-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G3C+0Tv/vaul+US7ULbSBqaRSvckf5Fb7BWQEdaKbEwg/FH0fuBhc1QHLY3Y9yZj NPzvss/htceF/GlB1nyDDA== 0000755933-01-500014.txt : 20020410 0000755933-01-500014.hdr.sgml : 20020410 ACCESSION NUMBER: 0000755933-01-500014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERCHANGE FINANCIAL SERVICES CORP /NJ/ CENTRAL INDEX KEY: 0000755933 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 222553159 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10518 FILM NUMBER: 1789463 BUSINESS ADDRESS: STREET 1: PARK 80 WEST PLAZA TWO STREET 2: ATTN INTERCHANGE STATE BANK CITY: SADDLE BROOK STATE: NJ ZIP: 07662 BUSINESS PHONE: 2017032265 MAIL ADDRESS: STREET 1: PARK 80 WEST STREET 2: PLAZA II CITY: SADDLE BROOK STATE: NJ ZIP: 07663 FORMER COMPANY: FORMER CONFORMED NAME: INTERCHANGE FINANCIAL SERVICES CORP DATE OF NAME CHANGE: 19861209 FORMER COMPANY: FORMER CONFORMED NAME: INTERCHANGER STATE BANK DATE OF NAME CHANGE: 19870416 10-Q 1 thirdq93001.txt 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, SEPTEMBER 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 October 31, 2001, was 6,471,058 shares. INTERCHANGE FINANCIAL SERVICES CORPORATION INDEX PART I FINANCIAL INFORMATION Page No. Item 1 Financial Statements Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 ......................1 Consolidated Statements of Income for the three and nine-month periods ended September 30, 2001 and 2000.......2 Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30, 2001 and 2000....................................3 Consolidated Statements of Cash Flows for the nine months ended September 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 ...........................8 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)............................................... 18 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)
September 30, December 31, 2001 2000 ____________ ___________ (unaudited) Assets Cash and due from banks $ 23,148 $ 22,100 Federal funds sold - 11,050 ____________ ___________ Total cash and cash equivalents 23,148 33,150 ____________ ___________ Securities held to maturity at amortized cost (estimated market value of $41,355 and $41,400 for September 30, 2001 and December 31, 2000, respectively) 40,196 41,042 ____________ ___________ Securities available for sale at estimated market value (amortized cost of $126,478 and $119,306 for September 30, 2001 and December 31, 2000, respectively) 130,274 120,312 ____________ ___________ Loans 591,849 560,879 Less: Allowance for loan and lease losses 6,339 6,154 ____________ ___________ Net loans 585,510 554,725 ____________ ___________ Premises and equipment, net 9,887 11,239 Foreclosed real estate and other repossesed assets 250 250 Bank owned life insurance 15,170 - Accrued interest receivable and other assets 7,178 9,526 ____________ ___________ Total assets $811,613 $770,244 ============ =========== Liabilities Deposits Non-interest bearing $107,036 $107,702 Interest bearing 598,735 561,158 ____________ ___________ Total deposits 705,771 668,860 ____________ ___________ Securities sold under agreements to repurchase 10,500 18,500 Short-term borrowings 18,547 13,000 Accrued interest payable and other liabilities 8,796 7,900 ____________ ___________ Total liabilities 743,614 708,260 ____________ ___________ Commitments and contingent liabilities Stockholders' equity: Common stock, without par value; 15,000,000 shares authorized; 6,503,208 and 6,530,498 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively 5,397 5,397 Capital surplus 21,041 21,077 Retained earnings 52,687 47,735 Accumulated other comprehensive income 2,136 526 ____________ ___________ 81,261 74,735 Less: Treasury stock 13,262 12,751 ____________ ___________ Total stockholders' equity 67,999 61,984 ____________ ___________ Total liabilities and stockholders' equity $811,613 $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 Nine Months Ended September 30, September 30, ------------------------ ------------------------- 2001 2000 2001 2000 ----------- ----------- ------------ ----------- Interest income Interest and fees on loans $11,560 $11,421 $34,889 $32,612 Interest on federal funds sold 59 258 495 528 Interest and dividends on securities Taxable interest income 2,438 2,594 7,408 7,212 Interest income exempt from federal income taxes 127 124 409 448 Dividends 59 65 195 190 ----------- ----------- ------------ ----------- Total interest income 14,243 14,462 43,396 40,990 ----------- ----------- ------------ ----------- Interest expense Interest on deposits 5,349 5,974 17,211 16,002 Interest on short-term borrowings 319 363 1,083 1,020 Interest on long-term borrowings - 209 - 622 ----------- ----------- ------------ ----------- Total interest expense 5,668 6,546 18,294 17,644 ----------- ----------- ------------ ----------- Net interest income 8,575 7,916 25,102 23,346 Provision for loan and lease losses 210 150 590 750 ----------- ----------- ------------ ----------- Net interest income after provision for loan losses 8,365 7,766 24,512 22,596 ----------- ----------- ------------ ----------- Noninterest income Service fees on deposit accounts 610 617 1,835 1,765 Net gain on sale of securities 129 - 247 97 Other 726 614 1,761 1,309 ----------- ----------- ------------ ----------- Total noninterest income 1,465 1,231 3,843 3,171 ----------- ----------- ------------ ----------- Noninterest expenses Salaries and benefits 3,082 2,866 9,159 8,317 Net occupancy 822 755 2,502 2,211 Furniture and equipment 274 247 818 795 Advertising and promotion 391 247 963 853 Federal Deposit Insurance Corporation assessment 32 33 97 97 Other 1,096 1,228 3,576 3,635 ----------- ----------- ------------ ----------- Total noninterest expenses 5,697 5,376 17,115 15,908 ----------- ----------- ------------ ----------- Income before income taxes 4,133 3,621 11,240 9,859 Income taxes 1,340 1,204 3,642 3,260 ----------- ----------- ------------ ----------- Net income $ 2,793 $ 2,417 $ 7,598 $ 6,599 =========== =========== ============ =========== Basic earnings per common share $0.43 $0.37 $1.16 $1.01 =========== =========== ============ =========== Diluted earnings per common share $0.43 $0.37 $1.16 $1.01 =========== =========== ============ =========== - ---------------------------------------------------------------------------------------------------------------------- See notes to consolidated financial statements
2 Interchange Financial Services Corporation - ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Nine Months Ended September 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 $6,599 6,599 6,599 Other comprehensive income, net of taxes Unrealized gains on debt securities 328 Less: gains on disposition of equity securities (61) ----------- Other comprehensive loss 267 267 267 ----------- Comprehensive income $6,866 =========== Dividends on common stock (2,446) (2,446) Issued 11,406 shares of common stock in connection with Executive Compensation Plan (6) 196 190 Exercise of 16,634 option shares (161) 281 120 Purchased 225,640 shares of common stock (3,797) (3,797) ----------- ------------ --------- ---------- ---------- ---------- -------- Balance at September 30, 2000 45,894 (408) 5,397 21,077 12,751) 59,209 Comprehensive income Net Income $2,657 2,657 2,657 Other comprehensive income, net of taxes Unrealized gains on AFS debt securities 934 ----------- Other comprehensive income 934 934 934 ----------- Comprehensive income $3,591 =========== Dividends on common stock (816) (816) ----------- ------------ --------- ---------- ---------- ---------- -------- Balance at December 31, 2000 47,735 526 5,397 21,077 (12,751) 61,984 Net Income $7,598 7,598 7,598 Other comprehensive income, net of taxes Unrealized gains on AFS debt securities 1,579 Add: losses on disposition of securities 28 Unrealized gains on equity securities 3 ----------- Other comprehensive income 1,610 1,610 1,610 ----------- Comprehensive income $9,208 =========== Dividends on common stock (2,645) (2,645) Issued 14,880 shares of common stock in connection with Executive Compensation Plan (14) 255 241 Exercised 4,030 option shares (23) 69 46 Purchased 46,200 shares of common stock (835) (835) ----------- --------- ---------- ---------- --------- -------- Balance at September 30, 2001 $52,688 $2,136 $5,397 $21,040 $(13,262) $67,999 =========== ========= ========= ========== ========= ======== - ------------------------------------------------------------------------------------------------------------------------------------ See notes to consolidated financial statements.
3 Interchange Financial Services Corporation - -------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, - -------------------------------------------------------------------------------------------------- (dollars in thousands) (unaudited)
2001 2000 ---------- ---------- Cash flows from operating activities Net income $7,598 $6,599 Non-cash items included in earnings Depreciation and amortization 1,036 1,022 Amortization of securities premiums 704 261 Accretion of securities discounts (250) (211) Amortization of premiums in connection with acquisition 81 234 Provision for loan losses 590 750 Net gain on sale of securities (247) (97) Net gain on sale of loans (240) (62) Decrease (increase) in operating assets Accrued interest receivable 408 (37) Other 510 (1,152) Incease (decrease) in operating liabilities Accrued interest payable (213) 633 Other 1,110 820 ---------- ---------- Cash provided by operating activities 11,087 8,760 ---------- ---------- Cash flows from investing activities (Payments for) proceeds from Net originations of loans (19,636) (24,949) Purchase of loans (15,687) (13,544) Sale of loans 4,178 1,357 Purchase of securities available for sale (61,552) (47,980) Maturities of securities available for sale 32,816 7,293 Sale of securities available for sale 21,339 17,697 Purchase of investment securities held to maturity (18,548) (11,900) Maturities of investment securities held to maturity 19,411 22,259 Sale of securities held to maturity - 2,002 Purchase of Bank Owned Life Insurance (15,000) - Purchase of fixed assets (944) (1,745) Sale of fixed assets 1,260 - --------- ---------- Cash used in investing activities (52,363) (49,510) --------- ---------- Cash flows from financing activities Proceeds from (payments for) Deposits more than withdrawals 36,911 52,657 Securities sold under agreements to repurchase and other borrowings 47,312 10,444 Retirement of securities sold under agreements to repurchase and other borrowings (49,765) (13,975) Dividends (2,646) (2,446) Common stock issued 241 190 Treasury stock (835) (3,797) Exercise of option shares from Treasury 46 120 --------- ---------- Cash provided by financing activities 31,264 43,193 --------- ---------- Increase (decrease) in cash and cash equivalents (10,012) 2,443 Cash and cash equivalents, beginning of year 33,150 17,669 --------- ---------- Cash and cash equivalents, end of period $23,138 $20,112 ========= ========== Supplemental disclosure of cash flow information: Cash paid for: Interest $17,770 $17,011 Income taxes 1,077 3,310 Supplemental disclosure of non-cash investing activities: (Increase)decrease-market valuation of securities available for sale $(1,610) $ (470) - -------------------------------------------------------------------------------------------------- See notes to consolidated financial statements
4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 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 nine-month periods ended September 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 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 and must be accounted for as either assets or liabilities at their fair value in the statement of financial position. The adoption of SFAS 133 did not have a material effect 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 ending 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". 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 October 12, 2001 to shareholders of record as of September 17, 2001. 6 6. Stock Repurchase Program During the period from October 1, 2001 through October 31, 2001, the Company repurchased 32,150 shares of its common stock on the open market pursuant to its previously announced Stock Repurchase Program. The repurchased shares are held as treasury stock and will be principally used for the exercise of stock options, incentive plan stock awards and other general corporate purposes. 7 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 nine month periods ended September 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., ("ICC") which engages in equipment lease financing. All of the Bank's subsidiaries are either New Jersey corporations or New Jersey limited liability companies, 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 8 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, reducing interest margins or increasing interest rate risk; (iii) deterioration in general economic conditions, internationally, nationally, or in the State of New Jersey; (iv) the occurrence of acts of terrorism, such as the events of September 11, 2001, or acts of war; (v) legislation or regulatory requirements or changes adversely affecting the business of the Company, and (vi) other risks detailed in reports filed by the Company with the Securities and Exchange Commission. 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. 9 THREE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000 RESULTS OF OPERATIONS Earnings Summary For the third quarter of 2001, the Company reported net income of $2.8 million, an increase of $376 thousand over the same period last year. Earnings per diluted common share increased 16.2% to $0.43 from $0.37 for the same period in 2000. The advance in earnings was driven largely by growth in net interest income on a tax equivalent basis, which increased $674 thousand, or 8.5%. The improvement in net interest income was attributable to the Company's loan production, which generated $36.7 million of growth in average loans. In addition, non-interest income, which increased $234 thousand, or 19.0%, over the same period last year also contributed to the improvement in earnings. The growth in revenues was partly offset by a $321 thousand, or 6.0%, increase in non-interest expenses, which largely reflect the costs associated with the opening of two new branches during the second half of 2000 and the growth of 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 $674 thousand, or 8.5%, to $8.7 million for the quarter ended September 30, 2001 as compared to the same quarter in 2000. The increase in net interest income is due primarily to a $31.2 million growth in average interest earning assets, particularly loans. This asset growth was funded by deposit liabilities, which grew $40.5 million on average for the third quarter of 2001 as compared to the same quarter in 2000. The growth in net interest income was also driven by an improvement in the net interest margin ("margin"), which increased by 18 basis points to 4.53% for the third quarter of 2001 as compared to the same quarter in 2000. Interest income, on a tax-equivalent basis, totaled $14.3 million for the third quarter of 2001, which decreased $204 thousand, or 1.4%, as compared to the same quarter in 2000. The decrease in interest income resulted from a 43 basis point decline in average yield on interest-earning assets to 7.49% for the third quarter of 2001 as compared to the same period in 2000. The decline in average yield is attributed to a reduction in market interest rates. A growth in average interest-earning assets, principally loans and securities, which increased $31.2 million or 4.3% partly offset the effects of the decline in asset yields. Interest expense, which totaled $5.7 million for the third quarter of 2001, decreased $878 thousand, or 13.4%, as compared to the same period in 2000. The decrease is principally due to 10 average rates paid on interest-bearing liabilities declining 77 basis points to 3.64% over the prior comparable period, despite a growth in average interest-bearing liabilities of $28.6 million for the third quarter of 2001 as compared to the third quarter of 2000. Non-interest Income For the quarter ended September 30, 2001, non-interest income increased $234 thousand, or 19%, to $1.5 million from $1.2 million one year ago. The significant components of the change were: an increase to the cash surrender value of the Bank's newly purchased bank owned life insurance ("BOLI") of $170 thousand; net gains on the sales of securities of $129 thousand; and an increase in lease syndication income of $123 thousand. The change was influenced by non-recurring items in 2000 consisting of gains from the early payoff of commercial loans purchased at a discount and the settlement of an insurance claim of $197 thousand and $53 thousand, respectively. Miscellaneous other income comprised the remainder of the increase in non-interest income. Non-interest Expenses Non-interest expenses increases $321 thousand, or 6%, to $5.7 million for the quarter ended September 30, 2001, from $5.4 million for the same period one year ago. The increase in non-interest expenses was principally due to growth in salaries and benefits and advertising expenses of $216 thousand and $144 thousand, respectively, for the third quarter of 2001 as compared to the same quarter in 2000. The growth in salaries and benefits was partly attributed to two new branches, which were opened in the second half of 2000 and the continued growth in the operations of ICC. Directors' expenses, which decreased $36 thousand, offset a portion of the growth in non-interest expenses. The decrease reflects a decline in the period expense for the Directors' Retirement Plan. Income Taxes Income tax expense as a percentage of pre-tax income was 32.4% for the three months ended September 30, 2001 as compared to 33.3% for the third quarter of 2000. The improvement was largely due to increased investments in loans and the BOLI, which are exempt from federal income tax. 11 NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000 RESULTS OF OPERATIONS Earnings Summary For the first nine months of 2001, the Company reported net income of $7.6 million, or $1.16 diluted earnings per common share, as compared with $6.6 million, or $1.01 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 tax equivalent basis, which increased $1.8 million, or 7.9%. The improvement in net interest income was attributable to the Company's loan production, which generated $44.5 million of growth in average loans. In addition, non-interest income, which increased $672 thousand, or 21.2%, over the same period last year also contributed to the improvement in earnings. The growth in revenues was partly offset by a $1.2 million, or 7.6%, increase in non-interest expenses, which largely reflect the costs associated with the opening of two branches during the second half of 2000 and the growth of ICC. Net Interest Income Net interest income on a tax equivalent basis increased $1.8 million to $25.3 million for the nine months ended September 30, 2001 as compared to the same period in 2000. The increase in net interest income is due primarily to a 7.5% growth in average interest earning assets, particularly loans. The asset growth was funded by deposit liabilities, which grew 9.0% on average for the nine months ended September 30, 2001, as compared to the same period last year. Interest income, on a tax-equivalent basis, totaled $43.6 million for the first nine months of 2001, an increase of $2.5 million, or 6.1%, as compared to the same period in 2000. The growth in interest income resulted from a $53.3 million, or 7.5%, growth in average interest-earning assets, principally loans, which grew $44.5 million, or 8.4%. The average yield on interest-earning assets declined 11 basis points to 7.64% for the first nine months of 2001 as compared to the same period in 2000 served to offset some of the benefits derived from the growth in interest earning assets. The decline in average yield was due largely to a reduction in market interest rates. Interest expense, which totaled$18.3 million for the first nine months of 2001, increased $650 thousand, or 3.7%, as compared to the same period in 2000. The increase is attributable mostly to the growth in average interest-bearing liabilities of $45.0 million for first nine months of 2001 as compared to the same period in 2000. A decrease in the average rates paid on interest-bearing liabilities of 16 basis points to 3.96% over the prior comparable period served to offset some of the growth in interest bearing liabilities. 12 Non-interest Income For the nine months ended September 30, 2001, non-interest income amounted to $3.8 million, an increase of $672 thousand, or 21.2%, as compared to the same period in 2000. The significant components of the change were: an increase to the cash surrender value of the Bank's newly purchased BOLI of $170 thousand; net gains on the sales of securities of $150 thousand; and an increase in lease syndication income of $156 thousand. Further, fees on deposit accounts increased $70 thousand also contributing to the increase. Non-interest Expenses For the nine months ended September 30, 2001, non-interest expenses totaled $17.1 million, an increase of $1.2 million, or 7.6%, as compared to the same period in 2000. The Bank's expansion program, which included adding two branches during the last half of 2000 and also included growing the operations of ICC was largely responsible for the increase in non-interest expenses. The increased costs for the new branches and ICC's increased operations were $413 thousand and $300 thousand, respectively. After adjusting for the above noted expenses related to expansion costs, non-interest expenses for the nine months ended September 30, 2001 increased $494 thousand, or 3.1%, compared to the nine months ended September 30, 2000. This change occurred in salaries and benefits and net occupancy, which increased $458 thousand, or 5.5%, and $120 thousand, or 5.4%, respectively, for the nine months ended 2001 as compared to the same period in 2000 was due mostly to normal growth. Income Taxes Income tax expense as a percentage of pre-tax income was 32.4% for the nine months ended September 30, 2001 as compared to 33.1% for the same period of 2000. The improvement was largely due to increased investment in loans that are exempt from federal income tax. 13 FINANCIAL CONDITION At September 30, 2001, the Company's total assets were $811.6 million, an increase of $41.4 million, or 5.4%, from $770.2 million at December 31, 2000. The growth was largely in loans and securities, which grew $31.0 million and $9.1 million, respectively, for September 30, 2001 as compared to December 31, 2000. The asset growth was funded principally by an increase in deposit liabilities, which occurred mostly in interest bearing demand deposits. Cash and Cash Equivalents At September 30, 2001, cash and cash equivalents decreased $10.0 million to $23.1 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 September 30, 2001, investment securities totaled $170.5 million and represented 21.0% of total assets, as compared to $161.4 million and 20.9%, respectively, at December 31, 2000. AFS securities comprised 76.4% of the total securities portfolio at September 30, 2001 as compared to 74.6% at December 31, 2000. During the third quarter of 2001, the Company sold securities with a book value of approximately $15.3 million and recognized $129 thousand in gains from the security sales. The proceeds from the securities sold were used to fund the purchase of the BOLI. 14 The following table reflects the composition of the securities portfolio: (dollars in thousands)
---------------------------------------------------------- September 30, 2001 ---------------------------------------------------------- (unaudited) Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value _________ __________ __________ _________ Securities held to maturity Mortgage-backed securities $23,765 $453 $ - $ 24,218 Obligations of U.S. agencies 5,974 233 - 6,207 Obligations of states & political subdivisions 10,126 470 2 10,594 Other debt securities 331 5 - 336 _________ __________ __________ _________ 40,196 1,161 2 41,355 _________ __________ __________ _________ Securities available for sale Obligations of U.S. Treasury 1,998 34 - 2,032 Mortgage-backed securities 90,292 2,254 19 92,527 Obligations of U.S. agencies 17,011 828 - 17,839 Obligations of states & political subdivisions 10,783 652 - 11,435 Other debt securities 2,410 42 - 2,452 Equity securities 3,984 5 - 3,989 _________ __________ __________ _________ 126,478 3,815 19 130,274 _________ __________ __________ _________ Total securities $166,674 $4,976 $21 $171,629 ========= ========== ========== ========= ---------------------------------------------------------- December 31, 2000 ---------------------------------------------------------- (unaudited) 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 ========= ========== ========== ========
15 At September 30, 2001, the contractual maturities of securities held to maturity and securities available for sale are as follows: (dollars in thousands) (unaudited)
Securities Securities Held to Maturity Available for Sale ___________________________ ____________________________ Amortized Market Amortized Market Cost Value Cost Value ___________________________ ____________________________ Within 1 year $ 4,904 $ 5,016 $ 6,050 $ 6,165 After 1 but within 5 years 6,223 6,473 50,315 52,207 After 5 but within 10 years 15,062 15,556 14,605 15,210 After 10 years 14,007 14,310 51,524 52,704 Equity securities - - 3,984 3,988 Total $ 40,196 $ 41,355 $ 126,478 $ 130,274 =========================== ============================
Loans Total loans amounted to $591.8 million at September 30, 2001, an increase of $31.0 million from $560.9 million at December 31, 2000. The growth was predominately in commercial mortgage loans and consumer lease financing, which increased $17.5 million and $13.9 million, respectively. During the first nine months of 2001, the Company purchased $15.4 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)
-------------------- ------------------- September 30, December 31, 2001 2000 -------------------- ------------------- (unaudited) Amount of loans by type Real estate-mortgage Commercial $199,203 $181,722 1-4 family residential First liens 116,246 110,369 Junior liens 8,425 11,195 Home equity 136,265 142,610 Commercial and financial 80,511 76,702 Real estate-construction 2,407 3,755 Installment 5,478 6,108 Lease financing Commercial 24,527 23,499 Consumer 18,787 4,919 -------------------- ------------------- Total $591,849 $560,879 ==================== ===================
16 Deposits 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 September 30, 2001, total deposits increased $36.9 million, or 5.5%, to $705.8 million from $668.9 million at December 31, 2000. The growth in deposits occurred principally in other interest-bearing demand deposits and time deposits, which increased $30.4 million, or 8.6%, and $7.1 million, or 3.4%, respectively, at September 30, 2001 as compared to 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. The average yield on other interest-bearing deposits decreased 89 basis points to 2.50% for the third quarter of 2001 as compared to the same period in 2000. For the three and nine months ended September 30, 2001, the Company's overall yield on deposits decreased by 56 basis points and 4 basis points, respectively, as compared to the same periods last year. The decrease is attributed predominately to changes in market interest rates and a change in the composition of deposit liabilities. Nonperforming Assets Nonperforming assets are comprised of nonaccrual loans, restructured loans and foreclosed real estate. At September 30, 2001, nonperforming assets amounted to $4.2 million, an increase of $2.6 million from $1.6 million at December 31, 2000. Included in non-performing loans at September 30, 2001 is a commercial loan amounting to $971 thousand, which was paid in full (including back interest and other charges) in October 2001. After adjusting for this occurrence, non-performing loans would have totaled $2.9 million at September 30, 2001, a $1.5 million increase from year-end 2000. Part of the increase is due to a commercial real estate loan amounting to $604 thousand, which is 25% guaranteed by the New Jersey Economic Development Authority. The remainder of the change is due largely to an increase in delinquencies in ICC's equipment lease portfolio. Management is presently working with its source vendors and other entities to resolve the delinquencies. The resolution includes but is not limited to obtaining possession of the equipment, which will be re-marketed by the vendors to new customers. The ratio of nonperforming assets to total loans and foreclosed real estate increased to 0.54% at September 30, 2001, adjusted for the pay-off of the $971 thousand commercial loan, from 0.29% at December 31, 2000. 17 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 $6.3 million at September 30, 2001, and $6.2 million at December 31, 2000, representing 161.7% and 441.2% of nonperforming loans at those dates, respectively. For the first nine months of 2001 and 2000, the Company's provision for loan and lease losses was $590 thousand and $750 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. ALCO and the Board of Directors review this report. At September 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 September 30, 2001, 18 the Company was within policy limits established by the Board of Directors for changes in net interest income and future economic value of equity. 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 nine 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 19 perpetual preferred stock, trust preferred securities, certain other capital instruments and term subordinated debt. Total capital is the sum of core and supplementary capital. At September 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 September 30, 2001, the minimum leverage ratio requirement to be considered adequately capitalized was 4%. The capital levels of the Company and the Bank at September 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. At September 30, 2001, 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 September 30, 2001 (unaudited): Total Capital (to Risk Weighted Assets): The Company $72,266 12.73 % $45,403 8.00 % $56,754 10.00 % The Bank 71,662 12.62 45,402 8.00 56,753 10.00 Tier 1 Capital (to Risk Weighted Assets): The Company 65,927 11.62 22,702 4.00 34,052 6.00 The Bank 65,323 11.51 22,701 4.00 34,052 6.00 Tier 1 Capital (to Average Assets): The Company 65,927 8.18 32,251 4.00 N/A N/A The Bank 65,323 8.13 32,144 4.00 40,181 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
20 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 September 30, 2001, the total of such assets amounted to $23.1 million, or 2.9%, 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 September 30, 2001, total investments amounted to $170.5 million, an increase of $9.1 million or 5.7% as compared to December 31, 2000. The growth in investments occurred mostly in AFS securities, which is also another significant liquidity source. At September 30, 2001, AFS securities amounted to $130.3 million, or 76.4%, 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 September 30, 2001 amounted to $585.5 million, an increase of $30.8 million, or 5.5%, 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 September 30, 2001, total deposits amounted to $705.8 million, an increase of $36.9 million, or 5.5%, 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 September 30, 2001, advances from the FHLB and REPOS amounted to $18.5 million and $10.5 million, respectively, as compared to $13.0 million and $18.5 million, respectively, at December 31, 2000. At September 30, 2001, total borrowings amounted to 3.6% 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. 21 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 None 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 22 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: November 14, 2001 23 Exhibit 11. Computation Re: Earnings Per Share (dollars in thousands, except per share amounts)
--------------------------------------------------- --------------------------------------------------- Three Months Ended, Nine Months Ended, --------------------------------------------------- --------------------------------------------------- September 30, 2001 September 30, 2000 September 30, 2001 September 30, 2000 ------------------------- ------------------------ ------------------------ ----------------------- Weighted Per Weighted Per Weighted Per Weighted Per Average Share Average Share Average Share Average Share Income Shares Amount Income Shares Amount Income Shares Amount Income Shares Amount ------ -------- ------ ------ -------- ------- ------ -------- ------ ------ -------- ------ Basic Earnings per Common Share Income available to common shareholders $2,793 6,521 $0.43 $2,417 6,527 $0.37 7,598 6,535 $1.16 $6,599 6,544 $1.01 ===== ===== ===== ===== Effect of Dilutive Shares Options issued to management 38 16 28 18 ------- ------ ----- ----- Diluted Earnings per Common Share $2,793 6,559 $0.43 $2,417 6,543 $0.37 $7,598 6,563 $1.16 $6,599 6,562 $1.01 ====== ======= ===== ======= ====== ===== ====== ===== ===== ====== ===== =====
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