IBS FINANCIAL CORP.
CONSOLIDATED FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts)
September 30,
------------------------
1996 1995
---- ----
EARNINGS PERFORMANCE FOR THE FISCAL YEAR:
Net interest income $24,733 26,668
Net income 4,537(a) 9,920
PER SHARE:
Net income $0.43(a) 0.84
Cash dividends declared 0.234 0.135
Book value 13.42 13.03
FINANCIAL CONDITION AT FISCAL YEAR END:
Total assets $742,051 726,536
Investments 26,712 241,345
Securities available for sale 215,331 0
Mortgage-backed securities 285,267 311,753
Loans 185,031 141,781
Deposits 571,366 564,910
Stockholders' equity 144,284 158,049
PERFORMANCE RATIOS:
Return on average assets 0.94%(b) 1.36%
Return on average equity 4.56%(b) 6.37%
Net interest margin 3.44% 3.77%
Operating expenses to average assets 1.92%(b) 1.68%
Efficiency ratio 55.96% 44.93%
(a) Reflects a one-time assessment of $3.7 million or $2.4
million after tax ($.23 per share) incurred in the September
1996 quarter to recapitalize the Savings Association Insurance
Fund of the Federal Deposit Insurance Corporation. See Note 18
of Notes to the Consolidated Financial Statements.
(b) Exclusive of one-time SAIF assessment. Including the SAIF
assessment, return on average assets, return on average equity
and operating expenses to average assets were .61%, 2.96% and
2.42%, respectively.
IBS FINANCIAL CORP.
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands, Except per Share Data)
As of or For the Year Ended September 30,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
FINANCIAL CONDITION:
Total assets $742,051 726,536 663,866 665,933 652,614 626,075
Loans 185,031 141,781 140,618 157,030 185,188 199,027
Investments 26,712 241,345 289,495 238,138 205,916 99,430
Mortgage-backed
securities 285,267 311,753 182,891 134,677 217,041 279,186
Cash and equivalents 12,466 12,542 32,586 119,014 24,392 30,912
Deposits 571,366 564,910 603,080 609,805 603,722 583,292
Stockholders' equity 144,284 158,049 57,594 52,631 44,579 37,954
Nonperforming assets (1) 827 663 1,005 5,478 8,495 8,751
Full service offices 8 8 8 8 8 8
OPERATIONS:
Total interest income $ 52,152 51,692 41,525 47,458 53,451 55,921
Total interest expense 27,419 25,024 25,674 28,093 34,916 42,851
Net interest income 24,733 26,668 15,851 19,365 18,535 13,070
Provision for loan losses 30 30 180 431 1,077 337
Other operating income 687 663 901 1,663 928 500
Operating expenses 14,231 12,215 9,015 8,738 8,342 8,387
Special SAIF
assessment (2) 3,700 0 0 0 0 0
Income before taxes 7,459 15,086 7,557 11,859 10,045 4,846
Income taxes 2,922 5,166 2,594 3,807 3,527 1,676
Net income $ 4,537 9,920 4,963 8,052 6,518 3,169
PER COMMON SHARE:
Net income $ 0.43(2) 0.84 N/A N/A N/A N/A
Cash dividends 0.234 0.135 N/A N/A N/A N/A
OPERATING RATIOS (3):
Average yield earned on
interest-earning assets 7.25% 7.30% 6.36% 7.29% 8.52% 9.33%
Average rate paid on
interest-bearing
liabilities 4.70% 4.39% 4.20% 4.60% 5.86% 7.47%
Average interest rate
spread (4) 2.55% 2.91% 2.16% 2.69% 2.66% 1.86%
Net interest margin 3.44% 3.77% 2.43% 2.98% 2.96% 2.18%
Ratio of interest-earning
assets to
interest-bearing
liabilities 123.38% 124.27% 106.74% 106.62% 102.30% 105.24%
Net interest income to
operating expenses 173.80% 218.32% 175.83% 221.64% 222.19% 155.84%
Operating expenses as a
percent of average
assets 1.92% 1.68% 1.34% 1.32% 1.30% 1.37%
Return on average assets 0.61%(2) 1.36% 0.74% 1.21% 1.02% 0.52%
Return on average equity 2.98%(2) 6.37% 8.98% 16.33% 15.58% 8.76%
Ratio of average equity
to average assets 20.53% 21.18% 8.24% 7.43% 6.52% 5.90%
Dividend payout ratio 51.07% 17.06% N/A N/A N/A N/A
ASSET QUALITY RATIOS:
Nonperforming loans and
troubled debt
restructurings as a
percent of total loans 0.45% 0.47% 3.62% 3.49% 4.59% 4.40%
Nonperforming assets and
troubled debt
restructurings as a
percent of total assets 0.11% 0.09% 0.77% 0.82% 1.30% 1.40%
Allowance for loan losses
as a percent of total
loans 0.55% 0.70% 0.38% 1.06% 0.67% 0.75%
Allowance for loan losses
as a percent of
nonperforming loans 123.8% 149.9% 52.7% 30.5% 17.9% 17.1%
Charge-offs to average
loans receivable
outstanding during
the period -- -- 0.89% -- 0.68% --
______________
(1) Nonperforming assets consist of nonperforming loans,
troubled debt restructurings and real estate owned ("REO").
Nonperforming loans consist of nonaccrual loans and accruing
loans 90 days or more overdue, while REO consists of real estate
acquired through foreclosure and real estate acquired by
acceptance of a deed-in lieu of foreclosure.
(2) Without giving effect to the special SAIF assessment, net
income per share would have been $.66 and return on average
assets and return on average equity would have been .94% and
4.56%, respectively. See Note 18 of Notes to the Consolidated
Financial Statements.
(3) Asset Quality Ratios are end of period ratios, except for
charge-offs to average loans. With the exception of end of
period ratios, all ratios are based on monthly balances during
the indicated periods.
(4) Interest rate spread represents the difference between the
weighted average yield on average interest- earning assets and
the weighted average cost of average interest-bearing
liabilities, and net interest margin represents net interest
income as a percent of average interest-earning assets.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
IBS Financial Corp. (the "Company") is a New Jersey corporation organized in
June 1994 by the Association for the purpose of acquiring all of the capital
stock of Inter-Boro Savings and Loan Association issued in the conversion of the
Association to stock form, which was completed on October 13, 1994. The only
significant assets of the Company are its investments in the capital stock of
the Association and IBSF Investment Corp., a wholly-owned investment subsidiary,
the Company's loan to an employee stock ownership plan, and certain U.S.
Government Agency securities.
The Association is a New Jersey chartered stock savings and loan association
which conducts business from ten offices located in Camden, Burlington and
Gloucester Counties, New Jersey. Two of these offices were just recently opened
in Gloucester and Voorhees Townships, Camden County. The Association's
operations date back to 1890. The Association's deposits are insured by the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC") to the maximum extent permitted by law.
IBS Financial Corp.'s consolidated operating results depend primarily upon its
net interest income, which is determined by the difference between interest and
dividend income on interest-earning assets, principally investment securities
and other investments, mortgage-backed securities and loans, and interest
expense on interest-bearing liabilities, which consist of deposits and advances
from the Federal Home Loan Bank of New York. The Company's net income is also
affected by its provision for loan losses, as well as the level of its other
income, including loan fees and late charges, gains on the sale of investments
and on the sale of real estate owned and other income and its general and
administrative expenses, such as compensation and employee benefits, net
occupancy and equipment expense, federal deposit insurance and miscellaneous
other expenses, and income taxes.
OPERATING STRATEGY
The Company has traditionally offered a variety of savings products to its
retail customers. The Company invests its funds in U.S. Government, U.S.
Government agency and mortgage-backed securities, other short term investments
and has concentrated its lending activities on real estate loans secured by
single (i.e., "one-to-four") family residential properties. In fiscal 1996 the
Company also expanded its investment in commercial real estate loans. The
commercial real estate loans originated are collateralized by small professional
and medical office buildings, commercial retail establishments and religious
organizations in its market area. In addition and to a lesser degree,
construction loans are originated to construct primarily single family
residences. In the past, the Company has also purchased whole residential
mortgage loans and participation interests in commercial real estate projects
located principally in New Jersey.
The Company began to deemphasize its real estate lending in the late 1980's due
to, among other reasons, declining real estate values. With the significant
decline in interest rates experienced during the early 1990s, the Company was
unwilling to actively originate long-term, fixed-rate residential mortgage loans
or purchase fixed-rate mortgage-backed securities. During this period, the
Company elected to build its liquidity, investing in U.S. Government and U.S.
Government agency securities with short maturities and cash and cash
equivalents, particularly bankers' acceptances. During the last half of 1994
,with a rising rate environment, the Board of Directors authorized the Company
to initiate a "tired" or laddered investment strategy under which it anticipated
investing $400 million over approximately an 18 month time period in
mortgage-backed securities and U.S. Government securities with varying
maturities.
The Company successfully reinvested the approximately $400 million in
mortgage-backed securities and U.S. Government and agency securities during the
fiscal year ended September 30, 1995. At September 30, 1995 mortgage-backed
securities amounted to $311.8 million or 42.9% of assets compared to $182.9
million or 27.5% of assets at September 30, 1994. In addition, the Company's
net interest margin increased to 3.77% for the year ended September 30, 1995
compared to 2.43% for the fiscal year ended September 30, 1994.
During fiscal 1996, the Company began emphasizing the origination of single
family residential loans and changed the mix of its originations to include more
commercial real estate loans in the local marketplace. In addition, the Company
continued to reduce its liquid assets by reinvesting the proceeds of maturing
investments into mortgage-backed securities generally with maturities of five
and seven years. This was designed to increase the Company's yield on its loan
portfolio. However, the Company experienced heavy repayments of higher
yielding residential loans and mortgage-backed securities that were reinvested
in lower yielding loan and mortgage-backed securities. As a result, the
Company's net interest margin was pressured, decreasing to 3.44% for the year
ended September 30, 1996.
ASSET AND LIABILITY MANAGEMENT
The principal objective of the Company's asset liability management function is
to evaluate the interest-rate risk included in certain balance sheet accounts,
determine the level of risk appropriate given the Company's business focus,
operating environment, capital and liquidity requirements and performance
objectives, establish prudent asset concentration guidelines and manage the risk
consistent with Board approved guidelines. The Company seeks to reduce the
vulnerability of its operations to changes in interest rates and to manage the
ratio of interest-rate sensitive assets to interest-rate sensitive liabilities
within specified maturities or repricing dates. The Company's actions in this
regard are taken under the guidance of the Asset/Liability Management Committee
("ALCO"), which is chaired by the Chief Financial Officer and comprised
principally by members of the Company's senior management. The ALCO reviews,
among other things, the sensitivity of the Company's assets and liabilities to
interest rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, purchase activity and maturity of investments. In
connection therewith, the ALCO generally reviews the Association's liquidity,
cash flow needs, maturities of investments, deposits and
borrowings and current market conditions and interest rates. The Chief
Executive Officer has authority to adjust pricing weekly with respect to the
Association's retail deposits.
The Company's primary ALCO monitoring tool is assets/liability simulation models
prepared on a quarterly basis and are designed to capture the dynamics of
balance sheet, rate and spread movements and to quantify variations in net
interest income under different interest rate environments. The Company also
utilizes market-value analysis, which addresses the change in equity value
arising from movements in interest rates. The market value of equity is
estimated on a market value basis. Market value analysis is intended to
evaluate the impact of immediate and sustained interest-rate shifts of the
current yield curve upon the market value of the current balance sheet.
One measure of interest rate risk is the gap ratio, which is defined as the
difference between the dollar volume of interest-earning assets and
interest-bearing liabilities maturing or repricing within a specified period of
time as a percentage of total assets. A positive gap results when the volume of
interest rate-sensitive assets exceeds that of interest rate-sensitive
liabilities within comparable time periods. A negative gap results when the
volume of interest-bearing liabilities exceeds that of interest rate-sensitive
assets within comparable time periods.
As indicated in the table below, the Company's one year gap position at
September 30, 1996 was a negative 8.9%. The one year time frame has been keyed
on because the majority of the Company's interest-earning assets and
interest-bearing liabilities are subject to repricing or maturity within this
period. Generally, a financial institution with a negative gap position will
most likely experience increases in net interest income during periods of
falling interest rates and decreases in net interest income during periods of
rising interest rates.
The following rate sensitivity table sets forth certain information at September
30, 1996 relating to the Company's assets and liabilities based on scheduled
repricing for adjustable assets and liabilities, or by contractual maturity for
fixed-rate assets and liabilities.
RATE SENSITIVITY ANALYSIS
IBS FINANCIAL CORP.
RATE SENSITIVITY ANALYSIS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 1996
--------------------------------------------------------------
SIX OVER 1-3 OVER 3-5 OVER 5
MONTHS ONE YEAR YEARS YEARS YEARS
-------- -------- --------- --------- -------
Interest-earning assets: $
Loans 15,095 24,452 40,904 26,127 80,939
Mortgage-backed securities 50,130 65,252 88,069 213,994 34,320
Investments 64,399 23,994 0 0 0
-------- ------- ------- ------- --------
Total 129,624 113,698 128,973 240,121 115,259
-------- ------- ------- ------- --------
Interest-bearing liabilities:
Maturing certificates of deposit 129,186 121,195 142,327 17,075 8,538
MMDA and NOW accounts 38,355 2,016 6,128 13,582 0
Passbook balances 7,872 7,872 31,488 33,722 13,885
Borrowed funds 1,490 1,536 6,618 6,495 2,652
-------- ------- ------- ------- -------
Total 176,903 132,619 186,561 70,874 25,075
-------- ------- ------- ------- -------
GAP $(47,279) (18,921) (57,588) 169,247 90,184
======== ======== ======= ======= =======
Cumulative GAP $(47,279) (66,200) (123,788) 45,459 135,643
======== ======== ======= ======= =======
Cumulative GAP to total assets -6.4% -8.9% -16.7% 6.1% 18.3%
======== ======== ======= ======= =======
RESULTS OF OPERATIONS
The Company's net income for the year ended September 30, 1996 amounted to
$4.5 million or $.43 per share compared with $9.9 million or $.84 per share
for fiscal 1995. Net income, before the one-time special assessment by the
Savings Association Insurance Fund ("SAIF"), for the year ended September 30,
1996 amounted to $6.9 million or $.66 per share. Per share amounts for prior
periods have been restated to reflect the 10% stock dividend paid on March
15, 1996. In addition, the per share amount for the fiscal year ended
September 30, 1995 includes earnings from the completion date of the initial
public offering and conversion on October 13, 1994. The decrease in earnings,
before the special SAIF assessment, was principally attributable to increased
operating expenses as well as reductions in net interest income reflecting
increased deposit and borrowing costs.
The Company reported net income of $9.9 million for the year ended September 30,
1995, an increase of $4.9 million or 98.0% from the $5.0 million earned in
fiscal 1994. This significant increase was due to substantially increased
interest income, which was primarily attributable to the program of reinvesting
cash and cash equivalent assets. Approximately $400 million, including the $104
million of net proceeds raised in the Company's initial public offering, was
reinvested in mortgage-backed securities and U.S. Government and agency
securities with a range of varying maturities.
NET INTEREST INCOME
Net interest income decreased by $1.9 million or 7.3% to $24.7 million for the
year ended September 30, 1996 from $26.7 million for the prior fiscal year. The
decrease in net interest income for the year ended September 30, 1996 resulted
from a decrease in average net interest-earning assets of $1.9 million or 1.4%,
as well as a decrease in the average interest rate spread of 36 basis points.
For the year ended September 30, 1995 net interest income amounted to $26.7
million, a $10.8 million or 68.2% increase from fiscal 1994. The increase in
net interest income for the year ended September 30, 1995 resulted from an
increase in average net interest-earning assets of $97.1 million or 235.4%,
principally mortgage-backed securities, as well as an increase in the average
interest rate spread of 75 basis points.
Total interest income increased by $.5 million or .9% for the year ended
September 30, 1996 from $51.7 million for the comparable prior year. This
increase was primarily the result of increases in average interest-earning
assets of $11.7 million or 1.7%, principally mortgage-backed securities, which
more than offset the 5 basis point decline in the average yield earned for the
year ended September 30, 1996. For the year ended September 30, 1995, total
interest income increased by $10.2 million or 24.5% from $41.5 million for the
comparable prior period. This $10.2 million increase in total interest income
was primarily the result of an increase in average interest-earning assets of
$55.3 million or 8.5% for the year ended September 30, 1995, principally
mortgage-backed securities. The average balance of mortgage-backed securities
increased by $158.1 million or 130.5% which, despite a 157 basis
point reduction in average yield earned, was more than sufficient to offset a
$93.8 million or 24.4% decrease in the average balance of investment
securities and a $9.1 million or 6.1% decrease in the average balance of
loans.
Total interest expense increased by $2.4 million or 9.6% for the year ended
September 30, 1996 to $27.4 million from $25.0 million for the prior fiscal
year. Increases in average deposit balances and increases in the rates paid for
the year ended September 30, 1996 were both contributing factors to the increase
in total interest expense. Increases in average deposit and advance balances
amounted to $13.6 million or 2.4% for the year ended September 30, 1996. The
rate paid on average interest-bearing deposits and advances increased by 31
basis points during the year ended September 30, 1996. For the year ended
September 30, 1995, total interest expense declined by $.7 million or 2.5% to
$25.0 million from the prior fiscal year. The decrease in interest expense was
attributable to a decrease in average deposit balances of $41.8 million or 6.8%,
which more than offset a 19 basis point increase in the average rates paid for
the year ended September 30, 1995. The decrease in average deposit balances
reflected higher market interest rates being available on other financial
instruments in the Company's marketplace as well as approximately $16.5 million
that reflected amounts charged against depositors accounts on October 13, 1994
for the purchase of the Company's stock in the initial public offering.
INTEREST YIELD/RATE SPREAD ANALYSIS
The following table sets forth for the periods indicated information regarding
(i) the Company's average balance sheet; (ii) the total dollar amounts of
interest income from interest-earning assets and the resulting average yields
(no tax equivalent adjustments were made); (iii) the total dollar amounts of
interest expense on interest-bearing liabilities and the resulting average
costs; (iv) average interest rate spread; and (vi) net interest margin.
Nonaccrual loan balances are included in total loans. Loan fees are included in
interest on total loans; however, such fees for all years presented are nominal.
IBS Financial Corp.
Spread Analysis
(Dollars in Thgousands)
Year Ended September 30,
1996 1995 1994
------------------------------ ----------------------------------- -------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- -------- ------ --------- -------- ------ --------- -------- ------
Interest-earning
assets:
Loans $159,628 $12,758 7.99% $138,619 $11,337 8.18% $147,691 $11,809 8.00%
Mortgage-backed
securities 380,677 28,226 7.41% 279,290 23,304 8.34% 121,176 12,005 9.91%
Investments 179,420 11,168 6.22% 290,121 17,051 5.88% 383,874 17,711 4.61%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-
earning assets 719,725 52,152 7.25% 708,030 51,692 7.30% 652,741 41,525 6.36%
------- ---- ------- ----
Noninterest-earning
assets 21,403 19,600 17,555
-------- -------- --------
Total assets $741,128 $727,630 $670,296
======== ======== ========
Interest-bearing
liabilities:
Deposits $572,826 26,753 4.67% 569,738 25,024 4.39% $611,514 25,674 4.20%
Borrowings 10,491 666 6.35% 0 0 0 0
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-
bearing
liabilities 583,317 27,419 4.70% 569,738 25,024 4.39% 611,514 25,674 4.20%
------- ---- ------- ---- ------- ----
Non-interest-
bearing
liabilities 5,655 3,763 3,524
Equity 152,156 154,129 55,258
-------- -------- --------
Total liabilities
and equity $741,128 $727,630 $670,296
======== ======== ========
Net interest income
and interest-rate
spread $24,733 2.55% $26,668 2.91% $15,851 2.16%
======= ==== ======= ==== ======= ====
Net yield on
interest-earning
assets 3.44% 3.77% 2.43%
==== ==== ====
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 123.38% 124.27% 106.74%
====== ====== ======
VOLUME/RATE ANALYSIS
The following tables set forth, among other things, the extent which changes in
interest rates and changes in the average balances of interest-earnings assets
and interest-bearing liabilities have affected interest income and expense
during the years ended September 30, 1996 and 1995.
IBS FINANCIAL CORP.
RATE VOLUME ANALYSIS
(DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, 1996 YEAR ENDED SEPTEMBER 30, 1995
---------------------------------------------------------------------------------------------
RATE/ RATE/
RATE VOLUME VOLUME TOTAL RATE VOLUME VOLUME TOTAL
---- ------ ------ ----- ----- ------ ------ -----
Interest Income:
Loans $ (263) 1,719 (35) 1,421 266 (726) (12) (472)
Mortgage-backed securities (2,597) 8,456 (937) 4,922 (1,902) 15,669 (2,468) 11,299
Investments (841) (7,207) 2,165 (5,883) 7,294 (4,322) (3,632) (660)
--------- ------ ----- ------ ------ ------ ------ ------
Total (3,701) 2,968 1,193 460 5,658 10,621 (6,112) 10,167
--------- ------ ----- ------ ------ ------ ------ ------
Interest expense:
Deposits 1,595 136 (2) 1,729 1,162 (1,755) (57) (650)
Borrowings 0 0 666 666 0 0 0 0
--------- ------ ----- ------ ------ ------ ------ ------
Total 1,595 136 664 2,395 1,162 (1,755) (57) (650)
--------- ------ ----- ------ ------ ------ ------ ------
Net change in net interest income $ (5,296) 2,832 529 (1,935) 4,496 12,376 (6,055) 10,817
========= ====== ===== ====== ====== ====== ====== ======
YEAR ENDED SEPTEMBER 30, 1994
------------------------------------------
RATE/
RATE VOLUME VOLUME TOTAL
---- ------ ------ -----
Interest Income:
Loans (425) (2,443) 57 (2,811)
Mortgage-backed securities (792) (5,271) 232 (5,831)
Investments (519) 3,180 48 2,709
------ ------ --- ------
Total (1,736) (4,534) 337 (5,933)
------ ------ --- ------
Interest expense:
Deposits (2,474) 60 (5) (2,419)
Borrowings 0 0 0 0
------ ------ --- ------
Total (2,474) 60 (5) (2,419)
------ ------ --- ------
Net change in net interest income 738 (4,594) 342 (3,514)
====== ====== === ======
PROVISION FOR LOAN LOSSES
The Company establishes provisions for loan losses, which are charged to
operations, in order to maintain the allowance for loan losses at a level which
is considered to be appropriate based upon loan and loss experience and an
evaluation of potential losses in the current loan portfolio, including the
evaluation of impaired loans under SFAS Nos. 114 and 118. A loan is considered
to be impaired when, based upon current information and events, it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the loan. An insignificant delay or insignificant
shortfall in the amount of payments does not necessarily result in the loan
being identified as impaired. For this purpose, delays less than 90 days are
considered to be insignificant. As of September 30, 1996, 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
September 30, 1996, the Company's impaired loans consisted of smaller balance
residential mortgage loans.
For the years ended September 30, 1996, 1995 and 1994, provisions for loan
losses were $30,000, $30,000 and $180,000, respectively. The reduced provision
during the year ended September 30, 1995 compared to the previous fiscal year
reflects a $3.2 million reduction in troubled debt restructuring of a commercial
real estate participation as well as a reduction in nonperforming loans. At
September 30, 1996, nonaccrual loans for which interest has been fully reserved
totaled approximately $827,000. The Company's allowance for loan losses
amounted to $1,204,000 or 145.6% of total nonperforming loans and troubled debt
restructurings and .55% of total loans receivable.
Although management utilizes its best judgment in providing for loan losses,
there can be no assurance that the Company will not have to increase its
provisions for loan losses 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 $687,000 for the year ended September 30,
1996, an increase of $24,000 or 3.6% over the comparable prior fiscal year. The
increase reflected a $70,000 gain on the sale of an investment as well as
increased loan fees and service charges on automated teller machine transactions
that was only partially offset by $100,000 of rental income from real estate
owned recognized in the prior fiscal year.
For the year ended September 30, 1995, other operating income decreased by $.2
million or 26.4% to $.7 million compared to $.9 million for the prior year. The
decline for the year ended September 30, 1995 reflects the absence of $.3
million of non-recurring income earned in fiscal 1994 associated with a troubled
debt restructuring, which was only partially offset by $.1 million of rental
income from real estate owned recognized in fiscal 1995.
OPERATING EXPENSES
Operating expenses amounted to $17.9 million for the year ended September 30,
1996, an increase of $5.7 million or 46.8% compared to $12.2 million for the
prior fiscal year. The SAIF special assessment amounted to $3.7 million of the
$5.7 million increase in operating expenses. On September 30, 1996 ,as part of
the omnibus appropriations package signed by the President, the government
mandated a special assessment to recapitalize the SAIF, which is part of the
Federal Deposit Insurance Corporation. The special assessment was levied
against all savings institutions in the country with deposits insured by the
SAIF. The Bank's future deposit insurance premiums will be significantly
reduced as a result of this recapitalization legislation. The annual deposit
insurance premiums will be reduced from $.23 for every $100 of deposits to $.064
for every $100 of deposits beginning January 1, 1997. The Bank expects to pay
approximately $.9 million less in insurance premiums during fiscal 1997 or
approximately $.06 per share based on the level of insured deposits at September
30, 1996.
Excluding the $3.7 million SAIF special assessment, operating expenses amounted
to $14.2 million, an increase of $2.0 million or 16.5% compared to the prior
fiscal year. Compensation and employee benefits increased $1.6 million or 21.8%
to $9.1 million from $7.5 million for the year ended September 30, 1995. The
substantial portion of this increase resulted from additional expenses
associated with the Company's ESOP of $.6 million, MRP of $.3 million and
supplemental pension plan of $.6 million. During fiscal 1996, the Company
terminated a defined benefit pension plan and the related supplemental pension
plan. The termination
resulted in an aggregate of $1.1 million of expense for these plans in fiscal
1996, which costs will not be incurred in fiscal 1997. As an additional cost
savings measure, the Company also eliminated all bonuses to senior management
in fiscal 1996. Professional fees and other expenses increased $.4 million
representing additional proxy contest expenses incurred in connection with
the Company's annual meeting, costs associated with pending litigation, and
additional professional fees incurred as a result of being a public reporting
company.
For the year ended September 30, 1995, operating expenses amounted to $12.2
million, an increase of $3.2 million or 35.5% compared to $9.0 million for the
prior fiscal year. Most of the increase was due to costs associated with the
implementation of the Company's ESOP and MRP. In addition, professional fees
also increased during the 1995 fiscal year reflecting the additional costs
associated with being a public reporting company as well as the new ESOP and MRP
plans that were being implemented. Advertising expenses also increased during
the year ended September 30, 1995 reflecting additional promotions regarding
mortgage loans and savings programs.
INCOME TAXES
For the years ended September 30, 1996, 1995 and 1994, the Company incurred
income tax expense of $2.9 million, $5.2 million and $2.6 million, respectively.
The decrease in fiscal 1996 and the increase in fiscal 1995 compared to the
prior year, respectively, in income tax expense generally follows the change in
income before income taxes as well as, for fiscal 1996, additional state income
tax expense. For additional information regarding income tax expense, refer to
Note 11 of Notes to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Association's primary sources of funds are deposits, repayments and
maturities of outstanding loans and mortgage-backed securities, maturities of
investment securities and other short-term investments, as well as advances from
the Federal Home Loan Bank and funds provided from operations. While scheduled
loan and mortgage-backed securities repayments and maturing investment
securities and short-term investments are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by the movement
of interest rates in general, economic conditions and competition. The
Association manages the pricing of its deposits to maintain a deposit balance
deemed appropriate and desirable. In addition, the Association invests in
short-term interest-earning assets which provide liquidity to meet lending
requirements. The Association also utilizes other borrowing sources,
principally advances from the Federal Home Loan Bank of New York. 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 $10.0
million from the Federal Reserve Bank of Philadelphia, without the need for
additional Board approval. In addition, during the year ended September 30,
1996 the Association's Board of Directors also provided management with the
authority to borrow up to $50 million from the Federal Home Loan Bank of New
York.
Liquidity management is both a daily and long-term function. Excess liquidity
is generally invested in short-term investments such as cash and cash
equivalents, U.S. Treasury, U.S. Government agencies and other qualified
investments. On a longer-term basis, the Association maintains a strategy of
investing in various mortgage-backed securities and other investment securities
and lending products. During the year ended September 30, 1996, the Association
used its sources of funds primarily to meet its ongoing commitments to pay
maturing savings certificates and savings withdrawals, fund loan and
mortgage-backed securities commitments and maintain an increasing portfolio of
mortgage-backed securities. At September 30, 1996, the total approved loan
commitments outstanding amounted to $4.9 million. Certificates of deposit
scheduled to mature in one year or less at September 30, 1996 totaled $242.8
million. Management of the Association believes that the Association has
adequate resources, including principal prepayments and repayments of loans and
mortgage-backed securities and maturing investments, to fund all of its
commitments to the extent required. Based upon its historical run-off
experience, management believes that a significant portion of maturing deposits
will remain with the Association.
The Association is required by the OTS to maintain average daily balances of
liquids assets and short-term liquid assets as defined in amounts equal to 5%
and 1%, respectively, of net withdrawable deposits and borrowings payable in one
year or less to assure its ability to meet demand for withdrawals and repayments
of short-term borrowings. The liquidity requirements may vary from time to time
at the direction of the OTS depending upon economic conditions and deposit
flows. The Association's average monthly liquidity ratio and short-term liquid
assets for September 30, 1996 was 14.0% and 13.0%, respectively. The
Association has substantially reduced its liquidity over the past two fiscal
years.
The Office of Thrift Supervision requires that the Company meet minimum
regulatory tangible, core and risk-based capital requirements. The Company is
required to maintain tangible capital equal to at least 1.5% of its adjusted
total assets, core capital equal to at least 3% of its adjusted total assets and
total capital equal to at least 8% of its risk-weighted assets. At September 30,
1996 the Company exceeded all regulatory capital requirements. At such date,
the Company had tangible capital equal to 19.3% of adjusted total assets, core
capital equal to 19.3% of adjusted total assets and total capital equal to 73.6%
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
The Company adopted Statement of Financial Accounting Standards ("SFAS") Nos.
114 and 118, "Accounting by Creditors for Impairment of a Loan and Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures", as of
October 1, 1995. This statement requires that certain impaired loans be
measured based on either the present value of expected future cash flows
discounted at the loan's effective interest rate, or the loan's observable
market price, or the fair value of the collateral if the loan is collateral
dependent. The adoption of these statements did not result in any additional
provisions for loan losses primarily because 100% of impaired loan valuations
continue to be based on the fair value of collateral.
In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 "Accounting for Stock-Based Compensation" which provides companies with
a choice either to expense the fair value of employee stock options over the
vesting period (recognition method) or to continue the current practice but
disclose the pro forma effects on net income and earnings per share had the fair
value method been used (disclosure only method). Companies electing the
disclosure only method will be required to include the pro forma effects of all
awards granted in fiscal years beginning after December 15, 1994. IBS Financial
Corp. elected the disclosure only method during this fiscal year.
On November 15, 1995, the FASB issued a Special Report, "A Guide to
Implementation of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities". On December 31, 1995, in accordance with the
provisions in the Special Report, the Company reclassified $307 million
of securities from held-to-maturity to available-for-sale. This
reclassification resulted in a $3.8 million unrealized gain, net of tax, which
was included in stockholders' equity at December 31, 1995. At September 30,
1996, this unrealized gain, net of tax, amounted to $1.0 million.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights and Excess Servicing Receivables and for Securitization of Mortgage
Loans", which is effective for years beginning after December 15, 1995. This
statement will require the Company to recognize servicing rights as assets,
regardless of how such assets were acquired. Additionally, the Company will be
required to assess the fair value of these assets at each reporting date to
determine any potential impairment. Management of the Company has not completed
an analysis of the effects this pronouncement will have on its results of
operations or financial position.
[LOGO]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
IBS Financial Corp.:
We have audited the accompanying consolidated statements of financial
condition of IBS Financial Corp. and subsidiaries (the "Company") as of
September 30, 1996 and 1995, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the three
years in the period ended September 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of IBS Financial Corp. and
subsidiaries at September 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended September 30, 1996 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Toche LLP
October 31, 1996
IBS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1996 AND 1995
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------------
ASSETS 1996 1995
---------- -----------
Cash and cash equivalents $ 12,466 $ 12,542
Investment securities held to maturity (estimated fair value 1996 -
$26,724; 1995 - $241,901) 26,712 241,345
Investment securities available for sale (amortized cost 1996 - $48,194) 48,337 -
Mortgage-backed securities held to maturity (estimated fair value
1996 - $285,831; 1995 - $323,630) 285,267 311,753
Mortgage-backed securities available for sale (amortized cost
1996 - $165,485) 166,994 -
Loans receivable - (net of allowance for loan losses 1996 -
$1,024; 1995 - $994) 185,031 141,781
Accrued interest receivable:
Loans 872 601
Mortgage-backed securities 2,682 3,069
Investments 965 3,394
Federal Home Loan Bank stock - at cost 4,590 3,672
Office properties and equipment - net 6,084 6,245
Prepaid expenses and other assets 2,051 2,134
--------- --------
TOTAL ASSETS $742,051 $726,536
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $571,366 $564,910
FHLB advances 18,792 -
Advances from borrowers for taxes and insurance 2,218 1,784
Accounts payable and accrued expenses 5,391 1,793
--------- --------
Total liabilities 597,767 568,487
--------- --------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 8)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 25,000,000
shares; issued, 11,609,723 shares 116 116
Additional paid-in capital 113,432 113,259
Common stock acquired by ESOP and MRP (11,097) (13,438)
Treasury stock - at cost; 1996 - 855,256 shares; 1995 - 580,486 shares (12,104) (7,751)
Net unrealized gain on securities available for sale, net of taxes 1,045 -
Retained earnings - substantially restricted 52,892 65,863
--------- ---------
Total stockholders' equity 144,284 158,049
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $742,051 $726,536
======== ========
See notes to consolidated financial statements.
-2-
IBS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(Dollars in Thousands Except Per Share Data)
- -------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
INTEREST INCOME:
Interest on loans $ 12,758 $ 11,337 $ 11,809
Interest on mortgage-backed securities 28,226 23,304 12,005
Interest and dividends on investments 11,168 17,051 17,711
--------- --------- ---------
Total interest income 52,152 51,692 41,525
--------- --------- ---------
INTEREST EXPENSE:
Deposits 26,753 25,024 25,674
Borrowings 666 - -
--------- --------- ---------
Total interest expense 27,419 25,024 25,674
--------- --------- ---------
NET INTEREST INCOME 24,733 26,668 15,851
PROVISION FOR LOAN LOSSES 30 30 180
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 24,703 26,638 15,671
--------- --------- ---------
OTHER OPERATING INCOME:
Loan fees and late charges 360 259 393
Other income 327 404 508
--------- --------- ---------
Total other operating income 687 663 901
--------- --------- ---------
OTHER EXPENSES:
Compensation and employee benefits 9,116 7,483 4,926
Federal insurance premiums 1,300 1,346 1,397
SAIF assessment 3,700 - -
Occupancy and equipment - net 1,134 1,141 1,078
Professional fees 759 486 263
Advertising and promotion 425 467 291
Data processing 442 430 415
Other operating expenses 1,055 862 645
--------- --------- ---------
Total other expenses 17,931 12,215 9,015
--------- --------- ---------
INCOME BEFORE INCOME TAXES 7,459 15,086 7,557
INCOME TAXES 2,922 5,166 2,594
--------- --------- ---------
NET INCOME $ 4,537 $ 9,920 $ 4,963
========= ========= =========
EARNINGS PER SHARE $ 0.43 $ 0.84 $ -
========= ========= =========
See notes to consolidated financial statements.
-3-
IBS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(Dollars in Thousands)
- ------------------------------------------------------------------------------
Common Net
Stock Unrealized
Additional Acquired by Gains (Losses) Total
Common Paid-in ESOP Treasury on AFS Retained Stockholders'
Stock Capital and MRP Stock Securities Earnings Equity
------- ----------- ------------ -------- -------------- --------- ------------
BALANCE, OCTOBER 1, 1993 $ - $ - $ - $ - $ - $ 52,631 $ 52,631
Net income - - - - - 4,963 4,963
------- ----------- ------------ -------- ------------- ---------- ------------
BALANCE, SEPTEMBER 30, 1994 - - - - - 57,594 57,594
Sale of 11,609,723 shares
of common stock, $.01 par value
(net of cost of $2,919) 116 113,062 - - - - 113,178
ESOP debt - - (9,288) - - - (9,288)
Payments on ESOP debt - - 1,063 - - - 1,063
Market adjustment - ESOP shares
released - 197 - - - - 197
Purchase of MRP stock - - (6,085) - - - (6,085)
MRP earned - - 872 - - - 872
Treasury stock purchased - - - (7,751) - - (7,751)
Cash dividends ($0.135 per share - - - - - (1,651) (1,651)
Net income - - - - - 9,920 9,920
-------- ---------- ----------- -------- -------- ---------- ---------
BALANCE, SEPTEMBER 30, 1995 116 113,259 (13,438) (7,751) - 65,863 158,049
Payments on ESOP debt - - 1,147 - - - 1,147
Market adjustment - ESOP shares
released - 388 - - - - 388
MRP earned - - 1,194 - - - 1,194
Treasury stock purchased - - - (19,830) - - (19,830)
Cash dividends ($0.234 per share) - - - - - (2,317) (2,317)
10% stock dividend - (180) - 15,371 - (15,191) -
Unrealized gain on transfer of
securities from held to
maturity to available for
sale, net of tax at December
1995 - - - - 3,149 - 3,149
Unrealized loss, net of taxes - - - - (2,104) - (2,104)
Stock option exercised - (35) - 106 - - 71
Net income - - - - - 4,537 4,537
-------- --------- ---------- ----------- ------- --------- ----------
BALANCE, SEPTEMBER 30, 1996 $ 116 $113,432 $(11,097) $ (12,104) $ 1,045 $ 52,892 $ 144,284
======== ========= ========== =========== ======= ========= ==========
See notes to consolidated financial statements.
-4-
IBS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(Dollars in Thousands)
- -------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 4,537 $ 9,920 $ 4,963
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and amortization 374 391 411
Provision for loan loss 30 30 180
Market adjustment on ESOP 388 197 -
MRP earned 1,194 872 -
Changes in assets and liabilities which
provided (used) cash:
Accrued interest receivable 2,545 (1,823) (733)
Prepaid expenses and other assets 83 1,385 (808)
Accounts payable and accrued expenses 2,991 256 (150)
------- -------- --------
Net cash provided by operating
activities 12,142 11,228 3,863
-------- --------- --------
INVESTING ACTIVITIES:
Principal repayments of:
Loans receivable 22,728 15,192 40,796
Mortgage-backed securities held to maturity 44,862 35,710 57,873
Mortgage-backed securities available for sale 33,916 - -
Purchases of:
Investments held to maturity (303,648) (640,701) (415,775)
Investments available for sale (10)
Mortgage-backed securities held to maturity (217,777) (164,572) (106,087)
Proceeds from:
Maturity of investments held to maturity 455,099 688,851 364,418
Maturity of investments available for sale 5,000
Loans originated or acquired (70,196) (16,818) (25,383)
Proceeds from loans sold 4,188 - -
(Purchase) redemption of Federal Home Loan
Bank stock (918) (1,068) 1,053
Proceeds from sale of real estate owned - 1,252 -
Proceeds from sale of investments 9,998 - -
Purchase of property and equipment (213) (543) (182)
-------- --------- --------
Net cash used in investing activities (16,971) (82,697) (83,287)
-------- --------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 6,456 (38,170) (6,725)
Net increase (decrease) in advances from
borrowers for taxes and insurance 434 129 (279)
Advances from FHLB 20,000 - -
Repayment of FHLB advances (1,208) - -
Cash dividends paid (2,317) (1,651) -
Proceeds from the sale of stock, net of ESOP
shares acquired - 103,890 -
Payments on ESOP debt 1,147 1,063 -
Treasury stock acquired (19,830) (7,751) -
Unearned MRP shares acquired - (6,085) -
Stock options exercised 71 - -
-------- -------- --------
Net cash provided by (used in)
financing activities 4,753 51,425 (7,004)
-------- -------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (76) (20,044) (86,428)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 12,542 32,586 119,014
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 12,466 $ 12,542 $ 32,586
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits $ 27,345 $ 25,025 $ 25,808
========= ========= =========
Income taxes $ 3,275 $ 4,345 $ 2,843
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES - Transfers from loans to real
estate owned $ 56 $ - $ 1,019
======== ======== =========
See notes to consolidated financial statements.
-5-
IBS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(Dollars in Thousands)
- ------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
IBS Financial Corp. (the "Company") is a New Jersey Corporation
organized in June 1994 for the purpose of acquiring all the capital stock
of Inter-Boro Savings and Loan Association (the "Association") issued in
the conversion of the Association to stock form (the "Conversion") which
was completed on October 13, 1994 (see Note 17). The Association is a New
Jersey chartered stock savings bank with ten branch offices in Camden,
Burlington and Gloucester counties.
The Association is principally in the business of attracting deposits
through its branch offices and investing those deposits together with
funds from borrowings and operations primarily in single-family residential
loans. The Company and the Association are supervised and regulated by
the New Jersey Banking Department, the Office of Thrift Supervision, the
Federal Reserve Bank, and the Federal Deposit Insurance Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The financial statements of the Company have been
prepared on the basis of generally accepted accounting principles. Due
to the Conversion, the financial statements for year ended September 30,
1994 have been previously reported upon as Inter-Boro Savings and Loan
Association.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of IBS Financial Corp. and its wholly owned
subsidiaries Inter-Boro Savings and Loan Association and IBS Investment
Corporation. All significant intercompany accounts and transactions have
been eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses
during the reporting period. The most significant estimates and
assumptions in the Company's financial statements affect the allowance for
loan losses. Actual results could differ from those estimates.
INVESTMENT AND MORTGAGE-BACKED SECURITIES - In May 1993, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS
IN DEBT AND EQUITY SECURITIES. The Company adopted SFAS No. 115 effective
October 1, 1994. There was no effect on stockholders' equity or net
income of initially applying the new standard. The Company adopted the
requirements of SFAS No. 115 to classify and account for debt and equity
securities as follows:
HELD TO MATURITY - Debt securities that management has the positive
intent and ability to hold until maturity are classified as held to
maturity and are carried at their remaining unpaid principal balance,
net of unamortized premiums or unaccreted discount. Premiums are
amortized and discounts are accreted using the interest method over the
estimated remaining term of the underlying security.
-6-
AVAILABLE FOR SALE - Debt and equity securities that will be held for an
indefinite period of time, including securities that may be sold in
response to changes in market interest or prepayment rates, needs for
liquidity and changes in the availability of and the yield of
alternative investments are classified as available for sale. These
assets are carried at their estimated fair value, which management has
determined to be market value. Market value is determined using
published quotes as of the close of business.
During 1995, FASB issued a Special Report, A GUIDE TO IMPLEMENTATION OF
STATEMENT NO. 115 ON ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES - QUESTIONS AND ANSWERS (the "Q&A Guide"). In December 1995,
in accordance with the provision of the Q&A Guide, the Company transferred
certain securities with an aggregate amortized cost of $199,401 from the
classification of held to maturity to available for sale.
REAL ESTATE OWNED - Real estate owned is initially recorded at the lower
of carrying value of the loan or fair value at the date of foreclosure
less costs to dispose. Costs relating to the development and improvement
of property are capitalized, and those relating to holding the property
are charged to expense.
OFFICE PROPERTIES AND EQUIPMENT - Office properties and equipment are
recorded at cost. Depreciation is computed using the straight-line method
over the expected useful lives (3-40 years) of the assets. The costs of
maintenance and repairs are expensed as they are incurred, and renewals
and betterments are capitalized.
ALLOWANCES FOR LOAN LOSSES - Allowances for loan losses primarily include
charges to reduce the recorded balances of mortgage loans receivable. The
charges can represent a general reserve on the entire mortgage portfolio
or specific reserves for individual loans.
Allowances are provided for specific loans when losses are probable and
can be estimated. When this occurs, management considers the remaining
principal balance and estimated net realizable value of the property
collateralizing the loan. Current and future operating and/or sales
conditions are considered. These estimates are susceptible to changes
that could result in material adjustments to results of operations.
Recovery of the carrying value of such loans is dependent, to a great
extent, on economic, operating and other conditions that may be beyond
management's control.
Loan loss reserves are established as an allowance for losses based on the
perceived risk of loss in the loan portfolio. In assessing risk,
management considers historical experience, volume and composition of
lending conducted by the Company, industry standards, status of
nonperforming loans, general economic conditions as they relate to the
Company's market area, and other factors related to the collectibility of
the Association's loan portfolio.
The Company adopted SFAS Nos. 114 and 118, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN and ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A
LOAN - INCOME RECOGNITION AND DISCLOSURES, as of October 1, 1995. SFAS
No. 114 requires that certain impaired loans be measured based either on
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. The adoption
of SFAS Nos. 114 and 118 did not result in additional provisions for loan
losses primarily because 100% of impaired loan valuations continue to be
based on the fair value of collateral.
-7-
INCOME RECOGNITION ON LOANS - Interest on loans is credited to income when
earned. Accrual of loan interest is discontinued and a reserve established
on existing accruals if management believes that after considering economic
and business conditions and collection efforts, the borrowers' financial
condition is such that collection of interest is doubtful.
DEFERRED LOAN FEES - The Company defers all loan origination fees net of
certain direct loan origination costs, and recognizes fees by accretion
into income as a yield adjustment over the life of the loan using the
interest method.
EARNINGS PER SHARE- For the year ended September 30, 1996, earnings per
share is based on income for the year ended September 30, 1996 divided by
the weighted-average number of shares and equivalent shares outstanding
during the period of 10,478,884. For the year ended September 30, 1995,
earnings per share is based on income from October 13, 1994 (the date of
the initial public offering) through September 30, 1995 of $9,679 divided
by the weighted-average number of shares and equivalent shares outstanding
during the period of 11,536,650 (restated for the stock dividend issued in
March 1996). Since the initial offering was completed on October 13, 1994,
earnings per share information for prior years is not applicable.
INCOME TAXES - The Company accounts for income taxes in accordance with
SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Under this method, deferred
income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future
years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Also under SFAS No. 109,
the effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash and
cash equivalents include cash and amounts due from depository institutions,
and federal funds sold with original maturities of less than 90 days.
STOCK OPTIONS - The Company accounts for stock options under Accounting
Principles Board Opinion No. 25 which measures compensation cost using the
intrinsic value based method. In October 1995, the FASB issued SFAS No.
123, ACCOUNTING FOR STOCK BASED COMPENSATION, establishing financial
accounting and reporting standards for stock-based employee compensation
plans. This statement encourages all entities to adopt a new method of
accounting to measure compensation cost of all employee stock compensation
plans based on the estimated fair value of the award at the date it is
granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the INTRINSIC VALUE BASED METHOD
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the
existing accounting are required to disclose in a footnote to the financial
statements proforma net income and, if presented, earnings per share, as if
this Statement had been adopted. The accounting requirements of this
Statement are effective for transactions entered into fiscal years that
begin after December 15, 1995; however, companies are required to disclose
information for awards granted in their first fiscal year beginning after
December 15, 1994. Proforma disclosures for awards granted in the first
fiscal year beginning after December 15, 1995 need not be included in
financial statements for that fiscal year but shall be presented
subsequently whenever financial statements for that fiscal year are
presented for comprehensive purposes with financial statements in a later
fiscal year. Management of the Company has not completed an analysis of
the potential effects of this Statement on its financial condition or
results of operations.
-8-
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS - In May 1995, the FASB issued
SFAS No. 122, ACCOUNTING FOR MORTGAGE SERVICING RIGHTS AND EXCESS SERVICING
RECEIVABLES AND FOR SECURITIZATION OF MORTGAGE LOANS. SFAS No. 122, which
is effective for the years beginning after December 15, 1995, will require
the Company to recognize servicing rights as assets, regardless of how such
assets were acquired. Additionally, the Company would be required to
assess the fair value of these assets at each reporting date to determine
any potential impairment. Management of the Company has not completed an
analysis of the effects this pronouncement would have on its results of
operations or financial position. Although superseded, this standard is
applicable until the effective date of SFAS No. 125.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES - In June 1996, FASB issued SFAS
No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES. SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on consistent
application of a FINANCIAL-COMPONENTS APPROACH that focuses on control.
Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control
has been surrendered, and derecognizes liabilities when extinguished.
This statement requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be
initially measured at fair value, if practicable. It also requires that
servicing assets and other retained interests in the transferred assets
be measured by allocating the previous carrying amount between the assets
sold, if any, and retained interests, if any, based on their relative fair
values at the date of the transfer.
This statement amends SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES, to clarify that a debt security may not be
classified as held-to-maturity if it can be prepaid or otherwise settled
in such a way that the holder of the security would not recover
substantially all of its recorded investment. This statement amends and
extends to all servicing assets and liabilities the accounting standards
for mortgage servicing rights now in SFAS No. 65, ACCOUNTING FOR CERTAIN
MORTGAGE BANKING ACTIVITIES, and supersedes SFAS No. 122, ACCOUNTING FOR
MORTGAGE SERVICING RIGHTS.
This statement is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively. Earlier or retroactive application is not
permitted. Management has not yet determined the effect of adopting this
standard.
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at September 30, 1996 and 1995 consist of the
following:
1996 1995
------- -------
Cash and amounts due from banks $ 4,966 $ 6,192
Federal funds sold - CoreStates (Interest rate,
1996 - 5.625%;
1995 - 6.375%) 7,500 6,350
------- -------
Total $12,466 $12,542
======= =======
-9-
4. INVESTMENT SECURITIES
A comparison of amortized cost and estimated fair value of investment
securities is as follows:
Held to Maturity
September 30, 1996
--------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ---------- ---------- ----------
U.S. Government obligations $ 26,366 $ 12 $ - $ 26,378
Term and other deposits in the Federal
Home Loan Bank 346 - - 346
--------- ----- ---- ---------
Total $ 26,712 $ 12 $ - $ 26,724
========= ===== ==== =========
Available for Sale
September 30, 1996
--------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ---------- ---------- ----------
U.S. Government obligations $ 48,194 $ 143 $ - $ 48,337
========= ====== ===== =========
Held to Maturity
September 30, 1995
--------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ---------- ---------- ----------
U.S. Government obligations $ 164,971 $ 682 $ 126 $ 165,527
Term and other deposits in the Federal
Home Loan Bank 76,374 - - 76,374
--------- ----- ---- ---------
Total $ 241,345 $ 682 $126 $ 241,901
========= ===== ==== =========
The amortized cost and estimated fair value of debt securities by
contractual maturity at September 30, 1996 are shown below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Estimated
Amortized Fair
Cost Value
--------- ---------
Due in one year or less $ 74,906 $ 75,061
Due after one year through
five years - -
-------- --------
$ 74,906 $ 75,061
======== ========
-10-
5. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at September 30, 1996 and 1995 consisted of the
following:
Held to Maturity
September 30, 1996
----------------------------------------------------
Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ---------- ---------- ---------
FNMA pass-through certificates $ 29,082 $ - $ 832 $ 28,250
GNMA pass-through certificates 115,903 5,718 63 121,558
FHLMC pass-through certificates 139,556 227 4,465 135,318
Private pass-through certificates
(noninsured) 726 - 21 705
-------- ------- ------ --------
Total $285,267 $ 5,945 $5,381 $285,831
======== ======= ====== ========
Available for Sale
September 30, 1996
----------------------------------------------------
Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ---------- ---------- ---------
FNMA pass-through certificates $ 12,043 $ 343 $ - $ 12,386
GNMA pass-through certificates 15,509 220 - 15,729
FHLMC pass-through certificates 137,933 1,325 379 138,879
-------- ------- ------ --------
Total $165,485 $ 1,888 $ 379 $166,994
======== ======= ====== ========
Held to Maturity
September 30, 1995
----------------------------------------------------
Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ---------- ---------- ---------
FNMA pass-through certificates $ 17,280 $ 491 $ - $ 17,771
GNMA pass-through certificates 142,054 8,488 - 150,542
FHLMC pass-through certificates 151,549 2,925 - 154,474
Private pass-through certificates
(noninsured) 870 - 27 843
-------- ------- ------ --------
Total $311,753 $11,904 $ 27 $323,630
======== ======= ====== ========
-11-
6. LOANS RECEIVABLE
Loans receivable consist of the following:
September 30,
----------------------
1996 1995
-------- --------
Mortgage loans (1-4 residential loans) $164,717 $132,251
Construction loan 1,256 1,889
Loans on savings accounts 2,472 2,616
Commercial real estate loans 19,548 8,548
Consumer loans 813 125
-------- --------
Total 188,806 145,429
Less:
Deferred loan fees (1,572) (982)
Allowance for loan losses (1,024) (994)
Loans in process (1,179) (1,672)
-------- --------
Total $185,031 $141,781
======== ========
At September 30, 1996 and 1995, the Company had outstanding commitments to
purchase and originate fixed rate (ranging from 6.5% to 8.0%) mortgage
loans totaling $6,554 and $5,049, respectively. All commitments are
expected to be funded within 12 months. The Company uses the same credit
policies in extending commitments as it does for loans.
The Company originates and purchases both adjustable and fixed interest
rate loans and mortgage-backed securities. At September 30, 1996, the
composition of these loans and mortgage-backed securities are $552,748 at
fixed interest rates and $83,035 at adjustable interest rates.
The adjustable rate loans and mortgage-backed securities have interest
rate adjustment limitations and are generally indexed to the one-year U.S.
Treasury Note rate. Future market factors may affect the correlation of
the interest rate adjustment with the rates the Association pays on the
short-term deposits that have been primarily utilized to fund these loans.
Certain directors and executive officers of the Company have loans with the
Company. Such loans were made in the ordinary course of business at the
Company's normal credit terms, including interest rate and
collateralization, and do not represent more than a normal risk of
collection. Total loans to these individuals are summarized as follows:
September 30,
--------------
1996 1995
----- -----
Balance, beginning of year $ 216 $ 223
New loans made during year 3 -
Repayments (7) (7)
----- -----
Balance, end of year $ 212 $ 216
===== =====
-12-
Most of the Company's activity is with customers located within the state
of New Jersey; therefore, the Company is lending subject to a concentration
of credit risk as it relates to this economic sector.
Changes in the allowance for loan losses were as follows:
Year Ended September 30,
-------------------------
1996 1995 1994
------- ---- -------
Balance, beginning of year $ 994 $530 $ 1,669
Provision for loan losses 30 30 180
Charge-offs - - (1,319)
Recoveries - 434 -
------ ---- ------
Balance, end of year $1,024 $994 $ 530
====== ==== ======
The provision for loan losses charged to expense is based upon past loan
and loss experience and an evaluation of potential losses in the current
loan and lease portfolio, including the evaluation of impaired loans under
SFAS No. 114. A loan is considered to be impaired when, based upon
current information and events, it is probable that the Association will
be unable to collect all amounts due according to the contractual terms
of the loan. An insignificant delay or insignificant shortfall in amounts
of payments does not necessarily result in the loan being identified as
impaired. For this purpose, delays less than 90 days are considered to
be insignificant. SFAS No. 114 does not apply to large groups of smaller
balance homogeneous loans that are collectively evaluated for impairment,
except for those loans restructured under a troubled debt restructuring.
At September 30, 1996, the Association has no loans considered impaired
under SFAS No. 114.
Nonperforming loans (which include loans in excess of 90-day delinquency)
at September 30, 1996, 1995 and 1994 amounted to approximately $827, $663
and $1,005, respectively. The reserve for delinquent interest on loans
totaled $58, $49 and $49 at September 30, 1996, 1995 and 1994,
respectively.
7. MORTGAGE BANKING ACTIVITIES
At September 30, 1996, 1995 and 1994, the Company was servicing loans for
others amounting to approximately $1,718, $5,045 and $4,336, respectively.
Servicing loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors
and foreclosure processing. Loan servicing income is recorded on the
accrual basis and includes servicing fees from investors and certain
charges collected from borrowers, such as late payment fees.
-13-
8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at September 30, 1996 and 1995 are
summarized as follows:
1996 1995
------- -------
Land and buildings $ 9,009 $ 8,841
Furniture and equipment 1,990 1,947
Leasehold improvements 110 110
------- -------
Total 11,109 10,898
Accumulated depreciation and amortization (5,025) (4,653)
------- -------
Net $ 6,084 $ 6,245
======= =======
Rental expense under operating leases for certain branch offices amounted
to $105, $92 and $98 for the years ended September 30, 1996, 1995 and 1994,
respectively. The following is a summary of future minimum lease payments
required under the leases:
Year Ending Minimum
September 30, Lease Payments
--------------
1997 $ 83
1998 66
1999 45
2000 30
2001 -
-----
Total $ 224
======
-14-
9. DEPOSITS
The major types of savings deposits by weighted interest rates, amounts
and the percentages of such types to total savings deposits at
September 30, 1996 and 1995 were as follows:
1996 1995
------------------------------------- -------------------------------------
Weighted Weighted
Percentage Interest Percentage Interest
Amount of Total Rate Amount of Total Rate
--------- ---------- ------------ ---------- ---------- -----------
Balances by interest rate:
NOW accounts $ 23,886 4.2 % 1.82 % $ 22,909 4.1 % 2.07 %
Money market deposit accounts 70,023 12.2 2.86 74,933 13.3 3.16
Passbook and club accounts 59,323 10.4 2.74 62,950 11.1 2.99
Interest Interest
Rate Rate
Range Range
-------- --------
Certificates by maturity:
Within 1 year 242,804 42.5 % 3.50 - 6.65 218,024 38.6 3.05 - 6.25
1 to 3 years 144,369 25.3 5.00 - 7.10 116,835 20.7 4.35 - 7.10
Beyond 3 years 30,600 5.3 5.25 - 9.00 68,877 12.1 5.00 - 9.00
--------- ---- --------- ----
Total certificates 417,773 73.1 403,736 71.4
--------- ---- --------- ----
Accrued interest on savings 361 0.1 382 0.1
--------- ---- --------- ----
Total deposits $ 571,366 100.0 % $ 564,910 100.0 %
========= ===== ========= =====
A summary of interest expense on deposits is as follows:
Year Ended September 30,
----------------------------
1996 1995 1994
------- ------- ------
NOW $ 460 $ 492 $ 521
MMDA 2,113 2,586 2,941
Passbook and club 1,717 1,992 2,095
Certificates 22,463 19,954 20,117
------- ------- ------
Total $26,753 $25,024 $25,674
======= ======= =======
10. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK
Advances from the Federal Home Loan Bank of New York which are amortizing
are as follows:
Interest September 30,
Due Rate 1996
---- -------- -------------
2001 5.918 % $ 9,275
2003 6.164 % 9,517
--------
$ 18,792
========
-15-
The advances are collateralized by Federal Home Loan Bank stock and
substantially all first mortgage loans.
11. INCOME TAXES
The income tax provision consists of the following:
1996 1995 1994
------- ------- -------
Current:
Federal $ 3,439 $ 4,888 $ 2,694
State 261 550 199
------- ------- -------
Total current 3,700 5,438 2,893
------- ------- -------
Deferred:
Federal (752) (267) (293)
State (26) (5) (6)
------- ------- -------
Total deferred (778) (272) (299)
------- ------- -------
Total income tax provision $ 2,922 $ 5,166 $ 2,594
======= ======= =======
The Company's provision for income taxes differs from the amounts
determined by applying the statutory federal income tax rate to income
taxes for the following reasons:
1996 1995 1994
----------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Tax at federal rate $2,611 35.0% $5,280 35.0% $2,645 35.0%
Surtax exemption (75) (1.0) (100) (0.7) (76) (1.0)
State taxes 155 2.0 360 2.4 127 1.7
Other 231 3.0 (374) (2.5) (102) (1.4)
------ ---- ------ ----- ------ ----
Total $2,922 39.0% $5,166 34.2% $2,594 34.3%
====== ==== ====== ==== ====== ====
-16-
Items that gave rise to significant portions of the deferred tax
accounts, which are included in prepaid expenses and other assets at
September 30, 1996 and 1995, are as follows:
1996 1995
------- -------
Deferred tax assets:
SAIF special assessment $ 1,258 $ -
Deferred loan fees 293 353
Deferred loan costs 9 38
Supplemental pension 514 235
Deferred compensation - 360
Accrued interest expense on CDs 77 96
Deferred income 445 223
Other 93 269
------- -------
Total 2,689 1,574
------- -------
Deferred tax liabilities:
Unrealized gain on investments (596) -
Allowance for loan loss (753) (296)
Depreciation on office property and equipment (762) (882)
------- -------
Total (2,111) (1,178)
------- -------
Net deferred tax assets $ 578 $ 396
======= =======
The Company is permitted under the Internal Revenue Code (the "Code") to
deduct an annual addition to the reserve for bad debts in determining
taxable income, subject to certain limitations. The Company's deduction
is based upon the percentage of taxable income method as defined by the
Code. The bad debt deduction allowable under this method equals 8% of
taxable income determined without regard to that deduction and with
certain adjustments. This addition differs from the bad debt experience
used for financing accounting purposes.
In August 1996, the Small Business Job Protection Act (the "Act") was
signed into law. The Act repealed the percentage of taxable income
method of accounting for bad debts for thrift institutions effective for
years beginning after December 31, 1995. The Act required the Company as
of October 1, 1996 to change its method of computing reserves for bad
debts to the specific charge-off method. The bad debt deduction
allowable under this method is available to large banks with assets
greater than $500 million. Generally, this method will allow the
Company to deduct an annual addition to the reserve for bad debts equal
to the Association's charge-offs.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in a method of
accounting determined solely with respect to the "applicable excess
reserves" of the institution. The amount of the applicable excess
reserves will be taken into account ratably over a six-taxable year
period, beginning with the first taxable year beginning after December
31, 1995. The timing of this recapture may be delayed for a two-year
period provided certain residential loan requirements are met. For
financial reporting purposes, the Company will not incur any additional
tax expense. Amounts which had previously been deferred will be reversed
for financial reporting purposes and will be included in the income tax
return of the Company, increasing income tax payable. At
-17-
September 30, 1996, under SFAS No. 109, deferred taxes totaling
approximately $800 were provided relating to such difference.
12. REGULATORY CAPITAL REQUIREMENTS
The Association is subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and
possibly additional discretionary--actions by regulators that, if
undertaken, could have a direct material effect on the Association's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Association must
meet specific capital guidelines that involve quantitative measurers of
the Association's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
Association's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Association to maintain minimum amounts and ratios
(set forth in the table below) of tangible and core capital (as defined
in the regulations) to total adjusted assets (as defined), and of
risk-based capital (as defined) to risk-weighted assets (as defined).
Management believes, as of September 30, 1996, that the Association
meets all capital adequacy requirements to which it is subject.
As of September 30, 1996, the most recent notification from the Office
of Thrift Supervision categorized the Association as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Association must maintain minimum
tangible, core and risk-based ratios as set forth in the table. There
are no conditions or events since that notification that management
believes have changed the Association's category.
AT SEPTEMBER 30, 1996:
Well Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
-------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
Tangible $143,239 19.31% $11,126 1.5% N/A N/A
Core (Leverage) 143,239 19.31% 22,252 3.0% 37,086 5.0%
Tier 1 risk-based 143,239 73.11 7,837 4.0 11,756 6.0
Total risk-based 143,263 73.63 15,675 8.0 19,594 10.0
AT SEPTEMBER 30, 1995:
Well Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
-------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
Tangible $124,015 17.90% $10,390 1.5% N/A N/A
Leverage 124,015 17.90% 20,779 3.0% 41,558 5.0%
Tier 1 risk -based 124,015 78.30 6,332 4.0 9,498 6.0
Total risk-based 125,009 79.00 12,664 8.0 15,830 10.0
13. PENSION PLAN
The Company terminated the defined benefit retirement plan effective
September 1, 1996. Pending regulatory approval, the remaining net
assets, if any, will be distributed to participants on a pro rata basis.
Total pension expense for the year ending September 30, 1996 was $334.
-18-
The net periodic pension costs for the years ended September 30, 1995
and 1994 included the following components:
1995 1994
------ -----
Service cost, benefits earned during the year $195 $ 185
Interest cost on projected benefit obligation 266 173
Actual return on plan assets (226) (220)
Amortization of unrecognized net assets and
other deferred amounts, net 16 13
---- -----
Net periodic pension cost $251 $ 151
==== =====
The following table sets forth the plan's funded status as of September
30, 1995:
1995
Actuarial present value of benefit obligation
(including vested benefit obligation $3,087) $3,151
======
Projected benefit obligation $3,996
Market value of plan assets 3,554
------
Plan assets less than projected benefit obligation (442)
Unrecognized net loss 839
Unrecognized net transition obligation being
amortized over fifteen years 75
------
Net pension asset $ 472
======
In determining the projected benefit obligation, the assumed discount
rate for each of the two years ended September 30, 1995 was 7.5%. The
weighted average rate of increase in compensation was 5%. The expected
long-term rate of return on assets used in determining net periodic
pension cost was 7.5%.
The Company also terminated a Supplemental Executive Retirement Plan
effective September 1, 1996. Total expense for the year ending
September 30, 1996 was $824.
-19-
14. EMPLOYEE STOCK OWNERSHIP PLAN AND RECOGNITION AND RETENTION PLAN
In connection with the Conversion, the Company established an ESOP for
the benefit of eligible employees. The Company purchased 928,777 shares
(1,021,654 shares restated for the stock dividend issued in March 1996)
of common stock on behalf of the ESOP in the Conversion. At September
30, 1996 and 1995, 77,994 and 78,657 shares of the total ESOP shares
were committed to be released with 142,408 and 23,219 shares allocated
to participants, respectively. The Company accounts for its ESOP in
accordance with Statement of Position 93-6, EMPLOYERS' ACCOUNTING FOR
EMPLOYEE STOCK OWNERSHIP PLANS, which requires the Company to recognize
compensation expense equal to the fair value of the ESOP shares during
the periods in which they become committed to be released. To the
extent that the fair value of the ESOP shares differs from the cost of
such shares, this differential will be charged or credited to equity as
additional paid-in capital. During 1996 and 1995, the differential
aggregated $388 and $197, respectively. Management expects the recorded
amount of expense to fluctuate as continuing adjustments are made to
reflect changes in the fair value of the ESOP shares. Employers with
internally leveraged ESOP's, such as the Company, do not report the loan
receivable from the ESOP as an asset, and do not report the ESOP debt
from the employer as a liability. The Company recorded compensation and
employee benefit expense related to the ESOP of $1,901 and $1,345,
respectively for the years ended September 30, 1996 and 1995.
At the Company's annual meeting of stockholders held on January 19,
1995, the Recognition and Retention Plan and Trust (the "MRP") was
approved by the Company's stockholders. The MRP purchased 510,827
shares in the open market at an aggregate cost of $6,085 and all shares
available under the MRP have been awarded to the Company's Board of
Directors and the Association's executive officers and other key
employees.
At September 30, 1996 and 1995, respectively, the net deferred cost of
the unearned MRP shares amounted to $4,891 and $5,213 and is recorded as
a charge against stockholders' equity. Compensation expense will be
recognized over the five year vesting period for shares awarded. The
Company recorded compensation and employee benefit expense related to
the MRP of $1,194 and $872 for the years ended September 30, 1996 and
1995, respectively.
15. STOCK OPTION PLAN
The Company has a stock option plan which was established and approved
by the stockholders at the annual stockholders' meeting held on January
19, 1995. The 1995 Plan is for executive officers and selected
full-time employees and directors.
Under this plan, compensatory options were granted to non-employee
directors and incentive options were granted to selected officers
and employees. The option price per share for options granted may
not be less than the fair market value of the common stock on the
date of grant.
The compensatory options are exercisable six months after issuance in
increments of 85% with 7.5% exercisable in each of the two years
thereafter. The incentive options are exercisable one year after
issuance in increments of 20% a year. All options expire in 10 years.
-20-
A summary of transactions under the Plan at September 30, 1996 and 1995
follows. All amounts are restated for the stock dividend issued in
March 1996.
September 30, 1996 September 30, 1995
----------------------------------------------------------- ---------------------------------------
Exercise price $ 9.432 $12.955 $13.864 $14.500 Total $9.432 $12.955 $13.864 Total
========== ======= ======= ======= ======= ====== ======= ======= =======
Outstanding,
beginning of
year 1,119,656 24,750 28,736 - 1,173,142 - -- - -
Options:
Granted - - - 2,000 2,000 1,119,656 24,750 28,736 1,173,142
Exercised (7,547) - - - (7,547) - - - -
Forfeited - - - - - - - - -
---------- ------- ------- ------ ---------- ---------- -------- ------- ----------
Outstanding,
end of year 1,112,109 24,750 28,736 2,000 1,167,595 1,119,656 24,750 28,736 1,173,142
---------- ------- ------- ------ ---------- ---------- -------- ------- ----------
Options exercisable 478,702 4,950 28,736 - 512,388 325,644 - - 325,644
========== ======= ======= ====== ========== ========== ======== ======= ==========
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. The estimated
fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data
to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
September 30, 1996 September 30, 1995
----------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ----------
Assets:
Cash and cash equivalents $ 12,466 $ 12,466 $ 12,542 $ 12,542
Investment securities held
to maturity 26,712 26,724 241,345 241,901
Investment securities available
for sale 48,337 48,337 - -
Mortgage-backed securities held
to maturity 285,267 285,831 311,753 323,630
Mortgage-backed securities
available for sale 166,994 166,994 - -
Loans receivable, net 185,031 188,799 141,781 142,978
Federal Home Loan Bank stock 4,590 4,590 3,672 3,672
Liabilities:
NOW accounts 23,886 23,886 22,909 22,909
Money market deposit accounts 70,023 70,023 74,933 74,933
Passbook and club accounts 59,323 59,323 62,950 62,950
Savings certificates 417,773 410,192 403,736 400,434
Advances from FHLB 18,792 18,792
Off-balance sheet commitments - 6,554 - 5,049
-21-
CASH AND CASH EQUIVALENTS - For cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES - The fair value of
investment securities and mortgage-backed securities is based on quoted
market prices, dealer quotes, and prices obtained from independent pricing
services.
LOAN RECEIVABLE - The fair value of loans is estimated based on present
value using approximately current entry-value interest rates applicable
to each category of such financial instruments.
FEDERAL HOME LOAN BANK STOCK - Although FHLB stock is an equity interest
in an FHLB, it is carried at cost because it does not have a readily
determinable fair value and it lacks a market.
NOW ACCOUNTS, MONEY MARKET DEPOSIT ACCOUNTS, PASSBOOK AND CLUB ACCOUNTS
AND SAVINGS CERTIFICATES - The fair value of NOW accounts, Money Market
Deposit accounts and passbook and club accounts is the amount reported in the
consolidated financial statements. The fair value of savings
certificates is based on a present value estimate using rates currently
offered for deposits of similar remaining maturity.
ADVANCES FROM FEDERAL HOME LOAN BANK - The fair value is the amount
payable on demand at the reporting date.
OFF-BALANCE SHEET COMMITMENTS - For commitments expiring within 90 days
or with a variable rate, the settlement amount is a reasonable estimate
of fair value. For commitments expiring beyond 90 days or with a fixed rate,
the fair value is the present value of the fees based on current loan
rates.
The fair value estimates presented herein are based on pertinent
information available to management as of September 30, 1996 and 1995.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these consolidated financial
statements since those dates and, therefore, current estimates of fair
value may differ significantly from the amounts presented herein.
17. STOCK CONVERSION
On October 13, 1994, the Association completed its Conversion from a New
Jersey chartered mutual savings and loan association to a New Jersey
chartered stock savings and loan association through the sale of 11,609,723
shares of common stock (par value $.01) of IBS Financial Corp., a New
Jersey corporation organized in June 1994 by the Association for the purpose
of acquiring all of the capital stock of the Association upon
consummation of the Conversion. Total proceeds of $116,097 were reduced by
Conversion expenses of approximately $2,919 and the excess of proceeds
over the par value of the stock was credited to paid-in capital in
excess of par. As a result of this Conversion, $56,600 of additional capital
was contributed to the Association from this newly formed holding
company in exchange for all of the outstanding capital stock of the
Association.
At the time of the Conversion, the Association established a liquidation
account in an amount equal to the Association's net worth as reflected
in the latest consolidated statement of financial condition of the
Association contained in the offering circular utilized in the
Conversion. The function of the liquidation account is to establish a
priority on liquidation and, except with respect to the payment of cash
dividends on, or the repurchase of, any of the common stock by the
Association, the existence of the liquidation account will not operate
to restrict the use or application of any of the net worth accounts of the
-22-
Association. In the event of a complete liquidation of the Association
(and only in such event), each eligible account holder will be entitled
to receive a pro rata distribution from the liquidation account, based on
such holder's proportionate amount of the total current adjusted balance
from deposit accounts then held by all eligible account holders, before any
liquidation distribution may be made with respect to stockholders.
18. SAVINGS ASSOCIATION INSURANCE FUND ASSESSMENT
On September 30, 1996, an omnibus appropriations bill for fiscal year
1997, which includes the recapitalization of the Savings Association
Insurance Fund (SAIF) became law. Accordingly, all SAIF insured depository
institutions will be charged a one-time special assessment on their
SAIF-accessible deposits as of March 31, 1995 at the rate of 65.7 basis
points, payable on November 27, 1996. The Bank accrued $3,700 for this
special assessment at September 30, 1996.
19. PARENT COMPANY FINANCIAL INFORMATION
The financial statements of IBS Financial Corp. (Parent only) as of and
for the periods ended September 30,1996 and 1995 are presented below:
STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996 AND 1995
(Dollars in Thousands)
- -------------------------------------------------------------------------------
ASSETS 1996 1995
-------- --------
Cash $ 122 $ 74
Investment in subsidiary 144,242 124,018
Investment securities held to maturity 354 34,000
Other assets 5 702
-------- --------
TOTAL ASSETS $144,723 $158,794
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES - Accrued expenses and other liabilities $ 439 $ 745
-------- --------
STOCKHOLDERS' EQUITY:
Common stock 116 116
Additional paid-in capital 113,432 113,259
Common stock acquired by ESOP and MRP (11,097) (13,438)
Treasury stock (12,104) (7,751)
Retained earnings 53,937 65,863
-------- --------
Total stockholders' equity 144,284 158,049
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $144,723 $158,794
======== ========
-23-
STATEMENT OF INCOME
PERIODS ENDED SEPTEMBER 30, 1996 and 1995
(Dollars in Thousands)
- --------------------------------------------------------------------------------
1996 1995
-------- --------
Interest income:
Interest on ESOP loan $ 701 $ 746
Interest and dividends on investments 1,109 2,762
------ ------
Total interest income 1,810 3,508
------ ------
Other operating income - 29
------ ------
Other expenses:
Management fee 980 1,132
Salaries and employee benefits 24 -
Professional services 451 139
Other operating expenses 350 224
Total other expenses 1,805 1,495
------ ------
Income before income taxes and equity in undistributed
earnings of subsidiaries 5 2,042
Income taxes (6) 827
------ ------
Income before equity in undistributed earnings of
subsidiaries 11 1,215
Equity in undistributed earnings of subsidiaries 4,526 8,705
------ ------
Net income $4,537 $9,920
====== ======
-24-
STATEMENT OF CASH FLOWS
PERIODS ENDED SEPTEMBER 30, 1996 and 1995
(Dollars in Thousands)
- -------------------------------------------------------------------------------
1996 1995
-------- --------
Operating activities:
Net income $ 4,537 $ 9,920
Changes in assets and liabilities which
provided (used) cash:
Other assets 697 (702)
Accrued expenses and other liabilities (306) 745
Equity in undistributed earnings of subsidiaries (4,526) (8,705)
-------- --------
Net cash provided by operating activities 402 1,258
-------- --------
Investing activities:
Proceeds from maturity of investments 18,993 -
Purchase of investments - (34,000)
Investment in subsidiary - (57,719)
-------- --------
Net cash provided by (used in) investing
activities 18,993 (91,719)
-------- --------
Financial activities:
Cash dividends paid (2,317) (1,651)
Payments on ESOP debt, net 1,535 1,260
Treasury stock acquired (19,830) (7,751)
Amortization of MRP shares 1,194 -
Stock options exercised 71 -
Proceeds from the sale of stock, net of ESOP
shares acquired - 103,890
Unearned MRP shares acquired, net - 5,213
-------- --------
Net cash (used in) provided by financing
activities (19,347) 90,535
-------- --------
Increase in cash and cash equivalents 48 74
Cash and cash equivalents, beginning of period 74 -
-------- --------
Cash and cash equivalents, end of period $ 122 $ 74
======== ========
Supplemental noncash investing activity:
Transfer of investment securities to subsidiaries $ 12,100 $ -
======== ========
-25-
20. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized quarterly data for each of the
last two years:
Three Months Ended
--------------------------------------------------------------------------------------
Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31
1996 1996 1996 1995 1995 1995 1995 1994
------- ------- ------- ------- ------- ------- ------- -------
Interest income $13,113 $13,090 $12,847 $13,102 $13,073 $13,355 $12,905 $12,359
Interest expense 6,930 6,896 6,750 6,843 6,649 6,426 6,044 5,905
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 6,183 6,194 6,097 6,259 6,424 6,929 6,861 6,454
Provision for loan losses 10 10 10 - 10 10 10 -
Other operating income 151 247 154 135 141 138 123 261
Other expenses 7,601 3,407 3,299 3,624 3,288 3,360 2,990 2,577
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes (1,277) 3,024 2,942 2,770 3,267 3,697 3,984 4,138
Income taxes (413) 1,174 1,133 1,028 951 1,452 1,366 1,397
------- ------- ------- ------- ------- ------- ------- -------
Net income $ (864) $ 1,850 $ 1,809 $ 1,742 $ 2,316 $ 2,245 $ 2,618 $ 2,741
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share $ (0.08) $ 0.18 $ 0.17 $ 0.16 $ 0.21 $ 0.20 $ 0.22 $ 0.21
======= ======= ======= ======= ======= ======= ======= =======
Dividends per share $ 0.060 $ 0.060 $ 0.060 $ 0.054 $ 0.045 $ 0.045 $ - $ 0.045
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share is computed independently for each of the quarters
presented. Consequently, the sum of quarters may not equal the earnings
per share.
Prices of common stock:
High $ 15.13 $ 14.50 $ 14.88 $ 15.45 $ 15.57 $ 12.73 $ 11.25 $ 9.55
Low 12.63 12.50 13.30 13.18 12.39 10.91 8.88 8.18
******
26
IBS FINANCIAL CORP.
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
AS OF OR FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- ------ ------ ------ ------ ------
FINANCIAL CONDITION:
Total assets $742,051 726,536 663,866 665,933 652,614 626,075
Loans 185,031 141,781 140,618 157,030 185,188 199,027
Investments 26,712 241,345 289,495 238,138 205,916 99,430
Mortgage-backed securities 285,267 311,753 182,891 134,677 217,041 279,186
Cash and equivalents 12,466 12,542 32,586 119,014 24,392 30,912
Deposits 571,366 564,910 603,080 609,805 603,722 583,292
Stockholders' equity 144,284 158,049 57,594 52,631 44,579 37,954
Nonperforming assets (1) 827 663 1,005 5,478 8,495 8,751
Full service offices 8 8 8 8 8 8
OPERATIONS:
Total interest income $ 52,152 51,692 41,525 47,458 53,451 55,921
Total interest expense 27,419 25,024 25,674 28,093 34,916 42,851
Net interest income 24,733 26,668 15,851 19,365 18,535 13,070
Provision for loan losses 30 30 180 431 1,077 337
Other operating income 687 663 901 1,663 928 500
Operating expenses 14,231 12,215 9,015 8,738 8,342 8,387
Special SAIF assessment (2) 3,700 0 0 0 0 0
Income before taxes 7,459 15,086 7,557 11,859 10,045 4,846
Income taxes 2,922 5,166 2,594 3,807 3,527 1,676
Net income $ 4,537 9,920 4,963 8,052 6,518 3,169
PER COMMON SHARE:
Net income $ 0.43(2) 0.84 N/A N/A N/A N/A
Cash dividends 0.234 0.135 N/A N/A N/A N/A
OPERATING RATIOS (3):
Average yield earned on interest-earning assets 7.25% 7.30% 6.36% 7.29% 8.52% 9.33%
Average rate paid on interest-bearing liabilities 4.70% 4.39% 4.20% 4.60% 5.86% 7.47%
Average interest rate spread (4) 2.55% 2.91% 2.16% 2.69% 2.66% 1.86%
Net interest margin 3.44% 3.77% 2.43% 2.98% 2.96% 2.18%
Ratio of interest-earning assets to interest-bearing
liabilities 123.38% 124.27% 106.74% 106.62% 102.30% 105.24%
Net interest income to operating expenses 173.80% 218.32% 175.83% 221.64% 222.19% 155.84%
Operating expenses as a percent of average assets 1.92% 1.68% 1.34% 1.32% 1.30% 1.37%
Return on average assets 0.61%(2) 1.36% 0.74% 1.21% 1.02% 0.52%
Return on average equity 2.98%(2) 6.37% 8.98% 16.33% 15.58% 8.76%
Ratio of average equity to average assets 20.53% 21.18% 8.24% 7.43% 6.52% 5.90%
Dividend payout ratio 51.07% 17.06% N/A N/A N/A N/A
ASSET QUALITY RATIOS:
Nonperforming loans and troubled debt restructurings
as a percent of total loans 0.45% 0.47% 3.62% 3.49% 4.59% 4.40%
Nonperforming assets and troubled debt
restructurings as a percent of total assets 0.11% 0.09% 0.77% 0.82% 1.30% 1.40%
Allowance for loan losses as a percent of total
loans 0.55% 0.70% 0.38% 1.06% 0.67% 0.75%
Allowance for loan losses as a percent of
nonperforming loans 123.8% 149.9% 52.7% 30.5% 17.9% 17.1%
Charge-offs to average loans receivable
outstanding during the period -- -- 0.89% -- 0.68% --
- -------------
(1) Nonperforming assets consist of nonperforming loans, troubled debt
restructurings and real estate owned ("REO"). Nonperforming loans
consist of nonaccrual loans and accruing loans 90 days or more overdue,
while REO consists of real estate acquired through foreclosure and real
estate acquired by acceptance of a deed-in lieu of foreclosure.
(2) Without giving effect to the special SAIF assessment, net income
per share would have been $.66 and return on average assets and return on
average equity would have been .94% and 4.56%, respectively. See Note
18 of Notes to the Consolidated Financial Statements.
(3) Asset Quality Ratios are end of period ratios, except for
charge-offs to average loans. With the exception of end of period
ratios, all ratios are based on monthly balances during the indicated
periods.
(4) Interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the
weighted average cost of average interest-bearing liabilities, and net
interest margin represents net interest income as a percent of average
interest-earning assets.