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, 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
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
W239 N1700 Busse Road
Waukesha, Wisconsin 53188-1160
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (262) 523-1000
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of August 13, 2002, the Issuer had 940,000 shares of $0.01 par value common
stock issued and outstanding.
INVESTORSBANCORP, INC.
FORM 10-QSB INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002 (Unaudited)
and December 31, 2001............................................ 3
Consolidated Statements of Income - For the Three and Six
Months Ended June 30, 2002 and 2001 (Unaudited).................. 4
Consolidated Statements of Changes in Shareholders' Equity -
For the Six Months Ended June 30, 2002 and 2001 (Unaudited)...... 5
Consolidated Statements of Cash Flows - For the Three and
Six Months Ended June 30, 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........................................ 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
2
INVESTORSBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
(UNAUDITED)
ASSETS
Cash and due from banks $ 2,031,804 $ 2,004,926
Available for sale securities - stated at fair value 2,429,991 5,347,264
Loans, less allowance for loan losses of $2,071,831
and $1,884,331 in 2002 and 2001, respectively 131,637,021 123,436,530
Mortgage loans held for sale 422,800 284,000
Premises and equipment, net 157,799 182,360
Accrued interest receivable and other assets 3,360,459 2,505,325
------------ ------------
TOTAL ASSETS $140,039,874 $133,760,405
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 6,846,631 $ 6,239,453
Savings and NOW 42,508,034 55,119,150
Other Time 71,949,729 58,655,079
------------ ------------
Total Deposits 121,304,394 120,013,682
Federal funds purchased 3,000,000 815,000
Other borrowings -- 3,000,000
Redeemable preferred securities of subsidiary trust 5,000,000 --
Accrued interest payable and other liabilities 1,043,562 1,040,308
------------ ------------
Total Liabilities 130,347,956 124,868,990
------------ ------------
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 3,175,499 2,374,996
Treasury stock, 110,000 shares in 2002 and 2001,
respectively, at cost (810,981) (810,981)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 9,691,918 8,891,415
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $140,039,874 $133,760,405
============ ============
3
INVESTORSBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
INTEREST INCOME:
Interest and fees on loans $1,977,445 $2,551,621 $3,868,725 $5,188,438
Interest on investment securities - taxable 18,724 119,733 41,646 266,721
Interest on federal funds sold 817 13,920 1,192 25,011
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 1,996,986 2,685,274 3,911,563 5,480,170
INTEREST EXPENSE:
Interest on deposits 806,524 1,508,476 1,585,131 3,329,584
Interest on federal funds purchased 8,817 9,081 14,908 23,933
Interest on other borrowings 51,423 68,000 101,355 135,808
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 866,764 1,585,557 1,701,394 3,489,325
NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES 1,130,222 1,099,717 2,210,169 1,990,845
Provision for loan losses 93,750 85,754 187,500 393,226
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 1,036,472 1,013,963 2,022,669 1,597,619
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Service fees 30,337 22,012 57,911 49,776
Management service fees 250,273 257,711 511,279 499,076
Service release premiums 115,054 139,382 188,507 320,858
Other income 11,435 14,209 26,481 28,778
---------- ---------- ---------- ----------
TOTAL NONINTEREST INCOME 407,099 433,314 784,178 898,488
---------- ---------- ---------- ----------
NONINTEREST EXPENSES:
Salaries 430,351 410,250 805,655 811,377
Pension, profit sharing, employee benefits 149,179 126,406 292,360 243,840
Occupancy 25,481 28,717 54,211 57,466
Furniture and equipment expenses 16,091 15,323 30,183 30,486
Data processing services 36,921 44,288 73,769 75,269
Other expenses 179,267 128,743 330,425 246,558
---------- ---------- ---------- ----------
TOTAL NONINTEREST EXPENSES 837,290 753,727 1,586,603 1,464,996
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 606,281 693,550 1,220,244 1,031,111
Less applicable income taxes 207,526 222,622 419,741 300,046
---------- ---------- ---------- ----------
NET INCOME $ 398,755 $ 470,928 $ 800,503 $ 731,065
========== ========== ========== ==========
PER SHARE AMOUNTS:
BASIC EARNINGS PER SHARE $ 0.42 $ 0.48 $ 0.85 $ 0.74
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ 0.40 $ 0.48 $ 0.81 $ 0.74
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 988,821 972,696 984,793 989,672
========== ========== ========== ==========
4
INVESTORSBANCORP, INC. AND SUBSIDIARIES
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 six months of 2001 -- -- 731,065 -- 731,065
Purchase of treasury stock -- -- -- (547,818) (547,818)
---------- ---------- ---------- ---------- ----------
BALANCES, June 30, 2001 $ 10,500 $7,316,900 $1,633,013 $ (810,981) $8,149,432
========== ========== ========== ========== ==========
BALANCES, December 31, 2001 $ 10,500 $7,316,900 $2,374,996 $ (810,981) $8,891,415
Net income for
first six months of 2002 -- -- 800,503 -- 800,503
---------- ---------- ---------- ---------- ----------
BALANCES, June 30, 2002 $ 10,500 $7,316,900 $3,175,499 $ (810,981) $9,691,918
========== ========== ========== ========== ==========
5
INVESTORSBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 800,503 $ 731,065
Adjustments to reconcile net income to net cash
flows from operating activities
Depreciation 37,645 26,597
Provision for loan losses 187,500 393,226
Net change in
Mortgage loans held for sale (138,800) (616,500)
Accrued interest receivable and other assets (855,134) 272,967
Accrued interest payable and other liabilities 3,254 (523,827)
----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES 34,968 283,528
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available for sale securities
Maturities, prepayments, sales and calls 2,917,273 7,579,981
Net increase in loans (8,387,991) (2,422,310)
Additions to premises and equipment (13,084) (122,859)
----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (5,483,802) 5,034,812
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits 1,290,712 (6,724,194)
Net change in federal funds purchased and
securities sold under repurchase agreements 2,185,000 1,050,000
(Pay off) proceeds from other borrowings (3,000,000) 500,000
Proceeds from issuance of trust preferred securities 5,000,000 --
Purchase of treasury stock -- (547,818)
----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES 5,475,712 (5,722,012)
----------- -----------
Net Change in Cash and Cash Equivalents 26,878 (403,672)
Cash and Cash Equivalents - Beginning of year 2,004,926 3,453,639
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 2,031,804 $ 3,049,967
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest $ 1,581,993 $ 3,673,138
Cash paid for income taxes $ 354,500 $ 429,000
6
INVESTORSBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 investment subsidiary as of October 20, 2000.
InvestorsBancorp Capital Trust I (the "Trust") was incorporated under Delaware
law on June 20, 2002, as a wholly-owned subsidiary of the Company to issue and
sell Capital Trust I Floating Rate Cumulative Trust Preferred Securities. The
Company issued a debenture to the Trust in exchange for the proceeds from the
sale of the securities (as described in Note 4) on June 27, 2002.
NOTE 2. ACCOUNTING POLICIES
Basis of Presentation - The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
the instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management of the Company, all adjustments necessary to present
fairly the financial position as of June 30, 2002 and December 31, 2001 and the
results of operations for the six months and three months ended June 30, 2002
and 2001 and cash flows for the six months ended June 30, 2002 and 2001 have
been made. Such adjustments consisted only of normal recurring items. Operating
results for the periods ended June 30, 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, the Trust, and the
Bank, its wholly-owned subsidiaries. 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 Bank. 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 net
fair market value of $42,000 at June 30, 2002.
NOTE 4. TRUST PREFERRED SECURITIES
On June 27, 2002, the Company purchased 155 shares of common securities of the
Trust at a price of $1,000 per share and the Trust issued 5,000 shares of Trust
Preferred Securities with a liquidation value of $1,000 per share. The proceeds
from this transaction were used by the Company to payoff $3.0 million of
subordinated debt and to increase capital at the Bank. The $5.16 million of
Trust Preferred Security debt is due on June 30, 2032, with interest payable
quarterly beginning on September 30, 2002. The interest rate is based on the
three month LIBOR rate plus 365 basis points and resets quarterly with a maximum
rate of 12% prior to June 30, 2007.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion provides additional analysis of the financial
statements and should be read in conjunction with that information. The
discussion focuses on significant factors that affected the Company's earnings
for the periods ended June 30, 2002 and 2001. The Bank and its operations
contributed substantially all of the revenue and expense during those periods.
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 JUNE 30, 2002 AND JUNE 30, 2001
During the quarter ended June 30, 2002, the Company reported net income of
$399,000, or $0.40 per share (diluted), as compared to net income of $471,000,
or $0.48 per share (diluted), for the quarter ended June 30, 2001. The $72,000
decrease in profitability was attributable to increased expenses in the areas of
salaries, employee benefits, professional fees and regulatory fees.
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 26% to $2.00 million for
the second quarter of 2002 from $2.69 million for the second quarter of 2001.
This decrease was due to lower
8
interest rates on loans with the average prime rate decreasing from 7.35% in the
second quarter of 2001 to 4.75% in the second quarter of 2002. The majority of
interest income on loans is derived from the commercial and commercial real
estate loan portfolios which comprised 80% of total loans at June 30, 2002.
Interest and fee income on loans totaled $1.98 million for the three months
ended June 30, 2002 and $2.55 million for the three months ended June 30, 2001.
Interest earned on investment securities and federal funds sold totaled $19,000
compared to $120,000 for the same periods due to decreases in the average
balances and lower interest rates between the second 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.
Interest expense decreased 45% to $867,000 for the quarter ended June 30, 2002
from $1.59 million for the quarter ended June 30, 2001 due to decreasing
interest rates. In addition, the average balance of the interest bearing
liabilities decreased 3% from the second quarter of last year. Interest expense
consists predominantly of interest paid on money market accounts, which totaled
$197,000 for the second quarter of 2002 and $655,000 for the second quarter of
2001, and certificates of deposit, which totaled $603,000 for the second quarter
of 2002 and $832,000 for the second quarter of 2001. Interest rate swap income
that is used to offset interest expense was $120,000 in the second quarter of
2002 and $80,000 in the second quarter of 2001. Interest expense on subordinated
debt and federal funds purchased totaled $60,000 compared to $77,000 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 3.16% for the second quarter of 2002
compared to 2.81% for the second quarter of 2001, a 35 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 197 basis points
due to decreases in interest rates. The average rate paid on interest bearing
liabilities decreased 232 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 $2.07 million as of June 30, 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 and the
increase is a result of an increase in total loans. A loan loss provision of
$94,000 was expensed in the quarter ended June 30, 2002 as compared to $86,000
during the quarter ended June 30, 2001. The allowance for loan losses at June
30, 2002 and June 30, 2001 was approximately 1.5% 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. Along with other financial
institutions, management shares a concern for the outlook of the economy during
the remainder of 2002. A slowdown in economic activity beginning in 2001
severely impacted several major industries as well as the economy as a whole.
Even though there are numerous indications of emerging strength, it is not
certain that this strength is sustainable. In addition, consumer confidence may
be negatively impacted by the recent substantial decline in equity prices.
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
9
real estate loans. Accordingly, the Company allocated $1.19 million (or 57% of
the total loan loss reserve) to these loans, which comprise about 80% 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 20% of
the loan portfolio. Approximately $780,000 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
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. The
Bank had eight impaired loans, which are mainly secured by real estate, totaling
$2.3 million at June 30, 2002. One loan totaling $1.27 million is secured by
real estate and represents 55% of the total impaired loans. 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 second quarter of 2002, $16,000 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 second quarter of 2002 was $6,000.
There were no loan charge-offs or recoveries during the three months ended June
30, 2002 and 2001. 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 June 30, 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 June 30,
2002 and December 31, 2001.
NONPERFORMING LOANS 6/30/02 12/31/01
------------------- ---------- ----------
Nonaccrual Loans $ 370,802 $1,937,882
Accruing Loans Past Due 90 Days or More(1) $1,647,575 $ 707,172
Restructured Loans(2) $ 278,814 $ --
- ---------------
(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 June 30, 2002 totaled $407,000 as
compared to $433,000 for the quarter ended June 30, 2001, a 6% decrease.
Management service fees were the largest component of non-interest income,
10
totaling $250,000 for the quarter ended June 30, 2002 compared to $258,000 for
the quarter ended June 30, 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 $115,000
for the quarter ended June 30, 2002 compared to $139,000 for the quarter ended
June 30, 2001. The decrease in 2002 of service release premiums is due to
smaller volume in home mortgage refinancing. Service charges related to deposit
accounts and other income totaled $42,000 compared to $36,000 for the same
period in 2001.
Non-interest expense increased 11% to $837,000 for the three months ended June
30, 2002 as compared to $754,000 for the three months ended June 30, 2001.
Salaries and employee benefits totaled $580,000 for the three months ended June
30, 2002 and $537,000 for the three months ended June 30, 2001. These amounts
included salaries that were reimbursed through the management service fee noted
above. Other operating expenses, which include occupancy and fixed asset
expense, data processing fees, advertising, investor communications, and
professional fees were $257,000 compared to $217,000, an 18% increase.
Regulatory agency fees increased $13,000 over the same period last year due to
an assessment increase. Professional fees, including network management
services, bank examination fees and trust organizational fees, increased $25,000
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 June 30, 2002, the Company recorded federal and state
income tax expense of $208,000. The Company also has a deferred tax asset of
$850,000. For the quarter ended June 30, 2001, the Company recorded a federal
and state income tax expense of $223,000 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 June 30, 2002 was 34%, as compared to 32% for the
second quarter of 2001.
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
During the six months ended June 30, 2002, the Company reported net income of
$801,000, or $0.81 per share (diluted), as compared to net income of $731,000,
or $0.74 per share (diluted), for the six months ended June 30, 2001. This
enhanced profitability was primarily attributable to a 65 basis point increase
in the interest rate spread of 3.07% for the first six months of 2002 compared
to 2.42% for the first six months of 2001. Offsetting this increase was an
increase of $141,000 in expenses during the six months ended June 30, 2002 when
compared to the six months ended June 30, 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 29% to $3.91 million for
the first six months of 2002 from $5.48 million for the first six months of
2001. This decrease was due to lower interest rates on loans with the average
prime rate decreasing from 7.99% in the first six months of 2001 to 4.75% in the
first six months of 2002. The majority of interest income on loans is derived
from the commercial and commercial real estate loan portfolios which comprised
80% of total loans at June 30, 2002. Interest and fee income on loans totaled
$3.87 million for the six months ended June 30, 2002 and $5.19 million for the
six months ended June 30, 2001. Interest earned on investment securities and
federal funds sold totaled $43,000 compared to $292,000 for the same periods due
to a decreases in the average balances and lower interest rates between the
first six months 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.
11
Interest expense decreased 51% to $1.70 million for the six months ended June
30, 2002 from $3.49 million for the six months ended June 30, 2001 due to
decreasing interest rates. Interest expense consists predominantly of interest
paid on money market accounts, which totaled $426,000 for the first six months
of 2002 and $1.52 million for the first six months of 2001, and certificates of
deposit, which totaled $1.15 million for the first six months of 2002 and $1.76
million for the first six months of 2001. Interest rate swap income that is used
to offset interest expense was $270,000 in the first six months of 2002 and
$120,000 in the first six months of 2001. Interest expense on subordinated debt
and federal funds purchased totaled $116,000 compared to $160,000 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 six months of 2002
compared to 2.42% for the first six months of 2001, a 65 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 225 basis
points due to decreases in interest rates. The average rate paid on interest
bearing liabilities decreased 290 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 $2.07 million as of June 30, 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 and the
increase is a result of an increase in total loans. A loan loss provision of
$188,000 was expensed in the six months ended June 30, 2002 as compared to
$393,000 during the six months ended June 30, 2001. The higher loan loss
provision in 2001 was the result of a loan charge-off of $222,000. The allowance
for loan losses at June 30, 2002 and June 30, 2001 was approximately 1.5% 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. Along with other financial
institutions, management shares a concern for the outlook of the economy during
the remainder of 2002. A slowdown in economic activity beginning in 2001
severely impacted several major industries as well as the economy as a whole.
Even though there are numerous indications of emerging strength, it is not
certain that this strength is sustainable. In addition, consumer confidence may
be negatively impacted by the recent substantial decline in equity prices.
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 $1.19 million (or 57% of the total loan loss
reserve) to these loans, which comprise about 80% 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 20% of the loan
portfolio. Approximately $780,000 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
12
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. The
Bank had eight impaired loans, which are mainly secured by real estate, totaling
$2.3 million at June 30, 2002. One loan totaling $1.27 million is secured by
real estate and represents 55% of the total impaired loans. 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 six months of 2002, $35,000 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 six months of 2002 was $14,000.
There were no loan charge-offs or recoveries during the six months ended June
30, 2002. During the first six months 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 June 30, 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 June 30,
2002 and December 31, 2001.
NONPERFORMING LOANS 6/30/02 12/31/01
------------------- ---------- ----------
Nonaccrual Loans $ 370,802 $1,937,882
Accruing Loans Past Due 90 Days or More(1) $1,647,575 $ 707,172
Restructured Loans(2) $ 278,814 $ --
- ---------------
(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 six months ended June 30, 2002 totaled $784,000 as
compared to $898,000 for the six months ended June 30, 2001, a 13% decrease.
Management service fees were the largest component of non-interest income,
totaling $511,000 for the six months ended June 30, 2002 compared to $499,000
for the six months ended June 30, 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
$189,000 for the six months ended June 30, 2002 compared to $321,000 for the six
months ended June 30, 2001. The decrease in 2002 of service release premiums is
due to smaller volume in home mortgage refinancing. Service charges related to
deposit accounts and other income totaled $84,000 compared to $78,000 for the
same period in 2001.
13
Non-interest expense increased 9% to $1.59 million for the six months months
ended June 30, 2002 as compared to $1.46 million for the six months months ended
June 30, 2001. Salaries and employee benefits totaled $1.10 million for the six
months ended June 30, 2002 and $1.06 million for the six months ended June 30,
2001. These amounts included salaries that were reimbursed through the
management service fee noted above. Other operating expenses, which include
occupancy and fixed asset expense, data processing fees, advertising, investor
communications, and professional fees were $489,000 compared to $410,000, a 19%
increase. Depreciation increased $11,000 over the same period last year due to
additional software and equipment. Regulatory agency fees increased $21,000 over
the same period last year due to an assessment increase. Professional fees,
including network management services, bank examination fees and trust
organizational fees, increased $34,500 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 six months ended June 30, 2002, the Company recorded federal and state
income tax expense of $420,000. The Company also has a deferred tax asset of
$850,000. For the six months ended June 30, 2001, the Company recorded a federal
and state income tax expense of $300,000 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 six months ended June 30, 2002 was 34%, as compared to 29% for the
first six months of 2001.
FINANCIAL CONDITION
The Company reported total assets of $140.04 million as of June 30, 2002 versus
$133.76 million as of December 31, 2001, a 5% increase. Cash and due from banks
increased to $2.03 million as of June 30, 2002 from $2.00 million at December
31, 2001.
The Company's investment securities portfolio decreased to $2.43 million as of
June 30, 2002 from $5.35 million at December 31, 2001 in order to fund loan
growth. 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 June 30, 2002, loans were $133.71 million compared to $125.32 million as
of December 31, 2001. Residential mortgage loans originated for sale on the
secondary market totaled an additional $423,000 as of June 30, 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 1.5% of gross
loans, totaling $2.07 million at June 30, 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
$24.30 million as of June 30, 2002, of which $3.24 million will be participated
to The Middleton Doll Company and other third party lenders.
Other assets at June 30, 2002 totaled $3.52 million compared to $2.69 million at
December 31, 2001. Other assets at June 30, 2002 included net furniture and
equipment of $158,000, accrued interest receivable on loans of $624,000, excess
servicing assets of $84,000 relating to loans sold to a third party, current and
deferred tax assets of $997,000, trust legal and placement fees of $155,000,
Federal Home Loan bank stock of $186,000, cash surrender value on a life
insurance policy of $1.12 million and other miscellaneous assets of $195,000.
14
Total deposits increased 1% to $121.30 million at June 30, 2002 from $120.01
million as of year end 2001. Indexed money market accounts decreased 23% to
$40.69 million as of June 30, 2002 from $52.80 million as of December 31, 2001.
Time certificates of deposit increased 23% to $71.95 million as of June 30, 2002
from $58.66 million as of year end. Time deposits include brokered CDs with
terms ranging from three months to three years and totaled $39.26 million and
$26.11 million as of June 30, 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 June 30, 2002 included
non-interest bearing accounts totaling $6.85 million and interest bearing
checking accounts (NOW accounts) of $1.81 million.
In addition to deposits, the Company periodically borrows funds via its
correspondent banking relationships. As of June 30, 2002, the Bank had purchased
$3.0 million in federal funds.
Other liabilities decreased to $1.04 million as of June 30, 2002 from $4.04
million at December 31, 2001. The $3.0 million of subordinated debt due to
affiliated companies was paid at June 30, 2002. Other liabilities as of June 30,
2002, consisted primarily of accrued interest payable of $713,000, accrued
expenses payable of $102,000, retained loan discount relating to loans sold to a
third party totaling $74,000, and other miscellaneous liabilities of $154,000.
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 June 30, 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 6/30/02 $10,418,242 8.0% $ 5,209,121 4.0% $ 5,448,075 4.0%
Well-capitalized at 6/30/02 $13,022,802 10.0% $ 7,813,681 6.0% $ 6,810,094 5.0%
At June 30, 2002
Bank $15,990,970 12.3% $14,357,639 11.0% $14,357,639 10.5%
Company $16,329,045 12.5% $12,922,557 9.9% $12,922,557 9.5%
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 June 30, 2002 and
December 31, 2001.
On June 27, 2002, the Company through its trust subsidiary, issued $5,000,000 of
redeemable preferred securities which is included above as Tier I capital.
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.
15
Liquidity
The liquidity of a financial institution reflects its ability to provide funds
to meet loan requests, accommodate possible deposit withdrawals, and take
advantage of interest rate market opportunities in a cost effective manner.
Although primary sources of funds are deposits and repayments of loan principal,
the Company also maintains a significant level of liquid assets to provide for
potential funding needs. In addition to cash balances as of June 30, 2002, the
Company held $2.43 million of marketable securities and $423,000 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 $185,900 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 June 30, 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.
16
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.
17
SCHEDULE 1
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
AVERAGE BALANCE SHEETS
FOR SIX MONTHS ENDED FOR YEAR ENDED
JUNE 30, 2002 DECEMBER 31, 2001
-------------------- -----------------
Cash and Due From Banks $ 1,905,553 $ 2,486,233
Federal Funds Sold 163,950 887,003
Investment Securities (Taxable) 4,100,544 7,757,898
Loans:
Commercial 32,016,848 31,238,702
Commercial Real Estate 67,610,783 64,175,781
Residential Real Estate 25,268,063 24,960,508
Industrial Revenue Bonds 1,174,027 1,997,198
Leases 869,224 1,127,594
Installment and Consumer 325,813 238,885
------------ ------------
Total Loans 127,264,758 123,738,668
Less: Allowance for Loan Losses (1,964,442) (1,965,799)
------------ ------------
Net Loans 125,300,316 121,772,869
Fixed Assets 168,920 161,100
Other Assets 2,441,548 2,257,797
------------ ------------
Total Assets $134,080,831 $135,322,900
============ ============
Demand Deposits $ 6,331,625 $ 7,264,187
Interest Bearing Deposits
NOW 1,918,286 2,113,772
Money Market 46,218,929 56,750,217
Time Deposits 64,820,064 55,951,694
------------ ------------
Total Deposits 119,288,904 122,079,870
Federal Funds Purchased 1,475,359 943,167
Subordinated Note 2,933,702 2,816,438
Other Liabilities 943,540 1,112,456
------------ ------------
Total Liabilities 124,641,505 126,951,931
Equity Capital 9,439,326 8,370,969
------------ ------------
Total Liabilities and Capital $134,080,831 $135,322,900
============ ============
18
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
June 30, 2002 and December 31, 2001.
JUNE 30, 2002 DECEMBER 31, 2001
----------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ------- ------------ -------
Commercial $ 31,189,768 23.25% $ 28,224,755 22.52%
Real Estate:
Construction 16,442,403 12.26% 17,000,955 13.56%
Commercial 63,214,514 47.13% 57,997,188 46.28%
Residential 21,160,641 15.78% 19,607,032 15.65%
Industrial Revenue Bonds
and Municipals 1,155,872 0.86% 1,196,306 0.95%
Leasing Finance Receivable 680,548 0.51% 1,022,014 0.82%
Installment and Consumer 287,906 0.21% 272,611 0.22%
------------ ------ ------------ ------
Total Loans $134,131,652 100.00% $125,320,861 100.00%
============ ====== ============ ======
19
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
or its subsidiaries are a party.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 16, 2002, the annual meeting of shareholders was held. At the
meeting Donald L. Menefee and Terry L. Mather were elected to serve as
Class II directors with terms expiring in 2005. Continuing as a Class
III director (term expires in 2003) is Donald E. Sydow. Continuing as
Class I directors with (terms expire in 2004) are George R. Schonath
and Jon McGlocklin. The shareholders ratified the appointment of
Virchow Krause & Company, LLP as the Company's independent public
accountants for the year ending December 31, 2002.
There were 940,000 issued and outstanding shares of common stock at
the time of the annual meeting. The voting on each item presented at
the annual meeting was as follows:
For Withheld
------- --------
Election of Directors
Donald L. Menefee 883,350 4,098
Terry L. Mather 883,347 4,101
For Against Abstain Total
------- ------- ------- -------
Ratification of Accountants 884,024 1,758 1,666 887,448
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
10 Indenture by and between InvestorsBancorp, Inc, and Wells
Fargo Bank, National Association, as Trustee dated June 27,
2002
11 Statement Regarding Computation of Per Share Earnings
99.1 Chief Executive Officer Certification
99.2 Chief Financial Officer Certification
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended June 30, 2002.
20
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 13, 2002 /s/ George R. Schonath
------------------------------------
George R. Schonath
Chief Executive Officer
Date: August 13, 2002 /s/ Susan J. Hauke
------------------------------------
Susan J. Hauke
Vice President Finance and
Chief Accounting Officer
21