SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM____ TO ____
Commission File number 1-10518
INTERCHANGE FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2553159
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Park 80 West/Plaza Two, Saddle Brook, NJ 07663
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 703-2265
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of Each Class which registered
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Common Stock (no par value) American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
Title of Class
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None
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report) and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Park III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of outstanding shares of the Registrant's common stock, no par
value per share, as of March 5, 1999, was as follows:
Class Number of Outstanding Shares
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Common Stock
(No par value) 7,210,237
The aggregate market value of Registrant's voting stock (based upon the closing
trade price on March 5, 1999), held by non-affiliates of the Registrant was
approximately $95,534,657
Documents incorporated by reference:
Portions of Registrant's definitive Proxy Statement for the 1999 Annual Meeting
of Stockholders are incorporated by reference to Part III of this Annual Report
on Form 10-K.
Portions of Registrant's Annual Report to Shareholders for the fiscal year ended
December 31, 1998 are incorporated by reference to Parts II and IV of this
Annual Report on Form 10-K.
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INTERCHANGE FINANCIAL SERVICES CORPORATION
INDEX TO ANNUAL REPORT
ON FORM 10-K
PART 1 PAGE
Item 1. Business............................................................. 1
Item 2. Properties........................................................... 7
Item 3. Legal Proceedings.................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders.................. 8
Executive Officers ........................................................... 9
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters............................................................. 10
Item 6. Selected Consolidated Financial Data............................... 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Resultsof Operations...............................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.. ...... 13
Item 8. Financial Statements and Supplementary Data........................ 13
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................... 13
PART III
Item 10. Directors and Executive Officers of the Registrant................. 13
Item 11. Executive Compensation............................................. 14
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................. 14
Item 13. Certain Relationships and Related Transactions..................... 14
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K......................................... 15
Signatures................................................................... 16
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PART I
Item 1. Business
General
Interchange Financial Services Corporation (the "Company"), a New Jersey
business corporation and registered bank holding company under the Bank Holding
Company Act of 1956, as amended, acquired all of the outstanding stock of
Interchange Bank, (formerly known as Interchange State Bank), a New Jersey
chartered bank (the "Bank" or "Interchange"), in 1986.
The Bank, established in 1969, is a full-service commercial bank
headquartered in Saddle Brook, New Jersey and is a member of the Federal Reserve
System. It offers banking services for individuals and businesses through its
fifteen banking offices and one supermarket mini-branch in Bergen County, New
Jersey. In 1998, the Company acquired The Jersey Bank for Savings ("Jersey
Bank"), which maintained two banking offices, one in Montvale, New Jersey and
another that was opened in the later part of 1996 in River Edge, New Jersey. In
addition, during 1998, the Company opened a full-service branch in Paramus, New
Jersey adjacent to a shopping mall along with a mini-branch within a 70,000
square foot supermarket located in the shopping mall.
In addition to the Bank, the Company has other wholly owned direct
subsidiaries. Clover Leaf Mortgage Company, a New Jersey Corporation established
in 1988 which is not currently engaged in any business activity, and Washington
Interchange Corporation, a New Jersey Corporation which was acquired by the
Company in May 1997 and owns one of the Bank's branch locations which it leases
to the Bank.
Subsidiaries of Interchange Bank include Clover Leaf Investment
Corporation, established in 1988 to engage in the business of an investment
company pursuant to New Jersey law; Clover Leaf Insurance Agency, Inc.,
established in 1990 to engage in the sales of tax-deferred annuities, and Clover
Leaf Management Realty Corporation which was originally established in 1987
under the name Clover Leaf Development Corporation. In 1998, the name and
purpose were changed in order to establish a Real Estate Investment Trust
("REIT") that could manage certain real estate assets of the Company in an
effort to take advantage of certain tax benefits. All the Bank's subsidiaries
are New Jersey corporations and are 100% owned by the Bank, except for the REIT
which is 99% owned by the Bank.
Banking Operations
The Bank offers a wide range of consumer banking services, including:
checking and savings accounts, money-market accounts, certificates of deposit,
individual retirement accounts, residential mortgages, home equity lines of
credit and other second mortgage loans, home improvement loans, automobile
loans, personal loans and overdraft protection. The Bank also offers its own
VISA(TM) credit card and several convenience products including the Interchange
Check Card which lets you access your checking account by using the card when
you make purchases. It can also be used as an
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ATM card to perform all the usual transactions. Interchange Bank-Line(R) allows
customers to perform basic banking transactions over the telephone and also
offers Direct Bill Payment. Direct Bill Payment allows customers to pay bills
over the phone since bill payments are debited directly to the customer's
checking account.The Bank is also in the mutual fund sales market. An Investment
Services Program is offered through an alliance between Interchange Bank and
Independent Bankers Association of America Financial Services Corporation
("IBAA"), under which mutual funds offered by IBAA are made available to the
Bank's customers by Bank employees. Fifteen automated teller machines (MAC(TM),
Plus(TM), HONOR(TM), CIRRUS(TM), VISA(TM), NYCE(TM), and MasterCard(TM)
networks) are located at thirteen of the banking offices, two are located at
supermarkets and one at a mini-market.
The Bank is engaged in the financing of local business and industry,
providing credit facilities and related services for smaller businesses,
typically those with $1 million to $5 million in annual sales. Commercial loan
customers of the Bank are businesses ranging from light manufacturing and local
wholesale and distribution companies to medium-sized service firms and local
retail businesses. Most forms of commercial lending are offered, including
working capital lines of credit, small business administration loans, term loans
for fixed asset acquisitions, commercial mortgages and other forms of
asset-based financing.
The Bank has taken advantage of opportunities to purchase packages of loans
and leases. In 1998, the Bank purchased $4.6 million of residential real estate
loans, and in 1997, the Bank purchased $10.2 million and $9.1 million of auto
leases and residential real estate loans, respectively. These loans and leases
were subjected to the Bank's independent credit analysis prior to purchase and
were, in some cases, purchased with a limited buy-back obligation or other
financial assurance from the sellers. In the Bank's experience, there are
significant opportunities to sell the Bank's other products and services to the
borrowers whose loans are purchased. The Bank believes that purchasing loans and
leases will continue to be a desirable way to increase its portfolios as
opportunities arise.
Deposits of the Bank are insured up to $100,000 per depositor by the Bank
Insurance Fund administered by the Federal Deposit Insurance Corporation
("FDIC").
Personnel
The Company had on average 208 full-time-equivalent employees during 1998.
Its principal executive office is located at Park 80 West/Plaza Two, Saddle
Brook, New Jersey 07663, telephone number (201) 703-2265. As used herein the
term "Company" includes the Bank and the subsidiaries of the Bank, unless the
context otherwise requires.
Market Areas
The Bank's principal market for its deposit gathering activities covers
major portions of Bergen County in the northeastern corner of New Jersey
adjacent to New York City. Bergen County has a relatively large affluent base
for the Bank's services. The principal service areas of the Bank represent a
diversified mix of stable residential neighborhoods
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with a wide range of per household income levels; offices, service industries
and light industrial facilities; and large shopping malls and small retail
outlets.
For many years Interchange Bank has conducted periodic market research to
keep aware of market trends. Much of this research affirmed that consumer
financial needs are directly related to identifiable life stages. In response to
these distinctive preferences, the Bank has designed and marketed "packaged"
products to appeal to these different segments.
Since there is a preponderance of the population in the age groups of 35-54
and 55+, Interchange has strategically targeted these two life stage segments by
designing and marketing "packaged" products (Money Maker Account and Prime Time
Account) which include deposit, credit and other services sold together as a
product unit. We also recognized the needs of "Generation X" with the Money Plus
Account (25-34) and our youngest with the Grow'N Up Savings(R) Passbook Account.
The Bank was among the first to offer such packaged financial products in its
area and management believes they have been successful in attracting deposits
and building a loyal client base.
Competition
Competition in the banking and financial services industry in the Company's
market area is intense. The Bank competes actively with national and
state-chartered commercial banks and other financial institutions, including
savings and loan associations, mutual savings banks, and credit unions. In
addition, the Bank faces competition from less heavily regulated entities such
as brokerage institutions, money management firms, consumer finance and credit
card companies and various other types of financial services companies. Many of
these institutions are larger than the Bank, some are better capitalized, and a
number pursue community banking strategies similar to those of the Bank.
Management believes that opportunities continue to exist to satisfy the
deposit and lending demands of small and middle market businesses. Larger banks
continued to show an appetite for only the largest loans, finding themselves
ill-equipped to administer smaller loans profitably. Interchange has the desire
and the ability to give smaller businesses the service they require and deserve.
Interchange meets this need through a unique program called Rapid Response
Banking. The program provides commercial loans up to $100,000 with a streamlined
approval process that borrows liberally from standard consumer lending
practices. Naturally, in due course, many small businesses become midsize
businesses, with a corresponding change in their financial requirements. But
they do not outgrow Interchange because of its ability to be responsive to both
constituencies. To continue serving companies throughout the various stages of
their evolution, Interchange created Business Class Banking--a program that
grows with the customer. Business Class Banking supports a spectrum of
business-oriented financial products with value-added services. By designing
progressive programs to accommodate the changing needs of growing businesses,
Interchange is extending the longevity of valuable customer relationships.
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Interchange Bank maintains a relational database. This is a powerful
technology, designed expressly for the banking industry and generally associated
with only the largest and most forward thinking companies. This technology
greatly enhances the Bank's internal marketing analysis by providing information
about account relationships, their activity and their relative value to the Bank
in great detail.
Interchange has maintained an ambitious program of primary research to keep
abreast of customer attitudes and preferences. Our sales quotas and incentives
for employees are linked directly to bank-wide goals and are used to motivate
employees to sell the "right" products to the "right" customers.
Regulation and Supervision
Banking is a complex, highly-regulated industry. The primary goals of the
bank regulatory scheme are to maintain a safe and sound banking system and to
facilitate the conduct of monetary policy. In furtherance of those goals,
Congress has created several largely antonomous regulatory agencies and enacted
myriad legislation that governs bank, bank holding companies and the banking
industry. Descriptions and references to the statutes and regulations below are
brief summaries thereof and do not purport to be complete.
The Company
The Company is a bank holding company under the Bank Holding Company Act of
1956, as amended (the "Holding Company Act"), and as such, is subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System (the "Federal Reserve "). As a bank holding company, the Company is
required to file an annual report with the Federal Reserve and such additional
information as the Federal Reserve may require pursuant to the Holding Company
Act and Federal Regulation Y. The Federal Reserve may conduct examinations of
the Company or any of its subsidiaries.
The Holding Company Act requires every bank holding company to obtain the
prior approval of the Federal Reserve before it may acquire all or substantially
all of the assets of any bank (although the Federal Reserve may not assert
jurisdiction in certain bank mergers that are regulated under the Bank Merger
Act), or ownership or control of any voting shares of any bank if after such
acquisition it would own or control directly or indirectly more than 5% of the
voting shares of such bank.
The Holding Company Act also provides that, with certain limited
exceptions, a bank holding company many not (i) engage in any activities other
than those of banking or managing or controlling banks and other authorized
subsidiaries or (ii) own or control more than five percent (5%) of the voting
shares of any company that is not a bank, including any foreign company. A bank
holding company is permitted, however, to acquire shares of any company the
activities of which the Federal Reserve, after due notice and opportunity for
hearing, has determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. The Federal Reserve has
issued regulations
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setting forth specific activities that are permissible under the exception. A
bank holding company and its subsidiaries are also prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services.
In approving acquisitions by bank holding companies of banks and companies
engaged in banking-related activities, the Federal Reserve considers whether the
performance of any such activity by an affiliate of the holding company can
reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency, that outweigh such
possible adverse effects as undue concentration of resources, decreased or
unfair competition, conflicts of interest and unsound banking practices.
Under certain circumstances, prior approval of the Federal Reserve is
required under the Holding Company Act before a bank holding company may
purchase or redeem any of its equity securities.
Transactions with Affiliates
The provisions of Section 23A of the Federal Reserve Act and related
statutes place limits on all insured banks (including the Bank) as to the amount
of loans or extensions of credit to, or investment in, or certain other
transactions with, their parent bank holding companies and certain of such
holding companies' subsidiaries and as to the amount of advances to third
parties collateralized by the securities or obligations of bank holding
companies or their subsidiaries. In addition, loans and extensions of credit to
affiliates of the Bank generally must be secured in the prescribed amounts.
Capital Adequacy Guidelines
The Federal Reserve issued guidelines establishing risk-based capital
requirements for bank holding companies and member banks. The guidelines
established a risk-based capital framework consisting of (1) a definition of
capital and (2) a system for assigning risk weights. Capital consists 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. Effective October 1, 1998, the Federal Reserve
adopted an amendment to their risk-based capital guidelines that permits insured
depository institutions to include in their Tier II capital up to 45% of the
pre-tax net unrealized gains on certain available for sale equity securities.
All assets and off-balance-sheet items are assigned to one of four weighted risk
categories ranging from 0% to 100%. Higher levels of capital are required for
the categories perceived as representing the greater risks. The Federal Reserve
established a minimum risk-based capital ratio of 8% (of which at least 4% must
be Tier I). An institution's risk-based capital ratio is determined by dividing
its qualifying capital by its risk-weighted assets. The guidelines make
regulatory capital requirements more sensitive to differences in risk profiles
among banking institutions, take off-balance sheet items into account in
assessing capital adequacy, and minimize disincentives to holding liquid,
low-risk assets. Banking organizations are generally expected to operate with
capital positions well
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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, 1998 the the Bank satisfies
these ratios and has been categorized as a well-capitalized institution which in
the regulatory framework for prompt corrective action imposes the lowest level
of supervisory restraints.
Capital adequacy guidelines focus principally on broad categories of credit
risk although the framework for assigning assets and off-balance sheet items to
risk categories does incorporate elements of transfer risk. The risk-based
capital ratio does not, however, incorporate other factors that may affect a
company's financial condition, such as overall interest rate exposure,
liquidity, funding and market risks, the quality and level of earnings,
investment or loan concentrations, the quality of loans and investments, the
effectiveness of loan and investment policies and management's ability to
monitor and control financial and operating risks.
In addition to the risk-based guidelines discussed above, the Federal
Reserve requires that a bank holding company and bank which meet the regulator's
highest performance and operational standards and which are not contemplating or
experiencing significant growth maintain a minimum leverage ratio (Tier I
capital as a percent of quarterly average adjusted assets) of 3%. For those
financial institutions with higher levels of risk or that are experiencing or
anticipating significant growth, the minimum leverage ratio will be increased.
The Federal Reserve is vested with broad enforcement powers over bank
holding companies to forestall activities that represent unsafe or unsound
practices or constitute violations of law. These powers may be exercised through
the issuance of cease and desist orders or other actions. The Federal Reserve is
also empowered to assess civil penalties against companies or individuals that
violate the Holding Company Act, to order termination of non-banking activities
of non-banking subsidiaries of bank holding companies and to order termination
of ownership and control of non-banking subsidiaries by bank holding companies.
Neither the Company nor any of its affiliates has ever been the subject of any
such actions by the Federal Reserve.
The Bank
As a New Jersey state-chartered bank, the Bank's operations are subject to
various requirements and restrictions of state law pertaining, among other
things, to lending limits, reserves, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends, locations of
branch offices and capital adequacy. The Bank is subject to primary supervision,
periodic examination and regulation by the New Jersey Department of Banking and
Insurance ("NJDBI"). As a member of the Federal Reserve System, the Bank is also
subject to regulation by the Federal Reserve. 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
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action to correct any conditions resulting from any violation or practice, to
issue an administrative order that can be judicially enforced, to, among other
things, direct an increase in capital, to restrict the growth of the Bank, to
assess civil penalties and to remove officers and directors. The Bank has never
been the subject of any administrative orders, memoranda of understanding or any
other regulatory action by the NJDBI. The Bank also is a member of the Federal
Reserve System and therefore subject to supervisory examination by and
regulations of the Federal Reserve Bank of New York.
The Bank's deposits are insured by the Bank Insurance Fund ("BIF")
administered by the FDIC up to a maximum of $100,000 per depositor. For this
protection, the Bank pays a quarterly statutory deposit insurance assessment to,
and is subject to the rules and regulations of, the FDIC.
The Bank's ability to pay dividends is subject to certain statutory and
regulatory restrictions. The New Jersey Banking Act of 1948, as amended,
provides that no state-chartered bank may pay a dividend on its capital stock
unless, following the payment of each such dividend, the capital stock of the
bank will be unimpaired, and the bank will have a surplus of not less than 50%
of its capital, or, if not, the payment of such dividend will not reduce the
surplus of the bank. In addition, the payment of dividends is limited by the
requirement to meet the risk-based capital guidelines issued by the Federal
Reserve Board and other regulations.
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 1998, the Bank's BIF FICO rates
ranged between 1.164 and 1.24 basis points and the SAIF FICO rates were between
5.82 and 6.22 basis points.
The foregoing is an attempt to summarize some of the relevant laws, rules
and regulations governing banks and bank holding companies, but does not purport
to be a complete summary of all applicable laws, rules and regulations governing
banks and bank holding companies.
Item 2. Properties
The Company leases ten banking offices, one mini-branch within a
supermarket, one operations/support facility and one administrative/executive
facility. It owns five banking offices and leases land on which it owns one bank
building. The Company owns land and a building to be used for a future branch
site. All of the facilities are located in Bergen County, New Jersey, which
constitutes the Company's primary market area.
Net investment in premises and equipment totaled $9.9 million at December
31, 1998. Annual rental payments
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with respect to the Company's leased facilities was $1.1 million for the year
ended, December 31, 1998.
In the opinion of management, the physical properties of the Company and
its subsidiaries are suitable and adequate and are being fully utilized.
Item 3. Legal Proceedings
In the ordinary course of business, the Company is involved in routine
litigation involving various aspects of its business, none of which,
individually or in the aggregate, in the opinion of management and its legal
counsel, is expected to have a material adverse impact on the consolidated
financial condition, results of operations or liquidity of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the three months ended December 31, 1998,
to a vote of the Company's security holders through the solicitation of proxies
or otherwise.
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Executive Officers
The following table sets forth the names, ages, and present positions of
the principal executive officers:
Name Age Positions Held with the Company and the Bank
____ ___ ____________________________________________
ANTHONY S. ABBATE . . . 59 President and Chief Executive Officer
ANTHONY J. LABOZZETTA. . 35 Executive Vice President and Chief Financial Officer
NICHOLAS VERDI . . . . . 50 Senior Vice President--Retail Banking
FRANK R. GIANCOLA . . . 45 Senior Vice President--Operations
PATRICIA D. ARNOLD . . 40 Senior Vice President--Commercial Lending
Business Experience
ANTHONY S. ABBATE, President and Chief Executive Officer of the Bank since
1981; Senior Vice President and Controller from October 1980; President and
Chief Executive Officer of Home State Bank 1978-1980. Engaged in the banking
industry since 1959.
ANTHONY J. LABOZZETTA, Executive Vice President and Chief Financial Officer
since September 1997; Treasurer from 1995. Engaged in the banking industry since
1989. Formerly a senior manager with an international accounting firm,
specializing in the financial services industry.
NICHOLAS VERDI, Senior Vice President - Retail Banking since October 1998.
Engaged in the banking industry since 1968. Formerly an Executive Director of
United Financial Services from 1997; Regional President of Hudson United Bank
from 1994 and Chief Operations Officer of Hudson United Bank from 1985.
FRANK R. GIANCOLA, Senior Vice President - Operations since September 1997;
Senior Vice President-Retail Banking from 1993; Senior Vice President-Operations
of the Bank from 1984; Senior Operations Officer from 1982; Vice
President/Branch Administrator from 1981. Engaged in the banking industry since
1971.
PATRICIA D. ARNOLD, Senior Vice President - Commercial Lending since August
1997; First Vice President from 1995; Department Head Vice President from 1986;
Assistant Vice President from 1985; Commercial Loan Officer-Assistant Treasurer
from 1983. Engaged in the banking industry since 1981.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board of Directors. Management is not aware of any family
relationship between any director or executive officer. No executive officer was
selected to his or her position pursuant to any arrangement or understanding
with any other person.
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Part II
Forward Looking Information
We discuss certain matters in this report which are not historical facts,
but which are "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These "forward looking statements"
include, but are not limited to, the adequacy of the allowance for loan losses,
profitability, interest rate risk, market risk, liquidity and the year 2000
readiness disclosure. The "forward looking statements" in this report reflect
what we currently anticipate will happen in each case. What actually happens
could differ materially from what we currently anticipate will happen as a
result of, but not limited to, changes in economic condition, interest rate
fluctuations, levels of loan growth and quality and the successful
implementation of its Year 2000 Plan, which includes capital expenditures, costs
of remediation and testing, the timetable for implementing the remediation and
testing phases of Year 2000 planning, the possible impact of third parties' Year
2000 issues on the Company, management's assessment of contingencies and
possible scenarios in its Year 2000 planning. We are not promising to make any
public announcement when we think "forward looking statements" in this document
are no longer accurate, whether as a result of new information, what actually
happens in the future or for any other reason.
Item 5. Market for the Registrant's Common Stock
and Related Stockholder Matters
The Company's common stock is traded on the American Stock Exchange under
the symbol "ISB." At March 5, 1999, there were approximately 1,326 shareholders
of record. A portion of the Company's common stock is held in "street name" by
nominees for the beneficial owners, so the actual number of shareholders is
probably higher. A cash dividend of $0.083, $0.09 and $0.10 was paid on each
common share outstanding in each quarter during 1996, 1997 and 1998,
respectively. The following table sets forth, for the periods indicated, the
reported high and low sales prices by quarter:
High Low
------------ ------------
1996
First quarter (1)(2)(3) $ 9.42 $ 8.41
Second quarter (2)(3) 9.17 8.55
Third quarter (2) (3) 9.83 8.33
Fourth quarter (2)(3) 8.34 9.50
1997
First quarter (2)(3) $ 14.67 $10.61
Second quarter (3) 17.58 11.92
Third quarter (3) 16.67 14.67
Fourth quarter (3) 21.58 14.75
1998
First quarter (3) $ 21.25 $18.17
Second quarter 23.25 19.25
Third quarter 20.88 15.31
Fourth quarter 17.75 14.06
The last reported sales price of common stock on March 5, 1999 was $16.875 per
share
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(1) On February 22, 1996, the Company declared a 5% Stock Dividend to be
distributed on April 19, 1996 to shareholders of record on March 20,
1996. The high and low sales prices and the cash dividends have been
restated to reflect the effects of the stock dividend.
(2) On February 27, 1997, the Company declared a 3 for 2 Stock Split to be
distributed on April 17, 1997 to shareholders of record on March 20,
1997. The high and low sales prices and the cash dividends have been
restated to reflect the effects of the stock split.
(3) On February 26, 1998, the Company 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 prices and the cash dividends have been
restated to reflect the effects of the stock split.
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The Company intends, subject to it's financial results, contractual, legal,
and regulatory restrictions, and other factors that its Board of Directors may
deem relevant, to declare and pay a quarterly cash dividend on it's common
stock. The principal source of the funds to pay any dividends on the Company's
common stock would be a dividend from the Bank. Certain federal and state
regulators impose restrictions on the payment of dividends by banks. See
"Business - Supervision and Regulation" for a discussion of these restrictions.
Item 6. Selected Consolidated Financial Data
The following selected financial data are derived from the Company's
audited Consolidated Financial Statements. The information set forth below
should be read in conjunction with the Consolidated Financial Statements and the
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The Consolidated Statements of Financial Condition
as of December 31, 1998 and 1997, and the Consolidated Statements of of Income,
Changes in Stockholders' Equity and Cash Flows for each of the years in the
three-year period ended December 31, 1998 and the report thereon of Deloitte &
Touche LLP are included on pages 28 through 47 of the Company's Annual Report to
Shareholders for the year ended, December 31, 1998, which pages are incorporated
herein by reference.
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Item 6. Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Y e a r s E n d e d D e c e m b e r 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Summary Earnings (in thousands)
Interest income $48,820 $45,310 $41,379 $40,765 $35,621
Interest expense 19,864 18,566 16,983 17,208 12,449
--------- --------- --------- ---------- ----------
Net interest income 28,956 26,744 24,396 23,557 23,172
Provision for loan losses 951 1,653 747 1,239 984
-------- --------- ---------- ---------- ----------
Net interest income after provision for loan losses 28,005 25,091 23,649 22,318 22,188
Non-interest income 4,928 4,774 4,248 4,579 3,659
Non-interest expenses 19,416 17,655 17,492 16,703 16,666
-------- --------- ---------- ---------- ----------
Income before cumulative effect of change in
accounting principle and income taxes 13,517 12,210 10,405 10,194 9,181
Income taxes 4,908 4,285 3,654 3,511 3,220
-------- --------- ---------- ----------- ---------
Net income $ 8,609 $ 7,925 $ 6,751 $ 6,683 $ 5,961
======== ========= ========== =========== =========
Per Share Data
Before deducting acquisition costs
Basic earnings per common share $1.32 $1.11 $0.95 $0.93 $0.82
Diluted earnings per common share 1.31 1.10 0.94 0.92 0.82
After deducting acquisition costs
Basic earnings per common share 1.20 1.11 0.95 0.93 0.82
Diluted earnings per common share 1.19 1.10 0.94 0.92 0.82
Cash dividends declared 0.40 0.36 0.33 0.31 0.29
Book value-end of year 8.66 7.86 7.02 6.43 5.29
Tangible book value-end of year 8.56 7.71 6.80 6.16 5.28
Weighted average shares outstanding (in thousands)
Basic 7,189 7,132 7,124 7,113 7,107
Diluted 7,237 7,222 7,190 7,157 7,130
Balance Sheet Data-end of year (in thousands)
Total assets $685,364 $625,050 $572,512 $548,220 $530,042
Securities held to maturity and securties available for sale 149,930 135,997 143,339 163,736 168,224
Loans 478,717 438,273 384,060 337,570 314,829
Allowance for loan losses 5,645 5,231 3,968 3,926 4,079
Total deposits 598,732 540,765 491,637 487,224 469,799
Securities sold under agreements to repurchase and 18,548 13,028 10,904 11,702 407
short-term borrowings
Long-term borrowings - 9,879 9,983 - 5,000
Total stockholders' equity 62,372 56,130 50,048 45,781 39,990
Selected Performance Ratios
Before deducting acquisition costs
Return on average total assets 1.44 % 1.33 % 1.22 % 1.26 % 1.19 %
Return on average total stockholders' equity 16.05 14.95 14.09 15.53 15.34
After deducting acquisition costs
Return on average total assets 1.31 1.33 1.22 1.26 1.19
Return on average total stockholders' equity 14.53 14.95 14.09 15.53 15.34
Dividend payout ratio 32.81 30.08 32.19 29.82 32.51
Average total stockholders' equity to average total assets 9.00 8.89 8.68 8.11 7.76
Net yield on interest earning assets (taxable equivalent) 4.62 4.78 4.75 4.74 4.95
Efficiency ratio (1) 53.59 56.47 60.02 59.38 60.19
Non-interest expenses to average assets 2.95 2.96 3.17 3.15 3.33
Non-interest income to average assets 0.75 0.80 0.77 0.86 0.73
Asset Quality Ratios-end of year
Nonaccrual loans to total loans 0.25 % 0.35 % 0.66 % 0.74 % 1.96 %
Nonperforming assets to total assets 0.26 0.33 0.67 0.95 1.43
Allowance for loan losses to nonaccrual loans 471.20 345.51 157.02 156.35 66.04
Allowance for loan losses to total loans 1.18 1.19 1.03 1.16 1.30
Net charge-offs to average loans for the year 0.12 0.10 0.20 0.44 0.34
Liquidity and Capital Ratios
Average loans to average deposits 81.06 % 78.09 % 72.19 % 67.14 % 65.20 %
Total stockholders' equity to total assets 9.10 8.98 8.74 8.35 7.54
Tier I capital to risk-weighted assets 13.80 13.19 13.79 13.92 13.43
Total capital to risk-weighted assets 15.12 14.44 15.04 15.17 14.68
Tier I leverage ratio 9.08 8.79 8.65 8.16 7.83
</TABLE>
- --------------------------------------------------------------------------------
(1) The efficiency ratio is calculated by dividing non-interest expenses,
excluding merger-related charges, amortization of intangibles and net
expense of foreclosed real estate by net interest income (on a fully
taxable equivalent basis) and non-interest income, excluding gains on
sales of loans, securities, loan servicing and a branch location.
12
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition Results
of Operations
The information contained in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 14
through 27 of the Company's 1998 Annual Report to Shareholders filed as Exhibit
13, is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The information regarding the market risk of the Company's financial
instruments, contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on page 23 of the Company's 1998 Annual
Report to Shareholders filed as Exhibit 13 is incorporated herein by reference.
Item 8. Financial Statements and Supplemental Data
The financial statements required by this Item are included in the
Company's 1998 Annual Report to Shareholders on pages 28 through 47, filed as
Exhibit 13, and incorporated herein by reference.
Page of Annual
Report to
Stockholders
-------------------
Report of Independent Public Accountants 28
Interchange Financial Services Corporation and Subsidiaries
Consolidated Balance Sheets 29
Consolidated Statements of Income 30
Consolidated Statements of Changes in Stockholders' Equity 31
Consolidated Statements of Cash Flows 32
Notes to Consolidated Financial Statements (Notes 1 - 21) 33 - 47
No supplementary data is included in this report as it is inapplicable, not
required, or the information is included elsewhere in the financial statements
or notes thereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
PART III
Item 10. Directors and Executive Officers
a. Directors
The information contained in the section entitled "Directors" in the
Company's definitive Proxy Statement for its 1999 Annual Meeting of
Stockholders, to be filed not later than 120 days after the close of
the Company's fiscal year, is incorporated herein by reference in
response to this item.
b. Executive Officers
Information required by this item is contained in Part I of this Form
10-K in the section entitled "Executive Officers."
c. Compliance with Section 16(a)
Information contained in the section entitled "Section 16 Compliance"
in the Company's definitive Proxy
13
<PAGE>
Statement for its 1999 Annual Meeting of Stockholders, to be filed
not later than 120 days after the close of the Company's fiscal
year, is incorporated herein by reference in response to this item.
Item 11. Executive Compensation
Information contained in the section entitled "Executive Compensation" in
the Company's definitive Proxy Statement for its 1999 Annual Meeting of
Stockholders, to be filed not later than 120 days after the close of the
Company's fiscal year, is incorporated herein by reference in response to this
item.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained in the section entitled "Amount and Nature of
Beneficial Ownership" in the Company's definitive Proxy Statement for its 1999
Annual Meeting of Stockholders, to be filed not later than 120 days after the
close of the Company's fiscal year, is incorporated herein by reference in
response to this item.
Item 13. Certain Relationships and Related Transactions
The information contained in the section entitled "Transactions with
Management" in the Company's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders, to be filed not later than 120 days after the close of
the Company's fiscal year, is incorporated herein by reference in response to
this item.
14
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements and Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements: The Financial Statements listed under
Item 8 to this Report are set forth at pages 28 through 32, and
the Notes to Consolidated Financial Statements are set forth at
pages 33 through 47, of the Annual Report to Shareholders for
1998 (See Exhibit 13 under paragraph (a)3 of this Item 14).
2. Financial Statement Schedules: All required schedules for the
Company and its subsidiaries have been included in the
Consolidated Financial Statements or related Notes thereto.
3. Exhibits: Exhibits followed by a parenthetical reference are
incorporated by reference herein from the document described
in such parenthetical reference.
Exhibit 3(a) Certificate of Incorporation of Registrant,
as amended (Incorporated by reference to Exhibit
3 to Form S-4, filed April 27, 1998,
Registration Statement No. 333-50065)
Exhibit 3(b) Bylaws of registrant (Incorporated by
reference to Exhibit 3(b) to Form S-2, filed
July 22, 1992, Registration Statement No.
33-49840)
Exhibit 10(a) Agreement for legal services between
Andora, Palmisano & Geaney and Registrant, dated
April 23, 1998
(1) Exhibit 10(b) Stock Option and Incentive Plan of
1997 (Incorporated by reference to Exhibit 4(c)
to Form S-8, filed September 30, 1997,
Registration Statement No. 33-82530)
(1) Exhibit 10(c) Directors' Retirement Program
(Incorporated by reference to Exhibit 10(i)(3)
to Annual Report on Form 10-K for fiscal year
ended December 31, 1994)
(1) Exhibit 10(d) Executives' Supplemental Pension
Plan (Incorporated by reference to Exhibit
10(i)(4) to Annual Report on Form 10-K for
fiscal year ended December 31, 1994)
* Exhibit 11 Statement regarding Computation of per share
earnings
* Exhibit 13 Portion of the Annual Report to Shareholders
for the year ended December 31, 1998
* Exhibit 21 Subsidiaries of Registrant
* Exhibit 23 Independent Auditors' Consent of Deloitte &
Touche LLP
* Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K during the quarter ended December 31,1998:
The Company filed a Current Report on Form 8-K on December 3,
1998. Item 5 of the referenced Current Report contained the
Company's Year 2000 Readiness Disclosure. No financial
statements were filed with the Report.
- ------------------------------
(1) Pursuant to Item 14(a) - 3 of Form 10-K, this exhibit represents management
contract or compensatory plan or arrangement required to be filed as an
exhibit to this Form 10-K pursuant to Item 14(c) of this item.
* Filed herewith
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Interchange Financial Services Corporation
By: /s/ Anthony S. Abbate By: /s/ Anthony Labozzetta
------------------------------------- ----------------------------
Anthony S. Abbate Anthony Labozzetta
President and Chief Executive Officer Executive Vice President
and Chief Financial Officer
(principal executive officer) (principal financial and
accounting officer)
March 11, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated:
/s/Anthony S. Abbate /s/James E. Healey
- ------------------------------------- -----------------------------------
Anthony S. Abbate March 11, 1999 James E. Healey March 11, 1999
Director Director
President and Chief Executive Officer
/s/Anthony D. Andora /s/Anthony Labozzetta
- -------------------------------------- -----------------------------------
Anthony D. Andora March 11, 1999 Anthony Labozzetta March 11, 1999
Director Executive Vice President and
Chairman of the Board Chief Financial Officer
/s/Donald L. Correll /s/Nicholas R. Marcalus
- -------------------------------------- -----------------------------------
Donald L. Correll March 11, 1999 Nicholas R. Marcalus March 11, 1999
Director Director
/s/Anthony R. Coscia /s/Eleanore S. Nissley
- -------------------------------------- -----------------------------------
Anthony R. Coscia March 11, 1999 Eleanore S. Nissley March 11, 1999
Director Director
/s/John J. Eccleston /s/Jeremiah F. O'Connor
- -------------------------------------- -----------------------------------
John J. Eccleston March 11, 1999 Jeremiah F. O'Connor March 11, 1999
Director Director
/s/David R. Ficca /s/Robert P. Rittereiser
- -------------------------------------- -----------------------------------
David R. Ficca March 11, 1999 Robert P. Rittereiser March 11, 1999
Director Director
/s/Richard A. Gilsenan /s/Benjamin Rosenzweig
- -------------------------------------- -----------------------------------
Richard A. Gilsenan March 11, 1999 Benjamin Rosenzweig March 11, 1999
Director Director
16
<PAGE>
AGREEMENT FOR LEGAL SERVICES
THIS AGREEMENT for legal services made this 23rd day of April, 1998, by and
between:
ANDORA, PALMISANO & GEANEY
A Professional Corporation
303 Molnar Drive,P.O. Box 431
Elmwood Park, New Jersey 07407-0431
hereinafter referred to as "Attorneys",
and
INTERCHANGE FINANCIAL SERVICES CORPORATION
Park 80 West, Plaza Two
Saddle Brook, New Jersey 07662
and
INTERCHANGE STATE BANK
A Banking Corporation
Park 80 West, Plaza Two
Saddle Brook, New Jersey 07662
hereinafter referred to as "Clients".
IN CONSIDERATION of the mutual promises, covenants and undertakings
contained herein the Attorneys and the Clients agree as follows:
1. RETAINER
Clients hereby retain the services of Attorneys to act as its corporate
counsel for the term and compensation as outlined herein.
2. TERM
The Attorneys shall be retained by Clients until the next annual
reorganization meeting of Clients.
3. COMPENSATION
The Clients shall pay the Attorneys for services rendered as corporate
counsel an annual retainer of NINETY-FIVE THOUSAND DOLLARS ($95,000.00) payable
in equal monthly installments on the first day of each and every month
commencing the first day of the month following the execution of this Agreement.
Clients shall, in addition to the annual retainer, pay to the Attorneys all
out-of-pocket expenses, filing fees, or disbursements made by the Attorneys on
Clients' behalf. Clients shall, in addition to the payment of the annual
retainer and all costs, pay to the Attorneys a legal fee based on the rate per
hour as shown on Schedule A for all legal services provided to Clients by the
Attorney which are "legal services rendered in addition to those rendered as
corporate counsel." Such fees and costs shall be billed by Attorneys to clients
on a thirty-day basis and Clients shall pay all bills within five (5) days after
each monthly Board of Director's meeting of the Clients.
<PAGE>
4. DEFINITIONS
The following words and phrases shall have the following meanings:
A. "Legal services rendered as corporate counsel" shall mean and
include all of the following types of legal work:
1. Except as hereinafter set forth in subparagraph B, document
review and drafting of documents on behalf of the Clients
including, but not limited to: leases, notes, contracts,
mortgages, commitment letters, disclosure statements,
modifications, extensions and legal agreements not related
to third-party borrowers, except residential mortgage
reviews.
2. Providing legal advice required in the usual course of
Clients' business including compliance analysis.
3. Attendance at Board of Director's and Shareholders' Meetings
other than as a Director.
4. Advice regarding levies and executions
5. Preparation of annual SEC 10K, 10Q and "ordinary" proxy
filings.
B. "Legal services rendered in addition to those rendered as general
corporate counsel" shall mean and include, but not be limited to,
all of the following types of legal work which shall be billed on
an hourly basis:
1. Litigation in which Clients are named as defendants.
2. Litigation or other proceedings in which Clients and another
person or agency (i.e., Small Business Administration)
specially retain Attorney.
The hourly rate for such legal services shall be
specifically agreed upon by Clients, the agency, and
Attorneys.
<PAGE>
3. Foreclosure litigation, including lien protection litigation
in any Court including the Bankruptcy Court.
4. Regulatory or administrative law proceedings including but
not limited to Department of Banking, zoning agencies,
N.L.R.B., F.D.I.C., OAL, and Tax Court.
5. Loan reviews and closings, including modifications and
extensions thereof, except that the fee shall be based upon
$250.00 per hour plus costs and such fee shall not exceed
1/2% of the principal amount of the loan plus costs but in
no event shall such fee be less than $250.00.
6. Closings in which the bank is a buyer or seller.
7. SEC Filings other than annual 10K, 10Q or "ordinary" proxy
filings.
8. Mergers and Acquisitions.
9. All other legal services not specifically set forth in
aragraph 4A.
5. BINDING EFFECT
This agreement shall be binding upon and shall inure to the benefit of the
parties' successors or assigns.
6. NO ASSIGNMENT
This agreement shall not be assigned or sublet without the express written
consent of the parties.
7. LAW APPLICABLE
This agreement shall be governed by the laws of the State of New Jersey.
8. SEVERABILITY
In the event any clause, section or paragraph of this agreement shall be
declared invalid or unenforceable by a court of competent jurisdiction, such
invalidity or unenforceability shall not affect the remainder of this Agreement.
<PAGE>
IN WITNESS WHEREOF the parties have hereunto signed this agreement the date
first above written.
INTERCHANGE STATE BANK
ATTEST:
/s/Benjamin Rosenzweig By: /s/ Anthony S. Abbate
- ------------------------------ -----------------------------
Benjamin Rosenzweig, Secretary Anthony S. Abbate, President
INTERCHANGE FINANCIAL SERVICES CORPORATION
ATTEST:
/s/Benjamin Rosenzweig By: /s/ Anthony S. Abbate
- ------------------------------ ------------------------------
Benjamin Rosenzweig, Secretary Anthony S. Abbate, President
ATTEST: ANDORA, PALMISANO & GEANEY
/s/John P. Palmisano, By: /s/ Anthony D. Andora
- ------------------------------ ------------------------------
John P. Palmisano, Secretary Anthony D. Andora, President
<PAGE>
SCHEDULE A
The hourly rates contained herein are subject to change on the anniversary
dates of the Agreement of Legal Services.
Schedule A, reviewed and approved at Annual Reorganization Meeting on April
23, 1998.
Anthony D. Andora $200.00 per hour
John P. Palmisano $200.00 per hour
John F. Geaney $200.00 per hour
Other Partners and
Senior Associates $175.00 per hour
Other Associates $150.00 per hour
Exhibit 11. Statement re computation of per share earnings
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Quarter Ended
-----------------------------------------------------------------------------------------------------------
March 31, 1998 June 30, 1998 September 30, 1998 December 31, 1998
-------------------------- ------------------------- -------------------------- -----------------------
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
--------- --------- -------- -------- ---------- ------- -------- --------- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Earnings per
Common Share
Income available to
common shareholders $1,977 7,167 $0.28 $1,428 7,193 $0.20 $2,547 7,197 $0.35 $2,657 7,199 $0.37
======== ======= ======== ======
Effect of Dilutive Shares
Options issued to
management 83 70 59 48
--------- ---------- -------- --------
Diluted Earnings per
Common Share $1,977 7,250 $0.27 $1,428 7,263 $0.20 $2,547 7,256 $0.35 $2,657 7,247 $0.37
========= ========= ======== ======== ================= ======== ========= ======== ======= ======= ======
-------------------------------------------------------------------------------------------------------------
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 $2,133 7,130 $0.30 $2,024 7,218 $0.28 $1,904 7,094 $0.27 $1,864 7,094 $0.26
======== ======= ======== ======
Effect of Dilutive Shares
Options issued to
management - 71 - 74 - 90 - 90
--------- --------- -------- ---------- ------- ---------- -------- -------
Diluted Earnings per
Common Share $2,133 7,201 $0.29 $2,024 7,292 $0.28 $1,904 7,184 $0.27 $1,864 7,184 $0.26
========= ========= ======== ======== ========== ====== ======= ========== ======== ======== ======= =====
----------------------------
Year Ended
----------------------------
31-Dec-96
----------------------------
Weighted Per
Average Share
Income Shares Amount
--------- --------- --------
Basic Earnings per
Common Share
Income available to
common shareholders $6,751 7,124 $0.95
========
Effect of Dilutive Shares
Options issued to
management 66
---------
Diluted Earnings per $6,751 7,190 $0.94
========== ========== =======
</TABLE>
Exhibit 13. Portions of the Annual Report to Shareholders for the year
ended, December 31, 1998.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
This section presents management's discussion and analysis of the
consolidated results of operations and financial condition of Interchange
Financial Services Corporation (the "Company"). The discussion and analysis
should be read in conjunction with the consolidated financial statements and
notes thereto on pages 29 through 47 and the summary consolidated data included
elsewhere in this report.
On May 31, 1998, the Company acquired The Jersey Bank for Savings ("Jersey
Bank"), which maintained two banking offices, both located within the Company's
delineated market area. At that date, Jersey Bank had total assets of $78.6
million and total deposits of $69.8 million. The transaction was accounted for
as a pooling-of-interests, and accordingly, the prior period financial
statements presented herein have been restated to include the accounts and
results of operations of Jersey Bank. Each share of Jersey Bank's common stock,
including shares of common stock that had been converted from shares of
preferred stock, was converted into 1.5 shares of the Company's common stock.
Total consideration tendered in the transaction amounted to 780,198 shares of
the Company's common stock.
Earnings Overview
Net income for the year ended December 31, 1998 was $8.6 million as
compared with $7.9 million in 1997, an increase of 8.6%. For the same period,
diluted earnings per share rose 8.2% to $1.19 in 1998 from $1.10 in 1997. Basic
earnings per share in 1998 were $1.20 as compared to $1.11 in 1997.
The earnings results for 1998 include merger-related charges of $1.4
million ($898 thousand, or $.12 per share, after tax) associated with the
acquisition of Jersey Bank. Excluding this merger-related charge, net income
would have increased 20.0% to $9.5 million, or $1.32 basic earnings per share
for the year ended December 31, 1998, compared to $7.9 million or $1.11 basic
earnings per share for 1997. Diluted earnings per share before the
merger-related charge were $1.31 for 1998 as compared to $1.10 in the prior
year, an increase of 19.1%.
The Company's strong operating performance for 1998 reflects solid loan and
deposit growth, excellent asset quality and a continued proficiency in managing
non-interest expenses. As a result, the Company's key earnings performance
measures remained strong. The Company's returns on average equity and average
assets before merger-related charges were 16.05% and 1.44%, respectively, in
1998 as compared to 14.95% and 1.33%, respectively, in 1997. Furthermore, the
sustained earnings and capital growth resulted in an increase in the quarterly
dividend paid on common stock to an annualized rate of $.40 in 1998 as compared
to $.36 in 1997, an increase of 11.1%.
Net interest income in 1998 was $29.0 million, up $2.2 million, or 8.3%
from 1997. This increase in net interest income was largely responsible for the
growth in net income. Average interest earning assets increased $67.2 million or
12.0% from 1997, and more than offset a decline of 16 basis points in the net
interest margin. In 1998, average total loans increased $59.5 million or 14.8%
and average total deposits increased $54.5 million or 10.6%. Non-interest
bearing demand deposits comprised $12.9 million or 23.6% of the increase.
Non-interest income was favorably impacted by growth in fee based income
which increased $511 thousand or 25.0% in 1998 as compared to 1997.
The Company also managed to control non-interest expenses in 1998, which
excluding the merger-related charge, increased by $369 thousand or 2.1% as
compared to 1997, despite the Company's continued investment in technology and
other tools to deliver faster more efficient services to its customers.
Table 1
- --------------------------------------------------------------------------------
Summary of Operating Results
- --------------------------------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
Net income (in thousands) $8,609 $7,925 $6,751
Basic earnings per common share 1.20 1.11 0.95
Diluted earnings per common share 1.19 1.10 0.94
Return on average total assets 1.31 % 1.33 % 1.22 %
Return on average total equity 14.53 14.95 14.09
Dividend payout ratio* 32.81 30.08 32.19
Average total stockholders' equity to 9.00 8.89 8.68
average total assets
* Cash dividends declared on common shares to net income.
Results of Operations
Net Interest Income
The major source of income the Company is net interest income. Net interest
income is the difference between the interest a company earns on its assets,
principally loans and investment securities, and interest it pays on its
deposits and borrowings. When expressed as a percentage of average interest
earning assets, it is referred to as net interest margin, or simply interest
margin. Table 2 sets forth a summary of average interest earning assets and
interest bearing liabilities for the years ended, December 31, 1998, 1997, and
1996, together with the interest earned and paid on each major type of asset and
liability account during such periods. The average rates on the earning assets
and the average cost of interest bearing liabilities during such periods are
also summarized. Table 3, which presents changes in interest income and interest
expense by each major asset and liability category for 1998 and 1997,
illustrates the impact of average volume growth (estimated according to prior
year rates) and rate changes (estimated on the basis of prior year volumes).
Changes not due solely to changes in either volume or rates have been allocated
based on the relationship of changes in volume and changes in rates.
Figures are adjusted to a taxable equivalent basis to recognize the income
from tax-exempt assets as if the interest was taxable, thereby allowing a
uniform comparison to be made between yields on assets.
14
<PAGE>
Table 2
- --------------------------------------------------------------------------------
Analysis of Net Interest Income
for the years ended December 31,
- --------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------- -------------------------- ------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
----------------------------- -------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Loans (1) $462,296 $38,904 8.42 % $402,799 $35,380 8.78 % $353,659 $31,367 8.87 %
Taxable securities (4) 132,433 8,206 6.20 137,202 8,856 6.45 142,247 9,075 6.38
Tax-exempt securities (2)(4) 4,428 234 5.28 2,514 129 5.13 2,919 160 5.48
Federal funds sold 27,318 1,474 5.40 16,061 896 5.58 13,299 710 5.34
Interest bearing demand deposits 1,024 55 5.37 1,721 78 4.53 2,185 104 4.76
_______ ______ _______ ______ _______ ______
Total interest earning assets 627,499 48,873 7.79 560,297 45,339 8.09 514,309 41,416 8.05
______ ______ ______
Non-interest earning assets
Cash and due from banks 17,618 24,579 24,687
Allowance for loan losses (5,437) (4,636) (4,084)
Other assets 18,336 16,117 16,766
_______ _______ _______
Total assets $658,016 $596,357 $551,678
======= ======= =======
Liabilities and stockholders' equity
Interest bearing liabilities
Demand deposits $171,546 5,573 3.25 $141,523 4,575 3.23 $118,482 3,617 3.05
Savings deposits 132,735 3,790 2.86 123,417 3,779 3.06 126,251 3,686 2.92
Time deposits 171,462 9,104 5.31 169,196 8,889 5.25 172,025 9,122 5.30
Short-term borrowings 14,723 807 5.48 12,844 727 5.66 8,810 513 5.82
Long-term borrowings 9,828 590 6.00 9,935 596 6.00 710 45 6.34
_______ ______ _______ ______ _______ _______
Total interest bearing liabilities 500,294 19,864 3.97 456,915 18,566 4.06 426,278 16,983 3.98
====== ====== ======
Non-interest bearing liabilities
Demand deposits 94,568 81,707 73,135
Other liabilities 3,903 4,738 4,353
_______ _______ _______
Total liabilities (3) 598,765 543,360 503,766
Stockholders' equity 59,251 52,997 47,912
_______ _______ _______
Total liabilities and stockholders' equity $658,016 $596,357 $551,678
======= ======= =======
Net interest income (tax-equivalent basis) 29,009 3.82 26,773 4.03 24,433 4.07
Tax-equivalent basis adjustment (53) (29) (37)
_______ _______ ______
Net interest income $28,956 $26,744 $24,396
====== ====== ======
Net interest income as a percent of
interest earning assets (tax-equivalent basis) 4.62 % 4.78 % 4.75 %
</TABLE>
- --------------------------------------------------------------------------------
(1) Nonaccrual loans and any related interest recorded have been included
in computing the average rate earned on the loan portfolio.
(2) Computed on a fully taxable equivalent basis using the corporate federal tax
rate of 34%.
(3) All deposits are in domestic bank offices.
(4) The average balances are based on historical cost and do not reflect
unrealized gains or losses.
15
<PAGE>
Table 3
- --------------------------------------------------------------------------------
Effect of Volume and Rate Changes on Net Interest Income
- --------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31, Year ended December 31,
1998 compared with 1997 1997 compared with 1996
increase (decrease) increase (decrease)
due to change in: due to change in:
------------------------------- ----------------------------
Net Net
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans $5,226 $(1,702) $3,524 $4,329 $(316) $4,013
Taxable securities (302) (348) (650) (328) 109 (219)
Tax-exempt securities 101 4 105 (21) (10) (31)
Federal funds sold 628 (50) 578 153 33 186
Interest bearing demand deposits (37) 14 (23) (20) (6) (26)
_____ _____ _____ _____ ___ _____
Total interest income 5,616 (2,082) 3,534 4,113 (190) 3,923
_____ _____ _____ _____ ___ _____
Interest expense
Demand deposits 975 23 998 711 247 958
Savings deposits 285 (274) 11 (79) 172 93
Time deposits 120 95 215 (110) (123) (233)
Short-term borrowings 102 (22) 80 235 (21) 214
Long-term borrowings (6) - (6) 585 (34) 551
______ _____ _____ _____ ___ _____
Total interest expense 1,476 (178) 1,298 1,342 241 1,583
______ _____ _____ _____ ___ _____
Change in net interest income $4,140 $(1,904) $2,236 $ 2,771 $ (431) $2,340
===== ===== ===== ===== === =====
</TABLE>
- --------------------------------------------------------------------------------
Non-performing loans are included in interest earning assets.
Net interest income, on a taxable equivalent basis, amounted to $29.0
million, an increase of $2.2 million, or 8.4%, from $26.8 million in 1997. The
increase in net interest income was principally due to the strong growth in
interest earning assets of $67.2 million that was funded largely by a $54.5
million growth in deposits. The growth, which occurred predominantly in demand
deposits, had a positive effect on the composition ("mix") of retail deposits.
The favorable change in retail deposit mix served to reduce the yield on total
deposits, which had a favorable impact on net interest income. The increase in
net interest income was partly offset by lower average rates on interest earning
assets, mainly loans. The net interest margin decreased 16 basis points to 4.62%
for 1998 as compared to 4.78% for 1997, largely due to the decline in market
interest rates.
Interest income, on a taxable equivalent basis, totaled $48.9 million in
1998, an increase of $3.5 million or 7.8% from $45.3 million in 1997. The
increase was principally driven by the growth in average interest earning
assets, which more than offset the effects of a decline in interest rates.
Average rates on interest earning assets decreased 30 basis points to 7.79% in
1998 as compared to 1997. The increase in average interest earning assets was
principally due to strong growth in loan originations. The average balance of
commercial and commercial mortgage loans increased by $22.4 million or 12.6% to
$200.0 million in 1998, as compared to 1997. The average balances of consumer
loans (comprised mostly of home equity loans) totaled $256.9 million in 1998,
compared to $225.2 million in 1997, an increase of $31.7 million or 14.1%. The
increase in average loans outstanding more than offset the effects of the
decrease in the average rates earned on those loans. Net interest income was
negatively affected by a decline in the average volume and average rate earned
on the securities portfolio. The decline in average rates was largely due to the
decline in market interest rates during 1998.
Interest expense, on a taxable equivalent basis, totaled $19.9 million in
1998, an increase of $1.3 million or 7.0% over the prior comparable period. The
increase was largely due to the $43.4 million growth in average interest bearing
liabilities, specifically interest bearing demand deposits. The average balance
of interest bearing demand deposits grew $30.0 million or 21.2% to $171.5
million in 1998 as compared to 1997. Total average interest and
non-interest-bearing demand deposits grew $42.9 million or 19.2%, in 1998, which
is largely attributable to the Company's continued efforts in marketing and
sales. In addition, commercial loans resulting from these sales efforts
generally carry compensating deposit balances in the form of demand deposits and
further contributed to the growth. The interest expense associated with the
growth was offset, in part, by a decrease in the average rates paid on interest
bearing liabilities of 9 basis points to 3.97% in 1998 as compared to 4.06% in
1997. The decline in average rates was largely due to a decline in the rates
offered on savings deposits and a more favorable retail deposit mix.
In 1997, net interest income, on a taxable equivalent basis, amounted to
$26.8 million, an increase of $2.3 million, or 9.6%, from $24.4 million in 1996.
The net interest margin increased to 4.78% in 1997 as compared to 4.75% in 1996.
The increase in net interest income was principally due to growth in interest
earning assets of $46.0 million, which were funded mostly with deposits and
borrowings that increased $26.0 million and $13.3 million, respectively.
In 1997, interest income, on a taxable equivalent basis, was $45.3 million,
an increase of $3.9 million or 9.5% from $41.4 million in 1996. The growth was
predominantly due to an increase in loan originations. The increase in the
average loan volume was partly offset by a decrease in the average volume of
securities; the proceeds of which were used to fund a portion of the loan
growth. The average yield on all interest earning assets was 8.09% in 1997 as
compared to 8.05% in 1996, an increase of 4 basis points.
In 1997, interest expenses, on a taxable equivalent basis, totaled $18.6
million, an increase of $1.6 million or 9.3% from $17.0 million in 1996. The
16
<PAGE>
increase was mostly due to increases in the average volume of interest bearing
demand deposits and long-term borrowings. The average balance of interest
bearing demand deposits was $141.5 million in 1997, compared to $118.5 million
in 1996, an increase of $23.0 million or 19.5%. The average balance of long-term
borrowings was $9.9 million in 1997, compared to $710 thousand in 1996, an
increase of $9.2 million. Total average interest and non-interest-bearing demand
deposits, which grew $31.6 million or 16.5%, was attributable to the Company's
efforts in marketing and sales. The average yield on all interest bearing
liabilities was 4.06% in 1997 as compared to 3.98% in 1996, an increase of 8
basis points.
Non-interest income
Non-interest income consists of all income other than interest and dividend
income and is derived from: fees on bank transactions and credit cards;
commissions on sales of annuities and mutual funds; rental of safe deposit space
and net gains on sales of assets. The Company recognizes the importance of
supplementing net interest income with other sources of income and maintains a
committee that continually explores new opportunities to build non-interest
income. In 1998, non-interest income totaled $4.9 million, an increase of $154
thousand or 3.2% over 1997. In 1997, total non-interest income increased $526
thousand or 12.4% over 1996.
In 1998, service fees on deposit accounts comprised 51.8% of non-interest
income as compared to 42.7% in 1997. Service fees on deposits increased $511
thousand or 25.0% in 1998 as compared to 1997. During 1998, the Company
established a committee to perform a comprehensive review of fee income sources.
The strategies implemented from the committee's findings were largely
responsible for the growth in service fees on deposits. The overall growth in
the deposit base also contributed to the increase.
There were no gains from loan sales during 1998, whereas, in 1997, the
Company realized pre-tax gains of $1.1 million from the sale of two commercial
mortgage loans. The loans were sold based on management's assessment of the risk
associated with such loans as they neared their maturity. In 1998, gains from
the sale of securities consisted of $876 thousand from the sale of available for
sale securities and $145 thousand from the call before maturity of a security.
There were no gains from the sale of securities in 1997.
The decrease of $681 thousand, in 1998 as compared to 1997, in collection
of principal in excess of reserves on loans purchased at a discount, was
partially offset by an increase in other non-interest income of $370 thousand
for the same period. Other non-interest income includes, but is not limited to,
income from servicing fees, commissions and fees and safe deposit rental, as
well as income from the sale of the reverse mortgage servicing portfolio.
In 1997, service fees on deposit accounts comprised 42.7% of non-interest
income as compared to 39.7% in 1996. Service fees on deposits increased $355
thousand or 21.1% in 1997 as compared to 1996.
In 1997, pre-tax gains of $1.1 million were recognized from the sale of two
commercial mortgage loans. There were no gains from the sale of loans during
1996. There were no gains from the sale securities in 1997. In 1996, security
gains of $235 thousand were recognized from the sale of available for sale
securities, which were sold as part of a securities portfolio-restructuring
plan.
Non-interest income recognized from the collection of principal in excess
of reserves on loans purchased at a discount increased by $255 thousand in 1997
as compared to 1996. All other non-interest income, which is comprised
principally of servicing fee income, commissions and fees, safe deposit rentals
and miscellaneous income, increased $57 thousand or 7.5% in 1997 as compared to
1996.
Table 4
- --------------------------------------------------------------------------------
Non-interest Income
for the years ended December 31,
- --------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Service fees on deposit accounts $2,551 $2,040 $1,685
Net gain on sale of securities 1,021 - 242
Net gain on sale of loans - 1,067 -
Accretion of discount in connection with acquisition - - 511
Net gain on sale of deposits of a branch location - - 455
Collection of acquired loans in excess of carrying value 174 855 600
All other 1,182 812 755
_____ _____ _____
$4,928 $4,774 $4,248
===== ===== =====
</TABLE>
Non-interest Expenses
Non-interest expenses totaled $19.4 million for 1998, an increase of $1.8
million or 10.0% from $17.6 million for 1997. The increase resulted principally
from the merger-related charges of $1.4 million associated with the acquisition
of Jersey Bank. Excluding the merger-related charges, non-interest expenses
increased $369 thousand or 2.1% over 1997. Initial costs associated with
establishing a Real Estate Investment Trust ("REIT") subsidiary of $231 thousand
also contributed to the increase. The REIT was established to manage certain
real estate assets of the Company in an effort to take advantage of certain tax
benefits. Further contributing to the increase were occupancy and furniture and
equipment costs, which increased $409 thousand due to the opening of a new
branch in Paramus and investments in technology. Also, salaries and benefits
increased $412 thousand (excluding costs associated with the REIT) due mostly to
salary increases, promotions and the opening of the new branch in Paramus. The
increases were partly offset by the recognition of $474 thousand cash surrender
value of certain directors' life insurance policies, which had not been
recognized in prior years. The amounts had not been recognized due to the
statutory receivership of the insurer, which gave rise to significant doubt
surrounding the collectibility of such amounts. In 1998, management determined
that the collectibility of the cash surrender value was probable since a solvent
insurance company had acquired the insurer. In addition, the Company benefited
from cost savings for the second half of 1998 with respect to the synergies
arising from the merger with Jersey Bank.
For 1997, total non-interest expenses increased $163 thousand or 0.9% from
$17.5 million for the year ended December 31, 1996. The increase in non-interest
expenses for 1997 was attributable to a $713 thousand increase in salaries and
benefits due primarily to annual salary increases, promotions and the full year
operation of the River Edge branch, which opened in the latter part of 1996. The
increase was, in part, offset by a $252 thousand decline in foreclosed real
estate expense resulting from the workout and sale of the foreclosed real estate
during the first half of 1997. Furthermore, the Company benefited from declines
of $104 thousand in the Federal Deposit Insurance Corporation ("FDIC")
assessment, $73 thousand in advertising and promotion expenses and $120 thousand
in occupancy and furniture and equipment costs. This decrease in occupancy and
furniture and equipment was mainly the result of closing two branch offices
during 1996 and the purchase of a previously leased branch location during 1997
coupled with a decline in maintenance costs incurred at all the Company's
locations.
One of the Company's goals is to control expenses in order to maximize
earnings and shareholder value. Generally, the efficiency ratio is one method
utilized to measure a bank's operating expenses. The efficiency ratio is
non-interest expenses, excluding the amortization of intangibles, merger-related
expenses and net expenses of foreclosed real estate, expressed as a percentage
of net interest income (on a fully taxable equivalent basis) and non-interest
income, excluding gains. Generally, the lower
17
<PAGE>
the efficiency ratio the more effective the Company is in utilizing its
resources to generate income. The efficiency ratio improved to 53.6% for 1998
compared to 56.5% in 1997. The improvement was largely attributable to the
growth in net interest income and non-interest income and was offset in part by
a marginal increase in non-interest expenses. The national peer group average
was 61.1% (peer group data as of September 30, 1998 - based upon the most recent
published report by SNL Securities). The efficiency ratio was 56.5% for 1997
compared to 60.0% in 1996. The national peer group average at December 31, 1997
was 60.4% (published by SNL Securities).
Table 5
- --------------------------------------------------------------------------------
Non-interest Expenses
for the years ended December 31,
- --------------------------------------------------------------------------------
(in thousands)
1998 1997 1996
--------- -------- --------
Salaries and benefits $ 9,437 $ 8,951 $ 8,238
Occupancy, furniture and equipment 3,440 3,031 3,151
Advertising and promotion 865 865 938
Federal Deposit Insurance Corporation assessment 75 58 162
Foreclosed real estate 1 - 252
Acquisition 1,392 - -
Other expenses
Stationery, printing and supplies 255 304 376
Professional fees 1,184 1,216 1,088
Communications 327 289 255
Postage and shipping 356 313 319
Credit card processing fees 24 63 45
Credit services 74 99 147
Amortization of premiums in connection
with acquisitions 384 444 444
Provision for litigation contingency - - (33)
Directors' fees, travel and retirement 88 607 553
Insurance premiums 172 240 244
Data Processing 538 548 490
Unrealized (gain)/loss on loans held for sale (18) 13
All other 804 645 810
--------- -------- --------
$19,416 $17,655 $17,492
========= ======== ========
Income Taxes
In 1998, income taxes amounted to $4.9 million as compared to $4.3 million
and $3.7 million for 1997 and 1996, respectively. The effective tax rate in 1998
was 36.3% as compared to 35.1% for both 1997 and 1996, respectively. Detailed
information on income taxes is shown in Notes 1 and 16 to the Consolidated
Financial Statements.
Financial Condition
Loan Portfolio
In 1998, high levels of prepayments and increased competitive factors
placed a great deal of pressure on loan production for the banking industry.
Despite this, the Company continued to experience strong growth in its loan
portfolio. At December 31, 1998, total loans amounted to $478.7 million, up
$40.4 million or 9.2% over the previous year. Promotional campaigns in
conjunction with competitive loan rates and focused sales efforts were
instrumental to the loan growth, particularly in the 1-4 family residential
mortgage loan portfolio. First lien real estate mortgage loans increased $16.5
million or 22.6% to $89.9 million in 1998 from $73.3 million in 1997. The loan
growth was largely in the subsidiary bank's delineated community, which confirms
the Company's pledge of striving to be the largest community-based banking
organization in Bergen County, dedicated to community service and helping its
customers grow and prosper.
Commercial real estate mortgage loans amounted to $148.9 million at
December 31, 1998, and represented 31.1% of total loans as compared to $135.0
million or 30.8% of all loans at the end of 1997. These loans are secured
primarily by first priority mortgage liens on owner-occupied commercial
properties. While a significant portion of the Company's loans are
collateralized by real estate located in northern New Jersey, the Company does
not have any concentration of loans in any single industry classified under the
Standard Industrial Classification Code, which exceeds 4% of its total loans.
In 1998, term federal funds totaling $7.5 million were purchased as
short-term investments. The remaining balance of $5.0 million is scheduled to
mature in the first quarter of 1999.
18
<PAGE>
Table 6
- --------------------------------------------------------------------------------
Loan Portfolio
at December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Amounts of loans by type (in thousands)
Commercial and financial $ 64,067 $ 51,573 $ 51,908 $ 42,645 $ 36,512
Real estate-construction 974 4,229 4,799 2,509 3,180
Real estate-mortgage
1-4 family residential
First liens 89,852 73,309 62,170 61,374 61,718
Junior liens 14,322 16,795 18,645 21,803 25,507
Available for sale - - 1,195 1,106 1,086
Home equity 142,781 143,177 121,504 102,006 88,860
Commercial 148,875 134,972 117,641 100,332 90,804
Installment
Credit cards and related plans 2,033 2,415 2,704 2,935 3,331
Other 1,200 1,702 3,494 2,805 3,133
Lease financing 9,613 10,101 - 55 698
Term federal funds 5,000 - - - -
---------- ---------- ---------- ---------- ---------
Total $478,717 $438,273 $384,060 $337,570 $314,829
========== ========== ========== ========== =========
Percent of loans by type
Commercial and financial 13.3 % 11.8 % 13.5 % 12.6 % 11.6 %
Real estate-construction 0.2 1.0 1.2 0.7 1.0
Real estate-mortgage
1-4 family residential
First liens 18.8 16.7 16.2 18.2 19.6
Junior liens 3.0 3.8 4.9 6.5 8.1
Available for sale - - 0.3 0.3 0.3
Home equity 29.8 32.7 31.6 30.2 28.3
Commercial 31.1 30.8 30.6 29.7 28.8
Installment
Credit cards and related plans 0.4 0.5 0.7 0.9 1.1
Other 0.3 0.4 1.0 0.9 1.0
Lease financing 2.0 2.3 - - 0.2
Term federal funds 1.1 - - - -
---------- ---------- ---------- ---------- ---------
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
========== ========== =========== ========== =========
The following table sets forth the maturity distribution of the
Company's loan portfolio as of December 31, 1998. The table excludes real estate
loans (other than construction loans), lease financing and installment loans:
(in thousands)
Due after
Due in one year Due after
one year through five
or less five years years Total
---------- ---------- ----------- ----------
Commercial and financial $17,623 $22,071 $24,373 $64,067
Real estate-construction 974 - - 974
---------- ---------- ----------- ----------
Total $18,597 $22,071 $24,373 $65,041
========== ========== =========== ==========
The following table sets forth, as of December 31, 1998, the sensitivity of the amounts due after one year to
changes in interest rates: (in thousands)
Due after
one year Due after
through five
five years years
---------- -----------
Fixed interest rate $14,397 $ 3,651
Variable interest rate 7,674 20,722
---------- -----------
Total $22,071 $24,373
========== ===========
</TABLE>
Loan Quality
The lending activities of the Company are guided by the basic lending
policy established by the Company's Board of Directors. Loans must meet the
tests of a prudent loan, which include criteria regarding the character,
capacity and capital of the borrower, collateral provided for the loan and
prevailing economic conditions. Generally, the Company obtains an independent
appraisal of real property, within regulatory guidelines, when it is considered
the primary collateral for a loan.
The Company employs a full-time loan review officer who evaluates the
credit risk for substantially all large commercial loans. This review process is
intended to identify adverse developments in individual credits, regardless of
whether such credits are also included on the watchlist discussed below and
whether or not the loans are delinquent. The loan review officer reports
directly to the President of the Company and provides quarterly reports to the
Board of Directors.
Management maintains a "watchlist" system under which credit officers are
required to provide early warning of possible deteriorations in loans. These
loans may not currently be delinquent, but may present indications of financial
weakness, such as deteriorating financial ratios of the borrowers, or other
concerns at an early stage to allow early implementation of responsive credit
strategies. The "watchlist" report is presented to Executive Management monthly
and to the Board of Directors on a quarterly basis.
19
<PAGE>
Loan Losses
The provision for loan losses represents management's determination of the
amount necessary to bring the allowance for loan losses to a level that
management considers adequate to reflect the risk of the future potential losses
inherent in the Company's loan portfolio. In its evaluation of the adequacy of
the allowance for loan losses, management considers past loan loss experience,
changes in the composition of performing and nonperforming loans, concentrations
of credit, economic conditions, collateral coverage, the condition of borrowers
facing financial pressure and the relationship of the current level of the
allowance to the credit portfolio and to nonperforming loans. However, the
process of determining the adequacy of the allowance is necessarily judgmental
and subject to changes in external conditions. Accordingly, there can be no
assurance that existing levels of the allowance will ultimately prove adequate
to cover actual loan losses.
Loan loss provisions for 1998 amounted to $951 thousand, a decrease of $702
thousand from the prior year. In 1997, the loan loss provision amounted to $1.7
million, an increase of $906 thousand from 1996. The Company's lending focus and
growth continues to be largely in its commercial and commercial mortgage loans
("commercial loans"). From 1995 to 1998, commercial loans increased $70.0
million or 48.9%, while 1-4 family residential and installment loans ("consumer
loans") increased $58.2 million or 30.3%. This growth and concentration of
credit towards commercial loans can change the characteristics of and
potentially increase the inherent credit risk in the Bank's loan portfolio. In
response to this trend, the Company, in 1997, increased the allocation
percentage applied to performing commercial loans to account for such risk. The
increase in the allocation, in 1997, along with the other assessments made by
management, resulted in an increase in the provision for loan losses and the
related allowance for loan losses. In 1998, management determined that the
allowance for loan losses was at a level sufficient to absorb estimated losses
in the loan portfolio, particularly with respect to the inherent credit risk
associated with growth and concentration of credit. As a result, the provision
for loan losses was lower in 1998, as compared to 1997.
Table 7
- --------------------------------------------------------------------------------
Loan Loss Experience
for the years ended December 31,
- --------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Average loans outstanding $462,296 $402,799 $353,659 $318,089 $293,792
============ ============ ============ ============ ============
Allowance at beginning of year $5,231 $3,968 $3,926 $4,079 $4,105
------------ ------------ ------------ ------------ ------------
Loans charged off
Commercial 15 293 8 399 281
Installment 135 141 78 108 149
Real estate 470 139 770 914 647
Lease financing - - 57 89 47
------------ ------------ ------------ ------------ ------------
Total 620 573 913 1,510 1,124
------------ ------------ ------------ ------------ ------------
Recoveries of loans previously charged off
Commercial 35 84 75 25 -
Installment 18 29 45 54 99
Real estate 30 70 88 32 15
Lease financing - - - 7 -
------------ ------------ ------------ ------------ ------------
Total 83 183 208 118 114
------------ ------------ ------------ ------------ ------------
Net loans charged off 537 390 705 1,392 1,010
------------ ------------ ------------ ------------ ------------
Additions to allowance charged to expense 951 1,653 747 1,239 984
------------ ------------ ------------ ------------ ------------
Allowance at end of year $5,645 $5,231 $3,968 $3,926 $4,079
============ ============ ============ ============ ============
Allowance to total loans 1.18 % 1.19 % 1.03 % 1.16 % 1.30 %
Allowance to nonaccrual loans 471.20 345.51 157.02 156.35 66.04
Allowance to nonaccrual loans and
loans past due 90 days or more 471.20 316.07 155.49 156.35 66.04
Ratio of net charge-offs to average loans 0.12 0.10 0.20 0.44 0.34
</TABLE>
The allowance for loan losses represented 471.2% of nonaccrual loans and
loans past due 90 days or more at the end of 1998, up from 316.1% at the end of
1997. The ratio increased principally as a result of a slight increase in the
allowance at year end and a $457 thousand decrease in nonaccrual loans and loans
past due 90 days or more in 1998 as compared to the end of the year in 1997.
Table 8
- --------------------------------------------------------------------------------
Allocation of Allowance for Loan Losses
at December 31,
- --------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial and financial $ 941 $ 903 $1,051 $ 965 $ 994
Installment 93 147 165 228 289
Real estate 3,633 3,335 2,026 2,104 1,807
Unallocated 978 846 726 629 989
======= ======= ======= ======== ========
$5,645 $5,231 $3,968 $3,926 $4,079
======= ======= ======= ======== ========
</TABLE>
The above allocation is intended for analytical purposes and may not be
indicative of the categories in which future loan losses occur.
20
<PAGE>
Nonperforming Assets
Nonperforming assets consist of nonaccrual loans, restructured loans and
foreclosed real estate. Loans are placed on nonaccrual status when, in the
opinion of management, the future collection of interest or principal according
to contractual term may be doubtful or when principal or interest payments are
in arrears 90 days or more. Foreclosed real estate, representing real estate
collateral acquired by legal foreclosure procedures, is valued using independent
appraisals and the Company's policy is to obtain revised appraisals annually.
The Company intends to dispose of each property at or near its current
valuation. However, there can be no assurance that disposals will be made as
soon as anticipated or at expected values.
Table 9 presents the detail of nonperforming assets and the aggregate of
loans whose principal and/or interest has not been paid according to contractual
terms. In 1998, the Company sold $409 thousand of nonperforming loans, which was
largely responsible for the decline in total nonperforming assets by $277
thousand in 1998 as compared to 1997. In 1997, total nonperforming assets
decreased by $1.8 million to $2.1 million in 1997 as compared to $3.9 million in
1996. The decrease was due, in part, to the sale of foreclosed real estate
totaling $610 thousand. Further contributing to the decrease was a $1.0 million
decline in nonaccrual loans which was largely due to a commercial loan pay-off
totaling $212 thousand and a charge-off coupled with a lump sum payment on
another commercial loan totaling $558 thousand. Based on the current information
available, except for the loans included in the table, there were no material
potential problem loans, either individually or in the aggregate, at December
31, 1998.
Table 9
- --------------------------------------------------------------------------------
Loan Delinquencies and Nonperforming Assets
at December 31,
- --------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Loans delinquent and accruing interest
Loans past due 30-89 days $379 $832 $838 $1,397 $1,513
Loans past due 90 days or more - 141 25 - -
--------- --------- --------- --------- ----------
Total loans delinquent and accruing interest $379 $973 $863 $1,397 $1,513
========= ========= ========= ========= ==========
Nonaccrual loans $1,198 $1,514 $2,527 $2,511 $6,177
Foreclosed real estate 84 - 610 1,213 880
Restructured loans 528 573 725 1,465 522
--------- --------- --------- --------- ----------
Total nonperforming assets $1,810 $2,087 $3,862 $5,189 $7,579
========= ========= ========= ========= ==========
Total nonperforming assets and loans
past due 90 days or more $1,810 $2,228 $3,887 $5,189 $7,579
========= ========= ========= ========= ==========
Nonaccrual loans to total loans 0.25 % 0.35 % 0.66 % 0.74 % 1.96 %
Nonperforming assets to total loans and
foreclosed real estate 0.38 0.48 1.00 1.53 2.40
Nonperforming assets to total assets 0.26 0.33 0.67 0.95 1.43
Nonaccrual loans and loans past due 90 days
or more to total loans 0.25 0.38 0.66 0.74 1.96
Nonperforming assets and loans past due 90 days
or more to total loans and foreclosed real estate 0.38 0.51 1.01 1.53 2.40
Nonperforming assets and loans past due 90 days
or more to total assets 0.26 0.36 0.68 0.95 1.43
</TABLE>
21
<PAGE>
Securities Held to Maturity and Securities Available for Sale
The Company identifies as "securities available for sale" securities used
as part of its asset/ liability management strategy, or securities that may be
sold in response to, among other things, changes in interest rates and
prepayment risk. Debt securities purchased with the intent and ability to hold
until maturity are classified as "held to maturity". See Notes 1 and 4 of Notes
to Consolidated Financial Statements for additional information concerning
securities.
Table 10 presents a summary of the contractual maturities and weighted
average yields (adjusted to a taxable equivalent basis) of "securities held to
maturity" and "securities available for sale". Historical cost was used to
calculate the weighted average yields.
Table 10
- --------------------------------------------------------------------------------
Securities
at December 31, 1998
- --------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
After 1 After 5 Weighted
Within But Within But Within After Average
1 Year 5 Years 10 Years 10 Years Total Yield
---------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Securities held to maturity at amortized cost
Obligations of U.S. Treasury $5,999 $ 9,993 - - $ 15,992 5.90 %
Mortgage-backed securities - 1,031 $ 10,195 $ 7,695 18,921 6.85
Obligations of U.S. agencies - 7,986 - - 7,986 5.99
Obligations of states & political subdivisions 6,711 787 - 3,613 11,111 5.55
Other debt securities 25 124 - - 149 6.57
---------- ----------- --------- -------- ---------
12,735 19,921 10,195 11,308 54,159
---------- ----------- --------- -------- ---------
Securities available for sale at market value
Obligations of U.S. Treasury 14,107 19,934 - - 34,041 6.38
Mortgage-backed securities 170 3,815 10,912 28,169 43,066 6.22
Obligations of U.S. agencies - 8,113 505 5,206 13,824 5.57
---------- --------- --------- -------- ---------
14,277 31,862 11,417 33,375 90,931
---------- --------- --------- -------- ---------
Total $27,012 $51,783 $21,612 $44,683 $145,090
========== ========= ========= ======== =========
Weighted average yield 6.07 % 6.08 % 6.50 % 6.19 % 6.18 %
The following table set forth the carrying value of the Corporation's held to
maturity and available for sale securities portfolios for the years ended,
December 31: (dollars in thousands)
1998 1997 1996
--------------------- -------------------- --------------------
Amount % Amount % Amount %
----------- -------- --------- ------ ---------- -------
Securities held to maturity
Obligations of U.S. Treasury $ 15,992 29.6 % $ 22,134 36.7 % $ 43,517 57.5 %
Mortgage-backed securities 18,921 34.9 28,398 47.0 22,440 29.7
Obligations of U.S. agencies 7,986 14.7 6,711 11.1 5,992 7.9
Obligations of states & political subdivisions 11,111 20.5 3,049 5.0 3,581 4.7
Other debt securities 149 0.3 150 0.2 150 0.2
----------- -------- ---------- ------ ---------- -------
$ 54,159 100.0 % $ 60,442 100.0 % $ 75,680 100.0 %
=========== ======== ========== ====== ========== =======
Securities available for sale
Obligations of U.S. Treasury $ 34,041 35.5 % $ 35,983 47.6 % $ 31,847 47.0 %
Mortgage-backed securities 43,066 45.0 27,149 35.9 23,522 34.8
Obligations of U.S. agencies 13,824 14.4 7,012 9.3 7,970 11.8
Equity securities 4,840 5.1 5,411 7.2 4,320 6.4
----------- -------- ---------- ------ ---------- ------
$ 95,771 100.0 % $ 75,555 100.0 % $ 67,659 100.0 %
=========== ======== ========== ====== ========== =======
</TABLE>
The Company's total investment portfolio increased by $13.9 million or
10.2% to $149.9 million at December 31, 1998 as compared to the prior year. The
growth was principally in U.S. agencies, obligations of states and political
subdivisions and mortgaged-backed securities, which includes collateralized
mortgage obligations ("CMO"). The growth was partly offset by a decline in U.S.
Treasury securities as a result of maturities. Substantially all of the
mortgage-backed securities held by the Company are issued or backed by Federal
agencies. At December 31, 1998, the Company's CMO portfolio did not include any
securities deemed as "high risk" as defined by the Federal Financial
Institutions Examination Council. Total gross unrealized gains and losses for
the total investment portfolio amounted to $2.7 million and $238 thousand,
respectively, at December 31, 1998.
The Company's held to maturity portfolio decreased by $6.3 million or 10.4%
to $54.2 million at December 31, 1998 as compared to the prior year. The
decrease was principally due to the transfer of certain securities classified as
held to maturity by Jersey Bank to available for sale. The securities were
reclassified upon consummation of the acquisition because of their higher degree
of interest rate sensitivity. Furthermore, the securities do not conform to the
Company's investment objectives or to its policy for managing interest rate
risk. At the date of transfer the securities had a book value of $8.2 million
and a market value of $8.1 million.
The Company's available for sale portfolio increased by $20.2 million or
26.8% to $95.8 million at December 31, 1998 as compared to the prior year. The
growth was largely due to the purchase of securities in 1998. In addition, the
above noted reclassification of certain securities of Jersey Bank also
contributed to the growth.
22
<PAGE>
Deposits
The Company traditionally relies on its deposit base to fund its credit
needs. Core deposits, which include non-interest bearing demand deposits,
interest bearing demand accounts, savings deposits, money market accounts and
time deposits in amounts under $100,000, represented 95.8% of total deposits at
December 31, 1998 and 93.8% at December 31, 1997.
Total deposits amounted to $598.7 million at December 31, 1998, an increase
of $58.0 million or 10.7% from year-end 1997. The most significant growth in the
deposit base occurred in non-interest and interest bearing demand deposits,
which increased $12.0 million or 12.5% and $39.9 million or 25.8% at December
31, 1998, respectively, as compared to the prior year. Time deposits marginally
increased by $2.4 million or 1.5% to $170.5 million at year-end 1998 as compared
to year-end 1997. The favorable change in mix of deposits, combined with
declines in interest rates, reduced the overall yield on deposits by 10 basis
points. The Company's emphasis of building core customer relationships has been
paramount to its success in positively changing the composition of its deposits
over the last five years.
Table 11
- --------------------------------------------------------------------------------
Deposit Summary
at December 31,
- --------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------------ --------------- ---------------- --------------- ----------------
Amount % Amount % Amount % Amount % Amount %
---------- ------- -------- ------ --------- ------ -------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand $ 107,408 17.9 % $ 95,436 17.6 % $ 78,450 16.0 % $70,667 14.5 % $ 67,491 14.4 %
Interest bearing demand 194,177 32.4 154,301 28.6 121,878 24.8 114,009 23.4 106,007 22.6
Money market 50,665 8.5 41,815 7.7 41,372 8.4 40,728 8.4 40,139 8.5
Savings 76,026 12.7 81,202 15.0 82,817 16.8 85,816 17.6 91,582 19.5
Time deposits less than $100,000 145,337 24.3 134,287 24.9 139,994 28.5 158,689 32.5 152,299 32.4
Time deposits greater than $100,000* 25,119 4.2 33,724 6.2 27,126 5.5 17,315 3.6 12,281 2.6
========== ======= ======== ====== ========= ====== ======== ====== ========= ======
$598,732 100.0 % $540,765 100.0 % $491,637 100.0 % $487,224 100.0 % $469,799 100.0 %
========== ======= ======== ====== ========= ====== ======== ====== ========= ======
</TABLE>
* The following table shows the time remaining to maturity of time certificates
of deposit of $100,000 or more as of December 31, 1998 (in thousands)
Three months or less $ 11,594
Over three months through six months 6,918
Over six months through twelve months 3,239
Over twelve months 3,368
----------
$25,119
==========
Market Risk
Market risk is generally described as the sensitivity of income to adverse
changes in interest rates, foreign currency exchange rates, commodity prices,
and other relevant market rates or prices. Market rate sensitive instruments
include: financial instruments such as investments, loans, mortgage-backed
securities, deposits, borrowings and other debt obligations; derivative
financial instruments, such as futures, forwards, swaps and options; and
derivative commodity instruments, such as commodity futures, forwards, swaps and
options that are permitted to be settled in cash or another financial
instrument.
The Company does not have any material exposure to foreign currency
exchange rate risk or commodity price risk. The Company did not enter into any
market rate sensitive instruments for trading purposes nor did it engage in any
hedging transactions utilizing derivative financial instruments during 1998. The
Company's real estate loan portfolio, concentrated primarily in northern New
Jersey, is subject to risks associated with the local and regional economies.
The Company's primary source of market risk exposure arises from changes in
market interest rates ("interest rate risk").
Interest Rate Risk
Interest rate risk is generally described as the exposure to potentially
adverse changes in current and future net interest income resulting from:
fluctuations in interest rates; product spreads; and imbalances in the repricing
opportunities of interest-rate-sensitive assets and liabilities. Therefore,
managing the Company's interest rate sensitivity is a primary objective of the
Company's senior management. The Company's Asset/Liability Committee ("ALCO") is
responsible for managing the exposure to changes in market interest rates. ALCO
attempts to maintain stable net interest margins by periodically evaluating the
relationship between interest-rate-sensitive assets and liabilities. The
evaluation, which is performed at least monthly, attempts to determine the
impact on net interest margin from current and prospective changes in market
interest rates.
The Company manages interest rate risk exposure with the utilization of
financial modeling and simulation techniques. These methods assist the Company
in determining the effects of market rate changes on net interest income and
future economic value. The objective of the Company is to maximize net interest
income within acceptable levels of risk established by policy. The techniques
utilized for managing exposure to market rate changes involve a variety of
interest rate, pricing and volume assumptions. These assumptions include
projections on growth, prepayment and withdrawal levels as well as other
embedded options inherently found in financial instruments. The Company reviews
and validates these assumptions at least annually, or more frequently, if
economic or other conditions change. At December 31, 1998, the Company simulated
the effects on net interest income given an instantaneous and parallel shift in
the yield curve of 200 basis points in either direction. Based on the
simulation, it was estimated that net interest income, over a twelve-month
horizon, would not decrease by more than 10.2%. At December 31, 1998, the
Company was within policy limits established for changes in net interest income
and future economic value.
The preceding simulation does not represent a Company forecast and should
not be relied upon as being indicative of expected operating results. These
hypothetical estimates are based upon numerous assumptions including: the nature
and timing of interest rate levels including yield curve shape, prepayments on
loans and securities, deposit decay rates, pricing decisions on loans and
deposits, reinvestment/replacement of asset and liability cashflows, and others.
While assumptions are developed based upon current economic and local market
conditions, the Company cannot make any assurances as to the predictive nature
of these assumptions including how customer preferences or competitor influences
might change.
Further, as market conditions vary from those assumed in the simulation,
actual results will also differ due to: prepayment/refinancing levels deviating
from those assumed, the varying impact of interest rate changes on caps or
floors on adjustable rate assets, the potential effect of changing debt service
levels on customers with adjustable rate loans, depositor early withdrawals
23
<PAGE>
and product preference changes, and other internal/external variables.
Furthermore, the simulation does not reflect actions that ALCO might take in
responding to anticipating changes in interest rates or competitive conditions
in the market place.
In addition to the above-mentioned techniques, the Company utilizes
sensitivity gap as an interest rate risk measurement. Sensitivity gap is
determined by analyzing the difference between the amount of interest earning
assets maturing or repricing within a specific time period and the amount of
interest bearing liabilities maturing or repricing within that same period of
time. Sensitivity gap provides an indication of the extent to which the
Company's net interest income may be affected by future changes in market
interest rates. The cumulative gap position expressed as a percentage of total
assets provides one relative measure of the Company's interest rate exposure.
The cumulative gap between the Company's interest-rate-sensitive assets and
its interest-rate-sensitive liabilities repricing within a one-year period was
(7.53%) at December 31, 1998. Since the cumulative gap was negative, the Company
has a "negative gap" position, which theoretically will cause its assets to
reprice more slowly than its deposit liabilities. In a declining interest rate
environment, interest costs may be expected to fall faster than the interest
received on earning assets, thus increasing the net interest spread. If interest
rates increase, a negative gap means that the interest received on earning
assets may be expected to increase more slowly than the interest paid on the
Company's liabilities therefore decreasing the net interest spread.
Certain shortcomings are inherent in the method of analysis presented in
Table 12. Although certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to changes in market
interest rates. The rates on certain types of assets and liabilities may
fluctuate in advance of changes in market rates, while rates on other types of
assets and liabilities may lag behind changes in market rates. In the event of a
change in interest rates, prepayment and early withdrawal levels could deviate
significantly from those assumed in calculating the table. The ability of
borrowers to service their debt may decrease in the event of an interest rate
increase. Management considers these factors when reviewing its gap position and
establishing its ongoing asset/liability strategy.
Table 12
- --------------------------------------------------------------------------------
Interest Rate Sensitivity Analysis
at December 31, 1998
- --------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
Non-
3 6 6 Mos. to 1 to 3 3 to 5 Over interest
Subject to rate change within Months Months 1 Year Years Years 5 Years Sensitive Total
-------- -------- --------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Net loans $139,587 $31,288 $48,739 $124,928 $85,294 $47,682 $(4,446) $473,072
Investment securities 13,897 8,253 31,752 66,362 8,692 19,075 1,899 149,930
Cash and amounts due from banks 23,175 - - - - - 20,109 43,284
Other noninterest earning assets - - - - - - 19,078 19,078
-------- -------- -------- -------- --------- -------- -------- --------
Total assets 176,659 39,541 80,491 191,290 93,986 66,757 36,640 685,364
-------- -------- -------- -------- --------- -------- -------- --------
Liabilities and stockholders' equity
Demand deposits 32,472 32,472 64,944 86,244 42,049 43,404 - 301,585
Savings deposits 6,653 6,652 13,305 34,173 10,541 4,702 - 76,026
Fixed maturity certificates of deposits 47,015 43,952 51,893 19,720 7,844 32 - 170,456
Money market accounts 7,599 7,599 15,200 10,898 5,038 4,331 - 50,665
Securities sold under agreements to purchase 7,780 1,000 - - - - - 8,780
Short-term borrowings 6,027 27 3,714 - - - - 9,768
Other liabilities - - - - - - 5,712 5,712
Stockholders' equity - - - - - - 62,372 62,372
-------- -------- -------- -------- --------- -------- -------- --------
Total liabilities and stockholders' equity 107,546 91,702 149,056 151,035 65,472 52,469 68,084 $685,364
-------- -------- -------- -------- --------- -------- -------- --------
GAP $69,113 $(52,161)$ (68,565) $40,255 $28,514 $14,288 $(31,444)
======== ======== ======== ======== ========= ======== ========
GAP to total assets 10.08 % (7.61)% (10.00)% 5.87 % 4.16 % 2.08 %
Cumulative GAP $69,113 $16,952 $(51,613) $(11,358) $17,156 $31,444
======== ======== ========= ======== ========= ========
Cumulative GAP to total assets 10.08 % 2.47 % (7.53)% (1.66)% 2.50 % 4.59 %
</TABLE>
Liquidity
A fundamental component of the Company's business strategy is to manage
liquidity to ensure the availability of sufficient resources to meet all
financial obligations and finance prospective business opportunities. Liquidity
management is critical to the stability of the Company. The liquidity position
of the Company over any given period of time is a product of it'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.
Traditionally, financing for the Company's loans and investments is derived
primarily from deposits, along with interest and principal payments on loans and
investments. At December 31, 1998, total deposits amounted to $598.7 million, an
increase of $58.0 million or 10.7% over the prior comparable year. In 1998, the
Company had strong deposit growth, and therefore, placed less reliance on
advances from the Federal Home Loan Bank of New York ("FHLB") and securities
sold under agreements to repurchase ("REPOS"). During 1998, the Company did not
obtain any new term-advances from the FHLB. At December 31, 1998, advances from
the FHLB and REPOS totaled $18.5 million and represented 2.7% of total assets as
compared to $22.9 million and 3.7% of total assets, at December 31, 1997.
In 1998, despite heightened competition for loans and increased loan
prepayments, loan production continued to be the Company's principal investing
activity. Net loans at December 31, 1998 amounted to $473.1 million, compared to
$433.0 million at the end of 1997, an increase of $40.0 million or 9.2%.
24
<PAGE>
The Company's most liquid assets are cash and due from banks, federal funds
sold and interest bearing demand deposits. At December 31, 1998, the total of
such assets amounted to $43.3 million or 6.3% of total assets, compared to $36.6
million or 5.9% of total assets at year-end 1997.
Another significant liquidity source is the Company's available for sale
securities. At December 31, 1998, available for sale securities amounted to
$95.8 million or 63.9% of total securities, compared to $75.6 million or 55.6%
of total securities at year-end 1997.
In addition to the aforementioned sources of liquidity, the Company has
available various other sources of liquidity, including federal funds purchased
from other banks and the Federal Reserve discount window. The Bank also has a
$57.7 million line of credit available through its membership in the FHLB
Management believes that the Company's sources of funds are sufficient to
meet its funding requirements.
Capital Adequacy
Stockholders' equity totaled $62.4 million and represents 9.1% of total
assets at December 31, 1998, compared to $56.1 million and 9.0% of total assets
at December 31, 1997. The $6.2 million increase was primarily attributable to
net income of $8.6 million less cash dividends of $2.8 million.
Guidelines issued by the Federal Reserve Board and the FDIC establish
capital adequacy guidelines for bank holding companies and state-chartered
banks. The guidelines establish a risk-based capital framework consisting of (1)
a definition of capital and (2) a system for assigning risk weights. Capital
consists of Tier 1 capital, which includes common shareholders' equity less
certain intangibles and a supplementary component called Tier II capital, which
includes a portion of the allowance for loan losses. Effective October 1, 1998,
the Federal Reserve Board and the FDIC adopted an amendment to their risk-based
capital guidelines that permits insured depository institutions to include in
their Tier II capital up to 45% of the pre-tax net unrealized gains on certain
available for sale equity securities. All assets and off-balance-sheet items are
assigned to one of four weighted risk categories ranging from 0% to 100%. Higher
levels of capital are required for the categories perceived as representing
greater risks. An institution's risk-based capital ratio is determined by
dividing its qualifying capital by its risk-weighted assets. The guidelines make
regulatory capital requirements more sensitive to differences in risk profiles
among banking institutions, take off-balance sheet items into account in
assessing capital adequacy and minimize the disincentive to holding liquid,
low-risk assets. Banking organizations are generally expected to operate with
capital positions well above the minimum rates. Institutions with higher levels
of risk, or which experience or anticipate significant growth, are also expected
to operate well above minimum capital standards. At December 31, 1998, the
Company's and the Bank's Tier I risk-based capital ratio was 13.80% and 13.34%,
respectively, well in excess of minimal capital standard.
These guidelines focus principally on broad categories of credit risk,
although the framework for assigning assets and off-balance sheet items to risk
categories does incorporate elements of transfer risk. The risk-based capital
ratio does not, however, incorporate other factors that may affect a company's
financial condition, such as overall interest rate exposure, liquidity, funding
and market risks, the quality and level of earnings, investment or loan
concentrations, the quality of loans and investments, the effectiveness of loan
and investment policies and management's ability to monitor and control
financial and operating risks.
In addition to the risk-based guidelines discussed above, the Federal
Reserve Board and the FDIC require that a bank holding company and bank which
meet the regulators' highest performance and operation standards and which are
not contemplating or experiencing significant growth maintain a minimum leverage
ratio (Tier I capital as a percent of quarterly average adjusted assets) of 3%.
For those financial institutions with higher levels of risk or that are
experiencing or anticipating significant growth, the minimum leverage ratio will
be increased. At December 31, 1998, the Company's and the Bank's leverage ratio
was 9.08% and 8.76%, respectively.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 introduces new
standards and disclosure requirements for the way companies report information
about operating segments, including related product information. Operating
segments are defined based upon the way management organizes segments for making
operating decisions and evaluating performance. Information such as segment net
earnings, appropriate revenues and expense items and certain balance sheet items
are required to be presented, and such amounts are required to be reconciled to
the company's combined financial information. SFAS 131 is applicable for all
public, for-profit companies and became effective for fiscal years beginning
after December 31, 1997. This standard, which was adopted, had no impact on the
Company.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits" ("SFAS 132"). SFAS 132 amends the disclosure
requirements related to pensions and other postretirement benefits by requiring
additional information that will facilitate financial analysis, and eliminating
certain disclosures that are considered no longer useful. SFAS No. 132
supersedes the disclosure requirements in SFAS Nos. 87, 88, and 106 but does not
change the measurement or recognition of these plans. This Statement is
effective for fiscal years beginning after December 15, 1997. The Company has
adopted this standard.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 requires that entities recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure those
instruments at fair value. Adoption of SFAS 133 is required for all fiscal
quarters of fiscal years beginning after June 15, 1999. Adoption of SFAS 133 is
not expected to have a material impact upon the Company's consolidated financial
condition or results of operations.
Effects of Inflation and Changing Prices
The financial statements and related financial data presented herein have
been prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than do general levels of inflation. Interest rates do not
necessarily move in the same magnitude as the prices of goods and services.
25
<PAGE>
Year 2000 Readiness Disclosure
This Year 2000 disclosure falls within the Year 2000 Information and
Readiness Disclosure Act of 1998.
Many of the world's computers have recorded years in a two-digit format
and, if not corrected, this problem will render such computers incapable of
interpreting dates beyond the year 1999, which could disrupt business ("Year
2000 issue"). A company's exposure to uncertainties and costs associated with
the Year 2000 issue depends on a number of factors, including software,
hardware, the industry in which it operates, and other entities with which it
electronically interacts.
The Company has established a Year 2000 Compliance Committee (the
"Committee") and has adopted a Year 2000 Compliance Plan (the "Y2K Plan"). The
objectives of the Committee and the Y2K Plan are to address the Year 2000 issue
and prepare the Company for the new millennium. As recommended by the Federal
Financial Institutions Examination Council, the Y2K Plan encompasses the
following phases: Awareness, Assessment, Renovation, Validation and
Implementation. These phases enable the Company to identify risks, develop an
action plan, and perform adequate testing and complete certification that its
processing systems will be Year 2000 ready. In the Awareness phase, the Company
defined the Year 2000 issues, informed management and staff and obtained
executive level support and funding. In addition, the Company compiled a
comprehensive list of items that may be affected by the Year 2000 compliance
issues. Such items include facilities and related non-information technology
systems (embedded technology), computer systems, hardware, and services and
products provided by third parties. In the Assessment phase, identified items
were evaluated to assess whether the items will function properly with the
century date change. The items were ranked in the order that they will need to
be remediated based on their mission critical nature and the potential impact to
the Company. The Renovation phase included an analysis of the items that are
affected by the Year 2000 issue, the identification of problem areas and the
repair of non-compliant items. The Validation phase includes thorough testing
and verification of systems, databases and utilities, including present and
forward date testing which includes simulating data conditions in the Year 2000.
The Implementation phase will consist of placing all the systems, databases and
utilities that have been renovated into production. As of December 31, 1998, the
Company has completed the Awareness, Assessment and Renovation phases and a
significant portion of the Validation phase with respect to its mission critical
applications. The Company expects to have the Validation phase with respect to
its mission critical applications completed by March 31, 1999, and the
Implementation phase completed by the second quarter of 1999.
The Company has begun and continues to survey and communicate with
counterparties, intermediaries and vendors ("Third Parties") with whom it has
important financial and operational relationships to determine the extent to
which they are vulnerable to Year 2000 issues. As of December 31, 1998, the
Company has received sufficient information from its Third Parties to conclude
that they are in the Renovation, Validation and Implementation phases of their
respective plans. However, as of December 31, 1998, the Company has not yet
received conclusive information from all Third Parties related to the
Renovation, Validation and Implementation phases to predict the outcome of their
efforts.
There are many risks associated with the Year 2000 issue, including the
failure of the Company's computer and non-financial technology systems. Such
failures could have a material adverse effect on the Company and may cause
system malfunctions, incorrect or incomplete transaction processing resulting in
the inability to reconcile accounting books and records. In addition, even if
the Company successfully remediates its Year 2000 issues, it can be adversely
affected by failures of Third Parties with which the Company has financial or
operational relationships to remediate their own Year 2000 issues. The failure
of Third Parties to remediate their Year 2000 issues in a timely manner could
result in a material financial risk to the Company. Such risks include business
interruption or shutdown, financial loss, regulatory actions and legal
liability. To mitigate Year 2000 risk, the Company is developing a Year 2000
specific contingency plan, which is expected to be completed by March 31, 1999.
Based on current information, the Company does not anticipate that the
overall costs related to the implementation of the Y2K Plan to be material in
any single year. The Company estimates that the total external cost of
implementing its Y2K Plan will amount to approximately $170 thousand. The Year
2000 costs include all activities undertaken on Year 2000 related matters,
including, but not limited to, renovation, validation, third party review and
contingency planning. However, costs for compensation and benefits of the
Company's internal employees have not yet been determined but is not expected to
be material. Through the year ended 1998, the Company has expended approximately
$20 thousand on the Year 2000 project. All Year 2000 remediation costs are
expensed in the period incurred.
26
<PAGE>
Forward Looking Statements
We discuss certain matters in this report which are not historical facts,
but which are "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These "forward looking statements"
include, but are not limited to, the adequacy of the allowance for loan losses,
profitability, interest rate risk, market risk, liquidity and the year 2000
readiness disclosure. The "forward looking statements" in this report reflect
what we currently anticipate will happen in each case. What actually happens
could differ materially from what we currently anticipate will happen as a
result of, but not limited to, changes in economic condition, interest rate
fluctuations, levels of loan growth and quality and the successful
implementation of its Year 2000 Plan, which includes capital expenditures, costs
of remediation and testing, the timetable for implementing the remediation and
testing phases of Year 2000 planning, the possible impact of third parties' Year
2000 issues on the Company, management's assessment of contingencies and
possible scenarios in its Year 2000 planning. We are not promising to make any
public announcement when we think "forward looking statements" in this document
are no longer accurate, whether as a result of new information, what actually
happens in the future or for any other reason.
Table 13
- --------------------------------------------------------------------------------
Quarterly Common Stock Price Range
for the years ended December 31,
- --------------------------------------------------------------------------------
The common stock is listed on the American Stock Exchange under the symbol
"ISB."
<TABLE>
<CAPTION>
High Low
Sales Sales Cash
Price Price Dividends
------------ ----------- ------------
<S> <C> <C> <C>
1996
First quarter (1)(2)(3) . . . . . . . . . . . $ 9.42 $ 8.41 $0.083
Second quarter (2)(3) . . . . . . . . . . . . 9.17 8.55 0.083
Third quarter (2) (3). . . . . . . . . . . . . . 9.83 8.33 0.083
Fourth quarter (2)(3). . . . . . . . . . . . . . 8.34 9.50 0.083
1997
First quarter (2)(3) . . . . . . . . . . . . . . . $ 14.67 $10.61 $0.09
Second quarter (3). . . . . . . . . . . . . . 17.58 11.92 0.09
Third quarter (3) . . . . . . . . . . . . . . . . 16.67 14.67 0.09
Fourth quarter (3) . . . . . . . . . . . . . . . 21.58 14.75 0.09
1998
First quarter (3) . . . . . . . . . . . . . . . $ 21.25 $18.17 $0.10
Second quarter . . . . . . . . . . . . . . 23.25 19.25 0.10
Third quarter . . . . . . . . . . . . . . . . 20.88 15.31 0.10
Fourth quarter . . . . . . . . . . . . . . . 17.75 14.06 0.10
The number of stockholders of record as of February 24, 1999 was 1,342
</TABLE>
- --------------------------------------------------------------------------------
(1) On February 22, 1996, the Company declared a 5% Stock Dividend to be
distributed on April 19, 1996 to shareholders of record on March 20, 1996.
The high and low sales prices and the cash dividends have been restated to
reflect the effects of the stock dividend.
(2) On February 27, 1997, the Company declared a 3 for 2 Stock Split to be
distributed on April 17, 1997 to shareholders of record on March 20, 1997.
The high and low sales prices and the cash dividends have been restated to
reflect the effects of the stock split.
(3) On February 26, 1998, the Company 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 prices and the cash dividends have been restated to
reflect the effects of the stock split.
27
<PAGE>
Independent Auditors' Report
- --------------------------------------------------------------------------------
Board of Directors and Stockholders
Interchange Financial Services Corporation
Saddle Brook, New Jersey
We have audited the accompanying consolidated balance sheets of Interchange
Financial Services Corporation and subsidiaries (the "Company") as of December
31, 1998 and 1997 and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Interchange Financial Services
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/S/ Deloitte & Touche LLP
Parsippany, New Jersey
January 20, 1999
28
<PAGE>
Interchange Financial Services Corporation
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Assets
Cash and due from banks $ 20,109 $ 19,215
Federal funds sold 23,175 15,400
Interest bearing demand deposits - 1,968
-------------- --------------
Total cash and cash equivalents 43,284 36,583
-------------- --------------
Securities held to maturity at amortized cost (estimated market value
of $54,761 and $60,834 for 1998 and 1997, respectively) 54,159 60,442
-------------- --------------
Securities available for sale at estimated market value (amortized cost
of $93,872 and $73,640 for 1998 and 1997, respectively) 95,771 75,555
-------------- --------------
Loans 478,717 438,273
Less: Allowance for loan losses 5,645 5,231
-------------- --------------
Net loans 473,072 433,042
-------------- --------------
Premises and equipment, net 9,871 9,548
Foreclosed real estate 84 -
Accrued interest receivable and other assets 9,123 9,880
============== ==============
Total assets $685,364 $625,050
============== ==============
Liabilities
Deposits
Non-interest bearing $107,408 $95,436
Interest bearing 491,324 445,329
-------------- --------------
Total deposits 598,732 540,765
-------------- --------------
Securities sold under agreements to repurchase 8,780 13,028
Short-term borrowings 9,768 -
Accrued interest payable and other liabilities 5,712 5,248
Long-term borrowings - 9,879
-------------- --------------
Total liabilities 622,992 568,920
-------------- --------------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, without par value; 15,000,000 shares authorized; 7,200,133 and
7,139,880 shares issued and outstanding in
1998 and 1997, respectively 5,397 5,396
Capital surplus 21,256 21,557
Retained earnings 35,482 29,698
Accumulated other comprehensive income 1,192 1,185
-------------- --------------
63,327 57,836
Less: Treasury stock 955 1,706
-------------- --------------
Total stockholders' equity 62,372 56,130
============== ==============
Total liabilities and stockholders' equity $685,364 $625,050
============== ==============
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
29
<PAGE>
Interchange Financial Services Corporation
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
- --------------------------------------------------------------------------------
(in thousands except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
Interest income
Interest and fees on loans $38,904 $35,380 $31,367
Interest on federal funds sold 1,474 896 710
Interest on interest bearing deposits 55 78 104
Interest and dividends on securities
Taxable interest income 7,934 8,626 8,894
Interest income exempt from federal income taxes 181 100 123
Dividends 272 230 181
------------ ----------- ------------
Total interest income 48,820 45,310 41,379
------------ ----------- ------------
Interest expense
Interest on deposits 18,467 17,243 16,425
Interest on securities sold under agreements to repurchase 806 685 267
Interest on short-term borrowings 1 42 246
Interest on long-term borrowings 590 596 45
------------ ----------- ------------
Total interest expense 19,864 18,566 16,983
------------ ----------- ------------
Net interest income 28,956 26,744 24,396
Provision for loan losses 951 1,653 747
------------ ----------- ------------
Net interest income after provision for loan losses 28,005 25,091 23,649
------------ ----------- ------------
Non-interest income
Service fees on deposit accounts 2,551 2,040 1,685
Net gain on sale of securities 1,021 - 242
Net gain on sale of loans - 1,067 -
Net gain on sale of branch - - 455
Accretion of discount in connection with acquisition - - 511
Other 1,356 1,667 1,355
------------ ----------- ------------
Total non-interest income 4,928 4,774 4,248
------------ ----------- ------------
Non-interest expenses
Salaries and benefits 9,437 8,951 8,238
Occupancy 2,405 2,152 2,370
Furniture and equipment 1,035 879 781
Advertising and promotion 865 865 938
Federal Deposit Insurance Corporation assessment 75 58 162
Foreclosed real estate 1 - 252
Acquisition 1,392 - -
Other 4,206 4,750 4,751
------------ ----------- ------------
Total non-interest expenses 19,416 17,655 17,492
------------ ----------- ------------
Income before income taxes 13,517 12,210 10,405
Income taxes 4,908 4,285 3,654
------------ ----------- ------------
Net income $ 8,609 $ 7,925 $ 6,751
============ =========== ============
Basic earnings per common share $1.20 $1.11 $0.95
===== ===== =====
Diluted earnings per common share $1.19 $1.10 $0.94
===== ===== =====
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
30
<PAGE>
Interchange Financial Services Corporation
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31,
- --------------------------------------------------------------------------------
(in thousands except share data)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Retained Comprehensive Common Capital Treasury
Income Earnings Income Stock Surplus Stock Total
------------- -------- ------------ -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $22,482 $673 $5,053 $17,580 $ (6) $45,782
Comprehensive income
Net Income $6,751 6,751 6,751
Other comprehensive income, net of taxes
Unrealized losses on debt securities (447)
Unrealized gains on equity securities 30
------------
Other comprehensive income (417) (417) (417)
------------
Comprehensive income $6,334
============
Dividends on common stock (2,173) (2,173)
5% common stock dividend (2,903) 225 2,678 -
Fractional shares on 5% common stock dividend (4) (4)
Issued 17,708 shares of common stock in connection with
Executive Compensation Plan 13 148 161
Purchase 17,232 shares of treasury stock (131) (131)
Reissuance of 10,355 shares of treasury stock under Dividend
Reinvestment Plan (1) 79 79
-------- ------------ -------- -------- ------- -------
Balance at December 31, 1996 24,157 256 5,291 20,402 (58) 50,048
Comprehensive income
Net Income $7,925 7,925 7,925
Other comprehensive income, net of taxes
Unrealized gains on debt securities 330
Unrealized gains on equity securities 599
-----------
Other comprehensive income 929 929 929
-----------
Comprehensive income $8,854
===========
Dividends on common stock (2,384) (2,384)
Fractional shares on 3 for 2 stock split (3) (3)
Issued 12,822 shares of common stock in connection
with Executive Compensation Plan 9 159 168
Exercised 73,519 option shares 55 377 432
Purchased 12,200 shares in exchange for option shares (163) (163)
Purchased 390 shares of treasury stock (3) (3)
Reissuance of 8,153 shares of treasury stock under the
Dividend Reinvestment Plan (1) 61 61
Issued 12,738 common shares under Dividend Reinvestment Plan (1) 9 113 122
Issued 229,562 shares of common stock in merger with
Washington Interchange Corporation 170 2,765 2,935
Acquired and retired 187,283 shares of common stock held by
Washington Interchange Corporation (138) (2,256) - (2,394)
Purchased 121,826 shares of common stock (1,543) (1,543)
------------ -------- ------------ -------- -------- ------- -------
Balance at December 31, 1997 29,698 1,185 5,396 21,557 (1,706) 56,130
Comprehensive income
Net Income $8,609 8,609 8,609
Other comprehensive income, net of taxes
Unrealized gains on debt securities 207
Unrealized losses securities transferred from held to
maturity to available to sale - Acquisition (17)
Unrealized gain on equity securities 343
Less: gains on disposition of equity securities (526)
-----------
Other comprehensive income 7 7 7
-----------
Comprehensive income $8,616
===========
Dividends on common stock (2,825) (2,825)
Fractional shares on 3 for 2 stock split and merger shares (5) (5)
Forfeiture of bonus stock (49) (49)
Issued 12,769 shares of common stock in connection
with Executive Compensation Plan 70 162 232
Exercise of 50,394 option shares 1 (366) 638 273
-------- ------------ -------- ------- -------- -------
Balance at December 31, 1998 $35,482 $1,192 $5,397 $21,256 $ (955) $62,372
======== ============ ======== ======= ======== =======
</TABLE>
- --------------------------------------------------------------------------------
All share data has been adjusted for the effects of the 3 for 2 stock split
issued on April 17, 1998 to shareholders of record on March 20, 1998
(1) Common shares issued as part of Jersey Bank for Savings' Dividend
Reinvestment Plan
See notes to consolidated financial statements.
31
<PAGE>
INTERCHANGE FINANCIAL SERVICES CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended, December 31,
- --------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 8,609 $ 7,925 $ 6,751
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 1,374 1,182 1,052
Amortization of securities premiums 964 818 1,066
Accretion of securities discounts (168) (126) (75)
Amortization of premiums in connection with acquisition 384 444 444
Accretion of discount in connection with acquisition - - (511)
Provision for loan losses 951 1,653 747
Net gain on sale of loans - (1,067) -
Net gain on sale of securities (1,021) - (242)
Net (gain) loss on sale of foreclosed real estate - (6) 87
Reduction in carrying value of foreclosed real estate - - 43
(Increase) decrease in carrying value of loans available for sale - (17) 13
Net loss on disposal of fixed assets 3 - 20
Decrease (increase) in operating assets
Net repayment (origination) of loans available for sale - 22 (102)
Accrued interest receivable (270) 305 446
Deferred taxes 228 (768) 138
Other 437 (1,942) 1,089
(Decrease) increase in operating liabilities
Accrued interest payable (88) 111 208
Other 552 543 74
---------- --------- ----------
Cash provided by operating activities 11,955 9,077 11,248
---------- --------- ----------
Cash flows from investing activities
(Payments for) proceeds from
Net originations of loans (31,848) (40,239) (45,978)
Purchase of loans (4,627) (19,247) (2,150)
Purchase of term federal funds (7,500) - -
Repayment of term federal funds 2,500 - -
Sale of loans 409 5,945 1,365
Purchase of securities available for sale (28,688) (15,438) (35,413)
Maturities of securities available for sale 16,971 4,386 7,578
Sale of securities available for sale 1,622 - 38,349
Sale of foreclosed real estate - 616 652
Purchase of securities held to maturity (30,435) (21,948) (23,497)
Maturities of securities held to maturity 26,808 41,167 25,979
Sale of securities held to maturity - - 6,008
Washington Interchange Merger - 37 -
Purchase of fixed assets (1,703) (3,464) (1,507)
Sale of fixed assets 4 13 -
---------- --------- ----------
Cash used in investing activities (56,487) (48,172) (28,614)
---------- --------- ----------
Cash flows from financing activities
Proceeds from (payments for)
Deposits in excess of withdrawals 57,967 49,128 14,115
Securities sold under agreements to repurchase and other borrowings 17,300 17,128 27,828
Retirement of securities sold under agreement to repurchase and
other borrowings (21,659) (20,454) (12,499)
Sale of deposits - - (9,702)
Dividends (2,825) (2,384) (2,173)
Common stock issued 226 345 156
Treasury stock (49) (1,543) (52)
Exercise of option shares 273 269 -
---------- --------- ----------
Cash provided by financing activities 51,233 42,489 17,673
---------- --------- ----------
Increase in cash and cash equivalents 6,701 3,394 307
Cash and cash equivalents, beginning of year 36,583 33,189 32,882
========== ========= ==========
Cash and cash equivalents, end of year $43,284 $36,583 $33,189
========== ========= ==========
Supplemental disclosure of cash flow information: Cash paid for:
Interest $19,953 $18,456 $16,771
Income taxes 3,844 4,985 3,637
Supplemental disclosure of non-cash investing activities:
Loans transferred to foreclosed real estate 84 - 179
Loans transferred from available for sale to held to maturity - 1,190 -
Decrease (increase) - market valuation of securities available for sale 15 (1,551) 618
Amortization of valuation allowance - securities transferred from available
for sale to held to maturity 1 36 25
Washington Interchange merger - 504 -
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. The following is a description of the Company's business and its
significant accounting and reporting policies used in the preparation of the
consolidated financial statements:
Nature of Business
Interchange Financial Services Corporation (the "Company"), a New Jersey
business corporation, is a holding company whose principal subsidiary is
Interchange Bank (the "Bank"), formerly known as Interchange State Bank. The
Bank is principally engaged in the business of attracting commercial and retail
deposits and investing those funds into commercial business and commercial
mortgage loans as well as residential mortgage and consumer loans. When demand
for loans is low, the Bank invests in debt securities. Currently, the Bank
conducts operations typical of a community bank in the northeast region of New
Jersey (primarily Bergen County).
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. Significant intercompany accounts
and transactions have been eliminated in consolidation. Certain prior period
amounts have been reclassified to conform with the financial statement
presentation of 1998. These reclassifications have no effect on stockholders'
equity or net income as previously reported.
Prior period financial statements have been restated to include the
accounts and results of operations of The Jersey Bank for Savings ("Jersey
Bank"), which was acquired by the Company in 1998 in a transaction that was
accounted for as a pooling-of-interests.
Use of Estimates
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
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant estimates pertain to the allowance for loan losses and the fair
value of financial instruments.
Cash and cash equivalents
For the purposes of presentation in the consolidated statements of cash
flows, cash and cash equivalents include cash on hand, amounts due from banks,
interest bearing demand deposits and federal funds sold.
Securities held to maturity and securities available for sale
Debt securities purchased with the intent and ability to hold until
maturity are classified as securities held to maturity and are carried at cost,
adjusted for the amortization of premiums and accretion of discounts. Management
determines whether the security will be classified as held to maturity at the
time of purchase.
All other securities, including equity securities, are classified as
securities available for sale. Securities classified as available for sale may
be sold prior to maturity in response to, but not limited to, changes in
interest rates, changes in prepayment risk or for asset/liability management
strategies. These securities are carried at fair value and any unrealized gains
and losses are reported, net of taxes, as a separate component of stockholders'
equity. Gains and losses from the sale of these securities are determined using
the specific identification method.
Loans
Generally, loans are carried at the principal amounts outstanding, net of
unearned discount and deferred loan origination fees and costs. Interest income
is accrued and credited to income as earned at the applicable interest rates.
Origination fees and certain direct loan origination costs are deferred and
amortized to interest income over the estimated life of the loan as an
adjustment to the yield.
Mortgage loans held for sale are carried at lower of aggregate cost or
market value. Gains and losses on loans sold are included in non-interest
income.
Loans are placed on nonaccrual status when, in the opinion of management,
the future collection of interest or principal according to contractual terms
may be doubtful or when principal or interest payments are in arrears 90 days or
more. Amounts accrued are evaluated for collectibility. Interest income on
nonaccrual loans is recognized on a cash basis, to the extent there is no doubt
of the future collection of principal. Loans are returned to accrual status when
management deems that collection of principal and interest is reasonable and
probable.
Loans are considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to contractual terms of the loan agreement. The collection of all
amounts due according to contractual terms means that both the contractual
interest and principal payments of a loan will be collected as scheduled in the
loan agreement.
All commercial and commercial mortgage loans are evaluated for impairment.
One-to-four family residential mortgage loans and consumer loans with small
balances are pooled together as homogeneous loans and, accordingly, are not
covered by Statement of Financial Accounting Standards 114. "Accounting by
creditors for Impairment of a Loan." All nonaccrual commercial and commercial
mortgage loans as well as non-homogeneous one-to-four family residential
mortgage loans and consumer loans are considered impaired.
The impairment of a loan is measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value of
the underlying collateral. The fair value of collateral, reduced by costs to
sell on a discounted basis, is utilized if a loan is collateral dependent or
foreclosure is probable.
The Bank acquired the assets and liabilities of a failed institution from
the Federal Deposit Insurance Corporation (the "FDIC") in July 1991, which was
accounted for using the purchase method of accounting. Consideration received
from the FDIC was assigned to the fair value of the loans acquired, the
allowance for loan losses and acquisition costs. Excess consideration was
accreted into income over a five-year period, which ended in August 1996.
Allowance for loan losses
The allowance for loan losses is established through charges to income.
Loan losses are charged against the allowance for loan losses when management
believes that the future collection of principal is unlikely. Subsequent
recoveries, if any, are credited to the allowance. If the allowance is
considered inadequate to absorb future loan losses on existing loans, based on,
but not limited to, increases in the size of the loan portfolio, increases in
charge-offs or changes in the risk characteristics of the loan portfolio, then
the provision for loan losses is increased.
The Company's allowance is an amount considered adequate to absorb possible
losses on existing loans that may become uncollectible based on management's
evaluations of the size and current risk characteristics of the loan portfolio.
The evaluations consider such factors as changes in the composition and volume
of the loan portfolio, the impact of changing economic conditions on the credit
worthiness of the borrowers, review of specific problem loans and management's
assessment of the inherent risk and overall quality of the loan portfolio.
33
<PAGE>
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method. Premises and equipment are depreciated over the estimated
useful lives of the assets. Leasehold improvements are amortized over the term
of the lease, if shorter. Estimated lives are 30 to 40 years for premises and 3
to 20 years for furniture and equipment. Maintenance and repairs are charged to
expenses as incurred, while renewals and major improvements are capitalized.
Foreclosed real estate
Foreclosed real estate is carried at the lower of cost or estimated fair
value, less estimated selling costs, at time of foreclosure. When a property is
acquired, the excess of the carrying amount over fair value, if any, is charged
to the allowance for loan losses. Subsequent valuations are performed
periodically and the carrying value is adjusted by a charge to foreclosed real
estate expense to reflect any subsequent declines in the estimated fair value.
As a result, further declines in real estate values may result in increased
foreclosed real estate expense. Routine holding costs are charged to foreclosed
real estate expense as incurred.
Income taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using current tax rates.
The effect on deferred taxes of a change in tax rates is recognized in income in
the period the change occurs. Deferred tax assets are reduced, through a
valuation allowance, if necessary, by the amount of such benefits that are not
expected to be realized based on current available evidence.
Per share amounts
Basic earnings per common share is computed by dividing income available to
common shareholders, less dividends on the preferred stock, if any, by the
weighted average number of common shares outstanding during the reporting
period. Diluted earnings per common share is computed similar to that of basic
earnings per common share except that the denominator is increased to include
the number of additional common shares that would have been outstanding if all
potentially dilutive common shares, stock options, were issued during the
reporting period.
Recently issued accounting pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 requires that entities recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure those
instruments at fair value. Adoption of SFAS 133 is required for all fiscal
quarters of fiscal years beginning after June 15, 1999. Adoption of SFAS 133 is
not expected to have a material impact upon the Company's consolidated financial
condition or results of operations.
Note 2. Acquisitions
On May 31, 1998, the Company completed its acquisition of Jersey Bank. The
transaction was accounted for as a pooling of interests, and accordingly, all
financial information presented herein has been restated to the earliest period
presented. Each of the shares of Jersey's common stock, including shares of
common stock that had been converted from shares of preferred stock, was
converted into 1.5 shares of the Company's common stock. Total consideration
tendered in the transaction amounted to 780,198 shares of the Company's common
stock.
In 1994, the Bank assumed the deposit liabilities of Volunteer Federal
Savings Association of Little Ferry, New Jersey. The premiums paid to acquire
the deposits in the Volunteer transaction and in a 1991 branch acquisition are
being amortized over a period ranging from five to seven years. Amortization in
1998, 1997 and 1996, which is included in non-interest expenses, amounted to
$383,000, $444,000 and $444,000, respectively.
Note 3. Restrictions on Cash and Due from Banks
The subsidiary bank is required to maintain a reserve balance with the
Federal Reserve Bank based upon the level of its deposit liability. The average
amount of this reserve balance for 1998 and 1997 was approximately $750,000 and
$7,310,000, respectively. In 1998, the Company implemented a strategy whereby
certain deposits were reclassified as non-transactional accounts for the purpose
of calculating the minimum reserve requirement. As a result, the average reserve
balance for 1998 decreased by $6,560,000, as compared to 1997.
34
<PAGE>
Note 4. Securities Held to Maturity and Securities Available for Sale
Securities held to maturity and securities available for sale consist of the
following: (in thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------
December 31, 1998
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Securities held to maturity
Obligations of U.S. Treasury $ 15,992 $ 180 - $ 16,172
Mortgage-backed securities 18,921 227 $23 19,125
Obligations of U.S. agencies 7,986 175 - 8,161
Obligations of states & political subdivisions 11,111 48 6 11,153
Other debt securities 149 1 - 150
-------------- -------------- -------------- --------------
54,159 631 29 54,761
-------------- -------------- -------------- --------------
Securities available for sale
Obligations of U.S. Treasury 33,264 777 - 34,041
Mortgage-backed securities 42,824 398 156 43,066
Obligations of U.S. agencies 13,687 190 53 13,824
Equity securities 4,097 743 - 4,840
-------------- -------------- -------------- --------------
93,872 2,108 209 95,771
-------------- -------------- -------------- --------------
Total securities $148,031 $2,739 $238 $150,532
============== ============== ============== ==============
----------------------------------------------------------------
December 31, 1997
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- -------------- -------------- --------------
Securities held to maturity
Obligations of U.S. Treasury $ 22,134 $ 122 - $ 22,256
Mortgage-backed securities 28,398 200 $ 96 28,502
Obligations of U.S. agencies 6,711 166 - 6,877
Obligations of states & political subdivisions 3,049 - - 3,049
Other debt securities 150 - - 150
-------------- -------------- -------------- --------------
60,442 488 96 60,834
-------------- -------------- -------------- --------------
Securities available for sale
Obligations of U.S. Treasury 35,452 605 74 35,983
Mortgage-backed securities 26,871 308 30 27,149
Obligations of U.S. agencies 6,954 70 12 7,012
Equity securities 4,363 1,048 - 5,411
-------------- -------------- -------------- --------------
73,640 2,031 116 75,555
-------------- -------------- -------------- --------------
Total securities $134,082 $2,519 $212 $136,389
============== ============== ============== ==============
</TABLE>
At December 31, 1998, the contractual maturities of securities held to maturity
and securities available for sale are as follows: (in thousands)
<TABLE>
<CAPTION>
Securities Securities
Held to Maturity Available for Sale
------------------------------ -----------------------------
Amortized Market Amortized Market
Cost Value Cost Value
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Within 1 year $12,735 $12,767 $14,191 $14,277
After 1 but within 5 years 19,921 20,268 30,944 31,862
After 5 but within 10 years 10,195 10,231 11,234 11,417
After 10 years 11,308 11,495 33,406 33,375
Equity securities - - 4,097 4,840
-------------- ------------- ------------- -------------
Total $54,159 $54,761 $93,872 $95,771
============== ============= ============= =============
</TABLE>
35
<PAGE>
Gross realized gains from the sale of securities available for sale
amounted to $876,000 and $452,000 in 1998 and 1996, respectively, while gross
realized losses amounted to $217,000 in 1996. There were no gross realized gains
in 1997 and there were no gross realized losses in 1998 or 1997. These amounts
are included in net gains on sale of securities. Also, included in net gains on
sale of securities for 1998 is a gain of $145,000 realized from the call before
maturity of a security.
There were no sales of securities held to maturity during the years ended,
December 31, 1998 and 1997. Proceeds from the sale of securities held to
maturity (scheduled to mature within 3 months) totaled $6,008,000 during the
year ended December 31, 1996 that resulted in realized gains of $7,000.
During 1998, securities with a book value totaling $8.2 million, which had
previously been classified by Jersey Bank as held to maturity, were transferred
to available for sale upon the consummation of the acquisition. These securities
were reclassified to available for sale because they have a higher degree of
interest rate sensitivity and do not conform to the Company's investment
objectives or to its policy for managing interest rate risk. The transfer of
these securities was done in conformance with Statement of Financial Accounting
Standards No.115, "Accounting for Certain Investments in Debt and Equity
Securities". At the date of transfer, the market value of these securities was
$8.1 million.
Securities with carrying amounts of $25.1 million and $28.4 million at
December 31, 1998 and 1997, respectively, were pledged for public deposits,
Federal Home Loan Bank advances, securities sold under repurchase agreements and
other purposes required by law.
Note 5. Loans
The composition of the loan portfolio is summarized as follows: (in
thousands)
-------------------------------
December 31,
-------------------------------
1998 1997
------------ ------------
Commercial and financial $64,067 $51,573
Real estate
Residential 246,955 233,281
Commercial 148,875 134,972
Construction 974 4,229
Installment 3,233 4,117
Lease financing 9,613 10,101
Term federal funds 5,000 -
------------ ------------
478,717 438,273
Allowance for loan losse 5,645 5,231
------------ ------------
Net loans $473,072 $433,042
============ ============
Nonperforming loans include loans which are accounted for on a nonaccrual basis
and troubled debt restructurings. Nonperforming loans are as follows: (in
thousands)
-------------------------------------------------
D e c e m b e r 31,
-------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Nonaccrual loans
Commercial and financial $ 266 $ 126 $ 820
Residential real estate 583 892 1,521
Commercial real estate 346 479 173
Installment 3 17 13
----------- ------------ ------------
$1,198 $1,514 $2,527
=========== ============ ============
Troubled debt restructurings
Commercial and financial $528 $573 $725
=========== ============ ============
Interest income that would have
been recorded during the
year on nonaccrual loans
outstanding at year-end in
accordance with
original terms $147 $147 $277
Interest income included in net
income during the year on
nonaccrual loans outstanding
at year-end $71 $81 $138
Loans on which interest is accruing and included in income, but which were
contractually past due 90 days or more as to principal or interest payments
amounted to $141,000 and $25,000 at December 31, 1997 and 1996, respectively.
There were no such loans at December 31, 1998.
Officers and directors of the Company and their affiliated companies are
customers and are engaged in transactions with the Company in the ordinary
course of business on substantially the same terms as those prevailing with
other non-affiliated borrowers and suppliers.
The following table summarizes activity with respect to these loans: (in
thousands)
-----------------------------
Years Ended December 31,
-----------------------------
1998 1997
-------------- -------------
Balance at beginning of year $10,160 $7,056
Less: former directors (3,574) -
Additions 2,014 5,359
Reductions (977) (2,255)
============== =============
Balance at end of year $7,623 $10,160
============== =============
36
<PAGE>
Note 6. Allowance for Loan Losses
The Company's recorded investment in impaired loans is as follows: (in
thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------
December 31,
---------------------------------------------------------------
1998 1997
----------------------------- ----------------------------
Investment Related Investment Related
in Allowance in Allowance
Impaired for Loan Impaired for Loan
Loans Losses Loans Losses
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Impaired loans
With a related allowance for loan losses
Commercial and financial $ 748 $ 91 $699 $97
Commercial real estate 346 52 479 72
Without a related allowance for loan losses
Commercial and financial 4 - - -
============== ============= ============= ==============
$1,098 $143 $1,178 $169
============== ============= ============= ==============
</TABLE>
- --------------------------------------------------------------------------------
The impairment of the above loans was measured based on the fair value of
collateral.
The following table sets forth certain information about impaired loans: (in
thousands)
------------------------------
Years Ended December 31,
------------------------------
1998 1997
------------ -------------
Average recorded investment $1,247 $1,221
============ =============
Interest income recognized during time period
that loans were impaired, using cash-basis
method of accounting $74 $67
============ =============
Changes in the allowance for loan losses are summarized as follows: (in
thousands)
<TABLE>
<CAPTION>
----------------------------------------------
Year Ended December 31,
----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year $5,231 $3,968 $3,926
Additions (deductions)
Provision charged to operations 951 1,653 747
Recoveries on loans previously charged off 83 183 208
Loans charged off (620) (573) (913)
------------ ------------ ------------
Balance at end of year $5,645 $5,231 $3,968
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
For years ended December 31, 1998, 1997 and 1996, the provisions charged to
expense for federal income tax purposes amounted to approximately $537,000,
$390,000, and $705,000, respectively.
Note 7. Premises and Equipment, net
Premises and equipment are summarized as follows: (in thousands)
-----------------------------------
December 31,
-----------------------------------
1998 1997
-------------- --------------
Land $1,588 $1,588
Buildings 3,187 3,097
Furniture, fixtures and equipment 5,807 5,726
Leasehold improvements 6,813 5,999
-------------- --------------
17,395 16,410
Less: accumulated depreciation and amortization 7,524 6,862
-------------- --------------
$9,871 $9,548
============== ==============
Note 8. Deposits
Deposits are summarized as follows: (in thousands)
-----------------------------------
December 31,
-----------------------------------
1998 1997
--------------- ----------------
Non-interest bearing demand deposits $107,408 $95,436
Interest bearing demand deposits 194,177 154,301
Money market deposits 50,665 41,815
Savings deposits 76,026 81,202
Time deposits 170,456 168,011
--------------- ----------------
$598,732 $540,765
=============== ================
At December 31, 1998 and 1997, the carrying amounts of certificates of
deposit that individually exceed $100,000 amounted to $25,119,000, and
$33,724,000, respectively. Interest expense related to such deposits was
approximately $1,616,000, $1,627,000, and $1,113,000 in 1998, 1997, and 1996,
respectively.
37
<PAGE>
Note 9. Securities Sold Under Agreements to Repurchase and Short-term Borrowings
Securities sold under agreements to repurchase and short-term borrowings
are summarized as follows: (in thousands)
-----------------------------
December 31,
-----------------------------
1998 1997
------------ -------------
Securities sold under agreements to repurchase $8,780 $13,028
Federal Home Loan Bank advances 9,768 -
============ =============
$18,548 $13,028
============ =============
The Bank has a $57.7 million line of credit available through its
membership in the Federal Home Loan Bank of New York ("FHLB").
Note 10. Long-term Borrowings
In 1997, long-term borrowings were comprised of two FHLB advances
consisting of a $3.9 million advance with a 20-year amortization term, a fixed
interest rate of 6.31% maturing in November 1999; and a $6.0 million advance
that has a fixed rate of 5.72% maturing in December 1999 and is collateralized
by U.S. Treasury securities. The FHLB has had an option to call the $6.0 million
advance since December 1998. These borrowings are recorded as short-term
borrowings in 1998.
Note 11. Benefit Plans
In 1993, the Company established a non-contributory defined benefit pension
plan covering all eligible employees. The funding policy is to contribute an
amount that is at least the minimum required by law. The plan assets consist of
investments in fixed income funds and equity mutual funds. Retirement income is
based on years of service under the plan and, subject to certain limits, on
final average compensation. Effective January 1, 1994, the Company established a
supplemental plan that provides for retirement income that would have been paid
but for the limitation under the qualified plan.
Effective August 1, 1994, the Company established a retirement plan for all
directors of the Company or the Bank who are not employees of the Company or of
any subsidiary or affiliate of the Company. As a part of this Plan, the Company
contributes annually to a life insurance policy or annuity contract for each
director with 5 years or more of service, as follows:
Years of Service Amount Contributed
---------------- ------------------
6 $5,000
7 6,000
8 7,000
9 8,000
10 9,000
11 or more 10,000
The Company owns the life insurance policies or annuity contracts.
Retirement income to a director who has completed five years of service through
ten years of service will be based on the cash value of the life insurance
policy or annuity contract. After ten years of service, the retirement income
will be the greater of the cash value of the life insurance policy or annuity
contract or an amount determined by multiplying the standard annual retainer
fees (currently $11,000) at the director's retirement day by the director's
years of service.
Net pension cost of each plan consists of the following: (in thousands)
The following are the components of the net periodic benefit cost for the years
ended December 31,
<TABLE>
<CAPTION>
Pension Plan Supplemental Plan Directors' Plan
------------------------ ------------------- -----------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
-------- ------- ------- ------ ----- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service cost $222 $195 $179 $22 $13 $12 $59 $47 $40
Interest cost 65 53 37 12 4 3 76 71 69
Expected return on plan assets (71) (51) (41) - - - - - -
Amortization of prior service cost - - - 8 1 1 147 147 147
Recognized net actuarial gain (6) - - - - -
-------- ------- ------- ------ ----- ------- -------- ------ ------
Net periodic benefit cost $210 $197 $175 $42 $18 $16 $282 $265 $256
======== ======= ======= ====== ===== ======= ======== ====== ======
</TABLE>
38
<PAGE>
The following table sets forth the funded status, as of December 31, of
the plans and amounts recognized in the Company's Consolidated Balance Sheets
and the major assumptions used to determine these amounts: (dollars in
thousands)
<TABLE>
<CAPTION>
Pension Plan Supplemental Plan Directors' Plan
-------------------- --------------------- -----------------------
1998 1997 1998 1997 1998 1997
--------- --------- ----------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Change in pension obligation
Pension obligation at beginning of year $1,013 $710 $ 70 $ 50 $ 1,074 $ 931
Service cost 222 195 22 13 59 47
Interest cost 65 53 12 4 76 71
Actuarial (gain) loss (1) (74) - 15 - (15) -
Benefits paid (3) (4) - - - -
Other (1) - 59 81 3 - 25
---------- --------- ----------- --------- ------------ ----------
Pension obligation at end of year 1,223 1,013 200 70 1,194 1,074
---------- --------- ----------- --------- ------------ ----------
Change in plan assets
Fair value of plan assets at beginning of year 738 644 - - - -
Actual return on plan assets 164 97 - - - -
Employer contribution 165 - - - - -
Change in market value - 1 - - - -
Benefits paid (3) (4) - - - -
----------- -------- ----------- --------- ------------ ----------
Fair value of plan assets at end of year 1,064 738 - - - -
----------- -------- ----------- --------- ------------ ----------
Funded Status (159) (275) (200) (70) (1,194) (1,074)
Unrecognized net actuarial (gain) loss (227) (65) 16 1 39 54
Unrecognized prior service cost (5) (6) 81 7 92 239
Adjustment for additional liability - - - - - (293)
=========== ======== =========== ========= ============= =========
Accrued pension cost $ (391) $(346) $ (103) $ (62) $ (1,063) $ (1,074)
=========== ======== =========== ========= ============= =========
Weighted-average assumptions (2)
Discount rate 7.25% 7.25% 7.25% 7.25% 7.25% 7.25%
Expected return on plan assets 8.00 8.00 8.00 8.00 8.00 8.00
Rate of compensation increase 5.00 5.00 N/A N/A N/A N/A
</TABLE>
- --------------------------------------------------------------------------------
(1) The breakdown of these items was not available for 1997. Therefore, the
net difference is included in Other in order to arrive at the pension
obligation at the end of the year.
(2) Weighted average assumptions were applied at the beginning of the period.
The Company has a Capital Investment Plan (the "Plan") which permits
employees to make basic contributions up to 4% of base compensation. In 1998,
the Plan was amended to permit employees to make basic contributions up to 6%.
Additional contributions up to 10% of compensation may be made when coupled with
basic contributions. Under the Plan, the Company provides a matching
contribution equal to 50% of the basic contribution of each participant. In
addition, the Company makes a fixed contribution on behalf of each participant
equal to 1% of such participant's base compensation. The Company's contribution
to the Plan amounted to $167,000 and $133,000 in 1998 and 1997, respectively.
39
<PAGE>
Note 12. Stock Option Plan
In 1989, the Company adopted a stock option plan, retitled the Stock Option
and Incentive Plan of 1997 (the "Stock Plan") that covers certain key employees.
Under this plan, as amended, a maximum of 637,875 shares of common stock may be
granted at fair market value at the date of grant. Options granted expire if not
exercised within ten years of date of grant and are exercisable according to a
vesting schedule, starting one year from the date of grant.
If compensation cost for Stock Plan awards had been measured based on the
fair value of the stock options awarded at the grant dates, net income and
diluted earnings per common share would have been reduced to the pro-forma
amounts below for the years ended December 31: (in thousands except share data)
1998 1997 1996
---------- --------- ----------
Net income:
As reported $8,609 $7,925 $6,751
Pro-forma 8,572 7,919 6,748
Diluted earnings per common share
As reported $1.19 $1.10 $.94
Pro-forma 1.18 1.10 .94
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yield
of 2.20%, 2.25%, 3.95%; expected volatility of 23.33%, 21.94% and 21.78%;
risk-free interest rate of 5.62%, 5.51% and 6.26%; and expected lives of 7
years. The effects of applying these assumptions in determining the pro-forma
net income may not be representative of the effects on pro-forma net income for
future years.
A summary of the Stock Plan's status as of December 31, and changes during the
years then ended is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------ -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 121,935 $ 6.62 195,604 $ 6.21 177,296 $ 5.99
Granted 49,875 18.17 2,250 16.00 18,308 8.36
Exercised (50,394) 5.27 (75,919) 5.85 - -
Forfeited (10,592) 12.05 - -
--------- -------- --------
Outstanding at December 31 110,824 11.91 121,935 6.62 195,604 6.21
========= ======== ========
Options exercisable at December 31 58,440 7.29 107,479 6.22 177,296 5.99
========= ======== ========
Weighted-average fair value of options granted
during the year ended December 31 (per option) $5.98 $4.29 $1.85
The following table summarizes information about options outstanding
under the Stock Plan at December 31, 1998:
Options Outstanding Options Exercisable
- ------------------------------------------------------------ ------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- --------------- -------------- ----------- ---------- ------------------------
Under $5 4,570 0.96 $4.71 4,570 $4.71
$ 5 - $10 58,629 5.34 7.47 53,120 7.38
$15 - $20 47,625 9.06 18.07 750 16.00
============== ===========
110,824 58,440
============== ===========
</TABLE>
Occasionally, the Company will acquire shares of its common stock and place
them in treasury stock. The shares are intended to be issued for the exercise of
stock options and the grants of restricted stock to executive management. There
were 74,500 and 134,025 shares of common stock held in treasury at December 31,
1998 and 1997, respectively.
40
<PAGE>
Note 13. Capital
The Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company and the Bank's capital amounts and the Bank's
classification, under the regulatory framework for prompt corrective action, are
also subject to qualitative judgments by the regulators about components, risk
weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier I capital to risk-weighted assets and Tier I capital to average assets.
Management believes, as of December 31, 1998, that the Company and the Bank meet
all capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the Federal
Reserve Bank categorized the Bank as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well capitalized,"
the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Company's and the Bank's capital amounts and ratios are as follows:
(dollars in thousands)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------- ------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ----------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk Weighted Assets):
The Company $66,474 15.12 % $35,149 8.00 % N/A N/A
The Bank 63,777 14.59 34,976 8.00 $43,721 10.00 %
Tier 1 Capital (to Risk Weighted Assets):
The Company 60,646 13.80 17,575 4.00 N/A N/A
The Bank 58,312 13.34 17,488 4.00 26,232 6.00
Tier 1 Capital (to Average Assets):
The Company 60,646 9.08 20,041 3.00 N/A N/A
The Bank 58,312 8.76 19,979 3.00 33,299 5.00
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
The Company $59,299 14.44 % $32,852 8.00 % N/A N/A
The Bank 57,448 14.05 32,705 8.00 $40,882 10.00 %
Tier 1 Capital (to Risk Weighted Assets):
The Company 54,166 13.19 16,426 4.00 N/A N/A
The Bank 52,338 12.80 16,353 4.00 24,529 6.00
Tier 1 Capital (to Average Assets):
The Company 54,166 8.79 18,482 3.00 N/A N/A
The Bank 52,338 8.53 18,403 3.00 30,672 5.00
</TABLE>
41
<PAGE>
Note 14. Earnings Per Share
The reconciliation of the numerators and denominators of the basic and
diluted earnings per common share computations for the years ended December 31,
are as follows: (in thousands except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ---------------------------- --------------------------------
Weighted Per Weighted Per Weighted Per
Average Share Average Share Average Share
Income Shares Amount Income Shares Amount Income Shares Amount
-------- ---------- -------- -------- ---------- -------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Earnings per Common Share
Income available to common
shareholders $8,609 7,189 $1.20 $7,925 7,132 $1.11 $6,751 7,124 $0.95
======== ======== =========
Effect of Dilutive Shares
Options issued to management 48 90 66
---------- ---------- -----------
Diluted Earnings per Common Share
Income available to common
shareholders $8,609 7,237 $1.19 $7,925 7,222 $1.10 $6,751 7,190 $0.94
======== ========== ========= ======== ========== ======== ========= =========== ==========
42
<PAGE>
Note 15. Other Non-interest Expenses
Expenses included in other non-interest expenses which exceed one percent
of the aggregate of total interest income and non-interest income for the years
ended, December 31, as follows: (in thousands)
1998 1997 1996
------- ------- -------
Professional fees $ 1,184 $1,216 $1,088
Data Processing 538 548 490
Directors' fees, travel and retirement 88 607 553
Note 16. Income Taxes
Income tax expense for the years ended December 31, is summarized as
follows: (in thousands)
1998 1997 1996
---------- --------- ---------
Federal: current $4,399 $4,304 $3,150
deferred (344) (600) 142
State: current 315 752 354
deferred 538 (171) 8
---------- --------- ---------
$4,908 $4,285 $3,654
========== ========= =========
</TABLE>
The effects of temporary differences that give rise to significant portions of
the Company's deferred tax assets and liabilities as of December 31, are as
follows: (in thousands)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets
Excess of book over tax allowance for loan losses $1,567 $1,584
Excess of book over tax depreciation 263 222
Excess of book over tax provision for benefit plan expense 571 631
Core deposit premium 179 157
Other 59 33
--------- ---------
Total deferred tax assets 2,639 2,627
--------- ---------
Deferred tax liabilities
Unrealized gains - securities available for sale 707 731
Loan origination fees 294 97
Other 103 95
--------- ---------
Total deferred tax liabilities 1,104 923
--------- ---------
Net deferred tax assets $1,535 $1,704
========= =========
</TABLE>
Under present tax law, banks with average total assets under $500 million
are permitted to compute a tax bad debt deduction based on an average loss
experience ratio, while banks with over $500 million in average total assets
must compute a tax bad debt deduction based on actual losses. The Company is
required to use the actual loss method when calculating the bad debt deduction
for tax purposes. The Company is also required to amortize its tax bad debt
reserves, which have accumulated under the average loss method in taxable income
over a four-year period. However, since the difference between the average loss
experience method and the actual loss method has been recorded as a temporary
difference, this change will have no effect on the Company's statement of income
in future years.
Net deferred tax assets are included in other assets on the consolidated
balance sheet. It is more likely than not that deferred tax assets of $1.5
million will be principally realized through carryback to taxable income in
prior years and future reversals of existing taxable temporary differences and,
to a lesser extent, future taxable income and tax planning strategies.
The provision for income taxes differs from the expected statutory provision as
follows:
----------------------------
December 31,
----------------------------
1998 1997 1996
------ ------ ------
Expected provision at statutory rate 34 % 34 % 34 %
Difference resulting from:
State income tax, net of federal benefit 2 3 2
Interest income exempt from federal taxes (1) (2) (1)
Merger related expenses 1 - -
======= ======= ======
36 % 35 % 35 %
======= ======= ======
43
<PAGE>
Note 17. Restrictions of Subsidiary Bank Dividends
Under New Jersey State law, the Bank may declare a dividend only if, after
payment thereof, its capital would be unimpaired and its remaining surplus would
equal 50 percent of its capital. At December 31, 1998, undistributed net assets
of the Bank were $59,591,000 of which $55,274,000 was available for the payment
of dividends. In addition, payment of dividends is limited by the requirement to
meet the capital guidelines issued by the Board of Governors of the Federal
Reserve System.
Note 18. Commitments and Contingent Liabilities
The Company has contingent liabilities and outstanding commitments that
include agreements to extend credit which arise in the normal course of business
and which are not shown in the accompanying financial statements.
Loan commitments are made to accommodate the financial needs of the
Company's customers. Standby letters of credit commit the Company to make
payments on behalf of customers when certain specified future events occur. They
are issued primarily to support performance bonds. Both arrangements have credit
risks essentially the same as that involved in extending loans to customers and
are subject to the normal credit policies of the Company.
A summary of commitments to extend credit at December 31, are summarized as
follows: (in thousands)
1998 1997
--------------- -------------
Credit card loans $ 6,019 $ 5,468
Home equity loans 55,435 49,174
Other loans 55,516 50,230
Standby letters of credit 1,700 1,449
--------------- -------------
$118,670 $106,321
=============== =============
The minimum annual rental under non-cancelable operating leases for
premises and equipment, exclusive of payments for maintenance, insurance and
taxes, is summarized as follows: (in thousands)
1999 $1,130
2000 955
2001 742
2002 580
2003 461
thereafter 2,435
------
Total minimum lease payments $6,303
======
Rent expense for all leases amounted to approximately $1,101,000, $981,000
and $1,090,000 in 1998, 1997, and 1996, respectively.
In 1998, the Company did not lease real estate from affiliates. In 1997 and
1996, certain real estate was leased from one and two companies, respectively,
that were affiliated with directors of the Company. Rental expense associated
with such leases was $30,000 and $143,000 for the years ended December 31, 1997
and 1996, respectively. A director of the Company also provided legal services
through his affiliated firm. Fees paid for these services amounted to
approximately $331,000, $382,000 and $375,000 in 1998, 1997, and 1996,
respectively.
The Company is also a party to routine litigation involving various aspects
of its business, none of which, in the opinion of management and its legal
counsel, is expected to have a material adverse impact on the consolidated
financial condition, results of operations or liquidity of the Company.
44
<PAGE>
Note 19. Fair Value of Financial Instruments
Fair value estimates of the Company's financial instruments are made at a
particular point in time, based on relevant market information and information
about the financial instrument. Fair values are most commonly derived from
quoted market prices. In the event market prices are not available, fair value
is determined using the present value of anticipated future cash flows. This
method is sensitive to the various assumptions and estimates used and the
resulting fair value estimates may be significantly affected by minor variations
in those assumptions or estimates. In that regard, it is likely the Company in
immediate settlement of the financial instruments would realize amounts
different from the fair value estimates.
The following table sets forth the carrying amounts and estimated fair values of
the Company's financial instruments: (in thousands)
-------------------------------------
December 31,
-------------------------------------
1998 1997
---------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- --------- --------- --------
Financial assets:
Cash and cash equivalents $43,284 $43,284 $36,583 $36,583
Securities held to maturity 54,159 54,761 60,442 60,834
Securities available for sale 95,771 95,771 75,555 75,555
Loans, net 473,072 475,272 433,042 433,831
-------- --------- --------- --------
$666,286 $669,088 $605,622 $606,803
======== ========= ========= ========
Financial liabilities:
Deposits $598,732 $599,375 $540,765 $540,472
Short-term borrowings 18,548 18,548 13,028 13,028
Long-term borrowings - - 9,879 9,872
-------- --------- --------- --------
$617,280 $617,923 $563,672 $563,372
======== ========= ========= ========
The methods and significant assumptions used to determine the estimated
fair values of the Company's financial instruments are as follows:
Cash and cash equivalents
Cash and cash equivalents include cash on hand, amounts due from banks,
interest bearing demand deposit and federal funds sold. The estimated fair
values of these financial instruments approximate their carrying values since
they mature overnight or are due on demand.
Securities held to maturity and securities available for sale
Estimated fair values are based principally on quoted market prices, where
available, or dealer quotes. In the event quoted market prices are not
available, fair values are estimated using market prices of similar securities.
Loans
The loan portfolio is segregated into various categories for purposes of
estimating fair value. The fair values of certain loans that reprice frequently
and have no significant change in credit risk is assumed to equal their carrying
values. The fair value of other types of loans is estimated by discounting the
future cash flows using interest rates that are currently being offered for
loans with similar terms to borrowers with similar credit quality. The fair
value of nonperforming loans is estimated using methods employed by management
in evaluating the allowance for loan losses.
In prior years, the Company in addition to the above, valued certain
homogenous loan categories on a pool basis using quoted market prices for
similar loans sold.
Deposits
The estimated fair values of deposits with no stated maturity, such as
demand deposits, savings, NOW and money market accounts are, by definition,
equal to the amount payable on demand at the reporting date. The fair values of
fixed-rate certificates of deposit are based on discounting the remaining
contractual cash flows using interest rates currently being offered on
certificates of deposit with similar attributes and remaining maturities.
Short-term borrowings
The fair value of short-term borrowings is assumed to equal the carrying
value in the financial statements, as these instruments are short-term.
Long-term borrowings
Fair value estimates of long-term borrowings are based on discounting the
remaining contractual cash flows using rates which are comparable to rates
currently being offered for borrowings with similar remaining maturities.
Off-balance-sheet financial instruments
The fair values of commitments to extend credit and unadvanced lines of
credit approximate the fees currently charged to enter into similar
transactions, considering the remaining terms of the commitments and the
credit-worthiness of the potential borrowers. At December 31, 1998 and 1997, the
estimated fair values of these off-balance-sheet financial instruments were
immaterial.
45
<PAGE>
Note 20. Parent Company Information (in thousands)
<TABLE>
<CAPTION>
------------------------------
December 31,
------------------------------
Condensed balance sheets 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Assets
Cash $ 355 - $ 6
Securities available for sale 1,321 $2,372 1,375
Investment in subsidiaries
Bank 59,591 53,673 48,688
Other 646 646 142
Dividends receivable 720 570 525
Other assets 602 (418) (21)
-------- -------- --------
Total assets $63,235 $56,843 $50,715
======== ======== ========
Liabilities
Dividends payable $ 720 $ 570 $ 525
Other liabilities 143 143 142
-------- -------- --------
863 713 667
-------- -------- --------
Stockholders' equity
Common stock 5,397 5,396 5,291
Capital Surplus 21,256 21,557 20,402
Retained earnings 35,482 29,698 24,157
Accumulated other comprehensive income 1,192 1,185 256
-------- -------- --------
63,327 57,836 50,106
Less: Treasury stock 955 1,706 58
-------- -------- --------
Total stockholders' equity 62,372 56,130 50,048
-------- -------- --------
Total liabilities and stockholders' equity $63,235 $56,843 $50,715
======== ======== ========
- --------------------------------------------------------------------------------------------
------------------------------
Years Ended December 31,
------------------------------
Condensed statements of income 1998 1997 1996
-------- -------- --------
Dividends from subsidiary bank $2,556 $3,798 $3,400
Dividends on equity securities 37 35 -
Net gain on sale of securities 876 - -
Management fees 39 40 45
-------- -------- --------
Total revenues 3,508 3,873 3,445
-------- -------- --------
Operating expenses 643 366 206
-------- -------- --------
Income before equity in undistributed earnings of subsidiaries 2,865 3,507 3,239
Equity in undistributed earnings of subsidiaries 5,744 4,418 3,512
-------- -------- --------
Net income $8,609 $7,925 $6,751
======== ======== ========
- --------------------------------------------------------------------------------------------
------------------------------
Years Ended December 31,
------------------------------
Condensed statements of cash flows 1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net income $8,609 $7,925 $6,751
Adjustments to reconcile net income
to net cash provided by operating activities
Net gain on sale of securities (876) - -
Increase in other assets (1,048) (45) (39)
Increase in dividends payable 150 45 40
Increase in other liabilities - 1 -
Equity in undistributed income of subsidiaries (5,744) (4,418) (3,512)
-------- -------- --------
Net cash provided by operating activities $1,091 3,508 3,240
-------- -------- --------
Cash flows from investing activities:
Purchase of securities available for sale - - (1,323)
Sale of securities available for sale 1,622 - -
Washington Interchange merger - 37 -
-------- -------- --------
Net cash provided by (used in) investing activities 1,622 37 (1,323)
-------- -------- --------
Cash flows from financing activities:
Cash dividends paid (2,801) (2,287) (2,077)
Treasury stock (49) (1,543) -
Common stock issued 226 279 156
Exercise of option shares 266 - -
-------- --------- --------
Net cash used in financing activities (2,358) (3,551) (1,921)
-------- --------- --------
Net increase/(decrease) in cash 355 (6) (4)
Cash at beginning of year - 6 10
-------- --------- --------
Cash at end of year $355 $ - $ 6
======== ========= ========
</TABLE>
46
<PAGE>
Note 21. Quarterly Financial Data (unaudited) (in thousands except per share
data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $11,923 $12,242 $12,502 $12,153
Interest expense 4,916 5,053 5,135 4,760
Net interest income 7,007 7,189 7,367 7,393
Provision for loan losses 219 212 210 310
Net gain on sale of securities - - 94 927
Income before income taxes 3,068 2,238 3,922 4,289
Net income 1,977 1,428 2,547 2,657
Basic earnings per common share 0.28 0.20 0.35 0.37
Diluted earnings per common share 0.27 0.20 0.35 0.37
- --------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------
Interest income $10,819 $11,187 $11,499 $11,805
Interest expense 4,351 4,622 4,766 4,827
Net interest income 6,468 6,565 6,733 6,978
Provision for loan losses 620 517 210 306
Income before income taxes 3,285 3,119 2,934 2,872
Net income 2,133 2,024 1,904 1,864
Basic earnings per common share 0.30 0.28 0.27 0.26
Diluted earnings per common share 0.29 0.28 0.27 0.26
</TABLE>
47
<PAGE>
Exhibit 21. Subsidiaries of the Registrant
Interchange Bank (formerly known as Interchange State Bank), Washington
Interchange Corporation and Clover Leaf Mortgage Company, Inc., all of which are
incorporated in New Jersey, are wholly owned direct subsidiaries of the
Registrant.
Clover Leaf Investment Corporation and Clover Leaf Insurance Agency are
incorporated in New Jersey and are wholly owned direct subsidiaries of
Interchange Bank. Clover Leaf Management Realty Corporation, a New Jersey
Corporation, which is also incorporated in New Jersey, is 99% owned by
Interchange Bank.
Exhibit 23. Independent Auditor's Consent
We consent to the incorporation by reference in Amendment No. 1 to Registration
Statement No. 33-82530 of Interchange Financial Services Corporation of our
report dated January 230, 1999, appearing in this Annual Report on Form 10-K of
Interchange Services Corporation for the year ended December 31, 1998.
/S/ Deloitte & Touche, LLP
Parsippany, New Jersey
March 19, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 20,109
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 23,175
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 95,771
<INVESTMENTS-CARRYING> 54,159
<INVESTMENTS-MARKET> 54,761
<LOANS> 478,717
<ALLOWANCE> 5,645
<TOTAL-ASSETS> 685,364
<DEPOSITS> 598,732
<SHORT-TERM> 18,548
<LIABILITIES-OTHER> 5,712
<LONG-TERM> 0
<COMMON> 5,397
0
0
<OTHER-SE> 56,975
<TOTAL-LIABILITIES-AND-EQUITY> 685,364
<INTEREST-LOAN> 38,904
<INTEREST-INVEST> 8,387
<INTEREST-OTHER> 1,529
<INTEREST-TOTAL> 48,820
<INTEREST-DEPOSIT> 18,467
<INTEREST-EXPENSE> 19,864
<INTEREST-INCOME-NET> 28,956
<LOAN-LOSSES> 951
<SECURITIES-GAINS> 1,021
<EXPENSE-OTHER> 19,416
<INCOME-PRETAX> 13,517
<INCOME-PRE-EXTRAORDINARY> 8,609
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,609
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.19
<YIELD-ACTUAL> 4.44
<LOANS-NON> 1,198
<LOANS-PAST> 0
<LOANS-TROUBLED> 528
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,231
<CHARGE-OFFS> 620
<RECOVERIES> 83
<ALLOWANCE-CLOSE> 5,645
<ALLOWANCE-DOMESTIC> 5,645
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 978
</TABLE>
