UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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 0-25756
ISB Financial Corporation
---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Louisiana 72-1280718
- - ------------------------------------------------ ----------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification Number)
1101 East Admiral Doyle Drive
New Iberia, Louisiana 70560
- - ------------------------------------------------ ----------------
(Address of principal executive office) (Zip Code)
(337) 365-2361
----------------------------------------------------
(Registrant's telephone number, including area code)
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 ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of November 9, 1999, 6,546,374 shares of the Registrants' common stock were
issued and outstanding. Of that total, 573,654 shares are held by the
Registrant's Employee Stock Ownership Plan, of which 279,997 shares were not
committed to be released.
1
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition................... 3
(As of September 30, 1999 and December 31, 1998)
Consolidated Statements of Income (For the three and nine....... 4
months ended September 30, 1999 and 1998)
Consolidated Statements of Stockholders' Equity (For the........ 5
nine months ended September 30, 1999 and 1998)
Consolidated Statements of Cash Flows (For the nine............. 6
months ended September 30, 1999 and 1998)
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition..... 9
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 17
PART 2. OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings.............................................. 18
Item 2. Changes in Securities.......................................... 18
Item 3. Defaults Upon Senior Securities................................ 18
Item 4. Submission of Matters to a Vote of Security Holders............ 18
Item 5. Other Information.............................................. 18
Item 6. Exhibits and Reports on Form 8-K............................... 18
SIGNATURES............................................................... 19
2
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(Dollars in Thousands, Except Share Data)
ASSETS
------
September 30, December 31,
1999 1998
---------------- ------------------
Cash and Cash Equivalents:
Cash on Hand and Due from Banks............................ $ 32,595 $ 36,953
Interest Bearing Deposits.................................. 3,092 108,918
Investment Securities:
Held to Maturity (fair value of $2,260 and $2,675,......... 2,259 2,673
respectively)
Available for Sale, at fair value.......................... 119,015 97,085
Mortgage-Backed Securities Held to Maturity (fair................. 284,330 277,798
value of $275,902 and $277,692, respectively)
Loans Held For Sale............................................... 4,437 18,495
Loans Receivable, Net............................................. 820,097 761,175
Foreclosed Property............................................... 352 384
Premises and Equipment, Net....................................... 26,792 27,326
Federal Home Loan Bank Stock, at Cost............................. 6,337 10,245
Accrued Interest Receivable....................................... 7,389 7,667
Goodwill and Acquisition Intangibles.............................. 42,912 45,352
Other Assets...................................................... 5,937 7,559
---------------- ------------------
TOTAL ASSETS $ 1,355,544 $ 1,401,630
================ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Deposits.......................................................... $ 1,098,113 $ 1,218,698
Federal Home Loan Bank Advances................................... 119,512 45,639
Long Term Debt.................................................... 5,575 0
Advance Payments by Borrowers for Taxes and Insurance............. 1,619 1,228
Accrued Interest Payable on Deposits.............................. 5,291 6,708
Accrued and Other Liabilities..................................... 5,294 5,390
---------------- ------------------
TOTAL LIABILITIES................................................. 1,235,404 1,277,663
---------------- ------------------
STOCKHOLDERS' EQUITY:
Preferred Stock of $1 par value; 5,000,000 shares authorized...... 0 0
-0- shares issued or outstanding
Common Stock of $1 par value, authorized 25,000,000............... 7,381 7,381
shares, 7,380,671 shares issued
Additional Paid-in Capital........................................ 68,554 68,021
Retained Earnings (Substantially Restricted)...................... 69,036 63,527
Unearned Common Stock Held by ESOP................................ (2,800) (3,267)
Unearned Common Stock Held by RRP Trust........................... (3,353) (3,683)
Treasury Stock, 834,297 and 498,805 shares, at cost............... (15,391) (8,361)
Accumulated Other Comprehensive Income............................ (3,287) 349
---------------- ------------------
TOTAL STOCKHOLDERS' EQUITY........................................ 120,140 123,967
---------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................ $ 1,355,544 $ 1,401,630
================ ==================
See Notes to Consolidated Financial Statements
3
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------- ----------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
INTEREST INCOME:
Interest on Loans........................................ $ 16,951 $ 15,255 $ 49,215 $ 43,857
Interest and Dividends on Investment Securities.......... 2,000 1,118 5,857 3,359
Interest on Mortgage-Backed Securities................... 4,501 2,524 13,398 5,946
Interest on Deposits..................................... 8 727 986 1,619
--------- --------- --------- ---------
Total Interest Income............................................ 23,460 19,624 69,456 54,781
--------- --------- --------- ---------
INTEREST EXPENSE:
Interest on Deposits..................................... 10,011 8,543 30,443 23,997
Interest on Federal Home Loan Bank Advances.............. 1,447 1,145 3,107 2,654
--------- --------- --------- ---------
Total Interest Expense........................................... 11,458 9,688 33,550 26,651
--------- --------- --------- ---------
Net Interest Income.............................................. 12,002 9,936 35,906 28,130
Provision for Loan Losses........................................ 288 206 923 691
--------- --------- --------- ---------
Net Interest Income After Provision for Loan Losses.............. 11,714 9,730 34,983 27,439
--------- --------- --------- ---------
NONINTEREST INCOME:
Gain on the Sale of Property............................. 60 - 125 14
Gain on the Sale of Loans................................ 192 523 990 1,045
Service Charges on Deposit Accounts...................... 2,011 1,063 5,738 2,913
Late Charges and Other Fees on Loans..................... 283 232 1,206 761
Other Income............................................. 838 365 2,576 1,093
--------- --------- --------- ---------
Total Noninterest Income......................................... 3,384 2,183 10,635 5,826
--------- --------- --------- ---------
NONINTEREST EXPENSE:
Salaries and Employee Benefits........................... 5,321 4,139 15,645 11,290
SAIF Deposit Insurance Premium........................... 109 108 354 327
Depreciation Expense..................................... 660 468 1,938 1,282
Occupancy Expense........................................ 807 542 2,337 1,485
Computer Expense......................................... 37 298 68 893
Marketing and Advertising................................ 230 264 704 717
Franchise and Shares Tax Expense......................... 345 248 988 745
Amortization of Goodwill and Other Acquired Intangibles.. 843 472 2,551 1,203
Other Expenses........................................... 2,208 1,663 7,259 4,539
--------- --------- --------- ---------
Total Noninterest Expense........................................ 10,560 8,202 31,844 22,481
--------- --------- --------- ---------
Income Before Income Tax Expense................................. 4,538 3,711 13,774 10,784
Income Tax Expense............................................... 1,751 1,489 5,300 4,259
--------- --------- --------- ---------
NET INCOME....................................................... $ 2,787 $ 2,222 $ 8,474 $ 6,525
========= ========= ========= =========
EARNINGS PER SHARE - BASIC....................................... $ 0.46 $ 0.35 $ 1.37 $ 1.04
========= ========= ========= =========
EARNINGS PER SHARE - DILUTED..................................... $ 0.45 $ 0.34 $ 1.35 $ 1.00
========= ========= ========= =========
See Notes to Consolidated Financial Statements
4
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(Dollars in Thousands)
Unearned
Unearned Common
Additional Common Stock
Common Paid In Retained Stock Held Held By
Stock Capital Earnings By ESOP RRP Trust
---------- ----------- ------------ ---------- -----------
BALANCE, DECEMBER 31, 1997.................... $ 7,381 $ 66,798 $ 57,096 $ (3,921) $ (4,082)
Comprehensive Income:
Net Income................................. 6,525
Change in Unrealized Gain (Loss) on
Securities Available for Sale
Net of Deferred Taxes of $20
Total Comprehensive Income
Cash Dividends Declared....................... (2,787)
Common Stock Released by...................... 784 494
ESOP Trust
Common Stock earned by Participants........... 32 295
of Management Recognition Plan
Treasury Stock Acquired
Stock Options Exercised....................... 7
---------- ----------- ------------ ---------- -----------
BALANCE, SEPTEMBER 30, 1998.................. $ 7,381 $ 67,621 $ 60,834 $ (3,427) $ (3,787)
========== =========== ============ ========== ===========
BALANCE, DECEMBER 31, 1998.................... $ 7,381 $ 68,021 $ 63,527 $ (3,267) $ (3,683)
Comprehensive Income:
Net Income................................. 8,474
Change in Unrealized Gain (Loss) on
Securities Available for Sale
Net of Deferred Taxes of ($1,749)
Total Comprehensive Income
Cash Dividends Declared....................... (2,965)
Common Stock Released by...................... 375 467
ESOP Trust
Common Stock Earned by Participants........... 157 330
of Recognition and Retention Plan Trust
Treasury Stock Acquired
Stock Options Exercised....................... 1
---------- ----------- ------------ ---------- -----------
BALANCE, SEPTEMBER 30, 1999................... $ 7,381 $ 68,554 $ 69,036 $ (2,800) $ (3,353)
========== =========== ============ ========== ==========
Accumulated
Other Total
Treasury Comprehensive Stockholders'
Stock Income Equity
---------- ----------- ------------
BALANCE, DECEMBER 31, 1997..................... $ (7,929) $ 221 $ 115,564
Comprehensive Income:
Net Income.................................. 6,525
Change in Unrealized Gain (Loss) on......... 198 198
------------
Securities Available for Sale
Net of Deferred Taxes of $20
Total Comprehensive Income..................... 6,723
Cash Dividends Declared........................ (2,787)
Common Stock Released by....................... 1,278
ESOP Trust
Common Stock earned by Participants............ 327
of Management Recognition Plan
Treasury Stock Acquired........................ (503) (503)
Stock Options Exercised........................ 71 78
---------- --------- ------------
BALANCE, SEPTEMBER 30, 1998................... $ (8,361) $ 419 120,680
========== ========= ===========
BALANCE, DECEMBER 31, 1998..................... $ (8,361) $ 349 123,967
Comprehensive Income:
Net Income.................................. 8,474
Change in Unrealized Gain (Loss) on......... (3,636) (3,636)
Securities Available for Sale
Net of Deferred Taxes of ($1,749)
------------
Total Comprehensive Income..................... 4,838
Cash Dividends Declared........................ (2,965)
Common Stock Released by....................... 842
ESOP Trust
Common Stock Earned by Participants............ 487
of Recognition and Retention Plan Trust
Treasury Stock Acquired........................ (7,045) (7,045)
Stock Options Exercised........................ 15 16
---------- --------- -----------
BALANCE, SEPTEMBER 30, 1999.................... $ (15,391) $ (3,287) $ 120,140
========== ========= ===========
See Notes to Consolidated Financial Statements
5
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended
September 30, 1999 and 1998
(Dollars in Thousands)
1999 1998
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income....................................................... $ 8,474 $ 6,525
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization............................. 4,964 2,606
Provision for Loan Losses................................. 923 691
Compensation Expensed Recognized on RRP................... 373 327
(Gain) Loss on Sale of Premises and Equipment............. (107) (12)
Book Value of Equipment Donated........................... 120 0
(Gain) Loss on Sale of Real Estate Owned.................. (30) 41
Gain on Sale of Loans Held for Sale....................... (991) (799)
Gain on Sale of Investments............................... 0 (3)
Amortization of Premium/Discount on Investments........... 852 (23)
Current Provision for Deferred Income Taxes............... (4) (33)
FHLB Stock Dividends...................................... (355) (272)
Loans Originated for Resale............................... (44,340) (48,683)
Proceeds from Loans Sold to Others........................ 60,453 49,482
Income Reinvested on Marketable Equity Security........... (241) (245)
ESOP Contribution......................................... 956 1,223
Changes in Assets and Liabilities:
(Increase) Decrease in Accrued Interest Receivable..... 278 (1,052)
Decrease in Other Assets and Other Liabilities......... 1,468 754
------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................ 32,793 10,527
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds From Calls of Held to Maturity Securities........ 0 68
Proceeds From Sales of Available for Sale Securities...... 0 8,498
Proceeds From Maturities of Held to Maturity Securities... 414 365
Proceeds From Maturities of Available for Sale Securities. 20,500 21,345
Proceeds From Mortgage-Backed Securities.................. 0 391
Principal Collections on Mortgage-Backed Securities....... 44,840 31,146
Purchases of Securities Available for Sale................ (47,837) (54,981)
Purchases of Held to Maturity Securities.................. 0 (1,295)
Purchases of Mortgage-Backed Securities................... (52,161) (162,103)
Increase in Loans Receivable, Net......................... (61,695) (14,041)
Proceeds From FHLB Stock Redemption....................... 4,853 1,162
Purchase of FHLB Stock.................................... (590) (4,828)
Purchase of Branch Deposits and Related Assets............ 0 293,029
Proceeds From Sale of Premises and Equipment.............. 503 202
Purchases of Premises and Equipment....................... (1,919) (3,308)
Proceeds From Disposition of Real Estate Owned............ 840 497
------------- ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES.............. (92,252) 116,147
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Change in Demand, NOW, Money Market and
Savings Deposits....................................... (62,238) (2,702)
Net Change in Time Deposits............................... (58,347) (24,202)
Increase in Escrow Funds and Miscellaneous
Deposits, Net.......................................... 391 308
Proceeds From FHLB Advances............................... 2,131,360 0
Principal Repayments of FHLB Advances..................... (2,057,487) (810)
Issuance of LT Debt....................................... 5,575 0
Dividends Paid to Shareholders............................ (2,950) (2,625)
Proceeds From Sale of Treasury Stock...................... 16 78
Payments to Repurchase Common Stock....................... (7,045) (503)
------------- ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES.............. (50,725) (30,456)
------------- ------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS...................... (110,184) 96,218
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................. 145,871 44,307
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....................... $ 35,687 $ 140,525
============= ============
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Acquisition of Real Estate in Settlement of Loans......... $ 769 $ 487
============= ============
SUPPLEMENTAL DISCLOSURES:
Cash Paid (Received) For:
Interest on Deposits and Borrowings....................... $ 34,967 $ 23,559
============= ============
Income Taxes.............................................. $ 4,673 $ 3,662
============= ============
Income Tax Refunds........................................ $ 9 $ -
============= ============
See Notes to Consolidated Financial Statements
6
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements were prepared in accordance
with the instructions to Form 10-Q, and therefore, do not include information or
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. All normal, recurring adjustments, which, in the opinion of
management, are necessary for a fair presentation of the financial statements,
have been included. These interim financial statements should be read in
conjunction with the audited financial statements and note disclosures for ISB
Financial Corporation (the "Company") previously filed with the Securities and
Exchange Commission in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
BUSINESS
The Company's principal business is conducted through its wholly owned
subsidiary, IBERIABANK (the "Bank"), which conducts business from its main
office located in New Iberia, Louisiana and 42 full-service branch offices
located in the cities of New Iberia, Lafayette, Scott, Carencro, St.
Martinville, Crowley, Rayne, Kaplan, Jeanerette, Franklin, Morgan City,
Abbeville, Ruston, Monroe, West Monroe, Gretna, Marrero, River Ridge, Metairie,
New Orleans and Kenner, Louisiana. The Federal Deposit Insurance Corporation
("FDIC") insures the Bank's deposits to the maximum extent permitted by law. The
Bank is a Louisiana chartered commercial bank. The Bank is subject to
examination and regulation by the Office of Financial Institutions of the State
of Louisiana, which is the Bank's chartering authority and primary regulator.
The Bank is also subject to regulation by the FDIC and to certain reserve
requirements established by the Federal Reserve Board ("FRB"). The Bank is a
member of the Federal Home Loan Bank of Dallas ("FHLB").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, the
Bank and the Bank's wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
2. LONG TERM DEBT
On March 4, 1999, the Company entered into a revolving line of credit agreement
with Union Planters Bank, N.A in the amount of $15.0 million. This revolving
line of credit is to be used for general operating purposes, including the
repurchase of the Company's common stock and for capital investment in the Bank.
The maturity date of the agreement is March 31, 2001. The Company is required to
make quarterly payments of interest at an interest rate equal to Wall Street
Prime minus .50% and any balance outstanding under the agreement will be due at
maturity. As security for the line of credit, the Company has pledged 100% of
the outstanding common stock of the Bank. At September 30, 1999, the Company had
drawn $5.6 million on the line of credit.
7
3. LOANS RECEIVABLE
Loans receivable (in thousands) at September 30, 1999 and December 31, 1998
consisted of the following:
Sept. 30, Dec. 31,
1999 1998
--------- ----------
Residential Mortgage Loans:
Single-family................................. $ 270,542 $ 301,468
Construction.................................. 5,929 7,549
--------- ----------
Total Residential Mortgage Loans........... 276,471 309,017
Commercial Loans:
Business...................................... 81,991 83,368
Real Estate................................... 154,117 117,628
--------- ----------
Total Commercial Loans..................... 236,108 200,996
Consumer Loans:
Home Equity................................ 86,661 73,184
Automobile................................. 22,823 24,630
Indirect Automobile........................ 164,214 114,337
Mobile Home................................ 2,436 2,511
Educational................................ 212 624
Credit Card................................ 5,566 4,584
Loans on Savings........................... 5,155 8,104
Other...................................... 25,091 27,753
--------- ----------
Total Consumer Loans................ 312,158 255,727
--------- ----------
Total Loans Receivable.............. 824,737 765,740
Adjustments:
Allowance for Loan Losses......................... ( 7,438) ( 7,135)
Prepaid Dealer Participation...................... ( 5,865) 4,145
Unearned Interest................................. ( 230) ( 236)
Deferred Loan Fees & Purchased Discounts, Net..... ( 2,837) ( 1,339)
--------- ----------
Loans Receivable, Net............................. $ 820,097 $ 761,175
========= ==========
4. EARNINGS PER SHARE
Basic earnings per share were based on 6,036,554 weighted average shares
outstanding during the three month period ended September 30, 1999. Diluted
earnings per share were based on 6,133,017 weighted average shares outstanding
during the three month period ended September 30, 1999. For the three months
ended September 30, 1999, the weighted average number of common shares
outstanding excludes (a) the weighted average unreleased shares owned by the
Employee Stock Ownership Plan ("ESOP") of 287,690; (b) the weighted average
shares owned by the Management Recognition Plan and Trust of 222,130 and (c) the
weighted average shares purchased in Treasury Stock of 834,297.
For the nine months ended September 30, 1999, basic earnings per share were
based on 6,171,897 weighted average shares outstanding and diluted earnings per
share were based on 6,293,987 weighted average shares outstanding. For the nine
months ended September 30, 1999, the weighted average number of common shares
outstanding excludes (a) the weighted average unreleased shares owned by the
ESOP of 303,217; (b) the weighted average shares owned by the Management
Recognition Plan and Trust of 234,455 and (c) the weighted average shares
purchased in Treasury Stock of 672,874.
8
This Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, which may be
identified by the use of such words as "believe," "expect," "anticipate,"
"should," "planned," "estimated," and "potential." Examples of forward-looking
statements include, but are not limited to, estimates with respect to the
financial condition, results of operations and business of the Company that are
subject to various factors which would cause actual results to differ materially
from the estimates. These factors include, but are not limited to, general
economic conditions, changes in interest rates, deposit flows, loan demand, real
estate values, and competition; changes in accounting principles, policies, or
guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory, and technological factors affecting the
Company's operations, pricing, products and services.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
At September 30, 1999, the consolidated assets of the Company totaled $1.36
billion, a decrease of $46.1 million, or 3.3%, from December 31, 1998.
Loans receivable, net, increased by $58.9 million, or 7.7%, to $820.1 million at
September 30, 1999 compared to $761.2 million at December 31, 1998. Such
increase was the result of a $34.9 million, or 29.7%, increase in the balance of
commercial real estate loans, a $13.5 million, or 18.4%, increase in home equity
loans, a $49.9 million, or 43.6%, increase in indirect automobile loans and a
$982,000, or 21.4%, increase in credit card loans, which was partially offset by
a $30.9 million, or 10.3%, decrease in single-family residential loans, a $1.4
million, or 1.7%, decrease in commercial business loans, a $1.6 million, or
21.5%, decrease in single-family residential construction loans, a $2.9 million,
or 36.4%, decrease in loans on savings and a $2.5 million, or 8.8%, decrease in
other consumer loans. The changes in the loan portfolio reflect management's
efforts to increase the originations of commercial real estate, commercial
business, indirect automobile loans and consumer loans. Such loans generally are
considered to involve more risk than 1 - 4 family residential mortgage loans,
but generally have higher yields. The Company's loan to deposit ratio at
September 30, 1999 was 74.7% compared to 62.5% at December 31, 1998. For
additional information on loans, see Note 3 to the Consolidated Financial
Statements.
Loans held for sale decreased $14.1 million, or 76.0%, to $4.4 million compared
to $18.5 million at December 31, 1998. Loans held for sale are single-family
residential mortgage loans to be sold in the secondary market.
Interest-bearing deposits at other institutions decreased $105.8 million, or
97.2%, to $3.1 million at September 30, 1999, compared to $108.9 million at
December 31, 1998. Such decrease was primarily used to fund loan originations,
the purchase of investment and mortgage-backed securities and net deposit
withdrawals.
The Company's investment securities available for sale increased $21.9 million,
or 22.6%, to $119.0 million at September 30, 1999, compared to $97.1 million at
December 31, 1998. Such increase was primarily the result of the purchase of
$47.8 million of investment securities available for sale, which was partially
offset by the maturity or redemption of $20.5 million of investment securities
available for sale and a $5.4 million decrease in the market value of such
securities.
Mortgage-backed securities increased $6.5 million, or 2.4%, to $284.3 million at
September 30, 1999, compared to $277.8 million at December 31, 1998. Such
increase was the result of $52.1million of purchases of mortgage-backed
securities, which was partially offset by $44.8 million of repayments of
mortgage-backed securities and $789,000 of net amortization of premiums on
mortgage-backed securities.
9
Deposits decreased $120.6 million, or 9.9%, to $1,098.1 million at September 30,
1999, compared to $1,218.7 million at December 31, 1998. The decrease in
deposits was primarily the result of a $15 million overnight deposit made on
December 31, 1998 that was withdrawn the next business day, a $58.3 million
decrease in time deposits due primarily to lower pricing of non-relationship
accounts and the runoff of transaction accounts, primarily from the former First
Commerce branches acquired in September of 1998.
Federal Home Loan Bank advances increased $73.9 million, or 161.9%, to $119.5
million at September 30, 1999, compared to $45.6 million at December 31, 1998.
The net increase in advances was in short term advances with a duration of 8
days or less. No new long term borrowings were made in 1999. The increase in
advances was used primarily to fund net deposit decreases.
Total stockholders' equity decreased $3.9 million, or 3.1%, to $120.0 million at
September 30, 1999. The decrease was the result of $7.0 million of treasury
stock acquired, $3.0 million of cash dividends declared on common stock and a
$3.6 million, after taxes, decrease in accumulated other comprehensive income,
which was partially offset by the Company's net income of $8.5 million, $842,000
of common stock released by the ESOP, $487,000 of common stock earned by
participants of the Recognition and Retention Plan and $16,000 of common stock
issued out of treasury upon exercise of stock options.
10
RESULTS OF OPERATIONS
The Company reported net income of $2.8 million for the three months ended
September 30, 1999, compared to $2.2 million earned during the three months
ended September 30, 1998. The Company's net interest income increased $2.1
million and total noninterest income increased $1.2 million during the
three months ended September 30, 1999 compared to the third quarter of
1998. Such increases were partially offset by a $2.4 million increase in
noninterest expense and a $262,000 increase in income tax expense. The
increases in interest income, interest expense, noninterest income and
noninterest expense were primarily the result of the acquisition of
branches from the former First Commerce Corporation ("First Commerce") in
September 1998. The Bank paid $29.2 million of cash as a deposit premium
and purchased $126.6 million of loans, $5.7 million of premises and
equipment and $753,000 of other assets. The Bank also assumed $452.6
million of deposits and $2.7 million of other liabilities from First
Commerce. The Bank received $292.4 million of net cash in the transaction.
For the nine months ended September 30, 1999, the Company earned $8.5
million compared to $6.5 million for the same period of 1998. The Company's
net interest income increased $7.5 million and total noninterest income
increased $4.8 million during the nine months ended September 30, 1999
compared to the first nine months of 1998. Such increases were partially
offset by a $232,000 increase in provision for loan losses, a $9.4 million
increase in noninterest expense and a $1.0 million increase in income tax
expense when comparing the first nine months of 1999 to the same period of
1998.
11
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Bank from
interest-earning assets and the resultant average yields (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average daily balances during the
indicated periods.
Three Months Ended September 30,
-----------------------------------------------------------------------
1999 1998
----------------------------------- --------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost(1) Balance Interest Cost(1)
-------------- --------- --------- ------------ ---------------------
Interest-earning assets:
Loans receivable:
Mortgage loans................................... $280,401 $5,486 7.83 % $342,943 $ 6,930 8.08 %
Commercial loans................................. 216,420 4,908 9.07 151,175 3,552 9.40
Consumer and other loans....................... 306,667 6,558 8.55 213,490 4,772 8.94
-------- ------ -------- ------
Total Loans................................. 803,488 16,952 8.44 707,608 15,254 8.62
-------- ------- -------- -------
Mortgage-backed securities............................ 291,044 4,501 6.19 157,281 2,523 6.42
Investment securities................................. 129,084 2,001 6.20 68,085 1,119 6.57
Other earning assets................................. 1,241 7 2.26 60,009 728 4.85
------ -- ------- ----
Total interest-earning assets..................... 1,224,857 23,461 7.66 992,983 19,624 7.91
------- -------
Non-interest-earning assets........................... 124,680 68,019
-------- -------
Total assets....................................... $1,349,537 $1,061,002
========== ===========
Interest-bearing liabilities:
Deposits:
Demand deposits.................................. $273,547 1,603 2.34 $181,413 1,232 2.72
Passbook savings deposits....................... 132,358 687 2.08 110,164 608 2.21
Certificates of deposits........................ 608,480 7,722 5.08 499,248 6,704 5.37
-------- ------ -------- ------
Total deposits................................ 1,014,385 10,012 3.95 790,825 8,544 4.32
Borrowings............................................. 92,877 1,446 6.23 72,708 1,144 6.29
------- ------ ------- ------
Total interest-bearing
liabilities.................................. 1,107,262 11,458 4.14 863,533 9,688 4.49
------- ------
Non-interest bearing demand deposits................. 112,081 63,792
Non-interest bearing liabilities..................... 10,831 13,343
------- -------
Total liabilities............................. 1,230,174 940,668
Stockholders' Equity................................... 119,363 120,334
-------- --------
Total liabilities and stockholders' equity.. $1,349,537 $1,061,002
========== ===========
Net interest-earning assets.......................... $ 117,595 $129,450
========= =========
Net interest income/interest rate
spread.............................................. $12,003 3.52 % $ 9,936 3.42 %
======== ===== ======= =====
Net interest margin.................................. 3.92 % 4.00 %
===== =====
Ratio of average interest-
earning assets to average
interest-bearing liabilities..................... 110.62% 114.99%
======= =======
Nine Months Ended September 30,
----------------------------------------------------------------------
1999 1998
---------------------------------- --------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost(1) Balance Interest Cost(1)
------------- ----------- ---------------------- ---------- ---------
Interest-earning assets:
Loans receivable:
Mortgage loans.................................... $296,091 $17,215 7.75 % $357,095 $21,569 8.05 %
Commercial loans.................................. 208,528 13,805 8.83 134,008 9,759 9.71
Consumer and other loans........................ 283,273 18,195 8.56 191,607 12,529 8.72
-------- ------- -------- -------
Total Loans.................................. 787,892 49,215 8.33 682,710 43,857 8.57
-------- ------- -------- -------
Mortgage-backed securities............................. 288,278 13,398 6.20 122,870 5,946 6.45
Investment securities.................................. 127,225 5,857 6.14 69,551 3,359 6.44
Other earning assets.................................. 30,626 986 4.29 38,627 1,619 5.59
------- ---- ------- ------
Total interest-earning assets...................... 1,234,021 69,456 7.50 913,758 54,781 7.99
------- -------
Non-interest-earning assets............................ 123,345 62,916
-------- -------
Total assets........................................ $1,357,366 $976,674
=========== ========
Interest-bearing liabilities:
Deposits:
Demand deposits................................... $284,633 4,763 2.23 $165,212 3,224 2.60
Passbook savings deposits........................ 129,740 1,847 1.90 109,512 1,887 2.30
Certificates of deposits......................... 627,617 23,833 5.06 460,884 18,887 5.46
-------- ------- -------- -------
Total deposits................................. 1,041,990 30,443 3.90 735,608 23,998 4.35
Borrowings.............................................. 67,379 3,107 6.15 55,334 2,653 6.39
------- ------ ------- ------
Total interest-bearing
liabilities................................... 1,109,369 33,550 4.03 790,942 26,651 4.49
------- -------
Non-interest bearing demand deposits.................. 114,213 52,334
Non-interest bearing liabilities...................... 11,902 14,650
------- -------
Total liabilities.............................. 1,235,484 857,926
Stockholders' Equity.................................... 121,881 118,748
-------- --------
Total liabilities and stockholders' equity... $1,357,365 $976,674
=========== ========
Net interest-earning assets........................... $124,652 $122,816
========= ========
Net interest income/interest rate
spread............................................... $35,906 3.47 % $28,130 3.50 %
======== ===== ======== =====
Net interest margin................................... 3.88 % 4.10 %
===== =====
Ratio of average interest-
earning assets to average
interest-bearing liabilities...................... 111.24% 115.53%
======= =======
- ---------------------
(1) Annualized.
12
NET INTEREST INCOME
Net interest income increased $2.1 million, or 20.8%, to $12.0 million in
the three months ended September 30, 1999, compared to $9.9 million in the
three months ended September 30, 1998. The increase was due to a $3.8
million, or 19.5% increase in interest income, which was partially offset
by a $1.8 million, or 18.3%, increase in interest expense. The increase in
interest income was the result of a $231.9 million, or 23.4%, increase in
the average balance of interest-earning assets, which was partially offset
by a 25 basis point (100 basis points being equal to 1%) decrease in the
yield earned on interest-earning assets. The increase in interest expense
was the result of a $243.7 million, or 28.2%, increase in the average
balance of interest-bearing liabilities, which was partially offset by a 35
basis point decrease in the cost thereof. The increases in the average
balances of interest-earning assets and interest-bearing liabilities were
due primarily to the branch acquisition from First Commerce in September
1998. The Company's interest rate spread (the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities) and net interest margin (net interest
income as a percentage of average interest-earning assets) amounted to
3.52% and 3.92%, respectively, during the three months ended September 30,
1999, compared to 3.42% and 4.00%, respectively, for the comparable period
in 1998.
For the nine months ended September 30, 1999, net interest income increased
$7.8 million, or 27.6%, to $35.9 million, compared to $28.1 million for the
first nine months of 1998. The increase was due to a $14.7 million, or
26.8%, increase in interest income, which was partially offset by a $6.9
million, or 25.9%, increase in interest expense. The increase in interest
income was the result of a $320.3 million, or 35.0%, increase in the
average balance of interest-earning assets, which was partially offset by a
49 basis point decrease in the yield earned on interest-earning assets. The
increase in interest expense was the result of a $318.4 million, or 40.3%,
increase in the average balance of interest-bearing liabilities, which was
partially offset by a 46 basis point decrease in the cost thereof. The
Company's interest rate spread and net interest margin amounted to 3.47%
and 3.88%, respectively, during the nine months ended September 30, 1999,
compared to 3.50% and 4.10%, respectively, for the comparable period in
1998.
INTEREST INCOME
The Company's total interest income was $23.5 million for the three months
ended September 30, 1999, compared to $19.6 million for the three months
ended September 30, 1998. The reason for the $3.8 million, or 19.5%,
increase in interest income was a $1.7 million, or 11.1%, increase in
interest income from loans, a $882,000, or 78.9%, increase in interest and
dividends on investment securities and a $2.0 million, or 78.3%, increase
in interest on mortgage-backed securities, which was partially offset by a
$719,000, or 98.9%, decrease in interest on deposits held at other
institutions. The increase in interest income from loans was the result of
a $95.9 million, or 13.5%, increase in the average balance of loans, which
was partially offset by an 18 basis point decrease in the yield earned
thereon. The increase in interest income from investment securities was the
result of a $61.0 million, or 89.6%, increase in the average balance of
investment securities, which was partially offset by an 37 basis point
decrease in the yield earned thereon. The increase in interest income from
mortgage-backed securities was the result of a $133.8 million, or 85.0%,
increase in the average balance of mortgage-backed securities, which was
partially offset by a 23 basis point decrease in the yield earned thereon.
The decrease in interest from deposits at other institutions was the result
of a $58.8 million, or 97.9%, decrease in the average balance of deposits
at other institutions, together with a 259 basis point decrease in the
yield earned thereon.
For the nine months ended September 30, 1999, total interest income was
$69.5 million, compared to $54.8 million for the same period in 1998. The
reasons for the $14.7 million, or 26.8%, increase in interest income were a
$5.4 million, or 12.2%, increase in interest income from loans, a $2.5
million, or 74.4%, increase in interest income from investment securities
and a $7.5 million, or 125.3%, increase in interest income from
mortgage-backed securities, which was partially offset by a $633,000, or
39.1%, decrease in interest income from deposits at other institutions. The
increase in interest from loans was the result of a $105.2 million, or
15.4%, increase in the average balance of
13
loans, which was partially offset by a 24 basis point decrease in the yield
on loans. The increase in interest and dividends on investment securities
was the result of a $57.7 million, or 82.9%, increase in the average
balance of investment securities, which was partially offset by a 30 basis
point decrease in the yield on investment securities. The increase in
interest on mortgage-backed securities was the result of a $165.4 million,
or 134.6%, increase in the average balance of mortgage-backed securities,
which was partially offset by a 25 basis point decrease in the yield on
mortgage-backed securities. The decrease in interest on deposits at other
institutions was the result of a $8.0 million, or 20.7%, decrease in the
average balance of deposits at other institutions, together with a 130
basis point decrease in the yield on deposits at other institutions.
INTEREST EXPENSE
The Company's total interest expense was $11.5 million during the three
months ended September 30, 1999, compared to $9.7 million for the three
months ended September 30, 1998. The reasons for the $1.8 million, or
18.3%, increase in interest expense was a $1.5 million, or 17.2%, increase
in interest expense on deposits due to a $223.6 million, or 28.3%, increase
in the average balance of interest-bearing deposits, which was partially
offset by a 37 basis point decrease in the cost of such deposits and a
$302,000, or 26.4%, increase in interest expense on advances due to a $20.2
million, or 27.7%, increase in the average balance of advances, which was
partially offset by a 6 basis point decrease in the cost of such advances.
For the nine months ended September 30, 1998, the Company's total interest
expense was $33.6 million, compared to $26.7 million for the same period in
1998. The reason for the $6.9 million, or 25.9%, increase in interest
expense was a $306.4 million, or 41.7%, increase in the average balance of
interest-bearing deposits, which was partially offset by a 45 basis point
decrease in the cost thereof and a $454,000, or 17.1%, increase in interest
expense on advances due to a $12.0 million, or 21.8%, increase in the
average balance of advances, which was partially offset by a 24 basis point
decrease in the cost of such advances.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $288,000 in the three months ended
September 30, 1999 as compared to $206,000 for the same period in 1998. The
Company had $5.1 million of non-performing loans, or .38% of total assets,
at September 30, 1999, compared to $5.6 million, or .38% of total assets,
at December 31, 1998. As of September 30, 1999, the ratio of the Company's
allowance for loan losses to non-performing loans was 145.8%, compared to
126.5% at December 31, 1998.
For the nine months ended September 30, 1999, the provision for loan losses
was $923,000 as compared to $691,000 for the first nine months of 1998.
NONINTEREST INCOME
Noninterest income increased $1.2 million, or 55.0%, in the three months
ended September 30, 1999 to $3.4 million, compared to $2.2 million for the
three months ended September 30, 1998. Such increase was due primarily to a
$948,000, or 89.2%, increase in service charges on deposit accounts, a
$51,000, or 22.0%, increase in late charges and other fees on loans and a
$473,000, or 129.6%, increase in other income, which was partially offset
by a $331,000, or 63.3% decrease in gains on the sale of mortgage loans in
the secondary market.
For the nine months ended September 30, 1999, noninterest income increased
$4.8 million, or 82.5%, to $10.6 million, compared to $5.8 million for the
first nine months of 1998. Such increase was due to a $2.8 million, or
97.0%, increase in service charges on deposits accounts, a $445,000, or
58.5%, increase in late charges and other fees on loans a $1.5 million, or
135.7%, increase in other income,
14
which was partially offset by a $55,000, or 5.3%, decrease in gains on the
sale of mortgage loans in the secondary market. The increase in fees on
deposit accounts is a result of the large amount of transaction accounts
acquired in the First Commerce transaction. The increase in other income is
attributable to an increase in ATM fees, commission income, and other
sources of other income.
NONINTEREST EXPENSE
Noninterest expense increased $2.4 million, or 28.7%, in the three months
ended September 30, 1999, to $10.6 million, compared to $8.2 million for
the three months ended September 30, 1998. Such increase was due primarily
to a $1.2 million, or 28.6%, increase in salaries and employee benefits
resulting from the increased staff added in the last half of 1998 as a
result primarily of the branch purchase in September 1998, a $192,000, or
41.0%, increase in depreciation expense primarily resulting from the fixed
assets acquired in the branch purchase in September 1998 and the in-house
data processing system installed in September 1998, a $265,000, or 48.9%,
increase in occupancy expense primarily resulting from the branch purchase,
a $97,000, or 39.1%, increase in franchise and shares tax primarily as a
result of capital increases in the Bank, a $371,000, or 78.6%, increase in
the amortization of goodwill and other acquired intangibles due to the
branch acquisition and a $545,000, or 32.8%, increase in other expenses,
which was partially offset by a $261,000, or 87.6%, decrease in computer
expense. The decrease in computer expenses is the result of the Company
acquiring an in-house data processing system rather than incurring direct
costs to a third party vendor.
For the nine months ended September 30, 1999, noninterest expense increased
$9.4 million, or 41.6%, to $31.8 million compared to $22.5 million for the
same period in 1998. Such increase was primarily due to a $4.4 million, or
38.6%, increase in salaries and employee benefits, a $656,000, or 51.2%,
increase in depreciation, a $852,000, or 57.4%, increase in occupancy
expense, a $243,000, or 32.6%, increase in franchise and shares tax, a $1.3
million, or 112.1%, increase in the amortization of goodwill and other
acquired intangibles and a $2.7 million, or 59.9%, increase in other
expense, which was partially offset by a $825,000, or 92.4%, decrease in
computer expense.
INCOME TAX EXPENSE
Income tax expense increased $262,000, or 17.6%, in the three months ended
September 30, 1999 to $1.8 million, compared to $1.5 million for the three
months ended September 30, 1998. The increase in income tax expense was due
primarily to the increase in income before income taxes.
For the nine months ended September 30, 1999, income tax expense increased
$1.0 million, or 24.4%, to $5.3 million, compared to $4.3 million for the
same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Company's
primary sources of funds are deposits, borrowings, amortization,
prepayments and maturities of outstanding loans and mortgage-backed
securities, maturities of investment securities and other short-term
investments and funds provided from operations. While scheduled payments
from the amortization of loans and mortgage-backed securities and maturing
investment securities and short-term investments are relatively predictable
sources of funds, deposit flows and loan and mortgage-backed security
prepayments are greatly influenced by general interest rates, economic
conditions and competition. In addition, the Company invests excess funds
in overnight deposits and other short-term interest-earning assets, which
provide liquidity to meet lending requirements. The Bank has been able to
generate sufficient cash through its deposits as well as borrowings. At
September 30, 1999, the Company had $119.5 million in outstanding advances
from the FHLB of Dallas and $5.6 million in outstanding advances from Union
Planters Bank, N.A.
15
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term
investments such as over-night deposits. On a longer-term basis, the
Company maintains a strategy of investing in various lending products. The
Company uses its sources of funds primarily to meet its ongoing commitments
and to pay maturing savings certificates and saving withdrawals, fund loan
commitments and maintain a portfolio of mortgage-backed and investment
securities. At September 30, 1999, the total approved loan commitments
outstanding amounted to $40.1 million. At the same time, commitments under
unused lines of credit, including credit card lines, amounted to $96.4
million. Certificates of deposit scheduled to mature in twelve months or
less at September 30, 1999 totaled $430.4 million. Based on past experience
management believes that a significant portion of maturing deposits will
remain with the Company. The Company anticipates it will continue to have
sufficient funds to meet its liquidity requirements.
At September 30, 1999, the Company and its subsidiary had regulatory
capital, which was in excess of regulatory requirements. The current
requirements and the Company's actual levels as of September 30, 1999 are
detailed below (dollars in thousands):
Required Capital Actual Capital
------------------ -------------------
Amount Percent Amount Percent
------ ------- ------ -------
Tier 1 Leverage...... $39,185 3.00% $86,137 6.59%
Tier 1 Risk-Based.... $32,328 4.00% $86,137 10.66%
Total Risk-Based..... $64,656 8.00% $93,575 11.58%
YEAR 2000 COMPLIANCE
The Year 2000 (Y2K) issues affects the ability of computer systems to
correctly process dates after December 31, 1999. These issues not only
affect the Bank, but virtually all companies that utilize computer
information systems.
In November 1997, the Bank established a Y2K Task Force headed by a member
of the Bank's senior management team. The mission of this task force was to
achieve Y2K compliance for all software, hardware and environmental systems
that were dependent upon computer technology for their operation.
In order to be ready for Year 2000, the Bank's Y2K Task Force developed a
Year 2000 Action and Assessment Plan (the "Action Plan"). The Action Plan
was developed using the guidelines outlined in the Federal Financial
Institution's Examination council, "The Effect of 2000 on Computer
Systems."
As part of the assessment phase of the project, the Y2K Task Force
identified 58 mission critical systems, 28 sensitive and 24 non-critical
applications. As a result of this assessment, the Bank undertook an
aggressive plan in early 1998 to completely replace all of the major
application systems with new state- of-the-art technology that was Y2K
compliant. The conversion to these new systems took place in September of
1998. The Bank has incurred capital expenditures amounting to approximately
$2.5 million for the replacement of the core application systems. All other
systems were determined by the Task Force to be Y2K compliant "as is," or
with some minor enhancements required. These enhancements are not expected
to involve material additional costs.
To assure that all systems are Y2K compliant, internal testing and
validation began in the fourth quarter of 1998 and has been completed as of
June 30, 1999.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are presented at
December 31, 1998 in Item 7A of the Company's Annual Report on Form 10-K,
filed with the Securities and Exchange Commission on March 31, 1999.
Management believes there have been no material changes in the Company's
market risk since December 31, 1998.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
Not Applicable
18
SIGNATURES
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, thereunto duly authorized.
ISB FINANCIAL CORPORATION
Date: January 28, 2000 By: /s/ Daryl G. Byrd
----------------- ---------------------
Daryl G. Byrd, President
Date: January 28, 2000 By: /s/ James R. McLemore, Jr.
----------------- -------------------------------
James R. McLemore, Jr., Senior Vice
President and Chief Financial Officer
19