1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 days. Yes X No
--- --- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of November 9, 1998, 6,881,866 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 342,733 shares were not
committed to be released.
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ISB FINANCIAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition 3
(As of September 30, 1998 and December 31, 1997)
Consolidated Statements of Income (For the three months 4
and nine months ended September 30, 1998 and 1997)
Consolidated Statements of Stockholders' Equity (For the 5
nine months ended September 30, 1998 and 1997)
Consolidated Statements of Cash Flows (For the nine 6
months ended September 30, 1998 and 1997)
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART 2. OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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3
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(Dollars in Thousands, Except Share Data)
ASSETS
------
September 30, December 31,
1998 1997
------------- ------------
Cash and Cash Equivalents:
Cash on Hand and Due from Banks $20,615 $11,959
Interest Bearing Deposits 119,910 32,348
Investment Securities:
Held to Maturity (fair value of $2,675 and $1,813, 2,673 1,811
respectively)
Available for Sale, at fair value 101,146 75,506
Mortgage-Backed Securities Held to Maturity (fair 245,760 115,125
value of $247,772 and $116,004, respectively)
Loans Receivable, Net 797,309 659,244
Repossessed Assets 429 473
Premises and Equipment, Net 26,808 19,253
Federal Home Loan Bank Stock, at Cost 10,098 6,160
Accrued Interest Receivable 7,385 5,514
Goodwill and Acquisition Intangibles 45,873 16,358
Other Assets 3,047 3,531
------------- ------------
TOTAL ASSETS $1,381,053 $947,282
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Deposits $1,204,369 $778,695
Federal Home Loan Bank Advances 45,918 46,728
Advance Payments by Borrowers for Taxes and Insurance 1,737 1,429
Accrued Interest Payable on Deposits 3,497 405
Accrued and Other Liabilities 4,852 4,461
------------- ------------
TOTAL LIABILITIES 1,260,373 831,718
------------- ------------
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 67,621 66,798
Retained Earnings (Substantially Restricted) 60,834 57,096
Unearned Common Stock Held by ESOP (3,427) (3,921)
Unearned Common Stock Held by RRP Trust (3,787) (4,082)
Treasury Stock, 498,805 and 478,643 shares, at cost (8,361) (7,929)
Accumulated Other Comoprehensive Income 419 221
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 120,680 115,564
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,381,053 $947,282
============= ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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4
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
INTEREST INCOME:
Interest on Loans $15,255 $13,228 $43,857 $38,360
Interest and Dividends on Investment Securities 1,118 1,667 3,359 4,837
Interest on Mortgage-Backed Securities 2,524 2,111 5,946 6,589
Interest on Deposits 727 345 1,619 1,370
--------- --------- --------- ---------
Total Interest Income 19,624 17,351 54,781 51,156
--------- --------- --------- ---------
INTEREST EXPENSE:
Interest on Deposits 8,543 8,474 23,997 24,712
Interest on Federal Home Loan Bank Advances 1,145 776 2,654 2,318
--------- --------- --------- ---------
Total Interest Expense 9,688 9,250 26,651 27,030
--------- --------- --------- ---------
Net Interest Income 9,936 8,101 28,130 24,126
Provision for Loan Losses 206 302 691 706
--------- --------- --------- ---------
Net Interest Income After Provision for Loan Losses 9,730 7,799 27,439 23,420
--------- --------- --------- ---------
NONINTEREST INCOME:
Service Charges on Deposit Accounts 1,063 962 2,913 2,473
Late Charges and Other Fees on Loans 233 271 761 702
Other Income 887 667 2,152 1,554
--------- --------- --------- ---------
Total Noninterest Income 2,183 1,900 5,826 4,729
--------- --------- --------- ---------
NONINTEREST EXPENSE:
Salaries and Employee Benefits 4,139 3,818 11,290 10,129
SAIF Deposit Insurance Premium 108 112 327 337
Depreciation Expense 468 384 1,282 946
Occupancy Expense 542 528 1,485 1,354
Computer Expense 298 218 893 828
Marketing and Advertising 264 161 717 384
Franchise and Shares Tax Expense 248 288 745 763
Amortization of Goodwill and Other Acquired Intangibles 472 385 1,203 1,168
Other Expenses 1,663 1,486 4,539 3,993
--------- --------- --------- ---------
Total Noninterest Expense 8,202 7,380 22,481 19,902
--------- --------- --------- ---------
Income Before Income Tax Expense 3,711 2,319 10,784 8,247
Income Tax Expense 1,489 1,017 4,259 3,398
--------- --------- --------- ---------
NET INCOME $2,222 $1,302 $6,525 $4,849
========= ========= ========= =========
EARNINGS PER SHARE - BASIC $0.35 $0.20 $1.04 $0.75
========= ========= ========= =========
EARNINGS PER SHARE - DILUTED $0.34 $0.20 $1.00 $0.75
========= ========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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5
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(Dollars in Thousands)
Unearned
Additional Common
Common Paid In Retained Stock Held
Stock Capital Earnings By ESOP
-------- ---------- ----------- --------------
BALANCE, DECEMBER 31, 1996 $7,381 $65,725 $54,660 ($4,612)
Comprehensive Income:
Net Income 4,849
Change in Unrealized Gain (Loss) on
Securities Available for Sale
Net of Deferred Taxes of $41
Total Comprehensive Income
Cash Dividends Declared (2,148)
Common Stock Released by 684 521
ESOP Trust
Common Stock earned by Participants 1
of Management Recognition Plan
Treasury Stock Acquired
-------- --------- ---------- --------------
BALANCE, SEPTEMBER 30, 1997 $7,381 $66,410 $57,361 ($4,091)
======== ========= ========== ==============
BALANCE, DECEMBER 31, 1997 $7,381 $66,798 $57,096 ($3,921)
Comprehensive Income:
Net Income 6,525
Change in Unrealized Gain (Loss) on
Securities Available for Sale
Net of Deferred Taxes of $67
Total Comprehensive Income
Cash Dividends Declared (2,787)
Common Stock Released by 784 494
ESOP Trust
Common Stock Earned by Participants 32
of Recognition and Retention Plan Trust
Treasury Stock Acquired
Stock Options Exercised 7
-------- --------- ---------- -------------
BALANCE, SEPTEMBER 30, 1998 $7,381 $67,621 $60,834 ($3,427)
======== ========= ========== =============
Unearned
Common
Stock Other Total
Held By Treasury Comprehensive Stockholders'
RRP Trust Stock Income Equity
--------------- ------------- --------------- -----------------
BALANCE, DECEMBER 31, 1996 ($4,476) ($4,859) $187 $114,006
Comprehensive Income:
Net Income 4,849
Change in Unrealized Gain (Loss) on 121 121
Securities Available for Sale
Net of Deferred Taxes of $41
-----------------
Total Comprehensive Income 4,970
Cash Dividends Declared (2,148)
Common Stock Released by 1,205
ESOP Trust
Common Stock earned by Participants 307 308
of Management Recognition Plan
Treasury Stock Acquired (3,089) (3,089)
--------------- ------------- --------------- -----------------
BALANCE, SEPTEMBER 30, 1997 ($4,169) ($7,948) $308 $115,252
=============== ============= =============== =================
BALANCE, DECEMBER 31, 1997 ($4,082) ($7,929) $221 $115,564
Comprehensive Income:
Net Income 6,525
Change in Unrealized Gain (Loss) on 198 198
Securities Available for Sale
Net of Deferred Taxes of $67
-----------------
Total Comprehensive Income 6,723
Cash Dividends Declared (2,787)
Common Stock Released by 1,278
ESOP Trust
Common Stock Earned by Participants 295 327
of Recognition and Retention Plan Trust
Treasury Stock Acquired (503) (503)
Stock Options Exercised 71 78
--------------- ------------- --------------- -----------------
BALANCE, SEPTEMBER 30, 1998 ($3,787) ($8,361) $419 $120,680
=============== ============= =============== =================
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ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1998 and 1997
(Dollars in Thousands)
1998 1997
------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 6,525 $ 4,849
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 2,606 2,130
Provision for Loan Losses 691 706
Compensation Expensed Recognized on RRP 327 308
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 41 (38)
Gain on Sale of Loans Held for Sale (799) (180)
Gain on Sale of Trading Securities 0 (15)
Amortization of Premium/Discount on Investments (23) 106
Current Provision for Deferred Income Taxes (33) 0
FHLB Stock Dividends (272) (261)
Loans Originated for Resale (48,683) (13,036)
Proceeds from Loans Sold to Others 49,482 13,216
Income Reinvested on Marketable Equity Security (245) (247)
ESOP Contribution 1,223 1,205
Net Change in Securities Classified as Trading 0 (164)
Changes in Assets and Liabilities:
Increase in Accrued Interest Receivable (1,052) (150)
Increase (Decrease) in Other Assets and Other 754 1,427
Liabilities
------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ 10,527 $ 9,863
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds From Sales of Trading Securities $ 0 $ 40
Proceeds From Calls of Held to Maturity Securities 68 406
Proceeds From Sales of Available for Sale Securities 8,498 40,600
Proceeds From Maturities of Held to Maturity Securities 365 0
Proceeds From Maturities of Available for Sale Securities 21,345 0
Proceeds From Maturities of Mortgage-Backed Securities 391 0
Principal Collections on Mortgage-Backed Securities 31,146 23,968
Purchases of Held to Maturity Securities (1,295) 0
Purchases of Securities Available for Sale (54,981) (30,335)
Purchases of Mortgage-Backed Securities (162,103) 0
Increase in Loans Receivable, Net (14,041) (71,520)
Proceeds From ESOP Note Repayment 0 841
Proceeds From FHLB Stock Redemption 1,162 0
Purchases of FHLB Stock (4,828) 0
Purchase of Branch Deposits and Related Assets 293,029 0
Proceeds From Sale of Premises and Equipment 202 0
Purchases of Premises and Equipment (3,308) (3,990)
Proceeds From Disposition of Real Estate Owned 497 820
------------------------------
NET CASH USED IN INVESTING ACTIVITIES $ 116,147 $ (39,170)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Change in Demand, NOW, Money Market and
Savings Deposits $ (2,702) $ 5,988
Net Change in Time Deposits (24,202) 16,952
Increase in Escrow Funds and Miscellaneous
Deposits, Net 308 327
Principal Repayments of FHLB Advances (810) (760)
Dividends Paid to Shareholders (2,625) (1,839)
Proceeds From Sale of Treasury Stock 78
Payments to Repurchase Common Stock (503) (3,089)
------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ (30,456) $ 17,579
------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 96,218 $ (11,728)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 44,307 53,385
------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 140,525 $ 41,657
==============================
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Acquisition of Real Estate in Settlement of Loans $ 487 $ 413
==============================
SUPPLEMENTAL DISCLOSURES:
Cash Paid (Received) For:
Interest on Deposits and Borrowings $ 23,559 $ 27,422
==============================
Income Taxes $ 3,562 $ 3,088
==============================
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ISB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The Accompanying consolidated financial statements were prepared in accordance
with 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 43 full-service branch offices
located in the cities of New Iberia, Lafayette, Scott, Carencro, St.
Martinville, Crowley, Rayne, Kaplan, Jeanerette, Franklin, Morgan City,
Abbeville, Ruston, Monroe, West Monroe, Gretna, Marrero, River Ridge, Metairie,
New Orleans and Kenner, Louisiana. The Federal Deposit Insurance Corporation
("FDIC") insures the Bank's deposits to the maximum extent permitted by law. The
Bank is a Louisiana chartered commercial bank. The Bank is subject to
examination and regulation by the Office of Financial Institutions of the State
of Louisiana, which is the Bank's chartering authority and primary regulator.
The Bank is also subject to regulation by the FDIC and to certain reserve
requirements established by the Federal Reserve Board ("FRB"). The Bank is a
member of the Federal Home Loan Bank of Dallas ("FHLB").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, the
Bank and the Bank's wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
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.
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2. LOANS RECEIVABLE
Loans receivable (in thousands) at September 30, 1998 and December 31, 1997
consisted of the following:
Sept. 30, Dec. 31,
1998 1997
--------- --------
Residential Mortgage Loans:
Single-family $ 358,356 $ 376,320
Multi-family 7,685 2,516
Construction 10,455 8,027
--------- ---------
Total Residential Mortgage Loans 376,496 386,863
Commercial Loans:
Business 78,179 57,978
Real Estate 92,960 48,291
--------- --------
Total Commercial Loans 171,139 106,269
Consumer Loans:
Home Equity 73,012 34,192
Automobile 25,336 9,433
Indirect Automobile 111,146 90,676
Mobile Home 2,765 3,226
Educational 1,021 9,458
Credit Card 3,872 4,150
Loans on Savings 9,683 11,255
Other 27,728 7,358
--------- ---------
Total Consumer Loans 254,563 169,748
--------- ---------
Total Loans Receivable 802,198 662,880
Adjustments:
Allowance for Loan Losses ( 7,173) ( 5,258)
Prepaid Dealer Participation 4,104 3,636
Unearned Interest ( 211) ( 160)
Deferred Loan Fees & Purchased Discounts, Net ( 1,609) 1,854)
----------- ---------
Loans Receivable, Net $ 797,309 $ 659,244
--------- ---------
The allowance for loan losses includes $1.4 million designated for acquired
loans.
3. EARNINGS PER SHARE
Basic earnings per share were based on 6,299,433 weighted average shares
outstanding during the three month period ended September 30, 1998. Diluted
earnings per share were based on 6,493,199 weighted average shares outstanding
during the three month period ended September 30, 1998. For the three months
ended September 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 350,884; (b) the weighted average
shares owned by the Management Recognition Plan and Trust of 248,397 and (c) the
weighted average shares purchased in Treasury Stock of 481,957.
For the nine months ended September 30, 1998, basic earnings per share were
based on 6,274,495 weighted average shares outstanding and diluted earnings
per share were based on 6,507,240 weighted average shares outstanding. For
the nine months ended September 30, 1998, the weighted average number of
common shares outstanding excludes (a) the weighted average unreleased
shares owned by the ESOP of 367,320; (b) the weighted average shares owned
by the
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Management Recognition Plan and Trust of 260,381 and (c) the weighted
average shares purchased in Treasury Stock of 478,102.
4. BRANCH OFFICE ACQUISITION
After the close of business on September 10, 1998, the Bank acquired 17
full service branch offices from the former First Commerce Corporation.
These 17 branch offices continue to be operated as offices of IBERIABANK.
The Bank paid $29.2 million of cash as deposit premium and paid book value
for $126.6 million of loans, $5.7 million of premises and equipment and
$5.5 million of other assets. The Bank received $455.3 million of cash as
the Bank assumed $452.6 million of deposits and $2.7 million of other
liabilities. The deposit premium and other costs incurred in the
acquisition resulted in $30.6 million of goodwill and acquisition
intangibles, which is to be amortized over 15 years using the straight-line
method. The revenues and expenses of the acquired 17 branch offices are
included in these consolidated financial statements only from the date of
the acquisition forward.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
At September 30, 1998, the consolidated assets of the Company totaled $1.4
billion million, an increase of $433.8 million, or 45.8%, from December 31,
1997.
Loans receivable, net, increased by $138.1 million, or 20.9%, to $797.3 million
at September 30, 1998, compared to $659.2 million at December 31, 1997. Such
increases were the result of $126.6 million of loans acquired in the branch
acquisition and $11.5 of net, after repayments, of loan originations during the
first nine months of 1998. This increase resulted in a $20.2 million, or 34.8%,
increase in commercial business loans, a $44.7 million, or 92.5%, increase in
commercial real estate loans, a $38.8 million, or 113.5% increase in home equity
loans, a $15.9 million, or 168.6% increase in automobile loans, a $20.5 million,
or 22.6% increase in indirect automobile loans and a $20.4 million, or 276.8%,
increase in other consumer loans. Such increases were partially offset by a
$18.0 million, or 4.8%, 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 September 30, 1998 was 66.2% 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 the cash received in
the branch acquisition.
Interest bearing deposits at other institutions increased $87.6 million, or
270.7%, to $119.9 million at September 30, 1998, compared to $32.3 million at
December 31, 1997. Such increase was primarily the result of the cash received
in the branch acquisition.
The Company's investment securities available for sale increased $25.6 million,
or 34.0%, to $101.1 million at September 30, 1998, compared to $75.5 million at
December 31, 1997. Such increase was the result of the purchase of $56.3 million
of investment securities available for sale, which was partially offset by the
maturity or redemption of $30.3 million of investment securities available for
sale and by $23,000 of amortization of premium on such securities.
Mortgage-backed securities increased $130.6 million, or 113.4%, to $245.8
million at September 30, 1998, compared to $115.1 million at December 31, 1997.
Such increase was the result of $162.1 million of purchases of mortgage-backed
securities, which was partially offset by $31.5 million of repayments and
maturities of such mortgage-backed securities.
Premises and equipment increased $7.6 million, or 39.2%, to $26.8 million at
September 30, 1998, compared to $19.3 million at December 31, 1997. Such
increase was primarily the result of $5.7 million of premises and equipment
purchased in the branch acquisition and the purchase of an in-house data
processing system. Such increases were partially offset by $1.3 million of
depreciation on premises and equipment.
Deposits increased $425.7 million, or 54.7%, to $1.2 billion at September 30,
1998, compared to $778.7 million at December 31, 1997. Such increase was due to
$452.6 million of deposits acquired in the branch acquisition, which was
partially offset by $26.9 million of net deposit withdrawals.
Advances from the FHLB of Dallas decreased $810,000, or 1.7% to $45.9 million at
September 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.
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Total stockholders' equity increased $5.1 million, or 4.4%, to $120.7 million at
September 30, 1998. The increase was the result of the Company's net income of
$6.5 million, $1.3 million of common stock released by the ESOP, $327,000 of
common stock earned by participants of the Recognition and Retention Plan,
$198,000, after deferred taxes, increase in accumulated other comprehensive
income and $78,000 of common stock issued out of treasury, all of which was
partially offset by the declaration of cash dividends on common stock of $2.8
million.
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RESULTS OF OPERATIONS
The Company reported net income of $2.2 million for the three months ended
September 30, 1998, compared to $1.3 million earned during the three months
ended September 30, 1997. The Company's net interest income increased $1.8
million, provision for loan losses decreased $96,000 and total noninterest
income increased $283,000 during the three months ended September 30, 1998
compared to the third quarter of 1997. Such increases were partially offset
by a $822,000 increase in noninterest expense and a $472,000 increase in
income tax expense.
For the nine months ended September 30, 1998, the Company earned $6.5
million compared to $4.8 million for the same period of 1997. The Company's
net interest income increased $4.0 million and total noninterest income
increased $1.1million during the nine months ended September 30, 1998
compared to the first nine months of 1997. Such increases were partially
offset by a $2.6 million increase in noninterest expense and a $861,000
increase in income tax expense when comparing the first nine months of 1998
to the same period of 1997.
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AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Bank from
interest-earning assets and the resultant average yields (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average daily balances during the
indicated periods.
Three Months Ended September 30,
-------------------------------------
1998
------------------------------------
Average
Average Yield/
Balance Interest Cost(1)
------------ ---------- --------
Interest-earning assets:
Loans receivable:
Mortgage loans % $425,712 $8,783 8.25 %
Commercial business loans 67,069 1,792 10.69
Consumer and other loans 214,827 4,679 8.71
------- -----
Total Loans 707,608 15,254 8.62
------- ------
Mortgage-backed securities 157,281 2,523 6.42
Investment securities 68,085 1,119 6.57
Other earning assets 60,009 728 4.85
------ ---
Total interest-earning assets 992,983 19,624 7.91
------
Non-interest-earning assets 68,019
------
Total assets $1,061,002
==========
Interest-bearing liabilities:
Deposits:
Demand deposits $181,413 1,232 2.72
Passbook savings deposits 110,164 608 2.21
Certificates of deposits 499,248 6,704 5.37
------- -----
Total deposits 790,825 8,544 4.32
Borrowings 72,708 1,144 6.29
------ -----
Total interest-bearing
liabilities 863,533 9,688 4.49
-----
Non-interest bearing demand deposits 63,792
Non-interest bearing liabilities 13,343
------
Total liabilities 940,668
Stockholders' Equity 120,334
-------
Total liabilities and stockholders' equity $1,061,002
==========
Net interest-earning assets $129,450
========
Net interest income/interest rate
spread % $9,936 3.42 %
====== ====
Net interest margin 4.00 %
====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 114.99%
=======
Three Months Ended September 30,
------------------------------------
1997
------------------------------------
Average
Average Yield/
Balance Interest Cost(1)
--------- ---------- --------
Interest-earning assets:
Loans receivable:
Mortgage loans $422,439 $8,643 8.18 %
Commercial business loans 47,795 1,206 10.09
Consumer and other loans 158,113 3,379 8.55
------- -----
Total Loans 628,347 13,228 8.42
------- ------
Mortgage-backed securities 131,307 2,111 6.43
Investment securities 107,305 1,667 6.21
Other earning assets 19,998 345 6.90
------ ---
Total interest-earning assets 886,957 17,351 7.82
------
Non-interest-earning assets 66,910
------
Total assets $953,867
========
Interest-bearing liabilities:
Deposits:
Demand deposits $139,222 938 2.69
Passbook savings deposits 115,533 749 2.59
Certificates of deposits 486,466 6,787 5.58
------- -----
Total deposits 741,221 8,474 4.57
Borrowings 47,158 776 6.58
------ ---
Total interest-bearing
liabilities 788,379 9,250 4.69
-----
Non-interest bearing demand deposits 38,207
Non-interest bearing liabilities 12,223
------
Total liabilities 838,809
Stockholders' Equity 115,058
-------
Total liabilities and stockholders' equity $953,867
========
Net interest-earning assets $98,578
=======
Net interest income/interest rate
spread $8,101 3.13 %
====== ====
Net interest margin 3.65 %
====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 112.50%
=======
Nine Months Ended September 30,
---------------------------------------
1998
-------------------------------------
Average
Average Yield/
Balance Interest Cost(1)
----------- ---------- --------
Interest-earning assets:
Loans receivable:
Mortgage loans $426,476 $26,397 8.25 %
Commercial business loans 63,100 5,024 10.62
Consumer and other loans 193,134 12,436 8.59
------- ------
Total Loans 682,710 43,857 8.57
------- ------
Mortgage-backed securities 122,870 5,946 6.45
Investment securities 69,551 3,359 6.44
Other earning assets 38,627 1,619 5.59
------ -----
Total interest-earning assets 913,758 54,781 7.99
------
Non-interest-earning assets 62,916
------
Total assets $976,674
========
Interest-bearing liabilities:
Deposits:
Demand deposits $165,212 3,224 2.60
Passbook savings deposits 109,512 1,887 2.30
Certificates of deposits 460,884 18,887 5.46
------- ------
Total deposits 735,608 23,998 4.35
Borrowings 55,334 2,653 6.39
------ -----
Total interest-bearing
liabilities 790,942 26,651 4.49
------
Non-interest bearing demand deposits 52,334
Non-interest bearing liabilities 14,650
------
Total liabilities 857,926
Stockholders' Equity 118,748
-------
Total liabilities and stockholders' equity $976,674
========
Net interest-earning assets $122,816
========
Net interest income/interest rate
spread $28,130 3.50 %
======= ====
Net interest margin 4.10 %
====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 115.53%
=======
Nine Months Ended September 30,
----------------------------------------
1997
----------------------------------------
Average
Average Yield/
Balance Interest Cost(1)
----------- ---------- --------
Interest-earning assets:
Loans receivable:
Mortgage loans $419,310 $25,630 8.15 %
Commercial business loans 43,804 3,402 10.36
Consumer and other loans 142,166 9,328 8.75
------- -----
Total Loans 605,280 38,360 8.45
------- ------
Mortgage-backed securities 138,391 6,589 6.35
Investment securities 106,614 4,837 6.05
Other earning assets 28,284 1,370 6.46
------ -----
Total interest-earning assets 878,569 51,156 7.76
------
Non-interest-earning assets 62,882
------
Total assets $941,451
========
Interest-bearing liabilities:
Deposits:
Demand deposits $137,823 2,711 2.62
Passbook savings deposits 118,251 2,279 2.57
Certificates of deposits 477,795 19,722 5.50
------- ------
Total deposits 733,869 24,712 4.49
Borrowings 47,410 2,318 6.52
------ -----
Total interest-bearing
liabilities 781,279 27,030 4.61
------
Non-interest bearing demand deposits 35,807
Non-interest bearing liabilities 10,039
------
Total liabilities 827,125
Stockholders' Equity 114,326
-------
Total liabilities and stockholders' equity $941,451
========
Net interest-earning assets $97,290
=======
Net interest income/interest rate
spread $24,126 3.15 %
======= ====
Net interest margin 3.66 %
====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 112.45%
=======
- ------------------------------
(1) Annualized.
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NET INTEREST INCOME
Net interest income increased $1.8 million, or 22.7%, to $9.9 million in the
three months ended September 30, 1998, compared to $8.1 million in the three
months ended September 30, 1997. The increase was due to a $2.3 million, or
13.1% increase in interest income, which was partially offset by a $438,000, or
4.7%, increase in interest expense. The increase in interest income was the
result of a 9 basis point (100 basis points being equal to 1%) increase in the
yield earned on interest-earning assets, together with a $106.0 million, or
12.0%, increase in the average balance on interest-earning assets. The increase
in interest expense was the result of a $75.2 million, or 9.5%, increase in the
average balance of interest-bearing liabilities, which was partially offset by a
20 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 3.42% and 4.00%, respectively, during the three months ended
September 30, 1998, compared to 3.13% and 3.65%, respectively, for the
comparable period in 1997.
For the nine months ended September 30, 1998, net interest income increased $4.0
million, or 16.6%, to $28.1 million, compared to $24.1 million for the first
nine months of 1997. The increase was due to a $3.6 million, or 7.1%, increase
in interest income, together with a $379,000, or 1.4%, decrease in interest
expense. The increase in interest income was the result of a $35.2 million, or
4.0%, increase in the average balance of interest-earning assets, together with
a 23 basis point increase in the yield earned on interest-earning assets. The
decrease in interest expense was the result of a 12 basis point decrease in the
cost of interest-bearing liabilities, which was partially offset by a $9.7
million, or 1.2% increase in the average balance of interest-bearing
liabilities. The Company's interest rate spread and net interest margin amounted
to 3.50% and 4.10%, respectively, during the nine months ended September 30,
1998, compared to 3.15% and 3.66%, respectively, for the comparable period in
1997.
INTEREST INCOME
The Company's total interest income was $19.6 million for the three months ended
September 30, 1998, compared to $17.4 million for the three months ended
September 30, 1997. The reason for the $2.3 million, or 13.1%, increase in
interest income was a $2.0 million, or 15.3%, increase in interest income from
loans, a $413,000, or 19.6%, increase in interest on mortgage-backed securities
and a $382,000, or 110.7%, increase in interest on deposits held at other
institutions, which was partially offset by a $549,000, or 32.9%, decrease in
interest and dividends on investment securities. The increase in interest income
from loans was the result of a $79.3 million, or 12.6%, increase in the average
balance of loans, together with a 20 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 increase in interest
income from mortgage-backed securities was the result of a $26.0 million, or
19.8%, increase in the average balance of mortgage-backed securities, which was
partially offset by a one basis point decrease in the yield earned thereon. The
increase in interest from deposits at other institutions was the result of a
$40.0 million, or 200.1%, increase in the average balance of deposits at other
institutions, which was partially offset by a 205 basis point decrease in the
yield earned thereon. The decrease in interest and dividends on investment
securities was the result of a $39.2 million, or 36.6%, decrease in the average
balance of investment securities, which was partially offset by a 36 basis point
increase in the yield earned thereon.
For the nine months ended September 30, 1998, total interest income was $54.8
million compared to $51.2 million for the same period in 1997. The reasons for
the $3.6 million, or 7.1%, increase in interest income were a $5.5 million, or
14.3%, increase in interest income from loans and a $249,000, or 18.2%, increase
in interest on deposits, which was partially offset by a $643,000, or 9.8%,
decrease in interest and dividends from investment securities and a $1.5
million, or 30.6%, decrease in interest from mortgage-backed securities. The
increase in interest from loans was the result of a $77.4 million, or 12.8%,
increase in the average balance of loans, together with a 12 basis point
increase in the yield earned thereon. The increase in interest on deposits at
other institutions was the result of a
14
15
$10.3 million, or 36.6%, increase in the average balance of deposits at other
institutions, which was partially offset by a 87 basis point decrease in the
yield earned thereon. The decrease in interest and dividends on investment
securities was the result of a $37.1 million, or 34.8%, decrease in the average
balance of investment securities, which was partially offset by a 39 basis point
increase in the yield earned thereon. The decrease in interest from
mortgage-backed securities was the result of a $15.5 million, or 11.2%, decrease
in the average balance of mortgage-backed securities, which was partially offset
by a 10 basis point increase in the yield earned thereon.
INTEREST EXPENSE
The Company's total interest expense was $9.7 million during the three months
ended September 30, 1998, compared to $9.3 million for the three months ended
September 30, 1997. The reasons for the $438,000, or 4.7%, increase in interest
expense was a $69,000, or .8%, increase in interest expense on deposits due to a
$49.6 million, or 6.74%, increase in interest-bearing deposits, which was
partially offset by a 25 basis point decrease in the cost of such deposits and a
$369,000, or 47.6%, increase in interest expense on FHLB advances due to a $25.6
million, or 54.2%, increase in the average balance of FHLB advances, which was
partially offset by a 29 basis point decrease in the cost of such advances..
For the nine months ended September 30, 1998, the company's total interest
expense was $26.7 million, compared to $27.0 million for the same period in
1997. The reasons for the $379,000, or 1.4%, decrease in interest expense was a
$715,000, or 2.9%, decrease in interest expense on deposits due to a 14 basis
point decrease in the cost of deposits, which was partially offset by a $1.7
million, or .2%, increase in the average balance of deposits, which was
partially offset by a $336,000, or 14.5%, increase in interest on FHLB advances
due to a $7.9 million, or 16.7%, increase in the average balance of FHLB
advances, which was partially offset by 13 basis point decrease in the cost
thereof.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $206,000 in the three months ended September
30, 1998 as compared to $302,000 for the same period in 1997. As of September
30, 1998, the ratio of the Company's allowance for loan losses to non-performing
loans was 303.0%, compared to 232.6% at December 31, 1997.
For the nine months ended September 30, 1998, the provision for loan losses was
$691,000 as compared to $706,000 for the first nine months of 1997.
NONINTEREST INCOME
Noninterest income increased $283,000, or 14.9%, in the three months ended
September 30, 1998 to $2.2 million, compared to $1.9 million for the three
months ended September 30, 1997. Such increase was due primarily to a $101,000,
or 10.5%, increase in service charges on deposit accounts and a $220,000, or
33.0%, increase in other income, which was partially offset by a $38,000, or
14.0%, 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. 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 nine months ended September 30, 1998, noninterest income increased $1.1
million, or 23.2%, to $5.8 million, compared to $4.7 million for the nine months
ended September 30, 1997. Such increase was due to a $440,000, or 17.8% increase
in service charges on deposit accounts, a $59,000, or 8.4%, increase in late
charges and other fees on loans and a $598,000, or 38.5%, increase in other
income.
15
16
NONINTEREST EXPENSE
Noninterest expense increased $822,000, or 11.1%, in the three months ended
September 30, 1998 to $8.2 million, compared to $7.4 million for the three
months ended September 30, 1997. Such increase was due primarily to a
$321,000, or 8.4%, 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 and the new employees
added as a result of the branch purchase in September of 1998, a $84,000,
or 21.9%, increase in depreciation expense, a $80,000, or 36.7%, increase
in computer expense, a $103,000, or 64.0%, increase in marketing and
advertising expense to advertise the branch acquisition and make the Bank
more visible in its marketplace, a $87,000, or 22.6%, increase in the
amortization of goodwill and other acquired intangibles due to the branch
acquisition and a $177,000, or 11.9%, increase in other expense.
For the nine months ended September 30, 1998, noninterest expense increased
$2.6 million, or 13.0%, to $22.5 million compared to $19.9 million for the
same period in 1997. Such increase was primarily due to a $1.2 million, or
11.5%, increase in salaries and employee benefits, a $336,000, or 35.5%,
increase in depreciation expense, a $131,000, or 9.7%, increase in
occupancy expense, a $335,000, or 86.7%, increase in marketing and
advertising expense and a $546,000, or 13.7%, increase in other expenses.
INCOME TAX EXPENSE
Income tax expense increased $472,000, or 46.4%, in the three months ended
September 30, 1998 to $1.5 million, compared to $1.0 million for the three
months ended September 30, 1997. The increase in income tax expense was due
primarily to the increase in income before income taxes.
For the nine months ended September 30, 1998, income tax expense increased
$861,000, or 25.3%, to $4.3 million, compared to $3.4 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
September 30, 1998, the Company had $45.9 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 September 30, 1998, the total approved loan commitments
outstanding amounted to $28.9 million. At the same time, commitments under
unused lines of credit, including credit card lines, amounted to $103.4
million. Certificates of deposit scheduled to mature in twelve months or
less at September 30, 1998 totaled $136.4 million. Based on past experience
16
17
management believes that a significant portion of maturing deposits will
remain with the Company. The Company anticipates it will continue to have
sufficient funds to meet its liquidity requirements.
At September 30, 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 September 30, 1998 are
detailed below (dollars in thousands):
Required Capital Actual Capital
-------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
Tier 1 Leverage $ 41,450 3.00% $ 74,806 5.41 %
Tier 1 Risk-Based $ 26,071 4.00% $ 74,806 11.48 %
Total Risk-Based $ 52,143 8.00% $ 81,979 12.58 %
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 has converted 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.
17
18
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.
18
19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a. Not Applicable
b. Reports on Form 8-K
The registrant filed the following current report on Form 8-K during
the quarter for which this report is filed:
Current report on Form 8-K dated September 11, 1998, filed on
September 23, 1998 (Item 2 - Acquisition or Disposition of Assets),
announcing the completion of the Registrant's subsidiary's acquisition
of 17 branch offices from the former First Commerce Corporation, which
has been acquired by BancOne Corporation. As permitted by Items 7(a)
(2) and 7(b)(2) of Form 8-K, the Registrant omitted from this filing
the financial statements of the business acquired and the pro forma
financial information required by the form, each of which may be filed
by amendment to this current report on Form 8-K.
19
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ISB FINANCIAL CORPORATION
Date: November 11, 1998 By: /s/ Larrey G. Mouton
----------------- ---------------------------
Larrey G. Mouton, President and
Chief Executive Officer
Date: November 11, 1998 By: /s/ James R. McLemore, Jr.
----------------- -----------------------------------
James R. McLemore, Jr., Senior Vice
President and Chief Financial Officer
20