The troubles of ISB Financial Corp., a Louisiana thrift that converted to a bank charter in 1996, illustrate the difficulty of making such a switch.

Martin Friedman, an analyst at Friedman, Billings Ramsey & Co. in Arlington, Va., said he expects ISB's difficulties to be shared by the growing number of thrifts that see greener pastures in commercial banking.

"I would say at least half the thrifts in the country are considering changing into banks," Mr. Friedman said.

Since it went public in 1995, $1.4 billion-asset ISB of New Iberia has aggressively bought bank offices and branches to bulk up its commercial banking business. In 1996 it bought two Louisiana banking companies - $73 million-asset Royal Bank Group of Acadiana and $264 million-asset Jefferson Bancorp of Gretna. In 1998 it purchased 17 branches of First Commerce Corp.

But the company is paying a price for its acquisitiveness and its drive to transform itself into a bank.

Last Thursday ISB announced that it would add $1.6 million to its loan-loss reserves, including $238,000 for specifically identified credits. In addition, ISB said it would have severance expenses as the result of firing 22 people from its staff of 580.

The restructuring will cause ISB's fourth-quarter earnings to drop 28%.

In addition, the company said its equity will decline by $4 million, from $120 million, because of a reclassification of $190 million in securities to "available for sale" from "held to maturity." The move will give the bank more liquidity but will not directly affect earnings.

Management said that the bank's "inherent" loan portfolio risk increased as the portfolio changed to include more commercial loans and less mortgages, Mr. Friedman said. Risk also increased because of continued weakness in business sectors in which the bank had made loans, and the acquisition of unseasoned loan portfolios.

Daryl G. Byrd, president, said that the restructuring would result in savings of $1.2 million in 2000 and approximately $2 million beginning in 2001.

In response to the announcement, Mr. Friedman, who has had a "buy" rating on the company for the last three years, reduced his 1999, 2000, and 2001 ISB earnings estimates, and slashed his rating on the company to "accumulate" on Thursday.

"Our perception is based on the market's tendency to react negatively toward companies announcing restructurings," he wrote in his report.

Mr. Friedman said that such difficulties are not uncommon when a thrift is changing into a bank. "However, we will take a wait-and-see approach to IBS efforts," he said.

It is not difficult to understand why a thrift would want to become a bank, said Mr. Friedman. "The thrift business, or mortgage business, is becoming more like a commodity every day. The margins are less and it is hard to make money unless you are big and efficient.

"Thrifts of every size are trying to become more bank-like," he said. "Some buy bank branches, some buy entire banks, and others hire former bankers to head their companies."

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