-----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, RiT5f1d0IJPtbNpEA9b5dajv3AbRZwB7RuCqqfzvLM4soJsiRoED5oLlhcSd77KB kmJm5Vv3EfQGOqK2OT27DQ== 0000755933-06-000020.txt : 20060501 0000755933-06-000020.hdr.sgml : 20060501 20060501165018 ACCESSION NUMBER: 0000755933-06-000020 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060501 DATE AS OF CHANGE: 20060501 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10518 FILM NUMBER: 06795795 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/A 1 amended10k123105.txt 10-K/A AS OF 12/31/2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-K/A ----------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005 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 (IRS Employer incorporation) 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 check mark whether the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes |_| No |X| Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Exchange Act. Yes |_| No |X| 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. Yes |X| No |_| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (check one): |_| Large Accelerated Filer |X| Accelerated Filer |_| Non-accelerated Filer Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| The aggregate market value of registrant's voting stock held by non-affiliates of the registrant on June 30, 2005 based on the average bid and ask price for such stock on that date was approximately $351,544,000. The number of outstanding shares of the Registrant's common stock, no par value per share, as of February 28, 2006, was 20,327,867. EXPLANATORY NOTE AS TO PURPOSE OF THIS AMENDMENT This Amendment No. 1 on Form 10-K/A to the Annual Report on Form 10-K of Interchange Financial Services Corporation (the "Company") for the fiscal year ended December 31, 2005 is being filed for the purpose of providing the information required by Part III of the Annual Report on Form 10-K, which the Company is no longer incorporating by reference to its proxy statement. Part III is hereby amended and restated in its entirety. As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), new certifications of our principal executive officer and principal financial officer are being filed as exhibits to this Amendment No. 1 on Form 10-K/A. No other information contained in the original filing is amended hereby. This amendment does not modify or update disclosures in the original filing. Furthermore, except for the matters described above, this amendment does not change any previously reported financial results, nor does it reflect events occurring after the date of the original filing. INTERCHANGE FINANCIAL SERVICES CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K PART I PAGE Item 1. Business............................................................1 Item 1A. Risk Factors........................................................8 Item 1B. Unresolved Staff Comments...........................................10 Item 2. Properties..........................................................10 Item 3. Legal Proceedings...................................................10 Item 4. Submission of Matters to a Vote of Security Holders.................10 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities......................11 Item 6. Selected Financial Data.............................................12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........35 Item 8. Financial Statements and Supplementary Data.........................39 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........................78 Item 9A. Controls and Procedures.............................................78 Item 9B. Other Information...................................................81 PART III Item 10. Directors and Executive Officers of the Registrant..................81 Item 11. Executive Compensation..............................................87 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters..................92 Item 13. Certain Relationships and Related Transactions......................94 Item 14. Principal Accounting Fees and Services..............................95 PART IV Item 15. Exhibits, Financial Statement Schedules.............................97 Signatures...................................................................99 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 has three other wholly owned direct subsidiaries: Clover Leaf Mortgage Company, a New Jersey corporation established in 1988, which is not currently engaged in any business activity; and Interchange Statutory Trust I and Interchange Statutory Trust II, which were formed for the sole purpose of issuing trust preferred securities. The Company does not qualify as the primary beneficiary for our wholly-owned trusts in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46) and FIN No. 46(R), "Consolidation of Variable Interest Entities." As a result, these trusts are not consolidated. 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, 2005, the Company had consolidated assets of approximately $1.6 billion, deposits of approximately $1.3 billion and shareholders' equity of approximately $179.0 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 thirty (30) banking offices and one (1) supermarket mini-branch in Bergen and Essex Counties, New Jersey. The Bank maintains thirty-four (34) automated teller machines (operating within the StarTM , PlusTM, CIRRUSTM, VISATM, NYCETM, and MasterCardTM networks), which are located at thirty of the banking offices, a supermarket, and the Bank's operations center. Subsidiaries of the Bank include: FCBC, LLC established in 2004 to hold a 49% investment in Benjamin Title LLC, a title insurance company, 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; 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 Bank's subsidiaries are organized under New Jersey law and are 100% owned by the Bank. Clover Leaf Investment Corporation has 99% ownership of one subsidiary, 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 has one wholly owned subsidiary, Bridge View Delaware, Inc. ("BVDI"). BVDI is an investment company operating pursuant to Delaware law. 1 Growth of the Company and the Bank __________________________________ On October 13, 2005 the Company completed its acquisition of Franklin Bank ("Franklin"), a one branch bank operating in Nutley, Essex County, New Jersey. At October 13, 2005 Franklin had approximately, $87.0 million in total assets, $77.2 million in total loans and $76.0 million in deposits. Under the terms of the agreement, the total consideration to be received by Franklin shareholders in the merger is fixed at 1,323,575 shares of the common stock of the Company. Based upon the Company's average closing stock price three days prior to and after the date of announcement of the acquisition which occurred on June 23, 2005 of $17.94, the transaction represents total consideration of approximately $24.9 million, including approximately $1.2 million for the cash payment for option holders. Under the definitive agreement, each Franklin shareholder received 1.2264 Company shares for each Franklin share held immediately prior to the merger. The acquisition was accounted for as a purchase and the cost in excess of fair value acquired was allocated first to net identified intangibles and then to goodwill. Based on the fair values the Company recorded goodwill of approximately $13.0 million. The Company's acquisition of Franklin is intended to further enhance Interchange's presence in northern New Jersey. As a result of the acquisition, the Bank now operates 30 banking offices and has approximately $1.6 billion in assets. The acquisition of Franklin was accomplished through a merger of Franklin with and into 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. 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 automobile loans. The Bank also offers a VISA(R) Credit Card and convenience services; such as, the Interchange Debit Card which allows our customers to make purchases wherever the VISA(R) 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 online banking and Bill Paying. InterBank allows our customers to access account information, process transfers between accounts, view paid check images, place a stop payment and much more. The InterBank 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 2 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, Business Check Card, Merchant Services, Lockbox and Escrow Management. The Bank also develops 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 a full service brokerage platform, including sales of annuities, mutual funds, insurance, stocks, bonds and virtually all general securities. An Investment Services Program is offered through an alliance between the Bank and Sorrento Pacific Financial, LLC ("SPF") and ICBA Financial Services, Inc. ("ICBAIS"), under which non-insured deposit products offered by SPF and ICBAIS 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 direct access, online discount brokerage services to its customers. The Bank offers securities trading through its web site, which is hyperlinked to Sorrento Pacific Financial, LLC., member NASD/SIPC, so that customers can access their brokerage 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 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 3 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. Personnel _________ The Company had 322 full-time-equivalent employees at year-end 2005. 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. 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 4 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. 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. 5 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 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, 2005, 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. The Basel Committee on Banking Supervision presented its "Basel II" regulatory capital guidelines in July 2004, which would require changes by large banks in the way in which their risk-based capital requirements are calculated. Federal banking regulators are considering the extent and timing of application of the guidelines to U.S. depository institutions. It is uncertain at the present time if Interchange will be either required or permitted to make changes in its regulatory capital structure in accordance with Basel II guidelines. The Bank 6 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. Future Legislation __________________ Various legislation ranging from consumer protection legislation to additional legislation proposing to substantially change the financial institution regulatory system is considered by Congress from time to time. Future legislation may change banking statutes and our operating environment in substantial and unpredictable ways. For instance, new legislation could increase or decrease the cost of doing business, limit or expand permissible activities, or change the competitive balance among various types of financial institutions. We cannot predict whether any legislation will be enacted that would have a material effect on our business. 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. 7 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," 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 undertake no obligation to update forward-looking statements or to make any public announcement when we consider forward-looking statements in this document to be no longer accurate, whether as a result of new information, what actually happens in the future or for any other reason. Item 1A. Risk Factors The following are certain risks that management believes are specific to our business. This should not be viewed as an all inclusive list or in any particular order. Future loan losses may exceed our allowance for loan losses ___________________________________________________________ We are subject to credit risk, which is the risk of losing principal or interest due to borrowers' failure to repay loans in accordance with their terms. A downturn in the economy or the real estate market in our market areas or a rapid change in interest rates could have a negative effect on collateral values and borrowers' ability to repay. This deterioration in economic conditions could result in losses to the Bank in excess of loan loss allowances. To the extent loans are not paid timely by borrowers, the loans are placed on non-accrual, thereby reducing interest income. To the extent loan charge-offs exceed our financial models, increased amounts charged to the provision for loan losses would reduce income. Rapidly changing interest rate environments could reduce our net interest _________________________________________________________________________ margin, net interest income, fee income and net income ______________________________________________________ Interest and fees on loans and securities, net of interest paid on deposits and borrowings, are a large part of our net income. Interest rates are key drivers of our net interest margin and subject to many factors beyond the control of management. As interest rates change, net interest income is affected. Rapid increases in interest rates in the future could result in interest expense increasing faster than interest income because of mismatches in financial instrument maturities. Further, substantially higher interest rates generally reduce loan demand and may result in slower loan growth particularly in construction lending, an important factor in the company's revenue growth over the 8 past two years. Decreases or increases in interest rates could have a negative effect on the spreads between the interest rates earned on assets and the rates of interest paid on liabilities, and therefore decrease net interest income. See "Quantitative and Qualitative Disclosures about Market Risk." Slower than anticipated growth in loans and deposits and new product and ________________________________________________________________________ service offerings could result in reduced net income ____________________________________________________ We have placed a strategic emphasis on growing our loans and deposit base and product offerings. Executing this strategy carries risks of slower than anticipated growth in loans, deposits and new products. Acquiring loans, deposits or products requires a significant investment of both financial and personnel resources. Lower than expected loan and deposit growth can decrease anticipated revenues and net income generated by those investments, and introducing new products could result in more additional expenses than anticipated and divert resources from current core operations. The financial services industry is very competitive ___________________________________________________ We face competition in attracting and retaining deposits, making loans, and providing other financial services throughout our market area. Our competitors include other community banks, larger banking institutions, and a wide range of other financial institutions such as credit unions, government-sponsored enterprises, mutual fund companies, insurance companies and other non-bank businesses. Many of these competitors have substantially greater resources than us. For a more complete discussion of our competitive environment, see "Business--Competition" in Item 1 above. If we are unable to compete effectively, we will lose market share and income from deposits, loans, and other products may be reduced. Decreased volumes and lower gains on sales of mortgage and SBA loans sold _________________________________________________________________________ could adversely impact net income _________________________________ We originate and sell mortgage and certain Small Business Administration ("SBA") loans. Changes in interest rates affect demand for our loan products and the revenue realized on the sale of loans. A decrease in the volume of loans sold can decrease our revenues and net income. Inability to hire or retain certain key professionals, management and staff ___________________________________________________________________________ could adversely affect our revenues and net income __________________________________________________ We rely on key personnel to manage and operate our business, including major revenue generating functions such as our loan and deposit portfolios. The loss of key staff may adversely affect our ability to maintain and manage these portfolios effectively, which could negatively effect our revenues. In addition, loss of key personnel could result in increased recruiting and hiring expenses, which could cause a decrease in our net income. Limited geographic area and subject to concentration in those areas ___________________________________________________________________ The Company's profitability is dependent on the profitability of the Bank, which operates almost exclusively in the state of New Jersey, with substantial concentrations of its activities and assets primarily in New Jersey's Bergen and Essex Counties. In addition to adverse changes in general conditions in the United States, unfavorable changes in local economic conditions affecting the areas in which the Bank operates may have a significant adverse impact on operations of the Company. Highly regulated environment and may be affected by changes in laws and _______________________________________________________________________ regulations ___________ The Bank is subject to federal and state banking laws. As a bank holding company, the Company is subject to the Bank Holding Company Act. As a public company, the Company is subject to legal restrictions and requirements, including reporting requirements, of the SEC, 9 including regulations promulgated following passage by Congress of the Sarbanes-Oxley Act. The regulations that most directly affect the Company and the Bank are in the areas of deposit gathering, lending, asset quality, capital adequacy, customer privacy, financial reporting and financial controls. The Company's policy is to fully comply with all regulatory requirements and the Company is periodically examined by the Federal Reserve Board. The Bank is periodically examined by both the state banking regulators and the Federal Reserve Board. Non-compliance with any applicable regulation could have material adverse consequences to the Company. Item 1B. Unresolved Staff Comments None. Item 2. Properties The Company leases twenty-one banking offices, one mini-branch within a supermarket, one operations/support facility and one administrative/executive facility. It owns seven banking offices and leases land on which it owns two bank buildings. All of the facilities are located in Bergen County, New Jersey, with the exception of the Nutley Branch in Essex County, 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, 2005. 10 Part II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common stock is presently listed for quotation on the Nasdaq National Market System under the symbol "IFCJ". At January 31, 2006, there were approximately 1,060 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: High Low Cash Sales Sales Dividends Price Price Declared ----------- ------------ ---------- 2005 First quarter . . . . $ 18.61 $ 16.54 $ 0.09 Second quarter . . . . 19.30 16.90 0.09 Third quarter . . . . 19.96 16.66 0.09 Fourth quarter . . . . 18.37 15.60 0.09 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 ____________________________________________________________________ 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 $0.08 and $0.09 was declared on each common share outstanding in each quarter during 2004 and 2005, 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 19 of Notes to Consolidated Financial Statement for additional information. 11 Issuer Purchases of Equity Securities _____________________________________ Set forth below is certain information regarding repurchase of our common stock during the quarter:
Total Number of Shares Maximum Number of Total Number Average Price Purchased as Part of the Shares That May Yet Be of Shares Paid Per 2005 Stock Repurchase Purchased Under the Period Purchased (1) Share Plan (2) Plan - ------------------------------------ -------------- ------------------------- ------------------------ 10/1/05 - 10/31/05 - - - - 11/1/05 - 11/30/05 78,063 17.92 78,063 870,014 12/1/05 - 12/31/05 243,674 18.02 321,737 626,340 -------------- ------------ ------------------------- ----------------------- Total for Quarter 321,737 17.99 ============== ============
(1) Shares purchased by the Company during the quarter include shares purchased pursuant to the Company's stock repurchase program publicly announced in June 2005 and shares owned and tendered by employees and directors in accordance with the Stock Option and Incentive Plan of 1997, as amended, the 2005 Omnibus Stock and Incentive Plan and the Outside Directors Incentive Compensation. See Note 14 of Notes to Consolidated Financial Statements for additional information. (2) Under the repurchase plan, the board of directors authorized the Company to purchase up to 950,000 common shares. 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 appearing elsewhere in this report and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations." 12
CONSOLIDATED FINANCIAL HIGHLIGHTS Years Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------ 2005 (1) 2004 2003 (2) 2002 2001 ----------- ----------- ------------ ----------- ---------- Income Statement Data (in thousands) Interest income $ 78,495 $ 66,100 $ 60,267 $ 56,500 $ 57,402 Interest expense 23,362 13,654 13,874 17,478 23,444 ---------- ----------- ------------ ----------- ---------- Net interest income 55,133 52,446 46,393 39,022 33,958 Provision for loan losses 925 1,200 1,815 1,500 1,075 ---------- ----------- ------------ ----------- ---------- Net interest income after provision for loan losses 54,208 51,246 44,578 37,522 32,883 Non-interest income 10,381 11,457 10,645 6,514 5,578 Non-interest expenses 35,700 36,008 31,239 25,063 22,873 ---------- ----------- ------------ ----------- ---------- Income before income taxes 28,889 26,695 23,984 18,973 15,588 Income Taxes 9,184 8,481 7,618 6,096 5,048 ---------- ----------- ------------ ----------- ---------- Net income $ 19,705 $ 18,214 $ 16,366 $ 12,877 $ 10,540 ========== ========== =========== ========== ========== Per Share Data Basic earnings per common share $ 1.01 $ 0.95 $ 0.92 $ 0.88 $ 0.72 Diluted earnings per common share 0.99 0.94 0.91 0.86 0.72 Cash dividends declared 0.36 0.33 0.29 0.27 0.24 Special Cash Dividend - - - 0.03 - Book value 8.89 7.85 7.45 5.48 4.69 Tangible book value (3) 5.20 4.74 4.39 5.37 4.69 Weighted average shares outstanding (in thousands) Basic 19,418 19,124 17,724 14,714 14,667 Diluted 19,835 19,476 17,987 14,899 14,734 Balance Sheet Data--end of year (in thousands) Total assets $1,631,386 $1,464,141 $ 1,385,872 $ 936,332 $ 830,949 Securities held-to-maturity and securities available-for-sale 356,466 388,729 452,060 252,512 193,902 Loans and leases 1,105,969 934,181 796,581 615,641 581,323 Allowance for loan and lease losses 10,646 9,797 9,641 7,207 6,569 Total deposits 1,260,108 1,246,138 1,156,797 815,672 726,483 Securities sold under agreements to repurchase 3,939 4,401 15,618 17,390 6,700 Short-term borrowings 46,150 24,600 46,491 - 18,100 Long-term borrowings and subordinated debentures 130,953 30,000 10,000 10,000 - Total stockholders' equity $ 179,002 $ 150,155 $ 143,193 $ 80,680 $ 68,233 Selected Performance Ratios Return on average total assets 1.28 % 1.29 % 1.35 % 1.43 % 1.31 % Return on average total stockholders' equity 12.38 12.54 13.54 17.35 16.06 Dividend Payout 35.59 35.03 30.37 33.56 33.37 Average total stockholders' equity to average total assets 10.38 10.25 9.95 8.27 8.13 Net yield on interest earning assets (taxable equivalent) (4) 4.05 4.16 4.29 4.68 4.49 Non-interest income to average total assets 0.68 0.81 0.88 0.73 0.69 Non-interest expense to average total assets 2.33 2.54 2.57 2.79 2.83 Asset Quality--end of year (in thousands) Nonaccrual loans and leases to total loans and leases 0.32 % 0.98 % 1.08 % 0.97 % 0.37 % Nonperforming assets to total assets 0.23 0.63 0.63 0.66 0.34 Allowance for loan and lease losses to nonaccrual loans and lease 299.21 107.27 112.50 120.86 304.12 Allowance for loan and lease losses to total loans and leases 0.96 1.05 1.21 1.17 1.13 Net charge-offs to average loans and leases 0.11 0.12 0.18 0.14 0.11 Liquidity and Capital Average loans and leases to average deposits 80.73 % 72.63 % 69.39 % 78.21 % 81.77 % Total stockholders' equity to total assets 10.97 10.26 10.33 8.62 8.21 Tier 1 capital to risk weighted assets 8.20 9.36 9.34 12.16 11.74 Total capital to risk weighted assets 11.02 10.35 10.46 13.33 12.89 Tier 1 capital to average assets 11.93 6.49 6.24 8.12 8.09 - --------------------------------------------------------------------------------------------------------------------------------- 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. (1) On October 13, 2005, the Company completed its acquisition of Franklin Bank ("Franklin"). Franklin operated one branch in Nutley, Essex County, New Jersey. At acquisition date Franklin had approximately $87 million in total assets, $77 million in loans and $76 million in deposits without giving effect to any purchase accounting adjustments. The Company's results of operations include Franklin from acquisition date. The transaction was accounted for as a purchase and the assets and liabilities of former Franklin were recorded at their respective fair values as of October 13, 2005. Based on the fair values, the significant purchase accounting adjustments recorded by the Company related to: core deposit intangibles of $2.4 million and goodwill of $13.0 million. (2) 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.
13
(3) Tangible book value is calculated by dividing 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 and therefore may not be comparable. 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. 2005 2004 2003 (2) 2002 2001 ------------ ----------- ----------- ----------- ---------- Total stockholders' equity $ 179,002 $ 150,155 $ 143,193 $ 80,680 $ 68,233 Less: goodwill and other intangible assets 74,379 59,612 58,826 1,678 - ------------ ----------- ----------- ----------- ---------- Total tangible capital $ 104,623 $ 90,543 $ 84,367 $79,002 $68,233 ============ =========== =========== =========== ========== Total shares issued 20,139 19,120 19,215 14,723 14,536 Tangible book value per share $5.20 $4.74 $4.39 $5.37 $4.69 (4) Net yield on interest earning assets (taxable equivalent) is calculated by dividing net interest income (on a fully taxable equivalent basis utilizing a 34% effective tax rate) by average interest earning assets. This measure represents a non-GAAP measurement and may not be consistently calculated throughout the industry and therefore may not be comparable. Management believes that this non-GAAP measurement provides a meaningful way to analyze the Company's net interest income year over year and versus the industry. 2005 2004 2003 (2) 2002 2001 ----------- ---------- ----------- -------- ---------- Net interest income $ 55,133 $ 52,446 $ 46,393 $ 39,022 $ 33,958 Tax-equivalent basis adjustment 1,067 643 533 376 324 ----------- ---------- ---------- -------- ---------- Net interest income (on a fully taxable equivalent basis) $ 56,200 $ 53,089 $ 46,926 $ 39,398 $ 34,282 =========== ========== ========== ======== ========== Average interest earning assets $1,389,154 $1,275,734 $1,093,373 $842,191 $764,218 Net yield on interest earning assets (taxable equivalent) 4.05 % 4.16 % 4.29 % 4.68 % 4.49 %
Item 7. 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 Financial Statements and Notes thereto in Item 8. "Financial Statements and Supplemental Data" and Item 6. "Selected Financial Data" included elsewhere in this report. Overview The Company is a community bank primarily operating in Bergen County, New Jersey, 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 84%, 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. 2005 continued to challenge the financial services sector, particularly those institutions that rely on spread management such as ours. The yield curve which had begun flattening in 2004 continued its unrelenting flattening throughout most of 2005. The flattening was a result of persistent 25 basis point increases in the federal funds rate at each meeting of the Federal Reserve Open Market Committee, which totaled 325 basis points over the past 18 months while long-term rates, the ten year treasury, decreased 22 basis points. The yields between the 2 and 5 year treasuries even inverted for a period of time. In addition to the influence the yield curve has on pricing, competitors also have been aggressively and at times imprudently pricing both deposits and loans. Our approach in meeting the challenges outlined has been to compete strategically on pricing of loans and deposits while utilizing alternative funding sources when opportunities arise to mitigate the cannibalization or disintermediation of our deposit base. Utilizing this approach has resulted in 14 successfully growing our commercial loans by over 20% on average year over year. These results were also achieved from our retooling of our commercial credit department which should assist in our ability to replicate the growth. We also saw a strong increase in our gains on sales of loans of the guaranteed portion of SBA loans, and although the recognition of such gains may not be linear on a quarterly basis; year over year we expect to see further growth. Funding our loan growth was a mixture of cash flows from our investment portfolio, growth in deposits and strategic borrowings. Our investment portfolio is well positioned to take advantage of the rise that has occurred in short-term rates as approximately $185 million of cash flows will be reinvested over the next year. The cash flows from the investment portfolio reinvestment rate should be between 225 and 450 basis points higher than we are currently realizing depending on whether the cash flows are reinvested into securities or loans. The structure of the cash flows was pre-designed to take advantage of the impending, and now realized, Federal Reserve rate hikes. The pre-designed cash flows from the securities are mainly attributable to securities purchased during 2003 at a time when real rates were at or near their lowest in 45 years. These securities were purchased at a time when significant inflows from deposits were occurring and we determined that the strategically sound approach was to maximize returns while mitigating extension risk. The short-term impact of specifically avoiding stretching for rate contributed to earnings pressure, however the long-term benefits should more than exceed the forgone income. Deposit average balances grew 4% year over year, excluding our acquisition of Franklin Bank ("Franklin"). Our growth in deposits was curtailed by our decisions that it was not always in the Company's best interests to compete on pricing, particularly when rates offered on short-term deposit products by the competitors at times exceeded the longer-term reinvestment rates or could not be reinvested at rates commensurate with the risks. Although, an increase in deposits may look good in reporting balance sheet growth it does not necessarily provide overall shareholder value. We continued our march forward as we expanded beyond Bergen County with the completion of our acquisition of Franklin during the fourth quarter. Franklin provides us with an exceptional platform to realize core loan and deposit growth. We intend to expand our branch network and service offerings further into Essex and other adjacent counties and we have already located a number of sites. While growing our non-interest income we sought opportunities to reduce and/or curtail our non-interest expense through well thought out and thorough process and program reviews. These reviews lead to the freezing of the qualified pension plan along with the Director's retirement plan and the defined benefit portion of the Supplemental Executive Retirement Plan effective December 31, 2005. In addition, our ability to work through non-performing loans has resulted in non-performing loans decreasing 61% as compared to December 31, 2004 and resulted in our allowance to non-performing loans as a percentage increasing to 299% from 107%. This along with other factors lead to a decrease in the provision for loan and leases losses as compared to the prior year. Return on average ("ROA") assets was 1.28%, for 2005 as compared to 1.29% for 2004. Our ROA has exceeded 1.20% since 1995. Our return on average equity ("ROE") was 12.38% versus 12.54% for 2005 and 2004 respectively. In summary, both profit and growth were achieved in 2005 without sacrificing one for the other. The challenges presented over the last several years, from interest rates falling to the lowest levels in 45 years through the flattening of the yield curve in 2004 and continuing into 2005, have all been met with keeping both growth and profits in mind. To that end we were able to maintain a margin above 4% and continued in a select group of banks as of June 30, 2005 based upon SNL data, with assets between $1-5 billion, which maintained an ROA above 1.20% and a tangible ROE which exceeded 19%. Only 24, of which we were one, out of 154 banks were able to have returns which exceeded 1.20% and a tangible ROE of 19% or better over the last 3 years. 15 Earnings Summary Net income was a record $19.7 million for the year 2005 and increased $1.5 million, or 8.2% when compared to 2004. Earnings per basic common share for the year ended December 31, 2005 increased $0.06 to $1.01 as compared to $0.95 for the preceding year, an increase of 6.3%. Earnings per diluted common share for the year ended December 31, 2005 increased $0.05 to $0.99 from $0.94 for the preceding year, an increase of 5.3%. For 2005, the Company's ROA was 1.28% as compared to 1.29% in 2004. The Company's ROE was 12.38% in 2005 as compared to 12.54% 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 $0.40 for 2006 as compared to $0.36 in 2005, an 11.1% increase. Net income was $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 ROA was 1.29% as compared to 1.35% in 2003. The Company's 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. Table 1 - ------------------------------------------------------------------------------- Summary of Operating Results - ------------------------------------------------------------------------------- 2005 2004 2003 ------------- ---------- ----------- Net income (in thousands) $ 19,705 $ 18,214 $ 16,366 Basic earnings per common share 1.01 0.95 0.92 Diluted earnings per common share 0.99 0.94 0.91 Return on average total assets 1.28 % 1.29 % 1.35 % Return on average total equity 12.38 % 12.54 % 13.54 % Dividend payout ratio* 35.59 % 35.03 % 30.37 % Average total stockholders'equity to average total assets 10.38 % 10.25 % 9.95 % * Cash dividends declared on common shares to net income. 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. Results of Operations _____________________ Net Interest 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, 2005, 2004 and 2003, 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 16 2005 and 2004, 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.
Table 2 - ----------------------------------------------------------------------------------------------------------------------------------- Analysis of Net Interest Income - ----------------------------------------------------------------------------------------------------------------------------------- for the years ended December 31, (dollars in thousands) 2005 2004 2003 --------------------------- ----------------------------- ---------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate --------------------------- ----------------------------- ---------------------------- Assets Interest earning assets Loans (1) $1,018,245 $66,530 6.53 % $ 872,322 $54,314 6.23 % $ 729,581 $49,142 6.74 % Taxable securities (2) 301,749 9,922 3.29 357,641 10,612 2.97 304,418 10,034 3.30 Tax-exempt securities (2)(3) 66,252 2,996 4.52 35,438 1,666 4.70 27,737 1,287 4.64 Interest earning deposits 3 - - 8 - - 5,810 61 1.05 Federal funds sold 2,905 114 3.82 10,325 151 1.46 25,827 276 1.07 ---------- -------- ------- ---------- -------- ------- ---------- -------- ------- Total interest-earning assets 1,389,154 $79,562 5.73 % 1,275,734 66,743 5.23 % 1,093,373 60,800 5.56 % -------- -------- -------- Non-interest earning assets Cash and due from banks 36,473 36,181 34,316 Allowance for loan and lease losses (10,300) (9,829) (8,762) Other assets 119,280 114,525 96,646 ---------- ----------- ----------- Total assets $1,534,607 $ 1,416,611 $ 1,215,573 ========== =========== =========== Liabilities and stockholders' equity Interest-bearing liabilities Demand deposits $ 471,194 8,218 1.74 % $ 471,489 4,881 1.04 % $ 395,408 4,700 1.19 Savings deposits 219,726 2,389 1.09 203,451 1,136 0.56 199,127 1,408 0.71 Time deposits 322,302 9,019 2.80 293,609 6,373 2.17 273,382 7,053 2.58 Short-term borrowings 44,990 1,153 2.56 29,080 359 1.23 17,875 285 1.59 Long-term borrowings 57,938 2,583 4.46 28,863 905 3.14 10,000 428 4.28 ---------- -------- ------- ---------- -------- --------- --------- ------- ------ Total interest-bearing liabilities 1,116,150 23,362 2.09 % 1,026,492 13,654 1.33 % 895,792 13,874 1.55 % -------- -------- ------- Non-interest bearing liabilities Demand deposits 248,017 232,513 183,451 Other liabilities 11,210 12,393 15,434 ---------- ----------- ----------- Total liabilities (4) 1,375,377 1,271,398 1,094,677 Stockholders' equity 159,230 145,213 120,896 ---------- ----------- ----------- Total liabilities and stockholders' equity $1,534,607 $ 1,416,611 $ 1,215,573 ========== =========== =========== Net interest income (tax-equivalent basis) 56,200 3.63 % 53,089 3.90 % 46,926 4.01 % Tax-equivalent basis adjustment (1,067) (643) (533) -------- -------- ------- Net interest income $55,133 $52,446 $46,393 ======== ======== ======= Net interest income as a percent of interest-earning assets (tax-equivalent basis) (5) 4.05 % 4.16 % 4.29 % - ---------------------------------------------------------------------------------------------------------------------------------- (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% for 2005. (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% for 2005. (4) All deposits are in domestic bank offices. (5) Net interest margin
17
Table 3 - ------------------------------------------------------------------------------------------------------------------------------- Effects of Volume and Rate Changes on Net Interest Income - ------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Year ended December 31, Year ended December 31, 2005 compared with 2004 2004 compared with 2003 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) $9,432 $2,784 $12,216 $9,615 $(4,443) $5,172 Taxable securities (1,836) 1,149 (687) 1,754 (1,176) 578 Tax-exempt securities (2) 1,449 (119) 1,330 362 17 379 Interest bearing deposits (284) 244 (40) (61) - (61) Federal funds sold - - - (323) 198 (125) ------- ------- ------- ------- ------- ------- Total interest income 8,761 4,058 12,819 11,347 (5,404) 5,943 ------- ------- ------- ------- ------- ------- Interest expense Demand deposits (5) 3,342 3,337 904 (723) 181 Savings deposits 98 1,155 1,253 31 (303) (272) Time deposits 668 1,978 2,646 594 (1,274) (680) Short-term borrowings 268 526 794 179 (105) 74 Long-term borrowings 1,183 495 1,678 807 (330) 477 ------- ------- ------- ------- ------- ------- Total interest expense 2,212 7,496 9,708 2,515 (2,735) (220) ------- ------- ------- ------- ------- ------- Change in net interest income $6,549 $(3,438) $3,111 $8,832 $(2,669) $6,163 ------- ------- ------- ------- ------- ------- - --------------------------------------------------------------------------------------------------------------------------------
(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 $56.2 million in 2005, an increase of $3.1 million, or 5.9%, from $53.1 million in 2004. The increase in net interest income was largely due to growth in average interest-earning assets of $113.4 million. The interest earning asset growth was funded by a $60.2 million growth in average deposits and a $45.0 million growth in average borrowings. The growth in average deposits occurred mostly in time deposits. The growth in interest earning assets and deposits were partly due to the Franklin acquisition. The aforementioned increase in net interest income was achieved despite an 11 basis point decline in the margin. The change in the margin was attributable to the increase in the Company's funding cost resulting from an increase in interest rates and a shift in our funding mix. Interest income, on a tax-equivalent basis, totaled $79.6 million for 2005, an increase of $12.8 million, or 19.2%, as compared to 2004. For the year ended December 31, 2005 and 2004, the tax equivalent basis adjustments to interest income were $1.1 million and $643 thousand, respectively. The increase was attributed to a growth in interest earning assets of $113.4 million, which was largely due to increases in average loans of $145.9 million. The increase in loans occurred mostly in commercial loans, which grew by $134.0 million. The increase in interest income was partly due to a 50 basis point increase in interest earning asset yields for 2005 as compared to 2004. The increase in interest earning asset yields was largely attributable to the increase in market interest rates and a change in our asset mix. Interest expense totaled $23.4 million in 2005, an increase of $9.7 million, or 71.1%, as compared to 2004. The increase was principally due to an increase in the average rates paid on interest-bearing liabilities of 76 basis points to 2.09% in 2005 as compared to 1.33% in 2004, which was mostly due to an increase in deposit rates paid. The increase in interest expense was largely due to an increase in rates paid on interest-bearing demand and time deposits of 70 basis points and 63 18 basis points, respectively, for 2005 as compared to 2004. Contributing to the increase in interest expense was the growth in average interest-bearing liabilities which occurred primarily in borrowings, time deposits and savings, which increased $45.0 million, $28.7 million and $16.3 million, respectively. 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 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. 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 was $10.4 million for the year ended December 31, 2005 as compared to $11.5 million for the same period in 2004. The decrease in non-interest income was primarily due to a decrease in the net gain of sale of securities of $1.1 million. Increases occurred in BOLI and "other" income of $103 thousand and $230 thousand, respectively. A contributor to the increase in other income was commercial loan prepayment penalties which increased $426 thousand to $854 thousand. The aforementioned increases were offset by decreases in commissions on mutual funds and annuities, service charges on deposits and net gain on sale of loans and leases of $170 thousand, $166 thousand and $23 thousand, respectively. The decrease in the net gain on sale of loans was attributable to a decrease in the gain on sale of residential mortgage loans and syndication fees of 19 $149 thousand and $80 thousand offset by an increase in the gain on sale of the guaranteed portion of Small Business Administration ("SBA") loans of $206 thousand or 27.3% as compared to prior year. 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. Net gains on the sale of loans and leases was $1.3 million for 2004 as compared to $769 thousand for 2003, an increase of $548 thousand primarily resulting from an increase in the sale of the guaranteed portion of SBA 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.
Table 4 - ----------------------------------------------------------------------------------- Non-interest Income - ----------------------------------------------------------------------------------- for the years ended December 31, (dollars in thousands) 2005 2004 2003 -------- --------- -------- Service fees on deposit accounts $3,587 $ 3,753 $ 3,485 Net gain on sale of securities 394 1,444 793 Net gain on sale of loans and leases 1,294 1,317 769 Bank owned life insurance 1,094 993 2,019 Commissions on sales of annuities and mutual funds 743 913 883 All other 3,269 3,037 2,696 -------- --------- -------- Total $ 10,381 $ 11,457 $ 10,645 ======== ========= ========
Non-interest Expense Non-interest expense was $35.7 million for the year ended December 31, 2005, a decrease of $308 thousand, or 0.9%, as compared to the same period in 2004. During 2005, the Company recognized a $1.2 million gain due to the curtailment of the defined benefit pension plan. The curtailment should provide a benefit in future years of approximately $500 thousand per year without giving effect to additional benefits that may have been paid as a result of an increase in years of service or additional staff. Excluding the $1.2 million gain relating to the defined benefit pension plan, non-interest expense increased $908 thousand, or 2.5%. The increase was primarily attributable to an increase in salaries and benefits of $1.1 million, or 5.5%. Also contributing to this increase were increases in occupancy and data processing of $300 thousand and $186 thousand, respectively, over the same period last year. The increases in the aforementioned were a result of normal anticipated growth. The increases were offset partially by decreases in legal fees, "directors' fees, travel and retirement", and advertising and promotion of $393 thousand, $146 thousand and $109 thousand, respectively, over the same period last year. 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, occupancy, and professional fees of $2.5 million, $706 thousand, and $1 million, respectively. 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 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 the increase in legal expenses primarily as a result of collection efforts. 20 Table 5 - -------------------------------------------------------------------------------- Non-interest Expense - -------------------------------------------------------------------------------- for the years ended December 31, (dollars in thousands) ------------ ------------ ------------ 2005 2004 2003 ------------ ------------ ------------ Salaries and benefits $ 19,325 $ 19,463 $ 16,994 Occupancy 5,583 5,283 4,577 Furniture and equipment 1,267 1,309 1,327 Advertising and promotion 1,347 1,456 1,412 Amortization of intangble assets 571 504 360 Other expenses Professional fees 2,227 2,609 1,568 Data processing 1,164 978 933 All other 4,216 4,406 4,068 ------------ ------------ ------------ Total $35,700 $ 36,008 $ 31,239 ============ ============ ============ Income Taxes In 2005, income taxes amounted to $9.2 million as compared to $8.5 million and $7.6 million for 2004 and 2003, respectively. Effective February 6, 2006 the New Jersey Division of Taxation amended certain provisions of the tax code which effectively eliminated the Company's ability to utilize the dividend received deduction for it's real estate investment trust subsidiary going forward. As such it is anticipated that our effective tax rate may increase as a result of the change. The effective tax rate was 31.8% for 2005, 2004 and 2003. In 2004 and 2005 the Company, through its subsidiaries, utilized the dividend received deduction for New Jersey based real estate investment trusts. Detailed information on income taxes is shown in Notes 1 and 18 to the Consolidated Financial Statements. Financial Condition Loan Portfolio At December 31, 2005, total loans amounted to $1.1 billion, an increase of $171.8 million, or 18.4%, compared to $934.2 million at December 31, 2004. The commercial loan growth was largely within the subsidiary Bank's delineated community in New Jersey. 21
Table 6 - --------------------------------------------------------------------------------------------------------------- Loan Portfolio - --------------------------------------------------------------------------------------------------------------- at December 31, 2005 2004 2003 2002 2001 -------------- ----------- ------------ ----------- ---------- Amounts of loans by type (in thousands) Real estate-mortgage 1-4 family residential First liens $ 132,443 $ 141,835 $ 100,286 $ 100,302 $113,703 Junior liens 1,682 2,544 4,138 6,241 8,384 Home equity 158,122 148,027 136,477 125,037 130,658 Commercial 479,120 375,985 330,040 222,628 198,319 Construction 92,390 51,162 31,077 11,359 5,265 -------------- ----------- ---------- ---------- --------- 863,757 719,553 602,018 465,567 456,329 -------------- ----------- ---------- ---------- --------- Commercial loans Commercial and financial 212,392 186,386 149,462 104,542 85,801 Lease financing 24,584 23,535 28,440 26,356 15,850 -------------- ----------- ---------- ---------- --------- 236,976 209,921 177,902 130,898 101,651 -------------- ----------- ---------- ---------- --------- Consumer loans Lease financing 94 680 12,416 15,969 18,822 Installment 5,142 4,027 4,245 3,207 4,521 -------------- ----------- ---------- ---------- --------- 5,236 4,707 16,661 19,176 23,343 -------------- ----------- ---------- ---------- --------- Total $ 1,105,969 $ 934,181 $ 796,581 $ 615,641 $581,323 ============== =========== ========== ========== ========= Percent of loans by type Real estate-mortgage 1-4 family residential First liens 12.0 % 15.2 % 12.6 % 16.3 % 19.6 % Junior liens 0.2 0.3 0.5 1.0 1.4 Home equity 14.3 15.8 17.1 20.3 22.5 Commercial 43.3 40.2 41.4 36.2 34.1 Construction 8.3 5.5 3.9 1.8 0.9 -------------- ----------- ---------- ---------- --------- 78.1 77.0 75.5 75.6 78.5 -------------- ----------- ---------- ---------- --------- Commercial loans Commercial and financial 19.2 20.0 18.8 17.0 14.8 Lease financing 2.2 2.5 3.6 4.3 2.7 -------------- ----------- ---------- ---------- --------- 21.4 22.5 22.4 21.3 17.5 -------------- ----------- ---------- ---------- --------- Consumer loans Lease financing - 0.1 1.6 2.6 3.2 Installment 0.5 0.4 0.5 0.5 0.8 -------------- ----------- ---------- ---------- --------- 0.5 0.5 2.1 3.1 4.0 -------------- ----------- ---------- ---------- --------- Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % ============== =========== ========== ========== =========
22 The following table sets forth the maturity distribution of the Company's loan portfolio as of December 31, 2005. 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...... $ 78,866 $ 56,456 $ 77,070 $212,392 Lease financing............... 921 21,997 1,666 24,584 Real estate-construction...... 45,240 45,371 1,779 92,390 ---------- --------- --------- -------- Total $125,027 $123,824 $ 80,515 $329,366 ========== ========= ========= ======== The following table sets forth the interest rate characteristics of loans due after one year as of December 31, 2005: (in thousands) Due after one year Due after through five five years years -------------- ---------- Fixed interest rate............... $ 112,649 $ 39,058 Variable interest rate............ 11,175 41,457 -------------- ---------- Total........................ $ 123,824 $ 80,515 ============== ========== 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 who provides quarterly reports to the Company's Board of Directors on asset quality. 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 23 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 2005 amounted to $925 thousand, a decrease of $275 thousand from the prior year. In 2004, the loan loss provision amounted to $1.2 million, a decrease of $615 thousand from 2003. The decrease in the loan loss provision for 2005 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 2005, nonperforming loans as a percentage of year end loans declined to 0.32% from 0.98%; in absolute terms nonperforming loans decreased $5.5 million to $3.6 million as compared to $9.1 million in 2004. Loans charged-off, net of recoveries increased $50 thousand to $1.1 million as compared to $1.0 million in 2004. The charge-offs occurred principally in the commercial and commercial lease portfolios. 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. 24
Table 7 - ------------------------------------------------------------------------------------------------------- Loan Loss Experience - ------------------------------------------------------------------------------------------------------- for the years ended December 31, (dollars in thousands) 2005 2004 2003 2002 2001 ----------- ---------- ---------- -------- ---------- Average loans outstanding $ 1,018,245 $ 872,322 $ 729,581 $611,659 $ 579,034 =========== ========== ========== ======== ========== Allowance at beginning of period $ 9,797 $ 9,641 $ 7,207 $ 6,569 $ 6,154 ----------- ---------- ---------- -------- ---------- Loans charged-off: Real estate - 357 162 17 11 Commercial and financial 706 89 25 - - Commercial lease financing 463 637 1,072 875 949 Consumer loans 34 54 97 34 4 ----------- ---------- ---------- -------- ---------- Total 1,203 1,137 1,356 926 964 ----------- ---------- ---------- -------- ---------- Recoveries of loans previously charged-off: Real estate 75 22 35 29 22 Commercial and financial 13 6 - - 264 Commercial lease financing - 63 8 16 8 Consumer loans 21 2 3 19 10 ----------- ---------- ---------- -------- ---------- Total 109 93 46 64 304 ----------- ---------- ---------- -------- ---------- Net loans charged-off 1,094 1,044 1,310 862 660 ----------- ---------- ---------- -------- ---------- Additions due to merger 1,018 - 1,929 - Provision for loan and lease losses 925 1,200 1,815 1,500 1,075 ----------- ---------- ---------- -------- ---------- Allowance at end of period $ 10,646 $ 9,797 $ 9,641 $ 7,207 $ 6,569 =========== ========== ========== ======== ========== Allowance to loans (end of period) 0.96 % 1.05 % 1.21 % 1.17 % 1.13 % Allowance to nonaccrual loans 299.21 % 107.27 % 112.50 % 120.86 % 304.12 % Allowance to nonaccrual loans and loans past due 90 days or more 299.21 % 107.27 % 112.50 % 120.86 % 304.12 % Ratio of net charge-offs to average loans (annualized) 0.11 % 0.12 % 0.18 % 0.14 % 0.11 %
At December 31, 2005, the ratio of the ALLL to total loans was 0.96% as compared to 1.05% at the end of the prior year. The ALLL represented 299.2% of nonaccrual loans and loans past due 90 days or more at December 31, 2005, down from 107.3% at the end of 2004. This ratio was impacted by a $5.6 million decrease in nonaccrual and restructured loans in 2005 as compared to the end of the year in 2004. 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 25 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 $20 thousand and $40 thousand at December 31, 2005 and 2004, respectively.
Table 8 - ------------------------------------------------------------------------------------------------------------------------------ Allocation of Allowance for Loan and Lease Losses - ------------------------------------------------------------------------------------------------------------------------------ at December 31, (dollars in thousands) 2005 2004 2003 2002 2001 ------------------- ------------------ ------------------ ------------------ -------------------- % 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 $ 5,719 78.1 % $ 4,307 77.0 % $ 6,743 75.5 % $ 3,724 75.6 % $ 4,028 78.5 Commercial and financial 2,972 19.2 2,987 20.0 479 18.8 1,435 17.0 1,389 14.8 Commercial lease financing 1,142 2.2 1,000 2.5 968 3.6 720 4.3 542 2.7 Consumer loans 43 0.5 90 0.5 186 2.1 132 3.1 5 4.0 Unallocated 770 - 1,413 - 1,265 - 1,196 - 605 - -------- --------- ------- -------- ------- -------- -------- --------- ------- -------- $ 10,646 100.0 % $ 9,797 100.0 % $ 9,641 100.0 % $ 7,207 100.0 % $ 6,569 100.0 % ======== ========= ======= ======== ======= ======== ======== ========= ======= ========
(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, 2005, nonperforming assets decreased $5.6 million, or 60.4%, as compared to the end of the prior year. Nonperforming assets are concentrated in three loans which represent $1.6 million. Nonperforming assets increased $489 thousand, or 5.6%, in 2004 as compared to 2003. 26
Table 9 - ------------------------------------------------------------------------------------------------------ Loan Delinquencies and Nonperforming Assets - ------------------------------------------------------------------------------------------------------ at December 31, (dollars in thousands) 2005 2004 2003 2002 2001 ------------- ---------- ---------- --------- --------- Loans delinquent and accruing interest Loans past due 30-89 days $1,146 $1,918 $1,265 $2,121 $1,938 Loans past due 90 days or more - - - - - ------------ ---------- ---------- ---------- -------- Total loans delinquent and accruing interest $1,146 $1,918 $1,265 $2,121 $1,938 ============ ========== ========== ========== ======== Nonaccrual loans $3,558 $9,133 $8,570 $5,963 $2,160 Foreclosed and repossessed assets 122 156 230 176 492 Restructured loans - - - - 150 ------------ ---------- ---------- ---------- -------- Total nonperforming assets $3,680 $9,289 $8,800 $6,139 $2,802 ============ ========== ========== ========== ======== Total nonperforming assets and loans past due 90 days or more $3,680 $9,289 $8,800 $6,139 $2,802 ============ ========== ========== ========== ======== Nonaccrual loans to total loans 0.32 % 0.98 % 1.08 % 0.97 % 0.37 % Nonperforming assets to total loans and foreclosed and repossessed assets 0.33 % 0.99 % 1.10 % 1.00 % 0.48 % Nonperforming assets to total assets 0.23 % 0.63 % 0.63 % 0.66 % 0.34 % Nonaccrual loans and loans past due 90 days or more to total loans 0.32 % 0.98 % 1.08 % 0.97 % 0.37 %
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, or securities that 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. 27
Table 10 - ---------------------------------------------------------------------------------------------------------------------------------- Securities - ---------------------------------------------------------------------------------------------------------------------------------- at December 31, 2005 (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 Government-Sponsored Enterprises: Mortgage-backed securities $ 2,407 $ 254 $ 162 - $ 2,823 6.18 % Obligations of U.S. agencies 1,920 - - - 1,920 3.10 Obligations of states & political subdivisions 10,548 4,364 12,599 $ 3,460 30,971 5.40 ------------ ---------- ---------- --------- ---------- ------- 14,875 4,618 12,761 3,460 35,714 5.34 ------------ ---------- ---------- --------- ---------- ------- Securities available-for-sale at estimated fair value Government-Sponsored Enterprises: Mortgage-backed securities 12,362 92,754 3,662 - 108,778 4.16 Obligations of U.S. agencies 118,352 45,624 - - 163,976 2.66 Obligations of states & political subdivisions 17,054 3,932 7,259 8,946 37,191 4.72 ------------ ---------- ---------- --------- ---------- ------- 147,768 142,310 10,921 8,946 309,945 3.43 ------------ ---------- ---------- --------- ---------- ------- Equity securities - - - - 10,807 - % ------------ ---------- ---------- --------- --------- ------- 147,768 142,310 10,921 8,946 320,752 ------------ ---------- ---------- --------- ---------- Total $ 162,643 $ 146,928 $ 23,682 $ 12,406 $ 356,466 ============ ========== ========== ========= ========== Weighted average yield (1) 2.60 % 4.10 % 6.21 % 6.53 % 3.63 % (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) 2005 2004 2003 ------------------------- ------------------ ----------------------- Amount % Amount % Amount % ------------ ---------- ---------- ------- ------------- -------- Securities held-to-maturity at amortized cost Government-Sponsored Enterprises: Mortgage-backed securities $ 2,823 7.9 % $ 5,583 38.4 % $ 9,850 51.6 % Obligations of U.S. agencies 1,920 5.4 - - - - Obligations of states & political subdivisions 30,971 86.7 8,947 61.6 9,257 48.4 ------------ ---------- ---------- ------- ------------- -------- $ 35,714 100.0 % $ 14,530 100.0 % $ 19,107 100.0 % ============ ========== ========== ======= ============= ======== Securities available-for-sale at estimated fair value Government-Sponsored Enterprises: Mortgage-backed securities $ 108,778 33.9 % $ 121,392 32.4 % $ 114,187 26.4 % Obligations of U.S. agencies 163,976 51.1 209,848 56.1 273,160 63.1 Obligations of states & political subdivisions 37,191 11.6 32,719 8.8 35,038 8.1 Obligations of U.S. Treasury - - 5,982 1.6 6,035 1.4 Equity securities 10,807 3.4 4,258 1.1 4,533 1.0 ------------ ---------- ---------- ------- ------------- -------- $ 320,752 100.0 % $ 374,199 100.0 % $ 432,953 100.0 % ============ ========== ========== ======= ============= ========
The Company's total investment portfolio decreased by $32.3 million, or 8.3%, to $356.5 million at December 31, 2005 as compared to the prior year. The decrease in the investment portfolio was largely attributed to cashflow 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 $1.0 million and $4.3 million, respectively, at December 31, 2005. At December 31, 2005, available-for-sale ("AFS") securities amounted to $320.8 million, or 90.0%, of total securities, compared to $374.2 million, or 96.3%, of total securities at year-end 2004. The Company's AFS portfolio decreased by $53.4 million, or 14.3%, at December 31, 2005 as compared to the prior year. The composition of investment securities shifted from obligations of U.S. Agencies to municipal and equity 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, 2005, 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 increased by $21.2 million, or 145.8%, to $35.7 million at December 31, 2005 as compared to the prior year. 28 Deposits Deposits, which include non-interest-bearing demand deposits, interest-bearing demand deposits, money market, 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 $14.0 million, or 1.1%, to $1.3 billion at December 31, 2005 as compared to the prior year. For 2005, the Company's overall yield on deposits increased by 66 basis points to 1.94% due mostly to an increase in market interest rates and change in deposit mix. The growth in the deposit base occurred mostly in non-interest bearing demand and money market deposits. Non-interest bearing demand deposits increased $25.1 million, or 10.7%, to $260.2 million at December 31, 2005 as compared to the prior year. Non-interest bearing demand deposits represented 20.6% of total deposits at December 31, 2005 and 18.9% at December 31, 2004. The growth in non-interest bearing demand deposits positively impacted the overall yield on deposit liabilities at December 31, 2005 as compared to year end 2004. Money market deposits increased $12.3 million, or 14.1%, to $100.0 million at December 31, 2005 as compared to the prior year. Money market deposits represented 7.9% of total deposits at December 31, 2005 and 7.0% at December 31, 2004. Contributing to the growth in deposits was a $7.7 million, or 6.8%, increase in savings deposits at December 31, 2005 as compared to year-end 2004. Savings deposits represented 9.6% of total deposits at December 31, 2005 and 9.1% at December 31, 2004.
Table 11 - ------------------------------------------------------------------------------------------------------------------------------- Deposit Summary - ------------------------------------------------------------------------------------------------------------------------------- at December 31, 2005 2004 2003 2002 2001 ------------------ ------------------ ------------------ ---------------- ---------------- Non-interest bearing demand $ 260,151 20.7% $ 235,036 18.9% $ 223,745 19.3% $ 118,578 14.5% $ 109,416 15.1% Interest bearing demand 466,436 37.0 472,807 37.9 446,786 38.6 323,998 39.7 282,173 38.8 Money market 99,907 7.9 87,595 7.0 84,162 7.3 55,372 6.8 47,569 6.5 Savings 121,093 9.6 113,352 9.1 120,136 10.4 80,300 9.8 72,092 9.9 Time deposits less than $100,000 261,980 20.8 286,471 23.0 265,356 22.9 210,727 25.9 194,754 26.9 Time deposits greater than $100,000 50,541 4.0 50,877 4.1 16,613 1.5 26,697 3.3 20,479 2.8 ---------- ------ ---------- ------ ---------- ------ --------- ------ --------- ------ $1,260,108 100.0% $1,246,138 100.0% $1,156,798 100.0% $ 815,672 100.0% $ 726,483 100.0% ========== ====== ========== ====== ========== ====== ========= ====== ========= ======
The following table shows the time remaining to maturity of time certificates of deposit of $100,000 or more as of December 31, 2005: (in thousands) Three months or less $ 23,501 Over three months through six months 8,828 Over six months through twelve months 3,374 Over twelve months 14,838 --------------- $50,541 =============== 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 29 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, 2005, total deposits amounted to $1.3 billion, an increase of $14.0 million, or 1.1%, over the prior comparable year. At December 31, 2005, advances from the Federal Home Loan Bank of New York ("FHLBNY"), subordinated debentures and securities sold under agreements to repurchase totaled $181.0 million and represented 11.1% of total assets as compared to $59.0 million and 4.0% of total assets, at December 31, 2004. Loan production continued to be the Company's principal investing activity. Net loans at December 31, 2005 amounted to $1.1 billion, an increase of $170.9 million, or 18.5%, compared to the same period in 2004. The Company's most liquid assets are cash and due from banks and federal funds sold. At December 31, 2005, the total of such assets amounted to $42.6 million, or 2.6%, of total assets, compared to $33.1 million, or 2.3%, of total assets at year-end 2004. 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, 2005, available-for-sale securities amounted to $320.8 million, or 90.0%, of total securities, compared to $374.2 million, or 96.3%, of total securities at year-end 2004. 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 $101.8 million line of credit available through its membership in the FHLBNY of which $28.8 million at December 31, 2005 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 19 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. 30 The following table sets forth contractual obligations and various commitments representing required and potential cash flows, including interest, as of December 31, 2005.
Table 12 - -------------------------------------------------------------------------------------------------------------- Contractual Obligations and Commitments at December 31, 2005 - -------------------------------------------------------------------------------------------------------------- (dollars in thousands) Contractual Obligations - ----------------------- Payment due by Period ----------------------------------------------------- Less than one One to three Four to five After five Total Amounts year years years years Committed ------------- ------------ ------------ ---------- ------------- Minimum annual rental under non-cancelable operating leases $2,766 $ 5,072 $ 3,883 $ 5,840 $ 17,561 Remaining contractual maturities of time deposits 185,869 129,696 6,090 46 321,701 Securities sold under agreements to repurchase and short-term borrowings 50,165 - - - 50,165 Long-term borrowings 4,279 27,197 21,669 90,304 143,449 Subordinated debentures (a) 1,258 2,516 2,516 57,726 64,016 ---------- ----------- ---------- --------- ------------ Total contractual cash obligations $244,337 $ 164,481 $ 34,158 $153,916 $ 596,892 ========== =========== ========== ========= ============ (a) The interest expense is based upon interest rates in effect at December 31, 2005. The subordinated debentures mature in 2035 and interest is calculated to this maturity date. The first non-penalized call date is in 2010 and is also when the debentures convert from fixed rate to floating rate. Other Commitments - ----------------- Amount of Commitment Expiration By Period ---------------------------------------------------- Less than one One to three Four to five After five Total Amounts year years years years Committed ------------- ------------ ------------- ---------- ------------- Loan commitments $ 118,935 $ 55,503 $ 16,759 $ 85,935 $ 277,132 Standby letters of credit 3,416 - - - 3,416 --------- ---------- --------- -------- ----------- Total other commitments $ 122,351 $ 55,503 $ 16,759 $ 85,935 $ 280,548 ========= ========== ========= ======== ===========
Capital Adequacy Stockholders' equity totaled $179.0 million, or 11.0%, of total assets at December 31, 2005, compared to $150.2 million, or 10.3%, of total assets at December 31, 2004. The $28.8 million growth was largely attributable to the shares issued as a result of the acquisition of Franklin an increase in net income offset in part by $7.0 million of cash dividends during 2005. 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, 2005, the Company's and the Bank's Tier 1 risk-based capital ratio was 11.02% and 11.08%, respectively, well in excess of minimum capital standards. 31 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, 2005, the Company's and the Bank's leverage ratio was 8.20% and 8.29%, respectively. Stock Repurchase Program On June 23, 2005, the Board of Directors authorized a program to repurchase up to 950,000 shares of the Company's outstanding common stock on the open market or in privately negotiated transactions, which supersedes the previous Board authorized program As of December 31, 2005, the company had purchased 321,737 shares at a total cost of approximately $5.8 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. 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 128,492 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 previously 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, 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 32 other financial assets, such as mortgage loans, to the secondary market. Exposure to loan commitments and letters of credit can be found in Table 12 under Liquidity. Critical Accounting Policies and Judgments The Company's consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1 Accounting Policies in the Notes to Consolidated Financial Statements. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect the Company's reported results and financial position for the period or in future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Assets and liabilities carried at fair value inherently result in more financial statement volatility. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments primarily by using internal cash flow and other financial modeling techniques. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on the Company's future financial condition and results of operations. Allowance for Loan and Lease Losses: The allowance for loan and lease losses 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 $10.6 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 20 "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 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 33 deemed to be impaired. Based upon management's evaluation, no impairment loss is required to be recognized. 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 8.4%. 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 $28 thousand. The discount rates that we utilized for determining the future pension obligations of the plans ranged between 5.25% and 5.70% 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 $324 thousand. During 2005 the Company froze all future benefits to be accrued under the plan. Recently issued accounting pronouncements: In December 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer" ("SOP 03-3"). SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an initial investment in loans or debt securities acquired in a transfer if those differences relate, at least in part, to a deterioration of credit quality. SOP 03-3 prohibits companies from carrying over valuation allowances in the initial accounting for such loans and limits the yield that may be accreted to the excess of undiscounted expected cash flows over the initial investment in the loan. Decreases in expected cash flows are recognized as impairment and increases are recognized prospectively through an adjustment of the loan yield. SOP 03-3 is effective for loans and debt securities acquired on or after January 1, 2005. Our adoption of this guidance did not have a significant effect on our consolidated financial statements. 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 fiscal year 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". We currently use the intrinsic-value method to measure compensation cost related to our share-based transactions. We will adopt SFAS 123R in 2006. The Company does not anticipate any material impact to its financial condition or results of operations as a result of the adoption of SFAS No. 123R. Estimated future levels of compensation expense recognized related to stock based awards would be impacted by new awards, modifications to awards, or cancellation of awards after the adoption of SFAS No. 123 (revised). On March 3, 2005, the Financial Accounting Standards ("FASB") Staff issued FASB Staff Position ("FSP") FIN 46(R)-5, "Implicit Variable Interests under FASB Interpretation No. 46" (FIN 46R-- Revised December 2003), "Consolidation of Variable Interest Entities" ("VIE"). This FSP requires a reporting enterprise to consider the impact of implicit variable interests in determining whether the reporting enterprise may absorb variability of the VIE or potential VIE. This staff 34 position was effective in the third quarter of 2005 and its adoption did not have a material impact on our consolidated financial statements. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections- a replacement of APB Opinion No. 20 and FASB Statement No. 3". SFAS No. 154 replaces APB Opinion No. 20, "Accounting Changes," and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements," and changes the accounting and reporting requirements for a change in accounting principle. SFAS No. 154 applies to all voluntary changes in an accounting principle, as well as to changes required by a new accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005 and requires retrospective application to prior periods' financial statements for most voluntary changes in an accounting principle, unless it is impracticable to do so. The Company does not anticipate any material impact to its financial condition or results of operations as a result of the adoption of SFAS No. 154. At its November 12-13, 2003 meeting, the Emerging Issues Task Force ("EITF") reached a consensus on Issue 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," that certain quantitative and qualitative disclosures should be required for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS No. 115 and 124 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The Company adopted the disclosure requirements in fiscal year 2003. At the March 17-18, 2004 meeting, the EITF reached a consensus, which approved an impairment model for debt and equity securities. In FASB Staff Position ("FSP") 03-01-01, issued in September 2004, the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of Issue 03-01 was delayed. On November 3, 2005, FSP FAS Nos. 115-1 and FAS 124-1 "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," was issued. This FSP nullifies certain requirements of Issue 03-1 and supersedes EITF Topic No. D-44, "Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value." This FSP nullified the requirements of paragraphs 10-18 of Issue 03-1, carried forward the requirements of paragraph 8 and 9 of Issue 03-1 with respect to cost-method investments and carries forward the disclosure requirements included in paragraphs 21 and 22 of Issue 03-1 and related examples. The guidance in this FSP shall be applied to reporting periods beginning after December 15, 2005. The Company believes the adoption of this FSP in 2006 will not materially impact our results of operations, financial condition, or related disclosures. Item 7A. Quantitative and Qualitative Disclosure about Market Risk 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 2005. 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 35 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, 2005, 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 200 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 3.6%. 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, 2005, 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. 36 Net Interest Income Sensitivity Simulation Percentage Change in Estimated Net Interest Income over a twelve month horizon ------------------------------------------- 2005 2004 ---------- ---------- +200 basis points -0.3 % -2.3 % +100 basis points 0.1 % -0.8 % - -100 basis points -0.9 % -3.0 % - -200 basis points -3.6 % * * 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 8.29% at December 31, 2005. Since the cumulative gap was negative, the Company has a "negative gap" position, which theoretically will cause its assets to reprice more slowly than its deposit liabilities. In a declining interest rate environment, interest costs may be expected to fall faster than the interest received on earning assets, thus increasing the net interest spread. If interest rates increase, a negative gap means that the interest received on earning assets may be expected to increase more slowly than the interest paid on the Company's liabilities therefore decreasing the net interest spread. Certain shortcomings are inherent in the method of gap analysis presented below. 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 37 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 13 - --------------------------------------------------------------------------------------------------------------------------------- Interest Rate Sensitivity Analysis - --------------------------------------------------------------------------------------------------------------------------------- at December 31, 2005 (dollars in thousands) Non- 3 6 6 Mos. to 1 to 3 3 to 5 Over interest Subject to rate change within Months Months 1 Year Years Years 5 Years Sensitive Total --------- --------- ---------- ---------- ---------- ---------- ---------- ----------- Assets Net loans $244,962 $ 61,636 $ 102,926 $ 275,081 $ 322,623 $ 93,317 $ (5,222) $1,095,323 Investment securities 49,533 43,193 82,421 77,877 45,949 61,553 (4,060) 356,466 Interest-earning deposits 4 - - - - - - 4 Cash and amounts due from banks - - - - - - 42,620 42,620 Other noninterest earning assets - 17,850 9,091 - - - 110,032 136,973 --------- --------- ---------- ---------- ---------- ---------- --------- ----------- Total assets 294,499 122,679 194,438 352,958 368,572 154,870 143,370 1,631,386 --------- --------- ---------- ---------- ---------- ---------- --------- =========== Liabilities and stockholders' equity Demand deposits 6,181 6,181 12,166 25,150 18,022 192,451 - 260,151 Savings deposits 116,151 111,803 69,027 52,500 12,585 104,370 - 466,436 Money market accounts 2,668 13,048 13,048 26,096 8,799 57,434 - 121,093 Fixed maturity certificates of deposits 25,562 7,492 7,492 14,984 6,106 38,271 - 99,907 Securities sold under agreements to repurchase 91,613 75,606 128,468 11,549 4,544 741 - 312,521 Short-term borrowings 3,939 - - - - - - 3,939 Long-term borrowings 56,483 - - 85,000 35,620 - - 177,103 Other liabilities - - - - - - 11,234 11,234 Stockholders' equity - - - - - - 179,002 179,002 --------- --------- ---------- ---------- ---------- ---------- --------- ----------- Total liabilities and stockholders'equity 302,597 214,130 230,201 215,279 85,676 393,267 190,236 $1,631,386 --------- --------- ---------- ---------- ---------- ---------- --------- =========== Gap $ (8,098) $(91,451) $ (35,763) $ 137,679 $ 282,896 $(238,397) $ (46,866) ========= ========= ========== ========== ========== ========== ========= Gap to total assets -0.50% -5.61% -2.19% 8.44% 17.34% -14.61% Cumulative Gap $ (8,098) $(99,549) $(135,312) $ 2,367 $ 285,263 $ 46,866 ========= ========= ========== ========== ========== ========== Cumulative Gap to total assets -0.50% -6.10% -8.29% 0.15% 17.49% 2.87%
38 Item 8. Financial Statements and Supplemental Data 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, 2005 and 2004, 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, 2005. 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, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, 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, 2005, 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 13, 2006 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 13, 2006 39 Interchange Financial Services Corporation - --------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------------------- at December 31 (dollars in thousands) 2005 2004 -------------- ------------- Assets Cash and due from banks $ 42,620 $ 33,108 Interest bearing demand deposits 4 2 -------------- ------------- Total cash and cash equivalents 42,624 33,110 -------------- ------------- Securities held-to-maturity at amortized cost (estimated fair value of $36,199 and $15,276 for 2005 and 2004, respectively) 35,714 14,530 -------------- ------------- Securities available-for-sale at estimated fair value (amortized cost of $324,548 and $375,241 for 2005 and 2004 respectively) 320,752 374,199 -------------- ------------- Loans and leases (net of unearned income and deferred fees of $6,786 and $5,514 2005 and 2004, respectively) 1,105,969 934,181 Less: Allowance for loan and lease losses 10,646 9,797 ------------- -------------- Net loans and leases 1,095,323 924,384 -------------- ------------- Bank owned life insurance 26,941 25,847 Premises and equipment, net 17,509 17,713 Foreclosed assets and other repossessed assets 122 156 Goodwill 68,910 55,952 Intangible assets 5,469 3,660 Accrued interest receivable and other assets 18,022 14,590 -------------- ------------- Total assets $ 1,631,386 $ 1,464,141 ============== ============= Liabilities Deposits Non-interest bearing $ 260,151 $ 235,036 Interest bearing 999,957 1,011,102 -------------- ------------- Total deposits 1,260,108 1,246,138 -------------- ------------- Securities sold under agreements to repurchase 3,939 4,401 Short-term borrowings 46,150 24,600 Long-term borrowings 110,333 30,000 Subordinated debentures 20,620 - Accrued interest payable and other liabilities 11,234 8,847 -------------- ------------- Total liabilities 1,452,384 1,313,986 -------------- ------------- Commitments and contingent liabilities Stockholders' equity: Common stock, without par value; 33,750,000 shares authorized; 20,138,668 and 19,119,814 shares issued and outstanding for 2005 and 2004, respectively 5,397 5,397 Capital surplus 97,238 73,320 Retained earnings 99,222 86,542 Accumulated other comprehensive loss, net of taxes of $1,497 and $408 for 2005 and 2004, respectively (2,310) (633) -------------- ------------- 199,547 164,626 Less: Treasury stock 20,545 14,471 -------------- ------------- Total stockholders' equity 179,002 150,155 -------------- ------------- Total liabilities and stockholders' equity $ 1,631,386 $ 1,464,141 ============== ============= - --------------------------------------------------------------------------------------------- See notes to consolidated financial statements.
40
Interchange Financial Services Corporation - ----------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME - ----------------------------------------------------------------------------------------------------------- For the Years Ended December 31, (in thousands, except per share data) 2005 2004 2003 --------------- ------------- ----------- Interest income Interest on loans and leases $ 66,433 $ 54,173 $48,982 Interest on federal funds sold 111 151 276 Interest on interest bearing deposits 3 - 61 Interest and dividends on securities Taxable interest income 9,623 10,520 9,847 Interest income exempt from federal income taxes 2,026 1,164 914 Dividends 299 92 187 --------------- ------------- ----------- Total interest income 78,495 66,100 60,267 --------------- ------------- ----------- Interest expense Interest on deposits 19,626 12,390 13,161 Interest on securities sold under agreements to repurchase 123 145 267 Interest on short-term borrowings 1,030 214 18 Interest on long-term borrowings and subordinated debentures 2,583 905 428 --------------- ------------- ----------- Total interest expense 23,362 13,654 13,874 --------------- ------------- ----------- Net interest income 55,133 52,446 46,393 Provision for loan and lease losses 925 1,200 1,815 --------------- ------------- ----------- Net interest income after provision for loan and lease losses 54,208 51,246 44,578 --------------- ------------- ----------- Non-interest income Service fees on deposit accounts 3,587 3,753 3,485 Net gain on sale of securities 394 1,444 793 Net gain on sale of loans and leases 1,294 1,317 769 Bank owned life insurance 1,094 993 2,019 Commissions on sale of annuities and mutual funds 743 913 883 Other 3,269 3,037 2,696 --------------- ------------- ----------- Total non-interest income 10,381 11,457 10,645 --------------- ------------- ----------- Non-interest expense Salaries and benefits 19,325 19,463 16,994 Occupancy 5,583 5,283 4,577 Furniture and equipment 1,267 1,309 1,327 Advertising and promotion 1,347 1,456 1,412 Amortization of intangible assets 571 504 360 Other 7,607 7,993 6,569 --------------- ------------- ----------- Total non-interest expense 35,700 36,008 31,239 --------------- ------------- ----------- Income before income taxes 28,889 26,695 23,984 Income taxes 9,184 8,481 7,618 --------------- ------------- ----------- Net income $ 19,705 $ 18,214 $ 16,366 =============== ============= =========== Basic earnings per common share $1.01 $0.95 $0.92 ===== ===== ===== Diluted earnings per common share $0.99 $0.94 $0.91 ===== ===== ===== - ----------------------------------------------------------------------------------------------------------- See notes to consolidated financial statements.
All share data was restated to reflect a 3-for-2 stock split declared on January 18, 2005 and paid on February 18, 2005. 41
Interchange Financial Services Corporation - ----------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31 (dollars in thousands) Accumulated Other Comprehensive Retained Comprehensive Common Capital Treasury Income Earnings Income(Loss) Stock Surplus Stock Total ------------- -------- ------------- -------- ---------- ----------- --------- Balance at January 1, 2003 $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 income net of taxes (1,162) (1,162) (1,162) ---------- Comprehensive income $ 15,204 ========== Dividends on common stock (4,970) (4,970) Issued 31,325 shares of common stock in connection with Executive Compensation Plan 109 245 354 Exercised 89,543 option shares (155) 593 438 Issued 4,424,579 shares of common stock in connection with the acquisition of Bridge View Bancorp 52,180 52,180 Reacquired 53,939 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 Less: unealized 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 ========== Issued 11,690 shares of common stock in connection with Executive Compensation Plan 103 102 205 Dividends on common stock (6,382) (6,382) Exercised 22,065 option shares (14) 160 146 Purchased 128,492 shares of common stock (2,154) (2,154) ---------- ----------- --------- --------- ----------- ---------- Balance at December 31, 2004 86,542 (633) 5,397 73,320 (14,471) 150,155 Comprehensive income Net Income $ 19,705 19,705 19,705 Other comprehensive losses, net of taxes Less: unealized losses on AFS debt securities (1,431) Less: net gains on disposition of securities (236) Minimum pension liability adjustment (10) ---------- Other comprehensive losses, net of taxes (1,677) (1,677) (1,677) ---------- Comprehensive income $ 18,028 ========== Dividends on common stock (7,013) (7,013) Issued 18,772 shares of common stock in connection with Executive Compensation Plan 174 162 336 Issued 1,323,181 shares of common stock in connection with the acquisition of Franklin Bank 23,738 23,738 Exercised 45,022 option shares 6 383 389 Payout of fractional shares resulting from the three-for-two stock split declared January 18, 2005 and paid on February 18, 2005 (7) (7) Payout of fractional shares in connection with the acquisition of Franklin Bank (5) (5) Purchased 328,192 shares of common stock (5,903) (5,903) Reacquired 39,228 shares in settlement of litigation (716) (716) ---------- ----------- --------- --------- ----------- ---------- Balance at December 31, 2005 $ 99,222 $ (2,310) $ 5,397 $ 97,238 $ (20,545) $ 179,002 ========== =========== ========= ========= =========== ========== - ----------------------------------------------------------------------------------------------------------------------------------- See notes to consolidated financial statements. All share data was restated to reflect a 3-for-2 stock split declared on January 18, 2005 and paid on February 18, 2005.
42
INTERCHANGE FINANCIAL SERVICES CORPORATION - ---------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - ---------------------------------------------------------------------------------------------- For the Years Ended December 31, (in thousands) 2005 2004 2003 ----------- --------- ---------- Cash flows from operating activities Net income $ 19,705 $ 18,214 $ 16,366 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 2,002 1,914 1,752 Amortization of securities premiums 4,002 5,237 4,643 Accretion of securities discounts (251) (269) (315) Amortization of loan premiums 87 61 - Amortization of premiums in connection with acquisition 645 1,023 1,033 Provision for loan and lease losses 925 1,200 1,815 Charge-off of foreclosed assets and other repossessed assets - 62 - Increase in cash surrender value of Bank Owned Life Insurance (1,094) (993) (579) Net gain on sale of securities (394) (1,444) (1,208) Origination of loans held for sale (36,975) (14,860) (18,089) Sale of loans held for sale 36,719 15,110 18,679 Acceleration of premium amortization on certain collateralized mortgage obligations - - 415 Net gain on sale of loans and leases (1,294) (1,317) (769) Net gain on sale of fixed assets - (16) 10 Write off of foreclosed and repossessed assets 47 - - Net gain on sale of foreclosed and repossessed assets - (17) (7) Decrease (increase) in operating assets Accrued interest receivable (1,160) 534 (1,225) Deferred taxes 1,187 1,672 Other Assets (1,212) (1,282) (4,080) Increase (decrease) in operating liabilities Accrued interest payable 410 (2) (322) Other 358 (4,923) (115) ---------- ----------- ---------- Cash provided by operating activities 22,520 19,419 19,676 ---------- ----------- ---------- Cash flows from investing activities (Payments for) proceeds from Net originations of loans and leases (90,980) (112,057) (904) Purchase of loans and leases (4,678) (42,531) (53) Sale of loans and leases 2,018 16,302 3,176 Purchase of securities available-for-sale (95,069) (109,564) (341,335) Maturities of securities available-for-sale 68,264 90,420 122,581 Sale of securities available-for-sale 78,661 69,114 44,361 Maturities of securities held-to-maturity 3,205 11,212 8,900 Sale of securities held-to-maturity 270 - - Purchase of securities held-to-maturity (25,023) (6,820) - Sale of foreclosed and other repossessed assets - 108 141 Purchase of fixed assets (1,150) (1,840) (1,242) Premium in connection with acquisition 75 75 (90) Net cash proceeds from acquisition of Bridge View Bancorp - - 19,439 Net cash proceeds from acquisition of Franklin Bank 3,504 - - Purchase of Bank Owned Life Insurance - (3,000) - Sale of fixed assets 1,171 2,766 - ---------- ----------- ---------- Cash used in investing activities (59,732) (85,815) (145,026) ---------- ----------- ---------- Cash flows from financing activities Proceeds from (payments for) Net change in deposits (62,062) 89,359 82,332 Securities sold under agreements to repurchase and other borrowings 1,020,585 20,000 147,734 Retirement of securities sold under agreement to repurchase and other borrowings (919,498) (33,108) (103,014) Issuance of long term subordinated debentures 20,620 - - Minimum pension liability, net of taxes - 5 (5) Dividends (7,013) (6,382) (4,970) Common stock issued 336 205 354 Payout of fractional shares resulting from 3-for-2 stock split (7) - - Payout of fractional shares resulting from Franklin Bank acquisition (5) - - Treasury stock (6,619) (2,154) - Exercise of option shares 389 146 438 ---------- ----------- ---------- Cash provided by financing activities 46,726 68,071 122,869 ---------- ----------- ---------- Increase in cash and cash equivalents 9,514 1,675 (2,481) Cash and cash equivalents, beginning of period 33,110 31,435 33,916 ---------- ----------- ---------- Cash and cash equivalents, end of period $ 42,624 $ 33,110 $ 31,435 ========== =========== ========== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 22,294 $13,463 $14,052 Income taxes 9,469 12,053 9,003 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 13 79 188 Stock issued related to acquisition 23,738 - 52,180 - ------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 certain of its direct and indirect wholly-owned subsidiaries and its indirect subsidiary, Clover Leaf Management Realty Corporation, which is 99.0% owned by Clover Leaf Investment Company, which is a wholly owned subsidiary of 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. In accordance with Financial Accounting Standards Board Interpretation No. 46 (Revised), "Consolidation of Variable Interest Entities," ("FIN No. 46" (revised)), the Company has two wholly owned trusts which are not consolidated. See Note 12 "Subordinated Debentures" for a more detailed discussion of these subsidiaries. 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 44 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 45 observable market price or the fair value of the underlying collateral. The fair value of collateral, reduced by costs to sell on a discounted basis, is utilized if a loan is collateral dependent or foreclosure is probable. One-to-four family residential mortgage loans and consumer loans with small balances are pooled together as homogeneous loans and, accordingly, are not covered by Statement of Financial Accounting Standards ("SFAS") No. 114 "Accounting by Creditors for Impairment of a Loan." A loan is categorized as a troubled debt restructure if a significant concession to contractual terms is granted to the borrower due to deterioration in the financial condition of the borrower. Generally, a nonaccrual loan that is restructured remains on nonaccrual until the obligation is brought current and has performed for a period of time to demonstrate that the borrower can meet the restructured terms. If the borrower's ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. Allowance for loan and lease losses: The allowance for loan and lease losses ("ALLL") is established through periodic charges to income. Loan losses are charged against the ALLL when management believes that the future collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. Management's determination of the adequacy of the allowances is based on periodic evaluations of the loan portfolio and other relevant factors 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 Sheet. 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 20 to 40 years for premises and 3 to 10 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 46 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 as of December 31 and June 30, depending on the original date of acquisitions, 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(loss): 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 47 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. Stock Based Compensation: The Company accounts for stock option plans under the recognition and measurement principles of "Accounting for Stock Issued to Employees" (APB No. 25) and related interpretations. No stock-based employee compensation costs are reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. In December 2004, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 123 (revised 2004), "Share-Based Payment," ("SFAS No. 123(R)"). SFAS No. 123(R) addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123(R) requires an entity to recognize the grant-date fair value of stock options and other equity-based compensation issued to employees within the income statement using a fair-value-based method, eliminating the intrinsic value method of accounting previously permissible under APB No. 25 and related interpretations. Prior to the required adoption of SFAS No. 123(R), the Company has elected to account for its stock-based incentive plans and awards under APB No. 25, and has adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." 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 2005, 2004 and 2003, respectively: dividend yield of 2.00%, 2.21%, 2.14%; expected volatility of 23.07%, 24.83%, and 24.69%; risk-free interest rate of 3.87%, 3.39% and 3.39%; 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) 48
2005 2004 2003 ----------- ----------- --------- Net Income As reported $19,705 $18,214 $16,366 Less: Total stock-based compensation expense determined under the fair value method for all rewards, net of related tax effects 2,268 834 521 ----------- ----------- --------- Pro-forma $17,437 $17,380 $15,845 =========== =========== ========= Earnings per share: Basic: As reported $ 1.01 $ 0.95 $ 0.92 Pro-forma $ 0.90 $ 0.91 $ 0.89 Diluted: As reported $ 0.99 $ 0.94 $ 0.91 Pro-forma $ 0.88 $ 0.89 $ 0.88 Basic shares 19,418 19,124 17,724 Diluted shares 19,835 19,476 17,987
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%. The increase in the total stock-based compensation expense in 2005 is a result of the acceleration of the unvested stock options. See Note 14, Stock Option and Incentive Plan. 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, 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. Recently issued accounting pronouncements: In December 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer" ("SOP 03-3"). SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an initial investment in loans or debt securities acquired in a transfer if those differences relate, at least in part, to a deterioration of credit quality. SOP 03-3 prohibits companies from carrying over valuation allowances in the initial accounting for such loans and limits the yield that may be accreted to the excess of undiscounted expected cash flows over the initial investment in the loan. Decreases in expected cash flows are recognized as impairment and increases are recognized prospectively 49 through an adjustment of the loan yield. SOP 03-3 is effective for loans and debt securities acquired on or after January 1, 2005. Our adoption of this guidance did not have a significant effect on our consolidated financial statements. 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 fiscal year that begins after December 15, 2005, and replaces SFAS No. 123, "Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". We currently use the intrinsic-value method to measure compensation cost related to our share-based transactions. We will adopt SFAS 123R in 2006. The Company does not anticipate any material impact to its financial condition or results of operations as a result of the adoption of SFAS No. 123R. Estimated future levels of compensation expense recognized related to stock based awards would be impacted by new awards, modifications to awards, or cancellation of awards after the adoption of SFAS No. 123 (revised). On March 3, 2005, the Financial Accounting Standards ("FASB") Staff issued FASB Staff Position ("FSP") FIN 46(R)-5, "Implicit Variable Interests under FASB Interpretation No. 46" (FIN 46R-- Revised December 2003), "Consolidation of Variable Interest Entities" ("VIE"). This FSP requires a reporting enterprise to consider the impact of implicit variable interests in determining whether the reporting enterprise may absorb variability of the VIE or potential VIE. This staff position was effective in the third quarter of 2005 and its adoption did not have a material impact on our consolidated financial statements. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections- a replacement of APB Opinion No. 20 and FASB Statement No. 3". SFAS No. 154 replaces APB Opinion No. 20, "Accounting Changes," and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements," and changes the accounting and reporting requirements for a change in accounting principle. SFAS No. 154 applies to all voluntary changes in an accounting principle, as well as to changes required by a new accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005 and requires retrospective application to prior periods' financial statements for most voluntary changes in an accounting principle, unless it is impracticable to do so. The Company does not anticipate any material impact to its financial condition or results of operations as a result of the adoption of SFAS No. 154. At its November 12-13, 2003 meeting, the Emerging Issues Task Force ("EITF") reached a consensus on Issue 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," that certain quantitative and qualitative disclosures should be required for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS No. 115 and 124 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The Company adopted the disclosure requirements in fiscal year 2003. At the March 17-18, 2004 meeting, the EITF reached a consensus, which approved an impairment model for debt and equity securities. In FASB Staff Position ("FSP") 03-01-01, issued in September 2004, the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of Issue 03-01 was delayed. On November 3, 2005, FSP FAS Nos. 115-1 and FAS 124-1 "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," was issued. This FSP nullifies certain requirements of Issue 03-1 and supersedes EITF Topic No. D-44, "Recognition of Other-Than-Temporary Impairment upon the ________________________________________________________________________________ Planned Sale of a Security Whose Cost Exceeds Fair Value." This FSP nullified __________________________________________________________ the requirements of paragraphs 10-18 of Issue 03-1, carried forward the requirements of paragraph 8 and 9 of Issue 03-1 with respect to cost-method investments and carries 50 forward the disclosure requirements included in paragraphs 21 and 22 of Issue 03-1 and related examples. The guidance in this FSP shall be applied to reporting periods beginning after December 15, 2005. The Company believes the adoption of this FSP in 2006 will not materially impact our results of operations, financial condition, or related disclosures. 2. Acquisitions On October 13, 2005 the Company completed its acquisition of Franklin Bank ("Franklin"), a one branch bank operating in Nutley, Essex County, New Jersey. At October 13, 2005 Franklin had approximately, $87.0 million in total assets, $77.2 million in net loans and $76.0 million in deposits. Under the terms of the agreement, the total consideration to be received by Franklin shareholders in the merger is fixed at 1,323,575 shares of the common stock of the Company. Based upon the Company's average closing stock price three days prior to and after the date of announcement of the acquisition which occurred on June 23, 2005 of $17.94, the transaction represents total consideration of approximately $24.9 million, including approximately $1.2 million for the cash payment for option holders. Under the definitive agreement, each Franklin shareholder received 1.2264 Company shares for each Franklin share held immediately prior to the merger. The acquisition was accounted for as a purchase and the cost in excess of the fair value of net assets acquired will be allocated first to net identified intangibles and then to goodwill. The goodwill is not tax deductible. The Company's acquisition of Franklin is intended to further enhance the Company's presence in northern New Jersey. As a result of the acquisition, the Bank now operates 30 banking offices. The acquisition of Franklin was accomplished through a merger of Franklin with and into the Bank, a wholly-owned subsidiary of the Company. The results of the acquisition are included in the financial statements of the Company from October 13, 2005. The following is a reconciliation of the purchase price paid by the Company for Franklin Bank: (in thousands) Cash and due from Banks $ 3,178 Federal funds sold 326 Investments 4,156 Loans - net 76,955 Premisies and equipment - net 1,542 Intangible assets 2,379 Accounts receivable and other assets 232 Non-interest bearing accounts (17,673) Interest bearing deposits (58,379) Borrowed funds (334) Accounts payable and other liabilities (1,602) -------------- Fair value of net assets acquired 10,780 Purchase price 23,738 -------------- Goodwill $ 12,958 ============== 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 2005 and 2004 was approximately $2.1 million. 51 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, 2005 ----------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------- -------------- -------------- ------------- Securities held-to-maturity Government-Sponsored Enterprises: Mortgage-backed securities $ 2,823 $ 15 $ 2 $ 2,836 Other debt 1,920 - - 1,920 Obligations of states & political subdivisions 30,971 481 9 31,443 -------------- -------------- -------------- ------------- $ 35,714 $ 496 $ 11 $ 36,199 ============== ============== ============== ============= Securities available-for-sale Government-Sponsored Enterprises: Mortgage-backed securities $110,408 $ 79 $1,709 $108,778 Other debt 166,510 6 2,540 163,976 Obligations of states & political subdivisions 36,823 428 60 37,191 Equity securities 10,807 - - 10,807 -------------- -------------- -------------- ------------- 324,548 513 4,309 320,752 -------------- -------------- -------------- ------------- Total securities $360,262 $1,009 $4,320 $356,951 ============== ============== ============== ============= ----------------------------------------------------------------- December 31, 2004 ----------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------- -------------- -------------- ------------- Securities held-to-maturity Government-Sponsored Enterprises: 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 Government-Sponsored Enterprises: Mortgage-backed securities 121,198 792 599 121,391 Other debt 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 ============== ============== ============== =============
52 At December 31, 2005, 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 $ 14,875 $ 14,886 $ 149,230 $ 147,768 After 1 but within 5 years 4,618 4,790 144,968 142,310 After 5 but within 10 years 12,761 12,999 10,822 10,921 After 10 years 3,460 3,524 8,721 8,946 Equity securities - - 10,807 10,807 ---------------- --------------- --------------- -------------- Total $ 35,714 $ 36,199 $ 324,548 $ 320,752 ================ =============== =============== ==============
Proceeds from the sale of securities available-for-sale amounted to $78.7 million, $69.1 million and $44.4 million for the years ended December 31, 2005, 2004 and 2003, respectively, which resulted in gross realized gains of $747 thousand, $1.5 million and $1.3 million for those periods, respectively. Gross realized losses from the sale of securities available-for-sale amounted to $361 thousand, $94 thousand and $71 thousand in 2005, 2004 and 2003, 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 $270 thousand for the year ended December 31, 2005. These security transactions resulted in $8 thousand in gains for 2005 and no gains for 2004. The securities had significantly paid down to less than 85% of the original purchased balance through normal principal amortization and prepayments. The investment portfolio is evaluated at least quarterly to determine if there are any securities with losses that are other-than-temporary. As of December 31, 2005, the Company has concluded that the unrealized losses are temporary in nature since they are primarily related to market interest rates and are not related to the underlying credit quality of the issuers of our investment portfolio. None of the investments are believed to be other-than-temporarily impaired. The Company has the ability and intent to hold the securities until maturity to recover the entire value. The following table summarizes all securities that have an unrealized loss and the duration of the unrealized loss at December 31, 2005: (in thousands) 53
--------------------------- ------------------------ ------------------------ 12 months or less 2 months or longer Totals --------------------------- ------------------------ ------------------------ Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ------------ ------------- ----------- ------------ ---------- ------------ Securities available-for-sale Government-Sponsored Enterprises: Mortgage-backed securities $ 42,556 $ 561 $ 53,118 $ 1,148 $ 95,674 $ 1,709 Other debt 6,058 89 153,227 2,451 159,285 2,540 Obligations of states & political subdivisions 3,423 33 2,512 27 5,935 60 ------------ ------------- ----------- ------------ ----------- ---------- $ 52,037 $ 683 $ 208,857 $ 3,626 $ 260,894 $ 4,309 ============ ============= =========== ============ =========== ========== Securities held-to-maturity Government-Sponsored Enterprises: Mortgage-backed securities $ 273 $ 2 $ 24 $ - $ 297 $ 2 Obligations of states & political subdivisions 2,577 9 - - 2,577 9 ------------ ------------- ----------- ------------ ----------- ---------- $ 2,850 $ 11 $ 24 $ - $ 2,874 $ 11 ============ ============= =========== ============ =========== ==========
54 The following table summarizes all securities that have an unrealized loss and the duration of the unrealized loss at December 31, 2004: (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 Government-Sponsored Enterprises: Mortgage-backed securities $ 54,616 $ 555 $ 13,966 $ 44 $ 68,582 $ 599 Other debt 91,582 840 104,493 1,512 196,075 2,352 Obligations of states & political subdivisions 479 7 3,138 37 3,617 44 ------------ ------------- ------------ -------------- ---------------------- $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. Securities with carrying amounts of $76.1 million and $62.2 million at December 31, 2005 and 2004, 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, 2005 and 2004 consisted primarily of FHLBNY stock. 55 5. Loans The composition of the loan portfolio is summarized as follows: (in thousands) ------------- ------------- December 31, December 31, 2005 2004 ------------- ------------- Real estate Residential $ 292,247 $292,406 Commercial 479,120 375,985 Construction 92,390 51,162 Commercial Commercial and financial 212,392 186,386 Lease financing 24,584 23,535 Consumer Lease financing 94 680 Installment 5,142 4,027 ------------- ------------- 1,105,969 934,181 Allowance for loan and lease losses (10,646) (9,797) ------------- ------------- Net loans and leases $1,095,323 $924,384 ============= ============= Loans are net of unearned income and deferred fees of $7.1 million and $5.6 million for 2005 and 2004, 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, December 31, 2005 2004 ------------- ------------- Nonaccrual loans Residential real estate $ 822 $1,660 Commercial real estate 363 2,320 Commercial and financial 997 2,981 Commercial lease financing 1,290 1,836 Consumer 86 336 ------------- ------------- $3,558 $9,133 ------------- ------------- Troubled debt restructurings - - ------------- ------------- Total nonperforming loans $3,558 $9,133 ============= ============= At December 31, 2005, 2004 and 2003, 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 56 nonaccrual loans outstanding at year end in accordance with original terms amounted to $290 thousand, $852 thousand and $773 thousand for the years ended December 31, 2005, 2004 and 2003, respectively. Interest income included in net income during the year on loans currently classified as nonaccrual loans outstanding at year end amounted to $104 thousand, $304 thousand and $353 thousand for the years ended December 31, 2005, 2004 and 2003, respectively. At December 31, 2005 and 2004 the Company had approximately $1.5 million 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 $1.1 million, $671 thousand and $501 thousand for the years ended December 31, 2005, 2004 and 2003, respectively. The following table summarizes activity with respect to these loans: (in thousands) ------------------------------- Years Ended December 31, ------------------------------- 2005 2004 ------------- ------------- Balance at beginning of year $ 9,944 $ 4,092 Additions 10,778 6,524 Reductions (6,959) (672) ------------- ------------- Balance at end of year $13,763 $ 9,944 ============= ============= 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, 2005 and 2004 were $29.1 million and $31.8 million, and $20.2 million and $14.6 million, respectively. These outstanding balances were not included in the consolidated balance sheets of the Company. The Company recognized loan servicing fee income of $367 thousand, $343 thousand and $180 thousand for the years ended December 31, 2005, 2004, and 2003, respectively. Loan servicing rights totaled $622 thousand, and $456 thousand at December 31, 2005, and 2004, 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, 2005, 2004 and 2003. 6. Allowance for Loan and Lease Losses The Company's recorded investment in impaired loans is as follows: (in thousands) 57
---------------------------------------------- December 31, ---------------------------------------------- 2005 2004 ----------------------- ---------------------- 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 $ 997 $ 281 $2,981 $420 Commercial real estate 380 4 2,320 98 Residential real estate 594 88 822 123 Without a related allowance for loan losses - - - - ------------ ---------- ------------- -------- $1,971 $ 374 $6,123 $641 ============ ========== ============= ======== - ------------------------------------------------------------------------------------------------------ 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, ------------------------ 2005 2004 ----------- ---------- Average recorded investment $ 2,362 $ 6,315 =========== ========== Interest income recognized during time period that loans were impaired, using cash-basis method of accounting $ 70 $ 122 =========== ========== Changes in the allowance for loan and lease losses are summarized as follows: (in thousands) ---------------------------------- December 31, ---------------------------------- 2005 2004 2003 ----------- ---------- --------- Balance at beginning of year $ 9,797 $9,641 $7,207 Additions (deductions) Provision charged to operations 925 1,200 1,815 Allowance acquired through acquisition 1,018 - 1,929 Recoveries on loans previously charged-off 109 93 46 Loans charged-off (1,203) (1,137) (1,356) ----------- --------- -------- Balance at end of year $10,646 $9,797 $9,641 =========== ========= ======== 7. Premises and Equipment, net Premises and equipment are summarized as follows: (in thousands) 58 ----------------------- December 31, ----------------------- 2005 2004 ------------ ---------- Land $ 3,992 $ 4,573 Buildings 6,169 6,441 Furniture, fixtures and equipment 10,109 9,121 Leasehold improvements 13,543 11,830 ------------ ---------- $ 33,813 $31,965 Less: accumulated depreciation and amortization 16,304 14,252 ------------ ---------- Net book value $ 17,509 $17,713 ============ ========== During 2005, the Company sold a building for approximately $1.2 million in a sale leaseback transaction in which no gain was recorded on the transaction. Depreciation and amortization expense amounted to $1.7 million for the years ended December 31, 2005 and 2004 and $1.6 million for the year ended December 31, 2003. 8. Goodwill and Other Intangibles At December 31, 2005 and 2004 gross intangible assets amounted to $7.0 million and $4.6 million, respectively, while accumulated amortization amounted to $1.5 million and $935 thousand, respectively. Amortization of intangible assets as a result of acquisitions, which is included in non-interest expense, amounted to $571 thousand, $504 thousand, and $360 thousand for the years ended December 31, 2005, 2004 and 2003, respectively. During the fourth quarter of 2005, the Company recorded a core-deposit intangible of $2.4 million in connection with the Franklin merger. 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 intangibles have an estimated life of between 8 and 10 years and the Company amortized $496 thousand, $430 thousand and $286 thousand for the years ended December 31, 2005, 2004 and 2003, respectively. Intangibles are periodically reviewed for impairment and estimated useful life. In addition, the Company recorded goodwill of $13.0 million and $54.4 million in connection with the Franklin and Bridge View mergers, respectively, 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, 2005 the scheduled amortization of intangible assets is as follows: (in thousands) 2006 $ 753 2007 747 2008 747 2009 747 2010 747 Thereafter 1,728 ------- Total $ 5,469 ======= 59 9. Deposits Deposits are summarized as follows: (in thousands) ------------------------------------- December 31, ------------------------------------- 2005 2004 --------------- ------------ Non-interest bearing demand deposits $ 260,151 $ 235,036 Interest bearing demand deposits 466,436 472,807 Savings deposits 121,093 113,352 Money market deposits 99,907 87,595 Time deposits 312,521 337,348 --------------- ------------ Total $ 1,260,108 $ 1,246,138 =============== ============ At December 31, 2005 and 2004, the carrying amounts of certificates of deposit that individually exceed $100,000 amounted to $50.5 million and $50.9 million, respectively. Interest expense relating to certificates of deposit that individually exceed $100,000 was approximately $1.1 million, $701 thousand, and $850 thousand in 2005, 2004 and 2003, respectively. At December 31, 2005, the scheduled maturities of time deposits are as follows: (in thousands) 2006 $ 184,008 2007 121,418 2008 1,883 2009 933 2010 4,248 Thereafter 31 ----------- Total $ 312,521 =========== The following table presents by various rate categories, the amount and the periods to maturity of the certificate of deposit accounts outstanding at December 31, 2005:
Over six Over one Over two months year years Six months through through through Over and less one year two years three years three years Total ---------- ---------- ---------- ----------- ---------- --------- 0.00% to 0.99% $ 9,303 $ 2,873 $ 6 - $ 4 $ 12,186 1.00% to 1.99% 7,519 270 202 $ 2 - 7,993 2.00% to 2.99% 47,768 7,552 614 451 199 56,584 3.00% to 3.99% 66,186 33,572 115,017 1,430 1,901 218,106 4.00% to 4.99% 6,567 335 5,528 - 3,100 15,530 5.00% to 5.99% 818 3 - - - 821 6.00% to 6.99% 1,241 1 51 - 8 1,301 ---------- ---------- ---------- ----------- ---------- --------- $139,402 $44,606 $121,418 $1,883 $5,212 $312,521 ========== ========== ========== =========== ========== =========
60 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, ---------------------------- 2005 2004 ---------------- ----------- Securities sold under agreements to repurchase $ 3,939 $ 4,401 Federal Home Loan Bank overnight advances 46,150 24,600 ---------------- ----------- $50,089 $29,001 ================ =========== Average balance during year $44,990 $29,080 Average interest rate during the year 2.56% 1.23% Maximum amount borrowed at any month end $78,341 $63,232 Securities sold under agreements to repurchase mature within one year. In addition, the Bank has an additional $73 million available under its line of credit agreement through its membership in the FHLBNY. 11. Long-term Borrowings The Bank has long-term borrowings, which have maturities of over one year, of $110.0 million and $30.0 million as of December 31, 2005 and 2004, respectively. The long-term borrowings consisted of $10 million of fixed rate FHLBNY advances at December 31, 2005, $90 million of FHLBNY Convertible Repurchase Advances at December 31, 2005 that are callable after a fixed period and $10 million of a callable FHLBNY Convertible Repurchase Advance with a Customized Strike Price at December 31, 2005 and 2004. This advance has a fixed rate of 4.22%, matures in January 2007 and is collateralized by 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, 2005, 3-month LIBOR was 4.54%. The $90 million in long-term callable FHLB advances with maturities of five to ten years and which can be called after the initial term of two to three years at interest rates between 3.66% to 3.99%. The long-term borrowings may not be repaid by the Bank prior to the scheduled/repurchase payment dates without penalty. 12. Subordinated Debentures During June 2005, Interchange Statutory Trust I and Interchange Statutory Trust II (together the "Trusts") each issued $10 million of pooled trust preferred securities. In conjunction with the issuance of the trust preferred securities the Company issued subordinated debentures to the Trusts totaling $20.6 million. The rates of interest paid on the securities issued by the Trusts and the Company have been fixed for 5 years, at an average rate of 6.10%, after which time the rates will float at the 3-month LIBOR plus 1.71%. The Company has the right to call the notes after 5 years on any of the interest payment dates. The final maturity date on the pool trust preferred securities and debentures is 2035. The Company does not meet the criteria as primary beneficiary for the Trusts in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46) and FIN No. 46(R), "Consolidation of Variable Interest Entities." As a result, these trusts are not consolidated. The Trusts have no independent operations. The obligations of the Trusts are fully and unconditionally guaranteed by the Company. The debentures are unsecured and rank subordinate and junior in right of payment to all indebtedness, liabilities and obligations of the Company. Interest on the debentures is cumulative and payable in arrears. Proceeds from any redemption of debentures would cause a mandatory redemption 61 of pooled trust preferred securities having an aggregate liquidation amount equal to the principal amount of debentures redeemed. 13. Benefit Plans Defined Benefit Plans - --------------------- On October 27, 2005, the Board of Directors of the Bank, adopted a resolution to "freeze" all future benefit accruals under the non-contributory defined benefit pension plan covering all eligible employees (the "Pension Plan") effective December 31, 2005. The purpose of the "freeze" was to afford flexibility in the retirement benefits that the Company provides while preserving all retirement plan participants' earned and vested benefits and managing the increasing costs associated with the retirement plan. The Company recognized one-time gain on curtailment of approximately $1.2 million in connection with the freezing of the retirement plan primarily based upon the difference between the projected benefit obligation and the accumulated benefit obligation. The Board also authorized the "freeze" of all future benefit accruals of the 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") and the defined benefit portion the 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. The Pension Plan was established in 1993 by the Bank . 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 at the time of the curtailment of the Pension Plan. Effective January 1, 1994, the Bank established the Supplemental Plan. For all of the plans, the discount rate for determining the pension benefit obligation and service cost at December 31, 2005 ranged between 4.50% and 5.90%, while the expected long-term return on Pension Plan assets was 8.00%. 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 the "Directors' Plan". As a part of this Directors' Plan, the Company contributed 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. 62 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 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 --------------------------- ------------------------ ------------------------- 2005 2004 2003 2005 2004 2003 2005 2004 2003 ---------- -------- -------- ------- -------- ------- -------- -------- ------ Service cost $ 710 $ 565 $ 490 $ - $32 $29 $107 $116 $ 85 Interest cost 291 223 181 20 26 21 94 126 114 Expected return on plan assets (223) (179) (124) - - - - - - Amortization of prior service cost 2 2 2 - 3 2 - - - Recognized net actuarial gain 20 - 1 - 3 - - (4) - Settlement gain - - - - - - (26) - - Curtailment gain (1,217) - - (3) - - - - - --------- ------- ------- ------ ------- ------ ---------- ----- ------ Net periodic (benefit) cost $ (417) $ 611 $ 550 $17 $64 $52 $175 $238 $199 ========= ======= ======= ====== ======= ====== ========== ===== ======
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) 63
Pension Plan Supplemental Plan Directors' Plan ------------------------------ ----------------------- ------------------------- 2005 2004 2005 2004 2005 2004 -------------- ------------- ---------- --------- ------------- --------- Change in pension obligation Pension obligation at beginning of year $ 4,692 $ 3,626 $ 466 $ 381 $ 2,321 $ 2,101 Service cost 710 565 - 32 107 116 Interest cost 291 223 20 26 94 126 Acquisition of Bridge View Plan - - - - - Actuarial (gain) loss 528 303 32 27 (88) 6 Benefits paid (49) (25) - - (336) (28) Curtailment (2,275) - (118) - - - -------------- ------------- ---------- --------- ------------- --------- Pension obligation at end of year 3,897 4,692 400 466 2,098 2,321 -------------- ------------- ---------- --------- ------------- --------- Change in plan assets Fair value of plan assets at beginning of year 2,797 1,980 - - - - Actual gain on plan assets 189 278 - - - - Employer contribution 43 564 - - - - Benefits paid (49) (25) - - - - -------------- ------------- ---------- --------- ------------- --------- Fair value of plan assets at end of year 2,980 2,797 - - - - -------------- ------------- ---------- --------- ------------- --------- Funded Status (917) (1,894) (400) (466) (2,098) (2,321) Unrecognized net actuarial (gain) loss - 493 (13) 56 (189) (110) Unrecognized amortized prior service cost - 26 - 13 - - Adjustment for additional liability - - - - - - -------------- ------------- ---------- --------- ------------- --------- Accrued pension cost $ (917) $(1,375) $(413) $(397) $(2,287) $(2,431) ============== ============= ========== ========= ============= ========= Weighted-average assumptions (1) Discount rate for net periodic benefit cost 5.90 % 6.25 % 5.00 % 6.25 % 4.50 % 6.25 % Discount rate for benefit obligations 5.70 5.90 5.50 5.00 5.25 5.00 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.
64 Other Balance Sheet Amounts The following amounts are included in the Consolidated Balance Sheets for December 31,: (in thousands) 2005 2004 -------------- ------------- Accrued benefit cost $ (3,617) $ (4,203) Accumulated other comprehensive income 17 - -------------- ------------- Net amount recognized $ (3,600) $ (4,203) ============== ============= The accumulated benefit obligation for all defined benefit pension plans was $6.4 million and $5.7 million at December 31, 2005 and 2004, respectively. Information for pension plans with an accumulated benefit obligation in excess of plan assets: (in thousands) 2005 2004 ------------ ----------- Projected benefit obligation $ 6,395 $ 7,479 Accumulated benefit obligation $ 6,395 $ 5,744 Fair value of plan assets $ 2,980 $ 2,797 During 2006 the Company anticipates contributing $796 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 ------------- ------------ ------------- ------------ 2006 $ 45 $ 3 $ 334 $382 2007 55 4 334 393 2008 59 4 334 397 2009 66 5 336 407 2010 108 230 30 368 2011 and thereafter 643 132 218 993 Defined Contribution Pension Plan _________________________________ 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. 65 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 $427,000, $382,000 and $347,000 in 2005, 2004 and 2003, respectively. 14. Stock Option and Incentive Plan The Company maintains two stock option and incentive plans the Stock Option and Incentive Plan of 1997, as amended, and the 2005 Omnibus Stock and Incentive Plan (together "the Plans"), that covers certain key employees. A total of 2,076,470 shares of common stock were made available for option and incentive awards under the Stock Option and Incentive Plan of 1997. Options to purchase 1,768,724 shares (net of forfeitures) and 264,586 shares of restricted and discount stock have been granted to date. A total of 1,500,000 shares of common stock were made available for option and incentive awards under the 2005 Omnibus Stock and Incentive Plan. The Compensation/Stock Option Committee administers the plans, reviews the awards and submits recommendations to the full board of directors for action. 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 plans incentive stock options or non-qualified stock options may be granted to employees. In addition, the 2005 Omnibus Stock and Incentive Plan allows for other types of stock based awards to be issued including stock appreciation rights and phantom stock during 2005 no such awards were granted under the plan. 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 to purchase 157,000 shares (net of forfeitures) have been granted to date. 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. During 2005 the Board of Directors elected to accelerate all unvested options under the Plans and Director's Stock Plan. As a result there will be no expense associated with these stock options in 2006. 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: 66
---------------------------------------------------------------------------- 2005 2004 2003 --------------------------- ------------------------- ---------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------------- ------------ ----------- ------------ ---------- ---------- Incentive Stock Options Outstanding at January 1 1,061,689 $11.19 834,330 $ 9.15 673,524 $ 7.83 Granted 264,377 16.69 262,725 17.50 258,750 11.33 Exercised (29,272) 8.21 (19,065) 7.44 (97,944) 5.89 Forfeited (14,125) 16.38 (16,301) 13.00 - - ------------- ------------ ----------- ------------ ---------- ---------- Outstanding at December 31 1,282,669 $12.33 1,061,689 $11.19 834,330 $ 9.15 ============= ============ =========== ============ ========== ========== Options exercisable at December 31 1,282,669 $12.33 573,212 $ 8.46 400,455 $ 7.74 Weighted-average fair value of options granted during the year ended December 31 (per option) $ 4.01 $ 4.67 $ 2.74 ---------------------------------------------------------------------------- 2005 2004 2003 --------------------------- ------------------------------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Non-Qualified Stock Options Options Price Options Price Options Price -------------- ------------- ------------- ----------- --------- -------- Outstanding at January 1 111,750 $11.52 87,750 $10.02 67,500 $ 9.03 Granted 29,250 17.64 33,750 15.75 27,000 11.80 Exercised (15,750) 9.42 (3,000) 8.63 (6,750) 7.29 Forfeited - - (6,750) 14.48 - - ------------- -------------------------- ----------- --------- ---------- Outstanding at December 31 125,250 $13.21 111,750 $11.52 87,750 $10.02 ============= ============ ============= =========== ========= ========== Options exercisable at December 31 125,250 $13.21 58,500 $ 9.22 36,000 $ 8.12 Weighted-average fair value of options granted during the year ended December 31 (per option) $ 4.49 $ 4.01 $ 3.07
All per share data and average shares were restated to reflect a 3-for-2 stock split declared January 18, 2005 and paid on February 18, 2005. The following table summarizes information about options outstanding under the Stock Plan and Director's Stock Plan at December 31, 2005: 67
Options Outstanding Options Exercisable - ---------------------------------------------------------------------------------------------- ---------------------------------- Weighted-Average Weighted-Average Weighted-Average Number Remaining Exercise Exercise Range of Exercise Prices Outstanding Contractual Life Price Exercisable Price - ---------------------------------------------------------------------------------------------- -------------------------------- Incentive Stock Options $ 0.00 $ 5.00 6,615 0.28 $ 3.72 6,615 $ 3.72 $ 5.00 $10.00 521,138 4.65 8.28 521,138 8.28 $10.00 $15.00 246,941 7.08 11.33 246,941 11.33 $15.00 $25.00 507,975 8.57 17.09 507,975 17.09 ------------------------------------------------------- ---------------------------------- 1,282,669 6.65 12.33 1,282,669 12.33 ------------------------------------------------------- ---------------------------------- Non-Qualified Stock Options $ 0.00 $10.00 25,500 4.94 13.84 25,500 13.84 $10.00 $15.00 42,000 6.87 14.79 42,000 14.79 $15.00 $20.00 57,750 8.83 18.14 57,750 18.14 ------------------------------------------------------- ---------------------------------- 125,250 7.38 16.14 125,250 16.14 ------------------------------------------------------- ---------------------------------- Totals 1,407,919 6.71 $12.67 1,407,919 $12.67 ======================================================= ==================================
All per share data and averages shares were restated to reflect a 3-for-2 stock split declared on January 18, 2005 and paid on February 18, 2005. 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, 2005, 2004 and 2003. Restricted Stock Awards 2005 2004 2003 -------- ----------- ----------- Outstanding at beginning of year 66,330 88,692 83,234 Granted 18,773 11,690 31,325 Vested (32,321) (34,052) (25,867) --------- ----------- ----------- Outstanding at year end 52,782 66,330 88,692 ========= =========== =========== All per share data and average shares were restated to reflect a 3-for-2 stock split declared on January 18, 2005 and paid on February 18, 2005. The amount of compensation cost related to restricted stock awards included in salary expense in 2005, 2004 and 2003 amounted to $203 thousand, $298 thousand and $237 thousand, respectively. 68 15. 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, 2005, all capital adequacy requirements to which they are subject. As of December 31, 2005, 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 Company'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, 2005: Total Capital (to Risk Weighted Assets): The Company $139,560 11.93 % $93,595 8.00 % N/A N/A The Bank 140,863 11.98 % 94,042 8.00 % $117,553 10.00 % Tier 1 Capital (to Risk Weighted Assets): The Company 128,894 11.02 % 46,797 4.00 % N/A N/A The Bank 130,197 11.08 % 47,021 4.00 % 70,532 6.00 % Tier 1 Capital (to Average Assets): The Company 128,894 8.20 % 47,158 3.00 % N/A N/A The Bank 130,197 8.29 % 47,110 3.00 % 78,516 5.00 % 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 %
Shares of common stock In 2001 and 2005, the Board of Directors of Interchange authorized programs to repurchase up to 450,000 shares and 950,000 shares, respectively, of Interchange's outstanding common stock on the open market or in privately negotiated transactions. During 2005 and 2004 the Company repurchased 321,737 and 128,492 shares for approximately $5.8 million and $2.2 million under the authorized repurchase programs. As of December 31, 2005 the Company had purchased 321,737 69 shares and 255,854 shares at a total cost of approximately $5.8 million and $4.4 million under the authorized 2005 and 2001share repurchase programs, respectively. 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, 2003 19,214 1,578 Reacquired shares in lieu of non-performing asset (129) 129 Issuance of stock from treasury 35 (35) ------------- ------------ Balance at December 31, 2004 19,120 1,672 Reacquired shares in lieu of non-performing assets (39) 39 Issuance of stock from treasury 63 (63) Purchase of treasury stock (328) 328 Issuance of stock for Franklin Bank 1,323 - ------------- ------------ Balance at December 31, 2005 20,139 1,976 ============= ============ All per share data and average shares were restated to reflect a 3-for-2 stock split declared on January 18, 2005 and paid on February 18, 2005. 16. 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)
2005 2004 2003 ------------------------------------ -------------------------- -------------------------- 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 $19,705 19,418 $1.01 $18,214 19,124 $0.95 $16,366 17,724 $0.92 ========== ========= ======== Effect of Dilutive Shares Weighted average shares if converted 417 352 263 ----------- --------- --------- Diluted Earnings per Common Share Net income available to common shareholders $19,705 19,835 $0.99 $18,214 19,476 $0.94 $16,366 17,987 $0.91 ============= =========== ========== ======== ========= ======= ======== ========= =======
All per share data and average shares were restated to reflect a 3-for-2 stock split declared on January 18, 2005 and paid on February 18, 2005. 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, 2005 and 2003. 70 17. 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) 2005 2004 2003 ------------ --------- --------- Professional fees $2,227 $2,609 $1,568 Data processing 1,164 978 933 Directors' fees, travel and reimbursement 702 848 690 All other 3,514 3,558 3,378 ------------ --------- --------- $7,607 $7,993 $6,569 ============ ========= ========= 18. Income Taxes Income tax expense for the years ended December 31, is summarized as follows: (in thousands) 2005 2004 2003 ------------- ------------ --------- Federal: current $8,059 $8,998 $5,711 deferred 752 (942) 1,461 State: current 659 688 34 deferred (286) (263) 412 ------------- ------------ --------- $9,184 $8,481 $7,618 ============= ============ ========= 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) 2005 2004 ---------- --------- Deferred tax assets Excess of book over tax allowance for loan and lease losses $4,349 $4,311 Excess of book over tax depreciation 13 21 Excess of book over tax provision for benefit plan expense 1,549 1,909 Core deposit premium 149 211 Unrealized losses- securities available-for-sale 1,496 408 Other 615 641 ---------- --------- Total deferred tax assets 8,171 7,501 ---------- --------- Deferred tax liabilities Dividend on REIT - 1,228 Excess of tax over book for leasing originations 429 587 Premium related to acquisitions 2,196 1,726 State tax 223 503 Other 1,225 912 ---------- --------- Total deferred tax liabilities 4,073 4,956 ---------- --------- Net deferred tax assets $4,098 $2,545 ========== ========= The provision for income taxes differs from the expected statutory provision as follows: 71 --------------------------------- December 31, --------------------------------- 2005 2004 2003 ----------- ---------- ------- Expected provision at statutory rate 35 % 35 % 35 % Difference resulting from: State income tax, net of federal benefit 1 2 2 Interest income exempt from federal taxes (3) (2) (2) Bank owned life insurance (1) (2) (3) Other - (1) - ----------- ---------- ------- 32 % 32 % 32 % =========== ========== ======= 19. 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, 2005, undistributed net assets of the Bank were $200.3 million of which $125.9 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. 20. 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, 2005 and 2004 the Company had a liability of $20 thousand and $40 thousand, 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) 2005 2004 ------------ ----------- Home equity loans $ 105,070 $ 103,625 Other loans 172,062 171,517 Standby letters of credit 3,416 3,193 ------------ ----------- $ 280,548 $ 278,335 ============ =========== 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". 72 Maximum potential Carrying amount of future amount of the Nature of the guarantee Payments liability - --------------------------------------------------------------- Standby letters of credit $3,416 $ - 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) Lease commitments 2006 $ 2,766 2007 2,719 2008 2,353 2009 2,092 2010 1,791 thereafter 5,840 ----------- Total minimum lease payments $17,561 =========== Rent expense for all leases amounted to approximately $2.7 million, $2.6 million and $2.3 million in 2005, 2004, and 2003, respectively. The Company is also a party to routine litigation involving various aspects of its business, none of which, in the opinion of management and its legal counsel, is expected to have a material adverse impact on the consolidated financial condition, results of operations or liquidity of the Company. 21. Related Party Transactions 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 is approximately $84 thousand. Rent expense paid was approximately $84 thousand, $76 thousand, and $62 thousand in 2005, 2004, and 2003, 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 $473 thousand, $493 thousand, and $356 thousand in 2005, 2004, and 2003, respectively. In addition, a director provided certain real estate appraisal services through an affiliated firm; fees paid for these services amounted to approximately $10 thousand and $41 thousand in 2005 and 2004, respectively. In 2004 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 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. 22. 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 73 values are most commonly derived from quoted market prices. In the event market prices are not available, fair value is determined using the present value of anticipated future cash flows. This method is sensitive to the various assumptions and estimates used and the resulting fair value estimates may be significantly affected by minor variations in those assumptions or estimates. In that regard, it is likely the Company in immediate settlement of the financial instruments would realize amounts different from the fair value estimates. The following table sets forth the carrying amounts and estimated fair values of the Company's financial instruments: (in thousands)
------------------------------------------------------------------ December 31, ------------------------------------------------------------------ 2005 2004 ------------------------------------ ----------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------------- ------------------ -------------- -------------- Cash and cash equivalents $ 42,624 $ 42,624 $ 33,110 $ 33,110 Securities held to maturity 35,714 36,199 14,530 15,276 Securities available for sale 320,752 320,752 374,199 374,199 Loans, net 1,095,323 1,089,034 924,384 929,492 ---------------- ------------------ -------------- -------------- $1,494,413 $1,488,609 $1,346,223 $1,352,077 ================ ================== ============== ============== Deposits $1,260,108 $1,242,178 $1,246,138 $1,127,185 Short-term borrowings 50,089 50,089 29,001 29,001 Long-term borrowings 130,953 127,998 30,000 29,631 ---------------- ------------------ -------------- -------------- $1,441,150 $1,420,265 $1,305,139 $1,185,817 ================ ================== ============== ==============
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 74 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, 2005 and 2004, the estimated fair values of these off-balance sheet financial instruments were immaterial. 75 23. Parent Company Only Information (in thousands) --------------------------- December 31, --------------------------- Condensed balance sheets 2005 2004 -------------- ----------- Assets Cash $ 5,233 $ 1,630 Investment in subsidiaries Bank 200,295 149,422 Other 763 142 -------------- ----------- Total assets $206,291 $151,194 ============== =========== Liabilities Loans from subsidiaries $ 4,500 - Subordinated debentures 20,620 - Other liabilities 2,161 $ 1,040 -------------- ----------- 27,289 1,040 -------------- ----------- Stockholders' equity Common stock 5,397 5,396 Capital Surplus 97,238 73,320 Retained earnings 99,222 86,542 Accumulated other comprehensive income (2,310) (633) -------------- ----------- 199,547 164,625 Less: Treasury stock 20,545 14,471 -------------- ----------- Total stockholders' equity 179,002 150,154 -------------- ----------- Total liabilities and stockholders' equity $206,291 $151,194 ============== =========== - -----------------------------------------------------------------------------
---------------------------------------- Years Ended December 31, ---------------------------------------- Condensed statements of income 2005 2004 2003 ---------------- ----------- ----------- Dividends from subsidiary bank $ 11,900 $ 11,710 $ 20,320 Net gain on sale of securities - 304 - Other income 95 - - ---------------- ----------- ----------- Total revenues 11,995 12,014 20,320 ---------------- ----------- ----------- Interest on borrowings and subordinated debentures 673 12 - Operating expenses 428 303 225 ---------------- ----------- ----------- Income before equity in undistributed earnings of subsidiaries 10,894 11,700 20,095 Equity in undistributed earnings of subsidiaries 8,812 6,514 (3,729) ---------------- ----------- ----------- Net income $ 19,705 $ 18,214 $ 16,366 ================ =========== =========== - ---------------------------------------------------------------------------------------------
76
------------------------------------ Years Ended December 31, ------------------------------------ Condensed statements of cash flows 2005 2004 2003 ------------ ----------- ----------- Cash flows from operating activities: Net income $19,705 $18,214 $16,366 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 Decrease (increase) in dividends payable - - (1,372) Decrease in other liabilities and other 1,130 (3,344) (198) Equity in undistributed income of subsidiaries (8,812) (6,514) 3,729 ------------ ----------- ----------- Net cash provided by operating activities 12,023 8,060 20,113 ------------ ----------- ----------- Cash flows from investing activities: Investments in subsidiaries (20,620) - - Sale of securities available-for-sale - 651 - ------------ ----------- ----------- Net cash provided by investing activities (20,620) 651 - ------------ ----------- ----------- Cash flows from financing activities: Cash dividends paid (7,013) (6,382) (4,970) Loan from subsidiary 4,500 - - Issuance of subordinated debuntures 20,620 Repayment of loan from subsidiary - - - Treasury stock (6,619) (2,154) (693) Common stock issued 335 205 354 Exercise of option shares 389 146 438 Payout of fractional shares (12) - - Net cash payments for the acquisition of Bridge View Bancorp - - (15,768) ------------ ----------- ----------- Net cash used in financing activities 12,200 (8,185) (20,639) ------------ ----------- ----------- Net increase/(decrease) in cash 3,603 526 (526) Cash at beginning of year 1,630 1,104 1,630 ------------ ----------- ----------- Cash at end of year $ 5,233 $ 1,630 $ 1,104 ============ =========== =========== Supplemental disclosure of non-cash investing and financing activities: Stock issued related to acquisitions $23,738 - $52,180
77 24. Quarterly Financial Data (unaudited) (in thousands, except per share data)
First Second Third Fourth 2005 Quarter Quarter Quarter Quarter - ---------------------------------------------------------------------------------------------------------------------- Interest income $18,005 $18,852 $20,060 $21,578 Interest expense 4,441 5,367 6,356 7,198 Net Interest income 13,564 13,485 13,704 14,380 Provision for loan losses 175 225 300 225 Net gain on sale of securities 67 250 77 - Non-interest income, excluding net gain on sale of securities 2,127 2,226 2,600 3,034 Non-interest expenses 9,154 9,180 9,247 8,119 Income before income taxes 6,429 6,556 6,834 9,070 Net income 4,420 4,515 4,676 6,094 Basic earnings per common share $ 0.23 $ 0.24 $ 0.24 $ 0.30 Diluted earnings per common share $ 0.23 $ 0.23 $ 0.24 $ 0.30 - ---------------------------------------------------------------------------------------------------------------------- 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 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.
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 (i) recorded, processed, summarized and reported accurately within the time periods specified in the Securities and Exchange Commission's (SEC) rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. 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 78 effective. The conclusions of the CEO and CFO from this evaluation were communicated to the Audit Committee. 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, 2005 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, 2005. 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, 2005, 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, 2005 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein: 79 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 report on internal control over financial reporting, that Interchange Financial Services Corporation and subsidiaries (the "Company"), maintained effective internal control over financial reporting as of December 31, 2005, 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, 2005, 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, 2005, 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, 2005 of the Company and our report dated March 13, 2006 expressed an unqualified opinion on those financial statements. /s/ Deloitte & Touche LLP - ------------------------- New York, New York March 13, 2006 80 Item 9B. Other Information. On January 17, 2006, the Board of Directors of Interchange Financial Services Corporation and Interchange Bank implemented the Interchange Bank Deferred Compensation Plan (the "DCP") as a replacement to the Supplemental Executives' Retirement Plan (the "SERP") which had been previously maintained. The DCP was implemented to: (i) preserve benefits previously accrued under the SERP, (ii) provide the ability for select executives to defer the receipt of a portion of their income in a manner that defers the taxation of such income, (iii) provide restorative payments to executives who are prevented from receiving the full benefits contemplated by the 401(k) plan's benefit formula, (iv) provide a pre-retirement death benefit to the Chief Executive Officer, and (v) comply with section 409A of the Internal Revenue Code of 1986 and regulations or other guidance of the Internal Revenue Service published thereunder (collectively, "Section 409A"). Section 409A requires certain IRS restrictions on payment timing to participants under the DCP and the circumstances under which elections to defer compensation or receive distributions of deferred compensation may be made. The DCP is an unfunded, non-qualified plan that provides for distribution of the amounts deferred to participants or their designated beneficiaries upon the occurrence of certain events such as death, retirement, or termination of service (as those terms are defined in the DCP as required by Section 409A). The DCP is attached hereto as Exhibit 10(g). PART III Item 10. Directors and Executive Officers of the Registrant Directors - --------- The name, age, principal occupation and business experience of each member of the Company's Board of Directors are set forth below. Unless otherwise indicated, each has held his or her current position for the last five years. Anthony D. Andora, age 75, is a member of Andora & Romano, LLC, a law firm in Paramus, New Jersey. Mr. Andora has been a director of the Company since 1984 and of the Bank since 1969. He is Chairman of the Board and is a member of the Executive Committee, the Corporate Planning and Finance Committee and serves in an ex-officio capacity on all committees. Anthony S. Abbate, age 66, is President and Chief Executive Officer of the Holding Company formed in 1984 and President and Chief Executive Officer of the bank since 1981. He is Chairman of the Executive Committee and a member of the Corporate Planning and Finance Committee and serves in an ex-officio capacity on all committees. Mr. Abbate also serves (since February 2004) as an independent director of the Board of K-Sea General Partner GP LLC, (NYSE:KSP) and member of the company's Audit Committee. Gerald A. Calabrese, Jr., age 56, is President of Century 21, Calabrese Realty and Chairman and Chief Executive Officer of Metropolitan Mortgage Company. Mr. Calabrese has been a director of the Company and the Bank since 2003. He serves as an alternate member of the Executive Committee. Donald L. Correll, age 55, is President and CEO of American Water Company, a subsidiary of RWE AG since April 17, 2006. Mr. Correll held the position of President and CEO of Pennichuck Corporation (PNNW: NASDAQ) since August 4, 2003, a holding company whose subsidiaries are active in public water supply, water related services and real estate. Mr. Correll 81 retired as Chairman and CEO of United Water Resources, Inc. in 2001. In July 2005, Mr. Correll was appointed to the Board of Directors of Health South Corporation. Mr. Correll has been a director of the Company and the Bank since 1994 and serves on the Audit Committee and Compensation/Stock Option Committee and is an alternate member of the Executive Committee. Anthony R. Coscia, age 46, is a partner and executive committee member of the law firm of Windels Marx Lane & Mittendorf, LLP in New York and New Brunswick, New Jersey. He currently serves as the Chairman of the Board of Commissioners of Port Authority of New York and New Jersey. In February 2006, Mr. Coscia was appointed to the Board of Directors of Ryan Beck & Co. Mr. Coscia has been a director of the Company and the Bank since 1997. He serves on the Audit Committee, Nominating/Governance Committee and is an alternate member of the Executive Committee. John J. Eccleston, age 80, retired principal of R.D. Hunter & Company, L.L.P., Certified Public Accountants. Prior to January 1995, he was Senior Partner of John J. Eccleston & Company, Certified Public Accountants and Registered Municipal Accountants. Mr. Eccleston has been a director of the Company since 1984 and the Bank since 1969. He is Chairman of the Audit Committee and a member of the Executive Committee, Nominating/Governance Committee and Corporate Planning/Finance Committee. David R. Ficca, age 74, is retired Vice Chairman and Senior Legal Officer of Kidde, Inc, a multi-market manufacturing and service organization. He has been a director of the Company since 1984 and of the Bank since 1983. He is a member of the Executive Committee, the Nominating/Governance Committee, the Corporate Planning/Finance Committee and the Compensation/Stock Option Committee. James E. Healey, age 64, is a practicing Certified Public Accountant in Ramsey, New Jersey and is also a Director of Sappi Ltd., a NYSE listed South African vertically integrated international pulp and paper producer and a Director of Marcal Paper Mills, Inc., a manufacturer and marketer of consumer tissue paper products. In addition, he is a Trustee of Pace University in New York City, a Trustee of St. Joseph's Health Care System in Paterson, New Jersey, and Chairman of the Board of Trustees of the United Way of Bergen County, in Oradell, New Jersey. In December 2000, Mr. Healey retired as Executive Vice President and Chief Financial Officer of Nabisco Holdings Corp., a position he held since June 1997, and retired as Senior Vice President and Chief Financial Officer of Nabisco Group Holdings, Inc., a position he held since June 1999. Mr. Healey has been a director of the Company and the Bank since 1993. He is Chairman of the Compensation/Stock Option Committee and serves on the Audit Committee, Corporate Planning/Finance Committee and the Executive Committee. Nicholas R. Marcalus, age 62, is Chairman, Chief Executive Officer of Marcal Paper Mills, Inc., a manufacturer and marketer of consumer tissue paper products, in Elmwood Park, New Jersey, and serves on the board of directors of that organization. Mr. Marcalus has been a director of the Company and the Bank since 1997. He serves as the Secretary and on the Investment Committee and is an alternate member of the Executive Committee. Eleanore S. Nissley, age 73, is a commercial real estate investor, President of The SIBS Company, LLC, a New Jersey real estate company, and owner of Anclote and Gulf Atlantic Asset Management, Inc., two Florida real estate companies. She currently serves as Vice Chairperson of Hackensack Meadowlands Development Commission. Mrs. Nissley has been a director of the Company and of the Bank since 1992. She is Chairman of the Nominating/Governance Committee and is a member of the Audit Committee and is an alternate member of the Executive Committee. 82 Jeremiah F. O'Connor, age 72, is currently a principal of NW Financial Group (since 1996), a financial advisory firm. Mr. O'Connor was formerly a Managing Director of NatWest Financial Markets Group (since 1994). Mr. O'Connor has been a director of the Company since 1984 and the Bank since 1969. He is Vice Chairman of the Board and serves on the Executive Committee. Robert P. Rittereiser, age 67, a private investor, joined Centurion Holdings LLC, a privately held Management Advisory Concern, in November 2005 as Advisor. Centurion provides services to corporations and government entities. He was formerly the Chairman and Chief Executive Officer of GFinancial, L.L.C., formerly known as Gruntal Financial, L.L.C., and GCO Services, L.L.C., formerly known as Gruntal & Co., L.L.C., which are related investment services firms based in New York City. On October 29, 2002, each of GFinancial, L.L.C., and GCO Services, L.L.C, filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code for the Southern District of New York. The Plans were confirmed on March 25, 2004 and his association ended at that time. He serves as a Director of Viecore, Inc., a privately held corporation in Upper Saddle River, New Jersey. Viecore, Inc. is a systems integration firm specializing in Voice Recognition Technology. He served as a Trustee of the DBL Liquidating Trust from April 1992 until April 1996. He has been a Director of the Company and of the Bank since July 1989. He is Chairman of the Corporate Planning/Finance Committee and a member of the Compensation/Stock Option Committee, the Executive Committee, and the Investment Committee. John A. Schepisi, age 61, is Senior Partner of Schepisi & McLaughlin, Attorneys at Law. Mr. Schepisi has been a director of the Company and the Bank since 2003. He serves as a member of the Corporate Planning/Finance Committee and is an alternate member of the Executive Committee. William "Pat" Schuber, age 58, is a member of the firm of DeCotiis, Fitzpatrick, Cole & Wisler, LLP a leading New Jersey law firm and is a member of the New Jersey Bar. He is senior lecturer at Fairleigh Dickinson University, the School of Administrative Science. Mr. Schuber was Bergen County Executive from 1991 to 2002 and former New Jersey Assemblyman from 1982 to 1990. He has been a member of the Bank's Board since 2003. He is member of the Nominating/Governance Committee and the Investment Committee and is an alternate member of the Executive Committee. Committees and Meetings of the Board of Directors ------------------------------------------------- During 2005, the board of directors of the Company held 6 meetings and board of directors of the Bank held 12 meetings. All incumbent directors attended at least 75% of the aggregate meetings of each board and the committees of each board on which they served that were held during fiscal year 2005. The Company's board of directors has determined that Mr. Eccleston, chairman, Messrs. Correll and Healey, members of the Company's audit committee are audit committee financial experts within the meaning of Securities and Exchange Commission regulations. 83 The following committees serve both the Company and the Bank:
- -------------------------------- -------------------------------------------------------------- --------------- Name of Committee and Functions of the Committee Number of Members Meetings in 2005 - -------------------------------- -------------------------------------------------------------- --------------- Audit Reviews significant audit, accounting and other principles, 10 John J. Eccleston, Chairman policies and practices, the activities of independent Donald L. Correll auditors and of the Company's internal auditors, and the Anthony R. Coscia conclusion and recommendations of auditors and the reports James E. Healey of regulatory examiners upon completion of their respective Eleanore S. Nissley audits and examinations. - -------------------------------- -------------------------------------------------------------- --------------- Compensation/Stock Option Administers management incentive compensation plans, 8 James E. Healey, Chairman including the Company's stock option and incentive plan. Donald L. Correll The committee makes recommendations to the Board of David R. Ficca Directors with respect to compensation of directors and Robert P. Rittereiser executive officers. - -------------------------------- -------------------------------------------------------------- --------------- Corporate Planning and Finance Responsible for the review of the annual budget, capital 2 Robert P. Rittereiser, Chairman expenditures and other financial transactions. Anthony S. Abbate Anthony D. Andora John J. Eccleston David R. Ficca James E. Healey John A. Schepisi - -------------------------------- -------------------------------------------------------------- --------------- Executive Has authority to exercise all of the powers of the Board of 13 Anthony S. Abbate, Chairman Directors with respect to the affairs of the Company, except Anthony D. Andora that the Executive Committee may not: (1) Exercise such John J. Eccleston powers while a quorum of the Board of Directors is actively David R. Ficca convened for the conduct of business; (2) Declare a dividend James E. Healey or approve any other distribution to stockholders; (3) Elect Jeremiah F. O'Connor or appoint any officer or director; and (4) Make, alter or Robert P. Rittereiser repeal the By-Laws of the Bank. - -------------------------------- -------------------------------------------------------------- --------------- Nominating/Governance Nominating: Advises and makes recommendations to the Board 3 Eleanore S. Nissley, Chairperson of Directors concerning the selection of candidates as David R. Ficca nominees for election as directors. The committee will Anthony R. Coscia consider nominations recommended by shareholders. John J. Eccleston William P. Schuber Governance: Develops and recommends to the Board of Directors a Code of Business Conduct and Ethics and considers any waivers from the Company's Code of Business Conduct and Ethics. The committee will arbitrate any issues involving conflicts of interest which are not in conformance with the Corporate Governance Guidelines of the Company and its subsidiaries. Each member of the Nominating Committee is independent as defined in the NASDAQ Stock Market Marketplace rules. - -------------------------------- -------------------------------------------------------------- ---------------
84 Executive Officers - ------------------ The following table sets forth the name, age, business experience and present position of the Company's principal executive officers: Name Age Positions Held with the Company ---- --- ------------------------------- ANTHONY S. ABBATE.......66 President & Chief Executive Officer ANTHONY J. LABOZZETTA...42 Executive Vice President & Chief Operating Officer PATRICIA D. ARNOLD......47 Senior Vice President & Chief Lending Officer CHARLES T. FIELD........41 Senior Vice President & Chief Financial Officer CHARLES P. FROST........54 Senior Vice President & Chief Credit Officer FRANK R. GIANCOLA.......52 Senior Vice President & Compliance Officer Business Experience Anthony S. Abbate, President and Chief Executive Officer of the Company since 1984 and 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. 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. Charles P. Frost, Senior Vice President and Chief Credit Officer since July 2004 and Director of Interchange Capital Company since January 2005. He served in a similar capacity for 9 years at Trustcompany Bank in Jersey City. His background includes 28 years in commercial lending/credit with various New Jersey banks. He is an active member of the RMA (Risk Management Association), having served on the Board of Governors for 8 years and as President of the Northern New Jersey Chapter from 2000-2001. 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 85 officer. No executive officer was selected to his or her position pursuant to any arrangement or understanding with any other person. Compliance with Section 16(a) ----------------------------- Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers and directors, and persons who beneficially own more than ten percent of the Company's equity securities, to file reports of security ownership and changes in such ownership with the Securities and Exchange Commission. These persons are also required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no other reports were required during the fiscal year ended December 31, 2005, the Company believes that, during the 2005 fiscal year, all of our executive officers and directors complied with all Section 16(a) filing requirements applicable to them, with the exception of the following: Form 4 filings for Directors William Schuber, John Schepisi, Robert Rittereiser, Jeremiah F. O'Connor, Eleanor S. Nissley, Nicholas R. Marcalus, James E. Healey, David R. Ficca, John J. Eccleston, Anthony R. Coscia, Donald R. Correll, Gerald A. Calabrese, and Anthony D. Andora, reflecting options to acquire common stock granted on April 22, 2004, were filed late on March 23, 2005. Code of Ethics -------------- We have adopted Codes of Ethics that applies to our Board of Directors and employees, including our principal executive officer, principal financial officer and principal accounting officer. The Code of Ethics is available free of charge by contacting the Company at Park 80 West, Plaza II, Saddle Brook, NJ 07663. Director Nominations by Shareholders ------------------------------------ Nominations may be made by any shareholder of the Company, who is entitled to vote at a meeting in which directors are to be elected and who provides timely notice to the Company's Secretary, as set forth in the Company's Bylaws. To be considered timely, nominations must be delivered to or received by the Company's Secretary not later than 60 days in advance of the date on which the proxy statement relating to the previous year's annual meeting was released to shareholders. The shareholder's notice to the Secretary must set forth certain information regarding the proposed nominee and the shareholder making such nomination or recommendation. If a nomination is not properly brought before the meeting in accordance with the Company's Bylaws, the Board of Directors or the Nominating/Governance Committee may determine that the nomination was not properly brought before the meeting and shall not be considered. For additional information about the Company's director nomination requirements, please see the Company's Bylaws. Candidates must possess the ability to apply good business judgment and must be in a position to properly exercise his or her duties of loyalty and care. Candidates should also exhibit proven leadership capabilities, high integrity and experience with a high level of responsibilities within their chosen fields. Additionally, a person is not qualified to serve as a director if he or she (a) is under indictment for, or has ever been convicted of, a criminal offense involving dishonesty or breach of trust and the penalty for such offense could be imprisonment for more than one year; (b) is a person against whom a federal or state bank regulatory agency has issued a cease and desist order for conduct involving dishonesty or breach of trust and that order is final and not subject to appeal; (c) has been found either by any federal or state regulatory agency whose decision is final and not subject to appeal or by a court to have (i) breached a fiduciary duty involving personal profit or (ii) 86 committed a willful violation of any law, rule or regulation governing banking, securities, commodities or insurance, or any final cease and desist order issued by a banking, securities, commodities or insurance regulatory agency; (d) has been nominated by a person who would be disqualified from serving as a director of the Company, as above; or (e) is a party (either directly or through an affiliate) to litigation or an administrative proceeding adverse to the Company or its bank subsidiary, except (i) derivative litigation brought in the name of the Company or its bank subsidiary by the director in his or her capacity as a shareholder of the Company or (ii) litigation arising out of a proxy fight concerning the election of directors of the Company or its bank subsidiary or otherwise involving control of the Company or its bank subsidiary. The above process and qualifications represent material changes to the procedures by which shareholders may recommend nominees to the Board of Directors of the Company. These changes were implemented by amendments to the Bylaws of the Company, which amendments were filed with the SEC as exhibits to the Form 8-K filed by the Company on December 29, 2005 and the Form 8-K filed by the Company on January 23, 2006. Item 11. Executive Compensation The following table sets forth compensation paid by the Company and its subsidiaries during the years ended December 31, 2005, 2004 and 2003, for services in all capacities, to Mr. Abbate, the Company's chief executive officer, and the next four highest paid executive officers of the Company whose total salary and bonus exceeded $100,000 during 2005. 87 SUMMARY COMPENSATION TABLE
Annual Compensation Long-term Compensation ---------------------------------- ---------------------------- Other Restricted All Other Annual Stock Options Compensation Name and Principal Position Year Salary($) Bonus($) Compensation($) Awards($)(1) (No. of Shares) ($) (2) ------- ---------- --------- ---------------- ------------ --------------- ------------ Anthony S. Abbate . . . . . . . . 2005 $420,000 $140,952 $13,612 $120,961 - $ 99,970 President and CEO 2004 400,000 137,600 4,671 118,000 82,500 72,903 2003 390,000 60,450 - 53,625 78,750 111,515 Anthony J. Labozzetta . . . . . . 2005 215,000 51,536 26,194 32,082 - 9,178 Executive Vice President and 2004 200,000 49,200 18,496 28,000 30,000 7,835 Chief Operating Officer 2003 190,000 22,800 5,066 33,250 28,125 8,124 Patricia D. Arnold. . . . . . . . 2005 180,250 43,206 19,124 8,149 - 5,535 Senior Vice President and 2004 175,000 43,050 5,419 30,275 21,000 7,198 Chief Lending Officer 2003 170,000 20,400 1,859 25,500 21,000 7,466 Charles T. Field. . . . . . . . . 2005 179,000 42,906 14,299 27,513 - 7,465 Senior Vice President and 2004 169,000 41,574 8,940 12,506 15,000 5,730 Chief Financial Officer 2003 146,961 19,800 - 28,875 7,500 4,253 Charles P. Frost. . . . . . . . . 2005 165,000 38,352 2,856 19,535 - 6,157 Senior Vice President and 2004 80,000 18,040 - - 7,500 1,953 Chief Credit Officer 2003 - - - - - - _______________________________ (1) The unvested performance-based restricted stock awards granted, to date, totaled 16,018, 12,428, 8,798, 702, and 6,229 for Messrs. Abbate, Labozzetta, Field, Frost, and Mrs. Arnold, respectively. The value of such awards at December 31, 2005, were $276,310, $214,383, $151,765, $12,109, and $107,450, respectively. The value of these shares at the date of grant is reflected in the table above. The awards for Messrs. Abbate, Labozzetta, Field, and Mrs. Arnold vest in three years following the date of grant provided they do not terminate their employment during that period. Dividends, if and when declared by the board of directors, will be paid on all restricted stock awards. 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. The performance-based restricted stock values are for awards earned in that year but granted in the following year. (2) Represents payments as shown below:
Year Abbate Labozzetta Arnold Field Frost ------- ---------- ----------- -------- ---------- --------- Amounts contributed to 401(k) plan 2005 $10,431 $8,378 $4,635 $6,865 $4,791 Value of life insurance premium paid 2005 4,953 600 900 600 1,366 in respect to coverage in excess of $50,000 Premium on disability policy 2005 7,860 - - - - Contribution to Supplemental 2005 76,726 200 - - - Executives' Retirement Plan
Stock Option Grants in Last Fiscal Year --------------------------------------- The following table sets forth certain information concerning grants of stock options awarded to the named executive officers during the year ended December 31, 2005. All options granted during the year were incentive stock options: 88
Potential Realized Value Number of % of Total at Assumed Annual Rates Securities Options of Stock Price Appreciation Underlying Granted to Exercise or For Option Term (3) Options Employees in Base Price Expiration ---------------------------- Name Granted Fiscal Year ($/Sh) (1) Date (2) 5% 10% - --------------------------- ------------- -------------- ------------- ------------ ------------- ------------- Anthony S. Abbate 82,500 31.2 $16.69 1/18/2015 $865,768 $2,194,026 Anthony Labozzetta 30,000 11.3 16.69 1/18/2015 314,825 797,827 Patricia Arnold 21,000 7.9 16.69 1/18/2015 220,377 558,479 Charles T. Field 15,000 5.7 16.69 1/18/2015 157,412 398,914 Charles P. Frost 7,500 2.8 16.69 1/18/2015 78,706 199,457 - ---------------------------
(1) The exercise price was based on the closing price of a share of the Company's stock on the date of grant as reported on the NASDAQ National Market. (2) Options are fully exercisable as of December 31, 2005. Options expire if not exercised within 10 years of grant date. (3) Pre-tax gain. The dollar amounts under these columns are the result of calculations at the 5% and 10% rates set by the Securities and Exchange Commission Regulation S-K and, therefore, are not intended to forecast possible future appreciation, if any, of the Company's stock price. The Company's per share stock price would be $27.19 and $43.29 if the increase was 5% and 10%, respectively, compounded annually over the option term. Aggregated Option Exercises in Last Fiscal Year and Year End Option Values --------------------------------------------------------------------------
Number of Securities Underlying Unexercised Value of Unexercised Options at Year End In-the-Money Options No. Shares ------------------------------ at Year-end (1) Acquired on Value Shares Shares -------------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ------------------------- ------------ -------------- -------------- --------------- --------------- ---------------- Anthony S. Abbate - - 307,500 - $1,015,275 $ - Anthony J. Labozzetta - - 120,000 - 480,458 - Patricia D. Arnold 2,125 $ 36,648 101,250 - 602,768 - Charles T. Field - - 22,500 - 8,400 - Charles P. Frost - - 7,500 - 4,200 -
(1) Pre-tax gain. Value of unexercised in-the-money options based on the December 30, 2005 closing price of $17.25 as reported on the NASDAQ. Stock Option and Incentive Plan ------------------------------- The Company maintains two stock option and incentive plans the Stock Option and Incentive Plan of 1997, as amended, and the 2005 Omnibus Stock and Incentive Plan (collectively the 'Plans"), which were 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 Plans also provide 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 89 twenty-five percent discount. All amounts in excess of the discounted purchase price of this stock are 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. Pension Plan and Supplemental Executives' Retirement Plan --------------------------------------------------------- At December 31, 2005 the Company, through the Bank, froze all future benefit accruals to its non-contributory defined benefit pension plan covering all eligible employees including Mrs. Arnold, Messrs. Abbate, Field, Frost and Labozzetta. Retirement income is based on years of service under the Plan and, subject to certain limits, on final average compensation. In 2005, the Company froze all future service benefit accruals as of December 31, 2004 under its old Supplemental Executives' Retirement Plan, a non-qualified plan intended to provide retirement income that would have been paid but for limitations imposed by the Internal Revenue Code under the qualified plan. In 1998, the Company previously amended the Supplemental Executives' Retirement Plan to include the director related retirement benefits relating to Mr. Abbate's membership on the board of directors. Benefits under the Supplemental Executives' Retirement Plan are paid from the general assets of the Company. The Board of Directors approved a new executive Deferred Compensation Plan ("DCP") which is structured similarly to the "old" SERP except it allows executive officers of the Company to defer a portion of their salary or bonus into future periods and after December 31, 2005 there are no future accruals for the Company's non-contributory defined benefit plan. The deferred portion of any salary or bonus will be credited with interest at the ten year treasury rate. Benefits under the new executive DCP will be paid out of the general assets of the Company. The following table shows the annual benefits payable based on a range of average compensation (comprised solely of base salary) and years of future service at normal retirement date. 5-Year Years of Service at Normal Retirement Date Average ----------------------------------------------------------- Compensation 5 10 20 30 35 ---------------- --------- ----------- ----------- ------------ ------------ $100,000 $ 5,544 $11,089 $ 22,177 $ 33,266 $ 38,810 150,000 9,294 18,589 37,177 55,766 65,060 200,000 13,044 26,089 52,177 78,266 91,310 250,000 16,794 33,589 67,177 100,766 117,560 300,000 20,544 41,089 82,177 123,266 143,810 400,000 28,044 56,089 112,177 168,266 196,310 450,000 31,794 63,589 127,177 190,766 222,560 500,000 35,544 71,089 142,177 213,266 248,810 - -------------------- 1. This Plan was effective January 1, 1993. 2. Benefits calculated are based on base salary and total credited service at normal retirement date from the later of (a) January 1, 1993 or (b) date of hire. The benefits above are inclusive of both benefits from the qualified defined benefit plan and from the defined benefit portion of the supplemental plan. Currently, the supplemental plan covers Mr. Abbate and Mr. Labozzetta. 3. Average compensation is the average of base salary over the five (5) consecutive calendar years producing the highest average. 4. The chart reflects a Social Security integration level based on the average age of the executive officer group, which was 50 years as of December 31, 2005. 90 5. The annual benefit shown in the table above is payable as a life annuity which is the normal form of retirement benefit for non-married participants. For married participants, the normal form of benefit is an actuarial equivalent joint and 50% survivor annuity. 6. At December 31, 2005, the estimated credited years of service for purposes of computing the retirement benefits under the Pension Plan and the SERP for the named executive officers are as follows: Mr. Abbate - 13 years; Mr. Labozzetta - 10 years; Mrs. Arnold - 13 years; Mr. Field - 2 years; and Mr. Frost - 1 year. The estimated covered compensation under the Interchange Pension Plan is as follows: Mr. Abbate - $46,344; Mr. Labozzetta - $86,436; Mrs. Arnold - $81,816; Mr. Field - $87,216; and Mr. Frost - $71,052 Change-in-Control Arrangements ------------------------------ The Company has a Change-in-Control Agreement with each of Mrs. Arnold and Messrs. Abbate, Field, Frost, and Labozzetta. The agreements provide, among other things, that if the executive is terminated during the two years after a "change in control", or if they voluntarily terminate during the two years following a "change in control", unless such termination is (i) because of the executive's death or retirement, (ii) by the Company for cause or disability or (iii) by the executive for other than good reason, they shall receive an amount equal to two times their highest annualized base salary plus an amount equal to the sum of the bonuses paid for the previous two years, except for (a) Mr. Abbate who shall receive (a) a lump sum amount equal to three (3) times his annual base salary at the highest rate in effect during the twelve (12) months immediately preceding his Date of Termination; plus (b) a lump sum amount equal to the greater of: (i) $300,000; or (ii) the sum of all bonuses earned by him (without regard to the date of payment) during the three calendar years preceding the calendar year in which occurs his Date of Termination and (b) Mr. Frost who will receive one times his highest annualized base salary. In addition, the executives will receive their unpaid base salary up to termination, accrued vacation pay, a portion of the bonus in the year of termination which has not yet been awarded or paid under the management incentive plan, benefits and continuation of health and welfare benefits, "grossed up" to cover any excise tax imposed by Section 4999 of the Internal Revenue Code (except for Mr. Frost whose agreement does not contain a "gross-up" provision). Compensation/Stock Option Committee Interlocks and Insider Participation ------------------------------------------------------------------------ No member of the Compensation/Stock Option Committee was, during 2005, or formerly, an employee of the Company. During 2005, no executive officer of the Company (i) served as a member of the compensation committee of another entity, one of whose executive officers served on the Compensation/Stock Option Committee of the Company, (ii) served as a director of another entity, one of whose executive officers served on the Compensation/Stock Option Committee of the Company, or (iii) was a member of the compensation committee of another entity, one of whose executive officers served as a Director of the Company. Director Compensation --------------------- In 2005, each director of the Company not employed by the Company was paid a retainer of $1,000. The Company's Chairman of the Board, Vice-Chairman of the Board and Secretary of the Board received additional retainers of $1,500, $500 and $250, respectively. In addition, each director of the Bank not employed by the Bank was paid a retainer at an annual rate of $10,000, a fee of $500 for each board meeting attended, a fee of $400 for each executive committee meeting attended and a fee of $300 for attendance at other committee meetings. The Bank's Chairman of the Board, the Vice-Chairman of the Board and Secretary of the Company and the Bank received additional retainers of $16,500, $13,500 and $4,000, respectively. Directors who are chairmen of the audit and compensation committees receive an additional retainer of $4,000 annually; while the chairman of the corporate 91 planning and finance committee receives an additional retainer of $2,000 annually. A director who is an employee of the Company or any subsidiary receives no retainer or fees. At December 31, 2005 the Bank maintained a retirement plan for eligible Directors. This plan has been frozen and no future service benefits will accrue to Directors subsequent to December 31, 2005. Eligible directors, excluding directors who are employed by the Company or the Bank and participate in a separate plan, are entitled to receive upon retirement an amount equal to the annual retainer paid a director for that year (exclusive of additional amounts paid to the Chairman of the Board, the Vice Chairman of the Board, the Secretary of the Company and the Bank and to committee chairmen) multiplied by his or her years of service on the board, multiplied by his or her vested percentage. 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) the benefits such participant had accrued as of such date under the terms and provision of the plan in effect prior to its restatement on January 2, 2002, or (ii) the cash value of any life insurance policy that was purchased and owned by the Company or the Bank for that participant under the terms and provisions of the plan in effect prior to its restatement. The benefit may be paid in a lump sum or paid out in five annual installment payments at the election of the participant. 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 the Company 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 2,250 shares of the Company's common stock are granted to each outside director of the Company each year on the anniversary date of the initial grant. Each option represents the right to purchase, upon exercise, one share of the Company's 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 shall be non-qualified stock options and are not entitled to special tax treatment under the Internal Revenue Code of 1986, as amended. During 2005 the Board of Directors accelerated the vesting of all options under the Outside Director Incentive Compensation Plan and froze future grants. A total of 225,000 shares of common stock were made available for option awards under the Outside Director Incentive Compensation Plan, of which options to purchase 157,500 shares (net of forfeitures) have been granted to date. In 2005, options to acquire 29,250 shares, net of forfeitures, were granted to the outside directors. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table sets forth the beneficial ownership of the Company's common stock by (a) each beneficial owner of more than five percent of the common stock, (b) each director, (c) each named executive officer, and (d) all current directors and executive officers of the Company as a group. Beneficially owned shares include shares over which the named person exercised either sole or shared voting power or sole or shared investment power. It also includes shares owned (i) by spouse, minor children or by relatives sharing the same home, or (ii) by entities owned or controlled by the named 92 person. Unless otherwise noted, all shares are owned of record and beneficially by the named person, either directly or through the dividend reinvestment plan as of March 31, 2006.
Beneficially Right to Deferral Percent Name and Address (1) Owned Acquire (2) Plans (3) Total of Class (4) ----------------------------------------- ---------------- ------------- ----------- ----------- ------------ (a) Lawrence B. Seidman 100 Misty Lane Parsippany, NJ 07054. . . . . . . . . . 1,037,305 (5) - - 1,037,305 5.1 (b) Anthony S. Abbate. . . . . . . . . . . . 535,454 307,500 39,250 882,205 4.3 Anthony D. Andora. . . . . . . . . . . . 294,232 6,750 - 300,982 1.5 Gerald A. Calabrese, Jr. . . . . . . . . 222,167 4,500 - 226,667 1.1 Donald L. Correll. . . . . . . . . . . . 18,230 13,500 - 31,730 * Anthony R. Coscia. . . . . . . . . . . . 18,613 13,500 - 32,113 * John J. Eccleston. . . . . . . . . . . . 175,914 9,750 - 185,664 * David R. Ficca . . . . . . . . . . . . . 129,986 (6) 13,500 - 143,486 * James E. Healey. . . . . . . . . . . . . 91,224 11,250 - 102,474 * Nicholas R. Marcalus . . . . . . . . . . 25,554 6,150 - 31,704 * Eleanore S. Nissley. . . . . . . . . . . 116,234 0 - 116,234 * Jeremiah F. O'Connor . . . . . . . . . . 129,297 0 - 129,297 * Robert P. Rittereiser. . . . . . . . . . 62,125 13,500 - 75,625 * John A. Schepisi . . . . . . . . . . . . 247,211 4,500 - 251,711 1.2 William "Pat" Schuber. . . . . . . . . . 1,106 6,750 - 7,856 * (c) Patricia D. Arnold. . . . . . . . . . . 29,086 115,250 31,924 176,260 * Charles T. Field. . . . . . . . . . . . 89 22,500 8,055 30,644 * Charles P. Frost . . . . . . . . . . . . 450 7,500 1,607 9,557 * Frank R. Giancola. . . . . . . . . . . . 3,828 106,875 45,251 155,954 * Anthony J. Labozzetta. . . . . . . . . . 108,128 120,000 17,009 245,136 1.2 (d) Directors and executive officers as a group (18 persons). . . . . . . . . . 2,208,927 783,275 143,097 3,135,299 15.4 - ---------------------------------------------- * Does not exceed one percent of class 1. The address for all persons listed under sections (b) and (c) is c/o Interchange Financial Services Corporation, Park 80 West Plaza Two, Saddle Brook, New Jersey 07663. 2. Includes stock acquirable by exercise of stock options exercisable within 60 days of the date of the Proxy Statement. 3. Shares held in deferred compensation accounts to which individuals have sole power to vote but no investment power. 4. Except for the percentages of certain parties that are based on presently exercisable options which are indicated in the preceding footnotes to the table, the percentages indicated are based on 20,336,697 shares of common stock issued and outstanding on March 31, 2006. In the case of parties holding presently exercisable options described in footnote 2 above, the percentage ownership is calculated on the assumption that the shares presently held or purchasable within the next 60 days underlying such options are outstanding. 5. As reported on SC 13D/A filed April 12, 2006 reporting 1,037,305 shares. 6. Includes 99,786 shares owned by Mr. Ficca's wife and 3,799 shares owned by a foundation. Mr. Ficca disclaims beneficial ownership of the shares owned by his wife and of the shares owned by the foundation.
93 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, 2005.
- ---------------------------------------------------------------------------------------------------------------------------------- Plan category Number of securities to be Weighted-average Number of securities remaining issued upon exercise of exercise price of available for future issuance under outstanding options, outstanding options, equity compensation plans (excluding warrants and rights warrants and rights securities reflected in column (a)) - ---------------------------------------------------------------------------------------------------------------------------------- (a) (b) (c) - ---------------------------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders 1,407,919 $12.67 1,610,660 Equity compensation plans not approved by security holders - - - ------------------- ----------------------- ------------------------------- Total 1,407,919 $12.67 1,610,660 =================== ======================= ===============================
Item 13. Certain Relationships and Related Transactions Officers and directors of the Company and their affiliated companies are customers of and are engaged in transactions with the Company and its subsidiaries in the ordinary course of business on substantially the same terms (including interest rates on loans, collateral and collectibility considerations) as those prevailing at the time for comparable transactions with other unaffiliated borrowers and suppliers. None of such loans gave been disclosed by the Company as non-accrual, past due, restructured or potential problems. Mr. Andora, a director of the Company and the Bank, is a member of Andora & Romano, LLC, a firm that renders various legal services to the Company and its subsidiaries. During 2005, Andora & Romano received fees for legal services of $423,474, including $95,000 paid pursuant to retainer contracts and $328,474 primarily representing fees for loan related matters, the bulk of which was reimbursed to the Bank by its customers. The Company expects to transact business with this firm in the future. Mr. Calabrese, Jr., a director of the Company and the Bank, is a member of Gerald A. Calabrese, Jr. & Company, a firm that renders real estate appraisal services to the Company and its subsidiaries. During 2005, Gerald A. Calabrese, Jr. & Company received $9,850 for real estate appraisals. The Company expects to transact business with this firm in the future. Mr. William "Pat" Schuber, a director of the Company and the Bank, is a member of DeCotiis, Fitzpatrick, Cole & Wisler, LLP a firm that renders various legal services to the Company and its subsidiaries. During 2005, DeCotiis, Fitzpatrick, Cole & Wisler, LLP received fees for legal services of $14,574, primarily representing fees for loan related matters, the bulk of which was reimbursed to the Bank by its customers. The Company expects to transact business with this firm in the future. Mr. Marcalus, a director of the Company and the Bank, is a member of Marcal Paper Mills, Inc. During 2005, Marcal Paper Mills, Inc. received $84,000 for subletting space to the Bank. The Company expects to transact business with this firm in the future. Mr. Schepisi, a director of the Company and the Bank, is a member of Schepisi & McLaughlin, a firm that renders various legal services to the Company and its subsidiaries. During 2005, Schepisi & McLaughlin received fees for legal services of $49,616, primarily representing fees for loan related matters, the bulk of which was reimbursed to the Bank by its customers. The Company expects to transact business with this firm in the future. 94 Item 14. Principal Accounting Fees and Services The following table summarizes the aggregate fees billed to the Company by Deloitte & Touche LLP our independent registered public accounting firm: 2005 2004 --------------- ------------ Audit Fees (a) $315,000 $315,500 Audit-Related Fees (b) $34,000 $47,500 Tax Fees (c) - - All Other Fees - - --------------- ------------ Total $349,000 $363,000 =============== ============ (a) Fees for audit services billed in 2005 and 2004 consisted of: o Audit of the Company's annual consolidated financial statements o Reviews of the Company's quarterly condensed consolidated financial statements o Attestation of management's assessment of internal control, as required by section 112 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) o New Jersey State Bank Directors Examination o Sarbanes-Oxley 404 attestation work (b) Fees for audit-related services billed in 2005 and 2004 consisted of: o Employee benefit plan audits o Examination of management's assertion regarding the Company's compliance with its minimum servicing standards under the Uniform Single Attestation Program for Mortgage Bankers (USAP) o In addition, 2005 fees included due diligence associated with mergers/acquisitions (c) There were no fees paid for tax services billed in 2005 or 2004. Fees for tax services consist of tax compliance: o Tax compliance services are services rendered based upon facts already in existence or transactions that have already occurred to document, compute, and obtain government approval for amounts to be included in tax filings and consisted of: i. Federal, state and local income tax return assistance ii. Sales and use, property and other tax return assistance In considering the nature of the services provided by the independent auditor, the Audit Committee determined that such services are compatible with the provision of independent audit services. The Audit Committee discussed these services with the independent auditor and Company management to determine that they are permitted under the rules and regulations concerning auditor independence promulgated by the U.S. Securities and Exchange Commission (the "SEC") to implement the Sarbanes-Oxley Act of 2002, as well as the American Institute of Certified Public Accountants. 95 Pre-Approval Policy - ------------------- All services performed by the independent auditor in 2005 were pre-approved in accordance with the pre-approval policy and procedures adopted by the Audit Committee at its January 20, 2004 meeting. This policy describes the permitted audit, audit-related, tax, and other services (collectively, the "Disclosure Categories") that the independent auditor may perform. Any requests for audit, audit-related, tax, and other services not contemplated must be submitted to the Audit Committee for specific pre-approval and cannot commence until such approval has been granted. The policy contains a de minimis provision that operates to provide retroactive approval for permissible non-audit services under certain circumstances. During 2005 no such fees were incurred. 96 PART IV Item 15. Exhibits, Financial Statement Schedules (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 2.2 Agreement and Plan of Merger, dated as of April 13, 2006, between Interchange Financial Services Corporation and TD Banknorth Inc. (Incorporated by reference to Exhibit 2.1 to Registrant's Form 8-K, filed April 19, 2006.) Exhibit 3(a) Amended and Restated Certificate of Incorporation of Registrant (Incorporated by reference to Exhibit 3.1 to Registrant's Form 8-K/A, filed August 3, 2005.) 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 28, 2005. (Incorporated by reference to Exhibit 10(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed March 16, 2006.) 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) Exhibit 10(c)Stock Option and Incentive Plan of 1997, as Amended (Incorporated by reference to Exhibit 4(a) to Registrant's Form S-8, filed August 26, 2002, Registration Statement No. 33-98705) Exhibit 10(d)Directors' Retirement Plan, as Amended 2003 (Incorporated by reference to Exhibit 10(d) to Annual Report on Form 10-K for fiscal year ended December 31, 2003) 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) Exhibit 10(f)Change-in-Control Agreements for the Registrant's principal executive officers, and Amendment dated June 14, 2001 (Incorporated by reference to 97 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. (Incorporated by reference to Exhibit 10(f)(1) to Annual Report on Form 10-K for fiscal year ended December 31, 2004) Exhibit 10(f)(2) Change-in-Control Agreement for the Registrant's chief credit officer, dated July 22, 2004. (Incorporated by reference to Exhibit 10(f)(2) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed March 16, 2006) Exhibit 10(g)Interchange Bank Deferred Compensation Plan (Incorporated by reference to Exhibit 10(g) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed March 16, 2006) Exhibit 11 Statement regarding computation of per share earnings Exhibit 21 Subsidiaries of Registrant Exhibit 23 Consent of Independent Registered Public Accounting Firm Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32 Certification Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 ------------------------------ 98 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 Senior Vice President and Chief Officer Financial Officer (principal executive officer) (principal financial and accounting officer) May 1, 2006 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 May 1, 2006 Charles T. Field May 1, 2006 Director Senior Vice President and President and Chief Executive Officer Chief Financial Officer /s/ Anthony D. Andora /s/ James E. Healey - ---------------------------------------- ------------------------------------- Anthony D. Andora May 1, 2006 James E. Healey May 1, 2006 Director Director Chairman of the Board /s/ Gerald A. Calabrese, Jr. /s/ Nicholas R. Marcalus - --------------------------------------- ------------------------------------- Gerald A. Calabrese, Jr. May 1, 2006 Nicholas R. Marcalus May 1, 2006 Director Director /s/ Donald L. Correll /s/ Eleanore S. Nissley - ---------------------------------------- ------------------------------------- Donald L. Correll May 1, 2006 Eleanore S. Nissley May 1, 2006 Director Director /s/ Anthony R. Coscia /s/ Jeremiah F. O'Connor - ---------------------------------------- ------------------------------------- Anthony R. Coscia May 1, 2006 Jeremiah F. O'Connor May 1, 2006 Director Director /s/ John J. Eccleston /s/ Robert P. Rittereiser - ---------------------------------------- ------------------------------------- John J. Eccleston May 1, 2006 Robert P. Rittereiser May 1, 2006 Director Director /s/ David R. Ficca /s/ John A. Schepisi - ---------------------------------------- ------------------------------------- David R. Ficca May 1, 2006 John A. Schepisi May 1, 2006 Director Director /s/ William P. Schuber - ---------------------------------------- William P. Schuber May 1, 2006 Director 99 EX-11 2 ex11.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)
2005 2004 2003 ------------------------------------ -------------------------- --------------------------- 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 $19,705 19,418 $1.01 $18,214 19,124 $0.95 $16,366 17,724 $0.92 ========= ======== ======= Effect of Dilutive Shares Weighted average shares if converted 417 352 263 ---------- -------- -------- Diluted Earnings per Common Share Net income available to common shareholders $19,705 19,835 $0.99 $18,214 19,476 $0.94 $16,366 17,987 $0.91 ============ ========== ========= ======= ======== ======= ======= ======== ======
All per share data and average shares were restated to reflect a 3-for-2 stock split declared on January 18, 2005 and paid on February 18, 2005. 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, 2005 and 2003. EX-21 3 ex21.txt SUBSIDIARIES 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. FCBC LLC, 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 Clover Leaf Investment Company. Bridge View Investment Company has one wholly owned subsidiary, Bridge View Delaware, Inc. ("BVDI"). EX-23 4 ex23.txt CONSENT OF DELOITTE & TOUCHE Exhibit 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statements No. 333-133451 and 333-98705 on Form S-8 of our reports dated March 13, 2006 relating to the financial statements of Interchange Financial Services Corporation, and management's report on the effectiveness of internal control over financial reporting, appearing in the Annual Report on Form 10-K/A of Interchange Financial Services Corporation for the year ended December 31, 2005. DELOITTE & TOUCHE LLP /s/Deloitte & Touche LLP _________________________ New York, New York April 28, 2006 EX-31 5 ex31-1.txt CERTIFICATION OF CEO Exhibit 31.1 - Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Anthony S. Abbate, certify that: 1. I have reviewed this annual report on Form 10-K/A 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: May 1, 2006 /s/ Anthony S. Abbate -------------------------------------- Anthony S. Abbate President and Chief Executive Officer EX-31 6 ex31-2.txt CERTIFICATION OF CFO Exhibit 31.2 - Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Charles T. Field, certify that: 1. I have reviewed this annual report on Form 10-K/A 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: May 1, 2006 /s/ Charles T. Field ------------------------------------ Charles T. Field Senior Vice President and CFO EX-32 7 ex32.txt CERTIFICATION PURSUANT TO 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/A for the Year Ended December 31, 2005, (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 as of the dates and for the periods covered by the Report. /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: May 1, 2006 -----END PRIVACY-ENHANCED MESSAGE-----