1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended March 31, 1998
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: 0-18415
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IBT Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Michigan 38-2830092
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
200 East Broadway 48858
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(Address of principal executive offices) (Zip code)
(517) 772-9471
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $6 par value, 873,960 as of April 30, 1998
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IBT BANCORP, INC.
Index to Form 10-Q
Part I Financial Information Page Numbers
Item 1 Consolidated Financial Statements 3-8
Item 2 Management's Discussion and
Analysis of Financial Condition
and Results of Operations 9-15
Item 3 Quantitative and Qualitative 16-17
Disclosures About Market Risk
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
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ITEM I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IBT BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) March 31 December 31
1998 1997
-------- --------
(Unaudited)
ASSETS
Cash and demand deposits due from banks........................ $ 12,834 $ 11,005
Federal funds sold............................................. 10,000 17,500
-------- --------
TOTAL CASH AND CASH EQUIVALENTS 22,834 28,505
Investment securities:
Securities available for sale (Amortized cost of
$97,619 in 1998 and $56,985 in 1997)...................... 98,146 57,391
Securities held to maturity (Fair value --
$8,363 in 1998 and $7,231 in 1997)........................ 8,287 7,160
-------- --------
TOTAL INVESTMENT SECURITIES 106,433 64,551
Loans:
Commercial and agricultural................................. 36,873 36,978
Real estate mortgage........................................ 143,759 143,424
Installment................................................. 35,809 36,847
-------- --------
TOTAL LOANS 216,441 217,249
Less allowance for loan losses................................. 2,871 2,677
-------- --------
NET LOANS 213,570 214,572
Other assets................................................... 17,599 11,103
-------- --------
TOTAL ASSETS $360,436 $318,731
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing......................................... $ 39,807 $ 43,207
NOW accounts................................................ 47,343 37,892
Certificates of deposit and other savings................... 219,868 182,314
Certificates of deposit over $100,000....................... 17,927 21,145
-------- --------
TOTAL DEPOSITS 324,945 284,558
Accrued interest and other liabilities......................... 3,679 3,215
-------- --------
TOTAL LIABILITIES 328,624 287,773
Shareholders' Equity:
Common stock -- $6 par value................................ 5,244 4,755
4,000,000 shares authorized; outstanding--
873,960 in 1998 (871,700 in 1997)
Capital surplus............................................. 18,481 13,687
Retained earnings........................................... 7,740 12,248
Accumulated other comprehensive income...................... 347 268
-------- --------
TOTAL SHAREHOLDERS' EQUITY 31,812 30,958
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $360,436 $318,731
======== ========
See notes to consolidated financial statements.
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IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(dollars in thousands)
Three Months Ended
March 31
-------------------------
1998 1997
------- -------
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING:
Balance at beginning of period 792,455 783,457
10% stock dividend 79,155
Issuance of common stock 2,350 2,616
------- -------
Balance end of period 873,960 786,073
======= =======
COMMON STOCK:
Balance at beginning of period $ 4,755 $ 4,701
10% stock dividend 475
Issuance of common stock 14 15
------- -------
Balance end of period 5,244 4,716
CAPITAL SURPLUS:
Balance at beginning of period 13,687 13,262
10% stock dividend 4,670
Issuance of common stock 124 106
------- -------
Balance end of period 18,481 13,368
RETAINED EARNINGS:
Balance at beginning of period 12,248 9,916
Net income 862 848
10% stock dividend (5,145)
Cash dividends ($0.25 per share in 1998 and $0.23 in 1997) (225) (196)
------- -------
Balance end of period 7,740 10,568
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of period 268 121
Unrealized gains (losses) on securities available for sale,
net of income taxes and reclassification adjustment 79 (127)
------- -------
Balance end of period 347 (6)
------- -------
TOTAL SHAREHOLDERS EQUITY END OF PERIOD $31,812 $28,646
======= =======
See notes to consolidated financial statements.
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IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands) Three Months Ended
March 31
------------------------
1998 1997
------ ------
INTEREST INCOME
Loans.......................................................... $4,676 $4,548
Investment securities:
Taxable...................................................... 908 700
Nontaxable................................................... 203 164
------ ------
TOTAL INTEREST ON INVESTMENT SECURITIES 1,111 864
Federal funds sold............................................. 110 119
------ ------
TOTAL INTEREST INCOME 5,897 5,531
INTEREST EXPENSE ON DEPOSITS..................................... 2,859 2,551
------ ------
NET INTEREST INCOME 3,038 2,980
Provision for loan losses........................................ 98 123
------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,940 2,857
NONINTEREST INCOME
Trust Fees..................................................... 103 87
Service charges on deposit accounts............................ 74 71
Other service charges and fees................................. 232 218
Other.......................................................... 167 136
Net realized loss of securities
available for sale.......................................... (8)
------ ------
TOTAL NONINTEREST INCOME 576 504
NONINTEREST EXPENSES
Salaries, wages and employee benefits.......................... 1,285 1,192
Occupancy ..................................................... 163 161
Furniture and equipment ....................................... 258 233
Other.......................................................... 625 589
------ ------
TOTAL NONINTEREST EXPENSE 2,331 2,175
INCOME BEFORE FEDERAL INCOME TAXES 1,185 1,186
Federal income taxes............................................. 323 338
------ ------
NET INCOME $ 862 $ 848
====== ======
Basic net income per share $ 0.99 $ 0.98
====== ======
Cash dividends per share $ 0.25 $ 0.23
====== ======
See notes to consolidated financial statements.
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IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(dollars in thousands) Three Months Ended
March 31
----------------------
1998 1997
---- ----
NET INCOME........................................................... $862 $848
Other comprehensive income before income taxes:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during period..... 120 (200)
Reclassification adjustment for realized (gains) losses
included in net income................................... 8
---- ----
Total comprehensive income before income taxes 120 (192)
Income tax expense (benefit) related to comprehensive
income................................................... 41 (65)
---- ----
OTHER COMPREHENSIVE INCOME NET OF INCOME TAXES....................... 79 (127)
---- ----
TOTAL COMPREHENSIVE INCOME $941 $721
==== ====
See notes to consolidated financial statements.
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IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands) Three Months Ended
March 31
1998 1997
------- -------
OPERATING ACTIVITIES
Interest and fees collected on loans
and investments.................................................. $ 5,507 $ 5,377
Other fees received................................................ 563 498
Interest paid...................................................... (2,849) (2,519)
Cash paid to suppliers and employees............................... (3,221) (2,013)
Federal income taxes paid..........................................
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 140 1,343
INVESTING ACTIVITIES
Proceeds from maturities and sales of
securities available for sale.................................... 2,953 3,840
Proceeds from maturities of
securities held to maturity...................................... 3,036
Purchase of securities available for sale.......................... (47,093) (5,349)
Purchase of securities held to maturity............................ (702)
Net decrease in loans.............................................. 1,136 3,033
Purchases of equipment and premises................................ (356) (318)
Acquisition of branch offices, less cash received.................. 38,178
------- -------
NET CASH (USED) PROVIDED IN INVESTING ACTIVITIES (2,848) 1,206
FINANCING ACTIVITIES
Net decrease in noninterest bearing deposits....................... (6,644) (6,131)
Net increase in interest bearing deposits.......................... 3,908 6,309
Cash dividends..................................................... (225) (196)
Proceeds from issuance of common stock............................. 138 121
------- -------
NET CASH PROVIDED IN FINANCING ACTIVITIES (2,823) 103
------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,671) 2,652
Cash and cash equivalents at beginning of period $28,505 $15,120
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $22,834 $17,772
======= =======
See notes to consolidated financial statements.
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IBT BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Corporation's annual report for the year ended December 31, 1997.
NOTE 2 COMPUTATION OF EARNINGS PER SHARE
The net income per share amounts are based on the weighted average
number of common shares outstanding. The weighted number of common shares
outstanding were 871,814 as of March 31, 1998, and 862,205 as of March 31, 1997.
The Corporation has no common stock equivalents and, accordingly, presents only
basic earnings per share.
NOTE 3 ADOPTION OF SFAS NO. 130
The Corporation adopted SFAS No. 130, Reporting Comprehensive Income,
on January 1, 1998. The Statement establishes standards for reporting and
displaying comprehensive income and its components. SFAS No. 130 requires that
all components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. For the
Corporation, comprehensive income includes net income and changes in unrealized
gains and losses on securities available for sale.
NOTE 4 BRANCH ACQUISITION
The Corporation's subsidiary bank, Isabella Bank and Trust, completed
the purchase of three branches from Old Kent Bank on March 30, 1998. The
purchase included approximately $43.0 million in deposits and $225,000 in loans.
The Results of Operations and Changes in Financial Condition include the
operating results from the date of purchase.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the major
factors that influenced IBT Bancorp's financial performance. This analysis
should be read in conjunction with the Corporation's 1997 annual report and with
the unaudited financial statements and notes, as set forth on pages 3 through 8
of this report.
THREE MONTHS ENDING MARCH 31, 1998 AND 1997
RESULTS OF OPERATIONS
Net income equaled $862,000 for the three month period ended March 31,
1998, compared to $848,000 for the same period in 1997, a 1.7% increase. Return
on average assets, which measures the ability of the Corporation to profitably
and efficiently employ its resources, equaled 1.07% for the first three months
of 1998 and 1.13% for 1997. Return on average equity, which indicates how
effectively the Corporation is able to generate earnings on shareholder invested
capital, equaled 11.09% through March 31, 1998 versus 11.96% for the same period
in 1997.
SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
March 31
---------------------
1998 1997
---------------------
INCOME STATEMENT DATA:
Net interest income $ 3,038 $ 2,980
Provision for loan losses 98 123
Net income 862 848
PER SHARE DATA:
Net income per common share $ 0.99 $ 0.98
Cash dividend per common share 0.25 0.23
RATIOS:
Average primary capital to average assets 10.46% 10.24%
Net income to average assets 1.07 1.13
Net income to average equity 11.09 11.96
NET INTEREST INCOME
Net interest income equals interest income less interest expense and is
the primary source of income for IBT Bancorp. In accordance with Statement of
Financial Accounting Standards Board (SFAS) No. 91, "Accounting for Loan Fees,"
interest income includes loan fees of $163,000 in 1998 versus $131,000 in 1997.
For analytical purposes, net interest income is adjusted to a "taxable
equivalent" basis by adding the income tax savings from interest on tax-exempt
loans and securities, thus making year-to-year comparisons more meaningful.
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IBT BANCORP, INC.
TABLE 1: AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME
(Dollars in Thousands)
The following schedules present the daily average amount outstanding
for each major category of interest earning assets, nonearning assets, interest
bearing liabilities, and noninterest bearing liabilities. This schedule also
presents an analysis of interest income and interest expense for the periods
indicated. All interest income is reported on a fully taxable equivalent (FTE)
basis using a 34% tax rate. Nonaccruing loans, for the purpose of the following
computations, are included in the average loan amounts outstanding.
Three Months Ending
March 31, 1998 March 31, 1997
Tax Average Tax Average
Average Equivalent Yield/ Average Equivalent Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
INTEREST EARNING ASSETS:
Loans $216,284 $4,704 8.70% $213,674 $4,573 8.56%
Taxable investment securities 52,110 799 6.13 43,478 676 6.22
Nontaxable investment securities 17,465 308 7.05 14,189 249 7.02
Federal funds sold 8,103 110 5.43 9,339 119 5.10
Other investments 6,910 108 6.25 1,369 24 7.01
-------- ------ ---- -------- ------ ----
Total Earning Assets 300,872 6,029 8.02 282,049 5,641 8.00
NONEARNING ASSETS:
Allowance for loan losses (2,794) (2,721)
Cash and due from banks 10,907 10,178
Premises and equipment 5,804 5,718
Accrued income and other assets 6,271 5,521
-------- --------
Total Assets $321,060 $300,745
======== ========
INTEREST BEARING LIABILITIES:
Interest bearing demand deposits 39,400 276 2.80 40,310 268 2.66
Savings deposits 75,210 621 3.30 72,082 578 3.21
Time deposits 133,211 1,947 5.85 119,383 1,705 5.71
Fed funds purchased 1,031 15 5.82
-------- ------ ---- -------- ------ ----
Total Interest Bearing Liabilities 248,852 2,859 4.60 231,775 2,551 4.40
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY:
Demand deposits 37,749 37,303
Other 3,380 3,302
Shareholders' equity 31,079 28,365
-------- --------
Total Liabilities and Equity $321,060 $300,745
======== ========
Net interest income (FTE) $3,170 $3,090
====== ======
Net yield on interest earning assets (FTE) 4.21% 4.38%
==== ====
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IBT BANCORP, INC.
TABLE 2: VOLUME AND RATE VARIANCE ANALYSIS
(Dollars in Thousands)
The following table sets forth the effect of volume and rate changes on
interest income and expense for the periods indicated. For the purpose of this
table, changes in interest due to volume and rate were determined as follows:
Volume Variance - change in volume multiplied by the previous year's rate.
Rate Variance - change in the fully taxable equivalent (FTE) rate
multiplied by the prior year's volume.
The change in interest due to both volume and rate has been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
Quarter Ended March 31, 1998
Compared to
March 31, 1997
Increase (Decrease) Due to
----------------------------------
Volume Rate Net
------ ---- ---
CHANGES IN INTEREST INCOME:
Loans $ 56 $ 75 $131
Taxable investment securities 133 (10) 123
Nontaxable investment securities 58 1 59
Federal funds sold (17) 8 (9)
Other investments 87 (3) 84
---- ---- ----
Total changes in interest income 317 71 388
Total changes in interest expense 236 72 308
---- ---- ----
Net Change in Interest Margin (FTE) $ 81 $ (1) $ 80
==== ==== ====
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IBT BANCORP, INC.
TABLE 3: SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in Thousands)
Year to Date
March 31
------------------------
1998 1997
------ ------
Summary of changes in allowance:
Allowance for loan losses - January 1 $2,677 $2,621
Loans charged off (36) (94)
Recoveries of charged off loans 132 118
------ ------
Net loans charged off 96 24
Provision charged to operations 98 123
------ ------
Allowance for loan losses - March 31 $2,871 $2,768
====== ======
Allowance for loan losses as a % of loans 1.33% 1.30%
====== ======
NONPERFORMING LOANS
(Dollars in thousands)
March 31
1998 1997
-------- --------
Total amount of loans outstanding for
the period $216,441 $212,446
======== ========
Nonaccrual loans $ 205 $ 191
Accruing loans past due 90 days or more 569 413
Restructured loans
-------- --------
Total $ 774 $ 604
======== ========
Loans classified as nonperforming as a
% of outstanding loans 0.36% 0.28%
======== ========
To management's knowledge, there are no other loans which cause management
to have serious doubts as to the ability of a borrower to comply with their loan
repayment terms.
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NET INTEREST INCOME (CONTINUED)
As shown in Tables number 1 and 2, when comparing the three month
period ending March 31, 1998 to the same period in 1997, fully taxable
equivalent (FTE) net interest income increased $80,000 or 2.6%. An increase of
6.7% in average interest earning assets provided $317,000 of FTE interest
income. The majority of this growth was funded by a 7.4% increase in interest
bearing deposits, resulting in $236,000 of additional interest expense. Overall,
changes in volume resulted in $81,000 of additional FTE interest income. The
average FTE interest rate earned on assets increased by 0.02%, increasing FTE
interest income by $71,000 and the average rate paid on deposits increased by
0.20%, increasing interest expense by $72,000. The net change related to
interest rates earned and paid was a $1,000 decrease in FTE net interest income.
The Corporation's FTE net interest yield as a percentage of average
earning assets equaled 4.21% during 1998 versus 4.38% in 1997. The 0.17%
decrease in the net interest yield was primarily a result of the Corporation's
increasing reliance on higher cost deposits such as certificates of deposit and
money market accounts to fund asset growth. In addition to increased reliance on
these funds, the cost of obtaining these funds has risen in relation to other
interest rates. Management expects the Corporation's reliance on higher cost
deposits to fund asset growth to continue.
The FTE net interest yield will be substantially impacted by the
Bank's purchase of the Old Kent branches. The net proceeds (due to the
assumption of the deposit liabilities) were invested in investment securities.
The investing of these funds was begun in late January 1998. The overall net FTE
interest yield on these additional funds is estimated to be 2.20% versus the
4.21% earned by the Corporation in the first quarter of 1998. Management expects
the Corporation's overall net FTE interest yield as a percentage of average
assets to decline by an average of 0.25% for the remainder of 1998. The
combination of lower interest margins and the write-off related to the $4.2
million deposit premium paid for the Old Kent branch deposits will result in the
Corporation's overall profitability as a percentage of assets (return on assets)
to decline by approximately 0.20% in 1998.
PROVISION FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by
its management of credit risk. Loans outstanding represent 60% of the
Corporation's total assets and is the Corporation's single largest concentration
of risk. The allowance for loan losses is management's estimation of potential
future losses inherent in the existing loan portfolio. Factors used to evaluate
the loan portfolio, and thus to determine the current charge to expense, include
recent loan loss history, financial condition of borrowers, amount of
nonperforming and impaired loans, overall economic conditions, and other
factors.
Comparing the year to date period of March 31, 1998 to March 31, 1997,
average loans outstanding increased 1.2%. The provision for loan losses was
decreased 20.3% to $98,000 in the first quarter of 1998 when compared to the
same quarter of 1997. As set forth in Table 3, loans classified as nonperforming
were $774,000 as of March 31, 1998, a $170,000 increase over the prior year. The
allowance for loan losses as a percentage of loans equaled 1.33% compared to
1.30% in 1997. In management's opinion, the allowance for loan losses is
adequate as of March 31, 1998.
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NONINTEREST INCOME
Noninterest income consists of trust fees, deposit service charges,
fees for other financial services, and gains and losses on investment securities
available for sale. Income earned from these sources increased $72,000 during
the three month period ending March 31, 1998, compared to the same period in
1997. Significant individual account changes during this period include a
$46,000 increase in gains on the sale of residential real estate mortgages and
student loans, a $16,000 increase in trust income, a $9,000 increase in mortgage
servicing fees, a $9,000 decrease in ATM fees, and a $16,000 decrease in income
earned from the sale of credit life.
The Corporation has established a policy that all 30 year amortized
fixed rate mortgage loans will be sold. These loans are accounted for according
to Statement of Financial Accounting Standards No. 125 and 128 and are sold
without recourse. The Corporation retains the servicing of these loans. The
calculation of gains on the sale of mortgages exclude at least 25 basis points
for the servicing of these loans. Included in other operating income is a
$77,000 gain on the sale of $11.8 million in mortgages during the first quarter
of 1998 versus a $36,000 gain on the sale of $4.0 million in the same period in
1997.
NONINTEREST EXPENSE
Noninterest expense increased $156,000 for the first three months of
1998 when compared to the same period in 1997. Noninterest expense was adversely
impacted during the first quarter of 1998 due to the purchase of Old Kent
branches. Specifically, management estimates that conversion related expenses,
which include salaries, postage, and supplies of about $35,000 were charged to
earnings in the first quarter of 1998.
The largest component of noninterest expense is salaries and employee
benefits, which increased $93,000 or 7.8%. In addition to increases due to
additional staffing and normal merit and promotional salary increases, the
Corporation incurred additional salary expenses due to an across the board
increase in hourly wages to retain its current technical and clerical employees
and to attract qualified workers in a tight labor market.
Occupancy and furniture and equipment expenses increased $27,000 or
6.9% in 1998. The most significant changes were increases in automatic teller
machine operating costs, equipment depreciation, and computer expenses. Other
operating expenses increased $36,000, a 6.1% increase. The most significant
increases were in printing and office supplies, postage, and loan acquisition
expenses.
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
Since December 31, 1997, total assets increased $41.7 million to
$360.4 million. During the first quarter of 1998, major changes in asset mix
included a $1.8 million increase in cash and cash equivalents, a $41.9 million
increase in investment securities, and an $800,000 decrease in net loans.
Deposits during this period increased $40.4 million. Interest bearing deposits
increased $37.0 million and noninterest bearing deposits decreased $3.4 million.
The majority of increases in the balance sheet were a result of Isabella Bank
and Trust's purchase of the three Old Kent branches.
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LIQUIDITY
Liquidity management is designed to have adequate resources available
to meet depositor and borrower discretionary demands for funds. Liquidity is
also required to fund expanding operations, investment oppor-tunities, and the
payment of cash dividends. The primary sources of the Corporation's liquidity
are cash, cash equivalents, and investment securities available for sale.
As of March 31, 1998, cash and cash equivalents as a percentage of
total assets equaled 6.3%, versus 8.9% as of December 31, 1997. During the first
three months of 1998, investing activities used $2.9 million and financing
activity used $2.8 million. The accumulated effect of the Corporation's
operating, investing, and financing activities was a $5.7 million decrease in
cash and cash equivalents during the first three months of 1998.
In addition to cash and cash equivalents, investment securities
available for sale are another source of liquidity. Securities available for
sale equaled $98.1 million as of March 31, 1998 and $57.4 million as of December
31, 1997. The Corporation's liquidity is considered adequate by management of
the Corporation.
CAPITAL
The capital of the Corporation consists solely of common stock,
surplus, retained earnings, and accumulated other comprehensive income, and
increased approximately $854,000 since December 31, 1997.
There are significant capital regulatory constraints placed on the
Corporation's capital. The Federal Reserve Board's current recommended minimum
tier 1 and tier 2 capital to average assets requirement is 6.0%. The
Corporation's tier 1 and tier 2 capital to average assets, which consists of
shareholder's equity plus the allowance for loan losses, was 9.5% at March 31,
1998.
The Federal Reserve Board has established a minimum risk based capital
standard. Under this standard, a framework has been established that assigns
risk weights to each category of on- and off-balance sheet items to arrive at
risk adjusted total assets. Regulatory capital is divided by the risk adjusted
assets with the resulting ratio compared to the minimum standard to determine
whether a bank has adequate capital. The minimum standard is 8%, of which at
least 4% must consist of equity capital net of goodwill. The following table
sets forth the percentages required under the Risk Based Capital guidelines and
the Corporation's ratios as of March 31, 1998:
PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS:
IBT Bancorp
Actual
Required 03/31/98
-------- --------
Equity Capital 4.00 13.28
Secondary Capital* 4.00 1.25
---- -----
Total Capital 8.00 14.50
==== =====
* IBT Bancorp's secondary capital consists solely of the allowance for
loan losses. The percentage for the secondary capital under the
required column is the maximum allowed from all sources.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risks are interest rate risk and, to a lesser
extent, liquidity risk. The Corporation has no foreign exchange risk, holds
limited loans outstanding to agricultural and oil and gas concerns, and holds no
trading account assets. Any changes in foreign exchange rates or commodity
prices would have an insignificant impact, if any, on the Corporation's interest
income and cash flows.
Interest rate risk ("IRR") is the exposure to the Corporation's net interest
income, its primary source of income, to changes in interest rates. IRR results
from the difference in the maturity or repricing frequency of a financial
institution's interest earning assets and its interest bearing liabilities.
Interest rate risk is the fundamental method in which financial institutions
earn income and create shareholder value. Excessive exposure to interest rate
risk could pose a significant risk to the Corporation's earnings and capital.
The Federal Reserve, the Corporation's primary Federal regulator, has adopted a
policy requiring the Board of Directors and senior management to effectively
manage the various risks that can have a material impact on the safety and
soundness of the Corporation. The risks include credit, interest rate,
liquidity, operational, and reputational. The Corporation has policies,
procedures and internal controls for measuring and managing these risks.
Specifically, the IRR policy and procedures include defining acceptable types
and terms of investments and funding sources, liquidity requirements, limits on
investments in long term assets, limiting the mismatch in repricing opportunity
of assets and liabilities, and the frequency of measuring and reporting to the
Board of Directors.
The Corporation uses several techniques to manage interest rate risk. The first
method is gap analysis. Gap analysis measures the cash flows and/or the earliest
repricing of the Corporation's interest bearing assets and liabilities. This
analysis is useful for measuring trends in the repricing characteristics of the
balance sheet. Significant assumptions are required in this process because of
the imbedded repricing options contained in assets and liabilities. A
substantial portion of the Corporation's assets are invested in loans and
mortgage backed securities. These assets have imbedded options that allow the
borrower to repay the balance prior to maturity without penalty. The amount of
prepayments is dependent upon many factors, including the interest rate of a
given loan in comparison to the current interest rates, for residential
mortgages the level of sales of used homes, and the overall availability of
credit in the market place. Generally, a decrease in interest rates will result
in an increase in the Corporation's cash flows from these assets. Investment
securities, other than those that are callable, do not have any significant
imbedded options. Saving and checking deposits may generally be withdrawn on
request without prior notice. The timing of cash flow from these deposits are
estimated based on historical experience. Time deposits have penalties which
discourage early withdrawals.
The second technique used in the management of interest rate risk is to combine
the projected cash flows and repricing characteristics generated by the gap
analysis and the interest rates associated with those cash flows and projected
future interest income. By changing the amount and timing of the cash flows and
the repricing interest rates of those cash flows, the Corporation can project
the effect of changing interest rates on its interest income.
The following table provides information about the Corporation's assets and
liabilities that are sensitive to changes in interest rates as of March 31,
1998. The Corporation has no interest rate swaps, futures contracts, or other
derivative financial options. The principal amounts of assets and time deposits
maturing were calculated based on the contractual maturity dates.
Savings and NOW accounts are based on management's estimate of their future cash
flows.
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Quantitative Disclosures of Market Risk
March 31 Fair Value
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1999 2000 2001 2002 2003 Thereafter Total 03/31/98
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Rate sensitive assets:
Other interest bearing assets $10,000 $10,000 $10,000
Average interest rates 5.45% 5.45%
Fixed interest rate securities $17,894 $18,928 $25,419 $11,572 $14,186 $18,434 $106,443 $106,508
Average interest rates 5.59% 6.11% 5.87% 5.86% 5.89% 6.57% 5.84%
Fixed interest rate loans $64,156 $47,050 $43,016 $25,268 $15,427 $6,415 $201,332 $203,014
Average interest rates 8.25% 8.31% 8.35% 8.13% 8.35% 7.84% 8.27%
Variable interest rate loans $12,166 $1,858 $851 $89 $14 $131 $15,109 $15,109
Average interest rates 10.24% 10.21% 9.38% 9.88% 11.00% 10.16% 10.27%
Rate sensitive liabilities:
Savings and NOW accounts $55,710 $16,254 $13,085 $11,115 $10,273 $27,405 $133,842 $133,842
Average interest rates 3.66% 2.62% 2.62% 2.61% 2.60% 2.52% 3.03%
Fixed interest rate time deposits $87,877 $24,385 $12,851 $13,838 $11,186 $125 $150,262 $149,750
Average interest rates 5.56% 6.05% 6.25% 6.61% 6.48% 6.70% 5.87%
Variable interest rate time deposits $640 $394 $1,034 $1,034
Average interest rates 5.29% 5.29% 5.29%
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PART II - OTHER INFORMATION
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed or required to be filed during
the quarter ended March 31, 1998.
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SIGNATURES
Pursuant to the requirements 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.
IBT Bancorp, Inc.
-----------------------------
Date: April 30, 1998 /s/ David W. Hole
------------------ ---------------------------------------------
David W. Hole, President/CEO
/s/ Dennis P. Angner
---------------------------------------------
Dennis P. Angner, Treasurer
(Principal Financial Officer)
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IBT BANCORP, INC.
EXHIBIT INDEX
Exhibit
No. Description Page Number
- ------- --------------------------- -----------
27 Financial Data Schedule 18
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