================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission File Number: 1-31655
-------
IBT BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1532164
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
309 MAIN STREET, IRWIN, PENNSYLVANIA 15642
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (724) 863-3100
-------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
COMMON STOCK, $1.25 PAR VALUE AMERICAN STOCK EXCHANGE
- ----------------------------- -----------------------
STOCK PURCHASE RIGHTS AMERICAN STOCK EXCHANGE
--------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Act: NONE
----
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [X] YES [ ] NO
Based on the closing sales price of $45.50 per share of the registrant's
common stock on June 30, 2004, as reported on the American Stock Exchange, the
aggregate market value of voting and non-voting stock held by non- affiliates of
the registrant was approximately $124.1 million. Solely for purposes of this
calculation, directors and executive officers are deemed affiliates.
As of March 1, 2005, there were 2,955,455 shares of the Registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of 2004 Annual Report to Stockholders (Parts II and IV)
2. Portions of Proxy Statement for the 2005 Annual Meeting of Stockholders.
(Part III)
================================================================================
PART I
FORWARD-LOOKING STATEMENTS
IBT Bancorp, Inc. (the "Company" or "Registrant") may from time to time
make written or oral "forward-looking statements," including statements
contained in the Company's filings with the Securities and Exchange Commission
(including this Annual Report on Form 10-K and the exhibits thereto), in its
reports to stockholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks involved
in the foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
ITEM 1. BUSINESS
- -----------------
GENERAL
IBT Bancorp, Inc. is a Pennsylvania corporation headquartered in Irwin,
Pennsylvania, which provides a full range of commercial and retail banking
services through its wholly-owned banking subsidiary, Irwin Bank & Trust Co.
(collectively, the "Company").
Irwin Bank & Trust Co. (the "Bank") was incorporated in 1922 under the laws
of Pennsylvania as a commercial bank under the name "Irwin Savings and Trust
Company." The Bank engages in a full-service mortgage, commercial and consumer
banking business, as well as trust and a variety of deposit services provided to
its customers. At December 31, 2004, the Bank operated through its main office,
seven branch offices, a loan center, and a trust office as well as through five
supermarket branches under the name "Irwin Bank Extra." The Bank's main office,
full service branch offices, loan center, trust office and supermarket branches
are located in the Pennsylvania counties of Westmoreland and Allegheny. The
Bank's web site is located at "www.myirwinbank.com."
References to the Company or Registrant used throughout this document
generally refers to the consolidated entity which includes the main operating
company, the Bank, unless the context indicates otherwise.
COMPETITION
The Registrant's primary market area consists of Westmoreland and Allegheny
counties, Pennsylvania, which are part of the Pittsburgh Metropolitan
Statistical Area ("Pittsburgh MSA") and is one of many financial institutions
serving this market area. Based on data compiled by the FDIC as of June 30, 2004
(the latest date for which such data is available) the Bank was ranked sixth of
20 FDIC-insured institutions in Westmoreland County with a 6.61% deposit market
share and 19th out of 39 institutions in Allegheny County with a 0.39% deposit
market share. The Bank was ranked 12th out of 64 institutions serving the
Pittsburgh MSA with a 1.0% market share. Such data does not reflect deposits
held by credit unions with which the Bank also competes. The competition for
deposit products comes from other insured financial institutions such as
commercial banks, thrift institutions and credit unions in the Registrant's
market area. Deposit competition also includes a number of insurance products
sold by local agents and investment products such as mutual funds and other
securities sold by local and regional brokers. Loan competition comes from other
insured financial institutions such as commercial banks, thrift institutions and
credit unions.
2
LENDING ACTIVITIES
ANALYSIS OF LOAN PORTFOLIO. The following table sets forth the composition
of the Registrant's loan portfolio in dollar amounts and in percentages of the
respective portfolios at the dates indicated.
AT DECEMBER 31,
--------------------------------------------------------------------------
2004 2003 2002
------------------- -------------------- -------------------
$ % $ % $ %
------- ------ ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
Mortgage....................... $252,114 57.37% $244,923 58.33% $210,244 57.87%
Installment.................... 84,673 19.27 78,327 18.65 59,321 16.33
Commercial..................... 61,140 13.91 59,591 14.19 58,634 16.14
Home equity lines of credit.... 23,201 5.28 21,963 5.23 15,832 4.36
PHEAA (1)...................... 7,355 1.67 7,834 1.87 6,900 1.90
Municipal...................... 10,050 2.29 6,268 1.49 11,190 3.08
Credit cards................... 45 0.01 38 0.01 32 0.01
Other.......................... 855 0.20 965 0.23 1,148 0.31
------- ------ ------- ------ ------- ------
Total loans...................... 439,433 100.00% 419,909 100.00% 363,301 100.00%
====== ====== ======
Less:
Unearned discount.............. -- -- --
Deferred loan origination
fees and costs............... 291 338 557
Allowance for loan losses...... 2,594 3,285 2,873
------- ------- -------
Total loans, net................. $436,548 $416,286 $359,871
======= ======= =======
AT DECEMBER 31,
------------------------------------------
2001 2000
-------------------- -------------------
$ % $ %
------- ------ ------- ------
(DOLLARS IN THOUSANDS)
Mortgage....................... $173,214 54.55% $152,753 51.95
Installment.................... 64,053 20.17 65,327 22.22
Commercial..................... 55,185 17.38 52,676 17.92
Home equity lines of credit.... 11,001 3.47 10,067 3.42
PHEAA (1)...................... 6,950 2.19 6,632 2.26
Municipal...................... 5,369 1.69 5,945 2.02
Credit cards................... 32 0.01 -- --
Other.......................... 1,715 0.54 611 0.21
------- ------ ------- ------
Total loans...................... 317,519 100.00% 294,011 100.00%
====== ======
Less:
Unearned discount.............. -- --
Deferred loan origination
fees and costs............... 273 178
Allowance for loan losses...... 2,114 1,919
------- -------
Total loans, net................. $315,132 $291,914
======= =======
<FN>
_________________________
(1) Pennsylvania Higher Education Assistance Authority.
</FN>
3
LOAN MATURITY TABLE. The following table sets forth maturities and interest
rate sensitivity for all categories of loans as of December 31, 2004. Scheduled
repayments are reported in the maturity category in which payment is due.
HOME
EQUITY
LINES OF PHEAA
MORTGAGE CREDIT(2) INSTALLMENT COMMERCIAL (1) MUNICIPAL
-------- -------- ----------- ---------- ------ ---------
(IN THOUSANDS)
1 year or less............ $11,734 $23,201 $11,342 $14,098 $ -- $10,050
After 1 year:
1 to 5 years............ 58,552 -- 37,480 17,844 7,355 --
After 5 years........... 181,828 -- 35,851 29,198 -- --
-------- ------- ------- ------- ------ -------
Total due after one year.. 240,380 -- 73,331 47,042 7,355 --
-------- ------- ------- ------- ------ -------
Total amount due.......... $252,114 $23,201 $84,673 $61,140 $7,355 $10,050
======== ======= ======= ======= ====== =======
CREDIT
CARDS
(2) OTHER TOTAL
------- ----- -----
(IN THOUSANDS)
1 year or less............ $45 $855 $71,325
After 1 year:
1 to 5 years............ -- -- 121,231
After 5 years........... -- -- 246,877
--- ---- --------
Total due after one year.. -- -- 368,108
--- ---- --------
Total amount due.......... $45 $855 $439,433
=== ==== ========
<FN>
______________________
(1) PHEAA loans are sold when repayment begins; assumption is that all PHEAA
loans will mature in 1 to 5 years.
(2) Home equity credit lines and credit card loans have no stated maturities;
therefore they are classified as due in one year or less.
</FN>
The following table sets forth, as of December 31, 2004, the dollar
amount of all loans due after December 31, 2004, based upon fixed rates of
interest or floating or adjustable interest rates.
FLOATING OR
FIXED RATES ADJUSTABLE RATES TOTAL
----------- ---------------- ------
(IN THOUSANDS)
Mortgage(1) ................. $223,832 $ 16,548 $240,380
Installment ................. 71,929 1,402 73,331
Commercial .................. 16,540 30,502 47,042
PHEAA ....................... -- 7,355 7,355
Total .................. $312,301 $ 55,807 $368,108
<FN>
__________________________
(1) Included in the mortgage loans portfolio are commercial real estate
loans. Commercial real estate loans are fixed rate loans that are
primarily callable loans, which reprice every three, five or ten years,
based upon the interest rate on similar loans at the time of repricing.
See "Mortgage Loans."
</FN>
MORTGAGE LOANS. The Registrant's primary lending activity consists of the
origination of residential and commercial mortgage loans secured by property in
its primary market area. The mortgage loan portfolio consists of one-to
four-family residential mortgage loans, commercial real estate loans, and
construction loans.
The Registrant had approximately $85.8 million of one- to four-family
residential mortgage loans in its mortgage loan portfolio at December 31, 2004.
The Registrant generally originates one- to four-family residential mortgage
loans in amounts of up to 80% of the appraised value of the mortgaged property
without requiring mortgage insurance. The Registrant will originate residential
mortgage loans in an amount up to 95% of the appraised value of a mortgaged
property; however, the borrower is required to obtain mortgage insurance for the
amount in excess of 80%. The Registrant offers residential fixed rate loans and
adjustable rate loans with amortization periods ranging from 15 to 30 years.
Interest rates for adjustable rate loans for residences adjust every 12 months
based upon the weekly average yield on the one-year U.S. Treasury securities,
plus a margin of 2.75 percentage points. These adjustable-rate loans have an
interest rate cap of
4
two percentage points per year and six percentage points over the life of the
loan, and are originated for retention in the portfolio.
Fixed-rate loans are underwritten in accordance with FannieMae guidelines.
Currently, loans underwritten in accordance with FannieMae guidelines are
generally sold in the secondary market. However, the number of saleable loans
could vary materially as a result of market conditions. The Registrant generally
charges a higher interest rate if loans are not saleable under FannieMae
guidelines. At December 31, 2004, $223.6 million of the Registrant's mortgage
portfolio consisted of long-term, fixed-rate mortgage loans of which $107,000
were classified as held-for-sale. The Registrant does not service any loans that
are sold and the Registrant is generally not liable for these loans (i.e.,
"nonrecourse loans").
Substantially all of the Registrant's one- to four-family mortgages include
"due on sale" clauses, which are provisions giving the Registrant the right to
declare a loan immediately payable if the borrower sells or otherwise transfers
an interest in the property to a third party.
Property appraisals on real estate securing the Registrant's one- to
four-family residential loans over $250,000 are made by appraisers approved by
the Board of Directors. Appraisals are performed in accordance with applicable
regulations and policies. The Registrant obtains title insurance policies on all
purchase money first mortgage real estate loans originated.
The Registrant's commercial real estate mortgage loans are long-term loans
secured primarily by multi-family dwelling units and commercial real estate.
Essentially all originated commercial real estate loans are within its market
area. Commercial real estate loans are originated at both fixed rate and
adjustable rates of interest. Fixed rate loans are primarily callable loans
having terms of up to 20 years. Callable loans reprice every three, five or ten
years based upon the interest rate on similar loans at the time of repricing. At
these specific time periods, the Registrant has the right but not the obligation
to either accelerate the loan balance or adjust the interest rate of these
loans.
Adjustable-rate commercial mortgage loans have interest rates set at the
six-month U.S. treasury bill rate, plus a margin of up to 3.75%. Adjustable-rate
commercial mortgage loans generally have terms of up to 20 years and no maximum
interest rate.
As of December 31, 2004, the Registrant's commercial real estate loans
totaled $122.2 million of the mortgage portfolio. Typically, commercial real
estate loans are originated in amounts up to 80% of the appraised value of the
mortgaged property.
The Registrant also originates loans to finance the construction of one- to
four-family dwellings and commercial real estate. The Registrant makes
construction loans both to individuals constructing their own residence and to
developers constructing homes for resale. Generally, the Registrant only makes
interim construction loans to individuals if it also makes permanent mortgage
loan on the property. Interim construction loans generally have terms of up to
nine months with fixed rates of interest. At December 31, 2004, construction
loans totaled $19.9 million with $6.5 million of that total yet to be disbursed.
Construction financing is generally considered to involve a higher degree
of risk of loss than long- term financing on improved, occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction and
the estimated cost (including interest) of construction. During the construction
phase, a number of factors could result in delays and cost overruns. If the
estimate of construction costs proves to be inaccurate, the Registrant may be
required to advance funds beyond the amount originally committed to permit
completion. If the
5
estimate of value proves to be inaccurate, the Registrant may be confronted, at
or prior to the maturity of the loan, with a project having a value which is
insufficient to assure full repayment.
INSTALLMENT LOANS. Installment loans primarily consist of home equity term
loans and to a lesser extent automobile loans. Home equity loans are secured
primarily by one- to four-family residences. The Registrant originates these
loans with fixed rates with terms of up to 20 years. These loans are subject to
90% combined loan-to-value limitation, including any outstanding mortgages or
liens, without requiring mortgage insurance. The Registrant will originate home
equity loans in an amount up 100% of the appraised value, however, mortgage
insurance for the borrower may be required. The Registrant originates automobile
loans with fixed rates of interest and terms of up to five years. At December
31, 2004, home equity term loans totaled $80.5 million.
COMMERCIAL LOANS. Commercial loans consist of loans secured by equipment,
accounts receivables, inventory, and other business purpose loans. Such loans
are generally secured by either the underlying collateral and/or by the personal
guarantees of the borrower.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself and the general economic environment.
HOME EQUITY LINES OF CREDIT. Revolving home equity lines of credit are
secured primarily by one- to four-family residences. The lines of credit are
generally subject to an 80% combined loan to value limitation, including all
outstanding mortgages and liens.
LOAN APPROVAL AUTHORITY AND UNDERWRITING. The Registrant establishes
various lending limits for its officers and maintains an officer review
committee. Certain officers generally have authority to approve loans up to
$500,000. Loans up to $1,000,000 are approved by an officer review committee
("ORC"). The ORC consists of the President and at least four other officers
appointed by the President. All loans over $1,000,000 are approved by the Board
of Directors.
Upon receipt of a completed loan application from a prospective borrower, a
credit report is ordered. Income and certain other information is verified. If
necessary, additional financial information may be requested. An appraisal or
other estimate of value of the real estate intended to be used as security for
the proposed loan is obtained. Appraisals are performed by independent
appraisers.
Title insurance is generally required on all purchase money real estate
mortgage loans. Borrowers also must obtain fire and casualty insurance. Flood
insurance is also required on loans secured by property that is located in a
flood zone.
LOAN COMMITMENTS. Written commitments are given to prospective borrowers on
all approved mortgage loans. Generally, the commitment requires acceptance
within 7 days of the date of issuance. At December 31, 2004, commitments to
cover originations of loans totaled $22.9 million.
CLASSIFIED ASSETS. Federal regulations provide for a classification system
for problem assets of insured institutions, including assets previously treated
as "scheduled items." Under this classification system, problem assets of
insured institutions are classified as "substandard," "doubtful" or "loss." An
asset is considered "substandard" if it is inadequately protected by the current
net worth and paying capacity of
6
the obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Assets
classified as "doubtful" have all the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection of principal in full," on the basis of currently existing facts,
conditions and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. Assets that do not expose the Registrant to risk sufficient to
warrant classification in one of the above categories, but which possess some
weakness, are required to be designated "special mention" by management.
When an insured institution classifies problem assets as either
"substandard" or "doubtful," it may establish allowances for loan losses in an
amount deemed prudent by management. When an insured institution classifies
problem assets as "loss," it is required either to establish an allowance for
losses equal to 100% of that portion of the assets so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its allowances is subject to review by the Federal
Deposit Insurance Corporation ("FDIC") which may order the establishment of
additional loss allowances.
The following table sets forth the Registrant's classified assets in
accordance with its classification system.
AT DECEMBER 31, 2004
--------------------
(IN THOUSANDS)
Special Mention........................................... $24,770
Substandard............................................... 3,940
Doubtful.................................................. 259
Loss...................................................... --
-------
Total............................................... $28,969
=======
OTHER REAL ESTATE OWNED. Real estate acquired by the Registrant as a result
of foreclosure or by deed in lieu of foreclosure is classified as other real
estate owned until such time as it is sold. When other real estate owned is
acquired, it is recorded at the lower of the unpaid balance of the related loan
or its fair value less disposal costs. Any write-down of other real estate owned
is charged to operations.
NONPERFORMING AND PROBLEM ASSETS
LOAN DELINQUENCIES. When a loan becomes 16 days past due, a notice of
nonpayment is sent to the borrower. Telephone collection calls, letters and/or
visits to the borrower are initiated at or after 16 days of the due date missed
in an effort to resolve the delinquency. Generally, if the loan continues in a
delinquent status for 90 days past due and no repayment plan has been reached,
foreclosure, liquidation or other legal proceedings may be initiated.
Loans are reviewed on a monthly basis and are placed on a non-accrual
status when the loan becomes more than 90 days delinquent and when, in our
opinion, the collection of additional interest is doubtful. Normally, interest
accrued and unpaid at the time a loan is placed on nonaccrual status is charged
against interest income. Subsequent interest payments, if any, are either
applied to the outstanding principal balance or recorded as interest income,
depending on the assessment of the ultimate collectibility of the loan.
NONPERFORMING ASSETS. The following table sets forth information regarding
nonaccrual loans and real estate owned, as of the dates indicated. As of the
dates indicated, no loans were categorized as troubled
7
debt restructurings within the meaning of Statement of Financial Accounting
Standards ("SFAS") No. 15 and there were no impaired loans within the meaning of
SFAS No. 114, as amended by SFAS 118.
AT DECEMBER 31,
----------------------------------------------------------
2004 2003 2002 2001 2000
------- ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Loans accounted for on a non-accrual basis:
Mortgage................................................ $ 120 $ 567 $ 446 $ 940 $ --
Home equity lines of credit............................. -- -- -- -- --
Installment............................................. -- -- 77 27 --
Commercial.............................................. -- -- 96 60 --
PHEAA................................................... -- -- -- -- --
Municipal............................................... -- -- -- -- --
Credit cards............................................ -- -- -- -- --
Other................................................... -- -- -- -- --
------- ------ ------ ------ ------
Total..................................................... $ 120 $ 567 $ 619 $1,027 $ --
------- ------ ------ ------ ------
Accruing loans which are contractually past
due 90 days or more:
Mortgage................................................ 3,618 704 728 559 1,067
Installment............................................. 9 10 -- 3 10
Commercial.............................................. 954 14 41 7 157
Home equity lines of credit............................. -- -- -- -- --
PHEAA................................................... -- -- -- -- --
Municipal............................................... -- -- -- -- --
Credit cards............................................ -- -- -- -- --
Other................................................... -- -- -- -- --
------- ------ ------ ------ ------
Total..................................................... 4,581 728 769 569 1,234
------- ------ ------ ------ ------
Total non-accrual and accrual loans....................... 4,701 1,295 1,388 1,596 1,234
------- ------ ------ ------ ------
Other real estate owned................................... 1,767 254 637 239 132
------- ------ ------ ------ ------
Other non-performing assets............................... -- -- -- -- --
------- ------ ------ ------ ------
Total non-performing assets............................... $ 6,468 $1,549 $2,025 $1,835 $1,366
======= ====== ====== ====== ======
Total non-accrual and accrual loans to net loans.......... 1.08% 0.31% 0.39% 0.51% 0.42%
======= ====== ====== ====== ======
Total non-accrual and accrual loans to total assets....... 0.70% 0.21% 0.24% 0.30% 0.25%
======= ====== ====== ====== ======
Total non-performing assets to total assets............... 0.96% 0.25% 0.35% 0.35% 0.28%
======= ====== ====== ====== ======
As of December 31, 2004, there were no loans not reflected in the above as
to which management had serious doubts as to the ability of borrowers to comply
with present loan repayment loans.
PROVISION FOR LOAN LOSSES. The provision for loan losses is charged to
operations to bring the total allowance for loan losses to a level that
represents management's best estimate of the losses inherent in the portfolio,
based on a monthly review by management of the following factors:
o Historical experience
o Volume
o Type of lending conducted by the Bank
o Industry standards
o The level and status of past due and non- performing loans
o The general economic conditions in the Bank's lending area; and
o Other factors affecting the collectability of the loans in the
portfolio
8
Large groups of homogeneous loans, such as residential real estate, small
commercial real estate loans and home equity and consumer loans are evaluated in
the aggregate using historical loss factors and other data. The amount of loss
reserve is calculated using historical loss rates, net of recoveries on a five
year rolling weighted average, adjusted for environmental, and other qualitative
factors such as industry, geographical, economic and political factors that can
effect loss rates or loss measurements.
Large balance and/or more complex loans such as multi-family and commercial
real estate loans may be evaluated on an individual basis and are also evaluated
in the aggregate to determine adequate reserves. As specific loans are
determined to be impaired specific reserves are assigned based upon collateral
value, market value, if determinable, or the present value of the estimated
future cash flows of the loan.
The allowance is increased by a provision for loan loss which is charged to
expense, and reduced by charge-offs, net of recoveries. Loans are placed on
non-accrual status when they are 90 days past due, unless they are adequately
collateralized and in the process of collection.
The allowance for loan losses is maintained at a level that represents
management's best estimate of losses in the portfolio at the balance sheet date.
However, there can be no assurance that the allowance for losses will be
adequate to cover losses which may be realized in the future and that additional
provisions for losses will not be required.
9
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets
forth information with respect to the Registrant's allowance for loan losses at
the dates indicated:
DECEMBER 31,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Total loans outstanding........................ $439,142 $419,571 $362,744 $317,246 $293,833
======== ======== ======== ======== ========
Average loans outstanding...................... $430,543 $393,743 $337,600 $304,080 $279,400
======== ======== ======== ======== ========
Allowance balances (at beginning of period)... $ 3,285 $ 2,873 $ 2,114 $ 1,919 $ 2,366
Provision:
Mortgage.................................... 430 430 930 200 30
Installment................................. 38 38 25 100 30
Commercial.................................. 132 132 145 200 240
Home equity lines of credit................. -- -- -- -- --
PHEAA....................................... -- -- -- -- --
Municipal................................... -- -- -- -- --
Credit cards................................ -- -- -- -- --
Other....................................... -- -- -- -- --
Net (charge-offs) recoveries:
Mortgage..................................... (1,204) (11) (219) (203) (34)
Installment.................................. (125) (64) (59) (90) (72)
Commercial................................... 38 (113) (63) (14) (616)
Home equity lines of credit.................. -- -- -- -- --
PHEAA........................................ -- -- -- -- --
Municipal.................................... -- -- -- -- --
Credit cards................................. -- -- -- 2 (25)
Other........................................ -- -- -- -- --
-------- -------- -------- -------- --------
Allowance balance (at end of period)........... $ 2,594 $ 3,285 $ 2,873 $ 2,114 $ 1,919
======== ======== ======== ======== ========
Allowance for loan losses as a percent
of total loans outstanding................... 0.59% 0.78% 0.79% 0.67% 0.65%
======== ======== ======== ======== ========
Net loans charged off as a percent of
average loans outstanding.................... 0.30% 0.05% 0.10% 0.10% 0.27%
======== ======== ======== ======== ========
10
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the allocation of the Registrant's allowance for loan losses by loan category
and the percent of loans in each category to total loans at the date indicated.
AT DECEMBER 31,
----------------------------------------------------------------------------
2004 2003 2002
--------------------- --------------------- --------------------
% OF % OF % OF
LOANS LOANS LOANS
TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
AT END OF PERIOD ALLOCATED TO:
Mortgage....................... $1,110 57.37% $ 806 58.33% $ 2,183 57.87%
Installment.................... 338 19.27 109 18.65 194 16.33
Commercial..................... 889 13.91 2,217 14.19 432 16.14
Home equity lines of credit.... 43 5.28 138 5.23 64 4.36
PHEAA.......................... 4 1.67 5 1.87 -- 1.90
Municipal...................... 210 2.29 9 1.49 -- 3.08
Credit cards................... -- 0.01 -- 0.01 -- 0.01
Other.......................... -- 0.20 1 0.23 -- 0.31
------ ------ ------ ------ ------ ------
Total allowance.................. $2,594 100.00% $3,285 100.00% $2,873 100.00%
====== ====== ====== ====== ====== ======
AT DECEMBER 31,
------------------------------------------------
2001 2000
--------------------- ----------------------
% OF % OF
LOANS LOANS
TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS
------ -------- ------ --------
(DOLLARS IN THOUSANDS)
AT END OF PERIOD ALLOCATED TO:
Mortgage....................... $1,120 54.55% $ 651 51.95%
Installment.................... 409 20.17 414 22.22
Commercial..................... 501 17.38 786 17.92
Home equity lines of credit.... 60 3.47 51 3.42
PHEAA.......................... 11 2.19 10 2.26
Municipal...................... 8 1.69 1 2.02
Credit cards................... -- 0.01 -- --
Other.......................... 5 0.54 6 0.21
------ ------ ------ ------
Total allowance.................. $2,114 100.00% $1,919 100.00%
====== ====== ====== ======
11
INVESTMENT ACTIVITIES
The Registrant maintains a level of liquid assets, including short-term
securities and certain other investments, which varies depending upon several
factors, including: (i) the yields on investment alternatives, (ii) management's
judgment as to the attractiveness of the yields then available in relation to
other opportunities, (iii) expectation of future yield levels, and (iv)
management's projections as to the short-term demand for funds to be used in
loan origination and other activities. Investment securities, including
mortgage-backed securities, are classified at the time of purchase, based upon
management's intentions and abilities, as securities held-to-maturity or
securities available-for-sale. Debt securities acquired with the intent and
ability to hold to maturity are classified as held-to-maturity and are stated at
cost and adjusted for amortization of premium and accretion of discount, which
are computed using the level yield method and recognized as adjustments of
interest income. All other debt securities are classified as available-for-sale
to serve principally as a source of liquidity.
Current accounting standards regarding investment securities (including
mortgage backed securities) require the Registrant to categorize securities as
"held to maturity," "available-for-sale" or "trading." As of December 31, 2004,
the Registrant had securities classified as "available-for-sale" (which included
FHLB stock) in the amount of $196.9 million and had no securities classified as
"held-to-maturity" or "trading." Securities classified as "available-for-sale"
are reported for financial reporting purposes at the fair market value with net
changes in the market value from period to period included as a separate
component of stockholders' equity, net of income taxes. At December 31, 2004,
the Registrant's securities available-for-sale had an amortized cost of $195.1
million and market value of $196.9 million. Changes in the market value of
securities available for sale do not affect the Company's income. In addition,
changes in the market value of securities available-for-sale do not affect the
Bank's regulatory capital requirements or its loan-to-one borrower limit.
At December 31, 2004, the Registrant's investment portfolio policy allowed
investments in instruments such as: (i) U.S. Treasury obligations, (ii) U.S.
federal agency or federally sponsored agency obligations, (iii) mortgage-backed
securities, (iv) municipal obligations, (v) banker's acceptances, (vi)
certificates of deposit, and (vii) investment grade corporate bonds, and
commercial paper. The board of directors may authorize additional investments.
As a source of liquidity and to supplement the Registrant's lending
activities, the Registrant has invested in residential mortgage-backed
securities. Mortgage-backed securities can serve as collateral for borrowings
and, through repayments, as a source of liquidity. Mortgage-backed securities
represent a participation interest in a pool of single-family or other type of
mortgages. Principal and interest payments are passed from the mortgage
originators, through intermediaries (generally quasi-governmental agencies) that
pool and repackage the participation interests in the form of securities. The
quasi-governmental agencies guarantee the payment of principal and interest to
investors and include FreddieMac, Government National Mortgage Association
("GinnieMae"), and FannieMae.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. Expected maturities will differ from contractual
maturities due to scheduled repayments and because borrowers may have the right
to call or prepay obligations with or without prepayment penalties.
Mortgage-backed securities issued by FreddieMac, GinnieMae, and FannieMae make
up a majority of the pass-through certificates market.
12
INVESTMENT PORTFOLIO. The following table sets forth the carrying value of
the Registrant's investment securities portfolio at the dates indicated:
AT DECEMBER 31
------------------------------
2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
Securities available for sale:
Obligations of U.S. government agencies ....... $ 71,103 $ 82,969 $ 80,503
Mortgage-backed securities .................... 65,004 37,656 54,104
Obligations of state and political subdivisions 46,446 37,921 38,889
Federal Home Loan Bank stock .................. 5,683 4,541 3,153
Equity securities ............................. 7,940 8,621 9,318
Other securities .............................. 716 740 750
-------- -------- --------
Total securities available for sale ........ $196,892 $172,448 $186,717
======== ======== ========
13
INVESTMENT PORTFOLIO MATURITIES. The following table sets forth certain
information regarding carrying values, weighted average yields, and maturities
of the Registrant's investment securities portfolio as of December 31, 2004.
Actual maturities may differ from contractual maturities as certain instruments
have call features which allow prepayment of obligations.
AS OF DECEMBER 31, 2004
------------------------------------------------------------------------------
AFTER FIVE
ONE YEAR OR LESS ONE TO FIVE YEARS TO TEN YEARS
------------------------ --------------------- ---------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Obligations of U.S.
government agencies............. $1,006 7.13% $1,092 7.33% $62,802 3.83%
Mortgage-backed securities.......... -- -- -- -- 25,124 3.88
Obligations of state and
political subdivisions (1)...... -- -- 2,261 5.13 8,146 4.88
Federal Home Loan Bank stock........ -- -- -- -- -- --
Equity securities................... -- -- -- -- -- --
Other securities .................. 502 7.04% 25 2.50 -- --
------ ------ -------
Total.......................... $1,508 7.10% $3,378 5.82% $96,072 3.93%
====== ====== =======
AS OF DECEMBER 31, 2004
---------------------------------------------------------------
MORE THAN
TEN YEARS TOTAL INVESTMENT SECURITIES
---------------------- ---------------------------------
CARRYING AVERAGE CARRYING AVERAGE MARKET
VALUE YIELD VALUE YIELD VALUE
-------- ------- -------- ------- ------
(DOLLARS IN THOUSANDS)
Obligations of U.S.
government agencies............. $ 6,203 4.07% $ 71,103 3.95% $ 71,103
Mortgage-backed securities.......... 39,880 4.81 65,004 4.45 65,004
Obligations of state and
political subdivisions (1)...... 36,039 4.63 46,446 4.70 46,446
Federal Home Loan Bank stock........ 5,683 2.43 5,683 2.43 5,683
Equity securities................... 7,940 2.28 7,940 2.28 7,940
Other securities .................. 189 1.85 716 5.51 716
------- -------- --------
Total.......................... $95,934 4.34% $196,892 4.19% $196,892
======= ======== ========
<FN>
____________________
(1) Average yields have not been computed on a tax-equivalent basis.
</FN>
14
SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Registrant's funds for
lending and other investment purposes. In addition to deposits, the Registrant
derives funds from the amortization, prepayment or sale of loans, maturities of
investment securities and operations. Scheduled loan principal repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and market
conditions. The Registrant can also borrow from the Federal Home Loan Bank
("FHLB") of Pittsburgh.
DEPOSITS. Consumer and commercial deposits are attracted principally from
within the Registrant's primary market area through the offering of a broad
selection of deposit instruments including checking, regular savings, money
market deposits, term certificate accounts and individual retirement accounts.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors. The Registrant regularly evaluates the internal cost of funds, surveys
rates offered by competing institutions, reviews the Registrant's cash flow
requirements for lending and liquidity and executes rate changes when deemed
appropriate. The Registrant does not obtain funds through brokers, nor does it
solicit funds outside the Commonwealth of Pennsylvania.
AT DECEMBER 31,
----------------------------------------------------------------------------
2004 2003 2002
---------------------- --------------------- --------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Checking accounts:
Non-interest-bearing.............. $ 80,423 -- % $ 77,862 -- % $ 71,568 -- %
Interest-bearing.................. 45,791 0.39 54,788 0.58 48,375 1.05
Passbook and club accounts........... 76,356 0.51 76,641 0.70 69,776 1.48
Money market accounts................ 58,103 0.89 61,138 1.05 60,735 2.03
Certificate accounts................. 245,881 3.08 221,186 3.30 208,789 3.80
-------- ----- -------- ---- -------- ----
Total....................... $506,554 1.71% $491,615 1.79% $459,243 2.33%
======== ===== ======== ==== ======== ====
The following table indicates the amount of certificates of deposit of
$100,000 or more by time remaining at December 31, 2004 (in thousands).
CERTIFICATES OF
MATURITY PERIODS DEPOSIT
---------------- ---------------
Three months or less...................... $13,565
Over three through six months............. 6,390
Over six through twelve months............ 24,993
Over twelve months........................ 17,587
-------
Total............................... $62,535
=======
BORROWINGS. Deposits are the primary source of funds for the Registrant's
lending and investment activities as well as for general business purposes.
Should the need arise, the Registrant has a maximum borrowing capacity with the
FHLB of $308 million. At December 31, 2004, there were outstanding $70.3 million
of long-term FHLB borrowings.
15
TRUST SERVICES
The Bank offers a variety of trust services including trust management,
estate planning and administration, investment counseling and management and
retirement planning. The Bank serves as trustee for testamentary, living,
irrevocable and charitable trusts, administers investment agencies, employee
benefit plans, guardianships, special needs trusts and offers separately managed
accounts. The Bank's fees for these services are generally a percentage of the
assets under management. As of December 31, 2004, the Bank had $110.0 million in
assets under management compared to $134.8 million at December 31, 2003. The
decline in assets under management in 2004 was primarily due to the mandatory
redemption of a $25.0 million municipal bond issue. For the year ended December
31, 2004, the Bank had income of $340,000 from its trust services.
PERSONNEL
As of December 31, 2004, the Registrant had 185 full-time and 55 part-time
employees. None of the Registrant's employees are represented by a collective
bargaining group.
SUPERVISION AND REGULATION
REGULATION OF THE COMPANY
Set forth below is a brief description of certain laws which related to the
regulation of the Company and the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations.
GENERAL. The Company, as a bank holding company registered under the Bank
Holding Company Act of 1956, as amended, is subject to regulation, supervision
and examination by the Board of Governors of the Federal Reserve System and by
the Pennsylvania Department of Banking. The Company is also required to file
annually a report of its operations with the Federal Reserve and the
Pennsylvania Department of Banking. This regulation and oversight is generally
intended to ensure that the Company limits its activities to those allowed by
law and that it operates in a safe and sound manner without endangering the
financial health of the Bank.
Under the Bank Holding Company Act, the Company must obtain the prior
approval of the Federal Reserve before it may acquire control of another bank or
bank holding company, merge or consolidate with another bank holding company,
acquire all or substantially all of the assets of another bank or bank holding
company, or acquire direct or indirect ownership or control of any voting shares
of any bank or bank holding company if, after such acquisition, the Company
would directly or indirectly own or control more than 5% of such shares.
Federal statutes impose restrictions on the ability of a bank holding
company and its nonbank subsidiaries to obtain extensions of credit from its
subsidiary bank, on the subsidiary bank's investments in the stock or securities
of the holding company, and on the subsidiary bank's taking of the holding
company's stock or securities as collateral for loans to any borrower. A bank
holding company and its subsidiaries are also prevented from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property, or furnishing of services by the subsidiary bank.
A bank holding company is required to serve as a source of financial and
managerial strength to its subsidiary banks and may not conduct its operations
in an unsafe or unsound manner. In addition, it
16
is the Federal Reserve policy that a bank holding company should stand ready to
use available resources to provide adequate capital to its subsidiary banks
during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Federal Reserve to be an unsafe and unsound
banking practice or a violation of the Federal Reserve regulations, or both.
NON-BANKING ACTIVITIES. The business activities of the Company, as a bank
holding company, are restricted by the Bank Holding Company Act. Under the Bank
Holding Company Act and the Federal Reserve's bank holding company regulations,
the Company may only engage in, or acquire or control voting securities or
assets of a company engaged in, (1) banking or managing or controlling banks and
other subsidiaries authorized under the Bank Holding Company Act and (2) any
non-banking activity the Federal Reserve has determined to be so closely related
to banking or managing or controlling banks to be a proper incident thereto.
These include any incidental activities necessary to carry on those activities,
as well as a lengthy list of activities that the Federal Reserve has determined
to be so closely related to the business of banking as to be a proper incident
thereto.
FINANCIAL MODERNIZATION. The Gramm-Leach-Bliley Act permits greater
affiliation among banks, securities firms, insurance companies, and other
companies under a new type of financial services company known as a "financial
holding company." A financial holding company essentially is a bank holding
company with significantly expanded powers. Financial holding companies are
authorized by statute to engage in a number of financial activities previously
impermissible for bank holding companies, including securities underwriting,
dealing and market making; sponsoring mutual funds and investment companies;
insurance underwriting and agency; and merchant banking activities. The Act also
permits the Federal Reserve and the Treasury Department to authorize additional
activities for financial holding companies if they are "financial in nature" or
"incidental" to financial activities. A bank holding company may become a
financial holding company if each of its subsidiary banks is well capitalized,
well managed, and has at least a "satisfactory" CRA rating. A financial holding
company must provide notice to the Federal Reserve within 30 days after
commencing activities previously determined by statute or by the Federal Reserve
and Department of the Treasury to be permissible. In fiscal 2000, the Company
submitted the required notice to the Federal Reserve and became a financial
holding company.
REGULATORY CAPITAL REQUIREMENTS. The Federal Reserve has adopted capital
adequacy guidelines under which it assesses the adequacy of capital in examining
and supervising a bank holding company and in analyzing applications to it under
the Bank Holding Company Act. The Federal Reserve's capital adequacy guidelines
are similar to those imposed on the Bank by the Federal Deposit Insurance
Corporation. See "Regulation of the Bank - Regulatory Capital Requirements."
RESTRICTIONS ON DIVIDENDS. The Pennsylvania Banking Code states, in part,
that dividends may be declared and paid only out of accumulated net earnings and
may not be declared or paid unless surplus (retained earnings) is at least equal
to contributed capital. The Bank has not declared or paid any dividends that
have caused its retained earnings to be reduced below the amount required.
Finally, dividends may not be declared or paid if the Bank is in default in
payment of any assessment due the Federal Deposit Insurance Corporation.
The Federal Reserve has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the Federal Reserve's view
that a bank holding company should pay cash dividends only to the extent that
the holding company's net income for the past year is sufficient to
17
cover both the cash dividends and a rate of earnings retention that is
consistent with the holding company's capital needs, asset quality and overall
financial condition. The Federal Reserve also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends. Furthermore, under the federal prompt corrective action
regulations, the Federal Reserve may prohibit a bank holding company from paying
any dividends if the holding company's bank subsidiary is classified as
"undercapitalized."
REGULATION OF THE BANK
GENERAL. As a Pennsylvania-chartered commercial bank with deposits insured
by the Federal Deposit Insurance Corporation which is not a member of the
Federal Reserve, the Bank is subject to extensive regulation and examination by
the Pennsylvania Department of Banking and by the Federal Deposit Insurance
Corporation, which insures its deposits to the maximum extent permitted by law.
The federal and state laws and regulations applicable to banks regulate, among
other things, the scope of their business, their investments, the reserves
required to be kept against deposits, the timing of the availability of
deposited funds and the nature and amount of and collateral for certain loans.
The laws and regulations governing the Bank generally have been promulgated to
protect depositors and not for the purpose of protecting stockholders. This
regulatory structure also gives the federal and state banking agencies extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulation, whether by the Pennsylvania Department
of Banking, the Federal Deposit Insurance Corporation or the United States
Congress, could have a material impact on the Company and its operations.
Federal law provides the federal banking regulators, including the Federal
Deposit Insurance Corporation and the Federal Reserve, with substantial
enforcement powers. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders, and to initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities.
PENNSYLVANIA BANKING LAW. The Pennsylvania Banking Code contains detailed
provisions governing the organization, location of offices, rights and
responsibilities of trustees, officers, and employees, as well as corporate
powers, savings and investment operations and other aspects of the Bank and its
affairs. The code delegates extensive rule-making power and administrative
discretion to the Pennsylvania Department of Banking so that the supervision and
regulation of state chartered commercial banks may be flexible and readily
responsive to changes in economic conditions and in savings and lending
practices.
The code also provides state-chartered commercial banks with the powers to
make certain leeway investments, subject to regulation by the Pennsylvania
Department of Banking. The Federal Deposit Insurance Corporation Act, however,
prohibits a state-chartered bank from making new investments, loans, or becoming
involved in activities as principal and equity investments which are not
permitted for national banks unless (1) the Federal Deposit Insurance
Corporation determines the activity or investment does not pose a significant
risk of loss to the appropriate deposit insurance fund and (2) the bank meets
all applicable federal capital requirements. Accordingly, the additional
operating authority provided to the Bank by the code is significantly restricted
by the Federal Deposit Insurance Act.
18
FEDERAL DEPOSIT INSURANCE. The Federal Deposit Insurance Corporation is an
independent federal agency that insures the deposits, up to prescribed statutory
limits, of federally insured banks and savings institutions and safeguards the
safety and soundness of the banking and savings industries. The Federal Deposit
Insurance Corporation administers two separate insurance funds, the Bank
Insurance Fund, which generally insures commercial bank and state savings bank
deposits, and the Savings Association Insurance Fund, which generally insures
savings association deposits. The Bank is a member of the Bank Insurance Fund
and its deposit accounts are insured by the Federal Deposit Insurance
Corporation, up to prescribed limits.
The Federal Deposit Insurance Corporation is authorized to establish
separate annual deposit insurance assessment rates for members of the Bank
Insurance Fund and the Savings Association Insurance Fund, and to increase
assessment rates if it determines such increases are appropriate to maintain the
reserves of either insurance fund. In addition, the Federal Deposit Insurance
Corporation is authorized to levy emergency special assessments on Bank
Insurance Fund and Savings Association Insurance Fund members. The Federal
Deposit Insurance Corporation's deposit insurance premiums are assessed through
a risk-based system under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums based upon their
level of capital and supervisory evaluation, with the assessment rate for most
institutions set at 0%.
In addition, all institutions with deposits insured by the Federal Deposit
Insurance Corporation are required to pay assessments to fund interest payments
on bonds issued by the Financing Corporation, an agency of the Federal
government established to recapitalize the predecessor to the Savings
Association Insurance Fund. The current quarterly assessment rate is
approximately 0.0146% of insured deposits. These assessments will continue until
the Financing Corporation bonds mature in 2017.
REGULATORY CAPITAL REQUIREMENTS. The Federal Deposit Insurance Corporation
has promulgated capital adequacy requirements for state-chartered banks that,
like the Bank are not members of the Federal Reserve System. At December 31,
2004, the Bank exceeded all regulatory capital requirements and was classified
as "well capitalized."
The Federal Deposit Insurance Corporation's capital regulations establish a
minimum 3% Tier 1 leverage capital requirement for the most highly rated
state-chartered, non-member banks, with an additional cushion of at least 100 to
200 basis points for all other state-chartered, non-member banks, which
effectively increases the minimum Tier 1 leverage ratio for such other banks to
4% to 5% or more. Under the Federal Deposit Insurance Corporation's regulation,
the highest-rated banks are those that the Federal Deposit Insurance Corporation
determines are not anticipating or experiencing significant growth and have well
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and, in general, which are
considered a strong banking organization, rated composite 1 under the Uniform
Financial Institutions Rating System. Tier 1 or core capital is defined as the
sum of common stockholders' equity (including retained earnings), noncumulative
perpetual preferred stock and related surplus, and minority interests in
consolidated subsidiaries, minus all intangible assets other than certain
mortgage and non-mortgage servicing assets and purchased credit card
relationships.
The Federal Deposit Insurance Corporation's regulations also require that
state-chartered, non- member banks meet a risk-based capital standard. The
risk-based capital standard requires the maintenance of total capital (which is
defined as Tier 1 capital and supplementary (Tier 2) capital) to risk weighted
assets of 8%. In determining the amount of risk-weighted assets, all assets,
plus certain off balance sheet assets, are multiplied by a risk-weight of 0% to
100%, based on the risks the Federal Deposit Insurance Corporation believes are
inherent in the type of asset or item. The components of Tier 1 capital for the
risk-based
19
standards are the same as those for the leverage capital requirement. The
components of supplementary (Tier 2) capital include cumulative perpetual
preferred stock, mandatory subordinated debt, perpetual subordinated debt,
intermediate-term preferred stock, up to 45% of unrealized gains on equity
securities and a bank's allowance for loan and lease losses. Allowance for loan
and lease losses includable in supplementary capital is limited to a maximum of
1.25% of risk-weighted assets. Overall, the amount of supplementary capital that
may be included in total capital is limited to 100% of Tier 1 capital.
A bank that has less than the minimum leverage capital requirement is
subject to various capital plan and activities restriction requirements. The
Federal Deposit Insurance Corporation's regulations also provide that any
insured depository institution with a ratio of Tier 1 capital to total assets
that is less than 2.0% is deemed to be operating in an unsafe or unsound
condition pursuant to Section 8(a) of the Federal Deposit Insurance Act and
could be subject to termination of deposit insurance.
The Bank is also subject to minimum capital requirements imposed by the
Pennsylvania Department of Banking on Pennsylvania-chartered depository
institutions. Under the Pennsylvania Department of Banking's capital
regulations, a Pennsylvania bank or savings bank must maintain a minimum
leverage ratio of Tier 1 capital (as defined under the Federal Deposit Insurance
Corporation's capital regulations) to total assets of 4%. In addition, the
Pennsylvania Department of Banking has the supervisory discretion to require a
higher leverage ratio for any institutions based on the institution's
substandard performance in any of a number of areas. The Bank was in compliance
with both the Federal Deposit Insurance Corporation and the Pennsylvania
Department of Banking capital requirements as of December 31, 2004.
AFFILIATE TRANSACTION RESTRICTIONS. Federal laws strictly limit the ability
of banks to engage in transactions with their affiliates, including their bank
holding companies. In particular, loans by a subsidiary bank to its parent
company or the nonbank subsidiaries of the bank holding company are limited to
10% of a bank subsidiary's capital and surplus and, with respect to such parent
company and all such nonbank subsidiaries, to an aggregate of 20% of the bank
subsidiary's capital and surplus. Further, loans and other extensions of credit
generally are required to be secured by eligible collateral in specified
amounts. Federal law also requires that all transactions between a bank and its
affiliates be on terms as favorable to the bank as transactions with
non-affiliates.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the Federal Home
Loan Bank of Pittsburgh, which is one of 12 regional Federal Home Loan Banks.
Each Federal Home Loan Bank serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from funds deposited by
member institutions and proceeds from the sale of consolidated obligations of
the Federal Home Loan Bank system. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the board of directors of
the Federal Home Loan Bank.
As a member, it is required to purchase and maintain stock in the Federal
Home Loan Bank of Pittsburgh in an amount equal to 5% of its outstanding
residential mortgage loans plus .7% of its unused maximum borrowing capacity. At
December 31, 2004, the Bank was in compliance with this requirement.
FEDERAL RESERVE SYSTEM. The Federal Reserve requires all depository
institutions to maintain non- interest bearing reserves at specified levels
against their transaction accounts (primarily checking and NOW accounts) and
non-personal time deposits. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve may be used to satisfy the liquidity
requirements that are imposed by the Department. At December 31, 2004, the Bank
met its reserve requirements.
20
ITEM 2. PROPERTIES
- -------------------
At December 31, 2004, the Registrant operated from its main office, six
branch offices and five supermarket branch offices and a loan office and a trust
office, all located in southwestern Pennsylvania. The total net book value of
the Registrant's investment in premises and equipment at December 31, 2004, was
approximately $6.2 million. The main office of the Company and of the Bank and
three branch offices are owned by the Bank and the remaining four branch
offices, five supermarket branch offices, and the Bank's trust division, are
leased by the Bank. These leases have initial terms of one to twenty years, and
all leases contain renewal options for additional years.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Registrant is periodically involved as a plaintiff or defendant in
various legal actions, such as actions to enforce liens, condemnation
proceedings on properties in which the Registrant holds mortgage interests,
matters involving the making and servicing of mortgage loans and other matters
incident to the Registrant's business. In the opinion of management, none of
these actions individually or in the aggregate is believed to be material to the
financial condition or results of operations of the Registrant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2004.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
AND ISSUER PURCHASES OF EQUITY SECURITIES
- -----------------------------------------
(a) MARKET FOR COMMON EQUITY. The information contained under the section
captioned "Stock Market Information" in the 2004 Annual Report to Stockholders
(the "Annual Report") is incorporated herein by reference. The Registrant did
not sell any equity securities that were not registered under the Securities Act
of 1933 during the period under report.
(b) USE OF PROCEEDS. Not applicable
(c) ISSUER PURCHASE OF EQUITY SECURITIES. No purchases of shares of Common
Stock were made by or on behalf of the Registrant during the fourth quarter of
the fiscal year under report.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information contained in the table captioned "Selected Financial
Information" in the Annual Report is incorporated herein by reference.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ---------------------------------------------------------------------
The information contained in the section captioned "Market Risk" in the
Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The Registrant's financial statements listed in Item 15 herein are
incorporated herein by reference from the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
- ---------------------------------
(a) DISCLOSURE CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, the effectiveness of the
Company's disclosure controls and procedures, as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
(b) INTERNAL CONTROL OVER FINANCIAL REPORTING
Management's Report on Internal Control Over Financial Reporting and the
Attestation Report of its Registered Public Accounting Firm are incorporated
herein by reference from the Annual Report.
There were no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
- ---------------------------
Not applicable.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Proposal I-- Election of
Directors" and "-- Biographical Information" in the definitive Proxy Statement
for the 2005 Annual Meeting of Stockholders ("Proxy Statement") is incorporated
herein by reference.
The Company has adopted a Code of Ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller or persons performing similar functions. A copy of the Company's Code
of Ethics will be furnished, without charge, to any person who requests such
copy by writing to the Secretary, IBT Bancorp, Inc., 309 Main Street, Irwin,
Pennsylvania 15642.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information contained under the section captioned "Director and
Executive Compensation" in the Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Information required by this item is incorporated herein by reference
to the Section captioned "Voting Securities and Principal Holders
Thereof -- Security Ownership of Certain Beneficial Owners" of the
Proxy Statement.
(b) SECURITY OWNERSHIP OF MANAGEMENT
Information required by this item is incorporated herein by reference
to the sections captioned "Voting Securities and Principal Holders
Thereof -- Security Ownership of Certain Beneficial Owners" and
"Proposal I -- Election of Directors" of the Proxy Statement.
(c) CHANGES IN CONTROL
Management of the Company knows of no arrangements, including any
pledge by any person of securities of the Company, the operation of
which may at a subsequent date result in a change in control of the
registrant.
23
(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Set forth below is information as of December 31, 2004 with respect to
compensation plans under which equity securities of the Registrant are
authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
NUMBER OF SECURITIES
NUMBER OF SECURITIES WEIGHTED-AVERAGE REMAINING AVAILABLE FOR
TO BE ISSUED UPON EXERCISE PRICE OF FUTURE ISSUANCE UNDER EQUITY
EXERCISE OF OUTSTANDING COMPENSATION PLANS
OUTSTANDING OPTIONS, OPTIONS, WARRANTS (EXCLUDING SECURITIES
WARRANTS AND RIGHTS AND RIGHTS REFLECTED IN COLUMN (A))
------------------- ----------------- --------------------------
Equity compensation plans
approved by shareholders:
2000 Stock Option Plan............... 102,089 $31.13 150,000
Equity compensation plans
not approved by shareholders......... -- -- --
------- ------ -------
TOTAL.......................... 102,089 $31.13 150,000
======= ====== =======
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors - - Certain
Relationships and Related Transactions" of the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
- ------------------------------------------------
The information called for by this item is incorporated herein by reference
to the section entitled "Ratification of Appointment of Accountants" in the
Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS
- ----------------------------------------
(a) Listed below are all financial statements and exhibits filed as part
of this report, and are incorporated by reference.
1. The consolidated statements of financial condition of IBT
Bancorp, Inc. and subsidiary as of December 31, 2004 and 2003,
and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the
three year period ended December 31, 2004, together with the
related
24
notes and the independent auditors' report of Edwards Sauer &
Owens, P.C., independent registered public accounting firm.
2. Schedules omitted as they are not applicable.
3. Exhibits
3(i) Articles of Incorporation of IBT Bancorp, Inc.*
3(ii) Amended Bylaws of IBT Bancorp, Inc.**
4.1 Rights Agreement, dated as of November 18, 2003 by and between IBT Bancorp, Inc.
and Registrar and Transfer Company*****
10 + Change In Control Severance Agreement with Charles G. Urtin***
10.1 + Deferred Compensation Plan For Bank Directors***
10.2 + Death Benefit Only Deferred Compensation Plan For Bank Directors
effective as of January 1, 1990***
10.3 + Retirement and Death Benefit Deferred Compensation Plan For Bank
Directors effective as of January 1, 1990***
10.4 + 2000 Stock Option Plan****
10.5 + Irwin Bank & Trust Company Supplemental Pension Plan
13 Portions of the 2004 Annual Report to Shareholders
21 Subsidiaries
23 Consent of Edwards, Sauer & Owens, P.C.
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32 Section 1350 Certification
_________________________
+ Management contract or compensatory plan or arrangement.
* Incorporated by reference to the identically numbered exhibits of the Registrant's Form 10
(File No. 0-25903) filed April 29, 1999.
** Incorporated by reference to the identically numbered exhibits
of the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 2002.
*** Incorporated by reference from the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999.
**** Incorporated by reference to the Form S-8 Registration
Statement (File No. 333-40398) filed with the SEC on June 29,
2000.
***** Incorporated by reference to Amendment No. 1 to Form 8-A
Registration Statement (File No. 001-31655) filed with the SEC
on November 20, 2003.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of March 16, 2005.
IBT BANCORP, INC.
By: /s/ Charles G. Urtin
------------------------------------
Charles G. Urtin, President and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below as of March 16, 2005 by the following persons
on behalf of the registrant and in the capacities indicated.
/s/ Charles G. Urtin /s/ Thomas E. Deger
- ----------------------------------------------- -----------------------------
Charles G. Urtin, President, Chief Executive Thomas E. Deger
Officer, and Director Director
(Principal Executive Officer)
/s/ Richard L. Ryan /s/ John N. Brenzia
- ----------------------------------------------- -----------------------------
Richard L. Ryan John N. Brenzia
Director Director
/s/ Charles W. Hengenroeder /s/ Robert C. Whisner
- ----------------------------------------------- -----------------------------
Charles W. Hengenroeder Robert C. Whisner
Director Director
/s/ Grant J. Shevchik /s/ Robert Rebich, Jr.
- ----------------------------------------------- -----------------------------
Grant J. Shevchik Robert Rebich, Jr.
Director Director
/s/ Raymond G. Suchta /s/ Richard J. Hoffman
- ----------------------------------------------- -----------------------------
Raymond G. Suchta Richard J. Hoffman
Senior Vice President and Chief Financial Officer Director
(Principal Financial and Accounting Officer)