-----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, VEkkX9/BPXqMjCbFFEQnm5FhOuu6zHkSnixX6dAGqRNgYtf/vrGYThhbKw9LY/ML xnFlZu88l1TaQJGc9HlR+A== 0000891092-98-000150.txt : 19980428 0000891092-98-000150.hdr.sgml : 19980428 ACCESSION NUMBER: 0000891092-98-000150 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19980427 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: S-4/A SEC ACT: SEC FILE NUMBER: 333-50065 FILM NUMBER: 98601503 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 S-4/A 1 FORM S-4 AMENDMENT NO. 1 Registration No. 333-50065 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- Amendment No. 1 to FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- INTERCHANGE FINANCIAL SERVICES CORPORATION (Exact name of registrant as specified in its charter) New Jersey (State or other jurisdiction of incorporation or organization) -------------- 6711 22-2553159 (Primary Standard Industrial (I.R.S. Employer Classification Code Number) Identification No.) -------------- Park 80 West/Plaza Two Saddle Brook, New Jersey 07663 (201) 703-2265 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Anthony S. Abbate, President and Chief Executive Officer Interchange Financial Service Corporation Park 80 West/Plaza Two Saddle Brook, New Jersey 07663 (201) 703-2265 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------- Please send copies of all communications to: PETER D. HUTCHEON, ESQ. VICTOR H. BOYAJIAN, ESQ. ADOLPH A. ROMEI, ESQ. Norris, McLaughlin Sills Cummis Zuckerman Beattie Padovano LLC & Marcus, P.A. Radin Tischman Epstein & 50 Chestnut Ridge Road 721 Route 202-206 Gross, P.A. P.O. Box 244 P.O. Box 1018 1 Riverfront Plaza Montvale, New Jersey Somerville, New Jersey Newark, New Jersey 07102 07645-0244 08876-1018 (908) 722-0700 Approximate date of commencement of proposed sale to the public: At the Effective Time of the Merger, as defined in the Agreement and Plan of Merger dated January 27, 1998 (the "Merger Agreement") among the Registrant, Interchange Bank (formerly known as Interchange State Bank) and The Jersey Bank For Savings, attached as Appendix A to the Proxy Statement-Prospectus. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. |_| If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------- Proposed Proposed Amount Maximum Maximum Amount of Title of each class of Securities to be Offering Price Aggregate Registration to be Registered Registered** Per Share* Offering Price* Fees - --------------------------------------------------------------------------------------------------------- Common Stock 780,300 $19.1667 $14,955,766 $4,411.95 - ---------------------------------------------------------------------------------------------------------
* Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(f) under the Securities Act of 1933, as amended, based on the price per share paid for Jersey Common Stock on March 20, 1998, the last known trade, as reported on the Over-The-Counter Bulletin Board. There was no asked price for Jersey Common Stock during the five trading days preceding the date of filing hereof, as advised by Advest Inc., and Jersey Common Stock had a book value of $13.18 per share on February 28, 1998. ** The Registrant also registers hereby such additional shares of its common stock as may be issuable in the Merger pursuant to the anti-dilution provisions of the Merger Agreement. -------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine. - -------------------------------------------------------------------------------- INTERCHANGE FINANCIAL SERVICES CORPORATION PART I INFORMATION REQUIRED IN PROSPECTUS CROSS REFERENCE SHEET Item 1. Cross Reference Sheet. Pursuant to Item 501 of Regulation S-K, this cross-reference sheet shows the location in the Prospectus/Proxy Statement of responses to Items 1 through 19 of Part I of Form S-4. Item Location or Heading No. Caption in Prospectus-Proxy Statement - --- ------- ----------------------------- A. INFORMATION ABOUT THE TRANSACTION 1. Forepart of Registration Statement Forepart of Registration Statement; and Outside Front Cover Page Cross Reference Sheet; Cover Page of of Prospectus Proxy Statement-Prospectus 2. Inside Front and Outside Back Inside Front Cover; Available Cover Pages of Prospectus Information; Information Incorporated by Reference; Table of Contents 3. Risk Factors, Ratio of Earnings Summary of Proxy Statement-Prospectus; to Fixed Charges and Other Selected Financial Data of Information Interchange; Comparative Per Share Data; Pro Forma Combined Financial Information 4. Terms of the Transaction Summary of Proxy Statement-Prospectus; The Proposed Merger; Comparison of the Rights of Shareholders of Interchange and Jersey 5. Pro Forma Financial Information Pro Forma Combined Financial Information 6. Material Contacts with the Company The Proposed Merger Being Acquired 7. Additional Information Required for Not Applicable Reoffering by Persons and Parties Deemed to Be Underwriters 8. Interests of Named Experts Legal Opinion, Experts and Counsel Item Location or Heading No. Caption in Prospectus-Proxy Statement - --- ------- ----------------------------- 9. Disclosure of Commission Position Not Applicable on Indemnification for Securities Act Liabilities B. INFORMATION ABOUT THE REGISTRANT 10. Information with Respect to Not Applicable S-3 Registrants 11. Incorporation of Certain Information Information Incorporated by Reference by Reference 12. Information with Respect to S-2 or Not Applicable S-3 Registrants 13. Incorporation of Certain Information Not Applicable by Reference 14. Information with Respect to Not Applicable Registrants Other Than S-3 or S-2 Registrants C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED 15. Information with Respect to S-3 Not Applicable Companies 16. Information with Respect to S-2 or Not Applicable S-3 Companies 17. Information with Respect to Certain Information Regarding Jersey; Companies Other than S-2 The Jersey Bank for Savings; Selected or S-3 Companies Financial Data of Jersey; Comparative Per Share Data D. VOTING AND MANAGEMENT INFORMATION 18. Information if Proxies, Consents or Introductory Statement; The Proposed Authorizations are to be Solicited Merger; Information Delivered and Incorporated by Reference 19. Information if Proxies, Consents Not Applicable or Authorization are Not to be Solicited or in an Exchange Offer THE JERSEY BANK FOR SAVINGS 2-8 South Kinderkamack Road Montvale, New Jersey 07645-0333 April 28, 1998 To Our Shareholders: A Special Meeting of Shareholders (the "Meeting") of The Jersey Bank For Savings ("Jersey") will be held on May 27, 1998 at the Holiday Inn, Montvale, New Jersey. At the Meeting holders of Jersey's Common Stock will be asked to approve an Agreement and Plan of Merger by and among Jersey, Interchange Financial Services Corporation ("Interchange") and Interchange Bank (formerly known as Interchange State Bank) ("Bank"), pursuant to which Jersey will be merged with and into Interchange Bank (the "Merger"). If the Merger is approved and becomes effective, shareholders of Jersey will receive 1.5 shares of Common Stock of Interchange (reflecting the 3 for 2 stock split of Interchange Common Stock effective April 17, 1998) for each share of Jersey Common Stock held by them, subject to adjustment, as more fully set forth in the Merger Agreement. Holders of Jersey's Preferred Stock are not entitled to vote at the Meeting. Each of them will be given the opportunity to enter into a Conversion Agreement with Jersey by which their preferred stock will convert into Jersey Common Stock, at a rate of .8695 shares of Jersey Common Stock for each share of Jersey Preferred Stock, immediately prior to the Merger's effective time. In such case, their shares of Jersey Common Stock will either (i) automatically be exchanged for Interchange Common Stock at the rate of 1.5 Interchange shares for each Jersey share; or (ii) if such holder gives written notice of dissent to Jersey on or before Friday, May 22, 1998, have the right to compel an appraisal of such shares and cash payment therefor under the terms and conditions of the New Jersey Banking Act, as amended. To date, all but one holder of 300 shares of Jersey Preferred Stock have entered into conversion agreements with Jersey. Holders of Jersey Preferred Stock are receiving a copy of the Proxy Statement-Prospectus for information purposes. In the accompanying material you will find a Notice of Special Meeting of Shareholders, a Proxy Card and a Proxy Statement-Prospectus which describes the details of the proposed Merger, the conditions to consummation of the Merger and information about Interchange, Bank and Jersey. The Board of Directors and its Special Committee have unanimously approved the Merger Agreement and the Board of Directors recommends that you vote "FOR" the approval of the Merger Agreement. Whether or not you are planning to attend the Meeting, it is important that your shares be represented. Please complete, sign and date the enclosed Proxy Card and mail it at your earliest convenience in the return envelope provided. If you attend the Special Meeting and file a written notice of revocation with the Secretary, you may vote in person even if you have already marked your proxy card. In connection with the execution of the Merger Agreement, all the directors of Jersey agreed to vote in favor or the Merger Agreement all shares of Jersey Common Stock which they hold. The enclosed also constitutes a Prospectus of Interchange with respect to the shares of Interchange Common Stock to be issued to the shareholders of Jersey if the Merger is consummated. Sincerely, /s/ Clyde Britt ------------------------------------- CLYDE BRITT President and Chief Executive Officer THE JERSEY BANK FOR SAVINGS 2-8 South Kinderkamack Road Montvale, New Jersey 07645-0333 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 27, 1998 NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "Meeting") of The Jersey Bank For Savings ("Jersey") will be held at the Holiday Inn, Montvale, New Jersey on May 27, 1998 at 10:00 a.m., for the purpose of considering and voting upon the following matters: 1. A proposal to approve an Agreement and Plan of Merger, dated as of January 27, 1998 (the "Merger Agreement") by and among Interchange Financial Services Corporation ("Interchange"), Interchange's New Jersey chartered commercial bank subsidiary, Interchange Bank (formerly known as Interchange State Bank) and Jersey, under which Jersey will merge into Interchange Bank (the "Merger"), and each share of Jersey Common Stock outstanding on the effective date of the Merger will be converted into 1.5 shares of Interchange Common Stock (reflecting the 3 for 2 stock split of Interchange Common Stock effective April 17, 1998) as described in the accompanying information. 2. Such other business as may properly come before the Meeting or any adjournment thereof. Only those holders of record of Jersey Common Stock as of the close of business on April 21, 1998 will be entitled to notice of, and to vote, at the Meeting. A list of such shareholders will be available at the Meeting. Consummation of the Merger is subject to certain conditions, including approval of the Merger Agreement by the affirmative vote at the Meeting of a least two-thirds of the outstanding shares of Jersey Common Stock entitled to vote, whether in person or by proxy. Your vote is important regardless of the number of shares that you own. Whether or not you plan to attend the Meeting, please mark, date and sign the enclosed proxy and return it as soon as possible in the enclosed stamped envelope. You may revoke the proxy at any time prior to its exercise, but only by delivering written notice of revocation to the Secretary of Jersey prior to the Special Meeting at Jersey's principal office, or to the Secretary of the Special Meeting while the Special Meeting is in progress and before such shares are voted. By Order of the Board of Directors, /s/ William C. Ledgerwood ------------------------------ Secretary Montvale, New Jersey April 28, 1998 THE MERGER IS OF MAJOR IMPORTANCE TO THE SHAREHOLDERS OF THE JERSEY BANK FOR SAVINGS. ACCORDINGLY, SHAREHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THE ATTACHED PROXY STATEMENT-PROSPECTUS. THE JERSEY BANK FOR SAVINGS PROXY STATEMENT for the Special Meeting of Shareholders of Jersey Bank to be held on May 27, 1998 ------------------ INTERCHANGE FINANCIAL SERVICES CORPORATION PROSPECTUS for the Common Stock of Interchange Financial Services Corporation to be issued in connection with the Merger of The Jersey Bank For Savings with and into Interchange Bank ------------------ This Proxy Statement-Prospectus is being furnished in connection with the solicitation of proxies by the Board of Directors of The Jersey Bank for Savings ("Jersey") to be used at a special meeting of its shareholders (the "Meeting") to be held on May 27, 1998 and any adjournments or postponements thereof. The purpose of the Meeting is to consider and vote upon an Agreement and Plan of Merger dated as of January 27, 1998 (the "Merger Agreement") by and among Jersey, Interchange Financial Services Corporation ("Interchange"), and Interchange's New Jersey chartered commercial bank subsidiary, Interchange Bank (formerly known as Interchange State Bank) ("Interchange Bank" or "Bank"). A copy of the Merger Agreement is attached as Appendix A to this Proxy Statement-Prospectus. In accordance with the terms of the Merger Agreement, upon approval of the Merger Agreement by the shareholders of Jersey, receipt of all requisite regulatory approvals and satisfaction or waiver of all other conditions, Jersey will merge with and into Bank (the "Merger"). Upon consummation of the Merger, each share of common stock of Jersey, $5.00 par value per share ("Jersey Common Stock"), issued and outstanding immediately prior to the Effective Time of the Merger, except for Excluded Shares (as defined below), will be converted into 1.5 shares (the "Exchange Ratio") of common stock of Interchange, no par value per share ("Interchange Common Stock"), subject to certain adjustments more fully described in this Proxy Statement-Prospectus. The Exchange Ratio reflects the 3 for 2 stock split of Interchange Common Stock effective April 17, 1998. Under the terms of the Merger Agreement, cash will be paid in lieu of fractional shares of Interchange Common Stock. Interchange has filed a Registration Statement pursuant to the Securities Act of 1933, as amended (the "Securities Act"), covering the shares of Interchange Common Stock which will be issued in connection with the Merger. In addition to constituting the Jersey Proxy Statement for the Meeting, this document constitutes a Prospectus of Interchange with respect to the Interchange Common Stock to be issued if the Merger is consummated. JERSEY STOCK CERTIFICATES SHOULD NOT BE RETURNED TO JERSEY WITH THE ENCLOSED PROXY AND SHOULD NOT BE FORWARDED UNTIL AFTER RECEIPT OF A LETTER OF TRANSMITTAL WHICH WILL BE PROVIDED TO JERSEY SHAREHOLDERS UPON CONSUMMATION OF THE MERGER. ALL INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE INTO THIS PROXY STATEMENT WITH RESPECT TO JERSEY WAS SUPPLIED BY JERSEY FOR INCLUSION HEREIN. ALL INFORMATION CONTAINED HEREIN OR INCORPORATED BY REFERENCE HEREIN WITH RESPECT TO INTERCHANGE WAS SUPPLIED BY INTERCHANGE FOR INCLUSION HEREIN. THE SHARES OF INTERCHANGE COMMON STOCK DESCRIBED IN THE ATTACHED PROXY STATEMENT-PROSPECTUS ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT-PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT-PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO SELL, TO ANY PERSON IN ANY JURISDICTION IN WHICH IT WOULD BE UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT-PROSPECTUS AT ANY TIME, NOR ANY DISTRIBUTION OF SHARES OF INTERCHANGE COMMON STOCK, SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. The date of this Proxy Statement-Prospectus is April 28, 1998. TABLE OF CONTENTS Page ---- AVAILABLE INFORMATION..........................................................4 INFORMATION INCORPORATED BY REFERENCE..........................................5 SUMMARY........................................................................6 The Meeting ...............................................................6 The Companies..............................................................6 The Merger.................................................................7 Selected Financial Data of Interchange....................................14 Selected Financial Data of Jersey.........................................15 Comparative Per Share Data................................................16 Summary Pro Forma Financial Information...................................18 INTRODUCTORY STATEMENT........................................................19 CERTAIN INFORMATION REGARDING INTERCHANGE.....................................19 General...................................................................19 Interchange Bank..........................................................19 CERTAIN INFORMATION REGARDING JERSEY..........................................20 THE MEETING...................................................................20 General...................................................................20 Purpose of the Meeting....................................................21 Vote Required; Shares Entitled to Vote....................................21 Solicitation, Voting and Revocation of Proxies............................21 THE PROPOSED MERGER...........................................................22 General Description.......................................................22 Consideration.............................................................22 Exchange of Certificates..................................................23 Conversion of Stock Options...............................................24 Background of the Merger..................................................24 Reasons for the Merger....................................................25 Opinion of Jersey's Financial Advisor.....................................26 Conditions to Consummation of the Merger..................................30 Representations and Warranties............................................30 Regulatory Approvals......................................................31 Effective Time; Amendments; Termination...................................31 Amendment of the Merger Agreement.........................................32 Accounting Treatment of the Merger........................................32 Federal Income Tax Consequences...........................................32 Interests of Certain Persons in the Merger................................33 1 Resale Considerations with Respect to the Interchange Common Stock...........................................................34 Business Pending Consummation of the Merger...............................34 Management and Operations after the Merger................................35 Stock Option for Shares of Jersey Common Stock............................35 Rights of Dissenting Jersey Shareholders..................................37 PRO FORMA COMBINED FINANCIAL INFORMATION......................................38 THE JERSEY BANK FOR SAVINGS...................................................41 Business of Jersey........................................................41 Management's Discussion and Analysis of Financial Condition and Results of Operations of Jersey.......................................44 Supervision and Regulation of Jersey......................................61 Security Ownership of Certain Beneficial Owners...........................63 Certain Transactions of Jersey............................................64 DESCRIPTION OF INTERCHANGE COMMON STOCK.......................................65 General...................................................................65 Dividend Rights...........................................................65 Voting Rights.............................................................65 Liquidation Rights........................................................66 Assessment and Redemption.................................................66 Other Matters.............................................................66 COMPARISON OF THE RIGHTS OF SHAREHOLDERS OF INTERCHANGE AND JERSEY....................................................67 Jersey....................................................................67 Voting Requirements...................................................67 Cumulative Voting.....................................................67 Classified Board of Directors.........................................67 Rights of Dissenting Shareholders.....................................67 Shareholder Consent to Corporate Action...............................67 Dividends.............................................................68 By-laws...............................................................68 Preemptive Rights.....................................................68 Interchange...............................................................68 Voting Requirements...................................................68 Classified Board of Directors.........................................69 Rights of Dissenting Shareholders.....................................69 Shareholder Consent to Corporate Action...............................69 Dividends.............................................................69 By-laws...............................................................70 2 Preemptive Rights.....................................................70 Shareholder Protection Legislation....................................70 Preferred Stock.......................................................70 LEGAL OPINION.................................................................70 EXPERTS.......................................................................70 INDEX TO FINANCIAL STATEMENTS OF JERSEY.......................................71 APPENDIX A - MERGER AGREEMENT................................................A-1 APPENDIX B - STOCK OPTION AGREEMENT..........................................B-1 APPENDIX C - FAIRNESS OPINION OF CAPITAL CONSULTANTS OF PRINCETON, INC.......C-1 APPENDIX D - SECTIONS 140 THROUGH 145 OF THE NEW JERSEY BANKING ACT OF 1948, AS AMENDED......................................D-1 3 AVAILABLE INFORMATION Interchange is subject to the information requirements of the Securities Exchange Act of 1934, as amended and the rules and regulations thereunder (the "Exchange Act") and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC" or "Commission"). Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's Regional Offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such materials can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission (such as Interchange). The address of the Commission's web site is http://www.sec.gov. In addition, Interchange Common Stock is listed on the American Stock Exchange, and reports, proxy statements and other information relating to Interchange may be inspected at the offices of the American Stock Exchange at: 86 Trinity Place, New York, New York 10006. Interchange has filed with the Commission a Registration Statement on Form S-4 under the Securities Act (together with all amendments and supplements thereto, the "Registration Statement"), with respect to the shares of Interchange Common Stock to be issued upon consummation of the Merger. This Proxy Statement-Prospectus does not contain all of the information set forth in the Registration Statement and exhibits thereto, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. Copies of the Registration Statement are available for inspection and copying as set forth above. Statements contained in this Proxy Statement-Prospectus or in any document incorporated by reference in this Proxy Statement-Prospectus relating to the contents of any contract or other document referred to herein or therein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or such other document, each such statement being qualified in all respects by such reference. THIS PROXY STATEMENT-PROSPECTUS INCORPORATES CERTAIN DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN CERTAIN EXHIBITS TO SUCH DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM A PROXY STATEMENT-PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST TO: BENJAMIN ROSENZWEIG, CORPORATE SECRETARY, INTERCHANGE FINANCIAL SERVICES CORPORATION, PARK 80 WEST /PLAZA TWO, SADDLE BROOK, NEW JERSEY 07663, (201) 703-2265. IN ORDER TO ENSURE TIMELY DELIVERY OF SUCH DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY MAY 21, 1998. 4 INFORMATION INCORPORATED BY REFERENCE The following documents filed by Interchange with the Commission (Company File No. 1-10518) are hereby incorporated by reference in this Proxy Statement-Prospectus: A. Annual Report on Form 10-K for the year ended December 31, 1997. B. Current Report on Form 8-K filed with the Commission on March 17, 1998. C. Current Report on Form 8-K filed with the Commission on March 17, 1998. D. The description of Interchange Common Stock set forth under the caption "Description of Capital Stock" in the final prospectus included in Interchange's Registration Statement on Form S-2 filed with the Commission on October 9, 1992 (File No. 33-49840) All documents filed by Interchange pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Proxy Statement-Prospectus and prior to the Meeting shall be deemed incorporated by reference into this Proxy Statement-Prospectus and shall be deemed a part hereof from the date of filing of such documents. All information contained or incorporated by reference in this Proxy Statement-Prospectus with respect to Interchange and Bank was supplied by Interchange and all information contained in this Proxy Statement-Prospectus with respect to Jersey was supplied by Jersey. Although neither Interchange nor Jersey have any knowledge that would indicate that any statements or information relating to the other party contained or incorporated herein are inaccurate or incomplete, neither Interchange nor Jersey can warrant the accuracy or completeness of such information or statements as they relate to the other entity or its subsidiaries. Any statement contained herein, in any supplement hereto or in a document incorporated by reference or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Proxy Statement-Prospectus to the extent that a statement contained herein, in any supplement hereto or in any subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Proxy Statement-Prospectus or any supplement hereto. 5 SUMMARY The following is a brief summary of certain information contained elsewhere in this Proxy Statement-Prospectus. This summary is necessarily incomplete and is qualified in its entirety by the more detailed information contained elsewhere in this Proxy Statement-Prospectus, including the Appendices hereto and the documents incorporated by reference herein. A copy of the Merger Agreement is set forth as Appendix A to this Proxy Statement-Prospectus. Jersey shareholders are urged to read carefully the entire Proxy Statement-Prospectus, including the Appendices. THE MEETING Date, Time and Place of Meeting The special meeting of shareholders (the "Meeting") of The Jersey Bank For Savings ("Jersey") will be held on Wednesday, May 27, 1998, at 10:00 a.m. at the Holiday Inn, Montvale, New Jersey. Record Date April 21, 1998 (the "Record Date"). Shares Entitled to Vote 456,270 shares of common stock, $5.00 par value per share, of Jersey ("Jersey Common Stock") were outstanding on the Record Date and are entitled to vote at the Meeting. Purpose of Meeting To consider and vote upon an Agreement and Plan of Merger dated as of January 27, 1998 (the "Merger Agreement") by and among Interchange Financial Services Corporation ("Interchange"), Interchange's chartered commercial bank subsidiary, Interchange Bank ("Bank"), and Jersey. Vote Required The affirmative vote, in person or by proxy, of at least two-thirds of the outstanding shares of Jersey Common Stock is required to approve the Merger Agreement. In connection with the execution of the Merger Agreement, all the directors of Jersey agreed to vote in favor of the Merger Agreement all shares of Jersey Common Stock which they hold. As of the Record Date, such persons held or had voting control (excluding options) of approximately 48% of the issued and outstanding shares of Jersey Common Stock. As of the Record Date, there were no executive officers of Jersey who are not also directors. Recommendation of the The Jersey Board of Directors and its Special Jersey Board of Directors Committee has unanimously approved the Merger and its Special Committee Agreement and unanimously recommends that holders of Jersey Common Stock vote "FOR" approval of the Merger Agreement. THE COMPANIES Interchange Interchange is a bank holding company organized under the laws of the State of New Jersey and registered under the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"). Interchange Bank is the 6 only banking subsidiary of Interchange, which operates 12 branches located in Bergen County, New Jersey. Interchange Bank is a member of the Federal Reserve System and its deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC"). At December 31, 1997, Interchange had consolidated assets of approximately $548 million. Interchange's principal executive offices are located at Park 80 West/Plaza Two, Saddle Brook, New Jersey 07663 and its telephone number is (201) 703-2265. See "Certain Information Regarding Interchange," "Available Information" and "Information Incorporated by Reference." Jersey Jersey is a savings bank organized under the laws of the State of New Jersey. Jersey presently operates two branches located in Bergen County, New Jersey. At December 31, 1997, Jersey had total assets of $77 million. Jersey's principal executive offices are located at 2-8 South Kinderkamack Road, Montvale, New Jersey 07645-0333. See "Certain Information Regarding Jersey;" and "The Jersey Bank for Savings." THE MERGER General Description of the In accordance with the terms of the Merger Merger; Effective Time Agreement, upon approval of the Merger Agreement by the shareholders of Jersey, receipt of all requisite regulatory approvals and satisfaction or waiver of all other conditions, including entrance by each holder of Jersey preferred stock into a conversion agreement as more fully defined below, Jersey will merge with and into Bank (the "Merger"), with Bank as the surviving entity. The Merger will become effective after 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"). The first calendar month end after such approvals have been completed shall be the "Effective Time". A closing under the Merger Agreement (the "Closing") will occur prior to the Effective Time on a day mutually agreed to by Interchange and Jersey within 30 days following the receipt of all necessary regulatory and governmental approvals and consents and satisfaction or waiver of all other conditions to closing (other than the delivery of documents to be delivered at the Closing) but not later than the last day of the calendar month in which the last approval of the foregoing is received, or on such other date as Bank and Jersey agree upon. See "The Proposed Merger -- General Description" and the full text of the Merger Agreement, which is attached as Appendix A to this Proxy Statement-Prospectus. Consideration Upon consummation of the Merger, each share of Jersey Common Stock issued and outstanding immediately prior to the Effective Time, including the shares issuable upon the conversion of Jersey Preferred Stock (except for Excluded Shares) will be converted into 1.5 shares (the "Exchange 7 Ratio") of common stock of Interchange, no par value per share ("Interchange Common Stock"). "Excluded Shares" are those shares of Jersey Common Stock which (i) are held by Jersey as treasury shares, (ii) are held directly or indirectly by Interchange (other than as trustee or in a fiduciary capacity or in satisfaction of a debt previously contracted for) or (iii) as to which dissenters' rights have been validly perfected under applicable law. The Exchange Ratio (which reflects the 3 for 2 stock split of Interchange Common Stock effective April 17, 1998) is subject to adjustment to take into account any stock split, stock dividend, stock combination, reclassification, or similar transaction by Interchange with respect to the Interchange Common Stock. In lieu of receiving fractional shares of Interchange Common Stock, Jersey shareholders will be entitled to receive, without interest, a cash payment equal to the value of any fractional share interest to which they would otherwise be entitled. The value of such fractional share interest will be determined by the "Average Closing Price" of Interchange Common Stock, defined as the average of the closing prices 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 Effective Time. The Average Closing Price is subject to adjustment to take into account any stock split, stock dividend, stock combination, reclassification, or similar transaction by Interchange with respect to Interchange Common Stock. See "The Proposed Merger -- Consideration; -- Termination of the Merger Agreement." Conversion of Stock Options At the Effective Time, any 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") will be converted into a number of whole shares of Interchange Common Stock equal to (A) 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, times (iii) the Average Closing Price of Interchange Common Stock, less (y) the aggregate exercise price for the Jersey Option, divided by (B) the Average Closing Price. As of December 31, 1997, there were no outstanding Jersey Options and none have been granted subsequently. Certain Federal Income Tax Consummation of the Merger is conditioned Consequences upon the receipt of an opinion of Norris, McLaughlin & Marcus, P.A. counsel to Interchange, to the effect that the Merger will constitute a tax-free reorganization as defined in Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). For information regarding certain federal income tax matters, see "The Proposed Merger - Federal Income Tax Consequences." Jersey shareholders are 8 urged to consult their own tax advisors as to the specific tax consequences to them of the Merger under applicable tax laws. Dissenters' Rights Pursuant to the provisions of Sections 140 through 145 of the New Jersey Banking Act of 1948, as amended ("Section 140"), any shareholder of Jersey has the right to dissent from the Merger by not voting for the Merger at the Meeting or by giving notice in writing at or prior to the Meeting to the presiding officer of Jersey that he dissents from the Merger and does not thereafter vote in favor of the Merger. If the Merger is consummated, each dissenting Jersey shareholder who fully complies with the requirements of Section 140 will be entitled to receive from Interchange a cash payment equal to the value of his Jersey shares as of the Effective Time. Section 140 provides that the value of the shares of any dissenting shareholder shall be ascertained, as of the Effective Time by an appraisal obtained as described in Section 140. The value of the shares ascertained is required to be paid by Bank promptly to dissenting shareholders. Shares represented by Jersey proxies that are returned signed but unmarked as to voting instructions will be voted in favor of the Merger, and therefore shareholders of such shares will have waived their rights to dissent. See "Rights Of Dissenting Jersey Shareholders" and Appendix D to this Proxy Statement, which sets forth the steps to be taken by a Jersey shareholder who wishes to exercise the right to dissent. Holders of Jersey's convertible preferred stock, par value $5.00 per share ("Jersey Preferred Stock") have been offered an opportunity to enter into a written agreement with Jersey (the "Conversion Agreements") to convert their shares of Jersey Preferred Stock into Jersey Common Stock immediately prior to the Effective Time of the Merger. Holders who so convert will receive shares of Interchange Common Stock at the Exchange Ratio at the Effective Time unless they give written notice to Jersey on or before May 22, 1998 that they have elected to seek appraisal and cash payment for their shares. Holders who so elect will be entitled to assert dissenters' rights under Section 140 in connection with the Merger as if such holders had been entitled to vote at the Meeting and voted against Merger. To date, all but one holder of 300 shares of Jersey Preferred Stock have entered into Conversion Agreements with Jersey. Opinion of Jersey's Financial The Board of Directors of Jersey retained Advisor Capital Consultants of Princeton, Inc. ("Capital Consultants") to evaluate the terms of the Merger. Capital Consultants delivered its written opinion dated January 27, 1998 and reissued its opinion dated April 14, 1998 to the Board of Directors of Jersey to the effect that the consideration to be received by the Jersey shareholders pursuant to the 9 Merger is fair to such shareholders from a financial point of view. For information concerning the matters reviewed, assumptions made and factors considered by Capital Consultants, see "The Proposed Merger -- Opinion of Jersey's Financial Advisor" and Appendix C to this Proxy Statement-Prospectus, which sets forth Capital Consultants' reissued fairness opinion in its entirety. Conditions to the Merger Consummation of the Merger is contingent upon a number of conditions, including receiving all necessary regulatory approvals; the approval of the Merger by the requisite two-thirds vote of the shareholders of Jersey Common Stock; execution and delivery of Conversion Agreements by Jersey and all holders of Jersey Preferred Stock; an opinion of Norris, McLaughlin & Marcus P.A., counsel to Interchange, to the effect that the Merger will result in a tax free reorganization; the qualification of the Merger for pooling-of-interests accounting treatment; an opinion of Capital Consultants, advisor to Jersey, that the Merger is fair to the shareholders of Jersey from a financial point of view. Capital Consultants' opinion is included in its entirety as Appendix C (See "The Proposed Merger -- Opinion of Jersey's Financial Advisor; -- Conditions to the Merger.") Regulatory Approvals Consummation of the Merger requires the approval of the Commissioner and the FRB, which were obtained on April 14, 1998 and April 21, 1998, respectively. Approval does not constitute an endorsement of the Merger or a determination by either the Commissioner or the FRB that the terms of the Merger are fair to the shareholders of Jersey. See "The Proposed Merger -- Regulatory Approvals." Termination Rights The Merger Agreement may be terminated by either Jersey or Interchange if the Effective Time has not occurred by November 30, 1998. For a more complete description of these and other termination rights available to Jersey and Interchange, see "The Proposed Merger -Termination of the Merger Agreement." Amendment of the Merger Agreement The terms of the Merger Agreement may be amended, modified or supplemented by the written consent of Interchange and Jersey at any time prior to the Effective Time. However, following Jersey shareholder approval of the Merger Agreement, Jersey shareholders must approve any amendment reducing or changing the amount or form of consideration to be received by them in the Merger. See "The Proposed Merger -- Amendment of the Merger Agreement." 10 Accounting Treatment of The Merger is expected to be accounted for as the Merger a pooling-of-interests for financial reporting purposes. Under the pooling-of-interests method of accounting, Jersey's historical basis of assets, liabilities and shareholders' equity will be retained by Interchange as the surviving entity. See "Pro Forma Combined Financial Information" and "The Proposed Merger -- Accounting Treatment of the Merger." Stock Option to Interchange In connection with the negotiation by for Jersey Shares Interchange and Jersey of the Merger Agreement, Interchange and Jersey entered into a Stock Option Agreement (the "Stock Option Agreement") dated as of January 27, 1998. Pursuant to the Stock Option Agreement, Jersey granted Interchange an option (the "Option"), exercisable only under certain limited and specifically defined circumstances, (each a "Triggering Event") to purchase up to 126,950 authorized but unissued shares of Jersey Common Stock, representing approximately 19.9% of the shares of Jersey Common Stock which would be outstanding immediately following the exercise of the Option, for an exercise price of $18.75 per share. Additionally, Interchange may request Jersey to repurchase such shares of Jersey Common Stock purchased by Interchange, in exercise of the Option, at the then fair market value for such shares under certain conditions described in the Stock Option Agreement. Interchange does not have any voting rights with respect to the shares of Jersey Common Stock subject to the Option prior to exercise of the Option. A copy of the Stock Option Agreement is attached as Appendix B to this Proxy Statement-Prospectus. In the event that certain Triggering Events specifically enumerated in the Stock Option Agreement occur and the Merger is not consummated, Interchange would recognize a gain on the sale of the shares of Jersey Common Stock received pursuant to the exercise of the Option if such shares of Jersey Common Stock were sold at prices exceeding $18.75 per share. The ability of Interchange to exercise the Option and to cause up to an additional 126,950 shares of Jersey Common Stock to be issued may be considered a deterrent to other potential acquirers of control of Jersey, as it is likely to increase the cost of an acquisition of all of the shares of Jersey Common Stock which would then be outstanding. The exercise of the Option by Interchange may also make pooling-of-interests accounting treatment unavailable to a subsequent acquirer. See "The Proposed Merger -- Stock Option for Shares of Jersey Common Stock." 11 Interests of Certain Persons The Merger Agreement provides that, in in the Merger cancellation of their respective employment agreements with Jersey and as a full release of all other severance payments and similar payment due either of them from Jersey, within 30 days of the Closing, Interchange will pay each of Clyde Britt, the President and CEO of Jersey and William C. Ledgerwood, the Senior Vice President and Treasurer of Jersey, an amount substantially equal to the amounts they would have received had the severance provision of their employment agreements been triggered. Bank may request Mr. Britt and Mr. Ledgerwood to provide services on mutually agreeable terms for a brief period as consultants to Bank in connection with the transition of operations resulting from the Merger. Payments for such consultancy, if any, will be at levels not greater then their current compensation as executive officers of Jersey. Pursuant to the terms of the Merger Agreement, each of Interchange and Bank have agreed to expand their respective Boards of Directors by two seats. Richard A. Gilsenan, Chairman of the Board of Jersey and Arthur R. Odabash, Vice Chairman of Jersey are to be appointed to fill those seats. The Bank has also agreed under the Merger Agreement to indemnify the Directors and Officers of Jersey for a period of six years following the Effective Time of the Merger and to continue the current Jersey directors and officers liability insurance for that same period. As of the Record Date, the directors of Jersey and their affiliates beneficially owned, in the aggregate, (excluding options) approximately 48% of the issued and outstanding shares of Jersey Common Stock. In connection with the execution of the Merger Agreement, the directors of Jersey agreed to vote in favor of the Merger Agreement. As of the Record Date, there were no executive officers of Jersey who are not also directors. See "The Jersey Bank for Savings- Security Ownership of Certain Beneficial Owners and Management of Jersey." Resale Considerations with The shares of Interchange Common Stock to be Respect to Interchange issued in the Merger will be registered under Common Stock the Securities Act of 1933, as amended (the "Securities Act"), and will be freely transferable, except for shares received by persons, including directors and executive officers of Jersey, who may be deemed to be "affiliates" of Jersey under Rule 145 promulgated under the Securities Act. In connection with pooling of interests accounting rules such persons have agreed not to sell or otherwise reduce their risk with respect to Interchange Common Stock until the publication of financial results reflecting at least 30 days of combined operations following the Effective Time. Further restrictions 12 apply to resales by affiliates under Rule 145. See "The Proposed Merger -- Resale Considerations with Respect to the Interchange Common Stock." Differences in Shareholders' Jersey is a New Jersey chartered capital Rights stock savings bank incorporated under the Banking Act and Interchange is a business corporation incorporated under the New Jersey Business Corporation Act ("NJBCA"). The rights of Jersey shareholders are currently governed by the Banking Act. At the Effective Time, each Jersey shareholder will become a shareholder of Interchange and the rights of Interchange shareholders are governed by the NJBCA. The Banking Act and the NJBCA, and the rights of shareholders thereunder, differ with respect to voting requirements and various other matters. In addition, the New Jersey Shareholders Protection Act, which is part of the NJBCA and has no counterpart in the Banking Act, prohibits certain transactions involving an "interested shareholder" and a "resident domestic corporation." See "Comparison of the Rights of Shareholders of Interchange and Jersey." Recent Events On February 26, 1998 the Interchange Board of Directors approved a 3 for 2 split of all shares of Interchange Common Stock issued and outstanding on March 20, 1998 to be distributed on April 17, 1998. As a result of the 3 for 2 stock split, the Exchange Ratio adjusted proportionately, from 1 to 1 to 1.5 to 1 pursuant to adjustment provisions in the Merger Agreement. All per share data for Interchange in this Proxy Statement-Prospectus assumes that the 3 for 2 stock split has become effective. The Interchange Board also approved an increase in the quarterly dividend rate from 9(cent) per share to 10(cent) per share (after taking into effect the 3 for 2 stock split effective April 17, 1998 described above). On February 24, 1998 Interchange Bank amended its Articles of Incorporation to change its name from Interchange State Bank to Interchange Bank. On April 21, 1998, the Board of Directors of Jersey announced earnings for the quarter ended March 31, 1998 of $56 thousand, basic earnings per common share of $0.10 and diluted earnings per common share and share equivalents of $0.11. These figures are unaudited. On April 22, 1998, the Board of Directors of Interchange announced earnings for the quarter ended March 31, 1998 of $1.9 million, basic earnings per common share of $0.30 and diluted earnings per common share and share equivalents of $0.30 (after giving effect to the 3 for 2 stock split effective April 17, 1998). These figures are unaudited. 13 Selected Financial Data of Interchange The following table sets forth certain selected historical consolidated financial data for Interchange. Such data has been derived from, and should be read in conjunction with, the audited consolidated financial statements of Interchange and are qualified in their entirety by reference to the more detailed consolidated financial statements, incorporated by reference within.
Years Ended December 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 (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 and share equivalents 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 securities 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 Efficiency ratio (2) 55.16 59.50 59.09 59.70 63.53 Ratio of earnings to fixed charges (3) Excluding interest on deposits 9.79x 18.70x 16.03x 24.44x 793.90x Including interest on deposits 1.75x 1.68x 1.63x 1.79x 1.77x 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) All per share data has been restated to retroactively reflect the effects of the 3 for 2 stock split to be distributed on April 17, 1998 to shareholders of record on March 20, 1998. Interchange implemented Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), which changes the method of calculating earnings per share. The amounts presented in 1994 and 1993 have been recalculated in accordance with SFAS No. 128, but do not appear in the 1993 and 1994 financial statements and, as such, are unaudited. (2) The efficiency ratio is calculated by dividing noninterest expenses, excluding amortization of intangibles and net expense of foreclosed real estate by net interest income and noninterest income excluding gains on sales of loans, securities, loan servicing and a branch location. (3) The ratio of earnings to fixed charges excluding interest on deposits is calculated by dividing income before taxes and extraordinary items before interest on borrowings by interest on borrowings on a pretax basis. The ratio of earnings to fixed charges including interest on deposits is calculated by dividing income before taxes and extraordinary items before interest on deposits and borrowings by interest on deposits plus interest on borrowings on a pretax basis. 14 Selected Financial Data of Jersey The following table sets forth certain selected historical financial data for Jersey. Such data has been derived from, and should be read in conjunction with, the audited financial statements of Jersey and are qualified in their entirety by reference to the more detailed financial statements, incorporated by reference within.
Years Ended December 31, ---------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- ------- -------- ------- Summary Earnings (in thousands) Interest income $5,152 $4,114 $3,765 $3,004 $2,584 Interest expense 3,023 2,380 2,055 1,441 1,214 ------- ------- ------- ------- ------- Net interest income 2,129 1,734 1,710 1,563 1,370 Provision for loan losses 23 47 39 40 50 ------- ------- ------- ------- ------- Net interest income after provision for loan losses 2,106 1,687 1,671 1,523 1,320 Noninterest income 166 135 126 91 79 Noninterest expenses 1,686 1,292 1,176 1,132 996 ------- ------- ------- ------- ------- Income before income taxes 586 530 621 482 403 Income taxes 217 198 218 157 88 ------- ------- ------- ------- ------- Net income $ 369 $ 332 $ 403 $ 325 $ 315 ======= ======= ======= ======= ======= Per Share Data Basic earnings per common share $0.75 $0.67 $0.83 $0.66 $0.74 Diluted earnings per common share and share equivalents 0.73 0.67 0.81 0.73 Cash dividends declared per common share 0.12 0.12 0.12 0.10 0.04 Book value-end of year 13.15 12.35 12.01 10.46 10.61 Tangible book value-end of year 13.03 12.37 11.94 11.23 10.61 Weighted average shares outstanding (in thousands) 434 426 428 424 419 Balance Sheet Data-end of year (in thousands) Total assets $77,012 $67,822 $56,763 $50,729 $45,212 Securities held to maturity and securities available for sale 28,371 24,711 21,503 19,443 18,642 Loans 36,418 32,267 26,406 24,174 18,458 Allowance for loan losses 338 315 279 240 200 Total deposits 70,072 61,624 50,772 45,629 40,235 Total stockholders' equity 6,360 5,687 5,540 4,860 4,813 Selected Performance Ratios Return on average total assets 0.49% 0.55% 0.75% 0.67% 0.74% Return on average total stockholders' equity 6.20 5.90 7.54 6.48 7.59 Dividend payout ratio (1) 26.29 28.92 24.07 27.08 7.62 Average total stockholders' equity to average total assets 7.96 9.27 9.94 10.36 9.78 Net yield on interest earning assets (taxable equivalent) 2.97 2.99 3.26 3.30 3.32 Noninterest expenses to average assets 2.25 2.13 2.19 2.34 2.35 Noninterest income to average assets 0.22 0.22 0.23 0.19 0.19 Efficiency ratio (2) 73.46 69.13 64.05 68.44 68.74 Ratio of earnings to fixed charges (3) Excluding interest on deposits -- -- -- -- -- Including interest on deposits 1.19x 1.22x 1.30x 1.33x 1.33x Asset Quality Ratios-end of year Nonaccrual loans to total loans, gross -- 1.37% -- -- -- Nonperforming assets to total assets -- 0.65 -- -- -- Allowance for loan losses to nonaccrual loans -- 71.11 -- -- -- Allowance for loan losses to total loans, net 0.94% 0.99 1.07% 1.00% 1.10% Net charge-offs to average loans for the year -- 0.04 -- -- -- Liquidity and Capital Ratios Average loans to average deposits 50.54% 51.52% 54.30% 50.75% 47.28% Total stockholders' equity to total assets 8.26 8.39 9.76 9.58 10.65 Tier I capital to risk-weighted assets 19.75 19.29 23.33 25.62 29.53 Total capital to risk-weighted assets 20.81 20.36 24.51 26.80 30.75 Tier I leverage ratio 8.43 9.39 10.26 10.23 11.80
- -------------------------------------------------------------------------------- (1) The dividend payout ratio is calculated by dividing cash dividends declared on common and preferred stock by net income. (2) The efficiency ratio is calculated by dividing noninterest expenses, excluding amortization of intangibles and net expense of foreclosed real estate by net interest income and noninterest income excluding gains. No gains were excluded from Jersey's calculations for the years ended December 31, 1993 through 1997. (3) The ratio of earnings to fixed charges excluding interest on deposits is calculated by dividing income before taxes and extraordinary items before interest on borrowings by interest on borrowings on a pretax basis. The ratio of earnings to fixed charges including interest on deposits is calculated by dividing income before taxes and extraordinary items before interest on deposits and borrowings by interest on deposits plus interest on borrowings on a pretax basis. 15 Comparative Per Share Data The following table sets forth the earnings per share, period-end book value per share and cash dividends per share of Interchange Common Stock and Jersey Common Stock for each of the years in the three-year period ended December 31, 1997, on an historical and pro forma basis, as well as pro forma equivalent per share data for Jersey. The historical per share data have been derived from the financial statements of Interchange and Jersey which are contained herein or incorporated by reference herein. The pro forma combined share data have been derived after giving effect to the Merger as if it occurred at the beginning of the period presented using the pooling-of-interests method of accounting. The historical per share data for Interchange has been restated to retroactively reflect the effects of the 3 for 2 stock split to be distributed on April 17, 1998 to shareholders of record on March 20, 1998. See "Pro Forma Combined Financial Information;" "Selected Financial Data of Interchange" and "Selected Financial Data of Jersey." Comparative Per Share Data Pro Forma Equi- valent per Historical Historical Pro Forma Jersey Interchange Jersey Combined Share(1) ----------- ---------- -------- -------- Year Ended December 31, 1997 Basic Earnings Per Common Share $1.18 $ 0.75 $1.11 $ 1.67 Diluted Earnings Per Common Share 1.17 0.73 1.10 1.65 Book Value Per Share 7.83 13.15 7.86 11.79 Cash Dividends Per Share (2) 0.36 0.12 0.36 0.54 Year Ended December 31, 1996 Basic Earnings Per Common Share 1.01 0.67 0.95 1.43 Diluted Earnings Per Common Share 1.00 0.67 0.94 1.41 Book Value Per Share 6.94 12.35 7.02 10.53 Cash Dividends Per Share (2) 0.33 0.12 0.33 0.50 Year Ended December 31, 1995 Basic Earnings Per Common Share 0.97 0.83 0.93 1.40 Diluted Earnings Per Common Share 0.97 0.81 0.92 1.38 Book Value Per Share 6.31 12.01 6.43 9.65 Cash Dividends Per Share (2) 0.31 0.12 0.31 0.47 (1) Jersey pro forma equivalent per share data is computed by multiplying the pro forma combined per share data (giving effect to the Merger) by the Exchange Ratio of 1.50. (2) The amount of future dividends payable by Interchange, if any, is subject to the discretion of Interchange's Board of Directors. The Directors normally consider Interchange's cash needs, general business conditions, dividends from subsidiaries and applicable governmental regulations and policies. Pro forma amounts assume that Interchange would have declared cash dividends per share on Interchange Common Stock equal to its historical cash dividends declared per share of Interchange Common Stock. 16
Equivalent Closing Sale Last Bid Value of Interchange Price Per Share Price Per Share Common Stock Per of Interchange of Jersey Share of Jersey Common Stock (1)(2)(3) Common Stock Common Stock -------------------------- ---------------------- ------------------ High Low High Low High Low ----------- ------------ ---------- -------- ------- ------ 1997 First quarter $14.67 $ 10.61 $11.50 $11.50 $22.00 $15.92 Second quarter 17.58 11.92 14.00 12.50 26.38 17.88 Third quarter 16.67 14.67 16.00 14.50 25.00 22.00 Fourth quarter 21.58 14.75 18.75 16.00 32.38 22.13 1996 First quarter 9.42 8.41 11.50 11.50 14.13 12.62 Second quarter 9.17 8.55 11.50 11.50 13.75 12.83 Third quarter 9.83 8.33 11.50 11.50 14.75 12.50 Fourth quarter 11.11 9.50 11.50 11.50 16.67 14.25 1995 First quarter 7.35 6.19 11.50 11.50 11.03 9.29 Second quarter 8.52 6.99 11.50 11.50 12.78 10.48 Third quarter 9.73 8.04 11.50 11.50 14.60 12.06 Fourth quarter 9.15 8.57 11.50 11.50 13.73 12.86
The following table presents for (i) January 26, 1998, the last full trading day before the public announcement of the signing of the Merger Agreement, and (ii) the date two days prior to the date of this Proxy Statement, the reported closing price per share of Interchange Common Stock and the reported last bid price of Jersey Common Stock on the AMEX and Over-The-Counter Bulletin Board, respectively. Equivalent Value Closing Sale Last Bid of Interchange Price Per Share Price Per Share Common Stock Per of Interchange of Jersey Share of Jersey Date Common Stock (3) Common Stock Common Stock - ------------------- ------------------ --------------- ---------------- January 26, 1998 $19.25 $18.75 $28.88 April 23, 1998 21.75 28.75 32.63 - ----------- (1) On February 22, 1996, Interchange 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, Interchange 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, Interchange declared a 3 for 2 Stock Split to be distributed on April 17, 1998 to shareholders of record on March 20, 1998. The high and low sales price and the cash dividends have been restated to reflect the effects of the stock split. 17 Summary Pro Forma Financial Information The following tables present certain Unaudited Combined Financial Information including the Pro Forma Unaudited Combined Condensed Results of Operations for the years ended December 31, 1997, 1996 and 1995, and the Pro Forma Unaudited Combined Balance Sheet at December 31, 1997. The Pro Forma Unaudited Combined Financial Information gives effect to the proposed Merger, accounted for as a pooling-of-interests, as if such transaction had been consummated on January 1 of each year. For the purpose of the Pro Forma Unaudited Combined Balance Sheet, the assumption is that the transaction had been consummated as of December 31, 1997. This information which has been prepared by Interchange's management is based on the historical financial statements of Interchange and Jersey included or incorporated by reference herein and should be read in conjunction with such financial statements and notes. See "Information Incorporated By Reference". The pro forma financial information assumes an Exchange Ratio of 1.5 shares of Interchange Common Stock for each share of Jersey Common Stock outstanding. The Pro Forma Unaudited Combined Financial Information should be read in conjunction with the Pro Forma Financial Information and the related notes thereto presented elsewhere in this Proxy Statement-Prospectus and the financial statements and related notes included and the consolidated financial statements incorporated by reference in this Proxy Statement-Prospectus. The Pro Forma financial information is not necessarily indicative of the results of operations which would have been achieved had the Merger been consummated as of the beginning of the periods for which such data are presented and should not be construed as being representative of future periods. Pro Forma Unaudited Combined Financial Information (in thousands, except per share data) For the Years Ended December 31, --------------------------------- 1997 1996 1995 ------- ------- ------- Results of Operations: Net interest income $26,771 $24,419 $23,555 Provision for loan losses 1,653 747 1,239 ------- ------- ------- Net interest income after provision for loan losses 25,118 23,672 22,316 ------- ------- ------- Total noninterest income 4,762 4,253 4,585 Total noninterest expenses 17,670 17,520 16,707 ------- ------- ------- Income before income taxes 12,210 10,405 10,194 Income taxes 4,285 3,654 3,511 ======= ======= ======= Net income $ 7,925 $ 6,751 $ 6,683 ======= ======= ======= Basic earnings per common share $ 1.11 $ 0.95 $ 0.93 Diluted earnings per common share 1.10 0.94 0.92 As of December 31, 1997 Balance Sheet: ----------------- Total Assets $625,049 Total Deposits 540,765 Total Stockholders' Equity 56,130 Book Value Per Common Share 7.86 The pro forma information does not include certain nonrecurring charges incurred in conjunction with the merger subsequent to December 31, 1997. These expenses are directly attributable to the merger and are expected to be included in income within the next 12 months. The expenses are estimated to be $624 thousand, net of taxes of $351 thousand. As of December 31, 1997, no material expenses were incurred that were directly related to the merger. 18 INTRODUCTORY STATEMENT All information contained in this Proxy Statement-Prospectus with respect to Jersey was supplied by Jersey for inclusion herein. All information contained herein or incorporated by reference herein with respect to Interchange and Bank was supplied by Interchange. The first date on which this Proxy Statement-Prospectus and the enclosed form of proxy are being sent to the shareholders of Jersey is on or about April 30, 1998. This Proxy Statement-Prospectus does not cover any resales of shares of Interchange Common Stock to be received by shareholders of Jersey upon consummation of the Merger. Affiliates of Jersey will be subject to restrictions on their ability to resell the Interchange Common Stock received by them in the Merger. See "The Proposed Merger -- Resale Considerations with Respect to the Interchange Common Stock." CERTAIN INFORMATION REGARDING INTERCHANGE General Interchange is a one-bank holding company registered with the Board of Governors of the Federal Reserve System (the "Board of Governors") under the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"). Interchange was organized under the laws of New Jersey on October 15, 1984 as a bank holding company for Bank. Interchange Bank began operations in 1969. In addition to Bank, Interchange directly owns Clover Leaf Mortgage Co., Inc. and Washington Interchange Corporation and indirectly owns additional non-bank subsidiaries through Bank, including Cloverleaf Development Corporation, Cloverleaf Insurance Agency, Inc., and Cloverleaf Investment Corporation, Inc. As of December 31, 1997 Interchange had consolidated assets of approximately $548 million, deposits of $471 million and shareholders' equity of $50 million. Interchange Bank Interchange Bank, a wholly owned subsidiary of Interchange, is a commercial bank established in 1969 under the laws of the State of New Jersey. Bank is a member of the Federal Reserve System and its deposits are insured by the FDIC. Bank maintains its principal office in Saddle Brook, New Jersey and operates 12 branches throughout Bergen County, New Jersey. Interchange Bank is engaged in the financing of local businesses and industry, providing credit facilities and related services for smaller businesses, typically those with $1 million to $5 million in annual sales, in light manufacturing, wholesale and retail distribution, and service businesses. A wide range of commercial lending products is offered, including working capital lines of credit, U.S. Small Business Administration - backed loans, term loans for fixed asset acquisitions, commercial mortgages and other asset-based financing. Interchange Bank also provides personal 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 lines. The Bank also offers a VISATM credit card and the Interchange Bank-Line telephone banking system. Certain employees are also licensed insurance agents qualified to offer tax deferred annuities and related insurance products. The Bank also offers mutual funds to its customers through a third party vendor. Automated teller machines are located at ten of the banking offices, at two supermarkets and one mini-market. The principal market for the bank's deposit gathering activities covers major portions of Bergen County in the Northeastern corner of New Jersey, adjacent to New York City. The principal service area 19 represents a diversified mix of stable residential neighborhoods with a wide range of per household income levels; offices, service industries and light industrial facilities; large shopping malls and small retail outlets. The Bank currently has 180 full time equivalent employees. Its principal executive offices are located at Park 80 West/Plaza Two, Saddle Brook, New Jersey 07763. Its telephone number is (201) 703-2265. CERTAIN INFORMATION REGARDING JERSEY Jersey Bank Jersey is a state-chartered non-member savings bank established in 1988 under the laws of the State of New Jersey. Jersey's deposits are insured by the FDIC. Jersey maintains its administrative offices and a branch office in Montvale, New Jersey, and operates a branch in River Edge, New Jersey. See "The Jersey Bank for Savings". Jersey offers a broad range of personal consumer banking services, including checking and savings accounts, money market accounts, certificates of deposit, individual retirement accounts, residential mortgages, home equity lines of credit, second mortgage loans, automobile loans, personal loans, overdraft loans, safe deposit boxes and telephone banking services. Twenty-four hour automated teller machines are located both at the banking office and branch office of Jersey. Jersey also offers commercial banking services, including commercial real estate based mortgage loans up to a maximum amount of approximately $900,000, and issues performance letters of credit. Jersey also processes merchant credit card receipts, is a federal tax payment depository, provides lease security deposit account management and lock box arrangements for rental collection. Jersey also offers attorney and other performance trust account facilities. The principal market for Jersey's services is Northeastern Bergen County. This principal service area encompasses a diversified mix of residential neighborhoods tending towards the higher range of per-household income levels, as well as offices, service industries and light industrial facilities, shopping malls and small retail outlets. Jersey currently has 20 full-time equivalent employees. Jersey's administrative offices are located at 2-8 Kinderkamack Road, Montvale, New Jersey 07645-0333. Its telephone number is (201) 930-0005. THE MEETING General This Proxy Statement-Prospectus solicits, on behalf of the Jersey Board of Directors, proxies to be voted at a Special Meeting of Shareholders (the "Meeting") of Jersey which is to be held at the Holiday Inn, Montvale, New Jersey on May 27, 1998 at 10:00 a.m., and at any adjournments or postponements thereof. 20 Purpose of the Meeting At the Meeting, the Jersey shareholders will (i) consider and vote upon a proposal to approve the Merger Agreement; and (ii) act on such other matters as may be properly brought before the Meeting. The Merger will only become effective after approval by Jersey shareholders and by the Commissioner and FRB. A closing under the Merger Agreement (the "Closing") will occur prior to the Effective Time on a day mutually agreed to by Interchange and Jersey within 30 days following the receipt of all necessary regulatory and governmental approvals and consents and satisfaction or waiver of all other conditions of closing (other than the delivery of 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 Effective Time, each outstanding share of Jersey Common Stock, except for Excluded Shares (as defined below), will be converted into 1.5 shares of Interchange Common Stock (which reflects the 3 for 2 stock split of Interchange Common Stock effective April 17, 1998), subject to adjustment, as more fully set forth in the Merger Agreement. See "The Proposed Merger -- General Description." THE BOARD OF DIRECTORS OF JERSEY RECOMMENDS THAT THE SHAREHOLDERS OF JERSEY VOTE IN FAVOR OF THE MERGER AGREEMENT. Vote Required; Shares Entitled to Vote Only holders of record of Jersey Common Stock at the close of business on April 21, 1998 (the "Record Date") are entitled to notice of and to vote at the Meeting. The number of shares of Jersey Common Stock issued, outstanding and entitled to vote at the close of business on the Record Date was 456,270. Holders of Jersey Common Stock of record on the Record Date are entitled to one vote per share on any matter that may properly come before the Meeting. The affirmative vote, in person or by proxy, of at least two-thirds of the outstanding shares of Jersey Common Stock is required to approve the Merger Agreement. In connection with the execution of the Merger Agreement, the directors of Jersey have agreed to vote in favor of the Merger Agreement the shares of Jersey Common Stock which they beneficially own (approximately 48% of the issued and outstanding shares of Jersey Common Stock, excluding options, as of the Record Date.) As of the Record Date, there were no executive officers of Jersey who are not also directors. See "The Jersey Bank for Savings- Security Ownership of Certain Beneficial Owners and Management of Jersey." Solicitation, Voting and Revocation of Proxies The enclosed proxy is designed to permit each shareholder of record on the Record Date to vote on all matters to come before the Meeting or any adjournment or postponement thereof. This proxy is solicited by the Board of Directors of Jersey. Any proxy may be revoked at any time before its exercise by giving written notice of revocation to William C. Ledgerwood, Secretary of Jersey, at the main office of Jersey at 2-8 South Kinderkamack Road, Montvale, New Jersey 07645-0333. A subsequently dated and duly executed proxy, if properly presented, will revoke a prior proxy. Any shareholder entitled to vote who has previously executed a proxy may attend the Meeting and vote in person, provided the shareholder has filed a written notice of revocation of such proxy with the Secretary of the Meeting prior to the voting of such proxy. Where a shareholder specifies a choice in the form of proxy with respect to a matter being voted upon, the shares represented by the proxy will be voted in accordance with such specification. If no such specification is made, the shares represented by proxies will be voted in favor of the Merger Agreement. 21 The Board of Directors of Jersey knows of no matters, other than the proposed Merger described in this Proxy Statement-Prospectus, that will be presented for consideration at the Meeting. However, if other matters properly come before the Meeting, it is intended that the persons designated as proxies will vote upon such additional matter(s) in accordance with their best judgment. The cost of soliciting proxies for the Meeting will be borne by Jersey. In addition to the use of the mail, proxies may be solicited personally, by telephone or telegram, and by directors, officers and employees of Jersey acting without additional compensation. Arrangements may also be made with brokers, dealers, nominees and other custodians for the forwarding of solicitation material to the beneficial owners of stock held of record by such persons, and such persons may be reimbursed by Jersey for reasonable out-of-pocket expenses. THE PROPOSED MERGER Descriptions of the Merger and the Merger Agreement (which is attached as Appendix A to this Proxy Statement-Prospectus) are qualified in their entirety by reference to the Merger Agreement which is hereby incorporated in this Proxy Statement-Prospectus by reference. Jersey shareholders are urged carefully to review the Merger Agreement. General Description The Merger Agreement provides that, at the Effective Time, Jersey will merge with and into Bank, with Bank as the surviving entity (the "Surviving Bank"). The separate identity and existence of Jersey will cease upon consummation of the Merger. All property, rights, powers and franchises of each of Jersey and Interchange will vest in the Surviving Bank. The Surviving Bank will be governed by the Certificate of Incorporation and bylaws of Bank in effect immediately prior to the Effective Time. Consideration Upon consummation of the Merger, each share of Jersey Common Stock issued and outstanding immediately prior to the Effective Time (except for Excluded Shares) will be converted into 1.5 shares of Interchange Common Stock (which reflects the 3 for 2 stock split of Interchange Common Stock effective April 17, 1998). "Excluded Shares" are those shares of Jersey common Stock which (i) are held by Jersey as treasury shares, (ii) are held directly or indirectly by Interchange (other than as trustee or in a fiduciary capacity or in satisfaction of a debt previously contracted for) or (iii) as to which dissenters' rights have been validly perfected under applicable law or pursuant to Conversion Agreements, as described below. The Exchange Ratio is subject to adjustment to take into account any stock split, stock dividend, stock combination, reclassification, or similar transaction by Interchange with respect to the Interchange Common Stock. Under the terms and conditions of Jersey Preferred Stock, such stock is convertible into Jersey Common Stock at any time, at the option of the holder. However, such shares do not automatically convert to Jersey Common Stock as a result of the Merger. The Merger makes no provision to exchange shares of Jersey Preferred Stock for shares of Interchange Common Stock or any other securities, cash or other property of Interchange or Interchange Bank. The Merger Agreement requires Jersey to enter into agreements (the "Conversion Agreements") with each holder of Jersey Preferred Stock which: (i) provides for the conversion of Jersey Preferred Stock into Jersey Common Stock immediately prior to the Effective Time upon the conversion terms set forth in Jersey's Certificate of Incorporation; (ii) allow the holders thereof to elect, at any time on or before May 22, 1998, the third business day prior to the Jersey Meeting, to exclude the shares of Jersey Common Stock issuable upon conversion from participating in the exchange for Interchange Common Stock at the Effective Time and, in lieu thereof, to exercise dissenter's rights of appraisal upon the terms and conditions set forth in Section 140 of the New Jersey Banking Act, as if such shares were entitled to vote at the Jersey Meeting and were voted against the Merger. It is a condition to Interchange's obligation to consummate 22 the Merger that all holders of Jersey Preferred Stock enter into Conversion Agreements or be compelled by a final non-appealable order of a court of competent jurisdiction to so convert their shares upon the terms and conditions set forth in the Conversion Agreements. If this condition were to be waived by Interchange, the holders of Jersey Preferred Stock who do not convert such shares into Jersey Common shares prior to the Effective Time will be precluded from receiving consideration in the Merger. To date, all but one holder of 300 shares of Jersey Preferred Stock have entered into Conversion Agreements with Jersey. No shareholder of Jersey Common Stock will be entitled to receive fractional shares of Interchange Common Stock, but instead will be entitled to receive, without interest, a cash payment equal to the value of any fractional share interest to which they would otherwise be entitled, determined by multiplying the shareholder's fractional interest by the Average Closing Price of Interchange Common Stock (as hereinafter defined). The "Average Closing Price" of Interchange Common Stock is defined in the Merger Agreement as the average of the closing prices of Interchange Common Stock as reported on the AMEX and published in the Wall Street Journal during the first 20 of the 25 consecutive trading days immediately preceding the Effective Time. Both the Exchange Ratio and the Average Closing Price are subject to adjustment to take into account any stock split, stock dividend, stock combination, reclassification, or similar transaction by Interchange with respect to Interchange Common Stock. Under New Jersey banking law, the Jersey shareholders are entitled to dissenters' rights of appraisal in connection with the Merger. Holders of Jersey Preferred Stock who enter into Conversion Agreements are also granted equivalent dissenters' rights under such Agreements. See "Rights of Dissenting Jersey Shareholders." Exchange of Certificates At the Effective Time, holders of certificates formerly representing shares of Jersey Common Stock will cease to have any rights as Jersey shareholders and their certificates automatically will represent the right to receive shares of Interchange Common Stock into which their shares of Jersey Common Stock will have been converted by the Merger. At the Effective Time, holders of certificates formerly evidencing Jersey Preferred Stock who have entered into a Conversion Agreement, will cease to have rights as Jersey Shareholders and their certificates automatically will represent the right to receive shares of Interchange Common Stock issuable in exchange for the shares of Jersey Common Stock into which such Jersey Preferred Stock is converted immediately prior to the Effective Time. As soon as practicable after the Effective Time, Interchange will send written notice to each holder of record of Jersey Common Stock and converting holders of Jersey Preferred Stock (other than those that exercise their dissenter's rights), indicating the number of shares of Interchange Common Stock into which such holder's shares of Jersey Common Stock have been converted. Each holder of outstanding certificates for Jersey Common Stock, promptly upon proper surrender of such certificates to Interchange after the Merger, will receive a certificate representing the full number of shares of Interchange Common Stock into which the shares of Jersey Common Stock previously represented by the surrendered certificates have been converted. At the time of issuance of a new Interchange stock certificate, each shareholder will receive a check for the amount of any fractional share interest to which he may be entitled to cash payment. Each share of Interchange Common Stock into which shares of Jersey Common Stock are converted will be deemed to have been issued at the Effective Time. Accordingly, Jersey shareholders who receive Interchange Common Stock in the Merger will be entitled to receive any dividend or other distribution which may be payable to holders of record of Interchange Common Stock on or after the Effective Time. However, no dividend or other distribution will actually be paid until the certificate or certificates formerly representing shares of Jersey Common Stock have been surrendered or Jersey Preferred Stock, as the case may be, at which time any accrued dividends and other distributions on such shares of Interchange Common Stock will be paid without interest. 23 HOLDERS OF JERSEY COMMON STOCK SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL AND INSTRUCTIONS. Conversion of Stock Options The Merger Agreement provides that each outstanding and fully vested option to purchase Jersey Common Stock (a "Jersey Option") will be converted at the Effective Time into the right to receive shares of Interchange Common Stock, as more fully described below. At the Effective Time, each outstanding and fully vested Jersey Option will be converted into an amount of Interchange Common Stock having a value equal to the difference between the exercise price of the Jersey Option and the value of the shares of Interchange Common Stock to be exchanged for each share of Jersey Common Stock to be determined using the Average Closing Price of Interchange Common Stock. As of December 31, 1997, there were no outstanding Jersey Options and none have been granted subsequently. Background of the Merger In June 1997, the Board of Directors of Jersey received a letter of inquiry from Interchange with respect to the feasibility of a strategic alliance. In August 1997, the Board of Directors formally retained the services of Capital Consultants to provide the Board with a preliminary indication of Jersey's share value in the context of a strategic transaction. On September 19, 1997, the Board of Directors of Jersey received a formal offer from Interchange under which Interchange proposed to purchase Jersey for consideration equal to two times Jersey's book value, or $23.25 per share of Jersey Common Stock. In response to this offer, the Board of Directors retained Capital Consultants to, among other things, evaluate the offer, perform due diligence and identify other potential strategic partners. During the course of its engagement, Capital Consultants conducted an informal "market check" by contacting other banking institutions. On October 28, 1997, the Jersey Board formally appointed a Special Committee, comprising Clyde C. Britt, Richard A. Gilsenan, Wilson Kaplen, Arthur R. Odabash and Stanley H. Marcus to evaluate its strategic alternatives, including the proposed transaction with Interchange, and to make a formal recommendation to the Board. During the fourth quarter of 1997, the Special Committee of Jersey met several times to evaluate Jersey's strategic alternatives. In particular, three basic strategic options were considered: (i) continuing the policy of independence with growth generated through internal operations; (ii) a merger-of-equals type of transaction; and (iii) a merger with a larger financial institution. During this period, the Special Committee, and/or its representatives engaged in preliminary and exploratory discussions with various financial institutions, including Interchange, which either resulted in the receipt of certain informal proposals on terms less favorable than the terms offered by Interchange, or no expression of interest. On November 5, 1997 the Special Committee held a meeting with Interchange to discuss the terms of the proposed offer; Capital Consultants participated in this meeting. At this meeting there was no agreement with respect to any material terms of the transaction, including structure and price. In December 1997, the Special Committee met to discuss various strategic alternatives, including Interchange's proposal. Capital Consultants presented the Board with an analysis of the various strategic alternatives. In consultation with Capital Consultants, and after careful consideration of the financial condition of Interchange and other potential strategic partners, the strategic benefits of 24 an alliance between Interchange and Jersey, the pro forma financial performance of a combined entity, the structure and terms of the proposed transaction and the other factors discussed below, the Special Committee then determined to pursue negotiations with Interchange. During January 1998, members of the Special Committee and personnel of Jersey and Capital Consultants continued a due diligence review. Simultaneously, the Special Committee, with Jersey's special counsel and Capital Consultants, continued negotiating the terms of the Merger Agreement and the related documentation. On or about January 19,1998, the Special Committee met with its advisors to analyze the terms of the proposed Interchange offer as reflected in documents delivered by Interchange. An analysis of the proposed transaction was prepared by special counsel and delivered to each member of the Jersey Board of Directors. Capital Consultants presented an analysis of the proposed transaction and confirmed its preliminary opinion of the fairness of the transaction from a financial point of view to the shareholders of Jersey. On January 27, 1998, the Board of Directors of Jersey and its Special Committee convened to discuss the definitive terms of the proposed transaction. Special counsel summarized the terms of the transaction. Capital Consultants distributed its analyses and delivered its written opinion that the proposed transaction was fair from a financial point of view to the shareholders of Jersey. The Special Committee and the Board of Directors of Jersey also discussed the potential financial and strategic benefits of the proposed transaction, the results of the due diligence review, the anticipated tax and accounting treatment of the proposed transaction, the various strategic alternatives, and the terms of the Merger Agreement and transactions contemplated thereby. The Special Committee, after due consideration of all of the information presented and consultation with its advisors, voted unanimously to approve the Merger Agreement and transactions contemplated thereby and made a recommendation to the Board of Directors. The Board of Directors, after due consideration and consultation with its advisors, voted unanimously to accept the recommendation of the Special Committee and approved the Merger Agreement (and related documentation) and the transactions contemplated thereby as being in the best interest of Jersey Bank and its shareholders and recommended that the Jersey shareholders approve the merger. The Merger Agreement was executed by the parties that day. Reasons for the Merger THE BOARD OF DIRECTORS OF JERSEY HAS APPROVED THE MERGER AGREEMENT, BELIEVES IT TO BE IN THE BEST INTERESTS OF THE SHAREHOLDERS OF JERSEY AND RECOMMENDS THAT JERSEY SHAREHOLDERS VOTE "FOR" THE MERGER AGREEMENT. The Board of Directors of Jersey believes that the terms of the Merger Agreement are fair to Jersey's shareholders. In approving the Merger Agreement, the Board evaluated the business, financial and market factors affecting Jersey, Interchange's historical and pro forma financial results, the liquidity and trading characteristics of the Interchange Common Stock, Interchange's credit policies, asset quality, adequacy of loan loss reserves and interest rate risk, the dividend income of the Interchange Common Stock and the Jersey Common Stock, the outlook for each institution in a changing banking and financial services industry, in consultation with its financial advisor. The Board also noted that Jersey would become part of a larger entity that would compete more effectively in the communities served by Jersey by offering a number of new or expanded services to residents of such communities. Furthermore, the Board considered the effect on shareholder value of Jersey's continuing as a stand-alone entity or combining with other potential merger partners, and the risks associated with such alternative strategies, compared to the effect of its combining with Interchange. The Board concluded that the merger with Interchange presented the best opportunity for maximizing shareholder value and increasing the liquidity of the Jersey Common Stock. The Board believes that shareholders of Jersey would be better served by converting their investment in Jersey into an investment in Interchange at the Exchange Ratio pursuant to the terms 25 of the Merger Agreement. Among other things, Interchange, as a more diversified institution with substantially greater assets than Jersey, is better positioned to succeed in the increasingly competitive environment in which banks are now operating. As part of Interchange, the offices of Jersey will have the support of Interchange's greater resources and broader access to markets for capital and lendable funds. This greater scope and depth of services coupled with the ability to offer larger loans should enable the offices of Jersey to serve effectively a wider range of customers. In addition, the Board of Directors believes that ownership of Interchange Common Stock, which is traded on the American Stock Exchange, will provide Jersey shareholders with a far more liquid investment than will continued ownership of Jersey Common Stock. Finally, the Board of Directors believes that Interchange's operations and business philosophy are consistent with those of Jersey. The foregoing discussion of the information and factors considered by the Board of Directors of Jersey is not intended to be exhaustive. The Board of Directors did not attach relative weight to the factors it considered in reaching its decision but, considering all factors discussed above, determined that the Merger pursuant to the Merger Agreement is in the best interest of, and is fair to, Jersey's shareholders. The Jersey Board of Directors unanimously approved the Merger Agreement and unanimously recommends that the Merger Agreement be approved by the holders of Jersey Common Stock. Opinion of Jersey's Financial Advisor The Jersey Board retained Capital Consultants to act as Jersey's financial advisor to assist the Jersey Board of Directors and management in connection with the Merger and related matters, and, if negotiations resulted in the execution of a definitive agreement, to render its opinion with respect to the fairness, from a financial point of view, to the shareholders of Jersey of the consideration to be received in a potential merger. Capital Consultants is regularly engaged in the valuation of banks, bank holding companies, savings and loan associations, and thrift holding companies in connection with mergers, acquisitions and other securities transactions. Capital Consultants has knowledge of, and experience with, the New Jersey banking and thrift market and financial organizations operating in that market and was selected by Jersey because of its knowledge of, experience with, and reputation in the financial services industry. Capital Consultants is not a market maker in either Interchange Common Stock or Jersey Common or Preferred Stock. On January 27, 1998, the date the Board of Directors of Jersey approved the Merger, Capital Consultants delivered to the Board of Directors its written opinion that, based on and subject to various items discussed in the presentations, the consideration to be received by Jersey's shareholders pursuant to the Merger Agreement is fair from a financial point of view to Jersey's shareholders. In requesting Capital Consultants' advice and opinion, Jersey's Board did not impose any limitations upon Capital Consultants with respect to the investigations made or procedures followed by it in rendering its opinion. Capital Consultants reissued its opinion as of the date of this Proxy Statement-Prospectus. The full text of the written opinion of Capital Consultants, which sets forth assumptions made and matters considered, is attached as Appendix C to this Proxy Statement-Prospectus. Jersey shareholders are urged to read this opinion in its entirety. Capital Consultants' opinion is directed only to the financial terms of the Merger and does not constitute a recommendation to any Jersey shareholder as to how such shareholder should vote at the Meeting. The summary information regarding Capital Consultants' opinion and the procedures followed in rendering such opinion set forth in this Proxy Statement-Prospectus is qualified in its entirety by reference to the full text of such opinion. 26 In arriving at its opinion, Capital Consultants reviewed and analyzed, among other things: (i) the Merger Agreement and related documents; (ii) the Interchange Registration Statement on Form S-4 of which this Proxy Statement-Prospectus is a part; (iii) publicly available information relating to Interchange and Jersey including, for Interchange, annual reports to shareholders and Annual Reports on Form 10-K filed with the SEC for the years ended December 31, 1995 through 1997, the Consolidated Statements of Financial Condition as of December 31, 1997, 1996 and 1995, and the related Consolidated Statements of Income, Changes in Shareholders' Equity and Cash Flows for the three year period ended December 31, 1997 included therein, and the quarterly reports to shareholders and Quarterly Reports on Form 10-Q filed with the SEC for the periods ended March 31, June 30, and September 30, 1997 and for Jersey, annual reports to shareholders for the years ended December 31, 1994 through 1996, Statements of Financial Condition as of December 31, 1997, 1996, and 1995 and related Statements of Income, Changes in Shareholders' Equity and Cash Flows for the three year period ended December 31, 1997, together with the Reports of Independent Public Accountants and quarterly Reports of Condition and Income as filed with the Federal Deposit Insurance Corporation for the periods ended March 31, June 30, and September 30, 1997; (iv) certain historical operating and financial information provided to Capital Consultants by the managements of Jersey and Interchange; (v) historical and current market data for the Jersey Common Stock and the Interchange Common Stock; (vi) the publicly available financial data and stock market performance data of publicly traded banking and thrift institutions which Capital Consultants deemed generally comparable to Jersey and Interchange; (vii) the nature and terms of recent acquisitions and merger transactions involving banking institutions and bank and thrift holding companies that Capital Consultants considered reasonably similar to Jersey and Interchange in financial character, operating character, historical performance, geographic market and economy; and (viii) such other studies, financial forecasts, analyses, inquiries and reports as Capital Consultants deemed appropriate. In addition, Capital Consultants conducted meetings with members of senior management of Jersey and Interchange for purposes of reviewing the future prospects of Jersey and Interchange. Capital Consultants evaluated the pro forma ownership of the Interchange Common Stock by Jersey's shareholders, relative to the pro forma contribution of Jersey's assets, deposits, equity and earnings to the pro forma resulting company in the Merger. Capital Consultants also took into account its experience in other transactions, as well as its knowledge of the banking and thrift industries and its experience in securities valuations. In rendering its opinion, Capital Consultants assumed, without independent verification, the accuracy and completeness of the financial and other information and representations provided to it by Jersey and Interchange. Capital Consultants did not conduct a physical inspection of any of the properties or assets of Jersey or Interchange and has not made any independent evaluations or appraisal of any properties, assets or liabilities of Jersey or Interchange. Capital Consultants has assumed and relied upon the accuracy and completeness of the publicly available financial and other information provided to it, has relied upon the representations and warranties of Jersey and Interchange made pursuant to the Merger Agreement, and has not independently attempted to verify any of such information. In rendering its opinion, Capital Consultants assumed that in the course of obtaining the necessary regulatory approvals for the Merger, no conditions will be imposed that will have a material adverse effect on the contemplated benefits of the Merger on a pro forma basis to Jersey. In arriving at its opinion, Capital Consultants performed a variety of financial analyses. Capital Consultants believes that its analyses must be considered as a whole and that consideration of portions of such analyses and the factors considered therein, without considering all factors and analyses, could create an incomplete view of the analyses and the process underlying Capital Consultants' opinion. The preparation of an opinion with respect to fairness, from a financial point of view, of the consideration to be received by shareholders is a complex process involving judgments and is not necessarily susceptible to partial analyses and summary description. 27 In its analyses, Capital Consultants made numerous assumptions with respect to Jersey's and Interchange's industry performance, business and economic conditions and other matters. Such assumptions and any forward-looking estimates reflected in Capital Consultants analyses almost always vary from actual results, and the difference between assumptions underlying such estimates and actual results can be material. Factors which may make actual results differ from anticipated results include, but are not limited to, changes in market interest rates; unforeseen competition; changes in customer economic activity which may affect loan activity; changes in the economy of the companies' market area, and other uncertainties, all of which are difficult to predict and beyond the control of Jersey or Interchange. Estimates of values of companies do not purport to be appraisals or necessarily reflect the prices at which companies or their securities may actually be sold. In connection with its opinion, Capital Consultants performed various analyses with respect to Jersey and Interchange. The following is a brief summary of such analyses, certain of which were presented to the Jersey Board by Capital Consultants. Valuation Analysis Using a valuation analysis, Capital Consultants estimated the present value of theoretical values of Jersey based on a range of price-to-earnings ("P/E") multiples between 16.0x and 18.0x and a range of discount rates between 6% and 8%. The range of values were based on a range of estimated earnings for the next three years assuming annual earnings growth from $400,000 in 1997 to $900,000 in 2000. The results of this analysis indicated a range of theoretical values for Jersey between $23.23 per share (P/E of 15.0x; 8% discount rate) and $28.16 per share (P/E of 17.0x; 6% discount rate). Capital Consultants also prepared a net present value analysis that indicated theoretical values for Jersey based on range of terminal book value multiples between 1.80x and 2.20x and a range of discount rates between 6% and 8%. The dividend payout remains the same and the range of terminal multiples of book value are based on the current price / book value multiples estimated for Jersey's value. The terminal values were discounted to present value using discount rates which reflect assumptions regarding the required rates of return of the current and prospective shareholders of Jersey Common Stock in these economic times. The range of present values per share of Jersey resulting from the above-referenced assumptions were $21.38 to $28.16 per share. Comparable Company Analysis Capital Consultants compared the operating performance of Jersey to publicly traded thrifts that Capital Consultants deemed to be similar to Jersey. The group consists of six publicly traded New Jersey based thrifts with total assets of between $110 million and $372 million. Capital Consultants compared Jersey with these institutions based on selected operating fundamentals, including capital adequacy, profitability and asset quality. Using pricing data as of December 31, 1997, the median price to stated book value was 161.5% for the comparable thrifts and 153.2% for Jersey. The median price to trailing twelve months earnings was 24.8x for the comparable thrifts and 27.6x for Jersey. The median equity to assets ratio was 12.2% for the group of comparable thrifts and 8.26% for Jersey. The median return on average assets for the twelve months ended September 30, 1997 was 0.75% for the comparable group of thrifts and 0.49% for Jersey. The median return on average equity for the twelve months ended September 30, 1997 was 5.48% for the comparable group of thrifts and 5.74% for Jersey. Finally, Capital Consultants compared the market price, market-to-book value and price-to-earnings multiples of the Interchange Common Stock with individual market multiples and medians of 28 twenty-one publicly traded New Jersey based commercial banks and bank holding companies having total assets between $139 million and $29.1 billion. The analysis also compared returns on average assets and average equity of Interchange to those of selected financial institutions and the medians of the comparable group. The analysis indicated that the Interchange common stock traded in December 1997 at a price-to-earnings multiple of 16.0 times trailing twelve months earnings for the period ended September 30, 1997 as compared to a comparative group medium of 20.9 times trailing twelve months earnings for the period ended September 30, 1997. While the Interchange Common Stock traded at a price-to-book value of 258%, the comparative group median was 263%. Interchange's financial performance, as measured by returns on average assets and average equity for the trailing twelve months ended September 30, 1997, was 1.53% and 17.17%, respectively, as compared to the median of the selected comparable financial institutions which was 1.18% and 13.52%, respectively. The Capital Consultants analyses also included summary income statement and balance sheet data and selected ratio analyses for Interchange and various other potential acquirers of Jersey. Contribution Analysis Capital Consultants prepared a contribution analysis showing the percentage of assets, deposits, net common equity and 1997 net income Jersey would contribute to the combined company on a pro forma basis, and compared these percentages to the pro forma ownership after the Acquisition. This analysis showed that Jersey would contribute 12.3% of pro forma consolidated total assets, 13.0% of pro forma consolidated deposits, 11.6% of pro forma consolidated shareholders' equity and 4.5% of pro forma consolidated net income for 1997, while Jersey shareholders would hold 10.9% of the pro forma ownership of Interchange. Impact Analysis Capital Consultants analyzed the financial implications of the Merger on Interchange's earnings per common share and book value per common share. This analysis was based on December 31, 1997 financial data for Interchange and Jersey and indicated that the acquisition of Jersey by Interchange would be (on a pro forma basis for the twelve months ended December 31, 1997, assuming the acquisition was effective as of January 1, 1997) approximately 6.2% dilutive to the earnings per share of Interchange Common Stock before any cost reductions were reflected and approximately 0.8% accretive to tangible book value per share of Interchange Common Stock on a fully diluted basis. Comparable Transaction Analysis Capital Consultants performed an analysis of prices and premiums offered in recently announced thrift institutions transactions in the region. Multiples of earnings and fully diluted book value implied by the consideration to be received by Jersey's shareholders in the Merger were compared with multiples offered in such regional transactions, which included pending and completed acquisitions announced between January 1, 1995 and January 26, 1998. The median offer price to book value for this regional group of comparable transactions was 177%. The equivalent offer price to book value for Jersey was 236% based on the assumed Interchange offer price of $28.875 for each outstanding share of Jersey Common Stock and Jersey's book value as of December 31, 1997. Also, the median price to last twelve months earnings for this regional group was 18 times versus Interchange's offer for Jersey at 42.2x. Capital Consultants also reviewed the core capital ratio to total assets of the comparative group and non-performing assets as a percentage of total assets and in such analyses, Jersey was above the median of the comparative group in non-performing assets as a percentage of total assets and was very comparable on core capital to total assets ratio. It is important to note that while Capital Consultants took into account the values shown in the comparables used in connection with the rendering of its opinion, no company or transaction used in 29 these analyses was identical to Jersey or the Merger. Accordingly, an analysis of the results in the foregoing is not mathematical; rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies involved, the timing of the transactions and prospective buyer interest, the earnings trends and prospects for the future, as well as other factors that could affect the public trading values of the companies included in the comparisons. For Capital Consultants' services in connection with the Merger, Jersey has agreed to pay Capital Consultants a fee, if the Merger is consummated, of approximately $140,000 plus reimbursement for reasonable out-of-pocket expenses. Jersey has also agreed to indemnify Capital Consultants against certain liabilities, including liabilities under the federal securities laws. Jersey has paid Capital Consultants $34,500 to date, and an additional $25,000 is due upon the mailing of this Proxy Statement-Prospectus. The balance of Capital Consultants' fee is due at the Effective Time. The amount of Capital Consultants' fee was determined by arms length negotiation between Jersey and Capital Consultants. Conditions to Consummation of the Merger Consummation of the Merger is subject to the satisfaction or waiver of certain conditions, including (i) approval by the requisite vote of the holders of Jersey Common Stock; (ii) the receipt of all consents, approvals and authorizations of all necessary federal government authorities (without any term or condition which would materially impair the value of Jersey to Interchange) and expiration of all required waiting periods necessary for the consummation of the Merger (see "-- Regulatory Approvals"); (iii) the effectiveness of the registration statement covering the shares of Interchange Common Stock to be issued to Jersey shareholders, which shares shall also have been approved for listing on the AMEX; (iv) each holder of Jersey Preferred Stock shall have entered into a Conversion Agreement or shall be compelled by a final, non-appealable order of a Court of competent jurisdiction to convert their Jersey Preferred Stock into Jersey Common Stock on the terms and conditions set forth in the Conversion Agreements; and (v) that the Merger will qualify for pooling-of-interests accounting treatment (see "-- Accounting Treatment of the Merger"). To date, all but one holder of 300 shares of Jersey Preferred Stock have entered into Conversion Agreements with Jersey. In addition, consummation of the Merger is conditioned upon receipt by the parties of an opinion of Norris, McLaughlin & Marcus P.A. to the effect that the conversion of Jersey Common Stock for Interchange Common Stock is a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code (the "Code") (See "-- Federal Income Tax Consequences"). Consummation of the Merger is also conditioned on, among other things, (i) the continued accuracy in all material respects of the representations and warranties of Jersey and Interchange contained in the Merger Agreement; (ii) the performance by Jersey and Interchange, in all material respects, of their respective obligations under the Merger Agreement; (iii) the absence of any litigation that would restrain or prohibit the consummation of the Merger; and (iv) receipt by the Board of Directors of Jersey of an opinion from Capital Consultants to the effect that, in its opinion, the consideration to be paid to Jersey shareholders under the Merger Agreement is fair to such shareholders from a financial point of view. This opinion has been issued and is attached as Appendix C to this Proxy Statement-Prospectus. See "-- Opinion of Jersey's Financial Advisor." Representations and Warranties The Merger Agreement contains customary representations and warranties by both Jersey and Interchange. The Merger Agreement also contains other representations and warranties by Interchange relating to, among other things, the adequacy of the capital of Interchange and Bank to satisfy all applicable regulatory requirements. 30 Regulatory Approvals Consummation of the Merger is subject, among other things, to prior receipt of all necessary regulatory approvals. Consummation of the Merger requires the approval of the Commissioner of the New Jersey Department of Banking and Insurance and FRB, which were obtained in writing from those agencies on April 14, 1998 and April 21, 1998, respectively. The approvals of such agencies do not constitute an endorsement of the Merger or a determination by either of them that the terms of the Merger are fair to the shareholders of Jersey. Interchange has the right to terminate the Merger Agreement if any necessary regulatory or governmental approval contains conditions which materially impair the value of Jersey, taken as a whole, to Interchange. Effective Time; Amendments; Termination A closing under the Merger Agreement (the "Closing") will occur on a day mutually agreed to by Interchange and Jersey within 30 days following the receipt of all necessary regulatory and governmental approvals and consents and the satisfaction or waiver of the other conditions to consummation of the Merger. At the Closing, documents required to satisfy the conditions to the Merger of the respective parties will be exchanged. The Merger shall become effective upon filing with the Commissioner a copy of the Merger Agreement together with a certification of the President of Interchange Bank and Jersey that the Merger Agreement has been approved by the stockholders of each by the requested vote. The date and time of such filing shall be the "Effective Time". The parties are cooperating to try to ensure that the Effective Time will be May 31, 1998, although this date is dependent upon satisfaction of all conditions precedent, some of which are not under control of Interchange and/or Jersey. No assurances can be given that the conditions precedent will be met or waived by such date. (See "-- Conditions to Consummation of the Merger"). Either Interchange or Jersey may terminate the Merger Agreement if (i) the Effective Time has not occurred by November 30, 1998; (ii) the stockholders of Jersey fail to approve the Merger Agreement at the Meeting, unless any such occurrence was caused by the failure of the terminating party to perform or observe its agreements set forth in the Merger Agreement; (iii) any application for any necessary regulatory or governmental approval is denied or withdrawn at the recommendation of the applicable regulatory agency or governmental authority, unless any such occurrence was caused by the failure of the terminating party to perform or observe its agreements set forth in the Merger Agreement; (iv) there has occurred a material adverse change in the business, operations, assets or financial condition of the other party; (v) the other party materially breaches any of its representations, warranties, covenants, agreements or obligations under the Merger Agreement 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 such non-breaching party; or (vi) any closing condition cannot reasonably be met by the other party after the other party has had a reasonable opportunity to cure the deficiency with respect to such condition. The Merger Agreement may also be terminated with the written consent of all parties thereto. Upon the termination of the Merger Agreement, except as otherwise described below, the transactions contemplated thereby other than the confidentiality provisions contained therein will be abandoned without further action by any party. Except as otherwise described below, in the event of a termination, each party will bear its own expenses and each party will retain all rights and remedies it may have at law or equity under the Merger Agreement. Interchange and Jersey shall equally bear all expenses (other than attorneys' fees) incurred in printing and filing this Proxy Statement-Prospectus and the Registration Statement of which it is a part. If the Merger Agreement is terminated by Jersey by reason of any material breach by Interchange of its 31 obligations, Interchange shall pay Jersey the sum of $500,000 as liquidated damages. If Jersey materially breaches the Merger Agreement, Interchange shall have the right to sue for specific performance, or money damages (of any nature, including all costs reasonably incurred under the Merger Agreement), up to $2,000,000. If Jersey receives an unsolicited offer from a third party to acquire Jersey and as a result thereof either: (i) the Merger is not consummated on or before November 30, 1998; or (ii) Jersey terminates the Merger Agreement, then Jersey is obligated to reimburse Interchange for all reasonable fees and costs (including legal and accounting fees) incurred in connection with the Merger Agreement and the transactions contemplated thereby. If the Merger is not consummated on or before November 30, 1998 as a result of the failure by Jersey to enter into Conversion Agreements and/or obtain court orders compelling conversion of all outstanding Jersey Preferred Stock, then Jersey shall reimburse Interchange for all costs and expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby. Amendment of the Merger Agreement The terms of the Merger Agreement may be amended, modified or supplemented by the written consent of Interchange and Jersey at any time prior to the Effective Time. However, following Jersey shareholder approval of the Merger Agreement, Jersey shareholders must approve any amendment reducing or changing the amount or form of consideration to be received by them in the Merger. Accounting Treatment of the Merger The Merger will be accounted for by Interchange under the pooling-of-interests method of accounting in accordance with generally accepted accounting principles. See "Pro Forma Combined Financial Information." Federal Income Tax Consequences THE FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL INFORMATION ONLY. IT MAY NOT BE APPLICABLE TO CERTAIN CLASSES OF TAXPAYERS, INCLUDING INSURANCE COMPANIES, SECURITIES DEALERS, FINANCIAL INSTITUTIONS, FOREIGN PERSONS AND PERSONS WHO ACQUIRED SHARES OF JERSEY COMMON STOCK AS COMPENSATION. JERSEY SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISERS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS. General. It is intended that the Merger will be treated as a reorganization as defined in Section 368(a) of the Code, and that, accordingly, no gain or loss will be recognized by Interchange or Jersey or by the shareholders of Jersey upon the conversion of their shares of Jersey Common Stock solely into shares of Interchange Common Stock pursuant to the Merger. Counsel to Interchange is required, as a condition of Closing, to provide an opinion to Interchange and to Jersey, with respect to the matter covered by the foregoing sentence. With respect to this Proxy Statement-Prospectus, Norris, McLaughlin & Marcus, P.A., counsel to Interchange, has provided an opinion that based upon the circumstances as they presently exist, it expects to be able to render the required opinion. Under the Merger Agreement, the condition that Norris, McLaughlin & Marcus, P.A. deliver the opinion described above can be waived by Interchange and Jersey. However, in the event that the delivery of such opinion of counsel is waived, or such opinion would otherwise set forth tax consequences materially different to a stockholder than those described above, Interchange and Jersey intend to resolicit proxies as required in accordance with the rules and regulations of the SEC. Consequences of Receipt of Cash in Lieu of Fractional Shares. In general, cash paid in lieu of fractional share interests in corporate reorganizations is treated as having been received in part or full 32 payment in exchange for the fractional share interest (and therefore subject to capital gains treatment if the related shares are held as capital assets) if the cash distribution is undertaken solely for purposes of saving the corporation the expense and inconvenience of issuing and transferring fractional shares and is not separately bargained for consideration. Basis of Interchange Common Stock. The basis of Interchange Common Stock received by a Jersey shareholder who receives solely Interchange Common Stock will be the same as the basis of such shareholder's Jersey Common Stock converted therefrom. Where a Jersey shareholder receives both Interchange Common Stock and cash, the basis of the Interchange Common Stock received will equal (a) the basis of the Jersey Common Stock exchanged therefor, (b) decreased by the amount of cash received and (c) increased by the amount of gain recognized, if any, on the exchange. Holding Period. The holding period of shares of Interchange Common Stock received in the Merger by holders of Jersey Common Stock will include the holding period during which such shares of Jersey Common Stock surrendered in conversion therefor were held by the holder thereof, provided such shares of Jersey Common Stock were held as capital assets. Interests of Certain Persons in the Merger The Merger Agreement provides that, in cancellation of their respective employment agreements with Jersey and as a full release of all other severance payments and similar payment due either of them from Jersey, within 30 days of the Closing, Interchange will pay each of Clyde Britt, the President and CEO of Jersey and William C. Ledgerwood, Senior Vice President and Treasurer of Jersey, an amount substantially equal to the amounts they would have received had the severance provisions of their employment contracts been triggered. The amounts payable to Messrs. Britt and Ledgerwood, with respect to their severance from Jersey, are to be paid into trusts established for their benefit at a financial institution located in New Jersey and paid out to them over a three year period. Bank may request Mr. Britt and/or Mr. Ledgerwood to provide services, on mutually agreeable terms, for a brief period as consultants to Bank in connection with the transition of operations resulting from the Merger. Payment for such consultancy, if any, will be at levels not greater then their current compensation as executive officers of Jersey. Pursuant to the terms of the Merger Agreement, Interchange and Bank each agreed to expand their respective Board of Directors by two seats. Following the Effective Time, Richard A. Gilsenan, Chairman of the Board of Jersey, is to be appointed to a seat on the Interchange Board to hold that seat until the 1999 annual meeting of Shareholders. For more than the past five years, Mr. Gilsenan, who is 80, has been a principal of Gilsenan & Company, LLP, a privately held real estate and insurance business. Interchange will also nominate Mr. Gilsenan for an additional one-year term as Director of Interchange. Mr. Gilsenan will be appointed to Director of Bank until Bank's 1999 annual meeting at which time he will be proposed for re-election to an additional one-year term. Following the Effective Time, Mr. Arthur R. Odabash, Vice Chairman of Jersey will be appointed a Director of Interchange to serve until the 1999 annual meeting when he will be nominated by Interchange to serve a two-year term as Director. For more than the past five years, Mr. Odabash, who is 63, has been the President of Kent Builders Management Company, a privately held real estate development firm. Mr. Odabash will also be appointed Director of Bank until the 1999 annual meeting of Bank. He will be proposed for re-election for additional one-year terms as Director of Bank at the annual meetings in 1999 and 2000. The Merger Agreement further provides that for a six year period following the Effective Time, Interchange will indemnify the directors and officers of Jersey against certain liabilities to the extent such persons were indemnified under Jersey's Certificate of Incorporation and Bylaws. Jersey will purchase at the expense of Interchange, continuation coverage for a period up to six (6) years (as determined by Interchange in light of costs) following the Effective Time under the policy of Director and Officer Liability Insurance Jersey currently has. 33 As of the Record Date, the directors of Jersey beneficially owned in the aggregate approximately 48% of the issued and outstanding shares of Jersey Common Stock. In connection with the execution of the Merger Agreement, the directors of Jersey have agreed to vote in favor of the Merger Agreement. As of the Record Date, there were no executive officers of Jersey who are not also directors. See "The Jersey Bank For Savings- Security Ownership of Certain Beneficial Owners and Management of Jersey". Resale Considerations With Respect to the Interchange Common Stock The shares of Interchange Common Stock that will be issued if the Merger is consummated have been registered under the Securities Act of 1933, as amended (the "Securities Act") and will be freely transferable, except for shares received by persons, including directors and executive officers of Jersey, who may be deemed to be "affiliates" of Jersey under Rule 145 promulgated under the Securities Act. An "affiliate" of an issuer is defined generally as a person who "controls" the issuer. Directors, executive officers and 10% shareholders are generally presumed by the Commission to control the issuer. Affiliates may not sell their shares of Interchange Common Stock acquired pursuant to the Merger, except pursuant to an effective registration statement under the Securities Act covering the Interchange Common Stock or in compliance with Rule 145 or another applicable exemption from the registration requirements of the Securities Act. Persons who may be deemed to be "affiliates" of Jersey have delivered letters to Interchange in which they have agreed to certain restrictions on their ability to sell, transfer or otherwise dispose of ("transfer") any Jersey Common Stock owned by them and any Interchange Common Stock acquired by them in the Merger. Pursuant to the accounting rules governing a pooling of interests, the affiliates of Jersey have agreed not to transfer the shares during a period commencing with the period beginning 30 days prior to the Effective Time and ending on the date on which financial results covering at least 30 days of post-merger combined operations of Interchange and Jersey have been published by Interchange or filed by Interchange on a Form 8-K, 10-Q or 10-K. Also, in connection with the pooling-of-interests rules, the affiliates have agreed not to transfer their Jersey Common Stock in the period prior to 30 days before the Effective Time without giving Interchange advance notice and an opportunity to object if the transfer would interfere with pooling-of-interests accounting for the Merger. Certificates representing the shares of Interchange Common Stock acquired by each such person pursuant to the Merger will bear a legend reflecting that the shares are restricted in accordance with the letter signed by such person and may not be transferred except in compliance with such restrictions. Persons who may be deemed "affiliates" of Interchange have also delivered letters in which they have agreed not to transfer Interchange Common Stock beneficially owned by them in violation of the pooling of interests restrictions set forth above with respect to Jersey. Business Pending Consummation of the Merger Jersey has agreed that prior to the Effective Time, except as otherwise approved by Interchange in writing or as permitted or required by the Merger Agreement, it will not: (i) change any provision of its Certificate of Incorporation or Bylaws or any similar governing documents; (ii) except for the issuance of Jersey Common Stock pursuant to the terms of outstanding Jersey Options, change the number of shares of, or issue any more shares of or grant any option or right with respect to, Jersey Common Stock, or split, combine or reclassify any shares of Jersey Common Stock, or redeem or otherwise acquire any shares of Jersey Common Stock (iii) except for the declaration and payment of periodic cash dividend 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 in respect of Jersey Common Stock or allow any optional purchases of capital stock under Jersey's Divided Reinvestment and Stock Purchase; (iv) grant any severance or termination pay (other 34 than pursuant to policies of Jersey in effect on the date of the Merger Agreement and disclosed to Interchange 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 other than regular and customary pay increases to its non-officer employees and in no event to exceed the amount of salary or bonuses paid in or with respect to 1997; (v) 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; (vi) make any capital expenditures other than in the ordinary course of business, other than pursuant to binding commitments existing on the date of the Merger Agreement, and expenditures necessary to maintain existing assets in good repair; (vii) file any application or make any contract with respect to branching or site location or relocation; (viii) agree to acquire any business or entity in any manner whatsoever (other than to foreclose on collateral for a defaulted loan); (ix) make any material change in its accounting methods or practices, other than changes required in accordance with GAAP; or (x) agree to do any of the foregoing. Jersey and Bank have entered into a service agreement dated April 8, 1998 under which Bank will provide loan processing and underwriting services for consumer loans upon the request of Jersey. It is not anticipated that Jersey will require substantial services under this agreement or that payments to Bank, if any, will be material. Jersey has further agreed that it will 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"). Jersey has agreed to promptly communicate to Interchange the terms of any proposal, whether written or oral, which it may receive in respect of any Acquisition Transaction. The Jersey Board may, however, enter into discussions or negotiations regarding an Acquisition Transaction if, after consulting with counsel, it determines that in the exercise of its fiduciary responsibilities such discussions or negotiations should be commenced. Management and Operations After the Merger At the Effective Time, as a result of the Merger, Jersey will be merged into Bank which will be the Surviving Bank. Bank will continue to operate as a subsidiary of Interchange. The location of the principal office of Interchange will remain unchanged: Park 80 West/Plaza Two, Saddle Brook, New Jersey. Following the Merger, the two branch offices of Jersey will serve as branch offices of Bank. Pursuant to the Merger Agreement any employee of Jersey who becomes an employee of Bank as a result of the Merger will be entitled to participate in compensation and benefit plans of Bank on the same basis as persons of comparable experience (not employed by Bank) who are hired by Bank. This provision does not provide any employee of Jersey any right of employment with Bank or any right to any particular seniority position. Pursuant to the terms of the Merger Agreement each of Interchange and Bank have agreed to expand their respective Board of Directors by two seats. Richard A. Gilsenan, Chairman of the Board of Jersey and Arthur R. Odabash, Vice Chairman of Jersey are to be appointed to fill those seats. See "-Interests of Certain Persons in the Merger." Stock Option for Shares of Jersey Common Stock In connection with the negotiation by Interchange and Jersey of the Merger Agreement, Interchange and Jersey entered into the Stock Option Agreement on January 27, 1998. A copy of the Stock Option Agreement is attached as Appendix B to this Proxy Statement-Prospectus. Descriptions of 35 the Stock Option Agreement in this Proxy Statement-Prospectus are qualified in their entirety by reference to the Stock Option Agreement. Pursuant to the Stock Option Agreement, Jersey granted Interchange the Option, exercisable only under certain limited and specifically defined circumstances, to purchase up to 126,950 authorized but unissued shares of Jersey Common Stock, representing approximately 19.9% of the shares of Jersey Common Stock which would be outstanding immediately following the exercise of the Option, for an exercise price of $18.75 per share. Interchange does not have any voting rights with respect to the shares of Jersey Common Stock subject to the Option prior to exercise of the Option. In the event that certain Triggering Events (as hereinafter described) specifically enumerated in the Stock Option Agreement occur, Interchange may exercise the Option in whole or in part. Additionally, after Interchange's exercise of the Option in whole or in part, Interchange may require Jersey to repurchase the shares of Jersey Common Stock purchased by Interchange, at the price per share determined, pursuant to the Option Agreement. In the event that a Triggering Event occurs and the Merger is not consummated, Interchange would recognize a gain on the sale of the shares of Jersey Common Stock received pursuant to the exercise of the Option if such shares of Jersey Common Stock were sold at prices exceeding $18.75 per share. The term "Triggering Event" is defined in the Stock Option Agreement to mean 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, and the rules and regulations thereunder (the "Exchange Act"), other than Interchange or an affiliate of Interchange and Jersey, (i) acquires beneficial ownership (as such term is defined in Rule 13d-3 promulgated under the Exchange Act) of at least 15% of the then outstanding shares of Jersey Common Stock; (ii) without the prior consent of Interchange enters into a letter of intent or an agreement with Jersey pursuant to which such person or any affiliate of such person would (a) merge or consolidate, or enter into any similar transaction, with Jersey, (b) acquire all or a significant portion of the assets or liabilities of Jersey, or (c) acquire beneficial ownership of securities representing, or the right to acquire the beneficial ownership or to vote securities representing, 15% or more of the then outstanding shares of Jersey Common Stock; (iii) without the prior consent of Interchange makes a filing with bank or thrift regulatory authorities or publicly announces a bona fide proposal (a "Proposal") for (a) 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 (b) 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 Jersey Common Stock, and thereafter, if such Proposal has not been publicly withdrawn (as defined below) at least 15 days prior to the Meeting and Jersey's shareholders fail to approve the Merger by the vote required by applicable law at the Meeting; (iv) makes a bona fide proposal and thereafter, but before such Proposal has been publicly withdrawn, Jersey willfully takes any action in any manner that would materially interfere with its ability to consummate the Merger or materially reduce the value of the Merger to Interchange; or (v) which is the holder of more than 10% of the outstanding shares of Jersey Common Stock solicits proxies in opposition to approval of the Merger. The definition of "Triggering Event" also includes 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 the shares of Jersey Common Stock, a merger, consolidation, plan of exchange, plan of acquisition or reorganization of Jersey, or a sale of shares of Jersey Common Stock or any significant portion of the assets or liabilities of Jersey comparable to (i) - (v) above. Under the Stock Option Agreement, a significant portion means 20% of the assets or liabilities of Jersey. "Publicly withdrawn" for purposes of the Stock Option Agreement means an unconditional bona fide withdrawal of a Proposal coupled with a public announcement of no further interest in pursuing such Proposal or acquiring any controlling influence over Jersey or in soliciting or inducing any other person (other than Interchange or any affiliate) to do so. Interchange may not sell, assign or otherwise transfer its rights and obligations under the Stock Option Agreement in whole or in part to any person or any group of persons other than to an affiliate of 36 Interchange. The Option may not be exercised (i) in the absence of any required governmental or regulatory approval or consent necessary for Jersey to issue the Jersey Common Stock subject to the Option 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 Jersey Common Stock subject to the Option. The Stock Option Agreement further provides that after the occurrence of a Triggering Event and upon receipt of a written request from Interchange, Jersey shall prepare and file a registration statement with the Commission covering the Option and such number of shares of Jersey Common Stock subject thereto as Interchange shall specify in its request, and shall use its best efforts to cause such registration statement to become effective in order to permit the sale or other disposition of the Option and the shares of Jersey Common Stock covered thereby; provided, however, that in no event will Interchange have the right to have more than one such registration statement become effective. The Stock Option Agreement terminates upon the earlier to occur of either the termination of the Merger Agreement or the consummation of the transactions contemplated thereby; provided that if the Merger Agreement terminates after the occurrence of a Triggering Event, the Stock Option Agreement will terminate 18 months following the date of termination of the Merger Agreement. The ability of Interchange to exercise the Option and to cause up to an additional 126,950 shares of Jersey Common Stock to be issued may be considered a deterrent to other potential acquirers of control of Jersey, as it is likely to increase the cost of an acquisition of all of the shares of Jersey Common Stock which would then be outstanding. The exercise of the Option by Interchange may also make pooling-of-interests accounting treatment unavailable to a subsequent acquirer. Rights of Dissenting Jersey Shareholders Pursuant to the provisions of Sections 140 through 145 of the New Jersey Banking Act ("Section 140"), any holder of Jersey Common Stock has the right to dissent from the Merger and to obtain payment of the value (determined as provided below) of his Jersey Common Stock if the Merger is consummated. Holders of Jersey Preferred Stock who enter into Conversion Agreements are granted equivalent rights to dissent in respect of the shares of Jersey Common Stock received by them under conversion. Any shareholder of Jersey who contemplates exercising the right to dissent is urged to read carefully the applicable provisions of Section 140 which are attached as Appendix D to this Proxy Statement. In order to dissent, a shareholder of Jersey must not vote to approve the merger. The following is a summary of the steps to be taken if the right to dissent is to be exercised. This summary is qualified in its entirety by the full text of Appendix D to this Proxy Statement. Each step must be taken in the indicated order and in strict compliance with the applicable provisions of Section 140 in order to perfect dissenter's rights. Any deviations from such steps may result in the forfeiture of dissenter's rights. Jersey shareholders whose shares are represented by proxies that are returned signed but unmarked as to voting instructions will be voted in favor of the Merger and, unless revoked (as described in "The Meeting -- Solicitation, Voting and Revocation of Proxies"), will have waived their right to dissent. Shareholders of Jersey who desire to dissent from the Merger and receive the value of their shares of Jersey Common Stock in cash after the consummation of the Merger must give notice of dissent in writing by registered mail or delivered personally to Jersey (addressed to Clyde Britt, The Jersey Bank For Savings, 2-8 South Kinderkamack Road, Montvale, New Jersey 07645-0333) which 37 notice MUST BE RECEIVED BY JERSEY NO LATER THAN MAY 22, 1998, THE DAY THREE BUSINESS DAYS PRIOR TO THE MEETING (a shareholder of Jersey who satisfies the foregoing requirements will hereinafter be referred to as a "Dissenting Shareholder"). Additionally, each Dissenting Shareholder must, within 30 days after the consummation of the Merger, notify Interchange Bank in writing that such Dissenting Shareholder desires to receive from Interchange Bank the value of such Dissenting Shareholder's shares and Interchange Bank may, within 10 days of such Dissenting Shareholder's demand for payment, offer to pay such Dissenting Shareholder, in cash, an amount equal to the shares of Jersey owned by such Dissenting Shareholder. Such demand must be given in writing by registered mail or personally delivered to Interchange Bank, Park 80 West/Plaza Two, Saddle Brook, New Jersey 07663, attn: Anthony S. Abbate, President. If the Dissenting Shareholder fails to accept the Interchange Bank offer of payment, the Dissenting Shareholder may, within 3 weeks after his or her receipt of Interchange's offer, or if Interchange Bank did not make an offer, within 3 weeks after the day on which the Dissenting Shareholder made his or her demand for payment, institute an action in the Superior Court of New Jersey for the appointment of a group of three appraisers to determine the value of the Dissenting Shareholder's shares as of the day of the consummation of the Merger. The appraisers will value such shares in accordance with Section 140. The valuation agreed upon by any two of the three appraisers shall govern. The costs of the appraisers shall be paid by Interchange Bank. PRO FORMA COMBINED FINANCIAL INFORMATION The following unaudited pro forma combined financial information presents the Pro Forma Combined Condensed Statement of Condition of Interchange and Jersey at December 31, 1997, giving effect to the Merger as if it had been consummated at such date. Also presented are the Pro Forma Combined Condensed Statements of Income for years ended December 31, 1997, 1996, 1995, giving effect to the Merger as if it was consummated on January 1 of each year. For the purpose of the Pro Forma Unaudited Combined Balance Sheet, the assumption is that the transaction had been consummated as of December 31, 1997. The unaudited pro forma financial information is based on the historical financial statements of Interchange and Jersey after giving effect to the Merger under the pooling-of-interests method of accounting and based upon the assumptions and adjustments contained in the accompanying Notes to Pro Forma Combined Condensed Financial Statements. The unaudited pro forma financial information has been prepared by Interchange's management based upon the historical financial statements and related notes thereto of Interchange and Jersey contained herein or incorporated herein by reference. The unaudited pro forma financial information should be read in conjunction with such historical financial statements and notes. The Pro Forma Combined Condensed Statements of Income are not necessarily indicative of operating results which would have been achieved had the Merger been consummated as of the beginning of the periods for which such data are presented and should not be construed as being representative of future periods. The pro forma information does not include certain nonrecurring charges incurred in conjunction with the merger subsequent to December 31, 1997. These expenses are directly attributable to the merger and are expected to be included in income within the next 12 months. The expenses are estimated to be $624 thousand, net of taxes of $351 thousand. As of December 31, 1997, no material expenses were incurred that were directly related to the merger. 38 PRO FORMA COMBINED BALANCE SHEETS (unaudited) December 31, 1997 (in thousands)
Pro Forma Interchange Adjustments and Jersey Interchange Jersey (1) Combined ------------ --------- ----------- --------- Assets Cash and due from banks $ 17,797 $ 1,418 -- $ 19,215 Interest-bearing deposits in other banks -- 1,968 -- 1,968 Federal funds sold 8,400 7,000 -- 15,400 -------- ------- -------- --------- Total cash and cash equivalents 26,197 10,386 -- 36,583 -------- ------- -------- --------- Securities held to maturity at amortized cost 46,370 14,072 -- 60,442 -------- ------- -------- --------- Securities available for sale at estimated market value 61,257 14,299 -- 75,556 -------- ------- -------- --------- Loans 401,854 36,418 -- 438,272 Less: Allowance for loan losses 4,893 338 -- 5,231 -------- ------- -------- --------- Net loans 396,961 36,080 -- 433,041 -------- ------- -------- --------- Premises and equipment, net 7,871 1,677 -- 9,548 Accrued interest receivable and other assets 9,381 498 -- 9,879 -------- ------- -------- --------- Total assets $548,037 $77,012 -- $ 625,049 ======== ======= ======== ========= Liabilities Deposits Noninterest bearing $ 92,145 $ 3,308 -- $ 95,453 Interest bearing 378,548 66,764 -- 445,312 -------- ------- -------- --------- Total deposits 470,693 70,072 -- 540,765 -------- ------- -------- --------- Securities sold under agreements to repurchase 13,027 -- -- 13,027 Accrued interest payable and other liabilities 4,668 580 -- 5,248 Long-term borrowings 9,879 -- -- 9,879 -------- ------- -------- --------- Total liabilities 498,267 70,652 -- 568,919 -------- ------- -------- --------- Commitments and contingent liabilities Stockholders' equity Preferred stock -- 368 $ (368) (0) Common stock 4,811 2,279 (1,694) 5,396 Capital surplus 15,836 2,655 2,062 20,553 Retained earnings 29,698 1,004 -- 30,702 Unrealized gain-securities available for sale, net of tax effect 1,131 54 -- 1,185 -------- ------- -------- --------- 51,476 6,360 -- 57,836 Less: Treasury stock 1,706 -- -- 1,706 -------- ------- -------- --------- Total stockholders' equity 49,770 6,360 -- 56,130 -------- ------- -------- --------- Total liabilities and stockholders' equity $548,037 $77,012 -- $ 625,049 ======== ======= ======== =========
- ------------ (1) The pro forma adjustments represent the difference between the stated value of Interchange and Jersey stock and the conversion of Jersey preferred stock as per the Merger Agreement. 39 PRO FORMA COMBINED STATEMENTS OF INCOME (unaudited) For the Year Ended December 31, 1997 (in thousands except per share data) Pro Forma Interchange Adjustments and Jersey Interchange Jersey (1) Combined ----------- ------- ---------- --------- Total interest income $40,175 $5,152 -- $45,327 Total interest expense 15,533 3,023 -- 18,556 ------- ------ -------- ------- Net interest income 24,642 2,129 -- 26,771 Provision for loan losses 1,630 23 -- 1,653 ------- ------ -------- ------- Net interest income after provision for loan losses 23,012 2,106 -- 25,118 ------- ------ -------- ------- Total noninterest income 4,596 166 -- 4,762 Total noninterest expenses 15,984 1,686 -- 17,670 ------- ------ -------- ------- Income before income taxes 11,624 586 -- 12,210 Income taxes 4,068 217 -- 4,285 ------- ------ -------- ------- Net income $ 7,556 $ 369 -- $ 7,925 ======= ====== ======== ======= Weighted Average Common Shares Outstanding 6,386 434 7,133 Basic earnings per common share $ 1.18 $ 0.75 $ 1.11 ====== ====== ======= Diluted earnings per common share $ 1.17 $ 0.73 $ 1.10 ====== ====== ======= - ------------ (1) The historical earnings per share of Interchange and Jersey have been restated to give retroactive effect to Interchange's 3 for 2 stock split effective April 17, 1998, and the conversion of Jersey preferred stock to common stock. PRO FORMA COMBINED STATEMENTS OF INCOME (unaudited) For the Year Ended December 31, 1996 (in thousands except per share data) Pro Forma Interchange Adjustments and Jersey Interchange Jersey (1) Combined ----------- ------- ---------- --------- Total interest income $37,284 $4,114 -- $41,398 Total interest expense 14,599 2,380 -- 16,979 ------- ------ --------- ------- Net interest income 22,685 1,734 -- 24,419 Provision for loan losses 700 47 -- 747 ------- ------ --------- ------- Net interest income after provision for loan losses 21,985 1,687 -- 23,672 ------- ------ --------- ------- Total noninterest income 4,118 135 -- 4,253 Total noninterest expenses 16,228 1,292 -- 17,520 ------- ------ --------- ------- Income before income taxes 9,875 530 -- 10,405 Income taxes 3,456 198 -- 3,654 ------- ------ --------- ------- Net income $ 6,419 $ 332 -- $ 6,751 ======= ====== ========= ======= Weighted Average Common Shares Outstanding 6,386 426 7,124 Basic earnings per common share $ 1.01 $ 0.67 $ 0.95 ====== ====== ======= Diluted earnings per common share $ 1.00 $ 0.67 $ 0.94 ====== ====== ======= - ----------- (1) The historical earnings per share of Interchange and Jersey have been restated to give retroactive effect to Interchange's 3 for 2 stock split effective April 17, 1998, and the conversion of Jersey preferred stock to common stock. 40 PRO FORMA COMBINED STATEMENTS OF INCOME (unaudited) For the Year Ended December 31, 1995 (in thousands except per share data) Pro Forma Interchange Adjustments and Jersey Interchange Jersey (1) Combined ----------- ------ --------- -------- Total interest income $36,995 $3,765 -- $40,760 Total interest expense 15,150 2,055 -- 17,205 ------- ------ --------- ------- Net interest income 21,845 1,710 -- 23,555 Provision for loan losses 1,200 39 -- 1,239 ------- ------ --------- ------- Net interest income after provision for loan losses 20,645 1,671 -- 22,316 ------- ------ --------- ------- Total noninterest income 4,459 126 -- 4,585 Total noninterest expenses 15,531 1,176 -- 16,707 ------- ------ --------- ------- Income before income taxes 9,573 621 -- 10,194 Income taxes 3,293 218 -- 3,511 ------- ------ --------- ------- Net income $ 6,280 $ 403 -- $ 6,683 ======= ====== ========= ======= Weighted Average Common Shares Outstanding 6,372 428 7,113 Basic earnings per common share $ 0.97 $ 0.83 $ 0.93 ======= ====== ======= Diluted earnings per common share $ 0.97 $ 0.81 $ 0.92 ======= ====== ======= - ------------ (1) The historical earnings per share of Interchange and Jersey have been restated to give retroactive effect to Interchange's 3 for 2 stock split effective April 17, 1998, and the conversion of Jersey preferred stock to common stock. THE JERSEY BANK FOR SAVINGS Business of Jersey Jersey, which is a savings bank chartered under the laws of New Jersey, engages in the business of commercial and consumer banking. As a community bank, Jersey offers a wide range of services to individuals, small businesses and not-for-profit organizations, including demand, savings and time deposits and commercial and consumer/installment loans, principally in Northeastern Bergen County, New Jersey. Jersey, which commenced operations on January 19, 1989, conducts its operations through its main office located in Borough of Montvale, New Jersey and through one branch office located in River Edge, New Jersey (which was opened in September 1996). Jersey is a non-member bank (i.e. is not a member of the Federal Reserve System) and its deposits are insured up to applicable legal limits by the FDIC. At December 31, 1997, Jersey had total assets, deposits and shareholders' equity of approximately $77.0 million, $70.1 million and $6.4 million, respectively. Since its inception, Jersey has experienced significant growth primarily due to an increase in deposits. Jersey's strategy has been to pursue deposit growth as the primary source of funds for its lending and investment activities while at the same time maintaining a strong capital position. Jersey has sought to encourage this growth by providing a high level of personal service as well as an attractive array of deposit programs. Jersey's business is subject to periodic fluctuations based on general national and local and economic conditions. The fluctuations are neither predictable nor controllable and may have material adverse consequences on the operation and financial condition of Jersey even if other favorable events occur. Jersey's financial condition is especially subject to fluctuations in the economic conditions prevailing in New Jersey where both of its branches are located. 41 Lending Jersey engages in a wide variety of lending activities which are primarily categorized as residential mortgage lending. Sources to fund Jersey's loans are derived primarily from deposits. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Jersey -- Deposits, -- Interest Rate Sensitivity and -- Liquidity." Jersey presently generates all of its loans in the State of New Jersey with a significant portion in Northeastern Bergen County. At December 31, 1997, Jersey's loan portfolio totaled $36.4 million and its lending limit to one borrower under applicable regulations was approximately $950 thousand or 15% of capital. Loans secured by 1-4 family residential properties comprised approximately $26.1 million or 71.7% of Jersey's loan portfolio. Loans are generated through Jersey's marketing efforts, its present customers, walk-in customers and referrals. Jersey has been able to maintain high overall credit quality through the establishment and observance of prudent lending policies and practices. Jersey has established a written loan policy for each of its categories of loans. These loan policies have been adopted by Jersey's Board of Directors and are reviewed periodically. All loans to directors (and their affiliates) must be approved by Jersey's Board of Directors. In managing the growth of its loan portfolio, Jersey has focused on: (i) the application of prudent underwriting criteria; (ii) establishing internal lending limits below Jersey's legal lending authority; (iii) active involvement by Jersey's senior management and Board of Directors in the loan approval process; and (iv) active monitoring of loans to ensure the repayments are made in a timely manner and to identify potential problem loans. For discussion of other aspects of Jersey's business see "--Management's Discussion and Analysis of Financial Condition and Results of Operations --Deposits --Loan Portfolio." Competition Jersey experiences substantial competition in attracting and retaining deposits and in making loans. Jersey competes with savings banks, savings and loan associations, and commercial banks, as well as with regional and national insurance companies and non-bank banks, regulated small loan companies and local credit unions, regional and national issuers of money market funds and corporate and government borrowers. The primary factors affecting competition for deposits are interest rates, the quality and range of financial services offered and the convenience of office locations and office hours. The primary factors in competing for loans are interest rates, loan origination fees and the quality and range of lending services offered. Other factors which affect competition include the general availability of lendable funds and credit, general and local economic conditions and the quality of service provided to customers. In New Jersey generally, and in Jersey's Northeastern Bergen County market in particular, large commercial banks, as well as savings banks and savings and loan associations, dominate the banking and thrift industries. By virtue of their larger capital, asset size and/or reserves, many such institutions have substantially greater lending limits and other resources than Jersey. In addition, many such institutions are empowered to perform a wider ranger of services, including trust services, than Jersey is empowered to perform. In addition to having established deposit bases and loan portfolios, these institutions, particularly the large regional commercial and savings banks, have the ability to finance extensive advertising campaigns and to allocate considerable resources to locations and products perceived as profitable. These institutions also have larger lending limits (ceilings on credit a bank may provide a single customer that are linked to the institution's capital) and, in certain cases, lower funding costs (the price a bank must pay for deposits and other borrowed monies used to make loans to 42 customers). Jersey's legal lending limit to one borrower or group of affiliated borrowers is 15% of Jersey's capital, which lending limit equaled approximately $950 thousand as of December 31, 1997. Accordingly, the size of loans which many of Jersey's competitors with greater capitalization may offer is larger than Jersey's. Employees As of December 31, 1997, Jersey had 20 full-time equivalent employees. Jersey employees do not have a collective bargaining agreement. Jersey believes its relationship with its employees to be satisfactory. Legal Proceedings Jersey is not presently involved in any legal proceedings which Jersey's management believes to be material to its financial condition or results of operations. As the nature of Jersey's business involves providing certain financial services, the collection of loans and the enforcement and validity of mortgages and other liens, Jersey is a plaintiff or defendant in various legal proceedings which may be considered as arising in the ordinary course of business. Premises Jersey owns in fee simple its branch office location in River Edge. The property is not subject to any commercial liens. Jersey leases its 3,000 square foot principal office in Montvale, New Jersey. The current annual rental of $65 thousand is subject to periodic adjustment. The lease expires in 2000 with renewal options available for 5 five-year periods. 43 Management's Discussion and Analysis of Financial Condition and Results of Operations This section presents management's discussion and analysis of the financial condition and results of operations of The Jersey Bank For Savings ("Jersey"). The discussion and analysis cover the financial condition of Jersey at December 31, 1997 and 1996, and results of operations for the twelve months ending December 31, 1997, 1996 and 1995. Please review the discussion and analysis in conjunction with the financial statements and notes thereto included elsewhere in this Proxy Statement-Prospectus. General Jersey's results of operations depend primarily on its net interest income, which is the difference between interest income on its interest-earning assets, such as loans and investment securities, and the interest paid on its interest-bearing liabilities, such as its deposits. The amount of net interest income is a function of the difference between the weighted average rate received on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, as well as the average level of interest-bearing assets as compared with that of interest-bearing liabilities. Net income is also affected by the amount of non-interest income and by operating expenses. Interest rates are highly sensitive to many factors, including domestic and international economic and political conditions and governmental monetary policies. Conditions such as inflation, recession, unemployment, money supply, international disorders and other factors beyond the control of Jersey may affect interest rates and adversely affect Jersey's operations. Financial Condition Total assets were $77.0 million and $67.8 million at December 31, 1997 and December 31, 1996, respectively. Growth in deposits has provided virtually all of the funding for the growth in total assets during the relevant periods. Deposits were $70.1 million and $61.6 million at December 31, 1997 and December 31, 1996, respectively. Jersey's net loan portfolio was $36.1 million and $32.0 million at December 31, 1997 and December 31, 1996, respectively. The growth in the total loan portfolio was attributable to an increase in business development activities. Investment securities were $28.4 million and $24.7 million at December 31, 1997 and December 31, 1996, respectively. Mortgage-backed securities were $25.0 million and $20.4 million at December 31, 1997 and December 31, 1996, respectively. The growth in the mortgage-backed security portfolio was part of Jersey's interest rate risk strategy. With regard to the mortgage-backed securities as of December 31, 1997, Jersey had $10.9 million classified as available for sale and $14.1 million classified as held to maturity. As of December 31, 1996, Jersey had $8.1 million classified as available for sale and $12.3 million classified as held to maturity. Overnight Federal funds sold totaled $7.0 million and $6.0 million at December 31, 1997 and December 31, 1996, respectively. Shareholders' equity was $6.4 million and $5.7 million at December 31, 1997 and December 31, 1996, respectively. The growth in shareholders' equity was primarily attributable to net income of $369 thousand augmented by the issuance of 8,492 shares of common stock under Jersey's dividend reinvestment plan and the exercise of options for 15,400 shares of common stock. 44 Results of Operations 1997 was a positive year for Jersey, highlighted by significant loan growth and improved earnings. Rapid growth of Jersey's River Edge branch, which opened in September 1996, contributed to a better earnings performance. Net income for the year ended December 31, 1997, was $369 thousand as compared with $332 thousand in 1996, an increase of 11.1%. For the same period basic earnings per common share rose 11.9% to $0.75 from $0.67 in 1996. Jersey's relevant earnings performance measures showed mixed results. Jersey's returns on average equity and average assets were 6.20% and 0.49%, respectively, in 1997 compared to 5.90% and 0.55%, respectively, in 1996. An increase in net interest income of $395 thousand or 22.8%, compared to the previous year, favorably affected 1997's earnings. The improvement resulted from strong loan growth and an increase in the taxable investment securities portfolio. Average total loans increased $6.4 million or 22.6%, while average taxable investment securities increased $6.5 million or 29.4%. (See table on following page: Average Balance Sheets and Analysis of Net Interest Earnings.) A significant increase in interest-bearing demand deposits and time deposits partially offset the benefit realized through the growth of interest-earning assets mentioned above. Average interest-bearing demand deposits increased $2.0 million or 55.0%, while average time deposits increased $9.1 million or 27.5%. As a result there was a nominal decrease of two basis points in the net interest margin, falling to 2.97% in 1997. A $394 thousand or 30.5% increase in noninterest expenses attributed to business expansion and other nonrecurring expenses adversely affected 1997's net income. Business expansion included the addition of a senior loan officer and expenses associated with operating Jersey's new branch and administrative office for the entire year. Those expenses added approximately $292 thousand to noninterest expenses. The difference, $102 thousand, resulted from nonrecurring expenses. Nonrecurring expenses included charges associated with an unsuccessful attempt to acquire another branch location and merger related expenses. Jersey surpassed the projected deposit break-even point for its new branch office during 1997. Management therefore expects that subsequent deposits will contribute an incremental benefit to earnings. In 1996, Jersey reported net income of $332 thousand or $0.67 basic earnings per common share, as compared to $403 thousand or $0.83 basic earnings per common share in 1995. Jersey's return on average equity and average assets were 5.90% and 0.55%, respectively, in 1996 as compared to 7.54% and 0.75%, respectively, in 1995. 45 Average Balance Sheets and Analysis of Net Interest Earnings (dollars in thousands)
Year Ended Year Ended Year Ended December 31, 1997 December 31, 1996 December 31, 1995 ----------------------------- ------------------------------ ----------------------------- Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance $ Expense $ Cost % Balance $ Expense $ Cost % Balance $ Expense $ Cost % --------- --------- --------- --------- --------- ---------- --------- --------- --------- ASSETS: Interest-earning assets: Loans: Real Estate 33,080 2,646 8.00 27,294 2,189 8.02 25,439 2,070 8.14 Installment 997 95 9.53 560 44 7.86 476 43 9.03 Other 420 47 11.19 275 22 8.00 193 15 7.77 Taxable investment securities 28,674 1,920 6.70 22,161 1,452 6.55 20,721 1,332 6.43 Interest-earning deposits in 1,769 78 4.41 2,185 104 4.76 2,160 102 4.72 other banks Federal funds sold 6,631 366 5.52 5,594 303 5.42 3,432 203 5.91 --------- --------- --------- --------- --------- --------- Total interest-earning assets 71,571 5,152 7.20 58,069 4,114 7.08 52,421 3,765 7.18 --------- --------- --------- --------- --------- --------- Noninterest-earning assets: Cash and due from banks 1,265 1,213 881 Allowance for loan losses and deferred Loan fees (377) (350) (333) Other assets 2,320 1,749 797 --------- --------- --------- TOTAL ASSETS 74,779 60,681 53,766 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Interest-bearing demand deposits 5,634 112 1.99 3,634 42 1.16 3,102 32 1.03 Savings deposits 17,637 544 3.08 16,046 498 3.10 16,596 522 3.15 Time deposits 42,211 2,367 5.61 33,102 1,840 5.56 26,973 1,501 5.56 --------- --------- --------- --------- --------- --------- Total interest-bearing liabilities 65,482 3,023 4.62 52,782 2,380 4.51 46,671 2,055 4.40 --------- --------- --------- --------- --------- --------- Noninterest-bearing liabilities: Demand deposits 2,769 1,811 1,412 Other liabilities 578 465 341 Shareholders' Equity 5,950 5,623 5,342 --------- --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 74,779 60,681 53,766 ========= ========= ========= Net interest income/Net interest spread 2,129 2.58 1,734 2.57 1,710 2.78 ========= ========= ========= Net yield on interest-earning assets 2.97 2.99 3.26
Net interest income in 1996 increased $24 thousand or 1.4%, as compared to 1995. Average total loans increased $2.0 million or 7.7%, while average taxable investment securities increased $1.4 million or 7.0%. Average time deposits increased $6.1 million or 22.7%, putting pressure on net interest income. The net interest margin reacted negatively to the increase in interest expense relative to interest income. The net interest margin slipped to 2.99% in 1996, from 3.26% a year earlier. 46 A $116 thousand or 9.9% increase in noninterest expenses resulted from business expansion during 1996. Expanding the staff to operate the new office plus three months of occupancy expense contributed most of the increase in noninterest expenses. Net Interest Income The following table presents changes in interest income and interest expense by major asset and liability category for 1997 and 1996. It illustrates the impact of average volume growth (estimated according to prior year rates) and rate changes (estimated on the basis of prior year volumes). An allocation based on the relationship of changes in volume and changes in rates apply when there are changes not due solely to changes in either volume or rates. Interest-earning assets include nonaccrual loans; computation of the average rate earned on the loan portfolio includes any interest received on such loans. Changes in Interest Income and Interest Expense (dollars in thousands)
For the Year Ended For the Year Ended December 31, 1997 compared to December 31, 1996 compared to December 31, 1996 December 31, 1995 Increase (Decrease) Increase (Decrease) Due to Change in Due to Change in -------------------------------- -------------------------------- Average Average Average Average Volume $ Rate $ Net $ Volume $ Rate $ Net $ --------- --------- --------- ---------- --------- --------- INTEREST INCOME: Loans: Real Estate 464 (7) 457 151 (32) 119 Installment 34 17 51 8 (7) 1 Other 12 13 25 6 1 7 Taxable investment securities 427 41 468 93 27 120 Interest-earning deposits in (20) (6) (26) 1 1 2 other banks Federal funds sold 56 7 63 128 (28) 100 --------- --------- --------- ---------- --------- --------- Total interest-earning assets 973 65 1,038 387 (38) 349 --------- --------- --------- ---------- --------- --------- INTEREST EXPENSE: Interest-bearing demand deposits 23 47 70 5 5 10 Savings deposits 49 (3) 46 (17) (7) (24) Time deposits 506 21 527 341 (2) 339 --------- --------- --------- ---------- --------- --------- Total interest-bearing liabilities 578 65 643 329 (4) 325 --------- --------- --------- ---------- --------- --------- Net change in net interest income 395 - 395 58 (34) 24 ========= ========= ========= ========== ========= =========
Interest income totaled $5.2 million in 1997, an increase of $1.1 million or 25.2% from $4.1 million in 1996. The increase was almost exclusively due to an increase in the average volume of loans and taxable investment securities. The average balance of residential and commercial mortgage loans totaled $31.2 million in 1997, compared to $26.8 million in 1996, an increase of $4.4 million or 16.4%. The average yield on all interest-earning assets was 7.20% in 1997 as compared to 7.08% in 1996, an increase of 12 basis points. Interest expense totaled $3.0 million in 1997, an increase of $643 thousand or 27.0% from $2.4 million in 1996. The increase was almost entirely due to an increase in the average volume of time deposits. The average balance of time deposits was $42.2 million in 1997, compared to $33.1 47 million in 1996, an increase of $9.1 million or 27.5%. The average balance of interest-bearing demand deposits was $5.6 million in 1997, compared to $3.6 million in 1996, an increase of $2.0 million or 55.0%. A new interest-bearing demand deposit account introduced in late 1996 fueled the growth. However, more than two-thirds of the increase in interest expense attributed to this type of account resulted from an increase in average rate due to its rate-tiered structure, rather than average volume. The average cost of all interest-bearing liabilities was 4.62% in 1997, as compared to 4.51% in 1996, an increase of 11 basis points. In 1996, interest income was $4.1 million, an increase of $349 thousand or 9.3% from $3.8 million in 1995. The increase was almost exclusively due to an increase in the average volume of loans and taxable investment securities. A 63.0% increase in average volume for federal funds sold also contributed to the increase in interest income. Interest income suffered with respect to average rate in 1996 compared to 1995. The average yield on all interest-earning assets was 7.08% in 1996 as compared to 7.18% in 1995, a decrease of 10 basis points. In 1996, interest expense totaled $2.4 million, an increase of $325 thousand or 15.8% from $2.1 million in 1995. The increase was almost entirely due to an increase in the average volume of time deposits. The average cost of all interest-bearing liabilities was 4.51% in 1996, as compared to 4.40% in 1995, an increase of 11 basis points. See "-- Interest Rate Sensitivity" Income Taxes In 1997, income taxes amounted to $217 thousand as compared to $198 thousand and $218 thousand for 1996 and 1995, respectively. The effective tax rate in 1997 was 37.0% as compared to 37.4% and 35.1% for 1996 and 1995, respectively. New Pronouncements The Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income," in June 1997. This statement is effective for years beginning after December 15, 1997. Statement No. 130 requires entities that present a complete set of financial statements to include the components of comprehensive income. Comprehensive income consists of net income or loss for the current period and revenues, expenses, gains and losses that bypass the income statement and are reported as a component of equity. The effect of adopting Standard No. 130 is not expected to be material to Jersey's results of operations or financial position. Also in June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," that is effective for all periods beginning after December 15, 1997. Statement No. 131 requires that public companies report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. Management is currently evaluating the disclosures impact of SFAS No. 131 on its financial statements and has not determined if it has any reportable segments. 48 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 that 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 price of goods and services. Loan Quality The following table provides an analysis of the allocation of Jersey's allowance for loan losses. Additions to the general reserve represent management's best estimate of the risk of future losses in the loan portfolio. Factors considered include: growth in the loan portfolio; the condition of borrowers; changes in the value of underlying collateral; past loss experience and economic conditions. Allocation of the Allowance for Loan Losses (dollars in thousands)
At December 31, ---------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------------------- -------------------- ------------------- -------------------- ------------------- Amount $ Loans % Amount $ Loans % Amount $ Loans % Amount $ Loans % Amount $ Loans % --------- --------- ---------- -------- --------- -------- --------- --------- --------- -------- BALANCE AT YEAR-END APPLICABLE TO: Commercial, financial & agricultural -- 0.04 6 1.86 5 2.04 -- -- -- 0.00 Real estate - Construction 77 6.19 10 4.29 15 3.88 23 5.22 15 3.71 Real estate - Mortgage 223 91.10 271 90.26 243 92.45 182 92.84 162 94.24 Installment loans to individuals 21 2.67 28 3.59 13 1.63 11 1.94 7 2.05 Unallocated 17 N/A -- N/A 3 N/A 24 N/A 16 N/A --------- --------- ---------- -------- --------- -------- --------- --------- --------- -------- Total allowance for loan losses 338 100.00 315 100.00 279 100.00 240 100.00 200 100.00 ========= ========= ========== ======== ========= ======== ========= ========= ========= ========
The allocation table provides information only and may not be indicative of where in the portfolio future loan losses will occur. 49 The following table provides an analysis of Jersey's loan loss experience. Additions to the general loan loss reserve occur on a monthly basis to keep pace with growth in the loan portfolio. Analysis of the Allowance for Loan Losses (dollar in thousands)
At December 31, ------------------------------------------------------------------------ 1997 1996 1995 1994 1993 ---------- --------- --------- ---------- --------- Amount $ Amount $ Amount $ Amount $ Amount $ ---------- --------- --------- ---------- --------- Balance at beginning of the year 315 279 240 200 150 Charge-offs: Installment loans to individuals -- 11 -- -- -- ---------- --------- --------- ---------- --------- Total charge-offs -- 11 -- -- -- ---------- --------- --------- ---------- --------- Recoveries -- -- -- -- - Additions charged to operations 23 47 39 40 50 ---------- --------- --------- ---------- --------- Balance at end of the year 338 315 279 240 200 ========== ========= ========= ========== ========= Ratio of net charge-offs to average loans outstanding -- 0.04% -- -- -- Allowance for loan losses at year-end to net loans outstanding at year-end 0.94% 0.99% 1.07% 1.00% 1.10% Allowance for loan losses at year-end to nonperforming loans at year-end N/A 71.11% N/A N/A N/A
Loan loss provisions for 1997 amounted to $23 thousand, a decrease of $24 thousand from the previous year. The absence of any charge-offs in 1997 plus Jersey receiving payment in full for two nonaccrual loans allowed Jersey to reduce its 1997 provision to the loan loss reserve by 51.1%. In 1996, the loan loss provision was $47 thousand, an increase of $8 thousand from 1995. In 1996, Jersey experienced for the first time the classification of two loans; each received a substandard rating. Jersey's only charge-off also occurred in 1996. As of year-end, nonaccrual loans totaled $443 thousand; the allowance for loan losses represented 71.1% of nonaccrual loans. Jersey's management maintains a "watchlist" system that provides the board of directors with an early warning of potential problem loans. These loans may not be delinquent currently, but either past due at least once in the past six months or there is an anticipated deterioration in the quality of the loan sometime in the future. The table found on the following page quantifies nonaccrual, past due and restructured loans over the previous five years. As of December 31, 1997, disclosed in the table are any loans considered by Jersey's management to have serious problems. 50 Nonaccrual, Past Due and Restructured Loans (dollars in thousands)
At December 31, ----------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Amount $ Amount $ Amount $ Amount $ Amount $ -------- -------- -------- -------- -------- NONACCRUAL LOANS: Real estate - Mortgage -- 443 -- -- -- -------- -------- -------- -------- -------- Total nonaccrual loans -- 443 -- -- -- -------- -------- -------- -------- -------- LOANS PAST DUE 90 DAYS OR MORE AND STILL ACCRUING: -- -- -- -- -- -------- -------- -------- -------- -------- TROUBLED DEBT RESTRUCTURINGS: -- -- -- -- -- -------- -------- -------- -------- -------- Total nonperforming loans -- 443 -- -- -- ======== ======== ======== ======== ======== Total nonperforming assets -- 443 -- -- -- ======== ======== ======== ======== ======== Nonaccrual loans to total loans, net -- 1.39% -- -- -- Nonperforming loans to total loans, gross -- 1.37% -- -- -- Nonperforming loans to total loans, net -- 1.39% -- -- -- Nonperforming loans to total assets -- 0.65% -- -- -- Nonperforming assets to total assets -- 0.65% -- -- --
At December 31, 1997, 1995, 1994 and 1993, there were no nonaccrual, past due or restructured loans. Loan Portfolio During 1997, Jersey continued to experience strong loan growth. At December 31, 1997, gross loans outstanding amounted to $36.4 million, an increase of $4.1 million or 12.9% over the previous year. Within the largest category of loans, real estate mortgages, the distribution was as follows: first and second mortgages on 1-4 family residential properties, $26.1 million; first mortgages on multi-family properties, $921 thousand; first mortgages on nonresidential properties, $6.2 million. Approximately $17.0 million of the residential first mortgages were one, three or five year adjustable rate loans. In 1996, gross loans outstanding increased $5.9 million to $32.3 million, an increase of 22.2% compared to 1995. Within the largest category of loans, real estate mortgages, the distribution was as follows: first and second mortgages on 1-4 family residential properties, $23.7 million; first mortgages on multi-family properties, $955 thousand; first mortgages on nonresidential properties, $4.4 million. Approximately $16.0 million of the residential first mortgages were one, three or five year adjustable rate loans. The table on the following page provides a distribution of the loan portfolio for each of the previous five years. There is also a reconciliation of loan types to the loan categories shown earlier in the average balance sheets. 51 Loan Portfolio (dollars in thousands)
At December 31, -------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------------- ------------------- ------------------- -------------------- ------------------- Amount $ Percent % Amount $ Percent % Amount $ Percent % Amount $ Percent % Amount $ Percent % -------- --------- -------- --------- -------- ---------- -------- --------- -------- --------- TYPES OF LOANS: Commercial, financial & agricultural 13 0.04 599 1.86 539 2.04 - - - - Real estate - Construction 2,255 6.19 1,385 4.29 1,025 3.88 1,263 5.22 685 3.71 Real estate - Mortgage 33,177 91.10 29,125 90.26 24,411 92.45 22,441 92.84 17,394 94.24 Installment loans to individuals 973 2.67 1,158 3.59 431 1.63 470 1.94 379 2.05 -------- -------- --------- --------- -------- -------- --------- --------- -------- -------- Total loans outstanding, gross 36,418 100.00 32,267 100.00 26,406 100.00 24,174 100.00 18,458 100.00 -------- ======== --------- ========= -------- ======== --------- ========= -------- ======== Less: Allowance for loan losses (338) (315) (279) (240) (200) -------- --------- -------- --------- --------- Total loans outstanding, net 36,080 31,952 26,127 23,934 18,258 ======== ========= ======== ========= =========
The following schedule sets forth the maturity distribution of Jersey's loan portfolio as of December 31, 1997. The table categorizes the loans as shown in the previous table. Within one year, $9.5 million of the loan portfolio will reprice to market interest rates. Between one year and five years, an additional $18.0 million will reprice to market interest rates. The remaining $8.9 million will reprice to market interest rates after five years. Loan Portfolio by Contractual Maturities (dollars in thousands) At December 31, 1997 ----------------------------------------- After 1 Year But Within 1 Within 5 After 5 Year $ Years $ Years $ Total $ --------- --------- --------- -------- TYPES OF LOANS: Commercial, financial and agricultural 13 -- -- 13 Real estate - Construction 2,241 14 -- 2,255 Real estate - Mortgage 1,461 6,058 25,692 33,211 Installment loans to individuals 431 542 -- 973 --------- --------- --------- -------- Total loans outstanding, gross 4,146 6,614 25,692 36,452 ========= ========= ========= ======== (1) (1) (2) (1) (2) (1) Estimated scheduled repayments reported in the maturity category in the which the payment is due. (2) Of loans due after one year, $9,801 have fixed interest rates and $22,505 have adjustable interest rates. Taxable Investment Securities Portfolio Jersey has relied on taxable investment securities, particularly mortgage-backed pass-through securities, when excess liquidity exceeds projected loan originations. They are a source of earnings providing a better return than federal funds sold but of course, considerably less than lending. In 1997, on average, taxable investment securities represented 40.1% of Jersey's interest-bearing assets, compared to 38.2% in 1996. Jersey classifies each taxable investment security according to one of two categories: available-for sale or held-to-maturity. Jersey classifies all fixed-rate instruments and adjustable rate instruments with repricing intervals of greater than one year as available-for-sale and adjustable rate 52 instruments with repricing intervals of one year or less as held-to-maturity. Historically, the ratio of held-to-maturity investments to available-for-sale investments has been generally 50/50. Management considers securities classified as available-for-sale an integral part of Jersey's asset and liability management strategy. The following table identifies the components found in each of the two investment categories. Taxable Investment Securities Portfolio (dollars in thousands) At December 31, ------------------------------------------- 1997 1997 1996 1995 --------- ---------- --------- --------- Fair Amortized Amortized Amortized Value $ Cost $ Cost $ Cost $ --------- ---------- --------- --------- HELD-TO-MATURITY: Mortgage-backed pass-through securities: Guaranteed by GNMA 9,787 9,807 6,311 4,535 Issued by FNMA and FHLMC 4,261 4,265 5,993 5,682 --------- ---------- --------- --------- Total held-to-maturity 14,048 14,072 12,304 10,217 --------- ---------- --------- --------- AVAILABLE-FOR-SALE: U.S. Treasury securities -- -- -- 1,000 Issued by U.S. Government- sponsored agencies 2,992 3,000 4,000 6,000 Mortgage-backed pass-through securities: Guaranteed by GNMA 1,926 1,887 286 343 Issued by FNMA and FHLMC 8,930 8,869 7,782 3,563 Federal Home Loan Bank Stock 451 451 357 340 --------- ---------- --------- --------- Total available-for-sale 14,299 14,207 12,425 11,246 --------- ---------- --------- --------- Total taxable investment securities 28,347 28,279 24,729 21,463 ========= ========== ========= ========= Given the low interest rate environment at year-end, the market value exceeded the book value of the available-for-sale portfolio. While more stable as interest rates move up, the value of adjustable rate mortgage-backed pass-through securities found in the held-to-maturity portfolio falls due to prepayment concerns while interest rates are low. As expected, at year-end, the book value was greater than the market value for the held-to-maturity portfolio. A summary of the contractual maturities and weighted average yield for the taxable investment securities portfolio follows on the next page. 53 Taxable Investment Securities by Their Contractual Maturities (dollars in thousands)
At December 31, 1997 ------------------------------------------------------------------------------------------------ After 1 Year But After 5 Years But Within 1 Year Within 5 Years Within 10 Years After 10 Years -------------------- -------------------- -------------------- -------------------- Weighted Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Amortized Average Cost $ Yield % Cost $ Yield % Cost $ Yield % Cost $ Yield % Total $ --------- --------- --------- --------- --------- --------- --------- --------- --------- HELD-TO-MATURITY: Mortgage-backed pass-through securities: (1) Guaranteed by GNMA -- -- -- -- -- -- 9,807 7.08 9,807 Issued by FNMA and FHLMC -- -- -- -- -- -- 4,265 7.61 4,265 --------- --------- --------- --------- --------- Total held-to-maturity -- -- -- 14,072 14,072 --------- --------- --------- --------- --------- AVAILABLE-FOR-SALE: Issued by U.S. Government- sponsored agencies 1,987 5.03 -- -- 1,005 7.39 -- -- 2,992 Mortgage-backed pass-through securities: Guaranteed by GNMA -- -- -- -- 1,265 7.08 660 7.50 1,925 Issued by FNMA and FHLMC -- -- 565 7.93 2,547 6.67 5,819 7.18 8,931 Federal Home Loan Bank Stock 451 7.05 -- -- -- -- -- -- 451 --------- --------- --------- --------- --------- Total available-for-sale 2,438 565 4,817 6,479 14,299 --------- --------- --------- --------- --------- Total taxable investment securities 2,438 565 4,817 20,551 28,371 ========= ========= ========= ========= ========= Weighted average yield 5.40 7.93 6.93 7.23 7.03% ========= ========= ========= ========= =========
(1) Mortgage-backed pass-through securities totaling $14,072 have adjustable interest rates. Within one year, $16.1 million of the taxable investment securities portfolio will reprice to market interest rates. Between one year and five years, an additional $3.1 million will reprice to market interest rates. The remaining $8.7 million will reprice to market interest rates after five years. Deposits Jersey relies exclusively on its deposit base, rather than other borrowings to fund its credit needs. Deposits totaled $70.1 million at December 31, 1997, an increase of $8.5 million from year-end 1996. Average total deposits increased $13.7 million or 25.0% in 1997, compared to an increase of $6.5 million or 13.5% in 1996. Jersey attributes most of the deposit growth to the new branch location. Certificates of deposit in amounts of $100,000 or more continue to be a source of new money. These large certificates of deposit totaled $12.4 million at December 31, 1997, an increase of $2.4 million from year-end 1996. While time deposits and savings deposits provided the foundation for growth of the bank during its formative years, management continually looks to increase both noninterest-bearing and interest-bearing demand deposits to strengthen core deposits. Jersey always offered 24-hour banking through its automated teller machines, but introducing telephone banking for all customers and merchant processing for commercial customers helped to significantly boost demand deposits. Average total demand deposits increased $3.0 million or 54.3% in 1997, compared to an increase of $931 thousand or 20.6% in 1996. 54 The following table provides average balances and weighted average cost by type of account. The second table highlights maturity information for large certificates of deposit. Deposits (dollars in thousands)
Year Ended Year Ended Year Ended December 31, 1997 December 31, 1996 December 31, 1995 ------------------- -------------------- ------------------- Average Average Average Balance $ Cost % Balance $ Cost % Balance $ Cost % --------- --------- --------- --------- --------- --------- DEPOSITS BY TYPE OF ACCOUNT: Noninterest-bearing demand deposits 2,769 -- 1,811 -- 1,412 -- Interest-bearing demand deposits 5,634 1.99 3,634 1.16 3,102 1.03 Savings deposits 17,637 3.08 16,046 3.10 16,596 3.15 Time deposits 42,211 5.61 33,102 5.56 26,973 5.56 --------- --------- --------- --------- --------- --------- Total deposits 68,251 4.43 54,593 4.36 48,083 4.27 ========= ========= ========= ========= ========= ========= Maturing at December 31, 1997, ------------------------------------------------------ After 3 After 6 Mos. But Mos. But Within 3 Within 6 Within 12 After 12 Months $ Months $ Months $ Months $ Total $ --------- --------- --------- --------- --------- CERTIFICATES OF DEPOSIT IN AMOUNTS OF $100,000 OR MORE 7,171 2,266 1,508 1,422 12,367 ========= ========= ========= ========= =========
Noninterest income is an important supplement to net interest income; it consists of all income other than interest and dividends. Noninterest income totaled $166 thousand for 1997, an increase of $31 thousand or 23.0% from $135 thousand for 1996. The largest component of noninterest income, service charges on deposit accounts, provided $120 thousand or 72.3% of 1997's noninterest income, compared to $107 thousand or 79.3% in 1996. Interest Rate Sensitivity Fluctuations in market interest rates can have a significant influence on net interest income. Therefore, managing Jersey's interest rate sensitivity is a primary objective of Jersey's management. Jersey's Investment Committee is responsible for managing the exposure to changes in market interest rates. The Investment Committee attempts to maintain stable net interest margins by periodically evaluating the relationship between interest-rate sensitive assets and interest-rate sensitive liabilities. The evaluation attempts to determine the impact on net interest margin from current and prospective changes in market interest rates. Interest rate sensitivity is determined by analyzing the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same period of time. This difference, or "sensitivity gap," provides an indication of the extent to which Jersey'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 Jersey's interest rate exposure. 55 The cumulative gap between Jersey's interest-rate sensitive assets and its interest-rate sensitive liabilities repricing within a one-year period was (20.38%) at December 31, 1997. Since the cumulative gap was negative, Jersey has a "negative gap" position that 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 Jersey's liabilities, therefore decreasing the net interest spread. Certain shortcomings are inherent in the method of analysis presented in the following table. 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. Actual prepayments of principal and early withdrawals of savings may deviate significantly from the assumptions used in the gap analysis when interest rates change. 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. Considering past experience, savings deposits (identified as "other savings deposits" in the following table) are generally not rate sensitive. However, there is no assurance that these balances will actually remain insensitive to interest rate changes in the future. As a result, the earliest repricing interval includes total savings deposits. 56 Interest Rate Risk Exposure Measurements: At Decemeber 31, 1997 (dollars in thousands)
Time Horizons: - -------------------------- ---------------------------------------------------------------------------------------------------- Rate sensitive assets $ Within WAvg $ Within WAvg $ Within WAvg $ Within WAvg $ Within WAvg $ Within WAvg subject to 1/98-3/98 % 4/98-12/98 % 1/99-12/00 % 1/01-12/02 % 1/03-12/12 % 1/13- % interest rate adjustment ---------------------------------------------------------------------------------------------------- within stated time $ Within $ Within $ Within $ Within $ Within $ Over horizons 3 Months 1 Year 3 Years 5 Years 15 Years 15 Years - -------------------------- ---------------------------------------------------------------------------------------------------- 1-4 family 1st mortgages: Fixed rate -- -- -- -- -- -- 218 7.30 6,600 7.54 -- -- 1-4 family 1st mortgages: Adjustable rate 535 8.46 4,750 7.87 5,121 7.12 6,557 7.71 49 7.00 -- -- 1-4 family subordinated liens: Fixed rate -- -- 62 7.48 22 7.32 246 7.62 655 8.22 22 8.00 1-4 family subordinated liens: Adjustable rate 1,259 9.84 -- -- -- -- -- -- -- -- -- -- Commercial mortgages: Fixed rate -- -- -- -- 712 8.64 413 7.60 473 8.79 179 7.50 Commercial mortgages: Adjustable rate 222 8.00 215 8.75 1,189 8.41 2,752 8.37 962 7.79 -- -- Construction mortgages: Adjustable rate 2,255 9.26 -- -- -- -- -- -- -- --- -- -- Other loans: Fixed and adjustable rate 161 9.66 33 8.40 681 9.77 110 8.94 -- -- -- -- Debt securities: Mortgage-backed PCs 1,964 7.24 12,109 7.24 1,113 6.63 2,033 7.76 7,709 7.01 -- -- Debt securities: Others -- -- 1,987 5.03 -- -- -- -- 1,005 7.39 -- -- All other interest- bearing assets 8,968 5.46 -- -- -- -- -- -- -- -- -- -- ---------------------------------------------------------------------------------------------------- Total rate sensitive assets 15,364 6.79 19,156 7.19 8,838 7.56 12,329 7.86 17,453 7.37 201 7.55 ---------------------------------------------------------------------------------------------------- Total rate sensitive assets(cummulative) 15,364 34,520 43,358 55,687 73,140 73,341 ---------------------------------------------------------------------------------------------------- Rate sensitive liabilities Money market deposit accounts 1,766 3.06 -- -- -- -- -- -- -- -- -- -- Other savings deposits 12,230 3.32 -- -- -- -- -- -- -- -- -- -- Time deposits of $100,000 or more 7,171 5.49 3,774 5.77 1,089 5.91 333 6.40 -- -- -- -- Other time deposits of less than $100,000 11,109 5.46 14,166 5.62 3,654 5.82 707 5.99 -- -- -- -- ---------------------------------------------------------------------------------------------------- Total rate sensitive liabilities 32,276 4.52 17,940 5.65 4,743 5.84 1,040 6.12 -- -- -- -- ---------------------------------------------------------------------------------------------------- Total rate sensitive liabilities(cummulative) 32,276 50,216 54,959 55,999 55,999 55,999 ---------------------------------------------------------------------------------------------------- Cummulative GAP (16,912) (15,696) (11,601) (312) 17,141 17,342 ---------------------------------------------------------------------------------------------------- GAP as a % of total assets($77,012) (21.96) (20.38) (15.06) (0.41) 22.26 22.52 ---------------------------------------------------------------------------------------------------- Rate sensitive assets as a % of rate sensitive liabilities 47.60 68.74 78.89 99.44 130.61 130.97 ----------------------------------------------------------------------------------------------------
Liquidity A fundamental component of Jersey's business strategy is to manage liquidity to ensure the availability of sufficient resources to meet all financial obligations and finance prospective business opportunities. Jersey's liquidity is a measure of its ability to fund loans, withdrawal of deposits and other cash outflows in a cost effective manner. Liquidity management is critical to the stability of Jersey. Liquidity levels over any given period of time is a product of Jersey's operating, financing and investing activities. The extent of such activities is often shaped by such external factors as competition for deposits and loan demand. Historically, financing for Jersey's loans and investments has been derived primarily from deposits, along with interest and principal payments on loans and investments. Deposit flows are greatly affected by general interest rates, economic conditions and competition. At December 31, 1997, total deposits amounted to $70.1 million, an increase of $8.4 million or 13.7% over the prior comparable year. 57 During 1997, loan production and the purchase of taxable securities were Jersey's principal investing activities. Net loans at December 31, 1997, totaled $36.1 million compared to $31.9 million at the end of 1996, an increase of $4.2 million or 13.2%. Total securities at December 31, 1997, totaled $28.4 million compared to $24.7 million at the end of 1996, an increase of 15.0%. Jersey'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 $10.4 million or 13.5% of total assets, compared to $8.9 million or 13.1% of total assets at year-end 1996. Another significant liquidity source is available-for-sale securities. At December 31, 1997, available-for-sale securities amounted to $14.3 million or 50.4% of total securities, compared to $12.4 million or 50.2% of total securities at year-end 1996. In addition to the aforementioned sources of liquidity, Jersey has a $3.2 million line of credit with the Federal Home Loan Bank of New York. Management believes that Jersey's sources of funds are sufficient to meet its funding requirements. Capital Adequacy At December 31, 1997, Jersey's shareholders' equity totaled $6.4 million as compared to $5.7 million at December 31, 1996. Jersey is 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 Jersey's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Jersey must meet specific capital guidelines that involve quantitative measures of Jersey's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Jersey's capital amounts and classifications 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 Jersey to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 1997, that Jersey meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the Federal Deposit Insurance Corporation categorized Jersey as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized Jersey must maintain minimum total risk-based; Tier I risk-based; and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. 58 Jersey's actual capital amounts and ratios are also presented in the table. (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) 6,644 20.81 => 2,554 => 8.00 => 3,193 => 10.00 Tier I Capital (to Risk Weighted Assets) 6,306 19.75 => 1,277 => 4.00 => 1,916 => 6.00 Tier I Capital (to Average Assets) 6,306 8.43 => 2,991 => 4.00 => 3,739 => 5.00 As of December 31, 1996: Total Capital (to Risk Weighted Assets) 6,012 20.36 => 2,362 => 8.00 => 2,953 => 10.00 Tier I Capital (to Risk Weighted Assets) 5,697 19.29 => 1,181 => 4.00 => 1,772 => 6.00 Tier I Capital (to Average Assets) 5,697 9.39 => 2,427 => 4.00 => 3,034 => 5.00
Key Ratios The following table provides several key ratios for Jersey. The ratios include return on assets (net income divided by average total assets), return on equity (net income divided by average equity), dividend payout ratio (dividends declared per share divided by net income per share) and equity to assets ratio (average equity divided by average total assets). Key Ratios For the Year Ended December 31, -------------------------------- 1997 1996 1995 -------------------------------- RETURN ON ASSETS 0.49% 0.55% 0.75% RETURN ON EQUITY 6.20% 5.90% 7.54% COMMON STOCK DIVIDEND PAYOUT RATIO 16.00% 17.91% 14.46% EQUITY TO ASSETS RATIO 7.98% 9.27% 9.94% 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. Jersey 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. Jersey has completed almost all of its assessment of its Year 2000 compliance, including receipt of satisfactory certification from the outside provider of its data processing services. Jersey expects that it would be able to achieve full compliance with Year 2000 requirements on a timely basis but has not yet determined the costs related to such compliance. Upon consummation of the Merger, Jersey will be incorporated into Interchange's Year 2000 plan. 59 Interchange 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. Interchange is also communicating with all third parties, on which it relies, to assess their progress in evaluating their systems and implementing any corrective measures. Interchange 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, Interchange will be Year 2000 compliant. At this time, Interchange 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. 60 Supervision and Regulation of Jersey As a New Jersey state-chartered bank, Jersey'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. Jersey is subject to primary supervision, periodic examination and regulation by the New Jersey Department of Banking and Insurance ("NJDBI"). If, as a result of an examination of a bank, the NJDBI determines that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the bank's operations are unsatisfactory or that the bank or its management is violating or has violated any law or regulation, various remedies are available to the NJDBI. Such remedies include the power to enjoin "unsafe and unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to, among other things, direct an increase in capital, to restrict the growth of Jersey, to assess civil penalties and to remove officers and directors. Jersey has never been the subject of any administrative orders, memoranda of understanding or any other regulatory action by the NJDBI. Jersey's deposits are insured by the Bank Insurance Fund administered by the FDIC up to a maximum of $100,000 per depositor. As an FDIC-insured institution, Jersey is also subject to regulation and examination by, and the supervision and control of, the FDIC. Additionally, Jersey is subject to numerous federal, state and local laws regulating the taking of deposits, the extension of credit, and the provision of banking services. Jersey must, for example, comply with capital adequacy requirements imposed upon FDIC-insured banks as further discussed herein. See "The Jersey Bank for Savings- Management's Discussion and Analysis of Financial Condition and Results of Operations--Capital Adequacy". Jersey is subject to federal regulations governing disclosure of credit terms to borrowers (Federal Truth-in-Lending Act), discrimination among credit customers (Equal Credit Opportunity Act) and permissible credit collection practices (Fair Credit Reporting Act). Additional federal legislation to which Jersey is subject includes rules concerning customers' rights and liabilities arising from the use of automated teller machines (Regulation E of the Electronic Transfer Act) and regulations limiting the "float" Jersey may maintain on check deposits. Since 1989, Congress has passed two major pieces of banking legislation, the Federal Institution Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), and the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FIRREA and FDICIA have significantly changed the thrift and commercial banking industries in an effort to protect deposit insurance funds and depositors by, among other things, revising and limiting the types and amounts of investment financial institutions may make, significantly increasing minimum regulatory capital requirements and broadening the scope of powers of federal bank and thrift regulators over financial institutions and affiliated persons. These laws, and the resulting implementing regulations, have subjected Jersey and the banking industry generally to extensive regulation, supervision, supervision and examination by the FDIC. This has resulted in increased deposit insurance premiums and increased administrative, professional and compensation expenses incurred to comply with the increased number of new regulations and policies. The regulatory structure created gives the regulatory authorities extensive authority in connection with their supervisory and enforcement activities and examination policies. Further, Congress could enact future legislation that could significantly affect the powers, authority and operations of Jersey. 61 Under the Community Reinvestment Act, as amended ("CRA"), as implemented by FDIC regulations, a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low-income and moderate-income neighborhoods. CRA does not establish specific lending requirements or programs for financial institutions and it does not limit an institution's discretion to develop the type of products and services that it believes are best suited to its particular community, provided they are consistent with CRA. CRA requires the FDIC to assess an institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. Effective July 1, 1990, CRA, as amended by FIRREA, requires public disclosure of an institution's CRA rating and requires that the FDIC provide a written evaluation of an institution's CRA performance utilizing a four-tiered descriptive rating system. An institution's CRA rating is taken into account in determining whether to grant charters, branches and other deposit facilities, relocations, mergers, consolidations and acquisitions. Poor performance may be the basis for denying any application. In addition, under applicable regulations, a bank having a less than satisfactory rating is not entitled to participate on the bid list for RTC and FDIC offerings. Jersey has continuously maintained a CRA rating of "satisfactory". 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, Jersey'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. Dividend Restrictions Jersey'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. Capital Requirements Jersey had shareholders' equity of $6.4 million at December 31, 1997, compared with $5.7 million at December 31, 1996. The FDIC has issued guidelines to implement risk-based capital requirements for state-chartered nonmember 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 62 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, Jersey 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. Capital adequacy guidelines focus principally on broad categories of credit risk although the framework for assigning assets and off-balance sheet items to risk categories does incorporate elements of transfer risk. The risk-based capital ratio does not, however, incorporate other factors that may affect a company's financial condition, such as overall interest rate exposure, liquidity, funding and market risks, the quality and level of earnings, investment or loan concentrations, the quality of loans and investments, the effectiveness of loan and investment policies and management's ability to monitor and control financial and operating risks. The federal regulatory agencies have also adopted a minimum leverage ratio which is intended to supplement risk-based capital requirements and to insure that all financial institutions continue to maintain a minimum level of capital. Current regulations stipulate that banks maintain a minimum level of Tier I capital to total assets. The most highly rated banks in terms of safe and sound operation that are not experiencing or anticipating significant growth are required to have Tier I capital equal to at least 3% of total assets. All other banks are expected to maintain a minimum leverage capital ratio (i.e., Tier I capital divided by total assets) in excess of the 3% minimum level. The FDIC regulations require a financial institution to maintain a minimum ratio of 4% to 5%, depending on the condition of the institution. Jersey's leverage ratio was 8.43% at December 31, 1997. Security Ownership of Certain Beneficial Owners and Management of Jersey On the Record Date, there were 456,270 shares of Jersey Common Stock issued and outstanding and no shares held in the treasury. Only shareholders of record as of the Record Date shall be entitled to vote at the Special Meeting and each share is entitled to one vote. As of the Record Date, Jersey's Board of Directors and affiliated entities owned or controlled (excluding options) approximately 48% of the outstanding shares of Jersey Common Stock. In connection with the execution of the Merger Agreement, all of the directors of Jersey agreed to vote in favor of the Merger Agreement. As of the Record Date, there were no executive officers of Jersey who are not also directors. 63 The following table sets forth information with respect to the beneficial ownership of Jersey Common Stock as of the Record Date, and the number and percentage of outstanding shares of Interchange Common Stock into which such shares would be converted in the Merger, by (i) each person known by Jersey to own beneficially more than 5% of the outstanding Jersey Common Stock, (ii) each current director of Jersey, and (iii) all executive officers and directors of Jersey as a group. Except as otherwise indicated, each of the persons named below has sole voting and investment power with respect to the Jersey Common Stock owned by them.
Percent of Inter- Total Percent of change Common Total Common Beneficial Beneficial Preferred Stock and Common Shares of Stock Ownership Percent of Ownership Percent of Stock Assumed and Assumed Interchange to be of Jersey Jersey of Jersey Jersey Assuming Converted Converted Common Stock held Common Common Preferred Preferred Conversion Preferred Preferred to be Post Name Stock Stock (1) Stock (2) Stock (2) to Common (3) Stock Stock Received (4) Merger - -------------------- ---------- ---------- ---------- ---------- ------------- ---------- ----------- ------------- ------- Richard A. Gilsenan 17,128 3.8 5,003 6.8 4,350 21,478 4.1 32,217 * Clyde C. Britt 16,453 3.6 -- -- -- 16,453 3.2 24,680 * Charles E. Clark 24,895 5.5 2,500 3.4 2,174 27,069 5.2 40,604 * Elias E. Eliasof 21,576 4.7 5,000 6.8 4,348 25,924 5.0 38,886 * Wilson Kaplen 52,254 11.5 6,750 9.2 5,869 58,123 11.2 87,185 1.3 William C. Ledgerwood 6,858 1.5 430 * 374 7,232 1.4 10,848 * Nathan R. Levine 18,276 4.0 2,000 2.7 1,739 20,015 3.8 30,023 * Jerome J. Lombardo 17,322 3.8 -- -- -- 17,322 3.3 25,983 * Arthur R. Odabash 25,368 5.6 7,750 10.5 6,739 32,107 6.2 48,161 * Stanley H. Marcus 2,322 * -- -- -- 2,322 * 3,483 * Lois E. Marshall 6,507 1.4 -- -- -- 6,507 1.3 9,761 * Ralph J. Padovano 2,808 * -- -- -- 2,808 * 4,212 * Edwina Palmisano 6,787 1.5 -- -- -- 6,787 1.3 10,181 * Directors and executive officers as a group 218,554 47.9 29,433 40.0 25,593 244,147 46.9 366,224 5.3 - ----------
* Does not exceed one percent of class (1) Does not include Jersey Preferred Stock, each share of which is convertible into 0.8695 shares of Jersey Common Stock immediately prior to the Effective Time. Holders of Jersey Preferred Stock have no vote until the Jersey Preferred Stock is converted into Jersey Common Stock. (2) Holders of Jersey Preferred Stock have no vote until the Jersey Bank Preferred Stock is converted into Jersey Common Stock. (3) The Conversion Agreements entered into pursuant to the Merger Agreement provide for the conversion of Jersey Preferred Stock into Jersey Common Stock immediately prior to the Effective Time at a conversion ratio of 0.8695. (4) Assumes each share of Jersey Common Stock and converted Preferred stock issued and outstanding immediately prior to the Effective Time is converted into 1.5 shares of Interchange Common Stock. Certain Transactions of Jersey At the close of the fiscal year ending December 31, 1997, loans outstanding to affiliates of Jersey totaled $3.6 million. Jersey paid to the law firm of Beattie Padovano, LLC for legal services rendered as special legal counsel to Jersey, both in connection with the merger and with other unrelated matters, fees of $31 thousand during fiscal year ending December 31, 1997, and $63 thousand in 1998 to date. Ralph Padovano, a member of the Board of Directors of Jersey, is a partner in the law firm of Beattie Padovano. 64 DESCRIPTION OF INTERCHANGE COMMON STOCK The authorized capital stock of Interchange consists of 15,000,000 shares of Interchange common stock and 1,000,000 shares of preferred stock ("Preferred Stock"). As of December 31, 1997, there were 6,360,588 shares of Interchange Common Stock issued and outstanding, adjusted retroactively to give effect to a 3 for 2 split (effective April 17, 1998) approved February 26, 1998 by Interchange's Board, and there were no shares of Preferred Stock outstanding. General Interchange is a New Jersey general business corporation governed by the New Jersey Business Corporation Act and a registered bank holding company under the Bank Holding Company Act. The following description of Interchange Common Stock sets forth certain general terms of Interchange Common Stock. See "Comparison of the Rights of Shareholders of Interchange and Jersey" for additional information relevant to an understanding of the capital stock of Interchange, including a description of the New Jersey Shareholders Protection Act, which restricts certain transactions involving an "interested shareholder" and a "resident domestic corporation". Dividend Rights Holders of Interchange Common Stock are entitled to dividends when, as and if declared by the Board of Directors of Interchange out of funds legally available for the payment of dividends. The only statutory limitation is that such dividends may not be paid when Interchange is insolvent. Because funds for the payment of dividends by Interchange must come primarily from the earnings of Interchange's bank subsidiary, as a practical matter, any restrictions on the ability of Bank to pay dividends will act as restrictions on the amount of funds available for payment of dividends by Interchange. The Banking Act provides that a New Jersey state chartered bank may declare and pay dividends on its outstanding stock as long as, following the payment of 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 stock or, if not, the payment of such dividend will not reduce the surplus of the bank. Interchange is also subject to the certain Federal Reserve Board policies which may, in certain circumstances, limit its ability to pay dividends. These policies require, among other things, that a bank holding company maintain a minimum capital base. The Federal Reserve Board would most likely seek to prohibit any dividend payment which would reduce a holding company's capital below these minimum amounts. Voting Rights At meetings of shareholders, holders of Interchange Common Stock are entitled to one vote per share. The quorum for shareholders' meeting is a majority of the outstanding shares. Except as indicated below, actions and authorizations to be taken or given by shareholders generally require the approval of a majority of the votes cast by holders of Interchange Common Stock at a meeting at which a quorum is present. The Board of Directors is divided into three classes of directors, each class being as nearly equal in number of directors as possible. Approximately one-third of the entire Board of Directors is elected each year and the directors serve for terms of up to three years and, in all cases, until their respective successors are duly elected and qualified. The exact number of directors and the number 65 constituting each class is fixed from time to time by resolution adopted by a majority of the entire Board of Directors. Interchange's Certificate of Incorporation contains a "minimum price" provision. No "Business Combination" (as defined in the Certificate of Incorporation) between Interchange and an "Interested Shareholder" (as defined in the Certificate of Incorporation to mean holders, directly or indirectly, of more than 10% of Interchange's outstanding voting stock) and/or an "Affiliate" (as defined in the Certificate of Incorporation) of an Interested Shareholder is or may be consummated unless (i) the proposed Business Combination is first approved by at least 80% of the then outstanding shares of capital stock of Interchange entitled to vote on the election of directors or (ii) the proposed Business Combination is first approved by a majority of "Continuing Directors" (defined in the Certificate of Incorporation as directors (other than the Interested Shareholder) who became directors prior to the time the Interested Shareholder became an Interested Shareholder, or who were subsequently nominated for director by a majority of other Continuing Directors) or (iii) the holders of Interchange Common Stock are offered consideration in an amount equal to or in excess of an amount determined in accordance with the formula contained in the Certificate of Incorporation, and the consideration for such Interchange Common Stock is in the form described in the Certificate of Incorporation. Interchange has in the past paid dividends and issued capital stock in accordance with the requirements described in the Certificate of Incorporation, an Interested Shareholder has not received special treatment from Interchange and a proxy or information pertaining to the proposed Business Corporation has been delivered to the shareholders of Interchange in accordance with the requirements set forth in the Certificate of Incorporation. Liquidation Rights In the event of liquidation, dissolution or winding up of Interchange, holders of Interchange Common Stock are entitled to share equally and ratably in assets available for distribution after payment of debts and liabilities. Assessment and Redemption All outstanding shares of Interchange Common Stock are fully paid and nonassessable. The Interchange Common Stock is not redeemable at the option of the issuer or the holders thereof. Other Matters Interchange can issue new shares of authorized but unissued Interchange Common Stock or Preferred Stock without shareholder approval. 66 COMPARISON OF THE RIGHTS OF SHAREHOLDERS OF JERSEY AND INTERCHANGE Jersey is a New Jersey capital stock savings bank incorporated under the New Jersey Banking Act of 1948, as amended (the "Banking Act"), and Interchange is a business corporation incorporated in New Jersey under the New Jersey Business Corporation Act (the "NJBCA"). The rights of Jersey shareholders are currently governed by New Jersey banking law. At the Effective Time, each Jersey shareholder will become a shareholder of Interchange and the rights of shareholders of Interchange are governed by New Jersey corporate law. The following is a comparison of certain provisions of New Jersey corporate law and New Jersey banking law and the respective certificates of incorporation and by-laws of each of Jersey and Interchange. This summary does not purport to be complete and is qualified in its entirety by reference to the Banking Act and the NJBCA, which statutes may change from time to time, and the Certificate of Incorporation of Interchange, which also may be changed. Jersey Voting Requirements The Banking Act generally provides that an amendment to the certificate of incorporation of a New Jersey state chartered savings bank requires the affirmative vote of two-thirds of the outstanding stock entitled to vote thereon. The Banking Act provides that a New Jersey state chartered savings bank conversion into, merger into, or consolidation with, a national bank or another New Jersey state chartered savings bank requires the affirmative vote of two-thirds of the bank's capital stock entitled to vote. Jersey's Certificate of Incorporation does not contain greater vote provisions than those required by the Banking Act. All shareholder voting rights of Jersey are vested in the holders of the Jersey Common Stock. All shareholder voting rights of Jersey are vested in the holders of the Jersey Common Stock. Cumulative Voting Under the Banking Act, there is no ability for a New Jersey state chartered savings bank to provide for cumulative voting. Classified Board of Directors Under the Banking Act, a New Jersey state chartered savings bank must have a classified board of directors. Rights of Dissenting Shareholders Generally, shareholders of a New Jersey state chartered savings bank who dissent from a conversion, merger or consolidation of the bank are entitled to appraisal rights. The shareholders of Jersey have statutory rights of appraisal with respect to the Merger. See "The Proposed Merger -- Rights of Dissenting Jersey Shareholders." Shareholder Consent to Corporate Action The Banking Act provides that any action required or permitted to be taken at a meeting of shareholders may be taken without a meeting if the shareholders unanimously consent in writing. 67 Dividends The Banking Act provides that a New Jersey state chartered savings bank may declare and pay dividends on its outstanding stock so long as, following the payment of such dividend, the capital stock of the bank will be unimpaired and the bank will have a surplus of not less than fifty percent of its capital stock or, if not, the payment of such dividend will not reduce the surplus of the bank. The Board's power to declare and issue dividends is also subject to the oversight and approval of the New Jersey Commissioner of Banking. By-laws Under the Banking Act, the authority to adopt, amend, or repeal the by-laws of a New Jersey state chartered savings bank is held exclusively by the bank's shareholders. However, the certificate of incorporation of a New Jersey state chartered savings bank may provide that the board of directors of the bank may also adopt, amend or repeal by-laws, subject to the continuing right of the shareholders of the bank to amend or repeal those by-laws. Preemptive Rights Shareholders of Jersey have no preemptive rights to subscribe for a pro rata portion of any additional shares of Jersey Common Stock issued by Jersey from time to time. Interchange Voting Requirements Under the NJBCA, unless a greater vote is specified in the certificate of incorporation, any amendment to a New Jersey corporation's certificate of incorporation, the voluntary dissolution of the corporation, the sale or other disposition of all or substantially all of a corporation's assets otherwise than in the ordinary course of business or the merger or consolidation of the corporation with another corporation, requires in each case the affirmative vote of a majority of the votes cast by shareholders of the corporation entitled to vote thereon. Interchange's Certificate of Incorporation does not presently contain provisions specifying a greater vote in certain circumstances. Under the NJBCA, the holders of a class or series of shares are entitled to vote as a class upon a proposed amendment to the certificate of incorporation, whether or not entitled to vote thereon by the provisions of the certificate of incorporation, if the amendment would exclude or limit their right to vote on any matter, limit or deny their preemptive rights, cancel or otherwise adversely affect their dividends which have accrued but have not been declared, create a new class or series having or convertible into shares having rights or preferences superior to the class or increase the rights or preference of any class or series. In addition, notwithstanding any provision of the certificate of incorporation, the holders of a class or series of shares whose rights or preferences would be subordinated or otherwise adversely affected by a proposed amendment are entitled to vote as a class if the amendment would affect their shares in the following manner: (i) decrease the par value; (ii) effect a conversion, exchange or reclassification of their shares; (iii) effect a conversion or exchange of any shares of another class or series into their class or series; (iv) change the designation, preferences, limitations or relative rights of their shares; (v) change the shares into a different number of shares, or into the same number of another class or series; or (vi) divide their shares into a series or determine the designation, preferences, limitation or relative rights of any such series, or authorize the board to take any such action. 68 Classified Board of Directors The NJBCA permits a New Jersey corporation to provide for a classified board in its certificate of incorporation and Interchange currently has a classified Board of Directors. The Interchange Board is divided into three classes, with one class of directors generally elected for three-year terms at each annual meeting. Rights of Dissenting Shareholders Generally, shareholders of a New Jersey state chartered bank who dissent from a conversion, merger or consolidation of the bank are entitled to appraisal rights. The shareholders of Jersey have statutory rights of appraisal with respect to the Merger. See "Rights Of Dissenting Jersey Shareholders." Shareholders of a New Jersey corporation who dissent from a merger, consolidation, sale of all or substantially all of the corporation's assets or certain other corporate transactions are generally entitled to appraisal rights. No statutory right of appraisal exists, however, where the stock of the New Jersey corporation is (i) listed on a national securities exchange, (ii) is held of record by not less than 1,000 holders, or (iii) where the consideration to be received pursuant to the merger, consolidation or sale consists of cash or securities or other obligations which, after the transaction, will be listed on a national securities exchange or held of record by not less than 1,000 holders. Shareholder Consent to Corporate Action Interchange's Certificate of Incorporation provides that any action required or permitted to be taken may only be effected at a duly called annual or special meeting of Interchange's shareholders, except that any such action may be taken by the unanimous written consent of Interchange shareholders entitled to vote. Under the NJBCA, a shareholder vote on a plan of merger or consolidation, if not conducted at a shareholders' meeting, may only be effected by either: (i) unanimous written consent of all shareholders entitled to vote on the issue with advance notice to any other shareholders, or (ii) written consent of shareholders who would have been entitled to cast the minimum number of votes necessary to authorize such action at a meeting, together with advance notice to all other shareholders. Dividends Unless there are other restrictions contained in its certificate of incorporation (and Interchange's Certificate of Incorporation presently contains no such restriction), the NJBCA generally provides that a New Jersey corporation may declare and pay dividends on its outstanding stock so long as the corporation is not insolvent and would not become insolvent as a consequence of the dividend payment. Because funds for the payment of dividends by Interchange must come primarily from the earnings of Interchange's bank subsidiary, as a practical matter, any restrictions on the ability of Bank to pay dividends act as restrictions on the amount of funds available for the payment of dividends by Interchange. At December 31, 1997, Interchange had $43.0 million available for shareholder dividends. For a description of the regulatory restrictions on dividend payments by Bank, see "Description of Interchange Capital Stock -- Dividend Rights." 69 By-laws Under the NJBCA, the board of directors of a New Jersey corporation has the power to adopt, amend, or repeal the corporation's by-laws, unless such powers are reserved in the certificate of incorporation to the shareholders (which Interchange's Certificate of Incorporation presently does not do). Preemptive Rights Under the NJBCA, shareholders of New Jersey corporations have only such preemptive rights as may be provided in the certificate of incorporation. Interchange's Certificate of Incorporation does not provide shareholders with preemptive rights. Shareholder Protection Legislation The New Jersey Shareholders Protection Act (the "NJSPA") prohibits certain transactions involving an "interested shareholder" and a "resident domestic corporation." An "interested shareholder" is one that is directly or indirectly a beneficial owner of 10% or more of the voting power of the outstanding voting stock of a resident domestic corporation. The NJSPA prohibits certain business combinations between an interested shareholder and a resident domestic corporation for a period of five years after the date the interested shareholder acquired its stock, unless the business combination was approved by the resident domestic corporation's board of directors prior to the stock acquisition date. After the five-year period expires, the prohibition on certain business combinations continues unless the combination is approved by the affirmative vote of two-thirds of the voting stock not beneficially owned by the interested shareholder, the combination is approved by the board prior to the interested shareholder's stock acquisition date or certain fair price provisions are satisfied. Preferred Stock Interchange can issue new shares of authorized but unissued Interchange Common Stock or preferred stock without shareholder approval. See "Description of Interchange Capital Stock." LEGAL OPINION Certain legal matters relating to the issuance of the shares of Interchange Common Stock offered hereby and certain tax consequences of the Merger will be passed upon by Norris, McLaughlin & Marcus, P.A. counsel to Interchange. EXPERTS The financial statements of Jersey included in this Proxy Statement-Prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm, as experts in accounting and auditing in giving said reports. The consolidated financial statements incorporated in this Proxy Statement-Prospectus by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997 have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is incorporated herein by reference, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 70 INDEX TO FINANCIAL STATEMENTS OF THE JERSEY BANK FOR SAVINGS Report of Independent Public Accountants.....................................F-1 Statements of Condition as of December 31, 1997 and 1996.....................F-2 Statements of Income for the years ended December 31, 1997, 1996 and 1995............................................F-3 Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995........................F-4 Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995............................................F-5 Notes to financial statements................................................F-6 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of The Jersey Bank For Savings: We have audited the accompanying statements of condition of The Jersey Bank For Savings (a New Jersey Chartered Savings Bank) as of December 31, 1997 and 1996, and the related statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Bank'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 financial statements referred to above present fairly, in all material respects, the financial position of The Jersey Bank For Savings as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Roseland, New Jersey January 27, 1998 (Except with respect to the matter discussed in Note 16, as to which the date is February 26, 1998.) F-1 THE JERSEY BANK FOR SAVINGS STATEMENTS OF CONDITION -- DECEMBER 31, 1997 AND 1996 ASSETS 1997 1996 ----------- ----------- CASH AND DUE FROM BANKS -- Noninterest bearing $ 1,418,000 $ 1,502,000 FEDERAL FUNDS SOLD 7,000,000 6,000,000 ----------- ----------- Total cash and cash equivalents 8,418,000 7,502,000 ----------- ----------- DUE FROM BANKS -- INTEREST BEARING 1,968,000 1,365,000 ----------- ----------- SECURITIES (Notes 2 and 3): Available for sale, at market value 14,299,000 12,407,000 Held to maturity, at amortized cost 14,072,000 12,304,000 (aggregate market value of $14,048,000 and $12,362,000 in 1997 and 1996, respectively) ----------- ----------- 28,371,000 24,711,000 ----------- ----------- LOANS (Notes 2, 4 and 5) 36,418,000 32,267,000 Less- Allowance for possible loan losses 338,000 315,000 ----------- ----------- Net loans 36,080,000 31,952,000 ----------- ----------- PREMISES AND EQUIPMENT, net (Notes 2 and 6) 1,677,000 1,693,000 ----------- ----------- ACCRUED INTEREST RECEIVABLE 413,000 406,000 ----------- ----------- OTHER ASSETS 85,000 193,000 ----------- ----------- Total assets $77,012,000 $67,822,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Deposits- Demand- Noninterest bearing $ 3,308,000 $ 2,160,000 Interest bearing 8,478,000 5,923,000 Savings 16,284,000 16,038,000 Time (Note 7) 42,002,000 37,503,000 ----------- ----------- Total deposits 70,072,000 61,624,000 Accrued interest payable 367,000 336,000 Accrued expenses and other liabilities 213,000 175,000 ----------- ----------- Total liabilities 70,652,000 62,135,000 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Note 13) SHAREHOLDERS' EQUITY (Notes 8 and 10): Convertible preferred stock, 6% noncumulative $5 par value, 300,000 shares authorized; 73,525 and 75,825 shares issued and outstanding for 1997 and 1996, respectively (liquidation value - $368,000) 368,000 379,000 Common stock, $5 par value, 2,000,000 shares authorized; 455,785 and 429,894 shares issued and outstanding for 1997 and 1996 2,279,000 2,150,000 Additional paid-in capital 2,655,000 2,495,000 Retained earnings 1,004,000 732,000 Treasury stock, at cost, 5,175 shares at December 31, 1996 -- (58,000) Unrealized gain (loss) on securities available for sale, net of income taxes 54,000 (11,000) ----------- ----------- Total shareholders' equity 6,360,000 5,687,000 ----------- ----------- Total liabilities and shareholders' equity $77,012,000 $67,822,000 =========== =========== The accompanying notes to financial statements are an integral part of these statements. F-2 THE JERSEY BANK FOR SAVINGS STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ---------- ---------- ---------- INTEREST INCOME (Note 2): Interest on loans $2,787,000 $2,255,000 $2,128,000 Interest on securities and interest bearing deposits with banks 1,998,000 1,556,000 1,434,000 Interest on Federal funds sold 367,000 303,000 203,000 ---------- ---------- ---------- Total interest income 5,152,000 4,114,000 3,765,000 INTEREST EXPENSE -- Interest on deposits 3,023,000 2,380,000 2,055,000 ---------- ---------- ---------- Net interest income 2,129,000 1,734,000 1,710,000 PROVISION FOR POSSIBLE LOAN LOSSES (Notes 2 and 5) 23,000 47,000 39,000 ---------- ---------- ---------- Net interest income after provision for possible loan losses 2,106,000 1,687,000 1,671,000 ---------- ---------- ---------- OTHER INCOME: Service charges on deposit accounts 120,000 107,000 100,000 Other income 46,000 28,000 26,000 ---------- ---------- ---------- Total other income 166,000 135,000 126,000 ---------- ---------- ---------- OTHER EXPENSES: Salaries and employee benefits 702,000 551,000 527,000 Net occupancy expense 313,000 231,000 198,000 Other operating expenses (Note 14) 671,000 510,000 451,000 ---------- ---------- ---------- Total other expenses 1,686,000 1,292,000 1,176,000 ---------- ---------- ---------- Income before income taxes 586,000 530,000 621,000 PROVISION FOR INCOME TAXES 217,000 198,000 218,000 ---------- ---------- ---------- Net income $ 369,000 $ 332,000 $ 403,000 ========== ========== ========== INCOME PER COMMON SHARE -- Basic (Notes 2 and 10) $ .75 $ .67 $ .83 ========== ========== ========== INCOME PER COMMON SHARE -- Diluted (Notes 2 and 10) $ .73 $ .67 $ .81 ========== ========== ==========
The accompanying notes to financial statements are an integral part of these statements. F-3 THE JERSEY BANK FOR SAVINGS STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Unrealized Gain (Loss) on Additional Securities Total Preferred Common Paid-In Retained Treasury Available for Shareholders' Stock Stock Capital Earnings Stock Sale Equity ----------- ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1994 $ 379,000 $ 2,142,000 $ 2,480,000 $ 190,000 -- ($ 331,000) $ 4,860,000 Issuance of 1,502 shares of -- 8,000 10,000 -- -- -- 18,000 common stock, under the dividend reinvestment plan (Note 8) Purchase of 5,000 shares of -- -- -- -- $ (52,000) -- (52,000) treasury stock Reissuance of 4,410 shares of -- -- 5,000 -- 46,000 -- 51,000 treasury stock under the dividend reinvestment plan (Note 8) Dividends- Common stock ($.12 per share) -- -- -- (51,000) -- -- (51,000) Preferred stock ($.60 per share) -- -- -- (46,000) -- -- (46,000) Net income -- 1995 -- -- -- 403,000 -- -- 403,000 Change in unrealized gain (loss) -- -- -- -- -- 357,000 357,000 on securities available for sale, net of deferred taxes ----------- ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1995 379,000 2,150,000 2,495,000 496,000 (6,000) 26,000 5,540,000 Purchase of 11,488 shares of -- -- -- -- (131,000) -- (131,000) treasury stock Reissuance of 6,903 shares of -- -- -- -- 79,000 -- 79,000 treasury stock under the dividend reinvestment plan (Note 8) Dividends- Common stock ($.12 per share) -- -- -- (51,000) -- -- (51,000) Preferred stock ($.60 per share) -- -- -- (45,000) -- -- (45,000) Net income -- 1996 -- -- -- 332,000 -- -- 332,000 Change in unrealized gain (loss) -- -- -- -- -- (37,000) (37,000) on securities available for sale, net of deferred taxes ----------- ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1996 379,000 2,150,000 2,495,000 732,000 (58,000) (11,000) 5,687,000 Purchase of 260 shares of treasury -- -- -- -- (3,000) -- (3,000) stock Issuance of 8,492 shares of common -- 42,000 81,000 -- -- -- 123,000 stock under the dividend reinvestment plan (Note 8) Reissuance of 5,435 shares of -- -- 2,000 -- 61,000 -- 63,000 treasury stock under the dividend reinvestment plan (Note 8) Conversion of 2,300 shares of (11,000) 10,000 -- -- -- -- (1,000) preferred stock into 1,999 shares of common stock Exercise of 15,400 stock options -- 77,000 77,000 -- -- -- 154,000 under the stock option plan (Note 8) Dividends- Common stock ($.12 per share) -- -- -- (52,000) -- -- (52,000) Preferred stock ($.60 per share) -- -- -- (45,000) -- -- (45,000) Net income -- 1997 -- -- -- 369,000 -- -- 369,000 Change in unrealized gain (loss) -- -- -- -- -- 65,000 65,000 on securities available for sale, net of deferred taxes ----------- ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1997 $ 368,000 $ 2,279,000 $ 2,655,000 $ 1,004,000 $ -- $ 54,000 $ 6,360,000 =========== =========== =========== =========== =========== =========== ===========
The accompanying notes to financial statements are an integral part of these statements. F-4 THE JERSEY BANK FOR SAVINGS STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ------------ ------------ ------------ OPERATING ACTIVITIES: Net income $ 369,000 $ 332,000 $ 403,000 Adjustments to reconcile net income to net cash provided by operating activities- Provision for possible loan losses 23,000 47,000 39,000 Loan charge-offs -- (11,000) -- Deferred tax (benefit) provision (12,000) (12,000) 26,000 Depreciation and amortization expense 114,000 68,000 75,000 Amortization of investment securities premium/discount, net 54,000 27,000 2,000 (Increase) decrease in accrued interest receivable (7,000) 42,000 (117,000) (Increase) decrease in other assets 77,000 (60,000) (65,000) Increase in accrued interest payable 31,000 89,000 100,000 Increase (decrease) in accrued expenses and other liabilities 38,000 (29,000) 111,000 ------------ ------------ ------------ Net cash provided by operating activities 687,000 493,000 574,000 ------------ ------------ ------------ INVESTING ACTIVITIES: Net (increase) decrease in due from banks -- interest bearing (603,000) 421,000 1,361,000 Purchases of securities- Available for sale (5,767,000) (7,900,000) (3,500,000) Held to maturity (5,331,000) (3,982,000) (2,523,000) Proceeds from sale of available for sale securities -- -- 1,101,000 Proceeds from maturities and repayments of securities- Available for sale 3,929,000 6,693,000 1,799,000 Held to maturity 3,563,000 1,895,000 1,626,000 Net increase in loans (4,151,000) (5,861,000) (2,232,000) Capital expenditures (98,000) (906,000) (673,000) ------------ ------------ ------------ Net cash used for investing activities (8,458,000) (9,640,000) (3,041,000) ------------ ------------ ------------ FINANCING ACTIVITIES: Net increase in deposits 8,448,000 10,852,000 5,143,000 Proceeds from the issuance of common stock 245,000 -- 4,000 Proceeds from the sale of treasury shares 45,000 23,000 9,000 Purchase of treasury shares (3,000) (131,000) (52,000) Cash dividends paid (48,000) (40,000) (41,000) ------------ ------------ ------------ Net cash provided by financing activities 8,687,000 10,704,000 5,063,000 ------------ ------------ ------------ Increase in cash and cash equivalents 916,000 1,557,000 2,596,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,502,000 5,945,000 3,349,000 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,418,000 $ 7,502,000 $ 5,945,000 ============ ============ ============ SUPPLEMENTAL DISCLOSURES: Cash paid during the year for- Interest $ 2,992,000 $ 2,291,000 $ 1,955,000 Income taxes 136,000 238,000 205,000 ============ ============ ============
The accompanying notes to financial statements are an integral part of these statements. F-5 THE JERSEY BANK FOR SAVINGS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 (1) NATURE OF OPERATIONS: The Jersey Bank For Savings (the "Bank") provides community banking services primarily to small to medium-size businesses and the professional community, as well as individuals residing in Northeastern Bergen County, New Jersey. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: A summary of significant accounting policies of the Bank applied in the preparation of the accompanying financial statements follows. Use of Estimates in the Preparation of Financial Statements- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates with regard to these financial statements relate to the allowance for possible loan losses and the fair value of financial instruments. Securities- Debt securities for which the Bank has both the positive intent and ability to hold to maturity are carried at amortized cost. Debt securities that the Bank does not have the positive intent and ability to hold to maturity and all marketable equity securities, are classified as available for sale and carried at fair value. Unrealized holding gains and losses on securities classified as available for sale are carried as a separate component of shareholders' equity, net of tax. Management determines the appropriate classification of debt securities at the time of purchase. The amortized cost of debt securities classified as held to maturity or available for sale is adjusted for amortization of premiums and accretion of discounts to maturity. Realized gains and losses, and declines in value other than temporary, are included in net securities gains (losses). The cost of securities sold is based on the specific identification method. For securities in the Bank's held to maturity and available for sale portfolios, fair value is determined by reference to quoted market prices. If quoted market prices are not available, fair value is estimated using quoted market values for similar securities. The Bank had no securities held for trading purposes as of December 31, 1997 or 1996. F-6 Allowance For Possible Loan Losses- The allowance for possible loan losses is maintained at a level considered adequate to provide for potential loan losses. The allowance is increased by provisions charged to expense and reduced by net charge-offs. The level of the allowance is based on management's evaluation of potential losses in the loan portfolio after consideration of appraised collateral values, financial condition of the borrowers, as well as prevailing and anticipated economic conditions. Credit reviews of the loan portfolio, designed to identify potential charges to the allowance, are made on a periodic basis during the year by senior management. Impaired Loans- The Bank evaluates loans held in its portfolio for impairment, as defined. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate. As a practical expedient, impairment may be measured based on the loans observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. Premises and Equipment- Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed primarily on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the lives of the related leases, or the life of the improvement, whichever is shorter. Interest on Loans- Interest on loans is credited to operations based upon the principal amount outstanding. Net loan origination fees are deferred and amortized over the life of the related loan as an adjustment to the loan yield. When management believes there is sufficient doubt as to the ultimate collectibility of interest on any loan, the accrual of applicable interest is discontinued. Income Taxes- The Bank uses the liability method of computing deferred income taxes. Deferred income taxes are recognized for tax consequences of "temporary differences" by applying enacted statutory tax rates, applicable to future years, to differences between the financial reporting and the tax basis of existing assets and liabilities. F-7 Stock Options- Effective January 1, 1995, the Bank adopted Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation." The Bank continues to apply APB Opinion 25 and related Interpretations in accounting for stock options granted to employees and directors and has elected to adopt only the disclosure requirements of SFAS No.123, as permitted. The Bank had no options granted in 1997 and 1996, therefore, no additional disclosures were required in the 1997 financial statements for SFAS No. 123. Cash and Cash Equivalents- Cash and cash equivalents includes cash on hand, noninterest bearing amounts due from banks and Federal funds sold. Generally, Federal funds are sold for a one-day period. Earnings Per Share- The Bank adopted SFAS No. 128, "Earnings per Share" effective December 15, 1997. In accordance with this new accounting standard, basic earnings per share is computed based on the weighted average number of shares outstanding for the periods presented. Diluted earnings per share is computed based on the weighted average number of shares outstanding of the period presented adjusted for the effect of the Bank's convertible preferred stock and stock options outstanding, if dilutive. The Bank restated previous reporting earnings per share for 1996 and 1995 as required by this new accounting standard. Dividend Restrictions- New Jersey state law permits the payment of dividends to the shareholders to the extent that the bank will have a surplus of not less than 50% of its capital stock or if not, payment of the dividend will not reduce its surplus. New Financial Accounting Standards- The Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income," in June 1997. This statement is effective for years beginning after December 15, 1997. Statement No. 130 requires entities that present a complete set of financial statements to include the components of comprehensive income. Comprehensive income consists of net income or loss for the current period and revenues, expenses, gains and losses that bypass the income statement and are reported as a component of equity. The effect of adopting Standards No.130 is not expected to be material to the Bank's results of operations or financial position. Also in June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information", which is effective for all periods beginning after December 15, 1997. Statement No. 131 requires that public companies report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. Management is currently evaluating the disclosures impact of SFAS No. 131 on its financial statements and has not determined if it has any reportable segments. F-8 (3) SECURITIES: Information with regard to the Bank's securities portfolio at December 31 is as follows- 1997 --------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ----------- ----------- ----------- Available for sale Mortgage backed securities $10,756,000 $ 111,000 ($ 12,000) $10,855,000 Other securities 3,451,000 5,000 (12,000) 3,444,000 ----------- ----------- ----------- ----------- Subtotals 14,207,000 116,000 (24,000) 14,299,000 Held to maturity Mortgage backed securities 14,072,000 47,000 (71,000) 14,048,000 ----------- ----------- ----------- ----------- Totals $28,279,000 $ 163,000 ($ 95,000) $28,347,000 =========== =========== =========== =========== 1996 --------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ----------- ----------- ----------- Available for sale Mortgage backed securities $ 8,068,000 $ 52,000 ($ 45,000) $ 8,075,000 Other securities 4,357,000 5,000 (30,000) 4,332,000 ----------- ----------- ----------- ----------- Subtotals 12,425,000 57,000 (75,000) 12,407,000 Held to maturity Mortgage backed securities 12,304,000 80,000 (22,000) 12,362,000 ----------- ----------- ----------- ----------- Totals $24,729,000 $ 137,000 ($ 97,000) $24,769,000 =========== =========== =========== =========== The amortized cost and estimated market value of debt securities at December 31, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Estimated Cost Market Value ----------- ------------ Due in one year through five years $2,500,000 $ 2,493,000 Due in more than five years 500,000 500,000 Mortgage-backed securities 24,828,000 24,903,000 Other securities 451,000 451,000 ----------- ------------ $28,279,000 $ 28,347,000 =========== ============ As of December 31, 1997 and 1996, securities having carrying values of $186,000 and $214,000, respectively, were pledged to secure public funds or for other purposes as required by law. F-9 (4) LOANS: Loans outstanding by classification at December 31 are as follows- 1997 1996 ------------ ------------ Loans secured by real estate- Residential $ 26,096,000 $ 24,719,000 Commercial 7,129,000 4,453,000 Construction 2,255,000 1,385,000 Loans to individuals 972,000 1,757,000 Unearned income (34,000) (47,000) ------------ ------------ $ 36,418,000 $ 32,267,000 ============ ============ As of December 31, 1997, the Bank had no impaired loans. As of December 31, 1996, the balance of impaired loans, which are defined as nonaccrual or nonperforming loans (past due over 90 days), was $443,000. The fair value of the collateral of these loans exceeded the Bank's respective recorded investments, therefore, no valuation allowance was necessary. Activity for 1997 related to loans to directors, executive officers and their affiliated interests is as follows- Balance, beginning of year $ 4,271,000 Loans granted 1,061,000 Repayments of loans (1,736,000) ----------- Balance, end of year $ 3,596,000 =========== All such loans are current as to principal and interest payments as of December 31, 1997. (5) ALLOWANCE FOR POSSIBLE LOAN LOSSES: The allowance for possible loan losses is based on estimates, and ultimate losses may vary from the current estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reflected in operations in the periods in which they become known. An analysis of the allowance for possible loan losses is as follows- 1997 1996 1995 --------- --------- --------- Balance, beginning of year $ 315,000 $ 279,000 $ 240,000 Provision charged to expense 23,000 47,000 39,000 Loan charge offs -- (11,000) -- --------- --------- --------- Balance, end of year $ 338,000 $ 315,000 $ 279,000 ========= ========= ========= F-10 (6) PREMISES AND EQUIPMENT: Premises and equipment consists of the following as of December 31- 1997 1996 ---------- ---------- Land $ 581,000 $ 581,000 Building 837,000 767,000 Furniture and equipment 498,000 472,000 Leasehold improvements 332,000 327,000 ---------- ---------- 2,248,000 2,147,000 Less- Accumulated depreciation and amortization 571,000 454,000 ---------- ---------- $1,677,000 $1,693,000 ========== ========== (7) DEPOSITS: Time deposits in denominations of $100,000 or more totaled $12,367,000 and $9,973,000 at December 31, 1997 and 1996, respectively. Scheduled maturities of certificates of deposits are as follows- Year Ended December 31, 1997 ---------------------------------------------------------- Over Three Over One Three Months Year Over Months or Through Through Three Less Twelve Months Three Years Years Total ----------- ------------- ----------- -------- ----------- $100,000 or more $ 7,171,000 $ 3,774,000 $ 1,089,000 $333,000 $12,367,000 Less than $100,000 11,108,000 14,166,000 3,654,000 707,000 29,635,000 Year Ended December 31, 1996 ---------------------------------------------------------- Over Three Over One Three Months Year Over Months or Through Through Three Less Twelve Months Three Years Years Total ----------- ------------- ----------- -------- ----------- $100,000 or more $ 5,882,000 $ 2,959,000 $ 504,000 $628,000 $ 9,973,000 Less than $100,000 10,148,000 11,808,000 5,087,000 487,000 27,530,000 (8) SHAREHOLDERS' EQUITY: Stock Option Plan- In June, 1990, under the Bank's stock option plan (the Plan) the Bank granted 17,000 options to certain executives for the purchase of common stock. The options become exercisable ratably over a five-year period and are exercisable over a ten-year period at a price of $10 per share. At December 31, 1997, all 17,000 had been exercised or expired. F-11 Convertible Preferred Stock- During 1993 and 1994, the Bank issued a total of 75,825 shares of 6% noncumulative convertible preferred stock at a price of $10 per share. Each share of preferred stock is convertible, at the holders' option, into one share of common stock of the Bank at a conversion price of $11.50 per share. During 1997, 2,300 shares were converted. No shares were converted in 1996. Dividend Reinvestment Plan- During 1993, the Bank instituted a common and preferred stock dividend reinvestment plan (the Plan) by which shareholders may use their cash dividends to purchase common stock of the Bank at $11.50 per share. In addition to the reinvestment of cash dividends, shareholders may make optional payments to the Plan in amounts not less than $100 and not more than $5,000 per quarter, for the purchase of common stock of the Bank. During 1997 and 1996, 13,927 and 6,903 shares of common stock were purchased under this plan. (9) INCOME TAXES: The components of the income tax provision are as follows- Year Ended December 31 ----------------------------------- 1997 1996 1995 --------- --------- --------- Federal income taxes (benefit)- Current $ 211,000 $ 195,000 $ 174,000 Deferred (12,000) (12,000) 26,000 State 18,000 15,000 18,000 --------- --------- --------- $ 217,000 $ 198,000 $ 218,000 ========= ========= ========= Temporary differences result from accounting for certain income and expense items in different time periods for financial statement purposes than for income tax return purposes. Cumulative temporary differences at December 31, 1997 and 1996 are as follows- Asset (Liability) -------------------- 1997 1996 -------- -------- Allowance for possible loan losses $ 80,000 $ 75,000 Deferred fee income 45,000 41,000 Depreciation (81,000) (42,000) Unrealized (gain) loss on securities available for sale (38,000) 7,000 Other -- (3,000) -------- -------- Deferred tax asset $ 6,000 $ 78,000 ======== ======== The Bank believes the existing net deductible temporary differences will reverse during periods in which the Bank generates sufficient net taxable income, accordingly, management has not recorded a valuation allowance as of December 31, 1997 and 1996. The difference between the provision for income taxes computed by applying the Federal income tax rate of 34% and the effective tax rate for 1997, 1996 and 1995 is primarily the result of state tax expense, net of the Federal benefit. F-12 (10) EARNINGS PER SHARE DISCLOSURES: The following is a reconciliation of basic and dilutive earnings per share- For the Year Ended December 31, 1997 ------------------------------------ Weighted Average Income Income Shares Per Share --------- --------- --------- Net Income $ 369,000 Less - Preferred stock dividends (45,000) --------- Net income per share - Basic income available to common shareholders 324,000 433,842 $ 0.75 ========= Effect of dilutive securities- Add-Preferred stock dividends 45,000 Convertible preferred shares 65,269 Options granted to employees 4,834 --------- --------- Net income per share - Diluted income available to common shareholders plus assumed conversions $ 369,000 503,945 $ 0.73 ========= ========= ========= For the Year Ended December 31, 1996 ------------------------------------ Weighted Average Income Income Shares Per Share --------- --------- --------- Net Income $ 332,000 Less - Preferred stock dividends (45,000) --------- Net income per share - Basic income available to common shareholders 287,000 425,854 $ 0.67 ========= Effect of dilutive securities- Add-Preferred stock dividends 45,000 Convertible preferred shares 65,930 Options granted to employees 2,217 --------- --------- Net income per share - Diluted income available to common shareholders plus assumed conversions $ 332,000 494,001 $ 0.67 ========= ========= ========= F-13 For the Year Ended December 31, 1995 ------------------------------------ Weighted Average Income Income Shares Per Share --------- --------- --------- Net Income $ 403,000 Less - Preferred stock dividends (46,000) --------- Net income per share -- Basic income available to common shareholders 357,000 428,179 $ 0.83 ========= Effect of dilutive securities- Add-Preferred stock dividends 46,000 Convertible preferred shares 65,930 Options granted to employees 2,217 --------- --------- Net income per share - Diluted income available to common shareholders plus assumed conversions $ 403,000 496,326 $ 0.81 ========= ========= ========= (11) REGULATORY CAPITAL REQUIREMENTS: The Bank is 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 Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications 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 Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 1997, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the Federal Deposit Insurance Corporation 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 table. There are no conditions or events since that notification that management believes have changed the institutions' category. F-14 The Bank's actual capital amounts and ratios are also presented in the table.
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------ --------------------- -------------------- Amount Ratio Amount Ratio Amount Ratio ---------- ----- ---------- ----- ---------- ----- As of December 31, 1997- Total capital (to Risk Weighted Assets) $6,644,000 20.81% => $2,554,000 => 8.00% => $3,193,000 => 10.00% Tier I Capital (to Risk Weighted Assets) 6,306,000 19.75% => 1,277,000 => 4.00% => 1,916,000 => 6.00% Tier I Capital (to Average Assets) 6,306,000 8.43% => 2,991,000 => 4.00% => 3,739,000 => 5.00% As of December 31, 1996- Total capital (to Risk Weighted Assets) 6,012,000 20.36% => 2,362,000 => 8.00% => 2,953,000 => 10.00% Tier I Capital (to Risk Weighted Assets) 5,697,000 19.29% => 1,181,000 => 4.00% => 1,772,000 => 6.00% Tier I Capital (to Average Assets) 5,697,000 9.39% => 2,427,000 => 4.00% => 3,034,000 => 5.00%
(12) BENEFIT PLAN: The Bank maintains a 401(k) plan for all employees who complete one year of service and attain the age of 21. Under the plan, the Bank will match 50% of the employee contributions up to a maximum of the first 4% of compensation deferred. Bank contributions are 100% vested when made. During 1997, 1996 and 1995, Bank contributions were approximately $7,000, $4,000 and $3,000, respectively. (13) COMMITMENTS AND CONTINGENCIES: The Bank currently leases its main office for a period of ten years with options to renew for five five-year periods. The future minimum rental payments are as follows- Lease Year 1998 $65,000 1999 65,000 2000 65,000 2001 65,000 2002 65,000 Thereafter 1,170,000 ---------- Total $1,495,000 ========== The above amounts represent the minimum rentals not adjusted for possible future increases due to escalation provisions and assumes that all option periods will be exercised by the Bank. Total rent expense was $68,000, $66,000 and $63,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The statement of condition does not reflect various commitments relating to financial instruments which are used in the normal course of business. Management does not anticipate that the settlement of those financial instruments will have a material adverse effect on the Bank's financial position. These instruments include commitments to extend credit and letters of credit. These financial instruments carry various degrees of credit risk, which is F-15 defined as the possibility that a loss may occur from the failure of another party to perform according to the terms of the contract. The Bank may, in the ordinary course of business, become a party to litigation involving collection matters, contract claims and other legal proceedings relating to the conduct of its business. The Bank also has various commitments and contingent liabilities, including unused loan commitments of approximately $6,587,000 which are not reflected in the accompanying statement of condition. In management's judgment, the financial position of the Bank will not be affected materially by the final outcome of any present legal proceedings or other contingent liabilities and commitments. (14) OTHER OPERATING EXPENSES: The components of other operating expenses for the year ended December 31, are as follows- 1997 1996 1995 -------- -------- -------- Insurance $ 27,000 $ 26,000 $ 32,000 Marketing 46,000 75,000 38,000 Computer services 170,000 131,000 119,000 Regulatory, professional and other fees 133,000 71,000 66,000 Office expense 57,000 43,000 41,000 All other 238,000 164,000 155,000 -------- -------- -------- $671,000 $510,000 $451,000 ======== ======== ======== (15) FAIR VALUE OF FINANCIAL INSTRUMENTS: The following is a summary of fair value versus the carrying value of the Bank's financial instruments. For the Bank, as for most financial institutions, the bulk of its assets and liabilities are considered financial instruments. Many of the Bank's financial instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Bank's general practice and intent to hold its financial instruments to maturity and not engage in trading or sales activities. Therefore, significant estimations and present value calculations were used by the Bank for the purpose of this disclosure. Estimated fair values have been determined by the Bank using the best available data and an estimation methodology suitable for each category of financial instruments. Financial instruments actively traded in the secondary market have been valued using available market prices. The estimation methodologies used, the estimated fair values, and the recorded book balances, were as follows- F-16
December 31, 1997 December 31, 1996 ---------------------------- --------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value -------------- ----------- -------------- ---------- Cash and cash equivalents $8,418,000 $8,418,000 $7,502,000 $7,502,000 Securities available for sale, including accrued interest receivable 14,314,000 (1) 14,406,000 12,548,000 (1) 12,530,000 Securities held to maturity, including accrued interest receivable 14,171,000 14,147,000 12,400,000 12,458,000 Loans, including accrued interest receivable 36,657,000 37,010,000 32,499,000 32,551,000 Deposits, including accrued interest payable 70,439,000 70,449,000 61,960,000 61,982,000
(1) Securities available for sale are carried at their estimated fair value. This amount represents amortized cost at December 31, 1997 and 1996. See Note 3. Financial instruments with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities. For those loans and deposits with floating interest rates, it is assumed that estimated fair values generally approximate the recorded book balances. There is no material difference between the notional amount and the estimated fair value of off-balance sheet unfunded loan commitments which totaled $6,587,000 and $6,108,000 at December 31, 1997 and 1996, respectively. Standby letters of credit totaling $64,000 and $97,000 as of December 31, 1997 and 1996, respectively, are based on fees charged for similar agreements; accordingly, the estimated fair value of standby letters of credit is nominal. See also Note 13 for additional discussion relating to these off-balance sheet activities. (16) MERGER AGREEMENT: On January 27, 1998, the Bank entered into an agreement and plan of merger (the "Merger Agreement") with Interchange Financial Services Corporation and Interchange State Bank (collectively "Interchange") providing for the merger (the "Merger") of the Bank with Interchange. The Merger Agreement provides that shareholders of the Bank will receive for each share of the Bank's common stock, 1.5 shares of common stock of Interchange, after giving effect to the 3 for 2 split of the common stock of Interchange, which was approved on February 26, 1998. Holders of the Bank's preferred stock will be given the opportunity to enter into a conversion agreement with the Bank by which each share will convert into common shares at the pre-determined conversion ratio of .8695 common shares for each preferred share. Completion of the Merger is subject to shareholder and regulatory approvals and is expected to close in the second quarter of 1998. The Merger will be accounted for as a pooling of interests under generally accepted accounting principles. Concurrently with the execution of the Merger Agreement the Bank entered into a stock option agreement with Interchange providing for the grant by the Bank to Interchange of an option (the "Option") to purchase a number of shares of the Bank's common stock not to F-17 exceed 19.9% of the common stock outstanding on January 27, 1998. The Option is exercisable only upon the occurrence of certain events, none of which, to the best knowledge of the Bank, has occurred. F-18 Appendix A Agreement and Plan of Merger, dated January 27, 1998 , by and among Interchange Financial Services Corporation, Interchange Bank (formerly known as Interchange State Bank) and The Jersey Bank for Savings, included as Appendix A to the Proxy Statement/Prospectus is incorporated by reference to Exhibit 10(d) to the Interchange Annual Report on Form 10-K for the year ended December 31, 1997, and by reference to Exhibit 2(c) hereto. A- 1 Appendix B Stock Option Agreement, dated January 27, 1998, by and among Interchange Financial Services Corporation and The Jersey Bank for Savings, included as Appendix B to the Proxy Statement/Prospectus is incorporated by reference to Exhibit 10(e) to the Interchange Annual Report on Form 10-K for the year ended December 31, 1997. B- 1 Appendix C April 27, 1998 PRIVATE AND CONFIDENTIAL Board of Directors The Jersey Bank for Savings 2-8 South Kinderkamack Road Montvale, NJ 07645-0333 Members of the Board: The Jersey Bank for Savings ("JERSEY") has entered into an Agreement and Plan of Merger and Stock Option Agreement dated January 27, 1998 ("MERGER AGREEMENT") with Interchange Financial Services Corporation ("INTERCHANGE") and Interchange Bank (formerly known as Interchange State Bank) which provides for the acquisition of JERSEY by means of a transaction ("MERGER") pursuant to which JERSEY would merge with and into Interchange Bank. If the MERGER is approved and consummated, subject to the provisions of the MERGER AGREEMENT, each share of JERSEY Common Stock issued and outstanding shall be converted at the Effective Time into the right to receive 1.5 shares of Common Stock, no par value, of INTERCHANGE. Immediately prior to the effect date, each share of JERSEY Preferred Stock, par value $5.00 per share, shall be converted into 0.8695 shares of JERSEY Common Stock and thereby become eligible for conversion into INTERCHANGE Common Stock as stated above. In lieu of the issuance of applicable fractional shares, INTERCHANGE will make a cash payment therefor based on the Average Closing Price of INTERCHANGE Common Stock as defined in the MERGER AGREEMENT. You have requested our opinion as to whether the consideration offered in the MERGER is fair, from a financial point of view, to the shareholders of JERSEY. Capital Consultants of Princeton, Inc. ("CAPITAL CONSULTANTS"), as a customary part of its investment banking business, is engaged in the valuation of commercial banking and thrift institutions and their securities in connection with mergers and acquisitions, private placements and valuations for estate, corporate and other purposes. In arriving at our opinion we have reviewed and analyzed, among other things: (i) the MERGER AGREEMENT; (ii) the INTERCHANGE Registration Statement on Form S-4 of which this Proxy Statement-Prospectus is a part; (iii) publicly available information relating to INTERCHANGE and JERSEY including, for INTERCHANGE, annual reports to shareholders and annual reports on Form 10-K filed with the SEC for the years ended December 31, 1995 through 1997, the Consolidated Financial Statements of December 31, 1997, 1996, and 1995, and the quarterly reports to shareholders and quarterly reports on Form 10-Q filed with the SEC for the periods ended March 31, June 30, and September 30, 1997, and for JERSEY annual reports to shareholders for the years ended December 31, 1994 through 1996, Financial Statements as of C- 1 December 31, 1997, 1996, and 1995 together with the Report of Independent Public Accountants and quarterly reports of Condition and Income as filed with the Federal Deposit Insurance Corporation for the periods ended March 31, June 30, and September 30, 1997; (iv) certain historical operating and financial information provided to CAPITAL CONSULTANTS by the managements of JERSEY and INTERCHANGE; (v) historical and current market data for the JERSEY Common Stock and the INTERCHANGE Common Stock; (vi) the publicly available financial data and stock market performance data of publicly traded banking and thrift institutions which CAPITAL CONSULTANTS deemed generally comparable to JERSEY and INTERCHANGE; (vii) the nature and terms of recent acquisitions and merger transactions involving banking institutions and bank and thrift holding companies that CAPITAL CONSULTANTS considered reasonably similar to JERSEY and INTERCHANGE in financial character, operating character, historical performance, geographic market and economy; and (viii) such other studies, financial forecasts, analyses, inquiries and reports as CAPITAL CONSULTANTS deemed appropriate. In addition, CAPITAL CONSULTANTS conducted meetings with members of senior management of JERSEY and INTERCHANGE for purposes of reviewing the future prospects of JERSEY and INTERCHANGE. CAPITAL CONSULTANTS evaluated the pro forma ownership of the INTERCHANGE Common Stock by JERSEY shareholders, relative to the pro forma contribution of JERSEY assets, deposits, equity, and earnings to the pro forma resulting company in the MERGER. CAPITAL CONSULTANTS also took into account its experience in other transactions, as well as its knowledge of the banking and thrift industries and its experience in securities valuations. In addition, we considered the future prospects of JERSEY in the event that it remained independent. As part of our engagement, we have prepared analyses of strategic and financial considerations of various strategic alternatives, and we have advised JERSEY in connection with its consideration of such alternatives. In this regard, we approached third parties to solicit interest in a possible strategic alliance with, or acquisition of, JERSEY. We held preliminary discussions with certain of these parties concerning the terms of their interest, of which you are aware. At your request, we participated with JERSEY in the negotiation of the MERGER AGREEMENT. While we have taken care in our investigation and analysis, we have relied upon and assumed the accuracy, completeness and fairness of the financial and other information provided to us or publicly available, and have not attempted to verify same. We have not made or obtained any independent evaluations or appraisals of the assets or liabilities of JERSEY or INTERCHANGE. In conducting our analysis and arriving at our opinion, we have considered such financial and other factors as we have deemed appropriate in the circumstances. In rendering our opinion, we have assumed that in the course of obtaining the necessary regulatory approvals for the MERGER, no conditions will be imposed that would have a material adverse effect on the contemplated benefits of MERGER. Our opinion is necessarily based upon market, economic, and other conditions as they exist and can be evaluated as of the date of this letter. Based upon and subject to the foregoing, it is our opinion as investment bankers that the consideration to be paid in the MERGER is fair, from a financial point of view, to the shareholders of JERSEY. Very truly yours, /s/ Capital Consultants of Princeton, Inc. - ----------------------------------------------- CAPITAL CONSULTANTS OF PRINCETON, INC. C- 2 Appendix D New Jersey Banking Act of l948 l7:9A-l40. Rights of dissenting stockholders; settlement by agreement A. A stockholder who (l) is entitled to vote at the meeting of stockholders prescribed by section l37; and who (2) serves a written notice of dissent from the merger agreement, in the manner, at the place, and within the time prescribed in subsections B and C of this section; and who (3) does not vote to approve the merger agreement at the meeting prescribed by section l37, or at any adjournment thereof, may, within thirty days after the filing of the agreement in the department as provided by section l37, serve a demand upon the receiving bank at its principal office, for the payment to him of the value of his shares of stock. The receiving bank may, within ten (l0) days after the receipt of such demand, offer to pay the stockholder a sum for his shares, which, in the opinion of the board of directors of the receiving bank, does not exceed the amount which would be paid upon such shares if the business and assets of the bank whose stock such stockholder holds were liquidated on the day of the filing of the agreement pursuant to section l37. B. Service of the notice of dissent prescribed by paragraph (2) of subsection A of this section shall be made at the principal office of the bank whose stock is held by the dissenting stockholder, and shall be made not later than the third day prior to the day fixed for the meeting of the stockholders of such bank pursuant to section l37. C. Service of the notice of dissent and of the demand for payment prescribed by this section may be made by registered mail or personally by the dissenting stockholder or his agent. l7:9A-l4l. Appointment of appraisers If a stockholder fails to accept the sum offered for his shares pursuant to section one hundred forty, he may, within three weeks after the receipt by him of the bank's offer of payment, or, if no offer is made by the bank, within three weeks after the date upon which his demand was served upon the bank as specified in section one hundred forty, institute an action in the Superior Court for the appointment of a board of three appraisers to determine the value of his shares of stock as of the day of the filing of the merger agreement pursuant to section one hundred thirty-seven. The court may proceed in the action in a summary manner or otherwise. Any other stockholder who has the right to institute a similar action may intervene. The court shall, in respect to any one bank, appoint a single board of three appraisers to determine the value of the shares of all stockholders of such bank who are parties to such action. D- 1 l7:9A-l42. Duties of appraisers; report; objections; compensation; vacancies A. The appraisers shall be sworn to the faithful discharge of their duties. They shall meet at such place or places, and shall give such notice of their meetings as the court may prescribe. The bank and each stockholder who is a party to the action instituted pursuant to section one hundred forty-one, may be represented by attorneys in the proceedings before such appraisers, and may present such evidence to them as shall be material to the issue. The determination of any two of the appraisers shall control. Upon the conclusion of their deliberations, the appraisers shall file in the Superior Court a report and appraisal of the value of the shares of stock, and shall mail a copy thereof to the bank and to each stockholder who is a party to said action. B. The bank and each stockholder who is a party to said action shall have ten days after the filing of the report and appraisal within which to object thereto in the Superior Court. In the absence of any objections, the report and appraisal shall be binding upon the bank and upon such stockholders, and the bank shall pay each such stockholder the value of his shares, as reported by the appraisers, with interest from the date of the filing of the merger agreement pursuant to section one hundred thirty-seven, at such rate, not in excess of the legal rate, as shall be fixed by the appraisers. If objections are made, the court shall make such order or judgment thereon as shall be just. C. The Superior Court shall fix the compensation of the appraisers, which shall be paid by the bank, and shall be vested with full jurisdiction over all matters arising out of an action instituted pursuant to section one hundred forty-one. In the case of a vacancy in the board of appraisers, the Superior Court shall, on its own motion, or upon motion of a stockholder, or of the receiving bank, fill such vacancy. l7:9A-l43. Assignment of stock to bank Upon payment by the bank of the value of shares of stock pursuant to this article, the holder thereof shall assign such shares to the bank. l7:9A-l44. Effect of stockholder's failure to act A stockholder who fails to act pursuant to sections l40 or l4l shall be forever barred from bringing any action to enforce his right to be paid the value of his shares in lieu of continuing his status as a stockholder in the receiving bank. l7:9A-l45. Obligation of bank to pay stockholder An offer by the bank and an acceptance thereof by the stockholder pursuant to section l40 and the determination of value upon proceedings brought pursuant to sections l4l and l42 shall constitute a debt of the receiving bank for the recovery of which an action will lie. D- 2 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS Item 20. Indemnification of Directors and Officers. Indemnification. The New Jersey Business Corporation Act empowers a corporation to indemnify a corporate agent against his expenses and liabilities incurred in connection with any proceeding (other than a derivative lawsuit) involving the corporate agent by reason of his being or having been a corporate agent if (a) the agent acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and (b) with respect to any criminal proceeding, the corporate agent had no reasonable cause to believe his conduct was unlawful. For purposes of the Act, the term "corporate agent" includes any present or former director, officer, employee or agent of the corporation, and a person serving as a "corporate agent" at the request of the corporation for any other enterprise. With respect to any derivative action, the corporation is empowered to indemnify a corporate agent against his expenses (but not his liabilities) incurred in connection with any proceeding involving the corporate agent by reason of his being or having been a corporate agent if the agent acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation. However, only the court in which the proceeding was brought can empower a corporation to indemnify a corporate agent against expenses with respect to any claim, issue or matter as to which the agent was adjudged liable for negligence or misconduct. The corporation may indemnify a corporate agent in a specific case if a determination is made by any of the following that the applicable standard of conduct was met: (i) the Board of Directors, or a committee thereof, acting by a majority vote of a quorum consisting of disinterested directors; (ii) by independent legal counsel, if there is not a quorum of disinterested directors or if the disinterested quorum empowers counsel to make the determination; or (iii) by the shareholders. A corporate agent is entitled to mandatory indemnification to the extent that the agent is successful on the merits or otherwise in any proceeding, or in defense of any claim, issue or matter in the proceeding. If a corporation fails or refuses to indemnify a corporate agent, whether the indemnification is permissive or mandatory, the agent may apply to a court to grant him the requested indemnification. In advance of the final disposition of a proceeding, the corporation may pay an agent's expenses if the agent agrees to repay the expenses unless it is ultimately determined he is entitled to indemnification. Exculpation. Article VI of the Certificate of Incorporation of Interchange provides: "A director or officer of the Corporation shall not be personally liable to the Corporation or its shareholders for damages for breach of any duty owed to the Corporation or its shareholders, except for liability for any breach of duty based upon an act or omission (a) in breach of such person's duty of loyalty to the Corporation or its shareholders, (b) not in good faith or involving a knowing violation of law, or (c) resulting in receipt by such person of an improper personal benefit." Item 21. A. Exhibits Exhibit No. Description - ----------- ----------- 2(a) Agreement and Plan of Merger, dated January 27, 1998 , by and among Interchange Financial Services Corporation, Interchange Bank (formerly known as Interchange State Bank) and The Jersey Bank for Savings, included as Appendix A to the Proxy Statement/Prospectus. For purposes of filing this Registration Statement on Form S-4 with the Commission incorporated by Reference to Interchange Annual Report on Form 10-K for the year ended December 31, 1997. 2(b) Stock Option Agreement, dated January 27, 1998, by and among Interchange Financial Services Corporation and The Jersey Bank for Savings, included as Appendix B to the Proxy Statement/Prospectus. For purposes of filing this Registration Statement on Form S-4 with the Commission incorporated by Reference to Interchange Annual Report on Form 10-K for the year ended December 31, 1997. 2(c) Amended Section 1.7 of the Agreement and Plan of Merger. 3 Certificate of Incorporation of Interchange Financial Services Corporation, and all amendments thereto. 5 Opinion of Norris, McLaughlin & Marcus, P.A. as to the legality of the securities to be registered. 8 Opinion of Norris, McLaughlin & Marcus, P.A. as to certain tax consequences of the Merger. 10(a) Form of Conversion Agreement entered in by Holders of Jersey Preferred Stock. 10(b) Form of Trust Agreement to be entered into between Interchange and a financial institution to be named with respect to payments relating to severance of Clyde Britt and William C. Ledgerwood. 11 Computation re earnings per share - Interchange 12 Computation re Ratio of earnings to fixed charges excluding interest on deposits and Ratio of earnings to fixed charges including interest on deposits. 23(a) Consent of Deloitte & Touche LLP. 23(b) Consent of Arthur Andersen LLP. 23(c)* Consent of Norris, McLaughlin & Marcus, P.A. (Included in Exhibits 5 and 8 hereto). 23(d) Consent of Capital Consultants, Inc. 99 Form of Proxy Card to be utilized by the Board of Directors of The Jersey Bank for Savings. * Included elsewhere in this registration statement. B. Financial Schedules All financial statement schedules have been omitted because they are not applicable or the required information is included in the financial statements or notes thereto or incorporated by reference therein. C. Report, Opinion or Appraisals Form of Fairness Opinion of Capital Consultants of Princeton, Inc. is included as Appendix C to Joint Proxy Statement/Prospectus. Item 22. Undertakings 1. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 2. The undersigned registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called or by the other items of the applicable form. 3. The registrant undertakes that every prospectus (i) that is filed pursuant to paragraph 2 immediately preceding, or (ii) that purports to meet the requirements of Section 10(a) (3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 4. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 5. The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. 6. Subject to appropriate interpretation, the undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration Statement when it becomes effective. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the Township of Saddle Brook, State of New Jersey on April 23, 1998. Interchange Financial Services Corporation /s/Anthony Labozzetta ------------------------------------------ Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated: /s/Anthony S. Abbate /s/James E. Healey - -------------------------------------- --------------------------------------- Anthony S. Abbate April 23, 1998 James E. Healey April 23, 1998 Director Director President and Chief Executive Officer /s/Anthony D. Andora /s/Anthony Labozzetta - -------------------------------------- --------------------------------------- Anthony D. Andora April 23, 1998 Anthony Labozzetta April 23, 1998 Director Executive Vice President and Chairman of the Board Chief Financial Officer /s/Donald L. Correll /s/Nicholas R. Marcalus - -------------------------------------- --------------------------------------- Donald L. Correll April 23, 1998 Nicholas R. Marcalus April 23, 1998 Director Director /s/Anthony R. Coscia /s/Eleanore S. Nissley - -------------------------------------- --------------------------------------- Anthony R. Coscia April 23, 1998 Eleanore S. Nissley April 23, 1998 Director Director /s/John J. Eccleston /s/Jeremiah F. O'Connor - -------------------------------------- --------------------------------------- John J. Eccleston April 23, 1998 Jeremiah F. O'Connor April 23, 1998 Director Director /s/David R. Ficca /s/Robert P. Rittereiser - -------------------------------------- --------------------------------------- David R. Ficca April 23, 1998 Robert P. Rittereiser April 23, 1998 Director Director /s/Benjamin Rosenzweig --------------------------------------- Benjamin Rosenzweig April 23, 1998 Director INDEX TO EXHIBITS Exhibit No. Description Exhibit No. Description - ----------- ----------- 2(a) Agreement and Plan of Merger, dated January 27, 1998 , by and among Interchange Financial Services Corporation, Interchange Bank (formerly known as Interchange State Bank) and The Jersey Bank for Savings, included as Appendix A to the Proxy Statement/Prospectus. For purposes of filing this Registration Statement on Form S-4 with the Commission incorporated by Reference to Interchange Annual Report on Form 10-K for the year ended December 31, 1997. 2(b) Stock Option Agreement, dated January 27, 1998, by and among Interchange Financial Services Corporation and The Jersey Bank for Savings, included as Appendix B to the Proxy Statement/Prospectus. For purposes of filing this Registration Statement on Form S-4 with the Commission incorporated by Reference to Interchange Annual Report on Form 10-K for the year ended December 31, 1997. 2(c) Amended Section 1.7 of the Agreement and Plan of Merger. 3 Certificate of Incorporation of Interchange Financial Services Corporation, and all amendments thereto. 5 Opinion of Norris, McLaughlin & Marcus, P.A. as to the legality of the securities to be registered. 8 Opinion of Norris, McLaughlin & Marcus, P.A. as to certain tax consequences of the Merger. 10(a) Form of Conversion Agreement entered in by Holders of Jersey Preferred Stock. 10(b) Form of Trust Agreement to be entered into between Interchange and a financial institution to be named with respect to payments relating to severance of Clyde Britt and William C. Ledgerwood. 11 Computation re earnings per share - Interchange 12 Computation re Ratio of earnings to fixed charges excluding interest on deposits and Ratio of earnings to fixed charges including interest on deposits. 23(a) Consent of Deloitte & Touche LLP. 23(b) Consent of Arthur Andersen LLP. 23(c)* Consent of Norris, McLaughlin & Marcus, P.A. (Included in Exhibits 5 and 8 hereto). 23(d) Consent of Capital Consultants, Inc. 99 Form of Proxy Card to be utilized by the Board of Directors of The Jersey Bank for Savings. * Included elsewhere in this registration statement. EX-2 2 AMENDED SECTION 1.7 Exhibit 2(c) To correct an inadvertent and technical omission from the Agreement and Plan of Merger dated January 27, 1998 (the "Merger Agreement") the parties to it agreed to amend the Agreement to revise the description of Interchange Bank's authorized capital in Section 1.7 by adding the following language to the 9th line of that section, after "... including capital reserves,": "... and $465,850 net unrealized gain on securities available for sale..." An amended page incorporating the above change was circulated and initiated by the parties and included with the Merger Agreement. EX-3 3 CERT. OF AMENDMENT TO CERT. OF INCORPORATION CERTIFICATE OF INCORPORATION OF INTERCHANGE FINANCIAL SERVICES CORPORATION The undersigned, being over the age of 18 years old, for the purposes of forming a corporation under the New Jersey Business Corporation Act, doe hereby execute the following certificate of incorporation: ARTICLE I CORPORATE NAME The name of the Corporation shall be Interchange Financial Services Corporation (hereinafter refereed to as the "Corporation"). ARTICLE II CURRENT REGISTERED OFFICE AND CURRENT REGISTERED AGENT The address of the Corporation's initial registered office is c/o Andora, Palmisano, De Cotiis & Harris, 311 Molnar Drive, P.O. Box 431, Elmwood Park, New Jersey 07407. The name of the current registered agent at that address is Anthony D. Andora, Esq. ARTICLE III BOARD OF DIRECTORS Number of Directors; Classification. The number of directors of the Corporation shall be not less than 5 nor more than 15 persons. The exact number of directors within such minimum and maximum limitations shall be fixed from time to time by the Board of Directors pursuant to a resolution adopted by a majority of the entire Board of Directors. Directors shall be classified with respect to the time for which they hold office into three classes as nearly equal in number as possible. At the annual meeting of shareholders held in 1985, one class will be elected for a term of one year, another class will be elected for a term of two years, and another class will be elected for a term of three years, each class to hold office until its successors are elected and qualified. At each annual meeting thereafter the successors of the class of directors whose term expires in that year shall be elected to hold office for a term of three years and thereafter until their successors are elected and qualified. Newly Created Directorships and Vacancies. Newly created directorships resulting from any increase in the number of directors may be filled by the Board of Directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, 1 retirement, removal or other cause may be filled by the affirmative vote of a majority of the remaining directors even though less than a quorum of the Board, or by a sole remaining director. Any director elected by the Board in accordance with the preceding sentence shall hold office until the next annual meeting of shareholders and thereafter until his successor shall have been elected and qualified. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. The directors constituting the initial Board of Directors shall be as follows: Name of Director Address ---------------- ------- ANTHONY S. ABBATE Interchange State Bank Park 80 West/Plaza Two Saddle Brook, NJ 07662 ANTHONY D. ANDORA, ESQ. Andora, Palmisano, DeCotiis & Harris 311 Molnar Drive, P.O. Box 431 Elmwood Park, NJ 07407 JEREMIAH F. O'CONNOR c/o Bell & Howell 299 Market Street Saddle Brook, NJ 07662 ALFRED J. CINELLI, D.D.S. 214 Market Street Elmwood Park, NJ 07407 PETER N. CIOLINO 53 Memorial Place Elmwood Park, NJ 07407 ANGELO M. D'ALESSANDRO A.M. D'Alessandro & Co., Inc. 22-08 Route 208 Fair Lawn, NJ 07410 JOHN J. ECCLESTON John J. Eccleston & Company 15 Essex Road, 5th Floor Paramus, NJ 07652 DAVID R. FICCA Kidde, Inc. Park 80 West/Plaza Two Saddle Brook, NJ 07662 JOSEPH S. GRADZKI 308 Wilson Street Saddle Brook, NJ 07662 ROGER L. HELIAS Roger L. Helias Agency 275 Market Street Saddle Brook, NJ 07662 PAUL KLEINKOPF 279 Collignan Way River Vale, NJ 07675 2 JAMES L. LEONE 285 Pascack Road Westwood, NJ 07675 BENJAMIN ROSENZWEIG c/o Azco Steel Company 100 Midland Avenue Saddle Brook, NJ 07662 ARTICLE IV CORPORATE PURPOSE The purpose for which the Corporation is organized is to engage in any activities for which corporations may be organized under the New Jersey Business Corporation Act, subject to any restrictions which may be imposed from time to time by the laws of the United States or the State of New Jersey with regard to the activities of a bank holding company. ARTICLE V CAPITAL STOCK The Corporation is authorized to issue 2,500,000 shares of common stock, all of which are without nominal or par value and 1,000,000 shares of preferred stock in such series and with such rights, preferences and terms, including voting rights, as the Board of Directors may determine. ARTICLE VI INDEMNIFICATION The Corporation shall indemnify its officers, directors, employees, and agents and former officers, directors, employees, and agents, and any other persons serving at the request of the Corporation as an officer, director, employee or agent of another corporation, association, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees, judgments, fines, and amounts paid in settlement) incurred in connection with any pending or threatened action, suit, or proceeding , whether civil, criminal, administrative or investigative, with respect to which such officer, director, employee, agent or other person is a party, or is threatened to be made a party, to the full extent permitted by the New Jersey Business Corporation Act. The indemnification provided herein shall not be deemed exclusive of any other right to which any person seeking indemnification may be entitled under any by-law, agreement, or vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity, and shall inure to the benefit of the heirs, executors, and the administrators of any such person. The Corporation shall have the power to purchase and maintain insurance on behalf of any persons enumerated above against any liability asserted against him and incurred by him in any such capacity, arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article. 3 ARTICLE VII SHAREHOLDER ACTION: SPECIAL MEETINGS Any action required or permitted to be taken by the shareholders of the Corporation shall be effected at a duly called annual or special meeting of shareholders of the Corporation and may not be effected by any consent in writing by such shareholders unless all the shareholders entitled to vote thereon consent thereto in writing. Special meetings of shareholders of the Corporation may be called only by the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors, or by the Chairman of the Board, the President, or the Executive Committee of the Board of Directors. ARTICLE IX NAME AND ADDRESS OF INCORPORATOR The name and address of the incorporator is: Anthony S. Abbate, Interchange State Bank, Park 80 West/Plaza Two, Saddle Brook, NJ 07662. IN WITNESS WHEREOF, I, the incorporator of the above named Corporation, have hereunto signed this certificate of incorporation on the 28th day of September, 1984. /s/ Anthony S. Abbate -------------------------------- ANTHONY S. ABBATE 4 CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF INTERCHANGE FINANCIAL SERVICES CORPORATION TO: SECRETARY OF STATE STATE OF NEW JERSEY Pursuant to the provisions of Section 14A:9-2(4) and Section 14A:9-4 (3), corporations, general, of the New Jersey Statutes, the undersigned executes the following Certification of Amendment to its Certificate of Incorporation: 1. The following amendment to the restated Certificate of Incorporation was approved by the Directors and thereafter duly adopted by the shareholders of the corporation on the 28th of May, 1987. Resolved, that the amended Certificate of Incorporation of Interchange Financial Services Corporation be and the same is hereby amended to add the following Article X: ARTICLE X LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS Except to the extent prohibited by law, a director or officer of the Corporation shall not be personally liable to the Corporation or its shareholders for damages for breach of any duty owed to the Corporation or its shareholders, provided that such provision shall not relieve a director or officer from liability for any breach of duty based upon an act or omission (i) in breach of such person's duty of loyalty to the corporation or its shareholders, (ii) not in good faith or involving a knowing violation of law, or (iii) resulting in receipt by such person of an improper personal benefit. If the New Jersey Business Corporation Act is amended after approval by the shareholders of this provision to authorize corporate action further elimating or limiting the personal liability of directors or officers, then the liability of a director and/or officer of the Corporation shall be eliminated or limited to the fullest extent permitted by the New Jersey Business Corporation Act as so amended. Any repeal or modification of the foregoing paragraph by the shareholders of the Corporation or otherwise shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such repeal or modification. 2. The total number of shares entitled to vote thereon was 1,628,536. 3. The number of shares voting for and against such amendment is as follows: NUMBER OF SHARES VOTING NUMBERS OF SHARES VOTING FOR AMENDMENT AGAINST AMENDMENT 1,406,514 13,134 4. The effective date of this Amendment to the Certificate of Incorporation shall be immediately as of filing. Dated: This 12th day of June, 1987. Attest: Interchange Financial Services Corporation /s/ Roger L. Helias By: /s/ Anthony S. Abbate - -------------------------------- -------------------------------------- ROGER L. HELIAS, Secretary ANTHONY S. ABBATE, President and Chief Executive Officer CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF INTERCHANGE FINANCIAL SERVICES CORPORATION TO: SECRETARY OF STATE STATE OF NEW JERSEY Pursuant to the provisions of Section 14A:9-2(4) and Section 14A:9-4 (3), corporations, general, of the New Jersey Statutes, the undersigned executes the following Certification of Amendment to its Certificate of Incorporation: 1. The restated Certificate of Incorporation provides in Article V that the corporation is authorized to issue 2,500,000 shares of common stock, all of which are without nominal or par value, as the Board of Directors may determine. 2. The following amendment to the restated Certificate of Incorporation was approved by the Directors and thereafter duly adopted by the shareholders of the corporation on the 28th of May, 1987. Resolved, that Article V of the Restated Certificate of Incorporation, be and the same is hereby amended and should read as follows: ARTICLE V CAPITAL STOCK The Corporation is authorized to issue 2,500,000 shares of common stock, all of which are without nominal or par value, as the Board of Directors may determine. The Corporation is also authorized to issue 1,000,000 shares of preferred stock, all of which are without nominal or par value, as the Board of Directors may determine. The Board of Directors may, at any time or from time to time, (a) divide any or all of the preferred shares into series; (b) determine for any series established by the board its designation, number of shares, and relative rights, preferences, and limitations; (c) increase the number of shares of any series established by the board, as long as the number, together with the number of shares of all series of preferred shares, does not exceed the number of those shares authorized pursuant to this certificate of Incorporation; (d) decrease the number of shares of any series established by the board to a number not less than the number of shares of that series then outstanding; (e) change the designation, number of shares, relative rights, preferences, or limitations of the shares of any services established by the board, no shares of which have been Issued; and (f) cause to be executed and filed without further approval of the shareholders of this corporation, any amendment or amendments to this certificate of incorporation as may be required to accomplish any of these amendments. In particular, but without limiting the generality of the above authority, the board of directors shall have authority to determine the following concerning any series of preferred stock established by the board: 1. The dividend rate or rates on shares of the series, any restrictions, limitations, or conditions on the payment of the dividends, whether dividends shall be cumulative and, if so, the date or dates from which dividends shall cumulate, and the dates on which dividends, if declared, shall be payable. 2. Whether the shares of the series shall be redeemable and, if so, the time or times, the price or prices, the required notice or notices, and the other terms and conditions on which the shares may be redeemed. 3. The rights of the holders of shares of the series in the event of liquidation, dissolution, or winding up of the corporation. 4. Whether the shares of the series shall be convertible into shares of any class, classes, or series, and if convertible, the price, prices, rate, or rates of conversion, any method of adjusting these prices or rates, and any other terms and conditions on which the shares shall be convertible. 5. The extent of any voting powers of the shares of the series. 3. The total number of shares entitled to vote thereon was 1,628,536. 4. The number of shares voting for and against such amendments is as follows: THE NUMBER OF SHARES THE NUMBER OF SHARES VOTING FOR AMENDMENT VOTING FOR AMENDMENT 1,355,950 35,676 5. The effective date of this amendment to the Restated Certificate of Incorporation shall be immediately as of filing. Dated: This 12th day of June, 1987. Attest: Interchange Financial Services Corporation /s/ Roger L. Helias By: /s/ Anthony S. Abbate - -------------------------------- -------------------------------------- ROGER L. HELIAS, Secretary ANTHONY S. ABBATE, President and Chief Executive Officer CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF INTERCHANGE FINANCIAL SERVICES CORPORATION TO: THE SECRETARY OF STATE STATE OF NEW JERSEY Pursuant to the provisions of Section 14A:9-(4) and Section 14A:9-4(3), corporations, general, of the New Jersey Statutes, the undersigned executes the following Certification of Amendment to its Certificate of Incorporation: 1. The Certification of Incorporation provides in Article V that the corporation is authorized to issue 2,500,000 shares of common stock, all of which are without nominal or par value, as the Board of Directors may determine. 2. The following amendment to the Certificate of Incorporation was approved by the Directors and thereafter duly adopted by the shareholders of the corporation on the 28th day of May, 1992. Resolved, that Article V of the Amended Certificate of Incorporation, be and the same is hereby amended and should read as follows: ARTICLE V CAPITAL STOCK The Corporation is authorized to issue 5,000,000 shares of common stock, all of which are without nominal or par value, as the Board of Directors may determine. The Corporation is also authorized to issue 1,000,000 shares of preferred stock, all of which are without nominal or par value, as the Board of Directors may determine. The Board of Directors may, at any time or from time to time, (a) divide any or all of the preferred shares into series; (b) determine for any series established by the board its designation, number of shares, and relative rights, preferences, and limitations; (c) increase the number of shares of any series established by the board, as long as the number, together with the number of shares of all series of preferred shares, does not exceed the number of those shares authorized pursuant to this certificate of incorporation; (d) decrease the number of shares of any series established by the board to a number not less than the number of shares of that series then outstanding ; (e) change the designation, executed and filed without further approval of the shareholders of this corporation, any amendment or amendments to this certificate of incorporation as may be required to accomplish any of these amendments. In particular, but without limiting the generality of the above authority, the board of directors shall have authority to determine the following concerning any series of preferred stock established by the board: 1. The dividend rate or rates on shares of the series, any restrictions, limitations, or conditions on the payment of the dividends, whether dividends shall be cumulative and, if so, the date or dates from which dividends shall cumulate, and the dates on which dividends, if declared, shall be payable. 2. Whether the shares of the series shall be redeemable and, if so, the time or times, the price or prices, the required notice or notices, and other terms and conditions on which the shares may be redeemed. 3. The rights of the holders of shares of the series in the event of liquidation, dissolution, or winding up of the corporation. 4. Whether the shares of the series shall be convertible into shares of any class, classes, or series, and if convertible, the price, prices, rate or rates of conversion, any method of adjusting these prices or rates, and any other terms and conditions on which the shares shall be convertible. 5. The extent of any voting powers of the shares of the series. 3. The total number of shares entitled to vote thereon was 1,727,100. 4. The number of shares voting for and against such amendments is as follows: THE NUMBER OF SHARES THE NUMBER OF SHARES VOTING FOR AMENDMENT VOTING AGAINST AMENDMENT 1,271,329 219,106 5. The effective date of this amendment to the Amended Certificate of Incorporation shall be immediately as of filing. Dated: This 13th day of July, 1992. Attest: Interchange Financial Services Corporation /s/ Susan Iacobucci By: /s/ Robert N. Harris - -------------------------------- -------------------------------------- SUSAN IACOBUCCI, Secretary ROBERT N. HARRIS, Executive Vice President CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF INTERCHANGE FINANCIAL SERVICES CORPORATION TO: THE SECRETARY OF STATE STATE OF NEW JERSEY Pursuant to the provisions of Section 14A:9-2(4) and Section 14A:9-4(3), Corporations, General, of the New Jersey Statutes, the undersigned executes the following Certification of Amendment to its Certificate of Incorporation: 1. The Certificate of Incorporation provides in Article V that the corporation is authorized to issue 5,000,000 shares of common stock, all of which are without nominal or par value, as the Board of Directors may determine. 2. The following amendment to the Certificate of Incorporation was approved by the Directors and thereafter duly adopted by the shareholders of the corporation on the 22nd day of May, 1997. Resolved, that Article V of the Amended Certificate of Incorporation, be and the same is hereby amended and should read as follows: ARTICLE V CAPITAL STOCK "The Company is authorized to issue 10,000,000 shares of common stock, all of which are without nominal or par value, as the Board of Directors may determine. The Company is also authorized to issue 1,000,000 shares of preferred stock, all of which are without nominal or par value, as the Board of Directors may determine. The Board of Directors may, at any time or from time to time, (a) divide any or all of the preferred shares into series; (b) determine for any series established by the Board, its designation, number of shares of relative rights, preferences, and limitations; (c) increase the number of shares of any services established by the Board, as long as the number, together with the number of shares of all series of preferred shares, does not exceed the number of those shares authorized pursuant to this certificate of incorporation: (d) decrease the number of shares of any series established by the Board to a number not less than the number of shares of that series then outstanding; (e) change the designation, number of shares, relative rights, preferences, or limitations of the shares of any series established by the Board, no shares of which have been issued; and (f) cause be executed and filed without further approval of the shareholder of the Company, any amendments to this certificate of incorporation as may be required to accomplish any of these amendments. In particular, but without limiting the generality of the above authority, the Board of Directors shall have the authority to determine the following concerning any series of preferred stock established by the Board: (1) The dividend rate or rates on shares of the series, any restrictions, limitations or conditions on the payment of the dividends, whether dividends shall be cumulative and, if so, the date or dates from which dividends shall cumulate, and the dates on which dividends, if declared, shall be payable. (2) Whether the shares of the series shall be redeemable and, if so, the time or times, the price or prices, the required notice or notices, and the other terms and conditions on which the shares may be redeemed. (3) The rights of the holders of shares of the series in the event of liquidation, dissolution, or winding up of the Company. (4) Whether the shares of the series shall be convertible into shares of any class, classes, or series, and if convertible, the price, prices, rate or rate of conversion, any method of adjusting these prices or rates, and any other terms and conditions on which the shares shall be convertible. (5) The extent of any voting powers of the shares of the series. 3. The total number of shares entitled to vote thereon was 4,277,840. 4. The number of shares voting for and against such amendments is as follows: THE NUMBER OF SHARES THE NUMBER OF SHARES VOTING FOR AMENDMENT VOTING AGAINST AMENDMENT 3,256,390 42,647 5. The effective date of this amendment is to the Amended Certificate of Incorporation shall be immediately as of filing. DATED: This 20th day of June, 1997. Attest: Interchange Financial Services Corporation /S/ Benjamin Rosenzweig By: /s/ Anthony S. Abbate - -------------------------------- -------------------------------------- BENJAMIN ROSENZWEIG ANTHONY S. ABBATE, Secretary to the Board President INTERCHANGE FINANCIAL SERVICES CORPORATION CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION Interchange Financial Services Corporation, organized under the laws of the State of New Jersey, to amend its Certificate of Incorporation to increase the number of authorized shares of Common Stock in connection with a division of its outstanding shares of Common Stock in accordance with N.J.S.A. 14A:7-15.1(3), hereby certifies: FIRST: The name of the Corporation is Interchange Financial Services Corporation. SECOND: The Board of Directors, at a meeting duly called and held on February 26, 1998, authorized and approved a 3 for 2 division of all of its issued and outstanding shares of Common Stock, no par value, effective April 17, 1998 and distributable to shareholders of record as of the close of business on March 20, 1998. As of the close of business on March 20, 1998 there were 4,329,742 shares of Common Stock, no par value issued and outstanding which are divided into 6,494,435 shares of Common Stock, no par value. THIRD: To increase the number of authorized shares of the Corporation from 10,000,000 to 15,000,000, Article V of the Corporation's Certificate of Incorporation is amended to delete the first paragraph thereof and replace it with a paragraph reading as follows: "ARTICLE V CAPITAL STOCK The Corporation is authorized to issue 15,000,000 shares of common stock, all of which are without nominal or par value, as the Board of Directors may determine. The Corporation is also authorized to issue 1,000,000 shares of preferred stock, all of which are without nominal or par value, as the Board of Directors may determine." Except as set forth in the foregoing amendment, all provisions of the Corporation's Certificate of Incorporation shall continue in full force and effect. FOURTH: The amendment described in Article THIRD will not adversely affect the rights or preferences of the holders of outstanding shares of any class or series and will not result in the percentage of authorized shares that remains unissued after the share division described in Article SECOND exceeding the percentage of authorized shares that was unissued before the division of shares. FIFTH: The within amendment to the Certificate of Incorporation was adopted by the Board of Directors of the Corporation at a meeting duly called and held on February 26, 1998 in accordance with N.J.S.A. 14A:7-15.1(2). SIXTH: The foregoing amendment to the Corporation's Certificate of Incorporation shall become effective on the later to occur of April 17, 1998 or the date on which this Certificate of Amendment is filed with the Secretary of State of the State of New Jersey. IN WITNESS WHEREOF, the Corporation has caused its duly authorized officer to execute this certificate the 14th day of April, 1998. ATTEST: INTERCHANGE FINANCIAL SERVICES CORPORATION BY: /s/ Benjamin Rosenzweig BY: /s/ Anthony J. Labozzetta - -------------------------------- -------------------------------------- Benjamin Rosenzweig, Anthony J. Labozzetta, Secretary Executive Vice President & CFO 2 EX-5 4 OPINION OF NORRIS, MCLAUGHLIN & MARCUS, P.A. April 27, l998 Interchange Financial Services Corporation Park 80 West, Plaza Two Saddle Brook, NJ 07662 Attn: Anthony S. Abbate President and Chief Executive Officer Dear Mr. Abbate: We have represented Interchange Financial Services Corporation ("IFSC"), a New Jersey corporation which is a registered bank holding company, and Interchange Bank (the "Bank"), a New Jersey chartered commercial bank which is a subsidiary of IFSC, in connection with the proposed merger of The Jersey Bank for Savings ("Jersey"), a New Jersey chartered capital stock savings bank, into the Bank. The merger shall be effected pursuant to the provisions of an Agreement and Plan of Merger dated January 27, 1998 by and among the IFSC, the Bank and Jersey (the "Merger Agreement"). We have examined the Registration Statement on Form S-4 (the "Registration Statement") to be filed by IFSC with the Securities and Exchange Commission in connection with the registration under the Securities Act of 1933, as amended (the "Act"), of shares of common stock of IFSC, no par value (the "Shares") to be issued pursuant to the Merger Agreement. We have also examined originals, or copies certified or otherwise identified to our satisfaction, of the Merger Agreement, the Certificate of Incorporation and By-Laws of IFSC, as currently in effect, and relevant resolutions of the Board of Directors of IFSC; and we have examined such other documents as we deemed necessary in order to express the opinion hereinafter set forth. In our examination of such documents and records, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and conformity with the originals of all documents submitted to us as copies. Based on the foregoing, it is our opinion that when, as and if the Registration Statement shall have become effective pursuant to the provisions of the Act, and the Shares shall have been duly issued and delivered in the manner contemplated by the Merger Agreement and the Registration Statement, including the Prospectus relating to the Shares included in the Registration Statement (the "Prospectus"), the Shares will be legally issued, fully paid and non-assessable. The foregoing opinion is limited to the federal laws of the United States and the laws of the State of New Jersey, and we are expressing no opinion as to the effect of the laws of any other jurisdiction. We consent to use of this opinion as an Exhibit to the Registration Statement and to the reference to this firm under the heading "Legal Opinion" in the Prospectus. Very truly yours, /s/ Norris, Mclaughlin & Marcus --------------------------------------- NORRIS, McLAUGHLIN & MARCUS EX-8 5 OPINION OF NORRIS, MCLAUGHLIN & MARCUS, P.A. April____ , l998 The Jersey Bank For Savings 2-8 South Kinderkamack Road at Grand Avenue Montvale, New Jersey 07645-0333 Attn: Clyde Britt, President and CEO Interchange Financial Services Corporation Park 80 West, Plaza Two Saddle Brook, New Jersey 07662 Attn: Anthony S. Abbate, President and CEO Dear Messers Britt and Abbate: We have represented Interchange Financial Services Corporation ("Interchange"), a New Jersey corporation, and Interchange Bank (the "Interchange Bank"), a New Jersey chartered commercial bank which is a subsidiary of Interchange, in connection with the proposed merger of The Jersey Bank for Savings ("Jersey"), a New Jersey chartered capital stock savings bank, into Interchange Bank. The merger shall be effected pursuant to the provisions of an Agreement and Plan of Merger dated January 27, 1998 by and among the Interchange, Interchange Bank and Jersey (the "Merger Agreement"). This opinion is delivered pursuant to Section 6.l(d) of the Merger Agreement. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Merger Agreement. Pursuant to the Merger Agreement, at the Effective Time the Merger shall be effected by merging Jersey into Interchange Bank to New Jersey state law, with Interchange Bank being the surviving legal entity. As a result of the Merger, at the Effective Time, each outstanding share of Jersey Common Stock (other than dissenting shares) shall be converted into the right to receive 1.5 shares of Interchange Common Stock (the "Exchange Ratio"), subject to adjustment as set forth in the Merger Agreement. No fractional shares of Interchange Common Stock shall be issued, and in lieu thereof, any holder of Jersey Common Stock otherwise entitled to receive a fractional interest will receive an amount in cash determined by multiplying such fractional interest by the Average Closing Price of Interchange Common Stock. We have assumed that no stock of Interchange Bank will be issued in the Merger. In rendering our opinion, Interchange, Interchange Bank and Jersey have delivered to us certificates in which they have made certain representations. These representations are relevant to our opinion and we have relied on such representations for purposes of our opinion. In rendering our opinion, we have considered the applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations promulgated thereunder, applicable judicial authorities, interpretive rulings of the Internal Revenue Service and such other authorities in effect on the date of this letter that we consider relevant. This opinion is limited to the federal income tax consequences of the Merger as described below and does not address the state, local or foreign income tax consequences, if any, of the Merger. Based on the foregoing, we are of the opinion that: 1. The Merger will, under current law, constitute a tax-free reorganization within the meaning of Code Sections 368(a)(1)(A) and 368(a)(2)(D). Interchange, Interchange Bank and Jersey will each be a "party to a reorganization" within the meaning of Code Section 368(b). For purposes of this opinion we are assuming that the fair market value of the Interchange Common Stock received by the shareholders of the Jersey Common Stock is equal to or greater than the fair market value of the non-Interchange Common Stock consideration received by the Jersey shareholders in the Merger. 2. No gain or loss will be recognized to the shareholders of Jersey Common Stock as a result of the exchange of their shares of Jersey Common Stock for shares of Interchange Common Stock pursuant to the Merger. Code Section 354(a)(1). However, gain or loss will be recognized on the receipt of cash, if any, in lieu of fractional shares and/or in payment of dissenter's rights. 3. The tax basis of the Interchange Common Stock received in the Merger by each shareholder of Jersey Common Stock will equal the tax basis of such shareholder's shares of Jersey Common Stock exchanged in the Merger, reduced by the amount of cash received, and increased by the amount of gain recognized, if any, on the exchange. Code Section 358. 4. The holding period for the shares of Interchange Common Stock received by each shareholder of Jersey Common Stock will include the period during which such shareholder held the shares of Jersey Common Stock exchanged in the Merger, provided such shares of Jersey Common Stock were held as capital assets. Code Section 1223(1). 5. Interchange will not recognize gain or loss as a result of the Merger. Code Sections 361(a) and 1032(a). 6. Interchange Bank will not recognize gain or loss as a result of the Merger. Code Section 361(a). 7. Jersey will not recognize gain or loss as a result of the Merger. Code Section 361(a). Except as set forth above, we express no opinion as to the tax consequences, whether federal, state, local or foreign, of the Merger, including but not limited to the tax consequences to or of (i) the conversion (prior to the Merger) of the Jersey Preferred Stock into Jersey Common Stock; (ii) the holders of the Excluded Shares; (iii) the holders of the Jersey Preferred Stock who do not enter into a Conversion Agreement; (iv) the conversion of a Jersey Option into Interchange Common Stock; (v) Interchange and Jersey under the Stock Option Agreement; (vi) payments to certain directors and officers of Jersey in cancellation of their employment agreements with Jersey and release of severance and similar payments due to them by Jersey; and (vii) shareholders of Jersey Common Stock who are insurance companies, securities dealers, financial institutions, foreign persons and persons who acquired shares of Jersey Common Stock as compensation. This opinion is being furnished to you and is intended solely for you use in connection with the transactions contemplated in this letter and may not be otherwise reproduced, used, circulated, filed, quoted, relied upon or otherwise referred to, in whole or in part, by you for any other purpose or by any other person or used in connection with any other transaction, without the express prior written consent of this firm. We hereby consent to our being designated as an expert in the Registration Statement with respect to the Federal income tax consequences of the Merger and to the inclusion of this letter as an exhibit to the Registration Statement. Very truly yours, NORRIS, McLAUGHLIN & MARCUS a Professional Corporation EX-10 6 FORM OF CONVERSION AGREEMENT Conversion Agreement April 10, 1998 The Jersey Bank For Savings 2-8 South Kinderkamack Road at Grand Avenue Montvale, New Jersey 07645-0333 Gentlemen Reference is made to (i) the Agreement and Plan of Merger, dated as of January 27, 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 record holder 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 the each share of the Jersey Preferred Stock into .8695 shares of Jersey Common Stock. I understand that Jersey requires that I deliver this Agreement to Jersey for transmission 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 delivery this Agreement to Jersey for delivery 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 delivery to me a copy of the Proxy Statement/Prospectus when such Proxy Statement/Prospectus is delivered to the Jersey Common Stockholders and 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 waiver 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 I understand that, at the Effective Time, each share of Jersey Common Stock received from the conversion of my Jersey Preferred Shares shall be converted into one (1) share of Interchange Common Stock. ___________________________________ EX-10 7 FORM OF TRUST AGREEMENT TRUST UNDER AGREEMENT AND PLAN OF MERGER This Agreement made this __ day of _____, 1998 by and between Interchange Financial Services Corporation (Company) and ______________________ (Trustee); WHEREAS, Company has agreed to pay Clyde Britt and William Ledgerwood severance payments under the Agreement and Plan of Merger dated _____, 1998 (the "Plan"); WHEREAS, Company has incurred or expects to incur liability with respect to the Plan; WHEREAS, Company wishes to establish a trust (hereinafter call "Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of Company's creditors in the event of Company's Insolvency, as herein defined, until paid to Plan participants and their beneficiaries in such manner and at such times as specified in the Plan; WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974; and WHEREAS, it is the intention of Company to make contributions to the Trust to provide itself with a source of funds to assist it in the meeting of its liabilities under the Plan. NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: Section 1. Establishment Of Trust (a) Company hereby deposits with Trustee in trust five hundred ninety thousand dollars ($588,200), which shall become the principal of the Trust to be held, administered and disposed of by Trustee as provided in this Trust Agreement. (b) The Trust shall become irrevocable upon approval by the Board of Directors. (c) The Trust is intended to be a grantor trust, of which Company is the grantor, within the meaning subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (d) The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of Company and shall be used exclusively for the uses and purposes of Plan participants and general creditors as herein set forth. Plan participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plan and this Trust Agreement shall be mere unsecured contractual rights of Plan participants and their beneficiaries against Company. Any assets held by the Trust will be subject to the claims of Company's general creditors under federal and state law in the event of Insolvency, as defined in Section 3(a) herein. (e) Company, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in trust with Trustee to augment the principal to be held, administered and disposed of by Trustee as provided in this Trust Agreement. Neither Trustee nor any Plan participant or beneficiary shall have any right to compel such additional deposits. Section 2. Payments to Plan Participants and Their Beneficiaries. (a) Company shall deliver to Trustee a schedule attached hereto as Schedule A (the "Payment Schedule"), that indicates the amounts payable (subject to Section 2(c)) in respect of each Plan participant (and his or her beneficiaries), that provides a formula or other instructions acceptable to Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Plan), and the time of commencement for payment of such amounts. Except as otherwise provided herein, Trustee shall make payments to the Plan participants and their beneficiaries in accordance with such Payment Schedule. The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plan and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by Company. (b) The entitlement of a Plan participant or his or her beneficiaries to benefits under the Plan shall be determined by Company or such party as it shall designate under the Plan and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plan. (c) Company, in its sole discretion, may make payment of benefits directly to Plan participants or their beneficiaries as they become due under the terms of the Plan. Company shall notify Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to participants or their beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Plan the Company shall not make or be required to make the balance of each such payment as it falls due. If the principal of the Trust and any earnings thereon are not sufficient to make all the payments due on Schedule A, the Company shall not be obligated to fund any such shortfall. In the case of a shortfall, the amount payable to any participant shall be reduced for such short fall proportionately by the same percentage they share the Trust expenses. Trustee shall notify Company where principal and earnings are not sufficient. Section 3. Trustee Responsibility Regarding Payments to Trust Beneficiary When Company Is Insolvent. (a) Trustee shall cease payment of benefits to Plan participants and their beneficiaries if the Company is Insolvent. Company shall be considered "insolvent" for purposes of this Trust Agreement if (i) Company is unable to pay its debts as they become due, or (ii) Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code or (iii) Company is determined to be insolvent by the Board of Governors of the Federal Reserve System. (b) At all times during the continuance of this Trust, as provided in Section l(d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of Company under federal and state law as set forth below. (1) The Board of Directors and the Chief Executive Officer of Company shall have the duty to inform Trustee in writing of Company's Insolvency. If a person claiming to be a creditor of Company alleges in writing to Trustee that Company has become Insolvent, Trustee shall determine whether Company is Insolvent and, pending such determination, Trustee shall discontinue payment of benefits to Plan participants or their beneficiaries. (2) Unless Trustee has actual knowledge of Company's Insolvency, or has received notice from Company or a person claiming to be a creditor alleging that Company is Insolvent, Trustee shall have no duty to inquire whether Company is Insolvent. Trustee may in all events rely on such evidence concerning Company's solvency as may be furnished to Trustee and that provides Trustee with a reasonable basis for making a determination concerning Company's solvency. (3) If at any time Trustee has determined that Company is Insolvent, Trustee shall discontinue payments to Plan participants or their beneficiaries and shall hold the assets of the Trust for the benefit of Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Plan participants or their beneficiaries to pursue their rights as general creditors of Company with respect to benefits due under the Plan or otherwise. (4) Trustee shall resume the payment of benefits to Plan participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after Trustee has determined that Company is not Insolvent (or is no longer Insolvent). (c) Provided that there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Plan participants or their beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of any payments made to Plan participants or their beneficiaries by Company in lieu of the payments provided for hereunder during any such period of discontinuance. Section 4. Payments to Company. Except as provided in Section 3 hereof, after the Trust has become irrevocable, Company shall have no right or power to direct Trustee to return to Company or to divert to others any of the Trust assets before all payment of benefits have been made to Plan participants and their beneficiaries pursuant to the terms of the Plan. Section 5. Investment Authority. The Trustee shall not be required to invest the Trust assets. If the Trustee is to invest the assets it shall invest the trust assets in bonds or other securities issued by the federal government or its agencies or money market investments therein or interest bearing accounts in depository institutions having assets of at least one billion dollars. All rights associated with assets of the Trust shall be exercised by Trustee or the person designated by Trustee, and shall in no event be exercisable by or rest with Plan participants. Section 6. Disposition of Income. During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. Section 7. Responsibility of Trustee. (a) Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by Company which is contemplated by, and in conformity with, the terms of the Plan or this Trust and is given in writing by Company. In the event of a dispute between Company and a party, Trustee may apply to a court of competent jurisdiction to resolve the dispute. (b) Trustee may consult with legal counsel (who may also be counsel for Company generally) with respect to any of its duties or obligations hereunder. (c) Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder. (d) Trustee shall have, without exclusion, all powers conferred on Trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Trust, Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy. (e) Notwithstanding any powers granted to Trustee pursuant to this Trust Agreement or to applicable law, Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701.2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. Section 8. Compensation and Expenses of Trustee. All fees and expenses shall be paid from the Trust corpus. Section 9. Resignation and Removal of Trustee. (a) Trustee may resign at any time by written notice to Company, which shall be effective ninety (90) days after receipt of such notice unless Company and Trustee agree otherwise. (b) Upon resignation or removal of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within ninety (90) days after receipt of notice of resignation, removal or transfer, unless Company extends the time limit. (c) If Trustee resigns a successor shall be appointed, in accordance with Section 10 hereof, by the effective date of resignation under paragraph (a) of this section. If no such appointment has been made, Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. Section 10. Appointment of Successor. (a) If Trustee resigns in accordance with Section 9(a) hereof, Company may appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under state law, as a successor to replace Trustee upon resignation or removal. The appointment shall, be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by Company or the successor Trustee to evidence the transfer. Section 11. Amendment or Termination. (a) This Trust Agreement may be amended by a written instrument executed by Trustee and Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Plan or shall make the Trust revocable after it has become irrevocable in accordance with Section 1(b) hereof. (b) The Trust shall not terminate until the date on which Plan participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan. Upon termination, of the Trust any assets remaining in the Trust shall be returned to Company. (c) Upon written approval of participants or beneficiaries entitled to payment of benefits pursuant to the terms of the Plan, Company may terminate this Trust prior to the time all benefit payments under the Plan have been made. All assets in the Trust at termination shall be returned to Company. Section 12. Miscellaneous. (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) Benefits payable to Plan participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment garnishment, levy, execution or other legal or equitable process. (c) This Trust Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey without regard to its conflict of law principals. Section 13. Effective Date. The effective date of this Trust Agreement shall be ___________, 1998. ATTEST: INTERCHANGE BANK _______________________________________ By: Anthony S. Abate, President and CEO ATTEST: [BANK] _______________________________________ SCHEDULE A PAYMENT SCHEDULE Participant Total Payments to be Made ----------- ------------------------- Clyde Britt $361,200 less 61% of annual Trustee fees subject to Section 2(c). William Ledgerwood $227,000 less 39% of annual Trustee fees subject to Section 2(c). Total respective payment to be paid to each participant in 36 equal monthly installments beginning on July 1, 1998. EX-11 8 COMPUTATION RE EARNINGS PER SHARE
----------------------------------------------------------------------------------------------------- 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 6,393 $ 0.32 $1,921 6,476 $ 0.30 $1,804 6,338 $ 0.28 $1,777 6,339 $ 0.28 ====== ====== ====== ====== Effect of Dilutive Shares Options issued to management -- 74 -- 81 -- 86 -- 78 ------ ----- ------ ----- ------ ----- ------ ----- Diluted Earnings per Common Share $2,054 6,467 $ 0.32 $1,921 6,557 $ 0.29 $1,804 6,423 $ 0.28 $1,777 6,417 $ 0.28 ====== ===== ====== ====== ===== ====== ====== ===== ====== ====== ===== ====== ----------------------------------------------------------------------------------------------------- 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 6,377 $ 0.25 $1,478 6,389 $ 0.24 $1,288 6,389 $ 0.20 $2,041 6,389 $ 0.32 ====== ====== ====== ====== Effect of Dilutive Shares Options issued to management -- 48 -- 42 -- 44 -- 59 ------ ----- ------ ----- ------ ----- ------ ----- Diluted Earnings per Common Share $1,612 6,425 $ 0.25 $1,478 6,431 $ 0.23 $1,288 6,432 $ 0.20 $2,041 6,447 $ 0.32 ====== ===== ====== ====== ===== ====== ====== ===== ====== ====== ===== ======
EX-12 9 COMPUTATION RE RATIO OF EARNINGS Ratio of earnings to fixed charges including interest on deposits - Interchange
----------------------------------------------- December 31, ----------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- Net income before taxes & extraordinary items $11,624 $ 9,875 $ 9,573 $ 8,698 $ 7,929 Interest on borrowings 1,323 558 637 371 10 ------- ------- ------- ------- ------- Income before taxes & extraordinary items and interest on borrowings 12,947 10,433 10,210 9,069 7,939 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Interest on borrowings 1,323 558 637 371 10 ------- ------- ------- ------- ------- Ratio of earnings to fixed charges excluding interest on deposits 9.79x 18.70x 16.03x 24.44x 793.90x ======= ======= ======= ======= =======
Ratio of earnings to fixed charges including interest on deposits - Interchange
----------------------------------------------- December 31, ----------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- Net income before taxes & extraordinary items $11,624 $ 9,875 $ 9,573 $ 8,698 $ 7,929 Interest on borrowings 1,323 558 637 371 10 Interest on deposits 14,210 14,041 14,513 10,635 10,227 ------- ------- ------- ------- ------- Income before taxes & extraordinary items and interest on deposits and borrowings 27,157 24,474 24,723 19,704 18,166 ------- ------- ------- ------- ------- Interest on deposits 1,323 558 637 371 10 Interest on borrowings 14,210 14,041 14,513 10,635 10,227 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Fixed charges 15,533 14,599 15,150 11,006 10,237 ------- ------- ------- ------- ------- Ratio of earnings to fixed charges including interest on deposits 1.75x 1.68x 1.63x 1.79x 1.77x ======= ======= ======= ======= =======
Ratio of earnings to fixed charges excluding interest on deposits - Jersey
----------------------------------------------- December 31, ----------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- Net income before taxes & extraordinary items $ 586 $ 530 $ 621 $ 482 $ 403 Interest on borrowings -- -- -- -- -- ------- ------- ------- ------- ------- Income before taxes & extraordinary items and interest on borrowings 586 530 621 482 403 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Interest on borrowings -- -- -- -- -- ------- ------- ------- ------- ------- Ratio of earnings to fixed charges excluding interest on deposits -- -- -- -- -- ======= ======= ======= ======= =======
Ratio of earnings to fixed charges including interest on deposits - Jersey
----------------------------------------------- December 31, ----------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- Net income before taxes & extraordinary items $ 586 $ 530 $ 621 $ 482 $ 403 Interest on borrowings -- -- -- -- -- Interest on deposits 3,023 2,380 2,055 1,441 1,214 ------- ------- ------- ------- ------- Income before taxes & extraordinary items and interest on deposits and borrowings 3,609 2,910 2,676 1,923 1,617 ------- ------- ------- ------- ------- Interest on deposits -- -- -- -- -- Interest on borrowings 3,023 2,380 2,055 1,441 1,214 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Fixed charges 3,023 2,380 2,055 1,441 1,214 ------- ------- ------- ------- ------- Ratio of earnings to fixed charges including interest on deposits 1.19x 1.22x 1.30x 1.33x 1.33x ======= ======= ======= ======= =======
EX-23 10 CONSENT OF DELOITTE & TOUCHE LLP. INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Amendment No. 1 to Registration Statement No. 333-50065 of Interchange Financial Services Corporation on Form S-4 of our report dated January 21, 1998, appearing in the Annual Report on Form 10-K of Interchange Financial Services Corporation for the year ended December 31, 1997 and to the reference to us under the heading "Experts" in the Proxy Statement-Prospectus, which is part of this Registration Statement. Deloitte & Touche, LLP Parsippany, New Jersey April 27, 1998 EX-23 11 CONSENT OF ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated January 27, 1998, (except with respect to the matter discussed in Note 16, as to which the date is February 26, 1998) regarding the financial statements for The Jersey Bank for Savings as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, and to all references to our Firm included in or made part of Amendment No. 1 to Registration Statement No. 333-50065 on Form S-4 and in this Proxy Statement-Prospectus. ARTHUR ANDERSEN LLP Roseland, New Jersey April 27, 1998 EX-23 12 CONSENT OF CAPITAL CONSULTANTS, INC. Exhibit 23(d) CONSENT OF CAPITAL CONSULTANTS, INC. April 27, 1998 To Whom It May Concern: We hereby consent to the use of our fairness opinion letter attached as Appendix C and to the reference to our firm under the heading "Opinion of Jersey's Financial Advisor" in the Registration Statement filed by Interchange Financial Services Corp. with the Securities and Exchange Commission in connection with the proposed acquisition of Jersey Bank for Savings by Interchange Financial Services Corp. Very truly yours, /s/ Capital Consultants of Princeton, Inc. Capital Consultants EX-99 13 FORM OF PROXY CARD PROXY THE JERSEY BANK FOR SAVINGS 2-8 South Kinderkamack Road, Montvale, New Jersey 07645-0333 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints Richard A. Gilsenan and Clyde C. Britt, or any one of them, as proxies, each with the power to appoint his substitute, and hereby authorizes them to represent and to vote, as designated below, all the shares of common stock of The Jersey Bank for Savings ("Jersey") held of record by the undersigned on April 21, 1998, at the annual meeting of stockholders to be held on May 27, 1998, or any adjournment thereof. 1. TO APPROVE AN AGREEMENT AND PLAN OF MERGER BY AND AMONG JERSEY, INTERCHANGE FINANCIAL SERVICES CORPORATION AND INTERCHANGE BANK (FORMERLY KNOWN AS INTERCHANGE STATE BANK). |_| FOR |_| AGAINST |_| ABSTAIN 2. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting. This proxy when properly executed will be voted in the manner directed herein by the undersigned stockholder. If no direction is made, this proxy will be voted FOR Proposal 1. Please sign exactly as name appears below. When shares are held by joint tenants, both should sign. When signing as an attorney, as executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized person. DATED:________________________,1998 ___________________________________ Signature ___________________________________ Signature if held jointly PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. -----END PRIVACY-ENHANCED MESSAGE-----