-----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, P++99yWPcWx1oppRu+Uu5lf2KqqWwZHHuDB+A1WzcxavbC8nJ4GipaL/W3zbo6TU reSe6xQ38yPHI2rR0kVlQQ== 0000755933-04-000007.txt : 20040315 0000755933-04-000007.hdr.sgml : 20040315 20040315165621 ACCESSION NUMBER: 0000755933-04-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040315 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: 1934 Act SEC FILE NUMBER: 001-10518 FILM NUMBER: 04670201 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 dec200310k.txt DECEMBER 31, 2003 UNITED STATES 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, 2003 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: None Securities registered pursuant to Section 12(g) of the Act: Title of Class ______________ Common Stock (no par value) 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 reports), 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 Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No ____ The aggregate market value of registrant's voting stock held by non-affiliates of the registrant computed June 30, 2003 based on the average bid and asked price for such stock on that date was approximately $248,631,000. The number of outstanding shares of the Registrant's common stock, no par value per share, as of February 27, 2004, was as follows: Class Number of Outstanding Shares _____ ____________________________ Common Stock (No par value) 12,735,206 Documents incorporated by reference: Portions of registrant's definitive Proxy Statement for the 2004 Annual Meeting of Shareholders (the "2004 annual Meeting Proxy Statement") to be filed on or before March 25, 2004 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, 2003 (the "2003 Annual Report to Shareholders") are incorporated by reference to Parts II and IV of this Annual Report on Form 10-K. With the exception of information specifically incorporated by reference, the 2004 Annual Meeting Proxy Statement and the 2003 Annual Report to Shareholders are not deemed to be part of the report. INTERCHANGE FINANCIAL SERVICES CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K PART I PAGE Item 1. Business.................................................... 1 Item 2. Properties.................................................. 11 Item 3. Legal Proceedings........................................... 11 Item 4. Submission of Matters to a Vote of Security Holders......... 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................................. 12 Item 6. Selected Financial Data.................................. 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.. 15 Item 8. Financial Statements and Supplementary Data.......... 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 15 PART III Item 10. Directors and Executive Officers of the Registrant... 16 Item 11. Executive Compensation............................... 17 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters... 18 Item 13. Certain Relationships and Related Transactions....... 19 Item 14. Principal Accounting Fees and Services............... 19 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................... 20 Exhibit Index ..................................................... 21 Signatures ..................................................... 22 PART I Item 1. Business General Interchange Financial Services Corporation (the "Company"), a New Jersey business corporation, is a bank holding company registered with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended. The Company was incorporated in the State of New Jersey on October 15, 1984. It acquired all of the outstanding stock of Interchange Bank (formerly known as Interchange State Bank), a New Jersey state chartered bank (the "Bank" or "Interchange"), in 1986. The Bank is the Company's principal operating subsidiary. In addition to the Bank, the Company owns all of the outstanding capital stock of Clover Leaf Mortgage Company, a New Jersey Corporation established in 1988, which is not currently engaged in any business activity. The Company's principal executive office is located at Park 80 West/ Plaza Two, Saddle Brook, New Jersey 07663, and the telephone number is (201) 703-2265. As of December 31, 2003, the Company had consolidated assets of approximately $1.4 billion, deposits of approximately $1.2 billion and shareholders' equity of approximately $143.2 million. As a holding company, the Company provides support services to its direct and indirect subsidiaries. These include executive management, personnel and benefits, risk management, data processing, strategic planning, legal, and accounting and treasury. Banking Subsidiary ___________________ The Bank established in 1969, is a full-service New Jersey-chartered commercial bank headquartered in Saddle Brook, New Jersey. The Bank is a member of the Federal Reserve System and its deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC"). It offers banking services for individuals and businesses through twenty-nine (29) banking offices and one (1) supermarket mini-branch in Bergen County, New Jersey. The Bank maintains thirty-four (34) automated teller machines (operating within the StarTM , PlusTM, CIRRUSTM, VISATM, NYCETM, and MasterCardTM networks), which are located at seventeen of the banking offices, a supermarket, a college and the Bank's operations center. Subsidiaries of the 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 sales of tax-deferred annuities; Clover Leaf Management Realty Corporation, established in 1998 as a Real Estate Investment Trust ("REIT") which manages certain real estate assets of the Company; Bridge View Investment Company, an investment company operating pursuant to New Jersey law; and Interchange Capital Company, L.L.C., established in 1999 to engage in equipment lease financing. All of 1 the Bank's subsidiaries are organized under New Jerseylaw and are 100% owned by the Bank, except for the REIT which is 99% owned by the Bank. Bridge View Investment Company has one wholly owned subsidiary, Bridge View Delaware, Inc. ("BVDI"). BVDI is an investment company operating pursuant to Delaware law. Growth of the Company and the Bank __________________________________ On April 30, 2003, the Company completed its acquisition of Bridge View Bancorp ("Bridge View"), a bank holding company headquartered in Englewood Cliffs, New Jersey for approximately $33.5 million in cash and 2.9 million in shares with an approximate value of $85.7 million. Bridge View's primary asset was Bridge View Bank which operated eleven branches in Bergen County, New Jersey. As of the acquisition date Bridge View had approximately $291 million in total assets, $184 million in loans and $259 million in deposits without giving effect to any purchase accounting adjustments. The transaction was accounted for as a purchase and the assets and liabilities of former Bridge View were recorded at their respective fair values as of April 30, 2003. Based on the fair values, the Company recorded purchase accounting adjustments related to: loans of $1.6 million; securities of $376 thousand; other assets of $1.9 million; other liabilities of $3.7 million; core deposit intangibles of $4.3 million and goodwill of $54.4 million. On January 16, 2002, the Company acquired certain assets and assumed certain liabilities of Monarch Capital Corporation ("Monarch"). In this asset purchase transaction, the Company acquired certain loans and leases valued at approximately $12.8 million. In addition, the Company assumed certain liabilities (borrowings) of Monarch, valued at approximately $12.7 million, which had been used to fund the loans and leases. The purchase price of $1.6 million was paid in cash and shares of Company common stock, subject to certain adjustments. On May 31, 1998, the Company completed its acquisition of Jersey Bank for Savings. At that date, Jersey Bank had total assets of approximately $78.6 million and total deposits of approximately $69.8 million. The transaction was accounted for as a pooling of interests. In the transaction, each share of stock of Jersey Bank for Savings, 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. The Company issued 780,198 shares of its common stock in the transaction. Description of Banking and Related Operations _____________________________________________ Through the Bank, the Company offers a wide range of consumer banking products and 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 2 improvement loans, automobile loans, personal loans and overdraft protection. The Bank also offers a VISATM credit card and several convenience products, including the Interchange Check Card, which permits customers to access their checking accounts by using the card when making purchases. The Interchange Check Card can also be used as an ATM card to perform basic banking transactions. Another service offered to customers is Interchange Bank-Line Telephone Banking, which permits customers to perform basic banking transactions, including, transfer money between accounts and make loan payments from any phone, at any time of the day or night by calling a toll-free number. The Bank also offers the Interchange Bank-Line Center, which is an inbound calling facility providing enhanced customer service via access to a single source for account and product information, opening accounts or even applying for a consumer loan. The Interchange Bank-Line Center also serves as an outbound telemarketing resource, contacting prospective and current customers for new accounts. The Bank also offers online banking through InterBank. InterBank, which is accessed through the Bank's web site at www.interchangebank.com, allows customers to access account information, process transfers between accounts, generate an account statement, pay bills electronically and more. As discussed herein, additional products and services may be accessed through the Bank's web site. The Bank also 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 types of commercial loan products are offered, including working capital lines of credit, small business administration loans, term loans for fixed asset acquisitions, commercial mortgages, equipment lease financing and other forms of asset-based financing. In addition to its origination activities, the Bank purchases packages of loans. These loans are subjected to the Bank's independent credit analysis prior to purchase. The Bank has experienced opportunities to sell its other products and services to the borrowers whose loans are purchased and believes that purchasing loans will continue to be a desirable way to augment its portfolios as opportunities arise. The Bank also engages in mutual fund and annuities sales and brokerage services. An Investment Services Program is offered through an alliance between the Bank and ICBA Financial Services Corporation ("ICBA"), under which mutual funds and annuities offered by ICBA are made available to the Bank's customers. The Bank has also expanded its product offerings by entering into an agreement with a third party provider to offer discount brokerage services to its customers. The Bank offers securities trading through its web site, which is hyperlinked to FISERV Securities, Inc., member NASD/SIPC, so that customers can access their brokerage 3 accounts via the Internet. There is also a direct link from the Company's web site to the Nasdaq National Market to allow investors to keep informed of the daily quotes and market activity for the Company's common stock. Additional information about the Bank and the Company may be found on our web site at www.interchangebank.com. Information contained on our Internet web site is not part of this Annual Report on Form 10-K and is not being incorporated by reference into this report. Market Areas ____________ The Company's principal market for its deposit gathering and loan origination 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 Company's services. The principal service areas of the Company represent a diversified mix of stable residential neighborhoods with a wide range of per household income levels; offices, service industries and light industrial facilities; and large shopping malls and small retail outlets. Competition ___________ Competition in the banking and financial services industry within the Company's primary market area is strong. The Bank actively competes with national and state-chartered commercial banks, operating on a local and national scale, 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. The Bank believes that opportunities continue to exist to satisfy the deposit and borrowing needs of small and middle market businesses. Larger banks continued to show an appetite for only the largest loans, finding themselves challenged to administer smaller loans profitably. Interchange has the desire and the ability to give smaller and mid-sized businesses the service they require. Many small businesses eventually become midsize businesses, with a corresponding change in their financial requirements. By designing programs to accommodate the changing needs of growing businesses, Interchange is extending the longevity of valuable customer relationships. For example, through our subsidiary, Interchange Capital Company, L.L.C., we are able to extend cost-effective equipment leasing solutions for a variety of expansion and upgrading projects. The Bank believes that it is able to maintain its relationship with these growing businesses because of its ability to be responsive to both small and midsize business constituencies. 4 Personnel _________ The Company had 319 full-time-equivalent employees at year-end 2003. The Company believes its relationship with employees to be good. Regulation and Supervision __________________________ Banking is a complex, highly regulated industry. The primary goals of the bank regulatory structure are to maintain a safe and sound banking system and to facilitate the conduct of sound monetary policy. In furtherance of those goals, Congress has created several largely autonomous regulatory agencies and enacted myriad legislation that governs banks, 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 descriptions are qualified in their entirety by reference to the specific statutes and regulations discussed. The Company The Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"), 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 BHCA and Federal Regulation Y. The Federal Reserve may conduct examinations of the Company or any of its subsidiaries. The BHCA 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 BHCA also provides that, with certain limited exceptions, a bank holding company may 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 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. 5 Under certain circumstances, prior approval of the Federal Reserve is required under the BHCA before a bank holding company may purchase or redeem any of its equity securities. Traditionally, the activities of bank holding companies have been limited to the business of banking and activities closely related or incidental to banking. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the "Modernization Act"), enacted on November 11, 1999, with an effective date of March 11, 2000, expanded the types of activities in which a bank holding company may engage. Subject to various limitations, the Modernization Act generally permits a bank holding company to elect to become a "financial holding company." A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are "financial in nature." Among the activities that are deemed "financial in nature" are, in addition to traditional lending activities, securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, certain merchant banking activities, and activities that the Federal Reserve considers to be closely related to banking. A bank holding company may become a financial holding company under the Modernization Act if each of its subsidiary banks is "well capitalized" under the Federal Reserve guidelines (See "Capital Adequacy Guidelines" below), is well managed and has at least a satisfactory rating under the Community Reinvestment Act. In addition, the bank holding company must file a declaration with the Federal Reserve that the bank holding company wishes to become a financial holding company. A bank holding company that falls out of compliance with such requirements may be required to cease engaging in certain activities permitted only for financial holding companies. Any bank holding company that does not elect to become a financial holding company remains subject to the current restrictions of the BHCA. Under the Modernization Act, the Federal Reserve serves as the primary "umbrella" regulator of financial holding companies, with supervisory authority over each parent company and limited authority over its subsidiaries. Expanded financial activities of financial holding companies will generally be regulated according to the type of such financial activity: banking activities by banking regulators, securities activities by securities regulators, and insurance activities by insurance regulators. The Modernization Act also imposes additional restrictions and heightened disclosure requirements regarding private information collected by financial institutions. Presently, the Company has not chosen to become a financial holding company. 6 Monetary Policy The banking industry is affected by the monetary and fiscal policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the national supply of bank credit to moderate recessions and to curb inflation. Among the instruments of monetary policy used by the Federal Reserve to implement its objectives are: open-market operations in U. S. government securities, changes in the discount rate and the federal funds rate (which is the rate banks charge each other for overnight borrowings), and changes in reserve requirements on bank deposits. Sarbanes-Oxley Act On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law. The Act addresses many aspects of financial accounting, corporate governance and public company disclosure. Among other things, it establishes a comprehensive framework for the oversight of public company auditing and for strengthening the independence of auditors and audit committees. Under the Act, audit committees are responsible for the appointment, compensation and oversight of the work of the auditors. The non-audit services that can be provided to a company by its auditor are limited. Audit committee members are subject to new rules addressing their independence. The Act also requires enhanced and accelerated financial disclosures, and it establishes various responsibility measures (including, for example, requiring the chief executive officer and chief financial officer to certify to the quality of a company's financial reporting). The Act imposes new restrictions on and accelerated reporting requirements for certain insider trading activities. It imposes a variety of new penalties for fraud and other violations and creates a new federal felony for securities fraud. Various sections of the Act are applicable to the Company. Portions of the Act were effective immediately; others became effective or are in the process of becoming effective through rulings by the Securities and Exchange Commission, based on timelines set forth in the law. Capital Adequacy Guidelines The Federal Reserve issued guidelines establishing risk-based capital requirements for bank holding companies having more than $150 million in assets and member banks of the Federal Reserve System. 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 1 capital, which includes common shareholders' equity less certain intangibles and a supplementary component called Tier 2, which includes a portion of the allowance for loan losses. Effective October 1, 1998, the Federal Reserve adopted an amendment to its risk-based capital guidelines that permits insured depository institutions to include in their Tier 2 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 7 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 1). 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 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. 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 1 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, 2003, the Company and the Bank satisfied these ratios and have been categorized as "well-capitalized" institutions, 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. 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 money penalties against companies or individuals that violate the BHCA, 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. 8 The Bank As a New Jersey state-chartered bank, the Bank's operations are subject to various requirements and restrictions of state law pertaining to, among other things, 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"). 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 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. To the extent that the foregoing information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the full text of those provisions. Also, as such statutes, regulations and policies are continually under review by Congress and state legislature and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank could have a material effect on the business of the Company. 9 Available Information _____________________ The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through the Company's web site as soon as reasonably practicable after such material is electronically filed or furnished to the Securities and Exchange Commission. The Company's web site address is www.interchangebank.com. Forward Looking Statements __________________________ In addition to discussing historical information, certain statements included in or incorporated into this report relating to the financial condition, results of operations and business of the Company which are not historical facts may be deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used herein, the words "anticipate", "intends", "believe", "estimate," "expect," "will" and other similar expressions (including when preceded or followed by the word "not") are generally intended to identify such forward-looking statements. Such statements are intended to be covered by the safe harbor provisions for forward-looking statements contained in such Act, and we are including this statement for purposes of invoking these safe harbor provisions. Such forward-looking statements include, but are not limited to, statements about the operations of the Company, the adequacy of the Company's allowance for losses associated with the loan portfolio, the prospects of continued loan and deposit growth, and improved credit quality. The forward-looking statements in this report involve certain estimates or assumptions, known and unknown risks and uncertainties, many of which are beyond the control of the Company, and reflect what we currently anticipate will happen in each case. What actually happens could differ materially from what we currently anticipate will happen due to a variety of factors, including, among others, (i) increased competitive pressures among financial services companies; (ii) changes in the interest rate environment, reducing interest margins or increasing interest rate risk; (iii) deterioration in general economic conditions, internationally, nationally, or in the State of New Jersey; (iv) the occurrence of acts of terrorism, such as the events of September 11, 2001, or acts of war; (v) legislation or regulatory requirements or changes adversely affecting the business of the Company; (vi) losses in the Company's leasing subsidiary exceeding management's expectations; (vii) expected revenue synergies from the Company's acquisition of Bridge View may not be fully realized or realized within the expected time frame; (viii) revenues following the Company's acquisition of Bridge View may be lower than expected; (ix) deposit attrition, operating costs, customer loss and business disruption following the Company's acquisition of Bridge View, including, without limitation, difficulties in 10 maintaining relationships with employees, may be greater than expected and (x) other risks detailed in reports filed by the Company with the Securities and Exchange Commission. Readers should not place undue expectations on any forward-looking statements. We are not promising to make any public announcement when we consider forward-looking statements in this document to be no longer accurate, whether as a result of new information, what actually happens in the future or for any other reason. Item 2. Properties The Company leases nineteen banking offices, one mini-branch within a supermarket, one operations/support facility and one administrative/executive facility. It also leases two locations for the sole purpose of operating Automated Teller Machines. It owns eight banking offices and leases land on which it owns two bank buildings. All of the facilities are located in Bergen County, New Jersey, which constitutes the Company's primary market area. In the opinion of management, the physical properties of the Company and its subsidiaries are suitable and adequate. Item 3. Legal Proceedings In the ordinary course of business, the Company and its subsidiaries are 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 to a vote of the Company's security holders through the solicitation of proxies or otherwise during the three months ended December 31, 2003. 11 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The Company's common stock is presently listed for quotation on the Nasdaq National Market System under the symbol "IFCJ". At February 27, 2004, there were approximately 1,386 shareholders of record. A portion of the Company's common stock is held in "street name" by nominees for beneficial owners, so the actual number of shareholders is probably higher. The following table sets forth, for the periods indicated, the reported high and low sales prices by quarter: - ---------------------------------------------------------------------------------------------------------------- Quarterly Common Stock Price Range - ----------------------------------- for the years ended December 31, - ---------------------------------------------------------------------------------------------------------------- High Low Cash Sales Sales Dividends Price Price Declared ------------ ------------ ------------ 2002 First quarter . . . . . $ 16.23 $ 12.47 $ 0.10 Second quarter . . . . . 19.27 16.23 0.10 Third quarter . . . . . 18.67 15.70 0.10 Fourth quarter . . . . . 19.10 15.95 0.14 2003 First quarter . . . . . $ 18.03 $ 16.10 $ 0.11 Second quarter . . . . . 22.50 17.20 0.11 Third quarter . . . . . 22.52 19.34 0.11 Fourth quarter . . . . . 26.68 20.45 0.11 - -------------------------------------------------------------------------------------------------------- All per share data was restated to reflect a 3-for-2 stock split declared on May 23, 2002 and paid on July 12, 2002.
A cash dividend of $0.10 and $0.11 was declared on each common share outstanding in each quarter during 2002 and 2003, respectively. The Company declared a special cash dividend of $0.04 per common share in the fourth quarter of 2002, which was paid in the first quarter of 2003. The Company intends, subject to its 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 its common stock in the future. The principal source of the funds to pay any dividends on the Company's common stock is dividends received from the Bank. Certain federal and state regulators impose restrictions on the payment of dividends by banks. See "Business - Regulation and Supervision" for a discussion of these restrictions. See Note 18 of Notes to Consolidated Financial Statement for additional information. 12 Item 6. Selected 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, 2003 and 2002, and the Consolidated Statements of Income, Changes in Stockholders' Equity and Cash Flows for each of the years in the three-year period ended December 31, 2003 and the report thereon of Deloitte & Touche LLP are included on pages 13 through 52 of the Company's 2003 Annual Report to Shareholders filed as Exhibit 13 hereto, which pages are incorporated herein by reference. CONSOLIDATED FINANCIAL HIGHLIGHTS Years Ended December 31, 2003 (1) 2002 2001 2000 1999 Income Statement Data (in thousands) Interest income $ 60,267 $ 56,500 $ 57,402 $ 55,621 $ 49,054 Interest expense 13,874 17,478 23,444 24,227 18,783 ---------- --------- ---------- ---------- ---------- Net interest income 46,393 39,022 33,958 31,394 30,271 Provision for loan losses 1,815 1,500 1,075 750 1,200 ---------- --------- ---------- ---------- ---------- Net interest income after provision for loan losses 44,578 37,522 32,883 30,644 29,071 Non-interest income 10,645 6,514 5,578 4,381 5,586 Non-interest expenses 31,239 25,063 22,873 21,177 20,063 ---------- --------- ---------- ---------- ---------- Income before income taxes 23,984 18,973 15,588 13,848 14,594 Income Taxes 7,618 6,096 5,048 4,592 4,959 ---------- --------- ---------- ---------- ---------- Net income $ 16,366 $ 12,877 $ 10,540 $ 9,256 $ 9,635 ========== ========= ========== ========= ========== Per Share Data (2) Basic earnings per common share $ 1.39 $ 1.31 $ 1.08 $ 0.94 $ 0.91 Diluted earnings per common share 1.36 1.30 1.07 0.94 0.91 Cash dividends declared 0.44 0.40 0.36 0.33 0.32 Special Cash Dividend - 0.04 - - - Book value 11.18 8.22 7.04 6.33 5.77 Tangible book value (3) 6.59 8.05 7.04 6.32 5.73 Weighted average shares outstanding (in thousands) Basic 11,816 9,809 9,779 9,810 10,547 Diluted 11,991 9,933 9,824 9,838 10,593 Balance Sheet Data--end of year (in thousands) Total assets $1,385,872 $ 936,332 $ 830,949 $ 770,244 $ 706,125 Securities held-to-maturity and securities available-for-sale 452,060 252,512 193,902 161,354 161,889 Loans and leases 796,581 615,641 581,323 560,879 511,976 Allowance for loan and lease losses 9,641 7,207 6,569 6,154 5,476 Total deposits 1,156,798 815,672 726,483 668,860 598,992 Securities sold under agreements to repurchase 15,618 17,390 6,700 18,500 16,431 Short-term borrowings 46,491 - 18,100 13,000 13,975 Long-term borrowings 10,000 10,000 - - 13,000 Total stockholders' equity $ 143,193 $ 80,680 $ 68,233 $ 61,984 $ 58,276 Selected Performance Ratios Return on average total assets 1.35 % 1.43 % 1.31 % 1.24 % 1.39 % Return on average total stockholders' equity 13.54 17.35 16.06 16.18 15.52 Dividend Payout 30.37 33.56 33.37 35.24 35.04 Average total stockholders' equity to average total assets 9.95 8.27 8.13 7.64 8.99 Net yield on interest earning assets (taxable equivalent) (4) 4.29 4.68 4.49 4.41 4.61 Non-interest income to average total assets 0.88 0.73 0.69 0.59 0.81 Non-interest expense to average total assets 2.57 2.79 2.83 2.83 2.90 Asset Quality--end of year Nonaccrual loans and leases to total loans and leases 1.08 % 0.97 % 0.37 % 0.25 % 0.22 % Nonperforming assets to total assets 0.63 0.66 0.34 0.21 0.22 Allowance for loan and lease losses to nonaccrual loans and leases 112.50 120.86 304.12 441.15 491.12 Allowance for loan and lease losses to total loans and leases 1.21 1.17 1.13 1.10 1.07 Net charge-offs to average loans and leases 0.18 0.14 0.11 0.01 0.28 Liquidity and Capital Average loans and leases to average deposits 69.39 % 78.21 % 81.77 % 82.81 % 81.79 % Total stockholders' equity to total assets 10.33 8.62 8.21 8.05 8.25 Tier 1 capital to risk weighted assets 9.34 12.16 11.74 11.75 12.72 Total capital to risk weighted assets 10.46 13.33 12.89 12.92 13.91 Tier 1 capital to average assets 6.24 8.12 8.09 8.02 8.32 13 All per share data and average shares were restated to reflect a 3-for-2 stock split declared on May 23, 2002 and paid on July 12, 2002. (1) On April 30, 2003, the Company completed its acquisition of Bridge View Bancorp ("Bridge View"). Bridge View's primary asset was Bridge View Bank which operated eleven branches in Bergen County, New Jersey. At acquisition date Bridge View had approximately $291 million in total assets, $184 million in loans and $259 million in deposits without giving effect to any purchase accounting adjustments. The Company's results of operations include Bridge View from acquisition date. The transaction was accounted for as a purchase and the assets and liabilities of former Bridge View were recorded at their respective fair values as of April 30, 2003. Based on the fair values, the Company recorded purchase accounting adjustments related to: loans of $1.6 million; securities of $376 thousand; other assets of $1.9 million; other liabilities of $2.5 million; core deposit intangibles of $4.3 million and goodwill of $54.4 million. (2) All per share data and average shares have been restated to reflect a 3 for 2 stock split declared on May 23, 2002 and paid on July 12, 2002. (3) Tangible book value is calculated by tangible capital (total stockholders' equity less goodwill and other intangible assets) by total shares issued. This measure represents a non-GAAP measurement and may not be consistently calculated throughout the industry. Management believes that this non-GAAP measurement provides a meaningful way to analyze the Company's tangible book value year over year and versus the industry. 2003 (1) 2002 2001 2000 1999 ---------- ------- ------- ------- ------- Total stockholders' equity $ 143,193 $80,680 $68,233 $61,984 $58,276 Less: goodwill and other intangible assets 58,826 1,678 - 81 394 ---------- ------- ------- ------- ------- Total tangible capital $ 84,367 $79,002 $68,233 $61,903 $57,882 ========== ======= ======= ======= ======= Total shares issued (2) 12,810 9,815 9,691 9,796 10,092 Tangible book value per share (2) $6.59 $8.05 $7.04 $6.32 $5.73 (4) Net yield on interest earning assets (taxable equivalent) is calculated by dividing net interest income (on a fully taxable equivalent basis utilizing a 34% effective tax rate) by average interest earning assets. This measure represents a non-GAAP measurement and may not be consistently calculated throughout the industry. Management believes that this non-GAAP measurement provides a meaningful way to analyze the Company's net interest income year over year and versus the industry. 2003 (1) 2002 2001 2000 1999 -------- -------- --------- -------- -------- Net interest income $ 46,393 $ 39,022 $ 33,958 $ 31,394 $ 30,271 Tax-equivalent basis adjustment 533 376 324 158 158 -------- -------- -------- -------- -------- Net interest income (on a fully taxable equivalent basis) $ 46,926 $ 39,398 $ 34,282 $ 31,552 $ 30,429 ======== ======== ======== ======== ======== Average interest earning assets $1,093,373 $842,191 $764,218 $715,113 $660,528 Net yield on interest earning assets (taxable equivalent) 4.29 % 4.68 % 4.49 % 4.41 % 4.61 %
14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information contained in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 13 through 30 of the Company's 2003 Annual Report to Shareholders filed as Exhibit 13 hereto 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 25 of the Company's 2003 Annual Report to Shareholders filed as Exhibit 13 hereto 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 2003 Annual Report to Shareholders on pages 31 through 52, filed as Exhibit 13 hereto and incorporated herein by reference. Page of Annual Report to Shareholders ------------------- Report of Independent Public Auditors ......................... 31 Interchange Financial Services Corporation and Subsidiaries Consolidated Balance Sheets .............................. 32 Consolidated Statements of Income ........................ 33 Consolidated Statements of Changes in Stockholders' Equity 34 Consolidated Statements of Cash Flows .................... 35 Notes to Consolidated Financial Statements (Notes 1 - 22) 36 - 52 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 There were no changes in or disagreements with accountants on accounting and financial disclosure as defined by item 304 of Regulation S-K. Item 9a. Controls and Procedures Within the end of the period covering this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e), as of December 31, 2003. Based upon that evaluation, the Chief Executive Officer and current and former Chief Financial Officers concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings with the Securities and Exchange Commission. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 15 PART III Item 10. Directors and Executive Officers a. Directors The information contained in the section entitled "INTERCHANGE PROPOSAL NO. 1 - ELECTION OF DIRECTORS - Nominees and Directors" in the Company's 2003 Annual Meeting Proxy Statement to be filed on or before March 25, 2004 is incorporated herein by reference in response to this item. b. Executive Officers The following table sets forth the names, ages, and present positions of the Company's and the Bank's principal executive officers: Name Age Positions Held with the Company ------- -------- -------------------------------- ANTHONY S. ABBATE . . .64 President and Chief Executive Officer ANTHONY J. LABOZZETTA .40 Executive Vice President and Chief Operating Officer PATRICIA D. ARNOLD . .45 Senior Vice President- Chief Credit Officer ALBERT F. BUZZETTI . ..64 Senior Vice President CHARLES T. FIELD . . ..39 Senior Vice President- Chief Financial Officer FRANK R. GIANCOLA . . .50 Senior Vice President-Operations Business Experience ANTHONY S. ABBATE, President and Chief Executive Officer of the Bank since 1981; Senior Vice President and Controller from October 1980 to 1981. Engaged in the banking industry since 1959. ANTHONY J. LABOZZETTA, Executive Vice President and Chief Operating Officer since February 2003; Executive Vice President and Chief Financial Officer from September 1997 to February 2003; Senior Vice President and Treasurer from 1995 to 1997. Engaged in the banking industry since 1989. Formerly a senior manager with an international accounting firm, specializing in the financial services industry. PATRICIA D. ARNOLD, Senior Vice President - Chief Credit Officer since August 1997; First Vice President from 1995 to 1997; Department Head Vice President from 1986 to 1995; Assistant Vice President from 1985 to 1986; Commercial Loan Officer-Assistant Treasurer from 1983 to 1985. Engaged in the banking industry since 1981. ALBERT F. BUZZETTI, Senior Vice President since May 2003. Formerly President, Chief Executive Officer and Director of Bridge View Bancorp and Bridge View Bank from 1988 to 2003. 16 CHARLES T. FIELD, Senior Vice President and Chief Financial Officer since February 2003. Formerly Vice President Finance and Treasurer of Viatel, Inc. from 1999 to 2002 and Treasurer from 1998 to 1999, Corporate Controller of Horsehead Industries, Inc. from 1995 to 1998 and a manager specializing in financial institutions at an international accounting firm from 1987 to 1995. FRANK R. GIANCOLA, Senior Vice President - Operations since September 1997; Senior Vice President-Retail Banking from 1993 to 1997; Senior Vice President-Operations of the Bank from 1984 to 1993; Senior Operations Officer from 1982 to 1984; Vice President/Branch Administrator from 1981 to 1982. Engaged in the banking industry since 1971. 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. c. Compliance with Section 16(a) Information contained in the section entitled "PRINCIPAL SHAREHOLDERS AND HOLDINGS OF MANAGEMENT OF INTERCHANGE - Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 2004 Annual Meeting Proxy Statement to be filed on or before March 25, 2004 is incorporated herein by reference in response to this item. d. Code of Ethics We have adopted Codes of Ethics for our Board of Directors and employees. The Code of Ethics is available free of charge by contacting the Company. Item 11. Executive Compensation Information contained in the section entitled "INTERCHANGE EXECUTIVE COMPENSATION AND OTHER INTERCHANGE INFORMATION - Executive Compensation" in the Company's 2004 Annual Meeting Proxy Statement to be filed on or before March 25, 2004 is incorporated herein by reference in response to this item. 17 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information contained in the section entitled "Principal Shareholders and Holdings of Management of Interchange" in the Company's 2004 Annual Meeting Proxy Statement to be filed on or before March 25, 2004 is incorporated herein by reference in response to this item. Equity Compensation Plan Information The table below summarizes information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of December 31, 2003. Plan category Number of securities remaining Number of securities Weighted-average available for future to be issued exercise price issuance under equity upon exercise of of outstandings compensation plans outstanding options options, warrants (excluding securities warrants and rights and rights reflected in column (a)) -------------------- ----------------- ------------------------ (a) (b) (c) Equity compensation plans approved by security holders 614,720 $13.85 460,885 Equity compensation plans not approved by security holders - - - ------- ------ ------- Total 614,720 $13.85 460,885 ======= ====== =======
The Outside Director Incentive Compensation Plan The Outside Director Incentive Compensation Plan is designed to attract qualified personnel to accept positions of responsibility as outside directors with Interchange and to provide incentives for persons to remain on the board, as outside directors. The Compensation/Stock Option Committee administers the Outside Director Incentive Compensation Plan, reviews the awards and submits recommendations to the full board of directors for action. Options to acquire 1,500 shares of Interchange common stock are granted to each outside director of Interchange each year on the anniversary date of the initial grant. Each option represents the right to purchase, upon exercise, one share of Interchange common stock at an exercise price equal to the price of a share of stock at the close of business on the date of the grant as reported by the NASDAQ National Market. Stock options may be exercisable between one and ten years from the date granted. All options granted under the Outside Director Incentive Compensation Plan are non-qualified stock options and are not entitled to special tax treatment under the Internal Revenue Code of 1986, as amended. Stock Option and Incentive Plan The Stock Option and Incentive Plan of 1997, as amended, is designed to align shareholders' and executive officers' interests. The Compensation/Stock Option Committee administers the plan, reviews the awards and submits recommendations to the full board of directors for action. Stock options are granted on a discretionary basis with an exercise price equal to the price of a share of stock at the close of business on the date of the grant as reported by the NASDAQ National Market. Stock options may be exercisable between one and ten years from the date granted. Such stock options provide a retention and motivational program for executives and an incentive for the creation of shareholder value over the long-term since their full benefit cannot be realized unless an appreciation in the price of the common stock occurs over a specified number of years. The Stock Option and Incentive Plan also provides for the issuance of incentive stock awards as determined by the board of directors of Interchange. Certain key executives may be awarded incentive compensation in the form of 3-year restricted stock, which is forfeitable upon termination of employment during that time period. Key employees may also use their cash bonus to purchase two-year restricted stock at a twenty-five percent discount. All amounts in excess of the purchase price of this stock are forfeitable should they terminate their employment during that time period. Incentive stock awards are an important factor in attracting and motivating key executives who will dedicate their maximum efforts toward the advancement of the Company. 18 Item 13. Certain Relationships and Related Transactions The information contained in the section entitled "Certain Relationships and Related Party Transactions of Interchange" in the Company's 2004 Annual Meeting Proxy Statement to be filed on or before March 25, 2004 is incorporated herein by reference in response to this item. Item 14. Principal Accounting Fees and Services The items required by Part III, Item 14 are incorporated herein by reference from the Registrant's Proxy Statement for its 2004 Annual Meeting of Stockholders to be filed on or before March 25, 2004. 19 PART IV Item 15. Exhibits, Financial Statement 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 32 through 35, and the Notes to Consolidated Financial Statements are set forth at pages 36 through 52, of the 2003 Annual Report to Shareholders (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 2.1 Agreement and Plan of Merger, dated as of November 18, 2002, by and between Registrant and Bridge View Bancorp (Incorporated by reference to Exhibit 2.1 to Registrant's Form S-4, filed February 14, 2003, Registration Statement No. 333-103256) Exhibit 3(a) Restated Certificate of Incorporation of Registrant (Incorporated by reference to Exhibit 3.1 to Registrant's Form S-4, filed February 14, 2003, Registration Statement No. 333-103256) Exhibit 3(b) Amended and Restated Bylaws of Registrant, dated October 24, 2002(Incorporated by reference to Exhibit 4(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002) * Exhibit 10(a)Agreement for legal services between Andora and Romano and Registrant, dated April 24, 2003. (1) Exhibit 10(b) Outside Director Incentive Compensation Plan (Incorporated by reference to Exhibit 4(a) to Registrant's Form S-8, filed June 26, 2000, Registration Statement No. 33-40098) (1) Exhibit 10(c)Stock Option and Incentive Plan of 1997, as Amended (Incorporated by reference to Exhibit 4(a) to Registrant's Form S-8, filed August 26, 2002, Registration Statement No. 33-98705) * Exhibit 10(d)Directors' Retirement Plan, as Amended 2003 (Incorporated by reference to Exhibit 10(d) to Annual Report on Form 10-K for fiscal year ended December 31, 2003)NOT YET FILED (1) Exhibit 10(e) Executives' Supplemental Pension Plan (1) Exhibit 10(f) Change-in-Control Agreements for the Registrant's principal executive officers, and Amendment dated June 14, 2001 * Exhibit 11 Statement regarding computation of per share earnings * * Exhibit 13 Portion of the Annual Report to Shareholders for the year ended December 31, 2003 * Exhibit 21 Subsidiaries of Registrant 20 * Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * Exhibit 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K during the quarter ended December 31, 2003: Form 8-K filed October 24, 2003, reporting earnings for the third quarter period ending September 30, 2003. ________________________________________________________________________________ (1) Pursuant to Item 14(a) - 3 of Form 10-K, this exhibit represents a 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 21 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/ Charles T. Field ------------------------------------- ----------------------------- Anthony S. Abbate Charles T. Field President and Chief Executive Officer Senior Vice President (principal executive officer) and Chief Fiancial Officer (principal financial and accounting officer) March 15, 2004 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/Charles T. Field - --------------------------------------- --------------------------------------- Anthony S. Abbate March 15, 2004 Charles T. Field March 15, 2004 Director Senior Vice President President and and Chief Financial Officer Chief Executive Officer /s/Anthony D. Andora /s/Nicholas R. Marcalus - --------------------------------------- --------------------------------------- Anthony D. Andora March 15, 2004 Nicholas R. Marcalus March 15, 2004 Director Director Chairman of the Board /s/Gerald A. Calabrese, Jr /s/Eleanore S. Nissley - --------------------------------------- --------------------------------------- Gerald A. Calabrese, Jr. March 15, 2004 Eleanore S. Nissley March 15, 2004 Director Director /s/Donald L. Correll /s/Jeremiah F. O'Connor, Sr. - --------------------------------------- --------------------------------------- Donald L. Correll March 15,2004 Jeremiah F. O'Connor,Sr. March 15, 2004 Director Director /s/Anthony R. Coscia /s/Joseph C. Parisi, Sr. - --------------------------------------- --------------------------------------- Anthony R. Coscia March 15, 2004 Joseph C. Parisi, Sr. March 15, 2004 Director Director /s/John J. Eccleston /s/Robert P. Rittereiser - --------------------------------------- --------------------------------------- John J. Eccleston March 15, 2004 Robert P. Rittereiser March 15, 2004 Director Director /s/David R. Ficca /s/Benjamin Rosenzweig - --------------------------------------- --------------------------------------- David R. Ficca March 15,2004 Benjamin Rosenzweig March 15, 2004 Director Director /s/James E. Healey /s/ John A. Schepisi - --------------------------------------- --------------------------------------- James E. Healey March 15, 2004 John A. Schepisi March 15, 2004 Director Director 22 EX-10 3 exhibit10a2003.txt EXHIBIT 10A Exhibit 10(a). Agreement for Legal Services AGREEMENT FOR LEGAL SERVICES ____________________________ THIS AGREEMENT for legal services made this 24th day of April, 2003 by and between: ANDORA & ROMANO, LLC A Professional Corporation 15 Essex Road Paramus, New Jersey 07652 hereinafter referred to as "Attorneys" and INTERCHANGE FINANCIAL SERVICES CORPORATION Park 80 West, Plaza Two Saddle Brook, New Jersey 07663 and INTERCHANGE BANK A Banking Corporation Park 80 West, Plaza Two Saddle Brook, New Jersey 07663 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 in addition to those rendered as corporate counsel." Such fees and costs shall be billed by Attorneys to Clients on a thirty (30) 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 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 Attorneys. 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., O.A.L. and Tax Court. 5. Loan reviews and closings, including modifications and extensions thereof, except that the fee shall be based upon $200.00 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 Client 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 Paragraph 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 that 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 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 ANDORA & ROMANO, LLC By: /s/ Anthony D. Andora ________________________________ Anthony D. Andora, Member of LLC 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 of Clients held on the 24th day of April, 2003. ____ _____ Anthony D. Andora $200.00 per hour Joseph M. Andresini $200.00 per hour Melissa A. Muilenburg $200.00 per hour Other Associates of Firm $175.00 per hour EX-10 4 exhibit10d2003.txt EXHIBIT 10D Exhibit 10(d) INTERCHANGE FINANCIAL SERVICES CORPORATION DIRECTORS' RETIREMENT PLAN (AS AMENDED 2003) Restated as of July 1, 2003 Table of Contents Page FOREWORD ...................................................... iii SECTION 1 DEFINITIONS.................................... 1 SECTION 2 PARTICIPATION.................................. 3 2.1 Commencement of Participation.................. 3 2.2 Information at Participation................... 3 2.3 Continuation of Participation.................. 3 SECTION 3 RETIREMENT BENEFITS............................ 4 3.1 Entitlement to Benefits........................ 4 3.2 Amount of Benefits............................. 4 3.3 Form of Benefit Payments....................... 5 3.4 Death Benefit.................................. 6 3.5 Life Insurance Policies or Annuity Contracts... 7 3.6 Unfunded Plan.................................. 7 SECTION 4 MISCELLANEOUS.................................. 8 4.1 Restriction Against Assignment................. 8 4.2 Payments in the Event of Incompetence.......... 8 4.3 No Right to Continue as Director............... 8 4.4 Discharge of Plan Obligations.................. 9 4.5 Successor Company.............................. 9 SECTION 5 ADMINISTRATION OF THE PLAN..................... 10 5.1 Administration of the Plan..................... 10 5.2 Responsibility of Committee.................... 10 5.3 Claims Procedure............................... 10 5.4 Limitation on Liability........................ 11 5.5 Agent for Service of Process................... 11 SECTION 6 AMENDMENT OF THE PLAN........................... 12 6.1 Plan Amendments................................. 12 SECTION 7 DISCONTINUANCE OF THE PLAN...................... 13 7.1 Termination of Plan............................. 13 SECTION 8 CONSTRUCTION OF THE PLAN........................ 14 8.1 Construction of the Plan........................ 14 8.2 Headings........................................ 14 FOREWORD Effective as of August 1, 1994, Interchange Financial Services Corporation adopted the Interchange Financial Services Corporation Directors' Retirement Plan (the "Plan"). The Plan is intended to promote the interest of Interchange Financial Services Corporation and its affiliates by providing retiring eligible members of its Board of Directors and the Board of Directors of Interchange Bank, a subsidiary of Interchange Financial Services Corporation, with retirement income. The Interchange Financial Services Corporation Directors' Retirement Plan (As Amended 2003), hereinafter set forth, constitutes an amendment in its entirety to said Plan which is continued effective as of July 1, 2003 with respect to Participants who had not yet retired, terminated employment or died as of such date. The rights of anyone covered under the Plan prior to July 1, 2003, who retired, terminated employment or died before that date, shall be determined in accordance with the terms and provisions of the Plan in effect on the date of such retirement, termination of employment or death, except as otherwise specifically provided herein. SECTION 1 DEFINITIONS As used herein, the following terms shall have the following respective meanings, unless a different meaning is required by the context: 1.1 "Appropriate Form" means the written form provided or prescribed by the Committee for the particular purpose. 1.2 "Bank" means Interchange Bank. 1.3 "Beneficiary" means the beneficiary or beneficiaries designated to receive benefits upon the death of the Participant. The Participant shall have the right to name a beneficiary (and to change such beneficiary from time to time without notice to, or consent of, the beneficiary) to receive the deceased Participant's benefit under the Plan. Such designation shall not be effective unless filed with the Committee. In the event there is no effective designation of a beneficiary in existence at the date of the Participant's death, the death benefit shall be distributed in accordance with the Plan to the Participant's Spouse or if unmarried to the Participant's estate. 1.4 "Boards of Directors" means the Board of Directors of the Company and the Board of Directors of the Bank. 1.5 "Committee" means the Compensation Committee of the Board of Directors of the Company. 1.6 "Company" means the Interchange Financial Services Corporation, the Bank's holding company. 1.7 "Director" means a member of either the Board of Directors of the Company or the Board of Directors of the Bank, who is not an employee of the Company or of any subsidiary or affiliate of the Company, including the Bank. 1.8 "Effective Date" means August 1, 1994. 1.9 "Participant" means a Director or former Director who is included in the Plan as provided in Section 2 hereof. 1.10 "Pensionable Amount" means the greatest standard annual retainer fee paid to a Director in effect at the Director's retirement, from either the Company or the Bank. 1.11 "Plan" means the Interchange Financial Services Corporation Directors' Retirement Plan as herein set forth, or as it may be amended from time to time. 1.12 "Plan Year" means: (a) the five consecutive month period beginning August 1, 1994 and ending December 31, 1994; (b) the 12 consecutive month period beginning January 1, 1995 and ending December 31, 1995; and (c) each calendar year thereafter. 1.13 "Retirement Date" means the date on which the Participant actually retires. 1.14 "Service" means membership on either of the Boards of Directors (including such membership before the Effective Date) other than while employed as an Employee. 1.15 "Spouse" means the spouse of a Participant at the Participant's Retirement Date. 1.16 "Supplemental Effective Date" means July 1, 2003. 1.17 "Vested Accrued Benefit" means the benefit determined under Section 3.2 of the Plan. SECTION 2 PARTICIPATION 2.1 Commencement of Participation On and after the Supplemental Effective Date, all Directors shall become Participants in the Plan. Participation shall begin on the later of the Supplemental Effective Date or the fifth anniversary of the commencement of the Director's Service, with the exception of the former directors of Bridge View Bancorp ("BVB Directors"), now directors of the Company and/or the Bank. The BVB Directors' tenure on past years of service at Bridge View Bancorp will be honored for purposes of determining their respective Vested Percentage. The benefits accrued to the BVB Directors who enter the Plan will be prospective only. No past service credit will accrue towards their benefits. 2.2 Information at Participation Upon becoming a Participant, a Director shall provide any information, on the Appropriate Form, that may be requested by the Committee for purposes of administering the Plan. The Participant, in completing the Appropriate Form as specified above: (a) shall agree to the terms of the Plan; (b) shall elect, in accordance with Section 3.3, the form of his or her benefit at retirement; and (c) shall designate a Beneficiary or Beneficiaries to receive any benefits payable under the Plan subsequent to his or her death. Any such election and/or designation shall be deemed to be continuing as to current and succeeding years until changed by notice to the Committee on the Appropriate Form. 2.3 Continuation of Participation ============================= A Director who has become a Participant shall continue as a Participant as long as he or she continues to be a Director or is entitled to benefits under the Plan. SECTION 3 RETIREMENT BENEFITS 3.1 Entitlement to Benefits ======================= A Participant shall have a vested percentage in the retirement benefits described under Section 3.2 based on his or her years of Service in accordance with the following schedule: Number of Years Vested Percentage =============== ================= 5 years or less 0% 6 years 20% 7 years 40% 8 years 60% 9 years 80% 10 or more years 100% 3.2 Amount of Benefits ================== (a) The annual retirement benefit payable to a Participant upon his or her Retirement Date shall be equal to one-fifth of the Participant's Vested Accrued Benefit. The Participant's Vested Accrued Benefit shall equal the product of (i), (ii) and (iii) below: (i) his or her Pensionable Amount, multiplied by (ii) his or her years of Service, multiplied by (iii)his or her vested percentage as determined in Section 3.1. (b) Notwithstanding the foregoing, the benefits payable to a Participant who was a Participant on the Supplemental Effective Date shall not be less than the greater of (i) or (ii) below: (i) the benefits such Participant had accrued as of such date under the terms and provisions of the Plan in effect prior to this restatement, or (ii) the cash value of any life insurance policy that was purchased and owned by the Company for that Participant under the terms and provisions of the Plan in effect prior to this restatement paid out in five annual installment payments. 3.3 Form of Benefit Payments ======================== (a) The normal form of payment shall be the five-year period certain annuity described in Section 3.2. Under this form, after the Participant's death, his or her Beneficiary shall receive the balance of payments (if any) due during the five-year period certain. If both the Participant and his or her designated Beneficiary die before the five-year period expires, the balance of the payments due shall be paid to the estate of the Participant or the party or parties entitled by law to receive such payment. If a Participant's designated Beneficiary predeceases him or her, the Participant may designate another Beneficiary. A Participant may change his or her designated Beneficiary at any time by filing a written notice of the change with the Committee. (b) In lieu of the normal form of payment, the Participant may elect to receive a single lump sum payment equal to the Participant's Vested Accrued Benefit. Such election must be made by the Participant and submitted to the Committee on the Appropriate Form at the time of his or her initial participation. 3.4 Death Benefit ============= (a) Death of an Active Participant ============================== In the event of the death of an active Participant, his or her Beneficiary shall receive a lump sum death benefit equal to the greater of (i) or (ii), subject to the conditions outlined in this Section 3.4(a): (i) The Participant's Vested Accrued Benefit as defined in Section 3.2; or (ii) $200,000, if eligible. In order for a Participant to be eligible for the death benefit under Section 3.4(a)(ii), the Participant must provide proof of insurability to the Committee in the manner deemed acceptable by the Committee. Participants who are insured as of the Supplemental Effective Date are deemed to have provided proof of insurability. A Participant maintains the right to decline the benefit provided under Section 3.4(a)(ii), if he or she does not wish to provide proof of insurability. In the event of the death of a Participant who has not provided proof of insurability to the Committee, the Beneficiary will only be entitled to the benefit provided under Section 3.4(a)(i). (b) Death of a Retired Participant If a retired Participant was receiving his or her benefit under Section 3.3(a) of the Plan, the death benefit shall be equal to the balance, if any, of the five-year certain only annuity. If a retired Participant received a benefit under Section 3.3(b) of the Plan, no death benefit is payable. Notwithstanding the foregoing, the death benefits payable to the Beneficiary of a Participant who was a Participant on the Supplemental Effective Date shall not be less than the death benefits to which such Beneficiary would have been entitled had the Participant died as of such date under the terms and provisions of the Plan in effect prior to this restatement. 3.5 Life Insurance Policies or Annuity Contracts =========================================================================== Participants are entitled to no benefits other than those described in Sections 3.2 and 3.4. The life insurance policies or annuity contracts purchased by the Company shall be owned by the Company. 3.6 Unfunded Plan ============= Benefits under the Plan will be paid from the general assets of the Bank and the Company. With respect to Participants who have served only on the Board of Directors of the Bank or the Board of Directors of the Company, the respective entity shall pay the entire cost of such benefits. In the event that the Bank or the Company establishes an advance accrual reserve on its books against the future expenses of benefit payments or contributions, such reserve shall not under any circumstances be deemed to be an asset of this Plan but, at all times, shall remain a part of the general assets of the Bank or the Company, subject to claims of the Bank's or the Company's creditors. SECTION 4 MISCELLANEOUS 4.1 Restriction Against Assignment - --- ------------------------------ It is a condition of the Plan, and all rights of each Participant shall be subject thereto, that no right or interest of any Participant in the Plan and no benefit payable under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any action by way of anticipating, alienating, selling, transferring, assigning, pledging, encumbering, or charging the same shall be void and of no effect; nor shall any such right, interest or benefit be in any manner liable for or subject to the debts, contracts, liabilities, engagements, or torts of the person entitled to such right, interest or benefit, except as specifically provided in this Plan. 4.2 Payments in the Event of Incompetence If any person entitled to receive any benefits hereunder is, in the judgment of the Committee, legally, physically, or mentally incapable of personally receiving and receipting for any distribution, the Committee may direct that any distribution due such person, unless claim has been made therefor by a duly appointed legal representative, be made to his or her spouse, children or other dependents, or to any other duly designated beneficiary, and any other distribution so made shall be a complete discharge of the liabilities of the Plan. 4.3 No Right to Continue as Director -------------------------------- The establishment of the Plan shall not be construed as conferring any rights upon any Director for continuation of service as a Director, nor shall it be construed as limiting in any way the right of the Company to treat him or her without regard to the effect which such treatment might have upon him or her as a Participant under the Plan. 4.4 Discharge of Plan Obligations ----------------------------- The determination of the Committee as to the identity of the proper payee of any benefit payment and the amount properly payable shall be conclusive, and payments in accordance with such determination shall constitute a complete discharge of all obligations on account thereof. 4.5 Successor Company ----------------- The provisions of this Plan shall be binding upon and inure to the benefit of any successor or assign of the Company. If a successor company amends or terminates this Plan, no such amendments or termination shall adversely affect the benefits of Participants that have accrued prior to such action, the benefits of any Participant who had previously retired or the benefits of any Beneficiary receiving Plan benefits. SECTION 5 ADMINISTRATION OF THE PLAN 5.1 Administration of the Plan -------------------------- Administration of the Plan shall be the responsibility of the Committee. 5.2 Responsibility of Committee --------------------------- Subject to Section 5.1, the Committee shall be responsible for the administration, operation and interpretation of the Plan. The Committee shall establish rules from time to time for the transaction of its business. It shall have the exclusive right to interpret the Plan and to decide any and all matters arising thereunder or in connection with the administration of the Plan, and it shall endeavor to act, whether by general rules or by particular decisions, so as not to discriminate in favor of any person or class of person. Such decisions, actions and records of the Committee shall be conclusive and binding upon the Bank and the Company and all persons having or claiming to have any right or interest in or under the Plan. 5.3 Claims Procedure ---------------- In the event that any Participant or other payee claims to be entitled to a benefit under the Plan and the Committee determines that such claim should be denied in whole or in part, the Committee shall, in writing, notify such claimant within 90 days of receipt of such claim that his or her claim or her claim has been denied, setting forth the specific reasons for such denial. Such notification shall be written in a manner reasonably expected to be understood by such Participant or other payee and shall set forth the pertinent sections of the Plan relied on, and where appropriate, an explanation of how the claimant can obtain review of such denial. Within 60 days after receipt of such notice, such claimant may request, by mailing or delivery of written notice to the Committee, a review by the Committee of the decision denying the claim. If the claimant fails to request such a review within such 60-day period, it shall be conclusively determined for all purposes of this Plan that the denial of such claim by the Committee is correct. If such claimant requests a review within such 60-day period, the Participant or other payee shall have 30 days after filing a request for review to submit additional written material in support of the claim. Within 60 days after the later of its receipt of the request for review or the request to submit additional written material, the Committee shall determine whether such denial of the claim was correct and shall notify such claimant in writing of its determination. If such determination is favorable to the claimant, it shall be binding and conclusive. If such determination is adverse to such claimant, it shall be binding and conclusive unless the claimant notifies the Committee within 90 days after the mailing or delivery to him or her by the Committee of its determination, that the claimant intends to institute legal proceedings challenging the determination of the Committee and actually institutes such legal proceedings within 180 days after such mailing or delivery. 5.4 Limitation on Liability ----------------------- The Committee shall not be liable for any act or omission on its part, excepting only its own willful misconduct or gross negligence or except as otherwise expressly provided by applicable law. To the extent permitted by applicable law, and not otherwise covered by insurance, the Company shall indemnify and save harmless the Committee members against any and all claims, demands, suits or proceedings in connection with the Plan that may be brought by Participants or by any other person, corporation, entity, government or agency thereof; provided, however, that such indemnification shall not apply with respect to acts or omissions of willful misconduct or gross negligence. The Boards of Directors, at the expense of the Company, may settle such claim or demand asserted, or suits or proceedings brought, against the Committee when such settlement appears to be in the best interest of the Company. 5.5 Agent for Service of Process ---------------------------- The Committee or such other person as may from time to time be designated by the Committee shall be the agent for service of process under the Plan. SECTION 6 AMENDMENT OF THE PLAN 6.1 Plan Amendments --------------- This Plan may be wholly or partially amended or otherwise modified at any time by the Boards of Directors, provided, however, that no amendment or modification shall have any retroactive effect so as to deprive any person of any benefit already accrued. SECTION 7 DISCONTINUANCE OF THE PLAN 7.1 Termination of Plan ------------------- The Plan may be terminated at any time by the Boards of Directors by written notice to the Committee at the time acting hereunder. Upon termination of the plan, no amendment or modification shall have any retroactive effect so as to deprive any person of any benefit already accrued. SECTION 8 CONTRUCTION OF THE PLAN 8.1 Construction of the Plan ------------------------ The validity of the Plan or any of the provisions thereof shall be determined under and shall be construed according to the laws of the State of New Jersey. 8.2 Headings -------- Headings or titles to sections or paragraphs in this document are for convenience of reference only and are not part of the Plan for any other purposes. EX-11 5 exhibit112003.txt EXHIBIT 11 Exhibit 11. Statement re computation of per share earnings 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)
Years Ended December 31, 2003 December 31, 2002 December 31, 2001 ----------------- ----------------- ----------------- Weighted Per Weighted Per Weighted Per Net Average Share Net Average Share Net Average Share Income Shares Amount Income Shares Amount Income Shares Amount ------ ------ ------ ------ ------ ------ ------ ------ ------ Basic Earnings per Common Share Net income available to common shareholders $16,366 11,816 $1.39 $12,877 9,809 $1.31 $10,540 9,779 $1.08 ===== ===== Effect of Dilutive Shares Weighted average shares if converted 175 124 45 --- --- -- Diluted Earnings per Common Share Net income available to common shareholders $16,366 11,991 $1.36 $12,877 9,933 $1.30 $10,540 9,824 $1.07 ======= ====== ===== ======= ===== ===== ======= ===== =====
EX-13 6 exhibit13.txt EXHIBIT 13 MD&A Management's Discussion and Analysis of Financial Condition and Results of Operations This section presents management's discussion and analysis of the results of operations and financial condition of Interchange Financial Services Corporation on a consolidated basis (the "Company"). The discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto on pages 32 through 52 and the summary consolidated data included elsewhere in this report. Overview The Company is a community bank operating in Bergen County, NJ, one of the most affluent counties in the country, and provides diversified financial services to both consumer and business customers. Our primary source of earnings is net interest income which represents the difference between the interest the Company earns on its assets, principally loans and leases (herein referred to collectively as 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 ("margin"). We augment our primary revenue source through other non-interest income sources that include service charges on deposits, bank owned life insurance income ("BOLI"), commissions on mutual funds and annuities and gains on sales of loans. In addition, the Company from time to time may recognize income on gains on sales of securities, however, we do not consider this a primary source of income as we do not have a securities trading portfolio. Over the past several years we have sought to focus our emphasis on developing and expanding our business customer relationships and operations. As part of this effort we continued to expand our commercial lending group and product offerings, which included establishing a Small Business Administration loan department and a Rapid Response loan program focused on small businesses. In addition, we enhanced our presence in Eastern Bergen County when we completed our acquisition of Bridge View Bancorp ("Bridge View") on April 30, 2003. As of that date Bridge View had approximately $291 million of total consolidated assets, $184 million of loans and $259 million of deposits, resulting in an increase of approximately 30% in the Company's total assets. The aggregate purchase price paid to Bridge View shareholders was approximately $85.7 million and consisted of approximately 2.9 million shares of the Company's common stock with an approximate market value of $52.2 million based upon the average closing price three days prior to and after the acquisition date and $33.5 million in cash. The transaction was accounted for as a purchase and the cost in excess of net assets acquired of approximately $58.7 million was allocated to identified intangibles of approximately $4.3 million and goodwill of approximately $54.4 million. We believe that the acquisition of Bridge View also provides us with the ability to leverage their customer base with our product offerings and acquire new customers as a result of an increase in our branch network. The increase in customers in terms of new customers to the merged entity or providing additional services to existing customers, we believe will drive volume in both deposits and assets and provide us with net interest income and non-interest income growth. The economic and competitive landscape provided significant challenges during a historically low interest rate environment. Margin compression occurred across the industry as interest rates hit a 45 year low in June of 2003. During the fourth quarter margin compression appears to have subsided as many institutions reported stabilization in their margins. The Company also experienced margin compression during 2003, however we continued to outperform our peer group from a margin perspective. It is anticipated that with changes in our asset mix as well as a slow down in prepayments in our loan and securities portfolios any additional margin compression will be minimized and over the longer term our margin should improve. Demand for commercial loans was soft across the industry as uncertainty in the economy restrained business expansion and loan demand. In addition, as demand softened competition increased for commercial loans which resulted in competitors offering longer term fixed rate loans which did not appear to provide an adequate risk reward profile. Although we were also impacted by the soft loan market and competition, we were able to increase our overall commercial loan portfolio. Earnings Summary Earnings per diluted common share for the year ended December 31, 2003 increased $0.06 to $1.36 as compared to $1.30 during the preceding year, an increase of 4.6%. Earnings per basic common share for the year ended December 31, 2003 increased $0.08 to $1.39 as compared to $1.31 during the preceding year, an increase of 6.1%. Net income for the year 2003 increased $3.5 million, or 27.1%, to $16.4 million when compared to 2002. For 2003, the Company's return on average assets ("ROA") was 1.35% as compared to 1.43% in 2002. The Company's return on average equity ("ROE") was 13.54% in 2003 as compared to 17.35% for the previous year. The change in ROA was a result of net interest margin compression due to prepayments in the loan and securities portfolio's along with core deposit growth outpacing deployment of those funds into higher yielding loans and maintaining an average life on the investment portfolio of approximately 2.5 years. ROE declined mainly due to an increase in equity as a result of the acquisition of Bridge View. Based on its earnings performance, the Company increased the quarterly dividend paid on common stock to an annualized rate of $0.50 for 2004 as compared to $0.44 in 2003. Net interest income, on a tax equivalent basis, increased to $46.4 million from $39.0 million an increase of $7.4 million, or 18.9%, which resulted from growth in interest earning assets and deposits offsetting a decline in margin. The taxable equivalent adjustment of $533 thousand represented an increase of approximately $157 thousand as compared to $376 thousand for the prior year. The Company believes that utilizing a taxable equivalent adjustment basis for net interest income provides a more meaningful basis for comparing the Company's results year over year and versus the industry. See Financial Highlights footnotes. Overall earnings improved despite the pressure exerted on our margin. Contributing to our earnings growth was an increase in our non-interest income. Non-interest income increased $4.1 million, or 63%, for 2003 as compared to 2002. Of the increase approximately $3.0 million, or 73%, resulted from the Company's organic growth. The improvement in non-interest income was largely due to increases in "other" non-interest income, BOLI income and service charges on deposits. Non-interest expense for 2003 increased $6.2 million, or 24.6%, as compared to 2002. The increase was due largely to the additional operating costs resulting from the Bridge View merger and normal increases related to salaries and benefits along with occupancy expense. Earnings per diluted common share for the year ended December 31, 2002 increased $0.23 to $1.30 as compared to $1.07 during the preceding year, an increase of 21.5%. Earnings per basic common share for the year ended December 31, 2002 increased $0.23 to $1.31 as compared to $1.08 during the preceding year, an increase of 21.3%. 13 Net income for the year 2002 increased $2.3 million, or 22.2%, to $12.9 million when compared to 2001. For 2002, the Company's ROA increased to 1.43% from 1.31% in 2001. The Company's ROE increased to 17.35% in 2002 from 16.06% for the previous year. The earnings performance for 2002 was driven by a $5.1 million, or 14.9%, increase in net interest income, on a taxable equivalent basis, which resulted from growth in interest earning assets and deposits and an improved margin. The margin improved largely due to a decrease in the Company's funding costs which, based on the composition of the Company's total deposits, was favorably affected by a decline in market interest rates. The earnings improved despite the increased levels of consumer loan prepayments, which occurred as a result of declining market interest rates. In addition, non-interest income grew 16.8% and contributed to the growth in revenue. The growth in revenue was partly offset by a 9.6% increase in non-interest expenses that is mostly attributable to normal growth and expansion. Non-interest income increased $936 thousand, or 16.8%, for 2002 as compared to 2001 due principally to growth from the sale of mutual funds and annuities, security gains and an increase in BOLI income. non-interest expense increased $2.2 million, or 9.6%, for 2002 as compared to 2001. Approximately $910 thousand of the growth is directly related to the growth and operation of the Company's leasing subsidiary and a new branch office that opened during 2002. These expansion programs are aimed at enhancing the Company's franchise value in its trade area. Table 1 - ------------------------------------------------------------------------------------------------------------- Summary of Operating Results - ------------------------------------------------------------------------------------------------------------- 2003 2002 2001 -------------------- ------------- ------------------- Net income (in thousands) $16,366 $ $2,877 $ 10,540 Basic earnings per common share 1.39 1.31 1.08 Diluted earnings per common share 1.36 1.30 1.07 Return on average total assets 1.35% 1.43% 1.31% Return on average total equity 13.54% 17.35% 16.06% Dividend payout ratio* 30.37% 33.56% 33.37% Average total stockholders' equity to average total assets 9.95 % 8.27% 8.13% * Cash dividends declared on common shares to net income.
Results of Operations Net Interest Income Net interest income represents the Company's primary source of income. Table 2 sets forth a summary of average interest-earning assets and interest-bearing liabilities for the years ended December 31, 2003, 2002 and 2001, 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 2003 and 2002, 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) 2003 2002 2001 ------------------------------------ --------------------------- ---------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------------------------------ --------------------------- ---------------------------- Assets Interest earning assets Loans (1) $ 729,581 $49,142 6.74 % $ 611,659 $45,496 7.44 % $579,034 $46,319 8.00% Taxable securities (2) 304,418 10,034 3.30 200,257 10,312 5.15 160,202 10,138 6.33 Tax-exempt securities (2)(3) 27,737 1,287 4.64 14,545 822 5.65 11,844 712 6.01 Interest earning deposits 5,810 61 1.05 - - - - - - Federal funds sold 25,827 276 1.07 15,730 246 1.56 13,138 557 4.24 ------------- ---------------------- ----------- -------- ------ ---------- ----------------- Total interest-earning assets 1,093,373 60,800 5.56 % 842,191 56,876 6.75 % 764,218 57,726 7.55% ---------- ---- -------- --------- Non-interest earning assets Cash and due from banks 34,316 20,635 20,216 Allowance for loan and lease losses (8,762) (6,572) (6,368) Other assets 96,646 41,303 29,265 ------------- ----------- ---------- Total assets $ 1,215,573 $897,557 $ 807,331 ============= =========== ========== Liabilities and stockholders' equity Interest-bearing liabilities Demand deposits $ 395,408 4,700 1.19 % $304,908 5,744 1.88 % $246,037 6,871 2.79% Savings deposits 199,127 1,408 0.71 136,527 1,952 1.43 128,987 2,801 2.17 Time deposits 273,382 7,053 2.58 224,931 8,661 3.85 222,493 12,398 5.57 Short-term borrowings 17,875 285 1.59 19,119 694 3.63 25,545 1,374 5.38 Long-term borrowings 10,000 428 4.28 9,945 427 4.29 - - - ------------- --------------------- ----------- -------- ------ ---------- ----------------- Total interest-bearing liabilities 895,792 13,874 1.55 % 695,430 17,478 2.51 % 623,062 23,444 3.76% Non-interest bearing liabilities Demand deposits 183,451 115,714 110,576 Other liabilities 15,434 12,176 8,078 ------------- ----------- ---------- Total liabilities (4) 1,094,677 823,320 741,716 Stockholders' equity 120,896 74,237 65,615 ------------- ----------- ---------- Total liabilities and stockholders' equity $1,215,573 $897,557 $ 807,331 ============= =========== ========== Net interest income (tax-equivalent basis) 46,926 4.01 % 39,398 4.24 % 34,282 3.79% Tax-equivalent basis adjustment (533) (376) (324) ----------- -------- -------- Net interest income $46,393 $39,022 $33,958 =========== ======== ======== Net interest income as a percent of interest-earning assets (tax-equivalent basis) (5) 4.29 % 4.68 % 4.49% - ------------------------------------------------------------------------------------------------------------------------------------ (1) Nonaccrual loans and any related interest recorded have been included in computing the average rate earned on the loan portfolio. (2) The average balances are based on historical cost and do not reflect unrealized gains or losses. (3) Computed on a fully taxable equivalent basis using the corporate federal tax rate of 34%. (4) All deposits are in domestic bank offices. (5) Net interest margin. 15
Table 3 - ------------------------------------------------------------------------------------------------------------------------------------ Effect of Volume and Rate Changes on Net Interest Income - ------------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands) Year ended December 31, Year ended December 31, 2003 compared with 2002 2002 compared with 2001 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 $8,771 $ (5,125) $ 3,646 $ 3,357 $ (4,180) $(823) Taxable securities 5,364 (5,642) (278) 2,535 (2,361) 174 Tax-exempt securities 746 (281) 465 162 (52) 110 Interest bearing deposits 61 - 61 - - - Federal funds sold 158 (128) 30 142 (453) (311) ------ --------- -------- ------- ------- ----- Total interest income 15,100 (11,176) 3,924 6,196 (7,046) (850) ------ --------- -------- ------- ------- ----- Interest expense Demand deposits 4,290 (5,334) (1,044) 3,130 (4,257) (1,127) Savings deposits 5,333 (5,876) (543) 175 (1,024) (849) Time deposits 3,023 (4,631) (1,608) 137 (3,874) (3,737) Short-term borrowings (43) (366) (409) (297) (383) (680) Long-term borrowings - 1 1 427 - 427 ------ ------- -------- ------ ------- ------- Total interest expense 12,603 (16,206) (3,603) 3,572 (9,538) (5,966) ------ -------- -------- ------ ------- ------- Change in net interest income $ 2,497 $ 5,030 $ 7,527 $ 2,624 $ 2,492 $5,116 ======= ======== ======== ======= ======= ======= - ---------------------------------------- Non-performing loans are included in interest earning assets.
Net interest income, on a taxable equivalent basis, amounted to $46.9 million in 2003, an increase of $7.5 million, or 19.1%, from $39.4 million in 2002. The increase in net interest income was largely due to growth in average interest-earning assets of $251.2 million. The interest earning asset growth was funded by a $269.3 million growth in average deposits. The growth in interest earning assets and deposits were primarily attributed to the Bridge View acquisition. The change in the margin of 39 basis points to 4.29% for 2003 as compared to the same period in 2002, partially offset the growth in interest earning assets. The change in the margin was attributable to a shift in our asset mix due to the historically low interest rates occurring in 2003, causing prepayments in our loan and securities portfolios and strong deposit growth. The funds from the prepayments and deposit growth being reinvested mainly into lower yielding investment securities along with loan modifications resulted in margin compression. Interest income, on a taxable equivalent basis, totaled $60.8 million for 2003, an increase of $3.9 million, or 6.9%, as compared to 2002. For the years ended December 31, 2003 and 2002, the tax equivalent basis adjustments were $533 thousand and $376 thousand, respectively. The increase in interest income is attributed to a growth in interest earning assets. The growth in interest earning assets was largely due to increases in average loans and investments of $117.9 million and $117.4 million, respectively. The Bridge View acquisition was the primary contributor to the increase in interest earning assets and loans for 2003. The increase in interest income was partly offset by a 119 basis point decline in interest earning asset yields for 2003 as compared to 2002. The decline in interest earning asset yields was largely attributed to a decrease in market interest rates and change in asset mix. Interest expense totaled $13.9 million in 2003, a decrease of $3.6 million, or 20.6%, as compared to 2002. The decrease was principally due to a decline in the average rates paid on interest-bearing liabilities of 96 basis points to 1.55% in 2003 as compared to 2.51% in 2002, which was mostly due to a decline in short-term market interest. Average rates paid on interest-bearing demand and time deposits decreased 69 basis points and 127 basis points, respectively, for 2003 as compared to 2002. The benefit derived from a decline in average rates more than offset the increase in interest expense associated with the growth of average interest-bearing liabilities of $200.4 million for 2003 as compared to the prior year. The growth in average interest-bearing liabilities was due mostly to the Bridge View acquisition and occurred primarily in interest-bearing demand, savings and time deposits, which increased $90.5 million, $62.6 million and $48.5 million, respectively. Net interest income, on a taxable equivalent basis, amounted to $39.4 million in 2002, an increase of $5.1 million, or 14.9%, from $34.3 million in 2001. The increase in net interest income was largely due to growth in average interest-earning assets of $78.0 million and a 19 basis point improvement in the margin. The interest earning asset growth was principally funded by a $74.0 million growth in average deposits, which occurred largely in interest-bearing demand deposits. The improvement in the margin of 19 basis points to 4.68% for 2002 as compared to 4.49% for 2001 was due mostly to a decrease in the Company's funding cost. Two factors were largely responsible for the decrease in funding cost: first, the composition ("mix") of the Company's retail deposits experienced a positive shift towards lower cost demand and savings deposits; second, short-term market interest rates (used to price deposit products) declined. Each of these factors served to reduce the Company's funding cost. Interest income, on a taxable equivalent basis, totaled $56.9 million in 2002, a decrease of $850 thousand, or 1.5%, from $57.7 million in 2001. The decrease in interest income was driven by lower average rates on interest earning assets, mostly loans, as a result of a decline in market interest rates. The average yield on interest earning assets decreased 80 basis points to 6.75% for 2002 as compared to 7.55% in 2001. Growth in average interest earning assets served to offset some of the effects of the lower average rates. The increase in average interest earning assets was largely due to growth in securities and loans of $42.8 million, or 24.9%, and $32.6 million, or 5.6%, respectively. The growth 16 in average loans was principally in commercial loans, which increased by $43.0 million, or 15.6%, to $317.7 million in 2002, as compared to $274.6 million in 2001. In addition, equipment financing leases generated by the Bank's leasing subsidiary, Interchange Capital Company L.L.C. ("ICC") grew, on average, $5.7 million, or 25.3%, for 2002. The average balance of consumer loans (comprised mostly of 1 to 4 family first mortgages and home equity loans) totaled $265.6 million in 2002, compared to $281.7 million in 2001, a decrease of $16.1 million, or 5.7%. The decline in the consumer loan portfolio was principally driven by higher levels of loan prepayments as a result of the low interest rate environment. Interest expense totaled $17.5 million in 2002, a decrease of $6.0 million, or 25.5%, as compared to 2001. The decrease was principally due to a decline in the average rates paid on interest-bearing liabilities of 125 basis point to 2.51% in 2002 as compared to 3.76% in 2001. The decrease in average rates was mostly due to a decline in short-term market interest rates, which had a favorable impact on average rates paid on interest-bearing demand and time deposits. Average rates paid on interest-bearing demand and time deposits decreased 91 basis points and 172 basis points, respectively, for 2002 as compared to 2001. The benefit derived from a decline in average rates helped offset the increase in interest expense associated with the growth of average interest-bearing liabilities of $72.4 million for 2002 as compared to the prior year. The growth in average interest-bearing liabilities was due mostly to an increase in interest-bearing demand deposits of $58.9 million, or 23.9%, for 2002 as compared to 2001. In addition, savings deposits increased $7.5 million, or 5.9%, for 2002 as compared to 2001. Non-interest Income Non-interest income consists of all income other than interest and dividend income and is principally derived from: service charges on deposits; loan fees; commissions on sales of annuities and mutual funds; rental fees for safe deposit space; BOLI income and net gains on sale of securities and loans. The Company recognizes the importance of supplementing net interest income with other sources of income and maintains a management committee that explores new opportunities to generate non-interest income. Non-interest income increased $4.1 million, or 63%, for 2003 as compared to 2002. Of the increase approximately $3.0 million, or 77%, resulted from the Company's organic growth. The improvement in non-interest income was largely due to increases in "other" non-interest income, BOLI income and service charges on deposits of $1.2 million, $1.1 million and $904 thousand, respectively. The increase in other income was primarily a result of prepayment penalties on commercial loans, while the increase in BOLI income was due to a claim on insurance policies, which amounted to $921 thousand. The growth in service charges on deposits and "other" non-interest income were largely due to the acquisition of Bridge View. Contributing to the improvement in non-interest income were net gains from the sale of loans and commissions on sales of mutual funds and annuities. The gain on sales of loans were from two programs the Company commenced in 2003; the Mortgage Partnership Financing program with the Federal Home Loan Bank of New York, whereby the Company sells its new originated conforming 20 and 30 year residential mortgages, and originating Small Business Administration loans and selling these into the secondary market. During 2003, the Company recognized net gains on the sale of securities of $793 thousand as compared to $564 thousand for the same period in 2002. The net gains for 2003 were a result of a combination of net realized gains from security sales of $1.2 million and gross losses of $415 thousand primarily from an acceleration of premium amortization on certain collateralized mortgage obligations. The acceleration of premium amortization was largely driven by the historically high mortgage prepayment speeds due to the low interest rate environment. Non-interest income for 2002 was $6.5 million, an increase of $936 thousand, or 16.8%, from $5.6 million in 2001. The growth was due mostly to a $312 thousand increase in net gain on sale of securities and an increase of $517 thousand in income related to the cash surrender value of BOLI contracts. Contributing to the growth in non-interest income was an increase in fee income derived from the sale of mutual funds, which increased $330 thousand. The growth in non-interest income for 2002 was reduced by a decline in net gains on the sale of loans and leases of $150 thousand.
Table 4 ______________________________________________________________________________________________ Non-interest Income ________________________________________________________________________________________________ for the years ended December 31, (dollars in thousands) 2003 2002 2001 _______ _______ ________ Service fees on deposit accounts $ 3,485 $ 2,581 $ 2,459 Net gain on sale of securities 793 564 252 Net gain on sale of loans and leases 769 400 550 Bank owned life insurance 2,019 895 378 Commissions on sales of annuities and mutual funds 883 603 273 All other 2,696 1,471 1,666 ________ _______ _______ Total $ 10,645 $ 6,514 $ 5,578 ======== ======= =======
17 Non-interest Expense Non-interest expense for 2003 increased $6.2 million, or 24.6%, to $31.2 million as compared to 2002. The increase was due largely to the additional operating costs resulting from the merger with Bridge View. Also contributing to the increase were normal increases related to salaries and benefits along with occupancy expense. In addition, the Company incurred direct integration expenses of approximately $357 thousand associated with the Bridge View merger, which included expenses associated with data processing, customer notifications and advertising, and salaries. The largest component of non-interest expense, salaries and benefits, increased $3.3 million, or 24.3%, for 2003 of which approximately $1.7 million of the increase was related to the Bridge View acquisition. Salaries and benefits, excluding amounts related to Bridge View, increased 11.9% due mostly to increased head count as a result of the Company's expansion, salary increases and higher benefit expenses. Bridge View also accounted for $986 thousand and $291 thousand of the increases in occupancy and amortization of the intangibles, respectively. Other non-interest expense increased $1.1 million, largely due to an increase of $294 thousand in data processing costs and $226 thousand in printing and postage costs while all other expenses increased $585 thousand. Non-interest expense for 2002 increased $2.2 million, or 9.6%, to $25.1 million as compared to 2001. Approximately $910 thousand of the increase was attributable to the expansion of the Bank's operations, principally the full year expense for a new office opened in the first quarter in 2002 and the growth of ICC. The growth in ICC was principally due to the assumption of Monarch Capital Corporation ("MCC") operations during the first quarter of 2002, which resulted from the Company's acquisition of certain assets and the assumption of certain liabilities of MCC. Excluding the costs related to the expansion, non-interest expense for 2002 increased $1.3 million, or 5.6%. The largest component of non-interest expense, salaries and benefits, increased $1.3 million, or 10.7%, for 2002 of which approximately $500 thousand of the increase was directly related to the expansion programs described above. Salaries and benefits, excluding amounts related to the expansion programs, increased 6.6% due mostly to normal promotions, salary increases and higher benefit expenses. In addition, other expense increased $708 thousand, largely due to an increase of $218 thousand in professional fees, an increase of $71 thousand in data processing costs and an increase of $419 thousand in all other expenses.
Table 5 ________________________________________________________________________________ Non-interest Expense ________________________________________________________________________________ for the years ended December 31, (dollars in thousands) 2003 2002 2001 =========== ========= =========== Salaries and benefits $16,994 $ 13,673 $ 12,353 Occupancy 4,577 3,438 3,275 Furniture and equipment 1,327 1,124 1,157 Advertising and promotion 1,412 1,295 1,251 Amortization of intangible assets 360 69 81 Other expenses Professional fees 1,568 1,458 1,240 Data Processing 933 639 568 All other 4,068 3,367 2,948 ----- ----- ----- Total $31,239 $ 25,063 $ 22,873 ============ ========== ===========
Income Taxes In 2003, income taxes amounted to $7.6 million as compared to $6.1 million and $5.0 million for 2002 and 2001, respectively. The effective tax rate in 2003 was 31.8% as compared to 32.1% and 32.4% for 2002 and 2001, respectively. Detailed information on income taxes is shown in Notes 1 and 17 to the Consolidated Financial Statements. ________________________________________________________________________________ Financial Condition Loan Portfolio At December 31, 2003, total loans amounted to $796.6 million, an increase of $181.0 million, or 29.4%, compared to $615.6 million at December 31, 2002. The growth was predominately a result of the Bridge View acquisition and occurred primarily in commercial real estate mortgage loans and commercial and financial loans, which increased $107.5 million and $45.0 million, respectively. Commercial real estate mortgage loans are typically secured by first priority mortgage liens on owner occupied commercial properties. The commercial loan growth was largely within the subsidiary Bank's delineated community, which is in Bergen County, New Jersey. 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 North American Industry Classification System, which exceeds 10% of its total loans and unfunded commitments. 18
Table 6 - ----------------------------------------------------------------------------------------------------- Loan Portfolio - ----------------------------------------------------------------------------------------------------- at December 31, 2003 2002 2001 2000 1999 ========== ========== ========= ========= ========= Amounts of loans by type (in thousands) Real estate-mortgage 1-4 family residential First liens $ 100,286 $ 100,302 $ 113,703 $ 110,369 $ 110,269 Junior liens 4,138 6,241 8,384 11,195 9,829 Home equity 136,477 125,037 130,658 142,610 144,747 Commercial 330,040 222,628 198,319 181,722 166,354 Construction 31,077 11,359 5,265 3,755 4,008 ------------ ---------- ---------- ---------- --------- 602,018 465,567 456,329 449,651 435,207 ------------ ---------- ---------- ---------- --------- Commercial loans Commercial and financial 149,462 104,542 85,801 76,702 63,684 Lease financing 28,440 26,356 15,850 23,804 1,813 ------------ ---------- ---------- ---------- --------- 177,902 130,898 101,651 100,506 65,497 ------------ ---------- ---------- ---------- --------- Consumer loans Lease financing 12,416 15,969 18,822 4,919 7,569 Installment 4,245 3,207 4,521 5,803 3,703 ------------ ---------- ---------- ---------- --------- 16,661 19,177 23,343 10,722 11,272 ------------ ---------- ---------- ---------- --------- Total $ 796,581 $ 615,641 $ 581,323 $ 560,879 $ 511,976 ============ ========== ========== ========== ========= Percent of loans by type Real estate-mortgage 1-4 family residential First liens 12.6 % 16.3 % 19.6 % 19.7 % 21.5 % Junior liens 0.5 1.0 1.4 2.0 1.9 Home equity 17.1 20.3 22.5 25.4 28.3 Commercial 41.4 36.2 34.1 32.4 32.5 Construction 3.9 1.8 0.9 0.7 0.8 ------------ ---------- ---------- ---------- --------- 75.5 75.6 78.5 80.2 85.0 ------------ ---------- ---------- ---------- --------- Commercial loans Commercial and financial 18.8 17.0 14.8 13.7 12.4 Lease financing 3.6 4.3 2.7 4.2 0.4 ------------ ---------- ---------- ---------- --------- 22.4 21.3 17.5 17.9 12.8 ------------ ---------- ---------- ---------- --------- Consumer loans Lease financing 1.6 2.6 3.2 0.9 1.5 Installment 0.5 0.5 0.8 1.0 0.7 ------------ ---------- ---------- ---------- ---------- 2.1 3.1 4.0 1.9 2.2 ------------ ---------- ---------- ---------- ---------- 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, 2003. The table excludes real estate loans (other than construction loans), and consumer loans: (in thousands) Due after Due in one year Due after one year through five or less five years years Total ------------ ---------- ---------- --------- Commercial and financial $57,470 $53,774 $38,218 $149,462 Lease financing 1,203 26,867 370 28,440 Real estate-construction 24,418 6,659 - 31,077 ----------- ---------- ---------- ----------- Total $83,091 $87,300 $38,588 $208,979 =========== ========== ========== ==========
The following table sets forth the interest rate characteristics of loans due after one year as of December 31, 2003: (in thousands) Due after one year Due after through five five years years ------------ ---------- Fixed interest rate $ 62,043 $ 17,308 Variable interest rate 25,257 21,280 ------------ ---------- Total $ 87,300 $ 38,588 ============ ==========
19 Loan Quality The lending activities of the Company follow the 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 maintains an independent loan review function. The responsibility of this function rests with the loan review officer who oversees the evaluation of credit risk for substantially all large commercial loans and leases as well as a sample of smaller commercial loans and leases. The loan review officer also monitors the integrity of the Company's credit risk rating system. 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. In addition, the loan review officer reviews commercial leases and consumer loans considered homogeneous in nature, to identify and evaluate the credit risks of these portfolios. The loan review officer reports directly to the Senior Vice President and Chief Financial Officer of the Company and provides quarterly reports to the Company's Board of Directors. Management maintains a "watchlist" system under which credit officers are required to provide early warning of possible deterioration in the credit quality of 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. Identification of such financial weaknesses at an early stage allows 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. Allowance for Loan and Lease Losses and Related Provision Credit risk represents the possibility that a borrower, counterparty or insurer may not perform in accordance with contractual terms. Credit risk is inherent in the financial services business and results from extending credit to customers, purchasing securities and entering into financial derivative transactions. The Company seeks to manage credit risk through, among other techniques, diversification, limiting credit exposure to any single industry or customer, requiring collateral, and selling participations to third parties. The allowance for loan and lease losses ("ALLL") is established through periodic charges to income. Loan losses are charged against the ALLL when management believes that the future collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. If management considers the ALLL inadequate to cover inherent 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 a provision is made to increase the ALLL. The Company performs periodic, systematic reviews of its portfolios to identify inherent losses and assess the overall probability of collection. These reviews result in the identification and quantification of loss factors, which are used in determining the amount of the ALLL. In addition, the Company periodically evaluates prevailing economic and business conditions, concentration and changes in the size and characteristics of the portfolio and other pertinent factors. Portions of the ALLL are allocated to cover the probable losses inherent in each loan and lease category based on the results of this detailed review process. Commercial loans and leases, which are not considered as part of a homogenous pool, are individually assigned a credit risk rating. Commercial loans, which have been internally classified above a certain credit risk rating, are periodically analyzed to determine the need for a specific loan loss allocation. For commercial loans and leases, not specifically reviewed, loss allocations are computed utilizing probable loss factors derived from actual delinquency and loss experience. The combination of these analyses is the basis for the determination of the commercial loan and lease portions of the ALLL. Consumer loans, which include residential mortgages, home equity loans/lines, direct/indirect loans, and consumer finance, are generally evaluated for credit risk as a group based upon product type. The determination of the ALLL for consumer loans are based upon a combination of historical losses and delinquencies Credit risk for small business loans and leases are analyzed in a similar manner utilizing a migration analysis, based upon delinquencies and historical losses. The results of the analyses are reviewed, discussed and approved by the Company's Board of Directors. On a quarterly basis an analysis of the ALLL and specific allocations of the reserve are performed. As a result, adjustments to reserve allocations for specific segments of the loan and lease portfolio may be made. At December 31, 2003, the Company's allocated ALLL amounted to 87% of the total ALLL. The process used by the Company to determine the appropriate overall reserve for credit losses is based on this analysis, taking into consideration management's judgment. This reserving methodology is reviewed on a periodic basis and modified as appropriate. Based on this analysis, including the aforementioned assumptions, management believes that the reserve for credit losses is adequate as of December 31, 2003. An integral component of the Company's risk management process is allocating the ALLL based upon risk characteristics, demonstrated losses, loan segmentations, and other factors. The unallocated component of the ALLL represents management's view that, given the complexities of the loan portfolio, there are probable losses that have been incurred but not yet specifically identified. This unallocated reserve may change periodically after evaluating factors impacting assumptions utilized in the allocated reserve calculation. While the ALLL is management's best estimate of the inherent loan losses incurred as of the balance sheet date, the process of determining the adequacy of the ALLL is judgmental and subject to changes in external conditions. Accordingly, there can be no assurance that existing levels of the ALLL will ultimately prove adequate to cover actual loan losses. Loan loss provisions for 2003 amounted to $1.8 million, an increase of $315 thousand from the prior year. In 2002, the loan loss provision amounted to $1.5 million, an increase of $425 thousand from 2001. The increase in the loan loss provision for 2003 was attributable to an increase in commercial loans and higher levels of non-performing loans. Loans are charged-off against the ALLL, when management believes that the future collection of principal is unlikely. In 2003, non-performing loans increased $2.6 million to $8.6 million as compared to $6.0 million in 2002. Loans charged-off, net of recoveries increased $448 thousand to $1.3 million as compared to $862 thousand in 2002. The charge-offs occurred principally in the ICC commercial lease portfolio which accounted for $1.1 million or 79% of all loans charged-off. Over the last three years ICC's leasing portfolio accounted for approximately $2.7 million or 79% of all charge-offs. The charge-offs occurred mostly in the two commercial lease portfolios that were purchased from brokers (indirect) during 2001. ICC's indirect commercial lease portfolio, which has experienced most of the charge-offs appears to have stabilized. ICC did not purchase any indirect lease portfolios in 2002 or 2003. ICC's credit policy was amended to exclude the purchase of indirect lease portfolios, on a flow basis or in the aggregate, from indirect sources and the Bank's Board of 20 Directors must approve any exceptions to policy. Management has been working to reduce the delinquencies in the lease portfolio and obtaining possession of the foreclosed equipment, which will be re-marketed by the vendors to new customers. In addition, management believes that at December 31, 2003 the allocated allowance to the commercial lease portfolio is sufficient to cover possible losses.
Table 7 - ------------------------------------------------------------------------------------------------- Loan Loss Experience - ------------------------------------------------------------------------------------------------- for the years ended December 31, (dollars in thousands) 2003 2002 2001 2000 1999 ----------- --------- -------- --------- ------------- Average loans outstanding $729,581 $611,659 $579,034 $536,971 $494,022 =========== ========= ========= ========= ============= Allowance at beginning of year $7,207 $6,569 $6,154 $5,476 $5,645 ----------- --------- --------- --------- ------------- Loans charged-off: Real estate 162 17 11 186 120 Commercial and financial 25 - - - 1,234 Commercial lease financing 1,072 875 949 8 - Consumer loans 97 34 4 25 59 ----------- --------- --------- --------- ------------- Total 1,356 926 964 219 1,413 ----------- --------- --------- --------- ------------- Recoveries of loans previously charged-off: Real estate 35 29 22 99 10 Commercial and financial - - 264 27 14 Commercial lease financing 8 16 8 - - Consumer loans 3 19 10 21 20 ----------- --------- --------- --------- ------------- Total 46 64 304 147 44 ----------- --------- --------- --------- ------------- Net loans charged-off 1,310 862 660 72 1,369 ----------- --------- --------- --------- ------------- Additions due to merger 1,929 - -- - - Provision for loan and lease losses 1,815 1,500 1,075 750 1,200 ----------- --------- --------- --------- ------------- Allowance at end of year $9,641 $7,207 $6,569 $6,154 $5,476 =========== ========= ========= ========= ============= Allowance to total loans 1.21 % 1.17 % 1.13 % 1.10 % 1.07 % Allowance to nonaccrual loans 112.50 % 120.86 % 304.12 % 441.15 % 491.12 % Allowance to nonaccrual loans and loans past due 90 days or more 112.50 % 120.86 % 304.12 % 441.15 % 491.12 % Ratio of net charge-offs to average loans 0.18 % 0.14 % 0.11 % 0.01 % 0.28 %
At December 31, 2003, the ratio of the ALLL to total loans was 1.21% as compared to 1.17% at the end of the prior year. The ALLL represented 112.5% of nonaccrual loans and loans past due 90 days or more at December 31, 2003, down from 120.9% at the end of 2002. This ratio was impacted by a $2.6 million increase in nonaccrual loans in 2003 as compared to the end of the year in 2002 offset by a $1.9 million increase in the ALLL in 2003 to reflect Bridge View's ALLL at the time of acquisition. Refer to the section titled "non-performing Assets" and Table 9 for more detail on loan delinquencies and non-performing assets. The Company has the same collateral policy for loans whether they are funded immediately or based on a commitment. A commitment to extend credit is a legally binding agreement to lend funds to a customer usually at a stated interest rate and for a specified purpose. Such commitments have fixed expiration dates and generally require a fee. The extension of a commitment gives rise to credit risk. The actual liquidity requirements or credit risk that the Company will experience will be lower than the contractual amount of commitments to extend credit because a significant portion of those commitments are expected to expire without being drawn upon. Certain commitments are subject to loan agreements containing covenants regarding the financial performance of the customer that must be met before the Company is required to fund the commitment. The Company uses the same credit policies in making commitments to extend credit as it does in funding loans. In addition, the Company manages the potential credit risk in commitments to extend credit by limiting the total amount of arrangements, both by individual customer and in the aggregate; by monitoring the size and maturity of the structure of these portfolios; and by applying the same credit standards maintained for all of its related credit activities. The credit risk associated with these off balance sheet commitments is recorded as a liability in the Company's balance sheet and management's determination of the reserve for these amounts are $140 thousand. 21
Table 8 - ----------------------------------------------------------------------------------------------------------------------------- Allocation of Allowance for Loan and Lease Losses - ----------------------------------------------------------------------------------------------------------------------------- at December 31, (dollars in thousands) 2003 2002 2001 2000 1999 __________________ ___________________ __________________ __________________ _____________________ % of % of % of % of % of Loans Loans Loans Loans Loans to Total to Total to Total to Total to Total Amount Loans(1) Amount Loans(1) Amount Loans(1) Amount Loans(1) Amount Loans(1) ------- -------- ------- --------- ------- -------- -------- ------- --------- --------- Real estate $6,743 75.5% $3,724 75.6% $4,028 78.5% $2,713 80.2% $2,191 85.0% Commercial and financial 479 18.8 1,435 17.0 1,389 14.8 931 13.6 634 12.5 Commercial lease financing 968 3.6 720 4.3 542 2.7 435 5.1 81 1.8 Consumer loans 186 2.1 132 3.1 5 4.0 35 1.1 82 0.7 Unallocated 1,265 - 1,196 - 605 - 2,040 - 2,488 - --------- --------- ------- ------- ------- ------- ------- ------- --------- ------- $9,641 100.0% $7,207 100.0% $6,569 100.0% $6,154 100.0% $ 5,476 100.0% ========= ========= ======= ======= ======= ======= ======= ======= ========== ======= (1) This column reflects each respective class of loans as a percent of total loans. The above allocation is intended for analytical purposes and may not be indicative of the categories in which future loan losses may occur.
Non-performing Assets Non-performing assets consist of nonaccrual loans, restructured loans and foreclosed assets (comprised of foreclosed real estate and repossessed assets. 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. 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 below presents the detail of non-performing assets and the aggregate of loans whose principal and/or interest has not been paid according to contractual terms. At December 31, 2003, non-performing assets increased $2.7 million, or 43.3%, as compared to the end of the prior year. The increase in non-performing assets was due mainly to one relationship representing $1.7 million of the increase in nonaccrual loans. Based upon the best currently available information it is believed that this relationship will be worked out during 2004 and the Company is not likely to experience a loss. Non-performing assets increased $3.3 million, or 119.1%, in 2002 as compared to 2001. Based on the current information available, except for the loans included in the table, management believes that there were no material probable problem loans or leases, either individually or in the aggregate, at December 31, 2003.
Table 9 _____________________________________________________________________________________________________________________ Loan Delinquencies and Nonperforming Assets _____________________________________________________________________________________________________________________ at December 31, (dollars in thousands) 2003 2002 2001 2000 1999 Loans delinquent and accruing interest ----------- ----------- --------- ---------- ---------- Loans past due 30-89 days $1,265 $2,121 $1,938 $2,058 $190 Loans past due 90 days or more - - - - - ----------- ----------- ---------- ---------- ---------- Total loans delinquent and accruing interest $1,265 $2,121 $1,938 $2,058 $190 =========== =========== ========== ========== =========== Nonaccrual loans $8,570 $5,963 $2,160 $1,395 $1,115 Foreclosed assets 230 176 492 250 250 Restructured loans - - 150 - 222 ----------- ----------- ---------- ---------- ----------- Total nonperforming assets $8,800 $6,139 $2,802 $1,645 $1,587 =========== =========== ========== ========== =========== Total nonperforming assets and loans $8,800 $6,139 $2,802 $1,645 $1,587 past due 90 days or more =========== =========== ========== ========== =========== Nonaccrual loans to total loans 1.08 % 0.97 % 0.37 % 0.25 % 0.22 % Nonperforming assets to total loans and foreclosed assets 1.10 % 1.00 % 0.48 % 0.29 % 0.31 % Nonperforming assets to total assets 0.63 % 0.66 % 0.34 % 0.21 % 0.22 % Nonaccrual loans and loans past due 90 days or more to total loans 1.08 % 0.97 % 0.37 % 0.25 % 0.22 %
22 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 using the corporate federal tax rate of 34%) 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, 2003 (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 (1) ------------ --------- ---------- --------- ---------- -------- Securities held-to-maturity at amortized cost Mortgage-backed securities $ 4,563 $ 3,456 $ 745 $ 1,086 $ 9,850 4.98 % Obligations of states & political subdivisions 1,178 3,178 3,966 935 9,257 6.77 ------------ --------- ---------- --------- ---------- -------- 5,741 6,634 4,711 2,021 19,107 5.85 ------------ --------- ---------- --------- ---------- -------- Securities available-for-sale at estimated fair value Mortgage-backed securities 43,017 55,579 6,604 8,987 114,187 3.74 Obligations of U.S. agencies 16,062 249,161 7,937 - 273,160 2.73 Obligations of states & political subdivisions 12,296 7,479 5,499 9,764 35,038 4.29 Obligations of the US Treasury 6,035 - - - 6,035 2.94 ------------ --------- ---------- --------- ---------- -------- 77,410 312,219 20,040 18,751 428,420 3.13 Equity securities - - - - 4,533 4.64 % ------------ --------- ---------- --------- ---------- --------- Total $ 83,151 $ 318,853 $ 24,751 $ 20,772 $ 452,060 ============ ========= ========== ========= ========== Weighted average yield (1) 2.66 % 3.04 % 4.89 % 6.72 % 3.26 % (1) Computed on a fully taxable equivalent basis using the corporate federal tax rate of 34%.
The following table sets forth the carrying value of the Company's held-to-maturity and available-for-sale securities portfolios for the years ended December 31: (dollars in thousands) 2003 2002 2001 ----------------------- --------------------- -------------------- Amount % Amount % Amount % ------------ --------- ---------- --------- ---------- -------- Securities held-to-maturity at amortized cost Mortgage-backed securities $ 9,850 51.6 % $ 16,437 58.3 % $ 22,201 57.1 % Obligations of U.S. agencies - - 1,991 7.1 5,977 15.4 Obligations of states & political subdivisions 9,257 48.4 9,664 34.3 9,855 25.3 Other debt securities - - 100 0.3 839 2.2 ------------ --------- ---------- --------- ---------- -------- $ 19,107 100.0 % $ 28,192 100.0 % $ 38,872 100.0 % ============ ========= ========== ========= ========== ======== Securities available-for-sale at estimated fair value Mortgage-backed securities $ 114,187 26.4 % $ 102,605 45.7 % $ 98,517 63.5 % Obligations of U.S. agencies 273,160 63.1 95,559 42.6 40,064 25.9 Obligations of states & political subdivisions 35,038 8.1 22,219 9.9 10,455 6.7 Obligations of U.S. Treasury 6,035 1.4 - - 2,017 1.3 Equity securities 4,533 1.0 3,937 1.8 3,977 2.6 ------------ --------- ---------- --------- ---------- -------- $ 432,953 2.4 % $ 224,320 100.0 % $ 155,030 100.0 % ============ ========= ========== ========= ========== ========
23 The Company's total investment portfolio increased by $199.5 million, or 79%, to $452.1 million at December 31, 2003 as compared to the prior year. The increase in the investment portfolio was primarily through deposit growth, prepayment on loans and the Bridge View acquisition. Total gross unrealized gains and total gross unrealized losses for the investment portfolio amounted to $6.5 million and $990 thousand, respectively, at December 31, 2003. At December 31, 2003, available-for-sale ("AFS") securities amounted to $433.0 million, or 95.8%, of total securities, compared to $224.3 million, or 88.8%, of total securities at year-end 2002. The Company's AFS portfolio increased by $208.6 million, or 93.0%, at December 31, 2003 as compared to the prior year. The composition of investment securities shifted from mortgage-backed securities to obligations of U.S. Agencies mostly due to market conditions and the Company's asset/liability management strategy. Substantially all of the mortgage-backed securities held by the Company are issued or backed by U.S. federal agencies. At December 31, 2003, the Company held no securities of a single issuer (except U.S. federal agencies) with a book value that exceeds 10% of Consolidated Stockholders' Equity. The Company's held-to-maturity portfolio decreased by $9.1 million, or 32.2%, to $19.1 million at December 31, 2003 as compared to the prior year. The decrease was mostly due to declines in mortgage-backed securities and obligations of U.S. agencies, which were largely the result of amortization and maturities. Deposits Deposits, which include non-interest-bearing demand deposits, interest-bearing demand deposits, savings and time deposits, are an essential and cost-effective funding source for the Company. The Company attributes its long-term success in growing deposits to the emphasis it places on building core customer relationships. The Company offers a variety of deposit products designed to meet the financial needs of the customers based on identifiable "life stages". Deposits increased $341.1 million, or 41.8%, to $1.2 billion at December 31, 2003 as compared to the prior year mainly from the acquisition of Bridge View and internal growth. For 2003, the Company's overall yield on deposits decreased by 94 basis points to 1.52% due mostly to a decline in market interest rates and change in deposit mix. The growth in the deposit base occurred mostly in interest-bearing demand deposits and non-interest bearing demand deposits. Interest-bearing demand deposits, which comprised the largest segment of the Company's total deposits, amounted to $446.8 million at December 31, 2003, an increase of $122.8 million, or 37.9%, from year-end 2002. The Company's yield on interest-bearing demand deposits decreased by 69 basis points to 1.19% for 2003 as compared to 2002. Non-interest bearing demand deposits increased $105.2 million, or 88.7%, to $223.7 million at December 31, 2003 as compared to the prior year. Non-interest bearing demand deposits represented 19.3% of total deposits at December 31, 2003 and 14.5% at December 31, 2002. The growth in non-interest bearing demand deposits positively impacted the overall yield on deposit liabilities at December 31, 2003 as compared to year-end 2002. Contributing to the growth in deposits was a $44.5 million, or 18.8%, increase in time deposits at December 31, 2003 as compared to year-end 2002. Time deposits represented 24.4% of total deposits at December 31, 2003 and 29.1% at December 31, 2002. The Company's yield on total time deposits decreased by 127 basis points to 2.58% for 2003 as compared to 2002.
Table 11 - ------------------------------------------------------------------------------------------------- Deposit Summary - ------------------------------------------------------------------------------------------------- at December 31, (dollars in thousands) 2003 2002 2001 ------------------------- ----------------- ------------------ Non-interest bearing demand $ 223,745 19.3 % $ 118,578 14.5 % $ 109,416 15.1 % Interest bearing demand 446,786 38.6 323,998 39.7 282,173 38.8 Money market 120,136 10.4 55,372 6.8 47,569 6.5 Savings 84,162 7.3 80,300 9.8 72,092 9.9 Time deposits less than $100,000 265,356 22.9 210,727 25.9 194,754 26.9 Time deposits greater than $100,000 16,613 1.5 26,697 3.3 20,479 2.8 -------------- ---------- ---------- ------ ---------- ----- $ 1,156,798 100.0 % $ 815,672 100.0 % $ 726,483 100.0 % ============== ========== ========== ====== ========== ===== The following table shows the time remaining to maturity of time certificates of deposit of $100,000 or more as of December 31, 2003: (in thousands) Three months or less ......................................... $ 7,914 Over three months through six months ......................... 3,699 Over six months through twelve months ........................ 3,066 Over twelve months ........................................... 1,934 ------- $16,613 =======
24 Market Risk Market risk is generally described as the sensitivity of income to adverse changes in interest rates, foreign currency exchange rates, commodity prices, and other relevant market rates or prices. Market rate sensitive instruments include: financial instruments such as investments, loans, mortgage-backed securities, deposits, borrowings and other debt obligations; derivative financial instruments, such as futures, forwards, swaps and options; and derivative commodity instruments, such as commodity futures, forwards, swaps and options that are permitted to be settled in cash or another financial instrument. The Company does not have any material exposure to foreign currency exchange rate risk or commodity price risk. The Company did not enter into any market rate sensitive instruments for trading purposes nor did it engage in any trading or hedging transactions utilizing derivative financial instruments during 2003. 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 quarterly and presented to the Board, simulates the impact on net interest margin from current and prospective changes in market interest rates. The Company manages interest rate risk exposure with the utilization of financial modeling and simulation techniques. These methods assist the Company in determining the effects of market rate changes on net interest income and future economic value of equity. The objective of the Company is to maximize net interest income within acceptable levels of risk established by policy. The techniques utilized for managing exposure to market rate changes involve a variety of interest rate, pricing and volume assumptions. These assumptions include projections on growth, prepayment and withdrawal levels as well as other embedded options inherently found in financial instruments. The Company reviews and validates these assumptions at least annually or more frequently if economic or other conditions change. At December 31, 2003, the Company simulated the effects on net interest income given an instantaneous and parallel shift in the yield curve of up to a 200 basis point rising interest rate environment and a 100 basis point declining interest rate environment. Based on the simulation, it was estimated that net interest income, over a twelve-month horizon, would not decrease by more than 4.5%. The Company's interest rate risk management policies provide that net interest income should not decrease by more than 15% or 10% if interest rates increase from current rates given an instantaneous and parallel shift in the yield curve of a 200 basis point rise in rates or 100 basis point decline in rates, respectively. Policy exceptions, if any are reported to the Board of Directors. At December 31, 2003, the Company was within policy limits established for changes in net interest income and future economic value of equity.
The following table sets forth the sensitivity results for the last two years. Net Interest Income Sensitivity Simulation Percentage Change in Estimated Net Interest Income over a twelve month horizon ---------------------- 2003 2002 --------- -------- +200 basis points -3.8 % -4.4 % +100 basis points -0.6 % 0.2 % -100 basis points -4.5 % -2.9 % -200 basis points * * * Not simulated due to the historically low interest rate environment.
The simulation described above does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape; prepayments on loans and securities; deposit decay rates; pricing decisions on loans and deposits; reinvestment/replacement of asset and liability cashflows; and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change. Further, as market conditions vary from those assumed in the simulation, actual results will also differ due to: prepayment/refinancing levels deviating from those assumed; the varying impact of interest rate changes on caps or floors on adjustable rate assets; the potential effect of changing debt service levels on customers with adjustable rate loans; depositor early withdrawals and product preference changes; and other internal/external variables. Furthermore, the simulation does not reflect actions that ALCO might take in response to anticipated changes in interest rates or competitive conditions in the market place. In addition to the above-mentioned techniques, the Company utilizes sensitivity gap analysis 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 analysis 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 a negative 12.8% at December 31, 2003. 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. 25 Certain shortcomings are inherent in the method of gap 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 debt may decrease in the event of an interest rate increase. Management considers these factors when reviewing its sensitivity gap position and establishing its ongoing asset/liability strategy.
Table 12 - ----------------------------------------------------------------------------------------------------------------------------- Interest Rate Sensitivity Analysis - ----------------------------------------------------------------------------------------------------------------------------- at December 31, 2003 (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 $245,648 $ 43,457 $ 81,528 $220,368 $ 151,899 $ 47,155 $ (3,115) $ 786,940 Investment securities 61,703 36,740 37,186 244,966 43,617 23,522 4,326 452,060 Cash and amounts due from banks 12 - - - - - 31,423 31,435 Other noninterest earning assets - - 21,343 - - - 94,094 115,437 --------- --------- ---------- --------- --------- ---------- --------- -------- Total assets 307,363 80,197 140,057 465,334 195,516 70,677 126,728 1,385,872 --------- --------- ---------- --------- --------- ---------- --------- ========= Liabilities and stockholders' equity Demand deposits 72,084 72,084 144,168 190,711 93,666 97,818 - 670,531 Money market accounts 31,696 9,259 18,517 13,277 6,137 5,276 - 84,162 Savings deposits 10,512 10,512 21,024 54,000 16,657 7,431 - 120,136 Fixed maturity certificates of deposits 90,856 69,813 94,400 24,315 2,585 - - 281,969 Securities sold under agreements to repurchase 8,379 4,380 760 946 520 633 - 15,618 Short-term borrowings 46,491 - - - - - - 46,491 Long-term borrowings - - - - 10,000 - - 10,000 Other liabilities - - - - - - 13,772 13,772 Stockholders' equity - - - - - - 143,193 143,193 --------- --------- ---------- --------- --------- ---------- --------- -------- Total liabilities and stockholders' equity 260,018 166,048 278,869 283,249 129,565 111,158 156,965 $1,385,872 --------- --------- ---------- --------- --------- ---------- --------- ========= Gap $ 47,345 $ (85,851) $ (138,812) $ 182,085 $ 65,951 $ (40,481) $ (30,237) ========= ========= ========== ========= ========= ========== ========= Gap to total assets 3.42 % (6.19)% (10.02)% 13.14 % 4.76 % (2.92)% Cumulative Gap $ 47,345 $(38,506) $ (177,318) $ 4,767 $ 70,718 $ 30,237 ========= ========= ========== ========= ========= ========= Cumulative Gap to total assets 3.42 % (2.78)% (12.79)% 0.34 % 5.10 % 2.18 %
26 Operational Risk The Company is exposed to a variety of operational risks that can affect each of its business activities, particularly those involving processing and servicing of loans. Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people or systems from external events. The risk of loss also includes losses that may arise from potential legal actions that could result from operational deficiencies or noncompliance with contracts, laws or regulations. The Company monitors and evaluates operational risk on an ongoing basis through systems of internal control, formal corporate-wide policies and procedures, and an internal audit function. 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 to 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 its 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, 2003, total deposits amounted to $1.2 billion, an increase of $341.1 million, or 41.8%, over the prior comparable year. At December 31, 2003, advances from the FHLB, overnight borrowings and securities sold under agreements to repurchase totaled $72.1 million and represented 5.2% of total assets as compared to $27.4 million and 2.9% of total assets at December 31, 2002. Loan production continued to be the Company's principal investing activity. Net loans at December 31, 2003 amounted to $786.9 million, an increase of $178.5 million, or 29.3%, compared to the same period in 2002. The Company's most liquid assets are cash and due from banks and federal funds sold. At December 31, 2003, the total of such assets amounted to $31.4 million, or 2.3%, of total assets, compared to $33.9 million, or 3.6%, of total assets at year-end 2002. The decrease in liquid assets, principally federal funds sold, was driven by the growth in the securities and loan portfolios. Another significant liquidity source is the Company's available-for-sale securities. At December 31, 2003, available-for-sale securities amounted to $433.0 million, or 95.8%, of total securities, compared to $224.3 million, or 88.8%, of total securities at year-end 2002. 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 $98.3 million line of credit available through its membership in the FHLB of which $46.5 million at December 31, 2003 was utilized. The Company maintains a policy of paying regular cash dividends and anticipates continuing that policy. The Company could, if necessary, modify the amount or frequency, of dividends as an additional source of liquidity. There are imposed dividend restrictions on the Bank. See Note 18 of Notes to Consolidated Financial Statement for additional information. Management believes that the Company's sources of funds are sufficient to meet its present funding requirements. The following table sets forth contractual obligations and various commitments representing required and potential cash flows as of December 31, 2003.
Table 13 - ------------------------------------------------------------------------------------------ Contractual Obligations and Commitments - ------------------------------------------------------------------------------------------ at December 31, 2003 (dollars in thousands) Contractual Obligations Payment due by Period -------------------------------------------- ----------- ----------- ----------- ---------- ------------- Total Less than One to Four to After Amounts one year three years five years five years Committed ----------- ----------- ----------- ---------- ------------- Minimum annual rental under non-cancelable operating leases $ 2,409 $ 4,389 $ 3,480 $ 7,669 $ 17,947 Remaining contractual maturities of time deposits 255,069 24,315 2,585 - 281,969 Securities sold under agreement to repurchase and short-term borrowings 62,109 - - - 62,109 Long-term borrowings - - 10,000 - 10,000 ------------ ----------- ----------- ---------- ------------- Total contractual cash obligations $ 319,587 $ 28,704 $ 16,065 $ 7,669 $ 372,025 ============ =========== =========== ========== =============
Other Commitments Amount of Commitment Expiration By Period ---------------------------------------------------- Total Less than One to Four to After Amounts one year three years five years five years Committed ----------- ----------- ----------- ---------- ------------- Loan commitments $ 60,311 $ 4,222 - $152,761 $ 217,294 Standby letters of credit 3,534 - - - 3,534 ------------ ----------- ----------- ---------- ------------- Total other commitments $ 63,845 $ 4,222 - $152,761 $ 220,828 ============ =========== =========== ========== =============
27 Capital Adequacy Stockholders' equity totaled $143.2 million, or 10.3%, of total assets at December 31, 2003, compared to $80.7 million, or 8.6%, of total assets at December 31, 2002. The $62.5 million growth was largely attributable to the acquisition of Bridge View and net income which contributed $52.2 million and $16.4 million, respectively, of the growth. These increases were offset in part by cash dividends of $5.0 million during 2003. Guidelines issued by the Federal Reserve Board and the Federal Deposit Insurance Corporation ("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 stockholders' equity less certain intangibles, and a supplementary component called Tier 2 capital, which includes a portion of the allowance for loan and lease 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 2 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, 2003, the Company's and the Bank's Tier 1 risk-based capital ratio was 9.34 % and 9.24%, respectively, well in excess of minimum capital standards. 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 1 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, 2003, the Company's and the Bank's leverage ratio was 6.24% and 6.22%, respectively. Stock Repurchase Program On April 26, 2001, the Board of Directors of Interchange authorized a program to repurchase up to 450,000 shares of Interchange's outstanding common stock on the open market or in privately negotiated transactions. No shares were repurchased during 2003 and as of December 31, 2003, the Company had purchased 170,193 shares at a total cost of approximately $2.2 million under the authorized program. The repurchased shares are held as treasury stock and will be principally used for the exercise of stock options, restricted stock awards under the Stock Plan and other general corporate purposes. Effects of Inflation and Changing Prices The financial statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, 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. Off Balance Sheet Arrangements As noted in Note 1 of the Consolidated Financial Statements on page 36, the Company's policy is to consolidate majority-owned subsidiaries that it controls. The Company does not dispose of troubled loans or problem assets by means of unconsolidated special purpose entities, use off-balance sheet entities to fund its business operations nor capitalize any off-balance sheet entity with the Company's stock. In the ordinary course of business, the Company originates and sells commercial leases and other financial assets, such as mortgage loans, to the secondary market. Exposure to loan commitments and letters of credit can be found in Table 13 under Liquidity. Critical Accounting Policies and Judgments The Company's consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1 Accounting Policies in the Notes to Consolidated Financial Statements. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect the Company's reported results and financial position for the period or in future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Assets and liabilities carried at fair value inherently result in more financial statement volatility. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third party sources, when available. When such information is not available, management estimates valuation adjustments primarily by using internal cash flow and other financial modeling techniques. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on the Company's future financial condition and results of operations. Allowance For Loan and Lease Losses The allowance for loan and lease losses ("ALLL") is established through periodic charges to income. Loan losses are charged against the ALLL when management believes that the future collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. The Company considers the ALLL of $9.6 million is adequate to cover specifically identifiable loan losses, as well as estimated losses inherent in our portfolio for which certain loss are probable but not specificially identifiable. 28 Management's determination of the adequacy of the allowances is based on periodic evaluations of the loan portfolio and other relevant factors. The evaluations are inherently subjective as it requires material estimates including such factors as potential loss factors, changes in trend of non-performing loans, current state of local and national economy, value of collaterial, changes in the composition and volume of the loan portfolio, review of specific problem loans and management's assessment of the inherent risk and overall quality of the loan portfolio. All of these factors may be susceptible to significant change. Also, the allocation of the allowance for credit losses to specific loan pools is based on historical loss trends and management's judgment concerning those trends. The primary risks inherent in the loan portfolio are possible increases in interest rates, a decline in the economy, and a possible decline in real estate market values. Any one or a combination of these events may adversely affect our loan portfolio resulting in increased delinquencies, loan losses, and future levels of provisions. To the extent actual outcomes differ from management estimates, additional provision for credit losses may be required that would adversely impact earnings in future periods. For further discussion see the "Loan Quality" and "Allowance for Loan and Lease Losses" sections on pages 20-22, along with Note 1 "Nature of Business and Summary of Significant Accounting Policies"; Note 6 "Allowance for Loan and Lease Losses"; and Note 19 "Commitments And Contingent Liabilities" of the Consolidated Financial Statements. Business Combinations: Business combinations are accounted using the purchase method of accounting, the net assets and liabilities of the companies acquired are recorded at their estimated fair value at the date of acquisition and include the results of operations of the acquired business from the date of acquisition. The excess of the purchase price over the estimated fair value of the net assets including identified intangible assets acquired is recognized as goodwill. Goodwill and Intangibles: With the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), on January 1, 2002, goodwill is no longer amortized to expense, but rather is tested for impairment periodically. Other intangible assets are amortized to expense using straight-line methods over their respective estimated useful lives. At least annually, and on an interim basis when conditions require, management reviews goodwill and other intangible assets and evaluates events or changes in circumstances that may indicate impairment in the carrying amount of such assets. If the sum of the expected undiscounted future cash flows, excluding interest charges, is less than the carrying amount of the asset, an impairment loss is recognized. An impairment is measured on a discounted future cash flow basis and a charge is recognized in the period that the asset has been deemed to be impaired. The majority of the Corporation's goodwill relates to its acquisition of Bridge View Bancorp on April 30, 2003. The value of this goodwill is dependent upon the Corporation's ability to provide quality, cost effective services in the face of competition from other market leaders on a national and local level. As such, goodwill value is supported ultimately by earnings which is driven by the volume of business transacted. A decline in earnings as a result of a lack of growth or the Company's inability to deliver cost effective services over sustained periods can lead to impairment of goodwill which could result in a charge and adversely impact earnings in future periods. Total goodwill was $55.9 million at December 31, 2003. See Note 1 "Accounting Policies" and Note 8 "Goodwill And Other Intangible Assets" for additional information. Pensions Plans: The Bank maintains a qualified defined benefit pension plan (the "Pension Plan"), which covers all eligible employees and an unfunded supplemental pension plan which provides retirement income to all eligible employees who would have been paid amounts in excess of the amounts provided by the Pension Plan but for limitations under the qualified Pension Plan. In addition, the Company has an unfunded retirement plan for all directors of the Bank who are not employees of the Company or any subsidiary or affiliate. Our expected long-term rate of return on plan assets is 8.0% and was based on our expectations of the long-term return on the balanced mutual fund that we invest our plan assets which has had a return for the life of the fund of 8.33%. A 1.0% decrease in the long-term rate of return on plan assets would have increased the net periodic pension cost of the Pension Plan by approximately $16 thousand. The discount rate that we utilize of 6.25% for determining future pension obligations is based on a review of long-term bonds that receive one of the two highest ratings given by a recognized rating agency. A 1.0% decrease in the discount rate would have increased the net periodic pension cost by approximately $183 thousand. Recently Issued Accounting Pronouncements In January 2003, the FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends FASB Statement No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. The Company adopted the disclosure provisions of SFAS No. 148 on January 1, 2003. The Company does not expect to change to using the fair value based method of accounting for stock-based employee compensation; and therefore, the adoption of SFAS No. 148 impacts only the disclosures, not the financial results, of the Company. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin ARB 51." FIN 46 addresses consolidation by business enterprises of variable interest entities (`VIE'). FIN 46 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE's activities or entitled to receive a majority of the entity's residual returns, or both. The provisions are effective for any new entities that are originated subsequent to January 31, 2003. On December 24, 2003, the FASB issued a revision to FIN 46 ("FIN 46-R"). The Company has adopted FIN 46-R as the method used for evaluating whether or not VIEs must be consolidated as of December 26, 2003. The adoption of FIN 46 and 46-R did not have an impact on the consolidated financial statements. In April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This Statement is effective for contracts entered into or modified after June 30, 2003, except for contracts that relate to SFAS 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 and for hedging relationships designated after June 30, 29 2003. The adoption of SFAS 149 did not have a material impact on the financial position or results of operations of the Company. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"), which establishes how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the financial position or results of operations of the Company because the Company does not have any financial instruments that have characteristics of both liabilities and equity. On December 23, 2003, the FASB issued Statement of Financial Accounting Standards No. 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits ("SFAS 132"). The revised SFAS 132 retains the disclosure requirements in the original statement and requires additional disclosures about pension plan assets, benefit obligations, benefit costs and other relevant information. The Company has included the new disclosures that are required for financial statements of annual periods ending after December 15, 2003. Forward Looking Statements In addition to discussing historical information, certain statements included in or incorporated into this report relating to the financial condition, results of operations and business of the Company which are not historical facts may be deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used herein, the words "anticipate," "believe," "estimate," "expect," "will" and other similar expressions (including when preceded or followed by the word "not") are generally intended to identify such forward-looking statements. Such statements are intended to be covered by the safe harbor provisions for forward-looking statements contained in such Act, and we are including this statement for purposes of invoking these safe harbor provisions. Such forward-looking statements include, but are not limited to, statements about the operations of the Company, the adequacy of the Company's allowance for losses associated with the loan and lease portfolio, the quality of the loan and lease portfolio, the prospects of continued loan and deposit growth, and improved credit quality. The forward-looking statements in this report involve certain estimates or assumptions, known and unknown risks and uncertainties, many of which are beyond the control of the Company, and reflect what we currently anticipate will happen in each case. What actually happens could differ materially from what we currently anticipate will happen due to a variety of factors, including, among others, (i) increased competitive pressures among financial services companies; (ii) changes in the interest rate environment, reducing interest margins or increasing interest rate risk; (iii) deterioration in general economic conditions, internationally, nationally, or in the State of New Jersey; (iv) the occurrence of acts of terrorism, such as the events of September 11, 2001, or acts of war; (v) legislation or regulatory requirements or changes adversely affecting the business of the Company; (vi) losses in the Company's leasing subsidiary exceeding management's expectations; (vii) expected revenue synergies from the Company's acquisition of Bridge View may not be fully realized or realized within the expected time frame; (viii) revenues following the Company's acquisition of Bridge View may be lower than expected; (ix) deposit attrition, operating costs, customer loss and business disruption following the Company's acquisition of Bridge View, including, without limitation, difficulties in maintaining relationships with employees, may be greater than expected and (x) other risks detailed in reports filed by the Company with the Securities and Exchange Commission. Readers should not place undue expectations on any forward-looking statements. We are not promising to make any public announcement when we consider forward-looking statements in this document to be no longer accurate, whether as a result of new information, what actually happens in the future or for any other reason. Table 14
- -------------------------------------------------------------------------------- Quarterly Common Stock Price Range - -------------------------------------------------------------------------------- for the years ended December 31, The Company's common stock is quoted on the Nasdaq National Market System under the symbol "IFCJ." There are imposed dividend restrictions on the Bank. See Note 18 of Notes to Consolidated Financial Statement for additional information. High Low Cash Sales Sales Dividends Price Price Declared ------------ ------------ ------------ 2002 First quarter . . . . . $ 16.23 $ 12.47 $ 0.10 Second quarter . . . . . 19.27 16.23 0.10 Third quarter . . . . . 18.67 15.70 0.10 Fourth quarter . . . . . 19.10 15.95 0.14 2003 First quarter . . . . . $ 18.03 $ 16.10 $ 0.11 Second quarter . . . . . 22.50 17.20 0.11 Third quarter . . . . . 22.52 19.34 0.11 Fourth quarter . . . . . 26.68 20.45 0.11 The number of stockholders of record as of February 27, 2003 was 1,386. All per share data was restated to reflect a 3-for-2 stock split declared on May 23, 2002 and paid on July 12, 2002.
30 Independent Auditor's 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, 2003 and 2002 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, 2003. 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 auditing standards generally accepted in the United States of America. 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, 2003 and 2002 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP New York, New York February 20, 2004 31
Interchange Financial Services Corporation - ---------------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - ---------------------------------------------------------------------------------------------------------- December 31, (dollars in thousands) December 31, December 31, 2003 2002 ---------------- --------- Assets Cash and due from banks $ 31,423 $ 23,266 Interest earning deposits 12 - Federal funds sold - 10,650 ---------------- --------- Total cash and cash equivalents 31,435 33,916 ---------------- --------- Securities held to maturity at amortized cost (estimated fair value of $20,223 and $29,590 for 2003 and 2002, respectively) 19,107 28,192 ---------------- --------- Securities available for sale at estimated fair value (amortized cost of $428,597 and $217,924 for 2003 and 2002, respectively) 432,953 224,320 ---------------- --------- Loans and leases (net of unearned income and deferred fees of $6,057 and $8,657 for 2003 and 2002 respectively. 796,581 615,641 Less: Allowance for loan and lease losses 9,641 7,207 ---------------- --------- 786,940 608,434 ---------------- --------- Bank owned life insurance 21,853 21,274 Premises and equipment, net 20,343 10,512 Foreclosed assets and other repossessed assets 230 176 Goodwill 55,924 1,447 Intangible assets 4,165 231 Accrued interest receivable and other assets 12,922 7,830 ---------------- --------- Total assets $1,385,872 $936,332 ================ ========= Liabilities Deposits Non-interest bearing $223,745 $118,578 Interest bearing 933,053 697,094 ---------------- --------- Total deposits 1,156,798 815,672 ---------------- --------- Securities sold under agreements to repurchase 15,618 17,390 Short-term borrowings 46,491 - Long-term borrowings 10,000 10,000 Accrued interest payable and other liabilities 13,772 12,590 ---------------- --------- Total liabilities 1,242,679 855,652 ---------------- --------- Commitments and contingent liabilities Stockholders' equity: Common stock, without par value; 22,500,000 shares authorized; 12,810,193 and 9,815,207 shares isssued and outstanding for 2003 and 2002, respectively 5,397 5,397 Capital surplus 73,231 21,097 Retained earnings 74,710 63,314 Accumulated other comprehensive income 2,434 3,596 ---------------- -------- 155,772 93,404 Less: Treasury stock 12,579 12,724 ---------------- -------- Total stockholders' equity 143,193 80,680 ---------------- --------- Total liabilities and stockholders' equity $1,385,872 $936,332 ================ ========= - -------------------------------------------------------------------------------------------------------- See notes to consolidated financial statements.
32
Interchange Financial Services Corporation - ------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME - ------------------------------------------------------------------------------------------------------- For the Years Ended December 31, (in thousands, except per share data) 2003 2002 2001 -------------- ----------- ------------ Interest income Interest on loans and leases $48,982 $45,343 $ 46,175 Interest on federal funds sold 276 246 557 Interest on interest bearing deposits 61 - - Interest and dividends on securities Taxable interest income 9,847 10,123 9,890 Interest income exempt from federal income taxes 914 599 532 Dividends 187 189 248 -------------- ----------- ------------ Total interest income 60,267 56,500 57,402 -------------- ----------- ------------ Interest expense Interest on deposits 13,161 16,357 22,070 Interest on securities sold under agreements to repurchase 267 291 526 Interest on short-term borrowings 18 403 848 Interest on long-term borrowings 428 427 - -------------- ----------- ------------ Total interest expense 13,874 17,478 23,444 -------------- ----------- ------------ Net interest income 46,393 39,022 33,958 Provision for loan and lease losses 1,815 1,500 1,075 -------------- ----------- ------------ Net interest income after provision for loan and lease losses 44,578 37,522 32,883 -------------- ----------- ------------ Non-interest income Service fees on deposit accounts 3,485 2,581 2,459 Net gain on sale of securities 793 564 252 Net gain on sale of loans and leases 769 400 550 Bank owned life insurance 2,019 895 378 Commisions on sale of annuities and mutual funds 883 603 273 Other 2,696 1,471 1,666 -------------- ----------- ------------ Total non-interest income 10,645 6,514 5,578 -------------- ----------- ------------ Non-interest expense Salaries and benefits 16,994 13,673 12,353 Occupancy 4,577 3,438 3,275 Furniture and equipment 1,327 1,124 1,157 Advertising and promotion 1,412 1,295 1,251 Amortization of intangible assets 360 69 81 Other 6,569 5,464 4,756 -------------- ----------- ------------ Total non-interest expense 31,239 25,063 22,873 -------------- ----------- ------------ Income before income taxes 23,984 18,973 15,588 Income taxes 7,618 6,096 5,048 -------------- ----------- ------------ Net income $ 16,366 $ 12,877 $ 10,540 ============== =========== ============ Basic earnings per common share $1.39 $1.31 $1.08 ============== =========== ============ Diluted earnings per common share $1.36 $1.30 $1.07 ============== =========== ============ - ------------------------------------------------------------------------------------------------------ See notes to consolidated financial statements All per share data was restated to reflect a 3-for-2 stock split declared on May 23, 2002 and paid on July 12, 2002.
33 Interchange Financial Services Corporation - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- For the Twelve Months Ended December 31 (dollars in thousands, except per share data) Accumulated Other Comprehensive Retained Comprehensive Common Capital Treasury Income Earnings Income Stock Surplus Stock Total ------------- -------- -------------- ------- -------- --------- --------- Balance at January 1, 2001 $47,735 $526 $5,397 $21,077 $(12,751) $61,984 Comprehensive income Net Income $10,540 10,540 10,540 Other comprehensive income, net of taxes Unrealized gains on AFS debt securities 602 Add: realized losses on disposition of securities 28 ------------ Other comprehensive income, net of taxes 630 630 630 ------------ Comprehensive income $11,170 ============ Dividends on common stock (3,517) (3,517) Issued 22,320 shares of common stock in connection with Executive Compensation Plan (14) 255 241 Exercised 13,226 option shares (70) 152 82 Purchased 140,643 shares of common stock (1,727) (1,727) -------- ------------ ------- --------- ------- --------- Balance at December 31, 2001 54,758 1,156 5,397 20,993 (14,071) 68,233 Comprehensive income Net Income $ 12,877 12,877 12,877 Other comprehensive income, net of taxes Unrealized gains on AFS debt securities 3,037 Less: realized gains on disposition of securities (597) Unrealized gains on equity securities - ---------- Other comprehensive income, net of taxes 2,440 2,440 2,440 ---------- Comprehensive income $ 15,317 ========== Dividends on common stock (4,321) (4,321) Issued 21,069 shares of common stock in connection with Executive Compensation Plan 66 244 310 Exercised 25,158 option shares (93) 291 198 Issued 107,877 shares of common stock in connection with the acquisition of certain assets and assumption of certain liabilities of Monarch Capital Corporation 131 1,244 1,375 Purchased 29,550 shares of common stock (432) (432) --------- -------- ------- --------- -------- ------- Balance at December 31, 2002 63,314 3,596 5,397 21,097 (12,724) 80,680 Comprehensive income Net Income $16,366 16,366 16,366 Other comprehensive income, net of taxes Unrealized net gains on AFS debt securities (474) Less: net gains on disposition of securities (820) Unrealized gains on equity securities 137 Minimum pension liability (5) ----------- Other comprehensive income, net of taxes (1,162) (1,162) (1,162) ---------- Comprehensive income $ 15,204 ========== Dividends on common stock (4,970) (4,970) Issued 20,883 shares of common stock in connection with Executive Compensation Plan 109 245 354 Exercised 59,695 option shares (155) 593 438 Issued 2,949,719 shares of common stock in connection with the acquisition of Bridge View Bancorp 52,180 52,180 Reacquired 35,959 shares in lieu of non-performing asset (693) (693) -------- ------- ------- -------- -------- --------- Balance at December 31, 2003 $74,710 $2,434 $5,397 $73,231 $(12,579) $143,193 ======== ======= ======= ======== ======== ========= - -------------------------------------------------------------------------------------------------------------------------- See notes to consolidated financial statements. All share data was restated to reflect a 3-for-2 stock split declared on May 23, 2002 and paid on July 12, 2002.
34
Interchange Financial Services Corporation - ------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, (in thousands) 2003 2002 2001 ------------ ----------- ----------- Cash flows from operating activities Net income $ 16,366 $ 12,877 $ 10,540 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 1,752 1,446 1,486 Amortization of securities premiums 4,643 2,039 1,044 Accretion of securities discounts (315) (305) (326) Amortization of premiums in connection with acquisition 1,033 69 81 Provision for loan and lease losses 1,815 1,500 1,075 Increase in cash surrender value of Bank Owned Life Insurance (579) (895) (378) Net gain on sale of securities (1,208) (564) (252) Origination of loans held for sale (18,089) - - Sale of loans held for sale 18,679 - - Acceleration of premium amortization on certain collateralized mortgage obligations 415 - - Net gain on sale of loans and leases (769) (400) (550) Net loss on sale of fixed assets 10 - - Net gain on sale of foreclosed real estate and repossessed assets (7) (40) - Decrease (increase) in operating assets Accrued interest receivable (1,225) (330) 443 Accounts receivable- leases sold - 4,921 - Deferred taxes 1,672 - (185) Other (4,080) (383) (5,337) (Decrease) increase in operating liabilities Accrued interest payable (322) (308) (478) Other (115) 1,467 4,010 ------------ ----------- ----------- Cash provided by operating activities 19,676 21,094 11,173 ------------ ----------- ----------- Cash flows from investing activities (Payments for) proceeds from Net originations of loans and leases (904) (26,826) (15,303) Purchase of loans and leases (53) (14,967) (18,760) Sale of loans and leases 3,176 6,603 13,267 Purchase of securities available for sale (341,335) (131,069) (99,767) Maturities of securities available for sale 122,581 43,219 46,339 Sale of securities available for sale 44,361 21,867 19,348 Maturities of HTM securities 8,900 8,481 18,699 Sale of securities held to maturity - 2,023 2,003 Purchase of HTM securities - - (18,548) Sale of foreclosed real estate and other repossessed assets 141 766 - Purchase of fixed assets (1,242) (1,646) (1,652) Premium in connection with acquisition (90) (1,748) - Net cash proceeds from acquisition of Bridge View Bancorp 19,439 - - Purchase of Bank Owned Life Insurance - (5,000) (15,000) Sale of fixed assets - - 1,260 ------------------------------------ Cash used in investing activities (145,026) (98,297) (68,114) ------------------------------------ Cash flows from financing activities Proceeds from (payments for) Deposits in excess of withdrawals 82,332 89,189 57,623 Securities sold under agreements to repurchase and other borrowings 147,734 64,693 55,592 Retirement of securities sold under agreement to repurchase and other borrowings (103,014) (62,104) (62,292) Minimum pension liability, net of taxes (5) - - Dividends (4,970) (4,321) (3,517) Common stock issued 354 1,685 241 Treasury stock - (432) (1,727) Exercise of option shares 438 198 82 ------------ ----------- ----------- Cash provided by financing activities 122,869 88,908 46,002 ------------ ----------- ----------- (Decrease) increase in cash and cash equivalents (2,481) 11,705 (10,939) Cash and cash equivalents, beginning of year 33,916 22,211 33,150 ------------ ----------- ----------- Cash and cash equivalents, end of year $ 31,435 $ 33,916 $ 22,211 ============ =========== =========== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 14,052 $ 17,786 $ 23,922 Income taxes 9,003 6,701 1,409 Supplemental disclosure of non-cash investing and financing activities: Loans transferred to foreclosed real estate and other repossessed assets 188 410 242 Stock issued for net assets purchased - 1,375 - Stock issued related to Bridge View acquisition 52,180 - - ____________________________________________________________________________________________________________________________________ See notes to consolidated financial statements.
35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of Business and Summary of Significant Accounting Policies The following is a description of the business of Interchange Financial Services Corporation ("Interchange") and subsidiaries (collectively, the "Company") and its significant accounting and reporting policies used in the preparation of the consolidated financial statements: Nature of Business Interchange, a New Jersey business corporation, is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, whose principal subsidiary is Interchange Bank (the "Bank"), a New Jersey state bank and member of the Federal Reserve System. 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 available funding exceeds loan demand, the Bank generally invests in debt securities. As a community bank operating in the northeast region of New Jersey (primarily Bergen County), the Bank is engaged in providing its customers a broad range of financial products and services, such as equipment leasing, mutual funds and annuities, brokerage services, conventional insurance, internet banking and title insurance. Summary of Significant Accounting Policies Principles of consolidation: The accompanying consolidated financial statements include the accounts of the Company, including its direct and indirect wholly-owned subsidiaries and its indirect subsidiary, Clover Leaf Management Realty Corporation, which is 99.0% owned by the Bank. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). 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 2003. Use of estimates: The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Such estimates include the allowance for loan and lease losses, the fair value of financial instruments, goodwill, intangibles, and retirement benefits. Actual results could differ from those estimates. 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 deposits and federal funds sold, with original maturities of three months or less. Securities held-to-maturity and securities available-for-sale: Debt securities purchased with the intent and ability to hold until maturity are classified as securities held-to-maturity ("HTM") and are carried at cost, adjusted for the amortization of premiums and accretion of discounts. Management determines whether the security will be classified as HTM at the time of purchase. All other securities, including equity securities, are classified as securities available-for-sale ("AFS"). Securities classified as AFS may be sold prior to maturity in response to, but not limited to, changes in interest rates, changes in prepayment risk or for asset/liability management strategies. These securities are carried at fair value and any unrealized gains and losses are reported, net of taxes, in accumulated other comprehensive income (loss) included in the consolidated statement of stockholders' equity. The estimated fair value for securities are based on quoted market prices, where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable instruments. Gains and losses from the sale of these securities are determined using the specific identification method and are reported in non-interest income. The Company does not acquire securities for the purpose of engaging in trading activities. Interest and dividends are accrued and credited to income as earned. Purchase premiums and discounts are recognized in interest income using the effective interest method over the term of the securities. On a quarterly basis the investment portfolio is evaluated to determine if there are any securities with losses that are other than temporary. An other than temporary impairment charge on a security is recorded if it is determined that we are unable to recover all amounts due under the contractual obligations of the debt or if there is a permenant diminution of value of equity securities. Loans and Leases: Loans and leases (herein referred to collectively as loans) are carried at the principal amounts outstanding, net of unearned discount and deferred loan origination fees and costs. Interest income is accrued and recognized as income when earned. 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. There were no loans held for sale at December 31, 2003 and 2002. Direct finance leases have terms ranging from three to seven years. Under direct finance lease accounting, the balance sheet includes the gross minimum lease payments receivable, unguaranteed estimated residual values of the leased equipment, and capitalized indirect costs, reduced by unearned lease income. Income from syndicated leases are included in non-interest income. The equipment lease residual values represent the expected proceeds from the sale of leased equipment at the end of the term of the lease and are determined on the basis of analyses prepared by the Bank's equipment leasing subsidiary, Interchange Capital Company L.L.C. ("ICC"), based upon professional appraisals, historical experience and industry data. Management reviews the estimated residual values on a periodic basis, and impairments in value, if any, are recognized as an immediate charge to income. Loans are placed on nonaccrual status when principal or interest payments are in arrears 90 days or more and/or in the opinion of management the future collection of interest or principal according to contractual terms may be doubtful. Amounts previously accrued are evaluated for collectibility and if necessary previously recognized income is reversed. 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 the obligation is brought current and has performed in accordance with the contractual terms for a reasonable period of time and, in management's judgement, collection of the contractual principal and interest is no longer doubtful. Loans are considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to contractual terms of the loan agreement. The 36 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 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 commercial 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. 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 ("SFAS") No. 114 "Accounting by Creditors for Impairment of a Loan." A loan is categorized as a troubled debt restructure if a significant concession to contractual terms is granted to the borrower due to deterioration in the financial condition of the borrower. Generally, a nonaccrual loan that is restructured remains on nonaccrual until the obligation is brought current and has performed for a period of time to demonstrate that the borrower can meet the restructured terms. If the borrower's ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. Allowance for loan and lease losses: The allowance for loan and lease losses ("ALLL") is established through periodic charges to income. Loan losses are charged against the ALLL when management believes that the future collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. Management's determination of the adequacy of the allowances is based on periodic evaluations of the loan portfolio and other relevant factors. The evaluations are inherently subjective as it requires material estimates including such factors as potential loss factors, changes in trend of non-performing loans, current state of local and national economy, value of collateral, changes in the composition and volume of the loan portfolio, review of specific problem loans and management's assessment of the inherent risk and overall quality of the loan portfolio. All of these factors may be susceptible to significant change. Also, the allocation of the allowance for credit losses to specific loan pools is based on historical loss trends and management's judgment concerning those trends. The primary risks inherent in the loan portfolio are possible increases in interest rates, a decline in the economy, and a possible decline in real estate market values. Any one or a combination of these events may adversely affect our loan portfolio resulting in increased delinquencies, loan losses, and future levels of provisions. To the extent actual outcomes differ from management estimates, additional provision for credit losses may be required that would adversely impact earnings in future periods. In addition to the allowance for credit losses, the Company maintains an allowance for unfunded loan commitments and letters of credit. This amount, reported as a liability on the Consolidated Balance Sheet, is determined using estimates of the probability of losses related to those credit exposures. Premises and equipment: Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straightline 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 assets: Foreclosed assets consist of real estate and other repossessed assets and are carried at the lower of cost or estimated fair value, less estimated selling costs, at time of foreclosure or repossession. When an asset is acquired, the excess of the carrying amount over fair value, if any, is charged to the ALLL. Subsequent valuations are performed periodically and the carrying value is adjusted by a charge to foreclosed asset expense to reflect any subsequent declines in the estimated fair value. As a result, further declines in the asset values may result in increased foreclosed asset expense. Routine holding costs are charged to foreclosed asset expense as incurred. Business Combinations: In business combinations accounted for using the purchase method of accounting, the assets and liabilities of the companies acquired are recorded at their estimated fair value at the date of acquisition and include the results of operations of the acquired business from the date of acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired is recognized as goodwill. Goodwill and Intangibles: With the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), on January 1, 2002, goodwill is no longer amortized to expense, but rather is tested for impairment periodically. Other intangible assets are amortized to expense using straight-line methods over their respective estimated useful lives. At least annually, and on an interim basis when conditions require, management reviews goodwill and other intangible assets and evaluates events or changes in circumstances that may indicate impairment in the carrying amount of such assets. If the sum of the expected undiscounted future cash flows, excluding interest charges, is less than the carrying amount of the asset, an impairment loss is recognized. An impairment is measured on a discounted future cash flow basis and a charge is recognized in the period that the asset has been deemed to be impaired. At the date of adoption, there was no unamortized goodwill. 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 enacted tax rates expected to apply in the period(s) in which the deferred tax asset or liability is expected to be settled or realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period in which 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. Earnings per common share: Basic earnings per common share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method. Segment Reporting: SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS No. 131"), requires disclosures for each reportable operating segment. As a community-oriented 37 financial institution, substantially all of the Company's operations entail the delivery of loan and deposit products and various other financial services to customers in its primary market area, which is Bergen County, New Jersey. The Company's community-banking operation constitutes the Company's only operating segment for financial reporting purposes under SFAS No. 131. Treasury Stock: The Company records common stock purchased for treasury at cost. At the date of subsequent reissuance, the treasury stock account is reduced by the average cost of such stock. Stock-Based Compensation: At December 31, 2003, the Company has stock-based employee compensation plans, which are described more fully in Note 12 Stock Option and Incentive Plan. The Company accounts for these plans under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation expense has been reflected in net income for stock options as all rights and options to purchase the Company's stock granted under these plans had an exercise price equal to the market value of the underlying stock on the date of grant. A table, which illustrates the income from continuing operations and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as amended, to stock-based employee compensation plans, is described more fully in Note 13 "Stock Option and Incentive Plan". Recently issued accounting pronouncements: In January 2003, the FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation Transition and Disclosure." SFAS No. 148 amends FASB Statement No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. The Company adopted the disclosure provisions of SFAS No. 148 on January 1, 2003. The Company does not expect to change to using the fair value based method of accounting for stock-based employee compensation; and therefore, the adoption of SFAS No. 148 impacts only the disclosures, not the financial results, of the Company. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin ARB 51." FIN 46 addresses consolidation by business enterprises of variable interest entities (`VIE'). FIN 46 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE's activities or entitled to receive a majority of the entity's residual returns, or both. The provisions are effective for any new entities that are originated subsequent to January 31, 2003. On December 24, 2003, the FASB issued a revision to FIN 46 ("FIN 46R"). The Company has adopted FIN 46R as the method used for evaluating whether or not VIEs must be consolidated as of December 26, 2003. The adoption of FIN 46 and 46R did not have an impact on the consolidated financial statements. In April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This Statement is effective for contracts entered into or modified after June 30, 2003, except for contracts that relate to SFAS 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 did not have a material impact on the financial position or results of operations of the Company. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"), which establishes how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the financial position or results of operations of the Company because the Company does not have any financial instruments that have characteristics of both liabilities and equity. On December 23, 2003, the FASB issued Statement of Financial Accounting Standards No. 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits ("SFAS 132"). The revised SFAS 132 retains the disclosure requirements in the original statement and requires additional disclosures about pension plan assets, benefit obligations, benefit costs and other relevant information. The Company has included the new disclosures that are required for financial statements of annual periods ending after December 15, 2003. Note 2. Acquisitions On April 30, 2003, the Company completed it's acquisition of Bridge View Bancorp ("Bridge View"), a Bergen County based bank holding company with eleven locations. As of that date Bridge View had approximately $291 million of total assets, $184 million of loans and $259 million of deposits. The aggregate purchase price paid to Bridge View shareholders was approximately $85.7 million and consisted of approximately 2.9 million shares of the Company's common stock with an approximate market value of $52.2 million based upon the average closing price three days prior to and after the acquisition date and $33.5 million in cash. The transaction was accounted for as a purchase and the cost in excess of net assets acquired of approximately $58.7 million was allocated to net identified intangibles of approximately $4.3 million and goodwill of approximately $54.4 million. The following is a reconciliation of the purchase price paid by Interchange for Bridge View: Cash and due from banks $ 49,555 Federal funds sold 7,000 Investments 39,907 Loans 183,845 Premises and equipment 10,222 Intangible assets 4,295 Accounts receivable and other assets 839 Non-interest bearing deposits (85,353) Interest bearing deposits (173,627) Accounts payable and other liabilities (5,338) --------------- Fair value net assets acquired 31,345 Purchase price 85,731 --------------- Goodwill $ 54,386 ===============
38 The following unaudited pro forma condensed consolidated statements of income for the years ended December 31, 2003 and 2002 give effect to the merger as if the merger had been consummated on either January 1, 2003 or 2002. The unaudited pro forma information is not necessarily indicative of the results of operations in the future or the results of operations, which would have been realized had the merger been consummated during the periods or as of the dates for which the unaudited pro forma information is presented. Interchange Financial Services Corporation and Subsidiaries PRO FORMA CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)
Year Ended December 31, ------------------------------ 2003 2002 (Unaudited) (Unaudited) Pro Forma Pro Forma -------------- --------------- Interest income $ 64,585 $ 69,255 Interest expense 14,491 18,975 -------------- --------------- Net interest income 50,094 50,280 Provision for loan and lease losses 1,830 2,070 -------------- --------------- Net interest income after provision for loan and lease losses 48,264 48,210 Non-interest income 11,429 9,036 Non-interest expense Salaries and benefits 18,489 18,075 Occupancy and FF&E 6,521 6,377 Other expenses 9,054 9,867 -------------- --------------- 34,064 34,319 Net income before taxes 25,629 22,927 Income Taxes 8,254 7,699 -------------- --------------- Net income $ 17,375 $ 15,228 ============== =============== Earnings per common share: Basic 1.36 1.19 Diluted 1.34 1.18
On January 16, 2002, the Company acquired certain assets and assumed certain liabilities of Monarch Capital Corporation ("Monarch"). In this asset purchase transaction, the Company acquired certain loans and leases valued at approximately $12.8 million. In addition, the Company assumed certain liabilities (borrowings) of Monarch, valued at approximately $12.7 million, which had been used to fund the loans and leases. The total purchase price was $1.6 million which was paid in cash and 71,918 in shares of Company stock with an approximate market value of $917 thousand subject to certain adjustments. The cost in excess of net assets acquired resulted in goodwill of approximately $1.5 million. Note 3. Restrictions on Cash and Due from Banks The Bank is required to maintain a reserve balance with the Federal Reserve Bank of New York based upon the level of its deposit liability. The average amount of this reserve balance for 2003 and 2002 was approximately $1.7 million and $775 thousand, respectively. 39 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, 2003 ------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ----------- ------------ -------------- Securities held-to-maturity Mortgage-backed securities $ 9,850 $ 330 $ 1 $ 10,179 Obligations of states & political subdivisions 9,257 787 - 10,044 ------------- ----------- ------------ -------------- $ 19,107 $ 1,117 $ 1 $ 20,223 ============= =========== ============ ============== Securities available-for-sale Obligations of U.S. Treasury $ 6,032 $ 5 $ 2 $ 6,035 Mortgage-backed securities 112,981 1,363 157 114,187 Obligations of U.S. agencies 271,339 2,583 762 273,160 Obligations of states & political subdivisions 33,849 1,257 68 35,038 Equity securities 4,396 137 - 4,533 ------------- ----------- ------------ -------------- 428,597 5,345 989 432,953 ------------- ----------- ------------ -------------- Total securities $ 447,704 $ 6,462 $ 990 $ 453,176 ============= =========== ============ ==============
------------------------------------------------------- December 31, 2002 ------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ----------- ------------ -------------- Securities held-to-maturity Mortgage-backed securities $ 16,437 $ 667 $ - $ 17,104 Obligations of U.S. agencies 1,991 68 - 2,059 Obligations of states & political subdivisions 9,664 663 - 10,327 Other debt securities 100 - - 100 ------------- ----------- ------------ -------------- 28,192 $1,398 - 29,590 ------------- ----------- ------------ -------------- Securities available-for-sale Mortgage-backed securities 101,028 1,778 201 102,605 Obligations of U.S. agencies 91,577 3,982 - 95,559 Obligations of states & political subdivisions 21,382 889 52 22,219 Equity securities 3,937 - - 3,937 ------------- ----------- ------------ -------------- 217,924 6,649 253 224,320 ------------- ----------- ------------ -------------- Total securities $ 246,116 $ 8,047 $ 253 $ 253,910 ============= =========== ============ ==============
Securities Securities Held-to-Maturity Available-for-Sale -------------------------- ------------------------ Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value ------------ ------------ ----------- ------------ Within 1 year $ 5,741 $ 5,951 $ 77,204 $ 77,410 After 1 but within 5 years 6,634 6,945 309,449 312,219 After 5 but within 10 years 4,711 5,174 19,813 20,040 After 10 years 2,021 2,153 17,735 18,751 Equity securities - - 4,396 4,533 ------------ ----------- ----------- ------------ Total $ 19,107 $ 20,223 $ 428,597 $ 432,953 ============ =========== =========== ============
40 Proceeds from the sale of securities available-for-sale amounted to $44.4 million, $21.9 million and $19.3 million for the years ended December 31, 2003, 2002 and 2001, respectively, which resulted in gross realized gains of $1.3 million, $573 thousand and $141 thousand for those periods, respectively. Gross realized losses from the sale of securities available-for-sale amounted to $71 thousand, $33 thousand and $19 thousand in 2003, 2002 and 2001, respectively. These amounts are included in net gain on sale of securities in the Consolidated Statements of Income. Proceeds from the sale or call of securities held to maturity amounted to $275 thousand for the year ended December 31, 2003 and $2.0 million for each of the years ended December 31, 2002 and 2001, respectively. These security transactions resulted in no gains for 2003 and realized gains of $24 thousand and $130 thousand for 2002 and 2001, respectively. The securities were either scheduled to mature within 3 months or were called before maturity. During 2003, the Company recognized an other than temporary impairment charge of $415 thousand from the acceleration of premium amortization on certain collateralized mortgage obligations. The acceleration of premium amortization was largely driven by the historically high mortgage prepayment speeds due to the low interest rate environment. These amounts are included in net gain on sale of securities in the Consolidated Statements of Income. The investment portfolio is evaluated at least quarterly to determine if there are any securities with losses that are other than temporary. One criteria in assessing for an other than temporary impairment charge is if a security has an unrealized loss that exceeds one year. At December 31, 2003, the Company had $6.2 million of securities with unrealized losses of $13 thousand that were in excess of one year. It is expected that the Company will recover all amounts due under the contractual obligations of those securities and as such, no other than temporary impairment charge was necessary. Securities with carrying amounts of $46.1 million and $58.6 million at December 31, 2003 and 2002, 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, ------------------------------- 2003 2002 -------------- ------------- Real Estate Residential .................... $ 240,901 $ 231,580 Commercial ..................... 330,040 222,628 Construction ................... 31,077 11,359 Commercial Commercial and financial ....... 149,462 104,542 Lease financing ................ 28,440 26,356 Consumer Lease financing ................ 12,416 15,969 Installment .................... 4,245 3,207 --------- --------- 796,581 615,641 Allowance for loan and lease losses (9,641) (7,207) --------- --------- $ 786,940 $ 608,434 ========= =========
Loans are net of unearned income and deferred fees of $6.1 million and $8.7 million at December 31, 2003 and 2002 respectively. Non-performing loans include loans which are accounted for on a nonaccrual basis and troubled debt restructurings. Non-performing loans are as follows: (in thousands)
--------------------------- December 31, --------------------------- 2003 2002 ---------- -------- Nonaccrual loans Residential real estate $ 1,364 $ 495 Commercial real estate 1,603 1,780 Commercial and financial 2,858 1,300 Commercial lease financing 2,365 2,357 Consumer 380 31 ---------- -------- $ 8,570 $ 5,963 ---------- -------- Troubled debt restructurings Commercial and financial - - ---------- -------- Total non-performing loans $8,570 $5,963 ========== ========
At December 31, 2003, 2002 and 2001, there were no loans or leases 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. Interest income that would have been recorded during the year on nonaccrual loans outstanding at year-end in accordance with original terms amounted to $773 thousand, $576 thousand and $231 thousand for the years ended December 31, 2003, 2002 and 2001, respectively. Interest income included in net income during the year on loans currently classified as nonaccrual loans outstanding at year-end amounted to $353 thousand, $321 thousand and $143 thousand for the years ended December 31, 2003, 2002 and 2001, respectively. 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 North American Industry Classification System, which exceeds 10% of its total loans and unfunded commitments. Certain officers and directors of the Company and their affiliated companies are customers of 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, --------------------------- 2003 2002 ---------- -------- Balance at beginning of year $ 5,135 $ 6,133 Additions - - Reductions (1,043) (998) ---------- -------- Balance at end of year $ 4,092 $ 5,135 ========== ========
41 Note 6. Allowance for Loan and Lease Losses The Company's recorded investment in impaired loans is as follows:(in thousands)
-------------------------------------------------------------- December 31, -------------------------------------------------------------- 2003 2002 ----------------------------- ----------------------------- Investment Related Investment Related in Allowance in Allowance Impaired for Loan Impaired for Loan Loans Losses Loans Losses ------------- ----------- ------------- ------------ Impaired loans With a related allowance for loan losses Commercial and financial ........................ $2,864 $ 463 $1,104 $ 128 Commercial real estate .......................... 1,603 40 1,780 45 Residential real estate ......................... 816 122 -- -- Without a related allowance for loan losses .................. -- -- -- -- ------ ------ ------ ------ $5,283 $ 625 $2,884 $ 173 ====== ====== ====== ====== - ------------------------------------------------------------------------------ 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, ------------------------ 2003 2002 ------- ------- Average recorded investment $ 4,711 $ 3,166 ======= ======= Interest income recognized during time period that loans were impaired, using cash-basis method of accounting $ 198 $ 160 ======= =======
Changes in the allowance for loan and lease losses are summarized as follows: (in thousands) --------------------------------- Year Ended December 31, --------------------------------- 2003 2002 2001 ----------- -------- -------- Balance at beginning of year .................. $ 7,207 $ 6,569 $ 6,154 Additions (deductions) Provision charged to operations .......... 1,815 1,500 1,075 Bridge View acquired allowance ........... 1,929 -- -- Recoveries on loans previously charged off 46 64 304 Loans charged off ........................ (1,356) (926) (964) ------- ------- ------- Balance at end of year ........................ $ 9,641 $ 7,207 $ 6,569 ======= ======== ========
Note 7. Premises and Equipment, net Premises and equipment are summarized as follows: (in thousands)
-------------------------------- December 31, -------------------------------- 2003 2002 ----------------- -------------- Land $ 6,028 $1,698 Buildings 6,880 2,195 Furniture, fixtures and equipment 8,939 7,785 Leasehold improvements 11,124 10,016 ----------------- -------------- 32,971 21,694 Less: accumulated depreciation and amortization 12,628 11,182 ----------------- -------------- $ 20,343 $10,512 ================= ==============
Note 8. Goodwill and Other Intangibles At December 31, 2003 gross intangible assets amounted to $4.6 million and accumulated amortization amounted to $430 thousand. At December 31, 2002, gross intangible assets amounted to $300 thousand and accumulated amortization amounted to $69 thousand. Amortization of intangible assets as a result of acquisitions, which is included in non-interest expense, amounted to $360 thousand, and $69 thousand for the year ended December 31, 2003 and 2002, respectively. During the second quarter, the Company recorded a core deposit intangible of $4.3 million in connection with the Bridge View merger. The core deposit intangible has an estimated life of 10 years and the Company amortized $286 thousand for the year ended December 31, 2003. The core deposit intangible will be periodically reviewed for impairment. In addition, the Company recorded goodwill of $54.4 million in connection with the Bridge View merger, which is not deductible for tax purposes. The goodwill will be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. At December 31, 2003, the scheduled amortization of the core deposit intangible is as follows: (in thousands) 2004 $ 430 2005 430 2006 430 2007 430 2008 and thereafter 2,289 ------------ Total $ 4,009 ============
42 Note 9. Deposits Deposits are summarized as follows: (in thousands)
------------------------------------ December 31, ------------------------------------ 2003 2002 ------------------ --------------- Non-interest bearing demand deposits $ 223,745 $ 118,578 Interest bearing demand deposits 446,786 323,998 Money market deposits 84,162 55,372 Savings deposits 120,136 80,300 Time deposits 281,969 237,424 ------------------ --------------- $1,156,798 $ 815,672 ================== ===============
At December 31, 2003 and 2002, the carrying amounts of certificates of deposit that individually exceed $100,000 amounted to $16.6 million and $26.7 million, respectively. Interest expense relating to certificates of deposit that individually exceed $100,000 was approximately $850 thousand, $1.0 million and $1.5 million in 2003, 2002 and 2001 respectively.
At December 31, 2003, the scheduled maturities of time deposits are as follows: (in thousands) 2004 $ 255,069 2005 20,916 2006 3,399 2007 1,252 2008 1,333 --------------- Total $ 281,969 ===============
Note 10. Securities Sold Under Agreements to Repurchase and Short-term Borrowings Securities sold under repurchase agreements and short-term borrowings are summarized as follows: (in thousands)
-------------------------- December 31, -------------------------- 2003 2002 -------------------------- Securities sold under agreements to repurchase $15,618 $17,390 Federal Home Loan Bank overnight advances 46,491 - -------------- ----------- $62,109 $17,390 ============== =========== Average balance outstanding $17,875 $ 19,119 Average interest rate 1.59% 3.63% Maximum amount borrowed $48,110 $ 30,607
Securities sold under agreements to repurchase mature within one year. In addition, the bank has an additional $51.8 million available under its agreement with Federal Home Loan Bank("FHLB") of New York. Note 11. Long-term Borrowings Long term borrowings consist of one FHLB advance of $10 million. The borrowing has a fixed rate of 4.22%, matures in January 2007 and is collateralized by U.S. Treasury and U.S. agency securities. The FHLB has an option to call the advance on a quarterly basis if the 3 month LIBOR resets above 7.50%. Note 12. Benefit Plans In 1993, the Bank established a non-contributory defined benefit pension plan covering all eligible employees (the "Pension Plan"). The funding policy is to contribute an amount that is at least the minimum required by law. The plan assets are invested through an unaffiliated trust company in a fixed income and equity (balanced) fund. The investment strategy of the fund is to hold 60% to 70% in stocks and the rest in fixed income securities. The fund performance is reviewed periodically by an administrative committee comprised of the Bank's President, Chief Financial Officer and Human Resources Director. Retirement income is based on years of service under the Pension Plan and, subject to certain limits, on final average compensation. Effective January 1, 1994, the Bank established a supplemental plan covering all eligible employees (the "Supplemental Plan") that provides for retirement income that would have been paid but for the limitation under the qualified Pension Plan. Effective August 1, 1994, the Company established a retirement plan for all directors of the Bank who are not employees of Interchange or of any subsidiary or affiliate of Interchange (the "Directors' Plan"). As a part of this Directors' 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 based on the greater of the cash value of the life insurance policy or annuity contract or an amount determined by multiplying the Bank's standard annual retainer fees at the director's retirement date by the director's years of service. Pursuant to the Directors' Plan, as amended from time to time, a director who has been on the board at least five years is entitled to receive upon retirement an amount equal to the standard annual retainer (currently $10,000) being paid to directors multiplied by the director's years of service on the board, multiplied by the director's vested percentage. Vesting occurs in 20% increments commencing in year six and ending in year ten at which time a director becomes fully vested. Notwithstanding the foregoing, the benefits payable to a participant who was a participant on January 1, 2002 shall not be less than the greater of (i) or (ii) below: (i) the benefits such participant had accrued as of such date under the terms and provision of the Directors' Plan in effect prior to the January 1, 2002 amendment, or (ii) the cash value of any life insurance policy that was purchased and owned by the Company or one of its subsidiaries prior to the plan amendment. The benefit may be paid in a lump sum or paid out in five annual installment payments at the election of the participant. 43 Net pension cost of each plan consists of the following: (in thousand)
Pension Plan Supplemental Plan Directors' Plan ------------ ----------------- --------------- 2003 2002 2001 2003 2002 2001 2003 2002 2001 ---- ---- ---- ---- ---- ---- ---- ---- ---- Service cost $ 490 $ 331 $ 249 $ 29 $ 25 $ 19 $ 85 $ 72 $ 49 Interest cost 181 150 116 21 19 14 114 98 94 Expected return on plan assets (124) (120) (100) - - - - - - Amortization of prior service cost 2 2 - 2 3 8 - - - Recognized net actuarial gain 1 - (18) - - (7) - - - ----- ----- ----- ---- ---- ---- ---- ----- ----- Net periodic benefit cost $ 550 $ 363 $ 247 $ 52 $ 47 $ 34 $199 $ 170 $ 143 ===== ===== ===== ==== ==== ==== ==== ===== =====
The following table sets forth the funded status, as of December 31, the measurement date, of each plan 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 ------------ ----------------- --------------- 2003 2002 2003 2002 2003 2002 ---- ---- ---- ---- ---- ---- Change in pension obligation Pension obligation at beginning of year $ 2,962 $ 2,000 $ 352 $ 288 $ 1,555 $ 1,411 Service cost 490 331 29 25 85 72 Interest cost 181 150 21 19 114 98 Acquisition of Bridge View Plan - - - - 376 - Actuarial (gain) loss 23 513 (21) 20 (29) (26) Benefits paid (30) (32) - - - - ----- ----- ------ ----- ----- ----- Pension obligation at end of year 3,626 2,962 381 352 2,101 1,555 ----- ----- ------ ----- ----- ----- Change in plan assets Fair value of plan assets at beginning of year 1,397 1,401 - - - - Actual gain (loss) on plan assets 320 (107) - - - - Employer contribution 293 135 - - - - Benefits paid (30) (32) - - - - ----- ----- ----- ----- ----- ----- Fair value of plan assets at end of year 1,980 1,397 - - - - ----- ----- ----- ----- ----- ----- Funded Status (1,646) (1,565) (381) (352) (2,100) (1,555) Unrecognized net actuarial (gain) loss 289 463 32 53 (120) (91) Unrecognized prior service cost 28 30 16 19 - - ----- ----- ------- ------ ------- ------- Accrued pension cost $(1,329) $(1,072) $ (333) $ (280) $(2,220) $(1,646) ======= ======== ====== ====== ======= ======== Weighted-average assumptions (1) Discount rate for net periodic benefit cost 6.50 % 7.25 % 6.50 % 7.25 % 6.50 % 7.25 % Discount rate for benefit obligations 6.25 6.50 6.25 6.50 6.25 6.50 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) Weighted average assumptions were applied at the beginning of the period.
Other Balance Sheet Amounts The following amounts are included in the Consolidated Balance Sheets for December 31,: (in thousands) 2003 2002 --------- -------- Accrued benefit cost $ (3,882) $ (2,998) Intangible assets 16 - Accumulated other comprehensive income 10 - --------- -------- Net amount recognized $ (3,856) $ (2,998) ======== ========
The accumulated benefit obligation for all defined benefit pension plans was $4.9 million and $3.7 million at December 31, 2003 and 2002, respectively. Information for pension plans with an accumulated benefit obligation in excess of plan assets: (in thousands) 2003 2002 ------- -------- Projected benefit obligation $ 6,108 $ 4,869 Accumulated benefit obligation $ 4,899 $ 3,730 Fair value of plan assets $ 1,980 $ 1,397
44 In 1976, the Bank established a Capital Investment Plan (the "Investment Plan") which permits employees to make basic contributions up to 4% of base compensation. In 1998, the Investment Plan was amended to permit employees to make basic contributions up to 6% of base compensation. Additional contributions up to 10% of compensation may be made when coupled with basic contributions. Under the Investment Plan, the Bank provides a matching contribution equal to 50% of the basic contribution of each participant. The Investment Plan offers employees a choice of 9 investment funds ranging from conservative to aggressive. Both employee and Bank matching contributions are invested in these funds according to the employees' elections. The investment choices are administered by an unaffiliated trust company. The fund options are reviewed periodically by an administrative committee comprised of the Bank's President, Chief Financial Officer and Human Resources Director. In addition, the Bank makes a fixed contribution on behalf of each participant equal to 1% of such participant's base compensation, which is in the form of Interchange common stock. The Bank's contribution to the Investment Plan amounted to $347 thousand, $281 thousand and $236 thousand in 2003, 2002 and 2001, respectively. NOTE 13. Stock Option and Incentive 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, options to purchase a maximum of 1,384,313 shares of Interchange 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. Pursuant to the Stock Plan, incentive stock options or non-qualified stock options may be granted to employees. In 2000, the Company adopted a stock option plan, titled "Outside Director's Incentive Compensation Plan" (the "Director's Stock Plan") that covers those members of the Board of Directors of the Company who have not served as a full-time employee of the Company or any of its subsidiaries during the prior twelve-month period. Under this plan, options to purchase a maximum of 150,000 shares of Interchange 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. Only non-qualified stock options are granted under the Director's Stock Plan. The status of options granted under the Stock Plan and Director's Stock Plan as of December 31, and changes during each of the three years then ended is summarized below:
2003 2002 2001 -------------------- ------------------ ---------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Incentive Stock Options Options Price Options Price Options Price - -------------------------- ---------- --------- -------- -------- ------- -------- Outstanding at January 1 449,016 $ 11.75 343,992 $ 10.36 277,094 $ 10.06 Granted 172,500 17.00 133,875 14.70 94,500 10.79 Exercised (65,296) 8.84 (20,660) 7.34 (13,226) 6.17 Forfeited - - (8,191) 12.62 (14,376) 11.24 --------- --------- -------- -------- ------- -------- Outstanding at December 31 556,220 $ 13.72 449,016 $ 11.75 343,992 $ 10.36 ========= ========= ======== ======== ======= ======== Options exercisable at December 31 266,970 $ 11.61 332,141 $ 11.06 184,733 $ 9.88 ========= ========= ======== ======== ======= ======== Weighted-average fair value of options granted during the year ended December 31 (per option) $ 4.11 $ 4.00 $ 2.85
2003 2002 2001 -------------------- ------------------ ---------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Non-Qualified Stock Options Options Price Options Price Options Price - --------------------------- ---------- --------- -------- -------- ------- -------- Outstanding at January 1 45,000 $ 13.54 33,000 $ 10.70 16,500 $ 9.33 Granted 18,000 17.70 16,500 18.33 16,500 12.07 Exercised (4,500) 10.94 (4,500) 10.24 - - Forfeited - - - - - - --------- --------- -------- -------- ------- -------- Outstanding at December 31 58,500 $ 15.02 45,000 $ 13.54 33,000 $ 10.70 ========= ========= ======== ======== ======= ======== Options exercisable at December 31 24,000 $ 12.18 12,000 $ 10.24 5,495 $ 9.33 ========= ======= ======== ======== ======= ======== Weighted-average fair value of options granted during the year ended December 31 (per option) $ 4.61 $ 5.04 $ 2.67 All per share data and averages shares were restated to reflect a 3 for 2 stock split declared on May 23, 2002 and paid on July 12, 2002.
45
The following table summarizes information about options outstanding under the Plan at December 31, 2003: 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 - ------------------------------ ------------- ------------- ----------- ------------ ----------- Incentive Stock Options $ 5 - $10 7,944 2.28 $ 5.57 7,944 $ 5.57 $10 - $15 375,776 6.66 12.39 259,026 11.79 $15 - $20 172,500 9.09 17.00 - - ------------- ------------ 556,220 266,970 ============= ============ Non-Qualified Stock Options $5- $10 10,500 6.33 9.33 10,500 9.33 $10 - $15 14,000 7.38 12.07 8,500 12.07 $15 - $20 34,000 8.85 18.00 5,000 18.33 ------------- ------------ 58,500 24,000 ------------- ------------ Total 614,720 290,970 ============= ============
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 2003, 2002 and 2001, respectively: dividend yield of 2.14%, 2.37%, 2.66%; expected volatility of 24.69%, 25.12% and 22.02%; risk-free interest rate of 3.39%, 4.65% and 5.03%; 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. If compensation cost for the Stock Plan and Director's 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 per share data) 2003 2002 2001 ---------- -------- -------- Net Income As reported $16,366 $12,877 $10,540 Less: Total stock-based compensation expense determined under the fair value method for all rewards, net of related tax effects 408 120 89 ---------- -------- -------- Pro-forma $15,958 $12,757 $10,451 ========== ======== ======== Diluted earnings per common share As reported $1.36 $1.30 $1.07 Less: Total stock-based compensation expense determined under the fair value method for all rewards, net of related tax effects 0.03 0.02 - ---------- -------- -------- $1.33 $1.28 $1.07 ========== ======== ========
All per share data and average shares were restated to reflect a 3 for 2 stock split declared on May 23, 2002 and paid on July 12,2002. Stock-based compensation Pursuant to the Stock Plan, key employees may be awarded restricted shares of Interchange common stock subject to certain vesting and restrictions. The awards are recorded at fair market value and amortized into salary expense over the vesting period. The following table sets forth the changes in restricted stock awards outstanding for the years ended December 31, 2003, 2002 and 2001. Restricted Stock Awards 2003 2002 2001 ------------- ------------- ----------- Outstanding at beginning of year 39,124 38,250 34,805 Granted 20,883 21,070 22,320 Vested (19,477) (20,196) (18,875) Forfeited - - - ------------- ------------- ----------- Outstanding at end of year 40,530 39,124 38,250 ============= ============= ===========
The amount of compensation cost related to restricted stock awards included in salary epense in 2003, 2002 and 2001 amounted to $237 thousand, $196 thousand and $185 thousand, respectively. 46 Note 14. Stockholders' Equity and Regulatory 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 levels that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's 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 1 capital to risk-weighted assets and Tier 1 capital to average assets. Management believes that as of December 31, 2003 the Company and the Bank met all capital adequacy requirements to which they are subject. As of December 31, 2003, the most recent notification from the Federal Reserve 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 1 risk-based and Tier 1 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.
To Be "Well Capitalized" Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions --------------------------- ----------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio ------------ ------------ ------------- ------- ----------- --------- As of December 31, 2003: Total Capital (to Risk Weighted Assets): The Company $91,694 10.46 % $70,146 8.00 % N/A N/A The Bank 91,358 10.35 % 70,637 8.00 % 88,296 10.00 % Tier 1 Capital (to Risk Weighted Assets): The Company 81,913 9.34 % 35,073 4.00 % N/A N/A The Bank 81,576 9.24 % 35,319 4.00 % 52,978 6.00 % Tier 1 Capital (to Average Assets): The Company 81,913 6.24 % 39,367 3.00 % N/A N/A The Bank 81,576 6.22 % 39,318 3.00 % 65,530 5.00 % As of December 31, 2002: Total Capital (to Risk Weighted Assets): The Company $82,658 13.33 % $49,619 8.00 % N/A N/A The Bank 80,813 13.00 % 49,714 8.00 % $62,143 10.00 % Tier 1 Capital (to Risk Weighted Assets): The Company 75,451 12.16 % 24,809 4.00 % N/A N/A The Bank 73,606 11.84 % 24,857 4.00 % 37,286 6.00 % Tier 1 Capital (to Average Assets): The Company 75,451 8.12 % 27,864 3.00 % N/A N/A The Bank 73,606 7.92 % 27,868 3.00 % 46,446 5.00 %
Shares of common stock On April 26, 2001, the Board of Directors of Interchange authorized a program to repurchase up to 450,000 shares of Interchange's outstanding common stock on the open market or in privately negotiated transactions. No shares were repurchased during 2003 and as of December 31, 2003, the Company had purchased 170,193 shares at a total cost of approximately $2.2 million under the authorized program. The repurchased shares are held as treasury stock and will be principally used for the exercise of stock options, restricted stock awards under the Stock Plan and other general corporate purposes. The following table summarizes the activity in common shares: (in thousands) Shares Issued Shares in Treasury ------------- ------------ Balance at December 31, 2001 9,691 1,221 Purchase of treasury stock (30) 30 Issuance of stock from treasury 154 (154) ------------- ------------ Balance at December 31, 2002 9,815 1,097 Reacquired shares in lieu of non-performing assets (36) 36 Issuance of stock from treasury 81 (81) Issuance of stock for Bridge View Bancorp acquisition 2,950 - ------------- ------------ Balance at December 31, 2003 12,810 1,052 ============= ============
All per share data and average shares were restated to reflect a 3-for-2 stock split declared on May 23, 2002 and paid on July 12, 2002. 47 Note 15. Earnings Per Common 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)
2003 2002 2001 -------------------------------- -------------------------- --------------------------- 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 Net income available to common shareholders $16,366 11,816 $1.39 $12,877 9,809 $1.31 $10,540 9,779 $1.08 ========= ======== ======== Effect of Dilutive Shares Weighted average shares if converted 175 124 45 ---------- --------- -------- Diluted Earnings per Common Share Net income available to common shareholders $16,366 11,991 $1.36 $12,877 9,933 $1.30 $10,540 9,824 $1.07 =========== ========== ========= ========================== ========= ======== ========
All per share data and average shares were restated to reflect a 3-for-2 stock split declared on May 23, 2002 and paid on July 12, 2002. Note 16. Other Non-interest Expense Expenses included in other non-interest expense which exceed one percent of the aggregate of total interest income and non-interest income for the years ended December 31, are as follows: (in thousands) 2003 2002 2001 ---- ---- ---- Professional fees ......... $1,568 $1,458 $1,240 Data Processing ........... 933 639 568 All other.................. 4,068 3,367 2,948 ------ ------ ------ $6,569 $5,464 $4,756 ====== ====== ======
Note 17. Income Taxes Income tax expense for the years ended December 31, is summarized as follows: (in thousands) 2003 2002 2001 ---------- --------- -------- Federal: current $5,711 $6,586 $4,908 deferred 1,461 (732) (96) State: current 34 242 236 deferred 412 - - ---------- --------- -------- $7,618 $6,096 $5,048 ========== ========= ========
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) 2003 2002 --------- -------- Deferred tax assets Excess of book over tax allowance for loan and lease losses $ 4,242 $2,468 Excess of book over tax depreciation 21 280 Excess of book over tax provision for benefit plan expense 1,773 1,038 Core deposit premium 261 195 Other 551 448 --------- -------- Total deferred tax assets 6,848 4,429 --------- -------- Deferred tax liabilities Unrealized gains - securities available for sale 1,779 2,175 Dividend on REIT 2,456 247 Excess of tax over book for leasing originations 858 - Premium related to Bridge View acquisition 2,238 - Other 363 372 --------- -------- Total deferred tax liabilities 7,694 2,794 --------- -------- Net deferred tax (liability) asset $ (846) $1,635 ========= ========
The provision for income taxes differs from the expected statutory provision as follows:
---------------------------------- December 31, ---------------------------------- 2003 2002 2001 ---------- --------- ------- Expected provision at statutory rate 35% 35 % 35 % Difference resulting from: State income tax, net of federal benefit 2 1 1 Interest income exempt from federal taxes (2) (2) (2) Bank owned life insurance (3) (2) (1) Other - - (1) ------- -------- ------- 32% 32 % 32 % ======= ======== =======
48 Note 18. Restrictions of Subsidiary Bank Dividends Under New Jersey 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, 2003, undistributed net assets of the Bank were $141.6 million of which $78.8 million 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 19. 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. At December 31, 2003 the Company had a reserve of $140 thousand recorded as a liability for potential losses associated with off balance sheet arrangements.
A summary of commitments to extend credit at December 31, are summarized as follows: (in thousands) 2003 2002 ----------- ---------- Home equity loans $ 89,249 $ 64,346 Other loans 128,045 90,156 Standby letters of credit 3,534 1,127 ----------- ---------- $220,828 $155,629 =========== ==========
The following table illustrates the Company's accounting for, and disclosure of, the issuance of certain types of guarantees as required under FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". Maximum potential Carrying amount of future amount of Nature of the guarantee payments the liability - ---------------------------------------------------------------------------- Standby letters of credit $3,534 $ -
Standby letters of credit are typically underwritten for terms of less than one year and are fully collateralized by either cash or indirectly secured by a line of credit, which is collateralized by real estate, receivables or other liquid collateral. The minimum annual rental under noncancelable operating leases for premises and equipment, exclusive of payments for maintenance, insurance and taxes, is summarized as follows: (in thousands) 2004 $ 2,409 2005 2,350 2006 2,039 2007 1,871 2008 1,609 thereafter 7,669 ------------ Total minimum lease payments $ 17,947 ============
Rent expense for all leases amounted to approximately $2.3 million, $1.7 million and $1.5 million in 2003, 2002, and 2001, respectively. The Company leases its operations facilities from an affiliated company of a director. The lease expires in October 2007 and provides that the annual minimum rent of approximately $84 thousand. Rent expense paid was approximately $62 thousand and $51 thousand in 2003 and 2002, respectively. Two directors of the Company provided legal services through affiliated firms. Fees paid for these services amounted to approximately $356 thousand, $296 thousand, and $309 thousand in 2003, 2002, and 2001, respectively. In addition, a director provided certain real estate appraisal services through an affiliated firm. Fees paid for these services amounted to approximately $8 thousand in 2003. The Company also obtained insurance from an affiliated agency of a director. Total costs associated with the policies purchased through the agency were approximately $17 thousand in 2003. The Company believes that all of the services obtained from directors are at arms length. In addition, Board approval is required to obtain services from an affiliated party. 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. 49 Note 20. 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, ------------------------------------------------------------------- 2003 2002 ------------------------------------ ---------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ----------------- ----------------- -------------- ------------- Financial assets: Cash and cash equivalents $ 31,435 $ 31,435 $ 33,916 $ 33,916 Securities held to maturity 19,107 20,223 28,192 29,590 Securities available for sale 432,953 432,953 224,320 224,320 Loans, net 786,940 794,042 608,434 618,028 ----------------- ----------------- -------------- ------------- $ 1,270,435 $ 1,278,653 $ 894,862 $ 905,854 ================= ================= ============== ============= Financial liabilities: Deposits $1,156,798 $ 1,157,635 $ 815,672 $ 817,661 Short-term borrowings 62,109 62,109 17,390 17,390 Long-term borrowings 10,000 10,149 10,000 10,438 ----------------- ----------------- -------------- ------------- $1,228,907 $ 1,229,893 $ 843,062 $ 845,489 ================= ================= ============== =============
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 deposits 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 value 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 non-performing loans is estimated using methods employed by management in evaluating the adequacy of the ALLL. 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, 2003 and 2002, the estimated fair values of these off-balance-sheet financial instruments were immaterial. 50 Note 21. Parent Company Only Information (in thousands)
------------------------ December 31, ------------------------ Condensed balance sheets 2003 2002 ------------- ---------- Assets Cash $ 1,104 $ 1,630 Securities available for sale 484 - Investment in subsidiaries Bank 145,889 78,834 Other 142 142 Dividends receivable - 1,588 Other assets 8 - ------------- ---------- Total assets $ 147,627 $ 82,194 ============= ========== Liabilities Dividends payable - $ 1,372 Other liabilities $ 4,434 142 ------------- ---------- 4,434 1,514 ------------- ---------- Stockholders' equity Common stock 5,396 5,397 Capital Surplus 73,232 21,097 Retained earnings 74,710 63,314 Accumulated other comprehensive income 2,434 3,596 ------------- ---------- 155,772 93,404 Less: Treasury stock 12,579 12,724 ------------- ---------- Total stockholders' equity 143,193 80,680 ------------- ---------- Total liabilities and stockholders' equity $ 147,627 $ 82,194 ============= ==========
--------------------------------- Years Ended December 31, --------------------------------- Condensed statements of income 2003 2002 2001 ------------- ------------------- Dividends from subsidiary bank $ 20,320 $ 3,107 $ 6,467 Net gain on sale of securities - - $ 20 Other income - 1 21 ------------- ------------------- Total revenues 20,320 3,108 6,508 ------------- ------------------- Operating expenses 225 176 270 ------------- ------------------- Income before equity in undistributed earnings of subsidiaries 20,095 2,932 6,238 Equity in undistributed earnings of subsidiaries (3,729) 9,945 4,302 ------------- ------------------- Net income $ 16,366 $ 12,877 $ 10,540 ============= ===================
- --------------------------------------------------------------------------------
--------------------------------- Years Ended December 31, --------------------------------- Condensed statements of cash flows 2003 2002 2001 ------------- ------------------- Cash flows from operating activities: Net income $16,366 $ 12,877 $ 10,540 Adjustments to reconcile net income to net cash provided by operating activities Net gain on sale of securities - - (20) Decrease (increase) in other assets 1,588 485 (1,277) Decrease (increase) in dividends payable (1,372) 501 56 Dncrease (increase) in other liabilities (198) (138) 138 Equity in undistributed income of subsidiaries 3,729 (9,945) (4,302) ------------- ------------------- Net cash provided by operating activities $20,113 3,779 5,135 ------------- ------------------- Cash flows from investing activities: Sale of securities available for sale - - 40 ------------- ------------------- Net cash provided by investing activities - - 40 ------------- ------------------- Cash flows from financing activities: Cash dividends paid (4,970) (4,321) (3,517) Treasury stock (693) (432) (1,727) Common stock issued 354 1,685 241 Exercise of option shares 438 198 82 Net cash proceeds from acquisition of Bridge View Bancorp (15,768) - - ------------- ------------------- Net cash used in financing activities (20,639) (2,870) (4,921) ------------- ------------------- Net decrease/(increase) in cash (526) 909 254 Cash at beginning of year 1,630 721 467 ------------- ------------------- Cash at end of year $ 1,104 $ 1,630 $ 721 ============= =================== Supplemental disclosure of non-cash investing and financing activities: Stock issued for net assets purchased - $ 1,375 - Stock issued related to Bridge View acquisition $52,180 - -
51 Note 22. Quarterly Financial Data (unaudited) (in thousands, except per share data) - ---------------------------------------------------------------------------------------------------------------------- First Second Third Fourth 2003 Quarter Quarter Quarter Quarter - ---------------------------------------------------------------------------------------------------------------------- Interest income $ 13,450 $ 15,202 $ 15,965 $ 15,651 Interest expense 3,598 3,602 3,371 3,303 Net Interest income 9,852 11,600 12,594 12,348 Provision for loan losses 265 530 485 535 Net gain on sale of securities - 19 501 273 Non-interest income, excluding net gain on sale of securities 1,844 2,625 2,834 2,549 Non-interest expenses 6,527 7,696 8,758 8,259 Income before income taxes 4,904 6,018 6,686 6,376 Net income 3,356 4,187 4,511 4,312 Basic earnings per common share $ 0.34 $ 0.35 $ 0.35 $ 0.34 Diluted earnings per common share $ 0.34 $ 0.35 $ 0.35 $ 0.33 - ---------------------------------------------------------------------------------------------------------------------- First Second Third Fourth 2002 Quarter Quarter Quarter Quarter - ---------------------------------------------------------------------------------------------------------------------- Interest income $ 13,744 $ 14,200 $ 14,370 $ 14,185 Interest expense 4,676 4,574 4,309 3,918 Net Interest income 9,068 9,626 10,061 10,267 Provision for loan losses 225 255 405 615 Net gain on sale of securities 187 94 214 69 Non-interest income, excluding net gain on sale of securities 1,374 1,383 1,560 1,632 Non-interest expenses 6,132 6,292 6,326 6,312 Income before income taxes 4,273 4,556 5,104 5,040 Net income 2,940 3,065 3,457 3,416 Basic earnings per common share $ 0.30 $ 0.31 $ 0.35 $ 0.35 Diluted earnings per common share $ 0.30 $ 0.31 $ 0.35 $ 0.34 All per share data has been restated to reflect a 3-for-2 stock split declared on May 23, 2002 and paid on July 12, 2002.
52 EX-21 7 exhibit212003.txt EXHIBIT 21 Exhibit 21. Subsidiaries of the Registrant Interchange Bank (formerly known as Interchange State Bank), and Clover Leaf Mortgage Company, Inc., both of which are incorporated in New Jersey, are wholly owned direct subsidiaries of the Registrant. Clover Leaf Investment Corporation, Clover Leaf Insurance Agency Inc.(d/b/a Interchange Insurance Agency), Bridge View Investment Company and Interchange Capital Company, L.L.C. are incorporated in New Jersey and are wholly owned direct subsidiaries of Interchange Bank. Clover Leaf Management Realty Corporation, which is also incorporated in New Jersey, is 99% owned by Interchange Bank. Bridge View Investment Company has one wholly owned subsidiary, Bridge View Delaware, Inc. ("BVDI"). EX-31 8 exhibit3112003.txt EXHIBIT 31.1 Exhibit 31.1 - Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 CERTIFICATION OF DISCLOSURE CONTROLS I, Anthony S. Abbate, certify that: 1. I have reviewed this annual report on Form 10-K of Interchange Financial Services Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 15, 2004 /s/ Anthony S. Abbate _____________________________________ Anthony S. Abbate President and Chief Executive Officer EX-31 9 exhibit3122003.txt EXHIBIT 31.2 Exhibit 31.2 - Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 CERTIFICATION OF DISCLOSURE CONTROLS I, Charles T. Field, certify that: 1. I have reviewed this annual report on Form 10-K of Interchange Financial Services Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 15, 2004 /s/ Charles T. Field ______________________________ Charles T. Field Senior Vice President and CFO EX-32 10 exhibit322003.txt EXHIBIT 32 Exhibit 32 - Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the filing of the Annual Report on Form 10-K for the Year Ended December 31, 2003, (the "Report") by Interchange Financial Services Corporation ("Registrant"), each of the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Registrant. /s/ Anthony S. Abbate _____________________________ Anthony S. Abbate President and Chief Executive Officer /s/ Charles T. Field ______________________________ Charles T. Field Senior Vice President and CFO -----END PRIVACY-ENHANCED MESSAGE-----