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, 2003
|_| 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
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(Exact name of registrant as specified in its charter)
New Jersey 22-2545165
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Union Boulevard, Totowa, New Jersey 07512
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(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
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Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.50 per share
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(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 June 30, 2003 (the last business day of the
registrant's most recently completed second fiscal quarter) was approximately
$96,746,477. 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 10, 2004 was 7,034,458.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the Company's definitive Proxy Statement for its
2004 Annual Meeting of Stockholders to be held on April 20, 2004 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, 2003
PAGE NO.
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PART I.........................................................................1
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........................................................................8
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 OPERATION..............................9
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....23
ITEM 8 FINANCIAL STATEMENTS...........................................24
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................49
ITEM 9A CONTROLS AND PROCEDURES........................................49
PART III......................................................................49
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 AND RELATED STOCKHOLDER MATTERS.....................49
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................50
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES.........................50
PART IV.......................................................................50
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.......................................................50
SIGNATURES....................................................................51
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"). At the end of 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. (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
("GCB"), Bergen Commercial Bank ("BCB") and Rock Community Bank ("RCB") (the
"Bank Subsidiaries"), and its nonbank subsidiaries.
During 2003, the Company continued to grow in assets in an increasingly
competitive and volatile environment. As of December 31, 2003, the Company's
consolidated assets were $753.1 million, as compared with consolidated assets of
$719.9 million at December 31, 2002. However, the challenging interest rate
environment prevented us from achieving the higher level of revenue commensurate
with our growth. Earnings for the full year 2003 were $6.7 million or $0.89 per
diluted share ($0.95 per basic share), a decline from $7.5 million or $0.98 per
diluted share ($1.04 per basic share) in 2002. The Company declared total cash
dividends of $0.43 per share and $0.37 per share during 2003 and 2002,
respectively.
BANK SUBSIDIARIES
GCB 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 2003, GCB had seven additional branches, of which six branches
are located in Passaic County and one in Morris County, New Jersey. Three
branches are located in Little Falls, two in Clifton, one at 100 Furler Street,
Totowa and the seventh in Lincoln Park. GCB 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, GCB 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 Hackensack, Hasbrouck Heights, Little Ferry, Wallington and
Wood-Ridge.
Highland Capital Corp. ("HCC"), a wholly-owned nonbank subsidiary of GCB,
engages in high quality vendor-driven lease programs focusing primarily on small
ticket medical equipment leasing. GCB 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 directly owns three nonbank subsidiaries. GCB Realty, L.L.C.
("Realty") was formed 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.
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
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Debentures are the 2002 Trust's sole revenue. In June and July, 2002 the Company
issued, through the 2002 Trust, 2,400,000 Preferred Securities, $10 face value
per security, for total proceeds of $24 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. The Company
wrote-off the unamortized issuance cost relating to the 10% Preferreds in 2002.
The 2002 refinancing of the Preferreds reduced the Company's 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.
In mid-2003, the Company's securities brokerage operations were
transferred from a nonbank subsidiary, Greater Community Financial, LLC ("GCF")
to GCB. The assets and business of the securities brokerage operation are now
operated as a division of GCB under the name of Greater Community Financial
("GCF"). Under an agreement executed in mid-2003, Raymond James Financial
Services, Inc. acts as GCF's registered broker-dealer.
RECENT LEGISLATION
The Sarbanes-Oxley Act of 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. 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 that 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 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.
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Bank Holding Company Regulation
During 2003 the Company continued to be registered as a bank holding
company and 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 regulation by the Department.
Federal Reserve policy 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, 2003 the Company
had approximately $8.2 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 requiring 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 that, 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 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.
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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 FDIC
approval is required to establish or relocate a branch office or 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 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. GCB 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, 2003, 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 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.
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Deposit Insurance
The Bank Subsidiaries are FDIC member institutions. As such, 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 in 1997 the assessment rates ranged from 0.00% to
0.27% of deposits. The Bank Subsidiaries' deposit assessment rates were 0.00% in
2002 and 2003.
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 both GCB and BCB for 1999 through 2003 are .015%.
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.
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%.
Only the strongest bank holding companies and banks, with composite examination
ratings of 1 under the rating system used by the federal bank regulators, are
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
5
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, 2003, the Company's total risk-based capital and leverage
capital ratios were 11.96% and 7.09%, 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.
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, 2003, the Company employed a total of approximately 197
employees, including 190 full-time employees. Management considers relations
with employees to be satisfactory.
6
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. GCB owns two properties in Passaic County, New Jersey
and BCB owns two properties in Bergen County, New Jersey.
GCB 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 2003, GCB 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.
Further information about the lease obligations of the Company and its
subsidiaries is contained in Note 13 of the Company's Notes to Consolidated
Financial Statements for the year ended December 31, 2003 (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 2003 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 1,035 holders of
record on December 31, 2003, 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 stock dividends paid in 2003 (2.5%) and 2002 (5%).
Cash
Market Quotations Dividends
------------------- ---------
High Low Declared
-------- -------- ---------
Year Ended December 31, 2002
First Quarter $13.24 $10.68 $.079
Second Quarter 15.24 12.73 .098
Third Quarter 16.04 13.95 .098
Fourth Quarter 15.85 12.74 .098
Year Ended December 31, 2003
First Quarter 15.90 15.70 .098
Second Quarter 17.16 16.72 .11
Third Quarter 16.47 16.12 .11
Fourth Quarter 17.22 16.79 .11
The Company's ability to pay dividends on its Common Stock in the future
is subject to numerous regulatory restrictions that are potentially applicable.
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, 2003 with
respect to compensation plans under which equity securities of the registrant
are authorized for issuance.
Equity Compensation Plan Information
- -------------------------------------------------------------------------------------------------------------------------------
Plan Category Number of securities to be Weighted average exercise Number of securities
issued upon exercise of price of outstanding options, remaining available for
outstanding options, warrants warrants and rights future issuance under equity
and rights. compensation plans (excluding
securities reflected in
Stock Option Plans (a) (b) column (a)
(c)
- -------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans 740,891 $7.02 226,982
approved by the security holder
Equity compensation plan not
approved by security holders n.a. n.a. n.a.
----------------------------- ----------------------------- -----------------------------
Total 740,891 $7.02 226,982
----------------------------- ----------------------------- -----------------------------
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 Operation,
appearing elsewhere herein.
As of the Years Ended December 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(In Thousands, except per share data)
Summary of Operations:
Total interest income .......................... $ 37,906 $ 40,905 $ 42,775 $ 41,458 $ 34,564
Total interest expense ......................... 12,244 14,686 20,497 20,664 17,140
Net interest income ............................ 25,662 26,219 22,278 20,794 17,424
Provision for loan and lease losses ............ 2,065 996 885 1,048 885
Net interest income after provision for loan
and lease losses ........................... 23,597 25,223 21,393 19,746 16,539
Non interest income ............................ 7,948 7,319 6,515 6,167 7,270
Non interest expenses .......................... 22,025 21,676 18,664 18,290 17,288
Income before income taxes ..................... 9,520 10,866 9,244 7,623 6,521
Provision for income taxes ..................... 2,786 3,353 3,164 2,793 2,349
Net Income ..................................... $ 6,734 $ 7,513 $ 6,080 $ 4,830 $ 4,172
Per Common Share Data: (1)
Earnings Per Share--Basic ...................... $ 0.95 $ 1.04 $ 0.85 $ 0.68 $ 0.60
Earnings Per Share--Diluted .................... $ 0.89 $ 0.98 $ 0.81 $ 0.66 $ 0.58
Cash dividends per common share ................ $ 0.43 $ 0.37 $ 0.30 $ 0.26 $ 0.22
Stock dividends per common share ............... 2.5% 5% 5% 5% 5%
Book value per common share .................... $ 7.22 $ 7.15 $ 6.39 $ 5.63 $ 4.95
Selected Operating Ratios:
Return on average assets ....................... 0.91% 1.09% 0.95% 0.84% 0.81%
Return on average equity ....................... 13.15% 15.29% 14.18% 13.43% 11.98%
Interest rate spread ........................... 3.25% 3.48% 2.93% 3.13% 3.02%
Net interest margin ............................ 3.75% 4.10% 3.79% 3.98% 3.78%
Financial Condition Data:
Total Assets ................................... $753,125 $719,867 $660,839 $607,305 $567,453
Cash and cash equivalents ...................... 29,233 37,133 46,997 56,292 19,200
Investment securities .......................... 155,239 192,195 151,906 138,153 151,191
Total Loans, net ............................... 515,657 436,044 404,250 366,139 340,563
Allowance for loan and lease losses ............ 8,142 7,298 6,320 5,657 4,953
Total Deposits ................................. 560,713 544,043 484,623 465,245 460,634
Other borrowings ............................... 134,747 115,728 115,347 90,020 64,403
Shareholders' equity ........................... $ 50,570 $ 51,498 $ 46,112 $ 40,231 $ 35,402
Capital Ratios:
Equity to assets ............................... 6.71% 7.15% 6.98% 6.62% 6.23%
Total risk-based capital ratio ................. 11.96% 13.77% 13.89% 13.88% 13.73%
Tier I risk-based capital ratio ................ 9.03% 10.58% 10.70% 10.14% 9.59%
Leverage ratio ................................. 7.09% 7.38% 7.23% 7.10% 7.18%
(1) All per share data has been adjusted to reflect stock dividends.
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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 operation 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 annual report. 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," "believe," "anticipate," "may," "will," or
similar statements or variations of such terms. Such forward-looking statements
involve
9
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 and leases 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 (US
GAAP) and general practices within the financial services industry. The
preparation of financial statements in conformity with US GAAP 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 annual testing of its outstanding goodwill.
Results of Operations: Fiscal Years Ended December 31, 2003, 2002 and 2001
In 2003, the Company recorded earnings of $6.7 million or $0.89 per
diluted share, a decrease of 10% from 2002. In 2002, the Company earned $7.5
million or $0.98 per diluted share, an increase of 24% over $6.1 million or
$0.81 per diluted share earned during 2001.
Cash earnings (net income before amortization of intangible assets) per
diluted share were $0.89, $0.98 and $0.92 for the years ending December 31,
2003, 2002 and 2001.
The decrease in net income for the year ended December 31, 2003 was
impacted by low interest rates combined with accelerated premium amortization on
mortgage backed securities. Also, during 2003 the Company recorded a $1.1
million increase in provisions for loan and lease losses and a charge of
approximately $360,000 for salaries and benefits relating to a separation
package for a former executive.
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, 2003, 2002 and 2001. 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, 2003 December 31, 2002 December 31, 2001
---------------------------- ---------------------------- ----------------------------
Interest Average Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
--------- -------- ------- --------- -------- ------- --------- -------- -------
(Dollars in Thousands)
ASSETS
Earning Assets:
Investment securities .................... $ 186,218 $ 6,289 3.38% $ 176,455 $ 8,057 4.57% $ 145,477 $ 8,647 5.94%
Due from banks - interest-bearing ........ 9,849 243 2.47% 14,846 511 3.44% 14,237 587 4.12%
Federal funds sold ....................... 16,060 187 1.16% 25,864 425 1.64% 38,299 1,591 4.15%
Loans (1) ................................ 472,306 31,187 6.60% 421,942 31,912 7.59% 390,354 31,950 8.18%
--------- ------- --------- ------- --------- -------
Total earning assets ................ 684,433 37,906 5.54% 639,107 40,905 6.42% 588,367 42,775 7.27%
Less: Allowance for loan and lease
losses ................................. (7,644) -- (6,651) -- (6,022) --
Unearned income - loans ............. (4,571) -- (3,138) -- (2,287) --
All other assets ......................... 67,755 -- 61,968 -- 59,539 --
--------- ------- --------- ------- --------- -------
Total assets ........................ $ 739,973 $37,906 $ 691,286 $40,905 $ 639,597 $42,775
========= ======= ========= ======= ========= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing Liabilities:
Savings and interest-bearing deposits .. $ 259,974 $ 2,080 0.80% $ 224,630 $ 3,139 1.40% $ 166,916 $ 3,515 2.11%
Time deposits .......................... 153,835 3,596 2.34% 154,577 4,859 3.14% 192,952 10,114 5.24%
Federal funds and short-term
borrowings (2) ....................... 96,923 4,537 4.68% 95,603 4,520 4.73% 89,514 4,568 5.10%
Trust preferred securities ............. 24,000 2,031 8.45% 24,112 2,168 8.99% 23,000 2,300 10.00%
--------- ------- --------- ------- --------- -------
Total interest-bearing liabilities .. 534,732 12,244 2.29% 498,922 14,686 2.94% 472,382 20,497 4.34%
Non interest-bearing deposits ............ 146,995 -- 135,840 -- 113,203 --
Other liabilities ........................ 7,023 -- 7,385 -- 11,127 --
Shareholders' equity ..................... 51,223 -- 49,139 -- 42,885 --
--------- ------- --------- ------- --------- -------
Total liabilities and
Shareholders' equity .............. $ 739,973 $12,244 $ 691,286 $14,686 $ 639,597 $20,497
========= ======= ========= ======= ========= -------
NET INTEREST INCOME ...................... $25,662 $26,219 $22,278
======= ======= =======
NET INTEREST MARGIN ...................... 3.75% 4.10% 3.79%
===== ===== =====
(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 2003, net interest income was greatly impacted by
low interest rates. The Company was successful in replacing loan runoff due to
high level of refinancing activity, but at a lower interest rate. The Company
also experienced a substantial principal paydowns on its mortgage backed
securities which accelerated the premium amortization. Total interest income
declined 7% when compared to 2002 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 $25.7 million in 2003, a $557,000 or 2% decrease
compared to 2002. Interest and fee income on loans during 2003 decreased by
$725,000 from 2002 in spite of a 12% increase in average total loans. The
average yield on loans decreased to 6.60% in 2003 compared to 7.59% in 2002 as a
result of repricing of loans at prevailing rates. Loans represented 69% and 66%
of average earning assets for 2003 and 2002, respectively. Income earned on
investment securities during 2003 decreased by $1.8 million, or 22% compared to
2002. Though the average investment securities increased by 6% in 2003 over
2002, income from securities decreased, largely due to declining yields during
2003 over 2002. The average yield on securities was 3.38% for 2003 compared to
4.57% for 2002. Investments represented 27% of average earning assets in 2003.
Interest income on federal funds sold and deposits with banks during 2003
decreased by $506,000 or 54% compared to 2002 as a result of a $14.8 million, or
36%, decrease in average federal funds sold and deposits with banks, coupled
with a decrease in the average yield on federal funds sold from 1.64% in 2002 to
1.16% in 2003. Federal funds sold and deposits with banks represent 4% and 6% of
average earning assets at December 31, 2003 and 2002, respectively.
In 2002, net interest income was $26.2 million, 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.
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 combination
of a $11.8 million, or 23%, decrease in average federal funds sold and deposits
with banks, and a decline in the average yield on federal funds sold from 4.15%
in 2001 to 1.64% in 2002. Federal funds sold and deposits with banks represent
6% and 9% of average earning assets at December 31, 2002 and 2001, respectively.
Interest expense for 2003 decreased by $2.4 million or 17% from 2002.
Interest expense on deposits decreased by $2.3 million primarily due to low
interest rates during 2003, while interest expense on long-term borrowings
decreased by $137,000 due to refinancing of the trust preferred securities
during the second half of 2002. Interest on short-term borrowings increased
moderately. For the year 2003 the average interest rate paid decreased by 65
basis points compared to 2002.
Interest expense for the year ended December 31, 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.
Average interest-bearing deposits comprised 77% in 2003, and 76% in both
2002 and 2001, 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 3.75%, 4.10% and 3.79% for the years
ended December 31, 2003, 2002 and 2001, 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,
2003 and 2002 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 2003 Full Year 2002
Compared to Full Year 2002 Compared to Full Year 2001
Increase(Decrease) Increase(Decrease)
------------------------------- -------------------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
(In Thousands)
Interest Earned On:
Loans .................................... $ 3,312 $(4,037) $ (725) $ 2,398 $(2,308) $ 90
Investment securities .................... 337 (2,105) (1,768) 1,414 (2,004) (590)
Other earning assets ..................... (238) (268) (506) (182) (1,060) (1,242)
------- ------- ------- ------- ------- -------
Total earning assets .................. $ 3,411 $(6,410) $(2,999) $ 3,630 $(5,372) $(1,742)
======= ======= ======= ======= ======= =======
Interest Paid On:
Savings and interest-bearing deposits .... $ 283 $(1,342) $(1,059) $ 807 $(1,182) $ (375)
Time deposits ............................ (22) (1,241) (1,263) (1,206) (4,050) (5,256)
Borrowings (1) ........................... 66 (186) (120) 402 (582) (180)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities ... $ 327 $(2,769) $(2,442) $ 3 $(5,814) $(5,811)
======= ======= ======= ======= ======= =======
(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 $2.1 million
in 2003 compared with $996,000 in 2002. Management of each Bank Subsidiary
regularly performs an analysis to identify the inherent risk of loss in its loan
portfolio, and management of GCB regularly conducts a similar review to identify
risks in the lease portfolio of HCC. These analyses include evaluations of
concentrations of credit, past loss experience, current economic conditions,
amount and composition of the loan portfolio (including loans and leases 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 loan and lease 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 and lease losses will not be required in
future periods. In addition, the Bank Subsidiaries' determinations as to the
amount of their allowances for possible loan and lease losses are subject to
review by the FDIC and the Department as part of their respective 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 $7.9 million in 2003, representing 24% of total
income (net interest income plus non-interest income), compared with $7.3
million and 22%, respectively, in 2002. The increase of $629,000 or 9% over 2002
is primarily due to increases of $983,000, $364,000 and $349,000 in gains on
sales of investment securities, fee income on mortgage loans sold and service
charges on deposit accounts, respectively, partially offset by a decline in gain
made on sale of leases of $1.0 million. Included in the increase of non-interest
income is $270,000 in gains on sale of assets resulting from the sale of real
estate, $372,000 in automated teller machine fees and $269,000 in rental income.
Total non-interest income was $7.3 million in 2002, representing 22% of
total income (net interest income plus non-interest income), compared with $6.5
million and 23%, respectively, in 2001. The increase of $804,000 or 12% 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.
Non-interest Expenses
Total non-interest expenses increased $349,000 or 2% to $22.0 million in
2003 compared with 2002. During 2002, the Company incurred a $1.0 million
write-off of the unamortized portion of the financing cost of trust preferred
securities. Excluding the $1.0 million charge, non-interest expense for the year
increased $1.4 million or 6.7%. The year to year increase in expenses is
attributable to the Company's growth while management is committed to
continually emphasize expense reduction. Of the total increase, increases in
salaries and employee benefits accounted for $1.5 million or 13.7% (of which
$360,000 is attributable to a separation package for a former executive), and
increases in occupancy and equipment expense accounted for $172,000. Those
increases were partially offset by decreases in other operating expenses and
office expense of $344,000 and $44,000, respectively.
13
Total non-interest expenses in 2002 increased $3.0 million or 16% to $21.7
million when compared with 2001. The increase in expenses was attributable to
the continued growth of the Company, its investment in technology and the need
to attract and retain high-caliber employees. Of the $3.0 million total
increase, 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, and increases in
occupancy and equipment expense accounted for $139,000. These increases were
partially offset by a decrease in amortization of intangible assets of $777,000
as a result of the adoption of a new accounting standards ceasing the further
amortization of goodwill, and a $31,000 decrease in office expense.
Income Taxes
The Company recorded income tax provisions of $2.8 million, $3.4 million
and $3.2 million for the years ended December 31, 2003, 2002 and 2001,
respectively. The Company's respective effective rates were 29%, 31% and 34% for
such years. The effective tax rate decreases are due to tax planning strategies
partially offset by nondeductible amortization of goodwill prior to 2002.
Financial Condition
The Company's performance for 2003 was highlighted by strong loan growth,
particularly in the commercial mortgage portfolio. At December 31, 2003, the
Company's total assets were $753.1 million, an increase of $33.3 million or 5%
over December 31, 2002. Gross loans increased by $80.5 million, or 18%,
reflecting increased loan demand, while investment securities, federal funds
sold and interest bearing due from banks decreased by $37.0 million, $7.7
million and $1.9 million, respectively. The increase in loans was supported by
increases in total deposits, short-term borrowings 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, 2003 were
9.03% and 11.96% for Tier 1 Capital and total risk-based capital, respectively,
substantially exceeding the minimum requirements under regulatory guidelines.
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.
Investment Securities
At December 31, 2003, the investment securities portfolio amounted to
$155.2 million, a decrease of $37.0 million or 19% from December 31, 2002. The
decrease was primarily related to maturities and principal paydowns and the
subsequent use of proceeds to meet loan demand. Investment securities at
December 31, 2002 increased by $40.3 million or 27% over December 31, 2001. The
increase was primarily related to liquidity arising from deposit growth. 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, 2003, 2002 and 2001.
December 31
--------------------------------------------------------------------------
2003 2002 2001
---------------------- ---------------------- ----------------------
(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 ... $ 27,572 $ 27,749 $ 22,823 $ 23,237 $ 21,288 $ 21,712
State and political subdivisions ... 13,272 13,241 4,536 4,595 7,279 7,253
Other debt and equity securities ... 23,953 28,356 25,860 29,413 23,796 26,679
Mortgage-backed securities ......... 83,528 83,167 128,057 129,630 93,860 94,568
--------- --------- --------- --------- --------- ---------
Total available-for-sale ...... $ 148,325 $ 152,513 $ 181,276 $ 186,875 $ 146,223 $ 150,212
--------- --------- --------- --------- --------- ---------
Held-to-maturity
U.S. Treasury and U.S..............
Government agencies securities ... $ 1,000 $ 985 $ 1,000 $ 1,003 $ 1,000 $ 950
State and political subdivisions ... 1,689 1,689 4,120 4,120 185 186
Mortgage-backed securities ......... 37 38 200 204 509 521
--------- --------- --------- --------- --------- ---------
Total held-to-maturity ........ $ 2,726 $ 2,712 $ 5,320 $ 5,327 $ 1,694 $ 1,657
--------- --------- --------- --------- --------- ---------
Total investment securities ... $ 151,051 $ 155,225 $ 186,596 $ 192,202 $ 147,917 $ 151,869
========= ========= ========= ========= ========= =========
During 2003, the Company realized net gains of $2.2 million from the sale
of $11.3 million in investment securities. In 2002, the Company realized net
gains of $1.2 million from the sale of $22.6 million in investment securities.
Included in shareholders'
14
equity at December 31, 2003 is accumulated other comprehensive income in the
amount of $2.5 million, a decrease of $865,000 or 25% from the end of 2002. The
Company has no investment securities held for trading purposes at December 31,
2003.
The following table shows the average yields, amortized costs and fair
values of the Company's investment securities by maturity.
December 31, 2003
-------------------------------
Average Amortized Fair
Yield Cost Value
------- --------- --------
(Dollars in Thousands)
Available-for-sale
Due in one year or less ........................ 2.86% $ 15,918 $ 16,088
Due after one year through 5 years ............. 2.88 7,283 7,307
Due after five years through 10 years .......... 3.37 7,079 6,956
Due after ten years ............................ 3.89 10,564 10,639
Mortgage-backed securities ..................... 3.99 83,528 83,167
Other debt and equity securities ............... n.a. 23,953 28,356
-------- --------
Total available-for-sale .................... $148,325 $152,513
======== ========
Held-to-maturity
Due in one year or less ........................ 1.59% $ 1,689 $ 1,689
Due after five years through 10 years .......... 6.05 1,000 985
Mortgage-backed securities ..................... 5.61 37 38
-------- --------
Total held-to-maturity .................... 2,726 2,712
-------- --------
Total investment securities ............... $151,051 $155,225
======== ========
Loan Portfolio
Loan growth during 2003 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, 2003 totaled $524.5
million, an increase of $80.5 million over the December 31, 2002 reported
amount. Average loan volume for 2003 increased $50.4 million, while the average
yield on loans decreased by 99 basis points from 2002 as a result of low
interest rates.
Loans outstanding of $444.1 million at December 31, 2002 increased $32.7
million from year-end 2001 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.
December 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(In Thousands)
Loans secured by one-to-four-family residential properties .. $148,121 $142,677 $146,450 $145,310 $141,072
Loans secured by multi-family residential properties ........ 11,619 12,861 13,039 15,049 13,750
Loans secured by nonresidential properties .................. 260,318 203,501 181,959 149,304 140,200
Loans to individuals ........................................ 5,686 8,843 8,491 10,639 9,405
Commercial loans ............................................ 37,532 33,859 38,467 32,212 27,680
Construction loans .......................................... 37,640 24,339 14,054 13,014 10,024
Lease financing receivables ................................. 23,181 17,058 7,306 7,912 3,122
Other loans ................................................. 449 957 1,643 532 1,782
-------- -------- -------- -------- --------
Total gross loans ...................................... $524,546 $444,095 $411,409 $373,972 $347,035
======== ======== ======== ======== ========
The following table sets forth the contractual maturity and interest rate
sensitivity of certain components of the loan portfolio at December 31, 2003.
Demand loans, having no stated schedule of repayment and no stated maturity, and
overdrafts are reported as due within one year.
December 31, 2003
------------------------------------------
Within 1 - 5 Over 5
1 year Years Years Total
------- ------- -------- --------
(In Thousands)
Loans with predetermined interest rates:
Loans secured by nonresidential properties ........... $ 7,995 $27,233 $ 48,742 $ 83,970
Commercial loans ..................................... 5,127 15,087 345 20,559
Lease financing receivables .......................... 7,854 15,241 86 23,181
Real estate construction ............................. 5,394 7,160 -- 12,554
------- ------- -------- --------
Total loans with predetermined interest rates ... 26,370 64,721 49,173 140,264
Loans with floating interest rates:
Loans secured by nonresidential properties ........... 10,787 9,114 156,447 176,348
Commercial loans ..................................... 12,853 3,130 990 16,973
Real estate construction ............................. 13,117 11,612 357 25,086
------- ------- -------- --------
Total loans with floating interest rates ........ 36,757 23,856 157,794 218,407
------- ------- -------- --------
Total gross loans ................... $63,127 $88,577 $206,967 $358,671
======= ======= ======== ========
15
At December 31, 2003 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, GCB 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. 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 and leases that are past due as to principal or
interest. The accrual of interest income on loans and leases is discontinued
when it is determined that such loans or leases 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 or leases.
During 2003, management has noted that the asset quality has shown some
deterioration, especially on the lease financing receivables portfolio. The
Company has taken action to reposition our leasing business to improve the
overall quality of the portfolio. However, the Company maintains adequate
reserves and believes additional reserves are not required. It will continue to
monitor both loans and lease financing 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:
December 31,
--------------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(Dollars in Thousands)
Nonaccruing loans and leases ................................. $2,010 $2,767 $1,373 $1,281 $1,678
Renegotiated loans ........................................... 252 295 545 845 606
------ ------ ------ ------ ------
Total nonperforming loans and leases .................... 2,262 3,062 1,918 2,126 2,284
Loans past due 90 days and accruing .......................... 313 587 34 54 248
Other real estate ............................................ -- -- 175 -- 467
------ ------ ------ ------ ------
Total nonperforming assets .............................. $2,575 $3,649 $2,127 $2,180 $2,999
====== ====== ====== ====== ======
Nonperforming loans and leases to total gross loans .......... .43% .69% .47% .57% .66%
Nonperforming assets to total gross loans and other
real estate owned ........................................ .49% .82% .52% .58% .86%
Nonperforming assets to total assets ......................... .34% .51% .32% .36% .53%
Allowance for loan and lease losses to nonperforming loans ... 359.95% 238.34% 329.51% 266.09% 216.86%
Nonperforming loans and leases decreased by $800,000 at December 31, 2003
compared to December 31, 2002. Almost all of the decrease is attributable to the
write-off of certain lease financing receivables. Nonperforming loans and leases
increased by $1.1 million at December 31, 2002 compared to December 31, 2001.
The increase is primarily due to the reclassifications of certain loans from
nonaccruing to current loans and from current to renegotiated status. If the
nonaccruing loans in 2003, 2002 and 2001 had continued to pay interest, interest
income during those years would have increased by $104,000, $135,000 and
$45,000, 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, 2003, 2002 and 2001, such loans
totaled $5.5 million, $4.9 million and $5.1 million with allowances of $1.7 $1.5
million and $833,000, 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 $844,000 to $8.1
million at December 31, 2003 compared to the end of the prior year. At December
31, 2002 the allowance for loan and lease losses was $7.3 million compared to
$6.3 million at December 31, 2001, an increase of $978,000. 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
16
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
that management considers adequate 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.
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, 2003.
The following table represents transactions affecting the allowance for
loan and lease losses for the periods indicated.
Years ended December 31,
----------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(Dollars in Thousands)
Balance at beginning of year ...................... $ 7,298 $ 6,320 $ 5,657 $ 4,953 $ 3,525
Charge-offs:
Commercial ..................................... (14) (160) (224) (142) (102)
Lease financing receivables .................... (1,331) (52) (39) -- --
Real estate - mortgages ........................ -- (47) (7) (198) --
Installment loans to individuals ............... (16) (3) (8) (49) (45)
Credit cards and related plans ................. (1) (36) (42) (60) (59)
-------- -------- -------- -------- --------
(1,362) (298) (320) (448) (206)
-------- -------- -------- -------- --------
Recoveries:
Commercial ..................................... 42 66 73 18 59
Lease Financing Receivables .................... 24 7 -- -- --
Real estate - mortgages ........................ 58 165 3 69 50
Installment loans to individuals ............... 4 26 12 7 4
Credit cards and related plans ................. 13 16 10 10 12
-------- -------- -------- -------- --------
141 280 98 104 125
-------- -------- -------- -------- --------
Net recoveries (charge-offs) ...................... (1,221) (18) (222) (345) (81)
Provision for loan losses ......................... 2,065 996 885 1,048 885
Adjustment(1) ..................................... -- -- -- -- 624
-------- -------- -------- -------- --------
Balance at end of year ............................ $ 8,142 $ 7,298 $ 6,320 $ 5,657 $ 4,953
======== ======== ======== ======== ========
Ratio of net charge-offs during the period to
average loans outstanding during the period .... (0.26)% (0.00%) (0.07%) (0.10%) (0.03%)
(1) Allowance for loan and lease losses acquired from First Savings Bank of
Little Falls in 1999.
17
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,
------------------------------------------------------------------------------------------
2003 2002 2001
-------------------------- -------------------------- --------------------------
% 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 ............... $3,712 45% 58% $3,576 49% 54% $3,388 53% 54%
Lease financing receivable ... 1,755 22 4 1,416 4 4 132 2 2
Construction ................. 403 5 7 278 4 5 164 3 3
Loans secured by 1-4
families ................... 893 11 30 1,521 21 35 1,918 30 39
Loans to individuals ....... 174 2 1 47 1 2 292 5 2
Unallocated reserves ......... 1,205 15 -- 460 21 -- 426 7 --
------ --- --- ------ --- --- ------ --- ---
Total allowance for loan
and lease losses ........... $8,142 100% 100% $7,298 100% 100% $6,320 100% 100%
====== === === ====== === === ====== === ===
At December 31,
----------------------------------------------------------
2000 1999
-------------------------- --------------------------
% 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 ............... $1,745 31% 48% $1,558 32% 48%
Lease financing receivable ... 87 2 2 56 1 1
Construction ................. 107 2 3 115 2 3
Loans secured by 1-4
families ................... 1,999 35 44 2,183 44 45
Loans to individuals ....... 343 6 3 264 5 3
Unallocated reserves ......... 1,376 24 -- 777 16 --
------ --- --- ------ --- ---
Total allowance for loan
and lease losses ........... $5,657 100% 100% $4,953 100% 100%
====== === === ====== === ===
18
Deposits
A certain portion of the Company's liquidity is funded through its deposit
sources. At December 31, 2003 total deposits were $560.7 million, an increase of
$16.7 million or 3% over 2002. Of the total increase, increases in demand
deposits, interest bearing and savings deposits accounted for $15.8 million,
$8.1 million and $6.1 million, respectively, while time deposits less than
$100,000 and time deposits $100,000 and over decreased by $11.3 million and $2.1
million, respectively. The majority of such increases were a result of
aggressive marketing of new products. The $13.4 million decrease in time
deposits was a result of maturity run off. Total deposit sources were $544.1
million at December 31, 2002, an increase of $59.4 million compared with
December 31, 2001. Non interest-bearing, interest-bearing demand deposits and
savings deposits increased by $17.9 million, $21.7 million and $28.6 million,
respectively, while time deposits decreased by $8.7 million. The decrease in
time deposits during 2002 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
2003 Yield/Rate 2002 Yield/Rate 2001 Yield/Rate
-------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
Non interest-bearing.......... $146,995 -0- $135,840 -0- $113,203 -0-
Savings and interest-bearing.. 259,974 0.80% 224,630 1.40% 166,916 2.11%
Time.......................... 153,835 2.34 154,577 3.14 192,952 5.24
-------- ---- -------- ---- -------- ----
$560,804 1.01% $515,047 1.55% $473,071 2.88%
======== ==== ======== ==== ======== ====
Listed below is a summary of time certificates of deposit $100,000 and
over categorized by time remaining to maturity.
At December 31,
2003
---------------
(In Thousands)
Three months or less............................................ $13,664
Over three months through six months............................ 6,272
Over six months through twelve months........................... 9,834
Over twelve months.............................................. 5,367
-------
$35,137
=======
Federal Home Loan Bank Advances
At December 31, 2003 Federal Home Loan Bank ("FHLB") advances totaled
$85.0 million, an increase of $5.0 million compared with December 31, 2002. The
Company considers FHLB advances as an added source of funding and accordingly
executed transactions during 2003 to meet its funding needs. The FHLB advances
have varying terms and interest rates.
Short-Term Borrowings
As of December 31, 2003, securities sold under agreements to repurchase
and federal funds purchased were $25.7 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,
--------------------------------
2003 2002 2001
-------- -------- --------
Securities sold under repurchase agreements and federal funds purchased
Balance at year-end .................................................. $ 25,747 $ 11,728 $ 22,347
Average during the year .............................................. 11,198 15,276 17,326
Maximum month-end balance ............................................ 25,747 26,545 64,010
Weighted average rate during the year ................................ 1.07% 1.42% 3.32%
Rate at December 31 .................................................. 0.71% 1.01% 1.67%
Guaranteed Preferred Beneficial Interest in the Company's Subordinated Debt
During June and July, 2002 the Company, through GCB Capital Trust II (the
"2002 Trust"), issued 2,400,000 Trust Preferred Securities, $10 face value, for
total proceeds of $24.0 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. In July 2002 the
Company used most of the net proceeds from the above transaction to redeem all
of the 10% Trust Preferred Securities that the Company had issued in 1997.
Excess proceeds of $1.0 million were used for expenses associated with the issue
of the 2002 Trust.
19
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, 2003. 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 a number of remedial options. They have
the ability to reposition their investment portfolios to include securities with
more advantageous repricing and/or maturity characteristics. They can attract
variable or fixed-rate loan products as appropriate. They can also price deposit
products to attract deposits with maturity characteristics that can lower their
exposures to interest rate risk.
The following table summarizes, as of December 31, 2003, the repricing of
earning assets and interest-bearing liabilities in accordance with their
contractual terms in given time periods.
Due
within Four to One to Two to Over
Three Twelve Two Five Five Fair
Months Months Years Years Years Total Value
-------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Rate-sensitive assets:
Investment securities and interest deposits
From banks........................................$ $ 18,549 $ 39,655 $ 27,338 $ 35,402 $ 41,833 $162,777 $162,764
Rate 2.83% 3.76% 4.02% 4.33% 5.39% 4.24%
Federal funds sold ..................................$ 10,000 -- -- -- -- 10,000 10,000
Rate 1.19% -- -- -- -- 1.19%
Total loans net of unearned income...................$ 114,012 59,866 63,770 176,703 109,448 523,799 525,899
Rate 5.27% 6.44% 6.98% 6.37% 6.10% 6.16%
-------- -------- -------- -------- -------- --------
Total rate-sensitive assets ....................... $142,561 $ 99,521 $ 91,108 $212,105 $151,281 $696,576 $698,663
======== ======== ======== ======== ======== ========
Rate-sensitive liabilities
Interest-bearing demand deposits.....................$ $ 69,032 $ 3,173 $ 21,449 $ 47,568 $ 17,497 $158,719 $158,719
Rate .72% 1.09% 0.67% 0.46% 0.50% 0.62%
Savings deposits.....................................$ 31,507 219 14,826 35,213 20,387 102,152 102,152
Rate 0.77% .66% .72% 0.31% .67% .58%
Time deposits........................................$ 35,651 73,013 19,178 17,535 2 145,379 146,784
Rate 1.42% 1.55% 3.28% 3.58% 5.30% 1.99%
Total borrowings (1).................................$ 25,510 5,026 10,037 40,126 54,048 134,747 141,933
Rate .41% 5.82% 3.61% 5.46% 6.85% 4.94%
-------- -------- -------- -------- -------- --------
Total rate-sensitive liabilities .................. $161,700 $ 81,4