-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HG8NFWQjjAODaCA+NXaZcP9wqPg9JND4NU3qrRBVGp66RTe9FLpjX7Vt0GfDhNuC Q5UqLbbbLui8rEgNLaLkRg== 0000755933-03-000065.txt : 20030515 0000755933-03-000065.hdr.sgml : 20030515 20030515174035 ACCESSION NUMBER: 0000755933-03-000065 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERCHANGE FINANCIAL SERVICES CORP /NJ/ CENTRAL INDEX KEY: 0000755933 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 222553159 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10518 FILM NUMBER: 03706459 BUSINESS ADDRESS: STREET 1: PARK 80 WEST PLAZA TWO STREET 2: ATTN INTERCHANGE STATE BANK CITY: SADDLE BROOK STATE: NJ ZIP: 07662 BUSINESS PHONE: 2017032265 MAIL ADDRESS: STREET 1: PARK 80 WEST STREET 2: PLAZA II CITY: SADDLE BROOK STATE: NJ ZIP: 07663 FORMER COMPANY: FORMER CONFORMED NAME: INTERCHANGER STATE BANK DATE OF NAME CHANGE: 19870416 FORMER COMPANY: FORMER CONFORMED NAME: INTERCHANGE FINANCIAL SERVICES CORP DATE OF NAME CHANGE: 19861209 10-Q 1 march03.txt 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 % (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 "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 -----END PRIVACY-ENHANCED MESSAGE-----