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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 thirteen banking offices, twelve of which
are located in Bergen County, New Jersey, and one of which is located in Passaic
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
one supermarket.
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 recent years, the Bank took advantage of opportunities to purchase
packages of loans from the Resolution Trust Corporation ("RTC") and from lending
institutions seeking to reduce assets in order to meet capital requirements,
thereby maintaining interest income and fostering asset growth in difficult
market conditions. 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 thirteen 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. Interchange's acquisition in 1991 of the
former Community Guardian Bank increased its penetration of existing market
areas and resulted in its first Passaic County banking location. 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. Since 1984, the Bank's assets have grown from $135 million to $491
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 180 full-time-equivalent employees during 1995. 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 and eastern Passaic 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 which includes a mortgage product for first time home buyers that
allows them to finance up to 95% of the value of the home. 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 between $5,000 and $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 don't 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. 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 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 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
organization 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 operation standards and which are not
contemplating or experiencing significant growth maintain a minimum leverage
ratio (Tier I capital as a percent of quarterly average adjusted assets) of 3%.
For those financial institutions with higher levels of risk or that are
experiencing or anticipating significant growth, the minimum leverage ratio will
be increased.
The 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 ("NJDB"). If, as a result of an examination of a bank, the NJDB
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 NJDB.
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 NJDB. 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; and "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.
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 Despot 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 will have a zero assessment, subject to
the statutory minimum.
ITEM 2. PROPERTIES
The Company leases nine banking offices, one mini branch, and one
operations/support facility. It owns three banking offices and leases land on
which it owns one bank building.
ITEM 3. LEGAL PROCEEDINGS
Interchange State Bank (the "Bank"), a wholly owned subsidiary of the
Company, is a defendant in a lawsuit commenced in April 1989, (Great American
Mortgage Corp., et al vs. Robert Utter, et al.) filed in Superior Court of New
Jersey alleging that the Bank was statutorily liable in conversion for having
paid checks drawn on demand deposit accounts of plaintiffs at the Bank bearing
forged or irregular endorsements.
On December 2, 1992, the Court directed judgment to be entered against the
Bank in the total principal sum of $484,000 with prejudgment interest. On April
5, 1993, the Bank filed a Notice of Appeal of this judgment and, by virtue of
post-judgment motions, the amount was reduced to the principal sum of $311,000
plus pre-judgment interest. This judgment was appealed and, by virtue of this
appeal, the amount was further reduced to $245,000. The matter remained on
appeal until May 8, 1995 at which time, by Court order, the matter was settled.
Pursuant thereto, the Bank has paid a total of $89,000 against the aforesaid
judgment, which has now been discharged of record. The Bank continues to pursue
various parties for recoupment of the aforesaid monies under which it is likely
that the Bank's liability for the payment will either be reduced to its
proportionate share under contribution theories or it will be exonerated under
indemnification theories.
In a related matter, on January 8, 1993, an interlocutory judgment was
entered against the Bank in the principal sum of $120,000 with prejudgment
interest. The Bank has appealed this judgment and a stay of execution has been
effected.
In 1992, the Company accrued $500,000 as a provision for an adverse
judgment in this litigation. Based on the May 8, 1995 partial settlement of
these matters, the Company has reduced the reserve by $250,000 to $161,000 which
the Company and its legal counsel believe is adequate to cover any remaining
liabilities related to these matters.
The Company is also a party to routine litigation involving various aspects
of its business, none of which, in the opinion of management, after consultation
with 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, 1995,
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 56 President and Chief Executive Officer
ROBERT N. HARRIS 63 Executive Vice President and
Chief Financial Officer
RICHARD N. LATRENTA 42 Senior Vice President--Lending
FRANK R. GIANCOLA 42 Senior Vice President--Retail Banking
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.
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.
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 AND
RELATED STOCKHOLDER MATTERS
The common stock is traded on the American Stock Exchange under the symbol
"ISB."
A cash dividend of $0.175, $0.175 and $0.18 was paid on each common share
outstanding in each quarter during 1993, 1994 and 1995, respectively. The
following table sets forth, for the periods indicated, the reported high and low
sales price:
High Low
---------- ---------
1993
First quarter $16.25 $13.00
Second quarter 15.50 13.75
Third quarter 18.80 13.875
Fourth quarter 17.875 14.25
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
The number of stockholders of record as of December 20, 1995, was 1,072.
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,
----------------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
SUMMARY EARNINGS (IN THOUSANDS)
Interest income $36,995 $32,612 $29,267 $31,258 $30,102
Interest expense 15,150 11,006 10,237 14,379 16,234
----------- ----------- ------------ ----------- -------
Net interest income 21,845 21,606 19,030 16,879 13,868
Provision for loan losses 1,200 944 1,065 2,237 900
----------- ----------- ------------ ----------- -------
Net interest income after provision for loan losses 20,645 20,662 17,965 14,642 12,968
Non-interest income 4,752 3,782 4,872 5,197 2,049
Non-interest expenses 15,824 15,746 14,908 13,645 11,089
----------- ----------- ------------ ----------- -----------
Income before cumulative effect of change in
accounting principle and income taxes 9,573 8,698 7,929 6,194 3,928
Income taxes 3,293 3,062 2,887 2,473 1,368
----------- ----------- ----------- ----------- -----------
Income before cumulative effect of
change in accounting principle 6,280 5,636 5,042 3,721 2,560
Cumulative effect of change in accounting principle - - (205) - -
----------- ----------- ------------ ----------- ----------
Net income $ 6,280 $ 5,636 $ 4,837 $ 3,721 $ 2,560
=========== =========== ============ =========== ===========
PER SHARE DATA
Income before cumulative effect of change
in accounting principle $2.29 $2.05 $1.80 $1.79 $1.26
Cumulative effect of change in accounting principle - - (0.08) - -
Net income 2.29 2.05 1.72 1.79 1.26
Cash dividends declared 0.72 0.70 0.70 0.70 0.70
Book value-end of year 14.92 12.14 11.47 10.45 8.70
Tangible book value-end of year 13.95 11.92 11.06 9.97 7.83
Weighted average shares outstanding (in thousands) 2,697 2,697 2,697 1,875 1,727
BALANCE SHEET DATA-END OF YEAR (IN THOUSANDS)
Total assets $ 491,457 $ 479,312 $ 421,659 $ 404,064 $ 399,771
Investment securities and securities
available for sale 142,233 148,781 118,939 96,480 84,143
Loans 311,164 290,654 266,992 269,214 282,627
Allowance for loan losses 3,647 3,839 3,905 4,100 3,566
Total deposits 436,452 424,170 385,430 369,327 375,567
Long-term debt - 5,000 - - -
Total stockholders' equity 40,241 35,129 33,305 31,555 20,018
SELECTED PERFORMANCE RATIOS
Return on average total assets 1.32 1.25 1.23 0.93 0.78
Return on average total stockholders' equity 16.66 16.58 15.63 16.25 13.29
Dividend payout ratio 32.28 35.47 41.39 46.73 62.07
Average total stockholders' equity to average total assets 7.90 7.52 7.90 5.74 5.84
Net yield on interest earning assets (taxable equivalent) 4.93 5.13 4.98 4.55 4.54
Non-interest expenses to average assets 3.32 3.48 3.65 3.42 3.36
Non-interest income to average assets 1.00 0.84 1.19 1.30 0.62
ASSET QUALITY RATIOS-END OF YEAR
Nonaccrual loans to total loans 0.81 2.13 1.47 1.97 1.75
Nonperforming assets to total assets 1.06 1.58 1.25 1.79 1.72
Allowance for loan losses to nonaccrual loans 145.24 62.15 99.77 77.31 71.90
Allowance for loan losses to total loans 1.17 1.32 1.46 1.52 1.26
Net charge-offs to average loans for the year 0.48 0.37 0.48 0.63 0.25
LIQUIDITY AND CAPITAL RATIOS
Average loans to average deposits 68.60 66.69 70.34 73.78 76.04
Total stockholders' equity to total assets 8.19 7.33 7.90 7.81 5.01
Tier I capital to risk-weighted assets 12.95 12.28 12.60 11.88 6.81
Total capital to risk-weighted assets 14.20 13.52 13.85 13.13 8.12
Tier I leverage ratio 7.84 7.39 7.71 7.59 4.65
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 35 through 62 and the summary consolidated data included
elsewhere in this report.
OVERVIEW OF RESULTS
In 1995, the Company reported net income of $6.3 million or $2.29 per
common share, as compared with $5.6 million or $2.05 per common share in 1994
and $4.8 million or $1.72 per common share in 1993.
Net income for 1995 was favorably impacted by an increase in non-interest
income of $970 thousand, or 25.6%, 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 also increased due to 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 non-interest
expenses of $78 thousand, or .5%, as compared to 1994. The nominal increase was
due to a $712 thousand, or 4.5%, 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 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 becoming fully
capitalized. The reduction in the assessment became effective in the second
quarter of 1995.
Net income in 1994 increased $799 thousand over 1993 due largely to the
$2.6 million increase in net interest income. Net interest income increased due
largely to the increase in average interest earning assets. The growth in
interest earning assets stemmed from two large loan acquisitions amounting to
$32.6 million during 1994, coupled with a $38.5 million growth in the average
balance of taxable investment securities. The loan acquisitions and purchases of
investment securities were funded by the acquisition of the deposit liabilities
of a failed institution from the Resolution Trust Corporation, combined with
borrowings from the Federal Home Loan Bank of New York. The increase in net
interest income was partly offset by a decrease in non-interest income of $1.1
million in 1994, compared to 1993. This decrease was due to a gain of $1.1
million from the sale of mortgage loans in 1993 that did not reoccur in 1994.
Table 1
SUMMARY OF OPERATING RESULTS
1995 1994 1993
---- ---- ----
Net income (in thousands) $6,280 $5,636 $4,837
Earnings per share 2.29 2.05 1.72
Return on average total assets 1.32% 1.25% 1.23%
Return on average total equity 16.66 16.58 15.63
Dividend payout ratio* 32.28 35.47 41.39
Average total stockholders' equity to
average total assets 7.90 7.52 7.90
*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 1994 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 assets yields.
Table 2
ANALYSIS OF NET INTEREST INCOME for the years ended December 31,
(dollars in thousands)
1995 1994
------------------------------------ ------------------------------------
AVERAGE AVERAGE Average Average
BALANCE INTEREST RATE Balance Interest Rate
------------------------------------ -----------------------------------
ASSETS
Interest earning assets
Loans (1) (2) $291,981 $27,427 9.39% $272,399 $23,537 8.64%
Taxable securities 144,156 9,138 6.34 137,484 8,604 6.26
Tax-exempt securities (2) 1,081 74 6.85 1,561 78 4.93
Federal funds sold 6,366 374 5.87 10,406 412 3.96
--------- -------- -------- --------
TOTAL INTEREST EARNING ASSETS 443,584 37,013 8.34 421,850 32,631 7.74
-------- --------
Non-interest earning assets
Cash and due from banks 20,781 20,120
Allowance for loan losses (3,865) (3,832)
Other assets 16,518 13,793
--------- ---------
TOTAL ASSETS $477,018 $451,931
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Demand deposits $102,397 3,141 3.07 $100,309 2,612 2.60
Savings deposits 111,959 3,515 3.14 122,083 3,191 2.61
Time deposits 146,133 7,857 5.38 124,791 4,832 3.87
Short-term borrowings 7,845 506 6.45 5,361 289 5.39
Long-term borrowings 1,932 131 6.78 1,192 82 6.80
--------- -------- --------- --------
TOTAL INTEREST BEARING LIABILITIES 370,266 15,150 4.09 353,736 11,006 3.11
-------- --------
Non-interest bearing liabilities
Demand deposits 65,164 61,271
Other liabilities 3,903 2,924
--------- ---------
Total liabilities (3) 439,333 417,931
Stockholders' equity 37,685 34,000
--------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $477,018 $451,931
========= ==========
Net interest income (tax-equivalent basis) 21,863 4.25 21,625 4.63
Tax-equivalent basis adjustment (18) (19)
-------- ----------
NET INTEREST INCOME $21,845 $21,606
======== ==========
NET INTEREST INCOME AS A PERCENT OF
INTEREST EARNING ASSETS (TAX-EQUIVALENT BASIS) 4.93% 5.13%
Table 2 (continued)
1993
------------------------------------
Average Average
Balance Interest Rate
------------------------------------
ASSETS
Interest earning assets
Loans (1) (2) $262,222 $22,142 8.44%
Taxable securities 98,997 6,466 6.53
Tax-exempt securities (2) 1,081 67 6.20
Federal funds sold 20,315 610 3.00
-------- -------
TOTAL INTEREST EARNING ASSETS 382,615 29,285 7.65
-------
Non-interest earning assets
Cash and due from banks 18,558
Allowance for loan losses (4,127)
Other assets 11,253
---------
TOTAL ASSETS $408,299
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Demand deposits $ 87,037 2,194 2.52
Savings deposits 109,432 2,994 2.74
Time deposits 122,317 5,039 4.12
Short-term borrowings 281 10 3.56
Long-term borrowings - - -
-------- -------
TOTAL INTEREST BEARING LIABILITIES 319,067 10,237 3.21
-------
Non-interest bearing liabilities
Demand deposits 53,999
Other liabilities 2,980
--------
Total liabilities (3) 376,046
Stockholders' equity 32,253
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $408,299
========
Net interest income (tax-equivalent basis) 19,048 4.44
Tax-equivalent basis adjustment (18)
-------
NET INTEREST INCOME $19,030
=======
NET INTEREST INCOME AS A PERCENT OF
INTEREST EARNING ASSETS (TAX-EQUIVALENT BASIS) 4.98%
(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.
Table 3
EFFECT OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
(in thousands)
YEAR ENDED DECEMBER 31, Year ended December 31,
1995 COMPARED WITH 1994 1994 compared with 1993
INCREASE (DECREASE) increase (decrease)
DUE TO CHANGE IN: due to change in:
----------------------------------------- ------------------------------------------
NET Net
AVERAGE AVERAGE INCREASE Average Average Increase
VOLUME RATE (DECREASE) Volume Rate (Decrease)
----------------------------------------- ------------------------------------------
Interest income
Loans $1,762 $2,128 $3,890 $ 867 $ 528 $1,395
Taxable securities 423 111 534 2,392 (254) 2,138
Tax-exempt securities (34) 30 (4) 20 (9) 11
Federal funds sold (160) 122 (38) (577) 379 (198)
--------- -------- --------- -------- ------- --------
TOTAL INTEREST INCOME 1,991 2,391 4,382 2,702 644 3,346
--------- -------- --------- -------- ------- --------
Interest expense
Demand deposits 54 475 529 346 72 418
Savings deposits (264) 588 324 333 (136) 197
Time deposits 922 2,103 3,025 102 (309) (207)
Short-term borrowings 152 65 217 271 8 279
Long-term borrowings 49 - 49 82 - 82
--------- -------- --------- -------- ------- --------
TOTAL INTEREST EXPENSE 913 3,231 4,144 1,134 (365) 769
--------- -------- --------- -------- ------- --------
CHANGE IN NET INTEREST
INCOME $1,078 $ (840) $ 238 $1,568 $1,009 $2,577
========= ======== ========= ======== ======= ========
The Company's net interest income, on a taxable equivalent basis, totaled
$21.9 million in 1995, 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 average rate, from 3.11% in 1994 to
4.09% in 1995, had a more adverse impact on net interest income.
The growth in average interest earning assets stemmed largely from
increased loans, particularly, commercial mortgages. The average balance of
commercial mortgages totaled $91.3 million in 1995, compared to $78.9 in 1994,
an increase of $12.4 million or 15.7%.
On the liability side, 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, 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 in 1995 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.
Net interest income, on a taxable equivalent basis, totaled $21.6 million
in 1994, an increase of $2.6 million or 13.5% over 1993. The increase was driven
mostly by a $39.2 million increase in average interest earning assets. The
volume increase made up $2.7 million of the $3.3 million total change in
interest income. Taxable investment securities comprised the largest increase.
The average balance increased $38.5 million in 1994 from $99.0 million in 1993
and accounted for $2.4 million of the variance in interest income due to volume
change. In addition, loan acquisitions of $25.7 million in June 1994 and $6.9
million in October 1994, contributed to the growth in interest income. The
increase in net interest income was partially offset by the increased volume of
interest bearing liabilities. This increase resulted in a $1.1 million increase
in interest expense. In 1994, the increase in interest bearing liabilities
resulted from the acquisition of $26.5 million of deposit liabilities from the
Resolution Trust Corporation in February 1994 and $18.0 million of advances from
the Federal Home Loan Bank of New York. These funds were used to finance the
growth in loans and investments.
Loan Losses
- ------------
The provision for loan losses represents management's determination of the
amount necessary to bring the allowance for 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 1995 amounted to $1.2 million representing an
increase of $256 thousand from the previous year. In 1994, the loan loss
provision amounted to $944 thousand, a decrease of $121 thousand from 1993. The
provision for loan losses in 1995, 1994 and 1993 include $62 thousand, $44
thousand and $160 thousand, respectively, representing the aggregate decline in
the market value of real estate collateral applicable to loans whose value is
dependent solely upon the value of the underlying collateral. The increase in
the loan loss provision in 1995 over 1994 mirrors the increased loan activity,
in particular, commercial and financial loans and commercial real estate loans.
Such loans generally carry a higher risk than do smaller residential
and consumer loans.
See sections on Loan Portfolio and Loan Quality beginning on page 20 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)
1995 1994 1993 1992 1991
------- -------- -------- ------- --------
Average loans outstanding $291,981 $272,399 $262,222 $272,002 $232,382
======== ========= ======== ======== ========
Allowance at beginning of year $3,839 $3,905 $4,100 $3,566 $2,440
Allowance recorded on acquired
loans - - - - 800
--------- --------- -------- -------- --------
3,839 3,905 4,100 3,566 3,240
-------- -------- -------- -------- --------
Loans charged off
Commercial 399 281 138 756 72
Installment 108 149 613 283 320
Real estate 914 647 560 792 200
Lease financing 89 47 - -
-------- -------- -------- -------- --------
Total 1,510 1,124 1,311 1,831 592
-------- -------- -------- -------- --------
Recoveries of loans
previously charged off
Commercial 25 - - 73 3
Installment 54 99 42 20 15
Real estate 32 15 9 35 -
Lease financing 7 - - - -
-------- -------- -------- -------- --------
Total 118 114 51 128 18
-------- -------- -------- -------- --------
Net loans charged off 1,392 1,010 1,260 1,703 574
-------- -------- -------- -------- --------
Additions to allowance charged
to expense
1,200 944 1,065 2,237 900
-------- -------- -------- -------- --------
Allowance at end of year $3,647 $3,839 $3,905 $4,100 $3,566
======== ======== ======== ======== ========
Allowance to total loans 1.17% 1.32% 1.46% 1.52% 1.26%
Allowance to nonaccrual loans 145.24 62.15 99.77 77.31 71.90
Allowance to nonaccrual loans and
loans past due 90 days or more 145.24 62.15 95.92 71.96 49.21
Ratio of net charge-offs to average
loans 0.48 0.37 0.48 0.63 0.25
The allowance for losses represented 70.3% of nonperforming assets at
year-end up from 50.7% at the end of 1994.
The ratio increased as a result of a $2.4 million decrease in nonperforming
assets in 1995 compared to 1994. The decrease stemmed largely from the
charge-off of approximately $1.2 million of loans in 1995 that were classified
as nonperforming in 1994. In addition, the Company received $617 thousand that
represented a guarantee by the New Jersey Economic Development Authority to
settle part of a substantial nonperforming loan.
TABLE 5
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES at December 31,
(in thousands)
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
Commercial and financial $1,993 $1,985 $2,822 $1,933 $1,184
Installment 215 278 324 352 911
Real estate 813 611 592 885 471
Unallocated 626 965 167 930 1,000
------ ------ ------ ------- -------
$3,647 $3,839 $3,905 $4,100 $3,566
====== ======= ======= ====== =======
The above allocation is intended for analytical purposes and may not be
indicative of the categories in which future loan losses occur.
Non-interest Income
- -------------------
Non-interest income consists of all income other than interest and
dividend income and is derived from fees on bank transactions and credit cards;
commissions on sales of annuities and mutual funds; rental of safe deposit
space; net gains on sales of assets and the accretion of discount in connection
with an acquisition. In 1995, non-interest income increased $1.0 million
due mostly to the subsidiary bank selling a portion of its loan servicing
portfolio which generated a net gain of $828 thousand. Non-interest income
decreased $1.1 million in 1994 compared to 1993. This decrease was directly
attributable to the sale of approximately $40 million of residential mortgages
in 1993 that resulted in a gain of $1.1 million. Other income, exclusive of gain
on sale of assets, expressed as a percentage of average assets was .78%, .79%
and .85% in 1995, 1994 and 1993, respectively.
Table 6
NON-INTEREST INCOME for the years ended December 31,
(in thousands)
1995 1994 1993
------ ------ ------
Service fees on deposit accounts $1,474 $1,496 $1,300
Service fees on loan accounts 280 258 178
Service fees on credit cards 168 155 155
Net gain/(loss) on sale of loans
available for sale 22 (14) 1,070
Net gain on sale of loans - - 284
Income from foreclosed real estate
operations 174 211 28
Net gain/(loss) on sale of securities
available for sale 15 (5) 1
Net gain on sale of loan servicing rights 828 - -
Commission on annuity sales 89 188 194
Commission on mutual funds sales 49 40 39
Accretion of discount in
connection with acquisition 760 760 777
Collection of acquired loans in
excess of carrying value 406 313 227
Rental on safe deposit boxes 142 138 134
All other 345 242 485
------ ------ ------
$4,752 $3,782 $4,872
====== ====== ======
Non-interest Expenses
- ---------------------
Non-interest expenses were $15.8 million in 1995, an increase of $78 thousand or
.5% over the previous year. Increases in non-interest expenses were minimal due
to expenses being offset by the settlement of a 1992 lawsuit against the banking
subsidiary which resulted in a $250 thousand reduction of a previously
established litigation reserve and to a $384 thousand decrease in the Federal
Deposit Insurance Corporation 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 becoming fully capitalized. The reduction in the
assessment became effective in the second quarter of 1995. Non-interest expenses
increased $838 thousand in 1994 over 1993 due mainly to the acquisition of a
failed bank and to the additional costs of operating a banking office opened in
September 1993 for an entire year.
Table 7
NON-INTEREST EXPENSES for the years ended December 31,
(in thousands)
1995 1994 1993
------ ------ ------
Salaries and benefits $ 7,254 $ 6,879 $ 6,383
Net occupancy and furniture
and equipment 2,777 2,540 2,528
Other expenses
Advertising and promotion 673 701 745
Stationery, printing and supplies 281 275 275
Federal Deposit Insurance Corporation
assessment 503 887 870
Professional fees 1,224 1,254 1,249
Communications 217 192 176
Postage and shipping 282 250 253
Credit card processing fees 156 161 160
Credit services 253 208 295
Foreclosed real estate expenses 227 313 411
Amortization of premiums in
connection with acquisitions 444 403 197
Provision for litigation contingency (250) - -
Directors' fees, travel and
retirement 536 399 236
Insurance premiums 256 332 364
Unrealized (gain)/loss on loans
held for sale (60) 85 -
All other 1,051 867 766
------- ------- -------
$15,824 $15,746 $14,908
======= ======= =======
Income Taxes
- ------------
In 1995, income taxes amounted to $3.3 million as compared to $3.1 million
and $2.9 million for 1994 and 1993, respectively. The effective tax rate in 1995
was 34.4% as compared to 35.2% and 36.4% for 1994 and 1993, respectively.
Detailed information on income taxes is shown in Notes 1 and 14 to the
Consolidated Financial Statements.
New Pronouncements
- ------------------
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 122, "Accounting for Mortgage Servicing Rights
- - an amendment to FASB Statement No. 65" ("SFAS No. 122"). This Statement
requires that a mortgage banking enterprise recognize, as separate assets,
rights to service mortgage loans for others, however those servicing rights are
acquired. Additionally, the Statement requires that a mortgage banking
enterprise assess its capitalized mortgage servicing rights for impairment based
on the fair value of those rights. This Statement applies prospectively to
fiscal years beginning after December 15, 1995 to transactions in which a
mortgage banking enterprise sells or securitizes mortgage loans with servicing
rights retained and to impairment evaluations of all amounts capitalized as
mortgage servicing rights, including those purchased before the adoption of this
Statement. The implementation of SFAS No. 122 will not be material to the
Company's financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). This Statement encourages, but does not require,
a fair value based method of accounting for stock-based compensation plans and
encourages entities to adopt that method in place of the provisions of APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Under the fair value
based method, compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period, which is usually the
vesting period. The provisions of this Statement are effective for transactions
entered into in fiscal years that begin after December 15, 1995. The
implementation of SFAS No. 123 will not be material to the Company's financial
statements.
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
- --------------
Total loans as of December 31, 1995, amounted to $311.2 million, up $20.5
million or 7.1% over the previous year. A promotional campaign and competitive
loan rates were instrumental to the $13.0 million increase in the home equity
loan portfolio. During 1995, the Company continued to meet the demand of its
business customers by growing the commercial and commercial mortgage portfolios
by approximately $5.6 and $9.2 million, respectively.
In 1994, total loans increased $23.7 million from the 1993 level. The
increase stemmed from the acquisition of commercial mortgages amounting to $25.7
million and the acquisition of $6.9 million of home equity loans combined with a
reduction in loans from the securitization and transfer to securities available
for sale of $27.9 million of residential mortgages.
Table 8
LOAN PORTFOLIO at December 31,
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
AMOUNTS OF LOANS BY TYPE (in thousands)
Commercial and financial $ 42,106 $ 36,512 $ 35,380 $ 39,107 $ 46,015
Real estate-construction 1,484 1,917 207 993 1,208
Real estate-mortgage
1-4 family residential
First liens 42,088 43,229 55,982 54,559 57,408
Junior liens 20,919 25,266 38,771 47,349 57,585
Available for sale 1,106 1,086 15,751 11,392 -
Home equity 101,133 88,147 50,197 59,513 70,703
Commercial 96,910 87,728 60,771 44,692 35,898
Installment
Credit cards and related plans 2,902 3,314 4,039 4,311 4,335
Other 2,461 2,757 3,918 4,166 6,772
Lease financing 55 698 1,976 3,132 2,703
-------- -------- -------- -------- --------
TOTAL $311,164 $290,654 $266,992 $269,214 $282,627
========= ======== ======== ======== ========
PERCENT OF LOANS BY TYPE
Commercial and financial 13.5% 12.6% 13.2% 14.4% 16.3%
Real estate-construction 0.5 0.7 0.1 0.4 0.4
Real estate-mortgage
1-4 family residential
First liens 13.5 14.9 21.0 20.3 20.3
Junior liens 6.7 8.7 14.5 17.6 20.4
Available for sale 0.4 0.4 5.9 4.2 -
Home equity 32.5 30.3 18.8 22.1 25.0
Commercial 31.2 30.2 22.8 16.6 12.7
Installment
Credit cards and related plans 0.9 1.1 1.5 1.6 1.5
Other 0.8 0.9 1.5 1.6 2.4
Lease financing - 0.2 0.7 1.2 1.0
---- ---- ---- ---- ----
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, 1995. 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 $11,647 $29,254 $1,205 $42,106
Construction 1,484 - - 1,484
--------- --------- -------- ---------
Total $13,131 $29,254 $1,205 $43,590
========= ========= ======== =========
Table 8b
The following table sets forth, as of December 31, 1995, 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 $ 9,374 $ 242
Variable interest rate 19,880 963
-------- --------
Total $29,254 $1,205
======== ========
Commercial real estate mortgage loans amounted to $96.9 million at December
31, 1995, and represented 31.2% of total loans compared to $87.7 million or
30.2% of all loans at the end of 1994. These loans are secured primarily by
first priority mortgage liens on owner-occupied commercial properties. While
approximately 85% 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 3% of its total loans.
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. An independent appraisal of real property is mandatory 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 16.) Other than the loans included
in the table, there were no material potential problem loans, either
individually or in the aggregate, at December 31, 1995.
Table 9
LOAN DELINQUENCIES AND NONPERFORMING ASSETS at December 31,
(dollars in thousands)
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
Loans delinquent and accruing interest
Loans past due 30-89 days $ 853 $ 805 $ 600 $1,838 $5,600
Loans past due 90 days or more - - 157 395 2,286
------ ------ ------ ------ ------
Total loans delinquent and accruing interest $ 853 $ 805 $ 757 $2,233 $7,886
====== ====== ====== ====== ======
Nonaccruing loans $2,511 $6,177 $3,914 $5,303 $4,960
Foreclosed real estate 1,213 880 1,342 1,655 787
Restructured loans 1,465 522 - 285 1,119
------ ------ ------ ------ ------
Total nonperforming assets $5,189 $7,579 $5,256 $7,243 $6,866
====== ====== ====== ====== ======
Total nonperforming assets and loans
past due 90 days or more $5,189 $7,579 $5,413 $7,638 $9,152
====== ====== ====== ====== ======
Nonaccrual loans to total loans 0.81% 2.13% 1.47% 1.97% 1.75%
Nonperforming assets to total loans and
foreclosed real estate 1.66 2.60 1.96 2.67 2.42
Nonperforming assets to total assets 1.06 1.58 1.25 1.79 1.72
Nonaccrual loans and loans past due 90 days
or more to total loans 0.81 2.13 1.52 2.12 2.56
Nonperforming assets and loans past due 90 days
or more to total loans and foreclosed real estate 1.66 2.60 2.02 2.82 3.23
Nonperforming assets and loans past due 90 days
or more to total assets 1.06 1.58 1.28 1.89 2.29
INVESTMENT SECURITIES 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 available for sale.
Table 10 presents a summary of the contractual maturities and weighted
average yields (adjusted to a taxable equivalent basis) of investment securities
and securities available for sale at December 31, 1995.
Table 10
SECURITIES at December 31, 1995
(dollars in thousands)
After 1 After 5
But But Weighted
Within Within Within After Average
1 Year 5 Years 10 Years 10 Years Total Yield
-------- --------- ---------- --------- ------- ---------
Investment securities at amortized cost
Obligations of U.S. Treasury $21,128 $44,095 - - $65,223 6.17%
Obligations of U.S. agencies - 8,037 - - 8,037 6.82
Obligations of states & political
subdivisions 993 175 - $110 1,278 6.10
Other debt securities - 50 $100 - 150 6.17
------- ------- ------- ------- -------
22,121 52,357 100 110 74,688
------- ------- ------- ------- -------
Securities available for sale at market
value
Obligations of U.S. Treasury - 31,063 11,107 - 42,170 6.17
Obligations of U.S. agencies - - - 22,941 22,941 6.19
------- ------- ------- ------- -------
- 31,063 11,107 22,941 65,111
------- ------- ------- ------- -------
Total $22,121 $83,420 $11,207 $23,051 $139,799
======= ======= ======= ======= ========
Weighted average yield 5.92% 6.18% 6.98% 6.21% 6.21%
DEPOSITS
The Company traditionally relies on its deposit base to fund its credit needs.
Core deposits, which include non-interest bearing demand deposits, interest
bearing demand accounts, savings deposits, money market accounts and time
deposits in amounts under $100,000, represented 97.3% of total deposits at
December 31, 1995, and 98.1% at December 31, 1994.
In 1995, the Company experienced a decline in savings deposits and an
increase in certificates of deposit. The shift in these deposit categories is
indicative of higher interest rates during the second half of 1994 and the first
half of 1995 that resulted in the increased popularity of certificates of
deposit.
Table 11
DEPOSIT SUMMARY at December 31,
(dollars in thousands)
1995 1994 1993 1992 1991
--------------- --------------- --------------- ---------------- -----------------
Non-interest bearing demand $69,213 15.8% $66,435 15.7% $59,170 15.3% $49,908 13.5% $52,458 14.0%
Interest bearing demand 110,813 25.4 101,873 24.0 92,115 23.9 87,253 23.7 54,332 14.4
Money market 38,716 8.9 37,816 8.9 43,483 11.3 37,923 10.3 48,300 12.9
Savings 71,170 16.3 75,906 17.9 70,062 18.2 63,168 17.1 50,534 13.4
Time deposits less than $100,000 134,866 30.9 134,097 31.6 110,457 28.7 121,295 32.8 151,680 40.4
Time deposits greater than $100,000 11,674 2.7 8,043 1.9 10,143 2.6 9,780 2.6 18,263 4.9
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
$436,452 100.0% $424,170 100.0% $385,430 100.0% $369,327 100.0% $375,567 100.0%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
* The following table shows the time remaining to maturity of time certificates
of deposit of $100,000 or more as of December 31, 1995 (in thousands)
Three months or less $ 5,720
Over three months through six months 3,289
Over six months through twelve months 1,649
Over twelve months 1,016
-------
$11,674
=======
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
(13.18%) at December 31, 1995. 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
RATE SENSITIVITY ANALYSIS at December 31, 1995
(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 YEAR YEARS 5 YEARS SENSITIVE TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Net loans $108,830 $18,971 $20,605 $53,057 $42,848 $62,225 $ 981 $307,517
Investment securities 69,547 6,044 14,075 48,279 4,078 210 - 142,233
Federal funds sold - - - - - - - -
Cash and amounts due from banks - - - - - - 25,151 25,151
Other non-interest earning assets - - - - - - 16,556 16,556
--------- ------- -------- -------- -------- ------- ------- -------
Total assets 178,377 25,015 34,680 101,336 46,926 62,435 42,688 491,457
--------- ------- -------- -------- ------- ------- ------- -------
Liabilities and stockholders' equity
Demand deposits 110,813 - - - - - 69,213 180,026
Savings deposits* 14,234 - - - 56,936 - - 71,170
Fixed maturity certificates 66,704 27,320 34,135 12,395 5,957 29 - 146,540
of deposits
Money market accounts 38,716 - - - - - - 38,716
Securities sold under agreements
to repurchase - 1,604 100 - - - - 1,704
Other borrowings 5,450 1,250 2,500 - - - - 9,200
Other liabilities - - - - - - 3,860 3,860
Stockholders' equity - - - - - - 40,241 40,241
--------- ------- ------ -------- ------- ------- -------- --------
Total liabilities and 235,917 30,174 36,735 12,395 62,893 29 113,314 $491,457
stockholders' equity --------- ------- ------ -------- ------- ------- --------- ========
GAP $(57,540) $(5,159) $ (2,055) $ 88,941 $(15,967) $62,406 $(70,626)
========= ======== ======= ======== ======== ======= ========
GAP to total assets (11.71)% (1.05)% (0.42)% 18.10% (3.25)% 12.70% (14.37)%
Cumulative GAP $(57,540) $(62,699) $(64,754) $ 24,187 $ 8,220 $70,626
========= ======== ======= ======== ======== =======
Cumulative GAP to total assets (11.71)% (12.76)% (13.18)% 4.92% 1.67% 14.37%
*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 year" 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, funding for the Company's loans and investments is derived
primarily from deposits, along with interest and principal payments on loans and
investments. The Company continued to place considerable emphasis on increasing
core deposits, a stable and cost effective source of funds. At December 31,
1995, core deposits (which represent 97.3% of total deposits) amounted to $424.8
million and increased $8.7 million or 2.1% over the prior comparable year.
During 1995, total deposits increased by $12.3 million. In 1995, the Company
continued to supplement the more traditional funding sources with borrowings
from the Federal Home Loan Bank of New York ("FHLB"). At December 31, 1995,
total advances from the FHLB amounted to $9.2 million as compared to $16.0
million at December 31, 1994.
In 1995, loan production continued to be the Company's principal investing
activity. Net loans at December 31, 1995 amounted to $307.5 million, compared to
$286.8 million at the end of 1994, an increase of $20.7 million or 7.2%.
The Company's most liquid assets are cash and due from banks and federal
funds sold. At December 31, 1995, the total of such assets amounted to $25.2
million or 5.1% of total assets compared to $26.0 million or 5.4% of total
assets, at year-end 1994.
Another significant liquidity source is the Company's available-for-sale
("AFS") securities. During December 1995, the Company reclassified certain
securities between held-to-maturity ("HTM") and AFS (see note 1 to the
consolidated financial statements). This reclassification improved the Company's
liquidity and interest rate sensitivity. At December 31, 1995, AFS securities
amounted to $67.5 million or 47.5% of total investment securities, compared to
$27.3 million or 18.3% of total investment securities at year-end 1994.
In addition to the aforementioned sources of liquidity, the Company derives
liquidity from various other sources, including federal funds purchased from
other banks, the Federal Reserve discount window and sales of securities under
repurchase agreements. The Bank also has a $47.5 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 $40.2 million and represents 8.19% of total assets
at December 31, 1995, compared to $35.1 million and 7.33% of total assets at
December 31, 1994. The $5.1 million increase was primarily attributable to a
$4.3 million rise in retained earnings (net income of $6.3 million less cash
dividends of $2.0 million). Stockholders' equity was further increased by a $2.5
million net increase to the market value adjustment for securities available for
sale. These components were partially offset by a reduction of $1.6 million
relating to the retirement of the Company's preferred stock.
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.
Table 13
Capital Position at December 31, 1995
(dollars in thousands)
Risk-weighted Capital Ratios
-------------------------------------------------------
Ratios
---------------------------------
Amount Actual Minimum
---------- --------- -----------
Stockholders' equity $ 40,241
Intangible assets (1,977)
Unrealized gain-securities available for sale,
net of taxes (646)
--------
Tier 1 capital 37,618 12.95% 4.00%
Allowable portion of allowance
for loan losses 3,632
--------
Total risk-based capital $ 41,250 14.20% 8.00%
========
Risk-weighted assets $290,593
Tier 1 Leverage Ratio
------------------------------------------------------
Ratios
--------------------------------
Amount Actual Minimum
---------- -------- ---------
Tier 1 capital $ 37,618 7.84% 3.00%
Average assets for the three months ended
December 31, 1995, as adjusted $479,580
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 1995 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."
ITEM 11. EXECUTIVE COMPENSATION
Information contained in the section entitled "Executive Compensation" of
the Company's 1995 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 1995 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
mangement" of the Company's 1995 Proxy Statement is incorporated herein by
reference in response to this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL 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, 1995.
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, 1995.
(b) Change in Control Agreement dated May 22, 1995 for
Anthony S. Abbate
(c) Change in Control Agreement dated May 22, 1995 for
Robert N. Harris
(d) Change in Control Agreement dated May 22, 1995 for
Richard N. Latrenta
(e) Change in Control Agreement dated May 22, 1995 for
Frank R. Giancola
(f) 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)).
(g) Lease for Lodi, N.J., Branch Office, dated January 25,
1985 (incorporated herein by reference to Registration
Statement No. 33-49840, exhibit 10(i)).
.
(h) 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).
(i) 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).
(j) 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 1996 Annual
Meeting of Stockholders which will be filed with the
Commission not later than 120 days after December 31,
1995
(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
22. Subsidiaries of Registrant
23. Independent Auditors' Consent
27. Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Interchange Financial Services Corporation
by /s/ Robert N. Harris
-------------------------
ROBERT N. HARRIS
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
March 28, 1996
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
- ---------------------------------------------
Anthony S. Abbate March 28, 1996
Director
President and Chief Executive Officer
/s/ Anthony Amato
- --------------------------------------------
Anthony Amato March 28, 1996
Director
/s/Anthony D. Andora
- ---------------------------------------------
Anthony D. Andora March 28, 1996
Director
Chairman of the Board
/s/Donald L. Correll
- ---------------------------------------------
Donald L. Correll March 28, 1996
Director
/s/John J. Eccleston
- ---------------------------------------------
John J. Eccleston March 28, 1996
Director
/s/J. Fletcher Creamer, Jr.
- ---------------------------------------------
J. Fletcher Creamer, Jr. March 28, 1996
Director
/s/David R. Ficca
- ---------------------------------------------
David R. Ficca March 28, 1996
Director
/s/Robert N. Harris
- ---------------------------------------------
Robert N. Harris March 28, 1996
Executive Vice President and
Chief Financial Officer
/s/James E. Healey
- ---------------------------------------------
James E. Healey March 28, 1996
Director
/s/Eleanore S. Nissley
- ---------------------------------------------
Eleanore S. Nissley March 28, 1996
Director
/s/Jeremiah F. O'Connor
- ---------------------------------------------
Jeremiah F. O'Connor March 28, 1996
Director
/s/Robert P. Rittereiser
- ---------------------------------------------
Robert P. Rittereiser March 28, 1996
Director
/s/Benjamin Rosenzweig
- ---------------------------------------------
Benjamin Rosenzweig March 28, 1996
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......................................... 35
Consolidated Balance Sheets at December 31, 1995 and 1994.............. 36
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993..................................... 37
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1995, 1994 and 1993................. 38
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993..................................... 39
Notes to Consolidated Financial Statements............................. 40
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.
c. Compliance with Section 16(a)
Information contained in the section entitled "Section 16 Compliance" of
the Company's 1995 Proxy Statement is incorporated herein by reference in
response to this item.
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, 1995 and 1994, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1995. 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, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Parsippany, New Jersey
January 19, 1996
INTERCHANGE FINANCIAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(DOLLARS IN THOUSANDS)
1995 1994
--------- ---------
ASSETS
Cash and due from banks $ 25,151 $ 22,865
Federal funds sold - 3,100
-------- --------
Total cash and cash equivalents 25,151 25,965
-------- --------
Investment securities at amortized cost (estimated
market value of $75,611 and $116,718) 74,688 121,512
------- --------
Securities available for sale at estimated market value
amortized cost of $66,604 and $30,079) 67,545 27,269
-------- --------
Loans 311,164 290,654
Less: Allowance for loan losses 3,647 3,839
-------- --------
Net loans 307,517 286,815
-------- --------
Premises and equipment, net 5,510 4,606
Foreclosed real estate 1,213 880
Accrued interest receivable and other assets 9,833 12,265
-------- --------
TOTAL ASSETS $491,457 $479,312
======== ========
LIABILITIES
Deposits
Non-interest bearing $ 69,213 $ 66,435
Interest bearing 367,239 357,735
-------- --------
Total deposits 436,452 424,170
Securities sold under agreements to repurchase 1,704 702
Short-term borrowings 9,200 11,000
Accrued interest payable and other liabilities 3,860 3,311
Long-term borrowings - 5,000
-------- --------
TOTAL LIABILITIES 451,216 444,183
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock - 5,000
Common stock, without par value; 5,000,000 shares authorized;
2,697,100 shares issued and outstanding 4,495 4,495
Capital surplus 12,110 11,333
Retained earnings 22,990 18,737
Unrealized gain(loss)-securities available for sale, net of taxes 646 (1,813)
-------- --------
40,241 37,752
Less: Treasury stock (68,000 shares of preferred, at cost) - 2,623
-------- --------
TOTAL STOCKHOLDERS' EQUITY 40,241 35,129
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $491,457 $479,312
======== ========
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)
1995 1994 1993
-------- -------- --------
INTEREST INCOME
Interest and fees on loans $27,427 $23,537 $22,142
Interest on federal funds sold 374 412 610
Interest and dividends on securities
Taxable interest income 8,969 8,469 6,348
Interest income exempt from federal income taxes 56 59 49
Dividends 169 135 118
------- ------- -------
TOTAL INTEREST INCOME 36,995 32,612 29,267
------- ------- -------
INTEREST EXPENSE
Interest on deposits 14,513 10,635 10,227
Interest on short-term borrowings 506 289 10
Interest on long-term borrowings 131 82 -
-------- ------- -------
TOTAL INTEREST EXPENSE 15,150 11,006 10,237
-------- ------- -------
NET INTEREST INCOME 21,845 21,606 19,030
Provision for loan losses 1,200 944 1,065
-------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 20,645 20,662 17,965
-------- ------- -------
NON-INTEREST INCOME
Service fees on deposit accounts 1,474 1,496 1,300
Net gain/(loss) on sale of securities available for sale 15 (5) 1
Net gain/(loss) on sale of loans available for sale 22 (14) 1,070
Net gain on sale of loans - - 284
Net gain on sale of loan servicing rights 828 - -
Accretion of discount in connection with acquisition 760 760 777
Other 1,653 1,545 1,440
-------- ------- -------
TOTAL NON-INTEREST INCOME 4,752 3,782 4,872
-------- ------- -------
NON-INTEREST EXPENSES
Salaries and benefits 7,254 6,879 6,383
Net occupancy 2,080 1,887 1,799
Furniture and equipment 697 653 729
Advertising and promotion 673 701 745
Federal Deposit Insurance Corporation assessment 503 887 870
Foreclosed real estate expense 227 313 411
Other 4,390 4,426 3,971
-------- ------- -------
TOTAL NON-INTEREST EXPENSES 15,824 15,746 14,908
-------- ------- -------
Income before cumulative effect of change in
accounting principle and income taxes 9,573 8,698 7,929
Income taxes 3,293 3,062 2,887
-------- ------- --------
Income before cumulative effect of
change in accounting principle 6,280 5,636 5,042
Cumulative effect of change in accounting principle - - (205)
-------- -------- --------
NET INCOME $ 6,280 $ 5,636 $ 4,837
======== ======== ========
PER COMMON SHARE
Income before cumulative effect of change
in accounting principle $2.29 $2.05 $1.80
Cumulative effect of change in accounting principle - - (0.08)
-------- -------- --------
Net income $2.29 $2.05 $1.72
======== ======== ========
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, 1993 $5,000 $4,495 $11,333 $12,350 $(1,623) $31,555
Net income 4,837 4,837
Dividends on common stock
at $0.70 per share (1,888) (1,888)
Dividends on preferred stock (199) (199)
Purchase of 25,000 preferred shares (1,000) (1,000)
------ ------ ------- ------- ------- ------
Balance at December 31, 1993 5,000 4,495 11,333 15,100 (2,623) 33,305
Net income 5,636 5,636
Dividends on common stock
at $0.70 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 $0.72 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
======= ====== ======= ======= ======= ====== =======
See notes to consolidated financial statements.
INTERCHANGE FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
1995 1994 1993
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . $ 6,280 $ 5,636 $ 4,837
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization of fixed assets. . . 859 831 752
Amortization of securities premiums . . . . . . . 1,452 1,543 1,106
Accretion of securities discounts . . . . . . . . (53) (11) (7)
Amortization of premium in connection with
acquisitions . . . . . . . . . . . . . . . . . . 444 403 197
Accretion of discount in connection with
acquisition . . . . . . . . . . . . . . . . . . . (760) (760) (777)
Provision for loan losses . . . . . . . . . . . . 1,200 944 1,065
Net (gain) loss on sale of foreclosed real estate (127) (209) 1
Net (gain) loss on sale of securities available
for sale . . . . . . . . . . . . . . . . . . . . . (15) 5 (1)
Net (gain) loss on sale of loans available for
sale . . . . . . . . . . . . . . . . . . . . . . . (22) 14 (1,070)
Net gain on sale of loans . . . . . . . . . . . . - - (284)
Reduction in carrying value of foreclosed real
estate . . . . . . . . . . . . . . . . . . . . . . - 122 203
(Increase) decrease in carrying value of loans
available for sale . . . . . . . . . . . . . . . . (80) 85 -
Loss on sale of fixed assets. . . . . . . . . . . 26 - -
(Increase) decrease in operating assets
Net origination of loans available for sale . . . (755) (15,451) (43,493)
Proceeds from sale of loans available for sale . . 837 2,129 40,205
Premium in connection with acquisition . . . . . . - (1,724) -
Accrued interest receivable . . . . . . . . . . . 144 (917) (151)
Deferred income taxes . . . . . . . . . . . . . . (134) (76) 99
Other. . . . . . . . . . . . . . . . . . . . . . . 694 (1,898) 502
Increase (decrease) in operating liabilities
Accrued interest payable . . . . . . . . . . . . . 162 72 (324)
Other . . . . . . . . . . . . . . . . . . . . . . 387 619 (137)
------- ------- -------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 10,539 (8,643) 2,723
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
(Payments for) proceeds from
Net origination of loans . . . . . . . . . . . . . (20,470) 1,377 4,932
Purchase of loans . . . . . . . . . . . . . . . . (1,251) (42,244) (900)
Sale of loans . . . . . . . . . . . . . . . . . . - 1,809 1,271
Purchase of securities available for sale . . . . (5,905) (1,895) (3,249)
Maturities of securities available for sale . . . 2,396 2,907 55
Sale of securities available for sale . . . . . . 2,484 305 789
Purchase of investment securities . . . . . . . . (3,999) (23,618) (30,152)
Maturities of investment securities . . . . . . . 14,000 16,000 9,000
Sale of foreclosed real estate . . . . . . . . . . 678 1,136 1,455
Advances on foreclosed real estate . . . . . . . . (285) (106) (268)
Purchase of fixed assets . . . . . . . . . . . . . (1,862) (667) (1,166)
Sale of fixed assets. . . . . . . . . . . . . . . 4 - -
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (14,210) (44,996) (18,233)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments for)
Deposits in excess of withdrawals . . . . . . . . 12,282 12,272 16,103
Securities sold under agreements to repurchase . . 1,704 295 203
Other borrowings . . . . . . . . . . . . . . . . . 4,200 18,000 -
Retirement of securities sold under agreement to
repurchase and other borrowings. . . . . . . . . (11,702) (2,000) -
Acquisition of deposit accounts . . . . . . . . . - 26,468 -
Dividends . . . . . . . . . . . . . . . . . . . . (2,027) (1,999) (2,087)
Treasury stock . . . . . . . . . . . . . . . . . . (1,600) - (1,000)
------- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,857 53,036 13,219
------- ------- -------
Decrease in cash and cash equivalents . . . . . . . . . (814) (603) (2,291)
Cash and cash equivalents at beginning of year . . . . . 25,965 26,568 28,859
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $25,151 $25,965 $26,568
======= ======= =======
Supplemental disclosure of cash flow information Cash paid for:
Income taxes. . . . . . . . . . . . . . . . . . . $ 3,346 $ 3,527 $ 2,595
Interest. . . . . . . . . . . . . . . . . . . . . 14,988 10,934 10,561
Supplemental non-cash investing activities
Loans transferred to foreclosed real estate. . . . 599 481 1,078
Securitization of loans reclassified to
securities available for sale. . . . . . . . . . - 27,888 -
(Increase) decrease-market valuation of securities
available for sale. . . . . . . . . . . . . . . (3,812) 2,810 -
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 business 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 and Passaic counties).
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 the maturities or repricing of assets are different than the
maturities or repricing of the 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.
Investment Securities 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 accretions 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.
During December 1995, the Company reclassified certain securities in its
investment portfolio. The reclassification was allowed by the Financial
Accounting Standards Board ("FASB") in their Special Report entitled "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." The Special Report established a one-time reprieve of
Statement 115 that extended from November 15, 1995 to December 31, 1995. The
reprieve provided the Company a single opportunity to reassess its investment
portfolio and revise the classifications. As a result of the reclassification,
stockholders' equity increased by $827 thousand.
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, 1995, approximately 85% of all loans are collateralized
by real estate located in northern New Jersey, the Company's market area.
Loans are placed on non-accrual 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 non-accrual
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.
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 in excess of that assigned to fair value specific loans,
recorded as an allowance for loan losses and accrued for acquisitions costs, is
being accreted into income over a five-year period ending July 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 non-accrual commercial and commercial
mortgages 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 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 adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" (SFAS 109) in 1993. Under the asset and liability
method of SFAS 109, 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 2,697,100 during 1995, 1994, and 1993. The potential dilution
from the exercise of stock options is not material.
2. ACQUISITIONS
On February 25, 1994, Interchange State Bank (the "Bank"), the wholly owned
subsidiary of the Company, 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 1995, 1994 and 1993, included in non-interest
expenses, amounted to $444,000, $403,000 and $197,000, 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 1995 and 1994 was approximately $6,803,000 and
$6,409,000, respectively.
4. INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE
Investment securities and securities available for sale are summarized as follows: (in thousands)
------------------------------------------------------------
December 31, 1995
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------------
INVESTMENT SECURITIES:
OBLIGATIONS OF U.S. TREASURY $65,223 $942 $26 $66,139
OBLIGATIONS OF U.S. AGENCIES 8,037 7 - 8,044
OBLIGATIONS OF STATES & POLITICAL 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
======= ===== ===== =======
------------------------------------------------------------
December 31, 1994
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------
Investment securities:
Obligations of U.S. Treasury $121,512 $47 $4,841 $116,718
------- ----- ------ -------
Securities available for sale:
Obligations of U.S. agencies 26,855 - 2,823 24,032
Obligations of states & political subdivisions 1,442 12 2 1,452
Other debt securities 147 3 - 150
Equity securities 1,635 - - 1,635
------- ----- ------ -------
30,079 15 2,825 27,269
------- ----- ------ -------
Total securities $151,591 $62 $7,666 $143,987
======= ===== ====== =======
At December 31, 1995, the contractual maturities of investment securities and securities available
for sale are as follows: (in thousands)
Securities
Investment Securities Available for Sale
--------------------------- ----------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ---------- ---------- -----------
Within 1 year $22,121 $22,227 - -
After 1 but within 5 years 52,357 53,174 $30,513 $31,063
After 5 but within 10 years 100 100 10,375 11,107
After 10 years 110 110 23,282 22,941
Equity securities - - 2,434 2,434
------- ------- ------- =------
$74,688 $75,611 $66,604 $67,545
======= ======= ======= =======
Proceeds from the sale of securities available for sale totaled $2,484,000,
$305,000 and $789,000 during the years ended December 31, 1995, 1994 and 1993,
respectively. Gains of $15,000 and $1,000 were realized in 1995 and 1993,
respectively, and a loss of $5,000 was realized in 1994.
Securities with carrying amounts of $11.1 million and $9.4 million at
December 31, 1995 and 1994, 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,
----------------------------
1995 1994
--------- ---------
Commercial and financial $ 42,106 $ 36,512
Real Estate
Residential 164,140 156,642
Commercial 96,910 87,728
Construction 1,484 1,917
Available for sale 1,106 1,086
Installment 5,363 6,071
Lease financing 55 698
--------- ---------
311,164 290,654
Allowance for loan losses 3,647 3,839
--------- ---------
Net loans $307,517 $286,815
========= =========
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,
------------------------------------------------
1995 1994 1993
------------ ------------ ------------
Nonaccrual loans
Commercial and financial $ 621 $ 3,159 $1,793
Residential real estate 1,646 2,430 2,115
Commercial real estate 235 588 -
Installment 9 - 6
------ ------ ------
$2,511 $6,177 $3,914
====== ====== ======
Troubled debt restructurings
Commercial and financial $1,000 $277 -
Commercial real estate 465 245 -
------ ------ ------
$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 $254 $669 $421
Interest income included in net income
during the year on nonaccrual loans
outstanding at year-end $114 $398 $134
Nonaccrual loans acquired in a 1991 transaction, at an estimated fair value
of $452,000, $1,060,000 and $1,586,000 at December 31, 1995, 1994 and 1993,
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, $2,773,000 and $3,648,000,
respectively.
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 $157,000 at December 31, 1993. 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,
------------------------------------
1995 1994
-------- --------
BALANCE AT BEGINNING OF YEAR $3,121 $3,725
Additions 339 359
Reductions (900) (963)
------ ------
BALANCE AT END OF YEAR $2,560 $3,121
====== ======
6. ALLOWANCE FOR LOAN LOSSES (in thousands)
The Company's recorded investment in impaired loans at December 31, is as
follows:
------------------------------ -----------------------------------
1995 1994
------------------------------ -----------------------------------
Related Related
Allowance Allowance
for Loan for Loan
Investment Losses Investment Losses
----------- ----------- ------------ -----------
Impaired loans
With a related allowance for
loan losses . . . . . . . . . . . . . . $2,290 $300 $4,486 $627
Without a related allowance
for loan losses . . . . . . . . . . . . 18 - 321 -
------ ---- ------ ----
$2,308 $300 $4,807 $627
====== ==== ====== ====
The following table sets forth certain information about impaired loans for the
year ended December 31, 1995:
Average recorded investment . . . . . . . . $2,485
======
Interest income recognized during time period that loans were impaired:
Recognized using cash-basis method
of accounting . . . . . . . . . . . . . . . $141
Recognized by other methods . . . . . . -
----
$141
====
Changes in the allowance for loan losses are summarized as follows:
----------------------------------------------
Years Ended December 31,
----------------------------------------------
1995 1994 1993
-------- -------- --------
BALANCE AT BEGINNING OF YEAR $3,839 $3,905 $4,100
Additions (deductions)
Provision charged to operations 1,200 944 1,065
Recoveries loans previously
charged off 118 114 51
Loans charged off (1,510) (1,124) (1,311)
------ ------ ------
BALANCE AT END OF YEAR $3,647 $3,839 $3,905
====== ====== ======
- -------------------------------------------------------------------------------------------------------------------
For years ended December 31, 1995, 1994 and 1993, the provisions charged to
expense for federal income tax purposes amounted to approximately $1,392,000,
$1,010,000 and $1,102,000, respectively.
7. PREMISES AND EQUIPMENT, NET
Premises and equipment are summarized as follows: (in thousands)
----------------------------
December 31,
----------------------------
1995 1994
-------- --------
Land $ 743 $ 743
Buildings 1,062 1,062
Furniture, fixture and equipment 3,864 3,252
Leasehold improvements 4,715 4,138
------ ------
10,384 9,195
Less accumulated depreciation and
amortization 4,874 4,589
------ ------
$5,510 $4,606
====== ======
8. DEPOSITS
Deposits are summarized as follows: (in thousands)
---------------------------------
December 31,
---------------------------------
1995 1994
-------- --------
Non-interest bearing demand deposits $ 69,213 $ 66,435
Interest bearing demand deposits 110,813 101,873
Money market deposits 38,716 37,816
Savings deposits 71,170 75,906
Time deposits 146,540 142,140
-------- --------
$436,452 $424,170
======== ========
At December 31, 1995 and 1994, the carrying amounts of certificates of
deposit that individually exceed $100,000 amounted to $11,674,000 and
$8,043,000, respectively. Interest expense related to such deposits was
approximately $568,000, $312,000 and $282,000 in 1995, 1994, and 1993,
respectively.
9. SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows: (in thousands)
------------------------
December 31,
------------------------
1995 1994
----- ----
Securities sold under
repurchase agreement $ 1,704 $ 702
Federal funds purchased 4,200 -
Advances from the Federal
Home Loan Bank of New York 5,000 11,000
----- ------
$10,904 $11,702
======= =======
The bank has a $47.5 million line of credit available through its
membership in the Federal Home Loan Bank of New York.
10. LONG-TERM BORROWINGS
Long-term debt amounting to $5.0 million at December 31, 1994 consisted of
an advance from the Federal Home Loan Bank of New York payable in equal
quarterly installments of $1,250,000 beginning in January 1996 and continuing
through October 1996. The aggregate average interest rate was 6.93% and ranged
from 6.71% to 7.14%.
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)
Supplemental
Pension Plan Plan Director's Plan
------------------------------------ ----------------------- ----------------------
1995 1994 1993 1995 1994 1995 1994
------ ------ ------ ------ ------ ------ ------
Service cost of benefits during
period $134 $195 $181 $10 $14 $ 39 $ 17
Interest cost on projected benefit
obligation 22 14 - 2 1 66 26
Actual return on plan assets (65) (5) - - - - -
Net amortization or deferral 39 (7) - - 1 147 61
---- ---- ---- --- --- ---- ----
Net pension cost $130 $197 $181 $12 $16 $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)
Supplemental
Pension Plan Plan Director's Plan
------------------- ------------------ -------------------
1995 1994 1995 1994 1995 1994
------ ------ ------ ------ ------ ------
Accumulated benefit obligation:
Vested $ 27 $ 19 - - $921 $775
Non-vested 275 160 $19 $ 5 - -
---- ---- --- --- ---- ----
$302 $179 $19 $ 5 $921 $775
==== ==== === === ==== ====
Projected benefit obligation $527 $248 $38 $17 $921 $775
Plan assets at fair value 488 221 - - - -
---- ---- --- --- ---- ----
Projected benefit obligation in
excess of plan assets 39 27 38 17 921 775
Unrecognized prior service cost 7 7 (9) (10) (535) (682)
Unrecognized net gain 37 128 (1) 9 (30) 11
Adjustment for additional liability - - - - 565 671
---- ---- --- --- ---- ----
Accrued pension cost included in
the balance sheet $83 $162 $28 $16 $921 $775
==== ==== === === ==== ====
Major assumptions:
Discount rate 7.5% 8.5% 7.5% 8.5% 7.5% 8.5%
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
Effective as of January 1, 1993, the Employees' Stock Ownership Plan (the
"ESOP") was renamed the Capital Investment Plan (the "Plan"). The Plan permits
employees to make basic contributions up to 4% of base compensation and may make
additional contributions up to 10% of compensation 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 $115,000, $98,000 and $106,000 in 1995, 1994 and 1993, 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 270,000 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.
Changes in options outstanding during the past three years were as follows:
Price range
Shares per share
------ -------------
Outstanding, January 1, 1993
(20,398 shares exercisable) 34,001 $11.125
Granted in 1993 30,250 16.875 to 17.00
Outstanding, December 31, 1993
(27,200 shares exercisable) 64,251 11.125 to 17.00
Outstanding, December 31, 1994
(43,383 shares exercisable) 64,251 11.125 to 17.00
Outstanding, December 31, 1995
(52,767 shares exerciseable
at $11.125 to $17.00) 64,251 11.125 to 17.00
13. OTHER NON-INTEREST EXPENSES
Expenses included in other non-interest expenses which exceed one percent of the
aggregate of total interest income and non-interest income in 1995, 1994 and
1993 are as follows:
1995 1994 1993
---- ---- ----
Professional fees $1,224 $1,254 $1,249
Amortization of premiums in
connection with acquisitions 444 403 197
Directors' fees, travel and
retirement 536 399 236
Insurance premiums 256 332 364
14. INCOME TAXES
Income tax expense for the years ended December 31, is summarized as follows: (in thousands)
1995 1994 1993
---- ---- ----
Federal: current $3,168 $2,913 $2,674
deferred (122) (62) (81)
State: current 259 225 319
deferred (12) (14) (25)
------ ----- ------
$3,293 $3,062 $2,887
====== ====== ======
The timing 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)
1995 1994
---- ----
Deferred tax assets
Excess of book over tax allowance for loan losses $752 $835
Excess of book over tax depreciation 201 146
Accrued lawsuit settlement not reflected
on tax return 81 189
Loan origination fees reported as taxable
income when received but deferred
for book reporting 192 178
Excess of book over tax provision for
benefit plan expense 259 118
Unrealized loss - securities available for sale - 997
Unrealized loss on other assets 183 137
Other 126 70
----- ------
Total deferred tax assets 1,794 2,670
Deferred tax liabilities
Accretion of bond discount not reported
as taxable income - 13
Unrealized gains-securites available for sale 356 -
------ ------
Net deferred tax assets $1,438 $2,657
====== ======
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 $1.4
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,
------------------------------------------------
1995 1994 1993
---- ---- ----
Expected provision at statutory rate 34% 34% 34%
Difference resulting from:
State income tax, net of federal benefit 1 2 2
Interest income exempt from federal taxes (1) (1) (1)
Other, net - - 1
---- ---- ----
34% 35% 36%
==== ==== ====
15. 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.
16. PARENT COMPANY INFORMATION (in thousands)
----------------------------
DECEMBER 31,
----------------------------
CONDENSED BALANCE SHEETS 1995 1994
------------ ----------
Assets
Cash $ 10 $ 10
Investment in subsidiaries
Bank 40,231 35,021
Other 142 142
Dividends receivable 485 472
Other assets - 110
------- -------
Total assets $40,868 $35,755
======= =======
Liabilities
Dividends payable $ 485 $ 472
Other liabilities 142 154
------- -------
627 626
------- -------
Stockholders' equity
Preferred stock - 5,000
Common stock 4,495 4,495
Surplus 12,110 11,333
Retained earnings 22,990 18,737
Unrealized gain/(loss) - securities
available for sale, net of taxes 646 (1,813)
------- ------
40,241 37,752
Less: Treasury stock - (2,623)
------- ------
Total liabilities and stockholders' equity $40,868 $35,755
======= =======
--------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------------------
CONDENSED STATEMENTS OF INCOME 1995 1994 1993
------- ------- ------
Dividends from subsidiary bank $3,627 $1,999 $2,587
Interest income on securities - - 10
Management fees 44 120 40
------ ------ ------
Total revenues 3,671 2,119 2,637
------ ------ ------
Operating expenses 142 133 105
------ ------ ------
Income before equity in undistributed earnings
of subsidiaries 3,529 1,986 2,532
Equity in undistributed earnings of subsidiaries 2,751 3,650 2,305
------ ------ ------
Net income $6,280 $5,636 $4,837
====== ====== ======
--------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 1995 1994 1993
------- ------- -------
Cash flows from operating activities
Net income $6,280 $5,636 $4,837
Adjustments to reconcile net income
to net cash provided by operating activities
Decrease in other assets 97 1 14
Increase in dividends payable 13 - -
(Decrease)/increase in other liabilities (12) 12 -
Equity in undistributed income of subsidiaries (2,751) (3,650) (2,305)
------ ------ ------
Net Cash provided by operating activities 3,627 1,999 2,546
------ ------ ------
Cash flows from financing activities
Cash dividends paid (2,027) (1,999) (2,087)
Treasury stock (1,600) - (1,000)
------ ------ ------
Net cash used in financing activities (3,627) (1,999) (3,087)
Net decrease in cash - - (541)
Cash at beginning of year 10 10 551
------ ------- ------
Cash at end of year $ 10 $ 10 $ 10
====== ======= ======
17. RESTRICTIONS OF SUBSIDIARY BANK DIVIDENDS
Under New Jersey State law, the Bank may declare a dividend only if, after
payment thereof, its capital would be unimpaired and its remaining surplus would
equal 50 percent of its capital. At December 31, 1995, undistributed net assets
of the Bank were $40,231,000 of which $35,913,000 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.
18. 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.
A summary of commitments to extend credit at December 31, are summarized as
follows: (in thousands)
1995 1994
---- ----
Credit card loans $ 6,985 $ 7,177
Home equity loans 41,089 41,993
Other loans 21,444 18,488
Standby letters of credit 1,258 914
------- ------
$70,776 $68,572
======= =======
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)
1996 $ 771
1997 707
1998 668
1999 556
2000 471
thereafter 895
---
Total minimum
lease payments $4,068
=====
Rent expense for all leases amounted to approximately $985,000, $884,000
and $1,009,000 in 1995, 1994, and 1993, respectively.
The Company leases certain real estate from three companies affiliated with
directors of the Company. Rental expense associated with such leases was
$157,000, $167,000 and $165,000 for the years ended December 31, 1995, 1994, and
1993, respectively. The aggregate minimum rental commitments through 2005 under
these leases was approximately $904,000 at December 31, 1995. A director of the
Company also provided legal services through his affiliated firm. Fees paid for
these services amounted to $322,500, $426,500 and $521,100 in 1995, 1994, and
1993, respectively. In 1993, certain directors provided insurance brokerage
services and consulting services through their affiliated firms and fees paid
for these services amounted to $513,000.
In addition, the Bank is a defendant in a lawsuit commenced in April 1989,
(GREAT AMERICAN MORTGAGE CORP. ET AL VS. ROBERT UTTER ET AL.) filed in Superior
Court of New Jersey alleging that the Bank was statutorily liable in conversion
for having paid checks drawn on demand deposit accounts of plaintiffs at the
Bank bearing forged endorsements.
On December 2, 1992, the court directed judgment to be entered against the
Bank in the total principal sum of $484,000 with prejudgment interest. On April
5, 1993, the Bank filed a Notice of Appeal of this judgment and, by virtue of
post-judgment motions, the amount was reduced to the principal sum of $311,000
plus pre-judgment interest. This judgment was appealed and, by virtue of this
appeal, the amount was further reduced to $245,000. The matter remained on
appeal until May 8, 1995, at which time, by Court order, the matter was settled.
Pursuant thereto, the Bank has paid a total of $89 thousand against the
aforesaid judgment, which has now been discharged of record. The Bank continues
to pursue various parties for recoupment of the aforesaid monies under which it
is likely that the Bank's liability for the payment will either be reduced to
its proportionate share under contribution theories or it will be exonerated
under indemnification theories.
In a related matter, on January 8, 1993, an interlocutory judgment was
entered against the Bank in the principal sum of $120,000 with prejudgment
interest. The Bank has appealed this judgment and a stay of execution has been
effected.
In 1992, the Company accrued $500,000 as a provision for an adverse
judgment in this litigation. Based on the May 8, 1995, partial settlement of
these matters, the Company has reduced the reserve by $250 thousand to $161
thousand which the Company and its legal counsel believe is adequate to cover
any remaining liabilities related to these matters.
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.
19. QUARTERLY FINANCIAL DATA (unaudited)(in thousands except per share data)
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------------------------------------------------------
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
AVAILABLE FOR SALE - 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 $0.51 $0.57 $0.51 $0.70
----------------------------------------------------------------------------------------------------------------
First Second Third Fourth
1994 Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------
Interest income $7,496 $7,772 $8,510 $8,834
Interest expense 2,392 2,550 2,778 3,286
Net interest income 5,104 5,222 5,732 5,548
Provision for loan losses 225 225 225 269
Net loss on sale of securities
available for sale - - - (5)
Income before income taxes 1,806 2,185 2,535 2,172
Net income 1,171 1,409 1,630 1,426
Net income per common share $0.42 $0.52 $0.59 $0.52
- ------------------------------------------------------------------------------
20. FAIR VALUE OF FINANCIAL INSTRUMENTS (in thousands)
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Values of Financial Instruments" ("SFAS No. 107") requires that the Company
disclose estimated fair values for its financial instruments. Fair value
estimates 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, as permitted by SFAS No. 107. 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.
1995 1994
---------------------------------- -----------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
------------- ------------ ------------ ------------
Financial assets:
Cash and cash equivalents $ 25,151 $ 25,151 $ 25,965 $ 25,965
Investment securities 74,688 75,611 121,512 116,718
Securities available for sale 67,545 67,545 27,269 27,269
Loans, net 307,517 313,097 286,815 280,042
-------- -------- -------- --------
$474,901 $481,404 $461,561 $449,994
======== ======== ======== ========
Financial liabilities:
Deposits $436,452 $436,699 424,170 423,895
Short-term borrowings 10,904 10,904 11,702 11,702
Long-term borrowings - - 5,000 4,956
-------- -------- -------- --------
$447,356 $447,603 $440,872 $440,553
======== ======== ======== ========
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 non-performing 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, 1995 and 1994, the estimated fair values of these
off-balance-sheet financial instruments were immaterial.