-----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, ApIu2hX/EF0S31K2uw6QV7A6RNwIVid6VI/WfVpYLZ9QkDkMoEmWPyGdv89JBwax OnE6CjH2IKUkBMZ8avFBEQ== 0000755933-04-000024.txt : 20040809 0000755933-04-000024.hdr.sgml : 20040809 20040809164553 ACCESSION NUMBER: 0000755933-04-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040809 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: 04961898 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 e18753_10q.txt FORM 10-Q 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, 2004 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 ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No ___ The number of outstanding shares of the Registrant's common stock, no par value per share, as of July 31, 2004, was 12,744,282 shares. INTERCHANGE FINANCIAL SERVICES CORPORATION INDEX PART I FINANCIAL INFORMATION Page No. Item 1 Financial Statements Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003 ............ 1 Unaudited Consolidated Statements of Income for the three and six-month periods ended June 30, 2004 and 2003 ......... 2 Unaudited Consolidated Statements of Changes in Stockholders' Equity for the six months ended June 30, 2004 and 2003 ..................................... 3 Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 .................... 4 Notes to Unaudited Consolidated Financial Statements ....... 5 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ........................ 15 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) ............................................ 31 Item 4 Controls and Procedures .................................... 36 PART II OTHER INFORMATION Item 1 Legal Proceedings .......................................... 37 Item 2 Changes in Securities and Use of Proceeds. ................. 37 Item 3 Defaults upon Senior Securities ............................ 37 Item 4 Submission of Matters to a Vote of Security Holders ........ 37 Item 5 Other Information .......................................... 37 Item 6 Exhibits and Reports on Form 8-K ........................... 37 Signatures ................................................. 38 Item 1: Financial Statements Interchange Financial Services Corporation - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- (dollars in thousands)
June 30, December 31, 2004 2003 ----------- ------------- (unaudited) Assets Cash and due from banks $ 32,343 $ 31,423 Interest earning deposits 6 12 ----------- ----------- Total cash and cash equivalents 32,349 31,435 ----------- ----------- Securities held to maturity at amortized cost (estimated market value of $21,315 and $20,223 for June 30, 2004 and December 31, 2003, respectively) 20,569 19,107 ----------- ----------- Securities available for sale at estimated market value (amortized cost of $360,751 and $428,597 for June 30, 2004 and December 31, 2003, respectively) 359,363 432,953 ----------- ----------- Loans and leases (net of unearned income and deferred fees of $5,116 and $6,057 for June 30, 2004 and December 31, 2003, respectively) 883,266 796,581 Less: Allowance for loan and lease losses 9,788 9,641 ----------- ----------- Net loans and leases 873,478 786,940 ----------- ----------- Bank owned life insurance 22,340 21,853 Premises and equipment, net 19,992 20,343 Foreclosed real estate and other repossesed assets 201 230 Goodwill 55,953 55,924 Intangible assets 3,913 4,165 Accrued interest receivable and other assets 15,532 12,922 ----------- ----------- Total assets $ 1,403,690 $ 1,385,872 =========== =========== Liabilities Deposits Non-interest bearing $ 238,317 $ 223,745 Interest bearing 948,521 933,053 ----------- ----------- Total deposits 1,186,838 1,156,798 ----------- ----------- Securities sold under agreements to repurchase 12,320 15,618 Short-term borrowings 16,525 46,491 Long-term borrowings 30,000 10,000 Accrued interest payable and other liabilities 14,790 13,772 ----------- ----------- Total liabilities 1,260,473 1,242,679 ----------- ----------- Commitments and contingent liabilities Stockholders' equity: Common stock, without par value; 22,500,000 shares authorized; 12,741,782 and 12,810,193 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively 5,397 5,397 Capital surplus 73,324 73,231 Retained earnings 79,857 74,710 Accumulated other comprehensive income (842) 2,434 ----------- ----------- 157,736 155,772 Less: Treasury stock 14,519 12,579 ----------- ----------- Total stockholders' equity 143,217 143,193 ----------- ----------- Total liabilities and stockholders' equity $ 1,403,690 $ 1,385,872 =========== ===========
- -------------------------------------------------------------------------------- See notes to condensed consolidated financial statements. -1- 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, -------------------- -------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Interest income Interest and fees on loans $13,125 $12,469 $25,832 $23,326 Interest on federal funds sold 31 121 37 184 Interest on interest bearing deposits - 9 - 21 Interest and dividends on securities Taxable interest income 2,561 2,329 5,211 4,612 Interest income exempt from federal income taxes 279 221 548 400 Dividends 2 53 41 109 ------- ------- ------- ------- Total interest income 15,998 15,202 31,669 28,652 ------- ------- ------- ------- Interest expense Interest on deposits 2,760 3,416 5,587 6,823 Interest on securities sold under agreements to repurchase 36 79 78 165 Interest on short-term borrowings 41 - 111 - Interest on long-term borrowings 225 107 423 212 ------- ------- ------- ------- Total interest expense 3,062 3,602 6,199 7,200 ------- ------- ------- ------- Net interest income 12,936 11,600 25,470 21,452 Provision for loan and lease losses 300 530 675 795 ------- ------- ------- ------- Net interest income after provision for loan losses 12,636 11,070 24,795 20,657 ------- ------- ------- ------- Non-interest income Service fees on deposit accounts 935 908 1,777 1,561 Net gain on sale of securities 305 19 819 19 Net gain on sale of loans and leases 57 147 133 345 Bank owned life insurance 226 784 487 1,062 Commissions on sale of annuities and mutual funds 256 175 468 388 Other 913 611 1,523 1,113 ------- ------- ------- ------- Total non-interest income 2,692 2,644 5,207 4,488 ------- ------- ------- ------- Non-interest expense Salaries and benefits 4,664 4,193 9,512 7,821 Net occupancy 1,287 1,095 2,652 2,023 Furniture and equipment 326 353 660 606 Advertising and promotion 470 423 863 737 Federal Deposit Insurance Corporation assessment 45 37 91 71 Foreclosed real estate 5 - 5 - Amortization of intangible assets 126 90 252 109 Other 1,875 1,505 3,680 2,856 ------- ------- ------- ------- Total non-interest expense 8,798 7,696 17,715 14,223 ------- ------- ------- ------- Income before income taxes 6,530 6,018 12,287 10,922 Income taxes 2,175 1,831 3,946 3,379 ------- ------- ------- ------- Net income $ 4,355 $ 4,187 $ 8,341 $ 7,543 ======= ======= ======= ======= Basic earnings per common share $ 0.34 $ 0.35 $ 0.65 $ 0.70 ======= ======= ======= ======= Diluted earnings per common share $ 0.34 $ 0.35 $ 0.64 $ 0.69 ======= ======= ======= =======
- -------------------------------------------------------------------------------- See notes to consolidated financial statements -2- Interchange Financial Services Corporation - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Six Months 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, 2003 $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 gains on AFS debt securities 282 Less: realized gains on disposition of securities (206) Minimum pension liability adjustment (19) ------ Other comprehensive income 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 Comprehensive income Net Income $8,823 8,823 8,823 Other comprehensive income, net of taxes Unrealized gains on AFS debt securities (756) Less: realized gains on disposition of securities (614) Unrealized gains on equity securities 137 Minimum pension liability adjustment 14 ------ Other comprehensive income (1,219) (1,219) (1,219) ------ Comprehensive income $7,604 ====== Dividends on common stock (2,806) (2,806) Exercised 52,554 option shares (124) 516 392 ------- ------ ------ ------- --------- -------- Balance at December 31, 2003 74,710 2,434 5,397 73,231 (12,579) 143,193 Comprehensive income Net Income $8,341 8,341 8,341 Other comprehensive income, net of taxes Unrealized gains on AFS debt securities (2,624) Less: realized gains on disposition of securities (652) ------ Other comprehensive income (3,276) (3,276) (3,276) ------ Comprehensive income $5,065 ====== Dividends on common stock (3,194) (3,194) Issued 7,793 shares of common stock in connection with Executive Compensation Plan 103 102 205 Exercised 9,332 option shares (10) 112 102 Purchased 84,786 shares of common stock (2,154) (2,154) ------- ------ ------ ------- --------- -------- Balance at June 30, 2004 $79,857 $ (842) $5,397 $73,324 $ (14,519) $143,217 ======= ====== ====== ======= ========= ========
- -------------------------------------------------------------------------------- See notes to condensed consolidated financial statements. -3- Interchange Financial Services Corporation - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, - -------------------------------------------------------------------------------- (in thousands) (unaudited)
2004 2003 -------- -------- Cash flows from operating activities Net income $ 8,341 $ 7,543 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 976 801 Amortization of securities premiums 2,973 1,649 Accretion of securities discounts (122) (166) Amortization of loan premiums 23 - Amortization of premiums in connection with acquisition 656 250 Provision for loan and lease losses 675 795 Increase in cash surrender value of Bank Owned Life Insurance (487) (268) Origination of loans held for sale (1,437) (7,549) Sale of loans held for sale 1,532 7,775 Net gain on sale of securities available for sale (819) (475) Net gain on sale of loans and leases (130) (345) Net gain on sale of fixed assets - 10 Net gain on the sale of repossessed assets (14) (7) Other than temporary impairment of securities - 415 Decrease (increase) in operating assets Accrued interest receivable 864 (554) Other (1,115) (5,309) (Decrease) increase in operating liabilities Accrued interest payable (74) (319) Other 1,092 1,962 ------- -------- Cash provided by operating activities 12,934 6,208 ------- -------- Cash flows from investing activities (Payments for) proceeds from Purchase of loans (36,449) (53) Net repayments (originations) of loans (51,898) (6,343) Sale of loans 744 1,520 Purchase of securities available for sale (38,840) (134,890) Maturities of securities available for sale 46,525 64,603 Sale of securities available for sale 58,235 13,029 Purchase of securities held to maturity (6,820) - Maturities of securities held to maturity 5,205 3,342 Purchase of fixed assets (546) (560) Sale of reposessed assets 77 100 Net cash proceeds from acquisition of Bridge View Bancorp - 20,191 ------- -------- Cash used in investing activities (23,767) (39,061) ------- -------- Cash flows from financing activities Proceeds from (payments for) Deposits in excess of withdrawals 30,052 62,272 Decrease in short term debt (33,264) (5,969) Increase in long term debt 20,000 - Minimum pension liability, net of taxes - (19) Dividends (3,194) (2,164) Treasury stock (2,154) - Common stock issued 205 354 Exercise of option shares 102 46 ------- -------- Cash provided by financing activities 11,747 54,520 ------- -------- Increase in cash and cash equivalents 914 21,667 Cash and cash equivalents, beginning of year 31,435 33,916 ------- -------- Cash and cash equivalents, end of period $32,349 $ 55,583 ======= ======== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 6,275 $ 7,101 Income taxes 4,100 4,365 Supplemental disclosure of non-cash investing activities: Loans transferred to foreclosed real estate and other repossessed assets 34 89 Stock issued related to Bridge View acquisition - 52,180
- -------------------------------------------------------------------------------- See notes to consolidated financial statements. -4- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 2004 (Unaudited) 1. Basis of Presentation The accompanying unaudited condensed 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 condensed 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, 2003. The consolidated financial data for the three and six month periods ended June 30, 2004 and 2003, 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, the fair value of financial instruments, goodwill, intangibles, taxes and retirement benefits. Stock Based Compensation: The Company accounts for stock option plans under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25. "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation costs are reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and diluted earnings per common share if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board ("FASB") Statement No. 123, " Accounting for Stock- -5- Based Compensation," to stock-based compensation for the three and six months ended June 30, 2004 and 2003: (in thousands, except share data) (unaudited)
-------------------------- ------------------------ For the three months ended For the six months ended June 30, June 30, 2004 2003 2004 2003 ------ ------ ------ ------ Net Income As reported $4,355 $4,187 $8,341 $7,543 Less: Total stock-based compensation expense determined under the fair value method for all rewards, net of related tax effects 147 90 273 173 ------ ------ ------ ------ Pro-forma $4,208 $4,097 $8,068 $7,370 ====== ====== ====== ====== Earnings per share: Basic: As reported 0.34 0.35 0.65 0.70 Pro forma 0.33 0.35 0.63 0.68 Diluted: As reported 0.34 0.35 0.64 0.69 Pro forma 0.32 0.34 0.62 0.67
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, 2004 and March 31, 2004, respectively: dividend yield of 2.09% and 2.22%; expected volatility of 24.00% and 24.92%; risk-free interest rate of 3.83% and 3.34%; and expected lives of 7 years. Prior period assumptions are described in Note 13 "Stock Option and Incentive Plan in the Notes to Consolidated Financial Statements" in the Company's 2003 Annual Report on Form 10-K. 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. At April 30, 2003, Bridge View had approximately $291 million of total assets, $184 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 over the periods 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 -6- in excess of net assets acquired of approximately $58.7 million was allocated to net identified intangibles of approximately $4.3 million and goodwill of approximately $54.4 million. The following pro forma condensed consolidated statements of income for the three and six months ended June 30, 2003 give effect to the merger as if the merger had been consummated on January 1, 2003. The unaudited 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 unaudited 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, --------------------- ------------------- 2004 2003 2004 2003 Pro Forma Pro Forma Interest income $ 15,998 $ 16,243 $ 31,669 $ 32,912 Interest expense 3,062 3,726 6,199 7,743 -------- -------- -------- -------- Net interest income 12,936 12,517 25,470 25,169 -------- -------- -------- -------- Provision for loan and lease losses 300 530 675 810 -------- -------- -------- -------- Net interest income after provision for loan and lease losses 12,636 11,987 24,795 24,359 Non-interest income 2,692 2,877 5,207 5,272 Non-interest expense Salaries and benefits 4,664 4,619 9,512 9,315 Occupancy and FF&E 1,613 1,618 3,312 3,246 Other expenses 2,521 2,353 4,891 4,773 -------- -------- -------- -------- 8,798 8,590 17,715 17,334 Net income before taxes 6,530 6,274 12,287 12,297 Income Taxes 2,175 1,936 3,946 3,931 -------- -------- -------- -------- Net income $ 4,355 $ 4,338 $ 8,341 $ 8,366 ======== ======== ======== ======== Earnings per common share: Basic $ 0.34 $ 0.34 $ 0.65 $ 0.66 ======== ======== ======== ======== Diluted $ 0.34 $ 0.33 $ 0.64 $ 0.65 ======== ======== ======== ======== See Accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statements. 3. Earnings Per Common Share Basic earnings per common share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share reflect additional common shares that would have been outstanding if dilutive potential -7- 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, 2004, the Company had commitments of approximately $277.4 million to extend credit, of which approximately $1.9 million represents standby letters of credit. 5. Goodwill and Other Intangibles With the adoption of Statement of Financial Accounting Standards ("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, 2004 and December 31, 2003, gross intangible assets amounted to $4.6 million at the end of each period while accumulated amortization amounted to $556 thousand and $430 thousand, respectively. Amortization of intangible assets as a result of acquisitions, which is included in non-interest expense, amounted to $126 thousand, and $90 thousand for the three months ended June 30, 2004 and 2003, respectively. During the second quarter of 2003, 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 $107 thousand for the three months ended June 30, 2004. The core deposit intangible will be periodically reviewed for impairment. In addition, the Company recorded goodwill of $54.4 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. -8- At June 30, 2004 the scheduled amortization of the core deposit intangible is as follows (in thousands): 2005 $ 430 2006 430 2007 430 2008 430 2009 and thereafter 1,859 ------- $ 3,579 ======= 6. Segment Reporting SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS No. 131"), requires disclosures for each reportable operating segment. As a community-oriented financial institution, substantially all of the Company's operations entail the delivery of loan and deposit products and various other financial services to customers in its primary market area, which is Bergen County, New Jersey. The Company's community-banking operation constitutes the Company's only operating segment for financial reporting purposes under SFAS No. 131. 7. Recent Accounting Pronouncements On December 23, 2003, the FASB issued Statement of Financial Accounting Standards No. 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits ("SFAS 132"). The revised SFAS 132 retains the disclosure requirements in the original statement and requires additional disclosures about pension plan assets, benefit obligations, benefit costs and other relevant information. The Company has included the new interim disclosures that are required for financial statements for periods ending after December 15, 2003. In March 2004, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF Issue 03-1 is effective for all annual or interim financial statements for periods beginning after June 15, 2004. EITF Issue 03-1 addresses the identification of other than temporarily impaired investments, and requires that an impairment charge be recognized for other than temporarily impaired investments for which there is neither the ability nor intent to hold either until maturity or until the market value of the investment recovers. Management is evaluating what effect, if any, EITF Issue No. 03-1 will have on the Company's consolidated financial statements. 8. Cash Dividend The Company paid a cash dividend of $0.125 per share on May 21, 2004 to holders of record as of May 3, 2004. -9- 9. Securities Held-to-Maturity and Securities Available-for-Sale Securities held-to-maturity ("HTM") and securities available-for-sale ("AFS") consist of the following: (in thousands)
------------------------------------------------- June 30, 2004 ------------------------------------------------- (unaudited) Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- --------- Securities HTM Mortgage-backed securities $ 7,643 $ 234 $ - $ 7,877 Obligations of U.S. agencies 3,000 - - 3,000 Obligations of states & political subdivisions 9,926 512 - 10,438 --------- ------- ------- --------- $ 20,569 $ 746 $ - $ 21,315 --------- ------- ------- --------- Securities AFS Mortgage-backed securities $ 104,222 $ 1,070 $ 576 $ 104,716 Obligations of U.S. agencies 221,304 777 2,964 219,117 Obligations of states & political subdivisions 30,638 581 372 30,847 Equity securities 4,587 96 - 4,683 --------- ------- ------- --------- 360,751 2,524 3,912 359,363 --------- ------- ------- --------- Total securities $ 381,320 $ 3,270 $ 3,912 $ 380,678 ========= ======= ======= =========
------------------------------------------------- December 31, 2003 ------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- --------- Securities HTM Mortgage-backed securities $ 9,850 $ 330 $ 1 $ 10,179 Obligations of states & political subdivisions 9,257 787 - 10,044 --------- ------- ------- --------- $ 19,107 $ 1,117 $ 1 $ 20,223 --------- ------- ------- --------- Securities AFS Obligations of U.S. Treasury $ 6,032 $ 5 $ 2 $ 6,035 Mortgage-backed securities 112,981 1,363 157 114,187 Obligations of U.S. agencies 271,339 2,583 762 273,160 Obligations of states & political subdivisions 33,849 1,257 68 35,038 Equity securities 4,396 137 - 4,533 --------- ------- ------- --------- 428,597 5,345 989 432,953 --------- ------- ------- --------- Total securities $ 447,704 $ 6,462 $ 990 $ 453,176 ========= ======= ======= =========
At June 30, 2004, the contractual maturities of securities HTM and securities AFS are as follows: (in thousands) (unaudited) -10- Securities Securities HTM AFS ---------------------- -------------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value ---------------------- -------------------- Within 1 year $ 4,307 $ 4,339 $ 29,825 $ 29,621 After 1 but within 5 years 9,679 10,005 290,761 289,510 After 5 but within 10 years 5,505 5,831 22,208 22,320 After 10 years 1,078 1,140 13,370 13,230 Equity securities - - 4,587 4,682 --------------------- ------------------- Total $20,569 $21,315 $360,751 $359,363 ===================== =================== Proceeds from the sale of securities AFS amounted to $58.2 million and $13.0 million for the six months ended June 30, 2004 and 2003, which resulted in gross realized gains of $913 thousand and $478 thousand for those periods, respectively. Gross realized losses from the sale of securities AFS amounted to $94 thousand and $44 thousand for the six months ended June 30, 2004 and 2003, respectively. These amounts are included in net gain on sale of securities in the Consolidated Statements of Income. 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 investment portfolio is evaluated at least quarterly to determine if there are any securities with losses that are other than temporary. One criteria in assessing for an other than temporary impairment charge is if a security has an unrealized loss that exceeds one year. At June 30, 2004, the Company had $12.9 million of securities with unrealized losses of $269 thousand that were in excess of one year. It is expected that the Company will recover all amounts due under the contractual obligations of those securities and as such, no other than temporary impairment charge was necessary. The Company did not have any unrealized losses in its' HTM portfolio. The following table summarizes all securities that have an unrealized loss and the duration of the unrealized loss at June 30, 2004: (in thousands) (unaudited)
12 months or less 12 months or longer Totals ---------------------- --------------------- ------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ---------------------- --------------------- ------------------- Securities AFS Mortgage-backed securities $ 52,761 $ 544 $ 3,216 $ 32 $ 55,977 $ 576 Obligations of U.S. agencies 187,518 2,755 9,292 209 196,810 2,964 Obligations of states & political subdivisions 10,504 344 441 28 10,945 372 -------------------- ------------------ ------------------ $250,783 $3,643 $12,949 $269 $263,732 $3,912 ==================== ================== ==================
Securities with carrying amounts of $46.6 million and $46.1 million at June 30, 2004 and December 31, 2003, respectively, were pledged for public deposits, Federal Home Loan Bank advances, securities sold under repurchase agreements and other purposes required by law. -11- 10. Loans The composition of the loan portfolio is summarized as follows: (in thousands) June 30, December 31, 2004 2003 ----------- ------------ (unaudited) Amount of loans by type Real estate-mortgage 1-4 family residential First liens $141,948 $100,286 Junior liens 3,191 4,138 Home equity 146,313 136,477 Commercial 353,878 330,040 Construction 29,557 31,077 -------- -------- 674,887 602,018 -------- -------- Commercial loans Commercial and financial 174,498 149,462 Lease financing 24,315 28,440 -------- -------- 198,813 177,902 -------- -------- Consumer loans Lease financing 4,624 12,416 Installment 4,942 4,245 -------- -------- 9,566 16,661 -------- -------- Total $883,266 $796,581 ======== ======== Nonperforming Assets Nonperforming loans include loans that are accounted for on a nonaccrual basis and troubled debt restructurings. Nonperforming loans are as follows: (in thousands) June 30, December 31, 2004 2003 -------------------------- (unaudited) Nonaccrual loans Residential real estate $1,469 $1,364 Commercial real estate 747 1,603 Commercial and financial 2,176 2,858 Commercial lease financing 1,760 2,365 Consumer 421 380 ------------------------ $6,573 $8,570 ======================== -12- 11. Allowance for Loan and Lease Losses The Company's recorded investment in impaired loans is as follows: (in thousands) ---------------------- --------------------- June 30, December 31, 2004 2003 ---------------------- --------------------- (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 $1,963 $381 $2,864 $463 Commercial real estate 747 19 1,603 40 Residential mortgages 821 123 816 122 Consumer 201 5 - - Without a related allowance for loan losses - - - - ------ ---- ------ ---- $3,732 $528 $5,283 $625 ====== ==== ====== ==== - -------------------------------------------------------------------------------- The impairment of the above loans was estimated based on the fair value of collateral. Changes in the allowance for loan and lease losses are summarized as follows: (in thousands) ------------------ ---------------- Three months ended Six months ended June 30, June 30, ------------------ ---------------- 2004 2003 2004 2003 ------ ------ ------ ------ (unaudited) (unaudited) Balance at beginning of period $9,635 $7,226 $9,641 $7,207 Additions (deductions) Provision for loan and lease losses 300 530 675 795 Recoveries on loans previously charged off 24 4 60 5 Loans charged off (171) (152) (588) (399) Additions due to merger - 1,929 - 1,929 ------ ------ ------ ------ Balance at end of year $9,788 $9,537 $9,788 $9,537 ====== ====== ====== ====== 12. Other Non-interest Expense Expenses included in other non-interest expense that exceed one percent of the aggregate of total interest income and non-interest income for the periods noted, are as follows: (in thousands) (unaudited) ---------------- --------------- Three months Six months ended June 30, ended June 30, ---------------- --------------- 2004 2003 2004 2003 ------ ------ ------ ------ Professional fees $ 361 $ 329 $ 677 $ 533 Data processing 283 308 564 523 Directors's fees, retirement and travel 194 181 410 309 Legal fees 240 98 450 178 All other 797 589 1,579 1,313 ------ ------ ------ ------ $1,875 $1,505 $3,680 $2,856 ====== ====== ====== ====== -13- 13. Long-term Borrowings Long-term borrowings consist of the following FHLB advances: (in thousands) (unaudited) Maturity June 30, December 31, Date Rate 2004 2003 - ---------------- ---- -------- ------------ (unaudited) January 2006 2.09% $10,000 - January 2007 (a) 4.22 10,000 $10,000 January 2007 2.69 10,000 - ---- ------- ------- 3.00% $30,000 $10,000 ==== ======= ======= (a) The FHLB has an option to call this advance on a quarterly basis if the 3-month LIBOR resets above 7.50%. 14. Benefit Plans In 1993, the Bank established a non-contributory defined benefit pension plan covering all eligible employees (the "Pension Plan"). In 1994, the Bank established a supplemental plan covering all eligible employees (the "Supplemental Plan") that provides for income that would have been paid out but for the limitation under the qualified Pension Plan. Also in 1994, the Company established a retirement plan for all directors of the Bank who are not employees of Interchange or of any subsidiary or affiliate of Interchange (the "Directors' Plan"). The following table shows the aggregated components of net periodic benefit costs for the periods noted: (in thousands) (unaudited) ------------------ ----------------- Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- 2004 2003 2004 2003 ------- -------- ------ ------ Service cost $166 $151 $333 $302 Interest cost 95 79 190 158 Expected return on plan assets (39) (31) (79) (62) Amortization of prior service cost 1 1 2 2 ---- ---- ---- ---- Net periodic benefit cost $223 $200 $446 $400 ==== ==== ==== ==== For the year ended December 31, 2004, the Bank anticipates contributing approximately $775 thousand to the Pension Plan. -14- 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, 2004 and 2003, 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 2003 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, 2004 include the results of Bridge View. 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) expected revenue synergies from the Company's acquisition of Bridge View may not be fully realized or realized within the expected time frame; (vii) revenues following the Company's acquisition of Bridge View may be lower than expected; (viii) deposit attrition, operating costs, customer loss and business disruption following the Company's acquisition of Bridge View, including, without limitation, difficulties in maintaining relationships -15- with employees, may be greater than expected and (ix) 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 Judgments" in our 2003 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. -16- Allowance for Loan and Lease Losses: The ALLL is generally established through periodic charges to income. Loan losses are charged against the ALLL when management believes that the probable future collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. If the ALLL is considered inadequate to absorb future loan losses on existing loans, based on, but not limited to, increases in the size of the loan portfolio, increases in charge-offs or changes in the risk characteristics of the loan portfolio, then the provision for loan and lease losses is increased. The Company considers the ALLL of $9.8 million adequate to cover estimated losses inherent in the loan portfolio that may become uncollectible based on management's periodic evaluations of the loan portfolio and other relevant factors. The evaluations are inherently subjective as it requires material estimates including such factors as potential loss factors, changes in trend of non-performing loans, current state of local and national economy, value of collateral changes in the composition and volume of the loan portfolio, review of specific problem loans and management's assessment of the inherent risk and overall quality of the loan portfolio. All of these factors may be susceptible to significant change. Also, the allocation of the allowance for credit losses to specific loan pools is based on historical loss trends and management's judgment concerning those trends. Business Combinations: Business combinations are accounted for 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. -17- THREE MONTHS ENDED JUNE 30, 2004 AND 2003 RESULTS OF OPERATIONS Summary Net income for the three months ended June 30, 2004 was approximately $4.4 million, an increase of $168 thousand, or 4.0%, over the same period last year. The increase in earnings resulted from an increase in our interest earning assets during the quarter of approximately $179.4 million, which was partly offset by an 18 basis point decline in our net interest margin. The increase in interest earning assets was partly attributed to the acquisition of Bridge View during the second quarter of 2003. For the second quarter of 2004, the Company reported earnings per diluted common share of $0.34, as compared to $0.35 for the same period in 2003. The decline in diluted earnings per share was a result of a compression in the net interest margin as compared to the second quarter in 2003 and an increase in average diluted shares outstanding as a result of the Bridge View transaction. For the three months ended June 30, 2004 and 2003, the Company's Return on Average Assets ("ROA") was 1.25% and 1.40%, respectively. The change in ROA for the quarter was a result of a decline in net interest margin. Return on Average Equity ("ROE") was 12.08% a decline from 14.03% when compared to the same period last year. ROE declined principally due to an increase in equity as a result of the acquisition of Bridge View and, to a lesser extent, compression in net interest margin. 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 income exempt from federal taxation has been restated to a fully tax-equivalent basis using the corporate federal tax rate of 34% for the quarter ended June 30, 2004 and 2003. 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 $1.4 million, or 11.8%, to $13.1 million for the quarter ended June 30, 2004 as compared to the same quarter in 2003. The tax equivalent basis adjustments for the quarters ended June 30, 2004 and 2003 were $162 thousand and $112 thousand, respectively. The increase in net interest income was due mostly to a 16.8% growth in interest earning assets. This interest earning asset growth was funded primarily by deposit liabilities, which grew 14.1% on average for the second quarter of 2004 as compared to the same quarter in 2003. The growth in interest earning assets and deposits were attributed to the Company's internal growth and to a lesser extent, the Bridge View acquisition. The margin for the second quarter of 2004 was 4.20%, a decline of -18- 18 basis points as compared to the same quarter in 2003 due to earning asset yields declining faster than the Company's cost of funds. The decline in asset yields was mainly attributable to maturities and prepayments in the loan and securities portfolio, while the Company's deposit pricing reached historical lows and appears to have become inelastic. During the quarter, the Company did experience expansion in its net interest margin as a shift in asset mix benefited the overall net interest margin. Interest income, on a tax-equivalent basis, totaled $16.2 million for the second quarter of 2004, an increase of $846 thousand, or 5.5%, as compared to the same quarter in 2003. The increase was mostly attributed to a $179.4 million, or 16.8%, growth in interest earning assets. The growth in interest earning assets was the result of increases in average loans and average investments of $113.2 million and $98.4 million, respectively. The increase in interest income was partly offset by a 55 basis point decline in interest earning asset yields for the second quarter of 2004 as compared to the same quarter in 2003. Interest expense, which totaled $3.1 million for the second quarter of 2004, decreased $540 thousand, or 15.0%, as compared to the same period in 2003. 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, 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 42 basis points to 1.22% for the quarter ended June 30, 2004 as compared to the same period in 2003. 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 $91.6 million, or 10.7%, for the second quarter of 2004 as compared to the same period in 2003. -19-
- ------------------------------------------------------------------------------------------------------------------------ Analysis of Net Interest Income - ------------------------------------------------------------------------------------------------------------------------ for the quarter ended June 30, (dollars in thousands) 2004 2003 (unaudited) ------------------------------- ------------------------------ Average Average Average Average Balance Interest Rate Balance Interest Rate ----------- -------- ------- ----------- -------- ------- Assets Interest earning assets: Loans (1) $ 845,747 $13,160 6.22% $ 732,516 $12,499 6.83% Taxable securities (4) 363,281 2,563 2.82 265,753 2,381 3.58 Tax-exempt securities (2) (4) 26,930 406 6.03 26,095 304 4.66 Interest earning deposits 6 - - 3,846 9 0.94 Federal funds sold 12,848 31 0.97 41,180 121 1.18 ---------- ------- ---- ---------- ------- ---- Total interest-earning assets 1,248,812 16,160 5.18 1,069,390 15,314 5.73 ------- ------- Non-interest earning assets: Cash and due from banks 36,326 37,642 Allowance for loan and lease losses (9,818) (8,606) Other assets 118,411 97,087 ---------- ---------- Total assets $1,393,731 $1,195,513 ========== ========== Liabilities and stockholders' equity Interest-bearing liabilities Interest bearing deposits $ 946,834 2,760 1.17 $ 855,189 3,416 1.60 Borrowings 54,862 302 2.20 25,035 186 2.96 ---------- ------- ---- ---------- ------- ---- Total interest-bearing liabilities 1,001,696 3,062 1.22 880,224 3,602 1.64 ------- ------- Non-interest bearing liabilities Demand deposits 232,734 178,434 Other liabilities 15,129 17,463 ---------- ---------- Total liabilities (3) 1,249,559 1,076,121 Stockholders' equity 144,172 119,392 ---------- ---------- Total liabilities and stockholders' equity $1,393,731 $1,195,513 ========== ========== Net interest income (tax-equivalent basis) 13,098 3.96 11,712 4.09 Tax-equivalent basis adjustment (162) (112) ------- ------- Net interest income $12,936 $11,600 ======= ======= Net interest income as a percent of interest-earning assets (tax-equivalent basis) 4.20% 4.38%
- -------------------------------------------------------------------------------- (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 Judgments: Allowance for Loan and Lease Losses" above. In the second quarter of 2004 and 2003, the Company's provision for loan and lease losses was $300 thousand and $530 thousand, respectively. Non-interest Income For the quarter ended June 30, 2004, non-interest income totaled $2.7 million, an increase of $48 thousand, or 1.8%, as compared to the same period in 2003. The increase was largely due to growth in "other" non-interest income, net gains on the sale of securities and commissions on sale of annuities and mutual funds of $302 thousand, $286 thousand and $81 thousand, respectively. The growth in "other" non-interest income was largely attributed to an increase in commercial loan prepayment penalties of $171 thousand. The Company experienced strong loan growth during 2004 that was funded by deposit growth and security sales, which contributed to the improvement in non-interest income. The improvement in non-interest income was partly offset by a decrease in Bank Owned Life Insurance -20- ("BOLI") income and a decline in net gain on sale of loans and leases of $558 thousand and $90 thousand, respectively. The decline in BOLI income was attributed to a claim on insurance policies in 2003 of $499 thousand, while the decrease in net gain on sale of loans and leases was due to lower demand for thirty-year residential mortgage loans. Non-interest Expense For the quarter ended June 30, 2004, non-interest expense was $8.8 million, an increase of $1.1 million, or 14.3%, 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 higher salary and benefits, legal and advertising expenses. Income Taxes Income tax expense as a percentage of pre-tax income was 33.3% for the three months ended June 30, 2004 as compared to 30.4% for the same period of 2003. The increase in percentage of income tax expense was in part due to the effect of a decline in non-taxable BOLI income. -21- SIX MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003 RESULTS OF OPERATIONS Summary Net income for the six months ended June 30, 2004 was approximately $8.3 million, an increase of $798 thousand, or 10.6%, over the same period last year. The increase in earnings resulted from an increase in interest earning assets from organic growth and the acquisition of Bridge View during the second quarter of 2003. The improvement in earnings was partly offset by a 29 basis point decline in the net interest margin. For the first six months of 2004, the Company reported earnings per diluted common share of $0.64, as compared to $0.69 for the same period in 2003. The decline in diluted earnings per share was a result of a compression in the net interest margin as compared to the same period in 2003 and an increase in average diluted shares outstanding as a result of the Bridge View transaction. For the six months ended June 30, 2004 and 2003, the Company's Return on Average Assets ("ROA") was 1.20% and 1.41%, respectively. The change in ROA for the period was a result of a decline in net interest margin. Return on Average Equity ("ROE") was 11.61% a decline from 14.97% when compared to the same period last year. ROE declined principally due to an increase in equity as a result of the acquisition of Bridge View and, to a lesser extent, compression in net interest margin. Net Interest Income Net interest income on a tax-equivalent basis increased $4.1 million, or 19%, to $25.8 million for the six months ended June 30, 2004 as compared to the same quarter in 2003. The tax equivalent basis adjustments for the six months ended June 30, 2004 and 2003 were $322 thousand and $220 thousand, respectively. The increase in net interest income was due mostly to a 27.2% growth in interest earning assets. This interest earning asset growth was funded primarily by deposit liabilities, which grew 25.7% on average for the six months of 2004 as compared to the same period in 2003. The increase in interest earning assets and deposits were attributed to the Company's internal growth and the Bridge View acquisition. The aforementioned improvement in net interest income was partly offset by a 29 basis point decline in the net interest margin for the six months ended June 30, 2004 as compared to the same period in 2003. The decrease in the net interest margin was due to earning asset yields declining faster than the Company's cost of funds. The decline in asset yields was mainly attributable to maturities and prepayments in the loan and securities portfolio, while the Company's deposit pricing reached historical lows and appears to have become inelastic. Interest income, on a tax-equivalent basis, totaled $32.0 million for the six months ended June 30, 2004, an increase of $3.1 million, or 10.8%, as compared to the same period in 2003. The increase was mostly attributed to a $265.6 million, or 27.2%, growth in interest earning assets. The growth in interest earning assets was the result of increases in average loans and average investments of $152.3 million -22- and $141.1 million, respectively. The increase in interest income was partly offset by a 76 basis point decline in interest earning asset yields for the six months ended June 30, 2004 as compared to the same period in 2003. Interest expense, which totaled $6.2 million for the six months ended June 30, 2004, decreased $1 million, or 13.9%, as compared to the same period in 2003. 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 55 basis points to 1.24% for the six months ended June 30, 2004 as compared to the same period in 2003. 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 159.2 million, or 20.4%, for the second quarter of 2004 as compared to the same period in 2003.
- ---------------------------------------------------------------------------------------------------------------------------- Analysis of Net Interest Income - ---------------------------------------------------------------------------------------------------------------------------- for the six months ended June 30, (dollars in thousands) 2004 2003 (unaudited) ---------------------------------------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ---------- -------- ------- ------- -------- ------- Assets Interest earning assets Loans (1) $ 826,067 $25,908 6.27% $673,735 $23,395 6.94% Taxable securities (4) 383,388 5,252 2.74 240,454 4,721 3.93 Tax-exempt securities (2) (4) 24,964 794 6.36 26,770 551 4.12 Interest earning deposits 9 - - 4,088 21 1.03 Federal funds sold 7,677 37 0.96 31,436 184 1.17 ---------- ------- --------- ------- Total interest-earning assets 1,242,105 31,991 5.15 976,483 28,872 5.91 ------- ------- Non-interest earning assets Cash and due from banks 35,937 29,947 Allowance for loan and lease losses (9,727) (7,910) Other assets 118,672 72,658 ---------- --------- Total assets $1,386,987 1,071,178 ========== ========= Liabilities and stockholders' equity Interest-bearing liabilities Interest bearing deposits $940,178 5,588 1.19 $ 780,986 6,823 1.75 Borrowings 60,112 611 2.03 25,629 377 2.94 ---------- ------- --------- ------- Total interest-bearing liabilities 1,000,290 6,199 1.24 $ 806,615 7,200 1.79 ------- ------- Non-interest bearing liabilities Demand deposits 228,417 148,771 Other liabilities 14,575 15,006 ---------- --------- Total liabilities (3) 1,243,282 970,392 Stockholders' equity 143,705 100,786 ---------- --------- Total liabilities and stockholders' equity $1,386,987 1,071,178 ========== ========= Net interest income (tax-equivalent basis) 25,792 3.91 21,672 4.12 Tax-equivalent basis adjustment (322) (220) ------- ------- Net interest income $25,470 21,452 ======= ======= Net interest income as a percent of interest-earning assets (tax-equivalent basis) 4.15% 4.44%
- -------------------------------------------------------------------------------- (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. -23- 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 Judgments: Allowance for Loan and Lease Losses" above. In the first six months of 2004 and 2003, the Company's provision for loan and lease losses was $675 thousand and $795 thousand, respectively. Non-interest Income For the six months ended June 30, 2004, non-interest income totaled $5.2 million, an increase of $719 thousand, or 16.0%, as compared to the same period in 2003. The improvement in non-interest income was mostly due to increases in net gains on the sale of securities, "other" non-interest income and service charges on deposits of $800 thousand, $410 thousand and $216 thousand, respectively. Net gains on the sale of securities for the six months ended June 30, 2004 and 2003, were $819 thousand and $19 thousand, respectively. The Company experienced strong loan growth during 2004 that was funded by deposit growth and security sales, which contributed to the improvement in non-interest income. The growth in "other" non-interest income was largely attributed to an increase in commercial loan prepayment penalties of $249 thousand. The improvement in non-interest income was partly offset by a decrease in BOLI income and a decline in net gain on sale of loans and leases of $575 thousand and $212 thousand, respectively. The decline in BOLI income was attributed to a claim on insurance policies in 2003 of $499 thousand, while the decrease in net gain on sale of loans and leases was due to lower demand for thirty-year residential mortgage loans. Non-interest Expense For the six months ended June 30, 2004, non-interest expense was $17.7 million, an increase of $3.5 million, or 24.5%, when compared to the same period one year ago. The increase was due largely to the additional operating costs resulting from the addition of eleven branch locations and the staffing of those branches acquired as part of the merger with Bridge View. Also contributing to the increase were normal increases related to salaries, benefits and occupancy expense. Income Taxes Income tax expense as a percentage of pre-tax income was 32.1% for the six months ended June 30, 2004 as compared to 30.9% for the same period of 2003. The increase in percentage of income tax expense was in part due to the effect of a decline in non-taxable BOLI income. -24- FINANCIAL CONDITION Cash and Cash Equivalents At June 30, 2004, cash and cash equivalents increased $914 thousand to $32.3 million as compared to December 31, 2003. Securities Portfolio Under Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), each security is classified as either trading, available for sale ("AFS"), or held to maturity ("HTM"). The Company has no securities held in a trading account. The securities AFS are recorded at their estimated fair value. The after-tax difference between amortized cost and estimated fair value of securities AFS is recorded as "accumulated other comprehensive income" in the equity section of the balance sheet. The tax impact of such adjustment is recorded as an adjustment to the amount of the deferred tax liability. The securities HTM are carried at cost adjusted for the amortization of premiums and accretion of discounts, which are recognized as an adjustment to income. Under SFAS No. 115, securities HTM, with some exceptions, may only be sold within three months of maturity. The Company uses its securities portfolio to ensure liquidity for cash flow requirements, to manage interest rate risk, provide a source of income, ensure collateral is available for pledging requirements and manage asset quality diversification. At June 30, 2004, investment securities totaled $379.9 million and represented 27.1% of total assets, as compared to $452.1 million and 32.6%, respectively, at December 31, 2003. Securities AFS comprised 94.6% of the total securities portfolio at June 30, 2004 as compared to 95.8% at December 31, 2003. At June 30, 2004, the Company had an unrealized loss of $642 thousand as compared to a net unrealized gain of $5.5 million at December 31, 2003. The decrease was attributed to a decline in market interest rates during that period. During the first half of 2004, the Company sold securities with a book value of approximately $57.4 million and recognized $913 thousand in gross gains and $94 thousand in gross losses. 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. In addition 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: (in thousands) -25-
---------------------------------------------- June 30, 2004 ---------------------------------------------- (unaudited) Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- Securities HTM Mortgage-backed securities $ 7,643 $ 234 $ - $ 7,877 Obligations of U.S. agencies 3,000 - - 3,000 Obligations of states & political subdivisions 9,926 512 - 10,438 -------- ------ ------ -------- $ 20,569 $ 746 $ - $ 21,315 ======== ====== ====== ======== Securities AFS Mortgage-backed securities $104,222 $1,070 $ 576 $104,716 Obligations of U.S. agencies 221,304 777 2,964 219,117 Obligations of states & political subdivisions 30,638 581 372 30,847 Equity securities 4,587 96 - 4,683 -------- ------ ------ -------- 360,751 2,524 3,912 359,363 -------- ------ ------ -------- Total securities $381,320 $3,270 $3,912 $380,678 ======== ====== ====== ========
---------------------------------------------- December 31, 2003 ---------------------------------------------- (unaudited) Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- Securities HTM Mortgage-backed securities $ 9,850 $ 330 $ 1 $ 10,179 Obligations of states & political subdivisions 9,257 787 - 10,044 -------- ------ ---- -------- $ 19,107 $1,117 $ 1 $ 20,223 -------- ------ ---- -------- Securities AFS Obligations of U.S. Treasury $ 6,032 $ 5 $ 2 $ 6,035 Mortgage-backed securities 112,981 1,363 157 114,187 Obligations of U.S. agencies 271,339 2,583 762 273,160 Obligations of states & political subdivisions 33,849 1,257 68 35,038 Equity securities 4,396 137 - 4,533 -------- ------ ---- -------- 428,597 5,345 989 432,953 -------- ------ ---- -------- Total securities $447,704 $6,462 $990 $453,176 ======== ====== ==== ========
At June 30, 2004, the contractual maturities of securities HTM and securities AFS are as follows: (in thousands) (unaudited) Securities Securities HTM AFS ---------------------- ---------------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value ---------------------- ---------------------- Within 1 year $ 4,307 $ 4,339 $ 29,825 $ 29,621 After 1 but within 5 years 9,679 10,005 290,761 289,510 After 5 but within 10 years 5,505 5,831 22,208 22,320 After 10 years 1,078 1,140 13,370 13,230 Equity securities - - 4,587 4,682 -------------------- --------------------- Total $20,569 $21,315 $360,751 $359,363 ==================== ===================== -26- Loans Total loans amounted to $883.3 million at June 30, 2004, an increase of $86.7 million from $796.6 million at December 31, 2003. The growth was attributed to increases in commercial loans of $43.2 million and residential mortgage loans of $50.6 million. The increase in commercial loans was largely in commercial and financial loans and commercial mortgages, which increased $25.0 million and $23.8 million, respectively, for the six month period ended June 30, 2004. The growth in residential mortgage loans was due in part to purchases of $36.4 million. These loans were subjected to the Company's independent credit analysis prior to purchase. Somewhat offsetting the aforementioned increases were decreases in consumer and commercial leases of $7.8 million and $4.1 million, respectively. ----------- ------------ June 30, December 31, (in thousands) 2004 2003 ----------- ------------ (unaudited) Amount of loans by type Real estate-mortgage 1-4 family residential First liens $141,948 $100,286 Junior liens 3,191 4,138 Home equity 146,313 136,477 Commercial 353,878 330,040 Construction 29,557 31,077 -------- -------- 674,887 602,018 -------- -------- Commercial loans Commercial and financial 174,498 149,462 Lease financing 24,315 28,440 -------- -------- 198,813 177,902 -------- -------- Consumer loans Lease financing 4,624 12,416 Installment 4,942 4,245 -------- -------- 9,566 16,661 -------- -------- Total $883,266 $796,581 ======== ======== -27- Nonperforming Assets Nonperforming assets are comprised of nonaccrual loans, restructured loans, foreclosed real estate and other repossessed assets. The Company's nonperforming assets at June 30, 2004 amounted to $6.8 million as compared to $8.8 million at December 31, 2003. The ratio of nonperforming assets to total loans and foreclosed real estate and other repossessed assets decreased to 0.77% at June 30, 2004 from 1.10% at December 31, 2003. The following table lists nonaccrual loans, restructured loans and foreclosed real estate and other repossessed assets at June 30, 2004, and December 31, 2003: (in thousands) ----------- ------------ June 30, December 31, 2004 2003 ----------- ------------ (unaudited) Nonperforming loans $6,573 $8,570 Foreclosed real estate and other repossessed assets 201 230 ------ ------ Total nonperforming assets $6,774 $8,800 ====== ====== Allowance for Loan and Lease Losses The ALLL is generally established through periodic charges to income. During the six months ended June 30, 2004, the ALLL remained relatively stable at $9.8 million. 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 $9.8 million adequate to cover estimated losses inherent in the loan portfolio that may become uncollectible based on management's periodic evaluations of the loan portfolio and other relevant factors. The evaluations are inherently subjective as they require material estimates including such factors as potential loss factors, changes in trend of non-performing loans, current state of local and national economy, value of collateral changes in the composition and volume of the loan portfolio, review of specific problem loans and management's assessment of the inherent risk and overall quality of the loan portfolio. All of these factors may be susceptible to significant change. Also, the allocation of the allowance for credit losses to specific loan pools is based on historical loss trends and management's judgment concerning those trends. -28- 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 months ended June 30, 2004 and 2003: (dollars in thousands) (unaudited)
Three months ended Six months ended June 30, June 30, --------------------- --------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Average loans outstanding $845,747 $732,516 $826,067 $673,735 ======== ======== ======== ======== Allowance at beginning of period 9,635 7,226 9,641 7,207 -------- -------- -------- -------- Loans charged off Real estate 9 - 76 - Commercial and financial 2 - 57 25 Commercial lease financing 134 147 411 355 Consumer loans 26 5 44 19 -------- -------- -------- -------- Total 171 152 588 399 -------- -------- -------- -------- Recoveries of loans previously charged off Real estate 4 - 4 - Commercial and financial 6 - 6 - Commercial lease financing 12 2 48 2 Consumer loans 2 2 2 3 -------- -------- -------- -------- Total 24 4 60 5 -------- -------- -------- -------- Additions due to merger - 1,929 - 1,929 Provision for loan and lease losses 300 530 675 795 -------- -------- -------- -------- Allowance at end of period $9,788 $9,537 $9,788 $9,537 ======== ======== ======== ======== Allowance to total loans (end of period) 1.11% 1.18% 1.11% 1.17% Ratio of net charge-offs to average loans (annualized) 0.07% 0.08% 0.13% 0.12%
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. 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, 2004, such deposits amounted to $666.2 million representing 56.1% of total deposits compared to 56.3% of total deposits at December 31, 2003. 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, 2004, total deposits increased $30.0 million, or 2.5%, remaining relatively stable at $1.2 billion. We benefited, however from a change in the mix as we experienced growth in core deposits (non time deposits) of $29.7 million, or 3.4% and time deposits increased $309 thousand, or 0.1%, respectively, at June 30, 2004 as compared to December 31, 2003. The growth in core deposits was due to increases in interest bearing demand and non-interest demand of $14.8 million and $14.6 million, -29- respectively. Time deposits amounted to $282.3 million, or 23.8%, of total deposits at June 30, 2004, as compared to $282.0 million, or 24.4%, at December 31, 2003. For the six months ended June 30, 2004, the Company's overall yield on deposits declined by 51 basis points from 1.47% to 0.96%, as compared to the same period 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, 2004 2003 ----------- ------------ (unaudited) Non-interest Demand $ 238,317 $ 223,745 Interest Bearing Demand 461,559 446,786 Savings 116,613 120,136 Money Market Savings 88,071 84,162 Time Deposits <$100,000 261,004 265,356 Time Deposits >$100,000 21,274 16,613 ---------- ---------- Total $1,186,838 $1,156,798 ========== ========== -30- 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 2004. 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") manages our 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 of directors, 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, 2004, 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 -31- estimated that net interest income, over a twelve-month horizon, would not decrease by more than 7.1%. At June 30, 2004, 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: (unaudited) Net Interest Income Sensitivity Simulation Percentage Change in Estimated Net Interest Income over a twelve month horizon ------------------------------------------- June 30, 2004 2003 ---- ---- +200 basis points -7.1 % -1.3 % +100 basis points -2.6 0.6 -100 basis points -3.4 -6.6 -200 basis points * * % * 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. The sensitivity gap analysis 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 -32- 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 14.8% at June 30, 2004. 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, theoretically 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, 2004, 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, 2004, the minimum leverage ratio requirement to be considered adequately capitalized was 3%. -33- The capital levels of the Company and the Bank at June 30, 2004, 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, 2004: (unaudited) Total Capital (to Risk Weighted Assets): The Company $95,294 10.16% $74,998 8.00% N/A N/A The Bank 95,073 10.14 74,973 8.00 $93,717 10.00% Tier 1 Capital (to Risk Weighted Assets): The Company 85,366 9.11 $37,499 4.00 N/A N/A The Bank 85,146 9.09 37,487 4.00 56,230 6.00 Tier 1 Capital (to Average Assets): The Company 85,366 6.40 $40,012 3.00 N/A N/A The Bank 85,146 6.40 39,886 3.00 66,476 5.00 As of December 31, 2003: Total Capital (to Risk Weighted Assets): The Company $91,694 10.46% $70,146 8.00% N/A N/A The Bank 91,358 10.35 70,637 8.00 $88,296 10.00% Tier 1 Capital (to Risk Weighted Assets): The Company 81,913 9.34 35,073 4.00 N/A N/A The Bank 81,576 9.24 35,319 4.00 52,978 6.00 Tier 1 Capital (to Average Assets): The Company 81,913 6.24 39,367 3.00 N/A N/A The Bank 81,576 6.22 39,318 3.00 65,530 5.00
Liquidity Liquidity is the ability to provide sufficient resources to meet all current financial obligations and finance prospective business opportunities. The Company's liquidity position over any given period of time is a product of its operating, financing and investing activities. The extent of such activities is often shaped by such external factors as competition for deposits and demand for loans. The Company's most liquid assets are cash and cash equivalents. At June 30, 2004, the total of such assets amounted to $32.3 million, or 2.3%, of total assets, compared to $31.4 million, or 2.3%, of total assets at December 31, 2003. Fluctuations in cash and cash equivalents are largely due to sales of securities, deposit growth and loan prepayments, which produce funds that are placed in federal funds sold or interest earning deposits pending investment in loans and securities. Financing for the Company's loans and investments is derived primarily from deposits, along with interest and principal payments on loans and investments. At June 30, 2004 and December 31, 2003, total deposits amounted to $1.2 billion. 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, 2004, advances from the FHLB and REPOS amounted to $46.5 million and $12.3 million, respectively, as compared to $56.5 million and $15.6 million, respectively, at December 31, 2003. -34- Net loans and leases at June 30, 2004 amounted to $873.5 million, an increase of $86.6 million, from $786.9 million at December 31, 2003. Another significant liquidity source is the Company's securities portfolio. Total securities at June 30, 2004 amounted to $379.9 million, a decrease of $72.2 million, from $452.1 million at December 31, 2003. At June 30, 2004 securities AFS amounted to $359.4 million, or 94.6%, of total securities compared to $433.0 million, or 95.8%, of total securities at December 31, 2003. 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 $100.0 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 Condensed Consolidated Balance Sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require collateral from the borrower if deemed necessary by the Company. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions. Commitments to extend credit and standby letters of credit are not recorded on the Company's condensed consolidated balance sheet until the instrument is exercised. At June 30, 2004 outstanding commitments to fund loans totaled $277.4 million and outstanding standby letters of credit totaled $1.9 million. The Company historically paid quarterly cash dividends and anticipates continuing paying quarterly dividends in the future. The Company could, if necessary, modify the amount or frequency, of dividends as an additional source of liquidity. There are imposed dividend restrictions on the Bank, which are described in Note 18 "Restrictions of Subsidiary Bank Dividends" in the Notes to Consolidated Financial Statements in the Company's 2003 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. -35- 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, 2004, 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, 2004, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, those controls. -36- 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 Set forth below is certain information regarding repurchases of our common stock during the quarter. 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 22, 2004. (b) Each of the persons nominated for director was elected; and the selection of Deloitte & Touche LLP as the Company's independent auditors for 2004 was ratified. The following are the voting results on each of these matters:
Against Or For Withheld Abstentions ---------- ---------- ----------- (1) ELECTION OF DIRECTORS Anthony D. Andora 9,927,737 857,088 0 Gerald A. Calabrese, Jr. 10,512,611 272,214 0 David R. Ficca 10,658,661 126,164 0 Nicholas R. Marcalus 10,455,293 329,532 0 Benjamin Rosenzweig 9,844,587 940,238 0 John A. Schepisi 10,655,228 129,597 0 Joseph C. Parisi 10,327,941 456,884 0 (2) Ratification of the selection of Deloitte & Touche LLP as the Company's independent Auditors for 2004. 10,663,599 33,267 87,958
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 -37- 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, 2004, the Company filed the following Current Report on Form 8-K: Form 8-K filed April 21, 2004, declaring a dividend for the second quarter of 2004. Form 8-K filed April 3, 2004, reporting earnings for the period ending March 31, 2004. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Interchange Financial Services Corporation By: /s/ Charles T. Field ----------------------------------- Charles T. Field Senior Vice President and CFO (Duly Authorized Officer and Principal Financial and Accounting Officer) Dated: August 9, 2004 -38- EX-11 2 e18753ex11.txt EXHIBIT 11 Exhibit 11. Computation Re: Earnings Per Share (dollars in thousands, except per share amounts) (unaudited)
-------------------------------------------------- -------------------------------------------------- Three Months Ended, Six Months Ended, -------------------------------------------------- -------------------------------------------------- June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003 ------------------------ ------------------------ ------------------------ ------------------------ 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 shareholders $4,355 12,741 $0.34 $4,187 11,818 $0.35 $8,341 12,754 $0.65 $7,543 10,829 $0.70 ===== ===== ===== ===== Effect of Dilutive Shares Options issued to management 236 178 250 158 ------ ------ ------ ------ Diluted Earnings per Common Share $4,355 12,977 $0.34 $4,187 11,996 $0.35 $8,341 13,004 $0.64 $7,543 10,987 $0.69 ====== ====== ===== ====== ====== ===== ====== ====== ===== ====== ====== =====
EX-31 3 e18753ex31_1.txt EXHIBIT 31.1 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 9, 2004 /s/ Anthony S. Abbate ------------------------------------- Anthony S. Abbate President and Chief Executive Officer EX-31 4 e18753ex31_2.txt EXHIBIT 31.2 Exhibit 31.2 - Certification of Chief Executive 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 9, 2004 /s/ Charles T. Field ------------------------------------------------- Charles T. Field Senior Vice President and Chief Financial Officer EX-32 5 e18753ex32.txt EXHIBIT 32 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, 2004, (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-----