10-Q 1 form10q601.txt SECOND QTR. 6/01 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, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM____ TO ____ Commission File number 1-10518 INTERCHANGE FINANCIAL SERVICES CORPORATION (Exact name of registrant as specified in its charter) New Jersey 22-2553159 ----------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Park 80 West/Plaza Two, Saddle Brook, NJ 07663 -------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (201) 703-2265 None ------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ The number of outstanding shares of the Registrant's common stock, no par value per share, as of July 31, 2001, was 6,526,142 shares. INTERCHANGE FINANCIAL SERVICES CORPORATION INDEX PART I FINANCIAL INFORMATION Page No. Item 1 Financial Statements Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000 . . . . . . . . . . . . . .1 Consolidated Statements of Income for the three and six-month periods ended June 30, 2001 and 2000 . . . . . . 2 Consolidated Statements of Changes in Stockholders' Equity for the six months ended June 30, 2001 and 2000 . . . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000 . . . . . . . . . . . 4 Notes to Consolidated Financial Statements . . . . . . . . . . 5 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . 7 Item 3 Quantitative and Qualitative Disclosures About Market Risk (Disclosures about quantitative and qualitative market risk are located in Management's Discussion and Analysis of Financial Condition and Results of Operation in the section on Market Risk). . . . . . . . . . . . . . . . . . . . . . . 17 PART II OTHER INFORMATION Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 22 Item 2 Changes in Securities and Use of Proceeds. . . . . . . . . . 22 Item 3 Defaults upon Senior Securities . . . . . . . . . . . . . . . 22 Item 4 Submission of Matters to a Vote of Security Holders . . . . . 22 Item 5 Other Information . . . . . . . . . . . . . . . . . . . . . . 22 Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 22 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . 23 Item 1: Financial Statements Interchange Financial Services Corporation ------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS ------------------------------------------------------------------------------------------------- (dollars in thousands)
June 30, December 31, 2001 2000 ___________ ____________ (unaudited) Assets Cash and due from banks $ 21,206 $ 22,100 Federal funds sold - 11,050 ___________ ____________ Total cash and cash equivalents 21,206 33,150 ___________ ____________ Securities held to maturity at amortized cost (estimated market value of $47,024 and $41,400 for June 30, 2001 and December 31, 2000, respectively) 46,523 41,042 ___________ ____________ Securities available for sale at estimated market value (amortized cost of $144,887 and $119,306 for June 30, 2001 and December 31, 2000, respectively) 146,735 120,312 ___________ ____________ Loans 584,908 560,879 Less: Allowance for loan and lease losses 6,524 6,154 ___________ ____________ Net loans 578,384 554,725 ___________ ____________ Premises and equipment, net 11,164 11,239 Foreclosed real estate and other repossesed assets 250 250 Accrued interest receivable and other assets 8,485 9,526 ___________ ____________ Total assets $812,747 $770,244 =========== ============ Liabilities Deposits Non-interest bearing $110,224 $107,702 Interest bearing 599,591 561,158 ___________ ____________ Total deposits 709,815 668,860 ___________ ____________ Securities sold under agreements to repurchase 12,000 18,500 Short-term borrowings 17,760 13,000 Accrued interest payable and other liabilities 7,648 7,900 ___________ ____________ Total liabilities 747,223 708,260 ___________ ____________ Commitments and contingent liabilities Stockholders' equity: Common stock, without par value; 15,000,000 shares authorized; 6,533,042 and 6,530,498 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively 5,397 5,397 Capital surplus 21,041 21,077 Retained earnings 50,774 47,735 Accumulated other comprehensive income 1,007 526 ___________ ____________ 78,219 74,735 Less: Treasury stock 12,695 12,751 ___________ ____________ Total stockholders' equity 65,524 61,984 ___________ ____________ Total liabilities and stockholders' equity $812,747 $770,244 =========== ============ _________________________________________________________________________________________________ See notes to consolidated financial statements.
1 Interchange Financial Services Corporation ----------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME ----------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, ---------------------------- ----------------------------- 2001 2000 2001 2000 ------------- ------------- -------------- ------------- Interest income Interest and fees on loans $11,644 $10,827 $23,329 $21,191 Interest on federal funds sold 131 170 436 270 Interest and dividends on securities Taxable interest income 2,575 2,396 4,970 4,618 Interest income exempt from federal income taxes 137 165 282 324 Dividends 64 64 136 125 ------------- ------------- -------------- ------------- Total interest income 14,551 13,622 29,153 26,528 ------------- ------------- -------------- ------------- Interest expense Interest on deposits 5,796 5,206 11,862 10,028 Interest on short-term borrowings 344 360 764 657 Interest on long-term borrowings - 206 - 413 ------------- ------------- -------------- ------------- Total interest expense 6,140 5,772 12,626 11,098 ------------- ------------- -------------- ------------- Net interest income 8,411 7,850 16,527 15,430 Provision for loan and lease losses 200 300 380 600 ------------- ------------- -------------- ------------- Net interest income after provision for loan losses 8,211 7,550 16,147 14,830 ------------- ------------- -------------- ------------- Non-interest income Service fees on deposit accounts 627 601 1,225 1,148 Net gain on sale of securities 53 - 118 97 Other 474 372 1,035 695 ------------- ------------- -------------- ------------- Total non-interest income 1,154 973 2,378 1,940 ------------- ------------- -------------- ------------- Non-interest expenses Salaries and benefits 3,005 2,692 6,077 5,451 Net occupancy 838 716 1,680 1,456 Furniture and equipment 265 266 544 548 Advertising and promotion 394 311 572 606 Federal Deposit Insurance Corporation assessment 32 32 65 64 Other 1,198 1,101 2,480 2,407 ------------- ------------- -------------- ------------- Total non-interest expenses 5,732 5,118 11,418 10,532 ------------- ------------- -------------- ------------- Income before income taxes 3,633 3,405 7,107 6,238 Income taxes 1,159 1,113 2,302 2,056 ------------- ------------- -------------- ------------- Net income $ 2,474 $ 2,292 $ 4,805 $ 4,182 ============= ============= ============== ============= Basic earnings per common share $0.38 $0.35 $0.73 $0.64 ============= ============= ============== ============= Diluted earnings per common share $0.38 $0.35 $0.73 $0.64 ============= ============= ============== ============= ----------------------------------------------------------------------------------------------------------------------------------- See notes to consolidated financial statements
2 Interchange Financial Services Corporation ----------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Six Months Ended June 30, ----------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) (unaudited)
Accumulated Other Comprehensive Retained Comprehensive Common Capital Treasury Income Earnings Income Stock Surplus Stock Total ------------ --------- ------------- ------- ------- -------- ------- Balance at January 1, 2000 $41,741 $ (675) $5,397 $21,244 $(9,431) $58,276 Comprehensive income Net Income $4,182 4,182 4,182 Other comprehensive income, net of taxes Unrealized losses on debt securities (215) Less: gains on disposition of equity securities (61) ----------- Other comprehensive loss (276) (276) (276) ----------- Comprehensive income $3,906 =========== Dividends on common stock (1,629) (1,629) Issued 11,406 shares of common stock in connection with Executive Compensation Plan (6) 196 190 Issued 11,406 shares of common stock in connection with Executive Compensation Plan (37) 67 30 Exercise of 4,134 option shares Purchased 225,640 shares of common stock (3,797) (3,797) -------- ------------- ------- ------- -------- ------ Balance at June 30, 2000 44,294 (951) 5,397 21,201 (12,965) 56,976 Comprehensive income Net Income $5,074 5,074 5,074 Other comprehensive income, net of taxes Unrealized gains on AFS debt securities 1,477 ---------- Other comprehensive income 1,477 1,477 1,477 ---------- Comprehensive income $6,551 ========== Dividends on common stock (1,633) (1,633) Exercised 12,500 option shares (124) 214 90 -------- ------------- ------- ------- -------- ------- Balance at December 31, 2000 47,735 526 5,397 21,077 (12,751) 61,984 Net Income $4,805 4,805 4,805 Other comprehensive income, net of taxes Unrealized gains on AFS debt securities 481 ----------- Other comprehensive income 481 481 481 ----------- Comprehensive income $5,286 =========== Dividends on common stock (1,766) (1,766) Issued 14,880 shares of common stock in connection with Executive Compensation Plan (14) 255 241 Exercised 2,364 option shares (22) 40 18 Purchased 13,200 shares of common stock (239) (239) -------- ------------- ------- ------- -------- ------- Balance at June 30, 2001 $50,774 $1,007 $5,397 $21,041 $(12,695) $65,524 ======== ============= ======= ======= ======== ======= ------------------------------------------------------------------------------------------------------------------------------------ See notes to consolidated financial statements.
3 INTERCHANGE FINANCIAL SERVICES CORPORATION --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS --------------------------------------------------------------------------------------------------------------------- (dollars in thousands) (unaudited)
For the Six Months Ended June 30, ---------------------------- 2001 2000 ------------- ------------ Cash flows from operating activities Net income $ 4,805 $ 4,182 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 736 677 Amortization of securities premiums 409 170 Accretion of securities discounts (174) (127) Amortization of premiums in connection with acquisition 74 157 Provision for loan losses 380 600 Net gain on sale of securities (118) (97) Net gain on sale of loans and leases (105) - Decrease (increase) in operating assets Accrued interest receivable 144 (453) Other 420 (3,068) (Decrease) increase in operating liabilities Accrued interest payable (148) 415 Other (104) 589 ------------- ------------ Cash provided by operating activities 6,319 3,045 ------------- ------------ Cash flows from investing activities (Payments for) proceeds from Net originations of loans (13,010) (27,707) Purchase of loans (12,758) (9,961) Sale of loans 1,824 1,356 Purchase of securities available for sale (55,811) (32,262) Maturities of securities available for sale 24,119 3,311 Sale of securities available for sale 6,050 17,696 Purchase of securities held to maturity (18,458) (7,333) Maturities of securities held to maturity 12,920 11,829 Sale of securities held to maturity - 2,002 Purchase of fixed assets (608) (1,046) Sale of fixed assets - - ------------- ------------ Cash used in investing activities (55,732) (42,115) ------------- ------------ Cash flows from financing activities Proceeds from (payments for) Deposits in excess of withdrawals 40,955 68,361 Securities sold under agreements to repurchase and other borrowings 31,760 7,576 Retirement of securities sold under agreement to repurchase and other borrowings (33,500) (13,975) Dividends (1,766) (1,629) Common stock issued from treasury 295 190 Treasury stock acquired (239) (3,797) Exercise of option shares (36) 30 ------------- ------------ Cash provided by financing activities 37,469 56,756 ------------- ------------ (Decrease) increase in cash and cash equivalents (11,944) 17,686 Cash and cash equivalents, beginning of period 33,150 17,669 ------------- ------------ Cash and cash equivalents, end of period $21,206 $35,355 ============= ============ Supplemental disclosure of cash flow information: Cash paid for: Interest $12,037 $10,683 Income taxes 795 2,275 Supplemental disclosure of non-cash investing activities: Decrease (increase) - market valuation of securities available for sale (481) 447 --------------------------------------------------------------------------------------------------------------------- See notes to consolidated financial statements.
4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 2001 (Unaudited) 1. Basis of Presentation The accompanying unaudited consolidated financial statements include the accounts of Interchange Financial Services Corporation and its wholly owned subsidiaries (the "Company") including its principal operating subsidiary, Interchange Bank (the "Bank"), and have been prepared in conformity with accounting principles generally accepted in the United States of America within the banking industry and in accordance with the rules and regulations of the Securities and Exchange Commission. Pursuant to such rules and regulations certain information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America within the banking industry have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and schedules thereto included in the annual report on Form 10-K of the Company for the year ended December 31, 2000. The consolidated financial data for the three and six-month periods ended June 30, 2001 and 2000, are unaudited but reflect all adjustments consisting of only normal recurring adjustments which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the interim periods. The results of operations for interim periods are not necessarily indicative of results to be expected for any other period or the full year. 2. Earnings Per Common Share Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per common share is similar to the computation of basic earnings per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. 3. Legal Proceedings The Company is a party to routine litigation involving various aspects of its business, none of which, in the opinion of management and its legal counsel, is expected to have a material adverse impact on the consolidated financial condition, results of operations or liquidity of the Company. 5 4. New Accounting Pronouncement On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments, and Hedging Activities". SFAS 133 established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The adoption of SFAS 133 did not have a significant impact on the financial position or results of operations of the Company because the Company does not have any derivative activity. The Company adopted SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for fiscal years after December 15, 2000. The Company's pledged assets to secured parties cannot be sold or repledged by those parties, therefore, no reclassification of pledged assets on the consolidated balance sheet was necessary for such transactions. The Company's adoption of this Statement did not have a material effect on its financial statements. On June 29, 2001, the Financial Accounting Standards Board approved for issuance Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets". Both statements were issued on July 20, 2001. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and that the use of the pooling-of-interest method is no longer allowed. SFAS No. 142 requires that upon adoption, amortization of goodwill will cease and instead, the carrying value of goodwill will be evaluated for impairment on an annual basis. Identifiable intangible assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The Company is required to implement SFAS No. 142 on January 1, 2002 and it has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations. 5. Cash Dividend The Company declared a cash dividend of $0.135 per share, payable on July 20, 2001 to shareholders of record as of June 15, 2001. 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The following discussion is an analysis of the consolidated financial condition and results of operations of the Company for the three and six month periods ended June 30, 2001 and 2000, and should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1 hereof. Company The Company is a bank holding company headquartered in Bergen County, New Jersey. The Company's principal operating subsidiary is Interchange Bank. In addition to the Bank, the Company has a wholly-owned direct subsidiary: Clover Leaf Mortgage Company, a New Jersey Corporation, which is not currently engaged in any business activity. Subsidiaries of the Bank include: Clover Leaf Investment Corporation, an investment company pursuant to New Jersey law; Clover Leaf Insurance Agency, Inc., engaged in the sale of tax-deferred annuities and insurance; Clover Leaf Management Realty Corporation, a Real Estate Investment Trust ("REIT"), which manages certain real estate assets of the Company; and Interchange Capital Company, L.L.C., which engages in equipment lease financing. All of the Bank's subsidiaries are New Jersey corporations or a Limited Liability Company and are 100% owned by the Bank, except for the REIT, which is 99% owned by the Bank. Forward-Looking Information In addition to discussing historical information, certain statements included in or incorporated into this report relate to the financial condition, results of operations and business of the Company which are not historical facts, but which are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used herein, the words "anticipate," "believe," "estimate," "expect," "will" and other similar expressions are generally intended to identify such forward-looking statements. Such statements are intended to be covered by the safe harbor provisions for forward looking statements contained in such Act, and we are including this statement for purposes of invoking these safe harbor provisions. These forward- looking statements include, but are not limited to, statements about the operations of the Company, the adequacy of the Company's allowance for losses associated with the loan portfolio, the prospects of continued loan and deposit growth, and improved credit quality. The forward-looking statements in this report involve certain estimates or assumptions, known and unknown 7 risks and uncertainties, many of which are beyond the control of the Company, and reflect what we currently anticipate will happen in each case. What actually happens could differ materially from what we currently anticipate will happen due to a variety of factors, including, among others, (i) increased competitive pressures among financial services companies; (ii) changes in the interest rate environment; (iii) deterioration in general economic conditions, internationally, nationally, or in the State of New Jersey; and (iv) legislation or regulatory requirements or changes adversely affecting the business of the Company. Readers should not place undue expectations on any forward-looking statements. We are not promising to make any public announcement when we consider forward-looking statements in this document to be no longer accurate, whether as a result of new information, what actually happens in the future or for any other reason. 8 THREE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 RESULTS OF OPERATIONS Earnings Summary For the second quarter of 2001, the Company reported net income of $2.5 million, an increase of $182 thousand over the same period last year. Earnings per diluted common share increased 8.6% to $0.38 from $0.35 for the same period in 2000. The advance in earnings was driven largely by growth in net interest income on a taxable equivalent basis, which increased $610 thousand, or 7.7%. The improvement in net interest income was attributable to the Company's loan and lease production, which generated $47.8 million of growth in average loans. In addition, non-interest income, which increased $181 thousand, or 18.6%, over the same period last year also contributed to the improvement in earnings. The growth in revenues was partly offset by a $614 thousand, or 12.0%, increase in non-interest expenses, which largely reflect the costs associated with the opening of two new branches within the past twelve months and the growth of Interchange Capital Company, LLC ("ICC"), the Bank's equipment lease financing subsidiary. Net Interest Income Net interest income is the most significant source of the Company's operating income. Net interest income on a tax-equivalent basis increased $610 thousand, or 7.7%, to $8.5 million for the quarter ended June 30, 2001 as compared to the same quarter in 2000. The increase in net interest income is due primarily to an 8.7% growth in average interest earning assets, particularly loans. This asset growth was funded by deposit liabilities, which grew 9.8% on average for the second quarter of 2001 as compared to the same quarter in 2000. The net interest margin ("margin") declined 4 basis points to 4.42% for the second quarter of 2001 as compared to the same quarter in 2000 and offset some of the growth in interest income. Interest income, on a tax-equivalent basis, totaled $14.6 million for the second quarter of 2001, an increase of $1.0 million, or 7.2%, as compared to the same quarter in 2000. The increase in interest income resulted from a $61.2 million, or 8.7%, growth in average interest-earning assets, principally loans and securities, which increased $47.8 million, or 9.0%, and $12.4 million, or 7.5%, respectively. The average yield on interest-earning assets decreased 10 basis points to 7.62% for the second quarter of 2001 as compared to the same period in 2000 and served to offset some of the benefits derived from the asset growth. Interest expense, which totaled $6.1 million for the second quarter of 2001, increased $368 thousand, or 6.4%, as compared to the same period in 2000. The increase is attributable mostly to the growth in average interest-bearing liabilities of $49.6 million for the second quarter of 2001 as 9 compared to the second quarter of 2000. A decrease in the average rates paid on interest-bearing liabilities of 9 basis points to 3.97% over the prior comparable period served to offset some of the growth in interest expense. Non-interest Income For the quarter ended June 30, 2001, non-interest income amounted to $1.2 million, an increase of $181 thousand, or 18.6%, as compared to the same period in 2000. Fees collected on loans and net gains on the sale of securities, which increased $58 thousand and $53 thousand, respectively, when compared to the same period in 2000, were largely responsible for the increase. In addition, a $26 thousand, or 4.3% increase in service fees on deposit accounts and a $14 thousand, or 23.3% increase in lease syndication income contributed to the growth in non-interest income. Miscellaneous other income comprised the remainder of the change in non-interest income. Non-interest Expenses For the quarter ended June 30, 2001, non-interest expenses totaled $5.7 million, an increase of $614 thousand, or 12.0%, as compared to the same period in 2000. The increase in non-interest expenses was mostly attributed to the opening of two branches in the second half of 2000 and growth in the operations of ICC, which accounted for $184 thousand and $117 thousand, respectively, of the increase. An increase in salaries and benefits, excluding the above noted expansion items, and advertising expenses of $153 thousand and $83 thousand, respectively, for the second quarter of 2001 as compared to the same quarter in 2000 contributed to the increase in non-interest expenses. The expense comparison was affected by a credit of $165 thousand arising from an adjustment to an actuarial assumption related to the outside directors retirement plan that is reflected in other non-interest expenses in the second quarter of 2000. Income Taxes Income tax expense as a percentage of pre-tax income was 31.9% for the three months ended June 30, 2001 as compared to 32.7% for the second quarter of 2000. The improvement was largely due to increased investment in loans that are exempt from federal income tax. 10 SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 RESULTS OF OPERATIONS Earnings Summary For the first six months of 2001, the Company reported net income of $4.8 million, or $0.73 diluted earnings per common share, as compared with $4.2 million, or $0.64 diluted earnings per common share for the same period last year. The advance in earnings was driven largely by growth in net interest income on a taxable equivalent basis, which increased $1.2 million, or 7.6%. The improvement in net interest income was attributable to the Company's loan and lease production, which generated $48.4 million of growth in average loans. In addition, non-interest income, which increased $438 thousand, or 22.6%, over the same period last year also contributed to the improvement in earnings. The growth in revenues was partly offset by a $886 thousand, or 8.4%, increase in non-interest expenses, which largely reflect the costs associated with the opening of two branches within the past twelve months and the growth of ICC. Net Interest Income Net interest income on a tax equivalent basis increased $1.2 million to $16.7 million for the six months ended June 30, 2001 as compared to the same period in 2000. The increase in net interest income is due primarily to a 9.3% growth in average interest earning assets, particularly loans. The asset growth was funded by deposit liabilities, which grew 10.5% on average for the six months ended June 30, 2001, as compared to the same period last year. The margin declined 7 basis points to 4.40% for the six months ended June 30, 2001, as compared to the same period last year and offset some of the growth in interest income. Interest income, on a tax-equivalent basis, totaled $29.3 million for the first six months of 2001, an increase of $2.7 million, or 10.1%, as compared to the same period in 2000. The growth in interest income resulted from a $64.5 million, or 9.3%, growth in average interest-earning assets, principally loans, which grew $48.4 million, or 9.3%. Furthermore, interest income was aided by an increase in the average yield on interest-earning assets of 6 basis points to 7.72% for the first six months of 2001 as compared to the same period in 2000. Interest expense, which totaled $12.6 million for the first six months of 2001, increased $1.5 million, or 13.8%, as compared to the same period in 2000. The increase is attributable mostly to the growth in average interest-bearing liabilities of $53.3 million for first six months of 2001 as compared to the same period in 2000. An increase in the average rates paid on interest-bearing liabilities of 16 basis points to 4.12% over the prior comparable period contributed to the increase in interest expense. 11 Non-interest Income For the six months ended June 30, 2001, non-interest income amounted to $2.4 million, an increase of $438 thousand, or 22.6%, as compared to the same period in 2000. An increase of $151 thousand in fees collected on loans was in part responsible for the increase. Further, fees on deposit accounts, lease syndication income and net gains on the sale of securities, which increased $77 thousand, $33 thousand and $21 thousand, respectively, contributed to the increase. Miscellaneous other income comprised the remainder of the change in non-interest income. Non-interest Expenses For the six months ended June 30, 2001, non-interest expenses totaled $11.4 million, an increase of $886 thousand, or 8.4%, as compared to the same period in 2000. The increase in non-interest expenses was mostly attributed to the opening of two branches in the second half of 2000 and growth in the operations of ICC, which accounted for $378 thousand and $240 thousand, respectively, of the increase. After adjusting for the above noted expansion related costs, non-interest expenses increased $268 thousand, or 2.5%. Income Taxes Income tax expense as a percentage of pre-tax income was 32.4% for the six months ended June 30, 2001 as compared to 33.0% for the same period of 2000. The improvement was largely due to increased investment in loans that are exempt from federal income tax. 12 FINANCIAL CONDITION At June 30, 2001, the Company's total assets were $812.7 million, an increase of $42.5 million, or 5.5%, from $770.2 million at December 31, 2000. The growth was largely in securities and loans, which grew $31.9 million and $24.0 million, respectively, for June 30, 2001 as compared to December 31, 2000. The asset growth was funded principally by growth in deposit liabilities, which occurred mostly in time deposits and interest bearing demand deposits. Cash and Cash Equivalents At June 30, 2001, cash and cash equivalents decreased $11.9 million to $21.2 million as compared to December 31, 2000. This is largely the result of investing activities (funding loans and investment growth) investing cash more rapidly than financing activities (reflecting principally deposit growth less repayments of borrowings) and operating activities (reflecting net income and changes in other assets) could generate it. This can be seen more completely on the accompanying unaudited Statements of Cash Flows. Securities Portfolio Under Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), each security is classified as either trading, available for sale ("AFS"), or held to maturity ("HTM"). The Company has no securities held in a trading account. The AFS securities are recorded at their fair value. The after-tax difference between amortized cost and fair value of AFS securities is recorded as "accumulated other comprehensive income" in the equity section of the balance sheet. The tax impact of such adjustment is recorded as an adjustment to the amount of the deferred tax liability. The HTM securities are carried at cost adjusted for the amortization of premiums and accretion of discounts, which are recognized as an adjustment to income. Under SFAS No. 115, HTM securities, with some exceptions, may only be sold within three months of maturity. The Company uses its securities portfolio to ensure liquidity for cash flow requirements, to manage interest rate risk, to provide a source of income, to ensure collateral is available for pledging requirements and to manage asset quality diversification. At June 30, 2001, investment securities totaled $193.3 million and represented 23.8% of total assets, as compared to $161.4 million and 20.9%, respectively, at December 31, 2000. AFS securities comprised 75.9% of the total securities portfolio at June 30, 2001 as compared to 74.6% at December 31, 2000. During the second quarter of 2001, the Company sold securities with a book value of approximately $6 million and recognized $53 thousand in gains. 13 The following table reflects the composition of the securities portfolio: (dollars in thousands)
----------------------------------------------------------------- June 30, 2001 ----------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ---------------- -------------- ------------- --------------- Securities held to maturity Mortgage-backed securities $25,585 $127 $120 $ 25,592 Obligations of U.S. agencies 9,234 251 - 9,485 Obligations of states & political subdivisions 11,345 260 22 11,583 Other debt securities 359 5 - 364 ---------------- -------------- ------------- --------------- 46,523 643 142 47,024 ---------------- -------------- ------------- --------------- Securities available for sale Obligations of U.S. Treasury 1,998 35 - 2,033 Mortgage-backed securities 97,732 1,269 90 98,911 Obligations of U.S. agencies 24,526 223 75 24,674 Obligations of states & political subdivisions 14,114 453 - 14,567 Other debt securities 2,519 12 1 2,530 Equity securities 3,998 22 - 4,020 ---------------- -------------- ------------- --------------- 144,887 2,014 166 146,735 ---------------- -------------- ------------- --------------- Total securities $191,410 $2,657 $308 $193,759 ================ ============== ============= =============== ----------------------------------------------------------------- December 31, 2000 ----------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ---------------- -------------- ------------- --------------- Securities held to maturity Mortgage-backed securities $ 12,646 $ 96 $ 48 $ 12,694 Obligations of U.S. agencies 15,161 244 8 15,397 Obligations of states & political subdivisions 12,813 137 64 12,886 Other debt securities 422 1 - 423 ---------------- -------------- ------------- --------------- 41,042 478 120 41,400 ---------------- -------------- ------------- --------------- Securities available for sale Obligations of U.S. Treasury 1,996 26 - 2,022 Mortgage-backed securities 79,242 758 155 79,845 Obligations of U.S. agencies 19,924 194 4 20,114 Obligations of states & political subdivisions 13,562 237 58 13,741 Other debt securities 612 8 - 620 Equity securities 3,970 - - 3,970 ---------------- -------------- ------------- --------------- 119,306 1,223 217 120,312 ---------------- -------------- ------------- --------------- Total securities $160,348 $1,701 $337 $161,712 ================ ============== ============= ===============
14 At June 30, 2001, the contractual maturities of securities held to maturity and securities available for sale are as follows: (dollars in thousands)
Securities Securities Held to Maturity Available for Sale -------------------------- -------------------------- Amortized Market Amortized Market Cost Value Cost Value ------------ ------------ ------------ ----------- Within 1 year $ 5,669 $ 5,709 $ 8,373 $ 8,424 After 1 but within 5 years 9,313 9,570 57,408 58,394 After 5 but within 10 years 15,014 15,120 21,878 21,986 After 10 years 16,527 16,625 53,230 53,911 Equity securities - - 3,998 4,020 ____________ ___________ ____________ ___________ Total $ 46,523 $47,024 $144,887 $ 146,735 ============ ============ ============ ===========
Loans Total loans amounted to $584.9 million at June 30, 2001, an increase of $24.0 million from $560.9 million at December 31, 2000. The growth was predominately in commercial mortgage loans and lease financing, which increased $15.4 million and $13.3 million, respectively. A decline in commercial and financial loans of $3.2 million served to offset some of this growth. During the first six months of 2001, the Company purchased $12.6 million of consumer auto leases. These leases were subjected to the Company's independent credit analysis prior to purchase and were, in some cases, purchased with a limited buy-back obligation from the sellers. The following table reflects the composition of the loan and lease portfolio: (dollars in thousands)
-------------------- ------------------- June 30, December 31, 2001 2000 -------------------- ------------------- Amount of loans by type Real estate-mortgage Commercial $197,095 $181,722 1-4 family residential First liens 116,556 110,369 Junior liens 9,404 11,195 Home equity 138,662 142,610 Commercial and financial 73,462 76,702 Real estate-construction 2,278 3,755 Installment 5,736 6,108 Lease financing Commercial 25,163 23,499 Consumer 16,552 4,919 -------------------- ------------------- Total $584,908 $560,879 ==================== ===================
15 Deposits Deposits, which include non-interest-bearing demand deposits, interest-bearing demand deposits, savings, and time deposits, are an essential and cost-effective funding source for the Company. The Company attributes its success in growing deposits to the emphasis it places on building core customer relationships by offering a variety of products designed to meet the financial needs of the customers based on their identifiable "life stages". At June 30, 2001, total deposits increased $41.0 million, or 6.1%, to $709.8 million from $668.9 million at December 31, 2000. The growth in deposits occurred mostly in time deposits and interest-bearing demand deposits, which increased $23.7 million and $12.9 million, respectively, at June 30, 2001 as compared to December 31, 2000. For the three and six months ended June 30, 2001, the Company's overall yield on deposits increased by 5 basis points and 23 basis points, respectively, as compared to the same periods last year. The increase is attributed predominately to changes in market interest rates and a change in the composition of deposit liabilities. Time deposits amounted to $232.2 million at June 30, 2001, an increase of $14.7 million, or 7.0%, from December 31, 2000. Time deposits represented 32.7% of total deposits at June 30, 2001 compared to 31.2% at December 31, 2000. Other interest-bearing deposits, which include interest-bearing demand, money market and savings accounts, comprise the largest segment of the Company's total deposits. At June 30, 2001, such deposits amounted to $367.4 million, an increase of $14.7 million, or 4.2%, from December 31, 2000. Non-interest bearing demand, which increased $2.5 million, or 2.3%, to $110.2 million at June 30, 2001 as compared to December 31, 2000 contributed to the growth in deposits and had a positive impact on the overall yield on deposit liabilities. Nonperforming Assets Nonperforming assets are comprised of nonaccrual loans, restructured loans and foreclosed real estate. At June 30, 2001, nonperforming assets amounted to $3.7 million, an increase of $2.0 million, or 124.0%, from $1.6 million at December 31, 2000. The increase in nonperforming assets is partly due to a $1.0 million increase in nonaccrual leases in the Company's equipment lease finance portfolio and a commercial mortgage loan amounting to $1.0 million that was classified as nonaccrual during the second quarter of 2001. The ratio of nonperforming assets to total loans and foreclosed real estate increased to 0.63% at June 30, 2001 from 0.29% at December 31, 2000. 16 Provision for Loan and Lease Losses and Loan Loss Experience The provision for loan and lease losses represents management's determination of the amount necessary to bring the allowance for loan and lease losses ("ALLL") to a level that management considers adequate to reflect the risk of future losses inherent in the Company's loan portfolio as of the balance sheet date. In its evaluation of the adequacy of the ALLL, management considers past loan loss experience, changes in the composition of performing and nonperforming loans, the condition of borrowers facing financial pressure, the relationship of the current level of the allowance to the credit portfolio and to nonperforming loans and existing economic conditions. However, the process of determining the adequacy of the ALLL is necessarily subjective and affected by changes in external conditions. Accordingly, there can be no assurance that existing levels of the ALLL will ultimately prove adequate to cover actual loan losses. The ALLL was $6.5 million at June 30, 2001, and $6.2 million at December 31, 2000, representing 190.0% and 441.2% of nonperforming loans at those dates, respectively. For the first six months of 2001 and 2000, the Company's provision for loan and lease losses was $380 thousand and $600 thousand, respectively. Market Risk The Company's primary exposure to market risk arises from changes in market interest rates ("interest rate risk"). The Company's profitability is largely dependent upon its ability to manage interest rate risk. Interest rate risk can be defined as the exposure of the Company's net interest income to adverse movements in interest rates. Although the Company manages other risks, as in credit and liquidity risk, in the normal course of its business, management considers interest rate risk to be its most significant market risk and could potentially have the largest material effect on the Company's financial condition. The primary objective of the asset/liability management process is to measure the effect of changing interest rates on net interest income and economic value of equity and adjust the balance sheet, if necessary, to minimize the inherent risk and maximize income. On a weekly basis, the Company's Asset/Liability Committee ("ALCO") meets to review matters pertaining to market and interest rate risk. On a quarterly basis, management through the use of an asset/liability simulation model produces a report, which estimates the potential impact on net interest income and future economic value of equity. This report is reviewed by ALCO and the Board of Directors. At June 30, 2001, the Company simulated the effects on net interest income given an instantaneous and parallel shift in the yield curve of 200 basis points in either direction. Based on the simulation, the results did not significantly change from December 31, 2000. At June 30, 2001, the Company was within policy limits established by the Board of Directors for changes in net interest income and future economic value of equity. 17 The Company does not have any material exposure to foreign currency exchange rate risk or commodity price risk. The Company did not enter into any market rate sensitive instruments for trading purposes nor did it engage in any hedging transactions utilizing derivative financial instruments during the first six months of 2001. The Company is, however, a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These instruments, which include commitments to extend credit and standby letters of credit, involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statement of condition. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require collateral from the borrower if deemed necessary by the Company. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions. Commitments to extend credit and standby letters of credit are not recorded on the Company's consolidated balance sheet until the instrument is exercised. Capital Adequacy The Company is subject to capital adequacy requirements imposed by the Board of Governors of the Federal Reserve System (the "Federal Reserve"); and the Bank is subject to similar capital adequacy requirements imposed by the Federal Deposit Insurance Corporation (the "FDIC"). The Federal Reserve and the FDIC have adopted risk-based capital requirements for assessing bank holding company and bank capital adequacy. These standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks, to account for off-balance sheet exposure. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate relative risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. A banking organization's total qualifying capital includes two components: core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core capital, which must comprise at least half of total capital, includes common shareholders' equity, qualifying perpetual preferred stock, trust preferred securities (subject to certain limitations) and minority interests, less goodwill. Supplementary capital includes the allowance for loan losses (subject to certain limitations),other perpetual preferred stock, trust preferred securities, certain other capital instruments and term subordinated debt. Total capital is the sum of core and supplementary capital. 18 At June 30, 2001, the minimum risk-based capital requirements to be considered adequately capitalized were 4% for Tier 1 capital and 8% for total capital. Federal banking regulators have also adopted leverage capital guidelines to supplement the risk-based measures. The leverage ratio is determined by dividing Tier 1 capital as defined under the risk-based guidelines by average total assets (non risk-adjusted) for the preceding quarter. At June 30, 2001, the minimum leverage ratio requirement to be considered adequately capitalized was 4%. The capital levels of the Company and the Bank at June 30, 2001, and the two highest capital adequacy levels recognized under the guidelines established by the Federal banking agencies are included in the following table. The Company and the Bank exceeded all the minimum capital ratios established by the Federal banking agencies to be considered "well-capitalized". The minimum capital guidelines are detailed in the table below. The Company's and the Bank's capital amounts and ratios are as follows: (dollars in thousands)
To Be "Well Capitalized" Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions -------------------------- ------------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio ------------- ------------ ------------- ----------- ----------- ---------- As of June 30, 2001: Total Capital (to Risk Weighted Assets): The Company $71,102 12.92 % $44,018 8.00 % $55,023 10.00 % The Bank 70,667 12.88 43,901 8.00 54,876 10.00 Tier 1 Capital (to Risk Weighted Assets): The Company 64,578 11.74 22,009 4.00 33,014 6.00 The Bank 64,143 11.69 21,950 4.00 32,925 6.00 Tier 1 Capital (to Average Assets): The Company 64,578 8.13 31,786 4.00 N/A N/A The Bank 64,143 8.03 31,943 4.00 39,929 5.00 As of December 31, 2000: Total Capital (to Risk Weighted Assets): The Company $67,632 12.92 % $41,864 8.00 % $52,331 10.00 % The Bank 67,165 12.83 41,865 8.00 52,331 10.00 Tier 1 Capital (to Risk Weighted Assets): The Company 61,478 11.75 20,932 4.00 31,398 6.00 The Bank 61,011 11.66 20,932 4.00 31,398 6.00 Tier 1 Capital (to Average Assets): The Company 61,478 8.02 30,656 4.00 N/A N/A The Bank 61,011 7.99 30,556 4.00 38,196 5.00
19 Liquidity Liquidity is the ability to provide sufficient resources to meet all financial current obligations and finance prospective business opportunities. The Company's liquidity position over any given period of time is a product of its operating, financing and investing activities. The extent of such activities is often shaped by such external factors as competition for deposits and demand for loans. The Company's most liquid assets are cash and due from banks and federal funds sold. At June 30, 2001, the total of such assets amounted to $21.2 million, or 2.6%, of total assets, compared to $33.1 million, or 4.3%, of total assets at December 31, 2000. The decrease in cash and cash equivalents was due largely to growth in investments and loans. At June 30, 2001, total investments amounted to $193.3 million, an increase of $31.9 million or 19.8% as compared to December 31, 2000. The growth in investments occurred mostly in AFS securities, which is also another significant liquidity source. At June 30, 2001, AFS securities amounted to $146.7 million, or 75.9%, of total securities, compared to $120.3 million, or 74.6%, of total securities at December 31, 2000. In 2001, despite heightened competition for loans, loan production continued to be the Company's principal investing activity. Net loans at June 30, 2001 amounted to $578.4 million, an increase of $23.7 million, or 4.3%, from $554.7 million at December 31, 2000. Financing for the Company's loans and investments is derived primarily from deposits, along with interest and principal payments on loans and investments. At June 30, 2001, total deposits amounted to $709.8 million, an increase of $41.0 million, or 6.1%, from December 31, 2000. In addition, the Company supplements the more traditional funding sources with borrowings from the Federal Home Loan Bank of New York ("FHLB") and with securities sold under agreements to repurchase ("REPOS"). At June 30, 2001, advances from the FHLB and REPOS amounted to $17.8 million and $12.0 million, respectively, as compared to $13.0 million and $18.5 million, respectively, at December 31, 2000. At June 30, 2001, total borrowings amounted to 3.7% of total assets, which was a decline from 4.1% at December 31, 2000. In addition to the aforementioned sources of liquidity, the Company has available various other sources of liquidity, including federal funds purchased from other banks and the Federal Reserve discount window. The Bank also has a $79.9 million line of credit available through its membership in the FHLB. Management believes that the Company's sources of funds are sufficient to meet its current funding requirements. 20 PART II - OTHER INFORMATION Item 1. Legal Proceedings Reference is made to Note 3 of the Company's Consolidated Financial Statements in this Form 10-Q. Item 2. Change in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders (a)The company held its Annual Meeting of Shareholders on April 26, 2001. (b)Each of the persons nominated for director was elected and the selection of Deloitte & Touche, LLP as the Company's independent auditors for 2001 was ratified. The following are the voting results on each of these matters: Against Or For Withheld Abstentions --- -------- ----------- (1) ELECTION OF DIRECTORS Anthony D. Andora 4,955,459 103,320 0 David R. Ficca 4,959,862 36,917 0 Nicholas R. Marcalus 4,959,709 99,070 0 Benjamin Rosenzweig 4,958,010 100,769 0 (2) Ratification of the selection of Deloitte & Touche, LLP as the Company's independent Auditors for 2001. 5,011,540 7,221 40,018 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are furnished herewith: Exhibit. ________ 11 Statement re computation of per share earnings (b) Reports on Form 8-K None 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Interchange Financial Services Corporation By: /s/ Anthony Labozzetta ----------------------------------- Anthony Labozzetta Executive Vice President & CFO (Duly Authorized Officer and Principal Financial and Accounting Officer) Dated: August 14, 2001 22