1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission File Number 0-25756
ISB Financial Corporation
------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Louisiana 72-1280718
- -------------------------------------------- ---------------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification Number)
1101 East Admiral Doyle Drive
New Iberia, Louisiana 70560
- -------------------------------------------- ---------------------------------
(Address of principal executive office) (Zip Code)
(318) 365-2361
-------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 day Yes X No
------ -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
As of July 28, 1998, 6,906,866 shares of the Registrant's common stock
were issued and outstanding. Of that total, 586,285 shares are held by the
Registrant's Employee Stock Ownership Plan, of which 359,032 shares were
not committed to be released.
2
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition 3
(As of June 30, 1998 and December 31, 1997)
Consolidated Statements of Income (For the three months 4
and six months ended June 30, 1998 and 1997)
Consolidated Statements of Stockholders' Equity (For the 5
six months ended June 30, 1998 and 1997)
Consolidated Statements of Cash Flows (For the six 6
months ended June 30, 1998 and 1997)
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART 2. OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
3
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(Dollars in Thousands, Except Share Data)
ASSETS
------
June 30, December 31,
1998 1997
----------- --------------
Cash and Cash Equivalents:
Cash on Hand and Due from Banks $18,223 $11,959
Interest Bearing Deposits 21,650 32,348
Investment Securities:
Held to Maturity (fair value of $1,380 and $1,813, 1,378 1,811
respectively)
Available for Sale, at fair value 54,292 75,506
Mortgage-Backed Securities Held to Maturity (fair 94,925 115,125
value of $96,209 and $116,004, respectively)
Loans Receivable, Net 683,107 659,244
Repossessed Assets 445 473
Premises and Equipment, Net 19,852 19,253
Federal Home Loan Bank Stock, at Cost 5,166 6,160
Accrued Interest Receivable 5,349 5,514
Goodwill and Acquisition Intangibles 15,631 16,358
Other Assets 3,213 3,531
------------- -------------
TOTAL ASSETS $923,231 $947,282
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Deposits $751,328 $778,695
Federal Home Loan Bank Advances 46,192 46,728
Advance Payments by Borrowers for Taxes and Insurance 1,681 1,429
Accrued Interest Payable on Deposits 385 405
Accrued and Other Liabilities 4,438 4,461
------------- -------------
TOTAL LIABILITIES 804,024 831,718
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred Stock of $1 par value; 5,000,000 shares authorized 0 0
-0- shares issued or outstanding
Common Stock of $1.00 par value, authorized 25,000,000 7,381 7,381
shares, 7,380,671 shares issued
Additional Paid-in Capital 67,379 66,798
Retained Earnings (Substantially Restricted) 59,575 57,096
Unearned Common Stock Held by ESOP (3,590) (3,921)
Unearned Common Stock Held by RRP Trust (3,889) (4,082)
Treasury Stock, 473,805 and 478,643 shares, at cost (7,858) (7,929)
Accumulated Other Comoprehensive Income 209 221
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 119,207 115,564
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $923,231 $947,282
============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
4
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------- ----------------------------
1998 1997 1998 1997
--------- --------- --------- --------
INTEREST INCOME:
Interest on Loans $14,569 $12,799 $28,602 $25,132
Interest and Dividends on Investment Securities 1,006 1,522 2,240 3,169
Interest on Mortgage-Backed Securities 1,612 2,214 3,423 4,478
Interest on Deposits 406 493 892 1,026
--------- --------- --------- --------
Total Interest Income 17,593 17,028 35,157 33,805
--------- --------- --------- --------
INTEREST EXPENSE:
Interest on Deposits 7,661 8,261 15,454 16,238
Interest on Federal Home Loan Bank Advances 756 773 1,509 1,542
--------- --------- --------- --------
Total Interest Expense 8,417 9,034 16,963 17,780
--------- --------- --------- --------
Net Interest Income 9,176 7,994 18,194 16,025
Provision for Loan Losses 255 242 485 404
--------- --------- --------- --------
Net Interest Income After Provision for Loan Losses 8,921 7,752 17,709 15,621
--------- --------- --------- --------
NONINTEREST INCOME:
Service Charges on Deposit Accounts 927 798 1,850 1,511
Late Charges and Other Fees on Loans 207 276 529 439
Other Income 712 466 1,264 879
--------- --------- --------- --------
Total Noninterest Income 1,846 1,540 3,643 2,829
--------- --------- --------- --------
NONINTEREST EXPENSE:
Salaries and Employee Benefits 3,632 3,164 7,152 6,311
SAIF Deposit Insurance Premium 109 114 219 225
Depreciation Expense 406 278 813 562
Occupancy Expense 468 418 943 826
Computer Expense 304 271 596 610
Marketing and Advertising 240 148 453 127
Franchise and Shares Tax Expense 248 234 497 474
Amortization of Goodwill and Other Acquired Intangibles 362 382 731 783
Other Expenses 1,458 1,375 2,875 2,604
--------- --------- --------- --------
Total Noninterest Expense 7,227 6,384 14,279 12,522
--------- --------- --------- --------
Income Before Income Tax Expense 3,540 2,908 7,073 5,928
Income Tax Expense 1,384 1,156 2,770 2,381
--------- --------- --------- --------
NET INCOME $2,156 $1,752 $4,303 $3,547
========= ========= ========= ========
EARNINGS PER SHARE - BASIC $0.34 $0.28 $0.69 $0.57
========= ========= ========= ========
EARNINGS PER SHARE - DILUTED $0.33 $0.27 $0.66 $0.55
========= ========= ========= ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
5
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(Dollars in Thousands)
Unearned
Unearned Common
Additional Common Stock
Common Paid In Retained Stock Held Held By
Stock Capital Earnings By ESOP RRP Trust
----------- ----------- ---------- ------------ -----------
BALANCE, DECEMBER 31, 1996 $7,381 $65,725 $54,660 ($4,612) ($4,476)
Comprehensive Income:
Net Income 3,547
Change in Unrealized Gain (Loss) on
Securities Available for Sale
Net of Deferred Taxes of ($35)
Total Comprehensive Income
Cash Dividends Declared (1,342)
Common Stock Released by 424 349
ESOP Trust
Common Stock earned by Participants 1 200
of Management Recognition Plan
Treasury Stock Acquired
----------- ----------- ---------- ------------ -----------
BALANCE, JUNE 30, 1997 $7,381 $66,150 $56,865 ($4,263) ($4,276)
=========== =========== ========== ============ ===========
BALANCE, DECEMBER 31, 1997 $7,381 $66,798 $57,096 ($3,921) ($4,082)
Comprehensive Income:
Net Income 4,303
Change in Unrealized Gain (Loss) on
Securities Available for Sale
Net of Deferred Taxes of $6
Total Comprehensive Income
Cash Dividends Declared (1,824)
Common Stock Released by 525 331
ESOP Trust
Common Stock Earned by Participants 21 193
of Recognition and Retention Plan
Trust
Treasury Stock Reissued 35
----------- ----------- ---------- ------------ -----------
BALANCE, JUNE 30, 1998 $7,381 $67,379 $59,575 ($3,590) ($3,889)
=========== =========== ========== ============ ===========
Accumulated
Other Total
Treasury Comprehensive Stockholders'
Stock Income Equity
---------- --------------- ------------
BALANCE, DECEMBER 31, 1996 ($4,859) $187 $114,006
Comprehensive Income:
Net Income 3,547
Change in Unrealized Gain (Loss) on (67) (67)
Securities Available for Sale
Net of Deferred Taxes of ($35) -----------
Total Comprehensive Income 3,480
Cash Dividends Declared (1,342)
Common Stock Released by 773
ESOP Trust
Common Stock earned by Participants 201
of Management Recognition Plan
Treasury Stock Acquired (3,089) (3,089)
---------- ----------- ------------
BALANCE, JUNE 30, 1997 ($7,948) $120 $114,029
========== =========== ============
BALANCE, DECEMBER 31, 1997 ($7,929) $221 $115,564
Comprehensive Income:
Net Income 4,303
Change in Unrealized Gain (Loss) on (12) (12)
Securities Available for Sale
Net of Deferred Taxes of $6 ------------
Total Comprehensive Income 4,291
Cash Dividends Declared (1,824)
Common Stock Released by 856
ESOP Trust
Common Stock Earned by Participants 214
of Recognition and Retention Plan
Trust
Treasury Stock Reissued 71 106
---------- ----------- ------------
BALANCE, JUNE 30, 1998 ($7,858) $209 $119,207
========== =========== ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
6
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Thousands)
For the Six Months
Ended June 30,
1998 1997
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,303 $ 3,547
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 1,623 1,415
Provision for Loan Losses 485 404
Compensation Expensed Recognized on RRP 214 201
Gain on Sale of Investments (3) 0
(Gain) Loss on Sale of Premises and Equipment (12) 7
Loss (Gain) on Sale of Real Estate Owned 44 (64)
Gain on Sale of Loans Held for Sale (499) (91)
Amortization of Premium/Discount on Investments (45) 170
Current Provision for Deferred Income Taxes (33) 0
FHLB Stock Dividends (168) (170)
Loans Originated for Resale (32,300) (6,827)
Proceeds from Loans Sold to Others 32,799 6,918
Income Reinvested on Marketable Equity Security (164) (163)
ESOP Contribution 801 773
Net Change in Securities Classified as Trading 0 (116)
Changes in Assets and Liabilities:
Decrease (Increase) in Accrued Interest Receivable 165 (281)
Decrease in Other Assets and Other Liabilities 151 283
--------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 7,361 $ 6,006
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds From Calls of Held to Maturity Securities $ 68 $ 0
Proceeds From Sales of Available for Sale Securities 8,498 0
Proceeds From Maturities of Held to Maturity Securities 365 406
Proceeds From Maturities of Available for Sale Securities 12,845 27,000
Purchases of Securities Available for Sale 0 (30,335)
Increase in Loans Receivable, Net (24,733) (45,537)
Proceeds From ESOP Note Repayment 0 841
Proceeds From Sale of Premises and Equipment 202 0
Purchases of Premises and Equipment (1,603) (2,820)
Proceeds From FHLB Stock Redemption 1,162 0
Proceeds From Disposition of Real Estate Owned 371 703
Principal Collections on Mortgage-Backed Securities 20,265 16,134
--------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ 17,440 $ (33,608)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Change in Demand, NOW, Money Market and
Savings Deposits $ (7,940) $ (78)
Net Change in Time Deposits (19,427) 16,384
Increase in Escrow Funds and Miscellaneous
Deposits, Net 252 211
Principal Repayments of FHLB Advances (536) (503)
Dividends Paid to Shareholders (1,662) (1,206)
Proceeds From Sale of Treasury Stock 78 0
Payments to Repurchase Common Stock 0 (3,089)
--------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES $ (29,235) $ 11,719
--------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (4,434) $ (15,883)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 44,307 53,385
--------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 39,873 $ 37,502
================================
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Acquisition of Real Estate in Settlement of Loans $ 381 $ 221
================================
SUPPLEMENTAL DISCLOSURES:
Cash Paid (Received) For:
Interest on Deposits and Borrowings $ 16,983 $ 18,143
================================
Income Taxes $ 2,302 $ 2,075
================================
Income Tax Refunds $ 0 $ 0
================================
6
7
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The Accompanying consolidated financial statements were prepared in
accordance with the instructions to Form 10-Q, and therefore, do not
include information or footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity
with generally accepted accounting principles. All normal, recurring
adjustments, which, in the opinion of management, are necessary for a fair
presentation of the financial statements, have been included. These
interim financial statements should be read in conjunction with the
audited financial statements and note disclosures for ISB Financial
Corporation (the "Company") previously filed with the Securities and
Exchange Commission in the Company's Annual Report on Form 10-k for the
year ended December 31, 1997.
BUSINESS
The Company's principal business is conducted through it's wholly owned
subsidiary, IBERIABANK (the "Bank"), which conducts business from its main
office located in New Iberia, Louisiana and 26 full-service branch offices
located in the cities of New Iberia, Lafayette, St. Martinville, Crowley,
Rayne, Kaplan, Jeanerette, Franklin, Morgan City, Abbeville, Gretna,
Marrero, River Ridge, Metairie, New Orleans and Kenner, Louisiana. The
Federal Deposit Insurance Corporation ("FDIC") insures the Bank's deposits
to the maximum extent permitted by law. The Bank is a Louisiana chartered
commercial bank. The Bank is subject to examination and regulation by the
Office of Financial Institutions of the State of Louisiana, which is the
Bank's chartering authority and primary regulator. The Bank is also
subject to regulation by the FDIC and to certain reserve requirements
established by the Federal Reserve Board ("FRB"). The Bank is a member of
the Federal Home Loan Bank of Dallas ("FHLB").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
the Bank and the Bank's wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
The branches in Marrero, River Ridge, Metairie, New Orleans, Gretna and
Kenner were branches of Jefferson Bank, a wholly owned subsidiary of the
Company that was merged into IBERIABANK on September 14, 1997. The
Company acquired Jefferson Bank in October of 1996.
7
8
2. LOANS RECEIVABLE
Loans receivable (in thousands) at June 30, 1998 and December 31, 1997
consisted of the following:
June 30, Dec. 31,
1998 1997
--------- ----------
Residential Mortgage Loans:
Single-family $ 351,095 $ 376,320
Multi-family 2,114 2,516
Construction 21,911 22,109
--------- ---------
Total Residential Mortgage Loans 375,120 400,945
Commercial Loans:
Business 64,620 57,978
Real Estate 62,601 48,291
--------- ---------
Total Commercial Loans 127,221 106,269
Consumer Loans:
Home Equity 42,420 34,192
Automobile 11,506 9,433
Indirect Automobile 107,765 90,676
Mobile Home 3,008 3,226
Educational 9,356 9,458
Credit Card 3,796 4,150
Loans on Savings 10,067 11,255
Other 7,904 7,358
--------- ---------
Total Consumer Loans 195,822 169,748
--------- ---------
Total Loans Receivable 698,163 676,962
Adjustments:
Allowance for Loan Losses ( 5,681) ( 5,258)
Loans-in-Process ( 11,679) ( 14,082)
Prepaid Dealer Participation 4,087 3,636
Unearned Interest ( 155) ( 160)
Deferred Loan Fees, Net ( 693) ( 709)
Discount on Loans Purchased ( 935) ( 1,145)
--------- ----------
Loans Receivable, Net $ 683,107 $ 659,244
--------- ----------
3. EARNINGS PER SHARE
Basic earnings per share were based on 6,278,162 weighted average shares
outstanding during the three month period ended June 30, 1998. Diluted
earnings per share were based on 6,525,266 weighted average shares
outstanding during the three month period ended June 30, 1998. For the
three months ended June 30, 1998, the weighted average number of common
shares outstanding excludes (a) the weighted average unreleased shares
owned by the Employee Stock Ownership Plan ("ESOP") of 367,267; (b) the
weighted average shares owned by the Management Recognition Plan and Trust
of 261,109 and (c) the weighted average shares purchased in Treasury Stock
of 474,133.
For the six months ended June 30, 1998, basic earnings per share were
based on 6,262,477 weighted average shares outstanding and diluted
earnings per share were based on 6,514,260 weighted average shares
outstanding. For the six months ended June 30, 1998, the weighted average
number of common shares outstanding excludes (a) the weighted average
unreleased shares owned by the ESOP of 375,537; (b) the weighted average
shares owned by the Management Recognition Plan and Trust of 266,501 and
(c) the weighted average shares purchased in Treasury Stock of 476,153.
8
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
At June 30, 1998, the consolidated assets of the Company totaled $923.2
million, a decrease of $24.1 million, or 2.5%, from December 31, 1997.
Loans receivable, net, increased by $23.9 million, or 3.6%, to $683.1
million at June 30, 1998, compared to $659.2 million at December 31, 1997.
Such increases was the result of a $6.6 million, or 11.5%, increase in
commercial business loans, a $14.3 million, or 29.6%, increase in
commercial real estate loans, a $8.2 million, or 24.1% increase in home
equity loans, a $2.1 million, or 22.0% increase in automobile loans and a
$17.1 million, or 18.9% increase in indirect automobile loans. Such
increases were partially offset by a $25.2 million, or 6.7%, decrease in
single-family residential loans. The changes in the loan portfolio
reflect management's efforts to increase the originations of commercial
real estate, commercial business, indirect automobile loans and consumer
loans. Such loans generally are considered to involve more risk than 1 -
4 family residential mortgage loans, but generally have higher yields.
The Company's loan to deposit ratio at June 30, 1998 was 90.9% compared to
84.7% at December 31 1997. For additional information on loans, see Note
2 to the Consolidated Financial Statements.
The increase in loans receivable was funded primarily by a decrease in
investment securities available for sale, a decrease in mortgage-backed
securities and a decrease in interest bearing deposits at other
institutions.
Interest bearing deposits at other institutions decreased $10.7 million,
or 33.1%, to $21.6 million at June 30, 1998, compared to $32.3 million at
December 31, 1997.
The Company's investment securities available for sale decreased $21.2
million, or 28.1%, to $54.3 million at June 30, 1998, compared to $75.5
million at December 31, 1997. Such decrease was the result of the
maturity or redemption of $21.3 million of investment securities available
for sale, which was partially offset by $45,000 of amortization of premium
on such securities.
Mortgage-backed securities decreased $20.2 million, or 17.5%, to $94.9
million at June 30, compared to $115.1 million at December 31, 1997. Such
decrease was attributable entirely to repayments.
Deposits decreased $27.4 million, or 3.5%, to $751.3 million at June 30,
1998, compared to $778.7 million at December 31, 1997. Such decrease was
due to $41.0 million of net deposit withdrawals, which was partially
offset by $13.6 million of credited interest. The decrease in deposits
was funded by decreases in mortgage-backed securities and investments
available for sale.
Advances from the FHLB of Dallas decreased $536,000, or 1.1% to $46.2
million at June 30, 1998, compared to $46.7 million at December 31, 1997.
The decrease in advances was attributable to scheduled payments made. The
advances are amortizing, fixed-rate and long term and were used to fund
originations of fixed-rate, long term single-family residential mortgage
loans.
Total stockholders' equity increased $3.6 million, or 3.2%, to $119.2
million at June 30, 1998. The increase was the result of the Company's
net income of $4.3 million, $856,000 of common stock released by the ESOP,
$214,000 of common stock earned by participants of the Recognition and
Retention Plan and $106,000 of common stock issued out of treasury, all of
which was partially offset by the declaration of cash dividends on common
stock of $1.8 million and a $12,000, after deferred taxes, decrease in
accumulated other comprehensive income.
9
10
RESULTS OF OPERATIONS
The Company reported net income of $2.2 million for the three months ended
June 30, 1998, compared to $1.8 million earned during the three months
ended June 30, 1997. The Company's net interest income increased $1.2
million and total noninterest income increased $306,000 during the three
months ended June 30, 1998 compared to the second quarter of 1997. Such
increases were partially offset by a $843,000 increase in noninterest
expense and a $228,000 increase in income tax expense.
For the six months ended June 30, 1998, the Company earned $4.3 million
compared to $3.5 million for the same period of 1997. The Company's net
interest income increased $2.2 million and total noninterest income
increased $814,000 during the six months ended June 30, 1998 compared to
the first six months of 1997. Such increases were partially offset by a
$81,000 increase in provision for loan losses, a $1.8 million increase in
noninterest expense and a $389,000 increase in income tax expense when
comparing the first six months of 1998 to the same period of 1997.
10
11
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average daily balances during the
indicated periods.
Three Months Ended June 30,
------------------------------------------------------------
1998 1997
----------------------------- ----------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost(1) Balance Interest Cost(1)
-------- -------- -------- ---------- ------- --------
Interest-earning assets:
Loans receivable:
Mortgage loans $425,813 $ 8,786 8.25% $421,252 $ 8,595 8.16%
Commercial business loans 63,461 1,673 10.55 43,329 1,118 10.32
Consumer and other loans 188,902 4,110 8.70 139,929 3,086 8.82
-------- ------- -------- -------
Total Loans 678,176 14,569 8.59 604,510 12,799 8.47
-------- ------- -------- -------
Mortgage-backed securities 100,587 1,612 6.41 138,356 2,214 6.40
Investment securities 64,699 1,006 6.22 105,883 1,522 5.75
Other earning assets 20,303 406 8.00 29,443 493 6.70
-------- ------- -------- -------
Total interest-earning assets 863,765 17,593 8.15 878,192 17,028 7.76
------- -------
Non-interest-earning assets 69,185 64,004
-------- --------
Total assets $932,950 $942,196
======== ========
Interest-bearing liabilities:
Deposits:
Demand deposits $153,936 1,016 2.64 $137,935 920 2.67
Passbook savings deposits 107,527 628 2.34 118,804 765 2.58
Certificates of deposits 448,405 6,017 5.37 477,798 6,576 5.51
-------- ------- -------- -------
Total deposits 709,868 7,661 4.32 734,537 8,261 4.50
Borrowings 46,371 756 6.52 47,413 773 6.52
-------- ------- -------- -------
Total interest-bearing
liabilities 756,239 8,417 4.45 781,950 9,034 4.62
------- -------
Non-interest bearing demand deposits 48,148 36,192
Non-interest bearing liabilities 9,748 10,247
-------- --------
Total liabilities 814,135 828,389
Stockholders' Equity 118,815 113,807
-------- --------
Total liabilities and stockholders' equity $932,950 $942,196
======== ========
Net interest-earning assets $107,526 $ 96,242
======== ========
Net interest income/interest rate
spread $ 9,176 3.70% $ 7,994 3.13%
======= ===== ======= =====
Net interest margin 4.25% 3.64%
===== =====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 114.22% 112.31%
======== ========
Six Months Ended June 30,
----------------------------------------------------------
1998 1997
--------------------------- -----------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost(1) Balance Interest Cost(1)
--------- -------- ------ ---------- --------- --------
Interest-earning assets:
Loans receivable:
Mortgage loans $426,890 $17,614 8.25% $417,720 $16,987 8.13%
Commercial business loans 60,966 3,231 10.60 42,568 2,196 10.32
Consumer and other loans 182,202 7,757 8.51 133,266 5,949 8.93
-------- ------- -------- -------
Total Loans 670,058 28,602 8.54 593,554 25,132 8.47
-------- ------- -------- -------
Mortgage-backed securities 105,380 3,423 6.50 141,992 4,478 6.31
Investment securities 72,563 2,240 6.17 106,261 3,169 5.96
Other earning assets 24,010 892 7.43 32,487 1,026 6.32
-------- ------- -------- -------
Total interest-earning assets 872,011 35,157 8.06 874,294 33,805 7.73
Non-interest-earning assets 65,693 61,058
-------- --------
Total assets $937,704 $935,352
======== ========
Interest-bearing liabilities:
Deposits:
Demand deposits $154,437 1,992 2.58 $137,112 1,773 2.59
Passbook savings deposits 109,179 1,279 2.34 119,633 1,530 2.56
Certificates of deposits 454,730 12,183 5.36 473,388 12,935 5.46
-------- ------- -------- -------
Total deposits 718,346 15,454 4.30 730,133 16,238 4.45
Borrowings 46,503 1,509 6.49 47,538 1,542 6.49
-------- ------- -------- -------
Total interest-bearing
liabilities 764,849 16,963 4.44 777,671 17,780 4.57
------- -------
Non-interest bearing demand deposits 46,486 34,589
Non-interest bearing liabilities 8,416 9,132
-------- --------
Total liabilities 819,751 821,392
Stockholders' Equity 117,953 113,960
-------- --------
Total liabilities and stockholders' equity $937,704 $935,352
======== ========
Net interest-earning assets $107,162 $ 96,623
======== ========
Net interest income/interest rate
spread $18,194 3.63% $16,025 3.16%
======= ===== ======= =====
Net interest margin 4.17% 3.67%
===== =====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 114.01% 112.42%
======== ========
- ------------------------------------
(1) Annualized.
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NET INTEREST INCOME
Net interest income increased $1.2 million, or 14.8%, to $9.2 million in
the three months ended June 30, 1998, compared to $8.0 million in the
three months ended June 30, 1997. The increase was due to a $565,000, or
3.3% increase in interest income, together with a $617,000, or 6.8%,
decrease in interest expense. The increase in interest income was the
result of a 39 basis point (100 basis points being equal to 1%) increase
in the yield earned on interest-earning assets, which was partially offset
by a $14.4 million, or 1.6%, decrease in the average balance on
interest-earning assets. The decrease in interest expense was the result
of a $25.7 million, or 3.3%, decrease in the average balance of
interest-bearing liabilities, together with a 17 basis point decrease in
the cost thereof. The Company's interest rate spread (the difference
between the weighted average yield on interest-earning assets and the
weighted average cost of interest-bearing liabilities) and net interest
margin (net interest income as a percentage of average interest-earning
assets) amounted to 3.70% and 4.25%, respectively, during the three months
ended June 30, 1998, compared to 3.13% and 3.64%, respectively, for the
comparable period in 1997.
For the six months ended June 30, 1998, net interest income increased $2.2
million, or 13.5%, to $18.2 million, compared to $16.0 million for the
first six months of 1997. The increase was due to a $1.4 million, or
4.0%, increase in interest income, together with a $817,000, or 4.6%,
decrease in interest expense. The increase in interest income was the
result of a 33 basis point increase in the yield earned on
interest-earning assets, which was partially offset by a $2.3 million, or
.3%, decrease in the average balance of interest-earning assets. The
decrease in interest expense was the result of a $12.8 million, or 1.6%,
decrease in the average balance of interest-bearing liabilities, together
with a 13 basis point decrease in the cost thereof. The Company's
interest rate spread and net interest margin amounted to 3.63% and 4.17%,
respectively, during the six months ended June 30, 1998, compared to 3.16%
and 3.67%, respectively, for the comparable period in 1997.
INTEREST INCOME
The Company's total interest income was $17.6 million for the three months
ended June 30, 1998, compared to $17.0 million for the three months ended
June 30, 1997. The reason for the $565,000, or 3.3%, increase in interest
income was a $1.8 million, or 13.8%, increase in interest income from
loans, which was partially offset by a $516,000, or 33.9%, decrease in
interest and dividends from investment securities, a $602,000, or 27.2%,
decrease in interest on mortgage-backed securities and a $87,000, or
17.6%, decrease in interest on deposits held at other institutions. The
increase in interest income from loans was the result of a $73.7 million,
or 12.2%, increase in the average balance of loans, together with a 12
basis point increase in the yield earned thereon. The increase in yield
on total loans was caused in part by the growth of commercial business and
consumer and other loans. The decrease in interest and dividends on
investment securities was the result of a $41.2 million, or 38.9%,
decrease in the average balance of investment securities, which was
partially offset by a 47 basis point increase in the yield earned thereon.
The decrease in interest income from mortgage-backed securities was the
result of a $37.8 million, or 27.3%, decrease in the average balance of
mortgage-backed securities, which was partially offset by a one basis
point increase in the yield earned thereon. The decrease in interest from
deposits at other institutions was the result of a $9.1 million, or 31.0%,
decrease in the average balance of deposits at other institutions, which
was partially offset by a 130 basis point increase in the yield earned
thereon.
For the six months ended June 30, 1998, total interest income was $35.2
million compared to $33.8 million for the same period in 1997. The
reasons for the $1.4 million, or 4.0%, increase in interest income were a
$3.5 million, or 13.8%, increase in interest income from loans, which was
partially offset by a $929,000, or 29.3%, decrease in interest and
dividends from investment securities, a $1.1 million, or 23.6%, decrease
in interest from mortgage-backed securities and a $134,000, or 13.1%,
decrease in interest from deposits held at other institutions. The
increase in interest from loans was the result of a $76.5 million, or
12.9%, increase in the average balance of loans, together with a seven
basis point increase in the yield earned thereon. The decrease in
interest and dividends on investment
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securities was the result of a $33.7 million, or 31.7%, decrease in the
average balance of investment securities, which was partially offset by a
21 basis point increase in the yield earned thereon. The decrease in
interest from mortgage-backed securities was the result of a $36.6
million, or 25.8%, decrease in the average balance of mortgage-backed
securities, which was partially offset by a 19 basis point increase in the
yield earned thereon. The decrease in interest on deposits at other
institutions was the result of a $8.5 million, or 26.1%, decrease in the
average balance of deposits held at other institutions, which was
partially offset by a 110 basis point increase in the yield earned
thereon.
INTEREST EXPENSE
The Company's total interest expense was $8.4 million during the three
months ended June 30, 1998, compared to $9.0 million for the three months
ended June 30, 1997. The reasons for the $617,000, or 6.8%, decrease in
interest expense was a $600,000, or 7.3%, decrease in interest expense on
deposits due to a $24.7 million, or 3.4%, decrease in interest-bearing
deposits, together with an 18 basis point decrease in the cost of such
deposits and a $17,000, or 2.2%, decrease in interest expense on FHLB
advances due to a $1.0 million, or 2.2%, decrease in the average balance
of FHLB advances.
For the six months ended June 30, 1998, the company's total interest
expense was $17.0 million, compared to $17.8 million for the same period
in 1997. The reasons for the $817,000, or 4.6%, decrease in interest
expense was a $784,000, or 4.8%, decrease in interest expense on deposits
due to a $11.8 million, or 1.6%, decrease in the average balance of
interest-bearing deposits, together with a 15 basis point decrease in the
cost thereof and a $33,000, or 2.1%, decrease in interest on FHLB advances
due to a $1.0 million, or 2.2%, decrease in the average balance of FHLB
advances.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $255,000 in the three months ended June
30, 1998 as compared to $242,000 for the same period in 1997. As of June
30, 1998, the ratio of the Company's allowance for loan losses to
non-performing loans was 227.1%, compared to 232.6% at December 31, 1997.
For the six months ended June 30, 1998, the provision for loan losses was
$485,000 as compared to $404,000 for the first six months of 1997.
NONINTEREST INCOME
Noninterest income increased $306,000, or 19.9%, in the three months ended
June 30, 1998 to $1.8 million, compared to $1.5 million for the three
months ended June 30, 1997. Such increase was due primarily to a
$129,000, or 16.2%, increase in service charges on deposit accounts and a
$246,000, or 52.8%, increase in other income, which was partially offset
by a $69,000, or 25.0%, decrease in late charges and other fees on loans.
The increase in service charges on deposit accounts was due primarily to
the increased number of accounts that are subject to such service charges
together with increased charges on such accounts. The increase in other
income was due primarily to increased gains on the sale of newly
originated mortgage loans in the secondary market.
For the six months ended June 30, 1998, noninterest income increased
$814,000, or 28.8%, to $3.6 million, compared to $2.8 million for the six
months ended June 30, 1997. Such increase was due to a $339,000, or 22.4%
increase in service charges on deposit accounts, a $90,000, or 20.5%,
increase in late charges and other fees on loans and a $385,000, or 43.8%,
increase in other income.
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NONINTEREST EXPENSE
Noninterest expense increased $843,000, or 13.2%, in the three months
ended June 30, 1998 to $7.2 million, compared to $6.4 million for the
three months ended June 30, 1997. Such increase was due primarily to a
$468,000, or 14.8%, increase in salaries and employee benefits resulting
from the increased staff added in the last half of 1997 as the Bank
transitioned from a savings bank to a commercial bank, a $128,000, or
46.0%, increase in depreciation expense, a $50,000, or 12.0%, increase in
occupancy expense, a $33,000, or 12.2%, increase in computer expense, a
$92,000, or 62.2%, increase in marketing and advertising expense in order
to make the Bank more visible in the marketplace and a $83,000, or 6.0%,
increase in other expense, which was partially offset by a $20,000, or
5.2%, decrease in amortization of goodwill and other acquired intangibles.
For the six months ended June 30, 1998, noninterest expense increased $1.8
million, or 14.0%, to $14.3 million compared to $12.5 million for the same
period in 1997. Such increase was primarily due to a $841,000, or 13.3%,
increase in salaries and employee benefits, a $251,000, or 44.7%, increase
in depreciation expense, a $117,000, or 14.2%, increase in occupancy
expense, a $326,000, or 256.7%, increase in marketing and advertising
expense and a $271,000, or 10.4%, increase in other expenses, which was
partially offset by a $52,000, or 6.6%, decrease in the amortization of
goodwill and other acquired intangibles.
INCOME TAX EXPENSE
Income tax expense increased $228,000, or 19.7%, in the three months ended
June 30, 1998 to $1.4 million, compared to $1.2 million for the three
months ended June 30, 1997. The increase in income tax expense was due
primarily to the increase in income before income taxes.
For the six months ended June 30, 1998, income tax expense increased
$389,000, or 16.3%, to $2.8 million, compared to $2.4 million for the same
period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The
Company's primary sources of funds are deposits, borrowings, amortization,
prepayments and maturities of outstanding loans and mortgage-backed
securities, maturities of investment securities and other short-term
investments and funds provided from operations. While scheduled payments
from the amortization of loans and mortgage-backed securities and maturing
investment securities and short-term investments are relatively
predictable sources of funds, deposit flows and loan and mortgage-backed
security prepayments are greatly influenced by general interest rates,
economic conditions and competition. In addition, the Company invests
excess funds in overnight deposits and other short-term interest-earning
assets, which provide liquidity to meet lending requirements. The Bank
has been able to generate sufficient cash through its deposits as well as
borrowings. At June 30, 1998, the Company had $46.2 million in
outstanding advances from the FHLB of Dallas.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term
investments such as over-night deposits. On a longer-term basis, the
Company maintains a strategy of investing in various lending products.
The Company uses its sources of funds primarily to meet its ongoing
commitments and to pay maturing savings certificates and saving
withdrawals, fund loan commitments and maintain a portfolio of
mortgage-backed and investment securities. At June 30, 1998, the total
approved loan commitments outstanding amounted to $42.3 million. At the
same time, commitments under unused lines of credit, including credit card
lines, amounted to $81.9 million. Certificates of deposit scheduled to
mature in twelve months or less at June 30, 1998 totaled $293.3 million.
Based on past experience management
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believes that a significant portion of maturing deposits will remain with
the Company. The Company anticipates it will continue to have sufficient
funds to meet its liquidity requirements.
At June 30, 1998, the Company and its subsidiary had regulatory capital
which was well in excess of regulatory requirements. The current
requirements and the Company's actual levels as of June 30, 1998 are
detailed below (dollars in thousands):
Required Capital Actual Capital
------------------ ------------------
Amount Percent Amount Percent
------ ------- ------ -------
Tier 1 Leverage $27,567 3.00% $103,576 11.27%
Tier 1 Risk-Based $21,218 4.00% $103,576 19.53%
Total Risk-Based $42,436 8.00% $109,257 20.60%
YEAR 2000 COMPLIANCE
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 converting to a
new computer vendor for data processing software for its core applications
that is Year 2000 compliant. 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.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities. The
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments imbedded in other
contracts. It requires than an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. The accounting for changes in the fair
value of derivative (that is, gains and losses) depends on the intended
use of the derivative and the resulting designation. The statement is
effective for fiscal years beginning after June 15, 1999. The Company
currently has no derivatives and does not have any hedging activities.
The adoption of this statement is not expected to have a material effect
on financial position and results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are presented
at December 31, 1997 in Item 7A of the Company's Annual Report on Form
10-K, filed with the Securities and Exchange Commission on March 31, 1998.
Management believes there have been no material changes in the Company's
market risk since December 31, 1997.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on April 15,
1998.
1. With respect to the election of three directors to serve three-year
terms expiring at the Annual Meeting of Stockholders to be held in
the year 2001 or until their respective successors are elected and
qualified, the following are the number of shares voted for each
nominee:
Elaine D. Abell For 6,065,103 Withheld 15,697
William H. Fenstermaker For 6,064,853 Withheld 15,947
Larrey G. Mouton For 6,011,990 Withheld 68,810
2. With respect to the ratification of Castaing, Hussey & Lolan, LLP as
the Company's independent auditors for the fiscal year ending
December 31, 1998, the following are the number of shares voted:
For 6,6068,933 Against 4,685 Abstain 7,182
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a. Not Applicable
b. No Form 8-K reports were filed during the quarter.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ISB FINANCIAL CORPORATION
Date: August 7, 1998 By: /s/ Larrey G. Mouton
-------------- ------------------------
Larrey G. Mouton, President and
Chief Executive Officer
Date: August 7, 1998 By: /s/ John J. Ballatin
-------------- -------------------------------
John J. Ballatin, Executive Vice
President and Cashier
18