<PAGE>
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
FOR THE FISCAL YEAR ENDED: SEPTEMBER 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No.: 0-24862
IBS FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
New Jersey 22-3301933
- ------------------------------------------- -------------------------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
1909 East Route 70
Cherry Hill, New Jersey 08003
- ------------------------------------------- -------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (609) 424-1000
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.01 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 to 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 to this
Form 10-K. [X]
As of December 5, 1997, the aggregate market value of the 9,032,289 shares
of Common Stock of the Registrant issued and outstanding on such date, which
excludes 1,905,038 shares held by employee benefit plans and by all directors
and officers of the Registrant as a group, was approximately $152.4 million.
This figure is based on the closing trade price of $16.875 per share of the
Registrant's Common Stock on December 5, 1997.
Number of shares of Common Stock outstanding as of December 5, 1997:
10,937,327
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended
September 30, 1997 are incorporated into Parts II and IV of the Form 10-K.
<PAGE>
PART I.
ITEM 1. BUSINESS
GENERAL
IBS Financial Corp. (the "Company") is a New Jersey corporation and sole
stockholder of Inter-Boro Savings and Loan Association (the "Association") which
converted to the stock form of organization in October 1994. The only
significant assets of the Company are its investments in the capital stock of
the Association, the Company's loan to an employee stock ownership plan, and
certain U.S. Government Agency securities and interest-bearing deposits.
The Association is a New Jersey chartered stock savings and loan association
which conducts business from ten offices located in Camden, Burlington and
Gloucester Counties, New Jersey. The Association's operations date back to 1890.
The Association's deposits are insured by the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") to the maximum
extent permitted by law.
The Company has traditionally offered a variety of savings products to its
retail customers. The Company invests its funds in U.S. Government, U.S.
Government agency and mortgage-backed securities, other short term investments
and has concentrated its lending activities on real estate loans secured by
single (i.e., "one-to-four") family residential properties. In fiscal 1996, the
Company also expanded its investment in commercial real estate loans. The
commercial real estate loans originated are collateralized by small professional
and medical office buildings, commercial retail establishments and religious
organizations in its market area. In addition and to a lesser degree,
construction loans are originated to construct primarily single family
residences. In the past, the Company has also purchased whole residential
mortgage loans and participation interests in commercial real estate projects
located principally in New Jersey.
During fiscal 1996, the Company began emphasizing the origination of single
family residential loans and changed the mix of its origination to include more
commercial real estate loans in the local marketplace. In addition, the Company
continued to reduce its liquid assets by reinvesting the proceeds of maturing
investments into mortgage-backed securities generally with maturities of five
and seven years. This was designed to increase the Company's yield on its loan
portfolio. During fiscal 1996, however, the Company experienced heavy repayments
of higher yielding residential loans and mortgage-backed securities that were
reinvested in lower yielding loan and mortgage-backed securities. As a result,
the Company's net interest margin was pressured, decreasing to 3.44% for the
year ended September 30, 1996 from 3.77% during fiscal 1995.
During fiscal 1997, the Company continued to emphasize the origination of
single-family residential loans and commercial real estate loans. The Company
also continued to experience relatively heavy repayments of higher yielding
residential loans and mortgage-backed securities that were reinvested in
lower yielding loans and mortgage-backed
<PAGE>
securities. In addition, the Company's net interest-earning assets declined
by approximately $20 million, principally reflecting the shares repurchased
during the fiscal year. This resulted in a decrease of 30 basis points in the
Company's net interest margin to 3.14% for the year ended September 30, 1997.
Financial highlights of the Company include:
- Profitability. Net income totalled $5.8 million, $4.5 million and $9.9
million for the fiscal years ended September 30, 1997, 1996, and 1995,
respectively. Net income during fiscal 1996 was impacted by a one-time
special assessment of $3.7 million ($2.4 million after tax) to
recapitalize the SAIF. See Note 18 of the Notes to Consolidated Financial
Statements incorporated by reference in Item 8 hereof. The Company manages
its net interest margin and maintains relatively low non-interest expense
levels and high asset quality.
- Asset Quality. Management of the Company believes that high asset quality
is the key to long-term financial strength. Stringent loan underwriting
and investment guidelines applied by the Association have resulted in a
portfolio of high quality loans and investments. At September 30, 1997,
single-family residential loans comprised 87.9% of the Association's total
loan portfolio. As of that date, total non-performing loans and troubled
debt restructurings constituted .46% of total loans and total
nonperforming assets and troubled debt restructurings were .13% of total
assets.
- Capital. The Company currently exceeds all minimum regulatory capital
requirements of the Office of Thrift Supervision ("OTS"). At September 30,
1997, it had tangible, core, and risk-based capital ratios of 17.24%,
17.24% and 61.60%, respectively.
- Retail Deposit Base. The Company has ten offices located in Camden,
Burlington and Gloucester Counties, New Jersey. It provides a full range
of deposit products and other services to its customers through this
branch network. At September 30, 1997, 25.5% of the Association's deposit
base of $567.4 million consisted of core deposits, which include passbook,
money market and NOW accounts.
The Company as a savings and loan holding company is subject to examination
and regulation by the OTS and the New Jersey Department of Banking (the
"Department"). The Association is also subject to examination and comprehensive
regulation by the Department and by the OTS. The Association is also regulated
by the FDIC, the administrator of the SAIF. The Association is subject to
certain reserve requirements established by the Board of Governors of the
Federal Reserve System ("Federal Reserve Board") and is a member of the Federal
Home Loan Bank ("FHLB") of New York, which is one of the 12 regional banks
comprising the FHLB System.
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LENDING ACTIVITIES
GENERAL. The Association's lending operations follow the traditional
pattern of primarily emphasizing the origination of single-family residential
loans for portfolio retention and to a lesser degree, the origination of
commercial real estate loans, construction loans on residential properties and
consumer loans, including home equity or improvement loans. In past years, the
Association has also purchased a relatively small amount of participation
interests in commercial real estate loans.
The Association's primary market area consists primarily of Camden County
and Burlington County and, to a significantly lesser extent, Gloucester County
in southern New Jersey. Substantially all of the Association's residential
mortgage loans are secured by properties located in New Jersey.
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<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Association's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
September 30,
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1997 1996 1995 1994
--------------------- --------------------- --------------------- ---------------------
Amount % Amount % Amount % Amount %
---------- --------- ---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real estate loans:
Single-family........ $ 184,498 87.85% $ 164,717 89.02% $ 132,251 93.28% $ 131,423 93.46%
Commercial........... 24,568 11.70 17,935 9.69 3,985 2.81 3,525 2.51
Commercial
participations...... -- -- 1,613 .87 4,563 3.22 4,916 3.50
Construction......... 261 .12 1,256 .68 1,889 1.33 2,801 1.99
Consumer and other
loans................ 3,720 1.77 3,285 1.78 2,741 1.93 2,073 1.47
---------- --------- ---------- --------- ---------- --------- ---------- ---------
Total loans........ 213,047 101.44 188,806 102.04 145,429 102.57 144,738 102.93
Less:
Allowance for loan
losses.............. (1,064) (.51) (1,024) (.55) (994) (0.70) (530) (0.38)
Loans in process..... (78) (.03) (1,179) (.64) (1,672) (1.18) (2,618) (1.86)
Deferred loan fees... (1,897) (.90) (1,572) (.85) (982) (0.69) (972) (0.69)
Unearned interest.... -- -- -- -- -- -- -- --
---------- --------- ---------- --------- ---------- --------- ---------- ---------
Loans receivable,
net............... $ 210,008 100.00% $ 185,031 100.00% $ 141,781 100.00% $ 140,618 100.00%
---------- --------- ---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- --------- ---------- ---------
<CAPTION>
1993
---------------------
Amount %
---------- ---------
<S> <C> <C>
Real estate loans:
Single-family........ $ 146,556 93.34%
Commercial........... 3,742 2.38
Commercial
participations...... 6,286 4.00
Construction......... 2,004 1.28
Consumer and other
loans............... 2,276 1.44
---------- ---------
Total loans........ 160,864 102.44
Less:
Allowance for loan
losses............... (1,669) (1.06)
Loans in process..... (1,271) (0.81)
Deferred loan fees... (893) (0.57)
Unearned interest.... (1) --
---------- ---------
Loans receivable,
net............... $ 157,030 100.00%
--------- ----------
---------- ---------
</TABLE>
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<PAGE>
CONTRACTUAL MATURITIES. The following table sets forth the scheduled
contractual maturities of the Association's loan portfolio at September 30,
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 Association's loan portfolio.
<TABLE>
<CAPTION>
Real Estate Loans
--------------------------------------------- Consumer and
Single-Family Commercial(1) Construction Other Loans Total
------------ -------------- --------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Amounts due in:
One year or less....................... $ 16,738 $ 1,341 $ 261 $ 2,557 $ 20,897
After one year through three years..... 4,764 -- -- 184 4,948
After three years through four years... 8,877 -- -- 246 9,123
After four years through ten years..... 18,100 212 -- 275 18,587
After ten years through twenty years... 51,830 5,679 -- 458 57,967
More than twenty years................. 84,189 17,336 -- -- 101,525
------------ ------- ----- ------ ----------
Total(2)............................. $ 184,498 $ 24,568 $ 261 $ 3,720 $ 213,047
------------ ------- ----- ------ ----------
------------ ------- ----- ------ ----------
Interest rate type for amounts due after
one year:
Fixed.................................. $ 144,080 $ 23,227 $ -- $ 1,163 $ 168,470
Adjustable............................. 23,680 -- -- -- 23,680
------------ ------- ----- ------ ----------
Total................................ $ 167,760 $ 23,227 $ -- $ 1,163 $ 192,150
------------ ------- ----- ------ ----------
------------ ------- ----- ------ ----------
</TABLE>
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(1) Includes commercial participations.
(2) Does not include adjustments relating to loans in process, the allowance for
loan losses, deferred loan fees and unearned interest.
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<PAGE>
Scheduled contractual repayment of loans does not reflect the expected term
of the Association's loan portfolio. The expected average life of loans is
substantially less than their contractual terms because of prepayments and
due-on-sale clauses, which give the Association 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 circumstance, the weighted
average yield on loans decreases as higher-yielding loans are repaid or
refinanced at lower rates.
Loan Origination, Purchase and Sales Activity. During fiscal 1996, there was
a net increase of $43.4 million in balances as loan originations and purchases
of $70.2 million exceeded loan repayments and other net deductions of $26.8
million. During fiscal 1997, there was a net increase of $24.2 million as loan
originations and purchases of $48.6 million exceeded loan repayments and other
deductions of $24.4 million. Reflecting the competitive loan origination
environment, loan originations and purchases decreased by $21.6 million from the
prior fiscal year.
One of the Company's long range objectives is to increase loan production
volumes. To accomplish this objective, the Association has hired two loan
solicitors whose compensation is based on a commission for loan production. In
addition, origination points charged to the loan customer were reduced during
fiscal 1995 to be very competitive in the Association's lending area. The
Association also adopted a more aggressive loan pricing posture and initiated a
sales call program during fiscal 1995 that requires periodic and repetitive
calls to area real estate brokers and builders. These programs have helped the
Association increase loan originations compared to fiscal 1995's level.
During the latter part of fiscal 1995 loan production volume began to
increase when compared to earlier in the fiscal year. During fiscal 1996 loan
production volume increased significantly as the Company's initiatives began to
have an impact. In addition, the Company changed the mix of its lending products
to increase the amount of higher rate commercial real estate loans originated.
These commercial real estate loans, many of which were secured by local medical
and professional offices, represented 11.7% of total loan balances at September
30, 1997 compared to 10.6% and 6.0% at September 30, 1996 and 1995,respectively.
Funding for these commercial loan originations was obtained from new borrowings
in the form of FHLB advances.
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<PAGE>
The following table shows the loan origination, purchase and sale activity
of the Association during the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ----------
(In Thousands)
Gross loans at beginning of period........................................... $ 188,806 $ 145,429 $ 144,738
----------- --------- ----------
Loan originations:
Real estate:
Single-family............................................................. 38,025 48,836 15,506
Commercial................................................................ 7,845 14,734 220
Construction.............................................................. -- 594 --
---------- ---------- ----------
Total real estate loans originated....................................... 45,870 64,164 15,726
Consumer and other originations.............................................. 2,562 2,389 1,868
---------- ---------- ----------
Total loans originated for investment.................................... 48,432 66,553 17,594
Purchase of whole loans and participations................................... 166 3,643 582
---------- ---------- ----------
Total originations and purchases of loans................................ 48,598 70,196 18,176
---------- ---------- ----------
Deduct:
Principal loan repayments and prepayments................................. (23,982) (22,575) (16,390)
Transferred to real estate owned.......................................... (150) (56) --
Loans sold................................................................ (225) (4,188) --
Loans assigned to and funded by Association pension fund.................. -- -- (1,095)
---------- ---------- ----------
Subtotal................................................................. (24,357) (26,819) (17,485)
---------- ---------- ----------
Net increase in loans........................................................ 24,241 43,377 691
---------- ---------- ----------
Gross loans at end of period................................................. $ 213,047 $ 188,806 $ 145,429
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Applications for residential mortgage and consumer loans are taken at all of
the Association's branch offices while applications for commercial real estate
loans are made at the Association's main office. Residential mortgage loan
applications are primarily developed from referrals from real estate brokers and
builders, existing customers and walk-in customers. Commercial real estate loan
applications are obtained primarily from previous borrowers as well as
referrals.
The Association's lending policy provides that residential mortgages up to
$350,000 may be approved with the signatures of three designated loan officers
who have been approved by the Chief Executive Officer or the General Loan
Committee. The General Loan Committee has been authorized by the Board to grant
loans up to $1.0 million, with loans in excess of this amount required to be
presented to the full Board for review and
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<PAGE>
approval. Notwithstanding the foregoing, it has been the practice of the
Association's management to present all loans which are not single-family
residential loans to the General Loan Committee and/or the Board of Directors
for review and approval, and to have the Board of Directors review any loan
application which would exceed $500,000. Under applicable regulations, the
maximum amount of loans that the Association may make to any one borrower,
including related entities, is limited to 15% of unimpaired capital and
surplus, which amounted to $19.2 million at September 30, 1997. In addition,
the Association limits lending on any one loan to $5.0 million unless
approved specifically by Board action. As of September 30, 1997, the
Association had nine loans outstanding with principal balances in excess of
$1.0 million.
Historically, the Association has originated substantially all of the loans
retained in its portfolio. Although the Association has not been a seller of
loans in the secondary market, substantially all of the residential real estate
loans originated by the Association have been under terms, conditions and
documentation which permit their sale to the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
The Association has not been an active purchaser of loans. However, the
Association has in the past purchased whole loans on residential properties
located in New Jersey and may do so again if presented with what management
believes is a satisfactory lending opportunity. The Association has also
previously purchased loan participations secured by commercial real estate
located primarily in New Jersey, although the Association has also purchased
participations elsewhere. Such loans were presented to the Association from
contacts primarily at other financial institutions, particularly those which
have previously done business with the Association. At September 30, 1997, all
such loans had been paid off and none of the Association's total loans
receivable consisted of participation interests in loans purchased from other
financial institutions. The Association will also consider the acquisition of an
interest in a commercial real estate loan in its general market area if
presented with what management believes is a satisfactory lending opportunity
which is consistent with the Association's underwriting standards.
SINGLE-FAMILY RESIDENTIAL REAL ESTATE LOANS. Historically, savings
institutions such as the Association have concentrated their lending activities
on the origination of loans secured primarily by first mortgage liens on
existing single-family residences. At September 30, 1997, $184.5 million or
87.9% of the Association's total loan portfolio consisted of single-family
residential real estate loans, substantially all of which are conventional
loans.
The Association historically has and continues to emphasize the origination
of fixed-rate loans with terms of 15 years or 30 years. Although such loans are
originated with the expectation that they will be maintained in portfolio, these
loans are originated only under terms, conditions and documentation which permit
their sale in the secondary market. The Association also makes available
single-family residential adjustable-rate mortgages ("ARMs") which provide for
periodic adjustments to the interest rate, but such loans have
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<PAGE>
never been as widely accepted in the Association's market area as the
fixed-rate mortgage loan products. The ARMs currently emphasized by the
Association have up to 30-year terms and an interest rate which adjusts every
one or three years in accordance with a designated index. Such loans have a
2% cap on any increase or decrease in the interest rate per period, and there
is currently a limit of 6% on the amount that the interest rate can change
over the life of the loan. The Association has not offered below market or
"teaser" rates and has not engaged in the practice of using a cap on the loan
payments, which could allow the loan balance to increase rather than
decrease, resulting in negative amortization.
At September 30, 1997, approximately $160.8 million or 87.2% of the
single-family residential loans in the Association's loan portfolio consisted of
loans which provide for fixed rates of interest. Although these loans generally
provide for repayments of principal over a fixed period of 15 to 30 years, it is
the Association's experience that because of prepayments and due-on-sale
clauses, such loans generally remain outstanding for a substantially shorter
period of time.
Property appraisals on the real estate and improvements securing the
Association's single-family residential loans are made by independent appraisers
approved by the Association's Board of Directors. Appraisals are performed in
accordance with federal regulations and policies. The Association obtains title
insurance policies on most first mortgage real estate loans originated by it. If
title insurance is not obtained or is unavailable, the Association obtains an
abstract of title and title opinion. Borrowers also must obtain hazard insurance
prior to closing and, when required by the United States Department of Housing
and Urban Development, flood insurance. Borrowers may be required to advance
funds, with each monthly payment or principal and interest, to a loan escrow
account from which the Association makes disbursements for items such as real
estate taxes and mortgage insurance premiums as they become due.
The Association also purchases Federal Housing Administration ("FHA")
insured, fixed-rate individual whole loans secured by first liens on
single-family residential properties located in 'low and moderate income'
defined census tracts in the Association's primary market area. In order to
promote the program and to make it more affordable for eligible applicants,
loans are originated at a rate of 1/2 of 1% under the then applicable FNMA
rate for FHA mortgages, which rate reduction is passed directly on to the
borrower. Loans are underwritten and documented following standard FHA
procedures, and are subject to approval by the Association in its sole
discretion prior to purchase. At September 30, 1997, the Association had
purchased 21 loans aggregating $855,000.
COMMERCIAL REAL ESTATE LOANS. The Association also originates mortgage
loans for the acquisition and refinancing of commercial real estate properties.
At September 30, 1997, $24.6 million or 11.7% of the Association's total loan
portfolio consisted of loans secured by existing commercial real estate
properties. During fiscal 1997, the Association originated five loans
aggregating $7.8 million, which are secured by commercial real estate located in
New Jersey and Pennsylvania, and nine loans aggregating $14.7 million in fiscal
1996.
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<PAGE>
The majority of the Association's commercial real estate loans are secured
by local medical and professional office facilities and other office buildings,
small retail establishments and synagogues. These types of properties constitute
the majority of the Association's commercial real estate loan portfolio. The
Association's commercial real estate loan portfolio consists primarily of loans
secured by properties located in its primary market area.
Although terms vary, commercial real estate loans generally are amortized
over a period of 15-25 years. The Association's commercial real estate loans
(and loan participations) have a weighted average maturity of 5.9 years at
September 30, 1997. The Association will originate these loans either with fixed
interest rates or with interest rates which adjust in accordance with a
designated index, which generally is negotiated at the time of origination. As
part of the criteria for underwriting commercial real estate loans, the
Association generally imposes a debt coverage ratio (the ratio of net cash from
operations before payment of debt service to debt service) of at least 125%. It
is also the Association's general policy to obtain personal guarantees on its
commercial real estate loans from the principals of the borrower and, when this
cannot be obtained, to impose more stringent loan-to-value, debt service and
other underwriting requirements. At September 30, 1997 the Association's
commercial real estate loan portfolio consisted of nine loans with a principal
balance in excess of $1,000,000.
CONSTRUCTION LOANS. The Association will also originate loans to construct
primarily single-family residences, and, to a much lesser extent, loans to
acquire and develop real estate for construction of residential properties.
These construction lending activities generally are limited to the Association's
primary market area. At September 30, 1997, the Association had one construction
loan outstanding in the amount of $.3 million or .1% of the Association's total
loan portfolio, of which $.1 million had been disbursed. Construction loans
generally have maturities of 6 to 12 months, with interest payments being made
monthly. Thereafter, the Association will generally provide the permanent
financing arrangements. The loans are made with floating rates of interest based
upon the prime rate plus a margin. The Association also receives fees upon
issuance of the commitment which range from 1% to 3% of the commitment. Loan
proceeds are disbursed in stages after inspections of the project indicate that
such disbursements are for costs already incurred and added to the value of the
project.
Prior to making a commitment to fund a construction loan, the Association
requires an appraisal of the property by independent appraisers approved by the
Board of Directors. The Association uses qualified appraisers on all of its
construction loans. Loan officers of the Association also review and inspect
each project at the commencement of construction. In addition, the project is
inspected by a loan officer of the Association prior to every disbursement of
funds during the term of the construction loan. Such inspection includes a
review for compliance with the construction plan, including materials
specifications.
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<PAGE>
Construction lending is generally considered to involve a higher level of
risk as compared to single-family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on real estate developers and
managers. Moreover, a construction loan can involve additional risks because
of the inherent difficulty in estimating both a property's value at
completion of the project and the estimated cost (including interest) of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. The Association has attempted to minimize
the foregoing risks by, among other things, limiting the extent of its
construction lending generally and by limiting its construction lending to
residential properties. In addition, the Association has adopted underwriting
guidelines which impose stringent loan-to-value, debt service and other
requirements for loans which are believed to involve higher elements of
credit risk, by limiting the geographic area in which the Association will do
business and by working with builders with whom it has established
relationships or which have quality reputations.
ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Association
attempts to cure the deficiency by contacting the borrower and seeking the
payment. Late notices are sent and/or personal contacts are made. In most cases,
deficiencies are cured promptly. While the Association generally prefers to work
with borrowers to resolve such problems, when a mortgage loan becomes 90 days
delinquent, the Association 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. The Association
does not accrue interest on loans past due 90 days or more.
Real estate acquired by the Association as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until it is sold.
When a property is acquired, it is recorded at the lower of cost or fair value.
Fair value is generally determined through the use of independent appraisals.
Any write-downs resulting at acquisition are charged to the allowance for loan
losses. All costs incurred in maintaining the Association's interest in the
property are capitalized between the date the loan becomes delinquent and the
date of acquisition. After the date of acquisition, all costs incurred in
maintaining the property are expenses and costs incurred for the improvement or
development of such property are capitalized. As of September 30, 1997, the
Association's real estate owned amounted to $.1 million, which was subsequently
sold in October 1997.
Under generally accepted accounting principles, the Association 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
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<PAGE>
Association for economic or legal reasons related to the borrower's financial
difficulties grants a concession to the borrower that the Association would
not otherwise consider. 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. During the fiscal year ended September 30, 1994, the
Association participated in the restructuring of a commercial real estate
loan participation, which was accounted for as a troubled debt restructuring.
The property securing the loan was 99% leased as of September 30, 1995 and
the loan had been performing on a timely basis since December 1993.
Accordingly, the loan was treated as a performing loan at September 30, 1995.
During fiscal 1996, this loan was sold which generated a gain of $16,000. At
September 30, 1997, the Association had no troubled debt restructurings.
NON-PERFORMING ASSETS AND TROUBLED DEBT RESTRUCTURINGS. The following table
sets forth the amounts and categories of the Association's non-performing assets
and troubled debt restructurings at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(Dollars In Thousands)
Non-accruing loans:
Single-family residential(1)............................................. $ 818 $ 827 $ 663 $ 1,005 $ 895
Commercial participations................................................ -- -- -- -- 4,583
------ ------ ------ ------- -------
Total nonperforming loans............................................ 818 827 663 1,005 5,478
Real estate owned........................................................ 142 -- -- 819 --
------ ------ ------ ------- -------
Total nonperforming assets........................................... $ 960 $ 827 $ 663 $ 1,824 $ 5,478
------ ------ ------ ------- -------
------ ------ ------ ------- -------
Troubled debt restructurings............................................. $ -- $ -- $ -- $ 3,261 $ --
------ ------ ------ ------- -------
------ ------ ------ ------- -------
Total nonperforming loans and troubled debt restructurings as a
percentage of total loans.............................................. 0.46% 0.45% 0.47% 3.62% 3.49%
------ ------ ------ ------- -------
------ ------ ------ ------- -------
Total nonperforming assets and troubled debt restructurings as a
percentage of total assets............................................. 0.13% 0.11% 0.09% 0.77% 0.82%
------ ------ ------ ------- -------
------ ------ ------ ------- -------
</TABLE>
- ------------------------
(1) Consists of an aggregate of 12, 11, 15, 16 and 16 loans at September 30,
1997, 1996, 1995, 1994 and 1993, respectively.
The Association's total non-performing assets and troubled debt
restructurings have declined from $5.5 million or .82% of total assets at
September 30, 1993 to $960,000 or .13% of total assets at September 30, 1997.
During the year ended September 1994, total non-performing assets declined by
$3.7 million or 66.7%, as the Association participated in
-12-
<PAGE>
the troubled debt restructuring of a commercial real estate participation and
took an additional non-performing commercial real estate loan participation
into REO after charging $1.3 million of its carrying value against the
allowance for loan losses. During the year ended September 30, 1995, total
non-performing assets declined by $1.2 million or 63.7% as the Association
sold the real estate owned and reduced single-family non-accruing loans.
During the year ended September 30, 1996, total non-performing assets
increased by $164,000 or 24.7% reflecting an increase in the amount of
non-accruing single-family loans. During the year ended September 30, 1997,
total non-performing assets increased by $133,000 or 16.1% as a result of
real estate owned.
At September 30, 1997 and 1996, approximately $83,000 and $69,000 in gross
interest income, respectively, would have been recorded in the period then ended
on loans accounted for on a non-accrual and restructured basis if such loans had
been current in accordance with their original terms and had been outstanding
throughout the period or since origination if held for part of the period. For
the years ended September 30, 1997 and 1996, $40,000 and $45,000, respectively,
were included in net income for these same loans prior to the time they were
placed on non-accrual status. The Association had no accruing loans greater than
90 days delinquent.
ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses is maintained at a
level that management considers adequate to provide for potential losses based
upon an evaluation of known and inherent risks in the loan portfolio. Allowances
for loan losses are based on estimated net realizable value. Management's
periodic evaluation is based upon examination of the portfolio, past loss
experience, current economic conditions, the results of the most recent
regulatory examinations, and other relevant factors. While management uses the
best information available to make such evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluations.
-13-
<PAGE>
The following table summarizes changes in the allowance for loan losses
and other selected statistics for the periods presented.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Average loans, net................................... $ 197,308 $ 159,628 $ 138,619 $ 147,691 $ 177,364
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Allowance for loan losses, beginning of year......... $ 1,024 $ 994 $ 530 $ 1,669 $ 1,238
Charged-off loans(1)................................. -- -- -- (1,319) --
Recoveries on loans previously charged off........... -- -- 434 -- --
Provision for loan losses............................ 40 30 30 180 431
---------- ---------- ---------- ---------- ----------
Allowance for loan losses, end of period............. $ 1,064 $ 1,024 $ 994 $ 530 $ 1,669
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net loans charged-off to average loans, net.......... --% --% --% 0.89% --%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Allowance for loan losses to total loans............. .51% 0.55% 0.70% 0.38% 1.06%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Allowance for loan losses to nonperforming loans..... 130.1% 123.8% 149.91% 52.71% 30.51%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Allowance for loan losses to nonperforming loans and
troubled debt restructurings....................... 130.1% 123.8% 149.91% 12.41% 30.51%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) Comprised entirely of commercial participations.
During the year ended September 30, 1994, the Association took a
non-performing commercial participation into REO after charging off $1.3
million of its carrying value against the allowance for loan losses. In
addition, during the period, the Association participated in the troubled
debt restructuring of a commercial real estate participation. Primarily as a
result of such actions, during the year ended September 30, 1994, total
non-performing assets declined by $3.7 million or 66.7%, to $1.8 million. Due
to the relatively low level of non-performing assets in the Association's
portfolio in fiscal 1995, 1996 and 1997, the ratio of such allowance to total
non-performing loans increased during such period, from 30.5% at September
30, 1993 to 149.9% at September 30, 1995, 123.8% at September 30, 1996 and
130.1% at September 30, 1997. The Association believes that its allowance is
adequate based upon its actual loss experience, which has historically been
low due to its conservative underwriting and primary reliance on single
family residential loans.
-14-
<PAGE>
The following table presents the allocation of the allowance for loan
losses to the total amount of loans in each category listed at the dated
indicated.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994
---------------------- ---------------------- ------------------------ ------------------------
% of Loans % of Loans % of Loans % of Loans
in Each in Each in Each in Each
Category Category Category Category
to to to to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
--------- ----------- --------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real estate:
Single-family....... $ 750 87.85% $ 724 89.02% $ 699 93.28% $ 236 93.46%
Commercial
participations..... -- -- 16 0.87 252 3.22 250 3.50
Commercial.......... 300 11.70 274 9.69 40 2.81 41 2.51
Construction........ 2 .09 1 0.12 2 0.28 2 0.30
Consumer and other... 12 .36 9 0.30 1 0.41 1 0.23
--------- ----------- --------- ----------- ----- ----------- ----- -----------
Total............ $ 1,064 100.00% $ 1,024 100.00% $ 994 100.00% $ 530 100.00%
--------- ----------- --------- ----------- ----- ----------- ----- -----------
--------- ----------- --------- ----------- ----- ----------- ----- -----------
<CAPTION>
1993
---------------------
% OF LOANS
IN EACH
CATEGORY
TO
Amount TOTAL LOANS
--------- -----------
<S> <C> <C>
Real estate:
Single-family....... $ 246 93.33%
Commercial
participations..... 1,358 4.00
Commercial.......... 7 2.38
Construction........ 57 0.29
Consumer and other... 1 --
--------------------
Total............ $ 1,669 100.00%
--------------------
--------------------
</TABLE>
-15-
<PAGE>
INVESTMENT ACTIVITIES
GENERAL. The Association's investment activities are managed by the Chief
Executive Officer with the assistance of other senior officers designated by
the Board of Directors. These activities are conducted in accordance with a
written investment policy which is reviewed and approved by the Board of
Directors at least annually. The Association's Asset Liability Management
Committee ("ALCO") has been designated to work with management and the Board
to implement and achieve the investment plan goals and to report at least
quarterly to the Board in conjunction with its review of the Association's
overall GAP and interest rate risk position. As reflected in its investment
policy, the Association's investment objective is to maintain a balance of
high quality and diversified investments with a minimum of credit risk.
Accordingly, the Association seeks a competitive return from its investments,
but the rate of return is only one consideration which is weighed against the
Association's other goals and objectives of liquidity and operating in a
manner deemed by the Board to reflect safety and soundness.
The Association has authority to invest in various types of assets. The
Association's investment officers are authorized by the Board to: purchase or
sell U.S. Government securities and securities issued by agencies thereof;
purchase, sell or trade any securities qualifying as eligible liquidity;
purchase or sell bonds, securities and money market investments under
repurchase or reverse repurchase agreements; purchase mortgage-related and
asset-backed securities; purchase whole loans and participations in the
secondary mortgage market; invest in financial institution certificates of
deposit, Federal and term funds, bankers' acceptances and other authorized
investments; invest in various corporate securities and bonds that have at
least an "AA" rating by two nationally recognized debt rating services; and
invest in various mutual funds and certain equity issues as authorized by the
Board. The Board does not permit investments in highly speculative securities.
The Association's investments and mortgage-backed securities are
classified as either "held to maturity" or "available for sale." The
investments and mortgage-backed securities classified as held to maturity are
based upon the Association's intent and ability to hold such investments to
maturity at the time of investment in accordance with generally accepted
accounting principles. These investment securities and mortgage-backed
securities are carried at amortized cost, with any discount or premium
amortized to maturity. The investments and mortgage-backed securities
classified as available for sale are based upon the Association's intent that
such securities will be held for an indefinite period of time and may be sold
in response to market changes. These assets are carried at their estimated
fair value, which management has determined to be market value.
In accordance with a Financial Accounting Standards Board ("FASB")
pronouncement issued in 1995, the Association transferred certain securities
with an aggregate amortized cost of $199,401 from the classification of held
to maturity to available for sale in December 1995. See Notes 2, 4 and 5 of
the Notes to Consolidated Financial Statements in Item 8 hereof incorporated
herein by reference.
-16-
<PAGE>
INVESTMENT SECURITIES. The following table sets forth certain information
relating to the Association's investment securities held to maturity
portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
Carrying Value Market Value Carrying Value Market Value Carrying Value Market Value
-------------- ------------ -------------- ------------ -------------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities....... $ -- $ -- $ -- $ -- $ 49,977 $ 50,252
Obligations of U.S. government
corporations and agencies.... 25,000 25,000 26,366 26,378 114,994 115,275
Term deposits in FHLB.......... 2,859 2,859 346 346 76,374 76,374
------- ------------ ------- ------------ -------------- ------------
Total...................... $ 27,859 $ 27,859 $ 26,712 $ 26,724 $ 241,345 $ 241,901
------- ------------ ------- ------------ -------------- ------------
------- ------------ ------- ------------ -------------- ------------
</TABLE>
The Association had no investment securities available for sale at
September 30, 1997.
At September 30, 1997, all of the Association's investment securities
were due in one year or less. The weighted average yield on a fully tax
equivalent basis for the held to maturity portfolio at September 30, 1997 was
5.6%.
The decrease in investment securities at September 30, 1996 when compared
to September 30, 1995 reflects the Association's plan to reduce its liquid
assets. At September 30, 1996 and 1997, the Association did not have
investments in the debt and/or equity securities of any issuer other than the
U.S. Government and U.S. Government agencies and corporations.
MORTGAGE-BACKED SECURITIES PORTFOLIO. The Association maintains a
portfolio of mortgage-backed securities as 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-related 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 which are passed from the mortgage originators, 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 Association. 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 GNMA.
The FHLMC is a public corporation chartered by the U.S. Government and
owned by the 12 Federal Home Loan Banks 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. The FNMA is a private
corporation chartered by the U.S. Congress with a mandate to
-17-
<PAGE>
establish a secondary market for conventional 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 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. For example, the FNMA and the FHLMC currently limit their loans
secured by a single-family, owner-occupied residence to $214,600. To
accommodate larger-sized loans, and loans that, for other reasons, do not
conform to the agency programs, a number of private institutions have
established their own home-loan origination and securitization programs.
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, 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.
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
securities are more liquid than individual mortgage loans. Mortgage-backed
securities issued or guaranteed by FNMA or FHLMC (except interest-only
securities or the residual interests in collateralized mortgage obligations) are
weighted at no more than 20.0% for risk-based capital purposes, compared to a
weight of 50.0% to 100.0% for residential loans. See "Regulation--The
Association--Capital Requirements."
-18-
<PAGE>
The following table sets forth the composition of the Association's
mortgage-backed securities portfolio which includes both securities available
for sale and held at maturity at the dates indicated.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
FNMA................................................. $ 44,694 $ 41,468 $ 17,280 $ -- $ --
GNMA................................................. 111,661 131,632 142,054 105,482 128,427
FHLMC................................................ 306,270 278,435 151,549 76,344 4,724
Private.............................................. 674 726 870 1,065 1,526
---------- ---------- ---------- ---------- ----------
Total mortgage-backed securities(1)................. $ 463,299 $ 452,261 $ 311,753 $ 182,891 $ 134,677
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) Includes FNMA, GNMA and FHLMC securities held for sale at September 30, 1997
of $8,744, $13,239 and $111,937, respectively, or an aggregate of $133,920.
The following table sets forth the purchases and principal repayments of
the Association's mortgage-backed securities for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Beginning balance............................................................ $ 452,261 $ 311,753 $ 182,891
---------- ---------- ----------
Mortgage-backed securities purchased......................................... 80,077 217,687 164,236
Principal repayments......................................................... (70,135) (78,778) (35,710)
Unrealized gain, net of tax.................................................. 1,000 1,509 --
Deferred discounts, net...................................................... 96 90 336
---------- ---------- ----------
Net change................................................................... 11,038 140,508 128,862
---------- ---------- ----------
Ending balance............................................................... $ 463,299 $ 452,261 $ 311,753
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
At September 30, 1997, the weighted average contractual maturity of all
of the Association's mortgage-backed securities was in excess of 9.0 years
and the weighted average yield on the mortgage-backed securities portfolio
was 7.0%. The actual maturity of a mortgage-backed security is 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. 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
-19-
<PAGE>
prevailing mortgage interest rates generally is the most significant
determinant of the rate of prepayments. During periods of falling mortgage
interest rates, if the coupon rate of the underlying mortgages exceeds the
prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, the Association
may be subject to reinvestment risk because to the extent that the
Association's mortgage-backed securities amortize or prepay faster than
anticipated, the Association may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate. The declining yields earned
during recent periods is a direct response to falling interest rates and
accelerated prepayments. At September 30, 1997, of the $463.3 million of
mortgage-backed securities, an aggregate of $411.5 million were secured by
fixed-rate mortgage loans and an aggregate of $51.8 million were secured by
adjustable-rate mortgage loans.
In February 1992, the OTS adopted a policy statement which states, among
other things, that mortgage derivative products (including CMOs and CMO
residuals and stripped mortgage-backed securities) which possess average life
or price volatility in excess of a benchmark fixed-rate 30-year
mortgage-backed pass-through security are "high-risk mortgage
securities," are not suitable investments for depository institutions, must
be carried in the institution's trading account or as assets held for sale,
and must be marked to market on a regular basis. The Association has no "high
risk" mortgage securities at September 30, 1997 and has no present intention
to alter materially its investment policies and practices.
SOURCES OF FUNDS
GENERAL. The Association's principal source of funds for use in lending
and for other general business purposes has traditionally come from deposits
obtained through the Association's branch offices. The Association also
derives funds from amortization and prepayments of outstanding loans and
mortgage-backed securities and from maturing investment securities. The
Association also borrows from the FHLB of New York. The Association had $34.3
million of FHLB borrowings outstanding at September 30, 1997. Loan repayments
are a relatively stable source of funds, while deposits inflows and outflows
are significantly influenced by general interest rates and money market
conditions. During the year ended September 30, 1997, the Company's Board of
Directors provided management with the authority to borrow up to $150 million
from the Federal Home Loan Bank of New York.
DEPOSITS. The Association's current deposit products include passbook
accounts, negotiable order of withdrawal (NOW) accounts, money market deposit
accounts, demand deposit accounts and certificates of deposit ranging in
terms from seven days to seven years. The Association's deposit products also
include Individual Retirement Account ("IRA") and Keogh certificates and
passbook accounts.
The Association's deposits are obtained primarily from residents in its
primary market area of Camden, Burlington and Gloucester Counties in Southern
New Jersey. The
-20-
<PAGE>
Association to a lesser extent obtains deposits from other locations in the
Greater Philadelphia metropolitan area. The Association attracts deposit
accounts by offering a wide variety of accounts, competitive interest rates,
and convenient branch office locations and service hours. The Association
primarily utilizes print media to attract new customers and savings deposits.
The Association has never utilized the services of deposit brokers and had no
brokered deposits at September 30, 1997. During fiscal 1995, the Association
acquired three automated teller machines, two of which are located at branch
offices in Camden County and one at a Burlington County branch office. The
Association is affiliated with the MAC-Registered Trademark- ATM System. In
October 1996, the Association increased its branch network from 8 offices to
10 offices. These new offices, which are full service branches equipped with
automated teller machines, are located in Gloucester Township and Voorhees
Township, Camden County, New Jersey. Of the Associations 10 offices, five are
currently equipped with automated teller machines.
The Association 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
Association in recent years has experienced disintermediation of deposits
into competing investment products. However, the disintermediation
experienced has been consistent with the Association's strategy of
controlling growth.
-21-
<PAGE>
The following table shows the distribution of, and certain other information
relating to, the Association's deposits by type of deposit as of the dates
indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
Amount Percent Amount Percent Amount Percent
---------- ----------- ---------- ----------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and club accounts............................ $ 57,638 10.2% $ 59,323 10.4% $ 62,950 11.1%
Money market.......................................... 63,248 11.2 70,023 12.2 74,933 13.3
Certificate of deposit................................ 422,505 74.3 417,773 73.1 403,736 71.4
NOW accounts.......................................... 23,570 4.2 23,886 4.2 22,909 4.1
Accrued interest...................................... 414 .1 361 .1 382 .1
---------- ----- ---------- ----- ---------- -----
Total deposits at end of period..................... $ 567,375 100.0% $ 571,366 100.0% $ 564,910 100.0%
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
</TABLE>
-22-
<PAGE>
The following table presents, by various interest rate categories, the
amount of certificates of deposit at September 30, 1997 and 1996, and the
amounts at September 30, 1997 which mature during the periods indicated.
<TABLE>
<CAPTION>
Amounts at September 30, 1997
September 30, Maturing Within
Certificates of ---------------------- ------------------------------------------------
Deposit 1997 1996 One Year Two Years Three Years Thereafter
- ------------------------------------------------- ---------- ---------- --------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
2.00% to 4.00% $ 7,007 $ 8,522 $ 1,895 $ 1,234 $ 1,227 $ 2,651
4.01% to 6.00% 367,448 337,123 252,595 78,173 17,412 19,268
6.01% to 8.00% 46,292 70,155 24,622 10,513 3,506 7,651
8.01% to 10.0% 1,758 1,973 582 1,138 38 --
---------- ---------- --------- ----------- ----------- -----------
Total certificate accounts $ 422,505 $ 417,773 $ 279,694 $ 91,058 $ 22,183 $ 29,570
---------- ---------- --------- ----------- ----------- -----------
---------- ---------- --------- ----------- ----------- -----------
</TABLE>
-23-
<PAGE>
The following table presents the average balance of each deposit type and
the average rate paid on each deposit type for the periods indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -----------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
-------- -------- ------- --------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and
club
accounts.... $ 57,891 2.74% $ 60,561 2.84% $ 67,810 2.94%
Money
market...... 67,770 2.82 72,798 2.90 83,482 3.09
Certificates
of deposit.. 419,513 5.46 415,447 5.41 394,704 5.06
NOW accounts.. 24,517 1.80 24,020 1.92 23,742 2.07
-------- --------- --------
Total
deposits.... $569,691 4.72 $572,826 4.67 $569,738 4.39
-------- --------- --------
-------- --------- --------
</TABLE>
The following table sets forth the Association's net savings flows during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Beginning balance............................................................ $ 571,366 $ 564,910 $ 603,080
---------- ---------- ----------
Decrease before interest credited............................................ (27,165) (16,562) (59,836)
Interest credited............................................................ 23,174 23,018 21,666
---------- ---------- ----------
Net savings increase (decrease).............................................. (3,991) 6,456 (38,170)
---------- ---------- ----------
Ending balance............................................................... $ 567,375 $ 571,366 $ 564,910
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following table sets forth maturities of the Association's certificates
of deposit of $100,000 or more at September 30, 1997 by time remaining to
maturity.
<TABLE>
<CAPTION>
Amounts in
Thousands
-----------
<S> <C>
Three months or less................................................................................. $ 14,719
Over three months through six months................................................................. 4,908
Over six months through 12 months.................................................................... 9,010
Over 12 months....................................................................................... 19,478
-----------
Total................................................................................................ $ 48,115
-----------
-----------
</TABLE>
-24-
<PAGE>
SUBSIDIARIES
The Company has two wholly-owned subsidiaries, the Association and its
wholly owned subsidiary, IBS Delaware Investment Corp. ("IBSD"), and IBSF
Investment Corp., a New Jersey-chartered investment company formed in 1996,
which ceased operations at September 30, 1997.
In December 1996, the Association established IBSD solely to manage
certain of the investments of the Association. At September 30, 1997, IBSD
had total assets of approximately $180 million comprised principally of
mortgage-backed securities.
COMPETITION
The Association faces significant competition for real estate loans,
principally from mortgage banking companies, other savings institutions,
commercial banks and credit unions. Factors which affect competition
generally include the general and local economic conditions, current interest
rate levels and volatility in the mortgage markets. The Association also
faces significant competition in attracting deposits. Its most direct
competition for deposits has historically come from commercial banks and
other savings institutions located in its market area. The Association faces
additional significant competition for investors' funds from other
non-depository institutions, including mutual funds and brokerage firms. The
Association competes for deposits principally by offering depositors a
variety of deposit programs, convenient branch locations, hours and other
services. The Association does not rely upon any individual group or entity
for a material portion of its deposits.
Federal legislation in recent years has eliminated many of the
distinctions between commercial banks and savings institutions and holding
companies and allowed bank holding companies to acquire savings institutions.
Such legislation has generally resulted in an increase in the competition
encountered by savings institutions and has resulted in a decrease in both
the number of savings institutions and the aggregate size of the savings
industry.
REGULATION
THE COMPANY. The Company is a registered savings and loan holding company
and is subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the
Association is subject to certain restrictions in its dealings with the
Company and affiliates thereof. The Company is also subject to regulation by
the Department pursuant to the New Jersey Savings and Loan Act (the "Act").
-25-
<PAGE>
The Company was also previously a bank holding company regulated by the
Federal Reserve Board. The Company was required to become a bank holding
company by virtue of the Association having failed to comply with the QTL
test as of July 1993 and being unable to re-qualify as a "qualified thrift
lender" as of July 1994. The Association re-qualified as a qualified thrift
lender in August 1995, and the Company is no longer a bank holding company.
See "--The Association Qualified Thrift Lender Test."
FEDERAL ACTIVITIES RESTRICTIONS. There are generally no restrictions on
the activities of a savings and loan holding company which holds only one
subsidiary savings association. However, if the Director of the OTS
determines that there is reasonable cause to believe that the continuation by
a savings and loan holding company of an activity constitutes a serious risk
to the financial safety, soundness or stability of its subsidiary savings
association, the Director may impose such restrictions as deemed necessary to
address such risk, including limiting (i) payment of dividends by the savings
association; (ii) transactions between the savings association and its
affiliates; and (iii) any activities of the savings association that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings association. As was the case with
the Company, notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, a savings and loan
holding company is required to register as a bank holding company within one
year of the failure of the QTL test by its subsidiary insured institution.
Under such circumstances, the holding company becomes subject to all of the
provisions of the BHCA and other statutes applicable to bank holding
companies, in the same manner and to the same extent as if the company were a
bank holding company.
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Association,
the Company would thereupon become a multiple savings and loan holding
company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, as set forth below, the activities of the
Company and any of its subsidiaries (other than the Association or other
subsidiary savings associations) would thereafter be subject to further
restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings association shall
commence or continue for a limited period of time after becoming a multiple
savings and loan holding company or subsidiary thereof any business activity,
other than: (i) furnishing or performing management services for a subsidiary
savings association; (ii) conducting an insurance agency or escrow business;
(iii) holding, managing, or liquidating assets owned by or acquired from a
subsidiary savings association; (iv) holding or managing properties used or
occupied by a subsidiary savings association; (v) acting as trustee under
deeds of trust; (vi) those activities authorized by regulation as of March 5,
1987 to be engaged in by multiple savings and loan holding companies; or
(vii) unless the Director of the OTS by regulation prohibits or limits such
activities for savings and loan holding companies, those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies. The activities described in (i) through (vi) above may only be
engaged in after giving the OTS prior notice and being informed that the OTS
does not
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object to such activities. In addition, the activities described in (vii)
above also must be approved by the Director of the OTS prior to being engaged
in by a multiple savings and loan holding company.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between
savings associations and any affiliate are governed by Sections 23A and 23B
of the Federal Reserve Act and OTS regulations. An affiliate of a savings
association is any company or entity which controls, is controlled by or is
under common control with the savings association. In a holding company
context, the parent holding company of a savings association (such as the
Company) and any companies which are controlled by such parent holding
company are affiliates of the savings association. Generally, such provisions
(i) limit the extent to which the savings association or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such association'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
association 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 such provisions, no savings association 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 association.
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 (a "principal
stockholder"), 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). Section
22(h) also requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons and also requires prior board approval for
certain loans. 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. At September 30, 1997, the
Association was in compliance with the above restrictions.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without
prior approval of the Director of the OTS, (i) control of any other savings
association or savings and loan holding company or substantially all the
assets thereof or (ii) more than 5% of the voting shares of a savings
association or holding company thereof which is not a subsidiary. Except with
the prior approval of the Director of the OTS, no director or officer of a
savings and loan holding
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company or person owning or controlling by proxy or otherwise more than 25%
of such company's stock, may acquire control of any savings association,
other than a subsidiary savings association, or of any other savings and loan
holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls
savings associations in more than one state if (i) the multiple savings and
loan holding company involved controls a savings association which operated a
home or branch office located in the state of the association to be acquired
as of March 5, 1987; (ii) the acquiror is authorized to acquire control of
the savings association pursuant to the emergency acquisition provisions of
the Federal Deposit Insurance Act ("FDIA"), or (iii) the statutes of the
state in which the association to be acquired is located specifically permit
institutions to be acquired by the state-chartered associations or savings
and loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
associations).
Under the Bank Holding Company Act of 1956, the FRB is authorized to
approve an application by a bank holding company to acquire control of a
savings association. In addition, a bank holding company that controls a
savings association may merge or consolidate the assets and liabilities of
the savings association with, or transfer assets and liabilities to, any
subsidiary bank which is a member of the Bank Insurance Fund ("BIF") with the
approval of the appropriate federal banking agency and the Federal Reserve
Board. As a result of these provisions, there have been a number of
acquisitions of savings associations by bank holding companies in recent
years.
Under New Jersey law, if the Company wishes to acquire another savings
institution, savings institution holding company, or substantially all the
assets of a savings institution, it must file an application under the
Banking Act and have it approved by the Commissioner. Legislation enacted in
New Jersey permits insured institutions or savings and loan holding companies
located in New Jersey to acquire or be acquired by insured institutions or
holding companies on either a regional or national basis upon the occurrence
of certain triggering conditions which are determined by the Commissioner.
The acquiror must be located in a state which has reciprocal legislation in
effect on substantially the same terms and conditions as stated in the New
Jersey legislation. This law explicitly prohibits interstate branching.
THE ASSOCIATION. The OTS and the Department have extensive regulatory
authority over the operations of New Jersey chartered savings associations.
As part of this authority, savings associations are required to file periodic
reports with the OTS and the Department and are subject to periodic
examinations by the OTS and the Department. The investment and lending
authority of savings associations are prescribed by federal and New Jersey
laws and regulations and they are prohibited from engaging in any activities
not permitted by such laws and regulations. Such regulation and supervision
is primarily intended for the protection of depositors.
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For a discussion of the limitations on the aggregate amount of loans that
a savings association can make to any one borrower, including related
entities, see "Business of the Association--Lending Activities--Loan
Origination, Purchase and Sales Activity."
The OTS' enforcement authority over all savings associations and their
holding companies includes, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. 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 the OTS.
INSURANCE OF ACCOUNTS. The deposits of the Association are insured up to
$100,000 per insured member (as defined by law and regulation) by the SAIF
administered by the FDIC and are backed by the full faith and credit of the
United States Government. As insurer, the FDIC is authorized to conduct
examinations of, and to require reporting by, FDIC-insured institutions. It
also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious threat to the
FDIC. The FDIC also has the authority to initiate enforcement actions against
savings associations, after giving the OTS an opportunity to take such action.
Under current FDIC regulations, SAIF-insured institutions are assigned to
one of three capital groups which are based solely on the level of an
institution's capital-- "well capitalized," "adequately capitalized," and
"undercapitalized" --which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the
FDIA. These three groups are then divided into three subgroups which reflect
varying levels of supervisory concern, from those which are considered to be
healthy to those which are considered to be of substantial supervisory
concern. The matrix so created results in nine assessment risk
classifications, with rates ranging prior to September 30, 1996 from .23% for
well capitalized, healthy institutions to .31% for undercapitalized
institutions with substantial supervisory concerns. The insurance premiums
for the Association for the first semi-annual period in calendar 1996
was .23%.
The deposits of the Bank are currently insured by the SAIF. Both the
SAIF and the BIF are required by law to attain and thereafter maintain a
reserve ratio of 1.25% of insured deposits. The BIF has achieved a fully
funded status, and therefore as discussed below, in fiscal 1996 the FDIC
substantially reduced the average deposit insurance premium paid by
BIF-insured banks to a level approximately 75% below the average premium then
paid by savings institutions.
On November 14, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. The final rule reduced deposit insurance premiums for BIF
member institutions to zero basis points (subject to a $2,000 minimum) for
institutions in the lowest risk category, while holding deposit insurance
premiums for SAIF members at their then current
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levels (23 basis points for institutions in the lowest risk category). The
reduction was effective with respect to the semi-annual premium assessment
beginning January 1, 1996.
On September 30, 1996, President Clinton signed into law legislation
which eliminated the premium differential between SAIF-insured institutions
and BIF-insured institutions by recapitalizing the SAIF's reserves to the
required ratio. The legislation required all SAIF member institutions pay a
one-time special assessment to recapitalize the SAIF, with the aggregate
amount 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.
Implementing FDIC regulations imposed a one-time special assessment of
65.7 basis points of SAIF-assessable deposits as of March 31, 1995, which was
accrued as an expense on September 30, 1996. The Association's one-time
pre-tax special assessment amounted to $3.7 million, or $2.4 million after
tax. The payment of such special assessment, net of tax, had the effect of
immediately reducing the Association's capital by $2.4 million. Nevertheless,
management does not believe that this one-time special assessment had a
material adverse effect on the Company's consolidated financial condition.
In the fourth quarter of 1996, the FDIC lowered the 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 generally range
from zero basis points, except that during the fourth quarter of 1996, the
rates for SAIF members ranged from 18 to 27 basis points in order to include
assessments paid to the Financing Corporation ("FICO"). From 1997 through
1999, SAIF members will pay 6.4 basis points to fund the FICO, while BIF
member institutions will pay about 1.3 basis points. The Association's
insurance premiums, which had amounted to 23 basis points, were thus reduced
to 6.4 basis points effective January 1, 1997.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Association, if it determines after a hearing that
the institution has engaged or is engaging in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement
with the FDIC. It also may suspend deposit insurance temporarily during the
hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If insurance of accounts is terminated,
the accounts at the institution at the time of the termination, less
subsequent withdrawals, shall continue to be insured for a period of six
months to two years, as determined by the FDIC. Management is aware of no
existing circumstances which could result in termination of the Association's
deposit insurance.
CAPITAL REQUIREMENTS. Federally insured savings associations are
required to maintain minimum levels of regulatory capital. The OTS has
established capital standards applicable to all savings associations. These
standards generally must be as stringent as the comparable
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capital requirements imposed on national banks. The OTS also is authorized to
impose capital requirements in excess of these standards on individual
associations on a case-by-case basis.
Current OTS capital standards require savings associations to satisfy
three different capital requirements. Under these standards, savings
associations must maintain "tangible" capital equal to at least 1.5% of
adjusted total assets, "core" capital equal to at least 3.0% of adjusted
total assets and "total" capital (a combination of core and "supplementary"
capital) equal to at least 8.0% of "risk-weighted" assets. For purposes of
the regulation, core capital generally consists of common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and related surplus, minority interests in the equity accounts of fully
consolidated subsidiaries, certain nonwithdrawable accounts and pledged
deposits, and "qualifying supervisory goodwill." Tangible capital is given
the same definition as core capital but does not include qualifying
supervisory goodwill and is reduced by the amount of all the savings
association's intangible assets, with only a limited exception for purchased
mortgage servicing rights. The Association had no goodwill or other
intangible assets at September 30, 1997. Both core and tangible capital are
further reduced by an amount equal to a savings association's debt and equity
investments in subsidiaries engaged in activities not permissible to national
banks (other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies). These adjustments do not affect the
Association's regulatory capital.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to include both core capital and supplementary
capital in its total capital, provided that the amount of supplementary
capital included does not exceed the savings association's core capital.
Supplementary capital generally consists of hybrid capital instruments;
perpetual preferred stock which is not eligible to be included as core
capital; subordinated debt and intermediate-term preferred stock; and general
allowances for loan losses up to a maximum of 1.25% of risk-weighted assets.
In determining the required amount of risk-based capital, total assets,
including certain off-balance sheet items, are multiplied by a risk weight
based on the risks inherent in the type of assets. The risk weights assigned
by the OTS for principal categories of assets are (i) 0% for cash and
securities issued by the U.S. Government or unconditionally backed by the
full faith and credit of the U.S. Government; (ii) 20% for securities (other
than equity securities) issued by U.S. Government-sponsored agencies and
mortgage-backed securities issued by, or fully guaranteed as to principal and
interest by, the FNMA or the FHLMC, except for those classes with residual
characteristics or stripped mortgage-related securities; (iii) 50% for
prudently underwritten permanent one- to four-family first lien mortgage
loans not more than 90 days delinquent and having a loan-to-value ratio of
not more than 80% at origination unless insured to such ratio by an insurer
approved by the FNMA or the FHLMC, qualifying residential bridge loans made
directly for the construction of one- to four-family residences and
qualifying multi-family residential loans; and (iv) 100% for all other loans
and investments, including consumer loans, commercial loans, and one- to
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four-family residential real estate loans more than 90 days delinquent, and
for repossessed assets.
In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation. Under
the rule, an institution with a greater than "normal" level of interest rate
risk will be subject to a deduction of its interest rate risk component from
total capital for purposes of calculating its risk-based capital. As a
result, such an institution will be required to maintain additional capital
in order to comply with the risk-based capital requirement. An institution
with a greater than "normal" interest rate risk is defined as an institution
that would suffer a loss of net portfolio value exceeding 2.0% of the
estimated economic value of its assets in the event of a 200 basis point
increase or decrease (with certain minor exceptions) in interest rates. The
interest rate risk component will be calculated, on a quarterly basis, as
one-half of the difference between an institution's measured interest rate
risk and 2.0%, multiplied by the economic value of its assets. The rule also
authorizes the Director of the OTS, or his designee, to waive or defer an
institution's interest rate risk component on a case-by-case basis. The final
rule was originally effective as of January 1, 1994, subject however to a two
quarter "lag" time between the reporting date of the data used to calculate
an institution's interest rate risk and the effective date of each quarter's
interest rate risk component. However, in October 1994 the Director of the
OTS indicated that it would waive the capital deductions for institutions
with a greater than "normal" risk until the OTS published an appeals process.
On August 21, 1995, the OTS released Thrift Bulletin 67 which established (i)
an appeals process to handle "requests for adjustments" to the interest rate
risk component and (ii) a process by which "well-capitalized" institutions
may obtain authorization to use their own interest rate risk model to
determine their interest rate risk component. The Director of the OTS
indicated, concurrent with the release of Thrift Bulletin 67, that the OTS
will continue to delay the implementation of the capital deduction for
interest rate risk pending the testing of the appeals process set forth in
Thrift Bulletin 67.
Effective November 28, 1994, the OTS revised its interim policy issued in
August 1993 under which savings institutions computed their regulatory
capital in accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Under the revised OTS policy, savings
institutions must value securities available for sale at amortized cost for
regulatory capital purposes. This means that in computing regulatory capital,
savings institutions should add back any unrealized losses and deduct any
unrealized gains, net of income taxes, on debt securities reported as a
separate component of GAAP capital.
At September 30, 1997, the Association exceeded all of its regulatory
capital requirements, with tangible, core and risk-based capital ratios of
17.24%, 17.24% and 61.60%, respectively. The following table sets forth the
Association's compliance with each of the above-described capital
requirements as of September 30, 1997.
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The following is a reconciliation of the Association's equity determined in
accordance with GAAP to regulatory tangible, core, and risk-based capital at
September 30, 1997.
Tangible Core Risk-Based
Capital Capital(1) Capital(2)
---------- ----------- -----------
(In Thousands)
GAAP equity............................... $ 127,180 $ 127,180 $ 127,180
Unrealized gain on available for sale
securities, net of tax.................. (1,631) (1,631) (1,631)
Goodwill.................................. -- -- --
Assets required to be deducted............ -- -- --
General valuation allowances(3)........... -- -- 1,064
---------- ----------- --------
Total regulatory capital.................. 125,549 125,549 126,613
Minimum required regulatory capital(4).... 10,976 21,953 16,529
---------- ----------- --------
Excess regulatory capital................. $ 114,573 $ 103,596 $ 110,084
---------- ----------- --------
---------- ----------- --------
Regulatory capital as a percentage........ 17.24% 17.24% 61.60%
Minimum capital required as a
percentage(4).......................... 1.50% 3.00% 8.00%
---------- ----------- --------
Regulatory capital as a percentage in
excess of requirements.................. 15.74% 14.24% 53.60%
---------- ----------- --------
---------- ----------- --------
- ------------------------
(1) Does not reflect the 4.0% requirement to be met in order for an institution
to be "adequately capitalized" under the prompt corrective action
regulations.
(2) Does not reflect the interest-rate risk component in the risk-based capital
requirement, the effective date of which has been postponed as discussed
above.
(3) General valuation allowances are only used in the calculation of risk-based
capital. Such allowances are limited to 1.25% of risk-weighted assets.
(4) Tangible and core capital are computed as a percentage of adjusted total
assets of $732.5 million. Risk-based capital is computed as a percentage of
adjusted risk-weighted assets of $206.8 million.
Any savings institution that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on the institution's operations,
termination of federal deposit insurance and the appointment of a conservator or
receiver. The OTS' capital regulation provides that such actions,
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through enforcement proceedings or otherwise, could require one or more of a
variety of corrective actions.
LIQUIDITY REQUIREMENTS. All savings associations are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At September 30, 1997, the required minimum
liquid asset ratio was 5%. The Association has consistently exceeded such
regulatory liquidity requirement and, at September 30, 1997, had a liquidity
ratio of 43.1%, which included mortgage-backed securities maturing within five
years. The short-term liquidity ratio was 8.4% as of such date.
ACCOUNTING REQUIREMENTS. Applicable OTS accounting regulations and
reporting requirements apply the following standards: (i) regulatory reports
will incorporate GAAP when GAAP is used by federal banking agencies; (ii)
savings association transactions, financial condition and regulatory capital
must be reported and disclosed in accordance with OTS regulatory reporting
requirements that will be at least as stringent as for national banks; and (iii)
the Director of the OTS may prescribe regulatory reporting requirements more
stringent than GAAP whenever the Director determines that such requirements are
necessary to ensure the safe and sound reporting and operation of savings
associations.
The accounting principles for depository institutions are currently
undergoing review to determine whether the historical cost model or market-based
measure of valuation is the appropriate measure for reporting the assets of such
institutions in their financial statements. Such proposal is controversial
because any change in applicable accounting principles which requires depository
institutions to carry mortgage-backed securities and mortgage loans at fair
market value could result in substantial losses to such institutions and
increased volatility in their liquidity and operations. Currently, it cannot be
predicted whether there may be any changes in the accounting principles for
depository institutions in this regard beyond those imposed by SFAS No. 115 or
when any such changes might become effective.
QUALIFIED THRIFT LENDER TEST. All savings institutions are required to meet
a QTL test to avoid certain restrictions on their operations. Under Section 2303
of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, a savings
institution can comply with the QTL test by either qualifying as a domestic
building and loan association as defined in Section 7701(a)(19) of the Internal
Revenue Code of 1986, as amended ("Code") or meeting the second prong of the QTL
test set forth in Section 10(m) of the HOLA. A savings association that does not
meet the QTL Test must either convert to a bank charter or comply with the
following restrictions on its operations: (i) the association may not engage in
any new activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the association shall be restricted to those of a national bank; (iii)
the association shall not be eligible to obtain any advances from its FHLB; and
(iv) payment of dividends by the
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association shall be subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the
association ceases to be a QTL, it must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations).
To date, these restrictions have not limited the Association's operations in
any manner.
Currently, the prong of the QTL test that is not based on the Code requires
that 65% of an association's "portfolio assets" (as defined) consist of certain
housing and consumer-related assets on a monthly average basis in nine out of
every 12 months. Assets that qualify without limit for inclusion as part of the
65% requirement are loans made to purchase, refinance, construct, improve or
repair domestic residential housing and manufactured housing, home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); stock issued by the FHLB of New
York; and direct or indirect obligations of the FDIC. In addition, the following
assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings association's portfolio assets: 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
consumer and educational loans (limited to 10% of total portfolio assets); and
stock issued by the FHLMC or the FNMA. Portfolio assets consist of total assets
minus the sum of (i) goodwill and other intangible assets, (ii) property used by
the savings association to conduct its business, and (iii) liquid assets up to
20% of the association's total assets. At September 30, 1997, the qualified
thrift investments of the Association were approximately 113.0% of its portfolio
assets.
Under OTS regulations which govern the conduct of savings and loan holding
companies, any savings and loan holding company is required to register as a
bank holding company within one year of the failure of the QTL Test by its
subsidiary insured institution. Under such circumstances, the holding company
would become subject to all of the provisions of the BHCA and other statutes
applicable to bank holding companies, in the same manner and to the same extent
as if the company were a bank holding company. The Association ceased to be a
qualified thrift lender in July 1993, but then re-qualified as a qualified
thrift lender in August 1995. Because the Association did not re-qualify as a
QTL by July 1994, which was one year from the date of its failure of the QTL
test, in connection with the conversion and the acquisition of all of the
Association's capital stock by the Company, the Company applied to, and received
approval from, the Board of Governors of the Federal Reserve System to become a
bank holding company. This was in addition to the Association's status as a
savings and loan holding company.
During the last half of fiscal 1994, the Board of Directors authorized the
Association to initiate a "tiered" or laddered investment strategy pursuant to
which it anticipated investing approximately $400.0 million in mortgage-backed
securities and U.S. Government securities with varying maturities and, with
respect to longer-term investments, in mortgage loans. See "Business-General."
Based upon such investment program, the Association as of August 1995 had
maintained monthly averages of QTIs equal to at least 92.21% of
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portfolio assets for at least nine months over a twelve month period, and had
thereby re-qualified as a "qualified thrift lender." The Company
de-registered as a bank holding company in December 1996.
Restrictions on Capital Distributions. OTS regulations govern capital
distributions by savings associations, which include cash dividends, stock
redemptions or repurchases, cash-out mergers, interest payments on certain
convertible debt and other transactions charged to the capital account of a
savings association to make capital distributions. Generally, the regulation
creates a safe harbor for specified levels of capital distributions from
associations meeting at least their minimum capital requirements, so long as
such associations notify the OTS and receive no objection to the distribution
from the OTS. Savings institutions and distributions that do not qualify for the
safe harbor are required to obtain prior OTS approval before making any capital
distributions.
Generally, a savings association that before and after the proposed
distribution meets or exceed its fully phased-in capital requirements (a Tier 1
association) may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the association's ratio of total
capital to assets exceeds its tangible, core or risk-based capital requirement.
Failure to meet minimum capital requirements will result in further restrictions
on capital distributions, including possible prohibition without explicit OTS
approval. See "--Capital Requirements."
In order to make distributions under these safe harbors, Tier 1 and Tier 2
associations must submit 30 days written notice to the OTS prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 association deemed
to be in need of more than normal supervision by the OTS may be downgraded to a
Tier 2 or Tier 3 association as a result of such a determination. The
Association currently is a Tier 1 institution for purposes of the regulation
dealing with capital distributions.
OTS regulations also prohibit the Association from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
(or total) capital of the Association would be reduced below the amount required
to be maintained for the liquidation account established by it for certain
depositors in connection with its conversion from mutual to stock form.
On December 5, 1994, the OTS published a notice of proposed rulemaking to
amend its capital distribution regulation. Under the proposal, institutions
would be permitted to only make capital distributions that would not result in
their capital being reduced below the level required to remain "adequately
capitalized." Because the Association is a subsidiary of a holding company, the
proposal would require the Association to provide notice to the OTS of its
intent to make a capital distribution. The Association does not
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<PAGE>
believe that the proposal will adversely affect its ability to make capital
distributions if it is adopted substantially as proposed.
FEDERAL HOME LOAN BANK SYSTEM. The Association is a member of the FHLB of
New York, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB. At September
30, 1997, the Association had $34.3 million in FHLB advances.
As a member, the Association is required to purchase and maintain stock in
the FHLB of New York in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At September 30, 1997, the Association had $6.1
million in FHLB stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community
investment and low- and moderate-income housing projects. These contributions
have adversely affected the level of FHLB dividends paid and could continue
to do so in the future. These contributions also could have an adverse effect
on the value of FHLB stock in the future. For the years ended September 30,
1997 and 1996, dividends paid by the FHLB of New York to the Association
totalled approximately $353,000 and $277,000, respectively.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts) and non-personal time deposits. As of
September 30, 1997, no reserves were required to be maintained on the first $4.4
million of transaction accounts, reserves of 3% were required to be maintained
against the next $44.9 million of net transaction accounts (with such dollar
amounts subject to adjustment by the FRB), and a reserve of 10% (which is
subject to adjustment by the FRB to a level between 8% and 14%) against all
remaining net transaction accounts. At September 30, 1997, the Association was
in compliance with applicable requirements. However, because required reserves
must be maintained in the form of vault cash or a non interest-bearing account
at a Federal Reserve Association, the effect of this reserve requirement is to
reduce an institution's earning assets.
NEW JERSEY LAW. The Commissioner regulates the Association's internal
business procedures as well as it deposits, lending and investment activities.
The Commissioner must approve changes to the Association's Certificate of
Incorporation, establishment or relocation of branch offices, mergers and the
issuance of additional stock. In addition, the Commissioner conducts periodic
examinations of the Association. Certain of the areas regulated by the
Commissioner are not subject to similar regulation by the FDIC.
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<PAGE>
Recent federal and state legislative developments have reduced distinctions
between commercial banks and SAIF-insured savings institutions in New Jersey
with respect to lending and investment authority as well as interest rate
limitations. As federal law has expanded the authority of federally chartered
savings institutions to engage in activities previously reserved for commercial
banks, New Jersey legislation and regulations ("parity legislation") have given
New Jersey chartered savings institutions, such as the Association, the powers
of federally chartered savings institutions.
FEDERAL AND STATE TAXATION
GENERAL. The Company and the Association are subject to the corporate tax
provisions of the Code, as well as certain additional provisions of the Code
which apply to thrift and other types of financial institutions. The
following discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to
the Company and the Association.
FISCAL YEAR. The Company and the Association and its subsidiaries file a
consolidated federal income tax return on a September 30 fiscal year end basis,
beginning with the fiscal year ended September 30, 1995.
METHOD OF ACCOUNTING. The Association maintains its books and records for
federal income tax purposes using the accrual method of accounting. The accrual
method of accounting generally requires that items of income be recognized when
all events have occurred that establish the right to receive the income and the
amount of income can be determined with reasonable accuracy, and that items of
expense be deducted at the later of (i) the time when all events have occurred
that establish the liability to pay the expense and the amount of such liability
can be determined with reasonable accuracy or (ii) the time when economic
performance with respect to the item of expense has occurred.
BAD DEBT RESERVES. Savings associations, such as the Association, which
meet certain definitional tests primarily relating to their assets and the
nature of their businesses, are permitted to establish a reserve for bad debts
and to make annual additions to the reserve. These additions may, within
specified formula limits, be deducted in arriving at the institution's taxable
income.
In August 1996, legislation was enacted that repeals the reserve method
of accounting (including the percentage of taxable income method) previously
used by many savings associations to calculate their bad debt reserve for
federal income tax purposes. As a result, the Association must recapture that
portion of its reserve which exceeds the amount that could have been taken
under the experience method for post-1987 tax years. As the Company has
previously provided deferred taxes on this amount, no additional financial
statement tax expense should result from this new legislation. The recapture
amount may be suspended for two years if the Association meets certain
residential lending origination requirements.
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<PAGE>
DISTRIBUTIONS. If the Association were to distribute cash or property to
its sole stockholder having a total fair market value in excess of its
accumulated tax-paid earnings and profits, or were to distribute cash or
property to its stockholder in redemption of its stock, the Association would
generally be required to recognize as income an amount which, when reduced by
the amount of federal income tax that would be attributable to the inclusion of
such amount in income, is equal to the lesser of: (i) the amount of the
distribution or (ii) the sum of (a) the amount of the accumulated bad debt
reserve of the Association with respect to qualifying real property loans (to
the extent that additions to such reserve exceed the additions that would be
permitted under the experience method) and (b) the amount of the Association's
supplemental bad debt reserve.
MINIMUM TAX. The Code imposes an alternative minimum tax at a rate of 20%
on a base of regular taxable income plus certain tax preferences ("alternative
minimum taxable income" or "AMTI"). The alternative minimum tax is payable to
the extent such AMTI is in excess of an exemption amount. The Code provides that
an item of tax preference is the excess of the bad debt deduction allowable for
a taxable year pursuant to the percentage of taxable income method over the
amount allowable under the experience method. Other items of tax preference that
constitute AMTI include (a) tax exempt interest on newly-issued (generally,
issued on or after August 8, 1986) private activity bonds other than certain
qualified bonds and (b) 75% of the excess (if any) of (i) adjusted current
earnings as defined in the Code, over (ii) AMTI (determined without regard to
this preference and prior to reduction by net operating losses). Net operating
losses can offset no more than 90% of AMTI. Certain payments of alternative
minimum tax may be used as credits against regular tax liabilities in future
years.
AUDIT BY IRS. The Association's federal income tax returns for taxable
years through December 31, 1994 have been closed for the purpose of examination
by the Internal Revenue Service.
STATE TAXATION. The Company and its non-thrift subsidiaries that are
engaged in business in New Jersey are subject to the state's Corporate Business
Tax Act which imposes a "franchise tax" at the rate of 9% on the Company's and
its non-thrift subsidiaries' taxable income, before net operating loss
deductions and special deductions, as calculated for federal income tax
purposes. The Association is taxed at the rate of 3% on its taxable income,
before net operating loss deductions and special deductions for federal income
tax purposes.
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<PAGE>
Item 2. Properties
The following table sets forth certain information with respect to the
Association's branch offices and operations center at September 30, 1997.
Net Book
Value of Amount of
Description/Address Leased/Owned Property Deposits
- ------------------------------------- ------------ --------- -------------
(In Thousands)
Main Office:
- ------------
Route 70 and Springdale Road Owned $ 387 $ 148,653
Cherry Hill, New Jersey 08003
Branch Offices:
- ---------------
Kings Highway and Chapel Avenue Leased(1) 5 46,756
Cherry Hill, New Jersey 08034
Centrum Shopping Center Leased(2) 5 35,656
219Y Haddonfield Berlin Road
Cherry Hill, New Jersey 08034
400 White Horse Pike Owned 338 163,071
Laurel Springs, New Jersey 08021
Route 73 and Brick Road Leased(3) 9 27,004
Marlton, New Jersey 08053
Pleasant Valley Ave. and Owned 201 51,134
Fellowship Road
Mount Laurel, New Jersey 08054
Hurffville--Crosskeys Road and Owned 7 32,804
Altair Drive
Washington Township, New Jersey 08012
Route 70 and Hartford Road Owned 272 56,702
Medford, New Jersey 08055
1651 Blackwood-Clementon Road Owned 668 2,754
Gloucester Township, New Jersey 08012
1 Lucas Lane Owned 412 2,427
Voorhees, New Jersey 08043
Operations Center:
- ------------------
1909 E. Marlton Pike Owned 4,145 --
Cherry Hill, New Jersey 08003
----------- ----------
$ 6,449 $ 566,961(4)
----------- ----------
----------- ----------
- ------------------------
(1) Ten year lease expires May 31, 2000 with no lease renewal options.
(2) Five year lease expires May 31, 1998 with two, five-year renewal options
thereafter.
(3) Five year lease expires March 31, 1998 with no lease renewal options.
(4) Does not include accrued interest of $414.
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<PAGE>
Item 3. Legal Proceedings.
There are no material legal proceedings to which the Company or any
subsidiary is a party or to which any of their property is subject, except as
described below.
On November 12, 1996, the Company filed suit in the United States
District Court for the District of New Jersey against Lawrence B.
Seidman, Richard Whitman and other members of the "IBS Financial Corp.
Committee to Maximize Shareholder Value." The Company's complaint alleged
that the Committee had failed to disclose all the information required by the
federal securities laws and the Company's Certificate of Incorporation in the
materials the Committee had submitted in connection with the nomination of
Ernest Beier, Jr., for election as a director of the Company, and in the
Committee's Schedule 13D filings with the Securities and Exchange Commission.
The Company sought a declaratory judgment that the Committee's filings were
incomplete and inadequate, that the Company's Board could reject the
nomination of Mr. Beier, and that the Company need not, at that time, provide
a shareholder list to the Committee. The complaint also asked for an
injunction against further violations of the securities laws by Messrs.
Seidman and Whitman and the other members of their group. Some members of the
Committee counterclaimed, challenging the action of the Company's Board, in
July 1996, reducing the number of directors from seven to six.
A mere six days after the Company's lawsuit was filed, Mr. Seidman's group
amended its Schedule 13D to disclose for the first time an 18 month old
agreement involving 96,025 shares of the Company's Common Stock. The amended
Schedule 13D also corrected some, but not all, of the deficiencies noted in the
Company's lawsuit. For example, certain members of the Committee are limited
liability companies or limited partnerships; the Committee did not disclose, in
its amended Schedule 13D, the names of the investors in those limited liability
entities nor did it attach the limited partnership and operating agreements.
After a preliminary litigation conference, Mr. Seidman's group further
amended its Schedule 13D to disclose publicly for the first time various limited
partnership and operating agreements, to disclose for the first time the
identities of the persons or entities who had invested in the four members of
the group formed directly or indirectly by Mr. Seidman, and to disclose for the
first time the identities of five individuals who had entered into agreements
with Mr. Seidman regarding the voting of their shares.
As a result of the expedited discovery conducted by the Company and the
amended Schedule 13Ds filed by the Seidman group, the Company discovered that
Seidcal Associates, L.L.C. ("Seidcal") owns 71.4% of Seidman and Associates,
L.L.C. ("SAL") and 75.0% of Seidman and Associates II, L.L.C. ("SAL II") (SAL
and SAL II are members of the Committee). The Company also discovered that
Charisma Partners, L.P. ("Partners") owns 54.5% of Federal Holdings L.L.C.
("Holdings") (Holdings is a member of the Committee), that 8th Floor Realty
Corp. ("Realty Corp.") is the sole general partner of Partners, and that
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<PAGE>
Kevin Moore is a Vice President of Realty Corp., the organizer of Holdings
and the Administrative Manager of Holdings. To date, however, no information
regarding the members of Seidcal, the directors and other executive officers
of Realty Corp., or the business, source of funds or controlling persons of
Seidcal, Partners or Realty Corp. has been publicly disclosed by the Seidman
group.
On January 23, 1997, the District Court ruled that the Schedule 13D
amendments filed by Mr. Seidman's group after the litigation was commenced
mooted the Company's claims regarding the deficient disclosures initially
provided by Mr. Seidman's group and that the amended Schedule 13Ds were
adequate. Because the judge noted that "(a)n amendment which cures a violation
of the Exchange Act moots a claim that arises from the failure to file a proper
Schedule 13D," the Court did not find it necessary to rule expressly that the
prior Schedule 13Ds violated the securities laws. The District Court also held
that the Company did not meet its burden of proof in demonstrating (1) Seidcal's
control over SAL and SAL II, (2) the control of Partners, Realty Corp. and Kevin
Moore over Holdings, (3) that Seidcal, Partners and Realty Corp. had arranged
for financing, or (4) that Seidcal, Partners and Realty Corp. were
"participants" in the Seidman's group's proxy solicitation. In addition, because
the nominating materials were similar to those received by the Company the prior
year and because the Court believed the Company was not prejudiced by the
failure of the Seidman group to provide proper disclosures in a timely manner,
the Court declined to enforce the disclosure requirements in the Company's
Certificate of Incorporation and held that the Company could not reject the
defendants' nominations as deficient or untimely and that the defendants could
receive a stockholder list. Furthermore, the court set aside the July 1996
reduction in Board size, even though the decision to reduce the size of the
Board was made several months prior to the submission of nominees by the Seidman
group (the reduction in Board size was first disclosed to the Seidman group in
October 1996).
The Company believes that the Seidman group's disclosure are still
inadequate, particularly since the group's Schedule 13Ds fail to provide any
disclosures regarding Seidcal and Partners. Although Seidcal and Partners
each owns more than 50% of one or more of the limited liability companies
formed by Mr. Seidman, and although Seidcal and Partners each has the
contractual right to make certain decisions for those companies, the Seidman
group has argued that they are not "control persons", and has refused to make
complete disclosures about them. The Company also believes that the Company's
Board properly rejected the nomination of Mr. Beier, and reasonably and
properly decided to reduce the Board's size. For these reasons, on January
31, 1997, the Company appealed the District Court's decision to the United
States Court of Appeals for the Third Circuit, and the Company requested that
the Third Circuit hear the appeal on an expedited basis. On February 7, 1997,
Mr. Seidman's group opposed the request for an expedited appeal.
On February 28, 1997, the United States Court of Appeals for the Third
Circuit granted the Company's motion for an expedited appeal, over the objection
of the Seidman
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<PAGE>
group. The appeal was argued on May 23, 1997. To date, the Third Circuit has
not issued a decision on the appeal.
While the appeal was pending, Mr. Seidman asked the Superior Court of New
Jersey, Chancery Division, Passaic County, to set the annual meeting date. On
February 24, 1997, the Passaic County Court orally directed that the Annual
Meeting be held on April 18, 1997. The Court stayed that order after the
Court of Appeals granted the Company's motion for an expedited appeal. On May
30, 1997, the Passaic County judge ordered that the Company's annual meeting
of stockholders be held on August 4, 1997, on the assumption that the Third
Circuit decision would be received in June. On June 27, 1997, the Passaic
County judge re-affirmed his order, and the annual meeting was held on August
4, 1997.
At the August 4, 1997 annual stockholders' meeting, the Company's
nominees--Messrs. Auchter and Abramowitz--received a majority of the votes cast
at the meeting as set forth in Item 4 below. Mr. Seidman, however, has filed yet
another lawsuit, seeking to overturn the election.
The Company's Employee Stock Ownership Plan ("ESOP"), like the ESOPs of many
other companies, provides for "mirror" or "proportional" voting of shares not
yet allocated to the accounts of employee-participants. The ESOP trustees
ordinarily vote the unallocated shares "in the same proportion for and against
proposals" as the employee-participants choose to vote their allocated shares,
unless the trustees determine that compliance with applicable law, the fiduciary
duties of the trustees or an Employer ESOP Voting Policy requires the shares to
be voted in a different manner. All but a handful of the employee-participants
in the ESOP directed the trustees to vote the "allocated" stock for the
Company's slate of candidates for election as directors at the August 4, 1997
meeting. The trustees then carefully considered their fiduciary duties under
applicable law and the provisions of the Employer ESOP Voting Policy, and the
trustees voted the ESOP's unallocated stock essentially in the same proportion,
for and against, as the employee-participants had directed them to vote the
allocated stock.
In a complaint filed in mid-August in the Superior Court of New Jersey,
Chancery Division, Passaic County, Mr. Seidman challenged the "proportional"
voting of the unallocated shares. Apparently believing that Messrs. Ochman,
Auchter and Borden were still trustees of the ESOP on August 4 (they were not),
Mr. Seidman sued them, Mr. Abramowitz and the Company. He later dismissed his
claims against Mr. Abramowitz.
On August 19, 1997, a Passaic County judge issued an ex parte order
temporarily restraining the Company "from installing Thomas Auchter and Arthur
Abramowitz as New Members of The Board of Directors...."
Defendants removed Mr.Seidman's "ESOP" action to the United States District
Court for the District of New Jersey, and filed an Answer. The Company believes
that the ESOP trustees acted properly and that Mr. Seidman's complaint is
meritless.
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<PAGE>
On September 19, 1997, the ESOP's trustees (Mr. Borden, Mr. Gleason and Mr.
Stiles) filed a complaint in the United States District Court for the District
of New Jersey, naming Mr. Seidman as a defendant, and seeking a declaration that
the "proportional" voting provision of the ESOP is lawful and that the trustees
acted properly when they voted the unallocated shares in accordance with the
directions of the ESOP employee-participants. Mr. Seidman has answered the
trustees' complaint.
The trustees' lawsuit has been assigned to the same federal judge as Mr.
Seidman's "ESOP" lawsuit. Formal discovery has yet to begin; no trial has been
set.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Stockholders held on August 4, 1997, the
stockholders of the Company elected the Company's nominees for director and
ratified the appointment of the Company's independent auditors, as set forth
below. The number of shares present at the Annual Meeting in person or by proxy
was 9,379,558. The matters voted upon together with the applicable voting
results were as follows:
For Withhold
--------- -----------
1. Election of Directors
Thomas J. Auchter................... 4,911,642 115,941
Arthur J. Abramowitz................ 4,922,437 105,146
Ernest Beier, Jr.................... 4,340,093 11,882
Richard Whitman..................... 4,340,030 11,945
For Against Abstain
--------- ----------- ---------
2. Ratification of appointment
of Deloitte & Touche L.L.P.......... 9,217,498 43,042 118,918
The other directors of the Company whose terms continued after the Annual
Meeting are John A. Borden, Paul W. Gleason, Francis X. Lorbecki, Jr., Joseph M.
Ochman, Sr. and Albert D. Stiles, Jr. As discussed under Item 3 above, following
the Annual Meeting, Mr. Seidman filed additional litigation with regard to the
election of Messrs. Auchter and Abramowitz.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Shares of the Company's common stock are traded nationally under the symbol
"IBSF" on the Nasdaq National Market. See also Note 20 of the Notes to
Consolidated Financial Statements in Item 8 hereof incorporated herein by
reference.
At November 30, 1997, the Company had approximately 2,100 stockholders of
record.
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page 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
21 of the Registrant's 1997 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required herein is incorporated by reference from pages 10
to 13 of the Registrant's 1997 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages 22
to 48 of the Registrant's 1997 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following tables present information concerning the director of the
Company, including tenure as a director of the Company's subsidiary, Inter-Boro
Savings and Loan Association.
DIRECTORS WHOSE TERMS EXPIRE IN 1998
<TABLE>
<CAPTION>
Principal Occupation
During Director
Name Age(1) the Past Five Years Since
- ---------------------------------------------- ------------- -------------------------- -----------
<S> <C> <C> <C>
John A. Borden 79 Director; engaged in real 1966
estate related activities
since 1937 and independent
real estate appraiser
since 1953.
Joseph M. Ochman, Sr. 66 Chairman of the Board of 1971
the Association since 1976
and of the Company since
1994; President and Chief
Executive Officer of the
Association since 1971 and
of the Company since 1994.
</TABLE>
DIRECTOR WHOSE TERM EXPIRES IN 1999
<TABLE>
<CAPTION>
Principal Occupation
During Director
Name Age(1) the Past Five Years Since
- ---------------------------------------------- ------------- -------------------------- -----------
<S> <C> <C> <C>
Paul W. Gleason 78 Director; currently 1976
retired. Formerly Chairman
of the Board and principal
stockholder of Formigli
Corporation, a concrete
business, Berlin, New
Jersey.
</TABLE>
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<PAGE>
DIRECTORS WHOSE TERMS EXPIRE IN 2000
<TABLE>
<CAPTION>
Principal Occupation
During Director
Name Age(1) the Past Five Years Since
- ---------------------------------------------- ------------- -------------------------- -----------
<S> <C> <C> <C>
Francis X. Lorbecki, Jr. 75 Director; currently 1968
retired. Formerly Senior
Vice President and loan
officer of the Association
until 1981.
Albert D. Stiles, Jr. 70 Director; founder and 1977
owner of Wills and Stiles,
Inc., an electrical
contractor, Medford, New
Jersey; self-employed
builder and developer of
residential and commercial
properties in the South
Jersey area.
</TABLE>
DIRECTOR WHOSE TERM EXPIRE IN 2001
<TABLE>
<CAPTION>
Principal Occupation
During Director
Name Age(1) the Past Five Years Since
- ---------------------------------------------- ------------- -------------------------- -----------
<S> <C> <C> <C>
Thomas J. Auchter 71 Director; President of 1967
Investment 2010, a private
investment company, since
1991. Formerly Director of
Finance and Treasurer,
Delaware River Port
Authority, Camden, New
Jersey, from 1960 to 1991.
</TABLE>
- ------------------------
(1) As of September 30, 1997.
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<PAGE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Set forth below is information with respect to the principal occupations
during the last five years for the five executive officers of the Company and
the Association who do not serve as directors.
Richard G. Sharp. Mr. Sharp has served as Executive Vice President and Chief
Financial Officer of the Association since 1984 and of the Company since 1994,
and has been employed in various capacities at the Association since 1972. Mr.
Sharp is a past President of the Philadelphia Chapter of the Financial Managers
Society and a past District Director of the Financial Managers Society's
national organization. Mr. Sharp is currently a member of the Pennsylvania
Institute of Certified Public Accountants, the American Institute of Certified
Public Accountants and the Financial Managers Society. Mr. Sharp is 63 years old
as of September 30, 1997.
Matthew J. Kennedy. Mr. Kennedy has served as Executive Vice President and
Treasurer of the Company and the Association since April 1996 and prior thereto
as Senior Vice President and Assistant Treasurer since September 1995. He joined
the Association in February 1995 as a Vice President. Mr. Kennedy was previously
employed by Valley Federal Savings and Loan Association, Easton, Pennsylvania,
where he served as Executive Vice President and Chief Financial Officer from
1985 to November 1993. Mr. Kennedy is 53 years old as of September 30, 1997.
Anthony C. Chigounis. Mr. Chigounis has served as Senior Vice President,
Operations and Administration of the Association since 1984, and has been
employed in various capacities at the Association since 1971. Mr. Chigounis has
been active in a number of civic organizations, including the United Way of both
Burlington and Camden County, New Jersey. Mr. Chigounis served as President of
the Camden County Council of Boy Scouts of America and is currently a member of
the Executive Council. Mr. Chigounis is 60 years old as of September 30, 1997.
Andrew A. Cosenza. Mr. Cosenza has served as Senior Vice President, Savings
Officer of the Association since 1984, and has been employed in various
capacities at the Association since 1970. Mr. Cosenza is a member and past
Director of the Philadelphia Chapter of the Financial Managers Society, and a
member of the Delaware Valley Chapter of the Institute for Financial Education.
Mr. Cosenza has also been affiliated with the United Way of Camden County since
1980. Mr. Cosenza is 55 years old as of September 30, 1997.
Lorraine H. O'Hara. Ms. O'Hara has served as Senior Vice President and
Assistant Secretary of the Association since 1987, and has served in various
capacities at the Association since 1966. Ms. O'Hara is a member and past
President of the Philadelphia Chapter of the Financial Managers Society and is a
member of the New Jersey State League Human Resource Committee and the South
Jersey Human Resources Group. Ms. O'Hara
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<PAGE>
has also been active in several United Way annual campaigns. Ms. O'Hara is 72
years old as of September 30, 1997.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of certain information concerning
the compensation paid by the Company and the Association for services rendered
in all capacities during the three years ended September 30, 1996 to the
President and Chief Executive Officer of the Company and the Association and
each other executive officer of the Company and its subsidiaries whose total
compensation during the fiscal year exceeded $100,000.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
--------------------------------------- ------------------------------------
Awards Payouts
------------------------ --------
Name and Fiscal Other Annual Stock Number of LTIP All Other
Principal Position Year Salary(1) Bonus(2) Compensation(3) Grants(4) Options(5) Payouts Compensation
- ---------------------- ----------- ---------- --------- ---------------- ------------ ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph M. Ochman, Sr. 1997 $ 548,000 $ -- $ -- $ -- -- -- $606,679(6)
President and Chief 1996 523,882 -- -- -- -- -- 311,338
Executive Officer 1995 482,750 90,000 -- 1,204,506 367,157 -- 86,896
Richard G. Sharp 1997 $ 121,680 $ -- $ -- $ -- -- -- $ 60,223(6)
Executive Vice 1996 119,060 -- -- -- -- -- 65,682
President and CFO 1995 113,295 18,000 -- 481,794 147,969 -- 10,676
Matthew J. Kennedy
Executive Vice 1997 $ 106,808 $ -- $ -- $ -- 6,900 -- $ 49,231
President and 1996 93,493 -- -- -- 2,300 -- --
Treasurer 1995 55,408 4,000 -- -- 25,300 -- --
</TABLE>
- ------------------------
(1) Includes $0, $16,000 and $62,500 accrued on behalf of Mr. Ochman pursuant to
a deferred compensation plan in fiscal 1997, 1996 and 1995, respectively.
(2) The Company did not pay its senior executive officers a bonus for fiscal
1997 or 1996.
(3) Does not include amounts attributable to miscellaneous benefits received by
the named executive officers. In the opinion of management of the
Association, the costs to the Association of providing such benefits to each
named executive officer during the year ended September 30, 1997 did not
exceed the lesser of $50,000 or 10% of the total of annual salary and bonus
reported for the individual.
(4) Represents the grant of 146,863 and 58,744 shares of restricted Common Stock
to Messrs. Ochman and Sharp, respectively, pursuant to the Company's
Recognition Plan, which were deemed to have had the indicated value at the
date of grant. The restricted Common Stock awarded to Messrs. Ochman and
Sharp which had not yet vested as of September 30, 1997 had a fair market
value of $1.5 million and $601,000 at September 30, 1997, respectively,
based on the $17.063 per share closing market
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<PAGE>
price on such date. The awards vest 20% each year beginning January 19,
1996, and dividends are paid on the restricted shares.
(5) Consists of stock options granted pursuant to the Company's 1995 Stock
Option Plan which are exercisable at the rate of 20% each year beginning
January 19, 1996.
(6) Includes $9,510 in premiums paid on certain life insurance policies,
$535,521 of stock units allocated to Mr. Ochman's account under the
Company's Excess Benefit Plan, and $1,900 for fees paid for service as
trustee of the Association's pension plan to Mr. Ochman in fiscal 1997.
Also includes $60,223, $60,223 and $49,231 for 4,112 shares, 4,112 shares
and 3,361 shares allocated on behalf of Messrs. Ochman, Sharp and Kennedy,
respectively, in fiscal 1997 under the Company's ESOP.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Review Committee of the Board of Directors recommends
compensation for the Association's employees, which is then ratified by the full
Board of Directors. During the fiscal year ended September 30, 1997, the members
of the Committee were Messrs. Borden (Chairman), Gleason and Stiles. During
fiscal 1997, no member of the Compensation Review Committee was a former or
current full-time officer or employee of the Company or the Association.
-50-
<PAGE>
STOCK OPTIONS
The following table sets forth, with respect to each executive officer
named in the Summary Compensation Table, information with respect to stock
options granted during fiscal 1997.
<TABLE>
<CAPTION>
Potential Realizable Value at Alternative To (f)
Assumed Annual Rates of Stock And (g): Grant
Individual Grants Price Appreciation for Option Term Date Value
--------------------------------------------------- ---------------------------------- ------------------
Percent of Total Grant Date
Options Options Granted Exercise Expiration 5% ($) 10% ($) Percent Value $
Name Granted(1) to Employees(2) Price(3) Date (f) (g) (h)
- ---------------------- ---------- ---------------- -------- ---------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph M. Ochman, Sr.. -- -- -- -- -- -- --
Richard G. Sharp...... -- -- -- -- -- -- --
Matthew J. Kennedy.... 6,900 63% $15.00 3/21/07 $65,067(4) $171,879(4) N/A
</TABLE>
- ------------------------
(1) None of the indicated awards were accompanied by stock appreciation rights.
(2) Percentage of options granted to all employees and directors during fiscal
1997.
(3) The exercise price was based on the market price of the Common Stock on the
date of the grant.
(4) Assumes compounded rates of return for the remaining option life and future
stock prices of $24.43 and $38.91 per share at 5% and 10%, respectively.
The following table discloses certain information regarding the options held
at September 30, 1997 by the Chief Executive Officer and each other named
executive officer.
<TABLE>
<CAPTION>
Number of Options at Value of Options at
September 30, 1997 September 30, 1997
Shares -------------------------- --------------------------
Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------ ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joseph M. Ochman, Sr...................... 58,885 $ 432,315 87,968 220,294 $ 779,484 $ 1,952,025
Richard G. Sharp.......................... -- -- 59,188 88,781 524,465 786,688
Matthew J. Kennedy........................ -- -- 10,580 23,920 60,729 137,301
</TABLE>
- ------------------------
(1) Based on a per share market price of $17.063 at September 30, 1997.
-51-
<PAGE>
DIRECTORS' FEES
Directors of the Company received an annual fee of $2,400 from the Company
during fiscal 1997. Directors of the Association are paid a monthly fee for
attendance at each Board of Directors' meeting. The amount of the fee was $1,325
during fiscal 1997. Two paid absences are permitted. For service on the
Executive Committee, which generally meets once a month, directors received fees
of $575 per meeting attended in fiscal 1997. For service on the General Loan
Committee, which generally meets twice each month, directors received fees of
$500 per meeting attended in fiscal 1997. For all other meetings of committees,
which meet as needed, directors received fees of $475 per meeting attended
during fiscal 1997. Those directors who serve as trustees of the Association's
Retirement Plan receive a fee, which amounted to $475 per quarter during fiscal
1997. The Chairman of the Board of Directors does not receive any fees for
service as Chairman.
EMPLOYMENT AGREEMENTS
The Company and the Association (the "Employers") during October 1994
entered into employment agreements with each of Messrs. Ochman, Sharp,
Chigounis, Cosenza and Ms. O'Hara. The Employers agreed to employ Messrs. Ochman
and Sharp for a term of three years and the other officers for a term of two
years, in each case in their current respective positions. The agreements with
Messrs. Chigounis and Cosenza and Ms. O'Hara expired in October 1996, and the
agreement with Mr. Sharp expired in October 1997. On April 22, 1996, Mr.
Ochman's joint agreement with both the Company and the Association was replaced
by two separate three-year employment agreements--one with the Company and one
with the Association. The compensation and expenses of Mr. Ochman (the
"Executive") are paid by the Company and the Association in the same proportion
as the time and services actually expended by the Executive on behalf of each
respective Employer. The term of Mr. Ochman's employment agreements with the
Company and the Association shall be extended each year for a successive
additional one-year period upon approval of the respective Board of Directors
unless Mr. Ochman elects, not less than 30 days prior to the annual anniversary
date, not to extend the employment term.
The Executive's employment agreements are terminable with or without cause
by the respective Employer(s). The Executive has no right to compensation or
other benefits pursuant to the employment agreement for any period after
voluntary termination or termination by the respective Employer(s) for cause,
disability, retirement or death, provided, however, that (i) in the event that
(a) the Executive terminates his employment because of failure of the respective
Employer(s) to comply with any material provision of the employment agreement or
the respective Employer(s) change the Executive's title or duties, or (b) the
employment agreement is terminated by the respective Employer(s) other than for
cause, disability, retirement or death or by the Executive as a result of
certain adverse actions which are taken with respect to the Executive's
employment following a Change in Control of the Company, as defined, the
Executive will be entitled to a cash severance amount equal to three times the
Executive's base salary, and (ii) Mr. Ochman's
-52-
<PAGE>
employment agreements provide for certain death, disability and medical
benefits as set forth below. In addition, Mr. Ochman will be entitled to a
continuation of benefits similar to those he is receiving at the time of such
termination for the remaining term of the agreement or until he obtains
full-time employment with another employer.
A Change in Control is generally defined in the employment agreements to
include any change in control of the Company required to be reported under the
federal securities laws, as well as (i) the acquisition by any person of 25% or
more of the Company's outstanding voting securities and (ii) a change in a
majority of the directors of the Company during any two-year period without the
approval of at least two-thirds of the persons who were directors of the Company
at the beginning of such period.
The employment agreement with the Association provides that if the payments
and benefits to be provided thereunder or otherwise upon termination of
employment are deemed to constitute a "parachute payment" within the meaning of
Section 280G of the Code, then such payments and benefits payable thereunder
shall be reduced, in the manner determined by the Executive, by the amount, if
any, which is the minimum necessary to result in no portion of the payments and
benefits being non-deductible by the Employers for federal income tax purposes.
Parachute payments generally are payments in excess of three times the base
amount, which is defined to mean the recipient's average annual compensation
from the employer includible in the recipient's gross income during the most
recent five taxable years ending before the date on which a change in control of
the employer occurred. Recipients of parachute payments are subject to a 20%
excise tax on the amount by which such payments exceed the base amount, in
addition to regular income taxes, and payments in excess of the base amount are
not deductible by the employer as compensation expense for federal income tax
purposes. Under Mr. Ochman's employment agreement with the Company, Mr. Ochman
could receive payments and benefits that constitute a parachute payment, in
which event the Company has agreed to pay the 20% excise tax that would
otherwise be owed by Mr. Ochman and such additional amounts as may be necessary
to reimburse Mr. Ochman for the state and federal income and excise taxes on
such amounts. Because the amount of the payments and benefits that could
constitute a parachute payment is dependent upon the timing, price and structure
of any change in control that may occur in the future, it is not possible at
this time to quantify the dollar impact of this change in Mr. Ochman's
employment agreement.
Consistent with past practice, Mr. Ochman is provided with the use of an
automobile and the Employers pay the annual membership dues at two clubs. Under
Mr. Ochman's employment agreements, the Employers will provide coverage for Mr.
Ochman and his spouse under the Employers' health insurance plan until Mr.
Ochman attains age 70. In the event of Mr. Ochman's death or disability during
the term of the agreements, his spouse, estate, legal representative or named
beneficiaries will receive payments equal to the balance due to Mr. Ochman for
the remaining term of the agreements and Mr. Ochman's spouse will continue to be
covered under the Employers' health insurance plan for three years.
-53-
<PAGE>
Although the above-described employment agreements could increase the cost
of any acquisition of control of the Company, management of the Company does not
believe that the terms thereof would have a significant anti-takeover effect.
BENEFITS
RETIREMENT PLAN. The Association previously maintained a defined benefit
pension plan ("Retirement Plan") for all full time employees who had attained
the age of 21 years and had completed one year of service with the
Association. In general, the Retirement Plan provided for annual benefits
payable monthly upon retirement at age 65 in an amount equal to between 1.35%
and 2.00% of an employee's average earnings, which was the average
compensation paid to him or her over the five consecutive years of service
which produced the highest average during the 10 years preceding the
participant's retirement or termination of employment, excluding overtime,
commissions and bonuses, multiplied by his or her years of service (to a
maximum of 35 years). Under the Retirement Plan, an employee's benefits were
fully vested after five years of service. During the year ended September 30,
1996, the Association's pension expense under the Retirement Plan amounted to
$291,000.
At September 30, 1996, Messrs. Ochman, Sharp and Kennedy had 27, 24 and 2
years, respectively, of credited service under the Retirement Plan. The
Association terminated the Retirement Plan effective September 1, 1996 and
provided the participants with their benefits in March 1997. Messrs. Ochman,
Sharp and Kennedy received cumulative benefits under the Retirement Plan in lump
sum distributions of approximately $1.15 million, $543,000 and $22,000,
respectively, which cumulative benefits reflect 27, 24 and 2 years,
respectively, of credited service.
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT. In September 1987, the
Association entered into a Supplemental Executive Retirement Agreement ("SERP")
with Mr. Ochman in order to supplement the retirement benefits to be received by
him pursuant to the Association's Retirement Plan. Under the SERP, upon
retirement from the Association after attaining age 65, Mr. Ochman would have
been entitled to receive an annual supplemental retirement benefit equal to
1.35% of his final average earnings, as defined in the Retirement Plan, up to
the social security covered compensation, plus 2% of final average earnings in
excess of such amount multiplied by Mr. Ochman's years of service (to a maximum
of 35 years), and reduced by the benefit payable under the Retirement Plan. The
obligation to make payments pursuant to the SERP was unfunded, and the
Association annually credited to an account an amount which was projected to be
sufficient to defray the Association's obligation under the SERP. During the
year ended September 30, 1996, the Association recognized an expense of $824,000
in connection with the SERP. The Association has terminated the SERP effective
September 1, 1996 and provided cumulative SERP benefits of approximately $1.7
million to Mr. Ochman in March 1997. This amount represents cumulative benefits,
including the earnings thereon, since 1987.
-54-
<PAGE>
DEFERRED COMPENSATION AGREEMENT. In January 1977, the Association and
Mr. Ochman entered into a deferred compensation agreement which was restated
as of December 1988 (the "Agreement"), pursuant to which Mr. Ochman was
permitted to defer a discretionary percentage of the total compensation
otherwise payable to him. The payment of deferred compensation pursuant to
the Agreement was unfunded, and the Association credited to a deferred
compensation account the amounts of compensation deferred by Mr. Ochman.
Amounts held pursuant to the Agreement were required to be paid to Mr. Ochman
within 60 days following the date of the termination of his employment with
the Association, or as may be permitted at an earlier date by the Board of
Directors with Mr. Ochman abstaining from voting. Mr. Ochman deferred $16,000
of compensation during fiscal 1996. The Association and Mr. Ochman terminated
the agreement in January 1996, at which time the remaining cumulative
deferred amount of $202,000 was distributed to Mr. Ochman.
LIFE INSURANCE ARRANGEMENTS. In October 1981, the Association and Mr.
Ochman entered into a supplemental deferred compensation agreement (the
"Supplemental Agreement") pursuant to which the Association agreed to maintain
certain life insurance policies on Mr. Ochman's life with an aggregate face
amount of approximately $389,600 until Mr. Ochman's retirement after having
attained the age of 65. Life insurance policies that were previously owned by
the Association's Retirement Plan were purchased from the Retirement Plan by the
Association pursuant to the Supplemental Agreement for an amount equal to their
then cash value. The policies were amended to provide that the beneficiary of
the policies shall be Mr. Ochman's spouse and her heirs, and the Association
agreed to continue to pay the required premium payments. During the year ended
September 30, 1997, the Association paid total premiums of $9,510 with respect
to these insurance contracts. The Supplemental Agreement provides that,
following Mr. Ochman's retirement or disability, the Association will commence
payment to Mr. Ochman of the cash value of the insurance contracts in monthly
installments over a period of ten years.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Company has established the
ESOP for employees of the Company and the Association. Full-time employees of
the Company and the Association who have been credited with at least 1,000 hours
of service during a twelve month period and who have attained at least age 21
are eligible to participate in the ESOP.
In connection with the mutual to stock conversion of the Association, the
ESOP borrowed funds from the Company to purchase 8% of the Common Stock issued
in the conversion. The loan to the ESOP is being repaid principally from the
Company's and the Association's contributions to the ESOP over a period of 10
years, and the collateral for the loan is the Common Stock purchased by the
ESOP. The Company may, in any plan year, make additional discretionary
contributions for the benefit of plan participants in either cash or shares of
Common Stock, which may be acquired through the purchase of outstanding shares
in the market or from individual stockholders, upon the original issuance of
additional shares by the Company or upon the sale of treasury shares by the
Company. Such purchases, if made, would be funded through additional borrowings
by the ESOP or
-55-
<PAGE>
additional contributions from the Company. The timing, amount and manner of
future contributions to the ESOP will be affected by various factors,
including prevailing regulatory policies, the requirements of applicable laws
and regulations, and market conditions.
Shares purchased by the ESOP with the proceeds of the loan are held in a
suspense account and released on a pro rata basis as debt service payments are
made. Discretionary contributions to the ESOP and shares released from the
suspense account are allocated among participants on the basis of compensation.
Forfeitures are reallocated among remaining participating employees and may
reduce any amount the Company might otherwise have contributed to the ESOP.
Participants will vest in their right to receive their account balances within
the ESOP at the rate of 20% per year, starting with completion of their third
year of service. In the case of a "change in control," as defined, however,
participants will become immediately fully vested in their account balances.
Benefits may be payable upon retirement, early retirement, disability or
separation from service. The Company's contributions to the ESOP are not fixed,
so benefits payable under the ESOP cannot be estimated. Messrs. Borden, Gleason
and Stiles serve as trustees of the ESOP.
The Board of Directors of the Company has authorized an excess benefit
plan ("EBP") to provide certain additional retirement benefits to Mr. Ochman.
The EBP provides that Mr. Ochman shall receive an annual allocation of stock
units representing shares of Common Stock of the Company. The number of stock
units allocable to his benefit each year shall be equal to the difference
between the annual allocation of shares that would have been made to him in
the ESOP, without regard to the $150,000 limitation as set forth in Section
401(a)(17) of the Code, minus the number of shares actually allocated to his
ESOP account in a particular year. The Company allocated 33,746 stock units
having an aggregate value of $535,521 as of September 30, 1997 to the EBP in
fiscal 1997.
-56-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of the date indicated, certain
information as to the Common Stock beneficially owned by (i) each person or
entity, including any "group" as that term is used in Section 13(d)(3) of the
1934 Act, who or which was known to the Company to be the beneficial owner of
more than 5% of the issued and outstanding Common Stock, (ii) the directors of
the Company, (iii) certain executive officers of the Company, and (iv) all
directors and executive officers of the Company and the Association as a group.
<TABLE>
<CAPTION>
Common Stock
Beneficially Owned as of
September 30, 1997(1)(2)
-------------------------
Name of Beneficial Owner No. %
- ------------------------------------------------------------------------------------ ----------------- ------
<S> <C> <C>
IBS Financial Corp. Employee 1,223,347(3) 11.2%
Stock Ownership Plan Trust
1909 E. Route 70
Cherry Hill, New Jersey 08003
Lawrence B. Seidman, ET AL. 887,506(4) 8.1%
1235A Route 23 South
Wayne, New Jersey 07470
Directors:
Thomas J. Auchter 164,534(3)(5)(6) 1.5%
John A. Borden 123,904(3)(5)(7) 1.1%
Paul W. Gleason 116,027(5) 1.1%
Francis X. Lorbecki, Jr 115,515(5)(8) 1.0%
Joseph M. Ochman, Sr 440,436(3)(9) 4.0%
Albert D. Stiles, Jr 199,051(5)(10) 1.7%
Certain other executive officers:
Richard G. Sharp 149,691(11) 1.4%
All directors and executive officers of the Company and the Association
as a group (12 persons) 1,584,854(3)(12) 13.7%
</TABLE>
(FOOTNOTES ON FOLLOWING PAGES)
-57-
<PAGE>
- ------------------------
(1) For purposes of this table, pursuant to rules promulgated under the 1934
Act, an individual is considered to beneficially own shares of Common Stock
if he or she directly or indirectly has or shares (1) voting power, which
includes the power to vote or to direct the voting of the shares; or (2)
investment power, which includes the power to dispose or direct the
disposition of the shares. Unless otherwise indicated, an individual has
sole voting power and sole investment power with respect to the indicated
shares.
(2) Under applicable regulations, a person is deemed to have beneficial
ownership of any shares of Common Stock which may be acquired within 60 days
of September 30, 1997 pursuant to the exercise of outstanding stock options.
Shares of Common Stock which are subject to stock options are deemed to be
outstanding for the purpose of computing the percentage of outstanding
Common Stock owned by such person or group but not deemed outstanding for
the purpose of computing the percentage of Common Stock owned by any other
person or group.
(3) The IBS Financial Corp. Employee Stock Ownership Plan Trust ("Trust") was
established pursuant to the IBS Financial Corp. Employee Stock Ownership
Plan ("ESOP") by an agreement between the Company and Messrs. Ochman,
Auchter and Borden, who act as trustees of the plan ("Trustees"). As of
September 30, 1997, 899,712 shares of Common Stock held in the Trust were
unallocated and 323,635 shares had been allocated to the accounts of
participating employees. Under the terms of the ESOP, the Trustees will
generally vote the allocated shares held in the ESOP in accordance with
the instructions of the participating employees and will generally vote
unallocated shares held in the ESOP in the same proportion for and
against proposals to stockholders as the ESOP participants and
beneficiaries actually vote shares of Common Stock allocated to their
individual accounts, subject in each case to the fiduciary duties of the
ESOP trustees and applicable law. Any allocated shares which either
abstain on the proposal or are not voted will be disregarded in
determining the percentage of stock voted for and against each proposal
by the participants and beneficiaries. The amount of Common Stock
beneficially owned by directors who serve as trustees of the ESOP and by
all directors and executive officers as a group does not include the
unallocated shares held by the Trust.
(4) Based on a Schedule 13D filed pursuant to the 1934 Act by Lawrence B.
Seidman, Seidman and Associates, L.L.C. ("SAL"), Seidman and Associates II,
L.L.C. ("SAL II"), Federal Holdings, L.L.C. ("Holdings"), Seidman Investment
Partnership, L.P. ("SIP"), The Benchmark Company, Inc. ("TBCI"), Benchmark
Partners, LP ("Partners"), Richard Whitman, Lorraine Di Paolo, Dennis
Pollack, and Ernest Beier, Jr. (collectively, the "Reporting Persons"),
which have formed a "group" pursuant to Rule 13d-5 under the 1934 Act. Mr.
Seidman beneficially owns and has the right to vote and dispose of 4,117
shares of Common Stock owned by his retirement account.
-58-
<PAGE>
Mr. Seidman also claims sole investment discretion and voting authority
over an additional 8,976 shares of Common Stock held by Jeffrey Greenberg
(3,105 shares), Steven Greenberg (3,105 shares), Richard Baer (730
shares), Brent Wolmer (690 shares) and Sonia Seidman (1,346 shares). The
Schedule 13D filed by Mr. Seidman's group indicates that these last five
individuals have agreed to sell and vote their shares as directed by Mr.
Seidman. In addition, Mr. Seidman, in his capacity as the President of
Veteri Place Corporation, the sole general partner of SIP, which is an
investment partnership, and as manager of SAL, SAL II and Holdings,
companies organized to invest in securities, may be deemed to
beneficially own 418,674 shares of Common Stock owned beneficially by
such companies. Mr. Whitman and Ms. Di Paolo, the President and Executive
Vice President, respectively, of TCBI, a broker-dealer and investment
advisor, and each a general partner of Partners, an investment
partnership, have sole dispositive and voting power as to 3,542 shares
and 32,677 shares, respectively, of Common Stock. In addition, Mr.
Whitman and Ms. DiPaolo may be deemed to have shared dispositive and
voting power as to the 250,504 shares and the 143,750 shares of Common
Stock held by TBCI and Partners, respectively, except that one or both of
these companies sold an aggregate of 2,875 shares subsequent to the
Schedule 13D amendment dated January 23, 1997. Messrs. Pollack and Beier
own 14,081 shares and 14,950 shares, respectively, of Common Stock. The
above amounts exclude shares held by relatives of Messrs. Pollack and
Beier, as to which shares they disclaim beneficial ownership.
(5) Includes 18,946 unvested shares granted to each non-employee director
pursuant to the Company's Recognition and Retention Plan and Trust
("Recognition Plan"), which shares may be voted by each director, and
73,431 shares (67,681 shares for Mr. Gleason) which may be acquired upon
the exercise of stock options exercisable within 60 days of September 30,
1997.
(6) Includes 31,625 shares held by Mr. Auchter's wife.
(7) Includes 1,897 shares held by Mr. Borden's wife.
(8) Includes 63 shares held by Mr. Lorbecki's wife.
(9) Includes 111,495 shares held jointly with Mr. Ochman's wife, 88,116
unvested shares granted to Mr. Ochman pursuant to the Company's
Recognition Plan which may be voted by Mr. Ochman, 15,034 shares
allocated to Mr. Ochman pursuant to the Company's ESOP, 6,325 shares held
by Mr. Ochman's wife, 3,232 shares held in trust for the benefit of Mr.
Ochman's grandchildren and 87,977 shares which may be acquired upon the
exercise of stock options exercisable within 60 days of
September 30, 1997.
(10) Includes 10,120 shares held by Mr. Stiles' wife.
(11) Includes 12,650 shares held jointly with Mr. Sharp's wife, 8,133 shares
held by Mr. Sharp's wife, 35,245 unvested shares granted to Mr. Sharp
pursuant to the
-59-
<PAGE>
Company's Recognition Plan which may be voted by Mr. Sharp, 15,454
shares allocated to Mr. Sharp pursuant to the Company's ESOP and 59,188
shares which may be acquired upon the exercise of stock options
exercisable within 60 days of September 30, 1997.
(12) Includes 65,120 shares allocated to all executive officers as a group
pursuant to the Company's ESOP, 274,755 unvested shares granted to all
executive officers and directors as a group pursuant to the Company's
Recognition Plan which may be voted by such persons, and 612,326 shares
which may be acquired by all executive officers and directors as a group
upon the exercise of stock options exercisable within 60 days of September
30, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Association's policy provides that all loans made by the Association to
its directors and officers are made in the ordinary course of business, are made
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons and
do not involve more than the normal risk of collectability or present other
unfavorable features. During the fiscal year ended September 30, 1997, none of
the Association's directors and executive officers had aggregate loan balances
in excess of $60,000, and no such individual had engaged in any transaction with
the Association with a value in excess of $60,000.
-60-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Document filed as part of this Report.
(1) The following documents are filed as part of this report and are
incorporated herein by reference from the Registrant's 1997 Annual Report.
Report of Independent Auditors.
Consolidated Statements of Financial Condition at September 30, 1997 and
1996.
Consolidated Statements of Income for the Years Ended September 30, 1997,
1996, and 1995.
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended September 30, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1997, 1996 and 1995.
Notes to the Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are omitted
because they are not applicable or the required information is included in
the Consolidated Financial Statements or notes thereto.
-61-
<PAGE>
(3)(a) The following exhibits are filed as part of this Form 10-K,
and this list includes the Exhibit Index.
<TABLE>
<CAPTION>
No. Description
- ------- -----------------------------------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation of IBS Financial Corp.(1)
3.2 Amended Bylaws of IBS Financial Corp.(2)
4 Stock Certificate of IBS Financial Corp.(1)
10.1 IBS Financial Corp. Employee Stock Ownership Plan and Trust(1) *
10.2 Amendment No. 1 to the IBS Financial Corp. Employee Stock Ownership Plan and Trust(2) *
10.3 Employment Agreement between the Registrant and Joseph M. Ochman, Sr.(2) *
10.4 Employment Agreement between Inter-Boro Savings and Loan Association and Joseph M.
Ochman, Sr.(2)*
10.5 Employment Agreement between the Registrant, Inter-Boro Savingsand Loan Association
and Richard G. Sharp (expired in 10/97)(3)*
10.6 Stock Option Plan(3) *
10.7 Recognition and Retention Plan of Inter-Boro Savings and Loan Association and Trust
Agreement(3) *
10.8 Amendment Nos. 2 and 3 to the IBS Financial Corp. Employee Stock Ownership Plan and
Trust *
13 1997 Annual Report to Stockholders
21 Subsidiaries of the Registrant--Reference is made to Item 1. "Business" for the
required information
27 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 33-80548) filed by the Registrant with the Securities and
Exchange Commission ("SEC") on June 21, 1994, as amended.
(2) Incorporated by reference from the Annual Report on Form 10-K for the
year ended September 30, 1996 filed by the Registrant with the SEC.
(3) Incorporated by reference from the Annual Report on Form 10-K for the
year ended September 30, 1994 filed by the Registrant with the SEC.
* Management contract or compensatory plan or arrangement.
(3) (b) Reports filed on Form 8-K.
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
IBS FINANCIAL CORP.
By: /s/ Joseph M. Ochman, Sr.
-------------------------------
Joseph M. Ochman, Sr.
Chairman of the Board,
President and Chief Executive
Officer
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.
/s/ Joseph M. Ochman, Sr. December 19, 1997
- ---------------------------------------
Joseph M. Ochman, Sr.
Chairman of the Board, President and
Chief Executive Officer
/s/ Richard G. Sharp December 19, 1997
- ---------------------------------------
Richard G. Sharp
Executive Vice President and
Chief Financial Officer
/s/ Matthew J. Kennedy December 19, 1997
- ---------------------------------------
Matthew J. Kennedy
Executive Vice President and Treasurer
<PAGE>
/s/ Thomas J. Auchter December 19, 1997
- ---------------------------------------
Thomas J. Auchter
Director
/s/ John A. Borden December 19, 1997
- ---------------------------------------
John A. Borden
Director
/s/ Albert D. Stiles, Jr. December 19, 1997
- ---------------------------------------
Albert D. Stiles, Jr.
Director
/s/ Paul W. Gleason December 19, 1997
- ---------------------------------------
Paul W. Gleason
Director
<PAGE>
Exhibit 10.8
Amendment Nos. 2 and 3 to the IBS Financial Corp.
Employee Stock Ownership Plan and Trust
<PAGE>
AMENDMENT NUMBER TWO TO
IBS FINANCIAL CORP.
EMPLOYEE STOCK OWNERSHIP PLAN
BY THIS AGREEMENT, the IBS Financial Corp. Employee Stock Ownership Plan
(herein referred to as the "Plan") is hereby amended as follows, effective as of
January 1, 1996;
1. The second paragraph of Section 1.10 of the Plan is restated in its
entirety to read as follows:
For purposes of this Section, the determination of Compensation shall be
made by:
(a) excluding overtime.
(b) excluding all compensation received under a restricted stock
plan, including but not limited to the IBS Financial Corp. Recognition
Plan of Inter-Boro Savings and Loan Association.
(c) excluding discretionary bonuses.
(d) including amounts which are contributed by the Employer pursuant
to a salary reduction agreement and which are not includible in the gross
income of the Participant under Code Sections 125, 402(e)(3), 402(h),
403(b) or 457, and Employee contributions described in Code Section
414(h)(2) that are treated as Employer contributions.
2. All other provisions of the Plan shall continue in full force and effect.
IN WITNESS WHEREOF, this Amendment has been executed this 20th day of
December 1996.
Signed, sealed, and delivered
in the presence of:
IBS FINANCIAL CORP.
By: /s/ Joseph M. Ochman, Sr.
--------------------------------------
Joseph M. Ochman, Sr.
President and Chief Executive Officer
<PAGE>
IBS FINANCIAL CORP. EMPLOYEE STOCK
OWNERSHIP PLAN
By: /s/ Joseph M. Ochman, Sr.
--------------------------------------
Joseph M. Ochman, Sr., Trustee
By: /s/ Thomas J. Auchter
--------------------------------------
Thomas J. Auchter, Trustee
By: /s/ John A. Borden
--------------------------------------
John A. Borden, Trustee
<PAGE>
AMENDMENT NUMBER THREE TO
IBS FINANCIAL CORP.
EMPLOYEE STOCK OWNERSHIP PLAN
BY THIS AGREEMENT, the IBS Financial Corp. Employee Stock Ownership Plan
(herein referred to as the "Plan") is hereby amended as follows, effective as of
August 4, 1997:
1. The second paragraph of Section 8.4 of the Plan is restated in its
entirety to read as follows:
The Trustee shall vote all shares of Company Stock held by it as part of
the Plan assets in the Unallocated Company Stock Suspense Account in the
same proportion for and against proposals to stockholders of the Employer as
Participants and Beneficiaries actually vote shares of Company Stock which
have been allocated to their individual Company Stock Accounts; provided,
however, that notwithstanding the foregoing, if the Trustee determines that
compliance with the Employee Retirement Income Security Act of 1974
("ERISA"), compliance with the fiduciary duties of the Trustee, or
compliance with the Employer ESOP Voting Policy requires the shares held in
the Unallocated Company Stock Suspense Account to be voted in a different
manner, then the Trustee shall vote the shares held in the Unallocated
Company Stock Suspense Account in a manner that complies with ERISA, the
Trustee's fiduciary duties, and the Employer ESOP Voting Policy. In the
event that not all shares of Company Stock which have been allocated to the
individual Company Stock Accounts of Participants and Beneficiaries are
voted by the Participants or Beneficiaries for or against particular
proposals to stockholders of the Employer, the shares allocated to
individual Company Stock Accounts which either abstained on the proposal to
stockholders or were not actually voted on such proposal shall be
disregarded in determining the percentage of Company Stock voted for and
against the proposal to stockholders by Participants and Beneficiaries. The
Trustee shall not vote those shares of Company Stock which have been
allocated to the individual Company Stock Accounts of Participants and
Beneficiaries for which no instructions have been received, unless the
Trustee determines that compliance with ERISA, compliance with the fiduciary
duties of the Trustee, or compliance with the Employer ESOP Voting Policy
requires the Trustee to vote such shares.
2. All other provisions of the Plan shall continue in full force and effect.
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed this 4th day of August
1997.
Signed, sealed, and delivered in the presence of:
IBS FINANCIAL CORP.
By: /s/ JOSEPH M. OCHMAN, SR.
------------------------------------------
Joseph M. Ochman, Sr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INTER-BORO SAVINGS AND LOAN ASSOCIATION
By: /s/ JOSEPH M. OCHMAN, SR.
------------------------------------------
Joseph M. Ochman, Sr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
IBS FINANCIAL CORP. EMPLOYEE STOCK
OWNERSHIP PLAN
By: /s/ JOHN A. BORDEN
------------------------------------------
John A. Borden, Trustee
By: /s/ PAUL W. GLEASON
------------------------------------------
Paul W. Gleason, Trustee
By: /s/ ALBERT D. STILES, JR.
------------------------------------------
Albert D. Stiles, Jr., Trustee
<PAGE>
1997
ANNUAL
REPORT
STOCKHOLDER/CUSTOMER SATISFACTION IS OUR GOAL
IBSF
----
IBS Financial Corp.
Cherry Hill, New Jersey
<PAGE>
TABLE OF CONTENTS
Consolidated Financial Highlights............ 1
President's Letter to Stockholders........... 2
Selected Consolidated Financial Data......... 5
Management's Discussion and Analysis of 6
Financial Condition and Results of
Operations.................................
Independent Auditors' Report................. 22
Consolidated Financial Statements
Consolidated Statements of Financial 23
Condition................................
Consolidated Statements of Income.......... 24
Consolidated Statements of Changes in 25
Stockholders' Equity.....................
Consolidated Statements of Cash Flows...... 26
Notes to Consolidated Financial Statements... 27
Directors and Officers....................... 49
Banking Locations............................ 51
Stockholder Information...................... 52
<PAGE>
IBS FINANCIAL CORP.
CONSOLIDATED FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
<S> <C> <C>
1997 1996
--------------- ----------
EARNINGS PERFORMANCE FOR THE FISCAL YEAR:
Net interest income.................................................................. $ 22,623 $ 24,733
Net income........................................................................... 5,806 4,537(b)
PER SHARE(A):
Net income........................................................................... $ 0.54 $ 0.37(b)
Cash dividends declared.............................................................. 0.54 0.20
Book value........................................................................... 11.69 11.67
FINANCIAL CONDITION AT FISCAL YEAR END:
Total assets......................................................................... $ 734,751 $ 742,051
Investments held to maturity......................................................... 27,859 26,712
Securities available for sale........................................................ 136,430 215,331
Mortgage-backed securities held to maturity.......................................... 326,869 285,267
Loans................................................................................ 210,008 185,031
Deposits............................................................................. 567,375 571,366
Stockholders' equity................................................................. 128,019 144,284
PERFORMANCE RATIOS:
Return on average assets............................................................. 0.78% 0.94%(c)
Return on average equity............................................................. 4.44% 4.56%(c)
Net interest margin.................................................................. 3.14% 3.44%
Operating expenses to average assets................................................. 1.93% 1.92%(c)
Efficiency ratio..................................................................... 61.38% 55.96%
</TABLE>
- ------------------------
(a) Per share amounts have been restated to reflect the 15% stock dividend paid
on May 6, 1997 and the 10% stock dividend paid on March 15, 1996.
(b) Reflects a one-time assessment of $3.7 million or $2.4 million after tax
($.20 per share) incurred in the September 1996 quarter to recapitalize the
Savings Association Insurance Fund of the Federal Deposit Insurance
Corporation. See Note 18 of Notes to the Consolidated Financial Statements.
(c) Exclusive of one-time SAIF assessment. Including the SAIF assessment, return
on average assets, return on average equity and operating expenses to
average assets were .61%, 2.98% and 2.42%, respectively.
1
<PAGE>
IBSF
IBS FINANCIAL CORP.
P.O. BOX 5477
CHERRY HILL * NEW JERSEY 08034 * (609) 424-8600
December 12, 1997
To Our Stockholders
IBS Financial Corp. recorded net income of $5.8 million or $.54 per share
during fiscal 1997 compared to $4.5 million or $.37 per share for the prior
fiscal year. Last fiscal year's results included a one-time special assessment
of $3.7 million ($2.4 million after tax) to recapitalize the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation. Excluding
the special one-time assessment, net income for the fiscal year ended September
30, 1996 amounted to $6.9 million or $.57 per share. Per share amounts for prior
periods have been restated to reflect the 15% stock dividend paid to
stockholders on May 6, 1997.
The decrease in earnings, excluding the special SAIF assessment, for the
fiscal year ended September 30, 1997 compared with the prior fiscal year was
principally attributable to decreased interest income and increased interest
costs. Net interest income amounted to $22.6 million for the year ended
September 30, 1997, decreasing by $2.1 million or 8.5% from $24.7 million for
the prior fiscal year. Average balances of net interest-earning assets declined
to $116.5 million for the year ended September 30, 1997 from $136.4 million for
the fiscal year ended September 30, 1996. The Company's stock buyback program,
while beneficial from a per share standpoint, has the effect of reducing
interest-earning assets and the related interest income as the proceeds of
maturing investments are used to repurchase shares of stock.
The Company's net interest margin averaged 3.14% for the year ended
September 30, 1997 compared with 3.44% for the prior fiscal year. This margin
compression reflected both increases in the rates paid on deposits and decreases
in the yields earned on loans and mortgage-backed securities. The principal
causes of this compression, in addition to the reason discussed in the preceding
paragraph, were relatively heavy repayments of higher rate residential loans and
mortgage-backed securities that were reinvested in lower rate loans and
mortgage-backed securities, and higher deposit costs paid in the marketplace to
retain funds.
To offset some of the anticipated margin compression, the Company continued
to change the mix of its lending products to increase the amount of higher rate
commercial real estate loans. At September 30, 1997, total loans amounted to
$210.0 million, up significantly from the $185.0 million at the end of the prior
fiscal year. Commercial real estate loans, many of which are secured by local
medical and professional offices, amounted to $24.6 million and represented
11.7% of total loan balances at September 30, 1997, compared with $19.5 million
and 10.6% of total loan balances, respectively, at the end of the previous
fiscal year. Most of the new borrowings in the form of FHLB advances were
channeled into loans and mortgage-backed securities.
General and administrative expenses only increased $.1 million or .6% from
$14.2 million for the year ended September 30, 1996, after adjusting for the
$3.7 million SAIF assessment charge in fiscal 1996, to $14.3 million for the
year ended September 30, 1997. Increased compensation and benefit costs of $.3
2
<PAGE>
million representing a 3.2% increase over the prior year, and increased
professional fees and other expenses, principally involving the proxy contest,
as well as increased advertising expense in connection with the new branch
offices opened in late 1996 amounting to approximately $.6 million were
partially offset by the decrease in the annual SAIF deposit insurance premium
expense of approximately $.8 million.
The Company's chief objective is to consider all appropriate steps to
enhance stockholder value including, but not limited to, improving its earnings
per share and its return on equity. The Company's goals include maintaining high
asset quality, reducing excess equity through the use of share repurchase
programs when appropriate, dividend enhancing policies, and increasing its asset
and earnings base through the use of branch acquisitions, bank and thrift
acquisitions when the same can be accomplished at reasonable prices and deposit
growth and borrowing programs.
IBSF's superior asset quality is best reflected in its commitment to adhere
to traditionally conservative investment and loan underwriting guidelines. As a
result of these efforts, the Company has consistently maintained a very low
level of nonperforming assets. At September 30, 1997 and 1996, such
nonperforming assets amounted to $961,000 and $821,000 or .13% and .11% of total
assets, respectively. During the last three fiscal years, the Company has
experienced no net loan charge-offs. In addition, the allowance for loan losses
amounted to 130% of nonperforming assets at September 30, 1997 increasing from
124% at the end of the prior fiscal year.
During the fiscal year ended September 30, 1997, the Company repurchased
1,303,766 shares on the open market, reissued 1,435,767 shares to stockholders
representing the 15% stock dividend and reissued 62,859 shares in connection
with exercise of stock options. At September 30, 1997, the Company had 660,396
shares in treasury stock at an average cost of $15.50 per share. These share
repurchase programs help the Company improve its return on equity and earnings
per share. However, net interest income and net income are adversely affected as
a result of these share repurchase programs due to the lost interest income on
the proceeds of maturing investments that are used to repurchase the shares.
Cash dividends declared during the fiscal year ended September 30, 1997
amount to $.54 per share and included a special cash dividend of $.25 ($.22
adjusted for the 15% stock dividend) paid on January 3, 1997. The quarterly cash
dividend rate increased from $.08 per share to the current $.10 per share on
September 16, 1997. In addition, a 15% stock dividend was paid on May 6, 1997.
Effectively, in excess of 90% of the Company's earnings for the year ended
September 30, 1997 was paid out to stockholders.
As part of its capital management plan to reduce excess equity, the
Company's tangible equity to assets ratio was 17.42% at September 30, 1997,
decreasing from 19.44% at the end of the prior fiscal year.
The Company has a solid franchise in attractive communities with the average
deposit per branch amounting to approximately $57 million, including its two
newer offices opened in late 1996. These offices, which are full service
branches, are located in Gloucester Township and Voorhees Township, Camden
County, New Jersey and are located between existing branch offices. They were
opened with the goal of enhancing the Company's approximate 7.1% market share
position in Camden County and
3
<PAGE>
improving the franchise value. The Company also has a 3.3% deposit market
share in Burlington County and a 1.5% deposit market share in Gloucester
County.
Looking forward to fiscal 1998, we believe that we are better positioned to
meet the challenges and opportunities that lie ahead. Barring unforeseen events,
we expect the Company to improve its performance in the upcoming fiscal year. We
thank you for your continued support and confidence. We also thank our
directors, officers and employees for their dedicated efforts.
Sincerely,
/s/ Joseph M. Ochman, Sr.
-------------------------
Joseph M. Ochman, Sr.
Chairman of the Board,
President/CEO
4
<PAGE>
IBS Financial Corp.
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION:
Total assets......................................... $ 734,751 $ 742,051 $ 726,536 $ 663,866 $ 665,933
Loans................................................ 210,008 185,031 141,781 140,618 157,030
Investments held to maturity......................... 27,859 26,712 241,345 289,495 238,138
Mortgage-backed securities held to maturity.......... 326,869 285,267 311,753 182,891 134,677
Securities available for sale........................ 136,430 215,331 -- -- --
Cash and equivalents................................. 15,811 12,466 12,542 32,586 119,014
Deposits............................................. 567,375 571,366 564,910 603,080 609,805
Stockholders' equity................................. 128,019 144,284 158,049 57,594 52,631
Nonperforming assets(1).............................. 961 827 663 1,005 5,478
Full service offices................................. 10 8 8 8 8
OPERATIONS:
Total interest income................................ $ 51,703 $ 52,152 $ 51,692 $ 41,525 $ 47,458
Total interest expense............................... 29,080 27,419 25,024 25,674 28,093
Net interest income.................................. 22,623 24,733 26,668 15,851 19,365
Provision for loan losses............................ 40 30 30 180 431
Other operating income............................... 685 687 663 901 1,663
Operating expenses................................... 14,321 14,231 12,215 9,015 8,738
Special SAIF assessment(2)........................... -- 3,700 -- -- --
Income before taxes.................................. 8,947 7,459 15,086 7,557 11,859
Income taxes......................................... 3,141 2,922 5,166 2,594 3,807
Net income........................................... 5,806 4,537 9,920 4,963 8,052
PER COMMON SHARE(3):
Net income........................................... $ 0.54 $ 0.37(2) $ 0.73 N/A N/A
Cash dividends....................................... 0.54 0.20 0.12 N/A N/A
OPERATING RATIOS (4):
Average yield earned on interest-earning assets...... 7.17% 7.25% 7.30% 6.36% 7.29%
Average rate paid on interest-bearing liabilities.... 4.81 4.70 4.39 4.20 4.60
Average interest rate spread (5)..................... 2.36 2.55 2.91 2.16 2.69
Net interest margin.................................. 3.14 3.44 3.77 2.43 2.98
Ratio of interest-earning assets to interest-bearing
liabilities........................................ 119.25 123.38 124.27 106.74 106.62
Net interest income to operating expenses............ 157.97 173.80 218.32 175.83 221.64
Operating expenses as a percent of average assets.... 1.93 1.92 1.68 1.34 1.32
Return on average assets............................. 0.78 0.61(2) 1.36 0.74 1.21
Return on average equity............................. 4.44 2.98(2) 6.37 8.98 16.33
Ratio of average equity to average assets............ 17.61 20.53 21.18 8.24 7.43
Dividend payout ratio................................ 90.80 51.07 17.06 N/A N/A
ASSET QUALITY RATIOS:
Nonperforming loans and troubled debt restructurings
as a percent of total loans........................ 0.46% 0.45% 0.47% 3.62% 3.49%
Nonperforming assets and troubled debt restructurings
as a percent of total assets....................... 0.13 0.11 0.09 0.77 0.82
Allowance for loan losses as a percent of total
loans.............................................. 0.51 0.55 0.70 0.38 1.06
Allowance for loan losses as a percent of
nonperforming loans................................ 130.07 123.80 149.9 52.7 30.5
Charge-offs to average loans receivable outstanding
during the period.................................. -- -- -- 0.89 --
</TABLE>
- ------------------------
(1) Nonperforming assets consist of nonperforming loans, troubled debt
restructurings and real estate owned ("REO"). Nonperforming loans consist of
nonaccrual loans and accruing loans 90 days or more overdue, while REO
consists of real estate acquired through foreclosure and real estate
acquired by acceptance of a deed-in lieu of foreclosure.
(2) Without giving effect to the special SAIF assessment, net income per share
would have been $.57 and return on average assets and return on average
equity would have been .94% and 4.56%, respectively. See Note 18 of Notes to
the Consolidated Financial Statements.
(3) Per share amounts have been restated to reflect the prior stock dividends
paid.
(4) Asset Quality Ratios are end of period ratios, except for charge-offs to
average loans. With the exception of end of period ratios, all ratios are
based on monthly balances during the indicated periods.
(5) Interest rate spread represents the difference between the weighted average
yield on average interest-earning assets and the weighted average cost of
average interest-bearing liabilities, and net interest margin represents net
interest income as a percent of average interest-earning assets.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
IBS Financial Corp. (the "Company") is a New Jersey corporation organized in
June 1994 by the Association for the purpose of acquiring all of the capital
stock of Inter-Boro Savings and Loan Association (the "Association") issued in
the conversion of the Association to stock form, which was completed on October
13, 1994. The only significant assets of the Company are its investments in the
capital stock of the Association, the Company's loan to an employee stock
ownership plan, and certain U.S. Government agency securities and
interest-bearing deposits.
The Association is a New Jersey chartered stock savings and loan association
which conducts business from ten offices located in Camden, Burlington and
Gloucester Counties, New Jersey. Two of these offices were opened in late 1996
in Gloucester and Voorhees Townships, Camden County. The Association's
operations date back to 1890. The Association's deposits are insured by the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC") to the maximum extent permitted by law.
IBS Financial Corp.'s consolidated operating results depend primarily upon
its net interest income, which is determined by the difference between interest
and dividend income on interest-earning assets, principally investment
securities and other investments, mortgage-backed securities and loans, and
interest expense on interest-bearing liabilities, which consist of deposits and
advances from the Federal Home Loan Bank of New York. Net interest-earning
assets have been decreasing during the past two years as a result of the
Company's share repurchase programs undertaken as part of its capital management
plan to reduce excess equity. As a result, the Company's net interest income has
been decreasing over this same period. The Company's net income is also affected
by its provision for loan losses, as well as the level of its other income,
including loan fees and late charges, gains on the sale of investments and on
the sale of real estate owned and other income, its general and administrative
expenses, such as compensation and employee benefits, net occupancy and
equipment expense, federal deposit insurance and miscellaneous other expenses,
and income taxes.
This Annual Report includes statements that may constitute forward-looking
statements, usually containing the words "believe," "estimate," "project,"
"expect," "intend" or similar expressions. These statements are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements inherently involve risks and uncertainties that
could cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that could cause future results to vary from
current expectations include, but are not limited to, the following: changes in
economic conditions (both generally and more specifically in the markets in
which the
6
<PAGE>
Company operates); changes in interest rates, deposit flows, loan demand,
real estate values and competition; changes in accounting principles,
policies or guidelines and in government legislation and regulation (which
change from time to time and over which the Company has no control); and
other risks detailed in this Annual Report and in the Company's other
Securities and Exchange Commission filings. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect
events or circumstances that arise after the date hereof.
OPERATING STRATEGY
The Company has traditionally offered a variety of savings products to
its retail customers. The Company invests its funds in U.S. Government, U.S.
Government agency and mortgage-backed securities and other short-term
investments and has concentrated its lending activities on real estate loans
secured by single (i.e., "one-to-four") family residential properties. In
fiscal 1996 and 1997, the Company also expanded its investment in commercial
real estate loans. The commercial real estate loans originated are
collateralized by small professional and medical office buildings, commercial
retail establishments and religious organizations principally in the
Company's market area. In addition and to a lesser degree, construction loans
are originated to construct primarily single-family residences. In the past,
the Company has also purchased whole residential mortgage loans and
participation interests in commercial real estate projects located
principally in New Jersey.
The Company began to deemphasize its real estate lending in the late 1980's
due to, among other reasons, declining real estate values. With the significant
decline in interest rates experienced during the early 1990's, the Company was
unwilling to actively originate long-term, fixed-rate residential mortgage loans
or purchase fixed-rate mortgage-backed securities. During this period, the
Company elected to build its liquidity, investing in U.S. Government and U.S.
Government agency securities with short maturities and cash and cash
equivalents, particularly bankers' acceptances. During the last half of 1994,
with a rising rate environment, the Board of Directors authorized the Company to
initiate a "tiered" or laddered investment strategy under which it anticipated
investing $400 million over approximately an 18-month time period in
mortgage-backed securities and U.S. Government securities with varying
maturities. The Company successfully reinvested the approximately $400 million
in mortgage-backed securities and U.S. Government and agency securities during
the fiscal year ended September 30, 1995. At September 30, 1995, mortgage-backed
securities amounted to $311.8 million or 42.9% of assets compared to $182.9
million or 27.5% of assets at September 30, 1994. In addition, the Company's net
interest margin increased to 3.77% for the year ended September 30, 1995
compared to 2.43% for the fiscal year ended September 30, 1994.
During fiscal 1996, the Company began emphasizing the origination of
single-family residential loans and changed the mix of its originations to
include more commercial real estate loans in the local marketplace. In addition,
the Company continued to reduce its liquid assets by reinvesting the proceeds of
maturing investments into mortgage-backed
7
<PAGE>
securities generally with maturities of five and seven years. This was
designed to increase the Company's yield on its loan portfolio. However, the
Company experienced heavy repayments of higher yielding residential loans and
mortgage-backed securities that were reinvested in lower yielding loan and
mortgage-backed securities. As a result, the Company's net interest margin
was pressured, decreasing to 3.44% for the year ended September 30, 1996.
During fiscal 1997, the Company continued to emphasize the origination of
single-family residential loans and commercial real estate loans. The Company
also continued to experience relatively heavy repayments of higher yielding
residential loans and mortgage-backed securities that were reinvested in
lower yielding loan and mortgage-backed securities. In addition, the
Company's net interest-earning assets declined by approximately $20 million,
principally reflecting the shares repurchased during the fiscal year. This
resulted in a decrease of 30 basis points in the Company's net interest
margin to 3.14% for the year ended September 30, 1997.
ASSET AND LIABILITY MANAGEMENT
The principal objective of the Company's asset liability management
function is to evaluate the interest-rate risk included in certain balance
sheet accounts, determine the level of risk appropriate given the Company's
business focus, operating environment, capital and liquidity requirements and
performance objectives, establish prudent asset concentration guidelines and
manage the risk consistent with Board approved guidelines. The Company seeks
to reduce the vulnerability of its operations to changes in interest rates
and to manage the ratio of interest-rate sensitive assets to interest-rate
sensitive liabilities within specified maturities or repricing dates. The
Company's actions in this regard are taken under the guidance of the
Asset/Liability Management Committee ("ALCO"), which is chaired by the Chief
Financial Officer and comprised principally of members of the Company's
senior management. The ALCO reviews, among other things, the sensitivity of
the Company's assets and liabilities to interest rate changes, the book and
market values of assets and liabilities, unrealized gains and losses,
purchase activity and maturity of investments. In connection therewith, the
ALCO generally reviews the Association's liquidity, cash flow needs,
maturities of investments, deposits and borrowings and current market
conditions and interest rates. The Chief Executive Officer has authority to
adjust pricing weekly with respect to the Association's retail deposits.
The Company's primary ALCO monitoring tool is asset/liability simulation
models prepared on a quarterly basis and designed to capture the dynamics of
balance sheet, rate and spread movements and to quantify variations in net
interest income under different interest rate environments. The Company also
utilizes market-value analysis, which addresses the change in equity value
arising from movements in interest rates. The market value of equity is
estimated on a market value basis. Market value analysis is intended to evaluate
the impact of immediate and sustained interest-rate shifts of the current yield
curve upon the market value of the current balance sheet.
8
<PAGE>
One measure of interest rate risk is the gap ratio, which is defined as the
difference between the dollar volume of interest-earning assets and
interest-bearing liabilities maturing or repricing within a specified period of
time as a percentage of total assets. A positive gap results when the volume of
interest rate-sensitive assets exceeds that of interest rate-sensitive
liabilities within comparable time periods. A negative gap results when the
volume of interest-bearing liabilities exceeds that of interest rate-sensitive
assets within comparable time periods.
As indicated in the table below, the Company's one year gap position at
September 30, 1997 was a negative 18.7%. The one year time frame has been keyed
on because the majority of the Company's interest-earning assets and
interest-bearing liabilities are subject to repricing or maturity within this
period. Generally, a financial institution with a negative gap position will
most likely experience increases in net interest income during periods of
falling interest rates and decreases in net interest income during periods of
rising interest rates.
RATE SENSITIVITY ANALYSIS. The following rate sensitivity table sets forth
certain information at September 30, 1997 relating to the Company's assets and
liabilities based on scheduled repricing for adjustable assets and liabilities,
or by contractual maturity for fixed-rate assets and liabilities.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------------------------------------
SIX OVER 1-3 OVER 3-5 OVER 5
MONTHS ONE YEAR YEARS YEARS YEARS
---------- ----------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans............................................ $ 17,388 $ 23,904 $ 51,966 $ 30,176 $ 89,392
Mortgage-backed securities....................... 53,203 65,380 113,138 211,706 18,329
Investments...................................... 43,787 -- -- -- --
---------- ----------- ----------- ---------- ----------
Total.......................................... 114,378 89,284 165,104 241,882 107,721
---------- ----------- ----------- ---------- ----------
Interest-bearing liabilities:
Maturing certificates of deposit................. 150,230 135,129 110,781 20,260 8,973
MMDA and NOW accounts............................ 33,627 2,034 6,172 13,672 --
Passbook balances................................ 7,512 7,512 30,048 30,048 13,277
Borrowed funds................................... 2,489 2,568 21,104 7,182 975
---------- ----------- ----------- ---------- ----------
Total.......................................... 193,858 147,243 168,105 71,162 23,225
---------- ----------- ----------- ---------- ----------
GAP................................................ $ (79,480) $ (57,959) $ (3,001) $ 170,720 $ 84,496
---------- ----------- ----------- ---------- ----------
---------- ----------- ----------- ---------- ----------
Cumulative GAP..................................... $ (79,480) $ (137,439) $ (140,440) $ 30,280 $ 114,776
---------- ----------- ----------- ---------- ----------
---------- ----------- ----------- ---------- ----------
Cumulative GAP to total assets..................... (10.8)% (18.7)% (19.1)% 4.1% 15.6%
---------- ----------- ----------- ---------- ----------
---------- ----------- ----------- ---------- ----------
</TABLE>
9
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk of exposure is interest rate risk. The
Company has no exposure to foreign exchange since all of its transactions are
denominated in U.S. dollars. In addition, the Company has no specific exposure
to commodity prices.
Interest-rate risk ("IRR") is the exposure of a banking organization's
financial condition to adverse movements in interest rates. Accepting a
reasonable level of this risk can be an important source of profitability and
stockholder value. However, excessive levels of IRR can pose a significant
threat to the Company's earnings and stockholders' equity. As such, the
Company's goal is to maintain IRR at prudent levels as part of its effective
risk management plan.
Evaluating a financial institution's exposure to changes in interest rates
includes assessing both the adequacy of the management process to control IRR
and the institution's quantitative levels of risk exposure. As part of its
management process, the Company seeks to ensure that appropriate policies,
procedures and management information systems are in place to maintain IRR at
prudent levels. Evaluating the quantitative level of IRR exposure requires the
Company to assess the current and potential future effects of changes in
interest rates on its consolidated financial position, including capital
adequacy and earnings.
The Office of Thrift Supervision issued Thrift Bulletin No. 13 entitled
"Interest Rate Risk Exposure Guidelines on Director and Officer
Responsibilities." This bulletin indicates that managing interest rate risk is
an essential component in the safe and sound management of a savings
association. It provides guidance to insured savings associations regarding
their responsibilities in this area. It also describes the policies, practices
and procedures that associations are expected to utilize to comply with the
regulations on interest rate risk. The guidance emphasizes the need for active
board of director and management oversight and a comprehensive risk-management
process that effectively identifies, measures, limits and controls interest-rate
risk. Financial institutions derive their income primarily from the excess of
interest income collected over interest paid. The rates of interest an
institution earns on its assets and owes on its liabilities generally are
established contractually for a period of time. Since market interest rates
change over time, an institution may be exposed to lower profit margins if it
cannot adapt to interest rate changes in the marketplace. For example, an
institution's assets generally are invested at intermediate or long-term rates
and are funded with short-term rate liabilities. Should the market interest
rates rise by the time the short-term liabilities must be refinanced, the
increase in the institution's interest expense on its liabilities may not be
sufficiently offset if the assets continue to earn at the intermediate or
long-term fixed rates. As such, an institution's profits could decrease on its
existing asset portfolio because the institution either will have reduced net
interest income or, even possibly, net interest expense. Similar risks exist
when assets are subject to contractual interest-rate ceilings, or rate sensitive
assets are funded with longer-term, fixed rate liabilities in a decreasing
interest rate environment.
10
<PAGE>
Several techniques may be used by an institution to minimize interest rate
risk. One approach used by the Company is to analyze periodically its assets
and liabilities and adjust future financing and investment decisions based on
payment streams, interest rates, contractual maturities and estimated
sensitivity to actual or potential changes in market interest rates. In
recent years, the Company has invested in mortgage-backed securities with
shorter maturities as one way to help manage its gap position. Such
activities fall under the broad definition of asset/liability management. The
Company's primary asset/liability management technique is the measurement of
the gap, that is, the difference between the cash flow amounts of
interest-sensitive assets and liabilities that will be repriced during a
given period. For example, if the asset amount to be repriced exceeds the
corresponding liability amount for a certain period, the institution is in an
asset-sensitive gap position. In this situation, net interest income would
increase if market interest rates rose or decrease if market interest rates
fell. Alternatively, if more liabilities reprice than assets will reprice in
a given time period, the institution is in a liability-sensitive gap
position. As such, net interest income would decline when market interest
rates rose and increase when market interest rates fell. These illustrative
examples assume that interest rate changes for assets and liabilities are of
the same magnitude, whereas actual interest-rate changes generally differ in
magnitude for assets and liabilities.
Several ways an institution can manage interest rate risk includes
selling existing assets or repaying certain liabilities; matching repricing
periods for new assets and liabilities, for example by shortening terms of
new loans or investments; extending liability terms through new borrowings or
the pricing of deposit products; and hedging existing assets, liabilities or
anticipated transactions. An institution may also invest in more complex
financial instruments intended to hedge or otherwise change interest-rate
risk. Interest-free swaps, future contracts, options on futures, and other
such derivative financial instruments often are used for this purpose.
Because these instruments are sensitive to interest-rate changes, they
require effective management expertise. Financial institutions are also
subject to prepayment risk in falling interest rate environments. For
example, mortgage loans and mortgage-backed securities may be prepaid by a
debtor so that the debtor may refinance its obligation at a new and lower
interest rate. The Company has not purchased derivative financial instruments
in the past and does not currently intend to purchase such instruments in the
near future. Prepayments of assets carrying higher interest rates reduce the
Company's interest income and overall asset yields. A large portion of an
institution's liabilities may be short-term or due on demand, while most of
its assets may be invested in long-term loans or investments. Accordingly,
the Company requires the financial flexibility to have in place sources of
cash to meet short-term needs. These funds can be obtained by reducing liquid
assets, increasing deposits or borrowings, or selling assets. FHLB advances
have become increasingly important sources of liquidity for the Company.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates at September 30,
1997, based on the information and assumptions disclosed in the notes. The
Company believes that the assumptions used, which are based on statistical data,
are reasonable. The Company had
11
<PAGE>
no derivative financial instruments or trading portfolio at September 30,
1997. The expected maturity date values for loans receivable, mortgage-backed
securities and investment securities were adjusted for the expected
prepayments as disclosed in the notes. Similarly, expected maturity date
values for interest-bearing core deposits were calculated based upon
estimates of the period over which the deposit would be outstanding as
disclosed in the notes. The adjustable-rate financial instrument's maturity
date values likewise were adjusted for expected prepayments as disclosed in
the notes. However, from a risk management standpoint, the Company believes
that repricing dates rather than expected maturity dates are more relevant in
analyzing the value of such financial instruments.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE-FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------
THERE- FAIR
1998 1999 2000 2001 2002 AFTER TOTAL VALUE
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1)(2)(3)
Fixed rate............................. $ 26,363 $ 23,144 $ 19,453 $ 16,117 $ 14,058 $ 89,391 $ 188,526 $ 189,457
Average interest rate................ 7.85% 7.78% 7.74% 7.68% 7.64% 7.62% -- --
Adjustable rate........................ $ 4,580 $ 2,984 $ 2,537 $ 2,156 $ 1,833 $ 9,535 $ 23,625 $ 23,741
Average interest rate................ 7.96% 7.48% 7.47% 7.46% 7.45% 7.45% -- --
Mortgage-backed securities(4)(5)
Fixed rate............................. $ 67,459 $ 56,790 $ 56,349 $ 37,385 $ 174,321 $ 18,327 $ 410,631 $ 415,821
Average interest rate................ 7.31% 7.23% 7.77% 6.93% 6.40% 9.03% -- --
Adjustable rate........................ $ 5,726 $ 5,218 $ 4,762 $ 4,353 $ 3,989 $ 27,752 $ 51,800 $ 52,454
Average interest rate................ 6.88% 6.88% 6.88% 6.88% 6.88% 6.88% -- --
Investments(6)............................. $ 38,163 -- -- -- -- -- $ 38,163 $ 38,163
Average interest rate................ 5.49% -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Total................................ $ 142,291 $ 88,136 $ 83,101 $ 60,011 $ 194,201 $ 145,005 $ 712,745 $ 719,636
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
Interest-bearing deposits and
escrows(7)(8)(9)(10)................... $ 336,044 $ 73,787 $ 73,214 $ 33,147 $ 30,833 $ 22,250 $ 569,275 $ 567,826
Average interest rate................ 5.03% 4.93% 4.95% 3.18% 3.43% 4.02% -- --
Borrowings(11)............................. $ 5,057 $ 5,379 $ 15,725 $ 5,116 $ 2,066 $ 976 $ 34,319 $ 34,319
Average interest rate................ 6.21% 6.21% 6.37% 6.26% 6.22% 6.17% -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Total................................ $ 341,101 $ 79,166 $ 88,939 $ 38,263 $ 32,899 $ 23,226 $ 603,594 $ 602,145
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Net of undisbursed loan proceeds and does not include net deferred loan fees
or the allowance for loan losses.
(2) For single-family residential loans, assumes annual amortization and balloon
maturities as appropriate. Assumes a prepayment rate at 14% for adjustable
rate loans, and 8% to 23% for fixed rate loans. For other loans, assumes
amortization and balloon maturity as appropriate.
(3) Approximately 50% of the Company's adjustable rates loans reprice on an
annual basis based upon changes in the one year constant maturity treasury
index with various market based annual and lifetime interest rate caps and
floors. The other 50% of the Company's adjustable rate loans reprice on a
longer term basis such as
12
<PAGE>
three years and reprice on a periodic basis based upon the three year
constant maturity treasury index with various market based interest rate
caps and floors.
(4) Mortgage-backed securities with fixed rates collateralized with single
family residential loans reflect an assumed annual amortization and balloon
maturities as appropriate. Assumes prepayment rates of 11% to 29%.
(5) Substantially all of the Company's adjustable rate mortgage-backed
securities reprice on an annual basis based upon changes in the one year
constant maturity treasury index. Various market based lifetime caps and
floors exist on these securities. Assumes annual prepayment rates of 10%.
(6) Totals include the Company's investment in Federal Home Loan Bank stock.
(7) Certificate of deposit accounts reflect assumed stated maturities.
(8) Regular savings accounts reflect an assumed annual decay rate of 17% for
five year of less, with the remaining maturity in the eighth year.
(9) NOW accounts reflect an assumed annual decay rate of 17% for three years or
less, with the remaining maturity in years four and five.
(10) Money market deposit accounts reflect an assumed 100% maturity in one year
or less.
(11) Borrowed funds reflect assumed stated maturities.
The table below provides information regarding the Company's anticipated
transactions comprised of firm loan commitments and other commitments, including
undisbursed lines of credit. The Company used no derivative financial
instruments to hedge such anticipated transactions at September 30, 1997.
(Dollars in Thousands)
<TABLE>
<S> <C>
Anticipated Transactions
- -------------------------------------------------------------------------------
Undisbursed construction loans...................................... $ 78
Adjustable rate................................................... 9.50%
Undisbursed lines of credit......................................... $ 214
Adjustable rate................................................... 9.50%
Loan origination and purchase commitments
Fixed rate........................................................ $ 4,982
7.25%
Adjustable rate................................................... $ 3,302
8.56%
Total............................................................... $ 8,576
</TABLE>
13
<PAGE>
RESULTS OF OPERATIONS
GENERAL. The Company's net income for the year ended September 30, 1997
amounted to $5.8 million or $.54 per share compared with $4.5 million or $.37
per share for fiscal 1996. Last fiscal year's results included a one-time
special assessment of $3.7 million ($2.4 million after tax) to recapitalize
the SAIF. Excluding the special one-time assessment, net income for the
fiscal year ended September 30, 1996 amounted to $6.9 million or $.57 per
share. Per share amounts for prior periods have been restated to reflect the
15% stock dividend paid on May 6, 1997 and the 10% stock dividend paid on
March 15, 1996.
The decrease in earnings, excluding the special SAIF assessment, was
principally attributable to reductions in net interest income reflecting
decreased interest income and increased interest costs. Net interest income
decreased by $2.1 million or 8.5% to $22.6 million for the year ended September
30, 1997. Average balances of net interest-earning assets declined by
approximately $20 million to $116.5 million for the year ended September 30,
1997 from $136.4 million for the prior fiscal year, principally reflecting the
repurchase of common stock. In addition, net interest income declined due to
relatively heavy repayments of higher rate residential mortgage loans and
mortgage-backed securities that were reinvested in lower rate loans and
mortgage-backed securities, and higher deposit costs paid in the marketplace to
retain funds.
The Company reported net income for the year ended September 30, 1996 of
$4.5 million or $.37 per share compared with $9.9 million or $.73 per share for
fiscal 1995. Net income, before the one-time special assessment by the SAIF for
the year ended September 30, 1996, amounted to $6.9 million or $.57 per share.
The decrease in earnings, before the special SAIF assessment, was principally
attributable to increased operating expenses as well as reductions in net
interest income reflecting increased deposit and borrowing costs.
NET INTEREST INCOME. Net interest income decreased by $2.1 million or 8.5%
to $22.6 million for the year ended September 30, 1997 from $24.7 million for
the prior fiscal year. The decrease in net interest income resulted from a
decrease in average net interest-earning assets of $19.9 million or 14.6%, as
well as a decrease in the average interest rate spread of 19 basis points. For
the year ended September 30, 1996, net interest income amounted to $24.7
million, a decrease of $1.9 million or 7.3% from $26.7 million for fiscal 1995.
The decrease in net interest income for the year ended September 30, 1996
resulted from a decrease in average net interest-earning assets of $1.9 million
or 1.4%, as well as a decrease in the average interest rate spread of 36 basis
points.
Total interest income decreased by $.4 million or .9% for the year ended
September 30, 1997 from $52.2 million for the comparable prior year. This
decrease was primarily the result of a 8 basis point decline in the average
yield earned in fiscal 1997, which offset an increase in average
interest-earning assets of $1.7 million or .2%, principally mortgage-backed
securities. For the year ended September 30, 1996, total interest income
increased by .5 million or .9% from $51.7 million for the comparable prior
period. This
14
<PAGE>
increase in total interest income was primarily the result of an increase in
average interest-earning assets of $11.7 million or 1.7% for the year ended
September 30, 1996, principally mortgage-backed securities, which more than
offset a 5 basis point decline in the average yield earned in fiscal 1996.
Total interest expense increased by $1.7 million or 6.1% for the year ended
September 30, 1997 from $27.4 million for the prior fiscal year. Increases in
average deposit balances and increases in the rates paid for the year ended
September 30, 1997 were both contributing factors to the increase in total
interest expense. Increases in average deposit and advance balances amounted to
$21.6 million or 3.7% for the year ended September 30, 1997. The rate paid on
average interest-bearing deposits and advances increased by 11 basis points
during the year ended September 30, 1997. For the year ended September 30, 1996,
total interest expense increased by $2.4 million or 9.6% from $25.0 million for
the prior fiscal year.
The increase in interest expense was attributable to an increase in average
deposit and advance balances of $13.6 million or 2.4% as well as a 31 basis
point increase in the average rates paid on deposits and advances for the year
ended September 30, 1996.
INTEREST YIELD/RATE ANALYSIS. The following table sets forth for the
periods indicated information regarding (i) the Company's average balance
sheet; (ii) the total dollar amounts of interest income from interest-earning
assets and the resulting average yields (no tax equivalent adjustments were
made); (iii) the total dollar amounts of interest expense on interest-bearing
liabilities and the resulting average costs; (iv) average interest rate
spread; and (v) net interest margin. Nonaccrual loan balances are included in
total loans. Loan
15
<PAGE>
fees are included in interest on total loans; however, such
fees for all years presented are nominal.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- --------------------------------- ---------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST
--------- --------- --------- --------- ----------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans................................ $ 197,308 $ 15,399 7.80% $ 159,628 $ 12,758 7.99% $ 138,619 $ 11,337
Mortgage-backed securities........... 458,041 32,284 7.05 380,677 28,226 7.41 279,290 23,304
Investments.......................... 66,031 4,020 6.09 179,420 11,168 6.22 290,121 17,051
--------- --------- --------- --------- ----------- --------- --------- -----------
Total interest earning assets.......... 721,380 51,703 7.17 719,725 52,152 7.25 708,030 51,692
--------- --------- ------------ -------- -----------
Noninterest-earning assets............. 20,413 21,403 19,600
--------- --------- ---------
Total assets........................... $ 741,793 $ 741,128 $ 727,630
--------- --------- ---------
--------- --------- ---------
Interest-bearing liabilities:
Deposits............................. $ 569,691 26,864 4.72% $ 572,826 26,753 4.67 $ 569,738 25,024
Borrowings........................... 35,224 2,216 6.29% 10,491 666 6.35 -- --
--------- --------- --------- ----------- --------- -----------
Total interest-bearing liabilities..... 604,915 29,080 4.81% 583,317 27,419 4.70 569,738 25,024
--------- --------- ----------- --------- -----------
Non-interest-bearing liabilities....... 6,218 5,655 3,763
Equity................................. 130,660 152,156 154,129
--------- --------- ---------
Total liabilities and equity........... $ 741,793 $ 741,128 $ 727,630
--------- --------- ---------
--------- --------- ---------
Net interest income and interest-rate
spread............................... $ 22,623 2.36% $ 24,733 2.55% $ 26,668
--------- --------- ----------- --------- -----------
--------- --------- ----------- --------- -----------
Net yield on interest-earning assets... 3.14% 3.44%
--------- ---------
--------- ---------
Ratio of average interest-earning
assets to average interest-bearing
liabilities.......................... 119.25% 123.38%
--------- ---------
--------- ---------
<CAPTION>
<S> <C>
YIELD/
RATE
---------
<S> <C>
Interest-earning assets:
Loans................................ 8.18%
Mortgage-backed securities........... 8.34
Investments.......................... 5.88
---------
Total interest earning assets.......... 7.30%
---------
Noninterest-earning assets.............
Total assets...........................
Interest-bearing liabilities:
Deposits............................. 4.39
Borrowings........................... --
---------
Total interest-bearing liabilities..... 4.39
---------
Non-interest-bearing liabilities.......
Equity.................................
Total liabilities and equity...........
Net interest income and interest-rate
spread............................... 2.91%
---------
---------
Net yield on interest-earning assets... 3.77%
---------
---------
Ratio of average interest-earning
assets to average interest-bearing
liabilities.......................... 124.27%
---------
---------
</TABLE>
16
<PAGE>
RATE/VOLUME ANALYSIS. The following tables set forth, among other
things, the extent to which changes in interest rates and changes in the
average balances of interest-earning assets and interest-bearing liabilities
have affected interest income and expense during the years ended September
30, 1997 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1997 YEAR ENDED SEPTEMBER 30, 1996
--------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE/ RATE/
RATE VOLUME VOLUME TOTAL RATE VOLUME VOLUME TOTAL
--------- --------- ------------ --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Interest income:
Loans................................. $ 3,011 $ (303) $ (67) $ 2,641 $ (263) $ 1,719 $ (35) $ 1,421
Mortgage-backed securities............ 5,733 (1,370) (305) 4,058 (2,597) 8,456 (937) 4,922
Investments........................... (7,053) (233) 138 (7,148) (841) (7,207) 2,165 (5,883)
--------- --------- ------------ --------- --------- --------- --------- ---------
Total............................... 1,691 (1,906) (234) (449) (3,701) 2,968 1,193 460
--------- --------- ------------ --------- --------- --------- --------- ---------
Interest expense:
Deposits.............................. (146) 286 (29) 111 1,595 136 (2) 1,729
Borrowings............................ 1,571 (6) (15) 550 -- -- 666 666
--------- --------- ------------ --------- --------- --------- --------- ---------
Total............................... 1,425 280 (44) 1,661 1,595 136 664 2,395
--------- --------- ------------ --------- --------- --------- --------- ---------
Net change in net interest income....... $ 266 $ (2,186) $ (190) $ (2,110) $ (5,296) $ 2,832 $ 529 $ (1,935)
--------- --------- ------------ --------- --------- --------- --------- ---------
--------- --------- ------------ --------- --------- --------- --------- ---------
</TABLE>
PROVISION FOR LOAN LOSSES. The Company establishes provisions for loan
losses, which are charged to operations, in order to maintain the allowance for
loan losses at a level which is considered to be appropriate based upon loan and
loss experience and an evaluation of potential losses in the current loan
portfolio, including the evaluation of impaired loans under Statement of
Financial Accounting Standards ("SFAS") Nos. 114 and 118. A loan is considered
to be impaired when, based upon current information and events, it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the loan. An insignificant delay or insignificant shortfall
in the amount of payments does not necessarily result in the loan being
identified as impaired. For this purpose, delays less than 90 days are
considered to be insignificant. As of September 30, 1997, 100% of the impaired
loan balance was measured for impairment based upon the fair value of the loan's
collateral. Impairment losses are included in the provision for loan losses.
SFAS Nos. 114 and 118 do not apply to large groups of smaller balance homogenous
loans that are collectively evaluated for impairment, except for those loans
restructured under a troubled debt restructuring. Loans collectively evaluated
for impairment include consumer loans and residential real estate loans. At
September 30, 1997, the Company's impaired loans consisted of smaller balance
residential mortgage loans.
For the years ended September 30, 1997, 1996 and 1995, provisions for loan
losses were $40,000, $30,000 and $30,000, respectively. At September 30, 1997,
nonaccrual loans for which interest has been fully reserved totaled
approximately $818,000. The Company's allowance for loan losses amounted to
$1,064,000 or 130.1% of total nonperforming loans and troubled debt
restructurings and .51% of total loans receivable.
Although management utilizes its best judgment in providing for loan losses,
there can be no assurance that the Company will not have to increase its
provisions for loan losses
17
<PAGE>
in the future as a result of future increases in nonperforming loans or for
other reasons which could adversely affect the Company's results of
operations. In addition, various regulatory agencies periodically review the
allowance for loan losses. Such agencies may require the Company to recognize
additions to the allowance for loan losses based on their judgments of
information that is available to them at the time of their examination.
OTHER OPERATING INCOME. Other operating income amounted to $685,000 for the
year ended September 30, 1997, an increase of $2,000 or .3% over the comparable
prior fiscal year. The increase reflected additional loan and mortgage
prepayment penalty fees as well as increased service charges on automated teller
machine transactions that were partially offset by the $70,000 gain on the sale
of investments in the prior fiscal year.
For the year ended September 30, 1996, other operating income increased by
$24,000 or 3.6% to $687,000 compared to the prior fiscal year. The increase for
fiscal 1996 reflected a $70,000 gain on the sale of an investment as well as
increased loan fees and service charges on automated teller machine transactions
that was only partially offset by $100,000 of rental income from real estate
owned recognized in the prior fiscal year.
OPERATING EXPENSES. Operating expenses amounted to $14.3 million for the
year ended September 30, 1997, an increase of $.1 million or .6% compared to
$14.2 million, after adjusting for the $3.7 million SAIF special assessment, for
the prior fiscal year. Increased compensation and benefits together with
increases in professional fees, other expenses and advertising expense were
partially offset by the $.8 million decrease in the annual SAIF deposit
insurance premium. Compensation and employee benefits increased $.3 million or
3.2% to $9.4 million from $9.1 million for the year ended September 30, 1996,
reflecting increased Employee Stock Ownership Plan ("ESOP") expense of $1.2
million and increased compensation expense of $.3 million, which items were
partially offset by decreased pension and other expenses of $1.2 million.
Professional fees and other expenses increased $.4 million representing
additional legal costs associated with pending and settled litigation and
additional proxy contest expenses incurred in connection with the Company's
annual meeting. Advertising expense increased by $.1 million reflecting
increased advertising and promotion related to the two branch offices opened in
late 1996.
For the year ended September 30, 1996 operating expenses amounted to $17.9
million, an increase of $5.7 million of 46.8% compared to $12.2 million for the
prior fiscal year. The SAIF special assessment amounted to $3.7 million of the
$5.7 million increase in operating expenses. On September 30, 1996, as part of
the omnibus appropriations package signed by the President, the government
mandated a special assessment to recapitalize the SAIF, which is part of the
FDIC. The special assessment was levied against all saving institutions in the
country with deposits insured by the SAIF. The Association's deposit insurance
premiums were significantly reduced as a result of this recapitalization
legislation, as the annual deposit insurance premiums were reduced from $.23 for
every $100 of deposits to $.064 for every $100 of deposits beginning January 1,
1997.
18
<PAGE>
Excluding the $3.7 million SAIF special assessment, operating expenses
amounted to $14.2 million, an increase of $2.0 million or 16.5% compared to the
prior fiscal year. Compensation and employee benefits increased $1.6 million or
21.8% to $9.1 million from $7.5 million for the year ended September 30, 1995.
The substantial portion of this increase resulted from additional expenses
associated with the Company's ESOP of $.6 million, Recognition and Retention
Plan of $.3 million and supplemental pension plan of $.6 million. During fiscal
1996, the Company terminated a defined benefit pension plan and the related
supplemental pension plan. The termination resulted in an aggregate $1.1 million
of expense for these plans in fiscal 1996, which costs were not incurred in
fiscal 1997. As an additional cost savings measure, the Company also eliminated
all bonuses to senior management in fiscal 1996. Professional fees and other
expenses increased $.4 million representing additional proxy contest expense
incurred in connection with the Company's annual meeting, costs associated with
pending litigation, and additional professional fees incurred as a result of
being a public reporting company.
INCOME TAXES. For the years ended September 30, 1997, 1996 and 1995, the
Company incurred income tax expense of $3.1 million, $2.9 million and $5.2
million, respectively. The changes in income tax
expense in each of the fiscal years generally follows the change in income
before income taxes as well as, for fiscal 1996, additional state income tax
expense. For additional information regarding income tax expense, refer to Note
11 of Notes to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Association's primary sources of funds are deposits, repayments and
maturities of outstanding loans and mortgage-backed securities, maturities of
investment securities and other short-term investments, as well as advances from
the Federal Home Loan Bank and funds provided from operations. While scheduled
loan and mortgage-backed securities repayments and maturing investment
securities and short-term investments are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by the movement
of interest rates in general, economic conditions and competition. The
Association manages the pricing of its deposits to maintain a deposit balance
deemed appropriate and desirable. In addition, the Association invests in
short-term interest-earning assets which provide liquidity to meet lending
requirements. The Association also utilizes other borrowing sources, principally
advances from the Federal Home Loan Bank of New York. During the year ended
September 30, 1997 the Association's Board of Directors provided management with
the authority to borrow up to $150 million from the Federal Home Loan Bank of
New York.
Liquidity management is both a daily and long-term function. Excess
liquidity is generally invested in short-term investments such as cash and cash
equivalents, U.S. Treasury, U.S. Government agencies and other qualified
investments. On a longer-term basis, the Association maintains a strategy of
investing in various mortgage-backed securities and other investment securities
and lending products. During the year ended September 30,
19
<PAGE>
1997, the Association used its sources of funds primarily to meet its ongoing
commitments to pay maturing savings certificates and savings withdrawals,
fund loan and mortgage-backed securities commitments and maintain an
increasing portfolio of mortgage-backed securities. At September 30, 1997,
the total approved loan commitments outstanding amounted to $8.6 million.
Certificates of deposit scheduled to mature in one year or less at September
30, 1997 totaled $267.8 million. Management of the Association believes that
the Association has adequate resources, including principal prepayments and
repayments of loans and mortgage-backed securities and maturing investments,
to fund all of its commitments to the extent required. Based upon its
historical run-off experience, management believes that a significant portion
of maturing deposits will remain with the Association.
The Association is required by the Office of Thrift Supervision ("OTS") to
maintain average daily balances of liquid assets and short-term liquid assets as
defined in amounts equal to 5% and 1%, respectively, of net withdrawable
deposits and borrowings payable in one year or less to assure its ability to
meet demand for withdrawals and repayments of short-term borrowings. The
liquidity requirements may vary from time to time at the direction of the OTS
depending upon economic conditions and deposit flows. The Association's average
monthly liquidity ratio and short-term liquid assets for September 30, 1997 was
42.8% and 8.4%, respectively. The monthly liquidity ratio includes
mortgage-backed securities with maturities due within five years.
The OTS requires that the Company meet minimum regulatory tangible, core and
risk-based capital requirements. The Company is required to maintain tangible
capital equal to at least 1.5% of its adjusted total assets, core capital equal
to at least 3% of its adjusted total assets and total capital equal to at least
8% of its risk-weighted assets. At September 30, 1997 the Company exceeded all
regulatory capital requirements. At such date, the Company had tangible capital
equal to 17.3% of adjusted total assets, core capital equal to 17.3% of adjusted
total assets and total capital equal to 61.5% of risk-weighted assets.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes
in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and
20
<PAGE>
the maturity structure of the Association's assets and liabilities are
critical to the maintenance of acceptable performance levels.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No.128, Earnings Per Share which is effective for periods ending
after December 15, 1997 with prior periods presented being restated. This
statement changes the method for calculating earnings per share. The Company
has not completed an analysis of the impact of adopting this statement;
however, the Company will adopt this statement for the period ending December
31, 1997. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, which requires an entity to present, as a component of comprehensive
income, the amounts from transactions and other events which currently are
excluded from the statement of income and are recorded directly to
stockholders' equity. Also in June 1997, the FASB issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which is
effective for years beginning after December 15, 1997. This statement
requires an entity to disclose financial information in a manner consistent
to internally used information and requires more detailed disclosure of
operating and reporting segments than are currently in practice. Management
has not completed an analysis of the impact the adoption of these statements
will have on the Company's consolidated financial condition and results of
operations.
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Audit Committee of
IBS Financial Corp.:
We have audited the accompanying consolidated statements of financial
condition of IBS Financial Corp. and subsidiaries (the "Company") as of
September 30, 1997 and 1996, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the three
years in the period ended September 30, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of IBS Financial Corp.
and subsidiaries at September 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended September 30, 1997 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
October 30, 1997
22
<PAGE>
IBS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Cash and cash equivalents................................................................. $ 15,811 $ 12,466
Investment securities held to maturity (estimated fair value 1997--$27,859;
1996--$26,724).......................................................................... 27,859 26,712
Investment securities available for sale (amortized cost 1996--$48,194)................... -- 48,337
Mortgage-backed securities held to maturity (estimated fair value 1997-- $332,713;
1996--$285,831)......................................................................... 326,869 285,267
Mortgage-backed securities available for sale (amortized cost 1997--$133,920;
1996--$165,485)......................................................................... 136,430 166,994
Loans receivable (net of allowance for loan losses 1997--$1,064; 1996--$1,024)............ 210,008 185,031
Accrued interest receivable:
Loans................................................................................... 1,699 872
Mortgage-backed securities.............................................................. 2,015 2,682
Investments............................................................................. 103 965
Federal Home Loan Bank stock--at cost..................................................... 6,075 4,590
Office properties and equipment--net...................................................... 6,782 6,084
Prepaid expenses and other assets......................................................... 1,100 2,051
---------- ----------
TOTAL ASSETS.............................................................................. $ 734,751 $ 742,051
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits................................................................................ $ 567,375 $ 571,366
FHLB advances........................................................................... 34,319 18,792
Advances from borrowers for taxes and insurance......................................... 2,303 2,218
Accounts payable and accrued expenses................................................... 2,735 5,391
---------- ----------
Total liabilities..................................................................... 606,732 597,767
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 8)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 25,000,000
shares; issued 11,609,723 shares...................................................... 116 116
Additional paid-in capital.............................................................. 113,203 113,432
Common stock acquired by ESOP and MRP................................................... (8,941) (11,097)
Treasury stock- at cost; 1997--660,396 shares; 1996--855,256 shares..................... (10,238) (12,104)
Net unrealized gains on securities available for sale, net of taxes..................... 1,631 1,045
Retained earnings--substantially restricted............................................. 32,248 52,892
---------- ----------
Total stockholders' equity............................................................ 128,019 144,284
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................................ $ 734,751 $ 742,051
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
IBS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans.............................................................. $ 15,399 $ 12,758 $ 11,337
Interest on mortgage-backed securities......................................... 32,284 28,226 23,304
Interest and dividends on investments.......................................... 4,020 11,168 17,051
--------- --------- ---------
Total interest income....................................................... 51,703 52,152 51,692
--------- --------- ---------
INTEREST EXPENSE:
Deposits....................................................................... 26,864 26,753 25,024
Borrowings..................................................................... 2,216 666 --
--------- --------- ---------
Total interest expense...................................................... 29,080 27,419 25,024
--------- --------- ---------
NET INTEREST INCOME.............................................................. 22,623 24,733 26,668
PROVISION FOR LOAN LOSSES........................................................ 40 30 30
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.............................. 22,583 24,703 26,638
--------- --------- ---------
OTHER OPERATING INCOME:
Loan fees and late charges..................................................... 409 360 259
Other income................................................................... 276 327 404
--------- --------- ---------
Total other operating income................................................ 685 687 663
--------- --------- ---------
OTHER EXPENSES:
Compensation and employee benefits............................................. 9,409 9,116 7,483
Federal insurance premiums..................................................... 529 1,300 1,346
SAIF assessment................................................................ -- 3,700 --
Occupancy and equipment--net................................................... 1,163 1,134 1,141
Professional fees.............................................................. 905 759 486
Advertising and promotion...................................................... 506 425 467
Data processing................................................................ 468 442 430
Other operating expenses....................................................... 1,341 1,055 862
--------- --------- ---------
Total other expenses........................................................ 14,321 17,931 12,215
--------- --------- ---------
INCOME BEFORE INCOME TAXES....................................................... 8,947 7,459 15,086
INCOME TAXES..................................................................... 3,141 2,922 5,166
--------- --------- ---------
NET INCOME....................................................................... $ 5,806 $ 4,537 $ 9,920
--------- --------- ---------
--------- --------- ---------
EARNINGS PER SHARE............................................................... $ 0.54 $ 0.37 $ 0.73
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
IBS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
COMMON NET
STOCK UNREALIZED
ADDITIONAL ACQUIRED BY GAINS (LOSSES) TOTAL
COMMON PAID-IN ESOP TREASURY ON AFS RETAINED STOCKHOLDERS'
STOCK CAPITAL AND MRP STOCK SECURITIES EARNINGS EQUITY
------------------- ---------- ----------- --------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1,
1994............. $-- $ -- $ -- $ -- $ -- $ 57,594 $ 57,594
Sale of 11,609,723
shares of common
stock, $.01 par
value (net of
cost $2,919)..... 116 113,062 -- -- -- -- 113,178
ESOP debt.......... -- -- (9,288) -- -- -- (9,288)
Payments on ESOP
debt............. -- -- 1,063 -- -- -- 1,063
Market adjustment--
ESOP shares
released......... -- 197 -- -- -- -- 197
Purchase of MRP
stock............ -- -- (6,085) -- -- -- (6,085)
MRP earned......... -- -- 872 -- -- -- 872
Treasury stock
purchased........ -- -- -- (7,751) -- -- (7,751)
Cash dividends
($0.12 per
share)........... -- -- -- -- -- (1,651) (1,651)
Net income......... -- -- -- -- -- 9,920 9,920
---------- ---------- ----------- --------- -------------- --------- ------------
BALANCE, SEPTEMBER
30, 1995......... 116 113,259 (13,438) (7,751) -- 65,863 158,049
Payments on ESOP
debt............. -- -- 1,147 -- -- -- 1,147
Market adjustment--
ESOP shares
released......... -- 388 -- -- -- -- 388
MRP earned......... -- -- 1,194 -- -- -- 1,194
Treasury stock
purchased........ -- -- -- (19,830) -- -- (19,830)
Cash dividends
($0.20 per
share)........... -- -- -- -- -- (2,317) (2,317)
10% stock dividend -- (180) -- 15,371 -- (15,191) --
Unrealized gain on
transfer of
securities from
held to maturity
to available for
sale, net of
income tax....... -- -- -- -- 3,149 -- 3,149
Unrealized loss on
securities
available for
sale, net of
income taxes..... -- -- -- -- (2,104) -- (2,104)
Stock option
exercised........ -- (35) -- 106 -- -- 71
Net income......... -- -- -- -- -- 4,537 4,537
---------- ---------- ----------- --------- -------------- --------- ------------
BALANCE, SEPTEMBER
30, 1996......... 116 113,432 (11,097) (12,104) 1,045 52,892 144,284
Payments on ESOP
debt............. -- -- 946 -- -- -- 946
Market adjustment--
ESOP shares
released......... -- 894 -- -- -- -- 894
MRP earned......... -- -- 1,210 -- -- -- 1,210
Treasury stock
purchased........ -- -- -- (21,110) -- -- (21,110)
Cash dividends
($0.54 per
share)........... -- -- -- -- -- (5,272) (5,272)
15% stock dividend -- (836) -- 22,014 -- (21,178)
Unrealized gain on
securities
available for
sale, net of
income taxes..... -- -- -- -- 586 -- 586
Stock option
exercised........ -- (287) -- 962 -- -- 675
Net income......... -- -- -- -- -- 5,806 5,806
---------- ---------- ----------- --------- -------------- --------- ------------
BALANCE, SEPTEMBER
30, 1997......... $116 $113,203 $(8,941) $(10,238) $1,631 $32,248 $128,019
---------- ---------- ----------- --------- -------------- --------- ------------
---------- ---------- ----------- --------- -------------- --------- ------------
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
IBS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................................... $ 5,806 $ 4,537 $ 9,920
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for depreciation and amortization................................. 370 374 391
Provision for loan loss..................................................... 40 30 30
Market adjustment on ESOP................................................... 894 388 197
MRP earned.................................................................. 1,210 1,194 872
Deferred income taxes....................................................... 1,604 (778) (272)
Changes in assets and liabilities which provided (used) cash:
Accrued interest receivable............................................... 702 2,545 (1,823)
Prepaid expenses and other assets......................................... 951 83 1,385
Accounts payable and accrued expenses..................................... (2,656) 3,598 256
--------- ---------- ----------
Net cash provided by operating activities............................... 8,921 11,971 10,956
--------- ---------- ----------
INVESTING ACTIVITIES:
Principal repayments of:
Loans receivable.............................................................. 24,539 22,728 15,192
Mortgage-backed securities held to maturity................................... 38,475 44,862 35,710
Mortgage-backed securities available for sale................................. 31,660 33,916 --
Purchases of:
Investments held to maturity.................................................. (30,000) (303,648) (640,701)
Investments available for sale................................................ -- (10) --
Mortgage-backed securities held to maturity................................... (81,949) (217,606) (164,300)
Proceeds from:
Maturity of investments held to maturity...................................... 28,853 455,099 688,851
Maturity of investments available for sale.................................... 48,095 5,000 --
Loans originated or acquired.................................................... (49,556) (70,196) (16,818)
Proceeds from loans sold........................................................ -- 4,188 --
Purchase of Federal Home Loan Bank stock........................................ (1,485) (918) (1,068)
Proceeds from sale of real estate owned......................................... -- -- 1,252
Proceeds from sale of investments............................................... -- 9,998 --
Purchase of property and equipment.............................................. (1,068) (213) (543)
--------- ---------- ----------
Net cash provided by (used in) investing activities......................... 7,564 (16,800) (82,425)
--------- ---------- ----------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits........................................... (3,991) 6,456 (38,170)
Net increase in advances from borrowers for taxes and insurance............... 85 434 129
Advances from FHLB............................................................ 21,000 20,000 --
Repayment of FHLB advances.................................................... (5,473) (1,208) --
Cash dividends paid........................................................... (5,272) (2,317) (1,651)
Proceeds from the sale of stock, net of ESOP shares acquired.................. -- -- 103,890
Payments on ESOP debt......................................................... 946 1,147 1,063
Treasury stock acquired....................................................... (21,110) (19,830) (7,751)
Unearned MRP shares acquired.................................................. -- -- (6,085)
Stock options exercised....................................................... 675 71 --
--------- ---------- ----------
Net cash (used in) provided by financing activities........................... (13,140) 4,753 51,425
--------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ 3,345 (76) (20,044)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.................................... 12,466 12,542 32,586
--------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR.......................................... $ 15,811 $ 12,466 $ 12,542
--------- ---------- ----------
--------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits.......................................................... $ 28,624 $ 27,345 $ 25,025
--------- ---------- ----------
--------- ---------- ----------
Income taxes.................................................................. $ 1,134 $ 3,275 $ 4,345
--------- ---------- ----------
--------- ---------- ----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES--Transfers
from loans to real estate owned............................................... $ 150 $ 56 $ --
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
IBS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(Dollars in Thousands)
1. NATURE OF OPERATIONS
IBS Financial Corp. and subsidiaries (the "Company") is a New Jersey
Corporation organized in June 1994 for the purpose of acquiring all the
capital stock of Inter-Boro Savings and Loan Association (the "Association")
issued in the conversion of the Association to stock form (the "Conversion")
which was completed on October 13, 1994 (see Note 17).
The Association is a New Jersey chartered stock savings and loan with ten
branch offices in Camden, Burlington and Gloucester counties. The
Association is principally in the business of attracting deposits through
its branch offices and investing those deposits together with funds from
borrowings and operations primarily in single-family residential loans. The
Company and the Association are supervised and regulated by the New Jersey
Banking Department, the Office of Thrift Supervision, and the Federal
Deposit Insurance Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The consolidated financial statements of the Company
have been prepared on the basis of generally accepted accounting principles.
Principles of Consolidation--The consolidated financial statements include
the accounts of IBS Financial Corp. and its wholly owned subsidiaries, IBS
Investment Corporation, Inter-Boro Savings and Loan Association, and its
wholly owned subsidiary, IBS Delaware Investment Corp. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements--The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of income and expenses during the reporting period. The
most significant estimates and assumptions in the Company's consolidated
financial statements affect the allowance for loan losses. Actual results
could differ from those estimates.
Investment and Mortgage-Backed Securities--The Company accounts for
investment and mortgage-backed securities in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The Company classifies debt and
equity securities at the date of purchase as follows:
Held to Maturity--Debt securities that management has the positive intent
and ability to hold until maturity are classified as held to maturity and
are carried at their remaining unpaid principal balance, net of
unamortized premiums or unaccreted discount. Premiums are amortized and
discounts are accreted using the interest method over the estimated
remaining term of the underlying security.
27
<PAGE>
Available for Sale--Debt and equity securities that will be held for an
indefinite period of time, including securities that may be sold in
response to changes in market interest or prepayment rates, needs for
liquidity and changes in the availability of and the yield of alternative
investments are classified as available for sale. These assets are carried
at their estimated fair value, which management has determined to be
market value. Market value is determined using published quotes as of the
close of business. Unrealized gains and losses are excluded from earnings
and are reported net of tax as a separate component of stockholders'
equity until realized. Realized gains and losses on the sale of investment
and mortgage-backed securities classified as available for sale are
reported in the consolidated statement of income and are determined using
the adjusted cost of the specific security sold.
During 1995, the Financial Accounting Standards Board ("FASB") issued a
Special Report, A Guide to Implementation of Statement No. 115 on Accounting
for Certain Investments in Debt and Equity Securities--Questions and Answers
(the "Q&A Guide"). In December 1995, in accordance with the provision of the
Q&A Guide, the Company transferred certain securities with an aggregate
amortized cost of $199,401 from the classification of held to maturity to
available for sale.
Real Estate Owned--Real estate owned is initially recorded at the lower of
carrying value of the loan or fair value at the date of foreclosure less
costs to dispose. Costs relating to the development and improvement of
property are capitalized, and those relating to holding the property are
charged to expense.
Office Properties and Equipment--Office properties and equipment are
recorded at cost. Depreciation is computed using the straight-line method
over the expected useful lives (3-40 years) of the assets. The costs of
maintenance and repairs are expensed as they are incurred, and renewals
and betterments are capitalized.
Allowances for Loan Losses--Allowances for loan losses primarily include
charges to reduce the recorded balances of loans receivable. The charges
can represent a general reserve on the entire loan portfolio or specific
reserves for individual loans.
Allowances are provided for specific loans when losses are probable and can
be estimated. When this occurs, management considers the remaining principal
balance and estimated net realizable value of the property collateralizing
the loan. Current and future operating and/or sales conditions are
considered. These estimates are susceptible to changes that could result in
material adjustments to results of operations. Recovery of the carrying
value of such loans is dependent, to a great extent, on economic, operating
and other conditions that may be beyond management's control.
The Company accounts for impaired loans in accordance with SFAS Nos. 114 and
118, Accounting by Creditors for Impairment of a Loan and Accounting by
Creditors for Impairment of a Loan--Income Recognition and Disclosures. The
Company values impaired loans using the fair value of the collateral. Any
reserves determined under SFAS No. 114 would be included with the allowances
for loan losses.
Loan loss reserves are established as an allowance for losses based on the
perceived risk of loss in the loan portfolio. In assessing risk, management
considers historical experience, volume and composition of lending conducted
by the Company, industry standards, status of nonperforming loans, general
economic conditions as they relate to the Company's market area, and other
factors related to the collectibility of the Association's loan portfolio.
28
<PAGE>
Income Recognition on Loans--Interest on loans is credited to income when
earned. Accrual of loan interest is discontinued and a reserve established
on existing accruals if management believes that after considering economic
and business conditions and collection efforts, the borrowers' financial
condition is such that collection of interest is doubtful.
Deferred Loan Fees--The Company defers all loan origination fees net of
certain direct loan origination costs, and recognizes fees by accretion
into income as a yield adjustment over the life of the loan using the
interest method.
Mortgage Banking Activity-The Company adopted SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, effective for transactions occurring on or after January 1,
1997. This statement requires an entity which sells loans with servicing
retained to assess the retained interest in the servicing asset or liability
associated with the sold loans based on the relative fair values. The
servicing asset or liability is amortized in proportion to and over the
period of estimated net servicing income or net servicing loss, as
appropriate. Assessment of the fair value of the retained interest is
performed on an ongoing basis. The adoption of this statement did not have
a material impact on the Company's consolidated financial condition or
results of operations.
Earnings Per Share--For the years ended September 30, 1997 and 1996,
earnings per share is based on net income divided by the weighted-average
number of shares outstanding plus the common stock equivalents. For the year
ended September 30, 1995, earnings per share is based on income from October
13, 1994 (the date of the initial public offering) through September 30,
1995 of $9,679 divided by the weighted-average number of shares and common
stock equivalents outstanding during the period. Weighted-average shares
plus common stock equivalents for the years ended September 30, 1997, 1996
and 1995 are 10,681,591, 12,050,717, and 13,267,148, respectively.
Weighted-average shares outstanding have been restated for the March 1996
10% stock dividend and the May 1997 15% stock dividend.
Income Taxes--The Company accounts for income taxes in accordance with SFAS
No. 109, Accounting for Income Taxes. Under this method, deferred income
taxes are recognized for the tax consequences of "temporary differences" by
applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. Also under SFAS No. 109, the
effect on deferred taxes of a change in tax rates is recognized in income
in the period that includes the enactment date.
Cash and Cash Equivalents--For purposes of reporting cash flows, cash and
cash equivalents include cash and amounts due from depository institutions,
and federal funds sold with original maturities of less than 90 days.
Stock Options--Effective October 1, 1995, the Company adopted SFAS No. 123,
Accounting for Stock Based Compensation, which allows an entity to choose
between the intrinsic value method, as defined in Accounting Principles
Board Opinion No. 25, and the fair value method of accounting for stock
based compensation described in SFAS No. 123. An entity using the intrinsic
value method must show the pro-forma net income and earnings per share as
if the stock based compensation had been determined using the fair value
method. The Company continues to account for stock based compensation using
the intrinsic value method and has recognized no compensation expense under
this method.
New Accounting Standards Issued But Not Yet Adopted--In February of 1997,
the FASB issued SFAS No. 128, Earnings Per Share which is effective for
periods ending after December 15, 1997 with
29
<PAGE>
prior periods presented being restated. This statements changes the method
for calculating earnings per share. The Company has not completed an
analysis of the impact of adopting this statement; however, the Company
will adopt this statement for the period ending December 31, 1997.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which requires an entity to present, as a component of comprehensive income,
the amounts from transactions and other events which currently are excluded
from the statement of income and are recorded directly to stockholders'
equity. Also in June 1997 the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information which is effective for
years beginning after December 15, 1997. This statement requires an entity
to disclose financial information in a manner consistent to internally used
information and requires more detailed disclosures of operating and
reporting segments than are currently in practice. Management has not
completed an analysis of the impact the adoption of these statements will
have on the Company's consolidated financial condition or results of
operations.
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at September 30, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
Cash and amounts due from banks $ 13,301 $ 4,966
Federal funds--CoreStates (Interest rate, 1997--6.25%;
1996-- 5.625%) 2,510 7,500
--------- ---------
Total $ 15,811 $ 12,466
--------- ---------
--------- ---------
</TABLE>
30
<PAGE>
4. INVESTMENT SECURITIES
A comparison of amortized cost and estimated fair value of investment
securities is as follows:
<TABLE>
<CAPTION>
HELD TO MATURITY
SEPTEMBER 30, 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
----------- ------------- ------------- -----------
Term and other deposits in the Federal
Home Loan Bank (due within one year).............................. $ 27,859 $ -- $ -- $ 27,859
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY
SEPTEMBER 30, 1996
-----------------------------------------
<S> <C> <C> <C> <C>
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
----------- ------------- ------------- -----------
U.S. Government obligations............................. $ 2,800 $ 12 $ -- $ 2,812
Term and other deposits in the Federal
Home Loan Bank.......................................... 23,912 -- -- 23,912
----------- ---------- ---------- ---------
Total................................................... $ 26,712 $ 12 $ -- $ 26,724
----------- ---------- ---------- ---------
----------- ---------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
SEPTEMBER 30, 1996
------------------------------------------------------
<S> <C> <C> <C> <C>
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
----------- ------------- ------------- -----------
U.S. Government obligations....................................... $ 48,194 $ 143 $ -- $ 48,337
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
31
<PAGE>
5. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at September 30, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
HELD TO MATURITY
SEPTEMBER 30, 1997
------------------------------------------------
<S> <C> <C> <C> <C>
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---------- ----------- ----------- ----------
FNMA pass-through certificates................................... $ 35,723 $ 25 $ (266) $ 35,482
GNMA pass-through certificates................................... 96,597 6,091 -- 102,688
FHLMC pass-through certificates.................................. 193,875 858 (846) 193,887
Private pass-through certificates (noninsured)................... 674 -- (18) 656
---------- ----------- ----------- ----------
Total............................................................ $ 326,869 $ 6,974 $ (1,130) $ 332,713
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
SEPTEMBER 30, 1997
--------------------------------------------------
<S> <C> <C> <C> <C>
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---------- ----------- ------------- ----------
FNMA pass-through certificates................................... $ 8,744 $ 227 $ -- $ 8,971
GNMA pass-through certificates................................... 13,239 1,846 (21) 15,064
FHLMC pass-through certificates.................................. 111,937 458 -- 112,395
---------- ----------- --------- ----------
Total............................................................ $ 133,920 $ 2,531 $ (21) $ 136,430
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY
SEPTEMBER 30, 1996
------------------------------------------------
<S> <C> <C> <C> <C>
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---------- ----------- ----------- ----------
FNMA pass-through certificates................................... $ 29,082 $ -- $ (832) $ 28,250
GNMA pass-through certificates................................... 115,903 5,718 (63) 121,558
FHLMC pass-through certificates.................................. 139,556 227 (4,465) 135,318
Private pass-through certificates (noninsured)................... 726 -- (21) 705
---------- ----------- ----------- ----------
Total............................................................ $ 285,267 $ 5,945 $ (5,381) $ 285,831
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
SEPTEMBER 30, 1996
------------------------------------------------
<S> <C> <C> <C> <C>
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---------- ----------- ----------- ----------
FNMA pass-through certificates................................... $ 12,043 $ 343 $ -- $ 12,386
GNMA pass-through certificates................................... 15,509 220 -- 15,729
FHLMC pass-through certificates.................................. 137,933 1,325 (379) 138,879
---------- ----------- ----- ----------
Total............................................................ $ 165,485 $ 1,888 $ (379) $ 166,994
---------- ----------- ----- ----------
---------- ----------- ----- ----------
</TABLE>
32
<PAGE>
Mortgage-backed securities with a carrying value of $3,270 and $2,800 were
pledged as collateral for public funds on deposit and treasury tax and loan
processing at September 30, 1997 and 1996, respectively.
6. LOANS RECEIVABLE
Loans receivable at September 30, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Mortgage loans (1-4 residential loans).................................. $ 184,498 $ 164,717
Construction loan....................................................... 261 1,256
Loans on savings accounts............................................... 2,486 2,472
Commercial real estate loans............................................ 24,568 19,548
Consumer loans.......................................................... 1,234 813
---------- ----------
Total............................................................... 213,047 188,806
Less:
Deferred loan fees.................................................... (1,897) (1,572)
Allowance for loan losses............................................. (1,064) (1,024)
Loans in process...................................................... (78) (1,179)
---------- ----------
Total................................................................... $ 210,008 $ 185,031
---------- ----------
---------- ----------
</TABLE>
At September 30, 1997 and 1996, the Company had outstanding commitments to
purchase and originate fixed rate (ranging from 6.625% to 7.625%) mortgage loans
totaling $8,576 and $6,544, respectively. All commitments are expected to be
funded within 12 months. The Company uses the same credit policies in extending
commitments as it does for loans.
The Company originates and purchases both adjustable and fixed interest rate
loans and mortgage-backed securities. At September 30, 1997, the composition of
these loans and mortgage-backed securities are $416,975 at fixed interest rates
and $65,785 at adjustable interest rates.
The adjustable rate loans and mortgage-backed securities have interest rate
adjustment limitations and are generally indexed to the one-year U.S. Treasury
Note rate. Future market factors may affect the correlation of the interest rate
adjustment with the rates the Association pays on the short-term deposits that
have been primarily utilized to fund these loans.
33
<PAGE>
Certain directors and executive officers of the Company have loans with
the Company. Such loans were made in the ordinary course of business at the
Company's normal credit terms, including interest rate and collateralization,
and do not represent more than a normal risk of collection. Total loans to
these individuals at September 30, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Balance, beginning of year........................................................................ $ 212 $ 216
New loans made during year........................................................................ 6 3
Repayments........................................................................................ (8) (7)
--------- ---------
Balance, end of year.............................................................................. $ 210 $ 212
--------- ---------
--------- ---------
</TABLE>
Most of the Company's activity is with customers located within the state of
New Jersey; therefore, the Company is lending subject to a concentration of
credit risk as it relates to this economic sector.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Balance, beginning of year............................................................. $ 1,024 $ 994 $ 530
Provision for loan losses.............................................................. 40 30 30
Recoveries............................................................................. -- -- 434
--------- --------- ---------
Balance, end of year................................................................... $ 1,064 $ 1,024 $ 994
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for loan losses charged to expense is based upon past loan and
loss experience and an evaluation of potential losses in the current loan and
lease portfolio, including the evaluation of impaired loans under SFAS No. 114.
A loan is considered to be impaired when, based upon current information and
events, it is probable that the Association will be unable to collect all
amounts due according to the contractual terms of the loan. An insignificant
delay or insignificant shortfall in amounts of payments does not necessarily
result in the loan being identified as impaired. For this purpose, delays less
than 90 days are considered to be insignificant. SFAS No. 114 does not apply to
large groups of smaller balance homogeneous loans that are collectively
evaluated for impairment, except for those loans restructured under a troubled
debt restructuring. At September 30, 1997, the Association has no loans
considered impaired under SFAS No. 114.
Nonperforming loans (which include loans in excess of 90-day delinquency) at
September 30, 1997, 1996 and 1995 amounted to approximately $818, $827 and $663,
respectively. The reserve for delinquent interest on loans totaled $40, $58 and
$49 at September 30, 1997, 1996 and 1995, respectively.
7. MORTGAGE BANKING ACTIVITIES
At September 30, 1997, 1996 and 1995, the Company was servicing loans for
others amounting to approximately $1,687, $1,718 and $5,045, respectively.
Servicing loans for others generally consists of collecting mortgage payments,
maintaining escrow accounts, disbursing payments to investors and foreclosure
processing. Loan servicing income is recorded on the accrual basis and includes
servicing fees from investors and certain charges collected from borrowers, such
as late payment fees.
34
<PAGE>
8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at September 30, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land and buildings............................................................................. $ 9,926 $ 9,009
Furniture and equipment........................................................................ 2,140 1,990
Leasehold improvements......................................................................... 111 110
--------- ---------
Total...................................................................................... 12,177 11,109
Accumulated depreciation and amortization...................................................... (5,395) (5,025)
--------- ---------
Net............................................................................................ $ 6,782 $ 6,084
--------- ---------
--------- ---------
</TABLE>
Rental expense under operating leases for certain branch offices amounted
to $125, $105 and $92 for the years ended September 30, 1997, 1996 and 1995,
respectively. The following is a summary of future minimum lease payments
required under the leases:
YEAR ENDING MINIMUM
SEPTEMBER 30, LEASE PAYMENTS
- ---------------- --------------
1998......................... $ 83
1999......................... 63
2000......................... 48
2001......................... 19
2002......................... 19
------
Total........................ $ 232
------
------
35
<PAGE>
9. DEPOSITS
The major types of savings deposits by weighted interest rates, amounts and
the percentages of such types to total savings deposits at September 30, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED
PERCENTAGE INTEREST PERCENTAGE INTEREST
AMOUNT OF TOTAL RATE AMOUNT OF TOTAL RATE
--------- ----------- ---------- ---------- ----------- -----------
Balances by interest rate:
NOW accounts.................................... $ 23,570 4.2% 1.82% $ 23,886 4.2% 1.82%
Money market deposit accounts................... 63,248 11.2 2.86 70,023 12.2 2.86
Passbook and club accounts...................... 57,638 10.2 2.74 59,323 10.4 2.74
Certificates by maturity:
Within 1 year................................... 279,693 49.3 242,804 42.5%
1 to 3 years.................................... 113,242 19.9 144,369 25.3
Beyond 3 years.................................. 29,570 5.1 30,600 5.3
--------- ------- --------- ------
Total certificates.............................. 422,505 74.3 5.55 417,773 73.1 5.41
--------- ------- ------- ---------- ------ ------
Accrued interest on savings..................... 414 0.1 361 0.1
--------- ------- ---------- ------
Total deposits.................................. $ 567,375 100.0% $ 571,366 100.0%
--------- ------- --------- ------
--------- ------- --------- ------
</TABLE>
A summary of interest expense on deposits is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
NOW.............................................................................. $ 442 $ 460 $ 492
MMDA............................................................................. 1,911 2,113 2,586
Passbook and club................................................................ 1,589 1,717 1,992
Certificates..................................................................... 22,922 22,463 19,954
--------- --------- ---------
Total............................................................................ $ 26,864 $ 26,753 $ 25,024
--------- --------- ---------
--------- --------- ---------
</TABLE>
10. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK
Advances from the Federal Home Loan Bank of New York which are amortizing
are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
INTEREST --------------------
DUE RATE 1997 1996
- ------------------------------------------ ----------- --------- ---------
<S> <C> <C> <C>
1999...................................... 6.470% $ 10,000 $ --
2001...................................... 5.918 7,560 9,275
2001...................................... 6.530 8,551 --
2003...................................... 6.164 8,208 9,517
--------- ---------
$ 34,319 $ 18,792
--------- ---------
--------- ---------
</TABLE>
The advances are collateralized by Federal Home Loan Bank stock and
substantially all first mortgage loans.
36
<PAGE>
11. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal................................ $ 1,543 $ 3,439 $ 4,888
State.................................. (6) 261 550
--------- --------- ---------
Total current........................ 1,537 3,700 5,438
--------- --------- ---------
Deferred:
Federal................................ 1,544 (752) (267)
State.................................. 60 (26) (5)
--------- --------- ---------
Total deferred....................... 1,604 (778) (272)
--------- --------- ---------
Total income tax provision............... $ 3,141 $ 2,922 $ 5,166
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company's provision for income taxes differs from the amounts determined
by applying the statutory federal income tax rate to income taxes for the
following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ----------- --------- ----------- --------- -----------
Tax at federal rate.... $ 3,131 35.0% $ 2,611 35.0% $ 5,280 35.0%
Surtax exemption....... (89) (1.0) (75) (1.0) (100) (0.7)
State taxes............ 35 0.4 155 2.0 360 2.4
Other.................. 64 0.7 231 3.0 (374) (2.5)
--------- --- --------- --- --------- ---
Total.................. $ 3,141 35.1% $ 2,922 39.0% $ 5,166 34.2%
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
</TABLE>
37
<PAGE>
Items that gave rise to significant portions of the deferred tax accounts,
which are included in prepaid expenses and other assets at September 30, 1997
and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
SAIF special assessment......................... $ -- $ 1,258
Deferred loan fees.............................. 201 293
Deferred loan costs............................. 2 9
Supplemental pension............................ -- 514
Accrued interest expense on CDs................. 126 77
Deferred income................................. 796 445
Other........................................... -- 93
--------- ---------
Total......................................... 1,125 2,689
--------- ---------
Deferred tax liabilities:
Unrealized gain on investments.................. (878) (596)
Allowance for loan loss......................... (578) (753)
Depreciation on office property and equipment... (868) (762)
Supplemental pension............................ (78) --
Other........................................... (32) --
--------- ---------
Total......................................... (2,434) (2,111)
--------- ---------
Net deferred tax (liability) asset................ $(1,309) $ 578
--------- ---------
--------- ---------
</TABLE>
In August 1996, the Small Business Job Protection Act (the "Act") was signed
into law. The Act repealed the percentage of taxable income method of accounting
for bad debts for thrift institutions effective for years beginning after
December 31, 1995. The Act required the Company as of October 1, 1996 to change
its method of computing reserves for bad debts to the specific charge-off
method. The bad debt deduction allowable under this method is available to large
banks with assets greater than $500 million. Generally, this method will allow
the Company to deduct an annual addition to the reserve for bad debts equal to
the Association's charge-offs.
A thrift institution required to change its method of computing reserves for
bad debts will treat such change as a change in a method of accounting
determined solely with respect to the "applicable excess reserves" of the
institution. The amount of the applicable excess reserves will be taken into
account ratably over a six-year taxable period, beginning with the first taxable
year beginning after December 31, 1995. The timing of this recapture may be
delayed for a two-year period provided certain residential loan requirements are
met. For financial reporting purposes, the Company will not incur any additional
tax expense. Amounts which had previously been deferred will be reversed for
financial reporting purposes and will be included in the income tax return of
the Company, increasing income tax payable. At September 30, 1997, under SFAS
No. 109, deferred taxes totaling approximately $800 were provided relating to
such difference.
38
<PAGE>
12. REGULATORY CAPITAL REQUIREMENTS
The Association is subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could
have a direct material effect on the Association's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Association must meet specific capital
guidelines that involve quantitative measurers of the Association's assets,
liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Association's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth in
the table below) of tangible and core capital (as defined in the regulations)
to total adjusted assets (as defined), and of risk-based capital (as defined)
to risk-weighted assets (as defined). Management believes, as of September
30, 1997, that the Association meets all capital adequacy requirements to
which it is subject.
As of September 30, 1997, the most recent notification from the Office of
Thrift Supervision categorized the Association as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Association must maintain minimum tangible, core and
risk-based ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
Association's category.
September 30, 1997:
<TABLE>
<CAPTION>
Well Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
--------------------- ---------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
---------- --------- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Core (Leverage).................................... $ 126,302 17.24% $ 21,974 3.0% $ 10,338 5.0%
Tier 1 risk-based.................................. 126,302 61.09 N/A N/A 12,405 6.0
Total risk-based................................... 127,366 61.60 16,540 8.0 20,675 10.0
Tangible........................................... 126,302 17.24 10,987 1.5 N/A N/A
</TABLE>
September 30, 1996:
<TABLE>
<CAPTION>
Well Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
--------------------- ---------------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
---------- --------- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Core (Leverage).................................... $ 143,239 19.31% $ 22,252 3.0% $ 37,086 5.0%
Tier 1 risk-based.................................. 143,239 73.11 N/A N/A 11,756 6.0
Total risk-based................................... 144,263 73.63 15,675 8.0 19,594 10.0
Tangible........................................... 143,239 19.31 11,126 1.5 N/A N/A
</TABLE>
13. PENSION PLANS
The Company terminated the defined benefit retirement plan effective
September 1, 1996. The assets were distributed to participants on a pro rata
basis in April 1997. Total pension expense for the years ended September 30,
1997 and 1996 was $43 and $334, respectively.
39
<PAGE>
The net periodic pension cost for the year ended September 30, 1995 included
the following components:
<TABLE>
<CAPTION>
1995
---------
<S> <C>
Service cost, benefits earned during the year.............................................. $ 195
Interest cost on projected benefit obligation.............................................. 266
Actual return on plan assets............................................................... (226)
Amortization of unrecognized net assets and other deferred amounts, net.................... 16
---------
Net periodic pension cost.................................................................. $ 251
---------
---------
</TABLE>
In determining the projected benefit obligation, the assumed discount rate
for each of the two years ended September 30, 1995 was 7.5%. The weighted
average rate of increase in compensation was 5%. The expected long-term rate
of return on assets used in determining net periodic pension cost was 7.5%.
The Company also terminated a Supplemental Executive Retirement Plan
effective September 1, 1996. Total expense for the years ended September 30,
1997 and 1996 was $0 and $824, respectively.
14. EMPLOYEE STOCK OWNERSHIP PLAN AND RECOGNITION AND RETENTION PLAN
In connection with the Conversion, the Company established an ESOP for the
benefit of eligible employees. The Company purchased 928,777 shares
(1,174,902 shares restated for the 10% and 15% stock dividend paid in March
1996 and May 1997, respectively,) of common stock on behalf of the ESOP in
the Conversion. At September 30, 1997 and 1996, 85,794 and 77,994 shares of
the total ESOP shares were committed to be released with 323,635 and 137,638
shares allocated to participants, respectively. The Company accounts for its
ESOP in accordance with Statement of Position 93-6, Employers' Accounting
for Employee Stock Ownership Plans, which requires the Company to recognize
compensation expense equal to the fair value of the ESOP shares during the
periods in which they become committed to be released. To the extent that
the fair value of the ESOP shares differs from the cost of such shares, this
differential will be charged or credited to equity as additional paid-in
capital. During 1997 and 1996, the differential aggregated $894 and $388,
respectively. Management expects the recorded amount of expense to fluctuate
as continuing adjustments are made to reflect changes in the fair value of
the ESOP shares. Employers with internally leveraged ESOP's, such as the
Company, do not report the loan receivable from the ESOP as an asset, and do
not report the ESOP debt owed to the employer as a liability. The Company
recorded compensation and employee benefit expense related to the ESOP of
$3,129 and $1,901 for the years ended September 30, 1997 and 1996,
respectively.
At the Company's annual meeting of stockholders held on January 19, 1995, the
Recognition and Retention Plan and Trust (the "MRP") was approved by the
Company's stockholders. The MRP purchased 464,388 shares (587,451 shares
restated for the 10% and 15% stock dividend paid in March 1996 and May 1997,
respectively,) in the open market at an aggregate cost of $6,085 and all
shares available under the MRP have been awarded to the Company's Board of
Directors and the Association's executive officers and other key employees.
At September 30, 1997 and 1996, respectively, the net deferred cost of the
unearned MRP shares amounted to $3,681 and $4,891 and is recorded as a charge
against stockholders' equity. Compensation expense will be recognized over
the five-year vesting period for shares awarded. The Company recorded
compensation and employee benefit expense related to the MRP of $1,210 and
$1,194 for the years ended September 30, 1997 and 1996, respectively.
40
<PAGE>
15. STOCK OPTION PLAN
The Company has a stock option plan which was established and approved by the
stockholders at the annual stockholders' meeting held on January 19, 1995.
The 1995 plan is for executive officers and selected full-time employees and
directors.
Under this plan, compensatory options were granted to non-employee directors
and incentive options were granted to selected officers and employees. The
option price per share for options granted may not be less than the fair
market value of the common stock on the date of grant.
The compensatory options are exercisable six months after issuance in
increments of 85% with 7.5% exercisable in each of the two years thereafter.
The incentive options are exercisable one year after issuance in increments
of 20% a year. All options expire in 10 years.
A summary of transactions under the plan, with all amounts are restated for
the stock dividends issued in March 1996 and May 1997, respectively, for the
years ended September 30, 1997, 1996 and 1995 follows.
<TABLE>
<CAPTION>
Weighted
Average Exercise
Number of Exercise Price Price
Shares Per Share Per Share
---------- -------------- -----------------
<S> <C> <C> <C>
Outstanding at October 1,1994
Granted......................................................... 1,283,027 $ 8.20- 11.27 $ 8.27
Exercised....................................................... -- -- --
Expired......................................................... -- -- --
---------- --------------
Outstanding at September 30, 1995................................. 1,283,027 -- 8.27
Granted......................................................... 35,342 12.06--12.61 12.09
Exercised....................................................... (8,575) 8.20 8.20
Expired......................................................... -- -- --
---------- --------------
Outstanding at September 30, 1996................................. 1,309,794 8.60
Granted......................................................... 43,979 13.48--15.00 13.86
Exercised....................................................... (71,923) 8.20 8.20
Expired........................................................ -- -- --
---------- --------------
Outstanding at September 30, 1997................................. 1,281,850 $ 8.20- 15.00 8.56
---------- --------------
---------- --------------
</TABLE>
The following table summarizes stock options outstanding at September 30, 1997:
<TABLE>
<CAPTION>
Number of Weighted Average
Options Remaining Weighted Average
Range of Exercise Price Outstanding Contractual Life Exercise Price
----------------------- ----------- ----------------- -----------------
<S> <C> <C> <C>
$8.20........................................................ 1,177,229 8.00 $ 8.20
$11.27-12.61................................................. 60,642 8.60 11.72
$13.48....................................................... 33,054 10.00 13.48
$15.00....................................................... 10,925 10.00 15.00
-----------
1,281,850 8.11 $ 8.56
----------- ----- -----
-----------
</TABLE>
The Company accounts for stock based compensation using the intrinsic value
method and has recognized no compensation under the method. SFAS No. 123
permits the use of the intrinsic value method;
41
<PAGE>
however, requires the Company to disclose the pro-forma net income and
earnings per share as if the stock based compensation had been accounted for
using the fair value method. Had the compensation costs for the Company's
stock option plan been determined based on the fair value method, the
Company's net income and earnings per share would have been reduced to the
pro-forma amounts indicated below:
<TABLE>
<CAPTION>
Years Ended
September 30,
--------------------
<S> <C> <C> <C>
1997 1996
--------- ---------
Net Income As reported $ 5,806 $ 4,537
Pro-forma 5,692 4,477
Earnings per Share As reported 0.54 0.37
Pro-forma 0.53 0.36
Weighted average fair value of options granted. 4.61 4.52
</TABLE>
Significant assumptions used to calculate the above fair value of the options
granted are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Risk-free interest rate of return................................................ 6.54% 5.97%
Expected option life............................................................. 60 months 60 months
Expected volatility.............................................................. 37% 37%
Expected dividends............................................................... 2.0% 1.6%
</TABLE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, Disclosure About
Fair Value of Financial Instruments. The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
42
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
-------------------- ----------------------
<S> <C> <C> <C> <C>
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- -----------
Assets:
Cash and cash equivalents.......................................... $ 15,811 $ 15,811 $ 12,466 $ 12,466
Investment securities held to maturity............................. 27,859 27,859 26,712 26,724
Investment securities available for sale........................... -- -- 48,337 48,337
Mortgage-backed securities held to maturity........................ 326,869 332,713 285,267 285,831
Mortgage-backed securities available for sale...................... 133,920 136,430 165,485 166,994
Loans receivable, net.............................................. 210,008 211,055 185,031 188,799
Federal Home Loan Bank stock....................................... 6,075 6,075 4,590 4,590
Liabilities:
NOW accounts....................................................... 23,570 23,570 23,886 23,886
Money market deposit accounts...................................... 63,248 63,248 70,023 70,023
Passbook and club accounts......................................... 57,638 57,638 59,323 59,323
Savings certificates............................................... 422,505 421,056 417,773 410,192
FHLB advances...................................................... 34,319 34,319 18,792 18,792
Off-balance sheet commitments...................................... -- 8,576 -- 6,554
</TABLE>
Cash and Cash Equivalents--For cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
Investments and Mortgage-Backed Securities--The fair value of investment
securities and mortgage-backed securities is based on quoted market prices,
dealer quotes, and prices obtained from independent pricing services.
Loan Receivable--The fair value of loans is estimated based on present value
using approximately current entry-value interest rates applicable to each
category of such financial instruments.
Federal Home Loan Bank Stock--Although FHLB stock is an equity interest in
an FHLB, it is carried at cost because it does not have a readily determinable
fair value and it lacks a market.
NOW Accounts, Money Market Deposit Accounts, Passbook and Club Accounts and
Savings Certificates- The fair value of NOW accounts, money market deposit
accounts, and passbook and club accounts is the amount reported in the
consolidated financial statements. The fair value of savings certificates is
based on a present value estimate using rates currently offered for deposits of
similar remaining maturity.
Advances from Federal Home Loan Bank--The fair value is the amount payable
on demand at the reporting date.
Off-Balance-Sheet Commitments--For commitments expiring within 90 days or
with a variable rate, the settlement amount is a reasonable estimate of fair
value. For commitments expiring beyond 90 days or with a fixed rate, the fair
value is the present value of the fees based on current loan rates.
The fair value estimates presented herein are based on pertinent information
available to management as of September 30, 1997 and 1996. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these consolidated financial statements since those dates and, therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
43
<PAGE>
17. STOCK CONVERSION
On October 13, 1994, the Association completed its Conversion from a New
Jersey chartered mutual savings and loan association to a New Jersey chartered
stock savings and loan association through the sale of 11,609,723 shares of
common stock (par value $.01) of IBS Financial Corp., a New Jersey corporation
organized in June 1994 by the Association for the purpose of acquiring all of
the capital stock of the Association upon consummation of the Conversion. Total
proceeds of $116,097 were reduced by Conversion expenses of approximately $2,919
and the excess of proceeds over the par value of the stock was credited to
paid-in capital in excess of par. As a result of this Conversion, $56,600 of
additional capital was contributed to the Association from this newly formed
holding company in exchange for all of the outstanding capital stock of the
Association.
At the time of the Conversion, the Association established a liquidation
account in an amount equal to the Association's net worth as reflected in the
latest consolidated statement of financial condition of the Association
contained in the offering circular utilized in the Conversion. The function of
the liquidation account is to establish a priority on liquidation and, except
with respect to the payment of cash dividends on, or the repurchase of, any of
the common stock by the Association, the existence of the liquidation account
will not operate to restrict the use or application of any of the net worth
accounts of the Association. In the event of a complete liquidation of the
Association (and only in such event), each eligible account holder will be
entitled to receive a pro rata distribution from the liquidation account, based
on such holder's proportionate amount of the total current adjusted balance from
deposit accounts then held by all eligible account holders, before any
liquidation distribution may be made with respect to stockholders.
18. SAVINGS ASSOCIATION INSURANCE FUND ASSESSMENT
On September 30, 1996, an omnibus appropriations bill for fiscal year 1997,
which included the recapitalization of the Savings Association Insurance Fund
(SAIF) became law. Accordingly, all SAIF insured depository institutions were
charged a one-time special assessment on their SAIF-accessible deposits as of
March 31, 1995 at the rate of 65.7 basis points. The Company paid $3,700 on
November 27, 1996.
44
<PAGE>
19. PARENT COMPANY FINANCIAL INFORMATION
The financial statements of IBS Financial Corp. (Parent only) as of and for
the periods ended September 30,1997 and 1996 are presented below:
Statement of Financial Condition
September 30, 1997 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Cash...................................................................................... $ 117 $ 122
Investment in subsidiary.................................................................. 127,179 144,242
Investment securities held to maturity.................................................... 608 354
Other assets.............................................................................. 565 5
TOTAL ASSETS.............................................................................. $ 128,469 $ 144,723
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES--Accrued expenses and other liabilities....................................... $ 450 $ 439
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock.............................................................................. 116 116
Additional paid-in capital................................................................ 113,203 113,432
Common stock acquired by ESOP and MRP..................................................... (8,941) (11,097)
Treasury stock............................................................................ (10,238) (12,104)
Retained earnings......................................................................... 33,879 53,937
---------- ----------
Total stockholders' equity............................................................ 128,019 144,284
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................................ $ 128,469 $ 144,723
---------- ----------
---------- ----------
</TABLE>
45
<PAGE>
Statement of Income
Periods Ended September 30, 1997 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Interest income:
Interest on ESOP loan........................................................................ $ 648 $ 701
Interest and dividends on investments........................................................ 137 1,109
--------- ---------
Total interest income...................................................................... 785 1,810
Interest expense- Intercompany advances........................................................ 838 --
--------- ---------
Net interest (loss) income..................................................................... (53) 1,810
--------- ---------
Other expenses:
Management fee............................................................................... 300 980
Salaries and employee benefits............................................................... 24 24
Professional services........................................................................ 576 451
Other operating expenses..................................................................... 682 350
--------- ---------
Total other expenses....................................................................... 1,582 1,805
--------- ---------
(Loss) income before income tax benefit and equity in undistributed
earnings of subsidiaries..................................................................... (1,635) 5
Income tax benefit............................................................................. (564) (6)
--------- ---------
(Loss) income before equity in undistributed earnings of subsidiaries.......................... (1,071) 11
Equity in undistributed earnings of subsidiaries............................................... 6,877 4,526
--------- ---------
Net income..................................................................................... $ 5,806 $ 4,537
--------- ---------
--------- ---------
</TABLE>
46
<PAGE>
Statement of Cash Flows
Periods Ended September 30, 1997 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Operating activities:
Net income................................................................................. $ 5,806 $ 4,537
Changes in assets and liabilities which provided (used) cash:
Other assets............................................................................. (560) 697
Accrued expenses and other liabilities................................................... 11 (306)
Equity in undistributed earnings of subsidiaries......................................... (6,877) (4,526)
--------- ---------
Net cash (used in) provided by operating activities.................................... (1,620) 402
--------- ---------
Investing activities:
Proceeds from maturities of investments.................................................... 254 18,993
Investment in subsidiary................................................................... 24,018 --
--------- ---------
Net cash provided by investing activities.............................................. 24,272 18,993
--------- ---------
Financing activities:
Cash dividends paid........................................................................ (5,272) (2,317)
Payments on ESOP debt, net................................................................. 1,840 1,535
Treasury stock acquired.................................................................... (21,110) (19,830)
Amortization of MRP shares................................................................. 1,210 1,194
Stock options exercised.................................................................... 675 71
--------- ---------
Net cash used in financing activities.................................................. (22,657) (19,347)
--------- ---------
(Decrease) increase in cash and cash equivalents............................................. (5) 48
Cash and cash equivalents, beginning of period............................................... 122 74
--------- ---------
Cash and cash equivalents, end of period..................................................... $ 117 $ 122
--------- ---------
--------- ---------
Supplemental noncash investing activity--Transfer of investment securities (to) from
subsidiaries............................................................................... $ (12,100) $ 12,100
--------- ---------
--------- ---------
</TABLE>
47
<PAGE>
20. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized quarterly data for each of the last
two years restated for the stock dividends paid in March 1996 and May 1997,
respectively:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31
1997 1997 1997 1996 1996 1996 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------
Interest income...................... $ 12,883 $ 12,924 $ 12,830 $ 13,066 $ 13,113 $ 13,090 $ 12,847 $ 13,102
Interest expense..................... 7,330 7,235 7,224 7,291 6,930 6,896 6,750 6,843
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income.................. 5,553 5,689 5,606 5,775 6,183 6,194 6,097 6,259
Provision for loan losses............ 10 10 10 10 10 10 10 --
Other operating income............... 169 206 162 148 151 247 154 135
Other expenses....................... 3,699 3,410 3,676 3,536 7,601 3,407 3,299 3,624
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes........... 2,013 2,475 2,082 2,377 (1,277) 3,024 2,942 2,770
Income taxes......................... 735 859 723 824 (413) 1,174 1,133 1,028
--------- --------- --------- --------- --------- --------- --------- ---------
Net income........................... $ 1,278 $ 1,616 $ 1,359 $ 1,553 $ (864) $ 1,850 $ 1,809 $ 1,742
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Earnings per share................... $ 0.12 $ 0.15 $ 0.13 $ 0.14 $ (0.07) $ 0.15 $ 0.15 $ 0.14
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Dividends per share.................. $ 0.100 $ 0.080 $ 0.070 $ 0.287 $ 0.052 $ 0.052 $ 0.052 $ 0.047
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
Earnings per share is computed independently for each of the quarters
presented. Consequently, the sum of quarters may not equal the earnings per
share.
Prices of common stock:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $ 19.00 $ 18.13 $ 15.76 $ 14.24 $ 13.16 $ 12.61 $ 12.94 $ 13.43
Low 15.38 14.25 13.26 12.93 10.98 10.87 11.57 11.46
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
IBS FINANCIAL CORP. INTER-BORO SAVINGS AND
LOAN ASSOCIATION
Joseph M. Ochman, Sr. Joseph M. Ochman, Sr.
Chairman of the Board, President and Chairman of the Board, President and
Chief Executive Officer Chief Executive Officer
Thomas J. Auchter Thomas J. Auchter
President, Investment 2010, President, Investment 2010,
a private investment company a private investment company
John A. Borden, MAI John A. Borden, MAI
Independent real estate appraiser Independent real estate appraiser
Paul W. Gleason Paul W. Gleason
Retired; Formerly Chairman of Retired; Formerly Chairman of
Formigli Corporation, a concrete company Formigli Corporation, a concrete company
Francis X. Lorbecki, Jr. Francis X. Lorbecki, Jr.
Retired; Formerly Senior Vice President Retired; Formerly Senior Vice President
and Loan Officer of the Association and Loan Officer of the Association
Albert D. Stiles, Jr. Albert D. Stiles, Jr.
Owner of Wills and Stiles, Inc., Owner of Wills and Stiles, Inc.,
an electrical contractor an electrical contractor
Frank G. Lockhart
Realtor
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
OFFICERS
- --------------------------------------------------------
<S> <C>
IBS FINANCIAL CORP. INTER-BORO SAVINGS AND
LOAN ASSOCIATION
Joseph M. Ochman, Sr. Joseph M. Ochman, Sr.
Chairman of the Board, President and Chairman of the Board, President and
Chief Executive Officer Chief Executive Officer
Richard G. Sharp Richard G. Sharp
Executive Vice President and Executive Vice President
Chief Financial Officer and Chief Financial Officer
Matthew J. Kennedy Matthew J. Kennedy
Executive Vice President and Executive Vice President and
Treasurer Treasurer
Chiara Eisennagel Chiara Eisennagel
Corporate Secretary Corporate Secretary
Anthony C. Chigounis
Senior Vice President, Operations and
Administration
Andrew A. Cosenza
Senior Vice President, Deposit Acquisitions
Lorraine H. O'Hara
Senior Vice President and Assistant
Secretary
</TABLE>
50
<PAGE>
BANKING LOCATIONS
MAIN OFFICE
Route 70 and Springdale Road
Cherry Hill, New Jersey 08003
(609) 424-1000
BRANCH OFFICES
<TABLE>
<S> <C>
Kings Highway and Chapel Avenue Route 70 and Hartford Road
Cherry Hill, New Jersey 08034 Medford, New Jersey 08055
(609) 482-1100 (609) 654-0100
Centrum Shopping Center Pleasant Valley Avenue and
219-Y Haddonfield Berlin Road Fellowship Road
Cherry Hill, New Jersey 08034 Mount Laurel, New Jersey 08054
(609) 795-1400 (609) 234-4466
1651 Blackwood-Clementon Road 1 Lucas Lane off White Horse Road
Gloucester Township, New Jersey 08012 Voorhees, New Jersey 08043
(609) 227-6888 (609) 309-0900
400 White Horse Pike Hurffville-Cross Keys Road
Laurel Springs, New Jersey 08021 and Altair Drive
(609) 783-1000 Washington Township, New Jersey 08012
(609) 589-7000
Route 73 and Brick Road
Marlton, New Jersey 08053
(609) 983-8200
</TABLE>
51
<PAGE>
STOCKHOLDER INFORMATION
IBS Financial Corp. is a unitary savings and loan holding company conducting
business through its wholly-owned subsidiary, Inter-Boro Savings and Loan
Association and an investment subsidiary. The Association is a New Jersey
chartered, SAIF-insured savings institution operating through ten full-service
offices located in Camden, Burlington, and Gloucester Counties, New Jersey. The
Company's headquarters is located at 1909 East Route 70, Cherry Hill, New Jersey
08003.
TRANSFER AGENT/REGISTRAR
Chase Mellon Shareholder Services
450 West 33rd Street, 15th Floor
New York, New York 10001
1-800-526-0801
STOCKHOLDER REQUESTS
Requests for annual reports, quarterly reports and related stockholder
literature should be directed to the Corporate Secretary, IBS Financial Corp.,
1909 East Route 70, Cherry Hill, New Jersey 08003.
Stockholders needing assistance with stock records, transfers or lost
certificates, please contact the Company's transfer agent, Chase Mellon
Shareholder Services.
NASDAQ SYMBOL
Shares of IBS Financial Corp.'s common stock are traded nationally under the
symbol "IBSF" on the Nasdaq Stock Market, National Market System. At November
30, 1997, the Company had approximately 2,100 stockholders of record. See Note
20 to the Consolidated Financial Statements for the market price of the Common
Stock and dividends paid by the Company for each quarter during the last two
fiscal years.
52
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 15,811
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 136,430
<INVESTMENTS-CARRYING> 354,728
<INVESTMENTS-MARKET> 360,572
<LOANS> 211,072
<ALLOWANCE> 1,064
<TOTAL-ASSETS> 734,751
<DEPOSITS> 567,375
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,038
<LONG-TERM> 34,319
0
0
<COMMON> 116
<OTHER-SE> 127,903
<TOTAL-LIABILITIES-AND-EQUITY> 734,751
<INTEREST-LOAN> 15,399
<INTEREST-INVEST> 36,304
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 51,703
<INTEREST-DEPOSIT> 26,864
<INTEREST-EXPENSE> 29,080
<INTEREST-INCOME-NET> 22,623
<LOAN-LOSSES> 40
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 14,321
<INCOME-PRETAX> 8,947
<INCOME-PRE-EXTRAORDINARY> 5,806
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,806
<EPS-PRIMARY> .54
<EPS-DILUTED> .54
<YIELD-ACTUAL> 3.14
<LOANS-NON> 818
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,024
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,064
<ALLOWANCE-DOMESTIC> 1,064
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
