<TABLE>
INTERCHANGE FINANCIAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
September 30, December 31,
1998 1997
--------------- -------------
<S> <C> <C>
Assets
Cash and due from banks $ 14,288 $ 19,215
Interest bearing demand deposits 24 1,968
Federal funds sold - 15,400
--------------- -------------
Total cash and cash equivalents 14,312 36,583
--------------- -------------
Investment securities at amortized cost (approximate
market value of $60,362 and $60,834) 59,408 60,442
Securities available for sale at estimated market value
(amortized cost of $84,291 and $73,640) 86,351 75,556
Loans 475,791 438,273
Less: Allowance for loan losses 5,493 5,231
--------------- -------------
Net loans 470,298 433,042
--------------- -------------
Premises and equipment, net 9,954 9,548
Accrued interest receivable and other assets 8,202 9,879
--------------- -------------
Total assets $648,525 $625,050
=============== =============
Liabilities
Deposits
Noninterest bearing $ 93,318 $ 95,437
Interest bearing 470,497 445,329
--------------- -------------
Total deposits 563,815 540,766
Securities sold under agreements to repurchase 9,280 13,027
Short-term borrowings 650 -
Accrued interest payable and other liabilities 4,432 5,248
Long-term borrowings 9,797 9,879
--------------- -------------
Total liabilities 587,974 568,920
--------------- -------------
Commitments and contingent liabilities - -
Stockholders' equity
Common stock 5,397 5,396
Capital surplus 21,291 21,557
Retained earnings 33,545 29,698
Acumulated Other Comprehensive Income 1,306 1,185
--------------- -------------
61,539 57,836
Less: Treasury Stock (77,302 and 134,025 common shares) 988 1,706
--------------- -------------
Total stockholders' equity 60,551 56,130
--------------- -------------
Total liabilities and stockholders' equity $648,525 $625,050
=============== =============
- ------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
INTERCHANGE FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $10,028 $9,028 $29,238 $26,179
Interest on federal funds sold 359 170 1,162 556
Interest on interest bearing deposits 6 20 55 59
Interest and dividends on securities
Taxable interest income 2,021 2,194 6,003 6,496
Interest income exempt from federal income taxes 42 36 92 60
Dividends 77 55 208 169
------------ ----------- ----------- ------------
Total interest income 12,533 11,503 36,758 33,519
------------ ----------- ----------- ------------
Interest expense
Interest on deposits 4,743 4,436 13,956 12,746
Interest on short-term borrowings 235 180 692 545
Interest on long-term borrowings 148 149 442 447
------------ ----------- ----------- ------------
Total interest expense 5,126 4,765 15,090 13,738
------------ ----------- ----------- ------------
Net interest income 7,407 6,738 21,668 19,781
Provision for loan losses 210 210 641 1,347
------------ ----------- ----------- ------------
Net interest income after provision
for loan losses 7,197 6,528 21,027 18,434
------------ ----------- ----------- ------------
Noninterest income
Service fees on deposit accounts 652 557 1,926 1,502
Net gain on sale of loans - - - 1,067
Gain on sale of securities 94 - 94 -
Other 267 216 835 1,396
------------ ----------- ----------- ------------
Total noninterest income 1,013 773 2,855 3,965
------------ ----------- ----------- ------------
Noninterest expenses
Salaries and benefits 2,206 2,200 6,933 6,625
Net occupancy 611 527 1,747 1,607
Furniture and equipment 247 239 757 650
Advertising and promotion 195 196 585 582
Federal Deposit Insurance Corporation assessment 20 18 57 40
Foreclosed real estate expense, net - (5) - -
Acquisition 3 - 1,392 -
Other 1,006 1,192 3,183 3,557
------------ ----------- ----------- ------------
Total noninterest expenses 4,288 4,367 14,654 13,061
------------ ----------- ----------- ------------
Income before income taxes 3,922 2,934 9,228 9,338
Income taxes 1,375 1,030 3,276 3,277
------------ ----------- ----------- ------------
Net income $ 2,547 $ 1,904 $ 5,952 $ 6,061
============ =========== =========== ============
Basic earnings per common share $0.35 $0.27 $0.83 $0.85
============ =========== =========== ============
Diluted earnings per common share $0.35 $0.27 $0.82 $0.84
============ =========== =========== ============
- --------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
INTERCHANGE FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<CAPTION>
Accumulated
Other
Comprehensive Retained Comprehensive Common Capital Treasury
Income Earnings Income Stock Surplus Stock Total
---------- -------- --------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $24,157 $256 $5,285 $20,350 - $50,048
Comprehensive income
Net Income $6,061 6,061 6,061
Other comprehensive income, net of taxes
Unrealized gains on debt securities 284
Unrealized gains on equity securities 455
----------
Other comprehensive income 739 739 739
----------
==========
Comprehensive income $6,800
==========
Dividends on common stock (1,789) (1,789)
Fractional shares on 3 for 2 stock split (3) (3)
Issued 12,822 shares of common stock in connection
with Executive Compensation Plan (1) 9 159 168
Exercised 27,440 option shares (1) 20 143 163
Exercised 600 option shares (1) 4 4
Purchased 12,200 shares in exchange for option shares (1) (163) (163)
Issued 16,586 common shares under Dividend Reinvestment Plan 12 128 140
Issued 229,562 shares of common stock in merger with
Washington Interchange Corporation (1) 170 2,765 2,935
Acquired 187,283 shares of common stock held by
Washington Interchange Corporation (1) (2,394) (2,394)
Retired 187,283 shares of common stock held by
Washington Interchange Corporation (1) (138) (2,256) 2,394 -
Purchased 121,826 shares of common stock (1) (1,543) (1,543)
---------- -------- --------------- -------- -------- -------- ----------
Balance at September 30, 1997 28,429 995 5,358 21,290 (1,706) 54,366
Comprehensive income
Net Income $1,864 1,864 1,864
Other comprehensive income, net of taxes
Unrealized gains on debt securities 45
Unrealized gains on equity securities 145
----------
Other comprehensive income 190 190 190
----------
==========
Comprehensive income $2,054
==========
Dividends on common stock (595) (595)
Exercised 23,225 option shares (1) 18 97 115
Exercised 23,100 option shares (1) 17 133 150
Issued 11,480 common shares under Dividend Reinvestment Plan 3 37 40
-------- --------------- -------- -------- -------- ----------
Balance at December 31, 1997 29,698 1,185 5,396 21,557 (1,706) 56,130
Comprehensive income
Net Income $5,952 5,952 5,952
Other comprehensive income, net of taxes
Unrealized gains on debt securities 467
Unrealized losses securities transferred from held to
maturity to available to sale - Acquisition (22)
Unrealized loss on equity securities (268)
Less: gains on disposition of equity securities (56)
----------
Other comprehensive income 121 121 121
----------
==========
Comprehensive income $6,073
==========
Dividends on common stock (2,105) (2,105)
Fractional shares on 3 for 2 stock split and merger shares (6) (6)
Issued 12,769 shares of common stock in connection
with Executive Compensation Plan (1) 70 162 232
Exercise of 44,680 option shares (1) 1 (330) 556 227
-------- --------------- -------- -------- -------- ----------
Balance at September 30, 1998 $33,545 $1,306 $5,397 $21,291 $(988) $60,551
======== =============== ======== ======== ======== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Adjusted for the effects of the 3 for 2 stock split issued on April 17, 1998 to shareholders of record on March 20, 1998
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INTERCHANGE FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
For the nine months ended
September 30,
-------------------------
1998 1997
-------------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 5,952 $ 6,061
Non-cash items included in earnings
Depreciation and amortization of fixed assets 1,015 863
Amortization of securities premiums 709 626
Accretion of securities discounts (131) (89)
Amortization of premiums in connection with acquisition 305 333
Provision for loan losses 641 1,347
Net gain on sale of loans - (1,067)
Net gain on sale of available for sale securities (94) -
Net gain on sale of foreclosed real estate - (6)
Increase in carrying value of loans available for sale - (7)
Decrease (increase) in operating assets
Net repayment of loans available for sale - 18
Accrued interest receivable (52) 274
Deferred taxes (3) (29)
Other 1,392 50
(Decrease) increase in operating liabilities
Accrued interest payable (83) 84
Other (733) (256)
---------- ----------
Cash provided by operating activities 8,918 8,202
---------- ----------
Cash flows from investing activities
(Payments for) proceeds from
Net originations of loans (21,179) (33,853)
Purchase of loans (12,127) (1,502)
Purchase of term federal funds (7,500) -
Repayment of term federal funds 2,500 -
Sale of loans 409 5,944
Purchase of securities available for sale (14,662) (13,320)
Maturities of securities available for sale 13,313 3,331
Sale of securities available for sale 229 -
Sale of foreclosed real estate - 616
Purchase of investment securities (27,169) (21,948)
Maturities of investment securities 18,189 30,304
Washington Interchange Merger - 37
Purchase of fixed assets (1,414) (3,000)
Sale of fixed assets 4 13
---------- ----------
Cash used in investing activities (49,407) (33,378)
---------- ----------
Cash flows from financing activities
Proceeds from (payments for)
Deposits more than withdrawals 23,049 30,557
Securities sold under agreements to repurchase 16,300 14,388
Other borrowings 650 (5,200)
Retirement of securities sold under agreement to repurchase and other
borrowings (20,129) (12,878)
Dividends (2,105) (1,789)
Common stock issued 226 312
Treasury stock - (1,543)
Exercise of option shares from Treasury 227 -
---------- ----------
Cash provided by financing activities 18,218 23,847
---------- ----------
Increase in cash and cash equivalents (22,271) (1,329)
Cash and cash equivalents, beginning of year 36,583 33,189
========== ==========
Cash and cash equivalents, end of period $14,312 $31,860
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $15,172 $13,655
Income taxes 4,113 3,885
Supplemental disclosure of non-cash investing activities:
Increase - market valuation of securities available for sale $ (145) $(1,210)
Amortization of valuation allowance - securities transferred from
available for sale to held to maturity - 8
Washington Interchange merger - 504
- --------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
1. Basis of Presentation
The accompanying unaudited consolidated financial statements 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 Interchange
Financial Services Corporation (the "Company") for the year ended December 31,
1997.
The consolidated financial data for the nine months ended September 30,
1998 and 1997, 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. Effective May 31, 1998, the Company acquired The Jersey
Bank for Savings ("Jersey"). The acquisition has been accounted for under the
pooling-of-interests method of accounting, accordingly, the financial statements
have been retroactively restated to include the consolidated accounts of Jersey
for all periods presented. The transaction resulted in the issuance of 780,198
shares of the Company's common stock.
1. 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.
<PAGE>
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.
<PAGE>
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 months
ended September 30, 1998 and 1997, and should be read in conjunction with the
consolidated financial statements and notes thereto included in Item 1 hereof.
The Company issued a 3 for 2 stock split on April 17, 1998 to shareholders
of record on March 20, 1998. All per share and share data have been
retroactively restated to include the effects of the split for all periods
presented.
Effective May 31, 1998, the Company acquired The Jersey Bank for Savings
("Jersey"). The acquisition has been accounted for under the pooling of
interests method of accounting, accordingly the financial statements have been
retroactively restated to include the consolidated accounts of Jersey for all
periods presented.
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Earnings Summary
Net income for the three months ended September 30, 1998, was $2.5 million
or $.35 diluted earnings per common share, as compared to $1.9 million or $.27
diluted earnings per common share for the same period a year ago. Growth in net
interest income and noninterest income as well as a decline in noninterest
expenses was principally responsible for the improvement in earnings.
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 $670
thousand or 9.9% to $7.4 million for the quarter ended September 30, 1998 as
compared to the same quarter in 1997. The increase in net interest income is
principally due to higher levels of interest earning assets and increased loan
production. The loan growth was funded largely by the growth in deposit
liabilities.
Average earning assets increased $71.1 million or 12.6% to $636.5 million
for the quarter ended September 30, 1998, over the same period in 1997. The
growth was mainly the result of an increase in loan volume, particularly,
commercial mortgages, home equity loans and 1-4 family residential mortgages.
For the third quarter of 1998, average loans increased $61.7 million or 15.1%
over the same period in 1997. The average yield on loans was negatively impacted
by a decline in market rates and increased competitive factors and decreased 33
basis points for the quarter ended September 30, 1998, as compared to the same
period a year ago. However, the increased loan volume contributed to a $1.0
million growth in loan interest income that offset the decline in yield. The
growth in loan interest income was instrumental to the growth in net interest
income.
For the quarter ended September 30, 1998, average interest bearing deposits
grew $39.1 million or 8.9% and noninterest bearing demand deposits grew $13.3
million or 16.1%. The total growth in average deposits amounted to 10.0%.
Despite the strong growth in interest bearing deposits, the Company's annualized
cost of deposits decreased 9 basis points over the third quarter of 1997.
Noninterest Income
For the quarter ended September 30, 1998, noninterest income amounted to
$1.0 million, an increase of $240 thousand as compared to the same period in
1997. The increase was largely the result of a $95 thousand increase in service
charges on deposits. The higher levels of service charges on deposits can be
attributed to a comprehensive review of the sources of fee income employed by
the Company and the growth in the deposit base. A gain of $94 thousand from the
sale of equity securities also contributed to the increase in noninterest
income.
Noninterest Expenses
For the quarter ended September 30, 1998, noninterest expenses amounted to
$4.3 million, a decrease of approximately $79 thousand as compared to the same
period in 1997. The decrease was principally due to a $186 thousand decline in
other noninterest expenses. The decrease in other noninterest expenses, includes
but is not limited to, a $96,000 decline in legal costs. In addition, the
Company exceeded cost savings expectations with respect to the merger with
Jersey Bank for Savings, which further contributed to the decrease in
noninterest expenses. The decline in noninterest expenses was partially offset
by a $92 thousand increase in occupancy and equipment costs due mainly to an
increase in depreciation expense resulting from the installation of a new
mainframe computer and the renovation of a branch during the first six months of
1998.
One of the Company's goals is to control expenses in order to maximize
earnings and shareholder value. Generally, the efficiency ratio is one method
utilized to measure a bank's operating expenses. The efficiency ratio is gross
operating expenses, excluding the amortization of intangibles, the merger
related expenses and net expenses of foreclosed real estate, expressed as a
percentage of net interest income (on a fully taxable equivalent basis) and
other noninterest income, excluding gains. Generally, the lower the efficiency
ratio the more effective the Company is in utilizing its resources to produce
income. The Company's efficiency ratio for the quarter ended September 30, 1998,
was 50.5% as compared to 56.7% for the same period in 1997. The improvement was
mostly attributable to the growth in net interest income and noninterest income
and a decline in noninterest expenses. The national peer group average
(published by SNL Securities) for the year 1997 was 60.4%.
Income Taxes
Income tax expense as a percentage of pre-tax income was 35.1% for the
quarter ended September 30, 1998 the same as the third quarter of 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Earnings Summary
Net income for the nine months ended September 30, 1998, was $6.0 million
or $.82 diluted earnings per common share, as compared to $6.1 million or $.84
diluted earnings per common share for the same period a year ago. If the Jersey
nonrecurring merger related charge of $898 thousand, net of tax were excluded,
the Company would have reported net income of $6.9 million, an increase of $789
thousand or 13.0% from the prior comparable period. Diluted earnings per common
share, excluding the merger related charge, were $.95, an increase of 13.1% over
the prior comparable period.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income on a tax equivalent basis increased $1.9 million to
$21.7 million for the nine months ended September 30, 1998 as compared to the
same period of 1997. The increase in net interest income is principally due to
higher levels of interest earning assets and increased loan production. The loan
growth was funded largely by the growth in deposit liabilities.
Average earning assets increased $73.2 million or 13.3% to $625.0 million
for the nine months ended September 30, 1998, over the same period in 1997. The
growth was mainly the result of an increase in loan volume, particularly,
commercial mortgage loans, home equity loans and consumer auto leases. For the
first nine months of 1998, average loans increased $62.1 million or 15.7% over
the same period in 1997. The average yield on loans was negatively impacted by a
decline in market rates and increased competitive factors and decreased 30 basis
points for the nine months ended September 30, 1998, as compared to the same
period a year ago. However, the increased loan volume contributed to a $3.1
million growth in loan income that offset the decline in yield. The growth in
loan income was instrumental to the growth in net interest income.
For the nine months ended September 30, 1998, average interest bearing
deposits grew $41.7 million or 9.7% and noninterest bearing demand deposits grew
$13.7 million or 17.4%. The total growth in average deposits amounted to 10.9%.
Despite the strong growth in interest bearing deposits, the Company's annualized
cost of deposits decreased 4 basis points as compared to the first nine months
of 1997.
Noninterest Income
For the nine months ended September 30, 1998, noninterest income amounted
to $2.9 million, a decrease of $1.1 million from the same period in 1997. The
decrease was principally due to the recognition of gains during the first half
of 1997 of $1.1 million from the sale of commercial loans and of $775 thousand
from the payoff of a commercial loan that was acquired at a discount. Adjusting
for these significant nonrecurring items, noninterest income effectively
increased $732 thousand. The increase was largely the result of a $424 thousand
increase in service charges on deposits. The higher levels of service charges on
deposits can be attributed to a comprehensive review of the source of fee income
employed by the Company and the growth in the deposit base. A gain of $94
thousand from the sale of equity securities and a gain of $53 thousand from the
sale of reverse mortgage servicing also contributed to the effective increase in
noninterest income.
Noninterest Expenses
For the nine months ended September 30, 1998, noninterest expenses amounted
to $14.7 million, an increase of $1.6 million as compared to the same period in
1997. The predominant factor for the increase was the one time merger related
charges of $1.4 million resulting from the merger with The Jersey Bank for
Savings. Excluding the one time merger related charges noninterest expenses
increased $201 thousand or 1.5% over the same period in 1997. Salaries and
benefits expense, which increased $308 thousand or 4.6% contributed mostly to
the increase. The increase was mostly due to normal salary raises and
promotions. At September 30, 1998 and 1997, full-time equivalent staff was 199.
Occupancy and equipment costs that increased $247 thousand from the same period
in 1997 were also partly responsible for the increase. The increase in occupancy
and equipment costs was mostly due an increase in depreciation expense resulting
from the installation of a new mainframe computer, the addition of new equipment
and the renovation of a branch during the first six months of 1998. The
recognition of approximately $355 thousand from the cash surrender value of the
directors' life insurance policies, which reduced other noninterest expenses,
partly offset the increases in salaries and benefits and in occupancy and
equipment expenses.
The Company's efficiency ratio for the nine months ended September 30,
1998, was 53.04% as compared to 58.11% for the same period in 1997. The
improvement was mostly attributable to the growth in net interest income and
noninterest income in conjunction with a moderate growth in noninterest
expenses. The national peer group average (published by SNL Securities) for the
year 1997 was 60.4%.
Income Taxes
Income tax expense as a percentage of pre-tax income was 35.5% for the nine
months ended September 30, 1998 as compared to 35.1% for the same period in
1997. The increase is attributable to an increase in the effective state income
tax rate.
FINANCIAL CONDITION
At September 30, 1998, the Company's total assets increased $23.5 million
or 3.8% to $648.5 million from $625.1 million at December 31, 1997. At September
30, 1998, cash and cash equivalents decreased $22.3 million as compared to
December 31, 1997. This is principally the result of financing activities
(reflecting principally repayments of borrowings) and investing activities
(funding loans and investment growth) utilizing cash more rapidly than the
operating activities (reflecting net income and changes in other assets) can
provide it. This can be seen more completely on the accompanying Statements of
Cash Flows.
<PAGE>
<TABLE>
Securities
Securities held to maturity and securities available for sale consist of the following: (in thousands)
<CAPTION>
September 30, 1998
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Securities held to maturity
Obligations of U.S. Treasury $ 19,997 $ 237 - $ 20,234
Mortgage-backed securities 20,681 310 $21 20,970
Obligations of U.S. Agencies 10,737 370 - 11,107
Obligations of states & political subdivisions 7,844 57 - 7,901
Other debt securities 149 1 - 150
------------- ------------- ------------- -------------
59,408 975 21 60,362
------------- ------------- ------------- -------------
Securities available for sale
Obligations of U.S. Treasury 33,312 940 - 34,252
Mortgage-backed securities 39,806 563 141 40,228
Obligations of U.S. Agencies 6,465 188 - 6,653
Equity securities 4,708 510 - 5,218
------------- ------------- ------------- -------------
84,291 2,201 141 86,351
------------- ------------- ------------- -------------
Total securities $143,699 $3,176 $162 $146,713
============= ============= ============= =============
December 31, 1997
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- ------------- -------------
Securities held to maturity
Obligations of U.S. Treasury $ 22,134 $ 122 - $ 22,256
Mortgage-backed securities 28,398 200 $ 96 28,502
Obligations of U.S. Agencies 6,711 166 - 6,877
Obligations of states & political subdivisions 3,049 - - 3,049
Other debt securities 150 - - 150
------------- ------------- ------------- -------------
60,442 488 96 60,834
------------- ------------- ------------- -------------
Securities available for sale
Obligations of U.S. Treasury 35,452 605 74 35,983
Mortgage-backed securities 26,871 308 30 27,149
Obligations of U.S. Agencies 6,954 71 12 7,013
Equity securities 4,363 1,048 - 5,411
------------- ------------- ------------- -------------
73,640 2,032 116 75,556
------------- ------------- ------------- -------------
Total securities $134,082 $2,520 $212 $136,390
============= ============= ============= =============
</TABLE>
<PAGE>
<TABLE>
At September 30, 1998, the contractual maturities of securities held to maturity and securities available
for sale are as follows: (in thousands)
<CAPTION>
Securities Securities
Held to Maturity Available for Sale
---------------------------- ---------------------------
Amortized Market Amortized Market
Cost Value Cost Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Within 1 year $14,741 $14,796 $14,199 $14,328
After 1 but within 5 years 20,159 20,586 29,258 30,338
After 5 but within 10 years 13,446 13,690 11,869 12,140
After 10 years 11,062 11,290 24,257 24,327
Equity securities - - 4,708 5,218
------------ ------------ ------------ ------------
Total $59,408 $60,362 $84,291 $86,351
============ ============ ============ ============
</TABLE>
Loans
At September 30, 1998, total loans increased $37.5 million or 8.6% to
$475.8 million from $438.3 million at December 31, 1997. The following table
reflects the composition of the loan portfolio at September 30, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
______________ ______________
September 30, December 31,
1998 1997
______________ ______________
<S> <C> <C>
Amounts of loans by type (in thousands)
Real estate-mortgage
Commercial $147,571 $134,972
1-4 family residential
First liens 87,351 73,275
Junior liens 15,559 16,795
Home equity 144,724 143,177
Commercial and financial 61,907 51,574
Real estate-construction 695 4,229
Installment
Credit cards and related plans 2,375 2,415
Other 1,379 1,736
Lease financing 9,230 10,101
Term Fed Funds 5,000 -
================= ================
Total $475,791 $438,273
================= ================
</TABLE>
<PAGE>
At September 30, 1998, total deposits increased $23.0 million or 4.3% to
$563.8 million from $540.8 million at December 31, 1997. The growth was
principally in money market deposit accounts and interest bearing demand
deposits, which grew $17.1 million and $9.7 million, respectively. Time deposits
grew $3.1 million and represent 30.4% of all deposits at September 30, 1998, as
compared to 31.1% at December 31, 1997.
Nonperforming Assets
Nonperforming assets are comprised of nonaccrual loans, restructured loans
and foreclosed real estate. At September 30, 1998, nonperforming assets amounted
to $1.8 million, a decrease of $1.0 million from $2.8 million at September 30,
1997. The sale of $409 thousand of nonperforming loans comprised part of the
decrease. The ratio of nonperforming assets to total loans and foreclosed real
estate decreased to 0.37% at September 30, 1998 from 0.67% at September 30,
1997. At September 30, 1998, nonperforming assets decreased $337 thousand from
$2.1 million at December 31, 1997. For the third quarter of 1998, the ratio of
nonperforming assets to total loans and foreclosed real estate decreased 11
basis points from 0.48% at December 31, 1997.
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, there can be no assurance that existing levels of the
allowance will ultimately prove adequate to cover actual loan losses.
The allowance for loan losses was $5.5 million at September 30, 1998, and
$5.2 million at December 31, 1997, representing 313.9% and 250.7% of
nonperforming loans at those dates, respectively. In the third quarter of 1998,
the Company's provision for loan losses was $210 thousand, the same as the
amount provided in the third quarter of 1997.
<PAGE>
<TABLE>
Capital Adequacy
The Company's and the Bank's capital amounts and ratios are as follows: (dollars in thousands)
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------- ------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ----------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998:
Total Capital (to Risk Weighted Assets):
The Company $64,237 14.99 % $34,294 8.00 % N/A N/A
The Bank 62,288 14.60 34,139 8.00 $42,674 10.00 %
Tier 1 Capital (to Risk Weighted Assets):
The Company 58,650 13.68 17,147 4.00 N/A N/A
The Bank 56,954 13.35 17,070 4.00 25,605 6.00
Tier 1 Capital (to Average Assets):
The Company 58,650 8.83 19,932 3.00 N/A N/A
The Bank 56,954 8.60 19,864 3.00 33,107 5.00
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
The Company $59,185 14.51 % $32,631 8.00 % N/A N/A
The Bank 57,335 14.12 32,485 8.00 $40,606 10.00 %
Tier 1 Capital (to Risk Weighted Assets):
The Company 54,166 13.28 16,316 4.00 N/A N/A
The Bank 52,338 12.89 16,242 4.00 24,364 6.00
Tier 1 Capital (to Average Assets):
The Company 54,166 8.79 18,482 3.00 N/A N/A
The Bank 52,338 8.53 18,403 3.00 30,672 5.00
</TABLE>
<PAGE>
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 is often
shaped by such external factors 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, 1998, total deposits amounted to $563.8 million, an increase of
$23.0 million or 4.3% from December 31, 1997. 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, 1998, advances from the
FHLB and REPOS amounted to $10.4 million and $9.3 million, respectively, as
compared to $9.9 million and $13.0 million, respectively, at December 31, 1997.
In the third quarter of 1998, loan production continued to be the Company's
principal investing activity. Net loans at September 30, 1998 amounted to $470.3
million, compared to $433.0 million at the end of 1997, an increase of $37.3
million or 8.6%.
The Company's most liquid assets are cash and cash equivalents and federal
funds sold. At September 30, 1998, the total of such assets amounted to $14.3
million or 2.2% of total assets, compared to $36.6 million or 5.9% of total
assets at year-end 1997.
Another significant liquidity source is the Company's available-for-sale
("AFS") securities. At September 30, 1998, AFS securities amounted to $86.4
million or 59.2% of total securities, compared to $75.6 million or 55.6% of
total securities at year-end 1997.
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
$57.7 million line of credit available through its membership in the Federal
Home Loan Bank of New York.
Management believes that the Company's sources of funds are sufficient to
meet its funding requirements.
<PAGE>
Forward Looking Statements
We discuss certain matters in this report which are not historical facts,
but which are "forward looking statements." These "forward looking statements"
include, but are not limited to, estimates of capital expenditures, costs of
remediation and testing, the timetable for implementing the remediation and
testing phases of Year 2000 planning, the possible impact of third parties' Year
2000 issues on the Company, management's assessment of contingencies and
possible scenarios in its Year 2000 planning. The "forward looking statements"
in this report reflect what we currently anticipate will happen in each case.
What actually happens could differ materially from what we currently anticipate
will happen. We are not promising to make any public announcement when we think
"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.
Year 2000 Readiness Disclosure
This year 2000 disclosure falls within the Year 2000 Information and
Readiness Disclosure Act of 1998. The issue surrounding many of the world's
computers is principally that years are currently recorded in a two-digit
format. If not corrected, this problem will render such computers incapable of
interpreting dates beyond the year 1999, which could disrupt business.
Hereinafter, this issue will collectively be referred to as the "Year 2000
issue". A company's exposure to uncertainties and costs associated with the Year
2000 issue depends on a number of factors, including software, hardware, the
industry in which it operates, and other entities with which it electronically
interacts.
The Company has adopted a Year 2000 Compliance Plan (the "Plan") and has
established a Year 2000 Compliance Committee (the "Committee"). The objectives
of the Plan and the Committee are to address the Year 2000 issues and prepare
the Company for the new millennium. As recommended by the Federal Financial
Institutions Examination Council, the Plan encompasses the following phases:
Awareness, Assessment, Renovation, Validation and Implementation. These phases
will enable the Company to identify risks, develop an action plan, and perform
adequate testing and complete certification that its processing systems will be
Year 2000 ready. In the Awareness phase, the Company defined the Year 2000
issues, informed management and staff and obtained executive level support and
funding. In addition, the Company compiled a comprehensive list of items that
may be affected by the Year 2000 compliance issues. Such items include
facilities and related non-information technology systems (embedded technology),
computer systems, hardware, and services and products provided by third parties.
In the Assessment phase, the Company evaluated the items identified in the
Awareness phase to assess whether the items will function properly with the
century date change. The items were ranked in the order that they will need to
be remediated based on their mission critical nature and the potential impact to
the Company. The Renovation phase includes an analysis of the items that are
affected by Year 2000, the identification of problem areas and the repair of
non-compliant items. As of September 30, 1998, the Company has completed the
Awareness, Assessment and Renovation phases; however, more Renovation type
processes may be required depending upon the outcome of the Validation and
Implementation phases. The Validation phase will include a thorough testing and
verification of systems, databases and utilities, including present and forward
date testing which includes simulating data conditions in the Year 2000. The
Implementation phase will consist of placing all the systems, databases and
utilities that have been renovated into production. As of September 30, 1998,
the Company has conducted and continues to conduct procedures associated with
the Renovation, Validation and Implementation phases. The Company expects to
complete the Validation (testing) phase with respect to its mission critical
applications by March 31, 1999, and the Implementation phase completed by the
second quarter of 1999.
The Company has begun and continues to survey and communicate with
counterparties, intermediaries and vendors ("Third Parties") with whom it has
important financial and operational relationships to determine the extent to
which they are vulnerable to Year 2000 issues. As of September 30, 1998, the
Company has received sufficient information from its Third Parties to conclude
that they are in the Renovation, Validation and Implementation phases of their
respective plans. However, as of September 30, 1998, the Company has not yet
received conclusive information from all Third Parties related to the
Renovation, Validation and Implementation phases to predict the outcome of their
efforts.
There are many risks associated with the Year 2000 issue, including the
failure of the Company's computer and non-financial technology systems. Such
failures could have a material adverse effect on the Company and may cause
system malfunctions, incorrect or incomplete transaction processing resulting in
the inability to reconcile accounting books and records. In addition, even if
the Company successfully remediates its Year 2000 issues, it can be adversely
affected by failures of Third Parties with which the Company has financial or
operational relationships to remediate their own Year 2000 issues. The failure
of Third Parties to remediate their Year 2000 issues in a timely manner could
result in a material financial risk to the Company. Such risks include business
interruption or shutdown, financial loss, regulatory actions and legal
liability. The Company is planning to develop a Year 2000 specific contingency
plan as part of its overall Year 2000 plan in an effort to mitigate Year 2000
risk.
Based on current information, the Company does not anticipate that the
overall costs related to the implementation of the Year 2000 plan to be material
in any single year. The Company estimates that the total external cost of
implementing its Year 2000 plan will amount to approximately $170 thousand. The
Year 2000 costs include all activities undertaken on Year 2000 related matters,
including, but not limited to, renovation, validation (testing), third party
review and contingency planning. However, costs for compensation and benefits of
the Company's internal employees have not yet been determined. Through the third
quarter of 1998, the Company has expended approximately $13 thousand on the Year
2000 project. All Year 2000 costs are expensed in the period incurred.
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Form 10-K filed for the year ended December 31,
1997.
Item 5. Other Information
The Company hired Nicholas G. Verdi as Sr. Vice President of
Retail Banking effective October 13, 1998, replacing Richard N.
Latrenta who resigned on October 23, 1998 to pursue other interests.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3. (a) Certificate of Incorporation and Amendments thereto are
incorporated herein by reference to Form S-4,
Registration Statement No. 333-50065.
Exhibit 3 filed April 27, 1998.
(b) By-laws are incorporated herein by reference to
Registration Statement No. 33-49840, Exhibit 3(b)
11 StatementRe: Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the
Company during the quarter ended September 30, 1998
<PAGE>
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
<TABLE>
Exhibit 11. Computation Re: Earnings Per Share
<CAPTION>
---------------------------------------------------------- ---------------------------------------------------
Three Months Ended, Nine Months Ended,
---------------------------------------------------------- ---------------------------------------------------
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
---------------------------- ---------------------------- ----------------------------- ---------------------
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
---------- -------- -------- ------- -------- ------ -------- -------- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Earnings per
Common Share
Income available to
common shareholders $2,547 7,186 $0.35 $1,904 7,090 $0.27 $5,952 7,197 $0.83 $6,061 7,090 $0.85
======== ====== ====== ========
Effect of Dilutive Shares
Options issued to
management - 59 - 91 - 59 - 91
------- -------- ------- -------- -------- -------- ---- -------- --------- --------
Diluted Earnings per
Common Share $2,547 7,245 $0.35 $1,904 7,181 $0.27 $5,952 7,256 $0.82 $6,061 7,181 $0.84
======= ======== ======== ======= ======== ====== ======== ======== ====== ======== ========= ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Sep-30-1998
<CASH> 14,288
<INT-BEARING-DEPOSITS> 24
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 86,351
<INVESTMENTS-CARRYING> 59,408
<INVESTMENTS-MARKET> 60,360
<LOANS> 475,791
<ALLOWANCE> 5,493
<TOTAL-ASSETS> 648,525
<DEPOSITS> 563,815
<SHORT-TERM> 9,930
<LIABILITIES-OTHER> 4,432
<LONG-TERM> 9,797
<COMMON> 5,397
0
0
<OTHER-SE> 55,154
<TOTAL-LIABILITIES-AND-EQUITY> 648,525
<INTEREST-LOAN> 29,238
<INTEREST-INVEST> 6,358
<INTEREST-OTHER> 1,162
<INTEREST-TOTAL> 36,758
<INTEREST-DEPOSIT> 13,956
<INTEREST-EXPENSE> 15,090
<INTEREST-INCOME-NET> 21,668
<LOAN-LOSSES> 641
<SECURITIES-GAINS> 94
<EXPENSE-OTHER> 14,654
<INCOME-PRETAX> 9,228
<INCOME-PRE-EXTRAORDINARY> 5,952
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,952
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.82
<YIELD-ACTUAL> 4.65
<LOANS-NON> 1,207
<LOANS-PAST> 0
<LOANS-TROUBLED> 543
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,231
<CHARGE-OFFS> 448
<RECOVERIES> 69
<ALLOWANCE-CLOSE> 5,493
<ALLOWANCE-DOMESTIC> 5,493
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 982
</TABLE>
