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, 2003
-------------
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____
Commission file number: 0-29400
INVESTORSBANCORP, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1854234
--------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
W239 N1700 Busse Road
Waukesha, Wisconsin 53188-1160
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(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, 2003, the Issuer had 990,529 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, 2003 (Unaudited) and
December 31, 2002 ......................................................................3
Consolidated Statements of Income - For the Three Months and Six Months
Ended June 30, 2003 and 2002 (Unaudited) ...............................................4
Consolidated Statements of Changes in Shareholders' Equity - For the
Six Months Ended June 30, 2003 and 2002 (Unaudited). ...................................5
Consolidated Statements of Cash Flows - For the Six Months Ended
June 30, 2003 and 2002 (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 ...............................................................19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .....................................................................21
Item 2. Changes in Securities and Use of Proceeds .............................................21
Item 3. Defaults Upon Senior Securities .......................................................21
Item 4. Submission of Matters to a Vote of Security Holders ...................................21
Item 5 Other Information .....................................................................21
Item 6. Exhibits and Reports on Form 8-K ......................................................21
Signatures ............................................................................22
2
INVESTORSBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 DECEMBER 31, 2002
------------------ ------------------
(UNAUDITED)
ASSETS
- ------
Cash and due from banks $ 2,426,290 $ 2,819,527
Available for sale securities - stated at fair value 3,000,004 1,983,567
Loans, less allowance for loan losses of $2,025,145 and
$1,986,076 in 2003 and 2002, respectively 161,625,975 154,516,551
Loans held for sale 2,567,650 1,188,075
Premises and equipment, net 2,493,428 2,527,165
Cash surrender value of life insurance 1,825,409 1,134,908
Accrued interest receivable and other assets 3,347,801 3,570,156
------------------ ------------------
TOTAL ASSETS $ 177,286,557 $ 167,739,949
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Deposits:
Demand $ 6,801,313 $ 8,498,777
Savings and NOW 33,566,640 38,249,871
Other Time 91,658,785 89,192,094
------------------ ------------------
Total Deposits 132,026,738 135,940,742
Federal funds purchased 3,700,000 1,475,000
Federal Home Loan Bank borrowings 18,200,000 13,600,000
Subordinated debt 5,000,000 -
Guaranteed preferred beneficial interest in the
company's junior subordinated debt 5,000,000 5,000,000
Accrued interest payable and other liabilities 657,845 1,367,413
------------------ ------------------
TOTAL LIABILITIES 164,584,583 157,383,155
------------------ ------------------
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, none issued - -
Common stock, $0.01 par value; 9,000,000 shares
authorized, 1,120,422 shares issued in 2003 and
1,050,000 shares issued in 2002 11,204 10,500
Surplus 8,316,188 7,316,900
Retained earnings 5,444,321 4,047,189
Treasury stock, 129,893 shares, at cost (1,069,739) (1,017,795)
------------------ ------------------
TOTAL SHAREHOLDERS' EQUITY 12,701,974 10,356,794
------------------ ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 177,286,557 $ 167,739,949
================== ==================
3
INVESTORSBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30,
-------- --------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
INTEREST INCOME:
Interest and fees on loans $ 2,240,638 $ 1,973,824 $ 4,375,429 $ 3,862,426
Interest on investment securities - taxable 22,829 18,725 35,759 41,647
Interest on federal funds sold 3 817 114 1,192
--------------- --------------- --------------- ---------------
TOTAL INTEREST INCOME 2,263,470 1,993,366 4,411,302 3,905,265
INTEREST EXPENSE:
Interest on deposits 606,038 806,524 1,260,962 1,585,131
Interest on federal funds purchased 18,736 8,817 33,123 14,908
Interest on Federal Home Loan Bank borrowings 70,742 - 136,229 -
Interest on company's subordinated debt 51,136 48,267 51,136 98,199
Interest on guaranteed preferred beneficial interest
in the company's junior subordinated debt 65,062 3,156 129,830 3,156
--------------- --------------- --------------- ---------------
TOTAL INTEREST EXPENSE 811,714 866,764 1,611,280 1,701,394
NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES 1,451,756 1,126,602 2,800,022 2,203,871
Provision for loan losses - 93,750 41,432 187,500
--------------- --------------- --------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 1,451,756 1,032,852 2,758,590 2,016,371
--------------- --------------- --------------- ---------------
NONINTEREST INCOME:
Service fees 44,308 41,277 94,202 82,226
Management service fees 221,428 250,273 451,277 511,279
Gain on sale of loans 236,603 115,054 416,311 188,507
Increase in cash surrender value of life insurance 22,679 23,396 39,297 25,742
Other income 34,746 495 73,407 2,166
--------------- --------------- --------------- ---------------
TOTAL NONINTEREST INCOME 559,764 430,495 1,074,494 809,920
--------------- --------------- --------------- ---------------
NONINTEREST EXPENSES:
Salaries 359,302 430,351 874,370 805,655
Employee benefits 110,703 182,303 286,697 318,102
Occupancy 32,881 25,480 55,228 54,211
Furniture and equipment expenses 38,880 35,096 80,009 67,828
Data processing services 36,006 36,921 76,168 73,769
Other expenses 159,526 146,915 317,369 286,482
--------------- --------------- --------------- ---------------
TOTAL NONINTEREST EXPENSES 737,298 857,066 1,689,841 1,606,047
--------------- --------------- --------------- ---------------
INCOME BEFORE INCOME TAXES 1,274,222 606,281 2,143,243 1,220,244
Less applicable income taxes 448,199 207,526 746,111 419,741
--------------- --------------- --------------- ---------------
NET INCOME $ 826,023 $ 398,755 $ 1,397,132 $ 800,503
=============== =============== =============== ===============
PER SHARE AMOUNTS:
BASIC EARNINGS PER SHARE $ 0.83 $ 0.42 $ 1.46 $ 0.85
=============== =============== =============== ===============
DILUTED EARNINGS PER SHARE $ 0.79 $ 0.40 $ 1.38 $ 0.81
=============== =============== =============== ===============
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 1,043,302 988,821 1,013,390 984,793
=============== =============== =============== ===============
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, 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
============ ============ ============ ============ ============
BALANCES, December 31, 2002 $ 10,500 $ 7,316,900 $ 4,047,189 $ (1,017,795) $ 10,356,794
Net income for
first six months of 2003 - - 1,397,132 - 1,397,132
Issuance of 70,422 shares
of common stock 704 999,288 - - 999,992
Purchase of 3,658 shares
of treasury stock - - - (51,944) (51,944)
------------ ------------ ------------ ------------ ------------
BALANCES, June 30, 2003 $ 11,204 $ 8,316,188 $ 5,444,321 $ (1,069,739) $ 12,701,974
============ ============ ============ ============ ============
5
INVESTORSBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
----------------
JUNE 30,
--------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,397,132 $ 800,503
Adjustments to reconcile net income to net
cash flows from operating activities
Depreciation 52,878 37,645
Gain on sale of loans (416,311) (188,507)
Provision for loan losses 41,432 187,500
Net change in
Loans due to origination and sale of loans
held for sale (963,264) 49,707
Accrued interest receivable and other assets (225,746) (855,134)
Accrued interest payable and other liabilities (709,568) 3,254
----------------- -----------------
NET CASH FLOWS FROM OPERATING ACTIVITIES (823,447) 34,968
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Federal Home Loan Bank stock (242,400) -
Activity in available for sale securities
Maturities, prepayments, sales and calls (1,016,437) 2,917,273
Net increase in loans (7,150,856) (8,387,991)
Additions to premises and equipment (19,141) (13,084)
----------------- -----------------
NET CASH FLOWS FROM INVESTING ACTIVITIES (8,428,834) (5,483,802)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (3,914,004) 1,290,712
Net change in federal funds purchased 2,225,000 2,185,000
Net change in Federal Home Loan Bank borrowings 4,600,000 -
Proceeds from (pay off from) subordinated debt 5,000,000 (3,000,000)
Proceeds from issuance of trust preferred securities - 5,000,000
Proceeds from issuance of common stock 999,992 -
Purchase of treasury stock (51,944) -
----------------- -----------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 8,859,044 5,475,712
----------------- -----------------
Net Change in Cash and Cash Equivalents (393,237) 26,878
Cash and Cash Equivalents - Beginning of year 2,819,527 2,004,926
----------------- -----------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 2,426,290 $ 2,031,804
================= =================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest $ 1,472,356 $ 1,581,993
Cash paid for income taxes $ 664,700 $ 354,500
6
INVESTORSBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(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.
On March 26, 2003, the Company announced that its Board of Directors had
unanimously authorized a "going private" transaction by which George Schonath,
the Company's president and chief executive officer, and his family will become
the sole shareholders of the Company. As a result of this transaction, shares
held by all other shareholders will be converted into the right to receive
$14.20 per share in cash. The transaction will be structured as a cash-out
merger with a wholly-owned subsidiary of the Company formed for this purpose.
Upon completion of the merger, the Company's common stock will no longer be
listed on the OTC Bulletin Board and the registration of its securities with the
Securities and Exchange Commission will be terminated.
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, 2003 and December 31, 2002 and the
results of operations for the six months and three months ended June 30, 2003
and 2002 and cash flows for the six months ended June 30, 2003 and 2002 have
been made. Such adjustments consisted only of normal recurring items. Operating
results for the periods ended June 30, 2003 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2003. 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 2002 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, 2002.
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. 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
7
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.
FASB Interpretation 45; Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others and FASB
Interpretation 46; Consolidation of Variable Interest Entities does not apply to
the Company.
Certain 2003 and 2002 amounts have been reclassified to conform with the 2003
presentation. The reclassifications have no effect on reported amount of net
income or equity.
NOTE 3. OTHER BORROWINGS
On April 10, 2003, the Company borrowed $5.0 million of subordinated debt
through a pool issued by CitiGroup Global Markets Inc. (formerly, Salomon Smith
Barney, Inc.). The debt has a ten year term and matures on April 7, 2013. The
proceeds from this transaction will be used by the Company for the proposed
going private transaction. Interest is payable quarterly and is based on the
three month LIBOR rate plus 320 basis points and resets quarterly.
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, 2003 and 2002. 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, 2003 AND JUNE 30, 2002
For the quarter ended June 30, 2003, the Company reported net income of
$826,000, or $0.79 per share (diluted), as compared to net income of $399,000,
or $0.40 per share (diluted), for the quarter ended June 30, 2002. The increase
in profitability was primarily attributable to a 27% increase in the earning
assets when comparing the two quarters. Average earning assets were $169.15
million for the second quarter of 2003 as compared to $133.70 million for the
second quarter of 2002. With mortgage interest rates continuing to be at
historically low levels, mortgage loans outstanding increased $5.09 million
during the second quarter of 2003. The Company does not anticipate that this
level of residential mortgage loan activity will be sustained throughout the
remainder of the year.
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. Net interest income increased $0.33 million when
comparing the quarter ended June 30, 2003 to the quarter ended June 30, 2002.
Total interest income increased 14% to $2.26 million for the second quarter of
2003 from $1.99 million for the second quarter of 2002. The increase in interest
income was due to an increase in average loans outstanding of $36.38 million
when comparing the quarter ended June 30, 2003 to the quarter ended June 30,
2002. Interest and fee income on loans totaled $2.24 million for the three
months ended June 30, 2003 and $1.97 million for the three
8
months ended June 30, 2002. Interest earned on investment securities and federal
funds sold totaled $23,000 compared to $20,000 for the same periods. The
majority of interest income on loans is derived from the commercial and
commercial real estate loan portfolios which comprised approximately 70% of
average outstanding loans at June 30, 2003 and 80% of average outstanding loans
at June 30, 2002. 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 6% to $812,000 for the quarter ended June 30, 2003
from $867,000 for the quarter ended June 30, 2002 due to lower interest rates
for money market accounts and time deposits. However, the average balance of the
interest bearing liabilities increased 32% in comparing the quarter ended June
30, 2003 to the quarter ended June 30, 2002. The average balance at June 30,
2003 for interest bearing deposits increased $11.25 million over the same period
a year ago. In order to fund loan growth, the Bank increased the average balance
of other borrowings and federal funds purchased by $28.60 million over the same
period last year. Interest expense consists predominantly of interest paid on
certificates of deposit, which totaled $0.77 million for the second quarter of
2003 and $0.72 million for the second quarter of 2002. Interest rate swap income
of $0.26 million in the second quarter of 2003 and $0.12 million in the second
quarter of 2002 was used to offset interest expense on the certificates of
deposit. Interest expense on money market accounts and NOW accounts totaled
$97,000 for the second quarter of 2003 and $203,000 for the second quarter of
2002. Interest expense on other borrowings and federal funds purchased totaled
$206,000 compared to $60,000 for the same periods.
As presented in the following schedule, the Company's interest rate spread was
3.30% for the second quarter of 2003 compared to 3.07% for the second quarter of
2002, a 23 basis point increase. The rate paid on total interest bearing
liabilities decreased more than the decrease in the yield on earning assets. The
yield on average earning assets decreased 61 basis points and the average rate
paid on interest bearing liabilities decreased 84 basis points due to decreases
in interest rates.
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
AVERAGE RELATED YIELD AVERAGE RELATED YIELD
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------------- ------------- -------- ------------- ----------- --------
Earning Assets:
Federal Funds Sold $ 1,374 $ 3 0.88% $ 225,165 $ 817 1.46%
Taxable Securities 2,802,769 22,829 3.27% 3,504,749 18,725 2.14%
Loans (a)(b) 166,344,157 2,240,638 5.40% 129,968,190 1,973,824 6.09%
--------------- --------------- ------- --------------- --------------- -------
Total Earning Assets $ 169,148,300 $ 2,263,470 5.37% $ 133,698,104 $ 1,993,366 5.98%
Interest Bearing
Liabilities:
NOW Accounts $ 3,332,538 $ 5,958 0.72% $ 1,924,496 $ 6,333 1.32%
Money Market 31,732,952 91,196 1.15% 43,765,721 196,849 1.80%
Time Deposits 90,768,686 508,884 2.25% 68,894,774 603,342 3.51%
Federal Funds Purchased 4,580,330 18,736 1.64% 1,777,418 8,817 1.99%
Other Borrowings 27,090,110 186,940 2.77% 3,087,912 51,423 6.68%
--------------- --------------- ------- --------------- --------------- -------
Total Interest Bearing $ 157,504,616 $ 811,714 2.07% $ 119,450,321 $ 866,764 2.91%
Liabilities
Interest Spread $ 1,451,756 3.30% $ 1,126,602 3.07%
Interest Margin $ 1,451,756 3.44% $ 1,126,602 3.38%
9
Provision for Loan Losses
The allowance for loan losses is established through a provision for loan losses
charged to expense. The allowance increased to $2.02 million as of June 30, 2003
from $1.99 million as of December 31, 2002 due primarily to an increase in total
loans. As of June 30, 2003, the allowance was approximately 1.2% of total loans,
net of residential mortgage loans held for sale on the secondary market. No loan
loss provision was expensed in the quarter ended June 30, 2003 as compared to
$94,000 during the quarter ended June 30, 2002.
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. At
the present time, management believes the allowance for loan losses is at a
level commensurate with the overall risk exposure of the loan portfolio.
However, should the commercial economic climate continue to be depressed,
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.
The majority of risk in the loan portfolio lies in commercial loans which
include commercial real estate loans. Accordingly, the Bank allocated $1.60
million (or 79% of the loan loss reserve total) to these loans, which comprised
70% of the loan portfolio. The Bank also allocated $180,000 (or approximately 9%
of the loan loss reserve total) to residential mortgages, which comprised about
30% of the loan portfolio. Approximately $247,000 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
moderate level of unallocated reserves given the weakness in the manufacturing
sector and uncertainty in the future direction of the economy. 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.
Impaired loans totaled $3.26 million and represented 2.0% of the loan portfolio
at June 30, 2003. Four commercial loans, secured by real estate, totaling $2.75
million accounted for 84% of the impaired loan total. The gross interest income
which would have been recorded during the quarter ended June 30, 2003, had the
non-accruing loans been current in accordance with their original terms, was
$75,000. The amount of interest income from non-accruing loans that was
collected and included in net income was $51,000. 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 quarter ended June 30, 2003, there were no loan charge-offs and
recoveries totaled $1,500. There were no loan charge-offs or recoveries during
the quarter ended June 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 the ability to repay their debt.
While a comprehensive analysis of the allowance for loan losses is somewhat
limited due to the Company's relatively short history, management believes that
the allowance was at an adequate level at June 30, 2003 based on the composition
of the portfolio as well as regulatory guidelines. Management recognizes there
are significant estimates in the process and losses could be significantly
different from those currently estimated.
The following table summarizes the Company's nonperforming loans as of June 30,
2003 and December 31, 2002. The increase in non-accrual loans from December 31,
2002, to June 30, 2003, was attributable to three commercial real estate loans
totaling $1.56 million being transferred to non-accrual status. Loans totaling
$0.39 million were transferred to accrual status or paid off. The decrease in
past due accruing loans from December 31, 2002 to June 30, 2003 was attributable
to $0.66 million of matured loans being paid off or refinanced during 2003 and
the remaining loan of $0.65 million was transferred to non-accrual status. One
commercial loan was restructured during 2003.
10
NONPERFORMING LOANS 6/30/2003 12/31/2002
- ------------------- --------- ----------
Nonaccrual Loans $ 3,255,625 $ 2,093,434
Accruing Loans Past Due 90 Days or More (1) $ - $ 1,310,560
Restructured Loans (2) $ 644,351 $ -
(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, 2003 totaled $560,000 as
compared to $430,000 for the quarter ended June 30, 2002, a 30% increase. The
gain on sale of loans was the largest component of non-interest income. The gain
resulted from the sale of residential mortgages originated for the secondary
market and totaled $237,000 for the quarter ended June 30, 2003 compared to
$115,000 for the quarter ended June 30, 2002. The refinancing of residential
mortgages continued to be strong during the second quarter of 2003, however, the
Company does not anticipate that this level of residential mortgage loan sales
is sustainable throughout the remainder of the year. Management service fees
totaled $221,000 for the quarter ended June 30, 2003 compared to $250,000 for
the quarter ended June 30, 2002. 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. The decrease in the fee income is a result of a
decrease in Middleton Doll's total loans and leased properties. Service charges
related to deposit accounts increased $3,000 and building rental income
increased $34,000 due to the building purchase in October of 2002.
Non-interest expense decreased 14% to $737,000 for the three months ended June
30, 2003 as compared to $857,000 for the three months ended June 30, 2002.
Salaries and employee benefits totaled $470,000 for the three months ended June
30, 2003 and $613,000 for the three months ended June 30, 2002. The decrease is
the result of a reduction in salary for an officer during the quarter ended June
30, 2003. 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 $267,000 compared to $244,000, a 9%
increase. Legal expenses relating to ongoing collection efforts regarding
commercial loans increased $28,000 over 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 tax exempt
interest income, tax differences in the allowance for loan losses and
charge-offs, non-accrual interest and depreciation.
For the quarter ended June 30, 2003, the Company recorded federal and state
income tax expense of $448,000 and had a deferred tax asset of $979,000. For the
quarter ended June 30, 2002, the Company recorded a federal and state income tax
expense of $208,000 and had a deferred tax asset of $850,000. The effective rate
for the income tax expense was 35% and 34% for the quarters ended June 30, 2003
and June 30, 2002, respectively.
Results of Operations
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002
For the six months ended June 30, 2003, the Company reported net income of $1.40
million, or $1.38 per share (diluted), as compared to net income of $801,000, or
$0.81 per share (diluted), for the six months ended June 30,
11
2002. The increase in profitability was primarily attributable to a 26% increase
in the earning assets when comparing the two periods. Average earning assets
were $166.27 million for the first six months of 2003 as compared to $131.53
million for the first six months of 2002. With mortgage interest rates
continuing to be at historically low levels, mortgage loans outstanding
increased $10.93 million during the first six months of 2003. The Company does
not anticipate that this level of residential mortgage loan activity will be
sustained throughout the remainder of the year.
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. Net interest income increased $0.60 million when
comparing the six months ended June 30, 2003 to the six months ended June 30,
2002.
Total interest income increased 13% to $4.41 million for the first six months of
2003 from $3.91 million for the first six months of 2002. The increase in
interest income was due to an increase in average loans outstanding of $36.71
million when comparing the six months ended June 30, 2003 to the six months
ended June 30, 2002. Interest and fee income on loans totaled $4.38 million for
the six months ended June 30, 2003 and $3.86 million for the six months ended
June 30, 2002. Interest earned on investment securities and federal funds sold
totaled $36,000 compared to $43,000 for the same periods due to a 46% decrease
in the average balance between the two periods. The majority of interest income
on loans is derived from the commercial and commercial real estate loan
portfolios which comprised approximately 70% of average outstanding loans at
June 30, 2003 and 80% of average outstanding loans at June 30, 2002. 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 5% to $1.61 million for the six months ended June 30,
2003 from $1.70 million for the six months ended June 30, 2002 due to lower
interest rates for money market accounts and time deposits. However, the average
balance of the interest bearing liabilities increased 31% in comparing the six
months ended June 30, 2003 to the six months ended June 30, 2002. The average
balance at June 30, 2003 for interest bearing deposits increased $12.79 million
over the same period a year ago. In order to fund loan growth, the Bank
increased the average balance of other borrowings and federal funds purchased by
$23.34 million over the same period last year. Interest expense consists
predominantly of interest paid on certificates of deposit, which totaled $1.55
million for the first six months of 2003 and $1.42 million for the first six
months of 2002. Interest rate swap income of $0.50 million in the first six
months of 2003 and $0.27 million in the first six months of 2002 was used to
offset interest expense on certificates of deposit. Interest on deposits also
includes interest paid on money market accounts and NOW accounts which totaled
$208,000 for the first six months of 2003 and $439,000 for the first six months
of 2002. Interest expense on other borrowings and federal funds purchased
totaled $350,000 compared to $116,000 for the same periods.
As presented in the following schedule, the Company's interest rate spread was
3.24% for the first six months of 2003 compared to 3.07% for the first six
months of 2002, a 17 basis point increase. The rate paid on total interest
bearing liabilities decreased more than the decrease in the yield on earning
assets. The yield on average earning assets decreased 64 basis points and the
average rate paid on interest bearing liabilities decreased 81 basis points due
to decreases in interest rates.
12
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
AVERAGE RELATED YIELD AVERAGE RELATED YIELD
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------------- --------------- ------- --------------- --------------- -------
Earning Assets:
Federal Funds Sold $ 23,343 $ 114 0.98% $ 163,950 $ 1,192 1.47%
Taxable Securities 2,277,823 35,759 3.17% 4,103,952 41,647 2.05%
Loans (a)(b) 163,973,125 4,375,429 5.38% 127,264,756 3,862,426 6.12%
--------------- --------------- ------- --------------- --------------- -------
Total Earning Assets $ 166,274,291 $ 4,411,302 5.35% $ 131,532,658 $ 3,905,265 5.99%
Interest Bearing
Liabilities:
NOW Accounts $ 3,248,211 $ 12,083 0.75% $ 1,918,286 $ 13,027 1.37%
Money Market 32,814,313 196,262 1.21% 46,218,929 425,620 1.86%
Time Deposits 89,716,181 1,052,617 2.37% 64,852,519 1,146,484 3.56%
Federal Funds Purchased 4,115,055 33,123 1.62% 1,475,359 14,908 2.04%
Other Borrowings 23,746,132 317,195 2.69% 3,044,199 101,355 6.71%
--------------- --------------- ------- --------------- --------------- -------
Total Interest Bearing $ 153,639,892 $ 1,611,280 2.11% $ 117,509,292 $ 1,701,394 2.92%
Liabilities
Interest Spread $ 2,800,022 3.24% $ 2,203,871 3.07%
Interest Margin $ 2,800,022 3.40% $ 2,203,871 3.38%
Provision for Loan Losses
The allowance for loan losses is established through a provision for loan losses
charged to expense. The allowance increased to $2.02 million as of June 30, 2003
from $1.99 million as of December 31, 2002 due primarily to an increase in total
loans. As of June 30, 2003, the allowance was approximately 1.2% of total loans,
net of residential mortgage loans held for sale on the secondary market. A loan
loss provision of $41,000 was expensed in the six months ended June 30, 2003
compared to $188,000 during the six months ended June 30, 2002.
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. At
the present time, management believes the allowance for loan losses is at a
level commensurate with the overall risk exposure of the loan portfolio.
However, should the commercial economic climate continue to be depressed,
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.
The majority of risk in the loan portfolio lies in commercial loans which
include commercial real estate loans. Accordingly, the Bank allocated $1.60
million (or 79% of the loan loss reserve total) to these loans, which comprised
70% of the loan portfolio. The Bank also allocated $180,000 (or approximately 9%
of the loan loss reserve total) to residential mortgages, which comprised about
30% of the loan portfolio. Approximately $247,000 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
moderate level of unallocated reserves given the weakness in the manufacturing
sector and uncertainty in the future direction of the economy. 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.
13
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.
Impaired loans totaled $3.26 million and represented 2.0% of the loan portfolio
at June 30, 2003. Four commercial loans, secured by real estate, totaling $2.75
million accounted for 84% of the impaired loan total. The gross interest income
which would have been recorded during the six months ended June 30, 2003, had
the non-accruing loans been current in accordance with their original terms, was
$130,000. The amount of interest income from non-accruing loans that was
collected and included in net income was $113,000. 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 six months ended June 30, 2003, loan charge-offs totaled $5,500 and
recoveries totaled $3,100. There were no loan charge-offs or recoveries during
the six months ended June 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 the ability to repay their debt.
While a comprehensive analysis of the allowance for loan losses is somewhat
limited due to the Company's relatively short history, management believes that
the allowance was at an adequate level at June 30, 2003 based on the composition
of the portfolio as well as regulatory guidelines. Management recognizes there
are significant estimates in the process and losses could be significantly
different from those currently estimated.
The following table summarizes the Company's nonperforming loans as of June 30,
2003 and December 31, 2002. The increase in non-accrual loans from December 31,
2002 to June 30, 2003 was attributable to three commercial real estate loans
totaling $1.56 million being transferred to non-accrual status. Loans totaling
$0.39 million were transferred to accrual status or paid off. The decrease in
past due accruing loans from December 31, 2002 to June 30, 2003 was attributable
to $0.66 million of matured loans being paid off or refinanced during 2003 and
the remaining loan of $0.65 million was transferred to non-accrual status. One
commercial loan was restructured during 2003.
NONPERFORMING LOANS 6/30/2003 12/31/2002
- ------------------- --------- ----------
Nonaccrual Loans $3,255,625 $ 2,093,434
Accruing Loans Past Due 90 Days or More (1) $ - $ 1,310,560
Restructured Loans (2) $ 644,351 $ -
(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, 2003 totaled $1.07 million
as compared to $810,000 for the six months ended June 30, 2002, a 32% increase.
Management service fees were the largest component of non-interest income
totaling $451,000 for the six months ended June 30, 2003 compared to $511,000
for the six months ended June 30, 2002. 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. The decrease in the fee income is a result of
a decrease in Middleton Doll's total loans and leased properties. The gain on
sale of loans, which are received from the sale of residential mortgages
originated for the secondary market, totaled $416,000 for the six months ended
June 30, 2003 compared to $189,000 for the six months ended June 30, 2002. The
refinancing of residential mortgages continued to be strong during the second
quarter of 2003, however, the Company does not anticipate that this level of
residential mortgage loan sales is sustainable throughout the remainder of the
year. Service charges related to deposit accounts increased $12,000, cash
surrender value of a keyman life insurance policy increased $14,000, building
rental income increased $68,000 due to the building purchase in October of 2002,
and other income increased $3,000 over the same period in 2002.
14
Non-interest expense increased 5% to $1.69 million for the six months ended June
30, 2003 as compared to $1.61 million for the six months ended June 30, 2002.
Salaries and employee benefits totaled $1.16 million for the six months ended
June 30, 2003 and $1.12 million for the six months ended June 30, 2002. These
amounts included salaries that were reimbursed through the management service
fee noted above. The exercise of stock options in 2003 resulted in a $95,000
increase in salary expense. Other operating expenses, which include occupancy
and fixed asset expense, data processing fees, advertising, investor
communications, and professional fees were $529,000 compared to $482,000, a 10%
increase. Legal expenses relating to ongoing collection efforts regarding
commercial loans increased $52,000 over 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 tax exempt
interest income, tax differences in the allowance for loan losses and
charge-offs, non-accrual interest and depreciation.
For the six months ended June 30, 2003, the Company recorded federal and state
income tax expense of $746,000 and had a deferred tax asset of $979,000. For the
six months ended June 30, 2002, the Company recorded a federal and state income
tax expense of $420,000 and had a deferred tax asset of $850,000. The effective
rate for the income tax expense was 35% and 34% for the six months ended June
30, 2003 and June 30, 2002, respectively.
FINANCIAL CONDITION
The Company reported total assets of $177.29 million as of June 30, 2003 versus
$167.74 million as of December 31, 2002, a 6% increase. Cash and due from banks
decreased to $2.43 million as of June 30, 2003 from $2.82 million at December
31, 2002.
The Company's investment securities portfolio increased to $3.00 million as of
June 30, 2003 from $1.98 million at December 31, 2002. Investment securities
consist of money market mutual fund balances as well as 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, 2003, loans were $163.65 million compared to $156.50 million as
of December 31, 2002. Residential mortgage loans originated for sale on the
secondary market totaled an additional $2.56 million as of June 30, 2003
compared to $1.19 million as of December 31, 2002. Excluding the mortgage loans
originated for sale, the allowance for loan losses remained at approximately
1.2% of gross loans, totaling $2.02 million at June 30, 2003 and $1.99 million
at year end 2002. In addition to loans outstanding, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements, commercial letters of credit
and standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received. The Company had gross unfunded loan commitments outstanding totaling
$25.25 million as of June 30, 2003.
15
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, 2003 and December 31, 2002.
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT
---------------- ----------- ----------------- ------------
Commercial $ 26,574,314 16.24% $ 28,279,734 18.07%
Real Estate:
Construction 9,256,910 5.65% 8,661,420 5.53%
Commercial 74,575,141 45.57% 77,072,033 49.25%
Agricultural 378,966 0.23% 394,138 0.25%
Residential 50,835,900 31.06% 39,905,008 25.50%
Industrial Revenue Bonds
and Municipals 1,069,808 0.66% 1,114,434 0.71%
Leasing Finance Receivable 456,303 0.28% 580,850 0.37%
Installment and Consumer 178,778 0.11% 345,010 0.22%
Other 325,000 0.20% 150,000 0.10%
--------------- ---------- --------------- ----------
Total Loans $ 163,651,120 100.00% $ 156,502,627 100.00%
=============== ========== =============== ==========
Other assets at June 30, 2003 totaled $7.67 million compared to $7.23 million at
December 31, 2002. Other assets at June 30, 2003 included net building,
furniture and equipment of $2.49 million, accrued interest receivable on loans
of $723,000, deferred tax assets of $979,000, trust and subordinated debt legal
and placement fees of $318,000, Federal Home Loan bank stock of $922,000, cash
surrender value on a life insurance policy of $1.83 million, fair market value
of interest rate swaps of $252,000, and other miscellaneous assets of $154,000.
Total deposits decreased to $132.03 million at June 30, 2003 from $135.94
million as of year end 2002. Indexed money market accounts decreased 14% to
$30.44 million as of June 30, 2003 from $35.24 million as of December 31, 2002
primarily due to decreases in interest rates. Time certificates of deposit
increased to $91.66 million as of June 30, 2003 from $89.19 million as of year
end. Time deposits include brokered CDs with terms ranging from three months to
five and one-half years and totaled $61.90 million and $57.05 million as of June
30, 2003 and December 31, 2002, respectively. In order for the Company to
facilitate continued loan growth, management expects to continue to issue
brokered CDs and to competitively price its retail money market and certificate
of deposit products. Other deposits as of June 30, 2003 included non-interest
bearing accounts totaling $6.80 million and interest bearing checking accounts
(NOW accounts) of $3.13 million.
In addition to deposits, the Company periodically borrows funds via its
correspondent banking relationships. As of June 30, 2003, the Bank had purchased
$3.70 million in federal funds and had borrowed $18.20 million from the Federal
Home Loan Bank of Chicago. Subordinated debt (see Note 3) of $5.0 million was
obtained during 2003 and trust preferred securities debt of $5.0 million was
obtained during 2002.
Other liabilities decreased to $658,000 as of June 30, 2003 from $1.37 million
at December 31, 2002. Other liabilities as of June 30, 2003, consisted primarily
of accrued interest payable of $553,000 and accrued expenses payable of
$105,000.
16
Capital Resources
Capital ratios applicable to the Bank and the Company at June 30, 2003 and
December 31, 2002 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 6/30/03 $11,884,658 8.0% $ 5,942,329 4.0% $ 7,114,760 4.0%
Well-capitalized at 6/30/03 $14,855,822 10.0% $ 8,913,493 6.0% $ 8,893,450 5.0%
At June 30, 2003
Bank $18,178,462 12.3% $16,325,488 11.0% $16,325,488 9.2%
Company $24,561,026 16.5% $16,935,963 11.4% $16,935,963 9.5%
At December 31, 2002
Bank $16,614,979 11.3% $14,779,437 10.1% $14,779,437 9.0%
Company $17,197,472 11.7% $13,809,057 9.4% $13,809,057 8.4%
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, 2003 and
December 31, 2002.
During the third quarter of 2003, the Company expects to pay approximately
$240,000 in expenses relating to the proposed "going private" transaction. The
expenses consist primarily of the fees and expenses of its financial advisor,
attorneys, and accountants, as well as other related charges. These expenses
will be charged directly to capital. The Company expects to remain
well-capitalized following the proposed transaction.
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 June 30, 2003, the
Company held $3.00 million of marketable securities and $2.57 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 $14.0 million, of which $3.70 million was outstanding at June 30, 2003.
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 issued
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 2002, the Bank became a member of the Federal Home Loan Bank of
Chicago ("FHLB of Chicago") and as of June 30, 2003, the Bank had purchased
$922,400 worth of FHLB of Chicago stock. The stock, along with the loans that
were pledged at June 30, 2003, allowed the Bank to borrow up to approximately
$21.50 million from the FHLB of Chicago of which $18.20
17
million was outstanding at June 30, 2003. 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, 2003, the Company had eight interest
rate swap agreements outstanding with a notional value totaling $54.0 million
structured as a hedge of specific fixed-rate deposits whose terms approximate
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. The Company's interest rate swaps are
classified as fair value hedges with a fair market value of $252,000 at June 30,
2003.
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.
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.
Significant Accounting Policies
Allowance for Loan Losses. 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 evaluations as well as possible losses inherent in
the balances of 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, an 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.
Impaired Loans. A loan is impaired when, based on current
information and events, management does not expect to collect all amounts due
according to the contractual terms of the loan agreement in the normal course of
business. A loan is also impaired when the loan contract is restructured by
extending the due date of either principal or interest payments or by reducing
the interest rate on the loan. A loan is not impaired during a period of
18
delay in payment if management expects to collect all amounts due including
accrued interest at the contractual interest rate for the period of the delay.
Fair Value of Financial Instruments. 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.
Derivative Instruments. 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.
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 future terrorist attacks and threats or acts of war
and the response of the United States to any such attacks or threats; (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.
ITEM 3. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
June 30, 2003. Based on that evaluation, the Company's management, including the
Chief Executive Officer and Chief Accounting Officer, concluded that the
Company's disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls.
19
SCHEDULE 1
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
AVERAGE BALANCE SHEETS
FOR SIX MONTHS ENDED FOR YEAR ENDED
JUNE 30, 2003 DECEMBER 31, 2002
----------------- -----------------
Cash and Due From Banks $ 2,185,494 $ 2,096,129
Federal Funds Sold 23,343 230,959
Investment Securities (Taxable) 2,277,823 3,027,752
Loans:
Commercial 29,489,492 35,246,287
Commercial Real Estate 83,162,922 70,416,856
Residential Real Estate 49,439,192 30,884,950
Industrial Revenue Bonds 1,089,375 1,153,572
Leases 504,988 757,498
Installment and Consumer 287,156 302,830
----------------- -----------------
Total Loans 163,973,125 138,761,993
Less: Allowance for Loan Losses (2,012,321) (2,016,798)
----------------- -----------------
Net Loans 161,960,804 136,745,195
Fixed Assets 2,521,358 564,068
Other Assets 4,949,210 2,816,959
----------------- -----------------
Total Assets $ 173,918,032 $ 145,481,062
================= =================
Demand Deposits $ 7,163,147 $ 6,859,043
Interest Bearing Deposits
NOW 3,248,211 2,003,988
Money Market 32,814,313 42,388,186
Time Deposits 89,716,181 73,501,313
----------------- -----------------
Total Deposits 132,941,852 124,752,530
Federal Funds Purchased 4,115,055 2,195,301
Other Borrowings 23,746,132 7,369,042
Other Liabilities 1,522,195 1,422,930
----------------- -----------------
Total Liabilities 162,325,234 135,739,803
Equity Capital 11,592,798 9,741,259
----------------- -----------------
Total Liabilities and Capital $ 173,918,032 $ 145,481,062
================= =================
20
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 AND USE OF PROCEEDS
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
31.1 Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
A report on Form 8-K was filed on March 26, 2003,
under Item 5, which reported the Company's
participation in a private offering of subordinated
debt securities and the execution of an agreement and
plan of merger with a wholly-owned subsidiary
providing for a transaction which will have the
effect of causing the Company's stock to be
de-registered from the Securities and Exchange Act of
1934, as amended.
A report on Form 8-K was filed on May 2, 2003, under
Item 12, which reported the Company's financial
results for the quarterly period ended on March 31,
2003.
21
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, 2003 /s/ George R. Schonath
----------------------
George R. Schonath
Chief Executive Officer
Date: August 13, 2003 /s/ Susan J. Hauke
------------------
Susan J. Hauke
Chief Financial Officer
22
EXHIBIT INDEX
Exhibit Number Description
11 Statement Regarding Computation of Per Share Earnings
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002