<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 0-25756
ISB Financial Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Louisiana 72-1280718
- ------------------------------------------------ --------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification Number)
1101 East Admiral Doyle Drive
New Iberia, Louisiana 70560
- ------------------------------------------------ --------------------------
(Address of principal executive office) (Zip Code)
(318) 365-2361
--------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
As of April 21, 1998, 6,906,318 shares of the Registrant's common
stock were issued and outstanding. Of that total, 586,285 shares are
held by the Registrant's Employee Stock Ownership Plan, of which
375,495 shares were not committed to be released.
<PAGE> 2
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition 3
(As of March 31, 1998 and December 31, 1997)
Consolidated Statements of Income (For the three months 4
ended March 31, 1998 and 1997)
Consolidated Statements of Stockholders' Equity (For the 5
three months ended March 31, 1998 and 1997)
Consolidated Statements of Cash Flows (For the three 6
months ended March 31, 1998 and 1997)
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
2
<PAGE> 3
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Assets
------ March 31, December 31,
1998 1997
--------- -----------
<S> <C> <C>
Cash and Cash Equivalents:
Cash on Hand and Due from Banks $ 11,747 $ 11,959
Interest Bearing Deposits 41,490 32,348
Investment Securities:
Held to Maturity (fair value of $1,448 and $1,813, 1,446 1,811
respectively)
Available for Sale, at fair value 62,802 75,506
Mortgage-Backed Securities Held to Maturity (fair 104,513 115,125
value of $105,712 and $116,004, respectively)
Loans Receivable, Net 672,970 659,244
Real Estate Owned 493 473
Premises and Equipment, Net 19,340 19,253
Federal Home Loan Bank Stock, at Cost 6,251 6,160
Accrued Interest Receivable 5,243 5,514
Goodwill and Acquisition Intangibles 15,989 16,358
Other Assets 991 3,531
-------- --------
Total Assets $943,275 $947,282
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits $771,823 $778,695
Federal Home Loan Bank Advances 46,462 46,728
Advance Payments by Borrowers for Taxes and Insurance 1,608 1,429
Accrued Interest Payable on Deposits 364 405
Accrued and Other Liabilities 5,576 4,461
-------- --------
Total Liabilities 825,833 831,718
-------- --------
Stockholders' Equity:
Preferred Stock of $1 par value; 5,000,000 shares authorized 0 0
-0- shares issued or outstanding
Common Stock of $1.00 par value, authorized 25,000,000 7,381 7,381
shares, 7,380,671 shares issued
Additional Paid-in Capital 67,072 66,798
Retained Earnings (Substantially Restricted) 58,332 57,096
Unearned Common Stock Held by ESOP (3,755) (3,921)
Unearned Common Stock Held by RRP Trust (3,981) (4,082)
Treasury Stock, 474,353 and 478,643 shares, at cost (7,866) (7,929)
Unrealized Gain on Securities, Net of Deferred Taxes 259 221
-------- --------
Total Stockholders' Equity 117,442 115,564
-------- --------
Total Liabilities and Stockholders' Equity $943,275 $947,282
======== ========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
3
<PAGE> 4
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------------
1998 1997
------- -------
<S> <C> <C>
Interest Income:
Interest on Loans $14,033 $12,333
Interest and Dividends on Investment Securities 1,234 1,647
Interest on Mortgage-Backed Securities 1,811 2,264
Interest on Deposits 486 533
------- -------
Total Interest Income 17,564 16,777
------- -------
Interest Expense:
Interest on Deposits 7,793 7,977
Interest on Federal Home Loan Bank Advances 753 769
------- -------
Total Interest Expense 8,546 8,746
------- -------
Net Interest Income 9,018 8,031
Provision for Loan Losses 230 162
------- -------
Net Interest Income After Provision for Loan Losses 8,788 7,869
------- -------
Noninterest Income:
Service Charges on Deposit Accounts 923 713
Late Charges and Other Fees on Loans 322 200
Other Income 552 376
------- -------
Total Noninterest Income 1,797 1,289
------- -------
Noninterest Expense:
Salaries and Employee Benefits 3,520 3,147
SAIF Deposit Insurance Premium 110 111
Depreciation Expense 407 284
Occupancy Expense 475 408
Computer Expense 292 339
Marketing and Advertising 213 75
Franchise and Shares Tax Expense 249 240
Amortization of Goodwill and Other Acquired Intangibles 369 401
Other Expenses 1,417 1,133
------- -------
Total Noninterest Expense 7,052 6,138
------- -------
Income Before Income Tax Expense 3,533 3,020
Income Tax Expense 1,386 1,225
------- -------
Net Income $ 2,147 $ 1,795
======= =======
Earnings Per Share - Basic $ 0.34 $ 0.29
======= =======
Earnings Per Share - Fully Diluted $ 0.33 $ 0.29
======= =======
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
4
<PAGE> 5
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Unearned
Unearned Common Net
Additional Common Stock Unrealized Total
Common Paid In Retained Stock Held Held By Treasury Gain (Loss) Stockholders'
Stock Capital Earnings By ESOP RRP Trust Stock On Securities Equity
------ ---------- -------- --------- --------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $7,381 $65,725 $54,660 ($4,612) ($4,476) ($4,859) $187 $114,006
Comprehensive Income:
Net Income 1,795 1,795
Change in Unrealized Gain (Loss) on (246) (246)
Securities Available for Sale
Net of Deferred Taxes of ($127)
--------
Total Comprehensive Income 1,549
Cash Dividends Declared (699) (699)
Common Stock Released by 209 175 384
ESOP Trust
Common Stock earned by Participants 1 93 94
of Management Recognition Plan
Treasury Stock Acquired (920) (920)
------ ------- ------- ------- ------- ------- ---- --------
Balance, March 31, 1997 $7,381 $65,725 $56,455 ($4,612) ($4,476) ($4,859) ($59) $115,555
====== ======= ======= ======= ======= ======= ==== ========
Balance, December 31, 1997 $7,381 $66,798 $57,096 ($3,921) ($4,082) ($7,929) $221 $115,564
Comprehensive Income:
Net Income 2,147 2,147
Change in Unrealized Gain (Loss) on 38 38
Securities Available for Sale
Net of Deferred Taxes of $20
--------
Total Comprehensive Income 2,185
Cash Dividends Declared (911) (911)
Common Stock Released by 259 166 425
ESOP Trust
Common Stock Earned by Participants 10 101 111
of Recognition and Retention Plan Trust
Treasury Stock Reissued 5 63 68
------ ------- ------- ------- ------- ------- ---- --------
Balance, March 31, 1998 $7,381 $66,798 $59,243 ($3,921) ($4,082) ($7,929) $259 $117,442
====== ======= ======= ======= ======= ======= ==== ========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
5
<PAGE> 6
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997
---------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,147 $ 1,795
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 809 719
Provision for Loan Losses 230 150
Compensation Expensed Recognized on RRP 111 94
(Gain) Loss on Sale of Premises and Equipment (12) 7
Loss (Gain) on Sale of Real Estate Owned 17 (24)
Gain on Sale of Loans Held for Sale (166) (40)
Amortization of Premium/Discount on Investments (54) 58
Current Provision for Deferred Income Taxes (32) 0
FHLB Stock Dividends (91) (82)
Loans Originated for Resale (10,939) (2,503)
Proceeds from Loans Sold to Others 11,105 2,543
Income Reinvested on Marketable Equity Security (82) (79)
ESOP Contribution 370 384
Net Change in Securities Classified as Trading 0 (42)
Proceeds from ESOP Note Repayment 0 841
Changes in Assets and Liabilities:
Decrease in Accrued Interest Receivable 271 41
Decrease in Other Assets and Other Liabilities 3,483 2,040
---------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 7,167 $ 5,902
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds From Maturities of Held to Maturity Securities $ 365 $ 340
Proceeds From Maturities of Available for Sale Securities 12,845 13,500
Purchases of Securities Available for Sale 0 (9,998)
Increase in Loans Receivable, Net (14,145) (20,806)
Proceeds From Sale of Premises and Equipment 202 0
Purchases of Premises and Equipment (684) (1,903)
Preceeds From Disposition of Real Estate Owned 157 501
Principal Collections on Mortgage-Backed Securities 10,664 10,122
---------------------------
NET CASH USED IN INVESTING ACTIVITIES $ 9,404 $ (8,244)
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Change in Demand, NOW, Money Market and
Savings Deposits $ 4,961 $ 11,117
Net Change in Time Deposits (11,833) (1,966)
Increase in Escrow Funds and Miscellaneous
Deposits, Net 179 85
Principal Repayments of FHLB Advances (266) (250)
Dividends Paid to Shareholders (750) (553)
Proceeds from Sale of Treasury Stock 68 0
Payments to Repurchase Common Stock 0 (920)
---------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ (7,641) $ 7,513
---------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 8,930 $ 5,171
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 44,307 53,385
---------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 53,237 $ 58,556
===========================
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Acquisition of Real Estate in Settlement of Loans $ 187 $ 79
===========================
SUPPLEMENTAL DISCLOSURES:
Cash Paid (Received) For:
Interest on Deposits and Borrowings $ 8,587 $ 9,167
===========================
Income Taxes $ - $ -
===========================
Income Tax Refunds $ - $ -
===========================
</TABLE>
6
<PAGE> 7
ISB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements were prepared in
accordance with instructions to Form 10-Q, and therefore, do not include
information or footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity
with generally accepted accounting principles. All normal, recurring
adjustments which, in the opinion of management, are necessary for a fair
presentation of the financial statements, have been included. These
interim financial statements should be read in conjunction with the
audited financial statements and note disclosures for ISB Financial
Corporation (the "Company") previously filed with the Securities and
Exchange Commission in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
BUSINESS
The Company's principal business is conducted through it's wholly owned
subsidiary, IBERIABANK (the "Bank"), which conducts business from its main
office located in New Iberia, Louisiana and 26 full-service branch offices
located in the cities of New Iberia, Lafayette, St. Martinville, Crowley,
Rayne, Kaplan, Jeanerette, Franklin, Morgan City, Abbeville, Gretna,
Marrero, River Ridge, Metairie, New Orleans and Kenner, Louisiana. The
Bank's deposits are insured by the Federal Deposit Insurance Corporation
("FDIC") to the maximum extent permitted by law. The Bank is a Louisiana
chartered commercial bank. The Bank is subject to examination and
regulation by the Office of Financial Institutions of the State of
Louisiana, which is the Bank's chartering authority and primary regulator.
The Bank is also subject to regulation by the FDIC and to certain reserve
requirements established by the Federal Reserve Board ("FRB"). The Bank is
a member of the Federal Home Loan Bank of Dallas ("FHLB").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
the Bank and the Bank's wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
The branches in Marrero, River Ridge, Metairie, New Orleans, Gretna and
Kenner were branches of Jefferson Bank, a wholly owned subsidiary of the
Company that was merged into Iberia Savings Bank on September 14, 1997.
Jefferson Bank was acquired by the Company in October of 1996.
7
<PAGE> 8
(2) LOANS RECEIVABLE
Loans receivable (in thousands) at March 31, 1998 and December 31, 1997
consisted of the following:
<TABLE>
<CAPTION>
Mar. 31, Dec. 31,
1998 1997
-------- --------
<S> <C> <C>
Residential Mortgage Loans:
Single-family $370,882 $376,320
Multi-family 2,332 2,516
Construction 22,185 22,109
-------- --------
Total Residential Mortgage Loans 395,399 400,945
-------- --------
Commercial Loans:
Business 59,407 57,978
Real Estate 55,999 48,291
-------- --------
Total Commercial Loans 115,406 106,269
Consumer Loans:
Home Equity 36,210 34,192
Automobile 10,450 9,433
Indirect Automobile 96,422 90,676
Mobile Home Loans 3,069 3,226
Educational Loans 9,619 9,458
Credit Card Loans 3,747 4,150
Loans on Savings 11,052 11,255
Other 8,727 7,358
-------- --------
Total Consumer Loans 179,296 169,748
-------- --------
Total Loans Receivable 690,101 676,962
-------- --------
Adjustments:
Allowance for Loan Losses (5,544) (5,258)
Loans-in-Process (13,290) (14,082)
Prepaid Dealer Participation 3,761 3,636
Unearned Interest (204) (160)
Deferred Loan Fees, Net (801) (709)
Discount on Loans Purchased (1,053) (1,145)
-------- --------
Loans Receivable, Net $672,970 $659,244
======== ========
</TABLE>
8
<PAGE> 9
(3) EARNINGS PER SHARE
Basic earnings per share were based on 6,246,791 weighted average shares
outstanding during the three month period ended March 31, 1998. Diluted
earnings per share were based on 6,502,254 weighted average shares
outstanding during the three month period ended March 31, 1998. For the
three months ended March 31, 1998, the weighted average number of common
shares outstanding excludes (a) the weighted average unreleased shares
owned by the Employee Stock Ownership Plan ("ESOP") of 383,808; (b) the
weighted average shares owned by the Management Recognition Plan and Trust
of 271,895 and (c) the weighted average shares purchased in Treasury Stock
of 478,177.
9
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
CHANGES IN FINANCIAL CONDITION
At March 31, 1998, the consolidated assets of the Company totalled $943.3
million, a decrease of $4.0 million, or .4%, from December 31, 1997.
Loans receivable, net, increased by $13.7 million, or 2.1%, to $673.0
million at March 31, 1998, compared to $659.2 million at December 31,
1997. Such increase was the result of a $7.7 million, or 16.0%, increase
in commercial real estate loans, a $1.4 million, or 2.5%, increase in
commercial business loans, a $2.0 million, or 5.9%, increase in home
equity loans, a $1.0 million, or 10.8%, increase in automobile loans, a
$5.7 million, or 6.3%, increase in indirect automobile loans and a $1.4
million, or 18.6%, increase in other consumer loans. Such increases were
partially offset by a $5.4 million, or 1.4%, decrease in single-family
residential loans. The changes in the loan portfolio reflect management's
efforts to increase the originations of commercial real estate, commercial
business, indirect automobile loans and consumer loans. Such loans
generally are considered to involve more risk than 1-4 family residential
mortgage loans, but generally have higher yields. The Company's loan to
deposit ratio at March 31, 1998 was 87.2% compared to 84.7% at December
31, 1997. For additional information on loans, see Note 2 to the Notes to
Consolidated Financial Statements.
The increase in loans receivable was funded primarily by a decrease in
investment securities available for sale and a decrease in mortgage-backed
securities.
Interest bearing deposits at other institutions increased $9.1 million, or
28.3%, to $41.5 million at March 31, 1998, compared to $32.3 million at
December 31, 1997.
The Company's investment securities available for sale decreased $12.7
million, or 16.8%, to $62.8 million at March 31, 1998, compared to $75.5
million at December 31, 1997. Such decrease was the result of the
maturity or redemption of $12.8 million of investment securities, which
was partially offset by the $58,000 increase in the market value of such
securities and $54,000 of net premium amortization on such securities.
Mortgage-backed securities decreased $10.6 million, or 9.2%, from December
31, 1997 to March 31, 1998. Such decrease was attributable entirely to
repayments.
Deposits decreased $6.9 million, or .9%, to $771.8 million at March 31,
1998, compared to $778.7 million at December 31, 1997. Such decrease was
due to $13.7 million of net deposits withdrawals, which was partially
offset by $6.8 million of interest credited.
Advances from the FHLB of Dallas decreased $266,000, or .6%, to $46.5
million at March 31, 1998, compared to $46.7 million at December 31, 1997.
The decrease in advances was attributable to scheduled payments made. The
advances are amortizing, fixed-rate and long term and were used to fund
originations of fixed-rate, long term single-family residential loans.
10
<PAGE> 11
Total stockholders' equity increased $1.9 million, or 1.6%, to $117.4
million at March 31, 1998. The increase was the result of the Company's
net income of $2.1 million, $425,000 of common stock released by the ESOP,
$111,000 of common stock earned by participants of the Recognition and
Retention Plan, a $38,000, after deferred taxes, increase in net
unrealized gains on securities available for sale and $68,000 of stock
issued out of treasury, all of which was partially offset by the
declaration of cash dividends on common stock of $911,000.
RESULTS OF OPERATIONS
The Company reported net income of $2.1 million for the three months ended
March 31, 1998, compared to $1.8 million during the three month period
ended March 31, 1997, an increase of $352,000. The Company's net interest
income increased by $987,000 and total noninterest income increased by
$508,000 during the three months ended March 31, 1998 compared to the
first quarter of 1997. Such changes were partially offset by a $68,000
increase in provision for loan losses, a $914,000 increase in total
noninterest expense and a $161,000 increase in income tax expense.
11
<PAGE> 12
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total
dollar amount of interest expense on interest-bearing liabilities and the
resultant average rate; (iii) net interest income; (iv) interest rate spread;
and (v) net interest margin. Information is based on average daily balances
during the indicated periods.
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------------------------
1998 1997
---------------------------------- --------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost(1) Balance Interest Cost(1)
-------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans $427,930 $8,828 8.25% $414,147 $8,392 8.11%
Commercial business loans 58,676 1,558 10.62 41,295 1,078 10.44
Consumer and other loans 175,242 3,647 8.32 126,381 2,863 9.06
-------- ------ -------- ------
Total Loans 661,848 14,033 8.48 581,823 12,333 8.48
-------- ------ -------- ------
Mortgage-backed securities 110,227 1,811 6.57 145,667 2,264 6.22
Investment securities 80,515 1,234 6.13 106,250 1,647 6.20
Other earning assets 29,466 486 6.60 35,551 533 6.00
-------- ------ -------- ------
Total interest-earning assets 882,056 17,564 7.97 869,291 16,777 7.72
------ ------
Non-interest-earning assets 62,645 59,836
-------- --------
Total assets $944,701 $929,127
======== ========
Interest-bearing liabilities:
Deposits:
Demand deposits $154,942 976 2.52 $136,275 853 2.50
Passbook savings deposits 110,693 651 2.35 120,474 765 2.54
Certificates of deposits 461,125 6,166 5.35 468,927 6,359 5.42
-------- ------ -------- ------
Total deposits 726,760 7,793 4.29 725,676 7,977 4.40
Borrowings 46,637 753 6.45 47,664 769 6.45
-------- ------ -------- ------
Total interest-bearing
liabilities 773,397 8,546 4.42 773,340 8,746 4.52
------ ------
Non-interest bearing demand deposits 44,801 32,966
Non-interest bearing liabilities 9,410 8,709
-------- --------
Total liabilities 827,608 815,015
Stockholders' Equity 117,093 114,112
-------- --------
Total liabilities and stockholders' equity $944,701 $929,127
======== ========
Net interest-earning assets $108,659 $ 95,951
======== ========
Net interest income/interest rate
spread $9,018 3.55% $8,031 3.20%
====== ===== ====== =====
Net interest margin 4.09% 3.70%
===== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 114.05% 112.41%
======== ========
</TABLE>
- ------------
(1) Annualized.
12
<PAGE> 13
NET INTEREST INCOME
Net interest income increased $987,000, or 12.3%, to $9.0 million in the
three months ended March 31, 1998, compared to $8.0 million in the three
months ended March 31, 1997. The increase was due to a $787,000, or 4.7%,
increase in interest income, together with a $200,000, or 2.3%, decrease
in interest expense. The increase in interest income was the result of a
$12.8 million, or 1.5%, increase in the average balance of
interest-earning assets, together with a 25 basis point (100 basis points
being equal to 1%) increase in the yield thereon. The decrease in
interest expense was the result of a 10 basis point decrease in the cost
of interest-bearing liabilities. The average balance of interest-bearing
liabilities remained unchanged from the first quarter of 1997 to the first
quarter of 1998. 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 3.55% and 4.09%, respectively, during the three months
ended March 31, 1998, compared to 3.20% and 3.70%, respectively, for the
comparable period in 1997.
INTEREST INCOME
The Company's total interest income was $17.6 million for the three months
ended March 31, 1998, compared to $16.8 million for the three months ended
March 31, 1997. The reason for the $787,000, or 4.7%, increase in
interest income was a $1.7 million, or 13.8%, increase in interest income
from loans, which was partially offset by a $413,000, or 25.1%, decrease
in interest and dividends on investment securities, a $453,000, or 20.0%,
decrease in interest income from mortgage-backed securities and a $47,000,
or 8.8%, decrease in interest on deposits held at other financial
institutions. The increase in interest income from loans was the result
of a $80.0 million, or 13.8%, increase in the average balance of loans.
The yield earned on loans remained unchanged at 8.48%. The decrease in
interest and dividends on investment securities was the result of a $25.7
million, or 24.2%, decrease in the average balance of investment
securities, together with a seven basis point decrease in the yield earned
thereon. The decrease in interest income from mortgage-backed securities
was the result of a $35.4 million, or 24.3%, decrease in the average
balance of mortgage-backed securities, which was partially offset by a 35
basis point increase in the yield earned thereon. The decrease in
interest on other earning assets, primarily deposits at other financial
institutions, was the result of a $6.1 million, or 17.1%, decrease in the
average balance of other earning assets, which was partially offset by a
60 basis point increase in the yield earned thereon.
INTEREST EXPENSE
The Company's total interest expense was $8.5 million during the three
months ended March 31, 1998, compared to $8.7 million for the three months
ended March 31, 1997. The reason for the $200,000, or 2.3%, decrease in
interest expense was an 11 basis point decrease in the average cost of
deposits, which was partially offset by a $1.1 million, or .1%, increase
in the average balance of deposits. Interest expense
13
<PAGE> 14
paid on advances from the FHLB remained relatively constant. The
borrowings from the FHLB are used to fund fixed-rate, long term
single-family residential loans.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $230,000 in the three months ended March
31, 1998 as compared to $162,000 for the same period in 1997. The
increased provisions for loan losses during the three month period in 1998
compared to 1997 was due to the increase in net loans, particularly the
increases in commercial real estate, commercial business and indirect
automobile loans which generally involve greater risk than single-family
residential loans. As of March 31, 1998, the ratio of the Company's
allowance for loan losses to non-performing loans was 223.9%.
NONINTEREST INCOME
Noninterest income increased $508,000, or 39.4%, in the three months ended
March 31, 1998 to $1.8 million, compared to $1.3 million for the three
months ended March 31, 1997. Such increase was due primarily to a
$210,000, or 29.5%, increase in service charges on deposit accounts, a
$122,000, or 61.0%, increase in late charges and other fees on loans and a
$176,000, or 46.8%, increase in other income. The increase in service
charges on deposit accounts was due primarily to the increased number of
accounts that are subject to such service charges together with increased
charges on such accounts. The increase in other income was due primarily
to increased gains on the sale of newly originated mortgage loans in the
secondary market.
NONINTEREST EXPENSE
Noninterest expense increased $914,000, or 14.9%, in the three months
ended March 31, 1998 to $7.1 million, compared to $6.1 million in the
three months ended March 31, 1997. Such increase was due primarily to a
$373,000, or 11.9%, increase in salaries and employee benefits, a
$123,000, or 43.1%, increase in depreciation expense, a $67,000, or 16.4%,
increase in occupancy expense, a $138,000, or 184.0%, increase in
marketing and advertising expense and a $284,000, or 25.1%, increase in
other expenses, all of which was partially offset by a $47,000, or 13.7%,
decrease in computer expense and a $32,000, or 8.0%, decrease in the
amortization of goodwill and other acquired intangibles.
INCOME TAX EXPENSE
Income tax expense increased $161,000, or 13.1%, in the three months ended
March 31, 1998 to $1.4 million compared to $1.2 million for the three
months ended March 31, 1998. The increase in income tax expense reflects
an increase in income before taxes.
14
<PAGE> 15
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 March 31, 1998, the Company had $46.5 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 March 31, 1998, the total approved loan
commitments outstanding amounted to $49.0 million. At the same time,
commitments under unused lines of credit, including credit card lines,
amounted to $60.7 million. Certificates of deposit scheduled to mature in
twelve months or less at March 31, 1998 totalled $327.6 million. Based on
past experience, management believes that a significant portion of
maturing deposits will remain with the Company. The Company anticipates it
will continue to have sufficient funds to meet its liquidity requirements.
At March 31, 1998, the Company and its subsidiary had regulatory capital
which was well in excess of regulatory requirements. The current
requirements and the Company's actual levels as of March 31, 1998 are
detailed below (dollars in thousands):
<TABLE>
<CAPTION>
Required Capital Actual Capital
----------------- -----------------
Amount Percent Amount Percent
------- ------- -------- -------
<S> <C> <C> <C> <C>
Tier 1 Leverage $28,495 3.00% $101,193 10.65%
Tier 1 Risk-Based $23,667 4.00% $101,193 17.10%
Total Risk-Based $47,334 8.00% $106,737 18.04%
</TABLE>
15
<PAGE> 16
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. Timely and
accurate data processing is essential to any financial institution. The
Company formed a task force in 1997 to assess the impact of the Year 2000
problem and to insure compliance for all critical and ancillary systems
utilized by the Company. The Company is in the process of selecting a new
computer vendor for data processing software for its core applications,
and the Company will determine compliance with Year 2000 issues before
awarding a contract. Many of the costs associated with determing
compliance with and correcting Year 2000 issues for ancillary computer
programs is expected to come from a reassignment of existing internal
resources and is not expected to involve material additional costs.
16
<PAGE> 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk are presented
at December 31, 1997 in Item 7A of the Company's Annual Report on Form
10-K, file with the SEC on March 31, 1998. Management believes there have
been no material changes in the Company's market risk since December 31,
1997.
17
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a) Not applicable.
b) No Form 8-K reports were filed during the quarter.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ISB FINANCIAL CORPORATION
Date: May 11, 1998 By: /s/ Larrey G. Mouton
------------------------------------------
Larrey G. Mouton, President and
Chief Executive Officer
Date: May 11, 1998 By: /s/ John J. Ballatin
------------------------------------------
John J. Ballatin, Executive Vice President
and Cashier
19
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000933141
<NAME> ISB FINANCIAL
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,747
<INT-BEARING-DEPOSITS> 41,490
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,802
<INVESTMENTS-CARRYING> 105,959
<INVESTMENTS-MARKET> 107,160
<LOANS> 672,970
<ALLOWANCE> (5,544)
<TOTAL-ASSETS> 943,275
<DEPOSITS> 771,823
<SHORT-TERM> 46,462
<LIABILITIES-OTHER> 7,548
<LONG-TERM> 0
0
0
<COMMON> 7,381
<OTHER-SE> 110,061
<TOTAL-LIABILITIES-AND-EQUITY> 943,275
<INTEREST-LOAN> 14,033
<INTEREST-INVEST> 3,045
<INTEREST-OTHER> 486
<INTEREST-TOTAL> 17,564
<INTEREST-DEPOSIT> 7,793
<INTEREST-EXPENSE> 8,546
<INTEREST-INCOME-NET> 9,018
<LOAN-LOSSES> 230
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,052
<INCOME-PRETAX> 3,533
<INCOME-PRE-EXTRAORDINARY> 2,147
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,147
<EPS-PRIMARY> .34
<EPS-DILUTED> .33
<YIELD-ACTUAL> 7.97
<LOANS-NON> 2,140
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 7,172
<ALLOWANCE-OPEN> 5,258
<CHARGE-OFFS> 181
<RECOVERIES> 237
<ALLOWANCE-CLOSE> 5,544
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,544
</TABLE>
