-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WAwj0Fp8cEyT8ylsNT8SjFMFIERiic1OVfQhG7KWC65CzY0i04TZon+e7622f/NL axILApCZphIUCo3yg5RyOA== 0000946275-06-000214.txt : 20060309 0000946275-06-000214.hdr.sgml : 20060309 20060308180433 ACCESSION NUMBER: 0000946275-06-000214 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060309 DATE AS OF CHANGE: 20060308 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IBT BANCORP INC CENTRAL INDEX KEY: 0000801122 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 251532164 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-31655 FILM NUMBER: 06674273 BUSINESS ADDRESS: STREET 1: 309 MAIN ST CITY: IRWIN STATE: PA ZIP: 15642 BUSINESS PHONE: 7248633100 MAIL ADDRESS: STREET 1: IBT BANCORP INC STREET 2: 309 MAIN ST CITY: IRWIN STATE: PA ZIP: 15642 10-K 1 f10k_123105-0262.txt FORM ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2005 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to __________________ Commission File Number: 1-31655 ------- IBT BANCORP, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 25-1532164 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 309 Main Street, Irwin, Pennsylvania 15642 - -------------------------------------------- ----------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (724) 863-3100 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, $1.25 par value American Stock Exchange Stock Purchase Rights American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ---- Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] YES [X] NO Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] YES [X] NO Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] YES [X] NO Based on the closing sales price of $40.65 per share of the registrant's common stock on June 30, 2005, as reported on the American Stock Exchange, the aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was approximately $108.6 million. Solely for purposes of this calculation, directors and executive officers are deemed affiliates. As of March 1, 2006, there were 2,954,455 shares of the Registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of 2005 Annual Report to Stockholders (Parts II and IV) 2. Portions of Proxy Statement for the 2006 Annual Meeting of Stockholders. (Part III) ================================================================================ IBT BANCORP, INC. ANNUAL REPORT ON FORM 10-K for the fiscal year ended December 31, 2005 INDEX
PART I Page ---- Item 1. Business................................................................ 1 Item 1A. Risk Factors............................................................ 22 Item 1B. Unresolved Staff Comments............................................... 25 Item 2. Properties.............................................................. 25 Item 3. Legal Proceedings....................................................... 25 Item 4. Submission of Matters to a Vote of Security Holders..................... 25 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities............................ 26 Item 6. Selected Financial Data................................................. 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation............................................ 26 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............. 26 Item 8. Financial Statements and Supplementary Data............................. 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................ 27 Item 9A. Controls and Procedures................................................. 27 Item 9B. Other Information....................................................... 27 PART III Item 10. Directors and Executive Officers of the Registrant...................... 27 Item 11. Executive Compensation.................................................. 28 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters..................................... 28 Item 13. Certain Relationships and Related Transactions.......................... 28 Item 14. Principal Accounting Fees and Services.................................. 29 PART IV Item 15. Exhibits, Financial Statement Schedules................................. 29 SIGNATURES ........................................................................ 31
PART I Forward-Looking Statements IBT Bancorp, Inc. (the "Company" or "Registrant") may from time to time make written or oral "forward-looking statements," including statements contained in the Company's filings with the Securities and Exchange Commission (including this Annual Report on Form 10-K and the exhibits thereto), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations, estimates and intentions, that are subject to change based on various important factors (some of which are beyond the Company's control including those discussed under Item 1A. Risk Factors). The following factors, among others, could also cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the willingness of users to substitute competitors' products and services for the Company's products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes, acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. Item 1. Business - ----------------- General IBT Bancorp, Inc. is a Pennsylvania corporation headquartered in Irwin, Pennsylvania, which provides a full range of commercial and retail banking and trust services through its wholly-owned banking subsidiary, Irwin Bank & Trust Co. (collectively, the "Company"). Irwin Bank & Trust Co. (the "Bank") was incorporated in 1922 under the laws of Pennsylvania as a commercial bank under the name "Irwin Savings and Trust Company." The Bank engages in a full-service mortgage, commercial and consumer banking business, as well as trust and a variety of deposit services provided to its customers. At December 31, 2005, the Bank operated through its main office, six branch offices, two loan centers, and a trust office as well as through four supermarket branches under the name "Irwin Bank Extra." The Bank's main office, full service branch offices, loan centers, trust office and supermarket branches are located in the Pennsylvania counties of Westmoreland and Allegheny. The Bank's web site is located at "www.myirwinbank.com." ------------------- 1 References to the Company or Registrant used throughout this document generally refers to the consolidated entity which includes the main operating company, the Bank, unless the context indicates otherwise. Competition The Registrant's primary market area consists of Westmoreland and Allegheny counties, Pennsylvania, which are part of the Pittsburgh Metropolitan Statistical Area ("Pittsburgh MSA") and it is one of many financial institutions serving this market area. Based on data compiled by the FDIC as of June 30, 2005 (the latest date for which such data is available), the Bank was ranked sixth of 21 FDIC-insured institutions in Westmoreland County with a 6.74% deposit market share and 19th out of 38 institutions in Allegheny County with a 0.36% deposit market share. The Bank was ranked 13th out of 64 institutions serving the Pittsburgh MSA with a 0.91% market share. Such data does not reflect deposits held by credit unions with which the Bank also competes. The competition for deposit products comes from other insured financial institutions such as commercial banks, thrift institutions and credit unions in the Registrant's market area as well as with out-of-market financial institutions that offer deposits over the internet and through other delivery channels. Deposit competition also includes a number of insurance products such as annuities sold by local agents and investment products such as mutual funds and other securities sold by local and regional brokers. Loan competition comes from other insured financial institutions such as commercial banks, thrift institutions and credit unions. Lending Activities The Bank's principal lending activity is the origination of loans secured primarily by first mortgage liens on properties in the Pittsburgh MSA. At December 31, 2005, the Bank's loan portfolio included $78.8 million of residential first mortgage loans, $1.9 million of residential construction loans, $168.0 million of commercial and multi-family real estate loans, and $4.0 million of commercial construction loans. In addition, the Bank's loan portfolio includes $19.7 million in home equity lines of credit which are also secured by liens on residential real estate. The Bank also offers commercial loans which are generally secured by non-real estate collateral and had $63.5 million in such loans in portfolio at December 31, 2005. The Bank lends to municipalities and other governmental entities and had $9.1 million of such loans in portfolio at December 31, 2005. The Bank also engages in consumer installment lending primarily in the form of home equity term loans and automobile loans. At December 31, 2005, the Bank had $92.7 million in home equity term loans and $757,000 in automobile loans in portfolio. In addition, the Bank originates education loans guaranteed by the Pennsylvania Higher Education Assistance Agency ("PHEAA") and held $6.8 million in such loans at December 31, 2005. Substantially all of the Bank's borrowers are located in the Pittsburgh MSA and would be expected to be affected by economic and other conditions in this area. The Company does not believe that there are any other concentrations of loans or borrowers exceeding 10% of total loans. 2 Loan Portfolio Composition. The following table sets forth the composition of the Registrant's loan portfolio in dollar amounts and in percentages of the respective portfolios at the dates indicated.
At December 31, -------------------------------------------------------------------------------------------------- 2005 2004 2003 2002 2001 ---------------- ------------------ ----------------- --------------- --------------- $ % $ % $ % $ % $ % ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ (Dollars in Thousands) Mortgage..................... $252,699 56.65% $252,114 57.37% $244,923 58.33% $210,244 57.87% $173,214 54.55% Installment.................. 93,428 20.95 84,673 19.27 78,327 18.65 59,321 16.33 64,053 20.17 Commercial................... 63,508 14.24 61,140 13.91 59,591 14.19 58,634 16.14 55,185 17.38 Home equity lines of credit.. 19,684 4.41 23,201 5.28 21,963 5.23 15,832 4.36 11,001 3.47 PHEAA........................ 6,781 1.52 7,355 1.67 7,834 1.87 6,900 1.90 6,950 2.19 Municipal.................... 9,149 2.05 10,050 2.29 6,268 1.49 11,190 3.08 5,369 1.69 Credit cards................. 62 0.01 45 0.01 38 0.01 32 0.01 32 0.01 Other........................ 744 0.17 855 0.20 965 0.23 1,148 0.31 1,715 0.54 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total loans............ 446,055 100.00% 439,433 100.00% 419,909 100.00% 363,301 100.00% 317,519 100.00% ====== ====== ====== ====== ====== Less: Unearned discount.......... -- -- -- -- -- Deferred loan origination fees and costs........... 266 291 338 557 273 Allowance for loan losses.. 3,564 2,594 3,285 2,873 2,114 -------- -------- -------- -------- -------- Total loans, net....... $442,225 $436,548 $416,286 $359,871 $315,132 ======== ======== ======== ======== ========
3 Loan Maturity Table. The following table sets forth maturities and interest rate sensitivity for all categories of loans as of December 31, 2005. Scheduled repayments are reported in the maturity category in which payment is due.
Home equity lines of Credit Mortgage credit(2) Installment Commercial PHEAA(1) Municipal Cards(2) Other Total -------- --------- ----------- ---------- -------- --------- -------- ----- ----- (In Thousands) 1 year or less............ $ 12,382 $19,684 $12,108 $ 6,704 $ -- $9,149 $ 62 $744 $ 60,833 After 1 year: 1 to 5 years............ 59,994 -- 40,682 19,531 6,781 -- -- -- 126,988 After 5 years........... 180,323 -- 40,638 37,273 -- -- -- -- 258,234 ------- ---------- ------ ------ -------- --------- ------- ------ ------- Total due after one year.. 240,317 -- 81,320 56,804 6,781 -- -- -- 385,222 ------- ----------- ------ ------ ----- --------- ------ ----- ------- Total amount due.......... $252,699 $19,684 $93,428 $63,508 $6,781 $9,149 $ 62 $744 $446,055 ======= ====== ====== ====== ===== ====== ===== === =======
- ---------------------- (1) PHEAA loans are sold when repayment begins; assumption is that all PHEAA loans will mature in 1 to 5 years. (2) Home equity credit lines and credit card loans have no stated maturities; therefore they are classified as due in one year or less. Loan Sensitivity Table. The following table sets forth, as of December 31, 2005, the dollar amount of all loans due after December 31, 2006, based upon fixed rates of interest or floating or adjustable interest rates. Floating or Fixed Rates Adjustable Rates Total ----------- ---------------- ----- (In Thousands) Mortgage(1) ...... $216,158 $24,159 $240,317 Installment........ 79,652 1,668 81,320 Commercial......... 28,772 28,032 56,804 PHEAA.............. -- 6,781 6,781 -------- ------- -------- Total......... $324,582 $60,640 $385,222 ======== ======= ======== - -------------------------- (1) Included in the mortgage loans portfolio are commercial real estate loans. Commercial real estate loans are fixed-rate loans that are primarily callable loans, which reprice every three, five or ten years, based upon the interest rate on similar loans at the time of repricing. See "Mortgage Loans." Mortgage Loans. The Registrant's primary lending activity consists of the origination of residential and commercial mortgage loans secured by property in its primary market area. The mortgage loan portfolio consists of one-to-four family residential mortgage loans, commercial real estate loans, and construction loans. The Registrant had approximately $78.8 million of one-to-four family residential mortgage loans in its mortgage loan portfolio at December 31, 2005. The Registrant generally originates one-to-four family residential mortgage loans in amounts of up to 80% of the appraised value of the mortgaged property without requiring mortgage insurance. The Registrant will originate residential mortgage loans in an amount up to 95% of the appraised value of a mortgaged property; however, the borrower is required to obtain mortgage insurance for the amount in excess of 80%. The Registrant offers residential fixed-rate loans and adjustable-rate loans with amortization periods ranging from 15 to 30 years. Interest rates for residential adjustable-rate loans residences adjust every 12 months based upon the weekly average yield on the one-year U.S. Treasury securities, plus a margin of 2.75 percentage points. These adjustable-rate loans have an interest rate cap of two percentage points per year and six percentage points over the life of the loan, and are originated for retention in the portfolio. 4 Fixed-rate residential mortgage loans are underwritten in accordance with FannieMae guidelines. Currently, loans underwritten in accordance with FannieMae guidelines are generally sold in the secondary market. However, the number of saleable loans could vary materially as a result of market conditions. The Registrant generally charges a higher interest rate if loans are not saleable under FannieMae guidelines. At December 31, 2005, $218.6 million of the Registrant's mortgage portfolio consisted of long-term, fixed-rate mortgage loans of which $300,000 were classified as held-for-sale. The Registrant does not service any loans that are sold and the Registrant is generally not liable for these loans (i.e., "nonrecourse loans"). Substantially all of the Registrant's one-to-four family mortgages include "due on sale" clauses, which are provisions giving the Registrant the right to declare a loan immediately payable if the borrower sells or otherwise transfers an interest in the property to a third party. Property appraisals on real estate securing the Registrant's one-to-four family residential loans over $250,000 are made by appraisers approved by the Board of Directors. Appraisals are performed in accordance with applicable regulations and policies. The Registrant obtains title insurance policies on all purchase money first mortgage real estate loans originated. The Registrant's commercial real estate mortgage loans are long-term loans secured primarily by multi-family dwelling units and commercial real estate. Essentially all originated commercial real estate loans are within its market area. Commercial real estate loans are originated at adjustable rates of interest. Adjustable-rate commercial mortgage loans have interest rates that reprice every 3, 5 or 10 years and are based on the corresponding FHLB advance rate plus up to 2.75 percentage points. Adjustable-rate commercial mortgage loans generally have terms of up to 20 years and no maximum interest rate. As of December 31, 2005, the Registrant's commercial real estate loans totaled $118.8 million of the mortgage portfolio. Typically, commercial real estate loans are originated in amounts up to 80% of the appraised value of the mortgaged property. The Registrant also originates loans to finance the construction of one-to-four family dwellings and commercial real estate. The Registrant makes construction loans both to individuals constructing their own residence and to developers constructing homes for resale. Generally, the Registrant only makes interim construction loans to individuals if it also makes the permanent mortgage loan on the property. Interim construction loans generally have terms of up to 12 months with fixed rates of interest. At December 31, 2005, construction loans totaled $19.4 million with $13.5 million of that total yet to be disbursed. Construction financing is generally considered to involve a higher degree of risk of loss than long- term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Registrant may be required to advance funds beyond the amount originally committed to permit completion. If the estimate of value proves to be inaccurate, the Registrant may be confronted, at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment. Installment Loans. Installment loans primarily consist of home equity term loans and to a lesser extent automobile loans. Home equity loans are secured primarily by one-to-four family residences. The Registrant originates these loans with fixed rates with terms of up to 20 years. These loans are subject to 90% combined loan-to-value limitation, including any outstanding mortgages or liens, without requiring mortgage insurance. The Registrant will originate home equity loans in an amount up 100% of the appraised value, 5 however, mortgage insurance for the borrower may be required. The Registrant originates automobile loans with fixed rates of interest and terms of up to five years. At December 31, 2005, home equity term loans totaled $92.7 million. Commercial Loans. Commercial loans consist of loans secured by equipment, accounts receivables, inventory, and other business purpose loans. Such loans are generally secured by either the underlying collateral and/or by the personal guarantees of the borrower. Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic environment. Home Equity Lines of Credit. Revolving home equity lines of credit are secured primarily by one- to-four family residences. The lines of credit are generally subject to an 80% combined loan-to-value limitation, including all outstanding mortgages and liens. PHEAA. The Bank originates education loans under the PHEAA Keystone Stafford and Plus programs. These programs are open to residents of Pennsylvania and parents of students at Pennsylvania post-secondary schools. Interest rates on these loans are currently equal to the 91-day U.S. Treasury bill rate plus a margin of 3.1 percentage points. Borrowers may defer and capitalize interest during periods of educational enrollment, unemployment or economic hardship. The Bank generally sells these loans to the PHEAA when repayment begins. Payments of principal and interest on these loans are guaranteed by the PHEAA and reinsured by the U.S. Department of Education under the Federal Family Education Loan Program. Municipal Loans. The Bank makes loans to various local municipalities. Such loans are generally unsecured and are obtained through competitive bidding. Municipal loans have terms of between 1 and 15 years and provide for payments of principal and interest during their terms. The interest earned on these loans is tax-exempt. Loan Approval Authority and Underwriting. The Registrant establishes various lending limits for its officers and maintains an officer review committee. Certain officers generally have authority to approve loans up to $500,000. Loans up to $1,000,000 are approved by an officer review committee ("ORC"). The ORC consists of the President and at least four other officers appointed by the President. All loans over $1,000,000 are approved by the Board of Directors. Upon receipt of a completed loan application from a prospective borrower, a credit report is ordered. Income and certain other information is verified. If necessary, additional financial information may be requested. An appraisal or other estimate of value of the real estate intended to be used as security for the proposed loan is obtained. Appraisals are performed by independent appraisers. Title insurance is generally required on all purchase money real estate mortgage loans. Borrowers also must obtain fire and casualty insurance. Flood insurance is also required on loans secured by property that is located in a flood zone. Loans to One Borrower Limits. By statute, the maximum amount of indebtedness that the Bank may have from any one customer may not exceed 15% of the Bank's capital accounts. Pursuant to the national bank parity provisions of the Pennsylvania Banking Code, the Bank may also lend up to the 6 maximum amounts permissible for national banks which are allowed to make loans to one borrower of up to 25% of capital and surplus in certain limited circumstances. At December 31, 2005, the Bank's loans-to- one-borrower limit was $10 million and the largest amount of indebtedness from any single customer was $9.2 million. This indebtedness consisted of 26 loans to one borrower secured by multi-unit apartment buildings and one-to-four family dwellings. Loan Commitments. Written commitments are given to prospective borrowers on all approved mortgage loans. Generally, the commitment requires acceptance within 7 days of the date of issuance. At December 31, 2005, commitments to cover originations of loans totaled $9.9 million. Classified Assets. Federal bank regulators require insured depository institutions to regularly review their loan portfolios and to assign ratings to weak loans according to a prescribed asset classification system. Under this classification system, problem assets of insured institutions are classified as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection of principal in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do not expose the Registrant to risk sufficient to warrant classification in one of the above categories, but which possess some weakness, are required to be designated "special mention" by management. When an insured institution classifies problem assets as either "substandard" or "doubtful," it may establish allowances for loan losses in an amount deemed prudent by management. When an insured institution classifies problem assets as "loss," it is required either to establish an allowance for losses equal to 100% of that portion of the assets so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its allowances is subject to review by the Federal Deposit Insurance Corporation ("FDIC") which may order the establishment of additional loss allowances. The following table sets forth the Registrant's classified assets in accordance with its classification system at the dates indicated. At December 31 --------------------------------------------------- 2005 2004 2003 2002 2001 ------- ------- ------- ------- ------- (In Thousands) Special Mention ......... $43,069 $24,770 $19,022 $13,044 $12,885 Substandard ............. 7,798 3,940 8,756 9,518 3,174 Doubtful ................ 240 259 668 9 -- Loss .................... -- -- -- -- -- ------- ------- ------- ------- ------- Total ............. $51,107 $28,969 $28,446 $22,571 $16,032 ======= ======= ======= ======= ======= The increases in special mention and substandard assets are due to the addition of commercial loans secured by real estate, which were classified due to either the financial condition of the individual borrower or the lack of current financial information on the borrower. Other Real Estate Owned. Real estate acquired by the Registrant as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned until such time as it is sold. When other 7 real estate owned is acquired, it is recorded at the lower of the unpaid balance of the related loan or its fair value less disposal costs. Any write-down of other real estate owned is charged to operations. Nonperforming and Problem Assets Loan Delinquencies. When a loan becomes 16 days past due, a notice of nonpayment is sent to the borrower. Telephone collection calls, letters and/or visits to the borrower are initiated at or after 16 days of the due date missed in an effort to resolve the delinquency. Generally, if the loan continues in a delinquent status for 90 days past due and no repayment plan has been reached, foreclosure, liquidation or other legal proceedings may be initiated. Loans are reviewed on a monthly basis and are placed on a non-accrual status when the loan becomes more than 90 days delinquent and when, in our opinion, the collection of additional interest is doubtful. Normally, interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income. Subsequent interest payments, if any, are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectibility of the loan. Nonperforming Assets. The following table sets forth information regarding nonaccrual loans and real estate owned, as of the dates indicated. As of the dates indicated, no loans were categorized as troubled debt restructurings within the meaning of Statement of Financial Accounting Standards ("SFAS") No. 15 and there were no impaired loans within the meaning of SFAS No. 114, as amended by SFAS 118.
At December 31, ----------------------------------------------------------- 2005 2004 2003 2002 2001 ---- ---- ---- ---- ---- (Dollars In Thousands) Loans accounted for on a non-accrual basis: Mortgage........................................... $ 111 $ 120 $ 567 $ 446 $ 940 Home equity lines of credit........................ -- -- -- -- -- Installment........................................ 26 -- -- 77 27 Commercial......................................... -- -- -- 96 60 PHEAA.............................................. -- -- -- -- -- Municipal.......................................... -- -- -- -- -- Credit cards....................................... -- -- -- -- -- Other.............................................. -- -- -- -- -- ------ ------ ------ ------ ------ Total........................................... $ 137 $ 120 $ 567 $ 619 $1,027 ------ ------ ------ ------ ------ Accruing loans which are contractually past due 90 days or more: Mortgage........................................... 541 3,618 704 728 559 Installment........................................ 14 9 10 -- 3 Commercial......................................... 161 954 14 41 7 Home equity lines of credit........................ -- -- -- -- -- PHEAA.............................................. -- -- -- -- -- Municipal.......................................... -- -- -- -- -- Credit cards....................................... -- -- -- -- -- Other.............................................. -- -- -- -- -- ------ ------ ------ ------ ------ Total........................................... 716 4,581 728 769 569 ------ ------ ------ ------ ------ Total non-accrual and 90-day past due loans.......... 853 4,701 1,295 1,388 1,596 ------ ------ ------ ------ ------ Other real estate owned.............................. 48 1,767 254 637 239 ------ ------ ------ ------ ------ Total non-performing assets.......................... $ 901 $6,468 $1,549 $2,025 $1,835 ====== ====== ====== ====== ====== Total non-accrual and accrual loans to net loans..... 0.19% 1.08% 0.31% 0.39% 0.51% ====== ====== ====== ====== ====== Total non-accrual and accrual loans to total assets.. 0.12% 0.70% 0.21% 0.24% 0.30% ====== ====== ====== ====== ====== Total non-performing assets to total assets.......... 0.13% 0.96% 0.25% 0.35% 0.35% ====== ====== ====== ====== ======
8 As of December 31, 2005, there were no loans not reflected in the above as to which management had serious doubts as to the ability of borrowers to comply with present loan repayment loans. Allowance for Loan Losses. The Company maintains an allowance for loan losses to absorb potential losses inherent in the loan portfolio. The allowance is reviewed monthly and a provision for loan losses is charged against operations to bring the allowance to a level which, in management's judgment, is adequate in light of the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Large groups of homogeneous loans, such as residential real estate, small commercial real estate loans and home equity and consumer loans are evaluated in the aggregate using historical loss factors and other data. The amount of loss reserve is calculated using historical loss rates, net of recoveries on a five year rolling weighted average, adjusted for environmental, and other qualitative factors such as industry, geographical, economic and political factors that can effect loss rates or loss measurements. Large balance and/or more complex loans such as multi-family and commercial real estate loans may be evaluated on an individual basis and are also evaluated in the aggregate to determine adequate reserves. As specific loans are determined to be impaired specific reserves are assigned based upon collateral value, market value, if determinable, or the present value of the estimated future cash flows of the loan. The allowance is increased by a provision for loan loss which is charged to expense, and reduced by charge-offs, net of recoveries. Loans are placed on non-accrual status when they are 90 days past due, unless they are adequately collateralized and in the process of collection. The allowance for loan losses is maintained at a level that represents management's best estimate of losses in the portfolio at the balance sheet date. However, there can be no assurance that the allowance for losses will be adequate to cover losses which may be realized in the future and that additional provisions for losses will not be required. 9 Activity in the Allowance for Loan Losses. The following table sets forth information with respect to the Registrant's allowance for loan losses at the dates indicated:
December 31, --------------------------------------------------------------------- 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- (Dollars in Thousands) Total loans outstanding........................ $445,789 $439,142 $419,571 $362,744 $317,246 ======== ======== ======== ======== ======== Average loans outstanding...................... $436,906 $430,543 $393,743 $337,600 $304,080 ======== ======== ======== ======== ======== Allowance balance (at beginning of period).... $ 2,594 $ 3,285 $ 2,873 $ 2,114 $ 1,919 -------- -------- -------- -------- -------- Provision...................................... 1,200 600 600 1,100 500 Charge-Offs: Mortgage.................................... (64) (1,204) (11) (219) (203) Installment................................. (188) (127) (84) (68) (92) Commercial.................................. (19) (8) (148) (154) (50) Home equity lines of credit................. -- -- -- -- -- PHEAA....................................... -- -- -- -- -- Municipal................................... -- -- -- -- -- Credit cards................................ -- -- -- -- -- Other....................................... -- -- -- -- -- -------- -------- -------- -------- -------- Total charge-offs........................ (271) (1,339) (243) (441) (345) Recoveries: Mortgage..................................... 7 -- -- -- -- Installment.................................. 21 3 20 9 2 Commercial................................... 13 45 35 91 45 Home equity lines of credit.................. -- -- -- -- -- PHEAA........................................ -- -- -- -- -- Municipal.................................... -- -- -- -- -- Credit cards................................. -- -- -- -- 2 Other........................................ -- -- -- -- -- -------- -------- -------- -------- -------- Total recoveries......................... 41 48 55 100 39 Net charge-offs................................ (230) (1,291) (188) (341) (306) -------- -------- -------- -------- -------- Allowance balance (at end of period)........... $ 3,564 $ 2,594 $ 3,285 $ 2,873 $ 2,114 ======== ======== ======== ======== ======== Allowance for loan losses as a percent of total loans outstanding................... 0.80% 0.59% 0.78% 0.79% 0.67% ======== ======== ======== ======== ======== Net loans charged off as a percent of average loans outstanding.................... 0.05% 0.30% 0.05% 0.10% 0.10% ======== ======== ======== ======== ========
10 Allocation of the Allowance For Loan Losses. The following table shows the allocation of the Registrant's allowance for loan losses by loan category and the percentage of total loans represented by each loan category at the date indicated.
At December 31, ------------------------------------------------------------------------------------------------ 2005 2004 2003 2002 2001 ------------------ ------------------ ----------------- ----------------- ------------------ % of % of % of % of % of Loans Loans Loans Loans Loans to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in Thousands) At end of period allocated to: Mortgage....................... $1,853 56.65% $1,110 57.37% $ 806 58.33% $ 515 57.87% $1,120 54.55% Installment.................... 282 29.95 338 19.27 109 18.65 188 16.33 409 20.17 Commercial..................... 1,395 14.24 889 13.91 2,217 14.19 2,100 16.14 501 17.38 Home equity lines of credit.... 32 4.41 43 5.28 138 5.23 64 4.36 60 3.47 PHEAA.......................... 1 1.52 4 1.67 5 1.87 2 1.90 11 2.19 Municipal...................... 1 2.05 210 2.29 9 1.49 4 3.08 8 1.69 Credit cards................... -- 0.01 -- 0.01 -- 0.01 -- 0.01 -- 0.01 Other.......................... -- 0.17 -- 0.20 1 0.23 -- 0.31 5 0.54 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total...................... $3,564 100.00% $2,594 100.00% $3,285 100.00% $2,873 100.00% $2,114 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
11 Investment Activities The Registrant maintains a level of liquid assets, including short-term securities and certain other investments, which varies depending upon several factors, including: (i) the yields on investment alternatives; (ii) management's judgment as to the attractiveness of the yields then available in relation to other opportunities; (iii) expectation of future yield levels; and (iv) management's projections as to the short- term demand for funds to be used in loan origination and other activities. Investment securities, including mortgage-backed securities, are classified at the time of purchase, based upon management's intentions and abilities, as securities held-to-maturity or securities available-for-sale. Debt securities acquired with the intent and ability to hold to maturity are classified as held-to-maturity and are stated at cost and adjusted for amortization of premium and accretion of discount, which are computed using the level yield method and recognized as adjustments of interest income. All other debt securities are classified as available-for-sale to serve principally as a source of liquidity. Current accounting standards regarding investment securities (including mortgage backed securities) require the Registrant to categorize securities as "held to maturity," "available-for-sale" which included FHLB stock or "trading." As of December 31, 2005, the Registrant had securities classified as "available-for- sale" (which included FHLB stock) in the amount of $201.5 million and had no securities classified as "held- to-maturity" or "trading." Securities classified as "available-for-sale" are reported for financial reporting purposes at the fair market value with net changes in the market value from period to period included as a separate component of stockholders' equity, net of income taxes. At December 31, 2005, the Registrant's securities available-for-sale had an amortized cost of $202.5 million and market value of $201.5 million. Changes in the market value of securities available-for-sale do not affect the Company's income. In addition, changes in the market value of securities available-for-sale do not affect the Bank's regulatory capital requirements or its loan-to-one borrower limit. At December 31, 2005, the Registrant's investment portfolio policy allowed investments in instruments such as: (i) U.S. Treasury obligations; (ii) U.S. federal agency or federally sponsored agency obligations; (iii) mortgage-backed securities; (iv) municipal obligations; (v) banker's acceptances; (vi) certificates of deposit; and (vii) investment-grade corporate bonds, and commercial paper. The board of directors may authorize additional investments. As a source of liquidity and to supplement the Registrant's lending activities, the Registrant has invested in residential mortgage-backed securities. Mortgage-backed securities can serve as collateral for borrowings and, through repayments, as a source of liquidity. Mortgage-backed securities represent a participation interest in a pool of single-family or other type of mortgages. Principal and interest payments are passed from the mortgage originators, through intermediaries (generally quasi-governmental agencies) that pool and repackage the participation interests in the form of securities. The quasi-governmental agencies guarantee the payment of principal and interest to investors and include FreddieMac, Government National Mortgage Association ("GinnieMae"), and FannieMae. Mortgage-backed securities typically are issued with stated principal amounts. The securities are backed by pools of mortgages that have loans with interest rates that are within a set range and have varying maturities. The underlying pool of mortgages can be composed of either fixed rate or adjustable rate mortgage loans. Mortgage-backed securities are generally referred to as mortgage participation certificates or pass-through certificates. The interest rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate or adjustable rate) and the prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgages. Expected maturities will differ from contractual maturities due to scheduled repayments and because borrowers may have the 12 right to call or prepay obligations with or without prepayment penalties. Mortgage-backed securities issued by FreddieMac, GinnieMae, and FannieMae make up a majority of the pass-through certificates market. Investment Portfolio. The following table sets forth the carrying value of the Registrant's investment securities portfolio at the dates indicated:
At December 31 ------------------------------ 2005 2004 2003 -------- -------- -------- (In Thousands) Securities available-for-sale: Obligations of U.S. government agencies .......... $ 78,874 $ 71,103 $ 82,969 Mortgage-backed securities ....................... 53,827 65,004 37,656 Obligations of state and political subdivisions... 54,808 46,446 37,921 Federal Home Loan Bank stock ..................... 5,470 5,683 4,541 Equity securities ................................ 8,288 7,940 8,621 Other securities ................................. 196 716 740 -------- -------- -------- Total securities available-for-sale ........... $201,463 $196,892 $172,448 ======== ======== ========
13 Investment Portfolio Maturities. The following table sets forth certain information regarding carrying values, weighted average yields, and maturities of the Registrant's investment securities portfolio as of December 31, 2005. Actual maturities may differ from contractual maturities as certain instruments have call features which allow prepayment of obligations.
As of December 31, 2005 ---------------------------------------------------------------------------------------------------- After Five More than Total One Year or Less One to Five Years to Ten Years Ten Years Investment Securities ----------------- ----------------- ----------------- ----------------- ------------------------ Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market Value Yield Value Yield Value Yield Value Yield Value Yield Value ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------ (Dollars in Thousands) Obligations of U.S. government agencies......... $ -- --% $3,006 5.31% $69,788 4.20% $ 6,080 4.06% $ 78,874 4.23% $78,874 Mortgage-backed securities...... -- -- 3,731 3.68 14,312 4.11 35,784 4.87 53,827 4.59 53,827 Obligations of state and political subdivisions (1).. -- -- 1,887 5.01 10,710 4.90 42,211 4.45 54,808 4.56 54,808 Federal Home Loan Bank stock.... -- -- -- -- -- -- 5,470 2.45 5,470 2.45 5,470 Equity securities............... -- -- -- -- -- -- 8,288 2.66 8,288 2.66 8,288 Other securities .............. -- -- 25 4.25 -- -- 171 2.66 196 2.86 196 ------ ------ ------- ------- -------- -------- Total...................... $ -- --% $8,649 4.54% $94,810 4.27% $98,004 4.32% $201,463 4.30% $201,463 ====== ====== ======= ======= ======== ========
- -------------------- (1) Average yields have not been computed on a tax-equivalent basis. 14 Sources of Funds General. Deposits are the major source of the Registrant's funds for lending and other investment purposes. In addition to deposits, the Registrant derives funds from the amortization, prepayment or sale of loans, maturities of investment securities and operations. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and market conditions. The Registrant can also borrow from the Federal Home Loan Bank ("FHLB") of Pittsburgh. Deposits. Consumer and commercial deposits are attracted principally from within the Registrant's primary market area through the offering of a broad selection of deposit instruments including checking, regular savings, money market deposits, term certificate accounts and individual retirement accounts. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. The Registrant regularly evaluates the internal cost of funds, surveys rates offered by competing institutions, reviews the Registrant's cash flow requirements for lending and liquidity and executes rate changes when deemed appropriate. The Registrant does not obtain funds through brokers, nor does it solicit funds outside the Commonwealth of Pennsylvania.
At December 31, ------------------------------------------------------------ ---- 2005 2004 2003 ------------------ ----------------- ------------------ ---- Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate ------- ---- ------- ---- ------- ---- (Dollars in thousands) Checking accounts: Non-interest-bearing....... $ 81,926 --% $ 80,423 --% $ 77,862 --% Interest-bearing........... 51,881 0.60 45,791 0.39 54,788 0.58 Passbook and club accounts.... 75,734 0.52 76,356 0.51 76,641 0.70 Money market accounts......... 62,225 1.67 58,103 0.89 61,138 1.05 Certificate accounts.......... 245,654 3.31 245,881 3.09 221,186 3.30 -------- ---- ------- ---- ------- ---- Total................ $517,420 1.91% $506,554 1.71% $491,615 1.79% ======== ==== ======== ==== ======== ====
The following table indicates the amount of certificates of deposit of $100,000 or more by time remaining at December 31, 2005 (in thousands). Certificates of Maturity Periods Deposit ---------------- --------------- Three months or less...................... $15,718 Over three through six months............. 11,934 Over six through twelve months............ 17,750 Over twelve months........................ 19,283 ------- Total............................... $64,685 ======= Borrowings. Deposits are the primary source of funds for the Registrant's lending and investment activities as well as for general business purposes. Should the need arise, the Registrant has a maximum borrowing capacity with the FHLB of $301.9 million. At December 31, 2005, there were outstanding $68.7 million of long-term FHLB borrowings. 15 The following table sets forth certain information regarding the Bank's repurchase agreements which were the only category of short-term borrowings (due within one year or less) whose average balance for the past fiscal year exceeded 30% of stockholders equity at December 31, 2005.
At or for the Year Ended December 31, ------------------------------------- 2005 2004 2003 ------- ------- ------- (Dollars in Thousands) Average balance outstanding ...................... $20,209 $15,205 $15,999 Maximum amount outstanding at any month-end during the period .................... $38,686 $24,682 $22,212 Weighted average interest rate during the period.. 2.79% 1.01% 0.84% Balance outstanding at end of period ............. $18,443 $15,157 $12,611 Weighted average interest rate at end of period... 3.51% 1.51% 0.75%
Trust Services The Bank offers a variety of trust services including trust management, estate planning and administration, investment counseling and management and retirement planning. The Bank serves as trustee for testamentary, living, irrevocable and charitable trusts, administers investment agencies, employee benefit plans, guardianships, special needs trusts and offers separately managed accounts. The Bank's fees for these services are generally a percentage of the assets under management. As of December 31, 2005, the Bank had $115.1 million in assets under management compared to $110.0 million at December 31, 2004. The increase in assets under management in 2005 was primarily due to increase in 401(k) plans. For the year ended December 31, 2005, the Bank had income of $455,000 from its trust services. Personnel As of December 31, 2005, the Registrant had 186 full-time and 53 part-time employees. None of the Registrant's employees are represented by a collective bargaining group. 16 SUPERVISION AND REGULATION Regulation of the Company Set forth below is a brief description of certain laws which related to the regulation of the Company and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. General. The Company, as a bank holding company registered under the Bank Holding Company Act of 1956, as amended, is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System and by the Pennsylvania Department of Banking. The Company is also required to file annually a report of its operations with the Federal Reserve and the Pennsylvania Department of Banking. This regulation and oversight is generally intended to ensure that the Company limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of the Bank. Under the Bank Holding Company Act, the Company must obtain the prior approval of the Federal Reserve before it may acquire control of another bank or bank holding company, merge or consolidate with another bank holding company, acquire all or substantially all of the assets of another bank or bank holding company, or acquire direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, the Company would directly or indirectly own or control more than 5% of such shares. Federal statutes impose restrictions on the ability of a bank holding company and its nonbank subsidiaries to obtain extensions of credit from its subsidiary bank, on the subsidiary bank's investments in the stock or securities of the holding company, and on the subsidiary bank's taking of the holding company's stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services by the subsidiary bank. A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve policy that a bank holding company should stand ready to use available resources to provide adequate capital to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve regulations, or both. Non-Banking Activities. The business activities of the Company, as a bank holding company, are restricted by the Bank Holding Company Act. Under the Bank Holding Company Act and the Federal Reserve's bank holding company regulations, the Company may only engage in, or acquire or control voting securities or assets of a company engaged in, (1) banking or managing or controlling banks and other subsidiaries authorized under the Bank Holding Company Act and (2) any non-banking activity the Federal Reserve has determined to be so closely related to banking or managing or controlling banks to be a proper incident thereto. These include any incidental activities necessary to carry on those activities, as well as a 17 lengthy list of activities that the Federal Reserve has determined to be so closely related to the business of banking as to be a proper incident thereto. Financial Modernization. The Gramm-Leach-Bliley Act permits greater affiliation among banks, securities firms, insurance companies, and other companies under a new type of financial services company known as a "financial holding company." A financial holding company essentially is a bank holding company with significantly expanded powers. Financial holding companies are authorized by statute to engage in a number of financial activities previously impermissible for bank holding companies, including securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking activities. The Act also permits the Federal Reserve and the Treasury Department to authorize additional activities for financial holding companies if they are "financial in nature" or "incidental" to financial activities. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, well managed, and has at least a "satisfactory" CRA rating. A financial holding company must provide notice to the Federal Reserve within 30 days after commencing activities previously determined by statute or by the Federal Reserve and Department of the Treasury to be permissible. In fiscal 2000, the Company submitted the required notice to the Federal Reserve and became a financial holding company. Regulatory Capital Requirements. The Federal Reserve has adopted capital adequacy guidelines under which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the Bank Holding Company Act. The Federal Reserve's capital adequacy guidelines are similar to those imposed on the Bank by the Federal Deposit Insurance Corporation. See "Regulation of the Bank - Regulatory Capital Requirements." Restrictions on Dividends. The Pennsylvania Banking Code states, in part, that dividends may be declared and paid only out of accumulated net earnings and may not be declared or paid unless surplus (retained earnings) is at least equal to contributed capital. The Bank has not declared or paid any dividends that have caused its retained earnings to be reduced below the amount required. Finally, dividends may not be declared or paid if the Bank is in default in payment of any assessment due the Federal Deposit Insurance Corporation. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve's view that a bank holding company should pay cash dividends only to the extent that the holding company's net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company's capital needs, asset quality and overall financial condition. The Federal Reserve also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the federal prompt corrective action regulations, the Federal Reserve may prohibit a bank holding company from paying any dividends if the holding company's bank subsidiary is classified as "undercapitalized." Regulation of the Bank General. As a Pennsylvania-chartered commercial bank with deposits insured by the Federal Deposit Insurance Corporation which is not a member of the Federal Reserve, the Bank is subject to extensive regulation and examination by the Pennsylvania Department of Banking and by the Federal Deposit Insurance Corporation, which insures its deposits to the maximum extent permitted by law. The federal and state laws and regulations applicable to banks regulate, among other things, the scope of their business, their investments, the reserves required to be kept against deposits, the timing of the availability of deposited funds 18 and the nature and amount of and collateral for certain loans. The laws and regulations governing the Bank generally have been promulgated to protect depositors and not for the purpose of protecting stockholders. This regulatory structure also gives the federal and state banking agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the Pennsylvania Department of Banking, the Federal Deposit Insurance Corporation or the United States Congress, could have a material impact on the Company and its operations. Federal law provides the federal banking regulators, including the Federal Deposit Insurance Corporation and the Federal Reserve, with substantial enforcement powers. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders, and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. Pennsylvania Banking Law. The Pennsylvania Banking Code ("Code") contains detailed provisions governing the organization, location of offices, rights and responsibilities of trustees, officers, and employees, as well as corporate powers, savings and investment operations and other aspects of the Bank and its affairs. The Code delegates extensive rule-making power and administrative discretion to the Pennsylvania Department of Banking so that the supervision and regulation of state chartered commercial banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices. The Code also provides state-chartered commercial banks with the powers to make certain leeway investments, subject to regulation by the Pennsylvania Department of Banking. The Federal Deposit Insurance Corporation Act, however, prohibits a state-chartered bank from making new investments, loans, or becoming involved in activities as principal and equity investments which are not permitted for national banks unless (1) the Federal Deposit Insurance Corporation determines the activity or investment does not pose a significant risk of loss to the appropriate deposit insurance fund and (2) the bank meets all applicable federal capital requirements. Accordingly, the additional operating authority provided to the Bank by the Code is significantly restricted by the Federal Deposit Insurance Act. Federal Deposit Insurance. The Federal Deposit Insurance Corporation is an independent federal agency that insures the deposits, up to prescribed statutory limits, of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The Federal Deposit Insurance Corporation administers two separate insurance funds, the Bank Insurance Fund, which generally insures commercial bank and state savings bank deposits, and the Savings Association Insurance Fund, which generally insures savings association deposits. The Bank is a member of the Bank Insurance Fund and its deposit accounts are insured by the Federal Deposit Insurance Corporation, up to prescribed limits. The Federal Deposit Insurance Corporation is authorized to establish separate annual deposit insurance assessment rates for members of the Bank Insurance Fund and the Savings Association Insurance Fund, and to increase assessment rates if it determines such increases are appropriate to maintain the reserves of either insurance fund. In addition, the Federal Deposit Insurance Corporation is authorized to levy emergency special assessments on Bank Insurance Fund and Savings Association Insurance Fund members. The Federal Deposit Insurance Corporation's deposit insurance premiums are assessed through a risk-based 19 system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation, with the assessment rate for most institutions set at 0%. In addition, all institutions with deposits insured by the Federal Deposit Insurance Corporation are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, an agency of the Federal government established to recapitalize the predecessor to the Savings Association Insurance Fund. The current quarterly assessment rate is approximately 0.0146% of insured deposits. These assessments will continue until the Financing Corporation bonds mature in 2017. Under the Federal Deposit Insurance Reform Act of 2005, which was signed into law on February 15, 2006: (i) the Bank Insurance Fund and the Savings Association Insurance Fund will be merged into a new combined fund, to be called the Deposit Insurance Fund effective July 1, 2006, (ii) the current $100,000 deposit insurance coverage will be indexed for inflation (with adjustments every five years, commencing January 1, 2011); and (iii) deposit insurance coverage for retirement accounts will be increased to $250,000 per participant subject to adjustment for inflation. The FDIC will be given greater latitude in setting the assessment rates for insured depository institutions which could be used to impose minimum assessments. The FDIC will be authorized to set the reserve ratio for the Deposit Insurance Fund annually at between 1.15% and 1.5% of estimated insured deposits. If the Deposit Insurance Fund's reserves exceed the designated reserve ratio, the FDIC is required to pay out all or, if the reserve ratio is less than 1.5%, a portion of the excess as a dividend to insured depository institutions based on the percentage of insured deposits held on December 31, 1996 adjusted for subsequently paid premiums. Insured depository institutions that were in existence on December 31, 1996 and paid assessments prior to that date (or their successors) are entitled to a one-time credit against future assessments based on their past contributions to the BIF or SAIF. Regulatory Capital Requirements. The Federal Deposit Insurance Corporation has promulgated capital adequacy requirements for state-chartered banks that, like the Bank are not members of the Federal Reserve System. At December 31, 2005, the Bank exceeded all regulatory capital requirements and was classified as "well capitalized." The Federal Deposit Insurance Corporation's capital regulations establish a minimum 3% Tier 1 leverage capital requirement for the most highly rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively increases the minimum Tier 1 leverage ratio for such other banks to 4% to 5% or more. Under the Federal Deposit Insurance Corporation's regulation, the highest-rated banks are those that the Federal Deposit Insurance Corporation determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System. Tier 1 or core capital is defined as the sum of common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain mortgage and non-mortgage servicing assets and purchased credit card relationships. The Federal Deposit Insurance Corporation's regulations also require that state-chartered, non- member banks meet a risk-based capital standard. The risk-based capital standard requires the maintenance of total capital (which is defined as Tier 1 capital and supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet assets, 20 are multiplied by a risk-weight of 0% to 100%, based on the risks the Federal Deposit Insurance Corporation believes are inherent in the type of asset or item. The components of Tier 1 capital for the risk-based standards are the same as those for the leverage capital requirement. The components of supplementary (Tier 2) capital include cumulative perpetual preferred stock, mandatory subordinated debt, perpetual subordinated debt, intermediate-term preferred stock, up to 45% of unrealized gains on equity securities and a bank's allowance for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital that may be included in total capital is limited to 100% of Tier 1 capital. A bank that has less than the minimum leverage capital requirement is subject to various capital plan and activities restriction requirements. The Federal Deposit Insurance Corporation's regulations also provide that any insured depository institution with a ratio of Tier 1 capital to total assets that is less than 2.0% is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the Federal Deposit Insurance Act and could be subject to termination of deposit insurance. The Bank is also subject to minimum capital requirements imposed by the Pennsylvania Department of Banking on Pennsylvania-chartered depository institutions. Under the Pennsylvania Department of Banking's capital regulations, a Pennsylvania bank or savings bank must maintain a minimum leverage ratio of Tier 1 capital (as defined under the Federal Deposit Insurance Corporation's capital regulations) to total assets of 4%. In addition, the Pennsylvania Department of Banking has the supervisory discretion to require a higher leverage ratio for any institutions based on the institution's substandard performance in any of a number of areas. The Bank was in compliance with both the Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking capital requirements as of December 31, 2005. Affiliate Transaction Restrictions. Federal laws strictly limit the ability of banks to engage in transactions with their affiliates, including their bank holding companies. In particular, loans by a subsidiary bank to its parent company or the nonbank subsidiaries of the bank holding company are limited to 10% of a bank subsidiary's capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary's capital and surplus. Further, loans and other extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that all transactions between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates. Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank of Pittsburgh, which is one of 12 regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank system. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the Federal Home Loan Bank. As a member, it is required to purchase and maintain stock in the Federal Home Loan Bank of Pittsburgh in an amount equal to 4.55% of its outstanding residential mortgage loans plus 0.55% of its unused maximum borrowing capacity. At December 31, 2005, the Bank was in compliance with this requirement. Federal Reserve System. The Federal Reserve requires all depository institutions to maintain non- interest bearing reserves at specified levels against their transaction accounts (primarily checking and NOW accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements 21 imposed by the Federal Reserve may be used to satisfy the liquidity requirements that are imposed by the Department. At December 31, 2005, the Bank met its reserve requirements. Item 1A. Risk Factors - --------------------- Investing in our securities may involve certain risks, including the risks described below. You should carefully consider these risk factors together with all other available information and data before you decide to invest in our securities. Our loan portfolio includes a substantial amount of commercial and commercial real estate loans. Our commercial loan portfolio, including real estate and non-real estate loans, was $146.9 million at December 31, 2005, comprising 32.9% of total loans. Commercial loans generally involve a greater degree of risk of nonpayment or late payment than home equity loans or residential mortgage loans. Any significant failure to pay or late payments by our customers would hurt our earnings. The increased credit risk associated with these types of loans is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. A number of factors may affect a borrower's ability to make or refinance a balloon payment, including the financial condition of the borrower, the prevailing local economic conditions and the prevailing interest rate environment. Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate or commercial project. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired. This cash flow shortage may result in the failure to make loan payments. In such cases, we may be compelled to modify the terms of the loan. In addition, the nature of these loans is such that they are generally less predictable and more difficult to evaluate and monitor. As a result, repayment of these loans may to a greater extent than residential loans be subject to adverse conditions in the real estate market or economy. Our concentration of loans in the Pittsburgh area exposes us to the risk of a possible economic downturn affecting that area. Because our loans are concentrated in the Pittsburgh area, a decline in the general economic conditions of this area could have a material adverse effect on our financial condition, results of operations and cash flows. In recent years, Pittsburgh has experienced the loss of several major employers and is expected to experience additional job losses as the result of the U.S. Airways merger and a decline in population. The Pittsburgh area is characterized by an aging population and household incomes below the national average. These factors may tend to limit economic growth and business opportunities. If we have failed to provide an adequate allowance for loan losses, there could be a significant negative impact on our earnings. The risk of loan losses varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value of the collateral for the loan. Based upon factors such as historical experience, an evaluation of economic conditions and a regular review of delinquencies and loan portfolio quality, our management makes various assumptions and judgments about the ultimate collectibility of the loan portfolio and provides 22 an allowance for loan losses. At December 31, 2005, our allowance for loan losses was $3.6 million which represented 0.80% of total loans and 400% of nonperforming loans. If our management's assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb future credit losses, or if the bank regulatory authorities require the Bank to increase its allowance for loan losses, our earnings could be significantly and adversely affected. As our loan portfolio has increased, we have increased our allowance for loan losses. Future additions to the allowance in the form of provisions for loan losses may be necessary due to changes in economic conditions or growth of our loan portfolio. As a result of the recent growth in our lending practices, a significant portion of our total loan portfolio may be considered unseasoned. Accordingly, specific payment and loss experience for this portion of the portfolio has not yet been fully established, and there is the potential for additional loan losses. Future changes in interest rates may reduce our profits. Our ability to make a profit largely depends on our net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between: o the interest income we earn on interest-earning assets, such as loans and investment securities; and o the interest expense we pay on our interest-bearing liabilities, such as deposits and amounts we borrow. If more interest-earning assets than interest-bearing liabilities re-price or mature during a time when interest rates are declining, then our net interest income may be reduced. If more interest-bearing liabilities than interest-earning assets re-price or mature during a time when interest rates are rising, then our net interest income may be reduced. At December 31, 2005, our interest-earning liabilities maturing or repricing within one year exceeded our interest-bearing assets maturing or repricing within one year by $71.8 million. As a result, the yield on our interest-earning assets should adjust to changes in interest rates at a faster rate than the cost of our interest-bearing liabilities and our net interest income may be reduced when interest rates decrease significantly for long periods of time. The loss of any of our executive officers could hurt our operations We rely heavily on our executive management team, the loss of any one of whom could have an adverse effect on our operations. As a community bank, our executive officers have more responsibility than would be typical at a larger financial institution with more employees. In addition, we have fewer senior level managers who would are in a position to succeed and assume the responsibilities of our executive officers. The loss of their business experience and relationships could affect our ability to generate loans and deposits. Our shareholder rights plan could have the effect of deterring accumulations of our common stock. The Company has adopted a shareholder rights plan pursuant to which the Company has distributed to each shareholder of record one right for each share held. The rights do not become exercisable until a person (other than an exempt person) acquires beneficial ownership of 10% or more of the Company's outstanding common stock or commences a tender or exchange offer that would result in the person 23 becoming a 10% or greater beneficial owner (an "Acquiring Person"). In that event, each rights holder other than the Acquiring Person will be entitled to purchase shares of the Company's common stock having value equal to twice the exercise price of the rights. In the event the Company merges with an Acquiring Person or an affiliate or associate of the Acquiring Person, the rights entitle holders other than the Acquiring Person to purchase a similar amount of that entity's stock at half price. The effect of the shareholder rights plan would be to significantly dilute the ownership of an Acquiring Person which may deter persons from accumulating large positions in our common stock. Various other provisions in our governing documents could have the effect on insulating management from a hostile takeover. The Company's Articles of Incorporation and Bylaws contain various other provisions that could have the effect of deterring changes in control which are not approved in advance by our Board of Directors, including: o Supermajority Vote Required for Business Combinations; o Consideration of Non-Monetary Factors in Evaluating Tender Offers; o Classified Board of Directors; o Restriction on Number of Directors and Filling Board Vacancies; o Additional Shares of Authorized Common Stock; and o Supermajority Vote Required for Charter Amendments. These provisions could have the effect of deterring a change in control of the Company. As a result, shareholders who wish to participate in a change in control transaction may not have the opportunity to do so. Item 1B. Unresolved Staff Comments - ----------------------------------- Not applicable. Item 2. Properties - ------------------- At December 31, 2005, the Registrant operated from its main office, six branch offices and four supermarket branch offices and two loan offices and a trust office, all located in southwestern Pennsylvania. The total net book value of the Registrant's investment in premises and equipment at December 31, 2005, was approximately $5.6 million. The main office of the Company and of the Bank and three branch offices are owned by the Bank and the remaining three branch offices, four supermarket branch offices, and the Bank's trust division and a loan center, are leased by the Bank. These leases have initial terms of one to twenty years, and all leases contain renewal options for additional periods of 1 to 5 years. Item 3. Legal Proceedings - -------------------------- The Registrant is periodically involved as a plaintiff or defendant in various legal actions, such as actions to enforce liens, condemnation proceedings on properties in which the Registrant holds mortgage interests, matters involving the making and servicing of mortgage loans and other matters incident to the Registrant's business. In the opinion of management, none of these actions individually or in the aggregate is believed to be material to the financial condition or results of operations of the Registrant. 24 Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2005. Part II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters - -------------------------------------------------------------------------------- and Issuer Purchases of Equity Securities - ----------------------------------------- (a) Market for Common Equity. The information contained under the section captioned "Stock Market Information" in the 2005 Annual Report to Stockholders (the "Annual Report") is incorporated herein by reference. The Registrant did not sell any equity securities that were not registered under the Securities Act of 1933 during the period under report. (b) Use of Proceeds. Not applicable (c) Issuer Purchase of Equity Securities. Not applicable. Item 6. Selected Financial Data - -------------------------------- The information contained in the table captioned "Financial Highlights" in the Annual Report is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - ------------- The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------- The information contained in the section captioned "Market Risk" in the Annual Report is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- The Registrant's financial statements listed in Item 15 herein are incorporated herein by reference from the Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and - -------------------------------------------------------------------------------- Financial Disclosure - -------------------- Not applicable. 25 Item 9A. Controls and Procedures - --------------------------------- (a) Disclosure Controls and Procedures The Company's management evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company's disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) Internal Control Over Financial Reporting Management's Report on Internal Control Over Financial Reporting and the Attestation Report of its Independent Registered Public Accounting Firm are incorporated herein by reference from the Annual Report. There were no changes in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Item 9B. Other Information - --------------------------- Not applicable. Part III Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ The information contained under the sections captioned "Section 16(a) Beneficial Ownership Reporting Compliance" and "Proposal I -- Election of Directors" and "-- Biographical Information" in the definitive Proxy Statement for the 2006 Annual Meeting of Stockholders ("Proxy Statement") is incorporated herein by reference. The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. A copy of the Company's Code of Ethics will be furnished, without charge, to any person who requests such copy by writing to the Secretary, IBT Bancorp, Inc., 309 Main Street, Irwin, Pennsylvania 15642. Item 11. Executive Compensation - -------------------------------- The information contained under the section captioned "Director and Executive Compensation" in the Proxy Statement is incorporated herein by reference. 26 Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the Section captioned "Voting Securities and Principal Holders Thereof -- Security Ownership of Certain Beneficial Owners" of the Proxy Statement. (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the sections captioned "Voting Securities and Principal Holders Thereof -- Security Ownership of Certain Beneficial Owners" and "Proposal I -- Election of Directors" of the Proxy Statement. (c) Changes in Control Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant. (d) Securities Authorized for Issuance Under Equity Compensation Plans Set forth below is information as of December 31, 2005 with respect to compensation plans under which equity securities of the Registrant are authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION (a) (b) (c) Number of securities Number of securities Weighted-average remaining available for to be issued upon exercise price of future issuance under exercise of outstanding equity compensation plans outstanding options, options, warrants (excluding securities warrants and rights and rights reflected in column (a)) -------------------- ---------- ------------------------ Equity compensation plans approved by shareholders: 2000 Stock Option Plan........... 87,271 $30.86 150,000 Equity compensation plans not approved by shareholders..... -- -- -- ------ ------ ------- TOTAL....................... 87,271 $30.86 150,000 ====== ====== =======
Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The information required by this item is incorporated herein by reference to the section captioned "Proposal I -- Election of Directors -- Certain Relationships and Related Transactions" of the Proxy Statement. Item 14. Principal Accounting Fees and Services - ------------------------------------------------ The information called for by this item is incorporated herein by reference to the section entitled "Ratification of Appointment of Accountants" in the Proxy Statement. Part IV Item 15. Exhibits, Financial Statements (a) Listed below are all financial statements and exhibits filed as part of this report, and are incorporated by reference. 1. The consolidated statements of financial condition of IBT Bancorp, Inc. and subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2005, together with the related notes and the independent auditors' report of Edwards Sauer & Owens, P.C., independent registered public accounting firm. 2. Schedules omitted as they are not applicable.
3. Exhibits 3(i) Articles of Incorporation of IBT Bancorp, Inc.* 3(ii) Amended Bylaws of IBT Bancorp, Inc.** 4.1 Rights Agreement, dated as of November 18, 2003 by and between IBT Bancorp, Inc. and Registrar and Transfer Company*** 10 + Change In Control Severance Agreement with Charles G. Urtin**** 10.1 + Deferred Compensation Plan For Bank Directors**** 10.2 + Death Benefit Only Deferred Compensation Plan For Bank Directors effective as of January 1, 1990**** 10.3 + Retirement and Death Benefit Deferred Compensation Plan For Bank Directors effective as of January 1, 1990**** 10.4 + 2000 Stock Option Plan***** 10.5 + Irwin Bank & Trust Company Supplemental Pension Plan****** 10.6 + Medical Insurance Continuation Agreement with Charles G. Urtin******* 13 Portions of the 2005 Annual Report to Shareholders 21 Subsidiaries 23 Consent of Edwards, Sauer & Owens, P.C. 28 31.1 Rule 13a-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a) Certification of Chief Financial Officer 32 Section 1350 Certification
------------------------- + Management contract or compensatory plan or arrangement. * Incorporated by reference to the identically numbered exhibits of the Registrant's Form 10 (File No. 0-25903) filed April 29, 1999. ** Incorporated by reference to the identically numbered exhibits of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. *** Incorporated by reference to Amendment No. 1 to Form 8-A Registration Statement (File No. 001-31655) filed with the SEC on November 20, 2003. **** Incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. ***** Incorporated by reference to the Registration Statement on Form S-8 (File No. 333-40398) filed with the SEC on June 29, 2000. ****** Incorporated by reference to identically numbered exhibit in Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2004. ******* Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed March 6, 2006. 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of March 8, 2006. IBT BANCORP, INC. By: /s/Charles G. Urtin ------------------------------- Charles G. Urtin, President and Chief Executive Officer (Duly Authorized Representative) Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below as of March 8, 2006 by the following persons on behalf of the registrant and in the capacities indicated.
/s/Charles G. Urtin /s/Thomas E. Deger - -------------------------------------------- ----------------------------------- Charles G. Urtin, President, Chief Executive Thomas E. Deger Officer, and Director Director (Principal Executive Officer) /s/Richard L. Ryan /s/John N. Brenzia - -------------------------------------------- ----------------------------------- Richard L. Ryan John N. Brenzia Director Director /s/Charles W. Hengenroeder /s/Robert C. Whisner - -------------------------------------------- ----------------------------------- Charles W. Hengenroeder Robert C. Whisner Director Director /s/Grant J. Shevchik /s/Robert Rebich, Jr. - -------------------------------------------- ----------------------------------- Grant J. Shevchik Robert Rebich, Jr. Director Director /s/Raymond G. Suchta - -------------------------------------------- ----------------------------------- Raymond G. Suchta Richard J. Hoffman Senior Vice President and Chief Financial Officer Director (Principal Financial and Accounting Officer)
EX-13 2 ex13.txt ANNUAL REPORT IBT BANCORP, INC. 2005 ANNUAL REPORT WHERE DO YOU WANT TO BE TODAY? [GRAPHIC OMITTED] BE MORE TOMORROW. TO OUR STOCKHOLDERS WHERE DO YOU WANT TO BE TODAY? That's the question we ask everyday at Irwin Bank & Trust Company. We ask our customers, providing them with the best financial advice, products, and services to help them raise their families, buy homes, start and expand businesses, save for higher education, and plan for retirement. We ask our local community, using our expertise and resources to encourage community development and revitalization initiatives that will help ensure a prosperous future for our area. Perhaps most importantly, we ask ourselves how we can be ever more efficient and responsive to the changing financial needs of our customers and our community, incorporating traditional values, world-class technology, and innovative, proactive thinking into our day-to-day operations and long-term strategies. We do this to reinforce the strong, personal relationships we build with our customers and our community - and help them reach their goals in life. A Banking Transformation. Today's market demands more from a bank, so IBT Bancorp, Inc., and its subsidiary, Irwin Bank & Trust Company, work hard to stay in the forefront of community banking, matching our unique mixture of products and services to the changing financial environment. Our continuing commitment to traditional banking values means that we have been able to extend the benefits of being a "local" bank far beyond the borders of our community, serving customers in new areas. And we must be doing something right. Today, with more than $685.2 million in assets, we are the largest financial institution headquartered in Westmoreland County. A Financial Snapshot. While the Company faced some challenges in 2005 due to a flat yield curve, a "buyer's market" in lending, and dropping bank margins, net income rose to $8.6 million, a significant improvement over last year. Despite the challenging market conditions, our earnings per share have consistently increased, and we are pleased to report growth in assets, and loans while keeping expenses under control. Assets increased by $9.3 million and net loan growth was $5.7 million. Shareholder benefit improved with a dividend increase of 15% to $1.84 per share. While the downward trend in loan pricing has eased, pressure on net interest margins remains a factor affecting our profitability. Also, mortgage rates remained relatively flat and refinancing has slowed significantly. A few other factors are noteworthy as well. Increases in service fee income resulted in a net gain of 38.8% over last year's already excellent performance. In fact, industry statistics show that we consistently outperform 75% of banks nationwide, and more than 90% of Pennsylvania banks. So despite the continuing economic challenges in today's banking marketplace, Irwin Bank & Trust Company is in a very positive position as we start 2006. Irwin Bank & Trust Company is also continuing our proactive and aggressive program of cost controls, aimed at keeping us on the cutting edge of banking product offerings while making us more efficient in our day-to-day operations. In 2005, we upgraded computer systems, while continued office consolidations have made us more efficient. And during this past year, we became a self-insured medical benefits provider - a move that will control the cost of benefits without sacrificing the quality of healthcare coverage we provide to our employees. IBT Bancorp, Inc. 2005 Annual Report/ 1 TO OUR STOCKHOLDERS 2005 Initiatives. Irwin Bank & Trust Company's total commitment to community banking values continues to define our core banking philosophy. However, influenced by the constant changes in banking technology, regulation, and customer expectations, the way we serve the needs of our customers is also constantly changing in response to market conditions. This allows us to accurately anticipate change and reposition ourselves to match the market, offering the right mix of banking products and services to help our customers run their businesses and lives more easily - and profitably. In 2005, Irwin Bank & Trust Company continued to move ahead in implementing world-class capabilities in check imaging, customer electronic transaction and account information delivery, customer relationship management, and expanded product offerings. Our Overdraft Advantage program also continued to grow, pleasing customers with its convenience - and providing us with growing service charge revenues. The account structure for Business Banking we introduced in 2004 continued to be increasingly successful. Bundled with advanced electronic and debit card capabilities, it helps customers manage their cash flow and financial assets more efficiently, opening new financial opportunities. We also created the new, full-time position of Business Banking Advisor. Our Business Banking Advisor acts like a "financial sales engineer," matching our capabilities to specific customer needs and then directing and coordinating our team of financial experts to create a Total Business Relationship with each customer. This enhances our ability to build long-term relationships while increasing opportunities to generate new and exciting revenue streams. Irwin Bank & Trust Company continued our expansion into the Greensburg market in 2005, opening the Mt. Pleasant Loan Center, highlighting our commitment to growing deposit and loan business outside of our traditional service areas. And our continued involvement in The Irwin Project, coupled with our employees' contributions of their time and money, keeps us closely tied to our community. Exceeding Expectations. How successful have we been in meeting or exceeding customer expectations? A recent survey showed that 98% of our customers would recommend us to a friend or business associate. Just as telling, more than 55% of customers who received the survey answered it - compared to the 5-10% average response rate. It seems that our customers not only like us, they're happy to tell others about us, too. We think that's a very good sign for the future. So, let's take a look at just where we are today. /s/ Charles G. Urtin Charles G. Urtin President & Chief Executive Officer IBT Bancorp, Inc. 2/ IBT Bancorp, Inc. 2005 Annual Report FINANCIAL HIGHLIGHTS IBT Bancorp, Inc. & Subsidiary
(Dollars in thousands, except per share data) YEARS ENDED 2005 2004 2003 2002 2001 SELECTED BALANCE SHEET DATA: Total assets $ 685,151 $ 675,857 $ 629,530 $ 584,035 $ 524,044 Cash and cash equivalents 15,500 16,187 15,829 15,066 25,218 Securities available for sale 201,463 196,891 172,448 186,718 162,968 Loans receivable (net) 442,265 436,548 416,286 359,872 315,132 Deposits 520,486 526,217 492,158 468,257 422,462 Repurchase agreements 18,443 15,157 12,611 14,526 11,207 Federal funds purchased 12,468 - 7,900 - - FHLB advances 68,651 70,265 53,308 40,000 35,000 Shareholders' equity 61,081 59,843 59,606 56,151 49,725 SELECTED RESULTS OF OPERATIONS Interest income $ 35,771 $ 33,726 $ 33,398 $ 33,560 $ 35,185 Net interest income 22,090 21,918 22,083 20,732 18,226 Provision for loan losses 1,200 600 600 1,100 500 Net interest income after provision for loan losses 20,890 21,318 21,483 19,632 17,726 Other income 6,635 5,116 5,891 5,317 4,009 Loss on write-down of equity securities - 2,426 - - - Other expense 16,187 15,095 14,300 12,831 11,284 Net income 8,579 6,085 9,646 8,937 7,465 PER SHARE DATA: Net Income Basic $ 2.90 $ 2.05 $ 3.24 $ 3.00 $ 2.49 Diluted 2.88 2.02 3.19 2.99 2.49 Cash dividends declared 1.84 1.60 1.40 1.20 1.04 SELECTED RATIOS: Return on average assets 1.26% 0.92% 1.59% 1.61% 1.45% Return on average equity 14.08% 10.25% 16.54% 16.95% 15.57% Ratio of average equity to average assets 8.97% 9.02% 9.59% 9.47% 9.31% Dividend payout 63.39% 78.01% 43.21% 40.00% 41.77%
TOTAL ASSETS AS OF 12/31 (IN MILLIONS) [Bar graph with following data points: 2001 $524.0 2002 $584.0 2003 $629.5 2004 $675.9 2005 $685.0] TOTAL EQUITY (IN THOUSANDS) [Bar graph with following data points: 2001 $49,725 2002 $56,151 2003 $59,606 2004 $59,843 2005 $61,081] NET INCOME (IN THOUSANDS) [Bar graph with following data points: 2001 $7,465 2002 $8,937 2003 $9,646 2004 $6,085 2005 $8,579] DILUTED EARNINGS PER SHARE [Bar graph with following data points: 2001 $2.49 2002 $2.99 2003 $3.19 2004 $2.02 2005 $2.88] DIVIDENDS PER SHARE [Bar graph with following data points: 2001 $1.04 2002 $1.20 2003 $1.40 2004 $1.60 2005 $1.84] IBT Bancorp, Inc. 2005 Annual Report/ 3 [GRAPHIC OMITTED] "IRWIN BANK LISTENED TO ME, LOOKED CLOSELY AT MY PROJECT, AND DEVELOPED A FINANCING STRATEGY THAT THE OTHER BANKS HADN'T EVEN CONSIDERED. THEIR EXTRA EFFORT IS WHAT SETS THEM APART." 4/ IBT Bancorp, Inc. 2005 Annual Report BOWLING A PERFECT GAME. Brian Saunier had a problem. How could he get the financial backing and services he needed to build the Paradise Island bowling facility he envisioned when the big, "local" banks just weren't interested? Luckily, a friend referred him to Irwin Bank -- and he found out how a "community bank" could help him in ways that the big guys wouldn't. To better serve a growing local population, Brian wanted to renovate and expand the old Corpen Lanes on Neville Island, adding 16 new lanes and putting in a new kitchen and bar, calling his new enterprise "Paradise Island." At least one other financial institution had looked at his project and turned him down, but Irwin Bank saw things differently. The project presented some financial challenges, so Irwin Bank did its homework and partnered with the SBA to help Brian get the loan he needed to improve his business. Irwin Bank is helping Brian Saunier to run his day-to-day business more efficiently, too. The Bank's world-class service capabilities allow customers like Brian to have a deposit relationship with us, even though they don't have a nearby branch office. Brian Saunier also uses Irwin Bank's lock box service for his subsidiary company, All American Bowling Co., Inc., an equipment supplier and installer. And he employs our internet banking capabilities to manage account information and other banking services. It's simple and convenient. And it's one more way that Irwin Bank's unique mix of world-class services and community values prove our ability to serve customers outside our traditional market area. [GRAPHIC OMITTED] (CAPTION:) CUSTOMERS: PARADISE ISLAND BOWLING, ALL AMERICAN BOWLING CO., INC. LOCATION: NEVILLE ISLAND, PA OWNER: BRIAN SAUNIER RELATIONSHIP MANAGER: JIM THOMPSON SERVICES: COMMERCIAL LOAN (SBA), DEPOSITS, LOCK BOX SERVICES, INTERNET BANKING IBT Bancorp, Inc. 2005 Annual Report/ 5 [GRAPHIC OMITTED] "THE BEST PART ABOUT MY RELATIONSHIP WITH IRWIN BANK IS KNOWING ALL THE PEOPLE I'M DEALING WITH. IF FOR SOME REASON I CAN'T REACH AL LAZAR, MY RELATIONSHIP MANAGER, I CAN CALL BOB BOWELL OR CHUCK URTIN, AND THEY'LL TAKE CARE OF ME." 6/ IBT Bancorp, Inc. 2005 Annual Report A RELATIONSHIP CAST IN... CONCRETE. Pete Cooper tells it this way. "10 years ago, I started Cooper Trading, Inc., in a 16' x 16' office with a phone and a fax machine. Today, we've grown to become a $12 million-a-year business. And as my business grew, Irwin Bank was right there to help me at every step along the way." Pete owns and runs CTI, a commercial building materials supplier of concrete and concrete accessories, below-grade waterproofing, piping systems, windows, siding, doors, and other materials. CTI has also been involved in some high-visibility projects around the Pittsburgh area. These include supplying exterior aluminum panels for the scoreboard and canopy materials above the seats at Heinz Field, concrete accessories at PNC Park and the new North Side parking garage, and patching on the Fort Duquesne Bridge. Irwin Bank has been a valuable partner and financial resource for CTI as the company has grown. The Bank financed the construction of CTI's concrete plant, an office/showroom, and provided a line of credit for working capital. Pete Cooper adds, "I recently went to Irwin Bank to discuss financing for a new warehouse and infrastructure improvements on our property. They came back with a recommendation to use a Small Business Administration (SBA) program that would make more financing available and allow us to make even more improvements. And that's exactly the kind of service I've come to expect from them." [GRAPHIC OMITTED] (CAPTION:) CUSTOMER: CTI (COOPER TRADING, INC). LOCATION: IRWIN, PA OWNER: PETE COOPER RELATIONSHIP MANAGER: AL LAZAR SERVICES: COMMERCIAL LOAN (SBA), DEPOSITS, BUSINESS CHECKING, INTERNET BANKING IBT Bancorp, Inc. 2005 Annual Report/ 7 MAKING THE COMMUNITY A BETTER PLACE. [Graphic omitted] IRWIN BANK EMPLOYEES AND FAMILIES HELPED MAKE THE NORWIN RELAY FOR LIFE A SUCCESS IN ITS FIRST YEAR. [Graphic omitted] THE LAMP THEATER WILL BE RECONSTRUCTED AS PART OF THE IRWIN PROJECT. THIS PHOTO WAS TAKEN OPENING NIGHT, 1938. As a vital part of the local community, Irwin Bank & Trust Company and our employees participate in a number of initiatives, such as The Irwin Project, that highlight our personal involvement and interest in strengthening our region's economy. Irwin Bank continued its commitment to our hometown through our support of the Irwin Project's "revitalization initiative" that is helping breathe new life into our region's economy and infrastructure. In 2005, The Irwin Project made significant progress on several fronts. The Project received $95,000 in grant funding, plus another $100,000 in private pledges. The Irwin Project has also been designated a Pennsylvania Blueprint Community and a project community of the Governor's Community Action Team (CAT), helping to facilitate project funding and implementation. The organization has built excellent working relationships with county and state agencies and, using the funding they have obtained, are helping create a new comprehensive municipal plan for Irwin Borough. An application for the PA Main Street Program is nearly complete, and additional grants in excess of $1 million have been submitted and are pending approval. And through the Blueprint Communities program this past year, local leaders attended a 5-day leadership and revitalization training course to help them meet the challenges of keeping our community vigorous and financially healthy. Company employees also serve as members and directors of several local organizations, and many more donate their time to these worthy causes. A variety of fundraising efforts in which we participate also help provide financial support for local initiatives. For instance, Irwin Bank was a sponsor of the 1st Annual Norwin Relay for Life, to raise money and awareness for the American Cancer Society. For the past three years, we have been a proud sponsor of the "Light Up a Child's Life" holiday campaign which benefits the Make-A-Wish Foundation of Western Pennsylvania. The holiday campaign has become the region's largest fundraiser to benefit children. The Irwin Bank Employee Club also played a significant roll in fundraising for non-profit organizations, including Toys for Tots, Salvation Army, American Red Cross and the Make-A-Wish Foundation of Westmoreland County. 8/ IBT Bancorp, Inc. 2005 Annual Report FINANCIAL REVIEW IBT Bancorp, Inc. 2005 Annual Report/ 9 Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words "believes", "anticipate", "contemplates", "expects", "intends" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which include changes in interest rates, risks associated with the effect of opening new branches, the ability to control costs and expenses, and general economic conditions. IBT Bancorp, Inc. undertakes no obligation to update those forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. GENERAL IBT Bancorp, Inc. is a bank holding company headquartered in Irwin, Pennsylvania, which provides a full range of commercial and retail banking and trust services through its wholly owned banking subsidiary, Irwin Bank & Trust Co. (collectively, the "Company"). The Company's stock is traded on the American Stock Exchange under the symbol IRW. CRITICAL ACCOUNTING POLICIES The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. The Company's accounting and reporting policies conform with the accounting principles generally accepted in the United States of America and general practices within the financial services industry. The preparation of the financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. Allowance for loan losses: The Company considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The balance in the allowance for loan losses is determined based on management's review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors. All of these factors may be susceptible to significant change to the extent actual outcomes differ from management's estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods. Accounting for stock options: As of January 1, 2003, the Company adopted SFAS 123 as amended by SFAS 148 in regards to the accounting for stock options. As required by this statement, the Company recognized compensation expense in the income statement based on the estimated fair value of the options on the date of the grant. Prior to this date the Company accounted for stock-based compensation in accordance with Accounting Principles Board Opinion (APB) No. 25. Under APB No. 25, no compensation expense is recognized in the income statement related to any options granted under the Company's stock option plans. The pro forma impact to net income and earnings per share that would occur if compensation expense was recognized, based on the estimated fair value of the options on the date of the grant, is disclosed in the notes to the consolidated financial statements. Other-than-temporary impairment: Generally accepted accounting principles require management to examine the investment portfolio for losses on investments, which may be determined to be other than temporary. The Company currently owns certain preferred stocks issued by the Federal National Mortgage Corporation (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Ongoing negative publicity concerning accounting practices at both agencies negatively impacts the value of these investments. These preferred stocks contain attributes of both debt and equity. The dividend paid is tied to an index plus or minus a margin, and the payment rate adjusts bi-annually. IBT Bancorp, Inc./1 Management's Discussion and Analysis of Financial Condition and Results of Operations FINANCIAL CONDITION At December 31, 2005, total assets increased $9.3 million, or 1.4%, to $685.2 million from $675.9 million at December 31, 2004. The increase in total assets was primarily the result of an increase of $5.7 million in net loans and $4.8 million in securities available for sale. Growth in the loan portfolio and securities available for sale was primarily funded by a net increase of $12.5 million in Federal funds purchased and $3.2 million in repurchase agreements. The increase in available for sale securities was mainly the result of purchases of $53.2 million offset by net proceeds from maturities and the sales of securities of $44.8 million. This resulted in net increases of U.S. Government agencies and obligations of state and political sub-divisions of $7.8 million and $8.4 million, respectively, offset by net decreases in mortgage-backed securities of $11.2 million. The Company periodically sells and purchases securities to maximize the return of the portfolio within the set policy limits established by the board of directors. The increase in net loans is primarily due to increases in installment term loans and commercial loans of $8.7 million and $2.4 million, respectively. Installment loan growth was offset by a decrease of $3.5 million in home equity adjustable rate lines of credit. Rising market rates precipitated the migration of customers to the fixed rate installment loans, from the adjustable rate lines of credit. The minimal growth in commercial loans and real estate secured mortgage loans was attributed to large payoffs experienced in 2005, principal repayments, and sales into the secondary mortgage market. The 1-4 family residential mortgage loans originated by the Company are periodically sold in the secondary market to mitigate the interest-rate risk associated with holding long-term, low rate loans in the portfolio. In 2005, the Company sold $7.5 million in loans. At December 31, 2005, total liabilities increased $8.1 million, or 1.3%, to $624.1 million from $616.0 million at December 31, 2004. The increase was primarily related to the increases in Federal funds purchased of $12.5 million and repurchase agreements of $3.2 million. The increases were offset by decreases in total deposits and FHLB advances of $5.7 million and $1.6 million, respectively. Non-interest bearing deposits decreased $3.4 million to $83.8 million at December 31, 2005 from $87.2 million at December 31, 2004. The decrease was substantially offset by a related increase of $3.2 million in repurchase agreements. Under the terms of the agreements, deposits in designated demand accounts of the customer are put into an investment vehicle which is used daily to purchase an interest in designated U.S. Government or Agencies' securities. The Company in turn agrees to repurchase these investments on a daily basis and pay the customers the daily interest earned based on the current market rate. See Note 8 to the consolidated financial statements. Interest-bearing deposits totaled $436.6 million at December 31, 2005, a decrease of $2.4 million from December 31, 2004. Included in this change was a decrease in interest-bearing checking accounts of $3.7 million, money market accounts of $1.0 million, and savings accounts of $3.0 million. The decreases were primarily due to the timing of month-end direct deposits, balance transfers to certificates of deposit, and increased competition from investment alternatives. Certificates of deposit had a net decrease of $2.2 million; however, included in this decrease were maturities of public funds from municipalities of $4.2 million. The proceeds of the maturities of the public funds were primarily used by the municipalities to meet expenses. At December 31, 2005, total stockholders' equity increased $1.3 million to $61.1 million from $59.8 million at December 31, 2004. The increase was primarily due to net income of $8.6 million for the period offset by a decrease of $1.7 million in accumulated other comprehensive income (net of income taxes), and dividends paid of $5.4 million. In addition, surplus (additional paid-in capital) decreased $245,000 due to stock options exercised and increased $59,000 due to stock options granted in accordance with the adoption of FASB 123, as amended by FASB 148. See Note 19 to the consolidated financial statements. Accumulated other comprehensive income decreased as a result of changes in the net unrealized gain on the available for sale securities due to fluctuations in interest rates. Because of interest rate volatility, the Company's accumulated other comprehensive income could materially fluctuate for each interim period and year-end. See Note 2 to the consolidated financial statements. 2/IBT Bancorp, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Net Income: Net income increased approximately $2.5 million, or 41.0%, to $8.6 million, or $2.88 per diluted share for the year ended December 31, 2005 from $6.1 million, or $2.02 per diluted share for the year ended December 31, 2004. The increase in net income for fiscal 2005 compared to fiscal 2004 was primarily due to a $3.9 million increase in other income and $2.1 million increase in interest income offset by an increase in interest expense of $1.9 million and increases in the provision for loan losses and other expenses of $600,000 and $1.1 million, respectively. A $15.5 million increase in average interest earning assets and a 19 basis point increase in the average yield supported the increase in interest income. The Company did not record any non-cash charges for investments whose value declines were determined to be other than temporarily impaired, as a result, other income for fiscal 2005 exceeded other income reported for 2004. The decrease in net income for fiscal 2004 compared to fiscal 2003 was primarily due to a $2.4 million non-cash charge resulting from a decrease in value of certain agency preferred stocks, which was determined by management, to be other than temporary as well as decreases in net interest income and total other income of $165,000 and $775,000, respectively and an increase of $795,000 in total other expenses. Net interest income decreased primarily because interest expense rose $493,000, or 4.4%, offset by an increase of $328,000, or 1.0% in interest income. Increases in interest expense were attributed to an increase of $46.6 million in average interest-bearing liabilities offset by a 12-basis point decline in average yield. Other income declined due to lower investment securities gains and lower gains on sales of foreclosed real estate. Net Interest Income: Net interest income is the most significant component of the Company's income from operations. Net interest income is the difference between interest received on interest-earning assets (primarily loans and investment securities) and interest paid on interest-bearing liabilities (primarily deposits and borrowed funds). Net interest income depends on the volume and rate earned on interest-earning assets and the volume and interest rate paid on interest-bearing liabilities. Net interest income increased $172,000, or 0.8% to $22.1 million for 2005 compared to $21.9 million for 2004. The increase was primarily due to increases in average interest earning assets of $15.5 million and average yield of 19 basis points. Included in this increase was a rise of $6.4 million in average loans receivable and $7.6 million in average investment securities coupled with increases in the average yields of 13 basis points and 37 basis points, respectively. Offsetting these changes was an increase in average interest bearing liabilities of $18.3 million and a 27 basis point increase in the average cost of funds. Net interest income decreased $165,000, or 0.7% to $21.9 million for 2004 compared to $22.1 million for 2003. The decrease was primarily due to an increase in average interest-bearing liabilities of $46.6 million offset by a 12-basis point decrease in the average cost of funds. Such increases were mainly in certificates of deposit, which rose an average of $24.7 million offset by a 21-basis point decline in average cost. Average interest earning assets increased $47.8 million in fiscal 2004 offset by a 40-basis point decrease in the average yield of interest earning assets. This increase was primarily in average loans and investment securities available for sale, which grew $36.8 million and $15.4 million, respectively offset by decreases in the average yields of 52-basis points and 24-basis points, respectively. The following table sets forth certain information relating to the Company's average balance sheet and, reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from daily balances. IBT Bancorp, Inc./3
Year Ended December 31, -------------------------------------------------------------------------------------- 2005 2004 -------------------------------------------------------------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ---------- --------- -------- ---------- --------- --------- (Dollars in Thousands) Interest-earning assets: Loans receivable (1) $ 436,906 $ 27,273 6.24% $ 430,543 $ 26,313 6.11% Investment securities (2) 200,528 8,437 4.21% 192,934 7,403 3.84% Federal funds sold 2,029 61 3.01% 540 10 1.82% ---------- --------- ------ ---------- --------- ------ Total interest-earning assets 639,463 35,771 5.59% 624,017 33,726 5.40% Non-interest earning assets (3) 40,138 34,156 ---------- ---------- Total assets $ 679,601 $ 658,173 ========== ========== Interest-bearing liabilities: Money market accounts $ 62,225 1,042 1.67% $ 58,103 516 0.89% Certificates of deposit 245,654 8,126 3.31% 245,881 7,595 3.09% Other liabilities (4) 224,533 4,514 2.01% 210,096 3,697 1.76% ---------- --------- ------ ---------- --------- ------ Total interest-bearing liabilities 532,412 13,682 2.57% 514,080 11,808 2.30% --------- ------ --------- ------ Non-interest-bearing liabilities (3) 86,244 84,704 ---------- ---------- Total liabilities 618,656 598,784 Stockholders' Equity (5) 60,945 59,389 ---------- ---------- Total liabilities and stockholders' equity $ 679,601 $ 658,173 ========== ========== Net interest income $ 22,089 $ 21,918 ========= ============ Interest rate spread (6) 3.02% 3.10% ====== ====== Net interest margin (7) 3.45% 3.51% ====== ====== Ratio of average interest-earning assets to average interest-bearing liabilities 120.11% 121.38% ====== ====== Year Ended December 31, -------------------------------------------- 2003 -------------------------------------------- Average Average Balance Interest Yield/Cost ---------- --------- ------ (Dollars in Thousands) Interest-earning assets: Loans receivable (1) $ 393,743 $ 26,097 6.63% Investment securities (2) 177,557 7,244 4.08% Federal funds sold 4,926 57 1.16% ---------- --------- ------ Total interest-earning assets 576,226 33,398 5.80% Non-interest earning assets (3) 31,441 ---------- Total assets $ 607,667 ========== Interest-bearing liabilities: Money market accounts $ 61,138 645 1.05% Certificates of deposit 221,186 7,303 3.30% Other liabilities (4) 185,117 3,367 1.82% ---------- --------- ------ Total interest-bearing liabilities 467,441 11,315 2.42% --------- ------ Non-interest-bearing liabilities (3) 81,918 ---------- Total liabilities 549,359 Stockholders' Equity (5) 58,308 ---------- Total liabilities and stockholders' equity $ 607,667 ========== Net interest income $ 22,083 ========= Interest rate spread (6) 3.38% ====== Net interest margin (7) 3.83% ====== Ratio of average interest-earning assets to average interest-bearing liabilities 123.27% ======
(1) Average balances include non-accrual loans, and are net of deferred loan fees. (2) Includes investment securities, interest-bearing deposits in other financial institutions and FHLB stock. (3) Includes net deferred income taxes in excess of deferred tax benefits on AFS securities (SFAS 115), stock options (SFAS 123/148) and deferred fees (SFAS 109) (4) Includes FHLB advances, Federal funds purchased, and repurchase agreements. (5) Includes capital stock, surplus and unrealized holding gains on SFAS 115 AFS securities. (6) Interest-rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (7) Net interest margin represents net interest income as a percentage of average interest earning assets. Management's Discussion and Analysis of Financial Condition and Results of Operations The following table shows the effect of changes in volumes and rates on interest income and interest expense. The changes in interest income and interest expense attributable to changes in both volume and rate have been allocated to the changes due to rate. Tax-exempt income was not recalculated on a tax equivalent basis due to the immateriality of the change to the table resulting from a recalculation.
Year Ended December 31, Year Ended December 31, ----------------------------- ----------------------------- 2005 vs. 2004 2004 vs. 2003 ----------------------------- ----------------------------- Increase (Decrease) Increase (Decrease) Due to Due to ----------------------------- ----------------------------- Volume Rate Net Volume Rate Net ------- ------- -------- ------- ------- ------- (In Thousands) Interest income: Loans receivable $ 389 $ 571 $ 960 $ 2,439 $(2,223) $ 216 Investment securities 291 743 1,034 627 (468) 159 Other interest-earning assets 27 24 51 (51) 4 (47) ------- ------- -------- ------- ------- ------- Total interest-earning assets 707 1,338 2,045 3,015 (2,687) 328 ------- ------- -------- ------- ------- ------- Interest expense: Money market accounts 36 489 525 (32) (97) (129) Certificates of deposit (7) 538 531 816 (524) 292 Other liabilities 254 563 817 454 (124) 330 ------- ------- -------- ------- ------- ------- Total interest-bearing liabilities 283 1,590 1,873 1,238 (745) 493 ------- ------- -------- ------- ------- ------- Net change in net interest income $ 424 $ (252) $ 172 $ 1,777 $(1,942) $ (165) ======= ======= ======== ======= ======= =======
PROVISION FOR LOAN LOSSES: The Company recorded a provision for loan losses of $1.2 million, $600,000, and $600,000 for 2005, 2004, and 2003, respectively. The table below sets forth information with respect to activity in the Company's allowance for loan losses for the years indicated:
AT DECEMBER 31, --------------------------------------- 2005 2004 2003 --------------------------------------- (DOLLARS IN THOUSANDS) Total loans outstanding $ 445,789 $ 439,142 $ 419,571 ======================================= Average loans outstanding $ 436,906 $ 430,543 $ 393,743 ======================================= Allowance balances (at beginning of period) $ 2,594 $ 3,285 $ 2,873 Provision: 1,200 600 600 IBT Bancorp, Inc./5 Management's Discussion and Analysis of Financial Condition and Results of Operations Charge-Offs: Mortgage (64) (1,204) (11) Installment (188) (127) (84) Commercial (19) (8) (148) Home equity lines of credit - - - PHEAA - - - Municipal - - - Credit cards - - - Other - - --------------------------------------- Total charge-offs (271) (1,339) (243) Recoveries: Mortgage 7 - - Installment 21 3 19 Commercial 13 45 36 Home equity lines of credit - - - PHEAA - - - Municipal - - - Credit cards - - - Other - - - --------------------------------------- Total recoveries 41 48 55 --------------------------------------- Net charge-offs (230) (1,291) (188) --------------------------------------- Allowance balance (at end of period) $ 3,564 $ 2,594 $ 3,285 ======================================= Allowance for loan losses as a percent of total loans outstanding 0.80% 0.59% 0.78% Net loans charged off as a percent of average loans outstanding 0.05% 0.30% 0.05%
The provision for loan losses is charged to operations to bring the total allowance for loan losses to a level that represents management's best estimate of the losses inherent in the portfolio, based on a monthly review by management of the following factors: o Historical experience o Volume o Type of lending conducted by the Bank o Industry standards o The level and status of past due and non-performing loans o The general economic conditions in the Bank's lending area; and o Other factors affecting the collectability of the loans in the portfolio 6/IBT Bancorp, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Large groups of homogeneous loans, such as residential real estate, small commercial real estate loans and home equity and consumer loans are evaluated in the aggregate using historical loss factors and other data. The amount of loss reserve is calculated using historical loss rates, net of recoveries on a five year rolling weighted average, adjusted for environmental, and other qualitative factors such as industry, geographical, economic and political factors that can effect loss rates or loss measurements. Large balance and/or more complex loans such as multi-family and commercial real estate loans may be evaluated on an individual basis and are also evaluated in the aggregate to determine adequate reserves. As specific loans are determined to be impaired, specific reserves are assigned based upon collateral value, market value, if determinable, or the present value of the estimated future cash flows of the loan. The allowance is increased by a provision for loan loss which is charged to expense, and reduced by charge-offs, net of recoveries. Loans are placed on non-accrual status when they are 90 days past due, unless they are adequately collateralized and in the process of collection. The allowance for loan losses is maintained at a level that represents management's best estimate of losses in the portfolio at the balance sheet date. However, there can be no assurance that the allowance for losses will be adequate to cover losses which may be realized in the future and that additional provisions for losses will not be required. OTHER INCOME: Total other income increased $3.9 million, or 144.4% to $6.6 million for the year ended December 31, 2005 from $2.7 million for the year ended December 31, 2004. The most significant change in other income is the decrease in investment security losses of $2.7 million for the year ended December 31, 2005. Security losses in 2004 were primarily related to a write down of preferred stocks due to an other than temporary impairment of fair value. Service fees increased $1.0 million to $3.6 million for the year ended December 31, 2005 from $2.6 million for 2004. This increase was primarily due to an additional $929,000 in fees collected on deposit accounts. Other income increased $197,000 to $1.2 million for December 31, 2005 from $1.0 million for 2004 due to a one-time gain recorded from the sale of property classified as other real estate. Total other income decreased approximately $3.2 million, or 54.3% to $2.7 million for the year ended December 31, 2004 from $5.9 million for the year ended December 31, 2003. The decrease in other income was primarily attributable to investment securities losses. Due to an other than temporary impairment in fair value, adjustable rate preferred stocks were written down to fair market value, which resulted in a $2.4 million after tax charge to earnings. Other income decreased $641,000 primarily due to a gain from the sale of other real estate of $351,000 recorded in fiscal 2003. OTHER EXPENSES: Total other expenses increased $1.1 million, or 7.3% to $16.2 million for the year ended December 31, 2005 from $15.1 million for the year ended December 31, 2004. This is primarily due to increases in salary and other expenses. Salary expense was $6.3 million for the year ended December 31, 2005 an increase of $400,000 over 2004. This increase is primarily due to additions to staff and annual merit increases. Other expenses increased $400,000 to $4.3 million for the year ended December 31, 2005 from $3.9 million at December 31, 2004. Such increases to expense were attributed to increases in other real estate, customer debit cards, and consulting fees paid by the Company of $172,000, $96,000, and $52,000, respectively. Total other expense increased $795,000, or 5.6%, to $15.1 million for 2004 from $14.3 million for 2003. Of this increase, approximately $222,000 is attributed to increased salaries, which reached $5.9 million for 2004 from $5.7 million for 2003. Such increases in salaries were mainly the result of staff additions and annual merit increases. Pension and other employee benefits increased $177,000 to $1.8 million for 2004 primarily due to increases in pension costs and health insurance premiums. Occupancy expense increased $218,000 to $1.8 million, for 2004 from $1.5 million for 2003 primarily due to increases in depreciation expenses of $261,000 related to building construction and equipment purchases for technological improvements. Other expenses increased $155,000 to $3.9 million for 2004 from $3.8 million for 2003. IBT Bancorp, Inc./7 Management's Discussion and Analysis of Financial Condition and Results of Operations INCOME TAXES: Income tax expense of $2.8 million for the year ended December 31, 2005 remained relatively unchanged from 2004, however the effective tax rate for 2005 dropped to 24.3% from 31.7% reported for 2004. Income tax expense for 2004 was $2.8 million compared to $3.4 million in 2003. The change in income tax expense was principally attributable to the change in earnings in each period. The Company's effective tax rates were 31.7%, and 26.2% for 2004 and 2003, respectively. The Company's effective tax rate has been below the statutory rate of 34% primarily due to interest earned on obligations of states and political subdivisions, which is exempt from federal taxation. The Company's effective tax rate increased to 31.7% in 2004 from 26.2% in 2003. The rate increased because of the insignificant tax effect concerning the $2.4 million write down of certain preferred stocks that was determined to be other than temporary. The loss on these investments is a capital loss, which can only be used to offset capital gains. The Company had very little in capital gains to offset. The tax benefit related to the $2.4 million write down was $45,000, a tax effect of 1.875%. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds include savings, deposits, loan repayments and prepayments, cash from operations and borrowings from the Federal Home Loan Bank. The Company uses its capital resources principally to fund loan originations and purchases, to repay maturing borrowings, to purchase investments, and for short-term liquidity needs. The Company expects to be able to fund or refinance, on a timely basis, its commitments and long-term liabilities. As of December 31, 2005, the Company had commitments to extend credit of $104.3 million. The Company's liquid assets consist of cash and cash equivalents, which include short-term investments. The levels of these assets are dependent on the Company's operating, financing, and investment activities during any given period. At December 31, 2005, cash and cash equivalents totaled $15.5 million. Net cash from operating activities for 2005 totaled $12.1 million, as compared to net cash from operating activities of $11.3 million for 2004. The increase in 2005 was primarily the result of a $2.5 million increase in net income, a $600,000 increase in the provision for loan losses, and a $600,000 increase in other assets offset by a $2.4 million change in the write-down of equity securities. Net cash from operating activities for 2004 totaled $11.3 million, as compared to net cash from operating activities of $10.1 million for 2003. The increase in 2004 was primarily the result of $2.4 million in write-down of equity securities Net cash used by investing activities for 2005 totaled $15.5 million, as compared to cash used of $50.5 million for 2004 and $47.9 million for 2003. The decrease of $35.0 million for 2005 is primarily due to decreases in securities purchased and loans made to customers of $58.4 million and $15.1 million, respectively. These changes were offset by a decrease of $40.4 million in proceeds from the sales and maturities of securities. The change for 2004 was due to an increase in purchases of securities available for sale and Federal Home Loan Bank stock of $34.8 million and $1.7 million, respectively offset by decreases in the proceeds from the sale and maturities of securities available for sale of $4.2 million, net loans made to customers of $34.4 million and purchases of premises and equipment of $1.7 million. Net cash from financing activities for the year ended December 31, 2005 totaled $2.7 million, as compared to net cash from financing activities of $39.6 million for 2004. The change in 2005 was primarily due to decreases in net deposits and proceeds from FHLB advances of $39.8 million and $28.0 million, respectively, offset by an increase in Federal funds purchased of $20.4 million and a decrease of $9.4 million in repayments of FHLB advances. Net cash from financing activities for the year ended December 31, 2004 totaled $39.6 million, as compared to net cash from financing activities of $38.5 million for 2003. The change in 2004 was the result of increased proceeds from FHLB advances of $12.0 million offset by increased repayments of $8.3 million and increases in net deposits of $10.2 million. Such increases were offset by the repayment of $7.9 million in federal funds purchased. 8/IBT Bancorp, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity may be adversely affected by unexpected deposit outflows, excessive interest rates paid by competitors, and similar matters. Management monitors projected liquidity needs and determines the level desirable, based in part on the Company's commitment to make loans and management's assessment of the Company's ability to generate funds. The Company is also subject to federal regulations that impose certain minimum capital requirements. The table below sets forth certain information regarding the Company's contractual obligations. See Note 4, Note 7 and Note 10 to the consolidated financial statements
Payments Due By Period -------------------------------------------------------------------------------- Less than 1 - 3 3 - 5 More than Contractual Obligations Total 1 year years years 5 years - -------------------------------------------------------------------------------------------------------------------------- (In Thousands) - -------------------------------------------------------------------------------------------------------------------------- Long-Term Debt Obligations $ 68,651 $ 4,161 $13,490 $18,000 $33,000 Operating Lease Obligations 947 204 317 245 181 Certificates of Deposit 251,067 145,791 71,460 15,291 18,525
OFF-BALANCE SHEET ARRANGEMENTS In the normal course of business, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in its consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers' requests for funding and take the form of loan commitments and lines of credit. At December 31, 2005 and 2004, the Company had commitments to extend credit in the amount of $104.3 million and $96.1 million, respectively. During the year ended December 31, 2005, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on its consolidated financial condition, results of operations or cash flows. MARKET RISK Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest rate risk inherent in its lending, investment and deposit taking activities. The Company's profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely impact the Company's earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. To that end, management actively monitors and manages its interest rate risk exposure. The principle objective of the Company's interest rate risk management is to evaluate the interest rate risk inherent in certain balance sheet accounts, determine the appropriate level of risk given the Company's business strategy, operating environment, capital and liquidity requirements, performance objectives, and manage the risk consistent with the Board of Directors' approved guidelines. Through such management, the Company seeks to minimize the vulnerability of its operations to changes in interest rates. The Company's Asset/Liability Committee is comprised of the Company's senior management under the direction of the Board of Directors, with senior management responsible for reviewing with the Board of Directors its activities and strategies, the effect of those strategies on the Company's net interest margin, the market value of the portfolio and the effect that changes in interest rates will have on the Company's portfolio and the Company's exposure limits. The Company utilizes the following strategies to manage interest rate risk: IBT Bancorp, Inc./9 Management's Discussion and Analysis of Financial Condition and Results of Operations o When market conditions permit, to originate and hold in its portfolio adjustable rate loans; o Sell fixed rate mortgage loans that conform to Federal National Mortgage Association guidelines when sales can be achieved on terms favorable to the Company; o Lengthen the maturities of its liabilities when deemed cost effective through the utilization of Federal Home Loan Bank advances; o Purchase mortgage-backed securities for the available for sale securities portfolio with cash flows that can be reinvested in higher earning instruments when interest rates rise; and o Generally, maintain securities in the available for sale portfolio that are short term to offset the risk of long term fixed rate mortgage loans in a rising rate environment. The following table shows the Company's financial instruments that are sensitive to changes in interest rates, categorized by expected maturity or repricing maturity, and the instruments' fair values at December 31, 2005. Market risk sensitive instruments are generally defined as those instruments that can be adversely impacted by changes in market interest rates. The Company currently does not participate in hedging programs, interest rate swaps or other activities involving the use of off-balance sheet derivative financial instruments, but may do so in the future to mitigate interest rate risk. Expected maturities are contractual maturities adjusted for prepayments of principle. The Company uses certain assumptions to estimate fair values and expected maturities. For assets, expected maturities are based upon contractual maturity, call dates and projected repayments of principle. For interest earning assets, no prepayments are assumed. Interest bearing liabilities, such as negotiable order of withdrawal ("NOW") accounts, money market accounts, and similar interest bearing demand accounts are subject to immediate withdrawal or repricing and are therefore presented in the earliest period in the table. 10/IBT Bancorp, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Expected Maturity/Principal Repayment at December 31,
Total Carrying Fair 2006 2007 2008 2009 2010 Thereafter Value Value -------- -------- -------- -------- -------- -------- -------- -------- (in thousands) Interest-earning assets - ----------------------- Mortgage loans $ 12,382 $ 16,542 $ 13,661 $ 15,079 $ 14,712 $180,323 $252,699 $258,038 Home equity loans, second mortgage loans, student loans, other loans 18,207 17,353 16,205 14,722 13,574 40,638 120,699 123,975 Commercial loans, municipal loans 15,853 8,071 5,888 3,304 2,268 37,273 72,657 73,883 Investment securities - 1,795 361 2,526 3,967 187,344 195,993 195,993 Interest-bearing - ----------------------- liabilities - ----------------------- NOW and other transaction accounts $ 41,186 $ - $ - $ - $ - $ - $ 41,186 $ 41,186 Money market and other savings accounts 144,386 - - - - - 144,386 144,386 Certificates of deposit 145,791 50,017 21,443 13,088 2,203 18,525 251,067 251,145 Federal Home Loan Bank of Pittsburgh advance 4,161 3,418 10,072 18,000 - 33,000 68,651 69,968
IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related financial data presented in this Annual Report have been prepared in accordance with generally accepted accounting principles in the United States, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the Company's operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In 2005, the Financial Accounting Standards Board issued FASB interpretation ("FIN") 47, Accounting for Asset Retirement Obligations and SFAS No. 154, Accounting Changes and Errors Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3. The Company does not believe these statements will have a material impact on the Bank or its operations. IBT Bancorp, Inc./11 Management's Report to Shareholders The consolidated financial statements presented are the responsibility of management and are prepared in accordance with generally accepted accounting principles. The financial information contained elsewhere in the annual report is consistent with that in the consolidated financial statements. The financial statements necessarily include amounts that are based on management's best judgments and estimates. In the opinion of management the accounting practices utilized are appropriate in the circumstances and the financial statements fairly reflect the financial position and results of operation of the Company. IBT Bancorp, Inc. maintains a system of internal controls over financial reporting, which is designed to provide reasonable assurance to the Company's management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company assessed its internal control over financial reporting as of December 31, 2005, based on the criteria for effective internal control over financial reporting as described in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon that assessment, the Company believes that, as of December 31, 2005, its system of internal controls over financial reporting met those criteria. The Company's independent auditors, Edwards Sauer and Owens, P.C. have issued an attestation report on management's assessment of the Company's internal controls over financial reporting. Their attestation is included elsewhere in this report. /s/ Charles G. Urtin /s/ Raymond G. Suchta Charles G. Urtin Raymond G. Suchta President & Chief Financial Officer Chief Executive Officer 12/IBT Bancorp, Inc.
EDWARDS Certified Public Accountants & Business Advisors SAUER & ----------------------------------------------------------------------------- OWENS, P.C. 500 Warner Centre, 332 Fifth Avenue, Pittsburgh, PA 15222 Phone: 412-281-9211 Fax: 412-281-2407 A Professional Corporation www.esocpa.com Direct Dial:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors IBT Bancorp, Inc. Irwin, Pennsylvania We have audited the accompanying consolidated balance sheets of IBT Bancorp, Inc. (the Bancorp) and subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2005. We also have audited management's assessment, included in the accompanying Management's Report to Shareholders, that IBT Bancorp, Inc. and subsidiary maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Bancorp's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements, an We conducted our audits in accordance with the standards of Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. EDWARDS SAUER & OWENS, P.C. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Bancorp are being made only in accordance with authorizations of management and directors of the Bancorp; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Bancorp's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IBT Bancorp, Inc. and subsidiary as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, management's assessment that IBT Bancorp, Inc. and subsidiary maintained effective internal control over financial reporting as of December 31, 2005 is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Furthermore, in our opinion, IBT Bancorp, Inc. and subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). /s/ Edwards Sauer & Owens, P.C. Pittsburgh, Pennsylvania February 3, 2006 Consolidated Balance Sheets/IBT Bancorp, Inc., and Subsidiary
DECEMBER 31, ------------------------------ 2005 2004 ------------- ------------- ASSETS Cash and due from banks $ 15,063,970 $ 14,641,942 Interest-bearing deposits in banks 435,970 515,229 Federal funds sold -- 1,030,000 Certificate of deposit 100,000 100,000 Securities available for sale 195,993,449 191,208,214 Federal Home Loan Bank stock, at cost 5,469,600 5,682,700 Loans, net of allowance for loan losses of $3,563,501 in 2005 and $2,593,642 in 2004 442,225,344 436,548,276 Premises and equipment, net 5,624,572 6,232,280 Other assets 20,237,792 19,898,464 ------------- ------------- TOTAL ASSETS $ 685,150,697 $ 675,857,105 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits Non-interest bearing $ 83,846,681 $ 87,248,485 Interest-bearing 436,639,077 438,968,463 ------------- ------------- Total deposits 520,485,758 526,216,948 Federal funds purchased 12,468,000 -- Repurchase agreements 18,442,703 15,157,257 Accrued interest and other liabilities 4,022,118 4,374,824 FHLB advances 68,651,125 70,265,314 ------------- ------------- Total liabilities 624,069,704 616,014,343 STOCKHOLDERS' EQUITY Capital stock, par value $1.25, 50,000,000 shares authorized, 3,023,799 shares issued, 2,955,455 shares outstanding at December 31, 2005 and 2004 3,779,749 3,779,749 Surplus 1,231,444 1,417,755 Retained earnings 58,931,230 55,789,915 Accumulated other comprehensive income (512,029) 1,204,744 ------------- ------------- 63,430,394 62,192,163 Less: Treasury stock, at cost (68,344 shares) (2,349,401) (2,349,401) ------------- ------------- Total stockholders' equity 61,080,993 59,842,762 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 685,150,697 $ 675,857,105 ============= =============
IBT Bancorp, Inc./13 The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Income/IBT Bancorp, Inc., and Subsidiary
YEARS ENDED DECEMBER 31, -------------------------------------------- 2005 2004 2003 ------------ ------------ ------------ INTEREST INCOME Loans, including fees $ 27,272,969 $ 26,312,685 $ 26,096,559 Investment securities 8,437,156 7,403,199 7,244,174 Federal funds sold 61,177 9,835 57,110 ------------ ------------ ------------ Total interest income 35,771,302 33,725,719 33,397,843 INTEREST EXPENSE Deposits 9,996,792 8,703,234 8,666,938 Federal funds purchased 180,901 92,982 25,933 FHLB advances 2,939,435 2,858,623 2,487,363 Repurchase agreements 564,658 152,970 134,546 ------------ ------------ ------------ Total interest expense 13,681,786 11,807,809 11,314,780 ------------ ------------ ------------ NET INTEREST INCOME 22,089,516 21,917,910 22,083,063 PROVISION FOR LOAN LOSSES 1,200,000 600,000 600,000 ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 20,889,516 21,317,910 21,483,063 OTHER INCOME (LOSSES) Service fees 3,602,991 2,595,941 2,370,065 Investment security gains 274,267 383,290 533,155 Investment security losses (138,078) (2,789,571) (67,636) Increase in cash surrender value of life insurance 456,042 466,923 513,066 Debit card fees 775,715 680,600 614,475 Trust fees 455,051 340,492 275,378 Other income 1,209,163 1,011,967 1,652,555 ------------ ------------ ------------ Total other income 6,635,151 2,689,642 5,891,058 OTHER EXPENSES Salaries 6,332,915 5,875,511 5,653,310 Pension and other employee benefits 1,831,784 1,820,031 1,642,651 Occupancy expense 1,795,473 1,767,950 1,549,532 Data processing expense 992,005 916,939 843,074 Advertising expense 387,344 309,032 412,702 Pennsylvania shares tax 560,428 496,802 446,041 Other expenses 4,287,034 3,908,424 3,752,672 ------------ ------------ ------------ Total other expenses 16,186,983 15,094,689 14,299,982 ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 11,337,684 8,912,863 13,074,139 PROVISION FOR INCOME TAXES 2,758,333 2,828,125 3,427,893 ------------ ------------ ------------ NET INCOME $ 8,579,351 $ 6,084,738 $ 9,646,246 ============ ============ ============ BASIC EARNINGS PER SHARE $ 2.90 $ 2.05 $ 3.24 ============ ============ ============ DILUTED EARNINGS PER SHARE $ 2.88 $ 2.02 $ 3.19 ============ ============ ============
14/IBT Bancorp, Inc. The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Changes in Stockholders' Equity/IBT Bancorp, Inc., and Subsidiary Years Ended December 31, 2005, 2004 and 2003
ACCUMULATED OTHER CAPITAL RETAINED COMPREHENSIVE TREASURY STOCK SURPLUS EARNINGS INCOME STOCK TOTAL ------------ ------------ ------------- ------------ ------------ ------------- BALANCE AT DECEMBER 31, 2002 $ 3,779,749 $ 2,073,102 $ 48,974,137 $ 2,667,456 $ (1,343,266) $ 56,151,178 Comprehensive Income Net income 9,646,246 9,646,246 Other comprehensive income, net of tax: Change in net unrealized holding gains on securities available for sale, net of deferred income tax benefit of ($739,040) (1,434,608) (1,434,608) Reclassification adjustment, net of deferred income tax benefit of ($102,624) (199,210) (199,210) ------------- (1,633,818) ------------- Total Comprehensive Income 8,012,428 Cash dividends ($1.40) (4,168,721) (4,168,721) Stock options granted / vested 102,154 102,154 Exercise of stock options (490,998) (490,998) Purchase of Treasury Stock - - ------------ ------------ ------------- -------------- ------------- -------------- BALANCE AT DECEMBER 31, 2003 $ 3,779,749 $ 1,684,258 $ 54,451,662 $ 1,033,638 $ (1,343,266) $ 59,606,041
IBT Bancorp, Inc./15 The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Changes in Stockholders' Equity (Cont.)/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
ACCUMULATED OTHER CAPITAL RETAINED COMPREHENSIVE TREASURY STOCK SURPLUS EARNINGS INCOME STOCK TOTAL ------------ ------------ ------------- ------------ ------------ ------------ BALANCE AT DECEMBER 31, 2003 $ 3,779,749 $ 1,684,258 $ 54,451,662 $ 1,033,638 $ (1,343,266) $ 59,606,041 Comprehensive Income Net income 6,084,738 6,084,738 Other comprehensive income, net of tax: Change in net unrealized holding gains on securities available for sale, net of deferred income tax benefit of ($688,712) (1,336,912) (1,336,912) Reclassification adjustment, net of deferred income tax of $776,858 1,508,018 1,508,018 ------------- 171,106 ------------- Total Comprehensive Income 6,255,844 Cash dividends ($1.60) (4,746,485) (4,746,485) Stock options granted / vested 59,141 59,141 Exercise of stock options (325,644) (325,644) Purchase of Treasury Stock (1,006,135) (1,006,135) ------------ ------------ ------------- ------------- ------------- ------------- BALANCE AT DECEMBER 31, 2004 $ 3,779,749 $ 1,417,755 $ 55,789,915 $ 1,204,744 $ (2,349,401) $ 59,842,762
16/IBT Bancorp, Inc. The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Changes in Stockholders' Equity (Cont.)/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
ACCUMULATED OTHER CAPITAL RETAINED COMPREHENSIVE TREASURY STOCK SURPLUS EARNINGS INCOME STOCK TOTAL ------------ ------------ ------------- ------------ ------------ ------------ BALANCE AT DECEMBER 31, 2004 $ 3,779,749 $ 1,417,755 $ 55,789,915 $ 1,204,744 $ (2,349,401) $ 59,842,762 Comprehensive Income Net income 8,579,351 8,579,351 Other comprehensive income, net of tax: Change in net unrealized holding gains on securities available for sale, net of deferred income tax benefit of ($831,292) (1,613,684) (1,613,684) Reclassification adjustment, net of deferred income tax of ($53,107) (103,089) (103,089) ------------- (1,716,773) ------------- Total Comprehensive Income 6,862,578 Cash dividends ($1.84) (5,438,036) (5,438,036) Stock options granted / vested 59,141 59,141 Exercise of stock options (245,452) (245,452) Purchase of Treasury Stock - ------------ ------------ ------------- ------------- ------------- ------------- BALANCE AT DECEMBER 31, 2005 $ 3,779,749 $ 1,231,444 $ 58,931,230 $ (512,029) $ (2,349,401) $ 61,080,993 ============ ============ ============= ============= ============= =============
IBT Bancorp, Inc./17 The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Cash Flows/IBT Bancorp, Inc., and Subsidiary
YEARS ENDED DECEMBER 31, ----------------------------------------------- 2005 2004 2003 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 8,579,351 $ 6,084,738 $ 9,646,246 Adjustments to reconcile net cash from operating activities: Depreciation 994,839 1,009,989 832,770 Increase in cash surrender value of insurance (456,042) (466,923) (513,066) Net amortization/accretion of premiums and discounts 810,975 1,046,467 1,129,046 Net investment security gains (136,189) (19,896) (465,519) Loss on write-down of equity securities -- 2,426,177 -- Provision for loan losses 1,200,000 600,000 600,000 Stock options granted/vested 59,141 59,141 102,154 Increase (decrease) in cash due to changes in assets and liabilities: Other assets 775,593 223,003 (921,069) Accrued interest and other liabilities 267,918 339,288 (311,325) ------------- ------------- ------------- NET CASH FROM OPERATING ACTIVITIES 12,095,586 11,301,984 10,099,237 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of certificate of deposit (100,000) (100,000) (100,000) Proceeds from maturity of certificate of deposit 100,000 100,000 100,000 Proceeds from sales of securities available for sale 9,728,425 61,556,451 34,800,655 Proceeds from maturities of securities available for sale 35,093,279 23,575,354 54,553,305 Purchase of securities available for sale (53,165,621) (111,626,403) (76,835,123) Net loans made to customers (6,989,448) (22,118,272) (56,458,544) Purchases of premises and equipment (387,131) (773,520) (2,542,504) Proceeds from the sale Federal Home Loan Bank stock 6,183,500 3,763,900 1,772,400 Purchase of Federal Home Loan Bank stock (5,970,400) (4,906,100) (3,160,300) ------------- ------------- ------------- NET CASH USED BY INVESTING ACTIVITIES (15,507,396) (50,528,590) (47,870,111) CASH FLOWS FROM FINANCING ACTIVITIES Net (decrease) increase in deposits (5,731,190) 34,059,419 23,900,202 Net increase(decrease) in securities sold under agreements to repurchase 3,285,446 2,546,380 (1,914,959) Net increase (decrease) in federal funds purchased 12,468,000 (7,900,000) 7,900,000 Dividends (5,438,036) (4,746,485) (4,168,721) Proceeds from FHLB advances -- 28,000,000 16,000,000 Repayment of FHLB advances (1,614,189) (11,042,453) (2,692,233) Purchase of treasury stock -- (1,006,135) -- Exercised stock options (245,452) (325,644) (490,998) ------------- ------------- ------------- NET CASH FROM FINANCING ACTIVITIES 2,724,579 39,585,082 38,533,291 ------------- ------------- ------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (687,231) 358,476 762,417 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 16,187,171 15,828,695 15,066,278 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 15,499,940 $ 16,187,171 $ 15,828,695 ============= ============= =============
18/IBT Bancorp, Inc. The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Cash Flows (Cont.)/IBT Bancorp, Inc., and Subsidiary
YEARS ENDED DECEMBER 31, --------------------------------------------- 2005 2004 2003 ------------- ------------- ------------- SUPPLEMENTAL DISCLOSURES Cash payments for: Interest $ 13,625,849 $ 11,446,837 $ 11,446,828 Income taxes $ 3,182,617 $ 2,634,965 $ 3,671,847 NON CASH TRANSACTIONS Recorded unrealized (losses) gains on securities available for sale $ (1,058,528) $ 1,825,368 $ 1,566,116 at December 31 Deferred (benefit) income taxes on recorded unrealized (losses) gains on securities available for sale at December 31 $ (546,500) $ 620,625 $ 532,479 Loans transferred to foreclosed real estate during the year $ 112,380 $ 1,557,735 $ 301,284 Recorded nonmonetary gain (loss) on securities available for sale at December 31 $ 81,111 $ (2,426,177) $ 11,960
The accompanying notes are an integral part of these consolidated financial statements. IBT Bancorp, Inc./19 Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS: IBT Bancorp, Inc. (the Bancorp), is a bank holding company whose principal activity is the ownership and management of its wholly owned subsidiary, Irwin Bank & Trust Company (the Bank). The Bank is a full service state chartered commercial banking institution and provides a variety of financial services to individuals and corporate customers through its six branch offices, two loan centers, a trust division, four supermarket branches and main office located in Southwestern Pennsylvania. The Bank's primary deposit products are non-interest and interest-bearing checking accounts, savings accounts and certificates of deposit. Its primary lending products are single-family and multi-family residential loans, installment loans and commercial loans. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Bancorp and the Bank. All significant intercompany accounts have been eliminated in the consolidation. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Bancorp and the Bank. All significant intercompany accounts have been eliminated in the consolidation. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan losses and foreclosed real estate, management obtains independent appraisals for significant properties. INVESTMENT SECURITIES: All investments in debt and equity securities are to be classified into three categories. Securities which management has positive intent and ability to hold until maturity are classified as held to maturity. Securities held to maturity are stated at cost, adjusted for amortization of premium and accretion of discount computed on a level yield basis. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. All other securities are classified as available for sale securities. Unrealized holding gains and losses for trading securities are included in earnings. Unrealized holding gains and losses for available for sale securities are excluded from earnings and reported net of income taxes as a separate component of stockholders' equity until realized. At this time, management has no intention of establishing a trading securities classification. Interest and dividends on securities are reported as interest income. Gains and losses realized on sales of securities represent the differences between net proceeds and carrying values determined by the specific identification method. ADVERTISING COSTS: Advertising costs are expensed as incurred. Advertising expense totaled $387,344 for 2005, $309,032 for 2004 and $412,702 for 2003. LOANS AND ALLOWANCE FOR LOAN LOSSES: Loans are stated at unpaid principal balances, less the allowance for loan losses and net deferred loan fees. 20/IBT Bancorp, Inc. Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Loan origination and commitment fees, as well as certain direct origination costs, are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method. Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status. The allowance for loan losses is maintained at a level which, in management's judgement, is adequate to absorb potential losses inherent in the loan portfolio. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Large groups of smaller balance homogeneous loans are valued collectively for impairment. The amount of loss reserve is calculated using historical loss rates, net of recoveries, adjusted for environmental, and other qualitative factors such as industry, geographical, economic and political factors that can affect loss rates or loss measurements. Allowances for losses on specifically identified loans that are determined to be impaired are calculated based upon collateral value, market value, if determinable, or the present value of the estimated future cash flows. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. Loans are placed on nonaccrual status when they are 90 days past due, unless they are adequately collateralized and in the process of collection. PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less accumulated depreciation computed on both the straight-line and accelerated methods over the estimated useful lives of the assets. Costs for maintenance and repairs are expensed currently. Costs of major additions or improvements are capitalized. OTHER REAL ESTATE OWNED (OREO): Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at the lower of the Bank's carrying amount or fair value less estimated selling cost at the date of foreclosure. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, these assets are carried at the lower of their new cost basis or fair value less cost to sell. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. INCOME TAXES: The Bancorp uses an asset and liability approach to financial accounting and reporting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. The Bancorp files consolidated Federal income tax returns with its subsidiary. EARNINGS PER SHARE: Earnings per share are calculated on the basis of the weighted average number of shares outstanding. The weighted average shares outstanding was 2,955,455, 2,966,409 and 2,977,655 for the years ended December 31, 2005, 2004 and 2003, respectively. IBT Bancorp, Inc./21 Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH EQUIVALENTS: For purposes of the Statements of Cash Flows, the Bancorp considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Bancorp considers all cash and amounts due from depository institutions, interest-bearing deposits in other banks, except certificates of deposit with maturities of more than three months, and federal funds sold to be cash equivalents for purposes of the statements of cash flows. RECLASSIFICATION OF PRIOR YEAR'S STATEMENTS: Certain previously reported items have been reclassified to conform to the current year's classifications. The reclassifications have no effect on total assets, total liabilities and stockholders' equity, or net income. NOTE 2 -- INVESTMENT SECURITIES Investment securities available for sale consist of the following:
DECEMBER 31, 2005 ------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ------------ ----------- ----------- ------------ Obligations of U.S. Government Agencies $ 80,139,533 $ 35,630 $(1,301,245) $ 78,873,918 Obligations of State and political sub-divisions 53,723,194 1,356,363 (271,660) 54,807,897 Mortgage-backed securities 55,228,872 114,890 (1,516,289) 53,827,473 Other securities 195,589 - (2) 195,587 Equity securities 7,764,789 557,507 (33,722) 8,288,574 ------------ ----------- ----------- ------------ $197,051,977 $ 2,064,390 $(3,122,918) $195,993,449 ============ =========== =========== ============ DECEMBER 31, 2004 ------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ------------ ----------- ----------- ------------ Obligations of U.S. Government Agencies $ 70,946,760 $ 212,077 $ (56,170) $ 71,102,667 Obligations of State and political sub-divisions 44,986,435 1,697,812 (238,524) 46,445,723 Mortgage-backed securities 64,928,907 422,687 (347,944) 65,003,650 Other securities 713,965 2,023 - 715,988 Equity securities 7,806,779 133,407 - 7,940,186 ------------ ----------- --------- ------------ $189,382,846 $ 2,468,006 $(642,638) $191,208,214 ============ =========== ========= ============
22/IBT Bancorp, Inc. Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 2 -- INVESTMENT SECURITIES (CONTINUED) Gross realized gains and losses on calls and sales of available-for-sale securities were:
YEARS ENDED DECEMBER 31, ------------------------------------ 2005 2004 2003 ---------- ---------- ---------- Gross realized gains: Obligations of U.S. Government Agencies $ -- $ 204,102 $ 75,646 Obligations of state and political sub-divisions 153,523 91,855 26,250 Mortgage-backed securities -- -- 279,457 Equity securities 120,744 87,333 151,802 ---------- ---------- ---------- $ 274,267 $ 383,290 $ 533,155 ========== ========== ========== Gross realized losses: Obligations of U.S. Government Agencies $ 45,679 $ 363,394 $ -- Mortgage-backed securities 92,399 -- 67,636 Equity securities -- 2,426,177 -- ---------- ---------- ---------- $ 138,078 $2,789,571 $ 67,636 ========== ========== ==========
In 2004, the Company recorded a $2,426,177 non-cash write-down of certain agency preferred stocks due to an impairment in value that was determined to be other than temporary. The amortized cost and estimated market value of the investment securities available for sale at December 31, 2005, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties.
AMORTIZED MARKET COST VALUE ------------ ------------ Due in one year or less $ -- $ -- Due after one year through five years 8,747,091 8,649,040 Due after five years through ten years 96,109,200 94,810,139 Due after ten years, includes equity securities 92,195,686 92,534,270 ------------ ------------ $197,051,977 $195,993,449 ============ ============
As a member of the Federal Home Loan Bank of Pittsburgh (FHLB), the Bank is required to maintain a minimum amount of FHLB stock. The minimum amount is calculated based on level of assets, residential real estate loans and outstanding FHLB advances. The Bank held $5,469,600 and $5,682,700 of FHLB stock at December 31, 2005 and 2004, respectively. IBT Bancorp, Inc./23 Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 2 -- INVESTMENT SECURITIES (CONTINUED) Temporarily impaired investments consist of the following:
DECEMBER 31, 2005 ---------------------------------------------------------------------------------------- LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL -------------------------- -------------------------- --------------------------- MARKET UNREALIZED MARKET UNREALIZED MARKET UNREALIZED VALUE LOSSES VALUE LOSSES VALUE LOSSES ------------ ----------- ----------- ----------- ------------ ----------- Obligations of U.S. Government Agencies $ 64,155,138 $ (984,395) $13,683,150 $ (316,850) $ 77,838,288 $(1,301,245) Mortgage-backed securities 22,243,112 (621,158) 24,593,146 (895,131) 46,836,258 (1,516,289) Obligations of state and political sub-divisions 14,909,740 (225,501) 2,100,444 (46,159) 17,010,184 (271,660) Other investments 979,056 (33,724) -- -- 979,056 (33,724) ------------ ----------- ----------- ----------- ------------ ----------- Total temporarily impaired securities $102,287,046 $(1,864,778) $40,376,740 $(1,258,140) $142,663,786 $(3,122,918) ============ =========== =========== =========== ============ ===========
Investments are reviewed for declines in value on a quarterly basis. Equity securities currently have market values that are in excess of carrying values. All other investments are interest rate sensitive. These investments earn interest at fixed or adjustable rates. The adjustable rate instruments are generally linked to an index, such as the 3 month libor rate, plus or minus a variable. The value of these instruments fluctuates with interest rates, therefore the changes in value are deemed to be temporary. NOTE 3 -- LOANS Major classifications of loans are as follows:
DECEMBER 31, -------------------------------- 2005 2004 ------------ ------------ Mortgage $252,699,327 $252,114,219 Home equity credit 19,684,198 23,201,124 Installment 93,428,367 84,673,524 Commercial 63,508,313 61,139,895 PHEAA 6,780,415 7,354,534 Municipal 9,148,382 10,050,265 Credit cards 61,868 44,882 Other 744,087 854,685 ------------ ------------ 446,054,957 439,433,128 Less: Allowance for loan losses 3,563,501 2,593,642 Deferred loan fees 266,112 291,210 ------------ ------------ $442,225,344 $436,548,276 ============ ============
24/IBT Bancorp, Inc. Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 3 -- LOANS (CONTINUED) The aggregate amount of demand deposit accounts with overdrawn balances that were reclassified as loan balances at December 31, 2005 and 2004 amounted to $607,114 and $715,870, respectively and are included in other loans. The total recorded investment in impaired loans amounted to $1,484,017 at December 31, 2005 and $1,535,834 at December 31, 2004. The allowance for loan losses related to impaired loans amounted to $522,857 and $412,470 at December 31, 2005 and 2004, respectively. Changes in the allowance for loan losses were as follows:
YEARS ENDED DECEMBER 31, ----------------------------------------- 2005 2004 2003 ----------- ----------- ----------- Balance, beginning of year $ 2,593,642 $ 3,284,830 $ 2,873,067 Provision charged to operations 1,200,000 600,000 600,000 Loans charged off (269,310) (1,338,749) (242,711) Recoveries 39,169 47,561 54,474 ----------- ----------- ----------- Balance, end of year $ 3,563,501 $ 2,593,642 $ 3,284,830 =========== =========== ===========
NOTE 4 -- PREMISES AND EQUIPMENT Premises and equipment which are stated at cost are as follows:
DECEMBER 31, ----------------------------- 2005 2004 ----------- ----------- Land $ 921,559 $ 921,559 Buildings and improvements 5,950,036 5,955,107 Furniture and equipment 7,744,717 7,413,916 ----------- ----------- 14,616,312 14,290,582 Less: Accumulated depreciation 8,991,740 8,058,302 ----------- ----------- $ 5,624,572 $ 6,232,280 =========== ===========
Depreciation expense was $994,839 in 2005, $1,009,989 in 2004 and $832,770 in 2003. Nine of the Bank's commercial branch office buildings and/or land, the Bank's trust division office and an operations facility are leased by the Bank. These leases have initial terms of 1 to 20 years, and all contain renewal options for additional years. In 2005, fully depreciated assets and the remaining depreciation on assets no longer in use, as a result of the closure of two branch offices, were written off. IBT Bancorp, Inc./25 Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 4 -- PREMISES AND EQUIPMENT (CONTINUED) The following is a summary of the future minimum lease payments under these operating leases: For the year ended December 31, 2006 $204,104 2007 167,428 2008 148,951 2009 148,894 2010 96,300 2011 and thereafter 180,984 -------- $946,661 ======== Rental expense under these operating leases was $247,327, $250,464 and $220,981 for the years ended December 31, 2005, 2004 and 2003, respectively. NOTE 5 -- JOINT VENTURE The Bancorp has an 85% limited partnership interest in T.A. of Irwin, L.P. This partnership provides title insurance to the general public. The Bancorp uses the equity method to account for its investment in the partnership. As of December 31, 2005 and 2004, the partnership is reflected in the other assets section of the balance sheet at $31,772 and $20,083, respectively. NOTE 6 -- BANK OWNED LIFE INSURANCE In 2001, the Bank purchased single premium life insurance policies on officers of the Bank at a cost of $10,000,000. At December 31, 2005 and 2004, the cash surrender value of these policies was $11,930,700 and $11,509,239, respectively, and is included in the other assets section of the balance sheet. The increase in cash surrender value of these policies is recorded as other income. NOTE 7 -- DEPOSITS Time deposits maturing in years ending December 31, as of December 31, 2005 are summarized as follows: 2006 $145,790,925 2007 50,017,326 2008 21,442,535 2009 13,087,855 2010 2,203,285 2011 and thereafter 18,525,116 ------------ $251,067,042 ============ 26/IBT Bancorp, Inc. Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 7 -- DEPOSITS (CONTINUED) The Bank held related party deposits of approximately $3,976,000 and $2,571,000 at December 31, 2005 and 2004, respectively. The Bank held time deposits of $100,000 or more of $64,684,980 and $63,260,047 at December 31, 2005 and 2004, respectively. NOTE 8 -- REPURCHASE AGREEMENTS The Bank offers its corporate customers an investment product fashioned in the form of a repurchase agreement. Under the terms of the agreement, deposits in designated demand accounts of the customer are put into an investment vehicle which is used daily to purchase an interest in designated U.S. Government or Agencies' securities owned by the Bank. The Bank in turn agrees to repurchase these investments on a daily basis and pay the customer the daily interest earned on them. The amount of repurchase agreements was $18,442,703 and $15,157,257 at December 31, 2005 and 2004, respectively. NOTE 9 -- PLEDGED ASSETS At December 31, 2005 and 2004, U.S. Government Agency obligations carried at approximately $40,865,000 and $48,257,000 respectively, were pledged to qualify for fiduciary powers, to secure public monies and for other purposes required or permitted by law. At December 31, 2005 and 2004, the carrying amount of securities pledged to secure repurchase agreements was approximately $30,917,000 and $23,525,000 respectively. NOTE 10 -- FHLB ADVANCES At December 31, 2005 and 2004, the Bank had the following advances from the Federal Home Loan Bank (FHLB).
2005 2004 INTEREST RATE MATURITY DATE --------------------- --------------------- ----------------------------- ------------------ $ 1,250,000 $ 1,250,000 2.54% Fixed February 21, 2006 1,250,000 1,250,000 2.83% Fixed August 21, 2006 1,416,489 2,233,153 2.99% Amortizing-Fixed August 20, 2007 2,000,000 2,000,000 3.67% Fixed September 5, 2007 1,734,636 2,532,161 2.79% Amortizing-Fixed January 28, 2008 5,000,000 5,000,000 5.63% Fixed to Float July 21, 2008 5,000,000 5,000,000 4.86% Fixed to Float October 23, 2008 8,000,000 8,000,000 3.48% Fixed w/Strike rate January 20, 2009 10,000,000 10,000,000 4.06% Fixed w/Strike rate July 22, 2009 4,000,000 4,000,000 5.18% Fixed w/Strike Rate February 23, 2011 4,000,000 4,000,000 4.98% Fixed to Float March 23, 2011 5,000,000 5,000,000 4.947% Fixed w/Strike Rate August 29, 2011 5,000,000 5,000,000 4.6% Fixed w/Strike Rate January 30, 2012 5,000,000 5,000,000 3.51% Fixed w/Strike Rate January 28, 2013 5,000,000 5,000,000 3.47% Fixed w/Strike Rate March 18, 2013 5,000,000 5,000,000 4.05% Fixed to Float August 20, 2014 --------------------- --------------------- $ 68,651,125 $70,265,314 ===================== =====================
Interest only is payable until maturity on all FHLB advances except for the FHLB advances with maturity dates of August 20, 2007 and January 28, 2008. Collateral for all advances includes all qualifying mortgages. IBT Bancorp, Inc./27 Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 10 -- FHLB ADVANCES (CONTINUED) The following is a summary of the principal payments due on FHLB amortizing advances at December 31, 2005.
Original loan amount $ 4,000,000 $ 2,500,000 Interest rate 2.79% 2.99% Monthly payment (includes interest) $ 71,502 $ 72,692 Number of payments 60 36 Maturity date January 28, 2008 August 20, 2007 Principal payments due December 31: 2006 $ 820,063 $ 841,420 2007 843,237 575,069 2008 71,336 -- --------------------- ----------------- Balance of loan at December 31, 2005 $ 1,734,636 $ 1,416,489 ===================== ===================
In 2005, the Bank renewed its line of credit with the FHLB in the amount of $20,000,000. The interest rate is variable and was 4.23% at December 31, 2005. The line of credit has an expiration date of May 11, 2006. There was no balance outstanding on the line of credit as of December 31, 2005. The Bank had maximum borrowing capacity with FHLB, including the line of credit, of approximately $301,914,000 and $308,386,000 at December 31, 2005 and 2004, respectively. NOTE 11 -- INCOME TAXES The provision for income taxes consists of:
YEARS ENDED DECEMBER 31, -------------------------------------------- 2005 2004 2003 ----------- ----------- ----------- Currently payable $ 3,086,159 $ 2,643,614 $ 3,424,374 Deferred (benefit) tax (327,826) 184,511 3,519 ----------- ----------- ----------- Total $ 2,758,333 $ 2,828,125 $ 3,427,893 =========== =========== ===========
The significant components of temporary differences for 2005, 2004 and 2003 are as follows:
YEARS ENDED DECEMBER 31, ----------------------------------------- 2005 2004 2003 --------- --------- --------- Provision for loan losses $(329,752) $ 153,231 $(201,201) Depreciation (137,670) (14,169) 143,959 Pension 106,946 85,095 28,457 Deferred loan fees 8,533 15,825 74,418 Other 24,117 (55,471) (42,114) --------- --------- --------- Total $(327,826) $ 184,511 $ 3,519 ========= ========= =========
28/IBT Bancorp, Inc. Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 11 -- INCOME TAXES (CONTINUED) A reconciliation of the federal statutory tax rate to the effective tax rate applicable to income before income taxes is as follows:
YEARS ENDED DECEMBER 31, --------------------------- % of Pretax Income --------------------------- 2005 2004 2003 ---- ---- ---- Provision at statutory rate 34.0% 34.0% 34.0% Effect of tax free income (7.7) (6.3) (5.2) Other (2.0) 4.0 (2.6) ---- ---- ---- Effective tax rate 24.3% 31.7% 26.2% ==== ==== ====
The deferred tax assets and deferred tax liabilities recorded on the balance sheet as of December 31, 2005 and 2004 are as follows:
2005 2004 ------------------------ ------------------------ DEFERRED TAX DEFERRED TAX ------------------------ ------------------------ ASSETS LIABILITIES ASSETS LIABILITIES ---------- ----------- ---------- ----------- Provision for loan losses $1,211,590 $ -- $ 881,838 $ -- Depreciation -- 166,238 -- 294,849 Pension expense -- 342,998 -- 236,052 Other 279,959 -- 337,330 28,247 SFAS 115 529,353 -- -- 620,625 ---------- ---------- ---------- ---------- $2,020,902 $ 509,236 $1,219,168 $1,179,773 ========== ========== ========== ==========
NOTE 12 -- SHAREHOLDER RIGHTS PLAN On November 18, 2003, the Board of Directors of the Bancorp adopted a Shareholder Rights Plan. The Board declared a dividend distribution of one Right for each outstanding share of common stock to stockholders of record at the close of business on December 1, 2003. Each Right initially entitled the registered holder to purchase from the Bancorp common stock worth $410 on the date of exercise, for a purchase price of $205, subject to adjustment. Initially, the Rights will be attached to all common stock certificates representing shares then outstanding, and no separate Rights certificates will be distributed. The Rights will separate from the common stock and a distribution date will occur upon the earlier of (i) 10 business days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person"), has acquired, or obtained the Right to acquire, beneficial ownership of 10% or more of the outstanding shares of common stock ("stock acquisition date") or (ii) 10 business days following the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 10% or more of such outstanding shares of common stock. The Rights are not exercisable until the distribution date and will expire at the close of business on December 1, 2013, unless earlier redeemed or exchanged by the Bancorp. IBT Bancorp, Inc./29 Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 12 -- SHAREHOLDER RIGHTS PLAN (CONTINUED) In the event that at any time following the Rights dividend declaration date, a person becomes the beneficial owner of 10% or more of the then-outstanding shares of common stock, each holder of a Right (other than Rights held by the party triggering the Rights and certain transferees which are voided) will thereafter have the right to receive, upon exercise, common stock (or, in certain circumstances, cash, property, or other securities of the Bancorp subject to certain limitations) having a value equal to two times the exercise price of the Right. However, Rights are not exercisable following the occurrence of the event set forth above until such time as the Rights are no longer redeemable by the Bancorp. NOTE 13 -- COMMITMENTS AND CONTINGENCIES In the normal course of business, there are various outstanding commitments and certain contingent liabilities which are not reflected in the accompanying financial statements. These commitments and contingent liabilities represent financial instruments with off-balance-sheet risk. The contract or notional amounts of those instruments were comprised of commitments to extend credit approximating $104,269,000 and $96,130,000 as of December 31, 2005 and 2004, respectively, and approximate fair value. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The same credit policies are used in making commitments and conditional obligations as for on-balance-sheet instruments. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation of the counterparty. The terms are typically for a one year period, with an annual renewal option subject to prior approval by management. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. These commitments are comprised primarily of available commercial and personal lines of credit. The exposure to loss under these commitments is limited by subjecting them to credit approval and monitoring procedures. Substantially all of the commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of the loan funding. Since many of the commitments are expected to expire without being drawn upon, the total contractual amounts do not necessarily represent future funding requirements. The Bancorp and Bank are involved in various legal actions from normal business activities. Management believes that the liability, if any, arising from such actions will not have a material adverse effect on the financial position of the Bancorp and Bank. NOTE 14 -- CONCENTRATION OF CREDIT The Bank primarily grants loans to customers in Western Pennsylvania, and maintains a diversified loan portfolio and the ability of its debtors to honor their contracts is not substantially dependent on any particular economic business sector. A substantial portion of the Bank's investments in municipal securities are obligations of state or political subdivisions located within Pennsylvania. As a whole, the Bank's loan and investment portfolios could be affected by the general economic conditions of Pennsylvania. In addition, at December 31, 2005 and 2004, a significant portion of the Bank's "due from banks" and "federal funds sold" is maintained with two large financial institutions located in Southwestern Pennsylvania. The Bank maintains a cash balance and federal funds sold at financial institutions that exceed the $100,000 amount that is insured by the FDIC. Amounts in excess of insured limits, per the institutions' records, were approximately $2,200,000 and $3,552,000 at December 31, 2005 and 2004, respectively. 30/IBT Bancorp, Inc. Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 15 -- EMPLOYEE BENEFIT PLANS DEFINED BENEFIT PLANS The Bank maintained one non-contributory defined benefit pension plan for its employees prior to 1995 (Plan #1). In 1995, various plan assumptions were changed which resulted in a reduction in benefits for older and long-standing employees. To compensate for this, a supplemental non-qualified plan was installed for those employees so affected (Plan #2). The Bank's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes for Plan #1. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Assets for the plans are primarily invested in U.S. Government obligations, corporate obligations, equity securities, and mutual funds whose valuations are subject to fluctuations of the securities' market. The actuarial measurement period of October 15, through October 14, was used to determine the components of the net periodic pension cost and the financial disclosures for both plans. The actuarial measurement date of October 15 was used in determining the plans' liabilities and asset information. The following is a combined summary of the plans' components as of December 31, 2005, 2004 and 2003, even though the information has been compiled on the basis of the actuarial measurement period.
2005 2004 2003 ----------- ----------- ----------- Change in Projected Benefit Obligation: Benefit obligation at beginning of year $ 3,655,011 $ 3,331,356 $ 2,739,116 Service cost 289,282 256,712 210,043 Interest cost 227,751 216,129 184,275 Actuarial loss due to settlements -- 8,099 -- Benefits paid (73,069) (350,346) (35,897) Other - net 357,012 193,061 233,819 ----------- ----------- ----------- Benefit obligation at end of year $ 4,455,987 $ 3,655,011 $ 3,331,356 =========== =========== =========== Change in Fair Value of Plan Assets: Plan assets at estimated fair value at beginning of year $ 2,783,121 $ 2,736,071 $ 2,201,346 Actual return on plan assets, net of expenses 157,829 146,318 305,653 Plan settlements -- (42,197) -- Benefits paid (73,069) (350,346) (35,897) Employer contributions 480,360 293,275 264,969 ----------- ----------- ----------- Fair value of plan assets at end of year $ 3,348,241 $ 2,783,121 $ 2,736,071 =========== =========== =========== Funded status $(1,107,746) $ (871,890) $ (595,285) Unrecognized net loss from actuarial experience 1,706,791 1,352,122 1,115,107 Unrecognized prior service cost (147,176) (165,438) (183,700) Unamortized net asset existing at date of adoption of SFAS No. 87 (17,917) (21,774) (27,075) Effect of settlements -- (5,989) -- ----------- ----------- ----------- Prepaid pension cost $ 433,952 $ 287,031 $ 309,047 =========== =========== ===========
IBT Bancorp, Inc./31 Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 15 -- EMPLOYEE BENEFIT PLANS (CONTINUED) Defined Benefit Plans (continued)
Net periodic pension cost included the following components: YEARS ENDED DECEMBER 31, ----------------------------------- 2005 2004 2003 --------- --------- --------- Service cost $ 289,282 $ 256,712 $ 210,043 Interest cost 227,751 216,129 184,275 Expected return on plan assets (219,638) (206,976) (167,906) Amortization of prior service cost (18,262) (18,262) (18,262) Amortization of transition asset (3,857) (4,098) (4,098) Recognized net actuarial loss 57,296 45,043 44,196 --------- --------- --------- Net periodic pension cost $ 332,572 $ 288,548 $ 248,248 ========= ========= ========= Amounts recognized in the consolidated balance sheets consist of: Years Ended December 31, ----------------------------------- 2005 2004 2003 --------- --------- --------- Prepaid benefit cost $1,043,094 $ 713,304 $ 536,653 ========== ========= =========
In the months of December 2005, 2004 and 2003, the Bank contributed $678,298, $480,360 and $293,275 respectively, to the plans subsequent to the actuarial measurement dates of October 15, 2005, 2004 and 2003. Because these employer contributions were paid after the actuarial measurement period ended, the Bank's prepaid pension cost at December 31, 2005, 2004 and 2003 was $1,043,094, $713,304 and $536,653, respectively. The combined accumulated benefit obligation for both plans was $3,237,383 and $2,675,106 at December 31, 2005, and 2004, respectively.
Weighted-average assumptions used to determine both the benefit obligations and net periodic pension Years Ended December 31, costs were as follows: -------------------------------------------- 2005 2004 2003 ------------ ------------- ------------ PLAN #1 Discount rate 6.00% 6.25% 6.50% Expected long-term return on plan assets 7.00% 7.00% 7.00% Rate of compensation increase 3.50% - 5.50% 3.50% - 5.50% 3.50% - 5.50% PLAN #2 Discount rate 7.00% 7.00% 7.00% Expected long-term return on plan assets 6.00% 6.00% 7.00% Rate of compensation increase 3.50% 3.50% 3.50%
The interest rate assumption utilized for the plan valuation methods is 7%. The interest rate assumption is reasonable considering historical rates of return and the asset allocation mix of the plan. 32/IBT Bancorp, Inc. Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 15 -- EMPLOYEE BENEFIT PLANS (CONTINUED) DEFINED BENEFIT PLANS (CONTINUED) Pension plan weighted-average asset allocations by investment category are as follows:
DECEMBER 31, ------------------------------ 2005 2004 2003 ---- ---- ----- Cash and cash equivalents 6% 9% 17% Stocks 18% 22% 24% Bonds 9% 12% 16% Mutual funds 36% 33% 30% Government securities 31% 24% 13% --- --- --- Total 100% 100% 100% === === ===
The Bank's pension plan funds are managed and held in trust by the Bank's Trust Division. The investment objective and strategy for investing plan assets calls for a "Moderate Growth Income Objective". This objective provides for a preservation of the principal's purchasing power and moderate growth and income. The range of equity exposure is from 40 to 80 percent and fixed income maturities to 30 years. The investment policies of the plan trustees prohibit the use of derivatives. In addition, the plan assets are diversified appropriately across different business sections for individual securities and the plan trustees have further diversified plan assets by maintaining an investment in mutual funds. OTHER EMPLOYEE BENEFIT PLANS The Bank also maintains non-qualified deferred compensation plans for certain directors, which are generally funded by life insurance. Prior to 2002, premiums on those policies were paid for by the Bank. In 2002, the Bank elected to pay those premiums with dividends accruing on the insurance policies. The present value of these benefits to be paid under the programs is being accrued over the estimated remaining service period of the participants. The liability for these future obligations was $602,118 and $588,611 at December 31, 2005 and 2004, respectively. In addition, the Bank maintains a qualified 401(k) - deferred compensation plan for eligible employees. The plan is designed to provide a predetermined matching contribution by the Bank based on compensation deferrals by participants in the plan. The Bank contributions, including administrative fees, for 2005, 2004 and 2003 amounted to $80,561, $77,362 and $68,479, respectively. NOTE 16 -- RELATED-PARTY TRANSACTIONS At December 31, 2005 and 2004, certain officers and directors of the Bancorp and the Bank, and companies in which they have beneficial ownership, were indebted to the Bank in the aggregate amount of approximately $8,257,000 and $11,565,000 respectively. During 2005, new loans to such related parties were approximately $1,749,000 and repayments approximated $5,057,000. IB T Bancorp, Inc./33 Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 17 -- DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Cash and cash equivalents: The carrying amount is a reasonable estimate of fair value. Certificates of deposit: The carrying amounts of these short term investments approximate their fair value. Investment securities: The fair value of securities is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. Federal Home Loan Bank stock: The carrying value of the FHLB stock is a reasonable estimate of fair value due to restrictions on the securities. Loans receivable: For certain homogeneous categories of loans, fair value is estimated using the quoted market prices for securities backed by similar loans adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers for the same remaining maturities. Deposit liabilities: The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Short-term borrowings: The carrying amounts of federal funds purchased and borrowings under repurchase agreements are short-term borrowings and approximate their fair values. FHLB advances: The fair value of FHLB advances was determined using a discounted cash flow analysis based on current FHLB advance rates for advances with similar maturities. The estimated fair value of the Bancorp's financial instruments as of December 31, 2005 are as follows:
CARRYING FAIR AMOUNT VALUE ------------ ------------ Financial Assets: Cash and cash equivalents $ 15,499,940 $ 15,499,940 Certificate of deposit $ 100,000 $ 100,000 Investment securities $195,993,449 $195,993,449 Federal Home Loan Bank stock $ 5,469,600 $ 5,469,600 Loans receivable $442,225,344 $452,066,869 Financial liabilities: Deposits $520,485,758 $520,564,662 Short-term borrowings $ 30,910,703 $ 30,910,703 FHLB advances $ 68,651,125 $ 69,968,141
The market values of investments, which are based upon quoted market prices, are contained in Note 2. 34/IBT Bancorp, Inc. Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 18 -- REGULATORY MATTERS The Bank is subject to legal limitations on the amount of dividends that can be paid to the Bancorp. The Pennsylvania Banking Code restricts the payment of dividends, generally to the extent of its retained earnings. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios, as set forth below, of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2005 and 2004, that the Bank meets all capital adequacy requirements to which it is subjected. The Bank's actual capital ratios as of December 31, 2005 and 2004, the minimum ratios required for capital adequacy purposes, and the ratios required to be considered well capitalized under the Federal Deposit Insurance Corporation Improvement Act of 1991 provisions are as follows:
DECEMBER 31, MINIMUM WELL --------------- CAPITAL CAPITALIZED 2005 2004 REQUIREMENTS REQUIREMENTS ---- ----- ------------ -------------- Risk-based capital ratio 14.2% 14.5% 8.0% 10.0% or higher Leverage capital ratio 8.9% 8.5% 3.0% to 4.0% 5.0% or higher Tier 1 risk-based capital ratio 15.1% 13.9% 4.0% 6.0% or higher
Included in cash and due from banks are required federal reserves of $7,450,000 and $7,032,000 at December 31, 2005 and 2004, respectively, for facilitating the implementation of monetary policy by the Federal Reserve System. The required reserves are computed by applying prescribed ratios to the classes of average deposit balances. These reserves are held in the form of due from banks. NOTE 19 -- STOCK OPTION PLAN The Bancorp's Stock Option Plan authorizes the granting of stock options to directors and employees for up to 300,000 shares of common stock. The stock option plan provides for a term of ten years, after which no awards can be made. Under the plan, the exercise price of each option equals the closing market price of the Bancorp's stock on the grant date, and an option's maximum term is ten years. Options constitute both incentive and non-incentive stock options and are generally granted annually in the month of May. Options granted to directors are vested immediately and are exercisable six months from the grant date and options granted to employees generally vest over three years. As of December 31, 2005, a total of 150,000 stock options have been granted, of which, 82,502 are vested and exercisable, 4,769 have not vested, 53,528 have been exercised and 9,201 have been forfeited. IBT Bancorp, Inc./25 Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 19 -- STOCK OPTION PLAN (CONTINUED) A summary of the status of the Bank's stock option plan is presented below:
DECEMBER 31, -------------------------------------------------------------------------------- 2005 2004 2003 ------------------------ ------------------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 102,089 $31.13 118,054 $ 30.94 119,709 $26.53 Granted -- -- -- $ -- 20,500 $51.40 Forfeitures -- -- (5,034) $ 39.34 (1,001) $29.58 Exercised (14,818) $26.75 (10,931) $ 25.35 (21,154) $25.85 ---------- -------- -------- Outstanding at December 31, 87,271 $30.86 102,089 $ 31.13 118,054 $30.94 ========== ======== ======== Exercisable at December 31, 82,502 $30.75 85,223 $ 28.71 73,887 $25.54 ========== ======= ========
The options outstanding at December 31, 2005, 2004 and 2003 had a weighted-average contractual maturity of 5.74 years, 6.68 years, and 7.66 years, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
DECEMBER 31, -------------------------------------- 2005 2004 2003 ------------ ------------ -------- Dividend yield None granted None granted 2.72% Expected life 7 years Expected volatility 20% Risk-free interest rate 4.00% Weighted-average fair value $10.75
Effective January 1, 2003, the Bank adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) 123, Accounting for Stock-Based Compensation, prospectively to all employee awards granted in 2003. Awards under the plan vest over periods ranging from six months to three years. Therefore, the cost related to stock-based compensation included in the determination of net income for 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of Statement 123. 36/IBT Bancorp, Inc. Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 19 -- STOCK OPTION PLAN (CONTINUED) The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each year.
YEARS ENDED DECEMBER 31, -------------------------------------------- 2005 2004 2003 ------------ -------------- ------------- Net income, as reported $ 8,579,351 $ 6,084,738 $ 9,646,246 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 39,034 39,034 67,422 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects -- 85,525 151,518 ------------ -------------- ------------- Pro-forma net income $ 8,618,385 $ 6,038,247 $ 9,562,150 ============ ============== ============= Earnings per share: Basic-as reported $ 2.90 $ 2.05 $ 3.24 ============ ============== ============= Basic-pro forma $ 2.92 $ 2.04 $ 3.21 ============ ============== ============= Diluted-as reported $ 2.88 $ 2.02 $ 3.19 ============ ============== ============= Diluted-pro forma $ 2.89 $ 2.01 $ 3.17 ============ ============== =============
Weighted-average number of shares outstanding assuming dilution of exercisable stock options using the treasury stock method was 2,982,450, 3,005,367, and 3,020,075 for the years ended December 31, 2005, 2004 and 2003, respectively. NOTE 20 -- TREASURY STOCK In 2004 the Bancorp repurchased 22,200 shares of its stock for $1,006,135 and is being held as treasury stock. The Bancorp did not repurchase any shares of its own stock during 2005. NOTE 21 -- RECENT ACCOUNTING PRONOUNCEMENTS In 2005, the FASB issued FASB interpretation ("FIN") No. 47, Accounting for Asset Retirement Obligations. FIN 47 clarifies that the term conditional asset retirement obligations, refers to a legal obligation to perform asset retirement activity in which the timing and/or the method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement obligation is unconditional even though uncertainty exists about the timing and/or method of settlement. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. Also in 2005, the Financial Accounting Standards Board issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3. Management does not believe either statement will have an impact on the Bank or its operations. IBT Bancorp, Inc./37 Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 22 -- PARENT COMPANY FINANCIAL INFORMATION The condensed financial information for IBT Bancorp, Inc. as of December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003 is as follows:
BALANCE SHEETS DECEMBER 31 ------------------------- 2005 2004 ----------- ----------- ASSETS Cash in bank $ 522,780 $ 264,390 Investment in subsidiary 60,002,071 58,868,856 Securities available for sale 294,163 513,157 Other assets 261,979 241,717 ----------- ----------- TOTAL ASSETS $61,080,993 $59,888,120 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES $ -- $ 45,358 STOCKHOLDERS' EQUITY 61,080,993 59,842,762 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $61,080,993 $59,888,120 =========== ===========
STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, ------------------------------------ 2005 2004 2003 ---------- ---------- ---------- INCOME Dividends from subsidiary $5,650,000 $5,900,000 $3,600,000 Other dividends 11,280 11,916 14,156 Investment security gains 120,744 87,333 151,802 Income from joint ventures 34,804 55,139 218,307 EXPENSES Professional fees 105,943 97,126 167,658 Miscellaneous 63,142 60,636 62,954 ---------- ---------- ---------- INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 5,647,743 5,896,626 3,753,653 EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 2,931,608 188,112 5,892,593 ---------- ---------- ---------- NET INCOME $8,579,351 $6,084,738 $9,646,246 ========== ========== ==========
38/IBT Bancorp, Inc. Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary Years Ended December 31, 2005, 2004 and 2003 NOTE 22 -- PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, ----------------------------------------- 2005 2004 2003 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 8,579,351 $ 6,084,738 $ 9,646,246 Adjustments to reconcile net income to net cash provided by operating activities: Net undistributed earnings of joint ventures (34,805) (55,139) (218,307) Investment security gains (120,744) (87,333) (151,802) Decrease in cash due to changes in assets and liabilities: Equity in undistributed earnings of subsidiary (2,931,608) (188,112) (5,892,593) ----------- ----------- ----------- NET CASH FROM OPERATING ACTIVITIES 5,492,194 5,754,154 3,383,544 CASH FLOWS FROM INVESTING ACTIVITIES Distributions from joint ventures 23,116 56,365 279,137 Proceeds from sale of securities available for sale 185,899 168,033 166,846 Purchase of securities available for sale (4,783) (22,355) (1,577) ----------- ----------- ----------- NET CASH FROM INVESTING ACTIVITIES 204,232 202,043 444,406 CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (5,438,036) (4,746,485) (4,168,721) Purchase of Treasury Stock -- (1,006,135) -- ----------- ----------- ----------- NET CASH USED BY FINANCING ACTIVITIES (5,438,036) (5,752,620) (4,168,721) ----------- ----------- ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS 258,390 203,577 (340,771) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 264,390 60,813 401,584 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 522,780 $ 264,390 $ 60,813 =========== =========== ===========
IBT Bancorp, Inc./39 Notes to Consolidated Financial Statements/IBT Bancorp, Inc., and Subsidiary YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 NOTE 23 -- CONDENSED CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
QUARTERS ENDED 2005 --------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ---------- ---------- ------------ ------------ Interest income $8,738,031 $8,814,344 $9,016,445 9,202,482 Interest expense 3,126,624 3,280,426 3,516,174 3,758,562 ---------- ---------- ---------- ---------- Net interest income 5,611,407 5,533,918 5,500,271 5,443,920 Provision for loan losses 300,000 300,000 300,000 300,000 Non-interest income 1,624,670 1,777,621 1,638,471 1,594,390 Non-interest expense 3,710,161 4,064,011 4,134,575 4,278,237 ---------- ---------- ---------- ---------- Income before income taxes 3,225,916 2,947,528 2,704,167 2,460,073 Income tax expense 901,770 621,685 665,927 568,951 ---------- ---------- ---------- ---------- Net income $2,324,146 $2,325,843 $2,038,240 $1,891,122 ========== ========== ========== ========== Net income per Share of Capital Stock $ 0.79 $ 0.79 $ 0.69 $ 0.63 ========== ========== ========== ========== QUARTERS ENDED 2004 --------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ---------- ---------- ------------ ------------ Interest income $8,310,564 $8,372,018 $8,401,372 $8,641,765 Interest expense 2,852,344 2,877,888 2,969,697 3,107,880 ---------- ---------- ---------- ---------- Net interest income 5,458,220 5,494,130 5,431,675 5,533,885 Provision for loan losses 125,000 125,000 40,000 310,000 Non-interest income 1,348,055 1,336,940 1,269,911 1,160,913 Non-interest expense 3,649,837 3,867,618 3,714,607 6,288,804 ---------- ---------- ---------- ---------- Income before income taxes 3,031,438 2,838,452 2,946,979 95,994 Income tax expense 678,843 750,216 785,605 613,461 ---------- ---------- ---------- ---------- Net income $2,352,595 $2,088,236 $2,161,374 $ (517,467) ========== ========== ========== ========== Net income per Share of Capital Stock $ 0.79 $ 0.70 $ 0.73 $ (0.17) ========== ========== ========== ==========
40/IBT Bancorp, Inc. IBT Bancorp, Inc./Corporate Profile IBT BANCORP, INC. CORPORATE PROFILE IBT Bancorp, Inc. (the "Company"), a Pennsylvania corporation, is the bank holding company for Irwin Bank & Trust Company ("Irwin Bank"). Irwin Bank is the principal subsidiary of the Company. Irwin Bank & Trust Company was incorporated in 1922 under the laws of Pennsylvania as a commercial bank. The Bank is headquartered in Irwin, Pennsylvania and conducts business through 7 full service branches, 4 supermarket branches, 2 loan offices, and a trust office in the Pennsylvania counties of Westmoreland and Allegheny. Irwin Bank is a diversified financial services institution providing a broad range of commercial and retail banking services, as well as trust services to consumers and businesses. Deposits in Irwin Bank are insured by the Federal deposit Insurance Corporation ("FDIC") to applicable limits. STOCK MARKET INFORMATION The Company's common stock is listed on the American Stock Exchange ("AMEX") under the symbol "IRW". As of March 1, 2005, IBT Bancorp, Inc. had approximately 1,306 shareholders of record and 2,955,455 shares of common stock outstanding. The number of stockholders does not reflect persons or entities who hold their stock in nominee or "street" name through various brokerage firms
Price Range Cash Dividends High ($) Low ($) Declared Per Share ($) 2005 First Quarter 48.30 43.75 .46 Second Quarter 45.50 37.00 .46 Third Quarter 44.60 40.50 .46 Fourth Quarter 46.30 40.50 .46 2004 First Quarter 62.60 47.85 .40 Second Quarter 48.09 44.87 .40 Third Quarter 51.00 45.50 .40 Fourth Quarter 50.25 45.20 .40
IBT Bancorp, Inc./41 IBT Bancorp, Inc./Corporate Profile The ability of the Company to pay dividends is dependent upon the ability of Irwin Bank to pay dividends to the Company. Because Irwin Bank is a depository institution insured by the FDIC it may not pay dividends or distribute capital assets if it is in default on any assessment due the FDIC. Additionally, Irwin Bank is also subject to certain state banking regulations. Under Federal Reserve Policy, the Company is required to maintain adequate regulatory capital and is expected to act as a source of financial strength to Irwin Bank and to commit resources to support Irwin Bank in circumstances where it might not do so absent such a policy. The policy could have the effect of reducing the amount of dividends declarable by the Company. ANNUAL SHAREHOLDERS MEETING The annual meeting of shareholders of IBT Bancorp, Inc., will be held on Tuesday April 18, 2006 at 2:00 PM local time, at the Irwin Masonic Hall, located at 417 Main Street, Irwin Pennsylvania 15642. FORM 10-K The Annual Report for the year ended December 31, 2005 filed with the Securities and Exchange Commission on Form 10-K, is available without charge upon written request. For a copy of the Form 10-K please contact: Raymond G. Suchta, Senior Vice President and Chief Financial Officer, IBT Bancorp, Inc., 309 Main Street, Irwin, PA 15642. TRANSFER AGENT INDEPENDENT AUDITORS Registrar and Transfer Company Edwards Sauer & Owens, P.C. Investor Relations 500 Warner Centre 10 Commerce Drive Pittsburgh, PA 15222 Cranford, New Jersey 07016-3572 1-800-368-5948 SPECIAL COUNSEL Malizia, Spidi & Fisch, PC 901 New York Avenue, NW Suite 210 East Washington, D.C. 20001 42/IBT Bancorp, Inc. Back row: BOARD OF DIRECTORS DR. GRANT J. SHEVCHIK Director RICHARD J. HOFFMAN Director SECOND ROW: ROBERT C. WHISNER Director [GRAPHIC OMITTED] CHARLES W. HERGENROEDER Director THOMAS E. DEGER Director FRONT ROW: JOHN N. BRENZIA Director RICHARD L. RYAN Director ROBERT REBICH, JR. Chairman CHARLES G. URTIN President/CEO EMPLOYEE MILESTONES, PROMOTIONS, AND NEW HIRES. TOP ROW: DEBRAH J. BACHY Loan Center Manager Promoted: June, 2005 CAROLYN SUE BOZZICK Assistant Vice President/Branch Manager-Haymaker Office Promoted: April, 2005 [GRAPHIC OMITTED] JUDI L. HEBRANK Operations Officer/Data Processing Promoted: December, 2005 DEBORAH L. KUKIC Assistant Vice President/ Training Officer Promoted: April, 2005 BOTTOM ROW: DAWN M. SIMPSON Deposit Operations Officer Promoted: April, 2005 NANCY A. SMITH Vice President/Mortgage Lending Promoted: April, 2005 DAVID J. WHEATON Vice President/Commercial Lending Hired: May, 2005 RICHARD P. ZELAZNY Assistant Vice President UVEST Investment Consultant Hired: January, 2005. The hard work and dedication of our employees make the continuing success of Irwin Bank & Trust Company possible. Their commitment and community- oriented spirit are a major part of what makes us unique as a community bank offering "big city" capabilities. In 2005, Nancy J. McCullough was recognized for her forty-five years of service, Sharon A. Jaffre was recognized for her thirty-five years of service, and Sara L. Benson and Patricia A. Debold were each recognized for their twenty-five years of service. We are proud to honor these employees for their many years of dedication and hard work for Irwin Bank & Trust Company. We are also pleased to recognize our officers who achieved higher rank and those who joined Irwin Bank & Trust Company last year.
IRWIN BANK & TRUST COMPANY LOCATIONS MAIN OFFICE | TRUST DIVISION 309 MAIN STREET | SUITE 204 IRWIN, PA 15642 | 20 N. PENNSYLVANIA AVENUE 724-863-3100 | GREENSBURG, PA 15601 724-836-2010 BRANCH OFFICES IN STORE LOCATIONS LOAN CENTER LOCATIONS GREENSBURG (TRIANGLE DR.) FT. ALLEN MAIN OFFICE LOAN CENTER 4 TRIANGLE DRIVE INSIDE HEMPFIELD SHOP N' SAVE 319 MAIN STREET GREENSBURG, PA 15601 ROUTE 136 & JANYCE DRIVE IRWIN, PA 15642 724-837-5000 GREENSBURG, PA 15601 724-863-3100 724-853-8540 GREENSBURG (PA COMMONS) IRWIN-NORTH HUNTINGDON MT. PLEASANT LOAN CENTER 20 N. PENNSYLVANIA AVENUE INSIDE SCOZIO`S SHOP N' SAVE 445 WEST MAIN STREET GREENSBURG, PA 15601 NORWIN HILLS SHOPPING CENTER MT. PLEASANT, PA 15666 724-837-5000 8775 NORWIN AVENUE 724-547-2255 NORTH HUNTINGDON, PA 15642 724-861-8701 MONROEVILLE PENN CROSSING HAYMAKER VILLAGE INSIDE SCOZIO'S FESTIVAL FOODS 4580 BROADWAY BLVD. 2000 PENNY LANE MONROEVILLE, PA 15146 JEANNETTE, PA 15644 412-858-4450 724-744-6111 PENN TOWNSHIP WHITE OAK 4021 ROUTE 130 INSIDE SCOZIO'S SHOP N' SAVE IRWIN, PA 15642 OAK PARK MALL 724-744-2176 2001 LINCOLN WAY WHITE OAK, PA 15131 412-664-0984 ROUTE 30 9350 ROUTE 30 IRWIN, PA 15642 724-863-2510 WHITE OAK OAK PARK MALL 2003 LINCOLN WAY WHITE OAK, PA 15131 412-678-3000 (LOGO:) IRWIN BANK & TRUST COMPANY
www.myirwinbank.com EX-21 3 ex-21.txt SUBSIDIARIES OF THE REGISTRANT SUBSIDIARIES OF THE REGISTRANT Parent - ------ IBT Bancorp, Inc. State or Other Jurisdiction Percentage Subsidiaries of Incorporation Ownership - ------------ ---------------- --------- Irwin Bank & Trust Company Pennsylvania 100% Subsidiaries of Irwin Bank & Trust Company - ------------------------------------------ T.A. of Irwin, LP Pennsylvania 85% EX-23 4 ex-23.txt CONSENT OF EDWARDS SAUER & OWENS, P.C. EDWARDS Certified Public Accountants & Business Advisors SAUER & ------------------------------------------------ OWENS 500 Warner Centre, 332 Fifth Avenue, Pittsburgh PA 1522 Phone: 412-281-9211 Fax: 412-281-2407 A Professional Corporation www.esocpa.com Direct Dial: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders IBT Bancorp, Inc. 309 Main Street Irwin, PA 15642 We consent to the incorporation by reference in the registration statement on Form S-8 pertaining to IBT Bancorp, Inc.'s 2000 Stock Option Plan filed June 29, 2000, of our report dated February 3, 2006, relating to the consolidated balance sheets of IBT Bancorp, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2005, management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 and the effectiveness of internal control over financial reporting as of December 31, 2005, which report is incorporated by reference in the December 31, 2005 annual report on Form 10-K of IBT Bancorp, Inc. /s/ Edwards Sauer & Owens, P.C. Edwards Sauer & Owens, P.C. March 6, 2006 Pittsburgh, Pennsylvania EX-31 5 ex31-1.txt CERTIFICATION CERTIFICATION I, Charles G. Urtin, President and Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of IBT Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer's auditors and the audit committee of the issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal control over financial reporting. Date: March 8, 2006 /s/Charles G. Urtin ------------------------------------- Charles G. Urtin President and Chief Executive Officer EX-31 6 ex31-2.txt CERTIFICATION CERTIFICATION I, Raymond G. Suchta, Vice President and Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of IBT Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer's auditors and the audit committee of the issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal control over financial reporting. Date: March 8, 2006 /s/Raymond G. Suchta ------------------------------- Raymond G. Suchta Chief Financial Officer EX-32 7 ex-32.txt CERTIFICATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K for the year ended December 31, 2005 (the "Report") of IBT Bancorp, Inc. (the "Company") as filed with the Securities and Exchange Commission on the date hereof, we, Charles G. Urtin, President and Chief Executive Officer, and Raymond G. Suchta, Chief Financial Officer, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/Charles G. Urtin /s/Raymond G. Suchta - ------------------------------------- -------------------------------------------- Charles G. Urtin Raymond G. Suchta President and Chief Executive Officer Chief Financial Officer (Principal Financial and Accounting Officer) March 8, 2006
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