1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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)
(318) 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 7, 1997, 6,900,710 shares of the Registrant's common stock
were issued and outstanding. Of that total, 590,069 shares are held by
the Registrant's Employee Stock Ownership Plan, of which 409,105 shares
were not committed to be released.
2
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition 3
(As of September 30, 1997 and December 31, 1996)
Consolidated Statements of Income (For the three months 4
and nine months ended September 30, 1997 and 1996)
Consolidated Statements of Stockholders' Equity (For the 5
nine months ended September 30, 1997 and 1996)
Consolidated Statements of Cash Flows (For the nine 6
months ended September 30, 1997 and 1996)
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
PART II. 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
3
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)
ASSETS
------
September 30, December 31,
1997 1996
------------- ------------
Cash and Cash Equivalents:
Cash on Hand and Due from Banks $14,628 $10,822
Interest Bearing Deposits 27,029 42,563
Investment Securities:
Held to Maturity (fair value of $1,814 and $2,218, 1,810 2,216
respectively)
Available for Sale, at fair value 91,085 101,144
Trading Account Securities, at fair value 504 364
Mortgage-Backed Securities Held to Maturity (fair 126,643 150,669
value of $127,262 and $150,014, respectively)
Loans Receivable, Net 641,520 571,119
Real Estate Owned 609 978
Premises and Equipment, Net 18,564 15,483
Federal Home Loan Bank Stock, at Cost 6,069 5,808
Accrued Interest Receivable 5,817 5,667
Goodwill and Acquisition Intangibles 16,636 17,807
Other Assets 5,134 4,624
------------- ------------
TOTAL ASSETS $956,048 $929,264
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Deposits $783,224 $760,284
Federal Home Loan Bank Advances 46,990 47,750
Advance Payments by Borrowers for Taxes and Insurance 1,932 1,605
Accrued Interest Payable on Deposits 441 832
Accrued and Other Liabilities 8,209 4,787
------------- ------------
TOTAL LIABILITIES 840,796 815,258
------------- ------------
STOCKHOLDERS' EQUITY:
Preferred Stock of $1 par value; 5,000,000 shares authorized 0 0
-0- shares issued or outstanding
Common Stock of $1.00 par value, authorized 25,000,000 7,381 7,381
shares, 7,380,671 shares issued
Additional Paid-in Capital 66,410 65,725
Retained Earnings (Substantially Restricted) 57,361 54,660
Unearned Common Stock Held by ESOP (4,091) (4,612)
Unearned Common Stock Held by RRP Trust (4,169) (4,476)
Treasury Stock, at cost; 479,961 shares (7,948) (4,859)
Unrealized Gain on Securities, Net of Deferred Taxes 308 187
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 115,252 114,006
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $956,048 $929,264
============= ============
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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4
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,
-------------------- -------------------
1997 1996 1997 1996
---------- -------- --------- --------
INTEREST INCOME:
Interest on Loans $13,228 $10,394 $38,360 $28,587
Interest and Dividends on Investment Securities 1,667 1,059 4,837 3,385
Interest on Mortgage-Backed Securities 2,111 831 6,589 2,440
Interest on Deposits 345 694 1,370 2,434
---------- -------- --------- --------
Total Interest Income 17,351 12,978 51,156 36,846
---------- -------- --------- --------
INTEREST EXPENSE:
Interest on Deposits 8,474 5,746 24,712 16,386
Interest on Federal Home Loan Bank Advances 776 791 2,318 2,331
---------- -------- --------- --------
Total Interest Expense 9,250 6,537 27,030 18,717
---------- -------- --------- --------
Net Interest Income 8,101 6,441 24,126 18,129
Provision for Loan Losses 302 27 706 44
---------- -------- --------- --------
Net Interest Income After Provision for Loan Losses 7,799 6,414 23,420 18,085
---------- -------- --------- --------
NONINTEREST INCOME:
Service Charges on Deposit Accounts 962 505 2,473 1,336
Late Charges and Other Fees on Loans 328 149 854 542
Other Income 610 191 1,402 640
---------- -------- --------- --------
Total Noninterest Income 1,900 845 4,729 2,518
---------- -------- --------- --------
NONINTEREST EXPENSE:
Salaries and Employee Benefits 3,818 2,113 10,129 5,870
SAIF Deposit Insurance Premium 112 3,153 337 3,661
Depreciation Expense 384 262 946 708
Occupancy Expense 528 336 1,354 825
Computer Expense 218 156 828 438
Net Costs (Income) of Other Real Estate 25 13 (35) 38
Franchise and Shares Tax Expense 288 224 763 671
Amortization of Goodwill and Other Acquired Intangibles 385 60 1,168 104
Other Expenses 1,622 1,158 4,412 2,820
---------- -------- --------- --------
Total Noninterest Expense 7,380 7,475 19,902 15,135
---------- -------- --------- --------
Income Before Income Tax Expense 2,319 (216) 8,247 5,468
Income Tax Expense 1,017 (23) 3,398 2,028
---------- -------- --------- --------
NET INCOME $1,302 ($193) $4,849 $3,440
========== ======== ========= ========
EARNINGS PER SHARE - PRIMARY AND FULLY DILUTED $0.20 ($0.03) $0.75 $0.50
========== ======== ========= ========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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5
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(Dollars in Thousands)
Unearned Common
Additional Common Stock
Common Paid In Retained Stock Held Held By Treasury
Stock Capital Earnings By ESOP RRP Trust Stock
------- ---------- ---------- ---------- ---------- ---------
BALANCE, JANUARY 1, 1996 $7,381 $65,293 $51,584 ($5,339) $0 $0
Net Income 3,440
Cash Dividends Declared (1,691)
Common Stock Released by 307 548
ESOP Trust
Common Stock Acquired by (4,687)
Management Recognition Plan Trust
Common Stock earned by Participants 123
of Management Recognition Plan
Treasury Stock Acquired (4,859)
Change in Unrealized Gain (Loss) on
Securities Available for Sale
------- ---------- ---------- ---------- ---------- ---------
BALANCE, SEPTEMBER 30, 1996 $7,381 $65,600 $53,333 ($4,791) ($4,564) ($4,859)
======= ========== ========== ========== ========== =========
BALANCE, JANUARY 1, 1997 $7,381 $65,725 $54,660 ($4,612) ($4,476) ($4,859)
Net Income 4,849
Cash Dividends Declared (2,148)
Common Stock Released by 684 521
ESOP Trust
Common Stock Earned by Participants 1 307
of Recognition and Retention Plan Trust
Treasury Stock Acquired (3,089)
Change in Unrealized Gain (Loss) on
Securities Available for Sale
------- ---------- ---------- ---------- ---------- ---------
BALANCE, SEPTEMBER 30, 1997 $7,381 $66,410 $57,361 ($4,091) ($4,169) ($7,948)
======= ========== ========== ========== ========== =========
Net
Unrealized Total
Gain (Loss) Stockholders'
On Securities Equity
------------- ------------
BALANCE, JANUARY 1, 1996 $758 $119,677
Net Income 3,440
Cash Dividends Declared (1,691)
Common Stock Released by 855
ESOP Trust
Common Stock Acquired by (4,687)
Management Recognition Plan Trust
Common Stock earned by Participants 123
of Management Recognition Plan
Treasury Stock Acquired (4,859)
Change in Unrealized Gain (Loss) on (544) (544)
Securities Available for Sale
------------ ----------
BALANCE, SEPTEMBER 30, 1996 $214 $112,314
============ ==========
BALANCE, JANUARY 1, 1997 $187 $114,006
Net Income 4,849
Cash Dividends Declared (2,148)
Common Stock Released by 1,205
ESOP Trust
Common Stock Earned by Participants 308
of Recognition and Retention Plan Trust
Treasury Stock Acquired (3,089)
Change in Unrealized Gain (Loss) on 121 121
Securities Available for Sale
------------ ----------
BALANCE, SEPTEMBER 30, 1997 $308 $115,252
============ ==========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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6
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For The Nine Months Ended
September 30, September 30,
1997 1996
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,849 $ 3,441
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation and Amortization 2,130 903
Provision for Loan Losses 706 44
Compensation Expense Recognized on RRP 308 123
Loss (Gain) on Sale of Premises and Equipment 7 (81)
Loss (Gain) on Sale of Real Estate Owned (38) 31
Write-Down of Real Estate Owned to Market Value 0 6
Gain on Loans Sold (180) 0
(Gain) Loss on Sale of Trading Securities (15) 0
Amortization of Premium/Discount on Investments 106 296
FHLB Stock Dividends (261) (174)
Loans Originated for Resale (13,036) (1,915)
Proceeds From Loans Sold to Others 13,216 1,927
Income Reinvested on Marketable Equity Security (247) (228)
ESOP Contribution 1,205 847
Net Change in Securities Classified as Trading (164) (2,332)
Changes in Assets and Liabilities:
Decrease (Increase) in Accrued Interest Receivable (150) 179
Decrease (Increase) in Other Assets and Other Liabilities 1,427 1,454
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,863 4,521
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Trading Securities 40 0
Proceeds from Maturities of Held to Maturity Securities 406 2,142
Proceeds from Maturities of Available for Sale Securities 40,600 28,125
Purchases of Securities Held to Maturity 0 (1,576)
Purchases of Securities Available for Sale (30,335) (2,995)
Increase in Loans Receivable, Net (71,520) (47,319)
Proceeds from ESOP Note Repayment 841 0
Proceeds from Sale of Premises and Equipment 0 180
Purchases of Premises and Equipment (3,990) (1,313)
Proceeds from Disposition of Real Estate Owned 820 253
Principal Collections on Mortgage-Backed Securities 23,968 5,575
Cash Paid In Excess of Cash Received on Bank Acquisitions 0 5,605
Other Investing Activities 0 (165)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (39,170) (11,488)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Change in Demand, NOW, Money Market and Savings Deposit 5,988 638
Net Change in Time Deposits 16,952 8,482
(Decrease) Increase in Escrow Funds and Miscellaneous Deposits, Net 327 (28)
Proceeds From FHLB Advances 0 8,195
Principal Repayments of FHLB Advances (760) (690)
Dividends Paid to Shareholders (1,839) (1,604)
Acquisition of Common Stock by RRP 0 (4,687)
Purchase of Treasury Stock (3,089) (4,859)
----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 17,579 5,447
----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,728) (1,520)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 53,385 51,742
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 41,657 $ 50,222
=========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Acquisition of Real Estate in Settlement of Loans $ 413 $ 213
SUPPLEMENTAL DISCLOSURES:
Cash Paid For:
Interest on Deposits and Borrowings $ 27,422 $ 18,324
Income Taxes $ 3,088 $ 2,818
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
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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 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, 1996.
BUSINESS
The Company's principal business is conducted through it's wholly owned
subsidiary, Iberia Savings Bank, which conducts business from its main
office located in New Iberia, Louisiana and 27 full-service branch offices
located in the cities of New Iberia, Lafayette, St. Martinville, Crowley,
Rayne, Kaplan, Jeanerette, Franklin, Morgan City, Abbeville, Gretna,
Marrero, River Ridge, Metairie, New Orleans and Kenner. The Bank's deposits
are insured by the Federal Deposit Insurance Corporation ("FDIC") to the
maximum extent permitted by law. The Company has previously announced its
intentions to convert Iberia Savings Bank to a Louisiana chartered
commercial bank. It is anticipated that this transaction will be
consummated in the fourth quarter of 1997. 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.
The branches in Marrero, River Ridge, Metairie, New Orleans, Gretna and
Kenner were branches of Jefferson Bank, a wholly owned subsidiary of the
Company that
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was merged into Iberia Savings Bank on September 14, 1997. Jefferson Bank
was acquired by the Company in October of 1996.
(2) LOANS RECEIVABLE
Loans receivable (in thousands) at September 30, 1997 and December 31, 1996
consisted of the following:
Sept. 30, Dec. 31,
1997 1996
--------- ---------
Mortgage Loans:
Single-family Residential $379,068 $386,555
Multifamily 2,584 2,279
Commercial Real Estate 41,355 22,961
Construction 17,880 14,064
--------- ---------
Total Mortgage Loans 440,887 425,859
--------- ---------
Commercial Business Loans 52,647 36,089
--------- ---------
Consumer Loans:
Home Equity $31,863 $25,918
Automobile 8,738 7,509
Indirect Automobile 87,127 52,371
Mobile Home Loans 3,446 4,215
Educational Loans 9,602 9,345
Credit Card Loans 3,956 4,017
Loans on Savings 12,104 12,487
Other 7,175 3,953
--------- ---------
Total Consumer Loans 164,011 119,815
--------- ---------
Total Loans Receivable 657,545 581,763
--------- ---------
Adjustments:
Allowance for Loan Losses (5,170) (4,615)
Loans-in-Process (12,664) (6,059)
Prepaid Dealer Participation 3,917 2,555
Unearned Interest (191) (143)
Deferred Loan Fees, Net (694) (922)
Discount on Loans Purchased (1,223) (1,460)
--------- ---------
Loans Receivable, Net $641,520 $571,119
========= =========
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(3) EARNINGS PER SHARE
Primary earnings per share were based on 6,470,981 weighted average shares
outstanding during the three month period ended September 30, 1997 and
6,449,315 weighted average shares outstanding during the nine months ended
September 30, 1997. Fully diluted earnings per share were based on
6,509,223 weighted average shares outstanding during the three month period
ended September 30, 1997 and 6,489,968 weighted average shares outstanding
during the nine months ended September 30, 1997. For the three months ended
September 30, 1997, the weighted average number of common shares outstanding
excludes (a) the weighted average unreleased shares owned by the Employee
Stock Ownership Plan ("ESOP") of 417,716; (b) the weighted average shares
owned by the Management Recognition Plan and Trust of 272,594 and (c) the
weighted average shares purchased in Treasury Stock of 479,961. For the
nine months ended September 30, 1997, the weighted average number of common
shares outstanding excludes (a) the weighted average unreleased shares owned
by the ESOP of 435,061; (b) the weighted average shares owned by the
Management Recognition Plan and Trust of 284,532 and (c) the weighted
average shares purchased in Treasury Stock of 437,235.
In February of 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," ("SFAS 128") which is required to
be adopted on December 31, 1997. At that time, the Company will be required
to change the method currently used to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will be
excluded. The Company does not believe that the effect of SFAS 128 on the
calculation of fully diluted earnings per share for these quarters would be
material.
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10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
CHANGES IN FINANCIAL CONDITION
At September 30, 1997, the consolidated assets of the Company totalled
$956.0 million, an increase of $26.8 million or 2.9% from December 31, 1996.
Loans receivable, net, increased by $70.4 million, or 12.3%, to $641.5
million at September 30, 1997, compared to $571.1 million at December 31,
1996. Such increase was the result of a $18.4 million, or 80.1%, increase
in commercial real estate loans, a $16.6 million, or 45.9%, increase in
commercial business loans, a $5.9 million, or 22.9%, increase in home equity
loans, a $34.8 million, or 66.4%, increase in indirect automobile loans and
a $3.5 million, or 8.4%, increase in all other consumer loans. Such
increases were partially offset by a $7.5 million, or 1.9%, decrease in
single-family residential loans. The changes in the loan portfolio reflect
management's efforts to increase the originations of commercial real estate,
commercial business and indirect automobile 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, 1997 was 81.9% compared to 75.1% at December 31, 1996. For
additional information on loans, see Note 2 to the Notes to Consolidated
Financial Statements.
The increase in loans receivable was funded primarily by a decrease in
interest bearing deposits at other institutions, a decrease in investment
securities available for sale, a decrease in mortgage-backed securities and
by an increase in customer deposits.
Interest bearing deposits at other institutions decreased $15.5 million, or
36.5%, to $27.0 million at September 30, 1997, compared to $42.6 million at
December 31, 1996.
The Company's investment securities available for sale decreased $10.1
million, or 9.9%, to $91.1 million at September 30, 1997, compared to $101.1
million at December 31, 1996. Such decrease was the result of the maturity
or redemption of $40.6 million of investment securities, which was partially
offset by the purchase of $30.3 million of investment securities together
with a $184,000 increase in the market value of such securities and $106,000
of premium amortization on such securities.
Mortgage-backed securities decreased $24.0 million, or 15.9%, from December
31, 1996 to September 30, 1997. Such decrease was attributable entirely to
repayments.
Deposits increased $22.9 million, or 3.0%, to $783.2 million at September
30, 1997, compared to $760.3 million at December 31, 1996. Such increase
was due to $2.9 million of net new deposits together with $20.0 million of
interest credited.
Advances from the FHLB of Dallas decreased $760,000, or 1.6%, to $47.0
million at September 30, 1997, compared to $47.8 million at December 31,
1996. The decrease in advances was attributable to scheduled payments
made. The advances are amortizing, fixed-rate and long term and were used
to fund originations of fixed-rate, long term single-family residential
loans.
Total stockholders' equity increased $1.2 million, or 1.1%, to $115.3
million at September 30,
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1997. The increase was the result of the Company's net income of $4.8
million, $1.2 million of common stock released by the ESOP, $308,000 of
common stock earned by participants of the Recognition and Retention Plan
and a $121,000, after deferred taxes, increase in net unrealized gains on
securities available for sale, which was partially offset by the declaration
of cash dividends on common stock of $2.1 million and $3.1 million of stock
repurchased into treasury.
RESULTS OF OPERATIONS
The Company reported net income of $1.3 million for the three months ended
September 30, 1997, compared to a net loss of $193,000 during the three
month period ended September 30, 1996. Net income for the three months
ended September 30, 1996 included a one-time SAIF assessment of $2.9
million. Excluding the SAIF assessment and its tax effect, net income for
the three months ended September 30, 1996 was $1.7 million. The Company's
net interest income increased by $1.7 million, total noninterest income
increased by $1.1 million and total noninterest expense decreased $95,000
during the three months ended September 30, 1997 compared to the third
quarter of 1996. Such changes were partially offset by a $275,000 increase
in provision for loan losses and a $1.0 million increase in income tax
expense. The change in noninterest expense includes an increase of $325,000
in the amortization of goodwill and other acquired intangibles.
For the nine months ended September 30, 1997 the Company earned $4.8 million
compared to $3.4 million for the same period of 1996. Excluding the
one-time SAIF assessment and its tax effect, net income for the nine months
ended September 30, 1996 was $5.4 million. The Company's net interest
income increased $6.0 million and total noninterest income increased $2.2
million during the nine months ended September 30, 1997 compared to the
first nine months of 1996. Such increases were partially offset by a
$662,000 increase in provision for loan losses, a $4.8 million increase in
noninterest expense and a $1.4 million increase in income tax expense when
comparing the first nine months of 1997 to the same period of 1996. The
increase in noninterest expense includes an increase of $1.1 million in the
amortization of goodwill and other acquired intangibles.
The increases in net interest income, noninterest income and noninterest
expense are due principally to the Bank's efforts to increase its commercial
real estate, commercial business and indirect automobile loans, which are
relatively higher yielding loans compared to single-family residential
mortgage loans, as well as the two acquisitions completed by the Company in
1996, which were Royal Bankgroup of Acadiana, Inc. ("Royal") of Lafayette,
Louisiana, and its wholly owned subsidiary, Bank of Lafayette, and Jefferson
Bancorp, Inc. ("Jefferson") of Gretna, Louisiana and its wholly owned
subsidiary, Jefferson Federal Savings Bank. The Royal acquisition added
$70.2 million of assets and $64.2 million of liabilities for a total cash
price of $9.2 million. Goodwill of $3.2 million was recognized in the Royal
transaction. The Jefferson acquisition added $266.2 million of assets and
$229.4 of liabilities for a total cash price of $51.8 million. Goodwill of
$11.1 million and a core deposit intangible of $3.8 million were recognized
in the Jefferson transaction. As of September 30, 1997, the Company had
$16.7 million of goodwill and other acquisition intangibles.
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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 Company 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,
-------------------------------------------------
1997
-------------------------------------------------
Yield/Cost Average
at September 30, Average Yield/
1997 Balance Interest Cost(1)
---------------- ------------- ----------------- --------------
Interest-earning assets:
Loans receivable:
Mortgage loans 7.87% $422,439 $8,643 8.18%
Commercial business loans 9.45 47,795 1,206 10.09
Consumer and other loans 9.64 158,113 3,379 8.55
------- -----
Total Loans 8.46 628,347 13,228 8.42
------- ------
Mortgage-backed securities 6.37 131,307 2,111 6.43
Investment securities 6.72 107,305 1,667 6.21
Other earning assets 6.15 19,998 345 6.90
------ ---
Total interest-earning assets 7.90 886,957 17,351 7.82
Non-interest-earning assets 66,910 ------
------
Total assets $953,867
========
Interest-bearing liabilities:
Deposits:
Demand deposits 2.04 $139,222 938 2.69
Passbook savings deposits 2.60 115,533 749 2.59
Certificates of deposits 5.65 486,466 6,787 5.58
------- -----
Total deposits 4.50 741,221 8,474 4.57
Borrowings 6.54 47,158 776 6.58
------ ---
Total interest-bearing
liabilities 4.62 788,379 9,250 4.69
-----
Non-interest bearing demand deposits 38,207
Non-interest bearing liabilities 12,223
------
Total liabilities 838,809
Stockholders' Equity 115,058
-------
Total liabilities and stockholders' equity $953,867
========
Net interest-earning assets $98,578
=======
Net interest income/interest rate
spread 3.28% $8,101 3.13%
===== ====== =====
Net interest margin 3.65%
=====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 112.50%
=======
Three Months Ended September 30,
-------------------------------------------------
1996
-------------------------------------------------
Average
Average Yield/
Balance Interest Cost(1)
------------- ----------------- --------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable:
Mortgage loans $354,712 $7,268 8.20%
Commercial business loans 28,581 805 11.27
Consumer and other loans 95,986 2,321 9.67
------ -----
Total Loans 479,279 10,394 8.67
------- ------
Mortgage-backed securities 50,962 831 6.52
Investment securities 70,459 1,059 6.01
Other earning assets 47,544 694 5.84
------ ---
Total interest-earning assets 648,244 12,978 8.01
------
Non-interest-earning assets 35,568
------
Total assets $683,812
========
Interest-bearing liabilities:
Deposits:
Demand deposits $76,560 504 2.63
Passbook savings deposits 61,310 412 2.69
Certificates of deposits 347,206 4,830 5.56
------- -----
Total deposits 485,076 5,746 4.74
Borrowings 48,154 791 6.57
------ ---
Total interest-bearing
liabilities 533,230 6,537 4.90
-----
Non-interest bearing demand deposits 30,365
Non-interest bearing liabilities 7,146
-----
Total liabilities 570,741
Stockholders' Equity 113,071
-------
Total liabilities and stockholders' equity $683,812
========
Net interest-earning assets $115,014
========
Net interest income/interest rate
spread $6,441 3.10%
====== =====
Net interest margin 3.97%
=====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 121.57%
=======
Nine Months Ended September 30,
-------------------------------------------------
1997
-------------------------------------------------
Average
Average Yield/
Balance Interest Cost(1)
------------- ----------------- --------------
Interest-earning assets:
Loans receivable:
Mortgage loans $419,310 $25,630 8.15%
Commercial business loans 43,804 3,402 10.36
Consumer and other loans 142,166 9,328 8.75
------- -----
Total Loans 605,280 38,360 8.45
------- ------
Mortgage-backed securities 138,391 6,589 6.35
Investment securities 106,614 4,837 6.05
Other earning assets 28,284 1,370 6.46
------ -----
Total interest-earning assets 878,569 51,156 7.76
------
Non-interest-earning assets 62,882
------
Total assets $941,451
========
Interest-bearing liabilities:
Deposits:
Demand deposits $137,823 2,711 2.62
Passbook savings deposits 118,251 2,279 2.57
Certificates of deposits 477,795 19,722 5.50
------- ------
Total deposits 733,869 24,712 4.49
Borrowings 47,410 2,318 6.52
------ -----
Total interest-bearing
liabilities 781,279 27,030 4.61
Non-interest bearing demand deposits 35,807 ------
Non-interest bearing liabilities 10,039
------
Total liabilities 827,125
Stockholders' Equity 114,326
-------
Total liabilities and stockholders' equity $941,451
========
Net interest-earning assets $97,290
=======
Net interest income/interest rate
spread $24,126 3.15%
======= =====
Net interest margin 3.66%
=====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 112.45%
=======
Nine Months Ended September 30,
-------------------------------------------------
1996
-------------------------------------------------
Average
Average Yield/
Balance Interest Cost(1)
------------- ----------------- --------------
Interest-earning assets:
Loans receivable:
Mortgage loans $347,903 $21,401 8.20%
Commercial business loans 19,174 1,630 11.33
Consumer and other loans 70,982 5,556 10.44
------ -----
Total Loans 438,059 28,587 8.70
------- ------
Mortgage-backed securities 50,562 2,440 6.43
Investment securities 74,189 3,385 6.08
Other earning assets 58,417 2,434 5.56
------ -----
Total interest-earning assets 621,227 36,846 7.91
Non-interest-earning assets 29,078 ------
------
Total assets $650,305
========
Interest-bearing liabilities:
Deposits:
Demand deposits $71,932 1,412 2.62
Passbook savings deposits 55,753 1,161 2.78
Certificates of deposits 332,146 13,813 5.54
------- ------
Total deposits 459,831 16,386 4.75
Borrowings 47,510 2,331 6.54
------ -----
Total interest-bearing
liabilities 507,341 18,717 4.92
------
Non-interest bearing demand deposits 18,251
Non-interest bearing liabilities 6,751
-----
Total liabilities 532,343
Stockholders' Equity 117,962
-------
Total liabilities and stockholders' equity $650,305
========
Net interest-earning assets $113,886
========
Net interest income/interest rate
spread $18,129 2.99%
======= =====
Net interest margin 3.89%
=====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 122.45%
=======
- --------------------------------
(1) Annualized.
12
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NET INTEREST INCOME
Net interest income increased $1.7 million, or 25.8%, to $8.1 million in
the three months ended September 30, 1997, compared to $6.4 million in the
three months ended September 30, 1996. The increase was due to a $4.4
million, or 33.7%, increase in interest income, which was partially offset
by a $2.7 million, or 41.5%, increase in interest expense. The increase in
interest income was the result of a $238.7 million, or 36.8%, increase in
the average balance of interest-earning assets, which was partially offset
by a 19 basis point (100 basis points being equal to 1%) decrease in the
yield thereon. The increase in interest expense was the result of a $255.1
million, or 47.8%, increase in the average balance of interest-bearing
liabilities, which was partially offset by a 21 basis point decrease in the
cost thereon. 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 3.13% and 3.65%, respectively, during the three months ended
September 30, 1997, compared to 3.10% and 3.97%, respectively, for the
comparable period in 1996.
The increase in average interest-earning assets and interest-bearing
liabilities was the result primarily of the two 1996 acquisitions. The
decrease in yields on earning assets and the decrease in costs of interest
bearing liabilities are primarily attributable to lower yielding assets and
lower costing liabilities acquired in the Jefferson transaction.
For the nine month period ending September 30, 1997, net interest income
increased $6.0 million, or 33.1%, to $24.1 million compared to $18.1 million
for the same period in 1996. The increase was due to a $14.3 million, or
38.8%, increase in interest income, which was partially offset by a $8.3
million, or 44.4%, increase in interest expense. The increase in interest
income was the result of a $257.3 million, or 41.4%, increase in the average
balance of interest-earning assets, which was partially offset by a 15 basis
point decrease in the yield thereon. The increase in interest expense was
the result of a $273.9 million, or 54.0%, increase in the average balance of
interest-bearing liabilities, which was partially offset by a 31 basis point
decrease in the cost thereon. The Company's interest rate spread and net
interest margin amounted to 3.15% and 3.66%, respectively, during the nine
months ended September 30, 1997, compared to 2.99% and 3.89%, respectively,
for the comparable period in 1996.
INTEREST INCOME
The Company's total interest income was $17.4 million for the three months
ended September 30, 1997, compared to $13.0 million for the three months
ended September 30, 1996. The reasons for the $4.4 million, or 33.7%,
increase in interest income were a $2.8 million, or 27.3%, increase in
interest income from loans, a $608,000, or 57.4%, increase in interest and
dividends on investment securities and a $1.3 million, or 154.0%, increase
in interest income from mortgage-backed securities, which was partially
offset by a $349,000, or 50.3%, decrease in interest on deposits held at
other financial institutions. The increase in interest income from loans
was the result of a $149.1 million, or 31.1%, increase in the average
balance of loans, which was partially offset by a 25 basis point decrease in
the yield earned thereon. The increase in interest and dividends on
investment securities was the result of a $36.8
13
14
million, or 52.3%, increase in the average balance of investment securities,
together with a 20 basis point increase in the yield earned thereon. The
increase in interest income from mortgage-backed securities was the result
of a $80.3 million, or 157.7%, increase in the average balance of
mortgage-backed securities, which was partially offset by a nine basis point
decrease in the yield earned thereon. The substantial increase in the
average balance of mortgage-backed securities was a result of the Jefferson
acquisition. The decrease in interest on other earning assets, primarily
deposits at other financial institutions, was the result of a $27.5 million,
or 57.9%, decrease in the average balance of other earning assets, which was
partially offset by a 106 basis point increase in the yield earned thereon.
For the nine months ended September 30, 1997, total interest income was
$51.2 million compared to $36.8 million for the same period in 1996. The
reasons for the $14.3 million, or 38.8%, increase in interest income were a
$9.8 million, or 34.2%, increase in interest income from loans, a $1.5
million, or 42.9%, increase in interest and dividends from investment
securities and a $4.1 million, or 170.0%, increase in interest income from
mortgage-backed securities, which was partially offset by a $1.1 million, or
43.7%, decrease in interest income from deposits held at other financial
institutions. The increase in interest income from loans was the result of
a $167.2 million, or 38.2%, increase in the average balance of loans, which
was partially offset by a 25 basis point decrease in the yield earned
thereon. The increase in interest and dividends on investment securities
was the result of a $32.4 million, or 43.7%, increase in the average balance
of investment securities, which was partially offset by a three basis point
decrease in the yield earned thereon. The increase in interest income from
mortgage-backed securities was the result of a $87.8 million, or 173.7%,
increase in the average balance of mortgage-backed securities, which was
partially offset by a eight basis point decrease in the yield earned
thereon. The decrease in interest income from other earning assets was the
result of a $30.1 million, or 51.6%, decrease in the average balance of
other earning assets, which was partially offset by a 90 basis point
increase in the yield earned thereon.
The increase in average interest-earning assets during the three and nine
month periods ended September 30, 1997 compared to the 1996 comparable
periods primarily reflect the Company's acquisitions of Royal and Jefferson
during 1996 and, to a lesser extent, increased loan origination efforts.
The Company originated $73.6 million and $185.6 million, respectively, of
new loans during the three and nine month periods ended September 30, 1997,
compared to $51.2 million and $129.8 million, respectively, of loans
originated during the three and nine month periods ended September 30, 1996.
INTEREST EXPENSE
The Company's total interest expense was $9.3 million during the three
months ended September 30, 1997, compared to $6.5 million for the three
months ended September 30, 1996. The reason for the $2.7 million, or 41.5%,
increase in interest expense was a $2.7 million, or 47.5%, increase in
interest expense on deposits due to a $256.1 million, or 52.8%, increase in
the average balance of deposits (primarily as a result of the two
acquisitions made in 1996), which was partially offset by a 17 basis point
decrease in the average cost thereof. Interest expense paid on advances from
the FHLB remained relatively constant. The borrowings from the FHLB are used
to fund fixed-rate, long term single-family residential loans.
14
15
For the nine months ended September 30, 1997, the company's total interest
expense was $27.0 million, compared to $18.7 million for the same period in
1996. The reason for the $8.3 million, or 44.4%, increase in interest
expense was a $8.3 million, or 50.8%, increase in interest expense on
deposits due to a $274.0 million, or 59.6%, increase in the average balance
of deposits (primarily as a result of the two acquisitions in 1996), which
was partially offset by a 26 basis point decrease in the cost thereof.
Interest expense on borrowings remained unchanged at $2.3 million for the
nine months ended September 30, 1997 and 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $302,000 in the three months ended
September 30, 1997 as compared to $27,000 for the same period in 1996. The
provision for loan losses was $706,000 in the nine months ended September
30, 1997, compared to $44,000 for the same period in 1996. The increased
provisions for loan losses during both the three and nine month periods in
1997 compared to the 1996 periods was due to the increase in net loans
during the periods, particularly the increases in commercial real estate,
commercial business and indirect automobile loans which generally involve
greater risk than single-family residential loans. As of September 30, 1997,
the ratio of the Company's allowance for loan losses to non-performing loans
was 256.1%.
NONINTEREST INCOME
Noninterest income increased $1.1 million, or 124.9%, in the three months
ended September 30, 1997 to $1.9 million, compared to $845,000 for the three
months ended September 30, 1996. Such increase was due primarily to a
$457,000, or 90.5%, increase in service charges on deposit accounts, a
$179,000, or 120.1%, increase in late charges and other fees on loans and a
$419,000, or 219.4%, increase in other income. The increase in service
charges on deposit accounts was due primarily to the increased number of
accounts that are subject to such service charges together with increased
charges on such accounts. The increase in other income was due primarily to
increased sales of investment services in the Bank's subsidiary company,
Iberia Financial Services, Inc.
For the nine months ended September 30, 1997, noninterest income increased
$2.2 million, or 87.8%, to $4.7 million, compared to $2.5 million for the
same period in 1996. Such increase was due primarily to a $1.1 million, or
85.1%, increase in service charges on deposit accounts, a $312,000, or
57.6%, increase in late charges and other fees on loans and a $762,000, or
119.1%, increase in other income.
NONINTEREST EXPENSE
Noninterest expense decreased $95,000, or 1.3%, in the three months ended
September 30, 1997 to $7.4 million, compared to $7.5 million in the three
months ended September 30, 1996. Such decrease was due primarily to a $3.0
million, or 96.4%, decrease in SAIF deposit insurance premium due primarily
to the one-time SAIF special assessment of $2.9 million in the third quarter
of 1996, which was partially offset by a $1.7 million, or 80.7%, increase in
15
16
salaries and employee benefits due primarily to salaries and benefits
associated with the additional personnel needed to staff the branch offices
acquired in 1996 and the two branch offices opened in 1997, additional staff
added as the Bank transitions to a commercial bank from a savings bank and a
$147,000 increase in the ESOP expense caused by an increase in the average
fair market value of Company stock, a $192,000, or 57.1%, increase in
occupancy expense due primarily to the 10 additional branches during the
1997 period compared to the 1996 period, a $122,000, or 46.6%, increase in
depreciation expense, a $62,000, or 39.7%, increase in computer expense, a
$325,000 increase in amortization of goodwill and other acquired intangibles
due to the Royal acquisition which took place in May of 1996 and the
Jefferson acquisition which was consummated in October of 1996, and a
$464,000, or 40.1%, increase in other noninterest expense.
For the nine months ended September 30, 1997, noninterest expense increased
$4.8 million, or 31.5%, to $19.9 million compared to $15.1 million for the
same period in 1996. Such increase was primarily due to a $4.3 million, or
72.6%, increase in salaries and employee benefits, a $529,000, or 64.1%,
increase in occupancy expense, a $238,000, or 33.6%, increase in
depreciation expense, a $390,000, or 89.0%, increase in computer expense, a
$1.1 million increase in amortization of goodwill and other acquired
intangibles and a $1.6 million, or 56.5%, increase in other noninterest
expense, which was partially offset by a $3.3 million, or 90.8%, decrease in
SAIF deposit insurance premium.
INCOME TAX EXPENSE
Income tax expense increased $1.0 million in the three months ended
September 30, 1997 to $1.0 million. The increase in income tax expense
reflects an increase in income before taxes and an increase in the effective
tax rate due primarily to the nondeductability of the amortization of
goodwill and other acquired intangibles for tax purposes.
For the nine months ended September 30, 1997, income tax expense increased
$1.4 million, or 67.6%, to $3.4 million compared to $2.0 million for the
same period in 1996.
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, 1997, the Company had $47.0 million in outstanding advances
from the Federal Home Loan Bank of Dallas.
16
17
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, to pay maturing
savings certificates and savings withdrawals, fund loan commitments and
maintain a portfolio of mortgage-backed and investment securities. At
September 30, 1997, the total approved loan commitments outstanding amounted
to $40.2 million. At the same time, commitments under unused lines of
credit, including credit card lines, amounted to $48.6 million. Certificates
of deposit scheduled to mature in twelve months or less at September 30,
1997 totalled $336.5 million. Based on past experience, management believes
that a significant portion of maturing deposits will remain with the Bank.
The Company anticipates it will continue to have sufficient funds to meet
its liquidity requirements.
At September 30, 1997, the Company and its subsidiary had regulatory capital
which was well in excess of regulatory requirements. The current
requirements and the Company's actual levels as of September 30, 1997 are
detailed below (dollars in thousands):
Required Capital Actual Capital
-------------------- --------------------
Amount Percent Amount Percent
------- ------- -------- -------
Tier 1 Leverage $28,741 3.00% $98,616 10.29%
Tier 1 Risk-Based $21,511 4.00% $98,616 18.34%
Total Risk-Based $43,021 8.00% $103,786 19.30%
17
18
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
a) Not applicable.
b) No Form 8-K reports were filed during the quarter.
18
19
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: November 7, 1997 By: /s/ Larrey G. Mouton
-----------------------------------------
Larrey G. Mouton, President and
Chief Executive Officer
Date: November 7, 1997 By: /s/ Thomas E. Harrison
-----------------------------------------
Thomas E. Harrison, Senior Vice President
and Chief Financial Officer
19