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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2000
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: 0-29400
INVESTORSBANCORP, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1854234
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
W239 N1700 Busse Road
Waukesha, Wisconsin 53188-1160
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (262) 523-1000
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.
Yes X No ___
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As of November 10, 2000, the Issuer had 1,026,299 shares of $0.01 par value
common stock outstanding.
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INVESTORSBANCORP, INC.
FORM 10-QSB INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000
(Unaudited) and December 31, 1999................................. 3
Consolidated Statements of Income - For the Three and Nine
Months Ended September 30, 2000 and 1999 (Unaudited).............. 4
Consolidated Statements of Changes in Shareholders' Equity -
For the Three and Nine Months Ended September 30, 2000
and 1999 (Unaudited).............................................. 6
Consolidated Statements of Cash Flows - For the Nine Months Ended
September 30, 2000 and 1999 (Unaudited)........................... 7
Notes to the Consolidated Financial Statements (Unaudited)........ 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 19
Item 2. Changes in Securities..................................... 19
Item 3. Defaults Upon Senior Securities........................... 19
Item 4. Submission of Matters to a Vote of Security Holders....... 19
Item 5 Other Information.......................................... 19
Item 6. Exhibits and Reports on Form 8-K.......................... 19
Signatures........................................................ 20
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INVESTORSBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
ASSETS
Cash and due from banks $ 3,690,550 $ 2,281,184
Federal funds sold 1,175,000 -
Available for sale securities 13,675,000 6,260,000
Mortgage loans held for sale 193,000 566,100
Loans, less allowance for loan losses of $1,064,360 and
$770,773, respectively 105,371,699 76,306,547
Furniture and equipment, net 66,057 93,478
Accrued interest receivable and other assets 1,432,064 1,001,192
------------- -------------
TOTAL ASSETS $ 125,603,370 $ 86,508,501
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 9,470,514 $ 4,273,423
Savings and NOW accounts 52,399,652 42,895,527
Time 51,800,980 29,619,256
------------- -------------
TOTAL DEPOSITS 113,671,146 76,788,206
Federal funds purchased - 925,000
Accrued interest payable and other liabilities 1,316,918 1,128,395
Subordinated note payable 2,500,000 -
------------- -------------
TOTAL LIABILITIES 117,488,064 78,841,601
------------- -------------
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, -0- shares issued and outstanding - -
Common stock, $0.01 par value; 9,000,000 shares
authorized, 1,050,000 shares issued 10,500 10,500
Surplus 7,316,900 7,316,900
Retained earnings 948,997 339,500
Treasury stock, at cost (23,013 shares as of
September 30, 2000) (161,091) -
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 8,115,306 7,666,900
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 125,603,370 $ 86,508,501
============= =============
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INVESTORSBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
INTEREST INCOME:
Interest and fees on loans $2,322,203 $1,344,269 $5,986,996 $3,395,083
Interest on investment securities 197,087 78,322 330,964 373,384
Interest on federal funds sold 45,109 13,071 74,088 61,972
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 2,564,399 1,435,662 6,392,048 3,830,439
INTEREST EXPENSE:
Interest on deposits 1,637,377 794,327 3,842,149 2,152,062
Interest on debt 69,316 - 117,534 -
Interest on federal funds purchased 574 4,059 43,123 4,210
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 1,707,267 798,386 4,002,806 2,156,272
NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES 857,132 637,276 2,389,242 1,674,167
Provision for loan losses 97,485 121,004 293,587 313,645
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 759,647 516,272 2,095,655 1,360,522
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Service charges on deposit accounts 17,678 10,998 47,625 25,950
Service release premiums 117,644 117,709 327,473 480,383
Management service fees 258,432 211,547 749,630 645,432
Other income 16,061 9,155 42,065 47,531
---------- ---------- ---------- ----------
TOTAL NONINTEREST INCOME 409,815 349,409 1,166,793 1,199,296
---------- ---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits 553,969 499,230 1,726,251 1,497,347
Occupancy expenses 23,778 7,984 69,188 52,115
Equipment expenses 15,476 14,499 50,123 43,456
Other expenses 164,044 124,349 443,494 369,342
---------- ---------- ---------- ----------
TOTAL NONINTEREST EXPENSE 757,267 646,062 2,289,056 1,962,260
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 412,195 219,619 973,392 597,558
Income tax expense 156,518 81,150 363,895 225,642
---------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 255,677 138,469 609,497 371,916
---------- ---------- ---------- ----------
Cumulative effect of expensing start-up costs
as incurred, net of income taxes - - - 111,713
---------- ---------- ---------- ----------
NET INCOME $ 255,677 $ 138,469 $ 609,497 $ 260,203
========== ========== ========== ==========
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INVESTORSBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
PER SHARE AMOUNTS:
BASIC EARNINGS PER SHARE:
Income before cumulative effect of a change in
accounting principle $ 0.24 $ 0.13 $ 0.58 $ 0.36
Cumulative effect of expensing start-up
costs as incurred - - - (0.11)
-------- -------- -------- --------
Net income $ 0.24 $ 0.13 $ 0.58 $ 0.25
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Income before cumulative effect of a change in
accounting principle $ 0.24 $ 0.13 $ 0.58 $ 0.36
Cumulative effect of expensing start-up
costs as incurred - - - (0.11)
-------- -------- -------- --------
Net income $ 0.24 $ 0.13 $ 0.58 $ 0.25
======== ======== ======== ========
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INVESTORSBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
RETAINED TOTAL
COMMON EARNINGS TREASURY SHAREHOLDERS'
STOCK SURPLUS (DEFICIT) STOCK EQUITY
----------- ----------- ---------- ---------- ------------
BALANCE, December 31, 1998 $ 10,000 $ 6,979,900 $ 94,341 $ - $ 7,184,241
Net income for
First nine months of 1999 - - 260,203 - 260,203
----------- ----------- ---------- ---------- ------------
BALANCE, September 30, 1999 $ 10,000 $ 6,979,900 $ 454,544 $ - $ 7,444,444
=========== =========== ========== ========== ============
BALANCE, December 31, 1999 $ 10,500 $ 7,316,900 $ 339,500 $ - $ 7,666,900
Net income for
First nine months of 2000 - - 609,497 - 609,497
Purchase of treasury stock - - - (161,091) (161,091)
----------- ----------- ---------- ---------- ------------
BALANCE, September 30, 2000 $ 10,500 $ 7,316,900 $ 948,997 $ (161,091) $ 8,115,306
=========== =========== ========== ========== ============
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INVESTORSBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 609,497 $ 260,203
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation 31,442 30,607
Provision for loan loss 293,587 313,645
Amortization of organizational costs - 183,780
Benefit for deferred taxes - (53,100)
Net decrease in mortgage loans held for sale 373,100 1,624,657
(Increase) decrease in assets:
Interest receivable (480,269) (123,913)
Other assets 49,397 166,038
Increase (decrease) in liabilities:
Accrued interest 635,675 (138,927)
Taxes payable (438,886) 8,080
Other liabilities (8,266) (111,547)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 1,065,277 2,159,523
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CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in federal funds sold (1,175,000) 365,000
Net decrease in federal funds purchased (925,000) -
Proceeds from sales of available for sale securities 8,330,000 14,890,000
Purchase of available for sale securities (15,745,000) (4,195,000)
Proceeds from maturity of held to maturity securities - 3,980,493
Purchase of furniture and equipment (4,021) (7,219)
Net increase in loans (29,358,739) (31,364,341)
------------- -----------
NET CASH USED IN INVESTING ACTIVITIES (38,877,760) (16,331,067)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 36,882,940 14,453,545
Proceeds from subordinated debt 2,500,000 -
Purchase of treasury stock (161,091) -
------------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 39,221,849 14,453,545
------------- -----------
Net increase in cash and due from banks 1,409,366 282,001
Cash and due from banks, beginning of period 2,281,184 1,049,145
------------- -----------
CASH AND DUE FROM BANKS, END OF PERIOD $ 3,690,550 $ 1,331,146
============= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 3,367,131 $ 2,295,199
============= ===========
Income taxes $ 802,781 $ 90,000
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INVESTORSBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1. ORGANIZATION
InvestorsBancorp, Inc. (the "Company") was incorporated under Wisconsin law on
June 12, 1996, to be the holding company of InvestorsBank, a Wisconsin state
bank located in Pewaukee, Wisconsin (the "Bank"). The Bank commenced business on
September 8, 1997.
Investors Business Credit, Inc. was incorporated under Nevada law on September
19, 2000, as a wholly owned subsidiary of the Bank to hold and manage certain
loans and securities of the Bank. A portion of the Bank's loan portfolio was
sold to the new investment subsidiary as of October 20, 2000.
NOTE 2. ACCOUNTING POLICIES
Basis of Presentation - The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form
10-QSB. 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 of the Company, all adjustments
necessary to present fairly the financial position as of September 30, 2000 and
December 31, 1999 and the results of operations and cash flows for the three
months and nine months ended September 30, 2000 and 1999 have been made. Such
adjustments consisted only of normal recurring items. Operating results for the
periods ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2000. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The accounting policies followed by the Company are set forth in Note 1
to the Company's consolidated financial statements contained in the Company's
1999 Annual Report on Form 10-KSB. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1999.
Principles of Consolidation - The consolidated financial statements as of and
for the period presented include the accounts of the Company and the Bank, its
wholly owned subsidiary. The accounts of the Bank also include the accounts of
Investors Business Credit, Inc. All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
NOTE 3. SUBORDINATED NOTE PAYABLE
On April 28, 2000, the Company borrowed $2.5 million from Bando McGlocklin
Capital Corporation pursuant to an unsecured note which bears interest at a
fixed rate of 11% per year through its maturity. Interest is payable quarterly
with the principal amount of the note due on April 30, 2010.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion provides additional analysis of the financial
statements and should be read in conjunction with that information. The
discussion focuses on significant factors that affected the Company's earnings
for the periods ended September 30, 2000 and 1999. During those periods the Bank
was the only operating subsidiary of the Company.
Results of Operations
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
During the quarter ended September 30, 2000, the Company reported net income of
$256,000, or $0.24 per diluted share, as compared to net income of $138,000, or
$0.13 per diluted share for the quarter ended September 30, 1999, an 86%
increase. This enhanced profitability was primarily attributable to a 60%
increase in average earning assets.
Net Interest Income
Net interest income is the difference between interest income, including fees on
loans, and interest expense, and is the largest contributing factor to net
income for the Company. Total net interest income increased 35% to $857,000 for
the quarter ended September 30, 2000 from $637,000 for the quarter ended
September 30, 1999. The net interest margin for the third quarter of 2000 was
2.96% compared to 3.50% for the third quarter of 1999. This decrease in the net
interest margin was primarily due to fixed rate loans which cause the margin to
decrease as interest rates increase. At September 30, 2000, 31% of the loans
were fixed rate loans. Additionally, the Company's cost of funds increased due
to the 164% increase in time deposits. As of September 30, 2000 time deposits
were $51.80 million compared to $19.62 million at September 30, 1999. Time
deposits typically have a higher interest cost compared to the money market
rate.
Significantly higher loan volumes and an increase in interest rates resulted in
a 73% increase in interest and fee income on loans which totaled $2.32 million
for the three months ended September 30, 2000 compared to $1.34 million for the
three months ended September 30, 1999. Approximately 54% of the loans are
repriced using the prime rate and the average prime rate was 9.50% for the third
quarter of 2000 compared to 8.10% for the third quarter of 1999. The majority of
interest income on loans was derived from the commercial and commercial real
estate loan portfolios which, in the aggregate, comprised approximately 76% of
total loans at September 30, 2000. Interest earned on investment securities and
federal funds sold totaling $197,000 and $45,000, respectively, were the other
components of interest income. While the direction of future interest rates,
competition, and other factors may have a significant impact, management
anticipates interest income will continue to increase proportionately with the
growth of the loan portfolio and other investments.
Interest expense increased more than interest income causing the Company's
margin to narrow. Interest expense increased 114% to $1.71 million for the
quarter ended September 30, 2000 from $798,000 for the quarter ended September
30, 1999. Interest expense consisted predominantly of
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interest paid on money market accounts totaling $782,000 and certificates of
deposit totaling $854,000 for the quarter ended September 30, 2000. The average
yield on money market accounts increased to 6.41% during the third quarter of
2000, up 29%, while the average yield on certificates of deposit increased to
6.84%, up 24%. The average yield on money market accounts and certificates of
deposit was 4.98% and 5.53%, respectively, during the third quarter of 1999.
Interest expense is anticipated to continue to rise in the future as management
expects these deposit instruments will remain the primary funding sources
utilized by the Company to fund additional growth.
Provision for Loan Losses
The allowance for loan losses increased 37% to $1.06 million as of September 30,
2000 from $771,000 as of December 31, 1999. The allowance for loan losses is
established through a provision for loan losses charged to expense. A loan loss
provision of $97,000 was expensed in the quarter ended September 30, 2000 as
compared to $121,000 during the three months ended September 30, 1999. The
allowance for loan losses remained at approximately 1.0% of total loans, net of
residential mortgage loans held for sale on the secondary market.
Loans are charged against the allowance for loan losses when management believes
that the collectibility of the principal is unlikely. The allowance is an amount
that management believes will be adequate to absorb possible losses on existing
loans that may become uncollectible, based on evaluation of the collectibility
of loans and prior loan loss experience. The evaluations take into consideration
such factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrower's ability to pay. While management uses
the best information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions. Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. A loan is impaired when it
is probable the creditor will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement.
There were no loan charge-offs or recoveries, nor any impaired loans during 1999
or the first nine months of 2000. While a comprehensive analysis of the
allowance for loan losses is somewhat difficult due to the Company's relatively
short operating history, management believes that the allowance was at an
adequate level at September 30, 2000 based on the composition of the portfolio
as well as regulatory guidelines. However, there can be no assurance that future
losses will not exceed the estimated amounts.
Non-Interest Income and Expenses
Non-interest income for the quarter ended September 30, 2000 totaled $410,000 as
compared to $349,000 for the quarter ended September 30, 1999, a 17% increase.
Service release fees remained the same at $118,000 for the quarter ended
September 30, 2000 and for the quarter ended September 30, 1999. Service release
fees are from the sale of residential mortgages sold in the secondary market.
Management service fees increased to $258,000 for the quarter ended
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September 30, 2000 compared to $212,000 for the quarter ended September 30,
1999. The Company charges Bando McGlocklin Capital Corporation (BMCC), the
former principal shareholder of the Company, a management fee for salaries and
employee benefits of common management, as well as a loan servicing fee based on
total loans and leases under management. As of September 30, 2000, the Company
had BMCC loans under management totaling $118 million and leased properties of
$36.6 million. Service charges and other income were $34,000 compared to $20,000
for the same periods, with the increase due to an increase in service fees and
credit card income.
Non-interest expense increased 17% to $757,000 for the three months ended
September 30, 2000 as compared to $646,000 for the three months ended September
30, 1999. Half of the increase was due to salaries and employee benefits expense
increasing $55,000 due to regular compensation increases and incentive
compensation. Salaries and employee benefits totaled $554,000 and $499,000 for
the three months ended September 30, 2000 and 1999, respectively. These amounts
include salaries that were reimbursed through the management service fee noted
above. The other operating expenses, which include occupancy and equipment
expense, data processing fees, advertising, investor communications, and
professional fees, increased $56,000. This increase was due to larger
expenditures for building rent, data processing services and the development of
a web site.
Amounts provided for income tax expense are based on income reported for
financial statement purposes and do not necessarily represent amounts currently
payable under tax laws. Deferred income tax assets and liabilities are computed
quarterly for differences between the financial statement and tax basis of
assets and liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. The differences are related principally to tax
exempt interest income, allowance for loan losses, and depreciation.
For the quarter ended September 30, 2000, the Company recorded federal and state
income tax expense of $157,000. The Company also has a deferred tax asset of
$294,000. For the quarter ended September 30, 1999, the Company recorded a
federal and state income tax expense of $81,000 and had a deferred tax asset of
$147,000. Management believes it is more likely than not that the deferred tax
asset will be fully realized. The effective rate for the expense for income
taxes for the quarter ended September 30, 2000 was 38%.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
During the nine months ended September 30, 2000, the Company reported net income
of $609,000, or $0.58 per diluted share, as compared to net income of $260,000,
or $0.25 per diluted share for the nine months ended September 30, 1999. Net
income for the nine months ended September 30, 1999 was reduced by the
cumulative effect of a change in accounting principle that totaled $112,000
after income taxes. Income before the cumulative effect of a change in
accounting principle increased 64%. This enhanced profitability was primarily
attributable to a 45% increase in average earning assets.
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Net Interest Income
Net interest income is the difference between interest income, including fees on
loans, and interest expense, and is the largest contributing factor to net
income for the Company. Total net interest income increased 43% to $2.39 million
for the nine months ended September 30, 2000 from $1.67 million for the nine
months ended September 30, 1999. The net interest margin for the first nine
months of 2000 was 3.27% compared to 3.32% for the first nine months of 1999.
Significantly higher loan volumes and an increase in interest rates resulted in
a 76% increase in interest and fee income on loans which totaled $5.99 million
for the nine months ended September 30, 2000 compared to $3.40 million for the
nine months ended September 30, 1999. The average prime rate was 9.15% for the
first nine months of 2000 compared to 7.87% for the first nine months of 1999.
At September 30, 2000, 54% of loans were subject to repricing using the prime
rate. The majority of interest income on loans was derived from the commercial
and commercial real estate loan portfolios which, in the aggregate, comprised
approximately 76% of total loans at September 30, 2000. Interest earned on
investment securities and federal funds sold totaling $331,000 and $74,000,
respectively, were the other components of interest income. While the direction
of future interest rates, competition, and other factors may have a significant
impact, management anticipates interest income will continue to increase
proportionately with the growth of the loan portfolio and other investments.
Interest expense similarly increased 85% to $4.00 million for the nine months
ended September 30, 2000 from $2.16 million for the nine months ended September
30, 1999. Interest expense consisted predominantly of interest paid on money
market accounts totaling $1.91 million and certificates of deposit totaling
$1.89 million for the nine months ended September 30, 2000. The average yield on
money market accounts increased to 6.06% during the first nine months of 2000,
up 25%, while the average yield on certificates of deposit increased to 6.46%,
up 16%. The average yield on money market accounts and certificates of deposit
were 4.86% and 5.57%, respectively, during the first nine months of 1999.
Interest expense is anticipated to continue to rise in the near future as
management expects these deposit instruments will remain the primary funding
sources utilized by the Company to fund additional growth.
Provision for Loan Losses
A loan loss provision of $294,000 was expensed during the nine months ended
September 30, 2000 as compared to $314,000 during the first nine months of 1999.
There were no loan charge-offs or recoveries nor any impaired loans for the nine
months ended September 30, 2000 and 1999.
Non-Interest Income and Expenses
Non-interest income for the nine months ended September 30, 2000 totaled $1.17
million as compared to $1.20 million for the nine months ended September 30,
1999, a 3% decrease. The majority of the decrease was the result of service
release fees decreasing to $327,000 for the nine months ended September 30, 2000
compared to $480,000 for the nine months ended September 30, 1999. Service
release fees are from the sale of residential mortgages sold in the secondary
market. Due to rising long-term interest rates, there were fewer individuals
refinancing their current mortgages during the first nine months of 2000 as
compared to the first nine months of
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1999. Management service fees totaled $750,000 for the nine months ended
September 30, 2000 compared to $645,000 for the nine months ended September 30,
1999. The Company charges Bando McGlocklin Capital Corporation (BMCC), the
former principal shareholder of the Company, a management fee for salaries and
employee benefits of common management, as well as a loan servicing fee based on
total loans and leases under management. As of September 30, 2000, the Company
had BMCC loans under management totaling $118 million and leased properties of
$36.6 million. Service charges and other income were $90,000 compared to $73,000
for the same periods with the increase due to an increase in service fees and
credit card income.
Non-interest expense increased 17% to $2.29 million for the nine months ended
September 30, 2000 as compared to $1.96 million for the nine months ended
September 30, 1999. The increase was primarily due to salaries and employee
benefits expense increasing $230,000 due to regular compensation increases and
incentive compensation. Salaries and employee benefits totaled $1.73 million and
$1.50 million for the nine months ended September 30, 2000 and 1999,
respectively. These amounts included salaries that were reimbursed through the
management service fee noted above. The other operating expenses, which included
occupancy and fixed asset expense, data processing fees, advertising, investor
communications, and professional fees, increased $98,000. This increase was due
to larger expenditures for building rent, data processing services and the
development of a web site.
For the nine months ended September 30, 2000, the Company recorded federal and
state income tax expense of $364,000. The Company also has a deferred tax asset
of $294,000. For the nine months ended September 30, 1999, the Company recorded
a federal and state income tax expense of $226,000 and had a deferred tax asset
of $147,000. Management believes it is more likely than not that the deferred
tax asset will be fully realized. The effective rate for the expense for income
taxes for the nine months ended September 30, 2000 was 37%.
FINANCIAL CONDITION
Assets
The Company reported total assets of $125.60 million as of September 30, 2000
versus $86.51 million as of December 31, 1999, a 45% increase. Cash and due from
banks increased to $3.69 million as of September 30, 2000 from $2.28 million at
December 31, 1999. Federal funds sold increased to $1.18 million at September
30, 2000. The Company's investment securities portfolio increased to $13.68
million as of September 30, 2000 from $6.26 million at year end. As of September
30, 2000, investment securities consisted of taxable variable rate demand notes
secured by irrevocable letters of credit from federally insured, domestic
financial institutions. Although the notes have a long term maturity structure,
the interest rate is adjustable weekly and the holder has the option to
liquidate the security at 100% of par value within seven days upon proper
notice. These instruments provide the Company with ready liquidity to provide
for loan funding requirements. Management believes that the investment portfolio
is adequately diversified.
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Loans continued to grow during the quarter. As of September 30, 2000, loans rose
38% to $106.44 million compared to $77.08 million as of December 31, 1999. While
most of the growth occurred in the commercial, industrial and commercial real
estate segments of the loan portfolio, residential real estate loans, including
home equity credit facilities, also grew considerably. It is management's goal
to continue to aggressively grow the loan portfolio with quality credits. For
the funding source of this loan growth, the Company does not rely solely on its
liquid assets, such as investments. The Company has access to various
off-balance sheet sources. As of September 30, 2000, the Company had $193,000 of
residential mortgage loans held for sale. As of December 31, 1999, residential
mortgage loans originated for sale on the secondary market totaled $566,000.
Excluding the mortgage loans originated for sale, the allowance for loan losses
remained at approximately 1.0% of gross loans, totaling $1.06 million at
September 30, 2000 and $771,000 at year end 1999. In addition to loans
outstanding, the Company had unfunded loan commitments totaling $24.10 million
as of September 30, 2000, net of participations sold. Loan demand continues to
remain strong for both commercial and residential loans in the Company's trade
area. Despite the recent increase in residential loan rates, the Company has
continued to increase its volume of residential loans and to grow its market
share through new referral sources.
Other assets at September 30, 2000 totaled $1.50 million compared to $1.09
million at December 31, 1999. Other assets at September 30, 2000 included net
furniture and equipment of $66,000, accrued interest receivable on loans and
investments of $965,000, excess servicing assets of $114,000 relating to loans
sold to a third party, deferred tax assets of $294,000 and other miscellaneous
assets of $61,000.
Liabilities
Total deposits increased 48% to $113.67 million at September 30, 2000 from
$76.79 million as of year end 1999. Indexed money market accounts comprised 45%
of the deposit base totaling $50.6 million as of September 30, 2000 compared to
$41.46 million as of December 31, 1999. Time certificates of deposit comprised
46% of the deposit base totaling $51.80 million as of September 30, 2000
compared to $29.62 million as of year end. Time deposits included retail
brokered deposits with maturities ranging from 1 to 7.5 years of $12.50 million
and $9.62 million as of September 30, 2000 and December 31, 1999, respectively.
In order for the Company to facilitate continued loan growth, management expects
to continue to aggressively market and competitively price its money market and
certificate of deposit products. Other deposits outstanding as of September 30,
2000 included non-interest bearing accounts totaling $9.47 million and interest
bearing checking accounts (NOW accounts) of $1.80 million.
Other liabilities increased to $3.82 million as of September 30, 2000 from $2.05
million at December 31, 1999. Subordinated debt increased by $2.50 million and
federal funds purchased decreased $925,000 from year end. On April 28, 2000, the
Company borrowed $2.50 million from Bando McGlocklin Capital Corporation
pursuant to an unsecured note which bears interest at a fixed rate of 11% per
year through its maturity. Other liabilities as of September 30, 2000 consisted
primarily of accrued interest payable totaling $1.13 million, as well as accrued
expenses payable of $28,000, retained loan discount relating to loans sold to a
third party totaling $100,000, and other miscellaneous liabilities of $62,000.
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CAPITAL RESOURCES
Capital ratios applicable to the Bank and the Company at September 30, 2000 and
December 31, 1999 were as follows:
Total Tier I
Risk-based Risk-based Leverage
Capital Capital Ratio
--------------- --------------- ---------------
Regulatory Capital Requirements:
Minimum 8.0% 4.0% 4.0%
Well-capitalized 10.0% 6.0% 5.0%
At September 30, 2000
Bank 11.1% 10.1% 9.0%
Company 11.1% 7.7% 6.9%
At December 31, 1999
Bank 11.1% 10.0% 9.4%
Company 11.1% 10.0% 9.4%
Management intends to maintain capital levels in excess of minimums established
by the regulatory authorities.
The application for a bank charter and for federal deposit insurance stated that
the Bank would retain its earnings during the first three years of operation. As
such, no dividends were paid by the Company to the shareholders during that
period. The Company expects that all future earnings will be retained to finance
the growth of the Company and the Bank and that no cash dividends will be paid
for the foreseeable future.
Liquidity
The liquidity of a financial institution reflects its ability to provide funds
to meet loan requests, accommodate possible deposit withdrawals, and take
advantage of interest rate market opportunities in a cost effective manner.
Although primary sources of funds are deposits and repayments of loan principal,
the Company maintains a significant level of liquid assets to provide for
potential funding needs. In addition to cash balances and federal funds sold as
of September 30, 2000, the Company held $13.68 million of marketable securities
and $193,000 of residential mortgage loans originated and intended for sale in
the secondary market. Should an immediate need for funds arise, these assets may
be readily liquidated with nominal risk of principal loss.
Additionally, the Company has access to various alternative sources of funds
including the purchase of federal funds from correspondent banks, the sale of
commercial loans, and the acquisition of brokered deposits. Currently, the
Company has correspondent banking relationships with four institutions which
collectively have approved federal funds lines for the Bank totaling $7.50
million. The Company also has the ability to sell loan participations to
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correspondents, affiliates and other financial institutions. Further, the
Company has the ability to acquire funds via the brokered certificate of deposit
market. Management has periodically purchased certificates of deposit through
approved brokers as market conditions dictate to fill funding gaps. The Bank has
been approved with the Federal Reserve Bank of Chicago to borrow funds from the
Discount Window on a secured basis. This will allow the Bank to borrow up to $10
million on a short-term basis in the event of an unexpected liquidity shortfall.
The actual amount the Bank will be able to borrow will depend on total capital
and on the amount of assets the Bank will pledge. At this time, the Bank has not
pledged any assets to the Federal Reserve. Management believes that current
liquidity levels are sufficient to meet anticipated loan demand, as well as to
absorb deposit withdrawals.
Asset/Liability Management
The primary function of asset/liability management is to identify, measure and
control the extent to which changes in interest rates, commodity prices or
equity prices adversely affect a financial institution's earnings or economic
capital. The Company's strategy is to optimize and stabilize net income across a
wide range of interest rate cycles while maintaining adequate liquidity and
conforming to all applicable capital and other regulatory requirements.
Changes in net interest income, other than volume related changes, arise when
interest rates on assets reprice in a time frame or interest rate environment
that is different from the repricing period for liabilities. Changes in net
interest income also arise from changes in the mix of interest earning assets
and interest bearing liabilities.
In the normal course of business, the Company engages in off-balance sheet
activity to hedge interest rate risk. As of September 30, 2000, the Company had
three interest rate swap agreements outstanding with a notional value totaling
$11.85 million structured as a hedge of specific fixed-rate deposits whose terms
coincide with the terms of the swap agreement. The swap agreements are
structured so that the Company receives a fixed interest rate and pays a
variable rate. The variable rate on one swap agreement is based on the federal
funds rate and the other two agreements are based upon LIBOR. These instruments
allow management to more closely balance the repricing opportunities of the
Company's assets and liabilities, and thereby, reduce potential interest rate
risk exposure. Although swaps reduce interest rate risk, the potential for
profit or loss on interest rate swaps still exists depending upon fluctuations
in interest rates.
The Company does not expect to experience any significant fluctuations in its
net interest income as a consequence of changes in interest rates.
Unlike most industries, virtually all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance and results of operations than
the effect of general levels of inflation. Interest rates do not necessarily
move in the same direction or magnitude as the prices of goods and services as
measured by the Consumer Price Index. As discussed previously, the Company's
interest rate gap position in conjunction with the direction of the movement in
interest rates is an important factor in the Company's operating results.
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RECENT REGULATORY DEVELOPMENTS
The Gramm-Leach-Bliley Act (the "Act"), which was enacted in November,
1999, allows eligible bank holding companies to engage in a wider range of
nonbanking activities, including greater authority to engage in securities and
insurance activities. Under the Act, an eligible bank holding company that
elects to become a financial holding company may engage in any activity that the
Board of Governors of the Federal Reserve System (the "Federal Reserve"), in
consultation with the Secretary of the Treasury, determines by regulation or
order is financial in nature, incidental to any such financial activity, or
complementary to any such financial activity and does not pose a substantial
risk to the safety or soundness of depository institutions or the financial
system generally. National banks are also authorized by the Act to engage,
through "financial subsidiaries," in certain activity that is permissible for
financial holding companies (as described above) and certain activity that the
Secretary of the Treasury, in consultation with the Federal Reserve, determines
is financial in nature or incidental to any such financial activity.
Although various bank regulatory agencies have issued regulations as
mandated by the Act, except for the jointly issued privacy regulations, the Act
and its implementing regulations have had little impact on the daily operations
of the Company and the Bank and, at this time, it is not possible to predict the
impact the Act and its implementing regulations may have on the Company or the
Bank. As of the date of this filing, the Company has not applied for or received
approval to operate as a financial holding company. In addition, the Bank has
not applied for or received approval to establish any financial subsidiaries.
Less than 10% of all bank holding companies have elected to become financial
holding companies.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Exchange Act. The Company intends such forward-looking statements to be covered
by the safe harbor provisions for forward-looking statements contained in the
Private Securities Reform Act of 1995, and is including this statement for
purposes of these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies and
expectations of the Company, are generally identifiable by the use of the words
"believe", "expect", "intend", "anticipate", "estimate", "project" or similar
expressions. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a
material adverse affect on the operations and future prospects of the Company
and the subsidiaries include, but are not limited to, changes in interest rates,
general economic conditions guidelines, including the condition of the local
real estate market, legislative/regulatory changes, monetary and fiscal policies
of the U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board, the quality or composition of the loan or investment portfolios,
demand for loan products, deposit flows, competition, demand for financial
services in the Company's market area, our implementation of new technologies,
our ability to develop and maintain secure and reliable electronic systems and
accounting principles and policies. These risks and uncertainties should be
considered in evaluating forward-looking statement and undue reliance should not
be placed on such statements.
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DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
AVERAGE BALANCE SHEETS
FOR NINE MONTHS ENDED FOR YEAR ENDED
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
Cash and due from banks $ 2,326,926 $ 1,413,255
Federal funds sold 1,593,266 1,786,216
Available for sale securities 6,720,310 8,442,054
Mortgage loans held for sale 425,985 878,445
Loans:
Commercial 17,167,457 22,441,159
Commercial Real Estate 51,822,334 25,819,397
Residential Real Estate 19,565,112 10,943,122
Installment and consumer 350,848 201,803
------------- ------------
Total loans 88,905,751 59,405,481
Less allowance for loan losses (874,550) (578,171)
------------- ------------
Net loans 88,031,201 58,827,310
Furniture and equipment, net 80,612 112,345
Accrued interest receivable and other assets 993,040 704,389
------------- ------------
Total assets $ 100,171,340 $ 72,164,014
============= ============
Demand deposits $ 6,258,815 $ 3,943,584
Interest bearing deposits
NOW 1,485,279 1,308,114
Money market 42,173,127 41,094,253
Time deposits 39,049,772 17,646,743
------------- ------------
Total deposits 88,966,993 63,992,694
Federal funds purchased 874,872 165,636
Accrued interest payable and other liabilities 954,155 690,363
Subordinated note payable 1,423,358 -
------------- ------------
Total liabilities 92,219,378 64,848,693
Equity capital 7,951,962 7,315,321
------------- ------------
Total liabilities and capital $ 100,171,340 $ 72,164,014
============= ============
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the
Company or its subsidiaries are a party.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
11 Statement Regarding Computation of Per
Share Earnings
27 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during the quarter ended September 30, 2000.
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SIGNATURE
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 thereunder duly authorized.
INVESTORSBANCORP, INC.
(Registrant)
Date: November 10, 2000 /s/ George R. Schonath
----------------------
George R. Schonath
Chief Executive Officer
Date: November 10, 2000 /s/ Susan J. Hauke
------------------
Susan J. Hauke
Vice President Finance and
Chief Accounting Officer
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