<PAGE>
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 31,1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission File Number 0-24862
IBS Financial Corp.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-3301933
- ------------------------------------------------ ----------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification Number)
1909 East Route 70
Cherry Hill, New Jersey 08003
--------------------------------------- ----------
(Address of principal executive office) (Zip Code)
(609) 424-1000
----------------------------------------------------
(Registrant's telephone number, including area code)
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 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the last practicable date. As of April 30, 1998
there were issued and outstanding 10,960,978 shares of the Registrant's Common
Stock.
<PAGE>
IBS FINANCIAL CORP.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Part I. Consolidated Financial Information Page
- ------- --------------------------------- ----
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition (As of
March 31, 1998 and September 30, 1997) 1
Consolidated Statements of Income (For the quarter
ended March 31, 1998 and 1997) 2
Consolidated Statements of Income (For the six months
ended March 31, 1998 and 1997) 3
Consolidated Statements of Cash Flows (For the six months
ended March 31, 1998 and 1997) 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Part II. Other Information
- ------- -----------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
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
</TABLE>
<PAGE>
IBS FINANCIAL CORP.
Consolidated Statements of Financial Condition
March 31, 1998 and September 30, 1997
(In thousands)
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
---- ----
Assets
- ------
<S> <C> <C>
Cash and cash equivalents $ 23,694 15,811
Securities available for sale 111,343 136,430
Investments (market value $6,972 and $27,859
at March 31, 1998 and September 30, 1997) 6,972 27,859
Mortgage-backed securities (market value $370,721 and
$332,713 at March 31, 1998 and September 30, 1997) 364,490 326,869
Loans receivable, net 228,095 210,008
Accrued interest receivable:
Loans 1,739 1,699
Mortgage-backed securities 1,995 2,015
Investments 4 103
Federal Home Loan Bank stock 6,513 6,075
Office properties and equipment, net 6,593 6,782
Other assets 677 1,100
--------- --------
Total assets $ 752,115 734,751
--------- --------
--------- --------
Liabilities and Stockholders' Equity
- ------------------------------------
Deposits $ 575,181 567,375
FHLB advances 41,829 34,319
Advances from borrowers 2,485 2,303
Other liabilities 2,103 2,735
--------- --------
Total liabilities 621,598 606,732
--------- --------
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 113,689 113,203
Common stock acquired by ESOP and RRP (7,862) (8,941)
Treasury stock, at cost; 650,049 shares and 660,396 shares (10,106) (10,238)
Net unrealized gain on securities available for
sale, net of taxes 1,267 1,631
Retained earnings 33,413 32,248
--------- --------
Total stockholders' equity 130,517 128,019
--------- --------
Total liabilities and stockholders' equity $ 752,115 734,751
--------- --------
--------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
IBS FINANCIAL CORP.
Consolidated Statements of Income
Quarter Ended March 31, 1998 and 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
---------
1998 1997
---- ----
<S> <C> <C>
Interest income:
Loans $ 4,235 3,770
Mortgage-backed securities 7,912 7,737
Investments 619 1,323
------- -------
Total interest income 12,766 12,830
------- -------
Interest expense:
Deposits 6,665 6,642
Borrowings 528 582
------- -------
Total interest expense 7,193 7,224
------- -------
Net interest income 5,573 5,606
Provision for loan losses 10 10
------- -------
Net interest income after provision
for loan losses 5,563 5,596
------- -------
Other operating income:
Service fees and late charges 187 90
Other income 69 72
------- -------
Total other operating income 256 162
------- -------
Operating expenses:
Compensation and employee benefits 2,550 2,381
Occupancy and equipment 237 288
Data processing 132 124
Federal insurance premiums 88 92
Advertising and promotion 78 169
Professional fees 182 300
Other 222 322
------- -------
Total operating expenses 3,489 3,676
------- -------
Income before taxes 2,330 2,082
Income taxes 757 723
------- -------
Net income $ 1,573 1,359
------- -------
------- -------
Basic earnings per share $ 0.15 0.13
------- -------
------- -------
Diluted earnings per share $ 0.15 0.12
------- -------
------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
IBS FINANCIAL CORP.
Consolidated Statements of Income
Six Months Ended March 31, 1998 and 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
----------------
1998 1997
---- ----
<S> <C> <C>
Interest income:
Loans $ 8,346 7,478
Mortgage-backed securities 16,030 15,614
Investments 1,214 2,804
------- ------
Total interest income 25,590 25,896
------- ------
Interest expense:
Deposits 13,465 13,414
Borrowings 1,056 1,101
------- ------
Total interest expense 14,521 14,515
------- ------
Net interest income 11,069 11,381
Provision for loan losses 20 20
------- ------
Net interest income after provision
for loan losses 11,049 11,361
------- ------
Other operating income:
Service fees and late charges 319 180
Other income 192 130
------- ------
Total other operating income 511 310
------- ------
Operating expenses:
Compensation and employee benefits 5,053 4,501
Occupancy and equipment 498 580
Data processing 247 235
Federal insurance premiums 177 346
Advertising and promotion 149 321
Professional fees 324 667
Other 503 562
------- ------
Total operating expenses 6,951 7,212
------- ------
Income before taxes 4,609 4,459
Income taxes 1,496 1,547
------- ------
Net income $ 3,113 2,912
------- ------
------- ------
Basic earnings per share $ 0.31 0.28
------- ------
------- ------
Diluted earnings per share $ 0.29 0.26
------- ------
------- ------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
IBS FINANCIAL CORP.
Consolidated Statements of Cash Flows
Six Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
(In thousands) Six Months Ended
March 31,
---------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,113 2,912
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 194 192
Provision for loan losses 20 20
Market adjustment on ESOP 629 359
RRP earned 606 604
Changes in assets and liabilities that
provided (used) cash:
Accrued interest receivable 79 465
Other assets 423 (90)
Other liabilities (436) (1,321)
-------- --------
Net cash provided by operating activities 4,628 3,141
-------- --------
INVESTING ACTIVITIES:
Principal repayments of:
Loans 14,231 10,248
Mortgage-backed securities 61,305 29,961
Purchases of:
Investments (40,000) (217,318)
Mortgage-backed securities (74,399) (34,972)
Proceeds from maturity of investments 60,887 244,956
Loans originated or acquired (32,392) (23,907)
Loans sold 54 0
FHLB stock redeemed (purchased) (438) (1,485)
Proceeds from sale of REO 0 0
Property and equipment acquired (5) (1,038)
-------- --------
Net cash provided by (used in) investing activities (10,757) 6,445
-------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 7,806 (622)
Increase (decrease) in advances from borrowers 182 14
FHLB advances 10,000 20,000
FHLB repayments (2,490) (2,060)
Cash dividends paid (1,948) (3,596)
Payments on ESOP debt, net 473 487
Treasury stock acquired (216) (20,001)
Stock options exercised 205 567
-------- --------
Net cash provided by (used in) financing activities 14,012 (5,211)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 7,883 4,375
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
IBS FINANCIAL CORP.
Consolidated Statements of Cash Flows, Continued
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 15,811 12,466
-------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $23,694 16,841
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES:
Cash paid out for:
Interest expense $14,529 14,388
-------- --------
-------- --------
Income taxes $ 1,638 0
-------- --------
-------- --------
NON-CASH TRANSFERS FROM LOANS TO
REAL ESTATE OWNED $ 0 0
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
IBS Financial Corp.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
The accompanying unaudited 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 normal recurring adjustments 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,
1997. The results for the quarter and six months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ended September 30, 1998. Share and per share data presented herein reflects 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.
6
<PAGE>
(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 numbers have been adjusted for stock
dividends. The Company purchased 1,174,902 shares of common stock on behalf of
the ESOP in the Conversion. At March 31, 1998, 29,898 shares of the total ESOP
shares were committed to be released with 622,382 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. At March 31, 1998,
the ESOP loan balance, net of related receivable, amounted to $5,659,000 and is
recorded as a charge against stockholders' equity. The Company recorded
compensation and employee benefit expense related to the ESOP of $672,000 and
$1,282,000 for the quarter and six months ended March 31, 1998, 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. In order to fund the RRP, the RRP purchased 587,451
shares, after adjusting for stock dividends, in the open market at an aggregate
cost of $6,085,000. As of March 31, 1998, all available shares under the RRP had
been awarded to the Company's Board of Directors and the Association's executive
officers and other key employees.
7
<PAGE>
At March 31, 1998, the deferred cost of the unearned RRP shares amounted to
$2,203,000 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 $304,000 and $607,000 for the quarter and six months ended
March 31, 1998, 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. All shares have been
adjusted for stock dividends. At March 31, 1998, an aggregate of 1,275,503 stock
options were outstanding and 90,285 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, 1998 and September 30, 1997 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
---- ----
<S> <C> <C>
Real estate loans:
Mortgage loans (1-4 residential) $ 203,588 184,498
Construction loans 2,400 261
Loans on savings accounts 2,206 2,486
Commercial real estate loans 23,902 24,568
Consumer loans 1,249 1,234
--------------- --------
Total 233,345 213,047
Less:
Deferred loan fees (2,032) (1,897)
Allowance for loan losses (1,084) (1,064)
Loans in process (2,134) (78)
--------------- --------
Total $ 228,095 210,008
--------------- --------
--------------- --------
</TABLE>
8
<PAGE>
Changes in the allowance for loan losses were as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Year Ended
March 31, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Balance, beginning of period $ 1,064 1,024
Provision for loan losses 20 40
Charge-offs 0 0
Recoveries 0 0
------------------ ---------------
Balance, end of period $ 1,084 1,064
------------------ ---------------
------------------ ---------------
</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, 1998, 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, 1998 and 1997, the Company's impaired loans consisted of smaller
balance residential mortgage loans.
Nonaccrual loans for which interest has been fully reserved totaled
approximately $691,000 at March 31, 1998 and $818,000 at September 30, 1997.
9
<PAGE>
(7) Deposits
The major types of savings deposits by amounts and the percentages were as
follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1998 September 30, 1997
----------------------------- -----------------------
Type of Account Amount % of Total Amount % of Total
- --------------- --------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Now $ 25,962 4.51% $ 23,570 4.20%
Money market deposit 61,438 10.68% 63,248 11.20%
Passbook and club 55,051 9.57% 57,638 10.20%
---------- ------------- --------- -------------
142,451 24.76% 144,456 25.60%
Certificates of deposit 432,335 75.17% 422,505 74.30%
Accrued interest on savings 395 0.07% 414 0.10%
---------- ------------- --------- -------------
Total deposits $575,181 100.00% $ 567,375 100.00%
---------- ------------- --------- -------------
---------- ------------- --------- -------------
</TABLE>
(8) Earnings Per Share
Basic and diluted earnings per share amounted to $.15 each for the quarter ended
March 31, 1998 compared with basic and diluted earnings per share of $.13 and
$.12 per share for the same quarter last year. For the six months ended March
31, 1998, basic and diluted earnings per share amounted to $.31 and $.28 per
share compared with basic and diluted earnings per share of $.28 and $.26,
respectively for the same six months last year. A reconciliation of the
numerator and denominators in the computation of basic and diluted earnings per
share follows:
<TABLE>
<CAPTION>
(In thousands, except per share)
Quarter Ended Quarter Ended
March 31, 1998 March 31,1997
-------------- -------------
Income Shares EPS Income Shares EPS
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $1,573 10,004 $0.15 $1,359 9,989 $0.13
Dilutive securities:
Stock options -- 652 -- -- 509 --
Unearned MRP -- 227 -- -- 344 --
------ ------ ------ ------ ------ -------
Diluted EPS $1,573 10,883 $0.15 $1,359 10,842 $0.12
------ ------ ------ ------ ------ -------
------ ------ ------ ------ ------ -------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
(In thousands, except per share)
Six Months Six Months
March 31, 1998 March 31,1997
-------------- -------------
Income Shares EPS Income Shares EPS
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $3,113 9,971 $0.31 $2,912 10,288 $0.28
Dilutive securities:
Stock options -- 641 -- -- 498 --
Unearned MRP -- 242 -- -- 359 --
------ ------ ------ ------ ------ ------
Diluted EPS $3,113 10,854 $0.29 $2,912 11,145 $0.26
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
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, 1998 was $1.6 million
or $.15 per diluted share compared with $1.4 million or $.12 per diluted share
for the same quarter last year. For the six months ended March 31, 1998, net
income amounted to $3.1 million or $.29 per diluted share compared with $2.9
million or $.26 per diluted share for the same six months last year.
The increase in earnings for the quarter and six months ended March 31, 1998
compared to the same periods last year was attributable to a combination of
factors, including decreased operating expenses and increased other operating
income, principally loan fees earned, that more than offset the decline in net
interest income. In addition, reduced income tax provisions contributed to the
increase in the six month period. The Company's net interest margin averaged
3.11% and 3.09% in the recent quarter and six months ended March 31, 1998
compared to 3.10% and 3.13% earned for the same periods last fiscal year,
respectively.
Financial Condition
- -------------------
Total assets increased by $17.3 million or 2.4% during the first six months of
fiscal 1998 from $734.8 million at September 30, 1997 to $752.1 million at March
31, 1998. Loan and mortgage-backed securities repayments, together with
increased deposits and an additional $10 million FHLB advance, were used to
invest in mortgage-backed securities and cash equivalents as well as to
originate additional mortgage loans. Cash and cash equivalents increased by $7.9
million or 49.9% from $15.8 million at September 30, 1997 to $23.7 million at
March 31, 1998. In an effort to shift from lower yielding assets to higher
yielding assets, mortgage-backed
11
<PAGE>
securities held to maturity increased by $37.6 million or 11.5% from $326.9
million at September 30, 1997 to $364.5 million at March 31, 1998, reflecting
additional purchases in excess of payments received during the period.
Securities available for sale decreased by $25.1 million or 18.3% from $136.4
million (all mortgage-backed securities) at September 30, 1997 to $111.3 million
(all mortgage-backed securities) at March 31, 1998. This decrease reflected
payments received on the mortgage-backed security portfolio. Investments
decreased by $20.9 million or 75.0% from $27.9 million at September 30, 1997 to
$7.0 million at March 31, 1998 reflecting maturing investments. Loans receivable
increased by $18.1 million or 8.6% from $210.0 million at September 30, 1997 to
$228.1 million at March 31, 1998, as loan originations exceeded loan repayments
during the six month period ended March 31, 1998.
During the six months ended March 31, 1998, deposits increased by $7.8 million
or 1.4% from $567.4 million at September 30,1997 to $575.2 million at March 31,
1998, principally reflecting new super certificates, with minimum deposit
requirements of $25,000, and other new deposit accounts attracted from merged
banks in the local market area. FHLB advances increased by $7.5 million or 21.9%
from $34.3 million at September 30, 1997 to $41.8 million at March 31, 1998.
Additional borrowings of $10 million were incurred during the quarter ended
March 31, 1998, primarily to fund loan originations and mortgage-backed
securities. Common stock acquired by ESOP and RRP decreased by $1.0 million or
12.1% from $8.9 million at September 30, 1997 to $7.9 million at March 31, 1998,
reflecting ESOP payments and RRP expense during the six month period. Retained
earnings increased by $1.2 million or 3.6% from $32.2 million at September 30,
1997 to $33.4 million at March 31, 1998. This change resulted from the net
income and the dividends declared during the six months ended March 31, 1998.
Total dividends declared included the two regular quarterly cash dividends of
$.10 per share each.
Results of Operations
- ---------------------
Net Income
Net income increased by $.2 million or 15.7% to $1.6 million for the quarter
ended March 31, 1998, compared with net income of $1.4 million for the same
quarter in the last fiscal year. For the six months ended March 31, 1998, net
income increased by $.2 million or 6.9 % to $3.1 million, compared with net
income of $2.9 million for the six months ended March 31, 1997. The increase in
both the quarter and six months results of operations was attributable to a
combination of factors, including reductions in operating expenses and increases
in other operating income, principally loan fees earned, that more than offset a
decline in net interest income. In addition, reduced income tax provisions
contributed to the increase in the six-month period.
Net Interest Income
Net interest income amounted to $5.57 million for the quarter ended March
31,1998, which represents a decrease of $33,000 or .6% from the $5.60 million
reported for the comparable prior quarter. For the six months ended March 31,
1998, net interest income decreased by $.3 million or 2.7% to $11.1 million from
$11.4 million for the six months last fiscal year. The decrease in net interest
income for the quarter ended March 31, 1998 resulted from a decrease in the net
interest rate spread of 4 basis points for the period which was partially offset
by an increase in
12
<PAGE>
the average balance of net interest-earning assets of $4.6 million or 4.1%. The
decrease in net interest income for the six months ended March 31, 1998 resulted
from a decrease in the net interest rate spread of 5 basis points and a decrease
in the average balance of net interest-earning assets of $2.3 million or 1.9%.
Total interest income decreased by $64,000 or .5% to $12.77 million for the
quarter ended March 31, 1998, from $12.83 million for the comparable prior
quarter. For the six months ended March 31, 1998, total interest income amounted
to $25.6 million, which represents a decrease of $.3 million or 1.2% from the
$25.9 million for the comparable prior six-month period. Average
interest-earning assets decreased by $6.4 million or .9% to $717.5 million for
the quarter ended March 31, 1998, compared to the same quarter last year and
decreased by $11.3 million or 1.6% to $716.2 million for the six months ended
March 31, 1998 compared to the same six month period last year, principally
reflecting the Company's stock repurchases which caused reductions in
investments for both periods. However, the yield earned on average
interest-earning assets increased by 3 basis points to 7.12% for the quarter
ended March 31, 1998 and increased by 2 basis points to 7.14% for the six months
ended March 31, 1998.
Total interest expense decreased by $31,000 or .4% to $7.19 million for the
quarter ended March 31, 1998 from $ 7.22 million for the comparable quarter last
year. For the six months ended March 31, 1998, total interest expense amounted
to $14.52 million and remained at the same level as the $14.52 million for the
same six month period last year. Average interest-bearing liabilities decreased
by $11.1 million or 1.8% to $599.8 million for the quarter ended March 31, 1998
from $610.9 million for the comparable quarter last fiscal year, principally
reflecting reduced deposits. For the six months ended March 31, 1998, average
interest-bearing liabilities decreased by $8.9 million or 5.8% to $599.5 million
from $608.5 million for the same six- month period last year, principally
reflecting reduced deposits. In addition, the average rate paid on
interest-bearing liabilities increased by 7 basis points to 4.80% for the
quarter ended March 31, 1998, while the average rate paid on interest-bearing
liabilities increased by 7 basis points to 4.84% for the six months ended March
31, 1998.
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, 1998 and 1997,
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, 1998 and 1997, the same $20,000 provisions for loan losses was
determined to be required. The allowance for loan losses amounted to $1,084,000
or .5% of the total loan portfolio at March 31, 1998.
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
13
<PAGE>
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 $256,000 for the quarter ended March 31,
1998, an increase of $94,000 or 58.0% over the comparable quarter last year. For
the six months ended March 31, 1998, other operating income increased by
$201,000 or 64.8% to $511,000 from $310,000 for the six months ended March 31,
1997. The increases for both the quarter and six months ended March 31, 1998
were chiefly due to additional loan fees earned and, for the six months ended
March 31, 1998, an insurance recovery of $57,000.
Operating expenses
Operating expenses amounted to $3.49 million and $6.95 million for the quarter
and six months ended March 31, 1998, which reflect decreases of $187,000 or 5.1%
and $261,000 or 3.6% from the comparable prior periods, respectively. The
decreases for both the quarter and six months ended March 31, 1998 principally
reflected a combination of factors, including decreased legal fees, advertising
expense, occupancy and equipment expense and federal deposit insurance premium
expense. These items were only partially offset by increased compensation and
benefits, principally resulting from the non-cash charge relating to the excess
of the market price over cost of IBSF stock on its ESOP plan.
Income taxes
Income tax expense amounted to $.76 million for the quarter ended March 31,
1998, an increase of $34,000 or 4.7% compared to $.72 million for the same
quarter last fiscal year. For the six months ended March 31, 1998, income tax
amounted to $1.50 million, a decrease of $51,000 or 3.3% compared to $1.55
million for the same six months last year. The change in income tax expense for
both the quarter and six months ended March 31, 1998 primarily relates to the
income before income taxes for the related periods as well as a reduction in
deferred tax expense no longer determined to be required.
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 utilizes other
borrowing sources, principally advances from the Federal Home Loan Bank of
14
<PAGE>
New York. As of March 31, 1998, the Association's Board of Directors has
provided management with the authority to borrow up to $150 million from the
Federal Home Loan Bank of New York.
Liquidity management is both a daily and long-term function. Excess liquidity is
generally invested in short-term investments such as cash and cash equivalents,
U.S. Treasury, U.S. Government agencies and other qualified investments. On a
longer-term basis, the Association maintains a strategy of investing in various
mortgage-backed securities and other investment securities and lending products.
During the quarter ended March 31, 1998, 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, 1998, the total approved loan and mortgage-backed securities
commitments outstanding amounted to $13.3 million. Certificates of deposit
scheduled to mature in one year or less at March 31, 1998 totaled $273.4
million. Management of the Association believes that the Association has
adequate resources, including principal prepayments and repayments of loans and
mortgage-backed securities and maturing investments, to fund all of its
commitments to the extent required. Based upon its historical run-off
experience, management believes that a significant portion of maturing deposits
will remain with the Association.
The Association is required by the Office of Thrift Supervision ("OTS") to
maintain average daily balances of liquid assets and short-term liquid assets as
defined in amount equal to 4% 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 for March
31, 1997 was 118.3%.
The OTS 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, 1998, the
Association exceeded all regulatory capital requirements. At such date, the
Association, on a bank only basis, had tangible capital equal to 17.1% of
adjusted total assets, core capital equal to 17.1% of adjusted total assets and
total capital equal to 59.5% of risk-weighted assets. At March 31, 1998, the
Company, on a consolidated basis, had tangible capital equal to 17.2% of
adjusted total assets, core capital equal to 17.2% of adjusted total assets and
total capital equal to 59.9% of risk-weighted assets.
15
<PAGE>
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.
Year 2000 Computer Problem
The Company has appointed a committee that has assessed and developed a plan to
prepare for the Year 2000 impact on electronic systems, programs and processes.
In addition, it has identified the level of risk that each of the systems pose
to the Company. Testing of revisions to the programs, processes and systems is
scheduled to be completed by January 1, 1999. Most of the Company's data
processing work is provided by third-party data processing service bureaus. The
Company is monitoring the progress of each of these vendors on a continuing
basis. It is currently estimated that the cost of replacing equipment, software
and other incidental costs will approximate $600,000.
16
<PAGE>
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 for cases that were dismissed subsequent to March 31, 1998 or currently
are in the process of being dismissed.
IBS Financial Corp. v. Seidman and Associates, L.L.C. et al.
On February 11, 1998, the United States Court of Appeals for the Third Circuit
ruled that Seidman and Associates, L.L.C. and certain affiliates (hereinafter
referred to as the "Seidman Group") failed to disclose information about group
members required by federal securities law to be disclosed in the Seidman
Group's Schedule 13D statement. See Opinion No. 97-5056 Filed February 11, 1998.
Specifically, the Court held that the Seidman Group should have-but did not-
make disclosures about persons "in control" of members of the Seidman Group. In
light of the deficiencies in the Seidman Group's 13D filings and nominating
materials, the Court also held that the Company's Board of Directors acted
within its authority in declining to accept the nominations for election to the
board which were made by the Seidman Group in connection with the Company's
August 1997 meeting of stockholders. In making its rulings, the Third Circuit
disagreed with the District Court's finding that the Seidman Group's Schedule
13D filing was sufficient and that the Company's Board was estopped from
rejecting the Seidman Group's nominees. The Third Circuit affirmed the District
Court's finding that the Company's Board should have seven, not six, directors.
The Third Circuit remanded the case to the District Court for further
proceedings consistent with the Third Circuit's opinion.
On April 24, 1998, the Company filed with the District Court a form of
Judgment After Remand that had been agreed to by Mr. Seidman's counsel. The form
of judgment states that (1) the Seidman Group should have made, but did not
make, disclosures in its Schedule 13D about persons controlling members of the
Group, (2) no question as to the sufficiency of the Seidman Group's amended
Schedule 13D filed on February 25, 1998 is before the District Court, and (3)
the Seidman Group did not make the disclosures required by the Company's
Certificate of Incorporation, and the Company's Board of Directors acted within
its authority in declining to accept the group's nominations.
Lawrence B. Seidman v.Seidman and Associates, L.L.C., et al. With
respect to Mr. Seidman's suit filed in August 1997 seeking to overturn the
results of the 1997 election of directors, in April 1998 the Court vacated its
order which had temporarily enjoined the Company from seating Messrs. Auchter
and Abramowitz as new directors and then dismissed Mr. Seidman's lawsuit with
prejudice and without costs.
Item 2. Changes in Securities
---------------------
Not applicable
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable
17
<PAGE>
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) On April 10, 1998 the Company filed a Form 8-K to report
the execution of a definitive Agreement and Plan of Merger, dated March 31, 1998
among HUBCO, Hudson United Bank, the Company and Inter-Boro Savings and Loan
Association (the "Agreement"). Pursuant to the Agreement, the Company will be
merged into HUBCO, and each share of common stock of the Company (excluding
treasury shares and certain shares held by HUBCO) will be converted into .534
shares of HUBCO's common stock, subject to adjustment in certain circumstances.
The Form 8-K was filed pursuant to "Item 5", Other Events," and no financial
statements were required to be filed with the Form 8-K.
18
<PAGE>
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 8, 1998 By: /s/ Joseph M. Ochman, Sr.
--------------------------
Joseph M. Ochman, Sr.
Chairman, President and
Chief Executive Officer
Date: May 8, 1998 By: /s/ Richard G. Sharp
---------------------
Richard G. Sharp
Executive Vice President and
Chief Financial Officer
Date: May 8, 1998 By: /s/ Matthew J. Kennedy
------------------------
Matthew J. Kennedy
Executive Vice President and
Treasurer
19
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<PAGE>
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<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
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