<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 0-25756
ISB Financial Corporation
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Louisiana 72-1280718
-------------------------------- --------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1101 East Admiral Doyle Drive
New Iberia, Louisiana 70560
--------------------------------- --------------
(Address of principal executive office) (Zip Code)
(318) 365-2361
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes ___X___ No_____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
As of November 8, 1996, 7,051,260 shares of the Registrant's common stock
were issued and outstanding. Of that total, 590,423 shares are held by the
Registrant's Employee Stock Ownership Plan, of which 479,100 shares were
not committed to be released.
<PAGE>
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition
(As of September 30, 1996 and December 31, 1995) 3
Consolidated Statements of Income (For the three
months and nine months ended September 30, 1996
and 1995) 4
Consolidated Statements of Stockholders' Equity
(For the nine months ended September 30, 1996
and 1995) 5
Consolidated Statements of Cash Flows (For the
nine months ended September 30, 1996 and 1995) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
<PAGE>
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(Dollars in Thousands)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Cash and Cash Equivalents:
Cash on Hand and Due from Banks $8,489 $5,313
Interest Bearing Deposits 41,733 46,429
Investment Securities:
Held to Maturity (market value of $2,218 and $784, 2,215 784
respectively)
Available for Sale, at market value 60,177 86,058
Trading Account Securities, at market value 2,722 389
Mortgage-Backed Securities Held to Maturity (market 50,287 51,646
value of $51,512 and $49,506, respectively)
Loans Receivable, Net 490,738 399,542
Real Estate Owned 938 561
Premises and Equipment, Net 12,361 9,440
Federal Home Loan Bank Stock, at Cost 4,116 3,739
Accrued Interest Receivable, Net 4,349 4,153
Other Assets 7,702 776
-------- --------
TOTAL ASSETS $685,827 $608,830
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $517,146 $444,600
Federal Home Loan Bank Advances 47,995 40,490
Accrued Interest Payable on Deposits 708 315
Advance Payments by Borrowers for Taxes and Insurance 1,303 1,239
Other Liabilities 6,361 2,509
-------- --------
TOTAL LIABILITIES 573,513 489,153
-------- --------
STOCKHOLDERS' EQUITY:
Preferred Stock of $1 par value; 5,000,000 shares authorized 0 0
-0- shares issued or outstanding
Common Stock of $1.00 par value, authorized 25,000,000 7,381 7,381
shares, issued and outstanding 7,380,671 shares
Paid in Capital 65,600 65,293
Retained Earnings 53,333 51,584
Unearned Common Stock Held by ESOP (4,791) (5,339)
Unearned Common Stock Held by MRP Trust (4,564) 0
Treasury Stock (4,859) 0
Net Unrealized Gain on Securities 214 758
-------- --------
TOTAL STOCKHOLDERS' EQUITY 112,314 119,677
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $685,827 $608,830
-------- --------
-------- --------
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
3
<PAGE>
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- --------------------
1996 1995 1996 1995
----- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $10,394 $8,219 $28,587 $24,320
Investment Securities Available for Sale 972 1,344 3,149 3,274
Investment Securities Held to Maturity 27 10 62 39
Mortgage-Backed Securities Held to Maturity 831 737 2,440 2,100
Interest-Bearing Deposits 694 501 2,434 1,108
------- ------ ------ -------
Total Interest Income 12,918 10,811 36,672 30,841
------- ------ ------ -------
INTEREST EXPENSE:
Deposits 5,746 5,086 16,386 15,012
Federal Home Loan Bank Advances 791 372 2,331 452
------- ------ ------ -------
Total Interest Expense 6,537 5,458 18,717 15,464
------- ------ ------ -------
Net Interest Income 6,381 5,353 17,955 15,377
Provision for Loan Losses 27 22 44 228
------- ------ ------ -------
Net Interest Income After Provision for
Loan Losses 6,354 5,331 17,911 15,149
------- ------ ------ -------
NONINTEREST INCOME:
Service Charges on Deposit Accounts 505 408 1,336 1,127
Late Charges and Other Fees on Loans 149 134 542 494
Dividends on FHLB Stock 60 59 174 173
Other Income 191 163 640 386
------- ------ ------ -------
Total Noninterest Income 905 764 2,692 2,180
------- ------ ------ -------
NONINTEREST EXPENSE:
Salaries and Employee Benefits 2,113 1,653 5,870 4,572
SAIF Deposit Insurance Premium 3,153 253 3,661 751
Depreciation Expense 262 197 708 573
Occupancy Expense 336 159 825 653
Computer Expense 156 123 438 378
Net Costs (Income) of Other Real Estate 13 (19) 38 (27)
Louisiana Shares and Franchise Tax 224 0 671 0
Other 1,218 829 2,924 2,299
------- ------ ------ -------
Total Noninterest Expense 7,475 3,195 15,135 9,199
------- ------ ------ -------
Income (Loss) Before Income Taxes (216) 2,900 5,468 8,130
Income Taxes (benefit) (23) 1,009 2,028 2,837
------- ------ ------ -------
NET INCOME (LOSS) ($193) $1,891 $3,440 $5,293
------- ------ ------ -------
------- ------ ------ -------
NET INCOME (LOSS) PER COMMON SHARE ($0.03) $0.28 $0.50 N/A
------- ------ ------ -------
------- ------ ------ -------
WEIGHTED AVERAGE SHARES OUTSTANDING 6,346,648 6,818,363 6,649,352 N/A
------- ------ ------ -------
------- ------ ------ -------
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
4
<PAGE>
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Unearned Unearned Common
Common Stock Acquired By Net
Stock Management Unrealized Total
Common Paid In Retained Acquired Recognition and Treasury Gain (Loss) Stockholders'
Stock Capital Earnings By ESOP Retention Plan Stock On Securities Equity
---------- --------- --------- ---------- ------------------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $46,105 ($1,265) $44,840
Net Income 5,293 5,293
Cash Dividends Declared (1,019) (1,019)
Common Stock Issued in
Conversion $7,381 $65,006 ($5,904) 66,483
Common Stock Released by
ESOP Trust 172 376 548
Charge in Unrealized Gain
(Loss) on Securities
Available for Sale 1,577 1,577
---------- --------- --------- ---------- ------------------- -------- -------------- --------------
Balance, September 30, 1995 $7,381 $65,178 $50,379 ($5,528) $0 $0 $312 $117,722
---------- --------- --------- ---------- ------------------- -------- -------------- --------------
---------- --------- --------- ---------- ------------------- -------- -------------- --------------
Balance, December 31, 1995 $7,381 $65,293 $51,584 ($5,339) $0 $0 $758 $119,677
Net Income 3,440 3,440
Cash Dividends Declared (1,691) (1,691)
Common Stock Released by
ESOP Trust 307 548 855
Common Stock Acquired by
Management Recognition Plan
Trust ($4,687) (4,687)
Common Stock Earned by
Participants of Management
Recognition Plan 123 123
Treasury Stock Acquired (4,859) (4,859)
Change in Unrealized Gain (Loss)
on Securities Available for
Sale (544) (544)
---------- --------- --------- ---------- ------------------- -------- -------------- --------------
Balance, September 30, 1996 $7,381 $65,600 $53,333 ($4,791) ($4,564) ($4,859) $214 $112,314
---------- --------- --------- ---------- ------------------- -------- -------------- --------------
---------- --------- --------- ---------- ------------------- -------- -------------- --------------
</TABLE>
5
<PAGE>
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
---------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,441 $ 5,293
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating
Activities:
Depreciation and Amortization 903 738
Provision for Loan Losses 44 228
Compensation Expense Recognized on
Management Recognition Plan 123 0
Gain on Sale of Premises and Equipment (81) (16)
(Gain) Loss on Sale of Real Estate Owned 31 (34)
Write Down of Real Estate Owned to
Market Value 6 0
Amortization of Premium/Discount on
Investments 296 294
Current Provision for Deferred Income Taxes 0 250
FHLB Stock Dividends (174) (173)
Loans Originated for Resale (1,915) 0
Proceeds From Loans Sold to Others 1,927 0
Income Reinvested on Marketable Equity
Security (228) (219)
ESOP Contribution 847 550
Net Change in Securities Classified
as Trading (2,332) 0
Changes in Assets and Liabilities:
Decrease (Increase) in Accrued
Interest Receivable 179 (834)
Decrease (Increase) in Other Assets
and Other Liabilities 1,454 (515)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,521 5,562
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Maturities of Held to
Maturity Securities 2,142 145
Proceeds from Maturities of Available
for Sale Securities 28,125 0
Purchases of Held to Maturity Securities (1,576) 0
Purchases of Available for Sale
Securities (2,995) (37,820)
Increase in Loans Receivable, Net (47,319) (20,707)
Proceeds from Sale of Premises and
Equipment 180 65
Purchases of Premises and Equipment (1,313) (450)
Proceeds from Disposition of Real
Estate Owned 253 184
Purchases of Mortgage-Backed Securities 0 (9,109)
Principal Collections on Mortgage-Backed
Securities 5,575 2,928
Cash Received in Excess of Purchase
Price of Bank Subsidiary 5,605 0
Other Investing Activities (165) 0
------- -------
NET CASH USED IN INVESTING ACTIVITIES (11,488) (64,764)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Change in Demand, NOW, Money Market
and Savings Deposit 638 (15,757)
Net Change in Time Deposits 8,482 17,960
Increase (Decrease) in Escrow Funds
and Miscellaneous Deposits, Net (28) 219
Proceeds From FHLB Advances 8,195 67,311
Principal Repayments of FHLB Advances (690) (41,836)
Proceeds from Issuance of Common Stock 0 67,903
Dividends Paid to Shareholders (1,604) (510)
Acquisition of Common Stock by
Management Recognition Plan (4,687) 0
Purchase of Treasury Stock (4,859) 0
Stock Conversion Costs Incurred 0 (1,116)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,447 94,174
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,520) 34,972
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 51,742 9,686
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 50,222 $ 44,658
------- -------
------- -------
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Acquisition of Real Estate in Settlement
of Loans $ 213 $ 183
SUPPLEMENTAL DISCLOSURES:
Cash Paid For:
Interest on Deposits and Borrowings $ 18,324 $ 15,224
Income Taxes $ 2,818 $ 2,552
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these Financial Statements.
6
<PAGE>
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements were prepared in
accordance with instructions to Form 10-Q, and therefore, do not include
information or footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. All normal, recurring adjustments which, in
the opinion of management, are necessary for a fair presentation of the
financial statements, have been included. These interim financial
statements should be read in conjunction with the audited financial
statements and note disclosures for ISB Financial Corporation (the
"Company") previously filed with the Securities and Exchange Commission in
the Company's Annual Report on Form 10-K for the year ended December 31,
1995.
BUSINESS
The Company's principal business is conducted through it's wholly owned
subsidiary, Iberia Savings Bank, which conducts business from its
main office located in New Iberia, Louisiana and 17 full-service branch
offices located in the cities of New Iberia, Lafayette, St. Martinville,
Crowley, Rayne, Kaplan, Jeanerette, Franklin, Morgan City and Abbeville.
The Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF") to the maximum extent permitted by law. The Bank is subject to
examination and regulation by the Office of Financial Institutions of the
State of Louisiana, which is the Bank's chartering authority and primary
regulator. The Bank is also subject to regulation by the Federal Deposit
Insurance Corporation ("FDIC"), as the administrator of the SAIF, and to
certain reserve requirements established by the Federal Reserve Board
("FRB"). The Bank is a member of the Federal Home Loan Bank of Dallas
("FHLB").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
the Bank and the Bank's wholly owned subsidiary. All significant
intercompany balances and transactions have been eliminated in
consolidation.
7
<PAGE>
(2) LOANS RECEIVABLE
Loans receivable (in thousands) at September 30, 1996 and December 31,
1995 consisted of the following:
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31,
1996 1995
--------- --------
<S> <C> <C>
Mortgage Loans:
Single-family Residential $331,895 $318,705
Multifamily 2,025 1,506
Commercial Real Estate 21,377 14,486
Construction 15,429 15,617
-------- --------
Total Mortgage Loans 370,726 350,314
-------- --------
Commercial Business Loans 32,226 11,055
-------- --------
Consumer Loans:
Home Equity $23,158 $15,364
Automobile 49,880 6,492
Mobile Home Loans 4,583 6,077
Educational Loans 9,641 9,262
Credit Card Loans 3,725 3,836
Loans on Savings 7,722 7,481
Other 3,613 4,960
-------- --------
Total Consumer Loans 102,322 53,472
-------- --------
Total Loans Receivable 505,274 414,841
-------- --------
Less:
Allowance for Loan Losses (4,060) (3,746)
Loans-in-Process (7,845) (8,399)
Unearned Discount (1) (1)
Deferred Loan Fees (1,057) (1,191)
Discount on Loans Purchased (1,573) (1,962)
-------- --------
Loans Receivable, Net $490,738 $399,542
-------- --------
-------- --------
</TABLE>
(3) EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the conversion from mutual to stock form, the Company
established an Employee Stock Ownership Plan ("ESOP") for the benefit of
employees of the Company and the Bank. The ESOP purchased 590,423 shares,
or 8% of the total stock sold in the conversion, for $5,904,230, financed
by a loan from the Company. The leveraged ESOP is accounted for in
accordance with AICPA SOP 93-6, "Employers' Accounting for Employee Stock
Ownership Plans".
Compensation cost of the ESOP for the nine months ended September 30, 1996
was $847,000 based on the release of 54,854 shares. At September 30, 1996,
there were 56,469 allocated shares, 54,854 shares had been committed to be
released, and 479,100 shares were held in suspense by the ESOP. The fair
value of the unearned ESOP shares was approximately $7,426,000.
8
<PAGE>
(4) EARNINGS PER SHARE
Earnings per share were based on 6,346,648 weighted average shares
outstanding during the three month period ended September 30, 1996. The
weighted average number of common shares outstanding excludes (a) the
weighted average unreleased shares owned by the ESOP of 488,158 for
the three month period ended September 30, 1996; (b) the weighted average
shares owned by the Management Recognition Plan and Trust of 295,226
for the three months ending September 30, 1996 and (c) the weighted
average shares purchased in Treasury Stock of 250,639. Earnings
per share for periods preceding the three months ended June 30, 1995
are not applicable, as the Bank's conversion from mutual-to-stock form
and reorganization into a holding company format was not completed until
April 6, 1995.
(5) ROYAL BANKGROUP OF ACADIANA, INC. ACQUISITION
After the close of business on May 3, 1996, the Company acquired, through
a multi-step cash merger transaction, Royal Bankgroup of Acadiana, Inc.
("RBA") and its wholly owned subsidiary, Bank of Lafayette ("BOL"), a
Louisiana chartered commercial bank with two offices in Lafayette,
Louisiana. BOL has been merged with and into Iberia Savings Bank and RBA
has been merged with and into the Company. The Company paid an aggregate
of $9.1 million in merger consideration for the previously outstanding
shares of common stock and options to acquire all of the outstanding common
stock of RBA. As of May 3, 1996, RBA had $76.3 million in total assets,
$63.5 million in total deposits and $44.1 million in loans outstanding.
The two BOL offices continue to be operated as branch offices of Iberia
Savings Bank. The transaction is accounted for as a purchase under
generally accepted accounting principles and it resulted in $3.3 million
of goodwill, which is to be amortized over 15 years, using the
straight-line method. The revenues and expenses of RBA are included in
these consolidated financial statements only from the date of the
acquisition forward.
(6) MANAGEMENT RECOGNITION AND RETENTION PLAN AND TRUST AND STOCK OPTION PLAN
On May 24, 1996, the shareholders of the Company approved the Management
Recognition and Retention Plan. The plan enables the Company to provide
officers, key employees and directors with a proprietary interest in the
Company as an incentive to contribute to its success. Pursuant to this
plan, the Company acquired 295,226 shares, or 4%, of its outstanding
common stock in an open market transaction. These shares are accounted
for as unearned deferred compensation and shares granted will be
amortized as compensation expense over the vesting period.
In May 1996, 168,864 shares were granted and those shares will vest over
seven years.
The shareholders also approved the Stock Option Plan on May 24, 1996. The
plan is designed to attract and retain qualified personnel in key
positions, provide officers and key employees with a proprietary interest
in the Company as an incentive to contribute to the success of the Company
and reward key employees for outstanding
9
<PAGE>
performance. The plan is also designed to retain qualified directors for
the Company. Pursuant to this plan, the Company has reserved 738,067
shares for issuance. In May 1996, 618,125 options were granted, and those
options will vest over seven years.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
At September 30, 1996, the consolidated assets of the Company totalled
$685.8 million, an increase of $77.0 million or 12.6% from December 31,
1995.
Loans receivable, net, increased by $91.2 million, or 22.8%, to $490.7
million at September 30, 1996, compared to $399.5 million at December 31,
1995. The increase was the result of $15.8 million of commercial business
and real estate loans, $22.8 million of automobile loans, and $5.5 million
of various other consumer loans acquired in the purchase of RBA and it's
subsidiary, BOL, together with loan originations during the period. This
resulted in a $13.2 million, or 4.1%, increase in single-family
residential loans, a $6.9 million, or 47.6%, increase in commercial real
estate loans, a $21.2 million, or 191.5%, increase in commercial business
loans, a $7.8 million, or 50.7%, increase in home equity loans and a $43.4
million, or 668.3%, increase in automobile loans. Such increases were
partially offset by a $1.5 million, or 24.6%, decrease in mobile home
loans and a $1.3 million, or 27.2%, decrease in other consumer loans.
The increase in loans receivable was funded primarily by the deposits
acquired from RBA, by the decrease in investment securities available for
sale, the decrease in interest bearing deposits at other institutions and
by fixed-rate advances from the Federal Home Loan Bank ("FHLB") of Dallas.
Interest bearing deposits at other institutions decreased $4.7 million, or
10.1%, to $41.7 million at September 30, 1996, compared to $46.4 million
at December 31, 1995.
The Company's investment securities available for sale decreased $25.9
million, or 30.1%, to $60.2 million at September 30, 1996, compared to
$86.1 million at December 31, 1995. Such decrease was due primarily to the
maturity or redemption of $30.1 million of investment securities together
with a $751,000 decrease in the market value of such securities which was
partially offset by the purchase of $3.0 million of investment securities
and $2.0 million of investment securities acquired from BOL.
Mortgage-backed securities decreased $1.4 million from December 31, 1995 to
September 30, 1996. Such decrease was the result of $5.8 million of
principal repayments on mortgage-backed securities partially offset by
$4.4 million of mortgage-backed securities acquired from BOL.
Deposits increased $72.5 million, or 16.3%, to $517.1 million at
September 30, 1996, compared to $444.6 million at December 31, 1995. Such
increase was due to $63.5 million of deposits acquired from BOL and $13.4
million of interest credited, which was partially offset by $4.4 million
in net deposit withdrawals.
Advances from the FHLB of Dallas increased $7.5 million, or 18.5%, to $48.0
million at September 30, 1996, compared to $40.5 million at December 31,
1995. The advances are fixed-rate and long term and are used to fund
additional originations of fixed-rate, long term single-family residential
loans.
11
<PAGE>
Total stockholders' equity decreased $7.4 million, or 6.2%, to $112.3
million at September 30, 1996, compared to $119.7 at December 31, 1995.
The decrease was the result of the declaration of cash dividends on common
stock of $1.7 million, a $544,000, after deferred taxes, decrease in net
unrealized gains on securities available for sale, $4.7 million of common
stock acquired by the Management Recognition and Retention Plan and Trust
and $4.9 million of stock purchased into treasury, which was partially
offset by the Company's net income of $3.4 million, $855,000 of common
stock released by the ESOP and $123,000 of common stock earned by
participants of the Management Recognition and Retention Plan.
RESULTS OF OPERATIONS
The Company reported a net loss of $193,000 for the three months ended
September 30, 1996, compared to $1.9 million earned during the three month
period ended September 30, 1995. The Company's net interest income
increased by $1.0 million and total noninterest income increased by
$141,000 during the three months ended September 30, 1996 compared to the
third quarter of 1995. Such increases were offset by a $4.3 million
increase in noninterest expense in the three months ended September 30,
1996 compared to the same period in 1995, primarily as a result of a $2.9
million special SAIF assessment from the Federal Deposit Insurance
Corporation, increases in salaries and benefits and the Louisiana shares
and franchise tax, which is imposed only for periods subsequent to the
Bank's mutual-to-stock conversion.
For the nine months ended September 30, 1996 the Company earned $3.4
million compared to $5.3 million for the same period of 1995. The
Company's net interest income increased $2.6 million, total noninterest
income increased $512,000 and income tax expense decreased $809,000 during
the nine months ended September 30, 1996 compared to the first nine months
of 1995. Such increases were offset by a $5.9 million increase in
noninterest expenses in the nine months ended September 30, 1996 compared
to the same period of 1995.
12
<PAGE>
Average Balances, Net Interest Income and Yields Earned and Rates Paid
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Bank from
interest-earning assets and the resultant average yields (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average daily balances during the
indicated periods.
<TABLE>
<CAPTION>
T h r e e M o n t h s E n d e d S e p t e m b e r 3 0,
----------------------------------------------------------
1996 1995
---------------------------- ---------------------------
Yield/Cost Average Average
at September 30, Average Yield/ Average Yield/
1996 Balance Interest Cost(1) Balance Interest Cost(1)
---------------- -------- -------- --------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans 7.81% $354,712 $7,268 8.20% $322,996 $6,686 8.28%
Commercial business loans 9.26 28,581 805 11.27 9,915 227 9.16
Consumer and other loans 9.47 95,986 2,321 9.67 51,774 1,306 10.09
------ ----- ------ -----
Total Loans 8.11 479,279 10,394 8.67 384,685 8,219 8.55
Mortgage-backed securities 6.49 50,962 831 6.52 46,747 737 6.31
Investment securities 6.17 66,403 999 6.02 88,069 1,354 6.15
Other earning assets 5.79 47,544 694 5.84 31,244 501 6.41
------ --- ------ ---
Total interest-earning assets 7.65 644,188 12,918 8.02 550,745 10,811 7.85
------ ------
Non-interest-earning assets 39,624 26,902
------ ------
Total assets $683,812 $577,647
-------- --------
-------- --------
Interest-bearing liabilities:
Deposits:
Demand deposits 1.88 $76,560 504 2.63 $61,455 430 2.80
Passbook savings deposits 2.66 61,310 412 2.69 50,411 353 2.80
Certificates of deposits 5.51 347,206 4,830 5.56 314,034 4,303 5.48
------- ----- ------- -----
Total deposits 4.60 485,076 5,746 4.74 425,900 5,086 4.78
Borrowings 6.54 48,154 791 6.57 20,584 372 7.23
------ --- ------ ---
Total interest-bearing liabilities 4.77 533,230 6,537 4.90 446,484 5,458 4.89
Noninterest-bearing demand deposits 30,365 8,569
Non-interest bearing liabilities 7,146 5,473
----- -----
Total liabilities 570,741 460,526
Stockholders' Equity 113,071 117,121
------- -------
Total liabilities and stockholders' equity $683,812 $577,647
======== ========
Net interest-earning assets $110,958 $104,261
======== ========
Net interest income/interest rate spread 2.88% $6,381 3.12% $5,353 2.96%
===== ====== ===== ====== =====
Net interest margin 3.96% 3.89%
===== =====
Ratio of average interest-earning assets to
average interest-bearing liabilities 120.81% 123.35%
======= =======
N i n e M o n t h s E n d e d S e p t e m b e r 3 0,
-----------------------------------------------------------
1996 1995
--------------------------- --------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost(1) Balance Interest Cost(1)
------- -------- ------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans $347,903 $21,401 8.20% $318,003 $19,847 8.32%
Commercial business loans 19,174 1,630 11.33 7,909 553 9.32
Consumer and other loans 70,982 5,556 10.44 51,730 3,920 10.10
-------- ------- -------- -------
Total Loans 438,059 28,587 8.70 377,642 24,320 8.59
Mortgage-backed securities 50,562 2,440 6.43 44,161 2,100 6.34
Investment securities 70,302 3,211 6.09 72,412 3,313 6.10
Other earning assets 58,417 2,434 5.56 20,492 1,108 7.21
-------- ------- -------- -------
Total interest-earning assets 617,340 36,672 7.92 514,707 30,841 7.99
------- -------
Non-interest-earning assets 32,965 26,969
-------- --------
Total assets $650,305 $541,676
-------- --------
-------- --------
Interest-bearing liabilities:
Deposits:
Demand deposits $ 71,932 1,412 2.62 $ 63,133 1,311 2.77
Passbook savings deposits 55,753 1,161 2.78 54,941 1,180 2.86
Certificates of deposits 332,146 13,813 5.54 310,824 12,521 5.37
-------- ------ -------- --------
Total deposits 459,831 16,386 4.75 428,898 15,012 4.67
Borrowings 47,510 2,331 6.54 8,642 452 6.97
-------- -------- -------- --------
Total interest-bearing liabilities 507,341 18,717 4.92 437,540 15,464 4.71
-------- --------
Noninterest-bearing demand deposits 18,251 7,494
Non-interest bearing liabilities 6,751 5,452
-------- --------
Total liabilities 532,343 450,486
Stockholders' Equity 117,962 91,190
-------- --------
Total liabilities and stockholders' equity $650,305 $541,676
-------- --------
-------- --------
Net interest-earning assets $109,999 $ 77,167
-------- --------
-------- --------
Net interest income/interest rate spread $17,955 3.00% $15,377 3.28%
------- ----- -------- ----
------- ----- -------- ----
Net interest margin 3.88% 3.98%
----- ----
----- ----
Ratio of average interest-earning assets to
average interest-bearing liabilities 121.68% 117.64%
------- -------
------- -------
- ----------------
(1) Annualized.
</TABLE>
13
<PAGE>
NET INTEREST INCOME
Net interest income increased $1.0 million, or 19.2%, to $6.4 million in
the three months ended September 30, 1996, compared to $5.4 million in the
three months ended September 30, 1995. The increase was due to a $2.1
million, or 19.5%, increase in interest income, which was partially offset
by a $1.1 million, or 19.8%, increase in interest expense. The increase
in interest income was the result of a $93.4 million, or 17.0%, increase
in the average balance of interest-earning assets, due in part to $63.2
million in aggregate interest-earning assets acquired from RBA, together
with a 17 basis point (100 basis points being equal to 1%) increase in the
yield thereon. The increase in interest expense was the result of a $86.7
million, or 19.4%, increase in the average balance of interest-bearing
liabilities together with a 1 basis point increase in the cost thereon.
The Company's interest rate spread (the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities) and net interest margin (net interest income
as a percentage of average interest-earning assets) amounted to 3.12% and
3.96%, respectively, during the three months ended September 30, 1996,
compared to 2.96% and 3.89%, respectively, for the comparable period in
1995.
For the nine month period ending September 30, 1996, net interest income
increased $2.6 million, or 16.8%, to $18.0 million compared to $15.4
million for the same period in 1995. The increase was due to a $5.8
million, or 18.9%, increase in interest income, which was partially offset
by a $3.3 million, or 21.0%, increase in interest expense. The increase
in interest income was the result of a $102.6 million, or 19.9%, increase
in the average balace of interest-earning assets which was partially
offset by a 7 basis point decrease in the yield thereon. The increase in
interest expense was the result of a $69.8 million, or 16.0%, increase in
the average balance of interest-bearing liabilities together with a 21
basis point increase in the cost thereon. The Company's interest rate
spread and net interest margin amounted to 3.00% and 3.88%, respectively,
during the nine months ended September 30, 1996, compared to 3.28% and
3.98%, respectively, for the comparable period in 1995.
INTEREST INCOME
The Company's total interest income was $12.9 million for the three months
ended September 30, 1996, compared to $10.8 million for the three months
ended September 30, 1995. The reasons for the $2.1 million, or 19.5%,
increase in interest income were a $2.2 million, or 26.5%, increase in
interest income from loans, a $193,000, or 38.5%, increase in interest
income from other earning assets, primarily interest-earning deposits held
at other institutions and a $94,000, or 12.8%, increase in interest income
from mortgage-backed securities which was partially offset by a $372,000,
or 27.7%, decrease in interest income from investment securities. The
increase in interest income from loans was the result of a $94.6 million,
or 24.6%, increase in the average balance of loans, together with a 12
basis point increase in the average yield earned thereon. The increase in
interest income from other earning assets was the result of a $16.3
million, or 52.2%, increase in the average balance of other earning assets
which was partially offset by a 57 basis point decrease in the yield
earned thereon. The increase in interest income on mortgage-backed
securities was the result of a $4.2
14
<PAGE>
million, or 9.0%, increase in the average balance of mortgage-backed
securities together with a 21 basis point increase in the yield earned
thereon. The decrease in interest income from investment securities was
the result of a $21.7 million, or 24.6%, decrease in the average balance
of investment securities together with a 13 basis point decrease in the
yield thereon.
For the nine months ended September 30, 1996, total interest income was
$37.7 million compared to $30.8 million for the same period in 1995. The
reasons for the $5.8 million, or 18.9%, increase in interest income were a
$4.3 million, or 17.5%, increase in interest income from loans, a $340,000,
or 16.2%, increase in interest income from mortgage-backed securities, and
a $1.3 million, or 119.7%, increase in interest income from other earning
assets. The increase in interest income from loans was the result of a
$60.4 million, or 16.0%, increase in the average balance of loans, together
with a 11 basis point increase in the yield thereon. The increase in
interest income from mortgage-backed securities was the result of $6.4
million, or 14.5%, increase in the average balance of mortgage-backed
securities, together with a 9 basis point increase in the yield earned
thereon. The increase in interest income from other earning assets was the
result of a $37.9 million, or 185.1%, increase in the average balance of
other earning assets, which was partially offset by a 165 basis point
decrease in the yield earned thereon. The decrease in interest income
from investment securities was the result of a $2.1 million, or 2.9%,
decrease in the average balance of investment securities together with a 1
basis point decrease in the yield earned thereon.
INTEREST EXPENSE
The Company's total interest expense was $6.5 million during the three
months ended September 30, 1996, compared to $5.5 million for the three
months ended September 30, 1995. The primary reasons for the $1.1 million,
or 19.8%, increase in interest expense was a $660,000, or 13.0%, increase
in interest expense on deposits due to a $59.2 million, or 13.9%, increase
in the average balance of deposits, which was partially offset by a 4
basis point decrease in the average cost thereof and a $419,000, or
112.6%, increase in interest expense paid on advances from the FHLB due to
a $27.6 million, or 133.9%, increase in the average balance of advances
from the FHLB which was partially offset by a 66 basis point decrease in
the cost thereof. The borrowings from the FHLB are used to fund
fixed-rate, long term single-family residential loans.
For the nine months ended September 30, 1996, the company's total interest
expense was $18.7 million, compared to $15.5 million for the same period
in 1995. The primary reasons for the $3.3 million, or 21.0%, increase in
interest expense was a $1.4 million, or 9.2%, increase in interest expense
on deposits due to a $30.9 million, or 7.2%, increase in the average
balance of deposits together with a 8 basis point increase in the cost
thereof and a $1.9 million, or 415.7%, increase in interest expense on
borrowings due to a $38.9 million, or 449.8%, increase in the average
balance of borrowings which was partially offset by a 43 basis point
decrease in the cost thereof.
15
<PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses was $27,000 in the three months ended
September 30, 1996 as compared to $22,000 for the same period in 1995.
The acquisition of BOL by the Company resulted in $542,000 of additional
loan loss reserves being added to the Company's loan loss reserves. As of
September 30, 1996, the ratio of the Company's allowance for loan losses to
non-performing loans was 263.1%.
NONINTEREST INCOME
Noninterest income increased $141,000, or 18.50%, in the three months ended
September 30, 1996 to $905,000, compared to $764,000 for the three months
ended September 30, 1995. Such increase was due primarily to a $97,000,
or 23.8%, increase in service charges on deposit accounts, a $28,000, or
17.2%, increase in other income and a $15,000, or 11.2%, increase in late
charges and fees on loans.
For the nine months ended September 30, 1996, noninterest income increased
$512,000, or 23.5%, to $2.7 million, compared to $2.2 million for the same
period in 1995. Such increase was due primarily to a $209,000, or 18.5%,
increase in service charges on deposit accounts, a $48,000, or 9.7%,
increase in late charges and other fees on loans and a $254,000, or 65.8%,
increase in other income.
NONINTEREST EXPENSE
Noninterest expense increased $4.3 million, or 134.0%, in the three months
ended September 30, 1996 to $7.5 million, compared to $3.2 million in the
three months ended September 30, 1995. Such increase was due primarily to a
$2.9 million increase in SAIF deposit insurance premium due to the
special SAIF assessment, a $460,000, or 27.8%, increase in salaries
and employee benefits due primarily to increase the ESOP and management
recognition plans and salaries and benefits associated with the additional
personnel needed to staff the two branch offices acquired from the Bank of
Lafayette and the two new branches opened in supermarkets during the second
quarter of 1996, a $177,000, or 111.3%, increase in occupancy expense
due primarily to the two branches acquired from RBA and the two new
supermarket branches and a $224,000 increase in Louisiana Shares Tax,
which is assessed only on stock-form institutions beginning in the year
following the issuance of stock, and Louisiana Franchise Tax, which was
nominal in 1995 because the parent company's assets at the beginning of
1995 were zero. Other noninterest expense increased $389,000, or 46.9%,
primarily due to increases associated with the two branch offices acquired
from BOL and the two new branch offices opened in supermarkets and the
amortization of goodwill associated with the RBA acquisition.
For the nine months ended September 30, 1996, noninterest expense increased
$5.9 million, or 64.5%, to $15.1 million compared to $9.2 million for the
same period in 1995. Such increase was primarily due to a $1.3 million, or
28.4%, increase in salaries and employee benefits, a $2.9 million increase
in SAIF deposit insurance
16
<PAGE>
premium from a $671,000 increase in Louisiana Shares Tax and Louisiana
Franchise Tax and a $625,000, or 27.2%, increase in other noninterest
expense.
INCOME TAX EXPENSE (BENEFIT)
Income tax expense decreased $1.0 million, or 102.3%, in the three months
ended September 30, 1996 to a benefit of $23,000, compared to $1.0 million
for the three months ended September 30, 1995. The decrease in income tax
expense reflects a decrease in income before income taxes.
For the nine months ended September 30, 1996, income tax expense decreased
$809,000, or 28.5%, to $2.0 million compared to $2.8 million for the same
period in 1995. The decrease in income tax expense reflects decrease
in income before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The
Company's primary sources of funds are deposits, borrowings, amortization,
prepayments and maturities of outstanding loans and mortgage-backed
securities, maturities of investment securities and other short-term
investments and funds provided from operations. While scheduled payments
from the amortization of loans and mortgage-backed securities and maturing
investment securities and short-term investments are relatively predictable
sources of funds, deposit flows and loan and mortgage-backed security
prepayments are greatly influenced by general interest rates, economic
conditions and competition. In addition, the Company invests excess funds
in overnight deposits and other short-term interest-earning assets which
provide liquidity to meet lending requirements. The Bank has been able to
generate sufficient cash through its deposits as well as borrowings. At
September 30, 1996, the Company had $48.0 million in outstanding advances
from the Federal Home Loan Bank of Dallas.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term
investments such as over-night deposits. On a longer-term basis, the
Company maintains a strategy of investing in various lending products.
The Company uses its sources of funds primarily to meet its ongoing
commitments, to pay maturing savings certificates and savings withdrawals,
fund loan commitments and maintain a portfolio of mortgage-backed and
investment securities. At September 30, 1996, the total approved loan
commitments outstanding amounted to $19.5 million. At the same time,
commitments under unused lines of credit, including credit card lines,
amounted to $45.9 million. Certificates of deposit scheduled to mature in
six months or less at September 30, 1996 totalled $136.7 million. Based
on past experience, management believes that a significant portion of
maturing deposits will remain with the Bank. On October 18, 1996, the
Company consummated its acquisition of Jefferson Bancorp, Inc. for
$51.2 million in cash. The Company anticipates it will continue to have
sufficient funds to
17
<PAGE>
meet its liquidity requirements.
At September 30, 1996, the Company and the Bank had regulatory capital
which was well in excess of regulatory limits. The current requirements
and the Bank's actual levels as of September 30, 1996 are detailed below
(dollars in thousands):
<TABLE>
<CAPTION>
REQUIRED CAPITAL ACTUAL CAPITAL EXCESS CAPITAL
---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Leverage $19,639 3.00% $81,384 12.43% $61,745 9.43%
Tier 1 Risk-Based $14,689 4.00% $81,384 22.16% $66,695 18.16%
Total Risk-Based $29,379 8.00% $85,444 23.27% $56,065 15.27%
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," establishing financial accounting and reporting standards
for stock-based employee compensation plans. This statement encourages
all entities to adopt a new method of accounting to measure compensation
cost of all employee stock compensation plans based on the estimated fair
value of the award at the date it is granted. Companies are, however,
allowed to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting, which generally does not
result in compensation expense recognition for most plans. Companies that
elect to remain with the existing accounting are required to disclose in a
footnote to the financial statements pro forma net income and, if
presented, earnings per share, as if this Statement had been adopted. The
accounting requirements of this Statement are effective for transactions
entered into in fiscal years that begin after December 15, 1995.
18
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
After the close of business on October 18, 1996, the Company acquired,
through a multi-step cash merger transaction, Jefferson Bancorp, Inc.
and its wholly owned subsidiary, Jefferson Federal Savings Bank, a
federally chartered savings and loan bank with seven offices in
Jefferson and Orleans parishes of Lousiana. Jefferson Federal Savings
Bank has been rechartered into a state savings bank and will operate as
Jefferson Bank and Jefferson Bancorp, Inc. has been merged with and
into the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Not applicable.
b) No Form 8-K reports were filed during the quarter.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ISB FINANCIAL CORPORATION
By: /s/ Larrey G. Mouton
------------------------
Date: November 8, 1996 Larrey G. Mouton, President and
Chief Executive Officer
By: /s/ William M. Lahasky
------------------------
Date: November 8, 1996 William M. Lahasky, Vice President
and Chief Financial Officer
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
Consolidated Statements of Financial Condition at September 30, 1996 and
December 31, 1995; Consolidated Statements of Operations for the
nine months ended September 30, 1996 and 1995 and Form 10-Q for the
nine months ended September 30, 1996 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 8,489
<INT-BEARING-DEPOSITS> 41,733
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 2,722
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 50,287
<INVESTMENTS-MARKET> 60,177
<LOANS> 494,798
<ALLOWANCE> (4,060)
<TOTAL-ASSETS> 685,827
<DEPOSITS> 517,146
<SHORT-TERM> 47,995
<LIABILITIES-OTHER> 8,372
<LONG-TERM> 0
0
0
<COMMON> 7,381
<OTHER-SE> 104,933
<TOTAL-LIABILITIES-AND-EQUITY> 685,827
<INTEREST-LOAN> 28,587
<INTEREST-INVEST> 5,651
<INTEREST-OTHER> 2,434
<INTEREST-TOTAL> 36,672
<INTEREST-DEPOSIT> 16,386
<INTEREST-EXPENSE> 18,717
<INTEREST-INCOME-NET> 17,955
<LOAN-LOSSES> 44
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 15,135
<INCOME-PRETAX> 5,468
<INCOME-PRE-EXTRAORDINARY> 5,468
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,440
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
<YIELD-ACTUAL> 3.88
<LOANS-NON> 1,841
<LOANS-PAST> 36
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,701
<ALLOWANCE-OPEN> 3,729
<CHARGE-OFFS> 393
<RECOVERIES> 183
<ALLOWANCE-CLOSE> 4,060
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,060
<FN>
<F1>In thousands, except per share data.
</FN>
</TABLE>
