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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, September 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 October 31, 2003, was 12,800,393 shares.
INTERCHANGE FINANCIAL SERVICES CORPORATION
INDEX
PART I FINANCIAL INFORMATION
Page No.
Item 1 Financial Statements
Consolidated Balance Sheets as of
September 30, 2003 and December 31, 2002.............. 1
Consolidated Statements of Income for the three
and nine-month periods ended September 30, 2003
and 2002.............................................. 2
Consolidated Statements of Changes in
Stockholders' Equity for the nine months ended
September 30, 2003 and 2002........................... 3
Consolidated Statements of Cash Flows for the
nine months ended September 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................... 13
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)............... 25
Item 4 Controls and Procedures................................ 28
PART II OTHER INFORMATION
Item 1 Legal Proceedings...................................... 29
Item 2 Changes in Securities and Use of Proceeds.............. 29
Item 3 Defaults upon Senior Securities........................ 29
Item 4 Submission of Matters to a Vote of Security Holders.... 29
Item 5 Other Information...................................... 29
Item 6 Exhibits and Reports on Form 8-K....................... 29
Signatures............................................. 30
Item 1: Financial Statements
Interchange Financial Services Corporation
________________________________________________________________________________________________________________
CONSOLIDATED BALANCE SHEETS
________________________________________________________________________________________________________________
(dollars in thousands)
September 30, December 31,
2003 2002
_____________ _____________
unaudited
_____________ _____________
Assets
Cash and due from banks $ 35,368 $ 23,266
Interest earning deposits 15,020 -
Federal funds sold - 10,650
_____________ _____________
Total cash and cash equivalents 50,388 33,916
_____________ _____________
Securities held to maturity at amortized cost (estimated fair value
of $21,836 and $29,590 for September 30, 2003 and December 31, 2002,
respectively) 20,534 28,192
_____________ _____________
Securities available for sale at estimated fair value (amortized cost
of $383,658 and $217,924 for September 30, 2003 and December 31, 2002,
respectively) 389,683 224,320
_____________ _____________
Loans and leases (net of unearned income and deferred fees of $7,575 and
$8,657 for September 30, 2003 and December 31, 2002, respectively) 783,686 615,641
Less: Allowance for loan and lease losses 9,355 7,207
_____________ _____________
Net loans and leases 774,331 608,434
_____________ _____________
Bank owned life insurance 21,589 21,274
Premises and equipment, net 20,428 10,512
Foreclosed real estate and other repossesed assets 251 176
Goodwill 55,613 1,447
Intangible assets 4,291 231
Accrued interest receivable and other assets 12,036 7,830
_____________ _____________
Total assets $1,349,144 $936,332
============= =============
Liabilities
Deposits
Non-interest bearing $214,969 $118,578
Interest bearing 949,814 697,094
_____________ _____________
Total deposits 1,164,783 815,672
_____________ _____________
Securities sold under agreements to repurchase 16,469 17,390
Short-term borrowings 2,150 -
Long-term borrowings 10,000 10,000
Accrued interest payable and other liabilities 14,713 12,590
_____________ _____________
Total liabilities 1,208,115 855,652
_____________ _____________
Commitments and contingent liabilities
Stockholders' equity:
Common stock, without par value; 22,500,000 shares authorized;
12,793,445 and 9,815,207 shares issued and outstanding at
September 30, 2003 and December 31, 2002, respectively) 5,397 5,397
Capital surplus 73,200 21,097
Retained earnings 71,801 63,314
Accumulated other comprehensive income 3,358 3,596
_____________ _____________
153,756 93,404
Less: Treasury stock 12,727 12,724
_____________ _____________
Total stockholders' equity 141,029 80,680
_____________ _____________
Total liabilities and stockholders' equity $1,349,144 $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 Nine Months Ended
September 30, September 30,
_______________________ _________________________
2003 2002 2003 2002
__________ ________ __________ ________
Interest income
Interest and fees on loans $13,044 $11,561 $36,370 $33,915
Interest on federal funds sold 68 45 252 165
Interest on interest bearing deposits 36 - 57 -
Interest and dividends on securities
Taxable interest income 2,507 2,563 7,119 7,665
Interest income exempt from federal income taxes 254 161 654 436
Dividends 56 40 165 134
___________ __________ __________ __________
Total interest income 15,965 14,370 44,617 42,315
___________ __________ __________ __________
Interest expense
Interest on deposits 3,204 3,991 10,027 12,688
Interest on securities sold under agreements to repurchase 58 91 223 183
Interest on short-term borrowings 1 120 1 370
Interest on long-term borrowings 108 108 320 319
__________ __________ ____________ __________
Total interest expense 3,371 4,310 10,571 13,560
__________ __________ ____________ __________
Net interest income 12,594 10,060 34,046 28,755
Provision for loan and lease losses 485 405 1,280 885
__________ __________ _____________ __________
Net interest income after provision
for loan losses 12,109 9,655 32,766 27,870
__________ __________ _____________ __________
Non-interest income
Service fees on deposit accounts 998 659 2,559 1,922
Net gain on sale of securities 501 214 520 495
Net gain on sale of loans and leases 222 185 567 223
Bank owned life insurance 692 220 1,754 665
Commissions on sale of annuities and mutual funds 270 181 658 388
Other 652 316 1,765 1,120
__________ __________ __________ ___________
Total non-interest income 3,335 1,775 7,823 4,813
__________ __________ __________ ___________
Non-interest expense
Salaries and benefits 4,707 3,505 12,528 10,067
Net occupancy 1,282 843 3,305 2,576
Furniture and equipment 373 267 979 857
Advertising and promotion 400 258 1,137 1,047
Federal Deposit Insurance Corporation assessment 45 32 116 97
Foreclosed real estate and other repossessed assets 1 5 1 16
Amortization of intangible assets 125 19 234 50
Other 1,825 1,397 4,681 4,040
_________ __________ __________ ___________
Total non-interest expense 8,758 6,326 22,981 18,750
_________ __________ __________ ___________
Income before income taxes 6,686 5,104 17,608 13,933
Income taxes 2,175 1,647 5,554 4,471
__________ __________ __________ ___________
Net income $ 4,511 $ 3,457 $ 12,054 $ 9,462
========== ========== ========== ===========
Basic earnings per common share $0.35 $0.35 $1.05 $0.96
========== =========== ========== ===========
Diluted earnings per common share $0.35 $0.35 $1.04 $0.95
========== ========== ========== ===========
___________________________________________________________________________________________________________________
See notes to consolidated financial statements
Interchange Financial Services Corporation
____________________________________________________________________________________________________________________________________
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended Ended September 30,
____________________________________________________________________________________________________________________________________
(dollars in thousand, 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 $9,462 9,462 9,462
Other comprehensive income, net of taxes
Unrealized gains on AFS debt securities 3,106
Less: gains on disposition of securities (453)
____________
Other comprehensive income, net of taxes 2,653 2,653 2,653
____________
Comprehensive income $12,115
============
Dividends on common stock (2,947) (2,947)
Issued 21,069 shares of common stock in connection
with Executive Compensation Plan 66 244 310
Exercised 23,658 option shares (92) 274 182
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 September 30, 2002 61,273 3,809 5,397 21,098 (12,544) 79,033
Comprehensive income
Net Income $3,415 3,415 3,415
Other comprehensive income, net of taxes
Unrealized gains on AFS debt securities (69)
Add: losses on disposition of securities (144)
____________
Other comprehensive income (213) (213) (213)
____________
Comprehensive income $3,202
============
Dividends on common stock (1,374) (1,374)
Exercised 1,500 option shares (1) 17 16
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 $12,054 12,054 12,054
Other comprehensive income, net of taxes
Unrealized net gains on AFS debt securities 375
Less: net gains on disposition of securities (594)
Minimum pension liability (19)
____________
Other comprehensive income (238) (238) (238)
____________
Comprehensive income $11,816
============
Dividends on common stock (3,567) (3,567)
Issued 20,833 shares of common stock in connection
with Executive Compensation Plan 109 245 354
Exercised 52,423 option shares (186) 445 259
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 September 30, 2003 $71,801 $3,358 $5,397 $73,200 $(12,727)$141,029
=========== ======== ======== ========= ======== ========
___________________________________________________________________________________________________________________________________
See notes to consolidated financial statements.
Interchange Financial Services Corporation
___________________________________________________________________________________________________________________________________
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
___________________________________________________________________________________________________________________________________
(dollars in thousands) (unaudited)
2003 2002
_________ __________
Cash flows from operating activities
Net income $ 12,054 $ 9,462
Non-cash items included in earnings
Depreciation and amortization 1,260 1,092
Amortization of securities premiums 2,869 1,347
Accretion of securities discounts (246) (223)
Amortization of premiums in connection with acquisition 617 50
Provision for loan losses 1,280 885
Increase in cash surrender value of Bank Owned Life Insurance (315) (666)
Net gain on sale of securities (935) (498)
Origination of loans held for sale (14,500) -
Sale of loans held for sale 15,266 -
Acceleration of premium amortization on certain collateralized
mortgage obligations 415 -
Net gain on sale of loans and leases (567) (223)
Net loss on sale of fixed assets 10 -
Net gain on sale of foreclosed real estate and repossessed assets (7) (40)
Decrease (increase) in operating assets
Accrued interest receivable (868) (60)
Accounts receivable- leases sold - 4,921
Goodwill (90) -
Deferred taxes (1,221) -
Other (1,345) (596)
Incease (decrease) in operating liabilities
Accrued interest payable (378) (203)
Other 863 1,319
__________ _________
Cash provided by operating activities 14,162 16,567
__________ _________
Cash flows from investing activities
(Payments for) proceeds from
Net (originations) amortization of loans 12,182 (32,705)
Purchase of loans (53) (14,945)
Sale of loans and leases 3,102 3,486
Purchase of securities available for sale (283,373) (90,277)
Maturities of securities available for sale 125,644 29,441
Sale of securities available for sale 29,732 19,791
Maturities of investment securities held to maturity 7,524 7,066
Sale of securities held to maturity - 2,023
Sale of foreclosed real estate and other repossessed assets 100 566
Purchase of fixed assets (879) (1,099)
Premium in connection with acquisition - (1,860)
Net cash proceeds from acquisition of Bridge View Bancorp 19,748 -
__________ _________
Cash used in investing activities (86,273) (78,513)
__________ _________
Cash flows from financing activities
Proceeds from (payments for)
Net increase in deposits 90,307 63,799
Securities sold under agreements to repurchase and other borrowings 33,986 69,353
Retirement of securities sold under agreements to repurchase and
other borrowings (32,756) (55,104)
Dividends (3,567) (2,947)
Common stock issued 354 1,685
Treasury stock - (235)
Exercise of option shares from Treasury 259 182
_________ ________
Cash provided by financing activities 88,583 76,733
_________ ________
Increase (decrease) in cash and cash equivalents 16,472 14,787
Cash and cash equivalents, beginning of year 33,916 22,211
_________ ________
Cash and cash equivalents, end of period $50,388 $36,998
========== =========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $10,673 $13,763
Income taxes 6,840 5,018
Supplemental disclosure of non-cash investing activities:
Loans transferred to foreclosed real estate and repossessed assets $168 $392
Stock issued for net assets purchased - 1,375
Stock issued related to Bridge View acquisition 52,180 -
____________________________________________________________________________________________________________________________________
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE-MONTH PERIODS
ENDED SEPTEMBER 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 nine-month periods ended
September 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 Accounting Principles Board ("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
Financial Accounting Standards Board ("FASB") Statement No. 123, " Accounting
for Stock-Based Compensation," to stock-based compensation for the three and
nine months ended September 30, 2003 and 2002: (in thousands, except share data)
(unaudited)
__________________________ _________________________
For the three months ended For the nine months ended
September 30, September 30,
2003 2002 2003 2002
___________ _________ ________ _________
Net Income
As reported $4,511 $3,457 $12,054 $9,462
Less: Total stock-based compensation expense
determined under the fair
value method for all rewards,
net of related tax effects 93 67 261 159
___________ _________ ________ _________
Pro-forma $4,418 $3,390 $11,793 $9,303
=========== ========= ======== =========
Diluted earnings per common share
As reported
$0.35 $0.35 $1.05 $0.96
Less: Total stock-based compensation expense
determined under the fair
value method for all rewards,
net of related tax effects 0.01 0.01 0.04 0.02
___________ __________ ________ _________
Pro-forma $0.34 $0.34 $1.01 $0.94
=========== ========== ======== =========
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 nine months ended September 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
$58.4 million was allocated to net identified intangibles of approximately $4.3
million and goodwill of approximately $54.1 million.
The following pro forma condensed consolidated statements of income for the
three and nine months ended September 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 Nine Months Ended
September 30, September 30,
__________________________ ___________________________
2003 2002 2003 2002
__________________________ ___________________________
Pro Forma Pro Forma Pro Forma Pro Forma
Interest income $ 15,441 $ 17,564 $ 48,970 $ 51,668
Interest expense 3,700 4,695 11,183 14,582
___________ ___________ __________ ___________
Net interest income 11,741 12,869 37,787 37,086
___________ ___________ __________ ___________
Provision for loan and lease losses 530 525 1,295 1,215
___________ ___________ __________ ___________
Net interest income after provision for loan and lease losses 11,211 12,344 36,492 35,871
Non-interest income 2,644 2,302 8,607 6,581
Non-interest expense
Salaries and benefits 4,192 4,550 14,023 13,061
Occupancy and FF&E 1,448 1,548 4,901 4,707
Other expenses 1,984 2,387 7,169 7,253
___________ ___________ __________ ___________
7,624 8,485 26,093 25,021
Net income before taxes 6,231 6,161 19,006 17,431
Income Taxes 1,916 2,190 6,113 5,862
___________ __________ __________ ___________
Net income $ 4,315 $ 3,971 $ 12,893 $ 11,569
=========== ========== ========== ===========
Earnings per common share:
Basic $ 0.44 $ 0.31 $ 1.01 $ 0.91
Diluted $ 0.43 $ 0.31 $ 1.00 $ 0.90
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 September 30, 2003, the Company had commitments of approximately $199.7
million to extend credit, of which approximately $2.1 million represents standby
letters of credit.
5. Goodwill and Other Intangibles
With the adoption of Statements of Financial Acounting Standards 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 September 30, 2003, gross intangible assets amounted to $4.6 million and
accumulated amortization amounted to $304 thousand. At December 31, 2002, gross
intangible assets amounted to $300 thousand and accumulated amortization
amounted to $69 thousand. Amortization of intangible assets as a result of
acquisitions, which is included in non-interest expense, amounted to $234
thousand, and $50 thousand for the nine months ended September 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 $178 thousand for the nine months ended September 30, 2003. The core
deposit intangible will be periodically reviewed for impairment. In addition,
the Company recorded goodwill of $54.1 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.
The estimated aggregate annual amortization expense for intangible assets is
summarized as follows: (in thousands)
2003 $361
2004 505
2005 505
2006 436
2007 429
2008 429
thereafter 1,861
_________
Total estimated amortization of intangibles $4,526
=========
6. Segment Reporting
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"), requires disclosures for each reportable
operating segment. As a community-oriented financial institution, substantially
all of the Company's operations entail the delivery of loan and deposit products
and various other financial services to customers in its primary market area,
which is Bergen County, New Jersey. The Company's community-banking operation
constitutes the Company's only operating segment for financial reporting
purposes under SFAS No. 131.
7. Recent Accounting Pronouncements
In April 2003, the 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 did not 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 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.
8. Cash Dividend
The Company paid a cash dividend of $0.11 per share on August 28, 2003 to
holders of record as of July 28, 2003.
9. 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)
_______________________________________________________________
September 30, 2003
_______________________________________________________________
(unaudited)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_____________ __________ ___________ __________
Securities HTM
Mortgage-backed securities $11,187 $421 $ - $ 11,608
Obligations of states & political subdivisions 9,247 881 - 10,128
Other debt securities 100 - - 100
_____________ __________ ___________ __________
20,534 1,302 - 21,836
Securities AFS _____________ __________ ___________ __________
Obligations of U.S. Treasury 28,098 12 - $ 28,110
Mortgage-backed securities 93,952 1,519 213 95,258
Obligations of U.S. agencies 225,034 3,886 256 228,664
Obligations of states & political subdivisions 32,619 1,099 98 33,620
Equity securities 3,955 76 - 4,031
_____________ __________ ___________ __________
383,658 6,592 567 389,683
_____________ __________ ___________ __________
Total securities $404,192 $7,894 $567 $411,519
============= ========== =========== ==========
________________________________________________________________
December 31, 2002
________________________________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
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 September 30, 2003, the contractual maturities of securities HTM and
securities AFS are as follows: (in thousands)
Securities Securities
HTM AFS
_____________________________ _______________________
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
______________ ______________ ___________ __________
Within 1 year $ 275 $ 278 $ 72,904 $ 72,957
After 1 but within 5 years 13,360 13,992 271,514 276,088
After 5 but within 10 years 4,772 5,253 12,883 13,150
After 10 years 2,127 2,313 22,402 23,457
Equity securities - - 3,955 4,031
_______________ ______________ ___________ ___________
Total $20,534 $ 21,836 $ 383,658 $389,683
=============== ============== =========== ===========
Proceeds from the sale of securities AFS amounted to $29.7 million and
$19.8 million for the nine months ended September 30, 2003 and 2002,
respectively, which resulted in gross realized gains of $981 thousand and $478
thousand for those periods, respectively. Gross realized losses from the sale of
securities AFS amounted to $46 thousand and $3 thousand for the nine months
ended September 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
nine months ended September 30, 2002, which resulted in realized gains of $23
thousand. The securities were either scheduled to mature within 3 months or were
called before maturity. There were no sales of securities HTM for the nine
months ended September 30, 2003.
On a quarterly basis, we evaluate our investment portfolio to determine
whether there are any other than temporary impairment valuation issues. This
analysis is performed by comparing quoted market prices to amortized cost and
evaluating each identified security whose market value is less than amortized
cost for a sustained period of time. Our accounting policy requires recognition
of an other than temporary impairment charge on a security if it is determined
that we are unable to recover all amounts due under the contractual obligations
of the security. Management uses its best estimate regarding the estimated
future payments on the contractual obligation by reviewing changes in security
ratings and evaluating the financial performance of the underlying issuer.
During the second quarter 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 $47.5 million and $58.6 million at
September 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.
10. Loans
The composition of the loan portfolio is summarized as follows: (in
thousands)
_____________________ _________________
September 30, December 31,
2003 2002
_____________________ _________________
(unaudited)
Amount of loans by type
Real estate-mortgage
1-4 family residential
First liens $107,151 $100,302
Junior liens 4,697 6,241
Home equity 142,039 125,037
Commercial 323,252 222,628
Construction 21,983 11,359
___________________ ___________________
599,122 465,567
__________________ ___________________
Commercial loans
Commercial and financial 138,571 104,542
Lease financing 27,737 26,356
__________________ ___________________
166,308 130,898
__________________ ___________________
Consumer loans
Lease financing 13,428 15,969
Installment 4,828 3,207
__________________ __________________
18,256 19,176
_________________ __________________
Total $783,686 $615,641
================== ==================
Nonperforming Assets
Nonperforming loans include loans which are accounted for on a nonaccrual
basis and troubled debt restructurings. Nonperforming loans are as follows: (in
thousands)
____________________ __________________
September 30, December 31,
2003 2002
____________________ __________________
(unaudited)
Nonaccrual loans
Residential real estate $ 946 $ 495
Commercial real estate 1,632 1,780
Commercial and financial 3,026 1,300
Commercial lease financing 2,011 2,357
Consumer 308 31
___________________ __________________
$ 7,923 $ 5,963
=================== ===================
11. Allowance for Loan and Lease Losses
The Company's recorded investment in impaired loans is as follows: (in
thousands)
______________________________ ______________________________
September 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 $ 245 $ 1,104 $ 128
Commercial real estate 664 17 1,780 45
Residential mortgages 547 82 - -
Without a related allowance for loan losses - - - -
__________ __________ ____________ _____________
$2,193 $ 344 $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 Nine months ended
September 30, September 30,
________________________ ________________________
2003 2002 2003 2002
__________ __________ ___________ __________
Balance at beginning of period $9,537 $6,430 $7,207 $6,569
Additions (deductions)
Provision for loan and lease losses 485 405 1,280 885
Recoveries on loans previously charged off 39 9 44 55
Loans charged off (706) (137) (1,105) (802)
Additions due to merger - - 1,929 -
__________ __________ __________ __________
Balance at end of year $9,355 $6,707 $9,355 $6,707
========== ========== ========== ==========
12. Other Non-interest Expense
Expenses included in other non-interest expense, which exceed one percent
of the aggregate of total interest income and non-interest income for the
periods noted, are as follows:(in thousands)
________________________ ________________________
Three months Nine months
ended September 30, ended September 30,
________________________ ________________________
2003 2002 2003 2002
__________ __________ _____________ _______
Professional fees $ 476 $ 484 $ 1,187 $ 1,166
Data processing $ 308 $ 176 $ 877 $ 558
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 nine month
periods ended September 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
nine month periods ending September 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) expected revenue synergies
from the Company's acquisition of Bridge View may not be fully realized or
realized within the expected time frame; (viii) revenues following the Company's
acquisition of Bridge View may be lower than expected; (ix) 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 (x)
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 $9.4 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 Statements of Financial Accounting Standards 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 SEPTEMBER 30, 2003 AND SEPTEMBER 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 nine month periods
ending September 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.
Net income for the three months ended September 30, 2003 was approximately
$4.5 million, an increase of $1.1 million, or 30.5%, over the same period last
year. The increase in earnings resulted from the acquisition of Bridge View
during the second quarter and an increase in non-interest income. For the third
quarter of 2003, the Company reported earnings per diluted common share of
$0.35, the same as reported in 2002, while average diluted shares outstanding
increased 30.3% over the same period in the prior year.
The growth in revenues was partly offset by a $2.4 million, or 38.5%,
increase in non-interest expense. This change largely reflects an increase in
expenses primarily due to additional operating costs associated with the Bridge
View acquisition and normal increases in salaries and benefits along with
occupancy expenses.
For the three months ended September 30, 2003 and 2002, the Company's
Return on Average Assets ("ROA") was 1.34% and 1.51%, respectively. The change
in ROA was a result of core deposit growth outpacing deployment of those funds
into higher yielding loans and an investment strategy that mitigates extension
risk. Return on Average Equity ("ROE") was 12.93% a decline from 18.22% when
compared to the same period last year. The main reason for the decline in ROE
was due to the increase in stockholders' equity related to the issuance of the
Company's stock as a part of the merger consideration for 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 nine months ended
September 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 $2.6 million, or
25.6%, to $12.8 million for the quarter ended September 30, 2003 as compared to
the same quarter in 2002. The tax equivalent adjustments for the quarters ended
September 30, 2003 and 2002 were $161 thousand and $98 thousand, respectively.
The increase in net interest income was due mostly to a 37.9% growth in interest
earning assets. This interest earning asset growth was funded primarily by
deposit liabilities, which grew 40.5% on average for the third 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 margin for the third quarter of 2003 was 4.29%, a decline
of 42 basis points as compared to the same quarter in 2002 which was a result of
assets repricing more quickly than liabilities and maintaining an average life
in the investment portfolio of approximately 2 years.
Interest income, on a tax-equivalent basis, totaled $16.1 million for the
third quarter of 2003, an increase of $1.7 million, or 11.5%, as compared to the
same quarter in 2002. The increase was mostly attributed to a $326.5 million, or
37.9%, growth in interest earning assets. The growth in interest earning assets
was the result of increases in average loans and average investments of $161.6
million and $130.6 million, respectively. The increase in interest income was
partly offset by a 128 basis point decline in interest earning asset yields for
the third quarter of 2003 as compared to the same quarter in 2002. The decline
in interest earning asset yields was largely attributed to the historically low
market interest rate environment.
Interest expense, which totaled $3.4 million for the third quarter of 2003,
decreased $939 thousand, or 21.8%, 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 105 basis points to 1.38% for the quarter ended September 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 $272.9 million, or 40.5%, for the third quarter of 2003 as
compared to the same period in 2002.
____________________________________________________________________________________________________________________________________
Analysis of Net Interest Income
____________________________________________________________________________________________________________________________________
for the quarter ended September 30,
(dollars in thousands) 2003 2002
______________________________________ _______________________________________________
(unaudited) Average Average Average Average
Balance Interest Rate Balance Interest Rate
Assets
__________ _________ ____________ ____________ _____________ ______________
Interest earning assets:
Loans (1) $788,705 $13,094 6.64 % $627,092 $11,599 7.40 %
Taxable securities (4) 325,435 2,562 3.15 211,099 2,603 4.93
Tax-exempt securities (2) (4) 29,873 365 4.89 13,620 221 6.49
Interest earning deposits 13,996 36 1.03 - - -
Federal funds sold 30,571 69 0.90 10,261 45 1.75
__________ _________ __________ _____________ _____________ __________
Total interest-earning assets 1,188,580 16,126 5.43 862,072 14,468 6.71
_________ _____________
Non-interest earning assets:
Cash and due from banks 42,652 19,561
Allowance for loan and lease losses (9,704) (6,477)
Other assets 120,090 37,809
___________ _____________
Total assets $1,341,618 $912,965
=========== ==============
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest bearing deposits $946,970 3,204 1.35 $674,038 3,991 2.37
Borrowings 27,436 167 2.43 34,749 319 3.66
__________ _________ __________ ______________ _____________ _________
Total interest-bearing liabilities 974,406 3,371 1.38 708,787 4,310 2.43
_________ _____________
Non-interest bearing liabilities
Demand deposits 211,765 116,028
Other liabilities 15,901 12,245
__________ ______________
Total liabilities (3) 1,202,072 837,060
Stockholders' equity 139,546 75,905
__________ ______________
Total liabilities and stockholders' $1,341,618 $912,965
equity ========== ==============
Net interest income (tax-equivalent basis) 12,755 4.05 10,158 4.28
Tax-equivalent basis adjustment (161) (98)
_________ _____________
Net interest income $12,594 $10,060
========= =============
Net interest income as a percent of interest-
earning assets (tax-equivalent basis) 4.29 % 4.71 %
____________________________________________________________________________________________________________________________________
(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 third quarter of 2003 and
2002, the Company's provision for loan and lease losses was $485 thousand and
$405 thousand, respectively.
Non-interest Income
For the quarter ended September 30, 2003, non-interest income totaled $3.3
million, an increase of $1.6 million, or 87.9%, 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, service charges on deposits and
"other" non-interest income of $472 thousand, $339 thousand and $336 thousand,
respectively. The increase in BOLI income was due to a claim on insurance
policies, which amounted to $422 thousand. The growth in service charges on
deposits was mostly due to the acquisition of Bridge View.
During the quarter, the Company recognized net gains on the sale of
securities of $501 thousand as compared to $214 thousand for the same period in
2002.
Non-interest Expense
For the quarter ended September 30, 2003, non-interest expense increased
$2.4 million to $8.8 million, an increase of 38.4% 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.
Income Taxes
Income tax expense as a percentage of pre-tax income was 32.5% for the
three months ended September 30, 2003 as compared to 32.3% for the third quarter
of 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
RESULTS OF OPERATIONS
Summary
For the first nine months of 2003, the Company reported net income of $12.1
million, or $1.04 diluted earnings per common share, as compared with $9.5
million, or $0.95 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 $5.4 million, or 18.6%.
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 $3.0 million, or 62.5%, over the
same period last year also contributed to the improvement in earnings. The
growth in revenues was partly offset by a $4.2 million, or 22.6% increase in
non-interest expense.
For the nine months ended September 30, 2003 and 2002, ROA was 1.38% as
compared to 1.43% and ROE was to 14.12% as compared to 17.49%, respectively. The
main reason for the decline in ROE was due to the increase in stockholders'
equity related to the issuance of the Company's stock as a part of the merger
consideration for Bridge View.
Net Interest Income
Net interest income on a tax-equivalent basis increased $5.4 million, or
18.6%, to $34.4 million for the nine months ended September 30, 2003 as compared
to the same period in 2002. The increase in net interest income was due mostly
to a 25.8% growth in average interest earning assets. This interest earning
asset growth was funded primarily by deposit liabilities, which grew 30.4% on
average for the first nine 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 27 basis
points to 4.38% for the first nine 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 $45.0 million for the
first nine months of 2003, an increase of $2.4 million, or 5.7%, as compared to
the same period in 2002. For the year to date periods ended September 30, 2003
and September 30, 2002, the tax equivalent basis adjustments were $381 thousand
and $276 thousand, respectively. The increase was mostly attributed to a $214.8
million, or 25.8%, growth in average interest earning assets. The growth in
interest earning assets was the result of increases in average loans and average
investments of $103.2 million and $85.8 million, respectively. The Bridge View
acquisition was the primary contributor to the increase in interest earning
assets, loans and investments for 2003. The increase in interest income was
partly offset by a 109 basis point decline in interest earning asset yields for
the first nine 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 $10.6 million for the first nine months of
2003, decreased $3.0 million, or 22.0%, 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 101 basis points to 1.63% for the nine months ended September 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 $179.3 million, or 27.3%, for the first nine months of 2003 as
compared to the same period in 2002.
____________________________________________________________________________________________________________________________________
Analysis of Net Interest Income
____________________________________________________________________________________________________________________________________
for the nine months ended September 30,
(dollars in thousands) 2003 2002
__________________________________________________________________________________
(unaudited) Average Average Average Average
Balance Interest Rate Balance Interest Rate
___________ _______ _______ _______ ________ _______
Assets
Interest earning assets
Loans (1) $712,480 $36,489 6.83 % $609,248 $34,030 7.45 %
Taxable securities (4) 270,379 7,284 3.59 195,056 7,799 5.33
Tax-exempt securities (2) (4) 26,529 916 4.60 16,048 597 4.96
Interest earning deposits 7,427 57 1.02 - - -
Federal funds sold 31,145 253 1.08 12,828 165 1.71
_________ _______ ______ ________ _______ ____
Total interest-earning assets 1,047,960 44,999 5.73 833,180 42,591 6.82
Non-interest earning assets
Cash and due from banks 34,229 20,289
Allowance for loan and lease losses (8,515) (6,460)
Other assets 88,642 37,714
__________ ________
Total assets $1,162,316 $884,723
========== ========
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest bearing deposits $836,922 10,027 1.60 $657,584 12,688 2.57
Borrowings 26,238 544 2.76 28,045 872 4.15
__________ _______ ______ ________ _________ ____
Total interest-bearing liabilities 863,160 10,571 1.63 685,629 13,560 2.64
_______ _________
Non-interest bearing liabilities
Demand deposits 170,000 114,824
Other liabilities 15,308 12,136
__________ ________
Total liabilities (3) 1,048,468 812,589
Stockholders' equity 113,848 72,134
Total liabilities and stockholders' equity $1,162,316 $884,723
========== =========
Net interest income (tax-equivalent basis) 34,428 4.10 29,031 4.18
Tax-equivalent basis adjustment (381) (276)
_______ _________
Net interest income $34,047 $28,755
======= =========
Net interest income as a percent of interest-earning assets
(tax-equivalent basis) 4.38 % 4.65 %
____________________________________________________________________________________________________________________________________
(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
For the nine months ended September 30, 2003 and 2002, the Company's
provision for loan and lease losses was $1.3 million and $885 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 nine months was a result of an increase in
commercial loans, certain nonperforming assets and the Bridge View merger.
Non-interest Income
For the nine months ended September 30, 2003, non-interest income grew to
$7.8 million, an increase of $3.0 million, or 62.5%, as compared to the nine
months ended September 30, 2002. 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 $1.1 million, $645 thousand and $344 thousand,
respectively. The increase in BOLI income was due to a claim on insurance
policies, which amounted to $921 thousand. The increase in net gains from the
sale of loans was due to income of $362 thousand realized primarily from the
sale of conforming 20 and 30 year residential mortgages through the Mortgage
Partnership Financing program with the Federal Home Loan Bank. 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 $637
thousand and $270 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 nine months ended September 30, 2003, the Company recognized net
gains on the sale of securities of $520 thousand as compared to $495 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 $935 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 nine months ended September 30, 2003, non-interest expense totaled
$23.0 million, an increase of $4.2 million, or 22.6%, 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 and benefits along with 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 31.5% for the nine
months ended September 30, 2003 as compared to 32.1% for the same period of
2002.
FINANCIAL CONDITION
The Company's consolidated balance sheet as of September 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 $54.1 million. The Company's total assets were $1.3 billion at
September 30, 2003, which represents an increase of $412.5 million, or 44.1%,
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 September 30, 2003, cash and cash equivalents increased $16.5 million to
$50.4 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
Consolidated 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 estimated 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, provide a source of income, ensure
collateral is available for pledging requirements and manage asset quality
diversification. At September 30, 2003, investment securities totaled $410.2
million and represented 30.4% of total assets, as compared to $252.5 million and
27.0%, respectively, at December 31, 2002. Securities AFS comprised 95.0% of the
total securities portfolio at September 30, 2003 as compared to 88.8% at
December 31, 2002. During 2003, the Company sold securities with a book value of
approximately $29.7 million and recognized $981 thousand in gross gains and $46
thousand in gross losses. During the second quarter 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)
_________________________________________________________
September 30, 2003
_________________________________________________________
(unaudited)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_____________ ____________ ___________ _____________
Securities HTM
Mortgage-backed securities $11,187 $421 $ - $ 11,608
Obligations of states & political subdivisions 9,247 881 - 10,128
Other debt securities 100 - - 100
_____________ _____________ ___________ _____________
20,534 1,302 - 21,836
_____________ _____________ ___________ _____________
Securities AFS
Obligations of U.S. Treasury 28,098 12 - $ 28,110
Mortgage-backed securities 93,952 1,519 213 95,258
Obligations of U.S. agencies 225,034 3,886 256 228,664
Obligations of states & political subdivisions 32,619 1,099 98 33,620
Equity securities 3,955 76 - 4,031
_____________ _____________ ___________ _____________
383,658 6,592 567 389,683
_____________ _____________ ___________ _____________
Total securities $404,192 $7,894 $567 $411,519
============= ============= =========== =============
___________________________________________________________
December 31, 2002
___________________________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
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 September 30, 2003, the contractual maturities of securities HTM and
securities AFS are as follows: (dollars in thousands) (unaudited)
Securities Securities
HTM AFS
_______________________ _________________________
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
_______________________ _________________________
Within 1 year $ 275 $ 278 $ 72,904 $ 72,957
After 1 but within 5 years 13,360 13,992 271,514 276,088
After 5 but within 10 years 4,772 5,253 12,883 13,150
After 10 years 2,127 2,313 22,402 23,457
Equity securities - - 3,955 4,031
___________ _________ __________ _________
Total $20,534 $21,836 $383,658 $389,683
=========== ========= ========== =========
Loans
Total loans amounted to $783.7 million at September 30, 2003, an increase
of $168.1 million from $615.6 million at December 31, 2002. The growth was
primarily attributed to the Bridge View acquisition.
The following table reflects the composition of the loan and lease
portfolio: (dollars in thousands)
___________________ ___________________
September 30, December 31,
2003 2002
___________________ ___________________
(unaudited)
Amount of loans by type
Real estate-mortgage
Residential $253,887 $231,580
Commercial 323,252 222,628
Construction 21,983 11,359
___________________ ___________________
599,122 465,567
___________________ ___________________
Commercial loans
Commercial and financial 138,571 104,542
Lease financing 27,737 26,356
___________________ __________________
166,308 130,898
___________________ __________________
Consumer loans
Lease financing 13,428 15,969
Installment 4,828 3,207
___________________ __________________
18,256 19,176
___________________ __________________
Total $783,686 $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 September 30, 2003
amounted to $8.2 million, an increase of $2.1 million, or 33.1%, from $6.1
million at December 31, 2002. The ratio of nonperforming assets to total loans
and foreclosed real estate and other repossessed assets increased to 1.04% at
September 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 September 30, 2003, and
December 31, 2002: (dollars in thousands)
_________________ _________________
September 30, December 31,
2003 2002
_________________ _________________
(Unaudited)
Nonperforming loans $7,923 $5,963
Foreclosed real estate and other repossessed assets 251 176
_________________ _________________
Total nonperforming assets $8,174 $6,139
================== ==================
Allowance for Loan and Lease Losses
The ALLL is generally established through periodic charges to income.
During the nine months, the ALLL also increased by approximately $2.1 million,
of which, approximately $1.9 million was due to 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 $9.4 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 nine months ended September 30, 2003 and 2002: (dollars in
thousands) (unaudited)
Three months ended Nine months ended
September 30, September 30,
_________________________ ___________________________
2003 2002 2003 2002
__________ ________ ________ ___________
Average loans outstanding $788,705 $627,092 $712,480 $609,248
========== ======== ======== ===========
Allowance at beginning of period 9,537 6,430 7,207 6,569
__________ ________ ________ ___________
Loans charged off
Real estate 4 14 4 14
Commercial and financial - - 25 9
Commercial lease financing 686 123 1,041 757
Consumer loans 16 - 35 22
__________ ________ ________ __________
Total 706 137 1,105 802
__________ ________ ________ __________
Recoveries of loans previously charged off
Real estate 35 - 35 28
Commercial and financial - - - -
Commercial lease financing 1 1 3 9
Consumer loans 3 8 6 18
__________ ________ ________ __________
Total 39 9 44 55
__________ ________ ________ __________
Additions due to merger - - 1,929 -
Provision for loan and lease losses 485 405 1,280 885
__________ ________ ________ __________
Allowance at end of period $9,355 $6,707 $9,355 $6,707
========== ======== ======== ==========
Allowance to total loans (end of period) 1.19 % 1.12 %
Ratio of net charge-offs to average loans (annualized) 0.34 % 0.08 % 0.20 % 0.16%
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 September 30, 2003, total deposits increased $349.1 million, or 42.8%,
to $1.2 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 September 30, 2003, the Company's deposits grew
$98.8 million or 12.1% 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 less than
$100,000, which increased $202.5 million, $96.4 million and $55.0 million,
respectively, at September 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 September 30, 2003, such deposits amounted to $662.1 million
representing 56.8% 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 $114.8 million, or 35.4%,
for September 30, 2003 as compared to December 31, 2002. Time deposits amounted
to $295.6 million at September 30, 2003, an increase of $50.3 million, or 21.2%,
from December 31, 2002. Total time deposits represented 24.7% of total deposits
at September 30, 2003 compared to 29.1% at December 31, 2002.
For the three and nine months ended September 30, 2003, the Company's
overall yield on deposits declined by 91 basis points to 1.11% and 86 basis
points to 1.33%, 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)
________________ _________________
September 30, December 31,
2003 2002
________________ _________________
(Unaudited)
Non-interest Demand $214,969 $118,578
Interest Bearing Demand 438,767 323,998
Savings 121,917 80,300
Money Market Savings 101,452 55,372
Time Deposits <$100,000 265,729 210,727
Time Deposits >$100,000 21,948 26,697
________________ _________________
Total $1,164,783 $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 nine 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 September 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 6.0%. At September 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
___________________________________________
September 30,
2003 2002
____________ _____________
+200 basis points -3.9 % -4.8 %
+100 basis points -0.3 % -0.1 %
- -100 basis points -6.0 % -1.8 %
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 10.9% at September 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
offbalance 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 September 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 September 30, 2003, the
minimum leverage ratio requirement to be considered adequately capitalized was
3%.
The capital levels of the Company and the Bank at September 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 September 30, 2003 (unaudited):
Total Capital (to Risk Weighted Assets):
The Company $88,552 10.43 % $67,921 8.00 % N/A N/A
The Bank 90,068 10.57 68,141 8.00 $85,176 10.00%
Tier 1 Capital (to Risk Weighted Assets):
The Company 79,092 9.32 33,961 4.00 N/A N/A
The Bank 80,608 9.46 34,071 4.00 51,106 6.00
Tier 1 Capital (to Average Assets):
The Company 79,092 6.18 38,389 3.00 N/A N/A
The Bank 80,608 6.28 38,486 3.00 64,143 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.
The Company's most liquid assets are cash and cash equivalents. At
September 30, 2003, the total of such assets amounted to $50.4 million, or 3.7%,
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 or interest earning deposits pending investment in loans and
securities.
Financing for the Company's loans and investments is derived primarily from
deposits, along with interest and principal payments on loans and investments.
At September 30, 2003, total deposits amounted to $1.2 billion, an increase of
$349.1 million, or 42.8%, 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 September 30, 2003, advances from the
FHLB and REPOS amounted to $12.2 million and $16.5 million, respectively, as
compared to $10.0 million and $17.4 million, respectively, at December 31, 2002.
Net loans and leases at September 30, 2003 amounted to $774.3 million, an
increase of $165.9 million, from $608.4 million at December 31, 2002. Another
significant liquidity source is the Company's securities portfolio. Total
securities at September 30, 2003 amounted to $410.2 million, an increase of
$157.7 million, from $252.5 million at December 31, 2002. At September 30, 2003
securities AFS amounted to $389.7 million, or 74%, 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
$96.3 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 Balance Sheets.
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 September 30, 2003 outstanding commitments to fund loans totaled
$197.6 million and outstanding standby letters of credit totaled $2.1 million.
The Company historically paid quarterly cash dividends and anticipates
continuing paying quarterly dividends 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 September 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 September 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
None
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 September 30, 2003, the Company filed the
following Current Report on Form 8-K:
Form 8-K filed July 24, 2003, reporting earnings for the second
quarter period ending June 30,2003.
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
______________________________________
Charles T. Field
Senior Vice President & CFO
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
Dated: November 14, 2003