<TABLE>
Interchange Financial Services Corporation
--------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------------------
(dollars in thousands)
<CAPTION>
June 30, December 31,
2000 1999
------------ -----------
(unaudited)
<S> <C> <C>
Assets
Cash and due from banks $ 23,005 $ 17,669
Federal funds sold 12,350 -
------------ -----------
Total cash and cash equivalents 35,355 17,669
------------ -----------
Securities held to maturity at amortized cost (estimated market value
of $47,273 and $53,784 at June 30, 2000 and December 31, 1999,
respectively) 48,031 54,540
------------ -----------
Securities available for sale at estimated market value (amortized cost
of $119,719 and $108,399 at June 30, 2000 and December 31, 1999,
respectively) 118,222 107,349
------------ -----------
Loans 548,242 511,976
Less: Allowance for loan losses 6,030 5,476
------------ -----------
Net loans 542,212 506,500
------------ -----------
Premises and equipment, net 10,702 10,289
Foreclosed real estate 250 250
Accrued interest receivable and other assets 13,019 9,528
------------ -----------
Total assets $767,791 $706,125
============ ===========
Liabilities
Deposits
Non-interest bearing $110,777 $102,392
Interest bearing 556,576 496,600
------------ -----------
Total deposits 667,353 598,992
------------ -----------
Securities sold under agreements to repurchase 24,007 16,431
Short-term borrowings - 13,975
Long-term borrowings 13,000 13,000
Accrued interest payable and other liabilities 6,455 5,451
------------ -----------
Total liabilities 710,815 647,849
------------ -----------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, without par value; 15,000,000 shares authorized;
6,517,998 and 6,728,098 shares issued and outstanding at
June 30, 2000 and December 31, 1999, respectively 5,397 5,397
Capital surplus 21,201 21,244
Retained earnings 44,294 41,741
Accumulated other comprehensive loss (951) (675)
------------ -----------
69,941 67,707
Less: Treasury stock 12,965 9,431
------------ -----------
Total stockholders' equity 56,976 58,276
------------ -----------
Total liabilities and stockholders' equity $767,791 $706,125
============ ===========
--------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</TABLE>
1
<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,
-------------------------- ----------------------------
2000 1999 2000 1999
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $10,861 $9,851 $21,245 $19,358
Interest on federal funds sold 170 195 270 414
Interest and dividends on securities
Taxable interest income 2,396 2,034 4,618 3,978
Interest income exempt from federal income taxes 165 88 324 197
Dividends 64 60 125 131
------------ ----------- ------------- -------------
Total interest income 13,656 12,228 26,582 24,078
------------ ----------- ------------- -------------
Interest expense
Interest on deposits 5,206 4,351 10,028 8,626
Interest on short-term borrowings 360 229 657 466
Interest on long-term borrowings 206 - 413 -
------------ ----------- ------------- -------------
Total interest expense 5,772 4,580 11,098 9,092
------------ ----------- ------------- -------------
Net interest income 7,884 7,648 15,484 14,986
Provision for loan losses 300 300 600 600
------------ ----------- ------------- -------------
Net interest income after provision
for loan losses 7,584 7,348 14,884 14,386
------------ ----------- ------------- -------------
Noninterest income
Service fees on deposit accounts 601 571 1,148 1,141
Net gain on sale of securities - 329 97 856
Other 338 621 641 872
------------ ----------- ------------- -------------
Total noninterest income 939 1,521 1,886 2,869
------------ ----------- ------------- -------------
Noninterest expenses
Salaries and benefits 2,692 2,569 5,451 5,109
Net occupancy 716 671 1,456 1,330
Furniture and equipment 266 256 548 507
Advertising and promotion 311 273 606 519
Federal Deposit Insurance Corporation assessment 32 20 64 40
Other 1,101 1,319 2,407 2,529
------------ ----------- ------------- -------------
Total noninterest expenses 5,118 5,108 10,532 10,034
------------ ----------- ------------- -------------
Income before income taxes 3,405 3,761 6,238 7,221
Income taxes 1,113 1,283 2,056 2,457
------------ ----------- ------------- -------------
Net income $ 2,292 $ 2,478 $ 4,182 $ 4,764
============ =========== ============= =============
Basic earnings per common share $0.35 $0.34 $0.64 $0.66
============ =========== ============= =============
Diluted earnings per common share $0.35 $0.34 $0.64 $0.66
============ =========== ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
</TABLE>
2
<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, 1999 $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 AFS 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
Purchased 38,500 shares of common stock (642) (642)
--------- ------------ ------- --------- --------- -------
Balance at June 30, 1999 38,516 (85) 5,397 21,304 (1,376) 63,756
Net Income $4,871 4,871 4,871
Other comprehensive income, net of taxes
Unrealized losses on AFS debt securities (590)
-------------
Other comprehensive loss (590) (590) (590)
-------------
Comprehensive income $4,281
=============
Dividends on common stock (1,646) (1,646)
Issued 620 shares of common stock in connection
with Executive Compensation Plan - - -
Exercised 7,836 option shares (60) 84 24
Purchased 455,860 shares of common stock (8,139) (8,139)
--------- ------------ ------- --------- --------- -------
Balance at December 31, 1999 41,741 (675) 5,397 21,244 (9,431) 58,276
Net Income $4,182 4,182 4,182
Other comprehensive income, net of taxes
Unrealized losses on AFS debt securities (215)
Less: gains on disposition of securities (61)
-------------
Other comprehensive loss (276) (276) (276)
-------------
Comprehensive income $3,906
=============
Dividends on common stock (1,629) (1,629)
Issued 11,406 shares of common stock in connection
with Executive Compensation Plan (6) 196 190
Exercised 4,134 option shares (37) 67 30
Purchased 225,640 shares of common stock (3,797) (3,797)
--------- ------------ ------- --------- --------- -------
Balance at June 30, 2000 $44,294 $ (951) $5,397 $21,201 $(12,965)$56,976
========= ============ ======= ========= ========= =======
------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
</TABLE>
3
<PAGE>
<TABLE>
INTERCHANGE FINANCIAL SERVICES CORPORATION
-------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
-------------------------------------------------------------------------------------------------------------
(dollars in thousands) (unaudited)
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,182 $ 4,764
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 677 775
Amortization of securities premiums 170 447
Accretion of securities discounts (127) (84)
Amortization of premiums in connection with acquisition 157 156
Provision for loan losses 600 600
Net gain on sale of securities (97) (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 (453) 260
Other (3,068) 11
(Decrease) increase in operating liabilities
Accrued interest payable 415 (81)
Other 589 662
----------- -----------
Cash provided by operating activities 3,045 6,620
----------- -----------
Cash flows from investing activities
(Payments for) proceeds from
Net originations of loans (27,707) (15,459)
Purchase of loans (9,961) (13,522)
Sale of loans 1,356 -
Repayment of term federal funds - 5,000
Purchase of securities available for sale (32,262) (47,530)
Maturities of securities available for sale 3,311 7,116
Sale of securities available for sale 17,696 25,590
Sale of foreclosed real estate - 121
Purchase of securities held to maturity (7,333) (6,226)
Maturities of securities held to maturity 11,829 13,811
Sale of securities held to maturity 2,002 2,003
Purchase of fixed assets (1,046) (480)
Sale of fixed assets - 2
----------- -----------
Cash used in investing activities (42,115) (29,574)
----------- -----------
Cash flows from financing activities
Proceeds from (payments for)
Deposits in excess of withdrawals 68,361 5,104
Securities sold under agreements to repurchase and
other borrowings 7,576 6,250
Retirement of securities sold under agreement to
repurchase and other borrowings (13,975) (7,838)
Dividends (1,629) (1,730)
Common stock issued from treasury 190 246
Treasury stock acquired (3,797) (642)
Exercise of option shares 30 23
----------- -----------
Cash provided by financing activities 56,756 1,413
----------- -----------
(Decrease) increase in cash and cash equivalents 17,686 (21,541)
Cash and cash equivalents, beginning of period 17,669 43,284
----------- -----------
Cash and cash equivalents, end of period $35,355 $21,743
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $10,683 $9,173
Income taxes 2,275 1,663
Supplemental disclosure of non-cash investing activities:
Decrease - market valuation of securities available for sale 447 2,023
-------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 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 six month periods ended
June 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>
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, 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 similar expressions
are generally intended to identify forward looking statements. These forward
looking statements include, but are not limited to, statements about the
operations of the Company, the adequacy of the Company's allowance for future
losses associated with the loan portfolio. The forward looking statements in
this report involve known and unknown 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. 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.
6
<PAGE>
THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
Earnings Summary
For the second quarter of 2000, the Company reported net income of $2.3
million or $0.35 diluted earnings per common share, as compared with $2.5
million or $0.34 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 from the sale of securities of $329 thousand and a $284 thousand
gain from the early pay-off of a commercial loan purchased at a discount.
Further, the 2000 quarterly earnings were impacted by costs associated with the
Bank's expansion programs. These costs were related to the operation of the
Bank's lease financing subsidiary, Interchange Capital Company, LLC ("ICC"), and
its new call center, Interchange Bank-Line Center, an inbound calling facility
that provides enhanced customer service via access to a single source for bank
product and account information. The call center also functions as an outbound
telemarketing resource, contacting prospects for new accounts in conjunction
with product promotions.
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 $240
thousand to $7.9 million for the quarter ended June 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. 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 June 30, 2000, average loans increased $39.4 million
or 8.0% over the same period in 1999, which contributed to the growth in average
earning assets of $51.8 million or 7.9%. The loan growth was funded largely by
deposit liabilities, which grew $41.9 million or 7.0%, on average, for the
second quarter 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, $21.2 million or 124.6% for the second quarter 2000 as
compared to the same period in 1999. Higher market interest rates and a growth
in borrowings resulted in an increase of 42 basis points to the Company's cost
of funds to 3.41%
7
<PAGE>
for the second quarter of 2000 as compared to the same period in 1999 and was
principally responsible for the decline in the margin. The margin was 4.48% for
the second quarter of 2000 as compared to 4.69% for the same quarter in 1999.
Non-interest Income
For the quarter ended June 30, 2000, non-interest income amounted to $939
thousand, a decrease of $582 thousand or 38.3% as compared to the same period in
1999. The quarterly comparison was affected by two non-recurring items in the
1999 period: net gains on the sale of securities of $329 thousand and a $284
thousand gain arising from the early pay-off of a commercial loan purchased at a
discount. Adjusting for the non-recurring items, non-interest income increased
$31 thousand or 3.4%. The increase is attributable to lease syndication fees of
$59 thousand and growth in fee income from the sale of mutual funds and
annuities of $55 thousand. In addition, non-interest income was aided by a $30
thousand or 5.3% growth in service fees on deposit accounts. Non-interest income
was adversely affected by a decline in income from foreclosed real estate of $38
thousand and a decrease in merchant fee income of $40 thousand. The merchant
portfolio was sold in the third quarter of 1999 following a risk/reward
evaluation, which determined that the risk associated with the portfolio
exceeded the levels deemed desirable by the Company.
Non-interest Expenses
For the quarter ended June 30, 2000, non-interest expenses amounted to $5.1
million, an increase of $10 thousand or 0.2% as compared to the same period in
1999. The comparison of non-interest expenses was impacted by operating costs
associated with the bank's expansion programs, which consisted of ICC and
Interchange Bank-Line Center; each of which began operations in the fourth
quarter of 1999. Expenses necessary to operate ICC and the Bank-line Center
during the second quarter of 2000 amounted to approximately $180 thousand and
$45 thousand, respectively, which approximated the Company's projections. During
the second quarter of 2000, other non-interest expenses benefited from a credit
of $165 thousand arising from an adjustment to an actuarial assumption related
to the outside directors retirement plan. Excluding the operating expenses
associated with the bank's expansion programs and the adjustment to the outside
directors retirement plan, non-interest expenses decreased $50 thousand or 1.0%
as compared to the same period in 1999.
8
<PAGE>
Income Taxes
Income tax expense as a percentage of pre-tax income was 32.7% for the
three months ended June 30, 2000 as compared to 34.1% for the same period in
1999. The improvement was largely due to increased investment in tax exempt
municipal securities and loans.
SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
Earnings Summary
For the first six months of 2000, the Company reported net income of $4.2
million or $0.64 diluted earnings per common share, as compared with $4.8
million or $0.66 diluted earnings per common share for the same period in 1999.
The earnings comparisons were mainly impacted by two non-recurring items in the
1999 period; net gains from the sale of securities of $856 thousand and a $284
thousand gain from the early pay-off of a commercial loan purchased at a
discount. Further, the 2000 quarterly earnings were impacted by costs associated
with the Bank's expansion programs, which consisted of costs related to the
operation of ICC and Interchange Bank-Line Center.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income on a tax equivalent basis increased $523 thousand to
$15.6 million for the six months ended June 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. The earnings benefit associated
with the growth in loans was offset, in part, by a decline in the net interest
margin ("margin").
For the six months ended June 30, 2000, average loans increased $39.8
million or 8.2% over the same period in 1999, which facilitated a growth in
average earning assets of $46.1 million or 7.1%. The loan growth was funded
largely by deposit liabilities, which grew $35.8 million or 6.0%, on average,
for the first six 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, $20.0 million or 116.0% for the first half of 2000
as compared to the same period in 1999. Higher market interest rates and a
growth in borrowings resulted in a 34 basis points increase in the Company's
cost of funds to 3.35% for the first half of 2000 as
9
<PAGE>
compared to the same period in 1999 and was principally responsible for the
decline in the margin. The margin was 4.48% for the first six months of 2000 as
compared to 4.64% for the same period in 1999.
Non-interest Income
For the six months ended June 30, 2000, non-interest income amounted to
$1.9 million, a decrease of $983 thousand or 34.3% as compared to the same
period in 1999. The earnings comparison was affected by two non-recurring items
in the 1999 period: net gains on the sale of securities of $856 thousand and a
$284 thousand gain arising from the early pay-off of a commercial loan purchased
at a discount. Net gains on the sale of securities amounted to $97 thousand for
the six months ended June 30, 2000. Adjusting for the non-recurring items,
non-interest income increased $60 thousand or 3.3%. The increase is attributable
to lease syndication fees of $59 thousand and growth in fee income from the sale
of mutual funds and annuities of $132 thousand. Non-interest income was
adversely affected by a decrease in income from foreclosed real estate of $41
thousand and a decline in merchant fee income of $90 thousand.
Non-interest Expenses
For the six months ended June 30, 2000, non-interest expenses amounted to
$10.5 million, an increase of $498 thousand or 5.0% as compared to the same
period in 1999 due largely to expansionary growth. Expenses necessary to start
and operate ICC and the Interchange Bank-line Center during the first half of
2000 amounted to approximately $345 thousand and $90 thousand, respectively.
Additionally, in the first quarter of 2000, the Company paid $118 thousand for a
legal settlement relating to the interpretation of past rental adjustments on a
branch office. Conversely, in the second quarter of 2000, non-interest expenses
benefited from a credit of $165 thousand arising from an adjustment to an
actuarial assumption related to the outside directors retirement plan. Excluding
the costs and operating expenses associated with the Bank's expansion programs,
the legal settlement and the adjustment to the outside directors retirement
plan, non-interest expenses increased $110 thousand or 1.1% as compared to the
same period in 1999.
10
<PAGE>
Income Taxes
Income tax expense as a percentage of pre-tax income was 33.0% for the six
months ended June 30, 2000 as compared to 34.0% for the same period in 1999. The
improvement was largely due to increased investment in tax exempt municipal
securities and loans.
FINANCIAL CONDITION
At June 30, 2000, the Company's total assets were $767.8 million, an
increase of $61.7 million or 8.7% from $706.1 million at December 31, 1999. At
June 30, 2000, cash and cash equivalents increased $17.7 million as compared to
December 31, 1999. This is principally 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 securities
available for sale are recorded at their fair value. The after-tax difference
between amortized cost and fair value of AFS securities is recorded as
"unrealized gain (loss) on securities" in the equity section of the balance
sheet. The tax impact of such adjustment is recorded as an adjustment to the
amount of the deferred tax liability.
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 June 30, 2000, investment securities totaled $166.3
million and represented 21.7% of total assets, as compared to $161.9 million and
22.9%, respectively, at December 31, 1999.
11
<PAGE>
<TABLE>
The following table presents the amount of these securities and their approximate values as of June 30, 2000 and December 31, 1999:
(dollars in thousands)
<CAPTION>
---------------------------------------------------
June 30, 2000
---------------------------------------------------
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 $2,000 - $1 $ 1,999
Mortgage-backed securities 17,763 $26 292 17,497
Obligations of U.S. agencies 11,929 - 82 11,847
Obligations of states & political subdivisions 15,854 11 406 15,459
Other debt securities 485 - 14 471
-------------- -------- ----------- ------------
48,031 37 795 47,273
-------------- -------- ----------- ------------
Securities available for sale
Obligations of U.S. Treasury 1,993 - 1 1,992
Mortgage-backed securities 69,845 56 1,168 68,733
Obligations of U.S. agencies 32,874 6 126 32,754
Obligations of states & political subdivisions 10,370 - 274 10,096
Other debt securities 682 10 - 692
Equity securities 3,955 - - 3,955
-------------- -------- ----------- ------------
119,719 72 1,569 118,222
-------------- -------- ----------- ------------
Total securities $167,750 $109 $2,364 $165,495
============== ======== =========== ============
---------------------------------------------------
December 31, 1999
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- -------- ----------- ------------
Securities held to maturity
Obligations of U.S. Treasury $ 9,997 $ 5 $ 8 $ 9,994
Mortgage-backed securities 20,232 60 289 20,003
Obligations of U.S. agencies 7,992 8 51 7,949
Obligations of states & political subdivisions 16,195 - 481 15,714
Other debt securities 124 - - 124
-------------- -------- ----------- ------------
54,540 73 829 53,784
-------------- -------- ----------- ------------
Securities available for sale
Obligations of U.S. Treasury 6,016 87 - 6,103
Mortgage-backed securities 68,331 104 982 67,453
Obligations of U.S. agencies 27,141 51 112 27,080
Obligations of states & political subdivisions 3,139 - 198 2,941
Equity securities 3,772 - - 3,772
-------------- -------- ----------- ------------
108,399 242 1,292 107,349
-------------- -------- ----------- ------------
Total securities $162,939 $315 $2,121 $161,133
============== ======== =========== ============
</TABLE>
12
<PAGE>
<TABLE>
At June 30, 2000, 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 $15,252 $15,239 $ 7,978 $ 7,918
After 1 but within 5 years 16,132 15,935 73,772 73,248
After 5 but within 10 years 4,329 4,251 15,264 14,557
After 10 years 12,318 11,848 18,750 18,544
Equity securities - - 3,955 3,955
------------------------- ---------------------------
Total $48,031 $47,273 $119,719 $118,222
========================= ===========================
</TABLE>
During the first quarter of 2000, the Company sold certain 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. 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
classification of securities under SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. There were no security sales during
the second quarter of 2000.
Loans
Total loans amounted to $548.2 million and $512.0 million at June 30, 2000
and December 31, 1999, respectively. Total loans at June 30, 2000 increased
$36.3 million or 7.1% as compared to December 31, 1999. The growth was
predominately in commercial mortgage loans and lease financing, which increased
$14.4 million and $12.7 million, respectively. During the second quarter of
2000, the Company purchased $7.5 million of commercial equipment leases. These
leases 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. During the
second quarter of 2000, the Company syndicated $1.1 million in commercial
equipment leases and collected $59,000 in syndication fees.
13
<PAGE>
<TABLE>
The following table reflects the composition of the loan portfolio:
<CAPTION>
-------------------- ------------------
June 30, December 31,
2000 1999
-------------------- ------------------
<S> <C> <C>
Amount of loans by type (dollars in thousands)
Real estate-mortgage
Commercial $180,797 $166,354
1-4 family residential
First liens 113,237 110,269
Junior liens 11,054 9,829
Home equity 144,403 144,747
Commercial and financial 67,341 63,684
Real estate-construction 5,139 4,008
Installment
Credit cards and related plans 858 947
Other 3,348 2,756
Lease financing 22,065 9,382
-------------------- ------------------
Total $548,242 $511,976
==================== ==================
</TABLE>
Deposits
At June 30, 2000, total deposits increased $68.4 million or 11.4% to $667.4
million from $599.0 million at December 31, 1999. The growth was principally in
time deposits, which grew $41.2 million or 25.4% as a result of promotional
campaigns. In addition, money market savings and non-interest bearing deposits
grew $18.5 million and $8.4 million, respectively. At June 30, 2000, time
deposits represent 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 June 30, 2000, nonperforming assets amounted to
$1.2 million, a decrease of $411 thousand or 25.9% from $1.6 million at December
31, 1999. Nonperforming assets decreased by $1.0 million or 46.8% from $2.2
million at June 30, 1999. The ratio of nonperforming assets to total loans and
foreclosed real estate decreased to 0.21% at June 30, 2000 from 0.31% and 0.44%
at December 31, 1999 and June 30, 1999, respectively. The
14
<PAGE>
decrease in nonperforming assets is comprised almost entirely of a commercial
loan of which $1.1 million was charged-off during the second and third quarters
of 1999.
Provision for Loan Losses and Loan Loss Experience
The provision for loan losses represents management's determination of the
amount necessary to bring the allowance for loan losses to a level that
management considers adequate to reflect the risk of future losses inherent in
the Company's loan portfolio. In its evaluation of the adequacy of the allowance
for loan losses, management considers past loan loss experience, changes in the
composition of performing and nonperforming loans, the condition of borrowers
facing financial pressure, the relationship of the current level of the
allowance to the credit portfolio and to nonperforming loans and existing
economic conditions. However, the process of determining the adequacy of the
allowance is necessarily judgmental and subject to changes in external
conditions. Accordingly, there can be no assurance that existing levels of the
allowance will ultimately prove adequate to cover actual loan losses.
The allowance for loan losses was $6.0 million at June 30, 2000, and $5.5
million at December 31, 1999, representing 651.2% and 409.6% of nonperforming
loans at those dates, respectively. In the first six months of 2000 and 1999,
the Company's provision for loan losses was $600 thousand.
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 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 June 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
15
<PAGE>
results did not materially change from March 31, 2000. At June 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
six 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.
Capital Adequacy
The Company is subject to capital adequacy requirements imposed by the
Board of Governors of the Federal Reserve (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.
16
<PAGE>
<TABLE>
<CAPTION>
The Company's and the Bank's capital amounts and ratios are as follows: (dollars in thousands)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- ------------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ------------ ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 2000:
Total Capital (to Risk Weighted Assets):
The Company $63,861 12.56 % $40,688 8.00 % N/A N/A
The Bank 62,933 12.33 40,840 8.00 $51,050 10.00%
Tier 1 Capital (to Risk Weighted Assets):
The Company 57,831 11.37 20,344 4.00 N/A N/A
The Bank 56,904 11.15 20,420 4.00 30,630 6.00
Tier 1 Capital (to Average Assets):
The Company 57,831 7.80 22,256 3.00 N/A N/A
The Bank 56,904 7.72 22,112 3.00 36,853 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>
17
<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, 2000, total deposits amounted to $667.4 million, an increase of
$68.4 million or 11.4% 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 June 30, 2000, advances from the FHLB and
REPOS amounted to $13.0 million and $24.0 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 production
continued to be the Company's principal investing activity. Net loans at June
30, 2000 amounted to $542.2 million, an increase of $35.7 million or 7.1% from
$506.5 million at December 31, 1999.
The Company's most liquid assets are cash and due from banks and federal
funds sold. At June 30, 2000, the total of such assets amounted to $35.4 million
or 4.6% 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. This cash was temporarily in federal funds, awaiting investment
in loans and securities.
Another significant liquidity source is the Company's AFS securities. At
June 30, 2000, AFS securities amounted to $118.2 million or 71.1% 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.
18
<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 Company held its Annual Meeting of Shareholders on
April 27, 2000.
(b) Each of the persons nominated for director was elected, the
Outside Director Incentive Compensation Plan was approved and
the selection of Deloitte & Touche, LLP as the Company's
independent auditors for 2000 was ratified. The following are
the voting results on each of these matters:
Against
or
For Withheld Abstentions
_____ ________ ___________
(1) ELECTION OF DIRECTORS:
Donald L. Correll 5,281,092 109,148 0
James E. Healey 5,307,102 83,138 0
Jeremiah F. O'Connor 5,233,529 156,711 0
Robert P. Rittereiser 5,307,411 82,829 0
(2) To Consider and vote upon the
Outside Director Incentive
Compensation Plan 4,683,974 490,747 215,519
(3) Ratification of the selection
of the of Deloitte & Touche, LLP
as the Company's independent
auditors for 2000. 5,199,063 32,457 158,720
19
<PAGE>
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 June 30, 2000
20
<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 14, 2000
21
