UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM____ TO ____
Commission File number 1-10518
INTERCHANGE FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2553159
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Park 80 West/Plaza Two, Saddle Brook, NJ 07663
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(201) 703-2265
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(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 October 29, 2004, was 12,745,735 shares.
INTERCHANGE FINANCIAL SERVICES CORPORATION
INDEX
PART I FINANCIAL INFORMATION
Page No.
Item 1 Financial Statements
Consolidated Balance Sheets as of
September 30, 2004 (unaudited) and December 31, 2003...............1
Unaudited Consolidated Statements of Income for the three
and nine month periods ended September 30, 2004 and 2003...........2
Unaudited Consolidated Statements of Changes in
Stockholders' Equity for the nine months ended
September 30, 2004 and 2003........................................3
Unaudited Consolidated Statements of Cash Flows for the
nine months ended September 30, 2004 and 2003......................4
Notes to Unaudited Condensed Consolidated Financial Statements.....5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................16
Item 3 Quantitative and Qualitative Disclosures About Market Risk........32
Item 4 Controls and Procedures...........................................36
PART II OTHER INFORMATION
Item 1 Legal Proceedings.................................................37
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds.......37
Item 3 Defaults upon Senior Securities...................................37
Item 4 Submission of Matters to a Vote of Security Holders...............37
Item 5 Other Information.................................................37
Item 6 Exhibits and Reports on Form 8-K..................................37
Signatures....................................................38
Item 1: FINANCIAL STATEMENTS
Interchange Financial Services Corporation
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CONDENSED CONSOLIDATED BALANCE SHEETS
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(dollars in thousands)
September 30, December 31,
2004 2003
------------- ------------
(unaudited)
Assets
Cash and due from banks $ 36,347 $ 31,423
Interest earning deposits 2 12
Federal funds sold 17,300 -
---------- ----------
Total cash and cash equivalents 53,649 31,435
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Securities held to maturity at amortized cost
(estimated market value of $17,571 and $20,223 for
September 30, 2004 and December 31, 2003, respectively) 16,692 19,107
---------- ----------
Securities available for sale at estimated market value
(amortized cost of $355,009 and $428,597 for
September 30, 2004 and December 31, 2003, respectively) 356,065 432,953
---------- ----------
Loans and leases (net of unearned income and deferred fees
of $5,316 and $6,057 for September 30, 2004 and
December 31, 2003, respectively) 927,154 796,581
Less: Allowance for loan and lease losses 9,797 9,641
---------- ----------
Net loans and leases 917,357 786,940
---------- ----------
Bank owned life insurance 22,585 21,853
Premises and equipment, net 17,878 20,343
Foreclosed real estate and other repossesed assets 246 230
Goodwill 55,952 55,924
Intangible assets 3,787 4,165
Accrued interest receivable and other assets 17,023 12,922
---------- ----------
Total assets $1,461,234 $1,385,872
========== ==========
Liabilities
Deposits
Non-interest bearing $ 230,198 $ 223,745
Interest bearing 1,015,116 933,053
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Total deposits 1,245,314 1,156,798
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Securities sold under agreements to repurchase 9,756 15,618
Short-term borrowings 14,000 46,491
Long-term borrowings 30,000 10,000
Accrued interest payable and other liabilities 14,387 13,772
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Total liabilities 1,313,457 1,242,679
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Commitments and contingent liabilities
Stockholders' equity:
Common stock, without par value; 22,500,000 shares authorized;
12,745,735 and 12,810,193 shares issued and outstanding at
September 30, 2004 and December 31, 2003, respectively 5,397 5,397
Capital surplus 73,326 73,231
Retained earnings 82,924 74,710
Accumulated other comprehensive income 618 2,434
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162,265 155,772
Less: Treasury stock 14,488 12,579
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Total stockholders' equity 147,777 143,193
---------- ----------
Total liabilities and stockholders' equity $1,461,234 $1,385,872
========== ==========
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See notes to condensed consolidated financial statements.
- 1 -
Interchange Financial Services Corporation
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CONSOLIDATED STATEMENTS OF INCOME
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(dollars in thousands, except per share data) (unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2004 2003 2004 2003
------- ------- ------- -------
Interest income
Interest and fees on loans $13,877 $13,044 $39,709 $36,370
Interest on federal funds sold 33 68 70 252
Interest on interest bearing deposits - 36 - 57
Interest and dividends on securities
Taxable interest income 2,630 2,507 7,841 7,119
Interest income exempt from federal income taxes 303 254 851 654
Dividends 33 56 74 165
------- ------- ------- -------
Total interest income 16,876 15,965 48,545 44,617
------- ------- ------- -------
Interest expense
Interest on deposits 3,085 3,204 8,672 10,027
Interest on securities sold under agreements to repurchase 34 58 112 223
Interest on short-term borrowings 60 1 171 1
Interest on long-term borrowings 237 108 660 320
------- ------- ------- -------
Total interest expense 3,416 3,371 9,615 10,571
------- ------- ------- -------
Net interest income 13,460 12,594 38,930 34,046
Provision for loan and lease losses 300 485 975 1,280
------- ------- ------- -------
Net interest income after provision
for loan losses 13,160 12,109 37,955 32,766
------- ------- ------- -------
Non-interest income
Service fees on deposit accounts 1,001 998 2,778 2,559
Net gain on sale of securities 163 501 982 520
Net gain on sale of loans and leases 273 222 406 567
Bank owned life insurance 245 692 732 1,754
Commissions on sale of annuities and mutual funds 266 270 734 658
Other 929 652 2,452 1,765
------- ------- ------- -------
Total non-interest income 2,877 3,335 8,084 7,823
------- ------- ------- -------
Non-interest expense
Salaries and benefits 5,029 4,707 14,541 12,528
Net occupancy 1,325 1,282 3,977 3,305
Furniture and equipment 327 373 987 979
Advertising and promotion 346 401 1,209 1,137
Federal Deposit Insurance Corporation assessment 43 45 134 116
Foreclosed real estate - 1 5 1
Amortization of intangible assets 126 125 378 234
Other 2,071 1,824 5,751 4,681
------- ------- ------- -------
Total non-interest expense 9,267 8,758 26,982 22,981
------- ------- ------- -------
Income before income taxes 6,770 6,686 19,057 17,608
Income taxes 2,109 2,175 6,055 5,554
------- ------- ------- -------
Net income $ 4,661 $ 4,511 $13,002 $12,054
======= ======= ======= =======
Basic earnings per common share $0.37 $0.35 $1.02 $1.05
======= ======= ======= =======
Diluted earnings per common share $0.36 $0.35 $1.00 $1.04
======= ======= ======= =======
- --------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
- 2 -
Interchange Financial Services Corporation
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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30,
- --------------------------------------------------------------------------------
(dollars in thousands, except per share data)
(unaudited)
Accumulated
Other
Comprehensive Retained Comprehensive Common Capital Treasury
Income Earnings Income Stock Surplus Stock Total
------------- -------- ------------- ------ ------- -------- --------
Balance at January 1, 2003 $63,314 $ 3,596 $5,397 $21,097 $(12,724) $ 80,680
Comprehensive income
Net Income $12,054 12,054 12,054
Other comprehensive income, net of taxes
Unrealized gains on AFS debt securities 375
Less: realized gains on disposition
of securities (594)
Minimum pension liability adjustment (19)
-------
Other comprehensive income (238) (238) (238)
-------
Comprehensive income $11,816
=======
Dividends on common stock (3,567) (3,567)
Issued 20,833 shares of common stock
in connection with Executive
Compensation Plan 109 245 354
Exercised 52,423 option shares (186) 445 259
Issued 2,949,719 shares of common stock
in connection with the acquisition of
Bridge View Bancorp 52,180 52,180
Reacquired 35,959 shares in lieu of
non-performing asset (693) (693)
------- ------- ------ ------- -------- --------
Balance at September 30, 2003 71,801 3,358 5,397 73,200 (12,727) 141,029
Comprehensive income
Net Income $ 4,312 4,312 4,312
Other comprehensive income, net of taxes
Unrealized losses on AFS debt securities (849)
Less: realized gains on disposition
of securities (226)
Unrealized gains on equity securities 137
Minimum pension liability adjustment 14
-------
Other comprehensive income (924) (924) (924)
-------
Comprehensive income $ 3,388
=======
Dividends on common stock (1,403) (1,403)
Exercised 52,554 option shares 31 148 179
------- ------- ------ ------- -------- --------
Balance at December 31, 2003 74,710 2,434 5,397 73,231 (12,579) 143,193
Comprehensive income
Net Income $13,002 13,002 13,002
Other comprehensive income, net of taxes
Unrealized losses on AFS debt securities (1,087)
Less: realized gains on disposition
of securities (729)
-------
Other comprehensive income (1,816) (1,816) (1,816)
-------
Comprehensive income $11,186
=======
Dividends on common stock (4,788) (4,788)
Issued 7,793 shares of common stock
in connection with Executive
Compensation Plan 103 102 205
Exercised 13,410 option shares (8) 143 135
Purchased 84,786 shares of common stock (2,154) (2,154)
------- ------- ------ ------- -------- --------
Balance at September 30, 2004 $82,924 $ 618 $5,397 $73,326 $(14,488) $147,777
======= ======= ====== ======= ======== ========
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See notes to condensed consolidated financial statements.
- 3 -
Interchange Financial Services Corporation
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CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
- --------------------------------------------------------------------------------
(dollars in thousands) (unaudited)
2004 2003
-------- ---------
Cash flows from operating activities
Net income $ 13,002 $ 12,054
Non-cash items included in earnings
Depreciation and amortization 1,438 1,260
Amortization of securities premiums 4,121 2,869
Accretion of securities discounts (200) (246)
Amortization of loan premiums 36 -
Amortization of premiums in connection with acquisition 877 617
Provision for loan losses 975 1,280
Increase in cash surrender value of Bank Owned Life Insurance (732) (315)
Net gain on sale of securities (982) (935)
Origination of loans held for sale (6,077) (14,500)
Sale of loans held for sale 6,433 15,266
Acceleration of premium amortization on certain collateralized
mortgage obligations - 415
Net gain on sale of loans and leases (406) (567)
Net loss (gain) on sale of fixed assets (16) 10
Net gain on sale of foreclosed real estate and repossessed assets (14) (7)
Decrease (increase) in operating assets
Accrued interest receivable 380 (868)
Goodwill (28) (90)
Deferred taxes 2,549 (1,221)
Other (5,678) (1,345)
Increase (decrease) in operating liabilities
Accrued interest payable 61 (378)
Other 554 863
-------- ---------
Cash provided by operating activities 16,293 14,162
-------- ---------
Cash flows from investing activities
(Payments for) proceeds from
Net (originations) amortization of loans (92,659) 12,182
Purchase of loans (40,459) (53)
Sale of loans and leases 1,193 3,102
Purchase of securities available for sale (71,960) (283,373)
Maturities of securities available for sale 79,126 125,644
Sale of securities available for sale 63,612 29,732
Purchase of securities held to maturity (6,820) -
Maturities of securities held to maturity 9,059 7,524
Sale of foreclosed real estate and other repossessed assets 77 100
Purchase of fixed assets (1,591) (879)
Sale of fixed assets 2,766 -
Net cash proceeds from acquisition of Bridge View Bancorp - 19,748
-------- ---------
Cash used in investing activities (57,656) (86,273)
-------- ---------
Cash flows from financing activities
Proceeds from (payments for)
Net increase in deposits 88,532 90,307
Increase (decrease) in short-term debt (38,353) 1,230
Increase in long-term debt 20,000 -
Dividends (4,788) (3,567)
Common stock issued 205 354
Treasury stock (2,154) -
Exercise of option shares from Treasury 135 259
-------- ---------
Cash provided by financing activities 63,577 88,583
-------- ---------
Increase (decrease) in cash and cash equivalents 22,214 16,472
Cash and cash equivalents, beginning of year 31,435 33,916
-------- ---------
Cash and cash equivalents, end of period $ 53,649 $ 50,388
======== =========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 9,556 $ 10,673
Income taxes 8,150 6,840
Supplemental disclosure of non-cash investing activities:
Loans transferred to foreclosed real estate and repossessed assets $ 79 $ 168
Stock issued related to Bridge View acquisition - 52,180
- --------------------------------------------------------------------------------
See notes to condensed consolidated financial statements
- 4 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2004
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of Interchange Financial Services Corporation and its
wholly owned subsidiaries (on a consolidated basis, the "Company") including its
principal operating subsidiary, Interchange Bank (the "Bank"), and have been
prepared in conformity with accounting principles generally accepted in the
United States of America ("GAAP") and in accordance with the rules and
regulations of the Securities and Exchange Commission. Pursuant to such rules
and regulations, certain information or footnotes necessary for a complete
presentation of financial condition, results of operations and cash flows in
conformity with GAAP have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and schedules thereto included in the annual report on Form
10-K of the Company for the year ended December 31, 2003.
The consolidated financial data for the three and nine month periods ended
September 30, 2004 and 2003, are unaudited but reflect all adjustments
consisting of only normal recurring adjustments which are, in the opinion of
management, considered necessary for a fair presentation of the financial
condition and results of operations for the interim periods. The results of
operations for interim periods are not necessarily indicative of results to be
expected for any other period or the full year.
Use of estimates: The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The most significant estimates
pertain to the allowance for loan and lease losses, the fair value of financial
instruments, goodwill, intangibles, taxes and retirement benefits.
Stock Based Compensation: The Company accounts for stock option plans under the
recognition and measurement principles of Accounting Principles Board ("APB")
Opinion No. 25. "Accounting for Stock Issued to Employees," and related
interpretations. No stock-based employee compensation costs are reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and diluted earnings per
common share if the Company had applied the fair value recognition provisions of
Financial Accounting Standards Board ("FASB") Statement No. 123, "Accounting for
Stock-Based Compensation," to stock-based compensation for the three and nine
months ended September 30, 2004 and 2003: (in thousands, except share data)
(unaudited)
- 5 -
For the three months ended For the nine months ended
September 30, September 30,
2004 2003 2004 2003
------ ------ ------- -------
Net Income
As reported $ 4,661 $4,511 $13,002 $12,054
Less: Total stock-based
compensation expense determined
under the fair value method for all
rewards, net of related tax effects 148 92 420 265
------- ------ ------- -------
Pro-forma $ 4,513 $4,419 $12,582 $11,789
======= ====== ======= =======
Earnings per share:
Basic:
As reported 0.37 0.35 1.02 1.05
Pro forma 0.35 0.35 0.99 1.03
Diluted:
As reported 0.36 0.35 1.00 1.04
Pro forma 0.35 0.34 0.97 1.01
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 nine months ended
September 30, 2004, respectively: dividend yield of 2.21%, expected volatility
of 24.83%; risk-free interest rate of 3.39%; and expected lives of 7 years.
There were no option grants for the three month period ended September 30, 2004.
Prior period assumptions are described in Note 13 "Stock Option and Incentive
Plan in the Notes to Consolidated Financial Statements" in the Company's 2003
Annual Report on Form 10-K. The effects of applying these assumptions in
determining the pro-forma net income may not be representative of the effects on
pro-forma net income for future years.
2. Acquisition and Pro Forma Disclosure
On April 30, 2003 the Company completed its acquisition of 100% of the
common stock of Bridge View Bancorp ("Bridge View"), a Bergen County-based bank
holding company with eleven locations, which expanded the Company's presence
into eastern Bergen County. The results of Bridge View's operations have been
included in the consolidated financial statements since that date. At April 30,
2003, Bridge View had approximately $291 million of total assets, $184 million
of loans and $259 million of deposits. The aggregate purchase price paid to
Bridge View shareholders was approximately $85.7 million and consisted of
approximately 2.9 million shares of the Company's common stock with an
approximate market value of $52.2 million, based upon the average closing price
over the periods three days prior to and after the acquisition date, and $33.5
million in cash. The transaction was accounted for as a purchase and the cost in
excess of net assets acquired of approximately $58.7 million was allocated to
net identified intangibles of approximately $4.3 million and goodwill of
approximately $54.4 million.
- 6 -
The following pro forma condensed consolidated statements of income for
the nine months ended September 30, 2003 give effect to the merger as if the
merger had been consummated on January 1, 2003.
The unaudited pro forma information is not necessarily indicative of the
results of operations in the future or the results of operations, which would
have been realized had the merger been consummated during the periods or as of
the dates for which the unaudited pro forma information is presented.
Nine Months Ended
September 30,
---------------------
2004 2003
Pro Forma
Interest income $48,545 $48,894
Interest expense 9,615 11,183
------- -------
Net interest income 38,930 37,711
------- -------
Provision for loan and lease losses 975 1,295
------- -------
Net interest income after provision for
loan and lease losses 37,955 36,416
Non-interest income 8,084 8,607
Non-interest expense
Salaries and benefits 14,541 14,023
Occupancy and FF&E 4,964 4,901
Other expenses 7,477 7,169
------- -------
26,982 26,093
Net income before taxes 19,057 18,930
Income Taxes 6,055 6,089
------- -------
Net income $13,002 $12,841
======= =======
Earnings per common share:
Basic 1.02 1.00
Diluted 1.00 0.99
3. Earnings Per Common Share
Basic earnings per common share represent income available to common
stockholders divided by the weighted-average number of common shares outstanding
during the period. Diluted earnings per common share reflect additional common
shares that would have been outstanding if dilutive potential 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 September 30, 2004 and 2003 the weighted average
shares outstanding for the nine months were approximately 13.0 million and 11.6
million.
- 7 -
4. Commitments and Contingent Liabilities
Legal Proceedings
The Company is a party to routine litigation involving various aspects of
its business, none of which, in the opinion of management, is expected to have a
material adverse impact on the consolidated financial condition, results of
operations or liquidity of the Company.
Commitments to Extend Credit
At September 30, 2004, the Company had commitments of approximately $273.3
million to extend credit, of which approximately $2.6 million represents standby
letters of credit.
5. Goodwill and Other Intangibles
With the adoption of Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), on January 1,
2002, goodwill is no longer amortized to expense, but rather is tested for
impairment periodically. Other intangible assets are amortized to expense using
straight-line methods over their respective estimated useful lives. At least
annually, management reviews goodwill and other intangible assets and evaluates
events or changes in circumstances that may indicate impairment in the carrying
amount of such assets. If the sum of the expected undiscounted future cash
flows, excluding interest charges, is less than the carrying amount of the
asset, an impairment loss is recognized. Impairment, if any, is measured on a
discounted future cash flow basis. Goodwill is reviewed for impairment annually
and on an interim basis when conditions require. If necessary an impairment
charge is recognized in the period that goodwill has been deemed to be impaired.
At the date of adoption, there was no unamortized goodwill.
At September 30, 2004 and December 31, 2003, gross intangible assets
amounted to $4.6 million at the end of each period while accumulated
amortization amounted to $808 thousand and $430 thousand, respectively.
Amortization of intangible assets as a result of acquisitions, which is included
in non-interest expense, amounted to $126 thousand, and $125 thousand for the
three months ended September 30, 2004 and 2003, respectively. During the second
quarter of 2003, the Company recorded a core deposit intangible of $4.3 million
in connection with the Bridge View merger. The core deposit intangible has an
estimated life of 10 years and the Company amortized $107 thousand for the three
month period ended September 30, 2004 and 2003. The core deposit intangible will
be periodically reviewed for impairment. In addition, the Company recorded
goodwill of $54.4 million in connection with the Bridge View merger. The
goodwill will be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142.
- 8 -
At September 30, 2004 the scheduled amortization of the core deposit intangible
is as follows (in thousands):
2005 $ 505
2006 436
2007 430
2008 430
2009 and thereafter 1,859
------
$3,660
======
6. Segment Reporting
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"), requires disclosures for each reportable
operating segment. As a community-oriented financial institution, substantially
all of the Company's operations entail the delivery of loan and deposit products
and various other financial services to customers in its primary market area,
which is Bergen County, New Jersey. The Company's community-banking operation
constitutes the Company's only operating segment for financial reporting
purposes under SFAS No. 131.
7. Recent Accounting Pronouncements
On December 23, 2003, the FASB issued Statement of Financial Accounting
Standards No. 132 (revised 2003), Employers' Disclosures about Pensions and
Other Postretirement Benefits ("SFAS 132"). The revised SFAS 132 retains the
disclosure requirements in the original statement and requires additional
disclosures about pension plan assets, benefit obligations, benefit costs and
other relevant information. The Company has included the new interim disclosures
that are required for financial statements for periods ending after December 15,
2003.
In March 2004, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments. EITF Issue 03-1 is effective for all
annual or interim financial statements for periods beginning after June 15,
2004. EITF Issue 03-1 addresses the identification of other than temporarily
impaired investments, and requires that an impairment charge be recognized for
other than temporarily impaired investments for which there is neither the
ability nor intent to hold either until maturity or until the market value of
the investment recovers.
In September 2004, the FASB also issued FSP EITF Issue 03-1-1, which
delayed the effective date of paragraphs 10-20 of EITF Issue No. 03-1.
Paragraphs 10-20 of EITF Issue No. 03-1 give guidance on how to evaluate and
recognize an impairment loss that is other than temporary. Application of these
paragraphs is deferred pending issuance of proposed FSP EITF Issue 03-1-a.
In September 2004, the FASB issued proposed FSP EITF Issue 03-1-a to
address the application of EITF Issue No. 03-1 to debt securities that are
impaired solely because of interest-rate and/or sector-spread increases, and
analyzed for impairment under paragraph 16 of EITF Issue No. 03-1. The proposed
FSP would be effective for other-than-temporary impairment evaluations of
interest-rate impaired and sector-spread impaired debt securities that are
analyzed under paragraph 16 of EITF Issue
- 9 -
No. 03-1 on the last reporting date of reporting periods ending after the final
FSP is posted to the FASB Web site.
The company has adopted the provisions of EITF Issue 03-1 applicable at
September 30, 2004. The company will evaluate the other provisions of EITF issue
03-1 when finalized.
8. Cash Dividend
The Company paid a cash dividend of $0.125 per share on August 20, 2004 to
holders of record as of August 2, 2004.
9. Securities Held-to-Maturity and Securities Available-for-Sale
Securities held-to-maturity ("HTM") and securities available-for-sale
("AFS") consist of the following: (in thousands)
-------------------------------------------------
September 30, 2004
-------------------------------------------------
(unaudited)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------
Securities HTM
Mortgage-backed securities $ 6,756 $ 169 - $ 6,925
Obligations of states & political subdivisions 9,936 710 - 10,646
-------- ------ ------ --------
$ 16,692 $ 879 - $ 17,571
-------- ------ ------ --------
Securities AFS
Mortgage-backed securities $103,391 $ 938 $ 361 $103,968
Obligations of U.S. agencies 212,555 652 1,301 211,906
Obligations of states & political subdivisions 34,476 1,068 28 35,516
Equity securities 4,587 88 - 4,675
-------- ------ ------ --------
355,009 2,746 1,690 356,065
-------- ------ ------ --------
Total securities $371,701 $3,625 $1,690 $373,636
======== ====== ====== ========
-------------------------------------------------
December 31, 2003
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------
Securities HTM
Mortgage-backed securities $ 9,850 $ 330 $ 1 $ 10,179
Obligations of states & political subdivisions 9,257 787 - 10,044
-------- ------ ------ --------
$ 19,107 $1,117 $ 1 $ 20,223
-------- ------ ------ --------
Securities AFS
Obligations of U.S. Treasury $ 6,032 $ 5 $ 2 $ 6,035
Mortgage-backed securities 112,981 1,363 157 114,187
Obligations of U.S. agencies 271,339 2,583 762 273,160
Obligations of states & political subdivisions 33,849 1,257 68 35,038
Equity securities 4,396 137 - 4,533
-------- ------ ------ --------
428,597 5,345 989 432,953
-------- ------ ------ --------
Total securities $447,704 $6,462 $ 990 $453,176
======== ====== ====== ========
- 10 -
At September 30, 2004, the contractual maturities of securities HTM and
securities AFS are as follows: (in thousands) (unaudited)
Securities Securities
HTM AFS
---------------------- ----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------------- ----------------------
Within 1 year $ 3,514 $ 3,562 $ 44,092 $ 44,139
After 1 but within 5 years 7,185 7,520 282,410 282,634
After 5 but within 10 years 4,806 5,195 10,394 10,605
After 10 years 1,187 1,294 13,526 14,012
Equity securities - - 4,587 4,675
------- ------- -------- --------
Total $16,692 $17,571 $355,009 $356,065
======= ======= ======== ========
Proceeds from the sale of securities AFS amounted to $63.6 million and
$29.7 million for the nine months ended September 30, 2004 and 2003, which
resulted in gross realized gains of $1.1 million and $981 thousand for those
periods, respectively. Gross realized losses from the sale of securities AFS
amounted to $94 thousand and $46 thousand for the nine months ended September
30, 2004 and 2003, respectively. These amounts are included in net gain on sale
of securities in the Consolidated Statements of Income.
During the first nine months of 2003, the Company realized gross losses
resulting from an acceleration of premium amortization on certain collateralized
mortgage obligations of $415 thousand. The acceleration of premium amortization
was largely driven by the historically high mortgage prepayment speeds due to
the low interest rate environment.
The investment portfolio is evaluated at least quarterly to determine if
there are any securities with losses that are other than temporary. One criteria
in assessing for an other than temporary impairment charge is if a security has
an unrealized loss that exceeds one year. At September 30, 2004, the Company had
$39.3 million of securities AFS with unrealized losses of $524 thousand that
were in excess of one year. It is expected that the Company will recover all
amounts due under the contractual obligations of those securities and, as such,
no other than temporary impairment charge was necessary. The Company did not
have any unrealized losses in the HTM portfolio. The following table summarizes
all securities that have an unrealized loss and the duration of the unrealized
loss at September 30, 2004: (in thousands) (unaudited)
- 11 -
----------------------- --------------------- ----------------------
12 months or less 12 months or longer Totals
----------------------- --------------------- ----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------------------- --------------------- ----------------------
Securities AFS
Mortgage-backed securities $ 49,551 $ 361 $ 192 - $ 49,743 $ 361
Obligations of U.S. agencies 149,402 802 36,707 $499 186,109 1,301
Obligations of states & political subdivisions 367 3 2,399 25 2,766 28
-------- ------ ------- ---- -------- ------
$199,320 $1,166 $39,298 $524 $238,618 $1,690
======== ====== ======= ==== ======== ======
Securities with carrying amounts of $65.5 million and $46.1 million at
September 30, 2004 and December 31, 2003, respectively, were pledged for public
deposits, Federal Home Loan Bank advances, securities sold under repurchase
agreements and other purposes required by law.
10. Loans
The composition of the loan portfolio is summarized as follows: (in
thousands)
------------- ------------
September 30, December 31,
(in thousands) 2004 2003
------------- ------------
(unaudited)
Amount of loans by type
Real estate mortgage
14 family residential
First liens $153,984 $100,286
Junior liens 2,859 4,138
Home equity 147,536 136,477
Commercial 372,926 330,040
Construction 37,449 31,077
-------- --------
714,754 602,018
-------- --------
Commercial loans
Commercial and financial 181,776 149,462
Lease financing 23,968 28,440
-------- --------
205,744 177,902
-------- --------
Consumer loans
Lease financing 2,260 12,416
Installment 4,396 4,245
-------- --------
6,656 16,661
-------- --------
Total $927,154 $796,581
======== ========
Nonperforming Assets
Nonperforming loans include loans that are accounted for on a nonaccrual
basis and troubled debt restructurings. Nonperforming loans are as follows: (in
thousands)
- 12 -
----------- ------------
Sept. 30, December 31,
2004 2003
----------- ------------
(unaudited)
Nonaccrual loans
Residential real estate $1,666 $1,364
Commercial real estate 2,406 1,603
Commercial and financial 3,173 2,858
Commercial lease financing 1,734 2,365
Consumer 394 380
------ ------
$9,373 $8,570
====== ======
11. Allowance for Loan and Lease Losses
The Company's recorded investment in impaired loans is as follows: (in
thousands)
------------------------- -------------------------
September 30, December 31,
2004 2003
------------------------- -------------------------
(unaudited)
Investment Related Investment Related
in Allowance in Allowance
Impaired for Loan Impaired for Loan
Loans Losses Loans Losses
---------- --------- ---------- ---------
Impaired loans
With a related allowance for loan losses
Commercial and financial $1,942 $ 325 $2,864 $463
Commercial real estate 763 19 1,603 40
Residential mortgages 836 124 816 122
Without a related allowance for loan losses - - - -
------ ------ ------ ----
$3,541 $ 468 $5,283 $625
====== ====== ====== ====
- --------------------------------------------------------------------------------
The impairment of the above loans was estimated based on the fair value of
collateral.
Changes in the allowance for loan and lease losses are summarized as follows:
(in thousands) (unaudited)
------------------- --------------------
Three months ended Nine months ended
September 30, September 30,
------------------- --------------------
2004 2003 2004 2003
------ ------ ------ -------
Balance at beginning of period $9,788 $9,537 $9,641 $ 7,207
Additions (deductions)
Provision for loan and lease losses 300 485 975 1,280
Recoveries on loans previously charged off 16 39 76 44
Loans charged off (307) (706) (895) (1,105)
Additions due to merger - - - 1,929
------ ------ ------ -------
Balance at end of year $9,797 $9,355 $9,797 $ 9,355
====== ====== ====== =======
- 13 -
12. Other Non-interest Expense
Expenses included in other non-interest expense that exceed one percent of
the aggregate of total interest income and non-interest income for the periods
noted, are as follows: (in thousands) (unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
Professional fees $ 385 $ 334 $1,062 $ 867
Data processing 284 275 848 797
Directors' fees, retirement
and travel 198 199 609 508
Legal fees 310 141 760 320
All other 894 875 2,472 2,189
------ ------ ------ ------
$2,071 $1,824 $5,751 $4,681
====== ====== ====== ======
13. Long-term Borrowings
Long-term borrowings consist of the following FHLB advances: (in thousands)
Maturity September 30, December 31,
Date Rate 2004 2003
- ---------------- ---- ------------- ------------
(unaudited)
January 2006 2.09 % $10,000 -
January 2007 (a) 4.22 10,000 $10,000
January 2007 2.69 10,000 -
---- ------- -------
3.00 % $30,000 $10,000
==== ======= =======
(a) The FHLB has an option to call this advance on a quarterly basis if
the 3month LIBOR resets above 7.50%.
14. Benefit Plans
In 1993, the Bank established a non-contributory defined benefit
pension plan covering all eligible employees (the "Pension Plan"). In 1994, the
Bank established a supplemental plan covering all eligible employees (the
"Supplemental Plan") that provides for income that would have been paid out but
for the limitation under the qualified Pension Plan. Also in 1994, the Company
established a retirement plan for all directors of the Bank who are not
employees of Interchange or of any subsidiary or affiliate of Interchange (the
"Directors' Plan").
- 14 -
The following table shows the aggregated components of net periodic
benefit costs for the periods noted: (in thousands) (unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
Service cost $166 $151 $ 499 $453
Interest cost 95 79 286 237
Expected return on plan assets (39) (31) (118) (93)
Amortization of prior service cost 1 1 4 2
---- ---- ----- ----
Net periodic benefit cost $223 $200 $ 671 $599
==== ==== ===== ====
For the year ended December 31, 2004, the Bank anticipates contributing
approximately $775 thousand to the Pension Plan.
- 15 -
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion is an analysis of the consolidated financial
condition and results of operations of the Company for the three and nine month
periods ended September 30, 2004 and 2003, and should be read in conjunction
with the consolidated financial statements and notes thereto included in Item 1
hereof. In addition, you should read this section in conjunction with
Management's Discussion and Analysis and Results of Operations included in the
Company's 2003 Annual Report on Form 10-K.
On April 30, 2003, the Company completed its acquisition of Bridge View
Bancorp ("Bridge View"). Accordingly the results of operations for the Company
include the results of Bridge View from April 30, 2003.
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.
- 16 -
Company
The Company is a bank holding company headquartered in Bergen County, New
Jersey. The Company's principal operating subsidiary is Interchange Bank, a New
Jersey-chartered commercial bank. In addition to the Bank, the Company has one
other wholly owned direct subsidiary: Clover Leaf Mortgage Company, a New Jersey
corporation, which is not currently engaged in any business activity. The Bank
has five direct subsidiaries: Clover Leaf Investment Corporation, an investment
company operating pursuant to New Jersey law; Clover Leaf Insurance Agency,
Inc., a New Jersey corporation engaged in the sale of tax-deferred annuities and
insurance; Clover Leaf Management Realty Corporation, a Real Estate Investment
Trust ("REIT"), which manages certain real estate assets of the Company; Bridge
View Investment Company, an investment company operating pursuant to New Jersey
law; and Interchange Capital Company, L.L.C. ("ICC"), a New Jersey limited
liability company which engages in equipment lease financing. All of the Bank's
subsidiaries are 100% owned by the Bank, except for the REIT, which is 99% owned
by the Bank. Bridge View Investment Company has one wholly owned subsidiary,
Bridge View Delaware, Inc. ("BVDI"). BVDI is an investment company operating
pursuant to Delaware law.
Critical Accounting Policies and Judgments
The Company's consolidated financial statements are prepared based on the
application of certain accounting policies, the most significant of which are
described in Note 1 "Accounting Policies in the Notes to Consolidated Financial
Statements and in the Management's Discussion and Analysis of Financial
Condition and Results of Operations: Critical Accounting Policies and Judgments"
in our 2003 Annual Report on Form 10-K. Certain of these policies require
numerous estimates and strategic or economic assumptions that may prove
inaccurate or subject to variations and may significantly affect the Company's
reported results and financial position for the period or in future periods. The
use of estimates, assumptions, and judgments are necessary when financial assets
and liabilities are required to be recorded at, or adjusted to reflect, fair
value. Assets and liabilities carried at fair value inherently result in more
financial statement volatility. Fair values and the information used to record
valuation adjustments for certain assets and liabilities are based on either
quoted market prices or are provided by other independent third-party sources,
when available. When such information is not available, management estimates
valuation adjustments primarily by using internal cash flow and other financial
modeling techniques. Changes in underlying factors, assumptions, or estimates in
any of these areas could have a material impact on the Company's future
financial condition and results of operations.
Allowance for Loan and Lease Losses: The allowance for loan and lease
losses ("ALLL") is generally established through periodic charges to income
through the provision of loan and lease losses. Loan losses are charged against
the ALLL when management believes that the probablefuture 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
- 17 -
of the loan portfolio, increases in charge-offs orchanges in the risk
characteristics of the loan portfolio, then the provision for loan and lease
losses is increased.
The Company considers the ALLL of $9.8 million adequate to cover estimated
losses inherent in the loan portfolio that may become uncollectible based on
management's periodic evaluations of the loan portfolio and other relevant
factors. The evaluations are inherently subjective as it requires material
estimates including, potential loss factors, changes in trend of non-performing
loans, current state of local and national economy, value of collateral; changes
in the composition and volume of the loan portfolio, review of specific problem
loans and management's assessment of the inherent risk and overall quality of
the loan portfolio. All of these factors may be susceptible to significant
change. Also, the allocation of the allowance for credit losses to specific loan
pools is based on historical loss trends and management's judgment concerning
those trends.
Business Combinations: Business combinations are accounted for using the
purchase method of accounting, the net assets of the companies acquired are
recorded at their estimated fair value at the date of acquisition and include
the results of operations of the acquired business from the date of acquisition.
The excess of the purchase price over the estimated fair value of the net assets
acquired is recognized as goodwill.
Goodwill: With the adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), on January 1, 2002, goodwill is no longer amortized to
expense, but rather is tested for impairment periodically. Other intangible
assets are amortized to expense using straight-line methods over their
respective estimated useful lives. At least annually, management reviews
goodwill and other intangible assets and evaluates events or changes in
circumstances that may indicate impairment in the carrying amount of such
assets. If the sum of the expected undiscounted future cash flows, excluding
interest charges, is less than the carrying amount of the asset, an impairment
loss is recognized. Impairment, if any, is measured on a discounted future cash
flow basis. Goodwill is reviewed for impairment annually and on an interim basis
when conditions require. If necessary, an impairment charge is recognized in the
period that goodwill has been deemed to be impaired. At the date of adoption,
there was no unamortized goodwill.
- 18 -
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
RESULTS OF OPERATIONS
Summary
For the third quarter of 2004, the Company reported earnings per diluted
common share of $0.36, as compared to $0.35 for the same period in 2003. Net
income for the three months ended September 30, 2004 was approximately $4.7
million, an increase of $150 thousand, or 3.3%, over the same period last year.
The increase in earnings resulted from an increase in our interest earning
assets during the quarter of approximately $97.2 million, which was partly
offset by a 5 basis point decline in our net interest margin.
For the three months ended September 30, 2004 and 2003, the Company's
Return on Average Assets ("ROA") was 1.31% and 1.34%, respectively. Return on
Average Equity ("ROE") for the three months ended September 30, 2004 was 12.90%
versus 12.93% for the same period in the prior year.
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 September 30,
2004 and 2003. This was accomplished by adjusting this income upward to make it
equivalent to the level of taxable income required to earn the same amount after
taxes.
Net interest income on a tax-equivalent basis increased $1.0 million, or
6.9%, to $13.6 million for the quarter ended September 30, 2004 as compared to
the same quarter in 2003. The tax equivalent basis adjustments for the quarters
ended September 30, 2004 and 2003 were $177 thousand and $161 thousand,
respectively. The increase in net interest income was due mostly to an 8.2%
growth in interest earning assets. This interest earning asset growth was funded
primarily by deposit liabilities, which grew 4.0% on average for the third
quarter of 2004 as compared to the same quarter in 2003. The margin for the
third quarter of 2004 was 4.24%, a decline of 5 basis points as compared to the
same quarter in 2003 due to earning asset yields declining faster than the
Company's cost of funds. The decline in asset yields was mainly attributable to
maturities and prepayments in the loan and securities portfolio, while the
Company's deposit pricing reached historical lows and appears to have become
inelastic. During the quarter, the Company did experience expansion in its net
interest margin as a result of a favorable shift in asset mix.
Interest income, on a tax-equivalent basis, totaled $17.1 million for the
third quarter of 2004, an increase of $927 thousand, or 5.7%, as compared to the
same quarter in 2003. The increase was mostly
- 19 -
attributed to a $97.2 million, or 8.2%, growth in interest earning assets. The
growth in interest earning assets was the result of increases in average loans
and average investments of $114.4 million and $18.5 million, respectively. The
increase in interest income was partly offset by a 12 basis point decline in
interest earning asset yields for the third quarter of 2004 as compared to the
same quarter in 2003.
Interest expense, which totaled $3.4 million for the third quarter of 2004,
decreased $45 thousand, or 1.3%, as compared to the same period in 2003. The
decrease in interest expense was a byproduct of the decline in market interest
rates, particularly short-term rates, during 2003 and through June of 2004. In
addition, a beneficial shift in the composition of the Company's deposits, which
is discussed further in the analysis of financial condition, also had a
favorable impact on the Company's interest expense. The improved deposit mix
combined with lower short-term interest rates reduced the average rate paid on
interest bearing liabilities by 5 basis points to 1.33% for the quarter ended
September 30, 2004 as compared to the same period in 2003. The magnitude of the
benefit derived from the decrease in rates paid on interest bearing liabilities
was partially reduced by the growth of deposits. Interest bearing deposits grew
on average $22.2 million, or 2.3%, for the third quarter of 2004 as compared to
the same period in 2003.
From June 30 through September 30, 2004 the Federal Reserve has raised the
overnight borrowing rate by 75 basis points which directly affected other
indices such as the prime rate. Some of the effects of the rate rise will likely
cause our overall interest costs to rise on interest bearing deposits and short
term borrowings. It is unlikely that we will need to reprice our liabilities to
absorb the 75 basis point rate rise. The projected increase in funding costs
is anticipated in large par to be offset by the repricing of assets linked to
indices and interest earning asset growth.
- 20 -
- --------------------------------------------------------------------------------
Analysis of Net Interest Income
- --------------------------------------------------------------------------------
for the quarter ended September 30,
(dollars in thousands) 2004 2003
---------------------------------- -----------------------------------
(unaudited) Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
Assets
Interest earning assets:
Loans (1) $ 903,113 $13,913 6.16 % $ 788,705 $13,094 6.64 %
Taxable securities (4) 346,836 2,663 3.07 325,435 2,562 3.15
Tax-exempt securities (2) (4) 26,930 444 6.59 29,873 365 4.89
Interest earning deposits 12 - - 13,996 36 1.03
Federal funds sold 8,899 33 1.48 30,571 69 0.90
---------- ------- ---- ---------- ------- ----
Total interest-earning assets 1,285,790 17,053 5.31 1,188,580 16,126 5.43
------- -------
Non-interest earning assets:
Cash and due from banks 36,837 42,652
Allowance for loan and lease losses (9,981) (9,704)
Other assets 114,422 120,090
---------- ----------
Total assets $1,427,068 $1,341,618
========== ==========
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest bearing deposits $969,217 3,085 1.27 $946,970 3,204 1.35
Borrowings 61,043 331 2.17 27,436 167 2.43
---------- ------- ---- ---------- ------- ----
Total interest-bearing liabilities 1,030,260 3,416 1.33 974,406 3,371 1.38
------- -------
Noninterest bearing liabilities
Demand deposits 235,869 211,765
Other liabilities 16,427 15,901
---------- ----------
Total liabilities (3) 1,282,556 1,202,072
Stockholders' equity 144,512 139,546
---------- ----------
Total liabilities and stockholders' equity $1,427,068 $1,341,618
========== ==========
Net interest income (tax-equivalent basis) 13,637 3.98 12,755 4.05
Tax-equivalent basis adjustment (177) (161)
------- -------
Net interest income $13,460 $12,594
======= =======
Net interest income as a percent of interest-earning
assets (tax-equivalent basis) 4.24 % 4.29 %
- --------------------------------------------------------------------------------
(1) Nonaccrual loans and any related interest recorded have been included in
computing the average rate earned on the loan portfolio. When applicable, tax
exempt loans are computed on a fully taxable equivalent basis using the
corporate federal tax rate of 34%.
(2) Computed on a fully taxable equivalent basis using the corporate federal tax
rate of 34%.
(3) All deposits are in domestic bank offices.
(4) The average balances are based on historical cost and do not reflect
unrealized gains or losses.
Provision for Loan and Lease Losses
The provision for loan and lease losses represents management's
calculation of the amount necessary to bring the ALLL to a level that management
considers adequate to reflect the risk of estimated losses inherent in the
Company's loan portfolio as of the balance sheet date. A more detailed
discussion of the evaluation of the ALLL can be found in the section titled
"Critical Accounting Policies and Judgments: Allowance for Loan and Lease
Losses" above. In the third quarter of 2004 and 2003, the Company's provision
for loan and lease losses was $300 thousand and $485 thousand, respectively.
Non-interest Income
For the quarter ended September 30, 2004, non-interest income totaled $2.9
million, a decrease of $458 thousand, or 13.7%, as compared to the same period
in 2003. The change was largely due to a decline in Bank Owned Life Insurance
("BOLI"), and net gains on sales of securities of $447 thousand and $338
thousand, respectively. The decline in BOLI income was attributed to a claim of
$422 thousand on insurance policies in 2003. This was offset by growth in
"other" non-interest income of $277 thousand and gains on sales of loans and
leases of $51 thousand. The growth in "other" non-interest income occurred
through loan fees and service charges of $307 thousand, primarily resulting from
loan
- 21 -
prepayments. The increase in gains on sales of loans arose out of an increase in
sales of SBA originated loans.
Non-interest Expense
For the quarter ended September 30, 2004, non-interest expense was $9.3
million, an increase of $509 thousand, or 5.8%. Contributing to the increase was
an increase in salaries and benefits, and legal fees, which increased $322
thousand and $169 thousand, respectively, as compared to the same period in
2003.
Income Taxes
Income tax expense as a percentage of pre-tax income was 31.2% for the
three months ended September 30, 2004 as compared to 32.5% for the same period
of 2003. The change in percentage of income tax expense was, in part, due to the
effect of non-taxable BOLI income offset by the increase of income tax expense
during the third quarter of 2003 from 34% to 35% as a result of the acquisition
of Bridge View.
- 22 -
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003
RESULTS OF OPERATIONS
Summary
Net income for the nine months ended September 30, 2004 was approximately
$13.0 million, an increase of $948 thousand, or 7.9%, over the same period last
year. The increase in earnings resulted from an increase in interest earning
assets from organic growth and the acquisition of Bridge View during the second
quarter of 2003. The improvement in earnings was partly offset by a 20 basis
point decline in the net interest margin. For the first nine months of 2004, the
Company reported earnings per diluted common share of $1.00, as compared to
$1.04 for the same period in 2003. The decline in diluted earnings per share was
a result of a compression in the net interest margin as compared to the same
period in 2003 and an increase in average diluted shares outstanding as a result
of the Bridge View transaction.
For the nine months ended September 30, 2004 and 2003, the Company's ROA
was 1.24% and 1.38%, respectively. The change in ROA for the period was a result
of a decline in net interest margin. ROE was 12.04% a decline from 14.12% when
compared to the same period last year. ROE declined principally due to an
increase in equity as a result of the acquisition of Bridge View and, to a
lesser extent, compression in net interest margin.
Net Interest Income
Net interest income on a tax-equivalent basis increased $5.0 million, or
14.5%, to $39.4 million for the nine months ended September 30, 2004 as compared
to the same quarter in 2003. The tax equivalent basis adjustments for the nine
months ended September 30, 2004 and 2003 were $499 thousand and $381 thousand,
respectively. The increase in net interest income was due mostly to a 19.9%
growth in interest earning assets. This interest earning asset growth was funded
primarily by deposit liabilities, which grew 17.3% on average for the nine
months of 2004 as compared to the same period in 2003. The increase in interest
earning assets and deposits were attributed to the Company's internal growth and
the Bridge View acquisition. The aforementioned improvement in net interest
income was partly offset by a 20 basis point decline in the net interest margin
for the nine months ended September 30, 2004 as compared to the same period in
2003. The decrease in the net interest margin was due to earning asset yields
declining faster than the Company's cost of funds. The decline in asset yields
was mainly attributable to maturities and prepayments in the loan and securities
portfolio, while the Company's deposit pricing reached historical lows and
appears to have become inelastic.
Interest income, on a tax-equivalent basis, totaled $49.0 million for the
nine months ended September 30, 2004, an increase of $4.0 million, or 9.0%, as
compared to the same period in 2003. The increase was mostly attributed to a
$208.8 million, or 19.9%, growth in interest earning assets. The growth in
interest earning assets was the result of increases in average loans and average
investments of $139.5 million and $99.8 million, respectively. The increase in
interest income was partly offset by a
- 23 -
53 basis point decline in interest earning asset yields for the nine months
ended September 30, 2004 as compared to the same period in 2003.
Interest expense, which totaled $9.6 million for the nine months ended
September 30, 2004, decreased $1.0 million, or 9.0%, as compared to the same
period in 2003. The decrease in interest expense was a byproduct of the decline
in market interest rates, particularly short-term rates, during 2003. In
addition, a beneficial shift in the composition of the Company's deposits, which
is discussed further in the analysis of financial condition below, also had a
favorable impact on the Company's interest expense. The improved deposit mix
combined with lower short-term interest rates reduced the average rate paid on
interest bearing liabilities by 36 basis points to 1.27% for the nine months
ended September 30, 2004 as compared to the same period in 2003. The magnitude
of the benefit derived from the decrease in rates paid on interest bearing
liabilities was partially reduced by the positive growth of deposits. Interest
bearing deposits grew on average $113.0 million, or 13.5%, for the third quarter
of 2004 as compared to the same period in 2003.
- --------------------------------------------------------------------------------
Analysis of Net Interest Income
- --------------------------------------------------------------------------------
for the year to date ended September 30,
(dollars in thousands) 2004 2003
---------------------------------- -----------------------------------
(unaudited) Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
Assets
Interest earning assets
Loans (1) $ 851,936 $39,821 6.23 % $ 712,480 $36,489 6.83 %
Taxable securities (4) 371,774 7,915 2.84 270,379 7,284 3.59
Tax-exempt securities (2) (4) 24,964 1,238 6.61 26,529 916 4.60
Interest earning deposits 10 - - 7,427 57 1.02
Federal funds sold 8,088 70 1.15 31,145 253 1.08
---------- ------- ---------- -------
Total interest-earning assets 1,256,772 49,044 5.20 1,047,960 44,999 5.73
------- -------
Non-interest earning assets
Cash and due from banks 36,239 34,229
Allowance for loan and lease losses (9,812) (8,515)
Other assets 117,245 88,642
---------- ---------
Total assets $1,400,444 1,162,316
========== =========
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest bearing deposits $949,929 8,672 1.22 $836,922 10,027 1.60
Borrowings 60,426 943 2.08 26,238 544 2.76
---------- ------- ---------- -------
Total interest-bearing liabilities 1,010,355 9,615 1.27 $863,160 10,571 1.63
------- -------
Non-interest bearing liabilities
Demand deposits 230,919 170,000
Other liabilities 15,194 15,308
---------- ---------
Total liabilities (3) 1,256,468 1,048,468
Stockholders' equity 143,976 113,848
---------- ---------
Total liabilities and stockholders' equity $1,400,444 1,162,316
========== =========
Net interest income (tax-equivalent basis) 39,429 3.93 34,428 4.10
Tax-equivalent basis adjustment (499) (381)
------- -------
Net interest income $38,930 $34,047
======= =======
Net interest income as a percent of interest-earning
assets (tax-equivalent basis) 4.18 % 4.38 %
- --------------------------------------------------------------------------------
(1) Nonaccrual loans and any related interest recorded have been included in
computing the average rate earned on the loan portfolio. When applicable, tax
exempt loans are computed on a fully taxable equivalent basis using the
corporate federal tax rate of 34%.
(2) Computed on a fully taxable equivalent basis using the corporate federal tax
rate of 34%.
(3) All deposits are in domestic bank offices.
(4) The average balances are based on historical cost and do not reflect
unrealized gains or losses.
- 24 -
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 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 nine months of 2004 and 2003, the Company's
provision for loan and lease losses was $975 thousand and $1.3 million,
respectively.
Non-interest Income
For the nine months ended September 30, 2004, non-interest income totaled
$8.1 million, an increase of $261 thousand, or 3.3%, as compared to the same
period in 2003. The improvement in non-interest income was primarily a result of
increases in "other" non-interest income, net gain on sales of securities, and
service charges on deposits of $687 thousand, $462 thousand and $219 thousand.
The increase in "other" non-interest income was primarily the result of loan
fees and services charges of $492 thousand as a result of loan prepayments. The
improvement in non-interest income was partly offset by a decrease in BOLI
income and a decline in net gain on sale of loans and leases of $1.0 million and
$161 thousand, respectively. The decline in BOLI income was attributed to a
claim on insurance policies in 2003 of $921 thousand. Net gain on sale of loans
and leases declined due to lower revenue from the sale of thirty-year
residential mortgage loans offset by an increase in the sale of SBA originated
loans.
Non-interest Expense
For the nine months ended September 30, 2004, non-interest expense was
$27.0 million, an increase of $4.0 million, or 17.4%, when compared to the same
period one year ago. The increase was due largely to the additional operating
costs resulting from the addition of eleven branch locations and the staffing of
those branches acquired as part of the merger with Bridge View. The costs
associated with the eleven additional branches are only included, from the date
of acquisition of Bridge View, for five months in 2003 as compared to nine
months for 2004. Also contributing to the increase were normal increases related
to salaries, benefits and occupancy expense.
Income Taxes
Income tax expense as a percentage of pre-tax income was 31.8% for the
nine months ended September 30, 2004 as compared to 31.5% for the same period of
2003.
- 25 -
FINANCIAL CONDITION
Cash and Cash Equivalents
At September 30, 2004, cash and cash equivalents increased $22.2 million
to $53.6 million as compared to December 31, 2003. This was primarily attributed
to federal funds sold increasing to $17.3 million while the Company was in a net
borrowing position at December 31, 2003.
Securities Portfolio
Under Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"), each security
is classified as either trading, 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 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 September 30, 2004, investment securities totaled
$372.8 million and represented 25.5% of total assets, as compared to $452.1
million and 32.6%, respectively, at December 31, 2003. Securities AFS comprised
95.5% of the total securities portfolio at September 30, 2004 as compared to
95.8% at December 31, 2003. At September 30, 2004, the Company had a net
unrealized gain of $1.9 million as compared to a net unrealized gain of $5.5
million at December 31, 2003. The decrease was mostly attributed to a decline in
market interest rates during that period.
During 2004, the Company sold securities with a book value of
approximately $62.6 million and recognized $1.1 million in gross gains and $94
thousand in gross losses. During 2003, the Company sold securities with a book
value of approximately $29.7 million and recognized $981 thousand in gross gains
and $46 thousand in gross losses. In addition during the first half of 2003, the
Company realized gross losses resulting from an acceleration of premium
amortization on certain collateralized mortgage obligations of $415 thousand.
The acceleration of premium amortization was largely driven by the historically
high mortgage prepayment speeds due to the low interest rate environment.
The following table reflects the composition of the securities portfolio:
(in thousands)
- 26 -
-------------------------------------------------
September 30, 2004
-------------------------------------------------
(unaudited)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
Securities HTM
Mortgage-backed securities $ 6,756 $ 169 - $ 6,925
Obligations of states & political subdivisions 9,936 710 - 10,646
-------- ------ ------- --------
$ 16,692 $ 879 - $ 17,571
-------- ------ ------- --------
Securities AFS
Mortgage-backed securities $103,391 $ 938 $ 361 $103,968
Obligations of U.S. agencies 212,555 652 1,301 211,906
Obligations of states & political subdivisions 34,476 1,068 28 35,516
Equity securities 4,587 88 - 4,675
-------- ------ ------- --------
355,009 2,746 1,690 356,065
-------- ------ ------- --------
Total securities $371,701 $3,625 $ 1,690 $373,636
======== ====== ======= ========
-------------------------------------------------
December 31, 2003
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
Securities HTM
Mortgage-backed securities $ 9,850 $ 330 $ 1 $ 10,179
Obligations of states & political subdivisions 9,257 787 - 10,044
-------- ------ ------- --------
$ 19,107 $1,117 $ 1 $ 20,223
-------- ------ ------- --------
Securities AFS
Obligations of U.S. Treasury $ 6,032 $ 5 $ 2 $ 6,035
Mortgage-backed securities 112,981 1,363 157 114,187
Obligations of U.S. agencies 271,339 2,583 762 273,160
Obligations of states & political subdivisions 33,849 1,257 68 35,038
Equity securities 4,396 137 - 4,533
-------- ------ ------- --------
428,597 5,345 989 432,953
-------- ------ ------- --------
Total securities $447,704 $6,462 $ 990 $453,176
======== ====== ======= ========
At September 30, 2004, the contractual maturities of securities HTM and
securities AFS are as follows: (in thousands) (unaudited)
Securities Securities
HTM AFS
---------------------- ----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------------- ----------------------
Within 1 year $ 3,514 $ 3,562 $ 44,092 $ 44,139
After 1 but within 5 years 7,185 7,520 282,410 282,634
After 5 but within 10 years 4,806 5,195 10,394 10,605
After 10 years 1,187 1,294 13,526 14,012
Equity securities - - 4,587 4,675
------- -------- -------- --------
Total $16,692 $ 17,571 $355,009 $356,065
======= ======== ======== ========
- 27 -
Loans
Total loans amounted to $927.2 million at September 30, 2004, an increase
of $130.6 million from $796.6 million at December 31, 2003. The growth was
attributable to increases in residential mortgage loans, commercial mortgage
loans and commercial and financial loans of $53.7 million, $42.9 million, and
$32.3 million, respectively. The growth in residential mortgages was due, in
part, to purchases of $36.4 million. These loans were subject to the Company's
independent credit analysis prior to purchase. Somewhat offsetting the
aforementioned increases were decreases in consumer and commercial leases of
$10.2 million and $4.5 million, respectively.
September 30, December 31,
(in thousands) 2004 2003
------------- ------------
(unaudited)
Amount of loans by type
Real estate-mortgage
1-4 family residential
First liens $153,984 $100,286
Junior liens 2,859 4,138
Home equity 147,536 136,477
Commercial 372,926 330,040
Construction 37,449 31,077
-------- --------
714,754 $602,018
-------- --------
Commercial loans
Commercial and financial 181,776 149,462
Lease financing 23,968 28,440
-------- --------
205,744 177,902
-------- --------
Consumer loans
Lease financing 2,260 12,416
Installment 4,396 4,245
-------- --------
6,656 16,661
-------- --------
Total $927,154 $796,581
======== ========
- 28 -
Nonperforming Assets
Nonperforming assets are comprised of nonaccrual loans, restructured
loans, foreclosed real estate and other repossessed assets. The Company's
nonperforming assets at September 30, 2004 amounted to $9.6 million as compared
to $8.8 million at December 31, 2003. The ratio of nonperforming assets to total
loans and foreclosed real estate and other repossessed assets decreased to 1.04%
at September 30, 2004 from 1.10% at December 31, 2003.
The following table lists nonaccrual loans, restructured loans and
foreclosed real estate and other repossessed assets at September 30, 2004, and
December 31, 2003: (in thousands)
September 30, December 31,
2004 2003
------------- ------------
(Unaudited)
Nonperforming loans $9,373 $8,570
Foreclosed real estate and other repossessed assets 246 230
------ ------
Total nonperforming assets $9,619 $8,800
====== ======
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 nine months ended
September 30, 2004, the ALLL increased $150 thousand to $9.8 million. Loan
losses are charged against the ALLL when management believes that the probable
future collection of principal is unlikely. Subsequent recoveries, if any, are
credited to the ALLL. If the ALLL is considered inadequate to absorb future loan
losses on existing loans, based on, but not limited to, increases in the size of
the loan portfolio, increases in charge-offs or changes in the risk
characteristics of the loan portfolio, then the provision for loan and lease
losses is increased.
The Company considers the ALLL of $9.8 million adequate to cover estimated
losses inherent in the loan portfolio that may become uncollectible based on
management's periodic evaluations of the loan portfolio and other relevant
factors. The evaluations are inherently subjective as they require material
estimates including such factors as potential loss factors, changes in trend of
non-performing loans, current state of local and national economy, value of
collateral changes in the composition and volume of the loan portfolio, review
of specific problem loans and management's assessment of the inherent risk and
overall quality of the loan portfolio. All of these factors may be susceptible
to significant change. Also, the allocation of the allowance for credit losses
to specific loan pools is based on historical loss trends and management's
judgment concerning those trends.
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
- 29 -
and certain pertinent ratios for the three months ended September 30, 2004 and
2003: (dollars in thousands) (unaudited)
---------------------- ----------------------
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
---------------------- ----------------------
Average loans outstanding $903,113 $788,705 $851,936 $712,480
======== ======== ======== ========
Allowance at beginning of period 9,788 9,537 9,641 7,207
-------- -------- -------- --------
Loans charged off
Real estate 202 4 278 4
Commercial and financial 30 - 87 25
Commercial lease financing 67 686 478 1,041
Consumer loans 8 16 52 35
-------- -------- -------- --------
Total 307 706 895 1,105
-------- -------- -------- --------
Recoveries of loans previously charged off
Real estate 15 35 19 35
Commercial and financial - - 6 -
Commercial lease financing - 1 48 3
Consumer loans 1 3 3 6
-------- -------- -------- --------
Total 16 39 76 44
-------- -------- -------- --------
Additions due to merger - - - 1,929
Provision for loan and lease losses 300 485 975 1,280
-------- -------- -------- --------
Allowance at end of period $ 9,797 $ 9,355 $ 9,797 $ 9,355
======== ======== ======== ========
Allowance to total loans (end of period) 1.06 % 1.19 % 1.06 % 1.21 %
Ratio of net charge-offs to average loans (annualized) 0.13 % 0.34 % 0.13 % 0.20 %
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 September 30,
2004, such deposits amounted to $693.4 million representing 55.8% of total
deposits compared to 56.3% of total deposits at December 31, 2003. The Company
attributes its success in growing deposits to the emphasis it places on building
core customer relationships by offering a variety of products designed to meet
the financial needs of its customers based on their identifiable "life stages".
At September 30, 2004, total deposits increased $88.5 million, or 7.7%, as
compared to December 31, 2003. We experienced growth in both core deposits (non
time deposits) of $48.8 million, or 5.6% and time deposits increased $39.8
million, or 14.1%, respectively, at September 30, 2004 as compared to December
31, 2003. The growth in core deposits was due to increases in interest bearing
demand and non-interest demand of $41.5 million and $6.5 million, respectively.
Time deposits amounted to $321.7 million, or 25.8%, of total deposits at
September 30, 2004, as compared to $282.0 million, or 24.4%, at December 31,
2003.
- 30 -
For the nine months ended September 30, 2004, the Company's overall yield
on deposits declined by 35 basis points from 1.33% to 0.98%, as compared to the
same period last year. The decrease was attributed predominately to changes in
market interest rates and a change in the composition of deposit liabilities.
The following table reflects the composition of deposit liabilities:
(dollars in thousands)
------------- ------------
September 30, December 31,
2004 2003
------------- ------------
(Unaudited)
Non-interest Demand $230,198 $223,745
Interest Bearing Demand 488,328 446,786
Savings 115,820 120,136
Money Market Savings 89,242 84,162
Time Deposits <$100,000 288,815 265,356
Time Deposits >$100,000 32,911 16,613
---------- ----------
Total $1,245,314 $1,156,798
========== ==========
- 31 -
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 nine 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 September 30, 2004, the Company simulated the
effects on net interest income given an instantaneous and parallel shift in the
yield curve of up to a 200 basis point rising interest rate environment and a
100 basis point declining interest rate environment. Based on that simulation,
it was estimated that net interest income, over a twelve-month horizon, would
not decrease by more than 5.3% At September 30, 2004, the
- 32 -
Company was within policy limits established by the board of directors for
changes in net interest income and future economic value of equity. The
following table illustrates the effects on net interest income given an
instantaneous and parallel shift in the yield curve of up to a 200 basis point
rising interest rate environment and a 100 basis point declining interest rate
environment: (unaudited)
------------------------------
Percentage Change in Estimated
Net Interest Income over a
twelve month horizon
------------------------------
September 30,
2004 2003
---- ----
+200 basis points -5.3 % -3.9 %
+100 basis points -2.5 -0.3
- -100 basis points -2.0 -6.0
- -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
- 33 -
in effect are designed to make regulatory capital requirements more
sensitive to differences in risk profiles among bank holding companies and
banks, to account for off-balance sheet exposure and to minimize disincentives
for holding liquid assets. Assets and off-balance sheet items are assigned to
broad risk categories, each with appropriate relative risk weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off balance sheet items.
A banking organization's total qualifying capital includes two components:
core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core
capital, which must comprise at least half of total capital, includes common
shareholders' equity, qualifying perpetual preferred stock, trust preferred
securities (subject to certain limitations) and minority interests, less
goodwill and any unrealized gains or losses. Supplementary capital includes the
allowance for loan losses (subject to certain limitations), other perpetual
preferred stock, trust preferred securities that exceed Tier 1 limits, certain
other capital instruments and term subordinated debt. Total capital is the sum
of core and supplementary capital.
At September 30, 2004, the minimum risk-based capital requirements to be
considered adequately capitalized were 4% for Tier 1 capital and 8% for total
capital.
Federal banking regulators have also adopted leverage capital guidelines
to supplement the risk-based measures. The leverage ratio is determined by
dividing Tier 1 capital as defined under the risk-based guidelines by average
total assets (non risk-adjusted) for the preceding quarter. At September 30,
2004, the minimum leverage ratio requirement to be considered adequately
capitalized was 3%.
The capital levels of the Company and the Bank at September 30, 2004, and
the two highest capital adequacy levels recognized under the guidelines
established by the federal banking agencies are included in the following table.
The Company's and the Bank's ratios all exceeded the well-capitalized guidelines
shown in the table. The change in the Company's risk weighted capital ratios
during the nine month period ending September 30, 2004 was primarily a result of
a shift from securities which had a lower risk rating basis into loans.
The Company's and the Bank's capital amounts and ratios are as follows:
(dollars in thousands)
- 34 -
To Be "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 2004: (unaudited)
Total Capital (to Risk Weighted Assets):
The Company $98,540 10.09 % $78,115 8.00 % N/A N/A
The Bank 98,068 10.04 78,123 8.00 97,654 10.00 %
Tier 1 Capital (to Risk Weighted Assets):
The Company 88,603 9.07 $39,057 4.00 N/A N/A
The Bank 88,131 9.02 39,062 4.00 58,592 6.00
Tier 1 Capital (to Average Assets):
The Company 88,603 6.43 $41,318 3.00 N/A N/A
The Bank 88,131 6.38 41,417 3.00 69,029 5.00
As of December 31, 2003:
Total Capital (to Risk Weighted Assets):
The Company $91,694 10.46 % $70,146 8.00 % N/A N/A
The Bank 91,358 10.35 70,637 8.00 $88,296 10.00 %
Tier 1 Capital (to Risk Weighted Assets):
The Company 81,913 9.34 35,073 4.00 N/A N/A
The Bank 81,576 9.24 35,319 4.00 52,978 6.00
Tier 1 Capital (to Average Assets):
The Company 81,913 6.24 39,367 3.00 N/A N/A
The Bank 81,576 6.22 39,318 3.00 65,530 5.00
Liquidity
Liquidity is the ability to provide sufficient resources to meet all
current financial obligations and finance prospective business opportunities.
The Company's liquidity position over any given period of time is a product of
its operating, financing and investing activities. The extent of such activities
is often shaped by such external factors as competition for deposits and demand
for loans.
The Company's most liquid assets are cash and cash equivalents. At
September 30, 2004, the total of such assets amounted to $53.6 million, or 3.7%,
of total assets, compared to $31.4 million, or 2.3%, of total assets at December
31, 2003. Fluctuations in cash and cash equivalents are largely due to sales of
securities, deposit growth and loan prepayments, which produce funds that are
placed in federal funds sold or interest earning deposits pending investment in
loans and securities.
Financing for the Company's loans and investments is derived primarily
from deposits, along with interest and principal payments on loans and
investments. At September 30, 2004 and December 31, 2003, total deposits
amounted to $1.2 billion. In addition, the Company supplemented the more
traditional funding sources with borrowings from the Federal Home Loan Bank of
New York ("FHLB") and with securities sold under agreements to repurchase
("REPOS"). At September 30, 2004, advances from the FHLB and REPOS amounted to
$44.0 million and $9.8 million, respectively, as compared to $56.5 million and
$15.6 million, respectively, at December 31, 2003.
Another significant liquidity source is the Company's securities
portfolio. Total securities at September 30, 2004 amounted to $372.8 million, a
decrease of $79.3 million, from $452.1 million at December 31, 2003. At
September 30, 2004 securities AFS amounted to $356.1 million, or 95.5%, of total
securities compared to $433.0 million, or 95.8%, of total securities at December
31, 2003.
- 35 -
In addition to the aforementioned sources of liquidity, the Company has
available various other sources of liquidity, including federal funds purchased
from other banks and the Federal Reserve discount window. The Bank also has a
$100.0 million line of credit available through its membership in the FHLB.
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These instruments, which include commitments to extend credit and standby
letters of credit, involve, to a varying degree, elements of credit and interest
rate risk in excess of the amount recognized in the Condensed Consolidated
Balance Sheets. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates and may require
collateral from the borrower if deemed necessary by the Company. Standby letters
of credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party up to a stipulated amount and with
specified terms and conditions. Commitments to extend credit and standby letters
of credit are not recorded on the Company's condensed consolidated balance sheet
until the instrument is exercised. At September 30, 2004 outstanding commitments
to fund loans totaled $273.3 million and outstanding standby letters of credit
totaled $2.6 million.
The Company has historically paid quarterly cash dividends and anticipates
continuing paying quarterly dividends in the future. The Company could, if
necessary, modify the amount or frequency, of dividends as an additional source
of liquidity. There are imposed dividend restrictions on the Bank, which are
described in Note 18 "Restrictions of Subsidiary Bank Dividends" in the Notes to
Consolidated Financial Statements in the Company's 2003 Annual Report on Form
10-K. Management believes that the Company has sufficient cash flow and
borrowing capacity to fund all outstanding commitments and letters of credit and
to maintain proper levels of liquidity.
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 September 30, 2004, we
carried out an evaluation under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Rule 13a-15(e) under the Exchange Act.
Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures are
effective.
The Company maintains internal control over financial reporting. During
the quarter ended September 30, 2004, there have been no changes in our internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, those controls.
- 36 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is also made to Note 4 of the Company's Consolidated Financial
Statements in this Form 10-Q.
Item 2. 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 per Share
------ ------------ ----------
8/1/04-8/31/04 875 $24.72
=== ======
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
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
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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
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Charles T. Field
Senior Vice President and CFO
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
Dated: November 9, 2004
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