-----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, Cpmr3jaMxYSjUBChw4YhLB6OziZZPVJRuzp8nxBEvr3/4PftAUflwhSUEl1CHQc4 mVmrS4baqtTRSkc+Y8dDuA== /in/edgar/work/0000891092-00-001075/0000891092-00-001075.txt : 20001115 0000891092-00-001075.hdr.sgml : 20001115 ACCESSION NUMBER: 0000891092-00-001075 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERCHANGE FINANCIAL SERVICES CORP /NJ/ CENTRAL INDEX KEY: 0000755933 STANDARD INDUSTRIAL CLASSIFICATION: [6021 ] IRS NUMBER: 222553159 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10518 FILM NUMBER: 763721 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: INTERCHANGER STATE BANK DATE OF NAME CHANGE: 19870416 FORMER COMPANY: FORMER CONFORMED NAME: INTERCHANGE FINANCIAL SERVICES CORP DATE OF NAME CHANGE: 19861209 10-Q 1 0001.txt FORM 10-Q 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, 2000 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, 2000, was 6,530,498 shares. INTERCHANGE FINANCIAL SERVICES CORPORATION INDEX PART I FINANCIAL INFORMATION
Page No. Item 1 Financial Statements Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 .................................................... 1 Consolidated Statements of Income for the three and nine month periods ended September 30, 2000 and 1999 ............................ 2 Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30, 2000 and 1999 .................... 3 Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999 ............... 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 Operations in the section on Market Risk) ...................................................... 17 PART II OTHER INFORMATION Item 1 Legal Proceedings .................................................... 21 Item 2 Changes in Securities and Use of Proceeds ............................ 21 Item 3 Defaults upon Senior Securities ...................................... 21 Item 4 Submission of Matters to a Vote of Security Holders .................. 21 Item 5 Other Information .................................................... 21 Item 6 Exhibits and Reports on Form 8-K ..................................... 21 Signatures ........................................................... 22
Interchange Financial Services Corporation - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- (dollars in thousands) September 30, December 31, 2000 1999 ------------- ------------ (unaudited) Assets Cash and due from banks $ 20,112 $ 17,669 Securities held to maturity at amortized cost (estimated market value of $41,808 and $53,784 at September 30, 2000 and December 31, 1999, respectively) 42,169 54,540 -------- -------- Securities available for sale at estimated market value (amortized cost of $131,447 and $108,399 at September 30, 2000 and December 31, 1999, respectively) 130,867 107,349 -------- -------- Loans 549,033 511,976 Less: Allowance for loan losses 6,085 5,476 -------- -------- Net loans 542,948 506,500 -------- -------- Premises and equipment, net 11,193 10,289 Foreclosed real estate 250 250 Accrued interest receivable and other assets 10,098 9,528 -------- -------- Total assets $757,637 $706,125 ======== ======== Liabilities Deposits Non-interest bearing $103,148 $102,392 Interest bearing 548,501 496,600 -------- -------- Total deposits 651,649 598,992 -------- -------- Securities sold under agreements to repurchase 23,500 16,431 Short-term borrowings 3,375 13,975 Long-term borrowings 13,000 13,000 Accrued interest payable and other liabilities 6,904 5,451 -------- -------- Total liabilities 698,428 647,849 -------- -------- Commitments and contingent liabilities Stockholders' equity: Common stock, without par value; 15,000,000 shares authorized; 6,530,498 and 6,728,098 shares issued and outstanding at September 30, 2000 and December 31, 1999, respectively 5,397 5,397 Capital surplus 21,077 21,244 Retained earnings 45,894 41,741 Accumulated other comprehensive loss (408) (675) -------- -------- 71,960 67,707 Less: Treasury stock 12,751 9,431 -------- -------- Total stockholders' equity 59,209 58,276 -------- -------- Total liabilities and stockholders' equity $757,637 $706,125 ======== ======== - -------------------------------------------------------------------------------- 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, -------------------------- ------------------------ 2000 1999 2000 1999 ---------- ---------- --------- -------- Interest income Interest and fees on loans $11,478 $10,047 $32,723 $29,405 Interest on federal funds sold 258 129 528 543 Interest and dividends on securities Taxable interest income 2,594 2,186 7,212 6,164 Interest income exempt from federal income taxes 124 142 448 339 Dividends 65 63 190 194 ------- ------- ------- ------- Total interest income 14,519 12,567 41,101 36,645 ------- ------- ------- ------- Interest expense Interest on deposits 5,974 4,486 16,002 13,112 Interest on short-term borrowings 363 246 1,020 712 Interest on long-term borrowings 209 -- 622 -- ------- ------- ------- ------- Total interest expense 6,546 4,732 17,644 13,824 ------- ------- ------- ------- Net interest income 7,973 7,835 23,457 22,821 Provision for loan losses 150 300 750 900 ------- ------- ------- ------- Net interest income after provision for loan losses 7,823 7,535 22,707 21,921 ------- ------- ------- ------- Noninterest income Service fees on deposit accounts 617 586 1,765 1,727 Net gain on sale of securities -- 3 97 859 Other 557 1,015 1,198 1,887 ------- ------- ------- ------- Total noninterest income 1,174 1,604 3,060 4,473 ------- ------- ------- ------- Noninterest expenses Salaries and benefits 2,866 2,623 8,317 7,732 Net occupancy 755 648 2,211 1,978 Furniture and equipment 247 260 795 767 Advertising and promotion 247 259 853 778 Federal Deposit Insurance Corporation assessment 33 20 97 60 Other 1,228 1,261 3,635 3,790 ------- ------- ------- ------- Total noninterest expenses 5,376 5,071 15,908 15,105 ------- ------- ------- ------- Income before income taxes 3,621 4,068 9,859 11,289 Income taxes 1,204 1,363 3,260 3,820 ------- ------- ------- ------- Net income $ 2,417 $ 2,705 $ 6,599 $ 7,469 ======= ======= ======= ======= Basic earnings per common share $ 0.37 $ 0.38 $ 1.01 $ 1.04 ======= ======= ======= ======= Diluted earnings per common share $ 0.37 $ 0.38 $ 1.01 $ 1.04 ======= ======= ======= =======
- -------------------------------------------------------------------------------- See notes to consolidated financial statements. 2 Interchange Financial Services Corporation - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- (dollars in thousands, except share data) (unaudited)
Accumulated Other Comprehensive Retained Comprehensive Common Capital Income Earnings Income Stock Surplus ------------- -------- ------------- ------ ------- Balance at January 1, 1999 $35,482 $1,192 $5,397 $21,256 Comprehensive income Net Income $7,469 7,469 Other comprehensive income, net of taxes Unrealized losses on AFS debt securities (1,126) Less: gains on disposition of securities (excludes equities) (90) Unrealized gains securities transferred from held to maturity to available to sale - Acquisition 23 Unrealized loss on equity securities (18) Less: gains on disposition of equity securities (428) ------- Other comprehensive loss (1,639) (1,639) ------- Comprehensive income $5,830 ======= Dividends on common stock (2,567) Issued 13,869 shares of common stock in connection with Executive Compensation Plan 62 Exercised 2,954 option shares (14) Purchased 38,500 shares of common stock -------- ------ ------ ------- Balance at September 30, 1999 40,384 (447) 5,397 21,304 Net Income $2,166 2,166 Other comprehensive income, net of taxes Unrealized losses on AFS debt securities (228) ------ Other comprehensive loss (228) (228) ====== Comprehensive income $1,938 ====== Dividends on common stock (809) Issued 620 shares of common stock in connection with Executive Compensation Plan -- Exercised 4,882 option shares (60) Purchased 455,860 shares of common stock -------- ------ ------ ------- Balance at December 31, 1999 41,741 (675) 5,397 21,244 Net Income $6,599 6,599 Other comprehensive income, net of taxes Unrealized gains on AFS debt securities 328 Less: gains on disposition of securities (61) ------ Other comprehensive income 267 267 ------ Comprehensive income $6,866 ====== Dividends on common stock (2,446) Issued 11,406 shares of common stock in connection with Executive Compensation Plan (6) Exercised 16,634 option shares (161) Purchased 225,640 shares of common stock -------- ------ ------ ------- Balance at September 30, 2000 $45,894 $ (408) $5,397 $21,077 ======== ====== ====== ======= Treasury Stock Total -------- ----- Balance at January 1, 1999 $ (955) $62,372 Comprehensive income Net Income 7,469 Other comprehensive income, net of taxes Unrealized losses on AFS debt securities Less: gains on disposition of securities (excludes equities) Unrealized gains securities transferred from held to maturity to available to sale - Acquisition Unrealized loss on equity securities Less: gains on disposition of equity securities Other comprehensive loss (1,639) Comprehensive income Dividends on common stock (2,567) Issued 13,869 shares of common stock in connection with Executive Compensation Plan 184 246 Exercised 2,954 option shares 37 23 Purchased 38,500 shares of common stock (5,861) (5,861) ------ ------- Balance at September 30, 1999 (6,595) 60,043 Net Income 2,166 Other comprehensive income, net of taxes Unrealized losses on AFS debt securities Other comprehensive loss (228) Comprehensive income Dividends on common stock (809) Issued 620 shares of common stock in connection with Executive Compensation Plan -- -- Exercised 4,882 option shares 84 24 Purchased 455,860 shares of common stock (2,920) (2,920) -------- ------- Balance at December 31, 1999 (9,431) 58,276 Net Income 6,599 Other comprehensive income, net of taxes Unrealized gains on AFS debt securities Less: gains on disposition of securities Other comprehensive income 267 Comprehensive income Dividends on common stock (2,446) Issued 11,406 shares of common stock in connection with Executive Compensation Plan 196 190 Exercised 16,634 option shares 281 120 Purchased 225,640 shares of common stock (3,797) (3,797) -------- ------- Balance at September 30, 2000 $(12,751) $59,209 ======== =======
- -------------------------------------------------------------------------------- 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)
2000 1999 -------- -------- Cash flows from operating activities Net income $ 6,599 $ 7,469 Non-cash items included in earnings Depreciation and amortization 1,022 1,135 Amortization of securities premiums 261 572 Accretion of securities discounts (211) (128) Amortization of premiums in connection with acquisition 234 234 Provision for loan losses 750 900 Net gain on sale of securities (97) (859) Net gain on sale of loans (62) -- Net gain on sale of foreclosed real estate -- (36) Net loss on disposal of fixed assets -- 2 Decrease (increase) in operating assets Accrued interest receivable (37) 254 Other (1,152) 114 Incease (decrease) in operating liabilities Accrued interest payable 633 (155) Other 820 1,253 -------- -------- Cash provided by operating activities 8,760 10,755 -------- -------- Cash flows from investing activities (Payments for) proceeds from Net originations of loans (24,949) (18,179) Purchase of loans (13,544) (14,688) Maturities of term federal funds -- 5,000 Sale of loans 1,357 -- Purchase of securities available for sale (47,980) (53,900) Maturities of securities available for sale 7,293 11,624 Sale of securities available for sale 17,697 26,193 Sale of foreclosed real estate -- 120 Purchase of investment securities held to maturity (11,900) (17,058) Maturities of investment securities held to maturity 22,259 15,091 Sale of securities held to maturity 2,002 2,003 Purchase of fixed assets (1,745) (910) Sale of fixed assets -- 3 -------- -------- Cash used in investing activities (49,510) (44,701) -------- -------- Cash flows from financing activities Proceeds from (payments for) Deposits more than withdrawals 52,657 3,765 Securities sold under agreements to repurchase and other borrowings 10,444 24,775 Retirement of securities sold under agreements to repurchase and other borrowings (13,975) (14,118) Dividends (2,446) (2,567) Common stock issued 190 246 Treasury stock (3,797) (5,861) Exercise of option shares from Treasury 120 23 -------- -------- Cash provided by financing activities 43,193 6,263 -------- -------- Increase (decrease) in cash and cash equivalents 2,443 (27,683) Cash and cash equivalents, beginning of year 17,669 43,284 ======== ======== Cash and cash equivalents, end of period $ 20,112 $ 15,601 ======== ======== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 17,011 $ 13,979 Income taxes 3,310 2,540 Supplemental disclosure of non-cash investing activities: (Increase) decrease - market valuation of securities available for sale $ (470) $ 2,574 Loans transferred to foreclosed real estate -- 250
- -------------------------------------------------------------------------------- See notes to consolidated financial statements 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 (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 generally accepted accounting principles 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 generally accepted accounting principles 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, 1999. The consolidated financial data for the three and nine month periods ended September 30, 2000 and 1999, 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 In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments, and Hedging Activities, which is effective for all fiscal years beginning after June 15, 1999. SFAS 133 establishes 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 Company intends to adopt SFAS 133 effective January 1, 2001. Management does not expect the adoption of SFAS 133 to have a significant impact on the financial position or results of operations of the Company because the Company does not have significant derivative activity. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2000 and 1999, and should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1 hereof. Forward Looking Information In addition to discussing historical information, certain matters 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. These forward looking statements include, but are not limited to, statements about the operations of the Company and the adequacy of the Company's allowance for future losses associated with the loan portfolio. The forward looking statements in this report involve certain assumptions, known and unknown 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) 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 are no longer accurate, whether as a result of new information, what actually happens in the future or for any other reason. 7 THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999 Earnings Summary For the third quarter of 2000, the Company reported net income of $2.4 million or $0.37 diluted earnings per common share, as compared with $2.7 million or $0.38 diluted earnings per common share for the same period in 1999. The earnings comparisons were impacted by two non-recurring items in the 1999 period: a gain of $416 thousand from the sale of the Bank's VISA(TM) and merchant credit card portfolios and a gain of $365 thousand from the early pay-off of commercial loans purchased at a discount from face value. During the third quarter of 2000, the Company recognized $197 thousand of income from the early pay-off of commercial loans purchased at a discount. Further, the 2000 quarterly earnings were impacted by costs associated with the Bank's expansion programs, which programs were not in place during the third quarter of 1999. These costs were related to the start-up and operation of the following: Interchange Capital Company, LLC ("ICC"), the Bank's equipment lease financing subsidiary; a new branch in Waldwick, New Jersey; and Interchange Bank-Line Center, an inbound and outbound call center. These expansion programs are strategies designed to enhance the Company's franchise value in its market area. RESULTS OF OPERATIONS 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 $155 thousand to $8.0 million for the quarter ended September 30, 2000 as compared to the same quarter of 1999. The increase in net interest income is due to higher levels of interest earning assets, particularly loans and leases. The earnings benefit associated with the growth in loans was offset, in part, by a decline in the net interest margin ("margin"). For the quarter ended September 30, 2000, average loans and leases increased $45.9 million or 9.1% over the same period in 1999, which contributed to the growth in average earning assets of $61.6 million or 9.2%. The loan and lease growth was funded largely by deposit liabilities, which grew $54.9 million or 9.0%, on average, for the third quarter of 2000 as compared to the same period in 1999. Furthermore, a portion of the growth in earning assets was funded by borrowings, which increased, on average, $18.9 million or 104.8% for the third quarter of 2000 as compared to the same period in 1999. The growth in borrowings was 8 predominately in securities sold under agreements to repurchase with the Bank's retail customers. Higher market interest rates and a shift in the composition of interest bearing liabilities resulted in a 72 basis points increase in the Company's cost of funds to 3.69% for the third quarter of 2000 as compared to the same period in 1999. The higher funding cost was principally responsible for the decline in the margin. The margin was 4.38% for the third quarter of 2000 as compared to 4.69% for the same quarter in 1999. Non-interest Income For the quarter ended September 30, 2000, non-interest income amounted to $1.2 million, a decrease of $430 thousand or 26.8% as compared to the same period in 1999. The quarterly comparison was largely affected by non-recurring items in the 1999 period: net gains on the sale of the Company's VISA(TM) and merchant portfolios of $416 thousand and a $365 thousand gain arising from the early pay-off of commercial loans purchased at a discount. During the same period in 2000, a gain of $197 thousand was recorded on the early pay-off of commercial loans purchased at a discount and income was recognized from the settlement of an insurance claim for flood damages amounting to $53 thousand. Adjusting for the non-recurring items during these two periods, non-interest income increased $101 thousand or 12.3%. A $31 thousand or 5.3% growth in service fees on deposit accounts contributed to the increase. Non-interest Expenses For the quarter ended September 30, 2000, non-interest expenses amounted to $5.4 million, an increase of $305 thousand or 6.0% as compared to the same period in 1999. This increase was due mostly to the Bank's expansion of its operations, which included, but was not limited to, ICC, the Company's new Bank-Line Center, a fully staffed in-bound and out-bound call center and a new branch in Waldwick, New Jersey. Expenses necessary to operate ICC, the Bank-line Center and the new branch during the third quarter of 2000 amounted to approximately $282 thousand and were comprised mostly of salaries and benefits. Excluding the operating expenses associated with the bank's expansion programs; non-interest expenses increased $23 thousand or 0.5% as compared to the same period in 1999. Income Taxes Income tax expense as a percentage of pre-tax income was 33.3% for the three months ended September 30, 2000 as compared to 33.5% for the same period in 1999. 9 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999 Earnings Summary For the first nine months of 2000, the Company reported net income of $6.6 million or $1.01 diluted earnings per common share, as compared with $7.5 million or $1.04 diluted earnings per common share for the same period in 1999. The earnings comparisons were mainly impacted by three non-recurring items in the 1999 period; net gains on the sale of securities of $859 thousand; gains of $416 thousand from the sale of the Bank's VISA(TM) and merchant credit card portfolios; and $670 thousand of income from the early pay-off of commercial loans purchased at a discount from face value. During the first nine-months of 2000, the Company recognized $217 thousand of income from the early pay-off of commercial loans purchased at a discount. Further, the 2000 earnings were impacted by costs associated with the Bank's expansion programs, which programs were not in place during the same period in 1999. These costs were related to the start-up and operation of the following: ICC; a new branch in Waldwick, New Jersey; and the Bank-Line Center. These expansion programs are strategies designed to enhance the Company's franchise value in its market area. RESULTS OF OPERATIONS Net Interest Income Net interest income on a tax equivalent basis increased $678 thousand to $23.6 million for the nine months ended September 30, 2000 as compared to the same period in 1999. The increase in net interest income is due to higher levels of interest earning assets, particularly loans and leases. The earnings benefit associated with the growth in loans was offset, in part, by a decline in the net interest margin ("margin"). For the nine months ended September 30, 2000, average loans and leases increased $41.8 million or 8.5% over the same period in 1999, which facilitated a growth in average earning assets of $51.2 million or 7.8%. The loan and lease growth was funded largely by deposit liabilities, which grew $41.9 million or 7.0%, on average, for the first nine months of 2000 as compared to the same period in 1999. Furthermore, a portion of the growth in earning assets was funded by borrowings, which increased, on average, $19.5 million or 112.1% for the first nine months of 2000 as compared to the same period in 1999. The growth in borrowings was predominately in securities sold under agreements to repurchase with the Bank's retail 10 customers. Higher market interest rates and a shift in the composition of interest bearing liabilities resulted in a 68 basis points increase in the Company's cost of funds to 3.67% for the first nine months of 2000 as compared to the same period in 1999. The higher funding cost was principally responsible for the decline in the margin. The margin was 4.45% for the first nine months of 2000 as compared to 4.66% for the same period in 1999. Non-interest Income For the nine months ended September 30, 2000, non-interest income amounted to $3.1 million, a decrease of $1.4 million or 31.6% compared to the same period in 1999. The decrease was primarily due to three non-recurring items which occurred during the 1999 period: net gains on the sale of securities of $859 thousand, the recognition of $670 thousand of income resulting from the early pay-off of commercial loans purchased at a discount and a gain of $416 thousand associated with the sale of the Company's VISA(TM) and merchant portfolios. During the 2000 year to date period, net gains on the sale of securities amounted to $97 thousand and the Company recorded gains of $217 thousand from the early pay-off of commercial loans purchased at a discount. In addition, $53 thousand of income was recorded from the settlement of a flood insurance claim. Adjusting for the non-recurring items during these two periods, non-interest income increased $165 thousand or 6.5%. The increase primarily is attributable to lease syndication fees of $61 thousand, and growth in fee income from the sale of mutual funds and annuities of $92 thousand. Non-interest Expenses For the nine months ended September 30, 2000, non-interest expenses amounted to $15.9 million, an increase of $803 thousand or 5.3% as compared to the same period in 1999. This increase was due mostly to the Bank's expansion of its operations, which included, but was not limited to, ICC, the Bank-Line Center, and a new branch in Waldwick, New Jersey. Expenses necessary to operate ICC, the Bank-Line Center and the new branch during the first nine months of 2000 amounted to approximately $776 thousand and were comprised mostly of salaries and benefits. During the 2000 period there were two non-recurring items which affected the earnings comparison with the same period in 1999: the Company paid $118 thousand for a legal settlement relating to the interpretation of past rental adjustments on a branch office. This expense was offset in the second quarter of 2000 by a credit of $165 thousand arising from an adjustment to an actuarial assumption related to the outside directors retirement plan. After adjusting for the costs and operating expenses associated with the 11 Bank's expansion programs, the legal settlement and the adjustment to the outside directors retirement plan, non-interest expenses increased $74 thousand or 0.5% as compared to the same period in 1999. Income Taxes Income tax expense as a percentage of pre-tax income was 33.1% for the nine months ended September 30, 2000 as compared to 33.8% for the same period in 1999. The improvement was largely due to increased investment in tax exempt municipal securities and loans. FINANCIAL CONDITION At September 30, 2000, the Company's total assets were $757.6 million, an increase of $51.5 million or 7.3% from $706.1 million at December 31, 1999. Loans and leases, which grew $37.1 million or 7.2% for September 30, 2000 as compared to December 31, 1999, comprised most of the increase. In addition, the investment portfolio grew $11.1 million or 6.9% for September 30, 2000 as compared to December 31, 1999. The asset growth was funded principally by the growth in deposit liabilities, which occurred mostly in time deposits. Cash and Cash Equivalents At September 30, 2000, cash and cash equivalents increased $2.4 million as compared to December 31, 1999. This is largely the result of financing activities (reflecting principally deposit growth less repayments of borrowings) and operating activities (reflecting net income and changes in other assets) generating cash more rapidly than the investing activities (funding loans and investment growth) can utilize 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 loss" in the equity section of the balance sheet. The tax impact of such 12 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, Accounting for Certain Investments in Debt and Equity Securities, 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, 2000, investment securities totaled $173.0 million and represented 22.8% of total assets, as compared to $161.9 million and 22.9%, respectively, at December 31, 1999. AFS securities comprised 75.6% of the total securities portfolio at September 30, 2000 as compared to 66.3% at December 31, 1999. The following table presents the amortized cost of these securities and their estimated market values as of September 30, 2000 and December 31, 1999: (dollars in thousands)
--------------------------------------------------- September 30, 2000 --------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ------------- --------- Securities held to maturity Mortgage-backed securities $ 13,748 $ 41 $ 167 $ 13,622 Obligations of U.S. agencies 15,149 45 25 15,169 Obligations of states & political subdivisions 12,806 36 294 12,548 Other debt securities 466 3 -- 469 -------- -------- -------- -------- 42,169 125 486 41,808 -------- -------- -------- -------- Securities available for sale Obligations of U.S. Treasury 1,995 7 -- 2,002 Mortgage-backed securities 78,350 198 765 77,783 Obligations of U.S. agencies 35,899 164 54 36,009 Obligations of states & political subdivisions 10,607 24 161 10,470 Other debt securities 641 7 -- 648 Equity securities 3,955 -- -- 3,955 -------- -------- -------- -------- 131,447 400 980 130,867 -------- -------- -------- -------- Total securities $173,616 $ 525 $ 1,466 $172,675 ======== ======== ======== ========
13
--------------------------------------------------- December 31, 1999 --------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ------------- --------- Securities held to maturity Obligations of U.S. Treasury $ 9,997 $ 5 $ 8 $ 9,994 Mortgage-backed securities 20,232 60 289 20,003 Obligations of U.S. agencies 7,992 8 51 7,949 Obligations of states & political subdivisions 16,195 -- 481 15,714 Other debt securities 124 -- -- 124 -------- -------- -------- -------- 54,540 73 829 53,784 -------- -------- -------- -------- Securities available for sale Obligations of U.S. Treasury 6,016 87 -- 6,103 Mortgage-backed securities 68,331 104 982 67,453 Obligations of U.S. agencies 27,141 51 112 27,080 Obligations of states & political subdivisions 3,139 -- 198 2,941 Equity securities 3,772 -- -- 3,772 -------- -------- -------- -------- 108,399 242 1,292 107,349 -------- -------- -------- -------- Total securities $162,939 $ 315 $ 2,121 $161,133 ======== ======== ======== ========
At September 30, 2000, 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 $ 10,208 $ 10,188 $ 12,794 $ 12,742 After 1 but within 5 years 14,802 14,759 77,391 77,153 After 5 but within 10 years 5,400 5,398 13,260 13,004 After 10 years 11,759 11,463 24,047 24,013 Equity securities -- -- 3,955 3,955 -------- -------- -------- -------- Total $ 42,169 $ 41,808 $131,447 $130,867 ======== ======== ======== ========
During the first quarter of 2000, the Company sold certain AFS securities in an effort to improve the risk/reward characteristics of the securities portfolio. AFS securities with a book value of $17.6 million were sold. Gains of $126 thousand and losses of $31 thousand were recognized from the sale. In addition, one HTM security with a book value of $2.0 million was sold. A gain of $2 thousand was recognized from the sale. The HTM security had a remaining maturity of less than two months, therefore, it is considered as a "maturity" for purposes of 14 classification of securities under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. There were no security sales during the second and third quarters of 2000. Loans and Leases Total loans and leases amounted to $549.0 million and $512.0 million at September 30, 2000 and December 31, 1999, respectively, representing an increase of $37.1 million or 7.2% as compared to December 31, 1999. The growth was predominately in commercial mortgage loans and lease financing, which increased $14.6 million and $14.3 million, respectively. During the first nine months of 2000, the Company purchased $5.3 million and $8.2 million of loans and leases, respectively. These assets were subjected to the Company's independent credit analysis prior to purchase. Opportunistic purchases of loans and leases are currently a desirable way for the Company to augment its loan and lease originations. For the first nine months of 2000, the Company syndicated $1.1 million in commercial equipment leases and collected $61,000 in syndication fees. The following table reflects the composition of the loan and lease portfolio: ------------- ------------ September 30, December 31, 2000 1999 ------------- ------------ Amount of loans by type (dollars in thousands) Real estate-mortgage Commercial $180,946 $166,354 1-4 family residential First liens 111,729 110,269 Junior liens 11,843 9,829 Home equity 143,820 144,747 Commercial and financial 68,137 63,684 Real estate-construction 3,767 4,008 Installment 5,086 3,703 Lease financing 23,705 9,382 -------- -------- Total $549,033 $511,976 ======== ======== 15 Deposits At September 30, 2000, total deposits increased $52.7 million or 8.8% to $651.6 million from $599.0 million at December 31, 1999. The growth was principally in time deposits, which grew $47.4 million or 29.2% as a result of promotional campaigns. In addition, money market savings grew $20.5 million or 41.6%. A decline in interest bearing demand and savings accounts of $12.2 million and $3.8 million, respectively, served to offset some of the aforementioned growth in time deposits and money market savings. At September 30, 2000, time deposits comprised 30.5% of all deposits as compared to 27.1% at December 31, 1999. Nonperforming Assets Nonperforming assets are comprised of nonaccrual loans, restructured loans and foreclosed real estate. At September 30, 2000, nonperforming assets amounted to $1.4 million, a decrease of $224 thousand or 14.1% from $1.6 million at December 31, 1999. Nonperforming assets at September 30, 2000 decreased by $43 thousand or 3.3% from $1.3 million at September 30, 1999. The ratio of nonperforming assets to total loans and foreclosed real estate decreased to 0.25% at September 30, 2000 from 0.31% and 0.26% at December 31, 1999 and September 30, 1999, respectively. Provision for Loan Losses and Loan Loss Experience The provision for loan losses represents management's determination of the amount necessary to bring the allowance for loan losses to a level that management considers adequate to reflect the risk of future losses inherent in the Company's loan portfolio. In its evaluation of the adequacy of the allowance for loan losses, 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 allowance is necessarily judgmental and subject to changes in external conditions. Accordingly, the Company cannot assure you that existing levels of the allowance will ultimately prove adequate to cover actual loan losses. The allowance for loan losses was $6.1 million at September 30, 2000, and $5.5 million at December 31, 1999, representing 546.7% and 409.6% of nonperforming loans at those dates, respectively. In the first nine months of 2000 and 1999, the Company's provision for loan losses was $750 thousand and $900 thousand, respectively. 16 Market Risk The Company's primary source of market risk exposure arises from changes in market interest rates ("interest rate risk"). The Company's financial performance 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 market value and adjust the balance sheet (if necessary) to minimize the inherent risk and maximize income. The Company's exposure to market risk and interest rate risk is reviewed on a regular basis by the Asset/Liability Committee of the Board of Directors. Tools used by management to evaluate risk include an asset/liability simulation model. At September 30, 2000, 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 materially change from December 31, 1999. At September 30, 2000, the Company was within policy limits established by the Board of Directors for changes in net interest income and future economic value. 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 2000. 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 Bank 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. 17 Capital Adequacy The Company is subject to capital adequacy requirements imposed by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). The Federal Reserve has 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 and to minimize disincentives for holding liquid assets. 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. 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, 2000: Total Capital (to Risk Weighted Assets): The Company $65,667 12.90% $40,734 8.00% N/A N/A The Bank 65,177 12.77 40,828 8.00 $51,035 10.00% Tier 1 Capital (to Risk Weighted Assets): The Company 59,582 11.70 20,367 4.00 N/A N/A The Bank 59,092 11.58 20,414 4.00 30,621 6.00 Tier 1 Capital (to Average Assets): The Company 59,582 7.75 23,068 3.00 N/A N/A The Bank 59,092 7.69 23,066 3.00 38,444 5.00 As of December 31, 1999: Total Capital (to Risk Weighted Assets): The Company $64,209 13.91% $36,925 8.00% N/A N/A The Bank 64,877 14.01 37,054 8.00 $46,318 10.00% Tier 1 Capital (to Risk Weighted Assets): The Company 58,733 12.72 18,463 4.00 N/A N/A The Bank 59,401 12.82 18,527 4.00 27,791 6.00 Tier 1 Capital (to Average Assets): The Company 58,733 8.32 21,167 3.00 N/A N/A The Bank 59,401 8.45 21,080 3.00 35,133 5.00
18 Liquidity Liquidity is the ability to provide sufficient resources to meet all financial obligations and finance prospective business opportunities. Liquidity levels over any given period of time are a product of the Company's operating, financing and investing activities. The extent of such activities are often shaped by external factors such as competition for deposits and demand for loans. 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, 2000, total deposits amounted to $651.6 million, an increase of $52.7 million or 8.8% from December 31, 1999. In addition, the Company supplemented 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, 2000, advances from the FHLB and REPOS amounted to $16.4 million and $23.5 million, respectively, as compared to $27.0 million and $16.4 million, respectively, at December 31, 1999. The decrease in advances from the FHLB was due to the repayment of overnight borrowings resulting from the growth in deposit liabilities. In 2000, despite heightened competition for loans, loan and lease production continued to be the Company's principal investing activity. The loan and lease portfolio at September 30, 2000 amounted to $549.0 million, an increase of $37.1 million or 7.2% from $512.0 million at December 31, 1999. The Company's most liquid assets are cash and due from banks and federal funds sold. At September 30, 2000, the total of such assets amounted to $20.1 million or 2.7% of total assets, compared to $17.7 million or 2.5% of total assets at year-end 1999. The increase in cash and cash equivalents was due largely to the deposit growth. Another significant liquidity source is the Company's AFS securities. At September 30, 2000, AFS securities amounted to $130.9 million or 75.6% of total securities, compared to $107.3 million or 66.3% of total securities at year-end 1999. 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 $67.5 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 funding requirements. 19 New Accounting Pronouncement In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments, and Hedging Activities, which is effective for all fiscal years beginning after June 15, 1999. SFAS 133 establishes 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 Company intends to adopt SFAS 133 effective January 1, 2001. Management does not expect the adoption of SFAS 133 to have a significant impact on the financial position or results of operations of the Company because the Company does not have significant derivative activity. 20 PART II - OTHER INFORMATION Item 1. Legal Proceedings Reference is made to Note 3 of the Company's Consolidated Financial Statements of this Form 10-Q. Item 2. Changes 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 No. ----------- 11 Statement re: computation of per share earnings 27 Financial Data Schedule (b) Reports on Form 8-K None filed for the quarter ended September 30, 2000 21 SIGNATURES Pursuant to the requirements of the Securities and 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, 2000 22 Exhibit 11. Computation Re: Earnings Per Share (dollars in thousands, except per share amounts)
--------------------------------------------------- --------------------------------------------------- Three Months Ended, Nine Months Ended, --------------------------------------------------- --------------------------------------------------- September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999 ------------------------- ------------------------ ------------------------- ------------------------ 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 $2,417 6,527 $0.37 $2,705 7,043 $0.38 $6,599 6,544 $1.01 $7,469 7,148 $1.04 ===== ===== ===== ===== Effect of Dilutive Shares Options issued to management 16 39 18 35 ----- ----- ----- ---- Diluted Earnings per Common Share $2,417 6,543 $0.37 $2,705 7,082 $0.38 $6,599 6,562 $1.01 $7,469 7,183 $1.04 ====== ===== ===== ====== ===== ===== ====== ===== ===== ====== ===== =====
EX-27 2 0002.txt FDS --
9 1000 9-Mos DEC-31-2000 JAN-01-2000 SEP-30-2000 20,112 0 0 0 130,867 42,169 41,808 549,033 6,085 757,637 651,649 26,875 6,904 13,000 0 0 5,397 53,812 757,637 32,723 7,850 528 41,101 16,002 17,644 23,457 750 97 15,908 9,859 9,859 0 0 6,599 1.01 1.01 4.45 1,113 24 0 0 5,476 214 73 6,085 6,085 0 2,773
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