SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-K
_________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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
_______________________________ __________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Park 80 West/Plaza Two, Saddle Brook, NJ 07663
________________________________________ __________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 703-2265
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of Each Class which registered
___________________________ _________________________
Common Stock (no par value) American Stock Exchange
________________________
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
______________
None
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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 Part 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 20, 2000, was as follows:
Class Number of Outstanding Shares
____________ ____________________________
Common Stock
(No par value) 6,518,864
The aggregate market value of Registrant's voting stock (based upon the
closing trade price on March 20, 2000), held by non-affiliates of the Registrant
was approximately $92,894,000.
Documents incorporated by reference:
Portions of Registrant's definitive Proxy Statement for the 2000 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, 1999 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............................................... 9
Item 3. Legal Proceedings........................................ 9
Item 4. Submission of Matters to a Vote of Security Holders...... 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 Results of Operations.................. 13
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........................................ 15
Item 13. Certain Relationships and Related Transactions............ 15
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K............................... 16
Signatures ...........................................................17
<PAGE>
PART I
Item 1. Business
General
Interchange Financial Services Corporation (the "Company") is a New Jersey
business corporation and registered bank holding company under the Bank Holding
Company Act of 1956, as amended. It 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 is the Company's
principal subsidiary. The Company's principal executive office is located at
Park 80 West/ Plaza Two, Saddle Brook, New Jersey 07663, and the telephone
number is (201) 703-2265.
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 in River Edge, New Jersey. During 1998, the Company also
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
same shopping mall in Paramus. No new branches were established during 1999.
In addition to the Bank, the Company has two 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 the 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 sales of tax-deferred annuities; Clover Leaf Management Realty
Corporation, established in 1998 is a Real Estate Investment Trust ("REIT")
which manages certain real estate assets of the Company in an effort to take
advantage of certain tax benefits; and Interchange Capital Company, L.L.C.,
established in 1999 to engage in equipment lease financing, specializing in
small ticket vendor leasing, and the solicitation of end users in the Bank's
current market. All of the Bank's subsidiaries are New Jersey corporations or
Limited Liability corporations and are 100% owned by the Bank, except for the
REIT which is 99% owned by the Bank.
Banking Operations
Through the Bank, the Company 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
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and overdraft protection. The Bank also offers a VISA(TM) credit card and
several convenience products including the Interchange Check Card, which permits
customers to access their checking accounts by using the card when making
purchases. It can also be used as an ATM card to perform basic banking
transactions. The Bank maintains seventeen automated teller machines (operating
within the MAC(TM), Plus(TM), HONOR(TM), CIRRUS(TM), VISA(TM), NYCE(TM), and
MasterCard(TM) networks), which are located at thirteen of the banking offices,
a supermarket and a mini-market.
Interchange Bank-Line(TM), which was updated in 1999, allows customers to
perform basic banking transactions over the telephone and offers Direct Bill
Payment, which allows customers to pay bills over the phone. Bill payments are
debited directly to the customer's checking account. In the second quarter of
1999, the Bank introduced toll free telephone access, 24 hours a day/7 days a
week, for the acceptance of consumer loan applications over the phone with a
live loan representative or through the Company's Internet web site. During the
fourth quarter of 1999, Interchange also established a new full service call
center. Interchange Bank-Line Center(TM) ("Bank-Line Center"), which is an
alternative delivery system designed to centralize inbound calls and give
customers the opportunity to open new accounts and apply for consumer credit
without the need to go to a branch. In addition, the Bank-Line Center will be
utilized as an outbound telemarketing resource for contacting targeted prospects
for new accounts in conjunction with current product promotions.
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, equipment lease financing
and other forms of asset-based financing.
In addition to its origination activities, the Bank purchases packages of
loans. In 1999 and 1998, the Bank purchased $13.4 million and $4.6 million of
residential real estate loans, respectively. These loans were subjected to the
Bank's independent credit analysis prior to purchase. In the Bank's experience,
there are opportunities to sell the Bank's other products and services to the
borrowers whose loans are purchased. The Bank believes that purchasing loans
will continue to be a desirable way to augment its portfolios as opportunities
arise.
The Bank also engages in mutual fund and annuities sales and brokerage
services. An Investment Services Program is offered through an alliance between
the Bank and the Independent Community Bankers Association of America ("ICBA"),
under which mutual funds and annuities offered by ICBA are made available to the
Bank's customers by Bank employees. The Bank has also expanded its product
offerings by entering into an agreement with a third party provider to offer
discount brokerage services to its customers. Interchange offers securities
trading through its web site, which is hyperlinked to U.S. Clearing Corp., so
that customers can access their brokerage accounts via the Internet.
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Further information on the Bank, our core values and purpose, and our products
and services can be found on our web site at www.interchangebank.com. There is
also a direct link from the Company's web site to the American Stock Exchange to
allow investors to keep informed of the daily quotes and market activity for the
Company's common stock. The Company's common stock trades on the American Stock
Exchange under the symbol IFC.
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").
Market Areas
The Company'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 Company's services. The principal service areas of the Company represent
a diversified mix of stable residential neighborhoods with a wide range of per
household income levels; offices, service industries and light industrial
facilities; and large shopping malls and small retail outlets.
For years, the 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 a preponderance of the population in the age groups of 35-54 and 55+
are within the Bank"s principal market, 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", customers with the Money Plus Account (25-34) and our youngest
customers 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 this strategy 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 strong. The Bank competes actively with national and
state-chartered commercial banks, operating on a local and national scale and
other financial institutions, including savings and loan associations, mutual
savings banks, and credit unions. In addition, the Bank faces competition from
less heavily regulated entities such as 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
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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. 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, many small businesses
eventually become midsize businesses, with a corresponding change in their
financial requirements. While these businesses grow, they do not outgrow
Interchange because of its ability to be responsive to both small and midsize
business 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
programs to accommodate the changing needs of growing businesses, Interchange is
extending the longevity of valuable customer relationships.
Interchange maintains a relational database, which enhances the Bank's
internal marketing analysis by providing information about account
relationships, their activity and their relative value to the Bank.
Interchange has maintained a program of primary research to keep abreast of
customer attitudes and preferences. 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.
Personnel
The Company had on average 204 full-time-equivalent employees during 1999.
The Company believes its relationship with employees to be good.
Regulation and Supervision
Banking is a complex, highly regulated industry. The primary goals of the
bank regulatory scheme are to maintain a safe and sound banking system and to
facilitate the conduct of sound monetary policy. In furtherance of those goals,
Congress has created several largely autonomous regulatory agencies and enacted
myriad legislation that governs banks, bank holding companies and the banking
industry. Descriptions and references to the statutes and regulations below are
brief summaries thereof and do not purport to be complete. The descriptions are
quantified in their entirety by reference to the specific statutes and
regulations discussed.
The Company
The Company is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended (the "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
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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 setting forth specific activities that are permissible under
the exception. A bank holding company and its subsidiaries are also prohibited
from engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services.
Under certain circumstances, prior approval of the Federal Reserve is
required under the Holding Company Act before a bank holding company may
purchase or redeem any of its equity securities.
Traditionally, the activities of bank holding companies have been limited
to the business of banking and activities closely related or incidental to
banking. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999
(the "Modernization Act"), enacted on November 11, 1999, with an effective date
of March 11, 2000, expands the types of activities in which a bank holding
company may engage. Subject to various limitations, the Modernization Act
generally permits a bank holding company to elect to become a "financial holding
company." A financial holding company may affiliate with securities firms and
insurance companies and engage in other activities that are "financial in
nature." Among the activities that are deemed "financial in nature" are, in
addition to traditional lending activities, securities underwriting, dealing in
or making a market in securities, sponsoring mutual funds and investment
companies, insurance underwriting and agency activities, certain merchant
banking activities, and activities that the Federal Reserve considers to be
closely related to banking. A bank holding company may become a financial
holding company under the Modernization Act if each of its subsidiary banks is
"well capitalized" under the Federal Reserve guidelines (See "Capital Adequacy
Guidelines" below), is well managed and has at least a satisfactory rating under
the Community Reinvestment Act. In addition, the bank holding company must file
a declaration with the Federal Reserve
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that the bank holding company wishes to become a financial holding company. A
bank holding company that falls out of compliance with such requirements may be
required to cease engaging in certain activities permitted only for financial
holding companies. Any bank holding company that does not elect to become a
financial holding company remains subject to the current restrictions of the
Holding Company Act. Interchange is considering, but has not yet decided,
whether to elect to become a financial holding company.
In a similar manner, a bank may establish one or more subsidiaries, which
subsidiaries may then engage in activities that are financial in nature.
Applicable law and regulation provide, however, that the amount of such
investments are generally limited to 45% of the total assets of the bank, and
such investments are not aggregated with the bank for determining compliance
with capital adequacy guidelines. Further, the transactions between the bank and
such a subsidiary are subject to certain limitations. (See generally, the
discussion of "Transactions with Affiliates" below.)
Under the Modernization Act, the Federal Reserve serves as the primary
"umbrella" regulator of financial holding companies, with supervisory authority
over each parent company and limited authority over its subsidiaries. Expanded
financial activities of financial holding companies will generally be regulated
according to the type of such financial activity: banking activities by banking
regulators, securities activities by securities regulators, and insurance
activities by insurance regulators. The Modernization Act also imposes
additional restrictions and heightened disclosure requirements regarding private
information collected by financial institutions. All implementing regulations
under the Modernization Act have not yet been promulgated in final form, and the
Company cannot predict the full sweep of the new legislation and has not yet
determined whether it will elect to become a financial holding company.
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 having more than $150 million in assets
and member banks of the Federal Reserve System. The guidelines established a
risk-based capital framework consisting of (1) a definition of capital and (2) a
system for assigning risk weights. Capital consists of Tier 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
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Reserve adopted an amendment to its 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 above the minimum rates. Institutions with higher
levels of risk, or which experience or anticipate significant growth, are also
expected to operate well above minimum capital standards. In addition to the
risk-based guidelines discussed above, the Federal Reserve requires that a bank
holding company and bank which meet the regulator's highest performance and
operational standards and which are not contemplating or experiencing
significant growth maintain a minimum leverage ratio (Tier 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, 1999 the Bank satisfied these ratios and has been categorized as a
well-capitalized institution, which in the regulatory framework for prompt
corrective action imposes the lowest level of supervisory restraints.
Capital adequacy guidelines focus principally on broad categories of credit
risk although the framework for assigning assets and off-balance sheet items to
risk categories does incorporate elements of transfer risk. The risk-based
capital ratio does not, however, incorporate other factors that may affect a
company's financial condition, such as overall interest rate exposure,
liquidity, funding and market risks, the quality and level of earnings,
investment or loan concentrations, the quality of loans and investments, the
effectiveness of loan and investment policies and management's ability to
monitor and control financial and operating risks.
The Federal 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.
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The Bank
As a New Jersey state-chartered bank, the Bank's operations are subject to
various requirements and restrictions of state law pertaining to, among other
things, lending limits, reserves, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends, locations of
branch offices and capital adequacy. The Bank is subject to primary supervision,
periodic examination and regulation by the New Jersey Department of Banking and
Insurance ("NJDBI"). 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 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 ability to pay dividends is subject to certain statutory and
regulatory restrictions. The New Jersey Banking Act of 1948, as amended,
provides that no state-chartered bank may pay a dividend on its capital stock
unless, following the payment of each such dividend, the capital stock of the
bank will be unimpaired, and the bank will have a surplus of not less than 50%
of its capital, or, if not, the payment of such dividend will not reduce the
surplus of the bank. In addition, the payment of dividends is limited by the
requirement to meet the risk-based capital guidelines issued by the Federal
Reserve Board and other regulations.
The Bank's deposits are insured by the Bank Insurance Fund ("BIF")
administered by the Federal Deposit Insurance Corporation ("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.
Under the FDIC's risk-based insurance assessment system, each insured bank
is placed in one of nine "assessment risk classifications" based on its capital
classification and the FDIC's consideration of supervisory evaluations provided
by the institution's primary federal regulator. Each insured bank's insurance
assessment rate is then determined by the risk category in which it has been
classified by the FDIC. There is currently a 27 basis point spread between the
highest and lowest assessment rates, so that banks classified as strongest by
the FDIC are subject in 2000 to 0% assessment, and banks classified as weakest
by the FDIC are subject to an assessment rate of 0.27%. In addition to its
insurance assessment, each insured bank is subject to a debt service assessment
of $0.0212
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and $0.0208 per one hundred dollars of deposits during the first and second
quarters of 2000, respectively, to help recapitalize the Savings Association
Insurance Fund of the FDIC. During 1999, the Bank's BIF debt service assessment
rates ranged between 1.176 and 1.22 basis points and SAIF debt service
assessment rates ranged between 5.80 and 6.10 basis points. The Bank's deposit
insurance assessments may increase or decrease depending upon the risk
assessment classification to which the Bank is assigned by the FDIC. Any
increase in insurance assessments could have an adverse effect on the Bank's
earnings.
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 also leases two locations for the sole purposes of operating
Automated Teller Machines. It owns four banking offices and leases land on which
it owns one bank building. The Company owns land and a building to be used for a
future branch site. The Company also has entered into a lease agreement for a
future branch site. In addition, there is one lease expiring in June 2000 from
which a branch office has been relocated. 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 $10.3 million at December
31, 1999. Annual rental payments with respect to the Company's leased facilities
was $1.3 million for the year ended, December 31, 1999.
In the opinion of management, the physical properties of the Company and
its subsidiaries are suitable and adequate and, except for those facilities
which have been secured for future expansion 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 to a vote of the Company's security holders
through the solicitation of proxies or otherwise during the three months ended
December 31, 1999.
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Part II
Forward Looking Information
In addition to discussing historical information, certain matters included
in or incorporated into this report relate to the financial condition, results
of operations and business of the Company which are not historical facts, but
which are "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. When used herein, the words
"anticipate," "believe," "estimate," "expect," "will" and similar expressions
are generally intended to identify forward-looking statements. These "forward
looking statements" include, but are not limited to, statements about the
operations of the Company, the adequacy of the Company's allowance for future
losses associated with the loan portfolio, and 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. The "forward
looking statements" in this report involve known and unknown risks and
uncertainties and reflect what we currently anticipate will happen in each case.
What actually happens could differ materially from what we currently anticipate
will happen due to a variety of factors, including, among others, (i) increased
competitive pressures among financial services companies; (ii) changes in the
interest rate environment; (iii) general economic conditions, internationally,
nationally, or in the State of New Jersey; and (iv) legislation or regulatory
requirements or changes adversely affecting the business of the Company. Readers
should not place undue expectations on any "forward looking statements." We are
not promising to make any public announcement when we consider "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 "IFC." At February 27, 2000, there were approximately 1,232
shareholders of record. A portion of the Company's common stock is held in
"street name" by nominees for beneficial owners, so the actual number of
shareholders is probably higher. The following table sets forth, for the periods
indicated, the reported high and low sales prices by quarter:
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<TABLE>
<CAPTION>
High Low
------------- -------------
<S> <C> <C>
1997
First quarter (1)(2) $ 14.67 $ 10.61
Second quarter (2) 17.58 11.92
Third quarter (2) 16.67 14.67
Fourth quarter (2) 21.58 14.75
1998
First quarter (2) $ 21.25 $ 18.17
Second quarter 23.25 19.25
Third quarter 20.88 15.31
Fourth quarter 17.75 14.06
1999
First quarter $ 17.50 $ 16.00
Second quarter 17.38 15.50
Third quarter 19.63 16.63
Fourth quarter 18.13 16.13
<FN>
- --------------------------------------------------------------------------------
(1) 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.
(2) 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.
</FN>
</TABLE>
A cash dividend of $0.09, $0.10 and $0.12 was paid on each common share
outstanding in each quarter during 1997, 1998 and 1999, respectively.
The Company intends, subject to its financial results, contractual, legal,
and regulatory restrictions, and other factors that its Board of Directors may
deem relevant, to declare and pay a quarterly cash dividend on it's common stock
in the future. The principal source of the funds to pay any dividends on the
Company's common stock would be dividends 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, 1999 and 1998, and the Consolidated Statements of Income,
Changes in Stockholders' Equity and Cash Flows for each of the years in the
three-year period ended December 31, 1999 and the report thereon of Deloitte &
Touche LLP are included on pages 28 through 46 of the Company's 1999 Annual
Report to Shareholders filed as Exhibit 13 hereto, which pages are incorporated
herein by reference.
11
<PAGE>
Item 6. Selected Consolidated Financial Data
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income Statement Data (in thousands)
Interest income $ 49,301 $ 48,820 $ 45,310 $ 41,379 $ 40,765
Interest expense 18,783 19,864 18,566 16,983 17,208
________ ________ ________ ________ ________
Net interest income 30,518 28,956 26,744 24,396 23,557
Provision for loan losses 1,200 951 1,653 747 1,239
________ ________ ________ ________ ________
Net interest income after provision for loan losses 29,318 28,005 25,091 23,649 22,318
Non-interest income 5,339 4,928 4,774 4,248 4,579
Non-interest expenses 20,063 19,416 17,655 17,492 16,703
________ ________ ________ ________ ________
Income before income taxes 14,594 13,517 12,210 10,405 10,194
Income Taxes 4,959 4,908 4,285 3,654 3,511
________ ________ ________ ________ ________
Net income $ 9,635 $ 8,609 $ 7,925 $ 6,751 $ 6,683
======== ======== ======== ========= =========
Per Share Data
Before deducting acquisition costs
Basic earnings per common share $1.37 $1.32 $1.11 $0.95 $0.93
Diluted earnings per common share 1.36 1.31 1.10 0.94 0.92
After deducting acquisition costs
Basic earnings per common share 1.37 1.20 1.11 0.95 0.93
Diluted earnings per common share 1.36 1.19 1.10 0.94 0.92
Cash dividends declared 0.48 0.40 0.36 0.33 0.31
Book value--end of year 8.66 8.66 7.86 7.02 6.43
Tangible book value--end of year 8.60 8.56 7.71 6.80 6.16
Weighted average shares outstanding (in thousands)
Basic 7,031 7,189 7,132 7,124 7,113
Diluted 7,062 7,237 7,222 7,190 7,157
Balance Sheet Data--end of year (in thousands)
Total assets $ 706,125 $ 685,364 $625,050 $572,512 $548,220
Securities held to maturity and securitie available for sale 161,889 149,930 135,997 143,339 163,736
Loans 511,976 478,717 438,273 384,060 337,570
Allowance for loan losses 5,476 5,645 5,231 3,968 3,926
Total deposits 598,992 598,732 540,765 491,637 487,224
Securities sold under agreements to repurchase and short term
borrowings 30,406 18,548 13,028 10,904 11,702
Long-term borrowings 13,000 - 9,876 9,983 -
Total stockholders' equity 58,276 62,372 56,130 50,048 45,781
Selected Performance Ratios
Before deducting acquisition costs
Return on average total assets 1.39 % 1.44 % 1.33 % 1.22 % 1.26 %
Return on average total stockholders' equity 15.52 16.05 14.95 14.09 15.53
After deducting acquisition costs
Return on average total assets 1.39 1.31 1.33 1.22 1.26
Return on average total stockholders' equity 15.52 14.53 14.95 14.09 15.53
Dividend Payout 35.04 32.81 30.08 32.19 29.82
Average total stockholders' equity to average total assets 8.99 9.00 8.89 8.68 8.11
Net yield on interest earning assets (taxable equivalent) 4.64 4.62 4.78 4.75 4.74
Efficiency ratio (1) 56.81 53.59 56.47 60.02 59.38
Non-interest income to average total assets 0.77 0.75 0.80 0.77 0.86
Non-interest expenses to average total assets 2.90 2.95 2.96 3.17 3.15
Asset Quality--end of year (in thousands)
Nonaccrual loans to total loans 0.22 % 0.25 % 0.35 % 0.66 % 0.74 %
Nonperforming assets to total assets 0.22 0.26 0.33 0.67 0.95
Allowance for loan losses to nonaccrual loans--end of year 491.12 471.20 345.51 157.02 156.35
Allowance for loan losses to total loans--end of year 1.07 1.18 1.19 1.03 1.16
Net charge-offs to average loans 0.28 0.12 0.10 0.20 0.44
Liquidity and Capital
Average loans to average deposits 81.79 % 81.06 % 78.09 % 72.19 % 67.14 %
Total stockholders' equity to total assets 8.25 9.10 8.98 8.74 8.35
Tier I capital to risk weighted assets 12.72 13.80 13.19 13.79 13.92
Total capital to risk weighted assets 13.91 15.12 14.44 15.04 15.17
Tier I capital to average assets 8.32 9.08 8.79 8.65 8.16
<FN>
All prior period information has been restated to reflect the Company's
acquisition of The Jersey Bank for Savings, which was completed on May 31, 1998
and was accounted for as a pooling of interests.
(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.
</FN>
</TABLE>
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 1999 Annual Report to Shareholders filed as Exhibit
13 hereto 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 1999 Annual
Report to Shareholders filed as Exhibit 13 hereto 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 1999 Annual Report to Shareholders on pages 28 through 46, filed as
Exhibit 13 hereto 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 - 46
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 "Nominees and
Directors" in the Company's definitive Proxy Statement for its 2000
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
The following table sets forth the names, ages, and present positions
of the Company's and the Bank's principal executive officers:
13
<PAGE>
Name Age Positions Held with the Company and the Bank
____ ___ ____________________________________________
ANTHONY S. ABBATE 60 President and Chief Executive Officer
ANTHONY J. LABOZZETTA 36 Executive Vice President and
Chief Financial Officer
FRANK R. GIANCOLA 46 Senior Vice President--Operations
PATRICIA D. ARNOLD 41 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.
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.
c. Compliance with Section 16(a)
Information contained in the section entitled "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Company's
definitive Proxy Statement for its 2000 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 2000 Annual Meeting of
Stockholders, to be filed not later than 120 days after the close of the
Company's
14
<PAGE>
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 2000
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 2000 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.
15
<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 46, of the Annual Report to
Shareholders for 1999 (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 22, 1999
(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, 1999
* 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 31,1999:
None.
[FN]
______________________________
(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
</FN>
16
<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 23, 2000
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 23, 2000 James E. Healey March 23, 2000
Director Director
President and Chief Executive Officer
/s/Anthony D. Andora /s/Anthony Labozzetta
- ---------------------------------------- ------------------------------------
Anthony D. Andora March 23, 2000 Anthony Labozzetta March 23, 2000
Director Executive Vice President and
Chairman of the Board Chief Financial Officer
/s/Donald L. Correll /s/Nicholas R. Marcalus
- ---------------------------------------- ------------------------------------
Donald L. Correll March 23, 2000 Nicholas R. Marcalus March 23, 2000
Director Director
/s/Anthony R. Coscia /s/Eleanore S. Nissley
- ---------------------------------------- ------------------------------------
Anthony R. Coscia March 23, 2000 Eleanore S. Nissley March 23, 2000
Director Director
/s/John J. Eccleston /s/Jeremiah F. O'Connor
- ---------------------------------------- ------------------------------------
John J. Eccleston March 23, 2000 Jeremiah F. O'Connor March 23, 2000
Director Director
/s/David R. Ficca /s/Robert P. Rittereiser
- ---------------------------------------- ------------------------------------
David R. Ficca March 23, 2000 Robert P. Rittereiser March 23, 2000
Director Director
/s/Richard A. Gilsenan /s/Benjamin Rosenzweig
- ---------------------------------------- ------------------------------------
Richard A. Gilsenan March 23, 2000 Benjamin Rosenzweig March 23, 2000
Director Director
17
AGREEMENT FOR LEGAL SERVICES
THIS AGREEMENT for legal services made this 22nd day of April, 1999, 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 07663
and
INTERCHANGE BANK
A Banking Corporation
Park 80 West, Plaza Two
Saddle Brook, New Jersey 07663
hereinafter referred to as "Clients".
IN CONSIDERATION of the mutual promises, covenants and undertakings
contained herein the Attorneys and the Clients agree as follows:
1. RETAINER
Clients hereby retain the services of Attorneys to act as its corporate
counsel for the term and compensation as outlined herein.
2. TERM
The Attorneys shall be retained by Clients until the next annual
reorganization meeting of Clients.
3. COMPENSATION
The Clients shall pay the Attorneys for services rendered as corporate
counsel an annual retainer of NINETY-FIVE THOUSAND DOLLARS ($95,000.00) payable
in equal monthly installments on the first day of each and every month
commencing the first day of the month following the execution of this Agreement.
Clients shall, in addition to the annual retainer, pay to the Attorneys all
out-of-pocket expenses, filing fees, or disbursements made by the Attorneys on
Clients' behalf. Clients shall, in addition to the payment of the annual
retainer and all costs, pay to the Attorneys a legal fee based on the rate per
hour as shown on Schedule A for all legal services provided to Clients by the
Attorney which are "legal services rendered in addition to those rendered as
corporate counsel." Such fees and costs shall be billed by Attorneys to clients
on a thirty-day basis and Clients shall pay all bills within five (5) days after
each monthly Board of Director's meeting of the Clients.
4. DEFINITIONS
The following words and phrases shall have the following meanings:
<PAGE>
A. "Legal services rendered as corporate counsel" shall mean and include all
of the following types of legal work:
1. Except as hereinafter set forth in subparagraph B, document review and
drafting of documents on behalf of the Clients including, but not
limited to: leases, notes, contracts, mortgages, commitment letters,
disclosure statements, modifications, extensions and legal agreements
not related to third-party borrowers, except residential mortgage
reviews.
2. Providing legal advice required in the usual course of Clients'
business including compliance analysis.
3. Attendance at Board of Director's and Shareholders' Meetings other than
as a Director.
4. Advice regarding levies and executions
5. Preparation of annual SEC 10K, 10Q and "ordinary" proxy filings.
B. "Legal services rendered in addition to those rendered as general corporate
counsel" shall mean and include, but not be limited to, all of the
following types of legal work which shall be billed on an hourly basis:
1. Litigation in which Clients are named as defendants.
2. Litigation or other proceedings in which Clients and another person or
agency (i.e., Small Business Administration) specially retain Attorney.
The hourly rate for such legal services shall be specifically agreed
upon by Clients, the agency, and Attorneys.
3. Foreclosure litigation, including lien protection litigation in any
Court including the Bankruptcy Court.
4. Regulatory or administrative law proceedings including but not limited
to Department of Banking, zoning agencies, N.L.R.B., F.D.I.C., OAL,
and Tax Court.
5. Loan reviews and closings, including modifications and extensions
thereof, except that the fee shall be based upon $200.00 per hour plus
costs and such fee shall not exceed 1/2% of the principal amount of the
loan plus costs but in no event shall such fee be less than $250.00.
6. Closings in which the bank is a buyer or seller.
7. SEC Filings other than annual 10K, 10Q or "ordinary" proxy filings.
8. Mergers and Acquisitions.
9. All other legal services not specifically set forth in Paragraph 4A.
5. BINDING EFFECT
This agreement shall be binding upon and shall inure to the benefit of the
parties' successors or assigns.
6. NO ASSIGNMENT
This agreement shall not be assigned or sublet without the express written
consent of the parties.
7. LAW APPLICABLE
This agreement shall be governed by the laws of the State of New Jersey.
8. SEVERABILITY
<PAGE>
In the event any clause, section or paragraph of this agreement shall be
declared invalid or unenforceable by a court of competent jurisdiction, such
invalidity or unenforceability shall not affect the remainder of this Agreement.
IN WITNESS WHEREOF the parties have hereunto signed this agreement the date
first above written.
INTERCHANGE 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
22, 1999.
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, 1999 June 30, 1999 September 30, 1999 December 31, 1999
______________________ _______________________ _____________________ ______________________
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 $2,286 7,206 $0.32 $2,478 7,212 $0.34 $2,705 7,043 $0.38 $2,167 6,785 $0.32
====== ====== ====== ======
Effect of Dilutive Shares
Options issued to management 42 33 39 33
________ ________ _______ _______
Diluted Earnings per Common Share
Income available to common
shareholders $2,286 7,248 $0.32 $2,478 7,245 $0.34 $2,705 7,082 $0.38 $2,167 6,818 $0.32
====== ======== ====== ======= ======== ==-=== ====== ======= ====== ====== ======= ======
________________________________________________________________________________________________
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
_______ ________ ______ ______ ________ ______ ______ _______ ______ ______ _______ ______
Basic Earnings per Common Share
Income available to common
shareholders $1,977 7,167 $0.28 $1,478 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
Income available to common
shareholders $1,977 7,250 $0.27 $1,478 7,263 $0.20 $2,547 7,256 $0.35 $2,657 7,247 $0.37
====== ======== ====== ======= ======== ==-=== ====== ======= ====== ====== ======= ======
______________________
Year Ended
______________________
December 31, 1997
______________________
Weighted Per
Average Share
Income Shares Amount
_______ ________ ______
Basic Earnings per Common Share
Income available to common
shareholders $7,925 7,132 $1.11
======
Effect of Dilutive Shares
Options issued to management 90
________
Diluted Earnings per Common Share
Income available to common
shareholders $7,925 7,222 $1.10
====== ======== ======
</TABLE>
Exhibit 13. Portions of the Annual Report to Shareholders for the year ended,
December 31, 1999.
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 Company's consolidated financial
statements and notes thereto on pages 29 through 46 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 Summary
Net income for the year ended December 31, 1999 was $9.6 million as
compared with $8.6 million in 1998, an increase of 11.9%. For the same period,
diluted earnings per share rose 14.3% to $1.36 in 1999 from $1.19 in 1998. Basic
earnings per share in 1999 were $1.37 as compared to $1.20 in 1998. Excluding,
the 1998 merger related charge of $898 thousand, net of tax, net income for 1999
would have increased $128 thousand or 1.3% as compared to 1998. Diluted earnings
per share would have increased 3.8% to $1.36 in 1999 as compared to $1.31 in
1998. Basic earnings per share would have increased 3.8% to $1.37 as compared to
$1.32 in 1998.
The Company's operating performance for 1999 reflects favorable loan and
deposit growth, healthy asset quality and a disciplined approach in managing
non-interest expenses. The Company's returns on average equity and average
assets were 15.52% and 1.39%, respectively, in 1999 as compared to 14.53% and
1.31%, respectively, in 1998. Furthermore, the favorable earnings growth
resulted in an increase in the quarterly dividend paid on common stock to an
annualized rate of $.48 in 1999 as compared to $.40 in 1998, an increase of
20.0%.
The improvement in earnings for 1999 as compared to 1998, was driven by
growth in net interest income, an increase in non-interest income and a
reduction in the Company's effective tax rate. Net interest income, on a taxable
equivalent basis, for 1999 increased $1.7 million, or 5.7% from 1998. The
increase in net interest income resulted primarily from the growth in average
interest earning assets and an improved net interest margin. Non-interest income
increased $411 thousand or 8.3% and had a favorable impact on earnings. The
Company's effective tax rate decreased to 34.0% for the year-ended 1999, as
compared to 36.3% for the same period in 1998 and had a favorable impact on
earnings.
Table 1
- ----------------------------------------------------------------
Summary of Operating Results
- ----------------------------------------------------------------
1999 1998 1997
-------- -------- --------
Net income (in thousands) $9,635 $8,609 $7,925
Basic earnings per common share 1.37 1.20 1.11
Diluted earnings per common share 1.36 1.19 1.10
Return on average total assets 1.39% 1.31% 1.33%
Return on average total equity 15.52 14.53 14.95
Dividend payout ratio* 35.04 32.81 30.08
Average total stockholders'equity to
average total assets 8.99 9.00 8.89
* Cash dividends declared on common shares to net income.
Results of Operations
Net Interest Income
The major source of income for 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, 1999, 1998 and
1997, 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 1999 and 1998,
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>
<CAPTION>
Table 2
______________________________________________________________________________________________________________________________
Analysis of Net Interest Income
for the years ended December 31,
______________________________________________________________________________________________________________________________
(dollars in thousands)
1999 1998 1997
--------------------------------- --------------------------- ---------------------------
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) $494,022 $39,521 8.00 % $462,296 $38,904 8.42 % $402,799 $35,380 8.78 %
Taxable securities (4) 142,786 8,692 6.09 132,433 8,206 6.20 137,202 8,856 6.45
Tax-exempt securities (2)(4) 11,578 650 5.61 4,428 234 5.28 2,514 129 5.13
Federal funds sold 12,142 596 4.91 27,318 1,474 5.40 16,061 896 5.58
Interest bearing demand deposits - - - 1,024 55 5.37 1,721 78 4.53
--------- --------- --------- ------- -------- ------
Total interest earning assets 660,528 49,459 7.49 627,499 48,873 7.79 560,297 45,339 8.09
--------- ------- ------
Non-interest earning assets
Cash and due from banks 18,386 17,618 24,579
Allowance for loan losses (5,638) (5,437) (4,636)
Other assets 17,682 18,336 16,117
--------- -------- --------
Total assets $690,958 $658,016 $596,357
========= ========= ========
Liabilities and stockholders' equity
Interest bearing liabilities
Demand deposits $201,150 6,055 3.01 $171,546 5,573 3.25 $141,523 4,575 3.23
Savings deposits 128,700 2,992 2.33 132,735 3,790 2.86 123,417 3,779 3.06
Time deposits 172,005 8,653 5.03 171,462 9,104 5.31 169,196 8,889 5.25
Short-term borrowings 18,501 1,000 5.41 14,723 807 5.48 12,844 727 5.66
Long-term borrowings 1,302 83 6.37 9,828 590 6.00 9,935 596 6.00
--------- --------- --------- ------- -------- ------
Total interest bearing liabilities 521,658 18,783 3.60 500,294 19,864 3.97 456,915 18,566 4.06
--------- ------- ------
Non-interest bearing liabilities
Demand deposits 102,194 94,568 81,707
Other liabilities 5,012 3,903 4,738
--------- -------- --------
Total liabilities (3) 628,864 598,765 543,360
Stockholders' equity 62,094 59,251 52,997
========= ========= ========
Total liabilities and $690,958 $658,016 $596,357
stockholders equity ========= ========= ========
Net interest income (tax-equivalent basis) 30,676 3.89 29,009 3.82 26,773 4.03
Tax-equivalent basis adjustment (158) (53) (29)
--------- ------- ------
Net interest income $30,518 $28,956 $26,744
========= ======== ======
Net interest income as a percent of
interest earning assets (tax-equivalent basis) 4.64 % 4.62 % 4.78 %
______________________________________________________________________________________________________________________________
<FN>
(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.
</FN>
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Table 3
- ------------------------------------------------------------------------------------------------------
Effect of Volume and Rate Changes on Net Interest Income
- ------------------------------------------------------------------------------------------------------
(in thousands)
Year ended December 31, Year ended December 31,
1999 compared with 1998 1998 compared with 1997
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 $2,671 $(2,054) $ 617 $5,226 $(1,702) $3,524
Taxable securities 641 (155) 486 (302) (348) (650)
Tax-exempt securities 401 15 416 101 4 105
Federal funds sold (755) (123) (878) 628 (50) 578
Interest bearing demand deposits (55) - (55) (37) 14 (23)
--------- --------- ---------- -------- -------- -----------
Total interest income 2,903 (2,317) 586 5,616 (2,082) 3,534
--------- --------- ---------- -------- -------- -----------
Interest expense
Demand deposits 962 (480) 482 975 23 998
Savings deposits (112) (686) (798) 285 (274) 11
Time deposits 29 (480) (451) 120 95 215
Short-term borrowings 207 (14) 193 102 (22) 80
Long-term borrowings (546) 39 (507) (6) - (6)
--------- --------- ---------- -------- -------- -----------
Total interest expense 540 (1,621) (1,081) 1,476 (178) 1,298
--------- --------- ---------- -------- -------- -----------
Change in net interest income $ 2,363 $ (696) $ 1,667 $4,140 $(1,904) $ 2,236
========= ========= ========== ======== ======== ===========
- -----------------------------------------------------------------------------------------------------
<FN>
Non-performing loans are included in interest earning assets.
</FN>
</TABLE>
Net interest income, on a taxable equivalent basis, amounted to $30.7
million, an increase of $1.7 million, or 5.7%, from $29.0 million in 1998. The
increase in net interest income was principally due to the strong growth in
interest earning assets of $33.0 million that was funded largely by a $33.7
million growth in deposits. The growth in deposits, which occurred predominantly
in interest and non-interest bearing demand deposits, had a positive effect on
the composition ("mix") of retail deposits. Net interest income was favorably
affected by a change in the retail deposit mix, which served to reduce the yield
on total deposits. The net interest margin increased 2 basis points to 4.64% for
1999 as compared to 4.62% for 1998, due largely to the positive effects on the
Company's funding cost resulting from the decline in market interest rates.
Interest income, on a taxable equivalent basis, totaled $49.5 million in
1999, an increase of $586 thousand or 1.2% from $48.9 million in 1998. The
increase was principally driven by the growth in average interest earning
assets. Average yields on interest earning assets decreased 30 basis points to
7.49% in 1999 as compared to 1998. 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 $23.1 million
or 11.6% to $223.1 million in 1999, as compared to $200.0 million in 1998. The
average balance of consumer loans (comprised mostly of home equity loans)
totaled $270.2 million in 1999, compared to $256.9 million in 1998, an increase
of $13.3 million or 5.2%. The increase in average loans outstanding more than
offset the effects of the decline in yield on interest earning assets resulting
from a decrease in market interest rates. Interest income also benefited from a
$17.5 million growth in the securities portfolio. The growth was partly offset
by a decline in the average yield of the securities portfolio. The decline in
average yield was largely due to the decline in market interest rates during
1999. A decline in Federal funds sold of $15.2 million negatively impacted
interest income.
Interest expense totaled $18.8 million in 1999, a decrease of $1.1 million
or 5.4% as compared to 1998. The decrease was principally due to a decline of 37
basis points in the average rates paid on interest bearing liabilities to 3.60%
in 1999 as compared to 3.97% in 1998. This decline in average rates was largely
due to a decrease in market interest rates and a more favorable retail deposit
mix. The positive effects of the decline in interest rates were partly offset by
a $21.4 million growth in average interest bearing liabilities, specifically
interest bearing demand deposits. The average balance of interest bearing demand
deposits grew $29.6 million or 17.3% to $201.2 million in 1999 as compared to
1998. Total average interest and non-interest bearing demand deposits grew $37.2
million or 14.0%, in 1999, which is largely attributable to the Company's
continued efforts in marketing and sales. In addition, commercial loans
resulting from these selling efforts generally carry compensating deposit
balances in the form of demand deposits and further contributed to the growth.
In 1998, 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 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 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.
In 1998, interest income, on a taxable equivalent basis, totaled $48.9
million, 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 yields on interest earning assets decreased 30 basis points to 7.79% in
1998 as compared to 1997. The increase in
16
<PAGE>
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 yields earned on
those loans. Net interest income was negatively affected by a decline in the
average volume and average yield earned on the securities portfolio. The decline
in average yield was largely due to the decline in market interest rates during
1998.
In 1998, interest expense totaled $19.9 million, an increase of $1.3
million or 7.0% as compared to 1997. 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
selling 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.
Non-interest income
Non-interest income consists of all income other than interest and dividend
income and is principally derived from: fees on bank transactions and credit
cards; loan fees; commissions on sales of annuities and mutual funds; rental of
safe deposit space; income from the collection of principal on acquired loans in
excess of their carrying value 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 explores new opportunities to
build non-interest income. In 1999, non-interest income totaled $5.3 million, an
increase of $411 thousand or 8.3% over 1998. The growth in non-interest income
was largely due to an increase in the collection of principal on acquired loans
in excess of their carrying value and gains from the sale of the Company's VISA
(TM) and merchant credit card portfolios. The major components of non-interest
income are described below. In 1998, total non-interest income increased $154
thousand or 3.2% over 1997.
In 1999, net gains from the sale of securities amounted to $859 thousand, a
decrease of $162 thousand or 15.9% from $1.0 million in 1998. Included in the
net gains is $856 thousand from the sale of available for sale securities and $3
thousand from the sale of a held to maturity security (scheduled to mature
within 3 months). In 1998, the net gain included $876 thousand from the sale of
available for sale securities and $145 thousand from the call of a security
before its maturity.
In 1999, the Company realized gains related to the sale of VISA(TM) and
merchant credit card portfolios of $86 thousand and $329 thousand, respectively.
The gain for the VISA(TM) portfolio sale is included in net gain on sale of
loans and the gain from the sale of the merchant credit card portfolio is
included in other income. The VISA(TM) and merchant credit card portfolios were
sold following an evaluation of the risk/reward profiles of the portfolios,
which determined that the risk associated with the portfolios exceeded the
levels deemed acceptable by the Company. During 1998, there were no gains from
the sale of VISA(TM) and merchant credit card portfolios.
In 1999, the collection of principal on acquired loans in excess of their
carrying value increased $508 thousand as compared to 1998. The increase for
1999 was negatively impacted by a decrease in service fees on deposits and other
non-interest income in the amount of $251 thousand and $99 thousand,
respectively. Other non-interest income includes, but is not limited to, income
from servicing fees, commissions, loan fees and safe deposit rental fees.
Included in other income for 1998 was $53 thousand from the sale of the reverse
mortgage-servicing portfolio.
In 1998, service fees on deposits increased $511 thousand or 25.0% as
compared to 1997. In 1998, strategies implemented by the Company 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 of a security before its
maturity. There were no gains from the sale of securities in 1997.
In 1998, the collection of principal on acquired loans in excess of their
carrying value decreased $681 thousand in 1998 as compared to 1997. The decrease
in 1998 was partially offset by an increase in other non-interest income of $370
thousand.
Table 4
________________________________________________________________________________
Non-interest Income
________________________________________________________________________________
for the years ended December 31,
(in thousands)
1999 1998 1997
______ ______ ______
Service fees on deposit accounts $2,300 $2,551 $2,040
Net gain on sale of securities 859 1,021 -
Net gain on sale of loans 86 - 1,067
Net gains on sale of merchant credit
card portfolio 329 - -
Collection of principal on acquired loans
in excess of their carrying value 682 174 855
All other 1,083 1,182 812
------ ------ ------
$5,339 $4,928 $4,774
====== ====== ======
Non-interest Expenses
Non-interest expenses totaled $20.1 million for 1999; an increase of $647
thousand or 3.3% from $19.4 million as compared to 1998. Excluding the one-time
charges that occurred in 1998 associated with the acquisition of Jersey Bank and
the 1998 recognition of $474 thousand in cash surrender value of certain
directors' life insurance policies, non-interest expenses for 1999 increased
$1.6 million or 8.5% as compared to 1998.
Salaries and benefits, the largest component of non-interest expenses,
increased $828 thousand or 8.8% when compared to the same period in 1998 due to
normal promotions, salary increases and the additions to staff associated with
the new branch opening in Paramus, New Jersey. Occupancy and furniture and
equipment expense increased $303 thousand when compared to the same period in
1998 of which approximately $176 thousand of the increase can be attributed to a
full year of operations of the Paramus branch, which was opened in the fourth
quarter of 1998. Contributing to the increase in non-interest expenses for 1999
were higher advertising and promotion expenses of $168 thousand, an increase in
Y2K expenses of $61 thousand, and approximately $70 thousand in expenses
associated with the establishment of Interchange Capital Company, a wholly owned
equipment
17
<PAGE>
lease-financing subsidiary. All other expenses increased by $151 thousand or
3.6% for 1999 as compared to 1998.
For 1998, non-interest expenses totaled $19.4 million, 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.
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 the efficiency ratio the more
effective the Company is in utilizing its resources to generate income. The
Company's efficiency ratio was 56.8%, 53.6% and 56.5% in 1999, 1998 and 1997,
respectively. The Company's efficiency ratio continues to remain below the
national peer group average. The national peer group average was 60.4% (peer
group data as of September 30, 1999 - based upon the most recent published
report by SNL Securities). The national peer group average for 1998 and 1997 was
60.0% and 59.9%, respectively (published by SNL Securities).
Table 5
_______________________________________________________________________________
Non-interest Expenses
_______________________________________________________________________________
for the years ended December 31,
(in thousands)
1999 1998 1997
________ _______ _______
Salaries and benefits $ 10,265 $ 9,437 $ 8,951
Occupancy, furniture and equipment 3,743 3,440 3,031
Advertising and promotion 1,033 865 865
Federal Deposit Insurance
Corporation assessment 81 75 58
Foreclosed real estate 13 1 -
Acquisition - 1,392 -
Other expenses
Stationery, printing and supplies 307 255 304
Professional fees 1,101 1,184 1,216
Communications 404 327 289
Postage and shipping 397 356 313
Credit card processing fees 12 24 63
Credit services 188 74 99
Amortization of premiums in connection
with acquisitions 313 384 444
Directors' fees, travel and retirement 546 88 607
Insurance premiums 123 172 240
Data Processing 517 538 548
Y2K 81 20 -
All other 939 784 627
________ _______ _______
$20,063 $19,416 $17,655
======== ======= =======
Income Taxes
In 1999, income taxes amounted to $5.0 million as compared to $4.9 million
and $4.3 million for 1998 and 1997, respectively. The effective tax rate in 1999
was 34.0% as compared to 36.3% and 35.1% for 1998 and 1997, respectively.
Detailed information on income taxes is shown in Notes 1 and 16 to the
Consolidated Financial Statements.
Financial Condition
Loan Portfolio
In 1999, 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, 1999, total loans amounted to $512.0 million and,
excluding term federal funds sold in 1998, were up $38.3 million or 8.1% 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 $20.4 million or 22.7% to $110.3 million in 1999 from $89.9
million in 1998. The loan growth was largely within 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, New Jersey
dedicated to community service and helping its customers grow and prosper.
Commercial real estate mortgage loans amounted to $166.4 million at
December 31, 1999, and represented 32.5% of total loans as compared to $148.9
million or 31.1% of all loans at the end of 1998. 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 6% of its total loans.
18
<PAGE>
<TABLE>
<CAPTION>
Table 6
________________________________________________________________________________________________________
Loan Portfolio
________________________________________________________________________________________________________
at December 31,
1999 1998 1997 1996 1995
________ ________ ________ ________ ________
<S> <C> <C> <C> <C> <C>
Amounts of loans by type (in thousands)
Commercial and financial $ 63,684 $ 64,067 $ 51,573 $ 51,908 $ 42,645
Real estate-construction 4,008 974 4,229 4,799 2,509
Real estate-mortgage
1-4 family residential
First liens 110,269 89,852 73,309 62,170 61,374
Junior liens 9,829 14,322 16,795 18,645 21,803
Available for sale - - - 1,195 1,106
Home equity 144,747 142,781 143,177 121,504 102,006
Commercial 166,354 148,875 134,972 117,641 100,332
Installment
Credit cards and related plans 947 2,033 2,415 2,704 2,935
Other 2,756 1,200 1,702 3,494 2,805
Lease financing 9,382 9,613 10,101 - 55
Term federal funds - 5,000 - - -
________ ________ ________ ________ ________
Total $511,976 $478,717 $438,273 $384,060 $337,570
======== ======== ======= ======= ========
Percent of loans by type
Commercial and financial 12.5 % 13.3 % 11.8 % 13.5 % 12.6 %
Real estate-construction 0.8 0.2 1.0 1.2 0.7
Real estate-mortgage
1-4 family residential
First liens 21.5 18.8 16.7 16.2 18.2
Junior liens 1.9 3.0 3.8 4.9 6.5
Available for sale - - - 0.3 0.3
Home equity 28.3 29.8 32.7 31.6 30.2
Commercial 32.5 31.1 30.8 30.6 29.7
Installment
Credit cards and related plans 0.2 0.4 0.5 0.7 0.9
Other 0.5 0.3 0.4 1.0 0.9
Lease financing 1.8 2.0 2.3 - -
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, 1999. 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 $9,357 $28,061 $26,266 $63,684
Real estate-construction 302 3,706 - 4,008
--------- ------- -------- -------
Total $9,659 $31,767 $26,266 $67,692
========= ======= ========= =======
The following table sets forth, as of December 31, 1999, 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 $19,227 $ 2,647
Variable interest rate 12,540 23,619
---------- -------
Total $31,767 $26,266
========== =======
</TABLE>
19
<PAGE>
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 Executive Vice President and Chief Financial Officer 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.
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 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 1999 amounted to $1.2 million, an increase of $249
thousand from the prior year. In 1998, the loan loss provision amounted to $951
thousand, a decrease of $702 thousand from 1997. The increase in the loan loss
provision for 1999 was due largely to continued growth in the Company's loan
portfolio and an increase in charge-offs. The Company's loan portfolio increased
$33.3 million in 1999, as compared to 1998. The Company's commercial and
commercial mortgage portfolios made up $20.1 million or 60.4% of the growth.
During 1999, the Company experienced an increase in its net charge-offs of $832
thousand. The increase was primarily due to the charge-off of one commercial
loan amounting to $1.1 million. In 1999, management determined that the
allowance for loan losses was at a level sufficient to absorb estimated losses
in the loan portfolio.
<TABLE>
<CAPTION>
Table 7
__________________________________________________________________________________________________
Loan Loss Experience
__________________________________________________________________________________________________
for the years ended December 31,
(dollars in thousands)
1999 1998 1997 1996 1995
_________ ________ ________ ________ ________
<S> <C> <C> <C> <C> <C>
Average loans outstanding $494,022 $462,296 $402,799 $353,659 $318,089
========= ======== ======== ======== ========
Allowance at beginning of year $5,645 $5,231 $3,968 $3,926 $4,079
--------- ------- ------- -------- --------
Loans charged off
Commercial 1,234 15 293 8 399
Installment 59 135 141 78 108
Real estate 120 470 139 770 914
Lease financing - - - 57 89
--------- -------- ------- -------- --------
Total 1,413 620 573 913 1,510
--------- -------- ------- -------- --------
Recoveries of loans previously charged off
Commercial 14 35 84 75 25
Installment 20 18 29 45 54
Real estate 10 30 70 88 32
Lease financing - - - - 7
--------- -------- ------- -------- --------
Total 44 83 183 208 118
--------- -------- ------- -------- --------
Net loans charged off 1,369 537 390 705 1,392
--------- -------- ------- -------- --------
Additions to allowance charged to expense 1,200 951 1,653 747 1,239
--------- -------- ------- -------- -------
Allowance at end of year $5,476 $5,645 $5,231 $3,968 $3,926
========= ======== ======= ======== =======
Allowance to total loans 1.07 % 1.18 % 1.19 % 1.03 % 1.16 %
Allowance to nonaccrual loans 491.12 471.20 345.51 157.02 156.35
Allowance to nonaccrual loans and
loans past due 90 days or more 491.12 471.20 316.07 155.49 156.35
Ratio of net charge-offs to average loans 0.28 0.12 0.10 0.20 0.44
</TABLE>
The allowance for loan losses ("allowance") represented 491.1% of
nonaccrual loans and loans past due 90 days or more at the end of 1999, up from
471.2% at the end of 1998. The ratio increased principally due to a $83 thousand
decrease in nonaccrual loans and loans past due 90 days or more in 1999 as
compared to the end of the year in 1998. The increase was partly offset by a
$169 thousand decrease in the allowance resulting from a $832 thousand increase
in net loans charged off.
20
<PAGE>
Table 8
- -------------------------------------------------------------------------
Allocation of Allowance for Loan Losses
- -------------------------------------------------------------------------
at December 31,
(in thousands)
1999 1998 1997 1996 1995
------- ------ ------ ------ --------
Commercial and financial $ 715 $1,036 $ 888 $982 $ 836
Installment 82 93 147 165 228
Real estate 2,191 2,330 2,628 2,101 2,252
Unallocated 2,488 2,186 1,567 720 610
------- ------ ------ ------ --------
$5,476 $5,645 $5,231 $3,968 $3,926
======= ====== ====== ====== ========
The above allocation is intended for analytical purposes and may not be
indicative of the categories in which future loan losses occur.
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 terms 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. Nonperforming assets decreased $223 thousand in 1999 as compared to 1998.
The decline was due largely to a $306 thousand decrease in restructured loans
resulting from the pay down of the principal balance. In addition, nonaccrual
loans decreased $83 thousand in 1999, as compared to 1998, and further reduced
nonperforming assets. These reductions were offset by an increase in foreclosed
real estate of $166 thousand. Nonperforming assets decreased $277 thousand in
1998 as compared to 1997. The decline was driven largely by the sale of $409
thousand of nonperforming loans during 1998.
Based on the current information available, except for the loans included
in the table, management believes that there were no material potential problem
loans, either individually or in the aggregate, at December 31, 1999.
<TABLE>
<CAPTION>
Table 9
_________________________________________________________________________________________________________
Loan Delinquencies and Nonperforming Assets
_________________________________________________________________________________________________________
at December 31,
(dollars in thousands)
1999 1998 1997 1996 1995
-------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Loans delinquent and accruing interest
Loans past due 30-89 days $190 $379 $832 $838 $1,397
Loans past due 90 days or more - - 141 25 -
-------- ------ ------ ------ -------
Total loans delinquent and accruing interest $190 $379 $973 $863 $1,397
======== ====== ====== ====== =======
Nonaccrual loans $1,115 $1,198 $1,514 $2,527 $2,511
Foreclosed real estate 250 84 - 610 1,213
Restructured loans 222 528 573 725 1,465
-------- ------ ------ ------ -------
Total nonperforming assets $1,587 $1,810 $2,087 $3,862 $5,189
======== ====== ======= ====== =======
Total nonperforming assets and loans
past due 90 days or more $1,587 $1,810 $2,228 $3,887 $5,189
======= ====== ====== ====== =======
Nonaccrual loans to total loans 0.22% 0.25% 0.35% 0.66% 0.74%
Nonperforming assets to total loans and
foreclosed real estate 0.31 0.38 0.48 1.00 1.53
Nonperforming assets to total assets 0.22 0.26 0.33 0.67 0.95
Nonaccrual loans and loans past due 90 days
or more to total loans 0.22 0.25 0.38 0.66 0.74
Nonperforming assets and loans past due 90 days
or more to total loans and foreclosed real estate 0.31 0.38 0.51 1.01 1.53
Nonperforming assets and loans past due 90 days
or more to total assets 0.22 0.26 0.36 0.68 0.95
</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>
<CAPTION>
Table 10
____________________________________________________________________________________________________________________
Securities
____________________________________________________________________________________________________________________
at December 31, 1999
(dollars in thousands)
After 1 After 5 Weighted
Within But Within But Within After Average
1 Year 5 Years 10 Years 10 Year Total Yield
------ -------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Securities held to maturity at amortized cost
Obligations of U.S. Treasury $ 9,997 - - - $ 9,997 5.74 %
Mortgage-backed securities 247 $10,758 $3,722 $5,505 20,232 6.76
Obligations of U.S. agencies 2,000 5,992 - - 7,992 6.56
Obligations of states & political subdivisions 6,987 1,803 951 6,454 16,195 6.12
Other debt securities 24 100 - - 124 6.82
------ -------- --------- --------- --------
19,255 18,653 4,673 11,959 54,540
------ -------- --------- --------- --------
Securities available for sale at market value
Obligations of U.S. Treasury - 6,103 - - 6,103 7.00
Mortgage-backed securities 154 41,868 11,897 13,534 67,453 6.53
Obligations of U.S. agencies 3,962 17,830 1,967 3,321 27,080 5.92
Obligations of states & political subdivisions - - 2,941 - 2,941 6.19
------ -------- --------- --------- --------
Total 4,116 65,801 16,805 16,855 103,577
------ -------- --------- --------- --------
$23,371 $84,454 $21,478 $28,814 $158,117
======= ======= ======= ======= ========
Weighted average yield 5.52% 6.53% 6.63% 6.44% 6.38%
The following table sets 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)
1999 1998 1997
----------------- --------------- --------------
Amount % Amount % Amount %
-------- ------- -------- ----- -------- -----
Securities held to maturity
Obligations of U.S. Treasury $ 9,997 18.3% $15,992 29.6% $22,134 36.7%
Mortgage-backed securities 20,232 37.1 18,921 34.9 28,398 47.0
Obligations of U.S. agencies 7,992 14.7 7,986 14.7 6,711 11.1
Obligations of states & political subdivisions 16,195 29.7 11,111 20.5 3,049 5.0
Other debt securities 124 0.2 149 0.3 150 0.2
-------- ------- -------- ----- -------- -----
$54,540 100.0% $54,159 100.0% $60,442 100.0%
======== ======= ======== ===== ======== ======
Securities available for sale
Obligations of U.S. Treasury $ 6,103 5.7% $34,041 35.5% $35,983 47.6%
Mortgage-backed securities 67,453 62.9 43,066 45.0 27,149 35.9
Obligations of U.S. agencies 27,080 25.2 13,824 14.4 7,012 9.3
Obligations of states & political subdivisions 2,941 2.7 - - - -
Equity securities 3,772 3.5 4,840 5.1 5,411 7.2
-------- ------- -------- ----- -------- -----
$107,349 100.0% $95,771 100.0% $75,555 100.0%
======== ======= ======== ===== ======== =====
</TABLE>
The Company's total investment portfolio increased by $12.0 million or 8.0%
to $161.9 million at December 31, 1999 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 a limited portfolio restructuring, maturities
and the sale of equity securities. The U.S. Treasury securities were sold as
part of a limited portfolio restructuring aimed at improving the risk/reward
characteristics of the securities portfolio. The Company sold the equity
securities to eliminate the market-risk exposure following the announcement by
the issuing company that it had agreed to merge with another organization.
Substantially all of the mortgage-backed securities held by the Company are
issued or backed by Federal agencies. At December 31, 1999, the Company's CMO
portfolio did not include any securities
22
<PAGE>
deemed as "high risk" as defined by the Federal Financial Institutions
Examination Council. Total gross unrealized gains and total gross unrealized
losses for the investment portfolio amounted to $315 thousand and $2.1 million,
respectively, at December 31, 1999.
The Company's held to maturity portfolio increased by $381 thousand or 1.0%
to $54.5 million at December 31, 1999 as compared to the prior year. The
increase was principally due to growth in obligations of states and political
subdivision securities. The growth was in part offset by a decline in U.S.
Treasury securities as a result of maturities and the limited portfolio
restructuring.
The Company's available for sale portfolio increased by $11.6 million or
12.1% to $107.3 million at December 31, 1999 as compared to the prior year. The
growth was largely due to the limited portfolio restructuring and the purchase
of securities in 1999. The limited portfolio restructuring involved the sale of
short-term U.S. Treasury securities and the purchasing of short-duration CMO's
and Non-callable U.S. Agency Medium Term Notes. The limited portfolio
restructuring was aimed at improving the risk/reward characteristics of the
securities portfolio.
During 1998, The Company transferred 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 did 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.
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 96.5% of total deposits at
December 31, 1999 and 95.8% at December 31, 1998.
Total deposits amounted to $599.0 million at December 31, 1999, an increase
of $260 thousand or 0.04% from year-end 1998. The growth in the deposit base
occurred in interest bearing demand deposits, which increased $19.8 million or
10.2% at December 31, 1999, as compared to the prior year. Time deposits, which
represents a higher cost of funds decreased by $8.0 million or 4.7% to $162.5
million at year-end 1999 as compared to year-end 1998. In addition, the growth
in deposits was in part offset by a decline in non-interest bearing demand
deposits.
During 1999, the Company had a favorable change in the mix of deposits (on
average), which when combined with declines in interest rates, reduced the
overall yield on deposits by 37 basis points. The Company's emphasis of building
core customer relationships has been paramount to its success in positively
changing the composition of its deposit mix over the last five years.
<TABLE>
<CAPTION>
Table 11
___________________________________________________________________________________________________________________________________
Deposit Summary
___________________________________________________________________________________________________________________________________
at December 31,
(dollars in thousands)
1999 1998 1997 1996 1995
----------------- ------------------ ----------------- ----------------- -----------------
Amount % Amount % Amount % Amount % Amount %
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $102,392 17.1% $107,408 7.9% $ 95,436 17.6% $ 78,450 16.0% $ 70,667 14.5%
Interest bearing demand 213,970 35.8 194,177 32.4 154,301 28.6 121,878 24.8 114,009 23.4
Money market 49,256 8.2 50,665 8.5 41,815 7.7 41,372 8.4 40,728 8.4
Savings 70,907 11.8 76,026 12.7 81,202 15.0 82,817 16.8 85,816 17.6
Time deposits less than $100,000 141,444 23.6 145,337 24.3 134,287 24.9 139,994 28.5 158,689 32.5
Time deposits greater than $100,000 21,023 3.5 25,119 4.2 33,724 6.2 27,126 5.5 17,315 3.6
-------- ----- -------- ----- -------- ---- -------- ----- -------- -------
$598,992 100.0% $598,732 100.0% $540,765 100.0% $491,637 100.0% $487,224 100.0%
======== ===== ======== ===== ======== ===== ======= ===== ======== =====
</TABLE>
The following table shows the time remaining to maturity of time certificates of
deposit of $100,000 or more as of December 31, 1999:
(in thousands)
Three months or less $10,443
Over three months through six months 5,067
Over six months through twelve months 3,008
Over twelve months 2,505
-------
$21,023
=======
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 1999. 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 quarterly, attempts to determine the
impact on net interest margin from current and prospective changes in market
interest rates.
23
<PAGE>
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, 1999, 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 11.1%. At December 31, 1999, 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 and
product preference changes, and other internal/external variables. Furthermore,
the simulation does not reflect actions that ALCO might take in responding to
anticipated changes in interest rates or competitive conditions in the market
place.
In addition to the above-mentioned techniques, the Company utilizes
sensitivity gap 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
(14.5%) at December 31, 1999. 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.
24
<PAGE>
<TABLE>
<CAPTION>
Table 12
______________________________________________________________________________________________________________________________
Interest Rate Sensitivity Analysis
______________________________________________________________________________________________________________________________
at December 31, 1999
(dollars in thousands)
Non-
3 6 6 Mos. to 1 to 3 3 to 5 Over interest
Subject to rate change within Months Months 1 Year Years Years 5 Years Sensitive Total
--------- -------- --------- --------- ------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Net loans $126,696 $ 30,709 $ 52,095 $143,744 $96,212 $60,992 $(3,948) $506,500
Investment securities 8,264 8,291 38,899 66,895 11,508 29,091 (1,059) 161,889
Cash and amounts due from banks - - - - - - 17,669 17,669
Other noninterest earning assets - - - - - - 20,067 20,067
--------- -------- --------- --------- -------- -------- -------- --------
Total assets 134,960 39,000 90,994 210,639 107,720 90,083 32,729 706,125
--------- -------- --------- --------- -------- -------- -------- --------
Liabilities and stockholders' equity
Demand deposits 33,986 33,986 67,972 89,760 44,229 46,429 - 316,362
Savings deposits 6,204 6,204 12,409 31,872 9,832 4,386 - 70,907
Fixed maturity certificates of deposits 52,994 45,128 41,179 17,370 5,796 - - 162,467
Money market accounts 7,388 7,388 14,777 10,595 4,898 4,210 - 49,256
Securities sold under agreements to repurchase 5,750 8,181 2,500 - - - - 16,431
Short-term borrowings 13,975 - - - - - - 13,975
Long-term borrowings - - 7,000 6,000 - - - 13,000
Other liabilities - - - - - - 5,451 5,451
Stockholders' equity - - - - - - 58,276 58,276
--------- -------- --------- --------- -------- -------- -------- --------
Total liabilities and stockholders' equity 120,297 100,887 145,837 155,597 64,755 55,025 63,727 $706,125
--------- -------- --------- --------- -------- -------- -------- --------
GAP $ 14,663 $(61,887) $ (54,843) $ 55,042 $42,965 $35,058 $(30,998)
========= ======== ========= ========= ======== ======== ========
GAP to total assets 2.08 % (8.76)% (7.77)% 7.79 % 6.08 % 4.96 %
Cumulative GAP $14,663 $(47,224) $(102,067) $(47,025) $(4,060) $30,998
========= ======== ========= ========= ======== ========
Cumulative GAP to total assets 2.08 % (6.69)% (14.45)% (6.66)% (0.57)% 4.39 %
</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 to finance prospective business opportunities.
Liquidity management is critical to the stability of the Company. The liquidity
position of the Company over any given period of time is a product of 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, 1999, total deposits amounted to $599.0 million, an
increase of $260 thousand or 0.04% over the prior comparable year. During 1999,
the Company obtained two new term-advances totaling $13.0 million from the FHLB.
At December 31, 1999, advances from the FHLB, overnight borrowings and
securities sold under agreements to repurchase ("REPOS") totaled $43.4 million
and represented 6.1% of total assets as compared to $18.5 million and 2.7% of
total assets, at December 31, 1998. In 1999, the Company's earning assets,
particularly loans, grew faster than its deposit liabilities resulting in the
increase in borrowings.
In 1999, 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, 1999 amounted to $506.5 million, compared to
$473.1 million at the end of 1998, an increase of $33.4 million or 7.1%.
The Company's most liquid assets are cash and due from banks and federal
funds sold. At December 31, 1999, the total of such assets amounted to $17.7
million or 2.5% of total assets, compared to $43.3 million or 6.3% of total
assets at year-end 1998. The decline in liquid assets, principally federal funds
sold, was used to fund investments and loan growth.
Another significant liquidity source is the Company's available for sale
securities. At December 31, 1999, available for sale securities amounted to
$107.3 million or 66.3% of total securities, compared to $95.8 million or 63.9%
of total securities at year-end 1998.
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
$67.5 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 present funding requirements.
Capital Adequacy
Stockholders' equity totaled $58.3 million and represents 8.3% of total
assets at December 31, 1999, compared to $62.4 million and 9.1% of total assets
at December 31, 1998. The $5.0 million decrease was largely attributable to
shares repurchased under the Company's stock repurchase plan, which amounted to
$8.8 million. Contributing to the decrease was cash dividends and an increase in
unrealized losses on available for sale securities, net of taxes, of $3.4
million and $1.9 million, respectively. The decrease was largely offset by net
income of $9.6 million.
Guidelines issued by the Federal Reserve Board and the Federal Deposit
Insurance Corporation ("FDIC") establish capital adequacy guidelines for bank
holding companies and state-chartered banks. The guidelines establish a
risk-based capital framework consisting of (1) a definition of capital and (2) a
system for assigning risk weights. Capital consists of Tier 1 capital, which
includes common 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
25
<PAGE>
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, 1999, the Company's and
Interchange Bank's Tier I risk-based capital ratio was 12.72% and 12.82%,
respectively, well in excess of minimum capital standards.
These guidelines focus principally on broad categories of credit risk,
although the framework for assigning assets and off-balance sheet items to risk
categories does incorporate elements of transfer risk. The risk-based capital
ratio does not, however, incorporate other factors that may affect a company's
financial condition, such as overall interest rate exposure, liquidity, funding
and market risks, the quality and level of earnings, investment or loan
concentrations, the quality of loans and investments, the effectiveness of loan
and investment policies and management's ability to monitor and control
financial and operating risks.
In addition to the risk-based guidelines discussed above, the Federal
Reserve Board and the FDIC require that a bank holding company and bank which
meet the regulators' highest performance and operation standards and which are
not contemplating or experiencing significant growth maintain a minimum leverage
ratio (Tier I capital as a percent of quarterly average adjusted assets) of 3%.
For those financial institutions with higher levels of risk or that are
experiencing or anticipating significant growth, the minimum leverage ratio will
be increased. At December 31, 1999, the Company's and the Bank's leverage ratio
was 8.32% and 8.45%, respectively.
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.
Recent Developments
In December 1999, the Company announced that its subsidiary, Interchange
Bank, has formed an equipment lease-financing subsidiary to be known as
Interchange Capital Company ("ICC"). ICC is a wholly owned subsidiary of the
Bank. ICC will be based at 185 Garibaldi Avenue in Lodi, New Jersey, and will
provide flexible equipment lease financing programs for businesses in the
manufacturing, healthcare, and automotive industries.
The management of ICC are highly capable commercial lenders. Thomas K.
Ficca, executive vice president, has served for more than 13 years in the
bank-leasing environment and is knowledgeable in matters of financial and tax
accounting issues and regulations relating to leasing. Robert M. McFadden,
executive vice president, has over 12 years of small ticket leasing experience
with some of the country's largest asset management and capital leasing
companies. Paul J. Winkelhoff, executive vice president, has accumulated more
than 12 years of leasing experience. During his career, he has held positions
with prominent national financial companies in the areas of collections, asset
management, documentation, and sales.
Recently issued accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("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. On
July 7, 1999, the FASB issued Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No.133" ("SFAS 137"). SFAS 137 delays the
effective date of SFAS 133 for one year, to fiscal years beginning after June
15, 2000. The delay applies to quarterly and annual financial statements and
SFAS No. 133 is now required for all fiscal quarters of fiscal years beginning
after June 15, 2000. Adoption of SFAS 133 is not expected to have a material
impact upon the Company's consolidated financial condition or results of
operations.
Year 2000 Readiness Disclosure
This Year 2000 disclosure falls within the Year 2000 Information and
Readiness Disclosure Act of 1999.
The Company has successfully implemented all phases of its Year 2000
Compliance Plan. The plan as implemented addressed all mission critical systems.
There were no known adverse effects from Year 2000 related issues on the
Company, including its systems and operations.
There remain certain risks associated with the Year 2000 issue such as the
adverse affects that may arise by the failures of third parties with which the
Company has financial or operational relationships to remediate their own Year
2000 issues. Third parties' failures 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
26
<PAGE>
or shutdown, financial loss, regulatory actions and legal liability. The Company
has no information that indicates that a significant vendor may be unable to
sell its products to the Company; a significant borrower or customer may be
unable to continue to conduct business with the Company; or that a significant
service provider may be unable to provide services to the Company in each case
because of Year 2000 compliance problems. The Company maintains a Year 2000
specific contingency in an effort to mitigate such risk. For the year ended
December 31, 1999, the Company has expended $81 thousand of direct costs and an
estimated $200 thousand of indirect costs (human resources).
Forward Looking Statements
In addition to discussing historical information, we discuss certain
matters in this report regarding the financial condition, results of operations
and business of the Company 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, statements about the operations of the Company, the adequacy
of the Company's allowance for future losses associated with the loan portfolio,
and 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. The "forward looking statements" in this report involve known and
unknown risks and uncertainties and reflect what we currently anticipate will
happen in each case. What actually happens could differ materially from what we
currently anticipate will happen due to a variety of factors, including, among
others, (i) increased competitive pressures among financial services companies;
(ii) changes in the interest rate environment; (iii) general economic
conditions, internationally, nationally, or in the State of New Jersey; and (iv)
legislation or regulatory requirements or changes adversely affecting the
business of the Company. Readers should not place undue expectations on any
"forward looking statements." We are not promising to make any public
announcement when we consider "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 Company's common stock is listed on the American Stock Exchange under
the symbol "IFC."
High Low
Sales Sales Cash
Price Price Dividends
------------- ------------- --------------
1997
First quarter (1)(2) $14.67 $10.61 $0.09
Second quarter (2) 17.58 11.92 0.09
Third quarter (2) 16.67 14.67 0.09
Fourth quarter (2) 21.58 14.75 0.09
1998
First quarter (2) $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
1999
First quarter $17.50 $16.00 $0.12
Second quarter 17.38 15.50 0.12
Third quarter 19.63 16.63 0.12
Fourth quarter 18.13 16.13 0.12
The number of stockholders of record as of February 17, 2000 was 1,232.
- --------------------------------------------------------------------------------
(1) 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.
(2) 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, 1999 and 1998 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, 1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/S/ Deloitte & Touche LLP
Deloitte & Touche LLP
Parsippany, New Jersey
January 19, 2000
28
<PAGE>
<TABLE>
<CAPTION>
Interchange Financial Services Corporation
- -------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------
December 31,
(dollars in thousands)
1999 1998
---------- ----------
<S> <C> <C>
Assets
Cash and due from banks $ 17,669 $ 20,109
Federal funds sold - 23,175
--------- ----------
Total cash and cash equivalents 17,669 43,284
--------- ----------
Securities held to maturity at amortized cost (estimated market value
of $53,784 and $54,761 for 1999 and 1998, respectively) 54,540 54,159
--------- ----------
Securities available for sale at estimated market value (amortized cost
of $108,399 and $93,872 for 1999 and 1998, respectively) 107,349 95,771
--------- ----------
Loans 511,976 478,717
Less: Allowance for loan losses 5,476 5,645
--------- ----------
Net loans 506,500 473,072
--------- ----------
Premises and equipment, net 10,289 9,871
Foreclosed real estate 250 84
Accrued interest receivable and other assets 9,528 9,123
--------- ----------
Total assets $706,125 $685,364
========= ==========
Liabilities
Deposits
Non-interest bearing $102,392 $107,408
Interest bearing 496,600 491,324
--------- ----------
Total deposits 598,992 598,732
--------- ----------
Securities sold under agreements to repurchase 16,431 8,780
Short-term borrowings 13,975 9,768
Long-term borrowings 13,000 -
Accrued interest payable and other liabilities 5,451 5,712
--------- ----------
Total liabilities 647,849 622,992
--------- ----------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, without par value; 15,000,000 shares authorized;
6,728,098 and 7,200,133 shares issued and outstanding in
1999 and 1998, respectively 5,397 5,397
Capital surplus 21,244 21,256
Retained earnings 41,741 35,482
Accumulated other comprehensive income/(loss) (675) 1,192
--------- ----------
67,707 63,327
Less: Treasury stock 9,431 955
--------- ----------
Total stockholders' equity 58,276 62,372
--------- ----------
Total liabilities and stockholders' equity $706,125 $685,364
========= ==========
<FN>
- -------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</FN>
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Interchange Financial Services Corporation
- ----------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- ----------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands except per share data)
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Interest income
Interest and fees on loans $39,521 $38,904 $35,380
Interest on federal funds sold 596 1,474 896
Interest on interest bearing deposits - 55 78
Interest and dividends on securities
Taxable interest income 8,432 7,934 8,626
Interest income exempt from federal income taxes 492 181 100
Dividends 260 272 230
---------- -------- --------
Total interest income 49,301 48,820 45,310
---------- -------- --------
Interest expense
Interest on deposits 17,700 18,467 17,243
Interest on securities sold under agreements to repurchase 392 806 685
Interest on short-term borrowings 608 1 42
Interest on long-term borrowings 83 590 596
---------- -------- --------
Total interest expense 18,783 19,864 18,566
---------- -------- --------
Net interest income 30,518 28,956 26,744
Provision for loan losses 1,200 951 1,653
---------- -------- --------
Net interest income after provision for loan losses 29,318 28,005 25,091
---------- -------- --------
Non-interest income
Service fees on deposit accounts 2,300 2,551 2,040
Net gain on sale of securities 859 1,021 -
Net gain on sale of loans 86 - 1,067
Other 2,094 1,356 1,667
---------- -------- --------
Total non-interest income 5,339 4,928 4,774
---------- -------- --------
Non-interest expenses
Salaries and benefits 10,265 9,437 8,951
Occupancy 2,698 2,405 2,152
Furniture and equipment 1,045 1,035 879
Advertising and promotion 1,033 865 865
Federal Deposit Insurance Corporation assessment 81 75 58
Foreclosed real estate 13 1 -
Acquisition - 1,392 -
Other 4,928 4,206 4,750
---------- -------- --------
Total non-interest expenses 20,063 19,416 17,655
---------- -------- --------
Income before income taxes 14,594 13,517 12,210
Income taxes 4,959 4,908 4,285
---------- -------- --------
Net income $ 9,635 $ 8,609 $ 7,925
========== ======== ========
Basic earnings per common share $1.37 $1.20 $1.11
========== ======== ========
Diluted earnings per common share $1.36 $1.19 $1.10
========== ======== ========
<FN>
- ----------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</FN>
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Interchange Financial Services Corporation
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands except per share data)
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, 1997 $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 for 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
Comprehensive income
Net Income $9,635 9,635 9,635
Other comprehensive loss, net of taxes
Unrealized losses on AFS debt securities (1,354)
Less: gains on disposition of securities (excludes equities)(90)
Unrealized gains securities transferred from held to
maturity to available for sale - Acquisition 23
Unrealized loss on equity securities (18)
Less: gains on disposition of equity securities (428)
------------
Other comprehensive loss (1,867) (1,867) 1,867)
------------
Comprehensive income $7,768
============
Dividends on common stock (3,376) (3,376)
Issued 14,489 shares of common stock in connection
with Executive Compensation Plan 62 184 246
Exercised 7,836 option shares (74) 121 47
Purchased 494,360 shares of common stock (8,781) (8,781)
-------- ------------ ------ ---------- --------- --------
Balance at December 31, 1999 $41,741 $ (675) $5,397 $21,244 $(9,431) $58,276
======== ============ ====== ========== ========= ========
<FN>
- -----------------------------------------------------------------------------------------------------------------------------------
All share data has been adjusted for the effects of 3 for 2 stock splits issued on April 17, 1997 to shareholders of record on
March 20, 1997 and 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
</FN>
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
INTERCHANGE FINANCIAL SERVICES CORPORATION
- ----------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------
For the Years Ended, December 31,
(in thousands)
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 9,635 $ 8,609 $ 7,925
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 1,400 1,374 1,182
Amortization of securities premiums 675 964 818
Accretion of securities discounts (178) (168) (126)
Amortization of premiums in connection with acquisition 312 384 444
Provision for loan losses 1,200 951 1,653
Net gain on sale of loans (86) - (1,067)
Net gain on sale of merchant credit card portfolio (329) - -
Net gain on sale of securities (859) (1,021) -
Net gain on sale of foreclosed real estate (36) - (6)
Increase in carrying value of loans available for sale - - (17)
Net loss on disposal of fixed assets 2 3 -
Decrease (increase) in operating assets
Net repayment of loans available for sale - - 22
Accrued interest receivable (72) (270) 305
Deferred taxes (1,059) 228 (768)
Other 1,442 437 (1,942)
(Decrease) increase in operating liabilities
Accrued interest payable (32) (88) 111
Other (229) 552 543
-------- -------- --------
Cash provided by operating activities 11,786 11,955 9,077
-------- -------- --------
Cash flows from investing activities
(Payments for) proceeds from
Net originations of loans (25,751) (31,848) (40,239)
Purchase of loans (15,196) (4,627) (19,247)
Purchase of term federal funds - (7,500) -
Repayment of term federal funds 5,000 2,500 -
Sale of loans 1,155 409 5,945
Sale of merchant credit card portfolio 329 - -
Purchase of securities available for sale (56,347) (28,688) (15,438)
Maturities of securities available for sale 16,152 16,971 4,386
Sale of securities available for sale 26,193 1,622 -
Sale of foreclosed real estate 120 - 616
Purchase of securities held to maturity (18,949) (30,435) (21,948)
Maturities of securities held to maturity 16,402 26,808 41,167
Sale of securities held to maturity 2,003 - -
Washington Interchange Merger - - 37
Purchase of fixed assets (1,769) (1,703) (3,464)
Sale of fixed assets 3 4 13
-------- -------- --------
Cash used in investing activities (50,655) (56,487) (48,172)
-------- -------- --------
Cash flows from financing activities
Proceeds from (payments for)
Deposits in excess of withdrawals 260 57,967 49,128
Securities sold under agreements to repurchase and other borrowings 57,906 17,300 17,128
Retirement of securities sold under agreement to repurchase and
other borrowings (33,048) (21,659) (20,454)
Dividends (3,376) (2,825) (2,384)
Common stock issued 246 226 345
Treasury stock (8,781) (49) (1,543)
Exercise of option shares 47 273 269
-------- -------- --------
Cash provided by financing activities 13,254 51,233 42,489
-------- -------- --------
(Decrease) increase in cash and cash equivalents (25,615) 6,701 3,394
Cash and cash equivalents, beginning of year 43,284 36,583 33,189
-------- -------- --------
Cash and cash equivalents, end of year $17,669 $43,284 $36,583
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $18,815 $19,953 $18,456
Income taxes 7,028 3,844 4,985
Supplemental disclosure of non-cash investing activities:
Loans transferred to foreclosed real estate 250 84 -
Loans transferred from available for sale to held to maturity - - 1,190
Decrease (increase) - market valuation of securities available for sale 2,949 15 (1,551)
Amortization of valuation allowance - securities transferred from available
for sale to held to maturity - 1 36
Washington Interchange merger - - 504
<FN>
- ----------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</FN>
</TABLE>
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 business of Interchange
Financial Services Corporation and subsidiaries (the "Company") and its
significant accounting and reporting policies used in the preparation of the
consolidated financial statements:
Nature of Business
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, including 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 1999. 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 the Bank will be unable to collect all amounts due
according to contractual terms of the loan agreement. The collection of all
amounts due according to contractual terms means that both the contractual
interest and principal payments of a loan will be collected as scheduled in the
loan agreement.
All 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.
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
33
<PAGE>
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.
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. On July 7, 1999, the FASB issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement
No.133" ("SFAS 137"). SFAS 137 delays the effective date of SFAS 133 for one
year, to fiscal years beginning after June 15, 2000. The delay applies to
quarterly and annual financial statements and SFAS No. 133 is now required for
all fiscal quarters of fiscal years beginning after June 15, 2000. 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 reflect the
acquisition of Jersey Bank to the earliest period presented. Each of the shares
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.
On April 30, 1997, the Company completed its acquisition of Washington
Interchange Corporation ("WIC") through a merger transaction involving a
subsidiary of the Company. The merger was accounted for as a pooling of
interests. The purpose of the merger was to acquire WIC's real estate, which is
used as a branch office by Interchange Bank. The Company issued 229,562 shares
of its common stock in connection with the acquisition and subsequently retired
187,283 shares of its common stock previously held by WIC. Total net
consideration tendered in the transaction amounted to 42,279 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 seven to ten years. Amortization in
1999, 1998 and 1997, which is included in non-interest expenses, amounted to
$313,000, $383,000 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 1999 and 1998 was approximately $775,000 and
$750,000, respectively.
34
<PAGE>
Note 4. Securities Held to Maturity and Securities Available for Sale
<TABLE>
<CAPTION>
Securities held to maturity and securities available for sale consist of the following: (in thousands)
------------------------------------------------
December 31, 1999
------------------------------------------------
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 $ 9,997 $ 5 $ 8 $ 9,994
Mortgage-backed securities 20,232 60 289 20,003
Obligations of U.S. agencies 7,992 8 51 7,949
Obligations of states & political subdivisions 16,195 - 481 15,714
Other debt securities 124 - - 124
------------- --------- -------------- ---------
54,540 73 829 53,784
------------- --------- -------------- ---------
Securities available for sale
Obligations of U.S. Treasury 6,016 87 - 6,103
Mortgage-backed securities 68,331 104 982 67,453
Obligations of U.S. agencies 27,141 51 112 27,080
Obligations of states & political subdivisions 3,139 - 198 2,941
Equity securities 3,772 - - 3,772
------------- --------- ------------- ----------
108,399 242 1,292 107,349
Total securities $162,939 $315 $2,121 $161,133
============= ========= ============= ==========
------------------------------------------------
December 31, 1998
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- --------- -------------- ---------
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
============= ========= ============= ==========
At December 31, 1999, the contractual maturities of securities held to maturity and securities available for sale are as follows:
(in thousands)
Securities Securities
Held to Maturity Available for Sale
----------------------- ------------------------
Amortized Market Amortized Market
Cost Value Cost Value
------------- --------- ------------- ----------
Within 1 year $19,255 $19,242 $4,148 $4,117
After 1 but within 5 years 18,653 18,474 66,224 65,800
After 5 but within 10 years 4,673 4,636 17,325 16,804
After 10 years 11,959 11,432 16,930 16,856
Equity securities - - 3,772 3,772
------------- --------- ------------- ----------
Total $54,540 $53,784 $108,399 $107,349
============= ========= ============= ==========
</TABLE>
35
<PAGE>
Gross realized gains from the sale of securities available for sale
amounted to $860,000 and $876,000 in 1999 and 1998, respectively. Gross realized
losses from the sale of securities available for sale amounted to $4,000 in
1999. 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 gain on sale
of securities. Also, included in net gain on sale of securities for 1998 is a
gain of $145,000 realized from the call of a security before its maturity.
Proceeds from the sale of securities held to maturity (scheduled to mature
within 3 months) totaled $2.0 million during the year ended December 31, 1999,
which resulted in realized gains of $3,000. There were no sales of securities
held to maturity during the years ended, December 31, 1998 and 1997.
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 $48.3 million and $25.1 million at
December 31, 1999 and 1998, 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,
------------------------
1999 1998
---------- --------
Commercial and financial $63,684 $64,067
Real estate
Residential 264,845 246,955
Commercial 166,354 148,875
Construction 4,008 974
Installment 3,703 3,233
Lease financing 9,382 9,613
Term federal funds - 5,000
---------- --------
511,976 478,717
Allowance for loan losses 5,476 5,645
---------- --------
Net loans $506,500 $473,072
========== ========
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,
------------------------------------------
1999 1998 1997
---------- -------- --------------
Nonaccrual loans
Commercial and financial $ 308 $ 266 $ 126
Residential real estate 398 583 892
Commercial real estate 409 346 479
Installment - 3 17
---------- -------- --------------
$1,115 $1,198 $1,514
========== ======== ==============
Troubled debt restructurings
Commercial and financial $222 $528 $573
========== ======== ==============
Interest income that would
have been recorded during
the year on nonaccrual loans
out-standing at year-end in
accordance with original terms $120 $147 $147
Interest income included in net
income during the year on
nonaccrual loans outstanding
at year-end $74 $71 $81
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 at December 31, 1997. There were no such loans at December
31, 1999 and 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,
------------------------
1999 1998
---------- --------
Balance at beginning of year $7,623 $10,160
Less: former directors - (3,574)
Additions 1,776 2,014
Reductions (2,045) (977)
---------- --------
Balance at end of year $7,354 $7,623
========== ========
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,
-------------------------------------------
1999 1998
--------------------- ---------------------
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 $ 272 $ 41 $748 $91
Commercial real estate 667 17 346 52
Without a related allowance for loan losses
Commercial and financial - - 4 -
---------- --------- ------------ --------
$939 $58 $1,098 $143
========== ========= ============ ========
<FN>
- ------------------------------------------------------------------------------------------------
The impairment of the above loans was measured based on the fair value of collateral.
</FN>
</TABLE>
The following table sets forth-certain information about impaired loans:
(in thousands)
------------------------
Years Ended December 31,
------------------------
1999 1998
--------- -------------
Average recorded investment $1,181 $1,247
========= =============
Interest income recognized
during time period that loans
were impaired, using cash-basis
method of accounting $90 $74
=== ===
Changes in the allowance for loan losses are summarized as follows:
(in thousands)
---------------------------------
Year Ended December 31,
---------------------------------
1999 1998 1997
--------- ---------- ----------
Balance at beginning of year $5,645 $5,231 $3,968
Additions (deductions)
Provision charged to operations 1,200 951 1,653
Recoveries on loans previously
charged off 44 83 183
Loans charged off (1,413) (620) (573)
--------- ---------- ----------
Balance at end of year $5,476 $5,645 $5,231
========= ========== ==========
- -------------------------------------------------------------------------------
For years ended December 31, 1999, 1998 and 1997, the provisions charged to
expense for federal income tax purposes amounted to approximately $1,369,000,
$537,000, and $390,000, respectively.
Note 7. Premises and Equipment, net
Premises and equipment are summarized as follows: (in thousands)
-------------------------
December 31,
-------------------------
1999 1998
-------------- ----------
Land $1,588 $1,588
Buildings 3,325 3,187
Furniture, fixtures and equipment 6,395 5,807
Leasehold improvements 7,734 6,813
-------------- ----------
19,042 17,395
Less: accumulated depreciation
and amortization 8,753 7,524
-------------- ----------
$10,289 $9,871
============== ==========
Note 8. Deposits
Deposits are summarized as follows: (in thousands)
----------------------------
December 31,
----------------------------
1999 1998
------------- -------------
Non-interest bearing demand deposits $102,392 $107,408
Interest bearing demand deposits 213,970 194,177
Money market deposits 49,256 50,665
Savings deposits 70,907 76,026
Time deposits 162,467 170,456
------------- -------------
$598,992 $598,732
============= =============
At December 31, 1999 and 1998, the carrying amounts of certificates of
deposit that individually exceed $100 thousand amounted to $21,023,000, and
$25,119,000, respectively. Interest expense relating to certificates of deposits
that individually exceed $100 thousand was approximately $1,371,000, $1,616,000,
and $1,627,000 in 1999, 1998, and 1997, 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,
--------------------
1999 1998
---------- --------
Securities sold under agreements
to repurchase $16,431 $8,780
Federal Funds Purchased 13,975 -
Federal Home Loan Bank advances - 9,768
---------- --------
$30,406 $18,548
========== ========
The Bank has a $67.5 million line of credit available through its
membership in the Federal Home Loan Bank of New York ("FHLB").
Note 10. Long-term Borrowings
In 1999, long-term borrowings were comprised of two FHLB advances totaling
$13.0 million. One of the borrowings consists of a $7.0 million advance that has
a fixed rate of 6.28% maturing in October 2002 and is collateralized by U.S.
Treasury and U.S. agency securities. The FHLB has an option to call the $7.0
million advance on October 26, 2001. The other borrowing consists of a $6.0
million advance that has a fixed rate of 6.30% maturing in December 2001 and is
collateralized by U.S. Treasury and U.S. agency securities. The FHLB has an
option to call the $6.0 million advance after December 2000.
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 $10,000) 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)
<TABLE>
<CAPTION>
Pension Plan Supplemental Plan Directors' Plan
---------------------- -----------------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
------- ----- ------ ----- ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service cost $251 $222 $195 $25 $22 $13 $61 $59 $47
Interest cost 85 65 53 14 12 4 80 76 71
Expected return on plan assets (85) (71) (51) - - - - - -
Amortization of prior service cost - - - 8 8 1 92 147 147
Recognized net actuarial gain (8) (6) - - - - - - -
------- ------ ------ ------ ----- ----- ------- ----- -----
Net periodic benefit cost $243 $210 $197 $47 $42 $18 $233 $282 $265
======= ====== ====== ====== ===== ====== ======= ====== =====
</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
---------------------- -------------------- -------------------------
1999 1998 1999 1998 1999 1998
---------- -------- --------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Change in pension obligation
Pension obligation at beginning of year $1,223 $1,013 $ 200 $ 70 $ 1,195 $ 1,074
Service cost 251 222 25 22 61 59
Interest cost 85 65 14 12 80 76
Actuarial (gain) loss (303) (74) (24) 15 (85) (15)
Benefits paid (23) (3) - - - -
Other - - - 81 - -
---------- -------- --------- -------- ------------ ---------
Pension obligation at end of year 1,233 1,223 215 200 1,251 1,194
---------- -------- --------- -------- ------------ ---------
Change in plan assets
Fair value of plan assets at beginning of year 1,064 738 - - - -
Actual return on plan assets 47 164 - - - -
Employer contribution - 165 - - - -
Benefits paid (23) (3) - - - -
---------- -------- --------- -------- ------------ ---------
Fair value of plan assets at end of year 1,088 1,064 - - - -
---------- -------- --------- -------- ------------ ---------
Funded Status (145) (159) (215) (200) (1,251) (1,194)
Unrecognized net actuarial (gain) loss (483) (227) (9) 16 (46) 39
Unrecognized prior service cost (5) (5) 73 81 - 92
---------- -------- --------- -------- ------------ ---------
Accrued pension cost $ (633) $ (391) $ (151) $ (103) $ (1,297) $ (1,063)
========== ======== ========= ======== ============ =========
Weighted-average assumptions (1)
Discount rate 8.00 % 7.25 % 8.00 % 7.25 % 8.00 % 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
<FN>
- ----------------------------------------------------------------------------------------------------------------------------
(1) Weighted average assumptions were applied at the beginning of the period.
</FN>
</TABLE>
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 $163,000 and $167,000 in 1999 and 1998, respectively.
Note 12. Stock Option and Incentive 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)
1999 1998 1997
--------- ---------------
Net Income
As reported. . . . . . . . $9,635. $8,609 $7,925
Pro-forma. . . . . . . . . 9,572 8,572 7,919
Diluted earnings per common share
As reported. . . . . . . . $1.36 $1.19 $1.10
Pro-forma. . . . . . . . . 1.36 1.18 1.10
39
<PAGE>
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 1999, 1998 and 1997, respectively: dividend yield
of 2.76%, 2.20%, 2.25%; expected volatility of 22.63%, 23.33% and 21.94%;
risk-free interest rate of 5.31%, 5.62% and 5.51%; 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
each of the three years then ended is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- ------------------ ------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- --------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 110,824 $ 11.91 121,935 $ 6.62 195,604 $ 6.21
Granted 58,750 16.97 49,875 18.17 2,250 16.00
Exercised (7,836) 6.05 (50,394) 5.27 (75,919) 5.85
Forfeited (8,750) 17.30 (10,592) 12.05 - -
--------- -------- --------
Outstanding at December 31 152,988 13.85 110,824 11.91 121,935 6.62
========= ======== ========
Options exercisable at December 31 71,238 9.79 58,440 7.29 107,479 6.22
========= ======== ========
Weighted-average fair value of options granted
during the year ended December 31 (per option) $5.03 $5.98 $4.29
</TABLE>
The following table summarizes information about options outstanding under
the Stock Plan at December 31, 1999:
Options Outstanding Options Exercisable
- ----------------------------------------------------------- --------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Prices Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------------- ---------- ----------- --------- ------------ ---------
$ 5 - $10 55,363 4.24 $7.45 55,363 $7.45
$15 - $20 97,625 8.65 17.48 15,875 17.96
---------- ------------
152,988 71,238
========== ============
Pursuant to the Stock Plan, restricted stock is awarded to key employees
providing for the award of Interchange's common stock subject to certain vesting
and restrictions. The awards are recorded at fair market value and amortized
into salary expense over the vesting period. The following table sets forth the
changes in restricted stock awards outstanding for the years ended December 31,
1999, 1998 and 1997.
Restricted Stock Awards 1999 1998 1997
- ----------------------- ---------- ---------- ---------
Outstanding at beginning of year 21,591 23,783 17,709
Granted 14,489 12,769 12,822
Vested (11,908) (11,320) (6,748)
Forfeited - (3,641) -
---------- ---------- ---------
Outstanding at end of year 24,172 21,591 23,783
========== ========== =========
The amount of compensation costs related to restricted stock awards
included in salary expense in 1999, 1998 and 1997 amounted to $144,908, $101,381
and $64,161, respectively.
40
<PAGE>
Note 13. Stockholders' Equity
The Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines, the Company and the Bank must meet specific capital levels
that involve quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Company's and the Bank's capital amounts and the Bank's classification, under
the regulatory framework for prompt corrective action, are also subject to
qualitative judgments by the regulators about components, risk weighting, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier I capital to risk-weighted assets and Tier I capital to average assets.
Management believes, as of December 31, 1999, that the Company and the Bank meet
all capital adequacy requirements to which they are subject.
As of December 31, 1999, 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, 1999
Total Capital (to Risk Weighted Assets):
The Company $64,209 13.91 % $36,925 8.00 % N/A N/A
The Bank 64,877 14.01 37,054 8.00 $46,318 10.00 %
Tier 1 Capital (to Risk Weighted Assets):
The Company 58,733 12.72 $18,463 4.00 N/A N/A
The Bank 59,401 12.82 18,527 4.00 27,791 6.00
Tier 1 Capital (to Average Assets):
The Company 58,733 8.32 21,167 3.00 N/A N/A
The Bank 59,401 8.45 21,080 3.00 35,133 5.00
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
</TABLE>
Shares of common stock
On June 2, 1999, the Board of Directors authorized a program to repurchase
up to 10 percent, or approximately 720 thousand shares, of the Company's
outstanding common stock. During 1999, the Company has repurchased approximately
494 thousand of its common shares pursuant to this program. The total cost of
the purchases was approximately $8.8 million. The repurchased shares are held as
treasury stock and will be principally used for the exercise of stock options,
incentive plan stock awards and other general corporate purposes.
The following table summarizes the activity in common shares:
Shares Shares in
Issued Treasury
------------- ---------
Balance, December 31, 1997 7,139,880 134,025
Forfeiture of stock bonus (3,641) 3,641
Issuance of stock 728 -
Issuance of stock from treasury 63,166 (63,166)
------------- ---------
Balance, December 31, 1998 7,200,133 74,500
Purchase of treasury stock (494,360) 494,360
Issuance of stock from treasury 22,325 (22,325)
------------- ---------
Balance, December 31, 1999 6,728,098 546,535
============= =========
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>
1999 1998 1997
------------------------- --------------------------------------------
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 $9,635 7,031 $1.37 $8,609 7,189 $1.20 $7,925 7,132 $1.11
======= ======= =======
Effect of Dilutive Shares
Options issued to management 31 48 90
--------- ------- -------
Diluted Earnings per Common Share
Income available to common
shareholders $9,635 7,062 $1.36 $8,609 7,237 $1.19 $7,925 7,222 $1.10
======= ========= ======= ====== ======= ====== ====== ======= =======
</TABLE>
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, are as follows: (in thousands)
1999 1998 1997
--------------------------
Professional fees $1,101 $1,184 $1,216
Data Processing 517 538 548
Directors' fees, travel and retirement 546 88 607
Note 16. Income Taxes
Income tax expense for the years ended December 31, is summarized as
follows: (in thousands)
1999 1998 1997
---------- --------- --------
Federal: current $5,114 $4,399 $4,304
deferred (316) (344) (600)
State: current 161 315 752
deferred - 538 (171)
---------- --------- --------
$4,959 $4,908 $4,285
========== ========= ========
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)
1999 1998
---------- --------
Deferred tax assets
Excess of book over tax allowance
for loan losses $ 1,638 $1,567
Excess of book over tax depreciation 253 263
Excess of book over tax provision for benefit
plan expense 714 571
Core deposit premium 223 179
Other 108 59
Unrealized losses - securities available for sale 367 -
---------- --------
Total deferred tax assets 3,303 2,639
---------- --------
Deferred tax liabilities
Unrealized gains - securities available for sale - 707
Loan origination fees 199 294
Other 179 103
---------- --------
Total deferred tax liabilities 378 1,104
---------- --------
Net deferred tax assets $2,925 $1,535
========== ========
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 $2.9
million will be principally realized through 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,
-------------------------------------
1999 1998 1997
---------- ---------- --------
Expected provision at statutory rate 35% 34% 34%
Difference resulting from:
State income tax, net of federal benefit 1 2 3
Interest income exempt from
federal taxes (1) (1) (2)
Other (1) 1 -
---------- ---------- --------
34% 36% 35%
========== ========== ========
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, 1999, undistributed net assets
of the Bank were $58,944,000 of which $54,626,000 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.
42
<PAGE>
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)
1999 1998
---------- -------
Credit card loans - $ 6,019
Home equity loans $58,523 55,435
Other loans 43,153 55,516
Standby letters of credit 449 1,700
---------- --------
$102,125 $118,670
========== ========
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)
2000 $1,134
2001 980
2002 757
2003 596
2004 455
thereafter 2,267
-----------
Total minimum lease payments $6,189
===========
Rent expense for all leases amounted to approximately $1,256,000,
$1,101,000 and $981,000 in 1999, 1998, and 1997, respectively.
In 1999 and 1998, the Company did not lease real estate from affiliates. In
1997, certain real estate was leased from one company that was affiliated with
directors of the Company. Rental expense associated with such leases was $30,000
for the year ended December 31, 1997. A director of the Company also provided
legal services through his affiliated firm. Fees paid for these services
amounted to approximately $325,000, $331,000 and $382,000 in 1999, 1998, and
1997, 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.
43
<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,
-----------------------------------
1999 1998
------------------ ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- ------- -------
Financial assets:
Cash and cash equivalents $ 17,669 $ 17,669 $ 43,28 $43,284
Securities held to maturity 54,540 53,784 54,159 54,761
Securities available for sale 107,349 107,349 95,771 95,771
Loans, net 506,500 495,452 473,074 75,272
-------- -------- -------- ------
$686,058 $674,254 $666,286 $669,088
======== ======== ======== =======
Financial liabilities:
Deposits $598,992 $597,887 $598,732 $599,375
Short-term borrowings 30,406 30,406 18,548 18,548
Long-term borrowings 13,000 12,906 - -
-------- -------- -------- ------
$642,398 $641,199 $617,280 $617,923
======== ======== ======== =======
The methods and significant assumptions used to determine the estimated
fair values of the Company's financial instruments are as follows:
Cash and cash equivalents
Cash and cash equivalents include cash on hand, amounts due from banks and
federal funds sold. The estimated fair values of these financial instruments
approximate their carrying values since they mature overnight or are due on
demand.
Securities held to maturity and securities available for sale
Estimated fair values are based principally on quoted market prices, where
available, or dealer quotes. In the event quoted market prices are not
available, fair values are estimated using market prices of similar securities.
Loans
The loan portfolio is segregated into various categories for purposes of
estimating fair value. The fair 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.
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, 1999 and 1998, the
estimated fair values of these off-balance-sheet financial instruments were
immaterial.
44
<PAGE>
Note 20. Parent Company Information
(in thousands)
<TABLE>
<CAPTION>
------------------------------------
December 31,
------------------------------------
Condensed balance sheets 1999 1998 1997
--------- -------- -----------
<S> <C> <C> <C>
Assets
Cash $ 641 $ 355 -
Securities available for sale - 1,321 $ 2,372
Investment in subsidiaries
Bank 58,944 59,591 53,673
Other 646 646 646
Dividends receivable - 720 570
Other assets - 602 (418)
--------- -------- -----------
Total assets $60,231 $63,235 $56,843
========= ======== ===========
Liabilities
Dividends payable $ 805 $ 720 $ 570
Loans from subsidiaries 1,000 - -
Other liabilities 150 143 143
--------- -------- -----------
1,955 863 713
--------- -------- -----------
Stockholders' equity
Common stock 5,397 5,397 5,396
Capital Surplus 21,244 21,256 21,557
Retained earnings 41,741 35,482 29,698
Accumulated other comprehensive income (675) 1,192 1,185
--------- -------- -----------
67,707 63,327 57,836
Less: Treasury stock 9,431 955 1,706
--------- -------- -----------
Total stockholders' equity 58,276 62,372 56,130
--------- -------- -----------
Total liabilities and stockholders' equity $60,231 $63,235 $56,843
========= ======== ===========
- -------------------------------------------------------------------------------------------------
------------------------------------
Years Ended December 31,
------------------------------------
Condensed statements of income 1999 1998 1997
--------- -------- -----------
Dividends from subsidiary bank $8,641 $2,556 $3,798
Dividends on equity securities 8 37 35
Net gain on sale of securities 714 876 -
Management fees 39 39 40
--------- -------- -----------
Total revenues 9,402 3,508 3,873
--------- -------- -----------
Interest on short-term borrowings 92 - -
Operating expenses 448 643 366
--------- -------- -----------
Income before equity in undistributed earnings of subsidiaries 8,862 2,865 3,507
Equity in undistributed earnings of subsidiaries 773 5,744 4,418
--------- -------- -----------
Net income $9,635 $8,609 $7,925
========= ======== ===========
- -------------------------------------------------------------------------------------------------
-----------------------------------
Years Ended December 31,
-----------------------------------
Condensed statements of cash flows 1999 1998 1997
---------- -------- ----------
Cash flows from operating activities:
Net income $9,635 $8,609 $7,925
Adjustments to reconcile net income
to net cash provided by operating activities
Net gain on sale of securities (714) (876) -
Decrease (increase) in other assets 1,618 (1,048) (45)
Increase in dividends payable 86 150 45
Increase in other liabilities 7 - 1
Equity in undistributed income of subsidiaries (774) (5,744) (4,418)
---------- -------- -----------
Net cash provided by operating activities 9,858 1,091 3,508
---------- -------- -----------
Cash flows from investing activities:
Sale of securities available for sale 1,292 1,622 -
Washington Interchange merger - - 37
---------- -------- -----------
Net cash provided by (used in) investing activities 1,292 1,622 37
---------- -------- -----------
Cash flows from financing activities:
Cash dividends paid (3,376) (2,801) (2,287)
Loan from subsidiary 1,000 - -
Treasury stock (8,781) (49) (1,543)
Common stock issued 246 226 279
Exercise of option shares 47 266 -
---------- -------- -----------
Net cash used in financing activities (10,864) (2,358) (3,551)
---------- -------- -----------
Net increase/(decrease) in cash 286 355 (6)
Cash at beginning of year 355 - 6
---------- -------- -----------
Cash at end of year $641 $355 $ -
========== ======== ===========
</TABLE>
45
<PAGE>
Note 21. Quarterly Financial Data
(unaudited) (in thousands except per share data)
- -------------------------------------------------------------------------------
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------
Interest income $11,850 $12,228 $12,567 $12,656
Interest expense 4,512 4,580 4,732 4,959
Net interest income 7,338 7,648 7,835 7,697
Provision for loan losses 300 300 300 300
Net gain on sale of securities 527 329 3 -
Income before income taxes 3,460 3,761 4,068 3,306
Net income 2,286 2,478 2,705 2,166
Basic earnings per common share 0.32 0.34 0.38 0.32
Diluted earnings per common share 0.32 0.34 0.38 0.32
- -------------------------------------------------------------------------------
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------
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
46
<PAGE>
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, Clover Leaf Insurance Agency d/b/a
Interchange Insurance Agency and Interchange Capital Company, L.L.C. are
incorporated in New Jersey and are wholly owned direct subsidiaries of
Interchange Bank. Clover Leaf Management Realty Corporation, a New Jersey
Corporation, which is also incorporated in New Jersey, is 99% owned by
Interchange Bank.
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 19, 2000, appearing in this Annual Report on Form 10-K of
Interchange Financial Services Corporation for the year ended December 31, 1999.
/S/ Deloitte & Touche, LLP
__________________________
Parsippany, New Jersey
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Dec-31-1999
<CASH> 17,669
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 107,349
<INVESTMENTS-CARRYING> 54,540
<INVESTMENTS-MARKET> 53,784
<LOANS> 511,976
<ALLOWANCE> 5,476
<TOTAL-ASSETS> 706,125
<DEPOSITS> 598,992
<SHORT-TERM> 30,406
<LIABILITIES-OTHER> 5,451
<LONG-TERM> 13,000
<COMMON> 5,397
0
0
<OTHER-SE> 52,879
<TOTAL-LIABILITIES-AND-EQUITY> 706,125
<INTEREST-LOAN> 39,521
<INTEREST-INVEST> 9,184
<INTEREST-OTHER> 596
<INTEREST-TOTAL> 49,301
<INTEREST-DEPOSIT> 17,700
<INTEREST-EXPENSE> 18,783
<INTEREST-INCOME-NET> 30,518
<LOAN-LOSSES> 1,200
<SECURITIES-GAINS> 859
<EXPENSE-OTHER> 20,063
<INCOME-PRETAX> 14,594
<INCOME-PRE-EXTRAORDINARY> 14,594
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,635
<EPS-BASIC> 1.37
<EPS-DILUTED> 1.36
<YIELD-ACTUAL> 4.64
<LOANS-NON> 1,115
<LOANS-PAST> 0
<LOANS-TROUBLED> 222
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,645
<CHARGE-OFFS> 1,413
<RECOVERIES> 44
<ALLOWANCE-CLOSE> 5,476
<ALLOWANCE-DOMESTIC> 5,476
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,488
</TABLE>
