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 March 31, 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 May 12, 2003, was 12,789,195 shares.
INTERCHANGE FINANCIAL SERVICES CORPORATION
INDEX
PART I FINANCIAL INFORMATION
Page No.
Item 1 Financial Statements
Consolidated Balance Sheets as of
March 31, 2003 (unaudited) and December 31, 2002 . . . . . . . . 1
Consolidated Statements of Income for the three months
ended March 31, 2003 (unaudited) and March 31, 2002 (unaudited).2
Consolidated Statements of Changes in
Stockholders' Equity for the three months ended
March 31, 2003 (unaudited) and March 31, 2002 (unaudited) . . . .3
Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 (unaudited) and March 31, 2002 (unaudited).4
Notes to Consolidated Financial Statements (unaudited) . . . . . 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 10
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). . . . . . . . . . . . . . . . . . . . . . . . 19
Item 4 Controls and Procedures . . . . . . . . . . . . . . . . . . . 24
PART II OTHER INFORMATION
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 25
Item 2 Changes in Securities and Use of Proceeds. . . . . . . . . . . 25
Item 3 Defaults upon Senior Securities . . . . . . . . . . . . . . . . 25
Item 4 Submission of Matters to a Vote of Security Holders . . . . . . 25
Item 5 Other Information . . . . . . . . . . . . . . . . . . . . . . . 25
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .25
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Item 1: Financial Statements
Interchange Financial Services Corporation
________________________________________________________________________________
CONSOLIDATED BALANCE SHEETS
________________________________________________________________________________
(dollars in thousands)
March 31, December 31,
2003 2002
__________ _____________
(unaudited)
Assets
Cash and due from banks $ 24,125 $ 23,266
Interest earning deposits 15,000 -
Federal funds sold 31,800 10,650
_________ ____________
Total cash and cash equivalents 70,925 33,916
_________ ____________
Securities held to maturity at amortized cost
(estimated market value of $28,050 and $29,590
for March 31, 2003 and December 31, 2002,
respectively) 26,803 28,192
__________ ____________
Securities available for sale at estimated market
value (amortized cost of $216,357 and $217,924
for March 31, 2003 and December 31, 2002,
respectively) 223,010 224,320
__________ ___________
Loans and leases (net of unearned income and
deferred fees of $7,830 and $8,657 for
March 31, 2003 and December 31, 2002,
respectively) 606,739 615,641
Less: Allowance for loan and lease losses 7,226 7,207
__________ __________
Net loans and leases 599,513 608,434
__________ __________
Bank owned life insurance 21,551 21,274
Premises and equipment, net 10,585 10,512
Foreclosed real estate and other repossesed assets 197 176
Goodwill 1,538 1,447
Intangible assets 213 231
Accrued interest receivable and other assets 8,532 7,830
__________ __________
Total assets $962,867 $936,332
========== ==========
Liabilities
Deposits
Non-interest bearing $118,216 $118,578
Interest bearing 722,699 697,094
__________ __________
Total deposits 840,915 815,672
Securities sold under agreements to repurchase 15,956 17,389
Long-term borrowings 10,000 10,000
Accrued interest payable and other liabilities 12,554 12,591
__________ _________
Total liabilities 879,425 855,652
__________ _________
Commitments and contingent liabilities
Stockholders' equity:
Common stock, without par value; 22,500,000
shares authorized;
9,839,682 and 9,815,207 shares issued and
outstanding at March 31, 2003 and
December 31, 2002, respectively 5,397 5,397
Capital surplus 21,178 21,097
Retained earnings 65,588 63,314
Accumulated other comprehensive income 3,720 3,596
________ __________
95,883 93,404
Less: Treasury stock 12,441 12,724
________ __________
Total stockholders' equity 83,442 80,680
________ __________
Total liabilities and stockholders' equity $962,867 $936,332
======== ==========
_____________________________________________________________________________
See notes to consolidated financial statements.
1
Interchange Financial Services Corporation
______________________________________________________________________________
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31,
______________________________________________________________________________
(dollars in thousands, except per share data)
(unaudited)
2003 2002
__________ ____________
Interest income
Interest and fees on loans $ 10,857 $ 11,014
Interest on federal funds sold 63 53
Interest on interest earning deposits 12 -
Interest and dividends on securities
Taxable interest income 2,283 2,504
Interest income exempt from federal income
taxes 179 126
Dividends 56 47
__________ _________
Total interest income 13,450 13,744
__________ _________
Interest expense
Interest on deposits 3,407 4,384
Interest on securities sold under agreements to
repurchase 86 49
Interest on short-term borrowings - 140
Interest on long-term borrowings 105 103
__________ _________
Total interest expense 3,598 4,676
__________ _________
Net interest income 9,852 9,068
Provision for loan and lease losses 265 225
__________ _________
Net interest income after provision for loan
losses 9,587 8,843
__________ _________
Non-interest income
Service fees on deposit accounts 653 614
Net gain on sale of securities - 187
Net gain on sale of loans and leases 198 30
Bank owned life insurance 278 221
Commissions on sale of annuities and mutual funds 213 52
Other 502 457
__________ _________
Total non-interest income 1,844 1,561
__________ _________
Non-interest expense
Salaries and benefits 3,628 3,259
Occupancy 928 864
Furniture and equipment 253 285
Advertising and promotion 315 425
Foreclosed real estate - 6
Amortization of intangible assets 19 13
Other 1,384 1,280
__________ _________
Total non-interest expense 6,527 6,132
__________ _________
Income before income taxes 4,904 4,272
Income taxes 1,548 1,332
Net income $ 3,356 $ 2,940
========== =========
Basic earnings per common share $0.34 $0.30
==== ====
Diluted earnings per common share $0.34 $0.30
==== ====
______________________________________________________________________________
See notes to consolidated financial statements.
2
Interchange Financial Services Corporation
___________________________________________________________________________________________________________________________________
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended Ended March 31,
___________________________________________________________________________________________________________________________________
(dollars in thousands, except per share data)
(unaudited)
Accumulated
Other
Comprehensive Retained Comprehensive Common Capital Treasury
Income Earnings Income Stock Surplus Stock Total
______________ ___________ _____________ ________ ________ _________ _______
Balance at January 1, 2002 $54,758 $1,156 $5,397 $20,993 $(4,071) $68,233
Comprehensive income
Net Income $2,940 2,940 2,940
Other comprehensive income, net of taxes
Unrealized losses on AFS debt securities (551)
Less: realized gains on disposition of
securities (117)
_____________
Other comprehensive income, net of taxes (668) (668) (668)
_____________
Comprehensive income $2,272
=============
Dividends on common stock (979) (979)
Issued 21,069 shares of common stock in
connection with Executive Compensation Plan 66 244 310
Exercised 10,625 option shares (63) 123 60
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 March 31, 2002 56,719 488 5,397 21,127 (12,695) 71,036
Comprehensive income
Net Income $9,937 9,937 9,937
Other comprehensive income, net of taxes
Unrealized gains on AFS debt securities 3,588
Less: realized gains on disposition of
securities (480)
_________
Other comprehensive income
3,108 3,108 3,108
________
Comprehensive income $13,045
========
Dividends on common stock (3,342) (3,342)
Exercised 14,533 option shares (30) 168 138
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 $3,356 3,356 3,356
Other comprehensive income, net of taxes
Unrealized gains on AFS debt securities 143
Minimum pension liability adjustment (19)
__________
Other comprehensive income
124 124 124
__________
Comprehensive income $3,480
==========
Dividends on common stock (1,082) (1,082)
Issued 20,833 shares of common stock in
connection with Executive Compensation Plan 109 245 354
Exercised 3,740 option shares (28) 38 10
________ _________ ________ ________ __________ ________
Balance at March 31, 2003
$65,588 $3,720 $5,397 $21,178 $(12,441) $83,442
======== ========== ======== ======== ========= ========
___________________________________________________________________________________________________________________________________
See notes to consolidated financial statements.
3
Interchange Financial Services Corporation
___________________________________________________________________________________________________________________________________
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31,
___________________________________________________________________________________________________________________________________
(dollars in thousands)
(unaudited)
2003 2002
__________ _________
Cash flows from operating activities
Net income $ 3,356 $ 2,940
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 357 367
Amortization of securities premiums 776 407
Accretion of securities discounts (77) (71)
Amortization of premiums in connection with acquisition 18 13
Provision for loan losses 265 225
Increase in cash surrender value of Bank Owned Life Insurance (277) (221)
Origination of Loans available for sale (4,068) -
Sale of loans available for sale 4,173 -
Net gain on sale of securities - (187)
Net gain on sale of loans (198) (30)
Net gain on sale of fixed assets 10 -
Decrease (increase) in operating assets
Accrued interest receivable (209) (289)
Accounts receivable- leases sold - 4,921
Other (725) (665)
(Decrease) increase in operating liabilities
Accrued interest payable 12 (135)
Other (49) 2,074
___________ _________
Cash provided by operating activities 3,364 9,349
___________ _________
Cash flows from investing activities
(Payments for) proceeds from
Purchase of loans - (14,930)
Net repayments (originations) of loans 7,499 (5,467)
Sale of loans 1,196 345
Purchase of securities available-for-sale (12,947) (31,796)
Maturities of securities available-for-sale 13,893 11,708
Sale of securities available for sale - 3,159
Maturities of securities held-to-maturity 1,311 3,908
Purchase of fixed assets (413) (525)
Sale of reposessed assets 33 91
Premium in connection with acquisition - (1,861)
____________ __________
Cash used in investing activities 10,572 (35,368)
____________ __________
Cash flows from financing activities
Proceeds from (payments for)
Deposits in excess of withdrawals 25,243 28,422
Securities sold under agreements to repurchase and other borrowings 8,275 22,656
Retirement of securities sold under agreement to repurchase and
other borrowings (9,708) (23,756)
Minimum pension liability, net of taxes (19) -
Dividends (1,082) (979)
Treasury stock - (235)
Common stock issued 354 1,685
Exercise of option shares 10 60
_____________ __________
Cash provided by financing activities 23,073 27,853
_____________ __________
Increase in cash and cash equivalents 37,009 1,834
Cash and cash equivalents, beginning of year 33,916 22,211
_____________ __________
Cash and cash equivalents, end of period $70,925 $24,045
============= ==========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $3,586 $6,410
Income taxes 45 -
Supplemental disclosure of non-cash investing activities:
Loans transferred to foreclosed real estate and other
repossessed assets 54 69
Stock issued for net assets purchased - 1,375
__________________________________________________________________________________________________________
See notes to consolidated financial statements. 4
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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 months ended March 31, 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.
2. 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.
3. Legal Proceedings
The Company is a party to routine litigation involving various aspects of
its business, none of which, in the opinion of management, is expected to have a
material adverse impact on the consolidated financial condition, results of
operations or liquidity of the Company.
5
4. Recent Accounting Pronouncements
On April 30, 2003, the Financial Accounting Standards Board (FASB) issued
Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
This Statement is effective for contracts entered into or modified after June
30, 2003, except for contracts that relate to SFAS 133 implementation issues
that have been effective for fiscal quarters that began prior to June 15, 2003
and for hedging relationships designated after June 30, 2003. The adoption of
SFAS 149 is not expected to have a material impact on the financial position or
results of operations of the Company because the Company does not have any
derivative activity.
5. Cash Dividend
The Company declared a cash dividend of $0.11 per share, which was paid on
March 28, 2003 to shareholders of record as of March 14, 2003.
6. Stock Based Compensation
The Company accounts for stock option plans under the recognition and
measurement principles of APB Opinion No. 25. "Accounting for Stock Issued to
Employees," and related interpretations. No stock-based employee compensation
costs are reflected in net income, as all options granted under those plans had
an exercise price equal to the market value of the underlying common stock on
the date of grant. The following table illustrates the effect net income and
diluted earnings per common share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, " Accounting for Stock-Based
Compensation," to stock-based compensation for the quarters ended March 31, 2003
and 2002:
(in thousands, except share data) (unaudited)
6
(in thousands, except share data) (unaudited)
_____________________________
For the three months ended
March 31,
2003 2002
___________ _____________
Net Income
As reported $3,356 $2,940
Less: Total stock-based
compensation 71pense determined
under the fair value method
for all rewards, net of related
tax effects 71 39
_______ _______
Pro-forma $3,356 $2,940
======= =======
Diluted earnings per common share
As reported $0.34 $ 0.30
Less: Total stock-based
compensation expense determine
under the fair value method for
all rewards, net of related
tax effects 0.01 0.01
Pro-forma ======== =======
$0.33 $0.29
======== =======
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants for the three months ended March 31, 2003 and 2002,
respectively: dividend yield of 2.48% and 2.37%; expected volatility of 24.80%
and 25.12%; risk-free interest rate of 3.44% and 4.65%; and expected lives of 7
years. 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.
7. Subsequent Events
On April 30, 2003 the Company completed its acquisition of Bridge View Bancorp
("Bridge View"), a Bergen County-based bank holding company with eleven
locations. At March 31, 2003, Bridge View had approximately $301.5 million of
total assets, $30.3 million of capital and $269.5 million of deposits. The
aggregate purchase price paid to Bridge View shareholders was approximately
$85.0 million and consisted of approximately 2.9 million shares of the Company's
common stock and $33.5 million in cash. The transaction will be accounted for as
a purchase and the cost in excess of net assets acquired will be allocated to
identified intangible assets and goodwill.
7
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 months ended
March 31, 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.
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 portfolio, the quality of the loan 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; and (vii) 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
8
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 four 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; 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.
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.
9
THREE MONTHS ENDED MARCH 31, 2003 AND MARCH 31, 2002
RESULTS OF OPERATIONS
For the first quarter of 2003, the Company reported earnings per diluted
common share of $0.34, an increase of 13.3% over the $0.30 reported in the same
period in 2002. Net income for the three months ended March 31, 2003 was $3.4
million, an increase of $416 thousand, or 14.1%, over the same period last year.
The improvement in earnings was largely provided by an $802 thousand, or 8.8%,
growth in net interest income on a tax-equivalent basis for the three-month
period. Growth in average interest earning assets of $85.0 million, or 10.7%,
along with a stable net interest margin ("margin") of 4.51% versus 4.59% for the
three months ended March 31, 2003 and 2002, respectively, were the main reasons
for the improvement in net interest income. The growth in average interest
earning assets was funded primarily with low cost core deposits, which are an
essential and cost-effective funding source for the Bank. The margin contraction
of 8 basis points, or 1.7%, for the three-month period ending March 31, 2003
when compared to the same period in 2002 resulted from average interest earning
assets repricing faster than our average interest bearing liabilities. A $283
thousand, or 18.1%, increase in non-interest income also contributed to the
growth in revenue.
The growth in revenues was partly offset by a $395 thousand, or 6.4%,
increase in non-interest expenses. The increase was due to an increase in salary
and benefits of approximately $369 thousand, or 11.3%, as a result of normal
promotion and merit raises, an increase in general medical and retirement
expenses and an increase in additional human infrastructure for planned
expansion.
For the three months ended March 31, 2003, two of the Company's key
performance ratios, Return on Average Assets ("ROA") and Return on Average
Equity ("ROE") remained strong when compared to the same period in 2002. ROA
increased to 1.42% from 1.38% and ROE was 16.38% as compared to 16.98% for the
same period last year.
Net Interest Income
Net interest income is the most significant source of the Company's
operating income. Net interest income on a tax-equivalent basis increased $802
thousand, or 8.8%, to $10.0 million for the quarter ended March 31, 2003 as
compared to the same quarter in 2002.Net interest income is adjusted to a
taxable equivalent basis to recognize the income from tax-exempt assets as if
the interest was taxable, thereby allowing a uniform comparison to be made
between yields on assets. The Company uses an effective tax rate of 34%, which
is adjusted for a "TEFRA" disallowance. The tax equivalent adjustment amounted
to $108 thousand and $90 thousand for the quarters ended March 31, 2003 and
2002, respectively. The increase in net interest income was due mostly to a
10.7% growth in average interest earning assets. The growth in interest earning
assets was funded
10
primarily by deposit liabilities, which grew 10.7% on average for the first
quarter of 2003 when compared to the same quarter in 2003. The margin, which
contracted 8 basis points to 4.51% for the first quarter of 2003 when compared
to the same quarter in 2002, offset the growth in net interest income. The
margin contraction resulted from average interest earning assets repricing
faster than average interest bearing liabilities. Earning asset yields decreased
80 basis points, while the cost of funds declined 74 basis points.
Interest income, on a tax-equivalent basis, totaled $13.6 million for the
first quarter of 2003, a decrease of $276 thousand, or 2.0%, when compared to
the same quarter in 2002. The decrease in interest income was a function of a
decline of 80 basis points in yields on interest earning assets to 6.14% for the
first quarter of 2003 when compared to the same quarter in 2002. The decline in
interest earning asset yields was largely attributed to a decrease in market
interest rates, prepayments, amortization and maturities in the loan and
securities portfolio as well as a shift in asset composition. The decrease was
tempered by a $85.0 million, or 10.7%, growth in average interest-earning
assets, which occurred mostly in securities and loans of $49.1 million, or
25.4%, and $22.6 million, or 3.8%, respectively.
Interest expense, which totaled $3.6 million for the first quarter of 2003,
decreased $1.1 million, or 23.1%, when 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 2002. In addition, the composition of
the Company's deposits also had a favorable impact on the Company's interest
expense. The deposit composition combined with lower short-term interest rates
reduced the average rate paid on interest bearing liabilities by 87 basis points
to 1.97% for the quarter ended March 31, 2003 when compared to the same period
in 2002. The interest expense benefit produced by the decline in the cost of
interest bearing liabilities more than offset the increase in interest expense
resulting from the growth of deposits. Interest bearing deposits grew on average
$73.3 million, or 11.6%, for the first quarter of 2003 when compared to the same
period in 2002.
11
____________________________________________________________________________________________________________________________________
Analysis of Net Interest Income
____________________________________________________________________________________________________________________________________
for the quarter ended March 31,
(dollars in thousands) 2003 2002
(unaudited) _______________________________________ _____________________________________
Average Average Average Average
Balance Interest Rate Balance Interest Rate
Assets ____________ ____________ ____________ _________ _________ __________
Interest earning assets:
Loans (1) $614,301 $10,897 7.10 % $591,674 $11,054 7.47 %
Taxable securities (4) 221,386 2,339 4.23 182,438 2,551 5.59
Tax-exempt securities (2) (4) 20,940 247 4.72 10,774 176 6.53
Interest earning deposits 4,333 12 1.11 - - -
Federal funds sold 21,585 63 1.17 12,668 53 1.67
____________ ____________ __________ _________ ___________ __________
Total interest-earning assets 882,545 13,558 6.14 797,554 13,834 6.94
____________ ___________
Non-interest earning assets:
Cash and due from banks 22,167 21,052
Allowance for loan and lease losses (7,207) (6,568)
Other assets 47,958 38,965
____________ _________
Total assets $945,463 $851,003
============ =========
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest bearing deposits $705,960 3,407 1.93 $632,697 4,384 2.77
Borrowings 26,229 191 2.91 25,880 292 4.51
____________ ____________ __________ _________ ___________ __________
Total interest-bearing liabilities 732,189 3,598 1.97 658,577 4,676 2.84
____________ ___________
Non-interest bearing liabilities
Demand deposits 118,779 112,135
Other liabilities 12,521 11,025
____________ _________
Total liabilities (3) 863,489 781,737
Stockholders' equity 81,974 69,266
____________ _________
Total liabilities and stockholders' equity $945,463 $851,003
============ =========
Net interest income (tax-equivalent basis) 9,960 4.17 9,158 4.10
Tax-equivalent basis adjustment (108) (90)
____________ _______
Net interest income $9,852 $9,068
=============
Net interest income as a percent of interest-earning
assets (tax-equivalent basis) 4.51 % 4.59 %
<FN>
(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.
</FN>
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 "Allowance for loan and lease losses". In the first
quarters of 2003 and 2002, the Company's provision for loan and lease losses was
$265 thousand and $225 thousand, respectively.
Non-interest Income
For the quarter ended March 31, 2003, non-interest income totaled $1.8
million, an increase of $283 thousand, or 18.1%, when compared to the same
period in 2002. The improvement was largely due to increases in commissions on
sales of annuities and mutual funds and net gains from the sale of conforming 20
and 30 year residential mortgages through the Mortgage Finance Partnership
Program ("MPF") with the Federal Home Loan Bank of $161 thousand and $137
thousand, respectively. In addition, an increase in the cash surrender value of
Bank Owned Life Insurance and in syndication fees on leases sold of $57 thousand
and $32 thousand, respectively, also contributed to the growth in non-interest
income. During the quarter the Company did not
12
recognize any gains on the sale of securities as compared to $187 thousand in
gains for the same period in 2002.
Non-interest Expense
Non-interest expense increased $395 thousand, or 6.4%, to $6.5 million for
the quarter ended March 31, 2003 when compared to the same period one year ago.
Contributing to the increase in non-interest expense were increases in salaries
and benefits and occupancy expenses of $369 thousand and $64 thousand,
respectively. A decline in advertising expenses of $110 thousand served to
partly offset the aforementioned increases. Advertising was reduced as campaigns
in 2002 for branding and the new branch in Hackensack did not reoccur in 2003.
Income Taxes
Income tax expense as a percentage of pre-tax income was 31.6% for the
three months ended March 31, 2003 as compared to 31.2% for the first quarter of
2002.
13
FINANCIAL CONDITION
At March 31, 2003, the Company's total assets were $962.9 million, an
increase of $26.5 million, or 2.8%, from $936.3 million at December 31, 2002.
The growth was largely in federal funds sold and interest earning deposits,
which grew $21.2 million and $15.0 million, respectively, during the period
between March 31, 2003 and December 31, 2002. The asset growth was funded
principally by a $25.2 million increase in deposit liabilities for March 31,
2003 as compared to December 31, 2002.
Cash and Cash Equivalents
At March 31, 2003, cash and cash equivalents increased $37.0 million to
$70.9 million when compared to December 31, 2002. This was largely the result of
financing activities (reflecting principally deposit growth less repayments of
borrowings) and operating activities (reflecting net income and changes in other
assets) generating cash more rapidly than investing activities (funding loans
and investment growth) could utilize it. This can be seen more completely on the
accompanying unaudited Statements of Cash Flows.
Securities Portfolio
Under Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"), each security
is classified as either trading, available-for-sale ("AFS"), or held-to-maturity
("HTM"). The Company has no securities classified as trading. The AFS securities
are recorded at their estimated fair value. The after-tax difference between
amortized cost and fair value of AFS securities 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 HTM securities are carried at cost adjusted for the
amortization of premiums and accretion of discounts, which are recognized as an
adjustment to income.
The Company uses its securities portfolio to ensure liquidity for cash flow
requirements, to manage interest rate risk, to provide a source of income, to
ensure collateral is available for pledging requirements and to manage asset
quality diversification. At March 31, 2003, investment securities totaled $249.8
million and represented 25.9% of total assets, as compared to $252.5 million and
27.0%, respectively, at December 31, 2002. AFS securities comprised 89.3% of the
total securities portfolio at March 31, 2003 as compared to 88.8% at December
31, 2002. During the first quarter of 2003, the Company did not sell any
securities.
14
The following table reflects the composition of the securities portfolio:
(dollars in thousands)
________________________________________________________
March 31, 2003
________________________________________________________
(unaudited)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
________________ ___________ ___________ ____________
Securities held to maturity
Mortgage-backed securities $15,481 $563 $10 $ 16,034
Obligations of U.S. agencies 1,994 43 - 2,037
Obligations of states & political subdivisions 9,228 651 - 9,879
Other debt securities 100 - - 100
________________ ___________ ___________ ____________
26,803 1,257 10 28,050
________________ ___________ ___________ ____________
Securities available for sale
Mortgage-backed securities 87,020 1,528 283 88,265
Obligations of U.S. agencies 103,587 4,527 25 108,089
Obligations of states & political subdivisions 21,813 945 39 22,719
Other debt securities - - - -
Equity securities 3,937 - - 3,937
________________ ____________ ___________ ___________
216,357 7,000 347 223,010
________________ ____________ ___________ ___________
Total securities $243,160 $8,257 $357 $251,060
================ ============ =========== ===========
__________________________________________________________
December 31, 2002
__________________________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
_______________ ____________ ___________ ______________
Securities held to maturity
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 1,398 - 29,590
_______________ ___________ ___________ _____________
Securities available for sale
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 March 31, 2003, the contractual maturities of HTM securities and AFS securities were as follows:
(dollars in thousands)
Securities Securities
Held-to-Maturity Available-for-Sale
___________________ _____________________
Amortized Market Amortized Market
Cost Value Cost Value
___________________ _____________________
Within 1 year $ 4,887 $ 4,929 $ 19,606 $ 19,584
After 1 but within 5 years 10,139 10,677 148,210 153,232
After 5 but within 10 years 7,942 8,465 19,374 19,887
After 10 years 3,835 3,979 25,230 26,370
Equity securities - - 3,937 3,937
___________________ _____________________
Total $26,803 $28,050 $216,357 $ 223,010
==================== =====================
Loans
Total loans amounted to $606.7 million at March 31, 2003, a decrease of
$8.9 million from $615.6 million at December 31, 2002. The decline was
predominately in commercial and residential mortgage loans, which decreased $5.5
million and $5.2 million, respectively. Increased loan prepayments as a result
of the historically low market interest rate environment and increased
competition for these loans drove the decline in the real estate mortgage
portfolios. In addition, the sale of loans through the previously mentioned FHLB
MPF program contributed to the reduction in loans.
The following table reflects the composition of the loan and lease
portfolio: (dollars in thousand
____________________ _________________
March 31, December 31,
2003 2002
____________________ _________________
(unaudited)
Amount of loans by type
Real estate-mortgage
1-4 family residential
First liens $96,533 $100,302
Junior liens 5,609 6,241
Home equity 124,238 125,037
Commercial 217,123 222,628
Construction 14,400 11,359
___________________ ________________
457,903 465,567
___________________ ________________
Commercial loans
Commercial and financial 105,482 104,542
Lease financing 25,480 26,356
___________________ ________________
130,962 130,898
___________________ ________________
Consumer loans
Lease financing 15,012 15,969
Installment 2,862 3,207
17,874 19,176
___________________ ________________
Total $606,739 $615,641
==================== =================
16
Nonperforming Assets
Nonperforming assets are comprised of nonaccrual loans, restructured loans,
foreclosed real estate and other repossessed assets. At March 31, 2003,
nonperforming assets amounted to $5.2 million, a decrease of $0.9 million from
$6.1 million at December 31, 2002. The decrease was due principally to the
pay-off in full of a non-performing commercial loan. Certain of the
nonperforming assets were collateralized by cash, other liquid collateral or
real estate. The Company maintains liquid collateral totaling $1.0 million,
which can be applied against losses on certain acquired leases representing
approximately $1.1 million of nonperforming assets. The ratio of nonperforming
assets to total loans and foreclosed real estate and other repossessed assets
increased to 0.86% at March 31, 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 March 31, 2003, and
December 31, 2002: (dollars in thousands)
_________________ _____________
March 31, December 31,
2003 2002
_________________ ______________
Nonperforming loans $5,013 $5,963
Foreclosed real estate and other repossessed assets 197 176
________________ _____________
Total nonperforming assets $5,210 $6,139
================ =============
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 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 $7.2 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 quarters ended March 31, 2003 and 2002: (dollars in thousands)
17
Three months ended
March 31,
_____________________________
2003 2002
____________ _____________
Average loans outstanding $614,301 $591,674
============ =============
Allowance at beginning of period 7,207 6,569
____________ _____________
Loans charged off
Real estate 6 -
Commercial and financial 25 22
Commercial lease financing 208 479
Consumer loans 7 -
____________ _____________
Total 247 501
____________ ____________
Recoveries of loans previously charged off
Commercial lease financing 1 5
Consumer loans - 1
____________ ____________
Total 1 6
____________ ____________
Additions to allowance charged to expense 265 225
___________ ____________
Allowance at end of period $ 7,226 $ 6,299
============ ============
Allowance to total loans 1.19 % 1.05 %
Ratio of net charge-offs to average loans (annualized) 0.16 % 0.33 %
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 March 31, 2003, total deposits were $840.9 million, an increase of $25.2
million, or 3.1%, when compared to $815.7 million at December 31, 2002. The
growth in deposits occurred mostly in money market savings and interest-bearing
demand deposits, which increased $10.2 million and $8.3 million, respectively.
In addition, growth in savings and total time deposits of $3.6 million and $3.5
million, respectively, contributed to the increase in deposits at March 31, 2003
as compared to December 31, 2002. Total time deposits represented 28.6% of total
deposits at March 31, 2003 compared to 29.1% at December 31, 2002.
For the three months ended March 31, 2003, the Company's overall yield on
deposits declined by 70 basis points to 1.65% as compared to the same period
last year. The decrease was mostly attributable to a decline in market interest
rates.
The following table reflects the composition of deposit liabilities:
(dollars in thousands)
18
_______________ ________________
March 31, December 31,
2003 2002
_______________ ________________
Non-interest Demand $118,218 $118,578
Interest Bearing Demand 332,322 323,998
Savings 83,873 80,300
Money Market Savings 65,617 55,372
Time Deposits <$100,000 221,492 210,727
Time Deposits >$100,000 19,393 26,697
______________ ________________
Total $840,915 $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 quarter 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
19
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 March 31, 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 an 100 basis point
declining interest rate environment. Based on the simulation, it was estimated
that net interest income, over a twelve-month horizon, would not decrease by
more than 4.0%. At March 31, 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 an 100 basis
point declining interest rate environment:
Net Interest Income Sensitivity Simulation
Percentage Change in Estimated Net Interest
Income over a twelve month horizon
___________________________________________
March 31,
2003 2002
____________ ____________
+200 basis points -1.8 % -12.0 %
+100 basis points 1.6 % -5.2 %
- -100 basis points -4.1 % -0.4 %
- -200 basis points * -1.8 %
* Not simulated due to the historically low interest rate environment.
The simulation described above does not represent a Company forecast and
should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including: the
nature and timing of interest rate levels including yield curve shape;
prepayments on loans and securities; deposit decay rates; pricing decisions on
loans and deposits; reinvestment/replacement of asset and liability cashflows;
and others. While assumptions are developed based upon current economic and
local market conditions, the Company cannot make any assurances as to the
predictive nature of these assumptions including how customer preferences or
competitor influences might change.
20
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 7.4% at March 31, 2003. Since the cumulative gap was negative, the
Company has a "negative gap" position, which theoretically will cause its assets
to reprice more slowly than its deposit liabilities. In a declining interest
rate environment, interest costs may be expected to fall faster than the
interest received on earning assets, thus increasing the net interest spread. If
interest rates increase, a negative gap means that the interest received on
earning assets may be expected to increase more slowly than the interest paid on
the Company's liabilities therefore decreasing the net interest spread.
Capital Adequacy
The Company is subject to capital adequacy requirements imposed by the
Board of Governors of the Federal Reserve System (the "Federal Reserve"); and
the Bank is subject to similar capital adequacy requirements imposed by the
Federal Deposit Insurance Corporation (the "FDIC"). The Federal Reserve and the
FDIC have adopted risk-based capital requirements for assessing bank holding
company and bank capital adequacy. These standards define capital and establish
minimum capital requirements in relation to assets and off-balance sheet
exposure, adjusted for credit risk. The risk-based capital standards currently
in effect are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among bank holding companies and banks, to account
for off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate relative risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.
21
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 March 31, 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 March 31, 2003, the
minimum leverage ratio requirement to be considered adequately capitalized was
3%.
The capital levels of the Company and the Bank at March 31, 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 March 31, 2003:
Total Capital (to Risk Weighted Assets):
The Company $85,224 13.46 % $50,638 8.00 % N/A N/A
The Bank 84,153 13.30 50,637 8.00 $63,297 10.00 %
Tier 1 Capital (to Risk Weighted Assets):
The Company 77,998 12.32 25,319 4.00 N/A N/A
The Bank 76,926 12.15 25,319 4.00 37,978 6.00
Tier 1 Capital (to Average Assets):
The Company 77,998 8.30 28,199 3.00 N/A N/A
The Bank 76,926 8.21 28,126 3.00 46,877 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
22
finance prospective business opportunities. The Company's liquidity position
over any given period of time is a product of its operating, financing and
investing activities. The extent of such activities is often shaped by such
external factors as competition for deposits and demand for loans.
Financing for the Company's loans and investments is derived primarily from
deposits, along with interest and principal payments on loans and investments.
At March 31, 2003, total deposits amounted to $840.9 million, an increase of
$25.2 million, or 3.1%, 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 March 31, 2003, advances from the FHLB
and REPOS amounted to $10.0 million and $16.0 million, respectively, as compared
to $10.0 million and $17.4 million, respectively, at December 31, 2002. Net
loans at March 31, 2003 amounted to $599.5 million, a decrease of $8.9 million,
from $608.4 million at December 31, 2002.
The Company's most liquid assets are cash and cash equivalents. At March
31, 2003, the total of such assets amounted to $70.9 million, or 7.4%, 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 temporary
investments and interest earning deposits pending investment in loans and
securities.
Another significant liquidity source is the Company's AFS securities. At
March 31, 2003 AFS securities amounted to $223.0 million, or 89.2%, of total
securities, compared to $224.3 million, or 88.8%, of total securities at
December 31, 2002.
In addition to the aforementioned sources of liquidity, the Company has
available various other sources of liquidity, including federal funds purchased
from other banks and the Federal Reserve discount window. The Bank also has a
$86.3 million line of credit available through its membership in the FHLB.
The Company is also party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These instruments, which include commitments to extend credit and
standby letters of credit, involve to a varying degree elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
statement of condition. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates and may require
collateral from the borrower if deemed necessary by the Company. Standby letters
of credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party up to a stipulated amount and with
specified terms and conditions. Commitments to extend credit and standby letters
of credit are not recorded on the Company's consolidated balance sheet until the
instrument is exercised. At March 31, 2003 outstanding commitments to fund loans
totaled $151.7 million and outstanding standby letters of credit totaled $1.3
million.
23
The Company maintains a policy of paying regular cash dividends and
anticipates continuing that policy. 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 of 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
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Section
240.13a-14(c) and 240.15b-14 (c)). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic filings with the
Securities and Exchange Commission. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is also made to Note 3 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
99 Certifications Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
During the quarter ended March 31, 2003, the Company filed the
following Current Report on Form 8-K:
On January 22, 2003, Interchange Financial Services
Corporation issued a press release reporting earnings for
the year and quarter ended December 31, 2002.
25
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: May 15, 2003
26
CERTIFICATION OF DISCLOSURE CONTROLS
I, Anthony S. Abbate, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Interchange Financial
Services Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14(c) and 15d-14(c)) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 /s/ Anthony S. Abbate
_____________________________________
President and Chief Executive Officer
27
CERTIFICATION OF DISCLOSURE CONTROLS
I, Charles T. Field, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Interchange Financial
Services Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14(c) and 15d-14(c)) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Charles T. Field
___________________________
Senior Vice President
and Chief Financial Officer
28
Exhibit 11. Statement re computation of per share earnings
(dollars in thousands, except per share amounts)
(unaudited)
__________________________________________________________________________________
Three Months Ended,
__________________________________________________________________________________
March 31, 2003 March 31, 2002
______________________________________ ________________________________________
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Income Shares Amount
____________ __________ __________ __________ _________ _____________
Basic Earnings per
Common Share
Income available to
common shareholders $3,356 9,829 $0.34 $2,940 9,777 $0.30
============ ============
Effect of Dilutive Shares
Options issued - 139 - 90
___________ ____________ __________ __________
Diluted Earnings per
Common Share $3,356 9,968 $0.34 $2,940 9,867 $0.30
=========== =============== ========== =========== ============ ============
Exhibit 99 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
In connection with the filing of the Quarterly Report on Form 10-Q for
the Quarter Ended March 31, 2003, (the "Report") by Interchange
Financial Services Corporation ("Registrant"), each of the undersigned
hereby certifies that:
1. The Report fully complies with the requirements of Section 13(a) or 15
(d) of the Securities Exchange Act of 1934, as amended, and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of Registrant.
/s/ Anthony S. Abbate
_____________________________________
Anthony S. Abbate
President and Chief Executive Officer
/s/ Charles T. Field
_____________________________________
Charles T. Field
Senior Vice President and CFO