<TABLE>
Interchange Financial Services Corporation
- ------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
(unaudited)
<S> <C> <C>
Assets
Cash and due from banks $ 15,601 $ 20,109
Federal funds sold - 23,175
-------------- --------------
Total cash and cash equivalents 15,601 43,284
-------------- --------------
Securities held to maturity at amortized cost (estimated market value of $53,685
and $54,761 at September 30, 1999 and December 31, 1998, respectively) 54,180 54,159
-------------- --------------
Securities available for sale at estimated market value (amortized cost of $110,314
$93,872 at September 30, 1999 and December 31, 1998, respectively) 109,638 95,771
-------------- --------------
Loans 505,931 478,717
Less: Allowance for loan losses 5,281 5,645
-------------- --------------
Net loans 500,650 473,072
-------------- --------------
Premises and equipment, net 9,765 9,871
Foreclosed real estate 250 84
Accrued interest receivable and other assets 8,471 9,123
============== ==============
Total assets $698,555 $685,364
============== ==============
Liabilities
Deposits
Non-interest bearing $100,160 $107,408
Interest bearing 502,337 491,324
-------------- --------------
Total deposits 602,497 598,732
-------------- --------------
Securities sold under agreements to repurchase 7,250 8,780
Short-term borrowings 21,955 9,768
Accrued interest payable and other liabilities 6,810 5,712
-------------- --------------
Total liabilities 638,512 622,992
-------------- --------------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, without par value; 15,000,000 shares authorized;
6,889,776 and 7,200,133 shares issued and outstanding at September 30, 1999
and December 31, 1998, respectively 5,397 5,397
Capital surplus 21,304 21,256
Retained earnings 40,384 35,482
Accumulated other comprehensive (loss) income (447) 1,192
-------------- --------------
66,638 63,327
Less: Treasury stock 6,595 955
-------------- --------------
Total stockholders' equity 60,043 62,372
============== ==============
Total liabilities and stockholders' equity $698,555 $685,364
============== ==============
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Interchange Financial Services Corporation
-------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) (unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $10,047 $9,997 $29,405 $29,147
Interest on federal funds sold 129 359 543 1,162
Interest on interest bearing deposits - 6 - 55
Interest and dividends on securities
Taxable interest income 2,186 2,021 6,164 6,003
Interest income exempt from federal income taxes 142 42 339 92
Dividends 63 77 194 208
------------- ------------- ------------- ------------
Total interest income 12,567 12,502 36,645 36,667
------------- ------------- ------------- ------------
Interest expense
Interest on deposits 4,486 4,751 13,112 13,969
Interest on short-term borrowings 246 235 712 692
Interest on long-term borrowings - 148 - 442
------------- ------------- ------------- ------------
Total interest expense 4,732 5,134 13,824 15,103
------------- ------------- ------------- ------------
Net interest income 7,835 7,368 22,821 21,564
Provision for loan losses 300 210 900 641
------------- ------------- ------------- ------------
Net interest income after provision
for loan losses 7,535 7,158 21,921 20,923
------------- ------------- ------------- -------------
Noninterest income
Service fees on deposit accounts 586 652 1,727 1,926
Net gain on sale of securities 3 94 859 94
Other 1,015 267 1,887 835
------------- ------------- ------------- -----------
Total noninterest income 1,604 1,013 4,473 2,855
------------- ------------- ------------- -----------
Noninterest expenses
Salaries and benefits 2,623 2,206 7,732 6,933
Net occupancy 648 616 1,978 1,750
Furniture and equipment 260 247 767 757
Advertising and promotion 259 219 778 654
Federal Deposit Insurance Corporation assessment 20 20 60 57
Acquisition - 3 - 1,392
Other 1,261 938 3,790 3,007
------------- ------------- ------------- -----------
Total noninterest expenses 5,071 4,249 15,105 14,550
------------- ------------- ------------- -----------
Income before income taxes 4,068 3,922 11,289 9,228
Income taxes 1,363 1,375 3,820 3,276
------------- ------------- ------------- -----------
Net income $ 2,705 $ 2,547 $ 7,469 $ 5,952
============= ============= ============= ===========
Basic earnings per common share $0.38 $0.35 $1.04 $0.83
============= ============= ============= ===========
Diluted earnings per common share $0.38 $0.35 $1.04 $0.82
============= ============= ============= ===========
-------------------------------------------------------------------------------------------------------------------------------
<FN>
See notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
<TABLE>
Interchange Financial Services Corporation
- ----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except share data) (unaudited)
<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, 1998 $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 for sale - Acquisition (22)
Unrealized lossess on equity securities (268)
Less: gains on disposition of equity securities (56)
----------
Other comprehensive loss 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 (5) (5)
Issued 12,769 shares of common stock in connection with
Executive Compensation Plan 70 162 232
Exercise of 44,680 option shares 1 (331) 556 226
--------- ----------- ------- ---------- --------- ------
Balance at September 30, 1998 33,545 1,306 5,397 21,291 (988) 60,551
Comprehensive income
Net Income $2,657 2,657 2,657
Other comprehensive income, net of taxes
Unrealized gains on debt securities (260)
Unrealized gains securities transferred from held to
maturity to available for sale - Acquisition 5
Unrealized gains on equity securities 611
Less: gains on disposition of equity securities (470)
----------
Other comprehensive income (114) (114) (114)
----------
Comprehensive income $2,543
==========
Dividends on common stock (720) (720)
Forfeiture of bonus stock (49) (49)
Exercised 5,714 option shares (35) 82 47
--------- ----------- -------- ---------- --------- --------- ------
Balance at December 31, 1998 35,482 1,192 5,397 21,256 (955) 62,372
Comprehensive income
Net Income $7,469 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) (1,639)
----------
Comprehensive income $5,830
==========
Dividends on common stock (2,567) (2,567)
Issued 14,489 shares of common stock in connection
with Executive Compensation Plan 62 184 246
Exercised 2,954 option shares (14) 37 23
Buy-back of stock (5,861) (5,861)
=========== ======== ========== ========= ========= ======
Balance at September 30, 1999 $40,384 $ (447) $5,397 $21,304 $(6,595) $60,043
=========== ======== ========== ========= ========= ======
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
All share data has been adjusted for the effects of the 3 for 2 stock split issued on April 17, 1998 to shareholders of
record on March 20, 1998.
</FN>
</TABLE>
<PAGE>
<TABLE>
Interchange Financial Services Corporation
- -----------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands) (unaudited)
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 7,469 $ 5,952
Non-cash items included in earnings
Depreciation and amortization 1,135 1,015
Amortization of securities premiums 572 709
Accretion of securities discounts (128) (131)
Amortization of premiums in connection with acquisition 234 305
Provision for loan losses 900 641
Net gain on sale of securities (859) (94)
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 254 (52)
Other 114 1,389
(Decrease) increase in operating liabilities
Accrued interest payable (155) (83)
Other 1,253 (733)
---------- ----------
Cash provided by operating activities 10,755 8,918
---------- ----------
Cash flows from investing activities
(Payments for) proceeds from
Net originations of loans (18,179) (21,179)
Purchase of loans (14,688) (12,127)
Purchase of term federal funds - (7,500)
Maturities of term federal funds 5,000 2,500
Sale of loans - 409
Purchase of securities available for sale (53,900) (14,662)
Maturities of securities available for sale 11,624 13,313
Sale of securities available for sale 26,193 229
Sale of foreclosed real estate 120 -
Purchase of investment securities held to maturity (17,058) (27,169)
Maturities of investment securities held to maturity 15,091 18,189
Sale of securities held to maturity 2,003 -
Purchase of fixed assets (910) (1,414)
Sale of fixed assets 3 4
---------- ----------
Cash used in investing activities (44,701) (49,407)
---------- ----------
Cash flows from financing activities
Proceeds from (payments for)
Deposits more than withdrawals 3,765 23,049
Securities sold under agreements to repurchase 12,500 16,300
Other borrowings 12,275 650
Retirement of securities sold under agreement to repurchase and other
borrowings (14,118) (20,129)
Dividends (2,567) (2,105)
Common stock issued 246 226
Treasury stock (5,861) -
Exercise of option shares from Treasury 23 227
---------- ----------
Cash provided by financing activities 6,263 18,218
---------- ----------
Increase in cash and cash equivalents (27,683) (22,271)
Cash and cash equivalents, beginning of year 43,284 36,583
========== ==========
Cash and cash equivalents, end of period $15,601 $14,312
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $13,979 $15,172
Income taxes 2,540 4,113
Supplemental disclosure of non-cash investing activities:
Decrease - market valuation of securities available for sale $2,574 $145
Loans transferred to foreclosed real estate 250 -
- --------------------------------------------------------------------------------------------------
<FN>
See notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
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 include the accounts of Interchange Financial Services Corporation
and Interchange Bank (the "Bank") and 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, 1998.
The consolidated financial data for the nine months ended September 30,
1999 and 1998, 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 restated to include the consolidated accounts of Jersey for all
periods presented prior to the date of acquisition. The transaction resulted in
the issuance of 780,198 shares of the Company's common stock.
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.
<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 month
periods ended September 30, 1999 and 1998, and should be read in conjunction
with the consolidated financial statements and notes thereto included in Item 1
hereof.
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
restated to include the consolidated accounts of Jersey for all periods
presented prior to the date of acquisition.
Forward Looking Information
In addition to discussing historical information, we discuss certain
matters in this report regarding 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. These "forward looking statements" include, but
are not limited to, estimates of capital expenditures relating to the Year 2000
issue, 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 involve risks and uncertainties 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. Reader should not place
undue expectations on any "forward looking statements." 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.
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
Earnings Summary
For the third quarter of 1999, the Company reported net income of $2.7
million or $0.38 diluted earnings per common share, as compared with $2.5
million or $0.35 diluted earnings per common share for the same period in 1998,
an increase of $158 thousand or 6.2%. The increase was due, in part, to a $502
thousand improvement in net interest income, on a tax equivalent basis,
resulting largely from a 7.0% growth in average loans outstanding for the third
quarter of 1999 as compared to the same period in 1998. Net income was also
favorably affected by improved non-interest income, which increased $591
thousand or 58.3% as compared to the same period in 1998 due mostly to income
recognition of $365 of purchase discounts on commercial loans and gains related
to the sale of the Company's VISA TM and merchant portfolios of $86 thousand and
$330 thousand, respectively. Non-interest expenses, which increased $822
thousand or 19.3% principally due to growth and expansion, partly offset the
benefits described above.
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 $502
thousand to $7.9 million for the quarter ended September 30, 1999 as compared to
the same quarter of 1998. The increase in net interest income is due to higher
levels of interest earning assets, particularly loans, coupled with a decrease
in interest expense resulting from a favorable shift in the composition of
deposits ("mix") and a decline in average borrowings of $8.5 million.
For the quarter ended September 30, 1999, average loans increased $32.7
million or 7.0% over the same period in 1998, which facilitated a growth in
average earning assets of $35.5 million or 5.6%. The loan growth was funded
largely by a $38.2 million or 6.0% growth in average deposits for the third
quarter 1999 as compared to the same period in 1998. During the comparative
period, average non-interest bearing and interest-bearing demand deposits
increased $8.4 million or 8.8% and $27.0 million or 15.1%, respectively. The
favorable change in the retail deposit mix combined with lower average
borrowings served to reduce the Company's cost of funds, resulting in a
favorable impact on net interest income. For the third quarter of 1999, the
Company's cost of funding interest-earning assets was 2.82% as compared to 3.23%
for the same quarter in 1998. The benefit derived from the lower funding cost
was partly offset by a decline in yields on average interest earning assets,
particularly loans. For the quarter ended September 30, 1999, the yield on
average interest earning assets was 7.51% as compared to 7.86% for the same
period in 1998.
Non-interest Income
For the quarter ended September 30, 1999, non-interest income amounted to
$1.6 million, an increase of $591 thousand or 58.3% as compared to the same
period in 1998. The increase was principally due to gains related to the sale of
the Company's VISA TM and merchant portfolios of $86 thousand and $330 thousand,
respectively. The VISA TM and merchant portfolios were sold following an
evaluation of the risk/reward profiles of the portfolios, which determined that
the risk associated with the portfolios exceeded the levels deemed desirable by
the Company. In addition, noninterest income increased due to the recognition of
$365 thousand of income resulting from the early pay-off of commercial loans
purchased at a discount.
These gains were partially offset by a decrease in service fees on deposit
accounts of $66 thousand or 10.1% for the third quarter of 1999 compared to the
same period in 1998.
Non-interest Expenses
For the quarter ended September 30, 1999, non-interest expenses amounted to
$5.1 million, an increase of $822 thousand or 19.3% as compared to the same
period in 1998. The most significant changes are discussed in the following
paragraph.
Salaries and benefits, the largest component of non-interest expenses,
increased $417 thousand or 18.9% when compared to the same quarter in 1998 due
to normal promotions, salary increases and additions to staff, particularly
those associated with the opening of a branch in Paramus, New Jersey during the
fourth quarter of 1998. Occupancy expense increased $32 thousand, when compared
to the same quarter in 1998 of which approximately $45 thousand can be
attributed to the opening of the Paramus branch. Directors' expense increased
$121 thousand and was attributable to the recognition of $119 thousand of cash
surrender value from the Directors life insurance in the third quarter of 1998,
which served to reduce the Directors' expense in that period.
Income Taxes
Income tax expense as a percentage of pre-tax income was 33.5% for the
three months ended September 30, 1999 as compared to 35.1% for the third quarter
of 1998. The decrease is attributable to the establishment of a Real Estate
Investment Trust ("REIT") in the second half of 1998. The REIT, which manages
certain real estate assets of the Company, was established in an effort to take
advantage of certain tax benefits.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
Earnings Summary
For the nine months ended September 30, 1999, the Company reported net
income of $7.5 million or $1.04 diluted earnings per common share, as compared
with $6.0 million or $0.82 diluted earnings per common share for the same period
of 1998, an increase of $1.5 million or 25.5%. The increase was due, in part, to
a $1.3 million improvement in net interest income, on a tax equivalent basis,
resulting largely from a 6.8% growth in average loans outstanding for the first
nine months of 1999 as compared to the same period in 1998. In addition, net
income was positively affected by improved non-interest income, which increased
$1.6 million or 56.7% due mostly to gains from the sale of securities, which
increased $765 thousand, purchase discounts collected of $670 thousand and gains
related to the sale of the Company's VISA TM and merchant portfolios of $86
thousand and $330 thousand, respectively. Non-interest expenses, excluding the
1998 one-time charges associated with the acquisition of Jersey, increased $1.9
million or 14.8% as compared to the same period in 1998, principally due to
growth and expansion, partly offset the benefits described above.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income on a tax equivalent basis increased $1.3 million to
$22.9 million for the nine months ended September 30, 1999 as compared to the
same period in 1998. The increase in net interest income is due to higher levels
of interest earning assets, particularly loans, coupled with a decrease in
interest expense resulting from a favorable shift in the composition of deposits
("mix") and a decline in average borrowings of $9.0 million.
For the nine months ended September 30, 1999, average loans increased $31.0
million or 6.8% over the same period in 1998, which facilitated a growth in
earning assets of $31.8 million or 5.1%. The loan growth was funded largely by a
$35.9 million or 6.3% growth in average deposits for the nine months of 1999 as
compared to the same period in 1998. During the comparative period, average
non-interest bearing and interest-bearing demand deposits increased $10.0
million or 10.8% and $29.9 million or 17.9%, respectively, while higher yielding
certificates of deposits greater than $100 thousand decreased approximately $2.7
million on average. The favorable change in the retail deposit mix combined with
a decline in average borrowings served to reduce the Company's cost of funds,
resulting in a favorable impact on net interest income. For the nine months
ended September 30, 1999, the Company's cost of funding interest-earning assets
was 2.81% as compared to 3.22% for the same period in 1998. The benefit derived
from the lower funding cost was partly offset by a decline in yields on average
interest earning assets, particularly loans. For the nine months ended September
30, 1999, the yield on average interest earning assets was 7.46% as compared to
7.83% for the same period in 1998.
Non-interest Income
For the nine months ended September 30, 1999, non-interest income amounted
to $4.5 million, an increase of $1.6 thousand or 56.7% as compared to the same
period in 1998. The increase was principally due to the recognition of $859
thousand of gains (pre-tax) from the sale of debt and equity securities. The
Company sold the equity securities to eliminate the market-risk exposure
following the announcement by the issuing company that it had agreed to merge
with another organization. The debt securities were sold as part of a limited
portfolio restructuring aimed at improving the risk/reward characteristics of
the securities portfolio. In addition, non-interest income was positively
affected by the recognition of $670 thousand of income resulting from the early
pay-off of commercial loans purchased at a discount. Further, gains associated
with the sale of the Company's VISA TM and merchant portfolios of $86 thousand
and $330 thousand, respectively, helped increase non-interest income.
These gains were partially offset by a decrease in service fees on deposit
accounts of $199 thousand or 10.3% for the nine months ended September 30, 1999
compared to the same period in 1998.
Non-interest Expenses
For the nine months ended September 30, 1999, non-interest expenses
amounted to $15.1 million, an increase of $555 thousand or 3.8% as compared to
the same period in 1998. Excluding the one-time charges associated with the
acquisition of Jersey, non-interest expenses for the nine months ended September
30, 1999 increased $1.9 million or 14.8% as compared to the same period in 1998.
The most significant changes are discussed in the following paragraph.
Salaries and benefits, the largest component of non-interest expenses,
increased $799 thousand or 11.5% when compared to the same period in 1998 due to
normal promotions, salary increases and the additions to staff associated with
the new branch opening in Paramus, New Jersey. Occupancy expense increased $228
thousand when compared to the same period in 1998 of which approximately $135
thousand of the increase can be attributed to the opening of the Paramus branch
during the fourth quarter of 1998. Directors' expense increased $384 thousand
and was attributable to the recognition of $355 thousand of cash surrender value
from the Directors life insurance during the first nine months of 1998, which
served to reduce the Directors' expense in that period. Furthermore, expenses
associated with modifying computer systems to address the Year 2000 Issue
totaled $89 thousand for the nine months ended September 30, 1999. There were no
expenses related to the Year 2000 Issue during the same period in 1998.
Income Taxes
Income tax expense as a percentage of pre-tax income was 33.8% for the nine
months ended September 30, 1999 as compared to 35.5% for the same period in
1998. The decrease is attributable to the establishment of a REIT in the second
half of 1998. The REIT, which manages certain real estate assets of the Company,
was established in an effort to take advantage of certain tax benefits.
FINANCIAL CONDITION
At September 30, 1999, the Company's total assets were $698.5 million, an
increase of $13.2 million or 1.9% from $685.4 million at December 31, 1998. At
September 30, 1999, cash and cash equivalents decreased $27.7 million as
compared to December 31, 1998. The decrease in cash is principally the result of
investing activities (funding loans and investment growth) utilizing cash more
rapidly than financing activities (reflecting mostly changes in deposits and
borrowings) and operating activities (reflecting net income and changes in other
assets) can provide it. This can be seen more completely on the accompanying
Consolidated Statements of Cash Flows.
<PAGE>
<TABLE>
Securities
Securities held to maturity and securities available for sale consist of the following: (dollars in thousands)
<CAPTION>
-----------------------------------------------------------------
September 30, 1999
-----------------------------------------------------------------
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 $9,996 $33 - $ 10,029
Mortgage-backed securities 21,775 92 $203 21,664
Obligations of U.S. agencies 7,990 32 38 7,984
Obligations of states & political subdivisions 14,295 - 412 13,883
Other debt securities 124 1 - 125
-------------- -------------- -------------- --------------
54,180 158 653 53,685
-------------- -------------- -------------- --------------
Securities available for sale
Obligations of U.S. Treasury 6,019 155 - 6,174
Mortgage-backed securities 70,257 157 906 69,508
Obligations of U.S. agencies 27,122 127 53 27,196
Obligations of states & political subdivisions 3,144 - 156 2,988
Equity securities 3,772 - - 3,772
-------------- -------------- -------------- --------------
110,314 439 1,115 109,638
-------------- -------------- -------------- --------------
Total securities $164,494 $597 $1,768 $163,323
============== ============== ============== ==============
-----------------------------------------------------------------
December 31, 1998
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- -------------- -------------- --------------
Securities held to maturity
Obligations of U.S. Treasury $ 15,992 $ 180 - $ 16,172
Mortgage-backed securities 18,921 227 $ 23 19,125
Obligations of U.S. agencies 7,986 175 - 8,161
Obligations of states & political subdivisions 11,111 48 6 11,153
Other debt securities 149 1 - 150
-------------- -------------- -------------- --------------
54,159 631 29 54,761
-------------- -------------- -------------- --------------
Securities available for sale
Obligations of U.S. Treasury 33,264 777 - 34,041
Mortgage-backed securities 42,824 398 156 43,066
Obligations of U.S. agencies 13,687 190 53 13,824
Equity securities 4,097 743 - 4,840
-------------- -------------- -------------- --------------
93,872 2,108 209 95,771
-------------- -------------- -------------- --------------
Total securities $148,031 $2,739 $238 $150,532
============== ============== ============== ==============
</TABLE>
<PAGE>
<TABLE>
At September 30, 1999, the contractual maturities of securities held to maturity and securities
available for sale are as follows: (dollars 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 $18,533 $18,561 $ 2,001 $ 1,995
After 1 but within 5 years 11,303 11,302 29,727 29,892
After 5 but within 10 years 12,345 12,299 25,643 25,076
After 10 years 11,999 11,523 49,171 48,903
Equity securities - - 3,772 3,772
-------------- ------------- --------------- ---------------
Total $54,180 $53,685 $110,314 $109,638
============== ============= =============== ===============
</TABLE>
During the second quarter of 1999, the Company performed a limited
securities portfolio restructuring aimed at improving the risk/reward
characteristics of the securities portfolio. Available-for-sale ("AFS")
securities with a book value of $24.2 million were sold. Gains of $143 thousand
and losses of $4 thousand were recognized from the sale. One held-to-maturity
("HTM") security with a book value of $2.0 million was sold. A gain of $3
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 classification of securities under Statement of Financial Accounting
Standard No. 115, Accounting for Certain Investments in Debt and Equity
Securities.
Loans
Total loans amounted to $505.9 million and $478.7 million at September 30,
1999 and December 31, 1998, respectively. Total loans at December 31, 1998,
included $5.0 million of term federal funds sold, which for accounting purposes
were classified as a loan. Excluding the term federal funds sold, total loans at
September 30, 1999 increased $32.2 million or 6.8% as compared to December 31,
1998.
<PAGE>
<TABLE>
The following table reflects the composition of the loan portfolio:
<CAPTION>
------------------- ----------------
September 30, December 31,
1999 1998
------------------- ----------------
<S> <C> <C>
Amount of loans by type (dollars in thousands)
Real estate-mortgage
Commercial $155,996 $148,875
1-4 family residential
First liens 110,614 89,852
Junior liens 10,505 14,322
Home equity 146,163 142,781
Commercial and financial 66,927 64,067
Real estate-construction 2,768 974
Installment
Credit cards and related plans 868 2,033
Other 2,745 1,200
Lease financing 9,345 9,613
Term Fed Funds - 5,000
=================== ================
Total $505,931 $478,717
=================== ================
</TABLE>
Deposits
At September 30, 1999, total deposits increased $3.8 million or 0.6% to
$602.5 million from $598.7 million at December 31, 1998. The growth was
principally in interest bearing demand deposits, which grew $9.6 million or
4.9%. The growth was offset, in part, by a decline in non-interest bearing
deposits of 7.2 million or 6.7%. Time deposits grew $1.3 million and represent
28.5% of all deposits at September 30, 1999, as compared to 28.5% at December
31, 1998.
Nonperforming Assets
Nonperforming assets are comprised of nonaccrual loans, restructured loans
and foreclosed real estate. At September 30, 1999, nonperforming assets amounted
to $1.3 million, a decrease of $430 thousand or 24.6% from $1.8 million at
September 30, 1998. The ratio of nonperforming assets to total loans and
foreclosed real estate decreased to 0.26% at September 30, 1999 from 0.37% at
September 30, 1998. At September 30, 1999, nonperforming assets decreased $491
thousand or 27.1% from $1.8 million at December 31, 1998. The ratio of
nonperforming assets to total loans and foreclosed real estate decreased to
0.26% at September 30, 1999 from 0.38% at December 31, 1998. Nonperforming
assets decreased due to the payoff of two nonperforming consumer loans, the sale
of a foreclosed real estate property and principal paydowns of a restructured
commercial loan.
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 subjective 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 $5.3 million at September 30, 1999, and
$5.6 million at December 31, 1998, representing 493.5% and 327.1% of
nonperforming loans at those dates, respectively. The decrease in the allowance
for loan losses was due to the charge-off of a commercial loan amounting to $1.1
million during the second and third quarters of 1999. For the nine months ended
September 30, 1999, the Company's provision for loan losses was $900 thousand,
an increase of $259 thousand from the same period a year ago. The increase was
largely due to continued loan growth.
Market Risk
The Company's primary source of market risk exposure arises from changes in
market interest rates ("interest rate risk"). The Company's success 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 that could
potentially have the largest material effect on the Company's financial
condition. The primary objective of the asset/liability management process is to
measure the effect of changing interest rates on net interest income and
economic value of equity and adjust the balance sheet (if necessary) to minimize
the inherent risk and maximize income. The Company's exposure to market risk and
interest rate risk is reviewed on a quarterly basis by the Asset/Liability
Committee. Tools used by management to evaluate risk include an asset/liability
simulation model. At September 30, 1999, 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. At September 30, 1999, 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 nine
months ended September 30, 1999.
The Company is, however, 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 financial condition. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates and may
require collateral from the borrower if deemed necessary by the Company. Standby
letters of credit are conditional commitments issued by the Company's subsidiary
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.
<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, 1999:
Total Capital (to Risk Weighted Assets):
The Company $65,376 14.81 % $35,307 8.00 % N/A N/A
The Bank 70,180 15.90 36,044 8.00 $45,054 10.00%
Tier 1 Capital (to Risk Weighted Assets):
The Company 60,095 13.62 17,653 4.00 N/A N/A
The Bank 64,899 14.40 18,022 4.00 27,033 6.00
Tier 1 Capital (to Average Assets):
The Company 60,095 8.57 21,040 3.00 N/A N/A
The Bank 64,899 9.24 21,078 3.00 35,130 5.00
As of December 31, 1998:
Total Capital (to Risk Weighted Assets):
The Company $66,474 15.12 % $35,149 8.00 % N/A N/A
The Bank 63,777 14.59 34,976 8.00 $43,721 10.00%
Tier 1 Capital (to Risk Weighted Assets):
The Company 60,646 13.80 17,575 4.00 N/A N/A
The Bank 58,312 13.34 17,488 4.00 26,232 6.00
Tier 1 Capital (to Average Assets):
The Company 60,646 9.08 20,041 3.00 N/A N/A
The Bank 58,312 8.76 19,979 3.00 33,299 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 are 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, 1999, total deposits amounted to $602.5 million, an increase of
$3.8 million or 0.6% from December 31, 1998. 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, 1999, advances from the
FHLB and REPOS amounted to $22.0 million and $7.3 million, respectively, as
compared to $9.8 million and $8.8 million, respectively, at December 31, 1998.
In 1999, despite heightened competition for loans and increased loan
prepayments, loan production continued to be the Company's principal investing
activity. Net loans at September 30, 1999 amounted to $500.7 million, an
increase of $27.6 million or 5.8%, from $473.1 million at December 31, 1998. Net
loans at December 31, 1998, included $5.0 million in term federal funds which
matured during the second quarter of 1999. Adjusting for the matured term
federal funds, net loans increased $32.6 million at September 30, 1999 as
compared to December 31, 1998.
The Company's most liquid assets are cash and due from banks and federal
funds sold. At September 30, 1999, the total of such assets amounted to $15.6
million or 2.2% of total assets, compared to $43.3 million or 6.3% of total
assets at year-end 1998. The decline was primarily due to a decrease of $23.2
million in federal funds sold, which were used to fund the growth in loans and
investments.
Another significant liquidity source is the Company's available-for-sale
("AFS") securities. At September 30, 1999, AFS securities amounted to $109.6
million or 66.9% of total securities, compared to $95.8 million or 63.9% of
total securities at year-end 1998.
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 Company's
subsidiary 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.
<PAGE>
Preparation for the Year 2000
Many of the world's computers and software applications were designed to
read years in a two-digit format. Thus, many of the world's information systems
and/or computer programs may not have the ability to recognize four digit date
code fields and, accordingly, may not have the ability to distinguish a year
that begins with "20" instead of the familiar "19". If not corrected, this
problem will render many computer applications incapable of interpreting dates
beyond the year 1999, which could significantly disrupt business. This issue is
referred to herein 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 developed and adopted a Year 2000 Compliance Plan (the
"Plan") and has established a Year 2000 Compliance Committee (the "Committee")
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 encompassed the following phases: Awareness, Assessment, Renovation,
Validation and Implementation. These phases have enabled the Company to identify
risks, develop an action plan, and perform adequate testing and complete
certification that its processing systems are 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
included an analysis of the items that are affected by Year 2000, the
identification of problem areas and the repair of non-compliant items. The
Validation (testing) phase included a thorough testing and verification of
systems, databases and utilities, including present and forward date testing
which consists of simulating data conditions in the Year 2000. The
Implementation phase consisted of placing all the systems, databases and
utilities that have been renovated into production. As of September 30, 1999,
the Company has completed all of the phases of the Plan. The Company expects to
continue testing date-sensitive applications throughout the remainder of the
year.
The Company 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 and what impact, if any, their efforts will
have on the Company's business and operations. In the event that a Third Party's
system will not be year 2000 compliant, the Company has assessed the potential
risk and, to the extent it is feasible, transfer its business to an alternate
vendor. As of September 30, 1999, 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, 1999, 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
possible 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 has developed a Year 2000 specific contingency plan as
part of its overall 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 Plan to be material in any
single year. The Company estimates that the total external cost of implementing
its 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, third party review and contingency planning.
However, costs for compensation and benefits of the Company's internal employees
have not yet been determined. The cost of Year 2000 compliance and the estimated
date of completion of necessary modifications are based on the Company's best
estimates, which were derived from various assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, and actual results could differ materially
from those anticipated. Through the first nine months of 1999, the Company has
expended approximately $89 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 Note 3 of the Company's Consolidated Financial
Statements of this Form 10-Q.
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) The Company filed a Current Report on Form 8-K, dated
September 3, 1999, covering Item 5 - Other Events -
regarding the adoption of a Stock Repurchase Plan to
repurchase up to 10% of the Company's outstanding common stock.
<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
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
Dated: November 12, 1999
<TABLE>
Exhibit 11. Computation re earnings per share
(dollars in thousands, except per share amounts)
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Three Months Ended, Nine Months Ended,
-----------------------------------------------------------------------------------------------------------
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
---------------------------- -------------------------- ------------------------- -----------------------
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 $2,705 7,043 $0.38 $2,547 7,186 $0.35 $7,469 7,148 $1.04 $5,952 7,197 $0.83
======== ======= ====== ========
Effect of Dilutive Shares
Options issued to
management - 39 - 59 - 35 - 91
--------- --------- -------- --------- ------ --------- ------ ---------
Diluted Earnings per
Common Share $2,705 7,082 $0.38 $2,547 7,245 $0.35 $7,469 7,183 $1.04 $5,952 7,288 $0.82
========= ========= ======== ========= ======== ======= ====== ========= ======= ====== =========== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Sep-30-1999
<CASH> 15,601
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 109,638
<INVESTMENTS-CARRYING> 54,180
<INVESTMENTS-MARKET> 53,685
<LOANS> 505,931
<ALLOWANCE> 5,281
<TOTAL-ASSETS> 698,555
<DEPOSITS> 602,497
<SHORT-TERM> 29,205
<LIABILITIES-OTHER> 6,810
<LONG-TERM> 0
<COMMON> 5,397
0
0
<OTHER-SE> 54,646
<TOTAL-LIABILITIES-AND-EQUITY> 698,555
<INTEREST-LOAN> 29,405
<INTEREST-INVEST> 6,697
<INTEREST-OTHER> 543
<INTEREST-TOTAL> 36,645
<INTEREST-DEPOSIT> 13,112
<INTEREST-EXPENSE> 13,824
<INTEREST-INCOME-NET> 22,821
<LOAN-LOSSES> 900
<SECURITIES-GAINS> 859
<EXPENSE-OTHER> 15,105
<INCOME-PRETAX> 11,289
<INCOME-PRE-EXTRAORDINARY> 11,289
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,469
<EPS-BASIC> 1.04
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 4.66
<LOANS-NON> 742
<LOANS-PAST> 0
<LOANS-TROUBLED> 321
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,645
<CHARGE-OFFS> 1,297
<RECOVERIES> 33
<ALLOWANCE-CLOSE> 5,281
<ALLOWANCE-DOMESTIC> 5,281
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,044
</TABLE>
