<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-24862
IBS FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
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<S> <C>
New Jersey 22-3301933
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(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification Number)
1909 East Route 70
Cherry Hill, New Jersey 08003
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(Address of principal executive office) (Zip Code)
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(609) 424-1000
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(Registrant's telephone number, including area code)
Indicated 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 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
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date. As of May 6, 1997 there were
issued and outstanding 11,012,246 shares of the Registrant's Common Stock,
after adjustment for the 15% stock dividend paid on May 6, 1997.
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IBS FINANCIAL CORP.
TABLE OF CONTENTS
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<CAPTION>
PART I. CONSOLIDATED FINANCIAL INFORMATION PAGE
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Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition (As of
March 31, 1997 and September 30, 1996) 1
Consolidated Statements of Income (For the quarter
ended March 31, 1997 and 1996) 2
Consolidated Statements of Income (For the six months
ended March 31, 1997 and 1996) 3
Consolidated Statements of Cash Flows (For the six months
ended March 31, 1997 and 1996) 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 16
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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IBS FINANCIAL CORP.
Consolidated Statements of Financial Condition
March 31, 1997 and September 30, 1996
(In thousands)
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
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<S> <C>
ASSETS
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Cash and cash equivalents $ 16,841 12,466
Securities available for sale 174,760 215,331
Investments (market value $25,999 and $26,724
at March 31, 1997 and September 30, 1996) 25,997 26,712
Mortgage-backed securities (market value $305,202 and
$285,831 at March 31, 1997 and September 30, 1996) 304,559 285,267
Loans receivable, net 198,670 185,031
Accrued interest receivable:
Loans 933 872
Mortgage-backed securities 2,704 2,682
Investments 417 965
Real estate owned, net - -
Federal Home Loan Bank stock 6,075 4,590
Office properties and equipment, net 6,930 6,084
Other assets 2,141 2,051
------------------------------
Total assets $ 740,027 742,051
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $ 570,744 571,366
FHLB advances 36,732 18,792
Advances from borrowers 2,232 2,218
Other liabilities 4,262 5,391
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Total liabilities 613,970 597,767
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Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 25,000,000
shares; 11,609,723 shares issued and outstanding 116 116
Additional paid-in capital 113,437 113,432
Common stock acquired by ESOP and RRP (10,006) (11,097)
Treasury stock, at cost; 2,033,857 shares and 855,256 shares (31,184) (12,104)
Net unrealized gain on securities available for
sale, net of taxes 1,486 1,045
Retained earnings 52,208 52,892
------------------------------
Total stockholders' equity 126,057 144,284
------------------------------
Total liabilities and stockholders' equity $ 740,027 742,051
==============================
</TABLE>
See accompanying notes to consolidated financial statements.
1
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IBS FINANCIAL CORP.
Consolidated Statements of Income
Quarter Ended March 31, 1997 and 1996
(in thousands, except per share data)
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<CAPTION>
Quarters Ended
March 31,
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1997 1996
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<S> <C> <C>
Interest income:
Loans $ 3,770 2,973
Mortgage-backed securities 7,737 6,389
Investments 1,323 3,485
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Total interest income 12,830 12,847
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Interest expense:
Deposits 6,642 6,669
Borrowings 582 81
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Total interest expense 7,224 6,750
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Net interest income 5,606 6,097
Provision for loan losses 10 10
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Net interest income after provision
for loan losses 5,596 6,087
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Other operating income:
Service fees and late charges 90 79
Other income 72 75
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Total other operating income 162 154
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Operating expenses:
Compensation and employee benefits 2,381 2,120
Occupancy and equipment 288 316
Data processing 124 118
Federal insurance premiums 92 322
Advertising and promotion 169 113
Professional fees 300 80
Other 322 230
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Total operating expenses 3,676 3,299
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Income before taxes 2,082 2,942
Income taxes 723 1,133
----------------------
Net income $ 1,359 1,809
======================
Earnings per share $ 0.13 0.15
======================
Average shares and equivalents outstanding 10,497 12,250
======================
</TABLE>
See accompanying notes to consolidated financial statements.
2
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IBS FINANCIAL CORP.
Consolidated Statements of Income
Six Months Ended September 30, 1997 and 1996
(in thousands, except per share data)
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<CAPTION>
Six Months Ennded
March 31,
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1997 1996
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<S> <C> <C>
Interest income:
Loans $ 7,478 5,901
Mortgage-backed securities 15,614 12,677
Investments 2,804 7,371
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Total interest income 25,896 25,949
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Interest expense:
Deposits 13,414 13,512
Borrowings 1,101 81
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Total interest expense 14,515 13,593
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Net interest income 11,381 12,356
Provision for loan losses 20 10
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Net interest income after provision
for loan losses 11,361 12,346
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Other operating income:
Service fees and late charges 180 151
Other income 130 138
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Total other operating income 310 289
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Operating expenses:
Compensation and employee benefits 4,501 4,176
Occupancy and equipment 580 607
Data processing 235 223
Federal insurance premiums 346 642
Advertising and promotion 321 217
Professional fees 667 404
Other 562 654
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Total operating expenses 7,212 6,923
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Income before taxes 4,459 5,712
Income taxes 1,547 2,161
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Net income $ 2,912 3,551
======================
Earnings per share $ 0.27 0.29
======================
Average shares and equivalents outstanding 10,786 12,396
======================
</TABLE>
See accompanying notes to consolidated financial statements.
3
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IBS FINANCIAL CORP.
Consolidated Statements of Cash Flows
Six Months Ended March 31, 1997 and 1996
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<CAPTION>
(In thousands) Six Months Ended
March, 31
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,912 3,551
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 192 193
Provision for loan losses 20 10
Market adjustment on ESOP 359 143
RRP earned 604 592
Changes in assets and liabilities that pro-
provided (used) cash:
Accrued interest receivable 465 1,588
Other assets (90) (305)
Other liabilities (1,321) (34)
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Net cash provided by operating activities 3,141 5,738
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INVESTING ACTIVITIES:
Principal repayments of:
Loans 10,248 10,676
Mortgage-backed securities 29,961 39,151
Purchases of:
Investments (217,318) (218,808)
Mortgage-backed securities (34,972) (122,119)
Proceeds from maturity of investments 244,956 285,972
Loans originated or acquired (23,907) (23,996)
Loans sold 0 4,045
FHLB stock redeemed (purchased) (1,485) (918)
Proceeds from sale of REO 0 (57)
Property and equipment acquired (1,038) (45)
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Net cash provided by (used in) investing activities 6,445 (26,099)
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FINANCING ACTIVITIES:
Net increase (decrease) in deposits (622) 12,167
Increase (decrease) in advances from borrowers 14 103
FHLB advances 20,000 20,000
FHLB repayments (2,060) 0
Cash dividends paid (3,596) (1,186)
Payments on ESOP debt, net 487 445
Treasury stock acquired (20,001) (10,485)
Stock options exercised 567 0
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Net cash provided by (used in) financing activities (5,211) 21,044
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INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 4,375 683
</TABLE>
See accompanying notes to consolidated financial statements.
4
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IBS FINANCIAL CORP.
Consolidated Statements of Cash Flows, Continued
(In thousands)
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<S> <C> <C>
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 12,466 12,542
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CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 16,841 13,225
=======================
SUPPLEMENTAL DISCLOSURES:
Cash paid out for:
Interest expense $ 14,388 13,538
=======================
Income taxes $ 0 1,564
=======================
NON-CASH TRANSFERS FROM LOANS TO
REAL ESTATE OWNED $ 0 69
=======================
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See accompanying notes to consolidated financial statements.
5
<PAGE> 8
IBS FINANCIAL CORP.
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements were prepared in accordance
with instructions to Form 10-Q, and therefore, do not include information or
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. However, all adjustments (consisting only of recurring accruals)
which, in the opinion of management, are necessary for a fair presentation of
the financial statements have been included. These unaudited consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and the accompanying notes thereto included
in the Annual Report of IBS Financial Corp. (the "Company") for the fiscal year
ended September 30, 1996. The results for the quarter and six months ended
March 31, 1997 are not necessarily indicative of the results that may be
expected for the fiscal year ending September 30, 1997. Share and per share
data presented herein reflect the effects of the 15% stock dividend paid on May
6, 1997.
BUSINESS
The Company's principal subsidiary, Inter-Boro Savings and Loan Association
(the "Association"), is a New Jersey state chartered stock savings and loan
association conducting business from its branch system located in Camden,
Burlington and Gloucester counties, New Jersey. The Association is subject to
competition from other financial institutions and other companies which provide
financial services. The Company and the Association are subject to the
regulations of certain federal and state agencies and undergo periodic
examinations by those regulatory authorities.
PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries including the Association. All
significant intercompany transactions have been eliminated in consolidation.
Additionally, certain reclassifications have been made in order to conform with
the current year's presentation. The accompanying unaudited consolidated
financial statements have been prepared using the accrual basis of accounting.
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(2) CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
On May 20, 1994, the Board of Directors of the Association adopted a plan of
conversion to convert from a New Jersey chartered mutual savings and loan
association to a New Jersey chartered capital stock savings and loan
association with the concurrent formation of a holding company ("the
Conversion").
The Conversion was completed on October 13, 1994 with the issuance by the
Company of 11,609,723 shares of its common stock in a public offering to the
Association's eligible depositors and borrowers, members of the general public
and the Company's employee stock ownership plan (the "ESOP").
In exchange for 50% of the net Conversion proceeds ($56.6 million), the Company
acquired 100% of the stock of the Association and retained 50% of the net
Conversion proceeds ($56.6 million).
(3) COMMON STOCK ACQUIRED BY THE EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Conversion, the Company established an ESOP for the
benefit of eligible employees. All share amounts herein include the effect of
the 15% stock dividend paid on May 6, 1997. The Company purchased 1,174,902
shares of common stock on behalf of the ESOP in the Conversion. At March 31,
1997, 149,448 shares of the total ESOP shares were committed to be released
with 163,769 shares allocated to participants. The Company accounts for its
ESOP in accordance with Statement of Position 93-6, "Employers' Accounting for
Employee Stock Ownership Plans," which requires the Company to recognize
compensation expense equal to the fair value of the ESOP shares during the
periods in which they become committed to be released. To the extent that the
fair value of the ESOP shares differs from the cost of such shares, this
differential will be charged or credited to equity as additional paid-in
capital. Management expects the recorded amount of compensation expense, which
will be recognized over a ten year vesting period, to fluctuate as continuing
adjustments are made to reflect changes in the fair value of the ESOP shares.
Employers with internally leveraged ESOP's, such as the Company, do not report
the loan receivable from the ESOP as an asset and do not report the ESOP debt
from the employer as a liability. The Company recorded compensation and
employee benefit expense related to the ESOP of $741,000 and $1,365,000 for the
quarter and six months ended March 31, 1997, respectively.
(4) RECOGNITION AND RETENTION PLAN TRUST
At the Company's Annual Meeting of Stockholders held on January 19, 1995, the
Recognition and Retention Plan and Trust (the "RRP") was approved by the
Company's stockholders. The share amounts herein include the effects of the
15% stock dividend paid on May 6, 1997. In order to fund the RRP, the RRP
purchased 587,451 shares in the open market at an aggregate cost of $6,085,000.
As of March 31, 1997, all available shares under the RRP had been awarded
7
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to the Company's Board of Directors and the Association's executive officers
and other key employees.
At March 31, 1997, the deferred cost of the unearned RRP shares amounted to
$3,416,000 and is recorded as a charge against stockholders' equity.
Compensation expense is being recognized over the five year vesting period for
shares awarded. The Company recorded compensation and employee benefit expense
related to the RRP of $301,000 and $604,000 for the quarter and six months
ended March 31, 1997, respectively. RRP charges began to be recorded in the
quarter ended June 30, 1995 when the RRP shares were purchased after receiving
required stockholder and regulatory approval.
(5) STOCK OPTION PLAN
The 1995 Stock Option Plan (the "Plan") was approved by the Company's
stockholders at the Annual Meeting on January 19, 1995. The share amounts
herein include the effects of the 15% stock dividend paid on May 6, 1997. At
March 31, 1997, an aggregate of 1,284,573 stock options were outstanding and
106,285 stock options were reserved for future issuance under the Plan. Stock
options were granted to directors, executive officers and other key employees.
These options are subject to vesting provisions as well as other provisions of
the Plan.
(6) LOANS RECEIVABLE
Loans receivable at March 31, 1997 and September 30, 1996 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
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<S> <C> <C> <C>
Real estate loans:
Mortgage loans ( 1-4 residential) $ 172,512 164,717
Construction loans 1,096 1,256
Loans on savings accounts 2,559 2,472
Commercial real estate loans 25,253 19,548
Consumer loans 852 813
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Total 202,272 188,806
Less:
Deferred loan fees (1,726) (1,572)
Allowance for loan losses (1,044) (1,024)
Loans in process (832) (1,179)
------------------------------------------
Total $ 198,670 185,031
==========================================
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8
<PAGE> 11
Changes in the allowance for loan losses were as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Year Ended
March 31, 1997 September 30, 1996
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<S> <C> <C>
Balance, beginning of period $ 1,024 994
Provision for loan losses 20 30
Charge-offs 0 0
Recoveries 0 0
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Balance, end of period $ 1,044 1,024
============================================
</TABLE>
The provision for loan losses charged to expense is based upon loan and loss
experience and an evaluation of potential losses in the current loan portfolio,
including the evaluation of impaired loans under SFAS Nos. 114 and 118. A loan
is considered to be impaired when, based upon current information and events,
it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan. An insignificant delay or
insignificant shortfall in the amount of payments does not necessarily result
in the loan being identified as impaired. For this purpose, delays less than
90 days are considered to be insignificant. As of March 31, 1997, 100% of the
impaired loan balance was measured for impairment based upon the fair value of
the loan's collateral. Impairment losses are included in the provision for
loan losses. SFAS 114 and 118 do not apply to large groups of smaller balance
homogenous loans that are collectively evaluated for impairment, except for
those loans restructured under a troubled debt restructuring. Loans
collectively evaluated for impairment include consumer loans and residential
real estate loans. At March 31, 1997 and 1996, the Company's impaired loans
consisted of smaller balance residential mortgage loans.
Nonaccrual loans for which interest has been fully reserved totaled
approximately $1,104,000 at March 31, 1997.
9
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(7) DEPOSITS
The major types of savings deposits by amounts and the percentages were as
follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1997 September 30, 1996
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Type of Account Amount % of Total Amount % of Total
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<S> <C> <C> <C> <C>
NOW $ 25,035 4.4% $ 23,886 4.2%
Money market deposit 69,294 12.1% 70,023 12.2%
Passbook and club 58,827 10.3% 59,323 10.4%
------------------------------ -----------------------------
153,156 26.8% 153,232 26.8%
Certificates of deposit 417,198 73.1% 417,773 73.1%
Accrued interest on savings 390 0.1% 361 0.1%
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Total deposits $ 570,744 100.0% $ 571,366 100.0%
============================== =============================
</TABLE>
(8) EARNINGS PER SHARE
Earnings per share amounted to $.13 for the quarter ended March 31, 1997
compared to $.15 per share for the same quarter last year. For the six months
ended March 31, 1997, earnings per share amounted to $.27 compared with $.29
per share for the same six months last year. Per share amounts for prior
periods have been restated to reflect the 15% stock dividend declared on March
21, 1997 and paid on May 6, 1997 to stockholders of record at the close of
business on April 21, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's net income for the quarter ended March 31, 1997 was $1.4 million
or $.13 per share compared with $1.8 million or $.15 per share for the same
quarter last year. For the six months ended March 31, 1997, net income
amounted to $2.9 million or $.27 per share compared with $3.6 million or $.29
per share for the same six months last year. Per share amounts for prior
periods have been restated to reflect the 15% stock dividend declared on March
21, 1997 and paid on May 6, 1997 to stockholders of record on April 21, 1997.
10
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The decrease in earnings for the quarter and six months ended March 31, 1997
compared to the same periods last year was due principally to a decline in net
interest income, reflecting increased interest expense. In addition, increased
operating expenses over the prior comparable periods were also a contributing
factor to the earnings declines. These factors were partially offset by
reduced income tax provisions. The Company's net interest margin averaged
3.10% and 3.13% in the recent quarter and six months ended March 31, 1997,
declining from 3.40% and 3.47% earned for the same periods last fiscal year,
respectively.
FINANCIAL CONDITION
Total assets decreased by $2.1 million or .3% during the first six months of
fiscal 1997 from $742.1 million at September 30, 1996 to $740.0 million at
March 31, 1997. Loan and mortgage-backed securities repayments, together with
additional FHLB advances, were used to invest in mortgage-backed securities and
cash equivalents as well as to originate additional mortgage loans and to
repurchase shares of the Company's common stock. Cash and cash equivalents
increased by $4.3 million or 35.1% from $12.5 million at September 30, 1996 to
$16.8 million at March 31, 1997. Mortgage-backed securities held to maturity
increased by $19.3 million or 6.8% from $285.3 million at September 30, 1996 to
$304.6 million at March 31, 1997, reflecting additional purchases in excess of
payments received during the period. Securities available for sale decreased
by $40.5 million or 18.9% from $215.3 million (including investments of $48.3
million and mortgage-backed securities of $167.0 million) at September 30, 1996
to $174.8 million (including investments of $21.3 million and mortgage-backed
securities of $153.5 million) at March 31, 1997. This decrease reflected both
maturities of investment securities and payments received on the
mortgage-backed security portfolio. Loans receivable increased by $13.7 million
or 7.4% from $185.0 million at September 30, 1996 to $198.7 million at March
31, 1997, as loan originations exceeded loan repayments during the six month
period ended March 31, 1997.
During the six months ended March 31, 1997, deposits decreased by $.7 million
or .1% from $571.4 million at September 30,1996 to $570.7 million at March 31,
1997, principally reflecting payment of the terminated defined benefit pension
plan to participants. Two new recently opened branches have been modestly
helpful in attracting deposits. FHLB advances increased by $17.9 million or
95.5% from $18.8 million at September 30, 1996 to $36.7 million at March 31,
1997. Additional borrowings of $20 million were taken down during the quarter
ended December 31, 1996. These three and five year advances with an average
interest rate of 6.50% were used generally to fund loan originations and
mortgage-backed securities. Treasury stock increased by $19.1 million or
157.6% from $12.1 million at September 30, 1996 to $31.2 million at March 31,
1997. Part of the Company's capital management plan consists of its ongoing
stock buyback program. During the six months ended March 31, 1997, the Company
completed the repurchase of 1,238,766 shares of its common stock in the open
market and reissued 60,165 shares in connection with the exercise of stock
options. At March 31, 1997, the Company had accumulated 2,033,857 shares of
treasury stock. Retained earnings decreased by $.7 million or 1.2% from $52.9
million at September 30, 1996 to $52.2 million at March 31, 1997. This change
resulted from the net income and the dividends declared during the six months
ended
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March 31, 1997. Total dividends declared included the two regular quarterly
cash dividends of $.08 per share each and a special cash dividend of $.25 per
share.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net income decreased by $.4 million or 24.9% to $1.4 million for the quarter
ended March 31, 1997, compared with net income of $1.8 million for the same
quarter in the last fiscal year. For the six months ended March 31, 1997, net
income decreased by $.7 million or 18.0 % to $2.9 million, compared with net
income of $3.6 million for the six months ended March 31, 1996. The decrease
in both the quarter and six months results of operations was primarily
attributable to reductions in net interest income, reflecting increased
interest expense. In addition, increased operating expenses over the prior
comparable periods were also a contributing factor to the earnings declines.
These factors were partially offset by reduced income tax provisions.
Net interest income amounted to $5.6 million for the quarter ended March
31,1997, which represents a decrease of $.5 million or 8.1% from the $6.1
million reported for the comparable prior quarter. For the six months ended
March 31, 1997, net interest income decreased by $1.1 million or 8.0% to $11.4
million from $12.3 million for the six months last fiscal year. The decrease
in net interest income for the quarter ended March 31, 1997 resulted from a
decrease in the net interest rate spread of 16 basis points for the period as
well as a decrease in the balance of average net interest-earning assets of
$23.5 million or 17.2%, principally reflecting significant treasury stock
purchases during the period. The decrease in net interest income for the six
months ended March 31, 1997 resulted from a decrease in the net interest rate
spread of 20 basis points and a decrease in the balance of average net
interest-earning assets of $18.9 million or 13.7%, again reflecting the
significant treasury stock purchases during the period.
Total interest income amounted to $12.8 million for the quarter ended March 31,
1997, remaining at the same $12.8 million level as the comparable prior
quarter. For the six months ended March 31, 1997, total interest income
amounted to $25.9 million, again remaining at the same $25.9 million level as
the comparable prior six month period. Average interest-earning assets
increased by $7.0 million or 1.0% to $723.9 million for the quarter ended March
31, 1997, compared to the same quarter last year and increased by $14.4 million
or 2.0% to $727.5 million for the six months ended March 31, 1997 compared to
the same six month period last year. However, the yield earned on average
interest-earning assets decreased by 8 basis points to 7.09% for the quarter
ended March 31, 1997 and decreased by 16 basis points to 7.12% for the six
months ended March 31, 1997.
Total interest expense increased by $.4 million or 7.0% to $7.2 million for the
quarter ended March 31, 1997 from $ 6.8 million for the comparable quarter last
year. For the six months ended March 31, 1997, total interest expense
increased by $.9 million or 6.8% to $14.5 million from $13.6 million for the
same six month period last year. Average interest-bearing liabilities
increased by $30.5 million or 5.3% to $610.9 million for the quarter ended
March 31, 1997 from $580.4 million for the comparable quarter last fiscal year,
principally reflecting additional FHLB advances. For the six months ended
March 31, 1997, average interest-bearing liabilities
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<PAGE> 15
increased by $33.4 million or 5.8% to $608.5 million from $575.1 million for
the same six month period last year, principally reflecting additional FHLB
advances. In addition, the average rate paid on interest-bearing liabilities
increased by 8 basis points to 4.73% for the quarter ended March 31, 1997,
while the average rate paid on interest-bearing liabilities increased by 4
basis points to 4.77% for the six months ended March 31, 1997.
PROVISION FOR LOAN LOSSES
The Company establishes a provision for loan losses, which is charged to
operations, in order to maintain the allowance for loan losses at a level which
is considered to be appropriate based upon an assessment of prior loss
experience, the volume and type of lending currently being engaged in by the
Company, industry standards, past due loans, economic conditions in the
Company's market area generally and other factors related to the collectibility
of the Company's loan portfolio. For the quarters ended March 31, 1997 and
1996, the same $10,000 provisions for loan losses were determined to be
required based upon the Company's risk assessment of the loan portfolio. For
the six months ended March 31, 1997, $20,000 was determined to be required,
compared to $10,000 for the comparable six months last year. The allowance for
loan losses amounted to $1,044,000 at March 31, 1997.
Although management utilizes its best judgment in providing for loan losses,
there can be no assurance that the Company will not have to increase its
provisions for loan losses in the future as a result of future increases in
nonperforming loans or for other reasons which could adversely affect the
Company's results of operations. In addition, various regulatory agencies
periodically review the allowance for loan losses. Such agencies may require
the Company to recognize additions to the allowance for loan losses based on
their judgments of information that is available to them at the time of their
examination.
OTHER OPERATING INCOME
Other operating income amounted to $162,000 for the quarter ended March 31,
1997, an increase of $8,000 or 5.2% over the comparable quarter last year. For
the six months ended March 31, 1997, other operating income increased by
$21,000 or 7.3% to $310,000 from $289,000 for the six months ended March 31,
1996. The increases for both the quarter and six months ended March 31, 1997
were chiefly due to additional loan fees earned.
OPERATING EXPENSES
Operating expenses amounted to $3.7 million and $7.2 million for the quarter
and six months ended March 31, 1997, which reflect increases of $377,000 or
11.4% and $289,000 or 4.2% from the comparable prior periods, respectively.
The increases for both the quarter and six months ended March 31, 1997
principally reflected increased legal fees arising from litigation involving
dissident stockholders, increased compensation and benefits, particularly the
cost of the Company's recognition and retention plan and ESOP plan, and
increased advertising expense chiefly to promote the two new branch offices,
which items were only partially offset by reduced deposit insurance premium
expense.
13
<PAGE> 16
INCOME TAXES
Income tax expense amounted to $.7 million for the quarter ended March 31,
1997, a decrease of $.4 million or 36.2% compared to $1.1 million for the
same quarter last fiscal year. For the six months ended March 31, 1997, income
tax amounted to $1.5 million, a decrease of $.7 million or 28.4% compared to
$2.2 million for the same six months last year. The decrease in income tax
expense for both the quarter and six months ended March 31, 1997 primarily
reflects the decrease in income before income taxes for the related periods.
In addition, an increased state tax provision at a higher rate reflecting
additional holding company income was recorded during the quarter and six
months ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Association's primary sources of funds are deposits, repayments and
maturities of outstanding loans and mortgage-backed securities, maturities of
investment securities and other short-term investments, as well as funds
provided from operations. While scheduled loan and mortgage-backed securities
repayments and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by the movement of interest rates in general, economic
conditions and competition. The Association manages the pricing of its
deposits to maintain a deposit balance deemed appropriate and desirable. In
addition, the Association invests in short-term interest earning assets which
provide liquidity to meet lending requirements. The Association also uses
advances from the Federal Home Loan Bank of New York as a funding source as
well as having available other borrowing sources. In the event of the need for
an additional source of funds, the Board of Directors of the Association has
provided management with the authority to borrow up to $10 million from the
Federal Reserve Bank of Philadelphia, without the need for additional Board
approval. In addition, the Company's Board of Directors also provided
management with the authority to borrow up to $100 million from the Federal
Home Loan Bank of New York.
Liquidity management is both a daily and long-term function. Excess liquidity
is generally invested in short-term investments such as cash and cash
equivalents, U.S. Treasury, U.S. Government agencies and other qualified
investments. On a longer-term basis, the Association maintains a strategy of
investing in various mortgage-backed securities and other investment securities
and lending products. During the quarter ended March 31, 1997, the Association
used its sources of funds primarily to meet its ongoing commitments to pay
maturing savings certificates and savings withdrawals, fund loan and
mortgage-backed securities commitments and maintain an increasing portfolio of
mortgage-backed securities. At March 31, 1997, the total approved loan and
mortgage-backed securities commitments outstanding amounted to $50.3 million.
Certificates of deposit scheduled to mature in one year or less at March 31,
1997 totaled $257.0 million. Management of the Association believes that the
Association has adequate resources, including principal prepayments and
repayments of loans and mortgage-backed securities and maturing investments, to
fund all of its commitments to the extent required. Based upon its historical
run-off experience, management believes that a significant portion of maturing
deposits will remain with the Association.
14
<PAGE> 17
The Association is required by the OTS to maintain average daily balances of
liquid assets and short-term liquid assets as defined in amounts equal to 5%
and 1%, respectively, of net withdrawable deposits and borrowings payable in
one year or less to assure its ability to meet demand for withdrawals and
repayments of short-term borrowings. The liquidity requirements may vary from
time to time at the direction of the OTS depending upon economic conditions and
deposit flows. The Association's average monthly liquidity ratio and
short-term liquid assets for March 31, 1997 was 12.8% and 10.6%, respectively.
The Office of Thrift Supervision requires that the Association meet minimum
regulatory tangible, core and risk-based capital requirements. The
Association is required to maintain tangible capital equal to at least 1.5% of
its adjusted total assets, core capital equal to at least 3% of its adjusted
total assets and total capital equal to at least 8% of its risk-weighted
assets. At March 31, 1997, the Association exceeded all regulatory capital
requirements. At such date, the Association had tangible capital equal to
16.6% of adjusted total assets, core capital equal to 16.6% of adjusted total
assets and total capital equal to 60.1% of risk-weighted assets.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes
in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Association's assets and
liabilities are critical to the maintenance of acceptable performance levels.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share" which establishes standards for computing and presenting
earnings per share. SFAS No. 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods.
Restatement of all prior-period earnings per share data presented is required.
Management of the Company has not completed an analysis of the effects this
pronouncement will have on its results of operations or financial position.
15
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings to which the Company or its
subsidiary is a party or to which any of their property is subject, except as
described below.
In November 1995, Lawrence B. Seidman filed a complaint in the
Superior Court of New Jersey, Passaic County, against the Company and its
directors alleging that a letter dated November 17, 1995, sent by the Company
to its shareholders in connection with the Company's solicitation of proxies
for the election of directors at the Annual Meeting held December 15, 1995,
contained defamatory statements about Mr. Seidman. The complaint requested an
unspecified amount of damages (including punitive damages from the director
defendants), interest, costs and fees, as well as an injunction prohibiting the
Company from indemnifying the directors. An amended complaint was filed in
January 1996, when the Court, instead of dismissing the original complaint,
permitted Mr. Seidman to amend his complaint. In October 1996, the Court
again allowed Mr. Seidman to amend his complaint, this time to add allegations
that two other letters sent by the Company to its shareholders during the proxy
contest also contained defamatory statements. On February 11, 1997, the Court
entered a summary judgment in favor of the Company and its directors, finding
that "the allegedly libelous statements are not actionable as a matter of law."
On November 12, 1996, the Company filed suit in the United States
District Court for the District of New Jersey against Mr. Seidman, Richard
Whitman and other members of the "IBS Financial Corp. Committee to Maximize
Shareholder Value." The Company's complaint alleged that the Committee had
failed to disclose all the information required by the federal securities laws
and the Company's Certificate of Incorporation in the materials the Committee
had submitted in connection with the nomination of Ernest Beier, Jr. for
election as a director of the Company, and in the Committee's Schedule 13D
filings with the Securities and Exchange Commission. The Company sought a
declaratory judgment that the Committee's filings were incomplete and
inadequate, that the Company's Board could reject the nomination of Mr. Beier,
and that the Company need not, at that time, provide a shareholder list to the
Committee. The complaint also asked for an injunction against further
violations of the securities laws by Messrs. Seidman and Whitman and the other
members of their group. Some members of the Committee counterclaimed,
challenging the action of the Company's Board, in July 1996, reducing the
number of directors from seven to six.
A mere six days after the Company's lawsuit was filed, Mr. Seidman's
group amended its Schedule 13D to disclose for the first time an 18 month old
agreement involving 83,500 shares of the Company's Common Stock. The amended
Schedule 13D also corrected some, but not all, of the deficiencies noted in the
Company's lawsuit. For example, certain members of the Committee are limited
liability companies or limited partnerships; the Committee did not disclose, in
its amended Schedule 13D, the names of the investors in those limited liability
entities, nor did it attach the limited partnership and operating agreements.
16
<PAGE> 19
After a preliminary litigation conference, Mr. Seidman's group further
amended its Schedule 13D to disclose publicly for the first time various
limited partnership and operating agreements, to disclose for the first time
the identities of the persons or entities who had invested in the four members
of the group formed directly or indirectly by Mr. Seidman, and to disclose for
the first time the identities of five individuals who had entered into
agreements with Mr. Seidman regarding the voting of their shares.
As a result of the expedited discovery conducted by the Company and
the amended Schedule 13Ds filed by the Seidman group, the Company discovered
that Seidcal Associates, L.L.C. ("Seidcal") owns 71.4% of Seidman and
Associates, L.L.C. ("SAL") and 75.0% of Seidman and Associates II, L.L.C. ("SAL
II"). The Company also discovered that Charisma Partners, L.P. ("Partners")
owns 54.5% of Federal Holdings L.L.C. ("Holdings"), that 8th Floor Realty Corp.
("Realty Corp.") is the sole general partner of Partners, and that Kevin Moore
is a Vice President of Realty Corp., the organizer of Holdings and the
Administrative Manager of Holdings. To date, no information regarding the
members of Seidcal, the directors and other executive officers of Realty Corp.,
or the business, source of funds or controlling persons of Seidcal, Partners or
Realty Corp. has been publicly disclosed by the Seidman group.
On January 23, 1997, the District Court ruled that the Schedule 13D
amendments filed by Mr. Seidman's group after the litigation was commenced
mooted the Company's claims regarding the deficient disclosures initially
provided by Mr. Seidman's group and that the amended Schedule 13Ds were
adequate. Because the judge noted that "(a)n amendment which cures a violation
of the Exchange Act moots a claim that arises from the failure to file a proper
Schedule 13D," the Court did not find it necessary to rule expressly that the
prior Schedule 13Ds violated the securities laws. The District Court also held
that the Company did not meet its burden of proof in demonstrating (1)
Seidcal's control over SAL and SAL II, (2) the control of Partners, Realty
Corp. and Kevin Moore over Holdings, (3) that Seidcal, Partners and Realty
Corp. had arranged for financing, or (4) that Seidcal, Partners and Realty
Corp. are "participants" in the Seidman's group's proxy solicitation. In
addition, because the nominating materials were similar to those received by
the Company the prior year and because the Court believed the Company was not
prejudiced by the failure of the Seidman group to provide proper disclosures in
a timely manner, the Court declined to enforce the disclosure requirements in
the Company's Certificate of Incorporation and held that the Company could not
reject the defendants' nominations as deficient or untimely and that the
defendants could receive a stockholder list. Furthermore, the court set aside
the July 1996 reduction in Board size, even though the decision to reduce the
size of the Board was made several months prior to the submission of nominees
by the Seidman group (the reduction in Board size was first disclosed to the
Seidman group in October 1996).
The Company believes that the Seidman group's disclosures are still
inadequate, particularly since the group's Schedule 13Ds fail to provide any
disclosures regarding Seidcal and Partners. Although Seidcal and Partners each
owns more than 50% of one or more of the limited liability companies formed by
Mr. Seidman, and although Seidcal and Partners each has the contractual right
to make certain decisions for those companies, the Seidman group has argued
that they are not control persons, and has refused to make complete disclosures
about
17
<PAGE> 20
them. The Company also believes that the Company's Board properly rejected the
nomination of Mr. Beier, and reasonably and properly decided to reduce the
Board's size. For these reasons, on January 31, 1997, the Company appealed the
District Court's decision to the United States Court of Appeals for the Third
Circuit, and the Company requested that the Third Circuit hear the appeal on an
expedited basis. On February 7, 1997, Mr. Seidman's group opposed the request
for an expedited appeal.
Rather than trying to get the appeal decided expeditiously, Mr.
Seidman asked the Superior Court of New Jersey, Chancery Division, Passaic
County, to set the annual meeting date. On February 24, 1997, the Passaic
County Court orally directed that the Annual Meeting be held on April 18, 1997.
The Court stayed that order after the Court of Appeals granted the Company's
motion for an expedited appeal, as set forth below.
On February 28, 1997, the United States Court of Appeals for the Third
Circuit granted the Company's motion for an expedited appeal, over the
objection of the Seidman group. The appeal has now been fully briefed, and
will be submitted for disposition on the merits during the week of May 19,
1997.
The Company regrets the need for the lawsuit, but believes that it had
no other choice in order to ensure compliance with the federal securities laws
by Mr. Seidman and his group and to inform the Company's stockholders of the
identities of Mr. Seidman's secret backers.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
a) Not applicable
b) No Form 8-K reports were filed during the quarter.
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements 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: May 6, 1997 By: /s/ Joseph M. Ochman, Sr.
--------------------------
Joseph M. Ochman, Sr.
Chairman, President and
Chief Executive Officer
Date: May 6, 1997 By: /s/ Richard G. Sharp
---------------------
Richard G. Sharp
Executive Vice President and
Chief Financial Officer
Date: May 6, 1997 By: /s/ Matthew J. Kennedy
------------------------
Matthew J. Kennedy
Executive Vice President and
Treasurer
19
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