UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 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 incorporation) (I.R.S. Employer
Identification No.)
W239 N1700 Busse Road
Waukesha, Wisconsin 53188-1160
------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (262) 523-1000
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of November 13, 2002, the Issuer had 925,265 shares of $0.01 par value common
stock issued and outstanding.
INVESTORSBANCORP, INC.
FORM 10-QSB INDEX
<Table>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002 (Unaudited) and
December 31, 2001 ...............................................................3
Consolidated Statements of Income - For the Three and Nine Months
Ended September 30, 2002 and 2001 (Unaudited) ...................................4
Consolidated Statements of Changes in Shareholders' Equity - For the
Nine Months Ended September 30, 2002 and 2001 (Unaudited)........................5
Consolidated Statements of Cash Flows - For the Three and Nine Months Ended
September 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
Item 3. Controls and Procedures ........................................................18
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
</Table>
2
INVESTORSBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(UNAUDITED)
ASSETS
Cash and due from banks $ 3,276,609 $ 2,004,926
Available for sale securities - stated at fair value 1,761,875 5,347,264
Loans, less allowance for loan losses of $2,265,581 and
$1,884,331 in 2002 and 2001, respectively 143,317,149 123,436,530
Mortgage loans held for sale 3,051,500 284,000
Premises and equipment, net 139,947 182,360
Accrued interest receivable and other assets 3,942,673 2,505,325
----------------- ------------------
TOTAL ASSETS $ 155,489,753 $ 133,760,405
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 8,149,663 $ 6,239,453
Savings and NOW 43,622,450 55,119,150
Other Time 81,184,600 58,655,079
----------------- ------------------
Total Deposits 132,956,713 120,013,682
Federal funds purchased 555,000 815,000
Other borrowings 5,200,000 3,000,000
Redeemable preferred securities of subsidiary trust 5,000,000 --
Accrued interest payable and other liabilities 1,697,627 1,040,308
----------------- ------------------
Total Liabilities 145,409,340 124,868,990
----------------- ------------------
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 3,606,691 2,374,996
Treasury stock, 123,016 shares in 2002 and 110,000
shares in 2001, respectively, at cost (853,678) (810,981)
----------------- ------------------
TOTAL SHAREHOLDERS' EQUITY 10,080,413 8,891,415
----------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 155,489,753 $ 133,760,405
================= ==================
</Table>
3
INVESTORSBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Interest income:
Interest and fees on loans $2,067,191 $2,358,917 $5,935,916 $7,547,355
Interest on investment securities - taxable 7,198 60,925 48,844 327,646
Interest on federal funds sold 1,240 4,203 2,432 29,214
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 2,075,629 2,424,045 5,987,192 7,904,215
INTEREST EXPENSE:
Interest on deposits 825,309 1,254,670 2,410,440 4,584,254
Interest on federal funds purchased 14,570 8,765 29,478 32,698
Interest on other borrowings 88,307 64,788 189,662 200,596
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 928,186 1,328,223 2,629,580 4,817,548
NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES 1,147,443 1,095,822 3,357,612 3,086,667
Provision for loan losses 192,704 85,755 380,204 478,981
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 954,739 1,010,067 2,977,408 2,607,686
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Service fees 35,241 23,300 93,152 73,076
Management service fees 248,213 246,502 759,492 745,578
Service release premiums 147,066 117,462 335,573 438,320
Other income 13,072 14,004 39,553 42,782
---------- ---------- ---------- ----------
TOTAL NONINTEREST INCOME 443,592 401,268 1,227,770 1,299,756
---------- ---------- ---------- ----------
NONINTEREST EXPENSES:
Salaries 380,604 389,074 1,186,259 1,200,451
Pension, profit sharing, employee benefits 136,337 111,541 428,697 355,381
Occupancy 28,659 27,517 82,870 84,983
Furniture and equipment expenses 12,344 13,604 42,527 44,090
Data processing services 53,097 41,259 126,866 116,528
Other expenses 140,109 142,630 470,534 389,188
---------- ---------- ---------- ----------
TOTAL NONINTEREST EXPENSES 751,150 725,625 2,337,753 2,190,621
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 647,181 685,710 1,867,425 1,716,821
Less applicable income taxes 215,989 230,570 635,730 530,616
---------- ---------- ---------- ----------
NET INCOME $ 431,192 $ 455,140 $1,231,695 $1,186,205
========== ========== ========== ==========
PER SHARE AMOUNTS:
Basic earnings per share $ 0.46 $ 0.48 $ 1.31 $ 1.22
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ 0.43 $ 0.48 $ 1.25 $ 1.22
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 991,540 949,711 986,817 975,567
========== ========== ========== ==========
</Table>
4
INVESTORSBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<Table>
<Caption>
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 nine
months of 2001 -- -- 1,186,205 -- 1,186,205
Purchase of treasury stock -- -- -- (547,818) (547,818)
------------ ------------ ------------ ------------ ------------
BALANCES, September 30, 2001 $ 10,500 $ 7,316,900 $ 2,088,153 $ (810,981) $ 8,604,572
============ ============ ============ ============ ============
BALANCES, December 31, 2001 $ 10,500 $ 7,316,900 $ 2,374,996 $ (810,981) $ 8,891,415
Net income for first nine
months of 2002 -- -- 1,231,695 -- 1,231,695
Purchase of treasury stock -- -- -- (42,697) (42,697)
------------ ------------ ------------ ------------ ------------
BALANCES, September 30, 2002 $ 10,500 $ 7,316,900 $ 3,606,691 $ (853,678) $ 10,080,413
============ ============ ============ ============ ============
</Table>
5
27
INVESTORSBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,231,695 $ 1,186,205
Adjustments to reconcile net income to net cash
flows from operating activities
Depreciation 57,249 43,044
Provision for loan losses 380,204 478,981
Net change in
Mortgage loans held for sale (2,767,500) (801,600)
Accrued interest receivable and other assets (1,437,348) (1,757)
Accrued interest payable and other liabilities 657,319 (208,726)
------------ ------------
NET CASH FLOWS FROM OPERATING ACTIVITIES (1,878,381) 696,147
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available for sale securities
Maturities, prepayments, sales and calls 3,585,389 10,917,310
Net increase in loans (20,260,823) (5,345,260)
Additions to premises and equipment (14,836) (125,120)
------------ ------------
NET CASH FLOWS FROM INVESTING ACTIVITIES (16,690,270) 5,446,930
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits 12,943,031 (12,807,575)
Net change in federal funds purchased and
securities sold under repurchase agreements (260,000) 5,785,000
(Pay off) proceeds from other borrowings 2,200,000 500,000
Proceeds from issuance of trust preferred securities 5,000,000 --
Purchase of treasury stock (42,697) (547,818)
------------ ------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 19,840,334 (7,070,393)
------------ ------------
Net Change in Cash and Cash Equivalents 1,271,683 (927,316)
Cash and Cash Equivalents - Beginning of year 2,004,926 3,453,639
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 3,276,609 $ 2,526,323
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest $ 2,174,393 $ 5,083,329
Cash paid for income taxes $ 620,500 $ 722,000
</Table>
6
INVESTORSBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 2002 and December 31, 2001 and
the results of operations for the nine months and three months ended September
30, 2002 and 2001 and cash flows for the nine months ended September 30, 2002
and 2001 have been made. Such adjustments consisted only of normal recurring
items. Operating results for the periods ended September 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 four interest rate swaps are classified as fair value hedges with a
net fair market value of $399,000 at September 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 pay off $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 September 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 SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
During the quarter ended September 30, 2002, the Company reported net income of
$431,000, or $0.43 per share (diluted), as compared to net income of $455,000,
or $0.48 per share (diluted), for the quarter ended September 30, 2001. The
$24,000 decrease in profitability was primarily attributable to an increase in
the loan loss reserve, which occurred for the most part due to the $11.87
million increase in loans during the quarter.
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 14% to $2.08 million for
the third quarter of 2002 from $2.42 million for the third quarter of 2001. This
decrease was due to lower
8
interest rates on loans with the average prime rate decreasing from 6.57% in the
third quarter of 2001 to 4.75% in the third quarter of 2002. On November 8,
2002, the prime rate was reduced by 0.5% to 4.25% as the result of the November
6th federal reserve rate cut. However, offsetting the significant decrease in
rates, average loans increased $18.87 million when comparing average outstanding
loan balances for the three months ended September 30, 2002 and September 30,
2001. The majority of interest income on loans is derived from the commercial
and commercial real estate loan portfolios which comprised approximately 80% of
total loans at September 30, 2002. Interest and fee income on loans totaled
$2.07 million for the three months ended September 30, 2002 and $2.36 million
for the three months ended September 30, 2001. Interest earned on investment
securities and federal funds sold totaled $8,000 compared to $65,000 for the
same periods due to a 54% decrease in the average balances and lower interest
rates between the third 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 30% to $928,000 for the quarter ended September 30,
2002 from $1.33 million for the quarter ended September 30, 2001 due to
decreasing interest rates for time deposits which matured during the period.
However, the average balance of the interest bearing liabilities increased 13%
from the third quarter of last year. Interest expense consists predominantly of
interest paid on money market accounts, which totaled $171,000 for the third
quarter of 2002 and $520,000 for the third quarter of 2001, and certificates of
deposit, which totaled $746,000 for the third quarter of 2002 and $800,000 for
the third quarter of 2001. Interest rate swap income that is used to offset
interest expense was $97,000 in the third quarter of 2002 and $82,000 in the
third quarter of 2001. Interest expense on other borrowings and federal funds
purchased totaled $103,000 compared to $74,000 for the same periods. The average
balance at September 30, 2002 for other borrowings and federal funds purchased
increased by $6.64 million over the same period a year ago in order to fund the
Bank's loan growth.
The Company's interest rate spread was 3.00% for the third quarter of 2002
compared to 2.87% for the third quarter of 2001, a 13 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 160 basis points
due to decreases in interest rates. The average rate paid on interest bearing
liabilities decreased 173 basis points due to lower short-term interest rates
and due to lower long-term interest rates for both time deposits which matured
and for other borrowings.
Provision for Loan Losses
The allowance for loan losses increased to $2.27 million as of September 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
$193,000 was expensed in the quarter ended September 30, 2002 as compared to
$86,000 during the quarter ended September 30, 2001. The allowance for loan
losses at September 30, 2002 and September 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
9
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 $1.97 million (or 87% of the total loan loss reserve) to these
loans, which comprised about 80% of the loan portfolio. The Company also
allocated $120,000 (or approximately 5% of the total loan loss reserve) to
residential mortgages, which comprised about 20% of the loan portfolio.
Approximately $180,000 of the reserve for loan losses was 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. 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 thirteen impaired loans, which are mainly secured by real estate,
totaling $3.0 million at September 30, 2002. One loan totaling $1.26 million is
secured by real estate and represented 42% 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 third quarter of
2002, $40,600 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 third quarter of
2002 was $1,500.
There were no loan charge-offs during the three months ended September 30, 2002
and 2001. There was a recovery of $1,000 during the three months ended September
30, 2002. 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 September 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 September
30, 2002 and December 31, 2001.
<Table>
<Caption>
NONPERFORMING LOANS 9/30/2002 12/31/2001
- ------------------- --------- ----------
Nonaccrual Loans $2,269,198 $1,937,882
Accruing Loans Past Due 90 Days or More (1) $ 739,284 $ 707,172
Restructured Loans (2) $ -- $ --
</Table>
(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.
10
Non-Interest Income and Expenses
Non-interest income for the quarter ended September 30, 2002 totaled $443,000 as
compared to $401,000 for the quarter ended September 30, 2001, a 10% increase.
Management service fees were the largest component of non-interest income,
totaling $248,000 for the quarter ended September 30, 2002 compared to $247,000
for the quarter ended September 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
$147,000 for the quarter ended September 30, 2002 compared to $117,000 for the
quarter ended September 30, 2001. The 26% increase in 2002 of service release
premiums was due to an increase in volume in home mortgage refinancing as
interest rates have continued to decrease. Service charges related to deposit
accounts and other income totaled $48,000 compared to $37,000 for the same
period in 2001.
Non-interest expense increased 3% to $751,000 for the three months ended
September 30, 2002 as compared to $726,000 for the three months ended September
30, 2001. Salaries and employee benefits totaled $517,000 for the three months
ended September 30, 2002 and $501,000 for the three months ended September 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 $234,000 compared to $225,000, a 4%
increase. Depreciation increased $3,000 over the same period last year due to
additional software and equipment. Professional fees, including network
management services, bank examination fees and trust organizational fees
accounted for the rest of the increase.
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 September 30, 2002, the Company recorded federal and state
income tax expense of $216,000. The Company also has a deferred tax asset of
$850,000. For the quarter ended September 30, 2001, the Company recorded a
federal and state income tax expense of $231,000 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 September 30, 2002 was 33%, as compared to 34% for
the third quarter of 2001.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
During the nine months ended September 30, 2002, the Company reported net income
of $1.23 million, or $1.25 per share (diluted), as compared to net income of
$1.19 million, or $1.22 per share (diluted), for the nine months ended September
30, 2001. This enhanced profitability was primarily attributable to a 6%
increase in the interest margin for the first nine months of 2002 compared to
the first nine months of 2001. Additionally, the provision for loan losses was
$99,000 less during the nine months ended September 30, 2002 when compared to
the nine months ended September 30, 2001. Offsetting these increases to income
were increased expenses of $147,000 during the nine months ended September 30,
2002 when compared to the nine months ended September 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 24% to $5.99 million for
the first nine months of 2002 from $7.90 million for the first nine months of
2001. This decrease was due to lower interest rates on loans with the average
prime rate decreasing from 7.52% in the first nine months of 2001 to 4.75% in
the first nine months of 2002. On November 8, 2002, the prime rate was reduced
by 0.5% to 4.25% as the
11
result of the November 6th federal reserve rate cut. However, offsetting the 37%
decrease in rates, average loans increased $9.26 million when comparing average
outstanding loan balances for the nine months ended September 30, 2002 and 2001.
The majority of interest income on loans is derived from the commercial and
commercial real estate loan portfolios which comprised approximately 80% of
total loans at September 30, 2002. Interest and fee income on loans totaled
$5.94 million for the nine months ended September 30, 2002 and $7.55 million for
the nine months ended September 30, 2001. Interest earned on investment
securities and federal funds sold totaled $51,000 compared to $357,000 for the
same periods due to a 60% decrease in the average balances and lower interest
rates between the first nine 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.
Interest expense decreased 45% to $2.63 million for the nine months ended
September 30, 2002 from $4.82 million for the nine months ended September 30,
2001 due to decreasing interest rates for time deposits which matured during the
period. Interest expense consists predominantly of interest paid on money market
accounts, which totaled $597,000 for the first nine months of 2002 and $2.04
million for the first nine months of 2001, and certificates of deposit, which
totaled $2.16 million for the first nine months of 2002 and $2.68 million for
the first nine months of 2001. Interest rate swap income that is used to offset
interest expense was $367,000 in the first nine months of 2002 and $203,000 in
the first nine months of 2001. Interest expense on other borrowings and federal
funds purchased totaled $219,000 compared to $233,000 for the same periods. The
average balance for other borrowings and federal funds purchased increased to
$6.61 million at September 30, 2002 as compared to $3.73 million at September
30, 2001 in order to fund the Bank's loan growth while at the same time the cost
for these funds has continued to decrease.
The Company's interest rate spread was 3.00% for the first nine months of 2002
compared to 2.57% for the first nine months of 2001, a 43 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 209 basis
points due to decreases in interest rates. The average rate paid on interest
bearing liabilities decreased 252 basis points due to lower short-term interest
rates and due to lower long-term interest rates for both time deposits which
matured and for other borrowings.
Provision for Loan Losses
The allowance for loan losses increased to $2.27 million as of September 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
$380,000 was expensed in the nine months ended June 30, 2002 as compared to
$479,000 during the nine 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 September 30, 2002 and September 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
12
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 $1.97 million (or 87% of the total loan loss reserve) to these
loans, which comprised about 80% of the loan portfolio. The Company also
allocated $120,000 (or approximately 5% of the total loan loss reserve) to
residential mortgages, which comprised about 20% of the loan portfolio.
Approximately $180,000 of the reserve for loan losses was 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. 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 thirteen impaired loans, which are mainly secured by real estate,
totaling $3.0 million at September 30, 2002. One loan totaling $1.26 million is
secured by real estate and represented 42% 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 nine months
of 2002, $46,400 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 nine months
of 2002 was $15,600.
There were no loan charge-offs or recoveries during the nine months ended
September 30, 2002. During the first nine 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 September 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 September
30, 2002 and December 31, 2001.
<Table>
<Caption>
NONPERFORMING LOANS 9/30/2002 12/31/2001
- ------------------- --------- ----------
Nonaccrual Loans $2,269,198 $1,937,882
Accruing Loans Past Due 90 Days or More(1) $ 739,284 $ 707,172
Restructured Loans(2) $ -- $ --
</Table>
(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.
13
Non-Interest Income and Expenses
Non-interest income for the nine months ended September 30, 2002 totaled $1.23
million as compared to $1.30 million for the nine months ended September 30,
2001, a 5% decrease. Management service fees were the largest component of
non-interest income, totaling $759,000 for the nine months ended September 30,
2002 compared to $746,000 for the nine months ended September 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 $336,000 for the nine months ended
September 30, 2002 compared to $438,000 for the nine months ended June 30, 2001.
The decrease in 2002 of service release premiums was due to smaller volume in
home mortgage refinancing. Service charges related to deposit accounts and other
income totaled $135,000 compared to $116,000 for the same period in 2001.
Non-interest expense increased 7% to $2.34 million for the nine months ended
September 30, 2002 as compared to $2.19 million for the nine months ended
September 30, 2001. Salaries and employee benefits totaled $1.61 million for the
nine months ended September 30, 2002 and $1.56 million for the nine months ended
September 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 $723,000 compared to $635,000, a 14%
increase. Depreciation increased $14,000 over the same period last year due to
additional software and equipment. Professional fees, including network
management services, bank examination fees and trust organizational fees,
increased $65,500 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 nine months ended September 30, 2002, the Company recorded federal and
state income tax expense of $636,000. The Company also has a deferred tax asset
of $850,000. For the nine months ended September 30, 2001, the Company recorded
a federal and state income tax expense of $531,000 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 nine months ended September 30, 2002 was 34%, as compared to 31%
for the first nine months of 2001.
FINANCIAL CONDITION
The Company reported total assets of $155.49 million as of September 30, 2002
versus $133.76 million as of December 31, 2001, a 16% increase. Cash and due
from banks increased to $3.28 million as of September 30, 2002 from $2.00
million at December 31, 2001.
The Company's investment securities portfolio decreased to $1.76 million as of
September 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 September 30, 2002, loans were $145.58 million compared to $125.32 million
as of December 31, 2001. Residential mortgage loans originated for sale on the
secondary market totaled an additional $3.05 million as of September 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 $2.27 million at
14
September 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 $23.03 million as of September 30, 2002,
of which $1.37 million will be participated to other third party lenders.
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
September 30, 2002 and December 31, 2001.
<Table>
<Caption>
SEPTEMBER 30, 2002 DECEMBER 31, 2001
----------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ------- ------------ -------
Commercial $ 31,662,825 21.75% $ 28,224,755 22.52%
Real Estate:
Construction 13,330,556 9.16% 17,000,955 13.56%
Commercial 70,584,944 48.48% 57,997,188 46.28%
Residential 27,869,659 19.14% 19,607,032 15.65%
Industrial Revenue Bonds
and Municipals 1,135,458 0.78% 1,196,306 0.95%
Leasing Finance Receivable 652,691 0.45% 1,022,014 0.82%
Installment and Consumer 346,597 0.24% 272,611 0.22%
------------ ------- ------------ -------
Total Loans $145,582,730 100.00% $125,320,861 100.00%
============ ======= ============ =======
</Table>
Other assets at September 30, 2002 totaled $4.08 million compared to $2.69
million at December 31, 2001. Other assets at September 30, 2002 included net
furniture and equipment of $140,000, accrued interest receivable on loans of
$735,000, current and deferred tax assets of $1.05 million, trust legal and
placement fees of $161,000, Federal Home Loan bank stock of $300,000, cash
surrender value on a life insurance policy of $1.12 million and other
miscellaneous assets of $577,000.
Total deposits increased 11% to $132.96 million at September 30, 2002 from
$120.01 million as of year end 2001. Indexed money market accounts decreased 21%
to $41.54 million as of September 30, 2002 from $52.80 million as of December
31, 2001. Time certificates of deposit increased 38% to $81.18 million as of
September 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
$47.19 million and $26.11 million as of September 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
September 30, 2002 included non-interest bearing accounts totaling $8.15 million
and interest bearing checking accounts (NOW accounts) of $2.09 million.
In addition to deposits, the Company periodically borrows funds via its
correspondent banking relationships. As of September 30, 2002, the Bank had
purchased $555,000 in federal funds and borrowed $5.2 million from the Federal
Home Loan Bank of Chicago. An additional $5.0 million of funding was obtained
through the issuance of trust preferred securities (see Note 4). The proceeds
from the issuance of the trust preferred securities were used to pay off $3.0
million of subordinated debt the Company had outstanding as of December 31,
2001.
Other liabilities increased to $1.70 million as of September 30, 2002 from $1.04
million at December 31, 2001. Other liabilities as of September 30, 2002,
consisted primarily of accrued interest payable of $1.05 million, accrued
expenses payable of $119,000, and other miscellaneous liabilities of $530,000.
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
15
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 September 30, 2002 and
December 31, 2001 were as follows:
<Table>
<Caption>
TOTAL CAPITAL TO TIER I CAPITAL TO TIER I CAPITAL TO
RISK WEIGHTED ASSETS RISK WEIGHTED ASSETS AVERAGE ASSETS
------------------------- ------------------------ -------------------------
Regulatory Capital
Requirements:
Minimum at 9/30/02 $11,212,161 8.0% $ 5,606,081 4.0% $ 5,947,805 4.0%
Well-capitalized at 9/30/02 $14,015,202 10.0% $ 8,409,121 6.0% $ 7,434,756 5.0%
At September 30, 2002
Bank $16,296,778 11.7% $14,543,014 10.4% $ 14,543,014 9.8%
Company $16,838,653 12.0% $13,440,548 9.6% $ 13,440,548 9.0%
At December 31, 2001
Bank $13,337,639 10.9% $11,801,176 9.6% $ 11,801,176 8.8%
Company $13,429,361 10.9% $ 8,891,415 7.2% $ 8,891,415 6.6%
</Table>
Management intends to maintain capital levels in excess of minimums established
by the regulatory authorities. The Company exceeds all regulatory requirements
regarding the maintenance of capital and was categorized as "well capitalized"
under the regulatory framework for capital adequacy as of September 30, 2002 and
December 31, 2001. On June 27, 2002, the Company through its trust subsidiary,
issued $5,000,000 of redeemable preferred securities, a portion of 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.
Liquidity
The liquidity of a financial institution reflects its ability to provide funds
to meet loan requests, accommodate possible deposit withdrawals, and take
advantage of interest rate market opportunities in a cost effective manner.
Although primary sources of funds are deposits and repayments of loan principal,
the Company also maintains a significant level of liquid assets to provide for
potential funding needs. In addition to cash balances as of September 30, 2002,
the Company held $1.76 million of marketable securities and $3.05 million 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 three
institutions which collectively have approved federal funds lines for the Bank
totaling $9.5 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
16
of Chicago ("FHLB of Chicago") and as of September 30, 2002, the Bank had
purchased $300,200 worth of FHLB of Chicago stock. The stock, along with the
loans that were pledged at September 30, 2002, allowed the Bank to borrow up to
$6,068,000 from the FHLB of Chicago. 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 September 30, 2002, the Company had four
interest rate swap agreements outstanding with a notional value totaling $27.0
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.
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
17
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.
ITEM 3. CONTROLS AND PROCEDURES
Based upon an evaluation within the 90 days prior to the filing date of this
report, the Company's Chief Executive Officer and Chief Accounting Officer
concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to the date of the evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
18
SCHEDULE 1
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
AVERAGE BALANCE SHEETS
<Table>
<Caption>
FOR NINE MONTHS ENDED FOR YEAR ENDED
SEPTEMBER 30, 2002 DECEMBER 31, 2001
--------------------- ------------------
Cash and Due From Banks $ 1,981,965 $ 2,486,233
Federal Funds Sold 219,817 887,003
Investment Securities (Taxable) 3,692,943 7,757,898
Loans:
Commercial 32,827,274 31,238,702
Commercial Real Estate 70,421,418 64,175,781
Residential Real Estate 26,674,931 24,960,508
Industrial Revenue Bonds 1,163,712 1,997,198
Leases 802,855 1,127,594
Installment and Consumer 299,553 238,885
--------------------- ------------------
Total Loans 132,189,743 123,738,668
Less: Allowance for Loan Losses (2,011,873) (1,965,799)
--------------------- ------------------
Net Loans 130,177,870 121,772,869
Fixed Assets 163,063 161,100
Other Assets 2,767,414 2,257,797
--------------------- ------------------
Total Assets $ 139,003,072 $ 135,322,900
===================== ==================
Demand Deposits $ 6,338,291 $ 7,264,187
Interest Bearing Deposits
NOW 1,848,360 2,113,772
Money Market 43,875,753 56,750,217
Time Deposits 69,678,520 55,951,694
--------------------- ------------------
Total Deposits 121,740,924 122,079,870
Federal Funds Purchased 1,875,092 943,167
Other borrowings 4,737,729 2,816,438
Other Liabilities 1,092,636 1,112,456
--------------------- ------------------
Total Liabilities 129,446,381 126,951,931
Equity Capital 9,556,691 8,370,969
--------------------- ------------------
Total Liabilities and Capital $ 139,003,072 $ 135,322,900
===================== ==================
</Table>
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
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
11 Statement Regarding Computation of Per Share Earnings
99.1 Chief Executive Officer Certification
99.2 Chief Accounting Officer Certification
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended September 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: November 13, 2002 /s/ George R. Schonath
----------------------
George R. Schonath
Chief Executive Officer
Date: November 13, 2002 /s/ Susan J. Hauke
------------------
Susan J. Hauke
Vice President Finance and
Chief Accounting Officer
21
I, George R. Schonath, Chief Executive Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
InvestorsBancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in the Report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to date of
their evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ George R. Schonath
----------------------
George R. Schonath
Chief Executive Officer
22
I, Susan J. Hauke, Chief Accounting Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
InvestorsBancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in the Report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to date of
their evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Susan J. Hauke
------------------
Susan J. Hauke
Vice President Finance and
Chief Accounting Officer
23