IBT BANCORP, INC.
2003 ANNUAL REPORT
SELECTED FINANCIAL INFORMATION
IBT BANCORP, INC & SUBSIDIARY
AT OR FOR THE YEARS ENDED
2003 2002 2001 2000 1999
(Dollars in thousands, except per share amounts)
SELECTED BALANCE SHEET DATA:
Assets $ 629,530 $ 584,035 $ 524,044 $ 496,379 $ 445,721
Cash and cash equivalents 15,829 15,066 25,218 21,746 19,264
Securities available for sales 172,448 186,718 162,968 167,874 151,063
Securities held to maturity - - - - -
Loans receivable (net) 416,286 359,872 315,132 291,914 260,502
Deposits 492,158 468,257 422,462 409,638 368,680
Repurchase agreements 12,611 14,526 11,207 9,022 6,457
Federal funds purchased 7,900 - - - 7,000
FHLB advances 53,308 40,000 35,000 28,000 22,000
Shareholders' equity 59,606 56,151 49,725 44,615 37,905
Selected Results of Operations
Interest income $ 33,398 $ 33,560 $ 35,185 $ 33,787 $ 29,731
Net interest income 22,083 20,732 18,226 17,200 16,087
Provision for loan losses 600 1,100 500 300 300
Net interest income after provision
for loan losses 21,483 19,632 17,726 16,900 15,787
Other income 5,891 5,317 4,009 2,946 2,764
Other expense 14,300 12,831 11,284 10,181 9,233
Net income 9,646 8,937 7,465 6,705 6,336
PER SHARE DATA:
Net Income
Basic $ 3.24 $ 3.00 $ 2.49 $ 2.23 $ 2.10
Diluted 3.19 2.99 2.49 2.23 2.10
Cash dividends declared 1.40 1.20 1.04 0.92 0.80
SELECTED RATIOS:
Return on average assets 1.59% 1.61% 1.45% 1.44% 1.49%
Return on average equity 16.54% 16.95% 15.57% 16.87% 16.54%
Ratio of average equity to average assets 9.59% 9.47% 9.31% 8.52% 8.99%
Dividend payout 43.21% 40.00% 41.77% 41.26% 38.10%
A MESSAGE TO OUR STOCKHOLDERS
2003 FINANCIAL PERFORMANCE.
Following 2002's "record-breaking" performance, 2003 was a year of
"ground-breaking" accomplishments resulting in continued growth, strong earnings
and impressive stock performance for IBT Bancorp, Inc. With its stock price
closing the year at $59.23, IBT Bancorp, Inc. shareholders achieved a $21.28 per
share or 56% gain on their investment. When dividends are included, the total
return was 60%. The gain was influenced by the company's decision to begin
trading on the American Stock Exchange. Strong performance by IBT Bancorp,
Inc.'s subsidiary Irwin Bank & Trust Company also contributed to the increase.
For 2003, the company achieved 7.8% growth in assets, 7.9% growth in earnings
and a 16.7% increase in the dividend.
GROUND-BREAKING EVENTS.
On April 1, 2003, IBT Bancorp, Inc. stock was listed and began trading on the
American Stock Exchange under the symbol "IRW". The exposure of the listing
positively impacted the stock's liquidity causing an immediate increase in the
price of IBT Bancorp, Inc. shares. Average daily trading volume was positively
affected, increasing 262% from 2002 to 2003. The stock is now part of the
Russell 3000 index.
On October 20, 2003, a new deposit product called Maximum Checking was
introduced and added to the Bank's portfolio. It was designed to attract and
retain customers that maintain higher checking account balances. Robust deposits
indicated an enthusiastic customer response to the new account. Irwin Bank and
Trust Company's deposit products now fully address competitive offerings and
satisfy customer demand.
In June 2003, Irwin Bank and Trust Company broke ground (literally) for
construction of a new, full-service branch office in Greensburg, Pennsylvania.
The new office opened on November 10, 2003. The facility expands the franchise
in the market area's dominant community and further establishes the Bank as
Westmoreland County's largest local financial institution. We will continue to
assess other opportunities for expansion and take advantage of them when
appropriate.
A final highlight of 2003 was the introduction of check imaging technology in
November. As part of the process, Irwin Bank & Trust Company also improved the
quality and readability of customer statements. The new technology has enabled
the Bank to be fully compliant with the Check 21 government mandate which
requires all banks to implement check imaging.
Groundbreaking for the new Greensburg office took place on June 10, 2003,
attended by the Company's Directors, the Greensburg Advisory Committee, and
Local, County and State Elected Officials. Shown from left to right,
Westmoreland County Commissioner Tom Balya, Branch Manager Kathleen
Jacquette-Tosh, Company President Charles G. Urtin, Greensburg Mayor Karl
Eisaman and Chairman of the Board J. Curt Gardner.
1
CHALLENGES, TRENDS AND STRATEGY.
As we had projected in 2002, continued margin compression throughout the banking
industry in 2003 was caused by historically low interest rates. During 2003, the
Company's net interest margin declined from 3.94% in 2002 to 3.83% in 2003.
However, despite the decrease, net income for the year rose 7.9%. Contributing
to the increase in net income was a 9.4% improvement in net interest income and
an 10.8% increase in non-interest income, offset by an 11.4% increase in
non-interest expenses. The overall increase in net interest income was the
result of an increase in interest bearing assets. However, the increase was
offset by the decrease in the net-interest margin. It appears that interest
rates will remain low through 2004 and cause continued pressure on banks
nationwide.
Increasing bank deposits was a difficult challenge in 2003 due to aggressive
competition and improved stock market performance. The robust stock market
attracted investors away from insured bank deposit instruments. The low rate
environment helped Company assets increase by way of record-breaking consumer
and real-estate mortgage activity. However, there was a seasonal decline in
consumer mortgage activity in the fourth quarter and there are indications that
the refinancing boom may have peaked. This trend may be at least partially
offset by new residential construction in our market area which remains strong.
A projected increase in demographic households locally and county-wide should
also have a positive impact on loan demand.
LOOKING AHEAD.
Our expectation is for challenges to continue in 2004. The net interest margin
will remain under pressure as long as interest rates remain at historic lows. To
offset the challenge, we remain focused on controlling expenses, growing
non-interest income, exploring prudent expansion opportunities and improving
customer retention.
Non-interest income growth potential exists in the Company's UVest and Trust
divisions. Our marketing strategy will emphasize internal opportunity by
improving the sales capability of our staff and improving our knowledge and
management of customer relationships. To facilitate the process, branch managers
now have direct access to customer relationship (CRM) data.
We will continue to design and implement strategies that focus on what we do
best, community banking. By listening to our customers and responding to their
changing needs, we will continue to build strong customer relationships, deliver
product value, and provide community leadership as our core community banking
strategy.
/S/ Charles G. Urtin /s/ J. Curt Gardner
Charles G. Urtin J. Curt Gardner
President & Chief Executive Officer Chairman of the Board
IBT Bancorp, Inc. IBT Bancorp, Inc.
2
[GRAPHIC OMITTED]
BOARD OF DIRECTORS / MANAGEMENT
IRWIN BANK & Trust Company Management
(Back row:) Raymond G. Suchta, Senior Vice President / CFO
David A. Finui, Senior Vice President / COO
(Seated front row:) Robert A. Bowell, Executive Vice President /
Secretary-Treasurer / CLO
Charles G. Urtin, President / CEO
[GRAPHIC OMITTED]
IBT BANCORP, INC. / IRWIN BANK & Trust Company
Board of Directors
(Back row:) J. Curt Gardner, Chairman
Edwin A. Paulone, Director
Dr. Grant J. Shevchik, Director
Charles G. Urtin, President / CEO
Richard L. Ryan, Director
(Seated front row:) Thomas Beter, Director
Robert Rebich, Director
Richard J. Hoffman, Director,
Robert C. Whisner, Director
3
THE AMERICAN STOCK EXCHANGE WELCOMES IBT BANCORP, INC.
IBT Bancorp began trading on the American Stock Exchange under the symbol "IRW"
on April 1, 2003. The AMEX listing benefits existing and future shareholders of
IBT Bancorp, Inc. by ensuring an efficient and liquid market. Valuation based on
supply and demand is enhanced by exposing fundamentals to the national and
international investing community. The auction market and specialist system of
the AMEX provide the fairest, most efficient, and most liquid market. The
increased exposure to the institutional investment community earned the Company
a listing on the Russell 3000 index. Bottom line: IBT Bancorp, Inc. shareholders
enjoyed a 56% increase in value in 2003.
Director Grant J. Shevchik, President and CEO Charles G. Urtin, COO David A.
Finui and CFO Raymond G. Suchta ring the opening bell at the American Stock
Exchange on the first day of Company stock trading, April 1, 2003.
A NEW FULL SERVICE BANKING FACILITY
On November 12, 2003, Irwin Bank and Trust Company opened its new branch banking
facility in Greensburg, Pennsylvania. The Company's design committee and
architect Barry Morris, developed a design concept that expresses Irwin Bank and
Trust Company's commitment to this important market. Consistent with customer
survey results, the design minimizes the use of delivery automation in favor of
a high touch approach to customer service. The floor plan offers a warm
transaction area while providing a comfortable and private waiting and office
area for new account openings, lending and investment appointments. Brand
awareness is apparent with the exterior presentation of a bold roof design in
the Company's signature color of blue.
[GRAPHIC OMITTED]
Irwin Bank & Trust Company's newest branch office opened on November 12, 2003.
Cutting the ribbon (L-R) are Directors Thomas Beter, Richard J. Hoffman and
Richard L. Ryan, Assistant Vice President and Branch Manager Kathleen
Jacquette-Tosh, Assistant Manager Megan Schaffer, Company President Charles G.
Urtin and Director Robert C. Whisner.
4
[GRAPHIC OMITTED]
Completion of Irwin Bank and Trust Company's 2003 technology initiatives will
provide customers with better statements and service and the Company with
improved capital management in 2004.
AN INVESTMENT IN TECHNOLOGY IMPROVES AUTOMATION, PROVIDES BETTER CUSTOMER
SERVICE AND ACHIEVES A COMPLIANCE MANDATE
Check Imaging went online in November of 2003. At the same time, new statement
rendering and printing technology was initiated. Multiple images of processed
checks are gang-printed on letter-sized pages that accompany easier to read
monthly statements. Research is dramatically faster and can be provided by
several bank resources such as the Call Center and Customer Service
Representatives. The processing, printing and mailing of customer statements are
now one automated process requiring significantly reduced manpower. Check
Imaging now places Irwin Bank and Trust Company in compliance with the recently
adopted Check 21 federal regulation, requiring all banks to process check images
by October of 2004.
PRODUCT DEVELOPMENT FILLS A GAP IN OUR MARKETING MIX
Irwin Bank and Trust Company launched a new checking product in October of 2003
called Maximum Checking. This product positions well in the family of
competitive offerings known as "relationship" accounts. It combines a wealth of
banking services in one simple account for a monthly fee. However, the fee is
waived if the customer achieves certain deposit or loan relationship balances.
In addition, Maximum Checking pays interest on the account balance. Customer
response has been enthusiastic. The product has out-performed all previous new
product launches and completes a family of checking accounts that fulfills the
needs of every market segment.
"We Offer Everything in One Simple Package" and "Maximum Reward, Maximum Value"
are the advertising slogans that say it all for the new Maximum Checking
account.
5
A YEAR OF SUCCESS FOR REAL ESTATE
BASED LENDING
For Irwin Bank and Trust Company, 2003 was a very good year for consumer and
real estate lending. Low interest rates continued to bring a record-level volume
of new residential and commercial mortgages, refinancing and construction loans.
The resulting increases in interest bearing assets favorably affected the
performance of IBT Bancorp Inc.'s subsidiary title company, T/A of Irwin, and
the generation of fee income resulting from the secondary sale of conforming
mortgages. Consumer loans also posted big gains in 2003. Installment loans
increased from $59,321,023 in 2002 to $78,326,069, a 32% increase. Home equity
lines of credit grew by 38% in both available and utilized credit lines. At year
end, available lines stood at $42,747,765 while lines in use had grown to
$21,963,205.
[GRAPHIC OMITTED]
Irwin Bank and Trust Company is committed to financing both the needs of our
neighbors and the dreams of our customers. Pictured above (L-R) Irwin Bank Vice
President Scott D. Porterfield, Hot Shots Owners Mike Gerger and Tim Davis,
along with Irwin Bank Chief Lending Officer Robert A. Bowell celebrate the
completion of Hot Shots, an indoor sports arena in Mount Pleasant, PA.
[GRAPHIC OMITTED]
Irwin Bank Chief Lending Officer Robert A. Bowell, Doctors Mark Klingensmith and
Geoffery Bisignani, building owners, and Irwin Bank Vice President Alan Lazar
visit The BK Medical Building, a new professional office building in Greensburg,
PA. The project was financed by Irwin Bank & Trust Company. (Not pictured: Dr.
Gregory Bisignani)
6
COMMUNITY SPIRIT IS THE SPIRIT OF COMMUNITY BANKING
Irwin Bank and Trust Company takes great pride in the financial and human
support it provides to the communities it serves. Well over 200 organizations
benefit from the Company's sponsorships, donations and the active participation
of its employees as volunteers and directors. Recipients range from far reaching
institutions including the United Way and the Make-A-Wish Foundation to the very
grassroots of local neighborhoods including school boosters, fire companies and
service clubs.
Community banking is also about understanding local banking needs. The Company's
Commercial Relationship Managers and Branch Retail Staff monitor and fulfill
those needs, providing customers with the banking solutions demanded by an
ever-changing marketplace.
[GRAPHIC OMITTED]
Irwin Bank and Trust company sponsored the painting of an historical billboard
commissioned by the Lincoln Highway Heritage Corridor located on a building in
downtown Greensburg.
[GRAPHIC OMITTED]
President and CEO Charles G. Urtin and Assistant Vice President Sheli Fyock
present Irwin Bank and Trust Company's donation to the Make-A-Wish Foundation at
a holiday radio-telethon held at Monroeville Mall. Accepting the donation is
local broadcast personality Kathy Svilar and Make-A-Wish representative, Ann
Fisher.
[GRAPHIC OMITTED]
Assistant Chief Mike Radakovich and Second Lieutenant Stephan Gongaware show off
Manor Borough's newest investment in the safety of its citizens, an Irwin Bank
and Trust Company-financed fire engine, to Chief Lending Officer Robert A.
Bowell and Vice President Alan Lazar.
7
[Graphic Omitted] [Graphic Omitted] [Graphic Omitted] [Graphic Omitted] [Graphic Omitted]
Douglas P. Arndt Louis C. Bouchat Carolyn Sue Bozzick Jeffrey A. Branthoover Lisa A. Dawson
Assistant Vice President/ Vice President / Retail Banking Officer/ Assistant Vice President/ Vice President /
Consumer Lending Commercial Lending Branch Mgr. - Haymaker Office Trust Loan Administration
Hired October, 2003 Hired March, 2003 Promoted November, 2003 Hired January, 2003 Promoted April, 2003
[Graphic Omitted] [Graphic Omitted] [Graphic Omitted] [Graphic Omitted] [Graphic Omitted]
Mary Ann Ernette Sheli L. Fyock Donald D. Henderson, III Debra S. Hopper Deborah L. Kukic
Assistant Vice President/ Assistant Vice Vice President / Vice President / Training Officer
UVEST Investment Services President/Marketing Operations Human Resources Promoted April, 2003
Hired August, 2003 Promoted April, 2003 Promoted April, 2003 Promoted April, 2003
[Graphic Omitted] [Graphic Omitted] [Graphic Omitted] [Graphic Omitted] [Graphic Omitted]
Maurine J. Peer Kristin S. Robertucci Linda D. Shaner Raymond G. Suchta James W. Thompson
Assistant Vice President/ Vice President / Assistant Vice President / Sr. Vice President / Vice President /
Branch Mgr. - Main Office Accounting Commercial Lending Chief Financial Officer Commercial Lending
Promoted April, 2003 Promoted April, 2003 Promoted November, 2003 Promoted April, 2003 Hired November, 2003
[Graphic Omitted] [Graphic Omitted]
Kathleen T. Jaquette-Tosh John R. Winter
Assistant Vice President / Vice President /
Branch Mgr. - Greensburg Branch Commercial Lending
Hired April, 2003 Hired April, 2003
8
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", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the effect of opening a new
branch, the ability to control costs and expenses, and general economic
conditions. IBT Bancorp, Inc. undertakes no obligation to publicly release the
results of any revisions to those forward looking statements, which may be made
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
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.
The Company opened a new full service branch office in the central
Greensburg area of Westmoreland county in November, 2003. The Company now
operates out of a main office, six branch offices, a loan center, a trust
office, and five supermarket branches located in the Pennsylvania counties of
Westmoreland and Allegheny.
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.
FINANCIAL CONDITION
At December 31, 2003, total assets increased $45.5 million, or 7.8%, to
$629.5 million from $584.0 million at December 31, 2002. The increase in total
assets was primarily the result of a $56.4 million increase in net loans
receivable offset by a $15.7 million decrease in securities available
1
for sale. The growth in the loan portfolio was funded by the decrease in
securities available for sale, increases in total deposits of $23.9 million and
additional FHLB advances of $13.3 million.
The increase in the loan portfolio was primarily due to an increase of
$34.7 million in real estate secured mortgage loans. Included in this category
are multi-family properties and commercial mortgages, which rose $11.7 million
and $31.8 million, respectively. Such increases were offset by a decrease of
$5.1 million in 1-4 family residential mortgages. This decrease is attributed to
customer refinancings, principal repayments, and sales into the secondary
mortgage market. The 1-4 family residential mortgage loans originated by the
Company are periodically sold to the Pennsylvania Housing Finance Agency
("PHFA") or PHH Mortgage Services to mitigate the interest-rate risk associated
with holding long-term, low rate loans in the portfolio. In 2003, loans sold to
PHFA and PHH were $1.1 million and $22.1 million, respectively.
Consumer installment and home equity credit lines increased $19.0 million
and $6.1 million, respectively, offset by a decrease of $4.9 million in loans
made to municipalities. Loan growth is attributed to the Company's offering of
competitive market interest rates.
The decrease in available for sale securities was primarily the result of
sales, principal repayments, and maturities of mortgage-backed securities, which
had a net decrease of $16.4 million and obligations of state and political
sub-divisions, which decreased $1.0 million. Such decreases were offset by an
increase of $2.5 million in obligations of U.S. government agencies. Federal
Home Loan Bank stock had a net increase of $1.4 million. The Company's
investment in this stock is determined by the outstanding borrowings the Company
has with the Federal Home Loan Bank and is purchased and sold at its stated
value.
At December 31, 2003, total liabilities increased $42.0 million, or 8.0%,
to $569.9 million from $527.9 million at December 31, 2002. The increase was
primarily related to the increase in total deposits, additional FHLB advances,
and overnight borrowings of $23.9 million, $13.3 million and $7.9 million,
respectively. The change in total deposits was a result of non-interest bearing
and interest-bearing deposit increases of $6.8 million and $17.2 million,
respectively. The interest-bearing deposit increases were primarily in
certificates of deposit and savings accounts, which rose $10.8 million and $4.3
million, respectively. Such increases were attributed to a growing deposit base
and competitive pricing.
Non-interest bearing deposits increased $6.8 million to $81.1 million at
December 31, 2003 from $74.3 million at December 31, 2002. Such increases
reflect additions to non-interest bearing deposits of $4.9 million offset by a
$1.9 million decrease in investments in repurchase agreements at December 31,
2003. 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.
The Company showed a net increase of $13.3 million in FHLB long-term
borrowings. These fixed-rate advances were used to fund the loan originations.
At December 31, 2003, total stockholders' equity increased $3.4 million to
$59.6 million from $56.2 million at December 31, 2002. The increase was
primarily due to net income of $9.6 million for the period offset by a $1.7
million decrease in accumulated other comprehensive income (net of income taxes)
and dividends paid of $4.2 million. In addition, surplus (additional paid-in
capital) decreased $491,000 due to stock options exercised and increased
$102,000 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.
RESULTS OF OPERATIONS
Net Income: Net income increased approximately $709,000, or 7.9%, to $9.6
million ($3.19 per diluted share) for the year ended December 31, 2003 from $8.9
million ($2.99 per diluted share) for the year ended December 31, 2002. The
increase in net
2
income for fiscal 2003 compared to fiscal 2002 was primarily due to a $1.9
million increase in net interest income, a $574,000 increase in other income and
a $500,000 decrease in the provision for loan losses. Net interest income
increased primarily because interest expense declined $1.5 million, or 11.8%,
while interest income remained relatively stable, declining only $162,000, or
..05%. The Company was able to maintain its levels of interest income due to a
$50.0 million increase in the average volume of interest-earning assets, which
more than offset a 58-basis point decline in average yield.
At December 31, 2002, net income increased approximately $1.4 million, or
19.7%, to $8.9 million ($2.99 per diluted share) from $7.5 million ($2.49 per
diluted share) for the year ended December 31, 2001. The increase in net income
for fiscal 2002 compared to fiscal 2001 was primarily due to an $1.9 increase in
net interest income after provision for loan losses. Such increase was primarily
attributable to a $31.0 million increase in the average balances of
interest-earning assets offset by a 73-basis point decline in the yield on
average interest-earning assets.
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 before the provision for loan losses increased $1.4
million, or 6.76% to $22.1 million for 2003 compared to $20.7 million for 2002.
The increase was primarily due to the increase in average loans of $56.1 million
and average investment securities available for sale of $4.1 million offset by a
decrease in average other interest-earning assets (primarily federal funds sold)
of $10.2 million and a 58-basis point decrease in the yield on average interest
earning assets to 5.80% for 2003 from 6.38% for 2002. The decrease in the yield
on average interest earning assets was primarily the result of yield decreases
in average loans and average investment securities of 68-basis points and
89-basis point, respectively. Average interest-bearing liabilities increased
$40.2 million in fiscal 2003 offset by a 58-basis point decrease in the average
cost of funds.
Net interest income increased $2.5 million, or 13.7% to $20.7 million for
2002 compared to $18.2 million for 2001. The increase was primarily due to the
increase in average loans of $33.5 million and average other interest-earning
assets (primarily federal funds sold) of $1.2 million offset by a decrease in
average investment securities available for sale of $3.8 million and a 73-basis
point decrease in the yield on average interest-earning assets to 6.38% for 2002
from 7.11% for 2001. The decrease in the yield on average interest earning
assets was primarily the result of yield decreases in average loans and average
investment securities of 69-basis points and 86-basis points, respectively. The
decrease in the average yields reflects the changes in the interest rate
environment including the Federal Reserve easing of interest rates during fiscal
2002. Average interest-bearing liabilities increased $29.5 million in fiscal
2002 offset by a 126-basis point decrease in the average cost of funds. As a
result, the interest rate spread for fiscal 2002 increased 53-basis points to
3.4% from 2.9% in fiscal 2001.
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 and the average yields
earned and rates paid. 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.
3
Year Ended December 31,
-----------------------------------------------------------------------------------
2003 2002
-----------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- -------- ---------- -------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) $393,743 $26,097 6.63% $337,600 $24,687 7.31%
Investment securities available for
sale (2) 177,557 7,244 4.08% 173,472 8,615 4.97%
Other interest-earning assets (5) 4,926 57 1.16% 15,086 258 1.71%
-------- ------- ------ -------- ------- ------
Total interest earning assets $576,226 $33,398 5.80% $526,158 $33,560 6.38%
Non-interest earning assets (8) 31,441 30,550
-------- --------
Total assets $607,667 $556,708
======== ========
Interest-bearing liabilities:
Money market accounts 61,138 645 1.05% 60,735 1,234 2.03%
Certificates of Deposit 221,186 7,303 3.30% 208,789 7,935 3.80%
Other liabilities (7) 185,117 3,367 1.82% 157,629 3,660 2.32%
-------- ------- ------ -------- ------- ------
Total interest-bearing liabilities $467,441 $11,315 2.42% $427,153 $12,829 3.00%
Non-interest-bearing liabilities (8) 81,918 76,818
-------- --------
Total liabilities $549,359 $503,971
Retained Earnings (6) 58,308 52,737
-------- --------
Total liabilities and stockholders'
equity $607,667 $556,708
======== ========
Net interest income $22,083 $20,731
======= ============
Interest rate spread (3) 3.38% 3.38%
====== ======
Net yield on interest-earning assets (4) 3.83% 3.94%
====== ======
Ratio of average interest-earning 123.27% 123.18%
assets to average interest-bearing liabilities ====== ======
-------------------------------------------
2001
-------------------------------------------
Average Average
Balance Interest Yield/Cost
------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) $304,080 $24,320 8.00%
Investment securities available for
sale (2) 177,263 10,337 5.83%
Other interest-earning assets (5) 13,850 527 3.81%
-------- ------- ------
Total interest earning assets $495,193 $35,184 7.11%
Non-interest earning assets (8) 20,404
--------
Total assets $515,597
========
Interest-bearing liabilities:
Money market accounts 55,020 1,751 3.18%
Certificates of Deposit 205,242 11,286 5.50%
Other liabilities (7) 137,481 3,921 2.85%
-------- ------- ------
Total interest-bearing liabilities $397,743 $16,958 4.26%
Non-interest-bearing liabilities (8) 69,904
--------
Total liabilities $467,647
Retained Earnings (6) 47,950
--------
Total liabilities and stockholders'
equity $515,597
========
Net interest income $18,226
=======
Interest rate spread (3) 2.85%
======
Net yield on interest-earning assets (4) 3.68%
======
Ratio of average interest-earning 124.50%
assets to average interest-bearing liabilities ======
<FN>
(1) Average balances include non-accrual loans, and are net of deferred loan
fees.
(2) Includes interest-bearing deposits in other financial institutions and FHLB
stock.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest earning assets. (5) Includes Federal funds
sold.
(6) Includes capital stock, surplus and unrealized holding gains on SFAS 115
AFS securities.
(7) Includes FHLB advances and Federal funds purchased.
(8) Includes net deferred income taxes in excess of deferred tax benefits on
AFS securities (SFAS 115), stock options (SFAS 123/148) and deferred fees
(SFAS109).
</FN>
4
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,
2003 vs. 2002 2002 vs. 2001
----------------------------- ------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------- ------------------------------
Volume Rate Net Volume Rate Net
------ ------- ------- ------ ------ --------
(In Thousands)
Interest income:
Loans receivable $ 4,105 $(2,696) $ 1,409 $ 2,681 $(2,314) $ 367
Investment securities
available for sale 203 (1,574) (1,371) (221) (1,501) (1,722)
Other interest earning assets (174) (27) (201) 47 (316) (269)
------- ------- ------- ------- ------- -------
Total interest-earning assets 4,134 (4,297) (163) 2,507 (4,131) (1,624)
------- ------- ------- ------- ------- -------
Interest expense:
Money market accounts 9 (597) (588) 182 (699) (517)
Certificates of deposit 471 (1,103) (632) 195 (3,546) (3,351)
Other liabilities 642 (936) (294) 574 (836) (262)
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities 1,122 (2,636) (1,514) 951 (5,081) (4,130)
------- ------- ------- ------- ------- -------
Net change in net interest income $ 3,012 $(1,661) $ 1,351 $ 1,556 $ 950 $ 2,506
======= ======= ======= ======= ======= =======
PROVISION FOR LOAN LOSSES: The Company recorded a provision for loan
losses of $600,000, $1.1 million and $500,000 for 2003, 2002, and 2001,
respectively. The table below sets forth information with respect to the
Company's allowance for loan losses for the years indicated:
5
At December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
(Dollars in Thousands)
Total loans outstanding $ 419,571 $ 362,744 $ 317,246
========= ========= =========
Average loans outstanding $ 393,743 $ 337,600 $ 304,080
========= ========= =========
Allowance balances (at
beginning of period) $ 2,873 $ 2,114 $ 1,919
Provision (credit):
Mortgage 430 930 200
Installment 38 25 100
Commercial 132 145 200
Home equity lines of credit -- -- --
PHEAA -- -- --
Municipal -- -- --
Credit cards -- -- --
Other -- -- --
Net (Charge-offs) recoveries:
Mortgage (11) (219) (203)
Installment (64) (59) (90)
Commercial (113) (63) (14)
Home equity lines of credit -- -- --
PHEAA -- -- --
Municipal -- -- --
Credit cards -- -- 2
Other -- -- --
--------- --------- ---------
Allowance balance (at end of period) $ 3,285 $ 2,873 $ 2,114
========= ========= =========
Allowance for loan losses as a percent of 0.78% 0.79% 0.67%
total loans outstanding
Net loans charged off as a percent of
average loans outstanding 0.05% 0.10% 0.10%
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
6
o The general economic conditions in the Bank's lending area; and
o Other factors affecting the collectability of the loans in the portfolio
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 approximately $574,000, or 10.8%
to $5.9 million for the year ended December 31, 2003 from $5.3 million for the
year ended December 31, 2002. Such increase was mainly the result of net
security gains of $466,000. Other income increased $316,000 primarily due to a
gain from the sale of other real estate of $351,000.
Total other income increased approximately $1.3 million, or 32.5% to $5.3
million for the year ended December 31, 2002 from $4.0 million for the year
ended December 31, 2001. Such increase was the result of $516,000 in additional
service fees primarily generated from overdraft fees, $499,000 in increased cash
surrender value from bank owned life insurance and other life insurance
policies, and $456,000 in other income. The increase in other income resulted
primarily from an additional $142,000 in gains generated from loan sales, net
gains from the sale of real estate of $104,000 and $186,000 from TA of Irwin,
L.P., a partnership formed by the Company in October 2000 to provide title
insurance to the general public. Such increases in fiscal 2002 were offset by a
decrease of $258,000 in net investment security gains compared to fiscal 2001.
Other Expenses: Total other expense increased $1.5 million, or 11.7%, to
$14.3 million for 2003 from $12.8 million for 2002. Of this increase,
approximately $355,000 is attributed to increased salaries, which reached $5.7
million for 2003 from $5.3 million for 2002. Salary increases were due to
additions to staff, annual merit increases, and commissions paid to commission
based lenders. Pension and other employee benefits increased $324,000 to $1.6
million for 2003 primarily due to increases in pension costs and health
insurance premiums of $96,000 and $129,000, respectively. Occupancy expense
increased $221,000 to $1.5 million, for 2003 from $1.3 million for 2002
primarily due to an increase of $153,000 in depreciation expense related to the
construction of a new branch and equipment purchases for technological
improvements. Rental expense increased $42,000 mainly due to the relocation of
the Company's item processing department. Other expenses increased $396,000 to
$3.8 million for 2003 from $3.4 million for 2002. This increase was comprised of
numerous items related to the normal cost of doing business, non-material in
nature.
Total other expense increased $1.5 million, or 13.3%, to $12.8 million for
2002 from $11.3 million for 2001. Of this increase, approximately $939,000 was
the result of increased salaries, which reached $5.3 million for 2002 from $4.4
million for 2001. The increase in salaries was a combination of additional staff
and annual merit increases. Pension and other employee benefits increased
$238,000 to $1.3 million for 2002 primarily due to a $117,000 increase in health
insurance premiums. Occupancy expense increased $119,000 to $1.3 million, for
2002 from $1.2 million for 2001 predominately due to increased
7
depreciation and real estate tax expense of $77,000 and $17,000, respectively.
Other expenses increased $157,000 to $3.4 million for 2002 from $3.2 million for
2001. This increase was mainly due to increased postage, check collection costs,
and losses as a result of bad checks and ATM fraud of $29,000, $45,000, and
$64,000, respectively. All of these increases were non-material in nature and
are due to the normal cost of doing business.
Income Taxes: Income tax expense for 2003 was $3.4 million compared to
$3.2 million in 2002 and $3.0 million in 2001. The increase in income tax
expense was principally attributable to increased earnings in each period. The
Company's effective tax rates were 26.2%, 26.2%, and 28.5% for 2003, 2002, and
2001, 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.
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, 2003, the Company had commitments to extend
credit of $77.0 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, 2003, cash and cash equivalents totaled $15.8 million.
Net cash from operating activities for 2003 totaled $10.1 million, as
compared to net cash from operating activities of $8.7 million for 2002. The
increase in 2003 was primarily the result of a $709,000 increase in net income
offset by a decrease of $921,000 in other assets and $500,000 in provision for
loan losses. Net cash from operating activities for 2002 totaled $8.7 million,
as compared to net cash used by operating activities of $377,000 for 2001. The
decrease in cash due to changes in other assets in 2001 was primarily the result
of a $10.0 million purchase of bank owned life insurance. See Note 6 to the
consolidated financial statements.
Net cash used by investing activities for 2003 totaled $47.9 million,
as compared to cash used of $69.1 million for 2002 and $14.7 million for 2001.
The decrease of $21.2 million for 2003 was primarily due to a decrease of $48.4
million in securities purchased. The increase of $54.4 million for 2002 was
primarily due to an increase in purchases of securities available for sale of
$25.4 million, an increase in net loans made to customers of $22.5 million, and
a decrease in the proceeds from maturities of securities available for sale of
$26.2 million, offset by proceeds from sales of securities available for sale of
$23.6 million.
Net cash from financing activities for the year ended December 31, 2003
totaled $38.5 million, as compared to net cash from financing activities of
$50.3 million for 2002 and $18.5 million for 2001. The $11.8 million decrease in
cash from financing activities in 2003 was primarily due to a decrease in the
net increase in deposits of $21.9 million. The $31.8 million increase in cash
from financing activities for 2002 was primarily the result of a $33.0 million
increase in deposits.
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 and Note 8 to the consolidated financial
statements.
8
Payments due by period
---------------------------------------------------------------------------
Less than 1-3 3-5 More than
Contractual Obligations Total 1 year years years 5 years
- ---------------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations 53,308 10,776 1,618 12,914 28,000
Operating Lease Obligations 888 213 254 115 306
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 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:
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, 2003.
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.
9
Expected Maturity/Principal Repayment at December 31,
Total Book Fair
2004 2005 2006 2007 2008 Thereafter Value Value
------- ------- ------- ------- ------- ---------- ------- -------
(Dollars in thousands)
Interest-earning assets
- -----------------------
Mortgage loans 10,442 10,028 8,958 7,989 6,463 201,043 244,923 248,442
Home equity loans,
second mortgage
loans, student
loans,
other loans 35,011 11,594 10,524 9,555 8,033 34,446 109,163 109,597
Commercial loans,
municipal loans 12,538 5,524 4,298 2,724 2,208 38,567 65,859 66,247
Investment securities
available for sale 2,485 1,498 100 5,751 3,368 153,139 166,341 167,907
Interest-bearing
- -----------------
liabilities
- -----------------
NOW and other
transaction accounts 19,295 - - - - - 19,295 19,295
Money market and
other savings
accounts 153,100 - - - - - 153,100 153,100
Certificates of
deposits 120,642 62,326 9,219 14,427 20,453 11,168 238,235 241,804
Federal Home Loan
Bank of Pittsburgh
advances 10,776 798 820 2,843 10,071 28,000 53,308 61,145
10
[Letterhead of Edwards Sauer & Owens]
INDEPENDENT AUDITORS' REPORT
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, 2003 and 2002, 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, 2003.
These consolidated financial statements are the responsibility of the Bancorp's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
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, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.
/s/ Edwards Sauer & Owens
Pittsburgh, Pennsylvania
January 26, 2004
CONSOLIDATED BALANCE SHEETS
IBT BANCORP, INC. AND SUBSIDIARY
December 31,
2003 2002
------------- -------------
ASSETS
Cash and due from banks $ 15,391,714 $ 12,677,160
Interest-bearing deposits in banks 436,981 760,118
Federal funds sold -- 1,629,000
Certificate of deposit 100,000 100,000
Securities available for sale 167,907,113 183,564,960
Federal Home Loan Bank stock, at cost 4,540,500 3,152,600
Loans, net of allowance for loan losses of
$3,284,830 in 2003 and $2,873,067 in 2002 416,286,455 359,871,514
Premises and equipment, net 6,468,749 4,759,015
Other assets 18,398,092 17,520,354
------------- -------------
TOTAL ASSETS $ 629,529,604 $ 584,034,721
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing $ 81,053,392 $ 74,339,035
Interest-bearing 411,104,137 393,918,292
------------- -------------
Total deposits 492,157,529 468,257,327
Federal funds purchased 7,900,000 --
Repurchase agreements 12,610,877 14,525,836
Accrued interest and other liabilities 3,947,390 5,100,380
FHLB advances 53,307,767 40,000,000
------------- -------------
Total liabilities 569,923,563 527,883,543
STOCKHOLDERS' EQUITY
Capital stock, par value $1.25,
50,000,000 shares authorized,
3,023,799 shares issued, 2,977,655
shares outstanding at December 31,
2003 and 2002 3,779,749 3,779,749
Surplus 1,684,258 2,073,102
Retained earnings 54,451,662 48,974,137
Accumulated other comprehensive income 1,033,638 2,667,456
------------- -------------
60,949,307 57,494,444
Less: Treasury stock, at cost (1,343,266) (1,343,266)
------------- -------------
Total stockholders' equity 59,606,041 56,151,178
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 629,529,604 $ 584,034,721
============= =============
The accompanying notes an integral part of these consolidated financial
statements.
2
CONSOLIDATED STATEMENTS OF INCOME
IBT BANCORP, INC. AND SUBSIDIARY
Years Ended December 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
INTEREST INCOME
Loans, including fees $ 26,096,559 $ 24,687,048 $ 24,320,407
Investment securities 7,244,174 8,614,876 10,337,309
Federal funds sold 57,110 258,302 527,021
------------ ------------ ------------
Total interest income 33,397,843 33,560,226 35,184,737
INTEREST EXPENSE
Deposits 8,666,938 10,537,258 14,773,560
Federal funds purchased 25,933 193 --
FHLB advances 2,487,363 2,113,678 1,833,212
Repurchase agreements 134,546 177,464 351,473
------------ ------------ ------------
Total interest expense 11,314,780 12,828,593 16,958,245
------------ ------------ ------------
NET INTEREST INCOME 22,083,063 20,731,633 18,226,492
PROVISION FOR LOAN LOSSES 600,000 1,100,000 500,000
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 21,483,063 19,631,633 17,726,492
OTHER INCOME (LOSSES)
Service fees 2,370,065 2,370,568 1,854,595
Investment security gains 533,155 158,670 452,890
Investment security losses (67,636) (24,925) (60,792)
Increase in cash surrender value 513,066 584,847 85,914
of life insurance
Debit card fees 614,475 615,517 520,393
Other income 1,927,933 1,612,378 1,155,822
------------ ------------ ------------
Total other income 5,891,058 5,317,055 4,008,822
OTHER EXPENSES
Salaries 5,653,310 5,297,750 4,359,468
Pension and other employee benefits 1,642,651 1,318,944 1,081,027
Occupancy expense 1,549,532 1,329,170 1,209,779
Data processing expense 843,074 729,548 750,896
Advertising expense 412,702 406,898 340,513
Pennsylvania shares tax 446,041 391,557 341,823
Other expenses 3,752,672 3,357,211 3,200,650
------------ ------------ ------------
Total other expenses 14,299,982 12,831,078 11,284,156
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 13,074,139 12,117,610 10,451,158
PROVISION FOR INCOME TAXES 3,427,893 3,180,311 2,985,824
------------ ------------ ------------
NET INCOME $ 9,646,246 $ 8,937,299 $ 7,465,334
============ ============ ============
BASIC EARNINGS PER SHARE $ 3.24 $ 3.00 $ 2.49
============ ============ ============
DILUTED EARNINGS PER SHARE $ 3.19 $ 2.99 $ 2.49
============ ============ ============
The accompanying notes an integral part of these consolidated financial
statements.
3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
IBT BANCORP, INC. AND SUBSIDIARY
Years Ended December 31, 2003, 2002 and 2001
ACCUMULATED
OTHER
CAPITAL RETAINED COMPREHENSIVE TREASURY
STOCK SURPLUS EARNINGS INCOME STOCK TOTAL
---------- ---------- ----------- ------------ ------------ ------------
BALANCE AT
DECEMBER 31, 2000 $3,779,749 $2,073,102 $39,261,880 $ 189,326 $ (689,476) $44,614,581
Comprehensive Income
Net income 7,465,334 7,465,334
Other comprehensive
income, net of tax:
Change in net
unrealized holding
gains on securities
available for sale,
net of deferred
income tax of
$747,292 1,450,626 1,450,626
Reclassification
adjustment, net of
deferred income
tax benefit of ($153,144) (297,280) (297,280)
------------
1,153,346
------------
Total Comprehensive
Income 8,618,680
Cash dividends ($1.04) (3,113,278) (3,113,278)
Purchase of
Treasury Stock (395,277) (395,277)
---------- ---------- ----------- ---------- ----------- -----------
BALANCE AT
DECEMBER 31, 2001 $3,779,749 $2,073,102 $43,613,936 $1,342,672 $(1,084,753) $49,724,706
========== ========== =========== ========== =========== ===========
The accompanying notes an integral part of these consolidated financial
statements.
4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
IBT BANCORP, INC. AND SUBSIDIARY
Years Ended December 31, 2003, 2002 and 2001
ACCUMULATED
OTHER
CAPITAL RETAINED COMPREHENSIVE TREASURY
STOCK SURPLUS EARNINGS INCOME STOCK TOTAL
---------- ---------- ----------- ------------ ------------ ------------
BALANCE AT
DECEMBER 31, 2001 $3,779,749 $2,073,102 $43,613,936 $1,342,672 $(1,084,753) $49,724,706
Comprehensive Income
Net income 8,937,299 8,937,299
Other comprehensive
income, net of tax:
Change in net
unrealized holding
gains on securities
available for sale,
net of deferred
income tax of
$718,036 1,393,742 1,393,742
Reclassification
adjustment, net of
deferred income
tax benefit of ($34,532) (68,958) (68,958)
-----------
1,324,784
-----------
Total Comprehensive
Income 10,262,083
Cash dividends ($1.20) (3,577,098) (3,577,098)
Purchase of
Treasury Stock (258,513) (258,513)
---------- ---------- ----------- ---------- ----------- -----------
BALANCE AT
DECEMBER 31, 2002 $3,779,749 $2,073,102 $48,947,137 $2,667,456 $(1,343,266) $56,151,178
========== ========== =========== ========== =========== ===========
The accompanying notes an integral part of these consolidated financial
statements.
5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
IBT BANCORP, INC. AND SUBSIDIARY
Years Ended December 31, 2003, 2002 and 2001
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 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 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
========== ========== =========== ========== =========== ===========
The accompanying notes an integral part of these consolidated financial
statements.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,646,246 $ 8,937,299 $ 7,465,334
Adjustments to reconcile net cash
from operating activities:
Depreciation 832,770 684,731 607,993
Increase in cash surrender value of insurance (513,066) (584,847) (85,914)
Net amortization/accretion of
premiums and discounts 1,129,046 429,379 102,482
Net investment security gains (465,519) (133,745) (392,098)
Provision for loan losses 600,000 1,100,000 500,000
Stock options granted 102,154 -- --
Increase (decrease) in cash due to
changes in assets and liabilities:
Other assets (921,069) (540,772) (8,527,117)
Accrued interest and other liabilities (311,325) (1,232,409) (48,024)
------------- ------------- -------------
Net Cash From (Used By) Operating Activities 10,099,237 8,659,636 (377,344)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of certificates of deposit (100,000) -- (2,606,400)
Proceeds from maturity of certificates of deposit 100,000 -- 5,206,400
Proceeds from sales of securities available for sale 34,800,655 31,725,398 8,128,240
Proceeds from maturities of securities available for sale 54,553,305 72,493,575 98,681,479
Purchase of securities available for sale (76,835,123) (125,205,572) (99,729,469)
Net loans made to customers (56,458,544) (46,265,045) (23,829,098)
Purchases of premises and equipment (2,542,504) (788,236) (363,726)
Proceeds from Federal Home Loan Bank stock 1,772,400 -- --
Purchase of Federal Home Loan Bank stock (3,160,300) (1,050,800) (137,500)
------------- ------------- -------------
Net Cash Used By Investing Activities (47,870,111) (69,090,680) (14,650,074)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 23,900,202 45,795,234 12,823,631
Net (decrease) increase in securities sold
under agreements to repurchase (1,914,959) 3,318,764 2,184,882
Net increase in federal funds purchased 7,900,000 -- --
Dividends (4,168,721) (3,577,098) (3,113,278)
Proceeds from FHLB advances 16,000,000 7,000,000 9,000,000
Repayment of FHLB advances (2,692,233) (2,000,000) (2,000,000)
Purchase of treasury stock -- (258,513) (395,277)
Exercised stock options (490,998) -- --
------------- ------------- -------------
Net Cash From Financing Activities 38,533,291 50,278,387 18,499,958
------------- ------------- -------------
Net Change in Cash and Cash Equivalents 762,417 (10,152,657) 3,472,540
Cash and Cash Equivalents at Beginning of Year 15,066,278 25,218,935 21,746,395
------------- ------------- -------------
Cash and Cash Equivalents at End of Year $ 15,828,695 $ 15,066,278 $ 25,218,935
============= ============= =============
The accompanying notes an integral part of these consolidated financial
statements.
7
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
Years Ended December 31,
----------------------------------------
2003 2002 2001
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES
Cash payments for:
Interest $11,446,828 $13,225,782 $18,089,680
Income taxes $ 3,671,847 $ 3,543,379 $ 3,003,600
NON CASH TRANSACTIONS
Recorded unrealized gains on
securities available for sale $ 1,566,116 $ 4,041,600 $ 2,034,303
at December 31
Deferred income taxes on recorded
unrealized gains on securities
available for sale at December 31 $ 532,479 $ 1,374,144 $ 691,631
Loans transferred to foreclosed real
estate during the year $ 301,284 $ 857,681 $ 432,376
Recorded nonmonetary gain on
securities available for sale
at December 31 $ 11,960 $ 1,986 $ 81,092
The accompanying notes an integral part of these consolidated financial
statements.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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 and 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, a loan center, a trust division, five 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.
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 $412,702 for 2003, $406,898 for 2002 and $340,513 for 2001.
LOANS AND ALLOWANCE FOR LOAN LOSSES: Loans are stated at unpaid principal
balances, less the allowance for loan losses and net deferred loan fees.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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 politcal 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 2,977,655, 2,980,282 and 2,993,693 for the years ended December
31, 2003, 2002 and 2001, respectively.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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, 2003
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- ------------- ------------- -------------
Obligations of
U.S. Government Agencies $ 82,462,153 $ 824,768 $ (318,174) $ 82,968,747
Obligations of State and
political sub-divisions 35,863,808 2,057,452 -- 37,921,260
Mortgage-backed securities 37,012,318 735,791 (91,604) 37,656,505
Other securities 710,005 29,553 -- 739,558
Equity securities 10,292,713 140,507 (1,812,177) 8,621,043
------------- ------------- ------------- -------------
$ 166,340,997 $ 3,788,071 $ (2,221,955) $ 167,907,113
============= ============= ============= =============
DECEMBER 31, 2002
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- ------------- ------------- -------------
Obligations of
U.S. Government Agencies $ 78,956,706 $ 1,547,905 $ (1,852) $ 80,502,759
Obligations of State and
political sub-divisions 37,252,772 1,668,700 (31,994) 38,889,478
Mortgage-backed securities 52,300,534 1,803,446 -- 54,103,980
Other securities 706,015 44,506 -- 750,521
Equity securities 10,307,333 102,647 (1,091,758) 9,318,222
-------------- ------------- ------------- -------------
$ 179,523,360 $ 5,167,204 $ (1,125,604) $ 183,564,960
============== ============= ============= =============
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
NOTE 2 -- INVESTMENT SECURITIES (CONTINUED)
Gross realized gains and losses on calls and sales of available-for-sale
securities were:
YEARS ENDED DECEMBER 31,
------------------------------
2003 2002 2001
-------- -------- --------
Gross realized gains:
Obligations of U.S. Government Agencies $ 75,646 $ 42,922 $358,639
Obligations of state and political sub-divisions 26,250 760 5,348
Mortgage-backed securities 279,457 113,002 606
Equity securities 151,802 1,986 88,297
-------- -------- --------
$533,155 $158,670 $452,890
======== ======== ========
Gross realized losses:
Obligations of U.S. Government Agencies $ -- $ -- $ 2,616
Mortgage-backed securities 67,636 24,925 58,176
-------- -------- --------
$ 67,636 $ 24,925 $ 60,792
======== ======== ========
The amortized cost and estimated market value of the investment securities
available for sale at December 31, 2003, 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 $ 2,484,522 $ 2,550,439
Due after one year through five years 10,717,749 11,057,213
Due after five years through ten years 85,468,227 86,358,100
Due after ten years, includes equity securities 67,670,499 67,941,361
------------ ------------
$166,340,997 $167,907,113
============ ============
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 $4,540,500 and $3,152,600 of FHLB stock
at December 31, 2003 and 2002, respectively.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
NOTE 2 -- INVESTMENT SECURITIES (CONTINUED)
Temporarily impaired investments consist of the following:
DECEMBER 31, 2003
------------------------------------------------------ --------------------------
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 $21,875,290 $ (318,174) $ -- $ -- $21,875,290 $ (318,174)
Mortgage-backed securities 13,826,675 (91,604) -- -- 13,826,675 (91,604)
Equity securities -- -- 8,180,000 (1,812,177) 8,180,000 (1,812,177)
----------- ----------- ----------- ----------- ----------- -----------
Total temporarily
impaired securities $35,701,965 $ (409,778) $ 8,180,000 $(1,812,177) $43,881,965 $(2,221,955)
=========== =========== =========== =========== =========== ===========
Investments are reviewed for declines in value on a quarterly basis. Common
stocks 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,
--------------------------------
2003 2002
------------ ------------
Mortgage $244,923,121 $210,244,046
Home equity credit 21,963,205 15,832,462
Installment 78,326,060 59,321,023
Commercial 59,591,433 58,633,722
PHEAA 7,833,861 6,899,585
Municipal 6,267,974 11,190,265
Credit cards 37,890 32,445
Other 965,493 1,147,661
------------ ------------
419,909,037 363,301,209
Less:
Allowance for loan losses 3,284,830 2,873,067
Deferred loan fees 337,752 556,628
------------ ------------
$416,286,455 $359,871,514
============ ============
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
NOTE 3 -- LOANS (CONTINUED)
The aggregate amount of demand deposit accounts with overdrawn balances that
were reclassified as loan balances at December 31, 2003 and 2002 amounted to
$407,581 and $490,961, respectively and are included in other loans.
The total recorded investment in impaired loans amounted to $567,564 at December
31, 2003 and $619,326 at December 31, 2002. The allowance for loan losses
related to impaired loans amounted to $283,782 and $309,663 at December 31, 2003
and 2002, respectively.
Changes in the allowance for loan losses were as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001
----------- ----------- ------------
Balance, beginning of year $ 2,873,067 $ 2,113,806 $ 1,919,327
Provision charged to operations 600,000 1,100,000 500,000
Loans charged off (242,711) (440,728) (344,909)
Recoveries 54,474 99,989 39,388
----------- ----------- ------------
Balance, end of year $ 3,284,830 $ 2,873,067 $ 2,113,806
=========== =========== ============
NOTE 4 -- PREMISES AND EQUIPMENT
Premises and equipment which are stated at cost are as follows:
DECEMBER 31,
-----------------------------
2003 2002
----------- -----------
Land $ 791,559 $ 450,466
Buildings and improvements 5,889,215 5,053,222
Furniture and equipment 7,298,169 5,932,751
----------- -----------
13,978,943 11,436,439
Less: Accumulated depreciation 7,510,194 6,677,424
----------- -----------
$ 6,468,749 $ 4,759,015
=========== ===========
During 2003, the Bank purchased land and built a new branch at a cost of
approximately $1,050,000.
Depreciation expense was $832,770 in 2003, $684,731 in 2002 and $607,993 in
2001.
Eight 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.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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,
2004 $ 212,953
2005 166,618
2006 87,532
2007 56,140
2008 59,116
2009 and thereafter 305,960
---------
$ 888,319
=========
Rental expense under these operating leases was $220,981, $183,005 and $178,437
for the years ended December 31, 2003, 2002 and 2001, 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, 2003 and 2002, the partnership is reflected in the other assets section of
the balance sheet at $21,309 and $82,140, 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, 2003 and 2002, the cash
surrender value of these policies was $11,068,593 and $10,584,859, 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, 2003 are
summarized as follows:
2004 $ 120,642,479
2005 62,325,950
2006 9,219,357
2007 14,426,491
2008 20,452,960
2009 and thereafter 11,167,981
-------------
$ 238,235,218
=============
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
NOTE 7 -- DEPOSITS (CONTINUED)
The Bank held related party deposits of approximately $2,750,000 and $3,600,000
at December 31, 2003 and 2002, respectively.
The Bank held time deposits that exceeded $100,000 of $42,550,077 and
$47,748,416 at December 31, 2003 and 2002, 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 $12,610,877 and
$14,525,836 at December 31, 2003 and 2002, respectively.
NOTE 9 -- PLEDGED ASSETS
At December 31, 2003 and 2002, U.S. Government Agency obligations carried at
approximately $25,500,000 and $42,800,000 respectively, were pledged to qualify
for fiduciary powers, to secure public monies and for other purposes required or
permitted by law. At December 31, 2003 and 2002, the carrying amount of
securities pledged to secure repurchase agreements was approximately $9,300,000
and $27,900,000 respectively.
NOTE 10 -- FHLB ADVANCES
At December 31, 2003 and 2002, the Bank had the following advances from the
Federal Home Loan Bank (FHLB).
2003 2002 Interest Rate Maturity Date
------------ ------------ ------------------------ -----------------
$ 10,000,000 $ 10,000,000 5.86% Fixed w/Strike Rate July 22, 2004
2,000,000 2,000,000 3.67% Fixed September 5, 2007
3,307,767 - 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
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 - 3.51% Fixed w/Strike Rate January 28, 2013
5,000,000 - 3.47% Fixed w/Strike Rate March 18, 2013
------------ ------------
$ 53,307,767 $ 40,000,000
============ ============
Interest only is payable until maturity on all FHLB advances except for the FHLB
advance with a maturity date of January 28, 2008. Collateral for all advances
includes all qualifying mortgages.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
NOTE 10 -- FHLB ADVANCES (CONTINUED)
The following is a summary of the principal payments due on the FHLB advance of
$4,000,000. The advance is payable in 60 monthly payments of $71,502 including
interest at 2.79%, maturing Janaury 28, 2008. The outstanding balance at
December 31, 2003 was $3,307,767;
Principal payments due December 31: 2004 $ 775,607
2005 797,525
2006 820,063
2007 843,237
2008 71,335
-----------
$ 3,307,767
===========
On May 27, 2003, the Bank obtained a line of credit from the Federal Home Loan
Bank in the amount of $20,000,000. The interest rate is variable and was 1.06%
at December 31, 2003. The line of credit has an expiration date of May 25, 2004.
There was no balance outstanding on the line of credit as of December 31, 2003.
The Bank had maximum borrowing capacity with FHLB of approximately $282,428,000
and $261,519,000 at December 31, 2003 and 2002, respectively.
NOTE 11 -- INCOME TAXES
The provision for income taxes consists of:
YEARS ENDED DECEMBER 31,
---------------------------------------------
2003 2002 2001
----------- ----------- -----------
Currently payable $ 3,424,374 $ 3,527,269 $ 3,072,885
Deferred tax (benefit) 3,519 (346,958) (87,061)
----------- ----------- -----------
Total $ 3,427,893 $ 3,180,311 $ 2,985,824
=========== =========== ===========
The significant components of temporary differences for 2003, 2002 and 2001 are
as follows:
Years Ended December 31,
------------------------------------------
2003 2002 2001
--------- --------- ---------
Provision for loan losses $(201,201) $(299,256) $ (86,543)
Depreciation 143,959 32,400 (30,397)
Pension 28,457 28,461 37,532
Deferred loan fees 74,418 (96,222) (32,695)
Other (42,114) (12,341) 25,042
--------- --------- ---------
Total $ 3,519 $(346,958) $ (87,061)
========= ========= =========
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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
-------------------------------
2003 2002 2001
------ ----- -----
Provision at statutory rate 34.0% 34.0% 34.0%
Effect of tax free income (5.2) (5.4) (4.3)
Other (2.6) (2.4) (1.2)
---- ---- ----
Effective tax rate 26.2% 26.2% 28.5%
==== ==== ====
The deferred tax assets and deferred tax liabilities recorded on the balance
sheet as of December 31, 2003 and 2002 are as follows:
2003 2002
--------------------------------------------------
Deferred Tax Deferred Tax
------------------------ ------------------------
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
Provision for loan losses $1,035,069 $ -- $ 833,868 $ --
Depreciation -- 309,018 -- 165,059
Pension expense -- 150,957 -- 122,499
Other 269,437 -- 301,741 --
SFAS 115 -- 532,479 -- 1,374,144
---------- ---------- ---------- ----------
$1,304,506 $ 992,454 $1,135,609 $1,661,702
========== ========== ========== ==========
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 certificate 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.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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 $76,971,000 and $75,521,000 as of December 31, 2003 and 2002,
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, 2003 and 2002, 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 $1,201,000 and $2,756,000 at December
31, 2003 and 2002, respectively.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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 and equity securities 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, 2003, 2002 and
2001, even though the information has been compiled on the basis of the
actuarial measurement period.
2003 2002 2001
----------- ----------- -----------
Change in Projected Benefit Obligation:
Benefit obligation at beginning of year $ 2,739,116 $ 2,253,576 $ 1,840,408
Service cost 210,043 179,307 151,433
Interest cost 184,275 162,431 141,430
Benefits paid (35,897) (161,570) (68,612)
Other - net 233,819 305,372 188,917
----------- ----------- -----------
Benefit obligation at end of year $ 3,331,356 $ 2,739,116 $ 2,253,576
=========== =========== ===========
Change in Fair Value of Plan Assets:
Plan assets at estimated
fair value at beginning of year $ 2,201,346 $ 2,350,244 $ 2,215,142
Actual return on plan assets, net of expenses 305,653 (207,196) 4,280
Benefits paid (35,897) (161,570) (68,612)
Employer contributions 264,969 219,868 199,434
----------- ----------- -----------
Fair value of plan assets at end of year $ 2,736,071 $ 2,201,346 $ 2,350,244
=========== =========== ===========
Funded status $ (595,285) $ (537,770) $ 96,668
Unrecognized net loss from actuarial experience 1,115,107 1,057,676 377,432
Unrecognized prior service cost (183,700) (201,962) (220,224)
Unamortized net asset existing at date
of adoption of SFAS No. 87 (27,075) (31,173) (35,271)
----------- ----------- -----------
Prepaid pension cost $ 309,047 $ 286,771 $ 218,605
=========== =========== ===========
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
NOTE 15 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
DEFINED BENEFIT PLANS (CONTINUED)
Net periodic pension cost included the following
components:
Years Ended December 31,
-----------------------------------
2003 2002 2001
--------- --------- ---------
Service cost $ 210,043 $ 179,307 $ 151,433
Interest cost 184,275 162,431 141,430
Expected return on plan assets (167,906) (175,875) (165,293)
Amortization of prior service cost (18,262) (18,262) (18,262)
Amortization of transition asset (4,098) (4,098) (4,098)
Recognized net actuarial loss 44,196 8,199 --
--------- --------- ---------
Net periodic pension cost $ 248,248 $ 151,702 $ 105,210
========= ========= =========
December 31,
Amounts recognized in the consolidated --------------------------------------
balance sheets consist of: 2003 2002 2001
-------- -------- --------
Prepaid benefit cost $536,653 $500,022 $406,868
======== ======== ========
In the months of December 2003, 2002 and 2001, the Bank contributed $293,275,
$264,969 and $219,868 respectively, to the plans subsequent to the actuarial
measurement dates of October 15, 2003, 2002 and 2001. Because these employer
contributions were paid after the actuarial measurement period ended, the Bank's
prepaid pension cost at December 31, 2003, 2002 and 2001 was $536,653, $500,022
and $406,868, respectively.
The combined accumulated benefit obligation for both plans was $2,417,536 and
$1,970,893 at December 31, 2003, and 2002, respectively.
Weighted-average assumptions used to determine YEARS ENDED DECEMBER 31,
both the benefit obligations and net periodic pension ------------------------------------------------------
costs were as follows: 2003 2002 2001
------------- ------------- -------------
Plan #1
Discount rate 6.50% 6.75% 7.25%
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 7.00% 7.00% 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.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
NOTE 15 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
DEFINED BENEFIT PLANS (CONTINUED)
DECEMBER 31,
Pension plan weighted-average asset allocations ------------------------------
by investment category are as follows: 2003 2002 2001
---- ---- ----
Cash and cash equivalents 17% 9% 15%
Stocks 24% 32% 37%
Bonds 16% 13% 9%
Mutual funds 30% 29% 29%
Government securities 13% 17% 10%
--- --- ---
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 income. The range
of equity exposure is from 40 to 80 percent and fixed income maturities to 30
years. The targeted asset allocation percentages for each category of plan
assets would reveal a strategy to acquire a higher position in equities to a
level of between 50 to 55 percent over the course of the next one to two year
period. The investment policies of the plan trustees prohibit the use of
derivatives. In addition, the plan assets are diversified appropriately across
different sections 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 $473,567 and $477,164 at December 31, 2003 and 2002,
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 2003, 2002 and
2001 amounted to $68,479, $57,304 and $53,404, respectively.
NOTE 16 -- RELATED-PARTY TRANSACTIONS
At December 31, 2003 and 2002, 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 $10,810,000 and $12,630,000
respectively. During 2003, new loans to such related parties were approximately
$1,770,000 and repayments approximated $3,590,000.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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, 2003 are as follows:
CARRYING FAIR
AMOUNT VALUE
Financial Assets:
Cash and cash equivalents $ 15,828,695 $ 15,828,695
Certificate of deposit $ 100,000 $ 100,000
Investment securities $167,907,113 $167,907,113
Federal Home Loan Bank stock $ 4,540,500 $ 4,540,500
Loans receivable $416,286,455 $420,626,455
Financial liabilities:
Deposits $492,157,529 $495,726,529
Short-term borrowings $ 20,510,877 $ 20,510,877
FHLB advances $ 53,307,767 $ 61,144,767
The market values of investments, which are based upon quoted market prices, are
contained in Note 2.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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, 2003 and 2002, that the Bank meets all capital adequacy
requirements to which it is subjected.
The Bank's actual capital ratios as of December 31, 2003 and 2002, 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
2003 2002 Requirements Requirements
------- ------- ------------ ---------------
Risk-based capital ratio 15.1% 15.2% 8.0% 10.0% or higher
Leverage capital ratio 9.1% 8.9% 3.0% to 4.0% 5.0% or higher
Tier 1 risk-based capital ratio 14.3% 14.4% 4.0% 6.0% or higher
Included in cash and due from banks are required federal reserves of $4,740,000
and $4,358,000 at December 31, 2003 and 2002, 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 Bank's Stock Option Plan authorizes the granting of stock options to Bank
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 Bank'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, 2003, a total of 150,000 stock options have been granted, of
which, 73,887 are vested and exercisable, 44,167 have not vested, 27,779 have
been exercised and 4,167 have been forfeited.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
NOTE 19 -- STOCK OPTION PLAN (CONTINUED)
A summary of the status of the Bank's stock option plan is presented below:
DECEMBER 31,
-------------------------------------------------------------------------
2003 2002 2001
------------------- ------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding at beginning of year 119,709 $ 26.53 94,000 $ 23.97 61,000 $ 24.50
Granted 20,500 $ 51.40 35,500 $ 32.88 33,000 $ 23.00
Forfeitures (1,001) $ 29.58 (3,166) $ 23.79 - -
Exercised (21,154) $ 25.85 (6,625) $ 25.58 - -
------- ------- ------
Outstanding at December 31, 118,054 $ 30.94 119,709 $ 26.53 94,000 $ 23.97
======= ======= ======
Exercisable at December 31, 73,887 $ 25.54 66,513 $ 25.70 41,333 $ 24.17
======= ======= ======
The options outstanding at December 31, 2003, 2002 and 2001 had a
weighted-average contractual maturity of 7.66 years, 8.2 years, and 8.73 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,
-------------------------------------------
2003 2002 2001
--------- -------- ---------
Dividend yield 2.72% 3.79% 3.59%
Expected life 7 years 7 years 7 years
Expected volatility 20% 19% 18%
Risk-free interest rate 4.00% 3.75% 4.95%
Weighted-average fair value $10.75 $7.46 $4.19
Prior to 2003, the Bank accounted for stock-based compensation under the
recognition and measurement provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock-based employee
compensation cost is reflected in either 2002 or 2001 net income, as all options
granted during 2002 and 2001 had an exercise price equal to the market value of
the underlying common stock on the date of grant. 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.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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,
-------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net income, as reported $ 9,646,246 $ 8,937,299 $ 7,465,334
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects 67,422 -- --
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects 151,518 327,483 114,219
------------ ------------ ------------
Pro-forma net income $ 9,562,150 $ 8,609,816 $ 7,351,115
============ ============ ============
Earnings per share:
Basic-as reported $ 3.24 $ 3.00 $ 2.49
============ ============ ============
Basic-pro forma $ 3.21 $ 2.84 $ 2.45
============ ============ ============
Diluted-as reported $ 3.19 $ 2.99 $ 2.49
============ ============ ============
Diluted-pro forma $ 3.17 $ 2.84 $ 2.45
============ ============ ============
Weighted-average number of shares outstanding assuming dilution of exercisable
stock options using the treasury stock method was 3,020,075, 2,991,043 and
2,994,088 for the years ended December 31, 2003, 2002 and 2001, respectively.
NOTE 20 -- TREASURY STOCK
In 2002 and 2001, the Bancorp repurchased 8,040 and 16,228 shares of its stock
for $258,513 and $395,277, respectively, and is being held as treasury stock.
The Bancorp did not repurchase any shares of its own stock during 2003.
NOTE 21 -- RECENT ACCOUNTING PRONOUNCEMENTS
In 2003, the Bank adopted the disclosure provisions as required by SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits", as
revised by the FASB. This statement retains the disclosure requirements
contained in the original Statement 132, the revised Statement requires
additional disclosures about plan assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other postretirement
benefit plans. The revised Statement does not change the measurement or
recognition of those plans as originaly required by SFAS No. 87, "Employers'
Accounting for Pensions". The provisions of the revised statement are effective
for fiscal years ending after December 15, 2003. Management has included the
additional disclosures in the notes to the financial statements and believes
that this statement has no financial impact on the Bank or its operations.
In 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities (effective for contracts entered into or
modified after June 30, 2003, with specified exceptions). Management does not
believe the statement will have a material impact on the Bank or its operations.
Also in 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" (effective for
financial instruments entered into or modified after May 31, 2003, with limited
exceptions). Management does not believe the statement will have a material
impact on the Bank or its operations.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
Years Ended December 31, 2003, 2002 and 2001
NOTE 22 -- PARENT COMPANY FINANCIAL INFORMATION
The condensed financial information for IBT Bancorp, Inc. as of December 31,
2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001 is as
follows:
BALANCE SHEETS
DECEMBER 31
-------------------------
2003 2002
----------- -----------
ASSETS
Cash in bank $ 60,813 $ 401,584
Investment in subsidiary 58,771,455 54,926,513
Securities available for sale 578,603 554,207
Other assets 242,943 303,774
----------- -----------
Total Assets $59,653,814 $56,186,078
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 47,773 $ 34,900
Stockholders' Equity 59,606,041 56,151,178
----------- -----------
Total Liabilities and Stockholders' Equity $59,653,814 $56,186,078
=========== ===========
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-----------------------------------
2003 2002 2001
--------- --------- ---------
Income
Dividends from subsidiary 3,600,000 4,000,000 3,650,000
Other dividends 14,156 14,069 16,978
Investment security gains 151,802 1,986 88,297
Income from joint ventures 218,307 185,541 102,124
Expenses
Professional fees 167,658 72,371 87,923
Loss on joint venture -- -- 27,471
Miscellaneous 62,954 33,203 16,880
---------- ---------- ----------
Income Before Income Taxes
and Equity in Undistributed Earnings of Subsidiary 3,753,653 4,096,022 3,725,125
Equity in Undistributed
Earnings of Subsidiary 5,892,593 4,841,277 3,740,209
---------- ---------- ----------
Net Income $9,646,246 $8,937,299 $7,465,334
========== ========== ==========
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
NOTE 22 -- PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,646,246 $ 8,937,299 $ 7,465,334
Adjustments to reconcile net income to
net cash provided by operating activities:
Net undistributed earnings of joint ventures (218,307) (185,541) (74,652)
Investment security gains (151,802) (1,986) (88,297)
Decrease in cash due to changes
in assets and liabilities:
Equity in undistributed earnings
of subsidiary (5,892,593) (4,841,277) (3,740,209)
----------- ----------- -----------
NET CASH FROM OPERATING ACTIVITIES 3,383,544 3,908,495 3,562,176
CASH FLOWS FROM INVESTING ACTIVITIES
Distributions from joint ventures 279,137 157,105 79,095
Proceeds from sale of securities
available for sale 166,846 -- 478,554
Purchase of securities available for sale (1,577) (74,095) (369,062)
----------- ----------- -----------
NET CASH FROM INVESTING ACTIVITIES 444,406 83,010 188,587
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (4,168,721) (3,577,098) (3,113,278)
Purchase of Treasury Stock -- (258,513) (395,277)
----------- ----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (4,168,721) (3,835,611) (3,508,555)
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (340,771) 155,894 242,208
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 401,584 245,690 3,482
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 60,813 $ 401,584 $ 245,690
=========== =========== ===========
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IBT BANCORP, INC. AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
NOTE 23 -- CONDENSED CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
QUARTERS ENDED 2003
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
Interest income $8,493,556 $8,338,858 $8,381,878 $8,183,551
Interest expense 2,973,791 2,826,082 2,736,619 2,778,289
---------- ---------- ---------- ----------
Net interest income 5,519,765 5,512,776 5,645,259 5,405,262
Provision for loan
losses 150,000 150,000 150,000 150,000
Non-interest income 1,440,540 1,686,128 1,581,936 1,182,452
Non-interest expense 3,246,494 3,744,055 3,581,862 3,727,570
---------- ---------- ---------- ----------
Income before income
taxes 3,563,811 3,304,849 3,495,333 2,710,144
Income tax expense 934,406 849,268 933,405 710,813
---------- ---------- ---------- ----------
Net income $2,629,405 $2,455,581 $2,561,928 $1,999,331
========== ========== ========== ==========
Net income per Share of
Capital Stock $ 0.88 $ 0.82 $ 0.86 $ 0.67
========== ========== ========== ==========
QUARTERS ENDED 2002
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
Interest income $8,207,972 $8,343,506 $8,523,469 $8,485,279
Interest expense 3,207,376 3,161,028 3,234,016 3,226,173
---------- ---------- ---------- ----------
Net interest income 5,000,596 5,182,478 5,289,453 5,259,106
Provision for loan
losses 250,000 250,000 300,000 300,000
Non-interest income 1,335,340 1,253,906 1,307,726 1,420,083
Non-interest expense 2,849,710 3,264,057 3,171,255 3,546,056
---------- ---------- ---------- ----------
Income before income
taxes 3,236,226 2,922,327 3,125,924 2,833,133
Income tax expense 805,240 779,597 834,259 761,215
---------- ---------- ---------- ----------
Net income $2,430,986 $2,142,730 $2,291,665 $2,071,918
========== ========== ========== ==========
Net income per Share of
Capital Stock $ 0.81 $ 0.72 $ 0.77 $ 0.70
========== ========== ========== ==========
29
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, 5
supermarket branches, a loan office, 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 2, 2004 IBT Bancorp, Inc. had approximately
700 shareholders of record and 2,977,655 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.
For 2003 the following table sets forth high and low trade prices per share for
the common stock for the calendar quarters indicated, based upon information
obtained from the AMEX.
For 2002 the following the following table sets forth high and low bid prices
per share for the common stock for the calendar quarters indicated, based upon
information obtained from the OTC Bulletin Board. All such bid prices reflect
inter-dealer prices, without retail mark-downs or commissions and may not
necessarily represent actual transactions.
Price Range Cash Dividends
High ($) Low ($) Declared Per Share ($)
-------- ------- ----------------------
2003
First Quarter 41.41 37.25 .35
Second Quarter 50.05 41.00 .35
Third Quarter 52.25 44.09 .35
Fourth Quarter 62.48 49.65 .35
2002
First Quarter 33.00 27.30 .30
Second Quarter 33.00 30.50 .30
Third Quarter 35.00 31.90 .30
Fourth Quarter 39.95 34.15 .30
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. This 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, 20, 2004 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, 2003 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
Investor Relations 500 Warner Center
10 Commerce Drive Pittsburgh, PA 15222
Cranford, New Jersey 07016-3572
1-800-368-5948
SPECIAL COUNSEL
Malizia, Spidi & Fisch, PC
1100 New York Avenue, NW
Suite 340 West
Washington, D.C. 20005
IRWIN BANK & Trust Company Officers
J. Curt Gardner, Chairman of the Board Mary Ann Ernette, Assistant Vice President-Uvest
Charles G. Urtin, President/CEO Keith Frid, Assistant Vice President/Auditor
Robert A. Bowell, Executive Vice President/ Sheli L. Fyock, Assistant Vice President-
Secretary-Treasurer/CLO Marketing/Assistant Secretary
David A. Finui, Senior Vice President/COO Beverly A. Hahn, Assistant Vice President/
Raymond G. Suchta, Senior Vice President/CFO Branch Manager - Penn Township
Leslie F. Petras, Senior Vice President-Commercial Loans Nancy J. McCullough, Assistant Vice President/
Louis C. Bouchat, Vice President-Commercial Loans Branch Manager - Route 30
Lisa A. Dawson, Vice President-Loan Administration Robert G. Michaud, Assistant Vice President-Marketing
Scott J. Fisher, Vice President-Trust Maurine J. Peer, Assistant Vice President/
Jay Gordon, Vice President-Commercial Loans Branch Manager - Main Office
Donald D. Henderson III, Vice President-Operations Darwin H. Poole, Assistant Vice President-
Debra S. Hopper, Vice President-Human Resources Data Processing
Alan Lazar, Vice President-Commercial Loans Nancy A. Smith, Assistant Vice President-
Joseph A. Mignogna, Vice President-Compliance Officer Mortgage Lending
John J. Minkel, Vice President-Consumer Loans Linda D. Shaner, Assistant Vice President-
Scott D. Porterfield, Vice President- Commercial Loans
Branch Administration / Business Development Thomas R. Stephenson, Assistant Vice President-
Kristin S. Robertucci, Vice President-Accounting Loan Review
James W. Thompson, Vice President-Commercial Loans Kathleen T. Jaquette-Tosh, Assistant Vice President/
Stacey G. Winfield, Vice President-Commercial Loans Branch Manager - Greensburg
John R. Winter, Vice President-Commercial Loans Gene Bender, Assistant Trust Officer
Douglas P. Arndt, Assistant Vice President-Consumer Loans Carolyn Sue Bozzick, Retail Banking Officer/Manager -
Jeffrey A. Branthoover, Assistant Vice President- Haymaker Village
Trust Administration Deborah L. Kukic, Training Officer
Barbara A. Burzio, Assistant Vice President-Commercial Loans Denise Y. Poole, Operations Officer
Barbara DelBene, Assistant Vice President/ Sandra L. Schwaderer, Retail Banking Officer/
Branch Manager - White Oak Manager - Pitcairn
IRWIN BANK & Trust Company Locations
Main Office Branch Offices Irwin Bank Extra Locations
309 Main Street Greensburg Ft. Allen
Irwin, PA 15642 4 Triangle Drive Inside Hempfield Shop N' Save
724-863-3100 Greensburg, PA 15601 Greensburg, PA 15601
724-837-5000 724-853-8540
Loan Center Monroeville Irwin-North Huntingdon
319 Main Street Haymaker Village Inside Scozio's Shop N' Save
Irwin, PA 15642 4580 Broadway Blvd. Norwin Hills Shopping Center
724-863-3100 Monroeville, PA 15146 8775 Norwin Avenue
412-858-4450 North Huntingdon, PA 15642
724-861-8701
Trust Division
Suite 204 Penn Township Monroeville
20 N. Pennsylvania Avenue 4021 Route 130 Inside Haymaker Village Giant Eagle
Greensburg, PA 15601 Irwin, PA 15642 4548 Broadway Blvd.
724-836-2010 724-744-2176 Monroeville, PA 15146
412-856-5330
UVest Investments Pitcairn
319 Main Street 512 Broadway Blvd. Penn Crossing
Irwin, PA 15642 Pitcairn, PA 15140 Inside Scozio's Festival Foods
724-978-2751 412-372-3838 2000 Penny Lane
Jeannette, PA 15644
Route 30 724-744-6111
9570 Route 30
Irwin, PA 15642 White Oak
724-863-2510 Inside Scozio's Shop N' Save
Oak Park Mall
White Oak 2001 Lincoln Way
Oak Park Mall White Oak, PA 15131
2003 Lincoln Way 412-664-0984
White Oak, PA 15131
412-678-3000