UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (318) 365- 2361
Securities registered pursuant of Section 12(b) of the Act: Not Applicable
Securities registered pursuant of Section 12(g) of the Act
Common Stock (par value $1.00 per share)
----------------------------------------
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant of Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10- K. [X]
As of March 16, 1999, the aggregate market value of the 6,368,344 shares of
Common Stock of the Registrant issued and outstanding on such date, which
excludes 461,522 shares held by all directors and officers of the Registrant as
a group, was approximately $129.0 million. This figure is based on the closing
sale price of $20.25 per share of the Registrant's Common Stock on March 16,
1999.
Number of shares of Common Stock outstanding as of December 31, 1998: 6,829,866
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the Part
of the Form 10-K into which the document is incorporated. (1) Portions of the
Annual Report to Stockholders for the fiscal year ended December 31, 1998 are
incorporated into Part II, Items 5 through 8 of this Form 10-K, (2) Portions of
the definitive proxy statement for the 1999 Annual Meeting of Stockholders to be
filed within 120 days of Registrant's fiscal year end are incorporated into Part
III, Items 9 through 13 of this Form 10- K.
<PAGE>
PART 1.
Item 1. Business.
General
ISB Financial Corporation (the "Company") is a Louisiana corporation
organized in November 1994 by Iberia Savings Bank ("Iberia") for the purpose of
acquiring all of the capital stock of Iberia to be issued by Iberia in the
conversion (the "Conversion") of Iberia to stock form, which was completed on
April 6, 1995. On May 3, 1996, the Company completed the acquisition of Royal
Bankgroup of Acadiana, Inc., ("Royal") and its wholly owned subsidiary, The Bank
of Lafayette ("BOL"). Royal was merged into the Company and BOL was merged into
Iberia. The two offices of BOL now operate as branches of Iberia. On October 18,
1996, the company completed the acquisition of Jefferson Bancorp, Inc. and its
wholly owned subsidiary, Jefferson Federal Savings Bank. Jefferson Bancorp, Inc.
was merged into the Company and Jefferson Federal Savings Bank operated as a
separate subsidiary of the Company until September 1, 1997, as a state chartered
savings bank under the name of Jefferson Bank ("Jefferson"). On September 1,
1997, Jefferson Bank was merged with and into Iberia Savings Bank. On December
1, 1997, Iberia Savings Bank changed its name to IBERIABANK and converted to a
Louisiana chartered commercial bank. On September 10, 1998, Iberia acquired 17
branch offices from the former First Commerce Corporation ("FCOM"). The only
significant assets of the Company are the capital stock of Iberia , the
Company's loan to an employee stock ownership plan, and cash. To date, the
business of the Company has consisted of the business of the Iberia. The
Company's common stock trades on the NASDAQ National Market under the symbol
"ISBF." At December 31, 1998, the Company had total assets of $1.4 billion,
total deposits of $1.2 billion and equity of $124.0 million.
Iberia is a Louisiana chartered stock commercial bank conducting
business from its main office located in New Iberia, Louisiana and 43
full-service branch offices located in New Iberia, Lafayette, Jeanerette,
Franklin, Morgan City, Crowley, Rayne, Kaplan, St. Martinville, Abbeville,
Scott, Carencro, Ruston, Monroe, West Monroe, Gretna, Marrero, River Ridge, New
Orleans, Metairie and Kenner, all of which are in Louisiana. The Bank attracts
retail deposits from the general public and the business community through a
variety of deposit products. Deposits are insured by the Savings Association
Insurance Fund ("SAIF"), administered by the Federal Deposit Insurance,
Corporation ("FDIC"), within applicable limits.
The Bank is primarily engaged in attracting deposits from the general
public and using those funds to originate loans. Previous to 1996, the Bank's
primary lending emphasis was loans secured by first and second liens on
single-family (one-to-four units) residences located in the Bank's primary
market area. At December 31, 1998, such loans amounted to $301.5 million or
39.4% of the Bank's gross loan portfolio. The Bank has placed recent emphasis on
the origination of consumer and commercial loans. Consumer loans consist of home
equity loans, home equity lines of credit, automobile loans, indirect automobile
loans, loans secured by deposit accounts and other consumer loans. At December
31, 1998, $255.7 million, or 33.4%, of the Bank's gross loans were consumer
loans. Of that amount $114.3 million, or 14.9% of gross loans, were indirect
automobile loans. Commercial loans consist of commercial real estate loans and
commercial business loans. At December 31, 1998, $117.6 million, or 15.4% of
gross loans are secured by commercial real estate and $83.4 million, or 10.9%,
are commercial business loans. The Bank also originates loans for the purpose of
constructing single-family residential units. At December 31, 1998, $7.5
million, or 1.0% of the Bank's loans, are construction loans.
The Company, as a bank holding company, is subject to regulation and
supervision by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board" or "FRB"). The Bank is subject to examination and comprehensive
regulation by the Office of Financial Institutions of the State of Louisiana
("OFI"), which is the Bank's chartering authority and primary regulator. The
Bank is also subject to regulation by the FDIC, as the administrator of the
SAIF, and to certain reserve requirements established by the Federal Reserve
Board. The Bank is a member of the Federal Home Loan Bank ("FHLB") of Dallas
which is one of the 12 regional banks comprising the FHLB System.
In addition to its deposit gathering and lending activities, the Bank
invests in mortgage-backed securities, substantially all of which are issued or
guaranteed by U.S. Government agencies and government sponsored enterprises, as
well as U.S. Treasury and federal government agency obligations and other
investment securities. At December 31, 1998, the Bank's mortgage-backed
securities amounted to $277.8 million, or 19.8% of total assets and its
investment securities amounted to $99.8 million, or 7.1% of total assets.
1
<PAGE>
Lending Activities
Loan Portfolio Composition The following table sets forth the
composition of the Banks' loans held in portfolio at the dates indicated (1)
<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>
Mortgage loans:
Single-family residential $ 301,468 39.37% $ 371,943 56.48% $ 386,555 67.14%
Construction 7,549 0.99% 8,027 1.22% 8,005 1.39%
--------- ----- --------- ----- --------- -----
Total mortgage loans 309,017 40.36% 379,970 57.70% 394,560 68.54%
--------- ----- --------- ----- --------- -----
Commercial Loans
Business loans 83,368 10.89% 57,978 8.80% 36,089 6.27%
Real estate 117,628 15.36% 50,807 7.72% 25,240 4.38%
--------- ----- --------- ----- --------- -----
Total commercial loans 200,996 26.25% 108,785 16.52% 61,329 10.65%
--------- ----- --------- ----- --------- -----
Consumer loans:
Home equity 73,184 9.56% 34,192 5.19% 21,646 3.76%
Automobile 24,630 3.22% 9,433 1.43% 7,509 1.30%
Indirect automobile 114,337 14.93% 90,676 13.77% 52,371 9.10%
Mobile home loans 2,511 0.33% 3,226 0.49% 4,215 0.73%
Educational loans 624 0.08% 9,458 1.44% 9,345 1.62%
Credit card loans 4,584 0.60% 4,150 0.63% 4,017 0.70%
Loans on savings 8,104 1.06% 11,255 1.71% 12,487 2.17%
Other 27,753 3.62% 7,358 1.12% 8,225 1.43%
--------- ----- --------- ----- --------- -----
Total consumer loans 255,727 33.40% 169,748 25.78% 119,815 20.81%
--------- ----- --------- ----- --------- -----
Total loans receivable 765,740 100.00% 658,503 100.00% 575,704 100.00%
--------- ------ --------- ------ --------- ------
Less:
Allowance for loan losses (7,135) (5,258) (4,615)
Unearned discount (236) (160) (143)
Prepaid dealer
participations 4,145 3,636 2,555
Deferred loan fees &
purchased discounts, net (1,339) (1,854) (2,382)
--------- --------- ---------
Loans receivable, net $ 761,175 $ 654,867 $ 571,119
--------- --------- ---------
</TABLE>
(1) This schedule does not include loans held for sale of $18.5 million and 4.3
million at December 31, 1998 and 1997 respectively. There were no loans
classified held for sale prior to the year ended December 31, 1997.
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1995 1994
--------------------------- -------------------------
Percent of Percent of
Amount Total Amount Total
-------------------------- ------------------------
<S> <C> <C> <C> <C>
Mortgage loans:
Single-family residential $ 318,705 78.41% $ 300,730 79.41%
Construction 7,218 1.78% 7,579 2.00%
--------- ----- --------- -----
Total mortgage loans 325,923 80.19% 308,309 81.41%
--------- ----- --------- -----
Commercial Loans
Business loans 11,055 2.72% 10,655 2.81%
Real estate 15,992 3.93% 8,242 2.18%
--------- ----- --------- -----
Total commercial loans 27,047 6.65% 18,897 4.99%
--------- ----- --------- -----
Consumer loans:
Home equity 15,364 3.78% 14,229 3.76%
Automobile 5,873 1.44% 5,003 1.32%
Indirect automobile 619 0.15% 939 0.25%
Mobile home loans 6,077 1.50% 8,017 2.12%
Educational loans 9,262 2.28% 9,639 2.55%
Credit card loans 3,836 0.94% 3,477 0.92%
Loans on savings 7,481 1.84% 8,305 2.19%
Other 4,960 1.22% 1,910 0.50%
--------- ----- --------- -----
Total consumer loans 53,472 13.16% 51,519 13.60%
--------- ----- --------- -----
Total loans receivable 406,442 100.00% 378,725 100.00%
--------- ----- --------- -----
Less:
Allowance for loan losses (3,746) (3,831)
Unearned discount (1) (5)
Prepaid dealer
participations 0 0
Deferred loan fees &
purchased discounts, net (3,153) (4,095)
------- -------
Loans receivable, net $399,542 $370,794
------- -------
</TABLE>
2
<PAGE>
Contractual Maturities. The following table sets forth the scheduled
contractual maturities of the Banks' loans held to maturity at December 31,
1998. Demand loans, loans having no stated schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less. The
amounts shown for each period do not take into account loan prepayments and
normal amortization of the Banks' loan portfolio held to maturity.
<TABLE>
<CAPTION>
Mortgage Commercial
------------------------------------------ ------------------------------------
Single-family Construction Total Real Estate Business Total
------------- ------------ ----- ----------- --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Amounts due in:
One year or less $ 15,264 $ 15,264 $ 85,480 $ 47,727 $ 133,207
After one year through five years 66,880 66,880 33,871 28,530 62,401
After five years 219,324 7,549 226,873 3,311 2,077 5,388
-----------------------------------------------------------------------------------
Total $ 301,468 $ 7,549 $ 309,017 $ 122,662 $ 78,334 $ 200,996
===================================================================================
Interest rate terms on amounts
due after one year:
Fixed - rate $ 150,968 $ 5,662 $ 149,105 $ 25,477 $ 20,972 $ 46,449
Adjustable - rate 135,236 1,887 144,648 11,705 9,635 21,340
-----------------------------------------------------------------------------------
Total $ 286,204 $ 7,549 $ 293,753 $ 37,182 $ 30,607 $ 67,789
===================================================================================
<PAGE>
<CAPTION>
Consumer
Loans Total
----- -----
<S> <C> <C>
Amounts due in:
One year or less $ 103,888 $ 252,359
After one year through five years 141,042 270,323
After five years 10,797 243,058
----------------------
Total $ 255,727 $ 765,740
======================
Interest rate terms on amounts
due after one year:
Fixed $ 151,475 $ 354,554
Adjustable 364 158,827
----------------------
Total $ 151,839 $ 513,381
======================
</TABLE>
3
<PAGE>
Scheduled contractual amortization of loans does not reflect the expected
term of the Bank's loan portfolio. The average life of loans is substantially
less than their contractual terms because of prepayments and due-on-sale
clauses, which give the Bank the right to declare a conventional loan
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase when current mortgage loan
rates are higher than rates on existing mortgage loans and, conversely, decrease
when rates on existing mortgage loans are lower than current mortgage loan rates
(due to refinancings of adjustable-rate and fixed-rate loans at lower rates).
Under the latter circumstances, the weighted average yield on loans decreases as
higher-yielding loans are repaid or refinanced at lower rates.
4
<PAGE>
Loan Originations, Purchase and Sales Activity.
The following table shows the loan origination, purchase and sale activity
of the Bank during the periods indicated.
<TABLE>
<CAPTION>
Y e a r E n d e d D e c e m b e r 3 1 ,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Gross loans at beginning of period $ 658,503 $ 580,164 $ 413,242 $ 383,974 $ 354,365
Originations of loans:
Mortgage loans:
Single-family residential 74,935 48,624 41,134 38,936 44,670
Construction 22,301 22,187 21,939 24,330 25,602
Commercial Loans:
Business 57,589 55,802 32,457 15,608 13,712
Real Estate 26,505 25,070 15,143 5,486 3,044
Consumer loans:
Home equity 38,547 18,693 13,785 11,257 8,367
Automobile 9,158 4,697 4,525 4,318 4,116
Indirect automobile 65,828 60,496 38,288 0 0
Mobile home 785 733 276 386 792
Educational 889 1,466 1,724 1,268 2,153
Loans on savings 3,300 5,202 5,272 4,463 3,329
Credit cards 9,134 1,338 1,137 1,430 6,677
Other 14,965 6,890 3,634 3,836 3,262
--------- --------- --------- --------- ---------
Total originations 323,936 251,198 179,314 111,318 115,724
--------- --------- --------- --------- ---------
Loan purchased/acquired 126,600 -- 109,121 996 --
--------- --------- --------- --------- ---------
Total purchases/acquisitions 126,600 -- 109,121 996 --
--------- --------- --------- --------- ---------
Total originations and purchases 450,536 251,198 288,435 112,314 115,724
Repayments (264,573) (152,589) (116,511) (82,356) (84,204)
Loan sales (78,726) (20,270) (5,002) (690) (1,911)
--------- --------- --------- --------- ---------
Net activity in loans 107,237 78,339 166,922 29,268 29,609
--------- --------- --------- --------- ---------
Gross loans held at end of period $ 765,740 $ 658,503 $ 580,164 $ 413,242 $ 383,974
========= ========= ========= ========= =========
</TABLE>
5
<PAGE>
The lending activities of Iberia are subject to written underwriting
standards and loan origination procedures established by the Bank's Board of
Directors and management. Applications for residential mortgage loans are taken
by one of the Banks' mortgage executives, while the Banks' designated consumer
lenders have primary responsibility for taking consumer loan applications and
its commercial lending officers have primary responsibility for taking
commercial business and commercial real estate loan applications. The Bank's
loan originators will take loan applications at any of the Banks' offices and,
on occasion, outside of the Banks' offices at the customer's convenience. The
process of underwriting all residential mortgage, consumer and construction
loans and obtaining appropriate documentation, such as credit reports,
appraisals and other documentation is centralized. The credit analysis
department is responsible for overseeing the underwriting of all commercial
business and commercial real estate loans. The Bank generally requires that a
property appraisal be obtained in connection with all new mortgage loans.
Property appraisals generally are performed by an independent appraiser from a
list approved by the Bank's Board of Directors. The Bank requires that title
insurance or a title opinion (other than with respect to home equity loans) and
hazard insurance be maintained on all security properties and that flood
insurance be maintained if the property is within a designated flood plain.
Residential mortgage loan applications are primarily developed from
advertising, referrals from real estate brokers and builders, existing customers
and walk-in customers. Commercial real estate and commercial business loan
applications are obtained primarily from previous borrowers, direct
solicitations by the Bank's personnel, as well as referrals. Consumer loans
originated by the Bank are obtained primarily through existing customers,
automobile dealerships and walk-in customers who have been made aware of the
Bank's programs by advertising and other means.
Applications for residential mortgage loans typically are approved by
certain designated officers or, if the loan amount exceeds $240,000 by a
combination of certain designated officers. If a loan is over $750,000, it must
also be approved by the Loan Committee of the Bank's Board of Directors. Certain
designated officers of the Bank have limited authority to approve commercial
loans not exceeding specified levels, the officers may combine their individual
limits and approve loans up to $1.0 million. Loans in excess of $1.0 million but
less than $8.0 million must be approved by the Bank's Commercial Loan Committee
made up of members of the Board of Directors. Commercial loans in excess of $8.0
million must be approved by the full Board of Directors. Certain designated
officers approve consumer loans up to $40,000 unsecured and $80,000 secured.
Consumer loans up to $200,000 unsecured and $500,000 secured must be approved by
certain combinations of Bank officers. Consumer loans up over $200,000 unsecured
and $500,000 secured must be approved by the Board of Directors Loan Committee.
Single-Family Residential Loans. Substantially all of the Bank's
single-family residential mortgage loans consist of conventional loans.
Conventional loans are loans that are neither insured by the Federal Housing
Administration ("FHA") or partially guaranteed by the Department of Veterans
Affairs ("VA"). The vast majority of the Bank's single-family residential
mortgage loans are secured by properties located in Southwestern Louisiana and
the greater New Orleans area and are originated under terms and documentation
which permit their sale to the Federal Home Loan Mortgage Corporation ("FHLMC")
or Federal National Mortgage Association ("FNMA"). Since 1996, the Bank has
decided to sell, or hold for sale, all conforming fixed-rate loan originations
into the secondary market and only retain nonconforming fixed-rate loan
originations in its portfolio.
Fixed-rate loans generally have maturities ranging from 15 to 30 years
and are fully amortizing with monthly loan payments sufficient to repay the
total amount of the loan with interest by the end of the loan term. The Bank's
fixed-rate loans generally are originated under terms, conditions and
documentation which permit them to be sold to U.S. Government sponsored
agencies, such as the FHLMC and the FNMA, and other investors in the secondary
market for mortgages. At December 31, 1998, $162.5 million, or 52.6%, of the
Bank's single-family residential mortgage and construction loans were fixed-rate
loans.
The adjustable-rate loans currently offered by the Bank have interest
rates which adjust on an annual basis from the closing date of the loan or an
annual basis commencing after an initial fixed-rate period of three, five or ten
years in accordance with a designated index, plus a margin. During 1996, the
Banks changed its index to the one year constant maturity treasury ("CMT") from
the National Median Cost of Funds for SAIF-Insured Institutions for all new
adjustable-rate single-family residential loan originations.. The Bank's
adjustable-rate single-family residential real estate loans generally have a cap
of 2% on any increase or decrease in the interest rate at any adjustment date,
and include a specified cap on the maximum interest rate over the life of the
loan, which cap generally is 4% to 6% above the initial rate. The Bank's
adjustable-rate loans require that any payment adjustment resulting from a
change in the interest rate of an adjustable-rate loan be sufficient to result
in full amortization of the loan by the end of the loan term and, thus, do not
permit any of the increased payment to be added to the principal amount of the
loan, or so-called negative amortization. At December 31, 1998, $146.6 million
or 47.4% of the Bank's single-family residential mortgage and construction loans
were adjustable-rate loans.
6
<PAGE>
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
increase the loan payment by the borrower increases to the extent permitted by
the terms of the loan, thereby increasing the potential for default. Moreover,
as with fixed-rate loans, as interest rates increase, the marketability of the
underlying collateral property may be adversely affected by higher interest
rates.
For conventional residential mortgage loans held in the portfolio and
also for those loans originated for sale in the secondary market, the Bank's
maximum loan-to-value ratio generally is 95%, and is based on the lesser of
sales price or appraised value. Generally on loans with a loan-to-value ratio of
over 80%, private mortgage insurance ("PMI") is required in an amount which
reduces the Bank's exposure to 80% or less.
In November 1994, in order to assist low- to moderate- income families
achieve home ownership, Iberia implemented a program whereby it will provide
100% financing to certain low-to moderate- income homebuyers in Iberia's market
area. Such loans are structured as a 30-year ARM with respect to 90% of the
value with the remaining necessary funds (including closing costs) being
provided through a five-year fixed rate second mortgage loan. No PMI is required
to be obtained with respect to loans originated under this program. Iberia has
developed its 100% financing loan product in an effort to address the home
buying needs of lower income residents. Due to the absence, or limited amount,
of equity with respect to such loans and the absence of PMI, this product may be
deemed to involve greater risk than Iberia's typical single-family residential
mortgage loans. However, the individual loans in this program generally are
relatively small, with balances generally less than $50,000. At this time,
Iberia anticipates that the aggregate balance of loans originated under this
program will not exceed $10.0 million. As of December 31, 1998, such loans
amounted to $5.7 million, or .7%, of the Bank's total loan portfolio. To date,
Iberia has not experienced any significant delinquency problems with respect to
loans originated under this program.
Construction Loans. Substantially all of the Bank's construction loans
have consisted of loans to construct single-family residences extended to
individuals where the Bank has committed to provide a permanent mortgage loan
upon completion of the residence. As of December 31, 1998, the Bank's
construction loans amounted to $7.5 million, or 1.0%, of the Bank's total loan
portfolio. The Bank's loans are underwritten as construction/permanent loans,
with one set of documents and one closing for both the construction and the
long-term portions of the such loans. The Bank's construction loans typically
provide for a construction period not exceeding 12 months, generally have
loan-to-value ratios of 80% or less of the appraised value upon completion and
generally do not require the amortization of principal during the construction
phase. Upon completion of construction, the loans convert to permanent
residential mortgage loans. Loan proceeds are disbursed in stages after
inspections of the project indicate that such disbursements are for costs
already incurred and which have added to the value of the project. The Bank also
will originate ground or land loans to individuals to purchase a building lot on
which he intends to build his primary residence.
Prior to making a commitment to fund a construction loan, the Bank
requires an appraisal of the property by an independent state-licensed or
qualified appraiser approved by the Board of Directors. In addition, during the
term of the construction loan, the project periodically is inspected by an
independent inspector.
Construction financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved, owner-occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of value proves to be inaccurate, the
Bank may be confronted, at or prior to the maturity of the loan, with a project,
when completed, having a value which is insufficient to assure full repayment.
Loans on lots may run the risk of adverse zoning changes, environmental or other
restrictions on future use.
Commercial Real Estate Loans. The Bank has increased its investment in
commercial real estate loans from $8.2 million, or 2.2% of the total loan
portfolio at December 31, 1994, to $117.6 million, or 15.4% of the total loan
portfolio, at December 31, 1998. The increase in commercial real estate loans
reflects, in part, the Bank's focused efforts to originate such loans in its
market area, as well as the acquisition of certain commercial real estate loans
acquired from BOL and FCOM. The Bank intends to continue to expand its
involvement in commercial real estate lending and to continue to moderately
increase the amount of such loans in the Bank's portfolio. The Bank expects it
will continue to grant such loans primarily to small and medium sized businesses
located in the Banks' primary market area, a portion of the market that the Bank
believes has been underserved in recent years. The types of properties securing
the Bank's commercial real estate loans include strip shopping centers,
professional office buildings, small retail establishments and warehouses, all
of which are located in the Bank's market area. As of December 31, 1998, the
Bank's largest commercial real estate loan had a balance of $5.1
7
<PAGE>
million. Such loan is secured by two office buildings in the Bank's market area
and is performing in accordance with its terms.
The Bank's commercial real estate loans generally are one-year
adjustable-rate loans indexed to the New York Prime Rate, as quoted in The Wall
Street Journal, plus a margin. Generally, fees of 50 basis points to 2% of the
principal loan balances are charged to the borrower upon closing. The Bank's
underwriting standards generally provide for terms of up to 10 years with
amortization of principal over the term of the loan and loan-to-value ratios of
not more than 75%. Generally, the Bank obtains personal guarantees of the
principals as additional security for any commercial real estate loans.
The Bank evaluates various aspects of commercial real estate loan
transactions in an effort to mitigate risk to the extent possible. In
underwriting these loans, consideration is given to the stability of the
property's cash flow history, future operating projections, current and
projected occupancy, position in the market, location and physical condition. In
recent periods, the Bank has also generally imposed a debt coverage ratio (the
ratio of net cash from operations before payment of debt service to debt
service) of not less than 120%. The underwriting analysis also includes credit
checks and a review of the financial condition of the borrower and guarantor, if
applicable. An appraisal report is prepared by a state licensed or certified
appraiser (generally MAI qualified) commissioned by the Bank to substantiate
property values for every commercial real estate loan transaction. All appraisal
reports are reviewed by the Bank prior to the closing of the loan. On occasion
the Bank also retains a second independent appraiser to review an appraisal
report.
Commercial real estate lending entails different and significant risks
when compared to single-family residential lending because such loans often
involve large loan balances to single borrowers and because the payment
experience on such loans is typically dependent on the successful operation of
the project or the borrower's business. These risks can also be significantly
affected by supply and demand conditions in the local market for apartments,
offices, warehouses or other commercial space. The Bank attempts to minimize its
risk exposure by limiting such lending to proven businesses, only considering
properties with existing operating performance which can be analyzed, requiring
conservative debt coverage ratios, and periodically monitoring the operation and
physical condition of the collateral. As of December 31, 1998, $1.8 million of
the Bank's commercial real estate loans were over 90 days and still accruing and
were considered non-performing.
Commercial Business Loans. The Bank originates commercial business
loans on a secured and, to a lesser extent, unsecured basis. The Bank's
commercial business loans generally are made to small to mid-size companies
located in the Bank's primary market area and are made for a variety of
commercial purposes. At December 31, 1998, the Bank's commercial business loans
amounted to $83.4 million or 10.9% of the Bank's gross loan portfolio. The Bank
has placed emphasis on the origination of commercial real estate and commercial
business loans. Commercial real estate and commercial business loans generally
have higher yields and shorter repayment periods than single-family residential
loans.
The Bank's commercial business loans may be structured as term loans or
revolving lines of credit. Commercial business loans generally have a term of
ten years or less and adjustable or variable rates of interest based upon the
New York Prime Rate. The Bank's commercial business loans generally are secured
by equipment, machinery, real property or other corporate assets. In addition,
the Bank generally obtains personal guarantees from the principals of the
borrower with respect to all commercial business loans. The Bank also provides
commercial loans structured as advances based upon perfected security interests
in accounts receivable and inventory. Generally the Bank will advance amounts
not in excess of 85.0% of accounts receivable, provided that such accounts have
not aged more than 90 days. In such cases, payments are made directly to the
Bank and the Bank generally maintains in escrow 2.0% to 100.0% of the amounts
received. As of December 31, 1998, the Bank had $658,000 of non-performing
commercial business loans and its largest commercial business loan had a
principal balance of $2.7 million. Such loan is secured by equipment, inventory
and receivables and has performed in accordance with its terms since
origination.
Consumer Loans. The Bank offers consumer loans in order to provide a
full range of retail financial services to its customers. At December 31, 1998,
$255.7 million, or 33.4%, of the Bank's total loan portfolio was comprised of
consumer loans. The Bank originates substantially all of such loans in its
primary market area.
The largest component of the Bank's consumer loan portfolio consists of
indirect automobile loans. These loans are originated by the automobile
dealerships and applications are facsimiled to Bank personnel for approval or
denial. The Bank relies on the dealerships, in part, for loan qualifying
information. To that extent, there is risk inherent in indirect automobile loans
apart from the ability of the consumer to repay the loan, that being fraud
perpetrated by the automobile dealership. To limit its exposure, the Bank has
limited its dealings with automobile dealerships which have demonstrated
reputable behavior in the past. At December 31, 1998, $114.3 million, or 14.9%,
of the Bank's total loan portfolio are indirect automobile loans.
8
<PAGE>
At December 31, 1998, the Bank's remaining consumer loan portfolio was
comprised of home equity loans, educational loans, loans secured by deposits at
the Bank, mobile home loans, direct automobile loans, credit card loans and
other consumer loans. At December 31, 1998, the Bank had $73.2 million or 9.6%
of home equity loans Deposit loans totaled $8.1 million, or 1.1%, of the Bank's
total loan portfolio at December 31, 1998. The Bank's mobile home loans amounted
to $2.5 million, or .3% of the loan portfolio at December 31, 1998. The Bank has
not emphasized originations of mobile home loans in recent years due to, among
other things, management's perception that such loans generally are riskier than
certain other consumer loans, such as home equity loans, and single-family
mortgage loans. The Bank also offers direct automobile loans, loans based on its
VISA and MasterCard credit cards and other consumer loans. At December 31, 1998,
the Bank's direct automobile loans amounted to $24.6 million, or 3.2%, of the
Bank's total loan portfolio. The Bank's Visa and MasterCard credit card loans
totaled $4.6 million, or 0.6%, of the Bank's total loan portfolio at such date.
The Bank's other personal consumer loans amounted to $27.8 million, or 3.6% of
the Bank's total loan portfolio at such date.
Loans-To-One-Borrower Limitations. The Louisiana Banking Laws impose
limitations on the aggregate amount of loans that a Louisiana chartered
commercial bank can make to any one borrower. Under these laws, the permissible
amount of loans-to-one borrower may not exceed 20% of the sum of the bank's
capital stock and surplus on an unsecured basis. On a secured basis, the
permissible amount of loans-to-one borrower may not exceed one-half the sum of
the bank's capital stock and unimpaired surplus. At December 31, 1998, Iberia's
limit on unsecured loans-to-one borrower was $17.8 million. At December 31,
1998, lberia's five largest loans or groups of loans-to-one borrower ranged from
$3.3 million to $9.3 million, and all of such loans were performing in
accordance with their terms.
Asset Quality
General. As a part of the Bank's efforts to improve asset quality, it
has developed and implemented an asset classification system. All of the Bank's
assets are subject to review under the classification system. All assets of the
Bank are periodically reviewed and the classifications are reviewed by the Loan
Committee of the Board of Directors on at least a quarterly basis.
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking payment.
Contacts are generally made 30 days after a payment is due. In most cases,
deficiencies are cured promptly. If a delinquency continues, late charges are
assessed and additional efforts are made to collect the loan. While the Bank
generally prefers to work with borrowers to resolve such problems, when the
account becomes 90 days delinquent, the Bank may institute foreclosure or other
proceedings, as necessary, to minimize any potential loss.
Loans are placed on non-accrual status when, in the judgment 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.
See Note 5 of the Notes to Consolidated Financial Statements.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure and loans deemed to be in-substance foreclosed under
GAAP are classified as real estate owned until sold. Pursuant to SOP 92-3 issued
by the AICPA in April 1992, which provides guidance on determining the balance
sheet treatment of foreclosed assets in annual financial statements for periods
ending on or after December 15, 1992, there is a rebuttable presumption that
foreclosed assets are held for sale and such assets are recommended to be
carried at the lower of fair value minus estimated costs to sell the property,
or cost (generally the balance of the loan on the property at the date of
acquisition). After the date of acquisition, all costs incurred in maintaining
the property are expenses and costs incurred for the improvement or development
of such property are capitalized up to the extent of their net realizable value.
The Bank's accounting for its real estate owned complies with the guidance set
forth in SOP 92-3.
Under GAAP, the Bank is required to account for certain loan
modifications or restructurings as "troubled debt restructurings." In general,
the modification or restructuring of a debt constitutes a troubled debt
restructuring if the Bank for economic or legal reasons related to the
borrower's financial difficulties grants a concession to the borrower that the
Bank would not otherwise consider under current market conditions. Debt
restructurings or loan modifications for a borrower do not necessarily always
constitute troubled debt restructurings, however, and troubled debt
restructurings do not necessarily result in non-accrual loans. The Bank had no
troubled debt restructuring as of December 31, 1998. See the table below under
"NonPerforming Assets and Troubled Debt Restructurings."
9
<PAGE>
Delinquent Loans. The following table sets forth information concerning
delinquent loans at December 31, 1998, in dollar amounts and as a percentage of
each category of the Bank's 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.
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------------
30 - 59 Days 60 - 89 Days
------------------------------- -------------------------------
Percent of Percent of
Amount Loan Category Amount Loan Category
------------ --------------- ------------ ---------------
(Dollars in Thousand)
<S> <C> <C> <C> <C>
Mortgage loans:
Residential:
Single-family $ 9,429 3.05% $ 2,248 0.73%
Construction - -
Commercial loans - -
Business 403 0.48% 758 0.91%
Real Estate 492 0.42% 302 0.26%
Consumer loans 4,136 1.62% 1,204 0.47%
-------- ---- ----- ----
Total $ 14,460 1.89% 4,512 0.59%
======== ==== ===== ====
</TABLE>
10
<PAGE>
Non-Performing Assets and Troubled Debt Restructurings. The following
table sets forth information relating to the Bank's non-performing assets and
troubled debt restructurings at the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
Single-family $ 483 $ 1,698 $ 823 $ 788 $ 729
Construction - - - - -
Commercial loans
Business 259 - 407 - -
Real Estate - 30 190 30 55
Consumer loans 637 419 1,002 597 461
------- ------- ------- ------- -------
Total non-accrual
loans 1,379 2,147 2,422 1,415 1,245
------- ------- ------- ------- -------
Accruing loans more than 90
days past due
Mortgage loans:
Single-family 2,025 -- -- -- --
Construction -- -- -- -- --
Commercial loans
Business 399 -- -- -- --
Real Estate 1,783 -- -- -- --
Consumer loans 53 3 69 53 13
------- ------- ------- ------- -------
Total non-performing
loans 5,639 2,150 2,491 1,468 1,258
------- ------- ------- ------- -------
Foreclosed property 384 473 978 561 570
------- ------- ------- ------- -------
Total non performing
assets $ 6,023 $ 2,623 $ 3,538 $ 2,029 $ 1,828
------- ------- ------- ------- -------
Performing troubled debt
restructuring $ - $ - $ 176 $ 186 $ 194
------- ------- ------- ------- -------
Total non-performing
assets and troubled debt
restructurings $ 6,023 $ 2,468 $ 3,714 $ 2,215 $ 2,022
Non-performing loans to
total loans 0.80% 0.38% 0.44% 0.35% 0.33%
Total non-performing
assets to total assets 0.43% 0.26% 0.38% 0.30% 0.37%
Total non-performing assets
and troubled debt
restructurings to total
assets 0.43% 0.26% 0.40% 0.36% 0.41%
</TABLE>
11.
<PAGE>
Other Classified Assets. Federal regulations require that the Bank
classifies 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.
At December 31, 1998, the Bank had $7.9 million of assets classified
substandard, $1.0 of assets classified doubtful, and no assets classified loss.
At such date, the aggregate of the Bank's classified assets amounted to .64% of
total assets.
Allowance For Loan Losses. The Bank's policy is to establish reserves
for estimated losses on delinquent loans when it determines that losses are
expected to be incurred on such loans and leases. The allowance for losses on
loans is maintained at a level believed adequate by management to absorb
potential losses in the portfolio. Management's determination of the adequacy of
the allowance is based on an evaluation of the portfolio, past loss experience,
current economic conditions, volume, growth and composition of the portfolio,
and other relevant factors. The allowance is increased by provisions for loan
losses, which are charged against income. As shown in the table below, at
December 31, 1998, the Bank's allowance for loan losses amounted to 126.5% and
.94% of the Bank's non-performing loans and gross loans receivable,
respectively.
Effective December 21, 1993, the FDIC, in conjunction with the Office
of the Comptroller of the Currency, the OTS and the Federal Reserve Board,
issued the Policy Statement regarding an institution's allowance for loan and
lease losses. The Policy Statement, which reflects the position of the issuing
regulatory agencies and does not necessarily constitute GAAP, includes guidance
(i) on the responsibilities of management for the assessment and establishment
of an adequate allowance and (ii) for the agencie's examiners to use in
evaluating the adequacy of such allowance and the policies utilized to determine
such allowance. The Policy Statement also sets forth quantitative measures for
the allowance with respect to assets classified substandard and doubtful and
with respect to the remaining portion of an institution's loan portfolio.
Specifically, the Policy Statement sets forth the following quantitative
measures which examiners may use to determine the reasonableness of an
allowance: (i) 50% of the portfolio that is classified doubtful; (ii) 15% of the
portfolio that is classified substandard; and (iii) for the portions of the
portfolio that have not been classified (including loans designated special
mention), estimated credit losses over the upcoming 12 months based on facts and
circumstances available on the evaluation date. While the Policy Statement sets
forth this quantitative measure, such guidance is not intended as a "floor" or
"ceiling". The review of the Policy Statement did not result in a material
adjustment to the Bank's policy for establishing loan losses.
12
<PAGE>
The following table sets forth the activity in the Bank's allowance
for loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period $5,258 $4,615 $3,746 3,831 $3,413
Allowance from acquisition 1,392 -- 1,114 13 --
Provisions 903 1,097 156 239 305
Charge-offs:
Mortgage loans:
Single-family 2 50 46 55 81
Construction -- -- -- -- --
Commercial business loans 43 191 61 -- --
Commercial -- -- -- 4
Consumer loans 818 562 509 371 214
------ ------ ------ ------ ------
Total 863 803 616 430 295
------ ------ ------ ------ ------
Recoveries:
Mortgage loans:
Single-family 36 79 39 15 302
Construction -- -- -- -- --
Commercial business loan 175 55 -- -- --
Commercial -- -- 43 -- --
Consumer loans 234 215 133 78 106
------ ------ ------ ------ ------
Total 445 349 215 93 408
------ ------ ------ ------ ------
Allowance at end of period $7,135 $5,258 $4,615 $3,746 $3,831
------ ------ ------ ------ ------
Allowance for loan losses to
total non-performing loans at
end of period 126.53% 244.56% 185.27% 255.18% 304.53%
Allowance for loan losses to
total loans at end of period 0.94% 0.80% 0.79% 0.90% 0.99%
</TABLE>
13
<PAGE>
The following table presents the allocation of the allowance for loan losses to
the total amount of loans in each category listed at the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------- ------------------- ------------------- --------------------
% of Loan % of Loan % of Loan % of Loan % of Loan
in Each in Each in Each in Each in Each
Category to Category to Category to Category to Category to
Amount Total Loan Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ---------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family residential $1,529 39.37% $1,448 55.96% $2,002 66.84% $2,194 77.20% $2,234 78.47%
Construction 38 0.99% 84 3.27% 72 2.41% 107 3.76% 107 3.74%
Commercial business 1,897 10.89% 1,356 8.56% 817 3.95% 134 2.66% 118 1.67%
Commercial real estate 1,663 15.35% 660 7.13% 502 6.20% 176 3.49% 196 2.76%
Consumer 2,008 33.40% 1,710 25.08% 1,222 20.60% 1,135 12.89% 1,176 13.36%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses $7,135 100.00% $5,258 100.00% $4,615 100.00% $3,746 100.00% $3,831 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
14
<PAGE>
Management of the Bank presently believes that its allowance for loan
losses is adequate to cover any potential losses in the Bank's loan portfolio.
However, future adjustments to this allowance may be necessary, and the Bank's
results of operations could be adversely affected if circumstances differ
substantially from the assumptions used by management in making its
determinations in this regard.
Mortgage-Backed Securities
As of December 31, 1998, the Bank's mortgage-backed securities amounted
to $277.8 million, or 19.8% of total assets. At the time of their respective
acquisitions, BOL and Jefferson provided $4.2 million and $106.8 million,
respectively, of mortgage-backed securities. The Bank's mortgage-backed
securities portfolios provides a means of investing in housing-related mortgage
instruments without the costs associated with originating mortgage loans for
portfolio retention and with limited credit risk of default which arises in
holding a portfolio of loans to maturity. Mortgage-backed securities (which also
are known as mortgage participation certificates or pass-through certificates)
represent a participation interest in a pool of single-family or multi-family
mortgages. The principal and interest payments on mortgage-backed securities are
passed from the mortgage originators, as servicer, 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 Banks. 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 Government
National Mortgage Association ("GNMA"). The Bank also invests to a limited
degree in certain privately issued, credit enhanced mortgage-backed securities
rated AA or above by national securities rating agencies.
The FHLMC is a public corporation chartered by the U.S. Government and
owned by the 12 FHLBs and federally insured savings institutions. The FHLMC
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. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the FHLMC
and the FNMA are U.S. Government-sponsored enterprises, these securities are
considered to be among the highest quality investments with minimal credit
risks. 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 FHA-insured and VA-guaranteed loans, 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 loans
that qualify for these programs which limit currently is $240,000.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate loans. As a result, the risk characteristics of the underlying
pool of mortgages, (i.e., fixed-rate or adjustable rate) as well as prepayment
risk, are passed on to the certificate holder. The life of a mortgage-backed
pass-through security thus approximates the life of the underlying mortgages.
The Bank's mortgage-backed securities include interests in
collateralized mortgage obligations ("CMOs"). CMOs have been developed in
response to investor concerns regarding the uncertainty of cash flows associated
with the prepayment option of the underlying mortgagor and are typically issued
by governmental agencies, governmental sponsored enterprises and special purpose
entities, such as trusts, corporations or partnerships, established by financial
institutions or other similar institutions. A CMO can be collateralized by loans
or securities which are insured or guaranteed by the FNMA, the FHLMC or the
GNMA. In contrast to pass-through mortgage-backed securities, in which cash flow
is received pro rata by all security holders, the cash flow from the mortgages
underlying a CMO is segmented and paid in accordance with a predetermined
priority to investors holding various CMO classes. By allocating the principal
and interest cash flows from the underlying collateral among the separate CMO
classes, different classes of bonds are created, each with its own stated
maturity, estimated average life, coupon rate and prepayment characteristics.
The regular interests of some CMOs are like traditional debt instruments because
they have stated principal amounts and traditionally defined interest-rate
terms. Purchasers of certain other CMOs are entitled to the excess, if any, of
the issuers cash inflows, including reinvestment earnings, over the cash
outflows for debt service and administrative expenses. These CMOs may include
instruments designated as residual interests, which represent an equity
ownership interest in the underlying collateral, subject to the first lien of
the investors in the other classes of the CMO. Certain residual CMO interests
may be riskier than many regular CMO interests to the extent that they could
result in the loss of a portion of the original investment. Moreover, cash flows
from residual interests are very sensitive to prepayments and, thus, contain a
high degree of interest-rate risk. At December
15
<PAGE>
31, 1998, the Bank's investment in CMOs amounted to $125.3 million, all of which
consisted of regular interests. As of December 31, 1998, the Bank's CMOs did not
include any residual interests or interest-only or principal-only securities. As
a matter of policy, the Bank does not invest in residual interests of CMOs or
interest-only and principal-only securities.
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 and
related securities are more liquid than individual mortgage loans and may be
used to collateralize borrowings of the Bank in the event that the Bank
determine to utilize borrowings as a source of funds. Mortgage-backed securities
issued or guaranteed by the FNMA or the FHLMC (except interest-only securities
or the residual interests in CMOs) are weighted at no more than 20.0% for
risk-based capital purposes, compared to a weight of 50.0% to 100.0% for
residential loans. See "Regulation - The Bank - Capital Requirements."
As of December 31, 1998, all of the Bank's mortgage-backed securities
were classified as held to maturity. Mortgage-backed securities which are held
to maturity are carried at cost, adjusted for the amortization of premiums and
the accretion of discounts using a method which approximates a level yield,
while mortgage-backed securities available for sale are carried at current
market value. See Notes 1 and 4 of the Notes to Consolidated Financial
Statements.
16
<PAGE>
The following table sets forth the composition of the Bank's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities:(1)
FHLMC $ 76,542 $ 54,285 $ 80,648
FNMA 19,194 28,864 35,340
GNMA 56,811 11,115 13,233
FNMA CMO 26,211 9,468 9,697
FHLMC CMO 78,712 10,901 10,901
Privately Issued (2) 20,328 492 850
-------- -------- --------
Total mortgage backed
securities (3) $277,798 $115,125 $150,669
-------- -------- --------
Total market value $277,692 $116,004 $150,014
-------- -------- --------
</TABLE>
(1) See Note 4 of the Notes to Consolidated Financial Statements.
(2) Rated AA by national rating agencies.
(3) At December 31, 1998, $46.9 million of the Banks' mortgage-backed
securities had adjustable rates and $230.9 million had fixed rates, of
which $27.6 million had a balloon feature (the mortgage-backed security
will mature and repay before the underlying loans have been fully
amortized).
The following table sets forth the purchases, principal repayments and sales
of the Bank's mortgage-backed securities for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995
--------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities
purchased $ 209,280 $ -- $ -- $ 15,532
Acquired -- -- 111,114 --
Principal repayments (46,571) (35,353) (11,903) (3,722)
Sales -- -- -- --
Other, net (36) (191) (181) (87)
--------- --------- --------- ---------
Net Change $ 162,673 $ (35,544) $ 99,023 $ 11,723
========= ========= ========= =========
</TABLE>
17
<PAGE>
The actual maturity of a mortgage-backed security may be less than its
stated maturity due to prepayments of the underlying mortgages. Prepayments that
are faster than anticipated may shorten the life of the security and adversely
affect its yield to maturity. The yield is based upon the interest income and
the amortization of any premium or discount related to the mortgage-backed
security. In accordance with GAAP, premiums and discounts are amortized over the
estimated lives of the loans, which decrease and increase interest income,
respectively. The prepayment assumptions used to determine the amortization
period for premiums and discounts can significantly affect the yield of the
mortgage-backed security, and these assumptions are reviewed periodically to
reflect actual prepayments. Although prepayments of underlying mortgages depend
on many factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant determinant
of the rate of prepayments.
During periods of rising mortgage interest rates, if the coupon rates
of the underlying mortgages are less than the prevailing market interest rates
offered for mortgage loans, refinancings generally decrease and slow the
prepayment of the underlying mortgages and the related securities. Conversely,
during periods of falling mortgage interest rates, if the coupon rates of the
underlying mortgages exceed the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and accelerates the prepayment
of the underlying mortgages and the related securities. Under such
circumstances, the Bank may be subject to reinvestment risk because to the
extent that the Bank's mortgage-related securities amortize or prepay faster
than anticipated, the Bank may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate. The declining yields earned
during fiscal 1993 and 1994 a direct response to falling interest rates as well
as to accelerated prepayments. In fiscal 1995, higher yields were earned as a
direct response to increasing interest rates.
Investment Securities
The Bank's investments in investment securities consist primarily of
securities issued by the U.S. Treasury and federal government agency
obligations. As of December 31, 1998, the Bank's investment securities available
for sale amounted to $97.1 million, net of gross unrealized gains of $531,000,
and its investment securities held to maturity amounted to $2.7 million. At the
time of their respective acquisitions, BOL and Jefferson provided $2.0 million
and $57.5 million, respectively, of investment securities. The Bank attempts to
maintain a high degree of liquidity in its investment securities portfolio and
generally do not invest in securities with average lives exceeding five years.
18
<PAGE>
The following table sets forth information regarding the amortized cost
and market value of the Bank's investment securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ----------------------------- -------------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------------ ------------ -------------- ----------- -------------- -------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
and federal agency
obligations $ 90,594 $ 91,159 $ 69,534 $ 69,872 $ 95,549 $ 95,855
Other 8,635 8,601 7,448 7,447 7,523 7,507
-------- -------- -------- -------- --------- ---------
Total $ 99,229 $ 99,760 $ 76,982 $ 77,319 $ 103,072 $ 103,362
======== ======== ======== ======== ========= =========
</TABLE>
19
<PAGE>
The following table sets forth certain information regarding the maturities of
the Bank's investment securities at December 31, 1998.
<TABLE>
<CAPTION>
Contractually Maturing
------------------------------------------------------------------------------
Weighted Weighted
Under 1 Average 1-5 Average
Year Yield Years Yield
------------------ ------------------ ------------------ ------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
U.S. Government and
federal agency obligations $25,698 6.45% $10,230 6.43%
Other 5,976 (1) 5.42% 1,328 4.88%
------- -------
Total $31,674 6.26% $11,558 6.25%
======= =======
<PAGE>
<CAPTION>
Contractually Maturing
------------------------------------------------------------------------------
Weighted Weighted
6-10 Average Over 10 Average
Years Yield Years Yield
------------------ ------------------ ---------------------- --------------
<S> <C> <C> <C>
U.S. Government and
federal agency obligations $ 55,231 6.14% $-- %
Other 1,295 7.20% --
------- ---
Total $ 56,526 6.16% $ 0
======= ===
</TABLE>
(1) Consists of a mutual fund of adjustable rate mortgage-backed securities,
all of which adjust at least annually.
20
<PAGE>
Sources of Funds
General. The Bank's principal source of funds for use in lending and for other
general business purposes has traditionally come from deposits obtained through
the Bank's branch offices. The acquisitions of Jefferson and BOL provided $288.3
million of deposits used to help fund the Bank's loan growth. The Bank also
derives funds from amortization and prepayments of outstanding loans and
mortgage-related securities, and from maturing investment 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. While available, during the past five years, the Bank has not used
borrowings to supplement its deposits as a source of funds.
Deposits. The Banks' current deposit products include passbook
accounts, NOW accounts, MMDA, certificates of deposit ranging in terms from 30
days to seven years and noninterest-bearing personal and business checking
accounts. The Bank's deposit products also include Individual Retirement Account
("IRA") certificates and Keogh accounts.
The Bank's deposits are obtained primarily from residents in its
primary market area. The Bank attracts local deposit accounts by offering a wide
variety of accounts, competitive interest rates, and convenient branch office
locations and service hours. The acquisition of BOL helped Iberia double its
market share in the greater Lafayette market. The acquisition of Jefferson
established the Company in a new market, the greater New Orleans area. The FCOM
acquisition helped Iberia gain the number two market share in the greater
Lafayette market and establish the Company, with a number two market share, in a
new market, the greater Monroe area. The Bank utilizes traditional marketing
methods to attract new customers and savings deposits, including print and
broadcast advertising and direct mailings. However, the Bank does not solicit
funds through deposit brokers nor does it pay any brokerage fees if it accepts
such deposits. The Bank participates in the regional ATM network known as
CIRRUS.
The Bank has been competitive in the types of accounts and in interest
rates it has offered on its deposit products but does not necessarily seek to
match the highest rates paid by competing institutions. With the significant
decline in interest rates paid on deposit products, the Bank in recent years has
experienced disintermediation of deposits into competing investment products.
See generally Note 8 of the Notes to Consolidated Financial Statements.
21
<PAGE>
The following table sets forth certain information relating to the Bank's
deposits at the dates indicated. Years prior to 1996 do not include deposits of
Jefferson or BOL, as those acquisitions did not take place until 1996. Years
prior to 1998 do not include deposits acquired in the branch acquisition from
FCOM, as that acquisition did not take place until 1998.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- -----------------------------
Percent Percent Percent
of Total of Total of Total
Amount Deposits Amount Deposits Amount Deposits
-------------- ----------- ------------ ------------ ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW account $ 210,891 17.30% $ 83,282 10.70% $ 76,991 10.13%
Money market accounts 102,357 8.40% 73,076 9.38% 58,669 7.72%
Non-interest-bearing
checking accounts 121,825 10.00% 44,862 5.76% 33,884 4.46%
---------- ------ ------- ------ -------- ------
Total demand deposits 435,073 35.70% 201,220 25.84% 169,544 22.30%
---------- ------ ------- ------ -------- ------
Passbook savings deposits 131,300 10.77% 109,532 14.07% 119,685 15.74%
------ ------ ------
Certificate of deposit
account:
Less than 6 months 248,986 20.43% 175,590 22.55% 11,099 1.46%
6 - 12 months 218,890 17.96% 126,375 16.23% 60,766 7.99%
13 - 36 months 168,057 13.79% 157,581 20.24% 261,151 34.35%
More than 36 months 16,392 1.35% 8,397 1.08% 138,039 18.16%
---------- ------ ------- ------ -------- ------
Total certificates 652,325 53.53% 467,943 60.09% 471,055 61.96%
---------- ------ -------- ------- -------- ------
Total deposits $1,218,698 100.00% $778,695 100.00% $760,284 100.00%
========== ======== ========
</TABLE>
22
<PAGE>
The following table sets forth the activity in the Bank's deposits during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Beginning balance $ 778,695 $ 760,284 $ 444,600
Deposits acquired 452,578 -- 288,290
Net increase (decrease)
before interest credited (36,295) (6,829) 7,869
Interest creditied 23,720 25,240 19,525
----------- ----------- -----------
Net increase (decrease) in
deposits 440,003 18,411 315,684
----------- ----------- -----------
Ending balance $ 1,218,698 $ 778,695 $ 760,284
=========== =========== ===========
</TABLE>
The following table sets forth by various interest rate categories the
certificates of deposit with the Bank at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1998 1997 1996
----------- -------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
0.00% to 2.99% $ 854 $ 90 $100.00
3.00% to 3.99% 45,738 2,665 706
4.00% to 4.99% 183,984 88,826 90,768
5.00% to 5.99% 319,736 275,302 258,860
6.00% to 6.99% 95,769 95,824 107,022
7.00% to 7.99% 6,001 5,068 13,429
8.00% and over 243 168 170
--------- -------- -------
$ 652,325 467,943 471,055
========= ======= =======
</TABLE>
23
<PAGE>
The following table sets forth the amount and maturities of the Banks'
certificates of deposit at December 31, 1998.
<TABLE>
<CAPTION>
Over One Over Two
Year Years Over Three
One Year and Through Through Years
Less Two Years Three Years
----------------- ---------------- ---------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
2.00% to 3.99% $ 42,680 $ 1,599 $ 2,088 $ 226
4.00% to 4.99% 130,669 36,348 13,551 3,416
5.00% to 6.99% 293,056 86,502 24,108 11,838
7.00% to 8.99% 1,471 3,408 453 912
-------- ------- ------- -------
$467,876 $27,857 $40,200 $16,392
======== ======= ======= =======
</TABLE>
24
<PAGE>
Borrowings. The Bank 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 and securities held to maturity, provided certain
standards related to creditworthiness have been met. Such advances are made
pursuant to several credit programs, each of which has its own interest rate and
range of maturities. The Bank made limited use of such borrowings during the
past five years. See Note 9 of the Notes of Consolidated Financial Statements.
Subsidiaries
Iberia only has one active, wholly owned subsidiary, Iberia Financial
Services, Inc. ("lberia Services"). At December 31, 1998, lberia's equity
investment in Iberia Services was $1.2 million and Iberia Services had total
assets of $1.2 million. For the years ended December 31, 1998 and 1997, Iberia
Services had total revenue of $957,000 and $663,000, respectively and a net
income of $72,000 in 1998 and $182,000 in 1997. See Note 1 of the Notes to
Consolidated Financial Statements. The business of Iberia Services consists of
holding certain parcels of real estate which the Iberia previously intended to
develop (all of which parcels were sold in 1996) as well as acting as a broker
for the sale of annuities and certain other securities to the general public.
Iberia Services has one wholly owned subsidiary, Finesco, Ltd., which the Bank
acquired in January 1995 and which business consists of insurance premium
financing.
Competition
The Bank faces strong competition both in attracting deposits and originating
loans. Its most direct competition for deposits has historically come from other
savings institutions, credit unions and commercial banks located in its market
area including many large financial institutions that have greater financial and
marketing resources available to them. In addition, during times of high
interest rates, the Bank has faced additional significant competition for
investors' funds from short-term money market securities, mutual funds and other
corporate and government securities. The ability of the Bank to attract and
retain savings deposits depends on its ability to generally provide a rate of
return, liquidity and risk comparable to that offered by competing investment
opportunities.
The Bank experiences strong competition for loan originations principally from
other savings institutions, commercial banks and mortgage banking companies. The
Bank competes for loans principally through the interest rates and loan fees it
charges, the efficiency and quality of services it provides borrowers and the
convenient locations of its branch office network. Competition may increase as a
result of the continuing reduction of restrictions on the interstate operations
of financial institutions.
Employees
The Bank had 471 full-time employees and 74 part-time employees as of December
31, 1998. None of these employees is represented by a collective bargaining
agreement. The Bank believes that it enjoys excellent relations with its
personnel.
Regulation
Set forth below is a brief description of certain laws and regulations that
relate to the regulation of the Company and the Bank. The description of these
laws and regulations, as well as descriptions of laws and regulations contained
elsewhere herein, does not purport to be complete and is qualified in its
entirety by reference to applicable laws and regulations.
The Company. The Company is a registered bank holding company pursuant to the
Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company, as a
bank holding company, is subject to regulation and supervision by the Federal
Reserve Board. The Company is required to file annually a report of its
operations with, and will be subject to examination by, the Federal Reserve
Board.
BHCA Activities and Other Limitations. The BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control of any
bank, without prior approval of the Federal Reserve Board. The BHCA also
generally prohibits a bank holding company from acquiring any bank located
outside of the state in which the existing bank subsidiaries of the bank holding
company are located unless specifically authorized by applicable state law. No
approval under the BHCA is required, however, for a bank holding company already
owning or controlling 50% of the voting shares of a bank to acquire additional
shares of such bank.
25
<PAGE>
The BHCA also prohibits a bank holding company, with certain exceptions, from
acquiring more than 5% of the voting shares of any company that is not a bank
and from engaging in any business other than banking or managing or controlling
banks. Under the BHCA, the Federal Reserve Board is authorized to approve the
ownership of shares by a bank holding company in any company, the activities of
which the Federal Reserve Board has determined to be so closely related to
banking or to managing or controlling banks as to be a proper incident thereto.
In making such determinations, the Federal Reserve Board is required to weigh
the expected benefit to the public, such as greater convenience, increased
competition or gains in efficiency, against the possible adverse effects, such
as undue concentration of resources, decreased or unfair competition, conflicts
of interest or unsound banking practices.
The Federal Reserve Board has by regulation determined that certain activities
are closely related to banking within the meaning of the BHCA. These activities
include operating a mortgage company, finance company, credit card company,
factoring company, trust company or savings association; performing certain data
processing operations; providing limited securities brokerage services; acting
as an investment or financial advisor; acting as an insurance agent for certain
types of credit-related insurance; leasing personal property on a full-payout,
non-operating basis; providing tax planning and preparation services- operating
a collection agency; and providing certain courier services. The Federal Reserve
Board also has determined that certain other activities, including real estate
brokerage and syndication, land development, property management and
underwriting of life insurance not related to credit transactions, are not
closely related to banking and a proper incident thereto.
Limitations on Transactions With Affiliates: Transaction between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is 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, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries are engaged 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 Sections 23A and 23B, no savings
institution may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are 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 savings 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). 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.
Capital Requirements. The Federal Reserve Board has adopted capital adequacy
guidelines pursuant to which it assesses the adequacy of capital in examining
and supervising a bank holding company and in analyzing applications to it under
the BHCA. The Federal Reserve Board capital adequacy guidelines generally
require bank holding companies to maintain total capital equal to 8% of total
risk-adjusted assets, with at least one-half of that amount consisting of Tier I
or core capital and up to one-half of that amount consisting of Tier II or
supplementary capital. Tier I capital for bank holding companies generally
consists of the sum of common stockholders' equity and perpetual preferred stock
(subject in the case of the latter to limitations on the kind and amount of such
stocks which may be included as Tier I capital), less goodwill and, with certain
exceptions, intangibles. Tier II capital generally consists of hybrid capital
instruments; perpetual preferred stock which is not eligible to be included as
Tier I capital; term subordinated debt and intermediate-term preferred stock;
and, subject to limitations, general allowances for loan losses, Assets are
adjusted under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no additional
capital) for assets such as cash to 100% for the bulk of assets which are
typically held by a bank holding company, including multi-family residential and
commercial real estate loans, commercial business loans and savings institution
is 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, Sections 23A and 23B (i) limit the extent to
which the savings institution or its subsidiaries are engaged 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
26
<PAGE>
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 Sections 23A and 23B, no savings
institution may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are 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 savings 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). 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.
Capital Requirements. The Federal Reserve Board has adopted capital adequacy
guidelines pursuant to which it assesses the adequacy of capital in examining
and supervising a bank holding company and in analyzing applications to it under
the BHCA. The Federal Reserve Board capital adequacy guidelines generally
require bank holding companies to maintain total capital equal to 8% of total
risk-adjusted assets, with at least one-half of that amount consisting of Tier I
or core capital and up to one-half of that amount consisting of Tier II or
supplementary capital. Tier I capital for bank holding companies generally
consists of the sum of common stockholders' equity and perpetual preferred stock
(subject in the case of the latter to limitations on the kind and amount of such
stocks which may be included as Tier I capital), less goodwill and, with certain
exceptions, intangibles. Tier II capital generally consists of hybrid capital
instruments; perpetual preferred stock which is not eligible to be included as
Tier I capital; term subordinated debt and intermediate-term preferred stock;
and, subject to limitations, general allowances for loan losses, Assets are
adjusted under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no additional
capital) for assets such as cash to 100% for the bulk of assets which are
typically held by a bank holding company, including multi-family residential and
commercial real estate loans, commercial business loans and consumer loans.
Single-family residential first mortgage loans which are not past-due (90 days
or more) or non-performing and which have been made in accordance with prudent
underwriting standards are assigned a 50% level in the risk-weighing system, as
are certain privately-issued mortgage-backed securities representing indirect
ownership of such loans. Off-balance sheet items also are adjusted to take into
account certain risk characteristics.
In addition to the risk-based capital requirements, the Federal Reserve Board
requires bank holding companies to maintain a minimum leverage capital ratio of
Tier I capital to total assets of 3.0%. Total assets for this purpose does not
include goodwill and any other intangible assets and investments that the
Federal Reserve Board determines should be deducted from Tier I capital. The
Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio
requirement is the minimum for the top-rated bank holding companies without any
<PAGE>
supervisory, financial or operational weaknesses or deficiencies or those which
are not experiencing or anticipating significant growth. Other bank holding
companies will be expected to maintain Tier I leverage capital ratios of at
least 4.0% to 5.0% or more, depending on their overall condition. At December
31, 1998, the Company believes it is in compliance with the above-described
Federal Reserve Board regulatory capital requirements.
Financial Support of Affiliated Institutions. Under Federal Reserve Board
policy, the Company will be expected to act as a source of financial strength to
the Bank and to commit resources to support the Bank in circumstances when it
might not do so absent such policy. The legality and precise scope of this
policy is unclear, however, in light of recent judicial precedent.
Federal Securities Laws. The Company's common stock is registered with the
SEC under the Securities Exchange Act of 1934 ("Exchange Act"). The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.
The Bank. The Bank is subject to extensive regulation and examination by the
OFI and by the FDIC and are also subject to certain requirements established by
the Federal Reserve Board. The federal and state laws and regulations which are
applicable to banks regulate, among other things, the scope of their business,
their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
certain loans. There are periodic examinations by the OFI and the FDIC to test
the Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for
27
<PAGE>
regulatory purposes. Any change in such regulation, whether by the OFI, the FDIC
or the Congress could have a material adverse impact on the Company, the Banks
and their operations.
FDIC Insurance Premiums. The deposits of the Bank are currently insured by the
SAIF, Both the SAIF and the Bank Insurance Fund ("BIF"), 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 fund met its target reserve level in September 1995, but the SAIF was not
expected to meet its target reserve level until at least 2002. Consequently, in
late 1995, the FDIC approved a final rule regarding deposit insurance premiums
which, effective with respect of the semiannual premium assessment beginning
January 1, 1996, reduced deposit insurance premiums for BIF member institutions
to zero basis points (subject to an annual minimum of $2,000) for institutions
in the lowest risk category. Deposit insurance premiums for SAIF members were
maintained at their existing levels (23 basis points for institutions in the
lowest risk category).
On September 30, 1996, President Clinton signed into law legislation which
will eliminate the premium differential between SAIF-insured institutions and
BIF-insured institutions be recapitalizing the SAIF's reserves to the required
ratio. The legislation provides that all SAIF member institutions pay a one-time
special assessment to recapitalize the SAIF, which in the aggregate will 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.
Effective October 8, 1996, FDIC regulations imposed a one-time special
assessment of 65.7 basis points on S AIF-assessable deposits as of March 31,
1995, which was collected on November 27, 1996. lberia's one-time special
assessment amounted to $2.9 million pre-tax. The payment of such special
assessment had the effect of immediately reducing lberia's capital by $1.9
million after tax. Jefferson was also subject of this assessment, but such
assessment was before Jefferson's acquisition on October 18, 1996.
On October 16, 1996, the FDIC proposed to lower 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 would range from
zero basis points to 27 basis points. From 1997 through 1999, SAIF members will
pay 6.4 basis points to fund the Financing Corporation while BIF member
institutions will pay approximately 1.3 basis points.
Capital Requirements. The FDIC has promulgated regulations and adopted a
statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, will not be members of the Federal Reserve System. These
requirements are substantially similar to those adopted by the Federal Reserve
Board regarding bank holding companies, as described above.
The FDIC's capital regulations establish a minimum 3.0% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier I leverage ratio for such other banks to 4.0% to 5.0% or more.
Under the FDIC's regulation, highest-rated banks are those that the FDIC
determines are not anticipating or experiencing significant growth and have well
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and, in general, which are
considered a strong banking organization and are rated composite I under the
Uniform Financial Institutions Rating System. Leverage or core capital is
defined as the sum of common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, and minority
interests in consolidated subsidiaries, minus all intangible assets other than
certain qualifying supervisory goodwill and certain purchased mortgage servicing
rights.
The FDIC also requires that banks meet a risk-based capital standard. The
risk-based capital standard for banks requires the maintenance of total capital
(which is defined as Tier I capital and supplementary (Tier 2) capital) to risk
weighted assets of 8%. In determining the amount of risk-weighted assets, all
assets, plus certain off balance sheet assets, are multiplied by a risk-weight
of 0% to 100%, based on the risks the FDIC believes are inherent in the type of
asset or item. The components of Tier I capital are equivalent to those
discussed above under the 3% leverage capital standard. The components of
supplementary capital include certain perpetual preferred stock, certain
mandatory convertible securities, certain subordinated debt and intermediate
preferred stock and general allowances for loan and lease losses. Allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of riskweighted assets. Overall, the amount of capital counted
toward supplementary capital cannot exceed 100% of core capital. At December 31,
1998, the Bank met each of its capital requirements.
In August 1995, the FDIC and other federal banking agencies published a final
rule modifying their existing risk-based capital standards to provide for
consideration of interest rate risk when assessing capital adequacy of a bank.
Under the final rule, the FDIC must explicitly include a bank's exposure to
declines in the economic value of its capital due to changes in interest rates
as a factor in evaluating a bank's capital adequacy. In addition, in August
1995, the FDIC and the other federal banking agencies published a joint policy
statement for public comment that describes the process the banking agencies
will use to measure and assess the exposure of a banks net economic value to
changes in interest rates. Under the policy statement, the FDIC will consider
results of supervisory and
28
<PAGE>
internal interest rate risk models as one factor in evaluating capital adequacy.
The FDIC intends, at a future date, to incorporate explicit minimum requirements
for interest rate risk in its risk-based capital standards through the use of a
model developed from the policy statement, a future proposed rule and the public
comments received therefrom.
Activities and Investments of Insured State-Chartered Banks. The activities
and equity investments of FDIC-insured, state-chartered banks are generally
limited to those that are permissible for national banks. Under regulations
dealing with equity investments, an insured state bank generally may not
directly or indirectly acquire or retain any equity investment of a type, or in
an amount, that is not permissible for a national bank. An insured state bank is
not prohibited from, among other things, (i) acquiring or retaining a majority
interest in a subsidiary, (ii) investing as a limited partner in a partnership
the sole purpose of which is direct or indirect investment in the acquisition,
rehabilitation or new construction of a qualified housing project, provided that
such limited partnership investments may not exceed 2% of the bank's total
assets, (iii) acquiring up to 10% of the voting stock of a company that solely
provides or reinsures directors', trustees' and officers' liability insurance
coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. In addition, an insured
state chartered bank may not, directly, or indirectly through a subsidiary,
engage as "principal" in any activity that is not permissible for a national
bank unless the FDIC has determined that such activities would pose no risk to
the insurance fund of which it is a member and the bank is in compliance with
applicable regulatory capital requirements. Any insured state-chartered bank
directly or indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity.
Regulatory Enforcement Authority. Applicable banking laws include substantial
enforcement powers available to federal banking regulators. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.
Federal and State Taxation
General. The Company and the Bank are subject to the generally applicable
corporate tax provisions of the Code, and the Bank is subject to certain
additional provisions of the Code which apply to thrift and other types of
financial institutions. The following discussion of federal taxation is intended
only to summarize certain pertinent federal income tax matters and is not a
comprehensive discussion of the tax rules applicable to the Bank.
Fiscal Year. The Company and the Bank and its subsidiary file a consolidated
federal income tax return on the basis of a fiscal year ending on December 31.
Bad Debt Reserves. Savings institutions, such as Iberia, which meet certain
definitional tests primarily relating to their assets and the nature of their
businesses, are permitted to establish a reserve for bad debts and to make
annual additions to the reserve. These additions may, within specified formula
limits, be deducted in arriving at the institution's taxable income. For
purposes of computing the deductible addition to its bad debt reserve, the
institution's loans are separated into "qualifying real property loans" (i.e.,
generally those loans secured by certain interests in real property) and all
other loans ("non-qualifying loans"). The deduction with respect to
non-qualifying loans must be computed under the experience method as described
below. The following formulas may be used to compute the bad debt deduction with
respect to qualifying real property loans: (i) actual loss experience, or (ii) a
percentage of taxable income. Reasonable additions to the reserve for losses on
non-qualifying loans must be based upon actual loss experience and would reduce
the current year's addition to the reserve for losses on qualifying real
property loans, unless that addition is also determined under the experience
method. The sum of the additions to each reserve for each year is the
institution's annual bad debt deduction.
Under the experience method, the deductible annual addition to the
institution's bad debt reserves is the amount necessary to increase the balance
of the reserve at the close of the taxable year to the greater of (a) the amount
which bears the same ratio to loans outstanding at the close of the taxable year
as the total net bad debts sustained during the current and five preceding
taxable years bear to the sum of the loans outstanding at the close of the six
years, or (b) the lower of (i) the balance of the reserve account at the close
of the last taxable year prior to the most recent adoption of the experience
method (the "base year"), except that for taxable years beginning after 1987,
the base year shall be the last taxable year beginning before 1988, or (ii) if
the amount of loans outstanding at the close of the taxable year is less than
the amount of loans outstanding at the close of the base year, the amount which
bears the same ratio to loans outstanding at the close of the taxable year as
the balance of the reserve at the close of the base year bears to the amount of
loans outstanding at the close of the base year.
Under the percentage of taxable income method, the bad debt deduction equals
8% of taxable income determined without regard to that deduction and with
certain adjustments. The availability of the percentage of taxable income method
permits a qualifying savings institution to be taxed at a lower effective
federal income tax rate than that applicable to corporations in general. This
resulted
29
<PAGE>
generally in an effective federal income tax rate payable by a qualifying
savings institution fully able to use the maximum deduction permitted under the
percentage of taxable income method, in the absence of other factors affecting
taxable income, of 31.3% exclusive of any minimum tax or environmental tax (as
compared to 34% for corporations generally). For tax years beginning on or after
January 1, 1993, the maximum corporate tax rate was increased to 35%, which
increased the maximum effective federal income tax rate payable by a qualifying
savings institution fully able to use the maximum deduction to 32.2%. Any
savings institution at least 60% of whose assets are qualifying assets, as
described in the Code, will generally be eligible for the full deduction of 8%
of taxable income. At least 60% of the assets of the Banks are "qualifying
assets" as defined in the Code, and Iberia anticipates that at least 60% of its
assets will continue to be qualifying assets in the immediate future. If this
ceases to be the case, the institution may be required to restore some portion
of its bad debt reserve to taxable income in the future.
Under the percentage of taxable income method, the bad debt deduction for an
addition to the reserve for qualifying real property loans cannot exceed the
amount necessary to increase the balance in this reserve to an amount equal to
6% of such loans outstanding at the end of the taxable year. The bad debt
deduction is also limited to the amount which, when added to the addition to the
reserve for losses on non-qualifying loans, equals the amount by which 12% of
deposits at the close of the year exceeds the sum of surplus, undivided profits
and reserves at the beginning of the year. Based on experience, it is not
expected that these restrictions will be a limiting factor for Iberia in the
foreseeable future. In addition, the deduction for qualifying real property
loans is reduced by an amount equal to all or part of the deduction for
non-qualifying loans.
At December 31, 1998, the federal income tax reserves of Iberia included $14.8
million 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 Iberia in connection with the Conversion and
the liquidation account established by Jefferson for the benefit of its
depositors at the time of its conversion, the retained earnings of Iberia are
substantially restricted.
Pursuant to certain legislation which was recently enacted and which was
effective for tax years that began after December 31, 1995, a large bank (one
with an adjusted basis of assets of greater than $500 million), such as Iberia,
would no longer be permitted to make additions to its tax bad debt reserve under
the percentage of taxable income method. Such legislation also requires Iberia
to realize increased tax liability over a period of at least six years,
beginning in 1996, relating to lberia's "applicable excess reserves." The amount
of applicable excess reserves is taken into account ratably over a six-taxable
year period, beginning with the first taxable year beginning after 1995, subject
of the residential loan requirement described below. The recapture requirement
would be suspended for each of two successive taxable years beginning January 1,
1996 in which Iberia originates an amount of certain kinds of residential loans
which in the aggregate are equal to or greater than the average of the principal
amounts of such loans made by Iberia during its six taxable years preceding
1996.
Distributions. If Iberia distributes cash or property to its stockholders, and
the distribution is treated as being from its accumulated bad debt reserves, the
distribution will cause Iberia 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-dividend
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 nondividend distribution is an amount that when reduced by
the tax attributable to it is equal to the amount of the distribution.
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 calculated on the AMTI in excess of an exemption amount. The alternative
minimum tax is assessed to the extent that it exceeds the tax on regular taxable
income. 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) tax-exempt
interest on newly issued (generally, issued on or after August 8, 1986) private
activity bonds other than certain qualified bonds 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 Company had a
federal net operating loss carryover of $1.2 million, which was assumed by the
Company in the acquisition of Royal Bankgroup.
Capital Gains and Corporate Dividends-Received Deductions. Corporate net
capital gains are taxed at a maximum rate of 34%. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient
30
<PAGE>
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 Bank.
The Company's consolidated federal income tax returns for the tax years ended
1996 and 1997 are open under the statute of limitations and are subject to
review by the IRS. In addition, the partial year 1996 federal tax returns of
Royal Bankgroup and Jefferson Bancorp are also considered open under the statute
of limitations and are subject to review by the IRS.
State Taxation
The nonbanking subsidiaries of the Bank and the Company are subject to the
Louisiana Corporation Income Tax based on their 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, the Bank 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 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.
31
<PAGE>
Item 2. Properties.
The following table sets forth certain information relating to the Bank's
offices at December 31, 1998.
<TABLE>
<CAPTION>
Net Book Value of
Property and
Leasehold
Improvements Deposits
Owned or at at
Location Leased December 31, 1998 December 31, 1998
- ------------------------------------------- ------------- ------------------ -----------------
(In Thousands)
<S> <C> <C> <C>
1101 E. Admiral Doyle Drive, New Iberia Owned $ 3,083 $ 213,870
1427 W. Main Street, Jeanerette Owned 192 27,923
403 N. Lewis Street, New Iberia Owned 347 51,231
1205 Victor II Boulevard, Morgan City Owned 342 20,464
1820 Main Street, Franklin (1) Leased 77 7,099
301 E. St. Peter Street, New Iberia Owned 1,033 22,149
700 Jefferson Street, Lafayette Owned 285 20,645
576 N. Parkerson Avenue, Crowley Owned 423 32,527
200 E. First Street, Kaplan Owned 127 24,385
1012 The Boulevard, Rayne Owned 217 10,825
500 S. Main Street, St Martinville Owned 70 12,431
1101 Veterans Memorial Drive, Abbeville Leased 1 7,235
150 Ridge Road, Lafayette Owned 71 12,312
2130 W. Kaliste Saloom, Lafayette Owned 1,128 16,147
2110 W. Pinhook Road, Lafayette Owned 2,814 71,373
2602 Johnston Street, Lafayette (1) Leased 316 17,432
2240 Ambassador Caffery, Lafayette Leased 143 5,114
4510 Ambassador Caffery, Lafayette Leased 144 2,258
2723 W. Pinhook Road Leased 159 1,379
1011 Fourth Street, Gretna Owned 754 72,964
3929 Veterans Blvd., Metairie Leased - 27,614
9300 Jefferson Hwy., River Ridge Owned 486 38,983
2330 Barataria Boulevard, Marrero Owned 313 39,343
4626 General De Gaulle, New Orleans Owned 236 13,498
111 Wall Boulevard, Gretna Owned 282 20,468
1820 Barataria Blvd. Marrero Owned 156 2,874
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Net Book Value of
Property and
Leasehold
Improvements Deposits
Owned or at at
Location Leased December 31, 1998 December 31, 1998
- ------------------------------------------- ------------- ------------------ -----------------
(In Thousands)
<S> <C> <C> <C>
4041 Williams Blvd. Kenner Leased 166 1,233
805 Bernard Road, Carencro Leased 248 26,310
200 Westgate Road, Scott Owned 28 27,525
463 Heyman Blvd., Lafayette Owned 296 35,904
1820 Moss St., Lafayette Owned 290 28,789
420 Kaliste Saloom, Lafayette Leased 77 26,561
4010 West Congress St, Lafayette Leased 52 28,858
3710 Ambassador Caffery, Lafayette Leased 17 22,089
3500 Desiard St, Monroe Owned 273 25,462
One Stella Mill Road, West Monroe Owned 1,687 27,034
2348 Sterlington Road, Monroe Leased 93 16,435
5329 Cypress St, West Monroe Owned 67 23,153
1900 Jackson St., Monroe Owned 117 9,860
305 South Vienna, Ruston Owned 645 46,418
2810 Louisville Ave, Monroe Leased 51 8,095
1327 North Trenton St, Ruston Owned 184 16,087
2907 Cypress St., West Monroe Owned 47 17,193
8019 Desiard St. Monroe Owned 168 39,149
-------- -----------
$ 17,705 $ 1,218,698
======== ===========
</TABLE>
- -------------------------------------------
(1) Building owned, ground leased.
33
<PAGE>
Item 3, Legal Proceedings.
The Company and the Bank are not involved in any pending legal
proceedings other than nonmaterial legal proceedings occurring in the ordinary
course of business.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The information required herein, to the extent applicable, is incorporated by
reference from page 51 of the Registrant's 1998 Annual Report to Stockholders
("Annual Report").
Item 6. Selected Financial Data.
The information required herein is incorporated by reference from pages 4 and
5 of the Registrant's 1998 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information required herein is incorporated by reference from pages
through through 18 of the Registrant's 1998 Annual Report.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
The information required hereon is incorporated by reference from pages 14
through 16 of the Registrant's 1998 Annual Report.
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from pages 19 to 50
of the Registrant's 1998 Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
The information required herein is incorporated by reference from the
Registrant's definitive proxy statement for the 1999 Annual Meeting of
Stockholders ("Proxy Statement").
Item 11. Executive Compensation.
The information required herein is incorporated by reference from the
Registrant's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required herein is incorporated by reference from the
Registrant's Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required herein is incorporated by reference from the
Registrant's Proxy Statement.
34
<PAGE>
PART IV.
Item 14. Exhibits, Financial Statement Schedules 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 8 hereof (see Exhibit 13):
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Income for the Fiscal Periods Ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Changes in Shareholders' Equity for the
Fiscal Periods Ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the Fiscal Periods ended
December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable accounting
regulation of the 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 10-K, and this
list includes the Exhibit Index.
<TABLE>
<CAPTION>
Exhibit Index
Page
----
<S> <C> <C>
3.1 Articles of Incorporation of ISB Financial Corporation *
3.2 Bylaws of ISB Financial Corporation *
4.1 Stock Certificate of ISB Financial Corporation **
10.1 ISB Financial Corporation Employee Stock Ownership Plan *
10.2 ISB Financial Corporation Profit Sharing Plan and Trust **
10.3 Employment Agreement among ISB Financial Corporation, IBERIABANK
and Larrey G. Mouton dated February 17, 1999 ***
10.4 Severance Agreement among ISB Financial Corporation, IBERIABANK and
and John J. Ballatin, James R. McLemore, Jr., Donald P. Lee and
Ronnie J. Foret
10.5
10.6 Stock Option Plan ****
10.7 Recognition and Retention Plan of Iberia Savings Bank and Trust
Agreement ****
**
13.0 1998 Annual Report to Stockholders
22.0 Subsidiaries of the Registrant - Reference is made to "Item 2.
"Business" for the required information
23.0 Consent of Castaing, Hussey, Lolan & Dauterive LLP
27.0 Financial Data Schedule
</TABLE>
(*) Incorporated herein by reference from the Registration Statement on Form
S-1 (Registration No. 33-86598) filed by the Registrant with the SEC on
November 22, 1994, as subsequently amended.
(**) Incorporated herein by reference from the Registration Statement on Form
S-8 (Registration No. 33-9321 0) filed by the Registrant with the SEC on
June 7, 1995.
(***) Incorporated herein by reference from the like-numbered exhibit from the
registrant's Annual Report on Form I O-K for the year ended December 3 1,
1997.
(****) Incorporated herein by reference from the Registrant's definitive proxy
statements dated April 16, 1996, as filed with the SEC.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/Larrey G. Mouton 3/30/99
President and Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/Larrey G. Mouton President, Chief Executive 3/30/99
Larrey G. Mouton Officer and Director
(principal executive officer)
/s/James R. McLemore, Jr. Senior Vice President and 3/30/99
James R. McLemore, Jr. Chief Financial Officer
(principal financial and
accounting officer)
- -------------------------- Chairman of the Board
Emile J. Plaisance, Jr.
/s/Elaine D. Abell Director 3/25/99
Elaine D. Abell
/s/Harry V. Barton, Jr. Director 3/25/99
Harry V. Barton, Jr.
/s/Cecil C. Broussard Director 3/25/99
Cecil C. Broussard+
/s/William H. Fenstermaker Director 3/30/99
William H. Fenstermaker
/s/Ray Himel Director 3/30/99
Ray Himel
/s/E. Stewart Shea, III Director 3/30/99
E. Stewart Shea, III
36
ISB FINANCIAL CORPORATION
1998 ANNUAL REPORT
IBERIABANK
An Independent Louisiana Bank (TM)
<PAGE>
TABLE OF CONTENTS
- ---------
SECTION 1
Letter to Stockholders .......................................... 2
Selected Consolidated Financial Data ............................ 4
Management's Discussion and Analysis of
Financial Condition and Results of Operations ............. 6
- ---------
SECTION 2
Report of Independent Auditors .................................. 19
Consolidated Financial Statements
Consolidated Statements of Financial Condition. ........... 20
Consolidated Statements of Income ......................... 21
Consolidated Statements of Stockholders' Equity ........... 22
Consolidated Statements of Cash Flows ..................... 23
Notes to Consolidated Financial Statements ................ 25
Corporate Information ........................................... 51
ANNUAL MEETING
The Annual Meeting of Stockholders is scheduled for Wednesday, April
21, at 3:00 p.m., at IBERIABANK, 1101 E. Admiral Doyle Drive, New Iberia,
Louisiana.
- 1 -
<PAGE>
LETTER TO STOCKHOLDERS
The growth of our Company in 1998 was nothing short of extraordinary.
In the third quarter of 1998, the Company acquired $455.3 million of assets from
First Commerce Corporation. The assets included $126.6 million of consumer and
commercial loans, $5.7 million in buildings and equipment, and $292.4 million in
cash. The price for this acquisition was the assumption of $452.6 million of
deposits and a premium of $29.2 million. We acquired 17 banking offices with 152
employees, 48,000 customer deposit accounts and 7,800 loan accounts. This
significantly changed the profile of IBERIABANK.
This acquisition increased our assets at year-end to $1.4 billion,
compared to $947.3 million at December 31, 1997, an increase of 48%. Net loans
increased 16% in 1998 and deposits increased 56% during the year. The purchased
loans were a good mixture of commercial and consumer loans, and the deposits
included many checking and money market accounts in addition to certificates of
deposit. We dramatically changed the mix of deposits and loans, in a manner
which fits well with our overall strategy to transition from a traditional
savings bank to a commercial bank.
During the year, commercial loan demand was brisk as we continued to
improve this line of business. Home mortgage lending also was strong in reaction
to the relatively low interest rates. Our mortgage division originated $96
million in new home loans during the year. Consistent with our general strategy
to sell long-term, fixed-rate mortgage loans, we sold $68 million in loans to
investors. The opportunity for new loan business is continuing into 1999.
Outstandings in the indirect automobile lending program continued to increase as
we added new dealers in our new market areas. Because of the significant amount
of new deposit balances acquired, we elected not to compete aggressively for
certificates of deposit by paying the relatively higher rates offered by some of
our competitors.
At the same time that we experienced this tremendous growth, we
replaced our entire data processing system, teller system and internal
accounting system in accordance with previously announced plans. We spent $2.5
million in this effort to prepare for Y2K and upgrade our capacities in our
efforts to continue to provide better customer service. This was quite a
challenge, but I am happy to report that our employees met the challenge by
working long hours and on weekends. I am proud of our employees and the results
they have achieved.
For the year of 1998, the Company earned $1.56 per share, an increase
of 88% over the 1997 earnings of $.83 per share. Included in the 1998 earnings
was a $.21 per share gain on the sale of land that was no longer needed for bank
premises. The earnings in 1997 included charges and expenses of a non-recurring
nature of $.19 a share. Excluding these one-time events in both years, operating
earnings in 1998 were $1.35 per share, compared with $1.01 in 1997, an increase
of 34%.
- 2 -
<PAGE>
Recognizing the importance of increasing stockholder value, your Board
of Directors authorized an increase in our quarterly dividends to $.14 per share
from $.125 per share in the first quarter of 1998. In the fourth quarter of
1998, the Board authorized another increase to $.15 per share. In addition, the
Company repurchased 25,000 shares of common stock during 1998. These shares will
be held as treasury stock and will be available for general corporate purposes
including being available for re-issuance as options are exercised. The return
on average stockholders' equity increased from 4.66% in 1997 to 8.47% in 1998
due to the combination of increased earnings, the share repurchases and the
improved leveraging of the balance sheet. The book value, or stockholders'
equity, per share at year-end 1998 increased to $18.91 from $17.75 at December
31, 1997. We recently announced our intention to purchase additional shares in
1999 as the opportunity permits.
As a result of the acquisition of branch offices made in 1998,
IBERIABANK now operates 26 full service offices in south central Louisiana, 10
full service offices located in northeast Louisiana and 8 full service offices
in the greater New Orleans area. In the year ahead, we will be challenged to
capitalize on our offices, customers and employees in new markets. We will also
be challenged in 1999 because the current weakness in oil and gas prices may put
a damper on economic growth in Louisiana. We believe that we are ready to accept
these challenges and take advantage of the opportunities to improve our Company.
We appreciate the confidence that you have placed in our Company. We
will continue to work diligently to improve the Company, IBERIABANK and the
value of your investment.
Sincerely,
/s/Larrey G. Mouton
Larrey G. Mouton
President and Chief Executive Officer
- 3 -
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(Dollars in Thousands except per share data)
December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $1,401,630 $947,282 $929,264 $608,830 $487,563
Cash and cash equivalents 145,871 44,307 53,385 51,742 9,686
Loans receivable, net 761,175 654,867 571,119 399,542 370,794
Investment securities 99,758 77,317 103,724 87,231 48,088
Mortgage-backed securities 277,798 115,125 150,669 51,646 39,923
Goodwill and acquisition intangibles 45,352 16,358 17,807 54 80
Deposit accounts 1,218,698 778,695 760,284 444,600 434,443
Borrowings 45,639 46,728 47,750 40,490 5,000
Stockholders' Equity 123,967 115,564 114,006 119,677 44,840
Book value per share $ 18.91 $ 17.75 $ 17.30 $ 17.48 N/A
Tangible book value per share 11.99 15.24 14.60 17.47 N/A
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income $ 78,350 $ 68,481 $ 52,707 $ 42,334 $ 36,548
Interest expense 38,458 36,050 27,136 21,282 17,294
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 39,892 32,431 25,571 21,052 19,254
Provision for loan losses 903 1,097 156 239 305
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 38,989 31,334 25,415 20,813 18,949
Noninterest income 10,750 6,390 3,818 2,668 2,425
Noninterest expense 33,420 28,601 20,778 12,693 11,783
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 16,319 9,123 8,455 10,788 9,591
Income taxes 6,182 3,780 3,177 3,781 3,354
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 10,137 $ 5,343 $ 5,278 $ 7,007 $ 6,237
- ---------------------------------------------------------------------------------------------------------------------------
Earnings per share - diluted $ 1.56 $ .83 $ .80 $ .80 (1) N/A
- ---------------------------------------------------------------------------------------------------------------------------
Operating earnings per share (2) $ 1.35 $ 1.01 $ 1.10 $ .80 (1) N/A
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends per share $ .57 $ .45 $ .33 $ .23 (1) N/A
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 4 -
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Operating Ratios (3):
Return on average assets 0.93% 0.57% 0.74% 1.26% 1.29%
Return on average equity 8.47 4.66 4.49 7.14 14.56
Equity to assets at the end of period 8.84 12.20 12.27 19.66 9.20
Interest-earning assets to interest-
bearing liabilities 113.92 113.33 120.01 119.87 107.69
Interest rate spread (4) 3.44 3.12 2.97 3.16 3.88
Net interest margin (4) 3.97 3.66 3.77 3.95 4.17
Noninterest expense to average assets 3.08 3.03 2.91 2.28 2.44
Efficiency ratio (5) 65.99 73.67 70.70 53.51 54.35
Dividend payout ratio 36.56 54.41 41.72 21.81 (1) N/A
Asset Quality Data:
Non-performing assets to total assets
at end of period (6) 0.43 0.29 0.38 0.33 0.37
Allowance for loan losses to
non-performing loans at end of period 126.53 232.55 180.27 255.18 304.53
Allowance for loan losses to total loans
at end of period 0.94 0.80 0.79 0.90 1.08
Consolidated Capital Ratios:
Tier 1 leverage capital ratio 5.81 10.54 10.34 19.52 9.44
Tier 1 risk-based capital ratio 9.89 18.52 20.91 42.79 19.12
Total risk-based capital ratio 10.80 19.50 21.92 44.14 20.37
</TABLE>
- ---------
(1) 1995 earnings per share and dividends declared have been stated only for a
partial period because of the Bank's conversion to stock form on April 6,
1995.
(2) Operating earnings exclude the effect of one-time or non-operating events
from reported net income.
(3) With the exception of end of period ratios, all ratios are based on average
daily balances during the respective periods and are annualized where
appropriate.
(4) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities, and net interest margin represents net
interest income as a percentage of average interest-earning assets.
(5) The efficiency ratio represents noninterest expense, as a percentage of the
sum of net interest income and noninterest income.
(6) Non-performing assets consist of non-accruing loans, loans 90 days or more
past due and repossessed assets.
- 5 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to assist readers in
understanding the financial condition and results of operations of ISB Financial
Corporation (the "Company") and its subsidiaries for the years ended December
31, 1996 through 1998. This review should be read in conjunction with the
audited consolidated financial statements, accompanying footnotes and
supplemental financial data included herein.
FINANCIAL CONDITION
- ------
ASSETS
General - Total assets of the Company increased by $454.3 million or
48.0%, from $947.3 million at December 31, 1997 to $1.4 billion at December 31,
1998. This increase was primarily due to the acquisition of 17 full service
branch offices from the former First Commerce Corporation ("FCOM") in September
of 1998. The 17 acquired branch offices were added to the branch network of the
Company's subsidiary, IBERIABANK (the "Bank"). The Bank now operates 44 full
service branch offices. The Bank paid $29.2 million of cash as a deposit premium
and purchased $126.6 million of loans, $5.7 million of premises and equipment
and $753,000 of other assets. The Bank also assumed $452.6 million of deposits
and $2.7 million of other liabilities. The Bank received $292.4 million of net
cash in the transaction. The cash has been invested in mortgage-backed
securities, investment securities and interest bearing cash accounts. The
deposit premium and other costs incurred in the acquisition resulted in $31.1
million of goodwill, which is to be amortized over 15 years using the
straight-line method. The following discussion describes the major changes in
the asset mix during 1998.
Cash and Cash Equivalents - Cash and cash equivalents, which consist of
interest-bearing and non-interest bearing deposits and cash on hand, increased
by $101.5 million, or 229.2%, to $145.9 million at December 31, 1998 compared to
$44.3 million at December 31, 1997. The increase in cash was due primarily to
$292.4 million of net cash received in the acquisition of branches from FCOM,
which was partially offset by $188.4 million of cash used in net securities
purchases together with $2.5 million of net other uses.
Investment Securities - Investment securities increased by an aggregate
of $22.4 million, or 29.0%, to $99.8 million at December 31, 1998 compared to
$77.3 million at December 31, 1997. Such increase was the result of $56.6
million of investment securities purchased and a
- 6 -
<PAGE>
$193,000 increase in the market value of investment securities available for
sale, which were partially offset by $34.3 million of investment securities
which were sold or which matured and $81,000 of amortization of premiums on
investment securities. The net cash used in the investment security portfolio
came primarily from purchases coincident to the acquisition of branches from
FCOM.
At December 31, 1998, $97.1 million of the Company's investment
securities were classified as available for sale with a pre-tax net unrealized
gain of $528,000. In addition, at such date, $91.2 million of the Company's
investment securities consisted of U.S. Government and Federal agency
obligations and $25.7 million, or 25.8% of the Company's investment securities
were due within one year. Note 3 to the Consolidated Financial Statements
provides further information on the Company's investment securities.
Mortgage-Backed Securities - Mortgage-backed securities increased by
$162.7 million, or 141.3%, to $277.8 million at December 31, 1998 compared to
$115.1 million at December 31, 1997. The increase in the balance of
mortgage-backed securities was due to $209.3 million of purchases of
mortgage-backed securities, which was partially offset by $46.6 million of
maturities and repayments of mortgage-backed securities. The net cash used in
the mortgage-backed security portfolio came primarily from purchases coincident
to the acquisition of branches from FCOM.
At December 31, 1998, approximately 92.7% of the Company's
mortgage-backed securities were issued or guaranteed by Federal agencies or
government sponsored enterprises. Additional information on the Company's
mortgage-backed securities may be found in Note 4 of the Consolidated Financial
Statements.
Loans Held for Sale - Loans held for sale increased $14.1 million, or
322.5%, to $18.5 million at December 31, 1998 compared to $4.4 million at
December 31, 1997. Loans held for sale represent single-family residential
mortgage loans to be sold in the secondary market. The increase in loans held
for sale reflect management's decision to sell more of its loan production in
the secondary market. In 1998, 71.5% of mortgage originations were sold in the
secondary market.
Loans Receivable, Net - Loans receivable, net, increased by $106.3
million, or 16.2%, to $761.2 million at December 31, 1998 compared to $654.9
million at December 31, 1997. The Company acquired $126.6 million of commercial
and consumer loans in the acquisition of branches from FCOM. Single-family
mortgage loans decreased $63.1 million, or 17.3% during 1998 as 71.5% of the
mortgage loans originated during 1998 were sold in the secondary market. During
1998, commercial business loans increased $23.4 million, or 39.0%, commercial
real estate loans increased $61.5 million, or 109.6%, home equity loans
increased $39.0 million, or 114.0%, automobile loans increased $15.2 million, or
161.1%, indirect automobile loans increased $23.7 million, or 26.1%, and other
loans increased $20.4 million, or 277.2%. Educational loans decreased $8.8
million, or 93.4%, during 1998 as the majority of the portfolio was sold. The
Company will no longer originate educational loans. The changes in the loan
portfolio reflect management's continued emphasis on commercial and consumer
lending. For additional information on loans, see Note 5 to the Consolidated
Financial Statements.
Premises and Equipment, Net - Premises and equipment, net, increased by
$8.1 million, or 41.9%, to $27.3 million at December 31, 1998 compared to $19.3
million at December 31, 1997. The increase was the result of $5.7 million of
premises and equipment acquired from FCOM, $4.3 million in purchases of other
premises and equipment, which was partially offset by $1.9 million of
depreciation of premises and equipment. The purchases of premises and equipment
included an in-house data processing system and various upgrades to the
Company's technological infrastructure.
- 7 -
<PAGE>
- ------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
General - The Company's primary funding sources included deposits,
borrowings from the Federal Home Loan Bank ("FHLB") of Dallas and stockholders'
equity. The following discussion focuses on the major changes in the mix during
1998.
Deposits - Deposits increased by $440.0 million, or 56.5%, from $778.7
million at December 31, 1997 to $1.2 billion at December 31, 1998. The increase
was the result of $452.6 million deposits acquired in the acquisition of
branches from FCOM and $23.7 million of interest credited which was partially
offset by $36.3 million of net cash withdrawals. The net cash withdrawals
consisted primarily of higher priced certificates of deposit as management
reduced its reliance on certificates of deposit as a funding source. At December
31, 1998, $121.8 million, or 10.0%, of the Company's total deposits were
non-interest bearing, compared to $44.8 million, or 5.8%, at December 31, 1997.
Additional information regarding deposits is provided in Note 8 to the
Consolidated Financial Statements.
Borrowings - The Company's borrowings are comprised of advances from
the Federal Home Loan Bank ("FHLB") of Dallas, which decreased $1.1 million, or
2.3%, from $46.7 million at December 31, 1997 to $45.6 million at December 31,
1998. The decrease in borrowings was due to normal amortization payments. The
advances, which are fixed-rate and long-term, were used in prior years to fund
fixed-rate and long-term single-family residential loans. For additional
information, including maturities of the Company's borrowings, see Note 9 to the
Consolidated Financial Statements.
Stockholders' Equity - Stockholders' equity provides a source of
permanent funding, allows for future growth and provides the Company with a
cushion to withstand unforeseen adverse developments. At December 31, 1998,
stockholders' equity totaled $124.0 million, an increase of $8.4 million from
the previous year-end level. The increase in stockholders' equity in 1998 was
the result of $10.1 million of net income, a $128,000 increase in unrealized
gain on securities available for sale, $95,000 of proceeds from the exercise of
stock options, $1.7 million of common stock released by the Company's Employee
Stock Ownership Plan ("ESOP") trust and $569,000 of common stock earned by
participants of the Company's Recognition and Retention Plan ("RRP") trust, all
of which were partially offset by $3.7 million of cash dividends declared on the
Company's common stock and $503,000 of the Company's common stock repurchased
and placed into treasury.
Federal regulations impose minimum regulatory capital requirements on
all institutions with deposits insured by the Federal Deposit Insurance
Corporation ("FDIC"). The Board of Governors of the Federal Reserve System
("FRB") imposes similar capital regulations on bank holding companies. At
December 31, 1998, the
- 8 -
<PAGE>
Company exceeded all regulatory capital ratio requirements with a tier 1
leverage capital ratio of 5.81%, a tier 1 risk-based capital ratio of 9.89% and
a total risk-based capital ratio of 10.80%. At December 31, 1998, IBERIABANK
exceeded all regulatory capital ratio requirements with a tier 1 leverage
capital ratio of 5.76%, a tier 1 risk-based capital ratio of 9.77% and a total
risk-based capital ratio of 10.68%. As part of the regulatory approval of the
acquisition of branches from FCOM, the Bank has committed to have a tier 1
leverage capital ratio of 6.0% and 6.5% at June 30, 1999 and December 31, 1999,
respectively. The graph at right displays the Company and IBERIABANK's
regulatory capital position as of December 31, 1998, along with the applicable
regulatory requirements.
- ---------------------
RESULTS OF OPERATIONS
General - The Company reported net income of $10.1 million, $5.3
million and $5.3 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Earnings in 1998 include a $1.3 million, after taxes, gain on the
sale of property. Earnings in 1997 include $1.2 million, after taxes, of
non-operating charges and expenses. Earnings in 1996 include $1.9 million, after
taxes, relating to the FDIC special assessment. Without these one-time or
non-operating items, the Company would have reported net income of $8.8 million,
$6.5 million and $7.2 million for the years ended December 31, 1998, 1997 and
1996, respectively. The 1998 results include all associated income and expense
items relating to the acquired branch offices from the date of acquisition
(September 10, 1998) until the end of the year. During 1998, interest income
increased $9.9 million, interest expense increased $2.4 million, the provision
for loan losses decreased $194,000, noninterest income increased $4.4 million,
noninterest expense increased $4.8 million and income tax expense increased $2.4
million. Cash earnings (net income before the amortization of goodwill) were
$12.0 million, $6.9 million and $5.7 million for the years ended December 31,
1998, 1997 and 1996, respectively.
- 9 -
<PAGE>
Net Interest Income - Net interest income is determined by interest
rate spread (i.e. the difference between the yields earned on interest-earning
assets and the rates paid on its interest-bearing liabilities) and the relative
amounts of interest-earning assets and interest-bearing liabilities. The
Company's average interest rate spread was 3.44%, 3.12% and 2.97% during the
years ended December 31, 1998, 1997 and 1996, respectively. The Company's net
interest margin (i.e., net interest income as a percentage of average
interest-earning assets) was 3.97%, 3.66% and 3.77%, during the years ended
December 31, 1998, 1997 and 1996, respectively. The net interest margin and net
interest spread were adversely impacted by the acquisition of branches from FCOM
in September of 1998. The net interest margin and net interest spread on the
assets and liabilities acquired from FCOMwere lower than what the Company
previously had due to the fact that loans purchased were only 28% of total
assets acquired, with cash accounting for 64% of total assets acquired. The
acquired cash was invested in relatively lower yielding investment securities,
mortgage-backed securities and interest bearing cash accounts.
Net interest income increased $7.5 million, or 23.0%, in 1998 to $39.9
million compared to $32.4 million in 1997. The reason for such increase was a
$9.9 million, or 14.4%, increase in interest income, which was partially offset
by a $2.4 million, or 6.7%, increase in interest expense. The increase was due
to both the increase in asset size and an increase in the net interest margin.
Net interest income increased $6.9 million, or 26.8%, in 1997 compared to 1996.
Such increase was due to a $15.8 million, or 29.9%, increase in interest income,
which was partially offset by a $8.9 million, or 32.8%, increase in interest
expense.
Interest Income - Interest income totaled $78.4 million for the year
ended December 31, 1998, an increase of $9.9 million over the total of $68.5
million for the year ended December 31, 1997. This improvement was mainly due to
an increase in the Company's average interest-earning assets of $119.0 million,
or 13.4%, to $1.0 billion for the year ended December 31, 1998, caused primarily
by the acquisition of branches from FCOM in September, 1998. Interest earned on
loans increased $8.4 million, or 16.2%, in 1998. The increase was due to a $87.8
million, or 14.1%, increase in the average balance of loans together with a 15
basis point (with 100 basis points being equal to 1%) increase in the yield
earned. Interest earned on investment securities decreased $1.2 million, or
18.6%, in 1998. The decrease was due to a $22.3 million, or 21.6%, decrease in
the average balance of investment securities, which was partially offset by a 23
basis point increase in the yield earned. Interest earned on mortgage-backed
securities increased $1.8 million, or 21.3%, in 1998. The increase was due to a
$26.0 million, or 19.4%, increase in the average balance of mortgage-backed
securities together with an 11 basis point increase in the yield earned.
Interest income on other earning assets, primarily interest-bearing deposits,
increased $807,000, or 45.8%, during 1998. The increase was due to a $27.4
million, or 102.7%, increase in the average balance of other earning assets,
which was partially offset by a 185 basis point decrease in the yield earned.
The weighted average yield on all interest earning assets increased from 7.73%
in 1997 to 7.80% in 1998.
Interest income amounted to $68.5 million and $52.7 million for the
years ended December 31, 1997 and 1996, respectively. The $15.8 million, or
29.9%, increase in interest income in 1997 was due to a $11.8 million, or 29.3%,
increase in interest income on loans, a $1.3 million, or 26.2%, increase in
interest income on investment securities, and a $3.9 million, or 87.6%, increase
in interest income on mortgage-backed securities, which was partially offset by
a $1.3 million, or 41.7%, decrease in interest income on other earning assets.
- 10 -
<PAGE>
Interest Expense - Interest expense increased $2.4 million, or 6.7%, in
1998 to $38.5 million compared to $36.1 million in 1997. The reason for such
increase was a $2.1 million, or 6.3%, increase in interest expense on deposits,
together with a $316,000, or 10.2%, increase in interest expense on borrowings.
The increase in interest expense on deposits was the result of a $94.7 million,
or 12.9%, increase in the average balance of deposits, which was partially
offset by a 26 basis point decrease in the average cost of deposits. The
decrease in the average cost of deposits was both the result of the net cash
withdrawals of relatively higher priced certificates of deposit together with
the acquisition from FCOM of a significant amount of relatively lower priced
deposits. The increase in the average balance of deposits was primarily the
result of the acquisition from FCOM that took place during 1998. The increase in
interest expense on borrowings was the result of a $5.7 million, or 12.0%,
increase in the average balance of borrowings, which was partially offset by a
ten basis point decrease in the average cost of borrowings. The reduced cost of
funds was the primary cause of the increased net interest margin for 1998.
Total interest expense amounted to $36.1 million and $27.1 million for
the years ended December 31, 1997 and 1996, respectively. The $8.9 million, or
32.8%, increase in interest expense in 1997 compared to 1996 was due to a $216.5
million, or 38.3%, increase in the average balance of interest-bearing
liabilities, which was partially offset by a 19 basis point decrease in the cost
of interest-bearing liabilities.
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.
<PAGE>
<TABLE>
<CAPTION>
(Dollars in Thousands) YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans $ 350,627 $27,944 7.97% $377,776 $30,276 8.01% $340,067 $27,793 8.17%
Commercial loans 149,627 14,317 9.57 89,982 8,896 9.89 46,431 4,414 9.51
Consumer loans 209,778 18,229 8.69 154,444 12,896 8.35 85,017 8,056 9.48
---------- ------- -------- ------- -------- -------
Total loans 710,032 60,490 8.52 622,202 52,068 8.37 471,515 40,263 8.54
---------- ------- -------- ------- -------- -------
Mortgage-backed securities 160,042 10,235 6.40 134,059 8,436 6.29 72,664 4,498 6.19
Investment securities 80,623 5,057 6.27 102,880 6,216 6.04 80,565 4,926 6.11
Other earning assets 54,160 2,568 4.74 26,723 1,761 6.59 53,535 3,020 5.64
---------- ------- -------- ------- -------- -------
Total interest-earning assets 1,004,857 78,350 7.80 885,864 68,481 7.73 678,279 52,707 7.77
---------- ------- -------- ------- -------- -------
Non-interest earning assets 81,583 58,793 35,572
---------- -------- --------
Total assets $1,086,440 $944,657 $713,851
========== ======== ========
Interest-bearing liabilities:
Deposits:
Demand deposits $ 196,254 4,801 2.45 $141,212 3,714 2.63 $ 84,921 2,151 2.53
Regular savings deposits 114,943 2,541 2.21 115,882 2,949 2.54 69,892 1,860 2.66
Certificates of deposit 517,952 27,707 5.35 477,325 26,294 5.51 362,745 20,006 5.52
---------- ------- -------- ------- -------- -------
Total deposits 829,140 35,049 4.23 734,419 32,957 4.49 517,558 24,017 4.64
Borrowings 52,936 3,409 6.44 47,281 3,093 6.54 47,610 3,119 6.55
---------- ------- -------- ------- -------- -------
Total interest-bearing liabilities 882,076 38,458 4.36 781,700 36,050 4.61 565,168 27,136 4.80
---------- ------- -------- ------- -------- -------
Non-interest bearing demand deposits 69,670 37,647 23,603
Non-interest bearing liabilities 14,982 10,583 7,597
---------- -------- --------
Total liabilities 966,728 829,930 596,368
Stockholders' Equity 119,712 114,727 117,483
---------- -------- --------
Total liabilities and
stockholders' equity $1,086,440 $944,657 $713,851
========== ======== ========
Net interest-earning assets $ 122,781 $104,164 $113,111
========== ======== ========
Net interest income/interest
rate spread $39,892 3.44% $32,431 3.12% $25,571 2.97%
======= ==== ======= ==== ======= ====
Net interest margin 3.97% 3.66% 3.77%
==== ==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities 113.92% 113.33% 120.01%
====== ====== ======
</TABLE>
- 11 -
<PAGE>
The following table analyzes the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to rate (changes in rate multiplied by the prior period's volume),
(ii) changes attributable to volume (changes in volume multiplied by the prior
period's rate, (iii) mixed change (changes in rate multiplied by changes in
volume), and (iv) total increase (decrease) (sum of the previous column).
<TABLE>
<CAPTION>
(Dollars in Thousands) Years ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998/1997 1997/1996
- ---------------------------------------------------------------------------------------------------------------------------
Change Attributable To Change Attributable To
- ---------------------------------------------------------------------------------------------------------------------------
Total Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans:
Mortgage loans $ (2,176) $ (168) $ 12 $(2,332) $ 3,082 $(539) $ (60) $ 2,483
Commercial business loans 5,897 (286) (190) 5,421 4,140 176 166 4,482
Consumer and other loans 4,620 525 188 5,333 6,579 (957) (782) 4,840
Investment securities (1,345) 237 (51) (1,159) 1,364 (58) (16) 1,290
Mortgage-backed securities 1,635 137 27 1,799 3,800 75 63 3,938
Other earning assets 1,808 (494) (507) 807 (1,513) 508 (254) (1,259)
- ---------------------------------------------------------------------------------------------------------------------------
Total net change in income
on interest-earning assets 10,439 (49) (521) 9,869 17,452 (795) (883) 15,774
- ---------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
Demand deposits 1,448 (260) (101) 1,087 1,426 82 55 1,563
Regular savings deposits (24) (387) 3 (408) 1,224 (81) (54) 1,089
Certificates of deposit 2,238 (760) (65) 1,413 6,319 (24) (7) 6,288
Borrowings 370 (48) (6) 316 (22) (4) 0 (26)
- ---------------------------------------------------------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities 4,032 (1,455) (169) 2,408 8,947 (27) (6) 8,914
- ---------------------------------------------------------------------------------------------------------------------------
Net change in net interest
income $ 6,407 $1,406 $(352) $7,461 $ 8,505 $(768) $(877) $ 6,860
===========================================================================================================================
</TABLE>
<PAGE>
Provision for Loan Losses - Provisions for loan losses are charged to
earnings to bring the total allowance for loan losses to a level considered
appropriate by management based on various factors, including historical
experience, the volume and type of lending conducted by the Company, the amount
of the Company's classified assets, the status of past due principal and
interest payments, general economic conditions, particularly as they relate to
the Company's market area, and other factors related to the collectibility of
the Company's loan portfolio. Management of the Company assesses the allowance
for loan losses on a quarterly basis and will make provisions for loan losses as
deemed appropriate in order to maintain the adequacy of the allowance for loan
losses.
The Company made a provision for loan losses of $903,000 in 1998,
compared to $1.1 million and $156,000 for 1997 and 1996, respectively. Net loan
charge-offs for 1998 totaled $418,000, compared to $454,000 for 1997.
The allowance for loan losses amounted to $7.1 million or .94% and
126.5% of total loans and total non-performing loans, respectively, at December
31, 1998 compared to .80% and 232.6%, respectively, at December 31, 1997. The
allowance for loan losses increased $1.9 million, or 35.7%, from the $5.3
million at
- 12 -
<PAGE>
December 31, 1997. The increase included $1.4 million added to the reserve as a
purchase accounting adjustment in the acquisition of branches from FCOM. The
decrease in the allowance for loan losses as a percentage of non-performing
loans was the result of the increase in non-performing loans.
Non-performing loans (non-accrual loans and accruing loans 90 days or
more overdue) were $5.6 million and $2.3 million at December 31, 1998 and 1997,
respectively. The increase in non-performing loans was primarily attributable to
the following factors: (1) the overall increase in loan balances, (2) two large
commercial loan relationships totaling $1.3 million which were past due 90 days
at December 31, 1998 and (3) a general increase in the amount of non-performing
loans which management attributes in part to administrative delays in the Bank's
loan renewal and collection efforts. This resulted from the extensive demands on
the staff in integrating the systems and operations acquired from FCOM as well
as the Company's data processing conversion in September of 1998. The Company's
foreclosed property amounted to $384,000 and $473,000 at December 31, 1998 and
1997, respectively. As a percentage of total assets, the Company's total
non-performing assets, which consists of non-performing loans plus foreclosed
property, amounted to $6.0 million, or .43% at December 31, 1998 compared to
$2.7 million, or .29%, at December 31, 1997.
Although management of the Company believes that the Company's
allowance for loan losses was adequate at December 31, 1998, based on facts and
circumstances available to it, there can be no assurances that additions to such
allowance will not be necessary in future periods, which would adversely affect
the Company's results of operations.
Noninterest Income - For 1998, the Company reported noninterest income
of $10.8 million compared to $6.4 million for 1997. The primary reasons for the
$4.4 million, or 68.2%, increase in noninterest income was a $1.8 million gain
on the sale of property realized in 1998, a $1.2 million, or 388.6%, increase in
gains on the sale of loans, reflecting the Company's increased emphasis on the
sale of newly originated fixed-rate single-family residential loans in the
secondary market, a $1.4 million, or 39.8%, increase in service charges on
deposit accounts reflecting an increase in the number of accounts that are
subject to service charges (due primarily to the acquisition of deposits from
FCOM), and a $329,000, or 24.4%, increase in other income, which was partially
offset by a $263,000, or 98.9%, decrease in gain on the sale of investment
securities and a $103,000, or 10.3% decrease in late charges and other fees on
loans.
- 13 -
<PAGE>
Total noninterest income amounted to $6.4 million and $3.8 million for
the years ended December 31, 1997 and 1996, respectively. The primary reasons
for the $2.6 million, or 67.4%, increase in noninterest income during 1997
compared to 1996 was a $1.4 million, or 70.8%, increase in service charges on
deposit accounts, a $251,000, or 456.4%, increase in gains on the sale of loans,
a $303,000, or 43.3%, increase in late charges and other fees on loans, a
$495,000, or 58.2%, increase in other income and $85,000 of gains on the sale of
investment securities.
Noninterest Expense - Noninterest expense includes salaries and
employee benefits, occupancy expense, federal deposit insurance premiums
(including, in 1996, the one-time special S A I F ("SAIF") assessment),
advertising and marketing expense, computer service expense, amortization of
goodwill and other acquired intangibles and other items. Noninterest expense
amounted to $33.4 million, $28.6 million and $20.8 million for the three years
ended December 31, 1998, 1997 and 1996, respectively. The primary reasons for
the $4.8 million, or 16.8%, increase in noninterest expense for 1998 compared to
1997 were the acquisition of the 17 branch offices and their employees and
continuing to build a commercial bank infrastructure. Salaries and employee
benefits increased $2.5 million, or 18.0%, depreciation expense increased
$501,000, or 35.3%, occupancy expense increased $316,000, or 16.7%, advertising
expense increased $179,000, or 19.2%, telephone expense increased $335,000, or
57.1%, franchise and shares tax expense increased $112,000, or 12.1%, the
amortization of goodwill and acquired intangibles increased $519,000, or 33.6%,
other expenses increased $1.3 million, or 27.2%, computer expense decreased
$690,000, or 43.5%, due primarily to the conversion to an in-house data
processing system and the computer service contract cancellation penalty paid in
1997, and printing, stationery and supplies expense decreased $155,000, or
16.1%.
The primary reasons for the $7.8 million, or 37.7%, increase in
noninterest expense for 1997 compared to 1996 were having a full year of
operating expenses for the nine offices acquired in 1996 and the two branch
offices opened in 1996, operating expenses relating to two new branch offices
opened in 1997, consolidating the two subsidiary banks and changing the Bank's
name, cancellation of the Bank's long-term computer servicing contract with a
resultant early termination penalty and continuing to build a commercial bank
infrastructure.
Income Taxes - For the years ended December 31, 1998, 1997 and 1996,
the Company incurred income tax expense of $6.2 million, $3.8 million and $3.2
million, respectively. The Company's effective tax rate amounted to 37.9%, 41.4%
and 37.6% during 1998, 1997 and 1996, respectively. The difference between the
effective tax rate and the statutory tax rate primarily related to variances in
the items that are either non-taxable or non-deductible, primarily the
non-deductibility of part of the amortization of goodwill and acquisition
intangibles, the non-deductible portion of the ESOP compensation expense and the
capital loss carryforward used during 1998. For more information, see Note 10 to
the Consolidated Financial Statements.
- ------------------------------
ASSET AND LIABILITY MANAGEMENT
The principal objective of the Company's asset and liability management
function is to evaluate the interest-rate risk included in certain balance sheet
accounts, determine the level of risk appropriate given the Company's business
focus, operating environment, capital and liquidity requirements and performance
objectives, establish prudent asset concentration guidelines and manage the risk
consistent with Board approved guidelines. Through such management, the Company
seeks to reduce the vulnerability of its operations to changes in interest rates
and to manage the ratio of interest-rate sensitive assets to interest-rate
sensitive liabilities within specified maturities or repricing dates. The
Company's actions in this regard are taken under the
- 14 -
<PAGE>
guidance of the Asset/Liability Committee ("ALCO"), which is chaired by the
Chief Executive Officer and comprised of members of the Company's senior
management. The ALCO generally meets on a monthly basis, to review, among other
things, the sensitivity of the Company's assets and liabilities to interest rate
changes, local and national market conditions and interest rates. In connection
therewith, the ALCO generally reviews the Company's liquidity, cash flow needs,
maturities of investments, deposits and borrowings, and capital position.
The objective of interest rate risk management is to control the
effects that interest rate fluctuations have on net interest income and on the
net present value of the Company's interest-earning assets and interest-bearing
liabilities. Management and the Board are responsible for managing interest rate
risk and employing risk management policies that monitor and limit exposure to
interest rate risk. Interest rate risk is measured using net interest margin
simulation and asset/liability net present value sensitivity analyses. These
analyses provide a range of potential impacts on net interest income and
portfolio equity caused by interest rate movements.
The Company uses financial modeling to measure the impact of changes in
interest rates on the net interest margin. As of December 31, 1998, the model
indicated the impact of an immediate and sustained 200 basis point rise in rates
over 12 months would approximate a .7% increase in net interest income, while a
200 basis point decline in rates over the same period would approximate a 1.4%
decrease in net interest income from an unchanged rate environment.
The preceding sensitivity analysis does not represent a Company
forecast and should not be relied upon as being indicative of expected operating
results. These hypothetical estimates are based upon numerous assumptions
including the nature and timing of interest rate levels including yield curve
shape, prepayments on loans and securities, deposit decay rates, pricing
decisions on loans and deposits, reinvestment/replacement of asset and liability
cash flows, and others. While assumptions are developed based upon current
economic and local market conditions, the Company cannot make any assurances as
to the predictive nature of these assumptions including how customer preferences
or competitor influences might change. Also, as market conditions vary from
those assumed in the sensitivity analysis, actual results will also differ due
to: prepayment/refinancing levels likely deviating from those assumed, the
varying impact of interest rate changes on caps or floors on adjustable rate
assets, the potential effect of changing debt service levels on customers with
adjustable rate loans, depositor early withdrawals and product preference
changes and other internal/external variables. Furthermore, the sensitivity
analysis does not reflect actions that the ALCO might take in responding to or
anticipating changes in interest rates.
As part of its asset/liability management strategy, the Company has
emphasized the origination of consumer loans, commercial business loans and
commercial real estate loans, all of which typically have shorter terms than
residential mortgage loans and/or adjustable or variable rates of interest. The
Company has also emphasized the origination of fixed-rate, long-term residential
loans for sale in the secondary market. As of December 31, 1998, $243.6 million,
or 32.0%, of the Company's total loan portfolio had adjustable interest rates.
- 15 -
<PAGE>
As part of the Company's asset/liability management strategies, the
Company has limited its investments in investment securities to those with an
estimated average life of seven years or less. In addition, at December 31,
1998, $27.6 million, or 12.0%, of the fixed-rate mortgage-backed securities had
a balloon feature (the mortgage-backed security will mature and repay before the
underlying loans have been fully amortized).
The Company's strategy with respect to liabilities in recent periods
has been to emphasize transaction accounts, particularly noninterest bearing
transaction accounts, which are not as sensitive to changes in interest rates as
time certificates of deposit. At December 31, 1998, 46.5% of the Company's
deposits were in transaction accounts compared to 39.9% at December 31, 1997.
Noninterest bearing transaction accounts total 10.0% of total deposits at
December 31, 1998, compared to 5.8% of total deposits at December 31, 1997.
- -------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Company's
primary sources of funds are deposits, borrowings, loan and mortgage-backed
security amortizations, prepayments and maturities, 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 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 Company has been able to generate sufficient cash
through its deposits and borrowings (consisting of advances from the FHLB of
Dallas). At December 31, 1998, the Company had $45.6 million of outstanding
advances from the FHLB of Dallas. Additional advances available at December 31,
1998 from the FHLB of Dallas amounted to $253.4 million.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight 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 certificates
of deposit and deposit withdrawals, to fund loan commitments and to maintain a
portfolio of mortgage-backed and investment securities. At December 31, 1998,
the total approved loan commitments outstanding amounted to $51.1 million. At
the same date, commitments under unused lines of credit, including credit card
lines, amounted to $81.9 million. Certificates of deposit scheduled to mature in
one year or less at December 31, 1998 totaled $467.9 million. Management
believes that a significant portion of maturing deposits will remain on deposit
with the Company. The Company anticipates it will continue to have sufficient
funds together with available borrowings to meet its current commitments.
- 16 -
<PAGE>
- ---------
YEAR 2000
The Year 2000 (Y2K) issues affects the ability of computer systems to
correctly process dates after December 31, 1999. These issues affect not only
the Bank, but virtually all companies that utilize computer information systems.
In November 1997, the Bank established a Y2K Task Force headed by a
member of the Bank's senior management team. The mission of this task force was
to achieve Y2K compliance for all software, hardware, and environmental systems
that were dependent upon computer technology for their operation.
In order to be ready for Year 2000, the Bank's Y2K Task Force developed
a Year 2000 Action and Assessment Plan (the "Action Plan") which was presented
to the Board of Directors in February, 1998. The Action Plan was developed using
the guidelines outlined in the Federal Financial Institution's Examination
Council "The Effect of 2000 on Computer Systems." The Y2K Task Force has been
assigned the responsibility of reporting progress on the Action Plan to the
Board of Directors on a quarterly basis.
As part of the assessment phase of the project, the Y2K Task Force
identified 58 mission critical systems, 28 sensitive and 24 non-critical
applications. As a result of this assessment, the Bank undertook an aggressive
plan in early 1998 to completely replace all of the major application systems
with new state-of-the-art technology that was Y2K compliant. The conversion to
these new systems took place in September of 1998. As of December 31, 1998, the
Bank has incurred capital expenditures amounting to approximately $2.5 million
for the replacement of the core application systems. All other systems were
determined by the Task Force to be Y2K compliant "as is," or with some minor
enhancements required. These enhancements are not expected to involve material
additional costs.
Additionally, a small number of mission critical systems are provided
by third parties on a service bureau basis such as credit card processing and
communication switching. Third party providers of these services are on schedule
to certify Y2K readiness and complete testing by the second quarter 1999.
To assure that all systems are Y2K compliant, internal testing and
validation began in the fourth quarter 1998 and is scheduled to be completed by
June 30, 1999. Currently the Bank is approximately 75% complete in its test and
validation phase.
No assurance can be given as to actual systems operations upon the turn
of the century. However, based on information currently known to the Bank, and
upon consideration of its testing efforts to date, management does not believe
that the turn of the century will have an adverse impact on the company's
operations and its ability to service its customers.
Y2K also affects certain of the Bank's customers, particularly in the
areas of access to funds and additional expenditures to achieve compliance. The
Bank has engaged in a program of contacting its commercial customers regarding
their awareness of the Y2K issues. Personal contact has been made with selected
commercial customers to review their preparedness for Y2K. Additionally, the
Bank has incorporated into our loan agreement documents, language that provides
borrower assurance of Y2K compliance. Based on the replies received to date, it
appears to the Bank that its' larger commercial customers are aware of the Y2K
issue and are taking appropriate actions.
- 17 -
<PAGE>
The discussion above entitled "Year 2000" includes certain "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995 ("PSLRA"). This statement is included for the express purpose
of availing IBERIABANK of the protections of the safe harbor provisions of the
PSLRA. Management's ability to predict results or effects of Year 2000 issues is
inherently uncertain and is subject to factors that may cause actual results to
differ materially from those projected. Factors that could affect the actual
results include the possibility that certain remediation efforts and contingency
plans will not operate as intended, the Company's failure to timely or
completely identify all software and hardware applications requiring
remediation, unexpected costs, and the uncertainty associated with the impact of
Year 2000 issues on the banking industry and on the Company's customers,
vendors, and others with whom it conducts business. Readers are cautioned not to
place undue reliance on these forward looking statements.
- ---------------------------------------
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with generally accepted
accounting principles, which generally require the measurement of financial
position and operation results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Company's assets and
liabilities are monetary in nature. As a result, interest rates generally have a
more significant impact on the Company's performance than does the effect of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services, since such prices are
affected by inflation to a larger extent than interest rates.
- --------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Statements ("SFAS") No. 128, Earning
Per Share. This statement establishes standards for computing and presenting
earnings per share ("EPS"). It will require the presentation of basic EPS on the
face of the income statement with dual presentation of both basic and diluted
EPS for entities with complex capital structures. The Company adopted this
statement on December 31, 1997. Restatement of all prior years presented is
required. The statement deals with reporting and disclosure issues and therefore
did not have an impact on the financial statements.
In June 1998, The FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. The statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative (that is, gains and losses) depends on the
intended use of the derivative and the resulting designation. The statement is
effective for fiscal years beginning after June 15, 1999. The Company currently
has no derivatives and does not have any hedging activities. The adoption of
this statement is not expected to have a material effect on financial position
and results of operations.
For additional information on these and other FASB statements see Note
1 to the Consolidated Financial Statements.
- 18 -
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Samuel R. Lolan
Patrick J. Dauterive
Lori D. Percle
Debbie B. Taylor
Katherine H. Armentor
Castaing Hussey Lolan & Dauterive, LLP
- ---Certified Public Accountants
- --------------------------------------------------------------------------------
Charles E. Castaing, Retired
Roger E. Hussey, Retired Robin G. Freyou
Dawn K. Gonsoulin
John G. Sarkies, Jr.
To the Board of Directors
ISB Financial Corporation and Subsidiaries
New Iberia, Louisiana
We have audited the accompanying consolidated statements of financial
condition of ISB Financial Corporation and Subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ISB
Financial Corporation and Subsidiaries as of December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/Castaing, Hussey, Lolan & Dauterive, LLP
New Iberia, Louisiana
February 12, 1999
525 Weeks Street x P.O. Box 14240 x New Iberia, Louisiana 70562-4240
Ph.: 318-364-7221 x Fax: 318-364-7235 x email: [email protected]
Members of American Institute of Certified Public Accountants
Society of Louisiana Certified Public Accountants
- 19 -
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1997
(Dollars in Thousands, except share data)
1998 1997
--------------------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents:
Cash on Hand and Due from Banks $ 36,953 $ 11,959
Interest Bearing Deposits - Federal Home Loan Bank 108,918 32,348
--------------------------
Total Cash and Cash Equivalents 145,871 44,307
Loans Held for Sale 18,495 4,377
Loans Receivable, net of allowance for loan losses of $7,135
and $5,258, respectively 761,175 654,867
Investment Securities:
Held to Maturity (fair value of $2,675 and $1,813, respectively) 2,673 1,811
Available for Sale, at fair value 97,085 75,506
Mortgage-Backed Securities Held to Maturity (fair value
of $277,692 and $116,004, respectively) 277,798 115,125
Foreclosed Property 384 473
Federal Home Loan Bank Stock, at cost 10,245 6,160
Premises and Equipment, Net 27,326 19,253
Accrued Interest Receivable 7,667 5,514
Goodwill and Acquisition Intangibles 45,352 16,358
Other Assets 7,559 3,531
--------------------------
Total Assets $1,401,630 $947,282
==========================
<PAGE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1997
(Dollars in Thousands, except share data)
1998 1997
--------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $1,218,698 $778,695
Federal Home Loan Bank Advances 45,639 46,728
Advance Payments by Borrowers for Taxes and Insurance 1,228 1,429
Accrued Interest Payable on Deposits 6,708 405
Accrued and Other Liabilities 5,390 4,461
--------------------------
Total Liabilities 1,277,663 831,718
--------------------------
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock of $1 Par Value; 5,000,000 shares authorized;
-0- shares issued or outstanding -0- -0-
Common Stock of $1 Par Value; 25,000,000 shares authorized;
7,380,671 shares issued 7,381 7,381
Additional Paid-in-Capital 68,021 66,798
Retained Earnings (Substantially Restricted) 63,527 57,096
Unearned Common Stock Held by ESOP (3,267) (3,921)
Unearned Common Stock Held by RRP Trust (3,683) (4,082)
Treasury Stock, 498,805 and 478,643 shares, at cost (8,361) (7,929)
Accumulated Other Comprehensive Income 349 221
--------------------------
Total Stockholders' Equity 123,967 115,564
--------------------------
Total Liabilities and Stockholders' Equity $1,401,630 $947,282
==========================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these Financial Statements.
- 20 -
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands, except per share data)
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Interest Income:
Interest on Loans $ 60,490 $ 52,068 $ 40,263
Interest and Dividends on Investment Securities 5,057 6,216 4,926
Interest on Mortgage-Backed Securities 10,235 8,436 4,498
Interest on Federal Home Loan Bank Deposits 2,568 1,761 3,020
----------------------------------------
Total Interest Income 78,350 68,481 52,707
----------------------------------------
Interest Expense:
Interest on Deposits 35,049 32,957 24,017
Interest on Federal Home Loan Bank Advances 3,409 3,093 3,119
----------------------------------------
Total Interest Expense 38,458 36,050 27,136
----------------------------------------
Net Interest Income 39,892 32,431 25,571
Provision for Loan Losses 903 1,097 156
----------------------------------------
Net Interest Income After Provision For Loan Losses 38,989 31,334 25,415
----------------------------------------
Noninterest Income:
Gain on Sale of Investments, Net 3 266 181
Gain of Sale of Property 1,781 -0- -0-
Gain on Sale of Loans, Net 1,495 306 55
Service Charges on Deposit Accounts 4,850 3,470 2,032
Late Charges and Other Fees on Loans 899 1,002 699
Other Income 1,722 1,346 851
----------------------------------------
Total Noninterest Income 10,750 6,390 3,818
----------------------------------------
<PAGE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands, except per share data)
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Noninterest Expense:
Salaries and Employee Benefits 16,125 13,671 8,475
SAIF Deposit Insurance Premium 438 451 3,679
Depreciation Expense 1,919 1,418 998
Occupancy Expense 2,205 1,889 1,229
Advertising Expense 1,110 931 762
Computer Expense 896 1,586 624
Printing, Stationery and Supplies Expense 806 961 424
Telephone Expense 922 587 328
Franchise and Shares Tax Expense 1,037 925 987
Amortization of Goodwill and Other
Acquired Intangibles 2,064 1,545 399
Other Expenses 5,898 4,637 2,873
----------------------------------------
Total Noninterest Expense 33,420 28,601 20,778
----------------------------------------
Income Before Income Tax Expense 16,319 9,123 8,455
Income Tax Expense 6,182 3,780 3,177
----------------------------------------
Net Income $ 10,137 $ 5,343 $ 5,278
=======================================
Earnings Per Share - Basic $ 1.61 $ .86 $ .80
=======================================
Earnings Per Share - Diluted $ 1.56 $ .83 $ .80
=======================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these Financial Statements.
- 21 -
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands)
Unearned
Retained Unearned Common
Additional Earnings - Common Stock
Common Paid-In (Substantially Stock Held Held By Treasury
Stock Capital Restricted) By ESOP RRP Trust Stock
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $7,381 $65,293 $51,584 $(5,339) $ -0- $ -0-
Comprehensive Income:
Net Income for the Year Ended
December 31, 1996 5,278
Change in Unrealized Gain on Securities
Available for Sale, Net of Deferred Taxes
Total Comprehensive Income
Cash Dividends Declared (2,202)
Common Stock Released by ESOP Trust 432 727
Common Stock Acquired by Recognition and
Retention Plan Trust (4,687)
Common Stock Earned by Participants of Recognition
and Retention Plan Trust 211
Treasury Stock Acquired at Cost (4,859)
------------------------------------------------------------------------
Balance, December 31, 1996 7,381 65,725 54,660 (4,612) (4,476) (4,859)
Comprehensive Income:
Net Income for the Year Ended December 31, 1997 5,343
Change in Unrealized Gain on Securities
Available for Sale, Net of Deferred Taxes
Total Comprehensive Income
Cash Dividends Declared (2,907)
Stock Options Exercised 1 19
Common Stock Released by ESOP Trust 991 691
Common Stock Earned by Participants of Recognition
and Retention Plan Trust 81 394
Treasury Stock Acquired at Cost (3,089)
------------------------------------------------------------------------
Balance, December 31, 1997 7,381 66,798 57,096 (3,921) (4,082) (7,929)
Comprehensive Income:
Net Income for the Year Ended December 31, 1998 10,137
Change in Unrealized Gain on Securities
Available for Sale, Net of Deferred Taxes
Total Comprehensive Income
Cash Dividends Declared (3,706)
Stock Options Exercised, including Tax Benefit 24 71
Common Stock Released by ESOP Trust 1,029 654
Common Stock Earned by Participants of Recognition
and Retention Plan Trust, including Tax Benefit 170 399
Treasury Stock Acquired at Cost (503)
------------------------------------------------------------------------
Balance, December 31, 1998 $7,381 $68,021 $63,527 $(3,267) $(3,683) $(8,361)
========================================================================
<PAGE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands)
Accumulated Total
Other Stock-
Comprehensive holders'
Income Equity
-------------------------
<S> <C> <C>
Balance, January 1, 1996 $ 758 $119,677
Comprehensive Income:
Net Income for the Year Ended
December 31, 1996 5,278
Change in Unrealized Gain on Securities
Available for Sale, Net of Deferred Taxes (571) (571)
---------
Total Comprehensive Income 4,707
Cash Dividends Declared (2,202)
Common Stock Released by ESOP Trust 1,159
Common Stock Acquired by Recognition and
Retention Plan Trust (4,687)
Common Stock Earned by Participants of Recognition
and Retention Plan Trust 211
Treasury Stock Acquired at Cost (4,859)
-------------------------
Balance, December 31, 1996 187 114,006
Comprehensive Income:
Net Income for the Year Ended December 31, 1997 5,343
Change in Unrealized Gain on Securities
Available for Sale, Net of Deferred Taxes 34 34
---------
Total Comprehensive Income 5,377
Cash Dividends Declared (2,907)
Stock Options Exercised 20
Common Stock Released by ESOP Trust 1,682
Common Stock Earned by Participants of Recognition
and Retention Plan Trust 475
Treasury Stock Acquired at Cost (3,089)
-------------------------
Balance, December 31, 1997 221 115,564
Comprehensive Income:
Net Income for the Year Ended December 31, 1998 10,137
Change in Unrealized Gain on Securities
Available for Sale, Net of Deferred Taxes 128 128
---------
Total Comprehensive Income 10,265
Cash Dividends Declared (3,706)
Stock Options Exercised, including Tax Benefit 95
Common Stock Released by ESOP Trust 1,683
Common Stock Earned by Participants of Recognition
and Retention Plan Trust, including Tax Benefit 569
Treasury Stock Acquired at Cost (503)
-------------------------
Balance, December 31, 1998 $ 349 $123,967
=========================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these Financial Statements.
- 22 -
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands)
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 10,137 $ 5,343 $ 5,278
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 4,283 3,052 1,522
Provision for Loan Losses 903 1,097 156
Compensation Expensed Recognized on RRP 443 414 211
(Gain) Loss on Sale of Premises and Equipment (59) 178 (107)
Gain on Sale of Property (1781) -0- -0-
Loss (Gain) on Sale of Foreclosed Property 134 (30) 32
Gain on Sale of Loans Held for Sale (1,495) (306) (55)
Gain on Sale of Investments (3) (266) (181)
Amortization of Premium/Discount on Investments 117 311 370
Current Provision for Deferred Income Taxes (167) 161 381
FHLB Stock Dividends (419) (352) (259)
Loans Originated for Sale (91,544) (24,341) (4,610)
Proceeds From Loans Sold to Others 78,726 20,270 4,665
Income Reinvested on Marketable Equity Security (326) (329) (306)
ESOP Contribution 1,683 1,629 1,146
Net Change in Securities Classified as Trading -0- 630 (9)
Changes in Assets and Liabilities:
(Increase) Decrease in Accrued Interest Receivable (1,334) 153 588
Decrease (Increase) in Other Assets and Other Liabilities 33 (976) (2,575)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash (Used In) Provided by Operating Activities (669) 6,638 6,247
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds From Calls of Held to Maturity Securities 68 -0- -0-
Proceeds From Sales of Available for Sale Securities 4,498 -0- 12,207
Proceeds From Maturities of Held to Maturity Securities 365 405 2,142
Proceeds From Maturities of Available for Sale Securities 29,345 56,100 40,625
Principal Collections on Mortgage-Backed Securities 46,571 35,487 11,903
Purchases of Securities Held to Maturity (1,295) -0- (1,576)
Purchases of Securities Available for Sale (54,981) (30,335) (11,034)
Purchases of Mortgage-Backed Securities (209,280) -0- -0-
Decrease (Increase) in Loans Receivable, Net 17,365 (85,417) (62,919)
Proceeds From FHLB Stock Redemption 1,162 -0- 24
Purchases of FHLB Stock (4,828) -0- -0-
Proceeds From Sale of Premises and Equipment 202 2 238
Purchases of Premises and Equipment (4,348) (5,271) (1,812)
Proceeds From Disposition of Real Estate Owned 2,719 931 338
Cash Received in Excess of Cash Paid on Branch Acquisition 292,439 -0- -0-
Cash Paid in Excess of Cash Received on Bank Acquisitions -0- -0- (17,521)
Payments Received from Note Receivable -0- 841 -0-
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Investing Activities 120,002 (27,257) (27,385)
- ---------------------------------------------------------------------------------------------------------------------------
(Continued)
</TABLE>
- 23 -
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands)
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities:
Net Change in Demand, NOW, Money Market and
Savings Deposits $ 28,266 21,523 16,248
Net Change in Time Deposits (40,841) (3,112) 11,158
Increase in Escrow Funds and Miscellaneous Deposits, Net (201) (176) (180)
Proceeds From FHLB Advances 176,000 -0- 8,195
Principal Repayments of FHLB Advances (177,089) (1,022) (935)
Dividends Paid to Shareholders (3,479) (2,604) (2,159)
Acquisition of Common Stock by RRP -0- -0- (4,687)
Proceeds from Sale of Treasury Stock 78 21 -0-
Payments to Repurchase Common Stock (503) (3,089) (4,859)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash (Used In) Provided by Financing Activities (17,769) 11,541 22,781
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash and Cash Equivalents 101,564 (9,078) 1,643
Cash and Cash Equivalents at Beginning of Period 44,307 53,385 51,742
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $145,871 $ 44,307 $ 53,385
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental Schedule of Noncash Activities:
Acquisition of Real Estate in Settlement of Loans $ 929 $ 566 $ 308
Transfer of Real Estate Owned to Land and Building $ -0- $ 168 $ -0-
Supplemental Disclosures:
Cash Paid (Received) For:
Interest on Deposits and Borrowings $ 34,745 $ 36,477 $ 26,618
Income Taxes $ 5,112 $ 4,226 $ 2,818
Income Tax Refunds $ (495) $ (938) $ -0-
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these Financial Statements.
- 24 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations: ISB Financial Corporation (the "Company") is a
Louisiana corporation organized in November 1994 for the purpose of becoming the
bank holding company for Iberia Savings Bank. The Board of Directors of Iberia
Savings Bank adopted the Plan of Conversion pursuant to which the bank converted
from a Louisiana-chartered mutual savings bank to a Louisiana-chartered stock
savings bank. The Company completed its subscription and community offering in
April 1995 and, with a portion of the net proceeds, acquired the capital stock
of the bank. In December of 1997, Iberia Savings Bank changed its charter from a
state savings bank to a state commercial bank and changed its name to IBERIABANK
("Iberia").
IBERIABANK operates 26 full service offices located in south central
Louisiana, 10 full service offices located in northeast Louisiana and 8 full
service offices located in the greater New Orleans area. Iberia Financial
Services, Inc. ("IFSI") is a wholly owned subsidiary of Iberia. IFSI's main
source of income is commissions from discount brokerage services and sales of
annuities. Finesco, Ltd. ("Finesco") is a wholly owned subsidiary of IFSI.
Finesco's main source of income is derived from interest earned on financing
insurance premiums.
Jefferson Bank, formerly Jefferson Federal Savings Bank, ("Jefferson"),
a Louisiana-chartered stock savings bank, was acquired on October 18, 1996 and
was operated as a wholly owned subsidiary of the Company until it was merged
into Iberia in September of 1997. See the related Acquisition footnote.
Principles of Consolidation: The consolidated financial statements
include the accounts of ISB Financial Corporation and its wholly owned
subsidiary, Iberia, as well as all subsidiaries of Iberia. All significant
intercompany balances and transactions have been eliminated in consolidation.
Use of 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 revenues and expenses
during the reporting period. Material estimates that are particularly
susceptible to significant change relate to the determination of the allowance
for losses on loans. Actual results could differ from those estimates.
While management uses available information to recognize losses on
loans, future additions to the allowance 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 Company's allowances for
losses on loans. Such agencies may require the Company to recognize additions to
the allowance based on their judgments about information available to them at
the time of their examination. Because of these factors, it is reasonably
possible that the allowance for losses on loans may change in the near term.
Cash and Cash Equivalents: For purposes of presentation in the
consolidated statements of cash flows, cash and cash equivalents are defined as
cash and interest bearing and non-interest bearing funds on deposit at other
financial institutions.
Investment Securities: Investment securities that are held for
short-term resale are classified as trading account securities and carried at
fair value. The Company had no trading securities during 1998 or 1997. Debt
securities that management has the ability and intent to hold to maturity are
classified as held to maturity and carried at cost, adjusted for amortization of
premiums and accretion of discounts using methods approximating the interest
method. Other marketable securities are classified as available for sale and are
carried at fair value. Realized and unrealized gains and losses on trading
account securities are included in net income. Unrealized gains and losses on
securities available for sale are recognized as a net amount in other
comprehensive income.
- 25 -
<PAGE>
Declines in the value of individual held to maturity and available for sale
securities below their cost that are other than temporary are included in
earnings as realized losses. The cost of securities sold is recognized using the
specific identification method.
Mortgage-Backed Securities: Mortgage-backed securities are classified
as held to maturity, and are stated at cost, adjusted for amortization of
premiums and accretion of discounts using a method that approximates level
yield. Decline in the value of individual securities below their cost that are
other than temporary are included in earnings as realized losses. The Company
has the intent and ability to hold these securities to maturity.
Federal Home Loan Bank Stock: Stock in the Federal Home Loan Bank of
Dallas ("FHLB") is carried at cost. Since Iberia is a member of the FHLB, it is
required to maintain an amount of FHLB stock based on its total assets. At
December 31, 1998 and 1997, the institution held more than the required level of
FHLB stock.
Loans Receivable: Loans receivable are stated at unpaid principal
balances, less the allowance for loan losses and net deferred loan origination
fees and unearned discounts.
Allowance for Loan Losses: The allowance for loan losses is maintained
at a level which, in management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is based on
management's evaluation of various factors, including the collectibility of the
loan portfolio, the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, and economic conditions.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. The allowance is increased
by a provision for loan losses, which is charged to expense, and reduced by
charge-offs, net of recoveries.
Interest and Fees on Loans: Interest income on loans is accrued over
the term of the loans based upon the principal balance outstanding.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received. A loan is considered impaired when it is probable that
all contractual amounts due will not be collected in accordance with the terms
of the loan. Residential mortgage loans and consumer installment loans are
considered to be groups of smaller balance homogeneous loans and are
collectively evaluated for impairment and are not subject to SFAS 114,
Accounting by Creditors for Impairment of a Loan, measurement criteria.
Net loan fees or costs incurred in the origination of all loans are
deferred and recognized as an adjustment of the yield on loans using the
effective interest method in accordance with Statement of Financial Accounting
Standard No. 91, Accounting For Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases. If the
related loan is settled prior to maturity, any remaining balance is immediately
recognized as income or an expense.
Premises and Equipment: Premises and equipment are being depreciated on
a straight line basis over the estimated useful lives of 15 to 40 years for
buildings and 5 to 10 years for furniture, fixtures and equipment.
Loans Held for Sale: Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated fair value.
- 26 -
<PAGE>
Loan Servicing: Mortgage servicing rights are recognized on loans sold
where the institution retains the servicing rights. The cost of mortgage
servicing rights is amortized in proportion to, and over the period of,
estimated net servicing revenues. Impairment of mortgage servicing rights is
assessed based on the fair value of those rights. Fair values are estimated
using discounted cash flows based on a current market interest rate.
Foreclosed Property: Real estate and other assets acquired in
settlement of loans are recorded at the balance of the loan or at estimated fair
value minus estimated costs to sell, whichever is less, at the date acquired,
plus capital improvements made thereafter to facilitate sale. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of cost or fair value minus estimated costs to sell. Costs
of holding real estate acquired in settlement of loans are shown as charges
against income currently. Gains on sales of such real estate are taken into
income based on the buyer's initial and continuing investment in the property.
Other assets acquired in settlement of loans consist primarily of automobiles.
Valuations are periodically performed by management, and an allowance for losses
is established by a charge to operations if the carrying value of a property
exceeds its fair value minus estimated costs to sell. The allowance for losses
was $-0- at December 31, 1998 and 1997.
Advertising Costs: The Company expenses all advertising costs as
incurred. There were no direct-response advertising costs capitalized as of
December 31, 1998 or 1997.
Goodwill and Other Intangible Assets: Goodwill, representing the
purchase price in excess of fair value of identifiable net assets at
acquisition, is amortized over periods not exceeding 25 years. Other acquired
intangible assets, such as core deposit intangibles, are amortized over the
periods benefited, not exceeding 8 years. As events or circumstances warrant,
the Company evaluates the recoverability of the unamortized balance based on
expected future profitability and undiscounted future cash flows of the
acquisitions and their contributions to the overall operation of the Company.
Income Taxes: The Company and all subsidiaries file a consolidated
federal income tax return on a calendar year basis. Deferred income taxes are
recognized for the tax consequences of temporary differences by applying enacted
statutory tax rates applicable to future years to differences between the
financial statements carrying amounts and the tax bases of existing assets and
liabilities in accordance with SFAS 109, Accounting for Income Taxes. The
measurement of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence, are not expected to be
realized.
Fair Value of Financial Instruments: The disclosure of the estimated
fair value of financial instruments is made in accordance with the requirements
of SFAS 107, Disclosures about Fair Value of Financial Instruments. The
estimated fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
- 27 -
<PAGE>
Cash and Cash Equivalents: The carrying amounts of cash and
short term instruments approximate their fair value.
Investment Securities: Fair value equals quoted market prices
and dealer quotes.
Loans: The fair value of mortgage loans receivable was
estimated based on present values using entry-value rates at December
31, 1998 and 1997, weighted for varying maturity dates. Other loans
receivable were valued based on present values using entry-value
interest rates at December 31, 1998 and 1997 applicable to each
category of loans.
Deposits: The fair value of NOW accounts, money market
deposits and savings accounts was the amount payable on demand at the
reporting date. Certificates of deposit were valued using a weighted
average rate calculated based upon rates at December 31, 1998 and 1997
for deposits of similar remaining maturities.
Off-Balance Sheet Items: The Company has outstanding
commitments to extend credit and standby letters of credit. These
off-balance sheet financial instruments are generally exercisable at
the market rate prevailing at the date the underlying transaction will
be completed and, therefore, have no current fair value.
Effects of New Accounting Pronouncements: In February 1997, the FASB
issued SFAS No. 128, Earnings Per Share. This statement establishes standards
for computing and presenting earnings per share ("EPS"). It requires the
presentation of basic EPS on the face of the income statement with dual
presentation of both basic and diluted EPS for entities with complex capital
structures. Basic EPS excludes the dilutive effect that could occur if any
securities or other contracts to issue common stock were exercised or converted
into or resulted in the issuance of common stock. Basic EPS is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. The computation of diluted EPS is
similar to the computation of basic EPS except the denominator is increased to
include the number of additional common shares that would have been outstanding
if the dilutive potential common shares had been issued.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains and losses).
This statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income (including, for
example, unrealized holding gains and losses on available for sale securities)
be reported in a financial statement similar to the statement of income and
retained income. The accumulated balance of other comprehensive income is
disclosed separately from retained income in the stockholders' equity section of
the balance sheet. This statement is effective for the Company for the fiscal
year beginning January 1, 1998. Adoption of this statement did not have a
material impact on the financial condition or results of operations because it
addresses reporting and disclosure issues.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. This statement establishes standards
for the way public business enterprises report information about operating
segments and establishes standards for related disclosures about products and
services, geographic areas and major customers. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Information
required to be disclosed includes segment profit or loss, certain specific
revenue and expense items, segment assets and certain other information. This
- 28 -
<PAGE>
statement is effective for the Company for financial statements issued for the
fiscal year beginning January 1, 1998. Adoption of this statement did not have a
material impact on the financial condition or results of operations because it
deals with reporting and disclosure issues.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities. The statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of derivatives (that
is, gains and losses) depends on the intended use of the derivative and the
resulting designation. The statement is effective for fiscal years beginning
after June 15, 1999. The Company currently has no derivatives and does not have
any hedging activities. The adoption of this statement is not expected to have a
material effect on financial position and results of operations.
Reclassifications: Certain reclassifications have been made to the 1996
and 1997 consolidated financial statements in order to conform to the
classifications adopted for reporting in 1998.
NOTE 2 - CASH:
The Company is required to maintain reserves which consist of vault
cash and cash on deposit with the Federal Reserve Bank based on a percentage of
customer deposits. The reserve balance required at December 31, 1998 and 1997
was $26,701,000 and $9,791,000, respectively.
NOTE 3 - INVESTMENT SECURITIES:
The amortized cost and estimated fair values of investment securities
(in thousands) at December 31, 1998 consisted of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Government and Federal
Agency Obligations $90,594 $ 653 $ (88) $91,159
Marketable Equity Security 5,962 -0- (36) 5,926
- ---------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $96,556 $ 653 $ (124) $97,085
===========================================================================================================================
Securities Held to Maturity:
Obligations of State and Political
Subdivisions $ 2,573 $ 2 $ -0- $ 2,575
Other 100 -0- -0- 100
- ---------------------------------------------------------------------------------------------------------------------------
Total Securities Held to Maturity $ 2,673 $ 2 $ -0- $ 2,675
===========================================================================================================================
</TABLE>
- 29 -
<PAGE>
The amortized cost and estimated fair value of investment securities at
December 31, 1998, by contractual maturity, are shown below (in thousands).
Expected maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Securities Available Securities
for Sale Held to Maturity
- ------------------------------------------------------------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $25,553 $25,698 $ 50 $ 50
Due two through five years 10,060 10,230 1,328 1,330
Due five through ten years 54,981 55,231 1,295 1,295
- ------------------------------------------------------------------------------------------------
Subtotal 90,594 91,159 2,673 2,675
Marketable Equity Security 5,962 5,926 -0- -0-
- ------------------------------------------------------------------------------------------------
Totals $96,556 $97,085 $ 2,673 $ 2,675
================================================================================================
</TABLE>
Proceeds from the sale of available for sale investment securities
during 1998 were $4,498,000. Gross gains of $3,000, before related income taxes
of $1,000 and gross losses of $-0- were realized on those sales.
Securities with carrying values of $3,994,000 and $3,256,000 at
December 31, 1998 and 1997, respectively were pledged to secure public deposits.
The amortized cost and estimated fair values of investment securities
(in thousands) at December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Government and Federal
Agency Obligations $69,534 $339 $ (1) $69,872
Marketable Equity Security 5,637 -0- (3) 5,634
- ---------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $75,171 $339 $ (4) $75,506
=========================================================================================================
Securities Held to Maturity:
Obligations of State and Political
Subdivisions $ 1,643 $ 2 $ -0- $ 1,645
Other 168 -0- -0- 168
- ---------------------------------------------------------------------------------------------------------
Total Securities Held to Maturity $ 1,811 $ 2 $ -0- $ 1,813
=========================================================================================================
</TABLE>
The Company had no sales of investment securities available for sale
during 1997.
Proceeds from the sale of available for sale investment securities
during 1996 were $12,207,000. Gross gains of $174,000, before related income
taxes of $59,000 and gross losses of $-0- were realized on those sales.
- 30 -
<PAGE>
NOTE 4 - MORTGAGE-BACKED SECURITIES:
All mortgage-backed securities are classified as held to maturity at
December 31, 1998 and 1997 and consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1998
- -----------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC $ 76,542 $ 261 $ (31) $ 76,772
FNMA 19,194 282 (3) 19,473
GNMA 56,811 341 (62) 57,090
FNMA CMO 26,211 118 (210) 26,119
FHLMC CMO 78,712 85 (898) 77,899
Privately Issued 20,328 15 (4) 20,339
- -----------------------------------------------------------------------------------------------
Totals $277,798 $ 1,102 $(1,208) $277,692
===============================================================================================
</TABLE>
There were no sales of mortgage-backed securities for the year ended
December 31, 1998.
Mortgage-backed securities include approximately $46,919,000 of
adjustable rate securities and $230,879,000 of fixed rate securities at December
31, 1998. At December 31, 1998, $27,637,000 of the mortgage-backed securities
had a balloon feature (the mortgage-backed security will mature and repay before
the underlying loans have been fully amortized).
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
- -----------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC $ 54,285 $ 271 $ (106) $ 54,450
FNMA 28,864 361 (11) 29,214
GNMA 11,115 359 (130) 11,344
FNMA CMO 9,468 -0- (35) 9,433
FHLMC CMO 10,901 234 (64) 11,071
Privately Issued 492 -0- -0- 492
- -----------------------------------------------------------------------------------------------
Totals $115,125 $ 1,225 $ (346) $116,004
===============================================================================================
</TABLE>
There were no sales of mortgage-backed securities for the years ended
December 31, 1997 and 1996.
Mortgage-backed securities include approximately $49,094,000 of
adjustable rate securities and $66,031,000 of fixed rate securities at December
31, 1997. At December 31, 1997, $55,414,000 of the mortgage-backed securities
had a balloon feature.
- 31 -
<PAGE>
NOTE 5 - LOANS RECEIVABLE:
Loans receivable (in thousands) at December 31, 1998 and 1997 consisted
of the following:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Residential Mortgage Loans:
Single-family Residential $301,468 $364,655
Construction 7,549 8,027
- ---------------------------------------------------------------------------------------------------------------------------
Total Mortgage Loans 309,017 372,682
- ---------------------------------------------------------------------------------------------------------------------------
Commercial Loans:
Business 83,368 59,964
Real Estate 117,628 56,109
- ---------------------------------------------------------------------------------------------------------------------------
Total Commercial Loans 200,996 116,073
- ---------------------------------------------------------------------------------------------------------------------------
Consumer Loans:
Home Equity 73,184 34,192
Automobile 24,630 9,433
Indirect Automobile 114,337 90,676
Mobile Home Loans 2,511 3,226
Educational Loans 624 9,458
Credit Card Loans 4,584 4,150
Loans on Savings 8,104 11,255
Other 27,753 7,358
- ---------------------------------------------------------------------------------------------------------------------------
Total Consumer Loans 255,727 169,748
- ---------------------------------------------------------------------------------------------------------------------------
Total Loans Receivable 765,740 658,503
Allowance for Loan Losses (7,135) (5,258)
Prepaid Dealer Participations 4,145 3,636
Unearned Discount (236) (160)
Deferred Loan Fees & Purchase Discounts, Net (1,339) (1,854)
- ---------------------------------------------------------------------------------------------------------------------------
Loans Receivable, Net $761,175 $654,867
===========================================================================================================================
</TABLE>
<PAGE>
Loans receivable include approximately $243,646,000 and $269,200,000 of
adjustable rate loans and $522,094,000 and $389,303,000 of fixed rate loans at
December 31, 1998 and 1997, respectively.
The amount of loans for which the accrual of interest has been
discontinued totaled approximately $1,379,000 and $2,150,000 at December 31,
1998 and 1997, respectively. Impaired loans are not material to the consolidated
financial statements.
A summary of changes in the allowance for loan losses (in thousands)
for the years ended December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, Beginning of Year $ 5,258 $ 4,615 $ 3,746
Allowance for Loan Losses from Acquisitions 1,392 -0- 1,114
Provision Charged to Operations 903 1,097 156
Loans Charged-Off (863) (803) (616)
Recoveries 445 349 215
- ------------------------------------------------------------------------------------------------------
Balance, End of Year $ 7,135 $ 5,258 $ 4,615
======================================================================================================
</TABLE>
- 32 -
<PAGE>
Fixed rate loans receivable (in thousands) as of December 31, 1998 are
scheduled to mature and adjustable rate loans are scheduled to reprice as
follows:
<TABLE>
<CAPTION>
Under 1 1 to 5 6 to 10 Years 11
Year Years Years and over Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mortgage Loans:
Fixed Rate $ 11,496 $ 49,903 $ 55,116 $ 45,949 $162,464
Adjustable Rate 43,315 67,840 35,398 -0- 146,553
Commercial Loans:
Fixed Rate 56,544 62,401 4,008 1,380 124,333
Adjustable Rate 76,663 -0- -0- -0- 76,663
Consumer Loans:
Fixed Rate 83,458 141,042 10,569 228 235,297
Adjustable Rate 20,430 -0- -0- -0- 20,430
- ---------------------------------------------------------------------------------------------------------------------------
Totals $291,906 $321,186 $105,091 $ 47,557 $765,740
===========================================================================================================================
</TABLE>
NOTE 6 - LOAN SERVICING:
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
mortgage loans serviced for others was $27,177,000 and $15,110,000 at December
31, 1998 and 1997, respectively.
Custodial escrow balances maintained in connection with the foregoing
portfolio of loans serviced for others, and included in demand deposits, were
approximately $129,000 and $89,000 at December 31, 1998 and 1997, respectively.
Mortgage loan servicing rights of $116,000 and $42,000 were capitalized
in 1998 and 1997, respectively. Amortization of mortgage servicing rights was
$15,000, $5,000 and $2,000 in 1998, 1997 and 1996, respectively. The balance of
mortgage servicing rights was $163,000 and $62,000 at December 31, 1998 and
1997, respectively.
<PAGE>
NOTE 7 - PREMISES AND EQUIPMENT:
Premises and equipment (in thousands) at December 31, 1998 and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
Land $ 4,089 $ 3,743
Buildings 18,265 14,980
Furniture, Fixtures and Equipment 14,145 11,465
- -----------------------------------------------------------------------------------
36,499 30,188
Less Accumulated Depreciation 9,173 10,935
- -----------------------------------------------------------------------------------
Total Premises and Equipment $ 27,326 $ 19,253
===================================================================================
</TABLE>
The Company actively engages in leasing office space that it has
available. Leases have different terms ranging from month-to-month rental to
five year leases. At December 31, 1998, the monthly lease income was $23,000 per
month. Total lease income for 1998, 1997 and 1996 was $355,000, $362,000 and
$361,000, respectively. Income from leases was reported as a reduction in
occupancy expense. The total allocated cost of
- 33 -
<PAGE>
the portion of the buildings held for lease at December 31, 1998 and 1997 was
$2,567,000 and $2,583,000, respectively, with related accumulated depreciation
of $928,000 and $852,000, respectively.
The Company leases certain branch offices, land and ATM facilities
through noncancellable operating leases with terms that range from one to twenty
years, with renewal options thereafter.
Minimum future annual rent commitments under these agreements as of
December 31, 1998 are:
Year Ending December 31, Amount
- ------------------------------------------------
1999 $ 500,709
2000 502,929
2001 316,956
2002 252,976
2003 and Thereafter 1,074,100
- ------------------------------------------------
Total $2,647,670
================================================
NOTE 8 - DEPOSITS:
An analysis of deposits (in thousands) as of December 31, 1998 and 1997
is as follows:
<TABLE>
<CAPTION>
December 31, 1998
- ---------------------------------------------------------------------------------------------------
Weighted Percent
Average Rate Balance to Total
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-Interest Bearing DDA .00% $ 121,825 10.00%
NOW Accounts 1.93% 210,891 17.30
Money Market Deposit 2.57% 102,357 8.40
- ---------------------------------------------------------------------------------------------------
Total Demand Deposits 435,073 35.70
- ---------------------------------------------------------------------------------------------------
Regular Savings 2.00% 131,300 10.77
- ---------------------------------------------------------------------------------------------------
Certificates of Deposit:
Less than 2.99% 854 .07
3.0 to 3.99% 45,738 3.75
4.0 to 4.99% 183,984 15.10
5.0 to 5.99% 319,736 26.24
6.0 to 6.99% 95,769 7.86
7.0 to 7.99% 6,001 .49
8.0 and over 243 .02
- ---------------------------------------------------------------------------------------------------
Total Certificates of Deposit 5.17% 652,325 53.53
- ---------------------------------------------------------------------------------------------------
Total Deposits 3.54% $1,218,698 100.00%
===================================================================================================
</TABLE>
- 34 -
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
- -------------------------------------------------------------------------------------------------
Weighted Percent
Average Rate Balance to Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-Interest Bearing DDA .00% $ 44,862 5.76%
NOW Accounts 1.85% 83,282 10.70
Money Market Deposit 3.50% 73,076 9.38
- -------------------------------------------------------------------------------------------------
Total Demand Deposits 201,220 25.84
- -------------------------------------------------------------------------------------------------
Regular Savings 2.41% 109,532 14.07
- -------------------------------------------------------------------------------------------------
Certificates of Deposit:
Less than 2.99% 90 .01
3.0 to 3.99% 2,665 .34
4.0 to 4.99% 88,826 11.41
5.0 to 5.99% 275,302 35.35
6.0 to 6.99% 95,824 12.31
7.0 to 7.99% 5,068 .65
8.0 and over 168 .02
- -------------------------------------------------------------------------------------------------
Total Certificates of Deposit 5.58% 467,943 60.09
- -------------------------------------------------------------------------------------------------
Total Deposits 4.22% $778,695 100.00%
=================================================================================================
</TABLE>
Certificates of deposit with a balance of $100,000 and over were
$130,631,000 and $93,728,000 at December 31, 1998 and 1997, respectively.
<PAGE>
A schedule of maturities of certificates of deposit (in thousands) at
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
2003 and
1999 2000 2001 2002 Thereafter TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Less than 2.99% $ 854 $ -0- $ -0- $ -0- $ -0- $ 854
3.0 to 3.99% 41,826 1,599 2,088 30 196 45,739
4.0 to 4.99% 130,669 36,348 13,551 882 2,534 183,984
5.0 to 5.99% 233,673 69,788 8,765 4,583 2,927 319,736
6.0 to 6.99% 59,383 16,714 15,343 4,078 250 95,768
7.0 to 7.99% 1,393 3,403 453 678 75 6,002
8.0 and over 78 5 -0- 86 73 242
- ---------------------------------------------------------------------------------------------------------------------------
Total Certificates
of Deposit $467,876 $127,857 $ 40,200 $ 10,337 $ 6,055 $652,325
===========================================================================================================================
</TABLE>
Interest expense on deposits (in thousands) is summarized as follows:
<TABLE>
<CAPTION>
For The Years Ended December 31,
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW Accounts $ 2,361 $ 1,537 $ 854
Money Market Deposits 2,438 2,177 1,297
Regular Savings 2,543 2,949 1,860
Certificates of Deposit 27,707 26,294 20,006
- ----------------------------------------------------------------------------------------------
Total Interest Expense on Deposits $ 35,049 $ 32,957 $ 24,017
==============================================================================================
</TABLE>
- 35 -
<PAGE>
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES:
Federal Home Loan Bank advances (in thousands) at December 31, 1998 and
1997 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Interest Rate:
5.0% to 5.99% $ 4,579 $ 4,778
6.0% to 6.99% 36,896 37,735
7.0% to 7.99% 4,164 4,215
- -------------------------------------------------------------------
Total Advances $ 45,639 $ 46,728
===================================================================
</TABLE>
Advances at December 31, 1998 have maturities in future years as
follows (in thousands):
Year Ending December 31, Amount
- ----------------------------------------------------------
2000 $ 7,292
2001 4,085
2002 9,233
2005 10,063
2006 1,628
After 2006 13,338
- ----------------------------------------------------------
$ 45,639
==========================================================
Repayments are amortized over periods ranging from fifteen to thirty
years, and have a balloon feature at maturity. All advances are collateralized
by a blanket pledge of mortgage loans and a secondary pledge of FHLB stock and
FHLB demand deposits. Total additional advances available from the FHLB at
December 31, 1998 were $257,158,000. Borrowings in excess of the existing limit
can be obtained with a pledge of investment securities and mortgage-backed
securities.
<PAGE>
NOTE 10 - INCOME TAXES:
The provision for income tax expense (in thousands) consists of the
following:
<TABLE>
<CAPTION>
For The Years Ended December 31,
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Expense:
Federal $ 6,386 $ 3,653 $ 2,756
State (37) (34) 40
- -------------------------------------------------------------------------------
Total Current Expense 6,349 3,619 2,796
Deferred Federal (Benefit) Expense (167) 161 381
- -------------------------------------------------------------------------------
Total Income Tax Expense $ 6,182 $ 3,780 $ 3,177
===============================================================================
</TABLE>
There was a balance due of federal income taxes of $381,000 at December
31, 1998 and an overpayment of federal income taxes of $1,219,000 at December
31, 1997.
- 36 -
<PAGE>
At December 31, 1998, the Company had the following tax carryovers
assumed in the Royal Bankgroup acquisition: Federal net operating loss of
$1,217,000, expiring in 2003 through 2012, and a capital loss of $350,000,
expiring in 1999. The capital loss carryover is only available to offset capital
gains, and a valuation allowance has been established equal to the total amount
at December 31, 1998 and 1997. The change in the valuation allowance relates to
the amount of capital loss carryover utilized in 1998.
The provision for federal income taxes differs from the amount computed
by applying the federal income tax statutory rate of 34 percent on income from
operations as indicated in the following analysis (in thousands):
<TABLE>
<CAPTION>
For The Years Ended December 31,
- ------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Tax Based on Statutory Rate $ 5,548 $ 3,102 $ 2,875
Increase (Decrease) Resulting from:
Portion of Income Taxed at 35% 63 -0- -0-
Effect of Tax-Exempt Income (94) (49) (46)
Amortization of Goodwill and Other Acquired
Intangibles 483 523 133
Interest and Other Nondeductible Expenses 37 25 17
Nondeductible ESOP Expense 318 319 142
State Income Tax on Non-Bank Entities (37) (34) 18
Other 42 (12) 38
Benefit from Change in Deferred Tax Valuation
Allowance (178) (94) -0-
- ------------------------------------------------------------------------------------------------
Income Tax Expense $ 6,182 $ 3,780 $ 3,177
================================================================================================
</TABLE>
<PAGE>
The net deferred tax liability (in thousands) at December 31, 1998 and
1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Asset:
Allowance for Loan Losses $ 1,112 $ 739
Deferred Directors' Fees 106 133
Net Operating Loss Carryover 414 412
Capital Loss Carryover 119 297
ESOP and RRP 234 212
Other 316 171
- ----------------------------------------------------------------------------------------------
Subtotal 2,301 1,964
- ----------------------------------------------------------------------------------------------
Deferred Tax Liability:
FHLB Stock (826) (850)
Premises and Equipment (1,399) (1,101)
Unrealized Gain on Investments Classified as Available for Sale (180) (114)
Deferred Gain on Like-Kind Exchange (335) -0-
Other (1) (263)
- ----------------------------------------------------------------------------------------------
Subtotal (2,741) (2,328)
- ----------------------------------------------------------------------------------------------
Deferred Tax Liabilities, Net of Deferred Tax Assets (440) (364)
Deferred Tax Valuation Reserve (119) (297)
- ----------------------------------------------------------------------------------------------
Net Deferred Tax Liability $ (559) $ (661)
==============================================================================================
</TABLE>
- 37 -
<PAGE>
A summary of the changes in the net deferred tax asset (liability) for
the years ended December 31, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Balance, Beginning $ (661) $ (482)
Deferred Tax Benefit (Expense), Charged to Operations 167 (161)
Unrealized Gain on Available for Sale Securities,
Charged to Equity (65) (18)
- ------------------------------------------------------------------------------------
Balance, Ending $ (559) $ (661)
====================================================================================
</TABLE>
Retained earnings at December 31, 1998 and 1997, included approximately
$14,791,000 accumulated prior to January 1, 1987 for which no provision for
federal income taxes has been made. If this portion of retained earnings is used
in the future for any purpose other than to absorb bad debts, it will be added
to future taxable income.
NOTE 11 - EARNINGS PER SHARE:
The Company adopted SFAS 128, as of December 31, 1997. Restatement of
earnings per share for all prior periods presented is required. Weighted average
shares of common stock outstanding for basic EPS excludes the weighted average
shares not released by the Employee Stock Ownership Plan ("ESOP") (359,164,
426,448 and 497,342 shares at December 31, 1998, 1997 and 1996, respectively)
and the weighted average unvested shares in the Recognition and Retention Plan
("RRP") (257,171, 281,448 and 176,327 shares at December 31, 1998, 1997 and
1996, respectively). The effect on diluted EPS of stock option shares
outstanding and unvested RRP shares is calculated using the treasury stock
method. The following sets forth the computation of net income per common share
and net income per common share-assuming dilution.
<PAGE>
<TABLE>
<CAPTION>
For The Years Ended December 31,
- --------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Income Applicable to Common Shares - $10,137,000 $5,343,000 $5,278,000
==================================================================================================
Denominator:
Weighted Average Common Shares
Outstanding 6,280,962 6,224,902 6,559,883
Effect of Dilutive Securities:
Stock Options Outstanding 185,235 180,911 8,252
RRP Grants 36,620 52,936 3,756
- --------------------------------------------------------------------------------------------------
Weighted Average Common Shares Outstanding -
Assuming Dilution 6,502,817 6,458,749 6,571,891
==================================================================================================
Earnings per Common Share $ 1.61 $ 0.86 $ 0.80
==================================================================================================
Earnings per Common Share - Assuming Dilution $ 1.56 $ 0.83 $ 0.80
==================================================================================================
</TABLE>
- 38 -
<PAGE>
NOTE 12 - CAPITAL REQUIREMENTS AND OTHER REGULATORY MATTERS:
The Company and Iberia are subject to various regulatory capital
requirements administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, Iberia must meet specific capital guidelines that involve quantitative
measures of Iberia's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. Iberia's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
To be classified as a well capitalized financial institution, Tier 1
leverage capital, Tier 1 risk-based capital and Total risk-based capital must be
at least five, six and ten percent, respectively. At December 31, 1998 and 1997,
Iberia was classified as well capitalized. There are no conditions or events
since those dates that management believes have changed Iberia's category.
In connection with the acquisition of branch deposits and related
assets from certain banking subsidiaries of First Commerce Corporation in
September 1998, additional capital requirements were imposed on Iberia by the
federal and state banking agencies. Iberia is currently required to have Tier I
leverage capital of 6.0% at June 30, 1999 and 6.5% at December 31, 1999.
<PAGE>
The Company and Iberia met all regulatory capital requirements as
follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1998
- ---------------------------------------------------------------------------------------------
Required Actual
Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 leverage capital:
ISB Financial Corp. $ 53,860 4.00% $ 78,226 5.81%
IBERIABANK 53,594 4.00% 77,131 5.76%
Tier 1 risk-based capital:
ISB Financial Corp. 31,624 4.00% 78,226 9.89%
IBERIABANK 31,575 4.00% 77,131 9.77%
Total risk-based capital:
ISB Financial Corp. 63,248 8.00% 85,361 10.80%
IBERIABANK 63,149 8.00% 84,266 10.68%
<CAPTION>
December 31, 1997
- ---------------------------------------------------------------------------------------------
Required Actual
Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 leverage capital:
ISB Financial Corp. $ 37,578 4.00% $ 98,985 10.54%
IBERIABANK 37,125 4.00% 88,291 9.51%
Tier 1 risk-based capital:
ISB Financial Corp. 21,380 4.00% 98,985 18.52%
IBERIABANK 21,167 4.00% 88,291 16.68%
Total risk-based capital:
ISB Financial Corp. 42,759 8.00% 104,243 19.50%
IBERIABANK 42,334 8.00% 93,549 17.68%
</TABLE>
- 39 -
<PAGE>
Iberia is restricted under applicable laws in the payment of dividends
to an amount equal to current year earnings plus undistributed earnings for the
immediately preceding year, unless prior permission is received from the
Commissioner of Financial Institutions for the State of Louisiana. Dividends
payable without permission by Iberia in 1999 will be limited to 1999 earnings
plus an additional $7,271,000. The Tier I leverage capital requirements
currently in effect may also limit Iberia's ability to pay dividends to the
Company.
NOTE 13 - BENEFIT PLANS:
401(k) Profit Sharing Plan
The Company has a non-contributory profit sharing plan covering
substantially all of its employees. Annual employer contributions to the plan
are set by the Board of Directors. Contributions for December 31, 1998, 1997 and
1996, were $-0-, $-0- and $-0-, respectively. The Company converted the Profit
Sharing Thrift Plan to a 401(k) Profit Sharing Plan effective January 1, 1995.
The amended plan provides, among other things, that participants in the plan be
able to direct the investment of their account balances within the Profit
Sharing Plan into alternative investment funds. Participant deferrals under the
salary reduction election may be matched by the employer based on a percentage
to be determined annually by the employer. There was no matching of participant
deferrals by the employer for the years ended December 31, 1998, 1997 and 1996.
Employee Stock Ownership Plan
In connection with the conversion from mutual to stock form, the
Company established an ESOP for the benefit of all eligible employees. The ESOP
purchased 590,423 shares, or 8 percent of the total stock sold in the Company's
initial public offering, for $5,904,000, financed by a loan from the Company.
The leveraged ESOP is accounted for in accordance with American Institute of
Certified Public Accountants ("AICPA") Statement of Procedures ("SOP") 93-6,
Employers' Accounting for Employee Stock Ownership Plans.
Full-time employees of the Company who have been credited with at least
1,000 hours of service during a 12 month period and who have attained age 21 are
eligible to participate in the ESOP. It is anticipated that contributions will
be made to the plan in amounts necessary to amortize the debt to the Company
over a period of 10 years.
Under SOP 93-6, unearned ESOP shares are not considered outstanding and
are shown as a reduction of stockholders' equity. Dividends on unallocated ESOP
shares are considered to be compensation expense. The Company will recognize
compensation cost equal to the fair value of the ESOP shares during the periods
in which they become committed to be released. To the extent that the fair value
of the Company's ESOP shares differ from the cost of such shares, this
differential will be credited to equity. The Company will receive a tax
deduction equal to the cost of the shares released. As the loan is internally
leveraged, the loan receivable from the ESOP to the Company is not reported as
an asset nor is the debt of the ESOP shown as a Company liability. Dividends on
allocated shares will be used to pay the ESOP debt.
Compensation cost related to the ESOP for the years ended December 31,
1998, 1997 and 1996 was $1,590,000, $1,629,000, and $1,146,000, respectively.
The fair value of the unearned ESOP shares, using the closing quoted market
price per share for that day was approximately $7,227,000 and $11,714,000 at
December 31, 1998 and 1997, respectively.
- 40 -
<PAGE>
A summary of the ESOP share allocation is as follows:
<TABLE>
<CAPTION>
For The Years Ended December 31,
- -----------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares allocated beginning of year 197,952 128,853 56,469
Shares allocated during year 65,458 69,099 72,738
Shares distributed during the year (16,415) -0- (354)
- -----------------------------------------------------------------------------------------------
Total allocated shares held by ESOP at year end 246,995 197,952 128,853
Unreleased shares 326,659 392,117 461,216
- -----------------------------------------------------------------------------------------------
Total ESOP shares 573,654 590,069 590,069
===============================================================================================
</TABLE>
Recognition and Retention Plan (RRP):
The Company established the RRP for certain officers and directors
during the year ended December 31, 1996. Following stockholder approval of the
RRP on May 24, 1996, the Company purchased 295,226 shares of the Corporation's
common stock in the open market at $15.875 per share to fully fund the related
trust and to be awarded in accordance with the provisions of the RRP. The cost
of the shares of restricted stock awarded under these plans are recorded as
unearned compensation, a contra equity account. The fair value of the shares on
the date of award will be recognized as compensation expense over the vesting
period, which is seven years. The holders of the restricted stock receive
dividends and have the right to vote the shares. For the years ended December
31, 1998, 1997 and 1996 the amount included in compensation expense was
$442,000, $416,000 and $211,000 respectively. The weighted average grant date
fair value of the restricted stock granted under the RRP during the years ended
December 31, 1998, 1997 and 1996 was $26.19, $25.37 and $15.92 respectively. A
summary of the changes in restricted stock follows:
<PAGE>
<TABLE>
<CAPTION>
Unawarded Awarded
Share Shares
- ---------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1, 1996 -0- -0-
Purchased by Plan 295,226 -0-
Granted (165,364) 165,364
Forfeited 3,936 (3,936)
Earned and Issued -0- -0-
- ---------------------------------------------------------------------------
Balance, December 31, 1996 133,798 161,428
Granted (28,500) 28,500
Forfeited 3,374 (3,374)
Earned and Issued -0- (23,061)
- ---------------------------------------------------------------------------
Balance, December 31, 1997 108,672 163,493
Granted (6,000) 6,000
Forfeited 7,387 (7,387)
Earned and Issued -0- (25,411)
- ---------------------------------------------------------------------------
Balance, December 31, 1998 110,059 136,695
===========================================================================
</TABLE>
- 41 -
<PAGE>
1996 Stock Option Plan:
In 1996, the Company adopted a stock option plan for the benefit of
directors, officers, and other key employees. The number of shares of common
stock reserved for issuance under the stock option plan was equal to 738,067
shares or 10 percent of the total number of common shares sold in the Company's
initial public offering of its common stock upon the mutual-to-stock conversion
of Iberia Savings Bank. The option exercise price cannot be less than the fair
value of the underlying common stock as of the date of the option grant and the
maximum option term cannot exceed ten years. The stock options granted to
directors and officers are exercisable in seven equal annual installments. No
compensation expense was recognized in 1998, 1997 or 1996 related to the stock
option plan.
The stock option plan also permits the granting of Stock Appreciation
Rights ("SAR's"). SAR's entitle the holder to receive, in the form of cash or
stock, the increase in the fair value of Company stock from the date of grant to
the date of exercise. No SAR's have been issued under the plan.
The following table summarizes the activity related to stock options :
<TABLE>
<CAPTION>
Weighted
Available Options Average
for Grant Outstanding Exercise Price
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
At inception, May 24, 1996 738,067 -0-
Granted (654,118) 654,118 $ 15.92
Canceled 10,395 (10,395) 15.88
Exercised -0- -0-
- --------------------------------------------------------------------------------------------
At December 31, 1996 94,344 643,723 15.92
Granted (90,650) 90,650 23.31
Canceled 25,611 (25,611) 18.73
Exercised -0- (1,318) 15.88
- --------------------------------------------------------------------------------------------
At December 31, 1997 29,305 707,444 16.76
Granted (34,500) 34,500 25.61
Canceled 49,972 (49,972) 19.13
Exercised -0- (4,838) 16.17
- --------------------------------------------------------------------------------------------
At December 31, 1998 44,777 687,134 17.04
=====================================================================
Exerciseable at December 31, 1996 -0-
=====================================================================
Exerciseable at December 31, 1997 89,399 $ 15.92
============================================================================================
Exerciseable at December 31, 1998 178,354 $ 16.29
============================================================================================
</TABLE>
- 42 -
<PAGE>
The following table presents the weighted average remaining life as of
December 31, 1998 for options outstanding within the stated exercise prices:
<TABLE>
<CAPTION>
Outstanding Exerciseable
- -----------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Exercise Number Average Average Number Average
Price Range of Exercise Remaining of Exercise
Per Share Options Price Life Options Price
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 15.88 579,341 $ 15.88 7.4 years 165,526 $ 15.88
$ 17.00 to $ 19.63 21,500 $ 18.04 8.1 years 4,571 17.90
$ 20.25 to $ 25.00 52,357 $ 23.16 8.5 years 6,480 23.30
$ 25.13 to $ 28.25 33,936 $ 26.87 9.1 years 1,777 25.72
</TABLE>
In October 1995, the FASB issued SFAS 123. SFAS 123 requires disclosure
of the compensation cost for stock-based incentives granted after January 1,
1995 based on the fair value at grant date for awards. Applying SFAS 123 would
result in pro forma net income and earnings per share amounts as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income As reported $10,137,000 $ 5,343,000 $ 5,278,000
Pro forma $ 9,736,000 $ 4,919,000 $ 5,054,000
Earnings per share As reported - basic $1.61 $.86 $.80
- diluted $1.56 $.83 $.80
Pro forma - basic $1.55 $.79 $.77
- diluted $1.50 $.76 $.77
</TABLE>
The fair value of each option is estimated on the date of grant using
an option-pricing model with the following weighted average assumptions used for
1998, 1997 and 1996 grants: dividend yields of 2.23, 1.84 and 2.00 percent;
expected volatility of 38.00, 23.37 and 18.97 percent; risk-free interest rate
of 5.48, 6.55 and 6.71 percent; and expected lives of 8.5 years for all options.
The weighted average fair value per share at the date of grant for shares
granted during 1998, 1997 and 1996 was $10.66, $8.35 and $5.19, respectively.
NOTE 14 - RELATED PARTY TRANSACTIONS:
The Company makes loans to its directors and principal officers in the
ordinary course of business. These loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other customers and did not involve more than a
normal risk of collectibility.
The Company has entered into an employment agreement with the
President/Chief Executive Officer and severance agreements with certain
officers. The total commitments under all agreements at December 31, 1998 was
$828,000.
- 43 -
<PAGE>
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISKS,
COMMITMENTS AND CONTINGENCIES:
The Company 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 include commitments to extend credit and
standby letters of credit. The same credit policies are used in these
commitments as for on-balance sheet instruments. The Company's exposure to
credit loss in the event of nonperformance by the other parties is represented
by the contractual amount of the financial instruments. The principal
commitments of the Company are as follows:
Loan Commitments:
At December 31, 1998 and 1997, the Company had outstanding firm
commitments to originate loans as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Mortgage Loans $ 4,205 $ 2,381
Undisbursed Mortgage Loans-in-Process 7,549 14,082
Commercial Loans 32,643 29,124
Consumer and Other Loans 6,726 2,554
- -------------------------------------------------------------------------
Total Commitments $ 51,123 $ 48,141
=========================================================================
</TABLE>
At December 31, 1998 and 1997, the Company had outstanding commitments
to sell loans of $17,762,000 and $3,266,000, respectively.
Lines and Letters of Credit:
The Company issues letters of credit and approves lines of credit on
substantially the same terms as other loans. At December 31, 1998 and 1997, the
letters of credit outstanding were $1,780,000 and $1,442,000, respectively.
Unfunded approved lines of credit, including unused credit card lines, at
December 31, 1998 and 1997 were $81,879,000 and $63,702,000, respectively.
Letters of Credit Issued on Behalf of the Company:
The Company has outstanding Standby Letters of Credit issued by the
FHLB in favor of customers of the Company. The Company uses these letters of
credit to collateralize public entity deposits in lieu of a direct pledge of
investment securities of the Company. At December 31, 1998 and 1997, outstanding
letters of credit totaled $3,365,000 and $2,835,000, respectively. The Company
has made a blanket pledge of loans to the FHLB to secure all letters of credit
issued on behalf of the Company. This blanket pledge is also used to
collateralize any direct borrowing from the FHLB.
- 44 -
<PAGE>
The Company is subject to certain claims and litigation arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected to
have a material effect on the consolidated financial position of the Company.
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.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
be drawn upon, the total commitment amounts generally represent future cash
requirements. The Company evaluates each customer's credit-worthiness on a
case-by-case basis. The amount of collateral, if deemed necessary by the Company
upon extension of credit, is based on management's credit evaluation of the
counterparty.
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair value of the Company's financial instruments (in
thousands) are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
- ----------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash $145,871 $145,871 $ 44,307 $ 44,307
Investment Securities 99,758 99,760 77,317 77,319
Mortgage-Backed Securities 277,798 277,692 115,125 116,004
Loans Held for Sale 18,495 18,667 4,377 4,401
Loans Receivable 765,740 771,594 661,742 677,107
Liabilities
Deposits:
Regular Savings, NOW Accounts,
and Money Market Deposits $566,373 566,373 $310,752 $310,752
Certificates of Deposit 652,325 657,367 467,943 471,717
FHLB Advances 45,639 47,499 46,728 47,874
</TABLE>
The fair value estimates presented herein are based upon pertinent
information available to management as of December 31, 1998 and 1997. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
- 45 -
<PAGE>
NOTE 17 - CONCENTRATED CREDIT RISKS:
Most of the Company's business activity is with customers located
within the State of Louisiana. The Company's lending activity in the past was
concentrated in the southwestern part of Louisiana. That economy has
historically been heavily dependent on the oil and gas industry. The Company in
recent years has increased originations of commercial loans and indirect
automobile loans, and through acquisitions has entered the New Orleans and
Monroe, Louisiana markets. Repayment of loans is expected to come from cash flow
of the borrower or, particularly with the residential mortgage portfolio, from
the sale of the real estate. Losses are limited by the value of the collateral
upon default of the borrowers.
NOTE 18 - COMPREHENSIVE INCOME:
The following is a summary of the components of other comprehensive
income (in thousands):
<TABLE>
<CAPTION>
For The Years Ended December 31,
- -----------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized Gain (Loss) on Securities Available
for Sale, Net $196 $ 52 $(691)
Reclassification Adjustment for Net Gains Realized
in Net Income (3) -0- (174)
- -----------------------------------------------------------------------------------------------
Other Comprehensive Income 193 52 (865)
Income Tax (Expense) Benefit Related to Other
Comprehensive Income (65) (18) 294
- -----------------------------------------------------------------------------------------------
Other Comprehensive Income, Net of Income Taxes $128 $ 34 $(571)
===============================================================================================
</TABLE>
NOTE 19 - ACQUISITIONS:
In May of 1996, the Company completed the acquisition of Royal
Bankgroup of Acadiana, Inc., ("Royal") and its wholly owned subsidiary, The Bank
of Lafayette ("BOL"). The total acquisition costs, including related expenses,
was $9,211,000. No stock was issued in the transaction and the acquisition is
accounted for as a purchase transaction. Total assets of $70,157,000 were
acquired, including $45,214,000 of loans, $15,128,000 in cash, $1,998,000 of
investment securities, $4,191,000 of mortgage-backed securities and $2,352,000
of fixed assets. Total liabilities of $64,154,000 were assumed, including
$63,487,000 of deposits. Goodwill of $3,208,000 was recognized in the
transaction and is being amortized over 15 years using the straight line method.
Total amortization of goodwill in 1998, 1997 and 1996 was $214,000, $ 206,000
and $150,000. Results of operations for Royal for the period prior to
acquisition are not included in these statements.
- 46 -
<PAGE>
In October of 1996, the Company completed the acquisition of Jefferson
Bancorp, Inc. and its wholly owned subsidiary, Jefferson Federal Savings Bank.
The total purchase price was $51,790,000 in cash and the acquisition is
accounted for as a purchase transaction. Total assets of $266,235,000 were
acquired, including $63,907,000 of loans, $28,352,000 in cash, $57,452,000 of
investment securities, $106,755,000 of mortgage-backed securities and $3,008,000
of fixed assets. Total liabilities of $229,387,000 were assumed, including
$224,803,000 of deposits. Goodwill of $11,116,000 was recognized in the
transaction and is being amortized over 25 years using the straight line method.
A core deposit intangible of $3,825,000 was recognized and is being amortized
over its estimated life of 8 years using accelerated methods. Total amortization
of the intangibles in 1998, 1997 and 1996 was $1,208,000, $1,324,000 and
$230,000. Results of operations for Jefferson are shown from the date of
acquisition only.
Had the acquisitions of Royal Bankgroup and Jefferson Bancorp been
consummated as of January 1, 1996, the Company's consolidated restated pro forma
results of operations for the year ended December 31, 1996 (in thousands) would
have been as follows:
1996
- -------------------------------------------------------------------
Restated Pro Forma Results of Operations:
Interest Income $ 68,313
Interest Expense (34,887)
Provision for Loan Losses (357)
Noninterest Income 4,805
Noninterest Expense (29,391)
Income Tax Expense (3,722)
- -------------------------------------------------------------------
Net Income $ 4,761
===================================================================
Earnings per Share - Basic and Fully Diluted $ .73
===================================================================
In September of 1998, the Company assumed the deposits and acquired the
related assets of 17 branches from certain banking subsidiaries of First
Commerce Corporation located in Lafayette and Monroe, Louisiana. Total assets of
$455,293,000 were acquired, including $126,600,000 of loans acquired at book
value, $292,439,000 of cash and $5,719,000 of fixed assets. Deposits of
$452,578,000 were assumed along with related liabilities of $2,715,000. Total
goodwill of $31,058,000 was recognized in the transaction, and is being
amortized over 15 years using the straight line method. Total amortization of
goodwill in 1998 was $630,000. Results of operations for the branch acquisitions
are shown from the date of acquisition only.
NOTE 20 - SEGMENT INFORMATION:
The Company, through its subsidiary bank, operates in one segment - the
financial services industry. Within this segment, the Company is primarily
engaged in commercial and consumer banking and mortgage lending.
- 47 -
<PAGE>
NOTE 21 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS:
Condensed financial statements of ISB Financial Corporation (parent
company) are shown below. The parent company has no significant operating
activities.
<TABLE>
<CAPTION>
Condensed Balance Sheets
December 31, 1998 and 1997
(Dollars in thousands)
1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash in Bank $ 1,114 $ 7,396
Investment in Subsidiaries 122,884 104,870
Other Assets 1,011 3,833
- -------------------------------------------------------------------------------------
Total Assets $125,009 $116,099
=====================================================================================
Liabilities and Stockholders' Equity
Liabilities 1,042 535
Stockholders' Equity 123,967 115,564
- -------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $125,009 $116,099
=====================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Income
Years Ended December 31, 1998, 1997 and 1996
(Dollars in thousands)
1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Income:
Dividends from Subsidiaries $ 3,147 $ 6,367 $ 25,490
Securities Gains/Losses -0- 265 181
Interest Income 303 395 1,650
Other Income 2 86 -0-
- ------------------------------------------------------------------------------------------------
Total Operating Income 3,452 7,113 27,321
Operating Expenses 1,761 1,532 1,483
- ------------------------------------------------------------------------------------------------
Income Before Income Tax Expense and
Increase (Decrease) in Equity in Undistributed
Earnings of Subsidiaries 1,691 5,581 25,838
Income Tax (Benefit) Expense (510) (427) 164
- ------------------------------------------------------------------------------------------------
Income Before Increase (Decrease) in Equity in
Undistributed Earnings of Subsidiaries 2,201 6,008 25,674
Increase (Decrease) in Equity in Undistributed
Earnings of Subsidiaries 7,936 (665) (20,396)
- ------------------------------------------------------------------------------------------------
Net Income $ 10,137 $ 5,343 $ 5,278
================================================================================================
- 48 -
<PAGE>
Condensed Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
(Dollars in thousands)
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 10,137 $ 5,343 $ 5,278
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Deferred Income Taxes (1) (21) (80)
(Increase) Decrease in Equity in Net Income of Subsidiaries (7,936) 665 20,396
Decrease (Increase) in Other Assets 3,239 (3,696) 402
Increase (Decrease) in Other Liabilities 7 (140) 147
Amortization of Premium/Discount on Investments -0- -0- 37
Net Change in Securities Classified as Trading -0- 630 (9)
Gain on Sale of Investments -0- (266) (181)
Compensation Expense Recognized on RRP 443 414 211
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 5,889 2,929 26,201
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Proceeds From Sales and Maturities of Securities
Available for Sale -0- -0- 26,832
Purchase of Capital Stock of Subsidiaries -0- -0- (42,480)
Payments Received from Note Receivable -0- 841 -0-
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used In) Investing Activities -0- 841 (15,648)
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Dividends Paid to Shareholders (3,479) (2,604) (2,159)
Capital Contributed to Subsidiaries (9,222) (207) (173)
Payments Received From ESOP 955 1,009 1,062
Payments to Repurchase Common Stock (503) (3,089) (9,546)
Proceeds from Sale of Treasury Stock 78 21 -0-
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Financing Activities (12,171) (4,870) (10,816)
- ---------------------------------------------------------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents (6,282) (1,100) (263)
Cash and Cash Equivalents, Beginning of Period 7,396 8,496 8,759
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 1,114 $ 7,396 $ 8,496
===========================================================================================================================
</TABLE>
Other Disclosures:
The Company was charged $120,000 by Iberia for management and accounting
services during 1998, 1997 and 1996.
- 49 -
<PAGE>
NOTE 22 - QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED):
<TABLE>
<CAPTION>
Year Ended December 31, 1998
- -------------------------------------------------------------------------------------------------------
First Second Third Fourth
(Dollars in thousands, except per share data) Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Interest Income $ 17,564 $ 17,593 $ 19,624 $ 23,570
Total Interest Expense 8,546 8,417 9,688 11,808
- -------------------------------------------------------------------------------------------------------
Net Interest Income 9,018 9,176 9,936 11,762
Provision for Loan Losses 230 255 206 211
- -------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 8,788 8,921 9,730 11,551
Noninterest Income 1,797 1,846 2,183 4,924
Noninterest Expense 6,683 6,865 7,730 10,078
Goodwill Amortization 369 362 472 861
- -------------------------------------------------------------------------------------------------------
Income Before Income Taxes 3,533 3,540 3,711 5,536
Income Tax Expense 1,386 1,384 1,489 1,924
- -------------------------------------------------------------------------------------------------------
Net Income $ 2,147 $ 2,156 $ 2,222 $ 3,612
=======================================================================================================
Earnings per Share - Basic $ .34 $ .34 $ .35 $ .57
=======================================================================================================
Earnings per Share - Diluted $ .33 $ .33 $ .34 $ .56
=======================================================================================================
<PAGE>
<CAPTION>
Year Ended December 31, 1997
- -------------------------------------------------------------------------------------------------------
First Second Third Fourth
(Dollars in thousands, except per share data) Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Interest Income $ 16,777 $ 17,028 $ 17,351 $ 17,325
Total Interest Expense 8,746 9,034 9,250 9,020
- -------------------------------------------------------------------------------------------------------
Net Interest Income 8,031 7,994 8,101 8,305
Provision for Loan Losses 162 242 302 391
- -------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 7,869 7,752 7,799 7,914
Noninterest Income 1,289 1,540 1,900 1,661
Noninterest Expense 6,138 6,384 7,380 8,699
- -------------------------------------------------------------------------------------------------------
Income Before Income Taxes 3,020 2,908 2,319 876
Income Tax Expense 1,225 1,156 1,017 382
- -------------------------------------------------------------------------------------------------------
Net Income $ 1,795 $ 1,752 $ 1,302 $ 494
=======================================================================================================
Earnings per Share - Basic $ .29 $ .28 $ .21 $ .08
=======================================================================================================
Earnings per Share - Diluted $ .28 $ .27 $ .20 $ .08
=======================================================================================================
</TABLE>
<PAGE>
- 50 -
<PAGE>
CORPORATE INFORMATION
DIRECTORS
Elaine D. Abell, Attorney in private practice, Lafayette, LA
Harry V. Barton, Jr., Certified Public Accountant, Lafayette, LA
Cecil C. Broussard, Self-employed Investor,
New Iberia, LA
William H. Fenstermaker, President and Chief Executive
Officer of C.H. Fenstermaker and Associates, Inc., Lafayette, LA
Ray Himel, Vice-Chairman, Owner of Himel Motor Supply Corp.,
Himel Marine and several Ace Hardware Stores in southern
Louisiana.
Larrey G. Mouton, President and Chief Executive Officer of
ISB Financial Corporation and IBERIABANK
Emile J. Plaisance, Jr., Chairman, Retired.
Stewart Shea, Vice President of Bayou Management Services
President of Bayou Pipe Coating, LLC, affiliates of Bayou
Management Services, New Iberia, LA.
DIRECTORS EMERITUS
William R. Bigler
Henry J. Dauterive, Jr.
Louis J. Tamporello
Guyton H. Watkins
EXECUTIVE OFFICERS
Larrey G. Mouton, President/Chief Executive Officer
John J. Ballatin, Executive Vice President, Operations
Ronnie J. Foret, Executive Vice President, Commercial Lending
James R. McLemore, Jr., Senior Vice President and
Chief Financial Officer
Donald P. Lee, Senior Vice President, Risk Management and In-house Counsel
Janel F. Tate, Senior Vice President, Mortgage Lending
J. Orlando Munoz, Senior Vice President, Retail Banking
Ronald J. Howton, Senior Vice President, Credit Administration
Guyton H. Watkins, Secretary
ANNUAL MEETING
Wednesday, April 21, 1999, 3:00 p.m.
IBERIABANK
1101 E. Admiral Doyle Drive
New Iberia, LA
Since April 7, 1995, ISB Financial Corporation's common stock has traded on the
National Association of Security Dealers Automated Quotations (NASDAQ) National
Market, under the symbol "ISBF," as reported to NASDAQ, the price information
reflects high and low sales prices. The following represents high and low
trading prices and dividends declared during each respective quarter for the
years ended December 31, 1997 and 1998.
Dividends
1997 HIGH LOW Declared
- --------------------------------------------------------
First Quarter $26.125 $17.625 $0.100
Second Quarter $26.500 $20.875 $0.100
Third Quarter $28.000 $23.375 $0.125
Fourth Quarter $30.000 $23.750 $.0125
Dividends
1998 HIGH LOW Declared
- --------------------------------------------------------
First Quarter $30.000 $25.375 $0.140
Second Quarter $29.375 $26.375 $0.140
Third Quarter $28.000 $19.813 $0.140
Fourth Quarter $26.250 $18.875 $.0150
SECURITIES LISTING
ISB Financial Corporation's common stock is traded on the NASDAQ National Market
under the symbol ISBF. Current price information can be found under the
NASDAQ-OTC National Market Listing.
- 51 -
<PAGE>
INVESTOR INFORMATION
Investors, analysts and others seeking financial information may contact:
Larrey G. Mouton, President/CEO or
James R. McLemore, Jr., Senior Vice President, CFO
ISB Financial Corporation
1101 E. Admiral Doyle Drive
New Iberia, LA 70560
(318) 365-2361
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(800) 368-5948
INDEPENDENT AUDITORS
Castaing, Hussey, Lolan & Dauterive, LLP
525 Weeks Street
New Iberia, LA 70560
SPECIAL COUNSEL
Elias, Matz, Tiernan & Herrick, L.L.P.
734 15th Street, N.W.
Washington, DC 20005
- 52 -
Samuel R. Lolan
Patrick J. Dauterive
Lori D. Percle
Debbie B. Taylor
Katherine H. Armentor
Castaing Hussey Lolan & Dauterive, LLP
- ---Certified Public Accountants
- --------------------------------------------------------------------------------
Charles E. Castaing, Retired
Roger E. Hussey, Retired Robin G. Freyou
Dawn K. Gonsoulin
John G. Sarkies, Jr.
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in the registration Statements on
Form S-8 (File Nos. 333-28859 and 033-93210) of our report dated February 12,
1999 appearing in this Annual Report on Form 10-K of ISB Financial Corporation
for the year ended December 31, 1998.
/s/Castaing, Hussey, Loan & Dauterive, LLP
New Iberia, Louisiana
March 29, 1999
525 Weeks Street x P.O. Box 14240 x New Iberia, Louisiana 70562-4240
Ph.: 318-364-7221 x Fax: 318-364-7235 x email: [email protected]
Members of American Institute of Certified Public Accountants
Society of Louisiana Certified Public Accountants
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 36,953
<INT-BEARING-DEPOSITS> 108,918
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 97,085
<INVESTMENTS-CARRYING> 280,471
<INVESTMENTS-MARKET> 280,367
<LOANS> 768,311
<ALLOWANCE> (7,135)
<TOTAL-ASSETS> 1,401,630
<DEPOSITS> 1,218,698
<SHORT-TERM> 0
<LIABILITIES-OTHER> 58,965
<LONG-TERM> 0
0
0
<COMMON> 7,381
<OTHER-SE> 116,586
<TOTAL-LIABILITIES-AND-EQUITY> 1,401,630
<INTEREST-LOAN> 60,490
<INTEREST-INVEST> 15,292
<INTEREST-OTHER> 2,568
<INTEREST-TOTAL> 78,350
<INTEREST-DEPOSIT> 35,049
<INTEREST-EXPENSE> 38,458
<INTEREST-INCOME-NET> 39,892
<LOAN-LOSSES> 903
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 33,420
<INCOME-PRETAX> 16,319
<INCOME-PRE-EXTRAORDINARY> 10,137
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,137
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.56
<YIELD-ACTUAL> 7.80
<LOANS-NON> 1,379
<LOANS-PAST> 5,657
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,258
<CHARGE-OFFS> 863
<RECOVERIES> 445
<ALLOWANCE-CLOSE> 7,135
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,135
</TABLE>
