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EXHIBIT 13
[ISB FINANCIAL CORPORATION LOGO]
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1997 ANNUAL REPORT
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TABLE OF CONTENTS
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SECTION 1
Letter to Stockholders ................................................ 2
Selected Consolidated Financial Data .................................. 4
Management's Discussion and Analysis of
Financial Condition and Results of Operations ................... 6
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SECTION 2
Report of Independent Auditors ........................................ 19
Consolidated Financial Statements
Consolidated Statements of Financial Condition. ................. 20
Consolidated Statements of Income ............................... 21
Consolidated Statements of Stockholders' Equity ................. 22
Consolidated Statements of Cash Flows ........................... 23
Notes to Consolidated Financial Statements ...................... 25
Corporate Information ................................................. 51
ANNUAL MEETING
The Annual Meeting of Stockholders is scheduled for Wednesday,
April 15, at 3:00 p.m., at IBERIABANK, 1101 E. Admiral Doyle Drive, New Iberia,
Louisiana.
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LETTER TO STOCKHOLDERS
We are pleased to report that the Company earned $5,343,000 or $0.86
per share for the year 1997 compared to $5,278,000 or $0.80 per share for the
year 1996. In the fourth quarter of 1997, the Company incurred charges and
expenses of a non-recurring nature of $1,167,000 or $0.19 per share on an after
tax basis. These were necessary costs of converting our two subsidiary savings
banks, Iberia Savings Bank and Jefferson Bank, to commercial banks,
consolidating and streamlining operations, and enhancing public recognition of
our new bank name. IBERIABANK, with the continuing consolidation of banking, is
now the third largest bank domiciled in Louisiana with total assets of $947.3
million.
Your Board of Directors is committed to increasing shareholder value and
recognizes the importance of dividends. Since becoming a public company in 1995,
we have increased quarterly dividends each year. In the third quarter, the
quarterly dividends were increased to $0.125 per share resulting in an
annualized dividend of $0.50 per share. In addition to increasing dividends in
1997, the Company repurchased 150,550 shares of our common stock at an average
price of $20.52 per share. In January 1998, the Company announced another share
repurchase program of up to 5% of the outstanding common stock. The repurchased
shares will be held as treasury stock and will be available for general
corporate purposes including being available for reissuance as options are
exercised under the 1996 stock option plan. As the result of the 1997 net
income, the stock repurchases and the payment of dividends, at December 31, 1997
the Company's book value, or stockholders' equity per share, increased to $17.74
and stockholders' equity to assets was 12.2%.
The mission of the Bank has not changed for the past 110 years of our
existence. We have had a proud history of serving our local community's
financial needs at a reasonable cost. Our charter change to a commercial bank
gives us even more flexibility to add quality financial services to the business
community. While concentrating on expanding our business services, we expect to
continue to remain the leading residential loan originator in our market.
The success of our commercial lending expansion in 1997 was aided by
continued economic expansion in the oil and gas industry in south Louisiana.
Commercial real estate and business loan balances increased 80.0% or $47.2
million during the year. In addition to dedicated commercial lending officers
servicing the larger credit needs, IBERIABANK organized a small business credit
department utilizing new computer technology to underwrite credit requests to
business owners with borrowing needs of less than $250,000. These small business
services are offered throughout our 27 branch offices. These new business
relationships have helped to generate deposits that are less interest sensitive
and lower interest costs.
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The increase in our consumer loan balances was 41.7% or $49.9 million
during 1997. This was primarily the result of continuing growth in our
program of financing automobiles through a network of local dealerships. Home
equity loan balances also increased strongly as homeowners utilized the equity
in their homes for improvements and other personal lifestyle needs. The Bank
invested in new computer application software and equipment to speed the loan
decision process and improve consistency in underwriting standards.
The mortgage division originated $70.8 million in home loans
and sold $19.9 million of these loans into the secondary market. We expect to
originate and sell more loans in 1998 in response to customer demand for long
term, fixed interest rate home loans. If interest rates remain at the current
low levels for the remainder of 1998, our residential loan balances may decrease
as homeowners refinance their loans. Any such refinancing and sales activities
can be expected to increase fee income.
The Bank improved our customer services with the introduction of
"I+Direct" in the fourth quarter of 1997. This new automated telephone system
gives our customers 24 hour access to information about their loan and deposit
accounts. They also are able to transfer funds and review transactions in
accounts from the convenience of their homes or offices . This complements our
network of "I-24" automated teller machines and the "I+Check Card," a debit card
that allows cash withdrawals and purchases at stores throughout the United
States. In addition, two new "supermarket branches" were opened in 1997. We now
operate four branch offices in Winn Dixie supermarkets. These branches provide
extended hours and convenient locations to our customers. We will continue to
make investments to develop our computer capacities to make our financial
services even more accessible and convenient.
Sincerely,
/s/ LARREY G. MOUTON
LARREY G. MOUTON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31,
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1997 1996 1995 1994 1993
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SELECTED FINANCIAL CONDITION DATA:
Total Assets $947,282 $929,264 $608,830 $487,563 $482,814
Cash and cash equivalents 44,307 53,385 51,742 9,686 19,674
Discount on loans purchased 1,145 1,460 1,962 2,679 3,876
Loans receivable, net 659,244 571,119 399,542 370,794 343,417
Investment securities 77,317 103,724 87,231 48,088 58,285
Mortgage-backed securities 115,125 150,669 51,646 39,923 41,419
Deposit accounts 778,695 760,284 444,600 434,443 439,500
Borrowings 46,728 47,750 40,490 5,000 --
Equity 115,564 114,006 119,677 44,840 39,863
YEAR ENDED DECEMBER 31,
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1997 1996 1995 1994 1993
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SELECTED OPERATING DATA:
Interest income $ 68,481 $ 52,707 $ 42,334 $ 36,548 $ 38,340
Interest expense 36,050 27,136 21,282 17,294 17,508
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Net interest income 32,431 25,571 21,052 19,254 20,832
Provision for loan losses 1,097 156 239 305 441
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Net interest income after provision
for loan losses 31,334 25,415 20,813 18,949 20,391
Noninterest income 6,390 3,818 2,668 2,425 2,107
Noninterest expense 28,601 20,778 12,693 11,783 11,407
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Income before income taxes 9,123 8,455 10,788 9,591 11,091
Income taxes 3,780 3,177 3,781 3,354 3,541
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Net income $ 5,343 $ 5,278 $ 7,007 $ 6,237 $ 7,550
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Earnings per share - Basic $ .86 $ .80 $ .80 (1) N/A N/A
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Earnings per share - Diluted $ .83 $ .80 $ .80 (1) N/A N/A
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AT OR FOR THE YEAR ENDED DECEMBER 31,
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1997 1996 1995 1994 1993
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SELECTED OPERATING RATIOS (2):
Return on average assets 0.57% 0.74% 1.26% 1.29% 1.55%
Return on average equity 4.66 4.49 7.14 14.56 20.77
Equity to assets at the end of period 12.20 12.27 19.66 9.20 8.26
Interest-earning assets to interest-
bearing liabilities 113.33 120.01 119.87 107.69 105.39
Interest rate spread (3) 3.12 2.97 3.16 3.88 4.24
Net interest margin (3) 3.66 3.77 3.95 4.17 4.44
Noninterest expense to average assets 3.03 2.91 2.28 2.44 2.35
Efficiency ratio (4) 73.67 70.70 53.51 54.35 49.73
ASSET QUALITY DATA:
Non-performing assets to total assets
at end of period (5) 0.29 0.38 0.33 0.37 0.46
Allowance for loan losses to
non-performing loans at end of period 232.55 180.27 255.18 304.53 246.60
Allowance for loan losses to total loans
at end of period 0.78 0.79 0.90 1.08 0.99
CONSOLIDATED CAPITAL RATIOS:
Tier 1 leverage capital ratio 10.54 10.34 19.52 9.44 8.21
Tier 1 risk-based capital ratio 18.52 20.91 42.79 19.12 18.24
Total risk-based capital ratio 19.50 21.92 44.14 20.37 19.48
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(1) 1995 earnings per share have been stated only for a partial period because
of the Bank's conversion to stock form on April 6, 1995.
(2) With the exception of end of period ratios, all ratios are based on average
daily balances during the respective periods and are annualized where
appropriate.
(3) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities, and net interest margin represents net
interest income as a percentage of average interest-earning assets.
(4) The efficiency ratio represents noninterest expense, as a percentage of the
sum of net interest income and noninterest income.
(5) Non-performing assets consist of non-accruing loans and real estate
acquired through foreclosure, by deed-in-lieu thereof or deemed insubstance
foreclosed.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to assist readers
in understanding the financial condition and results of operations of ISB
Financial Corporation (the "Company") and its subsidiaries for the years ended
December 31, 1995 through 1997. This review should be read in conjunction with
the audited consolidated financial statements, accompanying footnotes and
supplemental financial data included herein.
FINANCIAL CONDITION
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ASSETS
GENERAL - Total assets of the Company increased by $18.0 million or
1.9%. This increase was primarily the result of a $88.1 million increase in
loans receivable and a $3.8 million increase in premises and equipment which
was partially offset by a $9.1 million decrease in cash and cash equivalents, a
$26.4 million decrease in investment securities and a $35.5 million decrease in
mortgage-backed securities. Such net increases in assets was funded primarily
by a $18.4 million increase in customer deposits. The average balances of
assets and liabilities and the resulting levels of income and expense during
1997 included a full year of the balances associated with the Bank of Lafayette
("BOL") and Jefferson Federal Savings Bank ("Jefferson") acquisitions that
occurred in 1996. See Note 19 to the Consolidated Financial Statements for more
details. The following discussion describes the major changes in the asset mix
during 1997.
ASSET MIX
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AT DECEMBER 31, 1997
SINGLE FAMILY RESIDENTIAL LOANS 40.2%
CONSUMER LOANS 18.1%
CASH AND INVESTMENTS 12.8%
MORTGAGE-BACKED SECURITIES 12.2%
COMMERCIAL BUSINESS LOANS 6.0%
COMMERCIAL REAL ESTATE LOANS 5.3%
OTHER ASSETS 5.4%
CASH AND CASH EQUIVALENTS - Cash and cash equivalents, which
consist of interest-bearing and noninterest-bearing deposits and cash on hand,
decreased by $9.1 million, or 17.0%, to $44.3 million at December 31, 1997
compared to $53.4 million at December 31, 1996. The cash was used primarily to
fund increases in loans receivable.
INVESTMENT SECURITIES - Investment securities decreased by $26.4
million, or 25.5%, to $77.3 million at December 31, 1997 compared to $103.7
million at December 31, 1996. Such decrease was the result of $57.1 million of
investment securities sold or matured, which was partially offset by $30.3
million of investment securities purchased, a $50,000 increase in the market
value of investment securities available for sale and $311,000 of amortization
of premiums on investment securities. The cash generated from the decreased
balance of investment securities was used to fund increases in loans
receivable.
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At December 31, 1997, $75.5 million of the Company's investment
securities were classified as available for sale and had a pre-tax effected net
unrealized gain of $339,000 at such date. In addition, at such date, $69.9
million of the Company's investment securities consisted of U.S. Government and
Federal agency obligations and $33.8 million, or 43.8% of the Company's
investment securities were due within one year. Note 3 to the Consolidated
Financial Statements provides further information on the Company's investment
securities.
MORTGAGE-BACKED SECURITIES - Mortgage-backed securities decreased
by $35.5 million, or 23.6%, to $115.1 million at December 31, 1997 compared to
$150.7 million at December 31, 1996. The decrease in the balance of
mortgage-backed securities was due to repayments. The cash generated from the
repayments of mortgage-backed securities was used as a source of funds for the
increases in loans receivable.
At December 31, 1997, approximately 99.4% of the Company's
mortgage-backed securities were issued or guaranteed by Federal agencies or
government sponsored enterprises. Additional information on the Company's
mortgage-backed securities may be found in Note 4 of the Consolidated Financial
Statements.
LOANS RECEIVABLE, NET - Loans receivable, net, increased by $88.1
million, or 15.4%, to $659.2 million at December 31, 1997 compared to $571.1
million at December 31, 1996. Residential mortgage loans decreased $2.0
million, or .5%, during 1997 primarily by a $10.2 million, or 2.6%, decrease in
single-family residential loans which was partially offset by a $8.0 million,
or 57.2%, increase in construction loans. Total commercial loans increased
$47.2 million, or 80.0%, during 1997 as a result of a $21.9 million, or 60.7%,
increase in commercial business loans and a $25.3 million, or 110.3%, increase
in commercial real estate loans. During 1997, the Company continued its
emphasis on the origination of commercial real estate, commercial business,
home equity and indirect automobile loans. Consumer loans increased $49.9
million, or 41.7%, during 1997 to $169.7 million at year-end. Indirect
automobile loans increased $38.3 million, or 73.1% to $90.7 million or 13.4% of
total loans at December 31, 1997 and home equity loans increased $12.5 million
or 58.0% during 1997. For additional information on loans, see Note 5 to the
Consolidated Financial Statements.
PREMISES AND EQUIPMENT, NET - Premises and equipment, net,
increased by $3.8 million, or 24.3%, to $19.3 million at December 31, 1997
compared to $15. 5 million at December 31, 1996. The increase was the result of
$5.3 million in purchases of premises and equipment which was partially offset
by $1.5 million of depreciation of premises and equipment. The purchases of
premises and equipment included the opening of two new branch offices in
supermarkets, the purchase of land that was formally leased, the renovation of
a facility to accommodate the Company's expanded work force and upgrading of
the Company's technological infrastructure.
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LIABILITY AND EQUITY MIX
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AT DECEMBER 31, 1997
[CHART]
CERTIFICATES OF DEPOSIT 49.4%
DEMAND DEPOSITS 21.2%
STOCKHOLDERS' EQUITY 12.2%
REGULAR SAVINGS 11.6%
FHLB ADVANCES 4.9%
OTHER LIABILITIES 0.7%
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LIABILITIES AND STOCKHOLDERS' EQUITY
GENERAL - The Company's primary funding sources included deposits,
borrowings from the Federal Home Loan Bank ("FHLB") of Dallas and stockholders'
equity. The following discussion focuses on the major changes in the mix during
1997.
DEPOSITS - Deposits increased by $18.4 million, or 2.4%, from
$760.3 million at December 31, 1996 to $778.7 million at December 31, 1997. The
increase was the result of $26.7 million of interest credited which was
partially offset by $8.3 million of net cash withdrawals. The relative mix of
deposits remained stable during 1997, and at December 31, 1997, $44.8 million,
or 5.8%, of the Company's total deposits were non-interest bearing. Additional
information regarding deposits is provided in Note 8 to the Consolidated
Financial Statements.
BORROWINGS - The Company's borrowings are comprised of advances
from the Federal Home Loan Bank ("FHLB") of Dallas, which decreased $1.0
million, or 2.1%, from $47.7 million at December 31, 1996 to $46.7 million at
December 31, 1997. The decrease in borrowings was due to normal amortization
payments with respect to such borrowings. The advances, which are fixed-rate
and long-term, were used in prior years to fund fixed-rate and long-term
single-family residential loans. For additional information, including
maturities of the Company's borrowings, see Note 9 to the Consolidated
Financial Statements.
STOCKHOLDERS' EQUITY - Stockholders' equity provides a source of
permanent funding, allows for future growth and provides the Company with a
cushion to withstand unforeseen adverse developments. At December 31, 1997,
stockholders' equity totaled $115.6 million, an increase of $1.6 million from
the previous year-end level. The increase in stockholders' equity in 1997 was
the result of $5.3 million of net income, $1.7 million of common stock released
by the Company's Employee Stock Ownership Plan ("ESOP") trust and $475,000 of
common stock earned by participants of the Company's Recognition and Retention
Plan ("RRP") trust, which was partially offset by $2.9 million of cash
dividends declared on the Company's common stock and $3.1 million of the
Company's common stock re-purchased and placed into treasury.
Federal regulations impose minimum regulatory capital requirements
on all institutions with deposits insured by the Federal Deposit Insurance
Corporation ("FDIC"). The Board of Governors of the Federal Reserve System
("FRB") impose similar capital regulations on bank holding companies. At
December 31 1997, the
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Company exceeded all required regulatory capital ratio requirements with a tier
1 leverage capital ratio of 10.54%, a tier 1 risk-based capital ratio of 18.52%
and a total risk-based capital ratio of 19.50%. At December 31, 1997,
IBERIABANK exceeded all required regulatory capital ratio requirements with a
tier 1 leverage capital ratio of 9.51%, a tier 1 risk-based capital ratio of
16.68% and a total risk-based capital ratio of 17.68%. The graph to the right
displays the Company's and IBERIABANK's regulatory capital position as of
December 31, 1997, along with the applicable regulatory requirements.
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RESULTS OF OPERATIONS
GENERAL - The Company reported net income of $5.3 million, $5.3
million and $7.0 million for the years ended December 31, 1997, 1996 and 1995,
respectively. During 1997, interest income increased $15.8 million, interest
expense increased $8.9 million, the provision for loan losses increased
$941,000, noninterest income increased $2.6 million, noninterest expense
increased $7.8 million and income tax expense increased $603,000. Cash
earnings, net income before the amortization of goodwill, was $6.9 million,
$5.7 million and $7.1 million for the years ended December 31, 1997, 1996 and
1995, respectively.
NET INTEREST INCOME - Net interest income is determined by interest
rate spread (i.e. the difference between the yields earned on interest-earning
assets and the rates paid on its interest-bearing liabilities) and the relative
amounts of interest-earning assets and interest-bearing liabilities. The
Company's average interest rate spread was 3.12%, 2.97% and 3.16% during the
years ended December 31, 1997, 1996 and 1995, respectively. The Company's net
interest margin (i.e., net interest income as a percentage of average
interest-earning assets) was 3.66%, 3.77% and 3.95%, during
REGULATORY CAPITAL
[GRAPH]
TIER 1 TIER 1 TOTAL
LEVERAGE RISK-BASED RISK-BASED
RATIO RATIO RATIO
REQUIRED 4.00% 4.00% 8.00%
ISB FINANCIAL 10.54% 18.52% 19.50%
IBERIABANK 9.51% 16.68% 17.68%
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NET INCOME
[CHART]
1993 $7,550
1994 $6,237
1995 $7,007
1996 $5,278
1997 $5,343
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NET INTEREST MARGIN
[CHART]
1993 4.44%
1994 4.17%
1995 3.95%
1996 3.77%
1997 3.66%
the years ended December 31, 1997, 1996 and 1995, respectively.
Net interest income increased $6.9 million, or 26.8%, in 1997 to
$32.4 million compared to $25.6 million in 1996. The reason for such increase
was a $15.8 million, or 29.9%, increase in interest income, which was partially
offset by a $8.9 million, or 32.8%, increase in interest expense. Net interest
income increased $4.5 million, or 21.5%, in 1996 compared to 1995. Such
increase was due to a $10.4 million increase in interest income, which was
partially offset by a $5.9 million increase in interest expense.
INTEREST INCOME - Interest income totaled $68.5 million for the
year ended December 31, 1997, an increase of $15.8 million over the total of
$52.7 million for the year ended December 31, 1996. This improvement was mainly
due to an increase in the Company's average interest-earning assets of $207.6
million, or 30.6%, to $885.9 million for the year ended December 31, 1997,
caused primarily by the two acquisitions that took place during 1996. Interest
earned on loans increased $11.8 million, or 29.3%, in 1997. The increase was
due to a $150.7 million, or 32.0%, increase in the average balance of loans,
which was partially offset by a 17 basis point (with 100 basis points being
equal to 1%) decrease in the yield earned. Interest earned on investment
securities increased $1.3 million, or 26.2%, in 1997. The increase was due to a
$22.3 million, or 27.7%, increase in the average balance of investment
securities, which was partially offset by a 7 basis point decline in the yield
earned. Interest earned on mortgage-backed securities increased $3.9 million,
or 87.6%, in 1997. The increase was due to a $61.4 million, or 84.5%, increase
in the average balance of mortgage-backed securities together with a 10 basis
point increase in the yield earned. Interest income on other earning assets,
primarily interest-bearing deposits, decreased $1.3 million, or 41.7%, during
1997. The decrease was due to a $26.8 million, or 50.1%, decrease in the
average balance of other earning assets, which was partially offset by a 95
basis point increase in the yield earned. Interest income also is affected by
the accretion of discounts on purchased loans into interest income, which is
accounted for as a yield adjustment. During the years ended December 31, 1997
and 1996, $313,000 and $502,000, respectively, was accreted into income. At
December 31, 1997, the amount of the Company's remaining unaccreted discount
was $1.1 million.
Interest income amounted to $52.7 million and $42.3 million for the
years ended December 31, 1996 and 1995, respectively. The $10.4 million, or
24.5%, increase in interest income in 1996 was due to a $7.4 million, or 22.6%,
increase in interest income on loans, a $106,000, or 2.2%, increase in interest
income on investment securities, a $1.7 million, or 58.3%, increase in interest
income on mortgage-backed securities and a $1.2 million, or 64.0%, increase in
interest income on other earning assets.
INTEREST EXPENSE - Interest expense increased $8.9 million, or
32.8%, in 1997 to $36.1 million compared to $27.1 million in 1996. The reason
for such increase was a $8.9 million, or 37.2%, increase in interest
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expense on deposits, which was partially offset by a $26,000, or .8%, decrease
in interest expense on borrowings. The increase in interest expense on deposits
was the result of a $216.9 million, or 41.9%, increase in the average balance
of deposits, which was partially offset by a 15 basis point decrease in the
average cost of deposits. The increase in the average balance of deposits was
primarily the result of the two acquisitions that took place during 1996. The
decrease in interest expense on borrowings was the result of a $329,000, or
.7%, decrease in the average balance of borrowings together with a 1 basis
point decrease in the cost of borrowings.
Total interest expense amounted to $27.1 million and $21.3 million
for the years ended December 31, 1996 and 1995, respectively. The $5.9 million,
or 27.5%, increase in interest expense in 1996 compared to 1995 was due to a
$120.8 million, or 27.2%, increase in the average balance of interest-bearing
liabilities together with a 1 basis point increase in the cost of
interest-bearing liabilities.
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.
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
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1997 1996
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AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
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Interest-earning assets:
Loans receivable:
Mortgage loans $420,510 $34,272 8.15% $362,663 $29,648 8.18%
Commercial business loans 47,248 4,900 10.37 23,835 2,559 10.74
Consumer and other loans 154,444 12,896 8.35 85,017 8,056 9.48
-------- ------- -------- -------
Total loans 622,202 52,068 8.37 471,515 40,263 8.54
-------- ------- -------- -------
Mortgage-backed securities 134,059 8,436 6.29 72,664 4,498 6.19
Investment securities 102,880 6,216 6.04 80,565 4,926 6.11
Other earning assets 26,723 1,761 6.59 53,535 3,020 5.64
-------- ------- -------- -------
Total interest-earning assets 885,864 68,481 7.73 678,279 52,707 7.77
------- -------
Non-interest earning assets 58,793 35,572
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Total assets $944,657 $713,851
======== ========
Interest-bearing liabilities:
Deposits:
Demand deposits $141,212 3,714 2.63 $ 84,921 2,151 2.53
Passbook savings deposits 115,882 2,949 2.54 69,892 1,860 2.66
Certificates of deposit 477,325 26,294 5.51 362,745 20,006 5.52
-------- ------- -------- -------
Total deposits 734,419 32,957 4.49 517,558 24,017 4.64
Borrowings 47,281 3,093 6.54 47,610 3,119 6.55
-------- ------- -------- -------
Total interest-bearing liabilities 781,700 36,050 4.61 565,168 27,136 4.80
------- -------
Non-interest bearing demand deposits 37,647 23,603
Non-interest bearing liabilities 10,583 7,597
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Total liabilities 829,930 596,368
Stockholders' Equity 114,727 117,483
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Total liabilities and stockholders' equity $944,657 $713,851
======== ========
Net interest-earning assets $104,164 $113,111
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Net interest income/interest rate spread $32,431 3.12% $25,571 2.97%
======= ===== ======= =====
Net interest margin 3.66% 3.77%
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Ratio of average interest-earning assets to
average interest-bearing liabilities 113.33% 120.01%
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YEAR ENDED DECEMBER 31,
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1995
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AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
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Interest-earning assets:
Loans receivable:
Mortgage loans $321,528 $26,787 8.33%
Commercial business loans 8,699 838 9.63
Consumer and other loans 51,885 5,205 10.03
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Total loans 382,112 32,830 8.59
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Mortgage-backed securities 44,531 2,842 6.38
Investment securities 79,134 4,820 6.09
Other earning assets 26,922 1,842 6.84
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Total interest-earning assets 532,699 42,334 7.95
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Non-interest earning assets 23,366
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Total assets $556,065
========
Interest-bearing liabilities:
Deposits:
Demand deposits $ 63,035 1,736 2.75
Passbook savings deposits 53,532 1,520 2.84
Certificates of deposit 312,326 16,987 5.44
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Total deposits 428,893 20,243 4.72
Borrowings 15,511 1,039 6.70
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Total interest-bearing liabilities 444,404 21,282 4.79
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Non-interest bearing demand deposits 8,041
Non-interest bearing liabilities 5,538
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Total liabilities 457,983
Stockholders' Equity 98,082
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Total liabilities and stockholders' equity $556,065
========
Net interest-earning assets $ 88,295
========
Net interest income/interest rate spread $21,052 3.16%
======= ======
Net interest margin 3.95
======
Ratio of average interest-earning assets to
average interest-bearing liabilities 119.87%
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The following table analyzes the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. The table distinguishes between (i)
changes attributable to rate (changes in rate multiplied by the prior period's
volume), (ii) changes attributable to volume (changes in volume multiplied by
the prior period's rate, (iii) mixed change (changes in rate multiplied by
changes in volume), and (iv) total increase (decrease) (sum of the previous
column).
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1997/1996
---------------------------------------------------------
CHANGE ATTRIBUTABLE TO
---------------------------------------------------------
TOTAL
RATE/ INCREASE
VOLUME RATE VOLUME (DECREASE)
---------------------------------------------------------
Interest-Earning Assets:
Loans:
Mortgage loans $ 4,729 $ (91) $ (14) $ 4,624
Commercial business loans 2,514 (87) (86) 2,341
Consumer and other loans 6,579 (957) (782) 4,840
Investment securities 1,364 (58) (16) 1,290
Mortgage-backed securities 3,800 75 63 3,938
Other earning assets (1,513) 508 (254) (1,259)
---------------------------------------------------------
Total net change in income
on interest-earning assets 17,473 (610) (1,089) 15,774
---------------------------------------------------------
Interest-Bearing Liabilities:
Deposits:
Demand deposits 1,426 82 55 1,563
Regular savings deposits 1,224 (81) (54) 1,089
Certificates of deposit 6,319 (24) (7) 6,288
Borrowings (22) (4) 0 (26)
---------------------------------------------------------
Total net change in expense on
interest-bearing liabilities 8,947 (27) (6) 8,914
---------------------------------------------------------
Net change in net interest
income $ 8,526 $(583) $(1,083) $ 6,860
=========================================================
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1996/1995
-------------------------------------------------------
CHANGE ATTRIBUTABLE TO
-------------------------------------------------------
TOTAL
RATE/ INCREASE
VOLUME RATE VOLUME (DECREASE)
-------------------------------------------------------
Interest-Earning Assets:
Loans:
Mortgage loans $ 3,427 $(502) $ (64) $ 2,861
Commercial business loans 1,458 96 167 1,721
Consumer and other loans 3,324 (289) (184) 2,851
Investment securities 87 19 0 106
Mortgage-backed securities 1,795 (85) (54) 1,656
Other earning assets 1,821 (323) (320) 1,178
-------------------------------------------------------
Total net change in income
on interest-earning assets 11,912 (1,084) (455) 10,373
-------------------------------------------------------
Interest-Bearing Liabilities:
Deposits:
Demand deposits 602 (139) (48) 415
Regular savings deposits 464 (95) (29) 340
Certificates of deposit 2,743 238 38 3,019
Borrowings 2,150 (23) (47) 2,080
-------------------------------------------------------
Total net change in expense on
interest-bearing liabilities 5,959 (19) (86) 5,854
-------------------------------------------------------
Net change in net interest
income $ 5,953 $(1,065) $(369) $ 4,519
=======================================================
PROVISION FOR LOAN LOSSES - Provisions for loan losses are charged
to earnings to bring the total allowance for loan losses to a level considered
appropriate by management based on various factors, including historical
experience, the volume and type of lending conducted by the Company, the amount
of the Company's classified assets, the status of past due principal and
interest payments, general economic conditions, particularly as they relate to
the Company's market area, and other factors related to the collectibility of
the Company's loan portfolio. Management of the Company assesses the allowance
for loan losses on a quarterly basis and will make provisions for loan losses
as deemed appropriate in order to maintain the adequacy of the allowance for
loan losses.
The Company made a provision for loan losses of $1.1 million in
1997, compared to $156,000 and $239,000 for 1996 and 1995, respectively. The
increased provision for 1997 is primarily the result of the $85.5 million, or
76.8%, increase in commercial real estate, commercial business and indirect
automobile loan portfolios. Net loan charge offs for 1997 total $454,000.
The allowance for loan losses amounted to $5.3 million or .78% and
232.6% of total loans and total nonperforming loans, respectively, at December
31, 1997 compared to .79% and 180.3%, respectively, at December 31, 1996.
- ----
12
14
Non-performing loans (non-accrual loans and accruing loans 90 days
or more overdue) were $2.3 million and $2.6 million at December 31, 1997 and
1996, respectively. The Company's real estate owned, which consists of real
estate acquired through foreclosure or by deed-in-lieu thereof, amounted to
$473,000 and $978,000 at December 31, 1997 and 1996, respectively. As a
percentage of total assets, the Company's total non-performing assets, which
consists of non-performing loans plus real estate owned, amounted to $2.7
million, or .29%, at December 31, 1997 compared to $3.7 million, or .38%, at
December 31, 1996.
Although management of the Company believes that the Company's
allowance for loan losses was adequate at December 31, 1997, based on facts and
circumstances available to it, there can be no assurances that additions to
such allowance will not be necessary in future periods, which would adversely
affect the Company's results of operations.
ALLOWANCE FOR LOAN LOSSES
AND AMOUNT OF
NON-PERFORMING LOANS
AT YEAR END
[GRAPH]
1993 1994 1995 1996 1997
NON-PERFORMING LOANS $1,384 $1,258 $1,468 $2,560 $2,261
LOAN LOSS ALLOWANCE $3,413 $3,831 $3,746 $4,615 $5,258
NONINTEREST INCOME - For 1997, the Company reported noninterest
income of $6.4 million compared to $3.8 million for 1996. The primary reasons
for the $2.6 million, or 67.4%, increase in noninterest income was a $1.4
million, or 70.8%, increase in service charges on deposit accounts reflecting
an increase in the number of accounts that are subject to service charges and
an increase in the amount of such service charges, a $303,000, or 43.3%,
increase in late charges and other fees on loans, a $495,000, or 58.1%,
increase in other income, an $85,000, or 47.0%, increase in gains on sale of
investments and a $250,000 increase in gains on the sale of loans reflecting
the Company's increased emphasis on the sale of newly originated fixed rate
single-family residential loans in the secondary market.
Total noninterest income amounted to $3.8 million and $2.7 million
for the years ended December 31 1996 and 1995, respectively. The primary
reasons for the $1.1 million increase in noninterest income during 1996
compared to 1995 was a $507,000 increase in service charges on deposit
accounts, a $343,000 increase in other income and $181,000 of gains on the sale
of investment securities.
NONINTEREST EXPENSE - Noninterest expense includes salaries and
employee benefits, occupancy expense, federal deposit insurance premiums
(including, in 1996, the one-time special S A I F ("SAIF") assessment),
advertising and marketing expense, computer service expense and other items.
Noninterest expense amounted to $28.6 million, $20.8 million and $12.7 million
for the three years ended December 31, 1997, 1996 and 1995, respectively. The
primary reasons for the $7.8 million, or 37.7%, increase in noninterest expense
for 1997 compared to 1996 were having a full year of operating expense for the
nine offices acquired in 1996 and the two branch offices opened in 1996,
operating expenses relating to two new branch offices opened in 1997,
consolidating the two subsidiary banks and changing the Bank's name,
cancellation of the Bank's long-term computer servicing contract with a
resultant early termination penalty and continuing to build a commercial bank
infrastructure.
----
13
15
Salaries and employee benefits increased $5.2 million, or 61.3%,
occupancy expense increased $660,000, or 53.7%, computer expense increased
$962,000, or 154.2%, depreciation expense increased $420,000, or 42.1%, the
amortization of goodwill and other acquired intangibles increased $1.1 million,
or 287.2%, printing and office supplies expense increased $537,000, or 126.7%,
other expenses increased $2.0 million, or 63.2%, and SAIF deposit insurance
premiums decreased $3.2 million, or 87.7%. Compensation expense related to the
Company's Employee Stock Ownership Plan ("ESOP") was $1.6 million in 1997,
compared to $1.1 million in 1996. The increase in expense is attributable to
the increase in the Company's common stock market value associated with the
shares committed to be released during 1997. In addition, expense associated
with the Company's Recognition and Retention Plan was $416,000 in 1997, the
first full year of the plan's existence, compared to $211,000 in 1996. The
increase in computer expense of $962,000 from 1996 to 1997 was attributable in
part to a $500,000 charge to earnings associated with the penalty assessed on
the termination of the Company's long-term computer service contract.
Amortization of goodwill and other acquired intangibles from the Jefferson
transaction in 1996 was from the date of acquisition, October 18, 1996.
Amortization in 1997 consisted of a full year, resulting in the $1,146,000
increase. Amortization in 1998 is anticipated to decrease slightly due to the
accelerated amortization method used for the Jefferson core deposit intangible.
YEAR 2000 - Many existing computer programs use only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the century. Timely
and accurate data processing is essential to any financial institution. The
Company formed a task force in 1997 to assess the impact of the Year 2000
problem and to insure compliance for all critical and ancillary systems
utilized by the Company. The Company is in the process of selecting a new
computer vendor for data processing software for its core applications, and the
Company will determine compliance with Year 2000 issues before awarding a
contract. Many of the costs associated with determining compliance with and
correcting Year 2000 issues for ancillary computer programs is expected to come
from a reassignment of existing internal resources and is not expected to
involve material additional costs.
INCOME TAXES - For the years ended December 31, 1997, 1996 and
1995, the Company incurred income tax expense of $3.8 million, $3.2 million and
$3.8 million, respectively. The Company's effective tax rate amounted to 41.4%,
37.6% and 35.0% during 1997, 1996 and 1995, respectively. The difference
between the effective tax rate and the statutory tax rate primarily related to
variances in the items that are either non-taxable or non-deductible, primarily
the non-deductibility of the amortization of goodwill and acquisition
intangibles and the non-deductible portion of the ESOP compensation expense.
For more information, see Note 10 to the Consolidated Financial Statements.
- ------------------------------
ASSET AND LIABILITY MANAGEMENT
The principal objective of the Company's asset and liability
management function is to evaluate the interest-rate risk included in certain
balance sheet accounts, determine the level of risk appropriate given the
Company's business focus, operating environment, capital and liquidity
requirements and performance objectives, establish prudent asset concentration
guidelines and manage the risk consistent with Board approved guidelines.
Through such management, the Company seeks to reduce the vulnerability of its
operations to changes in interest rates and to manage the ratio of
interest-rate sensitive assets to interest-rate sensitive liabilities within
specified maturities or repricing dates. The Company's actions in this regard
are taken under the guidance of the Asset/Liability Committee ("ALCO"), which
is chaired by the Chief Executive Officer and comprised
- ----
14
16
of members of the Company's senior management. The ALCO generally meets on a
monthly basis, to review, among other things, the sensitivity of the Company's
assets and liabilities to interest rate changes, local and national market
conditions and interest rates. In connection therewith, the ALCO generally
reviews the Company's liquidity, cash flow needs, maturities of investments,
deposits and borrowings, and capital position. The ALCO reports to the
Company's Board of Directors on a quarterly basis.
The objective of interest rate risk management is to control the
effects that interest rate fluctuations have on net interest income and on the
net present value of the Company's interest-earning assets and interest-bearing
liabilities. Management and the Board are responsible for managing interest
rate risk and employing risk management policies that monitor and limit
exposure to interest rate risk. Interest rate risk is measured using net
interest margin simulation and asset/liability net present value sensitivity
analyses. These analyses provide a range of potential impacts on net interest
income and portfolio equity caused by interest rate movements.
The Company uses financial modeling to measure the impact of
changes interest rates on the net interest margin. The following table
illustrates the simulated impact of a 100 basis point (where 100 basis points
is equal to 1%) or 200 basis point upward or downward movement in interest
rates on net interest income and market value of portfolio equity. The impact
of the rate movements was developed by simulating the effect of rates changing
over a twelve month period from the December 31, 1997 levels.
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
(IN THOUSANDS) MOVEMENTS IN INTEREST RATES FROM DECEMBER 31, 1997 RATES
----------------------------------------------------------------------------
INCREASE DECREASE
----------------------------------------------------------------------------
+100 BP +200 BP -100 BP -200 BP
----------------------------------------------------------------------------
Net Interest Income (1,203) (2,398) +1,154 +2,283
Market Value of Portfolio Equity (13,369) (26,015) +14,931 +32,812
The preceding sensitivity analysis does not represent a Company
forecast and should not be relied upon as being indicative of expected
operating results. These hypothetical estimates are based upon numerous
assumptions including: the nature and timing of interest rate levels including
yield curve shape, prepayments on loans and securities, deposit decay rates,
pricing decisions on loans and deposits, reinvestment/replacement of asset and
liability cash flows, and others. While assumptions are developed based upon
current economic and local market conditions, the Company cannot make any
assurances as to the predictive nature of these assumptions including how
customer preferences or competitor influences might change. Also, as market
conditions vary from those assumed in the sensitivity analysis, actual results
will also differ due to: prepayment/refinancing levels likely deviating from
those assumed, the varying impact of interest rate changes on caps or floors on
adjustable rate assets, the potential effect of changing debt service levels on
customers with adjustable rate loans, depositor early withdrawals and product
preference changes, and other internal/external variables. Furthermore, the
sensitivity analysis does not reflect actions that the ALCO might take in
responding to or anticipating changes in interest rates.
As part of its asset/liability management strategy, the Company has
emphasized the origination of consumer loans, commercial business loans and
commercial real estate loans, all of which typically have shorter terms than
residential mortgage loans and/or adjustable or variable rates of interest. The
Company has also emphasized the origination of fixed-rate, long-term
residential loans for sale in the secondary market. As of December 31, 1997,
$269.2 million, or 39.8%, of the Company's total loan portfolio had adjustable
interest rates.
----
15
17
As part of the Company's asset/liability management strategies, the
Company has limited its investments in investment securities to those with an
estimated life of five years or less. In addition, the Company generally has
determined to limit its investments in mortgage-backed securities, all of which
are designated as held to maturity at December 31, 1997, to those which are
backed by adjustable-rate mortgages, have an adjustable rate feature or have an
estimated life of less that five years. At December 31, 1997, $49.1 million, or
42.6%, of the Company's mortgage-backed securities were backed by ARMs or had
adjustable interest rates. In addition, at December 31, 1997, $55.4 million, or
83.9%, of the fixed-rate mortgage-backed securities had a balloon feature (the
mortgage-backed security will mature and repay before the underlying loans have
been fully amortized). At December 31, 1997, the Company's portfolio of
mortgage-backed securities with a balloon feature had a weighted average life
of 2.1 years.
The Company's strategy with respect to liabilities in recent
periods has been to emphasize transaction accounts, which are not as sensitive
to changes in interest rates as time certificates of deposit. At December 31,
1997, 39.9% of the Company's deposits were in transaction accounts compared to
38.1% at December 31, 1996.
The following summarizes the anticipated maturities or repricing of
the Company's interest-earning assets and interest-bearing liabilities as of
December 31, 1997, based on the information and assumptions set forth in the
notes below.
UP TO ONE YEAR TO TWO YEARS TO THREE YEARS
ONE YEAR TWO YEARS THREE YEARS TO FIVE YEARS
-----------------------------------------------------------
(DOLLARS IN THOUSANDS)
Interest-earning assets (1):
Loans receivable $215,606 $ 87,911 $ 75,056 $113,181
Investment securities (2) 71,211 22,332 10,236 5,702
Mortgage-backed securities 64,876 10,726 11,304 19,762
-----------------------------------------------------------
Total 351,693 120,969 96,596 138,645
-----------------------------------------------------------
Interest-bearing liabilities:
Deposits:
NOW accounts (3) 30,814 16,790 11,417 7,547
Regular savings accounts (3) 18,620 15,455 12,828 18,438
Money market deposit
accounts ("MMDA") (3) 57,730 4,757 3,283 3,828
Certificates of deposit 301,965 95,487 40,554 28,136
Borrowings 2,064 1,976 1,921 3,587
-----------------------------------------------------------
Total 411,193 134,465 70,003 61,536
-----------------------------------------------------------
Excess (deficiency) of interest-
earning assets over interest-
bearing liabilities $(59,500) $(13,496) $ 26,593 $ 77,109
===========================================================
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $(59,500) $(72,996) $(46,403) $ 30,706
===========================================================
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities as a percent of total assets (6.28)% (7.71)% (4.90)% 3.24%
===========================================================
FIVE YEARS OVER TEN
TO TEN YEARS YEARS TOTAL
--------------------------------------
(DOLLARS IN THOUSANDS)
Interest-earning assets (1):
Loans receivable $109,150 $ 60,888 $661,792
Investment securities (2) 184 109,665
Mortgage-backed securities 8,457 115,125
--------------------------------------
Total 117,791 60,888 886,582
--------------------------------------
Interest-bearing liabilities:
Deposits:
NOW accounts (3) 10,129 6,585 83,282
Regular savings accounts (3) 25,710 18,481 109,532
Money market deposit
accounts ("MMDA") (3) 2,933 545 73,076
Certificates of deposit 1,801 -- 467,943
Borrowings 10,672 26,508 46,728
--------------------------------------
Total 51,245 52,119 780,561
--------------------------------------
Excess (deficiency) of interest-
earning assets over interest-
bearing liabilities $ 66,546 $ 8,769 $106,021
======================================
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 97,252 $106,021
======================================
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities as a percent of total assets 10.27% 11.19%
======================================
(1) Adjustable-rate assets are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are
due and fixed-rate assets are included in the periods in which they are
scheduled to be repaid, based on scheduled amortization, in each case as
adjusted to take into account estimated prepayments.
(2) Includes interest-bearing deposits at other institutions.
(3) Although the Company's NOW accounts, regular savings accounts and MMDAs are
subject to immediate withdrawal, management considers a substantial amount
of such accounts to be core deposits having significantly longer effective
maturities. The decay rates used on these accounts are based on Federal
Home Loan Bank of Atlanta assumptions and should not be regarded as
indicative of the actual withdrawals that may be experienced by the
Company. If all of the Company's NOW accounts, regular savings accounts and
MMDAs had been assumed to be subject to repricing within one year,
interest-bearing liabilities which were estimated to mature or reprice
within one year would have exceeded interest-earning assets with comparable
characteristics by $233.2 million or 24.62% of total assets.
- ----
16
18
- -------------------------------
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, loan and
mortgage-backed security amortizations, prepayments and maturities, 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
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 Company has been able to generate
sufficient cash through its deposits and borrowings (consisting of advances
from the FHLB of Dallas). At December 31, 1997, the Company had $46.7 million
of outstanding advances from the FHLB of Dallas. Additional advances available
at December 31, 1997 from the FHLB of Dallas amounted to $232.3 million.
Liquidity management is both a daily and long-term function of
business management. Excess liquidity is generally invested in short-term
investments such as overnight 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
certificates of deposit and deposit withdrawals, to fund loan commitments and
to maintain a portfolio of mortgage-backed and investment securities. At
December 31, 1997, the total approved loan commitments outstanding amounted to
$48.1 million. At the same date, commitments under unused lines of credit,
including credit card lines, amounted to $63.7 million. Certificates of deposit
scheduled to mature in one year or less at December 31, 1997 totaled $302.0
million. Management believes that a significant portion of maturing deposits
will remain on deposit with the Company. The Company anticipates it will
continue to have sufficient funds together with available borrowings to meet
its current commitments.
- ---------------------------------------
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with generally accepted
accounting principles, which generally require the measurement of financial
position and operation results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Company's assets and
liabilities are monetary in nature. As a result, interest rates generally have
a more significant impact on the Company's performance than does the effect of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services, since such prices are
affected by inflation to a larger extent than interest rates.
----
17
19
- --------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
The statement establishes accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on the
consistent application of the financial-components approach. This approach
requires the recognition of financial assets and servicing assets that are
controlled by the reporting entity, and the derecognition of financial assets
and liabilities when control is extinguished.
Servicing assets and other retained interests in transferred assets
are required to be measured by allocating the previous carrying amount between
the assets sold, if any, and the interest that is retained, if any, based on
the relative fair value of the assets at the date of transfer. SFAS 127,
Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125,
was issued in December 1996 and deferred application of many of the provisions
of SFAS 125 until January 1, 1998. The adoption of SFAS 125 is not expected to
have a material effect on financial position and the results of operations.
In February, 1997, the FASB issued SFAS No. 128, Earning Per Share.
This statement establishes standards for computing and presenting earnings per
share ("EPS"). It will require the presentation of basic EPS on the face of the
income statement with dual presentation of both basic and diluted EPS for
entities with complex capital structures. This statement was adopted by the
Company on December 31, 1997. Restatement of earnings per share for all prior
periods presented is required. The statement deals with reporting and
disclosure and therefore did not have an impact on the financial statements.
For additional information on these and other FASB statements see
Note 1 to the Consolidated Financial Statements.
- ----
18
20
INDEPENDENT AUDITOR'S REPORT
CHARLES E. CASTAING
ROGER E. HUSSEY CASTAING, HUSSEY & LOLAN, LLP
SAMUEL R. LOLAN CERTIFIED PUBLIC ACCOUNTANTS MEMBERS
PATRICK J. DAUTERIVE 525 WEEKS STREET - P.O. BOX 14240 AMERICAN INSTITUTE OF
LORI D. PERCLE NEW IBERIA, LOUISIANA 70562-4240 CERTIFIED PUBLIC ACCOUNTANTS
DEBBIE B. TAYLOR ------------------- SOCIETY OF
KATHERINE H. ARMENTOR PH: (318) 364-7221 LOUISIANA CERTIFIED PUBLIC ACCOUNTANTS
- --------------------- FAX: (318) 364-7235
ROBIN G. FREYOU
DAWN K. GONSOULIN
TO THE BOARD OF DIRECTORS
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
NEW IBERIA, LOUISIANA
We have audited the accompanying consolidated statements of
financial condition of ISB Financial Corporation and Subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of ISB
Financial Corporation and Subsidiaries as of December 31, 1997 and 1996, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ CASTAING, HUSSEY & LOLAN, LLP
New Iberia, Louisiana
February 6, 1998
----
19
21
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1997 1996
------------------------------
ASSETS
Cash and Cash Equivalents:
Cash on Hand and Due from Banks $ 11,959 $ 10,822
Interest Bearing Deposits - Federal Home Loan Bank 32,348 42,563
------------------------------
Total Cash and Cash Equivalents 44,307 53,385
Investment Securities:
Held to Maturity (fair value of $1,813 and $2,218, respectively) 1,811 2,216
Available for Sale, at fair value 75,506 101,144
Trading Account Securities, at fair value -0- 364
Mortgage-Backed Securities Held to Maturity (fair value
of $116,004 and $150,014, respectively) 115,125 150,669
Loans Receivable, net of allowance for loan losses of
$5,258 and $4,615, respectively 659,244 571,119
Real Estate Owned 473 978
Federal Home Loan Bank Stock, at cost 6,160 5,808
Premises and Equipment, Net 19,253 15,483
Accrued Interest Receivable 5,514 5,667
Goodwill and Acquisition Intangibles 16,358 17,807
Other Assets 3,531 4,624
------------------------------
TOTAL ASSETS $947,282 $929,264
==============================
LIABILITIES AND STOCKHOLDERS EQUITY
LIABILITIES:
Deposits $778,695 $760,284
Federal Home Loan Bank Advances 46,728 47,750
Advance Payments by Borrowers for Taxes and Insurance 1,429 1,605
Accrued Interest Payable on Deposits 405 832
Accrued and Other Liabilities 4,461 4,787
------------------------------
Total Liabilities 831,718 815,258
------------------------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY:
Preferred Stock of $1 Par Value; 5,000,000 shares authorized,
-0- shares issued or outstanding -0- -0-
Common Stock of $1 Par Value; 25,000,000 shares authorized;
7,380,671 shares issued 7,381 7,381
Additional Paid-in-Capital 66,798 65,725
Retained Earnings (Substantially Restricted) 57,096 54,660
Unearned Common Stock Held by ESOP (3,921) (4,612)
Unearned Common Stock Held by RRP Trust (4,082) (4,476)
Treasury Stock, 478,643 and 329,411 shares, at cost (7,929) (4,859)
Unrealized Gain on Securities, Net of Deferred Taxes 221 187
------------------------------
TOTAL STOCKHOLDERS' EQUITY 115,564 114,006
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $947,282 $929,264
==============================
The accompanying Notes to Consolidated Financial Statements are an integral
part of these Financial Statements.
- ----
20
22
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995
-----------------------------------------------------
INTEREST INCOME:
Interest on Loans $ 52,068 $ 40,263 $ 32,830
Interest and Dividends on Investment Securities 6,216 4,926 4,820
Interest on Mortgage-Backed Securities 8,436 4,498 2,842
Interest on Federal Home Loan Bank Deposits 1,761 3,020 1,842
-----------------------------------------------------
Total Interest Income 68,481 52,707 42,334
-----------------------------------------------------
INTEREST EXPENSE:
Interest on Deposits 32,957 24,017 20,243
Interest on Federal Home Loan Bank Advances 3,093 3,119 1,039
-----------------------------------------------------
Total Interest Expense 36,050 27,136 21,282
-----------------------------------------------------
Net Interest Income 32,431 25,571 21,052
Provision for Loan Losses 1,097 156 239
-----------------------------------------------------
Net Interest Income After Provision For Loan Losses 31,334 25,415 20,813
-----------------------------------------------------
NONINTEREST INCOME:
Gain on Sale of Investments, Net 266 181 -0-
Gain on Sale of Loans, Net 306 55 -0-
Service Charges on Deposit Accounts 3,470 2,032 1,525
Late Charges and Other Fees on Loans 1,002 699 635
Other Income 1,346 851 508
-----------------------------------------------------
Total Noninterest Income 6,390 3,818 2,668
-----------------------------------------------------
NONINTEREST EXPENSE:
Salaries and Employee Benefits 13,671 8,475 6,324
SAIF Deposit Insurance Premium 451 3,679 998
Depreciation Expense 1,418 998 774
Occupancy Expense 1,889 1,229 816
Advertising Expense 931 762 475
Computer Expense 1,586 624 505
Printing, Stationery and Supplies Expense 961 424 272
Franchise and Shares Tax Expense 925 987 -0-
Amortization of Goodwill and Other
Acquired Intangibles 1,545 399 89
Other Expenses 5,224 3,201 2,440
-----------------------------------------------------
Total Noninterest Expense 28,601 20,778 12,693
-----------------------------------------------------
Income Before Income Tax Expense 9,123 8,455 10,788
Income Tax Expense 3,780 3,177 3,781
-----------------------------------------------------
NET INCOME $ 5,343 $ 5,278 $ 7,007
=====================================================
Earnings Per Share - Basic * $ .86 $ .80 $ .80
=====================================================
Earnings Per Share - Diluted* $ .83 $ .80 $ .80
=====================================================
*Includes 2nd, 3rd and 4th quarters only for 1995.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these Financial Statements.
----
21
23
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
UNEARNED
RETAINED UNEARNED COMMON
ADDITIONAL EARNINGS - COMMON STOCK
COMMON PAID-IN (SUBSTANTIALLY STOCK HELD HELD BY
STOCK CAPITAL RESTRICTED) BY ESOP RRP TRUST
------------------------------------------------------------------
BALANCE, JANUARY 1, 1995 $ -0- $ -0- $46,105 $ -0- $ -0-
Net Income for the year ended December 31, 1995 7,007
Cash Dividends Declared (1,528)
Common Stock Issued in Conversion $7,381 65,006 (5,904)
Common Stock Released by ESOP Trust 287 565
Change in Unrealized Gain on Securities
Available for Sale, Net of Deferred Taxes
------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 7,381 65,293 51,584 (5,339) -0-
Net Income for the year ended December 31, 1996 5,278
Cash Dividends Declared (2,202)
Common Stock Released by ESOP Trust 432 727
Common Stock Acquired by Recognition and
Retention Plan Trust (4,687)
Common Stock Earned by Participants of Recognition
and Retention Plan Trust 211
Treasury Stock Acquired at Cost
Change in Unrealized Gain on Securities
Available for Sale, Net of Deferred Taxes
------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 7,381 65,725 54,660 (4,612) (4,476)
Net Income for the year ended December 31, 1997 5,343
Cash Dividends Declared (2,907)
Stock Options Exercised 1
Common Stock Released by ESOP Trust 991 691
Common Stock Earned by Participants of Recognition
and Retention Plan Trust 81 394
Treasury Stock Acquired at Cost
Change in Unrealized Gain on Securities
Available for Sale, Net of Deferred Taxes
------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $7,381 $66,798 $57,096 $(3,921) $(4,082)
==================================================================
(DOLLARS IN THOUSANDS)
UNREALIZED TOTAL
GAIN (LOSS) STOCK-
TREASURY ON SECURITIES, HOLDER'S
STOCK NET OF DEFERRED TAXES EQUITY
--------------------------------------------------
BALANCE, JANUARY 1, 1995 $ -0- $(1,265) $ 44,840
Net Income for the year ended December 31, 1995 7,007
Cash Dividends Declared (1,528)
Common Stock Issued in Conversion 66,483
Common Stock Released by ESOP Trust 852
Change in Unrealized Gain on Securities
Available for Sale, Net of Deferred Taxes 2,023 2,023
--------------------------------------------------
BALANCE, DECEMBER 31, 1995 -0- 758 119,677
Net Income for the year ended December 31, 1996 5,278
Cash Dividends Declared (2,202)
Common Stock Released by ESOP Trust 1,159
Common Stock Acquired by Recognition and
Retention Plan Trust (4,687)
Common Stock Earned by Participants of Recognition
and Retention Plan Trust 211
Treasury Stock Acquired at Cost (4,859) (4,859)
Change in Unrealized Gain on Securities
Available for Sale, Net of Deferred Taxes (571) (571)
--------------------------------------------------
BALANCE, DECEMBER 31, 1996 (4,859) 187 114,006
Net Income for the year ended December 31, 1997 5,343
Cash Dividends Declared (2,907)
Stock Options Exercised 19 20
Common Stock Released by ESOP Trust 1,682
Common Stock Earned by Participants of Recognition
and Retention Plan Trust 475
Treasury Stock Acquired at Cost (3,089) (3,089)
Change in Unrealized Gain on Securities
Available for Sale, Net of Deferred Taxes 34 34
--------------------------------------------------
BALANCE, DECEMBER 31, 1997 $(7,929) $ 221 $115,564
==================================================
The accompanying Notes to Consolidated Financial Statements are an integral
part of these Financial Statements.
- ----
22
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1997 1996 1995
-----------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 5,343 $ 5,278 $ 7,007
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 3,052 1,522 973
Provision for Loan Losses 1,097 156 239
Compensation Expensed Recognized on RRP 414 211 -0-
Loss(Gain) on Sale of Premises and Equipment 178 (107) (18)
(Gain) Loss on Sale of Real Estate Owned (30) 32 (42)
Gain on Sale of Loans Held for Sale (306) (55) -0-
Gain on Sale of Investments (266) (181) -0-
Amortization of Premium/Discount on Investments 311 370 405
Current Provision for Deferred Income Taxes 161 381 381
FHLB Stock Dividends (352) (259) (232)
Loans Originated for Resale (19,964) (4,610) (406)
Proceeds From Loans Sold to Others 20,270 4,665 406
Income Reinvested on Marketable Equity Security (329) (306) (296)
ESOP Contribution 1,629 1,146 852
Net Change in Securities Classified as Trading 630 (9) (390)
Changes in Assets and Liabilities:
Decrease (Increase) in Accrued Interest Receivable 153 588 (1,179)
(Increase) Decrease in Other Assets and Other Liabilities (976) (2,575) (180)
-----------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,015 6,247 7,520
-----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds From Sales of Available for Sale Securities -0- 12,207 -0-
Proceeds From Maturities of Held to Maturity Securities 405 2,142 145
Proceeds From Maturities of Available for Sale Securities 56,100 40,625 7,000
Purchases of Securities Held to Maturity -0- (1,576) -0-
Purchases of Securities Available for Sale (30,335) (11,034) (42,855)
Increase in Loans Receivable, Net (89,794) (62,919) (29,184)
Proceeds From FHLB Stock Redemption -0- 24 -0-
Proceeds From Sale of Premises and Equipment 2 238 70
Purchases of Premises and Equipment (5,271) (1,812) (645)
Proceeds From Disposition of Real Estate Owned 931 338 248
Purchases of Mortgage-Backed Securities -0- -0- (15,532)
Principal Collections on Mortgage-Backed Securities 35,487 11,903 3,722
Cash Paid in Excess of Cash Received on Bank Acquisitions -0- (17,521) -0-
Payments Received from Note Receivable 841 -0- -0-
Other Investing Activities -0- -0- (20)
------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (31,634) (27,385) (77,051)
------------------------------------------------------
(Continued)
----
23
25
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- CONTINUED
(DOLLARS IN THOUSANDS)
1997 1996 1995
-----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Change in Demand, NOW, Money Market and
Savings Deposits $ 21,523 $ 16,248 $ (10,181)
Net Change in Time Deposits (3,112) 11,158 20,338
(Decrease) Increase in Escrow Funds and Miscellaneous
Deposits, Net (176) (180) 172
Proceeds From FHLB Advances -0- 8,195 77,481
Principal Repayments of FHLB Advances (1,022) (935) (41,991)
Proceeds From Issuance of Common Stock -0- -0- 67,903
Dividends Paid to Shareholders (2,604) (2,159) (1,019)
Acquisition of Common Stock by RRP -0- (4,687) -0-
Payments to Repurchase Common Stock (3,089) (4,859) -0-
Proceeds from Sale of Treasury Stock 21 -0- -0-
Stock Conversion Costs Incurred -0- -0- (1,116)
------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,541 22,781 111,587
------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (9,078) 1,643 42,056
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 53,385 51,742 9,686
------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 44,307 $ 53,385 $ 51,742
======================================================
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Acquisition of Real Estate in Settlement of Loans $ 566 $ 308 $ 197
Transfer of Real Estate Owned to Land and Building $ 168 $ -0- $ -0-
SUPPLEMENTAL DISCLOSURES:
Cash Paid (Received) For:
Interest on Deposits and Borrowings $ 36,477 $ 26,618 $ 21,190
Income Taxes $ 4,226 $ 2,818 $ 3,472
Income Tax Refunds $ (938) $ -0- $ -0-
The accompanying Notes to Consolidated Financial Statements are an integral
part of these Financial Statements.
- ----
24
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS: ISB Financial Corporation (the "Company") is
a Louisiana corporation organized in November 1994 for the purpose of becoming
the bank holding company for Iberia Savings Bank. The Board of Directors of
Iberia Savings Bank adopted the Plan of Conversion pursuant to which the bank
converted from a Louisiana-chartered mutual savings bank to a
Louisiana-chartered stock savings bank. The Company completed its subscription
and community offering in April 1995 and, with a portion of the net proceeds,
acquired the capital stock of the bank.
The bank is a wholly owned subsidiary of the Company and provides a
full range of financial services to individuals and corporate customers through
its twenty-seven branches located throughout south Louisiana. In December of
1997, Iberia Savings Bank changed its charter from a state savings bank to a
state commercial bank and changed its name to IBERIABANK ("Iberia"). Iberia
Financial Services, Inc. ("IFSI") is a wholly owned subsidiary of Iberia.
IFSI's main source of income is commissions from discount brokerage services.
Finesco, Ltd. ("Finesco") is a wholly owned subsidiary of IFSI. Finesco's main
source of income is derived from interest earned on financing insurance
premiums.
Jefferson Bank, formerly Jefferson Federal Savings Bank,
("Jefferson"), a Louisiana-chartered stock savings bank, was acquired on
October 18, 1996 and was operated as a wholly owned subsidiary of the Company
until it was merged into Iberia Savings Bank in September of 1997. See the
related Acquisition footnote.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of ISB Financial Corporation and its wholly owned
subsidiary, Iberia, as well as all subsidiaries of the bank. All significant
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Material estimates that are particularly
susceptible to significant change relate to the determination of the allowance
for losses on loans. Actual results could differ from those estimates.
While management uses available information to recognize losses on
loans and foreclosed real estate, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowances for losses on loans and foreclosed
real estate. Such agencies may require the Company to recognize additions to
the allowances based on their judgments about information available to them at
the time of their examination. Because of these factors, it is reasonably
possible that the allowances for losses on loans and foreclosed real estate may
change in the near term.
CASH AND CASH EQUIVALENTS: For purposes of presentation in the
consolidated statements of cash flows, cash and cash equivalents are defined as
cash and interest bearing and non-interest bearing funds on deposit at other
financial institutions.
INVESTMENT SECURITIES: Investment securities that are held for
short-term resale are classified as trading account securities and carried at
fair value. Debt securities that management has the ability and intent to hold
to maturity are classified as held to maturity and carried at cost, adjusted
for amortization of premiums and accretion of discounts using methods
approximating the interest method. Other marketable securities are classified
as available for sale and are carried at fair value. Realized and unrealized
gains and losses on trading
----
25
27
account securities are included in net income. Unrealized gains and
losses on securities available for sale are recognized as direct increases or
decreases in stockholders' equity. The cost of securities sold is recognized
using the specific identification method.
MORTGAGE-BACKED SECURITIES: Mortgage-backed securities are
classified as held to maturity, and are stated at cost, adjusted for
amortization of premiums and accretion of discounts using a method that
approximates level yield. The Company has the intent and ability to hold these
securities to maturity.
FEDERAL HOME LOAN BANK STOCK: Stock in the Federal Home Loan Bank
of Dallas ("FHLB") is carried at cost. Since Iberia is a member of the FHLB, it
is required to maintain an amount of stock based on its total assets. At
December 31, 1997 and 1996, the institution held more than the required level
of FHLB stock.
LOANS RECEIVABLE: Loans receivable are stated at unpaid principal
balances, less the allowance for loan losses and net deferred loan origination
fees and unearned discounts.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is
maintained at a level which, in management's judgment, is adequate to absorb
credit losses inherent in the loan portfolio. The amount of the allowance is
based on management's evaluation of various factors, including the
collectibility of the loan portfolio, the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific impaired loans,
and economic conditions. Allowances for impaired loans are generally determined
based on collateral values or the present value of estimated cash flows. The
allowance is increased by a provision for loan losses, which is charged to
expense, and reduced by charge-offs, net of recoveries.
INTEREST AND FEES ON LOANS: Interest income on loans is accrued
over the term of the loans based upon the principal balance outstanding.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued interest
is reversed. Interest income is subsequently recognized only to the extent cash
payments are received. A loan is considered impaired when it is probable that
all contractual amounts due will not be collected in accordance with the terms
of the loan. Residential mortgage loans and consumer installment loans are
considered to be groups of smaller balance homogeneous loans and are
collectively evaluated for impairment and are not subject to SFAS 114,
Accounting by Creditors for Impairment of a Loan, measurement criteria.
Net loan fees or costs incurred in the origination of all loans are
deferred and recognized as an adjustment of the yield on loans using the
effective interest method in accordance with Statement of Financial Accounting
Standard No. 91, Accounting For Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases. If the
related loan is settled prior to maturity, any remaining balance is immediately
recognized as income or an expense.
PREMISES AND EQUIPMENT: Premises and equipment are being
depreciated on a straight line basis over the estimated useful lives of 15 to
40 years for buildings and 5 to 10 years for furniture, fixtures and equipment.
LOANS HELD FOR SALE: Mortgage loans originated and intended for
sale in the secondary market are carried at the lower of cost or estimated fair
value.
LOAN SERVICING: Mortgage servicing rights are recognized on loans
sold where the institution retains the servicing rights. The cost of mortgage
servicing rights is amortized in proportion to, and over the period of,
estimated net servicing revenues. Impairment of mortgage servicing rights is
assessed based on the fair value of those rights. Fair values are estimated
using discounted cash flows based on a current market interest rate.
- ----
26
28
REAL ESTATE AND OTHER ASSETS ACQUIRED IN SETTLEMENT OF LOANS: Real
estate and other assets acquired in settlement of loans are recorded at the
balance of the loan or at estimated fair value minus estimated costs to sell,
whichever is less, at the date acquired, plus capital improvements made
thereafter to facilitate sale. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of cost or
fair value minus estimated costs to sell. Costs of holding real estate acquired
in settlement of loans are shown as charges against income currently. Gains on
sales of such real estate are taken into income based on the buyer's initial
and continuing investment in the property. Other assets acquired in settlement
of loans consist primarily of automobiles. Valuations are periodically
performed by management, and an allowance for losses is established by a charge
to operations if the carrying value of a property exceeds its fair value minus
estimated costs to sell. The allowance for losses was $-0- at December 31, 1997
and 1996.
ADVERTISING COSTS: The Company expenses all advertising costs as
incurred. There were no direct-response advertising costs capitalized as of
December 31, 1997 or 1996.
GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill, representing the
purchase price in excess of fair value of identifiable net assets at
acquisition, is amortized over periods not exceeding 25 years. Other acquired
intangible assets, such as core deposit intangibles, are amortized over the
periods benefited, not exceeding 8 years.
INCOME TAXES: The Company and all subsidiaries file a consolidated
federal income tax return on a calendar year basis. Deferred income taxes are
recognized for the tax consequences of temporary differences by applying
enacted statutory tax rates applicable to future years to differences between
the financial statements carrying amounts and the tax bases of existing assets
and liabilities in accordance with SFAS 109, Accounting for Income Taxes. The
measurement of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence, are not expected to be
realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The disclosure of the
estimated fair value of financial instruments is made in accordance with the
requirements of SFAS 107, Disclosures about Fair Value of Financial
Instruments. The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of amounts the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated
fair value amounts.
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is practicable
to estimate that value:
CASH AND CASH EQUIVALENTS: For those short-terms
instruments, the carrying amounts were a reasonable estimate of
fair value.
INVESTMENT SECURITIES: Fair value equals quoted market
prices and dealer quotes.
LOANS: The fair value of mortgage loans receivable was
estimated based on present values using entry-value rates at
December 31, 1997 and 1996, weighted for varying maturity dates.
Other loans receivable were valued based on present values using
entry-value interest rates at December 31, 1997 and 1996 applicable
to each category of loans.
DEPOSITS: The fair value of NOW accounts, money market
deposits and savings accounts was the amount payable on demand at
the reporting date. Certificates of deposit were valued using a
weighted average rate calculated based upon rates at December 31,
1997 and 1996 for deposits of similar remaining maturities.
----
27
29
OFF BALANCE SHEET ITEMS: The Company has outstanding
commitments to extend credit and standby letters of credit. These
off-balance sheet financial instruments are generally exercisable
at the market rate prevailing at the date the underlying
transaction will be completed and, therefore, have no current fair
value.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS: In October 1995, the
Financial Accounting Standards Board ("FASB") issued SFAS 123, Accounting for
Stock-Based Compensation. The statement establishes a fair value based method
of accounting for stock-based compensation plans. It encourages entities to
adopt that method in place of the provisions of Accounting Principles Board
("APB") Opinion 25, Accounting for Stock Issued to Employees, for all
arrangements under which employees receive shares of stock or other equity
instruments of the employer if the employer incurs liabilities to employees in
amounts based on the price of its stock. The Company will continue using the
accounting methods prescribed by APB Opinion 25 and will disclose in the
footnotes information on a fair value basis for its stock-based compensation
plans.
In June 1996, the FASB issued SFAS 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. The
statement establishes accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on the
consistent application of the financial-components approach. This approach
requires the recognition of financial assets and servicing assets that are
controlled by the reporting entity, and the derecognition of financial assets
and liabilities when control is extinguished. Liabilities and derivatives
incurred or obtained by transferors in conjunction with the transfer of
financial assets are required to be measured at fair value, if practicable.
SFAS 125 also supersedes SFAS 122, Accounting for Mortgage Serving Rights.
Servicing assets and other retained interests in transferred assets
are required to be measured by allocating the previous carrying amount between
the assets sold, if any and the interest that is retained, if any, based on the
relative fair value of the assets at the date of transfer. SFAS 127, Deferral
of the Effective Date of Certain Provisions of FASB Statement No. 125, was
issued in December 1996 and deferred application of many of the provisions of
SFAS 125 until January 1, 1998. The adoption of SFAS 125 is not expected to
have a material effect on financial position and the results of operations.
In February, 1997, the FASB issued SFAS No. 128, Earnings Per
Share. This statement establishes standards for computing and presenting
earnings per share ("EPS"). It will require the presentation of basic EPS on
the face of the income statement with dual presentation of both basic and
diluted EPS for entities with complex capital structures. Basic EPS excludes
the dilutive effect that could occur if any securities or other contracts to
issue common stock were exercised or converted into or resulted in the issuance
of common stock. Basic EPS is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for
the period. The computation of diluted EPS is similar to the computation of
basic EPS except the denominator is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued.
In June, 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income. This statement establishes standards for reporting and
disclosure of comprehensive income and its components (revenues, expenses,
gains and losses). This statement requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
(including, for example, unrealized holding gains and losses on available for
sale securities) be reported in a financial statement similar to the statement
of income and retained income. The accumulated balance of other comprehensive
income will be disclosed separately from retained income in the shareholders'
equity section of the balance sheet. This statement is effective for the
Company for
- ----
28
30
the fiscal year beginning January 1, 1998. Adoption of this statement will not
have a material impact on the financial condition or results of operations
because it deals with reporting and disclosure.
In June, 1997 , the FASB issued SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. This statement establishes
standards for the way public business enterprises report information about
operating segments and establishes standards for related disclosures about
products and services, geographic areas and major customers. Operating segments
are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Information
required to be disclosed includes segment profit or loss, certain specific
revenue and expense items, segment assets and certain other information. This
statement is effective for the Company for financial statements issued for the
fiscal year beginning January 1, 1998. Adoption of this statement will not have
a material impact on the financial condition or results of operations because
it deals with reporting and disclosure.
RECLASSIFICATIONS: Certain reclassifications have been made to the
1995 and 1996 consolidated financial statements in order to conform to the
classifications adopted for reporting in 1997.
NOTE 2 - CASH:
The Company is required to maintain reserves which consist of vault
cash and cash on deposit with the Federal Reserve Bank based on a percentage of
customer deposits. The average reserve balance required at December 31, 1997
and 1996 was $7,334,000 and $4,353,000, respectively.
NOTE 3 - INVESTMENT SECURITIES:
The amortized cost and estimated fair values of investment
securities (in thousands) at December 31, 1997 consisted of the following:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------------------------------
Securities Available for Sale:
U.S. Government and Federal
Agency Obligations $69,534 $ 339 $ (1) $69,872
Marketable Equity Security 5,637 -0- (3) 5,634
--------------------------------------------------------------------------
Total Securities Available for Sale 75,171 339 (4) 75,506
--------------------------------------------------------------------------
Securities Held to Maturity:
Obligations of State and Political
Subdivisions 1,643 2 -0- 1,645
Other 168 -0- -0- 168
--------------------------------------------------------------------------
Total Securities Held to Maturity $ 1,811 $ 2 $ -0- $ 1,813
==========================================================================
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29
31
The amortized cost and estimated fair value of investment
securities at December 31, 1997, by contractual maturity, are shown below (in
thousands). Expected maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call
or prepayment penalties.
SECURITIES AVAILABLE SECURITIES
FOR SALE HELD TO MATURITY
--------------------------------------------------------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------------------------------------------------------------------------
Due in one year or less $33,777 $33,831 $ -0- $ -0-
Due two through five years 35,757 36,041 1,743 1,745
Due five through ten years -0- -0- 68 68
--------------------------------------------------------------------------
Subtotal 69,534 69,872 1,811 1,813
Marketable Equity Security 5,637 5,634 -0- -0-
--------------------------------------------------------------------------
Totals $75,171 $75,506 $ 1,811 $ 1,813
==========================================================================
The Company had no sales of investment securities available for
sale during 1997. Proceeds from the sale of trading securities during 1997 were
$630,000. Gross gains of $266,000, before related income taxes of $93,000 were
realized on those sales.
Securities with carrying values of $3,256,000 and $3,492,000 at
December 31, 1997 and 1996, respectively were pledged to secure public
deposits.
The amortized cost and estimated fair values of investment
securities (in thousands) at December 31, 1996 consisted of the following:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------------
Securities Available for Sale:
U.S. Government and Federal
Agency Obligations $ 95,549 $ 378 $ (72) $ 95,855
Marketable Equity Security 5,307 -0- (18) 5,289
----------------------------------------------------------
Total Securities Available for Sale $100,856 $ 378 $ (90) $101,144
==========================================================
Securities Held to Maturity:
Obligations of State and Political
Subdivisions $ 1,982 $ 3 $ -0- $ 1,985
Other 234 -0- (1) 233
----------------------------------------------------------
Total Securities Held to Maturity $ 2,216 $ 3 $ (1) $ 2,218
==========================================================
Proceeds from the sale of available for sale investment securities
during 1996 were $12,207,000. Gross gains of $174,000, before related income
taxes of $59,000 and gross losses of $-0- were realized on those sales.
Proceeds from the sale of trading securities during 1996 were $85,000. Gross
gains of $7,000, before related income taxes of $2,000 were realized on those
sales. Unrealized gains on trading account securities amounting to $14,000
were recognized in net income in 1996.
The Company had no sales of investment securities available for
sale during 1995. Unrealized losses on trading securities amounting to $4,000
were recognized in net income in 1995.
- ----
30
32
NOTE 4 - MORTGAGE-BACKED SECURITIES:
All mortgage-backed securities are classified as held to maturity
at December 31, 1997 and 1996 and consisted of the following (in thousands):
DECEMBER 31, 1997
-----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------------------
FHLMC $ 54,285 $ 271 $ (106) $ 54,450
FNMA 28,864 361 (11) 29,214
GNMA 11,115 359 (130) 11,344
FNMA CMO 9,468 -0- (35) 9,433
FHLMC CMO 10,901 234 (64) 11,071
Privately Issued 492 -0- -0- 492
-----------------------------------------------------------------------
Totals $115,125 $ 1,225 $ (346) $ 116,004
=======================================================================
There were no sales of mortgage-backed securities for the year
ended December 31, 1997.
Mortgage-backed securities include approximately $49,094,000 of
adjustable rate securities and $66,031,000 of fixed rate securities at December
31, 1997. At December 31, 1997, $55,414,000 of the mortgage-backed securities
had a balloon feature (the mortgage-backed security will mature and repay
before the underlying loans have been fully amortized).
DECEMBER 31, 1996
-----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------------------
FHLMC $ 80,648 $ 130 $ (603) $ 80,175
FNMA 35,340 232 (146) 35,426
GNMA 13,233 119 -0- 13,352
FNMA CMO 9,697 47 (256) 9,488
FHLMC CMO 10,901 97 (194) 10,804
Privately Issued 850 -0- (81) 769
-----------------------------------------------------------------------
Totals $150,669 $ 625 $ (1,280) $150,014
=======================================================================
Mortgage-backed securities include approximately $62,487,000 of
adjustable rate securities and $88,182,000 of fixed rate securities at December
31, 1996. At December 31, 1996, $79,300,000 of the mortgage-backed securities
had a balloon feature.
There were no sales of mortgage-backed securities for the years
ended December 31, 1996 and 1995.
----
31
33
NOTE 5 - LOANS RECEIVABLE:
Loans receivable (in thousands) at December 31, 1997 and 1996
consisted of the following:
DECEMBER 31,
------------------------------
1997 1996
------------------------------
Residential Mortgage Loans:
Single-family Residential $ 376,320 $ 386,555
Multi-family 2,516 2,279
Construction 22,109 14,064
------------------------------
Total Mortgage Loans 400,945 402,898
------------------------------
Commercial Loans:
Business 57,978 36,089
Real Estate 48,291 22,961
------------------------------
Total Commercial Loans 106,269 59,050
------------------------------
Consumer Loans:
Home Equity 34,192 21,646
Automobile 9,433 7,509
Indirect Automobile 90,676 52,371
Mobile Home Loans 3,226 4,215
Educational Loans 9,458 9,345
Credit Card Loans 4,150 4,017
Loans on Savings 11,255 12,487
Other 7,358 8,225
------------------------------
Total Consumer Loans 169,748 119,815
------------------------------
Total Loans Receivable 676,962 581,763
------------------------------
Allowance for Loan Losses (5,258) (4,615)
Loans-in-Process (14,082) (6,059)
Prepaid Dealer Participations 3,636 2,555
Unearned Discount (160) (143)
Deferred Loan Fees, Net (709) (922)
Discount on Loans Purchased (1,145) (1,460)
------------------------------
Loans Receivable, Net $ 659,244 $ 571,119
==============================
Loans receivable include approximately $269,200,000 and
$208,431,000 of adjustable rate loans and $407,762,000 and $373,332,000 of
fixed rate loans at December 31, 1997 and 1996, respectively.
The amount of loans for which the accrual of interest has been
discontinued totaled approximately $2,150,000 and $2,491,000 at December 31,
1997 and 1996, respectively. Impaired loans are not material to the
consolidated financial statements.
A summary of changes in the allowance for loan losses (in
thousands) for the years ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995
-------------------------------
Balance, Beginning of Year $ 4,615 $ 3,746 $ 3,831
Allowance for Loan Losses from Acquisitions -0- 1,114 13
Provision Charged to Operations 1,097 156 239
Loans Charged-Off (803) (616) (430)
Recoveries 349 215 93
-------------------------------
Balance, End of Year $ 5,258 $ 4,615 $ 3,746
===============================
- ----
32
34
Fixed rate loans receivable (in thousands) as of December 31, 1997
are scheduled to mature and adjustable rate loans are scheduled to reprice as
follows:
UNDER 1 1 TO 5 6 TO 10 YEARS 11
YEAR YEARS YEARS AND OVER TOTAL
---------------------------------------------------------
Loans secured by 1 - 4 family residential:
Fixed Rate $ 3,686 $ 20,483 $ 68,214 $119,684 $212,067
Adjustable Rate 46,030 51,238 78,697 1,283 177,248
Other loans secured by real estate:
Fixed Rate 3,797 19,412 9,483 14,856 47,548
Adjustable Rate 20,766 4,081 138 -0- 24,985
All other loans 71,597 129,520 12,726 1,271 215,114
---------------------------------------------------------
Totals $145,876 $224,734 $169,258 $137,094 $676,962
=========================================================
NOTE 6 - LOAN SERVICING:
Mortgage loans serviced for others are not included in the
accompanying consolidated statements of financial condition. The unpaid
principal balances of mortgage loans serviced for others was $15,110,000 and
$10,863,000 at December 31, 1997 and 1996, respectively.
Custodial escrow balances maintained in connection with the
foregoing portfolio of loans serviced for others, and included in demand
deposits, were approximately $89,000 and $122,000 at December 31, 1997 and
1996, respectively.
Mortgage loan servicing rights of $42,000 and $27,000 were
capitalized in 1997 and 1996, respectively. Amortization of mortgage servicing
rights was $5,000 in 1997 and $2,000 in 1996, and the balance of mortgage
servicing rights was $62,000 and $25,000 at December 31, 1997 and 1996
respectively.
NOTE 7 - PREMISES AND EQUIPMENT:
Premises and equipment (in thousands) at December 31, 1997 and 1996
is summarized as follows:
DECEMBER 31,
---------------------
1997 1996
---------------------
Land $ 3,743 $ 3,053
Buildings 14,980 13,774
Furniture, Fixtures and Equipment 11,465 8,968
---------------------
30,188 25,795
Less Accumulated Depreciation 10,935 10,312
---------------------
Total Premises and Equipment $ 19,253 $ 15,483
=====================
The Company actively engages in leasing office space that it has
available. Leases have different terms ranging from month-to-month rental to
five year leases. At December 31, 1997, the monthly lease income was $23,000
per month. Total lease income for 1997, 1996 and 1995 was $362,000, $361,000,
and $330,000, respectively. Income from leases was reported as a reduction in
occupancy expense. The total allocated cost of the portion of the buildings
held for lease at December 31, 1997 and 1996 was $2,583,000 and $2,808,000,
respectively, with related accumulated depreciation of $852,000 and $833,000,
respectively.
----
33
35
The Company leases certain branch offices, land and ATM facilities
through noncancellable operating leases with terms that range from one to
twenty years, with renewal options thereafter.
Minimum future annual rent commitments under these agreements as of
December 31, 1997 are:
YEAR ENDING DECEMBER 31, AMOUNT
---------------------------------------------
1998 $ 301,149
1999 295,285
2000 291,742
2001 101,480
2002 and Thereafter 520,334
-----------
Total $1,509,990
===========
NOTE 8 - DEPOSITS:
An analysis of deposits (in thousands) as of December 31, 1997 and
1996 is as follows:
DECEMBER 31, 1997
-------------------------------------------
WEIGHTED PERCENT
AVERAGE RATE BALANCE TO TOTAL
-------------------------------------------
Non-Interest-Bearing DDA .00% $ 44,862 5.76%
NOW Accounts 1.85% 83,282 10.70
Money Market Deposit 3.50% 73,076 9.38
------------------------
Total Demand Deposits 201,220 25.84
------------------------
Regular Savings 2.41% 109,532 14.07
------------------------
Certificates of Deposit:
Less than 2.99% 90 .01
3.0 to 3.99% 2,665 .34
4.0 to 4.99% 88,826 11.41
5.0 to 5.99% 275,302 35.35
6.0 to 6.99% 95,824 12.31
7.0 to 7.99% 5,068 .65
8.0 and over 168 .02
------------------------
Total Certificates of Deposit 5.58% 467,943 60.09
------------------------
Total Deposits 4.22% $778,695 100.00%
========================
- ----
34
36
DECEMBER 31, 1996
------------------------------------
WEIGHTED PERCENT
AVERAGE RATE BALANCE TO TOTAL
------------------------------------
Non-Interest-Bearing DDA .00% $ 33,884 4.46%
NOW Accounts 1.97% 76,991 10.13
Money Market Deposit 3.35% 58,669 7.72
--------------------
Total Demand Deposits 169,544 22.31
--------------------
--------------------
Regular Savings 2.60% 119,685 15.74
--------------------
Certificates of Deposit:
Less than 2.99% 100 .01
3.0 to 3.99% 706 .09
4.0 to 4.99% 90,768 11.94
5.0 to 5.99% 258,860 34.05
6.0 to 6.99% 107,022 14.08
7.0 to 7.99% 13,429 1.76
8.0 and over 170 .02
--------------------
Total Certificates of Deposit 5.60% 471,055 61.95
--------------------
Total Deposits 4.34% $760,284 100.00%
====================
Certificates of deposit with a balance of $100,000 and over were
$93,728,000 and $92,364,000 at December 31, 1997 and 1996, respectively.
A schedule of maturities of certificates of deposit (in thousands)
at December 31, 1997 is as follows:
2002 AND
1998 1999 2000 2001 THEREAFTER TOTAL
- ------------------------------------------------------------------------------------------
Less than 2.99% $ 90 $ -0- $ -0- $ -0- $ -0- $ 90
3.0 to 3.99% 2,582 66 -0- 17 -0- 2,665
4.0 to 4.99% 75,449 7,638 5,504 105 130 88,826
5.0 to 5.99% 181,669 59,036 23,194 6,285 5,118 275,302
6.0 to 6.99% 40,823 28,288 9,277 14,686 2,750 95,824
7.0 to 7.99% 1,352 443 2,579 447 247 5,068
8.0 and over -0- 16 -0- -0- 152 168
- ------------------------------------------------------------------------------------------
Total Certificates
of Deposit $301,965 $ 95,487 $ 40,554 $ 21,540 $ 8,397 $467,943
==========================================================================================
Interest expense on deposits (in thousands) is summarized as
follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------------------------------
NOW Accounts $ 1,537 $ 854 $ 674
Money Market Deposits 2,177 1,297 1,062
Regular Savings 2,949 1,860 1,520
Certificates of Deposit 26,294 20,006 16,987
--------------------------------
Total Interest Expense on Deposits $ 32,957 $ 24,017 $ 20,243
================================
----
35
37
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES:
Federal Home Loan Bank advances (in thousands) at December 31, 1997
and 1996 is summarized as follows:
DECEMBER 31,
---------------------
1997 1996
---------------------
Interest Rate:
5.0% to 5.99% $ 4,778 $ 4,967
6.0% to 6.99% 37,735 38,521
7.0% to 7.99% 4,215 4,262
---------------------
Total Advances $ 46,728 $ 47,750
=====================
Advances at December 31, 1997 have maturities in future years as
follows (in thousands):
YEAR ENDING DECEMBER 31, AMOUNT
--------------------------------------------------
2000 $ 7,265
2001 4,264
2002 9,844
2005 9,779
2006 1,651
After 2006 13,925
---------
$ 46,728
=========
Repayments are amortized over periods ranging from fifteen to
thirty years, and have a balloon feature at maturity. All advances are
collateralized by a blanket pledge of mortgage loans and a secondary pledge of
FHLB stock and FHLB demand deposits. Total additional advances available from
the FHLB at December 31, 1997 were $232,268,000. Borrowings in excess of the
existing limit can be obtained with a pledge of investment securities and
mortgage-backed securities.
NOTE 10 - INCOME TAXES:
The provision for income tax expense (in thousands) consists of the
following:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------------------------------
Current Expense:
Federal $ 3,653 $ 2,756 $ 3,379
State (34) 40 22
---------------------------------
Total Current Expense 3,619 2,796 3,401
Deferred Federal Expense 161 381 380
---------------------------------
Total Income Tax Expense $ 3,780 $ 3,177 $ 3,781
=================================
There was an overpayment of federal income taxes of $1,219,000 at
December 31, 1997 and $1,537,000 at December 31, 1996. Income tax was allocated
to the Company and its subsidiaries based on its taxable income or loss in
relation to total consolidated taxable income at the effective tax rate.
At December 31, 1997, the Company had the following tax carryovers
assumed in the Royal Bankgroup acquisition: Federal net operating loss of
$1,212,000, expiring in 2003 through 2012, a capital loss of $873,000, expiring
in 1998, and a state net operating loss of $451,000, expiring in 1999 through
2001. The capital loss
- ----
36
38
carryover is only available to offset capital gains, and a valuation
allowance has been established equal to the total amount at December 31, 1997
and 1996. The change in the valuation allowance relates to the amount of capital
loss carryover utilized in 1997.
The provision for federal income taxes differs from the amount
computed by applying the federal income tax statutory rate of 34 percent on
income from operations as indicated in the following analysis (in thousands):
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
------------------------------------
Federal Tax Based on Statutory Rate $ 3,102 $ 2,875 $ 3,668
Increase (Decrease) Resulting from:
Effect of Tax-Exempt Income (49) (46) (23)
Amortization of Goodwill and Other Acquired
Intangibles 523 133 23
Interest and Other Nondeductible Expenses 25 17 10
Nondeductible ESOP Expense 319 142 98
State Income Tax on Non-Bank Entities (34) 18 22
Other (12) 38 (17)
Benefit from Change in Deferred Tax Valuation
Allowance (94) -0- -0-
------------------------------------
Income Tax Expense $ 3,780 $ 3,177 $ 3,781
====================================
The net deferred tax liability (in thousands) at December 31, 1997
and 1996 is as follows:
DECEMBER 31,
------------------------------
1997 1996
------------------------------
Deferred Tax Asset:
Allowance for Loan Losses $ 739 $ 465
Deferred Loan Fees 14 24
Deferred Directors' Fees 133 114
Writedown of Real Estate Owned to Market Value 2 113
Health Care Accruals in Excess of Claims Paid 98 121
Net Operating Loss 412 496
Capital Loss Carryover 297 391
ESOP and RRP 212 159
Investment Securities -0- 16
Other 57 60
------------------------------
Subtotal 1,964 1,959
------------------------------
Deferred Tax Liability:
FHLB Stock (850) (729)
Premises and Equipment (1,047) (1,057)
Unrealized Gain on Investments Classified as
Available for Sale (114) (96)
Discount Accretion and Purchase Adjustment
on Investments (317) (168)
------------------------------
Subtotal (2,328) (2,050)
------------------------------
Deferred Tax Liabilities, Net of Deferred Tax
Assets (364) (91)
Deferred Tax Valuation Reserve (297) (391)
------------------------------
Net Deferred Tax Liability $ (661) $ (482)
==============================
----
37
39
A summary of the changes in the net deferred tax asset (liability)
for the years ended December 31, 1997 and 1996 is as follows (in thousands):
DECEMBER 31,
---------------------
1997 1996
---------------------
Balance, Beginning $ (482) $ (158)
Deferred Tax Expense, Charged to Operations (161) (381)
Deferred Tax Liability from Acquisition -0- (237)
Unrealized Gain on Available for Sale Securities,
Charged to Equity (18) 294
--------------------
Balance, Ending $ (661) $ (482)
====================
Retained earnings at December 31, 1997 and 1996, included
approximately $14,791,000 accumulated prior to January 1, 1987 for which no
provision for federal income taxes has been made. If this portion of retained
earnings is used in the future for any purpose other than to absorb bad debts,
it will be added to future taxable income.
NOTE 11 - EARNINGS PER SHARE:
The Company adopted SFAS 128, as of December 31, 1997. Restatement
of earnings per share for all prior periods presented is required. Weighted
average shares of common stock outstanding for basic EPS excludes the weighted
average shares unreleased by the Employee Stock Ownership Plan ("ESOP")
(426,448 shares at December 31, 1997) and the weighted average unvested shares
in the Recognition and Retention Plan ("RRP") (281,448 shares at December 31,
1997). The effect on diluted EPS of stock option shares outstanding and
unvested RRP shares is calculated using the treasury stock method. EPS for
periods preceding the three months ended June 30, 1995 are not applicable, as
the Company's conversion from mutual-to-stock form and reorganization into a
holding company format was not completed until April 6, 1995.
The following is a reconcilement of the numerator and denominator for basic and
diluted EPS:
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------------------------------------
YEAR ENDED DECEMBER 31, 1997
----------------------------------------
Basic EPS:
Income Available to Common Stockholders 5,343,000 6,224,902 $ 0.86
======
Effect of Dilutive Securities:
Stock Options Outstanding 180,911
Restricted Stock Grants 52,936
----------
Diluted EPS:
Income Available to Common Stockholders
Plus Assumed Conversions 5,343,000 6,458,749 $ 0.83
========================================
- ----
38
40
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------
Basic EPS:
Income Available to Common Stockholders 5,278,000 6,559,883 $ 0.80
======
Effect of Dilutive Securities:
Stock Options Outstanding 8,252
Restricted Stock Grants 3,756
----------
Diluted EPS:
Income Available to Common Stockholders
Plus Assumed Conversions 5,278,000 6,571,891 $ 0.80
=========================================================
NINE MONTHS ENDED DECEMBER 31, 1995
---------------------------------------------------------
Basic EPS:
Income Available to Common Stockholders 5,473,000 6,819,132 $ 0.80
=========================================================
No stock options or other potential common stock securities were
outstanding for the nine months ended December 31, 1995.
NOTE 12 - CAPITAL REQUIREMENTS AND OTHER REGULATORY MATTERS:
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Financial institutions are
segmented into one of five classifications ranging from "well capitalized" to
"critically undercapitalized". Should a financial institution's ratios decline
below the predetermined minimum ratios, the institution would be subject to
increasingly restrictive regulatory action.
To be classified as a well capitalized financial institution, Tier
1 leverage capital, Tier 1 risk-based capital and Total risk-based capital must
be at least five, six and ten percent, respectively. At December 31, 1997 and
1996, Iberia was classified as well capitalized. At December 31, 1996,
Jefferson was also classified as well capitalized. There are no conditions or
events since those dates that management believes have changed Iberia's
category.
The Company and the bank met all regulatory capital requirements as
follows (dollars in thousands):
----
39
41
DECEMBER 31, 1997
----------------------------------------------------------------
REQUIRED ACTUAL
AMOUNT PERCENT AMOUNT PERCENT
----------------------------------------------------------------
Tier 1 leverage capital:
ISB Financial Corp. $ 37,578 4.00% $ 98,985 10.54%
IBERIABANK 37,125 4.00% 88,291 9.51%
Tier 1 risk-based capital:
ISB Financial Corp. 21,380 4.00% 98,985 18.52%
IBERIABANK 21,167 4.00% 88,291 16.68%
Total risk-based capital:
ISB Financial Corp. 42,759 8.00% 104,243 19.50%
IBERIABANK 42,334 8.00% 93,549 17.68%
DECEMBER 31, 1996
---------------------------------------------------------------
REQUIRED ACTUAL
AMOUNT PERCENT AMOUNT PERCENT
---------------------------------------------------------------
Tier 1 leverage capital:
ISB Financial Corp. $ 37,171 4.00% $ 96,050 10.34%
Iberia Savings Bank 26,521 4.00% 68,337 10.31%
Jefferson Bank 10,420 4.00% 18,158 6.97%
Tier 1 risk-based capital:
ISB Financial Corp. 18,371 4.00% 96,050 20.91%
Iberia Savings Bank 15,289 4.00% 68,337 17.88%
Jefferson Bank 2,949 4.00% 18,158 24.63%
Total risk-based capital:
ISB Financial Corp. 36,743 8.00% 100,665 21.92%
Iberia Savings Bank 30,578 8.00% 72,377 18.94%
Jefferson Bank 5,897 8.00% 18,733 25.41%
Iberia is restricted under applicable laws in the payment of
dividends to an amount equal to current year earnings plus undistributed
earnings for the immediately preceding year, unless prior permission is
received from the Commissioner of Financial Institutions for the State of
Louisiana. For 1996, regulatory approval was obtained by Iberia to pay
dividends in excess of this limit in the amount of $21,000,000 to fund the
acquisitions. Dividends payable without permission by Iberia in 1998 will be
limited to 1998 earnings.
NOTE 13 - BENEFIT PLANS:
401(k) PROFIT SHARING PLAN:
The Company has a non-contributory profit sharing plan covering
substantially all of its employees. Annual employer contributions to the plan
are set by the Board of Directors. Contributions for December 31, 1997, 1996
and 1995, were $-0-, $-0- and $-0-, respectively. The Company converted the
Profit Sharing Thrift Plan to a 401(k) Profit Sharing Plan effective January 1,
1995. The amended plan provides, among other things, that participants in the
plan be able to direct the investment of their account balances within the
Profit Sharing Plan into alternative investment funds. Participant deferrals
under the salary reduction election may be matched by the employer based on a
percentage to be determined annually by the employer. There was no matching of
participant deferrals by the employer for the years ended December 31, 1997,
1996 and 1995.
- ----
40
42
EMPLOYEE STOCK OWNERSHIP PLAN:
In connection with the conversion from mutual to stock form, the
Company established an ESOP for the benefit of all eligible employees. The ESOP
purchased 590,423 shares, or 8 percent of the total stock sold in the Company's
initial public offering, for $5,904,000, financed by a loan from the Company.
The leveraged ESOP is accounted for in accordance with American Institute of
Certified Public Accountants ("AICPA") Statement of Procedures ("SOP") 93-6,
Employers' Accounting for Employee Stock Ownership Plans.
Full-time employees of the Company who have been credited with at
least 1,000 hours of service during a 12 month period and who have attained age
21 are eligible to participate in the ESOP. It is anticipated that
contributions will be made to the plan in amounts necessary to amortize the
debt to the Company over a period of 10 years.
Under SOP 93-6, unearned ESOP shares are not considered outstanding
and are shown as a reduction of stockholders' equity. Dividends on unallocated
ESOP shares are considered to be compensation expense. The Company will
recognize compensation cost equal to the fair value of the ESOP shares during
the periods in which they become committed to be released. To the extent that
the fair value of the Company's ESOP shares differ from the cost of such
shares, this differential will be credited to equity. The Company will receive
a tax deduction equal to the cost of the shares released. As the loan is
internally leveraged, the loan receivable from the ESOP to the Company is not
reported as an asset nor is the debt of the ESOP shown as a Company liability.
Dividends on allocated shares will be used to pay the ESOP debt.
Compensation cost related to the ESOP for the years ended December
31, 1997, 1996 and 1995 was $1,629,000, $1,146,000 and $852,000, respectively.
The fair value of the unearned ESOP shares, using the closing quoted market
price per share for that day was approximately $11,714,000 and $8,302,000 at
December 31, 1997 and 1996, respectively.
A summary of the ESOP share allocation is as follows:
DECEMBER 31,
------------------------------
1997 1996
------------------------------
Shares allocated beginning of year 128,853 56,469
Shares allocated during year 69,099 72,738
Shares distributed during the year -0- (354)
------------------------------
Total allocated shares held by ESOP at year end 197,952 128,853
Unreleased shares 392,117 461,216
------------------------------
Total ESOP shares 590,069 590,069
==============================
RECOGNITION AND RETENTION PLAN (RRP):
The Company established the RRP for certain officers and directors
during the year ended December 31, 1996. Following shareholder approval of the
RRP on May 24, 1996, the Company purchased 295,226 shares of the Corporation's
common stock in the open market at $15.875 per share to fully fund the related
trust and to be awarded in accordance with the provisions of the RRP. The cost
of the shares of restricted stock awarded under these plans are recorded as
unearned compensation, a contra equity account. The fair value of the shares on
the date of award will be recognized as compensation expense over the vesting
period, which is seven years. The holders of the restricted stock receive
dividends and have the right to vote the shares. For the years ended December
31, 1997 and 1996, the amount included in compensation expense was $416,000 and
$211,000,
----
41
43
respectively. The weighted-average grant-date fair value of the restricted stock
granted under the RRP during the years ended December 31, 1997 and 1996 was
$25.37 and $15.92, respectively. A summary of the changes in restricted stock
follows:
UNAWARDED AWARDED
SHARE SHARES
-------------------------
Balance, January 1, 1996 -0- -0-
Purchased by Plan 295,226 -0-
Granted (165,364) 165,364
Forfeited 3,936 (3,936)
Earned and Issued -0- -0-
-------------------------
Balance, December 31, 1996 133,798 161,428
Granted (28,500) 28,500
Forfeited 3,374 (3,374)
Earned and Issued -0- (23,061)
-------------------------
Balance, December 31, 1997 108,672 163,493
=========================
1996 STOCK OPTION PLAN:
In 1996, the Company adopted a stock option plan for the benefit of
directors, officers, and other key employees. The number of shares of common
stock reserved for issuance under the stock option plan was equal to 738,067
shares or 10 percent of the total number of common shares sold in the Company's
initial public offering of its common stock upon the mutual-to-stock conversion
of Iberia Savings Bank. The option exercise price cannot be less than the fair
value of the underlying common stock as of the date of the option grant and the
maximum option term cannot exceed ten years. The stock options granted to
directors and officers are exercisable in seven equal annual installments. No
compensation expense was recognized in 1997 or 1996 related to the stock option
plan.
The stock option plan also permits the granting of Stock
Appreciation Rights ("SAR's"). SAR's entitle the holder to receive, in the form
of cash or stock, the increase in the fair value of Company stock from the date
of grant to the date of exercise. No SAR's have been issued under the plan.
The following table summarizes the activity related to stock
options :
WEIGHTED -
AVAILABLE OPTIONS AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
--------------------------------------------------
At inception, May 24, 1996 738,067 -0-
Granted (654,118) 654,118 $ 15.92
Canceled 10,395 (10,395) 15.88
Exercised -0- -0-
----------------------------
At December 31, 1996 94,344 643,723 15.92
Granted (90,650) 90,650 23.31
Canceled 25,611 (25,611) 18.73
Exercised -0- (1,318) 15.88
----------------------------
At December 31, 1997 29,305 707,444 16.76
============================
Exerciseable at December 31, 1996 -0-
========
Exerciseable at December 31, 1997 89,399 $ 15.92
========
- ----
42
44
The following table presents the weighted-average remaining life as
of December 31, 1997 for options outstanding within the stated exercise prices:
OUTSTANDING EXERCISEABLE
- ---------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
EXERCISE NUMBER AVERAGE AVERAGE NUMBER AVERAGE
PRICE RANGE OF EXERCISE REMAINING OF EXERCISE
PER SHARE OPTIONS PRICE LIFE OPTIONS PRICE
- ---------------------------------------------------------------------------------------
$ 15.88 613,294 $ 15.88 8.4 years 87,613 $ 15.88
$ 17.00 to $ 18.50 19,500 $ 17.88 9.0 years 1,786 17.93
$ 20.25 to $ 25.00 60,500 $ 23.30 9.3 years -0- -0-
$ 25.13 to $ 27.00 14,150 $ 25.87 9.6 years -0- -0-
In October 1995, the FASB issued SFAS 123. SFAS 123 requires
disclosure of the compensation cost for stock-based incentives granted after
January 1, 1995 based on the fair value at grant date for awards. Applying SFAS
123 would result in pro forma net income and earnings per share amounts as
follows:
1997 1996
--------------------------
Net income As reported $5,343,000 $5,278,000
Pro forma $4,919,000 $5,054,000
Earnings per share As reported - basic $.86 $.80
- diluted $.83 $.80
Pro forma - basic $.79 $.77
- diluted $.76 $.77
The fair value of each option is estimated on the date of grant
using an option-pricing model with the following weighted-average assumptions
used for 1997 and 1996 grants: dividend yields of 1.84 and 2.00 percent;
expected volatility of 23.37 and 18.97 percent; risk-free interest rate of 6.55
and 6.71 percent; and expected lives of 8.5 years for all options. The
weighted-average fair value per share at the date of grant for shares granted
during 1997 and 1996 was $8.35 and $5.19, respectively.
NOTE 14 - RELATED PARTY TRANSACTIONS:
The Company makes loans to its directors and principal officers in
the ordinary course of business. These loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other customers and did not involve more than
a normal risk of collectibility.
The Company has entered into an employment agreement with the
President/Chief Executive Officer and severance agreements with certain
officers. The total commitments under all agreements at December 31, 1997 was
$1,226,000.
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NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISKS,
COMMITMENTS AND CONTINGENCIES:
The Company is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. The same credit policies are used
in these commitments as for on-balance-sheet instruments. The Company's
exposure to credit loss in the event of nonperformance by the other parties is
represented by the contractual amount of the financial instruments. The
principal commitments of the Company are as follows:
LOAN COMMITMENTS:
At December 31, 1997 and 1996, the Company had outstanding firm
commitments to originate loans as follows (in thousands):
DECEMBER 31,
---------------------
1997 1996
---------------------
Mortgage Loans $ 2,381 $ 167
Undisbursed Mortgage Loans-in-Process 14,082 6,426
Commercial Loans 29,124 25,822
Consumer and Other Loans 2,554 702
---------------------
Total Commitments $ 48,141 $ 33,117
=====================
At December 31, 1997 and 1996, the Company had no outstanding
commitments to sell loans.
LINES AND LETTERS OF CREDIT:
The Company issues letters of credit and approves lines of credit
on substantially the same terms as other loans. At December 31, 1997 and 1996,
the letters of credit outstanding were $1,442,000 and $1,232,000, respectively.
Unfunded approved lines of credit, including unused credit card lines, at
December 31, 1997 and 1996 were $63,702,000 and $42,625,000, respectively.
LETTERS OF CREDIT ISSUED ON BEHALF OF THE COMPANY:
The Company has outstanding Standby Letters of Credit issued by the
FHLB in favor of customers of the Company. The Company uses these letters of
credit to collateralize public entity deposits in lieu of a direct pledge of
investment securities of the Company. At December 31, 1997 and 1996,
outstanding letters of credit totaled $2,835,000 and $1,855,000, respectively.
The Company has made a blanket pledge of loans to the FHLB to secure all
letters of credit issued on behalf of the Company. This blanket pledge is also
used to collateralize any direct borrowing from the FHLB.
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46
The Company is subject to certain claims and litigation arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material effect on the consolidated financial position
of the Company.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
be drawn upon, the total commitment amounts generally represent future cash
requirements. The Company evaluates each customer's credit-worthiness on a
case-by-case basis. The amount of collateral, if deemed necessary by the
Company upon extension of credit, is based on management's credit evaluation of
the counterparty. Collateral normally consists of real property.
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair value of the Company's financial instruments (in
thousands) are as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------------------------------------------------------
ASSETS
Cash $ 44,307 $ 44,307 $ 53,385 $ 53,385
Investment Securities 77,317 77,319 103,724 103,726
Mortgage-Backed Securities 115,125 116,004 150,669 150,014
Loans Receivable 661,742 677,107 575,740 587,274
LIABILITIES
Deposits:
Regular Savings, NOW Accounts,
and Money Market Deposits $310,752 $311,031 $289,229 $289,229
Certificates of Deposit 467,943 471,717 471,055 476,749
FHLB Advances 46,728 47,874 47,750 45,653
The fair value estimates presented herein are based upon pertinent
information available to management as of December 31, 1997 and 1996. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
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NOTE 17 - CONCENTRATED CREDIT RISKS:
The Company's lending activity is concentrated within the
southwestern part of Louisiana where the main industries are agriculture and
oil and gas. Traditionally, the Company's major emphasis in lending has been
the origination of residential home loans and other loans secured by real
estate. In 1996 and 1997, there was an increase in originations of commercial
loans and indirect automobile dealer loans. The loans are expected to be paid
back from cash flow of the borrower or proceeds from the sale of the real
estate. Losses are limited by the value of the collateral upon default of the
borrowers. With the acquisition of Jefferson, the Company acquired a mortgage
loan portfolio in southeastern Louisiana, and has originated mortgage, consumer
and commercial loans in that market since acquisition.
NOTE 18 - CONVERSION FROM MUTUAL TO STOCK ASSOCIATION:
In 1995, Iberia Savings Bank converted from a Louisiana-chartered
mutual savings bank to a Louisiana-chartered stock savings bank, pursuant to
its Plan of Conversion. The Company issued 7,380,671 shares of common stock at
$10 per share. The Company's ESOP purchased 590,423 shares, financed by a loan
from the Company. The net proceeds received from the conversion was
$67,903,000. Total conversion costs approximated $1,346,000.
In accordance with regulations, at the time that Iberia converted
from a mutual savings bank to a stock savings bank, Iberia established a
liquidation account in the amount of $43,857,000. Jefferson also had a
liquidation account from its conversion from mutual to stock form in the amount
of $12,088,000, which was assumed by Iberia. The liquidation accounts will be
maintained for the benefit of eligible account holders and supplemental
eligible account holders who continue to maintain their accounts at Iberia,
after the Conversion. The liquidation accounts will be reduced annually to the
extent that eligible account holders and supplemental eligible account holders
have reduced their qualifying deposits. Subsequent increases will not restore
an eligible account holder's or supplemental eligible account holder's interest
in the liquidation account. In the event of a complete liquidation of Iberia
each account holder and supplemental eligible account holder will be entitled
to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held. Iberia may not pay a dividend on its capital stock if the dividend would
bring regulatory capital below the balance of the liquidation accounts.
Iberia is restricted from declaring or paying cash dividends or
repurchasing any of its shares of common stock if the effect thereof would
cause equity to be reduced below applicable regulatory capital maintenance
requirements or if such declaration and payment would otherwise violate
regulatory requirements.
NOTE 19 - ACQUISITIONS:
On May 3, 1996, the Company completed the acquisition of Royal
Bankgroup of Acadiana, Inc., ("Royal") and its wholly owned subsidiary, The
Bank of Lafayette ("BOL"). Royal was merged into the Company and BOL was merged
into Iberia Savings Bank. The two offices of BOL are operating as branches of
Iberia. The total acquisition costs, including related expenses, was
$9,211,000. No stock was issued in the transaction and
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48
the acquisition is accounted for as a purchase transaction. Total assets of
$70,157,000 were acquired, including $45,214,000 of loans, $15,128,000 in cash,
$1,998,000 of investment securities, $4,191,000 of mortgage-backed securities
and $2,352,000 of fixed assets. Total liabilities of $64,154,000 were assumed,
including $63,487,000 of deposits. Goodwill of $3,208,000 was recognized in
the transaction and will be amortized over 15 years using the straight line
method. Total amortization of goodwill in 1997 and 1996 was $ 206,000 and
$150,000. Results of operations for Royal for the period prior to acquisition
are not included in these statements.
On October 18, 1996, the Company completed the acquisition of
Jefferson Bancorp, Inc. and its wholly owned subsidiary, Jefferson Federal
Savings Bank. Jefferson Bancorp was merged into the Company and Jefferson FSB
changed its charter to a state savings bank, Jefferson Bank, and operated as a
subsidiary of the Company until September of 1997, when it was merged into
Iberia Savings Bank. The total purchase price was $51,790,000 in cash and the
acquisition is accounted for as a purchase transaction. Total assets of
$266,235,000 were acquired, including $63,907,000 of loans, $28,352,000 in
cash, $57,452,000 of investment securities, $106,755,000 of mortgage-backed
securities and $3,008,000 of fixed assets. Total liabilities of $229,387,000
were assumed, including $224,803,000 of deposits. Goodwill of $11,116,000 was
recognized in the transaction and is being amortized over 25 years using the
straight line method. A core deposit intangible of $3,825,000 was recognized
and will be amortized over its estimated life of 8 years using accelerated
methods. Total amortization of the intangibles in 1997 and 1996 was $1,324,000
and $230,000. Results of operations for Jefferson are shown from the date of
acquisition only.
Had the acquisitions of Royal Bankgroup and Jefferson Bancorp been
consummated as of January 1, 1996 and 1995, respectively, the Company's
consolidated restated pro forma results of operations for the years ended
December 31, 1996 and 1995 (in thousands) would have been as follows:
1996 1995
----------------------
Restated Pro Forma Results of Operations:
Interest Income $ 68,313 $ 64,088
Interest Expense (34,887) (31,492)
Provision for Loan Losses (357) (120)
Noninterest Income 4,805 4,618
Noninterest Expense (29,391) (23,464)
Income Tax Expense (3,722) (5,081)
----------------------
Net Income $ 4,761 $ 8,549
======================
Earnings per Share (includes 2nd, 3rd and 4th
quarters only for 1995) Basic and Fully Diluted $ .73 $ .97
======================
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NOTE 20 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS:
Condensed financial statements of ISB Financial Corporation (parent
company) are shown below. The parent company has no significant operating
activities.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1997 1996
-----------------------------
ASSETS
Cash in Bank $ 7,396 $ 8,496
Trading Account Securities -0- 364
Investment in Subsidiaries 104,870 104,507
Other Assets 3,833 1,336
-----------------------------
Total Assets $116,099 $114,703
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities 535 697
Stockholders' Equity 115,564 114,006
-----------------------------
Total Liabilities and Stockholders' Equity $116,099 $114,703
=============================
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
PERIOD FROM
APRIL 6, 1995 TO
DECEMBER 31,
1997 1996 1995
----------------------------------------
Operating Income:
Dividends from Subsidiaries $ 6,367 $ 25,490 $ 5,596
Securities Gains/Losses 265 181 -0-
Interest Income 395 1,650 1,558
Other Income 86 -0- -0-
-------------------------------------
Total Operating Income 7,113 27,321 7,154
Operating Expenses 1,532 1,483 173
-------------------------------------
Income Before Income Tax Expense and
Decrease in Equity in Undistributed
Earnings of Subsidiaries 5,581 25,838 6,981
Income Tax (Refund) Expense (427) 164 472
-------------------------------------
Income Before Decrease in Equity in
Undistributed Earnings of Subsidiaries 6,008 25,674 6,509
Decrease in Equity in Undistributed
Earnings of Subsidiaries (665) (20,396) (1,036)
-------------------------------------
NET INCOME $ 5,343 $ 5,278 $ 5,473
=====================================
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50
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
PERIOD FROM
APRIL 6, 1995 TO
DECEMBER 31,
1997 1996 1995
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 5,343 $ 5,278 $ 5,473
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Deferred Income Taxes (21) (80) 12
Decrease in Equity in Net Income of Subsidiaries 665 20,396 1,036
(Increase) Decrease in Other Assets (3,696) 402 (827)
(Decrease) Increase in Other Liabilities (140) 147 90
Amortization of Premium/Discount on Investments -0- 37 43
Net Change in Securities Classified as Trading 630 (9) (390)
Gain on Sale of Investments (266) (181) -0-
Compensation Expense Recognized on RRP 414 211 -0-
-------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,929 26,201 5,437
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Securities Available for Sale -0- -0- (33,738)
Proceeds From Sales and Maturities of Securities
Available for Sale -0- 26,832 7,000
Purchase of Capital Stock of Subsidiaries -0- (42,480) (36,193)
Payments Received from Note Receivable 841 -0- -0-
Other Investing Activities -0- -0- (20)
-------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 841 (15,648) (62,951)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends Paid to Shareholders (2,604) (2,159) (1,019)
Capital Contributed to Subsidiaries (207) (173) (89)
Payments Received From ESOP 1,009 1,062 824
Net Proceeds From Issuance of Common Stock -0- -0- 67,903
Stock Conversion Costs Incurred -0- -0- (1,346)
Payments to Repurchase Common Stock (3,089) (9,546) -0-
Proceeds from Sale of Treasury Stock 21 -0- -0-
-------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (4,870) (10,816) 66,273
-------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (1,100) (263) 8,759
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,496 8,759 -0-
-------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,396 $ 8,496 $ 8,759
===========================================
Other Disclosures:
The Company was charged $120,000 by Iberia for management and accounting
services during 1997 and 1996.
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NOTE 21 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
YEAR ENDED DECEMBER 31, 1997
------------------------------------------
FIRST SECOND THIRD FOURTH
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
------------------------------------------
Total Interest Income $ 16,777 $ 17,028 $ 17,351 $ 17,325
Total Interest Expense 8,746 9,034 9,250 9,020
------------------------------------------
Net Interest Income 8,031 7,994 8101 8,305
Provision for Loan Losses 162 242 302 391
------------------------------------------
Net Interest Income After Provision
for Loan Losses 7,869 7,752 7,799 7,914
Noninterest Income 1,289 1,540 1,900 1,661
Noninterest Expense 6,138 6,384 7,380 8,699
------------------------------------------
Income Before Income Taxes 3,020 2,908 2,319 876
Income Tax Expense 1,225 1,156 1,017 382
------------------------------------------
NET INCOME $ 1,795 $ 1,752 $ 1,302 $ 494
==========================================
Earnings per Share - Basic $ .29 $ .28 $ .21 $ .08
==========================================
Earnings per Share - Diluted $ .28 $ .27 $ .20 $ .08
==========================================
YEAR ENDED DECEMBER 31, 1996
------------------------------------------
FIRST SECOND THIRD FOURTH
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
------------------------------------------
Total Interest Income $ 11,460 $ 12,408 $ 12,978 $ 15,861
Total Interest Expense 5,912 6,268 6,538 8,418
------------------------------------------
Net Interest Income 5,548 6,140 6,440 7,443
Provision for Loan Losses 8 9 26 113
------------------------------------------
Net Interest Income After Provision
for Loan Losses 5,540 6,131 6,414 7,330
Noninterest Income 788 885 845 1,300
Noninterest Expense 3,552 4,108 7,475 5,643
------------------------------------------
Income (Loss) Before Income Taxes 2,776 2,908 (216) 2,987
Income Tax Expense (Refund) 997 1,054 (23) 1,149
------------------------------------------
NET INCOME (LOSS) $ 1,779 $ 1,854 $ (193) $ 1,838
==========================================
Earnings per Share - Basic and Diluted $ .26 $ .27 $ (.03) $ .29
==========================================
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CORPORATE INFORMATION
DIRECTORS
ELAINE D. ABELL, Attorney in private practice, Lafayette, LA
HARRY V. BARTON, JR., Certified Public Accountant, Lafayette, LA
WILLIAM R. BIGLER, Retired.
CECIL C. BROUSSARD, Self-employed Investor,
New Iberia, LA
HENRY J. DAUTERIVE, JR., CHAIRMAN, Retired.
WILLIAM H. FENSTERMAKER, President and Chief Executive
Officer of C.H. Fenstermaker and Associates, Inc.,
Lafayette, LA
RAY HIMEL, Owner of Himel Motor Supply Corp.,
Himel Marine and several Ace Hardware Stores in
southern Louisiana.
KAREN L. KNIGHT, Former President and Chief Executive
Officer of Jefferson Federal Savings Bank, Gretna, LA
LARREY G. MOUTON, PRESIDENT AND CHIEF EXECUTIVE OFFICER
of ISB Financial Corporation and IBERIABANK
EMILE J. PLAISANCE, JR., VICE CHAIRMAN, Retired.
STEWART SHEA, Vice President of Bayou Management Services, President of
BayouPipe Coating, LLC, affiliates of Bayou Management Services, New
Iberia, LA.
LOUIS J. TAMPORELLO, Retired.
GUYTON H. WATKINS, SECRETARY, Attorney in private practice.
EXECUTIVE OFFICERS
LARREY G. MOUTON, President/CEO
RONNIE J. FORET, Senior Executive Vice President
JOHN J. BALLATIN, Executive Vice President
ANNUAL MEETING
Wednesday, April 15, 1998, 3:00 p.m.
IBERIABANK
1101 E. Admiral Doyle Drive
New Iberia, LA
Since April 7, 1995, ISB Financial Corporation's common stock has traded on the
National Association of Security Dealers Automated Quotations (NASDAQ) National
Market, under the symbol "ISBF," as reported to NASDAQ, the price information
reflects high and low sales prices. The following represents high and low
trading prices and dividends declared during each respective quarter for the
years ended December 31, 1996 and 1997.
DIVIDENDS
1996 HIGH LOW DECLARED
- ------------------------------------------------
First Quarter $16.500 $15.125 $0.080
Second Quarter $16.375 $14.750 $0.080
Third Quarter $15.875 $13.375 $0.085
Fourth Quarter $18.500 $15.250 $0.085
DIVIDENDS
1997 HIGH LOW DECLARED
- ------------------------------------------------
First Quarter $26.125 $17.625 $0.100
Second Quarter $26.500 $20.875 $0.100
Third Quarter $28.000 $23.375 $0.125
Fourth Quarter $30.000 $23.750 $.0125
SECURITIES LISTING
ISB Financial Corporation's common stock is traded on the NASDAQ National
Market under the symbol ISBF. Current price information can be found under the
NASDAQ-OTC National Market Listing.
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INVESTOR INFORMATION
Investors, analysts and others seeking financial information may contact:
Larrey G. Mouton, President/CEO
ISB Financial Corporation
1101 E. Admiral Doyle Drive
New Iberia, LA 70560
(318) 365-2361
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(800) 368-5948
INDEPENDENT AUDITORS
Castaing, Hussey & Lolan, L.L.P.
525 Weeks Street
New Iberia, LA 70560
SPECIAL COUNSEL
Elias, Matz, Tiernan & Herrick, L.L.P.
734 15th Street, N.W.
Washington, DC 20005
GENERAL COUNSEL
Guyton Watkins
Landry & Watkins
211 E. Main Street
New Iberia, LA 70560
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