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, 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 (I.R.S. Employer
of incorporation) Identification No.)
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
---- ----
As of November 8, 2001, the Issuer had 940,000 shares of $0.01 par value common
stock issued and outstanding.
INVESTORSBANCORP, INC.
FORM 10-QSB INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2001 (Unaudited) and
December 31, 2000................................................................ 3
Consolidated Statements of Income - For the Three and Nine Months
Ended September 30, 2001 and 2000 (Unaudited)................................... 4
Consolidated Statements of Changes in Shareholders' Equity - For the
Three and Nine Months Ended September 30, 2001 and 2000 (Unaudited)............. 5
Consolidated Statements of Cash Flows - For the Nine Months Ended
September 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............................................................ 8
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
2
INVESTORSBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 , 2001 DECEMBER 31, 2000
------------------- -----------------
(UNAUDITED)
ASSETS
- ------
Cash and due from banks $ 2,526,323 $ 3,453,639
Federal funds sold - 1,250,000
Available for sale securities 3,473,884 14,391,194
Loans, less allowance for loan losses of $2,066,077 and
$1,808,813 in 2001 and 2000, respectively 123,645,006 118,778,727
Mortgage loans held for sale 901,600 100,000
Premises and equipment, net 169,615 87,539
Accrued interest receivable and other assets 2,650,588 2,648,831
------------- -------------
TOTAL ASSETS $ 133,367,016 $ 140,709,930
============= =============
LIABILITIES AND SHAREHOLDERS 'EQUITY
- ------------------------------------
LIABILITIES:
Deposits:
Demand $ 7,810,379 $ 8,031,571
Savings and NOW 55,900,824 62,597,776
Other Time 52,284,063 58,173,494
------------- -------------
TOTAL DEPOSITS 115,995,266 128,802,841
Federal funds purchased 4,535,000 -
Other borrowings 3,000,000 2,500,000
Accrued interest payable and other liabilities 1,232,178 1,440,904
------------- -------------
TOTAL LIABILITIES 124,762,444 132,743,745
============= =============
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 2,088,153 901,948
Treasury stock, 110,000 shares and 37,351 shares in
2001 and 2000, respectively, at cost (810,981) (263,163)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 8,604,572 7,966,185
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 133,367,016 $ 140,709,930
============= =============
3
INVESTORSBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
INTEREST INCOME:
Interest and fees on loans $2,358,917 $2,322,203 $7,547,355 $5,986,996
Interest on investment securities 60,925 197,087 327,646 330,964
Interest on federal funds sold 4,203 45,109 29,214 74,088
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 2,424,045 2,564,399 7,904,215 6,392,048
INTEREST EXPENSE:
Interest on deposits 1,254,670 1,637,377 4,584,254 3,842,149
Interest on federal funds purchased 8,765 574 32,698 43,123
Interest on other borrowings 64,788 69,316 200,596 117,534
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 1,328,223 1,707,267 4,817,548 4,002,806
NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES 1,095,822 857,132 3,086,667 2,389,242
Provision for loan losses 85,755 97,485 478,981 293,587
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 1,010,067 759,647 2,607,686 2,095,655
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Service fees 23,300 17,678 73,076 47,625
Management service fees 246,502 258,432 745,578 749,630
Service release premiums 117,462 117,644 438,320 327,473
Other income 14,004 16,061 42,782 42,065
---------- ---------- ---------- ----------
TOTAL NONINTEREST INCOME 401,268 409,815 1,299,756 1,166,793
---------- ---------- ---------- ----------
NONINTEREST EXPENSES:
Salaries 389,074 457,649 1,200,451 1,353,776
Pension, profit sharing, employee benefits 111,541 96,320 355,381 372,475
Occupancy 27,517 23,778 84,983 69,188
Furniture and equipment expenses 13,604 15,476 44,090 50,123
Data processing services 41,259 29,674 116,528 83,943
Other expenses 142,630 134,370 389,188 359,551
---------- ---------- ---------- ----------
TOTAL NONINTEREST EXPENSES 725,625 757,267 2,190,621 2,289,056
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 685,710 412,195 1,716,821 973,392
Income tax expense 230,570 156,518 530,616 363,895
---------- ---------- ---------- ----------
NET INCOME $ 455,140 $ 255,677 $1,186,205 $ 609,497
========== ========== ========== ==========
PER SHARE AMOUNTS:
BASIC EARNINGS PER SHARE $ 0.48 $ 0.24 $ 1.22 $ 0.58
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ 0.48 $ 0.24 $ 1.22 $ 0.58
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 949,711 1,046,998 975,567 1,048,992
========== ========== ========== ==========
4
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 nine months of 2001 - - 609,497 - 609,497
Purchase of 23,013 shares
of treasury stock - - - (161,091) (161,091)
----------- ----------- ----------- ----------- -----------
BALANCES, September 30, 2000 $ 10,500 $ 7,316,900 $ 948,997 $ (161,091) $ 8,115,306
=========== =========== =========== =========== ============
BALANCES, December 31, 2000 $ 10,500 $ 7,316,900 $ 901,948 $ (263,163) $ 7,966,185
Net income for
first nine months of 2001 - - 1,186,205 - 1,186,205
Purchase of 72,649 shares
of treasury stock - - - (547,818) (547,818)
----------- ----------- ----------- ----------- -----------
BALANCES, September 30, 2001 $ 10,500 $ 7,316,900 $ 2,088,153 $ (810,981) $ 8,604,572
=========== =========== =========== =========== ============
5
INVESTORSBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
-----------------
SEPTEMBER 30,
-------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,186,205 $ 609,497
Adjustments to reconcile net income to net cash
flows from operating activities
Depreciation 43,044 31,442
Provision for loan losses 478,981 293,587
Net change in
Mortgage loans held for sale (801,600) 373,100
Accrued interest receivable and other assets (1,757) (430,872)
Accrued interest payable and other liabilities (208,726) 188,523
------------ ------------
NET CASH FLOWS FROM OPERATING ACTIVITIES 696,147 1,065,277
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in federal funds sold 1,250,000 (1,175,000)
Activity in available for sale securities
Maturities, prepayments, sales and calls 16,852,310 8,330,000
Purchases (5,935,000) (15,745,000)
Net increase in loans (5,345,260) (29,358,739)
Additions to premises and equipment (125,120) (4,021)
------------ ------------
NET CASH FLOWS FROM INVESTING ACTIVITIES 6,696,930 (37,952,760)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in federal funds purchased 4,535,000 (925,000)
Net (decrease) increase in deposits (12,807,575) 36,882,940
Proceeds from subordinated debt 500,000 2,500,000
Purchase of treasury stock (547,818) (161,091)
------------ ------------
NET CASH FLOWS FROM FINANCING ACTIVITIES (8,320,393) 38,296,849
------------ ------------
Net Change in Cash and Due From Banks (927,316) 1,409,366
Cash and Due From Banks, beginning of period 3,453,639 2,281,184
------------ ------------
CASH AND DUE FROM BANKS, END OF PERIOD $ 2,526,323 $ 3,690,550
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest $ 5,083,329 $ 3,367,131
Cash paid for income taxes $ 722,000 $ 802,781
6
INVESTORSBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 2001 and December 31, 2000 and
the results of operations for the nine months and three months ended September
30, 2001 and 2000 and cash flows for the nine months ended September 30, 2001
and 2000 have been made. Such adjustments consisted only of normal recurring
items. Operating results for the periods ended September 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. In order to conform with the 2001 presentation, certain
amounts from 2000 have been reclassified. The reclassifications have no effect
on reported amounts of net income or equity.
NOTE 3. HEDGING ACTIVITIES
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The statement, as amended, establishes accounting and
reporting standards for derivative instruments and was effective January 1,
2001, for the Bank. At September 30, 2001, the Bank's interest rate swaps had a
fair market value of $236,000, with an offsetting fair market liability of
$236,000.
NOTE 4. OTHER BORROWINGS
In May, 2001, the Company borrowed $500,000 from the Schonath Family
Partnership, an affiliated company. The note is unsecured and bears interest at
the prime rate plus 2%. Interest is payable quarterly with the principal due on
May 1, 2011.
7
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, 2001 and 2000. During those periods, the
Bank was the only direct 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 September 30, 2001.
Results of Operations
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
During the quarter ended September 30, 2001, the Company reported net income of
$455,000, or $0.48 per share, as compared to net income of $256,000, or $0.24
per share, for the quarter ended September 30, 2000. This enhanced profitability
was primarily attributable to a 12% increase in average earning assets and a 70
basis point increase in the interest rate spread of 2.73% for the third quarter
of 2001 compared to 2.03% for the third quarter of 2000.
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 28% to $1.1 million
for the quarter ended September 30, 2001 from $857,000 for the quarter ended
September 30, 2000. Interest and fee income on loans totaled $2.4 million for
the three months ended September 30, 2001 and $2.3 million for the three months
ended September 30, 2000. The majority of interest income on loans was derived
from the commercial and commercial real estate loan portfolios which comprised
80% of total loans at September 30, 2001. Interest earned on investment
securities and federal funds sold totaled $65,000 compared to $242,000 for the
same periods.
Interest expense decreased 24% to $1.3 million for the quarter ended September
30, 2001 from $1.7 million for the quarter ended September 30, 2000 due to time
deposits maturing and a decrease in interest rates. Interest expense consisted
predominantly of interest paid on money market accounts totaling $520,000 and
certificates of deposit totaling $800,000 for the quarter ended September 30,
2001. Offsetting this expense was interest rate swap income of $83,000 for the
quarter (See Note 3). Interest expense on subordinated debt and federal funds
purchased totaled $74,000 compared to $70,000 for the same periods.
The Company's interest rate spread was 2.73% for the third quarter of 2001
compared to 2.03% for the third quarter of 2000, a 70 basis point increase. The
yield on average earning assets decreased 139 basis points due to a decrease in
interest rates. As of September 30, 2001, 67% of the earning assets had variable
interest rates. The average rate paid on interest bearing liabilities decreased
209 basis points due to both short-term and long-term interest rates being
lower. As time deposits mature they reset at the current rate which currently is
lower than their stated rate.
Provision for Loan Losses
The allowance for loan losses increased 17% to $2.1 million as of September 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 September 30, 2001 as
compared to $97,000 during the quarter ended September 30, 2000. The allowance
for loan losses at September 30, 2001 was approximately 1.6% of total loans
compared to 1% of total loans at September 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. Should the
economic climate continue to deteriorate, borrowers may experience difficulty,
and the
8
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 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 $1.5
million (or 71% of the total loan loss reserve) to these loans, which comprise
about 80% of the loan portfolio. The Company also allocated $103,000 (or
approximately 5% of the total loan loss reserve) to residential mortgages, which
comprise about 19% 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. Nine
impaired loans, which are mainly secured by real estate, totaled $1.7 million at
September 30, 2001. During the third quarter of 2001, $4,000 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 third quarter of 2001 was $39,000.
There were no loan charge-offs or recoveries during the three months ended
September 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
September 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 September 30, 2001 totaled $401,000 as
compared to $410,000 for the quarter ended September 30, 2000, a 2% decrease.
Management service fees were the largest component of non-interest income,
totaling $247,000 for the quarter ended September 30, 2001 compared to $258,000
for the quarter ended September 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
$117,000 for the quarter ended September 30, 2001 compared to $118,000 for the
quarter ended September 30, 2000. Service charges related to deposit accounts
and other income totaled $37,000 compared to $34,000 for the same period due to
an increase in service fees.
Non-interest expense decreased 4% to $726,000 for the three months ended
September 30, 2001 as compared to $757,000 for the three months ended September
30, 2000. The decrease was due to salary and employee benefit expense decreasing
$53,000 due to fewer personnel. Salaries and employee benefits totaled $501,000
and $554,000 for the three months ended September 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 $225,000 compared to $203,000, an 11%
increase. Data processing services increased $12,000 over the same period last
year due to the implementation of a new enhanced software system. Regulatory
agency fees increased $10,000 over the same period last year due to an
assessment increase.
9
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
allowance for loan losses and depreciation.
For the quarter ended September 30, 2001, the Company recorded federal and state
income tax expense of $231,000. The Company also has a deferred tax asset of
$702,000. For the quarter ended September 30, 2000, the Company recorded a
federal and state income tax expense of $157,000 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 September 30, 2001 was 34%, as compared to 38% for
the third quarter of 2000. The decrease in the effective rate was primarily the
result of the Bank establishing an investment subsidiary in September, 2000.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
During the nine months ended September 30, 2001, the Company reported net income
of $1.2 million or $1.22 per share, as compared to net income of $609,000, or
$0.58 per share, for the nine months ended September 30, 2000. This enhanced
profitability was primarily attributable to a 35% increase in average earning
assets and a 15 basis point increase in the interest rate spread of 2.42% for
the first nine months of 2001 compared to 2.27% for the first nine months of
2000. During the first nine months of 2001, short-term interest rates were
reduced eight times, for an overall decrease of 350 basis points.
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 29% to $3.1 million
for the nine months ended September 30, 2001 from $2.4 million for the nine
months ended September 30, 2000. Significantly higher loan volumes resulted in a
25% increase in interest and fee income on loans which totaled $7.5 million for
the nine months ended September 30, 2001 compared to $6.0 million for the nine
months ended September 30, 2000. The majority of interest income on loans was
derived from the commercial and commercial real estate loan portfolios which
comprised 80% of total loans at September 30, 2001. Interest earned on
investment securities and federal funds sold totaled $357,000 compared to
$405,000 for the same periods.
Interest expense increased 20% to $4.8 million for the nine months ended
September 30, 2001 from $4.0 million for the nine months ended September 30,
2000 due to an increase in money market deposits and certificates of deposit.
Interest expense consisted predominantly of interest paid on money market
accounts totaling $2.0 million and certificates of deposit totaling $2.7 million
for the nine months ended September 30, 2001. Offsetting this expense was
interest rate swap income of $203,000 for the first nine months (See Note 3 and
the discussion contained in the Asset/Liability Management section, below).
Interest expense on subordinated debt and federal funds purchased totaled
$233,000 compared to $161,000 for the same periods.
The Company's interest rate spread was 2.42% for the first nine months of 2001
compared to 2.27% for the first nine months of 2000, a 15 basis point increase.
The yield on average earning assets decreased 72 basis points due to a decrease
in interest rates. As of September 30, 2001, 67% of the earning assets had
variable interest rates. The average rate paid on interest bearing liabilities
decreased 87 basis points due to both short-term and long-term interest rates
being lower. As time deposits mature they reset at the current rate which
currently is lower than their stated rate.
10
Provision for Loan Losses
The allowance for loan losses increased 17% to $2.1 million as of September 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 $479,000 was expensed in the nine months ended September 30, 2001
as compared to $294,000 during the nine months ended September 30, 2000. The
allowance for loan losses was approximately 1.6% of total loans at September 30,
2001 compared to 1% at September 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 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 $1.5
million (or 71% of the total loan loss reserve) to these loans, which comprise
about 80% of the loan portfolio. The Company also allocated $103,000 (or
approximately 5% of the total loan loss reserve) to residential mortgages, which
comprise about 19% 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. Nine
impaired loans, which are mainly secured by real estate, totaled $1.7 million at
September 30, 2001. During the first nine months of 2001, $8,000 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 nine months of 2001 was $147,000.
During the nine months ended September 30, 2001, a loan charge-off of $222,000
was applied against the reserve. There were no loan charge-offs or 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 September 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 nine months ended September 30, 2001 totaled $1.3
million as compared to $1.2 million for the nine months ended September 30,
2000, an 8% increase. Management service fees were the largest component of
non-interest income, totaling $746,000 for the nine months ended September 30,
2001 compared to $750,000 for the nine months ended September 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 $438,000 for the nine months ended
September 30, 2001 compared to $327,000 for the nine months ended September 30,
2000. Due to the decrease in long-term interest rates, there were more
individuals refinancing their current mortgages during the first nine months
11
of 2001 as compared to the first nine months of 2000. Service charges related to
deposit accounts and other income totaled $116,000 compared to $90,000 for the
same periods. The increase was primarily due to an increase in service fees and
credit card income.
Non-interest expense decreased 4% to $2.2 million for the nine months ended
September 30, 2001 as compared to $2.3 million for the nine months ended
September 30, 2000. The decrease was due to salary and employee benefit expense
decreasing $170,000 due to fewer personnel. Salaries and employee benefits
totaled $1.6 million and $1.7 million for the nine months ended September 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 $635,000
compared to $563,000, a 13% increase. Data processing services increased $33,000
over the same period last year due to the implementation of a new enhanced
software system. Depreciation expense increased $12,000 due to new equipment
that was purchased for the Bank's new enhanced software system. Regulatory
agency fees increased $25,000 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
allowance for loan losses and depreciation.
For the nine months ended September 30, 2001, the Company recorded federal and
state income tax expense of $531,000. The Company also has a deferred tax asset
of $702,000. For the nine months ended September 30, 2000, the Company recorded
a federal and state income tax expense of $364,000 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 nine months ended September 30, 2001 was 31%, as compared to 37%
for the first nine 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 $133.4 million as of September 30, 2001
versus $140.7 million as of December 31, 2000, a 5% decrease. Cash and due from
banks decreased to $2.5 million as of September 30, 2001 from $3.5 million at
December 31, 2000. There were no Federal funds sold at September 30, 2001, which
was a decrease of $1.3 million from December 31, 2000.
The Company's investment securities portfolio decreased to $3.5 million as of
September 30, 2001 from $14.4 million at year end. The decrease is a combination
of an increase in loans and a decrease in deposits. In addition, the Bank has
increased its off balance sheet sources of funds to $18.5 million which reduces
the Bank's need for liquidity on the balance sheet. 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 September 30, 2001, loans were $125.7 million compared to $120.6 million
as of December 31, 2000. Residential mortgage loans originated for sale on the
secondary market totaled $902,000 as of September 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 $2.1 million at September 30, 2001 and $1.8 million at year end 2000.
In addition to loans outstanding, the Company had gross unfunded loan
commitments
12
outstanding totaling $24.6 million as of September 30, 2001, of which $2.0
million will be participated to The Middleton Doll Company and other third party
lenders. Management expected a reduction in the borrowing needs of its customers
due to the change in the economy and gross unfunded loan commitments declined
$6.2 million since December 31, 2000. Loan growth during the rest of 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
regulatory capital guidelines.
Other assets at September 30, 2001 totaled $2.8 million compared to $2.7 million
at December 31, 2000. Other assets at September 30, 2001 included net furniture
and equipment of $170,000, accrued interest receivable on loans and investments
of $699,000, excess servicing assets of $96,000 relating to loans sold to a
third party, deferred and current tax assets of $918,000, cash surrender value
on a life insurance policy of $634,000, fair market value of investment swaps of
$236,000 and other miscellaneous assets of $55,000.
Liabilities
Total deposits decreased 10% to $116.0 million at September 30, 2001 from $128.8
million as of year end 2000. Indexed money market accounts comprised 46% of the
deposit base totaling $53.8 million as of September 30, 2001 compared to $60.4
million as of December 31, 2000. Time certificates of deposit comprised 45% of
the deposit base totaling $52.3 million as of September 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 $15.6 million and $12.5
million as of September 30, 2001 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
September 30, 2001 included non-interest bearing accounts totaling $7.8 million
and interest bearing checking accounts (NOW accounts) of $2.1 million.
In addition to deposits, the Bank periodically borrows funds via its
correspondent banking relationships. As of September 30, 2001, $4.5 million was
outstanding.
Other liabilities increased 8% to $4.2 million as of September 30, 2001 from
$3.9 million at December 31, 2000. Subordinated debt owed to The Middleton Doll
Company totaled $2.5 million at September 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 September 30, 2001 consisted
primarily of accrued interest payable totaling $768,000, investment swap
offsetting liability of $236,000, as well as accrued expenses payable of
$228,000.
13
CAPITAL RESOURCES
Capital ratios applicable to the Bank and the Company at September 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 September 30, 2001
Bank 10.5% 9.2% 8.7%
Company 10.5% 6.9% 6.5%
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 September 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 September 30, 2001,
the Company held $3.5 million of marketable securities and $902,000 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 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.
14
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 September 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.
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, 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.
15
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
AVERAGE BALANCE SHEETS
FOR NINE MONTHS ENDED FOR YEAR ENDED
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
Cash and Due From Banks $ 2,543,624 $ 2,470,855
Federal Funds Sold 821,121 1,663,732
Investment Securities (Taxable) 8,911,410 8,152,896
Loans:
Commercial 33,581,940 26,630,429
Commercial Real Estate 60,589,123 44,618,345
Residential Real Estate 24,898,176 21,759,343
Industrial Revenue Bonds 2,264,777 2,655,569
Leases 1,153,864 141,836
Installment and Consumer 438,919 221,432
------------- -------------
Total Loans 122,926,799 96,026,954
Less: Allowance for Loan Losses (1,923,038) (940,425)
------------- -------------
Net Loans 121,003,761 95,086,529
Fixed Assets 156,159 79,491
Other Assets 2,282,265 1,183,610
------------- -------------
Total Assets $ 135,718,340 $ 108,637,113
============= =============
Demand Deposits $ 7,092,038 $ 6,670,805
Interest Bearing Deposits
NOW 2,094,027 1,573,632
Money Market 57,779,429 45,961,910
Time Deposits 55,661,989 42,967,959
------------- -------------
Total Deposits 122,627,483 97,174,306
Federal Funds Purchased 972,971 684,044
Subordinated Note 2,754,579 1,693,989
Other Liabilities 1,173,302 1,084,293
------------- -------------
Total Liabilities 127,528,335 100,636,632
Equity Capital 8,190,005 8,000,481
------------- -------------
Total Liabilities and Capital $ 135,718,340 $ 108,637,113
============= =============
16
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
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during the quarter ended September 30, 2001.
17
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 8, 2001 /s/ George R. Schonath
----------------------
George R. Schonath
Chief Executive Officer
Date: November 8, 2001 /s/ Susan J. Hauke
------------------
Susan J. Hauke
Vice President Finance and
Chief Accounting Officer
18