-----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, G71Q9wKoWCwnDZRBoZ8+41/ATn0+V7MOEw3IgoGknFbQ5b10jo6t49nNLdAWj9xI ShWnNL+xRQZAwNmDWPP7XA== 0000755933-05-000009.txt : 20050316 0000755933-05-000009.hdr.sgml : 20050316 20050316162004 ACCESSION NUMBER: 0000755933-05-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050316 DATE AS OF CHANGE: 20050316 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: 05685741 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 e20571_10k.txt 10-K AS OF DECEMBER 31, 2004 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, 2004 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM____ TO ____ Commission File number 1-10518 INTERCHANGE FINANCIAL SERVICES CORPORATION (Exact name of registrant as specified in its charter) New Jersey 22-2553159 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Park 80 West/Plaza Two, Saddle Brook, NJ 07663 - ---------------------------------------- ----- (Address of principal executive offices) (Zip Code) 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, 2004 based on the average bid and asked price for such stock on that date was approximately $315,241,000. The number of outstanding shares of the Registrant's common stock, no par value per share, as of February 28, 2005, was as follows: Class Number of Outstanding Shares ----- ---------------------------- Common Stock (No par value) 19,126,446 Documents incorporated by reference: Portions of registrant's definitive Proxy Statement for the 2005 Annual Meeting of Shareholders (the "2005 annual Meeting Proxy Statement") to be filed on or about March 30, 2005 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, 2004 (the "2004 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 2005 Annual Meeting Proxy Statement and the 2004 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 Item 9A Controls and Procedures.................................... 15 Item 9B Other Information.......................................... 18 PART III Item 10. Directors and Executive Officers........................... 18 Item 11. Executive Compensation..................................... 19 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters......... 20 Item 13. Certain Relationships and Related Transactions............. 21 Item 14. Principal Accounting Fees and Services..................... 21 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 22 Exhibit Index ........................................................... 22 Signatures ........................................................... 24 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, 2004, the Company had consolidated assets of approximately $1.5 billion, deposits of approximately $1.2 billion and shareholders' equity of approximately $150.2 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-two (32) automated teller machines (operating within the Star(TM), Plus(TM), CIRRUS(TM), VISA(TM), NYCE(TM), and MasterCard(TM) networks), which are located at twenty-nine of the banking offices, a supermarket, 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 the 1 Bank's subsidiaries are organized under New Jersey law 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 loans and lines of credit, home improvement loans and 2 automobile loans. The Bank also offers a VISA Credit Card and convenience services; such as, the Interchange Debit Card which allows our customers to make purchases wherever the Visa Debit Card is accepted and is also used as an ATM card to perform basic banking transactions. Other services that the Bank offers are InterBank(SM) online banking and Bill Paying. InterBank(SM) allows our customers to access account information, process transfers between accounts, view paid check images, place a stop payment and much more. The InterBank(SM) Bill Paying service lets customers pay bills online - controlling which merchants they pay, the amount they pay and when they pay all with safety, speed, simplicity and confidence. When customers are not able to get to a branch or do their banking online, they can be in touch with their accounts by phone 24 hours a day, 7 days a week with Interchange Bank-Line. The Bank's online services can be accessed through the Bank's web site at www.interchangebank.com. 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, the Bank offers a full line of cash management services for the corporate customer, including online banking through Interbanking(SM), Business Check Card, Merchant Services, Lockbox and Escrow Management. The Bank also specializes in developing corporate retirement plans for it's customers through the Bank's Investment Services Department. 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 believes it 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 326 full-time-equivalent employees at year-end 2004. 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, 2004, the Company and the Bank satisfied these ratios to be categorized as a "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 documents can also be obtained on the Securities and Exchange Commission website at www.sec.gov. The Company's web site address is www.interchangebank.com. Forward Looking Information In addition to discussing historical information, certain statements included in or incorporated into this report relating to the financial condition, results of operations and business of the Company, which are not historical facts, may be deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used herein, the words "anticipate," "believe," "estimate," "expect," "will" and other similar expressions (including when preceded or followed by the word "not") are generally intended to identify such forward-looking statements. Such statements are intended to be covered by the safe harbor provisions for forward-looking statements contained in such Act, and we are including this statement for purposes of invoking these safe harbor provisions. Such forward-looking statements include, but are not limited to, statements about the operations of the Company, the adequacy of the Company's allowance for losses associated with the loan and lease portfolio, the quality of the loan and lease portfolio, the prospects of continued loan and deposit growth, and improved credit quality. The forward-looking statements in this report involve certain estimates or assumptions, known and unknown risks and uncertainties, many of which are beyond the control of the Company, and reflect what we currently anticipate will happen in each case. What actually happens could differ materially from what we currently anticipate will happen due to a variety of factors, including, among others, (i) increased competitive pressures among financial services companies; (ii) changes in the interest rate environment, reducing interest margins or increasing interest rate risk; (iii) deterioration in general economic conditions, internationally, nationally, or in the State of New Jersey; (iv) disruptions caused by terrorism, such as the events of September 11, 2001, or military actions in the Middle East or other areas; (v) legislation or regulatory requirements or changes adversely affecting the business of the Company; and (vi) other risks detailed in reports filed by the Company with the Securities and Exchange Commission. Readers should not place undue expectations on any forward-looking statements. We are not promising to make any public announcement when we consider forward-looking statements in this document to be no longer accurate, whether as a result of new information, what actually happens in the future or for any other reason. 10 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 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, 2004. 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 28, 2005, there were approximately 1,281 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 ----- ----- -------- 2004 First quarter .............. $ 18.33 $ 14.80 $ 0.08 Second quarter ............. 16.89 14.85 0.08 Third quarter .............. 17.15 15.33 0.08 Fourth quarter ............. 17.97 15.82 0.08 2003 First quarter .............. $ 12.02 $ 10.73 $ 0.07 Second quarter ............. 15.00 11.47 0.07 Third quarter .............. 15.01 12.89 0.07 Fourth quarter ............. 17.79 13.63 0.07 All per share data was restated to reflect a 3-for-2 stock split declared on January 18, 2005 and paid on February 18, 2005. A cash dividend of $0.07 and $0.08 was declared on each common share outstanding in each quarter during 2003 and 2004, respectively. 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, 2004 and 2003, 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, 2004 and the report thereon of Deloitte & Touche LLP are included on pages 13 through 52 of the Company's 2004 Annual Report to Shareholders filed as Exhibit 13 hereto, which pages are incorporated herein by reference. CONSOLIDATED FINANCIAL HIGHLIGHTS Years Ended December 31, - --------------------------------------------------------------------------------
2004 2003 (1) 2002 2001 2000 ------------- ------------- ------------- ------------- ------------- Income Statement Data (in thousands) Interest income $ 66,100 $ 60,267 $ 56,500 $ 57,402 $ 55,621 Interest expense 13,654 13,874 17,478 23,444 24,227 ------------- ------------- ------------- ------------- ------------- Net interest income 52,446 46,393 39,022 33,958 31,394 Provision for loan losses 1,200 1,815 1,500 1,075 750 ------------- ------------- ------------- ------------- ------------- Net interest income after provision for loan losses 51,246 44,578 37,522 32,883 30,644 Non-interest income 11,457 10,645 6,514 5,578 4,381 Non-interest expenses 36,008 31,239 25,063 22,873 21,177 ------------- ------------- ------------- ------------- ------------- Income before income taxes 26,695 23,984 18,973 15,588 13,848 Income Taxes 8,481 7,618 6,096 5,048 4,592 ------------- ------------- ------------- ------------- ------------- Net income $ 18,214 $ 16,366 $ 12,877 $ 10,540 $ 9,256 ============= ============= ============= ============= ============= Per Share Data (2) Basic earnings per common share $ 0.95 $ 0.92 $ 0.88 $ 0.72 $ 0.63 Diluted earnings per common share 0.94 0.91 0.86 0.72 0.63 Cash dividends declared 0.33 0.29 0.27 0.24 0.22 Special Cash Dividend - - 0.03 - - Book value 7.85 7.45 5.48 4.69 4.22 Tangible book value (3) 4.74 4.39 5.37 4.69 4.21 Weighted average shares outstanding (in thousands) Basic 19,124 17,724 14,714 14,667 14,715 Diluted 19,476 17,987 14,899 14,734 14,756 Balance Sheet Data-end of year (in thousands) Total assets $ 1,464,141 $ 1,385,872 $ 936,332 $ 830,949 $ 770,244 Securities held-to-maturity and securities available-for-sale 388,729 452,060 252,512 193,902 161,354 Loans and leases 934,181 796,581 615,641 581,323 560,879 Allowance for loan and lease losses 9,797 9,641 7,207 6,569 6,154 Total deposits 1,246,138 1,156,797 815,672 726,483 668,860 Securities sold under agreements to repurchase 4,401 15,618 17,390 6,700 18,500 Short-term borrowings 24,600 46,491 - 18,100 13,000 Long-term borrowings 30,000 10,000 10,000 - - Total stockholders' equity $ 150,155 $ 143,193 $ 80,680 $ 68,233 $ 61,984 Selected Performance Ratios Return on average total assets 1.29% 1.35% 1.43% 1.31% 1.24% Return on average total stockholders' equity 12.54 13.54 17.35 16.06 16.18 Dividend Payout 35.03 30.37 33.56 33.37 35.24 Average total stockholders' equity to average total assets 10.25 9.95 8.27 8.13 7.64 Net yield on interest earning assets (taxable equivalent) (4) 4.16 4.29 4.68 4.49 4.41 Non-interest income to average total assets 0.81 0.88 0.73 0.69 0.59 Non-interest expense to average total assets 2.54 2.57 2.79 2.83 2.83 Asset Quality-end of year (in thousands) Nonaccrual loans and leases to total loans and leases 0.98% 1.08% 0.97% 0.37% 0.25% Nonperforming assets to total assets 0.63 0.63 0.66 0.34 0.21 Allowance for loan and lease losses to nonaccrual loans and leases 107.27 112.50 120.86 304.12 441.15 Allowance for loan and lease losses to total loans and leases 1.05 1.21 1.17 1.13 1.10 Net charge-offs to average loans and leases 0.12 0.13 0.14 0.11 0.01 Liquidity and Capital Average loans and leases to average deposits 72.63% 69.39% 78.21% 81.77% 82.81% Total stockholders' equity to total assets 10.26 10.33 8.62 8.21 8.05 Tier 1 capital to risk weighted assets 9.36 9.34 12.16 11.74 11.75 Total capital to risk weighted assets 10.35 10.46 13.33 12.89 12.92 Tier 1 capital to average assets 6.49 6.24 8.12 8.09 8.02
- -------------------------------------------------------------------------------- 13 (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 weighted average shares were restated to reflect a 3-for-2 stock split declared on May 23, 2002 and January 18, 2005 and paid on July 12, 2002 and February 18, 2005, respectively. (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.
2004 2003 (1) 2002 2001 2000 --------- --------- --------- --------- --------- Total stockholders' equity $ 150,155 $ 143,193 $ 80,680 $ 68,233 $ 61,984 Less: goodwill and other intangible assets 59,612 58,826 1,678 - 81 --------- --------- --------- --------- --------- Total tangible capital $ 90,543 $ 84,367 $ 79,002 $ 68,233 $ 61,903 ========= ========= ========= ========= ========= Total shares issued (2) 19,120 19,215 14,723 14,536 14,694 Tangible book value per share (2) $ 4.74 $ 4.39 $ 5.37 $ 4.69 $ 4.21
(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 measure
2004 2003 (1) 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Net interest income $ 52,446 $ 46,393 $ 39,022 $ 33,958 $ 31,394 Tax-equivalent basis adjustment 643 533 376 324 158 ---------- ---------- ---------- ---------- ---------- Net interest income (on a fully taxable equivalent basis) $ 53,089 $ 46,926 $ 39,398 $ 34,282 $ 31,552 ========== ========== ========== ========== ========== Average interest earning assets $1,275,734 $1,093,373 $ 842,191 $ 764,218 $ 715,113 Net yield on interest earning assets (taxable equivalent) 4.16% 4.29% 4.68% 4.49% 4.41%
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 2004 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 2004 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 Registered Public Accounting Firm 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 Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported accurately within the time periods specified in the Securities and Exchange Commission's (SEC) rules and forms. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures (pursuant to Exchange Act Rule 13a-15). Based upon this evaluation, the CEO and CFO concluded that our disclosure controls and procedures are effective. The conclusions of the CEO and CFO from this evaluation were communicated to the Audit Committee. 15 Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during the three months ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Report on Internal Control Over Financial Reporting. The management of Interchange Financial Services Corporation (the "Company"), is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: o Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; o Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; o Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may change. The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2004. In making this assessment, the Company's management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment, management determined that, as of December 31, 2004, the Company's internal control over financial reporting was effective based on those criteria. Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2004 has been audited by Deloitte & Touche LLP, an independent registered public accounting 16 firm, as stated in their report which appears herein: REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Interchange Financial Services Corporation Saddle Brook, New Jersey We have audited management's assessment, included in the accompanying management's assertion report, that Interchange Financial Services Corporation and subsidiaries (the "Company"), maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing, and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States America. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2004 of the Company and our report dated March 11, 2005 expressed an unqualified opinion on those financial statements. /s/ Deloitte & Touche LLP New York, New York March 11, 2005 17 Item 9B. Other Information. Not applicable. 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 2005 Annual Meeting Proxy Statement to be filed on or before March 30, 2005 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 and the Bank ---- --- -------------------------------------------- ANTHONY S. ABBATE ...... 65 President and Chief Executive Officer ANTHONY J. LABOZZETTA .. 41 Executive Vice President and Chief Operating Officer PATRICIA D. ARNOLD ..... 46 Senior Vice President and Chief Lending Officer CHARLES T. FIELD ....... 40 Senior Vice President and Chief Financial Officer FRANK R. GIANCOLA ...... 51 Senior Vice President and Compliance Officer 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 and Chief Lending 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. 18 Engaged in the banking industry since 1981. 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 and Compliance Officer 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 2005 Annual Meeting Proxy Statement to be filed on or before March 30, 2005 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 2005 Annual Meeting Proxy Statement to be filed on or before March 30, 2005 is incorporated herein by reference in response to this item. 19 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 2005 Annual Meeting Proxy Statement to be filed on or before March 30, 2005 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, 2004.
- ---------------------------------------------------------------------------------------------------------------------------- Number of securities remaining available for Number of securities to be Weighted-average future issuance under issued upon exercise of exercise price of equity compensation plans outstanding options, outstanding options, (excluding securities Plan category warrants and rights warrants and rights reflected in column (a)) - ---------------------------------------------------------------------------------------------------------------------------- (a) (b) (c) - ---------------------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders 782,293 $16.82 271,575 Equity compensation plans not approved by security holders - - - ------- ------ ------- Total 782,293 $16.82 271,575 ======= ====== =======
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 (2,250 shares after giving effect for the 3-for-2 stock split declared on January 18, 2005) 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 discounted purchase price of this stock are 20 forfeitable should the employee's employment terminate 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. 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 2005 Annual Meeting Proxy Statement to be filed on or before March 30, 2005 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 Company's 2005 Annual Meeting Proxy Statement to be filed on or before March 30, 2005. 21 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 31 through 34, and the Notes to Consolidated Financial Statements are set forth at pages 35 through 51, of the 2005 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 22, 2004. (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) (1) 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) (1) Exhibit 10(e) Executives' Supplemental Pension Plan (Incorporated by reference to Exhibit 10(i) (4) to Annual Report on Form 10-K for fiscal year ended December 31, 1994) (1) Exhibit 10(f) Change-in-Control Agreements for the Registrant's principal executive officers, and Amendment dated June 14, 2001 (Incorporated by reference to Exhibit 10(f) to Annual Report on Form 10-K for fiscal year ended December 31, 2001) * Exhibit 10(f)(1) Change-in-Control Agreement for the Registrant's principal financial officer, dated April 12, 2004. * Exhibit 11 Statement regarding computation of per share earnings * Exhibit 13 Portion of the Annual Report to Shareholders for the year ended December 31, 2004 * Exhibit 21 Subsidiaries of Registrant * Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 22 * 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, 2004: Form 8-K filed October 20, 2004, reporting dividends for the fourth quarter period ending December 31, 2004. Form 8-K filed October 29, 2004, reporting earnings for the third quarter period ending September 30, 2004. Form 8-K filed November 22, 2004, reporting the resignation of Joseph C. Parisi from the Board of Directors of the Registrant. Form 8-K filed December 2, 2004, reporting the passing of Benjamin Rosenzweig, Director and Secretary of the Board of Directors of the Registrant and its subsidiary, Interchange Bank. - ---------- (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 23 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 and Chief Financial Officer (principal executive officer) (principal financial and accounting officer)
March 16, 2005 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 16, 2005 Charles T. Field March 16, 2005 Director Senior Vice President and President and Chief Executive Officer Chief Financial Officer /s/Anthony D. Andora /s/James E. Healey - ----------------------------------------------------- ----------------------------------------------------- Anthony D. Andora March 16, 2005 James E. Healey March 16, 2005 Director Director Chairman of the Board /s/Gerald A. Calabrese Jr. /s/Nicholas R. Marcalus - ----------------------------------------------------- ----------------------------------------------------- Gerald A. Calabrese, Jr. March 16, 2005 Nicholas R. Marcalus March 16, 2005 Director Director /s/Donald L. Correll /s/Eleanore S. Nissley - ----------------------------------------------------- ----------------------------------------------------- Donald L. Correll March 16, 2005 Eleanore S. Nissley March 16, 2005 Director Director /s/Anthony R. Coscia /s/Jeremiah F. O'Connor - ----------------------------------------------------- ----------------------------------------------------- Anthony R. Coscia March 16, 2005 Jeremiah F. O'Connor March 16, 2005 Director Director /s/John J. Eccleston /s/Robert P. Rittereiser - ----------------------------------------------------- ----------------------------------------------------- John J. Eccleston March 16, 2005 Robert P. Rittereiser March 16, 2005 Director Director /s/David R. Ficca /s/John A. Schepisi - ----------------------------------------------------- ----------------------------------------------------- David R. Ficca March 16, 2005 John A. Schepisi March 16, 2005 Director Director
24 EX-10 2 e20571ex10a.txt EXHIBIT 10(A) LEGAL SERVICES Exhibit 10(a). Agreement for Legal Services AGREEMENT FOR LEGAL SERVICES THIS AGREEMENT for legal services made this 22nd day of April, 2004 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 the Annual Reorganization Meeting of Clients held on the __22_ day of April, 2004. Anthony D. Andora $200.00 per hour Melissa A. Muilenburg $200.00 per hour Others Members of the Firm $200.00 per hour EX-10 3 exhibit10f1.txt CHANGE IN CONTROL LETTER FOR CFO CHARLES FIELD April 12, 2004 Mr. Charles Field 8 Westervelt Avenue Tenafly, NJ 07670 Dear Mr. Field: Interchange Financial Services Corporation, a New Jersey Bank Holding Company (the "Company"), considers the maintenance of a sound and vital executive team to be essential to protecting and enhancing the best interests of the Company and its stockholders. In this connection, the Company recognizes that the possibility of a change in control presently exists and may exist in the future, and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of executives to the detriment of the Company and its stockholders. Accordingly, the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's executive team. This letter agreement sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a "change in control of the Company" (as defined in Section 2 hereof) under the circumstances described below. 1. Company's Right to Terminate During the term of this Agreement, the Company may terminate your employment at any time, with or without cause, subject to providing the benefits hereinafter specified in accordance with the terms hereof. 2. Change in Control Page 2 No benefits shall be payable hereunder unless there shall have been a change in control of the Company, as set forth below, and your employment by the Company shall thereafter have been terminated in accordance with Section 3 below. For purposes of this Agreement, a "change in control of the Company" shall mean, unless the Board otherwise directs resolution approved by unanimous vote of the entire membership thereof adopted prior thereto, a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"); provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 25% control of the combined voting power of the Company's then outstanding voting securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. 3. Termination Following Change in Control If any of the events described in Section 2 hereof constituting a change in control of the Company shall have occurred, you shall be entitled to the benefits provided in Section 4 hereof upon your subsequent termination, so long as such termination occurs within two (2) years after a change in control of the Company, unless such termination is (A) because of your death or Retirement, (B) by the Company for Cause or Disability or (c) by you other than for Good Reason. (i) Disability; Retirement (A) Termination by the Company of your employment based on "Disability" shall mean termination because of your absence from your duties with the Company on a full-time basis for 130 consecutive business days, as a result of your incapacity due to physical or mental illness, unless within thirty (30) days after Notice of Termination (as hereinafter defined) is given following such absence, you shall have returned to the full time performance of your duties; or Page 3 (B) Termination by the Company or you of your employment based on "Retirement" shall mean your voluntary termination in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (ii) Cause Termination by the Company of your employment for Cause shall mean your termination on account of: (A) Your willful commission of an act that causes or is reasonably likely to cause substantial damage to the Company; (B) Your commission of an act of fraud in the performance of your duties on behalf of the Company; (C) Your conviction for commission of a felony or other crime punishable by confinement for a period in excess of one (1) year in connection with the performance of your duties on behalf of the Company; or (D) The order of a federal or state bank regulatory agency or a court of competent jurisdiction requiring the termination of your employment. (iii) Good Reason Termination by you of your employment for "Good Reason" shall mean termination based on: (A) Subsequent to a change in control of the Company, and without your express written consent, the assignment to you of any duties inconsistent with your positions, duties, responsibilities and status with the Company immediately prior to a change in control, or a change in your reporting responsibilities, titles or offices as in effect immediately prior to a change in control, or any removal of you from or any failure to re-elect you to any of such positions, except in connection with the termination of your employment for Cause, Disability or Retirement or as a result of your death or by you other than for Good Reason; Page 4 (B) Subsequent to a change in control of the Company, a reduction by the Company in your base salary as in effect on the date hereof or as the same may be increased from time to time; (C) Subsequent to a change in control of the Company, a failure by the Company to continue any bonus plans in which you are presently entitled to participate (the "Bonus Plans") as the same may be modified from time to time but substantially in the forms currently in effect, or a failure by the Company to continue you as a participant in the Bonus Plans on at least the same basis as you presently participate in accordance with the Bonus Plans; (D) Subsequent to a change in control of the Company and without your express written consent, the Company's requiring you to be based anywhere other than within thirty (30) miles of your present office location, except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations; (E) Subsequent to change in control of the Company, the failure by the Company to continue in effect any benefit or compensation plan, stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health-and-accident plan or disability plan in which you are participating at the time of a change in control of the Company (or plans providing you with substantially similar benefits), the taking of any action by the Company which would adversely affect your participation in or materially reduce your benefits under any of such plans or deprive you of any material fringe benefit enjoyed by you at the time of the change in control, or the failure by the Company to provide you with the number of paid vacation days to which you are then entitled in accordance with the company's normal vacation policy in effect on the date hereof; Page 5 (F) Subsequent to a change in control of the Company, the failure by the Company to obtain the assumption of the agreement to perform this Agreement by any successor as contemplated in Section 6 hereof; or (G) Subsequent to a change in control of the Company, any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (iv) below (and, if applicable, paragraph (ii) above); and for purposes of this Agreement, no such purported termination shall be effective. (iv) Notice of Termination Any purported termination by the Company pursuant to paragraph (i) or (ii) above or by you pursuant to subparagraph (B) of paragraph (i) or paragraph (iii) above shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (v) Date of Termination "Date of Termination" shall mean (A) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such thirty (30) day period), (B) if your employment is terminated pursuant to paragraph (ii) above, the date specified in the Notice of Termination, and (C) if your employment is terminated for any other reason, the date on which a Notice of Termination is given; provided that if within thirty (30) days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding and final arbitration award or by a final judgment, order or decree of a court of competent jurisdiction entered upon such Page 6 arbitration award (the time of appeal therefrom having expired and no appeal having been perfected). 4. Certain Benefits Upon Termination If, after a change in control of the Company shall have occurred, as defined in Section 2 above, your employment by the Company shall be terminated (A) by the Company other than for Cause, Disability or Retirement or (B) by you for Good Reason, then you shall be entitled to the benefits provided below: (i) The Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given plus credit for any vacation earned but not taken and the amount, if any, of any bonus for a past fiscal year and the portion of the current fiscal year ending on the Date of Termination which has not yet been awarded or paid to you under the Bonus Plans; (ii) In lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as severance pay to you on the fifth day following the Date of Termination: (a) a lump sum amount equal to two (2) times your annual base salary at the highest rate in effect during the twelve (12) months immediately preceding the Date of Termination; plus (b) a lump sum amount equal to the sum of the bonuses paid to you for the two (2) year period beginning on the date immediately preceding your Date of Termination. (iii) The Company shall also pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement); (iv) The Company shall maintain in full force and effect, for your continued benefit until the earlier of (A) two (2) years after the Date of Termination or (B) your commencement of full time employment with a new employer, all life insurance, medical, Page 7 health and accident, and disability plans, programs or arrangements in which you were entitled to participate immediately prior to the Date of Termination, provided that your continued participation is possible under the general terms and provisions of such plans and programs. In the event that your participation in any such plan or program is barred, the Company shall arrange to provide you with benefits substantially similar to those which you are entitled to receive under such plans and programs. In addition, the Company shall pay you a lump sum amount of equivalent actuarial value to the additional pension benefit you would have earned under the Company's Pension Plan as in effect on the date the change of control occurs, but disregarding any Internal Revenue Code limitations pertaining to qualified plans, if you were granted at the time of your termination of employment two (2) additional years of Credited Service and deemed 2 years older under the Plan. In determining the equivalent actuarial value of the additional pension granted under this Section 4, an interest rate of 5% and the mortality table under the Company's Pension Plan shall be used to determine the lump sum amount. You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer after the Date of Termination or otherwise. 5. Certain Further Payments by the Corporation In the event that any amount or benefit paid or distributed to you pursuant to this Agreement, taken with any amounts or benefits otherwise paid or distributed to you by the Company or any affiliated company (collectively the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Code or any similar tax that may hereafter be imposed, the Company shall pay to you at the time specified below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by you with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 5, but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. Page 8 (i) For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) Such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount"(as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the opinion of the Company's independent certified public accountants appointed prior to the date the Change of Control occurs or tax counsel selected by such accountants (the "Accountants"), such Covered Payments (in whole or in part) either do not constitute parachute payments or represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount", or such parachute payments are otherwise not subject to such Excise Tax, and (B) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (ii) For purposes of determining the amount of the Tax Reimbursement Payment, you shall be deemed to pay: (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and (B) Any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. (iii) In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, you Page 9 shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is later determined to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payment with respect to such excess) at the time that the amount of such excess is finally determined. (iv) The Tax Reimbursement Payment (or portion thereof) provided for in this Section 5 shall be paid to you not later than ten (10) business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to you by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Corporation to you, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 6. Term of Agreement Page 10 This Agreement shall continue in effect so long as you are employed by the Company provided that, if a change of control of the Company, as defined in Section 2 hereof, shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of twenty-four (24) months beyond the month in which such change in control occurred. 7. Successor; Binding Agreement (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to you, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you terminated your employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as herein before defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 7 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributes, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate. 8. Notice Page 11 For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the President of the Company with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. Miscellaneous No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by you and such officer as may be specifically designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement; provided, however, that this Agreement shall not supersede or in any way limit the rights, duties or obligations you may have under any other written agreement with the Company. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New Jersey. 10. Validity The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11. Tax Withholding The Company may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. Page 12 12. Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 13. Arbitration Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, Interchange Financial Services Corp. By: /s/ Anthony D. Andora ---------------------------------------- Name: Anthony D. Andora Title: Chairman of the Board Agreed to this 21 day ----------- of April, 2004. /s/ Charles T. Field ______________________ Charles T. Field Attest by: /s/ Anthony S. Abbate __________________________ Anthony S. Abbate EX-11 4 e20571ex11.txt STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 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, 2004 December 31, 2003 December 31, 2002 -------------------------- -------------------------- -------------------------- 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 $18,214 19,124 $0.95 $16,366 17,724 $0.92 $12,877 14,714 $0.88 ===== ===== ===== Effect of Dilutive Shares Weighted average shares if converted 352 263 186 ------ ------ ------ Diluted Earnings per Common Share Net income available to common shareholders $18,214 19,476 $0.94 $16,366 17,987 $0.91 $12,877 14,900 $0.86 ======= ====== ===== ======= ====== ===== ======= ====== =====
All per share data and average shares were restated to reflect a 3-for-2 stock split declared on May 23, 2002 and January 18, 2005 and paid on July 12, 2002 and February 18, 2005, respectively. At December 31, 2004 257,100 stock options were excluded from the calculation of earnings per common share as they were antidilutive. There were no shares that were antidilutive at December 31, 2003 and 2002. EX-13 5 e20571ex13.txt MD&A AND FINANCIAL STATEMENTS 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, approximately 82%, is derived from 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 ("BOLI") income , commissions on mutual funds and annuities and gains on sales of loans and leases. 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. 2004 was a challenging year for financial institutions. During 2004, the Federal Reserve Bank raised overnight interest rates by 125 basis points. However, longer term rates, the ten year treasury, remained relatively low and actually declined slightly from 4.25% to 4.22% from December 31, 2003 versus December 31, 2004. The result was a flattening of the yield curve and a decline in spreads, which ultimately had an adverse impact on the margin. The challenges in this environment are to generate increased volume to offset the decline in spreads while remaining diligent to maintain an overall acceptable interest rate risk exposure and credit risk. In this type of interest rate environment it would be anticipated that the industry would experience a contraction in net interest margins. In addition, to the impact of the flattening of the yield curve faced by financial institutions, public companies had to address the additional regulatory and legal burdens placed upon them as a result of the Sarbanes-Oxley Act. Costs of implementing the requirements of this Act varied by industry and complexity of operations. Many depository institutions were impacted to a lesser extent due to adherence with the Federal Deposit Insurance Corporation Improvement Act dealing with the validation and testing of internal controls. However, the challenges of implementing the new act were still a hurdle. The consistent theme amongst all is that the direct and indirect costs of complying were high and the distraction for managements of smaller companies was significant. We faced the challenges above and were able to successfully grow the Company through the tremendous work of a dedicated employee base, leveraging our resources, and continuing to invest in Eastern Bergen County. This was evidenced by commercial loan growth of $98 million or 18.2% year over year. Commercial loans have been and continue to be our strategic focus and the resources that were applied resulted in exemplary growth. Consumer loan growth of $40 million, or 15.4%, complimented our commercial loan growth. The growth in our loan portfolio was funded by deposit growth of $89 million, or 7.7%, and from our securities portfolio cash flow from normal amortization and sales and maturities of securities. By continually positioning our securities portfolio to focus on total return we funded our expected loan growth demand and recognized gains on sales of securities. This achievement was a result of the strategies employed in our portfolio over the last several years to meet our strategic plan. Our investment strategies require that we maintain an overall discipline of avoiding extension risk while seeking to exceed our peers on a total return basis. Total return emphasizes that you generate more income and ending dollars than your peers. Recent articles in trade publications and from regulatory bodies have specifically addressed concerns that the regulators have on entities taking on undue interest rate (forsaking total return) and extension risk in chasing yields during the current interest rate cycle. 2004 represented the first full year of combined operations for the Company and Bridge View Bancorp ("Bridge View"). On a pro forma basis, as if Bridge View was acquired on January 1, 2003, EPS increased $0.05, or 5.6%. Earnings Summary Net income was a record $18.2 million for the year 2004 and increased $1.8 million, or 11.3% when compared to 2003. Earnings per diluted common share for the year ended December 31, 2004 increased $0.03 to $0.94 from $0.91 for the preceding year, an increase of 3.3%. Earnings per basic common share for the year ended December 31, 2004 increased $0.03 to $0.95 as compared to $0.92 for the preceding year, an increase of 3.3%. For 2004, the Company's return on average assets ("ROA") was 1.29% as compared to 1.35% in 2003. The Company's return on average equity ("ROE") was 12.54% in 2004 as compared to 13.54% for the previous year. Affecting both ROA and ROE was the net interest margin. Based on its earnings performance, the Company increased the quarterly dividend paid on common stock to an annualized rate of $0.36 for 2005 as compared to $0.33 in 2004 and declared a 3-for-2 stock split on January 18, 2005 which was paid on February 18, 2005. Net income for the year 2003 increased $3.5 million, or 27.1%, to $16.4 million when compared to 2002. Earnings per diluted common share for the year ended December 31, 2003 increased $0.05 to $0.91 as compared to $0.86 during the preceding year, an increase of 5.8%. Earnings per basic common share for the year ended December 31, 2003 increased $0.04 to $0.92 as compared to $0.88 for the preceding year, an increase of 4.5%. For 2003, the Company's ROA was 1.35% as compared to 1.43% in 2002. The Company's ROE was 13.54% in 2003 as compared to 17.35% for the previous year. The change in ROA was a result of prepayments in the loan and securities portfolio 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, which impacted net interest margin. ROE declined mainly due to an increase in equity as a result of the acquisition of Bridge View 13 Table 1 - -------------------------------------------------------------------------------- Summary of Operating Results - -------------------------------------------------------------------------------- 2004 2003 2002 ------- ------- ------- Net income (in thousands) $18,214 $16,366 $12,877 Basic earnings per common share 0.95 0.92 0.88 Diluted earnings per common share 0.94 0.91 0.86 Return on average total assets 1.29% 1.35% 1.43% Return on average total equity 12.54% 13.54% 17.35% Dividend payout ratio* 35.03% 30.37% 33.56% Average total stockholders' equity to average total assets 10.25% 9.95% 8.27% * Cash dividends declared on common shares to net income. All per share data was restated to reflect 3-for-2 stock splits declared on May 23, 2002 and January 18, 2005 and paid on July 12, 2002 and February 18, 2005, respectively. Results of Operations Net Interest Income Net interest income represents the Company's primary source of income. Net interest income, the difference between interest income and interest expense, is the most significant component of the Company's consolidated earnings. Net interest income is positively impacted by a combination of increases in earning assets over interest bearing liabilities and an increase in the net interest spread between earning assets and interest bearing liabilities. Net interest income is adversely impacted by a combination of a decrease in earning assets over interest bearing liabilities and a decrease in the net interest spread between earning assets and interest bearing liabilities. Table 2 sets forth a summary of average interest-earning assets and interest-bearing liabilities as of December 31, 2004, 2003 and 2002, together with the interest earned and paid on each major type of asset and liability account for the years then ended. 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 2004 and 2003, 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)
2004 2003 2002 ---------------------------- ------------------------------- ------------------------------ Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ---------------------------- ------------------------------- ------------------------------ Assets Interest earning assets Loans (1) $ 872,322 $54,314 6.23% $ 729,581 $49,142 6.74% $611,659 $45,496 7.44% Taxable securities (2) 357,641 10,612 2.97 304,418 10,034 3.30 200,257 10,312 5.15 Tax-exempt securities (2)(3) 35,438 1,666 4.70 27,737 1,287 4.64 14,545 822 5.65 Interest earning deposits 8 - - 5,810 61 1.05 - - - Federal funds sold 10,325 151 1.46 25,827 276 1.07 15,730 246 1.56 --------- ------ ---- ------- ------ ---- ------- ------ ---- Total interest-earning assets 1,275,734 66,743 5.23% 1,093,373 60,800 5.56% 842,191 56,876 6.75% ------ ------- ------ Non-interest earning assets Cash and due from banks 36,181 34,316 20,635 Allowance for loan and lease losses (9,829) (8,762) (6,572) Other assets 114,525 96,646 41,303 ---------- ---------- -------- Total assets $1,416,611 $1,215,573 $897,557 ========== ========== ======== Liabilities and stockholders' equity Interest-bearing liabilities Demand deposits $ 471,489 4,881 1.04% $ 395,408 4,700 1.19% $304,908 5,744 1.88 Savings deposits 203,451 1,136 0.56 199,127 1,408 0.71 136,527 1,952 1.43 Time deposits 293,609 6,373 2.17 273,382 7,053 2.58 224,931 8,661 3.85 Short-term borrowings 29,080 359 1.23 17,875 285 1.59 19,119 694 3.63 Long-term borrowings 28,863 905 3.14 10,000 428 4.28 9,945 427 4.29 --------- ------ ---- ------- ------- ---- -------- ------ ---- Total interest-bearing liabilities 1,026,492 13,654 1.33% 895,792 13,874 1.55% 695,430 17,478 2.51% ------ ------- -------- ------ Non-interest bearing liabilities Demand deposits 232,513 183,451 115,714 Other liabilities 12,393 15,434 12,176 ---------- ---------- -------- Total liabilities (4) 1,271,398 1,094,677 823,320 Stockholders' equity 145,213 120,896 74,237 ---------- ---------- -------- Total liabilities and stockholders' equity $1,416,611 $1,215,573 $897,557 ========== ========== ======== Net interest income (tax-equivalent basis) 53,089 3.90% 46,926 4.01% 39,398 4.24% Tax-equivalent basis adjustment (643) (533) (376) ------ ------- ------- Net interest income $52,446 $46,393 $39,022 ====== ======= ======= Net interest income as a percent of interest-earning assets (tax-equivalent basis) (5) 4.16% 4.29% 4.68%
(1) Nonaccrual loans and any related interest recorded have been included in computing the average rate earned on the loan portfolio. When applicable, tax exempt loans are computed on a fully taxable equivalent basis using the corporate federal tax rate of 34%. (2) The average balances are based on amortized 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 - -------------------------------------------------------------------------------- Effects of Volume and Rate Changes on Net Interest Income - -------------------------------------------------------------------------------- (dollars in thousands)
Year ended December 31, Year ended December 31, 2004 compared with 2003 2003 compared with 2002 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 (1) $ 9,615 $ (4,443) $ 5,172 $ 8,771 $ (5,125) $ 3,646 Taxable securities 1,754 (1,176) 578 5,364 (5,642) (278) Tax-exempt securities (2) 362 17 379 746 (281) 465 Interest bearing deposits (61) - (61) 61 - 61 Federal funds sold (323) 198 (125) 158 (128) 30 -------- -------- -------- -------- -------- -------- Total interest income 11,347 (5,404) 5,943 15,100 (11,176) 3,924 -------- -------- -------- -------- -------- -------- Interest expense Demand deposits 904 (723) 181 4,290 (5,334) (1,044) Savings deposits 31 (303) (272) 5,333 (5,876) (543) Time deposits 594 (1,274) (680) 3,023 (4,631) (1,608) Short-term borrowings 179 (105) 74 (43) (366) (409) Long-term borrowings 807 (330) 477 - 1 1 -------- -------- -------- -------- -------- -------- Total interest expense 2,515 (2,735) (220) 12,603 (16,206) (3,603) -------- -------- -------- -------- -------- -------- Change in net interest income $ 8,832 $ (2,669) $ 6,163 $ 2,497 $ 5,030 $ 7,527 ======== ======== ======== ======== ======== ======== - -----------------------------------------------------------------------------------------------------
(1) Non-performing loans are included in interest earning assets. (2) Computed on a fully taxable equivalent basis using the corporate federal tax rate of 34%. Net interest income, on a taxable equivalent basis, amounted to $53.1 million in 2004, an increase of $6.2 million, or 13.1%, from $46.9 million in 2003. The increase in net interest income was largely due to growth in average interest-earning assets of $182.4 million. The interest earning asset growth was funded by a $149.7 million growth in average deposits. The growth in average deposits occurred mostly in interest-bearing demand and time deposits. The growth in interest earning assets and deposits were partly due to the Bridge View acquisition. The aforementioned increase in net interest income was partly offset by a 13 basis point decline in the margin. The change in the margin was attributable to interest earning asset yields declining faster than the Company's cost of funds, which was largely due to short-term interest rates increasing faster than long-term interest rates. Interest income, on a tax-equivalent basis, totaled $66.7 million for 2004, an increase of $5.9 million, or 9.8%, as compared to 2003. For the year ended December 31, 2004 and 2003, the tax equivalent basis adjustments to interest income were $643 thousand and $533 thousand, respectively. The increase was attributed to a growth in interest earning assets, which was largely due to increases in average loans and investments of $142.7 million and $60.9 million, respectively. The increase in interest earning assets for 2004 was partly due to the Bridge View acquisition. The increase in interest income was partly offset by a 33 basis point decline in interest earning asset yields for 2004 as compared to 2003. The decline in interest earning asset yields was largely attributable to the repricing of interest earning assets and a change in asset mix. Interest expense totaled $13.7 million in 2004, a decrease of $220 thousand, or 1.6%, as compared to 2003. The decrease was principally due to a decline in the average rates paid on interest-bearing liabilities of 22 basis points to 1.33% in 2004 as compared to 1.55% in 2003 which was mostly due to a decline in deposit rates paid. The decline in interest expense was largely due to a decrease in rates paid on time deposits and interest-bearing demand deposits of 41 basis points and 15 basis points, respectively, for 2004 as compared to 2003. 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 $130.7 million for 2004 as compared to the prior year. The growth in average interest-bearing liabilities occurred primarily in interest-bearing demand, borrowings and time deposits, which increased $76.1 million, $30.1 million and $20.2 million, respectively. 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 was 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 contraction. Interest income, on a tax-equivalent basis, totaled $60.8 million for 2003, an increase of $3.9 million, or 6.9%, as compared to 2002. For the year ended December 31, 2003 and 2002, the tax equivalent basis adjustments were $533 thousand and $376 thousand, respectively. The increase 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 16 decline in interest earning asset yields for 2003 as compared to 2002. The decline in interest earning asset yields was largely attributable 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. 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 $812 thousand, or 7.6%, for 2004 as compared to 2003. The improvement in non-interest income was largely due to increases in gain on sale of securities, gain on sale of loans and leases, "other" non-interest income of $651 thousand, $548 thousand, and $341 thousand, respectively. The net gains on the sale of loans and leases of $1.3 million as compared to $769 thousand for the same period in 2003 was due to an increase in fee income of $754 thousand from the sale of the guaranteed portion of Small Business Administration loans. The increase in other income was primarily a result of realizing $393 thousand from the collection of principal on an acquired commercial loan in excess of its carrying value. Contributing to the improvement in non-interest income were service charges on deposits and commissions on sales of mutual funds and annuities. The aforementioned increases was partly offset by a decline in BOLI income of $1.0 million for 2004 as compared to 2003, which was due to a claim received in 2003 which did not reoccur in 2004. 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 of $1.2 million, $1.1 million and $904 thousand, respectively. The increase in BOLI income was primarily due to a claim on insurance policies, which amounted to $921 thousand. The growth in service charges on deposits and "other" non-interest income was 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: Mortgage Partnership Financing program with the Federal Home Loan Bank, whereby the Company sells its new originated conforming 20 and 30 year residential mortgages, and originating Small Business Administration loans and selling the guaranteed portion into the secondary market. Table 4 - -------------------------------------------------------------------------------- Non-interest Income - -------------------------------------------------------------------------------- for the years ended December 31, (dollars in thousands) 2004 2003 2002 ------- ------- ------- Service fees on deposit accounts $ 3,753 $ 3,485 $ 2,581 Net gain on sale of securities 1,444 793 564 Net gain on sale of loans and leases 1,317 769 400 Bank owned life insurance 993 2,019 895 Commissions on sales of annuities and mutual funds 913 883 603 All other 3,037 2,696 1,471 ------- ------- ------- Total $11,457 $10,645 $ 6,514 ======= ======= ======= 17 Non-interest Expense Non-interest expense for 2004 increased $4.8 million, or 15.3%, to $36.0 million as compared to 2003. The increase was attributed to increases in salaries and benefits, professional fees and occupancy fees. The increase was due in part to recognizing a full year of operating costs resulting from the merger with Bridge View for 2004 as compared to only eight months in 2003. In addition, the increase in salaries and benefits was attributed to normal increases and expansion of the Company. The increase in professional fees was largely due to costs related to implementation of Sarbanes-Oxley Section 404 and an increase in legal expenses primarily as a result of collection efforts. 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. Table 5 - -------------------------------------------------------------------------------- Non-interest Expense - -------------------------------------------------------------------------------- for the years ended December 31, (dollars in thousands) 2004 2003 2002 ------- ------- ------- Salaries and benefits $19,463 $16,994 $13,673 Occupancy 5,283 4,577 3,438 Furniture and equipment 1,309 1,327 1,124 Advertising and promotion 1,456 1,412 1,295 Amortization of intangble assets 504 360 69 Other expenses Professional fees 2,609 1,568 1,458 Data processing 978 933 639 All other 4,406 4,068 3,367 ------- ------- ------- Total $36,008 $31,239 $25,063 ======= ======= ======= Income Taxes In 2004, income taxes amounted to $8.5 million as compared to $7.6 million and $6.1 million for 2003 and 2002, respectively. The effective tax rate in 2004 was 31.8% as compared to 31.8% and 32.1% for 2003 and 2002, 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, 2004, total loans amounted to $934.2 million, an increase of $137.6 million, or 17.3%, compared to $796.6 million at December 31, 2003. The commercial loan growth was largely within the subsidiary Bank's delineated community, which is in Bergen County, New Jersey. 18 Table 6 - -------------------------------------------------------------------------------- Loan Portfolio - -------------------------------------------------------------------------------- at December 31,
2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Amounts of loans by type (in thousands) Real estate-mortgage 1-4 family residential First liens $ 141,835 $ 100,286 $ 100,302 $ 113,703 $ 110,369 Junior liens 2,544 4,138 6,241 8,384 11,195 Home equity 148,027 136,477 125,037 130,658 142,610 Commercial 375,985 330,040 222,628 198,319 181,722 Construction 51,162 31,077 11,359 5,265 3,755 ---------- ---------- ---------- ---------- ---------- 719,553 602,018 465,567 456,329 449,651 ---------- ---------- ---------- ---------- ---------- Commercial loans Commercial and financial 186,386 149,462 104,542 85,801 76,702 Lease financing 23,535 28,440 26,356 15,850 23,804 ---------- ---------- ---------- ---------- ---------- 209,921 177,902 130,898 101,651 100,506 ---------- ---------- ---------- ---------- ---------- Consumer loans Lease financing 680 12,416 15,969 18,822 4,919 Installment 4,027 4,245 3,207 4,521 5,803 ---------- ---------- ---------- ---------- ---------- 4,707 16,661 19,176 23,343 10,722 ---------- ---------- ---------- ---------- ---------- Total $ 934,181 $ 796,581 $ 615,641 $ 581,323 $ 560,879 ========== ========== ========== ========== ========== Percent of loans by type Real estate-mortgage 1-4 family residential First liens 15.2% 12.6% 16.3% 19.6% 19.7% Junior liens 0.3 0.5 1.0 1.4 2.0 Home equity 15.8 17.1 20.3 22.5 25.4 Commercial 40.2 41.4 36.2 34.1 32.4 Construction 5.5 3.9 1.8 0.9 0.7 ---------- ---------- ---------- ---------- ---------- 77.0 75.5 75.6 78.5 80.2 ---------- ---------- ---------- ---------- ---------- Commercial loans Commercial and financial 20.0 18.8 17.0 14.8 13.7 Lease financing 2.5 3.6 4.3 2.7 4.2 ---------- ---------- ---------- ---------- ---------- 22.5 22.4 21.3 17.5 17.9 ---------- ---------- ---------- ---------- ---------- Consumer loans Lease financing 0.1 1.6 2.6 3.2 0.9 Installment 0.4 0.5 0.5 0.8 1.0 ---------- ---------- ---------- ---------- ---------- 0.5 2.1 3.1 4.0 1.9 ---------- ---------- ---------- ---------- ---------- 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, 2004. 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 ....... $ 64,249 $ 61,136 $ 61,001 $186,386 Lease financing ................ 1,886 21,077 572 23,535 Real estate-construction ....... 26,197 23,125 1,840 51,162 -------- -------- -------- -------- Total ........................ $ 92,332 $105,338 $ 63,413 $261,083 ======== ======== ======== ======== The following table sets forth the interest rate characteristics of loans due after one year as of December 31, 2004: (in thousands) Due after one year Due after through five five years years -------- -------- Fixed interest rate ...................... $ 79,243 $ 22,953 Variable interest rate ................... 26,095 40,460 -------- -------- Total ............................... $105,338 $ 63,413 ======== ======== 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. In addition, the Company maintains a credit administration function which reports directly to the Senior Vice President and Chief Credit Officer. The credit administration function performs independent reviews of credits prior to the extension of such credit based upon pre-established guidelines. The independent review function allows the Company to effectively price transactions based upon credit risk and allows lending officers more time to allocate towards loan generation rather than credit analysis and underwriting. 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 large commercial loans and leases as well as a sample of smaller commercial loans and leases after the Company extended credit. 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 Credit Officer of the Bank 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. Watchlist loans are monitored and/or managed by our Special Asset Officer who is responsible for supervising the collection of delinquent loans. 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 provision for loan and lease losses represents management's determination of the amount necessary to bring the allowance for loan and lease losses ("ALLL") to a level that management considers adequate to reflect the risk of future estimated losses inherent in the Company's loan portfolio as of the balance sheet date. The Company evaluates the adequacy of the ALLL by performing periodic, systematic reviews of the loan portfolio. This process includes the identification and allocation of specific reserves for loans and leases, which are deemed impaired, and the allocation of reserves to pools of non-impaired loans. Portions of the ALLL are allocated to cover probable losses in each loan and lease category based on a migration analysis (loss experience) of the past five years, an analysis of concentration risk factors and an analysis of the economic environment in which the Company operates its lending business. The unallocated portion of the ALLL is management's evaluation of inherent risk in the portfolio based on changes in the composition of performing and nonperforming loans, concentrations of credit, economic conditions, the condition of borrowers facing financial pressure and the relationship of the current level of the ALLL to the credit portfolio and to nonperforming loans. While allocations are made to specific loans and pools of loans, the total allowance is available for all loan losses. 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 2004 amounted to $1.2 million, a decrease of $615 thousand from the prior year. In 2003, the loan loss provision amounted to $1.8 million, an increase of $315 thousand from 2002. The decrease in the loan loss provision for 2004 was partly attributable to an improvement in the overall economic environment and an improvement in the Company's historical net charge-off trend which are utilized in developing adequacy of the ALLL. Loans are charged-off against the ALLL, when management believes that the future collection of principal is unlikely. In 2004, nonperforming loans as a percentage of year end loans declined to 0.98% from 1.08%; although in absolute terms nonperforming loans increased $563 thousand to $9.1 million as compared to $8.6 million in 2003. Loans charged-off, net of recoveries decreased $266 thousand to $1.0 million as compared to $1.3 million in 2003. The charge-offs occurred principally in the commercial lease portfolio. Management of the Company determined that the ALLL, as set forth in Table 7, was at a level sufficient to cover the inherent loan losses in the loan portfolio as of the balance sheet date. 20 Table 7 - -------------------------------------------------------------------------------- Loan Loss Experience - -------------------------------------------------------------------------------- for the years ended December 31, (dollars in thousands)
2004 2003 2002 2001 2000 -------- -------- -------- -------- -------- Average loans outstanding $872,322 $729,581 $611,659 $579,034 $536,971 ======== ======== ======== ======== ======== Allowance at beginning of year $ 9,641 $ 7,207 $ 6,569 $ 6,154 $ 5,476 -------- -------- -------- -------- -------- Loans charged-off: Real estate 357 162 17 11 186 Commercial and financial 89 25 - - - Commercial lease financing 637 1,072 875 949 8 Consumer loans 54 97 34 4 25 -------- -------- -------- -------- -------- Total 1,137 1,356 926 964 219 -------- -------- -------- -------- -------- Recoveries of loans previously charged-off: Real estate 22 35 29 22 99 Commercial and financial 6 - - 264 27 Commercial lease financing 63 8 16 8 - Consumer loans 2 3 19 10 21 -------- -------- -------- -------- -------- Total 93 46 64 304 147 -------- -------- -------- -------- -------- Net loans charged-off 1,044 1,310 862 660 72 -------- -------- -------- -------- -------- Additions due to merger - 1,929 - - - Provision for loan and lease losses 1,200 1,815 1,500 1,075 750 -------- -------- -------- -------- -------- Allowance at end of year $ 9,797 $ 9,641 $ 7,207 $ 6,569 $ 6,154 ======== ======== ======== ======== ======== Allowance to total loans 1.05% 1.21% 1.17% 1.13% 1.10% Allowance to nonaccrual loans 107.27% 112.50% 120.86% 304.12% 441.15% Allowance to nonaccrual loans and loans past due 90 days or more 107.27% 112.50% 120.86% 304.12% 441.15% Ratio of net charge-offs to average loans 0.12% 0.18% 0.14% 0.11% 0.01%
At December 31, 2004, the ratio of the ALLL to total loans was 1.05% as compared to 1.21% at the end of the prior year. The ALLL represented 107.3% of nonaccrual loans and loans past due 90 days or more at December 31, 2004, down from 112.5% at the end of 2003. This ratio was impacted by a $563 thousand increase in nonaccrual and restructured loans in 2004 as compared to the end of the year in 2003 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 "Nonperforming Assets" and Table 9 for more detail on loan delinquencies and nonperforming 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 liability for these amounts were $40 thousand and $140 thousand at December 31, 2004 and 2003, respectively. 21 Table 8 - -------------------------------------------------------------------------------- Allocation of Allowance for Loan and Lease Losses - -------------------------------------------------------------------------------- at December 31, (dollars in thousands)
2004 2003 2002 2001 2000 ------------------- ------------------ ------------------ ------------------ ------------------ % of Loans % of Loans % of Loans % of Loans % of 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 $4,307 77.0% $6,743 75.5% $3,724 75.6% $4,028 78.5% $2,713 80.2% Commercial and financial 2,987 20.0 479 18.8 1,435 17.0 1,389 14.8 931 13.6 Commercial lease financing 1,000 2.5 968 3.6 720 4.3 542 2.7 435 5.1 Consumer loans 90 0.5 186 2.1 132 3.1 5 4.0 35 1.1 Unallocated 1,413 - 1,265 - 1,196 - 605 - 2,040 - ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- $9,797 100.0% $9,641 100.0% $7,207 100.0% $6,569 100.0% $6,154 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
(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. Nonperforming Assets Nonperforming 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. The Company has a dedicated Special Asset Management department that also oversees general collection efforts. The purpose of this department is to minimize any potential losses by remediation of credits through collection or disposal efforts. 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 nonperforming assets and the aggregate of loans whose principal and/or interest has not been paid according to contractual terms. At December 31, 2004, nonperforming assets increased $567 thousand, or 6.4%, as compared to the end of the prior year. Nonperforming assets are concentrated in one relationship of $2.4 million. Based upon the best currently available information it is believed that this relationship will resolve itself during 2005 and the Company will experience no loss. Nonperforming assets increased $2.7 million, or 43.3%, in 2003 as compared to 2002. Table 9 - -------------------------------------------------------------------------------- Loan Delinquencies and Nonperforming Assets - -------------------------------------------------------------------------------- at December 31, (dollars in thousands)
2004 2003 2002 2001 2000 ------ ------ ------ ------ ------ Loans delinquent and accruing interest Loans past due 30-89 days $1,918 $1,265 $2,121 $1,938 $2,058 Loans past due 90 days or more - - - - - ------ ------ ------ ------ ------ Total loans delinquent and accruing interest $1,918 $1,265 $2,121 $1,938 $2,058 ====== ====== ====== ====== ====== Nonaccrual loans $9,133 $8,570 $5,963 $2,160 $1,395 Foreclosed and repossessed assets 156 230 176 492 250 Restructured loans - - - 150 - ------ ------ ------ ------ ------ Total nonperforming assets $9,289 $8,800 $6,139 $2,802 $1,645 ====== ====== ====== ====== ====== Total nonperforming assets and loans past due 90 days or more $9,289 $8,800 $6,139 $2,802 $1,645 ====== ====== ====== ====== ====== Nonaccrual loans to total loans 0.98% 1.08% 0.97% 0.37% 0.25% Nonperforming assets to total loans and foreclosed and repossessed assets 0.99% 1.10% 1.00% 0.48% 0.29% Nonperforming assets to total assets 0.63% 0.63% 0.66% 0.34% 0.21% Nonaccrual loans and loans past due 90 days or more to total loans 0.98% 1.08% 0.97% 0.37% 0.25%
22 Securities Held-to-Maturity and Securities Available-for-Sale Debt securities purchased with the intent and ability to hold until maturity are classified as "held-to-maturity". The Company does not acquire securities for the purpose of engaging in trading activities and as such all other securities are classified as "securities available-for-sale". Securities available-for-sale are used as part of the Company's asset/ liability management strategy and may be sold in response to, among other things, changes in interest rates and prepayment risk. 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, 2004 (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 $ 1,407 $ 3,540 $ 368 $ 268 $ 5,583 5.99% Obligations of states & political subdivisions - 3,494 4,836 617 8,947 7.43 -------- -------- -------- -------- -------- -------- 1,407 7,034 5,204 885 14,530 6.88 -------- -------- -------- -------- -------- -------- Securities available-for-sale at estimated fair value Mortgage-backed securities 54,495 62,567 3,438 892 121,392 4.28 Obligations of U.S. agencies 23,544 186,304 - - 209,848 3.05 Obligations of states & political subdivisions 8,598 6,969 3,976 13,176 32,719 5.25 Obligations of the U.S. Treasury 5,982 - - - 5,982 2.13 -------- -------- -------- -------- -------- -------- 92,619 255,840 7,414 14,068 369,941 3.63 Equity securities - - - - 4,258 1.98 -------- -------- -------- -------- -------- -------- 92,619 255,840 7,414 14,068 374,199 3.61% -------- -------- -------- -------- -------- -------- Total $ 94,026 $262,874 $ 12,618 $ 14,953 $388,729 ======== ======== ======== ======== ======== Weighted average yield (1) 4.11% 3.33% 6.23% 6.79% 3.73%
(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)
2004 2003 2002 ------------------ ----------------- ----------------- Amount % Amount % Amount % -------- ----- -------- ----- -------- ----- Securities held-to-maturity at amortized cost Mortgage-backed securities $ 5,583 38.4% $ 9,850 51.6% $ 16,437 58.3% Obligations of U.S. agencies - - - - 1,991 7.1 Obligations of states & political subdivisions 8,947 61.6 9,257 48.4 9,664 34.3 Other debt securities - - - - 100 0.3 -------- ----- -------- ----- -------- ----- $ 14,530 100.0% $ 19,107 100.0% $ 28,192 100.0% ======== ===== ======== ===== ======== ===== Securities available-for-sale at estimated fair value Mortgage-backed securities $121,392 32.4% $114,187 26.4% $102,605 45.7% Obligations of U.S. agencies 209,848 56.1 273,160 63.1 95,559 42.6 Obligations of states & political subdivisions 32,719 8.8 35,038 8.1 22,219 9.9 Obligations of U.S. Treasury 5,982 1.6 6,035 1.4 - - Equity securities 4,258 1.1 4,533 1.0 3,937 1.8 -------- ----- -------- ----- -------- ----- $374,199 100.0% $432,953 100.0% $224,320 100.0% ======== ===== ======== ===== ======== =====
23 The Company's total investment portfolio decreased by $63.3 million, or 14%, to $388.7 million at December 31, 2004 as compared to the prior year. The decrease in the investment portfolio was largely attributed to cashflows from principal amortization, maturities and security sales, which were used to fund in part the strong growth in commercial loans. Total gross unrealized gains and total gross unrealized losses for the investment portfolio amounted to $2.7 million and $3.0 million, respectively, at December 31, 2004. At December 31, 2004, available-for-sale ("AFS") securities amounted to $374.2 million, or 96.3%, of total securities, compared to $433.0 million, or 95.8%, of total securities at year-end 2003. The Company's AFS portfolio decreased by $58.8 million, or 13.6%, at December 31, 2004 as compared to the prior year. The composition of investment securities shifted from obligations of U.S. Agencies to mortgage-backed securities 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, 2004, 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 $4.6 million, or 24.0%, to $14.5 million at December 31, 2004 as compared to the prior year. The decrease was mostly due to declines in mortgage-backed securities and obligations of state & political subdivisions, 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 $89.3 million, or 7.7%, to $1.2 billion at December 31, 2004 as compared to the prior year mainly from internal growth and the acquisition of Bridge View. For 2004, the Company's overall yield on deposits decreased by 24 basis points to 1.28% due mostly to a decline in market interest rates and change in deposit mix. The growth in the deposit base occurred mostly in time and interest-bearing demand deposits. Time deposits increased $55.4 million, or 19.6%, to $337.3 million at December 31, 2004 as compared to the prior year. Time deposits represented 27.2% of total deposits at December 31, 2004 and 24.4% at December 31, 2003. The Company's yield on total time deposits decreased by 41 basis points to 2.17% for 2004 as compared to 2003. Interest-bearing demand deposits, which comprised the largest segment of the Company's total deposits, amounted to $472.8 million at December 31, 2004, an increase of $26.0 million, or 5.8%, from year-end 2003. The Company's yield on interest-bearing demand deposits decreased by 15 basis points to 1.04% for 2004 as compared to 2003. Contributing to the growth in deposits was an $11.3 million, or 5.0%, increase in non-interest bearing demand deposits at December 31, 2004 as compared to year-end 2003. Non-interest bearing demand deposits represented 18.9% of total deposits at December 31, 2004 and 19.3% at December 31, 2003. Table 11 - -------------------------------------------------------------------------------- Deposit Summary at December 31, - -------------------------------------------------------------------------------- (dollars in thousands) 2004 2003 -------------------- -------------------- Non-interest bearing demand $ 235,036 18.9% $ 223,745 19.3% Interest bearing demand 472,807 37.9 446,786 38.6 Money market 87,595 7.0 84,162 7.3 Savings 113,352 9.1 120,136 10.4 Time deposits less than $100,000 286,471 23.0 265,356 22.9 Time deposits greater than $100,000 50,877 4.1 16,613 1.5 ---------- ----- ---------- ----- $1,246,138 100.0% $1,156,798 100.0% ========== ===== ========== ===== 2002 2001 -------------------- -------------------- Non-interest bearing demand $ 118,578 14.5% $ 109,416 15.1% Interest bearing demand 323,998 39.7 282,173 38.8 Money market 55,372 6.8 47,569 6.5 Savings 80,300 9.8 72,092 9.9 Time deposits less than $100,000 210,727 25.9 194,754 26.9 Time deposits greater than $100,000 26,697 3.3 20,479 2.8 ---------- ----- ---------- ----- $ 815,672 100.0% $ 726,483 100.0% ========== ===== ========== ===== 2000 -------------------- Non-interest bearing demand $ 107,702 16.1% Interest bearing demand 229,713 34.3 Money market 56,646 8.5 Savings 66,270 9.9 Time deposits less than $100,000 187,330 28.0 Time deposits greater than $100,000 21,199 3.2 ---------- ----- $ 668,860 100.0% ========== ===== The following table shows the time remaining to maturity of time certificates of deposit of $100,000 or more as of December 31, 2004: (in thousands) Three months or less $ 33,716 Over three months through six months 10,618 Over six months through twelve months 6,406 Over twelve months 137 -------- $ 50,877 ======== 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 2004. The Company's real estate loan portfolio, concentrated primarily in northern New Jersey, is subject to risks associated with the local and regional economies. The Company's primary source of market risk exposure arises from changes in market interest rates ("interest rate risk"). Interest Rate Risk Interest rate risk is generally described as the exposure to potentially adverse changes in current and future net interest income resulting from: fluctuations in interest rates; product spreads; and imbalances in the repricing opportunities of interest-rate-sensitive assets and liabilities. Therefore, managing the Company's interest rate sensitivity is a primary objective of the Company's senior management. The Company's Asset/Liability Committee ("ALCO") is responsible for managing the exposure to changes in market interest rates. ALCO is comprised of the Company's executive and senior management and meets regularly, typically weekly. 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, attempts to determine the impact on net interest margin from current and prospective changes in market interest rates. The Company manages interest rate risk exposure with the utilization of financial modeling and simulation techniques. These methods assist the Company in determining the effects of market rate changes on net interest income and future economic value of equity. The objective of the Company is to maximize net interest income within acceptable levels of risk established by policy. The techniques utilized for managing exposure to market rate changes involve a variety of interest rate, pricing and volume assumptions. These assumptions include projections on growth, prepayment and withdrawal levels as well as other embedded options inherently found in financial instruments. The Company reviews and validates these assumptions at least annually or more frequently if economic or other conditions change. At December 31, 2004, the Company simulated the effects on net interest income given an instantaneous and parallel shift in the yield curve of up to a 200 basis point rising interest rate environment and an 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 3.0%. 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, 2004, the Company was within policy limits established for changes in net interest income and future economic value of equity. Economic value of equity is defined as the market value of its assets less the market value of its liabilities plus (or minus) the market value of any off-balance sheet positions. 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 ---------- ---------- 2004 2003 ---------- ---------- +200 basis points -2.3 % -3.8 % +100 basis points -0.8 % -0.6 % - -100 basis points -3.0 % -4.5 % - -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 12.65% at December 31, 2004. 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, 2004 - -------------------------------------------------------------------------------- (dollars in thousands)
3 6 6 Mos. to 1 to 3 Subject to rate change within Months Months 1 Year Years ---------- ---------- ---------- ---------- Assets Net loans $ 251,063 $ 66,275 $ 90,177 $ 264,626 Investment securities 23,987 15,117 45,516 219,170 Interest-earning deposits 2 - - - Cash and amounts due from banks - - - - Other noninterest earning assets - - 25,846 - ---------- ---------- ---------- ---------- Total assets 275,052 81,392 161,539 483,796 ---------- ---------- ---------- ---------- Liabilities and stockholders' equity Demand deposits 100,141 127,797 76,351 49,809 Savings deposits 2,708 12,215 12,215 16,680 Money market accounts 3,656 8,340 8,340 61,367 Fixed maturity certificates of deposits 98,020 102,918 121,536 11,910 Securities sold under agreements to repurchase 4,401 - - - Short-term borrowings 24,600 - - - Long-term borrowings - - - 30,000 Other liabilities - - - - Stockholders' equity - - - - ---------- ---------- ---------- ---------- Total liabilities and stockholders' equity 233,526 251,270 218,442 169,766 ---------- ---------- ---------- ---------- Gap $ 41,526 $ (169,878) $ (56,903) $ 314,030 ========== ========== ========== ========== Gap to total assets 2.84% -11.60% -3.89% 21.45% Cumulative Gap $ 41,526 $ (128,352) $ (185,255) $ 128,775 ========== ========== ========== ========== Cumulative Gap to total assets 2.84% -8.77% -12.65% 8.80% Non- 3 to 5 Over interest Subject to rate change within Years 5 Years Sensitive Total ---------- ---------- ---------- ---------- Assets Net loans $ 172,162 $ 82,623 $ (2,542) $ 924,384 Investment securities 56,063 29,917 (1,041) 388,729 Interest-earning deposits - - - 2 Cash and amounts due from banks - - 33,108 33,108 Other noninterest earning assets - - 92,072 117,918 ---------- ---------- ---------- ---------- Total assets 228,225 112,540 121,597 1,464,141 ---------- ---------- ---------- ========== Liabilities and stockholders' equity Demand deposits 12,521 106,188 235,036 707,843 Savings deposits 9,811 59,723 - 113,352 Money market accounts 939 4,953 - 87,595 Fixed maturity certificates of deposits 2,242 722 - 337,348 Securities sold under agreements to repurchase - - - 4,401 Short-term borrowings - - - 24,600 Long-term borrowings - - - 30,000 Other liabilities - - 8,847 8,847 Stockholders' equity - - 150,155 150,155 ---------- ---------- ---------- ---------- Total liabilities and stockholders' equity 25,513 171,585 394,038 $1,464,141 ---------- ---------- ---------- ========== Gap $ 202,712 $ (59,046) $ (272,441) ========== ========== ========== Gap to total assets 13.85% -4.03% Cumulative Gap $ 331,487 $ 272,441 ========== ========== Cumulative Gap to total assets 22.64% 18.61%
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, 2004, total deposits amounted to $1.2 billion, an increase of $89.3 million, or 7.7%, over the prior comparable year. At December 31, 2004, advances from the Federal Home Loan Bank of New York ("FHLBNY"), overnight borrowings and securities sold under agreements to repurchase totaled $59.0 million and represented 4.0% of total assets as compared to $72.1 million and 5.2% of total assets, at December 31, 2003. Loan production continued to be the Company's principal investing activity. Net loans at December 31, 2004 amounted to $924.4 million, an increase of $137.4 million, or 17.5%, compared to the same period in 2003. The Company's most liquid assets are cash and due from banks and federal funds sold. At December 31, 2004, the total of such assets amounted to $33.1 million, or 2.3%, of total assets, compared to $31.4 million, or 2.3%, of total assets at year-end 2003. The increase in liquid assets was driven by the growth in deposits. Another significant liquidity source is the Company's available-for-sale securities. At December 31, 2004, available-for-sale securities amounted to $374.2 million, or 96.3%, of total securities, compared to $433.0 million, or 95.8%, of total securities at year-end 2003. In addition to the aforementioned sources of liquidity, the Company has available various other sources of liquidity, including federal funds purchased from other banks and the Federal Reserve discount window. The Bank also has a $100 million line of credit available through its membership in the FHLBNY of which $10.6 million at December 31, 2004 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, 2004. Table 13 - -------------------------------------------------------------------------------- Contractual Obligations and Commitments at December 31, 2004 - -------------------------------------------------------------------------------- (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 $ 2,565 $ 4,492 $ 3,079 $ 6,544 $ 16,680 Remaining contractual maturities of time deposits 323,080 12,066 2,185 17 337,348 Securities sold under agreements to repurchase and short-term borrowings 29,001 - - - 29,001 Long-term borrowings - 30,000 - - 30,000 -------- -------- -------- -------- -------- Total contractual cash obligations $354,646 $ 46,558 $ 5,264 $ 6,561 $413,029 ======== ======== ======== ======== ========
The amounts above exclude any related interest.
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 $164,192 $ 21,723 $ - $ 89,227 $275,142 Standby letters of credit 3,193 - - - 3,193 -------- -------- ----- -------- -------- Total other commitments $167,385 $ 21,723 $ - $ 89,227 $278,335 ======== ======== ===== ======== ========
27 Capital Adequacy Stockholders' equity totaled $150.2 million, or 10.3%, of total assets at December 31, 2004, compared to $143.2 million, or 10.3%, of total assets at December 31, 2003. The $7.0 million growth was largely attributable to an increase in net income offset in part by $6.4 million of cash dividends and a decline in other comprehensive income of $3.1 million primarily due a change in the market value of securities available-for-sale, net of taxes, during 2004. 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, 2004, the Company's and the Bank's Tier 1 risk-based capital ratio was 9.36% and 9.28%, 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, 2004, the Company's and the Bank's leverage ratio was 6.49% and 6.43%, respectively. Stock Repurchase Program On April 26, 2001, the Board of Directors of the Company authorized a program to repurchase up to 450,000 shares of the Company's outstanding common stock on the open market or in privately negotiated transactions. During 2004 the Company repurchased 85,661 shares and as of December 31, 2004, the Company had purchased 255,854 shares at a total cost of approximately $4.4 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 within the banking industry, 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. 28 Allowance for Loan and Lease Losses: The ALLL is established through periodic charges to income. Loan losses are charged against the ALLL when management believes that the future collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. If the ALLL is considered inadequate to absorb future loan losses on existing loans, based on, but not limited to, increases in the size of the loan portfolio, increases in charge-offs or changes in the risk characteristics of the loan portfolio, then the provision for loan and lease losses is increased. The Company considers the ALLL of $9.8 million adequate to cover estimated losses inherent in the loan portfolio, loan commitments and standby and other letters of credit that may become uncollectible based on management's evaluations of the size and current risk characteristics of the loan and lease portfolio as of the balance sheet date. The evaluations consider such factors as changes in the composition and volume of the loan portfolio, the impact of changing economic conditions on the credit worthiness of the borrowers, review of specific problem loans and management's assessment of the inherent risk and overall quality of the loan portfolio. For further discussion see the following "Loan Quality" and "Allowance for Loan and Lease Losses" sections below, 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 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 Other Intangible Assets: 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. Pension Plan: 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 8.3%. 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 $21 thousand. The discount rates that we utilized for determining the future pension obligations of the plans ranged between 4.5% and 5.9% and were based upon comparing expected benefit payouts to yields on bonds available in the market place. A 1.0% decrease in the discount rate would have increased the net periodic pension cost by approximately $220 thousand. Recently Issued Accounting Pronouncements: In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), Share-Based Payment. SFAS 123R requires that compensation cost relating to share-based payment transactions be recognized in the financial statements, with measurement based upon the fair value of the equity or liability instruments issued. The Statement is effective as of the beginning of the first interim reporting period that begins after June 15, 2005, and replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company currently uses the intrinsic-value method to measure compensation cost related to share-based transactions. We are currently evaluting what effect SFAS123R will have on the Company's consolidated financial statements. In March 2004, the Emerging Issues Task Force ("EITF") of the FASB reached a consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. As originally issued, EITF Issue No. 03-1 was to be effective for all annual or interim financial statements for periods beginning after June 15, 2004, however, a partial deferral was issued in September 2004. EITF Issue No. 03-1 addresses the identification of other-than temporarily impaired investments, and requires that an impairment charge be recognized for other-than-temporarily impaired investments for which there is neither the ability nor intent to hold either until maturity or until the market value of the investment recovers. We will continue to monitor developments. The Company has adopted the disclosure provisions of EITF 03-01. On December 23, 2003, the FASB issued SFAS No. 132 (revised 2003), Employer's Disclosures about Pensions and Other Postretirement Benefits ("SFAS 132"). The revised SFAS 132 retains the disclosure requirements in the original statement and requires additonal disclsoures about pension plan assets, benefit obligations, benefit costs and other relevant information. The Company has included the disclosures required for the current year's financial statements. 29 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) disruptions caused by terrorism, such as the events of September 11, 2001, or military actions in the Middle East or other areas; (v) legislation or regulatory requirements or changes adversely affecting the business of the Company; and (vi) other risks detailed in reports filed by the Company with the Securities and Exchange Commission. Readers should not place undue expectations on any forward-looking statements. We are not promising to make any public announcement when we consider forward-looking statements in this document to be no longer accurate, whether as a result of new information, what actually happens in the future or for any other reason. 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 ----- ----- -------- 2004 First quarter .............. $ 18.33 $ 14.80 $ 0.08 Second quarter ............. 16.89 14.85 0.08 Third quarter .............. 17.15 15.33 0.08 Fourth quarter ............. 17.97 15.82 0.08 2003 First quarter .............. $ 12.02 $ 10.73 $ 0.07 Second quarter ............. 15.00 11.47 0.07 Third quarter .............. 15.01 12.89 0.07 Fourth quarter ............. 17.79 13.63 0.07 The number of stockholders of record as of February 28, 2005 was 1,281. All per share data was restated to reflect a 3-for-2 stock split declared on January 18, 2005 and paid on February 18, 2005. 30 Exhibit 13. Portions of the Annual Report to Shareholders for the year ended, December 31, 2004 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - -------------------------------------------------------------------------------- To the Board of Directors and Stockholders of 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, 2004 and 2003, 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, 2004. These 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 the standards of the Public Company Accounting Oversight Board (United States). 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2005 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. /s/ Deloitte & Touche LLP New York, New York March 11, 2005 31 Interchange Financial Services Corporation - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- December 31, (dollars in thousands) December 31 December 31 2004 2003 ----------- ----------- Assets Cash and due from banks $ 33,108 $ 31,423 Interest bearing demand deposits 2 12 ----------- ----------- Total cash and cash equivalents 33,110 31,435 ----------- ----------- Securities held-to-maturity at amortized cost (estimated fair value of $15,276 and $20,223 for 2004 and 2003, respectively) 14,530 19,107 ----------- ----------- Securities available-for-sale at estimated fair value (amortized cost of $375,241 and $428,597 for 2004 and 2003, respectively) 374,199 432,953 ----------- ----------- Loans and leases (net of unearned income and deferred fees of $5,514 and $6,057 for 2004 and 2003, respectively 934,181 796,581 Less: Allowance for loan and lease losses 9,797 9,641 ----------- ----------- Net loans and leases 924,384 786,940 ----------- ----------- Bank owned life insurance 25,847 21,853 Premises and equipment, net 17,713 20,343 Foreclosed assets and other repossessed assets 156 230 Goodwill 55,952 55,924 Intangible assets 3,660 4,165 Accrued interest receivable and other assets 14,590 12,922 ----------- ----------- Total assets $ 1,464,141 $ 1,385,872 =========== =========== Liabilities Deposits Non-interest bearing $ 235,036 $ 223,745 Interest bearing 1,011,102 933,053 ----------- ----------- Total deposits 1,246,138 1,156,798 ----------- ----------- Securities sold under agreements to repurchase 4,401 15,618 Short-term borrowings 24,600 46,491 Long-term borrowings 30,000 10,000 Accrued interest payable and other liabilities 8,847 13,772 ----------- ----------- Total liabilities 1,313,986 1,242,679 ----------- ----------- Commitments and contingent liabilities Stockholders' equity: Common stock, without par value; 22,500,000 shares authorized; 12,746,535 and 12,810,193 shares issued and outstanding for 2004 and 2003, respectively 5,397 5,397 Capital surplus 73,320 73,231 Retained earnings 86,542 74,710 Accumulated other comprehensive income, net of taxes of $408 and $1,779 for 2004 and 2003, respectively (633) 2,434 ----------- ----------- 164,626 155,772 Less: Treasury stock 14,471 12,579 ----------- ----------- Total stockholders' equity 150,155 143,193 ----------- ----------- Total liabilities and stockholders' equity $ 1,464,141 $ 1,385,872 =========== =========== - -------------------------------------------------------------------------------- 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)
2004 2003 2002 ------- ------- ------- Interest income Interest on loans and leases $54,173 $48,982 $45,343 Interest on federal funds sold 151 276 246 Interest on interest bearing deposits - 61 - Interest and dividends on securities Taxable interest income 10,520 9,847 10,123 Interest income exempt from federal income taxes 1,164 914 599 Dividends 92 187 189 ------- ------- ------- Total interest income 66,100 60,267 56,500 ------- ------- ------- Interest expense Interest on deposits 12,390 13,161 16,357 Interest on securities sold under agreements to repurchase 145 267 291 Interest on short-term borrowings 214 18 403 Interest on long-term borrowings 905 428 427 ------- ------- ------- Total interest expense 13,654 13,874 17,478 ------- ------- ------- Net interest income 52,446 46,393 39,022 Provision for loan and lease losses 1,200 1,815 1,500 ------- ------- ------- Net interest income after provision for loan and lease losses 51,246 44,578 37,522 ------- ------- ------- Non-interest income Service fees on deposit accounts 3,753 3,485 2,581 Net gain on sale of securities 1,444 793 564 Net gain on sale of loans and leases 1,317 769 400 Bank owned life insurance 993 2,019 895 Commissions on sale of annuities and mutual funds 913 883 603 Other 3,037 2,696 1,471 ------- ------- ------- Total non-interest income 11,457 10,645 6,514 ------- ------- ------- Non-interest expense Salaries and benefits 19,463 16,994 13,673 Occupancy 5,283 4,577 3,438 Furniture and equipment 1,309 1,327 1,124 Advertising and promotion 1,456 1,412 1,295 Amortization of intangible assets 504 360 69 Other 7,993 6,569 5,464 ------- ------- ------- Total non-interest expense 36,008 31,239 25,063 ------- ------- ------- Income before income taxes 26,695 23,984 18,973 Income taxes 8,481 7,618 6,096 ------- ------- ------- Net income $18,214 $16,366 $12,877 ======= ======= ======= Basic earnings per common share $0.95 $0.92 $0.88 ======= ======= ======= Diluted earnings per common share $0.94 $0.91 $0.86 ======= ======= =======
- -------------------------------------------------------------------------------- See notes to consolidated financial statements. All per share data was restated to reflect 3-for-2 stock splits declared on May 23, 2002 and January 18, 2005 and paid on July 12, 2002 and February 18, 2005, respectively. 33 Interchange Financial Services Corporation - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- For the Years 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, 2002 $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: net gains on disposition of securities (597) -------- 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 losses, 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 losses, 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 Comprehensive income Net Income $ 18,214 18,214 18,214 Other comprehensive losses, net of taxes Unrealized losses on AFS debt securities (2,012) Less: net gains on disposition of securities (1,060) Minimum pension liability adjustment 5 --------- Other comprehensive losses, net of taxes (3,067) (3,067) (3,067) --------- Comprehensive income $ 15,147 ========= Dividends on common stock (6,382) (6,382) Issued 7,793 shares of common stock in connection with Executive Compensation Plan 103 102 205 Exercised 14,710 option shares (14) 160 146 Purchased 85,661 shares of common stock (2,154) (2,154) --------- ---------- --------- -------- --------- --------- Balance at December 31, 2004 $86,542 $ (633) $5,397 $73,320 $(14,471) $150,155 ========= ========== ========= ======== ========= =========
- -------------------------------------------------------------------------------- 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)
2004 2003 2002 --------- --------- --------- Cash flows from operating activities Net income $ 18,214 $ 16,366 $ 12,877 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 1,914 1,752 1,446 Amortization of securities premiums 5,237 4,643 2,039 Accretion of securities discounts (269) (315) (305) Amortization of loan premiums 61 - - Amortization of premiums in connection with acquisition 1,023 1,033 69 Provision for loan and lease losses 1,200 1,815 1,500 Charge off of foreclosed assets and other repossessed assets 62 - - Increase in cash surrender value of Bank Owned Life Insurance (993) (579) (895) Net gain on sale of securities (1,444) (1,208) (564) Origination of loans held for sale (14,860) (18,089) - Sale of loans held for sale 15,110 18,679 - Acceleration of premium amortization on certain collateralized mortgage obligations - 415 - Net gain on sale of loans and leases (1,317) (769) (400) Net (gain) loss on sale of fixed assets (16) 10 - Net gain on sale of foreclosed real estate and repossessed assets (17) (7) (40) Decrease (increase) in operating assets Accrued interest receivable 534 (1,225) (330) Accounts receivable- leases sold - - 4,921 Deferred taxes 1,187 1,672 - Other Assets (1,282) (4,080) (383) (Decrease) increase in operating liabilities Accrued interest payable (2) (322) (308) Other (4,923) (115) 1,467 --------- --------- --------- Cash provided by operating activities 19,419 19,676 21,094 --------- --------- ---------
Cash flows from investing activities (Payments for) proceeds from Net originations of loans and leases (112,057) (904) (26,826) Purchase of loans and leases (42,531) (53) (14,967) Sale of loans and leases 16,302 3,176 6,603 Purchase of securities available for sale (109,564) (341,335) (131,069) Maturities of securities available for sale 90,420 122,581 43,219 Sale of securities available for sale 69,114 44,361 21,867 Maturities of securities held to maturity 11,212 8,900 8,481 Sale of securities held to maturity - - 2,023 Purchase of securities held to maturity (6,820) - - Sale of foreclosed real estate and other repossessed assets 108 141 766 Purchase of fixed assets (1,840) (1,242) (1,646) Premium in connection with acquisition 75 (90) (1,748) Net cash from acquisition of Bridge View Bancorp - 19,439 - Purchase of Bank Owned Life Insurance (3,000) - (5,000) Sale of fixed assets 2,766 - - --------- --------- --------- Cash used in investing activities (85,815) (145,026) (98,297) --------- --------- --------- Cash flows from financing activities Proceeds from (payments for) Deposits in excess of withdrawals 89,359 82,332 89,189 Securities sold under agreements to repurchase and other borrowings 20,000 147,734 64,693 Retirement of securities sold under agreement to repurchase and other borrowings (33,108) (103,014) (62,104) Minimum pension liability, net of taxes 5 (5) - Dividends (6,382) (4,970) (4,321) Common stock issued 205 354 1,685 Treasury stock (2,154) - (432) Exercise of option shares 146 438 198 --------- --------- --------- Cash provided by financing activities 68,071 122,869 88,908 --------- --------- --------- Increase (decrease) in cash and cash equivalents 1,675 (2,481) 11,705 Cash and cash equivalents, beginning of year 31,435 33,916 22,211 --------- --------- --------- Cash and cash equivalents, end of year $ 33,110 $ 31,435 $ 33,916 ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid for: Interest $ 13,463 $ 14,052 $ 17,786 Income taxes 12,053 9,003 6,701 Supplemental disclosure of non-cash investing and financing activities: Loans transferred to loans available for sale 13,340 - - Loans transferred to foreclosed real estate and other repossessed assets 79 188 410 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. Currently, the Bank conducts operations typical of a community bank in the northeast region of New Jersey (primarily Bergen County). In addition, 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 and practices 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 2004. Use of estimates: The preparation of 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 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 Company makes an assessment to determine whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. The Company considers many factors including the severity and duration of the impairment; the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value; recent events specific to the issuer or industry; and for debt securities, external credit ratings and recent downgrades. Securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded as a realized loss in securities gains (losses). 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 noninterest income. 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 leases syndicated 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 judgment, 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 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 36 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 including valuations on non-performing loans in accordance with SFAS No. 114 "Accounting by Creditors for Impairment of a Loan." The evaluations are inherently subjective as it requires material estimates including such factors as potential loss factors, changes in trend of nonperforming 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 allowance contains a portion which represents management's evaluation of inherent risk in the portfolio based on changes in the composition of performing and nonperforming loans, concentrations of credit, economic conditions, the condition of borrowers facing financial pressure and the relationship of the current level of the ALLL to the credit portfolio and to nonperforming loans. The total allowance is available for all loan losses, although allocations are made to specific loans and pools of loans, and represents management's estimates of losses in accordance with SFAS No. 5 and SFAS No. 114. 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 is reported as a liability on the Consolidated Balance Sheets. Premises and equipment: Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method. Premises and equipment are depreciated over the estimated useful lives of the assets. Leasehold improvements are amortized over the term of the lease, if shorter. Estimated lives are 30 to 40 years for premises and 3 to 20 years for furniture and equipment. Maintenance and repairs are charged to expenses as incurred, while renewals and major improvements are capitalized. Long-lived assets. The carrying value of long-lived assets to be held and used is evaluated for impairment whenever indications of impairment exist in accordance with the requirements of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The carrying value of long-lived assets is considered impaired when the projected undiscounted cash flows are less than the carrying value. In that event, a loss would be recognized based on the amount by which the carrying value exceeds the fair value. Fair value is determined primarily by available market valuations or, if applicable, discounted cash flows. 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 other intangible assets: Goodwill is not 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. 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. Comprehensive income: Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes items such as unrealized gains and losses on securities available-for-sale, net of tax and minimum pension liability. Comprehensive income is presented in the consolidated statements of changes in stockholders' equity. 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. All earnings per share data has been adjusted to reflect a 3-for-2 stock split declared on January 18, 2005 and paid on February 18, 2005. Segment reporting: SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS No. 131"), requires disclosures for each reportable operating segment. As a community-oriented financial institution, 37 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 reissue, the treasury stock account is reduced by the average cost of such stock. Stock-based compensation: At December 31, 2004, the Company has stock-based employee compensation plans, which are described more fully in Note 13, Stock Option and Incentive Plan. The Company accounts for these plans under 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 December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), "Share-Based Payment". SFAS 123R requires that compensation cost relating to share-based payment transactions be recognized in the financial statements, with measurement based upon the fair value of the equity or liability instruments issued. The Statement is effective as of the beginning of the first interim reporting period that begins after June 15, 2005, and replaces SFAS No. 123, "Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". The company currently uses the intrinsic-value method to measure compensation cost related to our share-based transactions. We are currently evaluating what effect SFAS 123R will have on the Company's consolidated financial statements. In March 2004, the Emerging Issues Task Force ("EITF") of the FASB reached a consensus on EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments". As originally issued, EITF Issue No. 03-1 was to be effective for all annual or interim financial statements for periods beginning after June 15, 2004, however, a partial deferral was issued in September 2004. EITF Issue No. 03-1 addresses the identification of other-than-temporarily impaired investments, and requires that an impairment charge be recognized for other-than-temporarily impaired investments for which there is neither the ability nor intent to hold either until maturity or until the market value of the investment recovers. We will continue to monitor developments. The Company has adopted the disclosure provisions of EITF 03-01. On December 23, 2003, the FASB issued SFAS 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 disclosures required for the current year's financial statements. Note 2. Acquisitions On April 30, 2003, the Company completed its 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 the Company for Bridge View: (in thousands) Cash and due from banks $ 49,555 Federal funds sold 7,000 Investments 39,907 Loans 183,845 Premises and eqipment 10,222 Intangible assets 4,295 Accounts receivable and other assets 839 Non-interest bearing accounts (85,353) Interest bearing deposits (173,627) Accounts payable and other liabilities (5,338) --------- Fair value of net assets acquired 31,345 Purchase price 85,731 --------- Goodwill $ 54,386 ========= The following unaudited pro forma condensed consolidated statement of income for the year ended December 31, 2003 give effect to the merger as if it had been consummated on January 1, 2003. The unaudited pro forma information is not necessarily indicative of the results of operations in the future or the results of operations, which would have been realized had the merger been consummated during the period or as of the date for which the unaudited pro forma information is presented. Interchange Financial Services Corporation and Subsidiaries UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME For the year ended December 31, 2003 (in thousands, except per share data) Interest income $64,585 Interest expense 14,491 ------- Net interest income 50,094 Provision for loan and lease losses 1,830 ------- Net interest income after provision for loan and lease losses 48,264 ------- Non-interest income 11,429 ------- Non-interest expense Salaries and benefits 18,489 Occupancy and FF&E 6,521 Other expenses 9,054 ------- 34,064 ------- Net income before taxes 25,629 Income Taxes 8,254 ------- Net income $17,375 ======= Earnings per common share: Basic $ 0.91 Diluted 0.89 All per share data has been adjusted to reflect a 3-for-2 stock split declared January 18, 2005 and paid February 18, 2005. 38 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 2004 and 2003 was approximately $2.1 million and $1.7 million, respectively. 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, 2004 --------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- Securities held-to-maturity Mortgage-backed securities $ 5,583 $ 128 - $ 5,711 Obligations of states & political subdivisions 8,947 618 - 9,565 -------- -------- -------- -------- $ 14,530 $ 746 - $ 15,276 ======== ======== ======== ======== Securities available-for-sale Obligations of U.S. Treasury $ 5,981 $ 1 - $ 5,982 Mortgage-backed securities 121,198 792 $ 599 121,391 Obligations of U.S. agencies 211,856 345 2,352 209,849 Obligations of states & political subdivisions 31,948 815 44 32,719 Equity securities 4,258 - - 4,258 -------- -------- -------- -------- 375,241 1,953 2,995 374,199 -------- -------- -------- -------- Total securities $389,771 $ 2,699 $ 2,995 $389,475 ======== ======== ======== ======== --------------------------------------------------------- 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 ======== ======== ======== ========
At December 31, 2004, the contractual maturities of securities held-to-maturity and securities available-for-sale are as follows: (in thousands)
Securities Securities Held-to-Maturity Available-for-Sale ----------------------------- ----------------------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value ----------------------------- ----------------------------- Within 1 year $ 1,407 $ 1,423 $ 92,924 $ 92,619 After 1 but within 5 years 7,034 7,309 257,103 255,840 After 5 but within 10 years 5,204 5,597 7,315 7,414 After 10 years 885 947 13,641 14,068 Equity securities - - 4,258 4,258 -------- -------- -------- -------- Total $ 14,530 $ 15,276 $375,241 $374,199 ======== ======== ======== ========
39 Proceeds from the sale of securities available-for-sale amounted to $69.1 million, $44.4 million and $21.9 million for the years ended December 31, 2004, 2003 and 2002, respectively, which resulted in gross realized gains of $1.5 million, $1.3 million and $573 thousand for those periods, respectively. Gross realized losses from the sale of securities available-for-sale amounted to $94 thousand, $71 thousand and $33 thousand in 2004, 2003 and 2002, 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 and $2.0 million for the years ended December 31, 2003 and 2002, respectively. These security transactions resulted in no gains for 2003 and $24 thousand for 2002. 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. Based upon the Company's evaluation of the securities portfolios no other-than-temporary impairment charge was necessary at December 31, 2004 and 2003. The following table summarizes all securities that have an unrealized loss and the duration of the unrealized loss at December 31, 2004: (in thousands) Securities with carrying amounts of $62.2 million and $46.1 million at December 31, 2004 and 2003, respectively, were pledged for public deposits, Federal Home Loan Bank of New York ("FHLBNY") advances, securities sold under repurchase agreements and other purposes required by law. Equity securities at December 31, 2004 and 2003 consisted primarily of FHLBNY stock which requires six-months advance notice for withdrawal.
-------------------- -------------------- -------------------- 12 months or less 12 months or longer Totals -------------------- -------------------- -------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses -------- ---------- -------- ---------- -------- ---------- Securities available-for-sale Mortgage-backed securities $ 54,616 $ 555 $ 13,966 $ 44 $ 68,582 $ 599 Obligations of U.S. agencies 91,582 840 104,493 1,512 196,075 2,352 Obligations of states & political subdivisions 479 7 3,138 37 3,617 44 Equity securities - - - - - - -------- -------- -------- -------- -------- -------- $146,677 $ 1,402 $121,597 $ 1,593 $268,274 $ 2,995 ======== ======== ======== ======== ======== ========
The Company did not have any unrealized losses in the held-to-maturity portfolio. The following table summarizes all securities that have an unrealized loss and the duration of the unrealized loss at December 31, 2003: (in thousands)
-------------------- -------------------- -------------------- 12 months or less 12 months or longer Totals -------------------- -------------------- -------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses -------- ---------- -------- ---------- -------- ---------- Securities available-for-sale Mortgage-backed securities $ 31,230 $ 135 $ 4,641 $ 22 $ 35,871 $ 157 Obligations of U.S. agencies 132,335 762 - - 132,335 762 Obligations of states & political subdivisions 3,532 68 - - 3,532 68 Obligations of U.S. Treasury 3,014 2 - - 3,014 2 -------- -------- -------- -------- -------- -------- $170,111 $ 967 $ 4,641 $ 22 $174,752 $ 989 ======== ======== ======== ======== ======== ======== Securities held-to-maturity Mortgage-backed securities $ 138 $ 1 - - $ 138 $ 1 -------- -------- -------- -------- -------- -------- $ 138 $ 1 - - $ 138 $ 1 ======== ======== ======== ======== ======== ========
40 Note 5. Loans The composition of the loan portfolio is summarized as follows: (in thousands) -------------------------- December 31, -------------------------- 2004 2003 --------- --------- Real estate Residential $ 292,406 $ 240,901 Commercial 375,985 330,040 Construction 51,162 31,077 Commercial Commercial and financial 186,386 149,462 Lease financing 23,535 28,440 Consumer Lease financing 680 12,416 Installment 4,027 4,245 --------- --------- 934,181 796,581 Allowance for loan and lease losses (9,797) (9,641) --------- --------- Net loans $ 924,384 $ 786,940 ========= ========= Loans are net of unearned income and deferred fees of $5.6 million and $6.1 million for 2004 and 2003, respectively. Nonperforming loans include loans which are accounted for on a nonaccrual basis and troubled debt restructurings. Nonperforming loans are as follows: (in thousands) -------------------------- December 31, -------------------------- 2004 2003 --------- --------- Nonaccrual loans Residential real estate $ 1,660 $ 1,364 Commercial real estate 2,320 1,603 Commercial and financial 2,981 2,858 Commercial lease financing 1,836 2,365 Consumer 336 380 -------- -------- 9,133 8,570 -------- -------- Troubled debt restructurings Commercial and financial - - -------- -------- Total nonperforming loans $ 9,133 $ 8,570 ======== ======== At December 31, 2004, 2003 and 2002, 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 $852 thousand, $773 thousand and $576 thousand for the years ended December 31, 2004, 2003 and 2002, respectively. Interest income included in net income during the year on loans currently classified as nonaccrual loans outstanding at year end amounted to $304 thousand, $353 thousand and $321 thousand for the years ended December 31, 2004, 2003 and 2002, respectively. At December 31, 2004 the Company had approximately $650 thousand of loans held for sale which are carried at lower of cost or market. 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 nonaffiliated borrowers and suppliers. Interest income recognized with respect to these loans was approximately $671 thousand, $501 thousand and $443 thousand for the years ended December 31, 2004, 2003 and 2002, respectively. The following table summarizes activity with respect to these loans: (in thousands) ------------------------- Years Ended December 31, ------------------------- 2004 2003 -------- -------- Balance at beginning of year $ 4,092 $ 5,135 Additions 6,524 - Reductions (672) (1,043) -------- -------- Balance at end of year $ 9,944 $ 4,092 ======== ======== The Company also services residential mortgages and Small Business Administration ("SBA") loans for others. The Company is compensated for loan administrative services performed for residential mortgages and SBA loans originated and sold to third-party investors. The approximate aggregate balances of residential mortgages and SBA loans serviced for others at December 31, 2004 and 2003 were $31.8 million and $9.5 million, and $14.6 million and $1.4 million, respectively. These outstanding balances were not included in the consolidated balance sheets of the Company. The Company recognized loan servicing fee income of $343 thousand, and $180 thousand for the years ended December 31, 2004, and 2003, respectively. Loan servicing rights totaled $456 thousand, and $166 thousand at December 31, 2004, and 2003, respectively, and are included in other assets in the consolidated balance sheets. Loan servicing rights, which are classified in other assets, are periodically evaluated for impairment. Based upon the Company's evaluation no impairment was required to be recognized for the periods ended December 31, 2004, 2003, and 2002. 41 Note 6. Allowance for Loan and Lease Losses The Company's recorded investment in impaired loans is as follows: (in thousands)
------------------------------------------------------- December 31, ------------------------------------------------------- 2004 2003 ------------------------ ------------------------- 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 $2,981 $420 $2,864 $463 Commercial real estate 2,320 98 1,603 40 Residential real estate 822 123 816 122 Without a related allowance for loan losses - - - - ------ ------ ------ ------ $6,123 $641 $5,283 $625 ====== ====== ====== ======
- -------------------------------------------------------------------------------- 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, ------------------------- 2004 2003 -------- -------- Average recorded investment $ 6,315 $ 4,711 ======== ======== Interest income recognized during time period that loans were impaired, using cash-basis method of accounting $ 122 $ 198 ======== ======== Changes in the allowance for loan and lease losses are summarized as follows: (in thousands) --------------------------------- Year Ended December 31, --------------------------------- 2004 2003 2002 ------- ------- ------- Balance at beginning of year $ 9,641 $ 7,207 $ 6,569 Additions (deductions) Provision charged to operations 1,200 1,815 1,500 Bridge View acquired allowance - 1,929 - Recoveries on loans previously charged off 93 46 64 Loans charged off (1,137) (1,356) (926) ------- ------- ------- Balance at end of year $ 9,797 $ 9,641 $ 7,207 ======= ======= ======= Note 7. Premises and Equipment, net Premises and equipment are summarized as follows: (in thousands) ------------------------- Years Ended December 31, ------------------------- 2004 2003 -------- -------- Land $ 4,573 $ 6,028 Buildings 6,441 6,880 Furniture, fixtures and equipment 9,121 8,939 Leasehold improvements 11,830 11,124 -------- -------- $ 31,965 $ 32,971 Less: accumulated depreciation and amortization 14,252 12,628 -------- -------- Net book value $ 17,713 $ 20,343 ======== ======== During 2004 the Company sold one branch office for approximately $2.8 million and recognized a gain of $16 thousand. The branch was relocated to an alternative site within the municipality. Note 8. Goodwill and Other Intangibles At December 31, 2004 and 2003 gross intangible assets amounted to $4.6 million, while accumulated amortization amounted to $935 thousand and $430 thousand, respectively. Amortization of intangible assets as a result of acquisitions, which is included in non-interest expense, amounted to $504 thousand, $360 thousand, and $69 thousand for the years ended December 31, 2004, 2003, and 2002, respectively. During the second quarter of 2003, the Company recorded a core deposit intangible of $4.3 million in connection with the Bridge View merger. The core deposit intangible has an estimated life of 10 years and the Company amortized $430 thousand and $286 thousand for the years ended December 31, 2004 and 2003, respectively. Intangibles are periodically reviewed for impairment and estimated useful life. 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 is tested for impairment at least annually in accordance with the provisions of Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets." At December 31, 2004 the scheduled amortization of intangible assets is as follows: (in thousands) 2005 $ 505 2006 436 2007 430 2008 430 2009 430 Thereafter 1,429 ------ Total $3,660 ====== Note 9. Deposits Deposits are summarized as follows: (in thousands) December 31, --------------------------- 2004 2003 ---------- ---------- Non-interest bearing demand deposits $ 235,036 $ 223,745 Interest bearing demand deposits 472,807 446,786 Savings deposits 113,352 120,136 Money market deposits 87,595 84,162 Time deposits 337,348 281,969 ---------- ---------- Total $1,246,138 $1,156,798 ========== ========== 42 At December 31, 2004 and 2003, the carrying amounts of certificates of deposit that individually exceed $100,000 amounted to $50.9 million and $16.6 million, respectively. Interest expense relating to certificates of deposit that individually exceed $100,000 was approximately $701 thousand, $850 thousand, and $1.0 million in 2004, 2003 and 2002, respectively. At December 31, 2004, the scheduled maturities of time deposits are as follows: (in thousands) 2005 $323,080 2006 10,371 2007 1,695 2008 1,153 2009 1,032 Thereafter 17 -------- Total $337,348 ======== The following table presents by various rate categories, the amount and the periods to maturity of the certificate accounts outstanding at December 31, 2004:
Over six Over one Over two Over Six months months through year through years through three and less one year two years three years years Totals ---------- -------------- ------------ ------------- ----- ------ 0.00% to 0.99% $ 2,933 $ 55 - - - $ 2,988 1.00% to 1.99% 56,905 5,183 $ 27 - - 62,115 2.00% to 2.99% 145,950 65,556 5,777 $ 340 $ 732 218,355 3.00% to 3.99% 8,062 32,084 3,100 1,305 1,470 46,021 4.00% to 4.99% 13 1 501 - - 515 5.00% to 5.99% 360 - 794 - - 1,154 6.00% to 6.99% 3,111 2,867 172 50 - 6,200 --------- ---------- --------- --------- ------- -------- $ 217,334 $ 105,746 $ 10,371 $ 1,695 $ 2,202 $337,348 ========= ========== ========= ========= ======= ========
Note 10. Securities Sold Under Agreements to Repurchase and Short-term Borrowings Securities sold under agreements to repurchase and short-term borrowings are summarized as follows: (in thousands) December 31, ------------------------- 2004 2003 -------- -------- Securities sold under agreements to repurchase $ 4,401 $ 15,618 Federal Home Loan Bank overnight advances 24,600 46,491 -------- -------- $ 29,001 $ 62,109 ======== ======== Average balance outstanding $ 29,080 $ 17,875 Average interest rate 1.23% 1.59% Maximum amount borrowed $ 63,232 $ 48,110 Securities sold under agreements to repurchase mature within one year. In addition, the Bank has an additional $89.4 million available under its line of credit agreement through its membership in the FHLBNY. Note 11. Long-term Borrowings The Bank has long-term borrowings, which have maturities of over one year, of $30.0 million and $10.0 million as of December 31, 2004 and 2003, respectively. The long-term borrowings consisted of $20 million of fixed rate FHLBNY advances at December 31, 2004 and $10 million of a callable FHLBNY Convertible Repurchase Advance with a Customized Strike Price at December 31, 2004 and 2003. This advance has a fixed rate of 4.22%, matures in January 2007 and is collateralized by U.S. Treasury and U.S. agency securities. The FHLBNY has an option to call the advance on a quarterly basis if the 3-month LIBOR resets above 7.50%. At December 31, 2004, 3-month LIBOR was 2.56%. The $20 million in long-term fixed rate FHLB advances have remaining maturity terms of twelve to twenty-five months at interest rates between 2.09% percent to 2.69%. The long-term borrowings may not be repaid by the Bank prior to the scheduled/repurchase payment dates without penalty. 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. For all of the plans, the discount rate for determining the pension benefit obligation and service cost at December 31, 2004 ranged between 4.50% and 5.9%, while the expected long-term return on Pension Plan assets was 8.00 percent. The expected return on plan assets is based primarily upon the long-term rate of return of the fund. 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. The former directors of Bridge View have been credited for their prior years of service for vesting purposes and Bridge View's director plan was frozen and the future obligations have been included in the Director's Plan. 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 43 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. Net pension cost of each plan consists of the following: (in thousands)
Pension Plan Supplemental Plan Directors' Plan ------------------------- ----------------------- ------------------------ 2004 2003 2002 2004 2003 2002 2004 2003 2002 ----- ----- ----- ----- ----- ----- ----- ----- ----- Service cost $ 565 $ 490 $ 331 $ 32 $ 29 $ 25 $ 116 $ 85 $ 72 Interest cost 223 181 150 26 21 19 126 114 98 Expected return on plan assets (179) (124) (120) - - - - - - Amortization of prior service cost 2 2 2 3 2 3 - - - Recognized net actuarial gain - 1 - 3 - - (4) - - ----- ----- ----- ----- ----- ----- ----- ----- ----- Net periodic benefit cost $ 611 $ 550 $ 363 $ 64 $ 52 $ 47 $ 238 $ 199 $ 170 ===== ===== ===== ===== ===== ===== ===== ===== =====
The following table sets forth the funded status, as of December 31, 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 -------------------- -------------------- -------------------- 2004 2003 2004 2003 2004 2003 ------- ------- ------- ------- ------- ------- Change in pension obligation Pension obligation at beginning of year $ 3,626 $ 2,962 $ 381 $ 352 $ 2,101 $ 1,555 Service cost 565 490 32 29 116 85 Interest cost 223 181 26 21 126 114 Acquisition of Bridge View Plan - - - - - 376 Actuarial (gain) loss 303 23 27 (21) 6 (29) Benefits paid (25) (30) - - (28) - ------- ------- ------- ------- ------- ------- Pension obligation at end of year 4,692 3,626 466 381 2,321 2,101 ------- ------- ------- ------- ------- ------- Change in plan assets Fair value of plan assets at beginning of year 1,980 1,397 - - - - Actual gain (loss) on plan assets 278 320 - - - - Employer contribution 564 293 - - - - Benefits paid (25) (30) - - - - ------- ------- ------- ------- ------- ------- Fair value of plan assets at end of year 2,797 1,980 - - - - ------- ------- ------- ------- ------- ------- Funded Status (1,894) (1,646) (466) (381) (2,321) (2,100) Unrecognized net actuarial (gain) loss 493 289 56 32 (110) (120) Unrecognized amortized prior service cost 26 28 13 16 -- -- ------- ------- ------- ------- ------- ------- Accrued pension cost $(1,375) $(1,329) $ (397) $ (333) $(2,431) $(2,220) ======= ======= ======= ======= ======= ======= Weighted-average assumptions (1) Discount rate for net periodic benefit cost 6.25% 6.50% 6.25% 6.50% 6.25% 6.50% Discount rate for benefit obligations 5.90 6.25 5.00 6.25 5.00 6.25 Expected return on plan assets 8.00 8.00 N/A N/A N/A N/A 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) 2004 2003 -------- -------- Accrued benefit cost $ (4,203) $ (3,882) Intangible assets - 16 Accumulated other comprehensive income - 10 -------- -------- Net amount recognized $ (4,203) $ (3,856) The accumulated benefit obligation for all defined benefit pension plans was $5.7 million and $4.9 million at December 31, 2004 and 2003, respectively. Information for pension plans with an accumulated benefit obligation in excess of plan assets: (in thousands) 2004 2003 -------- -------- Projected benefit obligation $7,479 $6,108 Accumulated benefit obligation $5,744 $4,899 Fair value of plan assets $2,797 $1,980 44 During 2005 the Company anticipates contributing $624 thousand to fund all of the plans. The following payments, which reflect expected future service as appropriate, are expected to be paid: Supplemental Directors' Pension Plan Plan Plan Total ------------ ------------ ---------- ------ 2005 $ 47 $ 3 $ 578 $ 628 2006 46 4 324 374 2007 62 5 324 391 2008 73 5 324 402 2009 82 7 64 153 thereafter 943 495 374 1,812 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. Employees become eligible to participate in the Investment Plan upon attainment of age twenty-one and the completion of 1,000 hours of service. Vesting occurs after the completion of three years of service with regards to the Company match. The Investment Plan offers employees a choice of 10 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, which vests immediately, 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 $382,000, $347,000 and $281,000 in 2004, 2003 and 2002, 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 2,076,470 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 225,000 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:
2004 2003 2002 ----------------------- -------------------- ------------------------ Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price --------- --------- -------- -------- -------- ---------- Incentive Stock Options Outstanding at January 1 834,330 $ 9.15 673,524 $ 7.83 515,988 $ 6.91 Granted 262,725 17.50 258,750 11.33 200,813 9.80 Exercised (19,065) 7.44 (97,944) 5.89 (30,990) 4.89 Forfeited (16,301) 13.00 - - (12,287) 8.41 --------- ------- -------- ------- -------- -------- Outstanding at December 31 1,061,689 $11.19 834,330 $ 9.15 673,524 $ 7.83 ========= ======= ======== ======= ======== ======== Options exercisable at December 31 573,212 8.46 400,455 $ 7.74 498,212 $ 7.37 Weighted-average fair value of options granted during the year ended December 31 (per option) $ 4.67 $ 2.74 $ 2.67 2004 2003 2002 ----------------------- -------------------- ----------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price --------- ----------- -------- --------- ---------- ----------- Non-Qualified Stock Options Incentive Stock Options Outstanding at January 1 87,750 $10.02 67,500 $ 9.03 49,500 $ 7.13 Granted 33,750 15.75 27,000 11.80 24,750 12.22 Exercised (3,000) 8.63 (6,750) 7.29 (6,750) 6.83 Forfeited (6,750) 14.48 - - - - --------- ------- -------- ------- --------- -------- Outstanding at December 31 111,750 $11.52 87,750 $10.02 67,500 $ 9.03 ========= ======= ======== ======= ========= ======== Options exercisable at December 31 58,500 $ 9.22 36,000 $ 8.12 18,000 $ 6.83 Weighted-average fair value of options granted during the year ended December 31 (per option) $ 4.01 $ 3.07 $ 3.36
All per share data and weighted averages shares were restated to reflect 3-for-2 stock splits declared on May 23, 2002 and January 18, 2005 and paid on July 12, 2002 and February 18, 2005, respectively. 45 The following table summarizes information about options outstanding under the Stock Plan and Director's Stock Plan at December 31, 2004:
Options Outstanding Options Excercisable - -------------------------------------------------------------------------------------------------- ------------------------------ Weighted-Average Weighted-Average Weighted-Average Number Remaining Exercise Exercise Range of Exercise Prices Outstanding Contractual Life Price Exercisable Price - -------------------------------------------------------------------------------------------------- ------------------------------ Incentive Stock Options $0 - $5 8,100 1.28 $ 3.72 8,100 $ 3.72 $5 - $10 544,170 5.63 8.25 481,543 8.04 $10 - $15 252,319 8.08 11.33 83,569 11.33 $15 - $20 257,100 9.07 17.50 - - --------------------------------------------- ------------------------- 1,061,689 7.01 11.19 573,212 8.46 --------------------------------------------- ------------------------- Non-Qualified Stock Options $0 - $10 34,500 5.92 7.25 34,500 7.25 $10 - $15 48,000 7.85 12.00 24,000 12.06 $15 - $20 29,250 9.31 15.75 - - --------------------------------------------- ------------------------- 111,750 7.64 11.52 58,500 9.22 --------------------------------------------- ------------------------- Totals 1,173,439 7.07 $ 11.22 631,712 $ 8.53 ============================================= =========================
All per share data and averages shares were restated to reflect a 3-for-2 stock split declared on May 23, 2002 and January 18, 2005 and paid on July 12, 2002 and February 18, 2005, respectively. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2004, 2003 and 2002, respectively: dividend yield of 2.21%, 2.14%, 2.37%; expected volatility of 24.83%, 24.69% and 25.12%; risk-free interest rate of 3.39%, 3.39% and 4.65%; 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 share data) 2004 2003 2002 ---------- ---------- ---------- Net Income As reported $ 18,214 $ 16,366 $ 12,877 Less: Total stock-based compensation expense determined under the fair value method for all rewards, net of related tax effects 834 521 334 ---------- ---------- ---------- Pro-forma $ 17,380 $ 15,845 $ 12,543 ========== ========== ========== Earnings per share: Basic: As reported $ 0.95 $ 0.92 $ 0.88 Pro forma 0.91 0.89 0.85 Diluted: As reported 0.94 0.91 0.86 Pro forma 0.89 0.88 0.84 All per share data and average shares were restated to reflect all stock splits. The effective tax rate used for the non-qualified option expense was 35%. 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, 2004, 2003 and 2002. Restricted Stock Awards 2004 2003 2002 ------- ------- ------- Outstanding at beginning of year 40,530 39,124 38,250 Granted 7,793 20,883 21,070 Vested (22,427) (19,477) (20,196) ------- ------- ------- Outstanding at year end 25,896 40,530 39,124 ======= ======= ======= The amount of compensation cost related to restricted stock awards included in salary expense in 2004, 2003 and 2002 amounted to $298 thousand, $237 thousand and $196 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 the Company and the Bank met as of December 31, 2004, all capital adequacy requirements to which they are subject. As of December 31, 2004, the Bank has met the Federal Reserve capital calculation standards to be categorized 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 that management believes have changed the Bank's category. The Company's and the Bank's capital amounts and ratios are as follows: (dollars in thousands)
To Be "Well Capitalized" Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------ ------------------- ------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of December 31, 2004: Total Capital (to Risk Weighted Assets): The Company $102,175 10.35% $ 78,959 8.00% N/A N/A The Bank 101,442 10.27% 79,007 8.00% $ 98,759 10.00% Tier 1 Capital (to Risk Weighted Assets): The Company 92,338 9.36% 39,480 4.00% N/A N/A The Bank 91,605 9.28% 39,504 4.00% 59,256 6.00% Tier 1 Capital (to Average Assets): The Company 92,338 6.49% 42,692 3.00% N/A N/A The Bank 91,605 6.43% 42,735 3.00% 71,225 5.00% As of December 31, 2003: Total Capital (to Risk Weighted Assets): The Company $ 91,694 10.46% $ 70,146 8.00% N/A N/A The Bank 91,358 10.35% 70,637 8.00% $ 88,296 10.00% Tier 1 Capital (to Risk Weighted Assets): The Company 81,913 9.34% 35,073 4.00% N/A N/A The Bank 81,576 9.24% 35,319 4.00% 52,978 6.00% Tier 1 Capital (to Average Assets): The Company 81,913 6.24% 39,367 3.00% N/A N/A The Bank 81,576 6.22% 39,318 3.00% 65,530 5.00%
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. During 2004 the Company repurchased 85,661 shares for approximately $2.2 million, while there were no shares repurchased during 2003. As of December 31, 2004 the Company had purchased 255,854 shares at a total cost of approximately $4.4 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 Shares in Issued Treasury ------ --------- Balance at December 31, 2002 9,815 1,097 Reacquired shares in lieu of non-performing asset (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 Reacquired shares in lieu of non-performing asset (86) 86 Issuance of stock from treasury 23 (23) ------- ------ Balance at December 31, 2004 12,747 1,115 ======= ====== 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)
2004 2003 2002 --------------------------- ------------------------ ------------------------- 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 $18,214 19,124 $0.95 $16,366 17,724 $0.92 $12,877 14,714 $0.88 ===== ===== ===== Effect of Dilutive Shares Weighted average shares if converted 352 263 186 ------ ------ ------ Diluted Earnings per Common Share Net income available to common shareholders $18,214 19,476 $0.94 $16,366 17,987 $0.91 $12,877 14,900 $0.86 ======= ====== ===== ======= ====== ===== ======= ====== =====
At December 31, 2004 257,100 stock options were excluded from the calculation of earnings per common share as they were antidilutive. There were no shares that were antidilutive at December 31, 2003 and 2002. All per share data and average shares were restated to reflect 3-for-2 stock splits declared on May 23, 2002 and January 18, 2005 and paid on July 12, 2002 and February 18, 2005, respectively. 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) 2004 2003 2002 ------ ------ ------ Professional fees ............................. $2,609 $1,568 $1,458 Data Processing ............................... 978 933 639 Directors' fees, travel and reimbursement ..... 848 690 479 All other ..................................... 3,558 3,378 2,888 ------ ------ ------ $7,993 $6,569 $5,464 ====== ====== ====== Note 17. Income Taxes Income tax expense for the years ended December 31, is summarized as follows: (in thousands) 2004 2003 2002 ------- ------- ------- Federal: current $ 8,998 $ 5,711 $ 6,586 deferred (942) 1,461 (732) State: current 688 34 242 deferred (263) 412 - ------- ------- ------- $ 8,481 $ 7,618 $ 6,096 ======= ======= ======= 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) 2004 2003 ------- ------- Deferred tax assets Excess of book over tax allowance for loan and lease losses $ 4,311 $ 4,242 Excess of book over tax depreciation 21 21 Excess of book over tax provision for benefit plan expense 1,909 1,773 Core deposit premium 211 261 Unrealized losses- securities available-for-sale 408 - Other 641 551 ------- ------- Total deferred tax assets 7,501 6,848 ------- ------- Deferred tax liabilities Unrealized gains - securities available-for-sale - 1,779 Dividend on REIT 1,228 2,456 Excess of tax over book for lease originations 587 858 Premium related to Bridge View acquisition 1,726 2,238 State taxes 503 297 Other 912 66 ------- ------- Total deferred tax liabilities 4,956 7,694 ------- ------- Net deferred tax asset (liability) $ 2,545 $ (846) ======= ======= The provision for income taxes differs from the expected statutory provision as follows: December 31, ----------------------- 2004 2003 2002 ------ ------ ------ Expected provision at statutory rate 35% 35% 35% Difference resulting from: State income tax, net of federal benefit 2 2 1 Interest income exempt from federal taxes (2) (2) (2) Bank owned life insurance (2) (3) (2) 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, 2004, undistributed net assets of the Bank were $149.4 million of which $87.3 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 consolidated 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, 2004 and 2003 the Company had a liability of $40 thousand and $140 thousand, respectively, 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) 2004 2003 --------- --------- Home equity loans $103,625 $ 89,249 Other loans 171,517 128,045 Standby letters of credit 3,193 3,534 --------- --------- $278,335 $220,828 ========= ========= The following table illustrates the Company's accounting for, and disclosure of, the issuance of certain types of guarantees as required under FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". Maximum potential Carrying amount amount of future of the Nature of the guarantee payments liability - -------------------------------------------------------------------------------- Standby letters of credit $3,193 $ - 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 non-cancelable operating leases for premises and equipment, exclusive of payments for maintenance, insurance and taxes, is summarized as follows: (in thousands) 2005 $ 2,565 2006 2,318 2007 2,174 2008 1,766 2009 1,313 2010 and thereafter 6,544 ------- Total minimum lease payments $16,680 ======= Rent expense for all leases amounted to approximately $2.6 million, $2.3 million and $1.7 million in 2004, 2003, and 2002, 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 $76 thousand, $62 thousand, and $51 thousand in 2004, 2003, and 2002, respectively. Most of the Company's operating leases are for its branch locations which contain one to four renewal options. Each option allows for an extension of the lease for a period of five years. Two directors of the Company provided legal services through affiliated firms. Fees paid for these services amounted to approximately $493 thousand, $356 thousand, and $296 thousand in 2004, 2003, and 2002, respectively. In addition, a director provided certain real estate appraisal services through an affiliated firm; fees paid for these services amounted to approximately $41 thousand and $8 thousand in 2004 and 2003, respectively. Also, this same director found a tenant for space the bank had available for lease and received a $101 thousand commission fee; this fee was paid through the listing broker. 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 counsels, 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 estimated fair values of the Company's financial instruments at December 31, are as follows: (in thousands)
---------------------------------------------------------------------- December 31, ---------------------------------------------------------------------- 2004 2003 ------------------------------ ------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- ---------- ---------- Financial assets: Cash and cash equivalents $ 33,110 $ 33,110 $ 31,435 $ 31,435 Securities held-to-maturity 14,530 15,276 19,107 20,223 Securities available-for-sale 374,199 374,199 432,953 432,953 Loans, net 924,384 929,492 786,940 794,042 ---------- ---------- ---------- ---------- $1,346,223 $1,352,077 $1,270,435 $1,278,653 ========== ========== ========== ========== Financial liabilities: Deposits $1,246,138 $1,127,185 $1,156,798 $1,157,635 Short-term borrowings 29,001 29,001 62,109 62,109 Long-term borrowings 30,000 29,631 10,000 10,149 ---------- ---------- ---------- ---------- $1,305,139 $1,185,817 $1,228,907 $1,229,893 ========== ========== ========== ==========
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 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 nonperforming 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, 2004 and 2003, 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 2004 2003 -------- -------- Assets Cash $ 1,630 $ 1,104 Securities available-for-sale - 484 Investment in subsidiaries Bank 149,422 145,889 Other 142 142 Dividends receivable - - Other assets - 8 -------- -------- Total assets $151,194 $147,627 ======== ======== Liabilities Dividends payable - - Other liabilities $ 1,040 4,434 -------- -------- 1,040 4,434 -------- -------- Stockholders' equity Common stock 5,396 5,396 Capital surplus 73,320 73,232 Retained earnings 86,542 74,710 Accumulated other comprehensive income (633) 2,434 -------- -------- 164,625 155,772 Less: Treasury stock 14,471 12,579 -------- -------- Total stockholders' equity 150,154 143,193 -------- -------- Total liabilities and stockholders' equity $151,194 $147,627 ======== ======== --------------------------------- Years Ended December 31, --------------------------------- Condensed statements of income 2004 2003 2002 -------- -------- -------- Dividends from subsidiary bank $ 11,710 $ 20,320 $ 3,107 Net gain on sale of securities 304 - $ - Other income - - 1 -------- -------- -------- Total revenues 12,014 20,320 3,108 -------- -------- -------- Interest on short-term borrowings 12 - - Operating expenses 303 225 176 -------- -------- -------- Income before equity in undistributed earnings of subsidiaries 11,700 20,095 2,932 Equity in undistributed earnings of subsidiaries 6,514 (3,729) 9,945 -------- -------- -------- Net income $ 18,214 $ 16,366 $ 12,877 ======== ======== ========
---------------------------------------- Years Ended December 31, ---------------------------------------- Condensed statements of cash flows 2004 2003 2002 -------- -------- -------- Cash flows from operating activities: Net income $ 18,214 $ 16,366 $ 12,877 Adjustments to reconcile net income to net cash provided by operating activities Net gain on sale of securities available-for-sale (304) - - Decrease in other assets 8 1,588 485 Decrease (increase) in dividends payable - (1,372) 501 Decrease in other liabilities and other (3,344) (198) (138) Equity in undistributed income of subsidiaries (6,514) 3,729 (9,945) -------- -------- -------- Net cash provided by operating activities $ 8,060 20,113 3,779 -------- -------- -------- Cash flows from investing activities: Sale of securities available-for-sale 651 - - -------- -------- -------- Net cash provided by investing activities 651 - - -------- -------- -------- Cash flows from financing activities: Cash dividends paid (6,382) (4,970) (4,321) Treasury stock (2,154) (693) (432) Common stock issued 205 354 1,685 Exercise of option shares 146 438 198 Net cash payments for the acquisition of Bridge View Bancorp - (15,768) - -------- -------- -------- Net cash used in financing activities (8,185) (20,639) (2,870) -------- -------- -------- Net increase/(decrease) in cash 526 (526) 909 Cash at beginning of year 1,104 1,630 721 -------- -------- -------- Cash at end of year $ 1,630 $ 1,104 $ 1,630 ======== ======== ======== 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 2004 Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------------ Interest income $15,671 $15,998 $16,876 $17,555 Interest expense 3,137 3,062 3,416 4,039 Net Interest income 12,534 12,636 13,460 13,516 Provision for loan losses 375 300 300 225 Net gain on sale of securities 514 305 163 462 Non-interest income, excluding net gain on sale of securities 2,001 2,387 2,714 2,911 Non-interest expenses 8,917 8,798 9,267 9,026 Income before income taxes 5,757 6,530 6,770 7,638 Net income 3,986 4,355 4,661 5,212 Basic earnings per common share $ 0.21 $ 0.23 $ 0.25 $ 0.27 Diluted earnings per common share $ 0.21 $ 0.23 $ 0.24 $ 0.27 - ------------------------------------------------------------------------------------------------------------------------------------ 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 $ 0.23 $ 0.23 $ 0.23 $ 0.23 Diluted earnings per common share $ 0.23 $ 0.23 $ 0.23 $ 0.22
All per share data has been restated to reflect a 3-for-2 stock split declared on January 18, 2005 and paid on February 18, 2005. 52 EX-21 6 e20571ex21.txt SUBSIDIARIES OF THE REGISTRANT 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 7 e20571ex31-1.txt CERTIFICATION OF PRESIDENT, ANTHONY S. ABBATE 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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 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 16, 2005 /s/ Anthony S. Abbate ------------------------------------- Anthony S. Abbate President and Chief Executive Officer EX-31 8 e20571ex31-2.txt CERTIFICATION OF CFO, CHARLES T. FIELD 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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 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 16, 2005 /s/ Charles T. Field ----------------------------- Charles T. Field Senior Vice President and CFO EX-32 9 e20571ex32.txt CERTIFICATION PURSUANT TO SECTION 906 OF SOX 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, 2004, (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 Date: March 16, 2005 -----END PRIVACY-ENHANCED MESSAGE-----