-----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, UQKwEfBV7OAMDAloBcnejwrnfsTr6ff4Tpju49PSfP6G4XZQs3m5ygedLJrmVbBH /RjH4u8soq1U9z9skMd+Ug== 0000755933-96-000002.txt : 19960401 0000755933-96-000002.hdr.sgml : 19960401 ACCESSION NUMBER: 0000755933-96-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERCHANGE FINANCIAL SERVICES CORP /NJ/ CENTRAL INDEX KEY: 0000755933 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 222553159 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10518 FILM NUMBER: 96540730 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: PLAZE II CITY: SADDLE BROOK STATE: NJ ZIP: 07663 FORMER COMPANY: FORMER CONFORMED NAME: INTERCHANGER STATE BANK DATE OF NAME CHANGE: 19870416 FORMER COMPANY: FORMER CONFORMED NAME: INTERCHANGE FINANCIAL SERVICES CORP DATE OF NAME CHANGE: 19861209 10-K 1 FOR PERIOD ENDED 12/31/95 PART I ITEM 1. BUSINESS GENERAL Interchange Financial Services Corporation (the "Company"), a New Jersey business corporation and bank holding company under Federal law, acquired all of the outstanding stock of Interchange State Bank, a New Jersey chartered bank (the "Bank" or "Interchange") in 1986. The Bank, established in 1969, is a full-service commercial bank headquartered in Saddle Brook, New Jersey. It offers banking services for individuals and businesses through its thirteen banking offices, twelve of which are located in Bergen County, New Jersey, and one of which is located in Passaic County, New Jersey. In addition to its commercial lending activities, the Bank offers a wide range of consumer banking services, including: checking and savings accounts, money-market accounts, certificates of deposit, individual retirement accounts, residential mortgages, home equity lines of credit and other second mortgage loans, home improvement loans, automobile loans, personal loans and overdraft protection. The Bank also offers a VISA TM credit card and Interchange Bank-line--our telephone banking system. Certain Bank employees are also licensed insurance agents qualified to offer tax deferred annuities and related insurance products. The Bank also offers mutual funds to its customers through a third party vendor. Automated teller machines (MAC TM, PLUS TM, HONOR TM, VISA TM and MASTERCARD TM networks) are located at nine of the banking offices and at one supermarket. The Bank is engaged in the financing of local business and industry, providing credit facilities and related services for smaller businesses, typically those with $1 million to $5 million in annual sales. Commercial loan customers of the Bank are businesses ranging from light manufacturing and local wholesale and distribution companies to medium-sized service firms and local retail businesses. Most forms of commercial lending are offered, including working capital lines of credit, small business administration loans, term loans for fixed asset acquisitions, commercial mortgages and other forms of asset-based financing. In recent years, the Bank took advantage of opportunities to purchase packages of loans from the Resolution Trust Corporation ("RTC") and from lending institutions seeking to reduce assets in order to meet capital requirements, thereby maintaining interest income and fostering asset growth in difficult market conditions. These loans were subjected to the Bank's independent credit analysis prior to purchase and were, in some cases, purchased with a limited buy-back obligation or other financial assurance from the sellers. In the Bank's experience, there are significant opportunities to sell the Bank's other products and services to the borrowers whose loans are purchased. The Bank has expanded its service areas from one office in 1969 to the present thirteen banking locations by opening new branches and, in 1991, acquiring branch locations formerly operated by other institutions. Management believes that the 1991 acquisition of the Park Ridge office of The Howard Savings Bank has allowed the Bank to increase its penetration of the affluent Pascack Valley area of Bergen County. Interchange's acquisition in 1991 of the former Community Guardian Bank increased its penetration of existing market areas and resulted in its first Passaic County banking location. A new branch was opened in Little Ferry in September, 1993, and in 1994, deposits of a failed thrift institution were acquired and added to the already growing deposits in that office. Since 1984, the Bank's assets have grown from $135 million to $491 million. Deposits of the Bank are insured up to $100,000 per depositor by the Bank Insurance Fund administered by the FDIC. The Company had 180 full-time-equivalent employees during 1995. Its principal executive office is located at Park 80 West/Plaza Two, Saddle Brook, New Jersey 07663, telephone number (201)703-2265. As used herein the term "Company" includes the Bank and wholly-owned subsidiaries of the Bank, unless the context otherwise requires. The Bank's principal market for its deposit gathering activities covers major portions of Bergen County and eastern Passaic County, in the northeastern corner of New Jersey adjacent to New York City. The principal service areas of the Bank 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. For many years Interchange State Bank has conducted periodic market research to keep aware of market trends. Much of this research affirmed that consumer financial needs are directly related to identifiable life stages. In response to these distinctive preferences, the bank has designed and marketed "packaged" products to appeal to these different segments. Product packages consist of offering several deposit, credit and other financial services together as a product unit. This encourages customers to use multiple products and allows the bank to establish stronger relationships. The four product packages introduced to date include: GROW'N UP SAVINGS --a passbook savings account which can be opened for a child of any age that teaches them the good habits of saving. MONEY PLUS ACCOUNT --geared to the 24-34 year age group which includes a mortgage product for first time home buyers that allows them to finance up to 95% of the value of the home. MONEY MAKER ACCOUNT--created for the 35-54 year age group. This is an interest bearing checking account that offers higher rates automatically as the balance increases. PRIME TIME ACCOUNT--for the mature market which offers them a variety of financial and non-financial benefits available to them for a minimum balance only. Since the predominant age of the Interchange population is between 35-54 and 55+, the Money Maker and Prime Time Accounts offer a variety of products to accommodate any of their financial needs for that stage of their life. The Bank was among the first to offer such packaged financial products in its area and management believes they have been successful in attracting deposits and building a loyal client base. COMPETITION Competition in the banking and financial services industry in the Company's market area is intense. The Bank competes actively with national and state-chartered commercial banks and other financial institutions, including savings and loan associations, mutual savings banks, and credit unions. In addition, the Bank faces competition from less heavily regulated entities such as brokerage institutions, money management firms, consumer finance and credit card companies and various other types of financial services companies. Many of these institutions are larger than the Bank, some are better capitalized, and a number pursue community banking strategies similar to those of the Bank. Management believes that opportunities continue to exist to satisfy the deposit and lending demands of small and middle market businesses. Larger banks continued to show an appetite for only the largest loans, finding themselves ill-equipped to administer smaller loans profitably. Interchange has the desire and the ability to give smaller businesses the treatment they deserve. We promise and deliver to this market the kind of preferential, first class attention that megabanks give megacompanies. Interchange meets this need through a unique program called Rapid Response Banking. The program provides commercial loans between $5,000 and $50,000 with a streamlined approval process that borrows liberally from standard consumer lending practices. Naturally, in due course, many small businesses become midsize businesses, with a corresponding change in their financial requirements. But they don't outgrow Interchange because of our ability to be responsive to both constituencies. To continue serving companies throughout the various stages of their evolution, Interchange created Business Class Banking--a program that grows with the customer. Business Class Banking supports a spectrum of business-oriented financial products with value-added services. By designing progressive programs to accommodate the changing needs of growing businesses, Interchange is extending the longevity of valuable customer relationships. In 1995, Interchange State Bank installed a relational database. This is powerful new technology, designed expressly for the banking industry and generally associated with only the largest and most forward thinking companies. From a marketing point of view, the implications of this technology are significant. We can now analyze account relationships, their activity and their relative value to the Bank in great detail. Interchange has maintained an ambitious program of primary research to keep abreast of customer attitudes and preferences. Our sales quotas and incentives for employees are linked directly to bank-wide goals and are used to motivate employees to sell the "right" products to the "right" customers. REGULATION AND SUPERVISION The Company The Company is a bank holding company under the Bank Holding Company Act of 1956, as amended (the "Holding Company Act"), and as such, is subject to supervision by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). As a bank holding company, the Company is required to file an annual report with the Federal Reserve Board and such additional information as the Federal Reserve Board may require pursuant to the Holding Company Act. The Federal Reserve Board may conduct examinations of the Company or any of its subsidiaries. The Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire substantially all of the assets of any bank (although the Federal Reserve Board 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. Under certain circumstances, prior approval of the Federal Reserve Board is required under the Holding Company Act before a bank holding company may purchase or redeem any of its equity securities. The Holding Company Act also prohibits a bank holding company, with certain limited exceptions, from itself engaging in or acquiring direct or indirect interest in or control of any company that is engaged in non-banking activities. Certain exemptions are available with respect to subsidiaries engaged in servicing or liquidating activities or companies acquired by a bank holding company in satisfaction of debts previously contracted. Another principal exception to this prohibition allows the acquisition, following an application or notice process, of interests in companies whose activities are found by the Federal Reserve Board, by order or regulation, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that have been determined by regulation to be closely related to banking are making or servicing loans, underwriting credit life insurance, performing certain data processing services, acting as an investment or financial advisor and providing discount securities brokerage services. Other activities approved by the Federal Reserve Board include acquisition of a savings association, consumer financial counseling, tax planning and tax return preparation, futures and options advisory services, check guaranty services, collection agency and credit bureau services, and personal property appraisals. The provisions of Section 23A of the Federal Reserve Act and related statutes place limits on all insured banks (including the Bank) as to the amount of loans or extensions of credit to, or investment in, or certain other transactions with, their parent bank holding companies and certain of such holding companies' subsidiaries and as to the amount of advances to third parties collateralized by the securities or obligations of bank holding companies or their subsidiaries. In addition, loans and extensions of credit to affiliates of the Bank generally must be secured in the prescribed amounts. Capital Adequacy Guidelines The Federal Reserve Board issued guidelines establishing risk-based capital requirements for bank holding companies and member banks. The guidelines established a risk-based capital framework consisting of (1) a definition of capital consisting of Tier I capital, which includes common shareholders' equity less certain intangibles and a supplementary component called Tier II, which includes a portion of the allowance for loan losses and (2) a system for assigning assets and off-balance-sheet items to one of the four weighted risk categories, with higher levels of capital being required for the categories perceived as representing the greater risks, and established a minimum risk-based capital ratio of 8% (of which at least 4% must be Tier I). An institution's risk-based capital ratio is determined by dividing its qualifying capital by its risk-weighted assets. The guidelines make regulatory capital requirements more sensitive to differences in risk profiles among banking institutions, take off-balance sheet items into account in assessing capital adequacy, and minimize disincentives to holding liquid, low-risk assets. Banking organization 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. 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 requires that a bank holding company and bank which meet the regulator's highest performance and operation standards and which are not contemplating or experiencing significant growth maintain a minimum leverage ratio (Tier I capital as a percent of quarterly average adjusted assets) of 3%. For those financial institutions with higher levels of risk or that are experiencing or anticipating significant growth, the minimum leverage ratio will be increased. The Federal Reserve Board 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 Board is also empowered to assess civil penalties against companies or individuals who violate the Holding Company Act, to order termination of non-banking activities of non-banking subsidiaries of bank holding companies and to order termination of ownership and control of non-banking subsidiaries by bank holding companies. Neither the Company nor any of its affiliates has ever been the subject of any such actions by the Federal Reserve Board. THE BANK As a New Jersey state-chartered member bank, the Bank's operations are subject to various requirements and restrictions of state law pertaining, among other things, to lending limits, reserves, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices and capital adequacy. The Bank is subject to primary supervision, periodic examination and regulation by the New Jersey Department of Banking ("NJDB"). If, as a result of an examination of a bank, the NJDB 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 NJDB. 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 NJDB. The Bank also is subject to supervisory examination by the Federal Reserve Bank of New York. The Bank's deposits are insured by the Bank Insurance Fund administered by the FDIC up to a maximum of $100,000 per depositor. For this protection, each bank pays a semi-annual statutory 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. FDIC Improvement Act of 1991 The Federal Deposit Insurance Corporation Improvement of 1991, enacted in December 1991 ("FDICIA"), among other things, identifies the following capital standard categories for financial institutions: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The FDIC has enacted regulations to implement the prompt corrective action provisions of FDICIA. These regulations establish five classifications based on the capital measures of an institution. Under the guidelines, a "well capitalized" institution is one with a total risk-based capital ratio of 10% or above, a Tier I risk-based capital ratio of 6% or above and a Tier I leverage ratio of 5% or above, and is not subject to a capital directive to meet a specific level for any capital measure; and "adequately capitalized" institution is one with a total risk-based capital ratio of 8% or above, a Tier I risk-based ratio of 4% or above, and a Tier I leverage ratio of 4% or above and which is not a well capitalized institution; an "under-capitalized" institution is one that does not meet the capital levels necessary to be an adequately capitalized institution; a "significantly undercapitalized" institution is one with a total risk-based capital ratio of under 6%, a Tier I risk-based capital ratio of under 3%, or a Tier I leverage ratio of under 3%; and a "critically undercapitalized" institution is one with a Tier I leverage ratio of 2% or less. The institution's primary regulator has the discretion to downgrade the institution by one classification level if the institution is found to be unsafe and unsound, or to be engaged in unsafe and unsound practices. FDICIA imposes progressively more restrictive supervisory constraints on operations, management and capital distributions depending on the category in which an institution is classified. Pursuant to FDICIA, undercapitalized institutions must submit recapitalization plans, and a company controlling a failing institution must guarantee (subject to certain limitations) such institution's compliance with its plan in order for the plan to be accepted by the regulators. In addition, FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying a management fee to its holding company if the depository institution is, or would thereby become, undercapitalized. FDICIA also requires the various regulatory agencies to prescribe within one year from the date of enactment of FDICIA certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation, and permits regulatory action against a financial institution that does not meet such standards. FIRREA and FDICIA provide the federal banking agencies with significantly expanded powers to take enforcement action against institutions which fail to comply with capital or other standards. Such action may include the termination of deposit insurance by the FDIC or the appointment of a receiver or conservator for the institution. The Bank's deposits are insured by the FDIC and the Bank is therefore subject to FDIC deposit insurance assessments. On September 15, 1992, the FDIC approved the implementation of a transition risk-based deposit premium assessment system under which each depository institution is placed in one of nine assessment categories based on certain capital and supervisory measures. The assessment rates under the new system range from 0.23 percent to 0.31 percent depending upon the assessment category into which the depository institution is placed. In 1995, the Federal Despot Insurance Corporation reduced the lower tier of the assessment from 0.23 percent to 0.04 percent. The reduction of the assessment, effective as of the second quarter of 1995, resulted from the Bank Insurance Fund becoming fully capitalized. The Bank's assessment rate was 0.04 percent at December 31, 1995. Effective January 1, 1996, the FDIC further changed the rate structure for the BIF. Under the new rate structure, assessment rates will be between zero and 0.27 percent. However, institutions that have a zero assessment will be subject to a statutory minimum of $2,000 per year. In 1996, the Bank will have a zero assessment, subject to the statutory minimum. ITEM 2. PROPERTIES The Company leases nine banking offices, one mini branch, and one operations/support facility. It owns three banking offices and leases land on which it owns one bank building. ITEM 3. LEGAL PROCEEDINGS Interchange State Bank (the "Bank"), a wholly owned subsidiary of the Company, is a defendant in a lawsuit commenced in April 1989, (Great American Mortgage Corp., et al vs. Robert Utter, et al.) filed in Superior Court of New Jersey alleging that the Bank was statutorily liable in conversion for having paid checks drawn on demand deposit accounts of plaintiffs at the Bank bearing forged or irregular endorsements. On December 2, 1992, the Court directed judgment to be entered against the Bank in the total principal sum of $484,000 with prejudgment interest. On April 5, 1993, the Bank filed a Notice of Appeal of this judgment and, by virtue of post-judgment motions, the amount was reduced to the principal sum of $311,000 plus pre-judgment interest. This judgment was appealed and, by virtue of this appeal, the amount was further reduced to $245,000. The matter remained on appeal until May 8, 1995 at which time, by Court order, the matter was settled. Pursuant thereto, the Bank has paid a total of $89,000 against the aforesaid judgment, which has now been discharged of record. The Bank continues to pursue various parties for recoupment of the aforesaid monies under which it is likely that the Bank's liability for the payment will either be reduced to its proportionate share under contribution theories or it will be exonerated under indemnification theories. In a related matter, on January 8, 1993, an interlocutory judgment was entered against the Bank in the principal sum of $120,000 with prejudgment interest. The Bank has appealed this judgment and a stay of execution has been effected. In 1992, the Company accrued $500,000 as a provision for an adverse judgment in this litigation. Based on the May 8, 1995 partial settlement of these matters, the Company has reduced the reserve by $250,000 to $161,000 which the Company and its legal counsel believe is adequate to cover any remaining liabilities related to these matters. The Company is also a party to routine litigation involving various aspects of its business, none of which, in the opinion of management, after consultation with legal counsel, is expected to have a material, adverse impact on the consolidated financial condition, results of operations or liquidity of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the three months ended December 31, 1995, to a vote of the Company's security holders through the solicitation of proxies or otherwise. EXECUTIVE OFFICERS The following table sets forth the names, ages, and present positions of the principal executive officers: NAME AGE POSITIONS HELD WITH THE COMPANY AND THE BANK ANTHONY S. ABBATE 56 President and Chief Executive Officer ROBERT N. HARRIS 63 Executive Vice President and Chief Financial Officer RICHARD N. LATRENTA 42 Senior Vice President--Lending FRANK R. GIANCOLA 42 Senior Vice President--Retail Banking BUSINESS EXPERIENCE ANTHONY S. ABBATE, President and Chief Executive Officer of the Bank since 1981; Senior Vice President and Controller from October 1980; President and Chief Executive Officer of Home State Bank 1978-1980. Engaged in the banking industry since 1959. ROBERT N. HARRIS, Executive Vice President and Chief Financial Officer of the Bank since 1983; Senior Vice President and Chief Financial Officer of Bergen State Bank 1978-1983. Engaged in the banking industry since 1965. RICHARD N. LATRENTA, Senior Vice President-Lending of the Bank since 1984; Senior Loan Officer since 1982; Assistant Vice President since 1980; other positions with the Bank since 1976. Engaged in the banking industry since 1972. FRANK R. GIANCOLA, Senior Vice President-Retail Banking since January 1, 1993; Senior Vice President-Operations of the Bank from 1984; Senior Operations Officer from 1982; Vice President/Branch Administrator from 1981. Engaged in the banking industry since 1971. Officers are elected annually and serve at the discretion of the board of directors. Management is not aware of any family relationship between any director or executive officer. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The common stock is traded on the American Stock Exchange under the symbol "ISB." A cash dividend of $0.175, $0.175 and $0.18 was paid on each common share outstanding in each quarter during 1993, 1994 and 1995, respectively. The following table sets forth, for the periods indicated, the reported high and low sales price:
High Low ---------- --------- 1993 First quarter $16.25 $13.00 Second quarter 15.50 13.75 Third quarter 18.80 13.875 Fourth quarter 17.875 14.25 1994 First quarter $16.50 $14.00 Second quarter 16.625 14.25 Third quarter 16.75 15.375 Fourth quarter 16.375 14.75 1995 First quarter $17.375 $14.625 Second quarter 20.125 16.50 Third quarter 23.00 19.00 Fourth quarter 21.625 20.25 The number of stockholders of record as of December 20, 1995, was 1,072.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Y E A R S E N D E D D E C E M B E R 31, ---------------------------------------------------------------------- 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- SUMMARY EARNINGS (IN THOUSANDS) Interest income $36,995 $32,612 $29,267 $31,258 $30,102 Interest expense 15,150 11,006 10,237 14,379 16,234 ----------- ----------- ------------ ----------- ------- Net interest income 21,845 21,606 19,030 16,879 13,868 Provision for loan losses 1,200 944 1,065 2,237 900 ----------- ----------- ------------ ----------- ------- Net interest income after provision for loan losses 20,645 20,662 17,965 14,642 12,968 Non-interest income 4,752 3,782 4,872 5,197 2,049 Non-interest expenses 15,824 15,746 14,908 13,645 11,089 ----------- ----------- ------------ ----------- ----------- Income before cumulative effect of change in accounting principle and income taxes 9,573 8,698 7,929 6,194 3,928 Income taxes 3,293 3,062 2,887 2,473 1,368 ----------- ----------- ----------- ----------- ----------- Income before cumulative effect of change in accounting principle 6,280 5,636 5,042 3,721 2,560 Cumulative effect of change in accounting principle - - (205) - - ----------- ----------- ------------ ----------- ---------- Net income $ 6,280 $ 5,636 $ 4,837 $ 3,721 $ 2,560 =========== =========== ============ =========== =========== PER SHARE DATA Income before cumulative effect of change in accounting principle $2.29 $2.05 $1.80 $1.79 $1.26 Cumulative effect of change in accounting principle - - (0.08) - - Net income 2.29 2.05 1.72 1.79 1.26 Cash dividends declared 0.72 0.70 0.70 0.70 0.70 Book value-end of year 14.92 12.14 11.47 10.45 8.70 Tangible book value-end of year 13.95 11.92 11.06 9.97 7.83 Weighted average shares outstanding (in thousands) 2,697 2,697 2,697 1,875 1,727 BALANCE SHEET DATA-END OF YEAR (IN THOUSANDS) Total assets $ 491,457 $ 479,312 $ 421,659 $ 404,064 $ 399,771 Investment securities and securities available for sale 142,233 148,781 118,939 96,480 84,143 Loans 311,164 290,654 266,992 269,214 282,627 Allowance for loan losses 3,647 3,839 3,905 4,100 3,566 Total deposits 436,452 424,170 385,430 369,327 375,567 Long-term debt - 5,000 - - - Total stockholders' equity 40,241 35,129 33,305 31,555 20,018 SELECTED PERFORMANCE RATIOS Return on average total assets 1.32 1.25 1.23 0.93 0.78 Return on average total stockholders' equity 16.66 16.58 15.63 16.25 13.29 Dividend payout ratio 32.28 35.47 41.39 46.73 62.07 Average total stockholders' equity to average total assets 7.90 7.52 7.90 5.74 5.84 Net yield on interest earning assets (taxable equivalent) 4.93 5.13 4.98 4.55 4.54 Non-interest expenses to average assets 3.32 3.48 3.65 3.42 3.36 Non-interest income to average assets 1.00 0.84 1.19 1.30 0.62 ASSET QUALITY RATIOS-END OF YEAR Nonaccrual loans to total loans 0.81 2.13 1.47 1.97 1.75 Nonperforming assets to total assets 1.06 1.58 1.25 1.79 1.72 Allowance for loan losses to nonaccrual loans 145.24 62.15 99.77 77.31 71.90 Allowance for loan losses to total loans 1.17 1.32 1.46 1.52 1.26 Net charge-offs to average loans for the year 0.48 0.37 0.48 0.63 0.25 LIQUIDITY AND CAPITAL RATIOS Average loans to average deposits 68.60 66.69 70.34 73.78 76.04 Total stockholders' equity to total assets 8.19 7.33 7.90 7.81 5.01 Tier I capital to risk-weighted assets 12.95 12.28 12.60 11.88 6.81 Total capital to risk-weighted assets 14.20 13.52 13.85 13.13 8.12 Tier I leverage ratio 7.84 7.39 7.71 7.59 4.65
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section presents management's discussion and analysis of the consolidated results of operations and financial condition of Interchange Financial Services Corporation (the "Company"). The discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto on pages 35 through 62 and the summary consolidated data included elsewhere in this report. OVERVIEW OF RESULTS In 1995, the Company reported net income of $6.3 million or $2.29 per common share, as compared with $5.6 million or $2.05 per common share in 1994 and $4.8 million or $1.72 per common share in 1993. Net income for 1995 was favorably impacted by an increase in non-interest income of $970 thousand, or 25.6%, as compared to 1994. The increase was attributable to the sale of a portion of the subsidiary bank's loan servicing portfolio that generated a net gain of $828 thousand. Net income also increased due to an increase in interest income of $4.4 million resulting from an increase in average interest earning assets combined with an increase in average yields for those assets. The positive effect on net income derived from interest earning assets was mostly offset by a $4.1 million increase in interest expense in 1995 compared to 1994. An increase in interest bearing liabilities, specifically certificates of deposit, compounded by rising interest rates was primarily responsible for the increase in interest expense. In 1995, net income also benefited from the nominal growth in non-interest expenses of $78 thousand, or .5%, as compared to 1994. The nominal increase was due to a $712 thousand, or 4.5%, increase in operating expenses offset by a $250 thousand reduction to a previously established litigation reserve and a $384 thousand decrease in the Federal Deposit Insurance Corporation assessment. The assessment was reduced from 23 cents per thousand to 4 cents per thousand on qualified deposits as a result of the Bank Insurance Fund becoming fully capitalized. The reduction in the assessment became effective in the second quarter of 1995. Net income in 1994 increased $799 thousand over 1993 due largely to the $2.6 million increase in net interest income. Net interest income increased due largely to the increase in average interest earning assets. The growth in interest earning assets stemmed from two large loan acquisitions amounting to $32.6 million during 1994, coupled with a $38.5 million growth in the average balance of taxable investment securities. The loan acquisitions and purchases of investment securities were funded by the acquisition of the deposit liabilities of a failed institution from the Resolution Trust Corporation, combined with borrowings from the Federal Home Loan Bank of New York. The increase in net interest income was partly offset by a decrease in non-interest income of $1.1 million in 1994, compared to 1993. This decrease was due to a gain of $1.1 million from the sale of mortgage loans in 1993 that did not reoccur in 1994. Table 1 SUMMARY OF OPERATING RESULTS
1995 1994 1993 ---- ---- ---- Net income (in thousands) $6,280 $5,636 $4,837 Earnings per share 2.29 2.05 1.72 Return on average total assets 1.32% 1.25% 1.23% Return on average total equity 16.66 16.58 15.63 Dividend payout ratio* 32.28 35.47 41.39 Average total stockholders' equity to average total assets 7.90 7.52 7.90 *Cash dividends declared on common and preferred shares to net income
NET INTEREST INCOME NET INTEREST INCOME IS THE DIFFERENCE BETWEEN THE INTEREST A COMPANY EARNS ON ITS ASSETS, PRINCIPALLY LOANS AND INVESTMENT SECURITIES, AND INTEREST IT PAYS ON ITS DEPOSITS AND BORROWINGS. WHEN EXPRESSED AS A PERCENTAGE OF AVERAGE ASSETS, IT IS REFERRED TO AS NET INTEREST MARGIN, OR SIMPLY INTEREST MARGIN. TABLE 3, WHICH PRESENTS CHANGES IN INTEREST INCOME AND INTEREST EXPENSE BY MAJOR ASSET AND LIABILITY CATEGORY FOR 1994 AND 1995, 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 BALANCES OR RATES HAVE BEEN ALLOCATED TO SUCH CATEGORIES BASED ON THE RESPECTIVE PERCENTAGE CHANGES IN AVERAGE BALANCES AND AVERAGE 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 assets yields. Table 2 ANALYSIS OF NET INTEREST INCOME for the years ended December 31, (dollars in thousands)
1995 1994 ------------------------------------ ------------------------------------ AVERAGE AVERAGE Average Average BALANCE INTEREST RATE Balance Interest Rate ------------------------------------ ----------------------------------- ASSETS Interest earning assets Loans (1) (2) $291,981 $27,427 9.39% $272,399 $23,537 8.64% Taxable securities 144,156 9,138 6.34 137,484 8,604 6.26 Tax-exempt securities (2) 1,081 74 6.85 1,561 78 4.93 Federal funds sold 6,366 374 5.87 10,406 412 3.96 --------- -------- -------- -------- TOTAL INTEREST EARNING ASSETS 443,584 37,013 8.34 421,850 32,631 7.74 -------- -------- Non-interest earning assets Cash and due from banks 20,781 20,120 Allowance for loan losses (3,865) (3,832) Other assets 16,518 13,793 --------- --------- TOTAL ASSETS $477,018 $451,931 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities Demand deposits $102,397 3,141 3.07 $100,309 2,612 2.60 Savings deposits 111,959 3,515 3.14 122,083 3,191 2.61 Time deposits 146,133 7,857 5.38 124,791 4,832 3.87 Short-term borrowings 7,845 506 6.45 5,361 289 5.39 Long-term borrowings 1,932 131 6.78 1,192 82 6.80 --------- -------- --------- -------- TOTAL INTEREST BEARING LIABILITIES 370,266 15,150 4.09 353,736 11,006 3.11 -------- -------- Non-interest bearing liabilities Demand deposits 65,164 61,271 Other liabilities 3,903 2,924 --------- --------- Total liabilities (3) 439,333 417,931 Stockholders' equity 37,685 34,000 --------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $477,018 $451,931 ========= ========== Net interest income (tax-equivalent basis) 21,863 4.25 21,625 4.63 Tax-equivalent basis adjustment (18) (19) -------- ---------- NET INTEREST INCOME $21,845 $21,606 ======== ========== NET INTEREST INCOME AS A PERCENT OF INTEREST EARNING ASSETS (TAX-EQUIVALENT BASIS) 4.93% 5.13% Table 2 (continued) 1993 ------------------------------------ Average Average Balance Interest Rate ------------------------------------ ASSETS Interest earning assets Loans (1) (2) $262,222 $22,142 8.44% Taxable securities 98,997 6,466 6.53 Tax-exempt securities (2) 1,081 67 6.20 Federal funds sold 20,315 610 3.00 -------- ------- TOTAL INTEREST EARNING ASSETS 382,615 29,285 7.65 ------- Non-interest earning assets Cash and due from banks 18,558 Allowance for loan losses (4,127) Other assets 11,253 --------- TOTAL ASSETS $408,299 ========= LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities Demand deposits $ 87,037 2,194 2.52 Savings deposits 109,432 2,994 2.74 Time deposits 122,317 5,039 4.12 Short-term borrowings 281 10 3.56 Long-term borrowings - - - -------- ------- TOTAL INTEREST BEARING LIABILITIES 319,067 10,237 3.21 ------- Non-interest bearing liabilities Demand deposits 53,999 Other liabilities 2,980 -------- Total liabilities (3) 376,046 Stockholders' equity 32,253 -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $408,299 ======== Net interest income (tax-equivalent basis) 19,048 4.44 Tax-equivalent basis adjustment (18) ------- NET INTEREST INCOME $19,030 ======= NET INTEREST INCOME AS A PERCENT OF INTEREST EARNING ASSETS (TAX-EQUIVALENT BASIS) 4.98% (1) Nonaccrual loans and any related interest recorded have been included in computing the average rate earned on the loan portfolio. (2) Computed on a fully taxable equivalent basis using the corporate federal tax rate of 34%. (3) All deposits are in domestic bank offices.
Table 3 EFFECT OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME (in thousands)
YEAR ENDED DECEMBER 31, Year ended December 31, 1995 COMPARED WITH 1994 1994 compared with 1993 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 $1,762 $2,128 $3,890 $ 867 $ 528 $1,395 Taxable securities 423 111 534 2,392 (254) 2,138 Tax-exempt securities (34) 30 (4) 20 (9) 11 Federal funds sold (160) 122 (38) (577) 379 (198) --------- -------- --------- -------- ------- -------- TOTAL INTEREST INCOME 1,991 2,391 4,382 2,702 644 3,346 --------- -------- --------- -------- ------- -------- Interest expense Demand deposits 54 475 529 346 72 418 Savings deposits (264) 588 324 333 (136) 197 Time deposits 922 2,103 3,025 102 (309) (207) Short-term borrowings 152 65 217 271 8 279 Long-term borrowings 49 - 49 82 - 82 --------- -------- --------- -------- ------- -------- TOTAL INTEREST EXPENSE 913 3,231 4,144 1,134 (365) 769 --------- -------- --------- -------- ------- -------- CHANGE IN NET INTEREST INCOME $1,078 $ (840) $ 238 $1,568 $1,009 $2,577 ========= ======== ========= ======== ======= ========
The Company's net interest income, on a taxable equivalent basis, totaled $21.9 million in 1995, an increase of $238 thousand, or 1.1%, from $21.6 million in 1994. The increase was driven by a $21.7 million or 5.2% increase in average interest earning assets from 1994 levels of $421.9 million. In addition, net interest income was positively affected by an increase in average yield on interest earning assets from 7.74% in 1994 to 8.34% in 1995, an increase of 60 basis points. The benefits derived from the positive changes in average volume and average rate on interest earning assets were largely offset by the negative impacts of increases in average volume and average rate on interest bearing liabilities. Average interest bearing liabilities increased $16.5 million, or 4.7%, from 1994 levels of $353.7 million. More significantly, as illustrated in Table 3, the 98 basis point increase in average rate, from 3.11% in 1994 to 4.09% in 1995, had a more adverse impact on net interest income. The growth in average interest earning assets stemmed largely from increased loans, particularly, commercial mortgages. The average balance of commercial mortgages totaled $91.3 million in 1995, compared to $78.9 in 1994, an increase of $12.4 million or 15.7%. On the liability side, growth in the average balance of certificates of deposits ("CDs") was largely responsible for the $913 thousand increase in interest paid due to volume growth. In 1995, the average balance of CDs increased $21.3 million or 17.1% and the average balance of savings accounts decreased $10.1 million or 8.3%. The increase in CDs was the result of higher interest rates in the second half of 1994 and the first half of 1995, increasing the popularity of CDs. Rising interest rates increased the costs of the Company's deposit liabilities, particularly time deposits, and was responsible for $3.2 million of the increase in interest expense. Overall, the improved yields on interest earning assets, combined with the growth in average loans and investments generated a rise in interest income of $4.4 million in 1995 over 1994. Conversely, the increased costs of interest bearing liabilities, along with the increase in average balances, increased interest expense by $4.1 million, thereby, counteracting the positive benefits derived from interest earning assets. Net interest income, on a taxable equivalent basis, totaled $21.6 million in 1994, an increase of $2.6 million or 13.5% over 1993. The increase was driven mostly by a $39.2 million increase in average interest earning assets. The volume increase made up $2.7 million of the $3.3 million total change in interest income. Taxable investment securities comprised the largest increase. The average balance increased $38.5 million in 1994 from $99.0 million in 1993 and accounted for $2.4 million of the variance in interest income due to volume change. In addition, loan acquisitions of $25.7 million in June 1994 and $6.9 million in October 1994, contributed to the growth in interest income. The increase in net interest income was partially offset by the increased volume of interest bearing liabilities. This increase resulted in a $1.1 million increase in interest expense. In 1994, the increase in interest bearing liabilities resulted from the acquisition of $26.5 million of deposit liabilities from the Resolution Trust Corporation in February 1994 and $18.0 million of advances from the Federal Home Loan Bank of New York. These funds were used to finance the growth in loans and investments. Loan Losses - ------------ The provision for loan losses represents management's determination of the amount necessary to bring the allowance for losses to the level it considers adequate to reflect the risk of future losses in the loan portfolio. Factors considered in the evaluation include: past loss experience; changes in the composition of nonperforming loans; the condition of borrowers facing financial pressure, the relationship of the current level of the allowance to the portfolio and to nonperforming loans; and existing economic conditions. Loan loss provisions for 1995 amounted to $1.2 million representing an increase of $256 thousand from the previous year. In 1994, the loan loss provision amounted to $944 thousand, a decrease of $121 thousand from 1993. The provision for loan losses in 1995, 1994 and 1993 include $62 thousand, $44 thousand and $160 thousand, respectively, representing the aggregate decline in the market value of real estate collateral applicable to loans whose value is dependent solely upon the value of the underlying collateral. The increase in the loan loss provision in 1995 over 1994 mirrors the increased loan activity, in particular, commercial and financial loans and commercial real estate loans. Such loans generally carry a higher risk than do smaller residential and consumer loans. See sections on Loan Portfolio and Loan Quality beginning on page 20 of this report for additional discussions pertaining to the allowance for loan losses. Table 4 LOAN LOSS EXPERIENCE for the years ended December 31, (dollars in thousands)
1995 1994 1993 1992 1991 ------- -------- -------- ------- -------- Average loans outstanding $291,981 $272,399 $262,222 $272,002 $232,382 ======== ========= ======== ======== ======== Allowance at beginning of year $3,839 $3,905 $4,100 $3,566 $2,440 Allowance recorded on acquired loans - - - - 800 --------- --------- -------- -------- -------- 3,839 3,905 4,100 3,566 3,240 -------- -------- -------- -------- -------- Loans charged off Commercial 399 281 138 756 72 Installment 108 149 613 283 320 Real estate 914 647 560 792 200 Lease financing 89 47 - - -------- -------- -------- -------- -------- Total 1,510 1,124 1,311 1,831 592 -------- -------- -------- -------- -------- Recoveries of loans previously charged off Commercial 25 - - 73 3 Installment 54 99 42 20 15 Real estate 32 15 9 35 - Lease financing 7 - - - - -------- -------- -------- -------- -------- Total 118 114 51 128 18 -------- -------- -------- -------- -------- Net loans charged off 1,392 1,010 1,260 1,703 574 -------- -------- -------- -------- -------- Additions to allowance charged to expense 1,200 944 1,065 2,237 900 -------- -------- -------- -------- -------- Allowance at end of year $3,647 $3,839 $3,905 $4,100 $3,566 ======== ======== ======== ======== ======== Allowance to total loans 1.17% 1.32% 1.46% 1.52% 1.26% Allowance to nonaccrual loans 145.24 62.15 99.77 77.31 71.90 Allowance to nonaccrual loans and loans past due 90 days or more 145.24 62.15 95.92 71.96 49.21 Ratio of net charge-offs to average loans 0.48 0.37 0.48 0.63 0.25
The allowance for losses represented 70.3% of nonperforming assets at year-end up from 50.7% at the end of 1994. The ratio increased as a result of a $2.4 million decrease in nonperforming assets in 1995 compared to 1994. The decrease stemmed largely from the charge-off of approximately $1.2 million of loans in 1995 that were classified as nonperforming in 1994. In addition, the Company received $617 thousand that represented a guarantee by the New Jersey Economic Development Authority to settle part of a substantial nonperforming loan. TABLE 5 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES at December 31, (in thousands)
1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- Commercial and financial $1,993 $1,985 $2,822 $1,933 $1,184 Installment 215 278 324 352 911 Real estate 813 611 592 885 471 Unallocated 626 965 167 930 1,000 ------ ------ ------ ------- ------- $3,647 $3,839 $3,905 $4,100 $3,566 ====== ======= ======= ====== =======
The above allocation is intended for analytical purposes and may not be indicative of the categories in which future loan losses occur. Non-interest Income - ------------------- Non-interest income consists of all income other than interest and dividend income and is derived from fees on bank transactions and credit cards; commissions on sales of annuities and mutual funds; rental of safe deposit space; net gains on sales of assets and the accretion of discount in connection with an acquisition. In 1995, non-interest income increased $1.0 million due mostly to the subsidiary bank selling a portion of its loan servicing portfolio which generated a net gain of $828 thousand. Non-interest income decreased $1.1 million in 1994 compared to 1993. This decrease was directly attributable to the sale of approximately $40 million of residential mortgages in 1993 that resulted in a gain of $1.1 million. Other income, exclusive of gain on sale of assets, expressed as a percentage of average assets was .78%, .79% and .85% in 1995, 1994 and 1993, respectively. Table 6 NON-INTEREST INCOME for the years ended December 31, (in thousands)
1995 1994 1993 ------ ------ ------ Service fees on deposit accounts $1,474 $1,496 $1,300 Service fees on loan accounts 280 258 178 Service fees on credit cards 168 155 155 Net gain/(loss) on sale of loans available for sale 22 (14) 1,070 Net gain on sale of loans - - 284 Income from foreclosed real estate operations 174 211 28 Net gain/(loss) on sale of securities available for sale 15 (5) 1 Net gain on sale of loan servicing rights 828 - - Commission on annuity sales 89 188 194 Commission on mutual funds sales 49 40 39 Accretion of discount in connection with acquisition 760 760 777 Collection of acquired loans in excess of carrying value 406 313 227 Rental on safe deposit boxes 142 138 134 All other 345 242 485 ------ ------ ------ $4,752 $3,782 $4,872 ====== ====== ======
Non-interest Expenses - --------------------- Non-interest expenses were $15.8 million in 1995, an increase of $78 thousand or .5% over the previous year. Increases in non-interest expenses were minimal due to expenses being offset by the settlement of a 1992 lawsuit against the banking subsidiary which resulted in a $250 thousand reduction of a previously established litigation reserve and to a $384 thousand decrease in the Federal Deposit Insurance Corporation assessment. The assessment was reduced from 23 cents per thousand to 4 cents per thousand on qualified deposits as a result of the Bank Insurance Fund becoming fully capitalized. The reduction in the assessment became effective in the second quarter of 1995. Non-interest expenses increased $838 thousand in 1994 over 1993 due mainly to the acquisition of a failed bank and to the additional costs of operating a banking office opened in September 1993 for an entire year. Table 7 NON-INTEREST EXPENSES for the years ended December 31, (in thousands)
1995 1994 1993 ------ ------ ------ Salaries and benefits $ 7,254 $ 6,879 $ 6,383 Net occupancy and furniture and equipment 2,777 2,540 2,528 Other expenses Advertising and promotion 673 701 745 Stationery, printing and supplies 281 275 275 Federal Deposit Insurance Corporation assessment 503 887 870 Professional fees 1,224 1,254 1,249 Communications 217 192 176 Postage and shipping 282 250 253 Credit card processing fees 156 161 160 Credit services 253 208 295 Foreclosed real estate expenses 227 313 411 Amortization of premiums in connection with acquisitions 444 403 197 Provision for litigation contingency (250) - - Directors' fees, travel and retirement 536 399 236 Insurance premiums 256 332 364 Unrealized (gain)/loss on loans held for sale (60) 85 - All other 1,051 867 766 ------- ------- ------- $15,824 $15,746 $14,908 ======= ======= =======
Income Taxes - ------------ In 1995, income taxes amounted to $3.3 million as compared to $3.1 million and $2.9 million for 1994 and 1993, respectively. The effective tax rate in 1995 was 34.4% as compared to 35.2% and 36.4% for 1994 and 1993, respectively. Detailed information on income taxes is shown in Notes 1 and 14 to the Consolidated Financial Statements. New Pronouncements - ------------------ In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 122, "Accounting for Mortgage Servicing Rights - - an amendment to FASB Statement No. 65" ("SFAS No. 122"). This Statement requires that a mortgage banking enterprise recognize, as separate assets, rights to service mortgage loans for others, however those servicing rights are acquired. Additionally, the Statement requires that a mortgage banking enterprise assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights. This Statement applies prospectively to fiscal years beginning after December 15, 1995 to transactions in which a mortgage banking enterprise sells or securitizes mortgage loans with servicing rights retained and to impairment evaluations of all amounts capitalized as mortgage servicing rights, including those purchased before the adoption of this Statement. The implementation of SFAS No. 122 will not be material to the Company's financial statements. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). This Statement encourages, but does not require, a fair value based method of accounting for stock-based compensation plans and encourages entities to adopt that method in place of the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The provisions of this Statement are effective for transactions entered into in fiscal years that begin after December 15, 1995. The implementation of SFAS No. 123 will not be material to the Company's financial statements. Effects of Inflation and Changing Prices - ---------------------------------------- The financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same magnitude as the prices of goods and services. Loan Portfolio - -------------- Total loans as of December 31, 1995, amounted to $311.2 million, up $20.5 million or 7.1% over the previous year. A promotional campaign and competitive loan rates were instrumental to the $13.0 million increase in the home equity loan portfolio. During 1995, the Company continued to meet the demand of its business customers by growing the commercial and commercial mortgage portfolios by approximately $5.6 and $9.2 million, respectively. In 1994, total loans increased $23.7 million from the 1993 level. The increase stemmed from the acquisition of commercial mortgages amounting to $25.7 million and the acquisition of $6.9 million of home equity loans combined with a reduction in loans from the securitization and transfer to securities available for sale of $27.9 million of residential mortgages. Table 8 LOAN PORTFOLIO at December 31,
1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ AMOUNTS OF LOANS BY TYPE (in thousands) Commercial and financial $ 42,106 $ 36,512 $ 35,380 $ 39,107 $ 46,015 Real estate-construction 1,484 1,917 207 993 1,208 Real estate-mortgage 1-4 family residential First liens 42,088 43,229 55,982 54,559 57,408 Junior liens 20,919 25,266 38,771 47,349 57,585 Available for sale 1,106 1,086 15,751 11,392 - Home equity 101,133 88,147 50,197 59,513 70,703 Commercial 96,910 87,728 60,771 44,692 35,898 Installment Credit cards and related plans 2,902 3,314 4,039 4,311 4,335 Other 2,461 2,757 3,918 4,166 6,772 Lease financing 55 698 1,976 3,132 2,703 -------- -------- -------- -------- -------- TOTAL $311,164 $290,654 $266,992 $269,214 $282,627 ========= ======== ======== ======== ======== PERCENT OF LOANS BY TYPE Commercial and financial 13.5% 12.6% 13.2% 14.4% 16.3% Real estate-construction 0.5 0.7 0.1 0.4 0.4 Real estate-mortgage 1-4 family residential First liens 13.5 14.9 21.0 20.3 20.3 Junior liens 6.7 8.7 14.5 17.6 20.4 Available for sale 0.4 0.4 5.9 4.2 - Home equity 32.5 30.3 18.8 22.1 25.0 Commercial 31.2 30.2 22.8 16.6 12.7 Installment Credit cards and related plans 0.9 1.1 1.5 1.6 1.5 Other 0.8 0.9 1.5 1.6 2.4 Lease financing - 0.2 0.7 1.2 1.0 ---- ---- ---- ---- ---- TOTAL 100.0% 100.0% 100.0% 100.0% 100.0% ====== ====== ====== ====== ======
Table 8a The following table sets forth the maturity distribution of the Company's loan portfolio as of the December 31, 1995. The table excludes real estate loans (other than construction loans), lease financing and installment loans: (in thousands)
Due after Due in one year Due after one year through five or less five years years Total ----------- ------------- ---------- ---------- Commercial and financial $11,647 $29,254 $1,205 $42,106 Construction 1,484 - - 1,484 --------- --------- -------- --------- Total $13,131 $29,254 $1,205 $43,590 ========= ========= ======== ========= Table 8b The following table sets forth, as of December 31, 1995, the sensitivity of the amounts due after one year to changes in interest rates: (in thousands) Due after one year Due after through five five years years ------------- ------------ Fixed interest rate $ 9,374 $ 242 Variable interest rate 19,880 963 -------- -------- Total $29,254 $1,205 ======== ========
Commercial real estate mortgage loans amounted to $96.9 million at December 31, 1995, and represented 31.2% of total loans compared to $87.7 million or 30.2% of all loans at the end of 1994. These loans are secured primarily by first priority mortgage liens on owner-occupied commercial properties. While approximately 85% of all loans are collateralized by real estate located in northern New Jersey, the Company does not have any concentration of loans in any single industry classified under the Standard Industrial Classification Code which exceeds 3% of its total loans. Loan Quality - ------------ The lending activities of the Company are guided by the basic lending policy established by the Company's Board of Directors. Loans must meet the tests of a prudent loan, which include criteria regarding the character, capacity and capital of the borrower, collateral provided for the loan and prevailing economic conditions. An independent appraisal of real property is mandatory when it is considered the primary collateral for a loan. The Company employs a full-time loan review officer who evaluates the credit risk for substantially all large commercial loans. This review process is intended to identify adverse developments in individual credits, regardless of whether such credits are also included on the watchlist discussed below and whether or not the loans are delinquent. The loan review officer reports directly to the President of the Company. Management maintains a "watchlist" system under which credit officers are required to provide early warning of possible deteriorations in loans. These loans may not be delinquent currently, but may present indications of financial weakness, such as deteriorating financial ratios of the borrowers, or other concerns at an early stage to allow early implementation of responsive credit strategies. Nonperforming Assets - -------------------- Nonperforming assets consist of nonaccrual loans, restructured loans and foreclosed real estate. Foreclosed real estate, representing real estate collateral acquired by legal foreclosure procedures, is valued using independent appraisals and the Company's policy is to review such appraisals annually. The Company intends to dispose of each property at or near its current valuation. However, there can be no assurance that disposals will be made as soon as anticipated or at expected values. Table 9 presents the detail of nonperforming assets and the aggregate of loans whose principal and/or interest has not been paid according to contractual terms. (See discussion of loan losses on page 16.) Other than the loans included in the table, there were no material potential problem loans, either individually or in the aggregate, at December 31, 1995. Table 9 LOAN DELINQUENCIES AND NONPERFORMING ASSETS at December 31, (dollars in thousands)
1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ Loans delinquent and accruing interest Loans past due 30-89 days $ 853 $ 805 $ 600 $1,838 $5,600 Loans past due 90 days or more - - 157 395 2,286 ------ ------ ------ ------ ------ Total loans delinquent and accruing interest $ 853 $ 805 $ 757 $2,233 $7,886 ====== ====== ====== ====== ====== Nonaccruing loans $2,511 $6,177 $3,914 $5,303 $4,960 Foreclosed real estate 1,213 880 1,342 1,655 787 Restructured loans 1,465 522 - 285 1,119 ------ ------ ------ ------ ------ Total nonperforming assets $5,189 $7,579 $5,256 $7,243 $6,866 ====== ====== ====== ====== ====== Total nonperforming assets and loans past due 90 days or more $5,189 $7,579 $5,413 $7,638 $9,152 ====== ====== ====== ====== ====== Nonaccrual loans to total loans 0.81% 2.13% 1.47% 1.97% 1.75% Nonperforming assets to total loans and foreclosed real estate 1.66 2.60 1.96 2.67 2.42 Nonperforming assets to total assets 1.06 1.58 1.25 1.79 1.72 Nonaccrual loans and loans past due 90 days or more to total loans 0.81 2.13 1.52 2.12 2.56 Nonperforming assets and loans past due 90 days or more to total loans and foreclosed real estate 1.66 2.60 2.02 2.82 3.23 Nonperforming assets and loans past due 90 days or more to total assets 1.06 1.58 1.28 1.89 2.29
INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE The Company identifies as "securities available for sale" securities used as part of its asset and 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 available for sale. Table 10 presents a summary of the contractual maturities and weighted average yields (adjusted to a taxable equivalent basis) of investment securities and securities available for sale at December 31, 1995. Table 10 SECURITIES at December 31, 1995 (dollars in thousands)
After 1 After 5 But But Weighted Within Within Within After Average 1 Year 5 Years 10 Years 10 Years Total Yield -------- --------- ---------- --------- ------- --------- Investment securities at amortized cost Obligations of U.S. Treasury $21,128 $44,095 - - $65,223 6.17% Obligations of U.S. agencies - 8,037 - - 8,037 6.82 Obligations of states & political subdivisions 993 175 - $110 1,278 6.10 Other debt securities - 50 $100 - 150 6.17 ------- ------- ------- ------- ------- 22,121 52,357 100 110 74,688 ------- ------- ------- ------- ------- Securities available for sale at market value Obligations of U.S. Treasury - 31,063 11,107 - 42,170 6.17 Obligations of U.S. agencies - - - 22,941 22,941 6.19 ------- ------- ------- ------- ------- - 31,063 11,107 22,941 65,111 ------- ------- ------- ------- ------- Total $22,121 $83,420 $11,207 $23,051 $139,799 ======= ======= ======= ======= ======== Weighted average yield 5.92% 6.18% 6.98% 6.21% 6.21%
DEPOSITS The Company traditionally relies on its deposit base to fund its credit needs. Core deposits, which include non-interest bearing demand deposits, interest bearing demand accounts, savings deposits, money market accounts and time deposits in amounts under $100,000, represented 97.3% of total deposits at December 31, 1995, and 98.1% at December 31, 1994. In 1995, the Company experienced a decline in savings deposits and an increase in certificates of deposit. The shift in these deposit categories is indicative of higher interest rates during the second half of 1994 and the first half of 1995 that resulted in the increased popularity of certificates of deposit. Table 11 DEPOSIT SUMMARY at December 31, (dollars in thousands)
1995 1994 1993 1992 1991 --------------- --------------- --------------- ---------------- ----------------- Non-interest bearing demand $69,213 15.8% $66,435 15.7% $59,170 15.3% $49,908 13.5% $52,458 14.0% Interest bearing demand 110,813 25.4 101,873 24.0 92,115 23.9 87,253 23.7 54,332 14.4 Money market 38,716 8.9 37,816 8.9 43,483 11.3 37,923 10.3 48,300 12.9 Savings 71,170 16.3 75,906 17.9 70,062 18.2 63,168 17.1 50,534 13.4 Time deposits less than $100,000 134,866 30.9 134,097 31.6 110,457 28.7 121,295 32.8 151,680 40.4 Time deposits greater than $100,000 11,674 2.7 8,043 1.9 10,143 2.6 9,780 2.6 18,263 4.9 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ $436,452 100.0% $424,170 100.0% $385,430 100.0% $369,327 100.0% $375,567 100.0% ======== ====== ======== ====== ======== ====== ======== ====== ======== ====== * The following table shows the time remaining to maturity of time certificates of deposit of $100,000 or more as of December 31, 1995 (in thousands) Three months or less $ 5,720 Over three months through six months 3,289 Over six months through twelve months 1,649 Over twelve months 1,016 ------- $11,674 =======
INTEREST RATE SENSITIVITY FLUCTUATIONS IN MARKET INTEREST RATES CAN HAVE A SIGNIFICANT INFLUENCE ON NET INTEREST INCOME. THEREFORE, MANAGING THE COMPANY'S INTEREST RATE SENSITIVITY IS A PRIMARY OBJECTIVE OF THE COMPANY'S SENIOR MANAGEMENT. THE COMPANY'S ASSET/LIABILITY COMMITTEE ("ALCO") IS RESPONSIBLE FOR MANAGING THE EXPOSURE TO CHANGES IN MARKET INTEREST RATES. ALCO ATTEMPTS TO MAINTAIN STABLE NET INTEREST MARGINS BY PERIODICALLY EVALUATING THE RELATIONSHIP BETWEEN INTEREST-RATE SENSITIVE ASSETS AND INTEREST-RATE SENSITIVE LIABILITIES. THE EVALUATION ATTEMPTS TO DETERMINE THE IMPACT ON NET INTEREST MARGIN FROM CURRENT AND PROSPECTIVE CHANGES IN MARKET INTEREST RATES. INTEREST RATE SENSITIVITY 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. THIS DIFFERENCE, OR "SENSITIVITY GAP," PROVIDES AN INDICATION OF THE EXTENT TO WHICH THE COMPANY'S NET INTEREST INCOME MAY BE AFFECTED BY FUTURE CHANGES IN MARKET INTEREST RATES. THE CUMULATIVE GAP POSITION 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 (13.18%) at December 31, 1995. Since the cumulative gap was negative, the Company has a "negative gap" position which, theoretically will cause its assets to reprice more slowly than its deposit liabilities. In a declining interest rate environment, interest costs may be expected to fall faster than the interest received on earning assets, thus increasing the net interest spread. If interest rates increase, a negative gap means that the interest received on earning assets may be expected to increase more slowly than the interest paid on the Company's liabilities therefore decreasing the net interest spread. Certain shortcomings are inherent in the method of analysis presented in Table 12 . Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. The rates on certain types of assets and liabilities may fluctuate in advance of changes in market rates, while rates on other types of assets and liabilities may lag behind changes in market rates. In the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the table. The ability of borrowers to service their debt may decrease in the event of an interest rate increase. Management considers these factors when reviewing its gap position and establishing its ongoing asset/liability strategy. Table 12 RATE SENSITIVITY ANALYSIS at December 31, 1995 (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 YEAR YEARS 5 YEARS SENSITIVE TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Assets Net loans $108,830 $18,971 $20,605 $53,057 $42,848 $62,225 $ 981 $307,517 Investment securities 69,547 6,044 14,075 48,279 4,078 210 - 142,233 Federal funds sold - - - - - - - - Cash and amounts due from banks - - - - - - 25,151 25,151 Other non-interest earning assets - - - - - - 16,556 16,556 --------- ------- -------- -------- -------- ------- ------- ------- Total assets 178,377 25,015 34,680 101,336 46,926 62,435 42,688 491,457 --------- ------- -------- -------- ------- ------- ------- ------- Liabilities and stockholders' equity Demand deposits 110,813 - - - - - 69,213 180,026 Savings deposits* 14,234 - - - 56,936 - - 71,170 Fixed maturity certificates 66,704 27,320 34,135 12,395 5,957 29 - 146,540 of deposits Money market accounts 38,716 - - - - - - 38,716 Securities sold under agreements to repurchase - 1,604 100 - - - - 1,704 Other borrowings 5,450 1,250 2,500 - - - - 9,200 Other liabilities - - - - - - 3,860 3,860 Stockholders' equity - - - - - - 40,241 40,241 --------- ------- ------ -------- ------- ------- -------- -------- Total liabilities and 235,917 30,174 36,735 12,395 62,893 29 113,314 $491,457 stockholders' equity --------- ------- ------ -------- ------- ------- --------- ======== GAP $(57,540) $(5,159) $ (2,055) $ 88,941 $(15,967) $62,406 $(70,626) ========= ======== ======= ======== ======== ======= ======== GAP to total assets (11.71)% (1.05)% (0.42)% 18.10% (3.25)% 12.70% (14.37)% Cumulative GAP $(57,540) $(62,699) $(64,754) $ 24,187 $ 8,220 $70,626 ========= ======== ======= ======== ======== ======= Cumulative GAP to total assets (11.71)% (12.76)% (13.18)% 4.92% 1.67% 14.37% *Based on past experience with these accounts, management believes that these balances are not interest rate sensitive. Accordingly, 80% of such balances has been allocated to the "3 to 5 year" category. However, there is no assurance that these balances will actually remain insensitive to interest rate changes in the future.
LIQUIDITY A FUNDAMENTAL COMPONENT OF THE COMPANY'S BUSINESS STRATEGY IS TO MANAGE LIQUIDITY TO ENSURE THE AVAILABILITY OF SUFFICIENT RESOURCES TO MEET ALL FINANCIAL OBLIGATIONS AND FINANCE PROSPECTIVE BUSINESS OPPORTUNITIES. LIQUIDITY MANAGEMENT IS CRITICAL TO THE STABILITY OF THE COMPANY. LIQUIDITY LEVELS OVER ANY GIVEN PERIOD OF TIME ARE A PRODUCT OF THE COMPANY'S OPERATING, FINANCING AND INVESTING ACTIVITIES. THE EXTENT OF SUCH ACTIVITIES ARE OFTEN SHAPED BY SUCH EXTERNAL FACTORS AS COMPETITION FOR DEPOSITS AND LOAN DEMAND. Traditionally, funding for the Company's loans and investments is derived primarily from deposits, along with interest and principal payments on loans and investments. The Company continued to place considerable emphasis on increasing core deposits, a stable and cost effective source of funds. At December 31, 1995, core deposits (which represent 97.3% of total deposits) amounted to $424.8 million and increased $8.7 million or 2.1% over the prior comparable year. During 1995, total deposits increased by $12.3 million. In 1995, the Company continued to supplement the more traditional funding sources with borrowings from the Federal Home Loan Bank of New York ("FHLB"). At December 31, 1995, total advances from the FHLB amounted to $9.2 million as compared to $16.0 million at December 31, 1994. In 1995, loan production continued to be the Company's principal investing activity. Net loans at December 31, 1995 amounted to $307.5 million, compared to $286.8 million at the end of 1994, an increase of $20.7 million or 7.2%. The Company's most liquid assets are cash and due from banks and federal funds sold. At December 31, 1995, the total of such assets amounted to $25.2 million or 5.1% of total assets compared to $26.0 million or 5.4% of total assets, at year-end 1994. Another significant liquidity source is the Company's available-for-sale ("AFS") securities. During December 1995, the Company reclassified certain securities between held-to-maturity ("HTM") and AFS (see note 1 to the consolidated financial statements). This reclassification improved the Company's liquidity and interest rate sensitivity. At December 31, 1995, AFS securities amounted to $67.5 million or 47.5% of total investment securities, compared to $27.3 million or 18.3% of total investment securities at year-end 1994. In addition to the aforementioned sources of liquidity, the Company derives liquidity from various other sources, including federal funds purchased from other banks, the Federal Reserve discount window and sales of securities under repurchase agreements. The Bank also has a $47.5 million line of credit available through its membership in the Federal Home Loan Bank of New York. Management believes that the Company's sources of funds are sufficient to meet its funding requirements. CAPITAL ADEQUACY Stockholders' equity totaled $40.2 million and represents 8.19% of total assets at December 31, 1995, compared to $35.1 million and 7.33% of total assets at December 31, 1994. The $5.1 million increase was primarily attributable to a $4.3 million rise in retained earnings (net income of $6.3 million less cash dividends of $2.0 million). Stockholders' equity was further increased by a $2.5 million net increase to the market value adjustment for securities available for sale. These components were partially offset by a reduction of $1.6 million relating to the retirement of the Company's preferred stock. Guidelines issued by the Federal Reserve Board and the FDIC establish capital adequacy guidelines for bank holding companies and state-chartered non-member banks. The guidelines establish a risk-based capital framework consisting of (1) a definition of capital consisting of Tier 1 capital, which includes common shareholders' equity less certain intangibles and a supplementary component called Tier II, which includes a portion of the allowance for loan losses, and (2) a system for assigning assets and off-balance-sheet items to one of the four weighted risk categories, with higher levels of capital being required for the categories perceived as representing the 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. These guidelines focus principally on broad categories of credit risk, although the framework for assigning assets and off-balance sheet items to risk categories does incorporate elements of transfer risk. The risk-based capital ratio does not, however, incorporate other factors that may affect a company's financial condition, such as overall interest rate exposure, liquidity, funding and market risks, the quality and level of earnings, investment or loan concentrations, the quality of loans and investments, the effectiveness of loan and investment policies and management's ability to monitor and control financial and operating risks. In addition to the risk-based guidelines discussed above, the Federal Reserve Board and the FDIC require that a bank holding company and bank which meet the regulators' highest performance and operation standards and which are not contemplating or experiencing significant growth maintain a minimum leverage ratio (Tier I capital as a percent of quarterly average adjusted assets) of 3%. For those financial institutions with higher levels of risk or that are experiencing or anticipating significant growth, the minimum leverage ratio will be increased. Table 13 Capital Position at December 31, 1995 (dollars in thousands)
Risk-weighted Capital Ratios ------------------------------------------------------- Ratios --------------------------------- Amount Actual Minimum ---------- --------- ----------- Stockholders' equity $ 40,241 Intangible assets (1,977) Unrealized gain-securities available for sale, net of taxes (646) -------- Tier 1 capital 37,618 12.95% 4.00% Allowable portion of allowance for loan losses 3,632 -------- Total risk-based capital $ 41,250 14.20% 8.00% ======== Risk-weighted assets $290,593 Tier 1 Leverage Ratio ------------------------------------------------------ Ratios -------------------------------- Amount Actual Minimum ---------- -------- --------- Tier 1 capital $ 37,618 7.84% 3.00% Average assets for the three months ended December 31, 1995, as adjusted $479,580
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Changes in Stockholders Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS a. Directors The information contained in the Company's 1995 Proxy Statement is incorporated herein by reference in response to this item. b. Executive Officers Information required by this item is contained in Part I of this Form 10-k in the section entitled "Executive Officers." ITEM 11. EXECUTIVE COMPENSATION Information contained in the section entitled "Executive Compensation" of the Company's 1995 Proxy Statement is incorporated herein by reference to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained in the section entitled "Amount and Nature of Beneficial Ownership" of the Company's 1995 Proxy Statement is incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in the section entitled "Transactions with mangement" of the Company's 1995 Proxy Statement is incorporated herein by reference in response to this item. PART IV ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K a. Financial Statements and Schedules The financial statements and schedules listed in the accompanying Index to Consolidated Financial Statements and Schedules are filed as part of this Annual Report on Form 10-K b. Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1995. c. Exhibits 3. (a) Certificate of incorporation and amendments thereto (incorporated herein by reference to Registration Statement No. 33-49840, exhibit 3 (a)) (b) By-laws (incorporated herein by reference to Registration Statement No. 33-49840, exhibit 3(b)) 10. Material contracts (a) Agreement for legal services between Andora, Palmisano & Geaney and the Company dated April 27, 1995. (b) Change in Control Agreement dated May 22, 1995 for Anthony S. Abbate (c) Change in Control Agreement dated May 22, 1995 for Robert N. Harris (d) Change in Control Agreement dated May 22, 1995 for Richard N. Latrenta (e) Change in Control Agreement dated May 22, 1995 for Frank R. Giancola (f) Lease for Washington Township, N.J., Branch Office, dated April 13, 1972 and amended December 21, 1972 (incorporated herein by reference to Registration Statement No. 33-49840, exhibit 10(h)). (g) Lease for Lodi, N.J., Branch Office, dated January 25, 1985 (incorporated herein by reference to Registration Statement No. 33-49840, exhibit 10(i)). . (h) Lease for Elmwood Park, N.J., Retail Lending Processing Center, dated June 22, 1992 and amended June 28, 1994, (incorporated herein by reference to the Company's Annual Report on Form 10-K filed with the Commission for the year 1992). (i) Amendment to lease for Elmwood Park, New Jersey, Retail Lending Processing Center, dated June 28, 1994 (incorporated herein by reference to the Company's Annual Report on Form 10-K filed with the Commission for the year 1994). (j) Executive Compensation Plans and Arrangements (1) 1989 Stock Option Plan is incorporated herein by reference to Registration Statement No. 33-49840, exhibit 10(j). (2) Management Incentive Plan is incorporated by reference to Part III, Item 11, of the Company's definitive Proxy Statement for its 1996 Annual Meeting of Stockholders which will be filed with the Commission not later than 120 days after December 31, 1995 (3) Directors' Retirement Program (incorporated herein by reference to the Company's Annual Report on Form 10-K filed with the Commission for the year 1994). (4) Executives' Supplemental Pension Plan (incorporated herein by reference to the Company's Annual Report on Form 10-K filed with the Commission for the year 1994). (5) Deferred Compensation Plan for Robert N. Harris (incorporated herein by reference to the Company's Annual Report on Form 10-K filed with the Commission for the year 1994). 11. Statement of Computation of Per Share Earnings 22. Subsidiaries of Registrant 23. Independent Auditors' Consent 27. Financial Data Schedule 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/ Robert N. Harris ------------------------- ROBERT N. HARRIS EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER March 28, 1996 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 - --------------------------------------------- Anthony S. Abbate March 28, 1996 Director President and Chief Executive Officer /s/ Anthony Amato - -------------------------------------------- Anthony Amato March 28, 1996 Director /s/Anthony D. Andora - --------------------------------------------- Anthony D. Andora March 28, 1996 Director Chairman of the Board /s/Donald L. Correll - --------------------------------------------- Donald L. Correll March 28, 1996 Director /s/John J. Eccleston - --------------------------------------------- John J. Eccleston March 28, 1996 Director /s/J. Fletcher Creamer, Jr. - --------------------------------------------- J. Fletcher Creamer, Jr. March 28, 1996 Director /s/David R. Ficca - --------------------------------------------- David R. Ficca March 28, 1996 Director /s/Robert N. Harris - --------------------------------------------- Robert N. Harris March 28, 1996 Executive Vice President and Chief Financial Officer /s/James E. Healey - --------------------------------------------- James E. Healey March 28, 1996 Director /s/Eleanore S. Nissley - --------------------------------------------- Eleanore S. Nissley March 28, 1996 Director /s/Jeremiah F. O'Connor - --------------------------------------------- Jeremiah F. O'Connor March 28, 1996 Director /s/Robert P. Rittereiser - --------------------------------------------- Robert P. Rittereiser March 28, 1996 Director /s/Benjamin Rosenzweig - --------------------------------------------- Benjamin Rosenzweig March 28, 1996 Director
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES Page No. in Form 10-K Financial Statements Independent Auditors' Report relating to the Consolidated Financial Statements and Notes thereto......................................... 35 Consolidated Balance Sheets at December 31, 1995 and 1994.............. 36 Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993..................................... 37 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993................. 38 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993..................................... 39 Notes to Consolidated Financial Statements............................. 40
Schedules Schedules to the consolidated financial statements required by Article 9 of Regulation S-X are not required under the related instructions or are inapplicable and, therefore, have been omitted. c. Compliance with Section 16(a) Information contained in the section entitled "Section 16 Compliance" of the Company's 1995 Proxy Statement is incorporated herein by reference in response to this item. INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Interchange Financial Services Corporation Saddle Brook, New Jersey We have audited the accompanying consolidated balance sheets of Interchange Financial Services Corporation and subsidiaries (the "Company") as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Interchange Financial Services Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Parsippany, New Jersey January 19, 1996 INTERCHANGE FINANCIAL SERVICES CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, (DOLLARS IN THOUSANDS)
1995 1994 --------- --------- ASSETS Cash and due from banks $ 25,151 $ 22,865 Federal funds sold - 3,100 -------- -------- Total cash and cash equivalents 25,151 25,965 -------- -------- Investment securities at amortized cost (estimated market value of $75,611 and $116,718) 74,688 121,512 ------- -------- Securities available for sale at estimated market value amortized cost of $66,604 and $30,079) 67,545 27,269 -------- -------- Loans 311,164 290,654 Less: Allowance for loan losses 3,647 3,839 -------- -------- Net loans 307,517 286,815 -------- -------- Premises and equipment, net 5,510 4,606 Foreclosed real estate 1,213 880 Accrued interest receivable and other assets 9,833 12,265 -------- -------- TOTAL ASSETS $491,457 $479,312 ======== ======== LIABILITIES Deposits Non-interest bearing $ 69,213 $ 66,435 Interest bearing 367,239 357,735 -------- -------- Total deposits 436,452 424,170 Securities sold under agreements to repurchase 1,704 702 Short-term borrowings 9,200 11,000 Accrued interest payable and other liabilities 3,860 3,311 Long-term borrowings - 5,000 -------- -------- TOTAL LIABILITIES 451,216 444,183 -------- -------- STOCKHOLDERS' EQUITY Preferred stock - 5,000 Common stock, without par value; 5,000,000 shares authorized; 2,697,100 shares issued and outstanding 4,495 4,495 Capital surplus 12,110 11,333 Retained earnings 22,990 18,737 Unrealized gain(loss)-securities available for sale, net of taxes 646 (1,813) -------- -------- 40,241 37,752 Less: Treasury stock (68,000 shares of preferred, at cost) - 2,623 -------- -------- TOTAL STOCKHOLDERS' EQUITY 40,241 35,129 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $491,457 $479,312 ======== ======== See notes to consolidated financial statements
INTERCHANGE FINANCIAL SERVICES CORPORATION CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS EXCEPT PER SHARE DATA)
1995 1994 1993 -------- -------- -------- INTEREST INCOME Interest and fees on loans $27,427 $23,537 $22,142 Interest on federal funds sold 374 412 610 Interest and dividends on securities Taxable interest income 8,969 8,469 6,348 Interest income exempt from federal income taxes 56 59 49 Dividends 169 135 118 ------- ------- ------- TOTAL INTEREST INCOME 36,995 32,612 29,267 ------- ------- ------- INTEREST EXPENSE Interest on deposits 14,513 10,635 10,227 Interest on short-term borrowings 506 289 10 Interest on long-term borrowings 131 82 - -------- ------- ------- TOTAL INTEREST EXPENSE 15,150 11,006 10,237 -------- ------- ------- NET INTEREST INCOME 21,845 21,606 19,030 Provision for loan losses 1,200 944 1,065 -------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 20,645 20,662 17,965 -------- ------- ------- NON-INTEREST INCOME Service fees on deposit accounts 1,474 1,496 1,300 Net gain/(loss) on sale of securities available for sale 15 (5) 1 Net gain/(loss) on sale of loans available for sale 22 (14) 1,070 Net gain on sale of loans - - 284 Net gain on sale of loan servicing rights 828 - - Accretion of discount in connection with acquisition 760 760 777 Other 1,653 1,545 1,440 -------- ------- ------- TOTAL NON-INTEREST INCOME 4,752 3,782 4,872 -------- ------- ------- NON-INTEREST EXPENSES Salaries and benefits 7,254 6,879 6,383 Net occupancy 2,080 1,887 1,799 Furniture and equipment 697 653 729 Advertising and promotion 673 701 745 Federal Deposit Insurance Corporation assessment 503 887 870 Foreclosed real estate expense 227 313 411 Other 4,390 4,426 3,971 -------- ------- ------- TOTAL NON-INTEREST EXPENSES 15,824 15,746 14,908 -------- ------- ------- Income before cumulative effect of change in accounting principle and income taxes 9,573 8,698 7,929 Income taxes 3,293 3,062 2,887 -------- ------- -------- Income before cumulative effect of change in accounting principle 6,280 5,636 5,042 Cumulative effect of change in accounting principle - - (205) -------- -------- -------- NET INCOME $ 6,280 $ 5,636 $ 4,837 ======== ======== ======== PER COMMON SHARE Income before cumulative effect of change in accounting principle $2.29 $2.05 $1.80 Cumulative effect of change in accounting principle - - (0.08) -------- -------- -------- Net income $2.29 $2.05 $1.72 ======== ======== ======== See notes to consolidated financial statements.
INTERCHANGE FINANCIAL SERVICES CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS EXCEPT SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------------- Unrealized Gain/(Loss) on Securities Preferred Common Capital Retained Available Treasury Stock Stock Surplus Earnings for Sale Stock Total ------------------------------------------------------------------------------- ----- Balance at January 1, 1993 $5,000 $4,495 $11,333 $12,350 $(1,623) $31,555 Net income 4,837 4,837 Dividends on common stock at $0.70 per share (1,888) (1,888) Dividends on preferred stock (199) (199) Purchase of 25,000 preferred shares (1,000) (1,000) ------ ------ ------- ------- ------- ------ Balance at December 31, 1993 5,000 4,495 11,333 15,100 (2,623) 33,305 Net income 5,636 5,636 Dividends on common stock at $0.70 per share (1,887) (1,887) Dividends on preferred stock (112) (112) Unrealized loss on securities available for sale, net of income taxes $(1,813) (1,813) ------ ------ ------- ------- ------- ------- ------ Balance at December 31, 1994 5,000 4,495 11,333 18,737 (1,813) (2,623) 35,129 Net income 6,280 6,280 Dividends on common stock at $0.72 per share (1,942) (1,942) Dividends on preferred stock (85) (85) Purchase of 32,000 preferred shares (1,600) (1,600) Retirement of 100,000 shares of preferred stock (5,000) 777 4,223 - Increase in market valuation- securities available for sale, net of income taxes 2,459 2,459 ======= ====== ======= ======= ======= ====== ======= Balance at December 31, 1995 $ - $4,495 $12,110 $22,990 $ 646 $ - $40,241 ======= ====== ======= ======= ======= ====== ======= See notes to consolidated financial statements.
INTERCHANGE FINANCIAL SERVICES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS)
1995 1994 1993 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income . . . . . . . . . . . . . . . . . . . . . $ 6,280 $ 5,636 $ 4,837 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization of fixed assets. . . 859 831 752 Amortization of securities premiums . . . . . . . 1,452 1,543 1,106 Accretion of securities discounts . . . . . . . . (53) (11) (7) Amortization of premium in connection with acquisitions . . . . . . . . . . . . . . . . . . 444 403 197 Accretion of discount in connection with acquisition . . . . . . . . . . . . . . . . . . . (760) (760) (777) Provision for loan losses . . . . . . . . . . . . 1,200 944 1,065 Net (gain) loss on sale of foreclosed real estate (127) (209) 1 Net (gain) loss on sale of securities available for sale . . . . . . . . . . . . . . . . . . . . . (15) 5 (1) Net (gain) loss on sale of loans available for sale . . . . . . . . . . . . . . . . . . . . . . . (22) 14 (1,070) Net gain on sale of loans . . . . . . . . . . . . - - (284) Reduction in carrying value of foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . - 122 203 (Increase) decrease in carrying value of loans available for sale . . . . . . . . . . . . . . . . (80) 85 - Loss on sale of fixed assets. . . . . . . . . . . 26 - - (Increase) decrease in operating assets Net origination of loans available for sale . . . (755) (15,451) (43,493) Proceeds from sale of loans available for sale . . 837 2,129 40,205 Premium in connection with acquisition . . . . . . - (1,724) - Accrued interest receivable . . . . . . . . . . . 144 (917) (151) Deferred income taxes . . . . . . . . . . . . . . (134) (76) 99 Other. . . . . . . . . . . . . . . . . . . . . . . 694 (1,898) 502 Increase (decrease) in operating liabilities Accrued interest payable . . . . . . . . . . . . . 162 72 (324) Other . . . . . . . . . . . . . . . . . . . . . . 387 619 (137) ------- ------- ------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 10,539 (8,643) 2,723 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES (Payments for) proceeds from Net origination of loans . . . . . . . . . . . . . (20,470) 1,377 4,932 Purchase of loans . . . . . . . . . . . . . . . . (1,251) (42,244) (900) Sale of loans . . . . . . . . . . . . . . . . . . - 1,809 1,271 Purchase of securities available for sale . . . . (5,905) (1,895) (3,249) Maturities of securities available for sale . . . 2,396 2,907 55 Sale of securities available for sale . . . . . . 2,484 305 789 Purchase of investment securities . . . . . . . . (3,999) (23,618) (30,152) Maturities of investment securities . . . . . . . 14,000 16,000 9,000 Sale of foreclosed real estate . . . . . . . . . . 678 1,136 1,455 Advances on foreclosed real estate . . . . . . . . (285) (106) (268) Purchase of fixed assets . . . . . . . . . . . . . (1,862) (667) (1,166) Sale of fixed assets. . . . . . . . . . . . . . . 4 - - ------- ------- ------- NET CASH USED IN INVESTING ACTIVITIES (14,210) (44,996) (18,233) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from (payments for) Deposits in excess of withdrawals . . . . . . . . 12,282 12,272 16,103 Securities sold under agreements to repurchase . . 1,704 295 203 Other borrowings . . . . . . . . . . . . . . . . . 4,200 18,000 - Retirement of securities sold under agreement to repurchase and other borrowings. . . . . . . . . (11,702) (2,000) - Acquisition of deposit accounts . . . . . . . . . - 26,468 - Dividends . . . . . . . . . . . . . . . . . . . . (2,027) (1,999) (2,087) Treasury stock . . . . . . . . . . . . . . . . . . (1,600) - (1,000) ------- ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES 2,857 53,036 13,219 ------- ------- ------- Decrease in cash and cash equivalents . . . . . . . . . (814) (603) (2,291) Cash and cash equivalents at beginning of year . . . . . 25,965 26,568 28,859 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $25,151 $25,965 $26,568 ======= ======= ======= Supplemental disclosure of cash flow information Cash paid for: Income taxes. . . . . . . . . . . . . . . . . . . $ 3,346 $ 3,527 $ 2,595 Interest. . . . . . . . . . . . . . . . . . . . . 14,988 10,934 10,561 Supplemental non-cash investing activities Loans transferred to foreclosed real estate. . . . 599 481 1,078 Securitization of loans reclassified to securities available for sale. . . . . . . . . . - 27,888 - (Increase) decrease-market valuation of securities available for sale. . . . . . . . . . . . . . . (3,812) 2,810 - Securities transferred from available for sale to held to maturity. . . . . . . . . . . . . . . . 5,466 - - Securities transferred from held to maturity to available for sale. . . . . . . . . . . . . . 40,888 - - See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and practices within the banking industry. The following is a description of the Company's business and its significant accounting and reporting policies: Nature of Business and Significant Estimates -------------------------------------------- Interchange Financial Services Corporation (the "Company"), a New Jersey business corporation, is a holding company whose principal subsidiary is Interchange State Bank (the "Bank"). The Bank is principally engaged in the business of attracting business and retail deposits and investing those funds into commercial business and commercial mortgage loans as well as residential mortgage and consumer loans. When demand for loans is low, the Bank invests in debt securities. Currently, the Bank conducts community banking operations in the northeast region of New Jersey (primarily Bergen and Passaic counties). The Company uses certain accounting estimates in the preparation of its consolidated financial statements. As a result, actual results could differ from those estimates. The most significant estimate pertains to the allowance for loan losses. The borrowers ability to meet contractual obligations and collateral value are the most significant assumptions used to arrive at the estimate. The risks associated with such estimates arise when unforeseen conditions affect the borrowers ability to meet the contractual obligations of the loan and result in a decline in the value of the supporting collateral. Such unforeseen changes may have an adverse effect on the financial position of the Company. Additionally, the Company is exposed to significant changes in market interest rates. Such changes could have an adverse effect on the earning capacity and financial position of the Company, particularly, in those situations in which the maturities or repricing of assets are different than the maturities or repricing of the supporting liabilities. Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents ------------------------- For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Investment Securities and Securities Available for Sale ------------------------------------------------------- Debt securities which the Company has the positive intent and ability to hold until maturity are classified as held to maturity ("HTM") and are carried at cost, adjusted for the amortization of premiums and accretions of discounts on a level-yield method over the contractual maturity of the instruments. Investment securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale ("AFS") and are carried at market value. The unrealized gains and losses on these securities are reported, net of taxes, as a separate component of stockholders' equity. Management determines the appropriate classification of securities at the time of purchase. Securities classified as AFS include securities used as part of the Company's asset and liability management strategy, or securities that may be sold in response to, among other things, changes in interest rates and prepayment risk. Gains and losses from the sale of these securities are determined using the specific identification method. During December 1995, the Company reclassified certain securities in its investment portfolio. The reclassification was allowed by the Financial Accounting Standards Board ("FASB") in their Special Report entitled "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." The Special Report established a one-time reprieve of Statement 115 that extended from November 15, 1995 to December 31, 1995. The reprieve provided the Company a single opportunity to reassess its investment portfolio and revise the classifications. As a result of the reclassification, stockholders' equity increased by $827 thousand. Loans ----- Loans are stated at principal amounts outstanding, net of unearned discount. Interest income is accrued and credited at the applicable interest rates. Origination fees and certain direct origination costs have been deferred and are recognized over the life of the applicable loan as an adjustment to the yield. At December 31, 1995, approximately 85% of all loans are collateralized by real estate located in northern New Jersey, the Company's market area. Loans are placed on non-accrual status when, in the opinion of management, there is doubt as to the collectibility of interest or principal, or when principal or interest payments are in arrears 90 days or more, or if management considers collection of such amounts to be doubtful. Amounts accrued are evaluated for collectibility. Interest is subsequently recognized on non-accrual loans only to the extent that cash is received and the ultimate repayment of principal is not in doubt. Loans are returned to accrual status when management deems that collection of principal and interest is reasonable. Mortgage loans available for sale are carried at lower of aggregate cost or market value. In July 1991, the Bank acquired the assets and liabilities of a failed institution from the Federal Deposit Insurance Corporation (the "FDIC") which was accounted for using the purchase method of accounting. Consideration received from the FDIC in excess of that assigned to fair value specific loans, recorded as an allowance for loan losses and accrued for acquisitions costs, is being accreted into income over a five-year period ending July 1996. Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"), as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" ("SFAS No. 118"). Under SFAS No. 114, a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to contractual terms of the loan agreement. The collection of all amounts due according to contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. SFAS No. 114 requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral. The fair value of collateral, as reduced by costs to sell on a discounted basis, is utilized if a loan is collateral dependent or foreclosure is probable. All commercial and commercial mortgage loans are evaluated for impairment under SFAS No. 114. All non-accrual commercial and commercial mortgages loans are considered impaired. The adoption of these rules did not have an impact on the Company's financial condition and results of operations. Allowance for Loan Losses ------------------------- The allowance for loan losses is established through charges to income. Loan losses are charged against the allowance for loan losses when management believes that the collectibility of principal is unlikely. If, as a result of loans charged off or increases in the size or risk characteristics of the loan portfolio, the allowance is below the level considered by management to be adequate to absorb future loan losses on existing loans, the provision for loan losses is increased to the level considered necessary to provide an adequate allowance. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible based on evaluations of the collectibility of the loans. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and economic conditions that may affect the borrowers' ability to pay. Premises and Equipment ---------------------- Premises and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method. Premises and equipment are depreciated over the estimated useful lives of the assets. Leasehold improvements are amortized over the term of the lease, if shorter. Estimated lives are 30 to 40 years for premises and 3 to 20 years for furniture and equipment. Expenditures for maintenance and repairs are expensed as incurred. The cost of major renewals and improvements is capitalized. Foreclosed Real Estate ---------------------- Real estate properties acquired through foreclosure are recorded at the lower of cost or estimated fair value at time of foreclosure. Subsequent valuations are performed periodically and the carrying value is adjusted by a charge to foreclosed real estate expense to reflect any subsequent declines in the estimated fair value. As a result, further declines in real estate values may result in increased foreclosed real estate expense. Routine holding costs are charged to expense as incurred. Income Taxes ------------ The Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109) in 1993. Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using current rates. The effect on deferred taxes of a change in tax rates is recognized in income in the period the change occurs. Deferred tax assets are reduced, through a valuation allowance, if necessary, by the amount of such benefits that are not expected to be realized based on current available evidence. Per Share Amounts ----------------- Earnings per common share is computed by dividing net income, less dividends on the preferred stock by the weighted average number of common shares outstanding of 2,697,100 during 1995, 1994, and 1993. The potential dilution from the exercise of stock options is not material. 2. ACQUISITIONS On February 25, 1994, Interchange State Bank (the "Bank"), the wholly owned subsidiary of the Company, assumed the deposit liabilities amounting to $26,468,000 of Volunteer Federal Savings Association of Little Ferry, New Jersey. The Bank received $24,744,000 in cash representing the difference between the deposits assumed, net of $1,724,000 premium paid as part of the transaction. The premiums paid to acquire the deposits in the Volunteer transaction and in a 1991 branch acquisition are being amortized over a period ranging from five to seven years. Amortization in 1995, 1994 and 1993, included in non-interest expenses, amounted to $444,000, $403,000 and $197,000, respectively. 3. RESTRICTIONS ON CASH AND DUE FROM BANKS The subsidiary bank is required to maintain a reserve balance with the Federal Reserve Bank based upon the level of its deposit liability. The average amount of this reserve balance for 1995 and 1994 was approximately $6,803,000 and $6,409,000, respectively. 4. INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE Investment securities and securities available for sale are summarized as follows: (in thousands)
------------------------------------------------------------ December 31, 1995 ------------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------------------------------------------------------ INVESTMENT SECURITIES: OBLIGATIONS OF U.S. TREASURY $65,223 $942 $26 $66,139 OBLIGATIONS OF U.S. AGENCIES 8,037 7 - 8,044 OBLIGATIONS OF STATES & POLITICAL SUBDIVISIONS 1,278 - - 1,278 OTHER DEBT SECURITIES 150 - - 150 ------- ------ ------ ------- 74,688 949 26 75,611 ------- ------ ------ ------- SECURITIES AVAILABLE FOR SALE: OBLIGATIONS OF U.S. TREASURY 40,888 1,466 184 42,170 OBLIGATIONS OF U.S. AGENCIES 23,282 - 341 22,941 EQUITY SECURITIES 2,434 - - 2,434 ------- ----- ----- ------- 66,604 1,466 525 67,545 ------- ----- ----- ------- TOTAL SECURITIES $141,292 $2,415 $551 $143,156 ======= ===== ===== ======= ------------------------------------------------------------ December 31, 1994 ------------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value -------------------------------------------------------------- Investment securities: Obligations of U.S. Treasury $121,512 $47 $4,841 $116,718 ------- ----- ------ ------- Securities available for sale: Obligations of U.S. agencies 26,855 - 2,823 24,032 Obligations of states & political subdivisions 1,442 12 2 1,452 Other debt securities 147 3 - 150 Equity securities 1,635 - - 1,635 ------- ----- ------ ------- 30,079 15 2,825 27,269 ------- ----- ------ ------- Total securities $151,591 $62 $7,666 $143,987 ======= ===== ====== ======= At December 31, 1995, the contractual maturities of investment securities and securities available for sale are as follows: (in thousands) Securities Investment Securities Available for Sale --------------------------- ---------------------------- Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value ----------- ---------- ---------- ----------- Within 1 year $22,121 $22,227 - - After 1 but within 5 years 52,357 53,174 $30,513 $31,063 After 5 but within 10 years 100 100 10,375 11,107 After 10 years 110 110 23,282 22,941 Equity securities - - 2,434 2,434 ------- ------- ------- =------ $74,688 $75,611 $66,604 $67,545 ======= ======= ======= =======
Proceeds from the sale of securities available for sale totaled $2,484,000, $305,000 and $789,000 during the years ended December 31, 1995, 1994 and 1993, respectively. Gains of $15,000 and $1,000 were realized in 1995 and 1993, respectively, and a loss of $5,000 was realized in 1994. Securities with carrying amounts of $11.1 million and $9.4 million at December 31, 1995 and 1994, respectively, were pledged for public deposits, securities sold under repurchase agreements and other purposes required by law. 5. LOANS The composition of the loan portfolio is summarized as follows: (in thousands)
---------------------------- December 31, ---------------------------- 1995 1994 --------- --------- Commercial and financial $ 42,106 $ 36,512 Real Estate Residential 164,140 156,642 Commercial 96,910 87,728 Construction 1,484 1,917 Available for sale 1,106 1,086 Installment 5,363 6,071 Lease financing 55 698 --------- --------- 311,164 290,654 Allowance for loan losses 3,647 3,839 --------- --------- Net loans $307,517 $286,815 ========= =========
Nonperforming loans include loans which are accounted for on a nonaccrual basis and troubled debt restructurings. Nonperforming loans are as follows: (in thousands)
------------------------------------------------ D e c e m b e r 31, ------------------------------------------------ 1995 1994 1993 ------------ ------------ ------------ Nonaccrual loans Commercial and financial $ 621 $ 3,159 $1,793 Residential real estate 1,646 2,430 2,115 Commercial real estate 235 588 - Installment 9 - 6 ------ ------ ------ $2,511 $6,177 $3,914 ====== ====== ====== Troubled debt restructurings Commercial and financial $1,000 $277 - Commercial real estate 465 245 - ------ ------ ------ $1,465 $522 - ====== ====== ====== Interest income that would have been recorded during the year on nonaccrual loans outstanding at year-end in accordance with original terms $254 $669 $421 Interest income included in net income during the year on nonaccrual loans outstanding at year-end $114 $398 $134
Nonaccrual loans acquired in a 1991 transaction, at an estimated fair value of $452,000, $1,060,000 and $1,586,000 at December 31, 1995, 1994 and 1993, respectively, are not included in the preceding table. At the acquisition date, these loans were not performing according to their original terms and were discounted from a face value of $978,000, $2,773,000 and $3,648,000, respectively. Loans on which interest is accruing and included in income, but which were contractually past due 90 days or more as to principal or interest payments amounted to $157,000 at December 31, 1993. There were no such loans at December 31, 1994 and 1995. Officers and directors of the Company and their affiliated companies are customers and are engaged in transactions with the Company in the ordinary course of business on substantially the same terms as those prevailing with other borrowers and suppliers. The following table summarizes activity with respect to these loans: (in thousands)
------------------------------------ Years Ended December 31, ------------------------------------ 1995 1994 -------- -------- BALANCE AT BEGINNING OF YEAR $3,121 $3,725 Additions 339 359 Reductions (900) (963) ------ ------ BALANCE AT END OF YEAR $2,560 $3,121 ====== ======
6. ALLOWANCE FOR LOAN LOSSES (in thousands) The Company's recorded investment in impaired loans at December 31, is as follows:
------------------------------ ----------------------------------- 1995 1994 ------------------------------ ----------------------------------- Related Related Allowance Allowance for Loan for Loan Investment Losses Investment Losses ----------- ----------- ------------ ----------- Impaired loans With a related allowance for loan losses . . . . . . . . . . . . . . $2,290 $300 $4,486 $627 Without a related allowance for loan losses . . . . . . . . . . . . 18 - 321 - ------ ---- ------ ---- $2,308 $300 $4,807 $627 ====== ==== ====== ====
The following table sets forth certain information about impaired loans for the year ended December 31, 1995: Average recorded investment . . . . . . . . $2,485 ====== Interest income recognized during time period that loans were impaired: Recognized using cash-basis method of accounting . . . . . . . . . . . . . . . $141 Recognized by other methods . . . . . . - ---- $141 ==== Changes in the allowance for loan losses are summarized as follows:
---------------------------------------------- Years Ended December 31, ---------------------------------------------- 1995 1994 1993 -------- -------- -------- BALANCE AT BEGINNING OF YEAR $3,839 $3,905 $4,100 Additions (deductions) Provision charged to operations 1,200 944 1,065 Recoveries loans previously charged off 118 114 51 Loans charged off (1,510) (1,124) (1,311) ------ ------ ------ BALANCE AT END OF YEAR $3,647 $3,839 $3,905 ====== ====== ====== - ------------------------------------------------------------------------------------------------------------------- For years ended December 31, 1995, 1994 and 1993, the provisions charged to expense for federal income tax purposes amounted to approximately $1,392,000, $1,010,000 and $1,102,000, respectively.
7. PREMISES AND EQUIPMENT, NET Premises and equipment are summarized as follows: (in thousands)
---------------------------- December 31, ---------------------------- 1995 1994 -------- -------- Land $ 743 $ 743 Buildings 1,062 1,062 Furniture, fixture and equipment 3,864 3,252 Leasehold improvements 4,715 4,138 ------ ------ 10,384 9,195 Less accumulated depreciation and amortization 4,874 4,589 ------ ------ $5,510 $4,606 ====== ======
8. DEPOSITS Deposits are summarized as follows: (in thousands)
--------------------------------- December 31, --------------------------------- 1995 1994 -------- -------- Non-interest bearing demand deposits $ 69,213 $ 66,435 Interest bearing demand deposits 110,813 101,873 Money market deposits 38,716 37,816 Savings deposits 71,170 75,906 Time deposits 146,540 142,140 -------- -------- $436,452 $424,170 ======== ========
At December 31, 1995 and 1994, the carrying amounts of certificates of deposit that individually exceed $100,000 amounted to $11,674,000 and $8,043,000, respectively. Interest expense related to such deposits was approximately $568,000, $312,000 and $282,000 in 1995, 1994, and 1993, respectively. 9. SHORT-TERM BORROWINGS Short-term borrowings are summarized as follows: (in thousands)
------------------------ December 31, ------------------------ 1995 1994 ----- ---- Securities sold under repurchase agreement $ 1,704 $ 702 Federal funds purchased 4,200 - Advances from the Federal Home Loan Bank of New York 5,000 11,000 ----- ------ $10,904 $11,702 ======= =======
The bank has a $47.5 million line of credit available through its membership in the Federal Home Loan Bank of New York. 10. LONG-TERM BORROWINGS Long-term debt amounting to $5.0 million at December 31, 1994 consisted of an advance from the Federal Home Loan Bank of New York payable in equal quarterly installments of $1,250,000 beginning in January 1996 and continuing through October 1996. The aggregate average interest rate was 6.93% and ranged from 6.71% to 7.14%. 11. BENEFIT PLANS In 1993, the Company established a non-contributory defined benefit pension plan covering all eligible employees. The funding policy is to contribute an amount that is at least the minimum required by law. Retirement income is based on years of service under the plan and, subject to certain limits, on final average compensation. Effective January 1, 1994, the Company established a supplemental plan that provides for retirement income that would have been paid but for the limitation under the qualified plan. Effective August 1, 1994, the Company established a retirement plan for all directors of the Company or the Bank who are not employees of the Company or of any subsidiary or affiliate of the Company. As a part of this Plan, the Company contributes annually to a life insurance policy or annuity contract 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 life insurance policies or annuity contracts are owned by the Company. Retirement income to a director who has completed five years of service through ten years of service will be based on the cash value of the life insurance policy or annuity contract. After ten years of service, the retirement income will be the greater of the cash value of the life insurance policy or annuity contract or an amount determined by multiplying the standard annual retainer fees (currently $11,000) at the director's retirement day by the director's years of service. Net pension cost of each plan consist of the following: (in thousands)
Supplemental Pension Plan Plan Director's Plan ------------------------------------ ----------------------- ---------------------- 1995 1994 1993 1995 1994 1995 1994 ------ ------ ------ ------ ------ ------ ------ Service cost of benefits during period $134 $195 $181 $10 $14 $ 39 $ 17 Interest cost on projected benefit obligation 22 14 - 2 1 66 26 Actual return on plan assets (65) (5) - - - - - Net amortization or deferral 39 (7) - - 1 147 61 ---- ---- ---- --- --- ---- ---- Net pension cost $130 $197 $181 $12 $16 $252 $104 ==== ==== ==== === === ==== ====
The following table sets forth the funded status, as of December 31, of the plans and amounts recognized in the Company's Consolidated Balance Sheets and the major assumptions used to determine these amounts: (dollars in thousands)
Supplemental Pension Plan Plan Director's Plan ------------------- ------------------ ------------------- 1995 1994 1995 1994 1995 1994 ------ ------ ------ ------ ------ ------ Accumulated benefit obligation: Vested $ 27 $ 19 - - $921 $775 Non-vested 275 160 $19 $ 5 - - ---- ---- --- --- ---- ---- $302 $179 $19 $ 5 $921 $775 ==== ==== === === ==== ==== Projected benefit obligation $527 $248 $38 $17 $921 $775 Plan assets at fair value 488 221 - - - - ---- ---- --- --- ---- ---- Projected benefit obligation in excess of plan assets 39 27 38 17 921 775 Unrecognized prior service cost 7 7 (9) (10) (535) (682) Unrecognized net gain 37 128 (1) 9 (30) 11 Adjustment for additional liability - - - - 565 671 ---- ---- --- --- ---- ---- Accrued pension cost included in the balance sheet $83 $162 $28 $16 $921 $775 ==== ==== === === ==== ==== Major assumptions: Discount rate 7.5% 8.5% 7.5% 8.5% 7.5% 8.5% Expected rate of increase in future compensation 5.0 5.0 5.0 5.0 N/A N/A Expected long-term rate of return on assets 8.0 8.0 N/A N/A N/A N/A
Effective as of January 1, 1993, the Employees' Stock Ownership Plan (the "ESOP") was renamed the Capital Investment Plan (the "Plan"). The Plan permits employees to make basic contributions up to 4% of base compensation and may make additional contributions up to 10% of compensation when coupled with basic contributions. Under the Plan, the Company provides a matching contribution equal to 50% of the basic contribution of each participant. In addition, the Company makes a fixed contribution on behalf of each participant equal to 1% of such participant's base compensation. The Company's contribution to the Plan amounted to $115,000, $98,000 and $106,000 in 1995, 1994 and 1993, respectively. 12. STOCK OPTION PLAN In 1989, the Company adopted a stock option plan covering certain key employees. Under this plan, as amended, a maximum of 270,000 shares of common stock may be granted at fair market value at the date of grant. Options granted expire if not exercised within ten years of date of grant and are exercisable starting one year from the date of grant. Changes in options outstanding during the past three years were as follows:
Price range Shares per share ------ ------------- Outstanding, January 1, 1993 (20,398 shares exercisable) 34,001 $11.125 Granted in 1993 30,250 16.875 to 17.00 Outstanding, December 31, 1993 (27,200 shares exercisable) 64,251 11.125 to 17.00 Outstanding, December 31, 1994 (43,383 shares exercisable) 64,251 11.125 to 17.00 Outstanding, December 31, 1995 (52,767 shares exerciseable at $11.125 to $17.00) 64,251 11.125 to 17.00
13. OTHER NON-INTEREST EXPENSES Expenses included in other non-interest expenses which exceed one percent of the aggregate of total interest income and non-interest income in 1995, 1994 and 1993 are as follows:
1995 1994 1993 ---- ---- ---- Professional fees $1,224 $1,254 $1,249 Amortization of premiums in connection with acquisitions 444 403 197 Directors' fees, travel and retirement 536 399 236 Insurance premiums 256 332 364
14. INCOME TAXES Income tax expense for the years ended December 31, is summarized as follows: (in thousands)
1995 1994 1993 ---- ---- ---- Federal: current $3,168 $2,913 $2,674 deferred (122) (62) (81) State: current 259 225 319 deferred (12) (14) (25) ------ ----- ------ $3,293 $3,062 $2,887 ====== ====== ======
The timing 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)
1995 1994 ---- ---- Deferred tax assets Excess of book over tax allowance for loan losses $752 $835 Excess of book over tax depreciation 201 146 Accrued lawsuit settlement not reflected on tax return 81 189 Loan origination fees reported as taxable income when received but deferred for book reporting 192 178 Excess of book over tax provision for benefit plan expense 259 118 Unrealized loss - securities available for sale - 997 Unrealized loss on other assets 183 137 Other 126 70 ----- ------ Total deferred tax assets 1,794 2,670 Deferred tax liabilities Accretion of bond discount not reported as taxable income - 13 Unrealized gains-securites available for sale 356 - ------ ------ Net deferred tax assets $1,438 $2,657 ====== ======
Net deferred tax assets are included in other assets on the consolidated balance sheet. It is more likely than not that deferred tax assets of $1.4 million will be principally realized through carryback to taxable income in prior years and future reversals of existing taxable temporary differences and, to a lesser extent, future taxable income and tax planning strategies. The provision for income taxes differs from the expected statutory provision as follows:
------------------------------------------------ December 31, ------------------------------------------------ 1995 1994 1993 ---- ---- ---- Expected provision at statutory rate 34% 34% 34% Difference resulting from: State income tax, net of federal benefit 1 2 2 Interest income exempt from federal taxes (1) (1) (1) Other, net - - 1 ---- ---- ---- 34% 35% 36% ==== ==== ====
15. PREFERRED STOCK On September 15, 1995, the Company exercised its right to redeem all of its preferred stock, not held as Treasury Stock, at $50 per share. At the same time the Company elected to cancel these shares together with the shares held as Treasury Stock. The cancellation included all of the 100,000 shares issued in 1987. 16. PARENT COMPANY INFORMATION (in thousands)
---------------------------- DECEMBER 31, ---------------------------- CONDENSED BALANCE SHEETS 1995 1994 ------------ ---------- Assets Cash $ 10 $ 10 Investment in subsidiaries Bank 40,231 35,021 Other 142 142 Dividends receivable 485 472 Other assets - 110 ------- ------- Total assets $40,868 $35,755 ======= ======= Liabilities Dividends payable $ 485 $ 472 Other liabilities 142 154 ------- ------- 627 626 ------- ------- Stockholders' equity Preferred stock - 5,000 Common stock 4,495 4,495 Surplus 12,110 11,333 Retained earnings 22,990 18,737 Unrealized gain/(loss) - securities available for sale, net of taxes 646 (1,813) ------- ------ 40,241 37,752 Less: Treasury stock - (2,623) ------- ------ Total liabilities and stockholders' equity $40,868 $35,755 ======= ======= -------------------------------------------------- YEARS ENDED DECEMBER 31, -------------------------------------------------- CONDENSED STATEMENTS OF INCOME 1995 1994 1993 ------- ------- ------ Dividends from subsidiary bank $3,627 $1,999 $2,587 Interest income on securities - - 10 Management fees 44 120 40 ------ ------ ------ Total revenues 3,671 2,119 2,637 ------ ------ ------ Operating expenses 142 133 105 ------ ------ ------ Income before equity in undistributed earnings of subsidiaries 3,529 1,986 2,532 Equity in undistributed earnings of subsidiaries 2,751 3,650 2,305 ------ ------ ------ Net income $6,280 $5,636 $4,837 ====== ====== ====== -------------------------------------------------- YEARS ENDED DECEMBER 31, -------------------------------------------------- CONDENSED STATEMENTS OF CASH FLOWS 1995 1994 1993 ------- ------- ------- Cash flows from operating activities Net income $6,280 $5,636 $4,837 Adjustments to reconcile net income to net cash provided by operating activities Decrease in other assets 97 1 14 Increase in dividends payable 13 - - (Decrease)/increase in other liabilities (12) 12 - Equity in undistributed income of subsidiaries (2,751) (3,650) (2,305) ------ ------ ------ Net Cash provided by operating activities 3,627 1,999 2,546 ------ ------ ------ Cash flows from financing activities Cash dividends paid (2,027) (1,999) (2,087) Treasury stock (1,600) - (1,000) ------ ------ ------ Net cash used in financing activities (3,627) (1,999) (3,087) Net decrease in cash - - (541) Cash at beginning of year 10 10 551 ------ ------- ------ Cash at end of year $ 10 $ 10 $ 10 ====== ======= ======
17. RESTRICTIONS OF SUBSIDIARY BANK DIVIDENDS Under New Jersey State law, the Bank may declare a dividend only if, after payment thereof, its capital would be unimpaired and its remaining surplus would equal 50 percent of its capital. At December 31, 1995, undistributed net assets of the Bank were $40,231,000 of which $35,913,000 was available for the payment of dividends. In addition, payment of dividends is limited by the requirement to meet the capital guidelines issued by the Board of Governors of the Federal Reserve System. 18. COMMITMENTS AND CONTINGENT LIABILITIES The Company has outstanding commitments and contingent liabilities including agreements to extend credit which arise in the normal course of business and which are not shown in the accompanying financial statements. Loan commitments are made to accommodate the financial needs of the Company's customers. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. They are issued primarily to support performance bonds. Both arrangements have credit risks essentially the same as that involved in extending loans to customers and are subject to the normal credit policies. A summary of commitments to extend credit at December 31, are summarized as follows: (in thousands)
1995 1994 ---- ---- Credit card loans $ 6,985 $ 7,177 Home equity loans 41,089 41,993 Other loans 21,444 18,488 Standby letters of credit 1,258 914 ------- ------ $70,776 $68,572 ======= =======
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) 1996 $ 771 1997 707 1998 668 1999 556 2000 471 thereafter 895 --- Total minimum lease payments $4,068 ===== Rent expense for all leases amounted to approximately $985,000, $884,000 and $1,009,000 in 1995, 1994, and 1993, respectively. The Company leases certain real estate from three companies affiliated with directors of the Company. Rental expense associated with such leases was $157,000, $167,000 and $165,000 for the years ended December 31, 1995, 1994, and 1993, respectively. The aggregate minimum rental commitments through 2005 under these leases was approximately $904,000 at December 31, 1995. A director of the Company also provided legal services through his affiliated firm. Fees paid for these services amounted to $322,500, $426,500 and $521,100 in 1995, 1994, and 1993, respectively. In 1993, certain directors provided insurance brokerage services and consulting services through their affiliated firms and fees paid for these services amounted to $513,000. In addition, the Bank is a defendant in a lawsuit commenced in April 1989, (GREAT AMERICAN MORTGAGE CORP. ET AL VS. ROBERT UTTER ET AL.) filed in Superior Court of New Jersey alleging that the Bank was statutorily liable in conversion for having paid checks drawn on demand deposit accounts of plaintiffs at the Bank bearing forged endorsements. On December 2, 1992, the court directed judgment to be entered against the Bank in the total principal sum of $484,000 with prejudgment interest. On April 5, 1993, the Bank filed a Notice of Appeal of this judgment and, by virtue of post-judgment motions, the amount was reduced to the principal sum of $311,000 plus pre-judgment interest. This judgment was appealed and, by virtue of this appeal, the amount was further reduced to $245,000. The matter remained on appeal until May 8, 1995, at which time, by Court order, the matter was settled. Pursuant thereto, the Bank has paid a total of $89 thousand against the aforesaid judgment, which has now been discharged of record. The Bank continues to pursue various parties for recoupment of the aforesaid monies under which it is likely that the Bank's liability for the payment will either be reduced to its proportionate share under contribution theories or it will be exonerated under indemnification theories. In a related matter, on January 8, 1993, an interlocutory judgment was entered against the Bank in the principal sum of $120,000 with prejudgment interest. The Bank has appealed this judgment and a stay of execution has been effected. In 1992, the Company accrued $500,000 as a provision for an adverse judgment in this litigation. Based on the May 8, 1995, partial settlement of these matters, the Company has reduced the reserve by $250 thousand to $161 thousand which the Company and its legal counsel believe is adequate to cover any remaining liabilities related to these matters. 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. 19. QUARTERLY FINANCIAL DATA (unaudited)(in thousands except per share data)
FIRST SECOND THIRD FOURTH 1995 QUARTER QUARTER QUARTER QUARTER - ---------------------------------------------------------------------------------------------------------------- INTEREST INCOME $ 9,094 $9,250 $ 9,347 $9,304 INTEREST EXPENSE 3,625 3,827 3,843 3,855 NET INTEREST INCOME 5,469 5,423 5,504 5,449 PROVISION FOR LOAN LOSSES 225 375 225 375 NET GAIN ON SALE OF SECURITIES AVAILABLE FOR SALE - 15 - - INCOME BEFORE INCOME TAXES 2,161 2,320 2,177 2,915 NET INCOME 1,405 1,565 1,415 1,895 NET INCOME PER COMMON SHARE $0.51 $0.57 $0.51 $0.70 ---------------------------------------------------------------------------------------------------------------- First Second Third Fourth 1994 Quarter Quarter Quarter Quarter - ---------------------------------------------------------------------------------------------------------------- Interest income $7,496 $7,772 $8,510 $8,834 Interest expense 2,392 2,550 2,778 3,286 Net interest income 5,104 5,222 5,732 5,548 Provision for loan losses 225 225 225 269 Net loss on sale of securities available for sale - - - (5) Income before income taxes 1,806 2,185 2,535 2,172 Net income 1,171 1,409 1,630 1,426 Net income per common share $0.42 $0.52 $0.59 $0.52
- ------------------------------------------------------------------------------ 20. FAIR VALUE OF FINANCIAL INSTRUMENTS (in thousands) Statement of Financial Accounting Standards No. 107 "Disclosures about Fair Values of Financial Instruments" ("SFAS No. 107") requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates are made at a particular point in time, based on relevant market information and information about the financial instrument. Fair values are most commonly derived from quoted market prices. In the event market prices are not available, fair value is determined using the present value of anticipated future cash flows, as permitted by SFAS No. 107. 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 that amounts different from the fair value estimates would be realized by the Company in immediate settlement of the financial instruments.
1995 1994 ---------------------------------- ----------------------------------- CARRYING FAIR Carrying Fair AMOUNT VALUE Amount Value ------------- ------------ ------------ ------------ Financial assets: Cash and cash equivalents $ 25,151 $ 25,151 $ 25,965 $ 25,965 Investment securities 74,688 75,611 121,512 116,718 Securities available for sale 67,545 67,545 27,269 27,269 Loans, net 307,517 313,097 286,815 280,042 -------- -------- -------- -------- $474,901 $481,404 $461,561 $449,994 ======== ======== ======== ======== Financial liabilities: Deposits $436,452 $436,699 424,170 423,895 Short-term borrowings 10,904 10,904 11,702 11,702 Long-term borrowings - - 5,000 4,956 -------- -------- -------- -------- $447,356 $447,603 $440,872 $440,553 ======== ======== ======== ========
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. Investment Securities 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. Certain homogenous loan categories have been valued on a pool basis using quoted market prices for similar loans sold. The fair values of certain loans that reprice frequently and have no significant change in credit risk is assumed to equal their carrying values. The fair value of other types of loans is estimated by discounting the future cash flows using interest rates that are currently being offered for loans with similar terms to borrowers with similar credit quality. The fair value of non-performing loans is estimated using methods employed by management in evaluating the allowance for loan losses. Deposits - -------- The estimated fair values of deposits with no stated maturity, such as demand deposits, savings, NOW and money market accounts are, by definition, equal to the amount payable on demand at the reporting date. The fair values of fixed-rate certificates of deposit are based on discounting the remaining contractual cash flows using interest rates currently being offered on certificates of deposit with similar attributes and remaining maturities. Short-term Borrowings - ---------------------- The fair value of short-term borrowings is assumed to equal the carrying value in the financial statements, as these instruments are short-term. Long-term Borrowings - --------------------- Fair value estimates of long-term borrowings are based on discounting the remaining contractual cash flows using rates which are comparable to rates currently being offered for borrowings with similar remaining maturities. Off-balance-sheet Financial Instruments - --------------------------------------- The fair values of commitments to extend credit and unadvanced lines of credit are estimated based on an analysis of the interest rates and 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, 1995 and 1994, the estimated fair values of these off-balance-sheet financial instruments were immaterial. EX-10 2 MATERIAL CONTRACTS AGREEMENT FOR LEGAL SERVICES THIS AGREEMENT for legal services made this 27th day of April, 1995, by and between: ANDORA, PALMISANO & GEANEY A Professional Corporation 303 Molnar Drive, P.O. Box 431 Elmwood Park, New Jersey 07407-0431 hereinafter referred to as "Attorneys", and INTERCHANGE FINANCIAL SERVICES CORPORATION Park 80 West, Plaza Two Saddle Brook, New Jersey 07662 and INTERCHANGE STATE BANK A Banking Corporation Park 80 West, Plaza Two Saddle Brook, New Jersey 07662 hereinafter referred to as "Clients". IN CONSIDERATION of the mutual promises, covenants and undertakings contained herein the Attorneys and the Clients agree as follows: 1. RETAINER Clients hereby retain the services of Attorneys to act as its corporate counsel for the term and compensation as outlined herein. 2. TERM The Attorneys shall be retained by Clients until the next annual reorganization meeting of Clients. 3. COMPENSATION The Clients shall pay the Attorneys for services rendered as corporate counsel an annual retainer of NINETY-FIVE THOUSAND DOLLARS ($95,000.00) payable in equal monthly installments on the first day of each and every month commencing the first day of the month following the execution of this Agreement. Clients shall, in addition to the annual retainer, pay to the Attorneys all out-of-pocket expenses, filing fees, or disbursements made by the Attorneys on Clients' behalf. Clients shall, in addition to the payment of the annual retainer and all costs, pay to the Attorneys a legal fee based on the rate per hour as shown on Schedule A for all legal services provided to Clients by the Attorney which are "legal services rendered in addition to those rendered as corporate counsel." Such fees and costs shall be billed by Attorneys to clients on a thirty-day basis and Clients shall pay all bills within five (5) days after each monthly Board of Director's meeting of the Clients. 4. DEFINITIONS The following words and phrases shall have the following meanings: A. "Legal services rendered as corporate counsel" shall mean and include all of the following types of legal work: 1. Except as hereinafter set forth in subparagraph B, document review and drafting of documents on behalf of the Clients including, but not limited to: leases, notes, contracts, mortgages, commitment letters, disclosure statements, modifications, extensions and legal agreements not related to third-party borrowers, except residential mortgage reviews. 2. Providing legal advice required in the usual course of Clients' business including compliance analysis. 3. Attendance at Board of Director's and Shareholders' Meetings other than as a Director. 4. Advice regarding levies and executions 5. Preparation of annual SEC 10K, 10Q and "ordinary" proxy filings. B. "Legal services rendered in addition to those rendered as general corporate counsel" shall mean and include, but not be limited to, all of the following types of legal work which shall be billed on an hourly basis: 1. Litigation in which Clients are named as defendants. 2. Litigation or other proceedings in which Clients and another person or agency (i.e., Small Business Administration) specially retain Attorney. The hourly rate for such legal services shall be specifically agreed upon by Clients, the agency, and Attorneys. 3. Foreclosure litigation, including lien protection litigation in any Court including the Bankruptcy Court. 4. Regulatory or administrative law proceedings including but not limited to Department of Banking, zoning agencies, N.L.R.B., F.D.I.C., and Tax Court. 5. Loan reviews and closings, including modifications and extensions thereof, except that the fee shall be based upon $250.00 per hour plus costs and such fee shall not exceed 1/2% of the principal amount of the loan plus costs but in no event shall such fee be less than $250.00. 6. Closings in which the bank is a buyer or seller. 7. SEC Filings other than annual 10K, 10Q or "ordinary" proxy filings. 8. Mergers and Acquisitions. 9. All other legal services not specifically set forth in Paragraph 4A. 5. BINDING EFFECT This agreement shall be binding upon and shall inure to the benefit of the parties' successors or assigns. 6. NO ASSIGNMENT This agreement shall not be assigned or sublet without the express written consent of the parties. 7. LAW APPLICABLE This agreement shall be governed by the laws of the State of New Jersey. 8. SEVERABILITY In the event any clause, section or paragraph of this agreement shall be declared invalid or unenforceable by a court of competent jurisdiction, such invalid or unenforceability shall not affect the remainder of this Agreement. IN WITNESS WHEREOF the parties have hereunto signed this agreement the date first above written. INTERCHANGE STATE BANK ATTEST: /s/Benjamin Rosenzweig /s/ Anthony S. Abbate - ----------------------------- --------------------------- Benjamin Rosenzweig, Secretary Anthony S. Abbate, President INTERCHANGE FINANCIAL SERVICES CORPORATION ATTEST: /s/Benjamin Rosenzweig /s/ Anthony S. Abbate - ------------------------------ --------------------------- Benjamin Rosenzweig, Secretary Anthony S. Abbate, President ANDORA, PALMISANO & GEANEY ATTEST: s/sJohn P. Palmisano, s/sAnthony D. Andora - ---------------------------- ---------------------------- John P. Palmisano, Secretary Anthony D. Andora, President SCHEDULE A The hourly rates contained herein are subject to change on the anniversary dates of the Agreement of Legal Services. Schedule A, reviewed and approved at Annual Reorganization Meeting on April 27, 1995. Andora D. Andora $250.00 per hour John P. Palmisano $250.00 per hour John F. Geaney $250.00 per hour Other Partners and Senior Associates $175.00 per hour Other Associates $150.00 per hour May 22, 1995 Mr. Anthony S. Abbate 6 Robin Hood Court Montvale, NJ 07645 Dear Mr. Abbate: Interchange Financial Services Corporation, a New Jersey Bank Holding Company (the "Company"), considers the maintenance of a sound and vital executive team to be essential to protecting and enhancing the best interests of the Company and its stockholders. In this connection, the Company recognizes that the possibility of a change in control presently exists and may exist in the future, and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of executives to the detriment of the Company and its stockholders. Accordingly, the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's executive team. This letter agreement sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a "change in control of the Company" (as defined in Section 2 hereof) under the circumstances described below. 1. Company's Right to Terminate During the term of this Agreement, you agree that you will not voluntarily leave the employ of the Company except as may be permitted hereunder, and will continue to perform your regular duties as President and Chief Executive Officer of the Company. Notwithstanding the foregoing, the Company may terminate your employment at any time, subject to providing the benefits hereinafter specified in accordance with the terms hereof. 2. Change in Control No benefits shall be payable hereunder unless there shall have been a change in control of the Company, as set forth below, and your employment by the Company shall thereafter have been terminated in accordance with Section 3 below. For purposes of this Agreement, a "change in control of the Company" shall mean, unless the Board otherwise directs resolution approved by unanimous vote of the entire membership thereof adopted prior thereto, a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"); provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 25% control of the combined voting power of the Company's then outstanding securities; or (ii) during any period of three consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. 3. Termination Following Change in Control If any of the events described in Section 2 hereof constituting a change in control of the Company shall have occurred, you shall be entitled to the benefits provided in Section 4 hereof upon your subsequent termination, so long as such termination occurs within three (3) years after a change in control of the Company, unless such termination is (A) because of your death or Retirement, (B) by the Company for Cause or Disability or (c) by you other than for Good Reason. (i) Disability; Retirement (A) Termination by the Company of your employment based on "Disability" shall mean termination because of your absence from your duties with the Company on a full-time basis for 130 consecutive business days, as a result of your incapacity due to physical or mental illness, unless within thirty (30) days after Notice of Termination (as hereinafter defined) is given following such absence, you shall have returned to the full time performance of your duties; or (B) Termination by the Company or you of your employment based on "Retirement" shall mean your voluntary termination in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (ii) Cause Termination by the Company of your employment for Cause shall mean your termination on account of: (A) Your willful commission of an act that causes or is reasonably likely to cause substantial damage to the Company; (B) Your commission of an act of fraud in the performance of your duties on behalf of the Company; (C) Your conviction for commission of a felony or other crime punishable by confinement for a period in excess of one (1) year in connection with the performance of your duties on behalf of the Company; or (D) The order of a federal or state bank regulatory agency or a court of competent jurisdiction requiring the termination of your employment. (iii) Good Reason Termination by you of your employment for "Good Reason" shall mean termination based on: (A) Subsequent to a change in control of the Company, and without your express written consent, the assignment to you of any duties inconsistent with your positions, duties, responsibilities and status with the Company immediately prior to a change in control, or a change in your reporting responsibilities, titles or offices as in effect immediately prior to a change in control, or any removal of you from or any failure to re-elect you to any of such positions, except in connection with the termination of your employment for Cause, Disability or Retirement or as a result of your death or by you other than for Good Reason; (B) Subsequent to a change in control of the Company, a reduction by the Company in your base salary as in effect on the date hereof or as the same may be increased from time to time; (C) Subsequent to a change in control of the Company, a failure by the Company to continue any bonus plans in which you are presently entitled to participate (the "Bonus Plans") as the same may be modified from time to time but substantially in the forms currently in effect, or a failure by the Company to continue you as a participant in the Bonus Plans on at least the same basis as you presently participate in accordance with the Bonus Plans; (D) Subsequent to a change in control of the Company and without your express written consent, the Company's requiring you to be based anywhere other than within thirty (30) miles of your present office location, except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations; (E) Subsequent to change in control of the Company, the failure by the Company to continue in effect any benefit or compensation plan, stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health-and-accident plan or disability plan in which you are participating at the time of a change in control of the Company (or plans providing you with substantially similar benefits), the taking of any action by the Company which would adversely affect your participation in or materially reduce your benefits under any of such plans or deprive you of any material fringe benefit enjoyed by you at the time of the change in control, or the failure by the Company to provide you with the number of paid vacation days to which you are then entitled in accordance with the company's normal vacation policy in effect on the date hereof; (F) Subsequent to a change in control of the Company, the failure by the Company to obtain the assumption of the agreement to perform this Agreement by any successor as contemplated in Section 6 hereof; or (G) Subsequent to a change in control of the Company, any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (iv) below (and, if applicable, paragraph (ii) above); and for purposes of this Agreement, no such purported termination shall be effective. (iv) Notice of Termination Any purported termination by the Company pursuant to paragraph (i) or (ii) above or by you pursuant to subparagraph (B) of paragraph (i) or paragraph (iii) above shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (v) Date of Termination "Date of Termination" shall mean (A) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such thirty (30) day period), (B) if your employment is terminated pursuant to paragraph (ii) above, the date specified in the Notice of Termination, and (C) if your employment is terminated for any other reason, the date on which a Notice of Termination is given; provided that if within thirty (30) days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding and final arbitration award or by a final judgment, order or decree of a court of competent jurisdiction entered upon such arbitration award (the time of appeal therefrom having expired and no appeal having been perfected). 4. Certain Benefits Upon Termination If, after a change in control of the Company shall have occurred, as defined in Section 2 above, your employment by the Company shall be terminated (A) by the Company other than for Cause, Disability or Retirement or (B) by you for Good Reason, then you shall be entitled to the benefits provided below: (i) The Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given plus credit for any vacation earned but not taken and the amount, if any, of any bonus for a past fiscal year and the portion of the current fiscal year ending on the Date of Termination which has not yet been awarded or paid to you under the Bonus Plans; (ii) In lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as severance pay to you on the fifth day following the Date of Termination a lump sum amount equal to three (3) times your annual base salary at the highest rate in effect during the twelve (12) months immediately preceding the Date of Termination; (iii)The Company shall also pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement); (iv) The Company shall maintain in full force and effect, for your continued benefit until the earlier of (A) three (3) years after the Date of Termination or (B) your commencement of full time employment with a new employer, all life insurance, medical, health and accident, and disability plans, programs or arrangements in which you were entitled to participate immediately prior to the Date of Termination, provided that your continued participation is possible under the general terms and provisions of such plans and programs. In the event that your participation in any such plan or program is barred, the Company shall arrange to provide you with benefits substantially similar to those which you are entitled to receive under such plans and programs. In addition, the Company shall pay you a lump sum amount of equivalent actuarial value to the additional pension benefit you would have earned under the Company's Pension Plan as in effect on the date the change of control occurs, but disregarding any Internal Revenue Code limitations pertaining to qualified plans, if you were granted at the time of your termination of employment three (3) additional years of Credited Service and deemed 3 years older under the Plan. In determining the equivalent actuarial value of the additional pension granted under this Section 4, an interest rate of 5% and the mortality table under the Company's Pension Plan shall be used to determine the lump sum amount. You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer after the Date of Termination or otherwise. 5. Certain Further Payments by the Corporation In the event that any amount or benefit paid or distributed to you pursuant to this Agreement, taken with any amounts or benefits otherwise paid or distributed to you by the Company or any affiliated company (collectively the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Code or any similar tax that may hereafter be imposed, the Company shall pay to you at the time specified below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by you with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 5, but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (i) For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) Such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the opinion of the Company's independent certified public accountants appointed prior to the date the Change of Control occurs or tax counsel selected by such accountants (the "Accountants"), such Covered Payments (in whole or in part) either do not constitute parachute payments or represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount", or such parachute payments are otherwise not subject to such Excise Tax, and (B) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (ii) For purposes of determining the amount of the Tax Reimbursement Payment, you shall be deemed to pay: (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and (B) Any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. (iii)In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, you shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is later determined to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payment with respect to such excess) at the time that the amount of such excess is finally determined. (iv) The Tax Reimbursement Payment (or portion thereof) provided for in this Section 5 shall be paid to you not later than ten (10) business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to you by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Corporation to you, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 6. Term of Agreement This Agreement shall continue in effect so long as you are employed by the Company provided that, if a change of control of the Company, as defined in Section 2 hereof, shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of thirty-six (36) months beyond the month in which such change in control occurred. 7. Successor; Binding Agreement (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to you, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you terminated your employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 7 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate. 8. Notice For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the President of the Company with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. Miscellaneous No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by you and such officer as may be specifically designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement; provided, however, that this Agreement shall not supersede or in any way limit the rights, duties or obligations you may have under any other written agreement with the Company. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New Jersey. 10. Validity The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11. Tax Withholding The Company may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. 12. Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 13. Arbitration Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, THE COMPANY By /S/Anthony D. Andora ------------------------ Name: Anthony D. Andora Title:Chairman of the Board Agreed to this 26th day of May, 1995. /s/Anthony S. Abbate ---------------------------------- Anthony S. Abbate, President & CEO Attest by: /s/Benjamin Rosenzweig ---------------------- Benjamin Rosenzweig, Secretary May 22, 1995 Mr. Robert N. Harris 7 Brockden Drive Mendham, NJ 07945 Dear Mr. Harris: Interchange Financial Services Corporation, a New Jersey Bank Holding Company (the "Company"), considers the maintenance of a sound and vital executive team to be essential to protecting and enhancing the best interests of the Company and its stockholders. In this connection, the Company recognizes that the possibility of a change in control presently exists and may exist in the future, and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of executives to the detriment of the Company and its stockholders. Accordingly, the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's executive team. This letter agreement sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a "change in control of the Company" (as defined in Section 2 hereof) under the circumstances described below. 1. Company's Right to Terminate During the term of this Agreement, you agree that you will not voluntarily leave the employ of the Company except as may be permitted hereunder, and will continue to perform your regular duties as Executive Vice President of the Company. Notwithstanding the foregoing, the Company may terminate your employment at any time, subject to providing the benefits hereinafter specified in accordance with the terms hereof. 2. Change in Control No benefits shall be payable hereunder unless there shall have been a change in control of the Company, as set forth below, and your employment by the Company shall thereafter have been terminated in accordance with Section 3 below. For purposes of this Agreement, a "change in control of the Company" shall mean, unless the Board otherwise directs resolution approved by unanimous vote of the entire membership thereof adopted prior thereto, a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"); provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 25% control of the combined voting power of the Company's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. 3. Termination Following Change in Control If any of the events described in Section 2 hereof constituting a change in control of the Company shall have occurred, you shall be entitled to the benefits provided in Section 4 hereof upon your subsequent termination, so long as such termination occurs within two (2) years after a change in control of the Company, unless such termination is (A) because of your death or Retirement, (B) by the Company for Cause or Disability or (c) by you other than for Good Reason. (i) Disability; Retirement (A) Termination by the Company of your employment based on "Disability" shall mean termination because of your absence from your duties with the Company on a full-time basis for 130 consecutive business days, as a result of your incapacity due to physical or mental illness, unless within thirty (30) days after Notice of Termination (as hereinafter defined) is given following such absence, you shall have returned to the full time performance of your duties; or (B) Termination by the Company or you of your employment based on "Retirement" shall mean your voluntary termination in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (ii) Cause Termination by the Company of your employment for Cause shall mean your termination on account of: (A) Your willful commission of an act that causes or is reasonably likely to cause substantial damage to the Company; (B) Your commission of an act of fraud in the performance of your duties on behalf of the Company; (C) Your conviction for commission of a felony or other crime punishable by confinement for a period in excess of one (1) year in connection with the performance of your duties on behalf of the Company; or (D) The order of a federal or state bank regulatory agency or a court of competent jurisdiction requiring the termination of your employment. (iii) Good Reason Termination by you of your employment for "Good Reason" shall mean termination based on: (A) Subsequent to a change in control of the Company, and without your express written consent, the assignment to you of any duties inconsistent with your positions, duties, responsibilities and status with the Company immediately prior to a change in control, or a change in your reporting responsibilities, titles or offices as in effect immediately prior to a change in control, or any removal of you from or any failure to re-elect you to any of such positions, except in connection with the termination of your employment for Cause, Disability or Retirement or as a result of your death or by you other than for Good Reason; (B) Subsequent to a change in control of the Company, a reduction by the Company in your base salary as in effect on the date hereof or as the same may be increased from time to time; (C) Subsequent to a change in control of the Company, a failure by the Company to continue any bonus plans in which you are presently entitled to participate (the "Bonus Plans") as the same may be modified from time to time but substantially in the forms currently in effect, or a failure by the Company to continue you as a participant in the Bonus Plans on at least the same basis as you presently participate in accordance with the Bonus Plans; (D) Subsequent to a change in control of the Company and without your express written consent, the Company's requiring you to be based anywhere other than within thirty (30) miles of your present office location, except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations; (E) Subsequent to change in control of the Company, the failure by the Company to continue in effect any benefit or compensation plan, stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health-and-accident plan or disability plan in which you are participating at the time of a change in control of the Company (or plans providing you with substantially similar benefits), the taking of any action by the Company which would adversely affect your participation in or materially reduce your benefits under any of such plans or deprive you of any material fringe benefit enjoyed by you at the time of the change in control, or the failure by the Company to provide you with the number of paid vacation days to which you are then entitled in accordance with the company's normal vacation policy in effect on the date hereof; (F) Subsequent to a change in control of the Company, the failure by the Company to obtain the assumption of the agreement to perform this Agreement by any successor as contemplated in Section 6 hereof; or (G) Subsequent to a change in control of the Company, any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (iv) below (and, if applicable, paragraph (ii) above); and for purposes of this Agreement, no such purported termination shall be effective. (iv) Notice of Termination Any purported termination by the Company pursuant to paragraph (i) or (ii) above or by you pursuant to subparagraph (B) of paragraph (i) or paragraph (iii) above shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (v) Date of Termination "Date of Termination" shall mean (A) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such thirty (30) day period), (B) if your employment is terminated pursuant to paragraph (ii) above, the date specified in the Notice of Termination, and (C) if your employment is terminated for any other reason, the date on which a Notice of Termination is given; provided that if within thirty (30) days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding and final arbitration award or by a final judgment, order or decree of a court of competent jurisdiction entered upon such arbitration award (the time of appeal therefrom having expired and no appeal having been perfected). 4. Certain Benefits Upon Termination If, after a change in control of the Company shall have occurred, as defined in Section 2 above, your employment by the Company shall be terminated (A) by the Company other than for Cause, Disability or Retirement or (B) by you for Good Reason, then you shall be entitled to the benefits provided below: (i) The Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given plus credit for any vacation earned but not taken and the amount, if any, of any bonus for a past fiscal year and the portion of the current fiscal year ending on the Date of Termination which has not yet been awarded or paid to you under the Bonus Plans; (ii) In lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as severance pay to you on the fifth day following the Date of Termination a lump sum amount equal to two (2) times your annual base salary at the highest rate in effect during the twelve (12) months immediately preceding the Date of Termination; (iii)The Company shall also pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement); (iv) The Company shall maintain in full force and effect, for your continued benefit until the earlier of (A) two (2) years after the Date of Termination or (B) your commencement of full time employment with a new employer, all life insurance, medical, health and accident, and disability plans, programs or arrangements in which you were entitled to participate immediately prior to the Date of Termination, provided that your continued participation is possible under the general terms and provisions of such plans and programs. In the event that your participation in any such plan or program is barred, the Company shall arrange to provide you with benefits substantially similar to those which you are entitled to receive under such plans and programs. In addition, the Company shall pay you a lump sum amount of equivalent actuarial value to the additional pension benefit you would have earned under the Company's Pension Plan as in effect on the date the change of control occurs, but disregarding any Internal Revenue Code limitations pertaining to qualified plans, if you were granted at the time of your termination of employment two (2) additional years of Credited Service and deemed 2 years older under the Plan. In determining the equivalent actuarial value of the additional pension granted under this Section 4, an interest rate of 5% and the mortality table under the Company's Pension Plan shall be used to determine the lump sum amount. You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer after the Date of Termination or otherwise. 5. Certain Further Payments by the Corporation In the event that any amount or benefit paid or distributed to you pursuant to this Agreement, taken with any amounts or benefits otherwise paid or distributed to you by the Company or any affiliated company (collectively the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Code or any similar tax that may hereafter be imposed, the Company shall pay to you at the time specified below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by you with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 5, but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (i) For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) Such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the opinion of the Company's independent certified public accountants appointed prior to the date the Change of Control occurs or tax counsel selected by such accountants (the "Accountants"), such Covered Payments (in whole or in part) either do not constitute parachute payments or represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount", or such parachute payments are otherwise not subject to such Excise Tax, and (B) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (ii) For purposes of determining the amount of the Tax Reimbursement Payment, you shall be deemed to pay: (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and (B) Any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. (iii)In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, you shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is later determined to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payment with respect to such excess) at the time that the amount of such excess is finally determined. (iv) The Tax Reimbursement Payment (or portion thereof) provided for in this Section 5 shall be paid to you not later than ten (10) business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to you by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Corporation to you, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 6. Term of Agreement This Agreement shall continue in effect so long as you are employed by the Company provided that, if a change of control of the Company, as defined in Section 2 hereof, shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of thirty-six (36) months beyond the month in which such change in control occurred. 7. Successor; Binding Agreement (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to you, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you terminated your employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 7 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate. 8. Notice For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the President of the Company with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. Miscellaneous No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by you and such officer as may be specifically designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement; provided, however, that this Agreement shall not supersede or in any way limit the rights, duties or obligations you may have under any other written agreement with the Company. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New Jersey. 10. Validity The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11. Tax Withholding The Company may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. 12. Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 13. Arbitration Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, THE COMPANY By /s/Anthony D. Andora --------------------- Name: Anthony D. Andora Title: Chairman of the Board Agreed to this 8 day of June, 1995. /s/Robert N. Harris - ------------------- Robert N. Harris Executive Vice President Chief Financial Officer Attest by: /s/Benjamin Rosenzweig ---------------------- Benjamin Rosenzweig, Secretary May 22, 1995 Mr. Richard N. Latrenta 405 Tenafly Road Englewood, NJ 07631 Dear Mr. Latrenta: Interchange Financial Services Corporation, a New Jersey Bank Holding Company (the "Company"), considers the maintenance of a sound and vital executive team to be essential to protecting and enhancing the best interests of the Company and its stockholders. In this connection, the Company recognizes that the possibility of a change in control presently exists and may exist in the future, and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of executives to the detriment of the Company and its stockholders. Accordingly, the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's executive team. This letter agreement sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a "change in control of the Company" (as defined in Section 2 hereof) under the circumstances described below. 1. Company's Right to Terminate During the term of this Agreement, you agree that you will not voluntarily leave the employ of the Company except as may be permitted hereunder, and will continue to perform your regular duties as Senior Vice President of the Company. Notwithstanding the foregoing, the Company may terminate your employment at any time, subject to providing the benefits hereinafter specified in accordance with the terms hereof. 2. Change in Control No benefits shall be payable hereunder unless there shall have been a change in control of the Company, as set forth below, and your employment by the Company shall thereafter have been terminated in accordance with Section 3 below. For purposes of this Agreement, a "change in control of the Company" shall mean, unless the Board otherwise directs resolution approved by unanimous vote of the entire membership thereof adopted prior thereto, a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"); provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 25% control of the combined voting power of the Company's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. 3. Termination Following Change in Control If any of the events described in Section 2 hereof constituting a change in control of the Company shall have occurred, you shall be entitled to the benefits provided in Section 4 hereof upon your subsequent termination, so long as such termination occurs within two (2) years after a change in control of the Company, unless such termination is (A) because of your death or Retirement, (B) by the Company for Cause or Disability or (c) by you other than for Good Reason. (i) Disability; Retirement (A) Termination by the Company of your employment based on "Disability" shall mean termination because of your absence from your duties with the Company on a full-time basis for 130 consecutive business days, as a result of your incapacity due to physical or mental illness, unless within thirty (30) days after Notice of Termination (as hereinafter defined) is given following such absence, you shall have returned to the full time performance of your duties; or (B) Termination by the Company or you of your employment based on "Retirement" shall mean your voluntary termination in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (ii) Cause Termination by the Company of your employment for Cause shall mean your termination on account of: (A) Your willful commission of an act that causes or is reasonably likely to cause substantial damage to the Company; (B) Your commission of an act of fraud in the performance of your duties on behalf of the Company; (C) Your conviction for commission of a felony or other crime punishable by confinement for a period in excess of one (1) year in connection with the performance of your duties on behalf of the Company; or (D) The order of a federal or state bank regulatory agency or a court of competent jurisdiction requiring the termination of your employment. (iii) Good Reason Termination by you of your employment for "Good Reason" shall mean termination based on: (A) Subsequent to a change in control of the Company, and without your express written consent, the assignment to you of any duties inconsistent with your positions, duties, responsibilities and status with the Company immediately prior to a change in control, or a change in your reporting responsibilities, titles or offices as in effect immediately prior to a change in control, or any removal of you from or any failure to re-elect you to any of such positions, except in connection with the termination of your employment for Cause, Disability or Retirement or as a result of your death or by you other than for Good Reason; (B) Subsequent to a change in control of the Company, a reduction by the Company in your base salary as in effect on the date hereof or as the same may be increased from time to time; (C) Subsequent to a change in control of the Company, a failure by the Company to continue any bonus plans in which you are presently entitled to participate (the "Bonus Plans") as the same may be modified from time to time but substantially in the forms currently in effect, or a failure by the Company to continue you as a participant in the Bonus Plans on at least the same basis as you presently participate in accordance with the Bonus Plans; (D) Subsequent to a change in control of the Company and without your express written consent, the Company's requiring you to be based anywhere other than within thirty (30) miles of your present office location, except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations; (E) Subsequent to change in control of the Company, the failure by the Company to continue in effect any benefit or compensation plan, stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health-and-accident plan or disability plan in which you are participating at the time of a change in control of the Company (or plans providing you with substantially similar benefits), the taking of any action by the Company which would adversely affect your participation in or materially reduce your benefits under any of such plans or deprive you of any material fringe benefit enjoyed by you at the time of the change in control, or the failure by the Company to provide you with the number of paid vacation days to which you are then entitled in accordance with the company's normal vacation policy in effect on the date hereof; (F) Subsequent to a change in control of the Company, the failure by the Company to obtain the assumption of the agreement to perform this Agreement by any successor as contemplated in Section 6 hereof; or (G) Subsequent to a change in control of the Company, any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (iv) below (and, if applicable, paragraph (ii) above); and for purposes of this Agreement, no such purported termination shall be effective. (iv) Notice of Termination Any purported termination by the Company pursuant to paragraph (i) or (ii) above or by you pursuant to subparagraph (B) of paragraph (i) or paragraph (iii) above shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (v) Date of Termination "Date of Termination" shall mean (A) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such thirty (30) day period), (B) if your employment is terminated pursuant to paragraph (ii) above, the date specified in the Notice of Termination, and (C) if your employment is terminated for any other reason, the date on which a Notice of Termination is given; provided that if within thirty (30) days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding and final arbitration award or by a final judgment, order or decree of a court of competent jurisdiction entered upon such arbitration award (the time of appeal therefrom having expired and no appeal having been perfected). 4. Certain Benefits Upon Termination If, after a change in control of the Company shall have occurred, as defined in Section 2 above, your employment by the Company shall be terminated (A) by the Company other than for Cause, Disability or Retirement or (B) by you for Good Reason, then you shall be entitled to the benefits provided below: (i) The Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given plus credit for any vacation earned but not taken and the amount, if any, of any bonus for a past fiscal year and the portion of the current fiscal year ending on the Date of Termination which has not yet been awarded or paid to you under the Bonus Plans; (ii) In lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as severance pay to you on the fifth day following the Date of Termination a lump sum amount equal to two (2) times your annual base salary at the highest rate in effect during the twelve (12) months immediately preceding the Date of Termination; (iii)The Company shall also pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement); (iv) The Company shall maintain in full force and effect, for your continued benefit until the earlier of (A) two (2) years after the Date of Termination or (B) your commencement of full time employment with a new employer, all life insurance, medical, health and accident, and disability plans, programs or arrangements in which you were entitled to participate immediately prior to the Date of Termination, provided that your continued participation is possible under the general terms and provisions of such plans and programs. In the event that your participation in any such plan or program is barred, the Company shall arrange to provide you with benefits substantially similar to those which you are entitled to receive under such plans and programs. In addition, the Company shall pay you a lump sum amount of equivalent actuarial value to the additional pension benefit you would have earned under the Company's Pension Plan as in effect on the date the change of control occurs, but disregarding any Internal Revenue Code limitations pertaining to qualified plans, if you were granted at the time of your termination of employment two (2) additional years of Credited Service and deemed 2 years older under the Plan. In determining the equivalent actuarial value of the additional pension granted under this Section 4, an interest rate of 5% and the mortality table under the Company's Pension Plan shall be used to determine the lump sum amount. You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer after the Date of Termination or otherwise. 5. Certain Further Payments by the Corporation In the event that any amount or benefit paid or distributed to you pursuant to this Agreement, taken with any amounts or benefits otherwise paid or distributed to you by the Company or any affiliated company (collectively the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Code or any similar tax that may hereafter be imposed, the Company shall pay to you at the time specified below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by you with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 5, but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (i) For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) Such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the opinion of the Company's independent certified public accountants appointed prior to the date the Change of Control occurs or tax counsel selected by such accountants (the "Accountants"), such Covered Payments (in whole or in part) either do not constitute parachute payments or represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount", or such parachute payments are otherwise not subject to such Excise Tax, and (B) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (ii) For purposes of determining the amount of the Tax Reimbursement Payment, you shall be deemed to pay: (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and (B) Any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. (iii)In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, you shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is later determined to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payment with respect to such excess) at the time that the amount of such excess is finally determined. (iv) The Tax Reimbursement Payment (or portion thereof) provided for in this Section 5 shall be paid to you not later than ten (10) business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to you by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Corporation to you, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 6. Term of Agreement This Agreement shall continue in effect so long as you are employed by the Company provided that, if a change of control of the Company, as defined in Section 2 hereof, shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of thirty-six (36) months beyond the month in which such change in control occurred. 7. Successor; Binding Agreement (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to you, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you terminated your employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 7 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate. 8. Notice For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the President of the Company with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. Miscellaneous No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by you and such officer as may be specifically designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement; provided, however, that this Agreement shall not supersede or in any way limit the rights, duties or obligations you may have under any other written agreement with the Company. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New Jersey. 10. Validity The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11. Tax Withholding The Company may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. 12. Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 13. Arbitration Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, THE COMPANY By /s/Anthony D. Andora ------------------- Name: Anthony D. Andora Title: Chairman of the Board Agreed to this 8 day of June, 1995. /s/Richard N. Latrenta - ---------------------- Richard N. Latrenta, Sr. Vice President Sr. Loan Office Attest by: /s/Benjamin Rosenzweig ----------------------- Benjamin Rosenzweig, Secretary May 22, 1995 Mr. Frank R. Giancola 18 Franciscan Way Fair Lawn, NJ 07410 Dear Mr. Giancola: Interchange Financial Services Corporation, a New Jersey Bank Holding Company (the "Company"), considers the maintenance of a sound and vital executive team to be essential to protecting and enhancing the best interests of the Company and its stockholders. In this connection, the Company recognizes that the possibility of a change in control presently exists and may exist in the future, and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of executives to the detriment of the Company and its stockholders. Accordingly, the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's executive team. This letter agreement sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a "change in control of the Company" (as defined in Section 2 hereof) under the circumstances described below. 1. Company's Right to Terminate During the term of this Agreement, you agree that you will not voluntarily leave the employ of the Company except as may be permitted hereunder, and will continue to perform your regular duties as Senior Vice President of the Company. Notwithstanding the foregoing, the Company may terminate your employment at any time, subject to providing the benefits hereinafter specified in accordance with the terms hereof. 2. Change in Control No benefits shall be payable hereunder unless there shall have been a change in control of the Company, as set forth below, and your employment by the Company shall thereafter have been terminated in accordance with Section 3 below. For purposes of this Agreement, a "change in control of the Company" shall mean, unless the Board otherwise directs resolution approved by unanimous vote of the entire membership thereof adopted prior thereto, a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"); provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 25% control of the combined voting power of the Company's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. 3. Termination Following Change in Control If any of the events described in Section 2 hereof constituting a change in control of the Company shall have occurred, you shall be entitled to the benefits provided in Section 4 hereof upon your subsequent termination, so long as such termination occurs within two (2) years after a change in control of the Company, unless such termination is (A) because of your death or Retirement, (B) by the Company for Cause or Disability or (c) by you other than for Good Reason. (i) Disability; Retirement (A) Termination by the Company of your employment based on "Disability" shall mean termination because of your absence from your duties with the Company on a full-time basis for 130 consecutive business days, as a result of your incapacity due to physical or mental illness, unless within thirty (30) days after Notice of Termination (as hereinafter defined) is given following such absence, you shall have returned to the full time performance of your duties; or (B) Termination by the Company or you of your employment based on "Retirement" shall mean your voluntary termination in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (ii) Cause Termination by the Company of your employment for Cause shall mean your termination on account of: (A) Your willful commission of an act that causes or is reasonably likely to cause substantial damage to the Company; (B) Your commission of an act of fraud in the performance of your duties on behalf of the Company; (C) Your conviction for commission of a felony or other crime punishable by confinement for a period in excess of one (1) year in connection with the performance of your duties on behalf of the Company; or (D) The order of a federal or state bank regulatory agency or a court of competent jurisdiction requiring the termination of your employment. (iii) Good Reason Termination by you of your employment for "Good Reason" shall mean termination based on: (A) Subsequent to a change in control of the Company, and without your express written consent, the assignment to you of any duties inconsistent with your positions, duties, responsibilities and status with the Company immediately prior to a change in control, or a change in your reporting responsibilities, titles or offices as in effect immediately prior to a change in control, or any removal of you from or any failure to re-elect you to any of such positions, except in connection with the termination of your employment for Cause, Disability or Retirement or as a result of your death or by you other than for Good Reason; (B) Subsequent to a change in control of the Company, a reduction by the Company in your base salary as in effect on the date hereof or as the same may be increased from time to time; (C) Subsequent to a change in control of the Company, a failure by the Company to continue any bonus plans in which you are presently entitled to participate (the "Bonus Plans") as the same may be modified from time to time but substantially in the forms currently in effect, or a failure by the Company to continue you as a participant in the Bonus Plans on at least the same basis as you presently participate in accordance with the Bonus Plans; (D) Subsequent to a change in control of the Company and without your express written consent, the Company's requiring you to be based anywhere other than within thirty (30) miles of your present office location, except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations; (E) Subsequent to change in control of the Company, the failure by the Company to continue in effect any benefit or compensation plan, stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health-and-accident plan or disability plan in which you are participating at the time of a change in control of the Company (or plans providing you with substantially similar benefits), the taking of any action by the Company which would adversely affect your participation in or materially reduce your benefits under any of such plans or deprive you of any material fringe benefit enjoyed by you at the time of the change in control, or the failure by the Company to provide you with the number of paid vacation days to which you are then entitled in accordance with the company's normal vacation policy in effect on the date hereof; (F) Subsequent to a change in control of the Company, the failure by the Company to obtain the assumption of the agreement to perform this Agreement by any successor as contemplated in Section 6 hereof; or (G) Subsequent to a change in control of the Company, any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (iv) below (and, if applicable, paragraph (ii) above); and for purposes of this Agreement, no such purported termination shall be effective. (iv) Notice of Termination Any purported termination by the Company pursuant to paragraph (i) or (ii) above or by you pursuant to subparagraph (B) of paragraph (i) or paragraph (iii) above shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (v) Date of Termination "Date of Termination" shall mean (A) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such thirty (30) day period), (B) if your employment is terminated pursuant to paragraph (ii) above, the date specified in the Notice of Termination, and (C) if your employment is terminated for any other reason, the date on which a Notice of Termination is given; provided that if within thirty (30) days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding and final arbitration award or by a final judgment, order or decree of a court of competent jurisdiction entered upon such arbitration award (the time of appeal therefrom having expired and no appeal having been perfected). 4. Certain Benefits Upon Termination If, after a change in control of the Company shall have occurred, as defined in Section 2 above, your employment by the Company shall be terminated (A) by the Company other than for Cause, Disability or Retirement or (B) by you for Good Reason, then you shall be entitled to the benefits provided below: (i) The Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given plus credit for any vacation earned but not taken and the amount, if any, of any bonus for a past fiscal year and the portion of the current fiscal year ending on the Date of Termination which has not yet been awarded or paid to you under the Bonus Plans; (ii) In lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as severance pay to you on the fifth day following the Date of Termination a lump sum amount equal to two (2) times your annual base salary at the highest rate in effect during the twelve (12) months immediately preceding the Date of Termination; (iii)The Company shall also pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement); (iv) The Company shall maintain in full force and effect, for your continued benefit until the earlier of (A) two (2) years after the Date of Termination or (B) your commencement of full time employment with a new employer, all life insurance, medical, health and accident, and disability plans, programs or arrangements in which you were entitled to participate immediately prior to the Date of Termination, provided that your continued participation is possible under the general terms and provisions of such plans and programs. In the event that your participation in any such plan or program is barred, the Company shall arrange to provide you with benefits substantially similar to those which you are entitled to receive under such plans and programs. In addition, the Company shall pay you a lump sum amount of equivalent actuarial value to the additional pension benefit you would have earned under the Company's Pension Plan as in effect on the date the change of control occurs, but disregarding any Internal Revenue Code limitations pertaining to qualified plans, if you were granted at the time of your termination of employment two (2) additional years of Credited Service and deemed 2 years older under the Plan. In determining the equivalent actuarial value of the additional pension granted under this Section 4, an interest rate of 5% and the mortality table under the Company's Pension Plan shall be used to determine the lump sum amount. You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer after the Date of Termination or otherwise. 5. Certain Further Payments by the Corporation In the event that any amount or benefit paid or distributed to you pursuant to this Agreement, taken with any amounts or benefits otherwise paid or distributed to you by the Company or any affiliated company (collectively the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Code or any similar tax that may hereafter be imposed, the Company shall pay to you at the time specified below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by you with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 5, but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (i) For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) Such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the opinion of the Company's independent certified public accountants appointed prior to the date the Change of Control occurs or tax counsel selected by such accountants (the "Accountants"), such Covered Payments (in whole or in part) either do not constitute parachute payments or represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount", or such parachute payments are otherwise not subject to such Excise Tax, and (B) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (ii) For purposes of determining the amount of the Tax Reimbursement Payment, you shall be deemed to pay: (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and (B) Any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. (iii)In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, you shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is later determined to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payment with respect to such excess) at the time that the amount of such excess is finally determined. (iv) The Tax Reimbursement Payment (or portion thereof) provided for in this Section 5 shall be paid to you not later than ten (10) business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to you by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Corporation to you, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 6. Term of Agreement This Agreement shall continue in effect so long as you are employed by the Company provided that, if a change of control of the Company, as defined in Section 2 hereof, shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of thirty-six (36) months beyond the month in which such change in control occurred. 7. Successor; Binding Agreement (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to you, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you terminated your employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 7 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate. 8. Notice For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the President of the Company with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. Miscellaneous No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by you and such officer as may be specifically designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement; provided, however, that this Agreement shall not supersede or in any way limit the rights, duties or obligations you may have under any other written agreement with the Company. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New Jersey. 10. Validity The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11. Tax Withholding The Company may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. 12. Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 13. Arbitration Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, THE COMPANY By /s/Anthony D. Andora -------------------- Name:Anthony D. Andora Title:Chairman of the Board Agreed to this 2 day of June, 1995. /s/Frank R. Giancola - ---------------------------------- Frank R. Giancola, Sr. Vice President Attest by: /s/Benjamin Rosenzweig ---------------------- Benjamin Rosenzweig, Secretary EX-11 3 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 Statement re: Computation of per share earnings
------------------------------------------------------ Years Ended December 31, ------------------------------------------------------ 1995 1994 1993 ------- -------- -------- (in thousands) Net income $6,280 $5,636 $4,837 Preferred dividend requirements (85) (112) (199) ------ ------- ------ $6,195 $5,524 $4,638 ====== ====== ====== Weighted average common shares outstanding 2,697,100 2,697,100 2,697,100 Earnings per common share $2.29 $2.05 $1.72
EX-22 4 SUBSIDIARIES OF THE REGISTRANT Exhibit 22. SUBSIDIARIES OF THE REGISTRANT Interchange State Bank and Cloverleaf Mortgage Company, Inc., incorporated in New Jersey, are wholly owned subsidiaries of the Registrant. EX-23 5 INDEPENDENT AUDITORS' CONSENT Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-82530 of Interchange Financial Services Corporation on Form S-8 of our report dated January 20, 1996, appearing in this Annual Report of Form 10-K of Interchange Financial Services Corporation for the year ended December 31, 1995. Deloitte & Touche LLP Parsippany, New Jersey March 1996 EX-27 6
9 1,000 12-Mos Dec-31-1995 Dec-31-1995 25,151 0 0 0 67,545 74,688 75,611 311,164 3,647 491,457 436,452 10,904 3,860 0 4,495 0 0 35,746 491,457 27,427 9,194 374 36,995 14,513 15,150 21,845 1,200 15 15,824 9,573 6,280 0 0 6,280 2.29 2.29 4.818 2,511 0 1,465 0 3,839 1,510 118 3,647 3,021 0 626
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