Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-K
_________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM____ TO ____
Commission File number 1-10518
INTERCHANGE FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2553159
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Park 80 West/Plaza Two, Saddle Brook, NJ 07663
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 703-2265
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of Each Class which registered
------------------- ------------------------
None Not Applicable
_________________________
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
--------------
Common Stock (no par value)
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of outstanding shares of the Registrant's common stock, no par
value per share, as of March 19, 2002, was as follows:
Class Number of Outstanding Shares
----- ----------------------------
Common Stock
(No par value) 6,531,018
The aggregate market value of Registrant's voting stock (based upon the closing
trade price on March 19, 2002,) held by non-affiliates of the Registrant was
approximately $127,422,000.
Documents incorporated by reference:
Portions of Registrant's definitive Proxy Statement for the 2002 Annual Meeting
of Stockholders are incorporated by reference to Part III of this Annual Report
on Form 10-K.
Portions of Registran's Annual Report to Shareholders for the fiscal year ended
December 31, 2001 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 I PAGE
Item 1. Business..................................................... 1
Item 2. Properties................................................... 9
Item 3. Legal Proceedings............................................ 10
Item 4. Submission of Matters to a Vote of Security Holders.......... 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 11
Item 6. Selected Consolidated Financial Data......................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 14
Item 8. Financial Statements and Supplementary Data.................. 14
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................... 14
PART III
Item 10. Directors and Executive Officers of the Registrant........... 15
Item 11. Executive Compensation....................................... 16
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................. 16
Item 13. Certain Relationships and Related Transactions............... 16
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K................................... 17
Signatures ..................................................... 18
PART I
Item 1. Business
General
Interchange Financial Services Corporation (the "Company") is a New Jersey
business corporation and registered bank holding company under the Bank Holding
Company Act of 1956, as amended. It acquired all of the outstanding stock of
Interchange Bank (formerly known as Interchange State Bank), a New Jersey state
chartered bank (the "Bank" or "Interchange"), in 1986. The Bank is the Company's
principal operating subsidiary. The Company's principal executive office is
located at Park 80 West/ Plaza Two, Saddle Brook, New Jersey 07663, and the
telephone number is (201) 703-2265.
As a holding company, the Company provides support services to its direct
and indirect subsidiaries. These include executive management, personnel and
benefits, risk management, data processing, strategic planning, legal, and
accounting and treasury.
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 seventeen banking offices and one supermarket mini-branch in Bergen
County, New Jersey. During 2000, the Company opened two branches, one in
Waldwick, New Jersey and another in Ramsey, New Jersey. These newest branch
locations link the Company's service area from Montvale in the east to Oakland
in the west, giving its northern Bergen County customers greater access to the
Company's services. In 2000, the Company closed and relocated its Montvale
branch to an improved facility across the street.
In addition to the Bank, the Company owns all of the outstanding capital
stock of Clover Leaf Mortgage Company, a New Jersey Corporation established in
1988, which is not currently engaged in any business activity. During 2000,
Washington Interchange Corporation, formerly a wholly owned direct subsidiary,
was merged into the Bank. Subsidiaries of the Bank include: Clover Leaf
Investment Corporation, established in 1988 to engage in the business of an
investment company pursuant to New Jersey law; Clover Leaf Insurance Agency,
Inc., established in 1990 to engage in sales of tax-deferred annuities; Clover
Leaf Management Realty Corporation, established in 1998 as a Real Estate
Investment Trust ("REIT") which manages certain real estate assets of the
Company in an effort to take advantage of certain tax benefits; and Interchange
Capital Company, L.L.C., established in 1999 to engage in equipment lease
financing, specializing in small ticket vendor leasing, and the solicitation of
end users in the Bank's current market. All of the Bank's subsidiaries are
organized under New Jersey law and are 100% owned by the Bank, except for the
REIT which is 99% owned by the Bank.
1
Banking Operations
Through the Bank, the Company offers a wide range of consumer banking
products and 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 VISATM credit card and several convenience products,
including the Interchange Check Card, which permits customers to access their
checking accounts by using the card when making purchases. The Interchange Check
Card can also be used as an ATM card to perform basic banking transactions. The
Bank maintains nineteen automated teller machines (operating within the MACTM,
PlusTM, HONORTM, CIRRUSTM, VISATM, NYCETM, and MasterCardTM networks), which are
located at eighteen of the banking offices, a supermarket and a college.
Another service offered to customers is Interchange Bank-Line Telephone
Banking. Customers can perform basic banking transactions, transfer money
between accounts, make loan payments and more by phone from anywhere in the
world, at any time of the day or night by calling a toll-free number - with no
charge for routine services. Also established in 1999, the Interchange Bank-Line
Center is an inbound calling facility providing enhanced customer service via
access to a single source for account and product information, opening accounts
or even applying for a consumer loan. The Interchange Bank-Line Center also
serves as an outbound telemarketing resource, contacting prospective and current
customers for new accounts.
In July of 2000, the Bank announced the introduction of InterBank for
online banking. InterBank, which is accessed through the Bank's internet web
site at www.interchangebank.com, allows customers to access account information,
process transfers between accounts, generate an account statement, pay bills
electronically and more. As discussed herein, the concept of one-stop banking at
InterBank is extended further to include insurance products, securities trading
and 24 hours a day, 7 days a week loan applications - all of which are available
on the Bank's web site.
The Bank also 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. The Bank offers most forms of commercial lending, including
working capital lines of credit, small business administration loans, term loans
for fixed asset acquisitions, commercial mortgages, equipment lease financing
and other forms of asset-based financing.
In addition to its origination activities, the Bank purchases packages of
loans. In 2001 and 2000, the Bank purchased $18.8 million and $13.5 million of
loans, respectively. These loans were subjected to the Bank's
2
independent credit analysis prior to purchase. In the Bank's experience, there
are opportunities to sell the Bank's other products and services to the
borrowers whose loans are purchased by the Bank. The Bank believes that
purchasing loans will continue to be a desirable way to augment its portfolios
as opportunities arise.
The Bank also engages in mutual fund and annuities sales and brokerage
services. An Investment Services Program is offered through an alliance between
the Bank and the Independent Community Bankers Association of America Financial
Services Corporation ("ICBAFSC"), under which mutual funds and annuities offered
by ICBAFSC are made available to the Bank's customers by Bank employees. The
Bank has also expanded its product offerings by entering into an agreement with
ICBAFSC to offer discount brokerage services to its customers. The Bank offers
securities trading through its web site, which is hyperlinked to U.S. Clearing
Corp., so that customers can access their brokerage accounts via the Internet.
There is also a direct link from the Company's web site to the NASDAQ National
Market to allow investors to keep informed of the daily quotes and market
activity for the Company's common stock. The Company's common stock is listed
for quotation on the NASDAQ National Market System under the symbol IFCJ.
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").
Additional information about the Bank and the Company, our core purpose and
values, and our products and services may be found on our web site at
www.Interchangebank.com. Information contained on our Internet web site is not
part of this Annual Report on Form 10-K and is not being incorporated by
reference into this report.
Market Areas
The Company's principal market for its deposit gathering and loan
origination activities covers major portions of Bergen County in the
northeastern corner of New Jersey adjacent to New York City. Bergen County has a
relatively large affluent base for the Company's services. The principal service
areas of the Company is characterized by 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.
Over the years - and most recently in 2001- the Bank conducts periodic
market research, utilizing customer satisfaction studies and an outside firm to
shop our branches to keep aware of market trends. The information provided by
the research is used by the Bank to design new products and services or improve
on existing products and services in order to satisfy our customers' needs.
Interchange maintains a relational database, which enhances the Bank's
internal marketing analysis by providing information about account
relationships, their activity and their relative value to the Bank.
3
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.
Competition
Competition in the banking and financial services industry within the
Company's primary market area is strong. The Bank actively competes with
national and state-chartered commercial banks, operating on a local and national
scale, and other financial institutions, including savings and loan
associations, mutual savings banks, and credit unions. In addition, the Bank
faces competition from less heavily regulated entities such as brokerage
institutions, money management firms, consumer finance and credit card companies
and various other types of financial services companies. Many of these
institutions are larger than the Bank, 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 borrowing needs of small and middle market businesses located in the
Bank's primary market. Larger banks continued to show an interest for only the
largest loans, and may be challenged to administer smaller loans profitably.
Interchange has the desire and the ability to give smaller businesses the level
of service they require. Many small businesses eventually become midsize
businesses, with a corresponding change in their financial requirements. As
these businesses grow, they do not outgrow Interchange because of its ability to
be responsive to both small and midsize business constituencies. Businesses of
all sizes and professionals of all disciplines have benefited from our extensive
selection of commercial services and products. For example, the Business Class
Banking Account offers checking with a variety of extra services including
Interbanking - a proprietary product which allows the business customer to do
routine business banking right from their office computer. And through our
subsidiary, Interchange Capital Company, L.L.C., we are able to extend
cost-effective equipment leasing solutions for a variety of expansion and
upgrading projects. By designing programs to accommodate the changing needs of
growing businesses, Interchange is extending the longevity of valuable customer
relationships.
Personnel
The Company had 217 full-time-equivalent employees at year-end 2001. The
Company believes its relationship with employees to be good.
Regulation and Supervision
Banking is a complex, highly regulated industry. The primary goals of the
bank regulatory scheme are to maintain a safe and sound banking system and to
facilitate the conduct of sound monetary policy. In furtherance of those goals,
Congress has created several largely autonomous regulatory agencies and enacted
myriad legislation that governs banks, bank holding companies and the banking
industry. Descriptions and references to
4
the statutes and regulations below are brief summaries thereof and do not
purport to be complete. The descriptions are qualified in their entirety by
reference to the specific statutes and regulations discussed.
The Company
The Company is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended (the "Holding Company Act"), and as such, is
subject to supervision and regulation by the Board of Governors of the Federal
Reserve System (the "Federal Reserve "). As a bank holding company, the Company
is required to file an annual report with the Federal Reserve and such
additional information as the Federal Reserve may require pursuant to the
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 may not (i) engage in any activities other
than those of banking or managing or controlling banks and other authorized
subsidiaries or (ii) own or control more than five percent (5%) of the voting
shares of any company that is not a bank, including any foreign company. A bank
holding company is permitted, however, to acquire shares of any company the
activities of which the Federal Reserve, after due notice and opportunity for
hearing, has determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. The Federal Reserve has
issued regulations setting forth specific activities that are permissible under
the exception. A bank holding company and its subsidiaries are also prohibited
from engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services.
Under certain circumstances, prior approval of the Federal Reserve is
required under the Holding Company Act before a bank holding company may
purchase or redeem any of its equity securities.
Traditionally, the activities of bank holding companies have been limited
to the business of banking and activities closely related or incidental to
banking. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999
(the "Modernization Act"), enacted on November 11, 1999, with an effective date
of March 11, 2000, expanded the types of activities in which a bank holding
company may engage. Subject to various limitations, the Modernization Act
generally permits a bank holding company to elect to become a "financial holding
company." A financial holding company may affiliate with securities firms and
insurance companies
5
and engage in other activities that are "financial in nature." Among the
activities that are deemed "financial in nature" are, in addition to traditional
lending activities, securities underwriting, dealing in or making a market in
securities, sponsoring mutual funds and investment companies, insurance
underwriting and agency activities, certain merchant banking activities, and
activities that the Federal Reserve considers to be closely related to banking.
A bank holding company may become a financial holding company under the
Modernization Act if each of its subsidiary banks is "well capitalized" under
the Federal Reserve guidelines (See "Capital Adequacy Guidelines" below), is
well managed and has at least a satisfactory rating under the Community
Reinvestment Act. In addition, the bank holding company must file a declaration
with the Federal Reserve that the bank holding company wishes to become a
financial holding company. A bank holding company that falls out of compliance
with such requirements may be required to cease engaging in certain activities
permitted only for financial holding companies. Any bank holding company that
does not elect to become a financial holding company remains subject to the
current restrictions of the Holding Company Act. Presently, the Company has
chosen not to become a financial holding company.
In a similar manner, a bank may establish one or more subsidiaries, which
subsidiaries may then engage in activities that are financial in nature.
Applicable law and regulations provide, however, that the amount of such
investments are generally limited to 45% of the total assets of the bank, and
such investments are not aggregated with the bank for determining compliance
with capital adequacy guidelines. Further, the transactions between the bank and
such a subsidiary are subject to certain limitations. (See generally, the
discussion of "Transactions with Affiliates" below.)
Under the Modernization Act, the Federal Reserve serves as the primary
"umbrella" regulator of financial holding companies, with supervisory authority
over each parent company and limited authority over its subsidiaries. Expanded
financial activities of financial holding companies will generally be regulated
according to the type of such financial activity: banking activities by banking
regulators, securities activities by securities regulators, and insurance
activities by insurance regulators. The Modernization Act also imposes
additional restrictions and heightened disclosure requirements regarding private
information collected by financial institutions. Many, but not all, implementing
regulations under the Modernization Act have been promulgated in final form. The
Company cannot predict the full effect of the new legislation.
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
6
to the amount of advances to third parties collateralized by the securities or
obligations of bank holding companies or their subsidiaries. In addition, loans
and extensions of credit to affiliates of the Bank generally must be secured in
the prescribed amounts.
Capital Adequacy Guidelines
The Federal Reserve issued guidelines establishing risk-based capital
requirements for bank holding companies having more than $150 million in assets
and member banks of the Federal Reserve System. The guidelines established a
risk-based capital framework consisting of (1) a definition of capital and (2) a
system for assigning risk weights. Capital consists of Tier I capital, which
includes common shareholders' equity less certain intangibles and a
supplementary component called Tier II, which includes a portion of the
allowance for loan losses. Effective October 1, 1998, the Federal Reserve
adopted an amendment to its risk-based capital guidelines that permits insured
depository institutions to include in their Tier II capital up to 45% of the
pre-tax net unrealized gains on certain available for sale equity securities.
All assets and off-balance-sheet items are assigned to one of four weighted risk
categories ranging from 0% to 100%. Higher levels of capital are required for
the categories perceived as representing the greater risks. The Federal Reserve
established a minimum risk-based capital ratio of 8% (of which at least 4% must
be Tier I). An institution's risk-based capital ratio is determined by dividing
its qualifying capital by its risk-weighted assets. The guidelines make
regulatory capital requirements more sensitive to differences in risk profiles
among banking institutions, take off-balance sheet items into account in
assessing capital adequacy, and minimize disincentives to holding liquid,
low-risk assets. Banking organizations are generally expected to operate with
capital positions well above the minimum rates. Institutions with higher levels
of risk, or which experience or anticipate significant growth, are also expected
to operate well above minimum capital standards. In addition to the risk-based
guidelines discussed above, the Federal Reserve requires that a bank holding
company and bank which meet the regulator's highest performance and operational
standards and which are not contemplating or experiencing significant growth
maintain a minimum leverage ratio (Tier I capital as a percent of quarterly
average adjusted assets) of 3%. For those financial institutions with higher
levels of risk or that are experiencing or anticipating significant growth, the
minimum leverage ratio will be increased. At December 31, 2001 the Company and
the Bank satisfied these ratios and has been categorized as a well-capitalized
institution, which in the regulatory framework for prompt corrective action
imposes the lowest level of supervisory restraints. See Note 13 to the Company's
audited Consolidated Financial Statements for additional information regarding
the Company's and the Bank's capital adequacy.
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
7
risk-based capital ratio does not, however, incorporate other factors that may
affect a company's financial condition, such as overall interest rate exposure,
liquidity, funding and market risks, the quality and level of earnings,
investment or loan concentrations, the quality of loans and investments, the
effectiveness of loan and investment policies and management's ability to
monitor and control financial and operating risks.
The Federal Reserve is vested with broad enforcement powers over bank
holding companies to forestall activities that represent unsafe or unsound
practices or constitute violations of law. These powers may be exercised through
the issuance of cease and desist orders or other actions. The Federal Reserve is
also empowered to assess civil money 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 to, among other
things, lending limits, reserves, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends, locations of
branch offices and capital adequacy. The Bank is subject to primary supervision,
periodic examination and regulation by the New Jersey Department of Banking and
Insurance ("NJDBI"). If, as a result of an examination of a bank, the NJDBI
determines that the financial condition, capital resources, asset quality,
earnings prospects, management, liquidity, or other aspects of the bank's
operations are unsatisfactory or that the bank or its management is violating or
has violated any law or regulation, various remedies are available to the NJDBI.
Such remedies include the power to enjoin "unsafe and unsound" practices, to
require affirmative action to correct any conditions resulting from any
violation or practice, to issue an administrative order that can be judicially
enforced, to, among other things, direct an increase in capital, to restrict the
growth of the Bank, to assess civil penalties and to remove officers and
directors. The Bank has never been the subject of any administrative orders,
memoranda of understanding or any other regulatory action by the NJDBI. The Bank
also is a member of the Federal Reserve System and therefore subject to
supervisory examination by and regulations of the Federal Reserve Bank of New
York.
The Bank's 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
8
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.
Under the FDIC's risk-based insurance assessment system, each insured bank
is placed in one of nine "assessment risk classifications" based on its capital
classification and the FDIC's consideration of supervisory evaluations provided
by the institution's primary federal regulator. Each insured bank's insurance
assessment rate is then determined by the risk category in which it has been
classified by the FDIC. There is currently a 27 basis point spread between the
highest and lowest assessment rates, so that banks classified as strongest by
the FDIC are subject in 2002 to 0% assessment, and banks classified as weakest
by the FDIC are subject to an assessment rate of 0.27% of total deposits. In
addition to its insurance assessment, each insured bank is subject to a debt
service assessment of $0.0182 per one hundred dollars of deposits during the
first and second quarters of 2002, respectively, to help recapitalize the
Savings Association Insurance Fund of the FDIC. During 2001, the Bank's BIF debt
service assessment rates ranged between 1.84 and 1.96 basis points. The Bank's
deposit insurance assessments may increase or decrease depending upon the risk
assessment classification to which the Bank is assigned by the FDIC. Any
increase in insurance assessments could have an adverse effect on the Bank's
earnings.
The foregoing is an attempt to summarize some of the relevant laws, rules
and regulations governing banks and bank holding companies, but does not purport
to be a complete summary of all applicable laws, rules and regulations governing
banks and bank holding companies.
Item 2. Properties
The Company leases twelve banking offices, one mini-branch within a
supermarket, one operations/support facility and one administrative/executive
facility. It also leases two locations for the sole purpose of operating
Automated Teller Machines. It owns four banking offices and leases land on which
it owns one bank building. All of the facilities are located in Bergen County,
New Jersey, which constitutes the Company's primary market area.
Net investment in premises and equipment totaled $10.2 million at December
31, 2001. Annual rental payments with respect to the Company's leased facilities
were $1.5 million for the year ended December 31, 2001.
In the opinion of management, the physical properties of the Company and
its subsidiaries are suitable and adequate and, except for those facilities that
have been secured for future expansion, are being fully utilized.
9
Item 3. Legal Proceedings
In the ordinary course of business, the Company is involved in routine
litigation involving various aspects of its business, none of which,
individually or in the aggregate, in the opinion of management and its legal
counsel, is expected to have a material adverse impact on the consolidated
financial condition, results of operations or liquidity of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
through the solicitation of proxies or otherwise during the three months ended
December 31, 2001.
10
Part II
Forward Looking Information
In addition to discussing historical information, certain statements
included in or incorporated into this report relate to the financial condition,
results of operations and business of the Company which are not historical
facts, but which are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. When used herein, the words
"anticipate," "believe," "estimate," "expect," "will" and other similar
expressions are generally intended to identify such forward-looking statements.
Such statements are intended to be covered by the safe harbor provisions for
forward-looking statements contained in such Act, and we are including this
statement for purposes of invoking these safe harbor provisions. These
forward-looking statements include, but are not limited to, statements about the
operations of the Company, the adequacy of the Company's allowance for losses
associated with the loan portfolio, the prospects of continued loan and deposit
growth, and improved credit quality. The forward-looking statements in this
report involve certain estimates or assumptions, known and unknown risks and
uncertainties, many of which are beyond the control of the Company, and reflect
what we currently anticipate will happen in each case. What actually happens
could differ materially from what we currently anticipate will happen due to a
variety of factors, including, among others, (i) increased competitive pressures
among financial services companies; (ii) changes in the interest rate
environment, reducing interest margins or increasing interest rate risk; (iii)
deterioration in general economic conditions, internationally, nationally, or in
the State of New Jersey; (iv) the occurrence of acts of terrorism, such as the
events of September 11, 2001, or acts of war; (v) legislation or regulatory
requirements or changes adversely affecting the business of the Company, and
(vi) losses in the Company's leasing subsidiary exceeding management's
expectations, and (vii) other risks detailed in reports filed by the Company
with the Securities and Exchange Commission. Readers should not place undue
expectations on any forward-looking statements. We are not promising to make any
public announcement when we consider forward-looking statements in this document
to be 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 Equity and Related Stockholder Matters
The Company's common stock is presently listed for quotation on the NASDAQ
National Market System under the symbol "IFCJ." Effective January 17, 2001, the
Company de-listed its common stock from trading on the American Stock Exchange,
which had been trading under the symbol "IFC". Contemporaneous with this action,
the Company's common stock became listed for quotation on the NASDAQ National
Market
11
System. On January 16, 2001, the Company issued a press release to report
this change. At February 15, 2002, there were approximately 1,129 shareholders
of record. A portion of the Company's common stock is held in "street name" by
nominees for beneficial owners, so the actual number of shareholders is probably
higher. The following table sets forth, for the periods indicated, the reported
high and low sales prices by quarter:
Table 13
- --------------------------------------------------------------------------------
Quarterly Common Stock Price Range
for the years ended December 31,
- --------------------------------------------------------------------------------
The Company's common stock is quoted on the NASDAQ National Market System under
the symbol "IFCJ."
High Low Cash
Sales Sales Dividends
Price Price Declared
------- ------- ----------
1999
First quarter . . . . $17.50 $16.00 $0.120
Second quarter . . . . 17.38 15.50 0.120
Third quarter . . . . 19.63 16.63 0.120
Fourth quarter . . . . 18.13 16.13 0.120
2000
First quarter . . . . $17.50 $13.63 $0.125
Second quarter . . . . 14.38 12.13 0.125
Third quarter . . . . 13.75 12.00 0.125
Fourth quarter . . . . 15.00 12.94 0.125
2001
First quarter . . . . $18.88 $13.75 $0.135
Second quarter . . . . 18.35 14.94 0.135
Third quarter . . . . 18.62 17.36 0.135
Fourth quarter . . . . 19.72 17.55 0.135
The number of stockholders of record as of February 15, 2002 was 1,129.
- -----------------------------------------------------------------------
A cash dividend of $0.125 and $0.135 was declared on each common share
outstanding in each quarter during 2000 and 2001, respectively. In 2000, a cash
dividend of $0.12 was paid in the first quarter and $0.125 was paid in the
second, third and fourth quarters.
The Company intends, subject to its financial results, contractual, legal,
and regulatory restrictions, and other factors that its Board of Directors may
deem relevant, to declare and pay a quarterly cash dividend on its common stock
in the future. The principal source of the funds to pay any dividends on the
Company's common stock is dividends received 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
12
Results of Operations." The Consolidated Statements of Financial Condition
as of December 31, 2001 and 2000, and the Consolidated Statements of Income,
Changes in Stockholders' Equity and Cash Flows for each of the years in the
three-year period ended December 31, 2001 and the report thereon of Deloitte &
Touche LLP are included on pages 28 through 47 of the Company's 2001 Annual
Report to Shareholders filed as Exhibit 13 hereto, which pages are incorporated
herein by reference.
Item 6. Selected Consolidated Financial Data
FINANCIAL HIGHLIGHTS
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Income Statement Data (in thousands)
Interest income $57,402 $55,621 $49,054 $48,766 $45,265
Interest expense 23,444 24,227 18,783 19,864 18,566
-------- -------- -------- -------- --------
Net interest income 33,958 31,394 30,271 28,902 26,699
Provision for loan losses 1,075 750 1,200 951 1,653
-------- -------- -------- -------- --------
Net interest income after provision for losses 32,883 30,644 29,071 27,951 25,046
Non-interest income 5,578 4,381 5,586 4,982 4,819
Non-interest expenses 22,873 21,177 20,063 19,416 17,655
-------- -------- -------- -------- --------
Income before income taxes 15,588 13,848 14,594 13,517 12,210
Income Taxes 5,048 4,592 4,959 4,908 4,285
-------- -------- -------- -------- --------
Net income $10,540 $ 9,256 $ 9,635 $ 8,609 $ 7,925
========= ======== ======== ======== ========
Per Share Data
Before acquisition costs
Basic earnings per common share $1.62 $1.42 $1.37 $1.32 $1.11
Diluted earnings per common share 1.61 1.41 1.36 1.31 1.10
After acquisition costs
Basic earnings per common share 1.62 1.42 1.37 1.20 1.11
Diluted earnings per common share 1.61 1.41 1.36 1.19 1.10
Cash dividends declared 0.54 0.50 0.48 0.40 0.36
Book value--end of year 10.56 9.49 8.66 8.66 7.86
Tangible book value--end of year 10.56 9.48 8.60 8.56 7.71
Weighted average shares outstanding (in thousands)
Basic 6,519 6,540 7,031 7,189 7,132
Diluted 6,548 6,558 7,062 7,237 7,222
Balance Sheet Data--end of year (in thousands)
Total assets $830,949 $770,244 $706,125 $685,364 $625,050
Securities held to maturity and securities available for sale 193,902 l61,354 161,889 149,930 135,997
Loans 581,323 560,879 511,976 478,717 438,273
Allowance for loan losses 6,569 6,154 5,476 5,645 5,231
Total deposits 726,483 668,860 598,992 598,732 540,765
Securities sold under agreements to repurchase 6,700 18,500 16,431 8,780 13,028
Short-term borrowings 18,100 13,000 13,975 9,768 -
Long-term borrowings - - 13,000 - 9,876
Total stockholders' equity 68,233 61,984 58,276 62,372 56,130
Selected Performance Ratios
Before acquisition costs
Return on average total assets 1.31 % 1.24 % 1.39 % 1.44 % 1.33 %
Return on average total stockholders' equity 16.06 16.18 15.52 16.05 14.95
After acquisition costs
Return on average total assets 1.31 1.24 1.39 1.31 1.33
Return on average total stockholders' equity 16.06 16.18 15.52 14.53 14.95
Dividend Payout 33.37 35.24 35.04 32.81 30.08
Average total stockholders' equity to average total assets 8.13 7.64 8.99 9.00 8.89
Net yield on interest earning assets (taxable equivalent) 4.49 4.41 4.61 4.61 4.77
Efficiency ratio (1) 57.46 58.52 56.81 53.59 56.47
Non-interest income to average total assets 0.69 0.56 0.77 0.75 0.80
Non-interest expenses to average total assets 2.83 2.83 2.90 .95 2.96
Asset Quality--end of year (in thousands)
Nonaccrual loans to total loans 0.37 % 0.25 % 0.22 % 0.25 % 0.35 %
Nonperforming assets to total assets 0.34 0.21 0.22 0.26 0.33
Allowance for loan losses to nonaccrual loans--end of year 304.12 441.15 491.12 471.20 345.51
Allowance for loan losses to total loans--end of year 1.13 1.10 1.07 1.18 1.19
Net charge-offs to average loans 0.11 0.01 0.28 0.12 0.10
Liquidity and Capital
Average loans to average deposits 81.77 % 82.81 % 81.79 % 81.06 % 78.09 %
Total stockholders' equity to total assets 8.21 8.05 8.25 9.10 8.9
Tier I capital to risk weighted assets 11.74 11.75 12.72 13.80 13.19
Total capital to risk weighted assets 12.89 12.92 13.91 15.12 14.44
Tier I capital to average assets 8.09 8.02 8.32 9.08 8.79
- ----------------------------------------------------------------------------------------------------------------------------
(1) Information for this period has been restated to reflect the Company's acquisition of The Jersey Bank for Savings, which
was completed on May 31, 1998 and was accounted for as a pooling of interests.
(2) 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 and loan servicing.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 13
through 27 of the Company's 2001 Annual Report to Shareholders filed as Exhibit
13 hereto is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The information regarding the market risk of the Company's financial
instruments, contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on page 24 of the Company's 2001 Annual
Report to Shareholders filed as Exhibit 13 hereto is incorporated herein by
reference.
Item 8. Financial Statements and Supplemental Data
The financial statements required by this Item are included in the
Company's 2001 Annual Report to Shareholders on pages 28 through 47, filed as
Exhibit 13 hereto and incorporated herein by reference.
Page of Annual
Report to
Stockholders
--------------
Report of Independent Public Accountants 28
Interchange Financial Services Corporation and Subsidiaries
Consolidated Balance Sheets 29
Consolidated Statements of Income 30
Consolidated Statements of Changes in Stockholders' Equity 31
Consolidated Statements of Cash Flows 32
Notes to Consolidated Financial Statements (Notes 1 - 21) 33 - 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
14
PART III
Item 10. Directors and Executive Officers
a. Directors
The information contained in the section entitled "Nominees
and Directors" in the Company's definitive Proxy Statement for its
2002 Annual Meeting of Stockholders, to be filed not later than 120
days after the close of the Company's fiscal year, is incorporated
herein by reference in response to this item.
b. Executive Officers
The following table sets forth the names, ages, and present
positions of the Company's and the Bank's principal executive officers:
Name Age Positions Held with the Company and the Bank
- ---- --- -----------------------------------------------
ANTHONY S. ABBATE...... 62 President and Chief Executive Officer
ANTHONY J. LABOZZETTA.. 38 Executive Vice President and Chief Financial Officer
FRANK R. GIANCOLA ..... 48 Senior Vice President--Operations
PATRICIA D. ARNOLD ... 43 Senior Vice Presiden--Chief Credit Officer
Business Experience
ANTHONY S. ABBATE, President and Chief Executive Officer of the Bank since
1981; Senior Vice President and Controller from October 1980. Engaged in the
banking industry since 1959.
ANTHONY J. LABOZZETTA, Executive Vice President and Chief Financial Officer
since September 1997; Treasurer from 1995. Engaged in the banking industry since
1989. Formerly a senior manager with an international accounting firm,
specializing in the financial services industry.
FRANK R. GIANCOLA, Senior Vice President - Operations since September 1997;
Senior Vice President-Retail Banking from 1993; Senior Vice President-Operations
of the Bank from 1984; Senior Operations Officer from 1982; Vice
President/Branch Administrator from 1981. Engaged in the banking industry since
1971.
PATRICIA D. ARNOLD, Senior Vice President - Commercial Lending since August
1997; First Vice President from 1995; Department Head Vice President from 1986;
Assistant Vice President from 1985; Commercial Loan Officer-Assistant Treasurer
from 1983. Engaged in the banking industry since 1981.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board of Directors. Management is not aware of any family
relationship between any director or executive officer. No executive officer was
selected to his or her position pursuant to any arrangement or understanding
15
with any other person.
c. Compliance with Section 16(a)
Information contained in the section entitled "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Company's
definitive Proxy Statement for its 2002 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 2002 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 2002
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 2002 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.
16
PART IV
Item 14. Exhibits, Financial Statement 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 29 through 32,and
the Notes to Consolidated Financial Statements are set forth
at pages 33 through 47,of the Annual Report to Shareholders for
2001 (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 and
Romano and Registrant,dated April 26, 2001
(1) Exhibit 10(b) Outside Director Incentive Compensation Plan
Form S-8, filed June 26, 2000, Registration Statement
No. 33-40098
(1) Exhibit 10(c) Stock Option and Incentive Plan of 1997
(Incorporate by reference to Exhibit 4(c) to Form S-8, filed
September 30, 1997, Registration Statement No. 33-82530)
* Exhibit 10(d) Directors' Retirement Plan (as Amended 2002)
(1) Exhibit 10(e) 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 10(f) Change-in-Control Agreements for the
Registrant's principal executive officers, and Amendment dated
June 14, 2001
* Exhibit 11 Statement regarding Computation of per share
earnings
* Exhibit 13 Portion of the Annual Report to Shareholders for
the year ended December 31, 2001
* Exhibit 21 Subsidiaries of Registrant
* Exhibit 23 Independent Auditors' Consent of Deloitte &
Touche LLP
(b) Reports on Form 8-K during the quarter ended December 31, 2001:
The Company filed a Current Report on Form 8-K on December 28,
2001. Item 5 of the referenced Current Report contained the
press release announcing that it has signed a definitive
agreement with Monarch Capital Corporation ("Monarch"), to
purchase substantially all of Monarch's assets and liabilities
______________________________
(1) Pursuant to Item 14(a) - 3 of Form 10-K, this exhibit represents a
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
17
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 28, 2002
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/Anthony Labozzetta
- ------------------------------------- -------------------------------------
Anthony S. Abbate March 28, 2002 Anthony Labozzetta March 28, 2002
Director Executive Vice President and
President and Chief Executive Officer Chief Financial Officer
/s/Anthony D. Andora /s/Nicholas R. Marcalus
- ------------------------------------- --------------------------------------
Anthony D. Andora March 28, 2002 Nicholas R. Marcalus March 28, 2002
Director Director
Chairman of the Board
/s/Donald L. Correll /s/Eleanore S. Nissley
- ------------------------------------- --------------------------------------
Donald L. Correll March 28, 2002 Eleanore S. Nissley March 28, 2002
Director Director
/s/Anthony R. Coscia /s/Jeremiah F. O'Connor
- ------------------------------------- --------------------------------------
Anthony R. Coscia March 28, 2002 Jeremiah F. O'Connor March 28, 2002
Director Director
/s/John J. Eccleston /s/Robert P. Rittereiser
- ------------------------------------- --------------------------------------
John J. Eccleston March 28, 2002 Robert P. Rittereiser March 28, 2002
Director Director
/s/David R. Ficca /s/Benjamin Rosenzweig
- ------------------------------------ --------------------------------------
David R. Ficca March 28, 2002 Benjamin Rosenzweig March 28, 2002
Director Director
/s/James E. Healey
- -------------------------------------
James E. Healey March 28, 2002
Director
18