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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-Q
__________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR
THE QUARTERLY PERIOD ENDED, June 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM____ TO ____
Commission File number 1-10518
INTERCHANGE FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2553159
_______________________________ __________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Park 80 West/Plaza Two, Saddle Brook, NJ 07663
________________________________________ ______
(Address of principal executive offices) (Zip Code)
(201)703-2265
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
None
- --------------------------------------------------------------------------------
(Former name,former address and former fiscal year, if changed since last
report)
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of outstanding shares of the Registrant's common stock, no par
value per share, as of July 31, 2002, was 9,823,458 shares (after giving affect
to a 3-for-2 stock split paid on July 12, 2002).
INTERCHANGE FINANCIAL SERVICES CORPORATION
INDEX
PART I FINANCIAL INFORMATION
Page No.
Item 1 Financial Statements
Consolidated Balance Sheets as of
June 30, 2002 and December 31, 2001 . . . . . . . . . 1
Consolidated Statements of Income for the three
and six-month periods ended June 30, 2002 and 2001 . . 2
Consolidated Statements of Changes in
Stockholders' Equity for the six months ended
June 30, 2002 and 2001 . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the
six months ended June 30, 2002 and 2001 . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk
(Disclosures about quantitative and qualitative market risk
are located in Management's Discussion and Analysis of
Financial Condition and Results of Operation in the section
on Market Risk). . . . . . . . . . . . . . . . . . . . . . 22
PART II OTHER INFORMATION
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . 26
Item 2 Changes in Securities and Use of Proceeds. . . . . . . . 26
Item 3 Defaults upon Senior Securities . . . . . . . . . . . . . 26
Item 4 Submission of Matters to a Vote of Security Holders . . . 26
Item 5 Other Information . . . . . . . . . . . . . . . . . . . . 26
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . 27
Signatures . . . . . . . . . . . . . . . . . . . . . . . 27
Item 1: Financial Statements
Interchange Financial Services Corporation
- ------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------
(dollars in thousands)
June 30, December 31,
2002 2001
----------- ------------
(unaudited)
Assets
Cash and due from banks $ 18,132 $ 22,211
Securities held to maturity at amortized cost (estimated market value
of $32,242 and $39,580 for June 30, 2002 and December 31, 2001,
respectively) 31,005 38,872
----------- ------------
Securities available for sale at estimated market value (amortized cost
of $199,244 and $152,935 for June 30, 2002 and December 31, 2001,
respectively) 203,090 155,030
----------- ------------
Loans 621,909 581,323
Less: Allowance for loan and lease losses 6,430 6,569
----------- ------------
Net loans 615,479 574,754
----------- ------------
Bank owned life insurance 15,824 15,378
Premises and equipment, net 10,537 10,235
Foreclosed real estate and other repossesed assets 592 492
Accrued interest receivable and other assets 10,795 13,977
----------- ------------
Total assets $905,454 $830,949
=========== ============
Liabilities
Deposits
Non-interest bearing $110,513 $109,416
Interest bearing 681,662 617,067
----------- ------------
Total deposits 792,175 726,483
----------- ------------
Securities sold under agreements to repurchase 6,255 6,700
Short-term borrowings 7,900 18,100
Long-term borrowings 10,000 -
Accrued interest payable and other liabilities 14,250 11,433
----------- ------------
Total liabilities 830,580 762,716
----------- ------------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, without par value; 22,500,000 shares authorized;
9,819,884 and 9,690,651 shares issued and outstanding at
June 30, 2002 and December 31, 2001, respectively 5,397 5,397
Capital surplus 21,124 20,993
Retained earnings 58,802 54,758
Accumulated other comprehensive income 2,156 1,156
----------- ------------
87,479 82,304
Less: Treasury stock 12,605 14,071
----------- ------------
Total stockholders' equity 74,874 68,233
----------- ------------
Total liabilities and stockholders' equity $905,454 $830,949
=========== ============
- ------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
1
Interchange Financial Services Corporation
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) (unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Interest income
Interest and fees on loans $11,340 $11,644 $22,354 $23,329
Interest on federal funds sold 67 131 120 436
Interest and dividends on securities
Taxable interest income 2,598 2,575 5,102 4,970
Interest income exempt from federal income taxes 149 137 275 282
Dividends 47 64 94 136
-------- -------- -------- --------
Total interest income 14,201 14,551 27,945 29,153
-------- -------- -------- --------
Interest expense
Interest on deposits 4,313 5,796 8,697 11,862
Interest on securities sold under agreements to repurchase 43 126 92 341
Interest on short-term borrowings 110 218 250 423
Interest on long-term borrowings 108 - 211 -
-------- -------- -------- --------
Total interest expense 4,574 6,140 9,250 12,626
-------- -------- -------- --------
Net interest income 9,627 8,411 18,695 16,527
Provision for loan and lease losses 255 200 480 380
-------- -------- -------- --------
Net interest income after provision
for loan losses 9,372 8,211 18,215 16,147
-------- -------- -------- --------
Non-interest income
Service fees on deposit accounts 649 627 1,263 1,225
Net gain on sale of securities 94 53 281 118
Other 734 474 1,494 1,035
-------- -------- -------- --------
Total non-interest income 1,477 1,154 3,038 2,378
-------- -------- -------- --------
Non-interest expenses
Salaries and benefits 3,303 3,005 6,562 6,077
Net occupancy 869 838 1,733 1,680
Furniture and equipment 305 265 590 544
Advertising and promotion 364 394 789 572
Federal Deposit Insurance Corporation assessment 33 32 65 65
Other 1,418 1,198 2,685 2,480
-------- -------- -------- --------
Total non-interest expenses 6,292 5,732 12,424 11,418
-------- -------- -------- --------
Income before income taxes 4,557 3,633 8,829 7,107
Income taxes 1,492 1,159 2,824 2,302
-------- -------- -------- --------
Net income $ 3,065 $ 2,474 $ 6,005 $ 4,805
======== ======== ======== ========
Basic earnings per common share $0.31 $0.25 $0.61 $0.49
======== ======== ======== ========
Diluted earnings per common share $0.31 $0.25 $0.60 $0.49
======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
2
Interchange Financial Services Corporation
- ------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended Ended June 30,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)(unaudited)
Accumulated
Other
Comprehensive Retained Comprehensive Common Capital Treasury
Income Earnings Income Stock Surplus Stock Total
------------- -------- ------------- ------- ------- --------- -------
Balance at January 1, 2001 $47,735 $526 $5,397 $21,077 $(12,751) $61,984
Comprehensive income
Net Income $4,805 4,805 4,805
Other comprehensive income, net of taxes
Unrealized gains on AFS debt securities 481
-------------
Other comprehensive income, net of taxes 481 481 481
-------------
Comprehensive income $5,286
=============
Dividends on common stock (1,766) (1,766)
Issued 22,320 shares of common stock in connection
with Executive Compensation Plan (14) 255 241
Exercised 3,546 option shares (22) 40 18
Purchased 19,800 shares of common stock (239) (239)
-------- ------------- ------- ------- --------- -------
Balance at June 30, 2001 50,774 1,007 5,397 21,041 (12,695) 65,524
Comprehensive income
Net Income $5,735 5,735 5,735
Other comprehensive income, net of taxes
Unrealized gains on AFS debt securities 121
Add: losses on disposition of securities 28
-------------
Other comprehensive income 149 149 149
-------------
Comprehensive income $5,884
=============
Dividends on common stock (1,751) (1,751)
Exercised 9,680 option shares (48) 112 64
Purchased 120,843 shares of common stock (1,488) (1,488)
-------- ------------- ------- ------- --------- -------
Balance at December 31, 2001 54,758 1,156 5,397 20,993 (14,071) 68,233
Comprehensive income
Net Income $6,005 6,005 6,005
Other comprehensive income, net of taxes
Unrealized gains on AFS debt securities 1,187
Less: gains on disposition of securities (187)
-------------
Other comprehensive income 1,000 1,000 1,000
-------------
Comprehensive income $7,005
=============
Dividends on common stock (1,961) (1,961)
Issued 21,069 shares of common stock in connection
with Executive Compensation Plan 66 244 310
Exercised 18,435 option shares (66) 213 147
Issued 107,877 shares of common stock in connection with
the acquisition of certain assets and assumption of
131 1,244 1,375
Purchased 18,150 shares of common stock (235) (235)
-------- ------------- ------- ------- --------- -------
Balance at June 30, 2002 $58,802 $2,156 $5,397 $21,124 $(12,605) $74,874
======== ============= ======= ======== ========= =======
- -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
3
Interchange Financial Services Corporation
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
(unaudited)
2002 2001
----------- -----------
Cash flows from operating activities
Net income $ 6,005 $ 4,805
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 728 736
Amortization of securities premiums 853 409
Accretion of securities discounts (147) (174)
Amortization of premiums in connection with acquisition 32 74
Provision for loan and lease losses 480 380
Increase in cash surrender value of Bank Owned Life Insurance (446) -
Net gain on sale of securities (284) (118)
Net gain on sale of loans (38) (105)
Decrease (increase) in operating assets
Accrued interest receivable (442) 144
Accounts receivable- leases sold 4,921 -
Other (253) 420
(Decrease) increase in operating liabilities
Accrued interest payable (97) (148)
Other 2,915 (104)
----------- -----------
Cash provided by operating activities 14,227 6,319
----------- -----------
Cash flows from investing activities
(Payments for) proceeds from
Purchase of loans (14,945) (12,758)
Net originations of loans (27,066) (13,010)
Sale of loans 493 1,824
Purchase of securities available for sale (74,343) (55,811)
Maturities of securities available for sale 20,450 24,119
Sale of securities available for sale 7,234 6,050
Sale of securities held to maturity 2,023 -
Purchase of securities held to maturity - (18,458)
Maturities of securities held to maturity 5,772 12,920
Purchase of fixed assets (997) (608)
Sale of reposessed assets 251 -
Premium in connection with acquisition (1,861) -
----------- -----------
Cash used in investing activities (82,989) (55,732)
----------- -----------
Cash flows from financing activities
Proceeds from (payments for)
Deposits in excess of withdrawals 65,692 40,955
Securities sold under agreements to repurchase and other borrowings 13,542 31,760
Retirement of securities sold under agreement to repurchase and
other borrowings (14,187) (33,500)
Dividends (1,961) (1,766)
Treasury stock (235) (239)
Common stock issued 1,685 295
Exercise of option shares 147 (36)
----------- -----------
Cash provided by financing activities 64,683 37,469
----------- -----------
Increase in cash and cash equivalents (4,079) (11,944)
Cash and cash equivalents, beginning of year 22,211 33,150
----------- -----------
Cash and cash equivalents, end of period $18,132 $21,206
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $9,348 $12,037
Income taxes 2,679 795
Supplemental disclosure of non-cash investing activities:
Loans transferred to foreclosed real estated and other
repossessed assets 351 -
Increase - market valuation of securities available for sale, net of taxes (1,000) (481)
- -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 2002
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Interchange Financial Services Corporation and its wholly owned
subsidiaries (collectively, (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
within the banking industry 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 such
financial condition, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America within
the banking industry have been condensed or omitted. These consolidated
financial statements should be read in conjunction with the financial statements
and schedules thereto included in the annual report on Form 10-K of the Company
for the year ended December 31, 2001.
The consolidated financial data for the three and six-month periods ended
June 30, 2002 and 2001, are unaudited but reflect all adjustments consisting of
only normal recurring adjustments which are, in the opinion of management,
considered necessary for a fair presentation of the financial condition and
results of operations for the interim periods. The results of operations for
interim periods are not necessarily indicative of results to be expected for any
other period or the full year.
2. Earnings Per Common Share
Basic earnings per common share is computed by dividing net income for the
period by the weighted average number of shares of common stock outstanding
during the same period. Diluted earnings per common share is similar to the
computation of basic earnings per common share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares (e.g., common shares
issuable upon the exercise of outstanding stock options) had been issued. On May
23, 2002, the Company declared a 3 for 2 stock split payable on July 12, 2002 to
shareholders of record as of June 17, 2002. The effect of the stock split has
been retroactively reflected in the presentation of these consolidated financial
statements and notes thereto.
5
3. Legal Proceedings
The Company regularly is a party to routine litigation involving various
aspects of its business, none of which such litigation, in the opinion of
management and its legal counsel, is expected to have a material adverse impact
on the consolidated financial condition, results of operations or liquidity of
the Company.
4. New Accounting Pronouncement
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 "Business Combinations"
("SFAS 141"), which provides guidance on accounting for a business combination
at the date a business combination is completed. SFAS 141 requires the use of
the purchase method of accounting for all business combinations initiated after
June 30, 2001, thereby eliminating the use of the pooling of interest method.
Also, it provides new criteria that determine whether an acquired intangible
asset should be recognized separately from goodwill. The adoption of SFAS 141
did not have any impact on the financial condition or results of operations of
the Company.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 "Goodwill and Other Intangible Asset" ("SFAS 142") which provides
guidance on how to account for goodwill and intangible assets after the
acquisition is complete. The most substantive change represented by SFAS 142 is
that goodwill will no longer be amortized; instead, it will be evaluated for
impairment on an annual basis. Identifiable intangible assets will continue to
be amortized over their useful lives and reviewed for impairment in accordance
with SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" SFAS 142 will apply to existing goodwill
and intangible assets, beginning with fiscal years starting after December 15,
2001. The adoption of this standard did not have any impact on the financial
conditio or results of operations of the Company.
In August 2001, the FASB released Statement of Financial Accounting
Standards, "Accounting for the Impairment or Disposal of Long-Lived Assets"
"SFAS 144"). The provisions of SFAS 144 are effective for financial statements
issued for fiscal periods beginning after December 15, 2001. The adoption of
SFAS 144 did not have any impact on the financial position or results of
operations of the Company.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections ("SFAS 145"). SFAS 145 rescinds FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt and an
amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements. SFAS 145 also rescinds FASB
6
Statement No.44, Accounting for Intangible Assets of Motor Carriers. SFAS 145
amends FASB Statement No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS 145 also amends
other existing authoritative pronouncements to make varioius technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The provisions of SFAS 145 related to the rescission of FASB
Statement No. 4 are effective for fiscal years beginning May 15, 2002. The
provisions of SFAS 145 related to FASB Statement No. 13 are effective for
transactions occurring after May 15, 2002. All other provisions of SFAS 145 are
effective for financial statements issued on or after May 15, 2002. The adoption
of SFAS 145 is not expected to have a material effect on the consolidated
financial condition or results of operations of the Company.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS
146"). SFAS 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 replaces Emerging Issues Task
Force No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company is currently reviewing
the impact of the adoption of SFAS 146 on the Company's consolidated financial
statements.
5. Cash Dividend
On May 23, 2002, the Company declared a cash dividend of $0.10 per share
(adjusted for the 3 for 2 stock split), payable on July 12, 2002 to shareholders
of record as of June 17, 2002.The effect of the stock split has been
retroactively reflected in the presentation of these consolidated financial
statements and notes thereto.
7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion is an analysis of the consolidated financial
condition and results of operations of the Company for the three and six month
periods ended June 30, 2002 and 2001, and should be read in conjunction with the
consolidated financial statements and notes thereto included in Item 1 hereof.
Company
The Company is a bank holding company headquartered in Bergen County, New
Jersey. The Company's principal operating subsidiary is Interchange Bank, a New
Jersey-chartered commercial bank. In addition to the Bank, the Company has one
other wholly-owned direct subsidiary: Clover Leaf Mortgage Company, a New Jersey
corporation, which is not currently engaged in any business activity. The Bank
has four direct subsidiaries: Clover Leaf Investment Corporation, an investment
company, operating pursuant to New Jersey law; Clover Leaf Insurance Agency,
Inc., a New Jersey corporation, engaged in the sale of tax-deferred annuities
and insurance; Clover Leaf Management Realty Corporation, a Real Estate
Investment Trust ("REIT"), which manages certain real estate assets of the
Company; and Interchange Capital Company, L.L.C. ("ICC"),a New Jersey limited
liability company, which engages in equipment lease financing. All of the Bank's
subsidiaries are 100% owned by the Bank, except for the REIT, which is 99% owned
by the Bank.
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 statement" within the meaning
of the Private Securities Litigation Reform Act of 1995. When used herein, the
words "anticipate," "believe," "estimate," "expect," "will" and other similar
expressions(including when preceded or followed by the word "not")are generally
intended to identify such forward-looking statements. Such statements are
intended to be covered by the safe harbor provisions for forward looking
statements contained in such Act, and we are including this statement for
purposes of invoking these safe harbor provisions. Such forward- looking
statements include, but are not limited to, statements about the operations of
the Company, the adequacy of the Company's allowance for losses associated with
the loan portfolio, the prospects of continued loan and deposit growth, and
improved credit quality. The forward-looking statements in this
8
report involve certain estimates or assumptions, known and unknown risks and
uncertainties, many of which are beyond the control of the Company, and reflect
what we currently anticipate will happen in each case. What actually happens
could differ materially from what we currently anticipate will happen due to a
variety of factors, including, among others, (i) increased competitive pressures
among financial services companies; (ii) changes in the interest rate
environment, reducing interest margins or increasing interest rate risk; (iii)
deterioration in general economic conditions, internationally, nationally, or in
the State of New Jersey; (iv) the occurrence of acts of terrorism, such as the
events of September 11, 2001, or acts of war; (v)legislation or regulatory
requirements or changes adversely affecting the business of the Company;
(vi)losses in the Company's leasing subsidiary exceeding management's
expectations; and (vii) other risks detailed in reports filed by the Company
with the Securities and Exchange Commission. Readers should not place undue
expectations on any forward-looking statements. We are not promising to make any
public announcement when we 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.
9
THREE MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
RESULTS OF OPERATIONS
Earnings Summary
For the second quarter of 2002, the Company reported earnings per diluted
common share of $0.31, an increase of 24.0% over the $0.25 reported in the same
period in 2001. Net income for the three months ended June 30, 2002 was $3.1
million, an increase of $591 thousand, or 23.9%, over the same period last year.
The increase in earnings was driven largely by growth in net interest income on
a tax-equivalent basis, which increased $1.2 million, or 14.4%, for the
comparative three-month periods. Growth in earnings assets and an improved net
interest margin ("margin") helped to fuel the increase in net interest income.
The growth in earning assets was funded primarily with low cost core deposits,
which is an essential and cost-effective funding source for the Bank. The
improved margin, which increased 22 basis points to 4.64% for the three-month
period ending June 30, 2002 as compared to the same period in 2001, resulted
from a favorable decline in the cost of funds of approximately 109 basis points.
In addition, a $323 thousand, or 28.0%, increase in non-interest income during
the comparative periods favorably affected revenue.
The growth in revenues was partly offset by a $560 thousand, or 9.8%,
increase in non-interest expenses. This increase largely reflects the expenses
associated with a branch opened in the first quarter of 2002 as well as the
acquisition during the first quarter of 2002 of certain assets and assumption of
certain liabilities of Monarch Capital Corporation ("MCC") by the Company. As
part of that transaction, MCC's staff joined ICC.
For the three months ended June 30, 2002, two of the Company's key
performance ratios Return on Average Assets ("ROA") and Return on Average Equity
("ROE") improved when compared to the same period in 2001. ROA increased to
1.38% from 1.23% and ROE increased to 17.23% from 15.25% when compared to the
same period last year.
Net Interest Income
Net interest income is the most significant source of the Company's
operating income. Net interest income on a tax-equivalent basis increased $1.2
million, or 14.4%, to $9.7 million for the quarter ended June 30, 2002 as
compared to the same quarter in 2001. The increase in net interest income was
due mostly to growth in deposits and interest earning assets. This interest
earning asset growth was funded primarily by deposit liabilities, which grew
11.0% on average for the second quarter of 2002 as compared to the same quarter
in 2001. The margin, which increased 22 basis points to 4.64% for the second
quarter of 2002 as compared to the same quarter in 2001, contributed to the
growth in net interest income.
10
Interest income, on a tax-equivalent basis, totaled $14.3 million for the
second quarter of 2002, a decrease of $343 thousand, or 2.3%, as compared to the
same quarter in 2001. The decrease was mostly attributed to a 79 basis points
decline in interest earning asset yields for the second quarter of 2002 as
compared to the same quarter in 2001, which was largely attributed to a decrease
in market interest rates. The impact on interest income due to the lower
interest rate environment was partly offset by an increase in interest-earning
assets, which grew on average $68.8 million, or 8.9%, for the second quarter of
2002 as compared to the same period last year. The growth in average
interest-earning assets occurred mostly in securities and loans, which increased
$34.1 million, or 19.1%, and $30.8 million, or 5.3%, respectively.
Interest expense, which totaled $4.6 million for the second quarter of
2002, decreased $1.6 million, or 25.5%, as compared to the same period in 2001.
The decrease in interest expense was a byproduct of the decline in interest
rates, particularly short-term rates, during 2002. 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 131 basis points to 2.66% for the quarter ended June 30, 2002 as
compared to the same period in 2001. 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
$72.8 million, or 12.3%, for the second quarter of 2002 as compared to the same
period in 2001.
11
- ------------------------------------------------------------------------------------------------------------------------------------
Analysis of Net Interest Income
- ------------------------------------------------------------------------------------------------------------------------------------
for the quarter ended June 30,
(dollars in thousands) 2002 2001
(unaudited) ---------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
-------- -------- -------- -------- -------- --------
Assets
Interest earning assets
Loans (1) $608,589 $11,377 7.48 % $577,745 $11,680 8.09 %
Taxable securities 199,186 2,645 5.31 166,536 2,639 6.34
Tax-exempt securities (2) 13,775 200 5.81 12,279 182 5.93
Federal funds sold 15,582 67 1.72 11,819 131 4.43
-------- -------- -------- --------
Total interest-earning assets 837,132 14,289 6.83 768,379 14,632 7.62
-------- --------
Non-interest earning assets
Cash and due from banks 20,270 20,247
Allowance for loan and lease losses (6,336) (6,433)
Other assets 38,454 20,577
-------- --------
Total assets $889,520 $802,770
======== ========
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest bearing deposits $665,563 4,313 2.59 $592,783 5,796 3.91
Borrowings 23,407 261 4.46 26,106 344 5.27
-------- -------- -------- --------
Total interest-bearing liabilities 688,970 4,574 2.66 618,889 6,140 3.97
-------- --------
Non-interest bearing liabilities
Demand deposits 116,267 111,700
Other liabilities 13,124 7,299
-------- --------
Total liabilities (3) 818,361 737,888
Stockholders' equity 71,159 64,882
-------- --------
Total liabilities and stockholders' equity $889,520 $802,770
======== ========
Net interest income (tax-equivalent basis) 9,716 4.17 8,492 3.65
Tax-equivalent basis adjustment (88) (83)
-------- --------
Net interest income $9,628 $ 8,411
======== ========
Net interest income as a percent of interest-earning
assets (tax-equivalent basis) 4.64 % 4.42 %
- ------------------------------------------------------------------------------------------------------------------------------------
(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.
Provision for Loan and Lease Losses
The provision for loan and lease losses represents management's calculation
of the amount necessary to bring the allowance for loan and lease losses
("ALLL") to a level that management considers adequate to reflect the risk of
estimated losses inherent in the Company's loan portfolio as of the balance
sheet date. A more detailed discussion of the evaluation of the ALLL can be
found in the section titled "Significant Accounting Policy: Allowance for Loan
and lease losses". In the second quarter of 2002 and 2001, the Company's
provision for loan and lease losses was $255 thousand and $200 thousand,
respectively.
Non-interest Income
For the quarter ended June 30, 2002, non-interest income totaled $1.5
million, an increase of $323 thousand, or 28.0%, as compared to the same period
in 2001. Increases in the cash surrender value of the Bank Owned Life Insurance
("BOLI") contracts amounted to $225 thousand and were the
12
principal reason for this increase. In addition, commissions earned on the sales
of mutual funds and insurance products and net gains from the sales of
securities increased $130 thousand and $41 thousand, respectively, when compared
to the same period in 2001, and also contributed to the growth in non-interest
income. Syndication fees on leases sold by ICC decreased by $66 thousand over
the comparative periods, and served to offset some of the aforementioned
benefits.
Non-interest Expenses
For the quarter ended June 30, 2002, non-interest expenses increased $560
thousand to $6.3 million, an increase of 9.8% when compared to the same period
one year ago. The Bank's expansion program, including the acquisition of MCC,
contributed to the increase in non-interest expenses. The Bank opened a new
branch in Hackensack in January 2002. The costs associated with this branch
amounted to $98 thousand for the quarter ended June 30, 2002. In addition, in
January 2002, the Company acquired certain assets and assumed certain
liabilities of MCC. As part of the acquisition, the staff of MCC joined ICC. The
additional staffing contributed to the increase in ICC non-interest expenses of
$142 thousand for the three months ended June 30, 2002 as compared to the same
period last year. In addition, increases in salaries and benefits and other
expenses contributed to the increase in non-interest expenses. Salaries and
benefits, excluding amounts attributable to the new branch and the MCC
acquisition, increased by $161 thousand and is attributable to normal growth.
Other expenses increased by $220 thousand due in large part to a legal
settlement.
Income Taxes
Income tax expense as a percentage of pre-tax income was 32.7% for the
three months ended June 30, 2002 as compared to 31.9% for the second quarter of
2001.
13
SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
RESULTS OF OPERATIONS
Earnings Summary
For the first six months of 2002, the Company reported net income of $6.0
million, or $0.60 diluted earnings per common share, as compared with $4.8
million, or $0.49 diluted earnings per common share for the same period last
year. The increase in earnings was driven largely by growth in net interest
income on a taxable equivalent basis, which increased $2.2 million, or 13.1%.
The improvement in net interest income was attributable to growth in deposits
that fueled additional growth in interest earning assets. In addition,
non-interest income, which increased $660 thousand, or 27.8%, over the same
period last year also contributed to the improvement in earnings. The growth in
revenues was partly offset by a $1.0 million, or 8.8% increase in non-interest
expenses.
For the six months ended June 30, 2002, ROA and ROE improved to 1.38% from
1.21% and ROE increased to 17.10% from 15.09% when compared to the same period
last year.
Net Interest Income
Net interest income on a tax-equivalent basis increased $2.2 million, or
13.1%, to $18.9 million for the six months ended June 30, 2002 as compared to
the same period in 2001. The increase in net interest income was due to growth
in interest earning assets. The interest earning asset growth was funded by
deposit liabilities, which grew 9.7% on average for the six months ended of June
30, 2002 as compared to the same period in 2001. Contributing to the growth in
net interest income was an increase in the margin of 21 basis points to 4.61%
for the first six months of 2002 as compared to the same period in 2001.
Interest income, on a tax-equivalent basis, totaled $28.1 million for the
first six months of 2002,a decrease of $1.2 million, or 4.1%, as compared to the
same period in 2001. The decrease was mostly attributed to an 85 basis point
decline in interest earning asset yields for the first six months of 2002 as
compared to the same period in 2001. The decline in interest earning asset
yields was largely attributed to a decrease in market interest rates. The impact
on interest income due to the lower interest rate environment was partly offset
by an increase in the volume of interest-earning assets, which grew on average
$59.0 million, or 7.8%, for the first half of 2002 as compared to the same
period last year. The growth in interest-earning assets occurred mostly in
securities and loans, which increased $33.3 million, or 19.5%, and $28.5
million, or 5.0%, respectively.
Interest expense, which totaled $9.3 million for the six months ended June
30, 2002, decreased $3.4 million, or 26.7%, as compared to the same period in
2001. The improvement to interest expense is a byproduct of the decline in
interest rates, particularly short-term rates, during 2002. In addition, a
14
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 137 basis points to 2.75% for the six months ended June 30, 2002
as compared to the same period in 2001. 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 $63.5 million, or 10.8%, for the first six months of 2002 as compared to
the same period in 2001.
- ------------------------------------------------------------------------------------------------------------------------------------
Analysis of Net Interest Income
- ------------------------------------------------------------------------------------------------------------------------------------
for the quarter ended June 30,
(dollars in thousands) 2002 2001
(unaudited) ---------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
-------- -------- -------- -------- -------- --------
Assets
Interest earning assets
Loans (1) $600,178 $22,431 7.47 % $571,691 $23,402 8.19 %
Taxable securities 191,606 5,196 5.42 158,964 5,106 6.42
Tax-exempt securities (2) 12,577 376 5.98 11,870 372 6.27
Federal funds sold 14,133 120 1.70 16,930 436 5.15
-------- -------- -------- --------
Total interest-earning assets 818,494 28,123 6.87 759,455 29,316 7.72
-------- --------
Non-interest earning assets
Cash and due from banks 20,659 20,395
Allowance for loan and lease losses (6,451) (6,344)
Other assets 37,666 21,147
-------- --------
Total assets $870,368 $794,653
======== ========
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest bearing deposits $649,221 8,697 2.68 $585,755 11,862 4.05
Borrowings 24,637 553 4.49 27,629 764 5.53
-------- -------- -------- --------
Total interest-bearing liabilities 673,858 9,250 2.75 613,383 12,626 4.12
-------- --------
Non-interest bearing liabilities
Demand deposits 114,213 110,258
Other liabilities 12,080 7,348
-------- -------
Total liabilities (3) 800,150 730,989
Stockholders' equity 70,218 63,664
-------- -------
Total liabilities and stockholders' equity $870,368 794,653
======== =======
Net interest income (tax-equivalent basis) 18,873 4.12 16,690 3.60
Tax-equivalent basis adjustment (178) (163)
-------- --------
Net interest income $18,695 $ 16,527
======== ========
Net interest income as a percent of interest-earning
assets (tax-equivalent basis) 4.61% 4.40 %
- ------------------------------------------------------------------------------------------------------------------------------------
(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.
Provision for Loan and Lease Losses
For the six months ended June 30, 2002 and 2001, the Company's provision
for loan and lease losses was $480 thousand and $380 thousand, respectively. A
more detailed discussion of the evaluation of the ALLL can be found in the
section titled "Significant Accounting Policy: Allowance for loan and lease
losses".
15
Non-interest Income
For the six months ended June 30, 2002, non-interest income grew to $3.0
million, an increase of $660 thousand, or 27.8%, as compared to the six months
ended June 30, 2001. The improvement was driven by increases in the cash
surrender value of contracts related to the BOLI, net gains on the sales of
securities and commissions on the sales of annuities and insurance of $445
thousand, $163 thousand and $105 thousand, respectively. A reduction in
syndication fees from the sales of leases of $55 thousand offset somewhat the
aforementioned gains.
Non-interest Expenses
For the six months ended June 30, 2002, non-interest expenses totaled $12.4
million, an increase of $1.0 million, or 8.8%, as compared to the same period in
2001. Salaries and benefits, advertising and promotion and other expenses
increased $485 thousand, $217 thousand and $205 thousand, respectively, when
compared to the same period one year ago. The opening of the Bank's newest
branch in January along with an increase in the operations of ICC comprised $287
thousand of the increase to salaries and benefits. Advertising and promotion
expenses increased as a result of a more aggressive marketing campaign aimed at
increasing the Company's market penetration, the introduction of the Company's
new brand positioning in the market place as "The Bank For People Like You" and
promotional expenses related to the grand opening of the Hackensack office.
Other expenses increased primarily due to a legal settlement, as well as an
increase in employee recruiting fees of $76 thousand. The year to date
comparison is also affected by a non-recurring entrance fee of $59 thousand,
paid in 2001 for the Company's listing on the NASDAQ National Market System.
Income Taxes
Income tax expense as a percentage of pre-tax income was 32.0% for the six
months ended June 30, 2002 as compared to 32.4% for the same period of 2001.
16
FINANCIAL CONDITION
The Company's total assets were $905.5 million at June 30, 2002, which
represents an increase of $74.5 million, or 9.0%, from $830.9 million at
December 31, 2001. The growth was largely in securities and loans, which grew
$40.2 million and $40.6 million, respectively, for June 30, 2002 as compared to
December 31, 2001. The asset growth was funded principally by growth in deposit
liabilities, which occurred largely in interest bearing demand deposits, time
deposits greater than $100,000 and money market savings.
Cash and Cash Equivalents
At June 30, 2002, cash and cash equivalents decreased $4.1 million to $18.1
million as compared to December 31, 2001. This is largely the result of
investing activities (funding loans and investment growth) investing cash more
rapidly than financing activities (reflecting principally deposit growth less
repayments of borrowings) and operating activities (reflecting net income and
changes in other assets) could generate it. This can be seen more completely on
the accompanying unaudited Statements of Cash Flows.
Securities Portfolio
Under Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"), each security
is classified as either trading, available for sale ("AFS"), or held to maturity
("HTM"). The Company has no securities held in a trading account. The AFS
securities are recorded at their fair value. The after-tax difference between
amortized cost and fair value of AFS securities is recorded as "accumulated
other comprehensive income" in the equity section of the balance sheet. The tax
impact of such adjustment is recorded as an adjustment to the amount of the
deferred tax liability. The HTM securities are carried at cost adjusted for the
amortization of premiums and accretion of discounts, which are recognized as an
adjustment to income. Under SFAS No. 115, HTM securities, with some exceptions,
may only be sold within three months of maturity.
The Company uses its securities portfolio to ensure liquidity for cash flow
requirements, to manage interest rate risk, to provide a source of income, to
ensure collateral is available for pledging requirements and to manage asset
quality diversification. At June 30, 2002, investment securities totaled $234.1
million and represented 25.9% of total assets, as compared to $193.9 million and
23.3%, respectively, at December 31, 2001. AFS securities comprised 86.8% of the
total securities portfolio at June 30, 2002 as compared to 80.0% at December 31,
2001. During the second quarter of 2002, the Company sold securities with a book
value of approximately $6 million and recognized $94 thousand in gains.
17
The following table reflects the composition of the securities portfolio:
(dollars in thousands)
------------------------------------------------------------
June 30, 2002
------------------------------------------------------------
(unaudited)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ----------- --------------
Securities held to maturity
Mortgage-backed securities $19,028 $659 - $ 19,687
Obligations of U.S. agencies 1,984 98 - 2,082
Obligations of states & political subdivisions 9,736 482 $ 2 10,216
Other debt securities 257 - - 257
----------- ------------ ----------- -------------
31,005 1,239 2 32,242
----------- ------------ ----------- -------------
Securities available for sale
Mortgage-backed securities 102,266 2,282 59 104,489
Obligations of U.S. agencies 73,471 1,199 237 74,433
Obligations of states & political subdivisions 18,185 622 3 18,804
Other debt securities 1,385 42 - 1,427
Equity securities 3,937 - - 3,937
----------- ------------ ----------- -------------
199,244 4,145 299 203,090
----------- ------------ ----------- -------------
Total securities $230,249 $5,384 $301 $235,332
=========== ============ =========== =============
-------------------------------------------------------------
December 31, 2001
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------ -------------
Securities held to maturity
Mortgage-backed securities $22,201 $300 $9 $ 22,492
Obligations of U.S. agencies 5,977 181 - 6,158
Obligations of states & political subdivisions 9,855 244 23 10,076
Other debt securities 839 15 - 854
----------- ------------ ------------ -------------
38,872 740 32 39,580
----------- ------------ ------------ -------------
Securities available for sale
Obligations of U.S. Treasury 1,999 18 - 2,017
Mortgage-backed securities 97,022 1,808 313 98,517
Obligations of U.S. agencies 39,944 529 409 40,064
Obligations of states & political subdivisions 9,993 462 - 10,455
Equity securities 3,977 - - 3,977
----------- ------------ ------------ -------------
152,935 2,817 722 155,030
----------- ------------ ------------ -------------
Total securities $191,807 $3,557 $754 $194,610
=========== ============ ============ =============
18
At June 30, 2002, the contractual maturities of securities held to maturity
and securities available for sale are as follows: (dollars in thousands)
Securities Securities
Held to Maturity Available for Sale
-------------------- ---------------------
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- ---------
Within 1 year $ 752 $ 760 $ 11,597 $ 11,679
After 1 but within 5 years 7,566 7,936 122,472 124,326
After 5 but within 10 years 16,484 17,132 25,313 26,015
After 10 years 6,203 6,414 35,925 37,133
Equity securities - - 3,937 3,937
--------- --------- --------- ---------
Total $31,005 $32,242 $199,244 $203,090
==================== ====================
Loans
Total loans amounted to $621.9 million at June 30, 2002, an increase of
$40.6 million from $581.3 million at December 31, 2001. The growth was
predominately in commercial loans and leases and commercial mortgage loans,
which increased $32.6 million and $16.0 million, respectively. The increase in
commercial lease financing was due to the acquisition of approximately $10.7
million of commercial leases from MCC in the first quarter of 2002. The
acquisition was part of the Company's strategy of shifting the emphasis of its
leasing subsidiary, ICC, more towards the middle-market leasing business.
The following table reflects the composition of the loan and lease
portfolio: (dollars in thousands)
--------------- ---------------
June 30, December 31,
2002 2001
--------------- ---------------
(unaudited)
Amount of loans by type
Real estate-mortgage
1-4 family residential
First liens $111,352 $113,703
Junior liens 8,212 8,384
Home equity 126,553 130,658
Commercial 214,370 198,319
Construction 6,162 5,265
--------------- --------------
466,648 456,329
--------------- --------------
Commercial loans
Commercial and financial 105,428 85,801
Lease financing 28,788 15,850
--------------- --------------
134,216 101,651
--------------- --------------
Consumer loans
Lease financing 17,299 18,822
Installment 3,746 4,521
--------------- --------------
21,045 23,343
--------------- --------------
Total $621,909 $581,323
=============== ==============
19
Deposits
Deposits, which include non-interest-bearing demand deposits, time deposits
and other interest-bearing deposits, are an essential and cost-effective funding
source for the Company. The Company attributes its success in growing deposits
to the emphasis it places on building core customer relationships by offering a
variety of products designed to meet the financial needs of its customers based
on their identifiable "life stages".
At June 30, 2002, total deposits increased $65.7 million, or 9.0%, to
$792.2 million from $726.5 million at December 31, 2001. The growth in deposits
occurred mostly in other interest-bearing deposits and time deposits, which
increased $50.0 million and $14.6 million, respectively, at June 30, 2002 as
compared to December 31, 2001. Other interest-bearing deposits, which include
interest-bearing demand, money market and savings accounts, comprise the largest
segment of the Company's total deposits. At June 30, 2002, such deposits
amounted to $451.8 million, an increase of $50.0 million, or 12.4%, from
December 31, 2001. The growth in other interest-bearing deposits occurred
largely in interest bearing checking, which increased $33.2 million, or 11.8%,
for June 30, 2002 as compared to December 31, 2001. Time deposits amounted to
$229.9 million at June 30, 2002, an increase of $14.6 million, or 6.8%, from
December 31, 2001. The growth in time deposits was principally attributed to an
increase in municipal time deposits greater than $100,000. Total time deposits
represented 29.0% of total deposits at June 30, 2002 compared to 29.6% at
December 31, 2001.
For the three and six months ended June 30, 2002, the Company's overall
yield on deposits declined by 108 basis points to 2.21% and 113 basis points to
2.28%, respectively, as compared to the same periods last year. The decrease was
attributed predominately to changes in market interest rates and a change in the
composition of deposit liabilities.
The following table reflects the composition of deposit liabilities:
(dollars in thousands)
------------- -------------
June 30, December 31,
2002 2002
------------- -------------
Non-interest Demand $110,513 $109,416
Interest Bearing Demand 315,340 282,173
Savings 78,587 72,092
Money Market Savings 57,883 47,569
Time Deposits <$100,000 197,007 194,754
Time Deposits >$100,000 32,845 20,479
------------- -------------
Total $792,175 $726,483
============= =============
20
Nonperforming Assets
Nonperforming assets are comprised of nonaccrual loans, restructured loans,
foreclosed real estate and other repossessed assets. At June 30, 2002,
nonperforming assets amounted to $2.8 million, a decrease of $489 thousand, or
17.5%, from $2.3 million at December 31, 2001. The decrease in nonperforming
assets was partly due to a $592 thousand commercial mortgage loan, which became
current during the second quarter of 2002. The ratio of nonperforming assets to
total loans and foreclosed real estate decreased to 0.37% at June 30, 2002 from
0.48% at December 31, 2001.
The following table lists nonaccrual loans, restructured loans and
foreclosed real estate and other repossessed assets as June 30, 2002, and
December 31, 2001 (dollars in thousands).
------------ ------------
June 30, December 31,
2002 2002
------------ ------------
Nonperforming loans $ 1,721 $ 2,160
Restructured Loans - 150
Foreclosed real estate and other repossessed assets 592 492
------------ ------------
Total nonperforming assets $ 2,313 $ 2,802
============ ============
Significant Accounting Policy
Allowance for loan and lease losses: The ALLL is established through
periodic charges to income. Loan losses are charged against the ALLL when
management believes that the future collection of principal is unlikely.
Subsequent recoveries, if any, are credited to the ALLL. If the ALLL is
considered inadequate to absorb future loan losses on existing loans, based on,
but not limited to, increases in the size of the loan portfolio, increases in
charge-offs or changes in the risk characteristics of the loan portfolio, then
the provision for loan and lease losses is increased.
The Company's ALLL is an amount considered adequate to absorb estimated
losses on existing loans and leases that may become uncollectible based on
management's evaluations of the size and current risk characteristics of the
loan and lease portfolio as of the balance sheet date. The evaluations consider
such factors as changes in the composition and volume of the loan portfolio, the
impact of changing economic conditions on the credit worthiness of the
borrowers, review of specific problem loans and management's assessment of the
inherent risk and overall quality of the loan portfolio.
While the ALLL is management's best estimate of loan losses incurred as of
the balance sheet date, the process of determining the adequacy of the ALLL is
essentially judgmental and subject to changes to external conditions.
Accordingly, there can be no assurance that existing levels of the ALLL will
ultimately prove adequate to cover actual loan losses. The ALLL was $6.4 million
at June 30, 2002, and $6.6 million at December 31, 2001, representing 373.6% and
304.1% of the nonperforming loans at those dates, respectively.
21
The following table presents the provisions for loan and lease losses,
loans charged off and recoveries on loans previously charged off, the amount of
the allowance, the average loans outstanding and certain pertinent ratios for
the six months ended June 30, 2002 and 2001 (dollars in thousands).
--------------------------------
June 30,
--------------------------------
2002 2001
---------- ----------
Average loans outstanding $ 600,178 $ 571,691
========== ==========
Allowance at beginning of year 6,569 6,154
---------- ----------
Loans charged off
Commercial and financial 9 -
Commercial lease financing 634 227
Consumer loans 22 4
---------- ----------
Total 665 231
---------- ----------
Recoveries of loans previously charged off
Real estate 28 3
Commercial and financial - 189
Commercial lease financing 8 6
Consumer loans 10 23
---------- ----------
Total 46 221
---------- ----------
Additions to allowance charged to expense 480 380
---------- ----------
Allowance at end of period $6,430 $6,524
========== ==========
Allowance to total loans 1.07 % 1.14 %
Ratio of net charge-offs to average loans 0.10 % 0.00 %
- --------------------------------------------------------------------------------------
Market Risk
The Company's primary exposure to market risk arises from changes in market
interest rates ("interest rate risk"). The Company's profitability is largely
dependent upon its ability to manage interest rate risk. Interest rate risk can
be defined as the exposure of the Company's net interest income to adverse
movements in interest rates. Although the Company manages other risks, as in
credit and liquidity risk, in the normal course of its business, management
considers interest rate risk to be its most significant market risk and could
potentially have the largest material effect on the Company's financial
condition. The primary objective of the asset/liability management process is to
measure the effect of changing interest rates on net interest income and
economic value of equity and adjust the balance sheet, if necessary, to minimize
the inherent risk and maximize income. On a weekly basis, the Company's
Asset/Liability Committee ("ALCO") meets to review matters pertaining to market
and interest rate risk. On a quarterly basis, management through the use of an
asset/liability simulation model produces a report, which estimates the
potential impact on net interest income and future economic value of equity.
This report is reviewed by ALCO and the Board of Directors. At June 30, 2002,
the Company simulated the effects on net interest
22
income given an instantaneous and parallel shift in the yield curve of 200 basis
points in either direction. Based on the simulation, the results did not
significantly change from March 31, 2001. At June 30, 2002, the Company was
within policy limits established by the Board of Directors for changes in net
interest income and future economic value of equity.
The 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
hedging transactions utilizing derivative financial instruments during the first
six months of 2002.
The Company is, however, a 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 varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
statement of condition. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates and may require
collateral from the borrower if deemed necessary by the Company. Standby letters
of credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party up to a stipulated amount and with
specified terms and conditions. Commitments to extend credit and standby letters
of credit are not recorded on the Company's consolidated balance sheet until the
instrument is exercised.
Capital Adequacy
The Company is subject to capital adequacy requirements imposed by the
Board of Governors of the Federal Reserve System (the "Federal Reserve"); and
the Bank is subject to similar capital adequacy requirements imposed by the
Federal Deposit Insurance Corporation (the "FDIC"). The Federal Reserve and the
FDIC have adopted risk-based capital requirements for assessing bank holding
company and bank capital adequacy. These standards define capital and establish
minimum capital requirements in relation to assets and off-balance sheet
exposure, adjusted for credit risk. The risk-based capital standards currently
in effect are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among bank holding companies and banks, to account
for off-balance sheet exposure. 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
23
securities (subject to certain limitations) and minority interests, less
goodwill. Supplementary capital includes the allowance for loan losses (subject
to certain limitations),other perpetual preferred stock, trust preferred
securities, certain other capital instruments and term subordinated debt. Total
capital is the sum of core and supplementary capital.
At June 30, 2002, the minimum risk-based capital requirements to be
considered adequately capitalized were 4% for Tier 1 capital and 8% for total
capital.
Federal banking regulators have also adopted leverage capital guidelines to
supplement the risk-based measures. The leverage ratio is determined by dividing
Tier 1 capital as defined under the risk-based guidelines by average total
assets (non risk-adjusted) for the preceding quarter. At June 30, 2002, the
minimum leverage ratio requirement to be considered adequately capitalized was
4%.
The capital levels of the Company and the Bank at June 30, 2002, 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
and the Bank exceeded all the minimum capital ratios established by the Federal
banking agencies to be considered "well-capitalize". The minimum capital
guidelines are detailed in the table below.
The Company's and the Bank's capital amounts and ratios are as follows: (dollars in thousands)
To Be "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ---------- --------- --------- --------- ---------
As of June 30, 2002:
Total Capital (to Risk Weighted Assets):
The Company $77,372 12.64 % $48,973 8.00 % N/A N/A
The Bank 76,046 12.35 49,280 8.00 $61,601 10.00 %
Tier 1 Capital (to Risk Weighted Assets):
The Company 70,942 11.59 24,487 4.00 N/A N/A
The Bank 69,616 11.30 24,640 4.00 36,960 6.00
Tier 1 Capital (to Average Assets):
The Company 70,942 8.01 26,566 3.00 N/A N/A
The Bank 69,616 7.87 26,527 3.00 44,211 5.00
As of December 31, 2001:
Total Capital (to Risk Weighted Assets):
The Company $73,700 12.89 % $45,727 8.00 % N/A N/A
The Bank 71,916 12.58 45,733 8.00 $57,166 10.00 %
Tier 1 Capital (to Risk Weighted Assets):
The Company 67,131 11.74 22,864 4.00 N/A N/A
The Bank 65,347 11.43 22,866 4.00 34,299 6.00
Tier 1 Capital (to Average Assets):
The Company 67,131 8.09 24,901 3.00 N/A N/A
The Bank 65,347 7.93 24,727 3.00 41,212 5.00
Liquidity
Liquidity is the ability to provide sufficient resources to meet all
financial current obligations and finance prospective business opportunities.
The Company's liquidity position over any given period of time
24
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 due from banks and federal
funds sold. At June 30, 2002, the total of such assets amounted to $18.1
million, or 2.0%, of total assets, compared to $22.2 million, or 2.7%, of total
assets at December 31, 2001. The decrease in cash and cash equivalents was due
largely to growth in loans and securities. Net loans at June 30, 2002 amounted
to $615.5 million, an increase of $40.7 million, or 7.1%, from $574.8 million at
December 31, 2001. In 2002, despite heightened competition for loans, loan
production continued to be the Company's principal investing activity.
At June 30, 2002, total securities amounted to $234.1 million, an increase
of $40.2 million or 20.7% as compared to December 31, 2001. The growth in
investments occurred mostly in AFS securities, which is also another significant
liquidity source. At June 30, 2002, AFS securities amounted to $203.1 million,
or 86.8%, of total securities, compared to $155.0 million, or 80.0%, of total
securities at December 31, 2001.
Financing for the Company's loans and securities is derived primarily from
deposits, along with interest and principal payments on loans and securities. At
June 30, 2002, total deposits amounted to $792.1 million, an increase of $65.7
million, or 9.0%, from December 31, 2001. In addition, the Company supplements
the more traditional funding sources with borrowings from the Federal Home Loan
Bank of New York ("FHLB") and with securities sold under agreements to
repurchase ("REPOS"). At June 30, 2002, advances from the FHLB and REPOS
amounted to $17.9 million and $6.3 million, respectively, as compared to $18.1
million and $6.7 million, respectively, at December 31, 2001. At June 30, 2002,
total borrowings amounted to 2.7% of total assets, which was a decline from 3.0%
at December 31, 2001. 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 $79.9 million line of credit available through its membership in
the FHLB.
Management believes that the Company's sources of funds are sufficient to
meet its current funding requirements.
25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings Reference is also made to Note 3 of the Company's
Consolidated Financial Statements in this Form 10-Q. In the second
quarter of 2002, the Company entered into a settlement agreement with
respect to the matter involving Michael C.Guttuso and Anthony Andora as
previously described in the Company's quarterly report on Form 10-Q for
the quarterly period ended March 31, 2002. The terms of the settlement
are confidential. Management believes the amount paid and expenses
in the second quarter in settlement of this matter did not have a
material effect on the financial condition or results of operations of
the Company.
Item 2. Change in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a)The company held its Annual Meeting of Shareholders on April 25,2002.
(b)Each of the persons nominated for director was elected; amendment of
Company's Stock Option and Incentive Plan of 1997 was approved; and
the selection of Deloitte & Touche, LLP as the Company's independent
auditors for 2002 was ratified. The following are the voting results
on each of these matters:
Against
Or
For Withheld Abstentions
___ ________ __________
(1) ELECTION OF DIRECTORS
Anthony S. Abbate 7,312,218 92,795 0
Anthony R. Coscia 7,311,705 93,308 0
John J. Eccleston 7,302,058 100,955 0
Eleanore S. Nissley 7,312,035 92,978 0
(2) Approve amendment to the Company's
Stock Option and Incentive Plan of 1997
increasing shares of common stock
reserved for issuance. 6,759,665 571,041 74,307
(3) Ratification of the selection of
Deloitte & Touche, LLP as the Company's
independent Auditors for 2002. 7,143,108 259,092 2,813
All share data has been restated to reflect a 3 for 2 stock split paid on
July 12, 2002.
Item 5. Other Information
None
26
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are furnished herewith:
Exhibit.
--------
3 Certificate of Amendment to Certificate of Incorporation
Exhibit.
--------
11 Statement re computation of per share earnings
(b) Reports on Form 8-K
During the quarter ended June 30, 2002, the Company filed the
following Current Report on Form 8-K:
Form 8-K filed May 23, 2002, announcing that Interchange
Financial Services Corporation declared a 3 for 2 stock split
payable on July 12, 2002, along with its regular dividend of
$0.15 per common share, also payable on July 12, 2002 to holders
of record as of June 17, 2002.
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/ Anthony Labozzetta
---------------------------------
Anthony Labozzetta
Executive Vice President & CFO
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
Dated: August 14, 2002
27
Exhibit 3
INTERCHANGE FINANCIAL SERVICES CORPORATION
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
Interchange Financial Services Corporation, organized under the laws of the
State of New Jersey, to amend its Certificate of Incorporation to increase the
number of authorized shares of Common Stock in connection with a division of its
outstanding shares of Common Stock in accordance with N.J.S.A. 14A:7-15.1(3),
hereby certifies:
FIRST: The name of the Corporation is Interchange Financial Services
Corporation.
SECOND: The Board of Directors, at a meeting duly called and held on May
23, 2002, authorized and approved a 3 for 2 division of all its issued and
outstanding shares of Common Stock, no par value, effective July 12, 2002 and
distributable to shareholders of record as of the close of business on June 17,
2002. As of the close of business on June 17, 2002 there were 7,274,633 shares
of Common Stock, no par value issued and outstanding which are divided into
10,911,950 shares of Common Stock, no par value.
THIRD: To increase the number of authorized shares of the Corporation from
15,000,000 to 22,500,000, Article V of the Corporation's Certificate of
Incorporation is amended to delete the first paragraph thereof and replace it
with a paragraph reading as follows:
"ARTICLE V
CAPITAL STOCK
The Corporation is authorized to issue 22,500,000 shares of common
stock, all of which are without nominal or par value, as the Board of
Directors may determine. The Corporation is also authorized to issue
1,000,000 shares of preferred stock, all of which are without nominal
or par value, as the Board of Directors may determine."
Except as set forth in the foregoing amendment, all provisions of the
Corporation's Certificate of Incorporation shall continue in full force and
effect.
FOURTH: The amendment described in Article THIRD will not adversely affect
the rights or preferences of the holders of outstanding shares of any class or
series and will not result in the percentage of authorized shares that remains
unissued after the share division described in Article SECOND exceeding the
percentage of authorized shares that was unissued before division of shares.
FIFTH: The within amendment to the Certificate of Incorporation was adopted
by the Board of Directors of the Corporation at a meeting duly called and held
on May 23, 2002 in accordance with N.J.S.A. 14A:7-15.1(2).
SIXTH: The foregoing amendment to the Corporation's Certificate of
Incorporation shall become effective to occur on the later of July 12, 2002 or
the date on which this Certificate of Amendment is filed with the Secretary of
State of the State of New Jersey.
IN WITNESS WHEREOF, the Corporation has caused its duly authorized officer
to execute this certificate the 28th day of June, 2002.
ATTEST: INTERCHANGE FINANCIAL SERVICES
CORPORATION
BY:/s/ Benjamin Rosenzweig BY: /s/ Anthony J. Labozzetta
__________________________ ______________________________
Benjamin Rosenzweig Anthony J. Labozzetta
Secretary Executive Vice President & CFO
Exhibit 11. Computation Re: Earnings Per Share
(dollars in thousands, except per share amounts)
-------------------------------------------------- ----------------------------------------------------
Three Months Ended, Six Months Ended,
-------------------------------------------------- ----------------------------------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
----------------------- ------------------------- ----------------------------------------------------
Weighted Per Weighted Per Weighted Per Weighted Per
Average Share Average Share Average Share Average Share
Income Shares Amount Income Shares Amount Income Shares Amount Income Shares Amount
------- -------- ------ ------- --------- ------- ------ --------- ------ ------ --------- -------
Basic Earnings per
Common Share
Income available to
common shareholders $3,065 9,818 $0.31 $2,474 9,815 $0.25 6,005 9,797 $0.61 $4,805 9,813 $0.49
====== ======= ======
Effect of Dilutive Shares
Options issued to
management 174 43 132 34
-------- --------- --------- ---------
Diluted Earnings per
Common Share $3,065 9,992 $0.31 $2,474 9,858 $0.25 $6,005 9,929 $0.60 $4,805 9,847 $0.49
======= ======== ====== ====== ========= ======= ====== ========= ====== ====== ========= =======
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the filing of the Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 2002, (the"Report") by Interchange Financial Services
Corporation ("Registrant"), each of the undersigned hereby certifies that:
1. The Report fully complies with the requirements of Section 13(a) or 15 (d) of
the Securities Exchange Act of 1934, as amended, and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of Registrant.
/s/ Anthony S. Abbate
____________________________________________
Anthony S. Abbate
President and Chief Executive Officer
/s/ Anthony J. Labozzetta
____________________________________________
Anthony J. Labozzetta
Executive Vice President and CFO