<TABLE>
Interchange Financial Services Corporation
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
(unaudited)
<S> <C> <C>
Assets
Cash and due from banks $ 18,943 $ 20,109
Federal funds sold 2,800 23,175
-------------- --------------
Total cash and cash equivalents 21,743 43,284
-------------- --------------
Securities held to maturity at amortized cost (estimated market value of
$47,101 and $54,761 at June 30, 1999 and December 31, 1998, respectively) 47,410 54,159
-------------- --------------
Securities available for sale at estimated market value (amortized cost of
$106,348 and $93,872 at June 30, 1999 and December 31, 1998, respectively) 106,224 95,771
-------------- --------------
Loans 502,649 478,717
Less: Allowance for loan losses 5,498 5,645
-------------- --------------
Net loans 497,151 473,072
-------------- --------------
Premises and equipment, net 9,625 9,871
Foreclosed real estate - 84
Accrued interest receivable and other assets 8,693 9,123
============== ==============
Total assets $690,846 $685,364
============== ==============
Liabilities
Deposits
Non-interest bearing $106,128 $107,408
Interest bearing 497,708 491,324
-------------- --------------
Total deposits 603,836 598,732
-------------- --------------
Securities sold under agreements to repurchase 7,250 8,780
Short-term borrowings 9,710 9,768
Accrued interest payable and other liabilities 6,294 5,712
-------------- --------------
Total liabilities 627,090 622,992
-------------- --------------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, without par value; 15,000,000 shares authorized;
7,179,076 and 7,200,133 shares issued and outstanding at June 30, 1999
and December 31, 1998, respectively 5,397 5,397
Capital surplus 21,304 21,256
Retained earnings 38,516 35,482
Accumulated other comprehensive income (loss) (85) 1,192
-------------- --------------
65,132 63,327
Less: Treasury stock 1,376 955
-------------- --------------
Total stockholders' equity 63,756 62,372
============== ==============
Total liabilities and stockholders' equity $690,846 $685,364
============== ==============
- ---------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Interchange Financial Services Corporation
- ------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) (unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
1999 1998 1999 1998
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $9,851 $9,702 $19,358 $19,150
Interest on federal funds sold 195 422 414 803
Interest on interest bearing deposits - 25 - 49
Interest and dividends on securities
Taxable interest income 2,034 2,004 3,978 3,982
Interest income exempt from federal income taxes 88 21 197 50
Dividends 60 68 131 131
------------ ----------- ------------ ------------
Total interest income 12,228 12,242 24,078 24,165
------------ ----------- ------------ ------------
Interest expense
Interest on deposits 4,351 4,657 8,626 9,217
Interest on short-term borrowings 229 250 466 458
Interest on long-term borrowings - 147 - 294
------------ ----------- ------------ ------------
Total interest expense 4,580 5,054 9,092 9,969
------------ ----------- ------------ ------------
Net interest income 7,648 7,188 14,986 14,196
Provision for loan losses 300 212 600 431
------------ ----------- ------------ ------------
Net interest income after provision
for loan losses 7,348 6,976 14,386 13,765
------------ ----------- ------------ ------------
Noninterest income
Service fees on deposit accounts 571 650 1,141 1,274
Net gain on sale of securities 329 - 856 -
Other 621 235 872 568
------------ ----------- ------------ ------------
Total noninterest income 1,521 885 2,869 1,842
------------ ----------- ------------ ------------
Noninterest expenses
Salaries and benefits 2,569 2,243 5,109 4,727
Net occupancy 671 572 1,330 1,136
Furniture and equipment 256 253 507 511
Advertising and promotion 273 236 519 435
Federal Deposit Insurance Corporation assessment 20 19 40 37
Acquisition - 1,278 - 1,389
Other 1,319 1,022 2,529 2,066
------------ ----------- ------------ ------------
Total noninterest expenses 5,108 5,623 10,034 10,301
------------ ----------- ------------ ------------
Income before income taxes 3,761 2,238 7,221 5,306
Income taxes 1,283 811 2,457 1,901
------------ ----------- ------------ ------------
Net income $ 2,478 $ 1,427 $ 4,764 $ 3,405
============ =========== ============ ============
Basic earnings per common share $0.34 $0.20 $0.66 $0.47
============ =========== ============ ============
Diluted earnings per common share $0.34 $0.20 $0.66 $0.47
============ =========== ============ ============
- ------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
</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 $3,405 3,405 3,405
Other comprehensive income, net of taxes
Unrealized gains on debt securities 91
Unrealized losses securities transferred from held to
maturity to available for sale - Acquisition (40)
Unrealized lossess on equity securities (369)
-----------
Other comprehensive loss (318) (318) (318)
-----------
===========
Comprehensive income $3,087
===========
Dividends on common stock (1,385) (1,385)
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 70 162 232
Exercise of 44,680 option shares (330) 556 226
--------- ------------ --------- ---------- --------- -------
Balance at June 30, 1998 31,718 867 5,396 21,291 (988) 58,284
Comprehensive income
Net Income $5,204 5,204 5,204
Other comprehensive income, net of taxes
Unrealized gains on debt securities 116
Unrealized gains securities transferred from held to
maturity to available for sale - Acquisition 23
Unrealized gains on equity securities 712
Less: gains on disposition of equity securities (526)
-----------
Other comprehensive income 325 325 325
-----------
===========
Comprehensive income $5,529
===========
Dividends on common stock (1,440) (1,440)
Fractional shares on 3 for 2 stock split and merger shares -
Forfeiture of bonus stock (49) (49)
Exercised 13,789 option shares 1 (35) 82 48
--------- ------------ --------- ---------- --------- -------
Balance at December 31, 1998 35,482 1,192 5,397 21,256 (955) 62,372
Comprehensive income
Net Income $4,764 4,764 4,764
Other comprehensive income, net of taxes
Unrealized losses on debt securities (764)
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 (1,277) (1,277) (1,277)
-----------
===========
Comprehensive income $3,487
===========
Dividends on common stock (1,730) (1,730)
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 (642) (642)
========= ============ ========= ========== ========= ========
Balance at June 30, 1999 $38,516 $ (85) $5,397 $21,304 $(1,376) $63,756
========= ============ ========= ========== ========= ========
- ------------------------------------------------------------------------------------------------------------------------------------
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.
</TABLE>
<PAGE>
<TABLE>
INTERCHANGE FINANCIAL SERVICES CORPORATION
- ------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) (unaudited)
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,764 $ 3,405
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 775 671
Amortization of securities premiums 447 454
Accretion of securities discounts (84) (91)
Amortization of premiums in connection with acquisition 156 222
Provision for loan losses 600 431
Net gain on sale of securities (856) -
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 260 (252)
Other 11 1,405
(Decrease) increase in operating liabilities
Accrued interest payable (81) 138
Other 662 (1,027)
----------- -----------
Cash provided by operating activities 6,620 5,356
----------- -----------
Cash flows from investing activities
(Payments for) proceeds from
Net originations of loans (15,459) (22,415)
Purchase of loans (13,522) (3,626)
Sale of loans - 409
Purchase of term federal funds - (7,500)
Repayment of term federal funds 5,000 -
Purchase of securities available for sale (47,530) (10,546)
Maturities of securities available for sale 7,116 5,717
Sale of securities available for sale 25,590 -
Sale of foreclosed real estate 121 -
Purchase of securities held to maturity (6,226) (11,716)
Maturities of securities held to maturity 13,811 10,574
Sale of securities held to maturity 2,003 -
Purchase of fixed assets (480) (916)
Sale of fixed assets 2 4
----------- -----------
Cash used in investing activities (29,574) (40,015)
----------- -----------
Cash flows from financing activities
Proceeds from (payments for)
Deposits in excess of withdrawals 5,104 35,108
Securities sold under agreements to repurchase and other borrowings 6,250 8,020
Retirement of securities sold under agreement to repurchase and
other borrowings (7,838) (2,652)
Dividends (1,730) (1,385)
Common stock issued from treasury 246 226
Treasury stock acquired (642) -
Exercise of option shares 23 227
----------- -----------
Cash provided by financing activities 1,413 39,544
----------- -----------
(Decrease) increase in cash and cash equivalents (21,541) 4,885
Cash and cash equivalents, beginning of year 43,284 36,583
=========== ===========
Cash and cash equivalents, end of year $21,743 $41,468
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $9,173 $9,826
Income taxes 1,663 2,826
Supplemental disclosure of non-cash investing activities:
Decrease - market valuation of securities available for sale 2,023 541
Securities transferred from held to maturity to available for sale - 8,187
- ------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 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 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 six months ended June 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 six month
periods ended June 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." 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. 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 JUNE 30, 1999 AND JUNE 30, 1998
Earnings Summary
For the second quarter of 1999, the Company reported net income of $2.5
million or $0.34 diluted earnings per common share, as compared with $1.4
million or $0.20 diluted earnings per common share for the same period in 1998,
an increase of $1.1 million or 73.7%. The increase was due, in part, to a $483
thousand improvement in net interest income, on a tax equivalent basis,
resulting largely from a 6.8% growth in average loans outstanding for the second
quarter of 1999 as compared to the same period in 1998. In addition, net income
was positively affected by improved noninterest income, which increased $637
thousand or 72.1% as compared to the same period in 1998 due mostly to gains
from the sale of securities. Earnings during the quarter also benefited from a
decrease of $515 thousand or 9.2% in noninterest expenses as compared to the
same period in 1998. The decrease was principally due to $1.3 million of merger
related charges incurred in 1998 related to the Jersey acquisition, which
charges did not recur in 1999.
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 $483
thousand to $7.7 million for the quarter ended June 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 lower short-term market interest rates.
For the quarter ended June 30, 1999, average loans increased $31.0 million
or 6.8% over the same period in 1998, which facilitated a growth in average
earning assets of $28.5 million or 4.5%. The loan growth was funded largely by a
$34.1 million or 6.0% growth in average deposits for the second quarter 1999 as
compared to the same period in 1998. During the comparative period, average
non-interest bearing and interest-bearing demand deposits increased $10.1
million or 10.9% and $24.0 million or 5.1%, respectively, while higher yielding
certificates of deposits greater than $100 thousand remained relatively
unchanged. The favorable change in the retail deposit mix combined with lower
short-term market interest rates served to reduce the yield on total deposits,
resulting in a favorable impact on net interest income. For the second quarter
of 1999, the yield on total deposits was 2.9 % as compared to 3.3% 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 June 30, 1999, the yield on average interest
earning assets was 7.48% as compared to 7.83% for the same period in 1998.
Non-interest Income
For the quarter ended June 30, 1999, non-interest income amounted to $1.5
million, an increase of $637 thousand or 72.1% as compared to the same period in
1998. The increase was principally due to the recognition of $329 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, noninterest income was positively affected by
the recognition of $284 thousand of income arising from the early pay-off of a
commercial loan purchased at a discount.
These gains were partially offset by a decrease in service fees on deposit
accounts of $78 thousand or 12.0% for the second quarter of 1999 compared to the
same period in 1998.
Non-interest Expenses
For the quarter ended June 30, 1999, non-interest expenses amounted to $5.1
million, a decrease of $515 thousand or 9.2% as compared to the same period in
1998. The decrease was principally due to $1.3 million of merger-related charges
incurred in 1998 associated with the Jersey acquisition. The merger-related
charges were not repeated in the second quarter of 1999. Excluding the
merger-related charges, noninterest expenses, for the second quarter of 1999
increased $763 thousand or 17.6%.
Salaries and benefits, the largest component of non-interest expenses,
increased $326 thousand or 14.5% when compared to the same quarter in 1998 due
to normal promotions, salary increases and the additions to staff associated
with the new branch opening. At June 30, 1999, the number of full-time
equivalent employees were 204 as compared to 192 at June 30, 1998. Occupancy
expense increased $99 thousand, when compared to the same quarter in 1998 of
which approximately $45 thousand can be attributed to the opening of a new
branch in Paramus, New Jersey during the fourth quarter of 1998. Directors'
expense increased $108 thousand and was attributable to the recognition of $119
thousand of cash surrender value from the Directors life insurance in the second
quarter 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 $27 thousand for the quarter ended June 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 34.1% for the
three months ended June 30, 1999 as compared to 36.2% for the second 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.
SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
Earnings Summary
For the six months ended June 30, 1999, the Company reported net income of
$4.8 million or $0.66 diluted earnings per common share, as compared with $3.4
million or $0.47 diluted earnings per common share for the same period of 1998,
an increase of $1.4 million or 39.9%. The increase was due, in part, to a $839
thousand improvement in net interest income, on a tax equivalent basis,
resulting largely from a 6.7% growth in average loans outstanding for the first
six 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
$1.0 million or 55.8% due mostly to gains from the sale of securities. Earnings
also benefited from a decrease of $267 thousand or 2.6% in non-interest
expenses. The decrease was principally due to $1.4 million of merger-related
charges incurred in 1998 related to the Jersey acquisition, which did not recur
in 1999.
<PAGE>
RESULTS OF OPERATIONS
Net Interest Income
Net interest income on a tax equivalent basis increased $839 thousand to
$15.0 million for the six months ended June 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 lower short-term interest rates.
For the six months ended June 30, 1999, average loans increased $30.2
million or 6.7% over the same period in 1998, which facilitated a growth in
earning assets of $28.4 million or 4.4%. The loan growth was funded largely by a
$34.6 million or 6.2% growth in average deposits for the six months of 1999 as
compared to the same period in 1998. During the comparative period, average
non-interest bearing and interest-bearing deposits increased $10.8 million or
12.0% and $23.8 million or 5.1%, respectively, while higher yielding
certificates of deposits greater than $100 thousand decreased approximately $2.8
million on average. The favorable change in the retail deposit mix combined with
lower short-term market interest rates served to reduce the yield on total
deposits, resulting in a favorable impact on net interest income. For the six
months ended June 30, 1999, the yield on total deposits was 2.9 % as compared to
3.3% 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 six months ended June 30, 1999, the yield on
average interest earning assets was 7.44% as compared to 7.83% for the same
period in 1998.
Non-interest Income
For the six months ended June 30, 1999, non-interest income amounted to
$2.9 million, an increase of $1.0 thousand or 55.8% as compared to the same
period in 1998. The increase was principally due to the recognition of $856
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, noninterest income was positively
affected by the recognition of $284 thousand of income arising from the early
pay-off of a commercial loan purchased at a discount.
These gains were partially offset by a decrease in service fees on deposit
accounts of $133 thousand or 10.4% for the six months ended June 30, 1999
compared to the same period in 1998.
Non-interest Expenses
For the six months ended June 30, 1999, non-interest expenses amounted to
$10.0 million, a decrease of $267 thousand or 2.6% as compared to the same
period in 1998. The decrease was principally due to $1.4 million of
merger-related charges incurred in 1998 associated with the Jersey acquisition
that did not recur in 1999. Excluding the merger-related charges, non-interest
expenses for the six months ended June 30, 1999 increased $1.1 million or 12.6%
as compared to the same period in 1998.
Salaries and benefits, the largest component of non-interest expenses,
increased $382 thousand or 8.1% 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. At June 30, 1999, full-time equivalent staff was 204 as
compared to 192 at June 30, 1998. Occupancy expense increased $194 thousand when
compared to the same period in 1998 of which approximately $90 thousand of the
increase can be attributed to the opening of a new branch in Paramus, New Jersey
during the fourth quarter of 1998. Directors' expense increased $263 thousand
and was attributable to the recognition of $238 thousand of cash surrender value
from the Directors life insurance during the first six 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 $84 thousand for the six months ended June 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 34.0% for the six
months ended June 30, 1999 as compared to 35.8% 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.
<PAGE>
FINANCIAL CONDITION
At June 30, 1999, the Company's total assets were $690.8 million, an
increase of $5.5 million or .8% from $685.4 million at December 31, 1998. At
June 30, 1999, cash and cash equivalents decreased $21.5 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>
-------------------------------------------------------------------
June 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 $9,995 $24 $ 2 $ 10,017
Mortgage-backed securities 19,280 94 160 19,214
Obligations of U.S. agencies 7,989 42 39 7,992
Obligations of states & political subdivisions 10,022 - 269 9,753
Other debt securities 124 1 - 125
--------------- -------------- -------------- --------------
47,410 161 470 47,101
--------------- -------------- -------------- --------------
Securities available for sale
Obligations of U.S. Treasury 6,022 161 - 6,183
Mortgage-backed securities 72,253 215 465 72,003
Obligations of U.S. agencies 21,152 122 47 21,227
Obligations of states & political subdivisions 3,149 - 110 3,039
Equity securities 3,772 - - 3,772
--------------- -------------- -------------- --------------
106,348 498 622 106,224
--------------- -------------- -------------- --------------
Total securities $153,758 $659 $1,092 $153,325
=============== ============== ============== ==============
-------------------------------------------------------------------
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 June 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 $11,688 $ 11,712 - -
After 1 but within 5 years 11,492 11,484 $ 25,456 $ 25,627
After 5 but within 10 years 12,010 12,001 26,159 25,822
After 10 years 12,220 11,904 50,961 51,003
Equity securities - - 3,772 3,772
------------- ------------- --------------- ---------------
Total $47,410 $ 47,101 $ 106,348 $ 106,224
============= ============= =============== ===============
</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 $502.6 million and $478.7 million at June 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 June
30, 1999 increased $28.9 million or 6.1% as compared to December 31, 1998.
<PAGE>
The following table reflects the composition of the loan portfolio:
<TABLE>
<CAPTION>
--------------- ----------------
June 30, December 31,
1999 1998
--------------- ----------------
<S> <C> <C>
Amount of loans by type (dollars in thousands)
Real estate-mortgage
Commercial $160,155 $148,875
1-4 family residential
First liens 109,030 89,852
Junior liens 11,438 14,322
Home equity 143,909 142,781
Commercial and financial 63,557 64,067
Real estate-construction 1,840 974
Installment
Credit cards and related plans 1,944 2,033
Other 2,022 1,200
Lease financing 8,754 9,613
Term Fed Funds - 5,000
=============== ================
Total $502,649 $478,717
=============== ================
</TABLE>
Deposits
At June 30, 1999, total deposits increased $5.1 million or 0.9% to $603.8
million from $598.7 million at December 31, 1998. The growth was principally in
interest bearing demand deposits, which grew $3.5 million or 1.8%. Time deposits
grew $2.6 million and represent 28.7% of all deposits at June 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 June 30, 1999, nonperforming assets totalled to
$2.2 million, an increase of $413 thousand or 23.0% from $1.8 million at June
30, 1998. The ratio of nonperforming assets to total loans and foreclosed real
estate increased to 0.44% at June 30, 1999 from 0.38% at June 30, 1998. At June
30, 1999, nonperforming assets increased $399 thousand or 22.0% from $1.8
million at December 31, 1998. The ratio of nonperforming assets to total loans
and foreclosed real estate increased to 0.44% at June 30, 1999 from 0.38% at
December 31, 1998. The increase in nonperforming assets consisted almost
entirely of one commercial loan amounting to $1.2 million, which was placed on
nonaccrual status during the first quarter of 1999. $600 thousand of this
commercial loan was charged-off in the second quarter of 1999.
<PAGE>
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 $5.5 million at June 30, 1999, and $5.6
million at December 31, 1998, representing 248.9% and 300.2% of nonperforming
loans at those dates, respectively. In the second quarter of 1999, the Company's
provision for loan losses was $300 thousand, an increase of $88 thousand from
the same period a year ago. The increase was largely due to continued loan
growth and an increase in nonperforming loans.
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 and could
potentially have the largest material effect on the Company's financial
condition. The primary objective of the asset/liability management process is to
measure the effect of changing interest rates on net interest income and
economic value of equity and adjust the balance sheet (if necessary) to minimize
the inherent risk and maximize income. 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 June 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 June 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 six
months ended June 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 June 30, 1999:
Total Capital (to Risk Weighted Assets):
The Company $68,866 15.21 % $36,219 8.00 % N/A N/A
The Bank 68,156 15.06 36,214 8.00 $45,268 10.00%
Tier 1 Capital (to Risk Weighted Assets):
The Company 63,368 14.00 18,109 4.00 N/A N/A
The Bank 62,658 13.84 18,107 4.00 27,161 6.00
Tier 1 Capital (to Average Assets):
The Company 63,368 9.36 20,321 3.00 N/A N/A
The Bank 62,658 9.17 20,501 3.00 34,168 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 June 30, 1999, total deposits amounted to $603.8 million, an increase of $5.1
million or 0.9% 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 June 30, 1999, advances from the FHLB and REPOS
amounted to $9.7 million and $7.2 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 June 30, 1999 amounted to $497.1 million, an increase of
$24.1 million or 5.1%, 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 $29.1 million at June 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 June 30, 1999, the total of such assets amounted to $21.7 million
or 3.1% 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 $20.4 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 June 30, 1999, AFS securities amounted to $106.2 million
or 69.1% 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 $57.8 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 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 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 consists of placing all the systems, databases and
utilities that have been renovated into production. As of June 30, 1999, the
Company has completed all of the phases of the Plan with respect to its mission
critical applications. The Company expects to continue testing date-sensitive
applications throughout the remainder of the year. A small number of tasks
remain that are not considered mission critical, and the Company expects to
complete them in the third quarter of 1999.
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 will assess the potential
risk and, to the extent it is feasible, transfer its business to an alternate
vendor. As of June 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 June 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 six months of 1999, the Company has
expended approximately $84 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 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on April 22, 1999.
(b) Each of the persons named in the Proxy Statement as a nominee for
Director was elected and the selection of Deloitte & Touche, LLP
as the Company's independent auditors for 1999 was ratified. The
following are the voting results on each of these matters:
Against
or
For Withheld Abstentions
___ ________ ___________
(1) ELECTION OF DIRECTORS:
Anthony S. Abbate 5,592,192 55,486 0
Anthony R. Coscia 5,591,592 56,085 0
John J. Eccleston 5,588,787 58,891 0
Richard A. Gilsenan 5,582,058 65,620 0
Eleanore S. Nissley 5,591,524 56,153 0
(2) Ratification of the selection
of the selection of Deloitte
& Touche, LLP as the Company's
independent auditors for 1999. 5,535,262 12,024 100,392
Item 5. Other Information
None
<PAGE>
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 June 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: August 13, 1999
<TABLE>
Exhibit 11. Computation Re: Earnings Per Share
(dollars in thousands, except per share amounts)
<CAPTION>
---------------------------------------------------------------------------------------------------------
Three Months Ended, Six Months Ended,
---------------------------------------------------------------------------------------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 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 $2,478 7,212 $0.34 $1,427 7,193 $0.20 $4,764 7,209 $0.66 $3,405 7,180 $0.47
======= ====== ======= =======
Effect of Dilutive Shares
Options issued to
management - 33 - 70 - 35 - 70
------- ------ -------- ---- ------- ----- ------- ------
Diluted Earnings per
Common Share $2,478 7,245 $0.34 $1,427 7,263 $0.20 $4,764 7,244 $0.66 $3,405 7,250 $0.47
======= ====== ========= ======= ====== ======== ====== ======= ======== ======= =========== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Jun-30-1999
<CASH> 18,943
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 106,224
<INVESTMENTS-CARRYING> 47,410
<INVESTMENTS-MARKET> 47,101
<LOANS> 502,649
<ALLOWANCE> 5,498
<TOTAL-ASSETS> 690,846
<DEPOSITS> 603,836
<SHORT-TERM> 16,960
<LIABILITIES-OTHER> 6,294
<LONG-TERM> 0
<COMMON> 5,397
0
0
<OTHER-SE> 58,359
<TOTAL-LIABILITIES-AND-EQUITY> 690,846
<INTEREST-LOAN> 19,358
<INTEREST-INVEST> 4306
<INTEREST-OTHER> 414
<INTEREST-TOTAL> 24,078
<INTEREST-DEPOSIT> 8,626
<INTEREST-EXPENSE> 9,092
<INTEREST-INCOME-NET> 14,986
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 856
<EXPENSE-OTHER> 10,034
<INCOME-PRETAX> 7,221
<INCOME-PRE-EXTRAORDINARY> 7,221
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,764
<EPS-BASIC> 0.66
<EPS-DILUTED> 0.66
<YIELD-ACTUAL> 4.64
<LOANS-NON> 1,698
<LOANS-PAST> 0
<LOANS-TROUBLED> 435
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,645
<CHARGE-OFFS> 765
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 5,498
<ALLOWANCE-DOMESTIC> 5,498
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,037
</TABLE>
