-----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, Uc/yg+t0Otx4HyPZ9NRWMK398MonE5E3lFHZMv7RnHXkQPhY+f06WykpE5hkBkbE WrvxlBcrNI9vgUQaF6uwiw== 0000891092-98-000108.txt : 19980331 0000891092-98-000108.hdr.sgml : 19980331 ACCESSION NUMBER: 0000891092-98-000108 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 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: SEC FILE NUMBER: 001-10518 FILM NUMBER: 98578633 BUSINESS ADDRESS: STREET 1: PARK 80 WEST PLAZA TWO STREET 2: ATTN INTERCHANGE STATE BANK CITY: SADDLE BROOK STATE: NJ ZIP: 07662 BUSINESS PHONE: 2017032265 MAIL ADDRESS: STREET 1: PARK 80 WEST STREET 2: PLAZA II CITY: SADDLE BROOK STATE: NJ ZIP: 07663 FORMER COMPANY: FORMER CONFORMED NAME: INTERCHANGER STATE BANK DATE OF NAME CHANGE: 19870416 FORMER COMPANY: FORMER CONFORMED NAME: INTERCHANGE FINANCIAL SERVICES CORP DATE OF NAME CHANGE: 19861209 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission File number 1-10518 INTERCHANGE FINANCIAL SERVICES CORPORATION (Exact name of registrant as specified in its charter) New Jersey 22-2553159 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Park 80 West/Plaza Two, Saddle Brook, NJ 07663 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (201) 703-2265 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of Each Class which registered ------------------- ---------------- Common Stock (no par value) American Stock Exchange ------------------------ Securities registered pursuant to Section 12(g) of the Act: Title of Class -------------- None Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Park III of this Form 10-K or any amendment to this Form 10-K. [ ] Class Outstanding ----- ----------- Common Stock 4,272,161 (No par value) The aggregate market value on March 2, 1998, of voting stock held by non-affiliates of the Registrant was approximately $94,528,268 Documents incorporated by reference: Portions of the Registrant's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders are incorporated by reference in Part III of this report. INTERCHANGE FINANCIAL SERVICES CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K PART 1 PAGE Item 1. Business......................................................... 1 Item 2. Properties....................................................... 7 Item 3. Legal Proceedings................................................ 8 Item 4. Submission of Matters to a Vote of Security Holders.............. 8 Executive Officers .................................................... 9 PART II Item 5. Market for Registrant's Common Stock and Stockholder Matters..... 10 Item 6. Selected Consolidated Financial Data............................. 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 12 Item 8. Financial Statements and Supplemental Data....................... 35 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 35 PART III Item 10. Directors and Executive Officers................................. 35 Item 11. Executive Compensation........................................... 35 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................... 35 Item 13. Certain Relationships and Related Transactions................... 35 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................... 36 Signatures ............................................................. 37 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 twelve banking offices in Bergen County, New Jersey. In 1996, the Bank sold its Clifton, New Jersey branch and closed a mini-branch in Paramus. In the same year, it opened a branch in Oakland, New Jersey. In 1993, the Bank opened a Little Ferry branch, which was augmented in 1994 by the purchase of deposits of a failed thrift institution in its service area. The Bank offers a wide range of consumer banking services, including: checking and savings accounts, money-market accounts, certificates of deposit, individual retirement accounts, residential mortgages, home equity lines of credit and other second mortgage loans, home improvement loans, automobile loans, personal loans and overdraft protection. The Bank also offers its own VISA credit card and several new convenience products including the Interchange Check Card which lets you access your checking account by using the card when you make purchases. It can also be used as a MAC card to perform all the usual ATM transactions. Interchange Bank-Line(R) allows customers to perform basic banking transactions over the telephone. In 1997, a new feature of Bank-Line was introduced - Direct Bill Payment. Direct Bill Payment allows customers to pay bills over the phone since bill payments are debited directly to the customer's checking account. The Bank has also entered the mutual funds market. An Investment Services Program is offered through an alliance between Interchange State Bank and IBAA Financial Services Corporation, under which mutual funds offered by IBAA are made available to the Bank's customers by Bank employees. Automated teller machines (MAC(TM), Plus(TM), HONOR(TM), VISA(TM) and MasterCard(TM) networks) are located at ten of the banking offices, at two supermarkets and at one mini-market. The Bank is engaged in the financing of local business and industry, providing credit facilities and related services for smaller businesses, typically those with $1 million to $5 million in annual sales. Commercial loan customers of the Bank are businesses ranging from light manufacturing and local wholesale and distribution companies to medium-sized service firms and local retail businesses. Most forms of commercial lending are offered, 1 including working capital lines of credit, small business administration loans, term loans for fixed asset acquisitions, commercial mortgages and other forms of asset-based financing. The Bank has taken advantage of opportunities to purchase packages of loans and leases. In 1997, the Bank purchased $10.2 million and $9.1 million of auto leases and residential real estate loans, respectively. These loans and leases were subjected to the Bank's independent credit analysis prior to purchase and were, in some cases, purchased with a limited buy-back obligation or other financial assurance from the sellers. In the Bank's experience, there are significant opportunities to sell the Bank's other products and services to the borrowers whose loans are purchased. The Bank believes that purchasing loans and leases will continue to be a desirable way to increase its portfolios as opportunities arise. Deposits of the Bank are insured up to $100,000 per depositor by the Bank Insurance Fund administered by the FDIC. The Company had 177 full-time-equivalent employees during 1997. 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. Bergen County has a relatively large affluent base for the Bank's services. The Bank's principal market for its deposit gathering activities covers major portions of Bergen County in the northeastern corner of New Jersey adjacent to New York City. 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. Since there is a preponderance of the population in the age groups of 35-54 and 55+, Interchange has strategically targeted these two life stage segments by designing and marketing "packaged" products (Money Maker Account and Prime Time Account) which include deposit, credit and other services sold together as a product unit. We also recognized the needs of "Generation X" with the Money Plus Account (25-34) and our youngest with the Grow'N Up Savings(R) Passbook Account. The Bank was among the first to offer such packaged financial products in its area and management believes they have been successful in attracting deposits and building a loyal client base. 2 Recent Developments The Company and the Bank entered into an Agreement and Plan of Merger dated as of January 27, 1998 with The Jersey Bank for Savings ("Jersey"). Under the Agreement, Jersey will merge with and into the Bank, and shareholders of Jersey will receive 1.5 shares of the Company's common stock for each Jersey common share, after an adjustment to take into effect a 3 for 2 stock split approved by the Company to be distributed April 17, 1998. Jersey is a capital stock savings bank with two banking offices, in Montvale and River Edge, New Jersey. At December 31, 1997, Jersey had assets of $77 million, deposits of $70 million and shareholders' equity of $6.4 million. Completion of the Merger is subject to regulatory approvals and other conditions, and is not expected to occur prior to the end of the second quarter of 1998. The acquisition will be accounted for using the pooling-of-interests method. The Chairman and the Vice Chairman of the Board of Directors of Jersey are to be appointed to the Board of Directors of each of the Company and the Bank once the transaction is concluded. Competition Competition in the banking and financial services industry in the Company's market area is intense. The Bank competes actively with national and state-chartered commercial banks and other financial institutions, including savings and loan associations, mutual savings banks, and credit unions. In addition, the Bank faces competition from less heavily regulated entities such as brokerage institutions, money management firms, consumer finance and credit card companies and various other types of financial services companies. Many of these institutions are larger than the Bank, some are better capitalized, and a number pursue community banking strategies similar to those of the Bank. Management believes that opportunities continue to exist to satisfy the deposit and lending demands of small and middle market businesses. Larger banks continued to show an appetite for only the largest loans, finding themselves ill-equipped to administer smaller loans profitably. Interchange has the desire and the ability to give smaller businesses the service they require and deserve. Interchange meets this need through a unique program called Rapid Response Banking. The program provides commercial loans up to $100,000 with a streamlined approval process that borrows liberally from standard consumer lending practices. Naturally, in due course, many small businesses become midsize businesses, with a corresponding change in their financial requirements. But they do not outgrow Interchange because of its ability to be responsive to both constituencies. To continue serving companies throughout the various stages of their evolution, Interchange created Business Class Banking--a program that grows with the customer. Business Class Banking supports a spectrum of business-oriented financial products 3 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. Interchange State Bank maintains a relational database. This is a powerful technology, designed expressly for the banking industry and generally associated with only the largest and most forward thinking companies. This technology greatly enhances the Bank's internal marketing analysis by providing information about account relationships, their activity and their relative value to the Bank in great detail. Interchange has maintained an ambitious program of primary research to keep abreast of customer attitudes and preferences. Our sales quotas and incentives for employees are linked directly to bank-wide goals and are used to motivate employees to sell the "right" products to the "right" customers. Regulation and Supervision 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 and Federal Regulation Y. 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 all or 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 4 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 real estate 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 organizations are generally expected to operate with capital positions well above the minimum rates. Institutions with higher levels of risk, or which experience or anticipate significant growth, are also expected to operate well above minimum capital standards. At December 31, 1997 the Bank satisfies these ratios and has been categorized as a well-capitalized institution which in the regulatory framework for prompt corrective action imposes the lowest level of supervisory restraints. 5 Capital adequacy guidelines focus principally on broad categories of credit risk although the framework for assigning assets and off-balance sheet items to risk categories does incorporate elements of transfer risk. The risk-based capital ratio does not, however, incorporate other factors that may affect a company's financial condition, such as overall interest rate exposure, liquidity, funding and market risks, the quality and level of earnings, investment or loan concentrations, the quality of loans and investments, the effectiveness of loan and investment policies and management's ability to monitor and control financial and operating risks. In addition to the risk-based guidelines discussed above, the Federal Reserve Board requires that a bank holding company and bank which meet the regulator's highest performance and operational standards and which are not contemplating or experiencing significant growth maintain a minimum leverage ratio (Tier I capital as a percent of quarterly average adjusted assets) of 3%. For those financial institutions with higher levels of risk or that are experiencing or anticipating significant growth, the minimum leverage ratio will be increased. The Federal Reserve 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 bank, the Bank's operations are subject to various requirements and restrictions of state law pertaining, among other things, to lending limits, reserves, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices and capital adequacy. The Bank is subject to primary supervision, periodic examination and regulation by the New Jersey Department of Banking and Insurance ("NJDBI"). If, as a result of an examination of a bank, the NJDBI determines that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the bank's operations are unsatisfactory or that the bank or its management is violating or has violated any law or regulation, various remedies are available to the NJDBI. Such remedies include the power to enjoin "unsafe and unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to, among other things, direct an increase in capital, to 6 restrict the growth of the Bank, to assess civil penalties and to remove officers and directors. The Bank has never been the subject of any administrative orders, memoranda of understanding or any other regulatory action by the NJDBI. The Bank also is a member of the Federal Reserve System and therefore subject to supervisory examination by and regulations of the Federal Reserve Bank of New York. The Bank's deposits are insured by the Bank Insurance Fund administered by the FDIC up to a maximum of $100,000 per depositor. For this protection, the Bank pays a quarterly 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. The Bank's deposits are insured primarily by the Bank Insurance Fund ("BIF") administered by the FDIC and the Bank is therefore subject to FDIC deposit insurance assessments. The Deposit Insurance Funds Act of 1996 ("Funds Act") authorized the Financing Corporation ("FICO") to levy assessments on BIF and SAIF deposits and stipulated that the BIF rate must equal one-fifth the SAIF rate through year-end 1999, or until the insurance funds are merged, whichever occurs first. Thereafter, BIF and SAIF payers will be assessed on a pro-rata basis for FICO. FICO assessment rates are adjusted quarterly to reflect changes in the assessment bases of the respective funds based on quarterly Call Report and Thrift Financial Report submissions. During 1997, the Bank's BIF FICO rates ranged between 1.26 and 1.30 basis points and the SAIF FICO rates were between 6.30 and 6.50 basis points. Item 2. Properties The Company leases eight banking offices and one operations/support facility. It owns four banking offices and leases land on which it owns one bank building. The Company owns land and a building to be used for a future branch site. 7 Item 3. Legal Proceedings 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. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted during the three months ended December 31, 1997, to a vote of the Company's security holders through the solicitation of proxies or otherwise. 8 Executive Officers The following table sets forth the names, ages, and present positions of the principal executive officers: Name Age Positions Held with the Company and the Bank - ---- --- -------------------------------------------- ANTHONY S. ABBATE ...... 58 President and Chief Executive Officer ANTHONY J. LABOZZETTA .. 34 Executive Vice President and Chief Financial Officer RICHARD N. LATRENTA .... 44 Senior Vice President--Retail Banking FRANK R. GIANCOLA ...... 44 Senior Vice President--Operations PATRICIA D. ARNOLD .... 39 Senior Vice President--Commercial Lending Business Experience ANTHONY S. ABBATE, President and Chief Executive Officer of the Bank since 1981; Senior Vice President and Controller from October 1980; President and Chief Executive Officer of Home State Bank 1978-1980. Engaged in the banking industry since 1959. ANTHONY J. LABOZZETTA, Executive Vice President and Chief Financial Officer since September 1997; Treasurer from 1995. Engaged in the banking industry since 1989. Formerly a senior manager with an international accounting firm. RICHARD N. LATRENTA, Senior Vice President - Retail Banking Officer since September 1997; Senior Vice President-Lending of the Bank from 1984; Senior Loan Officer from 1982; Assistant Vice President from 1980; other positions with the Bank from 1976. Engaged in the banking industry since 1972. FRANK R. GIANCOLA, Senior Vice President - Operations Officer since September 1997; Senior Vice President-Retail Banking from 1993; Senior Vice President-Operations of the Bank from 1984; Senior Operations Officer from 1982; Vice President/Branch Administrator from 1981. Engaged in the banking industry since 1971. PATRICIA D. ARNOLD, Senior Vice President - Commercial Lending since August 1997; First Vice President from 1995; Department Head Vice President from 1986; Assistant Vice President from 1985; Commercial Loan Officer-Assistant Treasurer from 1983. Engaged in the banking industry since 1981. Officers are elected annually and serve at the discretion of the board of directors. Management is not aware of any family relationship between any director or executive officer. 9 Part II Forward Looking Information Statements included herein which are not historical facts are forward looking statements. Such forward looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward looking statements in this Report involve a number of risks and uncertainties, including but not limited to, changes in economic conditions and of government monetary policy, demand for the Bank's loan and deposit products and for services, competitive pressures from other financial institutions and other providers of financial services in the Bank's primary trade area, the ability to acquire loan and lease assets at reasonable prices, the financial ability of borrowers to make timely payments, the quality of Bank personnel and other factors identified in the Bank's filings with the Commission. Item 5. Market for the Registrant's Common Stock (3) The common stock is traded on the American Stock Exchange under the symbol "ISB." A cash dividend of $0.115, $0.1225 and $0.135 was paid on each common share outstanding in each quarter during 1995, 1996 and 1997, respectively. The following table sets forth, for the periods indicated, the reported high and low sales prices: High Low ---- --- 1995 (1)(2) First quarter $11.03 $ 9.285 Second quarter 12.78 10.48 Third quarter 14.60 12.06 Fourth quarter 13.73 12.86 1996 First quarter (1)(2) $14.13 $12.62 Second quarter (2) 13.75 12.83 Third quarter (2) 14.75 12.50 Fourth quarter (2) 16.67 14.25 1997 First quarter (2) $22.00 $15.92 Second quarter 26.375 17.875 Third quarter 25.00 22.00 Fourth quarter 32.375 22.125 The number of stockholders of record as of December 31, 1997, was 1,158. - ---------- (1) On February 22, 1996, the Company declared a 5% Stock Dividend to be distributed on April 19, 1996 to shareholders of record on March 20, 1996. The high and low sales price and the cash dividends have been restated to reflect the effects of the stock dividend. (2) On February 27, 1997, the Company declared a 3 for 2 Stock Split to be distributed on April 17, 1997 to shareholders of record on March 20, 1997. The high and low sales price and the cash dividends have been restated to reflect the effects of the stock split. (3) On February 26, 1998, the Board of Directors approved another 3 for 2 stock split distributable on April 17, 1998. The figures in the above table are not adjusted to reflect the 1998 split. 10 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, ----------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- Summary Earnings (in thousands) Interest income $ 40,175 $ 37,284 $ 36,995 $ 32,612 $ 29,267 Interest expense 15,533 14,599 15,150 11,006 10,237 ----------- ----------- ----------- ----------- ----------- Net interest income 24,642 22,685 21,845 21,606 19,030 Provision for loan losses 1,630 700 1,200 944 1,065 ----------- ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 23,012 21,985 20,645 20,662 17,965 Noninterest income 4,596 4,118 4,459 3,571 4,861 Noninterest expenses 15,984 16,228 15,531 15,535 14,897 ----------- ----------- ----------- ----------- ----------- Income before cumulative effect of change in accounting principle and income taxes 11,624 9,875 9,573 8,698 7,929 Income taxes 4,068 3,456 3,293 3,062 2,887 ----------- ----------- ----------- ----------- ----------- Income before cumulative effect of change in accounting principle 7,556 6,419 6,280 5,636 5,042 Cumulative effect of change in accounting principle -- -- -- -- (205) ----------- ----------- ----------- ----------- ----------- Net income $ 7,556 $ 6,419 $ 6,280 $ 5,636 $ 4,837 =========== =========== =========== =========== =========== Per Share Data Basic earnings per common share before cumulative effect of change in accounting principle $ 1.77 $ 1.51 $ 1.46 $ 1.30 $ 1.14 Cumulative effect of change in accounting principle -- -- -- -- (0.05) Basic earnings per common share 1.77 1.51 1.46 1.30 1.09 Diluted earnings per common share 1.75 1.50 1.45 1.30 1.09 Cash dividends declared 0.54 0.49 0.46 0.44 0.44 Book value-end of year 11.74 10.41 9.47 7.71 7.28 Tangible book value-end of year 11.29 10.11 9.02 7.78 7.28 Weighted average shares outstanding (in thousands) 4,257 4,257 4,248 4,248 4,248 Pro Forma Per Share Data (1) Basic earnings per common share before cumulative effect of change in accounting principle $ 1.18 $ 1.01 $ 0.97 $ 0.87 $ 0.76 Cumulative effect of change in accounting principle -- -- -- -- (0.03) Basic earnings per common share 1.18 1.01 0.97 0.87 0.73 Diluted earnings per common share 1.17 1.00 0.97 0.87 0.73 Cash dividends declared 0.36 0.33 0.31 0.29 0.29 Book value-end of year 7.83 6.94 6.31 5.14 4.85 Tangible book value-end of year 7.53 6.74 6.01 5.19 4.85 Weighted average shares outstanding (in thousands) 6,386 6,386 6,372 6,372 6,372 Balance Sheet Data-end of year (in thousands) Total assets $ 548,037 $ 504,689 $ 491,457 $ 479,312 $ 421,659 Securities held to maturity and securties available for sale 107,627 118,628 142,233 148,781 118,939 Loans 401,854 351,793 311,164 290,654 266,992 Allowance for loan losses 4,893 3,653 3,647 3,839 3,905 Total deposits 470,693 430,013 436,452 424,170 385,430 Long-term borrowings 9,879 9,983 -- 5,000 -- Total stockholders' equity 49,770 44,361 40,241 35,129 33,305 Selected Performance Ratios Return on average total assets 1.45% 1.31% 1.32% 1.25% 1.23% Return on average total stockholders' equity 16.05 15.18 16.66 16.58 15.63 Dividend payout ratio 30.27 32.36 32.28 35.47 41.39 Average total stockholders' equity to average total assets 9.02 8.61 7.90 7.52 7.90 Net yield on interest earning assets (taxable equivalent) 5.05 4.98 4.91 5.13 4.98 Noninterest expenses to average assets 3.06 3.31 3.26 3.44 3.65 Noninterest income to average assets 0.88 0.84 0.93 0.79 1.19 Asset Quality Ratios-end of year Nonaccrual loans to total loans 0.38% 0.59% 0.81% 2.13% 1.47% Nonperforming assets to total assets 0.38 0.68 1.06 1.58 1.25 Allowance for loan losses to nonaccrual loans 323.18 175.29 145.24 62.15 99.77 Allowance for loan losses to total loans 1.22 1.04 1.17 1.32 1.46 Net charge-offs to average loans for the year 0.11 0.21 0.48 0.37 0.48 Liquidity and Capital Ratios Average loans to average deposits 82.21% 74.78% 68.60% 66.69% 70.34% Total stockholders' equity to total assets 9.08 8.79 8.19 7.33 7.90 Tier I capital to risk-weighted assets 12.78 13.29 13.16 12.56 12.98 Total capital to risk-weighted assets 14.03 14.42 14.41 13.81 14.23 Tier I leverage ratio 8.86 8.66 7.98 7.57 7.96
- ---------- (1) On February 26, 1998, the Company declared a 3 for 2 stock split to be distributed on April 17, 1998, to shareholders of record as of March 20, 1998. The restated per share data reflects the effects of the stock split. Pro forma amounts are stated because the stock split had not been affected as of December 31, 1997. 11 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 F-1 through F-28 and the summary consolidated data included elsewhere in this report. Overview of Results 1997 was a productive year for the Company, highlighted by significant loan growth, solid earnings performance, and an improvement in asset quality. As a result of the sustained earnings and capital growth, the quarterly dividend paid on common stock was increased in 1997 to an annualized rate of $0.54 as compared to $0.49 in 1996. Net income for the year ended December 31, 1997 was $7.6 million as compared with $6.4 million in 1996, an increase of 17.7%. For the same period basic earnings per common share rose 17.2% to $1.77 from $1.51 in 1996. As a result, the Company's relevant earnings performance measures remained strong. The Company's returns on average equity and average assets were 16.05% and 1.45%, respectively, in 1997 as compared to 15.18% and 1.31%, respectively, in 1996. Earnings for 1997 were favorably affected by an increase in net interest income of $2.0 million or 8.6% compared to the previous year. The enhancement resulted from strong loan growth and an improved net interest margin. Average total loans increased $42.7 million or 13.1%, of which $20.3 million of the growth was comprised of consumer and residential mortgage loans. Net interest income also benefited from the growth in interest bearing and non-interest bearing demand deposits which increased on average $28.9 million or 15.5%. The strong loan growth, combined with an increase in low cost deposit liabilities, improved the net interest margin to 5.05%, an increase of 7 basis points over 1996. Net income for 1997 was adversely affected by an increase of $930 thousand in the provision for loan losses as compared to 1996. The increase is mainly attributable to the growth of the loan portfolio, particularly commercial loans which typically carry higher levels of inherent credit risk. Net income for 1997 was favorably affected by a pretax gain of $1.1 million resulting from the sale of two commercial mortgage loans and a pretax gain of $775 thousand related to the collection of principal on a loan in excess of its carrying value. The effects of these gains on earnings, when compared to the prior year, were partly 12 offset by net pretax gains of $951 thousand realized in 1996 related to the sale of deposits of a branch location, the sale of available-for-sale ("AFS") securities and the collection of principal on a loan in excess of its carrying value. In 1997, the Company continued to invest in technology and other tools to deliver faster more efficient services to its customers. Notwithstanding such investments the Company managed to control noninterest expenses which decreased by 1.5% to $16.0 million and helped improve earnings. In 1996, the Company reported net income of $6.4 million or $1.51 basic earnings per common share, as compared with $6.3 million or $1.46 basic earnings per common share in 1995. The Bank's return on average equity and average assets were 15.18% and 1.31%, respectively, in 1996 as compared to 16.66% and 1.32%, respectively, in 1995. Net income for 1996 was favorably affected by an increase in net interest income of $840 thousand or 3.8%, as compared to 1995 due largely to an improved net interest margin. The net interest margin increased 7 basis points in 1996, as compared to 1995, and was augmented by growth in average interest earning assets from 1995 levels. The growth occurred in loans which generally are the higher yielding assets for the Company. The net interest margin was also positively affected by growth in average noninterest bearing deposits of $6.2 million or 9.5%, from 1995 levels of $65.2 million. Furthermore, net interest income was positively affected by a favorable change in average rate paid on interest bearing liabilities resulting from a favorable shift in the mix of the Company's interest bearing liabilities. In addition, net income for 1996 was beneficially affected by a decrease of $500 thousand in the provision for loan losses as compared to 1995. The decrease was mainly attributable to improved trends with respect to nonperforming loans and a decline in charge-off experience in 1996 as compared to 1995. Net income for 1996 included the effects of the following pretax gains: A net gain of $455 thousand resulting from the sale of deposits of one of the Company's branch locations; a net gain of $235 thousand from the sale of AFS securities; and, a gain of $261 thousand related to the collection of principal on a loan in excess of its carrying value. The aforementioned gains did not serve to increase net income for 1996 over 1995 mainly due to a net gain of $828 thousand in 1995 related to the sale of a portion of the subsidiary bank's loan servicing portfolio. The benefits obtained from the improved net interest income and decrease in the provision for loan losses were partially offset by an increase of $697 thousand or 4.5% in operating expenses for 1996, as compared to 1995. 13 Table 1 - -------------------------------------------------------------------------------- Summary of Operating Results - -------------------------------------------------------------------------------- 1997 1996 1995 ---- ---- ---- Net income (in thousands) $7,556 $6,419 $6,280 Basic earnings per common share 1.77 1.51 1.46 Diluted earnings per common share 1.75 1.50 1.45 Return on average total assets 1.45% 1.31% 1.32% Return on average total equity 16.05 15.18 16.66 Dividend payout ratio* 30.27 32.36 32.28 Average total stockholders' equity to 9.02 8.61 7.90 average total assets - ---------- * 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 1997 and 1996, illustrates the impact of average volume growth (estimated according to prior year rates) and rate changes (estimated on the basis of prior year volumes). Changes not due solely to changes in either volume or rates have been allocated based on the relationship of changes in volume and changes in rates. Figures are adjusted to a taxable equivalent basis to recognize the income from tax-exempt assets as if the interest was taxable, thereby allowing a uniform comparison to be made between yields on assets. 14 Table 2 - -------------------------------------------------------------------------------- Analysis of Net Interest Income for the years ended December 31, - -------------------------------------------------------------------------------- (dollars in thousands)
1997 1996 1995 --------------------------- ----------------------------- ---------------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate --------------------------- ----------------------------- ---------------------------------- Assets Interest earning assets Loans (1) $368,208 $32,609 8.86% $325,530 $29,132 8.95% $291,981 $27,427 9.39% Taxable securities (4) 108,303 6,936 6.40 120,086 7,623 6.35 145,776 9,138 6.27 Tax-exempt securities (2)(4) 2,514 129 5.13 2,919 159 5.45 1,081 74 6.85 Federal funds sold 9,459 530 5.60 7,705 407 5.28 6,366 374 5.87 -------- ------- -------- ------- -------- ------- Total interest earning assets 488,484 40,204 8.23 456,240 37,321 8.18 445,204 37,013 8.31 ------- ------- ------- Noninterest earning assets Cash and due from banks 23,795 23,474 20,781 Allowance for loan losses (4,308) (3,734) (3,865) Other assets 13,917 15,017 14,898 -------- -------- -------- Total assets $521,888 $490,997 $477,018 ======== ======== ======== Liabilities and stockholders' equity Interest bearing liabilities Demand deposits $136,068 4,463 3.28 $114,848 3,575 3.11 $102,397 3,141 3.07 Savings deposits 105,780 3,225 3.05 110,205 3,184 2.89 111,959 3,515 3.14 Time deposits 126,985 6,522 5.14 138,923 7,282 5.24 146,133 7,857 5.38 Short-term borrowings 12,844 727 5.66 8,810 513 5.82 7,845 506 6.45 Long-term borrowings 9,935 596 6.00 710 45 6.34 1,932 131 6.78 -------- ------- -------- ------- -------- ------- Total interest bearing liabilities 391,612 15,533 3.97 373,496 14,599 3.91 370,266 15,150 4.09 ------- ------- ------- Noninterest bearing liabilities Demand deposits 79,044 71,324 65,164 Other liabilities 4,167 3,888 3,903 -------- -------- -------- Total liabilities (3) 474,823 448,708 439,333 Stockholders' equity 47,065 42,289 37,685 -------- -------- -------- Total liabilities and stockholders' equity $521,888 $490,997 $477,018 ======== ======== ======== Net interest income (tax-equivalent basis) 24,671 4.26 22,722 4.27 21,863 4.22 Tax-equivalent basis adjustment (29) (37) (18) ------- ------- ------- Net interest income $24,642 $22,685 $21,845 ======= ======= ======= Net interest income as a percent of interest earning assets (tax-equivalent basis) 5.05% 4.98% 4.91%
- ---------- (1) Nonaccrual loans and any related interest recorded have been included in computing the average rate earned on the loan portfolio. (2) Computed on a fully taxable equivalent basis using the corporate federal tax rate of 34%. (3) All deposits are in domestic bank offices. (4) The average balances are based on historical cost and do not reflect unrealized gains or losses. 15 Table 3 - -------------------------------------------------------------------------------- Effect of Volume and Rate Changes on Net Interest Income - -------------------------------------------------------------------------------- (in thousands)
Year ended December 31, Year ended December 31, 1997 compared with 1996 1996 compared with 1995 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 $3,819 $(342) $3,477 $3,150 $(1,445) $1,705 Taxable securities (755) 68 (687) (1,632) 117 (1,515) Tax-exempt securities (21) (9) (30) 126 (41) 85 Federal funds sold 97 26 123 79 (46) 33 ------ ----- ------ ------ ----- ----- Total interest income 3,140 (257) 2,883 1,723 (1,415) 308 ------ ----- ------ ------ ----- ----- Interest expense Demand deposits 688 200 888 387 47 434 Savings deposits (128) 169 41 (54) (277) (331) Time deposits (616) (144) (760) (376) (199) (575) Short-term borrowings 235 (21) 214 63 (56) 7 Long-term borrowings 585 (34) 551 (78) (8) (86) ------ ----- ------ ------ ----- ----- Total interest expense 764 170 934 (58) (493) (551) ------ ----- ------ ------ ----- ----- Change in net interest income $2,376 $(427) $1,949 $1,781 $(922) $ 859 ====== ===== ====== ====== ===== =====
- ---------- Nonperforming loans are included in interest earning assets. Interest income, on a taxable equivalent basis, totaled $40.2 million in 1997, an increase of $2.9 million or 7.7% from $37.3 million in 1996. The increase was predominantly due to an increase in the average volume of loans. The average balance of commercial and commercial mortgage loans totaled $170.6 million in 1997, compared to $148.1 million in 1996, an increase of $22.5 million or 15.2%. The average balances of consumer loans (comprised mostly of home equity loans) totaled $156.0 million in 1997, compared to $135.7 million in 1996, an increase of $20.3 million or 15.0%. The increase in the average loan volume was partly offset by a decrease in the average volume of securities; the proceeds of which were used to fund a portion of the loan growth. The average yield on all interest earning assets was 8.23% in 1997 as compared to 8.18% in 1996, an increase of 5 basis points. Interest expense, on a taxable equivalent basis, totaled $15.5 million in 1997, an increase of $934 thousand or 6.4% from $14.6 million in 1996. The increase was mostly due to increases in the average volume of interest bearing demand deposits and long-term borrowings . The average balance of interest bearing demand deposits was $136.1 million in 1997, compared to $114.9 million in 1996, an increase of $21.2 million or 18.5%. The average balance of long-term borrowings was $9.9 million in 1997, compared to $710 thousand in 1996, an increase of $9.2 16 million. The growth in demand deposits is attributable to the Company's continued efforts in marketing and sales. Commercial loans resulting from these efforts generally carry compensating deposit balances. The average yield on all interest bearing liabilities was 3.97% in 1997 as compared to 3.91% in 1996, an increase of 6 basis points. In 1996, interest income, on a taxable equivalent basis, was $37.3 million, an increase of $308 thousand or 0.8% from $37.0 million in 1995. The increase was predominantly due to an increase in the average volume of loans. The average balance of commercial and commercial mortgage loans totaled $148.1 million in 1996, compared to $129.3 million in 1995, an increase of $18.8 million or 14.5%. The average balances of consumer loans (comprised mostly of home equity loans) totaled $135.7 million in 1996, compared to $119.5 million in 1995, an increase of $16.2 million or 13.6%. The increase in the average loan volume was partly offset by a decrease in the average rate earned on loans and a decrease in the average volume of securities; the proceeds of which were used to fund a portion of the loan growth. The average yield on all interest earning assets was 8.18% in 1996 as compared to 8.31% in 1995, a decrease of 13 basis points. In 1996, interest expense, on a taxable equivalent basis, totaled $14.6 million, a decrease of $551 thousand or 3.6% from $15.2 million in 1995. The decline was mostly due to decreases in the average rate paid on deposits which resulted from a favorable shift in the composition of deposit liabilities for 1996. The shift occurred mostly from time deposits which carry higher yields to lower costing demand deposits. The average balance of interest bearing demand deposits was $114.9 million in 1996, compared to $102.4 million in 1995, an increase of $12.5 million or 12.2%. The average balance of time deposits was $138.9 million in 1996, compared to $146.1 million in 1995, a decrease of $7.2 million or 4.9%. The growth in demand deposits is attributable largely to the Company's marketing effort along with a more focused sales approach in the lending area. The loans resulting from this effort generally carry compensating balances in the form of demand deposit accounts. The reduction in time deposits was part of a planned effort not to renew certain high cost single transaction time deposits. The average yield on all interest bearing liabilities was 3.91% in 1996 as compared to 4.09% in 1995, a decrease of 18 basis points. Loan Losses The provision for loan losses represents management's determination of the amount necessary to bring the allowance for loan 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; loan concentrations and economic conditions. 17 Loan loss provisions for 1997 amounted to $1.6 million, an increase of $930 thousand from the previous year. The Bank's lending focus and growth have been largely in its commercial and commercial mortgage loan portfolio. Such growth and concentration can change the characteristics and potentially increase the inherent credit risk in the Bank's loan portfolio. As a result, during 1997, the Bank has increased its allowance for loan losses to capture such risk which resulted in an increase in the provision for loan losses. In 1996, the loan loss provision amounted to $700 thousand, a decrease of $500 thousand from 1995. The decrease in the provision for loan losses reflected, in part, the positive trends in nonperforming loans. In addition, it reflected the decrease in charge-off experience during 1996. Net loans charged-off against the allowance for loan losses in 1996 amounted to $694 thousand, down $698 thousand from $1.4 million in 1995. See sections on Loan Portfolio and Loan Quality beginning on page 24 of this report for additional discussions pertaining to the allowance for loan losses. 18 Table 4 - -------------------------------------------------------------------------------- Loan Loss Experience for the years ended December 31, - -------------------------------------------------------------------------------- (dollars in thousands)
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Average loans outstanding $368,208 $325,530 $291,981 $272,399 $262,222 ======== ======== ======== ======== ======== Allowance at beginning of year $ 3,653 $ 3,647 $ 3,839 $ 3,905 $ 4,100 -------- -------- -------- -------- -------- Loans charged off Commercial 293 8 399 281 138 Installment 141 67 108 149 613 Real estate 139 770 914 647 560 Lease financing -- 57 89 47 -- -------- -------- -------- -------- -------- Total 573 902 1,510 1,124 1,311 -------- -------- -------- -------- -------- Recoveries of loans previously charged off Commercial 84 75 25 -- -- Installment 29 45 54 99 42 Real estate 70 88 32 15 9 Lease financing -- -- 7 -- -- -------- -------- -------- -------- -------- Total 183 208 118 114 51 -------- -------- -------- -------- -------- Net loans charged off 390 694 1,392 1,010 1,260 -------- -------- -------- -------- -------- Additions to allowance charged to expense 1,630 700 1,200 944 1,065 -------- -------- -------- -------- -------- Allowance at end of year $ 4,893 $ 3,653 $ 3,647 $ 3,839 $ 3,905 ======== ======== ======== ======== ======== Allowance to total loans 1.22% 1.04% 1.17% 1.32% 1.46% Allowance to nonaccrual loans 323.18 175.29 145.24 62.15 99.77 Allowance to nonaccrual loans and loans past due 90 days or more 295.65 173.21 145.24 62.15 95.92 Ratio of net charge-offs to average loans 0.11 0.21 0.48 0.37 0.48
The allowance for losses represented 234.5% of nonperforming assets at the end of 1997, up from 106.8% at the end of 1996. The ratio increased as a result of a $1.3 million decrease in nonperforming assets in 1997 as compared to the end of the year in 1996. The decrease resulted largely from the sale of approximately $610 thousand of foreclosed real estate which resulted in a net gain of approximately $6 thousand. 19 Table 5 - -------------------------------------------------------------------------------- Allocation of Allowance for Loan Losses at December 31, - -------------------------------------------------------------------------------- (in thousands) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Commercial and financial $3,333 $2,199 $1,993 $1,985 $2,822 Installment 126 137 215 278 324 Real estate 605 591 813 611 592 Unallocated 829 726 626 965 167 ====== ====== ====== ====== ====== $4,893 $3,653 $3,647 $3,839 $3,905 ====== ====== ====== ====== ====== The above allocation is intended for analytical purposes and may not be indicative of the categories in which future loan losses occur. Noninterest income Noninterest income consists of all income other than interest and dividend income and is derived from: fees on bank transactions and credit cards; commissions on sales of annuities and mutual funds; rental of safe deposit space and net gains on sales of assets. Noninterest income totaled $4.6 million for 1997, an increase of $478 thousand or 11.6% from $4.1 million for 1996. For 1996, total noninterest income decreased $341 thousand or 7.6% from $4.5 million for the year ended December 31, 1995. The elements that significantly contributed to the changes in noninterest income are highlighted below. The increase in noninterest income for 1997 compared to 1996 was largely due to a $1.1 million pretax gain from the sale of two commercial mortgage loans and a $341 thousand increase in service fees collected on deposit accounts. Service charges to non-customers for use of the subsidiary bank's ATM machines contributed $177 thousand to the increase in service fee income. Further contributing to the improved noninterest income in 1997 compared to 1996 was an increase of $255 thousand relating to the collection of principal in excess of reserves on loans purchased at a discount. These benefits, however, were partially offset by net pretax gains, recognized in 1996, of $455 thousand from the sale of deposits of a branch location and $235 from the sale of available for sale securities which were sold as part of a securities portfolio restructuring plan. Noninterest income for 1996 also included $511 thousand of discount accretion in connection with a past acquisition that did not reoccur in 1997. In addition to the 1996 benefits, mentioned previously, noninterest income for 1996, also benefited from a $261 thousand gain related to the collection of principal on loans in excess of their carrying value. The benefits described above did not result in an increase to noninterest income in 1996 over 1995 largely because of a net pretax 20 gain in 1995 of $828 thousand pertaining to the sale of a portion of the subsidiary bank's loan servicing portfolio. Consequently, noninterest income for 1996 decreased, in large part, because the discount connected with an acquisition of a failed financial institution had been fully accreted. Discount accretion contributed $249 thousand less to noninterest income in 1996 as compared to 1995. Table 6 - -------------------------------------------------------------------------------- Noninterest Income for the years ended December 31, - -------------------------------------------------------------------------------- (in thousands) 1997 1996 1995 ---- ---- ---- Service fees on deposit accounts $1,920 $1,579 $1,474 Service fees on loan accounts 65 69 280 Service fees on credit cards 125 86 48 Net gain on sale of loans 1,067 -- 22 Net gain on sale of securities -- 242 15 Commission on annuity and mutual fund sales 39 66 138 Accretion of discount in connection with acquisition -- 511 760 Collection of acquired loans in excess of carrying value 855 600 406 Rental on safe deposit boxes 151 148 142 Net gain on sale of deposits of a branch location -- 455 -- Net gain on sale of loan servicing rights -- -- 828 All other 374 362 346 ------ ------ ------ $4,596 $4,118 $4,459 ====== ====== ====== Noninterest Expenses Noninterest expenses totaled $16.0 million for 1997. This represented a decrease of $244 thousand or 1.5% from total noninterest expenses of $16.2 million for 1996. For 1996, total noninterest expenses increased $697 thousand or 4.5% from $15.5 million for the year ended December 31, 1995. The elements that significantly contributed to the changes in noninterest expenses are highlighted below. The decrease in noninterest expenses for 1997 was attributable, in part, to a $252 thousand decline in foreclosed real estate expense resulting from the workout and sale of the Company's foreclosed real estate during the first half of the year. Also contributing to the improvement in noninterest expenses was a $109 decrease in Federal Deposit Insurance Corporation ("FDIC") assessment due to a one time FDIC special assessment charged in 1996. Furthermore, net occupancy and furniture and equipment costs decreased $219 thousand. This decrease was mainly the result of closing two branch offices during 1996 and the purchase of a previously leased branch location during 21 1997 coupled with a decline in maintenance costs incurred at all the Company's locations. An increase of $545 thousand in salaries and benefits due primarily to annual salary increases and promotions partially offset the benefits described above. Affecting the change in noninterest expenses for 1996 was an increase of $389 thousand or 5.4% in salaries and related expenses. For the most part, the increase resulted from promotions and normal annual salary adjustments. An increase of $210 thousand or 4.9% in other noninterest expenses also contributed to the change. The increase reflects a $250 thousand reduction of other noninterest expenses in 1995 for the reversal of a reserve related to a settled lawsuit. Furthermore, noninterest expenses were adversely affected by an increase of $198 thousand or 366.7% in foreclosed real estate expenses. In 1996, foreclosed real estate expense included net losses of $87 thousand pertaining to the disposition of foreclosed real estate as compared to net gains of $127 thousand for 1995. In 1996, noninterest expenses were favorably affected by a $343 thousand or 68.2% decrease in insurance premiums paid by the Company to the FDIC for deposit insurance. The decrease reflects the reduction in premium as the Bank Insurance Fund attained target reserve levels. 22 Table 7 - -------------------------------------------------------------------------------- Noninterest Expenses for the years ended December 31, - -------------------------------------------------------------------------------- (in thousands) 1997 1996 1995 ---- ---- ---- Salaries and benefits $ 8,188 $ 7,643 $ 7,254 Net occupancy and furniture and equipment 2,701 2,920 2,777 Other expenses Advertising and promotion 727 773 673 Stationery, printing and supplies 279 359 281 Federal Deposit Insurance Corporation assessment 51 160 503 Professional fees 1,183 1,117 1,321 Communications 279 246 217 Postage and shipping 291 301 282 Credit card processing fees 63 45 36 Credit services 95 145 156 Foreclosed real estate expense -- 252 54 Amortization of premiums in connection with acquisitions 444 444 444 Provision for litigation contingency -- (33) (250) Directors' fees, travel and retirement 564 553 536 Insurance premiums 194 204 256 Unrealized (gain)/loss on loans held for sale (18) 13 (60) All other 943 1,086 1,051 -------- -------- -------- $ 15,984 $ 16,228 $ 15,531 ======== ======== ======== Income Taxes In 1997, income taxes amounted to $4.1 million as compared to $3.5 million and $3.3 million for 1996 and 1995, respectively. The effective tax rate in 1997 was 35.0% as compared to 35.0% and 34.4% for 1996 and 1995, respectively. Detailed information on income taxes is shown in Notes 1 and 16 to the Consolidated Financial Statements. New Pronouncements In December 1996, the FASB issued Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125," ("SFAS No. 127"). SFAS No. 127 amends Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," ("SFAS No. 125"), by deferring for one year the effective date of paragraph 15 of SFAS No. 125 addressing secured borrowings and collateral, and paragraphs 9 through 12 and 237(b) addressing repurchase agreements, dollar rolls, security lending and similar transactions. The Company has determined that the adoption of SFAS No. 127 will not have a material impact on its consolidated financial statements. 23 In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS No. 130"). SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company will adopt SFAS No. 130 beginning January 1, 1998. 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 The Company, during 1997, continued to experience strong growth in its loan portfolio. At December 31, 1997, total loans amounted to $401.9 million, up $50.1 million or 14.2% over the previous year. Promotional campaigns in conjunction with competitive loan rates and focused sales efforts were instrumental to the loan growth. The loan growth was largely in the subsidiary bank's delineated community which confirms the Company's pledge of striving to be the largest community-based banking organization in Bergen County, dedicated to community service and helping its customers grow and prosper. In 1996, total loans increased $40.6 million from the 1995 level. The increase was largely the result of promotional campaigns and competitive loan rates as well as the ability of the Company to identify and meet the needs of its business customers. Commercial real estate mortgage loans amounted to $127.9 million at December 31, 1997, and represented 31.8% of total loans compared to $112.2 million or 31.9% of all loans at the end of 1996. These loans are secured primarily by first priority mortgage liens on owner-occupied commercial properties. While approximately 80% of all loans are collateralized by real estate located in northern New Jersey, the Company does not have any concentration 24 of loans in any single industry classified under the Standard Industrial Classification Code which exceeds 4% of its total loans. Table 8 - -------------------------------------------------------------------------------- Loan Portfolio at December 31, - --------------------------------------------------------------------------------
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Amounts of loans by type (in thousands) Commercial and financial $ 51,560 $ 51,908 $ 42,106 $ 36,512 $ 35,380 Real estate-construction 1,974 3,414 1,484 1,917 207 Real estate-mortgage 1-4 family residential First liens 49,477 40,426 42,088 43,229 55,982 Junior liens 15,617 18,254 20,919 25,266 38,771 Available for sale -- 1,195 1,106 1,086 15,751 Home equity 142,091 119,876 101,133 88,147 50,197 Commercial 127,856 112,233 96,910 87,728 60,771 Installment Credit cards and related plans 2,381 2,666 2,902 3,314 4,039 Other 797 1,821 2,461 2,757 3,918 Lease financing 10,101 -- 55 698 1,976 ---------- -------- -------- -------- -------- Total $ 401,854 $351,793 $311,164 $290,654 $266,992 ========== ======== ======== ======== ======== Percent of loans by type Commercial and financial 12.8% 14.8% 13.5% 12.6% 13.2% Real estate-construction 0.5 1.0 0.5 0.7 0.1 Real estate-mortgage 1-4 family residential First liens 12.3 11.5 13.5 14.9 21.0 Junior liens 3.9 5.2 6.7 8.7 14.5 Available for sale -- 0.3 0.4 0.4 5.9 Home equity 35.4 34.1 32.5 30.3 18.8 Commercial 31.8 31.9 31.2 30.2 22.8 Installment Credit cards and related plans 0.6 0.7 0.9 1.1 1.5 Other 0.2 0.5 0.8 0.9 1.5 Lease financing 2.5 -- -- 0.2 0.7 ---------- -------- -------- -------- -------- Total 100.0% 100.0% 100.0% 100.0% 100.0% ========== ======== ======== ======== ========
25 Table 8a - -------------------------------------------------------------------------------- The following table sets forth the maturity distribution of the Company's loan portfolio as of December 31, 1997 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 $10,160 $34,682 $ 6,718 $51,560 Construction 1,974 -- -- 1,974 ------- ------- ------- ------- Total $12,134 $34,682 $ 6,718 $53,534 ======= ======= ======= ======= Table 8b - -------------------------------------------------------------------------------- The following table sets forth, as of December 31, 1997, 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 $12,041 $ 927 Variable interest rate 22,641 5,791 ------- ------- Total $34,682 $ 6,718 ======= ======= 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. The Company obtains an independent appraisal of real property, within regulatory guidelines, when it is considered the primary collateral for a loan. The Company employs a full-time loan review officer who evaluates the credit risk for substantially all large commercial loans. This review process is intended to identify adverse developments in individual credits, regardless of whether such credits are also included on the watchlist discussed below and whether or not the loans are delinquent. The loan review officer reports directly to the President of the Company. 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. 26 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 17.) Other than the loans included in the table, there were no material potential problem loans, either individually or in the aggregate, at December 31, 1997. Table 9 - -------------------------------------------------------------------------------- Loan Delinquencies and Nonperforming Assets at December 31, - -------------------------------------------------------------------------------- (dollars in thousands)
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Loans delinquent and accruing interest Loans past due 30-89 days $ 533 $ 772 $ 853 $ 805 $ 600 Loans past due 90 days or more 141 25 -- -- 157 ------ ------ ------ ------ ------ Total loans delinquent and accruing interest $ 674 $ 797 $ 853 $ 805 $ 757 ====== ====== ====== ====== ====== Nonaccrual loans $1,514 $2,084 $2,511 $6,177 $3,914 Foreclosed real estate -- 610 1,213 880 1,342 Restructured loans 573 725 1,465 522 -- ------ ------ ------ ------ ------ Total nonperforming assets $2,087 $3,419 $5,189 $7,579 $5,256 ====== ====== ====== ====== ====== Total nonperforming assets and loans past due 90 days or more $2,228 $3,444 $5,189 $7,579 $5,413 ====== ====== ====== ====== ====== Nonaccrual loans to total loans 0.38% 0.59% 0.81% 2.13% 1.47% Nonperforming assets to total loans and foreclosed real estate 0.52 0.97 1.66 2.60 1.96 Nonperforming assets to total assets 0.38 0.68 1.06 1.58 1.25 Nonaccrual loans and loans past due 90 days or more to total loans 0.41 0.60 0.81 2.13 1.52 Nonperforming assets and loans past due 90 days or more to total loans and foreclosed real estate 0.55 0.98 1.66 2.60 2.02 Nonperforming assets and loans past due 90 days or more to total assets 0.41 0.68 1.06 1.58 1.28
27 Securities Held to Maturity 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. Table 10 presents a summary of the contractual maturities and weighted average yields (adjusted to a taxable equivalent basis) of securities held to maturity and securities available for sale. Historical cost was used to calculate the weighted average yields. Table 10 - -------------------------------------------------------------------------------- Securities at December 31, 1997 - -------------------------------------------------------------------------------- (dollars in thousands)
After 1 After 5 Weighted Within But Within But Within After Average 1 Year 5 Years 10 Years 10 Years Total Yield ------ ------- -------- -------- ----- ----- Securities held to maturity at amortized cost Obligations of U.S. Treasury $ 14,133 $ 8,001 -- -- $ 22,134 6.12% Mortgage-backed securities -- -- $ 4,723 $ 9,603 14,326 6.64 Obligations of U.S. agencies -- 3,976 2,735 -- 6,711 6.77 Obligations of states & political subdivisions 3,049 -- -- -- 3,049 5.58 Other debt securities -- 50 100 -- 150 6.58 -------- -------- -------- -------- -------- 17,182 12,027 7,558 9,603 46,370 -------- -------- -------- -------- -------- Securities available for sale at market value Obligations of U.S. Treasury 2,004 33,979 -- -- 35,983 6.36 Mortgage-backed securities -- 2,950 5,603 7,741 16,294 6.73 Obligations of U.S. agencies -- 4,020 -- -- 4,020 6.59 -------- -------- -------- -------- -------- 2,004 40,949 5,603 7,741 56,297 -------- -------- -------- -------- -------- Total $ 19,186 $ 52,976 $ 13,161 $ 17,344 $102,667 ======== ======== ======== ======== ======== Weighted average yield 5.95% 6.41% 6.77% 6.75% 6.43%
Deposits The Company traditionally relies on its deposit base to fund its credit needs. Core deposits, which include noninterest bearing demand deposits, interest bearing demand accounts, savings deposits, money market accounts and time deposits in amounts under $100,000, represented 95.5% of total deposits at December 31, 1997, and 96.0% at December 31, 1996. Total deposits amounted to $470.7 million at December 31, 1997, an increase of $40.7 million or 9.5% from 28 year end 1996. The most significant growth occurred in noninterest and interest bearing demand which increased $45.9 million or 23.7% to $239.7 million at December 31, 1997 as compared to the prior comparable period. Conversely, time deposits in amounts under $100,000 decreased $7.8 million or 6.9% to $104.7 million as compared to year end 1996. The positive change in the mix of deposit liabilities reflects the Company's continued emphasis of building core deposit relationships to supplant a portion of its higher costing deposit liabilities. The outflow of the higher costing time deposits was more than offset by the growth in low cost demand deposits. Table 11 - -------------------------------------------------------------------------------- Deposit Summary at December 31, - -------------------------------------------------------------------------------- (dollars in thousands)
1997 1996 1995 1994 1993 ------------------ ------------------ ------------------ ------------------ ----------------- Noninterest bearing demand $ 92,145 19.6% $ 76,340 17.8% $ 69,213 15.8% $ 66,435 15.7% $ 59,170 15.3% Interest bearing demand 147,573 31.4 117,461 27.3 110,813 25.4 101,873 24.0 92,115 23.9 Money market 40,049 8.5 39,815 9.3 38,716 8.9 37,816 8.9 43,483 11.3 Savings 64,917 13.8 66,778 15.5 71,170 16.3 75,906 17.9 70,062 18.2 Time deposits less than $100,000 104,652 22.2 112,466 26.1 134,866 30.9 134,097 31.6 110,457 28.7 Time deposits greater than $100,000 21,357 4.5 17,153 4.0 11,674 2.7 8,043 1.9 10,143 2.6 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- $470,693 100.0% $430,013 100.0% $436,452 100.0% $424,170 100.0% $385,430 100.0% ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
- ---------- * The following table shows the time remaining to maturity of time certificates of deposit of $100,000 or more as of December 31, 1997 (in thousands) Three months or less $ 8,447 Over three months through six months 7,106 Over six months through twelve months 3,512 Over twelve months 2,292 ------- $21,357 ======= 29 Interest Rate Risk Management Interest rate risk is generally described as the exposure to potentially adverse changes in current and future net interest income resulting from: fluctuations in interest rates; product spreads; and imbalances in the repricing opportunities of interest-rate sensitive assets and liabilities. Therefore, managing the Company's interest rate sensitivity is a primary objective of the Company's senior management. The Company's Asset/Liability Committee ("ALCO") is responsible for managing the exposure to changes in market interest rates. ALCO attempts to maintain stable net interest margins by periodically evaluating the relationship between interest-rate sensitive assets and interest-rate sensitive liabilities. The evaluation attempts to determine the impact on net interest margin from current and prospective changes in market interest rates. The Company manages interest rate risk exposure with the utilization of financial modeling and simulation techniques. These methods assist the Company in determining the effects of market rate changes on net interest income and future economic value. The objective of the Company is to maximize net interest income within acceptable levels of risk established by policy. The techniques utilized for managing exposure to market rate changes involve a variety of interest rate, pricing and volume assumptions. These assumptions include projections on growth, prepayment and withdrawal levels as well as other embedded options inherently found in financial instruments. The Company periodically reviews and validates these assumptions. At December 31, 1997, the Company simulated the effects on Net Interest Income given an instantaneous and parallel shift in the yield curve of 200 basis points in either direction. Based on the simulation, it was estimated that net interest income, over a twelve month horizon, would not decrease by more than 8.0%. At December 31, 1997, the Company was within policy limits established for changes in net interest income and future economic value. The preceding simulation does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cashflows, and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change. Also, as market conditions vary from those assumed in the simulation, actual results will also differ 30 due to: prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal/external variable. Furthermore, the simulation does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates. In addition to the above mentioned techniques, the Company utilizes sensitivity gap as an interest rate risk measurement. Sensitivity gap is determined by analyzing the difference between the amount of interest earning assets maturing or repricing within a specific time period and the amount of interest bearing liabilities maturing or repricing within that same period of time. Sensitivity gap provides an indication of the extent to which the Company's net interest income may be affected by future changes in market interest rates. The cumulative gap position 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 (4.35%) at December 31, 1997. 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. 31 Table 12 - -------------------------------------------------------------------------------- Interest Rate Sensitivity Analysis at December 31, 1997 - -------------------------------------------------------------------------------- (dollars in thousands)
Non- 3 6 6 Mos. to 1 to 3 3 to 5 Over interest Subject to rate change within Months Months 1 Year Years Years 5 Years Sensitive Total ------ ------ ------ ----- ----- ------- --------- ----- Assets Net loans $ 136,935 $ 25,756 $ 46,213 $ 100,133 $ 63,861 $ 27,442 $ (3,379) $ 396,961 Investment securities 7,692 6,994 17,045 45,678 20,307 8,087 1,824 107,627 Cash and amounts due from banks 8,400 -- -- -- -- -- 17,797 26,197 Other noninterest earning assets -- -- -- -- -- -- 17,252 17,252 --------- --------- --------- --------- --------- --------- --------- --------- Total assets 153,027 32,750 63,258 145,811 84,168 35,529 33,494 548,037 --------- --------- --------- --------- --------- --------- --------- --------- Liabilities and stockholders' equity Demand deposits 25,861 25,861 51,723 69,020 33,344 33,909 -- 239,718 Savings deposits 5,680 5,680 11,360 29,180 9,001 4,016 -- 64,917 Fixed maturity certificates of deposits 34,958 33,925 34,559 16,815 5,752 -- -- 126,009 Money market accounts 6,007 6,007 12,015 8,614 3,982 3,424 -- 40,049 Securities sold under agreements to repurchase 2,325 -- 10,702 -- -- -- -- 13,027 Long-term borrowings 54 54 6,107 3,664 -- -- -- 9,879 Other liabilities -- -- -- -- -- -- 4,668 4,668 Stockholders' equity -- -- -- -- -- -- 49,770 49,770 --------- --------- --------- --------- --------- --------- --------- _________ Total liabilities and stockholders' equity 74,885 71,527 126,466 127,293 52,079 41,349 54,438 $ 548,037 --------- --------- --------- --------- --------- --------- --------- _________ GAP $ 78,142 $ (38,777) $ (63,208) $ 18,518 $ 32,089 $ (5,820) $ (20,944) ========= ========= ========= ========= ========= ========= ========= GAP to total assets 14.26% (7.08)% (11.53)% 3.38% 5.86% (1.06)% Cumulative GAP $ 78,142 $ 39,365 $ (23,843) $ (5,325) $ 26,764 $ 20,944 ========= ========= ========= ========= ========= ========= Cumulative GAP to total assets 14.26% 7.18% (4.35)% (0.97)% 4.88% 3.82%
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, financing for the Company's loans and investments is derived primarily from deposits, along with interest and principal payments on loans and investments. At December 31, 1997, total deposits amounted to $470.7 million, an increase of $40.7 million or 9.5% over the prior comparable year. During 1997, the Company continued to use advances from the Federal Home Loan Bank of New York ("FHLB") and securities sold under agreements to repurchase ("REPOS") to supplement the more traditional funding sources. At December 31, 1997, advances from the FHLB and REPOS amounted to $9.9 million and $13.0 million, respectively, as compared to $15.2 million and $11.1 million, respectively, at December 31, 1996. In 1997, loan production continued to be the Company's principal investing activity. Net loans at December 31, 1997 amounted to $397.0 million, compared to $348.1 million at the end of 1996, an increase of $48.9 million or 14.0%. 32 The Company's most liquid assets are cash and due from banks and federal funds sold. At December 31, 1997, the total of such assets amounted to $26.2 million or 4.8% of total assets, compared to $24.3 million or 4.8% of total assets at year-end 1996. Another significant liquidity source is the Company's available-for-sale ("AFS") securities. At December 31, 1997, AFS securities amounted to $61.3 million or 56.9% of total securities, compared to $55.3 million or 46.6% of total securities at year-end 1996. In addition to the aforementioned sources of liquidity, the Company has available various other sources of liquidity, including federal funds purchased from other banks and the Federal Reserve discount window. The Bank also has a $51.0 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 $49.8 million and represents 9.1% of total assets at December 31, 1997, compared to $44.4 million and 8.8% of total assets at December 31, 1996. The $5.4 million increase was primarily attributable to net income of $7.6 million less cash dividends of $2.3 million. Guidelines issued by the Federal Reserve Board and the FDIC establish capital adequacy guidelines for bank holding companies and state-chartered banks. The guidelines establish a risk-based capital framework consisting of (1) a definition of capital 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 33 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. The Year 2000 Issue Many existing computer programs use only two digits to identify a year in the date field. As a result, the computer applications affected by such programs could fail or produce incorrect results by or at the Year 2000. The Company acknowledges the need to ensure its operations will not be adversely affected by Year 2000 computer software failures. Software failures due to processing errors, potentially arising from calculations using the Year 2000 date, are a known risk. The Company has implemented a five step plan that involves awareness, assessment, validation, renovation and implementation. It is currently assessing the extent to which its systems may be affected and is communicating with all necessary vendors concerning timely and completed remedies for those systems that require modification. The Company is also communicating with all third parties, on which it relies, to assess their progress in evaluating their systems and implementing any corrective measures. The Company has been taking and will continue to pursue all reasonably necessary steps to protect its operations and assets. It is currently anticipated that by December 31, 1998, the Company will be Year 2000 compliant. At this time, the Company has not yet determined the cost, which will be expensed as incurred, of evaluating its computer software or databases, or of making any modifications required to correct any "Year 2000" problems. 34 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 section entitled "Directors" in the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders is incorporated herein by reference in response to this item. b. Executive Officers Information required by this item is contained in Part I of this Form 10-K in the section entitled "Executive Officers." c. Compliance with Section 16(a) Information contained in the section entitled "Section 16 Compliance" in the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders is incorporated herein by reference in response to this item. Item 11. Executive Compensation Information contained in the section entitled "Executive Compensation" in the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders is incorporated herein by reference in response to this item. Item 12. Security Ownership of Certain Beneficial Owners and Management The information contained in the section entitled "Amount and Nature of Beneficial Ownership" in the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders is incorporated herein by reference in response to this item. Item 13. Certain Relationships and Related Transactions The information contained in the section entitled "Transactions with management" in the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders is incorporated herein by reference in response to this item. 35 PART IV Item 14. Exhibits, Financial Statements and 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, 1997. c. Exhibits 3.(a) Certificate of incorporation and amendments thereto are incorporated herein by reference to Registration Statement No. 33-49840, Exhibit 3 (a) (b) By-laws are 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 24, 1997. (b) Lease for Washington Township, N.J., Branch Office, dated April 13, 1972 and amended December 21, 1972 is incorporated herein by reference to Exhibit 10(h) filed with the Registration Statement No. 33-49840. (c) Executive Compensation Plans and Arrangements (1) The Stock Option and Incentive Plan of 1997 is incorporated herein by reference to Exhibit 4(a) filed with Registration Statement No. 33-82530. (2) Directors' Retirement Program is incorporated herein by reference to the Company's Annual Report on Form 10-K Commission for the year 1994. (3) Executives' Supplemental Pension Plan is incorporated herein by reference to Exhibit 10(i)(4) filed with the Company's Annual Report on Form 10-K for the year 1994. (d) Agreement and Plan of Merger dated January 27, 1998 by and among registrant, Interchange State Bank and The Jersey Bank for Savings. (e) Stock Option Agreement dated January 27, 1998 between the registrant and The Jersey Bank for Savings. 11. Statement re Computation of per share earnings 21. Subsidiaries of Registrant 23. Independent Auditors' Consent 27. Financial Data Schedule 36 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 /s/ Anthony Labozzetta ------------------------------------------ Anthony Labozzetta Executive Vice President and Chief Financial Officer March 26, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated: /s/Anthony S. Abbate /s/James E. Healey - ---------------------------------------- ------------------------------------- Anthony S. Abbate March 26, 1998 James E. Healey March 26, 1998 Director Director President and Chief Executive Officer /s/Anthony D. Andora /s/Anthony Labozzetta - ---------------------------------------- ------------------------------------- Anthony D. Andora March 26, 1998 Anthony Labozzetta March 26, 1998 Director Executive Vice President and Chairman of the Board Chief Financial Officer /s/Nicholas R. Marcalus - ---------------------------------------- ------------------------------------- Donald L. Correll March 26, 1998 Nicholas R. Marcalus March 26, 1998 Director Director /s/Anthony R. Coscia /s/Eleanore S. Nissley - ---------------------------------------- ------------------------------------- Anthony R. Coscia March 26, 1998 Eleanore S. Nissley March 26, 1998 Director Director /s/John J. Eccleston /s/Jeremiah F. O'Connor - ---------------------------------------- ------------------------------------- John J. Eccleston March 26, 1998 Jeremiah F. O'Connor March 26, 1998 Director Director /s/David R. Ficca /s/Robert P. Rittereiser - ---------------------------------------- ------------------------------------- David R. Ficca March 26, 1998 Robert P. Rittereiser March 26, 1998 Director Director /s/Benjamin Rosenzweig ------------------------------------- Benjamin Rosenzweig March 26, 1998 Director 37 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, 1997 and 1996 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Parsippany, New Jersey January 21, 1998 F-1 Interchange Financial Services Corporation - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS December 31, - -------------------------------------------------------------------------------- (dollars in thousands) 1997 1996 -------- -------- Assets Cash and due from banks $ 17,797 $ 24,322 Federal funds sold 8,400 -- -------- -------- Total cash and cash equivalents 26,197 24,322 -------- -------- Securities held to maturity at amortized cost (estimated market value of $46,786 and $63,619) 46,370 63,376 -------- -------- Securities available for sale at estimated market value (amortized cost of $59,433 and $54,871) 61,257 55,252 -------- -------- Loans 401,854 351,793 Less: Allowance for loan losses 4,893 3,653 -------- -------- Net loans 396,961 348,140 -------- -------- Premises and equipment, net 7,871 5,151 Foreclosed real estate -- 610 Accrued interest receivable and other assets 9,381 7,838 -------- -------- Total assets $548,037 $504,689 ======== ======== Liabilities Deposits Noninterest bearing $ 92,145 $ 76,340 Interest bearing 378,548 353,673 -------- -------- Total deposits 470,693 430,013 -------- -------- Securities sold under agreements to repurchase 13,027 11,050 Short-term borrowings -- 5,200 Accrued interest payable and other liabilities 4,668 4,082 Long-term borrowings 9,879 9,983 -------- -------- Total liabilities 498,267 460,328 -------- -------- Commitments and contingent liabilities Stockholders' equity Common stock, without par value; 10,000,000 shares authorized; 4,240,392 shares issued and outstanding in 1997 and 4,259,403 in 1996 4,811 4,733 Capital surplus 15,836 14,931 Retained earnings 29,698 24,429 Unrealized gain-securities available for sale, net of tax effect 1,131 268 -------- -------- 51,476 44,361 Less: Treasury stock 1,706 -- -------- -------- Total stockholders' equity 49,770 44,361 -------- -------- Total liabilities and stockholders' equity $548,037 $504,689 ======== ======== - -------------------------------------------------------------------------------- See notes to consolidated financial statements F-2 Interchange Financial Services Corporation - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, - -------------------------------------------------------------------------------- (in thousands except per share data) 1997 1996 1995 ------- ------- ------- Interest income Interest and fees on loans $32,609 $29,132 $27,427 Interest on federal funds sold 530 407 374 Interest and dividends on securities Taxable interest income 6,734 7,465 8,969 Interest income exempt from federal income taxes 100 122 56 Dividends 202 158 169 ------- ------- ------- Total interest income 40,175 37,284 36,995 ------- ------- ------- Interest expense Interest on deposits 14,210 14,041 14,513 Interest on securities sold under agreements to repurchase 685 267 12 Interest on short-term borrowings 42 246 494 Interest on long-term borrowings 596 45 131 ------- ------- ------- Total interest expense 15,533 14,599 15,150 ------- ------- ------- Net interest income 24,642 22,685 21,845 Provision for loan losses 1,630 700 1,200 ------- ------- ------- Net interest income after provision for loan losses 23,012 21,985 20,645 ------- ------- ------- Noninterest income Service fees on deposit accounts 1,920 1,579 1,474 Net gain on sale of securities -- 242 15 Net gain on sale of loans 1,067 -- 22 Net gain on sale of loan servicing rights -- -- 828 Net gain on sale of branch -- 455 -- Accretion of discount in connection with acquisition -- 511 760 Other 1,609 1,331 1,360 ------- ------- ------- Total noninterest income 4,596 4,118 4,459 ------- ------- ------- Noninterest expenses Salaries and benefits 8,188 7,643 7,254 Net occupancy 1,917 2,200 2,080 Furniture and equipment 784 720 697 Advertising and promotion 727 773 673 Federal Deposit Insurance Corporation assessment 51 160 503 Foreclosed real estate expense -- 252 54 Other 4,317 4,480 4,270 ------- ------- ------- Total noninterest expenses 15,984 16,228 15,531 ------- ------- ------- Income before income taxes 11,624 9,875 9,573 Income taxes 4,068 3,456 3,293 ------- ------- ------- Net income $ 7,556 $ 6,419 $ 6,280 ======= ======= ======= Basic earnings per common share $ 1.77 $ 1.51 $ 1.46 ======= ======= ======= Diluted earnings per common share $ 1.75 $ 1.50 $ 1.45 ======= ======= ======= - -------------------------------------------------------------------------------- See notes to consolidated financial statements. F-3 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, 1995 $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 $0.46 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 tax effect 2,459 2,459 ------- ------ ------- ------- ------- ------- ------- Balance at December 31, 1995 -- 4,495 12,110 22,990 646 -- 40,241 Net income 6,419 6,419 Dividends on common stock at $0.49 per share (2,077) (2,077) 5% common stock dividend 225 2,678 (2,903) -- Fractional shares of 5% common stock dividend (5) (5) Issued 7,498 shares of common stock in connection with Executive Compensation Plan 13 148 161 Decrease in market valuation-securities available for sale, net of tax effect (378) (378) ------- ------ ------- ------- ------- ------- ------- Balance at December 31, 1996 -- 4,733 14,931 24,429 268 -- 44,361 Net income 7,556 7,556 Dividends on common stock at $0.54 per share (2,287) (2,287) Issued 9,549 shares of common stock in connection with Executive Compensation Plan 9 159 168 Exercised 33,776 option shares 38 240 278 Purchased 8,133 shares in exchange for option shares (163) (163) Fractional shares on 3 for 2 stock split (4) (4) Issued 153,041 shares of common stock in merger with Washington Interchange Corporation 170 2,765 2,935 Acquired 124,855 shares of common stock held by Washington Interchange Corporation (2,394) (2,394) Retired 124,855 shares of common stock held by Washington Interchange Corporation at time of merger (139) (2,255) 2,394 -- Purchased 81,217 shares of common stock (1,543) (1,543) Increase in market valuation-securities available for sale, net of tax effect 863 863 ------- ------ ------- ------- ------- ------- ------- Balance at December 31, 1997 $ -- $4,811 $15,836 $29,698 $ 1,131 $(1,706) $49,770 ======= ====== ======= ======= ======= ======= =======
- -------------------------------------------------------------------------------- See notes to consolidated financial statements. F-4 Interchange Financial Services Corporation - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, - -------------------------------------------------------------------------------- (in thousands)
1997 1996 1995 --------- -------- -------- Cash flows from operating activities Net income $ 7,556 $ 6,419 $ 6,280 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization of fixed assets 1,065 984 859 Amortization of securities premiums 751 1,030 1,452 Accretion of securities discounts (115) (65) (53) Amortization of premium in connection with acquisitions 444 444 444 Accretion of discount in connection with acquisition -- (511) (760) Provision for loan losses 1,630 700 1,200 Net (gain) loss on sale of foreclosed real estate (6) 87 (127) Net gain on sale of securities -- (242) (15) Net gain on sale of loans (1,067) -- (22) Reduction in carrying value of foreclosed real estate -- 43 -- (Increase) decrease in carrying value of loans available for sale (17) 13 (80) Loss on disposal of fixed assets -- 20 26 (Increase) decrease in operating assets Net origination of loans available for sale 22 (102) (755) Proceeds from sale of loans available for sale -- -- 837 Accrued interest receivable 378 404 144 Deferred income taxes (65) 161 (134) Other (2,774) 1,148 694 Increase in operating liabilities Accrued interest payable 80 119 162 Other 505 103 387 -------- -------- -------- Net cash provided by operating activities 8,387 10,755 10,539 -------- -------- -------- Cash flows from investing activities (Payments for) proceeds from Net origination of loans (36,087) (40,117) (20,470) Purchase of loans (19,247) (2,150) (1,251) Sale of loans 5,945 1,365 -- Purchase of securities available for sale (6,108) (27,513) (5,905) Maturities of securities available for sale 1,309 885 2,396 Sale of securities available for sale -- 38,349 2,484 Sale of securities held to maturity -- 6,008 -- Purchase of securities held to maturity (21,086) (19,515) (3,999) Maturities of securities held to maturity 37,656 24,084 14,000 Sale of foreclosed real estate 616 644 678 Foreclosed real estate -- 8 (285) Purchase of fixed assets (3,362) (601) (1,862) Washington Interchange merger 37 -- -- Sale of fixed assets 13 -- 4 -------- -------- -------- Net cash used in investing activities (40,314) (18,553) (14,210) -------- -------- -------- Cash flows from financing activities Proceeds from (payments for) Deposits in excess of withdrawals 40,680 3,263 12,282 Securities sold under agreements to repurchase 17,127 16,828 1,704 Other borrowings -- 11,000 4,200 Retirement of securities sold under agreement to repurchase and other borrowings (20,454) (12,499) (11,702) Sale of deposit accounts -- (9,702) -- Dividends (2,287) (2,077) (2,027) Treasury stock (1,543) -- (1,600) Common stock issued 279 156 -- -------- -------- -------- Net cash provided by financing activities 33,802 6,969 2,857 -------- -------- -------- Increase (decrease) in cash and cash equivalents 1,875 (829) (814) Cash and cash equivalents at beginning of year 24,322 25,151 25,965 -------- -------- -------- Cash and cash equivalents at end of year $ 26,197 $ 24,322 $ 25,151 ======== ======== ======== Supplemental disclosure of cash flow information Cash paid for: Income taxes $ 4,890 $ 3,410 $ 3,346 Interest 15,453 14,480 14,988 Supplemental non-cash investing activities Loans transferred to foreclosed real estate -- 179 599 Loans transferred from available for sale to held to maturity 1,190 -- -- (Increase) decrease-market valuation of securities available for sale (1,442) 559 (3,812) Amortization of valuation allowance-securities transferred from available for sale to held to maturity 36 25 -- Securities transferred from available for sale to held to maturity -- -- 5,466 Securities transferred from held to maturity to available for sale -- -- 40,888 Washington Interchange merger 504 -- --
- -------------------------------------------------------------------------------- See notes to consolidated financial statements F-5 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 commercial and retail deposits and investing those funds into commercial business and commercial mortgage loans as well as residential mortgage and consumer loans. When demand for loans is low, the Bank invests in debt securities. Currently, the Bank conducts community banking operations in the northeast region of New Jersey (primarily Bergen County). 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 borrower's 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 a mismatch exists between the maturities or repricing of assets and 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. F-6 Securities held to maturity 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 accretion 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. 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, 1997, approximately 80% of all loans are collateralized by real estate located in northern New Jersey, the Company's market area. Loans are placed on nonaccrual 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. Amounts accrued are evaluated for collectibility. Interest is subsequently recognized on nonaccrual 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 and probable. Mortgage loans available for sale are carried at lower of aggregate cost or market value. The Bank acquired the assets and liabilities of a failed institution from the Federal Deposit Insurance Corporation (the "FDIC"), in July 1991, which was accounted for using the purchase method of accounting. Consideration received from the FDIC was assigned to the fair value of the loans acquired, the allowance for loan losses and acquisition costs. Excess consideration was accreted into income over a five-year period which ended in August 1996. 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 F-7 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. Impaired loans are 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. All nonaccrual commercial and commercial mortgage loans are considered impaired. 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, less estimated selling costs, 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 F-8 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 utilizes the asset and liability method for accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. 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 In 1997, the Company adopted Statement of Financial Accounting Standards No. 128 "Earnings per share." ("SFAS No. 128"). Basic earnings per common share is computed by dividing income available to common shareholders, less dividends on the preferred stock by the weighted average number of common shares outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. 2. Acquisitions On February 25, 1994, the Bank 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 1997, 1996 and 1995, included in noninterest expenses, amounted to $444,000 in each year. 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 1997 and 1996 was approximately $7,310,000 and $8,164,000, respectively. F-9 4. Securities Held to Maturity and Securities Available for Sale Securities held to maturity and securities available for sale are summarized as follows: (in thousands) --------------------------------------------- December 31, 1997 --------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------- -------- -------- -------- Securities held to maturity: Obligations of U.S. Treasury $22,134 $ 122 -- $22,256 Mortgage-backed securities 14,326 153 $ 25 14,454 Obligations of U.S. agencies 6,711 166 -- 6,877 Obligations of states & political subdivisions 3,049 -- -- 3,049 Other debt securities 150 -- -- 150 -------- ------- ------- -------- 46,370 441 25 46,786 -------- ------- ------- -------- Securities available for sale: Obligations of U.S. Treasury 35,452 605 74 35,983 Mortgage-backed securities 16,115 197 18 16,294 Obligations of U.S. agencies 3,954 66 -- 4,020 Equity securities 3,912 1,048 -- 4,960 -------- ------- ------- -------- 59,433 1,916 92 61,257 -------- ------- ------- -------- Total securities $105,803 $2,357 $117 $108,043 ======== ======= ======= ======== --------------------------------------------- December 31,1996 --------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------- -------- -------- -------- Securities held to maturity: Obligations of U.S. Treasury $ 43,517 $248 -- $ 43,765 Mortgage-backed securities 10,136 24 $ 50 10,110 Obligations of U.S. agencies 5,992 50 17 6,025 Obligations of states & political subdivisions 3,581 1 9 3,573 Other debt securities 150 -- 4 146 -------- ---- ---- -------- 63,376 323 80 63,619 -------- ---- ---- -------- Securities available for sale: Obligations of U.S. Treasury 31,640 453 246 31,847 Mortgage-backed securities 15,378 81 12 15,447 Obligations of U.S. agencies 3,941 54 -- 3,995 Equity securities 3,912 51 -- 3,963 -------- ---- ---- -------- 54,871 639 258 55,252 -------- ---- ---- -------- Total securities $118,247 $962 $338 $118,871 ======== ==== ==== ======== At December 31, 1997, the contractual maturities of securities held to maturity and securities available for sale are as follows: (in thousands) Securities Securities Held to Maturity Available for Sale ----------------------------------------------- Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value ------- ------- ------- ------- Within 1 year $17,182 $17,230 $ 2,000 $ 2,004 After 1 but within 5 years 12,027 12,175 40,325 40,949 After 5 but within 10 years 7,558 7,680 5,492 5,603 After 10 years 9,603 9,701 7,704 7,741 Equity securities -- -- 3,912 4,960 ------- ------- ------- ------- $46,370 $46,786 $59,433 $61,257 ======= ======= ======= ======= F-10 There were no sales of securities available for sale during the year ended, December 31, 1997. Proceeds from the sale of securities available for sale totaled $38,349,000 and $2,484,000 during the years ended December 31, 1996, and 1995 respectively. Gains of $452,000 and $16,000 were realized in 1996 and 1995, respectively, and losses of $217,000, and $1,000 were realized in 1996 and 1995, respectively. There were no sales of securities held to maturity during the year ended, December 31, 1997. Proceeds from the sale of securities held to maturity (scheduled to mature within 3 months) totaled $6,008,000 during the year ended December 31, 1996. Gains of $7,000 were realized in 1996. Securities with carrying amounts of $28.2 million and $26.1 million at December 31, 1997 and 1996, respectively, were pledged for public deposits, securities sold under repurchase agreements and other purposes required by law. F-11 5. Loans The composition of the loan portfolio is summarized as follows: (in thousands) -------------------------- December 31, -------------------------- 1997 1996 -------- -------- Commercial and financial $ 51,560 $ 51,908 Real Estate Residential 207,185 178,556 Commercial 127,856 112,233 Construction 1,974 3,414 Available for sale -- 1,195 Installment 3,178 4,487 Lease financing 10,101 -- -------- -------- 401,854 351,793 Allowance for loan losses 4,893 3,653 -------- -------- Net loans $396,961 $348,140 ======== ======== Nonperforming loans include loans which are accounted for on a nonaccrual basis and troubled debt restructurings. Nonperforming loans are as follows: (in thousands) ------------------------------- December 31, ------------------------------- 1997 1996 1995 ------- ------ ------ Nonaccrual loans Commercial and financial $ 126 $ 820 $ 621 Residential real estate 892 1,078 1,646 Commercial real estate 479 173 235 Installment 17 13 9 ------ ------ ------ $1,514 $2,084 $2,511 ====== ====== ====== Troubled debt restructurings Commercial and financial $ 573 $ 725 $1,000 Commercial real estate -- -- 465 ------ ------ ------ $ 573 $ 725 $1,465 ====== ====== ====== Interest income that would have been recorded during the year on nonaccrual loans outstanding at year-end in accordance with original terms $ 147 $ 242 $ 254 Interest income included in net income during the year on nonaccrual loans outstanding at year-end $ 81 $ 124 $ 114 Nonaccrual loans acquired in a 1991 transaction, with an estimated fair value of $452,000 at December 31, 1995, 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. There were no such loans at December 31, 1996 and 1997. F-12 Loans on which interest is accruing and included in income, but which were contractually past due 90 days or more as to principal or interest payments amounted to $141,000 and $25,000 at December 31, 1997 and 1996, respectively. There were no such loans at December 31, 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, ------------------------ 1997 1996 ------- ------- Balance at beginning of year $ 2,785 $ 2,938 Additions 4,298 268 Reductions (519) (421) ------- ------- Balance at end of year $ 6,564 $ 2,785 ======= ======= F-13 6. Allowance for Loan Losses The Company's recorded investment in impaired loans is as follows: (in thousands) ------------------------------------------------ December 31, ------------------------------------------------ 1997 1996 ---------------------- -------------------- Investment Related Investment Related in Allowance in Allowance Impaired for Loan Impaired for Loan Loans Losses Loans Losses -------- -------- -------- --------- Impaired loans With a related allowance for loan losses Commercial and Financial $ 699 $ 97 $1,559 $ 361 Commercial Real Estate 479 72 173 26 Without a related allowance for loan losses Commercial and Financial -- -- 50 -- ====== ====== ====== ====== $1,178 $ 169 $1,782 $ 387 ====== ====== ====== ====== - -------------------------------------------------------------------------------- All the above loans were measured on the fair value of collateral, except for one Commercial and Financial loan in 1996 with a $558,000 loan balance and a $279,000 related allowance which was measured using the present value of expected future cash flows. The following table sets forth certain information about impaired loans: (in thousands) --------------------------- Years Ended December 31, --------------------------- 1997 1996 --------- --------- Average recorded investment $1,221 $2,112 ======== ======== Interest income recognized during time period that loans were impaired, using cash-basis method of accounting $67 $126 ======= ======== Changes in the allowance for loan losses are summarized as follows: (in thousands) ------------------------------ Year Ended December 31, ------------------------------ 1997 1996 1995 --------- ------- ------ Balance at beginning of year $3,653 $3,647 $3,839 Additions (deductions) Provision charged to operations 1,630 700 1,200 Recoveries on loans previously charged off 183 208 118 Loans charged off (573) (902) (1,510) ------ ------ ------ Balance at end of year $4,893 $3,653 $3,647 ====== ====== ====== - -------------------------------------------------------------------------------- For years ended December 31, 1997, 1996 and 1995, the provisions charged to expense for federal income tax purposes amounted to approximately $390,000, $694,000, and $1,392,000, respectively. F-14 7. Premises and Equipment, net Premises and equipment are summarized as follows: (in thousands) ------------------- December 31, ------------------- 1997 1996 ------- ------- Land $ 1,007 $ 743 Buildings 2,260 1,062 Furniture, fixtures and equipment 5,228 3,817 Leasehold improvements 5,667 4,954 ------- ------- 14,162 10,576 Less: accumulated depreciation and amortization 6,291 5,425 ------- ------- $ 7,871 $ 5,151 ======= ======= 8. Deposits Deposits are summarized as follows: (in thousands) ----------------------- December 31, ----------------------- 1997 1996 -------- -------- Noninterest bearing demand deposits $ 92,145 $ 76,340 Interest bearing demand deposits 147,573 117,461 Money market deposits 40,049 39,815 Savings deposits 64,917 66,778 Time deposits 126,009 129,619 -------- -------- $470,693 $430,013 ======== ======== - -------------------------------------------------------------------------------- At December 31, 1997 and 1996, the carrying amounts of certificates of deposit that individually exceed $100,000 amounted to $21,357,000, and $17,153,000, respectively. Interest expense related to such deposits was approximately $953,000, $692,000, and $568,000 in 1997, 1996, and 1995, respectively. 9. Securities Sold Under Agreements to Repurchase and Short-term Borrowings Securities sold under repurchase agreements and short-term borrowings are summarized as follows: (in thousands) ------------------- December 31, ------------------- 1997 1996 ------- ------- Securities sold under agreements to repurchase $13,027 $11,050 Federal funds purchased -- 5,200 ======= ======= $13,027 $16,250 ======= ======= The Bank has a $51.0 million line of credit available through its membership in the Federal Home Loan Bank of New York. F-15 10. Long-term Borrowings Long-term borrowings are comprised of two Federal Home Loan Bank (the "FHLB") advances consisting of a $3.9 million advance with a 20-year amortization term, a fixed interest rate of 6.31% and matures in November 1999; and a $6.0 million advance, that has a fixed rate of 5.72% and matures in December 1999 and is collateralized by U.S. Treasury securities. The FHLB has an option to call the $6.0 million advance after December 1998. 11. Benefit Plans In 1993, the Company established a non-contributory defined benefit pension plan covering all eligible employees. The funding policy is to contribute an amount that is at least the minimum required by law. The plan assets consist of investments in fixed income funds and equity mutual funds. Retirement income is based on years of service under the plan and, subject to certain limits, on final average compensation. Effective January 1, 1994, the Company established a supplemental plan that provides for retirement income that would have been paid but for the limitation under the qualified plan. Effective August 1, 1994, the Company established a retirement plan for all directors of the Company or the Bank who are not employees of the Company or of any subsidiary or affiliate of the Company. As a part of this Plan, the Company contributes annually to a life insurance policy or annuity contract 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. F-16 Net pension cost of each plan consists of the following: (in thousands)
Pension Plan Supplemental Plan Directors' Plan ----------------------- --------------------- --------------------- 1997 1996 1995 1997 1996 1995 1997 1996 1995 ----- ----- ----- ----- ----- ----- ----- ----- ----- Service cost of benefits during period $ 195 $ 179 $ 134 $ 13 $ 12 $ 10 $ 47 $ 40 $ 39 Interest cost on projected benefit obligation 53 37 22 4 3 2 71 69 66 Actual return on plan assets (96) (51) (65) -- -- -- -- -- -- Net amortization or deferral 45 10 39 1 1 -- 147 147 147 ----- ----- ----- ----- ----- ----- ----- ----- ----- Net pension cost $ 197 $ 175 $ 130 $ 18 $ 16 $ 12 $ 265 $ 256 $ 252 ===== ===== ===== ===== ===== ===== ===== ===== =====
The following table sets forth the funded status, as of December 31, of the plans and amounts recognized in the Company's Consolidated Balance Sheets and the major assumptions used to determine these amounts: (dollars in thousands)
Pension Plan Supplemental Plan Directors' Plan ------------------ ------------------- ------------------- 1997 1996 1997 1996 1997 1996 ------- ------- ------- ------- ------- ------- Accumulated benefit obligation, Vested $ 416 $ 32 $ 32 -- $ 1,036 $ 931 Non-vested 172 376 12 $ 29 38 -- ------- ------- ------- ------- ------- ------- $ 588 $ 408 $ 44 $ 29 $ 1,074 $ 931 ======= ======= ======= ======= ======= ======= Projected benefit obligation $ 1,013 $ 710 $ 70 $ 50 $ 1,074 $ 931 Plan assets at fair value 738 644 -- -- -- -- ------- ------- ------- ------- ------- ------- Projected benefit obligation in excess of plan assets 275 66 70 50 1,074 931 Unrecognized prior service cost 6 6 (7) (8) (239) (387) Unrecognized net gain/(loss) 65 77 (1) 2 (54) (29) Adjustment for additional liability -- -- -- -- 293 416 ------- ------- ------- ------- ------- ------- Accrued pension cost included in the balance sheet $ 346 $ 149 $ 62 $ 44 $ 1,074 $ 931 ======= ======= ======= ======= ======= ======= Major assumptions: Discount rate 7.25% 7.50% 7.25% 7.50% 7.25% 7.50% Expected rate of increase in future compensation 5.00 5.00 5.00 5.00 N/A N/A Expected long-term rate of return on assets 8.00 8.00 N/A N/A N/A N/A
The Company has a Capital Investment Plan (the "Plan") which permits employees to make basic contributions up to 4% of base compensation. Additional contributions up to 10% of compensation may be made when coupled with basic contributions. Under the Plan, the Company provides a matching contribution equal to 50% of the basic contribution of each participant. In addition, the Company makes a fixed contribution on behalf of each participant equal to 1% of such participant's base compensation. The Company's contribution to the Plan amounted to $126,000, and $119,000 in 1997 and 1996, respectively. F-17 12. Stock Option Plan In 1997, the Company adopted a stock option plan, retitled the Stock Option and Incentive Plan of 1997 that covers certain key employees. Under this plan, as amended, a maximum of 425,250 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. If compensation cost for Plan awards had been measured based on the fair value of the stock options awarded at the grant dates, net income and diluted earnings per common share would have been reduced to the pro-forma amounts below for the years ended December 31, 1997 and 1996: (no options were granted in 1995) (in thousands except share data) ------------------------- December 31, --------- --------- 1997 1996 --------- --------- Net income: As reported $ 7,556 $ 6,419 Pro-forma 7,550 6,412 Diluted Earnings per common share As reported $ 1.75 $ 1.50 Pro-forma 1.75 1.50 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 1.89 percent in 1997 and 2.45 in 1996, expected volatility of 23.77 percent in 1997 and 22.26 percent in 1996 and weighted-average risk-free interest rate of 5.60 percent in 1997 and 6.26 percent in 1996. The effects of applying these assumptions in determining the pro forma net income may not be representative of the effects on pro forma net income for future years. A summary of the Plan's status as of December 31, and changes during the years then ended is presented below: (in thousands) 1997 1996 1995 --------------- ---------------- ---------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at January 1 113,404 $ 9.21 101,196 $ 8.81 101,196 $8.81 Granted 1,500 24.00 12,208 12.54 -- -- Excercised (33,613) 8.16 -- -- -- -- ------- ------- ------- Outstanding at December 31 81,291 9.83 113,404 9.21 101,196 8.81 ======= ======= ======= Options exercisable at December 31 71,655 9.33 101,199 8.81 85,314 8.45 ======= ======= ======= Weighted-average value of options granted during the year ended December 31 $12.36 5.10 -- (per option) F-18 The following table summarizes information about options outstanding under the Plan at December 31, 1997: (in thousands) Options Outstanding Options Exerciable - ------------------------------------------------------ ---------------------- Weighted- Average Weighted- Weighted- Ranges of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ------ ----------- ----------- -------- ----------- ----- 5-10 29,847 1.96 $ 7.06 29,847 $ 7.06 10-15 49,944 6.34 11.21 41,808 10.95 20-25 1,500 9.50 24.00 -- -- ------ ------ 81,291 71,655 ====== ====== - -------------------------------------------------------------------------------- From time to time the Company will acquire shares of its common stock and place them in treasury. The shares are intended to be issued for the exercise of stock options and the grants of restricted stock to executive management. At December 31, 1997, there were 89,350 shares in the treasury. There were no treasury shares at December 31, 1996. 13. Capital The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank's capital amounts and the Bank's classification, under the regulatory framework for prompt corrective action, are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets and Tier I capital to average assets. Management believes, as of December 31, 1997, that the Company and the Bank meet all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution's category. F-19 The Company's capital amounts and ratios are as follows: (dollars in thousands)
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------ ------------------- -------------------- Amount Ratio Amount Ratio Amount Ratio ------- ------ ------- ----- -------- ------ As of December 31, 1997: Total Capital (to Risk Weighted Assets): The Company $52,541 14.03% $29,961 8.00% N/A N/A The Bank 50,691 13.60 29,815 8.00 $37,269 10.00% Tier 1 Capital (to Risk Weighted Assets): The Company 47,860 12.78 14,981 4.00 N/A N/A The Bank 46,032 12.35 14,908 4.00 22,361 6.00 Tier 1 Capital (to Average Assets): The Company 47,860 8.86 16,214 3.00 N/A N/A The Bank 46,032 8.56 16,135 3.00 26,892 5.00 As of December 31, 1996: Total Capital (to Risk Weighted Assets): The Company $46,720 14.42% $25,918 8.00% N/A N/A The Bank 45,391 14.07 25,813 8.00 $32,266 10.00% Tier 1 Capital (to Risk Weighted Assets): The Company 43,067 13.29 12,959 4.00 N/A N/A The Bank 41,738 12.94 12,906 4.00 19,359 6.00 Tier 1 Capital (to Average Assets): The Company 43,067 8.66 14,925 3.00 N/A N/A The Bank 41,738 8.39 14,925 3.00 24,875 5.00
14. Earnings Per Share The reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the years ended December 31, are as follows: (dollars in thousands)
1997 1996 1995 --------------------------- --------------------------- -------------------------- Weighted Per Weighted Per Weighted Per Average Share Average Share Average Share Income Shares Amount Income Shares Amount Income Shares Amount -------- ---------- ------- -------- -------- ------ ------ -------- ------ Net Income $7,556 $6,419 $6,280 Less: preferred stock dividends -- -- 85 ------ ------ ------ Basic Earnings per Common Share Income available to common shareholders $7,556 4,257 $1.77 $6,419 4,257 $1.51 $6,195 4,248 $1.46 ===== ===== Effect of Dilutive Shares Options issued to management -- 53 -- 32 -- 27 ------ ----- ------ ----- ------ ----- Diluted Earnings per Common Share Income available to common shareholders $7,556 4,310 $1.75 $6,419 4,289 $1.50 $6,195 4,275 $1.45 ====== ===== ===== ====== ===== ===== ====== ===== =====
F-20 15. Other Noninterest Expenses Expenses included in other noninterest expenses which exceed one percent of the aggregate of total interest income and noninterest income for the years ended, December 31, are as follows: (in thousands) 1997 1996 1995 ------ ------ ------ Professional fees $1,183 $1,117 $1,321 Amortization of premiums in connection with acquisitions 444 444 444 Directors' fees, travel and retirement 564 553 536 16. Income Taxes Income tax expense for the years ended December 31, is summarized as follows: (in thousands) 1997 1996 1995 ------ ------ ------ Federal: current $4,093 $2,955 $3,168 deferred (588) 154 (122) State: current 734 339 259 deferred (171) 8 (12) ------ ------ ------ $4,068 $3,456 $3,293 ====== ====== ====== The effects of temporary differences that give rise to significant portions of the Company's deferred tax assets and liabilities as of December 31, are as follows: (in thousands) 1997 1996 ------- ------ Deferred tax assets Excess of book over tax allowance for loan losses $1,504 $ 958 Excess of book over tax depreciation 303 264 Excess of book over tax provision for benefit plan expense 631 408 Core deposit premium 157 105 Unrealized loss on other assets -- 10 Other 33 -- ------ ------ Total deferred tax assets 2,628 1,745 ------ ------ Deferred tax liabilities Unrealized gains - securities available for sale 693 151 Loan origination fees 142 34 Other 95 79 ------ ------ Total deferred tax liabilities 930 264 ------ ------ Net deferred tax assets $1,698 $1,481 ====== ====== Under the present tax law, banks with average total assets under $500 million qualify to compute a tax bad debt deduction based on an average loss experience ratio, while banks with over $500 million in average total assets must compute a tax bad debt deduction based on actual losses. In 1997, the Company's average total assets exceeded $500 million, and thus, it is now required to use the actual loss method when calculating the bad F-21 debt deduction for tax purposes. The Company is required to amortize its tax bad debt reserves which have accumulated under the average loss method in taxable income over a four year period. However, since the difference between the average loss experience method and the actual loss method has been recorded as a temporary difference, this change will have no effect on the Company's statement of income in future years. Net deferred tax assets are included in other assets on the consolidated balance sheet. It is more likely than not that deferred tax assets of $1.7 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, ------------------------------ 1997 1996 1995 ------ ------ ------ Expected provision at statutory rate 34% 34% 34% Difference resulting from: State income tax, net of federal benefit 3 2 1 Interest income exempt from federal taxes (2) (1) (1) --- --- --- 35% 35% 34% === === === 17. 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. F-22 18. Parent Company Information (in thousands) ------------------------- December 31, ------------------------- 1997 1996 ----------- ----------- Condensed balance sheets Assets Cash -- $ 6 Securities available for sale $ 2,372 1,375 Investment in subsidiaries Bank 47,313 43,001 Other 646 142 Dividends receivable 570 525 Other assets (418) (21) -------- -------- Total assets $ 50,483 $ 45,028 ======== ======== Liabilities Dividends payable $ 570 $ 525 Other liabilities 143 142 -------- -------- 713 667 -------- -------- Stockholders' equity Common stock 4,811 4,733 Surplus 15,836 14,931 Retained earnings 29,698 24,429 Unrealized gain - securities available for sale, net of taxes 1,131 268 -------- -------- 51,476 44,361 Less: Treasury stock 1,706 -- -------- -------- Total stockholders' equity 49,770 44,361 -------- -------- Total liabilities and stockholders' equity $ 50,483 $ 45,028 ======== ======== ================================================================================ ------------------------------------ Years Ended December 31, ------------------------------------ 1997 1996 1995 ----------- ---------- --------- Condensed statements of income Dividends from subsidiary bank $3,798 $3,400 $3,627 Dividends on equity securities 35 -- -- Management fees 40 45 44 ------ ------ ------ Total revenues 3,873 3,445 3,671 ------ ------ ------ Operating expenses 366 206 142 ------ ------ ------ Income before equity in undistributed earnings of subsidiaries 3,507 3,239 3,529 Equity in undistributed earnings of subsidiaries 4,049 3,180 2,751 ------ ------ ------ Net income $7,556 $6,419 $6,280 ====== ====== ====== - -------------------------------------------------------------------------------- ------------------------------------ Years Ended December 31, ------------------------------------ 1997 1996 1995 ----------- ---------- --------- Condensed statements of cash flows Cash flows from operating activities: Net income $ 7,556 $ 6,419 $ 6,280 Adjustments to reconcile net income to net cash provided by (used in) operating activities (Increase)/decrease in other assets (45) (39) 97 Increase in dividends payable 45 40 13 Increase/(decrease) in other liabilities 1 -- (12) Equity in undistributed income of subsidiaries (4,049) (3,180) (2,751) ------- ------- ------- Net cash provided by operating activities 3,508 3,240 3,627 ------- ------- ------- Cash flows from investing activities: Purchase of available for sale securities -- (1,323) -- Washington Interchange merger 37 -- -- ------- ------- ------- Net cash provided by / (used in) investing activities 37 (1,323) -- ------- ------- ------- Cash flows from financing activities: Cash dividends paid (2,287) (2,077) (2,027) Treasury stock (1,543) -- (1,600) Proceeds from issuance of common stock 279 156 -- ------- ------- ------- Net cash used in financing activities (3,551) (1,921) (3,627) ------- ------- ------- Net decrease in cash (6) (4) -- Cash at beginning of year 6 10 10 ------- ------- ------- Cash at end of year $ -- $ 6 $ 10 ======= ======= ======= F-23 19. 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, 1997, undistributed net assets of the Bank were $47,313,000 of which $42,995,000 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. 20. 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 of the Company. A summary of commitments to extend credit at December 31, are summarized as follows: (in thousands) 1997 1996 ---- ---- Credit card loans $ 5,468 $ 6,631 Home equity loans 48,119 43,204 Other loans 44,762 38,041 Standby letters of credit 1,385 444 ------- ------- $99,734 $88,320 ======= ======= 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) 1998 $ 804 1999 729 2000 577 2001 367 2002 194 thereafter 602 ------ Total minimum lease payments $3,273 ====== F-24 Rent expense for all leases amounted to approximately $913,000, $1,024,000 and $985,000 in 1997, 1996, and 1995, respectively. In 1997, the Company leased certain real estate from a company affiliated with directors of the Company. In 1996 and 1995, certain real estate was leased from two and three companies, respectively, that were affiliated with directors of the Company. Rental expense associated with such leases was $30,000, $143,000 and $157,000 for the years ended December 31, 1997, 1996 and 1995, respectively. A director of the Company also provided legal services through his affiliated firm. Fees paid for these services amounted to approximately $382,000, $375,000 and $323,000 in 1997, 1996, and 1995, respectively. The Company is also a party to routine litigation involving various aspects of its business, none of which, in the opinion of management and its legal counsel, is expected to have a material adverse impact on the consolidated financial condition, results of operations or liquidity of the Company. 21. Quarterly Financial Data (unaudited) (in thousands except per share data) - -------------------------------------------------------------------------------- First Second Third Fourth 1997 Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- Interest income $ 9,616 $ 9,875 $10,196 $10,488 Interest expense 3,638 3,847 3,990 4,058 Net interest income 5,978 6,028 6,206 6,430 Provision for loan losses 610 510 210 300 Net gain on sale of securities -- -- -- -- Income before income taxes 3,160 2,955 2,776 2,733 Net income 2,054 1,921 1,804 1,777 Basic earnings per common share 0.48 0.44 0.43 0.42 - -------------------------------------------------------------------------------- First Second Third Fourth 1996 Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- Interest income $9,207 $9,232 $9,262 $9,583 Interest expense 3,748 3,645 3,577 3,629 Net interest income 5,459 5,587 5,685 5,954 Provision for loan losses 250 150 150 150 Net gain on sale of securities 235 -- -- 7 Income before income taxes 2,480 2,274 1,982 3,139 Net income 1,612 1,478 1,288 2,041 Basic earnings per common share 0.38 0.35 0.30 0.48 F-25 22. Fair Value of Financial Instruments (in thousands) Fair value estimates of the Company's financial instruments are made at a particular point in time, based on relevant market information and information about the financial instrument. Fair values are most commonly derived from quoted market prices. In the event market prices are not available, fair value is determined using the present value of anticipated future cash flows. This method is sensitive to the various assumptions and estimates used and the resulting fair value estimates may be significantly affected by minor variations in those assumptions or estimates. In that regard, it is likely that amounts different from the fair value estimates would be realized by the Company in immediate settlement of the financial instruments. ----------------------------------------- December 31, ----------------------------------------- 1997 1996 ------------------- ------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- Financial assets: Cash and cash equivalents $ 26,197 $ 26,197 $ 24,322 $ 24,322 Securities held to maturity 46,370 46,786 63,376 63,319 Securities available for sale 61,257 61,257 55,252 55,252 Loans, net 396,961 397,398 348,140 350,702 -------- -------- -------- -------- $530,785 $531,638 $491,090 $493,595 ======== ======== ======== ======== Financial liabilities: Deposits $470,693 $470,390 $430,013 $430,229 Short-term borrowings 13,027 13,027 16,250 16,250 Long-term borrowings 9,879 9,872 9,983 9,981 -------- -------- -------- -------- $493,599 $493,289 $456,246 $456,460 ======== ======== ======== ======== 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. F-26 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. The fair values of certain loans that reprice frequently and have no significant change in credit risk is assumed to equal their carrying values. The fair value of other types of loans is estimated by discounting the future cash flows using interest rates that are currently being offered for loans with similar terms to borrowers with similar credit quality. The fair value of nonperforming loans is estimated using methods employed by management in evaluating the allowance for loan losses. In prior years, the Company in addition to the above, valued certain homogenous loan categories on a pool basis using quoted market prices for similar loans sold. Deposits The estimated fair values of deposits with no stated maturity, such as demand deposits, savings, NOW and money market accounts are, by definition, equal to the amount payable on demand at the reporting date. The fair values of fixed-rate certificates of deposit are based on discounting the remaining contractual cash flows using interest rates currently being offered on certificates of deposit with similar attributes and remaining maturities. Short-term borrowings The fair value of short-term borrowings is assumed to equal the carrying value in the financial statements, as these instruments are short-term. Long-term borrowings Fair value estimates of long-term borrowings are based on discounting the remaining contractual cash flows using rates which are comparable to rates currently being offered for borrowings with similar remaining maturities. F-27 Off-balance-sheet financial instruments The fair values of commitments to extend credit and unadvanced lines of credit approximate the fees currently charged to enter into similar transactions, considering the remaining terms of the commitments and the credit-worthiness of the potential borrowers. At December 31, 1997 and 1996, the estimated fair values of these off-balance-sheet financial instruments were immaterial. 23. Subsequent Events Merger Announcement On January 27, 1998, the Company and The Jersey Bank for Savings ("Jersey") signed a definitive agreement under which the Company will acquire Jersey in a merger of Jersey into the Bank. The merger is intended to be a share-for-share tax free transaction and will be accounted for as a pooling of interests. Each of the outstanding shares of Jersey will be exchanged for one share of the Company's common stock, subject to adjustment for stock splits and other events. Because the Company's Board has authorized a 3 for 2 stock split distributable on April 17, 1998, the share exchange ratios will adjust to 1.5 Company shares for each Jersey share. At December 31, 1997, Jersey had total assets of $77 million, deposits of $70 million and shareholders' equity of $6.4 million. Jersey's net income for the year ended December 31, 1997, was approximately $425 thousand, excluding extraordinary items. The acquisition is conditioned upon the satisfaction of necessary bank regulatory approvals, the approval of the shareholders of Jersey and other customary conditions. It is anticipated that the merger will be consummated late in the second, or early in the third quarter of 1998. Stock Split (Unaudited) On February 26, 1998, the Company declared a 3 for 2 stock split payable on April 17, 1998 to shareholders of record on March 20, 1998. At December 31, 1998, the pro forma basic earnings per common share would have been $1.18 and the diluted earnings per common share would have been $1.17. F-28 EX-10 2 AGREEMENT FOR LEGAL SERVICES AGREEMENT FOR LEGAL SERVICES THIS AGREEMENT for legal services made this 24th day of April, 1997, by and between: ANDORA, PALMISANO & GEANEY A Professional Corporation 303 Molnar Drive, P.O. Box 431 Elmwood Park, New Jersey 07407-0431 hereinafter referred to as "Attorneys", and INTERCHANGE FINANCIAL SERVICES CORPORATION Park 80 West, Plaza Two Saddle Brook, New Jersey 07662 and INTERCHANGE STATE BANK A Banking Corporation Park 80 West, Plaza Two Saddle Brook, New Jersey 07662 hereinafter referred to as "Clients". IN CONSIDERATION of the mutual promises, covenants and undertakings contained herein the Attorneys and the Clients agree as follows: 1. RETAINER Clients hereby retain the services of Attorneys to act as its corporate counsel for the term and compensation as outlined herein. 2. TERM The Attorneys shall be retained by Clients until the next annual reorganization meeting of Clients. 3. COMPENSATION The Clients shall pay the Attorneys for services rendered as corporate counsel an annual retainer of NINETY-FIVE THOUSAND DOLLARS ($95,000.00) payable in equal monthly installments on the first day of each and every month commencing the first day of the month following the execution of this Agreement. Clients shall, in addition to the annual retainer, pay to the Attorneys all out-of-pocket expenses, filing fees, or disbursements made by the Attorneys on Clients' behalf. Clients shall, in addition to the payment of the annual retainer and all costs, pay to the Attorneys a legal fee based on the rate per hour as shown on Schedule A for all legal services provided to Clients by the Attorney which are "legal services rendered in addition to those rendered as corporate counsel." Such fees and costs shall be billed by Attorneys to clients on a thirty-day basis and Clients shall pay all bills within five (5) days after each monthly Board of Director's meeting of the Clients. 4. DEFINITIONS The following words and phrases shall have the following meanings: A. "Legal services rendered as corporate counsel" shall mean and include all of the following types of legal work: 1. Except as hereinafter set forth in subparagraph B, document review and drafting of documents on behalf of the Clients including, but not limited to: leases, notes, contracts, mortgages, commitment letters, disclosure statements, modifications, extensions and legal agreements not related to third-party borrowers, except residential mortgage reviews. 2. Providing legal advice required in the usual course of Clients' business including compliance analysis. 3. Attendance at Board of Director's and Shareholders' Meetings other than as a Director. 4. Advice regarding levies and executions 5. Preparation of annual SEC 10K, 10Q and "ordinary" proxy filings. B. "Legal services rendered in addition to those rendered as general corporate counsel" shall mean and include, but not be limited to, all of the following types of legal work which shall be billed on an hourly basis: 1. Litigation in which Clients are named as defendants. 2. Litigation or other proceedings in which Clients and another person or agency (i.e., Small Business Administration) specially retain Attorney. The hourly rate for such legal services shall be specifically agreed upon by Clients, the agency, and Attorneys. 3. Foreclosure litigation, including lien protection litigation in any Court including the Bankruptcy Court. 4. Regulatory or administrative law proceedings including but not limited to Department of Banking, zoning agencies, N.L.R.B., F.D.I.C., OAL, and Tax Court. 5. Loan reviews and closings, including modifications and extensions thereof, except that the fee shall be based upon $250.00 per hour plus costs and such fee shall not exceed 1/2% of the principal amount of the loan plus costs but in no event shall such fee be less than $250.00. 6. Closings in which the bank is a buyer or seller. 7. SEC Filings other than annual 10K, 10Q or "ordinary" proxy filings. 8. Mergers and Acquisitions. 9. All other legal services not specifically set forth in 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 invalidity or unenforceability shall not affect the remainder of this Agreement. IN WITNESS WHEREOF the parties have hereunto signed this agreement the date first above written. INTERCHANGE STATE BANK ATTEST: /s/Benjamin Rosenzweig /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 ATTEST: ANDORA, PALMISANO & GEANEY /s/John P. Palmisano, /s/ Anthony D. Andora - ---------------------------- ----------------------------- John P. Palmisano, Secretary Anthony D. Andora, President SCHEDULE A The hourly rates contained herein are subject to change on the anniversary dates of the Agreement of Legal Services. Schedule A, reviewed and approved at Annual Reorganization Meeting on April 24, 1997. Anthony D. Andora $200.00 per hour John P. Palmisano $200.00 per hour John F. Geaney $200.00 per hour Other Partners and Senior Associates $175.00 per hour Other Associates $150.00 per hour EX-10 3 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER, dated as of January 27, 1998 ("Agreement"), is among Interchange Financial Services Corporation, a corporation chartered under the laws of the State of New Jersey ("Interchange"), Interchange State Bank, a commercial bank chartered under the laws of the State of New Jersey and subsidiary of Interchange ("Bank"), and The Jersey Bank For Savings, a savings bank chartered under the laws of the State of New Jersey ("Jersey"). WHEREAS, Interchange and Bank desire to acquire Jersey and Jersey's Board of Directors has determined, based upon the terms and conditions hereinafter set forth, that the acquisition is in the best interests of Jersey and its stockholders, each of the Board of Directors of Jersey, Interchange and Bank have duly adopted and approved this Agreement and the Board of Directors of Jersey has directed that it be submitted to its shareholders for approval; WHEREAS, the acquisition will be accomplished by merging Jersey into Bank with Bank as the surviving bank, and Jersey shareholders receiving the consideration hereinafter set forth; and WHEREAS, simultaneously with the execution of this Agreement, Jersey is issuing an option to Interchange to purchase 126,950 shares of the authorized and unissued Jersey Common Stock (as hereafter defined) at an option price of $18.75 per share, subject to the terms and conditions set forth in the Stock Option Agreement (the "Interchange Stock Option"). NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound, the parties hereto agree as follows: ARTICLE 1 THE MERGER ARTICLE 1.1 The Merger. Subject to the terms and conditions of this Agreement, at the Effective Time (as defined in Section 1.6), Jersey shall be merged with and into Bank under the charter of Bank (the "Merger") in accordance with the New Jersey Banking Act of 1948, as amended (the "Act"), and Bank shall be the surviving bank (the "Surviving Bank"). Attached hereto as Exhibit A is a list of the addresses of the principal office and branch office of Jersey. Attached hereto as Exhibit B is a list of the addresses of the principal office and branch offices of each of Bank and the Surviving Bank and the names of the officers and directors of the Surviving Bank. ARTICLE 1.2 Effect of the Merger. At the Effective Time, the Surviving Bank shall be considered the same business and corporate entity as each of Jersey and Bank and thereupon and thereafter, all the property, rights, powers and franchises of each of Jersey and Bank shall vest in the Surviving Bank and the Surviving Bank shall be subject to and be deemed to have assumed all of the debts, liabilities, obligations and duties of each of Jersey and Bank and shall have succeeded to all of each of their relationships, fiduciary or otherwise, as fully and to the same extent as if such property rights, privileges, powers, franchises, debts, obligations, duties and relationships had been originally acquired, incurred or entered into by the Surviving Bank. ARTICLE 1.3 Certificate of Incorporation. The Certificate of Incorporation of Bank as it exists immediately prior to the Effective Time shall continue as the Certificate of Incorporation of the Surviving Bank, as set forth in Schedule 1.3, until otherwise amended as provided by law. ARTICLE 1.4 Bylaws. The Bylaws of Bank as they exist immediately prior to the Effective Time shall continue as the Bylaws of the Surviving Bank until otherwise amended as provided by law. ARTICLE 1.5 Directors and Officers. The directors and officers of Bank as of the Effective Time shall continue as the directors and officers of the Surviving Bank. Subject to all applicable regulatory approvals, Richard A. Gilsenan ("Gilsenan") and Arthur R. Odabash ("Odabash") (if Gilsenan and/or Odabash dies prior to the Closing, the Board of Directors of Jersey, subject to the concurrence of Interchange and subject to all applicable regulatory approvals, may appoint a person to replace the dead person) shall each be designated a director of the Surviving Bank to hold office until the next annual meeting and, at such meeting, Gilsenan and Odabash shall each be nominated for an additional one-year term, and at the first annual meeting following the next annual meeting, Odabash shall be nominated to an additional one-year term. Further, subject to all applicable regulatory approvals, Gilsenan and Odabash shall each be designated a director of Interchange to hold office until the next annual meeting, and at such meeting, Gilsenan shall be nominated for an additional one-year term and Odabash shall be nominated for an additional two-year term. ARTICLE 1.6 Effective Time and Closing. The Merger shall become effective (and be consummated) upon approval by the Commissioner of Banking and Insurance of the State of New Jersey (the "Commissioner") and the Board of Governors of the Federal Reserve System ("FRB"). Each application for approval shall be filed by Bank with the approval of Jersey, which approval shall not be unreasonably withheld or delayed. The first calendar month end after such approvals have been completed shall be the "Effective Time". A closing (the "Closing") shall take place prior to the Effective Time at 10:00 a.m., on a day mutually agreed to by Interchange and Jersey within thirty (30) days following the receipt of all necessary regulatory and governmental approvals and consents and the expiration of all statutory waiting periods in respect thereof and the satisfaction or waiver of the conditions to the consummation of the Merger specified in Article ARTICLE 6 hereof (other than the delivery of certificates, opinions and other instruments and documents to be delivered at the Closing), but not later than the last day of the calendar month in which the last received of the foregoing is received, at the principal office of Interchange, or at such other place, time or date as Bank and Jersey may mutually agree upon. ARTICLE 1.7 Capital Stock. As of September 30, 1997, Jersey had capital of $6,051,567, divided into 436,435 shares of common stock, each of $5.00 par value, 75,525 shares of preferred stock, each of $5.00 par value, $2,550,152 of surplus, and undivided profits of $941,615. As of September 30, 1997, Bank had capital of $45,954,001, divided into 1,151,400 shares of common stock, each of $2.50 par value, $15,658,890 of surplus, and $26,950,761 of undivided profits. At the Effective Time, the amount of capital stock of Bank shall be $52,005,568, divided into 1,151,400 shares of common stock, each of $2.50 par value, and Bank shall have a surplus of $18,209,042 and undivided profits, including capital reserves, which when combined with the capital and surplus will be equal to the combined capital structures of Bank and Jersey as stated in the preceding two sentences, adjusted however, for earnings and expenses and dividends declared and paid by Jersey between September 30, 1997 and the Effective Time. ARTICLE 1.8 Jersey's Employees. Any employee of Jersey who becomes an employee of the Surviving Bank as a result of the Merger shall be entitled to participate in the compensation and benefit plans of the Surviving Bank on the same basis as persons (not employed by the Surviving Bank) of comparable experience who are hired by the Surviving Bank. This Section 1.8 shall not provide any employee of Jersey any right of employment with the Surviving Bank or any right to any particular seniority or position. ARTICLE 2 CONVERSION OF JERSEY SHARES ARTICLE 2.1 Conversion of Jersey Preferred Stock. Within 60 days after the execution of this Agreement by the parties, each holder of preferred stock, par value $5.00 per share, of Jersey ("Jersey Preferred Stock"), shall enter into a written agreement with Jersey, in the form attached hereto as Exhibit C (the "Conversion Agreement"), providing that such holder of Jersey Preferred Stock shall convert each of its shares of Jersey Preferred Stock into .8695 shares of Jersey Common Stock (hereinafter defined), effective immediately prior to the conversion of Jersey Common Stock pursuant to Section 2.2 (so that the number of shares of Jersey Common Stock eligible for conversion pursuant to Section 2.2 shall include the Jersey Common Stock arising from the conversion of the Jersey Preferred Stock), in accordance with the Jersey's Certificate of Amendment to its Certificate of Incorporation filed with the New Jersey Department of Banking on May 14, 1993, which authorized the issuance of the Jersey Preferred Stock and set forth its terms. Attached hereto as Exhibit D is a true and complete list of the holders of record of Jersey Preferred Stock as of the date hereof, in each case specifying the number of shares of Jersey Preferred Stock held by such holder and the record address of such holder. ARTICLE 2.2 Conversion of Jersey Common Stock. Each share of common stock, par value $5.00 per share, of Jersey ("Jersey Common Stock"), issued and outstanding immediately prior to the Effective Time (other than shares of Jersey Common Stock retired pursuant to Section 2.6 and Dissenting Shares as defined in Section 2.4) shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted as follows: (a) Exchange Ratio. Subject to the provisions of this Section 2.2, each share of Jersey Common Stock issued and outstanding immediately prior to the Effective Time (excluding shares of Jersey Common Stock retired pursuant to Section 2.6 and Dissenting Shares) shall be converted at the Effective Time into the right to receive one (1) share (the "Exchange Ratio") of common stock, no par value, of Interchange ("Interchange Common Stock"). (b) Fractional Shares; Average Closing Price. No fractional shares of Interchange Common Stock shall be issued, and, in lieu thereof, a cash payment shall be made based on the Average Closing Price. The Average Closing Price of Interchange Common Stock shall mean the Average Price (as hereinafter defined) calculated based upon the Closing Price (as hereinafter defined) of Interchange Common Stock during the first 20 of the 25 consecutive trading days immediately preceding the date of the Closing. The Closing Price shall mean the closing price of Interchange Common Stock as supplied by the American Stock Exchange ("AMEX") and published in The Wall Street Journal during the first 20 of the 25 consecutive trading days immediately preceding the date of the Closing. The Average Price shall be determined by taking the average of Closing Prices in the 20 day period. A trading day shall mean a day for which a Closing Price is so supplied and published. (c) Capital Changes. If between the date of this Agreement and the Effective Time the outstanding shares of Interchange Common Stock shall have been changed into a different number of shares or a different class, by reason of any stock dividend, stock split, reclassification, recapitalization, combination or exchange of shares, the Exchange Ratio shall be correspondingly adjusted to reflect such stock dividend, stock split, reclassification, recapitalization, combination or exchange of shares. (d) Cancellation of Jersey Certificates. After the Effective Time, each such share of Jersey Common Stock shall no longer be outstanding and shall automatically be cancelled and each of the certificates (the "Certificates") previously evidencing any such shares of Jersey Common Stock outstanding immediately prior to the Effective Time (other than shares of Jersey Common Stock retired pursuant to Section 2.6 and Dissenting Shares) shall thereafter represent the right to receive the consideration pursuant to Section (a) and (b) hereof. The holders of the Certificates shall cease to have any rights with respect to such shares of Jersey Common Stock except as otherwise provided herein or by law. The Certificates shall be exchanged for certificates evidencing shares of Interchange Common Stock issued pursuant to this Article ARTICLE 2, upon the surrender of such Certificates in accordance with this Article ARTICLE 2. (e) Jersey Stock Options. At the Effective Time, each outstanding option to purchase Jersey Common Stock (a "Jersey Option") granted under the stock option plan for certain executives of Jersey (the "Jersey Option Plan") shall be converted into the right to receive immediately after the Effective Time a number of whole shares of Interchange Common Stock which is the quotient obtained by dividing: the excess of (x) the product obtained by multiplying (i) the number of shares of Jersey Common Stock covered by the Jersey Option, times (ii) the Exchange Ratio (as adjusted), times (iii) the Average Closing Price, less (y) the aggregate exercise price for the Jersey Option; by the Average Closing Price. No fractional shares of Interchange Common Stock shall be issued pursuant to this Section 2.2(e)(ii), and in lieu thereof, each optionee who would otherwise be entitled to a fractional interest will receive an amount in cash determined by multiplying such fractional interest by the Average Closing Price. ARTICLE 2.3 Exchange of Shares. (a) Jersey and Interchange hereby appoint Continental Stock Transfer or such other institution as Interchange shall designate (the "Exchange Agent") as the Exchange Agent for purposes of effecting the conversion of Jersey Common Stock and Jersey Options. All fees and expenses of the Exchange Agent shall be paid by Interchange. As soon as practicable after the Effective Time, the Exchange Agent shall mail to each holder of record (a "Record Holder") of a Certificate or Certificates, a mutually agreed upon letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent), and instructions for use in effecting the surrender of the Certificates in exchange for Interchange Common Stock (and cash in lieu of fractional shares). Upon surrender of a Certificate for exchange and cancellation to the Exchange Agent, together with such letter of transmittal, duly executed, the Record Holder shall be entitled to promptly receive in exchange for such Certificate the consideration as provided in Section 2.2 hereof and the Certificates so surrendered shall be cancelled. The Exchange Agent shall not be obligated to deliver or cause to be delivered to any Record Holder the consideration to which such Record Holder would otherwise be entitled until such Record Holder surrenders the Certificate for exchange or, in default thereof, an appropriate Affidavit of Loss and Indemnity Agreement and/or a bond as may be reasonably required in each case by Interchange. Notwithstanding the time of surrender of the Certificates, Record Holders (other than holders of Dissenting Shares) shall be deemed shareholders of Interchange for all purposes from the Effective Time, except that Interchange shall withhold the payment of dividends from any Record Holder until such Record Holder effects the exchange of Certificates for Interchange Common Stock. (Such Record Holder shall receive such withheld dividends, without interest, upon effecting the share exchange.) With respect to each outstanding Jersey Option, Clyde C. Britt ("Britt") and William C. Ledgerwood ("Ledgerwood") shall receive the number of shares of Interchange Common Stock determined pursuant to Section 2.2(e). (b) After the Effective Time, there shall be no transfers on the stock transfer books of Jersey of the shares of Jersey Common Stock which were outstanding immediately prior to the Effective Time and, if any Certificates representing such shares are presented for transfer, they shall be cancelled and exchanged for the consideration pursuant to Section 2.2 hereof. (c) If payment of the consideration pursuant to Section 2.2 hereof is to be made in a name other than that in which the Certificate surrendered in exchange therefor is registered, it shall be a condition of such payment that the Certificate so surrendered shall be properly endorsed (or accompanied by an appropriate instrument of transfer) and otherwise in proper form for transfer, and that the person requesting such payment shall pay to the Exchange Agent in advance any transfer or other taxes required by reason of the payment to a person other than that of the registered holder of the Certificate surrendered, or required for any other reason, or shall establish to the reasonable satisfaction of the Exchange Agent that such tax has been paid or is not payable. (d) No certificates or scrip evidencing fractional shares of Interchange Common Stock shall be issued upon the surrender for exchange of Certificates and such fractional share interests will not entitle the owner thereof to vote or to any rights of a stockholder of Interchange. Cash shall be paid in lieu of fractional shares of Interchange Common Stock, based upon the Average Closing Price of Interchange Common Stock. ARTICLE 2.4 Dissenting Shares. Notwithstanding anything in this Agreement to the contrary, (i) any holder of Jersey Common Stock and (ii) any holder of Jersey Preferred Stock who has timely executed and delivered to Interchange, the Conversion Agreement, shall have the right to dissent to the extent offered to a merging capital savings bank under the Act, and if all necessary requirements of the Act are met, such shares shall be entitled to payment in cash from Bank of the fair value of such shares as determined in accordance with the Act; provided, however, that each holder of Jersey Preferred Stock entitled to dissenters' rights hereunder shall be treated as though all his, her or its shares of Jersey Preferred Stock have been converted into Jersey Common Stock (in accordance with the Conversion Agreement), solely for the purpose of ascertaining the extent of such Jersey Preferred Stockholder's dissenters' rights hereunder. All shares of Jersey Common Stock, including all shares of Jersey Common Stock which have been deemed, pursuant to this Section 2.4, to be issued to the holders of Jersey Preferred Stock who have dissenters' rights as a result of their respective timely execution and delivery of the Conversion Agreement, as to which the holder properly exercises dissenters' rights in accordance with the Act shall constitute "Dissenting Shares" unless and until such rights are waived by the party initially seeking to exercise such rights. ARTICLE 2.5 Bank Common Stock. The shares of common stock of Bank outstanding immediately prior to the Effective Time shall not be affected by the Merger but shall be the same number of shares of the Surviving Bank. ARTICLE 2.6 Certain Jersey Shares Returned. Each share of Jersey Common Stock that is either (a) owned by Interchange or any direct or indirect wholly-owned subsidiary of Interchange (other than shares held in trust accounts, managed accounts or in any similar manner as trustee or in a fiduciary capacity and shares held as collateral or in lieu of a debt previously contracted) or (b) held in the treasury of Jersey shall be cancelled and retired and no capital stock of Interchange, cash or other consideration shall be paid or delivered in exchange therefor. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF JERSEY References herein to "Jersey Disclosure Schedule" shall mean all of the disclosure schedules required by this Article 3, dated as of the date hereof and referenced to the specific sections and subsections of Article ARTICLE 3 of this Agreement. Jersey hereby represents and warrants to Interchange and Bank as follows: ARTICLE 3.1 Organization. (a) Jersey is a New Jersey savings bank whose deposits are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC") to the fullest extent permitted by law. Jersey is duly organized, validly existing and in good standing under the laws of the State of New Jersey. Jersey has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted and is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed, qualified or in good standing would not have a material adverse effect on the business, operations, assets or financial condition of Jersey. (b) The Jersey Disclosure Schedule sets forth true and complete copies of the Certificate of Incorporation and Bylaws of Jersey as in effect on the date hereof. Except as set forth in the Jersey Disclosure Schedule, Jersey does not own or control, directly or indirectly, any equity interest in any corporation, company, association, partnership, joint venture or other entity and owns no real estate, except real estate used for its banking premises. ARTICLE 3.2 Capitalization. The authorized capital stock of Jersey consists of 2,000,000 shares of Jersey Common Stock and 300,000 shares of Jersey Preferred Stock. As of September 30, 1997, (i) 436,435 shares of Jersey Common Stock and 75,525 shares of Jersey Preferred Stock were issued and outstanding, (ii) 16,600 shares of Jersey Common Stock were issuable upon exercise of current stock options granted pursuant to the Jersey Stock Option Plan, (iii) 65,669 shares of Jersey Common Stock were issuable upon the conversion of the Jersey Preferred Stock and (iv) no shares are held in the treasury of Jersey. All issued and outstanding shares of Jersey Common Stock and Jersey Preferred Stock have been duly authorized and validly issued, are fully paid, nonassessable and free of preemptive rights. Since September 30, 1997, to and including the date of this Agreement no additional shares of Jersey Common Stock or Jersey Preferred Stock have been issued except in connection with the exercise of options issued under the Jersey Option Plan, the conversion of Jersey Preferred Stock into Jersey Common Stock or shares issued under Jersey's Dividend Reinvestment and Stock Purchase Plan (the "Jersey DRIP"). The authorized but unissued shares of the capital stock of Jersey are not subject to pre-emptive rights. Except for: the options granted under the Jersey Option Plan prior to September 30, 1997; the Interchange Stock Option; the Jersey Preferred Stock; and the Jersey DRIP, Jersey does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the transfer, purchase or issuance of any shares of capital stock of Jersey or any securities representing the right to purchase or otherwise receive any shares of such capital stock or any securities convertible into or representing the right to subscribe for any such shares, and there are no agreements or understandings with respect to voting of any such shares. ARTICLE 3.3 Authority; No Violation. (a) Subject to the approval of this Agreement and the transactions contemplated hereby by the stockholders of Jersey, and subject to the parties obtaining all necessary regulatory approvals, Jersey has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby in accordance with the terms hereof. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of Jersey. Except for the approvals described in paragraph (b) below, no other corporate proceedings on the part of Jersey are necessary to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Jersey and constitutes the valid and binding obligation of Jersey, enforceable against Jersey in accordance with its terms. (b) Neither the execution and delivery of this Agreement by Jersey, nor the consummation by Jersey of the transactions contemplated hereby in accordance with the terms hereof, or compliance by Jersey with any of the terms or provisions hereof, will (i) violate any provision of Jersey's Certificate of Incorporation or other governing instrument or Bylaws, (ii) assuming that the consents and approvals set forth below are duly obtained, violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to Jersey or any of its properties or assets, or (iii) except as set forth in the Jersey Disclosure Schedule, violate, conflict with, result in a breach of any provisions of, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of, accelerate the performance required by, or result in the creation of any lien, security interest, charge or other encumbrance upon any of the properties or assets of Jersey under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Jersey is a party, or by which it or any of its properties or assets may be bound or affected except, with respect to (ii) and (iii) above, such as individually and in the aggregate will not have a material adverse effect on the business, operations, assets or financial condition of Jersey, or the ability of Jersey to consummate the transactions contemplated hereby. Except for consents and approvals of or filings or registrations with or notices to the third parties listed in the Jersey Disclosure Schedule, the Commissioner, the Securities and Exchange Commission (the "SEC"), and the stockholders of Jersey, no consents or approvals of or filings or registrations with or notices to any third party or any public body or authority are necessary on behalf of Jersey in connection with (x) the execution and delivery by Jersey of this Agreement and (y) the consummation by Jersey of transactions contemplated hereby. ARTICLE 3.4 Financial Statements. (a) The Jersey Disclosure Schedule sets forth copies of the statements of condition of Jersey as of December 31, 1994, 1995 and 1996, and the related statements of income, stockholders' equity and cash flows for the periods ended December 31 in each of the three years 1994 through 1996, in each case accompanied by the audit report of Arthur Anderson, LLP, independent public accountants with respect to Jersey, Jersey's unaudited comparative statements of condition and related comparative statements of operations for the periods ended March 31, June 30, and September 30, 1997, as provided to the shareholders of Jersey and Jersey's call reports for the periods ended March 31, June 30, and September 30, 1997, as filed with the FDIC (collectively, the "Jersey Financial Statements"). The Jersey Financial Statements (including the related notes) have been prepared in accordance with generally accepted accounting principles consistently applied during the periods involved (except as approved by such independent public accountants and disclosed therein), and fairly present the financial condition of Jersey as of the respective dates set forth therein, and the related statements of income, stockholders' equity and cash flows fairly present the results of the operations, stockholders' equity and cash flows of Jersey for the respective periods set forth therein, except for any year-end adjustment(s) which, alone or in the aggregate, do not materially impair the fair presentation of the financial condition of Jersey as of the respective dates of such prior Jersey Financial Statements as are affected by any such adjustment, and which, alone or in the aggregate, do not result in the presentation of a material adverse financial condition of Jersey as of the respective dates of such prior Jersey Financial Statements. (b) The books and records of Jersey have been and are being maintained in material compliance with applicable legal and accounting requirements, and reflect only actual transactions. (c) Except as and to the extent reflected, disclosed or reserved against in the Jersey Financial Statements (including the notes thereto), as of September 30, 1997 Jersey did not have and does not have, as the case may be, any liabilities, whether absolute, accrued, contingent or otherwise, which are material to the business, operations, assets or financial condition of Jersey. Since September 30, 1997 and to the date hereof, Jersey has not incurred any liabilities except in the ordinary course of business and consistent with prudent banking practice, and except as specifically contemplated by this Agreement or relating to other matters disclosed in this Agreement. (d) As of September 30, 1997, Jersey had stockholder's equity of $6,051,567, consisting of 436,435 shares of common stock, each of $5.00 par value, 75,525 shares of preferred stock, each of $5.00 par value, $2,550,152 of surplus, and undivided profits of $941,615. Without limiting or qualifying the materiality of any other representation, warranty or covenant in this Agreement, the representations contained in this paragraph 3.4(d) were a material inducement to Interchange in determining the Exchange Ratio and if these numbers were inaccurate when made and such inaccuracy is material, Interchange shall have the right to terminate this Agreement due to material breach of a representation by Jersey. ARTICLE 3.5 Financial Advisor; Broker's and Other Fees. Jersey has retained Capital Consultants of Princeton, Inc. ("Financial Advisor") to render a fairness opinion. Neither Jersey nor any of its directors or officers has employed any broker or finder or incurred any liability for any broker's or finder's fees or commissions in connection with any of the transactions contemplated by this Agreement. Except as set forth in the Jersey Disclosure Schedule, there are no fees (other than time charges billed at usual and customary rates) payable to any consultants, including lawyers and accountants, in connection with this transaction or which would be triggered by consummation of this transaction or the termination of the services of such consultants by Jersey. ARTICLE 3.6 Absence of Certain Changes or Events. (a) Except as set forth in the Jersey Disclosure Schedule, there has not been any material adverse change in the business, operations, assets or financial condition of Jersey since September 30, 1997, and to the best of Jersey's knowledge, no facts or conditions exist which Jersey believes will cause or is likely to cause such a material adverse change in the future. (b) Except as set forth in the Jersey Disclosure Schedule, Jersey has not taken or permitted any of the actions set forth in Section 5.2 hereof between September 30, 1997 and the date hereof and Jersey has conducted its business only in the ordinary course, consistent with past practice. ARTICLE 3.7 Legal Proceedings. Except as disclosed in the Jersey Disclosure Schedule, Jersey is not a party to any, and Jersey has received no notice of any pending or, to the best of Jersey's knowledge, threatened, material legal, administrative, arbitral or other proceedings, claims, actions or governmental investigations of any nature against Jersey or against any present or former Jersey officer or director in their capacity as a Jersey officer or director. Except as disclosed in the Jersey Disclosure Schedule, Jersey is not a party to any material order, judgment or decree entered against Jersey in any lawsuit or proceeding. ARTICLE 3.8 Taxes and Tax Returns. (a) Jersey has duly filed (and until the Effective Time will so file) all returns, declarations, reports, information returns and statements ("Returns") required to be filed by it in respect of any federal, state and local taxes (including withholding taxes, penalties or other payments required) and has duly paid (and until the Effective Time will so pay) all such taxes due and payable, other than taxes or other charges which are being contested in good faith. Jersey has established (and until the Effective Time will establish) on its books and records reserves that it reasonably believes are adequate for the payment of all federal, state and local taxes not yet due and payable, but are anticipated to be incurred in respect of Jersey through the Effective Time. Except as set forth in the Jersey Disclosure Schedule, the federal income tax returns of Jersey have been examined by the Internal Revenue Service (the "IRS") (or are closed to examination due to the expiration of the applicable statute of limitations) and no deficiencies were asserted as a result of such examinations which have not been resolved and paid in full. Except as set forth in the Jersey Disclosure Schedule, the applicable state income tax returns of Jersey have been examined by the applicable authorities (or are closed to examination due to the expiration of the statute of limitations) and no deficiencies were asserted as a result of such examinations which have not been resolved and paid in full. To the best knowledge of Jersey, there are no audits or other administrative or court proceedings presently pending, or claims asserted, for taxes or assessments upon Jersey nor has Jersey given any currently outstanding waivers or comparable consents regarding the application of the statute of limitations with respect to any taxes or tax Returns. (b) Except as set forth in the Jersey Disclosure Schedule, Jersey has not requested any extension of time within which to file any tax Return which Return has not since been filed, is not a party to any agreement providing for the allocation or sharing of taxes, is not required to include in income any adjustment pursuant to Section 481(a) of the Internal Revenue Code of 1986, as amended (the "Code"), by reason of a voluntary change in accounting method initiated by Jersey (nor does Jersey have any knowledge that the IRS has proposed any such adjustment or change of accounting method) and has filed a consent pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply. ARTICLE 3.9 Employee Benefit Plans. (a) Except as set forth in the Jersey Disclosure Schedule, Jersey does not maintain or contribute to any "employee pension benefit plan", within the meaning of Section 3(2)(A) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), "employee welfare benefit plan", within the meaning of Section 3(1) of ERISA, stock option plan, stock purchase plan, deferred compensation plan, severance plan, bonus plan, employment agreement or other similar plan, program or arrangement. Jersey has not, since September 2, 1974, contributed to any "Multiemployer Plan", within the meaning of Sections 3(37) and 4001(a)(3) of ERISA. (b) Except with respect to customary health and disability benefits, there are no unfunded benefits obligations which are not accounted for by reserves shown on the Jersey Financial Statements and established under generally accepted accounting principles, or otherwise noted on such Jersey Financial Statements. (c) Except as agreed to by Interchange in writing or set forth in the Jersey Disclosure Schedule, the consummation of the transactions contemplated by this Agreement will not (i) entitle any current or former employee of Jersey to severance pay or any similar payment or (ii) accelerate the time of payment, vesting, or increase the amount, of any compensation due to any current or former employee of Jersey under any Jersey benefit plan. (d) No officer, director, employee or agent (or former officer, director, employee or agent) of Jersey is entitled now, or will be entitled as a consequence of this Agreement or the Merger, to any payment or benefit from Jersey, Interchange or Bank which if paid or provided would constitute an "excess parachute payment", as defined in Section 280G of the Code or regulations promulgated thereunder. ARTICLE 3.10 Reports. (a) Each communication mailed by Jersey to all of its stockholders since January 1, 1994, and each annual, quarterly or special report, and proxy statement, as of its date, complied in all material respects with all applicable statutes, rules and regulations enforced or promulgated by the applicable regulatory agency and did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading; provided that disclosures as of a later date shall be deemed to modify disclosures as of an earlier date. (b) Jersey has, since January 1, 1994, duly filed with the FDIC in correct form the quarterly and annual reports required to be filed under applicable laws and regulations, and Jersey promptly will deliver or make available to Interchange accurate and complete copies of such reports. The Jersey Disclosure Schedule lists all examinations of Jersey conducted by either the FDIC or the New Jersey Department of Banking since January 1, 1994 and the dates of any responses thereto submitted by Jersey. ARTICLE 3.11 Jersey Information. The information relating to Jersey to be contained in the Proxy Statement/Prospectus (as defined in Section (a) hereof) to be delivered to stockholders of Jersey, including all holders of the Jersey Preferred Stock who have timely executed and delivered the Conversion Agreement, in connection with the solicitation of their approval of this Agreement and the transactions contemplated hereby, as of the date the Proxy Statement/Prospectus is mailed to stockholders of Jersey, and up to and including the date of the meeting of stockholders to which such Proxy Statement/Prospectus relates, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The information relating to Jersey in the Registration Statement (as defined in Section (a) hereof), as of the date of the filing thereof, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. ARTICLE 3.12 Compliance with Applicable Law. (a) General. Except as set forth in the Jersey Disclosure Schedule, to the best of Jersey's knowledge, Jersey holds all material licenses, franchises, permits and authorizations necessary for the lawful conduct of its businesses under and pursuant to each, and has complied with and is not in default in any material respect under any, applicable law, statute, order, rule, regulation, policy and/or guideline of any federal, state or local governmental authority relating to Jersey (other than where such defaults or non-compliances will not, alone or in the aggregate, result in a material adverse effect on the business, operations, assets or financial condition of Jersey). Further, except as set forth in the Jersey Disclosure Schedule, Jersey has not received notice of violation of, nor does it know of any violations (other than violations which will not, alone or in the aggregate, result in a material adverse effect on the business, operations, assets or financial condition of Jersey) of, any of he above. (b) CRA. Without limiting the foregoing, except as set forth in the Jersey Disclosure Schedule, to the best of Jersey's knowledge, Jersey has complied in all respects with the Community Reinvestment Act ("CRA"). Further, without limiting the foregoing, except as set forth in the Jersey Disclosure Schedule, Jersey has received a CRA rating of "satisfactory" as of its last examination and Jersey has not received any written notice from any persons asserting that such person would object to the consummation of this Merger due to the CRA performance of or rating of Jersey. (c) BSA. Without limiting the foregoing, except as set forth in the Jersey Disclosure Schedule, to the best of Jersey's knowledge, Jersey has complied in all material respects with the Bank Secrecy Act ("BSA"), including all regulations and filing requirements related thereto, and Jersey has implemented appropriate procedures to maintain compliance with the BSA. ARTICLE 3.13 Certain Contracts. (a) Except as disclosed in the Jersey Disclosure Schedule, Jersey is not a party to and is not bound by any contract or understanding (whether written or, to the best of its knowledge, oral) with respect to the employment or termination of any present or former officers, employees, directors or consultants. The Jersey Disclosure Schedule sets forth true and correct copies of all written employment agreements or termination agreements with officers, employees, directors, or consultants to which Jersey is a party. (b) Except as disclosed in the Jersey Disclosure Schedule and except for loan documents relating to existing loans (other than loans which impose a material burden on Jersey which is not usual and customary) where the loan evidenced by such documents is not in default, (i) as of the date of this Agreement, Jersey is not a party to and is not bound by any commitment, agreement or other instrument which is material to the business operations, assets or financial condition of Jersey, (ii) no commitment, agreement or other instrument to which Jersey is a party or by which it is bound limits the freedom of Jersey to compete in any line of business or with any person, and (iii) Jersey is not a party to any collective bargaining agreement. (c) Except as disclosed in the Jersey Disclosure Schedule, to the best of Jersey's knowledge, neither Jersey, nor any other party thereto, is in default in any material respect under any material lease, contract, mortgage, promissory note, deed of trust, loan agreement or other commitment or arrangement. ARTICLE 3.14 Properties and Insurance. (a) Jersey has good and, as to owned real property, if any, marketable title to all material assets and properties, whether real or personal, tangible or intangible, reflected in Jersey's balance sheet as of December 31, 1996, or owned and acquired subsequent thereto (except to the extent that such assets and properties have been disposed of for fair value in the ordinary course of business since December 31, 1996), subject to no encumbrances, liens, mortgages, security interests or pledges, except (i) those items that secure liabilities that are reflected in such balance sheet or the notes thereto or incurred in the ordinary course of business after the date of such balance sheet, (ii) statutory liens for amounts not yet delinquent or which are being contested in good faith, (iii) such encumbrances, liens, mortgages, security interests, pledges and title imperfections that are not in the aggregate material to the business, operations, assets, and financial condition of Jersey taken as a whole and (iv) with respect to owned real property, if any, title imperfections noted in title reports delivered to Interchange prior to the date hereof. Jersey, as lessee, has the right under valid and subsisting leases to occupy, use, possess and control, in all material respects, all real property leased by it, as presently occupied, used, possessed and controlled by it. The Jersey Disclosure Schedule sets forth true and correct copies of all written leases of real property used by Jersey to conduct its businesses. (b) The Jersey Disclosure Schedule lists all policies of insurance and bonds covering business operations and insurable properties and assets of Jersey, all risks insured against, and the amount thereof and deductibles relating thereto. Except as set forth in the Jersey Disclosure Schedule, as of the date hereof, Jersey has not received any notice of cancellation or notice of a material amendment of any such insurance policy or bond and neither of them is in default in any material respect under such policy or bond, and, to the best of Jersey's knowledge, no coverage thereunder is being disputed and all material claims thereunder have been filed in a timely fashion. ARTICLE 3.15 Minute Books. The minute book of Jersey contains accurate records of all meetings held by and other corporate action taken by its stockholders and Board of Directors (including committees of its Board of Directors). ARTICLE 3.16 Environmental Matters. Except as disclosed in the Jersey Disclosure Schedule, Jersey has not received any written notice, citation, claim, assessment, proposed assessment or demand for abatement alleging that Jersey (either directly or as a successor-in-interest in connection with the enforcement of remedies to realize the value of properties serving as collateral for outstanding loans) is responsible for the correction or clean-up of any condition material to the business, operations, assets or financial condition of Jersey. Except as disclosed in the Jersey Disclosure Schedule, Jersey has no knowledge that any toxic or hazardous substances or materials have been emitted, generated, disposed of or stored on any property owned or leased by Jersey in any manner that violates or, after the lapse of time may violate, any presently existing federal, state or local law or regulation governing or pertaining to such substances and materials. ARTICLE 3.17 Reserves. The allowance for possible loan and lease losses in the September 30, 1997 Jersey Financial Statements was adequate at the time based upon past loan loss experiences and potential losses in the portfolio at the time to cover all known or reasonably anticipated loan losses. ARTICLE 3.18 Disclosure. There are no material facts concerning the business, operations, assets or financial condition of Jersey which have not been disclosed to Interchange which would have a material adverse effect on the business, operations or financial condition of Jersey. No representation or warranty contained in Article III of this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein not misleading. Where this Agreement refers to the knowledge of Jersey, such reference shall be deemed to be the actual knowledge of the President and Chief Financial Officer of Jersey. Where a matter has been disclosed in one section of the Jersey Disclosure Schedule, such matters shall be deemed to have been disclosed with respect to each warranty and representation of Jersey in this Agreement. Such limitation with respect to the scope of knowledge in the preceding sentence shall not be understood to release any person from claims arising outside this Agreement. ARTICLE 3.19 Duration of Warranties. All representations and warranties of Jersey under this Agreement shall survive for a period of four (4) years from the date of this Agreement, and shall thereafter expire and be of no further force or effect. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BANK AND INTERCHANGE References herein to the "Interchange Disclosure Schedule" shall mean all of the disclosure schedules required by this Article 4, dated as of the date hereof and referenced to the specific sections and subsections of Article 4 of this Agreement, which have been delivered on the date hereof by Interchange to Jersey. Interchange hereby represents and warrants to Jersey as follows: ARTICLE 4.1 Corporate Organization. (a) Interchange is a corporation duly organized and validly existing and in good standing under the laws of the State of New Jersey. Interchange has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted, and is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed, qualified or in good standing would not have a material adverse effect on the business, operations, assets or financial condition of Interchange or any of its Subsidiaries (defined below). Interchange is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). (b) Each of the Subsidiaries of Interchange are listed in the Interchange Disclosure Schedule. The term "Subsidiary" when used in this Agreement with reference to Interchange means any corporation, joint venture, association, partnership, trust or other entity in which Interchange has, directly or indirectly, at least a 50 percent interest or acts as a general partner, including without limitation, Bank. Each Subsidiary of Interchange is duly organized and validly existing and in good standing under the laws of the jurisdiction of its incorporation. Bank is a New Jersey commercial bank whose deposits are insured by the Bank Insurance Fund of the FDIC to the fullest extent permitted by law. Each Subsidiary of Interchange has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted and is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed, qualified or in good standing would not have a material adverse effect on the business, operations, assets or financial condition of Interchange or any of its Subsidiaries. The Interchange Disclosure Schedule sets forth true and complete copies of the Certificate of Incorporation and Bylaws of Bank as in effect on the date hereof. ARTICLE 4.2 Capitalization. The authorized capital stock of Interchange consists of 10,000,000 shares of Interchange Common Stock. As of September 30, 1997, (i) 4,224,909 shares of Interchange Common Stock were issued and outstanding, including 20,476 shares of restricted stock issued under the Interchange Stock Option and Incentive Plan of 1997 ("Interchange Stock Option and Incentive Plan"), (ii) 96,772 shares of Interchange Common Stock were issuable upon exercise of current stock options granted pursuant to the Interchange Stock Option and Incentive Plan and (iii) 89,350 shares were issued and held in treasury. Since September 30, 1997, to and including the date of this Agreement, no additional shares of Interchange Common Stock have been issued except in connection with the exercise of options granted under the Interchange Stock Option and Incentive Plan or grants of restricted stock under the Interchange Stock Option and Incentive Plan. All issued and outstanding shares of Interchange Common Stock, and all issued and outstanding shares of capital stock of Interchange's Subsidiaries, have been duly authorized and validly issued, are fully paid, nonassessable and free of preemptive rights. All of the outstanding shares of capital stock of Interchange's Subsidiaries are owned by Interchange free and clear of any liens, encumbrances, charges, restrictions or rights of third parties. Except for options or other awards granted pursuant to the Interchange Stock Option and Incentive Plan, neither Interchange nor any of Interchange's Subsidiaries has or is bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the transfer, purchase or issuance of any shares of capital stock of Interchange or Interchange's Subsidiaries or any securities representing the right to purchase or subscribe to any such shares, and there are no agreements or understandings with respect to voting of any such shares. ARTICLE 4.3 Authority; No Violation. (a) Interchange and Bank have full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby in accordance with the terms hereof. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of Interchange and Bank. Except for the approval of Interchange as a shareholder of Bank and as required by the AMEX listing rules for the listing of shares of Interchange Common Stock, no other corporate proceedings on the part of Interchange and Bank are necessary to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Interchange and Bank and constitutes a valid and binding obligation of Interchange and Bank, enforceable against Interchange and Bank in accordance with its terms. (b) Neither the execution or delivery of this Agreement nor the consummation by Interchange and Bank of the transactions contemplated hereby in accordance with the terms hereof, will violate any provision of the Certificate of Incorporation or other governing instrument or Bylaws of Interchange or Bank, assuming that the consents and approvals set forth below are duly obtained, violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to Interchange or Bank or any of their respective properties or assets, or violate, conflict with, result in a breach of any provision of, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of, accelerate the performance required by, or result in the creation of any lien, security interest, charge or other encumbrance upon any of the properties or assets of Interchange or Bank under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Interchange or Bank is a party, or by which Interchange or Bank or any of their properties or assets may be bound or affected, except, with respect to (ii) and (iii) above, such as individually and in the aggregate will not have a material adverse effect on the business, operations, assets or financial condition of Interchange and Interchange's Subsidiaries on a consolidated basis, or the ability of Interchange and Bank to consummate the transactions contemplated hereby. Except for consents and approvals of or filings or registrations with or notices to the Commissioner, FRB, the SEC, applicable state securities bureaus or commissions, and the AMEX, no consents or approvals of or filings or registrations with or notices to any third party or any public body or authority are necessary on behalf of Interchange or Bank in connection with (a) the execution and delivery by Interchange or Bank of this Agreement and (b) the consummation by Interchange of the Merger and the other transactions contemplated hereby. To the best of Interchange's knowledge, no fact or condition exists which Interchange has reason to believe will prevent it or Bank from obtaining the aforementioned consents and approvals within the time frame contemplated hereby. ARTICLE 4.4 Financial Statements. (a) Interchange has previously delivered to Jersey copies of the consolidated (of Interchange and its Subsidiaries) statements of financial condition as of December 31, 1994, 1995 and 1996, the related consolidated statements (of Interchange and its Subsidiaries) of income, changes in stockholders' equity and of cash flows for the periods ended December 31 in each of the three fiscal years 1994 through 1996, in each case accompanied by the audit report of Deloitte & Touche LLP, independent public accountants with respect to Interchange, and the unaudited consolidated (of Interchange and its Subsidiaries) statements of condition as of March 31, June 30, and September 30, 1997 and the related unaudited consolidated (of Interchange and its Subsidiaries) statements of income, changes in stockholders' equity and cash flows for the three months then ended as reported in Interchange's Quarterly Reports on Form 10-Q, filed with the SEC under the Securities and Exchange Act of 1934, as amended (the "1934 Act") (collectively, the "Interchange Financial Statements"). The Interchange Financial Statements (including the related notes), have been prepared in accordance with generally accepted accounting principles consistently applied during the periods involved, and fairly present the consolidated financial position of Interchange and its Subsidiaries as of the respective dates set forth therein, and the related consolidated statements of income, changes in stockholders' equity and of cash flows (including the related notes, where applicable) fairly present the results of the consolidated operations and changes in stockholders' equity and of cash flows of Interchange and its Subsidiaries for the respective fiscal periods set forth therein, except for any year-end adjustment(s) which, alone or in the aggregate, do not materially impair the fair presentation of the financial condition of Interchange and its Subsidiaries, taken as a whole, as of the respective dates of such prior Interchange Financial Statements as are affected by any such adjustment, and which, alone or in the aggregate, do not result in the presentation of a material adverse financial condition of Interchange and its Subsidiaries, taken as a whole, as of the respective dates of such prior Interchange Financial Statements. (b) The books and records of Interchange and its Subsidiaries have been and are being maintained in material compliance with applicable legal and accounting requirements, and reflect only actual transactions. (c) Except as and to the extent reflected, disclosed or reserved against in the Interchange Financial Statements (including the notes thereto), as of September 30, 1997 neither Interchange nor any of its Subsidiaries had or has, as the case may be, any obligation or liability, whether absolute, accrued, contingent or otherwise, which are material to the business, operations, assets or financial condition of Interchange or any of its Subsidiaries. Since September 30, 1997, neither Interchange nor any of its Subsidiaries have incurred any liabilities, except in the ordinary course of business and consistent with prudent banking practice. ARTICLE 4.5 Brokerage and Other Fees. Other than McConnell, Budd & Downes, Inc., neither Interchange nor Bank nor any of their respective directors or officers has employed any broker or finder or incurred any liability for any broker's or finder's fees or commissions in connection with any of the transactions contemplated by this Agreement. ARTICLE 4.6 Absence of Certain Changes or Events. There has not been any material adverse change in the business, operations, assets or financial condition of Interchange and Interchange's Subsidiaries on a consolidated basis since September 30, 1997 and to the best of Interchange's knowledge, no fact or condition exists which Interchange believes will cause or is likely to cause such a material adverse change in the future. ARTICLE 4.7 Interchange Information. The information relating to Interchange, its Subsidiaries, this Agreement and the transactions contemplated hereby in the Proxy Statement/Prospectus (as defined in Section (a) hereof), as of the date of the mailing of the Proxy Statement/Prospectus, and up to and including the date of the meeting of stockholders of Jersey to which such Proxy Statement/Prospectus relates, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The information relating to Interchange, its Subsidiaries, this Agreement and the transactions contemplated hereby in the Registration Statement (as defined in Section (a) hereof), as of the date of the filing thereof, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. ARTICLE 4.8 Capital Adequacy. At the Effective Time, after taking into effect the Merger and the transactions contemplated hereunder, Interchange and Bank will have sufficient capital to satisfy all applicable regulatory capital requirements. ARTICLE 4.9 Interchange Common Stock. At the Effective Time, the Interchange Common Stock to be issued pursuant to the terms of Section 2.2, when so issued, shall be duly authorized, validly issued, fully paid, and non-assessable, free of preemptive rights and free and clear of all liens, encumbrances or restrictions created by or through Interchange. ARTICLE 4.10 Legal Proceedings. Except as disclosed in the Interchange Disclosure Schedule, neither Interchange nor any of its Subsidiaries is a party to any, and there are no material pending or, to the best of Interchange's knowledge, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental investigations of any nature against Interchange or any of its Subsidiaries which, if decided adversely to Interchange, or any of its Subsidiaries, would have a material adverse effect on the business, operations, assets or financial condition of Interchange and its Subsidiaries on a consolidated basis or on the unconsolidated business, operations, assets or financial condition of Bank. Except as disclosed in the Interchange Disclosure Schedule, neither Interchange nor any of Interchange's Subsidiaries is a party to any order, judgment or decree entered against Interchange or any such Subsidiary in any lawsuit or proceeding which would have a material adverse affect on the business, operations, assets or financial condition of Interchange and its Subsidiaries on a consolidated basis. ARTICLE 4.11 Taxes and Tax Returns. Interchange and each of its Subsidiaries has duly filed (and until the Effective Time will so file) all Returns required to be filed by it in respect of any federal, state and local taxes (including withholding taxes, penalties or other payments required) and has duly paid (and until the Effective Time will so pay) all such taxes due and payable, other than taxes or other charges which are being contested in good faith. Interchange and each of its Subsidiaries have established (and until the Effective Time will establish) on its books and records reserves that it reasonably believes are adequate for the payment of all federal, state and local taxes not yet due and payable, but anticipated to be incurred in respect of Interchange and its Subsidiaries through the Effective Time. No deficiencies exist or have been asserted based upon the federal or state income tax returns of Interchange and Bank. To the best knowledge of Interchange, there are no audits or other administrative or court proceedings pending, or claims asserted, for taxes or assessments upon Interchange or any of its Subsidiaries. ARTICLE 4.12 Employee Benefit Plans. (a) Interchange and its Subsidiaries maintain or contribute to certain "employee pension benefit plans" (the "Interchange Pension Plans"), as such term is defined in Section 3 of ERISA, and "employee welfare benefit plans" (the "Interchange Welfare Plans"), as such term is defined in Section 3 of ERISA. Since September 2, 1974, neither Interchange nor its Subsidiaries have contributed to any "Multiemployer Plan", as such term is defined in Section 3(37) of ERISA. (b) Each of the Interchange Pension Plans and each of the Interchange Welfare Plans has been operated in compliance in all material respects with the provisions of ERISA, the Code, all regulations, rulings and announcements promulgated or issued thereunder, and all other applicable governmental laws and regulations. (c) To the knowledge of Interchange, except with respect to customary health and disability benefits, there are no unfunded benefits obligations which are not accounted for by reserves shown on the Interchange Financial Statements and established under generally accepted accounting principles, or otherwise noted on such Interchange Financial Statements. ARTICLE 4.13 Reports. (a) Each communication mailed by Interchange to all of its stockholders since January 1, 1994, and each annual, quarterly or special report, and proxy statement as of its date, complied in all material respects with all applicable statutes, rules and regulations enforced or promulgated by the applicable regulatory agency and did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading; provided that disclosures as of a later date shall be deemed to modify disclosures as of an earlier date. (b) Interchange and Bank have, since January 1, 1994, duly filed with the SEC, FDIC and FRB in correct form the monthly, quarterly and annual reports required to be filed under applicable laws and regulations, copies of which have been furnished by Interchange to Jersey. ARTICLE 4.14 Compliance with Applicable Law. Interchange and its Subsidiaries hold all material licenses, franchises, permits and authorizations necessary for the lawful conduct of their respective businesses under and pursuant to each, and has complied with and is not in default in any respect under any, applicable law, statute, order, rule, regulation, policy and/or guideline of any federal, state or local governmental authority or the AMEX relating to Interchange and its Subsidiaries (other than where such default or non-compliance will not result in a material adverse effect on the business, operations, assets or financial condition of Interchange and its Subsidiaries on a consolidated basis), and neither Interchange nor any of its Subsidiaries has received notice of violation of, nor does it know of any violations (other than violations which will not, alone or in the aggregate, result in a material adverse effect on the business operations, assets or financial condition of Interchange and its Subsidiaries on a consolidated basis) of any of the above. ARTICLE 4.15 Properties and Insurance. (a) Interchange and its Subsidiaries have good and, as to owned real property, marketable title to all material assets and properties, whether real or personal, tangible or intangible, reflected in Interchange's consolidated balance sheet as of December 31, 1996, or owned and acquired subsequent thereto (except to the extent that such assets and properties have been disposed of for fair value in the ordinary course of business since December 31, 1996). Interchange and its Subsidiaries as lessees have the right under valid and subsisting leases to occupy, use, possess and control in all material respects, all real property leased by them as presently occupied, used, possessed and controlled by them. (b) The business operations and all insurable properties and assets of Interchange and its Subsidiaries are insured for their benefit against all risks which, in accordance with reasonably prudent business practice should be insured against, with such deductibles and against such risks and losses as are reasonably adequate for the business engaged in by Interchange and its Subsidiaries. As of the date hereof, Interchange has not received any notice of cancellation of or material amendment to any such insurance policy or bond and is not in default in any material respect under any such policy or bond, and, to the best of its knowledge, no coverage thereunder is being disputed and all material claims thereunder have been filed in a timely fashion. ARTICLE 4.16 Minute Books. The minute books of Interchange and its Subsidiaries contain accurate records of all meetings and other corporate action held of their respective stockholders and Boards of Directors (including committees of their respective Boards of Directors). ARTICLE 4.17 Environmental Matters. Except as disclosed in the Interchange Disclosure Schedule, neither Interchange nor any of its Subsidiaries has received any written notice, citation, claim, assessment, proposed assessment or demand for abatement alleging that Interchange or any of its Subsidiaries (either directly or as a successor-in-interest in connection with the enforcement of remedies to realize the value of properties serving as collateral for outstanding loans) is responsible for the correction or clean-up of any condition material to the business, operations, assets or financial condition of Interchange or its Subsidiaries. Except as disclosed in the Interchange Disclosure Schedule, Interchange has no knowledge that any toxic or hazardous substances or materials have been emitted, generated, disposed of or stored on any property owned or leased by Interchange or any of its Subsidiaries in any manner that violates or, after the lapse of time may violate, any presently existing federal, state or local law or regulation governing or pertaining to such substances and materials, the violation of which would have a material adverse effect on the business, operations, assets or financial condition of Interchange and its Subsidiaries on a consolidated basis. ARTICLE 4.18 Reserves. The allowance for possible loan and lease losses in the September 30, 1997 Interchange Financial Statements was adequate based at the time upon past loan loss experiences and potential losses in the portfolio at the time to cover all known or reasonably anticipated loan losses. ARTICLE 4.19 Certain Contracts. Neither Interchange nor any of its Subsidiaries are party to, or are bound by, any contract or understanding (i) which would prevent or impair the ability of Interchange and Bank to enter into this Agreement and consummate the transactions contemplated hereby, or (ii) as to which there is any default or threatened default by Interchange, its Subsidiaries or any other party to such contracts or understandings which would have a material adverse impact upon the business, operations, assets or financial condition of Interchange or any of its Subsidiaries. ARTICLE 4.20 Disclosures. There are no material facts concerning the business, operations, assets or financial condition of Interchange which would have a material adverse effect on the business, operations or financial condition of Interchange which have not been disclosed to Jersey directly or indirectly by access to any filing by Interchange under the 1934 Act. No representation or warranty contained in Article 4 of this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein not misleading. ARTICLE 4.21 Duration of Warranties. All representations and warranties of Interchange under this Agreement shall survive for a period of four (4) years from the date of this Agreement, and shall thereafter expire and be of no further force or effect. ARTICLE 5 COVENANTS OF THE PARTIES ARTICLE 5.1 Conduct of the Business of Jersey. During the period from the date of this Agreement to the Effective Time, Jersey shall conduct its business and engage in transactions permitted hereunder only in the ordinary course and consistent with prudent banking practice, except with the prior written consent of Interchange, which consent will not be unreasonably withheld. Jersey also shall use its best efforts to (i) preserve its business organization intact, (ii) keep available to itself the present services of its employees and (iii) preserve for itself and Interchange the goodwill of its customers and others with whom business relationships exist, in each case provided that Jersey shall not be required to take any unreasonable or extraordinary act or any action which would conflict with any other term of this Agreement. ARTICLE 5.2 Negative Covenants and Dividend Covenants. Jersey agrees that from the date hereof to the Effective Time, except as otherwise approved by Interchange in writing, or as permitted or required by this Agreement or as contained in the Jersey Disclosure Schedule, it will not: (a) change any provision of its Certificate of Incorporation or Bylaws or any similar governing documents; (b) change the number of shares of its authorized capital stock or issue any more shares of Jersey Common Stock or Jersey Preferred Stock or other capital stock or issue or grant any option, warrant, call, commitment, subscription, right to purchase or agreement of any character relating to the authorized or issued capital stock of Jersey or any securities convertible into shares of such stock, or split, combine or reclassify any shares of its capital stock; (c) except for the declaration and payment of periodic cash dividends with respect to its capital stock in amounts not higher than the last paid dividend and paid no more frequently than once a calendar quarter, declare, set aside or pay any dividend, or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock, or redeem or otherwise acquire any shares of such capital stock, or allow any optional purchases of capital stock under Jersey's Dividend Reinvestment and Stock Purchase Plan (d) grant any severance or termination pay (other than pursuant to policies of Jersey in effect on the date hereof and disclosed to Interchange in the Jersey Disclosure Schedule or as agreed to by Interchange in writing) to, or enter into or amend any employment agreement with, any of its directors, officers or employees; adopt any new employee benefit plan or arrangement of any type or amend any such existing benefit plan or arrangement; or award any increase in compensation or benefits to its directors, officers or employees except with respect to salary increases and bonuses for employees in the ordinary course of business and consistent with past practices and policies and in no event to exceed the amount of salary increases or bonuses paid in or with respect to 1997; (e) sell or dispose of any substantial amount of assets or incur any significant liabilities other than in the ordinary course of business consistent with past practices and policies; (f) make any capital expenditures outside of the ordinary course of business other than pursuant to binding commitments existing on the date hereof and other than expenditures necessary to maintain existing assets in good repair; provided, however that each individual expenditure shall not exceed $10,000 and the aggregate expenditures shall not exceed $25,000; (g) file any applications or make any contract with respect to branching or site location or relocation; (h) agree to acquire in any manner whatsoever (other than to realize upon collateral for a defaulted loan) any business or entity; (i) make any material change in its accounting methods or practices, other than changes required in accordance with generally accepted accounting principles; or (j) agree to do any of the foregoing. In the event Jersey shall request the consent of Interchange to take some or all of the above proscribed actions, Interchange shall not unreasonably withhold or delay its consent. ARTICLE 5.3 No Solicitation. Jersey shall not, directly or indirectly, encourage or solicit or hold discussions or negotiations with, or provide any information to, any person, entity or group (other than Interchange) concerning any merger or sale of shares of capital stock or sale of substantial assets or liabilities not in the ordinary course of business, or similar transactions involving Jersey (an "Acquisition Transaction"). Notwithstanding the foregoing, Jersey may (i) enter into discussions or negotiations or provide information in connection with an unsolicited possible Acquisition Transaction if the Board of Directors of Jersey, after consulting with counsel, determines that such discussions or negotiations should be commenced in the exercise of its fiduciary responsibilities or such information should be furnished in the exercise of its fiduciary responsibilities; and (ii) respond to inquiries from its shareholders in the ordinary course of business. Jersey will immediately communicate to Interchange the terms of any proposal, whether written or oral, which it may receive in respect of any Acquisition Transaction and the fact that it is having discussions or negotiations with, or supplying information to, a third party in connection with a possible Acquisition Transaction. ARTICLE 5.4 Current Information. During the period from the date of this Agreement to the Effective Time, Jersey will, at the request of Interchange, cause one or more of its designated representatives to confer on a monthly or more frequent basis with representatives of Interchange regarding Jersey's business, operations, properties, assets and financial condition and matters relating to the completion of the transactions contemplated herein. Without limiting the foregoing, before granting any loan or extension of credit by renewal or otherwise where the amount in question exceeds $50,000, Jersey will send to Interchange a description (i.e., a copy of the loan documents) for each new loan or extension of credit, and each renewal of an existing loan or extension of credit. Without the prior written approval of Interchange, Jersey shall not grant (i) any new loan or extension of credit or (ii) any renewal of an existing loan or extension of credit which exceeds $50,000. As soon as reasonably available, but in no event more than 45 days after the end of each fiscal quarter (other than the last fiscal quarter of each fiscal year) ending after the date of this Agreement, Jersey will deliver to Interchange Jersey's call reports filed with the FDIC and Jersey's unaudited comparative statements of condition and related comparative statements of operations provided to the shareholders of Jersey and Interchange will deliver to Jersey Interchange's quarterly reports on Form 10-Q, as filed with the SEC under the 1934 Act. As soon as reasonably available, but in no event more than 90 days after the end of each fiscal year, Jersey will deliver to Interchange and Interchange will deliver to Jersey their respective Annual Reports. ARTICLE 5.5 Access to Properties and Records; Confidentiality. (a) Jersey shall permit Interchange and its agents and representatives, including, without limitation, officers, directors, employees, attorneys, accountants and financial advisors (collectively, "Representatives"), and Interchange and Bank shall permit Jersey and its Representatives reasonable access to their respective properties, and shall disclose and make available to Interchange and its Representatives or Jersey and its Representatives, as the case may be, all books, papers and records relating to their respective assets, stock ownership, properties, operations, obligations and liabilities, including, but not limited to, all books of account (including the general ledger), tax records, minute books of directors' and stockholders' meetings, organizational documents, bylaws, material contracts and agreements, filings with any regulatory authority, independent auditors' work papers (subject to the receipt by such auditors of a standard access representation letter), litigation files, plans affecting employees, and any other business activities or prospects in which Interchange and its representatives or Jersey and its representatives may have a reasonable interest. Neither party shall be required to provide access to or to disclose information where such access or disclosure would violate or prejudice the rights of any customer or would contravene any law, rule, regulation, order or judgment. The parties will use their best efforts to obtain waivers of any such restriction and in any event make appropriate substitute disclosure arrangements under circumstances in which the restrictions of the preceding sentence apply. (b) All information furnished by the parties hereto previously in connection with transactions contemplated by this Agreement or pursuant hereto shall be used solely for the purpose of evaluating the Merger contemplated hereby and shall be treated as the sole property of the party delivering the information until consummation of the Merger contemplated hereby and, if such Merger shall not occur, each party and each party's Representatives shall return to the other party all documents or other materials containing, reflecting or referring to such information, will not retain any copies of such information, shall keep confidential all such information, and shall not directly or indirectly use such information for any competitive or commercial purposes or any other purpose not expressing permitted hereby. Each party hereto shall inform its Representatives of the terms of this Section 5.5. Any breach of this Section 5.5 by a Representative of a party hereto shall conclusively be deemed to be a breach thereof by such party. In the event that the Merger contemplated hereby does not occur or this Agreement is terminated, all documents, notes and other writings prepared by a party hereto or its Representatives based on information furnished by the other party, and all other documents and records obtained from another party hereto in connection herewith, shall be promptly destroyed. The obligation to keep such information confidential shall continue for five (5) years from the date the proposed Merger is abandoned but shall not apply to any information which the party receiving the information can establish by convincing evidence was already in its possession prior to the disclosure thereof to it by the other party; was then generally known to the public other than as a result of a disclosure by any party hereto or its Representative; became known to the public through no fault of the party receiving such information; or was disclosed to the party receiving such information by a third party not bound by an obligation of confidentiality; or disclosures pursuant to a legal, regulatory or examination requirement or in accordance with an order of a court of competent jurisdiction, provided that in the event of any disclosure required by this clause (ii) the disclosing party will give at least ten (10) days prior written notice of such disclosure to the other parties and shall not disclose any such information without an opinion of counsel supporting its position that such information must be disclosed. (c) In addition to all other remedies that may be available to any party hereto in connection with a breach by any other party hereto of its or its Representative's obligations hereunder, each party hereto shall be entitled to specific performance and injunctive and other equitable relief. Each party hereto waives, and agrees to use its best efforts to cause its Representatives to waive, any requirement to secure or post a bond in connection with any such relief. (d) The parties agree that, in the event the merger is not consummated, for a period of five (5) years from the date hereof, except to the extent Interchange has the right to acquire Jersey Common Stock pursuant to the Interchange Stock Option, neither party nor any of their respective subsidiaries or affiliates will, unless invited (where such invitation is not directly or indirectly solicited by the invited party) by the other party's Board of Directors: (i) acquire, offer or propose to acquire, or agree or seek to acquire, directly or indirectly, by purchase or otherwise, any securities or direct or indirect rights or options to acquire any securities of the other party or any subsidiary or affiliate thereof, or of any successor to, or person in control of the other party, or any assets of the other party or any subsidiary or affiliate or division thereof or of any such successor or controlling person; (ii) enter into or agree, offer, propose or seek to enter into, or otherwise be involved in or part of, directly or indirectly, any acquisition transaction or other business combination relating to all or part of the other party or its subsidiaries or affiliates or any acquisition transaction for all or part of the assets of the other party or any subsidiary or affiliate of the other party or any of their respective businesses; (iii) make, or in any way participate in, directly or indirectly, any "solicitations" of "proxies" (as such terms are used in the rules of the SEC) to vote, or seek to advise or influence any person or entity with respect to the voting of, any voting securities of the other party; (iv) form, join or in any way participate in a "group" (within the meaning of Section 13(d)(3) of the 1934 Act) or in concert with others to influence or control the other party's management or policies; (iv) directly or indirectly enter into any discussions, negotiations, arrangements or understandings with any other person with respect to any of the foregoing activities or propose any of such activities to any other person; (vii) advise, assist, encourage, act as a financing source for or otherwise invest in any other person in connection with any of the foregoing activities; or (viii) disclose any intention, plan or arrangement inconsistent with any of the foregoing. Each party agrees to promptly advise the other party of any inquiry or proposal made to it with respect to any of the foregoing. Each party also agrees that, during the five (5) year period referred to in the second preceding sentence, neither it nor any of its subsidiaries or affiliates will (i) request the other party or its advisors, directly or indirectly, to (1) amend or waive any provisions of this paragraph (including this sentence); or (2) otherwise consent to any action inconsistent with any provision of this paragraph (including this sentence); or (ii) make any initiative with respect to the other party or any of its subsidiaries or affiliates which could require the other party to make a public announcement regarding (1) such initiative; (2) any of the activities referred to in the second preceding sentence; (3) the possibility any similar transaction; or (4) the possibility of that party or any other person acquiring control of the other party, whether by means of a business combination or otherwise. ARTICLE 5.6 Regulatory Matters. (a) For the purposes of holding the meeting of Jersey stockholders and registering or otherwise qualifying under applicable federal and state securities laws Interchange Common Stock to be issued to Record Holders in connection with the Merger, the parties hereto shall cooperate in the preparation and filing by Interchange of a Registration Statement with the SEC which shall include an appropriate proxy statement and prospectus satisfying all applicable requirements of applicable state and federal laws, including the Securities Act of 1933, as amended (the "1933 Act"), the 1934 Act and applicable state securities laws and the rules and regulations thereunder. (Such proxy statement and prospectus in the form mailed by Jersey to the Jersey shareholders and optionees, together with any and all amendments and supplements thereto, is herein referred to as the "Proxy Statement/Prospectus" and the various documents to be filed by Interchange under the 1933 Act with the SEC to register for sale the Interchange Common Stock to be issued to Record Holders and optionees, including the Proxy Statement/Prospectus, and the Proxy Statement for Interchange stockholders, if necessary, together with any and all amendments and supplements thereto, are referred to herein as the "Registration Statement"). Interchange and Jersey shall cooperate to allow the prompt filing of such Registration Statement. (b) Interchange shall furnish information concerning Interchange as is necessary in order to cause the Proxy Statement/Prospectus, insofar as it relates to Interchange, to comply with Section (a) hereof. Interchange agrees promptly to advise Jersey if at any time prior to the Jersey shareholder meeting referred to in Section 5.7 hereof, any information provided by Interchange in the Proxy Statement/Prospectus becomes incorrect or incomplete in any material respect and to provide Jersey with the information needed to correct such inaccuracy or omission. Interchange shall furnish Jersey with such supplemental information as may be necessary in order to cause the Proxy Statement/Prospectus, insofar as it relates to Interchange, to comply with Section (a) after the mailing thereof to Jersey shareholders. (c) Jersey shall furnish Interchange with such information concerning Jersey as is necessary in order to cause the Proxy Statement/Prospectus and Registration Statement, insofar as it relates to Jersey, to comply with Section (a) hereof. Jersey agrees promptly to advise Interchange if, at any time prior to the Jersey shareholder's meeting referred to in Section 5.7 hereof, information provided by Jersey in the Proxy Statement/Prospectus becomes incorrect or incomplete in any material respect and to provide Interchange with the information needed to correct such inaccuracy or omission. Jersey shall furnish Interchange with such supplemental information as may be necessary in order to cause the Proxy Statement/Prospectus and Registration Statement, insofar as it relates to Jersey, to comply with Section (a) after the mailing thereof to Jersey shareholders. (d) Interchange shall promptly make such filings as are necessary in connection with the offering of the Interchange Common Stock with applicable state securities agencies and shall use all reasonable efforts to qualify the offering of the Interchange Common Stock under applicable state securities laws at the earliest practicable date. Jersey shall promptly furnish Interchange with such information regarding the Jersey shareholders as Interchange requires to enable it to determine what filings are required hereunder. Jersey authorizes Interchange to utilize in such filings the information concerning Jersey provided to Interchange in connection with, or contained in, the Proxy Statement/Prospectus. Interchange shall furnish Jersey with drafts of all such filings, shall provide Jersey the opportunity to comment thereon, and shall keep Jersey advised of the status thereof. Interchange and Jersey shall as promptly as practicable file the Registration Statement containing the Proxy Statement/Prospectus with the SEC, FRB and the Commissioner, and each of Interchange and Jersey shall promptly notify the other of all communications, oral or written, with the SEC, FRB and the Commissioner concerning the Registration Statement and the Proxy Statement/Prospectus. (e) Interchange shall cause the Interchange Common Stock to be issued in connection with the Merger to be listed on the AMEX. (f) The parties hereto will cooperate with each other and use their best efforts to prepare all necessary documentation, to effect all necessary filings and to obtain all necessary permits, consents, approvals and authorizations of all third parties and governmental bodies necessary to consummate the transactions contemplated by this Agreement as soon as possible, including, without limitation, those required by the Commissioner and FRB. The parties shall each have the right to review in advance and comment on all information relating to the other, as the case may be, which appears in any filing made with, or written material submitted to, any third party or governmental body in connection with the transactions contemplated by this Agreement. Interchange and Bank shall cause their applications to the Commissioner and FRB to be filed (i) within 60 days of the date hereof, so long as Jersey provides all information necessary to complete the application within 45 days of the date hereof, or (ii) within 15 days after all such information is provided, if Jersey does not provide all such information within such 45 day period. Interchange shall provide to Jersey drafts of all filings and applications referred to in this Section (f) and shall give Jersey the opportunity to comment thereon prior to their filing. (g) Each of the parties will promptly furnish each other with copies of written communications received by them or any of their respective Subsidiaries from, or delivered by any of the foregoing to, any governmental body in respect of the transactions contemplated hereby. ARTICLE 5.7 Approval of Stockholders. Jersey will (a) take all steps reasonably necessary duly to call, give notice of, convene and hold a meeting of the stockholders of Jersey as soon as reasonably practicable for the purpose of securing the approval by such stockholders of this Agreement, (b) subject to the Board of Directors of Jersey exercising its fiduciary duties, after consultation with counsel, with respect to any unsolicited Acquisition Transaction, recommend to the stockholders of Jersey the approval of this Agreement and the transactions contemplated hereby and use its best efforts to obtain, as promptly as practicable, such approval, and (c) cooperate and consult with Interchange with respect to each of the foregoing matters. Each director of Jersey has executed this Agreement confirming that each director agrees to vote his or her shares to approve the Merger. ARTICLE 5.8 Further Assurances. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use its best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws and regulations to satisfy the conditions to Closing and to consummate and make effective the transactions contemplated by this Agreement, including, without limitation, using reasonable efforts to lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the transactions contemplated by this Agreement and using its best efforts to prevent the breach of any representation, warranty, covenant or agreement of such party contained or referred to in this Agreement and to promptly remedy the same. Nothing in this section shall be construed to require any party to participate in any threatened or actual legal, administrative or other proceedings (other than proceedings, actions or investigations to which it is otherwise a party or subject or threatened to be made a party or subject) in connection with consummation of the transactions contemplated by this Agreement unless such party shall consent in advance and in writing to such participation and the other party agrees to reimburse and indemnify such party for and against any and all reasonable costs and damages related thereto. ARTICLE 5.9 Public Announcements. The parties hereto shall cooperate with each other in the development and distribution of all news releases and other public disclosures with respect to this Agreement or any of the transactions contemplated hereby, except as may be otherwise required by law or regulation or as to which the party releasing such information has used its best efforts to discuss with the other party in advance. Unless required by a court of competent jurisdiction or a regulatory body having regulatory jurisdiction over the party proposing to make disclosure, no public disclosure shall be made without the prior written approval of the CEO or CFO of Interchange provided that prior to making any public disclosure regarding the Merger, Interchange shall provide the Chairman of the Board of Directors of Jersey with a copy of the proposed public disclosure and allow him the opportunity to comment. ARTICLE 5.10 Failure to Fulfill Conditions. In the event that Interchange or Jersey determines that a material condition to its obligation to consummate the transactions contemplated hereby cannot be fulfilled on or prior to November 30, 1998, and that it will not waive that condition, it will promptly notify the other party. Jersey and Interchange will promptly inform the other of any facts applicable to Jersey or Interchange, respectively, or their respective directors, officers or Subsidiaries, that would be likely to prevent or materially delay approval of the Merger by any governmental authority or which would otherwise prevent or materially delay completion of the Merger. ARTICLE 5.11 Disclosure Supplements. From time to time prior to the Effective Time, each party hereto will promptly supplement or amend (by written notice to the other) its respective Disclosure Schedules delivered pursuant hereto with respect to any matter hereafter arising which, if existing, occurring or known at the date of this Agreement, would have been required to be set forth or described in such Schedules or which is necessary to correct any information in such Schedules which has been rendered materially inaccurate thereby. For the purpose of determining satisfaction of the conditions set forth in Article ARTICLE 6, no supplement or amendment to such Schedules shall correct or cure any warranty which was untrue when made, but supplements or amendments may be used to disclose subsequent facts or events to maintain the truthfulness of any warranty. ARTICLE 5.12 Indemnification and Insurance. Interchange agrees that it will, or if it is not permitted to do so under applicable law, it will cause Bank to, after the Effective Time, and to the extent permitted by applicable law, provide to the former and then current directors and officers of Jersey indemnification equivalent to that provided by the Certificate of Incorporation and By-laws of Jersey with respect to acts or omissions occurring prior to the Effective Time, whether asserted prior to or after the Effective Time, including without limitation, the authorization of this Agreement and the transactions contemplated hereby, for a period of six years from the Effective Time, or in the case of matters occurring prior to the Effective Time which have not been resolved prior to the sixth anniversary of the Effective Time, until such matters are finally resolved. Jersey shall purchase, at the expense of Interchange, continuation coverage for a period of up to six years (as determined by Interchange in light of costs) following consummation of the Merger under the policy of Directors and Officers Liability Insurance Jersey currently has. ARTICLE 5.13 Pooling and Tax-Free Reorganization Treatment. Neither Interchange nor Jersey shall intentionally take, fail to take or cause to be taken or not be taken, any action within its control, whether before or after the Effective Time, which would disqualify the Merger as a "pooling of interests" for accounting purposes or as a "reorganization" within the meaning of Section 368(a) of the Code. Interchange and Jersey acknowledge that Interchange requires the transaction to be accounted for as a "pooling" transaction, as a condition of the deal. ARTICLE 5.14 Affiliates. (a) Promptly, but in any event within two weeks, after the execution and delivery of this Agreement, (i) Jersey shall deliver to Interchange (x) a letter identifying all persons who, to the knowledge of Jersey, may be deemed to be "affiliates" of Jersey under Rule 145 of the 1933 Act, including without limitation all directors and executive officers of Jersey and (y) a letter identifying all persons who, to the knowledge of Jersey, may be deemed to be "affiliates" of Jersey as that term is used for purposes of qualifying for "pooling of interests" accounting treatment; and (ii) Interchange shall identify to Jersey all persons who, to the knowledge of Interchange, may be deemed "affiliates" of Interchange as that term is used for purposes of qualifying for "pooling of interests" accounting treatment. (b) Each person who may be deemed an affiliate of Jersey (under either Rule 145 of the 1933 Act or the accounting treatment rules) shall execute a letter substantially in the form of Schedule 5.14 hereto agreeing to be bound by the restrictions of Rule 145, as set forth in Schedule 5.14 and agreeing to be bound by the rules which permit the Merger to be treated as a pooling of interests for accounting purposes. In addition, Interchange shall cause its affiliates (as that term is used for purposes of qualifying for pooling of interests) to execute a letter within two weeks of the date hereof, in which such persons agree to be bound by the rules which permit the Merger to be treated as a pooling of interests for accounting treatment. ARTICLE 5.15 Compliance with the Industrial Site Recovery Act. Jersey, at its sole cost and expense, shall obtain prior to the Effective Time, either: (a) a Letter of Non-Applicability from the New Jersey Department of Environmental Protection and Energy ("NJDEPE") stating that none of the facilities located in New Jersey owned or operated by Jersey (each, a "Facility") is an "industrial establishment," as such term is defined under the Industrial Site Recovery Act ("ISRA"); (b) a Remediation Agreement issued by the NJDEPE pursuant to ISRA authorizing the consummation of the transactions contemplated by this Agreement; or (c) a Negative Declaration approval, Remedial Action Workplan approval, No Further Action letter or other document or documents issued by the NJDEPE advising that the requirements of ISRA have been satisfied with respect to each Facility subject to ISRA. In the event Jersey obtains a Remediation Agreement, Jersey will post or have posted an appropriate Remediation Funding Source or will have obtained the NJDEPE's approval to self-guaranty any Remediation Funding Source required under any such Remediation Agreement. ARTICLE 5.16 Agreement Concerning Termination of Employment. Within 30 days of the Closing, in cancellation of their respective employment agreements and as a full release for all other severance and similar payments due either of them from Jersey or claims against Jersey, Interchange shall pay (i) Britt the sum of $362,400, and (ii) Ledgerwood the sum of $227,600; provided, however, that such sums may be reduced or increased, at the option and at the direction of Jersey, so that the total amount paid to Britt and Ledgerwood is $1 less than the amount that would constitute an "excess parachute payment", as defined in Section 280G of the Code or regulations promulgated thereunder. Such sums shall be paid into trusts established for the benefit of each of Britt and Ledgerwood at a financial institution(s) located in the State of New Jersey and selected by Britt and Ledgerwood; provided, however, that Britt and Ledgerwood shall each be responsible for the expenses related to the establishment and maintenance of their respective trust. Said trusts will in turn make payment to the respective beneficiary over a three year period consistent with Jersey's current payroll periods. ARTICLE 6 CLOSING CONDITIONS ARTICLE 6.1 Conditions of Each Party's Obligations Under this Agreement. The respective obligations of each party under this Agreement to consummate the Merger shall be subject to the satisfaction, or, where permissible under applicable law, waiver at or prior to the Effective Time of the following conditions: (a) Approval of Stockholders; SEC Registration. This Agreement and the transactions contemplated hereby shall have been approved by the requisite vote of the stockholders of Jersey and, if necessary, Interchange. The Registration Statement shall have been declared effective by the SEC and shall not be subject to a stop order or any threatened stop order, the issuance of the Interchange Common Stock shall have been qualified in every state where such qualification is required under the applicable state securities laws and the Interchange Common Stock to be issued in connection with the Merger shall have been approved for listing on the AMEX. (b) Regulatory Filings. All necessary regulatory or governmental approvals and consents (including without limitation any required approval of the Commissioner and FRB) required to consummate the transactions contemplated hereby shall have been obtained without any term or condition which would materially impair the value of Jersey, taken as a whole, to Interchange. All conditions required to be satisfied prior to the Effective Time by the terms of such approvals and consents shall have been satisfied; and all statutory waiting periods in respect thereof shall have expired. For purposes of the foregoing, any matter involving 10% or more of the capital of Jersey shall be regarded as materially impairing the value of Jersey. (c) Suits and Proceedings. No order, judgment or decree shall be outstanding against a party hereto or a third party that would have the effect of preventing completion of the Merger; no suit, action or other proceeding shall be pending or threatened by any governmental body in which it is sought to restrain or prohibit the Merger and no suit, action or other proceeding shall be pending before any court or governmental agency in which it is sought to restrain or prohibit the Merger or obtain other substantial monetary or other relief against one or more parties hereto in connection with this Agreement and which Interchange or Jersey determines in good faith, based upon the advice of their respective counsel, makes it inadvisable to proceed with the Merger because any such suit, action or proceeding has a significant potential to be resolved in such a way as to deprive the party electing not to proceed of any of the material benefits to it of the Merger. (d) Tax Free Exchange. Interchange and Jersey shall have received an opinion, satisfactory to Interchange and Jersey, of Norris, McLaughlin & Marcus, P.A., counsel for Interchange, based on appropriate representations from the parties, to the effect that the transactions contemplated hereby will result in a reorganization (as defined in Section 368(a) of the Code), and accordingly no gain or loss will be recognized for federal income tax purposes to Interchange, Jersey or Bank or to the shareholders of Jersey who exchange their shares of Jersey for Interchange Common Stock (except to the extent that cash is received in lieu of fractional shares of Interchange Common Stock). ARTICLE 6.2 Conditions to the Obligations of Interchange Under this Agreement. The obligations of Interchange under this Agreement shall be further subject to the satisfaction or waiver, at or prior to the Effective Time, of the following conditions: (a) Representations and Warranties; Performance of Obligations of Jersey. The representations and warranties of Jersey contained in this Agreement shall be true and correct in all material respects on the Closing Date as though made on and as of the Closing Date. Jersey shall have performed in all material respects the agreements, covenants and obligations necessary to be performed by it prior to the Closing Date. With respect to any representation or warranty which as of the Closing Date has required a supplement or amendment to the Jersey Disclosure Schedule to render such representation or warranty true and correct as of the Closing Date, the representation and warranty shall be deemed true and correct as of the Closing Date only if the information contained in the supplement or amendment to the Disclosure Schedule related to events occurring following the execution of this Agreement and the facts disclosed in such supplement or amendment would not either alone, or together with any other supplements or amendments to the Jersey Disclosure Schedule, materially adversely effect the representation as to which the supplement or amendment relates; provided, however, even if any facts disclosed in such supplement or amendment either alone, or together with any other supplements or amendments to the Jersey Disclosure Schedule, materially adversely effect the representation as to which the supplement or amendment relates, if the facts will not materially impair the value of Jersey, taken as a whole, to Interchange, Interchange will not unreasonably refuse to waive the foregoing condition if such waiver is requested by Jersey. For purposes of the foregoing, any matter involving 10% or more of the capital of Jersey shall be regarded as materially impairing the value of Jersey. (b) Opinion of Counsel. Interchange shall have received an opinion of counsel to Jersey, dated the date of the Closing, in form and substance reasonably satisfactory to Interchange covering the matters set forth in Schedule 6.2. (c) Pooling of Interests. The Merger shall be qualified to be treated by Interchange as a pooling-of-interests for accounting purposes. (d) Certificates. Jersey shall have furnished Interchange with such certificates of its officers or others (without personal liability) and such other documents to evidence fulfillment of the conditions set forth in this Section 6.2 as Interchange may reasonably request. (e) Conversion of Jersey Preferred Stock. Each holder of Jersey Preferred Stock shall have either (i) timely executed and delivered to Interchange, the Conversion Agreement (which may result in such holder exercising dissenters' rights as afforded thereunder), or (ii) been ordered (by a final and non-appealable order) by a court of competent jurisdiction to either (aa) convert all his, her or its shares of Jersey Preferred Stock in a manner consistent with the Conversion Agreement, or (bb) exercise such holder's dissenters' rights provided to the holder under Section 2.4 of this Agreement. ARTICLE 6.3 Conditions to the Obligations of Jersey Under this Agreement. The obligations of Jersey under this Agreement shall be further subject to the satisfaction or waiver, at or prior to the Effective Time, of the following conditions: (a) Representations and Warranties; Performance of Obligations of Interchange. The representations and warranties of Interchange contained in this Agreement shall be true and correct in all material respects on the Closing Date as though made on and as of the Closing Date. Interchange and Bank shall have performed in all material respects, the agreements, covenants and obligations to be performed by them prior to the Closing Date. With respect to any representation or warranty which as of the Closing Date has required a supplement or amendment to the Interchange Disclosure Schedule to render such representation or warranty true and correct as of the Closing Date, the representation and warranty shall be deemed true and correct as of the Closing Date only if (i) the information contained in the supplement or amendment to the Disclosure Schedule related to events occurring following the execution of this Agreement and (ii) the facts disclosed in such supplement or amendment would not either alone, or together with any other supplements or amendments to the Interchange Disclosure Schedule, materially adversely effect the representation as to which the supplement or amendment relates. (b) Opinion of Counsel to Interchange. Jersey shall have received an opinion of counsel to Interchange, dated the date of the Closing, in form and substance reasonably satisfactory to Jersey, covering the matters set forth in Schedule 6.3. (c) Fairness Opinion. Jersey shall have received an opinion from Financial Advisor as of the date the Proxy Statement/Prospectus is mailed to Jersey's stockholders, to the effect that, in its opinion, the consideration to be paid to stockholders of Jersey hereunder is fair to such stockholders. (d) Certificates. Interchange shall have furnished Jersey with such certificates of its officers or others (without personal liability) and such other documents to evidence fulfillment of the conditions set forth in this Section 6.3 as Jersey may reasonably request. ARTICLE 7 TERMINATION, AMENDMENT AND WAIVER ARTICLE 7.1 Termination. This Agreement may be terminated prior to the Effective Time, whether before or after approval of this Agreement by the stockholders of Jersey: (a) By mutual written consent of the parties hereto. (b) By Interchange or Jersey if the Effective Time shall not have occurred on or prior to November 30, 1998, or (ii) if a vote of the stockholders of Jersey or, if necessary, of Interchange, is taken and such stockholders fail to approve this Agreement at the meeting (or any adjournment thereof) held for such purpose, unless in each case the failure of such occurrence shall be due to the failure of the party seeking to terminate this Agreement to perform or observe its agreements set forth herein to be performed or observed by such party at or before the Effective Time. (c) By Interchange or Jersey upon written notice to the other if any application for regulatory or governmental approval necessary to consummate the Merger and the other transactions contemplated hereby shall have been denied or withdrawn at the request or recommendation of the applicable regulatory agency or governmental authority or by Interchange upon written notice to Jersey if any such application is approved with conditions which materially impair the value of Jersey, taken as a whole, to Interchange, unless any such occurrence shall be due to the failure of the party seeking to terminate this Agreement to perform or observe its agreements set forth herein to be performed or observed by such party at or before the Effective Date. For purposes of the foregoing, any matter involving 10% or more of the capital of Jersey shall be regarded as materially impairing the value of Jersey. (d) By Interchange if there shall have occurred a material adverse change in the business, operations, assets, or financial condition of Jersey from that disclosed by Jersey on the date of this Agreement, or there was a material breach in any representation, warranty, covenant, agreement or obligation of Jersey hereunder and such material breach(es), taken alone or in the aggregate, will result in a material adverse effect on the business, operations, assets or financial condition of Jersey. (e) By Jersey, if there shall have occurred a material adverse change in the business, operations, assets or financial condition of Interchange, Bank or Interchange and its Subsidiaries on a consolidated basis from that disclosed by Interchange on the date of this Agreement; or there was a material breach in any representation, warranty, covenant, agreement or obligation of Interchange hereunder and such material breach(es), taken alone or in the aggregate, will result in a material adverse effect on the business, operations, assets or financial condition of Interchange. (f) By Interchange or Jersey if any condition to Closing specified under Article VI hereof applicable to such party cannot reasonably be met after giving the other party a reasonable opportunity to cure any such condition. (g) By Interchange if any supplemental Disclosure Schedule provided by Jersey after the date hereof discloses facts materially and substantially adverse to the business, operations or future prospects of Jersey; or (h) By Jersey if any supplemental Disclosure Schedule provided by Interchange after the date hereof discloses facts materially adverse to the business, operations, assets or future prospects of Interchange; or (i) By Interchange if all the holders of Jersey Preferred Stock do not enter into the Conversion Agreement within 60 days after the execution of this Agreement by the parties, except that Interchange cannot terminate this Agreement under this Section 7.1(i) if, after the expiration of such 60 day period, Jersey has brought an action(s) in a court of competent jurisdiction to require the holders of Jersey Preferred Stock who have not executed and delivered to Interchange the Conversion Agreement to either (i) convert their shares of Jersey Preferred Stock into Jersey Common Stock in a manner consistent with the Conversion Agreement, or (ii) exercise their dissenters' rights provided to them by Section 2.4 of this Agreement. ARTICLE 7.2 Effect of Termination. In the event of the termination and abandonment of this Agreement by either Interchange or Jersey pursuant to Section 7.1, this Agreement (except the provisions of Section 5.5(b) and Section 5.5(d) hereof) shall forthwith become void and have no effect, without any liability on the part of any party or its officers, directors or stockholders, except as set forth in Section 7.3 and further provided that the limit of liability set forth in this Section 7.2 and in Section 7.3 shall not affect the validity or enforceability of the Stock Option Agreement. ARTICLE 7.3 Fees, Expenses and Liabilities. (a) Except as otherwise set forth expressly in this Agreement, including the exceptions set forth this Section 7.3, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby (including legal, accounting and investment banking fees and expenses) shall be borne by the party incurring such costs; provided, however, that Interchange and Jersey shall share equally all fees and expenses, other than attorneys' fees, incurred in relation to the printing and filing of the Proxy Statement/Prospectus (including any related preliminary materials) and the Registration Statement (including financial statements and exhibits) and any amendments or supplements. Interchange shall pay the filing fees applicable to the Registration Statement, and Jersey shall pay the filing fees applicable to the Proxy Statement/Prospectus. (b) Interchange acknowledges that Jersey will be expending substantial sums in performing under this Agreement and in contemplation of the transaction contemplated hereby and, further, that the efforts necessary to bring the transaction contemplated herein to conclusion may result in the officers and directors of Jersey being unable to pursue possible business opportunities arising during the term of this Agreement. In the event this Agreement is terminated as a result of a material breach of this Agreement by Interchange, Interchange shall pay Jersey as liquidated damages the sum of $500,000. Interchange acknowledges that actual damages to Jersey as a result of a material breach of this Agreement by Interchange would be difficult or impossible to calculate, and Interchange further agrees that such sum represents a reasonable attempt to calculate damages resulting from the overall impact of termination of the transaction upon Jersey, and that the same does not constitute, nor is it intended to constitute, a penalty. Jersey agrees that such sum will be Jersey's exclusive remedy for Interchange's material breach of this Agreement. (c) If a third party makes an unsolicited offer to Jersey (and Jersey is able to sustain the burden of proving by a preponderance of the evidence that the offer was unsolicited) for an Acquisition Transaction and the Board of Directors of Jersey, after consulting with counsel, determines that such unsolicited offer should be considered or recommended by the Board of Directors of Jersey in the exercise of its fiduciary responsibilities, and the Closing does not occur on or before November 30, 1998 and/or the Agreement is terminated by Jersey solely because of such unsolicited offer, Jersey shall promptly reimburse Interchange for all reasonable costs and expenses incurred by Interchange for itself and on behalf of Bank in connection with this Agreement and the transactions contemplated hereby (including legal and accounting fees and disbursements of advisors). Such reimbursement of reasonable costs and expenses shall be Interchange's and Bank's exclusive remedy so long as (i) Jersey satisfies its burden to prove that such offer was unsolicited, and (ii) the Closing does not occur on or before November 30, 1998 and/or the Agreement is terminated by Jersey solely because of such unsolicited offer. (d) If Jersey materially breaches this Agreement, Interchange and/or Bank may bring suit against Jersey, including the right to seek Jersey's specific performance of the transactions contemplated by this Agreement. Further, if specific performance is not ordered or Interchange and/or Bank does not seek specific performance, Interchange and/or Bank may make a claim for money damages suffered by Interchange and/or Bank as a result of Jersey's material breach of this Agreement, including without limitation all damages, reasonable costs and expenses incurred by Interchange and Bank in connection with this Agreement and the transactions contemplated hereby (including legal, accounting and investment banking fees and expenses), as provided by law; provided, however, that Interchange and the Bank may not recover such money damages of any nature in excess of $2,000,000 in the aggregate. (e) If the Closing does not occur on or before November 30, 1998 because the Closing condition specified in Section 6.2(e) has not been satisfied, Jersey shall not be deemed to have committed a material breach of this Agreement as specified in Section 7.3(d), but Jersey shall nonetheless in such case promptly reimburse Interchange for all reasonable costs and expenses incurred by Interchange for itself and on behalf of Bank in connection with this Agreement and the transactions contemplated hereby (including legal and accounting fees and disbursements of advisors) and such reimbursement shall be Interchange's and Bank's exclusive remedy so long as (i) Jersey has used its best efforts to obtain the fulfillment of the Section 6.2(e) Closing condition, and (ii) the Closing does not occur on or before November 30, 1998 solely because the Section 6.2(e) Closing condition has not been satisfied. If Jersey fails to use its best efforts to obtain the timely fulfillment of the 6.2(e) Closing condition, such failure shall be deemed to be a material breach of this Agreement by Jersey. For the purposes of this Section 7.3(e), best efforts shall mean timely distribution of the Conversion Agreement to the Jersey Preferred Stockholders and timely institution of litigation as long as such litigation is diligently prosecuted. ARTICLE 7.4 Amendment. This Agreement may be amended by mutual action taken by the parties hereto at any time before or after adoption of this Agreement by the stockholders of Jersey but, after any such adoption, no amendment shall be made which reduces or changes the amount or form of the consideration to be delivered to the shareholders of Jersey without the approval of such stockholders. This Agreement may not be amended except by an instrument in writing signed on behalf of Interchange and Jersey. ARTICLE 7.5 Extension; Waiver. The parties may, at any time prior to the Effective Time of the Merger, extend the time for the performance of any of the obligations or other acts of the other parties hereto; waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant thereto or waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of any party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party against which the waiver is sought to be enforced. ARTICLE 8 MISCELLANEOUS ARTICLE 8.1 Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by telecopier with confirming copy sent the same day by registered or certified mail, postage prepaid, as follows: If to Interchange: Interchange Financial Services Corporation Park 80 West, Plaza Two Saddle Brook, New Jersey 07662 Attn.: Anthony S. Abbate, President & CEO With a copy to: Norris, McLaughlin & Marcus, P.A. 721 Route 202-206 P.O. Box 1018 Somerville, New Jersey 08876 Attn.: Peter D. Hutcheon, Esq. If to Jersey: The Jersey Bank For Savings 2-8 South Kinderkamack Road Montvale, New Jersey 07645-0333 Attn.: Clyde Britt, President & CEO With a copy to: Beattie Padovano 50 Chestnut Ridge Road P.O. Box 244 Montvale, New Jersey 07645-0244 Attn: Adolph A. Romei, Esq. Sills, Cummis, Zuckerman, Radin, Tischman, Epstein & Gross, P.A. One Riverfront Plaza Newark, New Jersey 07102-5400 Attn: Victor H. Boyajian, Esq. or such other addresses as shall be furnished in writing by any party, and any such notice or communication shall be deemed to have been given as of the date so delivered or telecopied and mailed. ARTICLE 8.2 Parties in Interest. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. No assignment of this Agreement may be made except upon the written consent of the other parties hereto. No person or entity shall be deemed a third-party beneficiary under this Agreement, other than current and former directors and officers of Jersey with respect to Section 5.12 hereof ARTICLE 8.3 Entire Agreement. This Agreement, which includes the Disclosure Schedules hereto and the other documents, agreements and instruments executed and delivered pursuant to or in connection with this Agreement, contains the entire Agreement between the parties hereto with respect to the transactions contemplated by this Agreement and supersedes all prior negotiations, arrangements or understandings, written or oral with respect thereto, except that the Confidentiality Agreement dated November 3, 1997 between Interchange and Jersey remains in effect until the first to occur of the Effective Time or the termination of this Agreement. ARTICLE 8.4 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall bc considered one and the same agreement and each of which shall be deemed an original. ARTICLE 8.5 Governing Law. This Agreement shall be governed by the laws of the State of New Jersey, without giving effect to the principles of conflict of laws thereof. ARTICLE 8.6 Descriptive Headings. The descriptive headings of this Agreement are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. IN WITNESS WHEREOF, Interchange, Bank and Jersey have caused this Agreement to be executed by their duly authorized officers as of the day and year first above written and each of the directors of Jersey has joined in this Agreement as set forth below. ATTEST INTERCHANGE FINANCIAL SERVICES CORPORATION /s/ Anthony Labozzetta /s/ Anthony S. Abbate - ----------------------------- ------------------------------------ Anthony Labozzetta Anthony S. Abbate, Secretary President and CEO ATTEST THE JERSEY BANK FOR SAVINGS /s/ William C. Ledgerwood /s/ Clyde Britt - ----------------------------- ------------------------------------ William C. Ledgerwood Clyde Britt Secretary President and CEO ATTEST INTERCHANGE STATE BANK /s/ Anthony Labozzetta /s/ Anthony S. Abbate - ----------------------------- ------------------------------------ Anthony Labozzetta Anthony S. Abbate, Secretary President and CEO EXHIBIT A (page 1 of 1) Jersey's Principal Office 2-8 South Kinderkamack Road at Grand Avenue Montvale, New Jersey 07645 Jersey's Branch Office 876 Kinderkamack Road River Edge, New Jersey 07661 EXHIBIT B (page 1 of 2) Bank's Principal Office Park 80 West -- Plaza Two Saddle Brook, New Jersey 07663 Bank's Branch Offices (11) 1. 200 Floral Lane, Saddle Brook, New Jersey 07633 2. 444 Boulevard, Elmwood Park, New Jersey 07407 3. 784 Franklin Avenue, Franklin Lakes, New Jersey 07417 4. 351 Midland Avenue, Garfield, New Jersey 07026 5. 321 Broadway Plaza, Hillsdale, New Jersey 07642 6. 225 Main Street, Little Ferry, New Jersey 07643 7. 185 Garibaldi Avenue, Lodi, New Jersey 07644 8. 3 Post Road, Oakland, New Jersey 07436 9. 165 Kinderkamack Road, Park Ridge, New Jersey 07656 10. 250 West Passaic Street, Rochelle Park, New Jersey 07622 11. 590 Pascack Road, Washington Township, New Jersey 07675 Surviving Bank's Principal Office Park 80 West -- Plaza Two Saddle Brook, New Jersey 07663 Surviving Bank's Branch Offices (there will be 13 branch offices) 1. 200 Floral Lane, Saddle Brook, New Jersey 07633 2. 444 Boulevard, Elmwood Park, New Jersey 07407 3. 784 Franklin Avenue, Franklin Lakes, New Jersey 07417 4. 351 Midland Avenue, Garfield, New Jersey 07026 EXHIBIT B (page 2 of 2) 5. 321 Broadway Plaza, Hillsdale, New Jersey 07642 6. 225 Main Street, Little Ferry, New Jersey 07643 7. 185 Garibaldi Avenue, Lodi, New Jersey 07644 8. 3 Post Road, Oakland, New Jersey 07436 9. 165 Kinderkamack Road, Park Ridge, New Jersey 07656 10. 250 West Passaic Street, Rochelle Park, New Jersey 07622 11. 590 Pascack Road, Washington Township, New Jersey 07675 12. 2-8 South Kinderkamack Road at Grand Avenue, Montvale, New Jersey 07645- 0333 13. 876 Kinderkamack Road, River Edge, New Jersey 07661 Directors of the Surviving Bank Anthony S. Abbate Anthony D. Andora Donald L. Correll Anthony R. Coscia John J. Eccleston David R. Ficca James E. Healey Nicholas R. Marcalus Eleanore S. Nissley Jeremiah F. O'Connor Robert P. Rittereiser Benjamin Rosenzweig Richard A. Gilsenan Arthur R. Odabash Officers of the Surviving Bank Anthony S. Abbate, President and CEO Frank R. Giancola, Senior Vice President, Operations Anthony Labozzeta, Executive Vice President and CFO Richard N. Latrenta, Senior Vice President, Retail Banking Patricia Arnold, Senior Vice President, Commercial Banking EXHIBIT C Conversion Agreement ______________, 1998 The Jersey Bank For Savings 2-8 South Kinderkamack Road Montvale, New Jersey 07645 Gentlemen: Reference is made to (i) the Agreement and Plan of Merger, dated as of January __, 1998 (the "Merger Agreement"), among Interchange Financial Services Corporation ("Interchange"), Interchange State Bank ("Bank") and The Jersey Bank For Savings ("Jersey"), pursuant to which Jersey will be merged into Bank (the "Merger"); and (ii) the Certificate of Amendment to the Certificate of Incorporation of Jersey filed with the New Jersey Department of Banking on May 14, 1993 (the "Amendment"), pursuant to which Jersey authorized the issuance of the Jersey Preferred Stock (as such term is defined in the Merger Agreement). All capitalized terms used herein, unless otherwise defined herein, shall have the same meaning as if used in the Merger Agreement. The undersigned, a holder of record of ______________ shares of Jersey Preferred Stock, who expects to derive substantial benefit from the Merger, in order to induce Interchange, Bank and Jersey to consummate the Merger, hereby agrees to convert each share of Jersey Preferred Stock into .8695 shares of Jersey Common Stock. I understand that Jersey requires that I deliver this Agreement to Interchange before the close of business on Friday, February 27, 1998. 1. Agreement to Convert. Subject to Section 3 of this Agreement, pursuant to and accordance with the Amendment, I agree that each of my shares of Jersey Preferred Stock (except for shares of my Jersey Preferred Stock which I have previously converted) shall immediately prior to the Effective Time automatically be converted into .8695 shares of Jersey Common Stock. I understand that I will not receive any fractional share resulting from such conversion, but in lieu thereof, you will pay me a sum equal to the Average Closing Price multiplied by such fraction of a whole share of Jersey Common Stock. 2. Representations Concerning this Agreement. I now hold and will continue to hold (until my shares are converted hereunder) my shares of Jersey Preferred Stock free and clear of any liens, encumbrances, charges, restrictions or rights of third parties and my entering into and performance of this Agreement will not violate or conflict with any other agreement, court order, instrument, judgment, order or decree by which I or any of my shares of Jersey Preferred Stock are bound. 3. Right to Dissent. If I timely execute and deliver this Agreement to Interchange, I will have a right to dissent to the consummation of the Merger and receive a cash payment equal to the fair value of the shares of Jersey Common Stock that I would receive under this Agreement. I understand that fair value will be determined by an appraisal proceeding supervised by a court of competent jurisdiction. I also understand that Jersey will deliver to me a copy of the Proxy Statement\Prospectus when such Proxy Statement\Prospectus is delivered to the Jersey Common Stockholders and that I will have adequate opportunity to review the Proxy Statement\Prospectus prior to the expiration of my right to dissent to the Merger and seek a cash payment for my shares. Unless I waive my right to dissent and seek such cash payment, such right shall continue after the delivery of the Proxy/Statement Prospectus and until the third day prior to the day fixed for the meeting of the Jersey Common Stockholders to vote on the Merger, as set forth in the Proxy Statement\Prospectus. 4. Acknowledgment of Receipt of Information and Effect of Merger. I acknowledge that I have received copies of and have read the Amendment and the Merger Agreement, together with all exhibits and disclosure schedules attached thereto. I also have received copies and read each of the following: the Annual Report of Interchange on Form 10-K for the year ended December 31, 1996, the Quarterly Reports on Form 10-Q for the Quarters ended March 31, June 30 and September 30, 1997 and the Proxy Statement for the 1997 Annual Meeting of Interchange. I have had adequate opportunity to consult with my advisers concerning any questions I might have regarding the conversion of my shares of Jersey Preferred Stock or the Merger and I understand that, at the Effective Time, each share of Jersey Common Stock received from the conversion of my shares of Jersey Preferred Stock shall be automatically converted into one (1) share of Interchange Common Stock. _____________________________________________________ (sign exactly the same as shares are held of record) Please print name: EXHIBIT D OMITTED EX-10 4 STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT THIS STOCK OPTION AGREEMENT ("Agreement") dated as of January 27, 1998, is by and between Interchange Financial Services Corporation, a New Jersey corporation and registered bank holding company ("Interchange"), and The Jersey Bank For Savings, a savings bank organized under the laws of New Jersey ("Jersey"). BACKGROUND 1. Interchange, Interchange State Bank ("Bank"), and Jersey, as of the date hereof, have executed a definitive agreement and plan of merger (the "Merger Agreement") pursuant to which Interchange will acquire Jersey through a merger of Jersey with and into Bank (the "Merger"). 2. As an inducement to Interchange to enter into the Merger Agreement and in consideration for such entry, Jersey desires to grant to Interchange an option to purchase authorized but unissued shares of common stock of Jersey in an amount and on the terms and conditions hereinafter set forth. AGREEMENT In consideration of the foregoing and the mutual covenants and agreements set forth herein and in the Merger Agreement, Interchange and Jersey, intending to be legally bound hereby, agree: 1. Grant of Option. Subject to the terms and conditions set forth herein, Jersey hereby grants to Interchange the option to purchase 126,950 shares of common stock, $5.00 par value (the "Common Stock") of Jersey at a price of $18.75 per share (the "Option Price"), on the terms and conditions set forth herein (the "Option"), but in no event shall the number of shares of Common Stock for which this Option is exercisable exceed 19.9% of the issued and outstanding shares of Common Stock of Jersey after giving effect to the conversion (whether or not such conversion has actually occurred) of the convertible preferred stock of Jersey into Common Stock. The Common Stock subject to the Option shall hereinafter be referred to as the "Option Shares". 2. Exercise of Option. This Option shall not be exercisable until the occurrence of a Triggering Event (as such term is hereinafter defined). Upon or after the occurrence of a Triggering Event (as such term is hereinafter defined), Interchange may exercise the Option, in whole or in part, at any time or from time to time. The term "Triggering Event" means the occurrence of any of the following events: A person or group (as such terms are defined in the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder) other than Interchange, Jersey or an affiliate of Interchange: a. acquires beneficial ownership (as such term is defined in Rule 13d-3 as promulgated under the Exchange Act) of at least 15% of the then outstanding shares of Common Stock; b. without the prior written consent of Interchange, enters into a letter of intent or an agreement, whether oral or written, with Jersey pursuant to which such person or any affiliate of such person would (i) merge or consolidate, or enter into any similar transaction with Jersey, (ii) acquire all or a significant portion of the assets or liabilities of Jersey, or (iii) acquire beneficial ownership of securities representing, or the right to acquire beneficial ownership or to vote securities representing 15% or more of the then outstanding shares of Common Stock; c. without the prior written consent of Interchange, makes a filing with any bank regulatory authorities or publicly announces a bona fide proposal (a "Proposal") for (i) any merger, consolidation or acquisition of all or a significant portion of all the assets or liabilities of Jersey or any other business combination involving Jersey, or (ii) a transaction involving the transfer of beneficial ownership of securities representing, or the right to acquire beneficial ownership or to vote securities representing, 15% or more of the outstanding shares of Common Stock, and thereafter, if such Proposal has not been Publicly Withdrawn (as such term is hereinafter defined) at least 15 days prior to the meeting of stockholders of Jersey called to vote on the Merger and Jersey's stockholders fail to approve the Merger by the vote required by applicable law at the meeting of stockholders called for such purpose; d. makes a bona fide Proposal and thereafter, but before such Proposal has been Publicly Withdrawn, Jersey willfully takes any action in any manner which would materially interfere with its ability to consummate the Merger or materially reduce the value of the transaction to Interchange; or e. which is the holder of more than 10% of the Common Stock solicits proxies in opposition to approval of the Merger. The term "Triggering Event" also means the taking of any direct or indirect action by Jersey or any of its directors, officers or agents to invite, encourage or solicit any proposal which has as its purpose a tender offer for shares of Common Stock, a merger, consolidation, plan of exchange, plan of acquisition or reorganization of Jersey, or a sale of shares of Common Stock or any significant portion of its assets or liabilities comparable to those set forth in (a)-(e) above. If more than one of the transactions giving rise to a Triggering Event under this Section is undertaken or effected, then all such transactions shall give rise only to one Triggering Event. The term "significant portion" means 20% of the assets or liabilities of Jersey. "Publicly Withdrawn", for purposes of clauses (c) and (d) above, shall mean an unconditional bona fide withdrawal of the Proposal coupled with a public announcement of no further interest in pursuing such Proposal or in acquiring any controlling influence over Jersey or in soliciting or inducing any other person (other than Interchange or any affiliate) to do so. Notwithstanding the foregoing, the Option may not be exercised at any time (i) in the absence of any required governmental or regulatory approval or consent necessary for Jersey to issue the Option Shares or Interchange to exercise the Option or prior to the expiration or termination of any waiting period required by law, or (ii) so long as any injunction or other order, decree or ruling issued by any federal or state court of competent jurisdiction is in effect which prohibits the sale or delivery of the Option Shares. Jersey shall notify Interchange promptly in writing of the occurrence of any Triggering Event known to it, it being understood that the giving of such notice by Jersey shall not be a condition to the right of Interchange to exercise the Option. Jersey will not take any action which would have the effect of preventing or disabling Jersey from delivering the Option Shares to Interchange upon exercise of the Option or otherwise performing its obligations under this Agreement. In the event Interchange wishes to exercise the Option, Interchange shall send a written notice to Jersey (the date of which is hereinafter referred to as the "Notice Date") specifying the total number of Option Shares it wishes to purchase and a place and date for the closing of such a purchase (a "Closing"); provided, however, that a Closing shall not occur prior to two days after the later of receipt of any necessary regulatory approvals and the expiration of any legally required notice or waiting period, if any. 3. Payment and Delivery of Certificates. At any Closing hereunder (a) Interchange will make payment to Jersey of the aggregate price for the Option Shares so purchased by wire transfer of immediately available funds to an account designated by Jersey, (b) Jersey will deliver to Interchange a stock certificate or certificates representing the number of Option Shares so purchased, free and clear of all liens, claims, charges and encumbrances of any kind or nature whatsoever created by or through Jersey, registered in the name of Interchange or its designee, in such denominations as were specified by Interchange in its notice of exercise and, if necessary, bearing a legend as set forth below and (c) Interchange shall pay any transfer or other taxes required by reason of the issuance of the Option Shares so purchased. If required under applicable federal securities laws, a legend will be placed on each stock certificate evidencing Option Shares issued pursuant to this Agreement, which legend will read substantially as follows: The shares of stock evidenced by this certificate have not been registered for sale under the Securities Act of 1933 (the "1933 Act"). These shares may not be sold, transferred or otherwise disposed of unless a registration statement with respect to the sale of such shares has been filed under the 1933 Act and declared effective or, in the opinion of counsel reasonably acceptable to Jersey, said transfer would be exempt from registration under the provisions of the 1933 Act and the regulations promulgated thereunder. No such legend shall be required if a registration statement is filed and declared effective under Section 4 hereof. 4. Registration Rights. Upon or after the occurrence of a Triggering Event and upon receipt of a written request from Interchange, Jersey shall, if necessary for the resale of the Option or the Option Shares by Interchange, prepare and file a registration statement with the Securities and Exchange Commission ("SEC"), the Federal Deposit Insurance Corporation ("FDIC") and any state securities bureau, covering the Option and such number of Option Shares as Interchange shall specify in its request, and Jersey shall use its best efforts to cause such registration statement to be declared effective in order to permit the sale or other disposition of the Option and the Option Shares, provided that Interchange shall in no event have the right to have more than one such registration statement become effective; for the purposes of the foregoing it shall not be necessary for the resale of the Option or the Option Shares by Interchange to register (i) with the SEC unless Jersey is required to file reports with the SEC under the 1934 Act; (ii) with the FDIC, unless the FDIC requires such registration and no exemption is available; or (iii) with any state securities bureau, unless the law of such state requires such registration and no exemption is available. In connection with such filing, Jersey shall use its best efforts to cause to be delivered to Interchange such certificates, opinions, accountant's letters and other documents as Interchange shall reasonably request and as are customarily provided in connection with registrations of securities under the Securities Act of 1933, as amended. All expenses incurred by Jersey in complying with the provisions of this Section 4, including without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for Jersey and blue sky fees and expenses shall be paid by Jersey. Underwriting discounts and commissions to brokers and dealers relating to the Option Shares, fees and disbursements of counsel to Interchange and any other expenses incurred by Interchange in connection with such registration shall be borne by Interchange. In connection with such filing, Jersey shall indemnify and hold harmless Interchange against any losses, claims, damages or liabilities, joint or several, to which Interchange may become subject, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any preliminary or final registration statement or any amendment or supplement thereto, or arise out of a material fact required to be stated therein or necessary to make the statements therein not misleading; and Jersey will reimburse Interchange for any reasonable legal or other expense reasonably incurred by Interchange in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that Jersey will not be liable in any case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such preliminary or final registration statement or such amendment or supplement thereto in reliance upon and in conformity with written information furnished by or on behalf of Interchange specifically for use in the preparation thereof. Interchange will indemnify and hold harmless Jersey to the same extent as set forth in the immediately preceding sentence but only with reference to written information specifically furnished by or on behalf of Interchange for use in the preparation of such preliminary or final registration statement or such amendment or supplement thereto; and Interchange will reimburse Jersey for any legal or other expense reasonably incurred by Jersey in connection with investigating or defending any such loss, claim, damage, liability or action. 5. Required Repurchase of Shares. Upon or after the occurrence of a Triggering Event described in Section 2(b) of this Agreement, then in lieu of a written request from Interchange under Section 4 hereof, Interchange may request in writing that Jersey repurchase the Option Shares. Promptly upon receipt of such request Jersey shall repurchase the Option Shares from Interchange at the price per Option Share equal to the highest of the following: (i) the highest price paid for any share of Common Stock in a Triggering Event, (ii) the highest price per share proposed to be paid for or realized by the shareholders in any Triggering Event, including any Proposal, (iii) the highest price to be paid for Jersey in any Proposal divided by the number of shares of Common Stock of Jersey outstanding at the time the Proposal is made (but not including the Option Shares), or (iv) the average of the highest bid price per share quoted by a market maker of Common Stock (after selecting from among the market makers the highest price per share for the Common Stock quoted for that day) during the first ten days immediately following the Triggering Event. 6. Adjustment Upon Changes in Capitalization. In the event of any change in the Common Stock by reason of stock dividends, split-ups, mergers, recapitalizations, combinations, conversions, exchanges of shares or the like, then the number and kind of Option Shares and the Option Price shall be appropriately adjusted. In the event any capital reorganization or reclassification of the Common Stock, or any consolidation, merger or similar transaction of Jersey with another entity, or in the event any sale of all or substantially all of the assets of Jersey shall be effected in such a way that the holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provisions (in form reasonably satisfactory to the holder hereof) shall be made whereby the holder hereof shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions specified herein and in lieu of the Common Stock immediately theretofore purchasable and receivable upon exercise of the rights represented by this Option, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore purchasable and receivable upon exercise of the rights represented by this Option had such reorganization, reclassification, consolidation, merger or sale not taken place; provided, however, that if such transaction results in the holders of Common Stock receiving only cash, the holder hereof shall be paid the difference between the Option Price and such cash consideration without the need to exercise the Option. 7. Filings and Consents. Each of Interchange and Jersey will use its best efforts to make all filings with, and to obtain consents of, all third parties and governmental authorities necessary to the consummation of the transactions contemplated by this Agreement. Exercise of the Option herein provided shall be subject to compliance with all applicable laws including, in the event Interchange is the holder hereof, approval of the Board of Governors of the Federal Reserve System and Jersey agrees to cooperate with and furnish to the holder hereof such information and documents as may be reasonably required to secure such approvals. 8. Representations and Warranties of Jersey. Jersey hereby represents and warrants to Interchange as follows: a. Due Authorization. Jersey has full corporate power and authority to execute, deliver and perform this Agreement and all corporate action necessary for execution, delivery and performance of this Agreement has been duly taken by Jersey. b. Authorized Shares. Jersey has taken and, as long as the Option is outstanding, will take all necessary corporate action to authorize and reserve for issuance all shares of Common Stock that may be issued pursuant to any exercise of the Option. c. No Conflicts. Neither the execution and delivery of this Agreement nor consummation of the transactions contemplated hereby (assuming all appropriate regulatory approvals) will violate or result in any violation or default of or be in conflict with or constitute a default under any term of the certificate of incorporation or by-laws of Jersey or any material agreement, instrument, judgment, decree, statute, rule or order applicable to Jersey. 9. Representations and Warranties of Interchange. Interchange hereby represents and warrants to Jersey as follows: a. Due Authorization. Interchange has full corporate power and authority to execute, deliver and perform this Agreement and all corporate action necessary for execution, delivery and performance of this Agreement has been duly taken by Interchange. b. No Conflicts. Neither the execution and delivery of this Agreement nor consummation of the transactions contemplated hereby (assuming all appropriate regulatory approvals) will violate or result in any violation or default of or be in conflict with or constitute a default under any term of the certificate of incorporation or by-laws of Interchange or a material default under any term of any agreement, instrument, judgment, decree, statute, rule or order applicable to Interchange. 10. Specific Performance. The parties hereto acknowledge that damages would be an inadequate remedy for a breach of this Agreement and that the obligations of the parties hereto shall be specifically enforceable. Notwithstanding the foregoing, Interchange shall have the right to seek money damages against Jersey for a breach of this Agreement, except that any damage award shall be subject to the provisions of Section 7.3(d) of the Merger Agreement. 11. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, among the parties or any of them with respect to the subject matter hereof. 12. Assignment or Transfer. Interchange may not sell, assign or otherwise transfer its rights and obligations hereunder, in whole or in part, to any person or group of persons other than to an affiliate of Interchange, except upon or after the occurrence of a Triggering Event. Interchange represents that it is acquiring the Option for Interchange's own account and not with a view to or for sale in connection with any distribution of the Option or the Option Shares. Interchange shall have the right to assign this Agreement to any party it selects after the occurrence of a Triggering Event. 13. Amendment of Agreement. By mutual consent of the parties hereto, this Agreement may be amended in writing at any time, for the purpose of facilitating performance hereunder or to comply with any applicable regulation of any governmental authority or any applicable order of any court or for any other purpose. 14. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 15. Notices. All notices, requests, consents and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered personally, by express service, cable, telegram or telex, or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties as follows: If to Interchange: Interchange Financial Services Corporation Park 80 West, Plaza Two Saddle Brook, New Jersey 07662 Attn.: Anthony S. Abbate, President and CEO With a copy to: Norris, McLaughlin & Marcus, P.A. 721 Route 202-206 P.O. Box 1018 Somerville, New Jersey 08876 Attn.: Peter D. Hutcheon, Esq. If to Jersey: The Jersey Bank For Savings 208 South Kinderkamack Road Montvale, New Jersey 07645-0333 Attn.: Clyde Britt, President and CEO With a copy to: Beattie Padovano 50 Chestnut Ridge Road P.O. Box 244 Montvale, New Jersey 07645-0244 Attn: Adolph A. Romei, Esq. Sills, Cummis, Zuckerman, Radin, Tischman, Epstein & Gross, P.A. One Riverfront Plaza Newark, New Jersey 07102-5400 Attn: Victor H. Boyajian, Esq. or to such other address as the person to whom notice is to be given may have previously furnished to the others in writing in the manner set forth above (provided that notice of any change of address shall be effective only upon receipt thereof). 16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey. 17. Captions. The captions in the Agreement are inserted for convenience and reference purposes, and shall not limit or otherwise affect any of the terms or provisions hereof. 18. Waivers and Extensions. The parties hereto may, by mutual consent, extend the time for performance of any of the obligations or acts of either party hereto. Each party may waive (i) compliance with any of the covenants of the other party contained in this Agreement and/or (ii) the other party's performance of any of its obligations set forth in this Agreement. 19. Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement, except as provided in Section 10 permitting Interchange to assign its rights and obligations hereunder. 20. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. 21. Termination. This Agreement shall terminate and be of no further force or effect upon the earlier to occur of either the termination of the Merger Agreement as provided therein or the consummation of the transaction contemplated by the Merger Agreement; provided, however, that if termination of the Merger Agreement occurs after the occurrence of a Triggering Event (as defined in Section 2 hereof), this Agreement shall terminate 18 months following the date of the termination of the Merger Agreement. 22. Expenses. Except as more particularly provided in Section 4 hereof with respect to certain expenses in connection with the registration of the Option or the Option Shares, each of the parties hereto shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder, including fees and expenses of its own financial consultants, investment bankers, accountants and counsel. IN WITNESS WHEREOF, each of the parties hereto, pursuant to resolutions adopted by its Board of Directors has caused this Agreement to be executed by its duly authorized officer all as of the day and year first above written. THE JERSEY BANK FOR SAVINGS By: /s/ Clyde Britt ------------------------------ Clyde Britt, President & CEO INTERCHANGE FINANCIAL SERVICES CORPORATION By: /s/ Anthony S. Abbate ------------------------------ Anthony S. Abbate, President & CEO EX-11 5 COMPUTATION OF PER SHARE EARNINGS Exhibit 11. Statement re computation of per share earnings
------------------------------------------------------------------------------------------------------------ Quarter Ended ------------------------------------------------------------------------------------------------------------ March 31, 1997 June 30, 1997 September 30, 1997 December 31, 1997 ------------------------- ------------------------- ------------------------- ------------------------ Weighted Per Weighted Per Weighted Per Weighted Per Average Share Average Share Average Share Average Share Income Shares Amount Income Shares Amount Income Shares Amount Income Shares Amount ------- --------- ------- ------ -------- ------ ------ -------- ------ ------ -------- ------ Basic Earnings per Common Share Income available to common shareholders $2,054 4,262 $0.48 $1,921 4,317 $0.44 $1,804 4,225 $0.43 $1,777 4,226 $0.42 ===== ===== ===== ===== Effect of Dilutive Shares Options issued to management -- 49 -- 54 -- 57 -- 52 ------ ----- ------- ----- ------ ------- ------ ----- Diluted Earnings per Common Share $2,054 4,311 $0.47 $1,921 4,371 $0.44 $1,804 4,282 $0.42 $1,777 4,278 $0.42 ====== ===== ===== ====== ===== ===== ====== ===== ===== ====== ===== ===== ------------------------------------------------------------------------------------------------------------ Quarter Ended ------------------------------------------------------------------------------------------------------------ March 31, 1996 June 30, 1996 September 30, 1996 December 31, 1996 ------------------------- ------------------------- ------------------------- -------------------------- Weighted Per Weighted Per Weighted Per Weighted Per Average Share Average Share Average Share Average Share Income Shares Amount Income Shares Amount Income Shares Amount Income Shares Amount ------- --------- ------- ------ -------- ------ ------ -------- ------ ------ -------- ------- Basic Earnings per Common Share Income available to common shareholders $1,612 4,251 $0.38 $1,478 4,259 $0.35 $1,288 4,259 $0.30 $2,041 4,259 $0.48 ===== ===== ===== ===== Effect of Dilutive Shares Options issued to management -- 32 -- 28 -- 29 -- 39 ------ ----- ------ ----- ------ ----- ------ ----- Diluted Earnings per Common Share $1,612 4,283 $0.38 $1,478 4,287 $0.34 $1,288 4,288 $0.30 $2,041 4,298 $0.48 ====== ===== ===== ====== ===== ===== ====== ===== ===== ====== ===== =====
---------------------------- Year Ended ---------------------------- December 31, 1995 --------------------------- Weighted Per Average Share Income Shares Amount --------------------------- Basic Earnings per Common Share Income available to common shareholders $6,280 Less: preferred stock dividends 85 ------ Basic Earnings per Common Share Income available to common shareholders $6,195 4,248 $1.46 ----- Effect of Dilutive Shares Options issued to management -- 27 ------ ----- Diluted Earnings per Common Share $6,195 4,275 $1.45 ====== ===== ===== EX-21 6 SUBSIDIARIES OF THE REGISTRANT Exhibit 21. Subsidiaries of the Registrant Interchange State Bank, Washington Interchange Corporation and Cloverleaf Mortgage Company, Inc., incorporated in New Jersey, are wholly owned subsidiaries of the Registrant. EX-23 7 INDEPENDENT AUDITOR'S CONSENT Exhibit 23. Independent Auditor's Consent We consent to the incorporation by reference in Amendment No. 1 to Registration Statement No. 33-82530 of Interchange Financial Services Corporation of our report dated January 21, 1998, appearing in this Annual Report on Form 10-K of Interchange Financial Services Corporation for the year ended December 31, 1997. Parsippany, New Jersey March 27, 1998 EX-27 8 FDS --
9 1,000 12-Mos Dec-31-1997 Dec-31-1997 7,575 10,222 8,400 0 61,257 46,370 46,786 401,854 4,893 548,037 470,693 13,027 4,668 9,879 4,811 0 0 44,959 548,037 32,609 7,036 530 40,175 14,210 1,323 24,642 1,630 0 15,984 11,624 11,624 0 0 7,556 1.77 1.75 4.80 1,514 141 573 0 3,653 573 183 4,893 4,893 0 829
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