SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED, September 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM____ TO ____
Commission File number 1-10518
INTERCHANGE FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2553159
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Park 80 West/Plaza Two, Saddle Brook, NJ 07663
---------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 703-2265
None
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
The number of outstanding shares of the Registrant's common stock, no par
value per share, as of October 31, 2000, was 6,530,498 shares.
<PAGE>
INTERCHANGE FINANCIAL SERVICES CORPORATION
INDEX
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
<S> <C>
Item 1 Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 .................................................... 1
Consolidated Statements of Income for the three and nine month
periods ended September 30, 2000 and 1999 ............................ 2
Consolidated Statements of Changes in Stockholders' Equity for
the nine months ended September 30, 2000 and 1999 .................... 3
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999 ............... 4
Notes to Consolidated Financial Statements .................. 5
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................ 7
Item 3 Quantitative and Qualitative Disclosures About Market Risk
(Disclosures about quantitative and qualitative market risk
are located in Management's Discussion and Analysis of
Financial Condition and Results of Operations in the section
on Market Risk) ...................................................... 17
PART II OTHER INFORMATION
Item 1 Legal Proceedings .................................................... 21
Item 2 Changes in Securities and Use of Proceeds ............................ 21
Item 3 Defaults upon Senior Securities ...................................... 21
Item 4 Submission of Matters to a Vote of Security Holders .................. 21
Item 5 Other Information .................................................... 21
Item 6 Exhibits and Reports on Form 8-K ..................................... 21
Signatures ........................................................... 22
</TABLE>
<PAGE>
Interchange Financial Services Corporation
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CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
(dollars in thousands)
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
Assets
Cash and due from banks $ 20,112 $ 17,669
Securities held to maturity at amortized cost
(estimated market value of $41,808 and $53,784
at September 30, 2000 and December 31, 1999,
respectively) 42,169 54,540
-------- --------
Securities available for sale at estimated
market value (amortized cost of $131,447 and
$108,399 at September 30, 2000 and December 31,
1999, respectively) 130,867 107,349
-------- --------
Loans 549,033 511,976
Less: Allowance for loan losses 6,085 5,476
-------- --------
Net loans 542,948 506,500
-------- --------
Premises and equipment, net 11,193 10,289
Foreclosed real estate 250 250
Accrued interest receivable and other assets 10,098 9,528
-------- --------
Total assets $757,637 $706,125
======== ========
Liabilities
Deposits
Non-interest bearing $103,148 $102,392
Interest bearing 548,501 496,600
-------- --------
Total deposits 651,649 598,992
-------- --------
Securities sold under agreements to repurchase 23,500 16,431
Short-term borrowings 3,375 13,975
Long-term borrowings 13,000 13,000
Accrued interest payable and other liabilities 6,904 5,451
-------- --------
Total liabilities 698,428 647,849
-------- --------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, without par value; 15,000,000
shares authorized; 6,530,498 and 6,728,098
shares issued and outstanding at September 30,
2000 and December 31, 1999, respectively 5,397 5,397
Capital surplus 21,077 21,244
Retained earnings 45,894 41,741
Accumulated other comprehensive loss (408) (675)
-------- --------
71,960 67,707
Less: Treasury stock 12,751 9,431
-------- --------
Total stockholders' equity 59,209 58,276
-------- --------
Total liabilities and stockholders' equity $757,637 $706,125
======== ========
--------------------------------------------------------------------------------
See notes to consolidated financial statements.
1
<PAGE>
Interchange Financial Services Corporation
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CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
(dollars in thousands, except per share data)(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ------------------------
2000 1999 2000 1999
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $11,478 $10,047 $32,723 $29,405
Interest on federal funds sold 258 129 528 543
Interest and dividends on securities
Taxable interest income 2,594 2,186 7,212 6,164
Interest income exempt from federal income taxes 124 142 448 339
Dividends 65 63 190 194
------- ------- ------- -------
Total interest income 14,519 12,567 41,101 36,645
------- ------- ------- -------
Interest expense
Interest on deposits 5,974 4,486 16,002 13,112
Interest on short-term borrowings 363 246 1,020 712
Interest on long-term borrowings 209 -- 622 --
------- ------- ------- -------
Total interest expense 6,546 4,732 17,644 13,824
------- ------- ------- -------
Net interest income 7,973 7,835 23,457 22,821
Provision for loan losses 150 300 750 900
------- ------- ------- -------
Net interest income after provision
for loan losses 7,823 7,535 22,707 21,921
------- ------- ------- -------
Noninterest income
Service fees on deposit accounts 617 586 1,765 1,727
Net gain on sale of securities -- 3 97 859
Other 557 1,015 1,198 1,887
------- ------- ------- -------
Total noninterest income 1,174 1,604 3,060 4,473
------- ------- ------- -------
Noninterest expenses
Salaries and benefits 2,866 2,623 8,317 7,732
Net occupancy 755 648 2,211 1,978
Furniture and equipment 247 260 795 767
Advertising and promotion 247 259 853 778
Federal Deposit Insurance Corporation assessment 33 20 97 60
Other 1,228 1,261 3,635 3,790
------- ------- ------- -------
Total noninterest expenses 5,376 5,071 15,908 15,105
------- ------- ------- -------
Income before income taxes 3,621 4,068 9,859 11,289
Income taxes 1,204 1,363 3,260 3,820
------- ------- ------- -------
Net income $ 2,417 $ 2,705 $ 6,599 $ 7,469
======= ======= ======= =======
Basic earnings per common share $ 0.37 $ 0.38 $ 1.01 $ 1.04
======= ======= ======= =======
Diluted earnings per common share $ 0.37 $ 0.38 $ 1.01 $ 1.04
======= ======= ======= =======
</TABLE>
--------------------------------------------------------------------------------
See notes to consolidated financial statements.
2
<PAGE>
Interchange Financial Services Corporation
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
(dollars in thousands, except share data) (unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Retained Comprehensive Common Capital
Income Earnings Income Stock Surplus
------------- -------- ------------- ------ -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $35,482 $1,192 $5,397 $21,256
Comprehensive income
Net Income $7,469 7,469
Other comprehensive income, net of taxes
Unrealized losses on AFS debt securities (1,126)
Less: gains on disposition of securities
(excludes equities) (90)
Unrealized gains securities transferred from held to
maturity to available to sale - Acquisition 23
Unrealized loss on equity securities (18)
Less: gains on disposition of equity securities (428)
-------
Other comprehensive loss (1,639) (1,639)
-------
Comprehensive income $5,830
=======
Dividends on common stock (2,567)
Issued 13,869 shares of common stock in connection
with Executive Compensation Plan 62
Exercised 2,954 option shares (14)
Purchased 38,500 shares of common stock
-------- ------ ------ -------
Balance at September 30, 1999 40,384 (447) 5,397 21,304
Net Income $2,166 2,166
Other comprehensive income, net of taxes
Unrealized losses on AFS debt securities (228)
------
Other comprehensive loss (228) (228)
======
Comprehensive income $1,938
======
Dividends on common stock (809)
Issued 620 shares of common stock in connection
with Executive Compensation Plan --
Exercised 4,882 option shares (60)
Purchased 455,860 shares of common stock
-------- ------ ------ -------
Balance at December 31, 1999 41,741 (675) 5,397 21,244
Net Income $6,599 6,599
Other comprehensive income, net of taxes
Unrealized gains on AFS debt securities 328
Less: gains on disposition of securities (61)
------
Other comprehensive income 267 267
------
Comprehensive income $6,866
======
Dividends on common stock (2,446)
Issued 11,406 shares of common stock in connection
with Executive Compensation Plan (6)
Exercised 16,634 option shares (161)
Purchased 225,640 shares of common stock
-------- ------ ------ -------
Balance at September 30, 2000 $45,894 $ (408) $5,397 $21,077
======== ====== ====== =======
<CAPTION>
Treasury
Stock Total
-------- -----
<S> <C> <C> <C>
Balance at January 1, 1999 $ (955) $62,372
Comprehensive income
Net Income 7,469
Other comprehensive income, net of taxes
Unrealized losses on AFS debt securities
Less: gains on disposition of securities
(excludes equities)
Unrealized gains securities transferred from held to
maturity to available to sale - Acquisition
Unrealized loss on equity securities
Less: gains on disposition of equity securities
Other comprehensive loss (1,639)
Comprehensive income
Dividends on common stock (2,567)
Issued 13,869 shares of common stock in connection
with Executive Compensation Plan 184 246
Exercised 2,954 option shares 37 23
Purchased 38,500 shares of common stock (5,861) (5,861)
------ -------
Balance at September 30, 1999 (6,595) 60,043
Net Income 2,166
Other comprehensive income, net of taxes
Unrealized losses on AFS debt securities
Other comprehensive loss (228)
Comprehensive income
Dividends on common stock (809)
Issued 620 shares of common stock in connection
with Executive Compensation Plan -- --
Exercised 4,882 option shares 84 24
Purchased 455,860 shares of common stock (2,920) (2,920)
-------- -------
Balance at December 31, 1999 (9,431) 58,276
Net Income 6,599
Other comprehensive income, net of taxes
Unrealized gains on AFS debt securities
Less: gains on disposition of securities
Other comprehensive income 267
Comprehensive income
Dividends on common stock (2,446)
Issued 11,406 shares of common stock in connection
with Executive Compensation Plan 196 190
Exercised 16,634 option shares 281 120
Purchased 225,640 shares of common stock (3,797) (3,797)
-------- -------
Balance at September 30, 2000 $(12,751) $59,209
======== =======
</TABLE>
--------------------------------------------------------------------------------
See notes to consolidated financial statements
3
<PAGE>
Interchange Financial Services Corporation
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
--------------------------------------------------------------------------------
(dollars in thousands) (unaudited)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 6,599 $ 7,469
Non-cash items included in earnings
Depreciation and amortization 1,022 1,135
Amortization of securities premiums 261 572
Accretion of securities discounts (211) (128)
Amortization of premiums in connection with acquisition 234 234
Provision for loan losses 750 900
Net gain on sale of securities (97) (859)
Net gain on sale of loans (62) --
Net gain on sale of foreclosed real estate -- (36)
Net loss on disposal of fixed assets -- 2
Decrease (increase) in operating assets
Accrued interest receivable (37) 254
Other (1,152) 114
Incease (decrease) in operating liabilities
Accrued interest payable 633 (155)
Other 820 1,253
-------- --------
Cash provided by operating activities 8,760 10,755
-------- --------
Cash flows from investing activities
(Payments for) proceeds from
Net originations of loans (24,949) (18,179)
Purchase of loans (13,544) (14,688)
Maturities of term federal funds -- 5,000
Sale of loans 1,357 --
Purchase of securities available for sale (47,980) (53,900)
Maturities of securities available for sale 7,293 11,624
Sale of securities available for sale 17,697 26,193
Sale of foreclosed real estate -- 120
Purchase of investment securities held to maturity (11,900) (17,058)
Maturities of investment securities held to maturity 22,259 15,091
Sale of securities held to maturity 2,002 2,003
Purchase of fixed assets (1,745) (910)
Sale of fixed assets -- 3
-------- --------
Cash used in investing activities (49,510) (44,701)
-------- --------
Cash flows from financing activities
Proceeds from (payments for)
Deposits more than withdrawals 52,657 3,765
Securities sold under agreements to repurchase and other borrowings 10,444 24,775
Retirement of securities sold under agreements to repurchase and other
borrowings (13,975) (14,118)
Dividends (2,446) (2,567)
Common stock issued 190 246
Treasury stock (3,797) (5,861)
Exercise of option shares from Treasury 120 23
-------- --------
Cash provided by financing activities 43,193 6,263
-------- --------
Increase (decrease) in cash and cash equivalents 2,443 (27,683)
Cash and cash equivalents, beginning of year 17,669 43,284
======== ========
Cash and cash equivalents, end of period $ 20,112 $ 15,601
======== ========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 17,011 $ 13,979
Income taxes 3,310 2,540
Supplemental disclosure of non-cash investing activities:
(Increase) decrease - market valuation of securities available for sale $ (470) $ 2,574
Loans transferred to foreclosed real estate
-- 250
</TABLE>
--------------------------------------------------------------------------------
See notes to consolidated financial statements
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Interchange Financial Services Corporation and its wholly owned
subsidiaries (the "Company") including its principal operating subsidiary,
Interchange Bank (the "Bank"), and have been prepared in conformity with
generally accepted accounting principles and in accordance with the rules and
regulations of the Securities and Exchange Commission. Pursuant to such rules
and regulations certain information or footnotes necessary for a complete
presentation of financial condition, results of operations and cash flows in
conformity with generally accepted accounting principles have been condensed or
omitted. These consolidated financial statements should be read in conjunction
with the financial statements and schedules thereto included in the annual
report on Form 10-K of the Company for the year ended December 31, 1999.
The consolidated financial data for the three and nine month periods ended
September 30, 2000 and 1999, are unaudited but reflect all adjustments
consisting of only normal recurring adjustments which are, in the opinion of
management, considered necessary for a fair presentation of the financial
condition and results of operations for the interim periods. The results of
operations for interim periods are not necessarily indicative of results to be
expected for any other period or the full year.
2. Earnings Per Common Share
Basic earnings per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted earnings
per common share is similar to the computation of basic earnings per common
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued.
3. Legal Proceedings
The Company is a party to routine litigation involving various aspects of
its business, none of which, in the opinion of management and its legal counsel,
is expected to have a material adverse impact on the consolidated financial
condition, results of operations or liquidity of the Company.
5
<PAGE>
4. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments, and Hedging Activities, which is effective for all
fiscal years beginning after June 15, 1999. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. Under SFAS
133, certain contracts that were not formerly considered derivatives may now
meet the definition of a derivative. The Company intends to adopt SFAS 133
effective January 1, 2001. Management does not expect the adoption of SFAS 133
to have a significant impact on the financial position or results of operations
of the Company because the Company does not have significant derivative
activity.
6
<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, 2000 and 1999, and should be read in conjunction
with the consolidated financial statements and notes thereto included in Item 1
hereof.
Forward Looking Information
In addition to discussing historical information, certain matters included
in or incorporated into this report relate to the financial condition, results
of operations and business of the Company which are not historical facts, but
which are "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. When used herein, the words
"anticipate," "believe," "estimate," "expect," "will" and other similar
expressions are generally intended to identify such forward looking statements.
These forward looking statements include, but are not limited to, statements
about the operations of the Company and the adequacy of the Company's allowance
for future losses associated with the loan portfolio. The forward looking
statements in this report involve certain assumptions, known and unknown risks
and uncertainties, many of which are beyond the control of the Company and
reflect what we currently anticipate will happen in each case. What actually
happens could differ materially from what we currently anticipate will happen
due to a variety of factors, including, among others, (i) increased competitive
pressures among financial services companies; (ii) changes in the interest rate
environment; (iii) general economic conditions, internationally, nationally, or
in the State of New Jersey; and (iv) legislation or regulatory requirements or
changes adversely affecting the business of the Company. Readers should not
place undue expectations on any "forward looking statements." We are not
promising to make any public announcement when we consider "forward looking
statements" in this document are no longer accurate, whether as a result of new
information, what actually happens in the future or for any other reason.
7
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
Earnings Summary
For the third quarter of 2000, the Company reported net income of $2.4
million or $0.37 diluted earnings per common share, as compared with $2.7
million or $0.38 diluted earnings per common share for the same period in 1999.
The earnings comparisons were impacted by two non-recurring items in the 1999
period: a gain of $416 thousand from the sale of the Bank's VISA(TM) and
merchant credit card portfolios and a gain of $365 thousand from the early
pay-off of commercial loans purchased at a discount from face value. During the
third quarter of 2000, the Company recognized $197 thousand of income from the
early pay-off of commercial loans purchased at a discount. Further, the 2000
quarterly earnings were impacted by costs associated with the Bank's expansion
programs, which programs were not in place during the third quarter of 1999.
These costs were related to the start-up and operation of the following:
Interchange Capital Company, LLC ("ICC"), the Bank's equipment lease financing
subsidiary; a new branch in Waldwick, New Jersey; and Interchange Bank-Line
Center, an inbound and outbound call center. These expansion programs are
strategies designed to enhance the Company's franchise value in its market area.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the most significant source of the Company's
operating income. Net interest income on a tax equivalent basis increased $155
thousand to $8.0 million for the quarter ended September 30, 2000 as compared to
the same quarter of 1999. The increase in net interest income is due to higher
levels of interest earning assets, particularly loans and leases. The earnings
benefit associated with the growth in loans was offset, in part, by a decline in
the net interest margin ("margin").
For the quarter ended September 30, 2000, average loans and leases
increased $45.9 million or 9.1% over the same period in 1999, which contributed
to the growth in average earning assets of $61.6 million or 9.2%. The loan and
lease growth was funded largely by deposit liabilities, which grew $54.9 million
or 9.0%, on average, for the third quarter of 2000 as compared to the same
period in 1999. Furthermore, a portion of the growth in earning assets was
funded by borrowings, which increased, on average, $18.9 million or 104.8% for
the third quarter of 2000 as compared to the same period in 1999. The growth in
borrowings was
8
<PAGE>
predominately in securities sold under agreements to repurchase with the Bank's
retail customers. Higher market interest rates and a shift in the composition of
interest bearing liabilities resulted in a 72 basis points increase in the
Company's cost of funds to 3.69% for the third quarter of 2000 as compared to
the same period in 1999. The higher funding cost was principally responsible for
the decline in the margin. The margin was 4.38% for the third quarter of 2000 as
compared to 4.69% for the same quarter in 1999.
Non-interest Income
For the quarter ended September 30, 2000, non-interest income amounted to
$1.2 million, a decrease of $430 thousand or 26.8% as compared to the same
period in 1999. The quarterly comparison was largely affected by non-recurring
items in the 1999 period: net gains on the sale of the Company's VISA(TM) and
merchant portfolios of $416 thousand and a $365 thousand gain arising from the
early pay-off of commercial loans purchased at a discount. During the same
period in 2000, a gain of $197 thousand was recorded on the early pay-off of
commercial loans purchased at a discount and income was recognized from the
settlement of an insurance claim for flood damages amounting to $53 thousand.
Adjusting for the non-recurring items during these two periods, non-interest
income increased $101 thousand or 12.3%. A $31 thousand or 5.3% growth in
service fees on deposit accounts contributed to the increase.
Non-interest Expenses
For the quarter ended September 30, 2000, non-interest expenses amounted
to $5.4 million, an increase of $305 thousand or 6.0% as compared to the same
period in 1999. This increase was due mostly to the Bank's expansion of its
operations, which included, but was not limited to, ICC, the Company's new
Bank-Line Center, a fully staffed in-bound and out-bound call center and a new
branch in Waldwick, New Jersey. Expenses necessary to operate ICC, the Bank-line
Center and the new branch during the third quarter of 2000 amounted to
approximately $282 thousand and were comprised mostly of salaries and benefits.
Excluding the operating expenses associated with the bank's expansion programs;
non-interest expenses increased $23 thousand or 0.5% as compared to the same
period in 1999.
Income Taxes
Income tax expense as a percentage of pre-tax income was 33.3% for the
three months ended September 30, 2000 as compared to 33.5% for the same period
in 1999.
9
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
Earnings Summary
For the first nine months of 2000, the Company reported net income of $6.6
million or $1.01 diluted earnings per common share, as compared with $7.5
million or $1.04 diluted earnings per common share for the same period in 1999.
The earnings comparisons were mainly impacted by three non-recurring items in
the 1999 period; net gains on the sale of securities of $859 thousand; gains of
$416 thousand from the sale of the Bank's VISA(TM) and merchant credit card
portfolios; and $670 thousand of income from the early pay-off of commercial
loans purchased at a discount from face value. During the first nine-months of
2000, the Company recognized $217 thousand of income from the early pay-off of
commercial loans purchased at a discount. Further, the 2000 earnings were
impacted by costs associated with the Bank's expansion programs, which programs
were not in place during the same period in 1999. These costs were related to
the start-up and operation of the following: ICC; a new branch in Waldwick, New
Jersey; and the Bank-Line Center. These expansion programs are strategies
designed to enhance the Company's franchise value in its market area.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income on a tax equivalent basis increased $678 thousand to
$23.6 million for the nine months ended September 30, 2000 as compared to the
same period in 1999. The increase in net interest income is due to higher levels
of interest earning assets, particularly loans and leases. The earnings benefit
associated with the growth in loans was offset, in part, by a decline in the net
interest margin ("margin").
For the nine months ended September 30, 2000, average loans and leases
increased $41.8 million or 8.5% over the same period in 1999, which facilitated
a growth in average earning assets of $51.2 million or 7.8%. The loan and lease
growth was funded largely by deposit liabilities, which grew $41.9 million or
7.0%, on average, for the first nine months of 2000 as compared to the same
period in 1999. Furthermore, a portion of the growth in earning assets was
funded by borrowings, which increased, on average, $19.5 million or 112.1% for
the first nine months of 2000 as compared to the same period in 1999. The growth
in borrowings was predominately in securities sold under agreements to
repurchase with the Bank's retail
10
<PAGE>
customers. Higher market interest rates and a shift in the composition of
interest bearing liabilities resulted in a 68 basis points increase in the
Company's cost of funds to 3.67% for the first nine months of 2000 as compared
to the same period in 1999. The higher funding cost was principally responsible
for the decline in the margin. The margin was 4.45% for the first nine months of
2000 as compared to 4.66% for the same period in 1999.
Non-interest Income
For the nine months ended September 30, 2000, non-interest income amounted
to $3.1 million, a decrease of $1.4 million or 31.6% compared to the same period
in 1999. The decrease was primarily due to three non-recurring items which
occurred during the 1999 period: net gains on the sale of securities of $859
thousand, the recognition of $670 thousand of income resulting from the early
pay-off of commercial loans purchased at a discount and a gain of $416 thousand
associated with the sale of the Company's VISA(TM) and merchant portfolios.
During the 2000 year to date period, net gains on the sale of securities
amounted to $97 thousand and the Company recorded gains of $217 thousand from
the early pay-off of commercial loans purchased at a discount. In addition, $53
thousand of income was recorded from the settlement of a flood insurance claim.
Adjusting for the non-recurring items during these two periods, non-interest
income increased $165 thousand or 6.5%. The increase primarily is attributable
to lease syndication fees of $61 thousand, and growth in fee income from the
sale of mutual funds and annuities of $92 thousand.
Non-interest Expenses
For the nine months ended September 30, 2000, non-interest expenses
amounted to $15.9 million, an increase of $803 thousand or 5.3% as compared to
the same period in 1999. This increase was due mostly to the Bank's expansion of
its operations, which included, but was not limited to, ICC, the Bank-Line
Center, and a new branch in Waldwick, New Jersey. Expenses necessary to operate
ICC, the Bank-Line Center and the new branch during the first nine months of
2000 amounted to approximately $776 thousand and were comprised mostly of
salaries and benefits. During the 2000 period there were two non-recurring items
which affected the earnings comparison with the same period in 1999: the Company
paid $118 thousand for a legal settlement relating to the interpretation of past
rental adjustments on a branch office. This expense was offset in the second
quarter of 2000 by a credit of $165 thousand arising from an adjustment to an
actuarial assumption related to the outside directors retirement plan. After
adjusting for the costs and operating expenses associated with the
11
<PAGE>
Bank's expansion programs, the legal settlement and the adjustment to the
outside directors retirement plan, non-interest expenses increased $74 thousand
or 0.5% as compared to the same period in 1999.
Income Taxes
Income tax expense as a percentage of pre-tax income was 33.1% for the
nine months ended September 30, 2000 as compared to 33.8% for the same period in
1999. The improvement was largely due to increased investment in tax exempt
municipal securities and loans.
FINANCIAL CONDITION
At September 30, 2000, the Company's total assets were $757.6 million, an
increase of $51.5 million or 7.3% from $706.1 million at December 31, 1999.
Loans and leases, which grew $37.1 million or 7.2% for September 30, 2000 as
compared to December 31, 1999, comprised most of the increase. In addition, the
investment portfolio grew $11.1 million or 6.9% for September 30, 2000 as
compared to December 31, 1999. The asset growth was funded principally by the
growth in deposit liabilities, which occurred mostly in time deposits.
Cash and Cash Equivalents
At September 30, 2000, cash and cash equivalents increased $2.4 million as
compared to December 31, 1999. This is largely the result of financing
activities (reflecting principally deposit growth less repayments of borrowings)
and operating activities (reflecting net income and changes in other assets)
generating cash more rapidly than the investing activities (funding loans and
investment growth) can utilize it. This can be seen more completely on the
accompanying unaudited Statements of Cash Flows.
Securities Portfolio
Under Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"), each security
is classified as either trading, available for sale ("AFS"), or held to maturity
("HTM"). The Company has no securities held in a trading account. The AFS
securities are recorded at their fair value. The after-tax difference between
amortized cost and fair value of AFS securities is recorded as "accumulated
other comprehensive loss" in the equity section of the balance sheet. The tax
impact of such
12
<PAGE>
adjustment is recorded as an adjustment to the amount of the deferred tax
liability. The HTM securities are carried at cost adjusted for the amortization
of premiums and accretion of discounts, which are recognized as an adjustment to
income. Under SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities, HTM securities, with some exceptions, may only be sold within
three months of maturity.
The Company uses its securities portfolio to ensure liquidity for cash
flow requirements, to manage interest rate risk, to provide a source of income,
to ensure collateral is available for pledging requirements and to manage asset
quality diversification. At September 30, 2000, investment securities totaled
$173.0 million and represented 22.8% of total assets, as compared to $161.9
million and 22.9%, respectively, at December 31, 1999. AFS securities comprised
75.6% of the total securities portfolio at September 30, 2000 as compared to
66.3% at December 31, 1999.
The following table presents the amortized cost of these securities and
their estimated market values as of September 30, 2000 and December 31, 1999:
(dollars in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------
September 30, 2000
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ------------- ---------
<S> <C> <C> <C> <C>
Securities held to maturity
Mortgage-backed securities $ 13,748 $ 41 $ 167 $ 13,622
Obligations of U.S. agencies 15,149 45 25 15,169
Obligations of states & political subdivisions 12,806 36 294 12,548
Other debt securities 466 3 -- 469
-------- -------- -------- --------
42,169 125 486 41,808
-------- -------- -------- --------
Securities available for sale
Obligations of U.S. Treasury 1,995 7 -- 2,002
Mortgage-backed securities 78,350 198 765 77,783
Obligations of U.S. agencies 35,899 164 54 36,009
Obligations of states & political subdivisions 10,607 24 161 10,470
Other debt securities 641 7 -- 648
Equity securities 3,955 -- -- 3,955
-------- -------- -------- --------
131,447 400 980 130,867
-------- -------- -------- --------
Total securities $173,616 $ 525 $ 1,466 $172,675
======== ======== ======== ========
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------
December 31, 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 $ 9,997 $ 5 $ 8 $ 9,994
Mortgage-backed securities 20,232 60 289 20,003
Obligations of U.S. agencies 7,992 8 51 7,949
Obligations of states & political subdivisions 16,195 -- 481 15,714
Other debt securities 124 -- -- 124
-------- -------- -------- --------
54,540 73 829 53,784
-------- -------- -------- --------
Securities available for sale
Obligations of U.S. Treasury 6,016 87 -- 6,103
Mortgage-backed securities 68,331 104 982 67,453
Obligations of U.S. agencies 27,141 51 112 27,080
Obligations of states & political subdivisions 3,139 -- 198 2,941
Equity securities 3,772 -- -- 3,772
-------- -------- -------- --------
108,399 242 1,292 107,349
-------- -------- -------- --------
Total securities $162,939 $ 315 $ 2,121 $161,133
======== ======== ======== ========
</TABLE>
At September 30, 2000, the contractual maturities of securities held to
maturity and securities available for sale are as follows: (dollars in
thousands)
<TABLE>
<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 $ 10,208 $ 10,188 $ 12,794 $ 12,742
After 1 but within 5 years 14,802 14,759 77,391 77,153
After 5 but within 10 years 5,400 5,398 13,260 13,004
After 10 years 11,759 11,463 24,047 24,013
Equity securities -- -- 3,955 3,955
-------- -------- -------- --------
Total $ 42,169 $ 41,808 $131,447 $130,867
======== ======== ======== ========
</TABLE>
During the first quarter of 2000, the Company sold certain AFS securities
in an effort to improve the risk/reward characteristics of the securities
portfolio. AFS securities with a book value of $17.6 million were sold. Gains of
$126 thousand and losses of $31 thousand were recognized from the sale. In
addition, one HTM security with a book value of $2.0 million was sold. A gain of
$2 thousand was recognized from the sale. The HTM security had a remaining
maturity of less than two months, therefore, it is considered as a "maturity"
for purposes of
14
<PAGE>
classification of securities under SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. There were no security sales during
the second and third quarters of 2000.
Loans and Leases
Total loans and leases amounted to $549.0 million and $512.0 million at
September 30, 2000 and December 31, 1999, respectively, representing an increase
of $37.1 million or 7.2% as compared to December 31, 1999. The growth was
predominately in commercial mortgage loans and lease financing, which increased
$14.6 million and $14.3 million, respectively. During the first nine months of
2000, the Company purchased $5.3 million and $8.2 million of loans and leases,
respectively. These assets were subjected to the Company's independent credit
analysis prior to purchase. Opportunistic purchases of loans and leases are
currently a desirable way for the Company to augment its loan and lease
originations. For the first nine months of 2000, the Company syndicated $1.1
million in commercial equipment leases and collected $61,000 in syndication
fees.
The following table reflects the composition of the loan and lease
portfolio:
------------- ------------
September 30, December 31,
2000 1999
------------- ------------
Amount of loans by type (dollars in thousands)
Real estate-mortgage
Commercial $180,946 $166,354
1-4 family residential
First liens 111,729 110,269
Junior liens 11,843 9,829
Home equity 143,820 144,747
Commercial and financial 68,137 63,684
Real estate-construction 3,767 4,008
Installment 5,086 3,703
Lease financing 23,705 9,382
-------- --------
Total $549,033 $511,976
======== ========
15
<PAGE>
Deposits
At September 30, 2000, total deposits increased $52.7 million or 8.8% to
$651.6 million from $599.0 million at December 31, 1999. The growth was
principally in time deposits, which grew $47.4 million or 29.2% as a result of
promotional campaigns. In addition, money market savings grew $20.5 million or
41.6%. A decline in interest bearing demand and savings accounts of $12.2
million and $3.8 million, respectively, served to offset some of the
aforementioned growth in time deposits and money market savings. At September
30, 2000, time deposits comprised 30.5% of all deposits as compared to 27.1% at
December 31, 1999.
Nonperforming Assets
Nonperforming assets are comprised of nonaccrual loans, restructured loans
and foreclosed real estate. At September 30, 2000, nonperforming assets amounted
to $1.4 million, a decrease of $224 thousand or 14.1% from $1.6 million at
December 31, 1999. Nonperforming assets at September 30, 2000 decreased by $43
thousand or 3.3% from $1.3 million at September 30, 1999. The ratio of
nonperforming assets to total loans and foreclosed real estate decreased to
0.25% at September 30, 2000 from 0.31% and 0.26% at December 31, 1999 and
September 30, 1999, respectively.
Provision for Loan Losses and Loan Loss Experience
The provision for loan losses represents management's determination of the
amount necessary to bring the allowance for loan losses to a level that
management considers adequate to reflect the risk of future losses inherent in
the Company's loan portfolio. In its evaluation of the adequacy of the allowance
for loan losses, management considers past loan loss experience, changes in the
composition of performing and nonperforming loans, the condition of borrowers
facing financial pressure, the relationship of the current level of the
allowance to the credit portfolio and to nonperforming loans and existing
economic conditions. However, the process of determining the adequacy of the
allowance is necessarily judgmental and subject to changes in external
conditions. Accordingly, the Company cannot assure you that existing levels of
the allowance will ultimately prove adequate to cover actual loan losses.
The allowance for loan losses was $6.1 million at September 30, 2000, and
$5.5 million at December 31, 1999, representing 546.7% and 409.6% of
nonperforming loans at those dates, respectively. In the first nine months of
2000 and 1999, the Company's provision for loan losses was $750 thousand and
$900 thousand, respectively.
16
<PAGE>
Market Risk
The Company's primary source of market risk exposure arises from changes
in market interest rates ("interest rate risk"). The Company's financial
performance is largely dependent upon its ability to manage interest rate risk.
Interest rate risk can be defined as the exposure of the Company's net interest
income to adverse movements in interest rates. Although the Company manages
other risks, as in credit and liquidity risk, in the normal course of its
business, management considers interest rate risk to be its most significant
market risk and could potentially have the largest material effect on the
Company's financial condition. The primary objective of the asset/liability
management process is to measure the effect of changing interest rates on net
interest income and market value and adjust the balance sheet (if necessary) to
minimize the inherent risk and maximize income. The Company's exposure to market
risk and interest rate risk is reviewed on a regular basis by the
Asset/Liability Committee of the Board of Directors. Tools used by management to
evaluate risk include an asset/liability simulation model. At September 30,
2000, the Company simulated the effects on net interest income given an
instantaneous and parallel shift in the yield curve of 200 basis points in
either direction. Based on the simulation, the results did not materially change
from December 31, 1999. At September 30, 2000, the Company was within policy
limits established by the Board of Directors for changes in net interest income
and future economic value.
The Company does not have any material exposure to foreign currency
exchange rate risk or commodity price risk. The Company did not enter into any
market rate sensitive instruments for trading purposes nor did it engage in any
hedging transactions utilizing derivative financial instruments during the first
nine months of 2000.
The Company is, however, a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its
customers. These instruments, which include commitments to extend credit and
standby letters of credit, involve to varying degrees elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
statement of condition. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates and may require
collateral from the borrower if deemed necessary by the Company. Standby letters
of credit are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party up to a stipulated amount and with
specified terms and conditions. Commitments to extend credit and standby letters
of credit are not recorded on the Company's consolidated balance sheet until the
instrument is exercised.
17
<PAGE>
Capital Adequacy
The Company is subject to capital adequacy requirements imposed by the
Board of Governors of the Federal Reserve System (the "Federal Reserve"). The
Federal Reserve has adopted risk-based capital requirements for assessing bank
holding company and bank capital adequacy. These standards define capital and
establish minimum capital requirements in relation to assets and off-balance
sheet exposure, adjusted for credit risk. The risk-based capital standards
currently in effect are designed to make regulatory capital requirements more
sensitive to differences in risk profiles among bank holding companies and
banks, to account for off-balance sheet exposure and to minimize disincentives
for holding liquid assets. Assets and off-balance sheet items are assigned to
broad risk categories, each with appropriate relative risk weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items.
The Company's and the Bank's capital amounts and ratios are as follows:
(dollars in thousands)
<TABLE>
<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, 2000:
Total Capital (to Risk Weighted Assets):
The Company $65,667 12.90% $40,734 8.00% N/A N/A
The Bank 65,177 12.77 40,828 8.00 $51,035 10.00%
Tier 1 Capital (to Risk Weighted Assets):
The Company 59,582 11.70 20,367 4.00 N/A N/A
The Bank 59,092 11.58 20,414 4.00 30,621 6.00
Tier 1 Capital (to Average Assets):
The Company 59,582 7.75 23,068 3.00 N/A N/A
The Bank 59,092 7.69 23,066 3.00 38,444 5.00
As of December 31, 1999:
Total Capital (to Risk Weighted Assets):
The Company $64,209 13.91% $36,925 8.00% N/A N/A
The Bank 64,877 14.01 37,054 8.00 $46,318 10.00%
Tier 1 Capital (to Risk Weighted Assets):
The Company 58,733 12.72 18,463 4.00 N/A N/A
The Bank 59,401 12.82 18,527 4.00 27,791 6.00
Tier 1 Capital (to Average Assets):
The Company 58,733 8.32 21,167 3.00 N/A N/A
The Bank 59,401 8.45 21,080 3.00 35,133 5.00
</TABLE>
18
<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 external factors such as competition for deposits and demand for
loans.
Financing for the Company's loans and investments is derived primarily
from deposits, along with interest and principal payments on loans and
investments. At September 30, 2000, total deposits amounted to $651.6 million,
an increase of $52.7 million or 8.8% from December 31, 1999. In addition, the
Company supplemented the more traditional funding sources with borrowings from
the Federal Home Loan Bank of New York ("FHLB") and with securities sold under
agreements to repurchase ("REPOS"). At September 30, 2000, advances from the
FHLB and REPOS amounted to $16.4 million and $23.5 million, respectively, as
compared to $27.0 million and $16.4 million, respectively, at December 31, 1999.
The decrease in advances from the FHLB was due to the repayment of overnight
borrowings resulting from the growth in deposit liabilities.
In 2000, despite heightened competition for loans, loan and lease
production continued to be the Company's principal investing activity. The loan
and lease portfolio at September 30, 2000 amounted to $549.0 million, an
increase of $37.1 million or 7.2% from $512.0 million at December 31, 1999.
The Company's most liquid assets are cash and due from banks and federal
funds sold. At September 30, 2000, the total of such assets amounted to $20.1
million or 2.7% of total assets, compared to $17.7 million or 2.5% of total
assets at year-end 1999. The increase in cash and cash equivalents was due
largely to the deposit growth.
Another significant liquidity source is the Company's AFS securities. At
September 30, 2000, AFS securities amounted to $130.9 million or 75.6% of total
securities, compared to $107.3 million or 66.3% of total securities at year-end
1999.
In addition to the aforementioned sources of liquidity, the Company has
available various other sources of liquidity, including federal funds purchased
from other banks and the Federal Reserve discount window. The Bank also has a
$67.5 million line of credit available through its membership in the FHLB.
Management believes that the Company's sources of funds are sufficient to
meet its funding requirements.
19
<PAGE>
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments, and Hedging Activities, which is effective for all
fiscal years beginning after June 15, 1999. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. Under SFAS
133, certain contracts that were not formerly considered derivatives may now
meet the definition of a derivative. The Company intends to adopt SFAS 133
effective January 1, 2001. Management does not expect the adoption of SFAS 133
to have a significant impact on the financial position or results of operations
of the Company because the Company does not have significant derivative
activity.
20
<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 and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are furnished herewith:
Exhibit No.
-----------
11 Statement re: computation of per share earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
None filed for the quarter ended September 30, 2000
21
<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 14, 2000
22
<PAGE>
Exhibit 11. Computation Re: Earnings Per Share
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
--------------------------------------------------- ---------------------------------------------------
Three Months Ended, Nine Months Ended,
--------------------------------------------------- ---------------------------------------------------
September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999
------------------------- ------------------------ ------------------------- ------------------------
Weighted Per Weighted Per Weighted Per Weighted Per
Average Share Average Share Average Share Average Share
Income Shares Amount Income Shares Amount Income Shares Amount Income Shares Amount
------ -------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Earnings per
Common Share
Income available to
common shareholders $2,417 6,527 $0.37 $2,705 7,043 $0.38 $6,599 6,544 $1.01 $7,469 7,148 $1.04
===== ===== ===== =====
Effect of Dilutive Shares
Options issued to
management 16 39 18 35
----- ----- ----- ----
Diluted Earnings per
Common Share $2,417 6,543 $0.37 $2,705 7,082 $0.38 $6,599 6,562 $1.01 $7,469 7,183 $1.04
====== ===== ===== ====== ===== ===== ====== ===== ===== ====== ===== =====
</TABLE>
