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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-Q
_________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED, June 30, 2003
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)
(201) 703-2265
________________________________________________________________________________
(Registrant's telephone number, including area code)
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 July 31, 2003, was 12,793,801 shares.
INTERCHANGE FINANCIAL SERVICES CORPORATION
INDEX
PART I FINANCIAL INFORMATION
Page No.
Item 1 Financial Statements
Consolidated Balance Sheets as of
June 30, 2003 and December 31, 2002 . . . . . . 1
Consolidated Statements of Income for the three and
six-month periods ended June 30, 2003 and 2002 . 2
Consolidated Statements of Changes in
Stockholders' Equity for the six months ended
June 30, 2003 and 2002 . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the
six months ended June 30, 2003 and 2002 . . . . 4
Notes to Consolidated Financial Statements . . . . 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . 12
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 Operation in the section on
Market Risk). . . . . . . . . . 26
Item 4 Controls and Procedures . . . . . 31
PART II OTHER INFORMATION
Item 1 Legal Proceedings . . . . . . . . . . . . . . 32
Item 2 Changes in Securities and Use of Proceeds. . . 32
Item 3 Defaults upon Senior Securities . . . . . . . 32
Item 4 Submission of Matters to a Vote
of Security Holders . . . . . . . . . . . . . 32
Item 5 Other Information . . . . . . . . . . . . . . 32
Item 6 Exhibits and Reports on Form 8-K . . . . . . 32
Signatures . . . . . . . . . . . . . . . . . 33
Item 1: Financial Statements
Interchange Financial Services Corporation
________________________________________________________________________________________________________
CONSOLIDATED BALANCE SHEETS
________________________________________________________________________________________________________
(dollars in thousands)
June 30, December 31,
2003 2002
___________ _____________
(unaudited)
Assets
Cash and due from banks $ 44,583 $ 23,266
Federal funds sold 11,000 10,650
___________ ___________
55,583 33,916
___________ ___________
Securities held to maturity at amortized cost (estimated market value
of $26,166 and $29,590 for June 30, 2003 and December 31, 2002,
respectively) 24,741 28,192
___________ ___________
Securities available for sale at estimated market value (amortized cost
of $313,667 and $217,924 for June 30, 2003 and December 31, 2002,
respectively) 320,204 224,320
___________ ___________
Loans and leases (net of unearned income and deferred fees of $7,573 and
$8,657 for June 30, 2003 and December 31, 2002, respectively) 805,084 615,641
Less: Allowance for loan and lease losses 9,537 7,207
___________ ___________
Net loans and leases 795,547 608,434
___________ ___________
Bank owned life insurance 21,542 21,274
Premises and equipment, net 20,440 10,512
Foreclosed real estate and other repossesed assets 172 176
Goodwill 55,270 1,447
Intangible assets 4,417 231
Accrued interest receivable and other assets 14,185 7,830
___________ ___________
Total assets $1,312,101 $936,332
=========== ===========
Liabilities
Deposits
Non-Interest bearing $212,395 $118,578
Interest bearing 924,431 697,094
___________ ___________
Total deposits 1,136,826 815,672
___________ ___________
Securities sold under agreements to repurchase 11,420 17,390
Long-term borrowings 10,000 10,000
Accrued interest payable and other liabilities 15,852 12,590
___________ ___________
Total liabilities 1,174,098 855,652
___________ ___________
Commitments and contingent liabilities
Stockholders' equity:
Common stock, without par value; 22,500,000 shares authorized;
12,756,842 and 9,815,207 shares issued and outstanding at
June 30, 2003 and December 31, 2002, respectively 5,397 5,397
Capital surplus 73,355 21,097
Retained earnings 68,693 63,314
Accumulated other comprehensive income 3,653 3,596
___________ __________
151,098 93,404
Less: Treasury stock 13,095 12,724
___________ _________
Total stockholders' equity 138,003 80,680
___________ _________
Total liabilities and stockholders' equity $1,312,101 $936,332
=========== =========
_______________________________________________________________________________________________________
See notes to consolidated financial statements.
Interchange Financial Services Corporation
______________________________________________________________________________________________________
CONSOLIDATED STATEMENTS OF INCOME
______________________________________________________________________________________________________
(dollars in thousands, except per share data) (unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
___________________________ ___________________________
2003 2002 2003 2002
____________ ____________ ____________ ____________
Interest income
Interest and fees on loans $12,470 $11,340 $23,326 $22,354
Interest on federal funds sold 121 67 184 120
Interest on interest bearing deposits 9 - 21 -
Interest and dividends on securities
Taxable interest income 2,329 2,598 4,612 5,102
Interest income exempt from federal income taxes 221 149 400 275
Dividends 52 47 109 94
___________ ____________ ____________ ____________
Total interest income 15,202 14,201 28,652 27,945
___________ ____________ ____________ _____________
Interest expense
Interest on deposits 3,416 4,313 6,823 8,697
Interest on securities sold under agreements to repurchase 79 43 165 92
Interest on short-term borrowings - 110 - 250
Interest on long-term borrowings 107 108 212 211
__________ ___________ ____________ ___________
Total interest expense 3,602 4,574 7,200 9,250
__________ ___________ ____________ ___________
Net interest income 11,600 9,627 21,452 18,695
Provision for loan and lease losses 530 255 795 480
__________ ___________ ____________ ___________
Net interest income after provision for loan losses 11,070 9,372 20,657 18,215
__________ ___________ ____________ ___________
Non-interest income
Service fees on deposit accounts 908 649 1,561 1,263
Net gain on sale of securities 19 94 19 281
Net gain on sale of loans and leases 147 8 345 38
Bank owned life insurance 784 224 1,062 445
Commissions on sale of annuities and mutual funds 175 155 388 207
Other 611 347 1,113 804
__________ ___________ ____________ ___________
Total non-interest income 2,644 1,477 4,488 3,038
__________ ___________ ____________ ___________
Non-interest expense
Salaries and benefits 4,193 3,303 7,821 6,562
Net occupancy 1,095 869 2,023 1,733
Furniture and equipment 353 305 606 590
Advertising and promotion 423 364 737 789
Federal Deposit Insurance Corporation assessment 37 33 71 65
Foreclosed real estate - 5 - 11
Amortization of intangible assets 90 18 109 31
Other 1,505 1,395 2,856 2,643
___________ ___________ ____________ ___________
Total non-interest expense 7,696 6,292 14,223 12,424
___________ ___________ ____________ ___________
Income before income taxes 6,018 4,557 10,922 8,829
Income taxes 1,831 1,492 3,379 2,824
___________ ___________ ____________ ___________
Net income $ 4,187 $ 3,065 $ 7,543 $ 6,005
=========== =========== ============ ===========
Basic earnings per common share $0.35 $0.31 $0.70 $0.61
=========== =========== ============ ===========
Diluted earnings per common share $0.35 $0.31 $0.69 $0.60
============ ============ ============ ===========
___________________________________________________________________________________________________________________________________
See notes to consolidated financial statements.
/TABLE>
Interchange Financial Services Corporation
___________________________________________________________________________________________________________________________________
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
For the Six Months Ended Ended June 30,
___________________________________________________________________________________________________________________________________
(dollars in thousands, except per share data) (unaudited)
Accumulated
Other
Comprehensive Retained Comprehensive Common Capital Treasury
Income Earnings Income Stock Surplus Stock Total
______________ ________ _____________ ______ ________ ________ ________
Balance at January 1, 2002 $54,758 $1,156 $5,397 $20,993 $(14,071) $68,233
Comprehensive income
Net Income $6,005 6,005 6,005
Other comprehensive income, net of taxes
Unrealized gains on AFS debt securities 1,187
Less: gains on disposition of securities (187)
____________
Other comprehensive income, net of taxes 1,000 1,000 1,000
____________
Comprehensive income $7,005
============
Dividends on common stock (1,961) (1,961)
Issued 21,069 shares of common stock in connection
with Executive Compensation Plan 66 244 310
Exercised 18,435 option shares (66) 213 147
Issued 107,877 shares of common stock in connection with
the acquisition of certain assets and assumption of
certain liabilities of Monarch Capital Corporation 131 1,244 1,375
Purchased 18,150 shares of common stock (235) (235)
________ _____________ ______ ______ ________ _______
Balance at June 30, 2002 58,802 2,156 5,397 21,124 (12,605) 74,874
Comprehensive income $6,872 6,872 6,872
Other comprehensive income, net of taxes
Unrealized gains on AFS debt securities 1,850
Add: losses on disposition of securities (410)
___________
Other comprehensive income, net of taxes 1,440 1,440 1,440
___________
Comprehensive income $8,312
===========
Dividends on common stock (2,360) (2,360)
Exercised 6,723 option shares (27) 78 51
Purchased 11,400 shares of common stock (197) (197)
________ ____________ ______ ______ _________ ______
Balance at December 31, 2002 63,314 3,596 5,397 21,097 (12,724) 80,680
Comprehensive income
Net Income $7,543 7,543 7,543
Other comprehensive income, net of taxes
Unrealized net gains on AFS debt securities 282
Less: net gains on disposition of securities (206)
Minimum pension liability (19)
___________
Other comprehensive income, net of taxes 57 57 57
___________
Comprehensive income $7,600
===========
Dividends on common stock (2,164) (2,164)
Issued 20,833 shares of common stock in connection
with Executive Compensation Plan 109 245 354
Exercised 7,141 option shares (31) 77 46
Issued 2,949,719 shares of common stock in connection with
the acquisition of Bridge View Bancorp 52,180 52,180
Reacquired 35,959 shares in lieu of non-performing asset (693) (693)
________ __________ _______ ________ ________ _______
Balance at June 30, 2003 $68,693 $3,653 $5,397 $73,355 $(13,095)$138,003
======== ========== ======= ======== ======== =======
___________________________________________________________________________________________________________________________________
See notes to consolidated financial statements.
Interchange Financial Services Corporation
___________________________________________________________________________________________________________
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
___________________________________________________________________________________________________________
(dollars in thousands)
(unaudited)
2003 2002
__________ __________
Cash flows from operating activities
Net income $ 7,543 $ 6,005
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 801 728
Amortization of securities premiums 1,649 853
Accretion of securities discounts (166) (147)
Amortization of premiums in connection with acquisition 250 32
Provision for loan and lease losses 795 480
Increase in cash surrender value of Bank Owned Life Insurance (268) (446)
Net gain on the sale of repossessed assets (7) -
Origination of loans held for sale (7,549) -
Sale of loans held for sale 7,775 -
Other than temporary impairment of securities 415 -
Net gain on sale of securities available for sale (475) (284)
Net gain on sale of loans and leases (345) (38)
Net gain on sale of fixed assets 10 -
Decrease (increase) in operating assets
Accrued interest receivable (554) (442)
Accounts receivable- leases sold - 4,921
Other (5,309) (253)
(Decrease) increase in operating liabilities
Accrued interest payable (319) (97)
Other 1,962 2,915
__________ ___________
Cash provided by operating activities 6,208 14,227
__________ ___________
Cash flows from investing activities
(Payments for) proceeds from
Purchase of loans (53) (14,945)
Net originations of loans (6,343) (27,066)
Net proceeds from the sale of leases 1,520 493
Purchase of securities available for sale (134,890) (74,343)
Maturities of securities available for sale 64,603 20,450
Sale of securities available for sale 13,029 7,234
Maturities of securities held to maturity 3,342 7,795
Purchase of fixed assets (560) (997)
Sale of reposessed assets 100 251
Net cash proceeds from acquisition of Bridge View Bancorp 20,191 -
Premium in connection with acquisition - (1,861)
__________ ___________
Cash used in investing activities (39,061) (82,989)
__________ ___________
Cash flows from financing activities
Proceeds from (payments for)
Deposits in excess of withdrawals 62,272 65,692
Securities sold under agreements to repurchase and other borrowings 14,059 13,542
Retirement of securities sold under agreement to repurchase and
other borrowings (20,028) (14,187)
Minimum pension liability, net of taxes (19) -
Dividends (2,164) (1,961)
Treasury stock - (235)
Common stock issued 354 1,685
Exercise of option shares 46 147
__________ ___________
Cash provided by financing activities 54,520 64,683
__________ ___________
Increase in cash and cash equivalents 21,667 (4,079)
Cash and cash equivalents, beginning of year 33,916 22,211
__________ ___________
Cash and cash equivalents, end of period $55,583 $18,132
========== ===========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $7,101 $9,348
Income taxes 4,365 2,679
Supplemental disclosure of non-cash investing activities:
Loans transferred to foreclosed real estate and other
repossessed assets 89 351
Stock issued related to Bridge View acquisition 52,180 -
___________________________________________________________________________________________________________
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX-MONTH PERIODS
ENDED JUNE 30, 2003
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Interchange Financial Services Corporation and its wholly owned
subsidiaries (on a consolidated basis, the "Company") including its principal
operating subsidiary, Interchange Bank (the "Bank"), and have been prepared in
conformity with accounting principles generally accepted in the United States of
America ("GAAP") 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
GAAP 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, 2002.
The consolidated financial data for the three and six-month periods ended
June 30, 2003 and 2002, 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.
Use of estimates: The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The most significant estimates
pertain to the allowance for loan and lease losses and the fair value of
financial instruments.
Stock Based Compensation: The Company accounts for stock option plans under the
recognition and measurement principles of APB Opinion No. 25. "Accounting for
Stock Issued to Employees," and related interpretations. No stock-based employee
compensation costs are reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the effect on
net income and diluted earnings per common share if the Company had applied the
fair value recognition provisions of FASB Statement No. 123, " Accounting for
Stock-Based Compensation," to stock-based compensation for the three and six
months ended June 30, 2003 and 2002:
(in thousands, except share data) (unaudited)
___________________________ __________________________
For the three months ended For the six months ended
June 30, June 30,
2003 2002 2003 2002
________ ____________ _________ ___________
Net Income
As reported $4,187 $3,065 $7,543 $6,005
Less: Total stock-based
compensation
expense determined under the fair
value method for all rewards,
net of related tax effects 90 62 160 121
________ ____________ _________ ___________
Pro-forma $4,097 $3,003 $7,383 $5,884
======== ============ ========= ===========
Diluted earnings per common share
As reported $ 0.35 $0.31 $0.69 $0.60
Less: Total stock-based
compensation
expense determined under the fair
value method for all rewards,
net of related tax effects 0.01 0.01 0.02 0.01
_______ ____________ _________ ___________
Pro-forma $0.34 $0.30 $0.67 $0.59
======= ============= ========= ===========
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The following weighted-average
assumptions were used for option grants issued during the three months ended
June 30, 2003: dividend yield of 2.14; expected volatility of 24.69%; risk-free
interest rate of 3.39%; and expected lives of 7 years. Prior period assumptions
are described in Note 12 "Stock Option and Incentive Plan in the Notes to
Consolidated Financial Statements" in the Company's 2002 Annual Report on Form
10K. The effects of applying these assumptions in determining the pro-forma net
income may not be representative of the effects on pro-forma net income for
future years.
2. Acquisition and Pro Forma Disclosure
On April 30, 2003 the Company completed its acquisition of 100% of the common
stock of Bridge View Bancorp ("Bridge View"), a Bergen County-based bank holding
company with eleven locations, which expanded the Company's presence into
eastern Bergen County. The results of Bridge View's operations have been
included in the consolidated financial statements since that date. Bridge View
had approximately $278 million of total assets, $185 million of loans and $259
million of deposits. The aggregate purchase price paid to Bridge View
shareholders was approximately $85.7 million and consisted of approximately 2.9
million shares of the Company's common stock with an approximate market value of
$52.2 million based upon the average closing price three days prior to and after
the acquisition date and $33.5 million in cash. The transaction was accounted
for as a purchase and the cost in excess of net assets acquired of approximately
$57.7 million was allocated to net identified intangibles of approximately $4.3
million and goodwill of approximately $53.7 million.
The following pro forma condensed consolidated statements of income for the
three and six months ended June 30, 2002 and 2003 give effect to the merger as
if the merger had been consummated on either January 1, 2002 or 2003.
The pro forma information is not necessarily indicative of the results of
operations in the future or the results of operations, which would have been
realized had the merger been consummated during the periods or as of the dates
for which the pro forma information is presented.
Interchange Financial Services Corporation and Subsidiaries
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
________________________ _________________________
2003 2002 2003 2002
Interest income $ 16,243 $ 17,316 $ 32,912 $ 34,105
Interest expense 3,726 4,862 7,743 9,887
________ ________ ________ ________
Net interest income 12,517 12,454 25,169 24,218
________ ________ ________ ________
Provision for loan and lease losses 530 405 810 690
________ ________ ________ ________
Net interest income after provision for loan
and lease losses 11,987 12,049 24,359 23,528
Non-interest income 2,877 2,236 5,272 4,279
Non-interest expense
Salaries and benefits 4,619 4,307 9,315 8,511
Occupancy and FF&E 1,618 1,643 3,246 3,159
Other expenses 2,353 2,539 4,773 4,866
_________ _______ ________ _______
8,590 8,489 17,334 16,536
Net income before taxes 6,274 5,796 12,297 11,271
Income Taxes 1,936 1,922 3,931 3,672
_________ _______ ________ ________
Net income $ 4,338 $ 3,874 $ 8,366 $ 7,599
========= ======= ======== ========
Earnings per common share:
Basic 0.34 0.31 0.66 0.61
Diluted 0.33 0.30 0.65 0.60
3. Earnings Per Common Share
Basic earnings per common share represents income available to common
stockholders divided by the weighted-average number of common shares outstanding
during the period. Diluted earnings per common share reflects additional common
shares that would have been outstanding if dilutive potential common shares had
been issued, as well as any adjustment to income that would result from the
assumed issuance. Potential common shares that may be issued by the Company
relate solely to outstanding stock options, and are determined using the
treasury stock method.
4. Commitments and Contingent Liabilities
Legal Proceedings
The Company is a party to routine litigation involving various aspects of
its business, none of which, in the opinion of management, is expected to have a
material adverse impact on the consolidated financial condition, results of
operations or liquidity of the Company.
Commitments to Extend Credit
At June 30, 2003, the Company had commitments of approximately $178 million
to extend credit, of which approximately $2 million represents standby letters
of credit.
5. Goodwill and Other Intangibles
With the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"), on January 1, 2002, goodwill is no longer amortized to expense,
but rather is tested for impairment periodically. Other intangible assets are
amortized to expense using straight-line methods over their respective estimated
useful lives. At least annually, management reviews goodwill and other
intangible assets and evaluates events or changes in circumstances that may
indicate impairment in the carrying amount of such assets. If the sum of the
expected undiscounted future cash flows, excluding interest charges, is less
than the carrying amount of the asset, an impairment loss is recognized.
Impairment, if any, is measured on a discounted future cash flow basis. Goodwill
is reviewed for impairment annually and on an interim basis when conditions
require. If necessary an impairment charge is recognized in the period that
goodwill has been deemed to be impaired. At the date of adoption, there was no
unamortized goodwill.
At June 30, 2003, gross intangible assets amounted to $4.6 million and
accumulated amortization amounted to $178,000. At December 31, 2002, gross
intangible assets amounted to $300,000 and accumulated amortization amounted to
$69,000. Amortization of intangible assets as a result of acquisitions, which is
included in non-interest expense, amounted to $109,000, and $31,000 for the six
months ended June 30, 2003 and 2002, respectively. During the second quarter,
the Company recorded a core deposit intangible of $4.3 million in connection
with the Bridge View merger. The core deposit intangible has an estimated life
of 10 years and the Company amortized $72,000 for the first half of 2003. The
core deposit intangible will be periodically reviewed for impairment. In
addition, the Company recorded goodwill of $53.7 million in connection with the
Bridge View merger. The goodwill will be tested for impairment at least annually
in accordance with the provisions of SFAS No. 142.
6. Recent Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board (FASB) issued
Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
This Statement is effective for contracts entered into or modified after June
30, 2003, except for contracts that relate to SFAS 133 implementation issues
that have been effective for fiscal quarters that began prior to June 15, 2003
and for hedging relationships designated after June 30, 2003. The adoption of
SFAS 149 is not expected to have a material impact on the financial position or
results of operations of the Company because the Company does not have any
derivative activity.
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"), which establishes how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS 150 did not have a
material impact on the financial position or results of operations of the
Company because the Company does not have any financial instruments that have
characteristics of both liabilities and equity.
7. Cash Dividend
The Company paid a cash dividend of $0.11 per share on May 26, 2003 to
holders of record as of April 28, 2003.
8. Securities Held-to-Maturity and Securities Available-for-Sale
Securities held-to-maturity ("HTM") and securities available-for-sale
("AFS") consist of the following: (in thousands)
_____________________________________________
June 30, 2003
_____________________________________________
(unaudited)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
__________ __________ __________ __________
Securities HTM
Mortgage-backed securities $13,405 $329 $ - $ 13,734
Obligations of U.S. agencies 1,998 15 - 2,013
Obligations of states & political subdivisions 9,238 1,081 - 10,319
Other debt securities 100 - - 100
__________ _________ __________ ___________
24,741 1,425 - 26,166
__________ _________ __________ ___________
Securities AFS
Obligations of U.S. Treasury $41,174 $10 $ - $ 41,184
Mortgage-backed securities 88,985 1,102 552 89,535
Obligations of U.S. agencies 145,244 4,506 47 149,703
Obligations of states & political subdivisions 34,309 1,520 2 35,827
Equity securities 3,955 - - 3,955
__________ _________ __________ ___________
313,667 7,138 601 320,204
__________ _________ __________ ___________
Total securities $338,408 $8,563 $601 $346,370
========== ========= ========== ===========
______________________________________________
December 31, 2002
______________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
________ __________ __________ _________
Securities HTM
Mortgage-backed securities $16,437 $667 $ - $ 17,104
Obligations of U.S. agencies 1,991 68 - 2,059
Obligations of states & political subdivisions 9,664 663 - 10,327
Other debt securities 100 - - 100
________ __________ __________ _________
28,192 1,399 - 29,590
________ __________ __________ _________
Securities AFS
Mortgage-backed securities 101,028 1,778 201 102,605
Obligations of U.S. agencies 91,577 3,982 - 95,559
Obligations of states & political subdivisions 21,382 889 52 22,219
Equity securities 3,937 - - 3,937
________ __________ __________ _________
217,924 6,649 253 224,320
________ __________ __________ _________
Total securities $246,116 $8,047 $253 $253,910
======== ========== ========== =========
At June 30, 2003, the contractual maturities of securities HTM and
securities AFS are as follows: (in thousands)
Securities Securities
HTM AFS
___________________ ______________________
Amortized Market Amortized Market
Cost Value Cost Value
______________________ ______________________
Within 1 year $ 3,283 $ 3,305 $ 73,404 $ 73,312
After 1 but within 5 years 10,011 10,461 200,804 205,766
After 5 but within 10 years 7,640 8,238 8,969 9,137
After 10 years 3,807 4,162 26,535 28,034
Equity securities - - 3,955 3,955
_______ ________ ________ ________
Total $24,741 $ 26,166 $313,667 $320,204
======= ======== ======== ========
Proceeds from the sale of securities AFS amounted to $13.0 million and $7.2
million for the six months ended June 30, 2003 and 2002, respectively, which
resulted in gross realized gains of $478,000 and $261,000 for those periods,
respectively. Gross realized losses from the sale of securities AFS amounted to
$44,000 and $3,000 for the six months ended June 30, 2003 and 2002,
respectively. These amounts are included in net gain on sale of securities in
the Consolidated Statements of Income.
Proceeds from the sale of securities HTM amounted to $2.0 million for the six
months ended June 30, 2002, which resulted in realized gains of $23,000. The
securities were either scheduled to mature within 3 months or were called before
maturity. There were no sales of securities HTM for the six months ended June
30, 2003.
During the first half of 2003, the Company realized gross losses resulting
from an acceleration of premium amortization on certain collateralized mortgage
obligations of $415 thousand. The acceleration of premium amortization was
largely driven by the historically high mortgage prepayment speeds due to the
low interest rate environment.
Securities with carrying amounts of $51.4 million and $58.6 million at June
30, 2003 and December 31, 2002, respectively, were pledged for public deposits,
Federal Home Loan Bank advances, securities sold under repurchase agreements and
other purposes required by law.
9. Loans
The composition of the loan portfolio is summarized as follows: (in
thousands)
____________________ __________________
June 30, December 31,
2003 2002
____________________ __________________
(unaudited)
Amount of loans by type
Real estate-mortgage
Residential $269,281 $231,580
Commercial 318,316 222,628
Construction 29,783 11,359
____________________ ___________________
617,380 465,567
____________________ ___________________
Commercial loans
Commercial and financial 134,728 104,542
Lease financing 31,477 26,356
____________________ ___________________
166,205 130,898
____________________ ___________________
Consumer loans
Lease financing 14,313 15,969
Installment 7,186 3,207
____________________ ___________________
21,499 19,176
____________________ ___________________
Total $805,084 $615,641
==================== =================
Nonperforming loans include loans, which are accounted for on a nonaccrual
basis and troubled debt restructurings. Nonperforming loans are as follows: (in
thousands)
_________________ ___________________
June 30, December 31,
2003 2002
_________________ ___________________
Nonaccrual loans
Residential real estate $1,220 $495
Commercial real estate 834 1,780
Commercial and financial 2,040 1,300
Commercial lease financing 2,696 2,357
Consumer 45 31
_________________ ___________________
$6,835 $5,963
================= ===================
10. Allowance for Loan and Lease Losses
The Company's recorded investment in impaired loans is as follows: (in thousands)
____________________________ _____________________________
June 30, December 31,
2003 2002
____________________________ _____________________________
(unaudited)
Investment Related Investment Related
in Allowance in Allowance
Impaired for Loan Impaired for Loan
Loans Losses Loans Losses
_________ __________ ___________ ____________
Impaired Loans
With a related allowance for loan losses
Commercial and financial $ 982 $ 251 $ 1,104 $ 128
Commercial real estate 664 17 1,780 45
Without a related allowance for loan losses - - - -
_________ __________ ___________ ____________
$1,646 $ 268 $2,884 $ 173
========= ========== =========== ============
The impairment of the above loans was measured based on the fair value of collateral.
Changes in the allowance for loan and lease losses are summarized as follows: (in thousands) (unaudited)
___________________________ _________________________
Three months ended June 30, Six months ended June 30,
___________________________ _________________________
2003 2002 2003 2002
__________ ________ ______ ________
Balance at beginning of period $7,227 $6,299 $7,207 $6,569
Additions (deductions)
Provision for loan and lease losses 530 255 795 480
Recoveries on loans previously charged off 3 40 5 46
Loans charged off (152) (164) (399) (665)
Additions due to merger 1,929 - 1,929 -
__________ ________ ______ _______
Balance at end of year $9,537 $6,430 $9,537 $6,430
========== ======== ====== =======
11. Other Non-interest Expense
(in thousands)
Three months Six months
ended June 30, ended June 30,
2003 2002 2003 2002
____ ____ ____ ____
Professional fees $367 $263 $711 $487
Data processing 308 187 523 381
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
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, 2003 and 2002, and should be read in conjunction with the
consolidated financial statements and notes thereto included in Item 1 hereof.
In addition, you should read this section in conjunction with Management's
Discussion and Analysis and Results of Operations included in the Company's 2002
Annual Report on Form 10-K.
On April 30, 2003 the Company completed its acquisition of Bridge View
Bancorp ("Bridge View"). Accordingly the results of operations for the three and
six month periods ending June 30, 2003 include the results of Bridge View from
that date.
Forward Looking Information
In addition to discussing historical information, certain statements
included in or incorporated into this report relating to the financial
condition, results of operations and business of the Company which are not
historical facts may be deemed "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 (including when preceded or followed by the word "not") are
generally intended to identify such forward-looking statements. Such statements
are intended to be covered by the safe harbor provisions for forward-looking
statements contained in such Act, and we are including this statement for
purposes of invoking these safe harbor provisions. Such forward-looking
statements include, but are not limited to, statements about the operations of
the Company, the adequacy of the Company's allowance for losses associated with
the loan and lease portfolio, the quality of the loan and lease portfolio, the
prospects of continued loan and deposit growth, and improved credit quality. The
forward-looking statements in this report involve certain estimates or
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, reducing interest margins or
increasing interest rate risk; (iii) deterioration in general economic
conditions, internationally, nationally, or in the State of New Jersey; (iv) the
occurrence of acts of terrorism, such as the events of September 11, 2001, or
acts of war; (v) legislation or regulatory requirements or changes adversely
affecting the business of the Company; (vi) losses in the Company's leasing
subsidiary exceeding management's expectations; (vii) the risk that the
businesses of the Company and Bridge View will not be integrated successfully or
such integration may be more difficult, time-consuming or costly than expected;
(viii)expected revenue synergies from the Company's acquisition of Bridge View
may not be fully realized or realized within the expected time frame; (ix)
revenues following the Company's acquisition of Bridge View may be lower than
expected; (x) deposit attrition, operating costs, customer loss and business
disruption following the Company's acquisition of Bridge View, including,
without limitation, difficulties in maintaining relationships with employees,
may be greater than expected and (xi) other risks detailed in reports filed by
the Company with the Securities and Exchange Commission. 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 to be no longer accurate, whether as a result of new information,
what actually happens in the future or for any other reason.
Company
The Company is a bank holding company headquartered in Bergen County, New
Jersey. The Company's principal operating subsidiary is Interchange Bank, a New
Jersey-chartered commercial bank. In addition to the Bank, the Company has one
other wholly owned direct subsidiary: Clover Leaf Mortgage Company, a New Jersey
corporation, which is not currently engaged in any business activity. The Bank
has five direct subsidiaries: Clover Leaf Investment Corporation, an investment
company operating pursuant to New Jersey law; Clover Leaf Insurance Agency,
Inc., a New Jersey corporation engaged in the sale of tax-deferred annuities and
insurance; Clover Leaf Management Realty Corporation, a Real Estate Investment
Trust ("REIT"), which manages certain real estate assets of the Company; Bridge
View Investment Company, an investment company operating pursuant to New Jersey
law; and Interchange Capital Company, L.L.C. ("ICC"), a New Jersey limited
liability company which engages in equipment lease financing. All of the Bank's
subsidiaries are 100% owned by the Bank, except for the REIT, which is 99% owned
by the Bank. Bridge View Investment Company has one wholly owned subsidiary,
Bridge View Delaware, Inc. ("BVDI"). BVDI is an investment company operating
pursuant to Delaware law.
Critical Accounting Policies and Judgments
The Company's consolidated financial statements are prepared based on the
application of certain accounting policies, the most significant of which are
described in Note 1 "Accounting Policies in the Notes to Consolidated Financial
Statements and in the Management's Discussion and Analysis of Financial
Condition and Results of Operations: Critical Accounting Policies and
Judgements" in our 2002 Annual Report on Form 10-K. Certain of these policies
require numerous estimates and strategic or economic assumptions that may prove
inaccurate or subject to variations and may significantly affect the Company's
reported results and financial position for the period or in future periods. The
use of estimates, assumptions, and judgments are necessary when financial assets
and liabilities are required to be recorded at, or adjusted to reflect, fair
value. Assets and liabilities carried at fair value inherently result in more
financial statement volatility. Fair values and the information used to record
valuation adjustments for certain assets and liabilities are based on either
quoted market prices or are provided by other independent third-party sources,
when available. When such information is not available, management estimates
valuation adjustments primarily by using internal cash flow and other financial
modeling techniques. Changes in underlying factors, assumptions, or estimates in
any of these areas could have a material impact on the Company's future
financial condition and results of operations.
Allowance for Loan and Lease Losses:The allowance for loan and lease losses
("ALLL") is established through periodic charges to income. Loan losses are
charged against the ALLL when management believes that the future collection of
principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL.
If the ALLL is considered inadequate to absorb future loan losses on existing
loans, based on, but not limited to, increases in the size of the loan
portfolio, increases in charge-offs or changes in the risk characteristics of
the loan portfolio, then the provision for loan and lease losses is increased.
The Company considers the ALLL of $9.5 million adequate to cover estimated
losses inherent in the loan portfolio, loan commitments and standby and other
letters of credit that may become uncollectible based on management's
evaluations of the size and current risk characteristics of the loan and lease
portfolio as of the balance sheet date. The evaluations consider such factors as
changes in the composition and volume of the loan portfolio, the impact of
changing economic conditions on the credit worthiness of the borrowers, review
of specific problem loans and management's assessment of the inherent risk and
overall quality of the loan portfolio.
Business Combinations: Business combinations are accounted using the purchase
method of accounting, the net assets of the companies acquired are recorded at
their estimated fair value at the date of acquisition and include the results of
operations of the acquired business from the date of acquisition. The excess of
the purchase price over the estimated fair value of the net assets acquired is
recognized as goodwill.
Goodwill: With the adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), on January 1, 2002, goodwill is no longer amortized to
expense, but rather is tested for impairment periodically. Other intangible
assets are amortized to expense using straight-line methods over their
respective estimated useful lives. At least annually, management reviews
goodwill and other intangible assets and evaluates events or changes in
circumstances that may indicate impairment in the carrying amount of such
assets. If the sum of the expected undiscounted future cash flows, excluding
interest charges, is less than the carrying amount of the asset, an impairment
loss is recognized. Impairment, if any, is measured on a discounted future cash
flow basis. Goodwill is reviewed for impairment annually and on an interim basis
when conditions require. If necessary an impairment charge is recognized in the
period that goodwill has been deemed to be impaired. At the date of adoption,
there was no unamortized goodwill.
THREE MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002
RESULTS OF OPERATIONS
Summary
On April 30, 2003, the Company completed its acquisition of Bridge View.
Accordingly the results of operations for the three and six month periods ending
June 30, 2003 include the results of Bridge View from that date. The Company was
able to fully integrate Bridge View, including the data processing function
within 40 days of closing. Integrating Bridge View during the quarter did not
result in a material economic benefit to the Company during the quarter.
However, management believes that future periods should benefit from resulting
cost savings.
For the second quarter of 2003, the Company reported earnings per diluted
common share of $0.35, an increase of 12.9% over the $0.31 reported in the same
period in 2002. Net income for the three months ended June 30, 2003 was
approximately $4.2 million, an increase of $1.1 million, or 36.6%, over the same
period last year. The increase in earnings resulted from the acquisition of
Bridge View during the quarter, a strong net interest margin ("margin") of 4.38%
and an increase in non-interest income.
The growth in revenues was partly offset by a $1.4 million, or 22.3%,
increase in non-interest expense. This increase largely reflects the expenses
associated with the acquisition of Bridge View during the quarter and normal
increases in salaries, benefits and occupancy expenses.
For the three months ended June 30, 2003, the Company's Return on Average
Assets ("ROA") improved to 1.40% from 1.38%. Return on Average Equity ("ROE")
was 14.03% a decline from 17.23% when compared to the same period last year. The
main reason for the decline in ROE was due to an increase in stockholders'
equity resulting from the related issuance of the Company's stock as a part of
the merger consideration with Bridge View.
Net Interest Income
Net interest income is the most significant source of the Company's
operating income. A portion of the Company's total interest income is derived
from investments that are exempt from federal taxation. The amount of pretax
income realized from those investments, due to the tax exemption, is less than
the amount of pretax income realizable from comparable investments subject to
federal taxation. For purposes of the following discussion, interest exempt from
federal taxation has been restated to a fully tax-equivalent basis using the
corporate federal tax rate of 34% for the three months and six months ended June
30, 2003 and 2002. This was accomplished by adjusting this income upward to make
it equivalent to the level of taxable income required to earn the same amount
after taxes.
Net interest income on a tax-equivalent basis increased $2.0 million, or
20.5%, to $11.7 million for the quarter ended June 30, 2003 as compared to the
same quarter in 2002. The increase in net interest income was due mostly to a
27.7% growth in interest earning assets. This interest earning asset growth was
funded primarily by deposit liabilities, which grew 32.2% on average for the
second quarter of 2003 as compared to the same quarter in 2002. The growth in
interest earning assets and deposits were attributed to the Bridge View
acquisition and the Company's internal growth. The Company's internal growth for
interest earning assets and deposits were 8.0% and 10.2%, respectively. The
margin, which decreased 26 basis points to 4.38% for the second quarter of 2003
as compared to the same quarter in 2002, partially offset the growth in interest
earning assets.
Interest income, on a tax-equivalent basis, totaled $15.3 million for the
second quarter of 2003, an increase of $1.0 million, or 7.2%, as compared to the
same quarter in 2002. The increase was mostly attributed to a $232.3 million, or
27.7%, growth in interest earning assets. The Bridge View acquisition
contributed approximately $165 million in average interest earning assets during
the current quarter. The growth in interest earning assets was the result of
increases in average loans and average investments of $123.9 million and $78.9
million, respectively. The Bridge View acquisition contributed approximately
$120 million and $28 million in average loans and average investments,
respectively, during the current quarter. The increase in interest income was
partly offset by a 110 basis point decline in interest earning asset yields for
the second quarter of 2003 as compared to the same quarter in 2002. The decline
in interest earning asset yields was largely attributed to a decrease in market
interest rates.
Interest expense, which totaled $3.6 million for the second quarter of
2003, decreased $972 thousand, or 21.3%, as compared to the same period in 2002.
The decrease in interest expense was a byproduct of the decline in market
interest rates, particularly short-term rates, during 2003. In addition, a
beneficial shift in the composition of the Company's deposits, which is
discussed further in the analysis of financial condition below, also had a
favorable impact on the Company's interest expense. The improved deposit mix
combined with lower short-term interest rates reduced the average rate paid on
interest bearing liabilities by 102 basis points to 1.64% for the quarter ended
June 30, 2003 as compared to the same period in 2002. The magnitude of the
benefit derived from the decrease in rates paid on interest bearing liabilities
was partially reduced by the positive growth of deposits. Interest bearing
deposits grew on average $189.6 million, or 28.5%, for the second quarter of
2003 as compared to the same period in 2002. The Bridge View acquisition
contributed approximately $122 million in average interest bearing deposits
during the current quarter.
___________________________________________________________________________________________________________________________________
Analysis of Net Interest Income
___________________________________________________________________________________________________________________________________
for the quarter ended June 30,
(dollars in thousands) 2003 2002
__________________________________ _________________________________
(unaudited) Average Average Average Average
Balance Interest Rate Balance Interest Rate
____________ _________ ________ _________ _________ ________
Assets
Interest earning assets:
Loans (1) $732,516 $12,498 6.82 % $608,589 $11,377 7.48 %
Taxable securities (4) 265,754 2,382 3.59 199,186 2,645 5.31
Tax-exempt securities (2) (4) 26,095 304 4.66 13,775 200 5.81
Interest earning deposits 3,846 9 0.94 - - -
Federal funds sold 41,180 120 1.17 15,582 67 1.72
___________ _________ _____ ________ ______ _____
Total interest-earning assets 1,069,391 15,313 5.73 837,132 14,289 6.83
_________ _______
Non-interest earning assets:
Cash and due from banks 37,642 20,270
Allowance for loan and lease losses (8,606) (6,336)
Other assets 97,085 38,454
__________ ________
Total assets $1,195,512 $889,520
========== ========
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest bearing deposits $855,189 3,416 1.60 $665,563 4,313 2.59
Borrowings 25,035 186 2.97 23,407 261 4.46
__________ ________ ____ ________ ______ _____
Total interest-bearing liabilities 880,224 3,602 1.64 688,970 4,574 2.66
________ ______
Non-interest bearing liabilities
Demand deposits 178,434 116,267
Other liabilities 17,462 13,124
__________ ________
Total liabilities (3) 1,076,120 818,361
Stockholders' equity 119,392 71,159
__________ ________
Total liabilities and stockholders' equity $1,195,512 $889,520
========== ========
Net interest income (tax-equivalent basis) 11,711 4.09 9,715 4.17
Tax-equivalent basis adjustment (112) (88)
________ ______
Net interest income $11,599 $9,627
======== ======
Net interest income as a percent of interest-
earning assets (tax-equivalent basis) 4.38 % 4.64 %
____________________________________________________________________________________________________________________________________
(1) Nonaccrual loans and any related interest recorded have been included in computing the average rate earned on the loan
portfolio. When applicable, tax exempt loans are computed on a fully taxable equivalent basis using the corporate
federal tax rate of 34%.
(2) Computed on a fully taxable equivalent basis using the corporate federal tax rate of 34%.
(3) All deposits are in domestic bank offices.
(4) The average balances are based on historical cost and do not reflect unrealized gains or losses.
Provision for Loan and Lease Losses
The provision for loan and lease losses represents management's calculation
of the amount necessary to bring the allowance for loan and lease losses
("ALLL") to a level that management considers adequate to reflect the risk of
estimated losses inherent in the Company's loan portfolio as of the balance
sheet date. A more detailed discussion of the evaluation of the ALLL can be
found in the section titled "Critical Accounting Policies and Judgements:
Allowance for Loan and Lease Losses" above. In the second quarter of 2003 and
2002, the Company's provision for loan and lease losses was $530 thousand and
$255 thousand, respectively. The increase in the provision for loan and lease
losses during the quarter was a result of an increase in commercial loans,
certain nonperforming assets and the Bridge View merger.
Non-interest Income
For the quarter ended June 30, 2003, non-interest income totaled $2.6
million, an increase of $1.2 million, or 79%, as compared to the same period in
2002. The improvement in non-interest income was mostly due to increases in Bank
Owned Life Insurance ("BOLI") income, "other" non-interest income and service
charges on deposits of $560 thousand, $264 thousand and $259 thousand,
respectively. The increase in BOLI income was due to a claim on insurance
policies, which amounted to $499 thousand. The growth in service charges on
deposits and "other" non-interest income was mostly due to the acquisition of
Bridge View. Contributing to the growth in non-interest income was an increase
in net gains from the sale of loans of $139 thousand. The increase in net gains
from the sale of loans was due to income of $120 thousand realized from the sale
of conforming 20 and 30 year residential mortgages through the Mortgage
Partnership Finance ("MPF") program with the Federal Home Loan Bank of New York.
Excluding the BOLI claim and Bridge View's non-interest income contribution,
non-interest income increased $369 thousand, or 25.0%, for the second quarter of
2003 as compared to the same period last year.
During the quarter, the Company recognized net gains on the sale of
securities of $19 thousand as compared to $94 thousand for the same period in
2002. The net gains for 2003 were a result of a combination of net realized
gains from security sales of $434 thousand and gross losses resulting from an
acceleration of premium amortization on certain collateralized mortgage
obligations of $415 thousand. The acceleration of premium amortization was
largely driven by the historically high mortgage prepayment speeds due to the
low interest rate environment.
Non-interest Expense
For the quarter ended June 30, 2003, non-interest expense increased $1.4
million to $7.7 million, an increase of 22.3% when compared to the same period
one year ago. The increase was due largely to the additional operating costs
resulting from the merger with Bridge View. Also contributing to the increase
were normal increases related to salaries, benefits and occupancy expense. In
addition, the Company incurred direct integration expenses of approximately $357
thousand associated with the Bridge View merger, which included expenses
associated with data processing, customer notifications and advertising, and
salaries.
Income Taxes
Income tax expense as a percentage of pre-tax income was 30.4% for the
three months ended June 30, 2003 as compared to 32.7% for the second quarter of
2002.
SIX MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002
RESULTS OF
OPERATIONS
Summary
For the first six months of 2003, the Company reported net income of $7.5
million, or $0.69 diluted earnings per common share, as compared with $6.0
million, or $0.60 diluted earnings per common share for the same period last
year. The increase in earnings was driven largely by growth in net interest
income on a taxable equivalent basis, which increased $2.8 million, or 14.8%.
The improvement in net interest income was attributable to the acquisition of
Bridge View along with a strong growth in deposits from the Company's original
eighteen branches that fueled additional growth in interest earning assets. In
addition, non-interest income, which increased $1.5 million, or 47.7%, over the
same period last year also contributed to the improvement in earnings. The
growth in revenues was partly offset by a $1.8 million, or 14.5% increase in
non-interest expense.
For the six months ended June 30, 2003, ROA improved to 1.41% from 1.38%
and ROE decreased to 14.97% from 17.10% when compared to the same period last
year. The main reason for the decline in ROE was due to an increase in
stockholders' equity resulting from the related issuance of the Company's stock
as a part of the merger consideration with Bridge View.
Net Interest Income
Net interest income on a tax-equivalent basis increased $2.8 million, or
14.8%, to $21.7 million for the six months ended June 30, 2003 as compared to
the same period in 2002. The increase in net interest income was due mostly to a
19.3% growth in interest earning assets. This interest earning asset growth was
funded primarily by deposit liabilities, which grew 21.8% on average for the
first six months of 2003 as compared to the same period in 2002. The growth in
interest earning assets and deposits were primarily attributed to the Bridge
View acquisition. The margin, which decreased 17 basis points to 4.44% for the
first six months of 2003 as compared to the same period in 2002, partially
offset the growth in interest earning assets.
Interest income, on a tax-equivalent basis, totaled $28.9 million for the
first six months of 2003, an increase of $749 thousand, or 2.7%, as compared to
the same period in 2002. The increase was mostly attributed to a $158.0 million,
or 19.3%, growth in interest earning assets. The Bridge View acquisition
contributed approximately $83 million in average interest earning assets for
2003. The growth in interest earning assets was the result of increases in
average loans and average investments of $73.6 million and $63.0 million,
respectively. The Bridge View acquisition contributed approximately $60 million
and $14 million in average loans and average investments, respectively, for
2003. The increase in interest income was partly offset by a 96 basis point
decline in interest earning asset yields for the first six months of 2003 as
compared to the same period in 2002. The decline in interest earning asset
yields was largely attributed to a decrease in market interest rates.
Interest expense, which totaled $7.2 million for the first six months of
2003, decreased $2.1 million, or 22.2%, as compared to the same period in 2002.
The decrease in interest expense was a byproduct of the decline in interest
rates, particularly short-term rates, during 2003. In addition, a beneficial
shift in the composition of the Company's deposits, which is discussed further
in the analysis of financial condition below, also had a favorable impact on the
Company's interest expense. The improved deposit mix combined with lower
short-term interest rates reduced the average rate paid on interest bearing
liabilities by 96 basis points to 1.79% for the six months ended June 30, 2003
as compared to the same period in 2002. The magnitude of the benefit derived
from the decrease in rates paid on interest bearing liabilities was partially
reduced by the positive growth of deposits. Interest bearing deposits grew on
average $131.8 million, or 20.3%, for the first six months of 2003 as compared
to the same period in 2002. The Bridge View acquisition contributed
approximately $61 million in average interest bearing deposits for 2003.
Analysis of Net Interest Income
_________________________________________________________________________________________________________________________________
for the six months ended June 30,
(dollars in thousands) 2003 2002
________________________________________________________________________________
(unaudited) Average Average Average Average
Balance Interest Rate Balance Interest Rate
___________ ________ _______ ________ _________ _______
Assets
Interest earning assets
Loans (1) $673,735 $23,395 6.94 % $600,178 $22,431 7.47 %
Taxable securities (4) 240,454 4,721 3.93 191,606 5,196 5.42
Tax-exempt securities (2) (4) 26,770 551 4.12 12,577 376 5.98
Interest earning deposits 4,088 21 1.03 - - -
Federal funds sold 31,436 184 1.17 14,133 120 1.70
___________ ________ _______ _________
Total interest-earning assets 976,483 28,872 5.91 818,494 28,123 6.87
________ _________
Non-interest earning assets
Cash and due from banks 29,947 20,659
Allowance for loan and lease losses (7,910) (6,451)
Other assets 72,658 37,666
___________ ________
Total assets $1,071,178 $870,368
=========== ========
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest bearing deposits $780,986 6,823 1.75 $649,221 8,697 2.68
Borrowings 25,629 377 2.94 24,637 553 4.49
___________ ________ _______ _________
Total interest-bearing liabilities 806,615 7,200 1.79 673,858 9,250 2.75
________ _________
Non-interest bearing liabilities
Demand deposits 148,771 114,213
Other liabilities 15,006 12,080
__________ _______
Total liabilities (3) 970,392 800,150
Stockholders' equity 100,786 70,218
__________ _______
Total liabilities and stockholders' equity $1,071,178 $870,368
========== =======
Net interest income (tax-equivalent basis) 21,672 4.12 18,873 4.12
Tax-equivalent basis adjustment (220) (178)
________ _________
Net interest income $21,452 $18,695
======== =========
Net interest income as a percent of interest-earning assets (tax-equivalent
basis) 4.44 % 4.61 %
__________________________________________________________________________________________________________________________________
(1)Nonaccrual loans and any related interest recorded have been included in computing the average rate earned on the loan portfolio.
when applicable, tax exempt loans are computed on a fully taxable equivalent basis.
(2)Computed on a fully taxable equivalent basis using the corporate federal tax rate of 34%.
(3)All deposits are in domestic bank offices.
(4)The average balances are based on historical cost and do not reflect unrealized gains or losses.
Provision for Loan and Lease Losses
For the six months ended June 30, 2003 and 2002, the Company's provision
for loan and lease losses was $795 thousand and $480 thousand, respectively. A
more detailed discussion of the evaluation of the ALLL can be found in the
section titled "Critical Accounting Policies and Judgements: Allowance for Loan
and Lease Losses" above. The increase in the provision for loan and lease losses
during the six months was a result of an increase in commercial loans, certain
nonperforming assets and the Bridge View merger.
Non-interest Income
For the six months ended June 30, 2003, non-interest income grew to $4.5
million, an increase of $1.5 million, or 47.7%, as compared to the six months
ended June 30, 2003. The improvement in non-interest income was largely due to
increases in BOLI income, "other" non-interest income and net gains from the
sale of loans of $617 thousand, $309 thousand and $307 thousand, respectively.
The increase in BOLI income was largely due to a claim on an insured, which
amounted to $499 thousand. The increase in net gains from the sale of loans was
due to income of $257 thousand realized from the sale of conforming 20 and 30
year residential mortgages through the MPF program with the Federal Home Loan
Bank of New York. Contributing to the improvement in non-interest income was
increases in service charges on deposits and commissions on the sale of mutual
funds and annuities of $298 thousand and $181 thousand, respectively. The growth
in service charges on deposits and "other" non-interest income were largely due
to the acquisition of Bridge View.
During the six months ended June 30, 2003, the Company recognized net gains
on the sale of securities of $19 thousand as compared to $281 thousand for the
same period in 2002. The net gains for 2003 were a result of a combination of
net realized gains from security sales of $434 thousand and gross losses
resulting from an acceleration of premium amortization on certain collateralized
mortgage obligations of $415 thousand. The acceleration of premium amortization
was largely driven by the historically high mortgage prepayment speeds due to
the low interest rate environment.
Non-interest Expense
For the six months ended June 30, 2003, non-interest expense totaled $14.2
million, an increase of $1.8 million, or 14.5%, as compared to the same period
in 2002. The increase was due largely to the additional operating costs
resulting from the merger with Bridge View. Also contributing to the increase
were normal increases related to salaries, benefits and occupancy expense. In
addition, the Company incurred direct integration expenses of approximately $357
thousand associated with the Bridge View merger, which included expenses
associated with data processing, customer notifications and advertising, and
salaries.
Income Taxes
Income tax expense as a percentage of pre-tax income was 30.9% for the six
months ended June 30, 2003 as compared to 32.0% for the same period of 2002.
FINANCIAL CONDITION
The Company's consolidated balance sheet as of June 30, 2003 includes the
assets and liabilities of the former Bridge View, which were recorded at their
respective fair values as of April 30, 2003. Based on the fair values, the
Company recorded purchase accounting adjustments related to: loans of $1.6
million; securities of $376 thousand; other assets of $1.9 million; other
liabilities of $2.5 million; core deposit intangibles of $4.3 million and
goodwill of $53.7 million. The Company's total assets were $1.3 billion at June
30, 2003, which represents an increase of $375.8 million, or 40.1%, from $936.3
million at December 31, 2002. The growth was largely attributable to the
acquisition of Bridge View on April 30, 2003 with total assets of approximately
$278 million and loans and deposits of approximately $185 million and $259
million, respectively, without giving effect for any purchase accounting
adjustments.
Cash and Cash Equivalents
At June 30, 2003, cash and cash equivalents increased $21.7 million to
$55.6 million as compared to December 31, 2002. This was primarily attributed to
the Bridge View merger and the result of investing activities (funding loans and
investment growth) investing cash less rapidly than financing activities
(reflecting principally deposit growth less repayments of borrowings) and
operating activities (reflecting net income and changes in other assets) could
generate 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
AFS are recorded at their fair value. The after-tax difference between amortized
cost and fair value of securities AFS is recorded as "accumulated other
comprehensive income" 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 securities HTM 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, securities HTM, 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 June 30, 2003, investment securities totaled $344.9
million and represented 26.3% of total assets, as compared to $252.5 million and
27.0%, respectively, at December 31, 2002. Securities AFS comprised 92.8% of the
total securities portfolio at June 30, 2003 as compared to 88.8% at December 31,
2002. During 2003, the Company sold securities with a book value of
approximately $13.0 million and recognized $478 thousand in gross gains and $44
thousand in gross losses. During the first half of 2003, the Company realized
gross losses resulting from an acceleration of premium amortization on certain
collateralized mortgage obligations of $415 thousand. The acceleration of
premium amortization was largely driven by the historically high mortgage
prepayment speeds due to the low interest rate environment.
The following table reflects the composition of the securities portfolio:
(dollars in thousands)
_____________________________________________
June 30, 2003
_____________________________________________
(unaudited)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
__________ __________ __________ __________
Securities HTM
Mortgage-backed securities $13,405 $329 $ - $ 13,734
Obligations of U.S. agencies 1,998 15 - 2,013
Obligations of states & political subdivisions 9,238 1,081 - 10,319
Other debt securities 100 - - 100
__________ _________ __________ ___________
24,741 1,425 - 26,166
__________ _________ __________ ___________
Securities AFS
Obligations of U.S. Treasury $41,174 $10 $ - $ 41,184
Mortgage-backed securities 88,985 1,102 552 89,535
Obligations of U.S. agencies 145,244 4,506 47 149,703
Obligations of states & political subdivisions 34,309 1,520 2 35,827
Equity securities 3,955 - - 3,955
__________ _________ __________ ___________
313,667 7,138 601 320,204
__________ _________ __________ ___________
Total securities $338,408 $8,563 $601 $346,370
========== ========= ========== ===========
______________________________________________
December 31, 2002
______________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
________ __________ __________ _________
Securities HTM
Mortgage-backed securities $16,437 $667 $ - $ 17,104
Obligations of U.S. agencies 1,991 68 - 2,059
Obligations of states & political subdivisions 9,664 663 - 10,327
Other debt securities 100 - - 100
________ __________ __________ _________
28,192 1,399 - 29,590
________ __________ __________ _________
Securities AFS
Mortgage-backed securities 101,028 1,778 201 102,605
Obligations of U.S. agencies 91,577 3,982 - 95,559
Obligations of states & political subdivisions 21,382 889 52 22,219
Equity securities 3,937 - - 3,937
________ __________ __________ _________
217,924 6,649 253 224,320
________ __________ __________ _________
Total securities $246,116 $8,047 $253 $253,910
======== ========== ========== =========
At June 30, 2003, the contractual maturities of securities HTM and
securities AFS are as follows: (dollars in thousands)(unaudited)
Securities Securities
HTM AFS
___________________ ______________________
Amortized Market Amortized Market
Cost Value Cost Value
______________________ ______________________
Within 1 year $ 3,283 $ 3,305 $ 73,404 $ 73,312
After 1 but within 5 years 10,011 10,461 200,804 205,766
After 5 but within 10 years 7,640 8,238 8,969 9,137
After 10 years 3,807 4,162 26,535 28,034
Equity securities - - 3,955 3,955
_______ ________ _________ ________
Total $24,741 $ 26,166 $313,667 $320,204
======= ======== ========= ========
Loans
Total loans amounted to $805.1 million at June 30, 2003, an increase of
$189.4 million from $615.6 million at December 31, 2002. The growth was
primarily attributed to the Bridge View acquisition, which contributed
approximately $123 million and $56 million in commercial and residential loans,
respectively, at June 30, 2003. The increase in loans occurred mostly in
commercial mortgage loans and commercial loans, which increased $95.7 million
and $35.3 million, respectively.
The following table reflects the composition of the loan and lease
portfolio: (dollars in thousands)
____________________ __________________
June 30, December 31,
2003 2002
____________________ __________________
(unaudited)
Amount of loans by type
Real estate-mortgage
1-4 family residential
First liens $115,039 $100,302
Junior liens 5,198 6,241
Home equity 149,044 125,037
Commercial 318,316 222,628
Construction 29,783 11,359
___________________ __________________
617,380 465,567
___________________ __________________
Commercial loans
Commercial and financial 134,728 104,542
Lease financing 31,477 26,356
___________________ __________________
166,205 130,898
___________________ __________________
Consumer loans
Lease financing 14,313 15,969
Installment 7,186 3,207
___________________ __________________
21,499 19,176
___________________ __________________
Total $805,084 $615,641
==================== ===================
Nonperforming Assets
Nonperforming assets are comprised of nonaccrual loans, restructured loans,
foreclosed real estate and other repossessed assets. With the completion of the
Bridge View merger, the Company's, nonperforming assets at June 30, 2003
amounted to $7.0 million, an increase of $865 thousand, or 14.1%, from $6.1
million at December 31, 2002. The ratio of nonperforming assets to total loans
and foreclosed real estate decreased to 0.87% at June 30, 2003 from 1.00% at
December 31, 2002.
The following table lists nonaccrual loans, restructured loans and
foreclosed real estate and other repossessed assets at June 30, 2003, and
December 31, 2002: (dollars in thousands)
_________________ __________________
June 30, December 31,
2003 2002
_________________ __________________
(unaudited)
Nonperforming loans $6,832 $5,963
Foreclosed real estate and other repossessed assets 172 176
_________________ __________________
Total nonperforming assets $7,004 $6,139
================== ==================
Allowance for Loan and Lease Losses
The ALLL is generally established through periodic charges to income.
During the quarter, the ALLL also increased by approximately $1.9 million, which
was the amount that Bridge View had on its statement of financial condition on
April 30, 2003. Loan losses are charged against the ALLL when management
believes that the probable future collection of principal is unlikely.
Subsequent recoveries, if any, are credited to the ALLL. If the ALLL is
considered inadequate to absorb future loan losses on existing loans, based on,
but not limited to, increases in the size of the loan portfolio, increases in
charge-offs or changes in the risk characteristics of the loan portfolio, then
the provision for loan and lease losses is increased.
The Company considers the ALLL of $9.5 million adequate to cover estimated
losses inherent in the loan portfolio that may become uncollectible based on
management's evaluations of the size and current risk characteristics of the
loan and lease portfolio as of the balance sheet date. The evaluations consider
such factors as changes in the composition and volume of the loan portfolio, the
impact of changing economic conditions on the credit worthiness of the
borrowers, review of specific problem loans and management's assessment of the
inherent risk and overall quality of the loan portfolio.
The following table presents the provisions for loan and lease losses,
loans charged off and recoveries on loans previously charged off, the amount of
the allowance, the average loans outstanding and certain pertinent ratios for
the three and six months ended June 30, 2003 and 2002: (dollars in
thousands)(unaudited)
_____________________________ _____________________
Three months ended Six months ended
June 30, June 30,
____________________________ _____________________
2003 2002 2003 2002
_________ __________ ________ _________
Average loans outstanding $732,516 $608,589 $673,735 $600,178
========= ========== ======== =========
Allowance at beginning of period 7,227 6,299 7,207 6,569
_________ __________ _________ _________
Loans charged off
Real estate - - - -
Commercial and financial - 9 25 9
Commercial lease financing 147 155 355 634
Consumer loans 5 - 19 22
_________ __________ _________ _________
Total 152 164 399 665
_________ __________ _________ _________
Recoveries of loans previously charged off
Real estate - 28 - 28
Commercial and financial - - - -
Commercial lease financing 1 3 2 8
Consumer loans 2 9 3 10
_________ __________ _________ _________
Total 3 40 5 46
_________ __________ _________ _________
Additions due to merger 1,929 - 1,929 -
Provision for loan and lease losses 530 255 795 480
_________ __________ _________ _________
Allowance at end of period $9,537 $6,430 $9,537 $6,430
========= ========== ========= =========
Allowance to total loans (end of period) 1.18 % 1.07 %
Ratio of net charge-offs to average loans (annualized) 0.08 % 0.08 % 0.12 % 0.21
Deposits
Deposits, which include non-interest-bearing demand deposits, time deposits
and other interest-bearing deposits are an essential and cost-effective funding
source for the Company. The Company attributes its success in growing deposits
to the emphasis it places on building core customer relationships by offering a
variety of products designed to meet the financial needs of its customers based
on their identifiable "life stages".
At June 30, 2003, total deposits increased $321 million, or 39.4%, to $1.1
billion from $815.7 million at December 31, 2002. Deposit growth was mainly a
function of the Bridge View merger, excluding the deposits held at former Bridge
View branches on June 30, 2003, the Company's deposits grew $73.4 million or
9.0% as compared to December 31, 2002. The growth in deposits occurred mostly in
other interest-bearing deposits, non-interest bearing demand deposits, and time
deposits, which increased $169.2 million, $93.8 million and $58.2 million,
respectively, at June 30, 2003 as compared to December 31, 2002. Other
interest-bearing deposits, which include interest-bearing demand, money market
and savings accounts, comprise the largest segment of the Company's total
deposits. At June 30, 2003, such deposits amounted to $628.8 million
representing 55.3% of total deposits compared to 56.4% of total deposits at
December 31, 2002. The growth in other interest-bearing deposits occurred
largely in interest bearing checking, which increased $78.4 million, or 24.2%,
for June 30, 2003 as compared to December 31, 2002. Time deposits amounted to
$295.6 million at June 30, 2003, an increase of $58.2 million, or 24.5%, from
December 31, 2002. Total time deposits represented 26.0% of total deposits at
June 30, 2003 compared to 29.0% at December 31, 2002.
For the three and six months ended June 30, 2003, the Company's overall
yield on deposits declined by 89 basis points to 1.32% and 81 basis points to
1.47%, respectively, as compared to the same periods last year. The decrease was
attributed predominately to changes in market interest rates and a change in the
composition of deposit liabilities.
The following table reflects the composition of deposit liabilities:
(dollars in thousands)
___________ _____________
June 30, December 31,
2003 2002
(unaudited)
___________ _____________
Non-interest Demand $212,395 $118,578
Interest Bearing Demand 402,409 323,998
Savings 122,314 80,300
Money Market Savings 104,116 55,372
Time Deposits <$100,000 265,856 210,727
Time Deposits >$100,000 29,736 26,697
__________ ____________
Total $1,136,826 $815,672
========== ============
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Market risk is generally described as the sensitivity of income to adverse
changes in interest rates, foreign currency exchange rates, commodity prices,
and other relevant market rates or prices. Market rate sensitive instruments
include: financial instruments such as investments, loans, mortgage-backed
securities, deposits, borrowings and other debt obligations; derivative
financial instruments, such as futures, forwards, swaps and options; and
derivative commodity instruments, such as commodity futures, forwards, swaps and
options that are permitted to be settled in cash or another financial
instrument.
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
trading or hedging transactions utilizing derivative financial instruments
during the first six months of 2003. The Company's real estate loan portfolio,
concentrated primarily in northern New Jersey, is subject to risks associated
with the local and regional economies. The Company's primary source of market
risk exposure arises from changes in market interest rates ("interest rate
risk").
Interest Rate Risk
Interest rate risk is generally described as the exposure to potentially
adverse changes in current and future net interest income resulting from:
fluctuations in interest rates; product spreads; and imbalances in the repricing
opportunities of interest-rate-sensitive assets and liabilities. Therefore,
managing the Company's interest rate sensitivity is a primary objective of the
Company's senior management. The Company's Asset/Liability Committee ("ALCO") is
responsible for managing the exposure to changes in market interest rates. ALCO
attempts to maintain stable net interest margins by periodically evaluating the
relationship between interest-rate-sensitive assets and liabilities. The
evaluation, which is performed at least quarterly and presented to the Board,
attempts to determine the impact on net interest margin from current and
prospective changes in market interest rates.
The Company manages interest rate risk exposure with the utilization of
financial modeling and simulation techniques. These methods assist the Company
in determining the effects of market rate changes on net interest income and
future economic value of equity. The objective of the Company is to maximize net
interest income within acceptable levels of risk established by policy. The
techniques utilized for managing exposure to market rate changes involve a
variety of interest rate, pricing and volume assumptions. These assumptions
include projections on growth, prepayment and withdrawal levels as well as other
embedded options inherently found in financial instruments. The Company reviews
and validates these assumptions at least annually or more frequently if economic
or other conditions change. At June 30, 2003, the Company simulated the effects
on net interest income given an instantaneous and parallel shift in the yield
curve of up to a 200 basis point rising interest rate environment and a 100
basis point declining interest rate environment. Based on that simulation, it
was estimated that net interest income, over a twelve-month horizon, would not
decrease by more than 7%. At June 30, 2003, the Company was within policy
limits established by the board of directors for changes in net interest income
and future economic value of equity. The following table illustrates the effects
on net interest income given an instantaneous and parallel shift in the yield
curve of up to a 200 basis point rising interest rate environment and a 100
basis point declining interest rate environment:
Net Interest Income Sensitivity Simulation
Percentage Change in Estimated Net Interest
Income over a twelve month horizon
_______________________________________________
June 30,
2003 2002
________________ ____________________
+200 basis points -1.3 % -7.3 %
+100 basis points 0.7 % -1.9 %
- -100 basis points -6.7 % -0.7 %
- -200 basis points * -2.1 %
* Not simulated due to the historically low interest rate environment.
The simulation described above does not represent a Company forecast and
should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including: the
nature and timing of interest rate levels including yield curve shape;
prepayments on loans and securities; deposit decay rates; pricing decisions on
loans and deposits; reinvestment/replacement of asset and liability cashflows;
and others. While assumptions are developed based upon current economic and
local market conditions, the Company cannot make any assurances as to the
predictive nature of these assumptions including how customer preferences or
competitor influences might change.
Further, as market conditions vary from those assumed in the simulation,
actual results will also differ due to: prepayment/refinancing levels deviating
from those assumed; the varying impact of interest rate changes on caps or
floors on adjustable rate assets; the potential effect of changing debt service
levels on customers with adjustable rate loans; depositor early withdrawals and
product preference changes; and other internal/external variables. Furthermore,
the simulation does not reflect actions that ALCO might take in response to
anticipated changes in interest rates or competitive conditions in the market
place.
In addition to the above-mentioned techniques, the Company utilizes
sensitivity gap analysis as an interest rate risk measurement. Sensitivity gap
is determined by analyzing the difference between the amount of interest-earning
assets maturing or repricing within a specific time period and the amount of
interest bearing liabilities maturing or repricing within that same period of
time. Sensitivity gap analysis provides an indication of the extent to which the
Company's net interest income may be affected by future changes in market
interest rates. The cumulative gap position expressed as a percentage of total
assets provides one relative measure of the Company's interest rate exposure.
The cumulative gap between the Company's interest-rate-sensitive assets and
its interest-rate-sensitive liabilities repricing within a one-year period was a
negative 8.4% at June 30, 2003. Since the cumulative gap was negative, the
Company has a "negative gap" position, which theoretically will cause its assets
to reprice more slowly than its deposit liabilities. In a declining interest
rate environment, interest costs may be expected to fall faster than the
interest received on earning assets, thus increasing the net interest spread. If
interest rates increase, a negative gap means that the interest received on
earning assets may be expected to increase more slowly than the interest paid on
the Company's liabilities therefore decreasing the net interest spread.
Capital Adequacy
The Company is subject to capital adequacy requirements imposed by the
Board of Governors of the Federal Reserve System (the "Federal Reserve"); and
the Bank is subject to similar capital adequacy requirements imposed by the
Federal Deposit Insurance Corporation (the "FDIC"). The Federal Reserve and the
FDIC have 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.
A banking organization's total qualifying capital includes two components:
core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core
capital, which must comprise at least half of total capital, includes common
shareholders' equity, qualifying perpetual preferred stock, trust preferred
securities (subject to certain limitations) and minority interests, less
goodwill and any unrealized gains or losses. Supplementary capital includes the
allowance for loan losses (subject to certain limitations), other perpetual
preferred stock, trust preferred securities that exceed Tier 1 limits, certain
other capital instruments and term subordinated debt. Total capital is the sum
of core and supplementary capital.
At June 30, 2003, the minimum risk-based capital requirements to be
considered adequately capitalized were 4% for Tier 1 capital and 8% for total
capital.
Federal banking regulators have also adopted leverage capital guidelines to
supplement the risk-based measures. The leverage ratio is determined by dividing
Tier 1 capital as defined under the risk-based guidelines by average total
assets (non risk-adjusted) for the preceding quarter. At June 30, 2003, the
minimum leverage ratio requirement to be considered adequately capitalized was
3%.
The capital levels of the Company and the Bank at June 30, 2003, and the
two highest capital adequacy levels recognized under the guidelines established
by the federal banking agencies are included in the following table. The
Company's and the Bank's ratios all exceeded the well-capitalized guidelines
shown in the table.
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
__________ ____________ ____________ __________ __________ __________
As of June 30, 2003 (unaudited):
Total Capital (to Risk Weighted Assets):
The Company $85,542 10.03 % $68,226 8.00 % N/A N/A
The Bank 85,874 10.06 68,267 8.00 $85,334 10.00 %
Tier 1 Capital (to Risk Weighted Assets):
The Company 76,005 8.91 34,113 4.00 N/A N/A
The Bank 76,267 8.94 34,134 4.00 51,201 6.00
Tier 1 Capital (to Average Assets):
The Company 76,005 6.65 34,290 3.00 N/A N/A
The Bank 76,267 6.59 34,702 3.00 57,836 5.00
As of December 31, 2002:
Total Capital (to Risk Weighted Assets):
The Company $82,658 13.33 % $49,619 8.00 % N/A N/A
The Bank 80,813 13.00 49,714 8.00 $62,143 10.00 %
Tier 1 Capital (to Risk Weighted Assets):
The Company 75,451 12.16 24,809 4.00 N/A N/A
The Bank 73,606 11.84 24,857 4.00 37,286 6.00
Tier 1 Capital (to Average Assets):
The Company 75,451 8.12 27,864 3.00 N/A N/A
The Bank 73,606 7.92 27,868 3.00 46,446 5.00
Liquidity
Liquidity is the ability to provide sufficient resources to meet all
current financial obligations and finance prospective business opportunities.
The Company's liquidity position over any given period of time is a product of
its operating, financing and investing activities. The extent of such activities
is often shaped by such external factors as competition for deposits and demand
for loans.
Financing for the Company's loans and investments is derived primarily from
deposits, along with interest and principal payments on loans and investments.
At June 30, 2003, total deposits amounted to $1.1 billion, an increase of $321
million, or 39.4%, from December 31, 2002. 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, 2003, advances from the FHLB and REPOS
amounted to $10.0 million and $11.4 million, respectively, as compared to $10.0
million and $17.4 million, respectively, at December 31, 2002. Net loans at June
30, 2003 amounted to $795.5 million, an increase of $187 million, from $608.4
million at December 31, 2002.
The Company's most liquid assets are cash and cash equivalents. At June 30,
2003, the total of such assets amounted to $55.6 million, or 4.2%, of total
assets, compared to $33.9 million, or 3.6%, of total assets at December 31,
2002. The increase in cash and cash equivalents was due largely to deposit
growth and loan prepayments, which produced funds that were placed in federal
funds sold pending investment in loans and securities.
Another significant liquidity source is the Company's securities AFS. At
June 30, 2003 securities AFS amounted to $320.2 million, or 93%, of total
securities, compared to $224.3 million, or 89%, of total securities at December
31, 2002.
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
$86.3 million line of credit available through its membership in the FHLB.
The Company is 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 a varying degree, 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 Company 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. At June 30, 2003 outstanding commitments to fund loans
totaled $176 million and outstanding standby letters of credit totaled $2
million.
The Company historically paid quarterly cash dividends and anticipates
continuing that paying quarterly dividend in the future. The Company could, if
necessary, modify the amount or frequency, of dividends as an additional source
of liquidity. There are imposed dividend restrictions on the Bank, which are
described in Note 17 "Restrictions of Subsidiary Bank Dividends in the Notes to
Consolidated Financial Statements" in the Company's 2002 Annual Report on Form
10-K. Management believes that the Company has sufficient cash flow and
borrowing capacity to fund all outstanding commitments and letters of credit and
to maintain proper levels of liquidity.
Item 4. Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934
(the "Exchange Act"), as of the end of the quarter ended June 30, 2003, we
carried out an evaluation under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Rule 13a-15(e) under the Exchange Act.
Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures are
effective.
The Company maintains internal control over financial reporting. During the
quarter ended June 30, 2003, there have been no changes in our internal controls
over financial reporting that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is also made to Note 4 of the Company's Consolidated
Financial Statements in this Form 10-Q.
Item 2. Change 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
(a) The company held its Annual Meeting of Shareholders on
April 24, 2003.
(b) Each of the persons nominated for director was elected; the issuance
of shares of the Company's common stock in connection with the
Company's acquisition of Bridge View Bancorp was approved; and the
selection of Deloitte & Touche LLP as the Company's independent
auditors for 2003 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 8,242,415 11,056 0
James E. Healey 8,243,107 10,364 0
Jeremiah F. O'Connor 8,123,599 129,872 0
Robert P. Rittereiser 8,242,804 10,667 0
(2) Approve the issuance of shares of the
Company's common stock in connection
with the Company's acquisition
of Bridge View Bancorp. 6,020,885 2,224,487 8,099
(3) Ratification of the selection of
Deloitte & Touche LLP as the Company's
independent Auditors for 2003. 8,213,608 30,745 9,118
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are furnished herewith:
Exhibit.
________
11 Statement re computation of per share earnings
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certifications Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
(b) Reports on Form 8-K
During the quarter ended June 30, 2003, the Company filed
the following Current Report on Form 8-K:
Form 8-K filed April 24, 2003, reporting earnings for the
first quarter period ending March 31, 2003.
Form 8-K filed May 2, 2003, announcing the Company had
completed its acquisition of Bridge View Bancorp.
Form 8-K filed May 15, 2003, announcing the Company had
consummated its previously announced acquisition of
Bridge View Bancorp.
Form 8-K/A filed May 16, 2003,amending Exhibit 23.11 to the
Form 8-K previously filed on May 15, 2003.
SIGNATURES
Pursuant to the requirements of the Securities 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/ Charles T. Field
______________________________________
Senior Vice President & CFO
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
Dated: August 14, 2003