1
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 June 30, 2001
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 incorporation) (I.R.S. Employer Identification No.)
W239 N1700 Busse Road
Waukesha, Wisconsin 53188-1160
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(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
----- -----
As of August 7, 2001, the Issuer had 940,000 shares of $0.01 par value common
stock issued and outstanding.
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INVESTORSBANCORP, INC.
FORM 10-QSB INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2001 (Unaudited) and
December 31, 2000 ......................................................................................3
Consolidated Statements of Income - For the Three and Six Months
Ended June 30, 2001 and 2000 (Unaudited) ...............................................................4
Consolidated Statements of Changes in Shareholders' Equity - For the
Three and Six Months Ended June 30, 2001 and 2000 (Unaudited) ..........................................5
Consolidated Statements of Cash Flows - For the Six Months Ended
June 30, 2001 and 2000 (Unaudited) ....................................................................6
Notes to the Consolidated Financial Statements (Unaudited) ............................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................................................................7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................................................17
Item 2. Changes in Securities .........................................................................17
Item 3. Defaults Upon Senior Securities ...............................................................17
Item 4. Submission of Matters to a Vote of Security Holders ...........................................17
Item 5 Other Information ..............................................................................17
Item 6. Exhibits and Reports on Form 8-K ..............................................................17
Signatures ............................................................................................18
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INVESTORSBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
-------- ------------
2001 2000
---- ----
ASSETS
Cash and due from banks $ 3,049,967 $ 3,453,639
Federal funds sold 200,000 1,250,000
Available for sale securities 6,811,213 14,391,194
Loans, less allowance for loan losses of $1,980,322 and
$1,808,813 in 2001 and 2000, respectively 120,807,811 118,778,727
Mortgage loans held for sale 716,500 100,000
Premises and equipment, net 183,801 87,539
Accrued interest receivable and other assets 2,375,864 2,648,831
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TOTAL ASSETS $ 134,145,156 $ 140,709,930
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 8,370,582 $ 8,031,571
Savings and NOW accounts 56,977,471 62,597,776
Other Time 56,730,594 58,173,494
------------- -------------
TOTAL DEPOSITS 122,078,647 128,802,841
Other borrowings 3,000,000 2,500,000
Accrued interest payable and other liabilities 917,077 1,440,904
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TOTAL LIABILITIES 125,995,724 132,743,745
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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 1,633,013 901,948
Treasury stock, 110,000 shares and 37,351 shares in
2001 and 2000, respectively, at cost (810,981) (263,163)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 8,149,432 7,966,185
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 134,145,156 $ 140,709,930
============= =============
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INVESTORSBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
INTEREST INCOME:
Interest and fees on loans $2,551,621 $1,982,588 $5,188,438 $3,664,793
Interest on investment securities 119,733 61,952 266,721 133,877
Interest on federal funds sold 13,920 16,872 25,011 28,979
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 2,685,274 2,061,412 5,480,170 3,827,649
INTEREST EXPENSE:
Interest on deposits 1,508,476 1,174,605 3,329,584 2,204,772
Interest on federal funds purchased 9,081 36,327 23,933 42,549
Interest on other borrowings 68,000 48,218 135,808 48,218
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 1,585,557 1,259,150 3,489,325 2,295,539
NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES 1,099,717 802,262 1,990,845 1,532,110
Provision for loan losses 85,754 155,947 393,226 196,102
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 1,013,963 646,315 1,597,619 1,336,008
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Service fees 22,012 17,383 49,776 29,947
Management service fees 257,711 253,491 499,076 491,198
Service release premiums 139,382 126,934 320,858 209,829
Other income 14,209 13,050 28,778 26,004
---------- ---------- ---------- ----------
TOTAL NONINTEREST INCOME 433,314 410,858 898,488 756,978
---------- ---------- ---------- ----------
NONINTEREST EXPENSES:
Salaries 410,250 451,690 811,377 896,127
Pension, profit sharing and other employee benefits 126,406 138,052 243,840 276,154
Occupancy 28,717 27,052 57,466 53,977
Furniture and equipment expenses 15,323 16,787 30,486 34,647
Data processing services 44,288 27,119 75,269 54,269
Other expenses 128,743 114,678 246,558 216,615
---------- ---------- ---------- ----------
TOTAL NONINTEREST EXPENSES 753,727 775,378 1,464,996 1,531,789
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 693,550 281,795 1,031,111 561,197
Income tax expense 222,622 103,838 300,046 207,377
---------- ---------- ---------- ----------
NET INCOME $ 470,928 $ 177,957 $ 731,065 $ 353,820
========== ========== ========== ==========
PER SHARE AMOUNTS:
BASIC EARNINGS PER SHARE $ 0.48 $ 0.17 $ 0.74 $ 0.34
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ 0.48 $ 0.17 $ 0.74 $ 0.34
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 972,696 1,050,000 989,672 1,050,000
========== ========== ========== ==========
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INVESTORSBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
TOTAL
COMMON RETAINED TREASURY SHAREHOLDERS'
STOCK SURPLUS EARNINGS STOCK EQUITY
----- ------- -------- ----- ------
BALANCES, December 31, 1999 $10,500 $7,316,900 $ 339,500 $ -- $ 7,666,900
Net income for
first six months of 2000 -- -- 353,820 -- 353,820
------- ---------- ---------- --------- -----------
BALANCES, June 30, 2000 $10,500 $7,316,900 $ 693,320 $ -- $ 8,020,720
======= ========== ========== ========= ===========
BALANCES, December 31, 2000 $10,500 $7,316,900 $ 901,948 $(263,163) $ 7,966,185
Net income for
first six months of 2001 -- -- 731,065 -- 731,065
Purchase of treasury stock -- -- -- (547,818) (547,818)
------- ---------- ---------- --------- -----------
BALANCES, June 30, 2001 $10,500 $7,316,900 $1,633,013 $(810,981) $ 8,149,432
======= ========== ========== ========= ===========
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INVESTORSBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 731,065 $ 353,820
Adjustments to reconcile net income to net cash
flows from operating activities
Depreciation 26,597 20,906
Provision for loan losses 393,226 196,102
Net change in
Mortgage loans held for sale (616,500) (334,400)
Accrued interest receivable and other assets 272,967 (109,236)
Accrued interest payable and other liabilities (523,827) (231,400)
------------ ------------
NET CASH FLOWS FROM OPERATING ACTIVITIES 283,528 (104,208)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in federal funds sold 1,050,000 (7,705,000)
Activity in available for sale securities
Maturities, prepayments, sales and calls 13,514,981 7,985,000
Purchases (5,935,000) (7,770,000)
Net increase in loans (2,422,310) (19,610,209)
Additions to premises and equipment (122,859) (1,267)
------------ ------------
NET CASH FLOWS FROM INVESTING ACTIVITIES 6,084,812 (27,101,476)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits (6,724,194) 26,490,145
Proceeds from subordinated debt 500,000 2,500,000
Purchase of treasury stock (547,818) --
------------ ------------
NET CASH FLOWS FROM FINANCING ACTIVITIES (6,772,012) 28,990,145
------------ ------------
Net Change in Cash and Due From Banks (403,672) 1,784,461
Cash and Due From Banks, beginning of period 3,453,639 2,281,184
------------ ------------
CASH AND DUE FROM BANKS, END OF PERIOD $ 3,049,967 $ 4,065,645
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest $ 3,673,138 $ 2,069,878
Cash paid for income taxes $ 429,000 $ 627,781
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INVESTORSBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(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 accounting principles generally
accepted in the United States of America for interim financial information and
the instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management of the Company, all adjustments necessary to present
fairly the financial position as of June 30, 2001 and December 31, 2000 and the
results of operations for the six months and three months ended June 30, 2001
and 2000 and cash flows for the six months ended June 30, 2001 and 2000 have
been made. Such adjustments consisted only of normal recurring items. Operating
results for the periods ended June 30, 2001 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2001. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America 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 2000 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, 2000.
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
its wholly owned subsidiary, Investors Business Credit, Inc. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
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 June 30, 2001 and 2000. During those periods, the Bank was
the only subsidiary of the Company and its operations contributed substantially
all of the revenue and expense. Included in the operations of the Bank are the
activities of its wholly-owned subsidiary, Investors Business Credit, Inc., for
the periods ending June 30, 2001.
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Results of Operations
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
During the quarter ended June 30, 2001, the Company reported net income of
$471,000, or $0.48 per share, as compared to net income of $178,000, or $0.17
per share for the quarter ended June 30, 2000. This enhanced profitability was
attributable to a 41% increase in average earning assets and a recovery of
$46,000 of interest on a non-accrual loan that was earned but not included in
interest income in prior quarters.
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 37% to $1.1 million
for the quarter ended June 30, 2001 from $802,000 for the quarter ended June 30,
2000. Higher loan volumes and the recovery of $46,000 of interest that would
have been reported in prior quarters resulted in a 30% increase in interest and
fee income on loans which totaled $2.6 million for the three months ended June
30, 2001 compared to $2.0 million for the three months ended June 30, 2000. The
majority of interest income on loans was derived from the commercial and
commercial real estate loan portfolios which comprised 76% of total loans at
June 30, 2001. Interest earned on investment securities and federal funds sold
totaling $134,000 and $79,000, respectively, were the other components of
interest income. During the second half of 2001, interest income will be largely
impacted by the direction of interest rates as 60% of the earning assets will
reprice as interest rates change.
Interest expense increased 23% to $1.6 million for the quarter ended June 30,
2001 from $1.3 million for the quarter ended June 30, 2000 due to the increase
in money market deposits and certificates of deposit. Interest expense consisted
predominantly of interest paid on money market accounts totaling $655,000 and
certificates of deposit totaling $912,000 for the quarter ended June 30, 2001.
Recent deposit growth has been flat and the trend continues to be flat. Time
deposits are maturing and are being renewed at lower interest rates. As a result
of the prevailing decrease of interest rates during the first half of 2001,
interest expense is declining.
The Company's interest rate spread was 2.67% for the second quarter of 2001
compared to 2.30% for the second quarter of 2000, a 37 basis point increase. The
yield on average earning assets decreased 70 basis points due to an decrease in
interest rates. As of June 30, 2001, 60% of the earning assets had variable
interest rates. The yield would have been 14 basis points lower without the
recovery of the $46,000 of non-accrual interest. The average rate paid on
interest bearing liabilities decreased 107 basis points due to short-term and
long-term interest rates being lower. As time deposits mature they are reset at
the current rate which currently is lower than their stated rate.
Provision for Loan Losses
The allowance for loan losses increased 11% to $2.0 million as of June 30, 2001
from $1.8 million as of December 31, 2000. The allowance for loan losses is
established through a provision for loan losses charged to expense. A loan loss
provision of $86,000 was expensed in the quarter ended June 30, 2001 as compared
to $156,000 during the quarter ended June 30, 2000. The allowance for loan
losses at June 30, 2001 was approximately 1.6% of total loans compared to 1% of
total loans at June 30, 2000, net of residential mortgage loans held for sale on
the secondary market. The Bank has a relatively high percentage of commercial
and commercial real estate loans, most of which are extended to small or
medium-sized businesses. Management believes the allowance for loan losses is at
a level commensurate with the overall risk exposure of the loan portfolio.
However, along with other financial institutions, management shares a concern
for the possible continued softening of the economy in 2001. Should the economic
climate continue to deteriorate, borrowers may experience difficulty, and the
level of non-performing loans, charge-offs, and delinquencies could rise and
require further increases in the provision.
Loans are charged against the allowance for loan losses when management believes
that the collection of 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 management's evaluation of the loans and
on prior loan loss experience. Loan 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
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affect the borrower's ability to repay. The allowance does not include the
effects of expected losses on specific loans or groups of loans that are related
to future events or expected changes in economic conditions. The majority of
risk in the loan portfolio lies in commercial loans which include commercial
real estate loans. Accordingly, the Company allocated $1.7 million (or 88% of
the total loan loss reserve) to these loans, which comprise about 76% of the
loan portfolio. The Company also allocated $95,000 (or approximately 5% of the
total loan loss reserve) to residential mortgages, which comprise about 21% of
the loan portfolio. 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. Four
impaired loans, which are mainly secured by real estate, totaled $1.9 million at
June 30, 2001. During the second quarter of 2001, $5,000 of gross interest
income was not recognized which would have been recorded had the non-accruing
loans been current in accordance with their original terms. The amount of
interest income on non-accruing loans that was collected and included in net
income for the second quarter of 2001 was $111,000. This amount includes the
recovery of $46,000 of interest on a loan that was earned but not reported in
prior quarters.
There were no loan charge-offs or recoveries during the three months ended June
30, 2001 and 2000. While a comprehensive analysis of the allowance for loan
losses is somewhat problematic due to the Company's relatively short history,
management believes that the allowance was at an adequate level at June 30, 2001
based on the composition of the portfolio as well as regulatory guidelines.
However, there can be no assurance that the allowance will be adequate to cover
all losses.
Non-Interest Income and Expenses
Non-interest income for the quarter ended June 30, 2001 totaled $433,000 as
compared to $411,000 for the quarter ended June 30, 2000, a 5% increase.
Management service fees were the largest component of non-interest income
totaling $258,000 for the quarter ended June 30, 2001 compared to $253,000 for
the quarter ended June 30, 2000. The Company charges The Middleton Doll Company,
an affiliate 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. Service release fees which are received from the sale
of residential mortgages originated for the secondary market totaled $139,000
for the quarter ended June 30, 2001 compared to $127,000 for the quarter ended
June 30, 2000. Service charges related to deposit accounts and other income
totaled $36,000 compared to $31,000 for the same period. The increase was due to
an increase in service fees.
Non-interest expense decreased 3% to $754,000 for the three months ended June
30, 2001 as compared to $775,000 for the three months ended June 30, 2000. The
decrease was due to salary and employee benefit expense decreasing $53,000 due
to personnel changes. Salaries and employee benefits totaled $537,000 and
$590,000 for the three months ended June 30, 2001 and 2000, respectively. These
amounts included salaries that were reimbursed through the management service
fee noted above. Other operating expenses, which include occupancy and fixed
asset expense, data processing fees, advertising, investor communications, and
professional fees were $217,000 compared to $185,000, a 17% increase. Data
processing services increased $17,000 over the same period last year due to the
implementation of a new enhanced software system. Regulatory agency fees
increased $12,000 over the same period last year due to an assessment increase.
Amounts provided for income tax expense or benefit 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 relate primarily to tax
exempt interest income, allowance for loan losses, and depreciation.
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For the quarter ended June 30, 2001, the Company recorded federal and state
income tax expense of $223,000. The Company also has a deferred tax asset of
$702,000. For the quarter ended June 30, 2000, the Company recorded a federal
and state income tax expense of $104,000 and had a deferred tax asset of
$294,000. 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 June 30, 2001 was 32%, as compared to 37% for the
second quarter of 2000. The decrease in the effective rate was the result of the
Bank establishing an investment subsidiary in September, 2000.
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
During the six months ended June 30, 2001, the Company reported net income of
$731,000, or $0.74 per share, as compared to net income of $354,000, or $0.34
per share for the six months ended June 30, 2000. This enhanced profitability
was primarily attributable to a 51% 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 33% to $2.0 million
for the six months ended June 30, 2001 from $1.5 million for the six months
ended June 30, 2000. Significantly higher loan volumes resulted in a 41%
increase in interest and fee income on loans which totaled $5.2 million for the
six months ended June 30, 2001 compared to $3.7 million for the six months ended
June 30, 2000. The majority of interest income on loans was derived from the
commercial and commercial real estate loan portfolios which comprised 76% of
total loans at June 30, 2001. Interest earned on investment securities and
federal funds sold totaling $292,000 and $163,000, respectively, were the other
components of interest income. During the second half of 2001, interest income
will be largely impacted by the direction of interest rates as 60% of the
earning assets will reprice as interest rates change.
Interest expense increased 52% to $3.5 million for the six months ended June 30,
2001 from $2.3 million for the six months ended June 30, 2000 due to the
increase in money market deposits and certificates of deposit. Interest expense
consisted predominantly of interest paid on money market accounts totaling $1.5
million and certificates of deposit totaling $1.9 million for the six months
ended June 30, 2001. Recent deposit growth has been flat and the trend continues
to be flat. Time deposits are maturing and are being renewed at lower interest
rates. As a result of the prevailing decrease of interest rates during the first
half of 2001, interest expense is declining.
The Company's interest rate spread was 2.28% for the first six months of 2001
compared to 2.46% for the first six months of 2000, an 18 basis point decrease.
The yield on average earning assets decreased 43 basis points due to an decrease
in interest rates. As of June 30, 2001, 60% of the earning assets had variable
interest rates. The average rate paid on interest bearing liabilities decreased
25 basis points due to short-term and long-term interest rates being lower. The
25 basis point decrease in interest bearing liabilities was partly offset by an
increase in subordinated debt. At June 30, 2001, the Company had $3.0 million of
subordinated debt. Interest expense on this debt was $136,000 in the first six
months of 2001 compared to $48,000 in the first six months of 2000.
Provision for Loan Losses
The allowance for loan losses increased 11% to $2.0 million as of June 30, 2001
from $1.8 million as of December 31, 2000. The allowance for loan losses is
established through a provision for loan losses charged to expense. A loan loss
provision of $393,000 was expensed in the six months ended June 30, 2001 as
compared to $196,000 during the six months ended June 30, 2000. The allowance
for loan losses was approximately 1.6% of total loans at June 30, 2001 compared
to 1% at June 30, 2000, net of residential mortgage loans held for sale on the
secondary market. The Bank has a relatively high percentage of commercial and
commercial real estate loans, most of which are extended to small or
medium-sized businesses. Management believes the allowance for loan losses is at
a level commensurate with the overall risk exposure of the loan portfolio.
However, along with other financial institutions, management shares a concern
for the possible continued softening of the economy in 2001. Should the economic
climate continue to deteriorate, borrowers may experience difficulty, and the
level of non-performing loans, charge-offs, and delinquencies could rise and
require further increases in the provision.
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Loans are charged against the allowance for loan losses when management believes
that the collection of 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 management's evaluation of the loans and
on prior loan loss experience. Loan 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 repay. The allowance does
not include the effects of expected losses on specific loans or groups of loans
that are related to future events or expected changes in economic conditions.
The majority of risk in the loan portfolio lies in commercial loans which
include commercial real estate loans. Accordingly, the Company allocated $1.7
million (or 88% of the total loan loss reserve) to these loans, which comprise
about 76% of the loan portfolio. The Company also allocated $95,000 (or
approximately 5% of the total loan loss reserve) to residential mortgages, which
comprise about 21% of the loan portfolio. 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. Four
impaired loans, which are mainly secured by real estate, totaled $1.9 million at
June 30, 2001. During the first six months of 2001, $5,000 of gross interest
income was not recognized which would have been recorded had the non-accruing
loans been current in accordance with their original terms. The amount of
interest income on non-accruing loans that was collected and included in net
income for the first six months of 2001 was $119,000.
During the six months ended June 30, 2001, a loan charge-off of $222,000 was
applied against the reserve. There were no loan recoveries during 2000. While a
comprehensive analysis of the allowance for loan losses is somewhat problematic
due to the Company's relatively short history, management believes that the
allowance was at an adequate level at June 30, 2001 based on the composition of
the portfolio as well as regulatory guidelines. However, there can be no
assurance that the allowance will be adequate to cover all losses.
Non-Interest Income and Expenses
Non-interest income for the six months ended June 30, 2001 totaled $898,000 as
compared to $757,000 for the six months ended June 30, 2000, a 19% increase.
Management service fees were the largest component of non-interest income
totaling $499,000 for the six months ended June 30, 2001 compared to $491,000
for the six months ended June 30, 2000. The Company charges The Middleton Doll
Company, an affiliate 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. Service release fees which are received from
the sale of residential mortgages originated for the secondary market totaled
$321,000 for the six months ended June 30, 2001 compared to $210,000 for the six
months ended June 30, 2000. Due to the decrease in long-term interest rates,
there were more individuals refinancing their current mortgages during the first
six months of 2001 as compared to the first six months of 2000. Service charges
related to deposit accounts and other income totaled $78,000 compared to $56,000
for the same periods. The increase was primarily due to an increase in service
fees and credit card income.
Non-interest expense decreased 5% to $1.46 million for the six months ended June
30, 2001 as compared to $1.53 million for the six months ended June 30, 2000.
The decrease was due to salary and employee benefit expense decreasing $117,000
due to personnel changes. Salaries and employee benefits totaled $1.1 million
and $1.2 million for the six months ended June 30, 2001 and 2000, respectively.
These amounts included salaries that were reimbursed through the management
service fee noted above. Other operating expenses, which include occupancy and
fixed asset expense, data processing fees, advertising, investor communications,
and professional fees were $410,000 compared to $360,000, a 14% increase. Data
processing services increased $21,000 over the same period last year due to the
implementation of a new enhanced software system. Depreciation expense increased
$6,000 due to the purchase of new equipment that was purchased for the bank's
new enhanced software system. Regulatory agency fees increased $14,000 over the
same period last year due to an assessment increase.
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Amounts provided for income tax expense or benefit 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 relate primarily to tax
exempt interest income, allowance for loan losses, and depreciation.
For the six months ended June 30, 2001, the Company recorded federal and state
income tax expense of $300,000. The Company also has a deferred tax asset of
$702,000. For the six months ended June 30, 2000, the Company recorded a federal
and state income tax expense of $207,000 and had a deferred tax asset of
$294,000. 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 six months ended June 30, 2001 was 29%, as compared to 37% for the
first six months of 2000. The decrease in the effective rate was the result of
the Bank establishing an investment subsidiary in September, 2000.
FINANCIAL CONDITION
Assets
The Company reported total assets of $134.1 million as of June 30, 2001 versus
$140.7 million as of December 31, 2000, a 5% decrease. Cash and due from banks
decreased to $3.0 million as of June 30, 2001 from $3.5 million at December 31,
2000. Federal funds sold decreased $1.1 million from December 31, 2000.
The Company's investment securities portfolio decreased to $6.8 million as of
June 30, 2001 from $14.4 million at year end. Investment securities consist of
taxable variable rate demand notes secured by irrevocable letters of credit
issued by 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.
As of June 30, 2001, loans were $122.8 million compared to $120.6 million as of
December 31, 2000. Residential mortgage loans originated for sale on the
secondary market totaled $717,000 as of June 30, 2001 compared to $100,000 as of
December 31, 2000. Excluding the mortgage loans originated for sale, the
allowance for loan losses remained at approximately 1.6% of gross loans,
totaling $2.0 million at June 30, 2001 and $1.8 million at year end 2000. In
addition to loans outstanding, the Company had gross unfunded loan commitments
outstanding totaling $25.3 million as of June 30, 2001, of which $4.2 million
will be participated to The Middleton Doll Company and other third party
lenders. Management expects a reduction in the borrowing needs of its customers
while the economy remains soft. Loan growth during the year will be limited
based upon the economic slowdown and the Company's regulatory capital
requirements. The Company intends to remain well-capitalized based upon its
regulatory capital requirements.
Other assets at June 30, 2001 totaled $2.6 million compared to $2.7 million at
December 31, 2000. Other assets at June 30, 2001 included net furniture and
equipment of $184,000, accrued interest receivable on loans and investments of
$679,000, excess servicing assets of $118,000 relating to loans sold to a third
party, deferred tax assets of $702,000, cash surrender value on a life insurance
policy of $630,000, a receivable relating to another life insurance policy of
$175,000 and other miscellaneous assets of $72,000.
Liabilities
Total deposits decreased 5% to $122.1 million at June 30, 2001 from $128.8
million as of year end 2000. Indexed money market accounts comprised 45% of the
deposit base totaling $54.7 million as of June 30, 2001 compared to $60.4
million as of December 31, 2000. Time certificates of deposit comprised 46% of
the deposit base totaling $56.7 million as of June 30, 2001 compared to $58.3
million as of year end. Time deposits include brokered CDs with terms ranging
from three months to seven years and totaled $15.0 million and $12.5 million as
of June 30, 2001
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and December 31, 2000, respectively. Management expects to competitively price
its money market and certificate of deposit products necessary to facilitate
expected loan growth. Other deposits as of June 30, 2001 included non-interest
bearing accounts totaling $8.4 million and interest bearing checking accounts
(NOW accounts) of $2.3 million.
In addition to deposits, the Bank periodically borrows funds via its
correspondent banking relationships. As of June 30, 2001 and December 31, 2000,
there were not any federal funds purchased.
Other liabilities remained stable at $3.9 million as of June 30, 2001 and at
December 31, 2000. Subordinated debt owed to The Middleton Doll Company totaled
$2.5 million at June 30, 2001 and December 31, 2000. On May 15, 2001, the
Company borrowed $500,000 from an affiliated party pursuant to an unsecured note
which bears interest at a variable rate of 2% over the prime rate through May 1,
2011. Other liabilities as of June 30, 2001 consisted primarily of accrued
interest payable totaling $850,000 as well as accrued expenses payable of
$67,000.
CAPITAL RESOURCES
Capital ratios applicable to the Bank and the Company at June 30, 2001 and
December 31, 2000 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 June 30, 2001
Bank 10.2% 9.0% 8.2%
Company 10.2% 6.6% 6.0%
At December 31, 2000
Bank 10.0% 8.8% 7.8%
Company 10.0% 6.7% 6.0%
Management intends to maintain capital levels in excess of minimums established
by the regulatory authorities. The Company exceeds all regulatory requirements
regarding the maintenance of capital and was categorized as "well capitalized"
under the regulatory framework for capital adequacy as of June 30, 2001 and
December 31, 2000.
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 cash dividends were paid by the Company to the shareholders during that
period which ended in September, 2000. The Company expects that future earnings
will also be retained to finance the growth of the Company and the Bank and that
no cash dividends will be paid in the near 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 also maintains a significant level of liquid assets to provide for
potential funding needs. In addition to cash balances as of June 30, 2001, the
Company held $6.8 million of marketable securities and $717,000 of residential
mortgage loans originated
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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 off-balance sheet 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 $8.5
million. The Company also has the ability to sell loan participations to
correspondents and affiliates. 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 by
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. Currently, the Bank has pledged enough
assets to borrow up to $10 million. Management believes that current liquidity
levels are sufficient to meet anticipated loan demand as well as to absorb
potential 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 impact 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 Bank engages in off-balance sheet activity
to hedge interest rate risk. As of June 30, 2001, the Bank had two interest rate
swap agreements outstanding with a notional value totaling $15.0 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
Bank receives a fixed interest rate and pays a variable rate based upon LIBOR.
These instruments allow management to more closely balance the repricing
opportunities of the Bank'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.
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
Securities Exchange Act of 1934. The Company intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation 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,
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strategies and expectations of the Company, are generally identifiable by the
use of the words "may", "will", "could", "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,
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, demand
for the Company's consumer products, its implementation of new technologies, its
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 statements and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.
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DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
AVERAGE BALANCE SHEETS
FOR SIX MONTHS ENDED FOR YEAR ENDED
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
Cash and Due From Banks $ 2,706,566 $ 2,470,855
Federal Funds Sold 1,000,088 1,663,732
Investment Securities (Taxable) 10,140,541 8,152,896
Loans:
Commercial 33,498,124 26,630,429
Commercial Real Estate 59,601,443 44,618,345
Residential Real Estate 25,521,567 21,759,343
Industrial Revenue Bonds 2,662,589 2,655,569
Leases 1,179,432 141,836
Installment and Consumer 423,435 221,432
------------- -------------
Total Loans 122,886,590 96,026,954
Less: Allowance for Loan Losses (1,878,444) (940,425)
------------- -------------
Net Loans 121,008,146 95,086,529
Fixed Assets 144,800 79,491
Other Assets 2,472,321 1,183,610
------------- -------------
Total Assets $ 137,472,462 $ 108,637,113
============= =============
Demand Deposits $ 7,091,809 $ 6,670,805
Interest Bearing Deposits
NOW 2,068,977 1,573,632
Money Market 58,806,994 45,961,910
Time Deposits 56,446,959 42,967,959
------------- -------------
Total Deposits 124,414,739 97,174,306
Federal Funds Purchased 912,575 684,044
Subordinated Note 2,629,834 1,693,989
Other Liabilities 1,434,208 1,084,293
------------- -------------
Total Liabilities 129,391,356 100,636,632
Equity Capital 8,081,106 8,000,481
------------- -------------
Total Liabilities and Capital $ 137,472,462 $ 108,637,113
============= =============
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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
On May 17, 2001, the annual meeting of shareholders was held.
At the meeting, George R. Schonath and Jon McGlocklin were
elected to serve as Class I directors with terms expiring in
2004. Continuing as Class II directors (terms expire in 2002)
are Donald Menefee and Terry L. Mather. Continuing as a Class
III director (term expires in 2003) is Donald E. Sydow. The
shareholders ratified the appointment of Virchow, Krause &
Company LLP as the Company's independent public accountants
for the year ending December 31, 2001.
There were 1,006,349 issued and outstanding shares of common
stock at the time of the annual meeting. The voting on each
item presented at the annual meeting was as follows:
For Withheld
--- --------
Election of Directors
George R. Schonath 941,331 4,196
Jon McGlocklin 941,240 4,287
For Against Abstain Total
--- ------- ------- -----
Ratification of Accountants 942,423 1,871 1,233 945,527
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
10 Promissory Note dated May 15, 2001 between
InvestorsBancorp, Inc. and the Schonath
Family Partnership, LLP
11 Statement Regarding Computation of Per Share
Earnings
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during the quarter ended June 30, 2001.
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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: August 7, 2001 /s/ George R. Schonath
----------------------
George R. Schonath
Chief Executive Officer
Date: August 7, 2001 /s/ Susan J. Hauke
------------------
Susan J. Hauke
Vice President Finance and
Chief Accounting Officer
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