<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO.2
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: SEPTEMBER 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
Commission File No.: 0-24862
IBS FINANCIAL CORP.
----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
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 (Zip Code)
Executive Offices)
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)
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(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 12, 1996, the aggregate value of the 8,533,433 shares of
Common Stock of the Registrant issued and outstanding on such date, which
excludes 1,402,472 shares held by all directors and officers of the
Registrant as a group, was approximately $132.3 million. This figure is
based on the last known trade price of $15.50 per share of the Registrant's
Common Stock on December 12, 1996.
Number of shares of Common Stock outstanding as of December 12, 1996:
9,935,905
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the fiscal year ended
September 30, 1995 are incorporated into Parts II and IV.
<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 and IBSF Investment Corp., a wholly-owned investment
subsidiary, the Company's loan to an employee stock ownership plan, and
certain U.S. Government Agency securities.
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.
Financial highlights of the Company include:
- Profitability. Net income totalled $4.5 million, $9.9 million and
$5.0 million for the fiscal years ended September 30, 1996, 1995,
and 1994, respectively. As
<PAGE>
discussed herein, 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, 1996, single-family residential loans comprised
89.0% of the Association's total loan portfolio. As of such date,
total non-performing loans and troubled debt restructurings
constituted .45% of total loans and total nonperforming assets and
troubled debt restructurings were .11% of total assets.
- Capital. The Company currently exceeds all minimum regulatory
capital requirements of the Office of Thrift Supervision ("OTS").
At September 30, 1996, it had tangible, core, and risk-based
capital ratios of 19.3%, 19.3% and 73.6%, 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, 1996,
26.8% of the Association's deposit base of $571.4 million consisted
of core deposits, which include passbook, money market and NOW
accounts.
The Company as a bank holding company and savings and loan holding
company is subject to examination and regulation by the Board of Governors of
the Federal Reserve System ("FRB"), 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
FRB 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.
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 (which was expanded in 1996), construction loans
on residential properties and consumer loans, including home
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<PAGE>
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,
-----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ------------------ ------------------ ------------------ ------------------
Amount % Amount % Amount % Amount % Amount %
--------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family $164,717 89.02% $ 132,251 93.28% $131,423 93.46% $146,556 93.34% $177,665 95.94%
Commercial 17,935 9.69 3,985 2.81 3,525 2.51 3,742 2.38 859 .46
Commercial participations 1,613 .87 4,563 3.22 4,916 3.50 6,286 4.00 5,830 3.15
Construction 1,256 .68 1,889 1.33 2,801 1.99 2,004 1.28 --- ---
Consumer and other loans 3,285 1.78 2,741 1.93 2,073 1.47 2,276 1.44 3,142 1.70
-------- ------ --------- ------ ------- ------ -------- ------ -------- ------
Total loans 188,806 102.04 145,429 102.57 144,738 102.93 160,864 102.44 187,496 101.25
-------- ------ --------- ------ ------- ------ -------- ------ -------- ------
Less:
Allowance for loan losses (1,024) (.55) (994) (0.70) (530) (0.38) (1,669) (1.06) (1,238) (0.67)
Loans in process (1,179) (.64) (1,672) (1.18) (2,618) (1.86) (1,271) (0.81) (91) (0.05)
Deferred loan fees (1,572) (.85) (982) (0.69) (972) (0.69) (893) (0.57) (978) (0.53)
Unearned interest --- --- --- --- --- --- (1) --- (1) ---
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Loans receivable, net $185,031 100.00% $141,781 100.00% $140,618 100.00% $157,030 100.00% $185,188 100.00%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
</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,
1996. 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
--------------- --------------- -------------- ------------ -----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Amounts due in:
One year or less $16,166 $ 554 $1,256 $2,501 $20,477
After one year through three years 4,476 1,644 0 363 6,483
After three years through four years 5,750 0 0 108 5,858
After four years through ten years 13,834 174 0 133 14,141
After ten years through twenty years 57,314 5,846 0 180 63,340
More than twenty years 67,177 11,330 0 0 78,507
------- ------ ------ ------ -------
Total(2) $164,717 $19,548 $1,256 $3,285 $188,806
------- ------ ------ ------ -------
------- ------ ------ ------ -------
Interest rate terms on amounts due after one
year:
Fixed $142,215 $18,994 $ 0 $3,285 $164,494
Adjustable 22,502 554 1,256 0 24,312
------- ------ ----- ------ -------
$164,717 $19,548 $1,256 $3,285 $188,806
------- ------ ------ ------ -------
------- ------ ------ ------ -------
</TABLE>
_______________
(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.
- 5 -
<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. In fiscal 1995, unlike
the prior two fiscal years, gross loan balances increased substantially.
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. The $52.0 million increase in total loan
originations and purchases in fiscal 1996 when compared to fiscal 1995 more
than offset a $6.2 million increase in principal loan repayments and
prepayments between such periods.
One of the Company's long range objectives is to increase loan production
volumes. To accomplish this objective, the Association has hired a loan
solicitor whose compensation is based on a commission for loan production.
Recently, the Association hired another loan solicitor and has plans to hire
a third loan solicitor in fiscal 1997. 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.
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 10.6% of total
loan balances at September 30, 1996 compared to 6.0% at the end of the
previous fiscal year. Funding for these commercial loan originations was
obtained from new borrowings in the form of FHLB advances.
- 6 -
<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,
-------------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- ---------------------
(In Thousands)
<S> <C> <C> <C>
Gross loans at beginning of period $145,429 $144,738 $160,864
-------- -------- --------
Loan originations:
Real estate:
Single-family 48,836 15,506 23,570
Commercial 14,734 220 275
Construction 594 --- 2,800
-------- -------- -------
Total real estate loans originated 64,164 15,726 26,645
-------- -------- -------
Consumer and other originations: 2,389 1,868 1,354
-------- -------- -------
Total loans originated for investment 66,553 17,594 27,999
-------- -------- -------
Purchase of whole loans and
participations 3,643 582 125
-------- -------- -------
Total originations and purchases of
loans 70,196 18,176 28,124
-------- -------- -------
Deduct:
Principal loan repayments and
prepayments (22,575) (16,390) (41,373)
Transferred to real estate owned (56) --- (1,019)
Loans sold (4,188) --- (273)
Loans assigned to and funded by
Association pension fund --- (1,095) (1,585)
-------- -------- -------
Subtotal (26,819) (17,485) (44,250)
-------- -------- -------
Net increase (decrease) in loans 43,377 691 (16,126)
-------- -------- --------
Gross loans at end of period $188,806 $145,429 $144,738
-------- -------- --------
-------- -------- --------
</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 $275,000 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
- 7 -
<PAGE>
loans in excess of this amount required to be presented to the full Board for
review and 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 $19.8 million at September
30, 1996. In addition, the Association limits lending on any one loan to
$5.0 million unless approved specifically by Board action. As of September
30, 1996, the Association had eight 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, 1996,
$1.6 million or .9% of the Association's total loans receivable consisted of
participation interests in loans purchased from other financial institutions,
all of which were paying in accordance with their loan terms. 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, 1996, $164.7
million or 89.0% 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 up to 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.
- 8 -
<PAGE>
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 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, 1996, approximately $143.9 million or 87.4% 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 will be 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, 1996, the Association had
purchased 17 loans aggregating $705,000.
COMMERCIAL REAL ESTATE LOANS. The Association also originates mortgage
loans for the acquisition and refinancing of commercial real estate
properties. At September 30, 1996, $17.9 million or 9.7% of the
Association's total loan portfolio consisted of loans secured by existing
commercial real estate properties and an additional $1.6 million or .9% of
the total
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<PAGE>
loan portfolio consisted of commercial real estate participation. During
fiscal 1996, the Association originated nine loans aggregating $14.5 million,
which are secured by commercial real estate located in New Jersey.
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
7.7 years at September 30, 1996. 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, 1996 the Association's commercial real estate loan portfolio
consisted of 18 loans (including one commercial participation) with an
average principal balance 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, 1996, the
Association had one construction loan outstanding in the amount of $1.3
million or .7% of the Association's total loan portfolio, of which $1.2 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
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<PAGE>
disbursement of funds during the term of the construction loan. Such
inspection includes a review for compliance with the construction plan,
including materials specifications.
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, 1996, the Association had no real estate
owned.
11
<PAGE>
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
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, 1996.
At September 30, 1995, During fiscal 1996, this loan was sold which generated
a gain of $16,000. At September 30, 1996, 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,
--------------------------------------------
1996 1995 1994 1993 1992
-------- ------ ------ ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Single-family residential(1) $827 $663 $1,005 $ 895 $1,040
Commercial participations --- --- --- 4,583 5,882
-------- ------ ------ ------ ----------
Total nonperforming loans 827 663 1,005 5,478 6,922
Real estate owned --- --- 819 --- 1,573
-------- ------ ------ ------ ----------
Total nonperforming assets $827 $663 $1,824 $5,478 $8,495
======== ====== ====== ====== ==========
Troubled debt restructurings $--- $ --- $3,261 $ --- $ ---
======== ====== ====== ====== ==========
Total nonperforming loans and
troubled debt restructurings
as a percentage of total loans 0.45% 0.47% 3.62% 3.49% 4.59%
======== ====== ====== ====== ==========
Total nonperforming assets
and troubled debt
restructurings as a percentage
of total assets 0.11% 0.09% 0.77% 0.82% 1.30%
======== ====== ======= ====== ==========
</TABLE>
(FOOTNOTES ON THE FOLLOWING PAGE)
12
<PAGE>
_______________
(1) Consists of an aggregate of 11, 15, 16, 16 and 21 loans at September 30,
1996, 1995, 1994, 1993 and 1992 respectively.
The Association's total non-performing assets and troubled debt
restructurings have declined from a high of $8.5 million or 1.30% of total
assets at September 30, 1992 to $800,000 million or .11% of total assets at
September 30, 1996. During the year ended September 1994, total
non-performing assets declined by $3.7 million or 66.7%, as the Association
participated in 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.
At September 30, 1996 and 1995, approximately $69,000 and $60,000 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, 1996 and 1995, $45,000 and
$46,000, 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,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Average loans, net $159,628 $138,619 $147,691 $177,364 $197,103
======== ======== ======== ======== ========
Allowance for loan losses,
beginning of year $ 994 $ 530 $ 1,669 $ 1,238 $ 1,495
Charged-off loans(1) --- --- (1,319) --- (1,334)
Recoveries on loans previously
charged off --- 434 --- --- ---
Provision for loan losses 30 30 180 431 1,077
-------- -------- -------- -------- --------
Allowance for loan losses, end
of period $ 1,024 $ 994 $ 530 $ 1,669 $ 1,238
======== ======== ======== ======== ========
Net loans charged-off to
average loans, net ---% ---% 0.89% ---% 0.68%
======== ======== ======== ======== ========
Allowance for loan losses to
total loans 0.55% 0.70% 0.38% 1.06% 0.67%
======== ======== ======== ======== ========
Allowance for loan losses to
nonperforming loans 123.8% 149.91% 52.71% 30.51% 17.9%
======== ======== ======== ======== ========
Allowance for loan losses to
nonperforming loans and
troubled debt restructurings 123.8% 149.91% 12.41% 30.51% 17.9%
======== ======== ======== ======== ========
</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 and 1996, 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 and 123.8% at September 30, 1996.
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,
-------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- ------------------- -------------------- ----------------------
% of Loans % of Loans % of Loans % of Loans % of Loans
in Each in Each in Each in Each in Each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------- ----------- ------ ----------- ------ ------------ ------ --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Single-family $ 724 89.02% $699 93.28% $236 93.46% $ 246 93.33% $ 299 95.94%
Commercial
participations 16 0.87 252 3.22 250 3.50 1,358 4.00 908 3.15
Commercial 274 9.69 40 2.81 41 2.51 7 2.38 30 0.46
Construction 1 0.12 2 0.28 2 0.30 57 0.29 --- ---
Consumer and
other 9 0.30 1 0.41 1 0.23 1 --- 1 0.45
------ ----- ----- ----- ----- ----- ------- ------ ------ -----
Total $1,024 100.00% $994 100.00% $530 100.00% $1,669 100.00% $1,238 100.00%
====== ====== ==== ====== ===== ====== ======= ====== ====== ======
</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. The Company
sold securities in fiscal 1996 and recognized a gain on sale of $70,000.
In accordance with a 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,
----------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
--------- ------- --------- ------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities $ --- $ --- $ 49,977 $ 50,252 $ 80,944 $ 80,245
Obligations of U.S.
government
corporations
and agencies 26,366 26,378 114,994 115,275 133,497 132,817
Term deposits in FHLB 346 346 76,374 76,374 75,054 75,054
------- ------- -------- -------- -------- --------
Total $26,712 $26,724 $241,345 $241,901 $289,495 $288,116
======= ======= ======== ======== ======== ========
</TABLE>
The following table sets forth certain information relating to the
Association's investment securities available for sale portfolio at the date
indicated.
<TABLE>
<CAPTION>
September 30, 1996
-----------------------------
Carrying Market
Value Value
-------- ---------
(In Thousands)
<S> <C> <C>
U.S. government obligations $48,337 $48,337
-------- ---------
-------- ---------
</TABLE>
At September 30, 1996, all of the Association's investment securities
both held to maturity and available for sale were due in one year or less.
The weighted average yield on a fully tax equivalent basis for the held to
maturity portfolio and the available for sale portfolio at September 30, 1996
was 5.48% and 6.43%, respectively.
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, 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
17
<PAGE>
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 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 $203,150. 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,
-----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
FNMA $ 41,468 $ 17,280 $ --- $ --- $ ---
GNMA 131,632 142,054 105,482 128,427 207,819
FHLMC 278,435 151,549 76,344 4,724 7,071
Private 726 870 1,065 1,526 2,151
-------- -------- -------- -------- --------
Total mortgage-backed
securities( 1) $452,261 $311,753 $182,891 $134,677 $217,041
======== ======== ======== ======== ========
</TABLE>
_________________
(1) Includes FNMA, GNMA and FHLMC securities held for sale at September
30, 1996 of $12,386, $15,729 and $138,879, respectively, or an aggregate of
$166,994.
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,
------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Beginning balance $311,753 $182,891 $134,677
Mortgage-backed securities purchased 217,687 164,236 105,853
Principal repayments (78,778) (35,710) (57,948)
Unrealized gain, net of tax 1,509 --- ---
Deferred discounts, net 90 336 309
-------- -------- --------
Net change 140,508 128,862 48,214
-------- -------- --------
Ending balance $452,261 $311,753 $182,891
======== ======== ========
</TABLE>
At September 30, 1996, the weighted average contractual maturity of all
of the Association's mortgage-backed securities was in excess of 10.5 years
and the weighted average yield on the mortgage-backed securities portfolio
was 7.07%. 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, 1996, of the $452.3 million of
mortgage-backed securities, an aggregate of $391.5 million were secured by
fixed-rate mortgage loans and an aggregate of $60.8 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, 1996 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 $18.8
million of FHLB borrowings outstanding at September 30, 1996. 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. In the event of the need for an additional source of
funds, the Board of Directors of the Company has authorized management to
borrow up to $10.0 million from the Federal Reserve Bank of Philadelphia
without the need for further Board approval. In addition, during the year
ended September 30, 1996, the Company's Board of Directors also provided
management with the authority to borrow up to $50 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 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.
20
<PAGE>
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 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, 1996. 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 affiliating 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. In
addition, the Association acquired another automated teller machine for use
at another Burlington County branch. Of the Associations 10 offices, 6 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,
----------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
-------- ------ -------- ----- -------- -----
Passbook and club accounts $ 59,323 10.4% $ 62,950 11.1% $ 80,494 13.3%
Money market 70,023 12.2 74,933 13.3 99,735 16.5
Certificate of deposit 417,773 73.1 403,736 71.4 396,194 65.7
NOW accounts 23,886 4.2 22,909 4.1 26,274 4.4
Accrued interest 361 .1 382 .1 383 0.1
-------- ------ -------- ----- -------- -----
Total deposits at end of
period $571,366 100.00% $564,910 100.0% $603,080 100.0%
-------- ------ -------- ----- -------- -----
-------- ------ -------- ----- -------- -----
</TABLE>
22
<PAGE>
The following table presents, by various interest rate categories, the
amount of certificates of deposit at September 30, 1996 and 1995, and the
amounts at September 30, 1996 which mature during the periods indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, AMOUNTS AT SEPTEMBER 30, 1996
MATURING WITHIN
-------------------- ----------------------------------------------
CERTIFICATES OF
DEPOSIT 1996 1995 ONE YEAR TWO YEARS THREE YEARS THEREAFTER
- --------------- -------- -------- -------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
2.00% to 4.00% $ 8,522 $ 29,325 $ 1,494 $ 316 $ 1,725 $ 4,987
4.01% to 6.00% 337,123 282,158 216,942 67,269 38,496 14,416
6.01% to 8.00% 70,155 83,958 24,063 24,384 10,546 11,162
8.01% to 10.0% 1,973 8,295 305 561 1,072 35
10.01% or more 0 --- 0 0 0 0
-------- -------- -------- -------- -------- --------
Total certificate
accounts $417,773 $403,736 $242,804 $92,530 $51,839 $30,600
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</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,
--------------------------------------------------------------------
1996 1995 1994
------------------- ------------------- --------------------
AVERAGE AVERAGE AVERAGE
AVERAGE RATE AVERAGE RATE AVERAGE RATE
BALANCE PAID BALANCE PAID BALANCE PAID
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Passbook and club accounts $60,561 2.84% $ 67,810 2.94% $76,585 2.75%
Money market 72,798 2.90 83,482 3.09 103,982 2.83
Certificates of deposit 415,447 5.41 394,704 5.06 404,002 4.97
NOW accounts 24,020 1.92 23,742 2.07 25,178 2.08
-------- ------ -------- ---- -------- ----
Total deposits $572,826 4.67% $569,738 4.39% $609,747 4.20%
-------- ------ -------- ---- -------- ----
-------- ------ -------- ---- -------- ----
</TABLE>
The following table sets forth the Association's net savings flows
during the periods indicated.
YEAR ENDED SEPTEMBER 30,
-----------------------------------
1996 1995 1994
-------- -------- ---------
(IN THOUSANDS)
Beginning balance $564,910 $603,080 $609,805
-------- -------- --------
Decrease before interest
credited (16,562) (59,836) (29,105)
Interest credited 23,018 21,666 22,380
-------- -------- --------
Net savings increase
(decrease) 6,456 (38,170) (6,725)
Ending balance $571,366 $564,910 $603,080
-------- -------- --------
-------- -------- --------
The following table sets forth maturities of the Association's
certificates of deposit of $100,000 or more at September 30, 1996 by time
remaining to maturity.
AMOUNTS IN
THOUSANDS
----------
Three months or less $ 8,051
Over three months through six months 8,717
Over six months through 12 months 7,399
Over 12 months 20,471
-------
Total $44,638
-------
-------
24
<PAGE>
SUBSIDIARIES
At September 30, 1996, the Company had two wholly-owned subsidiaries, the
Association and IBSF Investment Corp., a New Jersey-chartered investment
company formed in 1996, which had total assets of $12.2 million comprised
principally of investments in certificates of deposit and overnight funds at
the Federal Home Loan Bank of New York.
At September 30, 1996, the Association did not have any subsidiaries. In
December 1996, the Association received the non-objection of the OTS to
establish a Delaware operating subsidiary, IBS Delaware Investment Corp.
("IBSD"), solely to manage certain of the investments of the Association. The
Association is in the process of forming IBSD.
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 is also a bank holding company regulated by the Board of
Governors of the Federal Reserve system. 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. As a bank holding company, the
Company is subject to regulation and supervision by the Federal Reserve
Board, is required to file periodic reports and annually a report of its
operations with, and is subject to examination by, the Federal Reserve Board.
The Association re-qualified as a qualified thrift lender in August 1995.
See "- BHCA Activities and Other Limitations" and "-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 Association, notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, under OTS
regulations, 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 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. See "- BHCA
Activities and Other Limitations."
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
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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 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. 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, Sections 23A and 23B (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 Sections 23A and 23B, 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 places
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, 1996, 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
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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 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, 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 BHCA, 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 Association 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.
BHCA ACTIVITIES AND OTHER LIMITATIONS. The BHCA prohibits a bank
holding company from acquiring direct or indirect ownership or control of
more than 5% of the voting shares of any bank, or increasing such ownership
or control of any bank, without prior approval of the Federal Reserve Board.
The BHCA also generally prohibits a bank holding company
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from acquiring any
bank located outside of the state in which the existing bank subsidiaries of
the bank holding company are located unless specifically authorized by
applicable state law. No approval under the BHCA is required, however, for a
bank holding company already owning or controlling 50% of the voting shares
of a bank to acquire additional shares of such bank.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than banking or managing or
controlling banks. Under the BHCA, the Federal Reserve Board is authorized
to approve the ownership of shares by a bank holding company in any company,
the activities of which the Federal Reserve Board has determined to be so
closely related to banking or to managing or controlling banks as to be a
proper incident thereto. In making such determinations, the Federal Reserve
Board is required to weigh the expected benefit to the public, such as
greater convenience, increased competition or gains in efficiency, against
the possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices.
The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA.
These activities include operating a mortgage company, finance company,
credit card company, factoring company, trust company or savings association;
performing certain data processing operations; providing limited securities
brokerage services; acting as an investment or financial advisor; acting as
an insurance agent for certain types of credit-related insurance; leasing
personal property on a full-payout, non-operating basis; providing tax
planning and preparation services; operating a collection agency; and
providing certain courier services. The Federal Reserve Board also has
determined that certain other activities, including real estate brokerage and
syndication, land development, property management and underwriting of life
insurance not related to credit transactions, are not closely related to
banking and a proper incident thereto.
THE ASSOCIATION. The OTS and the Department have extensive regulatory
authority over the operations of 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.
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."
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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.
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.
The FDIC is authorized to establish separate assessment rates for
deposit insurance for members of the BIF and the SAIF. The FDIC may increase
assessment rates for either fund to restore the fund's ratio of reserves to
insured deposits to its statutorily set target level within a reasonable
time, and may decrease such assessment rates if such target level has been
met. Until the SAIF fund meets its target level, savings associations may
not transfer to the BIF fund. Furthermore, any such transfers, when
permitted, would be subject to exit and entrance fees. Under current FDIC
regulations, 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 Federal Deposit Insurance
Act ("FDIA") as discussed below. 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 from .23% for well
capitalized, healthy institutions to .31%
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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 BIF fund met its target reserve level in September 1995, but the
SAIF is not expected to meet its target reserve level until at least 2002.
Consequently, in late 1995, the FDIC approved a final rule regarding deposit
insurance premiums which, effective with respect to the semiannual premium
assessment beginning January 1, 1996, reduced deposit insurance premiums for
BIF member institutions to zero basis points (subject to an annual minimum of
$2,000) for institutions in the lowest risk category. Deposit insurance
premiums for SAIF members were maintained at their existing levels (23 basis
points for institutions in the lowest risk category).
On September 30, 1996, President Clinton signed into law legislation
which will eliminate the premium differential between SAIF-insured
institutions and BIF-insured institutions by recapitalizing the SAIF's
reserves to the required ratio. The legislation provides that all SAIF
member institutions pay a one-time special assessment to recapitalize the
SAIF, which in the aggregate will be sufficient to bring the reserve ratio in
the SAIF to 1.25% of insured deposits. The legislation also provides for the
merger of the BIF and the SAIF, with such merger being conditioned upon the
prior elimination of the thrift charter.
Effective October 8, 1996, FDIC regulations imposed a one-time special
assessment of 65.7 basis points of SAIF-assessable deposits as of March 31,
1995, which was collected on November 27, 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 will have a material adverse effect on the Company's consolidated
financial condition or cause non-compliance with the Association's regulatory
capital requirements.
On October 16, 1996, the FDIC proposed to lower assessment rates for
SAIF members to reduce the disparity in the assessment rates paid by BIF and
SAIF members. Beginning October 1, 1996, effective SAIF rates would range
from zero basis points to 27 basis points. From 1997 through 1999, SAIF
members will pay 6.4 basis points to fund the Financing Corporation while BIF
member institutions will pay about 1.3 basis points. The Association's
insurance premiums, which have amounted to 23 basis points will be reduced to
6.4 basis points. Based upon the level of assessable deposits at September
30, 1996, the Association would expect to pay $900,000 less in insurance
premiums during fiscal 1997 or approximately $.06 per share, after tax.
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 capital
requirements imposed on national banks. The OTS also is authorized to impose
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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, 1996. 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).
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
four-family residential real estate loans more than 90 days delinquent, and
for repossessed assets.
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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 became 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 publishes 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.
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, 1996.
September 30, 1996
-----------------------------------
Tangible Core Risk-based
Capital Capital Capital
-------- -------- ----------
(In Thousands)
GAAP equity $132,076 $132,076 $132,076
Unrealized gain on available for
sale securities, net of tax (1,045) (1,045) (1,045)
Goodwill --- --- ---
Assets required to be deducted --- --- ---
General valuation allowances --- --- 1,024
Total regulatory capital 131,031 131,031 132,055
Minimum capital requirement per
FIRREA published guidelines 10,942 21,883 15,474
------- ------- -------
Capital in Excess of Requirement $120,089 $109,148 $116,581
------- ------- -------
------- ------- -------
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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 the
present time, the required minimum liquid asset ratio is 5%. The Association
has consistently exceeded such regulatory liquidity requirement and, at
September 30, 1996, had a liquidity ratio of 13.0%.
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. Beginning January 1, 1993, a savings
association shall cease to be a qualified thrift lender when its qualified
thrift investments ("QTIs"), as measured by monthly averages over the
immediately preceding twelve month period, fall below 65% for four or more
of such months. Based on this regulatory standard, the Association ceased to
be a qualified thrift lender in July 1993.
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 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
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considerations). To date, these restrictions have not limited
the Association's operations in any manner.
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. Because
the Association did not re-qualify as a QTL in July 1994, which is 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 is in addition to the Association's status as a savings 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 anticipates 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 1996 had maintained monthly averages of QTIs equal to at least
92.21% of portfolio assets for at least nine months over a twelve month
period, and had thereby re-qualified as a "qualified thrift lender." At
September 30, 1996, 96.62% of the Association's assets were invested in QTIs.
Under Section 2303 of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996, a savings association can comply with the QTL test by
either meeting the QTL test set forth in the Home Owners' Loan Act, as
amended ("HOLA") and implementing regulations or 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").
The QTL Test set forth in the HOLA requires that Qualified Thrift
Investments ("QTIs") represent 65% of portfolio assets. Portfolio assets are
defined as total assets less intangibles, property used by a savings
association in its business and liquidity investments in an amount not
exceeding 20% of assets. Generally, QTI's are residential housing related
assets. The 1996 amendments allow small business loans, credit card loans,
student loans, and loans for personal, family and household purposes to be
included without limitation as qualified investments. At September 30, 1996,
approximately 96.62% of the Association's assets were invested in QTIs, which
was in excess of the percentage required to qualify the Association under the
QTL Test in effect at that time.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. OTS regulations govern capital
distributions by savings associations, which include cash dividends, stock
redemptions or repurchases, cash-
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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, savings associations that before and after the proposed
distribution meet or exceed their fully phased-in capital requirements, or
Tier 1 associations, 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 the ratio of its fully
phased-in capital requirement to assets. "Fully phased-in capital
requirement" is defined to mean an association's capital requirement under
the statutory and regulatory standards applicable on December 31, 1994, as
modified to reflect any applicable individual minimum capital requirement
imposed upon the association. Failure to meet fully phased-in or 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 believe that the proposal will adversely affect its ability to make
capital distributions if it is adopted substantially as proposed.
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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, 1996, the Association had $18.8
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, 1996, the
Association had $4.6 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, 1996 and 1995, dividends paid by the FHLB of New York to
the Association totalled approximately $277,000 and $259,000, 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, 1996, no reserves were required to be
maintained on the first $4.2 million of transaction accounts, reserves of 3%
were required to be maintained against the next $54.0 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, 1996, 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.
Recent federal and state legislative developments have reduced
distinctions between commercial banks and SAIF-insured savings institutions
in New Jersey with respect to
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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 Internal Revenue Code of 1986 (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 filed
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. Under applicable provisions of the Code, savings
institutions such as the Association are permitted to establish reserves for
bad debts and to make annual additions thereto which qualify as deductions
from taxable income. The bad debt deduction is generally based on a savings
institution's actual loss experience (the "Experience Method"). In addition,
provided that certain definitional tests relating to the composition of
assets and the nature of its business are met, a savings institution may
elect annually to compute its allowable addition to its bad debt reserves for
qualifying real property loans (generally loans secured by improved real
estate) by reference to a percentage of its taxable income (the "Percentage
Method").
Under the Experience Method, the deductible annual addition is the
amount necessary to increase the balance of the reserve at the close of the
taxable year to the greater of (i) the amount which bears the same ratio to
loans outstanding at the close of the taxable year as the total net bad debts
sustained during the current and five preceding taxable years bear to the sum
of the loans outstanding at the close of those six years or (ii) the balance
in the reserve account at the close of the Association's "base year," which
was its tax year ended September 30, 1987.
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Under the Percentage Method, the bad debt deduction with respect to
qualifying real property loans is computed as a percentage of the
Association's taxable income before such deduction, as adjusted for certain
items (such as capital gains and the dividends received deduction). Under
this method, a qualifying institution such as the Association generally may
deduct 8% of its taxable income. The availability of the Percentage Method
has permitted a qualifying savings institution, such as the Association, to
be taxed at an effective federal income tax rate 8% lower than for
corporations generally.
The income of the Company would not be subject to the bad debt deduction
allowed the Association, whether or not consolidated tax returns are filed;
however, losses of the Company or its subsidiaries included in the
consolidated tax returns may reduce the bad debt deduction allowed the
Association if a deduction is claimed under the Percentage Method.
On August 20, 1996, President Clinton signed legislation which
eliminated the percentage of taxable income bad debt deduction for thrift
institutions for tax years beginning after December 31, 1995. The new
legislation also requires a thrift to generally recapture the excess of its
current tax reserves over its 1987 base year reserves. 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.
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. The
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) for taxable
years beginning after 1989, 75% of the excess (if any) of (i) adjusted
current earnings as defined in the Code, over (ii) AMTI (determined
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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, 1993 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 percent 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 percent on its
taxable income, before net operating loss deductions and special deductions
for federal income tax purposes.
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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.
Date: February 12, 1997
By: /s/ Joseph M. Ochman, Sr.
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Joseph M. Ochman, Sr.
Chairman of the Board,
President and Chief Executive
Officer
