-----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, PSsShpwidzOUKQdNSIodZzcTWUaXaokUgaY7/14auASnyD2kTJT/A3qHHGbZF3JZ AVQ4XEgq0aPzyxxM7CRuuw== 0000755933-05-000023.txt : 20050510 0000755933-05-000023.hdr.sgml : 20050510 20050510163459 ACCESSION NUMBER: 0000755933-05-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050510 DATE AS OF CHANGE: 20050510 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: 1205 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10518 FILM NUMBER: 05817212 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 form10q1q05.txt FORM 10-Q, FIRST QUARTER 2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-Q ----------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005 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 April 29, 2005, was 19,152,464 shares. INTERCHANGE FINANCIAL SERVICES CORPORATION INDEX PART I FINANCIAL INFORMATION Page No. Item 1 Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2005 (unaudited) and December 31, 2004................1 Unaudited Condensed Consolidated Statements of Income for the three months ended March 31, 2005 and 2004......................2 Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2005 and 2004.........................................3 Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004..................4 Notes to Unaudited Condensed 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.......27 Item 4 Controls and Procedures..........................................31 PART II OTHER INFORMATION Item 1 Legal Proceedings................................................33 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds......33 Item 3 Defaults upon Senior Securities..................................33 Item 4 Submission of Matters to a Vote of Security Holders..............33 Item 5 Other Information................................................33 Item 6 Exhibits and Reports on Form 8-K.................................33 Signatures......................................................34 Item 1: FINANCIAL STATEMENTS Interchange Financial Services Corporation - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- (dollars in thousands, except share data)
March 31 December 31, 2005 2004 ----------- ----------- (unaudited) Assets Cash and due from banks $ 31,762 $ 33,108 Interest bearing demand deposits 2 2 ------------ ---------- Total cash and cash equivalents 31,764 33,110 ------------ ---------- Securities held-to-maturity at amortized cost (estimated fair value of $14,087 and $15,276 for March 31, 2005 and December 31, 2004, respectively) 13,510 14,530 ------------ ------------ Securities available-for-sale at estimated fair value (amortized cost of $362,257 and $375,241 for March 31, 2005 and December 31 2004, respectively) 357,929 374,199 ------------ ------------ Loans and leases (net of unearned income and deferred fees of $5,674 and $5,514 for March 31, 2005 and December 31, 2004, respectively) 977,089 934,181 Less: Allowance for loan and lease losses 9,876 9,797 ------------ ------------ Net loans and leases 967,213 924,384 ------------ ------------ Bank owned life insurance 26,110 25,847 Premises and equipment, net 17,579 17,713 Foreclosed assets and other repossessed assets 150 156 Goodwill 55,952 55,952 Intangible assets 3,534 3,660 Accrued interest receivable and other assets 15,108 14,590 ------------ ------------ Total assets $1,488,849 $1,464,141 ============ ============ Liabilities Deposits Non-interest bearing $236,439 $235,036 Interest bearing 994,957 1,011,102 ------------ ------------ Total deposits 1,231,396 1,246,138 ------------ ------------ Securities sold under agreements to repurchase 3,729 4,401 Short-term borrowings 56,857 24,600 Long-term borrowings 35,000 30,000 Accrued interest payable and other liabilities 10,660 8,847 ------------ ------------ Total liabilities 1,337,642 1,313,986 ------------ ------------ Stockholders' equity: Common stock, without par value; 33,750,000 shares authorized; 19,144,057 and 19,109,872 shares issued and outstanding for March 31, 2005 and December 31, 2004, respectively 5,397 5,397 Capital surplus 73,485 73,320 Retained earnings 89,234 86,542 Accumulated other comprehensive loss, net of taxes of $1,719 and $408 for March 31, 2005 and December 31, 2004, respectively (2,609) (633) ------------ ------------ 165,507 164,626 Less: Treasury stock 14,300 14,471 ------------ ------------ Total stockholders' equity 151,207 150,155 ------------ ------------ Total liabilities and stockholders' equity $1,488,849 $1,464,141 ============ ============
- ------------------------------------------------------------------------------- See notes to condensed consolidated financial statements. All share data was restated to reflect a 3-for-2 stock split declared on January 18, 2005 and paid on February 18, 2005. -1- Interchange Financial Services Corporation - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF INCOME For the Three Months Ended March 31, - -------------------------------------------------------------------------------- (dollars in thousands, except per share data) (unaudited)
2005 2004 ------------ ------------ Interest income Interest and fees on loans $ 14,957 $ 12,707 Interest on federal funds sold - 6 Interest and dividends on securities Taxable interest income 2,665 2,650 Interest income exempt from federal income taxes 323 269 Dividends 60 39 ------------ ------------ Total interest income 18,005 15,671 ------------ ------------ Interest expense Interest on deposits 3,922 2,827 Interest on securities sold under agreements to repurchase 23 42 Interest on short-term borrowings 180 70 Interest on long-term borrowings 316 198 ------------ ------------ Total interest expense 4,441 3,137 ------------ ------------ Net interest income 13,564 12,534 Provision for loan and lease losses 175 375 ------------ ------------ Net interest income after provision for loan and lease losses 13,389 12,159 ------------ ------------ Non-interest income Service fees on deposit accounts 883 842 Net gain on sale of securities 67 514 Net gain on sale of loans and leases 156 76 Bank owned life insurance 264 261 Commissions on sale of annuities and mutual funds 182 212 Other 642 610 ------------ ------------ Total non-interest income 2,194 2,515 ------------ ------------ Non-interest expense Salaries and benefits 4,955 4,848 Occupancy 1,463 1,365 Furniture and equipment 315 334 Advertising and promotion 395 393 Amortization of intangible assets 126 126 Other 1,900 1,851 ------------ ------------ 9,154 8,917 Income before income taxes 6,429 5,757 Income taxes 2,009 1,771 ------------ ------------ Net income $ 4,420 $ 3,986 ============ ============ Basic earnings per common share $0.23 $0.21 ===== ===== Diluted earnings per common share $0.23 $0.20 ===== =====
- -------------------------------------------------------------------------------- See notes to condensed consolidated financial statements. All per share data was restated to reflect a 3-for-2 stock split declared on January 18, 2005 and paid on February 18, 2005. -2- Interchange Financial Services Corporation - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Three Months Ended March 31, - -------------------------------------------------------------------------------- (dollars in thousands, except per share data) (unaudited)
Accumulated Other Comprehensive Retained Comprehensive Common Capital Treasury Income Earnings Income (Loss) Stock Surplus Stock Total ------------- -------- ------------- ------ ------- -------- -------- Balance at January 1, 2004 $74,710 $ 2,434 $5,397 $73,231 $(12,579) $143,193 Comprehensive income Net Income $ 3,986 3,986 3,986 Other comprehensive income, net of taxes Unrealized gains on AFS debt securities 1,402 Less: net gains on disposition of securities (287) ------- Other comprehensive income, net of taxes 1,115 1,115 1,115 ------- Comprehensive income $ 5,101 ======= Dividends on common stock (1,602) (1,602) Issued 11,690 shares of common stock in connection with Executive Compensation Plan 103 102 205 Exercised 10,811 option shares (9) 84 75 Purchased 127,179 shares of common stock (2,154) (2,154) ------- ------- ------ ------- -------- -------- Balance at March 31, 2004 77,094 3,549 5,397 73,325 (14,547) 144,818 Comprehensive income Net Income $14,228 14,228 14,228 Other comprehensive income, net of taxes Unrealized losses on AFS debt securities (3,551) Less: net gains on disposition of securities (773) Unrealized gains on equity securities 137 Minimum pension liability adjustment 5 ------- Other comprehensive losses, net of taxes (4,182) (4,182) (4,182) ------- Comprehensive income $10,046 ======= Dividends on common stock (4,780) (4,780) Exercised 11,254 option shares (5) 97 92 Purcahsed 1,313 shares of common stock (21) (21) ------- ------- ------ ------- -------- -------- Balance at December 31, 2004 86,542 (633) 5,397 73,320 (14,471) 150,155 Comprehensive income Net Income $ 4,420 4,420 4,420 Other comprehensive income, net of taxes Unrealized losses on AFS debt securities (1,890) Less: net gains on disposition of securities (86) ------- Other comprehensive losses, net of taxes (1,976) (1,976) (1,976) ------- Comprehensive income $ 2,444 ======= Dividends on common stock (1,721) (1,721) Issued 17,111 shares of common stock in connection with Executive Compensation Plan 154 151 305 Exercised 11,675 option shares 11 96 107 Purchased 4,532 shares of common stock (76) (76) Payout of fractional shares resulting from the three-for-two stock split declared January 18, 2005 and paid on February 18, 2005 (7) (7) ------- ------- ------ ------- -------- -------- Balance at March 31, 2005 $89,234 $(2,609) $5,397 $73,485 $(14,300) $151,207 ======= ======= ====== ======= ======== ========
- -------------------------------------------------------------------------------- See notes to condensed consolidated financial statements. All share data was restated to reflect a 3-for-2 stock split declared on January 18, 2005 and paid on February 18, 2005. -3-
Interchange Financial Services Corporation - ------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year to Date Periods Ended, March 31, - ------------------------------------------------------------------------------- (in thousands) (unaudited) 2005 2004 ---------- --------- Cash flows from operating activities Net income $ 4,420 $ 3,986 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 502 498 Amortization of securities premiums 1,088 1,590 Accretion of securities discounts (73) (58) Amortization of loan premiums 23 - Amortization of premiums in connection with acquisition 203 356 Provision for loan and lease losses 175 375 Loss on foreclosed assetsand other repossessed assets 13 - Increase in cash surrender value of Bank Owned Life Insurance (263) (261) Net gain on sale of securities (67) (514) Origination of loans held for sale (2,490) (880) Sale of loans held for sale 2,645 941 Net gain on sale of loans and leases (156) (76) Net gain on sale of foreclosed real estate and repossessed assets - (14) Decrease (increase) in operating assets Accrued interest receivable (113) 425 Deferred taxes (393) 1,766 Other Assets 1,236 (692) Increase (decrease) in operating liabilities Accrued interest payable 313 (29) Other 1,500 836 ---------- --------- Cash provided by operating activities 8,563 8,249 ---------- --------- Cash flows from investing activities (Payments for) proceeds from Net originations of loans and leases (40,313) (15,005) Purchase of loans and leases (2,837) (20,608) Sale of loans and leases 16 282 Purchase of securities available-for-sale (14,560) (2,799) Maturities of securities available-for-sale 23,585 21,990 Sale of securities available-for-sale 3,048 44,793 Maturities of securities held-to-maturity 984 1,119 Sale of foreclosed real estate and other repossessed assets - 59 Purchase of fixed assets (305) (328) Premium in connection with acquisition 19 19 ---------- --------- Cash (used in) provided by investing activities (30,362) 29,522 ---------- --------- Cash flows from financing activities Proceeds from (payments for) Net change in deposits (14,740) 9,336 Securities sold under agreements to repurchase and other borrowings 285,314 145,363 Retirement of securites sold under agreement to repurchase and other borrowings (248,729) (164,230) Dividends (1,721) (1,602) Common stock issued 305 205 Payout of fractional shares resulting from 3-for-2 stock split (7) - Treasury stock (76) (2,154) Exercise of option shares 107 75 ---------- --------- Cash provided by (used in) financing activities 20,453 (13,007) ---------- --------- Decrease (increase) in cash and cash equivalents (1,346) 24,764 Cash and cash equivalents, beginning of year 33,110 31,435 ---------- --------- Cash and cash equivalents, end of year $31,764 $56,199 ========== ========= Supplemental disclosure of cash flow information: Cash paid for: Interest $4,323 $3,168 Income taxes 38 - Supplemental disclosure of non-cash investing and financing activities: Loans transferred to foreclosed real estate and other repossessed assets 7 34
- ------------------------------------------------------------------------------- See notes to condensed consolidated financial statements -4- NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2005 (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 consolidated financial statements and schedules thereto included in the annual report on Form 10-K of the Company for the year ended December 31, 2004. The condensed consolidated financial data for the three months ended March 31, 2005 and 2004, 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 condensed 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. New Accounting Pronouncements: In December 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-3, "Accounting for Loans and Debt Securities Acquired in a Transfer" ("SOP 03-3"). SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected form an initial investment in loans or debt securities acquired in a transfer if those differences relate, at least in part, to a deterioration of credit quality. SOP 03-3 prohibits companies from carrying over valuation allowances in the initial accounting for such loans and limits the yield that may be accreted to the excess of undiscounted expected cash flows over the initial investment in the loan. Decreases in expected cash flows are recognized as impairment and increases are recognized prospectively through an adjustment of the loan yield. SOP 03-3 is effective for loans and debt securities acquired on or after January 1, 2005. Our adoption of this guidance did not have a significant effect on our financial condition or results of operations. -5- 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. In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 123 (revised 2004), "Share-Based Payment," ("SFAS No. 123(R)"). SFAS No. 123(R) addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123(R) requires an entity to recognize the grant-date fair value of stock options and other equity-based compensation issued to employees within the income statement using a fair-value-based method, eliminating the intrinsic value method of accounting previously permissible under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related interpretations. On April 15, 2005, the Securities and Exchange Commission ("SEC") issued a ruling amending the date for compliance with SFAS No. 123(R). Registrants will be required to adopt FAS 123(R) beginning with the first interim or annual reporting period of the registrant's first fiscal year beginning on or after June 15, 2005. For the Company, this ruling will require adoption of SFAS No. 123(R) by no later than January 1, 2006. The Company is in the process of evaluating and determining which of the alternative methodologies under SFAS No. 123(R) will be utilized. Prior to the required adoption of SFAS No. 123(R), the Company has elected to account for its stock-based incentive plans and awards under APB No. 25, and has adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." The following table illustrates the effect on net income and diluted earnings per common share if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board ("FASB") Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based compensation for the three months ended March 31, 2005 and 2004: (in thousands, except share data) (unaudited) -6- -------------------------- For the three months ended March 31, 2005 2004 ------------ ----------- Net Income As reported $4,420 $3,986 Less: Total stock-based compensation expense determined under the fair method for all rewards, net of related tax effects 266 187 ------------ ---------- Pro-forma $4,154 $3,799 ============ ========== Earnings per share: Basic: As reported 0.23 0.21 Pro forma 0.22 0.20 Diluted: As reported 0.23 0.20 Pro forma 0.21 0.19 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 March 31, 2005 and 2004, respectively: dividend yield of 2.01% and 2.22%, expected volatility of 23.05% and 24.92%; risk-free interest rate of 3.86% and 3.34%; and expected lives of approximately 7 years. The effects of applying these assumptions in determining the pro-forma net income may not be representative of the effects on pro-forma net income for future years. 2. 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 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. At March 31, 2005 and 2004 the weighted average shares outstanding for the three months were approximately 19.6 million and 19.5 million, respectively. -7- 3. 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 March 31, 2005, the Company had commitments of approximately $238.6 million to extend credit, of which approximately $3.2 million represents standby letters of credit. 4. Goodwill and Other Intangibles Goodwill is not 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. ----------------- -------------- March 31, December 31, 2005 2004 ----------------- -------------- (unaudited) Intangible Assets $ 4,595 $ 4,595 Accumulated Amortization (1,061) (935) ----------------- -------------- Net Intangible Asset $ 3,534 $ 3,660 ================= ============== Intangible assets are a result of acquisitions and are primarily related to core deposit intangibles ("CDI") which have an estimated life of 10 years. For each of the three month periods ended March 31, 2005 and 2004 the CDI amortized was $107 thousand. The CDI will be periodically reviewed for impairment. Goodwill is tested for impairment at least annually in accordance with the provisions of SFAS No. 142. At March 31, 2005 the scheduled amortization of the intangible assets is as follows (in thousands): 2006 $ 436 2007 430 2008 430 2009 430 2010 430 Thereafter 999 ------------ $ 3,155 ============ -8- 5. 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. 6. Cash Dividend On January 18, 2005, the Company declared a 3-for-2 stock split. The stock split was payable on February 18, 2005 to holders of record as of February 2, 2005. In addition, the Company paid a cash dividend of $0.09 per share on February 18, 2005, to holders of record as of January 31, 2005. 7. 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) (unaudited) -9-
------------------------------------------- March 31, 2005 ------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- --------- ---------- ---------- Securities held-to-maturity Government-Sponsored Enterprises: Mortgage-backed securities $ 4,552 $ 99 $ - $ 4,651 Obligations of states & political subdivisions 8,958 478 - 9,436 --------- -------- --------- --------- $ 13,510 $ 577 $ - $ 14,087 ========= ======== ========= ========= Securities available-for-sale Government-Sponsored Enterprises: Mortgage-backed securities $ 112,751 $ 554 $ 1,268 $ 112,037 Other debt 210,658 175 3,938 206,895 Obligations of states & political subdivisions 33,324 422 273 33,473 Equity securities 5,524 - - 5,524 --------- -------- --------- --------- 362,257 1,151 5,479 357,929 --------- -------- --------- --------- Total securities $ 375,767 $ 1,728 $ 5,479 $ 372,016 ========= ======== ========= ========= ------------------------------------------ December 31, 2004 ------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- --------- ---------- --------- Securities held-to-maturity Government-Sponsored Enterprises: Mortgage-backed securities $ 5,583 $ 128 $ - $ 5,711 Obligations of states & political subdivisions 8,947 618 - 9,565 --------- -------- --------- --------- $ 14,530 $ 746 $ - $ 15,276 ========= ======== ========= ========= Securities available-for-sale Obligations of U.S. Treasury $ 5,981 $ 1 $ - $ 5,982 Government-Sponsored Enterprises: Mortgage-backed securities 121,198 793 599 121,392 Other debt 211,856 344 2,352 209,848 Obligations of states & political subdivisions 31,948 815 44 32,719 Equity securities 4,258 - - 4,258 --------- -------- --------- --------- 375,241 1,953 2,995 374,199 --------- -------- --------- --------- Total securities $ 389,771 $ 2,699 $ 2,995 $ 389,475 ========= ======== ========= =========
At March 31, 2005, the contractual maturities of securities HTM and securities AFS are as follows: (in thousands) (unaudited) Securities Securities Held-to-Maturity Available-for-Sale ---------------------- -------------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value ----------- ---------- ---------- ---------- Within 1 year $ 1,936 $ 1,984 $ 131,752 $ 131,062 After 1 but within 5 years 6,100 6,290 204,512 200,771 After 5 but within 10 years 5,017 5,335 7,132 7,110 After 10 years 457 478 13,337 13,462 Equity securities - - 5,524 5,524 ----------- ---------- ---------- ---------- Total $ 13,510 $ 14,087 $ 362,257 $ 357,929 =========== ========== ========== ========== Proceeds from the sale of securities AFS amounted to $3.1 million and $44.8 million for the three months ended March 31, 2005 and 2004, which resulted in gross realized gains of $67 million and $520 -10- thousand for those periods, respectively. Gross realized losses from the sale of securities AFS amounted to $6 thousand for the three months ended March 31, 2004. For the quarter ended March 31, 2005, there were no gross realized losses from the sale of securities. These amounts are included in net gain on sale of securities in the Condensed Consolidated Statements of Income. On a quarterly basis, the Company makes an assessment to determine whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. The Company considers many factors including the severity and duration of the impairment; the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value; recent events specific to the issuer or industry; and for debt securities, external credit ratings and recent downgrades. Securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded as a realized loss in securities gains (losses). Based upon the Company's evaluation of the securities portfolios no other than temporary impairment charge was necessary at March 31, 2005 and 2004. The following table summarizes all securities that have an unrealized loss and the duration of the unrealized loss at March 31, 2005: (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 available-for-sale Government-Sponsored Enterprises: Mortgage-backed securities $79,158 $1,215 $2,776 $53 $81,934 $1,268 Other debt 162,946 3,243 31,914 695 194,860 3,938 Obligations of states & political subdivisions 4,194 177 3,315 96 7,509 273 ---------- ---------- ---------- ----------- ------------ ---------- $246,298 $4,635 $38,005 $844 $284,303 $5,479 =========== ========== ========== =========== ============ ==========
The following table summarizes all securities that have an unrealized loss and the duration of the unrealized loss at March 31, 2005: (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 available-for-sale Government-Sponsored Enterprises: Mortgage-backed securities $ 4,467 $ 15 $ 2,808 $ 8 $ 7,275 $ 23 Other debt 39,091 67 - - 39,091 67 Obligations of states and political subdivisions 3,372 30 - - 3,372 30 ------------- ----------- ------------- ----------- --------------- ---------- $46,930 $112 $2,808 $8 $49,738 $120 ============= =========== ============= =========== =============== ========== Securities held-to-maturity Government-Sponsored Enterprises: Mortgage-backed securities $229 $1 - - $229 $1 ------------- ----------- ------------- ----------- --------------- ---------- $229 $1 $0 $0 $229 $1 ============= =========== ============= =========== =============== ==========
-11- Securities with carrying amounts of $82.5 million and $62.2 million at March 31, 2005 and December 31, 2004, respectively, were pledged for public deposits, Federal Home Loan Bank advances, securities sold under repurchase agreements and other purposes required by law. 8. Loans The composition of the loan portfolio is summarized as follows: (in thousands) ------------- -------------- March 31, December 31, 2005 2004 ------------- -------------- (unaudited) Amount of loans by type Real estate-mortgage 1-4 family residential First liens $ 140,842 $ 141,835 Junior liens 2,290 2,544 Home equity 152,015 148,027 Commercial 394,798 375,985 Construction 61,822 51,162 ------------- ------------- 751,767 719,553 ------------- ------------- Commercial loans Commercial and financial 197,521 186,386 Lease financing 23,871 23,535 ------------- ------------- 221,392 209,921 ------------- ------------- Consumer loans Lease financing 278 680 Installment 3,652 4,027 ------------- ------------- 3,930 4,707 ------------- ------------- Total $ 977,089 $ 934,181 ============= ============= Nonperforming Loans Nonperforming loans include loans that are accounted for on a nonaccrual basis. Nonperforming loans are as follows: (in thousands) ----------------- ---------------- March 31, December 31, 2005 2004 ----------------- ---------------- (unaudited) Nonaccrual loans Residential real estate $ 1,097 $ 1,660 Commercial real estate 1,651 2,320 Commercial and financial 3,063 2,981 Commercial lease financing 1,836 1,836 Consumer 127 336 ----------------- ---------------- $ 7,774 $ 9,133 ================= ================ -12- 9. Allowance for Loan and Lease Losses The Company's recorded investment in impaired loans is as follows: (in thousands)
------------------------------- ---------------------------- March 31, December 31, 2005 2004 ------------------------------- ---------------------------- (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 $ 2,946 $ 420 $ 2,981 $ 420 Commercial real estate 1,655 26 2,320 98 Residential mortgages 978 112 822 123 Without a related allowance for loan losses - - - - ------------- -------------- ------------- ------------- $ 5,579 $ 558 $6,123 $ 641 ============= ============== ============= ============= - --------------------------------------------------------------------------------------- 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) (unaudited) ---------------------------- Three months ended March 31, ---------------------------- 2005 2004 ------------ ------------ Balance at beginning of period $9,797 $9,641 Additions (deductions) Provision charged to operations 175 375 Recoveries on loans previously charged off 78 36 Loans charged off (174) (417) ----------- ----------- Balance at end of period $9,876 $9,635 =========== =========== 10. Other Non-interest Expense Expenses included in other non-interest expense are as follows: (in thousands) (unaudited) ----------------------------- Three Months Ended March 31, ----------------------------- 2005 2004 ------------- ------------- Professional fees $ 361 $ 317 Data processing 265 281 Directors' fees, retirement and travel 217 216 Legal fees 185 210 All other 872 827 ------------- ------------- $ 1,900 $ 1,851 ============= ============= -13- 11. Long-term Borrowings Long-term borrowings consist of the following FHLB advances: (in thousands) Maturity March 31, December 31, Date Rate 2005 2004 - ---------------- ------------ ---------------- --------------- January 2006 2.09 % - $10,000 January 2007 (a) 4.22 $10,000 10,000 January 2007 2.69 10,000 10,000 January 2010 (b) 3.66 15,000 - ----------- ---------------- ---------------- 3.52 % $35,000 $30,000 =========== ================ ================ (a) The FHLB has an option to call this advance on a quarterly basis if the 3-month LIBOR resets above 7.50%. (b) The FHLB has an option to call this advance only on January 23, 2008. 12. 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 March 31, ------------ ------------- 2005 2004 ------------ ------------- Service cost $ 198 $ 166 Interest cost 102 95 Expected return on plan assets (55) (39) Amortization of prior service cost 1 1 ------------ ------------- Net periodic benefit cost $ 246 $ 223 ============ ============= During 2005, the Bank anticipates contributing approximately $43 thousand to the Pension Plan of which $9 thousand has already been contributed. -14- Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The following discussion is an analysis of the condensed consolidated financial condition and results of operations of the Company for the three month periods ended March 31, 2005 and 2004, and should be read in conjunction with the condensed 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 2004 Annual Report on Form 10-K. Forward Looking Information In addition to discussing historical information, certain statements included in or incorporated into this report relating to the financial condition, results of operations and business of the Company, which are not historical facts may be deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used herein, the words "anticipate," "believe," "estimate," "expect," "will" and other similar expressions (including when preceded or followed by the word "not") are generally intended to identify such forward-looking statements. Such statements are intended to be covered by the safe harbor provisions for forward-looking statements contained in such Act, and we are including this statement for purposes of invoking these safe harbor provisions. Such forward-looking statements include, but are not limited to, statements about the operations of the Company, the adequacy of the Company's allowance for losses associated with the loan 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) disruptions caused by terrorism, such as the events of September 11, 2001, or military actions in the Middle East or other areas; (v) legislation or regulatory requirements or changes adversely affecting the business of the Company; and (vi) 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. -15- 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 Management's Discussion and Analysis of Financial Condition and Results of Operations ("MDA"): "Critical Accounting Policies and Judgments" in our 2004 Annual Report on Form 10-K. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect the Company's reported results and financial position for the period or in future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Assets and liabilities carried at fair value inherently result in more financial statement volatility. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments primarily by using internal cash flow and other financial modeling techniques. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on the Company's future financial condition and results of operations. Allowance for Loan and Lease Losses: The allowance for loan and lease losses ("ALLL") is established through periodic charges to income. Loan losses are charged against the ALLL when management believes that the future collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. If the ALLL is considered inadequate to absorb future loan losses on existing loans, based on, but -16- 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 $9.9 million adequate to cover estimated losses inherent in the loan portfolio, loan commitments and standby and other letters of credit that may become uncollectible based on management's evaluations of the size and current risk characteristics of the loan and lease portfolio as of the balance sheet date. The evaluations consider such factors as changes in the composition and volume of the loan portfolio, the impact of changing economic conditions on the credit worthiness of the borrowers, review of specific problem loans and management's assessment of the inherent risk and overall quality of the loan portfolio. For further discussion see the "Loan Quality" and "Allowance for Loan and Lease Losses" sections of the MDA, along with Note 1 "Nature of Business and Summary of Significant Accounting Policies"; Note 6 "Allowance for Loan and Lease Losses"; and Note 12 "Commitments and Contingent Liabilities" of the Consolidated Financial Statements in our 2004 Annual Report on Form 10-K. Business Combinations: Business combinations are accounted for using the purchase method of accounting, which requires that the assets and liabilities of the companies acquired are recorded at their estimated fair value at the date of acquisition and included in the results of operations of the Company 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 and Other Intangible Assets: Goodwill is not 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, and on an interim basis when conditions require, 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. An impairment is measured on a discounted future cash flow basis and a charge is recognized in the period that the asset has been deemed to be impaired. Securities held-to-maturity and securities available-for-sale: Debt securities purchased with the intent and ability to hold until maturity are classified as securities held-to-maturity ("HTM") and are carried at cost, adjusted for the amortization of premiums and accretion of discounts. All other securities, including equity securities, are classified as securities available-for-sale ("AFS"). Securities classified as AFS may be sold prior to maturity in response to, but not limited to, changes in interest rates, changes in prepayment risk or for asset/liability management strategies. These securities are carried at fair value and any unrealized gains and losses are reported, net of taxes, in accumulated other comprehensive income (loss) included in the consolidated statement of stockholders' equity. The estimated fair value for securities are based on quoted market prices, where available. If quoted market prices are not available, estimated fair values are -17- based on quoted market prices of comparable instruments. Gains and losses from the sale of these securities are determined using the specific identification method and are reported in non-interest income. The Company does not acquire securities for the purpose of engaging in trading activities. On a quarterly basis, the Company makes an assessment to determine whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. The Company considers many factors including the severity and duration of the impairment; the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value; recent events specific to the issuer or industry; and for debt securities, external credit ratings and recent downgrades. Securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded as a realized loss in securities gains (losses). Pension Plan: The Bank maintains a qualified defined benefit pension plan (the "Pension Plan"), which covers all eligible employees and an unfunded supplemental pension plan which provides retirement income to all eligible employees who would have been paid amounts in excess of the amounts provided by the Pension Plan but for limitations under the qualified Pension Plan. In addition, the Company has an unfunded retirement plan for all directors of the Bank who are not employees of the Company or any subsidiary or affiliate. -18- THREE MONTHS ENDED MARCH 31, 2005 AND 2004 RESULTS OF OPERATIONS Summary For the first quarter of 2005, the Company reported earnings per diluted common share of $0.23, as compared to $0.21 for the same period in 2004, an increase of approximately 9.5%. Net income for the three months ended March 31, 2005 was approximately $4.4 million, an increase of $434 thousand, or 10.9%, over the same period last year. The increase in earnings resulted from an increase in our interest earning assets during the quarter of approximately $92.4 million. The Company's return on average assets increased to 1.20% as compared to 1.16% for the three months ended March 31, 2005 and 2004, respectively. In addition, the Company's return on average stockholders' equity increased to 11.70% for the first quarter 2005 versus 11.13% for the first quarter in 2004. 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 a corporate federal tax rate of 34% for the quarter ended March 31, 2005 and 2004. 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 $1.0 million, or 8.1%, to $13.7 million for the quarter ended March 31, 2005 as compared to the same quarter in 2004. The tax equivalent basis adjustments for the quarters ended March 31, 2005 and 2004 were $162 thousand and $160 thousand, respectively. The increase in net interest income was due mostly to a 7.5% growth in interest earning assets. This interest earning asset growth was funded primarily by deposit liabilities, which grew $78.1 million or 6.7% on average for the first quarter of 2005 as compared to the same quarter in 2004. The margin for the first quarter of 2005 was 4.14%, an increase of 3 basis points as compared to the same quarter in 2004. Interest income, on a tax-equivalent basis, totaled $18.2 million for the first quarter of 2005, an increase of $2.3 million, or 14.8%, as compared to the same quarter in 2004. The increase was mostly attributed to the growth in interest earning assets and the shift in asset mix as average loans grew $140.0 million, while investments declined by $45.2 million. Interest expense totaled $4.4 million for the first quarter of 2005, an increase of $1.3 million, as compared to the same period in 2004. The increase in interest expense was a byproduct of the increase -19- in market interest rates, particularly short-term rates, during the second half of 2004 and the first quarter of 2005. The increase in short-term interest rates increased the average rate paid on deposit liabilities by 29 basis points to 1.27% for the quarter ended March 31, 2005 as compared to the same period in 2004. Interest bearing deposits grew on average $63.6 million, or 6.8%, for the first quarter of 2005 as compared to the same period in 2004.
- -------------------------------------------------------------------------------- Analysis of Net Interest Income - -------------------------------------------------------------------------------- for the quarter ended March 31, (dollars in thousands) 2005 2004 ------------------------------------- --------------------------------- (unaudited) Average Average Average Average Balance Interest Rate Balance Interest Rate -------------- ----------- -------- ------------ --------- -------- Assets Interest earning assets: Loans (1) $946,417 $14,985 6.33 % $806,387 $12,748 6.32 % Taxable securities (4) 346,224 2,725 3.15 397,591 2,689 2.71 Tax-exempt securities (2) (4) 35,076 457 5.21 28,898 388 5.37 Interest earning deposits 2 - - 12 - - Federal funds sold 62 - - 2,507 6 0.96 ------------- ---------- ------- ----------- -------- ------- Total interest-earning assets 1,327,781 18,167 5.47 1,235,395 15,831 5.13 ---------- -------- Non-interest earning assets: Cash and due from banks 34,875 35,547 Allowance for loan and lease losses (9,874) (9,636) Other assets 115,435 118,933 ------------- ----------- Total assets $1,468,217 $1,380,239 ============= =========== Liabilities and stockholders' equity Interest-bearing liabilities Interest bearing deposits $997,141 3,922 1.57 $933,522 2,827 1.21 Borrowings 72,042 519 2.88 65,364 310 1.90 ------------- ---------- ------- ----------- -------- ------- Total interest-bearing liabilities 1,069,183 4,441 1.66 998,886 3,137 1.26 ---------- -------- Non-interest bearing liabilities Demand deposits 238,549 224,100 Other liabilities 9,433 14,013 ------------- ----------- Total liabilities (3) 1,317,165 1,236,999 Stockholders' equity 151,052 143,240 ------------- ----------- Total liabilities and stockholders' equity $1,468,217 $1,380,239 ============= =========== Net interest income (tax-equivalent basis) 13,726 3.81 12,694 3.87 Tax-equivalent basis adjustment (162) (160) ---------- -------- Net interest income $13,564 $12,534 ========== ======== Net interest income as a percent of interest- earning assets (tax-equivalent basis) 4.14 % 4.11 %
- -------------------------------------------------------------------------------- (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 amortized cost and do not reflect unrealized gains or losses. -20- Provision for Loan and Lease Losses The provision for loan and lease losses represents management's calculation of the amount necessary to bring the ALLL to a level that management considers adequate to reflect the risk of estimated losses inherent in the Company's loan and lease 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 quarter of 2005 and 2004, the Company's provision for loan and lease losses was $175 thousand and $375 thousand, respectively. The decline in the provision for loan and lease losses was primarily a result of an improvement in our non-performing assets. Non-interest Income For the quarter ended March 31, 2005, non-interest income totaled $2.2 million, a decrease of $321 thousand, or 12.8%, as compared to the same period in 2004. The change was largely due to a decline in net gains on sales of securities of $447 thousand. This was partly offset by growth in gains on sales of loans and leases of $80 thousand and service charges on deposits of $41 thousand. The increase in gains on sales of loans arose out of an increase in sales of Small Business Administration originated loans. Non-interest Expense For the quarter ended March 31, 2005, non-interest expense was $9.2 million, an increase of $237 thousand, or 2.7%. Contributing to the increase was an increase in salaries and benefits of $107 thousand, as compared to the same period in 2004. Income Taxes Income tax expense as a percentage of pre-tax income was 31.2% for the three months ended March 31, 2005 as compared to 30.8% for the same period of 2004. -21- FINANCIAL CONDITION Cash and Cash Equivalents At March 31, 2005, cash and cash equivalents was $31.8 million as compared to $33.1 million at December 31, 2004. 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, AFS, or 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's U.S. Government-Sponsored Enterprises securities at March 31, 2005 and 2004 are not guaranteed by the U.S. Government; however they are credit rated AAA or Aaa by nationally recognized statistical rating organizations. Substantially all obligations of states and political subdivisions are credit rated AAA or Aaa due to insurance, which guarantees the obligations against default, by private insurance companies. At March 31, 2005 and 2004, approximately $12.2 million and $9.9 million, respectively, of issuances are bond or tax anticipation notes from local municipalities, which are not rated. 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 March 31, 2005, investment securities totaled $371.4 million and represented 24.9% of total assets, as compared to $388.7 million and 26.5%, respectively, at December 31, 2004. Securities AFS comprised 96.4% of the total securities portfolio at March 31, 2005 as compared to 96.3% at December 31, 2004. At March 31, 2005, the Company had a net unrealized loss of $3.8 million as compared to a net unrealized loss of $296 thousand at December 31, 2004. The decrease was attributed to an increase in market interest rates during that period. Proceeds from the sale of securities AFS amounted to $3.1 million and $44.8 million for the three months ended March 31, 2005 and 2004, which resulted in gross realized gains of $67 million and $520 thousand for those periods, respectively. Gross realized losses from the sale of securities AFS amounted to $6 thousand for the three months ended March 31, 2004. For the quarter ended March 31, 2005, there were no gross realized losses from the sale of securities. These amounts are included in net gain on sale of securities in the Consolidated Statements of Income. -22- Loans Total loans amounted to $977.1 million at March 31, 2005, an increase of $42.9 million from $934.2 million at December 31, 2004. The growth was attributable to increases in commercial mortgage loans, commercial and financial loans, and construction loans of $18.8 million, $11.1 million, and $10.7 million, respectively. ------------- -------------- (in thousands) March 31, December 31, 2005 2004 ------------- -------------- (unaudited) Amount of loans by type Real estate-mortgage 1-4 family residential First liens $ 140,842 $ 141,835 Junior liens 2,290 2,544 Home equity 152,015 148,027 Commercial 394,798 375,985 Construction 61,822 51,162 ------------- ------------- 751,767 719,553 ------------- ------------- Commercial loans Commercial and financial 197,521 186,386 Lease financing 23,871 23,535 ------------- ------------- 221,392 209,921 ------------- ------------- Consumer loans Lease financing 278 680 Installment 3,652 4,027 ------------- ------------- 3,930 4,707 ------------- ------------- Total $ 977,089 $ 934,181 ============= ============= Nonperforming Assets Nonperforming assets are comprised of nonaccrual loans, restructured loans, foreclosed real estate and other repossessed assets. The Company's nonperforming assets at March 31, 2005 amounted to $7.9 million as compared to $9.3 million at December 31, 2004. The ratio of nonperforming assets to total loans and foreclosed real estate and other repossessed assets decreased to 0.81% at March 31, 2005 from 0.99% at December 31, 2004. The following table lists nonaccrual loans and foreclosed real estate and other repossessed assets at March 31, 2005, and December 31, 2004: (in thousands) March 31, December 31, 2005 2004 ----------- ------------ (unaudited) Nonperforming loans $ 7,774 $ 9,133 Foreclosed real estate and other repossessed assets 150 156 ----------- ------------ Total nonperforming assets $ 7,924 $ 9,289 =========== ============ -23- Allowance for Loan and Lease Losses The ALLL is generally established through periodic charges to income through the provision for loan and lease losses. During the three months ended March 31, 2005, the ALLL increased $79 thousand to $9.9 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 $9.9 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. -24- 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 March 31, 2005 and 2004: (dollars in thousands) (unaudited) ------------------------- Three months ended March 31, ------------------------- 2005 2004 ----------- ---------- Average loans outstanding $946,417 $806,387 =========== ========== Allowance at beginning of period 9,797 9,641 ----------- ---------- Loans charged off Real estate - 67 Commercial and financial 89 55 Commercial lease financing 81 277 Consumer loans 4 18 ----------- ---------- Total 174 417 ----------- ---------- Recoveries of loans previously charged off Real estate 72 - Commercial and financial - - Commercial lease financing - 36 Consumer loans 6 - ----------- ---------- Total 78 36 ----------- ---------- Additions due to merger - - Provision for loan and lease losses 175 375 ----------- ---------- Allowance at end of period $9,876 $9,635 =========== ========== Allowance to total loans (end of period) 1.01 % 1.16 % Ratio of net charge-offs to average loans(annualized) 0.04 % 0.19 % 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 March 31, 2005, such deposits amounted to $649.6 million representing 52.8% of total deposits compared to 54.1% of total deposits at December 31, 2004. The Company emphasizes building core customer relationships by offering a variety of products designed to meet the financial needs of its customers based on their identifiable "life stages". At March 31, 2005 and December 31, 2004 total deposits were approximately $1.2 billion. We saw a slight shift in our overall deposit mix as time deposits grew $8.0 million, while interest bearing demand and money market declined approximately $11.5 million and $12 million, respectively. Time -25- deposits amounted to $345.4 million, or 28.0%, of total deposits at March 31, 2005, as compared to $337.3 million, or 27.1%, at December 31, 2004. For the three months ended March 31, 2005, the Company's overall yield on deposits increased by 29 basis points from 0.98% to 1.27%, as compared to the same period last year. The increase 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) --------------- ------------------ March 31, December 31, 2005 2004 --------------- ------------------ (Unaudited) Non-interest Demand $236,439 $235,036 Interest Bearing Demand 461,325 472,807 Savings 112,622 113,352 Money Market Savings 75,632 87,595 Time Deposits <$100,000 292,227 286,471 Time Deposits >$100,000 53,151 50,877 --------------- ------------------ Total $1,231,396 $1,246,138 =============== ================== -26- 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 three 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 March 31, 2005, the Company simulated the effects on net interest income given an instantaneous and parallel shift in the yield curve of up to a 200 basis point rising interest rate environment and a 100 basis point declining interest rate environment. Based on that simulation, it was estimated that net interest income, over a twelve-month horizon, would not decrease by more than 4.7%. At March 31, 2005, the Company -27- 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) --------------------------------- Percentage Change in Estimated Net Interest Income over a twelve month horizon --------------------------------- March 31, 2005 2004 ---- ---- +200 basis points -4.7 % -5.6 % +100 basis points -1.9 -1.7 - -100 basis points -2.1 -4.8 - -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. 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 -28- 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 March 31, 2005, the minimum risk-based capital requirements to be considered adequately capitalized were 4% for Tier 1 capital and 8% for total capital. Federal banking regulators have also adopted leverage capital guidelines to supplement the risk-based measures. The leverage ratio is determined by dividing Tier 1 capital as defined under the risk-based guidelines by average total assets (non risk-adjusted) for the preceding quarter. At March 31, 2005, the minimum leverage ratio requirement to be considered adequately capitalized was 3%. The capital levels of the Company and the Bank at March 31, 2005, 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 change in the Company's risk weighted capital ratios during the three month period ending March 31, 2005 was primarily a result of a shift from securities which had a lower risk rating basis into loans. -29- The Company's and the Bank's capital amounts and ratios are as follows: (dollars in thousands)
To Be "Well Capitalized" Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions -------------------- ------------------- ------------------- Amount Ratio Amount Ratio Amount Ratio --------- --------- ---------- ------ --------- -------- As of March 31, 2005: Total Capital (to Risk Weighted Assets): The Company $105,353 10.20 % $82,600 8.00 % N/A N/A The Bank 104,397 10.10 % 82,655 8.00 % $98,759 10.00 % Tier 1 Capital (to Risk Weighted Assets): The Company 95,457 9.25 % 41,300 4.00 % N/A N/A The Bank 94,501 9.15 % 41,328 4.00 % 59,256 6.00 % Tier 1 Capital (to Average Assets): The Company 95,457 6.72 % 42,590 3.00 % N/A N/A The Bank 94,501 6.65 % 42,600 3.00 % 71,225 5.00 % As of December 31, 2004: Total Capital (to Risk Weighted Assets): The Company $102,175 10.35 % $78,959 8.00 % N/A N/A The Bank 101,442 10.27 % 79,007 8.00 % $98,759 10.00 % Tier 1 Capital (to Risk Weighted Assets): The Company 92,338 9.36 % 39,480 4.00 % N/A N/A The Bank 91,605 9.28 % 39,504 4.00 % 59,256 6.00 % Tier 1 Capital (to Average Assets): The Company 92,338 6.49 % 42,692 3.00 % N/A N/A The Bank 91,605 6.43 % 42,735 3.00 % 71,225 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 March 31, 2005, the total of such assets amounted to $31.8 million, or 2.1%, of total assets, compared to $33.1 million, or 2.3%, of total assets at December 31, 2004. Financing for the Company's loans and investments is derived primarily from deposits, along with interest and principal payments on loans and investments. At March 31, 2005 and December 31, 2004, 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 March 31, 2005, short-term borrowings from the FHLB and REPOS amounted to $56.9 million and $3.7 million, respectively, as compared to $24.6 million and $4.4 million, respectively, at December 31, 2004. Another significant liquidity source is the Company's securities portfolio. Total securities at March 31, 2005 amounted to $371.4 million, a decrease of $17.3 million, from $388.7 million at December 31, 2004. At March 31, 2005 securities AFS amounted to $357.9 million, or 96.4%, of total securities compared to $374.2 million, or 96.3%, of total securities at December 31, 2004. 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 -30- window. The Bank also has a $100.0 million line of credit available through its membership in the FHLB of which $39.5 million was utilized at March 31, 2005. 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 unaudited 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 March 31, 2005 outstanding commitments to fund loans totaled $238.6 million and outstanding standby letters of credit totaled $3.2 million. The Company has historically paid quarterly cash dividends and anticipates continuing paying quarterly dividends in the future. The Company's Board of Directors could, if they deemed it 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 2004 Annual Report on Form 10-K. Management believes that the Company has sufficient cash flow and borrowing capacity to fund all outstanding commitments and letters of credit and to maintain proper levels of liquidity. Item 4: CONTROLS AND PROCEDURES In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), as of the end of the quarter ended March 31, 2005, 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 to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and in reaching a reasonable level of assurance our -31- management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company maintains internal control over financial reporting. During the quarter ended March 31, 2005, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, those controls. -32- 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. Unregistered Sales of Equity in Securities and Use of Proceeds Set forth below is certain information regarding repurchases of our common stock during the quarter. Total Number Average of Shares Price Paid Period Purchased(1) per Share -------------- ------------ ---------- 1/1/05-1/31/05 954 17.03 2/1/05-2/28/05 3,578 16.57 ------------ ---------- 4,532 17.00 ============ ==========
(1) The 4,532 shares redeemed were not part of a publicly announced repurchase plan or program. The shares were owned and tendered by employees to the Company as payment for option exercises in accordance with the Outside Director Incentive Compensation Plan and the Stock Option and Incentive Plan of 1997, as amended. All share and per share data were restated to reflect 3-for-2 stock split declared on January 18, 2005 and paid on February 18, 2005. Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K The following exhibits are furnished herewith: Exhibit. -------- 11 Statement re computation of per share earnings 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -33- 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: May 10, 2005 -34- EX-11 2 exhibit11.txt EXHIBIT 11, STATEMENT RE: COMPUTATION Exhibit 11. Statement re computation of per share earnings (dollars in thousands, except per share amounts) (unaudited)
--------------------------------------------------------------------- Three Months Ended, --------------------------------------------------------------------- March 31, 2005 March 31, 2004 --------------------------------- ---------------------------------- Weighted Per Weighted Per Average Share Average Share Income Shares Amount Income Shares Amount ---------- ----------- ---------- ---------- ------------ ---------- Basic Earnings per Common Share Income available to common shareholders $4,420 19,134 $0.23 $3,986 19,150 $0.21 ========= ========= Effect of Dilutive Share Options issued - 422 - 393 --------- ---------- ---------- ----------- Diluted Earnings per Common Share $4,420 19,556 $0.23 $3,986 19,543 $0.20 ========= ========== ========== ========== =========== =========
All share and per share data were restated to reflect the 3-for-2 stock split declared on January 18, 2005 and paid on February 18, 2005. EX-31 3 exhibit31_1.txt EXHIBIT 31.1, CERTIFICATION OF CEO 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and we 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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: May 10, 2005 /s/ Anthony S. Abbate ---------------------------------------- Anthony S. Abbate President and Chief Executive Officer EX-31 4 exhibit31_2.txt EXHIBIT 31.2, CERTIFICATION OF CFO Exhibit 31.2 - Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 CERTIFICATION OF DISCLOSURE CONTROLS I, Charles T. Field, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Interchange Financial Services Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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: May 10, 2005 /s/ Charles T. Field ------------------------------------------------- Charles T. Field Senior Vice President and Chief Financial Officer EX-32 5 exhibit32.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 March 31, 2005, (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-----