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 March 31, 2002
--------------
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
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(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
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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 May 10, 2002, the Issuer had 940,000 shares of $0.01 par value common
stock issued and outstanding.
INVESTORSBANCORP, INC.
FORM 10-QSB INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2002 (Unaudited) and
December 31, 2001 ................................................................... 3
Consolidated Statements of Income - For the Three Months
Ended March 31, 2002 and 2001 (Unaudited) ........................................... 4
Consolidated Statements of Changes in Shareholders' Equity - For the
Three Months Ended March 31, 2002 and 2001 (Unaudited) .............................. 5
Consolidated Statements of Cash Flows - For the Three Months Ended
March 31, 2002 and 2001 (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
MARCH 31, 2002 DECEMBER 31, 2001
-------------- -----------------
(UNAUDITED)
ASSETS
- ------
Cash and due from banks $ 1,079,909 $ 2,004,926
Available for sale securities - stated at fair value 4,132,329 5,347,264
Loans, less allowance for loan losses of $1,978,081 and
$1,884,331 in 2002 and 2001, respectively 124,009,408 123,436,530
Mortgage loans held for sale 733,000 284,000
Premises and equipment, net 163,902 182,360
Accrued interest receivable and other assets 2,431,212 2,505,325
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TOTAL ASSETS $ 132,549,760 $ 133,760,405
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Deposits:
Demand $ 6,055,622 $ 6,239,453
Savings and NOW 48,540,559 55,119,150
Other Time 64,585,822 58,655,079
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Total Deposits 119,182,003 120,013,682
Federal funds purchased 225,000 815,000
Other borrowings 3,000,000 3,000,000
Accrued interest payable and other liabilities 849,594 1,040,308
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Total Liabilities 123,256,597 124,868,990
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SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, -0- issued - -
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 2,776,744 2,374,996
Treasury stock, 110,000 shares in 2002 and 2001,
respectively, at cost (810,981) (810,981)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 9,293,163 8,891,415
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 132,549,760 $ 133,760,405
============= =============
3
INVESTORSBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2002 2001
---- ----
INTEREST INCOME:
Interest and fees on loans $1,891,280 $2,636,817
Interest on investment securities - taxable 22,922 146,988
Interest on federal funds sold 375 11,091
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TOTAL INTEREST INCOME 1,914,577 2,794,896
INTEREST EXPENSE:
Interest on deposits 778,607 1,821,108
Interest on federal funds purchased 6,091 14,852
Interest on other borrowings 49,932 67,808
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TOTAL INTEREST EXPENSE 834,630 1,903,768
NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES 1,079,947 891,128
Provision for loan losses 93,750 307,472
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NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 986,197 583,656
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NONINTEREST INCOME:
Service fees 27,574 27,764
Management service fees 261,006 241,365
Service release premiums 73,453 181,476
Other income 15,046 14,569
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TOTAL NONINTEREST INCOME 377,079 465,174
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NONINTEREST EXPENSES:
Salaries 375,304 401,127
Pension, profit sharing, employee benefits 143,181 117,434
Occupancy 28,730 28,749
Furniture and equipment expenses 14,092 15,163
Data processing services 36,848 30,981
Other expenses 151,158 117,815
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TOTAL NONINTEREST EXPENSES 749,313 711,269
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INCOME BEFORE INCOME TAXES 613,963 337,561
Less applicable income taxes 212,215 77,424
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NET INCOME $ 401,748 $ 260,137
========== ==========
PER SHARE AMOUNTS:
BASIC EARNINGS PER SHARE $ 0.43 $ 0.26
========== ==========
DILUTED EARNINGS PER SHARE $ 0.41 $ 0.26
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 981,084 1,006,748
========== ==========
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, 2000 $10,500 $7,316,900 $ 901,948 $(263,163) $ 7,966,185
Net income for
first three months of 2001 - - 260,137 - 260,137
Purchase of treasury stock - - - (50,200) (50,200)
------- ---------- ---------- --------- -----------
BALANCES, March 31, 2001 $10,500 $7,316,900 $1,162,085 $(313,363) $ 8,176,122
======= ========== ========== ========= ===========
BALANCES, December 31, 2001 $10,500 $7,316,900 $2,374,996 $(810,981) $ 8,891,415
Net income for
first three months of 2002 - - 401,748 - 401,748
------- ---------- ---------- --------- -----------
BALANCES, March 31, 2002 $10,500 $7,316,900 $2,776,744 $(810,981) $ 9,293,163
======= ========== ========== ========= ===========
5
INVESTORSBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 401,748 $ 260,137
Adjustments to reconcile net income to net cash
flows from operating activities
Depreciation 18,640 10,505
Provision for loan losses 93,750 307,472
Net change in
Mortgage loans held for sale (449,000) (550,000)
Accrued interest receivable and other assets 74,113 (50,200)
Accrued interest payable and other liabilities (190,714) 88,533
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NET CASH FLOWS FROM OPERATING ACTIVITIES (51,463) 66,447
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available for sale securities
Maturities, prepayments, sales and calls 1,214,935 7,589,810
Net increase in loans (666,628) (670,376)
Additions to premises and equipment (182) (110,254)
----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES 548,125 6,809,180
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CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits (831,679) (2,579,619)
Net change in federal funds purchased and
securities sold under repurchase agreements (590,000) -
Purchase of treasury stock - (50,200)
----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES (1,421,679) (2,629,819)
----------- -----------
Net Change in Cash and Cash Equivalents (925,017) 4,245,808
Cash and Cash Equivalents - Beginning of year 2,004,926 4,703,639
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,079,909 $ 8,949,447
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest $ 766,908 $ 1,665,226
Cash paid for income taxes $ - $ 126,113
6
INVESTORSBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(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 March 31, 2002 and December 31, 2001 and the
results of operations for the three months ended March 31, 2002 and 2001 and
cash flows for the three months ended March 31, 2002 and 2001 have been made.
Such adjustments consisted only of normal recurring items. Operating results for
the periods ended March 31, 2002 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2002. 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 2001 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, 2001.
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.
The consolidated income of the Company is principally from the income of its
wholly owned subsidiary. The subsidiary Bank grants commercial, residential and
consumer loans and accepts deposits from customers primarily in southeastern
Wisconsin. The subsidiary Bank is subject to competition from other financial
institutions and nonfinancial institutions providing financial products.
Additionally, the Company and the subsidiary Bank are subject to the regulations
of certain regulatory agencies and undergo periodic examination by those
regulatory agencies.
In preparing consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the allowance for loan losses, deferred tax assets, and loan servicing
rights.
7
NOTE 3. INTEREST RATE SWAPS
The Company has entered into various interest rate swap agreements with other
companies to manage interest rate exposure. The interest rate swap agreements
are structured as hedges of specific fixed-rate deposits whose terms coincide
with the terms of the swap agreements. Under the terms of the swap agreements,
the parties exchange interest payment streams calculated on the notional
principal amount. The swap agreements are structured so that the Company
receives a fixed interest rate and pays a variable rate based on various rate
indexes. The swap agreements' expirations coincide with the maturity of the
fixed rate deposits. Although these 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 may be susceptible to risk with
respect to interest rate swap agreements to the extent of nonperformance by the
financial institutions participating in the interest rate swap agreements.
However, the Company does not anticipate nonperformance by these institutions.
The Company has adopted FAS 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended by FAS 137 "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement 133",
and FAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities". These statements require the Company to designate all derivative
instruments as either fair value hedges or cash flow hedges and to record the
hedge on the balance sheet at its fair market value. The net gain/loss on
instruments classified as cash flow hedges are reported as changes in other
comprehensive income. The net gain/loss on instruments classified as fair value
hedges are reported as increases/decreases in current year earnings. The
Company's two interest rate swaps are classified as fair value hedges with a
fair market value of ($76,000) at March 31, 2002.
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 March 31, 2002 and 2001. 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.
Results of Operations
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND MARCH 31, 2001
During the quarter ended March 31, 2002, the Company reported net income of
$402,000, or $0.41 per share (diluted), as compared to net income of $260,000,
or $0.26 per share (diluted), for the quarter ended March 31, 2001. This
enhanced profitability was primarily attributable to a 101 basis point increase
in the interest rate spread of 3.07% for the first quarter of 2002 compared to
2.06% for the first quarter of 2001.
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 interest income decreased 32% to $1.91 million for
the first quarter of 2002 from $2.79 million for the first quarter of 2001. This
decrease was due to lower interest rates on loans with the average prime rate
decreasing from 8.64% in the first quarter of 2001 to 4.75% in the first quarter
of 2002. The majority of interest income on loans is derived from the commercial
and commercial real estate loan portfolios which comprised 79% of total loans at
March 31, 2001. Interest and fee income on loans totaled $1.89 million for the
three months ended March 31, 2002 and $2.64 million for the three months ended
March 31, 2001. Interest earned on investment securities and federal funds sold
totaled $23,000 compared to $158,000 for the same periods due to a decrease in
the average balances between the first quarters of 2002 and 2001. While the
direction of future interest rates, competition, and other factors may have a
significant impact, management anticipates interest income will continue to
increase proportionately with the projected growth of the portfolio.
8
Interest expense decreased 56% to $835,000 for the quarter ended March 31, 2002
from $1.90 million for the quarter ended March 31, 2001 due to decreasing
interest rates. Interest expense consists predominantly of interest paid on
money market accounts, which totaled $229,000 for the first quarter of 2002 and
$865,000 for the first quarter of 2001, and certificates of deposit, which
totaled $543,000 for the first quarter of 2002 and $930,000 for the first
quarter of 2001. Interest rate swap income that is used to offset interest
expense was $150,000 in the first quarter of 2002 and $41,000 in the first
quarter of 2001. Interest expense on subordinated debt and federal funds
purchased totaled $56,000 compared to $83,000 for the same periods. It is
anticipated that management will continue to employ time deposit instruments as
the primary funding source utilized by the Company to fund additional growth.
The Company's interest rate spread was 3.07% for the first quarter of 2002
compared to 2.06% for the first quarter of 2001, a 101 basis point increase. The
rate paid on total interest bearing liabilities decreased more than the yield on
earning assets. The yield on average earning assets decreased 234 basis points
due to decreases in interest rates. The average rate paid on interest bearing
liabilities decreased 335 basis points due to lower short-term interest rates
and due to lower long-term interest rates for time deposits which matured.
Provision for Loan Losses
The allowance for loan losses increased to $1.98 million as of March 31, 2002
from $1.88 million as of December 31, 2001. The allowance for loan losses is
established through a provision for loan losses charged to expense. A loan loss
provision of $94,000 was expensed in the quarter ended March 31, 2002 as
compared to $307,000 during the quarter ended March 31, 2001. The higher loan
loss provision in March 2001 was the result of a loan charge-off of $222,000.
The allowance for loan losses at March 31, 2002 and March 31, 2001 was
approximately 1.6% of total loans, 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, should the
economic climate deteriorate further, certain 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 collectibility of the principal is unlikely. Subsequent recoveries, if
any, are credited to the allowance. The allowance is an amount that management
believes will be adequate to absorb possible losses relating to specifically
identified loans that may become uncollectible based on evaluation as well as
possible losses inherent in the loan portfolio. The evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrower's ability to repay. In
accordance with FASB Statements 5 and 114, the allowance is provided for losses
that have been incurred as of the balance sheet date and is based on past events
and current economic conditions, and 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 that include commercial real estate loans.
Accordingly, the Company allocated $1.01 million (or 51% of the total loan loss
reserve) to these loans, which comprise about 79% of the loan portfolio. The
Company also allocated $100,000 (or approximately 5% of the total loan loss
reserve) to residential mortgages, which comprise about 19% of the loan
portfolio. Approximately $866,000 of the reserve for loan losses is unallocated.
The unallocated amount is determined based on management's judgment which
considers, among other things, the risk of error in the specific allocations,
economic conditions and trends, loan portfolio concentrations, the size of
individual credit relationships, regulatory directives and other factors.
Continued softness in the industrial manufacturing sector of the economy, in
particular, has adversely impacted a number of the Company's commercial loan
customers. Management believes it is prudent to maintain a significant level of
unallocated reserves given the weakness in the manufacturing sector and
uncertainty in the future direction of the economy as a whole. 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
9
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 $941,000 at
March 31, 2002. The significant decrease in nonperforming loans, noted in the
chart below is the result of one loan for $1.11 million that was paid off in
January 2002. The accruing loans that were 90 days past due have all been
brought current during the first quarter. The accrual of interest income on
impaired loans is discontinued when, in the opinion of management, there is a
reasonable doubt as to the borrower's ability to meet payment of interest or
principal when they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Cash collections on impaired loans are
credited to the loan receivable balance or recognized as interest income on a
cash basis. Loans are returned to accrual status when the principal and interest
amounts contractually due are brought current and future payments are reasonably
assured. During the first quarter of 2002, $18,000 of gross interest income,
which would have been recorded had the non-accruing loans been current in
accordance with their original terms, was not recognized. The amount of interest
income on non-accruing loans that was collected and included in net income on a
cash basis for the first quarter of 2002 was $8,000.
There were no loan charge-offs or recoveries during the three months ended March
31, 2002. During the first quarter of 2001, a loan charge-off of $222,000 was
applied against the reserve. Management, to the best of its knowledge, is not
aware of any other significant loans, group of loans or segments of the
portfolio where there are serious doubts as to repayment ability. 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 March 31, 2002 based on the composition of
the portfolio as well as regulatory guidelines. Management recognizes there are
significant estimates in the process and the ultimate losses could be
significantly different from those currently estimated.
The following table summarizes the Company's nonperforming loans as of March 31,
2002 and December 31, 2001.
NONPERFORMING LOANS 3/31/2002 12/31/2001
- ------------------- --------- ----------
Nonaccrual Loans $ 636,750 $ 1,937,882
Accruing Loans Past Due 90 Days or More(1) $ - $ 707,172
Restructured Loans(2) $ 304,180 $ -
(1) Loans are generally placed on nonaccrual status when contractually
past due 90 days or more, unless management based upon the facts and
circumstances does not feel it is necessary to put the specific loan
on nonaccrual status.
(2) Loans are considered restructured when the terms are modified due to a
deterioration in the financial condition of the borrower.
Non-Interest Income and Expenses
Non-interest income for the quarter ended March 31, 2002 totaled $377,000 as
compared to $465,000 for the quarter ended March 31, 2001, a 19% decrease.
Management service fees were the largest component of non-interest income,
totaling $261,000 for the quarter ended March 31, 2002 compared to $241,000 for
the quarter ended March 31, 2001. 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
$73,000 for the quarter ended March 31, 2002 compared to $182,000 for the
quarter ended March 31, 2001. The large decrease in service release premiums in
2002 is due to the slow down in refinances of residential mortgages. Currently,
the bulk of the mortgages being originated are new home purchases or new
construction. Service charges related to deposit accounts and other income
totaled $43,000 compared to $42,000 for the same period in 2001.
Non-interest expense increased 5% to $749,000 for the three months ended March
31, 2002 as compared to $711,000 for the three months ended March 31, 2001.
Salaries and employee benefits totaled $518,000 for the three months ended March
31, 2002 and 2001, respectively. These amounts included salaries that were
reimbursed
10
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 $231,000 compared to
$193,000, a 20% increase. Data processing services increased $6,000 over the
same period last year due to the implementation of a new enhanced software
system and depreciation increased $8,000 over the same period last year due to
the additional software and equipment. Regulatory agency fees increased $8,000
over the same period last year due to an assessment increase. Professional fees,
including bank examination fees, increased $10,000 over the same period last
year.
Amounts provided for income tax expense are based on income reported for
financial statement purposes and do not necessarily represent amounts currently
payable under tax laws. Deferred income tax assets and liabilities are computed
quarterly for differences between the financial statement and tax basis of
assets and liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. The differences relate primarily to allowance for
loan losses and depreciation.
For the quarter ended March 31, 2002, the Company recorded federal and state
income tax expense of $212,000. The Company also has a deferred tax asset of
$850,000. For the quarter ended March 31, 2001, the Company recorded a federal
and state income tax expense of $77,000 and had a deferred tax asset of
$702,000. 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 March 31, 2002 was 35%, as compared to 23% for the
first quarter of 2001. During 2001 an adjustment to the loan loss provision
resulted in the lower tax rate for that period.
FINANCIAL CONDITION
The Company reported total assets of $132.55 million as of March 31, 2002 versus
$133.76 million as of December 31, 2001, a 1% decrease. Cash and due from banks
decreased to $1.08 million as of March 31, 2002 from $2.00 million at December
31, 2001.
The Company's investment securities portfolio decreased to $4.32 million as of
March 31, 2002 from $5.35 million at December 31, 2001 in order to fund loan
growth and to compensate for the decrease in deposits. 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. The cost value of these notes
approximates market value. 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 March 31, 2002, loans were $125.99 million compared to $125.32 million as
of December 31, 2001. Residential mortgage loans originated for sale on the
secondary market totaled an additional $733,000 as of March 31, 2002 compared to
$284,000 as of December 31, 2001. Excluding the mortgage loans originated for
sale, the allowance for loan losses remained at approximately 1.6% of gross
loans, totaling $1.98 million at March 31, 2002 and $1.88 million at year end
2001. In addition to loans outstanding, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements, commercial letters of credit
and standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received. The Company had gross unfunded loan commitments outstanding totaling
$25.58 million as of March 31, 2002, of which $2.95 million will be participated
to The Middleton Doll Company and other third party lenders.
Other assets at March 31, 2002 totaled $2.41 million compared to $2.69 million
at December 31, 2001. Other assets at March 31, 2002 included net furniture and
equipment of $164,000, accrued interest receivable on loans of $594,000, excess
servicing assets of $88,000 relating to loans sold to a third party, current and
deferred tax assets of $864,000, cash surrender value on a life insurance policy
of $628,000 and other miscellaneous assets of $73,000.
11
Total deposits decreased 1% to $119.18 million at March 31, 2002 from $120.01
million as of year end 2001. Indexed money market accounts decreased 12% to
$46.41 million as of March 31, 2002 from $52.80 million as of December 31, 2001.
Time certificates of deposit increased 10% to $64.59 million as of March 31,
2002 from $58.65 million as of year end. Time deposits include brokered CDs with
terms ranging from three months to three years and totaled $33.61 million and
$26.11 million as of March 31, 2002 and December 31, 2001, respectively. In
order for the Company to facilitate continued loan growth, management expects to
continue to aggressively market and competitively price its money market and
certificate of deposit products. Other deposits as of March 31, 2002 included
non-interest bearing accounts totaling $6.05 million and interest bearing
checking accounts (NOW accounts) of $2.13 million.
In addition to deposits, the Company periodically borrows funds via its
correspondent banking relationships. As of March 31, 2002, the Bank had
purchased $225,000 in federal funds.
Other liabilities decreased to $3.85 million as of March 31, 2002 from $4.04
million at December 31, 2001. At March 31, 2002, the Company had $3.0 million of
subordinated debt due to affiliated companies. The unsecured notes bear interest
at the prime rate plus two percent through their maturities. Other liabilities
as of March 31, 2002, consisted primarily of accrued interest payable of
$661,000, accrued expenses payable of $88,000, retained loan discount relating
to loans sold to a third party totaling $78,000, and other miscellaneous
liabilities of $22,000.
Financial Accounting Standard Board Statement No. 107, "Disclosures About Fair
Value of Financial Instruments", requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument.
CAPITAL RESOURCES
Capital ratios applicable to the Bank and the Company at March 31, 2002 and
December 31, 2001 were as follows:
TOTAL CAPITAL TO TIER I CAPITAL TO TIER I CAPITAL TO
RISK WEIGHTED ASSETS RISK WEIGHTED ASSETS AVERAGE ASSETS
-------------------------- -------------------------- ---------------------------
Regulatory Capital
Requirements:
Minimum at 3/31/02 $ 9,806,425 8.0% $ 4,903,213 4.0% $ 5,281,974 4.0%
Well-capitalized at 3/31/02 $12,258,031 10.0% $ 7,354,819 6.0% $ 6,602,468 5.0%
At March 31, 2002
Bank $13,716,200 11.2% $12,178,442 9.9% $ 12,178,442 9.2%
Company $13,831,157 11.3% $ 9,293,159 7.6% $ 9,293,159 7.0%
At December 31, 2001
Bank $13,337,639 10.9% $11,801,176 9.6% $ 11,801,176 8.8%
Company $13,429,361 10.9% $ 8,891,415 7.2% $ 8,891,415 6.6%
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 March 31, 2002 and
December 31, 2001.
The Company expects that all earnings will be retained to finance the growth of
the Company and the Bank and that no cash dividends will be paid for the
foreseeable future.
12
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 March 31, 2002, the
Company held $4.32 million of marketable securities and $733,000 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. 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 with the Federal Reserve Bank of Chicago to borrow funds from the
Discount Window on a secured basis. This will allow the Bank to borrow up to $10
million on a short-term basis in the event of an unexpected liquidity shortfall.
The actual amount the Bank will be able to borrow will depend on total capital
and on the amount of assets the Bank will pledge. Currently, the Bank has
pledged enough assets to borrow up to $10 million. In February, 2002, the Bank
became a member of the Federal Home Loan Bank of Chicago ("FHLB of Chicago"). As
a member, the Bank was required to purchase $184,900 worth of FHLB of Chicago
stock. Based upon the Bank's minimum stock purchase, the Bank has the capacity
to borrow $3,698,000 from the FHLB of Chicago. The borrowing capacity is also
dependent on the amount of loans that are pledged. At the present time, the Bank
has not used this new credit facility. 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 March 31, 2002, the Company 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
Company 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 Company's assets and liabilities and thereby, reduces
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.
Impact of Inflation and Changing Prices
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.
13
Recent Regulatory Developments
On October 26, 2001, President Bush signed into law the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act"). Among its other
provisions, the USA PATRIOT Act requires each financial institution: (i) to
establish an anti-money laundering program; (ii) to establish due diligence
policies, procedures and controls with respect to its private banking accounts
and correspondent banking accounts involving foreign individuals and certain
foreign banks; and (iii) to avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of,
foreign banks that do not have a physical presence in any country. The USA
PATRIOT Act also requires the Secretary of the Treasury to prescribe, by
regulations to be issued jointly with the federal banking regulators and certain
other agencies, minimum standards that financial institutions must follow to
verify the identity of customers, both foreign and domestic, when a customer
opens an account. In addition, the USA PATRIOT Act contains a provision
encouraging cooperation among financial institutions, regulatory authorities and
law enforcement authorities with respect to individuals, entities and
organizations suspected of engaging in terrorist acts or money laundering
activities.
During the first quarter of 2002, the Financial Crimes Enforcement Network
(FinCEN), a bureau of the Department of the Treasury, issued proposed and
interim regulations as mandated by the USA PATRIOT Act that would: (i) prohibit
certain financial institutions from providing correspondent accounts to foreign
shell banks; (ii) require such financial institutions to take reasonable steps
to ensure that correspondent accounts provided to foreign banks are not being
used to indirectly provide banking services to foreign shell banks; (iii)
require certain financial institutions that provide correspondent accounts to
foreign banks to maintain records of the ownership of such foreign banks and
their agents in the United States; (iv) require the termination of correspondent
accounts of foreign banks that fail to turn over their account records in
response to a lawful request from the Secretary of the Treasury or the Attorney
General; and (v) encourage information sharing among financial institutions and
federal law enforcement agencies to identify, prevent, deter and report money
laundering and terrorist activity. To date, it has not been possible to predict
the impact the USA PATRIOT ACT and its implementing regulations may have on the
Company or the Bank in the future.
Special Note Concerning Forward-Looking Statements
This document (including information incorporated by reference) contains, and
future oral and written statements of the Company and its management may
contain, forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to the financial condition, results
of operations, plans, objectives, future performance and business of the
Company. Forward-looking statements, which may be based upon beliefs,
expectations and assumptions of the Company's management and on information
currently available to management, are generally identifiable by the use of
words such as "believe", "expect", "anticipate", "plan", "intend", "estimate",
"may", "will", "would", "could", "should" or other similar expressions.
Additionally, all statements in this document, including forward-looking
statements, speak only as of the date they are made, and the Company undertakes
no obligation to update any statement in light of new information or future
events.
A number of factors, many of which are beyond the ability of the Company to
control or predict, could cause actual results to differ materially from those
in its forward-looking statements. These factors include, among others, the
following: (i) the strength of the local and national economy; (ii) the economic
impact of September 11th; (iii) changes in state and federal laws, regulations
and governmental policies concerning the Company's general business; (iv)
changes in interest rates and prepayment rates of the Company's assets; (v)
increased competition in the financial services sector and the inability to
attract new customers; (vi) changes in technology and the ability to develop and
maintain secure and reliable electronic systems; (vii) the loss of key
executives or employees; (viii) changes in consumer spending; (ix) unexpected
results of acquisitions; (x) unexpected outcomes of existing or new litigation
involving the Company; and (xi) changes in accounting policies and practices.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Additional 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.
14
SCHEDULE 1
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
AVERAGE BALANCE SHEETS
FOR THREE MONTHS ENDED FOR YEAR ENDED
MARCH 31, 2002 DECEMBER 31, 2001
-------------- -----------------
Cash and Due From Banks $ 1,973,385 $ 2,486,233
Federal Funds Sold 102,056 887,003
Investment Securities (Taxable) 4,709,813 7,757,898
Loans:
Commercial 31,197,612 31,238,702
Commercial Real Estate 66,004,460 64,175,781
Residential Real Estate 24,852,841 24,960,508
Industrial Revenue Bonds 1,184,576 1,997,198
Leases 953,457 1,127,594
Installment and Consumer 338,337 238,885
----------------------- -----------------------
Total Loans 124,531,283 123,738,668
Less: Allowance for Loan Losses (1,917,317) (1,965,799)
----------------------- -----------------------
Net Loans 122,613,966 121,772,869
Fixed Assets 175,890 161,100
Other Assets 2,418,490 2,257,797
----------------------- -----------------------
Total Assets $ 131,993,600 $ 135,322,900
======================= =======================
Demand Deposits $ 6,455,838 $ 7,264,187
Interest Bearing Deposits
NOW 1,912,009 2,113,772
Money Market 48,699,395 56,750,217
Time Deposits 60,713,969 55,951,694
----------------------- -----------------------
Total Deposits 117,781,211 122,079,870
Federal Funds Purchased 1,169,944 943,167
Subordinated Note 3,000,000 2,816,438
Other Liabilities 915,846 1,112,456
----------------------- -----------------------
Total Liabilities 122,867,001 126,951,931
Equity Capital 9,126,599 8,370,969
----------------------- -----------------------
Total Liabilities and Capital $ 131,993,600 $ 135,322,900
======================= =======================
15
SCHEDULE 2
LOAN SUMMARY
The following table summarizes the distribution of the Company's loan portfolio
expressed in dollar amounts and as a percentage of the total portfolio as of
March 31, 2002 and December 31, 2001.
MARCH 31, 2002 DECEMBER 31, 2001
-------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT
---------------- ----------- ----------------- ------------
Commercial $ 30,484,564 24.05% $ 28,224,755 22.52%
Real Estate:
Construction 13,723,592 10.83% 17,000,955 13.56%
Commercial 60,534,705 47.77% 57,997,188 46.28%
Residential 19,691,747 15.54% 19,607,032 15.65%
Industrial Revenue Bonds
and Municipals 1,176,115 0.93% 1,196,306 0.95%
Leasing Finance Receivable 856,988 0.68% 1,022,014 0.82%
Installment and Consumer 252,778 0.20% 272,611 0.22%
---------------- ----------- ----------------- ------------
Total Loans $ 126,720,489 100.00% $ 125,320,861 100.00%
================ =========== ================= ============
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 March 31, 2002.
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: May 10, 2002 /s/ George R. Schonath
----------------------
George R. Schonath
Chief Executive Officer
Date: May 10, 2002 /s/ Susan J. Hauke
------------------
Susan J. Hauke
Vice President Finance and
Chief Accounting Officer
18