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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM____ TO ____
Commission File number 1-10518
INTERCHANGE FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2553159
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Park 80 West/Plaza Two, Saddle Brook, NJ 07663
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 703-2265
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of Each Class which registered
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Common Stock (no par value) American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
Title of Class
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None
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report) and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Park III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of outstanding shares of the Registrant's common stock, no par
value per share, as of March 5, 1999, was as follows:
Class Number of Outstanding Shares
- --------------- -----------------------------
Common Stock
(No par value) 7,210,237
The aggregate market value of Registrant's voting stock (based upon the closing
trade price on March 5, 1999), held by non-affiliates of the Registrant was
approximately $95,534,657
Documents incorporated by reference:
Portions of Registrant's definitive Proxy Statement for the 1999 Annual Meeting
of Stockholders are incorporated by reference to Part III of this Annual Report
on Form 10-K.
Portions of Registrant's Annual Report to Shareholders for the fiscal year ended
December 31, 1998 are incorporated by reference to Parts II and IV of this
Annual Report on Form 10-K.
INTERCHANGE FINANCIAL SERVICES CORPORATION
INDEX TO ANNUAL REPORT
ON FORM 10-K
PART 1 PAGE
Item 1. Business............................................................. 1
Item 2. Properties........................................................... 7
Item 3. Legal Proceedings.................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders.................. 8
Executive Officers ........................................................... 9
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters............................................................. 10
Item 6. Selected Consolidated Financial Data............................... 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Resultsof Operations...............................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.. ...... 13
Item 8. Financial Statements and Supplementary Data........................ 13
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................... 13
PART III
Item 10. Directors and Executive Officers of the Registrant................. 13
Item 11. Executive Compensation............................................. 14
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................. 14
Item 13. Certain Relationships and Related Transactions..................... 14
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K......................................... 15
Signatures................................................................... 16
PART I
Item 1. Business
General
Interchange Financial Services Corporation (the "Company"), a New Jersey
business corporation and registered bank holding company under the Bank Holding
Company Act of 1956, as amended, acquired all of the outstanding stock of
Interchange Bank, (formerly known as Interchange State Bank), a New Jersey
chartered bank (the "Bank" or "Interchange"), in 1986.
The Bank, established in 1969, is a full-service commercial bank
headquartered in Saddle Brook, New Jersey and is a member of the Federal Reserve
System. It offers banking services for individuals and businesses through its
fifteen banking offices and one supermarket mini-branch in Bergen County, New
Jersey. In 1998, the Company acquired The Jersey Bank for Savings ("Jersey
Bank"), which maintained two banking offices, one in Montvale, New Jersey and
another that was opened in the later part of 1996 in River Edge, New Jersey. In
addition, during 1998, the Company opened a full-service branch in Paramus, New
Jersey adjacent to a shopping mall along with a mini-branch within a 70,000
square foot supermarket located in the shopping mall.
In addition to the Bank, the Company has other wholly owned direct
subsidiaries. Clover Leaf Mortgage Company, a New Jersey Corporation established
in 1988 which is not currently engaged in any business activity, and Washington
Interchange Corporation, a New Jersey Corporation which was acquired by the
Company in May 1997 and owns one of the Bank's branch locations which it leases
to the Bank.
Subsidiaries of Interchange Bank include Clover Leaf Investment
Corporation, established in 1988 to engage in the business of an investment
company pursuant to New Jersey law; Clover Leaf Insurance Agency, Inc.,
established in 1990 to engage in the sales of tax-deferred annuities, and Clover
Leaf Management Realty Corporation which was originally established in 1987
under the name Clover Leaf Development Corporation. In 1998, the name and
purpose were changed in order to establish a Real Estate Investment Trust
("REIT") that could manage certain real estate assets of the Company in an
effort to take advantage of certain tax benefits. All the Bank's subsidiaries
are New Jersey corporations and are 100% owned by the Bank, except for the REIT
which is 99% owned by the Bank.
Banking Operations
The Bank offers a wide range of consumer banking services, including:
checking and savings accounts, money-market accounts, certificates of deposit,
individual retirement accounts, residential mortgages, home equity lines of
credit and other second mortgage loans, home improvement loans, automobile
loans, personal loans and overdraft protection. The Bank also offers its own
VISA(TM) credit card and several convenience products including the Interchange
Check Card which lets you access your checking account by using the card when
you make purchases. It can also be used as an
1
ATM card to perform all the usual transactions. Interchange Bank-Line(R) allows
customers to perform basic banking transactions over the telephone and also
offers Direct Bill Payment. Direct Bill Payment allows customers to pay bills
over the phone since bill payments are debited directly to the customer's
checking account.The Bank is also in the mutual fund sales market. An Investment
Services Program is offered through an alliance between Interchange Bank and
Independent Bankers Association of America Financial Services Corporation
("IBAA"), under which mutual funds offered by IBAA are made available to the
Bank's customers by Bank employees. Fifteen automated teller machines (MAC(TM),
Plus(TM), HONOR(TM), CIRRUS(TM), VISA(TM), NYCE(TM), and MasterCard(TM)
networks) are located at thirteen of the banking offices, two are located at
supermarkets and one at a mini-market.
The Bank is engaged in the financing of local business and industry,
providing credit facilities and related services for smaller businesses,
typically those with $1 million to $5 million in annual sales. Commercial loan
customers of the Bank are businesses ranging from light manufacturing and local
wholesale and distribution companies to medium-sized service firms and local
retail businesses. Most forms of commercial lending are offered, including
working capital lines of credit, small business administration loans, term loans
for fixed asset acquisitions, commercial mortgages and other forms of
asset-based financing.
The Bank has taken advantage of opportunities to purchase packages of loans
and leases. In 1998, the Bank purchased $4.6 million of residential real estate
loans, and in 1997, the Bank purchased $10.2 million and $9.1 million of auto
leases and residential real estate loans, respectively. These loans and leases
were subjected to the Bank's independent credit analysis prior to purchase and
were, in some cases, purchased with a limited buy-back obligation or other
financial assurance from the sellers. In the Bank's experience, there are
significant opportunities to sell the Bank's other products and services to the
borrowers whose loans are purchased. The Bank believes that purchasing loans and
leases will continue to be a desirable way to increase its portfolios as
opportunities arise.
Deposits of the Bank are insured up to $100,000 per depositor by the Bank
Insurance Fund administered by the Federal Deposit Insurance Corporation
("FDIC").
Personnel
The Company had on average 208 full-time-equivalent employees during 1998.
Its principal executive office is located at Park 80 West/Plaza Two, Saddle
Brook, New Jersey 07663, telephone number (201) 703-2265. As used herein the
term "Company" includes the Bank and the subsidiaries of the Bank, unless the
context otherwise requires.
Market Areas
The Bank's principal market for its deposit gathering activities covers
major portions of Bergen County in the northeastern corner of New Jersey
adjacent to New York City. Bergen County has a relatively large affluent base
for the Bank's services. The principal service areas of the Bank represent a
diversified mix of stable residential neighborhoods
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with a wide range of per household income levels; offices, service industries
and light industrial facilities; and large shopping malls and small retail
outlets.
For many years Interchange Bank has conducted periodic market research to
keep aware of market trends. Much of this research affirmed that consumer
financial needs are directly related to identifiable life stages. In response to
these distinctive preferences, the Bank has designed and marketed "packaged"
products to appeal to these different segments.
Since there is a preponderance of the population in the age groups of 35-54
and 55+, Interchange has strategically targeted these two life stage segments by
designing and marketing "packaged" products (Money Maker Account and Prime Time
Account) which include deposit, credit and other services sold together as a
product unit. We also recognized the needs of "Generation X" with the Money Plus
Account (25-34) and our youngest with the Grow'N Up Savings(R) Passbook Account.
The Bank was among the first to offer such packaged financial products in its
area and management believes they have been successful in attracting deposits
and building a loyal client base.
Competition
Competition in the banking and financial services industry in the Company's
market area is intense. The Bank competes actively with national and
state-chartered commercial banks and other financial institutions, including
savings and loan associations, mutual savings banks, and credit unions. In
addition, the Bank faces competition from less heavily regulated entities such
as brokerage institutions, money management firms, consumer finance and credit
card companies and various other types of financial services companies. Many of
these institutions are larger than the Bank, some are better capitalized, and a
number pursue community banking strategies similar to those of the Bank.
Management believes that opportunities continue to exist to satisfy the
deposit and lending demands of small and middle market businesses. Larger banks
continued to show an appetite for only the largest loans, finding themselves
ill-equipped to administer smaller loans profitably. Interchange has the desire
and the ability to give smaller businesses the service they require and deserve.
Interchange meets this need through a unique program called Rapid Response
Banking. The program provides commercial loans up to $100,000 with a streamlined
approval process that borrows liberally from standard consumer lending
practices. Naturally, in due course, many small businesses become midsize
businesses, with a corresponding change in their financial requirements. But
they do not outgrow Interchange because of its ability to be responsive to both
constituencies. To continue serving companies throughout the various stages of
their evolution, Interchange created Business Class Banking--a program that
grows with the customer. Business Class Banking supports a spectrum of
business-oriented financial products with value-added services. By designing
progressive programs to accommodate the changing needs of growing businesses,
Interchange is extending the longevity of valuable customer relationships.
3
Interchange Bank maintains a relational database. This is a powerful
technology, designed expressly for the banking industry and generally associated
with only the largest and most forward thinking companies. This technology
greatly enhances the Bank's internal marketing analysis by providing information
about account relationships, their activity and their relative value to the Bank
in great detail.
Interchange has maintained an ambitious program of primary research to keep
abreast of customer attitudes and preferences. Our sales quotas and incentives
for employees are linked directly to bank-wide goals and are used to motivate
employees to sell the "right" products to the "right" customers.
Regulation and Supervision
Banking is a complex, highly-regulated industry. The primary goals of the
bank regulatory scheme are to maintain a safe and sound banking system and to
facilitate the conduct of monetary policy. In furtherance of those goals,
Congress has created several largely antonomous regulatory agencies and enacted
myriad legislation that governs bank, bank holding companies and the banking
industry. Descriptions and references to the statutes and regulations below are
brief summaries thereof and do not purport to be complete.
The Company
The Company is a bank holding company under the Bank Holding Company Act of
1956, as amended (the "Holding Company Act"), and as such, is subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System (the "Federal Reserve "). As a bank holding company, the Company is
required to file an annual report with the Federal Reserve and such additional
information as the Federal Reserve may require pursuant to the Holding Company
Act and Federal Regulation Y. The Federal Reserve may conduct examinations of
the Company or any of its subsidiaries.
The Holding Company Act requires every bank holding company to obtain the
prior approval of the Federal Reserve before it may acquire all or substantially
all of the assets of any bank (although the Federal Reserve may not assert
jurisdiction in certain bank mergers that are regulated under the Bank Merger
Act), or ownership or control of any voting shares of any bank if after such
acquisition it would own or control directly or indirectly more than 5% of the
voting shares of such bank.
The Holding Company Act also provides that, with certain limited
exceptions, a bank holding company many not (i) engage in any activities other
than those of banking or managing or controlling banks and other authorized
subsidiaries or (ii) own or control more than five percent (5%) of the voting
shares of any company that is not a bank, including any foreign company. A bank
holding company is permitted, however, to acquire shares of any company the
activities of which the Federal Reserve, after due notice and opportunity for
hearing, has determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. The Federal Reserve has
issued regulations
4
setting forth specific activities that are permissible under the exception. A
bank holding company and its subsidiaries are also prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services.
In approving acquisitions by bank holding companies of banks and companies
engaged in banking-related activities, the Federal Reserve considers whether the
performance of any such activity by an affiliate of the holding company can
reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency, that outweigh such
possible adverse effects as undue concentration of resources, decreased or
unfair competition, conflicts of interest and unsound banking practices.
Under certain circumstances, prior approval of the Federal Reserve is
required under the Holding Company Act before a bank holding company may
purchase or redeem any of its equity securities.
Transactions with Affiliates
The provisions of Section 23A of the Federal Reserve Act and related
statutes place limits on all insured banks (including the Bank) as to the amount
of loans or extensions of credit to, or investment in, or certain other
transactions with, their parent bank holding companies and certain of such
holding companies' subsidiaries and as to the amount of advances to third
parties collateralized by the securities or obligations of bank holding
companies or their subsidiaries. In addition, loans and extensions of credit to
affiliates of the Bank generally must be secured in the prescribed amounts.
Capital Adequacy Guidelines
The Federal Reserve issued guidelines establishing risk-based capital
requirements for bank holding companies and member banks. The guidelines
established a risk-based capital framework consisting of (1) a definition of
capital and (2) a system for assigning risk weights. Capital consists of Tier I
capital, which includes common shareholders' equity less certain intangibles and
a supplementary component called Tier II, which includes a portion of the
allowance for loan losses. Effective October 1, 1998, the Federal Reserve
adopted an amendment to their risk-based capital guidelines that permits insured
depository institutions to include in their Tier II capital up to 45% of the
pre-tax net unrealized gains on certain available for sale equity securities.
All assets and off-balance-sheet items are assigned to one of four weighted risk
categories ranging from 0% to 100%. Higher levels of capital are required for
the categories perceived as representing the greater risks. The Federal Reserve
established a minimum risk-based capital ratio of 8% (of which at least 4% must
be Tier I). An institution's risk-based capital ratio is determined by dividing
its qualifying capital by its risk-weighted assets. The guidelines make
regulatory capital requirements more sensitive to differences in risk profiles
among banking institutions, take off-balance sheet items into account in
assessing capital adequacy, and minimize disincentives to holding liquid,
low-risk assets. Banking organizations are generally expected to operate with
capital positions well
5
above the minimum rates. Institutions with higher levels of risk, or which
experience or anticipate significant growth, are also expected to operate well
above minimum capital standards. At December 31, 1998 the the Bank satisfies
these ratios and has been categorized as a well-capitalized institution which in
the regulatory framework for prompt corrective action imposes the lowest level
of supervisory restraints.
Capital adequacy guidelines focus principally on broad categories of credit
risk although the framework for assigning assets and off-balance sheet items to
risk categories does incorporate elements of transfer risk. The risk-based
capital ratio does not, however, incorporate other factors that may affect a
company's financial condition, such as overall interest rate exposure,
liquidity, funding and market risks, the quality and level of earnings,
investment or loan concentrations, the quality of loans and investments, the
effectiveness of loan and investment policies and management's ability to
monitor and control financial and operating risks.
In addition to the risk-based guidelines discussed above, the Federal
Reserve requires that a bank holding company and bank which meet the regulator's
highest performance and operational standards and which are not contemplating or
experiencing significant growth maintain a minimum leverage ratio (Tier I
capital as a percent of quarterly average adjusted assets) of 3%. For those
financial institutions with higher levels of risk or that are experiencing or
anticipating significant growth, the minimum leverage ratio will be increased.
The Federal Reserve is vested with broad enforcement powers over bank
holding companies to forestall activities that represent unsafe or unsound
practices or constitute violations of law. These powers may be exercised through
the issuance of cease and desist orders or other actions. The Federal Reserve is
also empowered to assess civil penalties against companies or individuals that
violate the Holding Company Act, to order termination of non-banking activities
of non-banking subsidiaries of bank holding companies and to order termination
of ownership and control of non-banking subsidiaries by bank holding companies.
Neither the Company nor any of its affiliates has ever been the subject of any
such actions by the Federal Reserve.
The Bank
As a New Jersey state-chartered bank, the Bank's operations are subject to
various requirements and restrictions of state law pertaining, among other
things, to lending limits, reserves, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends, locations of
branch offices and capital adequacy. The Bank is subject to primary supervision,
periodic examination and regulation by the New Jersey Department of Banking and
Insurance ("NJDBI"). As a member of the Federal Reserve System, the Bank is also
subject to regulation by the Federal Reserve. If, as a result of an examination
of a bank, the NJDBI determines that the financial condition, capital resources,
asset quality, earnings prospects, management, liquidity, or other aspects of
the bank's operations are unsatisfactory or that the bank or its management is
violating or has violated any law or regulation, various remedies are available
to the NJDBI. Such remedies include the power to enjoin "unsafe and unsound"
practices, to require affirmative
6
action to correct any conditions resulting from any violation or practice, to
issue an administrative order that can be judicially enforced, to, among other
things, direct an increase in capital, to restrict the growth of the Bank, to
assess civil penalties and to remove officers and directors. The Bank has never
been the subject of any administrative orders, memoranda of understanding or any
other regulatory action by the NJDBI. The Bank also is a member of the Federal
Reserve System and therefore subject to supervisory examination by and
regulations of the Federal Reserve Bank of New York.
The Bank's deposits are insured by the Bank Insurance Fund ("BIF")
administered by the FDIC up to a maximum of $100,000 per depositor. For this
protection, the Bank pays a quarterly statutory deposit insurance assessment to,
and is subject to the rules and regulations of, the FDIC.
The Bank's ability to pay dividends is subject to certain statutory and
regulatory restrictions. The New Jersey Banking Act of 1948, as amended,
provides that no state-chartered bank may pay a dividend on its capital stock
unless, following the payment of each such dividend, the capital stock of the
bank will be unimpaired, and the bank will have a surplus of not less than 50%
of its capital, or, if not, the payment of such dividend will not reduce the
surplus of the bank. In addition, the payment of dividends is limited by the
requirement to meet the risk-based capital guidelines issued by the Federal
Reserve Board and other regulations.
The Deposit Insurance Funds Act of 1996 ("Funds Act") authorized the
Financing Corporation ("FICO") to levy assessments on BIF and SAIF deposits and
stipulated that the BIF rate must equal one-fifth the SAIF rate through year-end
1999, or until the insurance funds are merged, whichever occurs first.
Thereafter, BIF and SAIF payers will be assessed on a pro-rata basis for FICO.
FICO assessment rates are adjusted quarterly to reflect changes in the
assessment bases of the respective funds based on quarterly Call Report and
Thrift Financial Report submissions. During 1998, the Bank's BIF FICO rates
ranged between 1.164 and 1.24 basis points and the SAIF FICO rates were between
5.82 and 6.22 basis points.
The foregoing is an attempt to summarize some of the relevant laws, rules
and regulations governing banks and bank holding companies, but does not purport
to be a complete summary of all applicable laws, rules and regulations governing
banks and bank holding companies.
Item 2. Properties
The Company leases ten banking offices, one mini-branch within a
supermarket, one operations/support facility and one administrative/executive
facility. It owns five banking offices and leases land on which it owns one bank
building. The Company owns land and a building to be used for a future branch
site. All of the facilities are located in Bergen County, New Jersey, which
constitutes the Company's primary market area.
Net investment in premises and equipment totaled $9.9 million at December
31, 1998. Annual rental payments
7
with respect to the Company's leased facilities was $1.1 million for the year
ended, December 31, 1998.
In the opinion of management, the physical properties of the Company and
its subsidiaries are suitable and adequate and are being fully utilized.
Item 3. Legal Proceedings
In the ordinary course of business, the Company is involved in routine
litigation involving various aspects of its business, none of which,
individually or in the aggregate, in the opinion of management and its legal
counsel, is expected to have a material adverse impact on the consolidated
financial condition, results of operations or liquidity of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the three months ended December 31, 1998,
to a vote of the Company's security holders through the solicitation of proxies
or otherwise.
8
Executive Officers
The following table sets forth the names, ages, and present positions of
the principal executive officers:
Name Age Positions Held with the Company and the Bank
____ ___ ____________________________________________
ANTHONY S. ABBATE . . . 59 President and Chief Executive Officer
ANTHONY J. LABOZZETTA. . 35 Executive Vice President and Chief Financial Officer
NICHOLAS VERDI . . . . . 50 Senior Vice President--Retail Banking
FRANK R. GIANCOLA . . . 45 Senior Vice President--Operations
PATRICIA D. ARNOLD . . 40 Senior Vice President--Commercial Lending
Business Experience
ANTHONY S. ABBATE, President and Chief Executive Officer of the Bank since
1981; Senior Vice President and Controller from October 1980; President and
Chief Executive Officer of Home State Bank 1978-1980. Engaged in the banking
industry since 1959.
ANTHONY J. LABOZZETTA, Executive Vice President and Chief Financial Officer
since September 1997; Treasurer from 1995. Engaged in the banking industry since
1989. Formerly a senior manager with an international accounting firm,
specializing in the financial services industry.
NICHOLAS VERDI, Senior Vice President - Retail Banking since October 1998.
Engaged in the banking industry since 1968. Formerly an Executive Director of
United Financial Services from 1997; Regional President of Hudson United Bank
from 1994 and Chief Operations Officer of Hudson United Bank from 1985.
FRANK R. GIANCOLA, Senior Vice President - Operations since September 1997;
Senior Vice President-Retail Banking from 1993; Senior Vice President-Operations
of the Bank from 1984; Senior Operations Officer from 1982; Vice
President/Branch Administrator from 1981. Engaged in the banking industry since
1971.
PATRICIA D. ARNOLD, Senior Vice President - Commercial Lending since August
1997; First Vice President from 1995; Department Head Vice President from 1986;
Assistant Vice President from 1985; Commercial Loan Officer-Assistant Treasurer
from 1983. Engaged in the banking industry since 1981.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board of Directors. Management is not aware of any family
relationship between any director or executive officer. No executive officer was
selected to his or her position pursuant to any arrangement or understanding
with any other person.
9
Part II
Forward Looking Information
We discuss certain matters in this report which are not historical facts,
but which are "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These "forward looking statements"
include, but are not limited to, the adequacy of the allowance for loan losses,
profitability, interest rate risk, market risk, liquidity and the year 2000
readiness disclosure. The "forward looking statements" in this report reflect
what we currently anticipate will happen in each case. What actually happens
could differ materially from what we currently anticipate will happen as a
result of, but not limited to, changes in economic condition, interest rate
fluctuations, levels of loan growth and quality and the successful
implementation of its Year 2000 Plan, which includes capital expenditures, costs
of remediation and testing, the timetable for implementing the remediation and
testing phases of Year 2000 planning, the possible impact of third parties' Year
2000 issues on the Company, management's assessment of contingencies and
possible scenarios in its Year 2000 planning. We are not promising to make any
public announcement when we think "forward looking statements" in this document
are no longer accurate, whether as a result of new information, what actually
happens in the future or for any other reason.
Item 5. Market for the Registrant's Common Stock
and Related Stockholder Matters
The Company's common stock is traded on the American Stock Exchange under
the symbol "ISB." At March 5, 1999, there were approximately 1,326 shareholders
of record. A portion of the Company's common stock is held in "street name" by
nominees for the beneficial owners, so the actual number of shareholders is
probably higher. A cash dividend of $0.083, $0.09 and $0.10 was paid on each
common share outstanding in each quarter during 1996, 1997 and 1998,
respectively. The following table sets forth, for the periods indicated, the
reported high and low sales prices by quarter:
High Low
------------ ------------
1996
First quarter (1)(2)(3) $ 9.42 $ 8.41
Second quarter (2)(3) 9.17 8.55
Third quarter (2) (3) 9.83 8.33
Fourth quarter (2)(3) 8.34 9.50
1997
First quarter (2)(3) $ 14.67 $10.61
Second quarter (3) 17.58 11.92
Third quarter (3) 16.67 14.67
Fourth quarter (3) 21.58 14.75
1998
First quarter (3) $ 21.25 $18.17
Second quarter 23.25 19.25
Third quarter 20.88 15.31
Fourth quarter 17.75 14.06
The last reported sales price of common stock on March 5, 1999 was $16.875 per
share
- --------------------------------------------------------------------------------
(1) On February 22, 1996, the Company declared a 5% Stock Dividend to be
distributed on April 19, 1996 to shareholders of record on March 20,
1996. The high and low sales prices and the cash dividends have been
restated to reflect the effects of the stock dividend.
(2) On February 27, 1997, the Company declared a 3 for 2 Stock Split to be
distributed on April 17, 1997 to shareholders of record on March 20,
1997. The high and low sales prices and the cash dividends have been
restated to reflect the effects of the stock split.
(3) On February 26, 1998, the Company declared a 3 for 2 Stock Split to be
distributed on April 17, 1998 to shareholders of record on March 20,
1998. The high and low sales prices and the cash dividends have been
restated to reflect the effects of the stock split.
10
The Company intends, subject to it's financial results, contractual, legal,
and regulatory restrictions, and other factors that its Board of Directors may
deem relevant, to declare and pay a quarterly cash dividend on it's common
stock. The principal source of the funds to pay any dividends on the Company's
common stock would be a dividend from the Bank. Certain federal and state
regulators impose restrictions on the payment of dividends by banks. See
"Business - Supervision and Regulation" for a discussion of these restrictions.
Item 6. Selected Consolidated Financial Data
The following selected financial data are derived from the Company's
audited Consolidated Financial Statements. The information set forth below
should be read in conjunction with the Consolidated Financial Statements and the
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The Consolidated Statements of Financial Condition
as of December 31, 1998 and 1997, and the Consolidated Statements of of Income,
Changes in Stockholders' Equity and Cash Flows for each of the years in the
three-year period ended December 31, 1998 and the report thereon of Deloitte &
Touche LLP are included on pages 28 through 47 of the Company's Annual Report to
Shareholders for the year ended, December 31, 1998, which pages are incorporated
herein by reference.
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Item 6. Selected Consolidated Financial Data
Y e a r s E n d e d D e c e m b e r 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ------------
Summary Earnings (in thousands)
Interest income $48,820 $45,310 $41,379 $40,765 $35,621
Interest expense 19,864 18,566 16,983 17,208 12,449
--------- --------- --------- ---------- ----------
Net interest income 28,956 26,744 24,396 23,557 23,172
Provision for loan losses 951 1,653 747 1,239 984
-------- --------- ---------- ---------- ----------
Net interest income after provision for loan losses 28,005 25,091 23,649 22,318 22,188
Non-interest income 4,928 4,774 4,248 4,579 3,659
Non-interest expenses 19,416 17,655 17,492 16,703 16,666
-------- --------- ---------- ---------- ----------
Income before cumulative effect of change in
accounting principle and income taxes 13,517 12,210 10,405 10,194 9,181
Income taxes 4,908 4,285 3,654 3,511 3,220
-------- --------- ---------- ----------- ---------
Net income $ 8,609 $ 7,925 $ 6,751 $ 6,683 $ 5,961
======== ========= ========== =========== =========
Per Share Data
Before deducting acquisition costs
Basic earnings per common share $1.32 $1.11 $0.95 $0.93 $0.82
Diluted earnings per common share 1.31 1.10 0.94 0.92 0.82
After deducting acquisition costs
Basic earnings per common share 1.20 1.11 0.95 0.93 0.82
Diluted earnings per common share 1.19 1.10 0.94 0.92 0.82
Cash dividends declared 0.40 0.36 0.33 0.31 0.29
Book value-end of year 8.66 7.86 7.02 6.43 5.29
Tangible book value-end of year 8.56 7.71 6.80 6.16 5.28
Weighted average shares outstanding (in thousands)
Basic 7,189 7,132 7,124 7,113 7,107
Diluted 7,237 7,222 7,190 7,157 7,130
Balance Sheet Data-end of year (in thousands)
Total assets $685,364 $625,050 $572,512 $548,220 $530,042
Securities held to maturity and securties available for sale 149,930 135,997 143,339 163,736 168,224
Loans 478,717 438,273 384,060 337,570 314,829
Allowance for loan losses 5,645 5,231 3,968 3,926 4,079
Total deposits 598,732 540,765 491,637 487,224 469,799
Securities sold under agreements to repurchase and 18,548 13,028 10,904 11,702 407
short-term borrowings
Long-term borrowings - 9,879 9,983 - 5,000
Total stockholders' equity 62,372 56,130 50,048 45,781 39,990
Selected Performance Ratios
Before deducting acquisition costs
Return on average total assets 1.44 % 1.33 % 1.22 % 1.26 % 1.19 %
Return on average total stockholders' equity 16.05 14.95 14.09 15.53 15.34
After deducting acquisition costs
Return on average total assets 1.31 1.33 1.22 1.26 1.19
Return on average total stockholders' equity 14.53 14.95 14.09 15.53 15.34
Dividend payout ratio 32.81 30.08 32.19 29.82 32.51
Average total stockholders' equity to average total assets 9.00 8.89 8.68 8.11 7.76
Net yield on interest earning assets (taxable equivalent) 4.62 4.78 4.75 4.74 4.95
Efficiency ratio (1) 53.59 56.47 60.02 59.38 60.19
Non-interest expenses to average assets 2.95 2.96 3.17 3.15 3.33
Non-interest income to average assets 0.75 0.80 0.77 0.86 0.73
Asset Quality Ratios-end of year
Nonaccrual loans to total loans 0.25 % 0.35 % 0.66 % 0.74 % 1.96 %
Nonperforming assets to total assets 0.26 0.33 0.67 0.95 1.43
Allowance for loan losses to nonaccrual loans 471.20 345.51 157.02 156.35 66.04
Allowance for loan losses to total loans 1.18 1.19 1.03 1.16 1.30
Net charge-offs to average loans for the year 0.12 0.10 0.20 0.44 0.34
Liquidity and Capital Ratios
Average loans to average deposits 81.06 % 78.09 % 72.19 % 67.14 % 65.20 %
Total stockholders' equity to total assets 9.10 8.98 8.74 8.35 7.54
Tier I capital to risk-weighted assets 13.80 13.19 13.79 13.92 13.43
Total capital to risk-weighted assets 15.12 14.44 15.04 15.17 14.68
Tier I leverage ratio 9.08 8.79 8.65 8.16 7.83
- --------------------------------------------------------------------------------
(1) The efficiency ratio is calculated by dividing non-interest expenses,
excluding merger-related charges, amortization of intangibles and net
expense of foreclosed real estate by net interest income (on a fully
taxable equivalent basis) and non-interest income, excluding gains on
sales of loans, securities, loan servicing and a branch location.
12
Item 7. Management's Discussion and Analysis of Financial Condition Results
of Operations
The information contained in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 14
through 27 of the Company's 1998 Annual Report to Shareholders filed as Exhibit
13, is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The information regarding the market risk of the Company's financial
instruments, contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on page 23 of the Company's 1998 Annual
Report to Shareholders filed as Exhibit 13 is incorporated herein by reference.
Item 8. Financial Statements and Supplemental Data
The financial statements required by this Item are included in the
Company's 1998 Annual Report to Shareholders on pages 28 through 47, filed as
Exhibit 13, and incorporated herein by reference.
Page of Annual
Report to
Stockholders
-------------------
Report of Independent Public Accountants 28
Interchange Financial Services Corporation and Subsidiaries
Consolidated Balance Sheets 29
Consolidated Statements of Income 30
Consolidated Statements of Changes in Stockholders' Equity 31
Consolidated Statements of Cash Flows 32
Notes to Consolidated Financial Statements (Notes 1 - 21) 33 - 47
No supplementary data is included in this report as it is inapplicable, not
required, or the information is included elsewhere in the financial statements
or notes thereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
PART III
Item 10. Directors and Executive Officers
a. Directors
The information contained in the section entitled "Directors" in the
Company's definitive Proxy Statement for its 1999 Annual Meeting of
Stockholders, to be filed not later than 120 days after the close of
the Company's fiscal year, is incorporated herein by reference in
response to this item.
b. Executive Officers
Information required by this item is contained in Part I of this Form
10-K in the section entitled "Executive Officers."
c. Compliance with Section 16(a)
Information contained in the section entitled "Section 16 Compliance"
in the Company's definitive Proxy
13
Statement for its 1999 Annual Meeting of Stockholders, to be filed
not later than 120 days after the close of the Company's fiscal
year, is incorporated herein by reference in response to this item.
Item 11. Executive Compensation
Information contained in the section entitled "Executive Compensation" in
the Company's definitive Proxy Statement for its 1999 Annual Meeting of
Stockholders, to be filed not later than 120 days after the close of the
Company's fiscal year, is incorporated herein by reference in response to this
item.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained in the section entitled "Amount and Nature of
Beneficial Ownership" in the Company's definitive Proxy Statement for its 1999
Annual Meeting of Stockholders, to be filed not later than 120 days after the
close of the Company's fiscal year, is incorporated herein by reference in
response to this item.
Item 13. Certain Relationships and Related Transactions
The information contained in the section entitled "Transactions with
Management" in the Company's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders, to be filed not later than 120 days after the close of
the Company's fiscal year, is incorporated herein by reference in response to
this item.
14
PART IV
Item 14. Exhibits, Financial Statements and Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements: The Financial Statements listed under
Item 8 to this Report are set forth at pages 28 through 32, and
the Notes to Consolidated Financial Statements are set forth at
pages 33 through 47, of the Annual Report to Shareholders for
1998 (See Exhibit 13 under paragraph (a)3 of this Item 14).
2. Financial Statement Schedules: All required schedules for the
Company and its subsidiaries have been included in the
Consolidated Financial Statements or related Notes thereto.
3. Exhibits: Exhibits followed by a parenthetical reference are
incorporated by reference herein from the document described
in such parenthetical reference.
Exhibit 3(a) Certificate of Incorporation of Registrant,
as amended (Incorporated by reference to Exhibit
3 to Form S-4, filed April 27, 1998,
Registration Statement No. 333-50065)
Exhibit 3(b) Bylaws of registrant (Incorporated by
reference to Exhibit 3(b) to Form S-2, filed
July 22, 1992, Registration Statement No.
33-49840)
Exhibit 10(a) Agreement for legal services between
Andora, Palmisano & Geaney and Registrant, dated
April 23, 1998
(1) Exhibit 10(b) Stock Option and Incentive Plan of
1997 (Incorporated by reference to Exhibit 4(c)
to Form S-8, filed September 30, 1997,
Registration Statement No. 33-82530)
(1) Exhibit 10(c) Directors' Retirement Program
(Incorporated by reference to Exhibit 10(i)(3)
to Annual Report on Form 10-K for fiscal year
ended December 31, 1994)
(1) Exhibit 10(d) Executives' Supplemental Pension
Plan (Incorporated by reference to Exhibit
10(i)(4) to Annual Report on Form 10-K for
fiscal year ended December 31, 1994)
* Exhibit 11 Statement regarding Computation of per share
earnings
* Exhibit 13 Portion of the Annual Report to Shareholders
for the year ended December 31, 1998
* Exhibit 21 Subsidiaries of Registrant
* Exhibit 23 Independent Auditors' Consent of Deloitte &
Touche LLP
* Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K during the quarter ended December 31,1998:
The Company filed a Current Report on Form 8-K on December 3,
1998. Item 5 of the referenced Current Report contained the
Company's Year 2000 Readiness Disclosure. No financial
statements were filed with the Report.
- ------------------------------
(1) Pursuant to Item 14(a) - 3 of Form 10-K, this exhibit represents management
contract or compensatory plan or arrangement required to be filed as an
exhibit to this Form 10-K pursuant to Item 14(c) of this item.
* Filed herewith
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Interchange Financial Services Corporation
By: /s/ Anthony S. Abbate By: /s/ Anthony Labozzetta
------------------------------------- ----------------------------
Anthony S. Abbate Anthony Labozzetta
President and Chief Executive Officer Executive Vice President
and Chief Financial Officer
(principal executive officer) (principal financial and
accounting officer)
March 11, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated:
/s/Anthony S. Abbate /s/James E. Healey
- ------------------------------------- -----------------------------------
Anthony S. Abbate March 11, 1999 James E. Healey March 11, 1999
Director Director
President and Chief Executive Officer
/s/Anthony D. Andora /s/Anthony Labozzetta
- -------------------------------------- -----------------------------------
Anthony D. Andora March 11, 1999 Anthony Labozzetta March 11, 1999
Director Executive Vice President and
Chairman of the Board Chief Financial Officer
/s/Donald L. Correll /s/Nicholas R. Marcalus
- -------------------------------------- -----------------------------------
Donald L. Correll March 11, 1999 Nicholas R. Marcalus March 11, 1999
Director Director
/s/Anthony R. Coscia /s/Eleanore S. Nissley
- -------------------------------------- -----------------------------------
Anthony R. Coscia March 11, 1999 Eleanore S. Nissley March 11, 1999
Director Director
/s/John J. Eccleston /s/Jeremiah F. O'Connor
- -------------------------------------- -----------------------------------
John J. Eccleston March 11, 1999 Jeremiah F. O'Connor March 11, 1999
Director Director
/s/David R. Ficca /s/Robert P. Rittereiser
- -------------------------------------- -----------------------------------
David R. Ficca March 11, 1999 Robert P. Rittereiser March 11, 1999
Director Director
/s/Richard A. Gilsenan /s/Benjamin Rosenzweig
- -------------------------------------- -----------------------------------
Richard A. Gilsenan March 11, 1999 Benjamin Rosenzweig March 11, 1999
Director Director
16