SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM l0-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
Act Of 1934.
For the transition period from to
Commission File Number 000-24907
IBL BANCORP, INC.
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(Name of small business issuer in its charter)
LOUISIANA 72 - 1421499
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23910 RAILROAD AVE., PLAQUEMINE, LOUISIANA 70764
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(Address of principal executive offices)
Issuer's telephone number, including area code: (225)687-6337
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0l per share
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB. [X]
Issuer's revenues for the fiscal year ended December 31, 1998: $1,837,024
As of March 19, 1999, the aggregate market value of the 150,976 shares of Common
Stock of the Issuer held by non-affiliates, which excludes 59,894 shares held by
all directors, executive officers and employee benefit plans of the Issuer, was
approximately $1.5 million. This figure is based on the average of the bid and
asked prices of $10.00 per share of the Issuer's Common Stock on March 19, 1999.
Number of shares of Common Stock outstanding on March 19, 1998: 210,870
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Portions of the Annual Report to Stockholders for the year ended
December 31, 1998 are incorporated into Part II, Items 5 through 8 and Part III,
Item 13 of this Form l0-KSB.
(2) Portions of the definitive proxy statement for the 1999 Annual
Meeting of Stockholders filed on March 19, 1999 are incorporated into Part III,
Items 9 through 12 of this Form l0-KSB.
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PART I.
Item 1. Description of Business.
IBL Bancorp, Inc. (the "Company") is a Louisiana corporation
organized in June 1998 by Iberville Building and Loan Association (the
"Association") for the purpose of becoming a unitary holding company of
the Association. The only significant assets of the Company are the
capital stock of the Association, the Company's loan to its Employee Stock
Ownership Plan (the "ESOP"), and the remainder of the net proceeds
retained by the Company in connection with the conversion of the
Association from mutual to stock form on September 30, 1998 (the
"Conversion"). The business and management of the Company primarily
consists of the business and management of the Association. The Company
neither owns nor leases any property, but instead uses the premises,
equipment and furniture of the Association. The Company does not intend to
employ any persons other than officers of the Association, and the Company
utilizes the support staff of the Association from time to time.
Additional employees will be hired as appropriate to the extent the
Company expands or changes its business in the future.
The Association is a Louisiana-chartered stock savings and
loan association that was originally formed in 1915. The Association
conducts business from its office in Plaquemine, Louisiana. At December
31, 1998, the Company had $23.9 million of total assets, $20.5 million of
total liabilities, including $20.0 million of deposits, and $3.4 million
of total stockholders' equity (representing 14.02% of total assets).
The Association is primarily engaged in attracting deposits
from the general public and using those and other available sources of
funds to originate loans secured primarily by single-family residences
(one-to-four units) located mainly in the parishes of Iberville and West
Baton Rouge. To a lesser extent, the Association also originates consumer
loans, construction loans and commercial real estate loans. At December
31, 1998, the Company's net loans receivable totaled $17.2 million or
72.1% of the Company's total assets. Conventional first mortgage, one- to
four-family residential loans (excluding construction loans) amounted to
$12.5 million or 67.5% of the Company's total loan portfolio at December
31, 1998. In addition, the Association invests in mortgaged-backed
securities and certificates of deposit. The Company had $3.6 million of
mortgage-backed securities at December 31, 1998, representing 15.0% of the
Company's total assets. The Company had $3.6 million of investment
securities (excluding FHLB stock) at December 31, 1998, representing 15.0%
of total assets. Of the $3.6 million of investment securities, $608,000
mature within five years of December 31, 1998. Also at December 31, 1998,
the Association had $795,000 in certificates of deposits with other
financial institutions all of which will mature within the next three
years.
The Association is a community-oriented savings institution,
which emphasizes retail lending and deposit products, customer service and
convenience. The Association has generally sought to achieve long-term
financial strength and stability by (i) increasing the amount and
stability of its net interest income, (ii) managing its assets and
liabilities to reduce its vulnerability to changes in interest rates, and
(iii)
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maintaining a low level of non-performing assets. Highlights of the
Association's business strategy include the following.
Capital Position. As of December 31, 1998, the Association
had total stockholder's equity of $ 2.7 million and exceeded all of its
regulatory capital requirements, with tangible, core and risk-based
capital ratios of 14.2%, 14.2% and 28.4%, respectively, as compared to the
minimum requirements of 1.5%, 3.0% and 8.0%, respectively.
Profitability. The Company has been profitable in each of
the last three years. Net income increased from $164,000 in 1997 to
$195,000 in 1998. Net income declined in 1996 to $78,000 from $166,000 in
1995 due to a special assessment paid for SAIF insurance which amounted to
$75,000 on an after-tax basis.
Asset Quality. The Company total non-performing assets were
1.0% of total assets at December 31, 1998 compared to 1.5% and 1.2% of
total assets at December 31, 1997 and 1996 respectively. Non-accruing
single-family residential loans and consumer loans represented 100% of the
total non-performing assets at December 31, 1998, 1997 and 1996. At
December 31, 1998, the Company's allowance for loan losses amounted to
$412,000 or 2.2% of the total loan portfolio.
Interest Rate Risk. The primary elements of the Company's
strategy to manage its interest rate risk include (i) emphasizing the
origination of adjustable-rate mortgages ("ARMs"), (ii) purchasing
adjustable-rate mortgage-backed securities, (iii) since mid-1996,
originating fixed-rate single-family residential loans to meet customer
demand, and (iv) maintaining lower-costing passbook and negotiable order
of withdrawal ("NOW") accounts. Based upon certain repricing assumptions,
the Company's interest-earning assets repricing or maturing within one
year exceeded its interest-bearing liabilities with similar
characteristics by $4.6 million or 19.1% of total assets at December
31,1998.
Community Orientation. The Company is committed to meeting
the financial needs of the communities in which it operates. Management
believes the Association is large enough to provide a full range of
personal financial services, yet small enough to be able to provide
services on a personalized and efficient basis. At December 31, 1998, most
of the Company's loans were to residents of its primary market area of
Iberville and West Baton Rouge parishes. The Company intends to continue
its practice of investing in loans in its primary market area in
accordance with its underwriting standards, subject to economic conditions
and the availability of reasonable investment alternatives.
The Association is subject to examination and comprehensive
regulation by the Louisiana Office of Financial Institutions ("OFI"),
which is the Association chartering authority, and by the Office of
Thrift Supervision ("OTS"), which is the Association's primary federal
regulator. The Association is also regulated by the Federal Deposit
Insurance Corporation ("FDIC"), the administrator of the Savings
Association Insurance Fund ("SAIF"), which insures deposits in the
Association to the maximum extent provided by law. The Association is also
subject to certain reserve requirements established by the Board of
Governors of the Federal Reserve System
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("FRB") and is a member of the Federal Home Loan Bank ("FHLB") of Dallas,
which is one of the 12 regional banks comprising the FHLB System.
The executive office for the Company and the Association is
located at 23910 Railroad Ave., Plaquemine, LA 70764, and its telephone
number is (225) 687-6337.
Market Area
The Company's primary market area consists of Iberville and
West Baton Rouge parishes in Louisiana. These parishes maintain a large
commuter population with residents commuting to jobs in Baton Rouge. The
population of Iberville Parish was approximately the same in 1996 as in
1990, while the population of West Baton Rouge Parish increased by
approximately 4.9% during this period. The unemployment rate for Iberville
and West Baton Rouge Parishes was 10.84% and 9.51%, respectively, in 1990,
compared to 9.48% for Louisiana and 6.24% for the United States. In
addition, the per capita income for Iberville and West Baton Rouge
Parishes in such year was $11,857 and $11,400, respectively, compared to
$12,345 for Louisiana and $16,738 for the United States.
Major employers in the two parishes are Dow USA, Iberville
and West Baton Rouge School Systems, Novartis and Georgia Gulf. In
addition, The Port of Greater Baton Rouge, located in West Baton Rouge
Parish, is a major port which provides export and import shipping. There
is also a large concentration of petro-chemical complexes and refineries
that utilize the port's facilities as well as the Mississippi River for
transportation of their products. Due to this large concentration of
petro-chemical complexes and refineries, any downturn in these industries
could have a significant impact on the Company's consolidated financial
statements and results of operations.
Lending Activities
Loan Portfolio Composition. At December 31, 1998, the
Company's net loan portfolio totaled $17.2 million, representing
approximately 72.1% of the Company's $23.9 million of total assets at that
date. All of the loans included in the loan portfolio at December 31, 1998
were loans originated by the Association. The principal lending activity
of the Association is the origination of single-family residential loans,
consumer loans, construction loans and to a lesser extent commercial real
estate loans and land loans. At December 31, 1998, single-family
residential and consumer loans amounted to 67.5% and 13.9%, respectively,
of the Company's total loan portfolio, while construction loans and
commercial real estate loans represented 3.7% and 4.8%, respectively, of
the total loan portfolio, in each case before net items.
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Loan Portfolio Composition. The following table sets forth
the composition of the Company's loan portfolio by type of loan at the
dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans
- - -----------------
Single-family residential $ 12,488 67.47% $ 11,531 67.13% $ 10,752 67.67%
Construction 692 3.74% 420 2.44% 464 2.92%
Commercial real estate 896 4.84% 943 5.49% 757 4.76%
Land 238 1.29% 271 1.58% 211 1.33%
-------- ------ -------- ------ -------- ------
Total real estate loans 14,314 77.34% 13,165 76.64% 12,184 76.68%
Consumer loans
- - --------------
Home equity and improvement 1,005 5.43% 1,172 6.82% 1,221 7.68%
Loans secured by savings accounts 617 3.33% 786 4.58% 670 4.22%
Automobile 1,251 6.76% 1,066 6.21% 814 5.12%
Unsecured 1,228 6.63% 924 5.38% 924 5.81%
Other 94 0.51% 65 0.38% 77 0.48%
-------- ------ -------- ------ -------- ------
Total consumer loans 4,195 22.66% 4,013 23.36% 3,706 23.32%
-------- ------ -------- ------ -------- ------
Total loans 18,509 100.00% 17,178 100.00% 15,890 100.00%
====== ====== ======
Less:
Unearned discounts 229 189 160
Loans in process 650 260 169
Deferred fees and discounts 9 7 5
Allowance for loan losses 412 404 362
Total loans receivable, net $ 17,209 $ 16,318 $ 15,194
======== ======== ========
</TABLE>
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<PAGE>
Contractual Terms to Final Maturities. The following table
sets forth certain information as of December 31, 1998 regarding the
dollar amount of loans maturing in the Company's portfolio, based on the
contractual date of the loan's final maturity, before giving effect to net
items. Demand loans and loans having no stated schedule of repayments and
no stated maturity are reported as due in one year or less. The amounts
shown below do not reflect normal principal amortization; rather, the
balance of each loan outstanding at December 31, 1998 is shown in the
appropriate year of the loan's final maturity.
<TABLE>
<CAPTION>
Single Commercial
family real
residential Construction estate Land Consumer Total
----------- ------------ ------ ---- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Amounts due after December 31, 1998 in:
One year or less .................... $ 18 $ 692 $ - $ 1 $ 1,343 $ 2,054
After one through two years ......... 34 - - - 446 480
After two through three years ....... 508 - - 11 466 985
After three through five years ...... 237 - 83 39 1,035 1,394
After five through ten years ........ 2,020 - - 109 678 2,807
After ten through fifteen years ..... 3,010 - 223 78 217 3,528
After fifteen years ................. 6,661 - 590 - 10 7,261
------- ------- -------- ------- ------- -------
Total loans (1) .................. $12,488 $ 692 $ 896 $ 238 $ 4,195 $18,509
======= ======= ======== ======= ======= =======
</TABLE>
(1) Gross of unearned discount, loans in process, deferred loan origination
fees and the allowance for loan losses.
The following table sets forth the dollar amount of all
loans, before net items, due after one year from December 31, 1998 as
shown in the preceding table, which have fixed interest rates or which
have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Due After One Year From
December 31, 1998
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Floating or
Fixed Adjustable
Rates Rates Total
----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C>
Single-family residential loans ...... $ 2,700 $ 9,770 $12,470
Commercial real estate loans ......... -- 896 896
Land loans ........................... 151 86 237
Consumer loans ....................... 2,369 483 2,852
------- ------- -------
Total loans ........................ $ 5,220 $11,235 $16,455
======= ======= =======
</TABLE>
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Scheduled contractual maturities of loans do not necessarily
reflect the actual term of the Company's loan portfolio. The average life
of mortgage loans is substantially less than their average contractual
terms because of loan prepayments. The average life of mortgage loans
tends to increase when current mortgage loan rates substantially exceed
rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans substantially exceed current mortgage loan rates.
Origination of Loans. The lending activities of the
Association are subject to the written, non-discriminatory, underwriting
standards and lending policies established by the Association's Board of
Directors and management. Loan originations are obtained through a variety
of sources, including referrals from real estate brokers, builders and
existing customers, newspaper and billboard advertising, and walk-in
customers. Loan applications are taken by lending personnel, and the loan
department supervises the procurement of credit reports, appraisals and
other documentation involved with a loan. Property valuations are
generally performed by independent outside appraisers approved by the
Association's Board of Directors. The Association generally requires title
insurance (or an attorney's opinion of title) and hazard insurance on
property securing first mortgage loans. Title insurance is not required
for consumer loans.
The Association's loan approval process is intended to
assess the borrower's ability to repay the loan, the viability of the loan
and the adequacy of the value of the property that will secure the loan.
The Association's lending policies allow its President or loan officer
authority to approve all types of loans not exceeding $30,000. Loan
amounts over $30,000 up to $150,000 may be approved by the Association's
President or loan officer and two other members of the board of directors.
Loans in excess of $150,000 must be approved by the Association's entire
board of directors, excluding the Association's attorney who abstains from
voting on loans due to his involvement in the majority of the
Association's real estate loan closings.
Generally, the Association originates substantially all of
the loans in its portfolio and holds them until maturity.
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The following table shows total loans originated and repaid
during the periods indicated. No loans were purchased or sold during the
periods shown.
<TABLE>
<CAPTION>
December 31,
------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Loan originations
Single-family residential
Loans for portfolio ..................... $ 2,484 $ 1,638 $ 1,266
------- ------- -------
Construction .............................. 692 620 465
Commercial real estate .................... 507 225 250
Land ...................................... 93 110 90
Consumer .................................. 1,989 1,545 2,146
------- ------- -------
Total loans originated ................ 5,765 4,138 4,217
------- ------- -------
Reductions
Loan principal reductions ................. (4,421) (2,851) (3,359)
------- ------- -------
Increase (decrease) due to other items - net (1) (453) (163) (180)
------- ------- -------
Net increase in loan portfolio ................. $ 891 $ 1,124 $ 678
======= ======= =======
</TABLE>
(1) Other items, net include the effects relating to unearned discount, loans
in process, deferred loan origination fees and the allowance for loan
losses.
Real Estate Lending Standards and Underwriting Policies.
Effective March 19, 1993, all financial institutions were required to
adopt and maintain comprehensive written real estate lending policies that
are consistent with safe and sound banking practices. These lending
policies must reflect consideration of the Interagency Guidelines for Real
Estate Lending Policies adopted by the federal banking agencies, including
the OTS, in December 1992 ("Guidelines"). The Guidelines set forth uniform
regulations prescribing standards for real estate lending. Real estate
lending is defined as extensions of credit secured by liens on interests
in real estate or made for the purpose of financing the construction of a
building or other improvements to real estate, regardless of whether a
lien has been taken on the property.
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An institution's lending policy must address certain lending
considerations set forth in the Guidelines, including loan-to-value
("LTV") limits, loan administration procedures, underwriting standards,
portfolio diversification standards, and documentation, approval and
reporting requirements. The policy must also be appropriate to the size of
the institution and the nature and scope of its operations, and must be
reviewed and approved by the institution's board of directors at least
annually. The LTV ratio framework, with the LTV ratio being the total
amount of credit to be extended divided by the appraised value or purchase
price of the property at the time the credit is originated, must be
established for each category of real estate loans. If a loan is not
secured by a first lien, the lender must combine all senior liens when
calculating this ratio.
Certain institutions can make real estate loans that do not
conform with the established LTV ratio limits up to 100% of the
institution's total capital. Within this aggregate limit, total loans for
all commercial, agricultural, multi-family and other non-one-to-four
family residential properties should not exceed 30% of total capital. An
institution will come under increased supervisory scrutiny as the total of
such loans approaches these levels. Certain loans are exempt from the LTV
ratios (e.g., those guaranteed by a government agency, loans to facilitate
the sale of real estate owned, loans renewed or restructured by the
original lender(s) to the same borrower(s) where there is no advancement
of funds, etc.).
The Association is in compliance with the above standards.
Although Louisiana laws and regulations permit
state-chartered savings institutions, such as the Association, to
originate and purchase loans secured by real estate located throughout the
United States, the Association's present lending is done primarily within
its primary market area, which consists of Iberville and West Baton Rouge
Parishes in Louisiana. Subject to the Association's loans-to-one borrower
limitation, the Association is permitted to invest without limitation in
residential mortgage loans and up to 400% of its capital in loans secured
by non-residential or commercial real estate. The Association may also
invest in secured and unsecured consumer loans in an amount not exceeding
35% of the Association's total assets. This 35% limitation may be exceeded
for certain types of consumer loans, such as home equity and property
improvement loans secured by residential real property. In addition, the
Association may invest up to 10% of its total assets in secured and
unsecured loans for commercial, corporate, business or agricultural
purposes. At December 31, 1998, the Association was well within each of
the above lending limits.
A savings institution generally may not make loans to one
borrower and related entities in an amount which exceeds the greater of
(i) 15% of its unimpaired capital and surplus, although loans in an amount
equal to an additional 10% of unimpaired capital and surplus may be made
to a borrower if the loans are fully secured by readily marketable
securities, and (ii) $500,000. At December 31, 1998, the Association's
limit on loans-to-one borrower was $500,000 and its five largest loans or
groups of loans-to-one borrower, including related entities amounted to
$500,000, $447,000, $327,000, $250,000, and $249,000, respectively, at
such date. All of the Association's five largest loans or groups of loans
were performing in accordance of
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their terms at December 31, 1998. The $500,000 borrowing relationship
consist of a single loan for the construction of a church.
Loans on Existing Residential Properties. The primary real
estate lending activity of the Association is the origination of loans
secured by first mortgage liens on single-family residences. At December
31, 1998, $12.5 million or 67.5% of the Company's total loan portfolio,
before net items, consisted of single-family residential loans.
The loan-to-value ratio, maturity and other provisions of
the loans made by the Association generally have reflected the policy of
making less than the maximum loan permissible under applicable
regulations, in accordance with sound lending practices, market conditions
and underwriting standards established by the Association. The
Association's lending policies on single-family residential mortgage loans
generally limit the maximum loan-to-value ratio to 80% of the lesser of
the appraised value or purchase price of the property, and generally the
single-family residential loans in excess of an 80% loan-to-value ratio
require private mortgage insurance. Residential mortgage loans are
amortized on a monthly basis with principal and interest due each month
and customarily do not include "due-on-sale" clauses.
Various legislative and regulatory changes have given the
Association the authority to originate and purchase mortgage loans which
provide for periodic interest rate adjustments subject to certain
limitations. The Association has been actively marketing ARMs in order to
decrease the vulnerability of its operations to changes in interest rates.
At December 31, 1998, single-family residential ARMs represented $9.8
million or 52.8% of the total loan portfolio, before net items.
The Association's single-family residential ARMs are fully
amortizing loans with contractual maturities of up to 30 years. These
loans have interest rates which are scheduled to adjust periodically in
accordance with a designated index. The Association currently offers ARMs
on which the interest rate adjusts every year based upon the national
average contract interest rate for all major types of lenders on the
purchases of previously occupied homes, plus a specified margin. The
margin above the index is generally .25%. There is a 2% cap on the rate
adjustment per period and a 13% cap on the maximum interest rate during
the life of the loan. The adjustable-rate loans in the Association's loan
portfolio are not convertible into fixed-rate loans, are not assumable
without the Association's consent, do not contain prepayment penalties and
do not produce negative amortization.
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<PAGE>
The Association qualifies borrowers based on the initial
interest rate on the ARM rather than the fully indexed rate. In a rising
interest rate environment, the interest rate on the ARM will increase on
the next adjustment date, resulting in an increase in the borrower's
monthly payment. To the extent the increased rate adversely affects the
borrower's ability to repay his loan, the Association is exposed to
increased credit risk. As of December 31, 1998, the Company's non-accruing
residential loans were $179,000. See "-Asset Quality."
The demand for adjustable-rate loans in the Association's
primary market area has been a function of several factors, including the
level of interest rates and the difference between the interest rates
offered by competitors for fixed-rate loans and adjustable-rate loans. Due
to the generally lower rates of interest prevailing in recent periods,
consumer preference for fixed-rate loans has increased. In mid-1996, the
Association began offering 15 year, fixed-rate residential loans for
retention in its portfolio, which loans totaled $2.7 million at December
31, 1998.
Construction Loans. At December 31, 1998, $692,000 or 3.7%
of the Association's total loan portfolio, before net items, consisted of
two loans for the construction of single-family residences and one loan
for the construction of a church. Construction loans are not being
actively marketed and are offered primarily as a service to existing
customers. The two single-family construction loans were for $64,000 and
$128,000 and the church construction loan was for $500,000 at December 31,
1998, including amounts not yet disbursed. The construction loans each
bear a fixed interest rate during the construction phase and are
structured to be converted to adjustable-rate permanent loans at the end
of the construction phase. The adjustable-interest rate is not determined
until the end of the construction phase, and the Association does not
charge an additional loan origination fee when the construction loan is
converted to a permanent loan.
Construction lending is generally considered to involve a
higher degree of risk of loss than long-term financing on improved,
owner-occupied real estate because of the uncertainties of construction,
including the possibility of costs exceeding the initial estimates and the
need to obtain a tenant or purchaser if the property will not be
owner-occupied. The Association generally attempts to mitigate the risks
associated with construction lending by, among other things, lending
primarily in its market area, using conservative underwriting guidelines,
and closely monitoring the construction process.
Commercial Real Estate Loans. The Association's commercial
real estate loan portfolio primarily consists of loans secured by retail
establishments and two trailer parks located within the Association's
primary market area. Commercial real estate loans amounted to $896,000 or
4.8% of the total loan portfolio at December 31, 1998. The largest
commercial real estate loan at December 31, 1998 was a loan secured by a
trailer park and amounted to $213,000 at such date. The average balance of
commercial real estate loans at December 31, 1998 was approximately
$112,000.
Nonresidential real estate loans may have terms up to 30
years and generally have adjustable rates of interest. The Association
uses the same index for commercial loans as it uses for single-family
residential loans, except that the margin
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<PAGE>
for commercial loans is generally 1.25% above the index. As part of its
commitment to loan quality, the Association's senior management reviews
each nonresidential loan prior to approval by the Board of Directors. All
loans are based on the appraised value of the secured property, and
commercial real estate loans are generally not made in amounts in excess
of 80% of the appraised value of the secured property. All appraisals are
performed by an independent appraiser designated by the Association and
are reviewed by management. In originating nonresidential loans, the
Association considers the quality of the property, the credit of the
borrower, the historical and projected cash flow of the project, the
location of the real estate and the quality of the property management. A
total of $225,000 of commercial real estate loans were originated in 1997,
and $507,000 were originated in 1998.
Commercial real estate lending is generally considered to
involve a higher degree of risk than single-family residential lending.
Such lending typically involves large loan balances concentrated in a
single borrower or groups of related borrowers for rental or business
properties. In addition, the payment experience on loans secured by
income-producing properties is typically dependent on the success of the
operation of the related project and thus is typically affected by adverse
conditions in the real estate market and in the economy. The Association
generally attempts to mitigate the risks associated with commercial real
estate lending by, among other things, lending primarily in its market
area and using low LTV ratios in the underwriting process.
Land Loans. As of December 31, 1998, the Association's land
loans are secured by vacant lots. These loans are generally for a maximum
of seven years and are fully amortizing. At December 31, 1998, the
Association's land loans amounted to $238,000 or 1.3% of the total loan
portfolio. Of such amount, $151,000 of the land loans had fixed rates
while $86,000 had adjustable interest rates. In 1998, the Association
agreed to participate in a $5.5 million loan with seven other financial
institutions to finance the development of 400 acres of land in the
Association's market area. The Association has a $385,000 or 7% interest
in the loan, and the funds will be disbursed as the development
progresses. As of December 31, 1998, $155,750 had been disbursed by the
Association on this project. The land will be developed into an 18-hole
golf course and into vacant lots for single-family residences. The loan
bears an interest rate of 1% below a specified prime rate, and the loan
will be repaid as the lots are sold.
Land development and acquisition loans involve significant
additional risks when compared with loans on existing residential
properties. These loans typically involve large loan balances to single
borrowers, and the payment experience is dependent on the successful
development of the land and the sale of the lots. These risks can be
significantly impacted by supply and demand conditions. The Association
reviewed a feasibility study and market analyses with respect to the above
project. In addition, the land was already owned by the developer and
serves as collateral for the loan.
Consumer Loans. Subject to restrictions contained in
applicable federal laws and regulations, the Association is authorized to
make loans for a wide variety of personal or consumer purposes. At
December 31, 1998, $4.2 million or 22.7% of the total loan portfolio
consisted of consumer loans.
13
<PAGE>
The Association originates consumer loans in order to
provide a full range of financial services to its customers and because
such loans generally have shorter terms and higher interest rates than
residential mortgage loans. The consumer loans offered by the Association
include home improvement loans, loans secured by deposit accounts in the
Association, automobile loans, mobile home loans, unsecured loans and
other miscellaneous loans.
Home equity and improvement loans are originated by the
Association for generally up to 80% of the appraised value, less the
amount of any existing prior liens on the property. The Association
secures the loan with a mortgage on the property (generally a second
mortgage) and will originate the loan even if another institution holds
the first mortgage. The loans have a maximum term of 15 years. At December
31, 1998, home equity and improvement loans totalled $1.0 million or 5.4%
of the total loan portfolio.
The Association offers loans secured by deposit accounts in
the Association, which loans amounted to $617,000 or 3.3% of the total
loan portfolio at December 31,1998. Such loans are originated for up to
90% of the account balance, with a hold placed on the account restricting
the withdrawal of the account balance. The interest rate on the loan is
equal to the interest rate paid on the account plus 2%, subject to a
minimum interest rate of 7% on the loan.
The Association offers automobile loans on both new and used
vehicles, with most of the loans secured by used vehicles. The automobile
loans have fixed rates of interest and terms of up to five years for new
vehicles and four years for used vehicles. Automobile loans amounted to
$1.3 million or 6.8% of the total loan portfolio at December 31, 1998.
The unsecured loans originated by the Association are
generally for a maximum of $5,000 and a maximum term of 36 months,
although the Association's policy permits up to $10,000 unsecured loans
for a term of up to 48 months. These loans bear a fixed rate of interest
and generally require monthly payments of principal and interest. The
amount of unsecured loans at December 31, 1998 was $1.2 million or 6.6% of
the total loan portfolio.
Other consumer loans primarily consist of mobile home loans
and overdrafts and amounted to $94,000 or .5% of the total loan portfolio
at December 31, 1998.
Consumer loans generally have shorter terms and higher
interest rates than mortgage loans but generally involve more credit risk
than mortgage loans because of the type and nature of collateral and, in
certain cases, the absence of collateral. In addition, consumer lending
collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness and personal bankruptcy. In many cases, any repossessed
collateral for a defaulted consumer loan will not provide an adequate
source of repayment of the outstanding loan balance because of improper
repair and maintenance of the underlying security. The remaining
deficiency often does not warrant further substantial collection efforts
against the borrower. The Association believes that the generally higher
yields
14
<PAGE>
can compensate for the increased credit risk associated with such loans
and that consumer loans are important to its efforts to increase rate
sensitivity, shorten the average maturity of its loan portfolio and
provide a full range of services to its customers.
Loan Origination and Other Fees. In addition to interest
earned on loans, the Association receives loan origination fees or
"points" for originating loans. Loan points are a percentage of the
principal amount of the mortgage loan and are charged to the borrower in
conjunction with the origination of the loan.
In accordance with SFAS No. 91, which deals with the
accounting for non-refundable fees and cost associated with originating or
acquiring loans, the Association's loan origination fees and certain
related direct loan origination costs are offset, and the resulting net
amount is deferred and amortized as interest income over the contractual
life of the related loans as an adjustment to the yield of such loans. At
December 31, 1998 the Association had $9,000 of loan fees which had been
deferred and are being recognized as income over the contractual life of
the related loans.
Asset Quality
Delinquent Loans. The following table sets forth information
concerning delinquent loans at December 31, 1998, in dollar amounts and as
a percentage of the Company's total loan portfolio. The amounts presented
represent the total outstanding principal balances of the related loans,
rather than the actual payment amounts which are past due. At December 31,
1998, the Company had no commercial real estate loans, construction loans
or land loans which were delinquent 30 or more days.
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Single-family
Residential Consumer Total
-------------------- -------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans Delinquent for:
- - ---------------------
30-59 days ................... $ 584 3.16% $ 337 1.82% $ 921 4.98%
60 - 89 days ................. 56 0.30% 31 0.17% 87 0.47%
90 days and over ............. 147 0.79% 94 0.51% 241 1.30%
------ ---- ------ ---- ------ ----
Total delinquent loans $ 787 4.25% $ 462 2.50% $1,249 6.75%
====== ==== ====== ==== ====== ====
</TABLE>
15
<PAGE>
Non-Performing Assets. When a borrower fails to make a
required loan payment, the Association attempts to cause the default to be
cured by contacting the borrower. Late charges are generally imposed
following the thirtieth day after a payment is due on mortgage loans and
after 15 days on consumer loans. In most cases defaults are cured
promptly. If a delinquency extends beyond 30 days, the loan and payment
history is reviewed and efforts are made to collect the loan. While the
Association generally prefers to work with borrowers to resolve such
problems, when the account becomes 90 days delinquent the Association
institutes foreclosure or other collection proceedings, as necessary, to
minimize any potential loss.
Loans are placed on non-accrual status when, in the
judgement of management, the probability of collection of interest is
deemed to be insufficient to warrant further accrual. When a loan is
placed on non-accrual status, previously accrued but unpaid interest is
deducted from interest income. As a matter of policy, the Association
discontinues the accrual of interest income when the loan becomes 90 days
past due. Specific reserves are established when a consumer loan becomes
90 days past due.
If foreclosure is effected, the property is sold at a
sheriff's sale. If the Association is the successful bidder, the acquired
real estate property is then included in the Association's "real estate
owned" account until it is sold. The Association is permitted under
applicable regulations to finance sales of real estate owned by "loans to
facilitate" which may involve more favorable interest rates and terms than
generally would be granted under the Association's underwriting
guidelines. At December 31, 1998, the Association had no real estate
owned.
16
<PAGE>
The following table sets forth the amounts and categories of
the Association's non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Nonaccrual loans:
Single-family residential ................... $147 $267 $214
Construction ................................ -- -- --
Commercial real estate ...................... -- -- --
Land ........................................ -- -- --
Consumer .................................... 95 65 56
---- ---- ----
Total non-accrual loans ................... 242 332 270
---- ---- ----
Real estate owned ............................. -- -- --
---- ---- ----
Total non-performing assets ............. $242 $332 $270
==== ==== ====
Total non-performing loans as a percent
of total loans ............................... 1.31% 1.93% 1.70%
==== ==== ====
Total non-performing assets as a percent
of total assets .............................. 1.01% 1.48% 1.24%
==== ==== ====
</TABLE>
The $242,000 of non-accruing loans at December 31, 1998
consisted of 15 single-family residential loans, of which the largest was
$54,000, and 21 consumer loans.
If the $242,000 of non-accruing loans at December 31, 1998
had been current in accordance with their terms during 1998, the gross
interest income on such loans would have been $35,494. A total of $51,475
of interest income on these non-accruing loans was actually recorded in
1998.
Classified Assets. All loans are reviewed on a regular basis
under the Association's asset classification policy. The Association's
total classified assets at December 31, 1998 (excluding loss assets
specifically reserved for), amounted to $583,500, all of which was
classified as substandard. The largest classified asset at December 31,
1998 consisted of a $113,000 adjustable-rate single-family dwelling. The
remaining $470,500 of substandard assets at December 31, 1999 consisted of
13 residential mortgage loans totaling $388,500 and 13 consumer loans
totaling $82,000.
Allowance for Loan Losses. At December 31, 1998, the
Company's allowance for loan losses amounted to $411,000 or 2.2% of the
total loan portfolio. The Association's loan portfolio consists primarily
of single-family residential loans, consumer loans and, to a lesser
extent, commercial real estate loans, construction loans
17
<PAGE>
and land loans. The loan loss allowance is maintained by management at a
level considered adequate to cover possible losses that are currently
anticipated based on prior loan loss experience, known and inherent risks
in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral,
general economic conditions, and other factors and estimates which are
subject to change over time. Although management believes that it uses the
best information available to make such determinations, future adjustments
to allowances may be necessary, and net income could be significantly
affected, if circumstances differ substantially from the assumptions used
in making the initial determinations.
The following table summarizes changes in the allowance for
loan losses and other selected statistics for the periods presented:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Total loans outstanding at end of period ......... $ 18,509 $ 17,178 $ 15,890
======== ======== ========
Average loans outstanding ....................... $ 16,611 $ 15,735 $ 14,727
======== ======== ========
Balance at beginning of period .................. $ 404 $ 362 $ 318
Charge offs (1) ................................. 13 2 --
-------- -------- --------
Recoveries (2) .................................. -- 2 5
Net charge offs / (recoveries) ................ 13 -- (5)
Provision for loan losses ....................... 21 42 39
-------- -------- --------
Balance at end of period ........................ $ 412 $ 404 $ 362
======== ======== ========
Allowance for loan losses as a percent of
total loans outstanding ........................ 2.23% 2.35% 2.28%
======== ======== ========
Ratio of net charge-offs (-)recoveries to average
loans outstanding .............................. 0.08% 0.00% -0.03%
======== ======== ========
</TABLE>
(1) Includes consumer loans of $13,000 in 1998 and $2,000 in 1997.
(2) Includes consumer loans of $1,000 in 1997 and $1,000 in 1996, all other
recoveries are on mortgage loans.
18
<PAGE>
The following table presents the allocation of the allowance
for loan losses by type of loan at each of the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- ----------------------
Loan Loan Loan
Category Category Category
Amount as a % Amount as a % Amount as a %
of of Total of of Total of of Total
Allowance Loans Allowance Loans Allowance Loans
--------- ----- --------- ----- --------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loan Type
- - ---------
Single-family residential $ 358 67.47% $ 338 67.13% $ 294 67.67%
Construction - 3.74% - 2.44% - 2.92%
Commercial real estate - 4.84% - 5.49% - 4.76%
Land - 1.29% - 1.58% - 1.33%
Consumer 53 22.66% 66 23.36% 68 23.32%
----- ------ ----- ------ ----- ------
Total real estate loans $ 411 100.00% $ 404 100.00% $ 362 100.00%
===== ====== ===== ====== ===== ======
</TABLE>
Mortgage-Backed Securities
Mortgage-backed securities represent a participation
interest in a pool of single-family or multi-family residential mortgages,
the principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies
and government-sponsored enterprises) that pool and repackage the
participation interests in the form of securities, to investors such as
the Company. Such U.S. Government agencies and government-sponsored
enterprises, which guarantee the payment of principal and interest to
investors, primarily include the FHLMC, the FNMA and the GNMA.
The FHLMC, which is a corporation chartered by the U.S.
Government, issues participation certificates backed principally by
conventional mortgage loans. The FHLMC guarantees the timely payment of
interest and the ultimate return of principal on participation
certificates. The FNMA is a private corporation chartered by the U.S.
Congress with a mandate to establish a secondary market for mortgage
loans. The FNMA guarantees the timely payment of principal and interest on
FNMA securities. The GNMA is a government agency within the Department of
Housing and Urban Development, which is intended to help finance
government-assisted housing programs. GNMA securities are backed by loans
insured by the Federal Housing Administration ("FHA"), or guaranteed by
the Veterans Administration ("VA"), and the timely payment of principal
and interest on GNMA securities are guaranteed by the GNMA and backed by
the full faith and credit of the U.S. Government. Because the FHLMC, the
FNMA and the GNMA were established to provide support for low- and
middle-income housing, there are limits to the maximum size of the loans
that qualify for these
19
<PAGE>
programs. For example, the FNMA and the FHLMC currently limit their loans
secured by a single-family, owner-occupied residence to $227,000. To
accommodate larger-sized loans, and loans that, for other reasons, do not
conform to the agency programs, a number of private institutions have
established their own home-loan origination and securitization programs.
Of the $3.7 million of mortgage-backed securities at
December 31, 1998, $2.1 million was accounted for as held to maturity and
had an aggregate market value of $2.1 million at such date. The remaining
$1.5 million of mortgage-backed securities at December 31, 1998 are
accounted for as available for sale and are thus carried at market value.
For additional information relating to the Company's mortgage-backed
securities, see Note E of Notes to Consolidated Financial Statements in
the Company's 1998 Annual Report to Stockholders, which is filed as
Exhibit 13.0 hereto ("1998 Annual Report").
Mortgage-backed securities generally yield less than the
loans which underlie such securities because of their payment guarantees
or credit enhancements which offer nominal credit risk. In addition,
mortgage-backed securities are more liquid than individual mortgage loans
and may be used to collateralize borrowings or other obligations of the
Company. In general, mortgage-backed pass-through securities are weighted
at no more than 20% for risk-based capital purposes, compared to an
assigned risk weighting of 50% to 100% for whole residential mortgage
loans. As a result, these types of securities allow the Company to
optimize regulatory capital to a greater extent than non-securitized whole
loans. While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as
the geographic distribution of the underlying mortgage loans, may alter
the prepayment rate of such mortgage loans and so affect both the
prepayment speed and value of such securities.
<PAGE>
The following table sets forth the composition of the Company's
mortgage-backed securities at each of the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Mortgage-backed securities held to maturity
FNMA $ 1,402 $ 1,173 $ 1,226
FHLMC 601 1,050 1,309
GNMA 119 163 200
------- ------- -------
Subtotal - held to maturity 2,122 2,386 2,735
------- ------- -------
Mortgage-backed securities available for sale
FNMA 1,348 1,948 1,427
GNMA 106 - -
------- ------- -------
Subtotal - available for sale 1,454 1,948 1,427
------- ------- -------
Total $ 3,576 $ 4,334 $ 4,162
======= ======= =======
</TABLE>
20
<PAGE>
Information regarding the contractual maturities and
weighted average yield of the Company's mortgage-backed securities
portfolio at December 31, 1998 is presented below. Due to repayments of
the underlying loans, the actual maturities of mortgage-backed securities
generally are substantially less than the scheduled maturities.
The following table sets forth the purchases and principal
repayments of the Company's mortgage-backed securities during the periods
indicated. There were no sales during the periods shown
<TABLE>
<CAPTION>
At or For The Year Ended
December 31,
------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Mortgage-backed securities at
beginning of period (cost) $ 4,329 $ 4,164 $ 3,938
Purchases 559 917 1,031
Repayments 1,284 734 786
Discount accretion / (premium amortization) (28) (18) (19)
------- ------- -------
Mortgage-backed securities at end of period (cost) $ 3,576 $ 4,329 $ 4,164
======= ======= =======
Mortgage-backed securities at end of
period (fair value) $ 3,570 $ 4,322 $ 4,124
======= ======= =======
Weighted average yield at end of period 5.76% 6.36% 6.31%
======= ======= =======
</TABLE>
21
<PAGE>
Investment Securities
The Association has the authority to invest in various types
of liquid assets, including United States Treasury obligations, securities
of various federal agencies and of state and municipal governments,
certificates of deposit at federally-insured banks and savings
institutions, certain bankers' acceptances and federal funds, and the
Company has broader investing authority. Each purchase of an investment
security is approved by the Board of Directors. The Company's investment
securities are carried in accordance with generally accepted accounting
principles ("GAAP"). All of the Company's investment securities were
accounted for as held-to-maturity at December 31, 1998.
Investment securities (excluding FHLB stock) totaled
$795,000 or 3.3% of total assets at December 31, 1998, consisting of
certificate of deposits in other financial institutions. At December 31,
1998 the Company had no other investment securities as compared to $15,000
of U.S. agency securities at December 31, 1997. Information regarding the
maturities of the investment securities is set forth in Note E of notes to
Consolidated Financials in the 1998 Annual Report.
Sources of Funds
General. Deposits are the primary source of the Company's
funds for lending and other investment purposes. In addition to deposits,
the Company derives funds from principal and interest payments on loans
and mortgage-backed securities. Loan repayments are a relatively stable
source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions
in the availability of funds from other sources. They may also be used on
a longer-term basis for general business purposes.
Deposits. The Association's deposits are attracted
principally from within the Association's primary market area through the
offering of a broad selection of deposit instruments, including NOW
accounts, money market deposit accounts, regular savings accounts, and
term certificate accounts. Included among these deposit products are
individual retirement account certificates of approximately $2.1 million
or 10.7% of total deposits at December 31, 1998. Deposit account terms
vary, with the principal differences being the minimum balance required,
the time periods the funds must remain on deposit and the interest rate.
The large variety of deposit accounts offered by the
Association has increased the Association's ability to retain deposits and
allowed it to be more competitive in obtaining new funds, but has not
eliminated the threat of disintermediation (the flow of funds away from
savings institutions into direct investment vehicles such as government
and corporate securities). In addition, the Association is subject to
short-term fluctuations in deposit flows. The Association's ability to
attract and maintain deposits is affected by the rate consciousness of its
customers and their willingness to move funds into higher-yielding
accounts. The Association's cost of funds has been, and will continue to
be, affected by money market conditions.
22
<PAGE>
The following table shows the distribution of, and certain
other information relating to, the Association's deposits by type of
deposit, as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------
1998 1997 1996
----------------------- -------------------------- -----------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
-------- ------ -------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts
2.00% - 3.99% $ - 0.00% $ - 0.00% $ 81 0.40%
4.00% - 5.99% 12,491 62.77% 12,424 62.04% 11,564 57.03%
6.00% - 7.99% 1,735 8.72% 2,213 11.05% 3,547 17.49%
-------- ------ -------- ------ -------- ------
Total certificate accounts 14,226 71.49% 14,637 73.09% 15,192 74.92%
-------- ------ -------- ------ -------- ------
Transaction accounts
Passbook accounts 3,323 16.70% 3,095 15.45% 2,813 13.87%
Money market accounts 153 0.77% 293 1.46% 338 1.67%
NOW accounts (1) 2,159 10.85% 1,968 9.83% 1,891 9.33%
-------- ------ -------- ------ -------- ------
Total transaction accounts 5,635 28.32% 5,356 26.75% 5,042 24.86%
-------- ------ -------- ------ -------- ------
Total deposit accounts 19,861 99.81% 19,993 99.84% 20,234 99.78%
Accrued interest payable 38 0.19% 33 0.16% 44 0.22%
-------- ------ -------- ------ -------- ------
Total deposits $ 19,899 100.00% $ 20,026 100.00% $ 20,278 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
(1) Includes noninterest-bearing checking accounts.
23
<PAGE>
The following table presents the average balance of each
type of deposit and the average rate paid on each type of deposit for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook savings accounts ............. $ 3,434 3.03% $ 2,982 3.03% $ 2,859 3.30%
Demand and NOW accounts (1) ........... 2,312 3.27% 2,027 2.70% 1,911 2.84%
Money market deposit accounts ......... 216 5.68% 309 4.61% 395 5.68%
Certificates of deposit ............... 14,594 4.84% 14,836 5.06% 14,809 4.98%
------- ------- -------
Total interest-bearing deposits (2) $20,556 4.37% $20,154 4.51% $19,974 4.55%
======= ======= =======
</TABLE>
(1) Includes noninterestbearing checking accounts.
(2) Excludes accrued interest payable.
The following table sets forth the savings flows of the
Association during the periods indicated.
<TABLE>
<CAPTION>
Years Ended D
cember 31,
------------------------
1998 1997 1996
-------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C>
Net increase (decrease) before interst credited (1) $ (1,030) $ (1,151) $ (179)
Interest credited 898 910 908
-------- -------- ------
Net increase (decrease) in deposits (2) $ (132) $ (241) $ 729
======== ======== ======
</TABLE>
(1) The information provided is the net of deposits and withdrawals because the
gross amount of deposits and withdrawals is not readily available.
(2) Excludes accrued interest payable on deposits.
24
<PAGE>
The Association attempts to control the flow of deposits by
pricing its accounts to remain generally competitive with other financial
institutions in its market area, but does not necessarily seek to match
the highest rates paid by competing institutions. The Association has
generally not taken a position of price leadership in its markets, except
when there has been an opportunity to market longer-term deposits.
The principal methods used by the Association to attract
deposits include the offering of a wide variety of services and accounts,
competitive interest rates and a convenient office location. The
Association does not advertise for deposits outside of its market area.
The following table presents, by various interest rate
categories, the amount of certificates of deposit at December 31, 1998,
which mature during the periods indicated.
<TABLE>
<CAPTION>
Certificates of Deposit
- - -----------------------
As of December 31, 1998:
- - ------------------------
Maturity Date
One Year Over One to Over Two to Over Three
or Less Two Years Three Years Years Total
------- --------- ----------- ----- -----
(Dollars in Thousands)
<C> <C> <C> <C> <C> <C>
4.00% - 5.99% $ 8,911 $ 2,227 $ 977 $ 427 $ 12,542
6.00% - 7.99% 859 560 43 222 1,684
------- ------- ------- ----- --------
Total $ 9,770 $ 2,787 $ 1,020 $ 649 $ 14,226
======= ======= ======= ===== ========
<CAPTION>
Certificates of Deposit - $100,000 or more
- - ------------------------------------------
(Dollars in
Thousands)
----------
<S> <C>
Maturing in quarter ending:
March 31, 1999 $ 610
June 30, 1999 327
September 30, 1999 607
December 31, 1999 200
After December 31, 1999 673
Total Certificates of
deposit - $100,000 or more -------
$ 2,417
=======
</TABLE>
25
<PAGE>
Borrowings. The Association may obtain advances from the
FHLB of Dallas upon the security of the common stock it owns in that bank
and certain of its residential mortgage loans, investment securities and
mortgage-backed securities, provided certain standards related to credit
worthiness have been met. See "Regulation -The Association - Federal Home
Loan Bank System." Such advances are made pursuant to several credit
programs, each of which has its own interest rate and range of maturities.
Such advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending.
As of December 31, 1998, the Association was permitted to
borrow up to an aggregate of $11.2 million from the FHLB of Dallas. The
Association had $495,000 of FHLB advances outstanding at December 31,
1998. Pursuant to collateral agreements with the FHLB, the December 31,
1998 advances are secured by a blanket floating lien on first mortgage
loans. At December 31, 1997, the advances were collateralized by a pledge
of certain FNMA participation certificates with outstanding principal
balances net of unamortized purchase premiums and discounts of $651,309.
The following table sets forth certain information regarding
borrowings at or for the dates indicated.
<TABLE>
<CAPTION>
At or for the Year Ended
December 31,
------------
1998 1997 1996
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding $ 293 $ 138 $ -
Maximum amount outstanding at any
month-end during the period $ 610 $ 695 $ -
Balance outstanding at end of period $ 495 $ 610 $ -
Average interest rate during the period 5.80% 5.07% -
Weighted average interest rate at end of period 4.61% 5.90% -
</TABLE>
26
<PAGE>
Subsidiary
At December 31, 1998, the Association had no subsidiaries.
Under Louisiana law, a state-chartered association may invest up to 10% of
its assets in service organizations or corporations.
Employees
The Association had seven full-time employees and one
part-time employee at December 31, 1998. None of these employees are
represented by a collective bargaining agent, and the Association believes
that it enjoys good relations with its personnel.
Competition
The Association faces significant competition both in
attracting deposits and in making loans. Its most direct competition for
deposits has come historically from commercial banks, credit unions and
other savings institutions located in its primary market area, including
many large financial institutions which have greater financial and
marketing resources available to them. In addition, the Association faces
additional significant competition for investors' funds from short-term
money market mutual funds and issuers of corporate and government
securities. The Association does not rely upon any individual group or
entity for a material portion of its deposits. The ability of the
Association to attract and retain deposits depends on its ability to
generally provide a rate of return, liquidity and risk comparable to that
offered by competing investment opportunities.
The Association's competition for real estate loans comes
principally from mortgage banking companies, commercial banks, other
savings institutions and credit unions. The Association competes for loan
originations primarily through the interest rates and loan fees it
charges, and the efficiency and quality of services it provides borrowers.
Factors which affect competition include general and local economic
conditions, current interest rate levels and volatility in the mortgage
markets.
27
<PAGE>
REGULATION
The following discussion of certain laws and regulations
which are applicable to the Company and the Association, as well as
descriptions of laws and regulations contained elsewhere herein,
summarizes the aspects of such laws and regulations which are deemed to be
material to the Company and the Association. However, the summary does not
purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
The Company
General. The Company, as a registered savings and loan
holding company within the meaning of the Home Owners' Loan Act, as
amended ("HOLA"), is subject to OTS regulations, examinations, supervision
and reporting requirements. As a subsidiary of a savings and loan holding
company, the Association is subject to certain restrictions in its
dealings with the Company and affiliates thereof.
Activities Restrictions. There are generally no restrictions
on the activities of a savings and loan holding company which holds only
one subsidiary savings institution. However, if the Director of the OTS
determines that there is reasonable cause to believe that the continuation
by a savings and loan holding company of an activity constitutes a serious
risk to the financial safety, soundness or stability of its subsidiary
savings institution, the Director may impose such restrictions as deemed
necessary to address such risk, including limiting (i) payment of
dividends by the savings institution; (ii) transactions between the
savings institution and its affiliates; and (iii) any activities of the
savings institution that might create a serious risk that the liabilities
of the holding company and its affiliates may be imposed on the savings
institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the QTL
test, as discussed under "-The Association Qualified Thrift Lender Test,"
then such unitary holding company also shall become subject to the
activities restrictions applicable to multiple savings and loan holding
companies and, unless the savings institution requalifies as a QTL within
one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company. See "-The Association
- Qualified Thrift Lender Test."
If the Company were to acquire control of another savings
institution, other than through merger or other business combination with
the Association, the Company would thereupon become a multiple savings and
loan holding company. Except where such acquisition is pursuant to the
authority to approve emergency thrift acquisitions and where each
subsidiary savings institution meets the QTL test, as set forth below, the
activities of the Company and any of its subsidiaries (other than the
Association or other subsidiary savings institutions) would thereafter be
subject to further restrictions. Among other things, no multiple savings
and loan holding company or subsidiary thereof which is not a savings
institution shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof
any business activity, except upon prior notice to and no objection by the
OTS, other than: (i) furnishing or performing management services for a
subsidiary savings institution; (ii) conducting an insurance agency or
escrow business; (iii) holding, managing, or liquidating assets owned by
or acquired from a subsidiary
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savings institution; (iv) holding or managing properties used or occupied
by a subsidiary savings institution; (v) acting as trustee under deeds of
trust; (vi) those activities authorized by regulation as of March 5, 1987
to be engaged in by multiple savings and loan holding companies; or (vii)
unless the Director of the OTS by regulation prohibits or limits such
activities for savings and loan holding companies, those activities
authorized by the FRB as permissible for bank holding companies. Those
activities described in (vii) above also must be approved by the Director
of the OTS prior to being engaged in by a multiple savings and loan
holding company.
Limitations on Transactions with Affiliates. Transactions
between savings institutions and any affiliate are governed by Sections
23A and 23B of the Federal Reserve Act and OTS regulations. Affiliates of
a savings institution include any company or entity which controls, is
controlled by or is under common control with the savings institution. In
a holding company context, the parent holding company of a savings
institution (such as the Company) and any companies which are controlled
by such parent holding company are affiliates of the savings institution.
Generally, such provisions (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with
any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions
with all affiliates to an amount equal to 20% of such capital stock and
surplus and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of
a guarantee and other similar transactions. In addition to the
restrictions imposed by such provisions, no savings institution may (i)
loan or otherwise extend credit to an affiliate, unless the affiliate is
engaged only in activities permissible for bank holding companies, or (ii)
purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries
of the saving institution.
In addition, Sections 22(h) and (g) of the Federal Reserve
Act place restrictions on loans to executive officers, directors and
principal stockholders. Under Section 22(h), loans to a director, an
executive officer and to a greater than 10% stockholder of a savings
institution, and certain affiliated interests of either, may not exceed,
together with all other outstanding loans to such person and affiliated
interests, the savings institution's loans to one borrower limit
(generally equal to 15% of the institution's unimpaired capital and
surplus). Section 22(h) also requires that loans to directors, executive
officers and principal stockholders be made on terms substantially the
same as offered in comparable transactions to other persons and also
requires prior board approval for certain loans. In addition, the
aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to
executive officers. At December 31, 1998, the Association was in
compliance with the above restrictions.
Restrictions on Acquisitions. Except under limited
circumstances, savings and loan holding companies are prohibited from
acquiring, without prior approval of the Director of the OTS, (i) control
of any other savings institution or savings and loan
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<PAGE>
holding company or substantially all the assets thereof or (ii) more than
5% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than
25% of such company's stock, may acquire control of any savings
institution, other than a subsidiary savings institution, or of any other
savings and loan holding company.
The Director of the OTS may only approve acquisitions
resulting in the formation of a multiple savings and loan holding company
which controls savings institutions in more than one state if (i) the
multiple savings and loan holding company involved controls a savings
institution which operated a home or branch office located in the state of
the institution to be acquired as of March 5, 1987; (ii) the acquirer is
authorized to acquire control of the savings institution pursuant to the
emergency acquisition provisions of the Federal Deposit Insurance Act
("FDIA"); or (iii) the statutes of the state in which the institution to
be acquired is located specifically permit institutions to be acquired by
the state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).
Under the Bank Holding Company Act of 1956, the FRB is
authorized to approve an application by a bank holding company to acquire
control of a savings institution. In addition, a bank holding company that
controls a savings institution may merge or consolidate the assets and
liabilities of the savings institution with, or transfer assets and
liabilities to, any subsidiary bank which is a member of the Bank
Insurance Fund ("BIF") with the approval of the appropriate federal
banking agency and the FRB. As a result of these provisions, there have
been a number of acquisitions of savings institutions by bank holding
companies in recent years.
The Association
General. The OFI is the Association's chartering authority,
and the OTS is the Association's primary federal regulator. The OTS and
the OFI have extensive authority over the operations of
Louisiana-chartered savings institutions. As part of this authority,
savings institutions are required to file periodic reports with the OTS
and the OFI and are subject to periodic examinations by the OTS, the OFI
and the FDIC. The investment and lending authority of savings institutions
are prescribed by federal laws and regulations, and such institutions are
prohibited from engaging in any activities not permitted by such laws and
regulations. Such regulation and supervision is primarily intended for the
protection of depositors.
The OTS' enforcement authority over all savings institutions
and their holding companies includes, among other things, the ability to
assess civil money penalties, to issue cease and desist or removal orders
and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe and
unsound practices. Other actions or inactions may provide the basis for
enforcement actions, including misleading or untimely reports filed with
the OTS.
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Insurance of Accounts. The deposits of the Association are
insured to the maximum extent permitted by the SAIF, which is administered
by the FDIC, and are backed by the full faith and credit of the U.S.
Government. As insurer, the FDIC is authorized to conduct examinations of,
and to require reporting by, FDIC-insured institutions. It also may
prohibit any FDIC-insured institution from engaging in any activity the
FDIC determines by regulation or order to pose a serious threat to the
FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take
such action.
Under current FDIC regulations, institutions are assigned to
one of three capital groups which are based solely on the level of an
institution's capital--"well capitalized", "adequately capitalized", and
"undercapitalized"--which are defined in the same manner as the
regulations establishing the prompt corrective action system discussed
below. These three groups are then divided into three subgroups which
reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications, with rates ranging prior to September 30,
1996 from .23% for well capitalized, healthy institutions to .31% for
undercapitalized institutions with substantial supervisory concerns. The
insurance premiums for the Association for 1995 and the first nine months
of 1996 were .23% (per annum) of insured deposits.
The deposits of the Association are currently insured by the
SAIF. Both the SAIF and the BlF, the federal deposit insurance fund that
covers commercial bank deposits, are required by law to attain and
thereafter maintain a reserve ratio of 1.25% of insured deposits. The BIF
achieved a fully funded status first and, therefore, as discussed below,
effective January 1, 1996 the FDIC substantially reduced the average
deposit insurance premium paid by commercial banks.
On November 14, 1995, the FDIC approved a final rule
regarding deposit insurance premiums. The final rule reduced deposit
insurance premiums for BlF member institutions to zero basis points
(subject to a $2,000 minimum) for institutions in the lowest risk
category, while holding deposit insurance premiums for SAIF members at
their then current levels (23 basis points for institutions in the lowest
risk category). The reduction was effective with respect to the semiannual
premium assessment beginning January 1, 1996.
On September 30, 1996, President Clinton signed into law
legislation which eliminated the premium differential between SAIF-insured
institutions and BIF-insured institutions by recapitalizing the SAIF's
reserves to the required ratio. The legislation required all SAIF member
institutions to pay a one-time special assessment to recapitalize the
SAIF, with the aggregate amount to be sufficient to bring the reserve
ratio in the SAIF to 1.25% of insured deposits. The legislation also
provides for the merger of the BIF and the SAIF, with such merger being
conditioned upon the prior elimination of the thrift charter.
Implementing FDIC regulations imposed a one-time special
assessment equal to 65.7 basis points for all SAIF-assessable deposits as
of March 31, 1995, which was accrued as an expense on September 30, 1996.
The one-time special assessment
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for the Association amounted to $123,000. Net of related tax benefits, the
one-time special assessment amounted to $75,000. The payment of such
special assessment had the effect of immediately reducing the
Association's capital by such amount. However, management does not believe
that this one-time special assessment had a material adverse effect on the
Association's financial condition.
In the fourth quarter of 1996, the FDIC lowered the
assessment rates for SAIF members to reduce the disparity in the
assessment rates paid by BIF and SAIF members. Beginning October 1, 1996,
effective SAIF rates generally range from zero basis points to 27 basis
points, except that during the fourth quarter of 1996, the rates for SAIF
members ranged from 18 basis points to 27 basis points in order to include
assessments paid to the Financing Corporations ("FICO"). From 1997 through
1999, SAIF members will pay 6.4 basis points to fund the FICO, while BIF
member institutions will pay approximately 1.3 basis points. The
Association's insurance premiums, which had amounted to 23 basis points,
were thus reduced to 6.4 basis points effective January 1, 1997. The
Association paid approximately $12,000 in insurance premiums in 1998.
The FDIC may terminate the deposit insurance of any insured
depository institution, including the Association, if it determines after
a hearing that the institution has engaged or is engaging in unsafe or
unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, order or any
condition imposed by an agreement with the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the institution at
the time of the termination, less subsequent withdrawals, shall continue
to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would
result in termination of the Association's deposit insurance.
Regulatory Capital Requirements. Federally insured savings
institutions are required to maintain minimum levels of regulatory
capital. The OTS has established capital standards applicable to all
savings institutions. These standards generally must be as stringent as
the comparable capital requirements imposed on national banks. The OTS
also is authorized to impose capital requirements in excess of these
standards on individual institutions on a case-by-case basis.
Current OTS capital standards require savings institutions
to satisfy three different capital requirements. Under these standards,
savings institutions must maintain "tangible" capital equal to at least
1.5% of adjusted total assets, "core" capital equal to at least 3.0% of
adjusted total assets and "total" capital (a combination of core and
"supplementary" capital) equal to at least 8.0% of "risk-weighted" assets.
For purposes of the regulation, core capital generally consists of common
stockholders' equity (including retained earnings). Tangible capital is
given the same definition as core capital but is reduced by the amount of
all the savings institution's intangible assets, with only a limited
exception for purchased mortgage servicing rights. At December 31, 1998,
the Association had no intangible assets which are deducted in computing
its tangible capital. Both core and tangible capital are further reduced
by an amount equal to a savings institution's debt and equity investments
in subsidiaries
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engaged in activities not permissible to national banks (other than
subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or
their holding companies). At December 31, 1998, the Association had no
subsidiaries.
In determining compliance with the risk-based capital
requirement, a savings institution is allowed to include both core capital
and supplementary capital in its total capital, provided that the amount
of supplementary capital included does not exceed the savings
institution's core capital. Supplementary capital generally consists of
general allowances for loan losses up to a maximum of 1.25% of
risk-weighted assets, together with certain other items. In determining
the required amount of risk-based capital, total assets, including certain
off-balance sheet items, are multiplied by a risk weight based on the
risks inherent in the type of assets. The risk weights assigned by the OTS
for principal categories of assets are (i) 0% for cash and securities
issued by the U.S. Government or unconditionally backed by the full faith
and credit of the U.S. Government; (ii) 20% for securities (other than
equity securities) issued by U.S. Government-sponsored agencies and
mortgage-backed securities issued by, or fully guaranteed as to principal
and interest by, the FNMA or the FHLMC, except for those classes with
residual characteristics or stripped mortgage-related securities; (iii)
50% for prudently underwritten permanent single-family first lien mortgage
loans not more than 90 days delinquent and having a loan-to-value ratio of
not more than 80% at origination unless insured to such ratio by an
insurer approved by the FNMA or the FHLMC, qualifying residential bridge
loans made directly for the construction of single-family residences, and
qualifying multi-family residential loans; and (iv) 100% for all other
loans and investments, including consumer loans, commercial loans, and
single-family residential real estate loans more than 90 days delinquent,
and for repossessed assets.
In August 1993, the OTS adopted a final rule incorporating
an interest-rate risk component into the risk-based capital regulation.
Under the rule, an institution with a greater than "normal" level of
interest rate risk will be subject to a deduction of its interest rate
risk component from total capital for purposes of calculating its
risk-based capital. As a result, such an institution will be required to
maintain additional capital in order to comply with the risk-based capital
requirement. An institution with a greater than "normal" interest rate
risk is defined as an institution that would suffer a loss of net
portfolio value exceeding 2.0% of the estimated economic value of its
assets in the event of a 200 basis point increase or decrease (with
certain minor exceptions) in interest rates. The interest rate risk
component will be calculated, on a quarterly basis, as one-half of the
difference between an institution's measured interest rate risk and 2.0%,
multiplied by the economic value of its assets. The rule also authorizes
the Director of the OTS, or his designee, to waive or defer an
institution's interest rate risk component on a case-by-case basis. The
final rule was originally effective as of January 1, 1994, subject however
to a two quarter "lag" time between the reporting date of the data used to
calculate an institution's interest rate risk and the effective date of
each quarter's interest rate risk component. However, in October 1994 the
Director of the OTS indicated that it would waive the capital deductions
for institutions with a greater than "normal" risk until the OTS published
an appeals process. On August 21, 1995, the OTS released Thrift Bulletin
67 which established (i) an appeals process to handle "requests for
adjustments" to the interest rate risk component and (ii) a process
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<PAGE>
by which "well-capitalized" institutions may obtain authorization to use
their own interest rate risk model to determine their interest rate risk
component. The Director of the OTS indicated, concurrent with the release
of Thrift Bulletin 67, that the OTS will continue to delay the
implementation of the capital deduction for interest rate risk pending the
testing of the appeals process set forth in Thrift Bulletin 67.
Effective November 28, 1994, the OTS revised its interim
policy issued in August 1993 under which savings institutions computed
their regulatory capital in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under the revised OTS
policy, savings institutions must value securities available for sale at
amortized cost for regulatory capital purposes. This means that in
computing regulatory capital, savings institutions should add back any
unrealized losses and deduct any unrealized gains, net of income taxes, on
debt securities reported as a separate component of GAAP capital. This
change in policy decreased the Association's regulatory capital at
December 31, 1998 by approximately $293.
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At December 31, 1998, the Association exceeded all of its
regulatory capital requirements, with tangible, core and risk-based
capital ratios of 16.5%, 16.5% and 65.3%, respectively. The following
table sets forth the Association's compliance with each of the
above-described capital requirements as of December 31, 1998.
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital (1)
------- ------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Capital under GAAP $ 3,383 $ 3,383 $ 3,383
Additional capital items:
Unrealized loss on securities available for sale,
net of taxes - - -
General valuation allowances (2) - - 158
------- ------- -----------
Regulatory Capital 3,383 3,383 3,541
Minimum required regulatory capital 359 955 998
------- ------- -----------
Excess regulatory capital $ 3,024 $ 2,428 $ 2,543
======= ======= =======
Regulatory capital as a percentage of assets (3) 14.17% 14.17% 28.38%
Minimum capital required as a percentage of
assets 1.50% 4.00% 8.00%
Regulatory capital as a percentage in
excess of requirements 12.67% 10.17% 20.38%
======= ======= =======
</TABLE>
(1) Does not reflect the interest-rate risk component in the minimum risk-based
capital requirement, the effective date of which has been postponed as
discussed above.
(2) General valuation allowances are used only in the calculation of risk-based
capital. Such allowances are limited to 1.25% of risk weighted assets.
(3) Tangible and core capital are computed as a percentage of adjusted total
assets of $23.9 million. Risk-based capital is computed as a percentage of
adjusted risk-weighted assets of $12.5 million.
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<PAGE>
Any savings institution that fails any of the capital
requirements is subject to possible enforcement actions by the OTS or the
FDIC. Such actions could include a capital directive, a cease and desist
order, civil money penalties, the establishment of restrictions on the
institution's operations, termination of federal deposit insurance and the
appointment of a conservator or receiver. The OTS' capital regulation
provides that such actions, through enforcement proceedings or otherwise,
could require one or more of a variety of corrective actions.
Prompt Corrective Action. Under the prompt corrective action
regulations of the OTS, an institution is deemed to be (i) "well
capitalized" if it has total risk-based capital of 10.0% or more, has a
Tier 1 risk-based capital ratio of 6.0% or more, has a Tier 1 leverage
capital ratio of 5.0% or more and is not subject to any order or final
capital directive to meet and maintain a specific capital level for any
capital measure, (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital
ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more
(3.0% under certain circumstances) and does not meet the definition of
"well capitalized," (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio
that is less than 4.0% or a Tier 1 leverage capital ratio that is less
than 4.0% (3.0% under certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less
than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a
Tier 1 leverage capital ratio that is less than 3.0%, and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets
that is equal to or less than 2.0%. Under specified circumstances, a
federal banking agency may reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized
institution or an undercapitalized institution to comply with supervisory
actions as if it were in the next lower category (except that the FDIC may
not reclassify a significantly undercapitalized institution as critically
undercapitalized).
An institution generally must file a written capital
restoration plan which meets specified requirements with its appropriate
federal banking agency within 45 days of the date that the institution
receives notice or is deemed to have notice that it is undercapitalized,
significantly undercapitalized or critically undercapitalized. A federal
banking agency must provide the institution with written notice of
approval or disapproval within 60 days after receiving a capital
restoration plan, subject to extensions by the agency. An institution
which is required to submit a capital restoration plan must concurrently
submit a performance guaranty by each company that controls the
institution. In addition, undercapitalized institutions are subject to
various regulatory restrictions, and the appropriate federal banking
agency also may take any number of discretionary supervisory actions.
At December 31, 1998, the Association was deemed a well
capitalized institution for purposes of the above regulations and as such
is not subject to the above mentioned restrictions.
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Safety and Soundness. The OTS and other federal banking
agencies have established guidelines for safety and soundness, addressing
operational and managerial standards, as well as compensation matters for
insured financial institutions. Institutions failing to meet these
standards are required to submit compliance plans to their appropriate
federal regulators. The OTS and the other agencies have also established
guidelines regarding asset quality and earnings standards for insured
institutions. The Association believes that it is in compliance with these
guidelines and standards.
Liquidity Requirements. All savings institutions are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less.
The liquidity requirement may vary from time to time (between 4% and 10%)
depending upon economic conditions and savings flows of all savings
institutions. At the present time, the required minimum liquid asset ratio
is 4%. At December 31, 1998, the Association's liquidity ratio was 17.46%.
Capital Distributions. OTS regulations govern capital
distributions by savings institutions, which include cash dividends, stock
redemptions or repurchases, and other transactions charged to the capital
account of a savings institution to make capital distributions. Generally,
through March 31 1999 a savings institution that before and after the
proposed distribution meets or exceeds its fully phased-in capital
requirements (Tier 1 institutions) may make capital distributions during
any calendar year equal to the higher of (i) 100% of net income for the
calendar year-to-date plus 50% of its "surplus capital ratio" at the
beginning of the calendar year or (ii) 75% of net income over the most
recent four-quarter period. The "surplus capital ratio" is defined to mean
the percentage by which the institution's tangible, core or risk-based
capital ratio exceeds its tangible, core or risk-based capital
requirement. At December 31, 1998, the Association was a Tier 1
institution for purposes of this regulation.
New capital distribution regulations take effect April
1,1999. Under the new regulations, a savings institution must file an
application for OTS approval of the capital distribution if either (1) the
total capital distributions for the applicable calendar year exceed the
sum of the institution's net income for that year to date plus the
institution's retained net income for the preceding two years, (2) the
institution would not be at least adequately capitalized following the
distribution, (3) the distribution would violate any applicable statute,
regulation, agreement or OTS-imposed condition, or (4) the institution is
not eligible for expedited treatment of its filing. If an application is
not required to be filed, savings institutions which are a subsidiary of a
holding company (as well as certain other institutions) must still file a
notice with the OTS at least 30 days before the board of directors
declares a dividend or approves a capital distribution.
Loans to One Borrower. The permissible amount of
loans-to-one borrower now generally follows the national bank standard for
all loans made by savings institutions. The national bank standard
generally does not permit loans-to-one borrower to exceed the greater of
$500,000 or 15% of unimpaired capital and surplus. Loans in an amount
equal to an additional l0% of unimpaired capital and surplus also
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<PAGE>
may be made to a borrower if the loans are fully secured by readily
marketable securities. For information about the largest borrowers from
the Association, see "Description of Business - Lending Activities - Real
Estate Lending Standards and Underwriting Policies."
Classified Assets. Federal regulations require that each
insured savings institution classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, federal
examiners have authority to identify problem assets and, if appropriate,
classify them. There are three classifications for problem assets:
"substandard," "doubtful" and "loss." Substandard assets have one or more
defined weaknesses and are characterized by the distinct possibility that
the insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets, with
the additional characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions
and values questionable, and there is a high possibility of loss. An asset
classified loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Another
category designated "special mention" also must be established and
maintained for assets which do not currently expose an insured institution
to a sufficient degree of risk to warrant classification as substandard,
doubtful or loss. Assets classified as substandard or doubtful require the
institution to establish general allowances for loan losses. If an asset
or portion thereof is classified loss, the insured institution must either
establish specific allowances for loan losses in the amount of 100% of the
portion of the asset classified loss, or charge-off such amount. General
loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital up to certain amounts, while specific
valuation allowances for loan losses do not qualify as regulatory capital.
Federal examiners may disagree with an insured institution's
classifications and amounts reserved. See "Description of Business - Asset
Quality - Classified Assets."
Community Reinvestment Act and the Fair Lending Laws.
Savings institutions have a responsibility under the Community
Reinvestment Act of 1977 ("CRA") and related regulations of the OTS to
help meet the credit needs of their communities, including low- and
moderate-income neighborhoods. In addition, the Equal Credit Opportunity
Act and the Fair Housing Act (together, the "Fair Lending Laws") prohibit
lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to
comply with the provisions of CRA could, at a minimum, result in
regulatory restrictions on its activities, and failure to comply with the
Fair Lending Laws could result in enforcement actions by the OTS, as well
as other federal regulatory agencies and the Department of Justice.
Qualified Thrift Lender Test. All savings institutions are
required to meet a QTL test in order to avoid certain restrictions on
their operations. Under Section 2303 of the Economic Growth and Regulatory
Paperwork Reduction Act of 1996, a savings institution can comply with the
QTL test by either qualifying as a domestic building and loan association
as defined in Section 7701(a) (19) of the Internal Revenue Code of 1986,
as amended ("Code") or meeting the second prong of the QTL test set forth
in Section 10(m) of the HOLA. A savings institution that does not meet the
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QTL test must either convert to a bank charter or comply with the
following restrictions on its operations: (i) the institution may not
engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a
national bank; (ii) the branching powers of the institution shall be
restricted to those of a national bank; (iii) the institution shall not be
eligible to obtain any advances from its FHLB; and (iv) payment of
dividends by the institution shall be subject to the rules regarding
payment of dividends by a national bank. Upon the expiration of three
years from the date the savings institution ceases to meet the QTL test,
it must cease any activity and not retain any investment not permissible
for a national bank and immediately repay any outstanding FHLB advances
(subject to safety and soundness considerations).
Currently, the prong of the QTL test that is not based on
the Code requires that 65% of an institution's "portfolio assets" (as
defined) consist of certain housing and consumer-related assets on a
monthly average basis in nine out of very 12 months. Assets that qualify
without limit for inclusion as part of the 65% requirement are loans made
to purchase, refinance, construct, improve or repair domestic residential
housing and manufactured housing; home equity loans; mortgage-backed
securities (where the mortgages are secured by domestic residential
housing or manufactured housing); stock issued by the FHLB of Dallas; and
direct or indirect obligations of the FDIC. In addition, the following
assets, among others, may be included in meeting the test subject to an
overall limit of 20% of the savings institution's portfolio assets: 50% of
residential mortgage loans originated and sold within 90 days of
origination; 100% of consumer and educational loans (limited to 10% of
total portfolio assets); and stock issued by the FHLMC or the FNMA.
Portfolio assets consist of total assets minus the sum of (i) goodwill and
other intangible assets, (ii) property used by the savings institution to
conduct its business, and (iii) liquid assets up to 20% of the
institution's total assets. At December 31, 1998, the qualified thrift
investments of the Association were approximately 101.23% of its portfolio
assets.
Federal Home Loan Bank System. The Association is a member
of the FHLB of Dallas, which is one of 12 regional FHLBs that administers
the home financing credit function of savings institutions. Each FHLB
serves as a reserve or central bank for its members within its assigned
region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members
(i.e., advances) in accordance with policies and procedures established by
the Board of Directors of the FHLB.
As a member, the Association is required to purchase and
maintain stock in the FHLB of Dallas in an amount equal to at least 1% of
its aggregate unpaid residential mortgage loans, home purchase contracts
or similar obligations at the beginning of each year. At December 31,
1998, the Association had $170,800 in FHLB stock, which was in compliance
with this requirement.
The FHLBs are required to provide funds for the resolution
of troubled savings institutions and to contribute to affordable housing
programs through direct loans or interest subsidies on advances targeted
for community investment and low-and moderate-income housing projects.
These contributions have adversely affected the level of FHLB dividends
paid in the past and could continue to do so in the future.
39
<PAGE>
These contributions also could have an adverse effect on the value of FHLB
stock in the future.
Federal Reserve System. The FRB requires all depository
institutions to maintain reserves against their transaction accounts
(primarily NOW and Super NOW checking accounts) and non-personal time
deposits. As of December 31, 1998, no reserves were required to be
maintained on the first $4.7 million of transaction accounts, reserves of
3% were required to be maintained against the next $47.8 million of net
transaction accounts (with such dollar amounts subject to adjustment by
the FRB), and a reserve of 10% (which is subject to adjustment by the FRB
to a level between 8% and 14%) is required against all remaining net
transaction accounts. Because required reserves must be maintained in the
form of vault cash or a noninterest-bearing account at a Federal Reserve
Bank, the effect of this reserve requirement is to reduce an institution's
earning assets.
Thrift Charter. Congress has been considering legislation in
various forms that would require savings institutions, such as the
Association, to convert their charters to national or state bank charters.
Recent legislation required the Treasury Department to prepare for
Congress a comprehensive study on development of a common charter for
savings institutions and commercial banks; and, in the event that the
thrift charter was eliminated by January 1, 1999, would require the merger
of the BIF and the SAIF into a single Deposit Insurance Fund on that date.
The Association cannot determine whether, or in what form, such
legislation may eventually be enacted and there can be no assurance that
any legislation that is enacted would not adversely affect the Association
and its parent holding company.
Louisiana Regulation. As a Louisiana-chartered savings
association, the Association also is subject to regulation and supervision
by the OFI. The Association is required to file periodic reports with and
is subject to periodic examinations at least once every two years by the
OFI. The lending and investment authority of the Association is prescribed
by Louisiana laws and regulations, as well as applicable federal laws and
regulations, and the Association is prohibited from engaging in any
activities not permitted by such law and regulations.
The Association is required by Louisiana law and regulations
to comply with certain reserve and capital requirements. At December 31,
1998, the Association was in compliance with all applicable reserve and
capital requirements.
Louisiana law and regulations also restrict the lending and
investment authority of Louisiana-chartered savings institutions. Such
laws and regulations restrict the amount a Louisiana-chartered savings
association can lend to any one borrower to an amount which, in the
aggregate, does not exceed the lesser of (i) 10% of the association's
savings deposits or (ii) the sum of the association's paid-in capital,
surplus, reserves for losses, and undivided profits. Federal law imposes
more restrictive limitations. See "Business-Lending Activities."
Notwithstanding the foregoing, Louisiana and federal law permits any such
association to lend to any one borrower an aggregate amount of at least
$500,000.
40
<PAGE>
In addition, Louisiana law restricts the ability of
Louisiana-chartered savings associations to invest in, among other things,
(i) commercial real estate loans (including commercial construction real
estate loans) up to 40% of total assets; (ii) real estate investments for
other than the association's offices up to 10% of total assets; (iii)
consumer loans, commercial paper and corporate debt securities up to 30%
of total assets; (iv) commercial, corporate, business or agricultural
loans up to 10% of total assets; and (v) capital stock, obligations and
other securities of service organizations up to 10% of total assets.
Louisiana law also sets forth maximum loan-to-value ratios with respect to
various types of loans. Applicable federal regulations impose more
restrictive limitations in certain instances. See "Business-Lending
Activities-Real Estate Lending Standards and Underwriting Policies."
The investment authority of Louisiana-chartered savings
associations is broader in many respects than that of federally-chartered
savings and loan associations. However, state-chartered savings
associations, such as the Association, are generally prohibited from
acquiring or retaining any equity investment, other than certain
investments in service corporations, of a type or in an amount that is not
permitted for a federally-chartered savings association. This prohibition
applies to equity investments in real estate, investments in equity
securities and any other investment or transaction that is in substance an
equity investment, even if the transaction is nominally a loan or other
permissible transaction. At December 31, 1998, the Association was in
compliance with such provisions.
Furthermore, a state-chartered savings association may not
engage as principal in any activity not permitted for federal associations
unless the FDIC has determined that such activity would pose no
significant risk to the affected deposit insurance fund and the
Association is in compliance with all applicable capital requirements.
When certain activities are permissible for a federal association, the
state association may engage in the activity in a higher amount if the
FDIC has not determined that such activity would pose a significant risk
of loss to the affected deposit insurance fund and the Association meets
the fully phased-in capital requirements. This increased investment
authority does not apply to investments in nonresidential real estate
loans. At December 31, 1998, the Association had no investments which were
affected by the foregoing limitations.
Under Louisiana law, a Louisiana-chartered savings
association may establish or maintain a branch office anywhere in
Louisiana with prior regulatory approval. In addition, an out-of-state
savings association or holding company may acquire a Louisiana-chartered
savings association or holding company if the OFI determines that the laws
of such other state permit a Louisiana-chartered savings association or
holding company to acquire a savings association or holding company in
such other state. Any such acquisition would require the out-of-state
entity to apply to the OFI and receive OFI approval.
41
<PAGE>
TAXATION
Federal Taxation
General. The Company and the Association are subject to the
generally applicable corporate tax provisions of the Code, and the
Association is subject to certain additional provisions of the Code which
apply to thrifts and other types of financial institutions. The following
discussion of federal taxation is intended only to summarize certain
pertinent federal income tax matters material to the taxation of the
Company and the Association and is not a comprehensive discussion of the
tax rules applicable to the Company and the Association.
Year. The Company and the Association file federal income
tax returns on the basis of a calendar year ending on December 31, and it
is expected that separate returns will be filed for 1998 and 1999.
Bad Debt Reserves. In August 1996, legislation was enacted
that repealed the reserve method of accounting (including the percentage
of taxable income method) previously used by many savings institutions to
calculate their bad debt reserve for federal income tax purposes. Savings
institutions with $500 million or less in assets may, however, continue to
use the experience method. As a result, the Association must recapture
that portion of its reserve which exceeds the amount that could have been
taken under the experience method for post-1987 tax years. At December 31,
1998, the Association's post-1987 excess reserves amounted to
approximately $43,000. The legislation also requires savings institutions
to account for bad debts for federal income tax purposes on the same basis
as commercial banks for tax years beginning after December 31, 1995. This
change in accounting method and reversal and excess bad debt reserves is
adequately provided for in the Association's deferred tax liability.
At December 31, 1998, the federal income tax reserves of the
Association included $110,577 for which no federal income tax has been
provided. Because of these federal income tax reserves and the liquidation
account established for the benefit of certain depositors of the
Association in connection with the conversion of the Association to stock
form, the retained earnings of the Association are substantially
restricted.
Distributions. If the Association were to distribute cash or
property to its sole stockholder, and the distribution was treated as
being from its accumulated bad debt reserves, the distribution would cause
the Association to have additional taxable income. A distribution is
deemed to have been made from accumulated bad debt reserves to the extent
that (a) the reserves exceed the amount that would have been accumulated
on the basis of actual loss experience, and (b) the distribution is a
"non-qualified distribution." A distribution with respect to stock is a
non-qualified distribution to the extent that, for federal income tax
purposes, (i) it is in redemption of shares, (ii) it is pursuant to a
liquidation of the institution, or (iii) in the case of a current
distribution, together with all other such distributions during the
taxable year, it exceeds the institution's current and post-1951
accumulated earnings and profits. The amount of additional taxable income
created by a non-qualified distribution is an amount that when reduced by
the tax attributable to it is equal to the amount of the distribution.
42
<PAGE>
Minimum Tax. The Code imposes an alternative minimum tax at
a rate of 20%. The alternative minimum tax generally applies to a base of
regular taxable income plus certain tax preferences ("alternative minimum
taxable income" or ("AMTI") and is payable to the extent such AMTI is in
excess of an exemption amount. The Code provides that an item of tax
preference is the excess of the bad debt deduction allowable for a taxable
year pursuant to the percentage of taxable income method over the amount
allowable under the experience method. Other items of tax preference that
constitute AMTI include (a) depreciation and (b) 75% of the excess (if
any) of (i) adjusted current earnings as defined in the Code, over (ii)
AMTI (determined without regard to this preference and prior to reduction
by net operating losses).
Net Operating Loss Carryovers. A financial institution may
carry back net operating losses ("NOLs") to the preceding three taxable
years and forward to the succeeding 15 taxable years. This provision
applies to losses incurred in taxable years beginning after 1986. At
December 31, 1998, the Association had no NOL carryforwards for federal
income tax purposes.
Capital Gains and Corporate Dividends-Received Deduction.
Corporate net capital gains are taxed at a maximum rate of 35%. The
corporate dividends-received deduction is 80% in the case of dividends
received from corporations with which a corporate recipient does not file
a consolidated tax return, and corporations which own less than 20% of the
stock of a corporation distributing a dividend may deduct only 70% of
dividends received or accrued on their behalf. However, a corporation may
deduct 100% of dividends from a member of the same affiliated group of
corporations.
Other Matters. Federal legislation is introduced from time
to time that would limit the ability of individuals to deduct interest
paid on mortgage loans. Individuals are currently not permitted to deduct
interest on consumer loans. Significant increases in tax rates or further
restrictions on the deductibility of mortgage interest could adversely
affect the Association.
The Association's federal income tax returns for the tax
years ended 1996, 1997 and 1998 are open under the statute of limitations
and are subject to review by the IRS. The Association's tax return for
1994 was audited by the IRS without material adjustment.
State Taxation
The Company is subject to the Louisiana Corporation Income
Tax based on its Louisiana taxable income, as well as franchise taxes. The
Corporation Income Tax applies at graduated rates from 4% upon the first
$25,000 of Louisiana taxable income to 8% on all Louisiana taxable income
in excess of $200,000. For these purposes, "Louisiana taxable income"
means net income which is earned within or derived from sources within the
State of Louisiana, after adjustments permitted under Louisiana law,
including a federal income tax deduction and an allowance for net
operating losses, if any. In addition, beginning in 1999, the Association
is subject to the Louisiana Shares Tax, which is imposed on the assessed
value of its stock. The formula for deriving the assessed value is to
calculate 15% of the sum of (a) 20% of the company's capitalized
43
<PAGE>
earnings, plus (b) 80% of the company's taxable stockholders' equity, and
to subtract from that figure 50% of the company's real and personal
property assessment. Various items may also be subtracted in calculating a
company's capitalized earnings.
Item 2. Description of Property.
At December 31, 1998, the Company and the Association
conducted their business from the Association's main office in Plaquemine,
Louisiana. The following table sets forth the net book value (including
furnishings and equipment) and certain other information with respect to
the offices and other properties of the Company at December 31, 1998.
As of December 31, 1998
-----------------------
Net Book
Leased / Value of
Description / Address Owned Property Deposits
--------------------- ----- -------- --------
(Dollars in thousands)
Home Office:
23910 Railroad Avenue
Plaquemine, Louisiana Owned $ 128 $ 19,899
Branch Office
None - - -
The estimated net book value of electronic data processing and other office
equipment owned by Iberville Building and Loan Association was $26,000 at
December 31, 1998.
Item 3. Legal Proceedings.
The Company and the Association are involved in routine
legal proceedings occurring in the ordinary course of business which, in
the aggregate, are believed by management to be immaterial to the
consolidated financial condition and results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
44
<PAGE>
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters.
The information required herein, to the extent applicable,
is incorporated by reference on pages 3 and 48 of the Company's 1998
Annual Report.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The information required herein is incorporated by reference
from pages 6 to 15 of the 1998 Annual Report.
Item 7. Financial Statements.
The information required herein is incorporated by reference
from pages 16 to 47 of the 1998 Annual Report.
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
Not applicable.
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act.
The information required herein is incorporated by reference
from pages 3 and 7 of the definitive proxy statement of the Company for
the Annual Meeting of Stockholders to be held on April 28, 1999, which was
filed on March 19, 1999 ("Definitive Proxy Statement")
Item 10. Executive Compensation.
The information required herein is incorporated by reference
from pages 7 to 10 the Definitive Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required herein is incorporated by reference
from pages 5 to 6 the Definitive Proxy Statement.
Item 12. Certain Relationships and Related Transactions.
The information required herein is incorporated by reference
from pages 10 to 12 the Definitive Proxy Statement.
45
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K.
(a) Documents Filed as Part of this Report
(1) The following financial statements are incorporated by
reference from Item 7 hereof (see Exhibit 13):
Independent Auditor's Report.
Consolidated Statements of Financial Condition as of
December 31, 1998 and 1997.
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997.
Consolidated Statements of Changes in Stockholders' Equity
for the Years ended December 31, 1998 and 1997.
Consolidated Statements of Cash Flows for the Years Ended
December. Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission ("SEC") are omitted because of the absence of conditions under
which they are required or because the required information is included in
the consolidated financial statements and related notes thereto.
(3) The following exhibits are filed as part of this Form
l0-KSB, this list includes the Exhibit Index.
Exhibit Index
2.1* Plan of Conversion
3.1* Articles of Incorporation of IBL Bancorp, Inc.
3.2* Bylaws of IBL Bancorp, Inc. 4.1* Stock Certificate of
IBL Bancorp, Inc.
10.1* Employment Agreement among IBL Bancorp, Inc.,
Iberville Building and Loan Association and G. Lloyd
Bouchereau, Jr., dated September 30, 1998
10.2* Employment Agreement among IBL Bancorp, Inc.,
Iberville Building and Loan Asociation and Danny M.
Strickland, dated September 30, 1998
13.0 1998 Annual Report to Stockholders
27.0 Financial Data Schedule
(*) Incorporated herein by reference from the Company's
Registration Statement on Form SB-2 (Registration No. 333-57623) filed by
the Company with the SEC on June 24, 1998, as subsequently amended.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
fourth quarter of the year ended December 31, 1998.
46
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IBL BANCORP, INC.
By: /s/G. Lloyd Bouchereau, Jr.
---------------------------
G. Lloyd Bouchereau, Jr.
President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.
Name Title Date
---- ----- ----
/s/ G. Lloyd Bouchereau, Jr. President and Chief March 19, 1999
- - ---------------------------- Executive Officer
G. Lloyd Bouchereau, Jr.
/s/ Bobby E. Stanley Director March 19, 1999
- - ---------------------
Bobby E. Stanley
/s/ John L. Delahaye Director March 19, 1999
- - --------------------
John L. Delahaye
/s/ Gary K. Pruitt Director March 19, 1999
- - ------------------
Gary K. Pruitt
/s/ Edward J. Steinmetz Director March 19, 1999
- - -----------------------
Edward J. Steinmetz
/s/ Danny M. Strickland Director March 19, 1999
- - -----------------------
Danny M. Strickland
1998
Annual Report
IBL Bancorp, Inc.
<PAGE>
IBL Bancorp, Inc.
23910 Railroad Ave.
Plaquemine, LA 70764
To Our Stockholders:
With the successful completion of the stock conversion of Iberville
Building and Loan Association, we are delighted to present this first annual
report to the stockholders of its holding company, IBL Bancorp, Inc.
The Company is positioned to begin a new era of service to the
community with the additional capital obtained through the stock offering. Loan
demand has held up well and we hope to continue to expand our loan portfolio. We
plan to take advantage of the opportunities afforded us in this very competitive
marketplace.
We are confident of the Association's sound financial condition and
look forward to the future with optimism and energy. We appreciate your
investment in the Company and invite your continued support of the Association,
which is Iberville and West Baton Rouge Parishes truly home- owned community
Association.
We invite you to review this Annual Report which discusses our
performance during fiscal year 1998.
Sincerely,
/s/G. Lloyd Bouchereau, Jr.
- - ---------------------------
G. Lloyd Bouchereau, Jr.
President & CEO
1
<PAGE>
IBL BANCORP, INC.
IBERVILLE BUILDING & LOAN ASSOCIATION
IBL BANCORP, INC. ("our holding company" or the "Company") was
incorporated under the laws of the State of Louisiana in 1998 to serve as the
holding company for Iberville Building & Loan Association ("us," "we," etc. or
the "Association") following our conversion from mutual to stock form (the
"Conversion"). On September 30, 1998, we consummated the Conversion, and the
Company completed its offering of Common Stock through the sale and issuance of
210,870 shares of common stock at a price of $10.00 per share, realizing gross
proceeds of $2.1 million. The Company purchased all of the capital stock of the
Association in exchange for 50% of the net Conversion proceeds. Prior to
September 30, 1998, the Company had no material assets or liabilities and
engaged in no business activities. Accordingly, the information set forth in
this report including the audited Consolidated Financial Statements and related
data, relates primarily to the Association.
Our holding company's executive offices are located at 23910 Railroad
Avenue, Plaquemine, Louisiana 70764, and its telephone number is (225) 687-6337.
IBERVILLE BUILDING & LOAN ASSOCIATION. We were organized as a state
chartered mutual savings institution in 1915. We currently operate through one
full service banking office located in Plaquemine, Louisiana. At December 31,
1998, we had total assets of $23.9 million, deposits of $19.9 million and equity
of $3.3 million or 14.1% of total assets.
We attract deposits from the general public and invest those funds in
loans secured by first mortgages on owner-occupied single-family residences,
commercial real estate loans and consumer loans. We also maintain an investment
portfolio, primarily of mortgage-backed securities issued by the Federal Home
Loan Mortgage Corporation ("FHLMC") or the Federal National Mortgage Association
("FNMA") and obligations of the federal government and agencies.
We derive our income principally from interest earned on loans,
investment securities and other interest-earning assets. Our principal expenses
are interest expense on deposits and noninterest expenses such as employee
compensation, deposit insurance and miscellaneous other expenses. Funds for our
activities are provided principally by deposit growth, repayments of outstanding
loans and investment securities, other operating revenues and, from time to
time, advances from the Federal Home Loan Bank of Dallas.
As a state chartered savings institution, we are subject to extensive
regulation by the Office of Financial Institutions, State of Louisiana ("OFI")
and by the Office of Thrift Supervision ("OTS"). Our lending activities and
other investments must comply with state and various federal regulatory
requirements, and these regulatory agencies periodically examine us for
compliance with various regulatory requirements. The Federal Deposit Insurance
Corporation ("FDIC") also has the authority to conduct special examinations. We
must also file reports with the OTS describing our activities and financial
condition and are subject to certain monetary reserve requirements promulgated
by the Board of Directors of the Federal Reserve System.
2
<PAGE>
MARKET FOR COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
Market for Common Stock. The Company's common stock was first quoted
and began trading on the Nasdaq Small Cap Market System on October 1, 1998,
under the symbol "IBLB". At that date there were approximately 210,870 shares of
the Company's common stock outstanding, and there were approximately 222 record
holders of the Company's common stock. Due to the relatively small size of the
offering and small number of stockholders there was only limited trading
activity in the fourth quarter of 1998. There were eight known trades in the
fourth quarter of 1998 the lowest of which was at $9.25 and the highest was at
$10.00.
The payment of dividends on the common stock is subject to
determination and declaration by the Board of Directors of our holding company.
The Board of Directors has adopted a policy of paying annual cash dividends at a
rate of $0.15 per share commencing with the Company's first dividend paid in
January 1999. The payment of future dividends will be subject to the
requirements of applicable law and the determination by our holding company's
Board of Directors that our net income, capital and financial condition, thrift
industry trends and general economic conditions justify the payment of
dividends, and we cannot assure you that dividends will continue to be paid in
the future.
3
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND OTHER DATA
At December 31,
---------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Selected Financial Condition Data:
Total assets ................................... $23,878 $22,395
Loans receivable, net .......................... 17,209 16,318
Other cash and amounts due
from depository institutions ............... 1,858 1,110
Investment securities:
Available for sale ......................... 1,454 1,948
Held to maturity .......................... 2,123 2,386
Deposits ....................................... 19,899 20,026
Borrowed money ................................. 495 610
Equity ......................................... 3,383 1,622
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Selected Operating Data:
Interest income .......................... $ 1,736 $ 1,691 $ 1,645
Interest expense ......................... 915 917 908
------- ------- -------
Net interest income before
provision for loan losses ........... 821 774 737
Provision for loan losses ................ 21 42 39
------- ------- -------
Net interest income after
provision for loan losses ........... 800 732 698
Noninterest income ....................... 101 98 131
Noninterest expense ...................... 604 568 703
------- ------- -------
Income before income taxes ............... 297 262 126
Income taxes ............................. 102 98 70
------- ------- -------
Net income ............................... 195 164 56
Other comprehensive income (loss), net ... (3) 4 (3)
------- ------- -------
Comprehensive income ............... $ 192 $ 168 $ 53
------- ------- -------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Selected Ratios
At or for the
Year Ended December 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Performance Ratios:
Return on average assets (net income
divided by average total assets) ................ .84% .74%
Return on average equity (net income
divided by average equity) ...................... 9.04 10.64
Interest rate spread (average yield on assets
minus average rate on liabilities) .............. 3.19 3.24
Net interest margin (net interest income
divided by average interest-earning assets) ..... 3.59 3.55
Ratio of average interest-earning assets
to average interest-bearing liabilities ......... 109.78 107.42
Ratio of noninterest expense to average
total assets .................................... 2.60 2.58
Efficiency Ratio (noninterest expense
divided by total of net interest income
and noninterest income) ......................... 65.51 65.13
Asset Quality Ratios:
Nonperforming assets to total assets at
end of period .................................. 1.01 1.48
Nonperforming loans to total loans at
end of period .................................. 1.31 1.93
Allowance for loan losses to total loans
at end of period ............................... 2.34 2.41
Allowance for loan losses to nonperforming
loans at end of period ......................... 170.25 121.69
Provision for loan losses to total loans ........... .12 .25
Net charge-offs to average loans
outstanding ..................................... .08 .01
</TABLE>
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our principal business consists of attracting deposits from the general
public and investing those funds in loans secured by one- to four-family
residential properties located in our primary market area, which consists of
mainly Iberville and West Baton Rouge Parishes. We also originate consumer
loans, a limited amount of commercial real estate loans and maintain a portfolio
of investment securities. Our investment securities portfolio consists of U.S.
Treasury notes and U.S. government agency securities and mortgage-backed
securities which are guaranteed as to principal and interest by the FHLMC, FNMA
or other governmental agencies. We also maintain an investment in Federal Home
Loan Bank of Dallas common stock.
Our net income primarily depends on our net interest income, which is
the difference between interest income earned on loans and investment securities
and interest paid on customers' deposits and borrowings. Our net income is also
affected by non-interest income, such as service charges on customers' deposit
accounts, loan service charges and other fees, and non-interest expense,
primarily consisting of compensation expense, deposit insurance and other
expenses incidental to our operations.
Our operations and those of the thrift industry as a whole are
significantly affected by prevailing economic conditions, competition and the
monetary and fiscal policies of governmental agencies. Our lending activities
are influenced by demand for and supply of housing and competition among lenders
and the level of interest rates in our market area. Our deposit flows and costs
of funds are influenced by prevailing market rates of interest, primarily on
competing investments, account maturities and the levels of personal income and
savings in our market area.
This Annual Report includes statements that may constitute
forward-looking statements, usually containing the words "believe," "estimate,"
"project," "expect," "intend" or similar expressions. These statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements inherently involve risk and
uncertainties that could cause actual results to differ materially from those
reflected in the forward-looking statements. Factors that could cause future
results to vary from current expectation include, but are not limited to, the
following: changes in economic conditions (both generally and more specifically
in the markets in which we operate); changes in interest rates, deposit flows,
loan demand, real estate values and competition; changes in accounting
principles, policies or guidelines and in government legislation and regulation
(which change from time to time and over which we have no control); and other
risks detailed in this Annual Report and in our other Securities and Exchange
Commission fillings. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect our analysis only as part of the date
hereof. We undertake no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
6
<PAGE>
The Year 2000
We have reviewed the Association's computer and data processing issues
relating to the Year 2000 and have developed a written Year 2000 Policy as well
as written Year 2000 Contingency and Test Plans. The Association's data
processing is handled by an independent third party data center. Successful
testing with this data center was completed in September of 1998 and went well.
Based on our review of our internal bookkeeping practices and the assurances by
our third party data processor and software vendor that they are Year 2000
compliant, we do not expect to incur significant additional bookkeeping, data
processing or other expenses in connection with issues related to the upcoming
millennium (that is, "Year 2000" issues). We have set a budget of $15,000 for
cost associated with the Year 2000, of which $5,000 has been incurred.
Management and the Board of Directors are committed to providing uninterrupted
service to our customers throughout the new millenium.
Asset/Liability Management
Net interest income, the primary component of our net income, is
determined by the difference or "spread" between the yield earned on our
interest-earning assets and the rates paid on our interest-bearing liabilities,
and the relative amounts of such assets and liabilities. Key components of an
asset/liability strategy are the monitoring and managing of interest rate
sensitivity on both the interest-earning assets and interest-bearing
liabilities. The matching of our assets and liabilities may be analyzed by
examining the extent to which our assets and liabilities are interest rate
sensitive and by monitoring the expected effects of interest rate changes on our
net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If our assets
mature or reprice more quickly or to a greater extent than our liabilities, our
net portfolio value and net interest income would tend to increase during period
of rising interest rates but decrease during periods of falling interest rates.
If our assets mature or reprice more slowly or to a lesser extent than our
liabilities, our net portfolio value and net interest income would tend to
decease during periods of rising interest rates but increase during periods of
falling interest rates. Our policy has been to mitigate the interest rate risk
inherent in the traditional savings institution business of originating
long-term loans funded by short-term deposits by pursuing the following
strategies: (1) we have historically maintained liquidity and capital levels to
compensate for unfavorable movements in market interest rates; and (2) in order
to mitigate the adverse effect of interest rate risk on future operations, we
emphasize the origination of adjustable-rate mortgage loans and shorter term
consumer loans and the purchase of adjustable-rate mortgage backed securities.
The OTS requires us to measure our interest rate risk by computing
estimated changes in the net portfolio value ("NPV") of our cash flows from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. These computations estimate the effect
on our NPV of sudden and sustained 1% to 4% increases and decreases in market
interest rates. Our board of directors has adopted an interest rate risk policy
which establishes maximum decreases in our estimated NPV in the event of 1%, 2%,
3% and 4% increases and decreases in market interest rates, respectively.
7
<PAGE>
The following table presents the Association's NPV as of December 31,
1998 as calculated by the OTS, based on information provided to the OTS by the
Association:
<TABLE>
<CAPTION>
Net Portfolio Value NPV as % of PV of Assets
Change in Rates $ Amount $ Change % Change NPV Ratio Change
--------------- -------- -------- -------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
+400 bp 3,649 (102) (3 %) 15.44 % 0 bp
+300 bp 3,752 1 0 % 15.72 % +28 bp
+200 bp 3,797 46 +1 % 15.79 % +34 bp
+100 bp 3,783 32 +1 % 15.65 % +20 bp
0 bp 3,751 -- -- 15.45 % --
-100 bp 3,761 10 0 % 15.39 % (6) bp
-200 bp 3,792 41 +1 % 15.40 % (4) bp
-300 bp 3,870 119 +3 % 15.75 % +13 bp
-400 bp 3,928 177 +5 % 15.67 % +22 bp
</TABLE>
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, in the event of a change in interest rates,
expected rates of prepayments on loans and early withdrawals from certificates
could deviate significantly from those assumed in calculating the table.
Our Board of Directors is responsible for reviewing our asset and
liability policies. On at least a quarterly basis, the Board reviews interest
rate risk and trends, as well as liquidity and capital ratios and requirements.
Our management is responsible for administering the policies and determinations
of the Board of Directors with respect to our asset and liability goals and
strategies.
<PAGE>
Average Balances, Interest and Average Yields
The following table sets forth information about our average
interest-earning assets and interest-bearing liabilities and reflects the
average yield of interest-earning assets and the average cost of
interest-bearing liabilities for the periods and at the date indicated. Average
balances are derived from month-end balances. Investment securities include the
aggregate of securities available for sale and held to maturity. The average
balance and average yield on investment securities is based on the fair value of
securities available for sale and the amortized cost of securities held to
maturity. The average balance of loans receivable includes delinquent loans,
8
<PAGE>
which are not considered significant. The average balance of equity includes the
net unrealized gain on available for sale securities. The following table does
not reflect any effect of income taxes.
9
<PAGE>
<TABLE>
<CAPTION>
IBL Bancorp, Inc.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
Year Ended Year Ended
December 31, 1998 December 31, 1997
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning Assets:
Loans receivable (2) $ 16,611 $ 1,407 8.47% $ 15,735 $ 1,346 8.55%
Mortgage-backed securities 3,788 223 5.89% 4,176 258 6.18%
FHLB stock and other investment securities 224 13 5.80% 367 22 5.99%
Interest-bearing deposits 2,265 93 4.11% 1519 65 4.28%
-------- ------- ---- -------- ------- ----
Total interest-earning assets 22,888 1,736 7.58% 21,797 1,691 7.76%
Non-interest earning assets 340 253
-------- --------
Total assets $ 23,228 $ 22,050
======== ========
INTEREST-BEARING LIABILITIES
Interest-bearing Liabilities:
Deposits (4) $ 20,556 $ 898 4.37% $ 20,154 $ 910 4.52%
FHLB advances 293 17 5.80% 138 7 5.07%
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 20,849 915 4.39% 20,292 917 4.52%
------- -------
Non-interest bearing liabilities 221 216
-------- --------
Total liabilities 21,070 20,508
Equity 2,158 1,542
Total liabilities and equity $ 23,228 $ 22,050
======== ========
Net interest income / average interest rate spread $ 821 3.19% $ 774 3.24%
======= ==== ======= ====
Net interest margin (5) 3.59% 3.55%
==== ====
Interest-earning assets to interest-bearing liabilities 109.78% 107.42%
======== ========
</TABLE>
(continued)
10
<PAGE>
<TABLE>
<CAPTION>
IBL Bancorp, Inc.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
Year Ended
December 31, 1996
Average Average
Balance Interest Rate
------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning Assets:
Loans receivable (2) $ 14,727 $ 1,269 8.62%
Mortgage-backed securities 4,282 259 6.05%
FHLB stock and other investment securities 478 32 6.69%
Interest-bearing deposits 1,815 85 4.68%
-------- ------- ----
Total interest-earning assets 21,302 1,645 7.72%
Non-interest earning assets 316
--------
Total assets $ 21,618
========
INTEREST-BEARING LIABILITIES
Interest-bearing Liabilities:
Deposits (4) $ 19,974 $ 908 4.55%
FHLB advances 0.00%
-------- ------- ----
Total interest-bearing liabilities 19,974 908 4.55%
-------
Non-interest bearing liabilities 180
--------
Total liabilities 20,154
Equity 1,464
Total liabilities and equity $ 21,618
========
Net interest income / average interest rate spread $ 737 3.17%
======= ====
Net interest margin (5) 3.46%
====
Interest-earning assets to interest-bearing liabilities 106.65%
========
</TABLE>
(1) At December 31, 1998, the weighted average yields earned and rates paid
were as follows: loans receivable, 7.98%; mortgage backed securities,
5.76%; investment securities, 5.80%; other interest-bearing deposits,
4.69%; total interest earning assets, 7.33%; deposits, 4.75%; FHLB
advances, 4.61%; total interest bearing liabilities, 4.75%; and, average
interest rate spread, 2.58%.
(2) Includes non-accruing loans.
(3) Includes FHLB stock.
(4) Includes noninterest-bearing checking accounts.
(5) equals net interest income divided by average interest-earning assets.
10
<PAGE>
Comparison of Financial Condition at December 31, 1998 and December 31, 1997
Total assets increased $1.5 million, or 6.6%, from $22.4 million at
December 31, 1997 to $23.9 million at December 31, 1998.
Loans receivable increased slightly from December 31, 1997 to December
31, 1998 as originations exceeded repayments for the period by approximately
$888,000. Our market area has experienced an increase in refinancing activity
during this period. While the proceeds from the conversion initially were
invested in short-term investment securities, over time we expect to use the
proceeds to increase our loans receivable.
Investment securities decreased from December 31, 1997, to December 31,
1998, by $773,000 due to the repayment of principal and the premium amortization
in the amount of $1.3 million. During the year we purchased $559,000 new
mortgage-backed securities.
Total deposits decreased by $100,000 from $20 million at December 31,
1997 to $19.9 million at December 31, 1998. The decrease was primarily due to
existing customers using their savings accounts to purchase stock during the
conversion.
Our equity increased $1,741,000 from $1,642,000 at December 31, 1997 to
$3,383,000 at December 31, 1998. The increase was due to $195,000 of net income
and $1,546,000 net proceeds from the conversion.
Comparison of Results of Operations for the Years Ended December 31, 1998, 1997
and 1996
Net income was $195,000 for the year ended December 31, 1998 compared
to $164,000 for the year ended December 31, 1997 and $77,000 for the year ended
December 31, 1996. The lower net income in 1996 was primarily attributable to
the special assessment paid to the SAIF of $123,000 ($75,000 after taxes). Net
income for 1998 resulted in a return on average assets of .84% compared to .74%
and .04% for 1997 and 1996, respectively.
Interest Income: Interest income totaled $1.7 million, $1.7 million and
$1.6 million for the years ended December 31, 1998, 1997 and 1996, respectively.
The average yield on interest-earning assets in 1996 was 7.7%, increased
slightly in 1997 to 7.8% and decreased slightly to 7.6% in 1998 due to a slight
decrease in market interest rates for investment securities. The increase in
1997 was due to an overall increase in the market interest rates in all
categories of interest-earning assets. The average balance of interest-earning
assets increased $1.1 million in 1998 and $400,000 in 1997.
Our primary source of interest income for the three-year period ended
December 31, 1998 was from loans receivable. Interest income from loans
receivable was $1.4 million, $1.3 million and $1.2 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
11
<PAGE>
The average balances of loans receivable also increased during the period with a
$876,000 increase in 1998, a $1.1 million increase in 1997 and a $678,000
increase in 1996 due to increase loan demand in our market area. Interest income
on investment securities decreased in 1998 by $16,000 due to a slight decrease
in average rates, and decreased in 1997 by $31,000 due to a decrease in the
average balance of $513,000.
Interest Expense: Interest on deposits decreased by $11,350 or 1.25% in
1998 after increasing by $2,000 or .02% in 1997 compared to the respective prior
periods. The decrease in 1998 was due to a decline in the average rate paid to
4.39% from 4.52% and to a $127,000 or .6% decline in the average balance. The
average rate paid also declined in 1997 compared to 1996, but this decline was
offset by a $180,000 or .9% increase in the average balance. The average balance
of lower rate passbooks and NOW accounts has increased during 1998, while the
average balance of money market deposit accounts and certificates of deposits
has generally declined.
Interest on advances from the Federal Home Loan Bank increased by
$9,700 or 138% over 1997 due to the fact the Association utilized advances in
1998 to purchase mortgage-backed securities and certificates of deposits in
other financial institutions. No borrowed money in 1996 was used.
Net Interest Income: Net interest income was $821,000, $774,000 and
$737,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The
increases in net interest income reflect an increase in our interest rate spread
from 3.17% for 1996 to 3.24% for 1997 and to 3.19% for 1998, coupled with a
slight increase in average interest-earning assets over average interest-bearing
liabilities each year. Our net interest margin was 3.59%, 3.55% and 3.46% for
the years ended December 31, 1998, 1997 and 1996.
Provisions for Loan Losses: The net provision for loan losses was
$21,000 in 1998, which increased our allowance for loan losses to $412,000 or
2.3% of the loan portfolio. In 1997, the net provision for loan losses was
$42,000, which increased our allowance for loan losses to $404,000 or 2.4% of
the loan portfolio and in 1996, the provision was $39,000 which increased our
allowance for loan losses to $362,000 or 2.4% of the loan portfolio. With
non-performing assets at December 31, 1998, 1997 and 1996 being $241,000,
$332,000 and $270,000, our analysis of the provision for loan losses led to the
conclusion that the allowance for loan losses was sufficient to meet the modest
charge-off and the current asset quality of the loan portfolio.
Noninterest Income: Noninterest income for the years ended December 31,
1998, 1997 and 1996 was $101,000, $98,000 and $131,000, respectively.
Noninterest income consisted primarily of customer service fees related to
customers' deposit accounts and loan service charges. Noninterest income
decreased from 1996 to 1997 primarily due to the disposition of the investment
in a captive life insurance company in 1996.
Noninterest Expense: Noninterest expense for the years ended December
31, 1998, 1997 and 1996 was $604,000, $568,000 and $703,000, respectively. The
decrease in noninterest expense in 1997 was primarily due to the special SAIF
assessment paid in 1996. Excluding the
12
<PAGE>
effects of such one-time assessment, total noninterest expense would have
decreased by $12,000 or 2.1% in 1997 compared to 1996, primarily due to
decreases in regular deposit insurance premiums and in professional, data
processing and other miscellaneous expenses partially offset by an increase in
compensation and benefits expense. The increase in noninterest expense in 1998
was $36,000 or 6.3% over 1997, primarily due to an increase in compensation and
benefits, data processing, office supplies and postage and other expenses.
Compensation and benefits were higher because of overall wage increases, as well
as the addition of a part-time employee and increased benefit costs. Data
processing increased due to $4,500 costs for a year 2000 test and an increase in
monthly service charges. Office supplies and postage increased by $6,000 due
primarily to an increase in mailing due to the conversion and additional
supplies used during the conversion. Other expenses increased by $6,000 due to
an increase in employee expense by $2,600 due to the employees attending more
seminars, increase in telephone expense by $1,300, increase in loan expense by
$1,100 and an increase in supervisory examination by $1,000.
Our operating efficiency, measured by our efficiency ratios
(noninterest expense divided by the total of net interest income and noninterest
income), was 65.5%, 65.1% and 86.0% for the years ended December 31, 1998, 1997
and 1996, respectively. The higher operating efficiency ratio for 1996 was due
to the inclusion of the special assessment for deposit insurance in noninterest
expense of $123,000. Excluding this special assessment, our adjusted operating
efficiency ratio for 1996 would have been 66.8%. The adjusted ratios of
noninterest expense to average total assets ratio (excluding the SAIF special
assessment) were 2.6%, 2.6% and 2.7% for the years ended December 31, 1998, 1997
and 1996, respectively. We expect our noninterest expenses for compensation and
other operating expenses will increase, particularly when the ESOP expense is
recognized for a full year and if our holding company's management recognition
plan is implemented.
Income Taxes: Our effective tax rate varied for each of the three years
ended December 31, 1998. Our effective tax rate was 34%, 37% and 56% for the
years ended December 31, 1998, 1997 and 1996, respectively. The 1996 effective
tax rate was higher than anticipated primarily due to the effect of changes in
the methods required to be used to calculate bad debt tax deductions. See Note J
of the Notes to Consolidated Financial Statements.
Sources of Capital and Liquidity
We have historically maintained substantial levels of capital. The
assessment of capital adequacy depends on several factors, including asset
quality, earnings trends, liquidity and economic conditions. We seek to maintain
high levels of regulatory capital to give us maximum flexibility in the changing
regulatory environment and to respond to changes in market and economic
conditions. These levels of capital have been achieved through consistent
earnings enhanced by low levels of noninterest expense and have been maintained
at those high levels as a result of our policy of moderate growth generally
confined to our market area. At December 31, 1998, we exceeded all current
regulatory capital requirements and met the definition of a "well-capitalized"
institution. See Note O of the Notes to Consolidated Financial Statements.
The primary business of our holding company is holding the stock of the
Association. The net proceeds of the Conversion retained by our holding company
on September 30, 1998
13
<PAGE>
have provided sufficient funds for its initial operations. Our holding company's
primary sources of liquidity in the future will be dividends paid by the
Association, repayment of the ESOP loan and income from investments in
securities and other financial institutions. We are subject to certain
regulatory limitations with respect to the payment of dividends to our holding
company.
We are required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which may be varied at the discretion of
the OTS depending on economic conditions and deposit outflows, is based upon a
percentage of deposits and, if any, short-term borrowings. At December 31, 1998,
current OTS regulations required that a savings institution maintain liquid
assets of not less than 4% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less, of which short-term
liquid assets must consist of not less than 1%. At December 31, 1998, our
liquidity, as measured for regulatory purposes, was 17.46% or $2.7 million in
excess of the minimum OTS liquidity requirement of 4%. We seek to maintain a
relatively high level of liquidity in order to retain flexibility in terms of
lending and investment opportunities and deposit pricing, and in order to meet
funding needs of deposit outflows and loan commitments. Historically, we have
been able to meet our liquidity demands through internal sources of funding.
Deposits are our primary source of funds for lending and other
investment purposes. In addition to deposits, we derive funds from payment of
principal and interest on loans and investment securities. While scheduled
principal and interest payments on loans and investment securities are a
relatively predictable source of funds, deposit flows and loan and investment
securities prepayments are greatly influenced by general interest rates,
economic conditions, competition and other factors. We do not solicit deposits
outside of our market area through brokers or other financial institutions.
We have also designated certain securities as available for sale in
order to meet liquidity demands. At December 31, 1998, we had designated
securities with a fair value of $1.8 million as available for sale. In addition
to internal sources of funding, we are a member of the Federal Home Loan Bank of
Dallas and have substantial borrowing authority with the Federal Home Loan Bank
of Dallas. Our use of a particular source of funds is based on need, comparative
total costs and availability.
At December 31, 1998, we had outstanding approximately $442,000 in
commitments to originate loans and unused lines of credit. At the same date, the
total amount of certificates of deposit which were scheduled to mature in one
year or less was $9.7 million. We anticipate that we will have resources to meet
our current commitments through internal funding sources described above.
Historically, we have been able to retain a significant amount of our deposits
as they mature.
14
<PAGE>
Impact of Inflation and Changing Prices
The financial statements and related notes appearing elsewhere in this
report have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time due to inflation. Virtually all of
our assets and liabilities are monetary. As a result, changes in interest rates
have a greater impact on our performance than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
Impact of New Accounting Standards
The following are recently issued accounting standards which we have
yet to adopt. For information about recent accounting standards which we have
adopted, see the Notes to Consolidated Financial Statements in this report.
The Statement of Financial Accounting Standards No. 133 (SFAS 133),
Accounting of Derivative Instruments and Hedging Activities, which establishes
additional accounting and reporting standards for derivative instruments
embedded in other contracts and hedging activities. We do not currently have any
financial instruments that meet the standard's definition of a derivative.
Consequently, the provisions of this pronouncement will not materially affect
our consolidated financial position or results of operations.
15
<PAGE>
[LETTERHEAD L.A. CHAMPAGNE & CO., L.L.P.
INDEPENDENT AUDITOR'S REPORT
Shareholders and Directors
IBL Bancorp, Inc.
We have audited the accompanying consolidated statements of financial
condition of IBL Bancorp, Inc. and its wholly-owned subsidiary, The
Iberville Building and Loan Association, as of December 31, 1998 and 1997,
and the related consolidated statements of income and comprehensive income,
changes in shareholders'equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Bancorp's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IBL
Bancorp, Inc. and its wholly-owned subsidiary, The Iberville Building and
Loan Association as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Notes A and S, IBL Bancorp, Inc. was formed in 1998 as the
holding company for The Iberville Building and Loan Association which was
acquired by the Bancorp under a plan for business reorganization of
entities under common control carried out in a manner similar to a pooling
of interest. The accompanying financial statements for 1998 are based on
the assumption that the Bancorp and the Association were combined for the
full year, and the 1997 financial statements have been restated to give
effect to the combination.
16
<PAGE>
As discussed in Note P, the 1997 financial statements have been restated to
present comprehensive income as required under the provisions of Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income.
The financial statements have also been restated to reflect adjustments in
the computation of deferred income taxes, and to include information
regarding the fair value of financial instruments as required by Statement
of Financial Accounting Standards No. 107, Disclosures About Fair Value of
Financial Instruments.
/s/L.A. Champagne & Co., L.L.P.
-------------------------------
L.A. Champagne & Co., L.L.P.
January 13, 1999
17
<PAGE>
<TABLE>
<CAPTION>
IBL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1997
1997
(Restated -
1998 Note P)
------------ ------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions............. $ 177,068 $ 142,714
Interest-bearing deposits in other institutions............... 1,681,430 967,494
------------ ------------
Total cash.................................................. 1,858,498 1,110,208
------------ ------------
Time deposits................................................. 795,000 -
------------ ------------
Investment securities held-to-maturity (estimated market
value $15,085 in 1997)...................................... - 15,152
Mortgage-backed securities held-to-maturity (estimated
market value $2,116,824 and $2,374,282)...................... 2,122,507 2,385,948
Mortgage-backed securities available-for-sale (amortized
cost $1,454,057 and $1,943,217).............................. 1,453,613 1,947,685
------------ ------------
Total investment securities................................. 3,576,120 4,348,785
------------ ------------
Loans receivable.............................................. 17,620,600 16,722,127
Less allowance for loan losses................................ 411,621 403,768
------------ ------------
Loans receivable, net....................................... 17,208,979 16,318,359
------------ ------------
Premises and equipment, net................................... 154,179 163,330
Federal Home Loan Bank stock, at cost......................... 170,800 363,100
Accrued interest receivable................................... 74,242 80,394
Other assets.................................................. 40,200 10,822
------------ ------------
Total assets................................................. $ 23,878,018 $ 22,394,998
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IBL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1997
1997
(Restated -
1998 Note P)
------------ ------------
<S> <C> <C>
LIABILITIES AND EQUITY
Deposits...................................................... $ 19,898,684 $ 20,026,417
Advances from Federal Home Loan Bank.......................... 495,000 610,000
Advances by borrowers for taxes and insurance................. 12,781 15,004
Federal income taxes payable.................................. 39,388 47,657
Other liabilities and deferrals............................... 49,570 73,960
------------ ------------
Total liabilities............................................ 20,495,423 20,773,038
------------ ------------
Commitments and contingencies................................. - -
------------ ------------
Preferred stock $.01 par, 2,000,000 shares authorized......... - -
Common stock - $.01 par, 5,000,000 shares authorized,
210,870 shares issued ....................................... 2,109 -
Additional paid-in capital.................................... 1,740,254 -
Unearned ESOP shares.......................................... (165,971) -
Retained earnings - substantially restricted.................. 1,806,496 1,619,011
Accumulated other comprehensive income (loss)................. (293) 2,949
------------ ------------
Total equity................................................ 3,382,595 1,621,960
------------ ------------
Total liabilities and equity................................ $ 23,878,018 $ 22,394,998
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 18 -
<PAGE>
<TABLE>
<CAPTION>
IBL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
Years ended December 31, 1998 and 1997
1997
Restated -
1998 Note P)
----------- -----------
<S> <C> <C>
INTEREST INCOME
Loans.................................................... $ 1,407,096 $ 1,346,487
Mortgage-backed securities............................... 223,105 258,333
FHLB stock and other securities.......................... 13,353 20,880
Deposits................................................. 92,613 65,009
----------- -----------
Total interest income.................................. 1,736,167 1,690,709
----------- -----------
INTEREST EXPENSE
Deposits
Interest-bearing demand deposit accounts................ 87,811 69,005
Passbook savings accounts............................... 103,940 90,325
Certificate of deposit accounts......................... 706,649 750,420
----------- -----------
Total interest on deposits............................. 898,400 909,750
Advances from Federal Home Loan Bank..................... 16,700 7,003
----------- -----------
Total interest expense................................. 915,100 916,753
----------- -----------
Net interest income.................................... 821,067 773,956
Provision for losses on loans............................ 20,926 42,147
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOSSES ON LOANS......................................... 800,141 731,809
----------- -----------
NON-INTEREST INCOME
Service charges on deposit accounts...................... 86,834 70,888
Other.................................................... 14,023 27,135
----------- -----------
Total non-interest income.............................. 100,857 98,023
----------- -----------
NON-INTEREST EXPENSES
Compensation and benefits................................ 332,770 316,209
Occupancy ............................................... 27,662 32,133
Furniture and equipment ................................. 26,896 26,822
Deposit insurance premium................................ 12,323 10,347
Data processing.......................................... 70,946 57,305
Legal and other professional............................. 17,289 24,105
Advertising.............................................. 15,720 12,340
Office supplies and postage.............................. 31,518 25,763
Other general and administrative......................... 68,825 62,930
----------- -----------
Total non-interest expenses............................ 603,949 567,954
----------- -----------
</TABLE>
Continued
- 19 -
<PAGE>
<TABLE>
<CAPTION>
1997
Restated -
1998 Note P)
--------- ---------
<S> <C> <C>
INCOME BEFORE PROVISION FOR INCOME TAXES................. $ 297,049 $ 261,878
PROVISION FOR INCOME TAXES............................... 101,656 98,134
--------- ---------
NET INCOME............................................... $ 195,393 $ 163,744
========= =========
Basic earnings per share................................. $ 1.01 $ -
========= =========
COMPREHENSIVE INCOME
Net income............................................... $ 195,393 $ 163,744
Other comprehensive income
Unrealized holding gains (losses) on
securities arising during the period.................. (4,912) 6,745
Income tax expense (benefit) related to
unrealized holding gains (losses)..................... (1,670) 2,463
--------- ---------
Other comprehensive income (loss), net of
tax effects............................................ (3,242) 4,282
--------- ---------
Comprehensive income..................................... $ 192,151 $ 168,026
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
- 20 -
<PAGE>
<TABLE>
<CAPTION>
IBL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1998 and 1997
Retained
Earnings
Additional Unearned Substan-
Common Paid In ESOP tially
Stock Capital Shares Restricted
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996, AS PREVIOUSLY
REPORTED................................ $ - $ - $ - $ 1,477,100
Prior period adjustment.................. - - - (21,833)
--------- ----------- ---------- -----------
BALANCE, DECEMBER 31, 1996, AS RESTATED.. - - - 1,455,267
COMPREHENSIVE INCOME
Net income, as restated.................. - - - 163,744
Other comprehensive income, net of tax
Unrealized losses on securities........ - - - -
--------- ----------- ---------- -----------
BALANCE, DECEMBER 31, 1997 (RESTATED).... $ - $ - $ - $ 1,619,011
========= =========== =========== ===========
BALANCE, DECEMBER 31, 1997 AS PREVIOUSLY
REPORTED................................ $ - $ - $ - $ 1,638,709
Prior period adjustment.................. - - - (19,698)
--------- ----------- ---------- -----------
BALANCE, DECEMBER 31, 1997, AS RESTATED.. - - - 1,619,011
========= =========== =========== ===========
COMPREHENSIVE INCOME
Net income............................... - - - 195,393
Other comprehensive income, net of tax
Unrealized losses on securities........ - - - -
--------- ----------- ---------- -----------
Comprehensive income................... 1,814,404
Issuance of common stock................. 2,109 1,740,254 - -
Acquisition of unearned ESOP shares...... - - (168,690) -
ESOP shares released for allocation...... - - 2,719 -
Dividends................................ - - - (7,908)
--------- ----------- ---------- -----------
BALANCE, DECEMBER 31, 1998............... $ 2,109 $ 1,740,254 $ (165,971) $ 1,806,496
========= =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Other
Compre-
hensive Total
Income Equity
-------- -----------
<S> <C> <C>
BALANCE, DECEMBER 31, 1996, AS PREVIOUSLY
REPORTED................................ $ (1,333) $ 1,475,767
Prior period adjustment.................. - (21,833)
-------- -----------
BALANCE, DECEMBER 31, 1996, AS RESTATED.. (1,333) 1,453,934
COMPREHENSIVE INCOME
Net income, as restated.................. - 163,744
Other comprehensive income, net of tax
Unrealized losses on securities........ 4,282 4,282
-------- -----------
BALANCE, DECEMBER 31, 1997 (RESTATED).... $ 2,949 $ 1,621,960
======== ===========
BALANCE, DECEMBER 31, 1997 AS PREVIOUSLY
REPORTED................................ $ 2,949 $ 1,641,658
Prior period adjustment.................. - (19,698)
-------- -----------
BALANCE, DECEMBER 31, 1997, AS RESTATED.. 2,949 1,621,960
COMPREHENSIVE INCOME
Net income............................... - 195,393
Other comprehensive income, net of tax
Unrealized losses on securities........ (3,242) (3,242)
-------- -----------
Comprehensive income................... (293) 1,814,111
Issuance of common stock................. - 1,742,363
Acquisition of unearned ESOP shares...... - (168,690)
ESOP shares released for allocation...... - 2,719
Dividends................................ - (7,908)
-------- -----------
BALANCE, DECEMBER 31, 1998............... $ (293) $ 3,382,595
======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
IBL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998 and 1997
1997
(Restated -
1998 Note P)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................... $ 195,393 $ 163,744
----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation ....................................................... 22,394 23,031
Provision for loan losses .......................................... 20,925 42,147
ESOP contribution .................................................. 2,719 -
Provision for deferred federal income tax (tax credit) ............. (36,354) (432)
Amortization of net premium on investment and mortgage
backed securities ................................................. 27,604 18,106
Net discount charged on installment loans .......................... 40,692 28,265
Net loan fees deferred ............................................. 1,865 1,975
Deferred profit recognized on sale of real estate .................. (85) (76)
Stock dividends from Federal Home Loan Bank ........................ (12,700) (20,700)
Net decrease (increase) in interest receivable ..................... 6,152 (3,126)
Net decrease (increase) in other assets ............................ (7,734) 22,599
Net increase (decrease) in interest payable ........................ 4,704 (10,998)
Net increase (decrease) in income taxes payable ................... (8,269) 47,657
Net increase (decrease) in other liabilities ....................... (15,833) 16,548
----------- -----------
Total adjustments ................................................ 46,080 164,996
----------- -----------
Net cash provided by operating activities ............................ 241,473 328,740
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans receivable ..................................... (954,102) (1,196,543)
Purchases of securities availableforsale ............................. (119,776) (762,465)
Principal payments received on mortgagebacked securities
available-for-sale .................................................. 593,732 242,415
Purchases of securities heldtomaturity ............................... (438,975) (154,850)
Maturity of U.S. Government obligation ............................... 15,152 -
Proceeds from sale of Federal Home Loan Bank stock ................... 205,000 -
Principal payments received on mortgagebacked securities
held-to-maturity .................................................... 690,016 491,701
Purchases of office property and equipment ........................... (13,243) (14,705)
Certificates of deposits acquired .................................... (795,000) -
----------- -----------
Net cash used in investing activities ................................ (817,196) (1,394,447)
----------- -----------
</TABLE>
Continued . . .
22
<PAGE>
<TABLE>
<CAPTION>
1997
(Restated -
1998 Note P)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposit accounts.............................. $ (132,437) $ (240,909)
Net decrease in advances by borrowers for taxes
and insurance................................................ (2,223) (1,676)
Advances from Federal Home Loan Bank.......................... 495,000 695,000
Repayment of advances from Federal Home Loan Bank............. (610,000) (85,000)
Net proceeds from sale of common stock........................ 1,573,673 -
------------ -----------
Net cash provided by financing activities..................... 1,324,013 367,415
------------ -----------
NET INCREASE (DECREASE) IN CASH............................... 748,290 (698,292)
Cash-beginning of year........................................ 1,110,208 1,808,500
------------ -----------
Cash-end of year.............................................. $ 1,858,498 $ 1,110,208
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
IBL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
A: SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
IBL Bancorp, Inc.(Bancorp) was organized as a Louisiana corporation on
June 16, 1998. The Bancorp was essentially inactive until September 30,
1998, when it acquired The Iberville Building and Loan Association
(Association) under a plan for business reorganization of entities
under common control carried out in a manner similar to a pooling of
interest. The Association became a wholly owned subsidiary of the
Bancorp through the exchange of all of its stock then outstanding. The
accompanying financial statements for 1998 are based on the assumption
that the Bancorp and the Association were combined for the full year,
and the financial statements of prior years have been restated to give
effect to the combination.
The Association is a state chartered financial institution whose
deposits are insured by the Federal Deposit Insurance Corporation
(FDIC). It is subject to regulation of the Office of the Comptroller of
the Currency, the Office of Thrift Supervision, and the Office of
Financial Institutions for the State of Louisiana. The Association
provides a variety of banking services to individuals and businesses.
Its primary deposit products are demand deposits and certificates of
deposit, and its primary lending products are real estate mortgage
loans. The Association primarily serves the parishes of Iberville and
West Baton Rouge from its only office location in Plaquemine,
Louisiana.
Principles of consolidation
The accompanying consolidated financial statements include the accounts
of the Bancorp and its wholly-owned subsidiary, the Association. In
consolidation, intercompany accounts and transactions have been
eliminated.
Basis of financial statement presentation
The accounting and reporting policies followed by the Bancorp and the
Association are in accordance with generally accepted accounting
principles and conform to general practices within the savings and loan
industry. The more significant of the principles used in preparing the
financial statements are briefly described below.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of
24
<PAGE>
A: SIGNIFICANT ACCOUNTING POLICIES (Continued)
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on loans
and real estate owned. A majority of the Association's loan portfolio
consists of single-family residential loans in Iberville and West Baton
Rouge parishes. The ultimate collectibility of a substantial portion of
the Association's loan portfolio is susceptible to changes in local
economic conditions.
While management uses available information to recognize losses on
loans, future additions to the allowances may be necessary based on
changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review
the Association's allowances for losses on loans and foreclosed real
estate. Such agencies may require the Association to recognize
additions to the allowances based on their judgments about information
available to them at the time of their examination. Because of these
factors, management's estimate of credit losses inherent in the loan
portfolio and the related allowance may change in the near term.
However, the amount of the change that is reasonably possible cannot be
estimated.
Investment securities
Trading securities - Debt securities and equity securities with readily
determinable fair values that are acquired with the intention of being
resold in the near term are classified as trading securities and are
recorded at their fair values. Realized and unrealized gains and losses
on trading account securities are recognized in current earnings. The
Association does not currently hold any securities for trading
purposes.
Securities held-to-maturity - Debt securities which the Association
both positively intends and has the ability to hold to maturity are
reported at cost, adjusted for amortization of premiums and accretion
of discounts that are recognized in interest income using methods
approximating the interest method over the period to maturity.
Securities available-for-sale - Securities not meeting the criteria of
either trading securities or securities held to maturity are classified
as available for sale and carried at fair value.
Unrealized holding gains and losses for these securities are
recognized, net of related tax effects, as a separate component of
comprehensive income and equity. Realized gains and losses on the sale
of securities available-for-sale are determined using the
specific-identification method based on original cost. The amortization
of premiums and the accretion of discounts are recognized in
25
<PAGE>
A: SIGNIFICANT ACCOUNTING POLICIES (Continued)
interest income using methods approximating the interest method over
the period to maturity.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than
temporary result in write-downs of the individual securities to their
fair value. The related write-downs are included in earnings as
realized losses.
Loans receivable
Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses, and net deferred loan-origination fees.
Interest on consumer loans with maturities of sixty months or less made
on a discount basis is recognized and included in interest income using
the sum-of-the-months-digits method over the term of the loan. Interest
on all other loans is accrued periodically based on the principal
balance outstanding. Interest accrued on such loans is included in
accrued interest receivable.
When, in the judgement of management, collection of accrued interest on
a loan becomes doubtful, or when a loan becomes ninety days delinquent,
further accrual of interest income is suspended and the loan is placed
on a non-accrual status. Interest accrued on such loans during the
current year, but uncollected, is reversed against operations.
Subsequent payments are generally applied to reduce the principal
amount outstanding.
Loans determined to be impaired under the provisions of Statement of
Accounting Standards (SFAS) No. 114, Accounting by Creditors for
Impairment of a Loan and SFAS No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures are carried
at either the discounted present value of expected future cash flows or
the fair value of underlying collateral if the loan is collateral
dependent. A loan is considered impaired when it is probable that
principal and interest will not be collected under the terms of the
loan. All nonaccrual loans are considered impaired. The provisions of
SFAS Nos. 114 and 118 do not apply to large groups of smaller balance
homogeneous loans including certain smaller balance home equity and
improvement loans and other consumer loans that are collectively
evaluated for impairment. Losses on impaired loans are included in the
allowance for loan losses.
Allowance for losses
It is the Association's policy to provide a valuation allowance for
estimated losses on loans. Various factors including the composition of
the loan portfolio, past loan loss experience, current economic
conditions and a specific provision for impaired loans provide a basis
for management's determination of the amount of the valuation allowance
for loan losses. Additions to the allowance
26
<PAGE>
A: SIGNIFICANT ACCOUNTING POLICIES (Continued)
are charged against current operations. Loans or portions of loans,
including impaired loans, deemed to be uncollectible are charged off
against the allowance for loan losses, and subsequent recoveries, if
any, are credited to the allowance.
Loan origination fees
Loan origination fees and certain direct costs of underwriting and
closing loans are deferred and amortized to income over the life of the
related loans using the level yield method.
Real estate acquired in settlement of loans
Real estate acquired in settlement of loans is recorded at the lower of
cost, that is, the balance of the loan, or its estimated fair value on
the date acquired. Capital improvements made thereafter to facilitate
sale are added to the carrying value, and adjustments are made to
reflect declines, if any, in net realizable values below the recorded
amounts. Costs of holding real estate acquired in settlement of loans
are reflected in income currently. Gains and losses realized on sales
of such real estate are reflected in current income based on the
property's initial recorded value plus capital improvements.
When sales of real estate are facilitated by financing, the adjusted
sales price is determined to be the sum of the cash proceeds, if any,
and the discounted present value of the loan. Gains and losses are
determined with reference to the adjusted sales price, and are
recognized currently except in certain circumstances when the cash paid
in is deemed insufficient, in which case, any gains resulting from the
sale are deferred and recognized as the debt principal is recognized.
Premises and equipment
Premises and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed on the straight-line basis or
under various accelerated methods over estimated useful lives as
follows:
Office building........................... 30-40 years
Furniture, fixtures and equipment......... 5-10 years
Costs of major additions are capitalized while repair and maintenance
costs are charged to operations as incurred.
Recognition of FHLB stock dividends
In accordance with current industry practice, stock dividends from the
FHLB are recorded as income when declared based upon a par value of
$100 per share for the number of shares issued.
27
<PAGE>
A: SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income taxes
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes which are determined under the liability method.
Deferred taxes are related primarily to the differences between the
financial and income tax bases of certain assets and liabilities
including accumulated depreciation on premises and equipment, deferred
loan fees and costs, interest discount and accruals, allowances for
losses on loans, Federal Home Loan Bank stock, and deferred gain on
property sales. Deferred tax assets and liabilities represent the
future tax return consequences of those differences which will either
be taxable or deductible when the assets and liabilities are recovered
or settled.
Cash flows
Cash consists of cash and interest-earning deposits due from other
financial institutions. For purposes of the statement of cash flows,
the Association considers highly liquid deposits including certificates
of deposits with maturities of three months or less when purchased to
be "cash." All other deposits, debt securities and investments
regardless of maturities are classified as time deposits or investment
securities.
Off-balance-sheet financial instruments
In the ordinary course of business the Association enters into
transactions that produce off-balance-sheet financial instruments
consisting of letters of credit and other commitments to extend credit.
Such financial instruments are recorded in the financial statements
when they are funded.
Loan servicing
None of the Association's loan servicing rights was obtained after
December 15, 1995. Consequently, the cost of loan servicing rights has
not been capitalized.
Advertising
The Association expenses advertising costs as they are incurred.
Advertising expense is reflected in the accompanying statements of
income and comprehensive income.
28
<PAGE>
B: LOANS RECEIVABLE
Loans receivable as of December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
First mortgage loans
Single-family residential.......................... $12,488,381 $11,531,849
Construction ...................................... 692,000 420,000
Commercial real estate ............................ 896,156 942,556
Land .............................................. 237,977 271,163
----------- -----------
14,314,514 13,165,568
Less: undisbursed loans in process ................. 650,000 260,145
deferred loan fees ....................... 9,102 7,237
allowance for losses ..................... 358,524 337,524
----------- -----------
Net first mortgage loans ........................... 13,296,888 12,560,662
----------- -----------
Home equity and improvement loans .................. 1,004,651 1,172,307
Share loans ........................................ 617,093 785,886
Other consumer and single-pay loans ................ 2,572,722 2,054,334
Less: unearned discount ............................ 229,278 188,586
----------- -----------
Net other consumer loans ........................... 2,343,444 1,865,748
----------- -----------
Total consumer loans ............................... 3,965,188 3,823,941
Less: allowance for losses ......................... 53,097 66,244
----------- -----------
Net consumer loans ................................. 3,912,091 3,757,697
----------- -----------
Net loans receivable................................ $17,208,979 $16,318,359
=========== ===========
</TABLE>
At December 31, 1998 and 1997, unpaid balances of impaired loans upon
which the accrual of interest had been suspended, all of which had
allowances determined in accordance with SFAS No. 114 and No. 118,
amounted to $241,731 and $331,771, respectively. None of the allowance
for loan losses related to impaired loans at December 31, 1998 and
$62,173 of the allowance at December 31, 1997, related to impaired
loans. Interest income on impaired loans of $51,475 and $28,864 was
recognized for cash payments received in 1998 and 1997, respectively.
The average recorded investment in impaired loans for those periods was
$255,275 and $301,037, respectively.
The Association is not committed to lend additional funds to debtors
whose loans have been classified as nonperforming.
At December 31, 1998 and 1997, the directors and officers (related
parties) owed the Association $474,853 and $507,705, respectively.
29
<PAGE>
B: LOANS RECEIVABLE (Continued)
During the years ended December 31, 1998 and 1997, new loans to such
related parties amounted to $47,465 and $98,500, respectively.
Principal repayments by such related parties amounted to $80,317 and
$50,895 for the years ended December 31, 1998 and 1997, respectively.
Such loans were made in the ordinary course of business on
substantially the same terms, including interest rates and collateral,
as those prevailing at the time in comparable transactions with others.
These loans do not involve more than a normal risk of collectibility or
carry other terms unfavorable to the Association.
C: ALLOWANCE FOR LOSSES
A summary of the changes in the allowance for loan losses for the years
ended December 31, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Balance - beginning of year................. $ 403,768 $ 361,857
Provision for loan losses................... 20,925 42,147
Charge-offs................................. (13,147) (2,089)
Recoveries.................................. 75 1,853
--------- ---------
$ 411,621 $ 403,768
========= =========
</TABLE>
There were no other real estate holdings or related allowance for real
estate losses for the years ended December 31, 1998 and 1997.
D: PREMISES AND EQUIPMENT
Premises and equipment as of December 31, 1998 and 1997 are summarized
by major classifications as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Land ......................................... $ 22,416 $ 22,416
Office building .............................. 261,578 255,262
Furniture, fixtures and equipment ............ 160,327 171,138
-------- --------
444,321 448,816
Less: accumulated depreciation ............... 290,141 285,486
-------- --------
$154,180 $163,330
======== ========
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Depreciation expense ......................... $22,394 $ 23,031
======= ========
</TABLE>
30
<PAGE>
E: INVESTMENT SECURITIES
The amortized cost and estimated market value of investments in
securities are as follows as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ --------- ----------- -----------
<S> <C> <C> <C> <C>
Securities Available-for-sale:
December 31, 1998
Mortgage-backed securities
FNMA.......................................... $ 1,347,574 $ 3,182 $ 3,406 $ 1,347,350
GNMA.......................................... 106,483 - 220 106,263
------------ --------- ----------- -----------
$ 1,454,057 $ 3,182 $ 3,626 $ 1,453,613
============ ========= =========== ===========
<CAPTION>
December 31, 1997
Mortgage-backed securities
<S> <C> <C> <C> <C>
FNMA...........................................$ 1,943,217 $ 8,696 $ 4,228 $ 1,947,685
============ ========= =========== ===========
<CAPTION>
<S> <C> <C> <C> <C>
Securities to be Held-to-Maturity:
December 31, 1998
Mortgage-backed securities
FNMA...........................................$ 1,402,165 $ 4,510 $ 12,374 $ 1,394,301
GNMA........................................... 119,337 1,152 - 120,489
FHLMC.......................................... 601,005 3,848 2,819 602,034
------------ --------- ----------- -----------
$ 2,122,507 $ 9,510 $ 15,193 $ 2,116,824
============ ========= =========== ===========
<CAPTION>
<S> <C> <C> <C> <C>
December 31, 1997
U.S.Treasury securities and
obligations of U.S. government
corporations and agencies......................$ 15,152 $ - $ 67 $ 15,085
------------ --------- ----------- -----------
Mortgage-backed securities
FNMA........................................... 1,173,209 5,945 17,772 1,161,382
GNMA........................................... 162,842 2,893 136 165,599
FHLMC.......................................... 1,049,897 8,289 10,885 1,047,301
------------ --------- ----------- -----------
2,385,948 17,127 28,793 2,374,282
------------ --------- ---------- -----------
$ 2,401,100 $ 17,127 $ 28,860 $ 2,389,367
============ ========= ========== ===========
</TABLE>
31
<PAGE>
E: INVESTMENT SECURITIES (Continued)
The following is a summary of maturities of securities held-to-maturity
and available-for-sale as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31, 1998
Weighted
Average Amortized Fair
Yield Cost Value
----- ----------- -----------
<S> <C> <C> <C>
Available-for-Sale
------------------
Due in one year or less.................................. 6.62% $ 115,237 $ 116,082
Due from one to five years............................... - - -
Due from five to ten years............................... - - -
Due after ten years...................................... 6.21% 1,338,820 1,337,531
----------- -----------
6.25% $ 1,454,057 $ 1,453,613
=========== ===========
Held-to-Maturity
----------------
Due in one year or less.................................. 7.80% $ 37,474 $ 37,804
Due from one to five years............................... 4.71% 456,042 453,864
Due from five to ten years............................... 5.71% 449,367 450,013
Due after ten years...................................... 6.08% 1,179,624 1,175,143
----------- -----------
5.74% $ 2,122,507 $ 2,116,824
=========== ===========
December 31, 1997
-----------------
Available-for-Sale
------------------
Due in one year or less.................................. - $ - $ -
Due from one to five years............................... 6.58% 242,642 244,434
Due from five to ten years............................... - - -
Due after ten years...................................... 6.66% 1,700,575 1,703,251
----------- -----------
6.65% $ 1,943,217 $ 1,947,685
=========== ===========
Held-to-Maturity
----------------
Due in one year or less.................................. 5.38% $ 17,652 $ 17,584
Due from one to five years............................... 5.94% 352,207 348,449
Due from five to ten years............................... 5.68% 342,198 337,277
Due after ten years...................................... 6.33% 1,689,043 1,686,057
----------- -----------
6.17% $ 2,401,100 $ 2,389,367
=========== ===========
</TABLE>
32
<PAGE>
E: INVESTMENT SECURITIES (Continued)
The amortized cost and fair value of mortgage-backed securities are
presented by contractual maturity in the preceding table. Expected
maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations without call or
prepayment penalties.
Mortgage-backed securities with a carrying amount of $484,080 and
$228,133 were pledged to secure deposits as required or permitted by
law at December 31, 1998 and 1997, respectively. See also note G.
F: DEPOSITS
An analysis of customers deposit accounts by interest rates as of
December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
-----------1998----------- ------------1997------------
Balances by interest rate Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Passbook and full-paid
accounts 2.5% to 3.0%.............................$ 3,322,644 16.70% $ 3,095,126 15.45%
----------- -------- ----------- --------
Certificates and money-
market accounts
4.2 to 5.7%....................................... 12,173,341 61.18% 11,914,079 59.49%
5.8 to 6.7%....................................... 1,942,451 9.76% 2,613,125 13.05%
6.8 to 7.7%....................................... 110,000 0.55% 110,000 0.55%
----------- -------- ----------- --------
14,225,792 71.49% 14,637,204 73.09%
----------- -------- ----------- --------
Now accounts
Non-interest bearing.............................. 356,666 1.79% 403,533 2.02%
2.3 to 3.0%....................................... 1,955,646 9.83% 1,857,322 9.27%
----------- -------- ----------- --------
2,312,312 11.62% 2,260,855 11.29%
----------- -------- ----------- --------
19,860,748 99.81% 19,993,185 99.83%
Accrued interest payable........................... 37,936 0.19% 33,232 0.17%
----------- -------- ----------- --------
$19,898,684 100.00% $20,026,417 100.00%
=========== ======== =========== ========
</TABLE>
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was $2,417,099 and $2,089,962 at December 31,
1998 and 1997, respectively. Deposit amounts in excess of $100,000 are
not federally insured.
33
<PAGE>
Maturities of certificates of deposit accounts are as follows:
<TABLE>
<CAPTION>
<S> <C>
One year or less....................................$ 9,769,390
Over one to two years............................... 2,787,169
Over two to three years............................. 1,020,140
Over three years.................................... 649,093
-------------
$ 14,225,792
=============
</TABLE>
Interest paid on deposits during 1998 and 1997 was $901,660 and
$920,214, respectively.
Officers' and directors' savings accounts amounted to $126,138 and
$376,477 at December 31, 1998 and 1997, respectively.
G: ADVANCES FROM FHLB AND OTHER BORROWED MONEY
Advances from the Federal Home Loan Bank (FHLB) consisted of the
following:
<TABLE>
<CAPTION>
Maturity Contract
Date Rate 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1998 5.90% $ - $ 610,000
2000 4.58% 198,000 -
2001 4.60% 99,000 -
2001 4.51% 99,000 -
2003 4.77% 99,000 -
---------- ----------
$ 495,000 $ 610,000
========== ==========
</TABLE>
At December 31, 1998, pursuant to collateral agreements with the FHLB,
advances are secured by a blanket floating lien on first mortgage
loans. At December 31, 1997, the advances were collateraized by pledge
of certain FNMA participation certificates with outstanding principal
balances net of unamortized purchase premiums and discounts of
$651,309.
Interest paid on advances from the Federal Home Loan Bank for 1998 and
1997 was $14,799 and $7,003, respectively.
34
<PAGE>
H: LOAN SERVICING
Mortgage loans serviced for others are not included in the
accom-panying statements of financial condition. The unpaid principal
balances of these loans at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Mortgage loan underlying FHLMC
mortgage backed securities................... $ 569,347 $ 772,342
========= =========
</TABLE>
Revenue from loan servicing was $2,877 and $3,780 for the years ended
December 31, 1998 and 1997, respectively.
Custodial escrow balances maintained in connection with the foregoing
loan servicing were $2,562 and $3,229 at December 31, 1998 and 1997,
respectively.
I: ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1998 and 1997 is summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Time deposits and other
investment securities................... $ 3,970 $ 260
Mortgage-backed securities............... 20,694 28,932
Loans receivable......................... 49,578 51,202
---------- ----------
$ 74,242 $ 80,394
========== ==========
</TABLE>
J: FEDERAL INCOME TAXES
Income tax expense for the years ended December 31, 1998 and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
1997
(Restated -
1998 Note P)
---------- ----------
<S> <C> <C>
Current............................... $ 138,010 $ 98,566
Deferred expense (benefit)............ (36,354) (432)
---------- ----------
$ 101,656 $ 98,134
========== ==========
</TABLE>
35
<PAGE>
J: FEDERAL INCOME TAXES (Continued)
Deferred income tax assets and liabilities are reflected in the
accompanying balance sheets as follows:
<TABLE>
<CAPTION>
1997
(Restated -
1998 Note P )
--------- ---------
<S> <C> <C>
Deferred tax liabilities ..................... $ (44,711) $ (76,001)
Deferred tax assets .......................... $ 123,446 $ 110,733
Deferred tax asset valuation allowance ....... (57,091) (51,112)
--------- ---------
Net deferred tax asset (included in
other assets) ............................... $ 21,644
=========
Net deferred tax liability (included
in other liabilities and deferrals) ......... $ (16,380)
=========
</TABLE>
Provision for federal income taxes differs from that computed at the
statutory 34% corporate tax rate, as follows:
<TABLE>
<CAPTION>
---------1998------------ -----------1997----------
Amount
Effective (Restated - Effective
Amount Rate Note P) Rate
--------- ------- --------- -----
<S> <C> <C> <C> <C>
Tax at statutory rate................................$ 101,997 34% $ 89,039 34%
Increase (decrease) in taxes:
Effect of graduated tax rates....................... - - (1,970) (1)%
Deferred tax effect thrift
bad debt reserve adjustment......................... - - - -
Other................................................ (341) - 11,065 4%
--------- ------- --------- -----
$ 101,656 34% $ 98,134 37%
========= ======= ========= =====
</TABLE>
The Association paid income taxes of $146,279 and $50,910 during the
years ended December 31, 1998 and 1997, respectively.
In prior years, the Association was allowed a special bad debt
deduction under various income tax provisions. If the amounts that
qualified as deductions for federal income tax purposes are later used
for purposes other than bad debt losses, they become subject to federal
income tax at the then current corporate rate. Retained earnings at
December 31, 1998 and 1997 include $110,577 for which federal income
tax has not been provided. The unrecorded deferred liability on these
amounts was approximately $37,600. Additionally, with the repeal in
1996 of the thrift bad debt reserve method that allowed for bad debt
deductions based upon a percentage of taxable income, the Association
is required to recapture over a six year period the $85,465 portion of
its bad debt reserves that exceeds allowable reserves under the
experience method.
36
<PAGE>
K: COMMITMENTS
The Association is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments consist
primarily of commitments to extend credit. These instruments involve,
to varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheet. The contract or notional amounts of
those instruments reflect the extent of the involvement the Association
has in particular classes of financial instruments. Commitments to
extend credit are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. The
Association evaluates each customer's credit worthiness on a
case-by-case basis. The Association's exposure to credit loss in the
event of nonperformance by the other party to the financial instruments
is represented by the contractual notional amount of those instruments.
As of December 31, 1998 and 1997, the Association was committed to
grant adjustable-rate mortgage loans with contract notional amounts of
$313,500 and $518,400, respectively. Additionally, the Association held
a $30,000 open letter of credit at December 31, 1998, and had issued
lines of credit with contract notional amounts of the unused portion
totalling $98,570 and $105,716 as of December 31, 1998 and 1997,
respectively.
L: PROFIT-SHARING PLAN
The Association provides a non-contributory defined contribution
retirement plan for all eligible employees. Contributions to the plan
are based upon employee compensation at rates not to exceed 15% as
determined annually by the Board of Directors. Contributions to the
plan were $28,532 and $31,151 for 1998 and 1997, respectively.
M: EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
During 1998, the Bancorp established an employee stock ownership plan.
The IBL Bancorp, Inc. Employee Stock Ownership Plan enables eligible
employees of the Bancorp and the Association to share in the growth of
the Bancorp through the acquisition of stock. Employees are generally
eligible to participate in the ESOP after completion of one year of
service and attaining age 21.
The ESOP acquired 16,869 shares of Bancorp stock at $10 a share in the
Bancorp's initial public offering. The acquisition was funded by a loan
from the Bancorp which bears interest at 8.5% and will be repaid
principally from company contributions to the ESOP over a period of ten
years. The loan agreement requires quarterly
37
<PAGE>
M: EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) (Continued)
interest and principal payments of $6,303. The loan is secured by the
pledge of the common stock purchased. Contributions to the ESOP must be
sufficient for debt service, but the company may, in any plan year,
make additional discretionary contributions for the benefit of plan
participants in the form of cash or shares of common stock.
In the event of plan or participant termination, or upon the
participant's death, disability or retirement, the Bancorp may be
required to purchase, subject to certain limitations, the shares from
the participants at the then fair market value.
Shares purchased by the ESOP with the proceeds of the loan will be held
in a suspense account and released to participants on a pro-rata basis
as debt service payments are made. As the Bancorp and the Association
make contributions to the ESOP sufficient to meet the principal and
interest requirements on the loan, shares are released from collateral.
The Bancorp accounts for its ESOP in accordance with Statement of
Position 93-6. Accordingly, the debt of the ESOP is not recorded as a
note receivable by the Bancorp, but the shares pledged as collateral
are reported as unearned ESOP shares on the statement of financial
condition. As shares are released from collateral, the Bancorp reports
compensation expense equal to the fair market value of the shares. ESOP
compensation expense was $9,511 for the year ended December 31, 1998.
Any excess or deficit of fair value over the cost of the ESOP shares
released is recorded in the equity section of the statement of
financial condition as additional paid-in-capital. The cost of all
unallocated shares held by the ESOP is reflected on the statement of
financial condition as a contra equity account.
The ESOP shares as of December 31, 1998 were as follows:
Allocated shares............................... -
Shares committed to be released................ 422
Unreleased shares.............................. 16,447
---------
Total ESOP shares............................. 16,869
=========
Fair value of unreleased shares............... $ 152,135
=========
N: NONCASH INVESTING AND FINANCING ACTIVITIES
There were no noncash investing and financing activities for the years
ended December 31, 1998 and 1997.
38
<PAGE>
O: REGULATORY MATTERS
The Association is subject to various regulatory capital requirements
administered by its primary federal regulator, the Office of Thrift
Supervision (OTS). Failure to meet the minimum regulatory capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators that, if undertaken, could have a
direct material affect on the Association and its financial statements.
Under the regulatory capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Association must meet
specific capital guidelines involving quantitative measures of the
Association's assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The Association's
capital amounts and classification under the prompt corrective action
guidelines are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Association to maintain minimum amounts and ratios
of: total risk-based capital and Tier I capital to risk-weighted assets
(as defined in the regulations), Tier I capital to adjusted total
assets (as defined), and tangible capital to adjusted total assets (as
defined). As discussed in greater detail below, as of December 31, 1998
and 1997, the Association meets the capital adequacy requirements to
which it is subject.
As of December 31, 1998 and 1997, based upon the most recent regulatory
filings with OTS, the Association was categorized as well capitalized
under the regulatory framework for prompt corrective action. To remain
categorized as well capitalized, the Association will have to maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as disclosed in the table below.
The actual and required capital amounts and ratios applicable to the
Association are presented in the table below (dollars in thousands).
<TABLE>
<CAPTION>
Minimum Required
To be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total risk-based capital
(To risk-weighted assets...............$ 3,541 28.38% $ 99 8.0% $ 1,248 10.0%
Tier I capital
(To risk-weighted assets)..............$ 3,383 27.12% $ 49 4.0% $ 74 6.0%
Tier I capital
(To adjusted total assets).............$ 3,383 14.20% $ 95 4.0% $ 1,194 5.0%
</TABLE>
39
<PAGE>
O: REGULATORY MATTERS (Continued)
<TABLE>
<CAPTION>
Minimum Required
To be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
------------------------
Total risk-based capital
(To risk-weighted assets...............$ 1,765 15.3% $ 921 8.0% $ 1,151 10.0%
Tier I capital
(To risk-weighted assets)..............$ 1,619 14.1% $ 461 4.0% $ 691 6.0%
Tier I capital
(To adjusted total assets).............$ 1,619 7.2% $ 896 4.0% $ 1,120 5.0%
</TABLE>
P: RESTATEMENTS AND PRIOR PERIOD ADJUSTMENT
Financial statements as of and for the year ended December 31, 1997
have been restated. The accompanying statements now include a
presentation of comprehensive income as required under the provisions
of Statement of Financial Accounting Standards No. ("SFAS") 130
Reporting of Comprehensive Income, which is effective for periods
beginning after December 15, 1997, and requires presentation of
comprehensive income for prior periods presented on a comparative
basis.
In addition, disclosure of information about the fair value of
financial instruments under SFAS No. 107 as of December 31, 1997, not
previously required under the provisions of SFAS No. 126 Exemption From
Certain Required Disclosures About Financial Instruments For Certain
Nonpublic Entities, is presented in Note R.
The December 31, 1997 financial statements have also been restated to
correct certain errors in those periods in order to reflect adjustments
to deferred income tax expense and related assets and liabilities. Such
adjustments give effect to timing differences related to the
recognition of stock dividends from the Federal Home Loan Bank and
changes to the income tax bad debt reserves precipitated by income tax
law changes in August, 1996. Deferred tax assets included in other
assets were decreased by $3,318 in 1997 and deferred tax liabilities
included in other liabilities and deferrals were increased by $16,380.
The provision for federal income taxes was decreased and net income was
increased by $2,135 in 1997 and previously reported retained earnings
as of December 31, 1997 was decreased by $19,698.
40
<PAGE>
Q: RELATED PARTY TRANSACTIONS
A Bancorp director is a partner in a local law firm that provides legal
services to the Bancorp. Fees paid to the law firm amounted to $4,800
for each of the years ended December 31, 1998 and 1997.
R: ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure is made in accordance with the requirements of
SFAS No. 107, Disclosures About Fair Value of Financial Instruments.
Financial instruments are defined as cash and contractual rights and
obligations that require settlement, directly or indirectly, in cash.
In cases where quoted market prices are not available, fair values have
been estimated using the present value of future cash flows or other
valuation techniques. The results of these techniques are highly
sensitive to the assumptions used, such as those concerning appropriate
discount rates and estimates of future cash flows, which require
considerable judgement. Accordingly, estimates presented herein are not
necessarily indicative of the amounts the Association could realize in
a current settlement of the underlying financial instruments. SFAS No.
107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. These disclosures should
not be interpreted as representing an aggregate measure of the
underlying value of the Association.
The Association does not maintain any investment or participation in
financial instruments or agreements whose value is linked to, or
derived from, changes in the value of some underlying asset or index.
Such instruments or agreements include futures, forward contracts,
option contracts, interest-rate swap agreements, and other financial
arrangements with similar characteristics, and are commonly referred to
as derivatives.
41
<PAGE>
R: ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair value of the Association's financial instruments was
as follows:
<TABLE>
<CAPTION>
-------------1998------------- -------------1997-------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and amounts due from
depository institutions................... $ 177 $ 177 $ 143 $ 143
Interest-bearing deposits
with other institutions................... 1,681 1,681 967 967
Time deposits.............................. 795 795 - -
Investment securities...................... 3,576 3,570 4,349 4,337
Loans receivable, net...................... 17,209 17,707 16,318 16,679
Accrued interest receivable................ 74 74 80 80
FHLB stock................................. 171 171 363 363
FINANCIAL LIABILITIES:
Deposits................................... $ 19,899 $ 19,939 $ 20,026 $ 20,042
Advances from FHLB......................... 495 495 610 610
Advances by borrowers for
taxes and insurance....................... 13 13 15 15
Other liabilities.......................... 89 89 122 122
</TABLE>
The Association in estimating the fair value of financial instruments
used the following significant methods and assumptions.
Cash and short-term investments
The carrying value of highly liquid instruments, such as cash on hand
and amounts due from depository institutions, and interest-earning
deposits in other institutions, provides a reasonable estimate of their
fair value.
Time deposits
Time deposits bear interest rates that in the aggregate are presently
considered fair in current market conditions. Therefore, the carrying
amounts reported in the statement of financial condition for these
financial instruments approximate fair value.
Investment securities
Fair value estimates for investment securities are based on quoted
market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. The carrying amount of accrued interest on securities
approximates its fair value.
42
<PAGE>
R: ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Loans receivable, net of allowance
The fair values for loans are estimated through discounted cash flow
analysis, using current rates at which loans with similar terms would
be made to borrowers of similar credit quality. Appropriate adjustments
are made to reflect probable credit losses. The carrying amount of
accrued interest on loans approximated its fair value.
Federal Home Loan Bank Stock
The Federal Home Loan Bank's board sets the value of Federal Home Loan
Bank stock at $100 per share.
Deposits
SFAS No. 107 specifies that the fair value of deposit liabilities with
no defined maturity is the amount payable on demand at the reporting
date, i.e., their carrying or book value. These deposits, which include
interest and non-interest bearing checking, passbook and full-paid
share savings, and money market accounts, represented approximately 28%
and 27% of total deposits at December 31, 1998 and 1997, respectively.
The fair value of fixed-rate certificates of deposit is estimated using
a discounted cash flow calculation that applies interest rates
currently offered on certificates of similar remaining maturities to a
schedule of aggregate expected cash flows on time deposits.
The carrying amount of accrued interest payable on deposits
approximates its fair value.
Advances from Federal Home Loan Bank
Advances from Federal Home Loan Bank bear interest rates that in the
aggregate are presently considered fair in current market conditions.
Therefore, the carrying amounts reported in the statement of financial
condition for these financial instruments approximate fair value.
Advances by borrowers for taxes and insurance (escrows) The carrying
amount of escrow accounts approximate fair value.
Off-balance-sheet instruments
Off-balance-sheet financial instruments include commitments to extend
credit, letters of credit, and other financial guarantees. The fair
value of such instruments is estimated using fees currently charged for
similar arrangements in the marketplace, adjusted for changes in terms
and credit risk as appropriate. The estimated fair value for these
instruments was not significant at December 31, 1998 and 1997. The
contract or notional amounts of the Association's financial instruments
with off-balance-sheet risk are disclosed in Note K.
43
<PAGE>
S: CONVERSION FROM A MUTUAL TO A STOCK ASSOCIATION
On September 30, 1998, The Iberville Building and Loan Association
converted from a Louisiana-chartered mutual savings and loan
association to a Louisiana chartered stock savings and loan association
to be known as "The Iberville Building and Loan Association" (the
Association). The Association issued and sold 1,000 shares of stock to
IBL Bancorp, Inc. for $871,182 and became a wholly-owned subsidiary of
the Bancorp.
In conjunction with the conversion, the Bancorp issued and sold 194,001
shares of its common stock at $10 per share. Net proceeds from the
initial public offering amounted to $1,573,673 after costs associated
with the offering, registration and conversion in the amount of
$366,337.
In accordance with OTS Regulations, the Association appropriated, upon
conversion, as a "liquidation account," $1,671,681, the amount of its
retained earnings at March 31, 1998, the latest date shown in the
prospectus issued in conjunction with the plan of conversion. The
liquidation account will be maintained for the benefit of eligible
holders who continue to maintain their accounts at the Association
after the conversion. The liquidation account will be reduced annually
to the extent that the eligible account holders have reduced their
qualifying deposits. Subsequent increases will not restore an eligible
account holder's interest in the liquidation account. In the event of a
complete liquidation of the Association, and only in such event, each
account holder will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the adjusted
qualifying account balances then held. The Association may not pay
dividends or repurchase its common stock if such dividends or
repurchases would reduce its equity below applicable regulatory capital
requirements or the required liquidation account amount.
T: CONCENTRATION OF CREDIT RISK
The Bancorp's loan portfolio consists of the various types of loans
described in Note B above. Real estate or other assets secure most
loans. These loans have been made to individuals and businesses in
south central Louisiana who are dependent on the area economy for their
livelihood and servicing of their loan obligations.
The Bancorp maintains deposits in other financial institutions that may
from time to time exceed the federally insured deposit limits.
U: DIVIDEND DECLARED
On December 17, 1998, the board of directors of IBL Bancorp, Inc.
declared a $.0375 per share dividend to stockholders of record at
44
<PAGE>
U: DIVIDEND DECLARED (Continued)
January 14, 1999, payable on January 29, 1999. The total dividend
payable of $7,908 is included in other liabilities.
V: EARNINGS PER SHARE
The computation of basic earnings per share for 1998 includes reported
net income in the numerator and the weighted average number of shares
outstanding of 194,002 in the denominator.
W: NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133 (SFAS 133),
Accounting of Derivative Instruments and Hedging Activities, is
effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999. Early application of the provisions of this statement is
encouraged, but it shall not be applied retroactively to financial
statements of prior periods. This statement establishes additional
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities.
It requires that entities recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The association does not currently have any
financial instruments that meet the Standard's definition of a
derivative. Consequently, the provisions of this pronouncement will not
materially affect the financial position or the results of operations
of the Bancorp. Early adoption of the provisions of this statement is
not anticipated, and presently, management is not contemplating any
transfers of securities held-to-maturity to the available-for-sale or
trading categories nor any transfers of available-for-sale securities
to the trading category.
X: PARENT COMPANY FINANCIAL STATEMENTS
The financial statements for IBL Bancorp, Inc. (parent company),
prepared on an unconsolidated basis are presented below:
<TABLE>
<CAPTION>
BALANCE SHEETS
December 31, 1998
<S> <C>
ASSETS
Cash ...................................................... $ 708,099
Investment in Iberville Building & Loan
Association at equity in underlying net assets ........... 2,682,921
-----------
Total assets ........................................... $ 3,391,020
===========
</TABLE>
45
<PAGE>
X: PARENT COMPANY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Other liabilities ......................................... $ 8,425
-----------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par, 2,000,000 shares
authorized
Common stock, $.01 par, 5,000,000 shares author
ized, 210,870 shares issued and outstanding .............. 2,109
Additional paid-in-capital ................................ 1,740,254
Unearned ESOP shares ...................................... (165,971)
Retained earnings substantially restricted ............... 1,806,496
Accumulated other comprehensive income .................... (293)
-----------
Total shareholders' equity ............................ 3,382,595
-----------
Total liabilities and shareholders' equity ............. $ 3,391,020
===========
STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1998
INCOME
Interest .................................................. $ 3,589
EXPENSES
Other general and administrative .......................... 700
-----------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF
IBERVILLE BUILDING & LOAN ASSOCIATION ..................... 2,889
-----------
Equity in undistributed earnings of Iberville
Building & Loan Association .............................. 193,021
-----------
INCOME BEFORE INCOME TAXES ................................ 195,910
PROVISION FOR INCOME TAXES ................................ 517
-----------
NET INCOME ................................................ 195,393
Retained earnings beginning of year ...................... 1,619,011
Less dividends declared ................................... (7,908)
-----------
Retained earnings end of year ............................ $ 1,806,496
===========
</TABLE>
46
<PAGE>
X: PARENT COMPANY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 195,393
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of
Iberville Building & Loan Association ................. (193,021)
Increase in other liabilities .......................... 517
-----------
Net cash provided by operating activities ................ 2,889
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Iberville Building & Loan
Association .............................................. (871,182)
-----------
Net cash used in investing activities .................... (871,182)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock ................... 1,573,673
Payment of ESOP shares ................................... 2,719
-----------
Net cash provided by financing activities ................ 1,576,392
-----------
NET INCREASE IN CASH ..................................... 708,099
Cash beginning of year .................................. -
-----------
Cash end of year ........................................ $ 708,099
===========
</TABLE>
47
<PAGE>
CORPORATE INFORMATION
Directors: Annual Stockholders Meeting:
G. Lloyd Bouchereau, Jr. April 28, 1999; 10:00 a.m.
President and Chief Executive Officer 23910 Railroad Avenue
Plaquemine, Louisiana
Record Date: March 3, 1999
John L. Delahaye Main Office:
Attorney 23910 Railroad Avenue
Plaquemine, Louisiana Plaquemine, Louisiana
Gary K. Pruitt Independent Auditor:
Retired L.A. Champagne & Co., L.L.P.
Greater Baton Rouge Port Commission Baton Rouge, Louisiana
Port Allen, Louisiana
Bobby E. Stanley General Counsel:
Self Employed Accountant Borron & Delahaye
Port Allen, Louisiana Plaquemine, Louisiana
Edward Steinmetz Securities and Regulatory Councel:
Plant Manager Elais, Matz, Tiernan & Herrick L.L.P.
Ashland Chemical Company Washington, D. C.
Plaquemine, Louisiana
Danny M. Strickland Stock Registrar & Transfer Agent:
Vice-President Registrar and Transfer Company
Cranford, New Jersey
Executive Officers:
G. Lloyd Bouchereau, Jr.
President and Chief Executive Officer
Danny M. Strickland
Vice-President
48
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
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0
0
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</TABLE>
