-----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, IfyYx5AREV+MkS8i3YD/bxKctGdvV5gWaBgHJwriMzXx6UCWoeV33n3cSd9lBYG/ vynQrZYaSOZOD+eCl9RF0Q== 0000755933-03-000074.txt : 20030814 0000755933-03-000074.hdr.sgml : 20030814 20030814164840 ACCESSION NUMBER: 0000755933-03-000074 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 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: 03848428 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 tenqjune.txt JUNE 30, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _________________ FORM 10-Q _________________ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED, June 30, 2003 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM____ TO ____ Commission File number 1-10518 INTERCHANGE FINANCIAL SERVICES CORPORATION (Exact name of registrant as specified in its charter) New Jersey 22-2553159 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Park 80 West/Plaza Two, Saddle Brook, NJ 07663 (Address of principal executive offices) (Zip Code) (201) 703-2265 ________________________________________________________________________________ (Registrant's telephone number, including area code) None ________________________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report) Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ _____ The number of outstanding shares of the Registrant's common stock, no par value per share, as of July 31, 2003, was 12,793,801 shares. INTERCHANGE FINANCIAL SERVICES CORPORATION INDEX PART I FINANCIAL INFORMATION Page No. Item 1 Financial Statements Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 . . . . . . 1 Consolidated Statements of Income for the three and six-month periods ended June 30, 2003 and 2002 . 2 Consolidated Statements of Changes in Stockholders' Equity for the six months ended June 30, 2003 and 2002 . . . . . . . . . . . . . 3 Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 . . . . 4 Notes to Consolidated Financial Statements . . . . 5 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . 12 Item 3 Quantitative and Qualitative Disclosures About Market Risk (Disclosures about quantitative and qualitative market risk are located in Management's Discussion and Analysis of Financial Condition and Results of Operation in the section on Market Risk). . . . . . . . . . 26 Item 4 Controls and Procedures . . . . . 31 PART II OTHER INFORMATION Item 1 Legal Proceedings . . . . . . . . . . . . . . 32 Item 2 Changes in Securities and Use of Proceeds. . . 32 Item 3 Defaults upon Senior Securities . . . . . . . 32 Item 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . 32 Item 5 Other Information . . . . . . . . . . . . . . 32 Item 6 Exhibits and Reports on Form 8-K . . . . . . 32 Signatures . . . . . . . . . . . . . . . . . 33 Item 1: Financial Statements Interchange Financial Services Corporation ________________________________________________________________________________________________________ CONSOLIDATED BALANCE SHEETS ________________________________________________________________________________________________________ (dollars in thousands)
June 30, December 31, 2003 2002 ___________ _____________ (unaudited) Assets Cash and due from banks $ 44,583 $ 23,266 Federal funds sold 11,000 10,650 ___________ ___________ 55,583 33,916 ___________ ___________ Securities held to maturity at amortized cost (estimated market value of $26,166 and $29,590 for June 30, 2003 and December 31, 2002, respectively) 24,741 28,192 ___________ ___________ Securities available for sale at estimated market value (amortized cost of $313,667 and $217,924 for June 30, 2003 and December 31, 2002, respectively) 320,204 224,320 ___________ ___________ Loans and leases (net of unearned income and deferred fees of $7,573 and $8,657 for June 30, 2003 and December 31, 2002, respectively) 805,084 615,641 Less: Allowance for loan and lease losses 9,537 7,207 ___________ ___________ Net loans and leases 795,547 608,434 ___________ ___________ Bank owned life insurance 21,542 21,274 Premises and equipment, net 20,440 10,512 Foreclosed real estate and other repossesed assets 172 176 Goodwill 55,270 1,447 Intangible assets 4,417 231 Accrued interest receivable and other assets 14,185 7,830 ___________ ___________ Total assets $1,312,101 $936,332 =========== =========== Liabilities Deposits Non-Interest bearing $212,395 $118,578 Interest bearing 924,431 697,094 ___________ ___________ Total deposits 1,136,826 815,672 ___________ ___________ Securities sold under agreements to repurchase 11,420 17,390 Long-term borrowings 10,000 10,000 Accrued interest payable and other liabilities 15,852 12,590 ___________ ___________ Total liabilities 1,174,098 855,652 ___________ ___________ Commitments and contingent liabilities Stockholders' equity: Common stock, without par value; 22,500,000 shares authorized; 12,756,842 and 9,815,207 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively 5,397 5,397 Capital surplus 73,355 21,097 Retained earnings 68,693 63,314 Accumulated other comprehensive income 3,653 3,596 ___________ __________ 151,098 93,404 Less: Treasury stock 13,095 12,724 ___________ _________ Total stockholders' equity 138,003 80,680 ___________ _________ Total liabilities and stockholders' equity $1,312,101 $936,332 =========== ========= _______________________________________________________________________________________________________ See notes to consolidated financial statements.
Interchange Financial Services Corporation ______________________________________________________________________________________________________ CONSOLIDATED STATEMENTS OF INCOME ______________________________________________________________________________________________________ (dollars in thousands, except per share data) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, ___________________________ ___________________________ 2003 2002 2003 2002 ____________ ____________ ____________ ____________ Interest income Interest and fees on loans $12,470 $11,340 $23,326 $22,354 Interest on federal funds sold 121 67 184 120 Interest on interest bearing deposits 9 - 21 - Interest and dividends on securities Taxable interest income 2,329 2,598 4,612 5,102 Interest income exempt from federal income taxes 221 149 400 275 Dividends 52 47 109 94 ___________ ____________ ____________ ____________ Total interest income 15,202 14,201 28,652 27,945 ___________ ____________ ____________ _____________ Interest expense Interest on deposits 3,416 4,313 6,823 8,697 Interest on securities sold under agreements to repurchase 79 43 165 92 Interest on short-term borrowings - 110 - 250 Interest on long-term borrowings 107 108 212 211 __________ ___________ ____________ ___________ Total interest expense 3,602 4,574 7,200 9,250 __________ ___________ ____________ ___________ Net interest income 11,600 9,627 21,452 18,695 Provision for loan and lease losses 530 255 795 480 __________ ___________ ____________ ___________ Net interest income after provision for loan losses 11,070 9,372 20,657 18,215 __________ ___________ ____________ ___________ Non-interest income Service fees on deposit accounts 908 649 1,561 1,263 Net gain on sale of securities 19 94 19 281 Net gain on sale of loans and leases 147 8 345 38 Bank owned life insurance 784 224 1,062 445 Commissions on sale of annuities and mutual funds 175 155 388 207 Other 611 347 1,113 804 __________ ___________ ____________ ___________ Total non-interest income 2,644 1,477 4,488 3,038 __________ ___________ ____________ ___________ Non-interest expense Salaries and benefits 4,193 3,303 7,821 6,562 Net occupancy 1,095 869 2,023 1,733 Furniture and equipment 353 305 606 590 Advertising and promotion 423 364 737 789 Federal Deposit Insurance Corporation assessment 37 33 71 65 Foreclosed real estate - 5 - 11 Amortization of intangible assets 90 18 109 31 Other 1,505 1,395 2,856 2,643 ___________ ___________ ____________ ___________ Total non-interest expense 7,696 6,292 14,223 12,424 ___________ ___________ ____________ ___________ Income before income taxes 6,018 4,557 10,922 8,829 Income taxes 1,831 1,492 3,379 2,824 ___________ ___________ ____________ ___________ Net income $ 4,187 $ 3,065 $ 7,543 $ 6,005 =========== =========== ============ =========== Basic earnings per common share $0.35 $0.31 $0.70 $0.61 =========== =========== ============ =========== Diluted earnings per common share $0.35 $0.31 $0.69 $0.60 ============ ============ ============ =========== ___________________________________________________________________________________________________________________________________ See notes to consolidated financial statements. /TABLE> Interchange Financial Services Corporation ___________________________________________________________________________________________________________________________________ CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY For the Six Months Ended Ended June 30, ___________________________________________________________________________________________________________________________________ (dollars in thousands, except per share data) (unaudited) Accumulated Other Comprehensive Retained Comprehensive Common Capital Treasury Income Earnings Income Stock Surplus Stock Total ______________ ________ _____________ ______ ________ ________ ________ Balance at January 1, 2002 $54,758 $1,156 $5,397 $20,993 $(14,071) $68,233 Comprehensive income Net Income $6,005 6,005 6,005 Other comprehensive income, net of taxes Unrealized gains on AFS debt securities 1,187 Less: gains on disposition of securities (187) ____________ Other comprehensive income, net of taxes 1,000 1,000 1,000 ____________ Comprehensive income $7,005 ============ Dividends on common stock (1,961) (1,961) Issued 21,069 shares of common stock in connection with Executive Compensation Plan 66 244 310 Exercised 18,435 option shares (66) 213 147 Issued 107,877 shares of common stock in connection with the acquisition of certain assets and assumption of certain liabilities of Monarch Capital Corporation 131 1,244 1,375 Purchased 18,150 shares of common stock (235) (235) ________ _____________ ______ ______ ________ _______ Balance at June 30, 2002 58,802 2,156 5,397 21,124 (12,605) 74,874 Comprehensive income $6,872 6,872 6,872 Other comprehensive income, net of taxes Unrealized gains on AFS debt securities 1,850 Add: losses on disposition of securities (410) ___________ Other comprehensive income, net of taxes 1,440 1,440 1,440 ___________ Comprehensive income $8,312 =========== Dividends on common stock (2,360) (2,360) Exercised 6,723 option shares (27) 78 51 Purchased 11,400 shares of common stock (197) (197) ________ ____________ ______ ______ _________ ______ Balance at December 31, 2002 63,314 3,596 5,397 21,097 (12,724) 80,680 Comprehensive income Net Income $7,543 7,543 7,543 Other comprehensive income, net of taxes Unrealized net gains on AFS debt securities 282 Less: net gains on disposition of securities (206) Minimum pension liability (19) ___________ Other comprehensive income, net of taxes 57 57 57 ___________ Comprehensive income $7,600 =========== Dividends on common stock (2,164) (2,164) Issued 20,833 shares of common stock in connection with Executive Compensation Plan 109 245 354 Exercised 7,141 option shares (31) 77 46 Issued 2,949,719 shares of common stock in connection with the acquisition of Bridge View Bancorp 52,180 52,180 Reacquired 35,959 shares in lieu of non-performing asset (693) (693) ________ __________ _______ ________ ________ _______ Balance at June 30, 2003 $68,693 $3,653 $5,397 $73,355 $(13,095)$138,003 ======== ========== ======= ======== ======== ======= ___________________________________________________________________________________________________________________________________ See notes to consolidated financial statements.
Interchange Financial Services Corporation ___________________________________________________________________________________________________________ CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, ___________________________________________________________________________________________________________ (dollars in thousands) (unaudited) 2003 2002 __________ __________ Cash flows from operating activities Net income $ 7,543 $ 6,005 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 801 728 Amortization of securities premiums 1,649 853 Accretion of securities discounts (166) (147) Amortization of premiums in connection with acquisition 250 32 Provision for loan and lease losses 795 480 Increase in cash surrender value of Bank Owned Life Insurance (268) (446) Net gain on the sale of repossessed assets (7) - Origination of loans held for sale (7,549) - Sale of loans held for sale 7,775 - Other than temporary impairment of securities 415 - Net gain on sale of securities available for sale (475) (284) Net gain on sale of loans and leases (345) (38) Net gain on sale of fixed assets 10 - Decrease (increase) in operating assets Accrued interest receivable (554) (442) Accounts receivable- leases sold - 4,921 Other (5,309) (253) (Decrease) increase in operating liabilities Accrued interest payable (319) (97) Other 1,962 2,915 __________ ___________ Cash provided by operating activities 6,208 14,227 __________ ___________ Cash flows from investing activities (Payments for) proceeds from Purchase of loans (53) (14,945) Net originations of loans (6,343) (27,066) Net proceeds from the sale of leases 1,520 493 Purchase of securities available for sale (134,890) (74,343) Maturities of securities available for sale 64,603 20,450 Sale of securities available for sale 13,029 7,234 Maturities of securities held to maturity 3,342 7,795 Purchase of fixed assets (560) (997) Sale of reposessed assets 100 251 Net cash proceeds from acquisition of Bridge View Bancorp 20,191 - Premium in connection with acquisition - (1,861) __________ ___________ Cash used in investing activities (39,061) (82,989) __________ ___________ Cash flows from financing activities Proceeds from (payments for) Deposits in excess of withdrawals 62,272 65,692 Securities sold under agreements to repurchase and other borrowings 14,059 13,542 Retirement of securities sold under agreement to repurchase and other borrowings (20,028) (14,187) Minimum pension liability, net of taxes (19) - Dividends (2,164) (1,961) Treasury stock - (235) Common stock issued 354 1,685 Exercise of option shares 46 147 __________ ___________ Cash provided by financing activities 54,520 64,683 __________ ___________ Increase in cash and cash equivalents 21,667 (4,079) Cash and cash equivalents, beginning of year 33,916 22,211 __________ ___________ Cash and cash equivalents, end of period $55,583 $18,132 ========== =========== Supplemental disclosure of cash flow information: Cash paid for: Interest $7,101 $9,348 Income taxes 4,365 2,679 Supplemental disclosure of non-cash investing activities: Loans transferred to foreclosed real estate and other repossessed assets 89 351 Stock issued related to Bridge View acquisition 52,180 - ___________________________________________________________________________________________________________ See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 2003 (Unaudited) 1. Basis of Presentation The accompanying unaudited consolidated financial statements include the accounts of Interchange Financial Services Corporation and its wholly owned subsidiaries (on a consolidated basis, the "Company") including its principal operating subsidiary, Interchange Bank (the "Bank"), and have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and in accordance with the rules and regulations of the Securities and Exchange Commission. Pursuant to such rules and regulations, certain information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with GAAP have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and schedules thereto included in the annual report on Form 10-K of the Company for the year ended December 31, 2002. The consolidated financial data for the three and six-month periods ended June 30, 2003 and 2002, are unaudited but reflect all adjustments consisting of only normal recurring adjustments which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the interim periods. The results of operations for interim periods are not necessarily indicative of results to be expected for any other period or the full year. Use of estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates pertain to the allowance for loan and lease losses and the fair value of financial instruments. Stock Based Compensation: The Company accounts for stock option plans under the recognition and measurement principles of APB Opinion No. 25. "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation costs are reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and diluted earnings per common share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, " Accounting for Stock-Based Compensation," to stock-based compensation for the three and six months ended June 30, 2003 and 2002: (in thousands, except share data) (unaudited) ___________________________ __________________________ For the three months ended For the six months ended June 30, June 30, 2003 2002 2003 2002 ________ ____________ _________ ___________ Net Income As reported $4,187 $3,065 $7,543 $6,005 Less: Total stock-based compensation expense determined under the fair value method for all rewards, net of related tax effects 90 62 160 121 ________ ____________ _________ ___________ Pro-forma $4,097 $3,003 $7,383 $5,884 ======== ============ ========= =========== Diluted earnings per common share As reported $ 0.35 $0.31 $0.69 $0.60 Less: Total stock-based compensation expense determined under the fair value method for all rewards, net of related tax effects 0.01 0.01 0.02 0.01 _______ ____________ _________ ___________ Pro-forma $0.34 $0.30 $0.67 $0.59 ======= ============= ========= ===========
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for option grants issued during the three months ended June 30, 2003: dividend yield of 2.14; expected volatility of 24.69%; risk-free interest rate of 3.39%; and expected lives of 7 years. Prior period assumptions are described in Note 12 "Stock Option and Incentive Plan in the Notes to Consolidated Financial Statements" in the Company's 2002 Annual Report on Form 10K. The effects of applying these assumptions in determining the pro-forma net income may not be representative of the effects on pro-forma net income for future years. 2. Acquisition and Pro Forma Disclosure On April 30, 2003 the Company completed its acquisition of 100% of the common stock of Bridge View Bancorp ("Bridge View"), a Bergen County-based bank holding company with eleven locations, which expanded the Company's presence into eastern Bergen County. The results of Bridge View's operations have been included in the consolidated financial statements since that date. Bridge View had approximately $278 million of total assets, $185 million of loans and $259 million of deposits. The aggregate purchase price paid to Bridge View shareholders was approximately $85.7 million and consisted of approximately 2.9 million shares of the Company's common stock with an approximate market value of $52.2 million based upon the average closing price three days prior to and after the acquisition date and $33.5 million in cash. The transaction was accounted for as a purchase and the cost in excess of net assets acquired of approximately $57.7 million was allocated to net identified intangibles of approximately $4.3 million and goodwill of approximately $53.7 million. The following pro forma condensed consolidated statements of income for the three and six months ended June 30, 2002 and 2003 give effect to the merger as if the merger had been consummated on either January 1, 2002 or 2003. The pro forma information is not necessarily indicative of the results of operations in the future or the results of operations, which would have been realized had the merger been consummated during the periods or as of the dates for which the pro forma information is presented. Interchange Financial Services Corporation and Subsidiaries PRO FORMA CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (unaudited) Three Months Ended Six Months Ended June 30, June 30, ________________________ _________________________ 2003 2002 2003 2002 Interest income $ 16,243 $ 17,316 $ 32,912 $ 34,105 Interest expense 3,726 4,862 7,743 9,887 ________ ________ ________ ________ Net interest income 12,517 12,454 25,169 24,218 ________ ________ ________ ________ Provision for loan and lease losses 530 405 810 690 ________ ________ ________ ________ Net interest income after provision for loan and lease losses 11,987 12,049 24,359 23,528 Non-interest income 2,877 2,236 5,272 4,279 Non-interest expense Salaries and benefits 4,619 4,307 9,315 8,511 Occupancy and FF&E 1,618 1,643 3,246 3,159 Other expenses 2,353 2,539 4,773 4,866 _________ _______ ________ _______ 8,590 8,489 17,334 16,536 Net income before taxes 6,274 5,796 12,297 11,271 Income Taxes 1,936 1,922 3,931 3,672 _________ _______ ________ ________ Net income $ 4,338 $ 3,874 $ 8,366 $ 7,599 ========= ======= ======== ======== Earnings per common share: Basic 0.34 0.31 0.66 0.61 Diluted 0.33 0.30 0.65 0.60
3. Earnings Per Common Share Basic earnings per common share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method. 4. Commitments and Contingent Liabilities Legal Proceedings The Company is a party to routine litigation involving various aspects of its business, none of which, in the opinion of management, is expected to have a material adverse impact on the consolidated financial condition, results of operations or liquidity of the Company. Commitments to Extend Credit At June 30, 2003, the Company had commitments of approximately $178 million to extend credit, of which approximately $2 million represents standby letters of credit. 5. Goodwill and Other Intangibles With the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), on January 1, 2002, goodwill is no longer amortized to expense, but rather is tested for impairment periodically. Other intangible assets are amortized to expense using straight-line methods over their respective estimated useful lives. At least annually, management reviews goodwill and other intangible assets and evaluates events or changes in circumstances that may indicate impairment in the carrying amount of such assets. If the sum of the expected undiscounted future cash flows, excluding interest charges, is less than the carrying amount of the asset, an impairment loss is recognized. Impairment, if any, is measured on a discounted future cash flow basis. Goodwill is reviewed for impairment annually and on an interim basis when conditions require. If necessary an impairment charge is recognized in the period that goodwill has been deemed to be impaired. At the date of adoption, there was no unamortized goodwill. At June 30, 2003, gross intangible assets amounted to $4.6 million and accumulated amortization amounted to $178,000. At December 31, 2002, gross intangible assets amounted to $300,000 and accumulated amortization amounted to $69,000. Amortization of intangible assets as a result of acquisitions, which is included in non-interest expense, amounted to $109,000, and $31,000 for the six months ended June 30, 2003 and 2002, respectively. During the second quarter, the Company recorded a core deposit intangible of $4.3 million in connection with the Bridge View merger. The core deposit intangible has an estimated life of 10 years and the Company amortized $72,000 for the first half of 2003. The core deposit intangible will be periodically reviewed for impairment. In addition, the Company recorded goodwill of $53.7 million in connection with the Bridge View merger. The goodwill will be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. 6. Recent Accounting Pronouncements In April 2003, the Financial Accounting Standards Board (FASB) issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This Statement is effective for contracts entered into or modified after June 30, 2003, except for contracts that relate to SFAS 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 is not expected to have a material impact on the financial position or results of operations of the Company because the Company does not have any derivative activity. In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"), which establishes how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the financial position or results of operations of the Company because the Company does not have any financial instruments that have characteristics of both liabilities and equity. 7. Cash Dividend The Company paid a cash dividend of $0.11 per share on May 26, 2003 to holders of record as of April 28, 2003. 8. Securities Held-to-Maturity and Securities Available-for-Sale Securities held-to-maturity ("HTM") and securities available-for-sale ("AFS") consist of the following: (in thousands) _____________________________________________ June 30, 2003 _____________________________________________ (unaudited) Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value __________ __________ __________ __________ Securities HTM Mortgage-backed securities $13,405 $329 $ - $ 13,734 Obligations of U.S. agencies 1,998 15 - 2,013 Obligations of states & political subdivisions 9,238 1,081 - 10,319 Other debt securities 100 - - 100 __________ _________ __________ ___________ 24,741 1,425 - 26,166 __________ _________ __________ ___________ Securities AFS Obligations of U.S. Treasury $41,174 $10 $ - $ 41,184 Mortgage-backed securities 88,985 1,102 552 89,535 Obligations of U.S. agencies 145,244 4,506 47 149,703 Obligations of states & political subdivisions 34,309 1,520 2 35,827 Equity securities 3,955 - - 3,955 __________ _________ __________ ___________ 313,667 7,138 601 320,204 __________ _________ __________ ___________ Total securities $338,408 $8,563 $601 $346,370 ========== ========= ========== =========== ______________________________________________ December 31, 2002 ______________________________________________ Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ________ __________ __________ _________ Securities HTM Mortgage-backed securities $16,437 $667 $ - $ 17,104 Obligations of U.S. agencies 1,991 68 - 2,059 Obligations of states & political subdivisions 9,664 663 - 10,327 Other debt securities 100 - - 100 ________ __________ __________ _________ 28,192 1,399 - 29,590 ________ __________ __________ _________ Securities AFS Mortgage-backed securities 101,028 1,778 201 102,605 Obligations of U.S. agencies 91,577 3,982 - 95,559 Obligations of states & political subdivisions 21,382 889 52 22,219 Equity securities 3,937 - - 3,937 ________ __________ __________ _________ 217,924 6,649 253 224,320 ________ __________ __________ _________ Total securities $246,116 $8,047 $253 $253,910 ======== ========== ========== =========
At June 30, 2003, the contractual maturities of securities HTM and securities AFS are as follows: (in thousands) Securities Securities HTM AFS ___________________ ______________________ Amortized Market Amortized Market Cost Value Cost Value ______________________ ______________________ Within 1 year $ 3,283 $ 3,305 $ 73,404 $ 73,312 After 1 but within 5 years 10,011 10,461 200,804 205,766 After 5 but within 10 years 7,640 8,238 8,969 9,137 After 10 years 3,807 4,162 26,535 28,034 Equity securities - - 3,955 3,955 _______ ________ ________ ________ Total $24,741 $ 26,166 $313,667 $320,204 ======= ======== ======== ========
Proceeds from the sale of securities AFS amounted to $13.0 million and $7.2 million for the six months ended June 30, 2003 and 2002, respectively, which resulted in gross realized gains of $478,000 and $261,000 for those periods, respectively. Gross realized losses from the sale of securities AFS amounted to $44,000 and $3,000 for the six months ended June 30, 2003 and 2002, respectively. These amounts are included in net gain on sale of securities in the Consolidated Statements of Income. Proceeds from the sale of securities HTM amounted to $2.0 million for the six months ended June 30, 2002, which resulted in realized gains of $23,000. The securities were either scheduled to mature within 3 months or were called before maturity. There were no sales of securities HTM for the six months ended June 30, 2003. During the first half of 2003, the Company realized gross losses resulting from an acceleration of premium amortization on certain collateralized mortgage obligations of $415 thousand. The acceleration of premium amortization was largely driven by the historically high mortgage prepayment speeds due to the low interest rate environment. Securities with carrying amounts of $51.4 million and $58.6 million at June 30, 2003 and December 31, 2002, respectively, were pledged for public deposits, Federal Home Loan Bank advances, securities sold under repurchase agreements and other purposes required by law. 9. Loans The composition of the loan portfolio is summarized as follows: (in thousands) ____________________ __________________ June 30, December 31, 2003 2002 ____________________ __________________ (unaudited) Amount of loans by type Real estate-mortgage Residential $269,281 $231,580 Commercial 318,316 222,628 Construction 29,783 11,359 ____________________ ___________________ 617,380 465,567 ____________________ ___________________ Commercial loans Commercial and financial 134,728 104,542 Lease financing 31,477 26,356 ____________________ ___________________ 166,205 130,898 ____________________ ___________________ Consumer loans Lease financing 14,313 15,969 Installment 7,186 3,207 ____________________ ___________________ 21,499 19,176 ____________________ ___________________ Total $805,084 $615,641 ==================== ================= Nonperforming loans include loans, which are accounted for on a nonaccrual basis and troubled debt restructurings. Nonperforming loans are as follows: (in thousands) _________________ ___________________ June 30, December 31, 2003 2002 _________________ ___________________ Nonaccrual loans Residential real estate $1,220 $495 Commercial real estate 834 1,780 Commercial and financial 2,040 1,300 Commercial lease financing 2,696 2,357 Consumer 45 31 _________________ ___________________ $6,835 $5,963 ================= ===================
10. Allowance for Loan and Lease Losses The Company's recorded investment in impaired loans is as follows: (in thousands) ____________________________ _____________________________ June 30, December 31, 2003 2002 ____________________________ _____________________________ (unaudited) Investment Related Investment Related in Allowance in Allowance Impaired for Loan Impaired for Loan Loans Losses Loans Losses _________ __________ ___________ ____________ Impaired Loans With a related allowance for loan losses Commercial and financial $ 982 $ 251 $ 1,104 $ 128 Commercial real estate 664 17 1,780 45 Without a related allowance for loan losses - - - - _________ __________ ___________ ____________ $1,646 $ 268 $2,884 $ 173 ========= ========== =========== ============ The impairment of the above loans was measured based on the fair value of collateral. Changes in the allowance for loan and lease losses are summarized as follows: (in thousands) (unaudited) ___________________________ _________________________ Three months ended June 30, Six months ended June 30, ___________________________ _________________________ 2003 2002 2003 2002 __________ ________ ______ ________ Balance at beginning of period $7,227 $6,299 $7,207 $6,569 Additions (deductions) Provision for loan and lease losses 530 255 795 480 Recoveries on loans previously charged off 3 40 5 46 Loans charged off (152) (164) (399) (665) Additions due to merger 1,929 - 1,929 - __________ ________ ______ _______ Balance at end of year $9,537 $6,430 $9,537 $6,430 ========== ======== ====== =======
11. Other Non-interest Expense (in thousands) Three months Six months ended June 30, ended June 30, 2003 2002 2003 2002 ____ ____ ____ ____ Professional fees $367 $263 $711 $487 Data processing 308 187 523 381
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The following discussion is an analysis of the consolidated financial condition and results of operations of the Company for the three and six month periods ended June 30, 2003 and 2002, and should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1 hereof. In addition, you should read this section in conjunction with Management's Discussion and Analysis and Results of Operations included in the Company's 2002 Annual Report on Form 10-K. On April 30, 2003 the Company completed its acquisition of Bridge View Bancorp ("Bridge View"). Accordingly the results of operations for the three and six month periods ending June 30, 2003 include the results of Bridge View from that date. Forward Looking Information In addition to discussing historical information, certain statements included in or incorporated into this report relating to the financial condition, results of operations and business of the Company which are not historical facts may be deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used herein, the words "anticipate," "believe," "estimate," "expect," "will" and other similar expressions (including when preceded or followed by the word "not") are generally intended to identify such forward-looking statements. Such statements are intended to be covered by the safe harbor provisions for forward-looking statements contained in such Act, and we are including this statement for purposes of invoking these safe harbor provisions. Such forward-looking statements include, but are not limited to, statements about the operations of the Company, the adequacy of the Company's allowance for losses associated with the loan and lease portfolio, the quality of the loan and lease portfolio, the prospects of continued loan and deposit growth, and improved credit quality. The forward-looking statements in this report involve certain estimates or assumptions, known and unknown risks and uncertainties, many of which are beyond the control of the Company, and reflect what we currently anticipate will happen in each case. What actually happens could differ materially from what we currently anticipate will happen due to a variety of factors, including, among others, (i) increased competitive pressures among financial services companies; (ii) changes in the interest rate environment, reducing interest margins or increasing interest rate risk; (iii) deterioration in general economic conditions, internationally, nationally, or in the State of New Jersey; (iv) the occurrence of acts of terrorism, such as the events of September 11, 2001, or acts of war; (v) legislation or regulatory requirements or changes adversely affecting the business of the Company; (vi) losses in the Company's leasing subsidiary exceeding management's expectations; (vii) the risk that the businesses of the Company and Bridge View will not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; (viii)expected revenue synergies from the Company's acquisition of Bridge View may not be fully realized or realized within the expected time frame; (ix) revenues following the Company's acquisition of Bridge View may be lower than expected; (x) deposit attrition, operating costs, customer loss and business disruption following the Company's acquisition of Bridge View, including, without limitation, difficulties in maintaining relationships with employees, may be greater than expected and (xi) other risks detailed in reports filed by the Company with the Securities and Exchange Commission. Readers should not place undue expectations on any forward-looking statements. We are not promising to make any public announcement when we consider forward-looking statements in this document to be no longer accurate, whether as a result of new information, what actually happens in the future or for any other reason. Company The Company is a bank holding company headquartered in Bergen County, New Jersey. The Company's principal operating subsidiary is Interchange Bank, a New Jersey-chartered commercial bank. In addition to the Bank, the Company has one other wholly owned direct subsidiary: Clover Leaf Mortgage Company, a New Jersey corporation, which is not currently engaged in any business activity. The Bank has five direct subsidiaries: Clover Leaf Investment Corporation, an investment company operating pursuant to New Jersey law; Clover Leaf Insurance Agency, Inc., a New Jersey corporation engaged in the sale of tax-deferred annuities and insurance; Clover Leaf Management Realty Corporation, a Real Estate Investment Trust ("REIT"), which manages certain real estate assets of the Company; Bridge View Investment Company, an investment company operating pursuant to New Jersey law; and Interchange Capital Company, L.L.C. ("ICC"), a New Jersey limited liability company which engages in equipment lease financing. All of the Bank's subsidiaries are 100% owned by the Bank, except for the REIT, which is 99% owned by the Bank. Bridge View Investment Company has one wholly owned subsidiary, Bridge View Delaware, Inc. ("BVDI"). BVDI is an investment company operating pursuant to Delaware law. Critical Accounting Policies and Judgments The Company's consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1 "Accounting Policies in the Notes to Consolidated Financial Statements and in the Management's Discussion and Analysis of Financial Condition and Results of Operations: Critical Accounting Policies and Judgements" in our 2002 Annual Report on Form 10-K. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect the Company's reported results and financial position for the period or in future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Assets and liabilities carried at fair value inherently result in more financial statement volatility. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments primarily by using internal cash flow and other financial modeling techniques. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on the Company's future financial condition and results of operations. Allowance for Loan and Lease Losses:The allowance for loan and lease losses ("ALLL") is established through periodic charges to income. Loan losses are charged against the ALLL when management believes that the future collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. If the ALLL is considered inadequate to absorb future loan losses on existing loans, based on, but not limited to, increases in the size of the loan portfolio, increases in charge-offs or changes in the risk characteristics of the loan portfolio, then the provision for loan and lease losses is increased. The Company considers the ALLL of $9.5 million adequate to cover estimated losses inherent in the loan portfolio, loan commitments and standby and other letters of credit that may become uncollectible based on management's evaluations of the size and current risk characteristics of the loan and lease portfolio as of the balance sheet date. The evaluations consider such factors as changes in the composition and volume of the loan portfolio, the impact of changing economic conditions on the credit worthiness of the borrowers, review of specific problem loans and management's assessment of the inherent risk and overall quality of the loan portfolio. Business Combinations: Business combinations are accounted using the purchase method of accounting, the net assets of the companies acquired are recorded at their estimated fair value at the date of acquisition and include the results of operations of the acquired business from the date of acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired is recognized as goodwill. Goodwill: With the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), on January 1, 2002, goodwill is no longer amortized to expense, but rather is tested for impairment periodically. Other intangible assets are amortized to expense using straight-line methods over their respective estimated useful lives. At least annually, management reviews goodwill and other intangible assets and evaluates events or changes in circumstances that may indicate impairment in the carrying amount of such assets. If the sum of the expected undiscounted future cash flows, excluding interest charges, is less than the carrying amount of the asset, an impairment loss is recognized. Impairment, if any, is measured on a discounted future cash flow basis. Goodwill is reviewed for impairment annually and on an interim basis when conditions require. If necessary an impairment charge is recognized in the period that goodwill has been deemed to be impaired. At the date of adoption, there was no unamortized goodwill. THREE MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002 RESULTS OF OPERATIONS Summary On April 30, 2003, the Company completed its acquisition of Bridge View. Accordingly the results of operations for the three and six month periods ending June 30, 2003 include the results of Bridge View from that date. The Company was able to fully integrate Bridge View, including the data processing function within 40 days of closing. Integrating Bridge View during the quarter did not result in a material economic benefit to the Company during the quarter. However, management believes that future periods should benefit from resulting cost savings. For the second quarter of 2003, the Company reported earnings per diluted common share of $0.35, an increase of 12.9% over the $0.31 reported in the same period in 2002. Net income for the three months ended June 30, 2003 was approximately $4.2 million, an increase of $1.1 million, or 36.6%, over the same period last year. The increase in earnings resulted from the acquisition of Bridge View during the quarter, a strong net interest margin ("margin") of 4.38% and an increase in non-interest income. The growth in revenues was partly offset by a $1.4 million, or 22.3%, increase in non-interest expense. This increase largely reflects the expenses associated with the acquisition of Bridge View during the quarter and normal increases in salaries, benefits and occupancy expenses. For the three months ended June 30, 2003, the Company's Return on Average Assets ("ROA") improved to 1.40% from 1.38%. Return on Average Equity ("ROE") was 14.03% a decline from 17.23% when compared to the same period last year. The main reason for the decline in ROE was due to an increase in stockholders' equity resulting from the related issuance of the Company's stock as a part of the merger consideration with Bridge View. Net Interest Income Net interest income is the most significant source of the Company's operating income. A portion of the Company's total interest income is derived from investments that are exempt from federal taxation. The amount of pretax income realized from those investments, due to the tax exemption, is less than the amount of pretax income realizable from comparable investments subject to federal taxation. For purposes of the following discussion, interest exempt from federal taxation has been restated to a fully tax-equivalent basis using the corporate federal tax rate of 34% for the three months and six months ended June 30, 2003 and 2002. This was accomplished by adjusting this income upward to make it equivalent to the level of taxable income required to earn the same amount after taxes. Net interest income on a tax-equivalent basis increased $2.0 million, or 20.5%, to $11.7 million for the quarter ended June 30, 2003 as compared to the same quarter in 2002. The increase in net interest income was due mostly to a 27.7% growth in interest earning assets. This interest earning asset growth was funded primarily by deposit liabilities, which grew 32.2% on average for the second quarter of 2003 as compared to the same quarter in 2002. The growth in interest earning assets and deposits were attributed to the Bridge View acquisition and the Company's internal growth. The Company's internal growth for interest earning assets and deposits were 8.0% and 10.2%, respectively. The margin, which decreased 26 basis points to 4.38% for the second quarter of 2003 as compared to the same quarter in 2002, partially offset the growth in interest earning assets. Interest income, on a tax-equivalent basis, totaled $15.3 million for the second quarter of 2003, an increase of $1.0 million, or 7.2%, as compared to the same quarter in 2002. The increase was mostly attributed to a $232.3 million, or 27.7%, growth in interest earning assets. The Bridge View acquisition contributed approximately $165 million in average interest earning assets during the current quarter. The growth in interest earning assets was the result of increases in average loans and average investments of $123.9 million and $78.9 million, respectively. The Bridge View acquisition contributed approximately $120 million and $28 million in average loans and average investments, respectively, during the current quarter. The increase in interest income was partly offset by a 110 basis point decline in interest earning asset yields for the second quarter of 2003 as compared to the same quarter in 2002. The decline in interest earning asset yields was largely attributed to a decrease in market interest rates. Interest expense, which totaled $3.6 million for the second quarter of 2003, decreased $972 thousand, or 21.3%, as compared to the same period in 2002. The decrease in interest expense was a byproduct of the decline in market interest rates, particularly short-term rates, during 2003. In addition, a beneficial shift in the composition of the Company's deposits, which is discussed further in the analysis of financial condition below, also had a favorable impact on the Company's interest expense. The improved deposit mix combined with lower short-term interest rates reduced the average rate paid on interest bearing liabilities by 102 basis points to 1.64% for the quarter ended June 30, 2003 as compared to the same period in 2002. The magnitude of the benefit derived from the decrease in rates paid on interest bearing liabilities was partially reduced by the positive growth of deposits. Interest bearing deposits grew on average $189.6 million, or 28.5%, for the second quarter of 2003 as compared to the same period in 2002. The Bridge View acquisition contributed approximately $122 million in average interest bearing deposits during the current quarter. ___________________________________________________________________________________________________________________________________ Analysis of Net Interest Income ___________________________________________________________________________________________________________________________________ for the quarter ended June 30, (dollars in thousands) 2003 2002
__________________________________ _________________________________ (unaudited) Average Average Average Average Balance Interest Rate Balance Interest Rate ____________ _________ ________ _________ _________ ________ Assets Interest earning assets: Loans (1) $732,516 $12,498 6.82 % $608,589 $11,377 7.48 % Taxable securities (4) 265,754 2,382 3.59 199,186 2,645 5.31 Tax-exempt securities (2) (4) 26,095 304 4.66 13,775 200 5.81 Interest earning deposits 3,846 9 0.94 - - - Federal funds sold 41,180 120 1.17 15,582 67 1.72 ___________ _________ _____ ________ ______ _____ Total interest-earning assets 1,069,391 15,313 5.73 837,132 14,289 6.83 _________ _______ Non-interest earning assets: Cash and due from banks 37,642 20,270 Allowance for loan and lease losses (8,606) (6,336) Other assets 97,085 38,454 __________ ________ Total assets $1,195,512 $889,520 ========== ======== Liabilities and stockholders' equity Interest-bearing liabilities Interest bearing deposits $855,189 3,416 1.60 $665,563 4,313 2.59 Borrowings 25,035 186 2.97 23,407 261 4.46 __________ ________ ____ ________ ______ _____ Total interest-bearing liabilities 880,224 3,602 1.64 688,970 4,574 2.66 ________ ______ Non-interest bearing liabilities Demand deposits 178,434 116,267 Other liabilities 17,462 13,124 __________ ________ Total liabilities (3) 1,076,120 818,361 Stockholders' equity 119,392 71,159 __________ ________ Total liabilities and stockholders' equity $1,195,512 $889,520 ========== ======== Net interest income (tax-equivalent basis) 11,711 4.09 9,715 4.17 Tax-equivalent basis adjustment (112) (88) ________ ______ Net interest income $11,599 $9,627 ======== ====== Net interest income as a percent of interest- earning assets (tax-equivalent basis) 4.38 % 4.64 % ____________________________________________________________________________________________________________________________________ (1) Nonaccrual loans and any related interest recorded have been included in computing the average rate earned on the loan portfolio. When applicable, tax exempt loans are computed on a fully taxable equivalent basis using the corporate federal tax rate of 34%. (2) Computed on a fully taxable equivalent basis using the corporate federal tax rate of 34%. (3) All deposits are in domestic bank offices. (4) The average balances are based on historical cost and do not reflect unrealized gains or losses.
Provision for Loan and Lease Losses The provision for loan and lease losses represents management's calculation of the amount necessary to bring the allowance for loan and lease losses ("ALLL") to a level that management considers adequate to reflect the risk of estimated losses inherent in the Company's loan portfolio as of the balance sheet date. A more detailed discussion of the evaluation of the ALLL can be found in the section titled "Critical Accounting Policies and Judgements: Allowance for Loan and Lease Losses" above. In the second quarter of 2003 and 2002, the Company's provision for loan and lease losses was $530 thousand and $255 thousand, respectively. The increase in the provision for loan and lease losses during the quarter was a result of an increase in commercial loans, certain nonperforming assets and the Bridge View merger. Non-interest Income For the quarter ended June 30, 2003, non-interest income totaled $2.6 million, an increase of $1.2 million, or 79%, as compared to the same period in 2002. The improvement in non-interest income was mostly due to increases in Bank Owned Life Insurance ("BOLI") income, "other" non-interest income and service charges on deposits of $560 thousand, $264 thousand and $259 thousand, respectively. The increase in BOLI income was due to a claim on insurance policies, which amounted to $499 thousand. The growth in service charges on deposits and "other" non-interest income was mostly due to the acquisition of Bridge View. Contributing to the growth in non-interest income was an increase in net gains from the sale of loans of $139 thousand. The increase in net gains from the sale of loans was due to income of $120 thousand realized from the sale of conforming 20 and 30 year residential mortgages through the Mortgage Partnership Finance ("MPF") program with the Federal Home Loan Bank of New York. Excluding the BOLI claim and Bridge View's non-interest income contribution, non-interest income increased $369 thousand, or 25.0%, for the second quarter of 2003 as compared to the same period last year. During the quarter, the Company recognized net gains on the sale of securities of $19 thousand as compared to $94 thousand for the same period in 2002. The net gains for 2003 were a result of a combination of net realized gains from security sales of $434 thousand and gross losses resulting from an acceleration of premium amortization on certain collateralized mortgage obligations of $415 thousand. The acceleration of premium amortization was largely driven by the historically high mortgage prepayment speeds due to the low interest rate environment. Non-interest Expense For the quarter ended June 30, 2003, non-interest expense increased $1.4 million to $7.7 million, an increase of 22.3% when compared to the same period one year ago. The increase was due largely to the additional operating costs resulting from the merger with Bridge View. Also contributing to the increase were normal increases related to salaries, benefits and occupancy expense. In addition, the Company incurred direct integration expenses of approximately $357 thousand associated with the Bridge View merger, which included expenses associated with data processing, customer notifications and advertising, and salaries. Income Taxes Income tax expense as a percentage of pre-tax income was 30.4% for the three months ended June 30, 2003 as compared to 32.7% for the second quarter of 2002. SIX MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002 RESULTS OF OPERATIONS Summary For the first six months of 2003, the Company reported net income of $7.5 million, or $0.69 diluted earnings per common share, as compared with $6.0 million, or $0.60 diluted earnings per common share for the same period last year. The increase in earnings was driven largely by growth in net interest income on a taxable equivalent basis, which increased $2.8 million, or 14.8%. The improvement in net interest income was attributable to the acquisition of Bridge View along with a strong growth in deposits from the Company's original eighteen branches that fueled additional growth in interest earning assets. In addition, non-interest income, which increased $1.5 million, or 47.7%, over the same period last year also contributed to the improvement in earnings. The growth in revenues was partly offset by a $1.8 million, or 14.5% increase in non-interest expense. For the six months ended June 30, 2003, ROA improved to 1.41% from 1.38% and ROE decreased to 14.97% from 17.10% when compared to the same period last year. The main reason for the decline in ROE was due to an increase in stockholders' equity resulting from the related issuance of the Company's stock as a part of the merger consideration with Bridge View. Net Interest Income Net interest income on a tax-equivalent basis increased $2.8 million, or 14.8%, to $21.7 million for the six months ended June 30, 2003 as compared to the same period in 2002. The increase in net interest income was due mostly to a 19.3% growth in interest earning assets. This interest earning asset growth was funded primarily by deposit liabilities, which grew 21.8% on average for the first six months of 2003 as compared to the same period in 2002. The growth in interest earning assets and deposits were primarily attributed to the Bridge View acquisition. The margin, which decreased 17 basis points to 4.44% for the first six months of 2003 as compared to the same period in 2002, partially offset the growth in interest earning assets. Interest income, on a tax-equivalent basis, totaled $28.9 million for the first six months of 2003, an increase of $749 thousand, or 2.7%, as compared to the same period in 2002. The increase was mostly attributed to a $158.0 million, or 19.3%, growth in interest earning assets. The Bridge View acquisition contributed approximately $83 million in average interest earning assets for 2003. The growth in interest earning assets was the result of increases in average loans and average investments of $73.6 million and $63.0 million, respectively. The Bridge View acquisition contributed approximately $60 million and $14 million in average loans and average investments, respectively, for 2003. The increase in interest income was partly offset by a 96 basis point decline in interest earning asset yields for the first six months of 2003 as compared to the same period in 2002. The decline in interest earning asset yields was largely attributed to a decrease in market interest rates. Interest expense, which totaled $7.2 million for the first six months of 2003, decreased $2.1 million, or 22.2%, as compared to the same period in 2002. The decrease in interest expense was a byproduct of the decline in interest rates, particularly short-term rates, during 2003. In addition, a beneficial shift in the composition of the Company's deposits, which is discussed further in the analysis of financial condition below, also had a favorable impact on the Company's interest expense. The improved deposit mix combined with lower short-term interest rates reduced the average rate paid on interest bearing liabilities by 96 basis points to 1.79% for the six months ended June 30, 2003 as compared to the same period in 2002. The magnitude of the benefit derived from the decrease in rates paid on interest bearing liabilities was partially reduced by the positive growth of deposits. Interest bearing deposits grew on average $131.8 million, or 20.3%, for the first six months of 2003 as compared to the same period in 2002. The Bridge View acquisition contributed approximately $61 million in average interest bearing deposits for 2003. Analysis of Net Interest Income _________________________________________________________________________________________________________________________________ for the six months ended June 30, (dollars in thousands) 2003 2002 ________________________________________________________________________________ (unaudited) Average Average Average Average Balance Interest Rate Balance Interest Rate ___________ ________ _______ ________ _________ _______ Assets Interest earning assets Loans (1) $673,735 $23,395 6.94 % $600,178 $22,431 7.47 % Taxable securities (4) 240,454 4,721 3.93 191,606 5,196 5.42 Tax-exempt securities (2) (4) 26,770 551 4.12 12,577 376 5.98 Interest earning deposits 4,088 21 1.03 - - - Federal funds sold 31,436 184 1.17 14,133 120 1.70 ___________ ________ _______ _________ Total interest-earning assets 976,483 28,872 5.91 818,494 28,123 6.87 ________ _________ Non-interest earning assets Cash and due from banks 29,947 20,659 Allowance for loan and lease losses (7,910) (6,451) Other assets 72,658 37,666 ___________ ________ Total assets $1,071,178 $870,368 =========== ======== Liabilities and stockholders' equity Interest-bearing liabilities Interest bearing deposits $780,986 6,823 1.75 $649,221 8,697 2.68 Borrowings 25,629 377 2.94 24,637 553 4.49 ___________ ________ _______ _________ Total interest-bearing liabilities 806,615 7,200 1.79 673,858 9,250 2.75 ________ _________ Non-interest bearing liabilities Demand deposits 148,771 114,213 Other liabilities 15,006 12,080 __________ _______ Total liabilities (3) 970,392 800,150 Stockholders' equity 100,786 70,218 __________ _______ Total liabilities and stockholders' equity $1,071,178 $870,368 ========== ======= Net interest income (tax-equivalent basis) 21,672 4.12 18,873 4.12 Tax-equivalent basis adjustment (220) (178) ________ _________ Net interest income $21,452 $18,695 ======== ========= Net interest income as a percent of interest-earning assets (tax-equivalent basis) 4.44 % 4.61 % __________________________________________________________________________________________________________________________________ (1)Nonaccrual loans and any related interest recorded have been included in computing the average rate earned on the loan portfolio. when applicable, tax exempt loans are computed on a fully taxable equivalent basis. (2)Computed on a fully taxable equivalent basis using the corporate federal tax rate of 34%. (3)All deposits are in domestic bank offices. (4)The average balances are based on historical cost and do not reflect unrealized gains or losses.
Provision for Loan and Lease Losses For the six months ended June 30, 2003 and 2002, the Company's provision for loan and lease losses was $795 thousand and $480 thousand, respectively. A more detailed discussion of the evaluation of the ALLL can be found in the section titled "Critical Accounting Policies and Judgements: Allowance for Loan and Lease Losses" above. The increase in the provision for loan and lease losses during the six months was a result of an increase in commercial loans, certain nonperforming assets and the Bridge View merger. Non-interest Income For the six months ended June 30, 2003, non-interest income grew to $4.5 million, an increase of $1.5 million, or 47.7%, as compared to the six months ended June 30, 2003. The improvement in non-interest income was largely due to increases in BOLI income, "other" non-interest income and net gains from the sale of loans of $617 thousand, $309 thousand and $307 thousand, respectively. The increase in BOLI income was largely due to a claim on an insured, which amounted to $499 thousand. The increase in net gains from the sale of loans was due to income of $257 thousand realized from the sale of conforming 20 and 30 year residential mortgages through the MPF program with the Federal Home Loan Bank of New York. Contributing to the improvement in non-interest income was increases in service charges on deposits and commissions on the sale of mutual funds and annuities of $298 thousand and $181 thousand, respectively. The growth in service charges on deposits and "other" non-interest income were largely due to the acquisition of Bridge View. During the six months ended June 30, 2003, the Company recognized net gains on the sale of securities of $19 thousand as compared to $281 thousand for the same period in 2002. The net gains for 2003 were a result of a combination of net realized gains from security sales of $434 thousand and gross losses resulting from an acceleration of premium amortization on certain collateralized mortgage obligations of $415 thousand. The acceleration of premium amortization was largely driven by the historically high mortgage prepayment speeds due to the low interest rate environment. Non-interest Expense For the six months ended June 30, 2003, non-interest expense totaled $14.2 million, an increase of $1.8 million, or 14.5%, as compared to the same period in 2002. The increase was due largely to the additional operating costs resulting from the merger with Bridge View. Also contributing to the increase were normal increases related to salaries, benefits and occupancy expense. In addition, the Company incurred direct integration expenses of approximately $357 thousand associated with the Bridge View merger, which included expenses associated with data processing, customer notifications and advertising, and salaries. Income Taxes Income tax expense as a percentage of pre-tax income was 30.9% for the six months ended June 30, 2003 as compared to 32.0% for the same period of 2002. FINANCIAL CONDITION The Company's consolidated balance sheet as of June 30, 2003 includes the assets and liabilities of the former Bridge View, which were recorded at their respective fair values as of April 30, 2003. Based on the fair values, the Company recorded purchase accounting adjustments related to: loans of $1.6 million; securities of $376 thousand; other assets of $1.9 million; other liabilities of $2.5 million; core deposit intangibles of $4.3 million and goodwill of $53.7 million. The Company's total assets were $1.3 billion at June 30, 2003, which represents an increase of $375.8 million, or 40.1%, from $936.3 million at December 31, 2002. The growth was largely attributable to the acquisition of Bridge View on April 30, 2003 with total assets of approximately $278 million and loans and deposits of approximately $185 million and $259 million, respectively, without giving effect for any purchase accounting adjustments. Cash and Cash Equivalents At June 30, 2003, cash and cash equivalents increased $21.7 million to $55.6 million as compared to December 31, 2002. This was primarily attributed to the Bridge View merger and the result of investing activities (funding loans and investment growth) investing cash less rapidly than financing activities (reflecting principally deposit growth less repayments of borrowings) and operating activities (reflecting net income and changes in other assets) could generate it. This can be seen more completely on the accompanying unaudited Statements of Cash Flows. Securities Portfolio Under Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), each security is classified as either trading, available for sale ("AFS"), or held to maturity ("HTM"). The Company has no securities held in a trading account. The securities AFS are recorded at their fair value. The after-tax difference between amortized cost and fair value of securities AFS is recorded as "accumulated other comprehensive income" in the equity section of the balance sheet. The tax impact of such adjustment is recorded as an adjustment to the amount of the deferred tax liability. The securities HTM are carried at cost adjusted for the amortization of premiums and accretion of discounts, which are recognized as an adjustment to income. Under SFAS No. 115, securities HTM, with some exceptions, may only be sold within three months of maturity. The Company uses its securities portfolio to ensure liquidity for cash flow requirements, to manage interest rate risk, to provide a source of income, to ensure collateral is available for pledging requirements and to manage asset quality diversification. At June 30, 2003, investment securities totaled $344.9 million and represented 26.3% of total assets, as compared to $252.5 million and 27.0%, respectively, at December 31, 2002. Securities AFS comprised 92.8% of the total securities portfolio at June 30, 2003 as compared to 88.8% at December 31, 2002. During 2003, the Company sold securities with a book value of approximately $13.0 million and recognized $478 thousand in gross gains and $44 thousand in gross losses. During the first half of 2003, the Company realized gross losses resulting from an acceleration of premium amortization on certain collateralized mortgage obligations of $415 thousand. The acceleration of premium amortization was largely driven by the historically high mortgage prepayment speeds due to the low interest rate environment. The following table reflects the composition of the securities portfolio: (dollars in thousands) _____________________________________________ June 30, 2003 _____________________________________________ (unaudited) Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value __________ __________ __________ __________ Securities HTM Mortgage-backed securities $13,405 $329 $ - $ 13,734 Obligations of U.S. agencies 1,998 15 - 2,013 Obligations of states & political subdivisions 9,238 1,081 - 10,319 Other debt securities 100 - - 100 __________ _________ __________ ___________ 24,741 1,425 - 26,166 __________ _________ __________ ___________ Securities AFS Obligations of U.S. Treasury $41,174 $10 $ - $ 41,184 Mortgage-backed securities 88,985 1,102 552 89,535 Obligations of U.S. agencies 145,244 4,506 47 149,703 Obligations of states & political subdivisions 34,309 1,520 2 35,827 Equity securities 3,955 - - 3,955 __________ _________ __________ ___________ 313,667 7,138 601 320,204 __________ _________ __________ ___________ Total securities $338,408 $8,563 $601 $346,370 ========== ========= ========== =========== ______________________________________________ December 31, 2002 ______________________________________________ Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ________ __________ __________ _________ Securities HTM Mortgage-backed securities $16,437 $667 $ - $ 17,104 Obligations of U.S. agencies 1,991 68 - 2,059 Obligations of states & political subdivisions 9,664 663 - 10,327 Other debt securities 100 - - 100 ________ __________ __________ _________ 28,192 1,399 - 29,590 ________ __________ __________ _________ Securities AFS Mortgage-backed securities 101,028 1,778 201 102,605 Obligations of U.S. agencies 91,577 3,982 - 95,559 Obligations of states & political subdivisions 21,382 889 52 22,219 Equity securities 3,937 - - 3,937 ________ __________ __________ _________ 217,924 6,649 253 224,320 ________ __________ __________ _________ Total securities $246,116 $8,047 $253 $253,910 ======== ========== ========== =========
At June 30, 2003, the contractual maturities of securities HTM and securities AFS are as follows: (dollars in thousands)(unaudited) Securities Securities HTM AFS ___________________ ______________________ Amortized Market Amortized Market Cost Value Cost Value ______________________ ______________________ Within 1 year $ 3,283 $ 3,305 $ 73,404 $ 73,312 After 1 but within 5 years 10,011 10,461 200,804 205,766 After 5 but within 10 years 7,640 8,238 8,969 9,137 After 10 years 3,807 4,162 26,535 28,034 Equity securities - - 3,955 3,955 _______ ________ _________ ________ Total $24,741 $ 26,166 $313,667 $320,204 ======= ======== ========= ======== Loans Total loans amounted to $805.1 million at June 30, 2003, an increase of $189.4 million from $615.6 million at December 31, 2002. The growth was primarily attributed to the Bridge View acquisition, which contributed approximately $123 million and $56 million in commercial and residential loans, respectively, at June 30, 2003. The increase in loans occurred mostly in commercial mortgage loans and commercial loans, which increased $95.7 million and $35.3 million, respectively.
The following table reflects the composition of the loan and lease portfolio: (dollars in thousands) ____________________ __________________ June 30, December 31, 2003 2002 ____________________ __________________ (unaudited) Amount of loans by type Real estate-mortgage 1-4 family residential First liens $115,039 $100,302 Junior liens 5,198 6,241 Home equity 149,044 125,037 Commercial 318,316 222,628 Construction 29,783 11,359 ___________________ __________________ 617,380 465,567 ___________________ __________________ Commercial loans Commercial and financial 134,728 104,542 Lease financing 31,477 26,356 ___________________ __________________ 166,205 130,898 ___________________ __________________ Consumer loans Lease financing 14,313 15,969 Installment 7,186 3,207 ___________________ __________________ 21,499 19,176 ___________________ __________________ Total $805,084 $615,641 ==================== ===================
Nonperforming Assets Nonperforming assets are comprised of nonaccrual loans, restructured loans, foreclosed real estate and other repossessed assets. With the completion of the Bridge View merger, the Company's, nonperforming assets at June 30, 2003 amounted to $7.0 million, an increase of $865 thousand, or 14.1%, from $6.1 million at December 31, 2002. The ratio of nonperforming assets to total loans and foreclosed real estate decreased to 0.87% at June 30, 2003 from 1.00% at December 31, 2002. The following table lists nonaccrual loans, restructured loans and foreclosed real estate and other repossessed assets at June 30, 2003, and December 31, 2002: (dollars in thousands) _________________ __________________ June 30, December 31, 2003 2002 _________________ __________________ (unaudited) Nonperforming loans $6,832 $5,963 Foreclosed real estate and other repossessed assets 172 176 _________________ __________________ Total nonperforming assets $7,004 $6,139 ================== ==================
Allowance for Loan and Lease Losses The ALLL is generally established through periodic charges to income. During the quarter, the ALLL also increased by approximately $1.9 million, which was the amount that Bridge View had on its statement of financial condition on April 30, 2003. Loan losses are charged against the ALLL when management believes that the probable future collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. If the ALLL is considered inadequate to absorb future loan losses on existing loans, based on, but not limited to, increases in the size of the loan portfolio, increases in charge-offs or changes in the risk characteristics of the loan portfolio, then the provision for loan and lease losses is increased. The Company considers the ALLL of $9.5 million adequate to cover estimated losses inherent in the loan portfolio that may become uncollectible based on management's evaluations of the size and current risk characteristics of the loan and lease portfolio as of the balance sheet date. The evaluations consider such factors as changes in the composition and volume of the loan portfolio, the impact of changing economic conditions on the credit worthiness of the borrowers, review of specific problem loans and management's assessment of the inherent risk and overall quality of the loan portfolio. The following table presents the provisions for loan and lease losses, loans charged off and recoveries on loans previously charged off, the amount of the allowance, the average loans outstanding and certain pertinent ratios for the three and six months ended June 30, 2003 and 2002: (dollars in thousands)(unaudited) _____________________________ _____________________ Three months ended Six months ended June 30, June 30, ____________________________ _____________________ 2003 2002 2003 2002 _________ __________ ________ _________ Average loans outstanding $732,516 $608,589 $673,735 $600,178 ========= ========== ======== ========= Allowance at beginning of period 7,227 6,299 7,207 6,569 _________ __________ _________ _________ Loans charged off Real estate - - - - Commercial and financial - 9 25 9 Commercial lease financing 147 155 355 634 Consumer loans 5 - 19 22 _________ __________ _________ _________ Total 152 164 399 665 _________ __________ _________ _________ Recoveries of loans previously charged off Real estate - 28 - 28 Commercial and financial - - - - Commercial lease financing 1 3 2 8 Consumer loans 2 9 3 10 _________ __________ _________ _________ Total 3 40 5 46 _________ __________ _________ _________ Additions due to merger 1,929 - 1,929 - Provision for loan and lease losses 530 255 795 480 _________ __________ _________ _________ Allowance at end of period $9,537 $6,430 $9,537 $6,430 ========= ========== ========= ========= Allowance to total loans (end of period) 1.18 % 1.07 % Ratio of net charge-offs to average loans (annualized) 0.08 % 0.08 % 0.12 % 0.21
Deposits Deposits, which include non-interest-bearing demand deposits, time deposits and other interest-bearing deposits are an essential and cost-effective funding source for the Company. The Company attributes its success in growing deposits to the emphasis it places on building core customer relationships by offering a variety of products designed to meet the financial needs of its customers based on their identifiable "life stages". At June 30, 2003, total deposits increased $321 million, or 39.4%, to $1.1 billion from $815.7 million at December 31, 2002. Deposit growth was mainly a function of the Bridge View merger, excluding the deposits held at former Bridge View branches on June 30, 2003, the Company's deposits grew $73.4 million or 9.0% as compared to December 31, 2002. The growth in deposits occurred mostly in other interest-bearing deposits, non-interest bearing demand deposits, and time deposits, which increased $169.2 million, $93.8 million and $58.2 million, respectively, at June 30, 2003 as compared to December 31, 2002. Other interest-bearing deposits, which include interest-bearing demand, money market and savings accounts, comprise the largest segment of the Company's total deposits. At June 30, 2003, such deposits amounted to $628.8 million representing 55.3% of total deposits compared to 56.4% of total deposits at December 31, 2002. The growth in other interest-bearing deposits occurred largely in interest bearing checking, which increased $78.4 million, or 24.2%, for June 30, 2003 as compared to December 31, 2002. Time deposits amounted to $295.6 million at June 30, 2003, an increase of $58.2 million, or 24.5%, from December 31, 2002. Total time deposits represented 26.0% of total deposits at June 30, 2003 compared to 29.0% at December 31, 2002. For the three and six months ended June 30, 2003, the Company's overall yield on deposits declined by 89 basis points to 1.32% and 81 basis points to 1.47%, respectively, as compared to the same periods last year. The decrease was attributed predominately to changes in market interest rates and a change in the composition of deposit liabilities. The following table reflects the composition of deposit liabilities: (dollars in thousands) ___________ _____________ June 30, December 31, 2003 2002 (unaudited) ___________ _____________ Non-interest Demand $212,395 $118,578 Interest Bearing Demand 402,409 323,998 Savings 122,314 80,300 Money Market Savings 104,116 55,372 Time Deposits <$100,000 265,856 210,727 Time Deposits >$100,000 29,736 26,697 __________ ____________ Total $1,136,826 $815,672 ========== ============
Item 3: Quantitative and Qualitative Disclosures About Market Risk Market risk is generally described as the sensitivity of income to adverse changes in interest rates, foreign currency exchange rates, commodity prices, and other relevant market rates or prices. Market rate sensitive instruments include: financial instruments such as investments, loans, mortgage-backed securities, deposits, borrowings and other debt obligations; derivative financial instruments, such as futures, forwards, swaps and options; and derivative commodity instruments, such as commodity futures, forwards, swaps and options that are permitted to be settled in cash or another financial instrument. The Company does not have any material exposure to foreign currency exchange rate risk or commodity price risk. The Company did not enter into any market rate sensitive instruments for trading purposes nor did it engage in any trading or hedging transactions utilizing derivative financial instruments during the first six months of 2003. The Company's real estate loan portfolio, concentrated primarily in northern New Jersey, is subject to risks associated with the local and regional economies. The Company's primary source of market risk exposure arises from changes in market interest rates ("interest rate risk"). Interest Rate Risk Interest rate risk is generally described as the exposure to potentially adverse changes in current and future net interest income resulting from: fluctuations in interest rates; product spreads; and imbalances in the repricing opportunities of interest-rate-sensitive assets and liabilities. Therefore, managing the Company's interest rate sensitivity is a primary objective of the Company's senior management. The Company's Asset/Liability Committee ("ALCO") is responsible for managing the exposure to changes in market interest rates. ALCO attempts to maintain stable net interest margins by periodically evaluating the relationship between interest-rate-sensitive assets and liabilities. The evaluation, which is performed at least quarterly and presented to the Board, attempts to determine the impact on net interest margin from current and prospective changes in market interest rates. The Company manages interest rate risk exposure with the utilization of financial modeling and simulation techniques. These methods assist the Company in determining the effects of market rate changes on net interest income and future economic value of equity. The objective of the Company is to maximize net interest income within acceptable levels of risk established by policy. The techniques utilized for managing exposure to market rate changes involve a variety of interest rate, pricing and volume assumptions. These assumptions include projections on growth, prepayment and withdrawal levels as well as other embedded options inherently found in financial instruments. The Company reviews and validates these assumptions at least annually or more frequently if economic or other conditions change. At June 30, 2003, the Company simulated the effects on net interest income given an instantaneous and parallel shift in the yield curve of up to a 200 basis point rising interest rate environment and a 100 basis point declining interest rate environment. Based on that simulation, it was estimated that net interest income, over a twelve-month horizon, would not decrease by more than 7%. At June 30, 2003, the Company was within policy limits established by the board of directors for changes in net interest income and future economic value of equity. The following table illustrates the effects on net interest income given an instantaneous and parallel shift in the yield curve of up to a 200 basis point rising interest rate environment and a 100 basis point declining interest rate environment: Net Interest Income Sensitivity Simulation Percentage Change in Estimated Net Interest Income over a twelve month horizon _______________________________________________ June 30, 2003 2002 ________________ ____________________ +200 basis points -1.3 % -7.3 % +100 basis points 0.7 % -1.9 % - -100 basis points -6.7 % -0.7 % - -200 basis points * -2.1 % * Not simulated due to the historically low interest rate environment.
The simulation described above does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape; prepayments on loans and securities; deposit decay rates; pricing decisions on loans and deposits; reinvestment/replacement of asset and liability cashflows; and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change. Further, as market conditions vary from those assumed in the simulation, actual results will also differ due to: prepayment/refinancing levels deviating from those assumed; the varying impact of interest rate changes on caps or floors on adjustable rate assets; the potential effect of changing debt service levels on customers with adjustable rate loans; depositor early withdrawals and product preference changes; and other internal/external variables. Furthermore, the simulation does not reflect actions that ALCO might take in response to anticipated changes in interest rates or competitive conditions in the market place. In addition to the above-mentioned techniques, the Company utilizes sensitivity gap analysis as an interest rate risk measurement. Sensitivity gap is determined by analyzing the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest bearing liabilities maturing or repricing within that same period of time. Sensitivity gap analysis provides an indication of the extent to which the Company's net interest income may be affected by future changes in market interest rates. The cumulative gap position expressed as a percentage of total assets provides one relative measure of the Company's interest rate exposure. The cumulative gap between the Company's interest-rate-sensitive assets and its interest-rate-sensitive liabilities repricing within a one-year period was a negative 8.4% at June 30, 2003. Since the cumulative gap was negative, the Company has a "negative gap" position, which theoretically will cause its assets to reprice more slowly than its deposit liabilities. In a declining interest rate environment, interest costs may be expected to fall faster than the interest received on earning assets, thus increasing the net interest spread. If interest rates increase, a negative gap means that the interest received on earning assets may be expected to increase more slowly than the interest paid on the Company's liabilities therefore decreasing the net interest spread. Capital Adequacy The Company is subject to capital adequacy requirements imposed by the Board of Governors of the Federal Reserve System (the "Federal Reserve"); and the Bank is subject to similar capital adequacy requirements imposed by the Federal Deposit Insurance Corporation (the "FDIC"). The Federal Reserve and the FDIC have adopted risk-based capital requirements for assessing bank holding company and bank capital adequacy. These standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate relative risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. A banking organization's total qualifying capital includes two components: core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core capital, which must comprise at least half of total capital, includes common shareholders' equity, qualifying perpetual preferred stock, trust preferred securities (subject to certain limitations) and minority interests, less goodwill and any unrealized gains or losses. Supplementary capital includes the allowance for loan losses (subject to certain limitations), other perpetual preferred stock, trust preferred securities that exceed Tier 1 limits, certain other capital instruments and term subordinated debt. Total capital is the sum of core and supplementary capital. At June 30, 2003, the minimum risk-based capital requirements to be considered adequately capitalized were 4% for Tier 1 capital and 8% for total capital. Federal banking regulators have also adopted leverage capital guidelines to supplement the risk-based measures. The leverage ratio is determined by dividing Tier 1 capital as defined under the risk-based guidelines by average total assets (non risk-adjusted) for the preceding quarter. At June 30, 2003, the minimum leverage ratio requirement to be considered adequately capitalized was 3%. The capital levels of the Company and the Bank at June 30, 2003, and the two highest capital adequacy levels recognized under the guidelines established by the federal banking agencies are included in the following table. The Company's and the Bank's ratios all exceeded the well-capitalized guidelines shown in the table. The Company's and the Bank's capital amounts and ratios are as follows: (dollars in thousands) To Be "Well Capitalized" Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions _______________________ _________________________ ______________________ Amount Ratio Amount Ratio Amount Ratio __________ ____________ ____________ __________ __________ __________ As of June 30, 2003 (unaudited): Total Capital (to Risk Weighted Assets): The Company $85,542 10.03 % $68,226 8.00 % N/A N/A The Bank 85,874 10.06 68,267 8.00 $85,334 10.00 % Tier 1 Capital (to Risk Weighted Assets): The Company 76,005 8.91 34,113 4.00 N/A N/A The Bank 76,267 8.94 34,134 4.00 51,201 6.00 Tier 1 Capital (to Average Assets): The Company 76,005 6.65 34,290 3.00 N/A N/A The Bank 76,267 6.59 34,702 3.00 57,836 5.00 As of December 31, 2002: Total Capital (to Risk Weighted Assets): The Company $82,658 13.33 % $49,619 8.00 % N/A N/A The Bank 80,813 13.00 49,714 8.00 $62,143 10.00 % Tier 1 Capital (to Risk Weighted Assets): The Company 75,451 12.16 24,809 4.00 N/A N/A The Bank 73,606 11.84 24,857 4.00 37,286 6.00 Tier 1 Capital (to Average Assets): The Company 75,451 8.12 27,864 3.00 N/A N/A The Bank 73,606 7.92 27,868 3.00 46,446 5.00
Liquidity Liquidity is the ability to provide sufficient resources to meet all current financial obligations and finance prospective business opportunities. The Company's liquidity position over any given period of time is a product of its operating, financing and investing activities. The extent of such activities is often shaped by such external factors as competition for deposits and demand for loans. Financing for the Company's loans and investments is derived primarily from deposits, along with interest and principal payments on loans and investments. At June 30, 2003, total deposits amounted to $1.1 billion, an increase of $321 million, or 39.4%, from December 31, 2002. In addition, the Company supplemented the more traditional funding sources with borrowings from the Federal Home Loan Bank of New York ("FHLB") and with securities sold under agreements to repurchase ("REPOS"). At June 30, 2003, advances from the FHLB and REPOS amounted to $10.0 million and $11.4 million, respectively, as compared to $10.0 million and $17.4 million, respectively, at December 31, 2002. Net loans at June 30, 2003 amounted to $795.5 million, an increase of $187 million, from $608.4 million at December 31, 2002. The Company's most liquid assets are cash and cash equivalents. At June 30, 2003, the total of such assets amounted to $55.6 million, or 4.2%, of total assets, compared to $33.9 million, or 3.6%, of total assets at December 31, 2002. The increase in cash and cash equivalents was due largely to deposit growth and loan prepayments, which produced funds that were placed in federal funds sold pending investment in loans and securities. Another significant liquidity source is the Company's securities AFS. At June 30, 2003 securities AFS amounted to $320.2 million, or 93%, of total securities, compared to $224.3 million, or 89%, of total securities at December 31, 2002. In addition to the aforementioned sources of liquidity, the Company has available various other sources of liquidity, including federal funds purchased from other banks and the Federal Reserve discount window. The Bank also has a $86.3 million line of credit available through its membership in the FHLB. The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These instruments, which include commitments to extend credit and standby letters of credit, involve, to a varying degree, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statement of condition. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require collateral from the borrower if deemed necessary by the Company. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions. Commitments to extend credit and standby letters of credit are not recorded on the Company's consolidated balance sheet until the instrument is exercised. At June 30, 2003 outstanding commitments to fund loans totaled $176 million and outstanding standby letters of credit totaled $2 million. The Company historically paid quarterly cash dividends and anticipates continuing that paying quarterly dividend in the future. The Company could, if necessary, modify the amount or frequency, of dividends as an additional source of liquidity. There are imposed dividend restrictions on the Bank, which are described in Note 17 "Restrictions of Subsidiary Bank Dividends in the Notes to Consolidated Financial Statements" in the Company's 2002 Annual Report on Form 10-K. Management believes that the Company has sufficient cash flow and borrowing capacity to fund all outstanding commitments and letters of credit and to maintain proper levels of liquidity. Item 4. Controls and Procedures In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), as of the end of the quarter ended June 30, 2003, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective. The Company maintains internal control over financial reporting. During the quarter ended June 30, 2003, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION Item 1. Legal Proceedings Reference is also made to Note 4 of the Company's Consolidated Financial Statements in this Form 10-Q. Item 2. Change in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders (a) The company held its Annual Meeting of Shareholders on April 24, 2003. (b) Each of the persons nominated for director was elected; the issuance of shares of the Company's common stock in connection with the Company's acquisition of Bridge View Bancorp was approved; and the selection of Deloitte & Touche LLP as the Company's independent auditors for 2003 was ratified. The following are the voting results on each of these matters: Against Or For Withheld Abstentions ___ _________ ___________ (1) ELECTION OF DIRECTORS Donald L. Correll 8,242,415 11,056 0 James E. Healey 8,243,107 10,364 0 Jeremiah F. O'Connor 8,123,599 129,872 0 Robert P. Rittereiser 8,242,804 10,667 0 (2) Approve the issuance of shares of the Company's common stock in connection with the Company's acquisition of Bridge View Bancorp. 6,020,885 2,224,487 8,099 (3) Ratification of the selection of Deloitte & Touche LLP as the Company's independent Auditors for 2003. 8,213,608 30,745 9,118 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are furnished herewith: Exhibit. ________ 11 Statement re computation of per share earnings 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certifications Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (b) Reports on Form 8-K During the quarter ended June 30, 2003, the Company filed the following Current Report on Form 8-K: Form 8-K filed April 24, 2003, reporting earnings for the first quarter period ending March 31, 2003. Form 8-K filed May 2, 2003, announcing the Company had completed its acquisition of Bridge View Bancorp. Form 8-K filed May 15, 2003, announcing the Company had consummated its previously announced acquisition of Bridge View Bancorp. Form 8-K/A filed May 16, 2003,amending Exhibit 23.11 to the Form 8-K previously filed on May 15, 2003. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Interchange Financial Services Corporation By: /s/ Charles T. Field ______________________________________ Senior Vice President & CFO (Duly Authorized Officer and Principal Financial and Accounting Officer) Dated: August 14, 2003 EX-11 3 ex11.txt JUNE 30, 2003 Exhibit 11. Computation Re: Earnings Per Share (dollars in thousands, except per share amounts)(unaudited) _________________________________________________ ____________________________________________________ Three Months Ended, Six Months Ended, _________________________________________________ ____________________________________________________ June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002 __________________________ _____________________ _______________________ ___________________________ Weighted Per Weighted Per Weighted Per Weighted Per Average Share Average Share Average Share Average Share Income Shares Amount Income Shares Amount Income Shares Amount Income Shares Amount _______ _________ ________ ______ ________ ______ _______ ________ _______ _________ ________ _______ Basic Earnings per Common Share Income available to common shareholder $4,187 11,818 $0.35 $3,065 9,818 $0.31 $7,543 10,829 $0.70 $6,005 9,797 $0.61 ======= ====== ====== ===== Effect of Dilutive Shares Options issued to management 178 176 158 132 _______ ________ ________ ______ Diluted Earnings per Common Share $4,187 11,996 $0.35 $3,065 9,994 $0.31 $7,543 10,987 $0.69 $6,005 9,929 $0.60 ======= ========== ======= ====== ======== ===== ======= ======== ====== ========= ======= =====
EX-31 4 ex311.txt JUNE 2003 Exhibit 31.1 - Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ Anthony S. Abbate _____________________________________ President and Chief Executive Officer EX-31 5 ex312.txt JUNE 2003 Exhibit 31.2 - Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ Charles T. Field _________________________________________________ Senior Vice President and Chief Financial Officer EX-32 6 exh32.txt JUNE 30, 2003 Exhibit 32 - 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 June 30, 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-----