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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1999
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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
P.O. Box 190
Pewaukee, Wisconsin 53072-0190
------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 523-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of August 11, 1999, the Issuer had 1,000,000 share of $0.01 par value Common
Stock issued and outstanding.
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INVESTORSBANCORP, INC.
FORM 10-QSB INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 1999 (Unaudited) and
December 31, 1998.................................................................. 3
Consolidated Statements of Income - For the Three and Six Months
Ended June 30, 1999 and 1998 (Unaudited).......................................... 4
Consolidated Statements of Changes in Shareholders' Equity - For the
Three and Six Months Ended June 30, 1999 and 1998 (Unaudited)...................... 6
Consolidated Statement of Cash Flows - For the Six Months Ended
June 30, 199 and 1998 (Unaudited)................................................. 7
Notes to the Consolidated Financial Statements (Unaudited)......................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 20
Item 2. Changes in Securities.................................................... 20
Item 3. Defaults Upon Senior Securities.......................................... 20
Item 4. Submission of Matters to a Vote of Security Holders........................ 20
Item 5 Other Information......................................................... 20
Item 6. Exhibits and Reports on Form 8-K........................................ 20
Signatures......................................................................... 21
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INVESTORSBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, DECEMBER 31,
-------- ------------
1999 1998
---- ----
ASSETS
Cash and due from banks $ 1,974,385 $ 1,049,145
Federal funds sold 70,000 540,000
Available for sale securities 7,400,000 14,980,000
Held to maturity securities, fair value of $3,980,493 -- 3,980,493
Loans, less allowance for loan losses of $588,445 and
$395,804, respectively 58,818,585 39,184,712
Mortgage loans held for sale 692,350 2,232,657
Furniture and equipment, net 112,574 126,760
Accrued interest receivable and other assets 730,652 1,007,615
----------- -----------
Total assets $69,798,546 $63,101,382
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $ 3,543,824 $ 2,616,842
Savings and NOW accounts 43,341,933 37,172,478
Time 15,066,555 15,215,270
----------- -----------
Total deposits 61,952,312 55,004,590
Accrued interest payable and other liabilities 540,259 912,551
----------- -----------
Total liabilities 62,492,571 55,917,141
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Shareholders' equity:
Preferred stock, $0.01 par value; shares authorized
1,000,000; no shares issued and outstanding -- --
Common stock, $0.01 par value; shares authorized
9,000,000; shares issued and outstanding 1,000,000 10,000 10,000
Additional paid in capital 6,979,900 6,979,900
Retained earnings 316,075 194,341
----------- -----------
Total shareholders' equity 7,305,975 7,184,241
----------- -----------
Total liabilities and shareholders' equity $69,798,546 $63,101,382
=========== ===========
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INVESTORSBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Interest income:
Interest and fees on loans $ 1,102,358 $ 564,037 $ 2,050,814 $ 886,544
Interest on securities 101,314 67,946 295,062 87,012
Interest on federal funds sold 17,707 99,464 48,901 179,395
----------- ----------- ----------- -----------
Total interest income 1,221,379 731,447 2,394,777 1,152,951
Interest expense - interest on deposits 686,618 398,358 1,357,886 596,140
----------- ----------- ----------- -----------
Net interest income before provision for
loan losses 534,761 333,089 1,036,891 556,811
Provision for loan losses 84,872 47,316 192,641 136,011
----------- ----------- ----------- -----------
Net interest income after provision for
loan losses 449,889 285,773 844,250 420,800
----------- ----------- ----------- -----------
Noninterest income:
Service charges 7,974 3,897 14,952 6,271
Service release premiums 170,971 114,989 362,674 200,668
Management services fees 220,474 187,489 433,885 377,941
Other income 6,356 -- 38,376 1,834
----------- ----------- ----------- -----------
Total noninterest income 405,775 306,375 849,887 586,714
----------- ----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 529,034 342,046 998,117 690,410
Occupancy expenses 22,591 20,421 44,131 42,638
Equipment expenses 15,886 15,121 28,957 30,698
Other expenses 120,425 121,278 244,993 231,929
----------- ----------- ----------- -----------
Total noninterest expense 687,936 498,866 1,316,198 995,675
----------- ----------- ----------- -----------
Income before income taxes 167,728 93,282 377,939 11,839
Income tax expense (benefit) 64,242 24,259 144,492 (25,041)
----------- ----------- ----------- -----------
Income before cumulative effect of a
change in accounting principle 103,486 69,023 233,447 36,880
----------- ----------- ----------- -----------
Cumulative effect of expensing start-up costs
as incurred, net of income taxes -- -- 111,713 --
----------- ----------- ----------- -----------
Net income $ 103,486 $ 69,023 $ 121,734 $ 36,880
=========== =========== =========== ===========
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INVESTORSBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(UNAUDITED)
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Per share amounts:
Basic earnings per share:
Income before cumulative effect of a change in
accounting principle $ 0.10 $ 0.07 $ 0.23 $ 0.04
Cumulative effect of expensing start-up
costs as incurred -- -- 0.11 --
-------- -------- -------- --------
Net income $ 0.10 $ 0.07 $ 0.12 $ 0.04
======== ======== ======== ========
Diluted earnings per share:
Income before cumulative effect of a change in
accounting principle $ 0.10 $ 0.07 $ 0.23 $ 0.04
Cumulative effect of expensing start-up
costs as incurred -- -- 0.11 --
-------- -------- -------- --------
Net income $ 0.10 $ 0.07 $ 0.12 $ 0.04
======== ======== ======== ========
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INVESTORSBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
Retained Total
Common Earnings Shareholders'
Stock Surplus (Deficit) Equity
----- ------- --------- ------
BALANCE, December 31, 1997 $ 10,000 $6,979,900 $ (102,900) $6,887,000
Net income for first six months of 1998 -- -- 36,880 36,880
---------- ---------- ---------- ----------
BALANCE, June 30, 1998 $ 10,000 $6,979,900 $ (66,020) $6,923,880
========== ========== ========== ==========
BALANCE, December 31, 1998 $ 10,000 $6,979,900 $ 194,341 $7,184,241
Net income for first six months of 1999 -- -- 121,734 121,734
---------- ---------- ---------- ----------
BALANCE, June 30, 1999 $ 10,000 $6,979,900 $ 316,075 $7,305,975
========== ========== ========== ==========
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INVESTORSBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
----------------
June 30,
--------
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 121,734 $ 36,880
Adjustments to reconcile net income to net cash
net cash used in operating activities
Depreciation 20,304 12,648
Provision for loan loss 192,641 136,011
Amortization of organizational costs -- 24,366
Benefit for deferred taxes (53,100) (25,041)
Net decrease in mortgage loans held for sale 1,540,307 --
(Increase) decrease in assets:
Interest receivable (20,132) (128,316)
Other assets 350,195 (49,191)
Increase (decrease) in liabilities:
Accrued interest (191,670) 208,456
Taxes payable (43,070) --
Other liabilities (137,552) 45,682
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Net cash provided by operating activities 1,779,657 261,495
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Cash flows from investing activities:
Net decrease (increase) in federal funds 470,000 (340,000)
Proceeds from sales of available for sale securities 10,775,000 3,775,000
Purchase of available for sale securities (3,195,000) (11,535,000)
Proceeds from maturity of held to maturity securities 3,980,493 --
Purchase of furniture and equipment (6,118) (4,045)
Net increase in loans (19,826,514) (18,515,195)
------------ -----------
Net cash used in investing activities (7,802,139) (26,619,240)
------------ -----------
Cash flows from financing activities:
Net increase in deposits 6,947,722 26,330,099
------------ -----------
Net cash provided by financing activities 6,947,722 26,330,099
------------ -----------
Net increase (decrease) in cash and due from banks 925,240 (27,646)
Cash and due from banks, beginning of period 1,049,145 1,248,803
------------ -----------
Cash and due from banks, end of period $ 1,974,385 $ 1,221,157
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,549,556 $ 387,684
============ ===========
Income taxes $ 60,000 $ --
============ ===========
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INVESTORSBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(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.
NOTE 2. ACCOUNTING POLICIES
Basis of Presentation - The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management of the Company, all adjustments
necessary to present fairly the financial position as of June 30, 1999 and
December 31, 1998 and the results of operations and cash flows for the three
months and six months ended June 30, 1999 have been made. Such adjustments
consisted only of normal recurring items. Operating results for the three months
and six months ended June 30, 1999 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1999. 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, 1998.
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. All significant intercompany accounts and transactions
have been eliminated in the consolidated financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion provides additional analysis of the financial
statements and should be read in conjunction with this information. This
discussion focuses on significant factors that affected the Company's earnings
for the periods ended June 30, 1999 and 1998. As of June 30, 1999 and 1998, the
Bank was the only subsidiary of the Company and its operations contributed all
of the revenue and expenses.
Results of Operations
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
During the quarter ended June 30, 1999, the Company reported net income of
$103,486, or $0.10 per share, as compared to net income of $69,023, or $0.07 per
share for the quarter ended June 30, 1998. This enhanced profitability was
primarily attributable to a significant increase in earning assets and the
absence of non-recurring expenses which were incurred during the Company's
initial development stage.
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 to $534,761 for the
quarter ended June 30, 1999 from $333,089 for the quarter ended June 30, 1998.
Significantly higher loan volumes resulted in a substantial increase in interest
and fee income on loans which totaled $1,102,358 for the three months ended June
30, 1999 compared to $564,037 for the three months ended June 30, 1998. The
majority of interest income on loans was derived from the commercial and
commercial real estate loan portfolios which, in aggregate, comprised 80.0% of
total loans at June 30, 1999. Interest earned on investment securities and
federal funds sold totaling $119,021 and $167,410, respectively, were the other
components of interest income. While the direction of future interest rates,
competition, and other factors may have a significant impact, management
anticipates interest income will continue to increase proportionately with the
growth of the loan portfolio and other investments.
Interest expense similarly increased to $686,618 for the quarter ended June 30,
1999 from $398,358 for the quarter ended June 30, 1998. Interest expense
consisted predominantly of interest paid on money market accounts totaling
$499,169 and certificates of deposit totaling $180,549 for the quarter ended
June 30, 1999. Interest expense is anticipated to continue to rise in 1999 as
management expects these deposit instruments will remain the primary funding
sources utilized by the Company to fund additional growth.
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Provision for Loan Losses
The allowance for loan losses increased to $588,445 as of June 30, 1999 from
$395,804 as of December 31, 1998. The allowance for loan losses is established
through a provision for loan losses charged to expense. Due in large part to
substantial loan growth, a loan loss provision of $84,872 was expensed in the
quarter ended June 30, 1999 as compared to $47,316 during the three months ended
June 30, 1998. The allowance for loan losses remained at approximately 1.00% of
total loans, net of residential mortgage loans held for sale on the secondary
market.
Loans are charged against the allowance for loan losses when management believes
that the collectibility of the principal is unlikely. The allowance is an amount
that management believes will be adequate to absorb possible losses on existing
loans that may become uncollectible, based on evaluation of the collectibility
of loans and prior loan loss experience. The evaluations take into consideration
such factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrower's ability to pay. While management uses
the best information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions. Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. A loan is impaired when it
is probable the creditor will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement.
There were no loan charge-offs or recoveries, nor any impaired loans during 1998
or the first half of 1999. While a comprehensive analysis of the allowance for
loan losses is somewhat difficult due to the Company's relatively short
operating history, management believes that the allowance was at an adequate
level at June 30, 1999 based on the composition of the portfolio as well as
regulatory guidelines.
Non-Interest Income and Expenses
Non-interest income for the quarter ended June 30, 1999 totaled $405,775 as
compared to $306,375 for the quarter ended June 30, 1998. Management service
fees totaled $220,474 for the quarter ended June 30, 1999 compared to $187,489
for the quarter ended June 30, 1998. The Company charges Bando McGlocklin
Capital Corporation (BMCC), the former principal shareholder of the Company, a
management fee for salaries and employee benefits of common management, as well
as a loan servicing fee based on total loans and leases under management. As of
June 30, 1999 BMCC had loans under management totaling $105,905,233 and leased
properties of $24,977,745. Other sources of non-interest income included
$170,971 of service release fees received in the three months ended June 30,
1999 compared to $114,989 for the three months ended June 30, 1998, from the
sale of residential mortgages originated for the secondary market. Service
charges and other income were $14,330 compared to $3,897 for the same periods.
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Non-interest expense increased to $687,936 for the three months ended June 30,
1999 as compared to $498,866 for the three months ended June 30, 1998. The
increase of $189,070 was primarily due to salaries and employee benefits expense
increasing $186,988 due to additional employees and regular compensation
increases. The Company as of June 30, 1999 had 29 full time equivalent employees
and as of June 30, 1998 there were approximately 18 full time equivalents.
Salaries and employee benefits totaled $529,034 and $342,046 for the three
months ended June 30, 1999 and 1998, respectively. These amounts include
salaries that were reimbursed through the management service fee noted above.
The other operating expenses, which included occupancy and fixed asset expense,
data processing fees, advertising, investor communications, and professional
fees, increased $2,082.
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 are related principally
to tax exempt interest income, allowance for loan losses, depreciation, and
operating loss carryforwards that will be used to offset future net operating
income.
For the quarter ended June 30, 1999 the Company recorded federal and state
income tax expense of $64,242. The Company also has a deferred tax asset of
$146,688. For the quarter ended June 30, 1998 the Company recorded a federal and
state income tax expense of $24,259 and had a deferred tax asset of $91,491.
Management believes it is more likely than not that the deferred tax asset will
be fully realized. The effective rate for the expense for income taxes for the
quarter ended June 30, 1999 was 38.3%.
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
During the six months ended June 30, 1999 the Company reported net income of
$121,734 or $0.12 per share as compared to $36,880 or $0.04 per share for the
six months ended June 30, 1998. Net income as of June 30, 1999 included the
cumulative effect of a change in accounting principle that totaled $111,713
after income taxes. The Company adopted Statement of Position 98-5 that requires
all entities to expense start-up costs as incurred. Income before cumulative
effect of a change in accounting principle was $233,447 or $0.23 per share for
the quarter ended June 30, 1999.
Net Interest Income
Total net interest income for the period nearly doubled to $1,036,891 for the
six months ended June 30, 1999 from $556,811 for the six months ended June 30,
1998. Interest income for the first half of 1999 consisted of $2,050,814 of
interest on loans and fees on loans, $48,901 of interest on federal funds sold
and $295,062 of interest on investment securities. During the first half of
1998, comparative amounts were $886,544, $179,395 and $87,012, respectively.
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Management anticipates that interest income will continue to grow along with the
loan portfolio and other assets of the Company.
Interest expense also increased to $1,357,886 for the six months ended June 30,
1999 as compared to $596,140 for the six months ended June 30, 1998. Average
deposits for the six months ended June 30, 1999 were $58,518,303 compared to
$22,668,790 for the six months ended June 30, 1998. As deposits continue to grow
the interest expense will also grow.
Provision for Loan Losses
A loan loss provision of $192,641 was expensed during the six months ended June
30, 1999 as compared to $136,011 during the first six months of 1998. There were
no loan charge-offs or recoveries nor any impaired loans for the six months
ended June 30, 1999 and 1998.
Non-Interest Income and Expenses
Non-interest income for the six months ended June 30, 1999 totaled $849,887 as
compared to $586,714 for the six months ended June 30, 1998. Management service
fees totaled $433,885 for the first six months of 1999 as compared to $377,941
for the first six months of 1998. Service release fees were $362,674 compared to
$200,668 for the same periods. In addition, service charges related to deposit
accounts totaled $14,952 and other income totaled $38,376 during the six months
ended June 30, 1999 compared to $6,271 and $1,834, respectively, for the six
months ended June 30, 1998.
Non-interest expense increased to $1,316,198 for the six months ended June 30,
1998 as compared to $995,675 for the six months ended June 30, 1998. The
increase of $320,523 was primarily due to salary and employee benefit expense
increasing $307,707 due to additional employees and regular compensation
increases. The Company as of June 30, 1999 had 29 full time equivalent employees
and as of June 30, 1998 there were approximately 18 full time equivalents.
Salaries and employee benefits totaled $998,117 and $690,410 for the six months
ended June 30, 1999 and 1998, respectively. These amounts included salaries that
were reimbursed through the management service fee noted above. The other
operating expenses, which included occupancy and fixed asset expense, data
processing fees, advertising, investor communications, and professional fees,
were $318,081 compared to $305,265 for the same periods, an increase of $12,816.
For the six months ended June 30, 1999 the Company recorded federal and state
income tax expense of $144,492 compared to an income tax benefit of $25,041 for
the six months ended June 30, 1998. The Company also has a deferred tax asset of
$146,688. Management believes it is more likely than not that the deferred tax
asset will be fully realized. The effective rate for the expense for income
taxes for the six months ended June 30, 1999 was 38.2%.
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FINANCIAL CONDITION
Assets
The Company reported total assets of $69,798,546 as of June 30, 1999 versus
$63,101,382 as of December 31, 1998, a 10.6% increase. Cash and due from banks
and federal funds sold increased to $2,044,385 as of June 30, 1999 from
$1,589,145 at December 31, 1998. The Company's investment securities portfolio
decreased to $7,400,000 as of June 30, 1999 from $18,960,493 at year end. The
$11,560,493 decrease in the investment portfolio was the result of funding loan
commitments in the first half of 1999. As of June 30, 1999 investment securities
consisted of taxable variable rate demand notes secured by irrevocable letters
of credit from federally insured, domestic financial institutions. Although the
notes have a long term maturity structure, the interest rate is adjustable
weekly and the holder has the option to liquidate the security at 100% of par
value within seven days upon proper notice. These instruments provide the
Company with ready liquidity to provide for loan funding requirements.
Management believes that the investment portfolio is adequately diversified.
Loans continued to grow during the quarter. As of June 30, 1999 loans rose 50.3%
to $59,407,030 compared to $39,580,516 as of December 31, 1998. While most of
the growth occurred in the commercial, industrial and commercial real estate
segments of the loan portfolio, residential real estate loans, including home
equity credit facilities, also grew considerably. It is management's focus to
grow the loan portfolio as much as possible. For the funding source of this loan
growth the bank does not rely solely on its liquid assets, such as investments.
The Bank has access to various off-balance sheet sources. As of June 30, 1999
the Company had $692,350 of loans held for sale. As of December 31, 1998
residential mortgage loans originated for sale on the secondary market totaled
$2,232,657. Excluding the mortgage loans originated for sale, the allowance for
loan losses remained at approximately 1.00% of gross loans, totaling $588,445 at
June 30, 1999 and $395,804 at year end 1998. In addition to loans outstanding,
the Company had unfunded loan commitments totaling $24,063,722 as of June 30,
1999, although the Bank intends to participate approximately $8,400,000 of those
loans to BMCC and other third party lenders. Loan demand continues to remain
strong for both commercial and residential loans in the Company's trade area.
Despite the recent increase in residential loan rates, the Company continues to
grow its market share.
Other assets at June 30, 1999 totaled $843,226 compared to $1,134,375 at
December 31, 1998. Other assets at June 30, 1999 included net furniture and
equipment of $112,574, accrued interest receivable on loans and investments of
$346,468, excess servicing assets of $134,919 relating to loans sold to a third
party, deferred tax assets of $146,688 and other miscellaneous assets of
$102,577. A significant portion of the decrease in other assets was attributable
to the adoption of Statement of Position 98-5 which required the Company to
expense in the first quarter the remaining organizational and start-up costs of
$183,780 and to the decrease of $136,428 in a receivable from a related company.
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Liabilities
Total deposits increased to $61,952,312 at June 30, 1999 from $55,004,590 as of
year end 1998. Indexed money market accounts comprised the largest portion of
the deposit base totaling $42,022,568 as of June 30, 1999 compared to
$35,842,546 as of December 31, 1998. Time certificates of deposit decreased to
$15,066,555 compared to $15,215,270 as of year end. Time deposits included
retail brokered deposits with maturities ranging from 1 to 3 years of $6,563,000
and $9,645,000 as of June 30, 1999 and December 31, 1998, respectively. In order
for the Company to facilitate continued loan growth, management expects to
continue to aggressively market and competitively price its money market and
certificate of deposit products. Other deposits outstanding as of June 30, 1999
included non-interest bearing accounts totaling $3,543,824 and interest bearing
checking accounts (NOW accounts) of $1,319,365.
Other liabilities decreased to $540,259 as of June 30, 1999 from $912,551 at
December 31, 1998. Other liabilities as of June 30, 1999 consisted primarily of
accrued interest payable totaling $261,381, as well as accrued expenses payable
of $109,548, retained loan discount relating to loans sold to a third party
totaling $118,900, and other miscellaneous liabilities of $50,430. The decrease
was the result of lower accrued interest payable and lower accrued expenses.
CAPITAL RESOURCES
Capital ratios applicable to the Bank and the Company at June 30, 1999 and
December 31, 1998 are as follows:
Total Tier I
Risk-based Risk-based Leverage
Capital Capital Ratio
------- ------- -----
Regulatory Capital Requirements:
Minimum 8.0% 4.0% 4.0%
Well-capitalized 10.0% 6.0% 5.0%
At June 30, 1999
Bank 13.0% 12.0% 10.9%
Company 13.0% 12.0% 10.9%
At December 31, 1998
Bank 15.3% 14.5% 16.7%
Company 15.3% 14.5% 16.7%
Management anticipates its capital ratios will continue to decline in 1999 as
additional loan growth occurs; however, management intends to maintain capital
levels well in excess of minimums established by the regulatory authorities. The
Bank has committed to the FDIC that
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the ratio of Tier I capital to total assets will not be less than 8% for
the first three years of operations commencing September 8, 1997.
The application for a bank charter and for federal deposit insurance stated that
the Bank would retain its earnings during the first three years of operation. As
such, no dividends will be paid by the Company to the shareholders during that
period. 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.
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 repayment of loan principal,
the Company maintains a significant level of liquid assets to provide for
potential funding needs. In addition to federal funds sold and cash balances as
of June 30, 1999 the Company held $7,400,000 of marketable securities. Should an
immediate need for funds arise, these assets may be readily liquidated with
nominal risk of principal loss. Additionally, the Company has access to various
alternative sources of funds including the purchase of federal funds from
correspondent banks, the sale of commercial loans, and the acquisition of
brokered deposits. Further, the Bank has a $3,000,000 revolving line of credit
with one of its correspondent banks. There was no outstanding balance on the
note as of June 30, 1999. Management believes that current liquidity levels are
sufficient to meet anticipated loan demand, as well as absorb deposit
withdrawals.
Asset/Liability Management
The primary function of asset/liability management is to identify, measure and
control the extent to which changes in interest rates, commodity prices or
equity prices adversely affect a financial institution's earnings or economic
capital. The Company's strategy is to optimize and stabilize net income across a
wide range of interest rate cycles while maintaining adequate liquidity and
conforming to all applicable capital and other regulatory requirements.
Changes in net interest income, other than volume related changes, arise when
interest rates on assets reprice in a time frame or interest rate environment
that is different from the repricing period for liabilities. Changes in net
interest income also arise from changes in the mix of interest earning assets
and interest bearing liabilities.
In the normal course of business, the Company engages in off-balance sheet
activity to hedge interest rate risk. As of June 30, 1999 the Company had one
interest rate swap agreement outstanding with a notional value totaling
$3,027,000, 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 which is based on the federal funds rate. These instruments allow
management to more closely balance the repricing opportunities of the Company's
assets and liabilities, and thereby, reduce potential rate risk exposure.
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The Company does not expect to experience any significant fluctuations in its
net interest income as a consequence of changes in interest rates.
Unlike most industries, virtually all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance and results of operations than
the effect of general levels of inflation. Interest rates do not necessarily
move in the same direction or magnitude as the prices of goods and services as
measured by the Consumer Price Index. As discussed previously, the Company's
interest rate gap position in conjunction with the direction of the movement in
interest rates is an important factor in the Company's operating results.
YEAR 2000
The Year 2000 has posed a unique set of challenges to those industries reliant
on information technology. As a result of methods employed by early programmers,
many software applications and operation programs may be unable to distinguish
the Year 2000 from the Year 1900. If not effectively addressed, this problem
could result in the production of inaccurate data, or, in the worst cases, the
inability of the systems to continue to function altogether. Financial
institutions are particularly vulnerable due to the industry's dependence on
electronic data processing systems.
In 1997, the Company moved into a newly constructed building. The move helped to
make the Year 2000 problem manageable because most of the Company's systems were
new purchases and the Year 2000 problem was factored into the Company's
decisions. The move also started the process of identifying the hardware and
software issues required assuring Year 2000 compliance. The Company began by
assessing the issues related to the Year 2000 and the potential for those issues
to adversely affect the Company's operations.
The Company has established a Year 2000 management committee to deal with this
issue. It is the mission of this committee to identify areas subject to
complication related to the Year 2000 and to initiate remedial measures designed
to eliminate any adverse effects on the Company's operations. The committee has
identified and tested all mission-critical software and hardware that may be
adversely affected by the Year 2000 and has required vendors to represent that
the systems and products provided are or will be Year 2000 compliant.
The Company licenses all software used in conducting its business from third
party vendors. None of the Company's software has been internally developed. The
Company has developed a comprehensive list of all software, all hardware and all
service providers used by the Company. Every vendor and commercial customer has
been contacted regarding the Year 2000 issue. The vendor of the primary software
in use at the Company released its Year 2000 compliant software in September,
1998. Testing at the Company, using test scripts developed by the vendor was
completed in the fall of 1998. The vendor has conducted proxy testing and has
had an independent company rate the proxy testing. The Company's Year 2000
committee has analyzed the published results by the independent company and is
satisfied that this vendor has proved itself Year 2000 compliant. The vendor
will be conducting additional seminars and will report its progress monthly to
the Company using a management report. In addition, the Company
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continues to monitor all other major vendors of services to the Company for Year
2000 issues in order to avoid shortages of supplies and services in the coming
months.
There are three third party utilities with which the Company has an important
relationship; Ameritech, U S Xchange (phone services) and Wisconsin Electric
Company (gas and electric service). Ameritech announced March 31, 1999 that
nearly all of their network components and IT systems were Year 2000 ready. U S
Xchange has issued a Year 2000 Readiness Disclosure statement dated April 8,
1999 stating that they will be "Y2K Compliant" well before the Year 2000.
Wisconsin Electric states that they are on schedule to have critical gas,
electric and steam systems ready. The Company has not identified any practical,
long-term alternatives for these basic utility services. In the event that the
utilities significantly curtail or interrupt their services to the Company, it
would have a significant adverse effect on the Company's ability to conduct its
business.
The Company has also tested all heating and air conditioning units, vault doors,
alarm systems, networks, etc. and is not aware of any significant problems with
such systems.
The Company's cumulative costs of the Year 2000 project through the quarter
ended June 30, 1999 totaled $13,000. At the present time, no situations that
will require material cost expenditures to become fully compliant have been
identified. However, the Year 2000 is pervasive and complex and can potentially
affect any computer process. Accordingly, no assurance can be given that Year
2000 compliance can be achieved without additional unanticipated expenditures
and uncertainties that might affect future financial results. The estimated
total cost of the Year 2000 project is currently $20,000. This includes costs to
upgrade software, test hardware, including the local area network, and replace
equipment specifically for the purpose of Year 2000 compliance and certain
administrative expenditures.
It is not possible at this time to quantify the estimated future costs due to
possible business disruption caused by vendors, suppliers, customers or even the
possible loss of electric power or phone service; however, such costs could be
substantial.
The Company is committed to a plan for achieving compliance, focusing not only
on its own data processing systems, but also on its loan customers. The
management committee has proposed policy and procedure changes to help identify
potential risks to the Company and to gain an understanding of how customers are
managing the risks associated with the Year 2000. The Company is assessing the
impact, if any, the Year 2000 will have on its credit risk and loan
underwriting. In connection with potential credit risk related to the Year 2000
issue, the Company has contacted its commercial loan customers regarding their
level of preparedness for the Year 2000.
The Company has developed contingency plans for various Year 2000 problems and
continues to revise those plans based on testing results and vendor
notifications.
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Exchange Act. The Company intends such forward-looking statements to be covered
by the safe harbor provisions for forward-looking statements contained in the
Private Securities Reform Act of 1995, and is including this statement for
purposes of these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies and
expectations of the Company, are generally identifiable by the use of the words
"believe", "expect", "intend", "anticipate", "estimate", "project" or similar
expressions. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a
material adverse affect on the operations and future prospects of the Company
and the subsidiaries include, but are not limited to, changes in interest rates,
general economic conditions guidelines, including the condition of the local
real estate market, legislative/regulatory changes, monetary and fiscal policies
of the U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board, the quality or composition of the loan or investment portfolios,
demand for loan products, deposit flows, competition, demand for financial
services in the Company's market area and accounting principles and policies.
These risks and uncertainties should be considered in evaluating forward-looking
statement and undue reliance should not be placed on such statements.
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DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
AVERAGE BALANCE SHEETS
For Six Months Ended For Year Ended
June 30, 1999 December 31, 1999
------------- -----------------
Cash and due from banks $ 1,130,169 $ 900,146
Federal funds sold 2,240,663 6,131,460
Investment securities 11,846,905 6,245,720
Loans:
Commercial 3,771,634 8,793,611
Commercial Real Estate 37,864,471 13,519,798
Residential Real Estate 8,930,395 5,787,793
Installment and consumer 281,807 121,804
------------ ------------
Total loans 50,848,307 28,223,006
Less allowance for loan losses (484,829) (233,614)
------------ ------------
Net loans 50,363,478 27,989,392
Fixed assets 121,086 124,374
Other assets 693,587 722,592
------------ ------------
Total assets $ 66,395,888 $ 42,113,684
============ ============
Demand deposits $ 2,997,437 $ 2,157,659
Interest bearing deposits
NOW 1,184,790 781,378
Money market 40,569,630 22,515,705
Time deposits 13,798,069 9,220,705
------------ ------------
Total deposits 58,549,926 34,675,447
Other liabilities 689,458 525,487
------------ ------------
Total liabilities 59,239,384 35,200,934
Equity capital 7,156,504 6,912,750
------------ ------------
Total liabilities and capital $ 66,395,888 $ 42,113,684
============ ============
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the
Company or its subsidiary is a party.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 6, 1999 the annual meeting of shareholders was held. At
the meeting, Salvatore L. Bando and Terry L. Mather were
elected to serve as Class II directors with terms expiring in
2002. Continuing as Class I directors (term expires in 2001)
are George R. Schonath and Jon McGlocklin. Continuing as a
Class III director (term expires in 2000) is Donald E. Sydow.
The shareholders ratified the appointment of Virchow, Krause &
Company LLP as the Company's independent public accountants
for the year ending December 31, 1999.
There were 1,000,000 issued and outstanding shares of Common
Stock outstanding at the time of the annual meeting. The
voting on each item presented at the annual meeting was as
follows:
For Withheld
--- --------
Election of Directors
Salvatore L. Bando 862,158 3,345
Terry L. Mather 862,957 2,546
For Not For Abstain Total
--- ------- ------- -----
Ratification of Accountants 859,425 4,562 1,516 865,503
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
11 Statement Regarding Computation of Per Share
Earnings
27 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during the quarter ended June 30, 1999.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
INVESTORSBANCORP, INC.
(Registrant)
Date: August 11, 1999 /s/ George R. Schonath
----------------------
George R. Schonath
President
Date: August 11, 1999 /s/ Susan J. Hauke
------------------
Susan J. Hauke
Chief Accounting Officer
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