UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30,1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-24862
IBS Financial Corp.
(Exact name of registrant as specified in its charter)
New Jersey 22-3301933
---------- ----------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification Number)
1909 East Route 70
Cherry Hill, New Jersey 08003
----------------------- -----
(Address of principal executive office) (Zip Code)
(609) 424-1000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the last practicable date. As of July 31, 1998
there were issued and outstanding 10,972,355 shares of the Registrant's Common
Stock.
IBS FINANCIAL CORP.
TABLE OF CONTENTS
Part I. Consolidated Financial Information Page
- ------- ---------------------------------- ----
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition (As of
June 30, 1998 and September 30, 1997) 1
Consolidated Statements of Income (For the quarter
ended June 30, 1998 and 1997) 2
Consolidated Statements of Income (For the nine months
ended June 30, 1998 and 1997) 3
Consolidated Statements of Cash Flows (For the nine months
ended June 30, 1998 and 1997) 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
IBS FINANCIAL CORP.
Consolidated Statements of Financial Condition
June 30, 1998 and September 30, 1997
(In thousands)
June 30, September 30,
1998 1997
Assets
Cash and cash equivalents $ 14,319 15,811
Securities available for sale 93,576 136,430
Investments (market value $31,453 and $27,859
at June 30, 1998 and September 30, 1997) 31,453 27,859
Mortgage-backed securities (market value $344,294 and
$332,713 at June 30, 1998 and September 30, 1997) 338,491 326,869
Loans receivable, net 242,137 210,008
Accrued interest receivable:
Loans 1,786 1,699
Mortgage-backed securities 1,783 2,015
Investments 14 103
Federal Home Loan Bank stock 6,513 6,075
Office properties and equipment, net 6,498 6,782
Other assets 1,124 1,100
-------------------------
Total assets $ 737,694 734,751
-------------------------
-------------------------
Liabilities and Stockholders' Equity
Deposits $ 559,753 567,375
FHLB advances 40,555 34,319
Advances from borrowers 2,739 2,303
Other liabilities 3,104 2,735
-------------------------
Total liabilities 606,151 606,732
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 25,000,000
shares; 11,609,723 shares issued 116 116
Additional paid-in capital 113,770 113,203
Common stock acquired by ESOP and RRP (7,323) (8,941)
Treasury stock, at cost; 647,607 shares and 660,396 shares (10,069) (10,238)
Net unrealized gain on securities available for
sale, net of taxes 1,084 1,631
Retained earnings 33,965 32,248
-------------------------
Total stockholders' equity 131,543 128,019
-------------------------
Total liabilities and stockholders' equity $ 737,694 734,751
-------------------------
-------------------------
See accompanying notes to consolidated financial statements.
1
IBS FINANCIAL CORP.
Consolidated Statements of Income
Quarter Ended June 30, 1998 and 1997
(in thousands, except per share data)
Quarter Ended
June 30,
-------------------
1998 1997
---- ----
Interest income:
Loans $ 4,447 3,934
Mortgage-backed securities 7,778 8,338
Investments 586 652
-------------------
Total interest income 12,811 12,924
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Interest expense:
Deposits 6,776 6,667
Borrowings 624 568
-------------------
Total interest expense 7,400 7,235
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Net interest income 5,411 5,689
Provision for loan losses 10 10
-------------------
Net interest income after provision
for loan losses 5,401 5,679
-------------------
Other operating income:
Service fees and late charges 234 130
Other income 97 76
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Total other operating income 331 206
-------------------
Operating expenses:
Compensation and employee benefits 2,362 2,378
Occupancy and equipment 255 267
Data processing 124 116
Federal insurance premiums 87 93
Advertising and promotion 92 102
Professional fees 168 44
Other 197 410
-------------------
Total operating expenses 3,285 3,410
-------------------
Income before taxes 2,447 2,475
Income taxes 883 859
-------------------
Net income $ 1,564 1,616
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-------------------
Basic earnings per share $ 0.16 0.17
-------------------
-------------------
Diluted earnings per share $ 0.14 0.15
-------------------
-------------------
See accompanying notes to consolidated financial statements.
2
IBS FINANCIAL CORP.
Consolidated Statements of Income
Nine Months Ended March 31, 1998 and 1997
(in thousands, except per share data)
Nine Months Ended
June 30,
----------------
1998 1997
---- ----
Interest income:
Loans $12,793 11,412
Mortgage-backed securities 23,808 23,952
Investments 1,800 3,456
--------------------
Total interest income 38,401 38,820
--------------------
Interest expense:
Deposits 20,241 20,081
Borrowings 1,680 1,669
--------------------
Total interest expense 21,921 21,750
--------------------
Net interest income 16,480 17,070
Provision for loan losses 30 30
--------------------
Net interest income after provision
for loan losses 16,450 17,040
--------------------
Other operating income:
Service fees and late charges 553 310
Other income 289 206
--------------------
Total other operating income 842 516
--------------------
Operating expenses:
Compensation and employee benefits 7,415 6,879
Occupancy and equipment 753 847
Data processing 371 351
Federal insurance premiums 264 439
Advertising and promotion 241 423
Professional fees 492 711
Other 700 972
--------------------
Total operating expenses 10,236 10,622
--------------------
Income before taxes 7,056 6,934
Income taxes 2,379 2,406
--------------------
Net income $ 4,677 4,528
--------------------
Basic earnings per share $ 0.47 0.45
--------------------
--------------------
Diluted earnings per share $ 0.43 0.41
--------------------
--------------------
See accompanying notes to consolidated financial statements.
3
IBS FINANCIAL CORP.
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1998 and 1997
(In thousands)
Nine Months Ended
June 30,
------------------
1998 1997
---- ----
OPERATING ACTIVITIES:
Net income $ 4,677 4,528
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 289 294
Provision for loan losses 30 30
Market adjustment on ESOP 728 604
RRP earned 909 907
Changes in assets and liabilities that
provided (used) cash:
Accrued interest receivable 234 368
Other assets (24) 1,476
Other liabilities 665 (2,734)
------------------------
Net cash provided by operating activities 7,508 5,473
------------------------
INVESTING ACTIVITIES:
Principal repayments of:
Loans 22,555 18,140
Mortgage-backed securities 104,788 47,113
Purchases of:
Investments (68,000) 0
Mortgage-backed securities (74,399) (80,077)
Proceeds from maturity of investments 64,406 56,483
Loans originated or acquired (54,768) (35,901)
Loans sold 54 0
FHLB stock redeemed (purchased) (438) (1,485)
Proceeds from sale of REO - -
Property and equipment acquired (5) (1,057)
------------------------
Net cash provided by (used in) investing activities (5,807) 3,216
------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits (7,622) (6,404)
Increase (decrease) in advances from borrowers 436 212
FHLB advances 10,000 21,000
FHLB repayments (3,764) (4,257)
Cash dividends paid (2,960) (4,404)
Payments on ESOP debt, net 709 781
Treasury stock acquired (216) (20,001)
Stock options exercised 224 570
------------------------
Net cash provided by (used in) financing activities (3,193) (12,503)
------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,492) (3,814)
See accompanying notes to consolidated financial statements.
4
IBS FINANCIAL CORP.
Consolidated Statements of Cash Flows, Continued
(In thousands)
Nine Months Ended
June 30,
-----------------
1998 1997
---- ----
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 15,811 12,466
--------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $14,319 8,652
--------------------
--------------------
SUPPLEMENTAL DISCLOSURES:
Cash paid out for:
Interest expense $22,005 21,781
--------------------
--------------------
Income taxes $ 1,988 (183)
--------------------
--------------------
NON-CASH TRANSFERS FROM LOANS TO
REAL ESTATE OWNED $ - -
--------------------
--------------------
5
IBS Financial Corp.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions to Form 10-Q, and therefore, do not include
information or footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. However, all normal recurring adjustments which,
in the opinion of management, are necessary for a fair presentation of the
financial statements, have been included. These unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and the accompanying notes thereto included in the Annual Report of
IBS Financial Corp. (the "Company") for the fiscal year ended September 30,
1997. The results for the quarter and nine months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ended September 30, 1998. Share and per share data presented herein reflects the
effects of the 15% stock dividend paid on May 6, 1997.
Business
The Company's principal subsidiary, Inter-Boro Savings and Loan Association (the
"Association"), is a New Jersey state chartered stock savings and loan
association conducting business from its branch system located in Camden,
Burlington and Gloucester counties, New Jersey. The Association is subject to
competition from other financial institutions and other companies which provide
financial services. The Company and the Association are subject to the
regulations of certain federal and state agencies and undergo periodic
examinations by those regulatory authorities.
Principles of Consolidation
The unaudited consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, including the Association. All
significant intercompany transactions have been eliminated in consolidation.
Additionally, certain reclassifications have been made in order to conform with
the current year's presentation. The accompanying unaudited consolidated
financial statements have been prepared using the accrual basis of accounting.
6
(2) Conversion to Capital Stock Form of Ownership
On May 20, 1994, the Board of Directors of the Association adopted a plan of
conversion to convert from a New Jersey chartered mutual savings and loan
association to a New Jersey chartered capital stock savings and loan association
with the concurrent formation of a holding company ("the Conversion").
The Conversion was completed on October 13, 1994 with the issuance by the
Company of 11,609,723 shares of its common stock in a public offering to the
Association's eligible depositors and borrowers, members of the general public
and the Company's employee stock ownership plan (the "ESOP").
In exchange for 50% of the net Conversion proceeds ($56.6 million), the Company
acquired 100% of the stock of the Association and retained 50% of the net
Conversion proceeds ($56.6 million).
(3) Common Stock Acquired by the Employee Stock Ownership Plan
In connection with the Conversion, the Company established an ESOP for the
benefit of eligible employees. All share numbers have been adjusted for stock
dividends. The Company purchased 1,174,902 shares of common stock on behalf of
the ESOP in the Conversion. At June 30, 1998, 59,796 shares of the total ESOP
shares were committed to be released with 584,356 shares allocated to
participants. The Company accounts for its ESOP in accordance with Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans," which
requires the Company to recognize compensation expense equal to the fair value
of the ESOP shares during the periods in which they become committed to be
released. To the extent that the fair value of the ESOP shares differs from the
cost of such shares, this differential will be charged or credited to equity as
additional paid-in capital. The recorded amount of compensation expense, which
is being recognized over a ten year vesting period, will fluctuate as continuing
adjustments are made to reflect changes in the fair value of the ESOP shares.
Employers with internally leveraged ESOP's, such as the Company, do not report
the loan receivable from the ESOP as an asset and do not report the ESOP debt
from the employer as a liability. At June 30, 1998, the ESOP loan balance, net
of related receivable, amounted to $5,423,000 and is recorded as a charge
against stockholders' equity. The Company recorded compensation and employee
benefit expense related to the ESOP of $610,000 and $1,892,000 for the quarter
and nine months ended June 30, 1998, respectively, compared to $569,000 and
$1,723,000 for the quarter and nine months ended June 30, 1997, respectively.
(4) Recognition and Retention Plan Trust
At the Company's Annual Meeting of Stockholders held on January 19, 1995, the
Recognition and Retention Plan and Trust (the "RRP") was approved by the
Company's stockholders. In order to fund the RRP, the RRP purchased 587,451
shares, after adjusting for stock dividends, in the open market at an aggregate
cost of $6,085,000. As of June 30, 1998, all available shares
7
under the RRP had been awarded to the Company's Board of Directors and the
Association's executive officers and other key employees.
At June 30, 1998, the deferred cost of the unearned RRP shares amounted to
$1,900,000 and is recorded as a charge against stockholders' equity.
Compensation expense is being recognized over the five year vesting period for
shares awarded. The Company recorded compensation and employee benefit expense
related to the RRP of $304,000 and $909,000 for the quarter and nine months
ended June 30, 1998, respectively, as compared to $303,000 and $907,000 for the
quarter and nine months ended June 30, 1997, respectively. RRP charges began to
be recorded in the quarter ended June 30, 1995 when the RRP shares were
purchased after receiving required stockholder and regulatory approval.
(5) Stock Option Plan
The 1995 Stock Option Plan (the "Plan") was approved by the Company's
stockholders at the Annual Meeting on January 19, 1995. All shares have been
adjusted for stock dividends. At June 30, 1998, an aggregate of 1,273,061 stock
options were outstanding and 90,285 stock options were reserved for future
issuance under the Plan. Stock options were granted to directors, executive
officers and other key employees. These options are subject to vesting
provisions as well as other provisions of the Plan.
(6) Loans Receivable
Loans receivable at June 30, 1998 and September 30, 1997 consisted of the
following (in thousands):
June 30, September 30,
1998 1997
---- ----
Real estate loans:
Mortgage loans ( 1-4 residential) $ 217,087 184,498
Construction loans 2,400 261
Loans on savings accounts 2,148 2,486
Commercial real estate loans 24,877 24,568
Consumer loans 1,262 1,234
-------------------- --------------------
Total 247,774 213,047
Less:
Deferred loan fees (2,143) (1,897)
Allowance for loan losses (1,094) (1,064)
Loans in process (2,400) (78)
-------------------- --------------------
Total $ 242,137 210,008
-------------------- --------------------
-------------------- --------------------
8
Changes in the allowance for loan losses were as follows (in thousands):
Nine Months Year Ended
June 30, 1998 September 30, 1997
----------------------- ------------------------
Balance, beginning of period $ 1,064 1,024
Provision for loan losses 30 40
Charge-offs 0 0
Recoveries 0 0
----------------------- ------------------------
Balance, end of period $ 1,094 1,064
----------------------- ------------------------
----------------------- ------------------------
The provision for loan losses charged to expense is based upon loan and loss
experience and an evaluation of potential losses in the current loan portfolio,
including the evaluation of impaired loans under SFAS Nos. 114 and 118. A loan
is considered to be impaired when, based upon current information and events, it
is probable that the Company will be unable to collect all amounts due according
to the contractual terms of the loan. An insignificant delay or insignificant
shortfall in the amount of payments does not necessarily result in the loan
being identified as impaired. For this purpose, delays less than 90 days are
considered to be insignificant. As of June 30, 1998, 100% of the impaired loan
balance was measured for impairment based upon the fair value of the loan's
collateral. Impairment losses are included in the provision for loan losses.
SFAS 114 and 118 do not apply to large groups of smaller balance homogenous
loans that are collectively evaluated for impairment, except for those loans
restructured under a troubled debt restructuring. Loans collectively evaluated
for impairment include consumer loans and residential real estate loans. At June
30, 1998 and 1997, the Company's impaired loans consisted of smaller balance
residential mortgage loans.
Nonaccrual loans for which interest has been fully reserved totaled
approximately $782,000 at June 30, 1998 and $818,000 at September 30, 1997.
9
(7) Deposits
The major types of savings deposits by amounts and the percentages were as
follows (in thousands):
June 30, 1998 September 30, 1997
----------------------------- ---------------------------
Type of Account Amount % of Total Amount % of Total
- --------------- --------------- ------------- ------------- -------------
NOW $ 25,223 4.51% $ 23,570 4.15%
Money market deposit 59,943 10.70% 63,248 11.15%
Passbook and club 54,610 9.76% 57,638 10.16%
--------------- ------------- ------------- -------------
139,776 24.97% 144,456 25.46%
Certificates of deposit 419,646 74.97% 422,505 74.47%
Accrued interest on savings 331 0.06% 414.00 0.07%
--------------- ------------- ------------- -------------
Total deposits $ 559,753 100.00% $ 567,375 100.00%
--------------- ------------- ------------- -------------
--------------- ------------- ------------- -------------
(8) Earnings Per Share
Basic and diluted earnings per share amounted to $.16 and $.14 for the quarter
ended June 30, 1998 compared with basic and diluted earnings per share of $.16
and $.15 per share, respectively, for the same quarter last year. For the nine
months ended June 30, 1998, basic and diluted earnings per share amounted to
$.47 and $.43 per share compared with basic and diluted earnings per share of
$.45 and $.41, respectively, for the same nine months last year. A
reconciliation of the numerator and denominators in the computation of basic and
diluted earnings per share follows:
(In thousands, except per share)
Quarter Ended Quarter Ended
June 30, 1998 June 30,1997
----------------------------- ----------------------------
Income Shares EPS Income Shares EPS
------ ------ --- ------ ------ ---
Basic EPS $1,564 10,076 $0.16 $1,616 9,889 $0.16
Dilutive securities:
Stock options -- 694 -- -- 615 --
Unearned MRP -- 198 -- -- 315.00 --
------ ------ ------ ------ ------ ------
Diluted EPS $1,564 10,968 $0.14 $1,616 10,819 $0.15
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
10
(In thousands, except per share)
Nine Months Nine Months
June 30, 1998 June 30, 1997
------------- - -------------
Income Shares EPS Income Shares EPS
------ ------ ------ ------ ------ ------
Basic EPS $4,677 10,007 $0.47 $4,528 10,173 $0.45
Dilutive securities:
Stock options -- 658 -- -- 537 --
Unearned MRP -- 228 -- -- 328 --
------ ------ ------ ------ ------ ------
Diluted EPS $4,677 10,893 $0.43 $4,528 11,038 $0.41
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company's net income for the quarter ended June 30, 1998 was $1.56 million
or $.14 per diluted share compared with $1.62 million or $.15 per diluted share
for the same quarter last year. For the nine months ended June 30, 1998, net
income amounted to $4.68 million or $.43 per diluted share compared with $4.53
million or $.41 per diluted share for the same nine months last year.
The decrease in earnings for the quarter ended June 30, 1998 compared to the
same period last year was principally attributable to a decline in net interest
income that was partially offset by increased loan fees earned and reduced
operating expenses. With the flattening of the yield curve, margins were
compressed and increased repayments of higher rate mortgage-backed securities
and loans were reinvested in lower rate interest-earning assets. The increase in
net income for the nine months ended June 30, 1998 compared to the same time
frame last year was attributable to reduced operating expenses and increased
loan fees that more than offset the decline in net interest income. The
Company's net interest margin averaged 2.98% and 3.06% in the recent quarter and
nine months ended June 30, 1998 compared to 3.19% and 3.15% earned for the same
periods last fiscal year, respectively.
Financial Condition
Total assets increased by $2.9 million or .4% during the first nine months of
fiscal 1998 from $734.8 million at September 30, 1997 to $737.7 million at June
30, 1998. Loan and mortgage-backed securities repayments, and an additional $10
million FHLB advance, were used to originate additional mortgage loans as well
as to invest in mortgage-backed securities and
11
fund deposit outflows. Securities available for sale decreased by $42.9 million
or 31.4% from $136.4 million (all mortgage-backed securities) at September 30,
1997 to $93.6 million (all mortgage-backed securities) at June 30, 1998. This
decrease reflected significant payments of $104.8 million received on the
mortgage-backed securities portfolio as long-term interest rates declined.
Mortgage-backed securities held to maturity increased by $11.6 million or 3.6%
from $326.9 million at September 30, 1997 to $338.5 million at June 30, 1998,
reflecting additional purchases in excess of payments received during the
period. Loans receivable increased by $32.1 million or 15.3% from $210.0 million
at September 30, 1997 to $242.1 million at June 30, 1998, as loan originations
exceeded loan repayments during the nine month period ended June 30, 1998.
During the nine months ended June 30, 1998, deposits decreased by $7.6 million
or 1.3% from $567.4 million at September 30,1997 to $559.8 million at June 30,
1998, principally reflecting the outflow of a combination of maturing higher
rate certificates and passbook and money-market accounts. FHLB advances
increased by $6.2 million or 18.2% from $34.3 million at September 30, 1997 to
$40.6 million at June 30, 1998. Additional borrowings of $10 million less
repayments of $3.8 during the nine months ended June 30, 1998 were primarily
used to fund loan originations and mortgage-backed securities. Common stock
acquired by the ESOP and RRP decreased by $1.6 million or 18.1% from $8.9
million at September 30, 1997 to $7.3 million at June 30, 1998, reflecting ESOP
payments and RRP expense during the nine month period. Retained earnings
increased by $1.7 million or 5.3% from $32.2 million at September 30, 1997 to
$34.0 million at June 30, 1998. This change resulted from the net income and the
dividends declared during the nine months ended June 30, 1998. Total dividends
declared included the three regular quarterly cash dividends of $.10 per share
each.
Results of Operations
Net Income
Net income decreased by $52,000 or 3.2% to $1.564 million for the quarter ended
June 30, 1998, compared with net income of $1.616 million for the same quarter
in the last fiscal year. For the nine months ended June 30, 1998, net income
increased by $149,000 or 3.3 % to $4.677 million, compared with net income of
$4.528 million for the nine months ended June 30, 1997. The decrease in earnings
for the quarter ended June 30, 1998 compared to the same period last year was
principally attributable to a decline in net interest income that was partially
offset by increased loan fees earned and reduced operating expenses. With the
flattening of the yield curve, margins were compressed and increased repayments
of higher rate mortgage-backed securities and loans were reinvested in lower
rate interest-earning assets. The increase in net income for the nine months
ended June 30, 1998 compared to the same time frame last year was attributable
to reduced operating expenses and increased loan fees that more than offset the
decline in net interest income.
Net Interest Income
Net interest income amounted to $5.411 million for the quarter ended June
30,1998, which represents a decrease of $278,000 or 4.9% from the $5.689 million
reported for the comparable prior quarter. For the nine months ended June 30,
1998, net interest income decreased by
12
$590,000 or 3.5% to $16.480 million from $17.070 million for the nine months
last fiscal year. The decrease in net interest income for the quarter ended June
30, 1998 resulted from a decrease in the net interest rate spread of 27 basis
points for the period, which was partially offset by an increase in the average
balance of net interest-earning assets of $8.4 million or 7.6%. The decrease in
net interest income for the nine months ended June 30, 1998 resulted from a
decrease in the net interest rate spread of 12 basis points, which was partially
offset by an increase in the average balance of net interest-earning assets of
$.8 million or .7%.
Total interest income decreased by $113,000 or .9% to $12.811 million for the
quarter ended June 30, 1998, from $12.924 million for the comparable prior
quarter. For the nine months ended June 30, 1998, total interest income amounted
to $38.401 million, which represents a decrease of $419,000 or 1.1% from the
$38.820 million for the comparable prior nine month period. Average
interest-earning assets increased by $13.4 million or 1.9% to $727.4 million for
the quarter ended June 30, 1998, compared to the same quarter last year and
decreased by $4.4 million or .6% to $718.9 million for the nine months ended
June 30, 1998 compared to the same nine month period last year. The yield earned
on average interest-earning assets decreased by 20 basis points to 7.04% for the
quarter ended June 30, 1998 and decreased by 4 basis points to 7.12% for the
nine months ended June 30, 1998.
Total interest expense increased by $165,000 or 2.3% to $7.400 million for the
quarter ended June 30, 1998 from $ 7.235 million for the comparable quarter last
year. For the nine months ended June 30, 1998, total interest expense amounted
to $21.921 million, which represents an increase of $171,000 or .8% from the
$21.750 million for the comparable nine month period. Average interest-bearing
liabilities increased by $5.0 million or .8% to $608.6 million for the quarter
ended June 30, 1998 from $603.6 million for the comparable quarter last fiscal
year. For the nine months ended June 30, 1998, average interest-bearing
liabilities decreased by $5.2 million or .9% to $601.4 million from $606.6
million for the same nine month period last year. In addition, the average rate
paid on interest-bearing liabilities increased by 7 basis points to 4.86% for
the quarter ended June 30, 1998, while the average rate paid on interest-bearing
liabilities increased by 8 basis points to 4.86% for the nine months ended June
30, 1998.
Provision for loan losses
The Company establishes a provision for loan losses, which is charged to
operations, in order to maintain the allowance for loan losses at a level which
is considered to be appropriate based upon an assessment of prior loss
experience, the volume and type of lending currently being engaged in by the
Company, industry standards, past due loans, economic conditions in the
Company's market area generally and other factors related to the collectibility
of the Company's loan portfolio. For the quarters ended June 30, 1998 and 1997,
the same $10,000 provisions for loan losses were determined to be required based
upon the Company's risk assessment of the loan portfolio. For the nine months
ended June 30, 1998 and 1997, the same $30,000 provisions for loan losses was
determined to be required. The allowance for loan losses amounted to $1,094,000
or .5% of the total loan portfolio at June 30, 1998, representing 139.9% of
total nonperforming loans at such date.
13
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 $331,000 for the quarter ended June 30, 1998,
an increase of $125,000 or 60.7% over the comparable quarter last year. For the
nine months ended June 30, 1998, other operating income increased by $326,000 or
63.2% to $842,000 from $516,000 for the nine months ended June 30, 1997. The
increases for both the quarter and nine months ended June 30, 1998 were chiefly
due to additional loan fees earned and, for the nine months ended June 30, 1998,
an insurance recovery of $57,000.
Operating expenses
Operating expenses amounted to $3.29 million and $10.24 million for the quarter
and nine months ended June 30, 1998, which reflect decreases of $125,000 or 3.7%
and $386,000 or 3.6% from the comparable prior periods, respectively. The
decreases for both the quarter and nine months ended June 31, 1998 principally
reflected a combination of factors, including decreased legal fees, proxy
expense, advertising expense, occupancy and equipment expense and federal
deposit insurance premium expense. These items were only partially offset by
increased compensation and benefits, principally resulting from the non-cash
charge relating to the excess of the market price over cost of IBSF stock on its
ESOP plan.
Income taxes
Income tax expense amounted to $.88 million for the quarter ended June 30, 1998,
an increase of $24,000 or 2.8% compared to $.86 million for the same quarter
last fiscal year. For the nine months ended June 30, 1998, income tax expense
amounted to $2.38 million, a decrease of $27,000 or 1.1% compared to $2.41
million for the same nine months last year. The change in income tax expense for
both the quarter and nine months ended June 30, 1998 primarily relates to the
income before income taxes for the related periods as well as a reduction in
deferred tax expense no longer determined to be required.
Liquidity and Capital Resources
The Association's primary sources of funds are deposits, repayments and
maturities of outstanding loans and mortgage-backed securities, maturities of
investment securities and other short-term investments, as well as funds
provided from operations. While scheduled loan and mortgage-backed securities
repayments and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by the movement of interest rates in general, economic
conditions and competition. The Association manages the pricing of its deposits
to maintain a deposit balance
14
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. As of June 30, 1998, the
Association's Board of Directors has provided management with the authority to
borrow up to $150 million from the Federal Home Loan Bank of New York.
Liquidity management is both a daily and long-term function. Excess liquidity is
generally invested in short-term investments such as cash and cash equivalents,
U.S. Treasury, U.S. Government agencies and other qualified investments. On a
longer-term basis, the Association maintains a strategy of investing in various
mortgage-backed securities and other investment securities and lending products.
During the quarter ended June 30, 1998, the Association used its sources of
funds primarily to meet its ongoing commitments to pay maturing savings
certificates and savings withdrawals, fund loan and mortgage-backed securities
commitments and maintain an increasing portfolio of mortgage-backed securities.
At June 30, 1998, the total approved loan and mortgage-backed securities
commitments outstanding amounted to $8.0 million. Certificates of deposit
scheduled to mature in one year or less at June 30, 1998 totaled $280.2 million.
Management of the Association believes that the Association has adequate
resources, including principal prepayments and repayments of loans and
mortgage-backed securities and maturing investments, to fund all of its
commitments to the extent required. Based upon its historical run-off
experience, management believes that a significant portion of maturing deposits
will remain with the Association.
The Association is required by the Office of Thrift Supervision ("OTS") to
maintain average daily balances of liquid assets and short-term liquid assets as
defined in an amount equal to 4% of net withdrawable deposits and borrowings
payable in one year or less to assure its ability to meet demand for withdrawals
and repayments of short-term borrowings. The liquidity requirements may vary
from time to time at the direction of the OTS depending upon economic conditions
and deposit flows. The Association's average monthly liquidity ratio for June
30, 1997 was 111.4%. This ratio includes all of the Association's
mortgage-backed securities portfolio.
The OTS requires that the Association meet minimum regulatory tangible, core and
risk-based capital requirements. The Association is required to maintain
tangible capital equal to at least 1.5% of its adjusted total assets, core
capital equal to at least 3% of its adjusted total assets and total capital
equal to at least 8% of its risk-weighted assets. At June 30, 1998, the
Association exceeded all regulatory capital requirements. At such date, the
Association, on a bank only basis, had tangible capital equal to 17.6% of
adjusted total assets, core capital equal to 17.6% of adjusted total assets and
total capital equal to 58.9% of risk-weighted assets. At June 30, 1998, the
Company, on a consolidated basis, had tangible capital equal to 17.7% of
adjusted total assets, core capital equal to 17.7% of adjusted total assets and
total capital equal to 59.3% of risk-weighted assets.
15
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and related notes presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Association's assets and liabilities
are critical to the maintenance of acceptable performance levels.
Year 2000 Computer Problem
The Company has appointed a committee that has assessed and developed a plan to
prepare for the Year 2000 impact on electronic systems, programs and processes.
In addition, it has identified the level of risk that each of the systems pose
to the Company. Testing of revisions to the programs, processes and systems is
scheduled to be completed by January 1, 1999. Most of the Company's data
processing work is provided by third-party data processing service bureaus. The
Company is monitoring the progress of each of these vendors on a continuing
basis. It is currently estimated that the cost of replacing equipment, software
and other incidental costs will approximate $600,000. None of these costs had
been incurred as of June 30, 1998.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable due to absence of material changes from fiscal year end data.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings to which the Company or its
subsidiary is a party or to which any of their property is subject.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
a) Not applicable
b) On April 10, 1998 the Company filed a Form 8-K to report the
execution of a definitive Agreement and Plan of Merger, dated March 31, 1998
among HUBCO, Hudson United Bank, the Company and Inter-Boro Savings and Loan
Association (the "Agreement"). Pursuant to the Agreement, the Company will be
merged into HUBCO, and each share of common stock of the Company (excluding
treasury shares and certain shares held by HUBCO) will be converted into .534
shares of HUBCO's common stock, subject to adjustment in certain circumstances.
The Form 8-K was filed pursuant to "Item 5, Other Events," and no financial
statements were required to be filed with the Form 8-K.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IBS FINANCIAL CORP.
Date: August 7, 1998 By: /s/ Joseph M. Ochman, Sr.
--------------------------
Joseph M. Ochman, Sr.
Chairman, President and
Chief Executive Officer
Date: August 7, 1998 By: /s/ Richard G. Sharp
---------------------
Richard G. Sharp
Executive Vice President and
Chief Financial Officer
Date: August 7, 1998 By: /s/ Matthew J. Kennedy
------------------------
Matthew J. Kennedy
Executive Vice President and
Treasurer
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