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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-25756
ISB Financial Corporation
------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Louisiana 72-1280718
--------- ----------
(State or other jurisdiction of (I.R. S. Employer
incorporation or organization) Identification Number)
1101 East Admiral Doyle Drive
New Iberia, Louisiana 70560
--------------------------------------- -------------
(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.
As of March 18, 1998, the aggregate market value of the 6,594,793 shares of
Common Stock of the Registrant issued and outstanding on such date, which
excludes 369,184 shares held by all directors and officers of the Registrant as
a group, was approximately $183.8 million. This figure is based on the closing
sale price of $27.875 per share of the Registrant's Common Stock on March 18,
1997.
Number of shares of Common Stock outstanding as of December 31, 1997: 6,902,028
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, 1997 are incorporated into Part II, Items 5 through 8 of this Form
10-K,
(2) Portions of the definitive proxy statement for the 1998 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.
2
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. 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 Banks. The
Company's common stock trades on the NASDAQ National Market under the symbol
"ISBF." At December 31, 1997, the Company had total assets of $947.3 million,
total deposits of $778.7 million and equity of $115.6 million.
Iberia is a Louisiana chartered stock commercial bank conducting business
from its main office located in New Iberia, Louisiana and 26 full-service branch
offices located in New Iberia, Lafayette, Jeanerette, Franklin, Morgan City,
Crowley, Rayne, Kaplan, St. Martinville, Abbeville, Gretna, Marrero, River
Ridge, New Orleans, Metairie and Kenner, all of which are in southern 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. The Bank's primary lending
emphasis has been 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, 1997, such loans amounted to $376.3 million or 55.6% 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, 1997,
$169.7 million, or 25.1%, of the Bank's gross loans were consumer loans. Of that
amount, $90.7 million, or 13.4% of gross loans, were indirect automobile loans.
Commercial loans consist of commercial real estate loans, commercial business
loans and multi-family residential real estate loans. At December 31, 1997,
$48.3 million, or 7.1% of loans are secured by commercial real estate, $58.0
million, or 8.6%, are commercial business loans and $2.5 million, or .4%, are
multi-family residential real estate loans. The Bank also originates loans for
the purpose of constructing single-family residential units. At December 31,
1997, $22.1 million, or 3.3%, are construction loans.
1.
3
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, 1997, the Bank's mortgage-backed
securities amounted to $115.1 million, or 12.2% of total assets and its
investment securities amounted to $77.3 million, or 8.2% of total assets.
2.
4
Lending Activities
Loan Portfolio Composition. The following table sets forth the
composition of the Banks' loans held in portfolio at the dates indicated
December 31,
-----------------------------------------------------------
1997 1996
------------------------- -----------------------------
Percent of Percent of
Amount Total Amount Total
----------- ----------- ------------ -----------
Mortgage loans:
Single-family residential $ 376,320 55.59% $ 386,555 66.45%
Multi-family 2,516 0.37% 2,279 0.39%
Construction 22,109 3.27% 14,064 2.41%
--------- -------- --------- --------
Total mortgage loans 400,945 59.23% 402,898 69.25%
--------- -------- --------- --------
Commercial Loans
Business loans 57,978 8.56% 36,089 6.20%
Real estate 48,291 7.13% 22,961 3.95%
--------- -------- --------- --------
Total commercial loans 106,269 15.69% 59,050 10.15%
--------- -------- --------- --------
Consumer loans:
Home equity 34,192 5.05% 21,646 3.72%
Automobile 9,433 1.39% 7,509 1.29%
Indirect 90,676 13.39% 52,371 9.00%
Mobile home loans 3,226 0.48% 4,215 0.73%
Educational loans 9,458 1.40% 9,345 1.61%
Credit card loans 4,150 0.61% 4,017 0.69%
Loans on savings 11,255 1.66% 12,487 2.15%
Other 7,358 1.09% 8,225 1.41%
--------- -------- --------- --------
Total consumer loans 169,748 25.08% 119,815 20.60%
--------- -------- --------- --------
Total loans receivable 676,962 100.00% 581,763 100.00%
--------- -------- --------- --------
Less:
Allowance for loan losses (5,258) (4,615)
Loans-in-process (14,082) (6,059)
Unearned discount (160) (143)
Prepaid dealer
participations 3,636 2,555
Deferred loan fees, net (709) (922)
Discount on loans
purchased (1,145) (1,460)
--------- ---------
Loans receivable, net 659,244 571,119
--------- ---------
December 31,
------------------------------------------------------------
1995 1994
---------------------------- ----------------------------
Percent of Percent of
Amount Total Amount Total
----------- ----------- ----------- ------------
Mortgage loans:
Single-family residential $ 318,705 76.83% $ 300,730 78.00%
Multi-family 1,506 0.36% 1,801 0.47%
Construction 15,617 3.76% 14,427 3.74%
--------- -------- --------- ---------
Total mortgage loans 335,828 80.95% 316,958 82.21%
--------- -------- --------- ---------
Commercial Loans
Business loans 11,055 2.66% 10,655 1.67%
Real estate 14,486 3.49% 6,441 2.76%
--------- -------- --------- ---------
Total commercial loans 25,541 6.15% 17,096 4.43%
--------- -------- --------- ---------
Consumer loans:
Home equity 15,364 3.70% 14,229 3.69%
Automobile 5,873 1.42% 5,003 1.54%
Indirect 619 0.15% 939 0.24%
Mobile home loans 6,077 1.46% 8,017 2.08%
Educational loans 9,262 2.23% 9,639 2.50%
Credit card loans 3,836 0.92% 3,477 0.90%
Loans on savings 7,481 1.80% 8,305 2.15%
Other 4,960 1.20% 1,910 0.50%
--------- -------- --------- ---------
Total consumer loans 53,472 12.90% 51,519 13.60%
--------- -------- --------- ---------
Total loans receivable 414,841 100.00% 385,573 100.24%
--------- -------- --------- ---------
Less:
Allowance for loan losses (3,746) (3,831)
Loans-in-process (8,399) (6,848)
Unearned discount (1) (5)
Prepaid dealer
participations 0 0
Deferred loan fees, net (1,191) (1,416)
Discount on loans
purchased (1,962) (2,679)
--------- ---------
Loans receivable, net 399,542 370,794
--------- ---------
December 31,
-------------------------------
1993
------------------------------
Percent of
Amount Total
----------- -----------
Mortgage loans:
Single-family residential $ 284,630 79.96%
Multi-family 1,897 0.53%
Construction 9,082 2.55%
-------- -------
Total mortgage loans 295,609 83.04%
-------- -------
Commercial Loans
Business loans 4,089 1.15%
Real estate 8,271 2.32%
-------- -------
Total commercial loans 12,360 3.47%
-------- -------
Consumer loans:
Home equity 11,493 3.23%
Automobile 3,616 1.02%
Indirect 1,339 0.38%
Mobile home loans 9,989 2.81%
Educational loans 8,953 2.52%
Credit card loans 2,406 0.68%
Loans on savings 8,117 2.28%
Other 2,082 0.58%
-------- -------
Total consumer loans 47,995 13.49%
-------- -------
Total loans receivable 355,964 100.00%
-------- -------
Less:
Allowance for loan losses (3,413)
Loans-in-process (3,991)
Unearned discount (25)
Prepaid dealer
participations 0
Deferred loan fees, net (1,242)
Discount on loans
purchased (3,876)
--------
Loans receivable, net 343,417
--------
3.
5
Contractual Maturities. The following table sets forth the scheduled
contractual maturities of the Banks' loans held to maturity at December 31,
1997. 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.
Single Family Residential
------------------------------------------------------------------------------
Single-family Multi-family Construction Total
------------- ------------ ------------ -----
Amounts due in:
One year or less $ 16,310 $ 18 $ 16,328
After one year through five years 65,940 1,052 66,992
After five years 294,070 1,446 22,109 (1) 317,625
------------------------------------------------------------------------------
Total(2) $ 376,320 $ 2,516 $ 22,109 $ 400,945
==============================================================================
Interest rate terms on amounts
due after one year:
Fixed $ 185,106 $ 1,649 $ 16,582 $ 203,337
Adjustable 174,904 849 5,527 181,280
------------------------------------------------------------------------------
Total $ 360,010 $ 2,498 $ 22,109 $ 384,617
==============================================================================
Commercial
------------------------------------------------
Business Consumer
Real Estate Loans Total Loans Total
----------- ----- ----- ----- -----
Amounts due in:
One year or less $ 10,768 $ 30,488 $ 41,256 $ 48,114 $ 105,698
After one year through five
years 12,614 10,473 23,087 91,882 181,961
After five years 24,909 17,017 41,926 29,752 389,303
-------------------------------------------------------------------------------------------
Total(2) $ 48,291 $ 57,978 $ 106,269 $ 169,748 $ 676,962
===========================================================================================
Interest rate terms on amounts
due after one year:
Fixed $ 16,570 $ 6,504 $ 23,074 $ 112,191 $ 338,602
Adjustable 20,953 20,986 41,939 9,443 232,662
---------------------------------------------------------------------------------------
Total $ 37,523 $ 27,490 $ 65,013 $ 121,634 $ 571,264
=======================================================================================
4.
6
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.
5.
7
Loan Originations, Purchases and Sales Activity. The following table shows
the loan origination, purchase and sale activity of the Bank during the periods
indicated.
Y e a r E n d e d D e c e m b e r 3 1 ,
---------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ---
(Dollars In Thousands)
Gross loans at beginning of period $ 581,763 $ 414,841 $ 385,573 $ 355,964 $ 353,172
-- -- --
Originations of loans:
Mortgage loans:
Single-family residential 48,624 41,134 38,936 44,670 61,745
Multi-family residential -- -- -- -- --
Construction 22,187 21,939 24,330 25,602 17,225
Commercial business loans 80,872 32,457 15,608 13,712 5,170
Commercial real estate -- 15,143 5,486 3,044 2,721
Consumer loans:
Home equity 18,693 13,785 11,257 8,367 7,261
Automobile 65,193 42,813 4,318 4,116 2,913
Mobile home loans 733 276 386 792 611
Educational loans 1,466 1,724 1,268 2,153 2,575
Loans on savings 5,202 5,272 4,463 3,329 3,908
Credit cards 1,338 1,137 1,430 6,677 5,311
Other 6,890 3,634 3,836 3,262 2,835
--------- --------- --------- --------- ---------
Total originations 251,198 179,314 111,318 115,724 112,275
--------- --------- --------- --------- ---------
--------------------------
Loan purchased/acquired -- 109,121 996 -- --
-------------------------- --------- --------- ---------
Total purchases/acquisitions 0 109,121 996 -- --
--------- --------- --------- --------- ---------
Total originations and purchases 251,198 288,435 112,314 115,724 112,275
Repayments (136,035) (116,511) (82,356) (84,204) (109,227)
Loan sales (19,964) (5,002) (690) (1,911) (256)
--------- --------- --------- --------- ---------
Net activity in loans 95,199 166,922 29,268 29,609 2,792
--------- --------- --------- --------- ---------
Gross loans held at end of period $ 676,962 $ 581,763 $ 414,841 $ 385,573 $ 355,964
========= ========= ========= ========= =========
6.
8
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 in one of the Bank's offices.
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 $227,100 by the
Officers' Loan Committee of the Bank, a committee of Bank officers. If a loan is
between $500,000 and $1.0 million, it must also be approved by the Loan
Committee of the Bank's Board of Directors, and loans in excess of $1.0 million
must be approved by the Board of Directors. Certain designated officers of the
Bank have limited authority to approve commercial loans not exceeding specified
levels and 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 $30,000 unsecured and $100,000 secured. Consumer loans up to
$200,000 unsecured and $500,000 secured must be approved by the Officer's Loan
Committee, consisting of at least two members of senior management. Consumer
loans up to $1.0 million must be approved by the Board of Directors Loan
Committee. Consumer loans in excess of $1.0 million must be approved by the
full board.
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"). During 1997 and 1996, the
Bank decided to sell 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, 1997, $196.4 million, or 52.2%, of the
Bank's single-family residential mortgage loans were fixed-rate loans.
7.
9
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, 1997, $179.9 million
or 47.8% of the Bank's single-family residential mortgage loans were
adjustable-rate loans.
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, 1997, such loan
originations have amounted to $7.4 million. 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, 1997, the Bank's construction
loans amounted to $22.1 million, or 3.3%, 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.
8.
10
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.
Consumer Loans. The Bank offers consumer loans in order to provide a full
range of retail financial services to its customers. At December 31, 1997,
$169.7 million, or 25.1%, 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 sent via facsimile 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 to automobile dealerships which have demonstrated
reputable behavior in the past. At December 31, 1997, $90.7 million, or 13.4%,
of the Bank's total loan portfolio are indirect automobile loans.
At December 31, 1997, 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, 1997, the Bank had $34.2 million or 5.1%
of home equity loans, and $9.5 million or 1.4% of educational loans, all of
which were underwritten to conform with the standards of the Louisiana Public
Facilities Authority ("LPFA"). Generally, the Bank has sold its educational
loans to the LPFA or other government sponsored agencies at the commencement of
the repayment period. Deposit loans totaled $11.3 million, or 1.7%, of the
Bank's total loan portfolio at December 31, 1997. The Bank's mobile home loans
amounted to $3.2 million, or .5% of the loan portfolio at December 31, 1997,
compared to $18.1 million or 5.4% of the Bank's loan portfolio at December 31,
1991. 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, 1997, the Bank's direct automobile loans amounted to $9.4
million, or 1.4%, of the Bank's total loan portfolio. The Bank's Visa and
MasterCard credit card loans totaled $4.2 million, or 0.6%, of the Bank's total
loan portfolio at such date. The Bank's other personal consumer loans amounted
to $7.4 million, or 1.1% of the Bank's total loan portfolio at such date.
Commercial and Multi-Family Residential Real Estate Loans. The Bank has
increased its investment in commercial real estate loans from $8.3 million, or
2.3% of the total loan portfolio at December 31, 1993, to $48.3 million, or
7.1% of the total loan portfolio, at December 31, 1997. The Bank's multi-family
residential loan portfolio at December 31, 1997 is $2.5 million or .4% of the
total loan portfolio. The increase in commercial real estate loans reflects, in
part, the Bank's determination to originate such loans in its market area and
certain commercial real estate loans acquired from BOL. 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
9.
11
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, 1997, the Bank's largest commercial real estate loan
had a balance of $2.7 million. Such loan is secured by a commercial office
complex in the Bank's market area and is performing in accordance with its
terms.
The Bank's commercial real estate and multi-family residential 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. Although terms for multi-family residential and
commercial real estate loans may vary, 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 and multi-family residential loans.
The Bank evaluates various aspects of commercial and multifamily
residential 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 and
multi-family loan transactions. 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 and multi-family residential 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
attempt 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, 1997, $30,000 of the Bank's commercial real estate loans were
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, 1997, the Bank's commercial business loans amounted to $58.0
million or 8.6% 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
10.
12
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% 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% to 100% of the amounts received.
As of December 31, 1997, the Bank had $129,000 of non-performing commercial
business loans and its largest commercial business loan had a principal balance
of $3.0 million. Such loan is secured by the borrower's accounts receivable and
generally has performed in accordance with its terms since origination.
Loans-To-One Borrower Limitations. The Louisiana Savings Bank Act of 1990,
as amended (the "LSBA") imposes limitations on the aggregate amount of loans
that a Louisiana chartered savings bank can make to any one borrower. Under
LSBA, the permissible amount of loans-to-one borrower may not exceed 15% of the
savings bank's total net worth. In addition, a savings bank may make loans in an
amount equal to an additional 10% of the savings bank's net worth if the loans
are 100% secured by readily marketable collateral. A savings bank's net worth
shall be calculated based on its last quarterly call report and consists of (i)
outstanding and unimpaired common stock; (ii) outstanding and unimpaired
perpetual preferred stock; (iii) unimpaired capital surplus, undivided profits,
capital reserves, minus intangible assets; (iv) purchased mortgage servicing
rights; or (v) mandatory convertible debt up to 20% of categories (i) through
(iv). Readily marketable collateral consists of financial instruments or bullion
which are salable under ordinary circumstances with reasonable promptness at
fair market value or on an auction or a similarly available daily bid and ask
price market. At December 31, 1997, Iberia's limit on unsecured loans-to-one
borrower under LSBA was $13.9 million. At December 31, 1997, lberia's five
largest loans or groups of loans-to-one borrower ranged from $2.5 to $4.7
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 institutes 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. As a matter of
policy, the Bank does not accrue interest on loans past due 90 days or more,
except for credit card loans. 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
11.
13
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 one
troubled debt restructuring as of December 31, 1997. See the table below under
"NonPerforming Assets and Troubled Debt Restructurings."
Delinquent Loans. The following table sets forth information concerning
delinquent loans at December 31, 1997, 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.
December 31, 1997
----------------------------------------------------------
30 - 59 Days 60 - 89 Days
------------------------------- ------------------------
Percent of Percent of
Loan Loan
Amount Category Amount Category
--------------- ------------- -------- --------------
(Dollars in Thousands)
Mortgage loans:
Residential:
Single-family $6,927 1.84% $1,651 0.44%
Multi-family - 0 -
Construction - 0 -
Commercial business loans 533 0.92% 343 0.59%
Commercial 433 0.92% 285 0.59%
Consumer loans 1,690 1.00% 582 0.34%
------ ---- ------ ----
Total $9,593 1.42% 2,861 0.42%
------ ---- ------ ----
12.
14
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.
December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in Thousands)
Non-accrual loans:
Mortgage loans:
Single-family $1,543 $ 892 $ 788 $ 729 $ 642
Multi-family - - - - -
Construction - - - - -
Commercial business loans 129 407 - - -
Commercial 30 190 30 55 142
Consumer loans 419 1,002 597 461 586
------ ------ ------ ------ ------
Total non-accrual
loans 2,121 2,491 1,415 1,245 1,370
------ ------ ------ ------ ------
Accruing loans more than 90
days past due (1) 3 69 53 13 14
------ ------ ------ ------ ------
Total non-performing
loans 2,124 2,560 1,468 1,258 1,384
------ ------ ------ ------ ------
Real Estate owned, net 473 978 561 570 859
------ ------ ------ ------ ------
Total non performing
assets $2,597 $3,538 $2,029 $1,828 $2,243
------ ------ ------ ------ ------
Performing troubled debt
restructuring $ 122 $ 176 $ 186 $ 194 $ 201
------ ------ ------ ------ ------
Total non-performing
assets and troubled debt
restructurings $2,719 $3,714 $2,215 $2,022 $2,444
Non-performing loans to
total loans 0.31% 0.44% 0.35% 0.33% 0.39%
Total non-performing
assets to total assets 0.29% 0.38% 0.33% 0.37% 0.46%
Total non-performing assets
and troubled debt
restructurings to total
assets 0.29% 0.40% 0.36% 0.41% 0.51%
13.
15
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, 1997, the Bank had $6.4 million of assets classified
substandard, $601,000 of assets classified doubtful, and no assets classified
loss. At such date, the aggregate of the Bank's classified assets amounted to
.74% 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, 1997, the
Bank's allowance for loan losses amounted to 232.6% and .78% 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 institutions's allowance for
loan and lease losses. The Policy Statement, which relflects 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 agencies' 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 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 agencies' examiners to use in 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.
14.
16
The following table sets forth the activity in the Bank's allowance for
loan losses during the periods indicated.
Year Ended December 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ------------ ----------- ---------- -------------
(Dollars in Thousands)
Allowance at beginning of period $4,615 $3,746 $3,831 $3,413 $3,254
Allowance from subsidiary acquisition - 1,114 13 - -
Provisions 1,097 156 239 305 441
Charge-offs:
Mortgage loans:
Single-family 50 46 55 81 107
Multi-family - - - - -
Construction - - - - -
Commercial business loans 191 61 - - -
Commercial - - 4 - 96
Consumer loans 562 509 371 214 343
------ ------ ------ ------ ------
Total 803 616 430 295 546
------ ------ ------ ------ ------
Recoveries:
Mortgage loans:
Single-family 79 39 15 302 107
Multi-family - - - - -
Construction - - - - -
Commercial business loan 55 - - - -
Commercial - 43 - - -
Consumer loans 215 133 78 106 157
------ ------ ------ ------ ------
Total 349 215 93 408 264
------ ------ ------ ------ ------
Allowance at end of period $5,258 $4,615 $3,746 $3,831 $3,413
------ ------ ------ ------ ------
Allowance for loan losses to
total non-performing loans at
end of period 232.60% 180.28% 255.18% 304.53% 246.60%
Allowance for loan losses to
total loans at end of period 0.78% 0.79% 0.90% 0.99% 0.96%
15.
17
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.
December 31,
----------------------------------------------------------------------------
1997 1996
-------------------------------------- ---------------------------------
% of Loan % of Loan
in Each in Each
Category to Category to
Amount Total Loans Amount Total Loans
------------------- -------------- --------------- --------------
Single-family residential 1,439 55.59% 1,991 66.45%
Multi-family residential 9 0.37% 11 0.39%
Construction 84 3.27% 72 2.41%
Commercial business 1,356 8.56% 817 3.95%
Commercial real estate 660 7.13% 502 6.20%
Consumer 1,710 25.08% 1,222 20.60%
------------------- -------------- --------------- --------------
Total allowance for loans losses 5,258 100.00% 4,615 100.00%
------------------- -------------- --------------- --------------
December 31,
--------------------------------------------------------------------
1995 1994
-------------------------------- --------------------------------
% of Loan % of Loan
in Each in Each
Category to Category to
Amount Total Loans Amount Total Loans
------------- -------------- ------------- ---------------
Single-family residential 2,184 76.83% 2,221 78.00%
Multi-family residential 10 0.36% 13 0.47%
Construction 107 3.76% 107 3.74%
Commercial business 134 2.66% 118 1.67%
Commercial real estate 176 3.49% 196 2.76%
Consumer 1,135 12.89% 1,176 13.36%
------------- -------------- ------------- ---------------
Total allowance for loans losses 3,746 100.00% 3,831 100.00%
------------- -------------- ------------- ---------------
December 31,
-------------------------------
1993
-------------------------------
% of Loan
in Each
Category to
Amount Total Loans
------------ --------------
Single-family residential 2,042 79.96%
Multi-family residential 14 0.53%
Construction 65 2.55%
Commercial business 97 1.15%
Commercial real estate 197 2.32%
Consumer 998 13.49%
------------ --------------
Total allowance for loans losses 3,413 100.00%
------------ --------------
16.
18
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, 1997, the Bank's mortgage-backed securities amounted to
$115.1 million, or 12.2% 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 $227,100.
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 has
generally determined, consistent with its asset/liability management strategies,
to limit its investments in mortgage-backed securities to securities backed by
ARMS, which have a balloon feature or securities which otherwise have an
adjustable rate feature.
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,
17.
19
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
31, 1997, the fair value of the Bank's investment in CMOs amounted to $20.5
million, all of which consisted of regular interests. As of December 31, 1997,
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% for
risk-based capital purposes, compared to a weight of 50% to 100% for residential
loans. See "Regulation - The Bank - Capital Requirements."
As of December 31, 1997, 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.
18.
20
The following table sets forth the composition of the Bank's
mortgage-backed securities at the dates indicated.
December 31,
--------------------------------------------
1997 1996 1995
---------- ------------ ------------
( Dollars In Thousands)
Mortgage-backed securities :
FHLMC $ 54,285 $ 80,648 $ 16,434
FNMA 28,864 35,340 15,553
GNMA 11,115 13,233 350
FNMA CMO 9,468 9,697 7,209
FHLMC CMO 10,901 10,901 10,901
Privately Issued (2) 492 850 1,199
-------- -------- --------
Total mortgage backed
securities $115,125 $150,669 $ 51,646
-------- -------- --------
Total market value $116,004 $150,014 $ 51,872
-------- -------- --------
(1) See Note 4 of the Notes to Consolidated Financial Statements.
(2) Rated AA by national rating agencies.
(3) At December 31, 1997, $49.1 million of the Banks' mortgage-backed
securities had adjustable rates and $66.0 million had fixed rates, of which
$55.4 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.
Year Ended December 31,
1997 1996 1995 1994
----------- ----------- ----------- ------------
(In Thousands)
Mortgage-backed securities
purchased(1) $ $ $ 15,532 $ 4,793
Acquired --- 111,114
Principal repayments (35,353) (11,903) (3,722) (6,108)
Sales --- --- --- ---
Other, net (191) (188) (87) (181)
--------- --------- --------- ---------
Net change $ (35,544) $ 99,023 $ 11,723 $ (1,496)
========= ========= ========= =========
(1) All purchases are of mortgage-backed securities issued by government
entities or government sponsored entities.
19.
21
At December 31, 1997, the weighted average contractual maturity of the
Bank's mortgage-backed securities with a balloon feature was approximately 2.1
years. 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.
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, 1997, the Bank's investment securities available
for sale amounted to $75.5 million, net of gross unrealized gains of $335,000,
and its investment securities held to maturity amounted to $1.8 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 does not invest in securities with terms to maturity exceeding five
years.
20.
22
The following table sets forth information regarding the amortized cost and
market value of the Bank's investment securities at the dates indicated.
December 31,
-----------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- --------------------------- ---------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------------- ------------- ----------- ----------- ----------- ------------
(Dollars In Thousands)
U.S. Government
and federal agency
obligations $ 69,534 $ 69,872 $ 95,549 $ 95,855 $ 79,907 $ 81,065
Other 7,448 7,447 7,523 7,507 5,785 5,777
-------- -------- -------- -------- -------- --------
Total $ 76,982 $ 77,319 $103,072 $103,362 $ 85,692 $ 86,842
-------- -------- -------- -------- -------- --------
21.
23
The following table sets forth certain information regarding the
maturities of the Bank's investment securities at December 31, 1997.
Contractually Maturing
----------------------------------------------------------------------------------
Weighted Weighted
Under 1 Average 1-5 Average
Year Yield Years Yield
--------------- ---------------- ---------------- ---------------
U.S. Government and
federal agency obligations $ 33,831 6.18% $ 36,041 6.45%
Other 5,634 (1) 5.80% 1,743 4.89%
--------------- ----------------
Total $ 39,465 6.13% $ 37,784 6.38%
=============== ================
Contractually Maturing
-------------------------------------------------------------------------------------
Weighted Weighted
6-10 Average Over 10 Average
Years Yield Years Yield
--------------- ---------------- --------------- ---------------
U.S. Government and
federal agency obligations $ 0 % $ --- %
Other 68 6.50% ---
--------------- ---------------
Total $ 68 6.50% $ 0
=============== ===============
- ------------------
(1) Consists of a mutual fund of adjustable rate mortgage-backed
securities, all of which adjust at least annually.
22.
24
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. During 1995 and 1996 the Bank also utilized borrowings from
the FHLB as a source of funds.
Deposits. The Bank's 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. In addition, Iberia has supplemented its traditional deposit
activities with acquisitions from the RTC in 1989, 1990 and 1991. 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 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 Note 8 of the Notes to Consolidated Financial Statements.
23.
25
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.
December 31,
-------------------------------------------------------------------------------
1997 1996 1995
------------------------ ---------------------- --------------------------
Percent Percent Percent
of Total of Total of Total
Amount Deposits Amount Deposits Amount Deposits
----------- ---------- --------- ---------- ---------- -------------
NOW account $ 83,282 10.70% $ 76,991 10.13% $ 32,472 7.30%
Money market accounts 73,076 9.38% 58,669 7.72% 32,204 7.24%
Non-interest-bearing
checking accounts 44,862 5.76% 33,884 4.46% 9,124 2.05%
-------- ------ -------- ------- -------- ------
Total demand deposits 201,220 25.84% 169,544 22.31% 73,800 16.59%
-------- ------ -------- ------- -------- ------
Passbook savings deposits 109,532 14.07% 119,685 15.74% 49,920 11.23%
------ ------- ------
Certificate of deposit
account:
Less than 6 months 175,590 22.54% 11,099 1.46% 16,101 3.62%
6 - 12 months 126,375 16.23% 60,766 7.98% 45,211 10.17%
13 - 36 months 157,581 20.24% 261,151 34.35% 119,263 26.83%
More than 36 months 8,397 1.08% 138,039 18.16% 140,305 31.56%
-------- ------ -------- ------- -------- ------
Total certificates 467,943 60.09% 471,055 61.95% 320,880 72.18%
-------- ------ -------- ------- -------- ------
Total deposits 778,695 100.00% 760,284 100.00% 444,600 100.00%
-------- -------- --------
The following table sets forth the activity in the Bank's deposits during
the periods indicated.
Year Ended December 31,
--------------------------------------------
1997 1996 1995
-------------- ------------ -----------
Beginning balance $ 760,284 $ 444,600 $ 434,443
Deposits acquired - 288,290 -
Net increase (decrease)
before interest credited (8,329) 7,869 (3,197)
Interest credited 26,740 19,525 13,354
--------- --------- ---------
Net increase (decrease) in
deposits 18,411 315,684 10,157
--------- --------- ---------
Ending balance $ 778,695 $ 760,284 $ 444,600
--------- --------- ---------
24.
26
The following table sets forth by various interest rate categories the
certificates of deposit with the Bank at the dates indicated.
December 31,
------------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in Thousands)
0.00% to 2.99% $ 90 $ 100 $ -
3.00% to 3.99% 2,665 706 3,840
4.00% to 4.99% 88,826 90,768 63,805
5.00% to 5.99% 275,302 258,860 162,619
6.00% to 6.99% 95,824 107,022 74,540
7.00% to 7.99% 5,068 13,429 15,953
8.00% and over 168 170 123
-------- -------- --------
$467,943 $471,055 $320,880
The following table sets forth the amount and maturities of the Bank's
certificates of deposit at December 31, 1997.
Over One Over Two
Year Years
One Year and Through Through Over Three
Less Two Years Three Years Years
------------- ----------- ----------- -------------
(Dollars in Thousands)
2.00% to 3.99% 2,672 66 0 17
4.00% to 4.99% 75,449 7,638 5,504 235
5.00% to 6.99% 222,492 87,324 32,471 28,839
7.00% to 8.99% 1,352 459 2,579 846
------- ------- ------- -------
301,965 95,487 40,554 29,937
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. During 1995 and 1996, the Company borrowed $77.5 million and $8.2
million, respectively, primarily to fund long term fixed-rate mortgage loans.
See Note 9 of the Notes of Consolidated Financial Statements.
25.
27
SUBSIDIARIES
Iberia only has one active, wholly owned subsidiary, Iberia Financial
Services, Inc. ("IFSI"). At December 31, 1997, lberia's equity investment in
IFSI was $1.1 million and IFSI had total assets of $1.2 million. For the years
ended December 31, 1997 and 1996, IFSI Services had total revenue of $663,000
and $210,000, respectively and a net income of $182,000 in 1997 and $131,000 in
1996. See Note 1 of the Notes to Consolidated Financial Statements. The business
of IFSI consists of acting as a broker for the sale of annuities and certain
other securities to the general public. IFSI 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 which 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 356 full-time employees and 39 part-time employees as of
December 31, 1997. 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
which 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 is 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
26.
28
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.
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.
27.
29
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-weighting 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
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, 1997, 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 is 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 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 Bank and their operations.
28.
30
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 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 by 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 SAIF-assessable deposits as of March 31,
1995, which was collected on November 27, 1996. Iberia's one-time special
assessment amounted to $2.9 million pre-tax. The payment of such special
assessment had the effect of immediately reducing Iberia's capital by $1.9
million after tax. Jefferson was also subject to 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. The Bank's deposit
insurance premiums, which have amounted to 23 basis points will be reduced to
6.4 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.
29.
31
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 II) 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 risk-weighted assets. Overall, the amount of capital counted
toward supplementary capital cannot exceed 100% of core capital. At December 31,
1997, 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 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.
30.
32
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. 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, is no longer permitted to make additions to its tax
bad debt reserve under the percentage of taxable income method, or to use the
experience method. Such legislation also requires Iberia to realize increased
tax liability over a period of at least six years, beginning in 1996, relating
to Iberia'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. The Bank is now required to use the specific charge off method
for its bad debt deduction At December 31, 1997, the federal income tax
reserves of Iberia included $14.8 million for which no federal income tax has
been provided, which represents deductions for bad debts in years prior to 1987
under the percentage of taxable income method allowed at the time. 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.
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).
31.
33
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, 1997 the Company had a
federal and state net operating loss carryover of $1.2 million million and
$451,000, respectively, which were 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 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 1994, 1995 and 1996 are open under the statute of limitations and are
subject to review by the IRS. In addition, the 1994, 1995 and 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 based on capital and long term debt. 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 bank's capitalized earnings, plus (b) 80% of
the bank's taxable stockholders' equity, and to subtract from that figure 50% of
the bank's real and personal property assessment. Various items may also be
subtracted in calculating a bank's capitalized earnings.
32.
34
ITEM 2. PROPERTIES.
The following table sets forth certain information relating to the Bank's
offices at December 31, 1997.
Net Book Value of
Property and
Leasehold
Improvements Deposits
Owned or at at
Location Leased December 31, 1997 December 31, 1997
- ---------------------------------------- ----------- ---------------------- -----------------
(In Thousands)
1101 E. Admiral Doyle Drive, New Iberia Owned 3,231 186,176
1427 W. Main Street, Jeanerette Owned 196 28,736
403 N. Lewis Street, New Iberia Owned 360 53,287
1205 Victor II Boulevard, Morgan City Owned 355 18,331
1820 Main Street, Franklin (1) Leased 78 6,997
301 E. St. Peter Street, New Iberia Owned 1,084 24,327
700 Jefferson Street, Lafayette Owned 294 25,252
576 N. Parkerson Avenue, Crowley Owned 440 36,356
200 E. First Street, Kaplan Owned 134 24,740
1012 The Boulevard, Rayne Owned 222 11,609
500 S. Main Street, St Martinville Owned 71 12,170
1101 Veterans Memorial Drive, Abbeville Leased 1 6,582
150 Ridge Road, Lafayette Owned 74 14,328
2130 W. Kaliste Saloom, Lafayette Owned 1,178 16,723
2110 W. Pinhook Road, Lafayette Owned 2,795 65,743
2602 Johnston Street, Lafayette (1) Leased 325 17,350
2240 Ambassador Caffery, Lafayette Leased 162 6,120
4510 Ambassador Caffery, Lafayette Leased 163 3,260
2723 W. Pinhook Road Leased 179 550
1011 Fourth Street, Gretna Owned 924 77,908
3929 Veterans Blvd., Metairie Leased 20 27,524
9300 Jefferson Hwy., River Ridge Owned 499 38,558
2330 Barataria Boulevard, Marrero Owned 319 37,359
4626 General De Gaulle, New Orleans Owned 245 13,611
111 Wall Boulevard, Gretna Owned 290 21,417
1820 Barataria Blvd. Marrero Owned 157 2,855
4041 Williams Blvd. Kenner Leased 185 826
---------- ---------
$ 13,981 $ 778,695
- ------------------
(1) Building owned, ground leased.
33.
35
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 1997 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 1997 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 6
to 18 of the Registrant's 1997 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 1997 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 1998 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.
36
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, 1997 and 1996.
Consolidated Statements of Income for the Fiscal Periods
Ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Changes in Shareholders' Equity
for the Fiscal Periods Ended December 31, 1997, 1996 and
1995.
Consolidated Statements of Cash Flows for the Fiscal Periods ended
December 31, 1997, 1996 and 1995.
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.
Exhibit Index
- -------------
Page
----
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 15, 1995 ***
10.4 Severance Agreement among ISB Financial Corporation,
IBERIABANK and Wayne Robideaux dated February 15,
1995 (representative of similar
agreements entered into with Scott T. Sutton,
William M. Lahasky, Johnny Ballatin, Donald Lee
and Ronnie Foret) **
13.0 1997 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 LLP
27.0 Financial Data Schedule
(*) 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 10-K for the year ended December 31,
1997.
35.
37
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
By: /s/ Larrey G. Mouton
---------------------------
March 24, 1998 Larrey G. Mouton
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 March 24, 1998
- ---------------------------- Officer and Director --------------
Larrey G. Mouton (principal executive officer)
/s/ John J. Ballatin Executive Vice President March 24, 1998
- ---------------------------- (principal financial and --------------
John J. Ballatin accounting officer)
/s/ Henry J. Dauterive, Jr. Chairman of the Board March 26, 1998
- ---------------------------- --------------
Henry J. Dauterive, Jr.
/s/ Emile J. Plaisance, Jr. Vice Chairman of the Board March 24, 1998
- ---------------------------- --------------
Emile J. Plaisance, Jr.
/s/ Elaine D. Abell Director March 26, 1998
- ---------------------------- --------------
Elaine D. Abell
/s/ Harry V. Barton, Jr. Director March 26, 1998
- ---------------------------- --------------
Harry V. Barton, Jr.
Director
- ---------------------------------------- --------------
William R. Bigler
36.
38
/s/ Cecil C. Broussard Director March 24, 1998
- ------------------------- --------------
Cecil C. Broussard
/s/ William H. Fenstermaker Director March 26, 1998
- ---------------------------- --------------
William H. Fenstermaker
/s/ Ray Himel Director March 26, 1998
- -------------------------------- --------------
Ray Himel
Director
- -------------------------------- --------------
Karen Knight
/s/ E. Stewart Shea, III Director March 26, 1998
- ------------------------------- --------------
E. Stewart Shea, III
/s/ Guyton H. Watkins Director March 25, 1998
- ------------------------------- --------------
Guyton H. Watkins
/s/ Louis J. Tamporello, Sr. Director March 26, 1998
- ------------------------------- --------------
Louis J. Tamporello, Sr.
37.