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PART I
ITEM 1. BUSINESS
GENERAL
Interchange Financial Services Corporation (the "Company"), a New
Jersey business corporation and bank holding company under Federal law, acquired
all of the outstanding stock of Interchange State Bank, a New Jersey chartered
bank (the "Bank" or "Interchange") in 1986.
The Bank, established in 1969, is a full-service commercial bank
headquartered in Saddle Brook, New Jersey. It offers banking services for
individuals and businesses through its twelve banking offices in Bergen County,
New Jersey.
In addition to its commercial lending activities, the Bank offers a
wide range of consumer banking services, including: checking and savings
accounts, money-market accounts, certificates of deposit, individual retirement
accounts, residential mortgages, home equity lines of credit and other second
mortgage loans, home improvement loans, automobile loans, personal loans and
overdraft protection. The Bank also offers a VISA(TM) credit card and
Interchange Bank-Line--our telephone banking system. Certain Bank employees are
also licensed insurance agents qualified to offer tax deferred annuities and
related insurance products. The Bank also offers mutual funds to its customers
through a third party vendor. Automated teller machines (MAC(TM), PLUS(TM),
HONOR(TM), VISA(TM) and MASTERCARD(TM) networks) are located at nine of the
banking offices and at two supermarkets.
The Bank is engaged in the financing of local business and industry,
providing credit facilities and related services for smaller businesses,
typically those with $1 million to $5 million in annual sales. Commercial loan
customers of the Bank are businesses ranging from light manufacturing and local
wholesale and distribution companies to medium-sized service firms and local
retail businesses. Most forms of commercial lending are offered, including
working capital lines of credit, small business administration loans, term loans
for fixed asset acquisitions, commercial mortgages and other forms of
asset-based financing.
In past years, the Bank has taken advantage of opportunities to
purchase packages of loans. These loans were subjected to the Bank's independent
credit analysis prior to purchase and were, in some cases, purchased with a
limited buy-back obligation or other financial assurance from the sellers. In
the Bank's experience, there are significant opportunities to sell the Bank's
other products and services to the borrowers whose loans are purchased.
The Bank has expanded its service areas from one office in 1969 to the
present twelve banking locations by opening new branches and, in 1991, acquiring
branch locations formerly operated by other institutions. Management believes
that the 1991 acquisition of the Park Ridge office of The Howard Savings Bank
has allowed the Bank to increase its penetration of the affluent Pascack Valley
area of Bergen County. The Company's acquisition in 1991 of the former Community
Guardian Bank increased its penetration of the existing market area. A new
branch was opened in Little Ferry in September, 1993, and in 1994, deposits of a
failed thrift institution were acquired and added to the already growing
deposits in that office. In June 1996, the Bank opened a new branch in Oakland,
New Jersey. This expansion will increase the Bank's penetration in its
contiguous market area. In September 1996, a mini-branch in Paramus, New Jersey,
was closed. In December 1996, the branch in Clifton, New Jersey, was sold. These
branches were eliminated in response to evaluations of prospective growth and
earnings contributions of the branches. Since 1984, the Bank's assets have grown
from $135 million to $505 million.
Deposits of the Bank are insured up to $100,000 per depositor by the
Bank Insurance Fund administered by the FDIC.
The Company had 175 full-time-equivalent employees during 1996. Its
principal executive office is located at Park 80 West/Plaza Two, Saddle Brook,
New Jersey 07663, telephone number (201)703-2265. As used herein the term
"Company" includes the Bank and wholly-owned subsidiaries of the Bank, unless
the context otherwise requires.
The Bank's principal market for its deposit gathering activities covers
major portions of Bergen County in the northeastern corner of New Jersey
adjacent to New York City. The principal service areas of the Bank represent a
diversified mix of stable residential neighborhoods with a wide range of per
household income levels; offices, service industries and light industrial
facilities; and large shopping malls and small retail outlets.
For many years Interchange State Bank has conducted periodic market
research to keep aware of market trends. Much of this research affirmed that
consumer financial needs are directly related to identifiable life stages. In
response to these distinctive preferences, the bank has designed and marketed
"packaged" products to appeal to these different segments. Product packages
consist of offering several deposit, credit and other financial services
together as a product unit. This encourages customers to use multiple products
and allows the bank to establish stronger relationships.
The four product packages introduced to date include: GROW'N UP SAVINGS
- --a passbook savings account which can be opened for a child of any age that
teaches them the good habits of saving. MONEY PLUS ACCOUNT --geared to the 24-34
year age group. This is a checking account which includes additional financial
benefits. MONEY MAKER ACCOUNT--created for the 35-54 year age group. This is an
interest bearing checking account that offers higher rates automatically as the
balance increases. PRIME TIME ACCOUNT--for the mature market which offers them a
variety of financial and non-financial benefits available to them for a minimum
balance only. Since the predominant age of the Interchange population is between
35-54 and 55+, the Money Maker and Prime Time Accounts offer a variety of
products to accommodate any of their financial needs for that stage of their
life. The Bank was among the first to offer such packaged financial products in
its area and management believes they have been successful in attracting
deposits and building a loyal client base.
COMPETITION
Competition in the banking and financial services industry in the
Company's market area is intense. The Bank competes actively with national and
state-chartered commercial banks and other financial institutions, including
savings and loan associations, mutual savings banks, and credit unions. In
addition, the Bank faces competition from less heavily regulated entities such
as brokerage institutions, money management firms, consumer finance and credit
card companies and various other types of financial services companies. Many of
these institutions are larger than the Bank, some are better capitalized, and a
number pursue community banking strategies similar to those of the Bank.
Management believes that opportunities continue to exist to satisfy
the deposit and lending demands of small and middle market businesses. Larger
banks continued to show an appetite for only the largest loans, finding
themselves ill-equipped to administer smaller loans profitably. Interchange has
the desire and the ability to give smaller businesses the treatment they
deserve. We promise and deliver to this market the kind of preferential, first
class attention that megabanks give megacompanies. Interchange meets this need
through a unique program called Rapid Response Banking. The program provides
commercial loans up to $50,000 with a streamlined approval process that borrows
liberally from standard consumer lending practices. Naturally, in due course,
many small businesses become midsize businesses, with a corresponding change in
their financial requirements. But they do not outgrow Interchange because of our
ability to be responsive to both constituencies. To continue serving companies
throughout the various stages of their evolution, Interchange created Business
Class Banking--a program that grows with the customer. Business Class Banking
supports a spectrum of business-oriented financial products with value-added
services. By designing progressive programs to accommodate the changing needs of
growing businesses, Interchange is extending the longevity of valuable customer
relationships.
In 1995, Interchange State Bank installed a relational database. This
is powerful new technology, designed expressly for the banking industry and
generally associated with only the largest and most forward thinking companies.
From a marketing point of view, the implications of this technology are
significant. We can now analyze account relationships, their activity and their
relative value to the Bank in great detail.
Interchange has maintained an ambitious program of primary research to
keep abreast of customer attitudes and preferences. Our sales quotas and
incentives for employees are linked directly to bank-wide goals and are used to
motivate employees to sell the "right" products to the "right" customers.
REGULATION AND SUPERVISION
THE COMPANY
The Company is a bank holding company under the Bank Holding Company
Act of 1956, as amended (the "Holding Company Act"), and as such, is subject to
supervision by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). As a bank holding company, the Company is required to
file an annual report with the Federal Reserve Board and such additional
information as the Federal Reserve Board may require pursuant to the Holding
Company Act and Federal Regulation Y. The Federal Reserve Board may conduct
examinations of the Company or any of its subsidiaries. The Holding Company Act
requires every bank holding company to obtain the prior approval of the Federal
Reserve Board before it may acquire all or substantially all of the assets of
any bank (although the Federal Reserve Board may not assert jurisdiction in
certain bank mergers that are regulated under the Bank Merger Act), or ownership
or control of any voting shares of any bank if after such acquisition it would
own or control directly or indirectly more than 5% of the voting shares of such
bank. Under certain circumstances, prior approval of the Federal Reserve Board
is required under the Holding Company Act before a bank holding company may
purchase or redeem any of its equity securities.
The Holding Company Act also prohibits a bank holding company, with
certain limited exceptions, from itself engaging in or acquiring direct or
indirect interest in or control of any company that is engaged in non-banking
activities. Certain exemptions are available with respect to subsidiaries
engaged in servicing or liquidating activities or companies acquired by a bank
holding company in satisfaction of debts previously contracted. Another
principal exception to this prohibition allows the acquisition, following an
application or notice process, of interests in companies whose activities are
found by the Federal Reserve Board, by order or regulation, to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. Some of the activities that have been determined by regulation to be
closely related to banking are making or servicing loans, underwriting credit
life insurance, performing certain data processing services, acting as an
investment or financial advisor and providing discount securities brokerage
services. Other activities approved by the Federal Reserve Board include
acquisition of a savings association, consumer financial counseling, tax
planning and tax return preparation, futures and options advisory services,
check guaranty services, collection agency and credit bureau services, and real
estate and personal property appraisals.
The provisions of Section 23A of the Federal Reserve Act and related
statutes place limits on all insured banks (including the Bank) as to the amount
of loans or extensions of credit to, or investment in, or certain other
transactions with, their parent bank holding companies and certain of such
holding companies' subsidiaries and as to the amount of advances to third
parties collateralized by the securities or obligations of bank holding
companies or their subsidiaries. In addition, loans and extensions of credit to
affiliates of the Bank generally must be secured in the prescribed amounts.
CAPITAL ADEQUACY GUIDELINES
The Federal Reserve Board issued guidelines establishing risk-based
capital requirements for bank holding companies and member banks. The guidelines
established a risk-based capital framework consisting of (1) a definition of
capital consisting of Tier I capital, which includes common shareholders' equity
less certain intangibles and a supplementary component called Tier II, which
includes a portion of the allowance for loan losses and (2) a system for
assigning assets and off-balance-sheet items to one of the four weighted risk
categories, with higher levels of capital being required for the categories
perceived as representing the greater risks, and established a minimum
risk-based capital ratio of 8% (of which at least 4% must be Tier I). An
institution's risk-based capital ratio is determined by dividing its qualifying
capital by its risk-weighted assets. The guidelines make regulatory capital
requirements more sensitive to differences in risk profiles among banking
institutions, take off-balance sheet items into account in assessing capital
adequacy, and minimize disincentives to holding liquid, low-risk assets. Banking
organizations are generally expected to operate with capital positions well
above the minimum rates. Institutions with higher levels of risk, or which
experience or anticipate significant growth, are also expected to operate well
above minimum capital standards.
These guidelines focus principally on broad categories of credit risk
although the framework for assigning assets and off-balance sheet items to risk
categories does incorporate elements of transfer risk. The risk-based capital
ratio does not, however, incorporate other factors that may affect a company's
financial condition, such as overall interest rate exposure, liquidity, funding
and market risks, the quality and level of earnings, investment or loan
concentrations, the quality of loans and investments, the effectiveness of loan
and investment policies and management's ability to monitor and control
financial and operating risks.
In addition to the risk-based guidelines discussed above, the Federal
Reserve Board requires that a bank holding company and bank which meet the
regulator's highest performance and operational standards and which are not
contemplating or experiencing significant growth maintain a minimum leverage
ratio (Tier I capital as a percent of quarterly average adjusted assets) of 3%.
For those financial institutions with higher levels of risk or that are
experiencing or anticipating significant growth, the minimum leverage ratio will
be increased.
The Federal Reserve Board is vested with broad enforcement powers over
bank holding companies to forestall activities that represent unsafe or unsound
practices or constitute violations of law. These powers may be exercised through
the issuance of cease and desist orders or other actions. The Federal Reserve
Board is also empowered to assess civil penalties against companies or
individuals who violate the Holding Company Act, to order termination of
non-banking activities of non-banking subsidiaries of bank holding companies and
to order termination of ownership and control of non-banking subsidiaries by
bank holding companies. Neither the Company nor any of its affiliates has ever
been the subject of any such actions by the Federal Reserve Board.
THE BANK
As a New Jersey state-chartered member bank, the Bank's operations are
subject to various requirements and restrictions of state law pertaining, among
other things, to lending limits, reserves, interest rates payable on deposits,
loans, investments, mergers and acquisitions, borrowings, dividends, locations
of branch offices and capital adequacy. The Bank is subject to primary
supervision, periodic examination and regulation by the New Jersey Department of
Banking and Insurance ("NJDBI"). If, as a result of an examination of a bank,
the NJDBI determines that the financial condition, capital resources, asset
quality, earnings prospects, management, liquidity, or other aspects of the
bank's operations are unsatisfactory or that the bank or its management is
violating or has violated any law or regulation, various remedies are available
to the NJDBI. Such remedies include the power to enjoin "unsafe and unsound"
practices, to require affirmative action to correct any conditions resulting
from any violation or practice, to issue an administrative order that can be
judicially enforced, to, among other things, direct an increase in capital, to
restrict the growth of 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 subject to supervisory examination by the Federal
Reserve Bank of New York.
The Bank's deposits are insured by the Bank Insurance Fund administered
by the FDIC up to a maximum of $100,000 per depositor. For this protection, each
bank pays a semi-annual statutory assessment to, and is subject to the rules and
regulations of, the FDIC.
The Bank's ability to pay dividends is subject to certain statutory and
regulatory restrictions. The New Jersey Banking Act of 1948, as amended,
provides that no state-chartered bank may pay a dividend on its capital stock
unless, following the payment of each such dividend, the capital stock of the
bank will be unimpaired, and the bank will have a surplus of not less than 50%
of its capital, or, if not, the payment of such dividend will not reduce the
surplus of the bank. In addition, the payment of dividends is limited by the
requirement to meet the risk-based capital guidelines issued by the Federal
Reserve Board and other regulations.
FDIC IMPROVEMENT ACT OF 1991
The Federal Deposit Insurance Corporation Improvement of 1991, enacted
in December 1991 ("FDICIA"), among other things, identifies the following
capital standard categories for financial institutions: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized. The FDIC has enacted regulations to implement the
prompt corrective action provisions of FDICIA. These regulations establish five
classifications based on the capital measures of an institution. Under the
guidelines, a "well capitalized" institution is one with a total risk-based
capital ratio of 10% or above, a Tier I risk-based capital ratio of 6% or above
and a Tier I leverage ratio of 5% or above, and is not subject to a capital
directive to meet a specific level for any capital measure; an "adequately
capitalized" institution is one with a total risk-based capital ratio of 8% or
above, a Tier I risk-based ratio of 4% or above, and a Tier I leverage ratio of
4% or above and which is not a well capitalized institution; an
"under-capitalized" institution is one that does not meet the capital levels
necessary to be an adequately capitalized institution; a "significantly
undercapitalized" institution is one with a total risk-based capital ratio of
under 6%, a Tier I risk-based capital ratio of under 3%, or a Tier I leverage
ratio of under 3%; and a "critically undercapitalized" institution is one with a
Tier I leverage ratio of 2% or less. The institution's primary regulator has the
discretion to downgrade the institution by one classification level if the
institution is found to be unsafe and unsound, or to be engaged in unsafe and
unsound practices.
FDICIA imposes progressively more restrictive supervisory constraints
on operations, management and capital distributions depending on the category in
which an institution is classified. Pursuant to FDICIA, undercapitalized
institutions must submit recapitalization plans, and a company controlling a
failing institution must guarantee (subject to certain limitations) such
institution's compliance with its plan in order for the plan to be accepted by
the regulators. In addition, FDICIA generally prohibits a depository institution
from making any capital distribution (including payment of a dividend) or paying
a management fee to its holding company if the depository institution is, or
would thereby become, undercapitalized. FDICIA also requires the various
regulatory agencies to prescribe within one year from the date of enactment of
FDICIA certain non-capital standards for safety and soundness relating generally
to operations and management, asset quality and executive compensation, and
permits regulatory action against a financial institution that does not meet
such standards.
The Financial Institutions Reform Recovery and Enforcement Act of 1989
("FIRREA") and FDICIA provide the federal banking agencies with significantly
expanded powers to take enforcement action against institutions which fail to
comply with capital or other standards. Such action may include the termination
of deposit insurance by the FDIC or the appointment of a receiver or conservator
for the institution.
The Bank's deposits are insured by the FDIC and the Bank is therefore
subject to FDIC deposit insurance assessments. On September 15, 1992, the FDIC
approved the implementation of a transition risk-based deposit premium
assessment system under which each depository institution is placed in one of
nine assessment categories based on certain capital and supervisory measures.
The assessment rates under the new system range from 0.23 percent to 0.31
percent depending upon the assessment category into which the depository
institution is placed. In 1995, the Federal Deposit Insurance Corporation
reduced the lower tier of the assessment from 0.23 percent to 0.04 percent. The
reduction of the assessment, effective as of the second quarter of 1995,
resulted from the Bank Insurance Fund becoming fully capitalized. The Bank's
assessment rate was 0.04 percent at December 31, 1995. Effective January 1,
1996, the FDIC further changed the rate structure for the BIF. Under the new
rate structure, assessment rates will be between zero and 0.27 percent. However,
institutions that have a zero assessment will be subject to a statutory minimum
of $2,000 per year. In 1996, the Bank had a zero assessment, subject to the
statutory minimum. A portion of the Bank's deposits (approximately 18 million)
are Oakar deposits and are subject to the Savings Association Insurance Fund
("SAIF") assessment. The SAIF assessment rates were between 0.23 and 0.31
percent in 1996 and will range between zero and 0.27 percent in 1997. In 1996,
the Bank had a 0.23 percent assessment rate.
ITEM 2. PROPERTIES
The Company leases nine banking offices and one operations/support
facility. The lease for the mini-branch located in Paramus, New Jersey, expired
in September 1996 and was not renewed. It owns three banking offices and leases
land on which it owns one bank building.
ITEM 3. LEGAL PROCEEDINGS
Interchange State Bank's (the "Bank"), a wholly owned subsidiary of the
Company, was a party to a lawsuit commenced in April 1989 (Great American
Mortgage Corp., et al, v. Robert Utter, et al.), filed in the Superior Court of
New Jersey alleging that the Bank was statutorily liable for having paid checks
which bore irregular endorsements. Various other legal proceedings related to
the foregoing were also instituted and, in those actions, the Bank pursued
various parties whom the Bank alleged were liable to it. On August 2, 1996, the
Bank paid $120,000 plus prejudgment interest to resolve the final matter
pertaining to these occurrences. The remainder of a reserve, which was
established in 1992, was sufficient to cover this amount. All legal proceedings
related to these occurrences, involving the potential liability of the Bank,
have now been resolved.
The Company is also a party to routine litigation involving various
aspects of its business, none of which, in the opinion of management and its
legal counsel, is expected to have a material adverse impact on the consolidated
financial condition, results of operations or liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the three months ended December 31,
1996, to a vote of the Company's security holders through the solicitation of
proxies or otherwise.
EXECUTIVE OFFICERS
The following table sets forth the names, ages, and present positions
of the principal executive
officers:
NAME AGE POSITIONS HELD WITH THE COMPANY AND THE BANK
- ---- --- --------------------------------------------
ANTHONY S. ABBATE . . . . . . . . . . . . 57 President and Chief Executive Officer
ROBERT N. HARRIS. . . . . . . . . . . . 64 Executive Vice President and Chief Financial
Officer(retired 12/31/96)
RICHARD N. LATRENTA . . . . . . . . . . . 43 Senior Vice President--Lending
FRANK R. GIANCOLA . . . . . . . . . . . . 43 Senior Vice President--Retail Banking
ANTHONY J. LABOZZETTA. . . . . . . . . . 33 Senior Vice President--Treasurer
BUSINESS EXPERIENCE
ANTHONY S. ABBATE, President and Chief Executive Officer of the Bank
since 1981; Senior Vice President and Controller from October 1980; President
and Chief Executive Officer of Home State Bank 1978-1980. Engaged in the banking
industry since 1959.
ROBERT N. HARRIS, Executive Vice President and Chief Financial Officer
of the Bank since 1983; Senior Vice President and Chief Financial Officer of
Bergen State Bank 1978-1983. Engaged in the banking industry since 1965. Mr.
Harris retired effective December 31, 1996.
RICHARD N. LATRENTA, Senior Vice President-Lending of the Bank since
1984; Senior Loan Officer since 1982; Assistant Vice President since 1980; other
positions with the Bank since 1976. Engaged in the banking industry since 1972.
FRANK R. GIANCOLA, Senior Vice President-Retail Banking since January
1, 1993; Senior Vice President-Operations of the Bank from 1984; Senior
Operations Officer from 1982; Vice President/Branch Administrator from 1981.
Engaged in the banking industry since 1971.
ANTHONY J. LABOZZETTA, Senior Vice President--Treasurer since January
1, 1997; Treasurer from 1995. Engaged in the banking industry since 1989.
Formerly a senior manager with an international accounting firm.
Officers are elected annually and serve at the discretion of the board
of directors. Management is not aware of any family relationship between any
director or executive officer.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
The common stock is traded on the American Stock Exchange under the symbol
"ISB." A cash dividend of $0.1675, $0.1725 and $0.185 was paid on each common
share outstanding in each quarter during 1994, 1995 and 1996, respectively. The
following table sets forth, for the periods indicated, the reported high and low
sales prices:
High Low
------- ------
1994
First quarter .............................. $16.50 $14.00
Second quarter ............................. 16.625 14.25
Third quarter .............................. 16.75 15.375
Fourth quarter ............................. 16.375 14.75
1995
First quarter .............................. $17.375 $14.625
Second quarter ............................. 20.125 16.50
Third quarter .............................. 23.00 19.00
Fourth quarter ............................. 21.625 20.25
1996
First quarter .............................. $22.25 $19.875
Second quarter ............................. 20.625 19.25
Third quarter .............................. 22.125 18.75
Fourth quarter ............................. 25.00 21.375
The number of stockholders of record as of December 31, 1996, was 1,098.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Y E A R S E N D E D D E C E M B E R 31,
----------------------------------------------------
1996 1995 1994 1993 1992
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SUMMARY EARNINGS (IN THOUSANDS)
Interest income .......................................... $37,284 $36,995 $32,612 $29,267 $31,258
Interest expense ......................................... 14,599 15,150 11,006 10,237 14,379
------ ------ ------ ------ ------
Net interest income ................................... 22,685 21,845 21,606 19,030 16,879
Provision for loan losses ................................ 700 1,200 944 1,065 2,237
------- ------- -------- ------- --------
Net interest income after provision for loan losses ... 21,985 20,645 20,662 17,965 14,642
Noninterest income ....................................... 4,272 4,579 3,571 4,861 5,104
Noninterest expenses ..................................... 16,382 15,651 15,535 14,897 13,552
------- ------- -------- ------- --------
Income before cumulative effect of change in
accounting principle and income taxes .............. 9,875 9,573 8,698 7,929 6,194
Income taxes ............................................. 3,456 3,293 3,062 2,887 2,473
------- ------- -------- ------- --------
Income before cumulative effect of
change in accounting principle ..................... 6,419 6,280 5,636 5,042 3,721
Cumulative effect of change in accounting principle ...... -- -- -- (205) --
------- ------- -------- ------- --------
Net income ............................................ $ 6,419 $ 6,280 $ 5,636 $ 4,837 $ 3,721
======= ======= ======== ======= ========
PER SHARE DATA
Income before cumulative effect of change
in accounting principle ............................... $2.26 $2.19 $1.95 $1.71 $1.71
Cumulative effect of change in accounting principle ...... -- -- -- (0.07) --
Net income ............................................... 2.26 2.19 1.95 1.64 1.71
Cash dividends declared .................................. 0.73 0.69 0.67 0.67 0.67
Book value-end of year ................................... 15.62 14.21 11.56 10.92 9.95
Tangible book value-end of year .......................... 15.16 13.53 11.67 10.92 9.95
Weighted average shares outstanding (in thousands) ....... 2,838 2,832 2,832 2,832 1,969
PER SHARE DATA RESTATED (1)
Income before cumulative effect of change
in accounting principle ............................... $1.51 $1.46 $1.30 $1.14 $1.14
Cumulative effect of change in accounting principle ...... -- -- -- (0.05) --
Net income ............................................... 1.51 1.46 1.30 1.09 1.14
Cash dividends declared .................................. 0.49 0.46 0.44 0.44 0.44
Book value-end of year ................................... 10.41 9.47 7.71 7.28 6.63
Tangible book value-end of year .......................... 10.11 9.02 7.78 7.28 6.63
Weighted average shares outstanding (in thousands) ....... 4,257 4,248 4,248 4,248 2,954
BALANCE SHEET DATA-END OF YEAR (IN THOUSANDS)
Total assets ............................................. $504,689 $491,457 $479,312 $421,659 $404,064
Securities held to maturity and
securities available for sale ......................... 118,628 142,233 148,781 118,939 96,480
Loans .................................................... 351,793 311,164 290,654 266,992 269,214
Allowance for loan losses ................................ 3,653 3,647 3,839 3,905 4,100
Total deposits ........................................... 430,013 436,452 424,170 385,430 369,327
Long-term borrowings...................................... 9,983 -- 5,000 -- --
Total stockholders' equity ............................... 44,361 40,241 35,129 33,305 31,555
SELECTED PERFORMANCE RATIOS
Return on average total assets ........................... 1.31% 1.32% 1.25% 1.23% 0.93%
Return on average total stockholders' equity ............. 15.18 16.66 16.58 15.63 16.25
Dividend payout ratio .................................... 32.36 32.28 35.47 41.39 46.73
Average total stockholders' equity to average total assets 8.61 7.90 7.52 7.90 5.74
Net yield on interest earning assets (taxable equivalent) 4.97 4.93 5.13 4.98 4.55
Noninterest expenses to average assets ................... 3.34 3.28 3.44 3.65 3.40
Noninterest income to average assets ..................... 0.87 0.96 0.79 1.19 1.28
ASSET QUALITY RATIOS-END OF YEAR
Nonaccrual loans to total loans .......................... 0.59% 0.81% 2.13% 1.47% 1.97%
Nonperforming assets to total assets ..................... 0.68 1.06 1.58 1.25 1.79
Allowance for loan losses to nonaccrual loans ............ 175.29 145.24 62.15 99.77 77.31
Allowance for loan losses to total loans ................. 1.04 1.17 1.32 1.46 1.52
Net charge-offs to average loans for the year ............ 0.21 0.48 0.37 0.48 0.63
LIQUIDITY AND CAPITAL RATIOS
Average loans to average deposits ........................ 74.78% 68.60% 66.69% 70.34% 73.78%
Total stockholders' equity to total assets ............... 8.79 8.19 7.33 7.90 7.81
Tier I capital to risk-weighted assets ................... 13.29 13.16 12.56 12.98 12.32
Total capital to risk-weighted assets .................... 14.42 14.41 13.81 14.23 13.57
Tier I leverage ratio .................................... 8.66 7.98 7.57 7.96 7.89
- ----------
(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 as of March 20, 1997.
The restated per share data reflects the effects of the stock split.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This section presents management's discussion and analysis of the
consolidated results of operations and financial condition of Interchange
Financial Services Corporation (the "Company"). The discussion and analysis
should be read in conjunction with the consolidated financial statements and
notes thereto on pages 36 through 60 and the summary consolidated data
included elsewhere in this report.
OVERVIEW OF RESULTS
In 1996, the Company reported net income of $6.4 million or $2.26 per
common share, as compared with $6.3 million or $2.19 per common share in 1995
and $5.6 million or $1.95 per common share in 1994.
Net income for 1996 was favorably affected by an increase in net
interest income of $840 thousand or 3.8%, as compared to 1995 due largely to an
improved net interest margin. The net interest margin increased 4 basis points
in 1996, as compared to 1995, and was augmented by growth in average interest
earning assets from 1995 levels. The growth occurred in loans which generally
are the higher yielding assets for the Company. The net interest margin was also
positively affected by growth in noninterest bearing liabilities of $6.2 million
or 9.5%, from 1995 levels of $65.2 million. Furthermore, net interest income was
positively affected by a favorable change in average rate paid on interest
bearing liabilities resulting from a favorable shift in the mix of the Company's
interest bearing liabilities.
In addition, net income for 1996 was beneficially affected by a
decrease of $500 thousand in the provision for loan losses as compared to 1995.
The decrease is mainly attributable to improved trends with respect to
nonperforming loans and a decline in charge-off experience in 1996 as compared
to 1995.
Net income for 1996 includes the effects of the following pretax gains:
A net gain of $455 thousand resulting from the sale of the deposits of one of
the Company's branch locations; a net gain of $235 thousand from the sale of
available-for-sale ("AFS") securities; and, a gain of $261 thousand related to
the collection of principal on a loan in excess of its carrying value. The
aforementioned gains did not serve to increase net income for 1996 over 1995
mainly due to a net gain of $828 thousand in 1995 related to the sale of a
portion of the subsidiary bank's loan servicing portfolio.
The benefits obtained from the improved net interest income and
decrease in the provision for loan losses were partially offset by an increase
of $731 thousand or 4.7% in operating expenses for 1996, as compared to 1995.
Net income for 1995 was favorably impacted by an increase in
noninterest income of $1.0 million, or 28.2%, as compared to 1994. The increase
was attributable to the sale of a portion of the subsidiary bank's loan
servicing portfolio that generated a net gain of $828 thousand. Net income was
also positively affected by an increase in interest income of $4.4 million
resulting from an increase in average interest earning assets combined with an
increase in average yields for those assets. The positive effect on net income
derived from interest earning assets was mostly offset by a $4.1 million
increase in interest expense in 1995 compared to 1994. An increase in interest
bearing liabilities, specifically certificates of deposit, compounded by rising
interest rates was primarily responsible for the increase in interest expense.
In 1995, net income also benefited from the nominal growth in
noninterest expenses of $116 thousand, or .7%, as compared to 1994. The nominal
increase was due to a $750 thousand, or 5.1%, increase in operating expenses
offset by a $250 thousand reduction to a previously established litigation
reserve and a $384 thousand decrease in the Federal Deposit Insurance
Corporation ("FDIC") assessment. The assessment was reduced from 23 cents per
thousand to 4 cents per thousand on qualified deposits as a result of the Bank
Insurance Fund ("BIF") becoming fully capitalized. The reduction in the
assessment became effective in the second quarter of 1995.
Table 1
- -------------------------------------------------------------------------------
SUMMARY OF OPERATING RESULTS
- -------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Net income (in thousands) ............... $6,419 $6,280 $5,636
Earnings per share ...................... 2.26 2.19 1.95
Return on average total assets .......... 1.31% 1.32% 1.25%
Return on average total equity .......... 15.18 16.66 16.58
Dividend payout ratio* .................. 32.36 32.28 35.47
Average total stockholders' equity to ... 8.61 7.90 7.52
average total assets
*Cash dividends declared on common and preferred shares to net income
NET INTEREST INCOME
NET INTEREST INCOME IS THE DIFFERENCE BETWEEN THE INTEREST A COMPANY
EARNS ON ITS ASSETS, PRINCIPALLY LOANS AND INVESTMENT SECURITIES, AND INTEREST
IT PAYS ON ITS DEPOSITS AND BORROWINGS. WHEN EXPRESSED AS A PERCENTAGE OF
AVERAGE ASSETS, IT IS REFERRED TO AS NET INTEREST MARGIN, OR SIMPLY INTEREST
MARGIN. TABLE 3, WHICH PRESENTS CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
BY MAJOR ASSET AND LIABILITY CATEGORY FOR 1996 AND 1995, ILLUSTRATES THE IMPACT
OF AVERAGE VOLUME GROWTH (ESTIMATED ACCORDING TO PRIOR YEAR RATES) AND RATE
CHANGES (ESTIMATED ON THE BASIS OF PRIOR YEAR VOLUMES). CHANGES NOT DUE SOLELY
TO CHANGES IN EITHER BALANCES OR RATES HAVE BEEN ALLOCATED TO SUCH CATEGORIES
BASED ON THE RESPECTIVE PERCENTAGE CHANGES IN AVERAGE BALANCES AND AVERAGE
RATES.
Figures are adjusted to a taxable equivalent basis to recognize the
income from tax-exempt assets as if the interest was taxable, thereby allowing a
uniform comparison to be made between yields on assets.
Table 2
- --------------------------------------------------------------------------------
ANALYSIS OF NET INTEREST INCOME
for the years ended December 31,
- --------------------------------------------------------------------------------
(in thousands)
1996
---------------------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
---------------------------------------------------
ASSETS
Interest earning assets
Loans (1) ....................................................... $ 325,530 $ 29,132 8.95%
Taxable securities (4) .......................................... 120,571 7,623 6.32
Tax-exempt securities (2) ....................................... 2,919 159 5.45
Federal funds sold .............................................. 7,705 407 5.28
------- --------
TOTAL INTEREST EARNING ASSETS ................................... 456,725 37,321 8.17
--------
Noninterest earning assets
Cash and due from banks ......................................... 23,474
Allowance for loan losses ....................................... (3,734)
Other assets .................................................... 14,532
------
TOTAL ASSETS .................................................... $ 490,997
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Demand deposits ................................................. $ 114,848 3,575 3.11
Savings deposits ................................................ 110,205 3,184 2.89
Time deposits ................................................... 138,923 7,282 5.24
Short-term borrowings ........................................... 8,810 513 5.82
Long-term borrowings ............................................ 710 45 6.34
--------- ------
TOTAL INTEREST BEARING LIABILITIES .............................. 373,496 14,599 3.91
------
Noninterest bearing liabilities
Demand deposits ................................................. 71,324
Other liabilities ............................................... 3,888
------
Total liabilities (3) ........................................... 448,708
Stockholders' equity ............................................ 42,289
-------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................... $ 490,997
=======
Net interest income (tax-equivalent basis) .............................. 22,722 4.26
Tax-equivalent basis adjustment ......................................... (37)
------
NET INTEREST INCOME ..................................................... $ 22,685
======
NET INTEREST INCOME AS A PERCENT OF
INTEREST EARNING ASSETS (TAX-EQUIVALENT BASIS) ...................... 4.97 %
Table 2 (Continued)
- --------------------------------------------------------------------------------
ANALYSIS OF NET INTEREST INCOME
for the years ended December 31,
- --------------------------------------------------------------------------------
(in thousands)
1995
---------------------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
---------------------------------------------------
ASSETS
Interest earning assets
Loans (1) ....................................................... $ 291,981 $ 27,427 9.39 %
Taxable securities (4) .......................................... 144,156 9,138 6.34
Tax-exempt securities (2) ....................................... 1,081 74 6.85
Federal funds sold .............................................. 6,366 374 5.87
-------- -------
TOTAL INTEREST EARNING ASSETS ................................... 443,584 37,013 8.34
-------
Noninterest earning assets
Cash and due from banks ......................................... 20,781
Allowance for loan losses ....................................... (3,865)
Other assets .................................................... 16,518
-------
TOTAL ASSETS .................................................... $ 477,018
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Demand deposits ................................................. $ 102,397 3,141 3.07
Savings deposits ................................................ 111,959 3,515 3.14
Time deposits ................................................... 146,133 7,857 5.38
Short-term borrowings ........................................... 7,845 506 6.45
Long-term borrowings ............................................ 1,932 131 6.78
--------- ------
TOTAL INTEREST BEARING LIABILITIES .............................. 370,266 15,150 4.09
------
Noninterest bearing liabilities
Demand deposits ................................................. 65,164
Other liabilities ............................................... 3,903
------
Total liabilities (3) ........................................... 439,333
Stockholders' equity ............................................ 37,685
-------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................... $ 477,018
=======
Net interest income (tax-equivalent basis) .............................. 21,863 4.25
Tax-equivalent basis adjustment ......................................... (18)
------
NET INTEREST INCOME ..................................................... $ 21,845
======
NET INTEREST INCOME AS A PERCENT OF
INTEREST EARNING ASSETS (TAX-EQUIVALENT BASIS) ...................... 4.93%
Table 2 (Continued)
- --------------------------------------------------------------------------------
ANALYSIS OF NET INTEREST INCOME
for the years ended December 31,
- ----------------------------------------------------------------------------------
(in thousands)
1994
---------------------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
---------------------------------------------------
ASSETS
Interest earning assets
Loans (1) ....................................................... $ 272,399 $ 23,537 8.64%
Taxable securities (4) .......................................... 137,484 8,604 6.26
Tax-exempt securities (2) ....................................... 1,561 78 4.93
Federal funds sold .............................................. 10,406 412 3.96
------- --------
TOTAL INTEREST EARNING ASSETS ................................... 421,850 32,631 7.74
Noninterest earning assets
Cash and due from banks ......................................... 20,120
Allowance for loan losses ....................................... (3,832)
Other assets .................................................... 13,793
------
TOTAL ASSETS .................................................... $ 451,931
======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Demand deposits ................................................. $ 100,309 2,612 2.60
Savings deposits ................................................ 122,083 3,191 2.61
Time deposits ................................................... 124,791 4,832 3.87
Short-term borrowings ........................................... 5,361 289 5.39
Long-term borrowings ............................................ 1,192 82 6.80
--------- ------
TOTAL INTEREST BEARING LIABILITIES .............................. 353,736 11,006 3.11
------
Noninterest bearing liabilities
Demand deposits ................................................. 61,271
Other liabilities ............................................... 2,924
------
Total liabilities (3) ........................................... 417,931
Stockholders' equity ............................................ 34,000
-------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................... $ 451,931
=======
Net interest income (tax-equivalent basis) .............................. 21,625 4.63
Tax-equivalent basis adjustment ......................................... (19)
------
NET INTEREST INCOME ..................................................... $ 21,606
======
NET INTEREST INCOME AS A PERCENT OF
INTEREST EARNING ASSETS (TAX-EQUIVALENT BASIS) ...................... 5.13%
- ----------
(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 rate was computed on a market value basis. Had the average rate
been computed on a historical cost basis, the average rate would have been
6.35%, 6.27% and 6.19% in 1996, 1995 and 1994, respectively.
- --------------------------------------------------------------------------------
Table 3
- --------------------------------------------------------------------------------
EFFECT OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
- --------------------------------------------------------------------------------
(in thousands)
YEAR ENDED DECEMBER 31, Year ended December 31,
1996 COMPARED WITH 1995 1995 compared with 1994
INCREASE (DECREASE) increase (decrease)
DUE TO CHANGE IN: due to change in:
-------------------------------------- -------------------------------------
NET
AVERAGE AVERAGE INCREASE Average Average Increase
VOLUME RATE (DECREASE) Volume Rate (Decrease)
-------------------------------------- --------------------------------------
Interest income
Loans .................................. $ 3,150 $(1,445) $ 1,705 $ 1,762 $ 2,128 $ 3,890
Taxable securities ..................... (1,486) (29) (1,515) 423 111 534
Tax-exempt securities .................. 126 (41) 85 (34) 30 (4)
Federal funds sold ..................... 79 (46) 33 (160) 122 (38)
------- ------- ------- ------- ------- -------
TOTAL INTEREST INCOME ............ 1,869 (1,561) 308 1,991 2,391 4,382
------- ------- ------- ------- ------- -------
Interest expense
Demand deposits ........................ 387 47 434 54 475 529
Savings deposits ....................... (54) (277) (331) (264) 588 324
Time deposits .......................... (376) (199) (575) 922 2,103 3,025
Short-term borrowings .................. 63 (56) 7 152 65 217
Long-term borrowings ................... (78) (8) (86) 49 -- 49
------- ------- ------- ------- ------- -------
TOTAL INTEREST EXPENSE ........... (58) (493) (551) 913 3,231 4,144
------- ------- ------- ------- ------- -------
CHANGE IN NET INTEREST
INCOME ................................. $ 1,927 $(1,068) $ 859 $ 1,078 $ (840) $ 238
======= ======= ======= ======= ======= =======
CHANGES IN INTEREST INCOME OR EXPENSE NOT ARISING SOLELY AS A RESULT OF VOLUME
OR RATE VARIANCES ARE ALLOCATED BASED ON THE RELATIONSHIP OF CHANGES IN VOLUME
AND CHANGES IN RATE.
NONPERFORMING LOANS ARE INCLUDED IN INTEREST EARNING ASSETS.
Net interest income, on a taxable equivalent basis, totaled $22.7
million in 1996, an increase of $859 thousand or 3.9% from $21.9 million in
1995. Net interest income benefited from a $13.1 million or 3.0% increase in
average interest earning assets from 1995 levels of $443.6 million. The benefits
derived from the increased volume were partly offset by an unfavorable change in
average yield on interest earning assets from 8.34% in 1995 to 8.17% in 1996, a
decrease of 17 basis points. Net interest income also benefited from the
marginal growth in interest bearing liabilities and the continued growth in
noninterest bearing demand deposits. In 1996, average interest bearing
liabilities increased $3.2 million or .9%, while noninterest bearing liabilities
increased $6.2 million or 9.5%, from 1995 levels of $370.3 million and $65.2
million, respectively. Furthermore, net interest income was positively affected
by a favorable change in average rate paid on interest bearing liabilities from
4.09% in 1995 to 3.91% in 1996, a decrease of 18 basis points.
The growth in interest earning assets stemmed largely from increased
loans, particularly, commercial and commercial mortgage loans, as well as,
consumer loans (comprised mostly of home equity loans). The average balances of
commercial and commercial mortgage loans totaled $102.1 million and $46.1
million in 1996, respectively, compared to $91.3 million and $37.6 million in
1995, respectively, an increase of $10.8 million or 11.8% and $8.5 million or
22.6%, respectively. The average balances of consumer loans (comprised mostly of
home equity loans) totaled $135.7 million in 1996, compared to $119.5 million in
1995, an increase of $16.2 million or 13.6%.
The growth in noninterest bearing demand deposits is attributable
largely to the Company's marketing effort along with a more focused sales
approach in the lending area. The loans resulting from this effort generally
carry compensating balances in the form of noninterest bearing demand accounts.
The favorable reduction in average rate paid on interest bearing deposits
resulted, in part, from a planned business strategy which did not allow certain
high cost certificates of deposits to renew at the high rates.
In 1995, net interest income, on a taxable equivalent basis, totaled
$21.9 million, an increase of $238 thousand, or 1.1%, from $21.6 million in
1994. The increase was driven by a $21.7 million or 5.2% increase in average
interest earning assets from 1994 levels of $421.9 million. In addition, net
interest income was positively affected by an increase in average yield on
interest earning assets from 7.74% in 1994 to 8.34% in 1995, an increase of 60
basis points. The benefits derived from the positive changes in average volume
and average rate on interest earning assets were largely offset by the negative
impacts of increases in average volume and average rate on interest bearing
liabilities. Average interest bearing liabilities increased $16.5 million, or
4.7%, from 1994 levels of $353.7 million. More significantly, as illustrated in
Table 3, the 98 basis point increase in the average rate paid on interest
bearing liabilities, from 3.11% in 1994 to 4.09% in 1995, had a more adverse
impact on net interest income.
In 1995, the growth in the average balance of certificates of deposits
("CDs") was largely responsible for the $913 thousand increase in interest paid
due to volume growth. In 1995, the average balance of CDs increased $21.3
million or 17.1% and the average balance of savings accounts decreased $10.1
million or 8.3%. The increase in CDs was the result of higher interest rates in
the second half of 1994 and the first half of 1995, increasing the popularity of
CDs. Rising interest rates increased the costs of the Company's deposit
liabilities, particularly time deposits, and was responsible for $3.2 million of
the increase in interest expense.
Overall for 1995, the improved yields on interest earning assets,
combined with the growth in average loans and investments, generated a rise in
interest income of $4.4 million over 1994. Conversely, the increased costs of
interest bearing liabilities, along with the increase in average balances,
increased interest expense by $4.1 million, thereby, counteracting the positive
benefits derived from interest earning assets.
LOAN LOSSES
The provision for loan losses represents management's determination of
the amount necessary to bring the allowance for loan losses to the level it
considers adequate to reflect the risk of future losses in the loan portfolio.
Factors considered in the evaluation include: past loss experience; changes in
the composition of nonperforming loans; the condition of borrowers facing
financial pressure; the relationship of the current level of the allowance to
the portfolio and to nonperforming loans; and existing economic conditions.
Loan loss provisions for 1996 amounted to $700 thousand, a decrease of
$500 thousand from the previous year. In 1995, the loan loss provision amounted
to $1.2 million, an increase of $256 thousand from 1994. The decrease in the
provision for loan losses reflects, in part, the positive trends in
nonperforming loans. In addition, it reflects the decrease in charge-off
experience during 1996. Net loans charged-off against the allowance for loan
losses in 1996 amounted to $694 thousand, down $698 thousand from $1.4 million
in 1995.
See sections on Loan Portfolio and Loan Quality beginning on page 22 of
this report for additional discussions pertaining to the allowance for loan
losses.
Table 4
- --------------------------------------------------------------------------------
LOAN LOSS EXPERIENCE
for the years ended December 31,
- --------------------------------------------------------------------------------
(dollars in thousands)
1996 1995 1994 1993 1992
--------- ---------- --------- --------- ---------
Average loans outstanding ..................... $325,530 $291,981 $272,399 $262,222 $272,002
======== ======== ======== ======== ========
Allowance at beginning of year ................ $ 3,647 $ 3,839 $ 3,905 $ 4,100 $ 3,566
-------- -------- -------- -------- --------
Loans charged off
Commercial .......................... 8 399 281 138 756
Installment ......................... 67 108 149 613 283
Real estate ......................... 770 914 647 560 792
Lease financing ..................... 57 89 47 -- --
-------- -------- -------- -------- --------
Total ........................... 902 1,510 1,124 1,311 1,831
-------- -------- -------- -------- --------
Recoveries of loans
previously charged off
Commercial .......................... 75 25 -- -- 73
Installment ......................... 45 54 99 42 20
Real estate ......................... 88 32 15 9 35
Lease financing ..................... -- 7 -- -- --
-------- -------- -------- -------- --------
Total ........................... 208 118 114 51 128
-------- -------- -------- -------- --------
Net loans charged off ......................... 694 1,392 1,010 1,260 1,703
-------- -------- -------- -------- --------
Additions to allowance charged
to expense ................................ 700 1,200 944 1,065 2,237
-------- -------- -------- -------- --------
Allowance at end of year ...................... $ 3,653 $ 3,647 $ 3,839 $ 3,905 $ 4,100
======== ======== ======== ======== ========
Allowance to total loans ...................... 1.04% 1.17% 1.32% 1.46% 1.52%
Allowance to nonaccrual loans ................. 175.29 145.24 62.15 99.77 77.31
Allowance to nonaccrual loans and
loans past due 90 days or more ........... 173.21 145.24 62.15 95.92 71.96
Ratio of net charge-offs to average
loans .................................... 0.21 0.48 0.37 0.48 0.63
The allowance for losses represented 106.8% of nonperforming assets at
year-end up from 70.3% At the end of 1995.
The ratio increased as a result of a $1.8 million decrease in
nonperforming assets in 1996 as compared to the end of the year in 1995. The
decrease resulted largely from a third quarter 1996 sale of approximately $1.9
million of nonperforming loans which resulted in a charge-off of $380 thousand.
The Company had valuation allowances on the nonperforming loans sufficient to
cover the charge-offs.
Table 5
- --------------------------------------------------------------------------------
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
at December 31,
- -------------------------------------------------------------------------------
(in thousands)
1996 1995 1994 1993 1992
------ ------ ------ ------ -----
Commercial and financial ...................... $2,199 $1,993 $1,985 $2,822 $1,933
Installment ................................... 137 215 278 324 352
Real estate ................................... 591 813 611 592 885
Unallocated ................................... 726 626 965 167 930
------ ------ ------ ------ ------
$3,653 $3,647 $3,839 $3,905 $4,100
====== ====== ====== ====== ======
The above allocation is intended for analytical purposes and may not
be indicative of the categories in which future loan losses occur.
NONINTEREST INCOME
Noninterest income consists of all income other than interest and
dividend income and is derived from: fees on bank transactions and credit cards;
commissions on sales of annuities and mutual funds; rental of safe deposit
space; net gains on sales of assets; and the accretion of discount in connection
with an acquisition. Noninterest income totaled $4.3 million for 1996, a
decrease of $307 thousand or 6.7% from $4.6 million for 1995. For 1995, total
noninterest income increased $1.0 million or 28.2% from $3.6 million for the
year ended December 31, 1994. The elements that significantly contributed to the
changes in noninterest income are highlighted below.
In 1996, noninterest income was positively affected by a net pretax
gain of $455 thousand resulting from the sale of the deposits of one of the
Company's branch locations. The sale was in response to the Company's evaluation
of the prospective growth and earnings contribution of the branch. Noninterest
income also benefited from a $235 thousand net pretax gain from the sale of
available-for-sale ("AFS") securities. The securities were sold as part of a
securities portfolio restructuring plan aimed at improving the portfolio's
return while reducing its risk. In addition, noninterest income benefited from a
$261 thousand gain related to the collection of principal on a loan in excess of
its carrying value. The benefits described above did not result in an increase
to noninterest income in 1996 over 1995 largely because of a net pretax gain in
1995 of $828 thousand pertaining to the sale of a portion of the subsidiary
bank's loan servicing portfolio. Consequently, noninterest income for 1996
decreased, in large part, because the discount connected with an acquisition of
a failed financial institution has been fully accreted. Discount accretion
contributed $249 thousand less to noninterest income in 1996 as compared to
1995.
The increase of $1.0 million in noninterest income for 1995 as
compared to 1994 is due largely to the subsidiary bank selling a portion of its
loan servicing portfolio which generated a gain of $828 thousand.
Table 6
- --------------------------------------------------------------------------------
NONINTEREST INCOME
for the years ended December 31,
- --------------------------------------------------------------------------------
(in thousands)
1996 1995 1994
---- ---- ----
Service fees on deposit accounts ................................... $ 1,579 $ 1,474 $ 1,496
Service fees on loan accounts ...................................... 69 280 258
Service fees on credit cards ....................................... 240 168 155
Net gain/(loss) on sale of loans
available for sale ........................................ -- 22 (14)
Net gain/(loss) on sale of securities .............................. 242 15 (5)
Commission on annuity and
mutual funds sales ........................................ 66 138 228
Accretion of discount in
connection with acquisition ............................... 511 760 760
Collection of acquired loans in
excess of carrying value .................................. 600 406 313
Rental on safe deposit boxes ....................................... 148 142 138
Net gain on sale of branch ......................................... 455 -- --
Net gain on sale of loan servicing rights .......................... -- 828 --
All other .......................................................... 362 346 242
------- ------- -------
$ 4,272 $ 4,579 $ 3,571
======= ======= =======
NONINTEREST EXPENSES
Noninterest expenses totaled $16.4 million for 1996. This represented
an increase of $731 thousand or 4.7% from total noninterest expenses of $15.7
million for 1995. For 1995, total noninterest expenses increased $116 thousand
or .7% from $15.5 million for the year ended December 31, 1994. The elements
that significantly contributed to the changes in noninterest expenses are
highlighted below.
Affecting the change in noninterest expenses for 1996 was an increase
of $389 thousand or 5.4% in salaries and related expenses. For the most part,
the increase resulted from promotions and normal annual salary adjustments. An
increase of $244 thousand or 5.6% in other noninterest expenses also contributed
to the change. The increase reflects a $250 thousand reduction of other
noninterest expenses in 1995 for the reversal of a reserve related to a settled
lawsuit. Furthermore, noninterest expenses were adversely affected by an
increase of $198 thousand or 366.7% in foreclosed real estate expenses. For the
most part, gains and losses from the disposition of foreclosed real estate
contributed to the change in foreclosed real estate expense. In 1996, foreclosed
real estate expense included net losses of $87 thousand pertaining to the
disposition of foreclosed real estate as compared to net gains of $127 thousand
for 1995. In 1996, noninterest expenses were favorably affected by a $343
thousand or 68.2% decrease in insurance premiums paid by the Company to the FDIC
for deposit insurance. The decrease reflects the reduction in premium as the BIF
attained target reserve levels.
The change in noninterest expenses for 1995 as compared to 1994 was
minimal, largely because normal increases in noninterest expenses were offset by
a $384 thousand or 43.3% decrease in insurance premiums paid by the Company to
the FDIC for deposit insurance during 1995. In addition, noninterest expenses in
1995 were favorably affected by a $250 thousand reduction of a litigation
reserve in connection with a settled lawsuit.
Table 7
- --------------------------------------------------------------------------------
Noninterest Expenses
for the years ended December 31,
- --------------------------------------------------------------------------------
(in thousands)
1996 1995 1994
------ ------ ------
Salaries and benefits ................................................ $7,643 $7,254 $6,879
Net occupancy and furniture
and equipment ..................................................... 2,920 2,777 2,540
Other expenses
Advertising and promotion ......................................... 773 673 701
Stationery, printing and supplies ................................. 359 281 275
Federal Deposit Insurance Corporation
assessment ..................................................... 160 503 887
Professional fees ................................................. 1,117 1,321 1,254
Communications .................................................... 246 217 192
Postage and shipping .............................................. 301 282 250
Credit card processing fees ....................................... 199 156 161
Credit services ................................................... 145 156 208
Foreclosed real estate expense .................................... 252 54 102
Amortization of premiums in
connection with acquisitions ................................... 444 444 403
Provision for litigation contingency .............................. (33) (250) --
Directors' fees, travel and retirement ............................ 553 536 399
Insurance premiums ................................................ 204 256 332
Unrealized loss/(gain) on loans held for sale ..................... 13 (60) 85
All other ......................................................... 1,086 1,051 867
-------- -------- --------
$ 16,382 $ 15,651 $ 15,535
======== ======== ========
INCOME TAXES
In 1996, income taxes amounted to $3.5 million as compared to $3.3
million and $3.1 million for 1995 and 1994, respectively. The effective tax rate
in 1996 was 35.0% as compared to 34.4% and 35.2% for 1995 and 1994,
respectively. Detailed information on income taxes is shown in Notes 1 and 15 to
the Consolidated Financial Statements.
NEW PRONOUNCEMENTS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"). SFAS No. 125 establishes accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial components approach that focuses on
control. Under this approach, an entity, subsequent to a transfer of financial
assets, must recognize the financial and servicing assets it controls and the
liabilities it has incurred, derecognize financial assets when control has been
surrendered, and derecognize liabilities when extinguished. Standards for
distinguishing transfers of financial assets that are sales from those that are
secured borrowings are provided in SFAS No. 125. A transfer not meeting the
criteria for a sale must be accounted for as a secured borrowing with pledge of
collateral.
SFAS No. 125 requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It additionally requires that servicing
assets and other retained interests in transferred assets be measured by
allocating the previous carrying amount between the assets sold, if any, and
retained interests, if any, based on their relative fair values at the date of
transfer. Servicing assets and liabilities must be subsequently measured by
amortization in proportion to and over the period of estimated net servicing
income or loss and assessed for asset impairment, or increased obligation, based
on their fair value.
SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively. Earlier or retroactive application is not
permitted. The Company is currently reviewing the impact of the implementation
of SFAS No. 125 on its consolidated financial statements.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125." SFAS No. 127
amends SFAS No. 125 by deferring for one year the effective date of paragraph 15
of SFAS No. 125 addressing secured borrowings and collateral, and for repurchase
agreement, dollar roll, security lending and similar transactions, of paragraphs
9 through 12 and 237(b) of SFAS No. 125.
EFFECTS OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than do general levels of inflation. Interest rates do not
necessarily move in the same magnitude as the prices of goods and services.
LOAN PORTFOLIO
Despite a surge in competition during 1996, the Company experienced
strong growth in its loan portfolio. At December 31, 1996, total loans amounted
to $351.8 million, up $40.6 million or 13.1% over the previous year. Promotional
campaigns in conjunction with competitive loan rates and focused sales efforts
were instrumental to the $18.7 million increase in the home equity loan
portfolio. A team-sales approach implemented during 1996 helped meet the demands
of our business customers and contributed to the $9.8 million and $15.3 million
increases in commercial and commercial mortgage loans, respectively.
In 1995, total loans increased $20.5 million from the 1994 level. The
increase was largely the result of promotional campaigns and competitive loan
rates as well as the ability of the Company to identify and meet the needs of
its business customers.
Commercial real estate mortgage loans amounted to $112.2 million at
December 31, 1996, and represented 31.9% of total loans compared to $96.9
million or 31.2% of all loans at the end of 1995. These loans are secured
primarily by first priority mortgage liens on owner-occupied commercial
properties. While approximately 84% of all loans are collateralized by real
estate located in northern New Jersey, the Company does not have any
concentration of loans in any single industry classified under the Standard
Industrial Classification Code which exceeds 4% of its total loans.
Table 8
- --------------------------------------------------------------------------------
LOAN PORTFOLIO
at December 31,
- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------- -------- -------- --------- --------
AMOUNTS OF LOANS BY TYPE (in thousands)
Commercial and financial ...................... $51,908 $42,106 $36,512 $35,380 $39,107
Real estate-construction ...................... 3,414 1,484 1,917 207 993
Real estate-mortgage
1-4 family residential
First liens ............................. 40,426 42,088 43,229 55,982 54,559
Junior liens ............................ 18,254 20,919 25,266 38,771 47,349
Available for sale ...................... 1,195 1,106 1,086 15,751 11,392
Home equity ............................. 119,876 101,133 88,147 50,197 59,513
Commercial ................................. 112,233 96,910 87,728 60,771 44,692
Installment
Credit cards and related plans ............. 2,666 2,902 3,314 4,039 4,311
Other ...................................... 1,821 2,461 2,757 3,918 4,166
Lease financing ............................... -- 55 698 1,976 3,132
------- -------- -------- -------- --------
TOTAL .............................. $351,793 $311,164 $290,654 $266,992 $269,214
======== ======== ======== ======== ========
PERCENT OF LOANS BY TYPE
Commercial and financial ...................... 14.8% 13.5% 12.6% 13.2% 14.4%
Real estate-construction ...................... 1.0 0.5 0.7 0.1 0.4
Real estate-mortgage
1-4 family residential
First liens ............................. 11.5 13.5 14.9 21.0 20.3
Junior liens ............................ 5.2 6.7 8.7 14.5 17.6
Available for sale ...................... 0.3 0.4 0.4 5.9 4.2
Home equity ............................. 34.1 32.5 30.3 18.8 22.1
Commercial ................................. 31.9 31.2 30.2 22.8 16.6
Installment
Credit cards and related plans ............. 0.7 0.9 1.1 1.5 1.6
Other ...................................... 0.5 0.8 0.9 1.5 1.6
Lease financing ............................... -- -- 0.2 0.7 1.2
-------- ------- ------- ------ -------
TOTAL .............................. 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======= ======== ======= =======
Table 8a
The following table sets forth the maturity distribution of the Company's
loan portfolio as of the December 31, 1996. 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 ........................... $13,430 $36,681 $ 1,797 $51,908
Construction ....................................... 3,414 -- -- 3,414
------- ------- ------- -------
Total .................................. $16,844 $36,681 $ 1,797 $55,322
======= ======= ======= ======
Table 8b
The following table sets forth, as of December 31, 1996, 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 ................................................. $ 8,385 $ 399
Variable interest rate .............................................. 28,296 1,398
------- -------
Total ................................................... $36,681 $ 1,797
======= =======
LOAN QUALITY
The lending activities of the Company are guided by the basic lending
policy established by the Company's Board of Directors. Loans must meet the
tests of a prudent loan, which include criteria regarding the character,
capacity and capital of the borrower, collateral provided for the loan and
prevailing economic conditions. The Company obtains an independent appraisal of
real property, within regulatory guidelines, when it is considered the primary
collateral for a loan.
The Company employs a full-time loan review officer who evaluates the
credit risk for substantially all large commercial loans. This review process is
intended to identify adverse developments in individual credits, regardless of
whether such credits are also included on the watchlist discussed below and
whether or not the loans are delinquent. The loan review officer reports
directly to the President of the Company.
Management maintains a "watchlist" system under which credit officers
are required to provide early warning of possible deteriorations in loans. These
loans may not be delinquent currently, but may present indications of financial
weakness, such as deteriorating financial ratios of the borrowers, or other
concerns at an early stage to allow early implementation of responsive credit
strategies.
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, restructured loans
and foreclosed real estate. Foreclosed real estate, representing real estate
collateral acquired by legal foreclosure procedures, is valued using independent
appraisals and the Company's policy is to review such appraisals annually. The
Company intends to dispose of each property at or near its current valuation.
However, there can be no assurance that disposals will be made as soon as
anticipated or at expected values.
Table 9 presents the detail of nonperforming assets and the aggregate
of loans whose principal and/or interest has not been paid according to
contractual terms. (See discussion of loan losses on page 17.) Other than the
loans included in the table, there were no material potential problem loans,
either individually or in the aggregate, at December 31, 1996.
Table 9
- --------------------------------------------------------------------------------
LOAN DELINQUENCIES AND NONPERFORMING ASSETS
at December 31,
- --------------------------------------------------------------------------------
(dollars in thousands)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Loans delinquent and accruing interest
Loans past due 30-89 days ................................... $ 772 $ 853 $ 805 $ 600 $1,838
Loans past due 90 days or more .............................. 25 -- -- 157 395
------ ------ ------ ------ ------
Total loans delinquent and accruing interest ............ $ 797 $ 853 $ 805 $ 757 $2,233
====== ====== ====== ====== ======
Nonaccrual loans .................................................. $2,084 $2,511 $6,177 $3,914 $5,303
Foreclosed real estate ............................................ 610 1,213 880 1,342 1,655
Restructured loans ................................................ 725 1,465 522 -- 285
------ ------ ------ ------ ------
Total nonperforming assets .............................. $3,419 $5,189 $7,579 $5,256 $7,243
====== ====== ====== ====== ======
Total nonperforming assets and loans
past due 90 days or more ............................ $3,444 $5,189 $7,579 $5,413 $7,638
====== ====== ====== ====== ======
Nonaccrual loans to total loans ................................... 0.59% 0.81% 2.13% 1.47% 1.97%
Nonperforming assets to total loans and
foreclosed real estate ...................................... 0.97 1.66 2.60 1.96 2.67
Nonperforming assets to total assets .............................. 0.68 1.06 1.58 1.25 1.79
Nonaccrual loans and loans past due 90 days
or more to total loans ...................................... 0.60 0.81 2.13 1.52 2.12
Nonperforming assets and loans past due 90 days
or more to total loans and foreclosed real estate ........... 0.98 1.66 2.60 2.02 2.82
Nonperforming assets and loans past due 90 days
or more to total assets ..................................... 0.68 1.06 1.58 1.28 1.89
SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE
The Company identifies as "securities available for sale" securities
used as part of its asset and liability management strategy, or securities that
may be sold in response to, among other things, changes in interest rates and
prepayment risk. See Notes 1 and 4 of Notes to Consolidated Financial Statements
for additional information concerning securities.
Table 10 presents a summary of the contractual maturities and weighted
average (adjusted to a taxable equivalent basis) of securities held to maturity
and securities available for sale.
Table 10
- --------------------------------------------------------------------------------
SECURITIES
at December 31, 1996
- --------------------------------------------------------------------------------
(dollars in thousands)
After 1 After 5 Weighted
Within But Within But Within After Average
1 Year 5 Years 10 Years 10 Years Total Yield
-------- -------- -------- -------- --------- ------
Securities held to maturity at amortized cost
Obligations of U.S. Treasury .......................... $29,116 $14,401 -- -- $ 43,517 6.28 %
Obligations of U.S. agencies .......................... -- 5,992 $4,090 $ 995 11,077 6.70
Obligations of states & political subdivisions ........ 3,471 -- -- 110 3,581 5.79
Other debt securities ................................. -- 50 100 5,051 5,201 6.22
-------- -------- -------- -------- --------
32,587 20,443 4,190 6,156 63,376
-------- -------- -------- -------- --------
Securities available for sale at market value
Obligations of U.S. Treasury .......................... -- 31,847 -- -- 31,847 6.37
Obligations of U.S. agencies .......................... -- 3,995 9,553 3,885 17,433 6.62
Other debt securities ................................. -- -- -- 2,009 2,009 7.02
-------- -------- -------- -------- --------
-- 35,842 9,553 5,894 51,289
-------- -------- -------- -------- --------
Total ............................................ $32,587 $56,285 $13,743 $12,050 $114,665
======== ======== ======== ======== =========
Weighted average yield .................................... 6.33% 6.33% 6.63% 6.55% 6.39%
The weighted average yields above were calculated using an historical cost basis
for held to maturity securities and a market value basis for available for sale
securities. Had the historical cost basis been used for available for sale
securities, the weighted average yield for the after one but within five years
category would have changed from 6.33% to 6.32% and the weighted average yield
for the obligations of U.S. Treasury (AFS) category would have changed from
6.37% to 6.35%. All other available for sale categories did not change as a
result of applying historical cost basis to the table.
DEPOSITS
The Company traditionally relies on its deposit base to fund its
credit needs. Core deposits, which include noninterest bearing demand deposits,
interest bearing demand accounts, savings deposits, money market accounts and
time deposits in amounts under $100,000, represented 96.0% of total deposits at
December 31, 1996, and 97.3% at December 31, 1995.
Total deposits amounted to $430 million at December 31, 1996, a
decrease of $6.4 million or 1.5% from year end 1995. The decrease was
attributable to the departure of $9.7 million of deposits in connection with the
sale of the Clifton Branch (See discussion pertaining to noninterest income on
page 19). In addition, approximately $9.4 million of high cost certificates of
deposits were not renewed as part of a planned business strategy. A new branch,
opened in June 1996 with deposit balances of approximately $7.0 million at
December 31, 1996, offset some of the planned outflows discussed above.
Table 11
- --------------------------------------------------------------------------------
DEPOSIT SUMMARY AT DECEMBER 31,
- --------------------------------------------------------------------------------
(dollars in thousands)
1996 1995 1994 1993 1992
--------------- ----------------- -------------- ---------------- --------------
Noninterest bearing demand .......... $ 76,340 17.8% $ 69,213 15.8% $ 66,435 15.7% $ 59,170 15.3% $ 49,908 13.5%
Interest bearing demand ............. 117,461 27.3 110,813 25.4 101,873 24.0 92,115 23.9 87,253 23.7
Money market ........................ 39,815 9.3 38,716 8.9 37,816 8.9 43,483 11.3 37,923 10.3
Savings ............................. 66,778 15.5 71,170 16.3 75,906 17.9 70,062 18.2 63,168 17.1
Time deposits less than $100,000 ... 112,466 26.1 134,866 30.9 134,097 31.6 110,457 28.7 121,295 32.8
Time deposits greater than $100,000 . 17,153 4.0 11,674 2.7 8,043 1.9 10,143 2.6 9,780 2.6
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
$430,013 100.0% $436,452 100.0% $424,170 100.0% $385,430 100.0% $369,327 100.0%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
* The following table shows the time remaining to maturity of time certificates
of deposit of $100,000 or more as of December 31, 1996 (in thousands)
Three months or less ......................................... $10,209
Over three months through six months ......................... 3,439
Over six months through twelve months ........................ 2,288
Over twelve months ........................................... 1,217
-------
$17,153
=======
INTEREST RATE SENSITIVITY
FLUCTUATIONS IN MARKET INTEREST RATES CAN HAVE A SIGNIFICANT INFLUENCE
ON NET INTEREST INCOME. THEREFORE, MANAGING THE COMPANY'S INTEREST RATE
SENSITIVITY IS A PRIMARY OBJECTIVE OF THE COMPANY'S SENIOR MANAGEMENT. THE
COMPANY'S ASSET/LIABILITY COMMITTEE ("ALCO") IS RESPONSIBLE FOR MANAGING THE
EXPOSURE TO CHANGES IN MARKET INTEREST RATES. ALCO ATTEMPTS TO MAINTAIN STABLE
NET INTEREST MARGINS BY PERIODICALLY EVALUATING THE RELATIONSHIP BETWEEN
INTEREST-RATE SENSITIVE ASSETS AND INTEREST-RATE SENSITIVE LIABILITIES. THE
EVALUATION ATTEMPTS TO DETERMINE THE IMPACT ON NET INTEREST MARGIN FROM CURRENT
AND PROSPECTIVE CHANGES IN MARKET INTEREST RATES.
INTEREST RATE SENSITIVITY IS DETERMINED BY ANALYZING THE DIFFERENCE
BETWEEN THE AMOUNT OF INTEREST EARNING ASSETS MATURING OR REPRICING WITHIN A
SPECIFIC TIME PERIOD AND THE AMOUNT OF INTEREST BEARING LIABILITIES MATURING OR
REPRICING WITHIN THAT SAME PERIOD OF TIME. THIS DIFFERENCE, OR "SENSITIVITY
GAP," PROVIDES AN INDICATION OF THE EXTENT TO WHICH THE COMPANY'S NET INTEREST
INCOME MAY BE AFFECTED BY FUTURE CHANGES IN MARKET INTEREST RATES. THE
CUMULATIVE GAP POSITION AS A PERCENTAGE OF TOTAL ASSETS PROVIDES ONE RELATIVE
MEASURE OF THE COMPANY'S INTEREST RATE EXPOSURE.
The cumulative gap between the Company's interest-rate sensitive
assets and its interest-rate sensitive liabilities repricing within a one-year
period was (12.22%) at December 31, 1996. Since the cumulative gap was negative,
the Company has a "negative gap" position which theoretically will cause its
assets to reprice more slowly than its deposit liabilities. In a declining
interest rate environment, interest costs may be expected to fall faster than
the interest received on earning assets, thus increasing the net interest
spread. If interest rates increase, a negative gap means that the interest
received on earning assets may be expected to increase more slowly than the
interest paid on the Company's liabilities therefore decreasing the net interest
spread.
Certain shortcomings are inherent in the method of analysis presented
in Table 12 . Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. The rates on certain types of assets and
liabilities may fluctuate in advance of changes in market rates, while rates on
other types of assets and liabilities may lag behind changes in market rates. In
the event of a change in interest rates, prepayment and early withdrawal levels
could deviate significantly from those assumed in calculating the table. The
ability of borrowers to service their debt may decrease in the event of an
interest rate increase. Management considers these factors when reviewing its
gap position and establishing its ongoing asset/liability strategy.
Table 12
- --------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY ANALYSIS
at December 31, 1996
- --------------------------------------------------------------------------------
(dollars in thousands)
NON-
3 6 6 MOS TO 1 TO 3 3 TO 5 OVER INTEREST
SUBJECT TO RATE CHANGE WITHIN MONTHS MONTHS 1 YEAR YEARS YEARS 5 YEARS SENSITIVE TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Net loans ....................... $ 109,837 $ 20,152 18,210 $ 64,953 $ 49,089 $ 87,395 $ (1,496) $ 348,140
Investment securities ........... 71,655 8,031 8,150 14,429 6,017 10,346 -- 118,628
Cash and amounts due from banks . -- -- -- -- -- -- 24,322 24,322
Other noninterest earning assets. -- -- -- -- -- -- 13,599 13,599
--------- --------- --------- --------- --------- --------- --------- ---------
Total assets ................ 181,492 28,183 26,360 79,382 55,106 97,741 36,425 504,689
--------- --------- --------- --------- --------- --------- --------- ---------
Liabilities and stockholders' equity
Demand deposits ................. 117,461 -- -- -- -- -- 76,340 193,801
Savings deposits* ............... 13,356 -- -- -- 53,422 -- -- 66,778
Fixed maturity certificates of
deposits ..................... 34,756 28,112 37,223 12,745 6,038 26 -- 118,900
Variable rate certificates of
deposits ..................... 10,719 -- -- -- -- -- -- 10,719
Money market accounts ........... 39,815 -- -- -- -- -- -- 39,815
Securities sold under agreements
to repurchase ................ 1,000 -- 10,050 -- -- -- -- 11,050
Short-term borrowings ........... 5,200 -- -- -- -- -- -- 5,200
Long-term borrowings ............ -- -- -- 9,983 -- -- -- 9,983
Other liabilities ............... -- -- -- -- -- -- 4,082 4,082
Stockholders' equity ............ -- -- -- -- -- -- 44,361 44,361
------- ------- ------- ------ ------- ------ ------- -------
Total liabilities and
stockholders' equity ...... 222,307 28,112 47,273 22,728 59,460 26 124,783 $ 504,689
------- ------- ------- ------ ------- ------ ------- ========
GAP ................................. $ (40,815) 71 $(20,913) $56,654 $(4,354) $97,715 $ (88,358)
======== ======= ========= ======== ======== ========= =========
GAP to total assets ................. (8.09)% 0.01% (4.14)% 11.23% (0.86)% 19.36% (17.51)%
Cumulative GAP ...................... $ (40,815) (40,744) (61,657) $(5,003) $(9,357) $88,358
========= ======= ========= ======== ======== ========
Cumulative GAP to total assets ...... (8.09)% (8.08)% (12.22)% (0.99)% (1.85)% 17.51%
*Based on past experience with these accounts, management believes that these
balances are not interest rate sensitive. Accordingly, 80% of such balances has
been allocated to the "3 to 5 years" category. However, there is no assurance
that these balances will actually remain insensitive to interest rate changes in
the future.
LIQUIDITY
A FUNDAMENTAL COMPONENT OF THE COMPANY'S BUSINESS STRATEGY IS TO
MANAGE LIQUIDITY TO ENSURE THE AVAILABILITY OF SUFFICIENT RESOURCES TO MEET ALL
FINANCIAL OBLIGATIONS AND FINANCE PROSPECTIVE BUSINESS OPPORTUNITIES. LIQUIDITY
MANAGEMENT IS CRITICAL TO THE STABILITY OF THE COMPANY. LIQUIDITY LEVELS OVER
ANY GIVEN PERIOD OF TIME ARE A PRODUCT OF THE COMPANY'S OPERATING, FINANCING AND
INVESTING ACTIVITIES. THE EXTENT OF SUCH ACTIVITIES ARE OFTEN SHAPED BY SUCH
EXTERNAL FACTORS AS COMPETITION FOR DEPOSITS AND LOAN DEMAND.
Traditionally, 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, 1996, total deposits amounted to $430
million, a decrease of $6.4 million or 1.5% over the prior comparable year. In
1996, the Company supplemented the more traditional funding sources with
borrowings from the Federal Home Loan Bank of New York ("FHLB") and with
securities sold under agreements to repurchase ("REPOS"). At December 31, 1996,
advances from the FHLB and REPOS amounted to $15.2 million and $11.1 million,
respectively, as compared to $9.2 million and $1.7 million, respectively, at
December 31, 1995.
In 1996, loan production continued to be the Company's principal
investing activity. Net loans at December 31, 1996 amounted to $348.1 million,
compared to $307.5 million at the end of 1995, an increase of $40.6 million or
13.2%.
The Company's most liquid assets are cash and due from banks and
federal funds sold. At December 31, 1996, the total of such assets amounted to
$24.3 million or 4.8% of total assets, compared to $25.2 million or 5.1% of
total assets at year-end 1995.
Another significant liquidity source is the Company's
available-for-sale ("AFS") securities. At December 31, 1996, AFS securities
amounted to $55.3 million or 46.6% of total securities, compared to $67.5
million or 47.5% of total securities at year-end 1995.
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 $49.1 million line of credit available through its membership in the
Federal Home Loan Bank of New York.
Management believes that the Company's sources of funds are sufficient
to meet its funding requirements.
CAPITAL ADEQUACY
Stockholders' equity totaled $44.4 million and represents 8.8% of total
assets at December 31, 1996, compared to $40.2 million and 8.2% of total assets
at December 31, 1995. The $4.1 million increase was primarily attributable to
net income of $6.4 million less cash dividends of $2.1 million.
Guidelines issued by the Federal Reserve Board and the FDIC establish
capital adequacy guidelines for bank holding companies and state-chartered
non-member banks. The guidelines establish a risk-based capital framework
consisting of (1) a definition of capital consisting of Tier 1 capital, which
includes common shareholders' equity less certain intangibles and a
supplementary component called Tier II, which includes a portion of the
allowance for loan losses, and (2) a system for assigning assets and
off-balance-sheet items to one of the four weighted risk categories, with higher
levels of capital being required for the categories perceived as representing
the greater risks. An institution's risk-based capital ratio is determined by
dividing its qualifying capital by its risk-weighted assets. The guidelines make
regulatory capital requirements more sensitive to differences in risk profiles
among banking institutions, take off-balance-sheet items into account in
assessing capital adequacy, and minimize the disincentive to holding liquid,
low-risk assets. Banking organizations are generally expected to operate with
capital positions well above the minimum rates. Institutions with higher levels
of risk, or which experience or anticipate significant growth, are also expected
to operate well above minimum capital standards.
These guidelines focus principally on broad categories of credit risk,
although the framework for assigning assets and off-balance sheet items to risk
categories does incorporate elements of transfer risk. The risk-based capital
ratio does not, however, incorporate other factors that may affect a company's
financial condition, such as overall interest rate exposure, liquidity, funding
and market risks, the quality and level of earnings, investment or loan
concentrations, the quality of loans and investments, the effectiveness of loan
and investment policies and management's ability to monitor and control
financial and operating risks.
In addition to the risk-based guidelines discussed above, the Federal
Reserve Board and the FDIC require that a bank holding company and bank which
meet the regulators' highest performance and operation standards and which are
not contemplating or experiencing significant growth maintain a minimum leverage
ratio (Tier I capital as a percent of quarterly average adjusted assets) of 3%.
For those financial institutions with higher levels of risk or that are
experiencing or anticipating significant growth, the minimum leverage ratio will
be increased.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
a. Directors
The information contained in the Company's 1996 Proxy Statement is
incorporated herein by reference in response to this item.
b. Executive Officers
Information required by this item is contained in Part I of this Form
10-K in the section entitled "Executive Officers."
c. Compliance with Section 16(a)
Information contained in the section entitled "Section 16 Compliance"
of the Company's 1996 Proxy Statement is incorporated herein by reference in
response to this item.
ITEM 11. EXECUTIVE COMPENSATION
Information contained in the section entitled "Executive Compensation"
of the Company's 1996 Proxy Statement is incorporated herein by reference to
this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the section entitled "Amount and Nature
of Beneficial Ownership" of the Company's 1996 Proxy Statement is incorporated
herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the section entitled "Transactions with
management" of the Company's 1996 Proxy Statement is incorporated herein by
reference in response to this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON FORM 8-K
a. Financial Statements and Schedules
The financial statements and schedules listed in the accompanying
Index to Consolidated Financial Statements and Schedules are filed
as part of this Annual Report on Form 10-K
b. Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended December 31, 1996.
c. Exhibits
3.(a)Certificate of incorporation and amendments thereto
(incorporated herein by reference to Registration Statement
No.33-49840, exhibit 3 (a))
(b)By-laws (incorporated herein by reference to
Registration Statement No. 33-49840, exhibit 3(b))
10. Material contracts
(a) Agreement for legal services between Andora, Palmisano
& Geaney and the Company dated April 27, 1996.
(b) Lease for Washington Township, N.J., Branch Office,
dated April 13, 1972 and amended December 21, 1972
(incorporated herein by reference to Registration
Statement No. 33-49840, exhibit 10(h)).
(c) Lease for Lodi, N.J., Branch Office, dated January 25,
1985 (incorporated herein by reference to Registration
Statement No. 33-49840, exhibit 10(i)).
(d) Lease for Elmwood Park, N.J., Retail Lending Processing
Center, dated June 22, 1992 and amended June 28, 1994,
(incorporated herein by reference to the Company's
Annual Report on Form 10-K filed with the Commission
for the year 1992).
(e) Amendment to lease for Elmwood Park, New Jersey, Retail
Lending Processing Center, dated June 28, 1994
(incorporated herein by reference to the Company's
Annual Report on Form 10-K filed with the Commission
for the year 1994).
(f) Executive Compensation Plans and Arrangements
(1) 1989 Stock Option Plan is incorporated herein by
reference to Registration Statement No. 33-49840,
exhibit 10(j).
(2) Management Incentive Plan is incorporated by reference
to Part III, Item 11, of the Company's definitive Proxy
Statement for its 1997 Annual Meeting of Stockholders
which will be filed with the Commission not later than
120 days after December 31, 1996
(3) Directors' Retirement Program (incorporated herein by
reference to the Company's Annual Report on Form 10-K
filed with the Commission for the year 1994).
(4) Executives' Supplemental Pension Plan (incorporated
herein by reference to the Company's Annual Report on
Form 10-K filed with the Commission for the year 1994).
(5) Deferred Compensation Plan for Robert N. Harris
(incorporated herein by reference to the Company's
Annual Report on Form 10-K filed with the Commission
for the year 1994).
11. Statement of Computation of Per Share Earnings
21. Subsidiaries of Registrant
23. Independent Auditors' Consent
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Interchange Financial Services Corporation
/s/Anthony Labozzetta
---------------------------------
Anthony Labozzetta,
Senior Vice President/Treasurer
March 27, 1997
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 27, 1997 James E. Healey March 27, 1997
Director Director
President and
Chief Executive Officer
/s/Anthony D. Andora /s/Anthony Labozzetta
- ---------------------------------- -----------------------------------------
Anthony D. Andora March 27, 1997 Anthony Labozzetta March 27, 1997
Director Senior Vice President and Treasurer
Chairman of the Board
/s/Donald L. Correll /s/Nicholas R. Marcalus
- ---------------------------------- -----------------------------------------
Donald L. Correll March 27, 1997 Nicholas R. Marcalus March 27, 1997
Director Director
/s/Anthony R. Cosia /s/Eleanore S. Nissley
- ---------------------------------- -----------------------------------------
Anthony R. Cosia March 27, 199 Eleanore S. Nissley March 27, 1997
Director Director
/s/John J. Eccleston /s/Jeremiah F. O'Connor
- ---------------------------------- -----------------------------------------
John J. Eccleston March 27, 1997 Jeremiah F. O'Connor March 27, 1997
Director Director
/s/David R. Ficca /s/Robert P. Rittereiser
- ---------------------------------- -----------------------------------------
David R. Ficca March 27, 1997 Robert P. Rittereiser March 27, 1997
Director Director
/s/Benjamin Rosenzweig
-----------------------------------------
Benjamin Rosenzweig March 27,1997
Director
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page No.
in Form 10-K
Financial Statements
Independent Auditors' Report relating to the Consolidated Financial
Statements and Notes thereto......................................... 36
Consolidated Balance Sheets at December 31, 1996 and 1995................. 37
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994..................................... 38
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994................. 39
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994..................................... 40
Notes to Consolidated Financial Statements................................ 42
Schedules
Schedules to the consolidated financial statements required by Article 9 of
Regulation S-X are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
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, 1996 and 1995 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, 1996. 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Parsippany, New Jersey
January 20, 1997
Interchange Financial Services Corporation
- -----------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31,
- -----------------------------------------------------------------------------------------------
(dollars in thousands)
1996 1995
-------- ---------
Assets
Cash and due from banks .................................................................... $ 24,322 $ 25,151
-------- --------
Securities held to maturity at amortized cost (estimated
market value of $63,619 and $75,611) .................................................. 63,376 74,688
-------- --------
Securities available for sale at estimated market value (amortized
cost of $54,871 and $66,604) .......................................................... 55,252 67,545
-------- --------
Loans ...................................................................................... 351,793 311,164
Less: Allowance for loan losses ........................................................... 3,653 3,647
-------- --------
Net loans .................................................................................. 348,140 307,517
-------- --------
Premises and equipment, net ................................................................ 5,151 5,510
Foreclosed real estate ..................................................................... 610 1,213
Accrued interest receivable and other assets ............................................... 7,838 9,833
-------- --------
Total assets ............................................................................... $504,689 $491,457
======== ========
Liabilities
Deposits
Noninterest bearing .................................................................... $ 76,340 $ 69,213
Interest bearing ....................................................................... 353,673 367,239
-------- --------
Total deposits ............................................................................. 430,013 436,452
Securities sold under agreements to repurchase ............................................. 11,050 1,704
Short-term borrowings ...................................................................... 5,200 9,200
Accrued interest payable and other liabilities ............................................. 4,082 3,860
Long-term borrowings ....................................................................... 9,983 --
-------- --------
Total liabilities .......................................................................... 460,328 451,216
-------- --------
Commitments and contingent liabilities
Stockholders' equity
Common stock, without par value; 5,000,000 shares authorized;
2,839,602 shares issued and outstanding in 1996
and 2,831,730 in 1995 .................................................................. 4,733 4,495
Capital surplus ............................................................................ 14,931 12,110
Retained earnings .......................................................................... 24,429 22,990
Unrealized gain-securities available for sale, net of taxes ................................ 268 646
-------- --------
Total stockholders' equity ................................................................. 44,361 40,241
-------- --------
Total liabilities and stockholders' equity ................................................. $504,689 $491,457
======== ========
- -----------------------------------------------------------------------------------------------
See notes to consolidated financial statements
Interchange Financial Services Corporation
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
- --------------------------------------------------------------------------------
(in thousands except per share data)
1996 1995 1994
----------- ----------- -----------
Interest income
Interest and fees on loans .................................................. $ 29,132 $ 27,427 $ 23,537
Interest on federal funds sold .............................................. 407 374 412
Interest and dividends on securities
Taxable interest income .................................................. 7,465 8,969 8,469
Interest income exempt from federal income taxes ......................... 122 56 59
Dividends ................................................................ 158 169 135
-------- -------- --------
Total interest income ....................................................... 37,284 36,995 32,612
-------- -------- --------
Interest expense
Interest on deposits ........................................................ 14,041 14,513 10,635
Interest on securities sold under agreements to repurchase .................. 267 12 17
Interest on short-term borrowings ........................................... 246 494 272
Interest on long-term borrowings ............................................ 45 131 82
-------- -------- --------
Total interest expense ...................................................... 14,599 15,150 11,006
-------- -------- --------
Net interest income ......................................................... 22,685 21,845 21,606
Provision for loan losses ................................................... 700 1,200 944
-------- -------- --------
Net interest income after provision
for loan losses ......................................................... 21,985 20,645 20,662
-------- -------- --------
Noninterest income
Service fees on deposit accounts ............................................ 1,579 1,474 1,496
Net gain/(loss) on sale of securities ....................................... 242 15 (5)
Net gain/(loss) on sale of loans available for sale ......................... -- 22 (14)
Net gain on sale of loan servicing rights ................................... -- 828 --
Net gain on sale of branch .................................................. 455 -- --
Accretion of discount in connection with acquisition ........................ 511 760 760
Other ....................................................................... 1,485 1,480 1,334
-------- -------- --------
Total noninterest income .................................................... 4,272 4,579 3,571
-------- -------- --------
Noninterest expenses
Salaries and benefits ....................................................... 7,643 7,254 6,879
Net occupancy ............................................................... 2,200 2,080 1,887
Furniture and equipment ..................................................... 720 697 653
Advertising and promotion ................................................... 773 673 701
Federal Deposit Insurance Corporation assessment ............................ 160 503 887
Foreclosed real estate expense .............................................. 252 54 102
Other ....................................................................... 4,634 4,390 4,426
-------- -------- --------
Total noninterest expenses .................................................. 16,382 15,651 15,535
-------- -------- --------
Income before income taxes .................................................. 9,875 9,573 8,698
Income taxes ................................................................ 3,456 3,293 3,062
-------- -------- --------
Net income .................................................................. $ 6,419 $ 6,280 $ 5,636
======== ======== ========
Net income per common share ................................................. $ 2.26 $ 2.19 $ 1.95
======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
Interchange Financial Services Corporation
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(in thousands except share data)
Unrealized
Gain/(Loss)
on Securities
Preferred Common Capital Retained Available Treasury
Stock Stock Surplus Earnings for Sale Stock Total
-------- -------- --------- ---------- -------- -------- ----------
Balance at January 1, 1994 ........ $ 5,000 $ 4,495 $ 11,333 $15,100 $(2,623) $33,305
Net income ........................ 5,636 5,636
Dividends on common stock
at $0.67 per share ............. (1,887) (1,887)
Dividends on preferred stock ...... (112) (112)
Unrealized loss on securities
available for sale,
net of income taxes ............ $(1,813) (1,813)
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1994 ...... 5,000 4,495 11,333 18,737 (1,813) (2,623) 35,129
Net income ........................ 6,280 6,280
Dividends on common stock
at $0.69 per share ............. (1,942) (1,942)
Dividends on preferred stock ...... (85) (85)
Purchase of 32,000 preferred shares (1,600) (1,600)
Retirement of 100,000 shares of
preferred stock ................ (5,000) 777 4,223 --
Increase in market valuation-
securities available for sale,
net of income taxes ............ 2,459 2,459
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1995 ...... -- 4,495 12,110 22,990 646 -- 40,241
Net income ........................ 6,419 6,419
Dividends on common stock
at $0.73 per share ............. (2,077) (2,077)
5% common stock dividend .......... 225 2,678 (2,903) --
Fractional shares of 5% common
stock dividend ................. (5) (5)
Issued 7,498 shares of common
stock in connection with
incentive plan ................. 13 148 161
Decrease in market valuation-
securities available for sale,
net of tax effect .............. (378) (378)
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1996 ...... $ -- $ 4,733 $ 14,931 $ 24,429 $ 268 $ -- $44,361
======== ======== ======== ======== ======== ======== ========
See notes to Consolidated Financial Statements
INTERCHANGE FINANCIAL SERVICES CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
- --------------------------------------------------------------------------------
(in thousands)
1996 1995 1994
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................... $ 6,419 $ 6,280 $ 5,636
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization of fixed assets .......................... 984 859 831
Amortization of securities premiums .................................... 1,030 1,452 1,543
Accretion of securities discounts ...................................... (65) (53) (11)
Amortization of premium in connection with acquisitions ................ 444 444 403
Accretion of discount in connection with acquisition ................... (511) (760) (760)
Provision for loan losses .............................................. 700 1,200 944
Net loss (gain) on sale of foreclosed real estate ...................... 87 (127) (209)
Net (gain) loss on sale of securities .................................. (242) (15) 5
Net (gain) loss on sale of loans available for sale .................... -- (22) 14
Reduction in carrying value of foreclosed real estate .................. 43 -- 122
Decrease (increase) in carrying value of loans available for sale ...... 13 (80) 85
Loss on disposal of fixed assets ....................................... 20 26 --
(Increase) decrease in operating assets
Net origination of loans available for sale ............................ (102) (755) (15,451)
Proceeds from sale of loans available for sale ......................... -- 837 2,129
Premium in connection with acquisition ................................. -- -- (1,724)
Accrued interest receivable ............................................ 404 144 (917)
Deferred income taxes .................................................. 161 (134) (76)
Other .................................................................. 1,148 694 (1,898)
Increase (decrease) in operating liabilities
Accrued interest payable ............................................... 119 162 72
Other .................................................................. 103 387 619
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ................. 10,755 10,539 (8,643)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
(Payments for) proceeds from
Net origination of loans ............................................... (40,117) (20,470) 1,377
Purchase of loans ...................................................... (2,150) (1,251) (42,244)
Sale of loans .......................................................... 1,365 -- 1,809
Purchase of securities available for sale .............................. (27,513) (5,905) (1,895)
Maturities of securities available for sale ............................ 885 2,396 2,907
Sale of securities available for sale .................................. 38,349 2,484 305
Sale of securities held to maturity .................................... 6,008 -- --
Purchase of securities held to maturity ................................ (19,515) (3,999) (23,618)
Maturities of securities held to maturity .............................. 24,084 14,000 16,000
Sale of foreclosed real estate ......................................... 644 678 1,136
Foreclosed real estate ................................................. 8 (285) (106)
Purchase of fixed assets ............................................... (601) (1,862) (667)
Sale of fixed assets ................................................... -- 4 --
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES ............................... (18,553) (14,210) (44,996)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments for)
Deposits in excess of withdrawals ...................................... 3,263 12,282 12,272
Securities sold under agreements to repurchase ......................... 16,828 1,704 295
Other borrowings ....................................................... 11,000 4,200 18,000
Retirement on other borrowings ......................................... (5,017) -- --
Retirement of securities sold under agreement to repurchase and
other borrowings .................................................... (7,482) (11,702) (2,000)
Sale of deposit accounts ............................................... (9,702) -- --
Acquisition of deposit accounts ........................................ -- -- 26,468
Dividends .............................................................. (2,077) (2,027) (1,999)
Treasury stock ......................................................... -- (1,600) --
Common stock issued .................................................... 156 -- --
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........................... 6,969 2,857 53,036
-------- -------- --------
Decrease in cash and cash equivalents ........................................... (829) (814) (603)
Cash and cash equivalents at beginning of year .................................. 25,151 25,965 26,568
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ........................................ $ 24,322 $ 25,151 $ 25,965
======== ======== ========
Supplemental disclosure of cash flow information
Cash paid for:
Income taxes ........................................................... $ 3,410 $ 3,346 $ 3,527
Interest ............................................................... 14,480 14,988 10,934
Supplemental non-cash investing activities
Loans transferred to foreclosed real estate ............................ 179 599 481
Securitization of loans reclassified to securities available for sale .. -- -- 27,888
Decrease (increase)-market valuation of securities available for sale 559 (3,812) 2,810
Amortization of valuation allowance-securities transferred from
available for sale to held to maturity .............................. 25 -- --
Securities transferred from available for sale to held to maturity ..... -- 5,466 --
Securities transferred from held to maturity to available for sale ..... -- 40,888 --
- --------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. The following is a description of the Company's business and its
significant accounting and reporting policies:
NATURE OF BUSINESS AND SIGNIFICANT ESTIMATES
Interchange Financial Services Corporation (the "Company"), a New
Jersey business corporation, is a holding company whose principal subsidiary is
Interchange State Bank (the "Bank"). The Bank is principally engaged in the
business of attracting commercial and retail deposits and investing those funds
into commercial business and commercial mortgage loans as well as residential
mortgage and consumer loans. When demand for loans is low, the Bank invests in
debt securities. Currently, the Bank conducts community banking operations in
the northeast region of New Jersey (primarily Bergen county).
The Company uses certain accounting estimates in the preparation of its
consolidated financial statements. As a result, actual results could differ from
those estimates.
The most significant estimate pertains to the allowance for loan
losses. The borrowers' ability to meet contractual obligations and collateral
value are the most significant assumptions used to arrive at the estimate. The
risks associated with such estimates arise when unforeseen conditions affect the
borrowers ability to meet the contractual obligations of the loan and result in
a decline in the value of the supporting collateral. Such unforeseen changes may
have an adverse effect on the financial position of the Company.
Additionally, the Company is exposed to significant changes in market
interest rates. Such changes could have an adverse effect on the earning
capacity and financial position of the Company, particularly, in those
situations in which a mismatch exists between the maturities or repricing of
assets and supporting liabilities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Significant intercompany accounts and transactions
have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold.
SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE
Debt securities which the Company has the positive intent and ability
to hold until maturity are classified as held to maturity ("HTM") and are
carried at cost, adjusted for the amortization of premiums and accretion of
discounts on a level-yield method over the contractual maturity of the
instruments. Investment securities to be held for indefinite periods of time and
not intended to be held to maturity are classified as available for sale ("AFS")
and are carried at market value. The unrealized gains and losses on these
securities are reported, net of taxes, as a separate component of stockholders'
equity. Management determines the appropriate classification of securities at
the time of purchase.
Securities classified as AFS include securities used as part of the
Company's asset and liability management strategy, or securities that may be
sold in response to, among other things, changes in interest rates and
prepayment risk. Gains and losses from the sale of these securities are
determined using the specific identification method.
LOANS
Loans are stated at principal amounts outstanding, net of unearned
discount. Interest income is accrued and credited at the applicable interest
rates. Origination fees and certain direct origination costs have been deferred
and are recognized over the life of the applicable loan as an adjustment to the
yield. At December 31, 1996, approximately 84% of all loans are collateralized
by real estate located in northern New Jersey, the Company's market area.
Loans are placed on nonaccrual status when, in the opinion of
management, there is doubt as to the collectibility of interest or principal, or
when principal or interest payments are in arrears 90 days or more, or if
management considers collection of such amounts to be doubtful. Amounts accrued
are evaluated for collectibility. Interest is subsequently recognized on
nonaccrual loans only to the extent that cash is received and the ultimate
repayment of principal is not in doubt. Loans are returned to accrual status
when management deems that collection of principal and interest is reasonable
and probable.
Mortgage loans available for sale are carried at lower of aggregate
cost or market value.
In July 1991, the Bank acquired the assets and liabilities of a failed
institution from the Federal Deposit Insurance Corporation (the "FDIC") which
was accounted for using the purchase method of accounting. Consideration
received from the FDIC was assigned to the fair value of the loans acquired, the
allowance for loan losses and acquisition costs. Excess consideration was
accreted into income over a five-year period which ended in August 1996.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("SFAS No. 114"), as amended by Statement of Financial Accounting Standards No.
118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures" ("SFAS No. 118"). Under SFAS No. 114, a loan is impaired when,
based on current information and events, it is probable that a creditor will be
unable to collect all amounts due according to contractual terms of the loan
agreement. The collection of all amounts due according to contractual terms
means that both the contractual interest and principal payments of a loan will
be collected as scheduled in the loan agreement. SFAS No. 114 requires that
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral. The fair value of collateral, as reduced by costs to sell on a
discounted basis, is utilized if a loan is collateral dependent or foreclosure
is probable. All commercial and commercial mortgage loans are evaluated for
impairment under SFAS No. 114. All nonaccrual commercial and commercial mortgage
loans are considered impaired. The adoption of these rules did not have an
impact on the Company's financial condition and results of operations.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through charges to income.
Loan losses are charged against the allowance for loan losses when management
believes that the collectibility of principal is unlikely. If, as a result of
loans charged off or increases in the size or risk characteristics of the loan
portfolio, the allowance is below the level considered by management to be
adequate to absorb future loan losses on existing loans, the provision for loan
losses is increased to the level considered necessary to provide an adequate
allowance. The allowance is an amount that management believes will be adequate
to absorb possible losses on existing loans that may become uncollectible based
on evaluations of the collectibility of the loans. The evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans and
economic conditions that may affect the borrowers' ability to pay.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method. Premises and equipment are depreciated over the
estimated useful lives of the assets. Leasehold improvements are amortized over
the term of the lease, if shorter. Estimated lives are 30 to 40 years for
premises and 3 to 20 years for furniture and equipment. Expenditures for
maintenance and repairs are expensed as incurred. The cost of major renewals and
improvements is capitalized.
FORECLOSED REAL ESTATE
Real estate properties acquired through foreclosure are recorded at the
lower of cost or estimated fair value, less estimated selling costs, at time of
foreclosure. Subsequent valuations are performed periodically and the carrying
value is adjusted by a charge to foreclosed real estate expense to reflect any
subsequent declines in the estimated fair value. As a result, further declines
in real estate values may result in increased foreclosed real estate expense.
Routine holding costs are charged to expense as incurred.
INCOME TAXES
The Company utilizes the asset and liability method for accounting for
income taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using current rates. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period the change occurs. Deferred tax assets are reduced, through a valuation
allowance, if necessary, by the amount of such benefits that are not expected to
be realized based on current available evidence.
PER SHARE AMOUNTS
Earnings per common share is computed by dividing net income, less
dividends on the preferred stock by the weighted average number of common shares
outstanding of 2,838,161 during 1996 and 2,831,730 during 1995 and 1994. The
potential dilution from the exercise of stock options is not material.
2. ACQUISITIONS
On February 25, 1994, the Bank assumed the deposit liabilities, amounting to
$26,468,000, of Volunteer Federal Savings Association of Little Ferry, New
Jersey. The Bank received $24,744,000 in cash representing the difference
between the deposits assumed, net of $1,724,000 premium paid as part of the
transaction.
The premiums paid to acquire the deposits in the Volunteer transaction
and in a 1991 branch acquisition are being amortized over a period ranging from
five to seven years. Amortization in 1996, 1995 and 1994, included in
noninterest expenses, amounted to $444,000, $444,000, and $403,000,
respectively.
3. RESTRICTIONS ON CASH AND DUE FROM BANKS
The subsidiary bank is required to maintain a reserve balance with the Federal
Reserve Bank based upon the level of its deposit liability. The average amount
of this reserve balance for 1996 and 1995 was approximately $8,164,000 and
$6,803,000, respectively.
4. SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE
Securities held to maturity and securities available for sale are
summarized as follows: (in thousands)
----------------------------------------------
DECEMBER 31,1996
----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
SECURITIES HELD TO MATURITY:
OBLIGATIONS OF U.S. TREASURY ................. $ 43,517 $ 248 -- $ 43,765
OBLIGATIONS OF U.S. AGENCIES ................. 11,077 74 $ 22 11,129
OBLIGATIONS OF STATES & POLITICAL SUBDIVISIONS 3,581 1 9 3,573
OTHER DEBT SECURITIES ........................ 5,201 -- 49 5,152
-------- -------- -------- --------
63,376 323 80 63,619
-------- -------- -------- --------
SECURITIES AVAILABLE FOR SALE:
OBLIGATIONS OF U.S. TREASURY ................. 31,640 453 246 31,847
OBLIGATIONS OF U.S. AGENCIES ................. 17,321 124 12 17,433
OTHER DEBT SECURITIES ........................ 1,998 11 -- 2,009
EQUITY SECURITIES ............................ 3,912 51 -- 3,963
-------- -------- -------- --------
54,871 639 258 55,252
-------- -------- -------- --------
TOTAL SECURITIES ..................... $118,247 $ 962 $ 338 $118,871
======== ======== ======== ========
----------------------------------------------
DECEMBER 31,1995
---------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Securities held to maturity:
Obligations of U.S. Treasury ................ $ 65,223 $ 942 $ 26 $ 66,139
Obligations of U.S. agencies ................ 8,037 7 -- 8,044
Obligations of states & politica subdivisions 1,278 -- -- 1,278
Other debt securities ....................... 150 -- -- 150
-------- -------- -------- --------
74,688 949 26 75,611
-------- -------- -------- --------
Securities available for sale:
Obligations of U.S. Treasury ................ 40,888 1,466 184 42,170
Obligations of U.S. agencies ................ 23,282 -- 341 22,941
Equity securities ........................... 2,434 -- -- 2,434
-------- -------- -------- --------
66,604 1,466 525 67,545
-------- -------- -------- --------
Total securities .................... $141,292 $ 2,415 $ 551 $143,156
======== ======== ======== ========
At December 31, 1996, the contractual maturities of securities held to
maturity and securities available for sale are as follows: (in thousands)
Securities Held to Securities
Maturity Available for Sale
---------------------------- ---------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- -------- --------- ---------
Within 1 year ...................................... $32,587 $32,719 -- --
After 1 but within 5 years ......................... 20,443 20,590 $35,581 $35,842
After 5 but within 10 years ........................ 4,190 4,205 9,522 9,553
After 10 years ..................................... 6,156 6,105 5,856 5,894
Equity securities .................................. -- -- 3,912 3,963
------- ------- ------- -------
$63,376 $63,619 $54,871 $55,252
======= ======= ======= =======
Proceeds from the sale of securities available for sale totaled
$38,349,000, $2,484,000, and $305,000 during the years ended december 31, 1996,
1995 and 1994, respectively. Gains of $452,000 and $16,000 were realized in 1996
and 1995, respectively, and losses of $217,000, $1,000 and $5,000 were realized
in 1996, 1995 and 1994, respectively.
Proceeds from the sale of securities held to maturity (scheduled to
mature within 3 months) totaled $6,008,000 during the year ended december 31,
1996. Gains of $7,000 were realized in 1996.
Securities with carrying amounts of $26.1 Million and $11.1 Million at
December 31, 1996 and 1995, respectively, were pledged for public deposits,
securities sold under repurchase agreements and other purposes required by law.
5. LOANS
The composition of the loan portfolio is summarized as follows: (in thousands)
--------------------------------------
December 31,
--------------------------------------
1996 1995
------------- ------------
Commercial and financial ................................................. $ 51,908 $ 42,106
Real Estate
Residential ........................................................... 178,556 164,140
Commercial ............................................................ 112,233 96,910
Construction .......................................................... 3,414 1,484
Available for sale .................................................... 1,195 1,106
Installment .............................................................. 4,487 5,363
Lease financing .......................................................... -- 55
-------- --------
351,793 311,164
Allowance for loan losses ................................................ 3,653 3,647
-------- --------
NET LOANS ................................................................ $348,140 $307,517
======== ========
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,
-------------------------------------------------
1996 1995 1994
------------ ------------- ------------
Nonaccrual loans
Commercial and financial ......................................... $ 820 $ 621 $3,159
Residential real estate .......................................... 1,078 1,646 2,430
Commercial real estate ........................................... 173 235 588
Installment ...................................................... 13 9 --
------ ------ ------
$2,084 $2,511 $6,177
====== ====== ======
Troubled debt restructurings
Commercial and financial ......................................... $ 725 $1,000 $ 277
Commercial real estate ........................................... -- 465 245
------ ------ ------
$ 725 $1,465 $ 522
====== ====== ======
Interest income that would have been
recorded during the year on nonaccrual
loans outstanding at year-end in
accordance with original terms .................................... $ 242 $ 254 $ 669
Interest income included in net income
during the year on nonaccrual loans
outstanding at year-end .......................................... $ 124 $ 114 $ 398
Nonaccrual loans acquired in a 1991 transaction, with an estimated fair
value of $452,000, and $1,060,000 at December 31, 1995 and 1994, respectively,
are not included in the preceding table. At the acquisition date, these loans
were not performing according to their original terms and were discounted from a
face value of $978,000 and $2,773,000, respectively. There were no such loans at
December 31, 1996.
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 $25,000 at December 31, 1996. There were no such loans at December
31, 1994 and 1995.
Officers and directors of the Company and their affiliated companies
are customers and are engaged in transactions with the Company in the ordinary
course of business on substantially the same terms as those prevailing with
other borrowers and suppliers.
The following table summarizes activity with respect to these loans:
(in thousands)
---------------------------------
Years Ended December 31,
---------------------------------
1996 1995
---------- ----------
Balance at beginning of year $2,938 $3,503
Additions 268 339
Reductions (421) (904)
---------- ----------
Balance at end of year $2,785 $2,938
========== ==========
6. ALLOWANCE FOR LOAN LOSSES
The Company's recorded investment in impaired loans is as follows:
----------------------------------------------------------
December 31,
----------------------------------------------------------
1996 1995
------------------------- --------------------------
RELATED Related
ALLOWANCE Allowance
FOR LOAN for Loan
INVESTMENT LOSSES Investment Losses
---------- --------- ---------- ---------
Impaired loans
With a related allowance for loan losses
Commercial and Financial ................................. $1,559 $ 361 $ 455 $ 232
Commercial real estate ................................... 173 26 1,834 68
Without a related allowance for loan losses
Commercial and Financial ................................. 50 -- 18 --
------ ------ ------ ------
$1,782 $ 387 $2,307 $ 300
====== ====== ====== ======
- -----------------------------------------------------------------------------------------------------------------------------------
All the above loans were measured based on the fair value of collateral except
for one Commercial and Financial loan in 1996 with a $558,000 loan balance and a
$279,000 related allowance which was measured using the present value of
expected cash flows.
The following table sets forth certain information about impaired loans:
(in thousands)
------------------------
Years Ended December 31,
------------------------
1996 1995
----------- ----------
Average recorded investment $2,112 $2,485
=========== ==========
Interest income recognized during
time period that loans were impaired:
Recognized using cash-basis method
of accounting $126 $141
Recognized by other methods - -
----------- ----------
$126 $141
=========== ==========
Changes in the allowance for loan losses are summarized as follows: (in
thousands)
------------------------
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- -----
Balance at beginning of year ............... $ 3,647 $ 3,839 $ 3,905
Additions (deductions)
Provision charged to operations ....... 700 1,200 944
Recoveries on loans previously
charged off ...................... 208 118 114
Loans charged off ..................... (902) (1,510) (1,124)
------- ------- -------
Balance at end of year ..................... $ 3,653 $ 3,647 $ 3,839
======= ======= =======
For years ended December 31, 1996, 1995 and 1994, the provisions charged to
expense for federal income tax purposes amounted to approximately $694,000,
$1,392,000, and $1,010,000, respectively.
7. PREMISES AND EQUIPMENT, NET
Premises and equipment are summarized as follows: (in thousands)
-----------------------
December 31,
----------------------
1996 1995
-------- ------
Land ........................................... $ 743 $ 743
Buildings ...................................... 1,062 1,062
Furniture, fixtures and equipment .............. 3,817 3,864
Leasehold improvements ......................... 4,954 4,715
------- -------
10,576 10,384
Less accumulated depreciation and
amortization .............................. 5,425 4,874
------- -------
$ 5,151 $ 5,510
======= =======
8. DEPOSITS
Deposits are summarized as follows: (in thousands)
-------------------------
December 31,
-------------------------
1996 1995
-------- ---------
Noninterest bearing demand deposits .............. $ 76,340 $ 69,213
Interest bearing demand deposits ................. 117,461 110,813
Money market deposits ............................ 39,815 38,716
Savings deposits ................................. 66,778 71,170
Time deposits .................................... 129,619 146,540
-------- --------
$430,013 $436,452
======== ========
At december 31, 1996 and 1995, the carrying amounts of certificates of
deposit that individually exceed $100,000 amounted to $17,153,000, and
$11,674,000, respectively. Interest expense related to such deposits was
approximately $692,000, $568,000, and $312,000 in 1996, 1995, and 1994,
respectively.
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,
--------------------
1996 1995
------ ------
Securities sold under agreements to repurchase ......... $11,050 $ 1,704
Federal funds purchased ................................ 5,200 4,200
Advances from the Federal Home Loan
Bank of New York ................................... -- 5,000
------- -------
$16,250 $10,904
======= =======
The Bank has a $49.1 million line of credit available through its
membership in the Federal Home Loan Bank of New York.
10. LONG-TERM BORROWINGS
Long-term borrowings are comprised of two Federal Home Loan Bank (the
"FHLB") advances consisting of a $4.0 million advance with a 20-year
amortization term, a fixed interest rate of 6.31% and matures in November 1998;
and a $6.0 million advance, collateralized by U.S. Treasury securities, that has
a fixed interest rate of 5.72% and matures in December 1999. The FHLB has an
option to call the $6.0 million advance after December 1998.
11. BENEFIT PLANS
In 1993, the Company established a non-contributory defined benefit
pension plan covering all eligible employees. The funding policy is to
contribute an amount that is at least the minimum required by law. Retirement
income is based on years of service under the plan and, subject to certain
limits, on final average compensation. Effective January 1, 1994, the Company
established a supplemental plan that provides for retirement income that would
have been paid but for the limitation under the qualified plan.
Effective August 1, 1994, the Company established a retirement plan for
all directors of the Company or the Bank who are not employees of the Company or
of any subsidiary or affiliate of the Company. As a part of this Plan, the
Company contributes annually to a life insurance policy or annuity contract as
follows:
YEARS OF SERVICE AMOUNT CONTRIBUTED
---------------- ------------------
6........ $5,000
7........ 6,000
8........ 7,000
9........ 8,000
10....... 9,000
11 or more 10,000
The life insurance policies or annuity contracts are owned by the Company.
Retirement income to a director who has completed five years of service through
ten years of service will be based on the cash value of the life insurance
policy or annuity contract. After ten years of service, the retirement income
will be the greater of the cash value of the life insurance policy or annuity
contract or an amount determined by multiplying the standard annual retainer
fees (currently $11,000) at the director's retirement day by the director's
years of service.
Net pension cost of each plan consist of the following: (in thousands)
Pension Plan Supplemental Plan Directors' Plan
----------------------- ---------------------- ------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ---- ---- ---- ----
Service cost of benefits during period .................. $179 $134 $195 $12 $10 $14 $ 40 $ 39 $ 17
Interest cost on projected benefit
obligation ........................................... 37 22 14 3 2 1 69 66 26
Actual return on plan assets ............................ (51) (65) (5) -- -- -- -- -- --
Net amortization or deferral ............................ 10 39 (7) 1 -- 1 147 147 61
----- ----- ----- ----- ----- ----- ----- ----- -----
Net pension cost ........................................ $175 $130 $197 $16 $12 $16 $256 $252 $104
===== ===== ===== ===== ===== ===== ===== ===== =====
The following table sets forth the funded status, as of December 31, of
the plans and amounts recognized in the Company's Consolidated Balance Sheets
and the major assumptions used to determine these amounts: (dollars in
thousands)
Pension Plan Supplemental Plan Directors' Plan
---------------------- -------------------- --------------------
1996 1995 1996 1995 1996 1995
------- -------- -------- ------- -------- -------
Accumulated benefit obligation,
Vested ....................................... $ 32 $ 27 -- -- $ 931 $ 921
Non-vested ................................... 376 275 $ 29 $ 19 -- --
----- ----- ----- ----- ----- -----
$ 408 $ 302 $ 29 $ 19 $ 931 $ 921
===== ===== ===== ===== ===== =====
Projected benefit obligation ..................... $ 710 $ 527 $ 50 $ 38 $ 931 $ 921
Plan assets at fair value ........................ 644 488 -- -- -- --
----- ----- ----- ----- ----- -----
Projected benefit obligation in
excess of plan assets ......................... 66 39 50 38 931 921
Unrecognized prior service cost .................. 6 7 (8) (9) (387) (535)
Unrecognized net gain/(loss) ..................... 77 37 2 (1) (29) (30)
Adjustment for additional liability .............. -- -- -- -- 416 565
----- ----- ----- ----- ----- -----
Accrued pension cost included in
the balance sheet ............................. $ 149 $ 83 $ 44 $ 28 $ 931 $ 921
===== ===== ===== ===== ===== =====
Major assumptions:
Discount rate ................................. 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%
Expected rate of increase in future
compensation ............................... 5.0 5.0 5.0 5.0 N/A N/A
Expected long-term rate of return
on assets .................................. 8.0 8.0 N/A N/A N/A N/A
The Company has a Capital Investment Plan (the "Plan") which permits
employees to make basic contributions up to 4% of base compensation. Additional
contributions up to 10% of compensation may be made when coupled with basic
contributions. Under the Plan, the Company provides a matching contribution
equal to 50% of the basic contribution of each participant. In addition, the
Company makes a fixed contribution on behalf of each participant equal to 1% of
such participant's base compensation. The Company's contribution to the Plan
amounted to $119,000, $115,000, and $98,000 in 1996, 1995 and 1994,
respectively.
12. STOCK OPTION PLAN
In 1989, the Company adopted a stock option plan covering certain key
employees. Under this plan, as amended, a maximum of 283,500 shares of common
stock may be granted at fair market value at the date of grant. Options granted
expire if not exercised within ten years of date of grant and are exercisable
starting one year from the date of grant.
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123. "Accounting for Stock-Based Compensation" (SFAS 123). SFAS
123 requires expanded disclosures of stock-based compensation arrangements with
employees, and encourages, but does not require compensation cost to be measured
based on the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply Accounting Principles Board Opinion No.
25 ("APB 25"), which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company will continue to apply APB 25 to
its stock-based compensation awards to employees.
If compensation cost for Plan awards had been determined based on fair
value at the grant dates, net income and earnings per share would have been
reduced to the pro-forma amounts below for the years ended December 31, 1996 and
1995: (no options were granted in 1995) (in thousands except share data)
-------------------------
December 31,
-------------------------
1996 1995
---------- ----------
Net income:
As reported .......................... $6,419 $6,280
Pro-forma ............................ 6,412 6,280
Net income per share:
As reported .......................... $2.26 $2.19
Pro-forma ............................ 2.26 2.19
The pro-forma effect of applying FAS 123 is not necessarily indicative of the
effect on reported net income for future years.
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 the periods ending December 31, 1996: expected
volatility, 22.26%; expected lives, 7 years; risk-free interest rate, 6.26%;
expected dividend yield, 2.45%.
A summary of the Plan's status and changes during the years then ended
is presented below: (in thousands except share data)
----------------------------------------------------------
December 31,
----------------------------------------------------------
1996 1995
--------------------------- ---------------------------
WEIGHTED- Weighted-
AVERAGE Average
EXERCISE Exercise
SHARES PRICE Shares Price
------ -------- ------ --------
Outstanding at January 1 ........................................ 67,464 $13.22 67,464 $13.22
Granted ......................................................... 8,139 18.81 -- --
------ ------ ------
Outstanding at December 31 ...................................... 75,603 13.82 67,464 13.22
====== ====== ======
Options exercisable at December 31 .............................. 65,260 13.12 55,406 12.58
====== ====== ======
Weighted-average fair value of options granted during
the year ended December 31 (per option) .................... $5.10 --
The following table summarizes information about options outstanding
under the Plan at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------- ----------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------ ------------ ------------ ------------ ------------ -------------
10 - 15 35,701 2.96 10.60 35,701 10.60
15 - 20 39,900 7.23 16.71 29,559 16.18
------------ ------------
75,601 65,260
============ ============
13. CAPITAL
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the their assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company and the Bank's capital amounts and the Bank's
classification under the regulatory framework for prompt corrective action, are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier I capital to risk-weighted assets and Tier I capital to average assets.
Management believes, as of December 31, 1996, that the Company and the Bank meet
all capital adequacy requirements to which it is subject.
As of December 31, 1996, 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 capital amounts and ratios are as follows: (dollars in
thousands)
Capitalized
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- -------------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
The Company ........................................ $46,720 14.42% $25,918 8.00% N/A N/A
The Bank ........................................... 45,391 14.07 25,813 8.00 $32,266 10.00%
Tier 1 Capital ( to Risk Weighted Assets):
The Company ........................................ 43,067 13.29 12,959 4.00 N/A N/A
The Bank ........................................... 41,738 12.94 12,906 4.00 19,359 6.00
Tier 1 Capital (to Average Assets):
The Company ........................................ 43,067 8.66 14,925 3.00 N/A N/A
The Bank ........................................... 41,738 8.39 14,925 3.00 24,875 5.00
As of December 31, 1995:
Total Capital (to Risk Weighted Assets):
The Company ........................................ $41,963 14.41% $23,304 8.00% N/A N/A
The Bank ........................................... 41,952 14.40 23,304 8.00 $29,130 10.00%
Tier 1 Capital ( to Risk Weighted Assets):
The Company ........................................ 38,322 13.16 11,652 4.00 N/A N/A
The Bank ........................................... 38,311 13.15 11,652 4.00 17,478 6.00
Tier 1 Capital (to Average Assets):
The Company ........................................ 38,322 7.98 14,409 3.00 N/A N/A
The Bank ........................................... 38,311 7.98 14,409 3.00 24,014 5.00
14. OTHER NONINTEREST EXPENSES
Expenses included in other noninterest expenses which exceed one percent of the
aggregate of total interest income and noninterest income in 1996, 1995 and 1994
are as follows: (in thousands)
1996 1995 1994
------ ------ ------
Professional fees $1,117 $1,321 $1,254
Amortization of premiums in
connection with acquisitions 444 444 403
Directors' fees, travel and retirement 553 536 399
15. INCOME TAXES
Income tax expense for the years ended December 31, is summarized as follows:
(in thousands)
1996 1995 1994
------- ------- ------
Federal: current ................... $2,955 $ 3,168 $ 2,913
deferred .................. 154 (122) (62)
State:
current ................... 339 259 225
deferred .................. 8 (12) (14)
------ ------- -------
$3,456 $ 3,293 $ 3,062
====== ======= =======
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)
1996 1995
-------- -----
Deferred tax assets
Excess of book over tax allowance for loan losses ................................. $ 958 $ 752
Excess of book over tax depreciation .............................................. 264 201
Accrued lawsuit settlement not reflected
on tax return ................................................................. -- 81
Loan origination fees ............................................................. -- 192
Excess of book over tax provision for
benefit plan expense .......................................................... 408 259
Core deposit premium .............................................................. 105 --
Unrealized loss on other assets ................................................... 10 183
Other ............................................................................. -- 126
------ ------
Total deferred tax assets ..................................................... 1,745 1,794
------ ------
Deferred tax liabilities
Unrealized gains - securities available for sale .................................. 151 356
Loan origination fees ............................................................. 34 --
Other ............................................................................. 79 --
------ ------
Total deferred tax liabilities ................................................ 264 356
------ ------
Net deferred tax assets ....................................................... $1,481 $1,438
====== ======
Net deferred tax assets are included in other assets on the
consolidated balance sheet. It is more likely than not that deferred tax assets
of $1.5 million will be principally realized through carryback to taxable income
in prior years and future reversals of existing taxable temporary differences
and, to a lesser extent, future taxable income and tax planning strategies.
The provision for income taxes differs from the expected statutory
provision as follows:
December 31,
--------------------
1996 1995 1994
---- ---- ----
Expected provision at statutory rate ........................... 34% 34% 34%
Difference resulting from:
State income tax, net of federal benefit ................... 2 1 2
Interest income exempt from federal taxes .................. (1) (1) (1)
--- --- ---
35% 34% 35%
=== === ===
16. PREFERRED STOCK
On September 15, 1995, the Company exercised its right to redeem all
of its preferred stock, not held as Treasury Stock, at $50 per share. At the
same time the Company elected to cancel these shares together with the shares
held as Treasury Stock. The cancellation included all of the 100,000 shares
issued in 1987.
17. PARENT COMPANY INFORMATION (in thousands)
December 31,
-------------------------
1996 1995
--------- ---------
CONDENSED BALANCE SHEETS
Assets
Cash .............................................................................. $ 6 $ 10
Securities available for sale ..................................................... 1,375 --
Investment in subsidiaries
Bank ............................................................................ 43,001 40,231
Other ........................................................................... 142 142
Dividends receivable .............................................................. 525 485
Other assets ...................................................................... (21) --
-------- -------
Total assets ................................................................... $ 45,028 $40,868
======== =======
Liabilities
Dividends payable ................................................................. $ 525 $ 485
Other liabilities ................................................................. 142 142
-------- -------
667 627
-------- -------
Stockholders' equity
Common stock ...................................................................... 4,733 4,495
Surplus ........................................................................... 14,931 12,110
Retained earnings ................................................................. 24,429 22,990
Unrealized gain - securities available for sale,
net of taxes .................................................................... 268 646
-------- -------
44,361 40,241
-------- -------
Total liabilities and stockholders' equity ..................................... $ 45,028 $40,868
======== =======
-------------------------------
Years Ended December 31,
---------------------------------
CONDENSED STATEMENTS OF INCOME ............................................................... 1996 1995 1994
-------- ------- -------
Dividends from subsidiary bank ............................................................... $ 3,400 $ 3,627 $ 1,999
Management fees .............................................................................. 45 44 120
-------- ------- -------
Total revenues ......................................................................... 3,445 3,671 2,119
-------- ------- -------
Operating expenses ........................................................................... 206 142 133
-------- ------- -------
Income before equity in undistributed
earnings of subsidiaries 3,239 3,529 1,986
Equity in undistributed earnings of subsidiaries ............................................. 3,180 2,751 3,650
-------- ------- -------
Net income ............................................................................. $ 6,419 $ 6,280 $ 5,636
======== ======= =======
-----------------------------------------
Years Ended December 31,
-----------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 1996 1995 1994
--------- --------- --------
Cash flows from operating activities:
Net income .......................................................... $ 6,419 $ 6,280 $ 5,636
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities
(Increase)/decrease in other assets ............................. (39) 97 1
Increase in dividends payable .................................... 40 13 --
(Decrease)/increase in other liabilities ......................... -- (12) 12
Equity in undistributed income of subsidiaries ...................... (3,180) (2,751) (3,650)
------- ------- -------
Net cash provided by operating activities ........................ 3,240 3,627 1,999
------- ------- -------
Cash flows from investing activities:
Purchase of available for sale securities ........................... (1,323) -- --
------- ------- -------
Cash flows from financing activities:
Cash dividends paid ................................................. (2,077) (2,027) (1,999)
Treasury stock ...................................................... -- (1,600) --
Proceeds from issuance of common stock .............................. 156 -- --
------- ------- -------
Net cash used in financing activities ............................ (1,921) (3,627) (1,999)
------- ------- -------
Net decrease in cash ................................................... (4) -- --
Cash at beginning of year .............................................. 10 10 10
------- ------- -------
Cash at end of year .................................................... $ 6 $ 10 $ 10
======= ======= =======
18. 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, 1996, undistributed net
assets of the Bank were $43,001,000 of which $38,683,000 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.
19. COMMITMENTS AND CONTINGENT LIABILITIES
The Company has outstanding commitments and contingent liabilities
including agreements to extend credit which arise in the normal course of
business and which are not shown in the accompanying financial statements.
Loan commitments are made to accommodate the financial needs of the
Company's customers. Standby letters of credit commit the Company to make
payments on behalf of customers when certain specified future events occur. They
are issued primarily to support performance bonds. Both arrangements have credit
risks essentially the same as that involved in extending loans to customers and
are subject to the normal credit policies of the Company.
A summary of commitments to extend credit at December 31, are
summarized as follows: (in thousands)
1996 1995
------- ------
CREDIT CARD LOANS $ 6,631 $ 6,985
HOME EQUITY LOANS 43,204 41,089
OTHER LOANS 38,041 21,444
STANDBY LETTERS OF CREDIT 444 1,258
--------- -------
$88,320 $70,776
========= =======
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)
1997 $ 868
1998 818
1999 714
2000 558
2001 346
THEREAFTER 822
-------
TOTAL MINIMUM LEASE PAYMENTS $4,126
=======
Rent expense for all leases amounted to approximately $1,024,000,
$985,000 and $884,000 in 1996, 1995, and 1994, respectively.
In 1996, the Company leased certain real estate from two companies
(three companies in 1995 and 1994) affiliated with directors of the company.
Rental expense associated with such leases was $143,000, $157,000 and $167,000
for the years ended december 31, 1996, 1995, and 1994, respectively. The
aggregate minimum rental commitments through 2003 under these leases was
approximately $708,000 at december 31, 1996. A director of the Company also
provided legal services through his affiliated firm. Fees paid for these
services amounted to approximately $375,000, $323,000 and $427,000 in 1996,
1995, and 1994, respectively.
Interchange State Bank's (the "bank"), a wholly owned
subsidiary of the Company was a party to a lawsuit commenced in April 1989
(Great American Mortgage Corp., Et al, v. Robert Utter, et al.), filed in the
Superior Court of New Jersey alleging that the Bank was statutorily liable for
having paid checks which bore irregular endorsements. Various other legal
proceedings related to the foregoing were also instituted and, in those actions,
the Bank pursued various parties whom the Bank alleged were liable to it. On
August 2, 1996, the Bank paid $120,000 plus prejudgment interest to resolve the
final matter pertaining to these occurrences. The remainder of a reserve, which
was established in 1992, was sufficient to cover this amount. All legal
proceedings related to these occurrences, involving the potential liability of
the Bank, have now been resolved.
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.
20. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME ........................................ $9,207 $9,232 $9,262 $9,583
INTEREST EXPENSE ....................................... 3,748 3,645 3,577 3,629
NET INTEREST INCOME .................................... 5,459 5,587 5,685 5,954
PROVISION FOR LOAN LOSSES .............................. 250 150 150 150
NET GAIN ON SALE OF SECURITIES ......................... 235 -- -- 7
INCOME BEFORE INCOME TAXES ............................. 2,480 2,274 1,982 3,139
NET INCOME ............................................. 1,612 1,478 1,288 2,041
NET INCOME PER COMMON SHARE ............................ 0.57 0.52 0.45 0.72
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First Second Third Fourth
1995 Quarter Quarter Quarter Quarter
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Interest income ........................................ $9,094 $9,250 $9,347 $9,304
Interest expense ....................................... 3,625 3,827 3,843 3,855
Net interest income .................................... 5,469 5,423 5,504 5,449
Provision for loan losses .............................. 225 375 225 375
Net gain on sale of securities ......................... -- 15 -- --
Income before income taxes ............................. 2,161 2,320 2,177 2,915
Net income ............................................. 1,405 1,565 1,415 1,895
Net income per common share ............................ 0.49 0.54 0.49 0.67
21. FAIR VALUE OF FINANCIAL INSTRUMENTS (in thousands)
Fair value estimates of the Company's financial instruments are made
at a particular point in time, based on relevant market information and
information about the financial instrument. Fair values are most commonly
derived from quoted market prices. In the event market prices are not available,
fair value is determined using the present value of anticipated future cash
flows. This method is sensitive to the various assumptions and estimates used
and the resulting fair value estimates may be significantly affected by minor
variations in those assumptions or estimates. In that regard, it is likely that
amounts different from the fair value estimates would be realized by the Company
in immediate settlement of the financial instruments.
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December 31,
---------------------------------------------------------
1996 1995
----------------------------- ----------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
--------- --------- -------- ---------
Financial assets:
Cash and cash equivalents ............................ $ 24,322 $ 24,322 $ 25,151 $ 25,151
Securities held to maturity .......................... 63,376 63,319 74,688 75,611
Securities available for sale ........................ 55,252 55,252 67,545 67,545
Loans, net ........................................... 348,140 350,702 307,517 313,097
-------- -------- -------- --------
$491,090 $493,595 $474,901 $481,404
======== ======== ======== ========
Financial liabilities:
Deposits ............................................. $430,013 $430,229 $436,452 $436,699
Short-term borrowings ................................ 16,250 16,250 10,904 10,904
Long-term borrowings ................................. 9,983 9,981 -- --
-------- -------- -------- --------
$456,246 $456,460 $447,356 $447,603
======== ======== ======== ========
The methods and significant assumptions used to determine the
estimated fair values of the Company's financial instruments are as follows:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks
and federal funds sold. The estimated fair values of these financial instruments
approximate their carrying values since they mature overnight or are due on
demand.
INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE
Estimated fair values are based principally on quoted market prices,
where available, or dealer quotes. In the event quoted market prices are not
available, fair values are estimated using market prices of similar securities.
LOANS
The loan portfolio is segregated into various categories for purposes
of estimating fair value. Certain homogenous loan categories have been valued on
a pool basis using quoted market prices for similar loans sold. The fair values
of certain loans that reprice frequently and have no significant change in
credit risk is assumed to equal their carrying values. The fair value of other
types of loans is estimated by discounting the future cash flows using interest
rates that are currently being offered for loans with similar terms to borrowers
with similar credit quality. The fair value of 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 are estimated based on an analysis of the interest rates and fees
currently charged to enter into similar transactions, considering the remaining
terms of the commitments and the credit-worthiness of the potential borrowers.
At December 31, 1996 and 1995, the estimated fair values of these
off-balance-sheet financial instruments were immaterial.