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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 SEPTEMBER 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 October 31, 2002, was 9,817,958 (after giving effect 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
September 30, 2002 and December 31, 2001 . . . . . . . . 1
Consolidated Statements of Income for the three
and nine-month periods ended September 30, 2002 and 2001 . 2
Consolidated Statements of Changes in
Stockholders' Equity for the nine months ended
September 30, 2002 and 2001 . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the
nine months ended September 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
Item 4 Controls and Procedures . . . . . . . . . . . . . . . . .27
PART II OTHER INFORMATION
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . 28
Item 2 Changes in Securities and Use of Proceeds. . . . . . . . 28
Item 3 Defaults Upon Senior Securities . . . . . . . . . . . . 28
Item 4 Submission of Matters to a Vote of Security Holders . . . 28
Item 5 Other Information . . . . . . . . . . . . . . . . . . . . 28
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . 28
Signatures . . . . . . . . . . . . . . . . . . . . . . . 29
Item 1: Financial Statements
Interchange Financial Services Corporation
- ------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------
(dollars in thousands)
September 30, December 31,
2002 2001
_____________ ____________
(unaudited)
Assets
Cash and due from banks $ 26,148 $ 22,211
Federal funds sold 10,850 -
_____________ ____________
Total cash and cash equivalents 36,998 22,211
_____________ ____________
Securities held to maturity at amortized cost (estimated market value
of $31,355 and $39,580 for September 30, 2002 and December 31, 2001,
respectively) 29,657 38,872
_____________ ____________
Securities available for sale at estimated market value (amortized cost
of $193,479 and $152,935 for September 30, 2002 and December 31, 2001,
respectively) 200,243 155,030
_____________ ____________
Loans 624,571 581,323
Less: Allowance for loan and lease losses 6,707 6,569
______________ ____________
Net loans 617,864 574,754
______________ ____________
Bank owned life insurance 16,044 15,378
Premises and equipment, net 10,293 10,235
Foreclosed real estate and other repossesed assets 358 492
Accrued interest receivable and other assets 9,455 13,977
______________ ____________
Total assets $920,912 $830,949
============= ============
Liabilities
Deposits
Non-interest bearing $116,857 $109,416
Interest bearing 673,425 617,067
_____________ ____________
Total deposits 790,282 726,483
_____________ ____________
Securities sold under agreements to repurchase 22,049 6,700
Short-term borrowings 7,000 18,100
Long-term borrowings 10,000 -
Accrued interest payable and other liabilities 12,548 11,433
_____________ ____________
Total liabilities 841,879 762,716
_____________ ____________
Stockholders' equity:
Common stock, without par value; 22,500,000 shares authorized;
9,824,958 and 9,690,651 shares issued and outstanding at
September 30, 2002 and December 31, 2001, respectively 5,397 5,397
Capital surplus 21,098 20,993
Retained earnings 61,273 54,758
Accumulated other comprehensive income 3,809 1,156
_____________ ____________
91,577 82,304
Less: Treasury stock 12,544 14,071
_____________ ____________
Total stockholders' equity 79,033 68,233
_____________ ____________
Total liabilities and stockholders' equity $920,912 $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 Nine Months Ended
September 30, September 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Interest income
Interest and fees on loans $11,561 $11,560 $33,915 $34,889
Interest on federal funds sold 45 59 165 495
Interest and dividends on securities
Taxable interest income 2,563 2,438 7,665 7,408
Interest income exempt from federal income taxes 161 127 436 409
Dividends 40 59 134 195
--------- --------- --------- ---------
Total interest income 14,370 14,243 42,315 43,396
--------- --------- --------- ---------
Interest expense
Interest on deposits 3,991 5,349 12,688 17,211
Interest on securities sold under agreements to repurchase 91 104 183 445
Interest on short-term borrowings 120 215 370 638
Interest on long-term borrowings 108 - 319 -
--------- --------- --------- ---------
Total interest expense 4,310 5,668 13,560 18,294
--------- --------- --------- ---------
Net interest income 10,060 8,575 28,755 25,102
Provision for loan and lease losses 405 210 885 590
--------- --------- --------- ---------
Net interest income after provision
for loan losses 9,655 8,365 27,870 24,512
--------- --------- --------- ---------
Non-interest income
Service fees on deposit accounts 659 610 1,922 1,835
Net gain on sale of securities 214 129 495 247
Other 902 726 2,396 1,761
--------- --------- -------- ---------
Total non-interest income 1,775 1,465 4,813 3,843
--------- --------- -------- ---------
Non-interest expenses
Salaries and benefits 3,505 3,082 10,067 9,159
Net occupancy 843 822 2,576 2,502
Furniture and equipment 267 274 857 818
Advertising and promotion 258 391 1,047 963
Federal Deposit Insurance Corporation assessment 32 32 97 97
Other 1,421 1,096 4,106 3,576
--------- --------- -------- ---------
Total non-interest expenses 6,326 5,697 18,750 17,115
--------- --------- -------- ---------
Income before income taxes 5,104 4,133 13,933 11,240
Income taxes 1,647 1,340 4,471 3,642
--------- --------- -------- ---------
Net income $ 3,457 $ 2,793 $ 9,462 $ 7,598
========= ========= ======== =========
Basic earnings per common share $0.35 $0.29 $0.96 $0.78
========= ========= ======== =========
Diluted earnings per common share $0.35 $0.28 $0.95 $0.77
========= ========= ======== =========
- ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
2
Interchange Financial Services Corporation
- ----------------------------------------------------------------------------------------------------------------------------------
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, 2001 $47,735 $526 $5,397 $21,077 $(12,751) $61,984
Comprehensive income
Net Income $7,598 7,598 7,598
Other comprehensive income, net of taxes
Unrealized gains on AFS debt securities 1,582
Add: losses on disposition of securities 28
------------
Other comprehensive income, net of taxes 1,610 1,610 1,610
------------
Comprehensive income $9,208
============
Dividends on common stock (2,645) (2,645)
Issued 22,320 shares of common stock in connection
with Executive Compensation Plan (14) 255 241
Exercised 6,045 option shares (23) 69 46
Purchased 69,300 shares of common stock (835) (835)
-------- ------------- ------- ------- -------- -------
Balance at September 30, 2001 52,688 2,136 5,397 21,040 (13,262) 67,999
Comprehensive income
Net Income $2,942 2,942 2,942
Other comprehensive income, net of taxes
Unrealized gains on AFS debt securities (980)
Add: losses on disposition of securities -
------------
Other comprehensive income (980) (980) (980)
------------
Comprehensive income $1,962
============
Dividends on common stock (872) (872)
Exercised 7,181 option shares (47) 83 36
Purchased 71,343 shares of common stock (892) (892)
-------- ------------- ------- ------- -------- -------
Balance at December 31, 2001 54,758 1,156 5,397 20,993 (14,071) 68,233
Comprehensive income
Net Income $9,462 9,462 9,462
Other comprehensive income, net of taxes
Unrealized gains on AFS debt securities 3,106
Less: gains on disposition of securities (453)
------------
Other comprehensive income 2,653 2,653 2,653
------------
Comprehensive income $12,115
============
Dividends on common stock (2,947) (2,947)
Issued 21,069 shares of common stock in connection
with Executive Compensation Plan 66 244 310
Exercised 23,658 option shares (92) 274 182
Issued 71,918 shares of common stock in connection with
the acquisition of certain assets and assumption of
certain liabilities of Monarch Capital Corporation 131 1,244 1,375
Purchased 18,150 shares of common stock (235) (235)
-------- ------------- ------- ------- -------- -------
Balance at September 30, 2002 $61,273 $3,809 $5,397 $21,098 $(12,544) $79,033
======== ============= ======= ======= ======== =======
- ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
3
Interchange Financial Services Corporation
- ------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
- ------------------------------------------------------------------------------------------------------
(dollars in thousands) (unaudited)
2002 2001
------------ ------------
Cash flows from operating activities
Net income $ 9,462 $ 7,598
Non-cash items included in earnings
Depreciation and amortization 1,092 1,036
Amortization of securities premiums 1,347 704
Accretion of securities discounts (223) (250)
Amortization of premiums in connection with acquisition 50 81
Provision for loan losses 885 590
Increase in cash surrender value of Bank Owned Life insurance (666) -
Net gain on sale of securities (498) (247)
Net gain on sale of loans (223) (240)
Net gain on sale of foreclosed real estate (40) -
Decrease (increase) in operating assets
Accrued interest receivable (60) 408
Accounts receivable- leases sold 4,921 -
Other (596) 510
Incease (decrease) in operating liabilities
Accrued interest payable (203) (213)
Other 1,319 1,110
------------ ------------
Cash provided by operating activities 16,567 11,087
------------ ------------
Cash flows from investing activities
(Payments for) proceeds from
Net originations of loans (32,705) (19,626)
Purchase of loans (14,945) (15,687)
Sale of loans 3,486 4,178
Purchase of securities available for sale (90,277) (61,552)
Maturities of securities available for sale 29,441 32,816
Sale of securities available for sale 19,791 21,339
Purchase of investment securities held to maturity - (18,548)
Maturities of investment securities held to maturity 7,066 19,411
Sale of securities held to maturity 2,023 -
Sale of foreclosed real estate 290 -
Purchase of Bank Owned Life Insurance - (15,000)
Purchase of fixed assets (1,099) (944)
Sale of repossessed assets 276 -
Sale of fixed assets - 1,260
Premium in connection with acquisition (1,860) -
------------ ------------
Cash used in investing activities (78,513) (52,353)
------------ ------------
Cash flows from financing activities
Proceeds from (payments for)
Deposits more than withdrawals 63,799 36,911
Securities sold under agreements to repurchase and other borrowings 69,353 47,312
Retirement of securities sold under agreements to repurchase and other
borrowings (55,104) (49,765)
Dividends (2,947) (2,646)
Common stock issued 1,685 241
Treasury stock (235) (835)
Exercise of option shares from Treasury 182 46
------------ ------------
Cash provided by financing activities 76,733 31,264
------------ ------------
Increase (decrease) in cash and cash equivalents 14,787 (10,002)
Cash and cash equivalents, beginning of year 22,211 33,150
------------ ------------
Cash and cash equivalents, end of period $36,998 $23,148
============ ============
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $13,763 $17,770
Income taxes 5,018 1,077
Supplemental disclosure of non-cash investing activities:
Increase - market valuation of securities available for sale $4,668 $1,610
- ------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 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 nine-month periods ended
September 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 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 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 various 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 after 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 Issue 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 adoption of SFAS 146 did not
have any impact on the consolidated financial condition or results of operations
of the Company.
6
In October 2002, the FASB issued Statement of Financial Accounting
Standards No. 147 "Acquisitions of Certain Financial Institutions" ("SFAS 147"),
which provides guidance on the accounting for the acquisitions of a financial
institution. SFAS 147 requires that the excess of the fair value of liabilities
assumed over the fair value of tangible and identifiable intangible assets
acquired in a business combination represents goodwill that should be accounted
for under FASB Statement No. 142, Goodwill and Other Intangible Assets. Thus,
the specialized accounting guidance in paragraph 5 of FASB Statement No. 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions, will not
apply after September 30, 2002. If certain criteria in Statement 147 are met,
the amount of the unidentifiable intangible asset will be reclassified to
goodwill upon adoption of that Statement. Financial institutions meeting
conditions outlined in Statement 147 will be required to restate previously
issued financial statements as if the amount accounted for under Statement 72 as
an unidentifiable intangible asset had been reclassified to goodwill as of the
date Statement 142 was initially applied. The adoption of SFAS 147 is not
expected to have a material effect on the consolidated financial condition or
results of operations of the Company.
5. Cash Dividend
The Company declared a cash dividend of $0.10 per share, payable on October
11, 2002 to shareholders of record as of September 16, 2002.
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 nine month
periods ended September 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 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
8
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 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 SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
RESULTS OF OPERATIONS
Earnings Summary
For the third quarter of 2002, the Company reported earnings per diluted
common share of $0.35, an increase of 25.0% over the $0.28 reported in the same
period in 2001. Net income for the three months ended September 30, 2002 was
$3.5 million, an increase of $664 thousand, or 23.8%, 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 $1.5 million, or 17.4%, for
the three-month period. Growth in interest earning assets and an improved net
interest margin ("margin") helped to fuel the increase in net interest income.
The growth in interest 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 18 basis points to 4.71% for the
three-month period ending September 30, 2002 when compared to the same period in
2001, resulted from a favorable decline in the cost of funds of approximately
100 basis points. A $310 thousand, or 21.2%, increase in non-interest income
also contributed to the growth in revenue.
The growth in revenues was partly offset by a $629 thousand, or 11.0%,
increase in non-interest expenses. The increase was due to normal operating
growth and costs resulting from expansion programs initiated in the first
quarter of 2002. The expansion programs included the opening of a new branch in
Hackensack, NJ and the assumption of Monarch Capital Corporation's ("MCC")
operations by Interchange Capital Company ("ICC"), which resulted from the
Company's acquisition of certain assets and certain liabilities of MCC.
For the three months ended September 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 1.51% from 1.38% and ROE increased to 18.22% from 16.84% 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 $1.5
million, or 17.4%, to $10.2 million for the quarter ended September 30, 2002 as
compared to the same quarter in 2001. The increase in net interest income was
due mostly to a 12.7% growth in average interest earning assets. The growth in
interest earning assets was funded primarily by deposit liabilities, which grew
11.4% on average for the third quarter of 2002 when compared to the same quarter
in 2001. The margin, which increased 18 basis points to 4.71% for the third
quarter of 2002 when compared to the same
10
quarter in 2001, contributed to the growth in net interest income. The
improvement in the margin resulted from a decline in the Company's cost of funds
by approximately 100 basis points to 2.09% for the three months ended September
30, 2002 when compared to the same period in the prior year.
Interest income, on a tax-equivalent basis, totaled $14.5 million for the
third quarter of 2002, an increase of $146 thousand, or 1.0%, when compared to
the same quarter in 2001. The increase was principally due to a $97.2 million,
or 12.7%, growth in average interest-earning assets. The growth in average
interest-earning assets occurred mostly in securities and loans, which increased
$51.2 million, or 29.5%, and $42.5 million, or 7.3%, respectively. The increase
in interest income was tempered by a 78 basis point decline in yields on
interest earning assets for the third quarter of 2002 when compared to the same
wuarter in 2001, which was largely attributed to a decrease in market interest
rates.
Interest expense, which totaled $4.3 million for the third quarter of 2002,
decreased $1.4 million, or 24.0%, when compared to the same period in 2001. The
decrease in interest expense was a byproduct of the decline in market 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 composition combined with lower
short-term interest rates reduced the average rate paid on interest bearing
liabilities by 121 basis points to 2.43% for the quarter ended September 30,
2002 when compared to the same period in 2001. The interest expense benefit
produced by the decline in the cost of interest bearing liabilities more than
offset the increase in interest expense resulting from the growth of deposits.
Interest bearing deposits grew on average $76.3 million, or 12.8%, for the third
quarter of 2002 when compared to the same period in 2001.
11
- ------------------------------------------------------------------------------------------------------------------------------------
Analysis of Net Interest Income
- ------------------------------------------------------------------------------------------------------------------------------------
for the three months ended September 30,
(dollars in thousands)
(unaudited)
2002 2001
__________________________________________________________________________
Average Average Average Average
Balance Interest Rate Balance Interest Rate
________ ________ _______ ________ ________ _______
Assets
Interest earning assets
Loans (1) $627,092 $11,599 7.40 % $584,548 $11,595 7.93 %
Taxable securities 211,099 2,603 4.93 164,780 2,497 6.06
Tax-exempt securities (2) 13,620 221 6.49 8,728 171 7.84
Federal funds sold 10,261 45 1.75 6,796 59 3.46
________ _______ ________ ________
Total interest-earning assets 862,072 14,468 6.71 764,852 14,322 7.49
_______ ________
Non-interest earning assets
Cash and due from banks 19,561 19,736
Allowance for loan and lease losses (6,477) (6,419)
Other assets 37,809 30,244
________ ________
Total assets $912,965 $808,413
======== ========
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest bearing deposits $674,038 3,991 2.37 $597,739 5,349 3.58
Borrowings 34,749 319 3.66 24,578 319 5.19
________ _______ ________ ________
Total interest-bearing liabilities 708,787 4,310 2.43 622,317 5,668 3.64
_______ ________
Non-interest bearing liabilities
Demand deposits 116,028 111,516
Other liabilities 12,245 8,233
________ ________
Total liabilities (3) 837,060 742,066
Stockholders' equity 75,905 66,347
________ ________
Total liabilities and stockholders' equity $912,965 $808,413
======== ========
Net interest income (tax-equivalent basis) 10,158 4.28 8,654 3.85
Tax-equivalent basis adjustment (98) (79)
_______ ________
Net interest income $10,060 $8,575
======= ========
Net interest income as a percent of interest-earning assets
(tax-equivalent basis) 4.71 % 4.53 %
- ------------------------------------------------------------------------------------------------------------------------------------
(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 third quarters of 2002 and 2001, the Company's
provision for loan and lease losses was $405 thousand and $210 thousand,
respectively. The increase in the provision was principally a byproduct of the
higher levels of nonperforming assets.
Non-interest Income
For the quarter ended September 30, 2002, non-interest income totaled $1.8
million, an increase of $310 thousand, or 21.2%, when compared to the same
period in 2001. The improvement was largely due to increases in commissions
earned on the sales of mutual funds and annuities and net gains from the sales
of securities of $94 thousand and $85 thousand, respectively. In addition, an
increase in syndication fees on leases sold and in the cash surrender
12
value of Bank Owned Life Insurance ("BOLI") of $61 thousand and $50 thousand,
respectively, also contributed to the growth in non-interest income.
Non-interest Expenses
Non-interest expenses increased $629 thousand to $6.3 million for the
quarter ended September 30, 2002, when compared to the same period one year ago.
Contributing to the increase in non-interest expenses were costs resulting from
the operation of a new branch and the assumption of MCC's operations by ICC,
which resulted from the Company's acquisition of certain assets and certain
liabilities of MCC. The operating costs associated with the new branch and the
assumption of MCC's operations amounted to $97 thousand and $98 thousand,
respectively, for the quarter ended September 30, 2002. The new branch was
opened and MCC's operations were assumed in January 2002. Also contributing to
the increase in non-interest expenses were increases in salaries and benefits
and legal fees, which increased $423 thousand and $79 thousand, respectively.
Salaries and benefits, excluding amounts attributable to the new branch and the
MCC acquisition, increased $293 thousand and were attributable to normal growth.
Income Taxes
Income tax expense as a percentage of pre-tax income was 32.3% for the
three months ended September 30, 2002 as compared to 32.4% for the third quarter
of 2001.
13
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
RESULTS OF OPERATIONS
Earnings Summary
For the first nine months of 2002, the Company reported net income of $9.5
million, or $0.95 diluted earnings per common share, as compared with $7.6
million, or $0.77 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 $3.7 million, or 14.5%.
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 $970 thousand, or 25.2%, over the same
period last year also contributed to the improvement in earnings. The growth in
revenues was partly offset by a $1.6 million, or 9.6% increase in non-interest
expenses.
For the nine months ended September 30, 2002, ROA improved to 1.43% from
1.27% and ROE increased to 17.49% from 15.69% when compared to the same period
last year.
Net Interest Income
Net interest income on a tax-equivalent basis increased $3.7 million, or
14.5%, to $29.0 million for the nine months ended September 30, 2002 when
compared to the same period in 2001. The increase in net interest income was due
to a 9.4% growth in average interest earning assets. The interest earning asset
growth was funded by deposit liabilities, which grew 10.3% on average for the
nine months ended of September 30, 2002 when 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 4.65% for the first nine months of 2002 when
compared to the same period in 2001. The improvement in the margin resulted from
a decline in the Company's cost of funds by approximately 109 basis points to
2.19% for the nine months ended September 30, 2002 when compared to the same
period in the prior year.
Interest income, on a tax-equivalent basis, totaled $42.6 million for the
first nine months of 2002, a decrease of $1.0 million, or 2.4%, when compared to
the same period in 2001. The decrease was mostly attributed to an 82 basis point
decline in interest earning asset yields for the first nine 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
$71.9 million, or 9.4%, for the first nine months of 2002 when compared to the
same period last year. The growth in interest-earning assets occurred
14
mostly in securities and loans, which increased $39.4 million, or 22.9%, and
$33.2 million, or 5.8%, respectively.
Interest expense, which totaled $13.6 million for the nine months ended
September 30, 2002, decreased $4.7 million, or 25.9%, when 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 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 132 basis points to 2.64% for the nine months
ended September 30, 2002 when compared to the same period in 2001. The interest
expense benefit produced by the decline in the cost of interest bearing
liabilities more than offset the increase in interest expense resulting from the
growth of deposits. Interest bearing deposits grew on average $67.8 million, or
11.5%, for the first nine months of 2002 as compared to the same period in 2001.
- -----------------------------------------------------------------------------------------------------------------------------------
Analysis of Net Interest Income
- -----------------------------------------------------------------------------------------------------------------------------------
for the nine months ended September 30,
(dollars in thousands)
(unaudited)
2002 2001
__________________________________________________________________________
Average Average Average Average
Balance Interest Rate Balance Interest Rate
________ ________ _______ ________ ________ _______
Assets
Interest earning assets
Loans (1) $609,248 $34,030 7.45 % $576,023 $34,997 8.10 %
Taxable securities 195,056 7,799 5,33 160,925 7,603 6.30
Tax-exempt securities (2) 16,048 597 4.96 10,810 543 6.70
Federal funds sold 12,828 165 1.71 13,516 495 4.88
________ _______ ________ ________
Total interest-earning assets 833,180 42,591 6.82 761,274 43,638 7.64
_______ ________
Non-interest earning assets
Cash and due from banks 20,289 10,173
Allowance for loan and lease losses (6,460) (6,369)
Other assets 37,714 24,213
________ ________
Total assets $884,723 $799,291
======== ========
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest bearing deposits $657,584 12,688 2.57 $589,793 17,211 3.89
Borrowings 28,045 872 4.15 26,600 1,083 5.43
________ _______ ________ ________
Total interest-bearing liabilities 685,629 13,560 2.64 616,393 18,294 3.96
_______ ________
Non-interest bearing liabilities
Demand deposits 114,824 110,682
Other liabilities 12,136 7,648
________ ________
Total liabilities (3) 812,589 734,723
Stockholders' equity 72,134 64,568
________ ________
Total liabilities and stockholders' equity $884,723 $799,291
======== ========
Net interest income (tax-equivalent basis) 29,031 4.18 25,344 3.69
Tax-equivalent basis adjustment (276) (242)
_______ ________
Net interest income $28,755 $24,102
======= ========
Net interest income as a percent of interest-earning assets
(tax-equivalent basis) 4.65 % 4.44 %
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Nonaccrual loans and any related interest recorded have been included in computing the average rate earned on the loan
portfolio. When applicable, tax exempt loans are computed on a fully taxable equivalent basis using the corporate federal tax
rate of 34%.
(2) Computed on a fully taxable equivalent basis using the corporate federal tax rate of 34%.
(3) All deposits are in domestic bank offices.
15
Provision for Loan and Lease Losses
For the nine months ended September 30, 2002 and 2001, the Company's
provision for loan and lease losses was $885 thousand and $590 thousand,
respectively. The increase in the provision was a result of incresed levels of
nonperforming assets at the Company's leasing subsidiary, ICC, which increased
$631 thousand at September 30, 2002, when compared to September 30, 2001. 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".
Non-interest Income
For the nine months ended September 30, 2002, non-interest income grew to
$4.8 million, an increase of $970 thousand, or 25.2%, when compared to the same
period one year ago. The improvement in non-interest income was attributed to
increases in the cash surrender value of contracts related to the BOLI, net
gains on the sales of securities and commissions earned on the sales of mutual
funds and annuities of $495 thousand, $248 thousand and $198 thousand,
respectively.
Non-interest Expenses
Non-interest expenses for the nine months ended September 30, 2002,
increased by $1.6 million to $18.8 million, an increase of 9.6% from the $17.1
million total for the same period in 2001. The increase in non-interest expenses
was partly due to the Bank's expansion programs undertaken in January 2002,
which included a new branch in Hackensack, NJ and the assumption of MCC's
operations. Expenses associated with the Hackensack branch and MCC totaled $315
thousand and $361 thousand, respectively. Salaries and benefits, after adjusting
for the increase due to expansion, grew $540 thousand. The increase was
primarily due to normal growth and higher costs related to employee benefits. In
addition, other expenses grew $530 thousand mostly due to increases in the
following: legal expenses of $128 thousand; recruiting fees of $89 thousand;
consulting fees of $70 thousand; and audit fees of $76 thousand; and a legal
settlement of $113 thousand.
Income Taxes
Income tax expense as a percentage of pre-tax income was 32.1% for the nine
months ended September 30, 2002 as compared to 32.4% for the same period of
2001.
16
FINANCIAL CONDITION
At September 30, 2002, the Company's total assets were $920.9 million, an
increase of $90.0 million, or 10.8%, from $830.9 million at December 31, 2001.
The growth was largely in loans and securities, which grew $43.2 million and
$36.0 million, respectively, during the period between September 30, 2002 and
December 31, 2001. The asset growth was funded principally by a $63.8 million
increase in deposit liabilities.
Cash and Cash Equivalents
At September 30, 2002, cash and cash equivalents increased $14.8 million to
$37.0 million when compared to December 31, 2001. This was largely the result of
financing activities (reflecting principally deposit growth less repayments of
borrowings) and operating activities (reflecting net income and changes in other
assets) generating cash more rapidly than investing activities (funding loans
and investment growth) could utilize 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 accrretion 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 September 30, 2002, investment securities totaled
$229.9 million and represented 25.0% of total assets, as compared to $193.9
million and 23.3%, respectively, at December 31, 2001. AFS securities comprised
87.1% of the total securities portfolio at September 30, 2002 as compared to
80.0% at December 31, 2001. During the third quarter of 2002, the Company sold
securities with a book value of approximately $12.3 million and recognized $214
thousand in gains.
17
The following table reflects the composition of the securities portfolio:
(dollars in thousands)
------------------------------------------------------
September 30, 2002
------------------------------------------------------
(unaudited)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
___________ __________ __________ __________
Securities held to maturity
Mortgage-backed securities $17,782 $738 $ - $ 18,520
Obligations of U.S. agencies 1,987 89 - 2,076
Obligations of states & political subdivisions 9,655 873 2 10,526
Other debt securities 233 - - 233
___________ __________ __________ __________
29,657 1,700 2 31,355
---------- ---------- ---------- ----------
Securities available for sale
Mortgage-backed securities $98,010 $1,882 $160 $ 99,732
Obligations of U.S. agencies 73,353 3,804 - 77,157
Obligations of states & political subdivisions 18,179 1,238 - 19,417
Equity securities 3,937 - - 3,937
---------- ---------- ---------- ----------
193,479 6,924 160 200,243
---------- ---------- ---------- ----------
Total securities $223,136 $8,624 $162 $231,598
========== ========== ========== ==========
------------------------------------------------------
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 September 30, 2002, the contractual maturities of securities held to
maturity and securities available for sale were as follows: (dollars in
thousands)
Securities Securities
Held to Maturity Available for Sale
---------------------- ------------------------
Amortized Market Amortized Market
Cost Value Cost Value
---------------------- ------------------------
Within 1 year $ 2,362 $ 2,456 $ 9,377 $ 9,548
After 1 but within 5 years 5,443 5,817 116,827 121,218
After 5 but within 10 years 16,159 17,082 29,227 30,153
After 10 years 5,693 6,000 34,111 35,387
Equity securities 0 0 3,937 3,937
---------------------- ------------------------
Total $29,657 $ 31,355 $193,479 $200,243
====================== ========================
Loans
Total loans amounted to $624.6 million at September 30, 2002, an increase
of $43.2 million from $581.3 million at December 31, 2001. The growth was
predominately in commercial mortgage and commercial and financial loans, which
increased $24.9 million and $14.8 million, respectively. In addition, commercial
lease financing increased $12.0 million mostly due to the acquisition 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 1-4 family
residential mortgage portfolio declined by $12.3 million, which served to partly
offset the commercial loan growth. Increased loan prepayments as a result of the
historically low market interest rate environment and increased competition for
these loans drove the decline in the 1-4 family residential mortgage portfolio.
The following table reflects the composition of the loan and lease
portfolio: (dollars in thousands)
--------------- ---------------
September 30, December 31,
2002 2001
--------------- ---------------
(unaudited)
Amount of loans by type
Real estate-mortgage
1-4 family residential
First liens $105,513 $113,703
Junior liens 7,013 8,384
Home equity 127,943 130,658
Commercial 223,242 198,319
Construction 11,977 5,265
--------------- ---------------
475,688 456,329
--------------- ---------------
Commercial loans
Commercial and financial 100,564 85,801
Lease financing 27,897 15,850
--------------- ----------------
128,461 101,651
--------------- ----------------
Consumer loans
Lease financing 16,640 18,822
Installment 3,782 4,521
--------------- ---------------
20,422 23,343
--------------- ---------------
Total $624,571 $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 September 30, 2002, total deposits were $790;3 million, an increase of
$63.8 million, or 8.8%, when compared to $726.5 million at December 31, 2001.
The growth in deposits occurred mostly in other interest-bearing deposits and
time deposits less than $100,000, which increased $44.6 million and $10.9
million, respectively, during the period between September 30, 2002 and December
31, 2001. Other interest-bearing deposits, which include money market,
interest-bearing demand, and savings accounts, comprise the largest segment of
the Company's total deposits. At September 30, 2002, other interest-bearing
deposits amounted to $446.6 million, an increase of $44.6 million, or 11.1%,
from December 31, 2001 levels. The growth in other interest-bearing deposits
occurred largely in interest bearing demand deposits, which increased $29.8
million, or 10.6%, during the period between September 30, 2002 and December 31,
2001. Total time deposits represented 28.7% of total deposits at September 30,
2002 compared to 29.6% at December 31, 2001.
For the three and nine months ended September 30, 2002, the Company's
overall yield on deposits declined by 100 basis points to 2.02% and 109 basis
points to 2.19%, respectively, as compared to the same periods last year. For
each of the periods, the decrease was attributable to a decline in market
interest rates and a shift in the composition of deposit liabilities towards
lower cost deposits.
The following table reflects the composition of deposit liabilities:
(dollars in thousands)
------------- -------------
September 30, December 31,
2002 2001
------------- -------------
Non-interest Demand $116,857 $109,416
Interest Bearing Demand 311,996 282,173
Savings 78,613 72,092
Money Market Savings 55,849 47,569
Time Deposits <$100,000 205,635 194,754
Time Deposits >$100,000 21,332 20,479
------------- -------------
Total 790,282 726,483
============= =============
20
Nonperforming Assets
Nonperforming assets are comprised of nonaccrual loans, restructured loans,
foreclosed real estate and other repossessed assets. At September 30, 2002,
nonperforming assets amounted to $4.0 million, an increase of $1.2 million from
$2.8 million at December 31, 2001. The increase in nonperforming assets was
principally due to two credit facilities that were placed on non-accrual status:
a commercial and financial loan and a commercial lease, which amounted to $1.0
million and $900 thousand, respectively. The commercial and financial loan is to
a contracting company and is secured by cash and real estate collateral. The
commercial lease was part of the leases acquired in the Monarch Capital
Corporation transaction. A holdback (from the purchase price) of $500,000 is
maintained, which can be applied against losses on the acquired leases. The
increase in nonperforming assets was partly offset by a decline in residential
nonperforming loans, the pay-off of a restructured loan and the sale of a
foreclosed asset. The ratio of nonperforming assets to total loans and
foreclosed assets increased to 0.65% at September 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 at September 30, 2002, and
December 31, 2001. (dollars in thousands)
--------------- ---------------
September 30, December 31,
2002 2001
--------------- ---------------
Nonperforming loans $3,675 $2,160
Restructured Loan 0 150
Foreclosed real estate and other repossessed assets 358 492
--------------- ---------------
Total nonperforming assets $4,033 $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
managemen's evaluations of the size and current risk characteristics of the
loan and lease portfolio as of the balance sheet date. The
21
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 managemen'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 in 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 $6.7 million
at September 30, 2002, and $6.6 million at December 31, 2001, representing
182.5% and 304.1% of nonperforming loans at those dates, respectively.
The following table presents the provisions for loan and lease losses,
loans charged off and recoveries on loans previously charged off, the amount of
the allowance, the average loans outstanding and certain pertinent ratios for
the three and nine months ended September 30, 2002 and 2001. (dollars in
thousands)
Three months ended Nine Months ended
September 30, September 30,
--------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Average loans outstanding $627,092 $584,548 $609,248 $576,023
========= ========= ========= =========
Allowance at beginning of period 6,430 6,524 6,569 6,154
--------- --------- --------- ---------
Loans charged off
Real estate 14 3 14 5
Commercial and financial 0 0 0 0
Commercial lease financing 124 470 758 697
Consumer loans 0 2 31 4
--------- --------- --------- ---------
Total 138 475 803 706
--------- --------- --------- ---------
Recoveries of loans previously charged off
Real estate 0 2 29 20
Commercial and financial 0 76 0 266
Commercial lease financing 1 0 9 6
Consumer loans 9 2 18 9
--------- --------- --------- ---------
Total 10 80 56 301
--------- --------- --------- ---------
Additions to allowance charged to expense 405 210 885 590
--------- --------- --------- ---------
Allowance at end of period $6,707 $6,339 $6,707 $6,339
========= ========= ========= =========
Allowance to total loans 1.07 % 1.07 %
Ratio of net charge-offs to average loans 0.08 % 0.27 % 0.16 % 0.09 %
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
22
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 Management 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.
ALCO and the Board of Directors review this report. At September 30, 2002, the
Company simulated the effects on net interest 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 June 30, 2002.
At September 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
nine 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
23
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
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 not includable in core capital, certain other capital instruments and
term subordinated debt. Total capital is the sum of core and supplementary
capital.
At September 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 September 30, 2002, the
minimum leverage ratio requirement to be considered adequately capitalized was
4%.
The capital levels of the Company and the Bank at September 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-capitalized". The minimum
capital guidelines are detailed in the table below.
24
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 September 30, 2002:
Total Capital (to Risk Weighted Assets):
The Company $80,173 12.93 % $49,613 8.00 % N/A N/A
The Bank 78,860 12.72 49,600 8.00 $62,000 10.00 %
Tier 1 Capital (to Risk Weighted Assets):
The Company 73,466 11.85 24,807 4.00 N/A N/A
The Bank 72,152 11.64 24,800 4.00 37,200 6.00
Tier 1 Capital (to Average Assets):
The Company 73,466 8.10 27,220 3.00 N/A N/A
The Bank 72,152 7.95 27,220 3.00 45,366 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 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 September 30, 2002, the total of such assets amounted to $37.0
million, or 4.0%, of total assets, compared to $22.2 million, or 2.7%, of total
assets at December 31, 2001. The increase in cash and cash equivalents was due
to financing activities (reflecting principally deposit growth less repayments
of borrowings) and operating activities (reflecting net income and changes in
other assets) generating cash more rapidly than investing activities (funding
loans and investment growth) could utilize it.
Net loans at September 30, 2002 amounted to $617.9 million, an increase of
$43.1 million, or 7.5%, 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 September 30, 2002, total securities
amounted to $229.9 million, an increase of $36.0 million or 18.6% as compared to
25
December 31, 2001. The growth in investments occurred mostly in AFS securities,
which is also another significant liquidity source. At September 30, 2002, AFS
securities amounted to $200.2 million, or 87.1%, 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
September 30, 2002, total deposits amounted to $790.3 million, an increase of
$63.8 million, or 8.8%, 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 September 30, 2002, advances from the
FHLB and REPOS amounted to $17.0 million and $22.0 million, respectively, as
compared to $18.1 million and $6.7 million, respectively, at December 31, 2001.
At September 30, 2002, total borrowings amounted to 4.2% of total assets, an
increase 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 $86.3 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.
26
Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic filings with Securities and Exchange
Commissioner. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
27
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.
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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are furnished herewith:
Exhibit.
--------
3 (a)Certificate of Amendment to Certificate of Incorporation
increasing the number of common shares to 22,500,000.
(b) Amended and Restated Bylaws dated October 24, 2002.
Exhibit.
--------
11 Statement re computation of per share earnings
Exhibit.
--------
99 Certifications Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
(c) Executive Compensation Plans and Arrangements
(1) Interchange Financial Services Corporation Stock Option and
Incentive Stock Plan of 1997, as amended (formerly known as
"Stock Option Plan of 1989") filed as part of Amendment to
Form S-8 filed with the Securities and Exchange Commission
on August 26, 2002, is incorporated herein by reference to
Registration Statement No. 33-82530.
28
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: November 14, 2002
29
CERTIFICATION OF DISCLOSURE CONTROLS
I, Anthony S. Abbate, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Interchange Financial
Services Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Anthony S. Abbate
_________________ _____________________________________
President and Chief Executive Officer
CERTIFICATION OF DISCLOSURE CONTROLS
I, Anthony Labozzetta, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Interchange Financial
Services Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Anthony Labozzetta
_________________ _____________________________
Executive Vice President and
Chief Financial Officer
Exhibit 3 (a). Certificate of Amendment to Certificate of Incorporation
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 3 (b). Amended and Restated Bylaws dated October 24, 2002.
INTERCHANGE FINANCIAL SERVICES CORPORATION
Park 80 West/Plaza Two
Saddle Brook, New Jersey 07663
BY-LAWS
ARTICLE I
SHAREHOLDERS' MEETING
Section 1 - Annual Meeting
The Annual Meeting of Shareholders for the election of Directors and such
other business as may properly come before the meeting shall be held on the
last Wednesday in April each year at the principal place of business of the
Corporation; or at such other date and place as shall be fixed by the Board
of Directors (hereinafter referred to as the "Board"). The Annual Meeting
shall be held upon not less than ten, nor more than sixty, days written
notice of the hours, date, place and purposes of the meeting.
Section 2 - Special Meetings
A Special Meeting of shareholders may be called for any purpose by the
Chairman of the Board, the President, a majority of the Board or the
Executive Committee. A special meeting shall be held upon not less than
ten, nor more than sixty days written notice of the hour, date, place and
purposes of the meeting.
Section 3 - Quorum
A majority of the outstanding common stock represented in person or by
proxy shall constitute a quorum at any meeting of shareholders. If a quorum
is not present at a meeting, the meeting may be adjourned and the meeting
may be held, as adjourned, without further notice, in the event a quorum is
present.
Section 4 - Shareholder Action
A majority of the votes cast shall decide every question or matter
submitted to the shareholders at any meeting, except as to matters
requiring a greater proportion of shares as provided by the Certificate of
Incorporation or the New Jersey Business Corporation Act.
Section 5 - Record Date
The Board shall fix a record date for each meeting of shareholders and for
other corporate action for purposes of determining the shareholders of the
Corporation who are entitled to: (i) notice of, or to vote at, any meeting
of shareholders; (ii) give a written consent to any action without a
meeting; or (iii) receive payment of any dividend, distribution or
allotment of any right. The record date shall not be more than sixty days,
nor less than ten days, prior to the shareholders meeting, or other
corporate action or event to which it relates.
Section 6 - Mailing or Delivering Notice
All notices, dividends or distributions to which a shareholder is entitled
shall be mailed to the most recent address listed for each shareholder of
record on the books of the corporation.
Section 7 - Inspectors of Election
At meetings of shareholders, three Inspectors shall be appointed by the
Board to manage the election of directors and to act as tellers for any
other vote taken by ballot. The Inspectors of Election shall tabulate the
proxies and ballots for the election of Directors and other votes and shall
file with the Secretary of the meeting, a Certificate under their hands,
certifying the results thereof, including in the case of the election of
directors, the names of the directors elected. Upon his/her appointment,
each inspector shall take and sign an oath faithfully to execute the duties
of inspector with strict impartiality and according to the best of his
ability. Inspectors shall perform all the duties imposed upon them by the
New Jersey Business Corporation Act, Section 14A:5-26.
Section 8 - Proxies
Shareholders may vote at any meeting of the shareholders by proxies duly
authorized in writing.
ARTICLE II
DIRECTORS
Section 1 - Board of Directors
The Board shall have power to manage and administer the business and
affairs of the Corporation. Except as expressly limited by law, all powers
of the Corporation shall be vested in, and may be exercised by, the Board.
Section 2 - Number & Term of Office
The number of directors shall be not less than five (5) and not more than
fifteen (15). The exact number shall be determined by the Board. Directors
shall be elected according to the class as determined by a resolution
adopted by the Board and for such terms as set forth in such resolution.
Three classes will be created in the resolution at the initial annual
meeting at which directors are elected by class. One class will be elected
for a term of one year, the second class for a term of two years and a
third class for a term of three years. Each class will thereafter hold
office until its successors are elected and qualified. At each annual
meeting thereafter the successors of the classes of Directors whose term
expires in that year shall be elected to hold office for a term of three
years and thereafter until the successors are elected and qualified. The
Board shall have the right to increase the number of Directors between
annual meetings and to fill the vacancies so created.
Section 3 - Regular Meetings
The regular organizational meeting of the Board shall be held without
notice immediately following the annual shareholders' meeting for the
purpose of electing officers and conducting any other business as may come
before the meeting and at such place as determined by the Board by
resolution. The Board shall hold other regular meetings on the third
Thursday of each month at such time and place as fixed by the Board. Any
regular meeting may be omitted entirely. Each Director shall be given
notice of all regular meetings by telephone, in person, by regular mail or
by hand delivery of the notice.
Section 4 - Special Meetings
A special meeting of the Board may be called for any purpose at any time by
the Chairman of the Board, the President or a majority of the Board. At
least 24 hours notice shall be given if delivered orally (either by
telephone, in person or by telegraph), or at least three days notice if
such notice shall be given by mail
to the business or residence address of each Director. The notice shall
specify the hour, date and place of the meeting.
Section 5 - Action Without Meeting
The Board, and any committees of the Board, may act without a meeting if,
prior or subsequent to the action, each member of the Board, or such
committee thereof, shall consent in writing to the action. The written
consent or consents shall be filed in the minutes book.
Section 6 - Participation at Meetings by Conference Telephone Calls
Any or all directors may participate in a meeting of the Board or a
committee thereof by means of telephone conference call, speakerphone or
any other means of communication by which all persons participating in the
meeting are able to hear each other.
Section 7 - Quorum
A majority of the Directors then in office shall constitute a quorum at any
meeting, except when otherwise provided by law or these By-Laws. If a
quorum is not present at a meeting, the meeting may be adjourned by those
directors present and the adjourned meeting may be held, without further
notice, when a quorum is present. The act of the majority present at a
meeting at which a quorum is present shall be the act of the Board, unless
otherwise provided by law or these By-Laws.
Section 8 - Removal
Any director, or the entire Board of Directors, may be removed at any time
by the shareholders, with or without cause, but only by the affirmative
vote of the holders of at least 80% of the shares of the Corporation
entitled to vote for the election of Directors generally. The Board of
Directors may remove any director for cause or suspend a Director pending a
final determination that cause exists for removal, but in either case, only
by a majority vote of the entire Board.
Section 9 - Vacancies on Board of Directors
Newly created directorships resulting from any increase in the number of
directors may be filled by the Board. Any vacancies on the Board resulting
from death, resignation, disqualification, retirement, removal or other
cause may be filled: (i) by the Board; (ii) by the affirmative vote of a
majority of the remaining directors in the event the vacancies have reduced
the remaining directors to less than a quorum; or (iii) by a sole remaining
director. Any director elected by The Board in accordance with this section
shall hold office until the next annual meeting of shareholders and
thereafter until his successor shall have been elected and qualified. No
decrease in the number of directors constituting the Board of Directors
shall shorten the term of any incumbent Director.
Section 10 - Director Qualifications - 9/26/02
A person is not qualified to serve as a director if he or she is (a) under
indictment for, or has ever been convicted of, a criminal offense involving
dishonesty or breach of trust and the penalty for such offense could be
imprisonment for more than one year; (b) is a person against whom a federal
or state bank regulatory agency has, within the past ten years, issued a
cease and desist order for conduct involving dishonesty or breach of trust
and that order is final and not subject to appeal; (c) has been found
either by any federal or state regulatory agency whose decision is final
and not subject to appeal or by a court to have (i) breached a fiduciary
duty involving personal profit or (ii) committed a willful violation of any
law, rule or regulation governing banking, securities, commodities or
insurance, or any final cease and desist order issued by a banking,
securities, commodities or insurance regulatory agency; or (d) has been
nominated by a person who would be disqualified from serving as a director
of this Corporation under subsection (a), (b) or (c) or (e) is a party
(either directly or through an affiliate) to litigation or an
administrative proceeding adverse to the Corporation or its bank
subsidiary, except (i) derivative litigation brought in the name of the
Corporation or its bank subsidiary by the director in his or her capacity
as a shareholder of the Corporation or (ii) litigation arising out of a
proxy fight concerning the election of directors of the Corporation or its
bank subsidiary or otherwise involving control of the Corporation or its
bank subsidiary. Each director of the Corporation is obligated to inform
the Corporation immediately of any occurrence which comes within
subsections (a), (b), (c), (d) or (e) of the prior sentence. A director of
the Corporation who becomes unqualified to serve as a director pursuant to
this Section shall forthwith cease to serve as a director of the
Corporation without the necessity of action by the Board to remove or
suspend the director. In case of a director who becomes unqualified under
subsection (e) of the first sentence of this section, the director may be
considered for re-election to the Board after the conclusion of the
litigation or administrative proceeding. The Corporation shall confirm in
writing to any director who becomes unqualified to serve as a director of
the Corporation as set forth in this Section, that the director has become
unqualified and shall forthwith cease to serve as a director of the
Corporation. In addition, notice of said disqualification and cessation of
service shall be given to the directors as well as to the Regional Office
of the Board of Governors of the Federal Reserve System, and as
appropriate, to the Commission of Banking and Insurance of the State of New
Jersey.
ARTICLE III
COMMITTEES OF THE BOARD
Section 1 - Executive Committee - 10/24/02
The Board, at its organizational meeting each year, may appoint an
Executive Committee of at least eight (8) Directors, including the Chairman
of the Board and the President and directors who presently serve, or
previously served as chairmen of standing committees. The Executive
Committee shall have the power to conduct the affairs of the Corporation
between regular meetings of the full Board. The Executive Committee shall
be bound to carry out the policies and philosophies of the full Board, as
expressed by the Board at its regular meetings, and as set forth in these
By-Laws. Where sufficient policy guidelines are not available, the
Executive Committee shall, except in emergent matters, await discussions by
and policy guidance from the full Board at a meeting. Subject to any
limitations imposed by the New Jersey Business Corporation Act, the
Certificate of Incorporation, these By-Laws or any resolution duly adopted
by the Board, the Executive Committee may exercise all of the powers of the
Board except the Executive Committee shall not:
(a) Make, alter or repeal any By-Law
(b) Elect, appoint or remove any officer of the corporation, any directors
or any member of the Executive Committee
(c) Submit to shareholders any action that requires shareholders' approval;
or
(d) Amend or repeal any resolution previously adopted by the Board
The Executive Committee shall keep minutes of its meetings and such minutes
shall be submitted to the next regular or special meeting of the Board at
which a quorum is present. The Executive Committee may make rules governing
its meetings and procedures as are consistent with these By-Laws and the
New Jersey Business Corporation Act. A majority of the members of the
Executive Committee shall constitute a quorum for the transaction of
business and the Executive Committee may act by the vote of a majority of
the directors voting at any meeting at which a quorum is present. The
Executive Committee shall select one of its members to serve as chairman of
the committee.
Section 2 - Other Committees
The Board may appoint, from time to time, other committees for such
purposes and with such powers as the Board may determine. A Director must
serve a minimum of three years before being considered for the chairmanship
of a committee.
ARTICLE IV
OFFICERS
Section 1
At the first meeting of the Board following each annual meeting of the
shareholders of the Corporation, the Directors shall elect a Chairman and
Vice Chairman of the Board and elect a President and one or more Vice
Presidents who shall hold their respective offices from the time of their
election until the first meeting of the Board following the next annual
meeting of shareholders at which such officers are elected or appointed.
The elected or appointed officers shall hold office subject to removal by
the Board at its pleasure. Other officers may hold more than one office.
Section 2
The Chairman of the Board shall preside at the annual shareholders' meeting
and all shareholders' meetings and at the annual meeting of the Board and
all regular and special meetings of the Board. The Chairman shall have all
powers of the directors as defined in these By-Laws, the Certificate of
Incorporation and the Statutes of the State of New Jersey. He shall cause
to have prepared an agenda for each of the Directo' meetings. The Vice
Chairman of the Board shall preside over the meeting of the Board in the
absence of the Chairman. The Chairman shall be an ex-officio member of all
Board committees to which he is not appointed. The Chairman shall exercise
such specific additional powers and duties as from time to time may be
assigned by the Board.
Section 3
The President shall be the Chief Executive Officer of the corporation and,
in addition to statutory duties, shall, during the recess of the Board,
have general control and management of the affairs and business of the
Corporation; he shall be a member ex-officio of all standing committees,
and shall perform such other duties as shall, from time to time, be
assigned to him by the Board or the Executive Committee, if any. He shall
execute the policies and instructions of the Board and may delegate the
duties and functions imposed upon him to other officers of the Corporation.
In the absence of the Chairman and Vice Chairman of the Board, the
President shall preside at the meetings of the Board and at shareholder
meetings.
The President shall, from time to time, engage other personnel, employees
and agents for the Corporation as the President and Board deem necessary
and advisable for the transaction of business who shall hold their offices
respectively during the pleasure of the Board and the President; and
perform such duties as may be designated or assigned to them by the said
Board or the President.
Section 4
The Vice Presidents shall perform such duties as designated by the
President or the Board, and if the Office of the President becomes vacant,
the Executive Vice President shall perform the duties of the President
until such time as the Board elects a President.
Section 5
The Board may appoint one or more assistant Vice Presidents, one or more
Assistant Secretaries, one or more Assistant Treasurers; and such other
officers as, from time to time, may appear to the Board to be required or
desirable to transact the business of the corporation. Such officers shall
exercise such powers and perform such duties as pertain to their several
offices, or as may be conferred upon or assigned to them by the Board or
the President.
Section 6
The Secretary, in addition to statutory duties, shall act as Secretary of
all meetings of the shareholders and shall record the minutes of all such
meetings in books provided for that purpose; shall attend to giving and
serving of all notices of the Corporation and shall have charge of such
books, documents and papers as the Board may direct: shall perform such
other duties as shall, from time to time, be assigned by the Board or The
Executive Committee, if any, and shall be sworn to the faithful discharge
of duties.
Section 7
The Treasurer, in addition to statutory duties, shall keep full and
accurate accounts of the receipts and disbursements of the funds belonging
to the Corporation, shall disburse the funds of the corporation as may be
ordered by the Board or by the Executive Committee, if any, taking proper
vouchers for such disbursements, and shall render to the President and
Directors whenever they may require, an account of all transactions as
Treasurer and of the financial condition of the Corporation; shall perform
such other duties as shall be assigned by the Board or Executive Committee,
if any.
Section 8
If the office of any Director or of the Chairman or Vice Chairman of the
Board, the President, Vice President, Secretary or Treasurer or one or more
of them becomes vacant for any reason whatsoever, the remaining Directors,
at any duly convened meeting, may by a majority vote of those present, fill
such vacancy and the person chosen shall hold office for the un-expired
term of such office and until his successor shall be chosen.
Section 9
All officers and agents chosen or appointed by the Board shall be subject
to removal by the Board at any time, with or without cause; and in case of
the absence of any officers or agent of the Board may, without removal,
delegate that officer's powers and duties to any other officer or suitable
person for such period as it shall deem proper.
Section 10
The Corporation shall indemnify its officers, directors, employees and
agents and former officers, directors, employees and agents and any other
persons serving at the request of the Corporation as an officer, director,
employee or agent of another corporation, association, partnership, joint
venture, trust or other enterprise against expenses (including attorneys
fees, judgments, fines and amounts paid in settlement) incurred in
connection with any pending or threatened action, suit or proceeding,
whether civil, criminal, administrative or investigative, with respect to
such officer, director, employee, agent or other person is a party or is
threatened to be made a party to the full extent permitted by the New
Jersey Business corporation Act. The indemnification provided herein shall
not be deemed exclusive of any other right to which any person seeking
indemnification may be entitled under any By-Law, agreement or vote of
shareholders or disinterested directors or vote of shareholders or
otherwise, both as to action in their official capacity and as to action in
another capacity and shall inure to the benefit of the heirs, executors and
the administrators of any such person. The Corporation shall advance legal
fees and
expenses pursuant to this Indemnification provision whenever any officer or
director has been sued or brought into an administrative hearing as a
result of actions taken on behalf of the Corporation or any of its
subsidiaries, subject, however, to receipt of an undertaking by the
officer, director or agent to repay such advances if it be ultimately
determined that such person is not entitled to indemnification. The
Corporation shall have the power to purchase and maintain insurance on
behalf of any persons enumerated above against any liability asserted
against him and incurred by him in any such capacity, arising out of his
status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Article.
Section 11
Signature powers of officers and employees and the authority of officers
and employees to affix the corporate seal of the corporation shall be
designated by the Board or the Executive Committee, if any.
ARTICLE V
WAIVERS OF NOTICE
Any notice required by these By-Laws, by the Certificate of Incorporation
or by the New Jersey Business Corporation act may be waived in writing by a
person entitled to notice. The waiver or waivers may be executed either
before or after the event with respect to which the notice is waived. Each
director or shareholder attending a meeting without protesting prior to its
conclusion, the lack of proper notice shall be deemed conclusively to have
waived notice of the meeting.
The shares of the corporation shall be represented by Certificates of the
Corporation signed by, or in the name of, the corporation in such form as
authorized by law and approved by the Board; and shall be sealed with the
seal of the corporation. The seal may be reproduced by facsimile.
Nothing contained in this Article VII shall be construed to relieve any
interested shareholder from any fiduciary obligation imposed by law.
ARTICLE VI
AMENDMENTS TO AND EFFECT OF BY-LAWS; FISCAL YEAR
1. Force and Effect of By-Laws These By-Laws are subject to the provisions
of the New Jersey Business Corporation Act and the Corporation's
Certificate of Incorporation, as it may be amended from time to time. If
any provision in these By-Laws is inconsistent with a provision of the Act
or the Certificate of Incorporation, the provisions of the Act or the
Certificate of Incorporation shall govern.
2. Amendments to By-Laws: These By-Laws may be altered, amended, repealed
by the shareholders, but only by the affirmative vote of the holders of 80%
or more of the then outstanding voting stock, or by a majority of the
entire Board. Any By-Law adopted, or repealed by the shareholders may be
amended or repealed by the Board, unless the resolution of the shareholders
adopting such By-Laws expressly reserves to the shareholders the right to
amend or repeal it.
3. Fiscal Year: The fiscal year of the Corporation shall begin on the first
day of January each year.
4. Records: The Certificate of Incorporation, the By-Laws and the
proceedings of all meetings of the shareholders, the Board and standing
committees of the Board, shall be recorded in appropriate
minute books provided for the purpose. The minutes of each meeting shall be
signed by the Secretary or other officer appointed to act as secretary of
the meeting.
5. Inspection: A copy of the By-Laws, with all amendments thereto, shall at
all times be kept in a convenient place at the principal place of business
of the Corporation, and for a proper purpose, shall be open for inspection
to any shareholder during business hours.
Exhibit 11. Computation Re: Earnings Per Share
(dollars in thousands, except per share amounts)
-------------------------------------------------- ---------------------------------------------------
Three Months Ended, Nine Months Ended,
-------------------------------------------------- ---------------------------------------------------
September 30, 2002 September 30, 2001 September 30, 2002 September 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 $3,457 9,824 $0.35 $2,793 9,782 $0.29 $9,462 9,806 $0.96 $7,598 9,803 $0.78
====== ======= ======= ======
Effect of Dilutive Shares
Options issued to
management 132 57 122 42
-------- -------- -------- --------
Diluted Earnings per
Common Share $3,457 9,956 $0.35 $2,793 9,839 $0.28 $9,462 9,928 $0.95 $7,598 9,845 $0.77
====== ======== ====== ====== ======== ======== ====== ======== ====== ======= ======== ======
Exhibit 99- 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 September 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 Labozzetta
_____________________________________
Anthony Labozzetta
Executive Vice President and CFO