-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T6OZPGUlCJO8b6HTsaJVJu4iufx5gxEM2H2RHPQq7vQhbO/HxHlXAzPxBM2IMKyT hy+ZWHg44SOcU2TGTktdMQ== 0000755933-99-000005.txt : 19990322 0000755933-99-000005.hdr.sgml : 19990322 ACCESSION NUMBER: 0000755933-99-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERCHANGE FINANCIAL SERVICES CORP /NJ/ CENTRAL INDEX KEY: 0000755933 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 222553159 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10518 FILM NUMBER: 99568671 BUSINESS ADDRESS: STREET 1: PARK 80 WEST PLAZA TWO STREET 2: ATTN INTERCHANGE STATE BANK CITY: SADDLE BROOK STATE: NJ ZIP: 07662 BUSINESS PHONE: 2017032265 MAIL ADDRESS: STREET 1: PARK 80 WEST STREET 2: PLAZA II CITY: SADDLE BROOK STATE: NJ ZIP: 07663 FORMER COMPANY: FORMER CONFORMED NAME: INTERCHANGER STATE BANK DATE OF NAME CHANGE: 19870416 FORMER COMPANY: FORMER CONFORMED NAME: INTERCHANGE FINANCIAL SERVICES CORP DATE OF NAME CHANGE: 19861209 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-K ----------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 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) Registrant's telephone number, including area code: (201) 703-2265 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of Each Class which registered - --------------------------- ------------------------- Common Stock (no par value) American Stock Exchange ------------------------ Securities registered pursuant to Section 12(g) of the Act: Title of Class -------------- None Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report) and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Park III of this Form 10-K or any amendment to this Form 10-K. [ ] The number of outstanding shares of the Registrant's common stock, no par value per share, as of March 5, 1999, was as follows: Class Number of Outstanding Shares - --------------- ----------------------------- Common Stock (No par value) 7,210,237 The aggregate market value of Registrant's voting stock (based upon the closing trade price on March 5, 1999), held by non-affiliates of the Registrant was approximately $95,534,657 Documents incorporated by reference: Portions of Registrant's definitive Proxy Statement for the 1999 Annual Meeting of Stockholders are incorporated by reference to Part III of this Annual Report on Form 10-K. Portions of Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1998 are incorporated by reference to Parts II and IV of this Annual Report on Form 10-K. INTERCHANGE FINANCIAL SERVICES CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K PART 1 PAGE Item 1. Business............................................................. 1 Item 2. Properties........................................................... 7 Item 3. Legal Proceedings.................................................... 8 Item 4. Submission of Matters to a Vote of Security Holders.................. 8 Executive Officers ........................................................... 9 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters............................................................. 10 Item 6. Selected Consolidated Financial Data............................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Resultsof Operations............................... Item 7A. Quantitative and Qualitative Disclosures About Market Risk.. ...... 13 Item 8. Financial Statements and Supplementary Data........................ 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................... 13 PART III Item 10. Directors and Executive Officers of the Registrant................. 13 Item 11. Executive Compensation............................................. 14 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 14 Item 13. Certain Relationships and Related Transactions..................... 14 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................... 15 Signatures................................................................... 16 PART I Item 1. Business General Interchange Financial Services Corporation (the "Company"), a New Jersey business corporation and registered bank holding company under the Bank Holding Company Act of 1956, as amended, acquired all of the outstanding stock of Interchange Bank, (formerly known as Interchange State Bank), a New Jersey chartered bank (the "Bank" or "Interchange"), in 1986. The Bank, established in 1969, is a full-service commercial bank headquartered in Saddle Brook, New Jersey and is a member of the Federal Reserve System. It offers banking services for individuals and businesses through its fifteen banking offices and one supermarket mini-branch in Bergen County, New Jersey. In 1998, the Company acquired The Jersey Bank for Savings ("Jersey Bank"), which maintained two banking offices, one in Montvale, New Jersey and another that was opened in the later part of 1996 in River Edge, New Jersey. In addition, during 1998, the Company opened a full-service branch in Paramus, New Jersey adjacent to a shopping mall along with a mini-branch within a 70,000 square foot supermarket located in the shopping mall. In addition to the Bank, the Company has other wholly owned direct subsidiaries. Clover Leaf Mortgage Company, a New Jersey Corporation established in 1988 which is not currently engaged in any business activity, and Washington Interchange Corporation, a New Jersey Corporation which was acquired by the Company in May 1997 and owns one of the Bank's branch locations which it leases to the Bank. Subsidiaries of Interchange Bank include Clover Leaf Investment Corporation, established in 1988 to engage in the business of an investment company pursuant to New Jersey law; Clover Leaf Insurance Agency, Inc., established in 1990 to engage in the sales of tax-deferred annuities, and Clover Leaf Management Realty Corporation which was originally established in 1987 under the name Clover Leaf Development Corporation. In 1998, the name and purpose were changed in order to establish a Real Estate Investment Trust ("REIT") that could manage certain real estate assets of the Company in an effort to take advantage of certain tax benefits. All the Bank's subsidiaries are New Jersey corporations and are 100% owned by the Bank, except for the REIT which is 99% owned by the Bank. Banking Operations The Bank offers a wide range of consumer banking services, including: checking and savings accounts, money-market accounts, certificates of deposit, individual retirement accounts, residential mortgages, home equity lines of credit and other second mortgage loans, home improvement loans, automobile loans, personal loans and overdraft protection. The Bank also offers its own VISA(TM) credit card and several convenience products including the Interchange Check Card which lets you access your checking account by using the card when you make purchases. It can also be used as an 1 ATM card to perform all the usual transactions. Interchange Bank-Line(R) allows customers to perform basic banking transactions over the telephone and also offers Direct Bill Payment. Direct Bill Payment allows customers to pay bills over the phone since bill payments are debited directly to the customer's checking account.The Bank is also in the mutual fund sales market. An Investment Services Program is offered through an alliance between Interchange Bank and Independent Bankers Association of America Financial Services Corporation ("IBAA"), under which mutual funds offered by IBAA are made available to the Bank's customers by Bank employees. Fifteen automated teller machines (MAC(TM), Plus(TM), HONOR(TM), CIRRUS(TM), VISA(TM), NYCE(TM), and MasterCard(TM) networks) are located at thirteen of the banking offices, two are located at supermarkets and one at a mini-market. The Bank is engaged in the financing of local business and industry, providing credit facilities and related services for smaller businesses, typically those with $1 million to $5 million in annual sales. Commercial loan customers of the Bank are businesses ranging from light manufacturing and local wholesale and distribution companies to medium-sized service firms and local retail businesses. Most forms of commercial lending are offered, including working capital lines of credit, small business administration loans, term loans for fixed asset acquisitions, commercial mortgages and other forms of asset-based financing. The Bank has taken advantage of opportunities to purchase packages of loans and leases. In 1998, the Bank purchased $4.6 million of residential real estate loans, and in 1997, the Bank purchased $10.2 million and $9.1 million of auto leases and residential real estate loans, respectively. These loans and leases were subjected to the Bank's independent credit analysis prior to purchase and were, in some cases, purchased with a limited buy-back obligation or other financial assurance from the sellers. In the Bank's experience, there are significant opportunities to sell the Bank's other products and services to the borrowers whose loans are purchased. The Bank believes that purchasing loans and leases will continue to be a desirable way to increase its portfolios as opportunities arise. Deposits of the Bank are insured up to $100,000 per depositor by the Bank Insurance Fund administered by the Federal Deposit Insurance Corporation ("FDIC"). Personnel The Company had on average 208 full-time-equivalent employees during 1998. Its principal executive office is located at Park 80 West/Plaza Two, Saddle Brook, New Jersey 07663, telephone number (201) 703-2265. As used herein the term "Company" includes the Bank and the subsidiaries of the Bank, unless the context otherwise requires. Market Areas The Bank's principal market for its deposit gathering activities covers major portions of Bergen County in the northeastern corner of New Jersey adjacent to New York City. Bergen County has a relatively large affluent base for the Bank's services. The principal service areas of the Bank represent a diversified mix of stable residential neighborhoods 2 with a wide range of per household income levels; offices, service industries and light industrial facilities; and large shopping malls and small retail outlets. For many years Interchange Bank has conducted periodic market research to keep aware of market trends. Much of this research affirmed that consumer financial needs are directly related to identifiable life stages. In response to these distinctive preferences, the Bank has designed and marketed "packaged" products to appeal to these different segments. Since there is a preponderance of the population in the age groups of 35-54 and 55+, Interchange has strategically targeted these two life stage segments by designing and marketing "packaged" products (Money Maker Account and Prime Time Account) which include deposit, credit and other services sold together as a product unit. We also recognized the needs of "Generation X" with the Money Plus Account (25-34) and our youngest with the Grow'N Up Savings(R) Passbook Account. The Bank was among the first to offer such packaged financial products in its area and management believes they have been successful in attracting deposits and building a loyal client base. Competition Competition in the banking and financial services industry in the Company's market area is intense. The Bank competes actively with national and state-chartered commercial banks and other financial institutions, including savings and loan associations, mutual savings banks, and credit unions. In addition, the Bank faces competition from less heavily regulated entities such as brokerage institutions, money management firms, consumer finance and credit card companies and various other types of financial services companies. Many of these institutions are larger than the Bank, some are better capitalized, and a number pursue community banking strategies similar to those of the Bank. Management believes that opportunities continue to exist to satisfy the deposit and lending demands of small and middle market businesses. Larger banks continued to show an appetite for only the largest loans, finding themselves ill-equipped to administer smaller loans profitably. Interchange has the desire and the ability to give smaller businesses the service they require and deserve. Interchange meets this need through a unique program called Rapid Response Banking. The program provides commercial loans up to $100,000 with a streamlined approval process that borrows liberally from standard consumer lending practices. Naturally, in due course, many small businesses become midsize businesses, with a corresponding change in their financial requirements. But they do not outgrow Interchange because of its ability to be responsive to both constituencies. To continue serving companies throughout the various stages of their evolution, Interchange created Business Class Banking--a program that grows with the customer. Business Class Banking supports a spectrum of business-oriented financial products with value-added services. By designing progressive programs to accommodate the changing needs of growing businesses, Interchange is extending the longevity of valuable customer relationships. 3 Interchange Bank maintains a relational database. This is a powerful technology, designed expressly for the banking industry and generally associated with only the largest and most forward thinking companies. This technology greatly enhances the Bank's internal marketing analysis by providing information about account relationships, their activity and their relative value to the Bank in great detail. Interchange has maintained an ambitious program of primary research to keep abreast of customer attitudes and preferences. Our sales quotas and incentives for employees are linked directly to bank-wide goals and are used to motivate employees to sell the "right" products to the "right" customers. Regulation and Supervision Banking is a complex, highly-regulated industry. The primary goals of the bank regulatory scheme are to maintain a safe and sound banking system and to facilitate the conduct of monetary policy. In furtherance of those goals, Congress has created several largely antonomous regulatory agencies and enacted myriad legislation that governs bank, bank holding companies and the banking industry. Descriptions and references to the statutes and regulations below are brief summaries thereof and do not purport to be complete. The Company The Company is a bank holding company under the Bank Holding Company Act of 1956, as amended (the "Holding Company Act"), and as such, is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve "). As a bank holding company, the Company is required to file an annual report with the Federal Reserve and such additional information as the Federal Reserve may require pursuant to the Holding Company Act and Federal Regulation Y. The Federal Reserve may conduct examinations of the Company or any of its subsidiaries. The Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before it may acquire all or substantially all of the assets of any bank (although the Federal Reserve may not assert jurisdiction in certain bank mergers that are regulated under the Bank Merger Act), or ownership or control of any voting shares of any bank if after such acquisition it would own or control directly or indirectly more than 5% of the voting shares of such bank. The Holding Company Act also provides that, with certain limited exceptions, a bank holding company many not (i) engage in any activities other than those of banking or managing or controlling banks and other authorized subsidiaries or (ii) own or control more than five percent (5%) of the voting shares of any company that is not a bank, including any foreign company. A bank holding company is permitted, however, to acquire shares of any company the activities of which the Federal Reserve, after due notice and opportunity for hearing, has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Federal Reserve has issued regulations 4 setting forth specific activities that are permissible under the exception. A bank holding company and its subsidiaries are also prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. In approving acquisitions by bank holding companies of banks and companies engaged in banking-related activities, the Federal Reserve considers whether the performance of any such activity by an affiliate of the holding company can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh such possible adverse effects as undue concentration of resources, decreased or unfair competition, conflicts of interest and unsound banking practices. Under certain circumstances, prior approval of the Federal Reserve is required under the Holding Company Act before a bank holding company may purchase or redeem any of its equity securities. Transactions with Affiliates The provisions of Section 23A of the Federal Reserve Act and related statutes place limits on all insured banks (including the Bank) as to the amount of loans or extensions of credit to, or investment in, or certain other transactions with, their parent bank holding companies and certain of such holding companies' subsidiaries and as to the amount of advances to third parties collateralized by the securities or obligations of bank holding companies or their subsidiaries. In addition, loans and extensions of credit to affiliates of the Bank generally must be secured in the prescribed amounts. Capital Adequacy Guidelines The Federal Reserve issued guidelines establishing risk-based capital requirements for bank holding companies and member banks. The guidelines established a risk-based capital framework consisting of (1) a definition of capital and (2) a system for assigning risk weights. Capital consists of Tier I capital, which includes common shareholders' equity less certain intangibles and a supplementary component called Tier II, which includes a portion of the allowance for loan losses. Effective October 1, 1998, the Federal Reserve adopted an amendment to their risk-based capital guidelines that permits insured depository institutions to include in their Tier II capital up to 45% of the pre-tax net unrealized gains on certain available for sale equity securities. All assets and off-balance-sheet items are assigned to one of four weighted risk categories ranging from 0% to 100%. Higher levels of capital are required for the categories perceived as representing the greater risks. The Federal Reserve established a minimum risk-based capital ratio of 8% (of which at least 4% must be Tier I). An institution's risk-based capital ratio is determined by dividing its qualifying capital by its risk-weighted assets. The guidelines make regulatory capital requirements more sensitive to differences in risk profiles among banking institutions, take off-balance sheet items into account in assessing capital adequacy, and minimize disincentives to holding liquid, low-risk assets. Banking organizations are generally expected to operate with capital positions well 5 above the minimum rates. Institutions with higher levels of risk, or which experience or anticipate significant growth, are also expected to operate well above minimum capital standards. At December 31, 1998 the the Bank satisfies these ratios and has been categorized as a well-capitalized institution which in the regulatory framework for prompt corrective action imposes the lowest level of supervisory restraints. Capital adequacy guidelines focus principally on broad categories of credit risk although the framework for assigning assets and off-balance sheet items to risk categories does incorporate elements of transfer risk. The risk-based capital ratio does not, however, incorporate other factors that may affect a company's financial condition, such as overall interest rate exposure, liquidity, funding and market risks, the quality and level of earnings, investment or loan concentrations, the quality of loans and investments, the effectiveness of loan and investment policies and management's ability to monitor and control financial and operating risks. In addition to the risk-based guidelines discussed above, the Federal Reserve requires that a bank holding company and bank which meet the regulator's highest performance and operational standards and which are not contemplating or experiencing significant growth maintain a minimum leverage ratio (Tier I capital as a percent of quarterly average adjusted assets) of 3%. For those financial institutions with higher levels of risk or that are experiencing or anticipating significant growth, the minimum leverage ratio will be increased. The Federal Reserve is vested with broad enforcement powers over bank holding companies to forestall activities that represent unsafe or unsound practices or constitute violations of law. These powers may be exercised through the issuance of cease and desist orders or other actions. The Federal Reserve is also empowered to assess civil penalties against companies or individuals that violate the Holding Company Act, to order termination of non-banking activities of non-banking subsidiaries of bank holding companies and to order termination of ownership and control of non-banking subsidiaries by bank holding companies. Neither the Company nor any of its affiliates has ever been the subject of any such actions by the Federal Reserve. The Bank As a New Jersey state-chartered bank, the Bank's operations are subject to various requirements and restrictions of state law pertaining, among other things, to lending limits, reserves, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices and capital adequacy. The Bank is subject to primary supervision, periodic examination and regulation by the New Jersey Department of Banking and Insurance ("NJDBI"). As a member of the Federal Reserve System, the Bank is also subject to regulation by the Federal Reserve. If, as a result of an examination of a bank, the NJDBI determines that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the bank's operations are unsatisfactory or that the bank or its management is violating or has violated any law or regulation, various remedies are available to the NJDBI. Such remedies include the power to enjoin "unsafe and unsound" practices, to require affirmative 6 action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to, among other things, direct an increase in capital, to restrict the growth of the Bank, to assess civil penalties and to remove officers and directors. The Bank has never been the subject of any administrative orders, memoranda of understanding or any other regulatory action by the NJDBI. The Bank also is a member of the Federal Reserve System and therefore subject to supervisory examination by and regulations of the Federal Reserve Bank of New York. The Bank's deposits are insured by the Bank Insurance Fund ("BIF") administered by the FDIC up to a maximum of $100,000 per depositor. For this protection, the Bank pays a quarterly statutory deposit insurance assessment to, and is subject to the rules and regulations of, the FDIC. The Bank's ability to pay dividends is subject to certain statutory and regulatory restrictions. The New Jersey Banking Act of 1948, as amended, provides that no state-chartered bank may pay a dividend on its capital stock unless, following the payment of each such dividend, the capital stock of the bank will be unimpaired, and the bank will have a surplus of not less than 50% of its capital, or, if not, the payment of such dividend will not reduce the surplus of the bank. In addition, the payment of dividends is limited by the requirement to meet the risk-based capital guidelines issued by the Federal Reserve Board and other regulations. The Deposit Insurance Funds Act of 1996 ("Funds Act") authorized the Financing Corporation ("FICO") to levy assessments on BIF and SAIF deposits and stipulated that the BIF rate must equal one-fifth the SAIF rate through year-end 1999, or until the insurance funds are merged, whichever occurs first. Thereafter, BIF and SAIF payers will be assessed on a pro-rata basis for FICO. FICO assessment rates are adjusted quarterly to reflect changes in the assessment bases of the respective funds based on quarterly Call Report and Thrift Financial Report submissions. During 1998, the Bank's BIF FICO rates ranged between 1.164 and 1.24 basis points and the SAIF FICO rates were between 5.82 and 6.22 basis points. The foregoing is an attempt to summarize some of the relevant laws, rules and regulations governing banks and bank holding companies, but does not purport to be a complete summary of all applicable laws, rules and regulations governing banks and bank holding companies. Item 2. Properties The Company leases ten banking offices, one mini-branch within a supermarket, one operations/support facility and one administrative/executive facility. It owns five banking offices and leases land on which it owns one bank building. The Company owns land and a building to be used for a future branch site. All of the facilities are located in Bergen County, New Jersey, which constitutes the Company's primary market area. Net investment in premises and equipment totaled $9.9 million at December 31, 1998. Annual rental payments 7 with respect to the Company's leased facilities was $1.1 million for the year ended, December 31, 1998. In the opinion of management, the physical properties of the Company and its subsidiaries are suitable and adequate and are being fully utilized. Item 3. Legal Proceedings In the ordinary course of business, the Company is involved in routine litigation involving various aspects of its business, none of which, individually or in the aggregate, 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. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted during the three months ended December 31, 1998, to a vote of the Company's security holders through the solicitation of proxies or otherwise. 8 Executive Officers The following table sets forth the names, ages, and present positions of the principal executive officers: Name Age Positions Held with the Company and the Bank ____ ___ ____________________________________________ ANTHONY S. ABBATE . . . 59 President and Chief Executive Officer ANTHONY J. LABOZZETTA. . 35 Executive Vice President and Chief Financial Officer NICHOLAS VERDI . . . . . 50 Senior Vice President--Retail Banking FRANK R. GIANCOLA . . . 45 Senior Vice President--Operations PATRICIA D. ARNOLD . . 40 Senior Vice President--Commercial Lending Business Experience ANTHONY S. ABBATE, President and Chief Executive Officer of the Bank since 1981; Senior Vice President and Controller from October 1980; President and Chief Executive Officer of Home State Bank 1978-1980. Engaged in the banking industry since 1959. ANTHONY J. LABOZZETTA, Executive Vice President and Chief Financial Officer since September 1997; Treasurer from 1995. Engaged in the banking industry since 1989. Formerly a senior manager with an international accounting firm, specializing in the financial services industry. NICHOLAS VERDI, Senior Vice President - Retail Banking since October 1998. Engaged in the banking industry since 1968. Formerly an Executive Director of United Financial Services from 1997; Regional President of Hudson United Bank from 1994 and Chief Operations Officer of Hudson United Bank from 1985. FRANK R. GIANCOLA, Senior Vice President - Operations since September 1997; Senior Vice President-Retail Banking from 1993; Senior Vice President-Operations of the Bank from 1984; Senior Operations Officer from 1982; Vice President/Branch Administrator from 1981. Engaged in the banking industry since 1971. PATRICIA D. ARNOLD, Senior Vice President - Commercial Lending since August 1997; First Vice President from 1995; Department Head Vice President from 1986; Assistant Vice President from 1985; Commercial Loan Officer-Assistant Treasurer from 1983. Engaged in the banking industry since 1981. Officers are elected annually by the Board of Directors and serve at the discretion of the Board of Directors. Management is not aware of any family relationship between any director or executive officer. No executive officer was selected to his or her position pursuant to any arrangement or understanding with any other person. 9 Part II Forward Looking Information We discuss certain matters in this report which are not historical facts, but which are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These "forward looking statements" include, but are not limited to, the adequacy of the allowance for loan losses, profitability, interest rate risk, market risk, liquidity and the year 2000 readiness disclosure. The "forward looking statements" in this report reflect what we currently anticipate will happen in each case. What actually happens could differ materially from what we currently anticipate will happen as a result of, but not limited to, changes in economic condition, interest rate fluctuations, levels of loan growth and quality and the successful implementation of its Year 2000 Plan, which includes capital expenditures, costs of remediation and testing, the timetable for implementing the remediation and testing phases of Year 2000 planning, the possible impact of third parties' Year 2000 issues on the Company, management's assessment of contingencies and possible scenarios in its Year 2000 planning. We are not promising to make any public announcement when we think "forward looking statements" in this document are no longer accurate, whether as a result of new information, what actually happens in the future or for any other reason. Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters The Company's common stock is traded on the American Stock Exchange under the symbol "ISB." At March 5, 1999, there were approximately 1,326 shareholders of record. A portion of the Company's common stock is held in "street name" by nominees for the beneficial owners, so the actual number of shareholders is probably higher. A cash dividend of $0.083, $0.09 and $0.10 was paid on each common share outstanding in each quarter during 1996, 1997 and 1998, respectively. The following table sets forth, for the periods indicated, the reported high and low sales prices by quarter: High Low ------------ ------------ 1996 First quarter (1)(2)(3) $ 9.42 $ 8.41 Second quarter (2)(3) 9.17 8.55 Third quarter (2) (3) 9.83 8.33 Fourth quarter (2)(3) 8.34 9.50 1997 First quarter (2)(3) $ 14.67 $10.61 Second quarter (3) 17.58 11.92 Third quarter (3) 16.67 14.67 Fourth quarter (3) 21.58 14.75 1998 First quarter (3) $ 21.25 $18.17 Second quarter 23.25 19.25 Third quarter 20.88 15.31 Fourth quarter 17.75 14.06 The last reported sales price of common stock on March 5, 1999 was $16.875 per share - -------------------------------------------------------------------------------- (1) On February 22, 1996, the Company declared a 5% Stock Dividend to be distributed on April 19, 1996 to shareholders of record on March 20, 1996. The high and low sales prices and the cash dividends have been restated to reflect the effects of the stock dividend. (2) On February 27, 1997, the Company declared a 3 for 2 Stock Split to be distributed on April 17, 1997 to shareholders of record on March 20, 1997. The high and low sales prices and the cash dividends have been restated to reflect the effects of the stock split. (3) On February 26, 1998, the Company declared a 3 for 2 Stock Split to be distributed on April 17, 1998 to shareholders of record on March 20, 1998. The high and low sales prices and the cash dividends have been restated to reflect the effects of the stock split. 10 The Company intends, subject to it's financial results, contractual, legal, and regulatory restrictions, and other factors that its Board of Directors may deem relevant, to declare and pay a quarterly cash dividend on it's common stock. The principal source of the funds to pay any dividends on the Company's common stock would be a dividend from the Bank. Certain federal and state regulators impose restrictions on the payment of dividends by banks. See "Business - Supervision and Regulation" for a discussion of these restrictions. Item 6. Selected Consolidated Financial Data The following selected financial data are derived from the Company's audited Consolidated Financial Statements. The information set forth below should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Consolidated Statements of Financial Condition as of December 31, 1998 and 1997, and the Consolidated Statements of of Income, Changes in Stockholders' Equity and Cash Flows for each of the years in the three-year period ended December 31, 1998 and the report thereon of Deloitte & Touche LLP are included on pages 28 through 47 of the Company's Annual Report to Shareholders for the year ended, December 31, 1998, which pages are incorporated herein by reference. 11 Item 6. Selected Consolidated Financial Data
Y e a r s E n d e d D e c e m b e r 31, ------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- ------------ Summary Earnings (in thousands) Interest income $48,820 $45,310 $41,379 $40,765 $35,621 Interest expense 19,864 18,566 16,983 17,208 12,449 --------- --------- --------- ---------- ---------- Net interest income 28,956 26,744 24,396 23,557 23,172 Provision for loan losses 951 1,653 747 1,239 984 -------- --------- ---------- ---------- ---------- Net interest income after provision for loan losses 28,005 25,091 23,649 22,318 22,188 Non-interest income 4,928 4,774 4,248 4,579 3,659 Non-interest expenses 19,416 17,655 17,492 16,703 16,666 -------- --------- ---------- ---------- ---------- Income before cumulative effect of change in accounting principle and income taxes 13,517 12,210 10,405 10,194 9,181 Income taxes 4,908 4,285 3,654 3,511 3,220 -------- --------- ---------- ----------- --------- Net income $ 8,609 $ 7,925 $ 6,751 $ 6,683 $ 5,961 ======== ========= ========== =========== ========= Per Share Data Before deducting acquisition costs Basic earnings per common share $1.32 $1.11 $0.95 $0.93 $0.82 Diluted earnings per common share 1.31 1.10 0.94 0.92 0.82 After deducting acquisition costs Basic earnings per common share 1.20 1.11 0.95 0.93 0.82 Diluted earnings per common share 1.19 1.10 0.94 0.92 0.82 Cash dividends declared 0.40 0.36 0.33 0.31 0.29 Book value-end of year 8.66 7.86 7.02 6.43 5.29 Tangible book value-end of year 8.56 7.71 6.80 6.16 5.28 Weighted average shares outstanding (in thousands) Basic 7,189 7,132 7,124 7,113 7,107 Diluted 7,237 7,222 7,190 7,157 7,130 Balance Sheet Data-end of year (in thousands) Total assets $685,364 $625,050 $572,512 $548,220 $530,042 Securities held to maturity and securties available for sale 149,930 135,997 143,339 163,736 168,224 Loans 478,717 438,273 384,060 337,570 314,829 Allowance for loan losses 5,645 5,231 3,968 3,926 4,079 Total deposits 598,732 540,765 491,637 487,224 469,799 Securities sold under agreements to repurchase and 18,548 13,028 10,904 11,702 407 short-term borrowings Long-term borrowings - 9,879 9,983 - 5,000 Total stockholders' equity 62,372 56,130 50,048 45,781 39,990 Selected Performance Ratios Before deducting acquisition costs Return on average total assets 1.44 % 1.33 % 1.22 % 1.26 % 1.19 % Return on average total stockholders' equity 16.05 14.95 14.09 15.53 15.34 After deducting acquisition costs Return on average total assets 1.31 1.33 1.22 1.26 1.19 Return on average total stockholders' equity 14.53 14.95 14.09 15.53 15.34 Dividend payout ratio 32.81 30.08 32.19 29.82 32.51 Average total stockholders' equity to average total assets 9.00 8.89 8.68 8.11 7.76 Net yield on interest earning assets (taxable equivalent) 4.62 4.78 4.75 4.74 4.95 Efficiency ratio (1) 53.59 56.47 60.02 59.38 60.19 Non-interest expenses to average assets 2.95 2.96 3.17 3.15 3.33 Non-interest income to average assets 0.75 0.80 0.77 0.86 0.73 Asset Quality Ratios-end of year Nonaccrual loans to total loans 0.25 % 0.35 % 0.66 % 0.74 % 1.96 % Nonperforming assets to total assets 0.26 0.33 0.67 0.95 1.43 Allowance for loan losses to nonaccrual loans 471.20 345.51 157.02 156.35 66.04 Allowance for loan losses to total loans 1.18 1.19 1.03 1.16 1.30 Net charge-offs to average loans for the year 0.12 0.10 0.20 0.44 0.34 Liquidity and Capital Ratios Average loans to average deposits 81.06 % 78.09 % 72.19 % 67.14 % 65.20 % Total stockholders' equity to total assets 9.10 8.98 8.74 8.35 7.54 Tier I capital to risk-weighted assets 13.80 13.19 13.79 13.92 13.43 Total capital to risk-weighted assets 15.12 14.44 15.04 15.17 14.68 Tier I leverage ratio 9.08 8.79 8.65 8.16 7.83
- -------------------------------------------------------------------------------- (1) The efficiency ratio is calculated by dividing non-interest expenses, excluding merger-related charges, amortization of intangibles and net expense of foreclosed real estate by net interest income (on a fully taxable equivalent basis) and non-interest income, excluding gains on sales of loans, securities, loan servicing and a branch location. 12 Item 7. Management's Discussion and Analysis of Financial Condition Results of Operations The information contained in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 14 through 27 of the Company's 1998 Annual Report to Shareholders filed as Exhibit 13, is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosure about Market Risk The information regarding the market risk of the Company's financial instruments, contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 23 of the Company's 1998 Annual Report to Shareholders filed as Exhibit 13 is incorporated herein by reference. Item 8. Financial Statements and Supplemental Data The financial statements required by this Item are included in the Company's 1998 Annual Report to Shareholders on pages 28 through 47, filed as Exhibit 13, and incorporated herein by reference. Page of Annual Report to Stockholders ------------------- Report of Independent Public Accountants 28 Interchange Financial Services Corporation and Subsidiaries Consolidated Balance Sheets 29 Consolidated Statements of Income 30 Consolidated Statements of Changes in Stockholders' Equity 31 Consolidated Statements of Cash Flows 32 Notes to Consolidated Financial Statements (Notes 1 - 21) 33 - 47 No supplementary data is included in this report as it is inapplicable, not required, or the information is included elsewhere in the financial statements or notes thereto. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable PART III Item 10. Directors and Executive Officers a. Directors The information contained in the section entitled "Directors" in the Company's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, to be filed not later than 120 days after the close of the Company's fiscal year, is incorporated herein by reference in response to this item. b. Executive Officers Information required by this item is contained in Part I of this Form 10-K in the section entitled "Executive Officers." c. Compliance with Section 16(a) Information contained in the section entitled "Section 16 Compliance" in the Company's definitive Proxy 13 Statement for its 1999 Annual Meeting of Stockholders, to be filed not later than 120 days after the close of the Company's fiscal year, is incorporated herein by reference in response to this item. Item 11. Executive Compensation Information contained in the section entitled "Executive Compensation" in the Company's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, to be filed not later than 120 days after the close of the Company's fiscal year, is incorporated herein by reference in response to this item. Item 12. Security Ownership of Certain Beneficial Owners and Management The information contained in the section entitled "Amount and Nature of Beneficial Ownership" in the Company's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, to be filed not later than 120 days after the close of the Company's fiscal year, is incorporated herein by reference in response to this item. Item 13. Certain Relationships and Related Transactions The information contained in the section entitled "Transactions with Management" in the Company's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, to be filed not later than 120 days after the close of the Company's fiscal year, is incorporated herein by reference in response to this item. 14 PART IV Item 14. Exhibits, Financial Statements and Schedules and Reports on Form 8-K (a) The following documents are filed as part of this Report: 1. Financial Statements: The Financial Statements listed under Item 8 to this Report are set forth at pages 28 through 32, and the Notes to Consolidated Financial Statements are set forth at pages 33 through 47, of the Annual Report to Shareholders for 1998 (See Exhibit 13 under paragraph (a)3 of this Item 14). 2. Financial Statement Schedules: All required schedules for the Company and its subsidiaries have been included in the Consolidated Financial Statements or related Notes thereto. 3. Exhibits: Exhibits followed by a parenthetical reference are incorporated by reference herein from the document described in such parenthetical reference. Exhibit 3(a) Certificate of Incorporation of Registrant, as amended (Incorporated by reference to Exhibit 3 to Form S-4, filed April 27, 1998, Registration Statement No. 333-50065) Exhibit 3(b) Bylaws of registrant (Incorporated by reference to Exhibit 3(b) to Form S-2, filed July 22, 1992, Registration Statement No. 33-49840) Exhibit 10(a) Agreement for legal services between Andora, Palmisano & Geaney and Registrant, dated April 23, 1998 (1) Exhibit 10(b) Stock Option and Incentive Plan of 1997 (Incorporated by reference to Exhibit 4(c) to Form S-8, filed September 30, 1997, Registration Statement No. 33-82530) (1) Exhibit 10(c) Directors' Retirement Program (Incorporated by reference to Exhibit 10(i)(3) to Annual Report on Form 10-K for fiscal year ended December 31, 1994) (1) Exhibit 10(d) Executives' Supplemental Pension Plan (Incorporated by reference to Exhibit 10(i)(4) to Annual Report on Form 10-K for fiscal year ended December 31, 1994) * Exhibit 11 Statement regarding Computation of per share earnings * Exhibit 13 Portion of the Annual Report to Shareholders for the year ended December 31, 1998 * Exhibit 21 Subsidiaries of Registrant * Exhibit 23 Independent Auditors' Consent of Deloitte & Touche LLP * Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K during the quarter ended December 31,1998: The Company filed a Current Report on Form 8-K on December 3, 1998. Item 5 of the referenced Current Report contained the Company's Year 2000 Readiness Disclosure. No financial statements were filed with the Report. - ------------------------------ (1) Pursuant to Item 14(a) - 3 of Form 10-K, this exhibit represents management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this item. * Filed herewith 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Interchange Financial Services Corporation By: /s/ Anthony S. Abbate By: /s/ Anthony Labozzetta ------------------------------------- ---------------------------- Anthony S. Abbate Anthony Labozzetta President and Chief Executive Officer Executive Vice President and Chief Financial Officer (principal executive officer) (principal financial and accounting officer) March 11, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated: /s/Anthony S. Abbate /s/James E. Healey - ------------------------------------- ----------------------------------- Anthony S. Abbate March 11, 1999 James E. Healey March 11, 1999 Director Director President and Chief Executive Officer /s/Anthony D. Andora /s/Anthony Labozzetta - -------------------------------------- ----------------------------------- Anthony D. Andora March 11, 1999 Anthony Labozzetta March 11, 1999 Director Executive Vice President and Chairman of the Board Chief Financial Officer /s/Donald L. Correll /s/Nicholas R. Marcalus - -------------------------------------- ----------------------------------- Donald L. Correll March 11, 1999 Nicholas R. Marcalus March 11, 1999 Director Director /s/Anthony R. Coscia /s/Eleanore S. Nissley - -------------------------------------- ----------------------------------- Anthony R. Coscia March 11, 1999 Eleanore S. Nissley March 11, 1999 Director Director /s/John J. Eccleston /s/Jeremiah F. O'Connor - -------------------------------------- ----------------------------------- John J. Eccleston March 11, 1999 Jeremiah F. O'Connor March 11, 1999 Director Director /s/David R. Ficca /s/Robert P. Rittereiser - -------------------------------------- ----------------------------------- David R. Ficca March 11, 1999 Robert P. Rittereiser March 11, 1999 Director Director /s/Richard A. Gilsenan /s/Benjamin Rosenzweig - -------------------------------------- ----------------------------------- Richard A. Gilsenan March 11, 1999 Benjamin Rosenzweig March 11, 1999 Director Director 16 EX-10.A 2 AGREEMENT FOR LEGAL SERVICES AGREEMENT FOR LEGAL SERVICES THIS AGREEMENT for legal services made this 23rd day of April, 1998, by and between: ANDORA, PALMISANO & GEANEY A Professional Corporation 303 Molnar Drive,P.O. Box 431 Elmwood Park, New Jersey 07407-0431 hereinafter referred to as "Attorneys", and INTERCHANGE FINANCIAL SERVICES CORPORATION Park 80 West, Plaza Two Saddle Brook, New Jersey 07662 and INTERCHANGE STATE BANK A Banking Corporation Park 80 West, Plaza Two Saddle Brook, New Jersey 07662 hereinafter referred to as "Clients". IN CONSIDERATION of the mutual promises, covenants and undertakings contained herein the Attorneys and the Clients agree as follows: 1. RETAINER Clients hereby retain the services of Attorneys to act as its corporate counsel for the term and compensation as outlined herein. 2. TERM The Attorneys shall be retained by Clients until the next annual reorganization meeting of Clients. 3. COMPENSATION The Clients shall pay the Attorneys for services rendered as corporate counsel an annual retainer of NINETY-FIVE THOUSAND DOLLARS ($95,000.00) payable in equal monthly installments on the first day of each and every month commencing the first day of the month following the execution of this Agreement. Clients shall, in addition to the annual retainer, pay to the Attorneys all out-of-pocket expenses, filing fees, or disbursements made by the Attorneys on Clients' behalf. Clients shall, in addition to the payment of the annual retainer and all costs, pay to the Attorneys a legal fee based on the rate per hour as shown on Schedule A for all legal services provided to Clients by the Attorney which are "legal services rendered in addition to those rendered as corporate counsel." Such fees and costs shall be billed by Attorneys to clients on a thirty-day basis and Clients shall pay all bills within five (5) days after each monthly Board of Director's meeting of the Clients. 4. DEFINITIONS The following words and phrases shall have the following meanings: A. "Legal services rendered as corporate counsel" shall mean and include all of the following types of legal work: 1. Except as hereinafter set forth in subparagraph B, document review and drafting of documents on behalf of the Clients including, but not limited to: leases, notes, contracts, mortgages, commitment letters, disclosure statements, modifications, extensions and legal agreements not related to third-party borrowers, except residential mortgage reviews. 2. Providing legal advice required in the usual course of Clients' business including compliance analysis. 3. Attendance at Board of Director's and Shareholders' Meetings other than as a Director. 4. Advice regarding levies and executions 5. Preparation of annual SEC 10K, 10Q and "ordinary" proxy filings. B. "Legal services rendered in addition to those rendered as general corporate counsel" shall mean and include, but not be limited to, all of the following types of legal work which shall be billed on an hourly basis: 1. Litigation in which Clients are named as defendants. 2. Litigation or other proceedings in which Clients and another person or agency (i.e., Small Business Administration) specially retain Attorney. The hourly rate for such legal services shall be specifically agreed upon by Clients, the agency, and Attorneys. 3. Foreclosure litigation, including lien protection litigation in any Court including the Bankruptcy Court. 4. Regulatory or administrative law proceedings including but not limited to Department of Banking, zoning agencies, N.L.R.B., F.D.I.C., OAL, and Tax Court. 5. Loan reviews and closings, including modifications and extensions thereof, except that the fee shall be based upon $250.00 per hour plus costs and such fee shall not exceed 1/2% of the principal amount of the loan plus costs but in no event shall such fee be less than $250.00. 6. Closings in which the bank is a buyer or seller. 7. SEC Filings other than annual 10K, 10Q or "ordinary" proxy filings. 8. Mergers and Acquisitions. 9. All other legal services not specifically set forth in aragraph 4A. 5. BINDING EFFECT This agreement shall be binding upon and shall inure to the benefit of the parties' successors or assigns. 6. NO ASSIGNMENT This agreement shall not be assigned or sublet without the express written consent of the parties. 7. LAW APPLICABLE This agreement shall be governed by the laws of the State of New Jersey. 8. SEVERABILITY In the event any clause, section or paragraph of this agreement shall be declared invalid or unenforceable by a court of competent jurisdiction, such invalidity or unenforceability shall not affect the remainder of this Agreement. IN WITNESS WHEREOF the parties have hereunto signed this agreement the date first above written. INTERCHANGE STATE BANK ATTEST: /s/Benjamin Rosenzweig By: /s/ Anthony S. Abbate - ------------------------------ ----------------------------- Benjamin Rosenzweig, Secretary Anthony S. Abbate, President INTERCHANGE FINANCIAL SERVICES CORPORATION ATTEST: /s/Benjamin Rosenzweig By: /s/ Anthony S. Abbate - ------------------------------ ------------------------------ Benjamin Rosenzweig, Secretary Anthony S. Abbate, President ATTEST: ANDORA, PALMISANO & GEANEY /s/John P. Palmisano, By: /s/ Anthony D. Andora - ------------------------------ ------------------------------ John P. Palmisano, Secretary Anthony D. Andora, President SCHEDULE A The hourly rates contained herein are subject to change on the anniversary dates of the Agreement of Legal Services. Schedule A, reviewed and approved at Annual Reorganization Meeting on April 23, 1998. Anthony D. Andora $200.00 per hour John P. Palmisano $200.00 per hour John F. Geaney $200.00 per hour Other Partners and Senior Associates $175.00 per hour Other Associates $150.00 per hour EX-11 3 COMPUTATION OF PER SHARE EARNINGS Exhibit 11. Statement re computation of per share earnings
----------------------------------------------------------------------------------------------------------- Quarter Ended ----------------------------------------------------------------------------------------------------------- March 31, 1998 June 30, 1998 September 30, 1998 December 31, 1998 -------------------------- ------------------------- -------------------------- ----------------------- 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 $1,977 7,167 $0.28 $1,428 7,193 $0.20 $2,547 7,197 $0.35 $2,657 7,199 $0.37 ======== ======= ======== ====== Effect of Dilutive Shares Options issued to management 83 70 59 48 --------- ---------- -------- -------- Diluted Earnings per Common Share $1,977 7,250 $0.27 $1,428 7,263 $0.20 $2,547 7,256 $0.35 $2,657 7,247 $0.37 ========= ========= ======== ======== ================= ======== ========= ======== ======= ======= ====== ------------------------------------------------------------------------------------------------------------- Quarter Ended ------------------------------------------------------------------------------------------------------------- March 31, 1997 June 30, 1997 September 30, 1997 December 31, 1997 ---------------------------- -------------------------- ---------------------------- ---------------------- 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 $2,133 7,130 $0.30 $2,024 7,218 $0.28 $1,904 7,094 $0.27 $1,864 7,094 $0.26 ======== ======= ======== ====== Effect of Dilutive Shares Options issued to management - 71 - 74 - 90 - 90 --------- --------- -------- ---------- ------- ---------- -------- ------- Diluted Earnings per Common Share $2,133 7,201 $0.29 $2,024 7,292 $0.28 $1,904 7,184 $0.27 $1,864 7,184 $0.26 ========= ========= ======== ======== ========== ====== ======= ========== ======== ======== ======= ===== ---------------------------- Year Ended ---------------------------- 31-Dec-96 ---------------------------- Weighted Per Average Share Income Shares Amount --------- --------- -------- Basic Earnings per Common Share Income available to common shareholders $6,751 7,124 $0.95 ======== Effect of Dilutive Shares Options issued to management 66 --------- Diluted Earnings per $6,751 7,190 $0.94 ========== ========== =======
EX-13 4 PORTIONS OF THE ANNUAL REPORT TO SHAREHOLDERS Exhibit 13. Portions of the Annual Report to Shareholders for the year ended, December 31, 1998. Management's Discussion and Analysis of Financial Condition and Results of Operations This section presents management's discussion and analysis of the consolidated results of operations and financial condition of Interchange Financial Services Corporation (the "Company"). The discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto on pages 29 through 47 and the summary consolidated data included elsewhere in this report. On May 31, 1998, the Company acquired The Jersey Bank for Savings ("Jersey Bank"), which maintained two banking offices, both located within the Company's delineated market area. At that date, Jersey Bank had total assets of $78.6 million and total deposits of $69.8 million. The transaction was accounted for as a pooling-of-interests, and accordingly, the prior period financial statements presented herein have been restated to include the accounts and results of operations of Jersey Bank. Each share of Jersey Bank's common stock, including shares of common stock that had been converted from shares of preferred stock, was converted into 1.5 shares of the Company's common stock. Total consideration tendered in the transaction amounted to 780,198 shares of the Company's common stock. Earnings Overview Net income for the year ended December 31, 1998 was $8.6 million as compared with $7.9 million in 1997, an increase of 8.6%. For the same period, diluted earnings per share rose 8.2% to $1.19 in 1998 from $1.10 in 1997. Basic earnings per share in 1998 were $1.20 as compared to $1.11 in 1997. The earnings results for 1998 include merger-related charges of $1.4 million ($898 thousand, or $.12 per share, after tax) associated with the acquisition of Jersey Bank. Excluding this merger-related charge, net income would have increased 20.0% to $9.5 million, or $1.32 basic earnings per share for the year ended December 31, 1998, compared to $7.9 million or $1.11 basic earnings per share for 1997. Diluted earnings per share before the merger-related charge were $1.31 for 1998 as compared to $1.10 in the prior year, an increase of 19.1%. The Company's strong operating performance for 1998 reflects solid loan and deposit growth, excellent asset quality and a continued proficiency in managing non-interest expenses. As a result, the Company's key earnings performance measures remained strong. The Company's returns on average equity and average assets before merger-related charges were 16.05% and 1.44%, respectively, in 1998 as compared to 14.95% and 1.33%, respectively, in 1997. Furthermore, the sustained earnings and capital growth resulted in an increase in the quarterly dividend paid on common stock to an annualized rate of $.40 in 1998 as compared to $.36 in 1997, an increase of 11.1%. Net interest income in 1998 was $29.0 million, up $2.2 million, or 8.3% from 1997. This increase in net interest income was largely responsible for the growth in net income. Average interest earning assets increased $67.2 million or 12.0% from 1997, and more than offset a decline of 16 basis points in the net interest margin. In 1998, average total loans increased $59.5 million or 14.8% and average total deposits increased $54.5 million or 10.6%. Non-interest bearing demand deposits comprised $12.9 million or 23.6% of the increase. Non-interest income was favorably impacted by growth in fee based income which increased $511 thousand or 25.0% in 1998 as compared to 1997. The Company also managed to control non-interest expenses in 1998, which excluding the merger-related charge, increased by $369 thousand or 2.1% as compared to 1997, despite the Company's continued investment in technology and other tools to deliver faster more efficient services to its customers. Table 1 - -------------------------------------------------------------------------------- Summary of Operating Results - -------------------------------------------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Net income (in thousands) $8,609 $7,925 $6,751 Basic earnings per common share 1.20 1.11 0.95 Diluted earnings per common share 1.19 1.10 0.94 Return on average total assets 1.31 % 1.33 % 1.22 % Return on average total equity 14.53 14.95 14.09 Dividend payout ratio* 32.81 30.08 32.19 Average total stockholders' equity to 9.00 8.89 8.68 average total assets * Cash dividends declared on common shares to net income. Results of Operations Net Interest Income The major source of income the Company is net interest income. Net interest income is the difference between the interest a company earns on its assets, principally loans and investment securities, and interest it pays on its deposits and borrowings. When expressed as a percentage of average interest earning assets, it is referred to as net interest margin, or simply interest margin. Table 2 sets forth a summary of average interest earning assets and interest bearing liabilities for the years ended, December 31, 1998, 1997, and 1996, together with the interest earned and paid on each major type of asset and liability account during such periods. The average rates on the earning assets and the average cost of interest bearing liabilities during such periods are also summarized. Table 3, which presents changes in interest income and interest expense by each major asset and liability category for 1998 and 1997, illustrates the impact of average volume growth (estimated according to prior year rates) and rate changes (estimated on the basis of prior year volumes). Changes not due solely to changes in either volume or rates have been allocated based on the relationship of changes in volume and changes in rates. Figures are adjusted to a taxable equivalent basis to recognize the income from tax-exempt assets as if the interest was taxable, thereby allowing a uniform comparison to be made between yields on assets. 14 Table 2 - -------------------------------------------------------------------------------- Analysis of Net Interest Income for the years ended December 31, - -------------------------------------------------------------------------------- (dollars in thousands)
1998 1997 1996 ----------------------------- -------------------------- ------------------------------ Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ----------------------------- -------------------------- ------------------------------ Assets Interest earning assets Loans (1) $462,296 $38,904 8.42 % $402,799 $35,380 8.78 % $353,659 $31,367 8.87 % Taxable securities (4) 132,433 8,206 6.20 137,202 8,856 6.45 142,247 9,075 6.38 Tax-exempt securities (2)(4) 4,428 234 5.28 2,514 129 5.13 2,919 160 5.48 Federal funds sold 27,318 1,474 5.40 16,061 896 5.58 13,299 710 5.34 Interest bearing demand deposits 1,024 55 5.37 1,721 78 4.53 2,185 104 4.76 _______ ______ _______ ______ _______ ______ Total interest earning assets 627,499 48,873 7.79 560,297 45,339 8.09 514,309 41,416 8.05 ______ ______ ______ Non-interest earning assets Cash and due from banks 17,618 24,579 24,687 Allowance for loan losses (5,437) (4,636) (4,084) Other assets 18,336 16,117 16,766 _______ _______ _______ Total assets $658,016 $596,357 $551,678 ======= ======= ======= Liabilities and stockholders' equity Interest bearing liabilities Demand deposits $171,546 5,573 3.25 $141,523 4,575 3.23 $118,482 3,617 3.05 Savings deposits 132,735 3,790 2.86 123,417 3,779 3.06 126,251 3,686 2.92 Time deposits 171,462 9,104 5.31 169,196 8,889 5.25 172,025 9,122 5.30 Short-term borrowings 14,723 807 5.48 12,844 727 5.66 8,810 513 5.82 Long-term borrowings 9,828 590 6.00 9,935 596 6.00 710 45 6.34 _______ ______ _______ ______ _______ _______ Total interest bearing liabilities 500,294 19,864 3.97 456,915 18,566 4.06 426,278 16,983 3.98 ====== ====== ====== Non-interest bearing liabilities Demand deposits 94,568 81,707 73,135 Other liabilities 3,903 4,738 4,353 _______ _______ _______ Total liabilities (3) 598,765 543,360 503,766 Stockholders' equity 59,251 52,997 47,912 _______ _______ _______ Total liabilities and stockholders' equity $658,016 $596,357 $551,678 ======= ======= ======= Net interest income (tax-equivalent basis) 29,009 3.82 26,773 4.03 24,433 4.07 Tax-equivalent basis adjustment (53) (29) (37) _______ _______ ______ Net interest income $28,956 $26,744 $24,396 ====== ====== ====== Net interest income as a percent of interest earning assets (tax-equivalent basis) 4.62 % 4.78 % 4.75 %
- -------------------------------------------------------------------------------- (1) Nonaccrual loans and any related interest recorded have been included in computing the average rate earned on the loan portfolio. (2) Computed on a fully taxable equivalent basis using the corporate federal tax rate of 34%. (3) All deposits are in domestic bank offices. (4) The average balances are based on historical cost and do not reflect unrealized gains or losses. 15 Table 3 - -------------------------------------------------------------------------------- Effect of Volume and Rate Changes on Net Interest Income - -------------------------------------------------------------------------------- (in thousands)
Year ended December 31, Year ended December 31, 1998 compared with 1997 1997 compared with 1996 increase (decrease) increase (decrease) due to change in: due to change in: ------------------------------- ---------------------------- Net Net Average Average Increase Average Average Increase Volume Rate (Decrease) Volume Rate (Decrease) -------------------------------- ---------------------------- Interest income Loans $5,226 $(1,702) $3,524 $4,329 $(316) $4,013 Taxable securities (302) (348) (650) (328) 109 (219) Tax-exempt securities 101 4 105 (21) (10) (31) Federal funds sold 628 (50) 578 153 33 186 Interest bearing demand deposits (37) 14 (23) (20) (6) (26) _____ _____ _____ _____ ___ _____ Total interest income 5,616 (2,082) 3,534 4,113 (190) 3,923 _____ _____ _____ _____ ___ _____ Interest expense Demand deposits 975 23 998 711 247 958 Savings deposits 285 (274) 11 (79) 172 93 Time deposits 120 95 215 (110) (123) (233) Short-term borrowings 102 (22) 80 235 (21) 214 Long-term borrowings (6) - (6) 585 (34) 551 ______ _____ _____ _____ ___ _____ Total interest expense 1,476 (178) 1,298 1,342 241 1,583 ______ _____ _____ _____ ___ _____ Change in net interest income $4,140 $(1,904) $2,236 $ 2,771 $ (431) $2,340 ===== ===== ===== ===== === =====
- -------------------------------------------------------------------------------- Non-performing loans are included in interest earning assets. Net interest income, on a taxable equivalent basis, amounted to $29.0 million, an increase of $2.2 million, or 8.4%, from $26.8 million in 1997. The increase in net interest income was principally due to the strong growth in interest earning assets of $67.2 million that was funded largely by a $54.5 million growth in deposits. The growth, which occurred predominantly in demand deposits, had a positive effect on the composition ("mix") of retail deposits. The favorable change in retail deposit mix served to reduce the yield on total deposits, which had a favorable impact on net interest income. The increase in net interest income was partly offset by lower average rates on interest earning assets, mainly loans. The net interest margin decreased 16 basis points to 4.62% for 1998 as compared to 4.78% for 1997, largely due to the decline in market interest rates. Interest income, on a taxable equivalent basis, totaled $48.9 million in 1998, an increase of $3.5 million or 7.8% from $45.3 million in 1997. The increase was principally driven by the growth in average interest earning assets, which more than offset the effects of a decline in interest rates. Average rates on interest earning assets decreased 30 basis points to 7.79% in 1998 as compared to 1997. The increase in average interest earning assets was principally due to strong growth in loan originations. The average balance of commercial and commercial mortgage loans increased by $22.4 million or 12.6% to $200.0 million in 1998, as compared to 1997. The average balances of consumer loans (comprised mostly of home equity loans) totaled $256.9 million in 1998, compared to $225.2 million in 1997, an increase of $31.7 million or 14.1%. The increase in average loans outstanding more than offset the effects of the decrease in the average rates earned on those loans. Net interest income was negatively affected by a decline in the average volume and average rate earned on the securities portfolio. The decline in average rates was largely due to the decline in market interest rates during 1998. Interest expense, on a taxable equivalent basis, totaled $19.9 million in 1998, an increase of $1.3 million or 7.0% over the prior comparable period. The increase was largely due to the $43.4 million growth in average interest bearing liabilities, specifically interest bearing demand deposits. The average balance of interest bearing demand deposits grew $30.0 million or 21.2% to $171.5 million in 1998 as compared to 1997. Total average interest and non-interest-bearing demand deposits grew $42.9 million or 19.2%, in 1998, which is largely attributable to the Company's continued efforts in marketing and sales. In addition, commercial loans resulting from these sales efforts generally carry compensating deposit balances in the form of demand deposits and further contributed to the growth. The interest expense associated with the growth was offset, in part, by a decrease in the average rates paid on interest bearing liabilities of 9 basis points to 3.97% in 1998 as compared to 4.06% in 1997. The decline in average rates was largely due to a decline in the rates offered on savings deposits and a more favorable retail deposit mix. In 1997, net interest income, on a taxable equivalent basis, amounted to $26.8 million, an increase of $2.3 million, or 9.6%, from $24.4 million in 1996. The net interest margin increased to 4.78% in 1997 as compared to 4.75% in 1996. The increase in net interest income was principally due to growth in interest earning assets of $46.0 million, which were funded mostly with deposits and borrowings that increased $26.0 million and $13.3 million, respectively. In 1997, interest income, on a taxable equivalent basis, was $45.3 million, an increase of $3.9 million or 9.5% from $41.4 million in 1996. The growth was predominantly due to an increase in loan originations. The increase in the average loan volume was partly offset by a decrease in the average volume of securities; the proceeds of which were used to fund a portion of the loan growth. The average yield on all interest earning assets was 8.09% in 1997 as compared to 8.05% in 1996, an increase of 4 basis points. In 1997, interest expenses, on a taxable equivalent basis, totaled $18.6 million, an increase of $1.6 million or 9.3% from $17.0 million in 1996. The 16 increase was mostly due to increases in the average volume of interest bearing demand deposits and long-term borrowings. The average balance of interest bearing demand deposits was $141.5 million in 1997, compared to $118.5 million in 1996, an increase of $23.0 million or 19.5%. The average balance of long-term borrowings was $9.9 million in 1997, compared to $710 thousand in 1996, an increase of $9.2 million. Total average interest and non-interest-bearing demand deposits, which grew $31.6 million or 16.5%, was attributable to the Company's efforts in marketing and sales. The average yield on all interest bearing liabilities was 4.06% in 1997 as compared to 3.98% in 1996, an increase of 8 basis points. Non-interest income Non-interest income consists of all income other than interest and dividend income and is derived from: fees on bank transactions and credit cards; commissions on sales of annuities and mutual funds; rental of safe deposit space and net gains on sales of assets. The Company recognizes the importance of supplementing net interest income with other sources of income and maintains a committee that continually explores new opportunities to build non-interest income. In 1998, non-interest income totaled $4.9 million, an increase of $154 thousand or 3.2% over 1997. In 1997, total non-interest income increased $526 thousand or 12.4% over 1996. In 1998, service fees on deposit accounts comprised 51.8% of non-interest income as compared to 42.7% in 1997. Service fees on deposits increased $511 thousand or 25.0% in 1998 as compared to 1997. During 1998, the Company established a committee to perform a comprehensive review of fee income sources. The strategies implemented from the committee's findings were largely responsible for the growth in service fees on deposits. The overall growth in the deposit base also contributed to the increase. There were no gains from loan sales during 1998, whereas, in 1997, the Company realized pre-tax gains of $1.1 million from the sale of two commercial mortgage loans. The loans were sold based on management's assessment of the risk associated with such loans as they neared their maturity. In 1998, gains from the sale of securities consisted of $876 thousand from the sale of available for sale securities and $145 thousand from the call before maturity of a security. There were no gains from the sale of securities in 1997. The decrease of $681 thousand, in 1998 as compared to 1997, in collection of principal in excess of reserves on loans purchased at a discount, was partially offset by an increase in other non-interest income of $370 thousand for the same period. Other non-interest income includes, but is not limited to, income from servicing fees, commissions and fees and safe deposit rental, as well as income from the sale of the reverse mortgage servicing portfolio. In 1997, service fees on deposit accounts comprised 42.7% of non-interest income as compared to 39.7% in 1996. Service fees on deposits increased $355 thousand or 21.1% in 1997 as compared to 1996. In 1997, pre-tax gains of $1.1 million were recognized from the sale of two commercial mortgage loans. There were no gains from the sale of loans during 1996. There were no gains from the sale securities in 1997. In 1996, security gains of $235 thousand were recognized from the sale of available for sale securities, which were sold as part of a securities portfolio-restructuring plan. Non-interest income recognized from the collection of principal in excess of reserves on loans purchased at a discount increased by $255 thousand in 1997 as compared to 1996. All other non-interest income, which is comprised principally of servicing fee income, commissions and fees, safe deposit rentals and miscellaneous income, increased $57 thousand or 7.5% in 1997 as compared to 1996. Table 4 - -------------------------------------------------------------------------------- Non-interest Income for the years ended December 31, - -------------------------------------------------------------------------------- (in thousands)
1998 1997 1996 ------ ------ ------ Service fees on deposit accounts $2,551 $2,040 $1,685 Net gain on sale of securities 1,021 - 242 Net gain on sale of loans - 1,067 - Accretion of discount in connection with acquisition - - 511 Net gain on sale of deposits of a branch location - - 455 Collection of acquired loans in excess of carrying value 174 855 600 All other 1,182 812 755 _____ _____ _____ $4,928 $4,774 $4,248 ===== ===== =====
Non-interest Expenses Non-interest expenses totaled $19.4 million for 1998, an increase of $1.8 million or 10.0% from $17.6 million for 1997. The increase resulted principally from the merger-related charges of $1.4 million associated with the acquisition of Jersey Bank. Excluding the merger-related charges, non-interest expenses increased $369 thousand or 2.1% over 1997. Initial costs associated with establishing a Real Estate Investment Trust ("REIT") subsidiary of $231 thousand also contributed to the increase. The REIT was established to manage certain real estate assets of the Company in an effort to take advantage of certain tax benefits. Further contributing to the increase were occupancy and furniture and equipment costs, which increased $409 thousand due to the opening of a new branch in Paramus and investments in technology. Also, salaries and benefits increased $412 thousand (excluding costs associated with the REIT) due mostly to salary increases, promotions and the opening of the new branch in Paramus. The increases were partly offset by the recognition of $474 thousand cash surrender value of certain directors' life insurance policies, which had not been recognized in prior years. The amounts had not been recognized due to the statutory receivership of the insurer, which gave rise to significant doubt surrounding the collectibility of such amounts. In 1998, management determined that the collectibility of the cash surrender value was probable since a solvent insurance company had acquired the insurer. In addition, the Company benefited from cost savings for the second half of 1998 with respect to the synergies arising from the merger with Jersey Bank. For 1997, total non-interest expenses increased $163 thousand or 0.9% from $17.5 million for the year ended December 31, 1996. The increase in non-interest expenses for 1997 was attributable to a $713 thousand increase in salaries and benefits due primarily to annual salary increases, promotions and the full year operation of the River Edge branch, which opened in the latter part of 1996. The increase was, in part, offset by a $252 thousand decline in foreclosed real estate expense resulting from the workout and sale of the foreclosed real estate during the first half of 1997. Furthermore, the Company benefited from declines of $104 thousand in the Federal Deposit Insurance Corporation ("FDIC") assessment, $73 thousand in advertising and promotion expenses and $120 thousand in occupancy and furniture and equipment costs. This decrease in occupancy and furniture and equipment was mainly the result of closing two branch offices during 1996 and the purchase of a previously leased branch location during 1997 coupled with a decline in maintenance costs incurred at all the Company's locations. One of the Company's goals is to control expenses in order to maximize earnings and shareholder value. Generally, the efficiency ratio is one method utilized to measure a bank's operating expenses. The efficiency ratio is non-interest expenses, excluding the amortization of intangibles, merger-related expenses and net expenses of foreclosed real estate, expressed as a percentage of net interest income (on a fully taxable equivalent basis) and non-interest income, excluding gains. Generally, the lower 17 the efficiency ratio the more effective the Company is in utilizing its resources to generate income. The efficiency ratio improved to 53.6% for 1998 compared to 56.5% in 1997. The improvement was largely attributable to the growth in net interest income and non-interest income and was offset in part by a marginal increase in non-interest expenses. The national peer group average was 61.1% (peer group data as of September 30, 1998 - based upon the most recent published report by SNL Securities). The efficiency ratio was 56.5% for 1997 compared to 60.0% in 1996. The national peer group average at December 31, 1997 was 60.4% (published by SNL Securities). Table 5 - -------------------------------------------------------------------------------- Non-interest Expenses for the years ended December 31, - -------------------------------------------------------------------------------- (in thousands) 1998 1997 1996 --------- -------- -------- Salaries and benefits $ 9,437 $ 8,951 $ 8,238 Occupancy, furniture and equipment 3,440 3,031 3,151 Advertising and promotion 865 865 938 Federal Deposit Insurance Corporation assessment 75 58 162 Foreclosed real estate 1 - 252 Acquisition 1,392 - - Other expenses Stationery, printing and supplies 255 304 376 Professional fees 1,184 1,216 1,088 Communications 327 289 255 Postage and shipping 356 313 319 Credit card processing fees 24 63 45 Credit services 74 99 147 Amortization of premiums in connection with acquisitions 384 444 444 Provision for litigation contingency - - (33) Directors' fees, travel and retirement 88 607 553 Insurance premiums 172 240 244 Data Processing 538 548 490 Unrealized (gain)/loss on loans held for sale (18) 13 All other 804 645 810 --------- -------- -------- $19,416 $17,655 $17,492 ========= ======== ======== Income Taxes In 1998, income taxes amounted to $4.9 million as compared to $4.3 million and $3.7 million for 1997 and 1996, respectively. The effective tax rate in 1998 was 36.3% as compared to 35.1% for both 1997 and 1996, respectively. Detailed information on income taxes is shown in Notes 1 and 16 to the Consolidated Financial Statements. Financial Condition Loan Portfolio In 1998, high levels of prepayments and increased competitive factors placed a great deal of pressure on loan production for the banking industry. Despite this, the Company continued to experience strong growth in its loan portfolio. At December 31, 1998, total loans amounted to $478.7 million, up $40.4 million or 9.2% over the previous year. Promotional campaigns in conjunction with competitive loan rates and focused sales efforts were instrumental to the loan growth, particularly in the 1-4 family residential mortgage loan portfolio. First lien real estate mortgage loans increased $16.5 million or 22.6% to $89.9 million in 1998 from $73.3 million in 1997. The loan growth was largely in the subsidiary bank's delineated community, which confirms the Company's pledge of striving to be the largest community-based banking organization in Bergen County, dedicated to community service and helping its customers grow and prosper. Commercial real estate mortgage loans amounted to $148.9 million at December 31, 1998, and represented 31.1% of total loans as compared to $135.0 million or 30.8% of all loans at the end of 1997. These loans are secured primarily by first priority mortgage liens on owner-occupied commercial properties. While a significant portion of the Company's loans are collateralized by real estate located in northern New Jersey, the Company does not have any concentration of loans in any single industry classified under the Standard Industrial Classification Code, which exceeds 4% of its total loans. In 1998, term federal funds totaling $7.5 million were purchased as short-term investments. The remaining balance of $5.0 million is scheduled to mature in the first quarter of 1999. 18 Table 6 - -------------------------------------------------------------------------------- Loan Portfolio at December 31, - --------------------------------------------------------------------------------
1998 1997 1996 1995 1994 ---------- ---------- ---------- --------- ---------- Amounts of loans by type (in thousands) Commercial and financial $ 64,067 $ 51,573 $ 51,908 $ 42,645 $ 36,512 Real estate-construction 974 4,229 4,799 2,509 3,180 Real estate-mortgage 1-4 family residential First liens 89,852 73,309 62,170 61,374 61,718 Junior liens 14,322 16,795 18,645 21,803 25,507 Available for sale - - 1,195 1,106 1,086 Home equity 142,781 143,177 121,504 102,006 88,860 Commercial 148,875 134,972 117,641 100,332 90,804 Installment Credit cards and related plans 2,033 2,415 2,704 2,935 3,331 Other 1,200 1,702 3,494 2,805 3,133 Lease financing 9,613 10,101 - 55 698 Term federal funds 5,000 - - - - ---------- ---------- ---------- ---------- --------- Total $478,717 $438,273 $384,060 $337,570 $314,829 ========== ========== ========== ========== ========= Percent of loans by type Commercial and financial 13.3 % 11.8 % 13.5 % 12.6 % 11.6 % Real estate-construction 0.2 1.0 1.2 0.7 1.0 Real estate-mortgage 1-4 family residential First liens 18.8 16.7 16.2 18.2 19.6 Junior liens 3.0 3.8 4.9 6.5 8.1 Available for sale - - 0.3 0.3 0.3 Home equity 29.8 32.7 31.6 30.2 28.3 Commercial 31.1 30.8 30.6 29.7 28.8 Installment Credit cards and related plans 0.4 0.5 0.7 0.9 1.1 Other 0.3 0.4 1.0 0.9 1.0 Lease financing 2.0 2.3 - - 0.2 Term federal funds 1.1 - - - - ---------- ---------- ---------- ---------- --------- Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % ========== ========== =========== ========== ========= The following table sets forth the maturity distribution of the Company's loan portfolio as of December 31, 1998. The table excludes real estate loans (other than construction loans), lease financing and installment loans: (in thousands) Due after Due in one year Due after one year through five or less five years years Total ---------- ---------- ----------- ---------- Commercial and financial $17,623 $22,071 $24,373 $64,067 Real estate-construction 974 - - 974 ---------- ---------- ----------- ---------- Total $18,597 $22,071 $24,373 $65,041 ========== ========== =========== ========== The following table sets forth, as of December 31, 1998, the sensitivity of the amounts due after one year to changes in interest rates: (in thousands) Due after one year Due after through five five years years ---------- ----------- Fixed interest rate $14,397 $ 3,651 Variable interest rate 7,674 20,722 ---------- ----------- Total $22,071 $24,373 ========== ===========
Loan Quality The lending activities of the Company are guided by the basic lending policy established by the Company's Board of Directors. Loans must meet the tests of a prudent loan, which include criteria regarding the character, capacity and capital of the borrower, collateral provided for the loan and prevailing economic conditions. Generally, the Company obtains an independent appraisal of real property, within regulatory guidelines, when it is considered the primary collateral for a loan. The Company employs a full-time loan review officer who evaluates the credit risk for substantially all large commercial loans. This review process is intended to identify adverse developments in individual credits, regardless of whether such credits are also included on the watchlist discussed below and whether or not the loans are delinquent. The loan review officer reports directly to the President of the Company and provides quarterly reports to the Board of Directors. Management maintains a "watchlist" system under which credit officers are required to provide early warning of possible deteriorations in loans. These loans may not currently be delinquent, but may present indications of financial weakness, such as deteriorating financial ratios of the borrowers, or other concerns at an early stage to allow early implementation of responsive credit strategies. The "watchlist" report is presented to Executive Management monthly and to the Board of Directors on a quarterly basis. 19 Loan Losses The provision for loan losses represents management's determination of the amount necessary to bring the allowance for loan losses to a level that management considers adequate to reflect the risk of the future potential losses inherent in the Company's loan portfolio. In its evaluation of the adequacy of the allowance for loan losses, management considers past loan loss experience, changes in the composition of performing and nonperforming loans, concentrations of credit, economic conditions, collateral coverage, the condition of borrowers facing financial pressure and the relationship of the current level of the allowance to the credit portfolio and to nonperforming loans. However, the process of determining the adequacy of the allowance is necessarily judgmental and subject to changes in external conditions. Accordingly, there can be no assurance that existing levels of the allowance will ultimately prove adequate to cover actual loan losses. Loan loss provisions for 1998 amounted to $951 thousand, a decrease of $702 thousand from the prior year. In 1997, the loan loss provision amounted to $1.7 million, an increase of $906 thousand from 1996. The Company's lending focus and growth continues to be largely in its commercial and commercial mortgage loans ("commercial loans"). From 1995 to 1998, commercial loans increased $70.0 million or 48.9%, while 1-4 family residential and installment loans ("consumer loans") increased $58.2 million or 30.3%. This growth and concentration of credit towards commercial loans can change the characteristics of and potentially increase the inherent credit risk in the Bank's loan portfolio. In response to this trend, the Company, in 1997, increased the allocation percentage applied to performing commercial loans to account for such risk. The increase in the allocation, in 1997, along with the other assessments made by management, resulted in an increase in the provision for loan losses and the related allowance for loan losses. In 1998, management determined that the allowance for loan losses was at a level sufficient to absorb estimated losses in the loan portfolio, particularly with respect to the inherent credit risk associated with growth and concentration of credit. As a result, the provision for loan losses was lower in 1998, as compared to 1997. Table 7 - -------------------------------------------------------------------------------- Loan Loss Experience for the years ended December 31, - -------------------------------------------------------------------------------- (dollars in thousands)
1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ Average loans outstanding $462,296 $402,799 $353,659 $318,089 $293,792 ============ ============ ============ ============ ============ Allowance at beginning of year $5,231 $3,968 $3,926 $4,079 $4,105 ------------ ------------ ------------ ------------ ------------ Loans charged off Commercial 15 293 8 399 281 Installment 135 141 78 108 149 Real estate 470 139 770 914 647 Lease financing - - 57 89 47 ------------ ------------ ------------ ------------ ------------ Total 620 573 913 1,510 1,124 ------------ ------------ ------------ ------------ ------------ Recoveries of loans previously charged off Commercial 35 84 75 25 - Installment 18 29 45 54 99 Real estate 30 70 88 32 15 Lease financing - - - 7 - ------------ ------------ ------------ ------------ ------------ Total 83 183 208 118 114 ------------ ------------ ------------ ------------ ------------ Net loans charged off 537 390 705 1,392 1,010 ------------ ------------ ------------ ------------ ------------ Additions to allowance charged to expense 951 1,653 747 1,239 984 ------------ ------------ ------------ ------------ ------------ Allowance at end of year $5,645 $5,231 $3,968 $3,926 $4,079 ============ ============ ============ ============ ============ Allowance to total loans 1.18 % 1.19 % 1.03 % 1.16 % 1.30 % Allowance to nonaccrual loans 471.20 345.51 157.02 156.35 66.04 Allowance to nonaccrual loans and loans past due 90 days or more 471.20 316.07 155.49 156.35 66.04 Ratio of net charge-offs to average loans 0.12 0.10 0.20 0.44 0.34
The allowance for loan losses represented 471.2% of nonaccrual loans and loans past due 90 days or more at the end of 1998, up from 316.1% at the end of 1997. The ratio increased principally as a result of a slight increase in the allowance at year end and a $457 thousand decrease in nonaccrual loans and loans past due 90 days or more in 1998 as compared to the end of the year in 1997. Table 8 - -------------------------------------------------------------------------------- Allocation of Allowance for Loan Losses at December 31, - -------------------------------------------------------------------------------- (in thousands)
1998 1997 1996 1995 1994 ------- ------- ------- -------- -------- Commercial and financial $ 941 $ 903 $1,051 $ 965 $ 994 Installment 93 147 165 228 289 Real estate 3,633 3,335 2,026 2,104 1,807 Unallocated 978 846 726 629 989 ======= ======= ======= ======== ======== $5,645 $5,231 $3,968 $3,926 $4,079 ======= ======= ======= ======== ========
The above allocation is intended for analytical purposes and may not be indicative of the categories in which future loan losses occur. 20 Nonperforming Assets Nonperforming assets consist of nonaccrual loans, restructured loans and foreclosed real estate. Loans are placed on nonaccrual status when, in the opinion of management, the future collection of interest or principal according to contractual term may be doubtful or when principal or interest payments are in arrears 90 days or more. Foreclosed real estate, representing real estate collateral acquired by legal foreclosure procedures, is valued using independent appraisals and the Company's policy is to obtain revised appraisals annually. The Company intends to dispose of each property at or near its current valuation. However, there can be no assurance that disposals will be made as soon as anticipated or at expected values. Table 9 presents the detail of nonperforming assets and the aggregate of loans whose principal and/or interest has not been paid according to contractual terms. In 1998, the Company sold $409 thousand of nonperforming loans, which was largely responsible for the decline in total nonperforming assets by $277 thousand in 1998 as compared to 1997. In 1997, total nonperforming assets decreased by $1.8 million to $2.1 million in 1997 as compared to $3.9 million in 1996. The decrease was due, in part, to the sale of foreclosed real estate totaling $610 thousand. Further contributing to the decrease was a $1.0 million decline in nonaccrual loans which was largely due to a commercial loan pay-off totaling $212 thousand and a charge-off coupled with a lump sum payment on another commercial loan totaling $558 thousand. Based on the current information available, except for the loans included in the table, there were no material potential problem loans, either individually or in the aggregate, at December 31, 1998. Table 9 - -------------------------------------------------------------------------------- Loan Delinquencies and Nonperforming Assets at December 31, - -------------------------------------------------------------------------------- (dollars in thousands)
1998 1997 1996 1995 1994 --------- --------- --------- --------- ---------- Loans delinquent and accruing interest Loans past due 30-89 days $379 $832 $838 $1,397 $1,513 Loans past due 90 days or more - 141 25 - - --------- --------- --------- --------- ---------- Total loans delinquent and accruing interest $379 $973 $863 $1,397 $1,513 ========= ========= ========= ========= ========== Nonaccrual loans $1,198 $1,514 $2,527 $2,511 $6,177 Foreclosed real estate 84 - 610 1,213 880 Restructured loans 528 573 725 1,465 522 --------- --------- --------- --------- ---------- Total nonperforming assets $1,810 $2,087 $3,862 $5,189 $7,579 ========= ========= ========= ========= ========== Total nonperforming assets and loans past due 90 days or more $1,810 $2,228 $3,887 $5,189 $7,579 ========= ========= ========= ========= ========== Nonaccrual loans to total loans 0.25 % 0.35 % 0.66 % 0.74 % 1.96 % Nonperforming assets to total loans and foreclosed real estate 0.38 0.48 1.00 1.53 2.40 Nonperforming assets to total assets 0.26 0.33 0.67 0.95 1.43 Nonaccrual loans and loans past due 90 days or more to total loans 0.25 0.38 0.66 0.74 1.96 Nonperforming assets and loans past due 90 days or more to total loans and foreclosed real estate 0.38 0.51 1.01 1.53 2.40 Nonperforming assets and loans past due 90 days or more to total assets 0.26 0.36 0.68 0.95 1.43
21 Securities Held to Maturity and Securities Available for Sale The Company identifies as "securities available for sale" securities used as part of its asset/ liability management strategy, or securities that may be sold in response to, among other things, changes in interest rates and prepayment risk. Debt securities purchased with the intent and ability to hold until maturity are classified as "held to maturity". See Notes 1 and 4 of Notes to Consolidated Financial Statements for additional information concerning securities. Table 10 presents a summary of the contractual maturities and weighted average yields (adjusted to a taxable equivalent basis) of "securities held to maturity" and "securities available for sale". Historical cost was used to calculate the weighted average yields. Table 10 - -------------------------------------------------------------------------------- Securities at December 31, 1998 - -------------------------------------------------------------------------------- (dollars in thousands)
After 1 After 5 Weighted Within But Within But Within After Average 1 Year 5 Years 10 Years 10 Years Total Yield ---------- ----------- --------- --------- --------- --------- Securities held to maturity at amortized cost Obligations of U.S. Treasury $5,999 $ 9,993 - - $ 15,992 5.90 % Mortgage-backed securities - 1,031 $ 10,195 $ 7,695 18,921 6.85 Obligations of U.S. agencies - 7,986 - - 7,986 5.99 Obligations of states & political subdivisions 6,711 787 - 3,613 11,111 5.55 Other debt securities 25 124 - - 149 6.57 ---------- ----------- --------- -------- --------- 12,735 19,921 10,195 11,308 54,159 ---------- ----------- --------- -------- --------- Securities available for sale at market value Obligations of U.S. Treasury 14,107 19,934 - - 34,041 6.38 Mortgage-backed securities 170 3,815 10,912 28,169 43,066 6.22 Obligations of U.S. agencies - 8,113 505 5,206 13,824 5.57 ---------- --------- --------- -------- --------- 14,277 31,862 11,417 33,375 90,931 ---------- --------- --------- -------- --------- Total $27,012 $51,783 $21,612 $44,683 $145,090 ========== ========= ========= ======== ========= Weighted average yield 6.07 % 6.08 % 6.50 % 6.19 % 6.18 % The following table set forth the carrying value of the Corporation's held to maturity and available for sale securities portfolios for the years ended, December 31: (dollars in thousands) 1998 1997 1996 --------------------- -------------------- -------------------- Amount % Amount % Amount % ----------- -------- --------- ------ ---------- ------- Securities held to maturity Obligations of U.S. Treasury $ 15,992 29.6 % $ 22,134 36.7 % $ 43,517 57.5 % Mortgage-backed securities 18,921 34.9 28,398 47.0 22,440 29.7 Obligations of U.S. agencies 7,986 14.7 6,711 11.1 5,992 7.9 Obligations of states & political subdivisions 11,111 20.5 3,049 5.0 3,581 4.7 Other debt securities 149 0.3 150 0.2 150 0.2 ----------- -------- ---------- ------ ---------- ------- $ 54,159 100.0 % $ 60,442 100.0 % $ 75,680 100.0 % =========== ======== ========== ====== ========== ======= Securities available for sale Obligations of U.S. Treasury $ 34,041 35.5 % $ 35,983 47.6 % $ 31,847 47.0 % Mortgage-backed securities 43,066 45.0 27,149 35.9 23,522 34.8 Obligations of U.S. agencies 13,824 14.4 7,012 9.3 7,970 11.8 Equity securities 4,840 5.1 5,411 7.2 4,320 6.4 ----------- -------- ---------- ------ ---------- ------ $ 95,771 100.0 % $ 75,555 100.0 % $ 67,659 100.0 % =========== ======== ========== ====== ========== =======
The Company's total investment portfolio increased by $13.9 million or 10.2% to $149.9 million at December 31, 1998 as compared to the prior year. The growth was principally in U.S. agencies, obligations of states and political subdivisions and mortgaged-backed securities, which includes collateralized mortgage obligations ("CMO"). The growth was partly offset by a decline in U.S. Treasury securities as a result of maturities. Substantially all of the mortgage-backed securities held by the Company are issued or backed by Federal agencies. At December 31, 1998, the Company's CMO portfolio did not include any securities deemed as "high risk" as defined by the Federal Financial Institutions Examination Council. Total gross unrealized gains and losses for the total investment portfolio amounted to $2.7 million and $238 thousand, respectively, at December 31, 1998. The Company's held to maturity portfolio decreased by $6.3 million or 10.4% to $54.2 million at December 31, 1998 as compared to the prior year. The decrease was principally due to the transfer of certain securities classified as held to maturity by Jersey Bank to available for sale. The securities were reclassified upon consummation of the acquisition because of their higher degree of interest rate sensitivity. Furthermore, the securities do not conform to the Company's investment objectives or to its policy for managing interest rate risk. At the date of transfer the securities had a book value of $8.2 million and a market value of $8.1 million. The Company's available for sale portfolio increased by $20.2 million or 26.8% to $95.8 million at December 31, 1998 as compared to the prior year. The growth was largely due to the purchase of securities in 1998. In addition, the above noted reclassification of certain securities of Jersey Bank also contributed to the growth. 22 Deposits The Company traditionally relies on its deposit base to fund its credit needs. Core deposits, which include non-interest bearing demand deposits, interest bearing demand accounts, savings deposits, money market accounts and time deposits in amounts under $100,000, represented 95.8% of total deposits at December 31, 1998 and 93.8% at December 31, 1997. Total deposits amounted to $598.7 million at December 31, 1998, an increase of $58.0 million or 10.7% from year-end 1997. The most significant growth in the deposit base occurred in non-interest and interest bearing demand deposits, which increased $12.0 million or 12.5% and $39.9 million or 25.8% at December 31, 1998, respectively, as compared to the prior year. Time deposits marginally increased by $2.4 million or 1.5% to $170.5 million at year-end 1998 as compared to year-end 1997. The favorable change in mix of deposits, combined with declines in interest rates, reduced the overall yield on deposits by 10 basis points. The Company's emphasis of building core customer relationships has been paramount to its success in positively changing the composition of its deposits over the last five years. Table 11 - -------------------------------------------------------------------------------- Deposit Summary at December 31, - -------------------------------------------------------------------------------- (dollars in thousands)
1998 1997 1996 1995 1994 ------------------ --------------- ---------------- --------------- ---------------- Amount % Amount % Amount % Amount % Amount % ---------- ------- -------- ------ --------- ------ -------- ------ --------- ------ Noninterest bearing demand $ 107,408 17.9 % $ 95,436 17.6 % $ 78,450 16.0 % $70,667 14.5 % $ 67,491 14.4 % Interest bearing demand 194,177 32.4 154,301 28.6 121,878 24.8 114,009 23.4 106,007 22.6 Money market 50,665 8.5 41,815 7.7 41,372 8.4 40,728 8.4 40,139 8.5 Savings 76,026 12.7 81,202 15.0 82,817 16.8 85,816 17.6 91,582 19.5 Time deposits less than $100,000 145,337 24.3 134,287 24.9 139,994 28.5 158,689 32.5 152,299 32.4 Time deposits greater than $100,000* 25,119 4.2 33,724 6.2 27,126 5.5 17,315 3.6 12,281 2.6 ========== ======= ======== ====== ========= ====== ======== ====== ========= ====== $598,732 100.0 % $540,765 100.0 % $491,637 100.0 % $487,224 100.0 % $469,799 100.0 % ========== ======= ======== ====== ========= ====== ======== ====== ========= ======
* The following table shows the time remaining to maturity of time certificates of deposit of $100,000 or more as of December 31, 1998 (in thousands) Three months or less $ 11,594 Over three months through six months 6,918 Over six months through twelve months 3,239 Over twelve months 3,368 ---------- $25,119 ========== Market Risk Market risk is generally described as the sensitivity of income to adverse changes in interest rates, foreign currency exchange rates, commodity prices, and other relevant market rates or prices. Market rate sensitive instruments include: financial instruments such as investments, loans, mortgage-backed securities, deposits, borrowings and other debt obligations; derivative financial instruments, such as futures, forwards, swaps and options; and derivative commodity instruments, such as commodity futures, forwards, swaps and options that are permitted to be settled in cash or another financial instrument. The Company does not have any material exposure to foreign currency exchange rate risk or commodity price risk. The Company did not enter into any market rate sensitive instruments for trading purposes nor did it engage in any hedging transactions utilizing derivative financial instruments during 1998. The Company's real estate loan portfolio, concentrated primarily in northern New Jersey, is subject to risks associated with the local and regional economies. The Company's primary source of market risk exposure arises from changes in market interest rates ("interest rate risk"). Interest Rate Risk Interest rate risk is generally described as the exposure to potentially adverse changes in current and future net interest income resulting from: fluctuations in interest rates; product spreads; and imbalances in the repricing opportunities of interest-rate-sensitive assets and liabilities. Therefore, managing the Company's interest rate sensitivity is a primary objective of the Company's senior management. The Company's Asset/Liability Committee ("ALCO") is responsible for managing the exposure to changes in market interest rates. ALCO attempts to maintain stable net interest margins by periodically evaluating the relationship between interest-rate-sensitive assets and liabilities. The evaluation, which is performed at least monthly, attempts to determine the impact on net interest margin from current and prospective changes in market interest rates. The Company manages interest rate risk exposure with the utilization of financial modeling and simulation techniques. These methods assist the Company in determining the effects of market rate changes on net interest income and future economic value. The objective of the Company is to maximize net interest income within acceptable levels of risk established by policy. The techniques utilized for managing exposure to market rate changes involve a variety of interest rate, pricing and volume assumptions. These assumptions include projections on growth, prepayment and withdrawal levels as well as other embedded options inherently found in financial instruments. The Company reviews and validates these assumptions at least annually, or more frequently, if economic or other conditions change. At December 31, 1998, 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, it was estimated that net interest income, over a twelve-month horizon, would not decrease by more than 10.2%. At December 31, 1998, the Company was within policy limits established for changes in net interest income and future economic value. The preceding simulation does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cashflows, and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change. Further, as market conditions vary from those assumed in the simulation, actual results will also differ due to: prepayment/refinancing levels deviating from those assumed, the varying impact of interest rate changes on caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals 23 and product preference changes, and other internal/external variables. Furthermore, the simulation does not reflect actions that ALCO might take in responding to anticipating changes in interest rates or competitive conditions in the market place. In addition to the above-mentioned techniques, the Company utilizes sensitivity gap as an interest rate risk measurement. Sensitivity gap is determined by analyzing the difference between the amount of interest earning assets maturing or repricing within a specific time period and the amount of interest bearing liabilities maturing or repricing within that same period of time. Sensitivity gap provides an indication of the extent to which the Company's net interest income may be affected by future changes in market interest rates. The cumulative gap position expressed as a percentage of total assets provides one relative measure of the Company's interest rate exposure. The cumulative gap between the Company's interest-rate-sensitive assets and its interest-rate-sensitive liabilities repricing within a one-year period was (7.53%) at December 31, 1998. Since the cumulative gap was negative, the Company has a "negative gap" position, which theoretically will cause its assets to reprice more slowly than its deposit liabilities. In a declining interest rate environment, interest costs may be expected to fall faster than the interest received on earning assets, thus increasing the net interest spread. If interest rates increase, a negative gap means that the interest received on earning assets may be expected to increase more slowly than the interest paid on the Company's liabilities therefore decreasing the net interest spread. Certain shortcomings are inherent in the method of analysis presented in Table 12. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. The rates on certain types of assets and liabilities may fluctuate in advance of changes in market rates, while rates on other types of assets and liabilities may lag behind changes in market rates. In the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the table. The ability of borrowers to service their debt may decrease in the event of an interest rate increase. Management considers these factors when reviewing its gap position and establishing its ongoing asset/liability strategy. Table 12 - -------------------------------------------------------------------------------- Interest Rate Sensitivity Analysis at December 31, 1998 - -------------------------------------------------------------------------------- (dollars in thousands)
Non- 3 6 6 Mos. to 1 to 3 3 to 5 Over interest Subject to rate change within Months Months 1 Year Years Years 5 Years Sensitive Total -------- -------- --------- -------- --------- -------- -------- -------- Assets Net loans $139,587 $31,288 $48,739 $124,928 $85,294 $47,682 $(4,446) $473,072 Investment securities 13,897 8,253 31,752 66,362 8,692 19,075 1,899 149,930 Cash and amounts due from banks 23,175 - - - - - 20,109 43,284 Other noninterest earning assets - - - - - - 19,078 19,078 -------- -------- -------- -------- --------- -------- -------- -------- Total assets 176,659 39,541 80,491 191,290 93,986 66,757 36,640 685,364 -------- -------- -------- -------- --------- -------- -------- -------- Liabilities and stockholders' equity Demand deposits 32,472 32,472 64,944 86,244 42,049 43,404 - 301,585 Savings deposits 6,653 6,652 13,305 34,173 10,541 4,702 - 76,026 Fixed maturity certificates of deposits 47,015 43,952 51,893 19,720 7,844 32 - 170,456 Money market accounts 7,599 7,599 15,200 10,898 5,038 4,331 - 50,665 Securities sold under agreements to purchase 7,780 1,000 - - - - - 8,780 Short-term borrowings 6,027 27 3,714 - - - - 9,768 Other liabilities - - - - - - 5,712 5,712 Stockholders' equity - - - - - - 62,372 62,372 -------- -------- -------- -------- --------- -------- -------- -------- Total liabilities and stockholders' equity 107,546 91,702 149,056 151,035 65,472 52,469 68,084 $685,364 -------- -------- -------- -------- --------- -------- -------- -------- GAP $69,113 $(52,161)$ (68,565) $40,255 $28,514 $14,288 $(31,444) ======== ======== ======== ======== ========= ======== ======== GAP to total assets 10.08 % (7.61)% (10.00)% 5.87 % 4.16 % 2.08 % Cumulative GAP $69,113 $16,952 $(51,613) $(11,358) $17,156 $31,444 ======== ======== ========= ======== ========= ======== Cumulative GAP to total assets 10.08 % 2.47 % (7.53)% (1.66)% 2.50 % 4.59 %
Liquidity A fundamental component of the Company's business strategy is to manage liquidity to ensure the availability of sufficient resources to meet all financial obligations and finance prospective business opportunities. Liquidity management is critical to the stability of the Company. The liquidity position of the Company over any given period of time is a product of it's operating, financing and investing activities. The extent of such activities is often shaped by such external factors as competition for deposits and loan demand. Traditionally, financing for the Company's loans and investments is derived primarily from deposits, along with interest and principal payments on loans and investments. At December 31, 1998, total deposits amounted to $598.7 million, an increase of $58.0 million or 10.7% over the prior comparable year. In 1998, the Company had strong deposit growth, and therefore, placed less reliance on advances from the Federal Home Loan Bank of New York ("FHLB") and securities sold under agreements to repurchase ("REPOS"). During 1998, the Company did not obtain any new term-advances from the FHLB. At December 31, 1998, advances from the FHLB and REPOS totaled $18.5 million and represented 2.7% of total assets as compared to $22.9 million and 3.7% of total assets, at December 31, 1997. In 1998, despite heightened competition for loans and increased loan prepayments, loan production continued to be the Company's principal investing activity. Net loans at December 31, 1998 amounted to $473.1 million, compared to $433.0 million at the end of 1997, an increase of $40.0 million or 9.2%. 24 The Company's most liquid assets are cash and due from banks, federal funds sold and interest bearing demand deposits. At December 31, 1998, the total of such assets amounted to $43.3 million or 6.3% of total assets, compared to $36.6 million or 5.9% of total assets at year-end 1997. Another significant liquidity source is the Company's available for sale securities. At December 31, 1998, available for sale securities amounted to $95.8 million or 63.9% of total securities, compared to $75.6 million or 55.6% of total securities at year-end 1997. 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 $57.7 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 funding requirements. Capital Adequacy Stockholders' equity totaled $62.4 million and represents 9.1% of total assets at December 31, 1998, compared to $56.1 million and 9.0% of total assets at December 31, 1997. The $6.2 million increase was primarily attributable to net income of $8.6 million less cash dividends of $2.8 million. Guidelines issued by the Federal Reserve Board and the FDIC establish capital adequacy guidelines for bank holding companies and state-chartered banks. The guidelines establish a risk-based capital framework consisting of (1) a definition of capital and (2) a system for assigning risk weights. Capital consists of Tier 1 capital, which includes common shareholders' equity less certain intangibles and a supplementary component called Tier II capital, which includes a portion of the allowance for loan losses. Effective October 1, 1998, the Federal Reserve Board and the FDIC adopted an amendment to their risk-based capital guidelines that permits insured depository institutions to include in their Tier II capital up to 45% of the pre-tax net unrealized gains on certain available for sale equity securities. All assets and off-balance-sheet items are assigned to one of four weighted risk categories ranging from 0% to 100%. Higher levels of capital are required for the categories perceived as representing greater risks. An institution's risk-based capital ratio is determined by dividing its qualifying capital by its risk-weighted assets. The guidelines make regulatory capital requirements more sensitive to differences in risk profiles among banking institutions, take off-balance sheet items into account in assessing capital adequacy and minimize the disincentive to holding liquid, low-risk assets. Banking organizations are generally expected to operate with capital positions well above the minimum rates. Institutions with higher levels of risk, or which experience or anticipate significant growth, are also expected to operate well above minimum capital standards. At December 31, 1998, the Company's and the Bank's Tier I risk-based capital ratio was 13.80% and 13.34%, respectively, well in excess of minimal capital standard. These guidelines focus principally on broad categories of credit risk, although the framework for assigning assets and off-balance sheet items to risk categories does incorporate elements of transfer risk. The risk-based capital ratio does not, however, incorporate other factors that may affect a company's financial condition, such as overall interest rate exposure, liquidity, funding and market risks, the quality and level of earnings, investment or loan concentrations, the quality of loans and investments, the effectiveness of loan and investment policies and management's ability to monitor and control financial and operating risks. In addition to the risk-based guidelines discussed above, the Federal Reserve Board and the FDIC require that a bank holding company and bank which meet the regulators' highest performance and operation standards and which are not contemplating or experiencing significant growth maintain a minimum leverage ratio (Tier I capital as a percent of quarterly average adjusted assets) of 3%. For those financial institutions with higher levels of risk or that are experiencing or anticipating significant growth, the minimum leverage ratio will be increased. At December 31, 1998, the Company's and the Bank's leverage ratio was 9.08% and 8.76%, respectively. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 introduces new standards and disclosure requirements for the way companies report information about operating segments, including related product information. Operating segments are defined based upon the way management organizes segments for making operating decisions and evaluating performance. Information such as segment net earnings, appropriate revenues and expense items and certain balance sheet items are required to be presented, and such amounts are required to be reconciled to the company's combined financial information. SFAS 131 is applicable for all public, for-profit companies and became effective for fiscal years beginning after December 31, 1997. This standard, which was adopted, had no impact on the Company. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 amends the disclosure requirements related to pensions and other postretirement benefits by requiring additional information that will facilitate financial analysis, and eliminating certain disclosures that are considered no longer useful. SFAS No. 132 supersedes the disclosure requirements in SFAS Nos. 87, 88, and 106 but does not change the measurement or recognition of these plans. This Statement is effective for fiscal years beginning after December 15, 1997. The Company has adopted this standard. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Adoption of SFAS 133 is required for all fiscal quarters of fiscal years beginning after June 15, 1999. Adoption of SFAS 133 is not expected to have a material impact upon the Company's consolidated financial condition or results of operations. Effects of Inflation and Changing Prices The financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same magnitude as the prices of goods and services. 25 Year 2000 Readiness Disclosure This Year 2000 disclosure falls within the Year 2000 Information and Readiness Disclosure Act of 1998. Many of the world's computers have recorded years in a two-digit format and, if not corrected, this problem will render such computers incapable of interpreting dates beyond the year 1999, which could disrupt business ("Year 2000 issue"). A company's exposure to uncertainties and costs associated with the Year 2000 issue depends on a number of factors, including software, hardware, the industry in which it operates, and other entities with which it electronically interacts. The Company has established a Year 2000 Compliance Committee (the "Committee") and has adopted a Year 2000 Compliance Plan (the "Y2K Plan"). The objectives of the Committee and the Y2K Plan are to address the Year 2000 issue and prepare the Company for the new millennium. As recommended by the Federal Financial Institutions Examination Council, the Y2K Plan encompasses the following phases: Awareness, Assessment, Renovation, Validation and Implementation. These phases enable the Company to identify risks, develop an action plan, and perform adequate testing and complete certification that its processing systems will be Year 2000 ready. In the Awareness phase, the Company defined the Year 2000 issues, informed management and staff and obtained executive level support and funding. In addition, the Company compiled a comprehensive list of items that may be affected by the Year 2000 compliance issues. Such items include facilities and related non-information technology systems (embedded technology), computer systems, hardware, and services and products provided by third parties. In the Assessment phase, identified items were evaluated to assess whether the items will function properly with the century date change. The items were ranked in the order that they will need to be remediated based on their mission critical nature and the potential impact to the Company. The Renovation phase included an analysis of the items that are affected by the Year 2000 issue, the identification of problem areas and the repair of non-compliant items. The Validation phase includes thorough testing and verification of systems, databases and utilities, including present and forward date testing which includes simulating data conditions in the Year 2000. The Implementation phase will consist of placing all the systems, databases and utilities that have been renovated into production. As of December 31, 1998, the Company has completed the Awareness, Assessment and Renovation phases and a significant portion of the Validation phase with respect to its mission critical applications. The Company expects to have the Validation phase with respect to its mission critical applications completed by March 31, 1999, and the Implementation phase completed by the second quarter of 1999. The Company has begun and continues to survey and communicate with counterparties, intermediaries and vendors ("Third Parties") with whom it has important financial and operational relationships to determine the extent to which they are vulnerable to Year 2000 issues. As of December 31, 1998, the Company has received sufficient information from its Third Parties to conclude that they are in the Renovation, Validation and Implementation phases of their respective plans. However, as of December 31, 1998, the Company has not yet received conclusive information from all Third Parties related to the Renovation, Validation and Implementation phases to predict the outcome of their efforts. There are many risks associated with the Year 2000 issue, including the failure of the Company's computer and non-financial technology systems. Such failures could have a material adverse effect on the Company and may cause system malfunctions, incorrect or incomplete transaction processing resulting in the inability to reconcile accounting books and records. In addition, even if the Company successfully remediates its Year 2000 issues, it can be adversely affected by failures of Third Parties with which the Company has financial or operational relationships to remediate their own Year 2000 issues. The failure of Third Parties to remediate their Year 2000 issues in a timely manner could result in a material financial risk to the Company. Such risks include business interruption or shutdown, financial loss, regulatory actions and legal liability. To mitigate Year 2000 risk, the Company is developing a Year 2000 specific contingency plan, which is expected to be completed by March 31, 1999. Based on current information, the Company does not anticipate that the overall costs related to the implementation of the Y2K Plan to be material in any single year. The Company estimates that the total external cost of implementing its Y2K Plan will amount to approximately $170 thousand. The Year 2000 costs include all activities undertaken on Year 2000 related matters, including, but not limited to, renovation, validation, third party review and contingency planning. However, costs for compensation and benefits of the Company's internal employees have not yet been determined but is not expected to be material. Through the year ended 1998, the Company has expended approximately $20 thousand on the Year 2000 project. All Year 2000 remediation costs are expensed in the period incurred. 26 Forward Looking Statements We discuss certain matters in this report which are not historical facts, but which are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These "forward looking statements" include, but are not limited to, the adequacy of the allowance for loan losses, profitability, interest rate risk, market risk, liquidity and the year 2000 readiness disclosure. The "forward looking statements" in this report reflect what we currently anticipate will happen in each case. What actually happens could differ materially from what we currently anticipate will happen as a result of, but not limited to, changes in economic condition, interest rate fluctuations, levels of loan growth and quality and the successful implementation of its Year 2000 Plan, which includes capital expenditures, costs of remediation and testing, the timetable for implementing the remediation and testing phases of Year 2000 planning, the possible impact of third parties' Year 2000 issues on the Company, management's assessment of contingencies and possible scenarios in its Year 2000 planning. We are not promising to make any public announcement when we think "forward looking statements" in this document are no longer accurate, whether as a result of new information, what actually happens in the future or for any other reason. Table 13 - -------------------------------------------------------------------------------- Quarterly Common Stock Price Range for the years ended December 31, - -------------------------------------------------------------------------------- The common stock is listed on the American Stock Exchange under the symbol "ISB."
High Low Sales Sales Cash Price Price Dividends ------------ ----------- ------------ 1996 First quarter (1)(2)(3) . . . . . . . . . . . $ 9.42 $ 8.41 $0.083 Second quarter (2)(3) . . . . . . . . . . . . 9.17 8.55 0.083 Third quarter (2) (3). . . . . . . . . . . . . . 9.83 8.33 0.083 Fourth quarter (2)(3). . . . . . . . . . . . . . 8.34 9.50 0.083 1997 First quarter (2)(3) . . . . . . . . . . . . . . . $ 14.67 $10.61 $0.09 Second quarter (3). . . . . . . . . . . . . . 17.58 11.92 0.09 Third quarter (3) . . . . . . . . . . . . . . . . 16.67 14.67 0.09 Fourth quarter (3) . . . . . . . . . . . . . . . 21.58 14.75 0.09 1998 First quarter (3) . . . . . . . . . . . . . . . $ 21.25 $18.17 $0.10 Second quarter . . . . . . . . . . . . . . 23.25 19.25 0.10 Third quarter . . . . . . . . . . . . . . . . 20.88 15.31 0.10 Fourth quarter . . . . . . . . . . . . . . . 17.75 14.06 0.10 The number of stockholders of record as of February 24, 1999 was 1,342
- -------------------------------------------------------------------------------- (1) On February 22, 1996, the Company declared a 5% Stock Dividend to be distributed on April 19, 1996 to shareholders of record on March 20, 1996. The high and low sales prices and the cash dividends have been restated to reflect the effects of the stock dividend. (2) On February 27, 1997, the Company declared a 3 for 2 Stock Split to be distributed on April 17, 1997 to shareholders of record on March 20, 1997. The high and low sales prices and the cash dividends have been restated to reflect the effects of the stock split. (3) On February 26, 1998, the Company declared a 3 for 2 Stock Split to be distributed on April 17, 1998 to shareholders of record on March 20, 1998. The high and low sales prices and the cash dividends have been restated to reflect the effects of the stock split. 27 Independent Auditors' Report - -------------------------------------------------------------------------------- Board of Directors and Stockholders Interchange Financial Services Corporation Saddle Brook, New Jersey We have audited the accompanying consolidated balance sheets of Interchange Financial Services Corporation and subsidiaries (the "Company") as of December 31, 1998 and 1997 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Interchange Financial Services Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /S/ Deloitte & Touche LLP Parsippany, New Jersey January 20, 1999 28 Interchange Financial Services Corporation - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS December 31, - -------------------------------------------------------------------------------- (dollars in thousands)
1998 1997 -------------- -------------- Assets Cash and due from banks $ 20,109 $ 19,215 Federal funds sold 23,175 15,400 Interest bearing demand deposits - 1,968 -------------- -------------- Total cash and cash equivalents 43,284 36,583 -------------- -------------- Securities held to maturity at amortized cost (estimated market value of $54,761 and $60,834 for 1998 and 1997, respectively) 54,159 60,442 -------------- -------------- Securities available for sale at estimated market value (amortized cost of $93,872 and $73,640 for 1998 and 1997, respectively) 95,771 75,555 -------------- -------------- Loans 478,717 438,273 Less: Allowance for loan losses 5,645 5,231 -------------- -------------- Net loans 473,072 433,042 -------------- -------------- Premises and equipment, net 9,871 9,548 Foreclosed real estate 84 - Accrued interest receivable and other assets 9,123 9,880 ============== ============== Total assets $685,364 $625,050 ============== ============== Liabilities Deposits Non-interest bearing $107,408 $95,436 Interest bearing 491,324 445,329 -------------- -------------- Total deposits 598,732 540,765 -------------- -------------- Securities sold under agreements to repurchase 8,780 13,028 Short-term borrowings 9,768 - Accrued interest payable and other liabilities 5,712 5,248 Long-term borrowings - 9,879 -------------- -------------- Total liabilities 622,992 568,920 -------------- -------------- Commitments and contingent liabilities Stockholders' equity: Common stock, without par value; 15,000,000 shares authorized; 7,200,133 and 7,139,880 shares issued and outstanding in 1998 and 1997, respectively 5,397 5,396 Capital surplus 21,256 21,557 Retained earnings 35,482 29,698 Accumulated other comprehensive income 1,192 1,185 -------------- -------------- 63,327 57,836 Less: Treasury stock 955 1,706 -------------- -------------- Total stockholders' equity 62,372 56,130 ============== ============== Total liabilities and stockholders' equity $685,364 $625,050 ============== ==============
- -------------------------------------------------------------------------------- See notes to consolidated financial statements. 29 Interchange Financial Services Corporation - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, - -------------------------------------------------------------------------------- (in thousands except per share data)
1998 1997 1996 ------------ ----------- ------------ Interest income Interest and fees on loans $38,904 $35,380 $31,367 Interest on federal funds sold 1,474 896 710 Interest on interest bearing deposits 55 78 104 Interest and dividends on securities Taxable interest income 7,934 8,626 8,894 Interest income exempt from federal income taxes 181 100 123 Dividends 272 230 181 ------------ ----------- ------------ Total interest income 48,820 45,310 41,379 ------------ ----------- ------------ Interest expense Interest on deposits 18,467 17,243 16,425 Interest on securities sold under agreements to repurchase 806 685 267 Interest on short-term borrowings 1 42 246 Interest on long-term borrowings 590 596 45 ------------ ----------- ------------ Total interest expense 19,864 18,566 16,983 ------------ ----------- ------------ Net interest income 28,956 26,744 24,396 Provision for loan losses 951 1,653 747 ------------ ----------- ------------ Net interest income after provision for loan losses 28,005 25,091 23,649 ------------ ----------- ------------ Non-interest income Service fees on deposit accounts 2,551 2,040 1,685 Net gain on sale of securities 1,021 - 242 Net gain on sale of loans - 1,067 - Net gain on sale of branch - - 455 Accretion of discount in connection with acquisition - - 511 Other 1,356 1,667 1,355 ------------ ----------- ------------ Total non-interest income 4,928 4,774 4,248 ------------ ----------- ------------ Non-interest expenses Salaries and benefits 9,437 8,951 8,238 Occupancy 2,405 2,152 2,370 Furniture and equipment 1,035 879 781 Advertising and promotion 865 865 938 Federal Deposit Insurance Corporation assessment 75 58 162 Foreclosed real estate 1 - 252 Acquisition 1,392 - - Other 4,206 4,750 4,751 ------------ ----------- ------------ Total non-interest expenses 19,416 17,655 17,492 ------------ ----------- ------------ Income before income taxes 13,517 12,210 10,405 Income taxes 4,908 4,285 3,654 ------------ ----------- ------------ Net income $ 8,609 $ 7,925 $ 6,751 ============ =========== ============ Basic earnings per common share $1.20 $1.11 $0.95 ===== ===== ===== Diluted earnings per common share $1.19 $1.10 $0.94 ===== ===== =====
- -------------------------------------------------------------------------------- See notes to consolidated financial statements. 30 Interchange Financial Services Corporation - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Years Ended December 31, - -------------------------------------------------------------------------------- (in thousands except share data)
Accumulated Other Comprehensive Retained Comprehensive Common Capital Treasury Income Earnings Income Stock Surplus Stock Total ------------- -------- ------------ -------- -------- ------- ------- Balance at January 1, 1996 $22,482 $673 $5,053 $17,580 $ (6) $45,782 Comprehensive income Net Income $6,751 6,751 6,751 Other comprehensive income, net of taxes Unrealized losses on debt securities (447) Unrealized gains on equity securities 30 ------------ Other comprehensive income (417) (417) (417) ------------ Comprehensive income $6,334 ============ Dividends on common stock (2,173) (2,173) 5% common stock dividend (2,903) 225 2,678 - Fractional shares on 5% common stock dividend (4) (4) Issued 17,708 shares of common stock in connection with Executive Compensation Plan 13 148 161 Purchase 17,232 shares of treasury stock (131) (131) Reissuance of 10,355 shares of treasury stock under Dividend Reinvestment Plan (1) 79 79 -------- ------------ -------- -------- ------- ------- Balance at December 31, 1996 24,157 256 5,291 20,402 (58) 50,048 Comprehensive income Net Income $7,925 7,925 7,925 Other comprehensive income, net of taxes Unrealized gains on debt securities 330 Unrealized gains on equity securities 599 ----------- Other comprehensive income 929 929 929 ----------- Comprehensive income $8,854 =========== Dividends on common stock (2,384) (2,384) Fractional shares on 3 for 2 stock split (3) (3) Issued 12,822 shares of common stock in connection with Executive Compensation Plan 9 159 168 Exercised 73,519 option shares 55 377 432 Purchased 12,200 shares in exchange for option shares (163) (163) Purchased 390 shares of treasury stock (3) (3) Reissuance of 8,153 shares of treasury stock under the Dividend Reinvestment Plan (1) 61 61 Issued 12,738 common shares under Dividend Reinvestment Plan (1) 9 113 122 Issued 229,562 shares of common stock in merger with Washington Interchange Corporation 170 2,765 2,935 Acquired and retired 187,283 shares of common stock held by Washington Interchange Corporation (138) (2,256) - (2,394) Purchased 121,826 shares of common stock (1,543) (1,543) ------------ -------- ------------ -------- -------- ------- ------- Balance at December 31, 1997 29,698 1,185 5,396 21,557 (1,706) 56,130 Comprehensive income Net Income $8,609 8,609 8,609 Other comprehensive income, net of taxes Unrealized gains on debt securities 207 Unrealized losses securities transferred from held to maturity to available to sale - Acquisition (17) Unrealized gain on equity securities 343 Less: gains on disposition of equity securities (526) ----------- Other comprehensive income 7 7 7 ----------- Comprehensive income $8,616 =========== Dividends on common stock (2,825) (2,825) Fractional shares on 3 for 2 stock split and merger shares (5) (5) Forfeiture of bonus stock (49) (49) Issued 12,769 shares of common stock in connection with Executive Compensation Plan 70 162 232 Exercise of 50,394 option shares 1 (366) 638 273 -------- ------------ -------- ------- -------- ------- Balance at December 31, 1998 $35,482 $1,192 $5,397 $21,256 $ (955) $62,372 ======== ============ ======== ======= ======== =======
- -------------------------------------------------------------------------------- All share data has been adjusted for the effects of the 3 for 2 stock split issued on April 17, 1998 to shareholders of record on March 20, 1998 (1) Common shares issued as part of Jersey Bank for Savings' Dividend Reinvestment Plan See notes to consolidated financial statements. 31 INTERCHANGE FINANCIAL SERVICES CORPORATION - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended, December 31, - -------------------------------------------------------------------------------- (in thousands)
1998 1997 1996 ---------- --------- ---------- Cash flows from operating activities Net income $ 8,609 $ 7,925 $ 6,751 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 1,374 1,182 1,052 Amortization of securities premiums 964 818 1,066 Accretion of securities discounts (168) (126) (75) Amortization of premiums in connection with acquisition 384 444 444 Accretion of discount in connection with acquisition - - (511) Provision for loan losses 951 1,653 747 Net gain on sale of loans - (1,067) - Net gain on sale of securities (1,021) - (242) Net (gain) loss on sale of foreclosed real estate - (6) 87 Reduction in carrying value of foreclosed real estate - - 43 (Increase) decrease in carrying value of loans available for sale - (17) 13 Net loss on disposal of fixed assets 3 - 20 Decrease (increase) in operating assets Net repayment (origination) of loans available for sale - 22 (102) Accrued interest receivable (270) 305 446 Deferred taxes 228 (768) 138 Other 437 (1,942) 1,089 (Decrease) increase in operating liabilities Accrued interest payable (88) 111 208 Other 552 543 74 ---------- --------- ---------- Cash provided by operating activities 11,955 9,077 11,248 ---------- --------- ---------- Cash flows from investing activities (Payments for) proceeds from Net originations of loans (31,848) (40,239) (45,978) Purchase of loans (4,627) (19,247) (2,150) Purchase of term federal funds (7,500) - - Repayment of term federal funds 2,500 - - Sale of loans 409 5,945 1,365 Purchase of securities available for sale (28,688) (15,438) (35,413) Maturities of securities available for sale 16,971 4,386 7,578 Sale of securities available for sale 1,622 - 38,349 Sale of foreclosed real estate - 616 652 Purchase of securities held to maturity (30,435) (21,948) (23,497) Maturities of securities held to maturity 26,808 41,167 25,979 Sale of securities held to maturity - - 6,008 Washington Interchange Merger - 37 - Purchase of fixed assets (1,703) (3,464) (1,507) Sale of fixed assets 4 13 - ---------- --------- ---------- Cash used in investing activities (56,487) (48,172) (28,614) ---------- --------- ---------- Cash flows from financing activities Proceeds from (payments for) Deposits in excess of withdrawals 57,967 49,128 14,115 Securities sold under agreements to repurchase and other borrowings 17,300 17,128 27,828 Retirement of securities sold under agreement to repurchase and other borrowings (21,659) (20,454) (12,499) Sale of deposits - - (9,702) Dividends (2,825) (2,384) (2,173) Common stock issued 226 345 156 Treasury stock (49) (1,543) (52) Exercise of option shares 273 269 - ---------- --------- ---------- Cash provided by financing activities 51,233 42,489 17,673 ---------- --------- ---------- Increase in cash and cash equivalents 6,701 3,394 307 Cash and cash equivalents, beginning of year 36,583 33,189 32,882 ========== ========= ========== Cash and cash equivalents, end of year $43,284 $36,583 $33,189 ========== ========= ========== Supplemental disclosure of cash flow information: Cash paid for: Interest $19,953 $18,456 $16,771 Income taxes 3,844 4,985 3,637 Supplemental disclosure of non-cash investing activities: Loans transferred to foreclosed real estate 84 - 179 Loans transferred from available for sale to held to maturity - 1,190 - Decrease (increase) - market valuation of securities available for sale 15 (1,551) 618 Amortization of valuation allowance - securities transferred from available for sale to held to maturity 1 36 25 Washington Interchange merger - 504 -
- -------------------------------------------------------------------------------- See notes to consolidated financial statements. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and practices within the banking industry. The following is a description of the Company's business and its significant accounting and reporting policies used in the preparation of the consolidated financial statements: Nature of Business Interchange Financial Services Corporation (the "Company"), a New Jersey business corporation, is a holding company whose principal subsidiary is Interchange Bank (the "Bank"), formerly known as Interchange State Bank. The Bank is principally engaged in the business of attracting commercial and retail deposits and investing those funds into commercial business and commercial mortgage loans as well as residential mortgage and consumer loans. When demand for loans is low, the Bank invests in debt securities. Currently, the Bank conducts operations typical of a community bank in the northeast region of New Jersey (primarily Bergen County). Principles of consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform with the financial statement presentation of 1998. These reclassifications have no effect on stockholders' equity or net income as previously reported. Prior period financial statements have been restated to include the accounts and results of operations of The Jersey Bank for Savings ("Jersey Bank"), which was acquired by the Company in 1998 in a transaction that was accounted for as a pooling-of-interests. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates pertain to the allowance for loan losses and the fair value of financial instruments. Cash and cash equivalents For the purposes of presentation in the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest bearing demand deposits and federal funds sold. Securities held to maturity and securities available for sale Debt securities purchased with the intent and ability to hold until maturity are classified as securities held to maturity and are carried at cost, adjusted for the amortization of premiums and accretion of discounts. Management determines whether the security will be classified as held to maturity at the time of purchase. All other securities, including equity securities, are classified as securities available for sale. Securities classified as available for sale may be sold prior to maturity in response to, but not limited to, changes in interest rates, changes in prepayment risk or for asset/liability management strategies. These securities are carried at fair value and any unrealized gains and losses are reported, net of taxes, as a separate component of stockholders' equity. Gains and losses from the sale of these securities are determined using the specific identification method. Loans Generally, loans are carried at the principal amounts outstanding, net of unearned discount and deferred loan origination fees and costs. Interest income is accrued and credited to income as earned at the applicable interest rates. Origination fees and certain direct loan origination costs are deferred and amortized to interest income over the estimated life of the loan as an adjustment to the yield. Mortgage loans held for sale are carried at lower of aggregate cost or market value. Gains and losses on loans sold are included in non-interest income. Loans are placed on nonaccrual status when, in the opinion of management, the future collection of interest or principal according to contractual terms may be doubtful or when principal or interest payments are in arrears 90 days or more. Amounts accrued are evaluated for collectibility. Interest income on nonaccrual loans is recognized on a cash basis, to the extent there is no doubt of the future collection of principal. Loans are returned to accrual status when management deems that collection of principal and interest is reasonable and probable. Loans are considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to contractual terms of the loan agreement. The collection of all amounts due according to contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. All commercial and commercial mortgage loans are evaluated for impairment. One-to-four family residential mortgage loans and consumer loans with small balances are pooled together as homogeneous loans and, accordingly, are not covered by Statement of Financial Accounting Standards 114. "Accounting by creditors for Impairment of a Loan." All nonaccrual commercial and commercial mortgage loans as well as non-homogeneous one-to-four family residential mortgage loans and consumer loans are considered impaired. The impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the underlying collateral. The fair value of collateral, reduced by costs to sell on a discounted basis, is utilized if a loan is collateral dependent or foreclosure is probable. The Bank acquired the assets and liabilities of a failed institution from the Federal Deposit Insurance Corporation (the "FDIC") in July 1991, which was accounted for using the purchase method of accounting. Consideration received from the FDIC was assigned to the fair value of the loans acquired, the allowance for loan losses and acquisition costs. Excess consideration was accreted into income over a five-year period, which ended in August 1996. Allowance for loan losses The allowance for loan losses is established through charges to income. Loan losses are charged against the allowance for loan losses when management believes that the future collection of principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. If the allowance 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 losses is increased. The Company's allowance is an amount considered adequate to absorb possible losses on existing loans that may become uncollectible based on management's evaluations of the size and current risk characteristics of the loan portfolio. The evaluations consider such factors as changes in the composition and volume of the loan portfolio, the impact of changing economic conditions on the credit worthiness of the borrowers, review of specific problem loans and management's assessment of the inherent risk and overall quality of the loan portfolio. 33 Premises and equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method. Premises and equipment are depreciated over the estimated useful lives of the assets. Leasehold improvements are amortized over the term of the lease, if shorter. Estimated lives are 30 to 40 years for premises and 3 to 20 years for furniture and equipment. Maintenance and repairs are charged to expenses as incurred, while renewals and major improvements are capitalized. Foreclosed real estate Foreclosed real estate is carried at the lower of cost or estimated fair value, less estimated selling costs, at time of foreclosure. When a property is acquired, the excess of the carrying amount over fair value, if any, is charged to the allowance for loan losses. Subsequent valuations are performed periodically and the carrying value is adjusted by a charge to foreclosed real estate expense to reflect any subsequent declines in the estimated fair value. As a result, further declines in real estate values may result in increased foreclosed real estate expense. Routine holding costs are charged to foreclosed real estate expense as incurred. Income taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using current tax rates. The effect on deferred taxes of a change in tax rates is recognized in income in the period the change occurs. Deferred tax assets are reduced, through a valuation allowance, if necessary, by the amount of such benefits that are not expected to be realized based on current available evidence. Per share amounts Basic earnings per common share is computed by dividing income available to common shareholders, less dividends on the preferred stock, if any, by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed similar to that 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 all potentially dilutive common shares, stock options, were issued during the reporting period. Recently issued accounting pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Adoption of SFAS 133 is required for all fiscal quarters of fiscal years beginning after June 15, 1999. Adoption of SFAS 133 is not expected to have a material impact upon the Company's consolidated financial condition or results of operations. Note 2. Acquisitions On May 31, 1998, the Company completed its acquisition of Jersey Bank. The transaction was accounted for as a pooling of interests, and accordingly, all financial information presented herein has been restated to the earliest period presented. Each of the shares of Jersey's common stock, including shares of common stock that had been converted from shares of preferred stock, was converted into 1.5 shares of the Company's common stock. Total consideration tendered in the transaction amounted to 780,198 shares of the Company's common stock. In 1994, the Bank assumed the deposit liabilities of Volunteer Federal Savings Association of Little Ferry, New Jersey. The premiums paid to acquire the deposits in the Volunteer transaction and in a 1991 branch acquisition are being amortized over a period ranging from five to seven years. Amortization in 1998, 1997 and 1996, which is included in non-interest expenses, amounted to $383,000, $444,000 and $444,000, respectively. Note 3. Restrictions on Cash and Due from Banks The subsidiary bank is required to maintain a reserve balance with the Federal Reserve Bank based upon the level of its deposit liability. The average amount of this reserve balance for 1998 and 1997 was approximately $750,000 and $7,310,000, respectively. In 1998, the Company implemented a strategy whereby certain deposits were reclassified as non-transactional accounts for the purpose of calculating the minimum reserve requirement. As a result, the average reserve balance for 1998 decreased by $6,560,000, as compared to 1997. 34 Note 4. Securities Held to Maturity and Securities Available for Sale Securities held to maturity and securities available for sale consist of the following: (in thousands)
---------------------------------------------------------------- December 31, 1998 ---------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value -------------- -------------- -------------- -------------- Securities held to maturity Obligations of U.S. Treasury $ 15,992 $ 180 - $ 16,172 Mortgage-backed securities 18,921 227 $23 19,125 Obligations of U.S. agencies 7,986 175 - 8,161 Obligations of states & political subdivisions 11,111 48 6 11,153 Other debt securities 149 1 - 150 -------------- -------------- -------------- -------------- 54,159 631 29 54,761 -------------- -------------- -------------- -------------- Securities available for sale Obligations of U.S. Treasury 33,264 777 - 34,041 Mortgage-backed securities 42,824 398 156 43,066 Obligations of U.S. agencies 13,687 190 53 13,824 Equity securities 4,097 743 - 4,840 -------------- -------------- -------------- -------------- 93,872 2,108 209 95,771 -------------- -------------- -------------- -------------- Total securities $148,031 $2,739 $238 $150,532 ============== ============== ============== ============== ---------------------------------------------------------------- December 31, 1997 ---------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value -------------- -------------- -------------- -------------- Securities held to maturity Obligations of U.S. Treasury $ 22,134 $ 122 - $ 22,256 Mortgage-backed securities 28,398 200 $ 96 28,502 Obligations of U.S. agencies 6,711 166 - 6,877 Obligations of states & political subdivisions 3,049 - - 3,049 Other debt securities 150 - - 150 -------------- -------------- -------------- -------------- 60,442 488 96 60,834 -------------- -------------- -------------- -------------- Securities available for sale Obligations of U.S. Treasury 35,452 605 74 35,983 Mortgage-backed securities 26,871 308 30 27,149 Obligations of U.S. agencies 6,954 70 12 7,012 Equity securities 4,363 1,048 - 5,411 -------------- -------------- -------------- -------------- 73,640 2,031 116 75,555 -------------- -------------- -------------- -------------- Total securities $134,082 $2,519 $212 $136,389 ============== ============== ============== ==============
At December 31, 1998, the contractual maturities of securities held to maturity and securities available for sale are as follows: (in thousands)
Securities Securities Held to Maturity Available for Sale ------------------------------ ----------------------------- Amortized Market Amortized Market Cost Value Cost Value -------------- ------------- ------------- ------------- Within 1 year $12,735 $12,767 $14,191 $14,277 After 1 but within 5 years 19,921 20,268 30,944 31,862 After 5 but within 10 years 10,195 10,231 11,234 11,417 After 10 years 11,308 11,495 33,406 33,375 Equity securities - - 4,097 4,840 -------------- ------------- ------------- ------------- Total $54,159 $54,761 $93,872 $95,771 ============== ============= ============= =============
35 Gross realized gains from the sale of securities available for sale amounted to $876,000 and $452,000 in 1998 and 1996, respectively, while gross realized losses amounted to $217,000 in 1996. There were no gross realized gains in 1997 and there were no gross realized losses in 1998 or 1997. These amounts are included in net gains on sale of securities. Also, included in net gains on sale of securities for 1998 is a gain of $145,000 realized from the call before maturity of a security. There were no sales of securities held to maturity during the years ended, December 31, 1998 and 1997. Proceeds from the sale of securities held to maturity (scheduled to mature within 3 months) totaled $6,008,000 during the year ended December 31, 1996 that resulted in realized gains of $7,000. During 1998, securities with a book value totaling $8.2 million, which had previously been classified by Jersey Bank as held to maturity, were transferred to available for sale upon the consummation of the acquisition. These securities were reclassified to available for sale because they have a higher degree of interest rate sensitivity and do not conform to the Company's investment objectives or to its policy for managing interest rate risk. The transfer of these securities was done in conformance with Statement of Financial Accounting Standards No.115, "Accounting for Certain Investments in Debt and Equity Securities". At the date of transfer, the market value of these securities was $8.1 million. Securities with carrying amounts of $25.1 million and $28.4 million at December 31, 1998 and 1997, respectively, were pledged for public deposits, Federal Home Loan Bank advances, securities sold under repurchase agreements and other purposes required by law. Note 5. Loans The composition of the loan portfolio is summarized as follows: (in thousands) ------------------------------- December 31, ------------------------------- 1998 1997 ------------ ------------ Commercial and financial $64,067 $51,573 Real estate Residential 246,955 233,281 Commercial 148,875 134,972 Construction 974 4,229 Installment 3,233 4,117 Lease financing 9,613 10,101 Term federal funds 5,000 - ------------ ------------ 478,717 438,273 Allowance for loan losse 5,645 5,231 ------------ ------------ Net loans $473,072 $433,042 ============ ============ Nonperforming loans include loans which are accounted for on a nonaccrual basis and troubled debt restructurings. Nonperforming loans are as follows: (in thousands) ------------------------------------------------- D e c e m b e r 31, ------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Nonaccrual loans Commercial and financial $ 266 $ 126 $ 820 Residential real estate 583 892 1,521 Commercial real estate 346 479 173 Installment 3 17 13 ----------- ------------ ------------ $1,198 $1,514 $2,527 =========== ============ ============ Troubled debt restructurings Commercial and financial $528 $573 $725 =========== ============ ============ Interest income that would have been recorded during the year on nonaccrual loans outstanding at year-end in accordance with original terms $147 $147 $277 Interest income included in net income during the year on nonaccrual loans outstanding at year-end $71 $81 $138 Loans on which interest is accruing and included in income, but which were contractually past due 90 days or more as to principal or interest payments amounted to $141,000 and $25,000 at December 31, 1997 and 1996, respectively. There were no such loans at December 31, 1998. Officers and directors of the Company and their affiliated companies are customers and are engaged in transactions with the Company in the ordinary course of business on substantially the same terms as those prevailing with other non-affiliated borrowers and suppliers. The following table summarizes activity with respect to these loans: (in thousands) ----------------------------- Years Ended December 31, ----------------------------- 1998 1997 -------------- ------------- Balance at beginning of year $10,160 $7,056 Less: former directors (3,574) - Additions 2,014 5,359 Reductions (977) (2,255) ============== ============= Balance at end of year $7,623 $10,160 ============== ============= 36 Note 6. Allowance for Loan Losses The Company's recorded investment in impaired loans is as follows: (in thousands)
--------------------------------------------------------------- December 31, --------------------------------------------------------------- 1998 1997 ----------------------------- ---------------------------- Investment Related Investment Related in Allowance in Allowance Impaired for Loan Impaired for Loan Loans Losses Loans Losses -------------- ------------- ------------- -------------- Impaired loans With a related allowance for loan losses Commercial and financial $ 748 $ 91 $699 $97 Commercial real estate 346 52 479 72 Without a related allowance for loan losses Commercial and financial 4 - - - ============== ============= ============= ============== $1,098 $143 $1,178 $169 ============== ============= ============= ==============
- -------------------------------------------------------------------------------- The impairment of the above loans was measured based on the fair value of collateral. The following table sets forth certain information about impaired loans: (in thousands) ------------------------------ Years Ended December 31, ------------------------------ 1998 1997 ------------ ------------- Average recorded investment $1,247 $1,221 ============ ============= Interest income recognized during time period that loans were impaired, using cash-basis method of accounting $74 $67 ============ ============= Changes in the allowance for loan losses are summarized as follows: (in thousands)
---------------------------------------------- Year Ended December 31, ---------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Balance at beginning of year $5,231 $3,968 $3,926 Additions (deductions) Provision charged to operations 951 1,653 747 Recoveries on loans previously charged off 83 183 208 Loans charged off (620) (573) (913) ------------ ------------ ------------ Balance at end of year $5,645 $5,231 $3,968 ============ ============ ============
- -------------------------------------------------------------------------------- For years ended December 31, 1998, 1997 and 1996, the provisions charged to expense for federal income tax purposes amounted to approximately $537,000, $390,000, and $705,000, respectively. Note 7. Premises and Equipment, net Premises and equipment are summarized as follows: (in thousands) ----------------------------------- December 31, ----------------------------------- 1998 1997 -------------- -------------- Land $1,588 $1,588 Buildings 3,187 3,097 Furniture, fixtures and equipment 5,807 5,726 Leasehold improvements 6,813 5,999 -------------- -------------- 17,395 16,410 Less: accumulated depreciation and amortization 7,524 6,862 -------------- -------------- $9,871 $9,548 ============== ============== Note 8. Deposits Deposits are summarized as follows: (in thousands) ----------------------------------- December 31, ----------------------------------- 1998 1997 --------------- ---------------- Non-interest bearing demand deposits $107,408 $95,436 Interest bearing demand deposits 194,177 154,301 Money market deposits 50,665 41,815 Savings deposits 76,026 81,202 Time deposits 170,456 168,011 --------------- ---------------- $598,732 $540,765 =============== ================ At December 31, 1998 and 1997, the carrying amounts of certificates of deposit that individually exceed $100,000 amounted to $25,119,000, and $33,724,000, respectively. Interest expense related to such deposits was approximately $1,616,000, $1,627,000, and $1,113,000 in 1998, 1997, and 1996, respectively. 37 Note 9. Securities Sold Under Agreements to Repurchase and Short-term Borrowings Securities sold under agreements to repurchase and short-term borrowings are summarized as follows: (in thousands) ----------------------------- December 31, ----------------------------- 1998 1997 ------------ ------------- Securities sold under agreements to repurchase $8,780 $13,028 Federal Home Loan Bank advances 9,768 - ============ ============= $18,548 $13,028 ============ ============= The Bank has a $57.7 million line of credit available through its membership in the Federal Home Loan Bank of New York ("FHLB"). Note 10. Long-term Borrowings In 1997, long-term borrowings were comprised of two FHLB advances consisting of a $3.9 million advance with a 20-year amortization term, a fixed interest rate of 6.31% maturing in November 1999; and a $6.0 million advance that has a fixed rate of 5.72% maturing in December 1999 and is collateralized by U.S. Treasury securities. The FHLB has had an option to call the $6.0 million advance since December 1998. These borrowings are recorded as short-term borrowings in 1998. Note 11. Benefit Plans In 1993, the Company established a non-contributory defined benefit pension plan covering all eligible employees. The funding policy is to contribute an amount that is at least the minimum required by law. The plan assets consist of investments in fixed income funds and equity mutual funds. Retirement income is based on years of service under the plan and, subject to certain limits, on final average compensation. Effective January 1, 1994, the Company established a supplemental plan that provides for retirement income that would have been paid but for the limitation under the qualified plan. Effective August 1, 1994, the Company established a retirement plan for all directors of the Company or the Bank who are not employees of the Company or of any subsidiary or affiliate of the Company. As a part of this Plan, the Company contributes annually to a life insurance policy or annuity contract for each director with 5 years or more of service, as follows: Years of Service Amount Contributed ---------------- ------------------ 6 $5,000 7 6,000 8 7,000 9 8,000 10 9,000 11 or more 10,000 The Company owns the life insurance policies or annuity contracts. Retirement income to a director who has completed five years of service through ten years of service will be based on the cash value of the life insurance policy or annuity contract. After ten years of service, the retirement income will be the greater of the cash value of the life insurance policy or annuity contract or an amount determined by multiplying the standard annual retainer fees (currently $11,000) at the director's retirement day by the director's years of service. Net pension cost of each plan consists of the following: (in thousands) The following are the components of the net periodic benefit cost for the years ended December 31,
Pension Plan Supplemental Plan Directors' Plan ------------------------ ------------------- ----------------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 -------- ------- ------- ------ ----- ------- -------- ------ ------ Service cost $222 $195 $179 $22 $13 $12 $59 $47 $40 Interest cost 65 53 37 12 4 3 76 71 69 Expected return on plan assets (71) (51) (41) - - - - - - Amortization of prior service cost - - - 8 1 1 147 147 147 Recognized net actuarial gain (6) - - - - - -------- ------- ------- ------ ----- ------- -------- ------ ------ Net periodic benefit cost $210 $197 $175 $42 $18 $16 $282 $265 $256 ======== ======= ======= ====== ===== ======= ======== ====== ======
38 The following table sets forth the funded status, as of December 31, of the plans and amounts recognized in the Company's Consolidated Balance Sheets and the major assumptions used to determine these amounts: (dollars in thousands)
Pension Plan Supplemental Plan Directors' Plan -------------------- --------------------- ----------------------- 1998 1997 1998 1997 1998 1997 --------- --------- ----------- --------- ------------ ---------- Change in pension obligation Pension obligation at beginning of year $1,013 $710 $ 70 $ 50 $ 1,074 $ 931 Service cost 222 195 22 13 59 47 Interest cost 65 53 12 4 76 71 Actuarial (gain) loss (1) (74) - 15 - (15) - Benefits paid (3) (4) - - - - Other (1) - 59 81 3 - 25 ---------- --------- ----------- --------- ------------ ---------- Pension obligation at end of year 1,223 1,013 200 70 1,194 1,074 ---------- --------- ----------- --------- ------------ ---------- Change in plan assets Fair value of plan assets at beginning of year 738 644 - - - - Actual return on plan assets 164 97 - - - - Employer contribution 165 - - - - - Change in market value - 1 - - - - Benefits paid (3) (4) - - - - ----------- -------- ----------- --------- ------------ ---------- Fair value of plan assets at end of year 1,064 738 - - - - ----------- -------- ----------- --------- ------------ ---------- Funded Status (159) (275) (200) (70) (1,194) (1,074) Unrecognized net actuarial (gain) loss (227) (65) 16 1 39 54 Unrecognized prior service cost (5) (6) 81 7 92 239 Adjustment for additional liability - - - - - (293) =========== ======== =========== ========= ============= ========= Accrued pension cost $ (391) $(346) $ (103) $ (62) $ (1,063) $ (1,074) =========== ======== =========== ========= ============= ========= Weighted-average assumptions (2) Discount rate 7.25% 7.25% 7.25% 7.25% 7.25% 7.25% Expected return on plan assets 8.00 8.00 8.00 8.00 8.00 8.00 Rate of compensation increase 5.00 5.00 N/A N/A N/A N/A
- -------------------------------------------------------------------------------- (1) The breakdown of these items was not available for 1997. Therefore, the net difference is included in Other in order to arrive at the pension obligation at the end of the year. (2) Weighted average assumptions were applied at the beginning of the period. The Company has a Capital Investment Plan (the "Plan") which permits employees to make basic contributions up to 4% of base compensation. In 1998, the Plan was amended to permit employees to make basic contributions up to 6%. Additional contributions up to 10% of compensation may be made when coupled with basic contributions. Under the Plan, the Company provides a matching contribution equal to 50% of the basic contribution of each participant. In addition, the Company makes a fixed contribution on behalf of each participant equal to 1% of such participant's base compensation. The Company's contribution to the Plan amounted to $167,000 and $133,000 in 1998 and 1997, respectively. 39 Note 12. Stock Option Plan In 1989, the Company adopted a stock option plan, retitled the Stock Option and Incentive Plan of 1997 (the "Stock Plan") that covers certain key employees. Under this plan, as amended, a maximum of 637,875 shares of common stock may be granted at fair market value at the date of grant. Options granted expire if not exercised within ten years of date of grant and are exercisable according to a vesting schedule, starting one year from the date of grant. If compensation cost for Stock Plan awards had been measured based on the fair value of the stock options awarded at the grant dates, net income and diluted earnings per common share would have been reduced to the pro-forma amounts below for the years ended December 31: (in thousands except share data) 1998 1997 1996 ---------- --------- ---------- Net income: As reported $8,609 $7,925 $6,751 Pro-forma 8,572 7,919 6,748 Diluted earnings per common share As reported $1.19 $1.10 $.94 Pro-forma 1.18 1.10 .94 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yield of 2.20%, 2.25%, 3.95%; expected volatility of 23.33%, 21.94% and 21.78%; risk-free interest rate of 5.62%, 5.51% and 6.26%; and expected lives of 7 years. The effects of applying these assumptions in determining the pro-forma net income may not be representative of the effects on pro-forma net income for future years. A summary of the Stock Plan's status as of December 31, and changes during the years then ended is presented below:
1998 1997 1996 ------------------- ------------------ ------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- -------- -------- -------- -------- --------- Outstanding at January 1 121,935 $ 6.62 195,604 $ 6.21 177,296 $ 5.99 Granted 49,875 18.17 2,250 16.00 18,308 8.36 Exercised (50,394) 5.27 (75,919) 5.85 - - Forfeited (10,592) 12.05 - - --------- -------- -------- Outstanding at December 31 110,824 11.91 121,935 6.62 195,604 6.21 ========= ======== ======== Options exercisable at December 31 58,440 7.29 107,479 6.22 177,296 5.99 ========= ======== ======== Weighted-average fair value of options granted during the year ended December 31 (per option) $5.98 $4.29 $1.85 The following table summarizes information about options outstanding under the Stock Plan at December 31, 1998: Options Outstanding Options Exercisable - ------------------------------------------------------------ ------------------------ Weighted- Average Weighted- Weighted- Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price - --------------- -------------- ----------- ---------- ------------------------ Under $5 4,570 0.96 $4.71 4,570 $4.71 $ 5 - $10 58,629 5.34 7.47 53,120 7.38 $15 - $20 47,625 9.06 18.07 750 16.00 ============== =========== 110,824 58,440 ============== ===========
Occasionally, the Company will acquire shares of its common stock and place them in treasury stock. The shares are intended to be issued for the exercise of stock options and the grants of restricted stock to executive management. There were 74,500 and 134,025 shares of common stock held in treasury at December 31, 1998 and 1997, respectively. 40 Note 13. Capital The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank's capital amounts and the Bank's classification, under the regulatory framework for prompt corrective action, are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets and Tier I capital to average assets. Management believes, as of December 31, 1998, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1998, the most recent notification from the Federal Reserve Bank categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized," the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution's category. 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 December 31, 1998: Total Capital (to Risk Weighted Assets): The Company $66,474 15.12 % $35,149 8.00 % N/A N/A The Bank 63,777 14.59 34,976 8.00 $43,721 10.00 % Tier 1 Capital (to Risk Weighted Assets): The Company 60,646 13.80 17,575 4.00 N/A N/A The Bank 58,312 13.34 17,488 4.00 26,232 6.00 Tier 1 Capital (to Average Assets): The Company 60,646 9.08 20,041 3.00 N/A N/A The Bank 58,312 8.76 19,979 3.00 33,299 5.00 As of December 31, 1997: Total Capital (to Risk Weighted Assets): The Company $59,299 14.44 % $32,852 8.00 % N/A N/A The Bank 57,448 14.05 32,705 8.00 $40,882 10.00 % Tier 1 Capital (to Risk Weighted Assets): The Company 54,166 13.19 16,426 4.00 N/A N/A The Bank 52,338 12.80 16,353 4.00 24,529 6.00 Tier 1 Capital (to Average Assets): The Company 54,166 8.79 18,482 3.00 N/A N/A The Bank 52,338 8.53 18,403 3.00 30,672 5.00
41 Note 14. Earnings Per Share The reconciliation of the numerators and denominators of the basic and diluted earnings per common share computations for the years ended December 31, are as follows: (in thousands except per share data)
1998 1997 1996 ---------------------------- ---------------------------- -------------------------------- Weighted Per Weighted Per Weighted Per Average Share Average Share Average Share Income Shares Amount Income Shares Amount Income Shares Amount -------- ---------- -------- -------- ---------- -------- --------- ----------- --------- Basic Earnings per Common Share Income available to common shareholders $8,609 7,189 $1.20 $7,925 7,132 $1.11 $6,751 7,124 $0.95 ======== ======== ========= Effect of Dilutive Shares Options issued to management 48 90 66 ---------- ---------- ----------- Diluted Earnings per Common Share Income available to common shareholders $8,609 7,237 $1.19 $7,925 7,222 $1.10 $6,751 7,190 $0.94 ======== ========== ========= ======== ========== ======== ========= =========== ========== 42 Note 15. Other Non-interest Expenses Expenses included in other non-interest expenses which exceed one percent of the aggregate of total interest income and non-interest income for the years ended, December 31, as follows: (in thousands) 1998 1997 1996 ------- ------- ------- Professional fees $ 1,184 $1,216 $1,088 Data Processing 538 548 490 Directors' fees, travel and retirement 88 607 553 Note 16. Income Taxes Income tax expense for the years ended December 31, is summarized as follows: (in thousands) 1998 1997 1996 ---------- --------- --------- Federal: current $4,399 $4,304 $3,150 deferred (344) (600) 142 State: current 315 752 354 deferred 538 (171) 8 ---------- --------- --------- $4,908 $4,285 $3,654 ========== ========= =========
The effects of temporary differences that give rise to significant portions of the Company's deferred tax assets and liabilities as of December 31, are as follows: (in thousands)
1998 1997 --------- --------- Deferred tax assets Excess of book over tax allowance for loan losses $1,567 $1,584 Excess of book over tax depreciation 263 222 Excess of book over tax provision for benefit plan expense 571 631 Core deposit premium 179 157 Other 59 33 --------- --------- Total deferred tax assets 2,639 2,627 --------- --------- Deferred tax liabilities Unrealized gains - securities available for sale 707 731 Loan origination fees 294 97 Other 103 95 --------- --------- Total deferred tax liabilities 1,104 923 --------- --------- Net deferred tax assets $1,535 $1,704 ========= =========
Under present tax law, banks with average total assets under $500 million are permitted to compute a tax bad debt deduction based on an average loss experience ratio, while banks with over $500 million in average total assets must compute a tax bad debt deduction based on actual losses. The Company is required to use the actual loss method when calculating the bad debt deduction for tax purposes. The Company is also required to amortize its tax bad debt reserves, which have accumulated under the average loss method in taxable income over a four-year period. However, since the difference between the average loss experience method and the actual loss method has been recorded as a temporary difference, this change will have no effect on the Company's statement of income in future years. Net deferred tax assets are included in other assets on the consolidated balance sheet. It is more likely than not that deferred tax assets of $1.5 million will be principally realized through carryback to taxable income in prior years and future reversals of existing taxable temporary differences and, to a lesser extent, future taxable income and tax planning strategies. The provision for income taxes differs from the expected statutory provision as follows: ---------------------------- December 31, ---------------------------- 1998 1997 1996 ------ ------ ------ Expected provision at statutory rate 34 % 34 % 34 % Difference resulting from: State income tax, net of federal benefit 2 3 2 Interest income exempt from federal taxes (1) (2) (1) Merger related expenses 1 - - ======= ======= ====== 36 % 35 % 35 % ======= ======= ====== 43 Note 17. Restrictions of Subsidiary Bank Dividends Under New Jersey State law, the Bank may declare a dividend only if, after payment thereof, its capital would be unimpaired and its remaining surplus would equal 50 percent of its capital. At December 31, 1998, undistributed net assets of the Bank were $59,591,000 of which $55,274,000 was available for the payment of dividends. In addition, payment of dividends is limited by the requirement to meet the capital guidelines issued by the Board of Governors of the Federal Reserve System. Note 18. Commitments and Contingent Liabilities The Company has contingent liabilities and outstanding commitments that include agreements to extend credit which arise in the normal course of business and which are not shown in the accompanying financial statements. Loan commitments are made to accommodate the financial needs of the Company's customers. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. They are issued primarily to support performance bonds. Both arrangements have credit risks essentially the same as that involved in extending loans to customers and are subject to the normal credit policies of the Company. A summary of commitments to extend credit at December 31, are summarized as follows: (in thousands) 1998 1997 --------------- ------------- Credit card loans $ 6,019 $ 5,468 Home equity loans 55,435 49,174 Other loans 55,516 50,230 Standby letters of credit 1,700 1,449 --------------- ------------- $118,670 $106,321 =============== ============= The minimum annual rental under non-cancelable operating leases for premises and equipment, exclusive of payments for maintenance, insurance and taxes, is summarized as follows: (in thousands) 1999 $1,130 2000 955 2001 742 2002 580 2003 461 thereafter 2,435 ------ Total minimum lease payments $6,303 ====== Rent expense for all leases amounted to approximately $1,101,000, $981,000 and $1,090,000 in 1998, 1997, and 1996, respectively. In 1998, the Company did not lease real estate from affiliates. In 1997 and 1996, certain real estate was leased from one and two companies, respectively, that were affiliated with directors of the Company. Rental expense associated with such leases was $30,000 and $143,000 for the years ended December 31, 1997 and 1996, respectively. A director of the Company also provided legal services through his affiliated firm. Fees paid for these services amounted to approximately $331,000, $382,000 and $375,000 in 1998, 1997, and 1996, respectively. The Company is also a party to routine litigation involving various aspects of its business, none of which, 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. 44 Note 19. Fair Value of Financial Instruments Fair value estimates of the Company's financial instruments are made at a particular point in time, based on relevant market information and information about the financial instrument. Fair values are most commonly derived from quoted market prices. In the event market prices are not available, fair value is determined using the present value of anticipated future cash flows. This method is sensitive to the various assumptions and estimates used and the resulting fair value estimates may be significantly affected by minor variations in those assumptions or estimates. In that regard, it is likely the Company in immediate settlement of the financial instruments would realize amounts different from the fair value estimates. The following table sets forth the carrying amounts and estimated fair values of the Company's financial instruments: (in thousands) ------------------------------------- December 31, ------------------------------------- 1998 1997 ---------------- ------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- --------- --------- -------- Financial assets: Cash and cash equivalents $43,284 $43,284 $36,583 $36,583 Securities held to maturity 54,159 54,761 60,442 60,834 Securities available for sale 95,771 95,771 75,555 75,555 Loans, net 473,072 475,272 433,042 433,831 -------- --------- --------- -------- $666,286 $669,088 $605,622 $606,803 ======== ========= ========= ======== Financial liabilities: Deposits $598,732 $599,375 $540,765 $540,472 Short-term borrowings 18,548 18,548 13,028 13,028 Long-term borrowings - - 9,879 9,872 -------- --------- --------- -------- $617,280 $617,923 $563,672 $563,372 ======== ========= ========= ======== The methods and significant assumptions used to determine the estimated fair values of the Company's financial instruments are as follows: Cash and cash equivalents Cash and cash equivalents include cash on hand, amounts due from banks, interest bearing demand deposit and federal funds sold. The estimated fair values of these financial instruments approximate their carrying values since they mature overnight or are due on demand. Securities held to maturity and securities available for sale Estimated fair values are based principally on quoted market prices, where available, or dealer quotes. In the event quoted market prices are not available, fair values are estimated using market prices of similar securities. Loans The loan portfolio is segregated into various categories for purposes of estimating fair value. The fair values of certain loans that reprice frequently and have no significant change in credit risk is assumed to equal their carrying values. The fair value of other types of loans is estimated by discounting the future cash flows using interest rates that are currently being offered for loans with similar terms to borrowers with similar credit quality. The fair value of nonperforming loans is estimated using methods employed by management in evaluating the allowance for loan losses. In prior years, the Company in addition to the above, valued certain homogenous loan categories on a pool basis using quoted market prices for similar loans sold. Deposits The estimated fair values of deposits with no stated maturity, such as demand deposits, savings, NOW and money market accounts are, by definition, equal to the amount payable on demand at the reporting date. The fair values of fixed-rate certificates of deposit are based on discounting the remaining contractual cash flows using interest rates currently being offered on certificates of deposit with similar attributes and remaining maturities. Short-term borrowings The fair value of short-term borrowings is assumed to equal the carrying value in the financial statements, as these instruments are short-term. Long-term borrowings Fair value estimates of long-term borrowings are based on discounting the remaining contractual cash flows using rates which are comparable to rates currently being offered for borrowings with similar remaining maturities. Off-balance-sheet financial instruments The fair values of commitments to extend credit and unadvanced lines of credit approximate the fees currently charged to enter into similar transactions, considering the remaining terms of the commitments and the credit-worthiness of the potential borrowers. At December 31, 1998 and 1997, the estimated fair values of these off-balance-sheet financial instruments were immaterial. 45 Note 20. Parent Company Information (in thousands)
------------------------------ December 31, ------------------------------ Condensed balance sheets 1998 1997 1996 -------- -------- -------- Assets Cash $ 355 - $ 6 Securities available for sale 1,321 $2,372 1,375 Investment in subsidiaries Bank 59,591 53,673 48,688 Other 646 646 142 Dividends receivable 720 570 525 Other assets 602 (418) (21) -------- -------- -------- Total assets $63,235 $56,843 $50,715 ======== ======== ======== Liabilities Dividends payable $ 720 $ 570 $ 525 Other liabilities 143 143 142 -------- -------- -------- 863 713 667 -------- -------- -------- Stockholders' equity Common stock 5,397 5,396 5,291 Capital Surplus 21,256 21,557 20,402 Retained earnings 35,482 29,698 24,157 Accumulated other comprehensive income 1,192 1,185 256 -------- -------- -------- 63,327 57,836 50,106 Less: Treasury stock 955 1,706 58 -------- -------- -------- Total stockholders' equity 62,372 56,130 50,048 -------- -------- -------- Total liabilities and stockholders' equity $63,235 $56,843 $50,715 ======== ======== ======== - -------------------------------------------------------------------------------------------- ------------------------------ Years Ended December 31, ------------------------------ Condensed statements of income 1998 1997 1996 -------- -------- -------- Dividends from subsidiary bank $2,556 $3,798 $3,400 Dividends on equity securities 37 35 - Net gain on sale of securities 876 - - Management fees 39 40 45 -------- -------- -------- Total revenues 3,508 3,873 3,445 -------- -------- -------- Operating expenses 643 366 206 -------- -------- -------- Income before equity in undistributed earnings of subsidiaries 2,865 3,507 3,239 Equity in undistributed earnings of subsidiaries 5,744 4,418 3,512 -------- -------- -------- Net income $8,609 $7,925 $6,751 ======== ======== ======== - -------------------------------------------------------------------------------------------- ------------------------------ Years Ended December 31, ------------------------------ Condensed statements of cash flows 1998 1997 1996 -------- -------- -------- Cash flows from operating activities: Net income $8,609 $7,925 $6,751 Adjustments to reconcile net income to net cash provided by operating activities Net gain on sale of securities (876) - - Increase in other assets (1,048) (45) (39) Increase in dividends payable 150 45 40 Increase in other liabilities - 1 - Equity in undistributed income of subsidiaries (5,744) (4,418) (3,512) -------- -------- -------- Net cash provided by operating activities $1,091 3,508 3,240 -------- -------- -------- Cash flows from investing activities: Purchase of securities available for sale - - (1,323) Sale of securities available for sale 1,622 - - Washington Interchange merger - 37 - -------- -------- -------- Net cash provided by (used in) investing activities 1,622 37 (1,323) -------- -------- -------- Cash flows from financing activities: Cash dividends paid (2,801) (2,287) (2,077) Treasury stock (49) (1,543) - Common stock issued 226 279 156 Exercise of option shares 266 - - -------- --------- -------- Net cash used in financing activities (2,358) (3,551) (1,921) -------- --------- -------- Net increase/(decrease) in cash 355 (6) (4) Cash at beginning of year - 6 10 -------- --------- -------- Cash at end of year $355 $ - $ 6 ======== ========= ========
46 Note 21. Quarterly Financial Data (unaudited) (in thousands except per share data)
- -------------------------------------------------------------------------------------------------------------------------- First Second Third Fourth 1998 Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------------------------- Interest income $11,923 $12,242 $12,502 $12,153 Interest expense 4,916 5,053 5,135 4,760 Net interest income 7,007 7,189 7,367 7,393 Provision for loan losses 219 212 210 310 Net gain on sale of securities - - 94 927 Income before income taxes 3,068 2,238 3,922 4,289 Net income 1,977 1,428 2,547 2,657 Basic earnings per common share 0.28 0.20 0.35 0.37 Diluted earnings per common share 0.27 0.20 0.35 0.37 - -------------------------------------------------------------------------------------------------------------------------- First Second Third Fourth 1997 Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------------------------- Interest income $10,819 $11,187 $11,499 $11,805 Interest expense 4,351 4,622 4,766 4,827 Net interest income 6,468 6,565 6,733 6,978 Provision for loan losses 620 517 210 306 Income before income taxes 3,285 3,119 2,934 2,872 Net income 2,133 2,024 1,904 1,864 Basic earnings per common share 0.30 0.28 0.27 0.26 Diluted earnings per common share 0.29 0.28 0.27 0.26
47 EX-21 5 SUBSIDIARIES OF THE REGISTRANT Exhibit 21. Subsidiaries of the Registrant Interchange Bank (formerly known as Interchange State Bank), Washington Interchange Corporation and Clover Leaf Mortgage Company, Inc., all of which are incorporated in New Jersey, are wholly owned direct subsidiaries of the Registrant. Clover Leaf Investment Corporation and Clover Leaf Insurance Agency are incorporated in New Jersey and are wholly owned direct subsidiaries of Interchange Bank. Clover Leaf Management Realty Corporation, a New Jersey Corporation, which is also incorporated in New Jersey, is 99% owned by Interchange Bank. EX-23 6 INDEPENDENT AUDITOR'S CONSENT Exhibit 23. Independent Auditor's Consent We consent to the incorporation by reference in Amendment No. 1 to Registration Statement No. 33-82530 of Interchange Financial Services Corporation of our report dated January 230, 1999, appearing in this Annual Report on Form 10-K of Interchange Services Corporation for the year ended December 31, 1998. /S/ Deloitte & Touche, LLP Parsippany, New Jersey March 19, 1999 EX-27 7
9 1,000 12-Mos Dec-31-1998 Dec-31-1998 20,109 0 23,175 0 95,771 54,159 54,761 478,717 5,645 685,364 598,732 18,548 5,712 0 5,397 0 0 56,975 685,364 38,904 8,387 1,529 48,820 18,467 19,864 28,956 951 1,021 19,416 13,517 8,609 0 0 8,609 1.20 1.19 4.44 1,198 0 528 0 5,231 620 83 5,645 5,645 0 978
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