UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to______________
Commission file number 0-14294
Greater Community Bancorp
(Exact name of registrant as specified in its charter)
New Jersey 22-2545165
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Union Boulevard, Totowa, New Jersey 07512
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 942-1111
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NASDAQ National Market
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.50 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 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 reports), 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. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.
YES |X| NO |_|
The aggregate market value of the voting common stock held by
non-affiliates of the registrant at February 28, 2003 was approximately
$93,779,577. This calculation does not reflect a determination that persons are
affiliates for any other purpose.
The number of shares outstanding of the registrant's common stock as of
February 28, 2003 was 7,042,504.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the Company's definitive Proxy Statement for its
2003 Annual Meeting of Stockholders to be held on April 15, 2003 is incorporated
by reference into Part III, Items 10 through 13, inclusive.
GREATER COMMUNITY BANCORP AND SUBSIDIARIES
Index to Form 10-K for December 31, 2002
PART I PAGE NO.
Item 1. Business.......................................................... 1
Item 2. Properties........................................................ 7
Item 3. Legal Proceedings................................................. 7
Item 4. Submission of Matters to a Vote of Security Holders............... 7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................... 8
Item 6. Selected Financial Data........................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 9
Item 7a. Quantitative and Qualitative Disclosures about Market Risk........ 24
Item 8. Financial Statements.............................................. 25
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................. 49
PART III
Item 10. Directors and Executive Officers of the Registrant................ 49
Item 11. Executive Compensation............................................ 49
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 49
Item 13. Certain Relationships and Related Transactions.................... 49
Item 14 Controls and Procedures........................................... 49
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 50
SIGNATURES................................................................. 51
CERTIFICATION.............................................................. 52
EXHIBIT INDEX.............................................................. E-1
PART I
Item 1 BUSINESS
THE HOLDING COMPANY
Greater Community Bancorp (the "Company") is a business corporation
incorporated in New Jersey in 1984. It is registered as a bank holding company
with the Board of Governors of the Federal Reserve System ("Federal Reserve")
under the Federal Bank Holding Company Act of 1956, as amended ("Holding Company
Act"). In December, 2001 the Company filed a declaration with the Federal
Reserve to be designated as a "financial holding company" pursuant to the
Gramm-Leach-Bliley Act of 1999 (the "1999 Act"). The 1999 Act permits a bank
holding company to qualify as a financial holding company and expand into a wide
variety of services that are financial in nature, provided that its subsidiary
depository institutions are well-managed, well-capitalized and have received a
"satisfactory" rating on their last Community Reinvestment Act examination. The
Federal Reserve accepted the Company's declaration shortly after it was filed.
(See "SUPERVISION AND REGULATION -- Financial Holding Company Regulation"
below.)
The Company's primary business activity is the ownership and operation of
its three New Jersey commercial bank subsidiaries, Greater Community Bank
("GCBank"), Bergen Commercial Bank ("BCB") and Rock Community Bank ("RCB") (the
"Bank Subsidiaries"), and its nonbank subsidiaries.
During 2002, the Company continued to grow in both assets and earnings in
an increasingly competitive and volatile environment. As of December 31, 2002,
the Company's consolidated assets were $719.9 million, as compared with
consolidated assets of $660.8 million at December 31, 2001. Earnings for the
full year 2002 were $7.5 million or $1.01 per diluted share ($1.07 per basic
share), up from $6.1 million or $0.83 per diluted share ($0.87 per basic share)
in 2001. The Company declared total cash dividends of $0.38 per share and $0.31
per share during 2002 and 2001, respectively.
BANK SUBSIDIARIES
GCBank received its charter from the New Jersey Department of Banking &
Insurance (the "Department") in 1985 and commenced operations as a commercial
bank in 1986. Its main office is located at 55 Union Boulevard, Totowa, New
Jersey. During 2001, GCBank had six additional branches, all of which are
located in Passaic County, New Jersey. Three branches are located in Little
Falls, two in Clifton, and a sixth at 100 Furler Street, Totowa. Effective
February 2002, a seventh branch was established in Lincoln Park, Morris County,
New Jersey. GCBank conducts a general commercial and retail banking business
encompassing a wide range of traditional deposits and lending functions. It
offers a broad variety of lending services, including commercial and residential
real estate loans, short and medium term loans, revolving credit arrangements,
lines of credit and consumer installment loans. In the depository area, GCBank
offers a broad variety of deposit accounts, including consumer and commercial
checking accounts and NOW accounts. It also offers other customary banking
services.
BCB was incorporated in New Jersey in 1987 and commenced banking
operations in 1988. BCB concentrates its operations in commercial lending and
loan origination secured by real estate generally involving nonresidential
properties, primarily servicing Bergen County, New Jersey. BCB also offers other
customary banking services. BCB's main office is located at Two Sears Drive in
Paramus, New Jersey. BCB has five additional branch offices in Bergen County,
located in Hasbrouck Heights, Wood-Ridge, Wallington, Hackensack and Little
Ferry.
GCBank and BCB each has a wholly-owned investment company subsidiary, a
New Jersey corporation, formed to manage their respective investment portfolios.
Each of the investment companies in turn has a wholly-owned Delaware subsidiary
that holds and manages its investment securities.
RCB commenced its banking operations in 1999. Its sole office is located
at 175 Rock Road in Glen Rock, New Jersey. It primarily services Bergen County.
RCB offers a variety of banking services, including commercial and real estate
lending, revolving credit arrangements and consumer loans. It also offers
traditional deposit services and other customary banking services.
NONBANK SUBSIDIARIES
The Company owns four nonbank subsidiaries. GCB Realty, L.L.C. ("Realty")
is a New Jersey limited liability company located in Totowa, New Jersey. Its
purposes are to acquire and manage real estate properties. Realty owns a
property in Bergen County, New Jersey. BCB and five other tenants lease space in
the building.
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Highland Capital Corp. ("HCC"), a wholly-owned nonbank subsidiary of
GCBank engages in commercial equipment leasing focusing on small ticket and
lower or middle market leases for resale to third parties.
GCB Capital Trust II (the "2002 Trust") was formed in 2002 under the
Business Trust Act of Delaware. The 2002 Trust's sole purposes were to issue and
sell Trust Preferred Securities ("Preferred Securities") and Common Securities
and use the sales proceeds to acquire Junior Subordinated Debentures (the
"Debentures") issued by the Company. The Company owns all of the 2002 Trust's
Common Securities. The Debentures are the 2002 Trust's sole assets and the
Company's interest payments on the Debentures are the 2002 Trust's sole revenue.
On June 28, 2002 the Company issued, through the 2002 Trust, 2,300,000 Preferred
Securities, $10 face value per security, for total proceeds of $23 million. On
July 9, 2002 the underwriters exercised their overallotment option to buy an
additional 100,000 Preferred Securities at the face value of $10 for total
proceeds of $1.0 million. The Preferred Securities have an annual distribution
rate of 8.45% payable quarterly. The Preferred Securities mature on June 30,
2032 but are callable at the Company's option on or after June 30, 2007. On July
8, 2002, the Company used the net proceeds from the above transaction to call
the 920,000 securities of 10% Trust Preferred Securities, $25 face value ("10%
Preferreds"), issued by the Company in 1997. Upon redemption of the 10%
Preferreds, the Company wrote-off the associated unamortized issuance cost of
$674,000 after taxes $348,000, through a charge to its statement of income. Such
charge was reflected in the calculation of earnings for the third quarter of
2002. The refinancing of the $23 million in 10% Preferreds will reduce annual
pre-tax interest expense by approximately $350,000.
Greater Community Services, Inc. provides accounting/bookkeeping, data
processing and management information systems, loan operations and various other
banking-related services at cost to the Bank Subsidiaries.
Greater Community Financial, LLC ("GCF") is a New Jersey limited liability
company located in Clifton, New Jersey. GCF engages in the business of
securities broker and dealer. The Board of Directors of the Company has decided
to change the method of delivery of brokerage services to Greater Community
Financials customers. Management is actively pursuing a relationship with a
third party provider to function as the registered broker/dealer for GCF's
operations. At this time, details have not been finalized nor has the third
party provider been identified.
RECENT LEGISLATION
Federal legislation enacted in mid-2002 is now having, and will in the
future have, a great impact on the corporate governance and financial statement
preparation and reporting obligations of publicly held business entities such as
the Company. Known as the Sarbanes-Oxley Act of 2002, this legislation contains
far-reaching requirements relating to, among other things: certifications by an
issuer's principal officers relating to the accuracy of financial disclosures
and disclosure controls and procedures; the independence of auditors; the
composition, specific duties and independence of audit committees of boards of
directors; the manner in which audit committees obtain and process financial and
related information; acceleration, over a period of years, of the time within
which issuers must file annual and quarterly reports; an increase in the events
required to be reported currently; and a dramatic acceleration of the time
within which an issuer's "insiders" must report changes in beneficial ownership
of the issuer's securities. The Company expects that compliance with this
legislation will be time-consuming and expensive.
COMPETITION
The Company, through the Bank Subsidiaries, competes with other New Jersey
commercial banks, savings banks, savings and loan associations, finance
companies, insurance companies and credit unions. A substantial number of
offices of competing financial institutions are located within the Bank
Subsidiaries' respective market areas. The past trend towards consolidation of
the banking industry has continued in New Jersey in recent years. This trend may
make it more difficult for smaller banks such as the Bank Subsidiaries to
compete with larger national and regional banking institutions. Several of the
Bank Subsidiaries' competitors are affiliated with major banking and financial
institutions that are substantially larger and have far greater financial
resources than the Bank Subsidiaries.
Competitive factors between financial institutions can be classified into
two categories: competitive rates and competitive service. Rate competition is
intense especially in the area of time deposits. The Bank Subsidiaries compete
with larger institutions with respect to the interest rates they offer. From a
service standpoint, the Bank Subsidiaries' competitors, by virtue of their
superior financial resources, have substantially greater lending limits than the
Bank Subsidiaries. Such competitors also perform certain functions for their
customers, such as trust and international services, which the Bank Subsidiaries
have chosen not to provide.
SUPERVISION AND REGULATION
The banking industry is highly regulated. Statutory and regulatory
controls increase a bank holding company's cost of doing business, limit its
management's options to deploy assets and maximize income and may significantly
limit the activities of institutions which do not meet regulatory capital or
other requirements. Areas subject to regulation and supervision by the bank
regulatory agencies include, among others: minimum capital levels; dividends;
affiliate transactions; expansion of locations; acquisitions and mergers;
reserves against deposits; deposit insurance premiums; credit underwriting
standards; management and
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internal controls; investments; and general safety and soundness of banks and
bank holding companies. Supervision, regulation and examination of the Company
and the Bank Subsidiaries by the bank regulatory agencies are intended primarily
for the protection of depositors, the communities served by the institutions or
other governmental interests, rather than for holders of stock of the Company
The following is a brief summary of certain statutes, rules and
regulations affecting the Company and the Bank Subsidiaries. A number of other
statutes and regulations and governmental policies have an impact on their
operations. The Company is unable to predict the nature or the extent of the
effects on its business and earnings that fiscal or monetary policies, economic
control or new federal or state legislation may have in the future. The
following summary does not purport to be complete and is qualified in its
entirety by reference to such statutes and regulations.
Bank Holding Company Regulation
During 2002 the Company continued to be registered as a bank holding
company also classified as a financial holding company under the Holding Company
Act. As such, it is subject to regular examination, supervision and regulation
by the Federal Reserve. The Company is required to file reports with the Federal
Reserve and to furnish such additional information as the Federal Reserve may
require pursuant to the Holding Company Act. The Company also is subject to
regulations by the Department.
A policy of the Federal Reserve requires the Company to act as a source of
financial and managerial strength to the Bank Subsidiaries and to commit
resources to support them. In addition, any loans by the Company to the Bank
Subsidiaries would be subordinate in right of payment to deposits and certain
other indebtedness of the Bank Subsidiaries. At December 31, 2002 the Company
had approximately $13.4 million in financial resources in addition to its
investment in the Bank Subsidiaries and nonbank subsidiaries. The Federal
Reserve has adopted guidelines regarding the capital adequacy of bank holding
companies that require them to maintain specified minimum ratios of capital to
total assets and capital to risk-weighted assets.
Holding Company Activities
With certain exceptions, the Holding Company Act prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of a company that is not a bank or a bank holding company
or from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
nonbank activities which, by statute or by Federal Reserve regulation or order,
have been identified as activities closely related to the business of banking.
The Company's activities are subject to these legal and regulatory limitations
under the Holding Company Act and related Federal Reserve regulations.
Satisfactory capital ratios and Community Reinvestment Act ("CRA") ratings are
generally prerequisites to obtaining regulatory approval to make acquisitions.
The Federal Interstate Banking and Branching Act of 1994 permits a bank
holding company to acquire banks in states other than its home state, regardless
of applicable state law. The 1994 law also permits banks to create interstate
branches, either by merging across state lines or by creating new branches,
subject to a state's ability to opt out of these enabling provisions. As have
most states, New Jersey has enacted legislation to authorize interstate banking
either by merger or by branching into New Jersey if the foreign bank already has
branches in New Jersey; however, that legislation did not authorize de novo
branching into New Jersey.
Holding Company Dividends and Stock Repurchases
The Federal Reserve has the power to prohibit bank holding companies from
paying dividends if their actions are deemed to constitute unsafe or unsound
practices. The Federal Reserve has issued a policy statement on the payment of
cash dividends by bank holding companies. It is the Federal Reserve's view that
a bank holding company should pay cash dividends only to the extent that its net
income for the past year is sufficient to cover both the cash dividends and a
rate of earnings retention that is consistent with its capital needs, asset
quality and overall financial condition.
As a bank holding company, the Company is required to give the Federal
Reserve prior written notice of any purchase or redemption of its outstanding
equity securities if the gross consideration for the purchase or redemption,
when combined with the net consideration paid for all such purchases or
redemptions during the preceding 12 months, is equal to 10% or more of the
Company's consolidated net worth. The Federal Reserve may disapprove such a
purchase or redemption if it determines that the proposal would violate any law,
regulation, Federal Reserve order, directive or any condition imposed by or
written agreement with the Federal Reserve.
Financial Holding Company Regulation
The Gramm-Leach-Bliley Act of 1999 ("1999 Act") removed long-standing
legal barriers separating banks and securities firms, and facilitates
affiliations of securities firms, insurance companies and banks. As a "financial
holding company" effective in January, 2002, the Company may engage in any
activity that the Federal Reserve determines to be financial in nature or
incidental to such
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financial activity, or is complementary to a financial activity and does not
pose a substantial risk to the safety or soundness of depository institutions or
the financial system generally. The 1999 Act provides that the following
activities shall be considered to be financial in nature: (a) lending,
exchanging, transferring, investing for others or safeguarding money or
securities; (b) insuring, guaranteeing or indemnifying against loss, harm,
damage, illness, disability or death, or providing and issuing annuities, and
acting as principal, agent or broker for purposes of the foregoing, in any
State; (c) providing financial, investment or economic advisory services,
including advising an investment company; (d) issuing or selling instruments
representing interests in pools of assets permissible for a bank to hold
directly; (e) underwriting, dealing in or making a market in securities; (f)
engaging in any activity that the Federal Reserve has determined to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto; (g) engaging in the United States in any activity that a bank
holding company may engage in outside of the United States that the Federal
Reserve has determined to be usual in connection with the transaction of banking
or other financial operations abroad; (h) engaging through non-bank subsidiaries
in various underwriting or merchant or investment banking activities; and (i)
acquiring investment assets through insurance company affiliates in the ordinary
course of an insurance company business.
Bank Regulation
As state-chartered banks that are not members of the Federal Reserve
System, the Bank Subsidiaries are subject to the primary federal supervision of
the FDIC under the Federal Deposit Insurance Act (the "FDIA"). Prior approval of
the FDIC is required for the Bank Subsidiaries to establish or relocate a branch
office or to engage in any merger, consolidation or significant purchase or sale
of assets. The Bank Subsidiaries are also subject to regulation and supervision
by the Department. In addition, they are subject to numerous federal and state
laws and regulations which set forth specific restrictions and procedural
requirements with respect to the establishment of branches, investments,
interest rates on loans, credit practices, the disclosure of credit terms and
discrimination in credit transactions.
The FDIC and the Department regularly examine the operations of the
respective Bank Subsidiaries and their condition, including capital adequacy,
reserves, loans, investments and management practices. These examinations are
for the protection of the Bank Subsidiaries' depositors and the Bank Insurance
Fund ("BIF") and not the Company. The Bank Subsidiaries are also required to
furnish quarterly and annual reports to the FDIC. The FDIC's enforcement
authority includes the power to remove officers and directors and the authority
to issue orders to prevent a bank from engaging in unsafe or unsound practices
or violating laws or regulations governing its business.
The FDIC has adopted regulations regarding the capital adequacy of banks
subject to its primary supervision. Such regulations require those banks to
maintain specified minimum ratios of capital to total assets and capital to
risk-weighted assets. See "Regulatory Capital Requirements".
Statewide branching is permitted in New Jersey. Branch approvals are
subject to statutory standards relating to safety and soundness, competition,
public convenience and CRA performance.
Community Reinvestment Act
Under the CRA, the Subsidiary Banks have a continuing and affirmative
obligation, consistent with their safe and sound operation, to help meet the
credit needs of their entire communities, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. GCBank and BCB
received "satisfactory" CRA ratings in their most recent examinations.
Bank Dividends
New Jersey law permits the Bank Subsidiaries to declare dividends only if,
after payment of the dividends, their capital would be unimpaired and their
remaining surplus would equal at least 50% of their capital. Under the FDIA, the
Bank Subsidiaries are prohibited from declaring or paying dividends or making
any other capital distribution if, after that distribution, they would fail to
meet their regulatory capital requirements. At December 31, 2002, the Bank
Subsidiaries met their regulatory capital requirements. The FDIC also has
authority to prohibit the payment of dividends by a bank when it determines such
payment to be an unsafe and unsound banking practice. The FDIC may prohibit
parent companies of banks that are deemed to be "significantly undercapitalized"
under the FDIA or which fail to properly submit and implement capital
restoration plans required by the FDIA from paying dividends or making other
capital distributions without the FDIC's permission. See "Holding Company
Dividends and Stock Repurchases".
Restrictions On Intercompany Transactions
The Bank Subsidiaries are subject to restrictions imposed by federal law
on extensions of credit to, and certain other transactions with, the Company and
other affiliates. Such restrictions prevent the Company and its affiliates from
borrowing from the Bank Subsidiaries unless the loans are secured by specified
collateral, and require such transactions to have terms comparable to terms of
arms-length transactions with third persons. Such transactions by each of the
Bank Subsidiaries are generally limited in amount as to
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the Company and as to any other affiliate to 10% of the Subsidiary Bank's
capital and surplus. As to the Company and all other affiliates, such
transactions are limited to an aggregate of 20% of the Subsidiary Bank's capital
and surplus. These regulations and restrictions may limit the Company's ability
to obtain funds from the Bank Subsidiaries for its cash needs, including funds
for acquisitions and for payment of dividends, interest and operating expenses.
Real Estate Lending Guidelines
Under FDIC regulations, state banks must adopt and maintain written
policies establishing appropriate limits and standards for real estate lending
activities. These policies must establish loan portfolio diversification
standards, prudent underwriting standards (including loan-to-value limits that
are clear and measurable), loan administration procedures and documentation,
approval and reporting requirements. A bank's real estate lending policy must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies adopted by federal bank regulators.
Deposit Insurance
Since the Bank Subsidiaries are FDIC member institutions, their respective
deposits are currently insured to a maximum of $100,000 per depositor through
the BIF, administered by the FDIC. The Bank Subsidiaries are also required to
pay deposit insurance premiums to the FDIC.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") included provisions to reform the federal deposit insurance system,
including the implementation of risk-based deposit insurance premiums. FDICIA
permits the FDIC to make special assessments on insured depository institutions
in amounts the FDIC determines necessary to give it adequate assessment income
to repay amounts borrowed from the U.S. Treasury and other sources or for any
other purpose the FDIC deems necessary. Under a risk-based insurance premium
system, banks are assessed insurance premiums according to how much risk they
are deemed to present to the BIF. Banks with higher levels of capital and
involving a low degree of supervisory concern are assessed lower premiums than
banks with lower levels of capital and/or involving a higher degree of
supervisory concern. Effective January 1, 1997 the assessment rates ranged from
0.00% to 0.27% of deposits. The Bank Subsidiaries' deposit assessment rates were
0.00% in 2001 and 2002.
The Deposit Insurance Act of 1996 authorized the Financing Corporation
("FICO") to levy assessments on BIF assessable deposits and stipulated that the
rate must equal one-fifth the FICO assessment rate that is applied to deposits
assessable by the Savings Association Insurance Fund ("SAIF"). The rates
established for GCBank and BCB for 1998 through 2002 were 0.065% and 0.013%,
respectively.
Standards for Safety and Soundness
Under FDICIA, each federal banking agency is required to prescribe
noncapital safety and soundness standards for institutions under its authority.
The federal banking agencies have adopted interagency guidelines covering
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees, benefits, and standards for asset quality and earnings
sufficiency. An institution that fails to meet any of these standards may be
required to develop a plan acceptable to the agency, specifying the steps that
the institution will take to meet the standards. Failure to submit or implement
such a plan may subject the institution to regulatory sanctions. The Company
believes the Bank Subsidiaries meet all adopted standards.
Enforcement Powers
The bank regulatory agencies have broad discretion to issue cease and
desist orders if they determine that the Company or its Bank Subsidiaries are
engaging in "unsafe or unsound banking practices". In addition, the federal bank
regulatory authorities may impose substantial civil money penalties for
violations of certain federal banking statutes and regulations, violation of a
fiduciary duty, or violation of a final or temporary cease and desist orders,
among other things. Financial institutions and a broad range of persons
associated with them are subject to the imposition of fines, penalties, and
other enforcement actions based upon the conduct of their relationships with the
institutions.
The FDIC may be appointed as a conservator or receiver for a depository
institution based upon a number of events and circumstances. In such a capacity
the FDIC also has express authority to repudiate most contracts with such
institution that it determines to be burdensome or to promote the orderly
administration of the institution's affairs. The FDIC also has authority to
enforce contracts made by a depository institution notwithstanding any
contractual provision providing for termination, default, acceleration, or
exercise of rights upon, or solely by reason of, insolvency or the appointment
of a conservator or receiver. Insured depository institutions also are
prohibited from entering into contracts for goods, products or services that
would adversely affect their safety and soundness.
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Regulatory Capital Requirements
The Federal Reserve and the FDIC have established guidelines with respect
to the maintenance of appropriate levels of capital by bank holding companies
and state-chartered banks that are not members of the Federal Reserve System
("state nonmember banks"). The regulations impose two sets of capital adequacy
requirements: minimum leverage rules, which require maintenance of a specified
minimum ratio of capital to total assets, and risk-based capital rules, which
require the maintenance of specified minimum ratios of capital to
"risk-weighted" assets.
These regulations require bank holding companies and state nonmember banks
to maintain a minimum leverage ratio of "Tier I capital" to total assets of 3%.
Although setting a minimum 3% leverage ratio, the capital regulations state that
only the strongest bank holding companies and banks, with composite examination
ratings of 1 under the rating system used by the federal bank regulators, would
be permitted to operate at or near such minimum level of capital. All other bank
holding companies and banks are expected to maintain a leverage ratio of at
least 1% to 2% above the minimum ratio, depending on the assessment of an
individual organization's capital adequacy by its primary regulator. Any bank or
bank holding company experiencing or anticipating significant growth would be
expected to maintain capital well above the minimum levels. In addition, the
Federal Reserve has indicated that whenever appropriate, and in particular when
a bank holding company is undertaking expansion, seeking to engage in new
activities or otherwise facing unusual or abnormal risks, it will consider, on a
case-by-case basis, the level of an organization's ratio of tangible Tier I
capital (after deducting all intangibles) to total assets in making an overall
assessment of capital.
The risk-based capital rules require bank holding companies and state
nonmember banks to maintain minimum regulatory capital levels based upon a
weighting of their assets and off-balance sheet obligations according to risk.
The risk-based capital rules have two basic components: a Tier I or core capital
requirement and a Tier II or supplementary capital requirement. Tier I capital
consists primarily of common stockholders' equity, certain perpetual preferred
stock and minority interests in the equity accounts of consolidated
subsidiaries, less most intangible assets, primarily goodwill. Tier II capital
elements include, subject to certain limitations, the allowance for losses on
loans and leases; perpetual preferred stock that does not qualify for Tier I and
long-term preferred stock with an original maturity of at least 20 years from
issuance; hybrid capital instruments, including perpetual debt and mandatory
convertible securities; and subordinated debt and intermediate-term preferred
stock.
The risk-based capital regulations assign balance sheet assets and credit
equivalent amounts of off-balance sheet obligations to one of four broad risk
categories based principally on the degree of credit risk associated with the
obligor. The assets and off-balance sheet items in the four risk categories are
weighted at 0%, 20%, 50% and 100%. These computations result in the total
risk-weighted assets.
The risk-based capital regulations require all banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios, (i) supplementary capital is limited to no more than 100% of core
capital, and (ii) the aggregate amount of certain types of supplementary capital
is limited. In addition, the risk-based capital regulations limit the allowance
for loan and lease losses which may be included as capital to 1.25% of total
risk-weighted assets.
At December 31, 2002, the Company's total risk-based capital and leverage
capital ratios were 13.77% and 7.38%, respectively. The minimum level
established by the regulators for these measures are 8% and 4%, respectively.
FDICIA requires federal banking regulators to classify insured depository
institutions by capital levels and to take various prompt corrective actions to
resolve the problems of any institution that fails to satisfy the capital
standards. Under FDICIA and its "prompt corrective action" regulations, all
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees that would cause the
institution to fail to satisfy the minimum levels for any of its capital
requirements.
Under the FDIC's prompt corrective action regulation, a "well-capitalized"
bank is one that is not subject to any regulatory order or directive to meet any
specific capital level and that has or exceeds the following capital levels: a
total risk-based capital ratio of 10%, a Tier I risk-based capital ratio of 6%
and a leverage ratio of 5%. An "adequately-capitalized" bank is one that does
not qualify as "well-capitalized" but meets or exceeds the following capital
requirements: a total risk-based capital ratio of 8%, a Tier I risk-based
capital ratio of 4% and a leverage ratio of either 4% or 3% if the bank has the
highest composite examination rating. A bank not meeting these criteria will be
treated as "undercapitalized," "significantly undercapitalized," or "critically
undercapitalized" depending on the extent to which the bank's capital levels are
below these standards. A bank falling within any of the three "undercapitalized"
categories will be subject to increased monitoring by the appropriate federal
banking regulator and other restrictions.
6
EFFECT OF GOVERNMENT MONETARY POLICIES; POSSIBLE FURTHER LEGISLATION
The Company's earnings are and will be affected by domestic and
international economic conditions and the monetary and fiscal policies of the
United States and foreign governments and their agencies.
The Federal Reserve's monetary policies have had, and will probably
continue to have, an important impact on the operating results of commercial
banks through its power to implement national monetary policy in order, among
other things, to curb inflation or combat a recession. The Federal Reserve has a
major effect on the levels of bank loans, investments and deposits through its
open market operations in United States Government securities and through its
regulation of, among other things, the discount rate on borrowings of banks and
the imposition of nonearning reserve requirements against member bank deposits.
It is not possible to predict the nature and impact of future changes in
monetary and fiscal policies.
From time to time, proposals are made in the United States Congress, the
New Jersey Legislature and various bank regulatory authorities that would alter
the powers of, and place restrictions on, different types of banking
organizations. It is impossible to predict whether any of these proposals will
be adopted and any impact of such adoption on the business of the Company and/or
the Bank Subsidiaries.
The Bank Subsidiaries are also subject to various Federal and State laws
such as usury laws and consumer protection laws.
EMPLOYEES
As of December 31, 2002, the Company employed a total of approximately 212
employees, including 175 full-time employees. Management considers relations
with employees to be satisfactory.
Item 2 PROPERTIES
The Company does not directly own or lease any land, buildings or
equipment. However, the Company's nonbank subsidiary, Realty, owns a property in
Bergen County, New Jersey.
GCBank leases its main office banking facility and certain other office
space at 55 Union Boulevard, Totowa, New Jersey. Such space is owned by a
limited liability company of which the Company's chairman and chairman emeritus
are members. During 2002, GCBank also leased space for its other branches in
Totowa, Little Falls, Clifton and Lincoln Park.
BCB leases its main office space at Two Sears Drive, Paramus, New Jersey,
from Realty. BCB also leases space for three other branches in Hackensack,
Wallington and Wood-Ridge, New Jersey. BCB owns the space for its branches
located in Hasbrouck Heights and Little Ferry, New Jersey.
RCB leases its main office space at 175 Rock Road, Glen Rock, New Jersey.
Sinabaldo Leone, Jr., a director of RCB, owns the leased space.
In the opinion of management, all such leased properties are adequately
insured and leased at fair rentals.
For further information regarding the Bank Subsidiaries' lease
obligations, see Note 14 of the Company's Notes to Consolidated Financial
Statements for the year ended December 31, 2002, contained in Item 8 -
"Financial Statements".
Item 3 LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time parties to various
legal actions arising in the normal course of business. Management believes
there is no proceeding threatened or pending against the Company, which, if
determined adversely, would have a material effect on the Company's business,
consolidated financial position or consolidated results of operations.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 2002 to a vote of
security holders through the solicitation of proxies or otherwise.
7
PART II
Item 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was held by approximately 1,027 holders of
record on December 31, 2002, and is traded on the NASDAQ National Market under
the symbol GFLS.
The following table indicates the range of high and low market quotations
of the Common Stock, as reported by NASDAQ, and the cash dividends declared per
share on the Common Stock, in each case for the quarterly periods indicated. The
market quotations and cash dividends have been adjusted to take into account the
effect of the 5% stock dividends paid in 2002 and 2001.
Cash
Market Quotations Dividends
---------------------------- ------------
High Low Declared
-------- -------- ------------
Year Ended December 31, 2001
First Quarter $12.14 $ .21 $.068
Second Quarter 11.90 9.62 .081
Third Quarter 12.00 10.24 .081
Fourth Quarter 12.59 10.06 .081
Year Ended December 31, 2002
First Quarter $13.57 $10.95 $.081
Second Quarter 15.62 13.05 .100
Third Quarter 16.44 14.30 .100
Fourth Quarter 16.25 13.06 .100
The Company's ability to pay dividends on its Common Stock in the future
is subject to numerous regulatory restrictions that are potentially applicable.
However, management does not expect any such restrictions to apply so long as
the Company and the Bank Subsidiaries continue to operate profitably.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2002 with
respect to compensation plans under which equity securities of the registrant
are authorized for issuance.
Equity Compensation Plan Information
Plan Category Number of Weighted average Number of securities
securities to exercise price of remaining available for
be issued upon outstanding future issuance under
exercise of options, warrants equity compensation
outstanding and rights plans (excluding
Stock Option Plans options, securities reflected in
warrants and column (a))
rights
(a) (b) (c)
- ----------------------------------- -------------- --------------- --------------------------
Equity Compensation plans approved by the
security holder 436,475 $7.32 214,725
Equity compensation plans not approved by
security holders n a n a n a
------- ----- -------
Total 436,475 $7.32 214,725
8
Item 6 SELECTED FINANCIAL DATA
The selected consolidated financial highlights of the Company set forth
below should be read in conjunction with the more detailed information included
in the Consolidated Financial Statements, related Notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations,
appearing elsewhere herein.
As of the Years Ended December 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In Thousands, except per share data)
Summary of Operations:
Total interest income ....................... $ 41,033 $ 42,775 $ 41,458 $ 34,564 $ 24,866
Total interest expense ...................... 14,686 20,497 20,664 17,140 12,009
Net interest income ......................... 26,347 22,278 20,794 17,424 12,857
Provision for loan and lease losses ......... 996 885 1,048 885 520
Net interest income after provision for loan
and lease losses ........................ 25,351 21,393 19,746 16,539 12,337
Non interest income ......................... 7,191 6,515 6,167 7,270 4,656
Non interest expenses ....................... 21,676 18,664 18,290 17,288 11,450
Income before income taxes .................. 10,866 9,244 7,623 6,521 5,543
Provision for income taxes .................. 3,353 3,164 2,793 2,349 2,000
Net Income .................................. $ 7,513 $ 6,080 $ 4,830 $ 4,172 $ 3,543
Per Common Share Data: (1)
Earnings Per Share--Basic ................... $ 1.07 $ 0.87 $ 0.70 $ 0.61 $ 0.55
Earnings Per Share--Diluted ................. $ 1.01 $ 0.83 $ 0.68 $ 0.59 $ 0.53
Cash dividends per common share ............. $ 0.38 $ 0.31 $ 0.27 $ 0.23 $ 0.19
Stock splits and dividends per common share . 5% 5% 5% 5% 2 for 1
Book value per common share ................. $ 7.33 $ 6.55 $ 5.78 $ 5.07 $ 4.99
Selected Operating Ratios:
Return on average assets .................... 1.09% 0.95% 0.84% 0.81% 1.00%
Return on average equity .................... 15.29% 14.18% 13.43% 11.98% 11.88%
Interest rate spread ........................ 3.48% 2.93% 3.13% 3.02% 2.65%
Net interest margin ......................... 4.12% 3.79% 3.98% 3.78% 3.87%
Financial Condition Data:
Total Assets ................................ $719,867 $660,839 $607,305 $567,453 $372,400
Cash and cash equivalents ................... 37,133 46,997 56,292 19,200 23,640
Investment securities ....................... 192,195 151,906 138,153 151,191 111,601
Total Loans, net ............................ 436,044 404,250 366,139 340,563 201,765
Allowance for loan and lease losses ......... 7,298 6,320 5,657 4,953 3,525
Total Deposits .............................. 544,043 484,623 465,245 460,634 293,395
Other borrowings ............................ 115,728 115,347 90,020 64,403 40,103
Shareholders' equity ........................ $ 51,498 $ 46,112 $ 40,231 $ 35,402 $ 32,309
Capital Ratios:
Equity to assets ............................ 7.15% 6.98% 6.62% 6.23% 8.68%
Total risk-based capital ratio .............. 13.77% 13.89% 13.88% 13.73% 21.58%
Tier I risk-based capital ratio ............. 10.58% 10.70% 10.14% 9.59% 15.32%
Leverage ratio .............................. 7.38% 7.23% 7.10% 7.18% 11.21%
(1) All per share data has been adjusted to reflect stock dividends and stock
split.
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this analysis is to provide the reader with information
relevant to understanding and assessing the Company's financial condition and
results of operations for each of the past three years and its financial
condition at the end of each of the past two years. In order to appreciate this
analysis fully, the reader is encouraged to review the consolidated financial
statements and statistical data presented in this document. Data is presented
for the Company and its subsidiaries in the aggregate unless otherwise
indicated.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Form 10-K, both in this MD&A section and elsewhere (including
documents incorporated by reference herein), contains both historical
information and "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are not
historical facts and include expressions about management's confidence and
strategies and its expectations about new and existing programs and products,
relationships, opportunities, technology and market conditions. These statements
may be identified by an asterisk (*) or such forward-looking terminology as
"projected," "expect," "look,"
9
"believe," "anticipate," "may," "will," or similar statements or variations of
such terms. Such forward-looking statements involve certain risks and
uncertainties. These include, but are not limited to, the ability of the
Company's Bank Subsidiaries to generate deposits and loans and attract qualified
employees, the direction of interest rates, continued levels of loan quality and
origination volume, continued relationships with major customers including
sources for loans as well as the effects of economic conditions and legal and
regulatory barriers and structure. Actual results may differ materially from
such forward-looking statements. The Company assumes no obligation to update any
such forward-looking statement at any time.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States of America and
general practices within the financial services industry. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and the
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
The Company considers that the determination of the allowance for loan and
lease losses involves a higher degree of judgment and complexity than its other
significant accounting policies. The allowance for loan losses is calculated
with the objective of maintaining a reserve level believed by management to be
sufficient to absorb estimated credit losses. Management's determination of the
adequacy of the allowance is based on periodic evaluations of the loan and lease
portfolios and other relevant factors. However, this evaluation is inherently
subjective as it requires material estimates, including, among others, expected
default probabilities, loss given default, expected commitment usage, the
amounts and timing of expected future cash flows on impaired loans, mortgages,
and general amounts for historical loss experience. The process also considers
economic conditions, uncertainties in estimating losses and inherent risks in
the loan portfolio. All of these factors may be susceptible to significant
change. To the extent actual outcomes differ from management estimates,
additional provisions for loan and lease losses may be required that would
adversely impact earnings in future periods.
The Company recognizes deferred tax assets and liabilities for the future
tax effects of temporary differences, net operating loss carryforwards and tax
credits. Deferred tax assets are subject to management's judgment based upon
available evidence that future realization is more likely than not. If
management determines that the Company may be unable to realize all or part of
net deferred tax assets in the future, a direct charge to income tax expense may
be required to reduce the recorded value of the net deferred tax asset to the
expected realizable amount.
The Company adopted SFAS No. 142, Goodwill and Intangible Assets, on
January 1, 2002. This SFAS modifies the accounting for all purchased goodwill
and intangible assets. SFAS No. 142 includes requirements to test goodwill and
indefinite lived intangible assets for impairment rather than amortize them. On
January 1, 2002, the Company stopped amortizing goodwill, which approximated
$800,000 annually. The Company did not identify any impairment of goodwill
during its transitional testing of its outstanding goodwill.
Results of Operations: Fiscal Years Ended December 31, 2002, 2001 and 2000
In 2002, the Company recorded earnings of $7.5 million or $1.01 per
diluted share an increase of 24% over 2001. During 2001, the Company earned $6.1
million or $0.83 per diluted share, a 26% increase over $4.8 million or $0.68
per diluted share earned during 2000.
Cash earnings (net income before amortization of intangible assets) per
diluted share were $1.01, $0.94 and $0.79 for the years ending December 31,
2002, 2001 and 2000.
The increase in net income for the year ended December 31, 2002 primarily
reflects higher net interest income, partially offset by higher salaries and
employee benefits, regulatory, professional and other fees, and a one-time
writeoff of unamortized financing costs from a 1997 trust preferred securities
issue that the Company redeemed during 2002.
Average Balances and Net Interest Income
Net interest income, the primary source of the Company's results of
operations, is the difference between interest, dividends and fees earned on
loans and other earning assets, and interest paid on interest-bearing
liabilities. Earning assets include loans to businesses and individuals,
investment securities, interest-bearing deposits with banks and federal funds
sold in the interbank market. Interest-bearing liabilities include primarily
interest-bearing demand, savings and time deposits. Net interest income is
determined by the difference between the yields earned on earning assets and
rates paid on interest-bearing liabilities ("interest rate spread") and the
relative amounts of earning assets and interest-bearing liabilities. The
Company's interest rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit flows
and general levels of nonperforming assets.
The following table sets forth the Company's consolidated average balances
of assets, liabilities and shareholders' equity as well as the amount of
interest income and expense on related items, and the Company's average yield
for the years ended December 31, 2002, 2001 and 2000. The yields are not shown
on a fully taxable basis.
10
Average Balance Sheet, Interest Income and Expense and Average Interest Rates
For the Years Ended
----------------------------------------------------------------------------------
December 31, 2002 December 31, 2001
---------------------------------------- ----------------------------------------
Average Interest Average Average Interest Average
Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
ASSETS
Earning Assets: $176,455 $ 8,057 4.57% $145,477 $ 8,647 5.94%
Investment securities......................... 14,846 511 3.44% 14,237 587 4.12%
Due from banks - interest-bearing............. 25,864 425 1.64% 38,299 1,591 4.15%
Federal funds sold............................ 421,942 32,040 7.59% 390,354 31,950 8.18%
-------- ------- -------- -------
Loans(1)...................................... 639,107 41,033 6.42% 588,367 42,775 7.27%
Total earning assets..................... (6,651) -- (6,022) --
Less: Allowance for loan and lease losses..... (3,138) -- (2,287) --
Unearned income - loans.................. 61,968 -- 59,539 --
-------- ------- -------- -------
All other assets.............................. $691,286 $41,033 $639,597 $42,775
======== ======= ======== =======
Total assets.............................
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing Liabilities:
Savings and interest-bearing deposits....... $224,630 $3,139 1.40% $166,916 $3,515 2.11%
Time deposits............................... 154,577 4,859 3.14% 192,952 10,114 5.24%
Federal funds and short-term borrowings(2).. 95,603 4,520 4.73% 89,514 4,568 5.10%
Trust preferred securities.................. 24,112 2,168 8.99% 23,000 2,300 10.00%
-------- ------- - -------- -------
Total interest-bearing liabilities....... 498,922 14,686 2.94% 472,382 20,497 4.34%
Non interest-bearing deposits................. 135,840 -- 113,203 --
Other liabilities............................. 7,385 -- 11,127 --
Shareholders' equity.......................... 49,139 -- 42,885 --
-------- ------- -------- -------
Total liabilities and
Shareholders' equity.................. $691,286 $14,686 $639,597 $20,497
======== ======= ======== -------
NET INTEREST INCOME ......................... $26,347 $22,278
======= =======
NET INTEREST MARGIN........................... 4.12% 3.79%
==== =====
For the Years Ended
------------------------------------------
December 31, 2000
-------------- ------------ ------------
Average Interest Average
Balance Earned/Paid Yield/Rate
-------------- ------------ ------------
(Dollars in Thousands)
ASSETS
Earning Assets:
Investment securities......................... $144,980 $ 9,369 6.46%
Due from banks - interest-bearing............. 8,543 549 6.43%
Federal funds sold............................ 9,789 538 5.50%
Loans(1)...................................... 358,636 31,002 8.64%
-------- -------
Total earning assets..................... 521,948 41,458 7.94%
Less: Allowance for loan and lease losses..... (5,387) --
Unearned income - loans.................. (1,661) --
All other assets.............................. 60,114 --
-------- -------
Total assets............................. $578,336 $41,458
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing Liabilities:
Savings and interest-bearing deposits....... $135,953 $ 3,187 2.34%
Time deposits............................... 223,834 12,512 5.59%
Federal funds and short-term borrowings(2).. 46,748 2,665 5.70%
Trust preferred securities.................. 23,000 2,300 10.00%
Total interest-bearing liabilities....... -------- -------
429,535 20,664 4.81%
Non interest-bearing deposits................. 103,209 --
Other liabilities............................. 9,622 --
Shareholders' equity.......................... 35,970 --
-------- -------
Total liabilities and
Shareholders' equity.................. $578,336 $20,664
======== -------
NET INTEREST INCOME ......................... $20,794
=======
NET INTEREST MARGIN........................... 3.98%
====
(1) Average balance includes nonperforming loans and leases.
(2) Balance includes FHLB Advances, Federal Funds purchased and securities
sold under agreements to repurchase
11
Net Interest Income
Net interest income is the largest source of the Company's operating
income. Changes in net interest income and margin result from the interaction
between the volume and composition of earning assets, related yields and
associated funding costs. In 2002, net interest income was greatly impacted by
several rate changes that occurred in 2001 and 2002. Total interest income
remained almost unchanged from 2001 despite an increase in average earning
assets, whereas total interest expense declined dramatically with the repricing
of paying liabilities in a lower rate environment.
Net interest income was $26.3 million in 2002, a $4.1 million or 18%
increase compared to 2001. Interest and fee income on loans during 2002
increased moderately over 2001 in spite of an 8% increase in average total
loans. The average yield on loans decreased to 7.59% in 2002 compared to 8.18%
in 2001 as a result of repricing of loans at prevailing rates. Loans represented
66% of average earning assets for both 2002 and 2001. Income earned on
investment securities during 2002 decreased by $590,000, or 7% compared to 2001.
Though the average investment securities increased by 21% in 2002 over 2001,
income from securities decreased, largely due to declining yields during 2002
over 2001. The average yield on securities was 4.57% for 2002 compared to 5.94%
for 2001. Investments represented 28% of average earning assets in 2002 and
2001. Interest income on federal funds sold and deposits with banks during 2002
decreased by $1.2 million or 57% compared to 2001 as a result of a $11.8
million, or 23%, decrease in average federal funds sold and deposits with banks.
Also, in 2002, the average yield on federal funds sold declined to 1.64% from
4.15% in 2001. Federal funds sold and deposits with banks represent 6% and 9% of
average earning assets at December 31, 2002 and 2001, respectively.
In 2001, net interest income was $22.3 million, a $1.5 million or 7%
increase compared to 2000. Interest and fee income on loans during 2001
increased by $1.0 million or 3% over 2000 as a result of an increase of 9% in
average total loans. The average yield on loans decreased to 8.18% in 2001
compared to 8.64% in 2000 as a result of repricing of loans at prevailing rates
and a general decline in overall interest rates during the year. Loans represent
66% and 68% of average earning assets in 2001 and 2000, respectively. Income
earned on investment securities during 2001 decreased by $722,000, or 8%
compared to 2000. Since the average investment securities were almost unchanged
from 2001, the decrease was largely due to declining interest rates during 2001
over 2000. The average yield on securities was 5.94% for the year ended December
31, 2001, compared to 6.46% for the prior year. Investments represent 25% and
28% at 2001 and 2000, respectively, of average earning assets. Interest income
on federal funds sold and deposits with banks during 2001 increased by $1.1
million or 196% compared to 2000 as a result of a $34.2 million, or 187%,
increase in average federal funds sold and deposits with banks. Federal funds
sold and deposits with banks represent 9% and 4% of average earning assets at
December 31, 2001 and 2000, respectively.
Interest expense for 2002 decreased by $5.8 million or 28% from 2001.
Interest expense on deposits decreased by $5.6 million primarily due to
declining interest rates during 2002 and 2001, while interest expense on
short-term borrowings decreased by $48,000. Interest expense on long-term
borrowings decreased by $132,000 due to the refinancing of the trust preferred
securities during the second half of 2002. For the year 2002 the average
interest rate paid decreased by 140 basis points compared to 2001.
Interest expense for the year ended December 31, 2001, decreased by
$167,000 or 1% from the level of interest expense for 2000. Interest expense on
deposits decreased by $2.1 million primarily due to declining interest rates
during 2001, while interest expense on short-term borrowings increased by $1.9
million as a direct result of increase in federal home loan bank advances. For
the year 2001, average interest rate paid decreased by 47 basis points compared
to 2000.
Average interest-bearing deposits comprised 76% in both 2002 and 2001, and
84% in 2000, of the Company's total funding sources, with the balance comprised
of short- and long-term funding.
The Company's net interest margin, which measures net interest income as a
percentage of average earning assets, was 4.12%, 3.79% and 3.98% for the years
ended December 31, 2002, 2001 and 2000, respectively.
Rate/Volume Analysis
The following table sets forth the changes in interest income and expenses
as they relate to changes in volume and rate for the years ended December 31,
2002 and 2001 compared to the prior years. Because of numerous simultaneous
balance and rate changes during the periods indicated, it is difficult to
allocate the changes precisely between balances and rates. For purposes of this
table, changes that are not due solely to changes in balances or rates are
allocated between such categories based on the average percentage changes in
average balances and average rates.
12
Full Year 2002 Full Year 2001
Compared to Full Year 2001 Compared to Full Year 2000
Increase(Decrease) Increase(Decrease)
---------------------------------- ----------------------------------
Volume Rate Net Volume Rate Net
-------- -------- -------- -------- -------- --------
(In Thousands)
Interest Earned On:
Loans ................................ $ 2,398 $ (2,308) $ 90 $ 2,580 $ (1,632) $ 948
Investment securities ................ 1,414 (2,004) (590) 26 (748) (722)
Other earning assets ................. (182) (1,060) (1,242) 1,420 (329) 1,091
-------- -------- -------- -------- -------- --------
Total earning assets .............. $ 3,630 $ (5,372) $ (1,742) $ 4,026 $ (2,709) $ 1,317
======== ======== ======== ======== ======== ========
Interest Paid On:
Savings and interest-bearing deposits $ 807 $ (1,182) $ (375) $ 650 $ (322) $ 328
Time deposits ........................ (1,206) (4,050) (5,256) (1,623) (775) (2,398)
Borrowings (1) ....................... 402 (582) (180) 2,612 (709) 1,903
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $ 3 $ (5,814) $ (5,811) $ 1,639 $ (1,806) $ (167)
======== ======== ======== ======== ======== ========
(1) Includes FHLB advances, federal funds purchased, securities sold under
agreements to repurchase and trust preferred securities.
Provision for Loan and Lease Losses
The Company recorded a provision for loan and lease losses of $996,000 in
2002 compared with $885,000 in 2001 and $1.0 million in 2000. Management of each
Bank Subsidiary regularly performs an analysis to identify the inherent risk of
loss in its loan portfolio. This analysis includes evaluation of concentrations
of credit, past loss experience, current economic conditions, amount and
composition of the loan portfolio (including loans being specifically monitored
by management), estimated fair value of underlying collateral, loan commitments
outstanding, delinquencies and other factors.
The Bank Subsidiaries will continue to monitor their allowances for loan
and leases losses and make future adjustments to the allowances through the
provision for possible loan losses as economic conditions dictate. Although the
Bank Subsidiaries maintain their loan loss allowances at levels they consider
adequate to provide for the inherent risk of loss in their loan portfolios,
there can be no assurance that future losses will not exceed estimated amounts
or that additional provisions for loan losses will not be required in future
periods.In addition, the Bank Subsidiaries' determinations as to the amount of
their allowances for possible loan losses are subject to review by the FDIC and
the Department, as part of their examination processes. Such reviews may result
in the establishment of an additional allowance based upon those regulators'
judgments after a review of the information available at the times of their
examinations.
Non-interest Income
Non-interest income was $7.2 million in 2002, representing 21% of total
income (net interest income plus non-interest income), compared with $6.5
million and 23%, respectively, in 2001. The increase of $676,000 or 10% over
2001 is primarily due to increases in gains on sales of investment securities
and all other income. Gains on sale of investment securities increased by
$558,000 and all other income increased by $179,000. Included in the increase of
all other income is $124,000 in gains on sale of assets as a result of the sale
of the MasterCard portfolio in early 2002. Other income for 2002 also included
$306,000 in rental income and $354,000 in automated teller machine service fees.
Total non-interest income was $6.5 million in 2001 and represented 23% of
total income (net interest income plus non-interest income) compared with $6.2
million and 23%, respectively, in 2000. The increase of $348,000 or 6% over 2000
is primarily due to increases in service charges on deposit accounts, gains on
sales of investment securities and leasing income offsetting decreases in other
commission and fees and gain on sale of assets. Service charges on deposit
accounts increased by $437,000, gains on sale of investment securities increased
by $526,000 and gain on sale of leases increased by $243,000 while other
commission and fees declined $416,000 and gain on sale of assets declined by
$517,000. The majority of such increases resulted from the overall growth of the
Company. Included in all other income for 2001 is $274,000 in rental income and
$288,000 in automated teller machine service fees.
Non-interest Expenses
Total non-interest expenses increased $3.0 million or 16% to $21.7 million
in 2002 compared with 2001.While management continues to emphasize expense
control, the year to year increase in expenses is attributable to the continued
growth of the Company, its investment in technology and the need to attract and
retain high-caliber employees. Of the total increase of $3.0 million, increases
in salaries and employee benefits accounted for $1.3 million, a write off of the
unamortized deferred financing cost from the issuance of trust preferred
securities in 1997 accounted for $1.0 million, increases in regulatory,
professional and other fees accounted for $652,000, increases in other operating
expenses accounted for $566,000, increases in occupancy and equipment
13
expense accounted for $139,000, and offset by a decrease in office expense of
$31,000 and in amortization of intangible assets of $777,000 as a result of the
adoption of a new accounting standards prohibiting the further amortization of
goodwill.
Total non-interest expenses in 2001 increased $374,000 or 2% to $18.7
million compared with 2000. The level of operating expenses during 2001 was
favorably impacted by management's commitment to control increases in
non-interest expenses. While management continued to emphasize expense control,
the year to year increase in expenses was attributable to the Company's
continued growth, its investment in technology and its need to attract and
retain high-caliber employees. Of the total increase, salaries and employee
benefits accounted for $509,000, other operating expenses accounted for $137,000
and office expenses accounted for $48,000, offset in part by decreases in
occupancy and equipment expense of $114,000 and regulatory and professional fees
of $215,000. The decrease in occupancy and equipment expense was attributable to
a decline in depreciation expense resulting from certain fully depreciated fixed
assets. The decrease in regulatory and professional fees resulted from a decline
in legal expenses.
Income Taxes
The Company recorded income tax provisions of $3.4 million, $3.2 million
and $2.8 million for the years ended December 31, 2002, 2001 and 2000,
respectively. The Company's effective rate was 31%, 34% and 37% for the years
ended December 31, 2002, 2001 and 2000, respectively. The net decreases in the
effective rate are due to tax planning strategies partially offset by
nondeductible amortization of goodwill prior to 2002.
Financial Condition
The Company's performance for 2002 was highlighted by loan growth,
particularly in the commercial mortgage portfolio. At December 31, 2002, the
Company's total assets were $719.9 million, an increase of $58.4 million or 8%
over December 31, 2001. Gross loans increased by $32.7 million reflecting
increased loan demand. Investment securities increased by $40.3 million, while
federal funds sold and interest bearing due from banks decreased by $6.0 million
and $4.4 million, respectively. The increase in loans and investments were
supported by increases in total deposits and FHLB advances.
A key element of the Company's consistent performance is its strong
capital base. The Company's risk-based capital ratios at December 31, 2002 were
10.58% and 13.77% for Tier 1 Capital and total risk-based capital, respectively,
substantially exceeding the minimum requirements under regulatory guidelines.
The Company's return on average equity in 2002 was 15.29% compared to 14.18% in
2001.
At December 31, 2001, the Company's total assets were $660.8 million, an
increase of $53.5 million or 9% over December 31, 2000. Gross loans increased by
$37.4 million reflecting increased loan demand. Investment securities and
interest-bearing due from banks increased by $13.8 million and $9.1 million,
respectively. These increases were related to increases in total deposits and
FHLB advances. Federal funds sold decreased by $12.1 million.
Investment Securities
At December 31, 2002, the investment securities portfolio amounted to
$192.2 million, an increase of $40.3 million or 27% over December 31, 2001. The
increase was primarily related to liquidity arising from deposit growth.
Investment securities at December 31, 2001 decreased by $13.8 million or 10%
over December 31, 2000. The decrease was primarily related to maturities and
principal paydowns and the subsequent use of proceeds to meet loan demand. The
following table presents the composition of the investment securities portfolio
along with the amortized cost and fair values of those components at December
31, 2002, 2001 and 2000.
14
December 31
--------------------------------------------------------------------------
2002 2001 2000
---------------------- ---------------------- ----------------------
(In Thousands)
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- ---------
Available-for-sale
U.S. Treasury and U.S. Government
agencies securities............ $ 22,823 $ 23,237 $ 21,288 $ 21,712 $ 65,768 $ 65,684
State and political subdivisions. 4,536 4,595 7,279 7,253 5,446 5,426
Other debt and equity securities. 25,860 29,413 23,796 26,679 16,802 18,306
Mortgage-backed securities ...... 128,057 129,630 93,860 94,568 45,188 45,176
--------- --------- --------- --------- --------- ---------
Total available-for-sale ... $ 181,276 $ 186,875 $ 146,223 $ 150,212 $ 133,204 $ 134,592
--------- --------- --------- --------- --------- ---------
Held-to-maturity
U.S. Treasury and U.S. Government
agencies securities............ $ 1,000 $ 1,003 $ 1,000 $ 950 $ 1,000 $ 791
State and political subdivisions. 4,120 4,120 185 186 870 870
Mortgage-backed securities ...... 200 204 509 521 1,691 1,695
--------- --------- --------- --------- --------- ---------
Total held-to-maturity ..... $ 5,320 $ 5,327 $ 1,694 $ 1,657 $ 3,561 $ 3,356
--------- --------- --------- --------- --------- ---------
Total investment securities. $ 186,596 $ 192,202 $ 147,917 $ 151,869 $ 136,765 $ 137,948
========= ========= ========= ========= ========= =========
During 2002, the Company realized net gains of $1.2 million from the sale
of $22.6 million in investment securities. In 2001, the Company realized net
gains of $633,000 from the sale of $17.6 million in investment securities.
Included in shareholders' equity at December 31, 2002 is accumulated other
comprehensive income in the amount of $3.4 million, an increase of $1.0 million
or 42% over the end of 2001. The Company has no investment securities held for
trading purposes at December 31, 2002.
The following table shows the average yields, amortized costs and fair
values of the Company's investment securities by maturity.
December 31, 2002
----------------------------------
Average Amortized Fair
Yield Cost Value
--------- --------- ---------
(Dollars in Thousands)
Available-for-sale
Due in one year or less .................. 3.83% $ 8,771 $ 8,815
Due after one year through 5 years ....... 3.91 12,798 13,176
Due after five years through 10 years .... 4.47 1,157 1,172
Due after ten years ...................... 3.94 4,633 4,669
Mortgage-backed securities ............... 4.73 128,057 129,630
Other debt and equity securities ......... n.a. 25,860 29,413
--------- ---------
Total available-for-sale .............. $ 181,276 $ 186,875
========= =========
Held-to-maturity
Due in one year or less .................. 1.83% $ 4,120 $ 4,120
Due after five years through 10 years .... 5.08 1,000 1,003
Mortgage-backed securities ............... 6.21 200 204
--------- ---------
Total held-to-maturity .............. $ 5,320 $ 5,327
--------- ---------
Total investment securities ......... $ 186,596 $ 192,202
========= =========
Loan Portfolio
Loan growth during 2002 occurred primarily in loans secured by
nonresidential properties and commercial loans. The growth reflected the
Company's aggressive business development programs and capitalizing upon new
opportunities. The gross loan portfolio at December 31, 2002 totaled $444.1
million, an increase of $32.7 million over the December 31, 2001 reported
amount. Average loan volume for 2002 increased $31.6 million, while the average
yield on loans decreased by 59 basis points from 2001 as a result of declining
interest rates.
Loans outstanding of $411.4 million at December 31, 2001 increased $37.4
million from year-end 2000 primarily due to increased loan demand in the
Company's primary market areas. The following table summarizes the components of
the gross loan portfolio at the dates indicated.
15
December 31,
-----------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In Thousands)
Loans secured by one-to-four-family residential
properties.............................................. $142,677 $146,450 $145,310 $141,072 $57,586
Loans secured by multi-family residential properties.... 12,861 13,039 15,049 13,750 8,899
Loans secured by nonresidential properties.............. 203,501 181,959 149,304 140,200 100,687
Loans to individuals.................................... 8,843 8,491 10,639 9,405 10,609
Commercial loans........................................ 33,859 38,467 32,212 27,680 19,902
Construction loans...................................... 24,339 14,054 13,014 10,024 5,163
Lease financing receivables............................. 17,058 7,306 7,912 3,122 1,205
Other loans............................................. 957 1,643 532 1,782 2,069
-------- -------- -------- -------- --------
Total gross loans...................................... $444,095 $411,409 $373,972 $346,935 $206,120
======== ======== ======== ======== ========
The following table sets forth the contractual maturity and interest rate
sensitivity of certain components of the loan portfolio at December 31, 2002.
Demand loans, having no stated schedule of repayment and no stated maturity, and
overdrafts are reported as due within one year.
December 31, 2002
--------------------------------------------
Within 1 - 5 Over 5
1 year Years Years Total
-------- -------- -------- --------
Loans with predetermined interest rates: (In Thousands)
Loans secured by nonresidential properties ........... $ 10,979 $ 22,767 $ 12,379 $ 46,125
Commercial loans ..................................... 3,481 12,649 169 16,299
Lease financing receivables .......................... 2,213 14,378 467 17,058
Real estate construction ............................. 2,955 805 -- 3,760
-------- -------- -------- --------
Total loans with predetermined interest rates ....... $ 19,628 $ 50,599 $ 13,015 $ 83,242
Loans with floating interest rates:
Loans secured by nonresidential properties ........... 8,842 10,316 138,218 157,376
Commercial loans ..................................... 11,278 4,266 2,016 17,560
Construction loans ................................... 10,623 9,588 368 20,579
-------- -------- -------- --------
Total loans with floating interest rates ............ 30,743 24,170 140,602 195,515
-------- -------- -------- --------
Total gross loans ..................... $ 50,371 $ 74,769 $153,617 $278,757
======== ======== ======== ========
At December 31, 2002 no loans were concentrated within a single industry
or group of related industries and the Company had no foreign loans.
Asset Quality
Various degrees of risk are associated with substantially all investing
activities. The senior lending officers of BCB, GCBank and RCB are charged with
monitoring asset quality, establishing credit policies and procedures and
seeking consistent application of these policies and procedures. Nonperforming
assets include past due, nonaccrual and renegotiated and other real estate
loans. Since lending is concentrated within the local market area, nonperforming
loans and leases were also made primarily to customers operating in that area.
The degree of risk inherent in all lending activities is influenced heavily by
general economic conditions in the immediate market area. Among the factors that
tend to affect portfolio risks are changes in local or regional real estate
values, income levels and energy prices. These factors, coupled with
unemployment levels and tax rates, as well as governmental actions and weakened
market conditions that reduce credit demand among qualified borrowers, are also
important determinants of the risk inherent in lending.
Past Due, Nonaccruing and Renegotiated Loans. It is the Company's policy
to review monthly all loans that are past due as to principal or interest. The
accrual of interest income on loans is discontinued when it is determined that
such loans are either doubtful of collection or are involved in a protracted
collection process. The current year's uncollected interest is reversed on such
nonaccrual loans.
Management has noted that the asset quality has recently shown some
deterioration in loans and lease financing receivables portfolios. However, the
Company maintains more than adequate reserves and believes additional reserves
are not required. It will continue to monitor both portfolios closely.
Management has also restructured the terms of certain loans to accommodate
changes in the financial condition of borrowers. A typical concession would be a
reduction in the currently payable interest rate to one that is lower than the
current market rate for new debt with similar risks; interest foregone would be
deferred until maturity.
The following table summarizes the composition of the Company's
nonperforming assets and related asset quality ratios as of the dates indicated:
16
December 31,
------ ------ ------ ------ ------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(Dollars in Thousands)
Nonaccruing loans and leases ....................... $2,767 $1,373 $1,281 $1,678 $1,657
Renegotiated loans ................................. 295 545 845 606 416
------ ------ ------ ------ ------
Total nonperforming loans and leases ........... 3,062 1,918 2,126 2,284 2,073
Loans past due 90 days and accruing ................ 587 34 54 248 461
Other real estate .................................. -- 175 -- 467 495
------ ------ ------ ------ ------
Total nonperforming assets ..................... $3,649 $2,127 $2,180 $2,999 $3,029
====== ====== ====== ====== ======
Nonperforming loans and leases to total gross loans. .69% .47% .57% .66% 1.01%
Nonperforming assets to total gross loans and other
real estate owned ............................... .82% .52% .58% .86% 1.47%
Nonperforming assets to total assets ............... .51% .32% .36% .53% .81%
Allowance for loan and lease losses to nonperforming
loans ........................................... 238.34% 329.51% 266.09% 216.86% 170.04%
Nonperforming loans and leases increased by $1.1 million at December 31,
2002 compared to December 31, 2001. Of the total increase, $937,000 is
attributable to the reclassification of certain lease financing receivables from
current to nonaccruing status. Nonperforming loans and leases decreased by
$208,000 at December 31, 2001 compared to December 31, 2000. The decrease is
primarily due to the reclassification of certain loans from nonaccruing to
current loans coupled with current to renegotiated status. If the nonaccruing
loans in 2002, 2001 and 2000 had continued to pay interest, interest income
during those years would have increased by $135,000, $45,000 and $67,000,
respectively.
Potential Problem Loans. As part of the loan review process, management
routinely identifies performing loans when there is a doubt as to whether the
borrowers will comply with the original loan repayment terms and allocates
specific reserves against them. At December 31, 2002, 2001 and 2000, such loans
totaled $4.9 million, $5.1 million and $7.2 million with allowances of $1.5
million, $833,000 and $855,000, respectively, specifically allocated to them.
Foreign Loans. The Company has no foreign loans or any other foreign
exposure.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses increased by $978,000 to $7.3
million at December 31, 2002 compared to the end of the prior year. At December
31, 2001 the allowance for loan and lease losses was $6.3 million compared to
$5.7 million at December 31, 2000, an increase of $600,000. The allowance for
loan and lease losses is increased periodically through charges to earnings in
the form of a provision for loan and lease losses. Loans that are deemed
uncollectible are charged against the allowance and any recoveries of such loans
are credited to it. Management believes that although chargeoffs may occur in
the future, adequate reserves have been provided.
The Company maintains an allowance for loan and lease losses at an amount
considered adequate by management to provide for potential credit losses based
upon periodic evaluation of the risk characteristics of the loan portfolio.
Management reviews the adequacy of the allowance on a monthly basis. In doing
so, it takes into consideration factors such as actual versus estimated losses,
regional and national economic conditions, portfolio concentration and the
impact of government regulations. The Company makes specific allocations to
impaired loans and for doubtful or watchlist loans, an allocated reserve based
on historical trends and an unallocated portion. The Company consistently
applies the following comprehensive methodology.
The first category of reserves consists of specific allocation of the
allowance for doubtful or watchlist loans. This allocation is established for
specific commercial and industrial loans, real estate development loans, and
construction loans, which have been identified by bank management as being
high-risk loan assets. These loans are assigned a doubtful risk-rating grade
based solely on nonperformance according to their payment terms and there is
reason to believe that repayment of the loan principal in whole or part is
unlikely. The specific allocation of the allowance is the total amount of
potential unconfirmed losses for these individual doubtful or watchlist loans.
To assist in determining the fair value of loan collateral, the Company often
utilizes independent third party qualified appraisal firms which in turn employ
their own criteria and assumptions that may include occupancy rates, rental
rates, and property expenses, among others.
The second category of reserves consists of the allocated portion of the
allowance. This is determined by taking the loan portfolios outstanding and
creating individual loan pools for commercial loans, real estate loans and
construction loans and various types of loans to individuals that have similar
characteristics and applying historical loss experience for each pool. This
estimate represents the potential unconfirmed losses within each pool of the
portfolio. The historical estimation for each loan pool is then adjusted to
account for current conditions, current loan portfolio performance, loan policy
or management changes or any other factor which may cause future losses to
deviate from historical levels.
17
Finally, the Company also maintains an unallocated allowance that is used
to cover any factors or condition that may cause a potential loan loss but are
not specifically identifiable. Management considers an unallocated portion of
the allowance as necessary irrespective of how detailed an analysis of potential
loan losses is performed because these estimates by definition lack precision.
Management must make estimates using assumptions and information, which is often
subjective and changing rapidly. Management believes the allowance for loan and
lease losses and nonperforming loans and leases was at an acceptable level at
December 31, 2002.
The following table represents transactions affecting the allowance for
loan and lease losses for the periods indicated.
Years ended December31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(Dollars in Thousands)
Balance at beginning of year .......................... $ 6,320 $ 5,657 $ 4,953 $ 3,525 $ 2,731
Charge-offs:
Commercial ......................................... (160) (224) (108) (102) (5)
Lease financing receivables ........................ (52) (39) -- -- --
Real estate - mortgages ............................ (47) (7) (198) -- (31)
Installment loans to individuals ................... (3) (8) (49) (45) (34)
Credit cards and related plans ..................... (36) (42) (60) (59) (53)
-------- -------- -------- -------- --------
(298) (320) (448) (206) (123)
-------- -------- -------- -------- --------
Recoveries:
Commercial ......................................... 66 73 18 59 376
Lease Financing Receivables ........................ 7 -- -- -- --
Real estate - mortgages ............................ 165 3 69 50 11
Installment loans to individuals ................... 26 12 7 4 5
Credit cards and related plans ..................... 16 10 10 12 5
-------- -------- -------- -------- --------
280 98 104 125 397
-------- -------- -------- -------- --------
Net recoveries (charge-offs) .......................... (18) (222) (345) (81) 274
Provision for loan losses ............................. 996 885 1,048 885 520
Adjustment(1) ......................................... -- -- -- 624 --
-------- -------- -------- -------- --------
Balance at end of year ................................ $ 7,298 $ 6,320 $ 5,657 $ 4,953 $ 3,525
======== ======== ======== ======== ========
Ratio of net recoveries (charge-offs) during the period
to average loans outstanding during the period ..... (0.00%) (0.07%) (0.10%) (0.03%) 0.15%
(1) Allowance for loan and lease losses acquired from First Savings Bank of
Little Falls in 1999.
18
Allocation of the Allowance for Loan and Lease Losses
The following table sets forth the allocation of the allowance for loan
and lease losses by loan category amounts, the percent of loans in each category
to total loans in the allowance, and the percent of loans in each category to
total loans, at each of the dates indicated.
At December 31,
----------------------------------------------------------------------------------------
2002 2001 2000
-------------------------- -------------------------- ------------------------------
% of % of % of
Loans Loans Loans
to to to
% of Total % of Total % of Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------ --------- ------ ------ --------- ------ ------ --------- ------
(Dollars in Thousands)
Balance at end of
Period allocable to:
Commercial and non-
residential properties ..... $3,576 49% 54% $3,388 53% 54% $1,745 31% 48%
Leased financing receivable ... 1,416 4 4 132 2 2 87 2 2
Construction .................. 278 4 5 164 3 3 107 2 3
Loans secured by 1-4 families . 1,521 21 35 1,918 30 39 1,999 35 44
Loans to individuals .......... 47 1 2 292 5 2 343 6 3
Unallocated reserves .......... 460 21 -- 426 7 -- 1,376 24 --
------ --------- ------ ------ --------- ------ ------ ------ ------
Total allowance for loan and
lease losses ............... $7,298 100% 100% $6,320 100% 100% $5,657 100% 100%
====== ========= ====== ====== ========= ====== ====== ====== ======
At December 31,
-------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
% of % of
Loans Loans
to to
% of Total % of Total
Amount Allowance Loans Amount Allowance Loans
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
Balance at end of
Period allocable to:
Commercial and non-
residential properties .... $ 1,558 32% 48% $ 1,467 43% 59%
Leased financing receivable .. 56 1 1 -- -- --
Construction ................. 115 2 3 49 1 2
Loans secured by 1-4 families 2,183 44 45 919 26 34
Loans to individuals ......... 264 5 3 369 10 5
Unallocated reserves ......... 777 16 -- 721 20 --
--------- --------- --------- --------- --------- ---------
Total allowance for loan and
lease losses .............. $ 4,953 100% 100% $ 3,525 100% 100%
========= ========= ========= ========= ========= =========
19
Deposits
A certain portion of the Company's liquidity is funded through its deposit
sources. At December 31, 2002 total deposits were $544.1 million, an increase of
$59.4 million or 12% over 2001. Of the total increase, increases in demand
deposits, interest bearing and savings deposits accounted for $17.9 million,
$21.7 million and $28.6 million, respectively, while time deposits less than
$100,000 and time deposits greater than $100,000 decreased by $7.1 million and
$1.6 million, respectively. The majority of such increases were a result of
aggressive marketing efforts. The $9.7 million decrease in time deposits was a
result of maturity run off. Total deposit sources were $484.6 million at
December 31, 2001, an increase of $19.4 million compared with December 31, 2000.
Non interest-bearing, interest-bearing demand deposits and savings deposits
increased by $12.0 million, $30.8 million and $13.2 million, respectively, while
time deposits decreased by $36.7 million. The decrease in time deposits during
2001 resulted from maturity run off.
The following table summarizes the average yield/rate of the components of
average deposit liabilities for the years indicated.
Years ended December 31,
-------------------------------------------------------------------------------
Average Average Average
2002 Yield/Rate 2001 Yield/Rate 2000 Yield/Rate
-------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
Non interest-bearing.......... $135,840 -0- $113,203 -0- $103,209 -0-
Savings and interest-bearing.. 224,630 1.40% 166,916 2.11% 135,953 2.34%
Time.......................... 154,577 3.14 192,952 5.24 223,834 5.59
-------- ---- -------- ---- -------- ----
$515,047 1.55% $473,071 2.88% $462,996 3.39%
======== ==== ======== ==== ======== ====
Listed below is a summary of time certificates of deposit $100,000 and over
categorized by time remaining to maturity.
At December
31, 2002
--------------
(In Thousands)
Three months or less................................. $ 17,435
Over three months through six months................. 5,531
Over six months through twelve months................ 10,298
Over twelve months................................... 3,927
--------
$ 37,191
--------
Federal Home Loan Bank Advances
At December 31, 2002 Federal Home Loan Bank ("FHLB") advances totaled
$80.0 million, an increase of $10.0 million compared with December 31, 2001. The
Company considers FHLB advances as an added source of funding and accordingly
executed transactions during 2002 to meet its funding needs. The FHLB advances
have varying terms and interest rates.
Short-Term Borrowings
As of December 31, 2002, securities sold under agreements to repurchase
were $11.7 million. Short-term borrowings include various other borrowings,
which generally have maturities of less than one year. The details of these
categories for the last three years are presented below (in thousands):
Years ended December 31,
----------------------------------
2002 2001 2000
-------- -------- --------
Securities sold under repurchase agreements and federal funds purchased
Balance at year-end ............................................... $ 11,728 $ 22,347 $ 17,020
Average during the year ........................................... 15,276 17,326 15,201
Maximum month-end balance ......................................... 26,545 64,010 40,420
Weighted average rate during the year ............................. 1.42% 3.32% 5.64%
Rate at December 31 ............................................... 1.01% 1.67% 5.52%
Guaranteed Preferred Beneficial Interest in the Company's Subordinated Debt
On June 28, 2002 GCB Capital Trust II (the "2002 Trust") was formed for
the purpose of issuing Trust Preferred Securities. Through the 2002 Trust, the
Company issued 2,300,000 Trust Preferred Securities, $10 face value for a total
proceeds of $23.0 million. On July 9, 2002 the underwriters exercised their
overallotment option to purchase an additional 100,000 securities at the face
value of
20
$10 for total proceeds of $1.0 million. The securities have an annual
distribution rate of 8.45% payable quarterly. The securities mature on June 30,
2032 but are callable at the Company's option on or after June 30, 2007. During
July 2002 the Company used the net proceeds of $23.0 million from the above
transaction to redeem the 920,000 shares of 10% Trust Preferred Securities, $25
face value, issued by the Company in 1997. The remaining $1.0 million was used
for general corporate purposes.
Interest Rate Sensitivity
Banks are concerned with the extent to which they are able to match
maturities of interest-earning assets and interest-bearing liabilities. Such
matching is facilitated by examining the extent to which assets and liabilities
are interest rate sensitive and by monitoring the institution's interest rate
sensitivity gap. An asset or liability is considered to be interest rate
sensitive if it will mature or reprice within a specific time period. The
interest rate sensitivity gap is defined as the excess of interest-earning
assets maturing or repricing within a specific time period over interest-bearing
liabilities maturing or repricing within that time period. The Bank Subsidiaries
monitor their gaps on a monthly basis, primarily their six-month and one-year
maturities, and work to maintain their gaps within a range of 10% to (25)%.
The Company had a positive one-year gap position with respect to its
exposure to interest rate risk at December 31, 2002. The Asset/Liability
Management Committees of the Bank Subsidiaries' respective Boards of Directors
meet quarterly to discuss their interest rate risks. The Company uses simulation
models to measure the impact of potential changes in interest rates on the net
interest income, balance sheet mix and spread relationship between market rates
and bank products. As described below, sudden changes in interest rates should
not have a material impact to the Bank Subsidiaries' results of operations.
Should the Bank Subsidiaries experience a positive or negative mismatch in
excess of the approved range, they have