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FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC)
XXXXXXXXXX, X.X. 00000-0000
FORM 10-K
(Xxxx 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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM: TO
FDIC INSURANCE CERTIFICATE NO. 12525
THE TRUST COMPANY OF NEW JERSEY
(Exact name of registrant as specified in its charter)
NEW JERSEY 00-0000000
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
35 JOURNAL SQUARE 07306
JERSEY CITY, NEW JERSEY (Zip Code)
(Address of principal executives offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(000) 000-0000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS
-------------------
Common Stock $2.00 par value
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check xxxx 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 xxxx 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 Bank's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [ ]
Indicate by check xxxx 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 stock of the registrant held by
non-affiliates (for this purpose, persons and entities other than executive
officers, directors, and 5% or more stockholders) of the registrant, as of the
last business day of the registrant's most recently completed second quarter
(June 30, 2003), is estimated to have been approximately $339,279,000.
As of February 23, 2004, there were 18,439,530 shares of common stock,
$2.00 par value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statements for the 2003 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
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THE TRUST COMPANY OF NEW JERSEY
INDEX
PAGE
----
PART I
Business....................................................
Item 1. 2
Properties..................................................
Item 2. 13
Legal Proceedings...........................................
Item 3. 13
Submission of Matters to a Vote of Security Holders.........
Item 4. 13
PART II
Market for the Bank's Common Stock and Related Stockholder
Matters.....................................................
Item 5. 14
Selected Financial Data.....................................
Item 6. 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................
Item 7. 16
Quantitative and Qualitative Disclosures about Market
Risk........................................................
Item 7A. 44
Financial Statements and Supplementary Data.................
Item 8. 45
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................
Item 9. 79
Controls and Procedures.....................................
Item 9A 79
PART III
Directors and Executive Officers of the Bank................
Item 10. 80
Executive Compensation......................................
Item 11. 80
Security Ownership of Certain Beneficial Owners and
Management..................................................
Item 12. 80
Certain Relationships and Related Transactions..............
Item 13. 80
Principal Accountant Fees and Services......................
Item 14. 80
PART IV
Exhibits, Financial Statement Schedules and Reports on Form
8-K.........................................................
Item 15. 80
Signatures.................................................. 81
Exhibit Index............................................... 82
1
PART I
ITEM 1. BUSINESS
GENERAL
The Trust Company of New Jersey (the "Bank"), a New Jersey commercial bank
that offers a full variety of services to meet the needs of its communities, was
formed in 1896. Our headquarters are located in Jersey City, New Jersey. Our
market area primarily consists of northern and central New Jersey. We have 94
branch offices (including 42 in-store branches) in the following counties:
Bergen, Essex, Hudson, Mercer, Middlesex, Monmouth, Xxxxxx, Ocean, Passaic,
Somerset, Union and Warren, New Jersey and Rockland County, New York.
Our principal business is to generate net interest income by accepting
deposits (including: regular savings, time certificates, demand accounts, NOW
accounts, money market deposit accounts, holiday clubs, vacation clubs and
certificates of deposit) from the general public and investing those deposits,
together with funds from borrowings and ongoing operations in loans (including
commercial loans, small business financing, commercial and residential mortgage
loans, home equity loans, construction loans, asset-based loans and consumer
loans) and a variety of investments (including U.S. Government and Government
Agency and sponsored corporations securities, State, County and municipal
securities, Federal funds sold and commercial paper). A material portion of our
deposits (approximately 14% as of December 31, 2003) have been obtained from
local governments and agencies.
Net interest income, representing the difference between interest earned on
asset portfolios and interest paid on liabilities, is the most significant
component of our revenue.
We also generate non-interest revenues through our offering of other
banking, financial and fiduciary services and through the sale of mortgages we
have originated. Financial services include mortgage servicing, safe deposit
rentals, the issuance of domestic and foreign letters of credit, wire transfer,
collection and night depository services. We also offer automated payroll and
lock box services as well as rent security computer services for our commercial
customers.
Our Trust Department offers corporate and personal services, including XXX
and Xxxxx Plans, estate services, custodian and corporate trusteeships, pension
and profit sharing trust services and corporate paying agent services.
Lending Activities. Our total loans were $2.199 billion at December 31,
2003, compared to $2.042 billion at December 31, 2002. In addition, we sold or
securitized loans of $567 million, $357 million and $167 million for the twelve
months ended December 31, 2003, 2002 and 2001, respectively.
It is generally our intent when a loan is originated, to hold it until it
matures or pays off. Loans not originated with the intent to hold are classified
as held for sale. As part of management's effort to mitigate credit and
interest-rate risk, we may, based upon market conditions, sell or securitize
residential mortgages when management believes good opportunities arise. When a
decision is made to sell or securitize residential mortgages, the loans are
identified as held for sale and carried at the lower of aggregate cost or
market. When the loans are sold or securitized, we allocate the cost of the loan
between the respective fair values of servicing and loan principal. In the case
of loan sales, any excess (or deficiency) of sale proceeds over the remaining
loan principal is recorded in other income in the caption gain/(loss) on sales
of securitizations and loans. When loans are securitized, the loan's allocated
cost basis is transferred to the Bank's securities available for sale portfolio
at the lower of cost or market. These securities are then marked-to-market with
any adjustment recorded in accumulated other comprehensive income.
Investment Activities. We are permitted to make certain investments,
including investments in securities issued by various federal agencies and state
and municipal governments, deposits at the Federal Home Loan Bank of New York,
certificates of deposits in federally insured institutions, certain bankers'
acceptances and federal funds. We may also invest, subject to certain
limitations, in short term corporate obligations referred to as "commercial
paper" and certain other types of corporate debt securities and mutual funds. We
2
are required to maintain a minimum amount of liquid assets that may be invested
in cash and specified securities.
We invest in investment securities in order to diversify our assets, manage
cash flow, obtain yield and maintain the minimum levels of liquid assets
required by regulatory authorities. Such investments generally include sales of
federal funds, and purchases of federal government and agency securities,
mortgage backed securities, corporate bonds, municipal bonds and commercial
paper.
Securities classified as available for sale are stated at market value;
those classified as held to maturity are stated at cost, adjusted for
amortization of premium and accretion of discount.
Deposit Activity and Other Sources of Funds. Deposits are the primary
source of our funding for lending and other investment purposes. In addition to
deposits, our sources of funding include loan principal repayments, interest
payments and maturing investments. Loan repayments and interest payments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by prevailing market interest rates and money market
conditions. Borrowings may be used to supplement our available funds, and from
time to time we have borrowed funds from the Federal Home Loan Bank of New York
and through reverse repurchase agreements. Under these agreements, we acquire
funds through the sale of securities and simultaneously commit to repurchasing
the securities sold on a certain date at a specified price (which is the sale
price plus interest).
We attract deposits principally from within our market area by offering a
variety of deposit instruments, including passbook and statement accounts and
certificates of deposit that range in term from 91 days to several years.
Deposit terms vary, principally on the basis of the minimum balance required,
the length of time the funds must remain on deposit and the interest rate. We
generally seek to attract deposits from local residents through our branch
network rather than from outside our market area. We also hold deposits from
various municipal and other governmental agencies. We do not accept deposits
from brokers. We establish our interest rates, maturities, service fees and
withdrawal penalties on deposits on a periodic basis. We determine deposit
interest rates and maturities based on funding needs, liquidity requirements,
the rates paid by our competitors, our growth goals, and applicable regulatory
restrictions and requirements.
Deposits historically have been the primary source of funds for our
lending, investment and general operating activities. However, we utilize FHLB
advances and securities sold under agreement to repurchase to supplement our
supply of lendable funds and to meet deposit withdrawal requirements.
PENDING MERGER WITH NORTH FORK BANK
On December 16, 2003, the Bank entered into a definitive agreement with
North Fork Bancorporation, Inc. and its wholly-owned subsidiary, North Fork Bank
(collectively, "NFB"), pursuant to which the Bank will merge with and into North
Fork Bank. At the time of announcement, the all-stock transaction was valued at
approximately $726 million. The transaction is currently expected to close in
the second quarter of 2004. It remains subject to regulatory and shareholder
approvals. See Item 7. -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a more detailed discussion of the
pending merger.
OTHER EVENTS
Formation of Bank Holding Company. Late in 2002, the Bank filed a
registration statement on Form S-4 with the Securities and Exchange Commission
in connection with the formation of a bank holding company structure for the
purpose of achieving greater financial and operative flexibility for the Bank as
a stand-alone entity. However, as a result of the announcement of the pending
merger with NFB, the Bank's plans to finalize the formation of the bank holding
company have been abandoned.
Special Committee of the Board of Directors. On February 13, 2003, the
Bank announced that it had determined that its former Chairman, the late Siggi
X. Xxxxxx, owned a larger interest in the Bank than had been reported
previously. The additional shares were held in accounts that had not been
attributed to Xx. Xxxxxx, including one account held through the Bank.
3
The Bank formed a special committee of independent directors to review the
matter and the involvement of the Bank and related persons. The committee found
that, during the period from January 30, 1992 through September 10, 2001 Xx.
Xxxxxx purchased 848,070 shares of the Bank's common stock, and during the
period from January 26, 1998 through February 12, 2002 Xx. Xxxxxx sold 119,675
shares of the Bank's common stock, in each case in a transaction that was not
previously attributed to him. As a result of this review, the Estate of Siggi X.
Xxxxxx disgorged any profits made on these transactions as calculated pursuant
to applicable law. These matters did not have a material impact on the Bank's
financial statements or its customers.
The Bank has cooperated with federal and state regulatory authorities in
investigating this matter and has adopted remedial measures.
WEBSITE
Our website address is xxx.xxxxxxxxxxxx.xxx. We have a policy of making
available, free of charge, on our website, all of our filings under the
Securities Exchange Act of 1934, as amended, including our proxy materials,
annual report on Form 10-K, quarterly reports on Form 10-Q and all amendments to
those reports and current reports on Form 8-K as soon as reasonably practicable
after such material is filed with or furnished to the FDIC.
SUBSIDIARY ACTIVITIES
We currently have four active subsidiaries:
1. TCB Investment Corp., for making qualified investments in municipal
securities, U.S. Government securities and corporate obligations.
2. ORAC, Inc., formerly Realty Acquisition Corporation, for the
holding of foreclosed real estate.
3. TC Financial, LLC, formerly TCNJ Financial Services, Inc., for
offering annuities, mutual funds and life insurance products.
4. TC Preferred Funding, Inc., a real estate investment trust for the
holding of certain of our real estate investments.
We also have three subsidiaries that remain inactive.
COMPETITION
We face strong competition in the communities we serve from other banking
institutions as well as from other financial institutions. Banks in New Jersey
and throughout the country, many of which are substantially larger than us,
provide substantial competition for financial services and deposits.
Competition for most of the services we perform has been increasing from
financial institutions other than commercial banks due to the recent relaxation
of regulatory restrictions. We compete for deposits with other financial
institutions such as savings banks, savings and loan associations, credit
unions, issuers of commercial paper and money market funds. These institutions,
as well as brokerage houses, consumer finance companies, factors, insurance
companies, mortgage bankers, real estate investment trusts and pension trusts,
are important competitors for various other types of banking services,
principally lending. There have been a number of recent mergers among local
financial institutions, which have had the effect of concentrating deposit and
loan activities among fewer depository institutions and more mergers may occur
in the future. In addition, personal and corporate trust and investment
counseling services are offered by insurance companies, investment counseling
firms and other business entities.
4
REGULATION
GENERAL
The Bank is a New Jersey chartered bank, and its deposit accounts are
insured up to applicable limits by the Federal Deposit Insurance Corporation
("FDIC") under the Bank Insurance Fund ("BIF"). The Bank is subject to extensive
regulation, examination and supervision by the Commissioner of the New Jersey
Department of Banking and Insurance as its chartering agency, and by the FDIC as
the deposit insurer. We refer to the "New Jersey Department of Banking and
Insurance" as the "Department," and to the commissioner of the Department as the
"Commissioner." The Bank must file reports with the Commissioner and the FDIC
concerning its activities and financial condition, and must obtain regulatory
approval prior to entering into certain transactions, such as mergers with, or
acquisitions of, other depository institutions and opening or acquiring branch
offices. The Commissioner and the FDIC conduct periodic examinations to assess
the Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which a state
chartered bank can engage and is intended primarily for the protection of the
deposit insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes.
Any change in such laws and regulations, whether by the Department, the
FDIC, or through legislation, could have a material adverse effect on the Bank
and its operations and stockholders.
NEW JERSEY BANKING REGULATION
Activity Powers. The Bank derives its lending, investment and other
activity powers primarily from the applicable provisions of the New Jersey
Banking Act and its related regulations. Under these laws and regulations, state
banks, including the Bank, generally may invest in:
- real estate mortgages;
- consumer and commercial loans;
- specific types of debt securities, including certain corporate debt
securities and obligations of federal, state and local governments and
agencies;
- certain types of corporate equity securities; and
- certain other assets.
A bank may also invest pursuant to a "leeway" power that permits
investments not otherwise permitted by the New Jersey Banking Act. "Leeway"
investments must comply with a number of limitations on the individual and
aggregate amounts of "leeway" investments. A bank may also exercise trust powers
upon approval of the Department, which the Bank has obtained. New Jersey banks
may also exercise any power authorized for national banks unless the Department
determines otherwise. The exercise of these lending, investment and activity
powers is limited by federal law and the related regulations. See "-- Federal
Banking Regulation -- Activity Restrictions on State Chartered Banks" below.
Loans-to-One-Borrower Limitations. With certain specified exceptions, a
New Jersey bank may not make loans or extend credit to a single borrower and to
entities related to the borrower in an aggregate amount that would exceed 15% of
the Bank's capital funds. A New Jersey bank may lend an additional 10% of the
bank's capital funds if secured by collateral meeting the requirements of the
New Jersey Banking Act. The bank currently complies with applicable
loans-to-one-borrower limitations.
Dividends. Under the New Jersey Banking Act, a New Jersey bank may declare
and pay a dividend on its capital stock only to the extent that the payment of
the dividend would not impair the capital stock of the bank. In addition, a New
Jersey bank may not pay a dividend if the surplus of the bank would, after the
payment of the dividend, be reduced unless after such reduction the surplus was
50% or more of the bank's
5
capital stock. Federal law may also limit the amount of dividends that may be
paid by the Bank. See "-- Federal Banking Regulation -- Prompt Corrective
Action" below.
Minimum Capital Requirements. Regulations of the Department impose on New
Jersey chartered depository institutions, including the Bank, minimum capital
requirements similar to those imposed by the FDIC on insured state banks. See
"-- Federal Banking Regulation -- Capital Requirements" below.
Examination and Enforcement. The Department may examine the bank whenever
it deems an examination advisable. The Commissioner examines the bank at least
every two years, but in any event the Commissioner may order any bank to
discontinue any violation of law or unsafe or unsound business practice and may
direct any director, officer, attorney or employee of a state chartered bank
engaged in an objectionable activity, after the Department has ordered the
activity to be terminated, to show cause at a hearing before the Department why
such person should not be removed.
FEDERAL BANKING REGULATION
Capital Requirements. FDIC regulations require BIF insured banks, such as
the Bank, to maintain minimum levels of capital. The FDIC regulations define two
tiers, or classes, of capital. Tier 1 capital is comprised of the sum of common
stockholders' equity (excluding the net unrealized appreciation or depreciation,
net of tax, from available-for-sale securities), non-cumulative perpetual
preferred stock (including any related surplus) and minority interests in
consolidated subsidiaries, minus all intangible assets (other than qualifying
servicing rights), and any net unrealized loss on marketable equity securities.
The components of Tier 2 capital currently include cumulative perpetual
preferred stock, certain perpetual preferred stock for which the dividend rate
may be reset periodically, mandatory convertible securities, subordinated debt,
intermediate preferred stock and allowance for loan losses. Allowance for loan
losses included in Tier 2 capital is limited to a maximum of 1.25% of risk
weighted assets. Overall, the amount of Tier 2 capital that may be included in
total capital cannot exceed 100% of Tier 1 capital.
FDIC regulations establish for banks that have the highest examination
rating of the FDIC under the Uniform Financial Institutions Rating System and
that are not experiencing or anticipating significant growth, a minimum leverage
capital ratio of Tier 1 capital to total assets of 3%. For all other banks, such
leverage capital ratio is 4%, unless a higher leverage capital ratio is
warranted by the particular circumstances or risk profile of the depository
institution. The FDIC regulations also require that banks meet a risk based
capital standard. The risk based capital standard requires the maintenance of a
ratio of total capital -- which is defined as the sum of Tier 1 capital and Tier
2 capital -- to risk-weighted assets of at least 8% and a ratio of Tier 1
capital to risk-weighted assets of at least 4%. In determining the amount of
risk-weighted assets, all assets, plus certain off balance sheet items, are
multiplied by risk weights ranging from 0% to 100%, based on the relative risks
inherent in each type of asset or item, as established by the FDIC. As of
December 31, 2003, our leverage ratio was 5.75%, our Tier 1 capital ratio was
9.63% and our total capital ratio was 10.03%. These ratios exceed the FDIC's
minimum ratios and the levels required to be considered "well capitalized" under
FDIC regulations, described below under "-- Prompt Corrective Active."
The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to declines in
the economic value of a bank's capital due to changes in interest rates when
assessing the bank's capital adequacy. Under such a risk assessment, examiners
will evaluate a bank's capital for interest rate risk on a case-by-case basis,
with consideration of both quantitative and qualitative factors. According to
the agencies, applicable considerations include the quality of the bank's
interest rate risk management process, the overall financial condition of the
bank and the level of other risks at the bank for which capital is needed.
Institutions with significant interest rate risk may be required to hold
additional capital. The agencies also issued a joint policy statement providing
guidance on interest rate risk management, including a discussion of the
critical factors affecting the agencies' evaluation of interest rate risk in
connection with capital adequacy.
FDIC regulations established minimum regulatory capital requirements for
equity investments in non-financial companies. The regulations apply a series of
marginal capital charges that range from 8% to 25% depending upon the size of
the aggregate equity investment portfolio of the banking organization relative
to
6
its Tier 1 capital. The capital charge would be applied by making a deduction,
which would be based on the adjusted carrying value of the equity investment
from the organization's Tier 1 capital. We do not believe this new capital
requirement will have a material adverse effect upon our operations. However, we
will have to take this requirement into consideration should we, at some point
in the future, decide to invest in non-financial companies.
Activity Restrictions on State Chartered Banks. Section 24 of the Federal
Deposit Insurance Act, as amended ("FDIA"), which was added by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), generally
limits the activities and investments of state chartered FDIC insured banks and
their subsidiaries to those permissible for federally chartered national banks
and their subsidiaries, unless such activities and investments are specifically
exempted by Section 24 or consented to by the FDIC. Section 24 provides an
exception for majority owned subsidiaries of a bank, but Section 24 limits the
activities of such subsidiaries to those permissible for a national bank under
Section 24 of the FDIA and the FDIC regulations issued pursuant thereto, or as
approved by the FDIC.
Before making a new investment or engaging in a new activity not
permissible for a national bank or otherwise permissible under Section 24 of the
FDIC regulations thereunder, an insured bank must seek approval from the FDIC to
make such investment or engage in such activity. The FDIC will not approve the
activity unless the bank meets its minimum capital requirements and the FDIC
determines that the activity does not present a significant risk to the FDIC
insurance funds.
The Xxxxx-Xxxxx Xxxxxx Act, commonly referred to as "Xxxxx-Xxxxx," permits
a state chartered bank to engage, through financial subsidiaries, in any
activity in which a national bank may engage through a financial subsidiary and
on substantially the same terms and conditions. In general, Xxxxx-Xxxxx permits
a national bank that is well-capitalized and well-managed to conduct, through a
financial subsidiary, any activity permitted for a financial holding company
other than insurance underwriting, insurance investments, real estate investment
or development or merchant banking. The total assets of all such financial
subsidiaries may not exceed the lesser of 45% of the bank's total assets or $50
billion. The bank must have policies and procedures to assess the financial
subsidiary's risk and protect the bank from such risk and potential liability,
must not consolidate the financial subsidiary's assets with the bank's and must
exclude from its own assets and equity all equity investments, including
retained earnings, in the financial subsidiary. Generally, Xxxxx-Xxxxx will
preempt all state laws regarding the permissibility of certain activities for
state chartered banks if such state law is in conflict with the provisions of
Gramm Xxxxx, with the exception of certain insurance activities, regardless of
whether the state law would authorize broader or more restrictive activities.
Federal Home Loan Bank System. The Bank is a member of the Federal Home
Loan Bank, or FHLB, system, which consists of twelve regional FHLBs, each
subject to supervision and regulation by the Federal Housing Finance Board. The
FHLB provides a central credit facility primarily for member thrift institutions
as well as other entities involved in home mortgage lending. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLBs. It makes loans to members in accordance with policies and procedures,
including collateral requirements, established by the respective boards of
directors of the FHLBs. These policies and procedures are subject to the
regulation and oversight of the Federal Housing Finance Board. All long-term
advances are required to provide funds for residential home financing. The
Federal Housing Finance Board has also established standards of community or
investment service that members must meet to maintain access to such long-term
advances. The Bank, as a member of the FHLB of New York, is required to purchase
and hold shares of capital stock in that FHLB in an amount at least equal to the
greater of:
- 1% of the aggregate principal amount of its unpaid mortgage loans, home
purchase contracts, pass-through securities and similar obligations at
the beginning of each year; or
- 5%, or such greater fraction as established by the FHLB, of its advances
from the FHLB as of December 31, 2003.
Pursuant to Xxxxx-Xxxxx, the foregoing minimum share ownership requirements
will be replaced by regulations to be promulgated by the FHLB. Xxxxx-Xxxxx
specifically provides that the minimum
7
requirements in existence immediately prior to adoption of Xxxxx-Xxxxx shall
remain in effect until such regulations are adopted.
Enforcement. The FDIC has extensive enforcement authority over insured
banks, including the Bank. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease and desist
orders and to remove directors and officers, to order divestitures and withhold
approval of the acquisition of businesses or the exercise of powers, to
terminate deposit insurance coverage and to place a depository institution in
receivership. In general, these enforcement actions may be initiated in response
to violations of laws and regulations and to unsafe or unsound practices. The
FDIC is required, with certain exceptions, to appoint a receiver or conservator
for an insured state bank if that bank is "critically undercapitalized." For
this purpose, "critically undercapitalized" means having a ratio of tangible
capital to total assets of less than 2%. The FDIC may also appoint a conservator
or receiver for a state bank on the basis of the institution's financial
condition or upon the occurrence of certain events, including:
- insolvency whereby the assets of the bank are less than its liabilities
to depositors and others;
- substantial dissipation of assets or earnings through violations of law
or unsafe or unsound practices;
- existence of an unsafe or unsound condition to transact business;
- likelihood that the bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business;
and
- insufficient capital, or the incurring or likely incurring of losses that
will deplete substantially all of the institution's capital with no
reasonable prospect of replenishment of capital without federal
assistance.
Safety and Soundness Standards. Pursuant to the requirements of FDICIA, as
amended by the Xxxxxx Community Development and Regulatory Improvement Act of
1994, each federal banking agency, including the FDIC, has adopted guidelines
establishing general standards relating to internal controls, information and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, asset quality, earnings and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal shareholder.
In addition, the FDIC adopted regulations to require a bank that is given
notice by the FDIC that it is not satisfying any of such safety and soundness
standards to submit a compliance plan to the FDIC. If, after being so notified,
a bank fails to submit an acceptable compliance plan or fails in any material
respect to implement an accepted compliance plan, the FDIC may issue an order
directing corrective and other actions of the types to which a significantly
undercapitalized institution is subject under the "prompt corrective action"
provisions of FDICIA. If a bank fails to comply with such an order, the FDIC may
seek to enforce such an order in judicial proceedings and to impose civil
monetary penalties.
Prompt Corrective Action. Under the FDIC's prompt corrective action
regulations, the FDIC is required to take certain, and is authorized to take
other, supervisory actions against undercapitalized banking institutions. For
this purpose, a banking institution would be placed in one of five categories
based on the banking institution's capital. Generally, a banking institution is
treated as "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of core capital to risk-weighted assets is at
least 6%, its ratio of core capital to total assets is at least 5% and it is not
subject to any order or directive by the FDIC to meet a specific capital level.
A banking institution will be treated as "adequately capitalized" if its ratio
of total capital to risk-weighted assets is at least 8%, its ratio of core
capital to risk-weighted assets is at least 4% and its ratio of core capital to
total assets is at least 4% (3% if the banking institution receives the highest
rating on the CAMEL financial institutions rating system). A banking institution
that has a total risk-based capital of less than 8% or a leverage ratio or a
Tier 1 capital ratio that is less than 4% (3% leverage ratio if the banking
institution receives the highest rating on the CAMEL financial institutions
rating system)
8
is considered to be "undercapitalized." A banking institution that has a total
risk-based capital of less than 6% or a Tier 1 risk-based capital ratio or a
leverage ratio of less than 3% is considered to be "significantly
undercapitalized." A banking institution that has a tangible capital to assets
ratio equal to or less than 2% is deemed to be "critically undercapitalized."
The elements of a banking institution's capital for purposes of the prompt
corrective action regulations are defined generally as they are under the
regulations for minimum capital requirements. See "-- Capital Requirements."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as a banking institution's
capital deteriorates within the three undercapitalized categories. All banking
institutions are prohibited from paying dividends or other capital distributions
or paying management fees to any controlling person if, following such
distribution, the banking institution would be undercapitalized. An
undercapitalized banking institution is required to file a capital restoration
plan within 45 days of the date the banking institution receives notice that it
is within any of the three undercapitalized categories. The FDIC is required to
monitor closely the condition of an undercapitalized banking institution and to
restrict the asset growth, acquisitions, branching, and new lines of business of
such a banking institution. Significantly undercapitalized banking institutions
are subject to restrictions on compensation of senior executive officers; such a
banking institution may not, without FDIC consent, pay any bonus or provide
compensation to any senior executive officer at a rate exceeding the officer's
average rate of compensation (excluding bonuses, stock options and
profit-sharing) during the 12 months preceding the month when the banking
institution became undercapitalized. A significantly undercapitalized banking
institution may also be subject, among other things, to forced changes in the
composition of its board of directors or senior management, additional
restrictions on transactions with affiliates, restrictions on acceptance of
deposits from correspondent associations, further restrictions on asset growth,
restrictions on rates paid on deposits, forced termination or reduction of
activities deemed risky, and any further operational restrictions deemed
necessary by the FDIC.
If one or more grounds exist for appointing a conservator or receiver for
an association, the FDIC may require the banking institution to issue additional
debt or stock, sell assets, be acquired or combine with another banking
institution. The FDIC has a broad range of grounds under which it may appoint a
receiver or conservator for an insured depositary institution.
Insurance Activities. Federal banking agencies have adopted regulations
prohibiting depository institutions from conditioning the extension of credit to
individuals upon either the purchase of an insurance product or annuity or an
agreement by the consumer not to purchase an insurance product or annuity from
an entity that is not affiliated with the depository institution. The
regulations also require prior disclosure of this prohibition to potential
insurance product or annuity customers. We do not believe that these regulations
have a material impact on our operations.
Deposit Insurance. Pursuant to FDICIA, the FDIC established a system for
setting deposit insurance premiums based upon the risks a particular bank or
savings association posed to its deposit insurance funds. Under the risk-based
deposit insurance assessment system, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending six months before the assessment period. The three
capital categories are (1) well capitalized, (2) adequately capitalized and (3)
undercapitalized. The FDIC also assigns an institution to one of three
supervisory subcategories within each capital group. With respect to the capital
ratios, institutions are classified as well capitalized, adequately capitalized
or undercapitalized, using ratios that are substantially similar to the prompt
corrective action capital ratios discussed above. The FDIC also assigns an
institution to a supervisory subgroup based on a supervisory evaluation provided
to the FDIC by the institution's primary federal regulator and information that
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds (which may include, if applicable,
information provided by the institution's state supervisor).
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied.
9
Assessment rates for deposit insurance currently range from 0 basis points to 27
basis points. The capital and supervisory subgroup to which an institution is
assigned by the FDIC is confidential and may not be disclosed. The assessment
rates for our BIF assessable deposits are zero basis points. If the FDIC
determines that assessment rates should be increased, institutions in all risk
categories could be affected. The FDIC has exercised this authority several
times in the past and could raise insurance assessment rates in the future. Due
to the current financial condition of the BIF, which is below the 1.25 percent
Designated Reserve Ratio "rate-cliff," the deposit insurance assessment rate was
increased an insignificant amount in the first half of 2004.
Under the Deposit Insurance Funds Act of 1996 ("Funds Act"), the assessment
base for the payments on the bonds ("FICO bonds") issued in the late 1980's by
the Financing Corporation to recapitalize the now defunct Federal Savings and
Loan Insurance Corporation was expanded to include, beginning January 1, 1997,
the deposits of BIF-insured institutions, such as the Bank. Our total expense in
2003 for the assessment for deposit insurance and the FICO payments was
$550,000.
Under the FDIA, the FDIC may terminate the insurance of an institution's
deposits upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC.
Transactions with Affiliates of the Bank. The Bank is subject to the
affiliate and insider transaction rules set forth in Sections 23A, 23B, 22(g)
and 22(h) of the Federal Reserve Act, and the regulations of the FRB promulgated
thereunder. These provisions, among other things, prohibit or limit a bank from
extending credit to, or entering into certain transactions with, its affiliates
and principal stockholders, directors and executive officers of the Bank.
Provisions of the New Jersey Banking Act impose conditions and limitations
on the liabilities to a bank of its directors and executive officers and of
corporations and partnerships controlled by such persons that are comparable in
many respects to the conditions and limitations imposed on the loans and
extensions of credit to insiders and their related interests under federal law
and regulation, as discussed above. The New Jersey Banking Act also provides
that a bank that is in compliance with the applicable federal laws and
regulations is deemed to be in compliance with such provisions of the New Jersey
Banking Act.
Privacy Standards. Financial institutions, including the Bank, are subject
to FDIC regulations implementing the privacy protection provisions of
Xxxxx-Xxxxx. These regulations require the Bank to disclose its privacy policy,
including identifying with whom it shares "non-public personal information,"
regarding customers at the time of establishing the customer relationship and
annually thereafter.
The regulations also require the Bank to provide its customers with initial
and annual notices that accurately reflect its privacy policies and practices.
In addition, the Bank is required to provide its customers with the ability to
"opt-out" of having the Bank share their non-public personal information with
unaffiliated third parties before they can disclose such information, subject to
certain exceptions. The implementation of these regulations did not have a
material adverse effect on the Bank.
Community Reinvestment Act. Under the Community Reinvestment Act, commonly
referred to as "CRA," any insured depository institution, including the Bank,
has a continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, 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. The CRA requires the FDIC,
in connection with its examination of a bank, to assess the depository
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution, including applications for branch relocations, additional branches
and acquisitions.
10
Current CRA regulations rate an institution based on its actual performance
in meeting community needs. In particular, the evaluation system focuses on
three tests:
- a lending test, to evaluate the institution's record of making loans in
its service areas;
- an investment test, to evaluate the institution's record of investing in
community development projects, affordable housing, and programs
benefiting low or moderate income individuals and businesses; and
- a service test, to evaluate the institution's delivery of services
through its branches, ATMs and other offices.
The CRA requires the FDIC to provide a written evaluation of an
institution's CRA performance utilizing a four-tiered descriptive rating system
and requires public disclosure of an institution's CRA rating. Federal banking
agencies have adopted regulations implementing the requirements under
Xxxxx-Xxxxx that insured depository institutions publicly disclose certain
agreements that are in fulfillment of the CRA. Management does not believe that
these regulations have a material impact on the Bank's operations.
Internet Banking. Technological developments are dramatically altering the
ways in which most companies, including financial institutions, conduct their
business. The growth of the Internet is prompting banks to reconsider business
strategies and adopt alternative distribution and marketing systems. The federal
bank regulatory agencies have conducted seminars and published materials
targeted to various aspects of internet banking, and have indicated their
intention to reevaluate their regulations to ensure that they encourage banks'
efficiency and competitiveness consistent with safe and sound banking practices.
We cannot make assurances that the federal bank regulatory agencies will adopt
new regulations that will not materially affect the Bank's internet operations
or restrict any such further operations.
FEDERAL RESERVE SYSTEM
Under FRB regulations, the Bank is required to maintain non-interest
earning reserves against its transaction accounts (primarily NOW and regular
checking accounts). The Bank is in compliance with the foregoing requirements.
Because required reserves must be maintained in the form of either vault cash, a
non-interest bearing account at a FRB or a pass through account as defined by
the FRB, the effect of this reserve requirement is to reduce the Bank's interest
earning assets.
THE USA PATRIOT ACT
In response to the events of September 11, 2001, President Xxxxxx X. Xxxx
signed into law the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA
PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal
government new powers to address terrorist threats through enhanced domestic
security measures, expanded surveillance powers, increased information sharing,
and broadened anti-money laundering requirements. By way of amendments to the
Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to
encourage information sharing among bank regulatory agencies and law enforcement
bodies. Further, certain provisions of Title III impose affirmative obligations
on a broad range of financial institutions, including banks, thrifts, brokers,
dealers, credit unions, money transfer agents and parties registered under the
Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
- Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at a minimum: (i) internal
policies, procedures, and controls, (ii) specific designation of an
anti-money laundering compliance officer, (iii) ongoing employee training
programs, and (iv) an independent audit function to test the anti-money
laundering program.
- Section 326 of the Act authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue regulations
that provide for minimum standards with respect to customer
identification at the time new accounts are opened.
11
- Section 312 of the Act requires financial institutions that establish,
maintain, administer, or manage private banking accounts or correspondent
accounts in the United States for non-United States persons or their
representatives including foreign individuals visiting the United States
to establish appropriate, specific, and, where necessary, enhanced due
diligence policies, procedures, and controls designed to detect and
report money laundering.
- Financial institutions are prohibited from establishing, maintaining,
administering or managing correspondent accounts for foreign banks that
do not have a physical presence in any country, and will be subject to
certain recordkeeping obligations with respect to correspondent accounts
of foreign banks.
- Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications.
XXXXXXXX-XXXXX ACT OF 2002
On July 30, 2002, Xxxxxxxxx Xxxx signed into law the Xxxxxxxx-Xxxxx Act of
2002, or "SOA." The stated goals of SOA are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving
the accuracy and reliability of corporate disclosures pursuant to the securities
laws.
We believe that SOA is the most far-reaching U.S. securities legislation
enacted in some time. SOA generally applies to all companies, both U.S. and
non-U.S., that file or are required to file periodic reports with the Securities
and Exchange Commission (the "SEC") or, in the Bank's case, with the FDIC, under
the Securities Exchange Act of 1934.
SOA includes very specific additional disclosure requirements and new
corporate governance rules, requires the SEC and securities exchanges to adopt
extensive additional disclosure, corporate governance and other related rules
and mandates further studies of certain issues by the SEC and the Comptroller
General. SOA represents significant federal involvement in matters traditionally
left to state regulatory systems, such as the regulation of the accounting
profession, and to state corporate law, such as the relationship between a board
of directors and management and between a board of directors and its committees.
SOA addresses, among other matters:
- audit committees for all reporting companies;
- certification of financial statements by the chief executive officer and
the chief financial officer;
- the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and senior
officers in the twelve month period following initial publication of any
financial statements that later require restatement in connection with
misconduct;
- a prohibition on xxxxxxx xxxxxxx during pension plan black out periods;
- disclosure of off-balance sheet transactions;
- expedited filing requirements for Forms F-8As;
- disclosure of a code of ethics;
- "real time" filing of periodic reports;
- the formation of a public accounting oversight board;
- auditor independence; and
- various increased criminal penalties for violations of securities laws.
12
EMPLOYEES
We had 1,145 full-time and 161 part-time employees as of December 31, 2003.
Of these, 294 full-time and 93 part-time non-administrative employees are
represented by a union, Local 153 Office and Professional Employees
International Union AFL-CIO. The current collective bargaining agreement, which
is for a term of three years, expires on November 20, 2005. The collective
bargaining agreement includes an "Open Shop" provision.
ITEM 2. PROPERTIES
Our main office, 00 Xxxxxxx Xxxxxx, Xxxxxx Xxxx, Xxx Xxxxxx, is a
twelve-story, 144,000 square foot office building with street level retail
establishments. We use approximately 75% of this building; the remainder is
offered for rent to third-parties. In addition to our main office, we have 93
branch offices (42 of which are in-store locations), as well as a data
processing center and a records storage facility. We own the main building and
eighteen of the other locations. The owned offices are free and clear of
mortgages. The remaining 77 are under leases which expire at various dates from
2004 to 2022.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are a party to various legal proceedings incident to
our business. At December 31, 2003, there were no legal proceedings to which we
or our subsidiaries were a party, or to which any of our property was subject,
which were expected by us to result in a material loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
PART II
ITEM 5. MARKET FOR THE BANK'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Bank's common stock is traded on the NASDAQ National Market System
under the symbol "TCNJ." At February 23, 2004, there were 18,439,530 shares of
our common stock outstanding, which were held of record by 3,958 stockholders.
The following table shows, for the periods indicated, the high and low per share
sales price of our common stock as reported on the NASDAQ National Market System
and the dividends declared on our common stock.
PRICE RANGE
---------------
QUARTER ENDED HIGH LOW DIVIDENDS PER SHARE
------------- ------ ------ -------------------
Year Ended December 31, 2002
First Quarter................................... $24.56 $20.91 $0.15
Second Quarter.................................. 27.28 23.05 0.15
Third Quarter................................... 27.28 23.25 0.15
Fourth Quarter.................................. 28.93 22.50 0.16
Year Ended December 31, 2003
First Quarter................................... 30.50 26.58 0.16
Second Quarter.................................. 31.30 26.83 0.16
Third Quarter................................... 33.85 29.85 0.18
Fourth Quarter.................................. 40.00 30.31 0.18
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2003 with
respect to shares of our common stock that may be issued under the Bank's
existing equity compensation plans, which consist of the (i) 2000 Non-employee
Director Stock Option Plan, (ii) 1993 Incentive Stock Option Plan, (iii) 1993
Executive Stock Option Plan, (iv) 2002 Stock Option Plan, and (v) 2002 Executive
Stock Option Plan, each of which has been approved by the Bank's stockholders.
(C)
NUMBER OF
(A) (B) SECURITIES
NUMBER OF WEIGHTED- REMAINING AVAILABLE
SECURITIES TO BE AVERAGE EXERCISE FOR FUTURE ISSUANCE
ISSUED UPON PRICE OF UNDER EQUITY
EXERCISE OF OUTSTANDING COMPENSATION PLANS
OUTSTANDING OPTIONS, (EXCLUDING
OPTIONS, WARRANTS WARRANTS AND SECURITIES REFLECTED
PLAN CATEGORY AND RIGHTS RIGHTS IN COLUMN (A))
------------- ----------------- ----------------- --------------------
Equity Compensation Plans Approved
by Security Holders............... 1,984,966 $20.47 656,150
Equity Compensation Plans Not
Approved by Security Holders...... -- -- --
--------- ------ -------
TOTAL............................... 1,984,966 $20.47 656,150
========= ====== =======
14
ITEM 6. SELECTED FINANCIAL DATA
On January 28, 2004, the Bank announced preliminary results for the fourth
quarter 2003 and for the entire year 2003, reflecting net income of $21.0
million, or $1.15 per basic share and $1.11 per diluted share. Subsequently, the
Bank recorded a provision of $5.0 million before taxes ($3.0 million after
taxes) to cover the discovery of certain reconciling items currently being
reviewed by the Bank. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations: 2003 Compared With
2002 -- Non-Interest Expenses." The following selected financial data should be
read in conjunction with the consolidated financial statements and the notes
related thereto presented elsewhere herein.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF INCOME DATA:
Interest income.................. $ 204,585 $ 224,354 $ 236,479 $ 246,818 $ 208,366
Interest expense................. 78,647 106,746 134,780 157,411 116,250
----------- ----------- ----------- ----------- -----------
Net interest income.............. 125,938 117,608 101,699 89,407 92,116
Provision for loan losses........ 12,800 2,200 2,200 (619) 1,200
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses...... 113,138 115,408 99,499 90,026 90,916
Non-interest income.............. 39,440 46,187 32,651 21,098 17,052
Non-interest expense............. 132,171 110,297 83,466 84,016 65,799
----------- ----------- ----------- ----------- -----------
Income before provision for
income taxes................... 20,407 51,298 48,684 27,108 42,169
Provision for income taxes....... 2,336 13,308 14,167 7,157 13,488
----------- ----------- ----------- ----------- -----------
Net income(1).................... $ 18,071 $ 37,990 $ 34,517 $ 19,951 $ 28,681
=========== =========== =========== =========== ===========
COMMON SHARE DATA:
Net income (basic)............... $ 0.99 $ 2.07 $ 1.86 $ 1.07 $ 1.51
Net income (diluted)............. $ 0.95 $ 2.03 $ 1.84 $ 1.04 $ 1.50
Cash dividends per common
share.......................... $ 0.68 $ 0.61 $ 0.57 $ 0.56 $ 0.52
Weighted average shares
(basic)........................ 18,338,712 18,386,331 18,513,826 18,681,775 18,992,391
Weighted average shares
(diluted)...................... 18,933,515 18,694,748 18,735,981 18,681,775 19,139,925
AT DECEMBER 31,
--------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF CONDITION DATA:
Total assets.......................... $4,278,005 $4,410,802 $4,072,769 $3,530,936 $3,432,382
Loans (net of unearned income)........ 2,198,801 2,041,854 1,819,164 1,602,072 1,524,897
Securities............................ 1,730,833 1,979,701 1,732,207 1,608,748 1,636,120
Deposits.............................. 3,306,683 3,437,282 3,087,154 2,708,807 2,691,583
Stockholders' equity.................. 263,365 264,270 213,305 185,726 161,450
Book value per common share........... 14.32 14.43 11.57 10.03 8.58
OTHER DATA:
Number of deposit accounts............ 244,113 257,704 244,979 240,020 229,503
Offices in bank buildings............. 52 51 48 47 46
In-store branches..................... 42 50 38 26 15
CAPITAL RATIOS:
Leverage ratio........................ 5.75% 5.47% 5.62% 5.48% 5.54%
Tier 1 capital to risk-weighted
assets.............................. 9.63 9.74 10.02 9.67 9.82
Total capital to risk-weighted
assets.............................. 10.03 10.14 10.46 10.08 10.25
15
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001 2000 1999
----- ------ ------ ------ ------
SELECTED FINANCIAL RATIOS:
PERFORMANCE RATIOS:
Return on average assets(1)........................ 0.42% 0.91% 0.93% 0.55% 0.90%
Return on average equity(2)........................ 6.72 16.04 16.72 12.52 16.77
Equity-to-assets(3)................................ 6.25 5.65 5.54 4.40 5.38
Net interest margin(4)............................. 3.39 3.23 3.08 2.71 3.23
Dividend payout ratio(5)........................... 71.58 30.05 30.98 53.85 34.67
ASSET QUALITY RATIOS:
Non-performing assets to total assets(6)........... 0.63 0.32 0.47 0.60 0.72
Non-accrual loans to total loans(7)................ 1.08 0.21 0.30 0.31 0.42
Allowance for loan losses to total loans........... 0.46 0.49 0.54 0.53 0.56
Allowance for loan losses to non-accrual loans..... 42.85 229.80 173.44 165.83 128.74
Net loan charge-offs to average loans.............. 0.60 0.10 0.05 0.04 0.11
---------------
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Total average equity divided by average total assets.
(4) Calculation of net interest margin is based upon net interest income on a
taxable equivalent basis divided by average interest-earning assets. See
page 24 regarding the calculation of the taxable equivalent adjustment.
(5) Dividends per share divided by diluted net income per share.
(6) Non-performing assets consist of non-accrual loans and property acquired by
the Bank through foreclosure or repossession or as an in-substance
foreclosure.
(7) Calculated net of unearned discounts.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
The information disclosed in this document includes various forward-looking
statements with respect to credit quality (including delinquency trends and the
allowance for loan losses), corporate objectives, and other financial and
business matters. The words "anticipates," "projects," "intends," "estimates,"
"expects," "believes," "plans," "may," "will," "should," "could," and other
similar expressions are intended to identify these forward-looking statements.
In addition, any statements we make that are not historical facts should be
considered to be forward-looking statements. We caution that these
forward-looking statements are necessarily speculative and speak only as of the
date made, and are subject to numerous assumptions, risks and uncertainties, all
of which may change over time. Actual results could differ materially from these
forward-looking statements. Certain events may occur that could cause our actual
results to be materially different than those described in this document. In
addition to the factors disclosed elsewhere in this document, the following
factors, among others, could cause our actual results to differ materially and
adversely from such forward-looking statements:
- competition and pricing pressures on loan and deposit products;
- changes in economic conditions nationally, regionally and in our markets;
- the extent and timing of actions of the Federal Reserve Board;
- changes in levels of market interest rates;
- clients' acceptance of our products and services;
16
- credit risks in our loan portfolio; and
- the extent and timing of legislative and regulatory actions and reforms.
The above-listed risk factors are not necessarily exhaustive, particularly
as to possible future events, and new risk factors may emerge from time to time.
The information contained in this document speaks only as of the date indicated
on the signature page of this document unless the information specifically
indicates that another date applies. We are not obligated to update and do not
undertake to update any of our forward-looking statements made in this document.
PENDING MERGER WITH NFB
On December 16, 2003, the Bank entered into a definitive agreement to be
acquired by NFB in an all-stock transaction valued at $726 million. The Bank's
stockholders will receive a fixed exchange ratio of one share of NFB common
stock for each share held. The transaction is intended to qualify as a
reorganization for federal income tax purposes and provide a tax-free exchange
of shares.
The definitive agreement has been approved by the directors of both NFB and
the Bank. The transaction is subject to all required regulatory approvals,
approval of the stockholders of the Bank (by a two-thirds vote of outstanding
shares), and other customary conditions. Bank stockholders holding approximately
42% of the Bank's stock have committed to vote in favor of the merger through
the execution of voting agreements. The transaction is expected to be completed
in the second quarter of 2004.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" is based upon the Bank's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Bank to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. Note 1 to the Bank's
Consolidated Financial Statements for the year ended December 31, 2003 contains
a summary of the Bank's significant accounting policies. Management believes the
Bank's policy with respect to the methodology for the determination of the
allowance for loan losses involves a high degree of complexity and requires
management to make difficult and subjective judgments which often require
assumptions or estimates about highly uncertain matters. Changes in these
judgments, assumptions or estimates could materially impact results of
operations. This critical policy and its application is periodically reviewed
with the Audit and Examination Committee and the Board of Directors.
The provision for loan losses is based upon management's evaluation of the
adequacy of the allowance for loan losses, including an assessment of known and
inherent risks in the portfolio, giving consideration to the size and
composition of the loan portfolio, actual loan loss experience, level of
delinquencies, detailed analysis of individual loans for which full
collectibility may not be assured, the existence and estimated net realizable
value of any underlying collateral and guarantees securing the loans, and
current economic and market conditions. Although management uses the best
information available, the level of the allowance for loan losses remains an
estimate that is subject to significant judgment and short-term change. Various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to make additional provisions for loan losses based upon
information available to them at the time of their examination. Furthermore, the
majority of the Bank's loans are secured by real estate in the State of New
Jersey. Accordingly, the collectibility of a substantial portion of the carrying
value of the Bank's loan portfolio is susceptible to changes in local market
conditions and may be adversely affected should real estate values decline or
the New Jersey area experience an adverse economic shock. Future adjustments to
the allowance for loan losses may be necessary due to economic, operating,
regulatory and other conditions beyond the Bank's control.
The Bank accounts for its pension expense by utilizing the "immediate
recognition" provisions of Statement of Financial Accounting Standards No. 87.
Accordingly, plan assets and the projected benefit obligation are each
marked-to-market at all period-ends and recorded in employee benefits expense.
17
Generally, the value of plan assets are subject to the inherent volatility of
the securities markets and the specific market performance of the plan assets;
the value of the projected benefit obligation (which can also have a significant
element of volatility) is subject to the level of interest rates, the expected
inflation rate, the number of employees covered under the plan, and other
factors.
GENERAL
The Bank's net income is dependent primarily on its net interest income,
which is the difference between interest and dividend income earned on our loan
and securities portfolios and the interest paid on our interest-bearing
liabilities, such as deposits and borrowings. Our net income is also affected by
the generation of non-interest income, such as loan fees and service charges, as
well as gains on sales of securities available for sale and sales of
securitizations and loans. In addition, our net income is affected by the level
of the provision for loan losses, as well as non-interest expenses.
Our operations and the entire banking industry are significantly affected
by prevailing economic conditions, competition and the monetary and fiscal
policies of governmental agencies. Lending activities are influenced by
competition among lenders, the level of interest rates, the availability of
funds and, in certain markets, the demand for and supply of housing. Deposit
flow and costs of funds are influenced by prevailing market rates of interest,
primarily on competing investments, account maturities, and the levels of
personal income and savings nationwide.
RESULTS OF OPERATIONS: 2003 COMPARED WITH 2002
Overview: Net income for 2003 amounted to $18.1 million, a decrease of
52.4% from the $38.0 million earned in 2002. Diluted earnings per share for the
full year were $0.95, 53.2% lower than the $2.03 earned in 2002. The decrease in
net income was attributable to several factors, primarily increases in
non-interest expense and the provision for loan losses and lower gains on
securities sales that are discussed below. Those negative factors were partly
offset by an improvement in 2003 in net interest income and pension income
compared to a small amount of pension expense in 2002 and a decline in the
provision for income taxes.
Net Interest Income: Net interest income for the year 2003 increased by
7.1% to $125.9 million from $117.6 million for the year 2002. Net interest
income represents the difference between interest received on interest earning
assets, primarily loans and securities available for sale and held to maturity,
and the interest expense paid on interest bearing liabilities, primarily
deposits and borrowings. All interest income and expense amounts in this
discussion of net interest income are stated on a pre-tax adjusted basis. The
related yield, return on assets, spreads and the net interest margin reflect the
tax-equivalent adjustments that were made to income derived from any tax-exempt
loans and securities. All interest earning assets and interest bearing
liabilities are discussed in terms of average balances.
The Bank's net interest income performance was driven primarily by its
low-cost core deposit sources of funds that are invested in interest earning
assets, principally loans and securities. Total average interest earning assets
increased $68 million in 2003 to $3.947 billion, from $3.879 billion in 2002.
Total average interest bearing liabilities decreased $13 million in 2003, with a
$15 million decline in interest bearing deposits being partly offset by a $2
million increase in borrowings. Net average non-interest bearing sources of
funds increased $81 million or 16.7% to $567 million from $486 million in 2002.
Growth in demand deposits accounted for virtually all of this increase. The
Bank's net interest margin increased 16 basis points to 3.39% in 2003 from 3.23%
in 2002.
Total interest income decreased from $224.4 million in 2002 to $204.6
million in 2003, attributable to a 59 basis point decrease in the average yield
earned on total interest earning assets (reflecting the lower rate environment
in 2003), partially offset by the previously mentioned increase in the volume of
total interest earning assets.
Interest and fees on loans decreased from $134.8 million in 2002 to $134.4
million in 2003. The decrease was attributable to the lower rate environment,
the continued prepayment by borrowers of higher
18
yielding 1 -- 4 family residential mortgage loans and the securitization and
sale of 1 -- 4 family residential mortgage loans originated by the Bank. These
factors contributed to a 76 basis point decline in the average rate earned on
loans. The decline in the average rate earned on loans was partly offset by an
11.4% increase in loan volume, spurred primarily by increases in 1 -- 4 family
residential mortgage loans, consumer lending (principally automobile loans) and
commercial lending, including asset-based loans.
Interest and dividends on securities declined $17.7 million to $69.0
million in 2003 from $86.7 million in 2002. The securities portfolio consists of
securities available for sale (average balance of $1.639 billion in 2003; $1.563
billion in 2002) and securities held to maturity (average balance of $53 million
and $84 million in 2003 and 2002, respectively). The decline in the total amount
of interest and dividends reflects the lower rate environment and the impact of
prepayments on the Bank's portfolio of mortgage-backed securities. The average
yield earned on the securities portfolio was 4.46% in 2003 and 5.44% in 2002.
The impact of the decline in yields was partially offset by an increase in the
average balance of securities available for sale, principally Federal agency and
mortgage-backed securities. The average balance of mortgage-backed securities
amounted to $956 million in 2003 and $920 million in 2002. The average balance
of Federal agency securities increased from $198 million in 2002 to $251 million
in 2003.
Late in the third quarter and early in the fourth quarter 2003, the Bank
repositioned certain aspects of its mortgage-backed securities portfolio through
the sale of $162 million principal amount of securities at a loss of $1.6
million. The securities sold were replaced with approximately $180 million
principal amount of mortgage-backed securities that had a 210 basis point higher
yield. Gains of $1.6 million were realized on the sale of $20 million of trust
preferred securities. The net effect of the sales and replacement was to
increase the yield on the Bank's total securities portfolio by approximately 40
basis points. In addition, during the fourth quarter 2003, a general slowdown in
prepayments in the remaining mortgage-backed securities portfolio contributed to
an overall increase in the yield on the total securities portfolio of 53 basis
points.
Interest expense on deposits decreased from $76.3 million in 2002 to $50.5
million in 2003. This decline reflected the lower rate environment in 2003 and a
strategic decision to decrease the Bank's reliance upon high-cost time deposits.
The average balance of interest bearing core deposits (defined as savings, NOW
and money market deposits) increased 11.3% to $1.231 billion in 2003, while the
rate paid on such deposits decreased 73 basis points to 1.19%. The average
balance of time deposits decreased $140 million to $1.502 billion in 2003. The
rate paid on time deposits declined 96 basis points to 2.39%.
Interest expense on borrowed funds decreased $2.3 million to $28.1 million
in 2003 from $30.4 million in 2002, due to the lower rate environment in 2003
and the impact of the Bank's restructuring of its Federal Home Loan Bank
advances. (See "Financial Condition: December 31, 2003 Compared to December 31,
2002" for a description of this restructuring.) The average balance of borrowed
funds increased modestly in 2003 to $647 million from $645 million in 2002.
Provision for Loan Losses: The Bank's provision for loan losses is
established periodically at levels determined by management to be necessary to
maintain the allowance for loan losses at an adequate level. During 2003, the
Bank recorded a provision for loan losses of $12.8 million, an increase of $10.6
million from the provision recorded in 2002. The increase in the provision for
loan losses is primarily attributable to the transfer of certain commercial real
estate loans to held for sale in connection with the pending merger with NFB, as
described below, and to a lesser extent to the growth in the volume of loans
held in our loan portfolio and a change in the composition of loans comprising
our loan portfolio. During the year, consumer loans increased as a percentage of
the loan portfolio. Due to the nature of consumer lending, this growth has
resulted in a higher level of net loan charge-offs, which required an increase
in the provision for loan losses.
In connection with its merger agreement with NFB, the Bank committed to
sell certain commercial real estate loans to one borrower totaling $29.2 million
(including unfunded commitments of $0.9 million). The borrower has recently
exhibited a deteriorating financial condition but remains current as to
principal and interest. If the Bank is unable to sell the loans by the merger
closing date, certain principal stockholders of the Bank have agreed, at NFB's
request, to purchase the loans for $20 million. During the fourth quarter 2003,
the Bank recognized a loan charge-off of $9.2 million, placed the loans on
non-accrual status,
19
reclassified the remaining balance of the loans to the held-for-sale category
and replenished the allowance for loan losses through a charge to the provision
for loan losses of $9.2 million.
The allowance for loan losses was deemed adequate at $10.1 million as of
December 31, 2003 and $10.0 million as of December 31, 2002. Non-accrual loans
held in portfolio increased modestly from $4.3 million at December 31, 2002 to
$4.6 million at December 31, 2003. Loans held in portfolio accruing interest,
but on which interest or principal was 90 days or more past due, decreased from
$1.1 million at December 31, 2002 to $0.3 million at December 31, 2003. See
additional discussion under "Asset Quality."
Non-Interest Income: Non-interest income for the year 2003 decreased by
$6.8 million to $39.4 million from $46.2 million for the year 2002. The decrease
was attributable primarily to a reduction in net gains on securities sales of
$7.9 million to $1.2 million recorded in 2003 compared to $9.1 million recorded
in 2002, partially offset by increases in trust commissions and bank owned life
insurance income. Bank owned life insurance income was higher by $0.4 million in
2003 versus 2002 due primarily to the receipt of higher death benefits during
2003 from the death of the Bank's former chairman.
Non-Interest Expenses: Non-interest expenses increased by $21.9 million to
$132.2 million for the year 2003 versus $110.3 million for the year 2002. The
increase was due to several factors described in the following discussion.
Salaries and employee benefits expense increased $10.7 million to $64.6
million for the year 2003 versus $53.9 million for the year 2002. The increase
was attributable to a $7.9 million charge in 2003 for death benefits due the
estate of the former chairman under his employment contract, the full-year
impact of hiring employees to staff 16 branch locations opened throughout 2002
and the hiring of new senior managers for various positions, increased expense
under the Bank's stock appreciation rights benefit program which is based upon
the Bank's stock price at year-end, normal salary increases and an increase in
health benefit costs.
Pension expense (income) was income of $12.1 million in 2003 and expense of
$0.9 million in 2002. The Bank accounts for its pension expense by utilizing the
"immediate recognition" provisions of Statement of Financial Accounting
Standards No. 87. Accordingly, plan assets and the projected benefit obligation
are each marked-to-market at all period-ends and recorded in employee benefits
expense. Generally, the value of plan assets is subject to the inherent
volatility of the securities markets and the specific market performance of the
plan assets; the value of the projected benefit obligation (which can also have
a significant element of volatility) is subject to the level of interest rates,
the expected inflation rate, the number of employees covered under the plan, and
other factors. During 2003, the value of the Plan's assets increased $19.7
million due to large gains, both realized and unrealized, on certain equity
holdings, while the projected benefit obligation increased $7.2 million. The
increase in the projected benefit obligation was due in part to a 50 basis
points decline from 6.50% at year-end 2002 to 6.00% at year-end 2003 in the
Plan's discount rate, which resulted in a higher projected benefit obligation.
Occupancy and furniture and equipment expense increased $2.0 million to
$24.1 million for the year 2003 versus $22.1 million for the year 2002, mainly
due to branch expansion. Merger related expenses amounted to $7.2 million and
were comprised of investment banking, legal and accounting fees and charges
under certain employment contracts. The $6.0 million loss on early
extinguishment of debt relates to the early redemption of $100 million of FHLB
advances.
For the year 2003, mortgage servicing asset valuation expense amounted to a
charge of $1.0 million compared to a charge of $2.5 million in 2002. These
charges represent adjustments to the valuation allowance maintained for mortgage
servicing rights which is used to adjust the carrying amount of mortgage
servicing assets to their lower of cost or market value. As of December 31,
2003, the Bank's mortgage servicing asset, net of valuation allowance, had a
carrying value of $4.2 million.
All other expenses amounted to $41.4 million in 2003 and $31.0 million in
2002. The $10.4 million increase is attributable to $1.4 million relating to
auditing and legal fees incurred in connection with the re-audit of the Bank's
financial statements and the work performed by a Special Committee of
independent directors, $0.8 million of branch closing expenses, $1.1 million of
professional fees related to initiatives that
20
have been abandoned due to the merger agreement with NFB and other non-recurring
projects, expanded advertising and a general increase in expenses related to
expanded business activity.
The increase in all other expenses is also attributable to a $5.0 million
provision that was established in 2003 for probable losses incurred by the Bank
related to unreconciled general ledger accounts. During February 2004, the Bank
discovered unreconciled differences in certain general ledger accounts that
amounted to approximately $4.8 million. The Bank is reviewing this matter, but
as of yet cannot identify the specific transactions that caused the difference.
Based upon their nature, we believe that any substantial collection of these
items is remote and a loss from these differences is probable and have recorded
a liability of $5.0 million before taxes ($3.0 million after taxes) in the
fourth quarter 2003 to cover losses expected to arise from this review.
Provision for Income Taxes: The provision for income taxes amounted to
$2.3 million in 2003 and $13.3 million in 2002. The effective tax rate was 11.4%
and 25.9% in 2003 and 2002, respectively. The decline in the effective tax rate
was attributable to the Bank's having a higher proportion of income exempt from
taxes in 2003 compared with 2002, partly offset by the non-deductibility of
certain expenses related to the NFB merger. Tax-exempt income is derived
primarily from the securities portfolio and bank owned life insurance.
RESULTS OF OPERATIONS: 2002 COMPARED WITH 2001
Overview: Net income for 2002 amounted to $38.0 million, an increase of
10.1% from the $34.5 million earned in 2001. Diluted earnings per share for the
full year were $2.03, 10.3% higher than the $1.84 earned in 2001. The increase
in net income was attributable to increases in net interest income and
non-interest income and a decrease in the provision for income taxes, partly
offset by higher non-interest expenses. The improvement in net interest income
during 2002 was mainly attributable to a significant increase in demand and
savings deposits and lower rates paid on certificates of deposit, which enabled
the Bank to increase its net interest margin from 3.08% in 2001 to 3.23% in
2002. The increase in non-interest income primarily resulted from gains on the
sale of securitizations and residential mortgages that were originated by the
Bank and an increase in deposit service charges and other retail banking fees.
The higher level of non-interest expenses was mainly due to higher pension
expense and increases in salaries and wages, the latter being principally due to
the net addition of 15 banking branches and normal salary and benefit increases,
primarily health benefit costs.
Net Interest Income: Net interest income for the year 2002 increased by
15.6% to $117.6 million from $101.7 million for the year 2001. Net interest
income represents the difference between interest received on interest earning
assets, primarily loans and securities available for sale and held to maturity,
and the interest expense paid on interest bearing liabilities, primarily
deposits and borrowings. All interest income and expense amounts in this
discussion of net interest income are stated on a pre-tax adjusted basis. The
related yield, return on assets, spreads and the net interest margin reflect the
tax-equivalent adjustments that were made to income derived from any tax-exempt
loans and securities. All interest earning assets and interest-bearing
liabilities are discussed in terms of average balances.
The Bank's net interest income performance was driven primarily by its
low-cost core deposit sources of funds that are invested in interest earning
assets, principally loans and securities. Total average interest earning assets
increased $425 million in 2002 to $3.879 billion, from $3.454 billion in 2001.
Total average interest bearing liabilities increased $361 million in 2002, with
interest bearing deposit growth representing 95.3% of the growth in interest
bearing sources of funds. Net average non-interest bearing sources of funds
increased 15.0% to $485.8 million from $422.4 million in 2001. Growth in demand
deposits accounted for virtually all of this increase. The Bank's net interest
margin increased 15 basis points to 3.23% in 2002 from 3.08% in 2001.
Total interest income decreased from $236.5 million in 2001 to $224.4
million in 2002, attributable to a 102 basis point decrease in the average yield
earned on total interest earning assets (reflecting the lower rate environment
in 2002), partially offset by the previously mentioned increase in the volume of
total interest earning assets.
21
Interest and fees on loans decreased from $139.0 million in 2001 to $134.8
million in 2002. The decrease was attributable to the lower rate environment,
the continued prepayment by borrowers of higher yielding 1 -- 4 residential
mortgage loans and the securitization and sale of 1 -- 4 family residential
mortgage loans originated by the Bank. These factors contributed to a 64 basis
point decline in the average rate earned on loans. The decline in the average
rate earned on loans was partly offset by a moderate increase in loan volume,
spurred primarily by increases in other consumer lending (principally automobile
loans).
Interest and dividends on securities declined $7.5 million to $86.7 million
in 2002 from $94.2 million in 2001. The securities portfolio consists of
securities available for sale (average balance of $1,563 million in 2002;
average balance of $1,083 million in 2001) and securities held to maturity
(average balance of $84 million and $391 million in 2002 and 2001,
respectively). The decline in the total amount of interest and dividends
reflects the lower rate environment and the impact of prepayments on the Bank's
portfolio of mortgage-backed securities. The average yield earned on the
securities portfolio was 5.44% in 2002 and 6.50% in 2001. The impact of the
decline in yields was partially offset by an increase in the average balance of
securities available for sale, principally mortgage-backed securities. The
average balance of mortgage-backed securities increased $467 million to $920
million in 2002 from $453 million in 2001.
Interest expense on deposits decreased from $102.8 million in 2001 to $76.3
million in 2002. This decline reflected the lower rate environment in 2002. The
average balance of interest bearing core deposits (defined as savings, NOW and
money market deposits) increased 47.2% to $1.106 billion in 2002, while the rate
paid on such deposits decreased 62 basis points to 1.92%. The average balance of
time deposits decreased $10 million to $1.642 billion in 2002. The rate paid on
time deposits declined 171 basis points to 3.35%.
Interest expense on borrowed funds decreased $1.6 million to $30.4 million
in 2002 from $32.0 million in 2001, due to the lower rate environment in 2002.
The average balance of borrowed funds increased in 2002 to $645.2 million from
$628.4 million in 2001. During 2002, the Bank maintained its use of fixed rate
callable advances from the Federal Home Loan Bank at the level outstanding at
December 31, 2001, with the average balance outstanding during 2002 reaching
$600 million compared to average outstandings of $427.5 million in 2001.
Provision for Loan Losses: The Bank's provision for loan losses is
established periodically at levels determined by management to be necessary to
maintain the allowance for loan losses at an adequate level. During 2002 and
2001, in response to loan demand and a weakening economy, the Bank maintained
the provision at $2.2 million. The allowance for loan losses was deemed adequate
at $10.0 million as of December 31, 2002. Loans accounted for on a non-accrual
basis decreased from $5.6 million at December 31, 2001 to $4.3 million at
December 31, 2002. Loans accruing interest, but on which interest or principal
was 90 days or more past due, increased from $0.9 million at December 31, 2001
to $1.1 million at December 31, 2002. See additional discussion under "Asset
Quality."
Non-Interest Income: Non-interest income for the year 2002 increased by
$13.5 million to $46.2 million from $32.7 million for the year 2001. The
increase was attributable primarily to $11.7 million in gains on sales of
securitizations and loans in 2002 on sales of $524.4 million of residential
mortgages that were originated by the Bank. In addition, service charges and
other retail banking fees increased by $3.9 million, driven by increased sales
of annuities and mutual fund products at the Bank's TC Financial subsidiary.
Bank owned life insurance income was higher by $1.1 million in 2002 versus 2001
due primarily to the receipt of a death benefit. Net realized gains on sales of
available for sale securities were $9.1 million in 2002 and $12.4 million in
2001.
Non-Interest Expenses: Non-interest expenses increased by $26.8 million to
$110.3 million for the year 2002 versus $83.5 million for the year 2001. A
significant portion of this increase, $15.1 million, was due to pension expense
(income) that is accounted for under the "immediate recognition" provisions of
Statement of Financial Accounting Standards No. 87. For the years ended December
31, 2002 and 2001, the net effects of marking to market such assets and
obligations under this accounting method were a $0.9 million expense in 2002 and
a $14.2 million income in 2001.
22
Salaries and employee benefits, other than pension expense, increased by
$5.4 million to $53.9 million for the year 2002 versus $48.5 million for the
year 2001. This was due largely to an increase in the number of employees
resulting from a higher number of branches in operation, normal salary increases
and an increase in health benefit costs. Occupancy expense increased by $1.3
million to $13.7 million in 2002 from $12.4 million in 2001 due to the
aforementioned increase in the number of branches. Other expense increased by
$5.0 million for the year 2002 versus the year 2001, largely due to higher
outside data processing services related to increased check processing volumes,
other real estate owned ("OREO") write-downs of $2.0 million in 2002 and an
increase in the valuation allowance for the Bank's mortgage servicing assets to
$2.5 million for 2002 versus $1.6 million in 2001. As of December 31, 2002, the
Bank's mortgage servicing asset was valued at $2.1 million.
Provision for Income Taxes: The provision for income taxes amounted to
$13.3 million in 2002 and $14.2 million in 2001. The effective tax rate was
25.9% and 29.1% in 2002 and 2001, respectively. The decline in the effective tax
rate was attributable to the Bank having a higher proportion of income exempt
from taxes in 2002 compared with 2001. Tax-exempt income is derived primarily
from the securities portfolio and bank owned life insurance.
CLOSING OF BRANCHES
During the fourth quarter 2003, the Bank completed the previously announced
closing of 9 in-store branches, recognizing a pretax charge of $0.8 million.
This was in addition to the one in-store branch closed during the second quarter
2003 at an insignificant cost. In January 2004, the Bank announced plans to
close an additional twenty in-store branches, continuing a strategy of closing
under-performing locations. These closings are expected to occur no later than
May 2004, prior to the anticipated closing of the merger with NFB. It is
estimated that a pretax charge of $7.0 million will be recognized in the second
quarter 2004 with respect to the twenty branches that are being closed.
Consistent with its previous experience, the Bank believes that it will retain a
major portion of the deposits and customer relationships of these branches. The
Bank estimates that the 29 in-store closings will contribute $4.0 million in
pretax earnings on an annual basis.
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to our average
interest-earning assets and average interest-bearing liabilities and reflects
the average yield on assets and the average cost of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average balances of assets or liabilities, respectively, for the periods
shown. The tables also present information for the periods indicated with
respect to the difference between the weighted average yield earned on interest-
earning assets and the weighted average rate paid on interest-bearing
liabilities, or "interest rate spread," which banking institutions have
traditionally used as an indicator of profitability. Another indicator of an
institution's net interest income is its "net interest margin," which is its net
interest income divided by its average balance of interest-earning assets. Net
interest income is affected by the interest rate spread and by the relative
amounts of interest-earning assets and interest-bearing liabilities. When
interest-earning assets
23
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income.
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
2003 2002
------------------------------------ --------------------------
AVERAGE INTEREST & AVERAGE AVERAGE INTEREST &
BALANCE FEES RATE BALANCE FEES
---------- ------------- ------- ---------- -------------
(DOLLARS IN THOUSANDS, INCOME ON A TAX-EQUIVALENT BASIS)
ASSETS
Interest-earning assets:
Loans:
Commercial................. $ 168,411 $ 10,213 6.06% $ 143,847 $ 9,559
Installment................ 769,499 45,114 5.86 672,234 45,310
Real estate................ 1,168,559 79,558 6.81 1,074,663 80,545
---------- -------- ---------- --------
Total loans.............. 2,106,469 134,885 6.40 1,890,744 135,414
---------- -------- ---------- --------
Securities:
Taxable.................... 1,416,800 55,289 3.90 1,381,937 70,929
Non-taxable................ 275,134 20,218 7.35 265,265 18,645
---------- -------- ---------- --------
Total securities......... 1,691,934 75,507 4.46 1,647,202 89,574
---------- -------- ---------- --------
Money market investments..... 148,350 1,777 1.18 340,600 6,555
---------- -------- ---------- --------
Total interest-earning
assets................. 3,946,753 212,169 5.38 3,878,546 231,543
---------- -------- ---------- --------
Noninterest-earning assets:
Cash and due from banks.... 109,625 113,927
Other assets............... 251,523 211,370
Allowance for loan
losses................... (10,342) (9,901)
---------- ----------
Total noninterest-earning
assets................. 350,806 315,396
---------- ----------
Total assets.................. $4,297,559 $4,193,942
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings, NOW and money market
deposits................... $1,230,668 14,641 1.19% $1,106,007 21,273
Other time deposits.......... 762,819 22,001 2.88 875,757 34,246
Certificates of deposits
$100,000 and over.......... 738,980 13,902 1.87 765,817 20,814
---------- -------- ---------- --------
Total interest-bearing
deposits............... 2,732,467 50,544 1.85 2,747,581 76,333
---------- -------- ---------- --------
Borrowings................... 647,313 28,103 4.28 645,175 30,413
---------- -------- ---------- --------
Total interest-bearing
liabilities............ 3,379,780 78,647 2.33 3,392,756 106,746
---------- -------- ---------- --------
Noninterest-bearing
liabilities and stockholders'
equity:
Demand deposits............ 607,735 528,457
Other liabilities.......... 41,239 35,895
---------- ----------
Total noninterest-bearing
liabilities............ 648,974 564,352
Stockholders' equity.......... 268,805 236,834
---------- ----------
Total liabilities and
stockholders' equity......... $4,297,559 $4,193,942
========== ==========
Net interest income/spread
(tax-equivalent basis)....... $133,522 3.05% $124,797
======== ========
Net interest margin
(tax-equivalent basis)....... 3.39%
Tax equivalent adjustments:
Loans........................ $ 508 $ 663
Investment securities........ 7,076 6,526
-------- --------
Total.................... $ 7,584 $ 7,189
======== ========
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
2002 2001
------- ------------------------------------
AVERAGE AVERAGE INTEREST & AVERAGE
RATE BALANCE FEES RATE
------- ---------- ------------- -------
(DOLLARS IN THOUSANDS, INCOME ON A TAX-EQUIVALENT BASIS)
ASSETS
Interest-earning assets:
Loans:
Commercial................. 6.65% $ 129,317 $ 10,380 8.03%
Installment................ 6.74 589,205 45,002 7.64
Real estate................ 7.49 1,069,983 84,196 7.87
---------- --------
Total loans.............. 7.16 1,788,505 139,578 7.80
---------- --------
Securities:
Taxable.................... 5.13 1,308,277 83,644 6.39
Non-taxable................ 7.03 165,295 12,083 7.31
---------- --------
Total securities......... 5.44 1,473,572 95,727 6.50
---------- --------
Money market investments..... 1.90 191,899 6,023 3.14
---------- --------
Total interest-earning
assets................. 5.97 3,453,976 241,328 6.99
---------- --------
Noninterest-earning assets:
Cash and due from banks.... 92,329
Other assets............... 187,002
Allowance for loan
losses................... (8,682)
----------
Total noninterest-earning
assets................. 270,649
----------
Total assets.................. $3,724,625
==========
LIABILITIES AND STOCKHOLDERS'
Interest-bearing liabilities:
Savings, NOW and money market
deposits................... 1.92% $ 751,289 19,107 2.54%
Other time deposits.......... 3.91 854,203 45,775 5.36
Certificates of deposits
$100,000 and over.......... 2.72 797,672 37,925 4.75
---------- --------
Total interest-bearing
deposits............... 2.78 2,403,164 102,807 4.28
---------- --------
Borrowings................... 4.71 628,370 31,973 5.09
---------- --------
Total interest-bearing
liabilities............ 3.15 3,031,534 134,780 4.45
---------- --------
Noninterest-bearing
liabilities and stockholders'
equity:
Demand deposits............ 460,147
Other liabilities.......... 26,523
----------
Total noninterest-bearing
liabilities............ 486,670
Stockholders' equity.......... 206,421
----------
Total liabilities and
stockholders' equity......... $3,724,625
==========
Net interest income/spread
(tax-equivalent basis)....... 2.82% $106,548 2.54%
========
Net interest margin
(tax-equivalent basis)....... 3.23% 3.08%
Tax equivalent adjustments:
Loans........................ $ 616
Investment securities........ 4,233
--------
Total.................... $ 4,849
========
Loans include nonaccruing loans, the effect of which is to reduce the rate
earned on loans. Income is stated on a tax-equivalent basis by adding to income
an amount equal to the tax benefit of owning tax-exempt securities and loans
based on the statutory federal rate in effect (35% in 2003, 2002 and 2001).
24
RATE/VOLUME ANALYSIS
The following table sets forth information (on a taxable equivalent basis)
regarding the extent to which changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have affected
our interest income and expense during the periods indicated. Average balances
and rates include non-accruing loans. For each category of interest-earning
asset and interest-bearing liability, information is provided for changes
attributable to (i) changes in volume (changes in volume multiplied by old
rate), (ii) changes in rates (change in rate multiplied by old volume) and (iii)
total change. Changes in rate/volume (changes in rate multiplied by the changes
in volume) are allocated proportionately between changes in rate and changes in
volume.
YEAR ENDED DECEMBER 31, 2003 YEAR ENDED DECEMBER 31, 2002
COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------------------- ----------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
----------------------------- ----------------------------
VOLUME RATE NET VOLUME RATE NET
------- -------- -------- ------- -------- -------
(IN THOUSANDS)
Interest-earning assets:
Loans............................. $13,436 $(13,965) $ (529) $(9,874) $ 5,710 $(4,164)
Securities........................ 1,183 (15,250) (14,067) 8,713 (14,866) (6,153)
Money market investments.......... (3,122) (1,656) (4,778) 3,861 (3,329) 532
------- -------- -------- ------- -------- -------
Total interest income............. 11,497 (30,871) (19,374) 2,700 (12,485) (9,785)
------- -------- -------- ------- -------- -------
Interest-bearing liabilities:
Savings, NOW and money market
deposits........................ 1,918 (8,550) (6,632) 6,348 (4,182) 2,166
Other time deposits............... (3,837) (8,408) (12,245) 999 (12,528) (11,529)
Certificates of deposit $100,000
and over........................ (617) (6,294) (6,911) (1,190) (15,921) (17,111)
Borrowings........................ (540) (1,771) (2,311) 824 (2,384) (1,560)
------- -------- -------- ------- -------- -------
Total interest expense............ (3,076) (25,023) (28,099) 6,981 (35,015) (28,034)
------- -------- -------- ------- -------- -------
Net interest income............... $14,573 $ (5,848) $ 8,725 $(4,281) $ 22,530 $18,249
======= ======== ======== ======= ======== =======
ASSET/LIABILITY MANAGEMENT AND MARKET RISK DISCLOSURE
We originate and invest in interest-earning assets and solicit
interest-bearing and non-interest bearing deposit accounts. Our operations are
subject to risk resulting from interest rate fluctuations to the extent that
there is a difference between the amount of our interest-earning assets and the
amount of interest-bearing liabilities that mature, re-price, or are
prepaid/withdrawn in specified time periods. Interest rate risk is the risk that
our earnings and/or net portfolio value, as defined below, will change when
interest rates change. The principal objective of our asset/liability management
activities is to provide maximum levels of net interest income while maintaining
acceptable levels of interest rate and liquidity risk.
Management monitors and controls interest rate risk through a variety of
techniques including use of interest rate sensitivity models and traditional
interest rate sensitivity gap analysis. Through use of the models, we project
future net interest income and then estimate the effect on projected net
interest income of various changes in interest rates and balance sheet growth
rates. We also use the models to calculate the change in net portfolio value
over a range of interest rate change scenarios. Net portfolio value is the
present value of expected future cash flows from assets less the present value
of expected cash flows from liabilities. Traditional gap analysis involves
arranging interest-earning assets and interest-bearing liabilities by re-pricing
periods and then computing the difference, or interest-rate sensitivity gap,
between the assets and liabilities which are estimated to re-price during each
time period and cumulatively through the end of each time period. The dollar
difference between rate sensitive assets and rate sensitive liabilities within
given time
25
periods is referred to as the "interest sensitivity gap." By this definition, a
"gap" has an asset, liability and time component.
A negative gap is created when rate sensitive liabilities exceed rate
sensitive assets within a particular time frame. Conversely, a positive gap
occurs when the Bank has more rate sensitive assets than rate sensitive
liabilities within a particular time frame. Negative gaps result when an
institution borrows on a shorter-term basis and lends on a longer-term basis.
Positive gaps occur when an institution borrows on a longer-term basis and lends
on a shorter-term basis. In an increasing rate environment, earnings will
generally increase with a positive short-term gap. Earnings will generally
decrease in a rising rate environment when the short-term gap is negative.
Both interest rate sensitivity modeling and gap analysis involve a variety
of significant estimates and assumptions and are done at a specific point in
time. Interest rate sensitivity modeling requires, among other things, estimates
of how much and when yields and costs on individual categories of
interest-earning assets and interest-bearing liabilities will respond to general
changes in market interest rates, future cash flows and discount rates.
Gap analysis requires estimates as to when individual categories of
interest sensitive assets and liabilities will re-price and assumes that assets
and liabilities assigned to the same re-pricing period will re-price at the same
time and in the same amount. Like sensitivity modeling, gap analysis does not
take into account the fact that the re-pricing of some assets and liabilities is
discretionary and subject to competitive and other pressures.
Changes in the estimates and assumptions made for interest rate sensitivity
modeling and gap analysis could have a significant impact on projected results
and conclusions. Therefore, these techniques may not accurately reflect the
impact of general interest rate movements on our net interest income or net
portfolio value.
Our models provide information pursuant to the market risk disclosure rules
set forth in Item 305 of Regulation S-K of the Securities and Exchange
Commission. The information is based on significant estimates and assumptions
and constitutes a "forward looking statement" within the meaning of that term as
set forth in the Private Securities Litigation Reform Act of 1995. The base case
information shows an estimate of our net portfolio value at December 31, 2003
arrived at by discounting estimated future cash flows at current market rates
and an estimate of future net interest income assuming that maturing assets or
liabilities are replaced with new balances of the same type, in the same amount,
and at the same rate level. The rate change information shows estimates of net
portfolio value at December 31, 2003 and future net interest income assuming
rate changes of varying amounts. Rate changes are assumed to occur uniformly
across the yield curve regardless of the duration to maturity or re-pricing of
specific assets and liabilities. In addition, for purposes of calculating net
portfolio value, the indicated rate changes are assumed to be shock or immediate
changes, while for purposes of projecting future net interest income the
indicated rate changes are assumed to occur evenly over a twelve-month time
period. In projecting future net interest income under the indicated rate change
scenarios, activity is simulated by replacing maturing balances with new
balances of the same type, in the same amount, but at the current rate level and
adjusting re-pricing balances to the current rate level.
Based on the results of our interest simulation model as of December 31,
2003, the impact of a 100 basis-point change in rates occurring evenly over a
twelve-month period would be an improvement of $1.9 million, or 1.4%, in net
interest income if rates decreased, compared to a decline of $0.5 million, or
0.4%, in net interest income if rates increased. The impact of an immediate 100
basis point change in rates at December 31, 2003 would be an increase of $44.7
million, or 7.7%, in net portfolio value if rates decreased, versus a decrease
of $91.2 million, or 15.7%, in net portfolio value if rates increased.
FINANCIAL CONDITION: DECEMBER 31, 2003 COMPARED TO DECEMBER 31, 2002
Total assets at December 31, 2003 were $4.278 billion, a decrease of $133
million, or 3.0%, compared to $4.411 billion at December 31, 2002. Loans,
including loans held for sale, increased by $157 million, or
26
7.7%, to $2.199 billion at December 31, 2003 as compared to $2.042 billion at
December 31, 2002 despite loan securitizations and sales totaling $567 million
during 2003. Total securities decreased by $249 million, or 12.6%, to $1.731
billion at December 31, 2003 as compared to $1.980 billion at December 31, 2002.
The decline in total assets reflected a de-leveraging of the balance sheet as
total deposits declined 3.8% or $131 million to $3.307 billion at December 31,
2003 as compared to $3.437 billion at December 31, 2002. This reflected a
decrease in time deposits of $180 million or 11.0% that was partly offset by an
increase in core deposits, primarily non-interest bearing demand deposits, of
$49 million or 2.7%. Total stockholders' equity decreased $0.9 million to $263.4
million at December 31, 2003 as compared to $264.3 million at December 31, 2002.
Net income of $18.1 million for the year ended December 31, 2003 and $3.6
million related to the issuance of 174,684 shares of common stock through the
exercise of stock options and other stock option related transactions, were
offset by a decline of $7.3 million (after tax) in unrealized gains on
securities available for sale, the repurchase of 99,792 shares of common stock
at a total cost of $2.8 million and cash dividends of $12.5 million during the
year ended December 31, 2003. Under the repurchase program authorized by the
Board of Directors on September 25, 2002, 82,308 shares remain to be purchased
as of December 31, 2003. A $50 million increase in securities sold under
agreements to repurchase and other borrowings was offset by a $50 million
decrease in Federal Home Loan Bank advances.
The Bank restructured a portion of its borrowings from the FHLB as follows:
- In late June 2003, the Bank prepaid a $50 million callable advance
bearing interest at 3.42%, resulting in the Bank paying a prepayment fee
of $2,758,000 ($1,631,000 after taxes) that was recorded in the
Consolidated Statement of Income in the caption "Loss on early
extinguishment of debt."
- In August 2003, the Bank entered into a $50 million non-callable advance
due August 11, 2006 bearing interest at 2.58%.
- In late September 2003, the Bank prepaid two $25 million callable
advances bearing interest at 3.70% and 4.34%, respectively, resulting in
the Bank paying a prepayment fee of $3,269,000 ($1,934,000 after taxes)
that was recorded in the Consolidated Statement of Income in the caption
"Loss on early extinguishment of debt."
- In September 2003 and October 2003, respectively, the Bank entered into
two $25 million 2-year term repurchase agreements bearing interest at
1.825% and 1.76%, respectively.
- In July 2003, the Bank entered into interest rate swap transactions with
embedded options for $175 million of convertible advances from the FHLB
that are designated as fair value xxxxxx. These xxxxxx are designed to
convert fixed rate borrowings into floating rate borrowings and to
eliminate any call risk to which the Bank had been subject. The $175
million notional interest rate swaps convert the fixed interest rates
that the Bank was paying on three separate advances from the FHLB at
interest rates ranging from 4.42% to 5.50% to floating interest rates of
3-month LIBOR plus spreads ranging from 174 to 231 basis points. The
embedded option gives the Bank the right to convert the fixed rate
received under the interest rate swaps to a 3-month LIBOR rate. This
right will be exercised if the FHLB calls and the Bank converts the
advances held by the Bank into 3-month LIBOR instruments. Under the
contractual terms of the advances, the Bank can choose to convert each
advance into either a floating or fixed interest rate at then current
market prices based upon the then current product listing offered by the
FHLB. With the embedded option, the Bank eliminated any interest rate
risk associated with the call provision of the FHLB advances. The
effectiveness of the fair value hedge is evaluated quarterly. The hedge
was effective through December 31, 2003.
The Bank maintains a portfolio of loans held for sale that is valued at the
lower of cost or estimated fair value on an aggregate basis. At December 31,
2003, loans held for sale was comprised of $46,981,000 of performing 1 -- 4
family residential mortgage loans and $19,114,000 of loans to a single
commercial real estate customer. The aggregate fair value of the 1 -- 4 family
residential mortgage loans in the held for sale portfolio exceeded their cost.
In connection with its merger agreement with NFB, the Bank committed to
sell the loans held for sale related to the commercial real estate customer. The
customer has recently exhibited a deterioration in
27
financial condition. If the Bank is unable to sell the loans prior to the
effectiveness of the merger, certain principal stockholders of the Bank have
agreed, at NFB's request, to purchase the loans for $20 million. Accordingly, in
the fourth quarter of 2003 the Bank recognized a loan charge-off and an increase
in the provision for loan losses of $9.2 million, placed the loans on
non-accrual status and reclassified the remaining $19.1 million balance of the
loans to the held for sale category.
With the exception of this commercial real estate customer, the Bank
anticipates that in the future it will only sell or securitize and sell loans
that are performing.
Loans Sold or Securitized and Sold with Recourse: The Bank, under certain
limited circumstances, sells or securitizes and sells 1 -- 4 family residential
mortgage loans with recourse provisions. At the time these mortgage loans are
sold or securitized and sold, an evaluation is made of the potential recourse
liability. This evaluation takes into account the Bank's underwriting standards
for originating 1 -- 4 family residential mortgage loans, the value of the
mortgaged property, the borrower's payment history, the Bank's historical
experience with these categories of loans and other factors noted in the
discussion of the Allowance for Loan Losses. To date, at the time of sale, all
of the Bank's 1 -- 4 family residential mortgage loans have been performing in
accordance with their terms and the recourse liability has been estimated at
zero. At December 31, 2003, the principal amount of loans sold with recourse
amounted to $2.2 million.
The Bank also considers mortgage loans sold with recourse in the
determination of the fair value of its mortgage servicing rights. Due to the
small amount of outstanding loans sold with recourse, the impact of the recourse
provisions has been immaterial to the mortgage servicing asset.
In connection with future sales or securitizations and sales of mortgage
loans, the Bank does not anticipate selling loans with recourse. However, the
decision to sell loans with recourse is often a function of market conditions.
At this time, the Bank cannot predict when or if it will sell such loans.
Off-Balance Sheet Arrangements: The following table shows the amounts and
expected maturities of significant commitments, as of December 31, 2003. Further
discussion of these commitments is included in Item 8. Financial Statements and
Supplementary Data, Note 18 to the Consolidated Financial Statements.
1 YEAR OR LESS 1-3 YEARS 3-5 YEARS OVER 5 YEARS TOTAL
-------------- --------- --------- ------------ -------
($ IN THOUSANDS)
Standby letters of credit....... $18,838 $1,081 $11 $ -- $19,930
======= ====== === ===== =======
Commitments under standby letters of credit, both financial and
performance, do not necessarily represent future cash requirements, in that
these commitments often expire without being drawn upon.
Contractual Obligations: The following table shows the contractual
obligations of the Bank by contractual payment period as of December 31, 2003.
Further discussion of these obligations is included in
28
Item 8. Financial Statements and Supplementary Data, Notes 13, 17 and 18 to the
Consolidated Financial Statements.
1 YEAR OR LESS 1-3 YEARS 3-5 YEARS OVER 5 YEARS TOTAL
-------------- --------- --------- ------------ --------
($ IN THOUSANDS)
Securities sold under
agreements to repurchase and
other borrowings............ $71,331 $50,000 $ -- $ -- $121,331
Federal Home Loan Bank
advances.................... -- 225,000 100,000 225,000 550,000
Liability for stock
appreciation rights
outstanding................. 1,994 -- -- -- 1,994
Obligations under operating
leases...................... 5,647 9,544 6,351 8,375 29,917
Purchased services............ 8,658 4,313 157 -- 13,128
Borrowings under securities sold under agreements to repurchase and other
borrowings and Federal Home Loan Bank advances have defined terms and, in the
case of FHLB advances, a majority are callable at the option of the issuer at
specified dates in 2004 through 2006. The table above is based upon contractual
maturity dates.
The liability for stock appreciation rights ("SARs") outstanding relates to
stock options granted to executive management in 2000 and 2001 that have SARs
attached and expire ten years from the date of grant. The liability at December
31, 2003 represents the product of the excess of the Bank's year-end stock price
over the stock price on grant date multiplied by the number of vested SARs.
Vested SARs are exercisable at any time up to the expiration date of the grant.
The obligation under operating leases relates to banking facilities and
remote ATMs that are located on property leased by the Bank. The banking
facility leases are generally for five-year terms with renewal clauses.
In the normal course of business, the Bank enters into various data
processing services and other service agreements. These contracts have both
fixed fees and variable fees based upon usage. These agreements generally have
terms ranging from 1 to 5 years and are cancelable with notice to the vendor.
LENDING ACTIVITIES
General. The bulk of our lending business consists of residential,
commercial and construction loans secured by real estate. We also offer a full
range of secured and unsecured lending products to commercial and industrial
entities and individuals. We operate in accordance with guidelines approved by
our Board of Directors that address loan types, target markets, underwriting and
collateral requirements, terms, interest rate and yield considerations,
compliance with laws and regulations and limitations on loans to one borrower.
In addition, our loan policy outlines the appraisal requirements when funding a
loan secured by real estate and also covers the requirements for appraisals on
renewals. These policies are reviewed and re-approved at least annually by our
Board of Directors. We have focused our lending activities on the types of loans
that we believe will be most in demand by our target customers. The Bank's legal
lending limit as of December 31, 2003 was $39.3 million for unsecured lending
and $65.5 million for secured lending.
Our total loans, excluding loans held for sale, were $2.133 billion at
December 31, 2003, compared to $1.791 billion at December 31, 2002. Loans held
for sale amounted to $66 million at December 31, 2003 and $251 million at
December 31, 2002. In addition, we sold or securitized loans of $567 million and
$357 million for the years ended December 31, 2003 and 2002, respectively.
29
Loan Portfolio Composition. The following table sets forth selected data
relating to the composition of our loan portfolio at the dates indicated.
AT DECEMBER 31,
--------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
($ IN THOUSANDS)
Loans held in portfolio:
Commercial, financial & agricultural
loans............................... $ 192,893 $ 134,001 $ 128,189 $ 116,015 $ 84,292
Consumer installment loans(1)......... 682,116 642,462 533,081 441,727 385,889
Real estate construction loans........ 75,852 65,406 93,327 75,662 86,188
Mortgage loans:
Commercial mortgage loans........... 571,357 625,724 574,117 443,195 393,055
Residential mortgage loans.......... 610,488 322,977 490,450 525,473 575,473
---------- ---------- ---------- ---------- ----------
Total mortgage loans............. 1,181,845 948,701 1,064,567 968,668 968,528
---------- ---------- ---------- ---------- ----------
Total loans held in portfolio......... $2,132,706 $1,790,570 $1,819,164 $1,602,072 $1,524,897
========== ========== ========== ========== ==========
Loans held for sale:
Commercial, financial & agricultural
loans............................... $ 3,582 $ -- $ -- $ -- $ --
Real estate construction loans........ 13,650 -- -- -- --
Mortgage loans:
Commercial mortgage loans........... 1,882 -- -- -- --
Residential mortgage loans.......... 46,981 251,284 -- -- --
---------- ---------- ---------- ---------- ----------
Total mortgage loans............. 48,863 251,284 -- -- --
---------- ---------- ---------- ---------- ----------
Total loans held for sale............. $ 66,095 $ 251,284 $ -- $ -- $ --
========== ========== ========== ========== ==========
---------------
(1) Includes automobile and direct consumer loans.
Loan Maturity Schedules. Approximate maturities of the Bank's loans held
in portfolio, by category, as of December 31, 2003 are summarized in the
following chart. Maturities have been determined based upon contractual terms,
except that maturities within one year include loans that will be renewed
(rolled over) or extended in the normal course of business. Of the loans that
are due after one year, those with predetermined interest rates amounted to
$1.654 billion and those with floating or adjustable interest rates amounted to
$261 million.
MATURITIES
----------------------------------------------
WITHIN 1 OVER 5
YEAR 1-5 YEARS YEARS TOTAL
-------- --------- ---------- ----------
($ IN THOUSANDS)
Commercial, financial and agricultural
loans................................. $126,843 $ 60,328 $ 5,722 $ 192,893
Consumer installment loans.............. 25,551 506,609 149,956 682,116
Real estate construction loans.......... 43,002 32,850 -- 75,852
Mortgage loans:
Commercial mortgage loans............. 17,850 127,826 425,681 571,357
Residential mortgage loans............ 4,855 15,441 590,192 610,488
-------- -------- ---------- ----------
Total mortgage loans.................... 22,705 143,267 1,015,873 1,181,845
-------- -------- ---------- ----------
Total loans............................. $218,101 $743,054 $1,171,551 $2,132,706
======== ======== ========== ==========
Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The expected life, often referred to as
average life, of long-term loans is substantially less than their contractual
terms due to prepayments. In addition, due-on-sale clauses in most of our loans
generally give us
30
the right to declare a loan due and payable in the event, among other things,
that a borrower sells the real property subject to a mortgage and the loan is
not repaid. The average life of mortgage loans tends to increase when current
mortgage loan market rates are substantially higher than rates on existing
mortgage loans and tends to decrease when current mortgage loan market rates are
substantially lower than rates on existing mortgage loans.
Loan Sales. It is our intent when a loan is originated for portfolio, to
hold it until it matures or pays off. However, as part of management's effort to
increase revenue, reduce credit and interest-rate risk and strengthen the Bank's
capital, we may, based upon market conditions, designate selected 1 -- 4 family
residential mortgage loans to be sold or securitized and sold. Residential
mortgages identified as held for sale are segregated in the statement of
condition and carried at the lower of aggregate cost or market. When the loans
are sold or securitized and sold, we allocate the cost of the loan between the
respective fair values of servicing and loan principal. Any excess or deficiency
of sale proceeds compared to the allocated cost is recorded in non-interest
income as gain (loss) on sales of securitizations and loans. When loans are
securitized and held by the Bank, the loans are transferred to the Bank's
securities available for sale portfolio. These securities are then
marked-to-market with any adjustment recorded in accumulated other comprehensive
income.
Real Estate Loans. Real estate loans, both held for sale and held in
portfolio, represent our greatest concentration of loans. We make real estate
loans for the purchase, construction and refinancing of 1 -- 4 family and
commercial properties. Our real estate loans totaled $1.320 billion at December
31, 2003, representing 60% of our total loans outstanding.
We pursue an aggressive policy of evaluating and monitoring any real estate
loan that becomes troubled, including reappraisal when appropriate. We recognize
and reserve for potential exposures as soon as identified. However, our ability
to minimize losses on foreclosed properties is affected by each property's
individual nature and characteristics, the status of the real estate market at
the time, general economic conditions and other factors.
Residential Mortgage Loans. Residential mortgage loans, both held for sale
and held in portfolio, include loans secured by first or second mortgages on
1 -- 4 family residences and totaled $657 million at December 31, 2003. These
loans are generated directly by the Bank through both our branch staff and a
dedicated sales force aided by referrals from real estate agents, builders,
attorneys and financial planners. Substantially all of our residential loans are
secured by properties located within our market area, although we have made
loans secured by properties outside our market area to qualifying existing
customers. Of our residential mortgage loans as of December 31, 2003, 11% have
variable rates of interest while 89% have fixed interest rates.
Our 1 -- 4 family residential mortgage loans are originated with maturities
ranging up to 30 years. Theses loans are either fully amortizing with monthly
payments sufficient to repay the total amount of the loan or amortizing with a
balloon feature, typically due in fifteen years or less. We review information
concerning the income, financial condition, employment history and credit
history when evaluating the creditworthiness of an applicant for a residential
mortgage loans.
Commercial Mortgage Loans. Our commercial mortgage loans, both held for
sale and held in portfolio, totaled $573 million at December 31, 2003. These
loans are secured principally by commercial buildings for multi-family, office,
retail, manufacturing, hotel and motel, self-storage and warehouse space.
Generally, when we underwrite commercial mortgage loans, we require the personal
guaranty of borrowers and a demonstrated cash flow capability sufficient to
service the debt. Loans secured by commercial real estate may be larger and
involve a greater degree of risk than 1 -- 4 family residential mortgage loans,
and payments on such loans are often dependent on the successful operation or
management of the properties and the underlying business. We make commercial
mortgage loans at both fixed and variable rates for terms up to 20 years with
balloon maturities or rate resets at 5, 10 or 20 years. Of our commercial
mortgage loans, as of December 31, 2003, 9% have variable rates of interest
while 91% have fixed interest rates.
31
Construction Loans. We originate 1 -- 4 family residential construction
loans for the construction of custom homes (where the home buyer is the borrower
and we have pre-approved the permanent financing), and we also provide
construction financing to builders. We lend to builders who have demonstrated a
favorable record of performance and profitable operations and who are building
in our market area. We also make commercial real estate construction loans where
we are either willing to provide the permanent financing as mentioned in the
preceding paragraph or with a pre-arranged permanent financing commitment from
an unrelated third party. We limit our construction lending requests and utilize
independent professionals to inspect the project prior to paying any draw
requests from the builder. With few exceptions, the Bank requires personal
guarantees on construction loans. Construction loans, both held for sale and
held in portfolio, aggregated $90 million at December 31, 2003 and all have
variable interest rates.
Commercial Loans. At December 31, 2003, our commercial loan portfolio
equaled $193 million or 9% of our total loans. Commercial loans include both
secured and unsecured loans and lines of credit for working capital, expansion
and other business purposes, including asset-based loans under full or partial
dominion. Short-term working capital loans generally are secured by accounts
receivable, inventory or equipment. The Bank also makes term loans secured by
equipment and real estate. Lending decisions are based on an evaluation of the
financial strength, management and credit history of the borrower, and the
quality of the collateral securing the loan. With few exceptions, the Bank
requires personal guarantees and secondary sources of repayment.
Commercial loans generally provide greater yields and re-price more
frequently than other types of loans, such as real estate loans. More frequent
re-pricing means that yields on our commercial loans adjust with changes in
interest rates. More than 75% of commercial loans have variable interest rates.
Consumer Loans. Consumer lending includes loans to individuals for both
direct and indirect automobile loans and miscellaneous secured and unsecured
personal loans. Consumer loans generally can carry significantly greater risks
than other loans, even if secured, when the collateral securing a defaulted
consumer loan may not provide an adequate source of repayment of the loan. We
attempt to manage the risks inherent in consumer lending by following
established credit guidelines and underwriting practices designed to minimize
risk of loss and a particular focus on the collection process. Consumer loans
generally have fixed interest rates.
ASSET QUALITY
Nonperforming Assets. The following table sets forth information with
respect to our nonperforming assets at the dates indicated. During the five
years ended December 31, 2003, the Bank did not participate in transactions in
which a debtor transferred assets to the Bank, as creditor, in exchange for a
reduction of outstanding debt, other than foreclosures and other exercises of
rights as a secured creditor in the ordinary course of business.
AT DECEMBER 31,
-----------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
($ IN THOUSANDS)
Non-accrual loans(1).................
Held for sale(2)................... $19,114 $ -- $ -- $ -- $ --
Held in portfolio.................. 4,561 4,339 5,621 5,136 6,628
Other real estate owned, net of
reserves(3)........................ 3,271 9,846 13,387 15,905 17,941
------- ------- ------- ------- -------
Total non-performing assets.......... $26,946 $14,185 $19,008 $21,041 $24,569
======= ======= ======= ======= =======
Loans contractually past due 90 days
or more as to principal or interest
and still accruing interest........ $ 285 $ 1,112 $ 881 $ 898 $ 613
======= ======= ======= ======= =======
---------------
(1) Non-accrual status denotes any loan where the delinquency exceeds 90 days
past due and in the opinion of management the collection of additional
interest is doubtful. After a careful review of individual loan
32
history and related collateral by management, the loan may continue to
accrue interest. If, however, in the opinion of management, the collection
of additional interest is doubtful, the loan will remain in non-accrual
status. Payments received on a non-accrual loan are either applied to the
outstanding principal balance or recorded as interest income, depending on
our assessment of the collectibility of the loan. During 2003, 2002, 2001,
2000 and 1999, gross interest income of $402,000, $384,000, $481,000,
$471,000 and $694,000, respectively, would have been recorded on loans held
in portfolio accounted for on a non-accrual basis at the end of the year if
the loans had been current throughout the year. Instead, interest on such
loans included in income during the respective years was not significant.
(2) The balance of non-accrual loans held for sale is comprised of loans to a
single commercial real estate borrower who has recently exhibited a
deterioration in financial condition. As part of the merger agreement with
NFB, the Bank has committed to selling this relationship prior to the
effectiveness of the merger. See notes 2 and 7 to the Consolidated Financial
Statements.
(3) Other real estate owned represents property acquired by us through
foreclosure or repossession or as an in-substance foreclosure. These assets
are recorded at the lower of their fair value or the unpaid principal
balance plus unpaid accrued interest of the related loans. The $6.6 million
decline in other real estate owned during the twelve months ended December
31, 2003 was due to $4.4 million of sales of property and $2.2 million of
write-downs of various properties to updated appraised values.
On the dates presented in the table above, the Bank did not have any
troubled debt restructurings, as defined under Statement of Financial Accounting
Standards No. 15, which are loans where the creditor has, for economic or legal
reasons, granted concessions to the debtor that the creditor would not otherwise
consider.
Our ratio of non-accrual loans held in portfolio to total loans held in
portfolio was 0.21% at December 31, 2003 and 2002, and 0.30% at December 31,
2001.
The following table summarizes the amounts of non-accrual loans, excluding
loans held for sale, by category at the dates indicated:
AT DECEMBER 31,
------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
($ IN THOUSANDS)
Commercial, financial and agricultural
loans................................... $ 842 $1,076 $1,391 $ 974 $1,994
Consumer installment loans................ 1,889 727 684 599 681
Real estate construction loans............ -- -- 31 95 --
Commercial mortgage loans................. 1,511 1,783 1,624 1,929 2,134
Residential mortgage loans................ 319 753 1,891 1,539 1,819
------ ------ ------ ------ ------
Total..................................... $4,561 $4,339 $5,621 $5,136 $6,628
====== ====== ====== ====== ======
The Bank ordinarily does not enter into agreements whereby it would reduce
the principal amount of a loan, reduce the interest rate below the current
market rates or extend the maturity date at a favorable interest rate. All loans
for which there presently exists serious doubt as to the borrower's ability to
comply with payment terms are included in one of the categories above.
33
The following table summarizes the principal amounts of loans 90 days past
due and accruing by category at the dates indicated:
AT DECEMBER 31,
----------------------------------
2003 2002 2001 2000 1999
---- ------ ---- ---- ----
($ IN THOUSANDS)
Commercial, financial and agricultural loans.... $ -- $ 300 $611 $691 $ --
Consumer installment loans...................... 285 133 35 50 28
Real estate constructions loans................. -- -- -- -- --
Commercial mortgage loans....................... -- -- -- -- --
Residential mortgage loans...................... -- 679 235 157 585
---- ------ ---- ---- ----
Total......................................... $285 $1,112 $881 $898 $613
==== ====== ==== ==== ====
With regard to impaired loans, see Note 7 of the "Notes to the Consolidated
Financial Statements."
Asset Classification and Allowances for Loan Losses. Federal regulations
require banking institutions to classify their assets on the basis of quality on
a regular basis. An asset is classified as "substandard" if it is determined to
be inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. An asset is classified as
"doubtful" if full collection is highly questionable or improbable. An asset is
classified as "loss" if it is considered uncollectible, even if a partial
recovery could be expected in the future. The regulations also provide for a
"special mention" designation, described as assets that do not currently expose
the financial institution to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving management's close attention. Federal or state examiners may disagree
with our classifications.
In originating loans, we recognize that credit losses will occur and that
the risk of loss will vary with, among other things, the type of loan being
made, the creditworthiness of the borrower over the term of the loan, general
economic conditions and, in the case of a secured loan, the quality of the
security for the loan. We maintain a general allowance for loan losses based on,
among other things, regular reviews of delinquencies and loan portfolio quality,
character and size, our and the industry's historical and projected loss
experience and current and forecasted economic conditions. We increase our
allowance for loan losses by charging provisions for loan losses against our
income. Federal examiners may disagree with us as to the appropriate level of
our allowance for loan losses.
We monitor our asset quality and charge off loans and properties acquired
in settlement of loans against the allowance for loan losses when appropriate
and provide specific loss reserves when necessary. Although we believe that we
use the best information available to make determinations with respect to the
allowances for loan losses, future adjustments may be necessary if economic
conditions differ substantially from the economic conditions in the assumptions
used in making the initial determinations.
The determination of the adequacy of the allowance for loan losses is a
critical accounting policy of the Bank. In establishing the allowance for loan
losses, we take into consideration probable losses that have been identified in
connection with specific loans as well as losses that have not been identified
but can be expected to occur. We conduct regular reviews of our loans and
evaluate the need to establish general and specific allowances on the basis of
this review. Our Board of Directors establishes general allowances on at least a
quarterly basis based on an assessment of risk in our loans, taking into
consideration the following:
- the composition and quality of the portfolio;
- delinquency trends;
- current charge-off and loss experience;
- the state of the real estate market; and
- economic conditions generally.
34
We provide specific allowances for individual loans, or portions of loans,
when we believe that ultimate collection is improbable based on the current
payment status of the loan and the fair value or net realizable value of the
security for the loan. At the date of foreclosure or other repossession or at
the date that we determine that a property is an impaired property, we transfer
the property to a category referred to as "other real estate owned" and book
that property at fair value, less estimated selling costs. By the term "fair
value," we mean the amount in cash or cash-equivalent value of other
consideration that a real estate parcel would yield in a current sale between a
willing buyer and a willing seller. At December 31, 2003, we held $3.3 million,
net of allowances, in other real estate owned. When the Bank forecloses on a
property, we charge any amount of cost in excess of fair value against the
allowance for loan losses. We also record an allowance for estimated selling
costs of the property immediately after foreclosure. Subsequent to acquisition,
we periodically re-evaluate the property and establish an additional allowance
if the estimated fair value of the property, less estimated costs to sell,
declines. If, upon ultimate disposition of the property, net sales proceeds
exceed the net carrying value of the property, we record a gain on the sale of
real estate.
An analysis of loan loss experience follows for the periods set forth
below. The Bank aims to keep its allowance for loan losses at a level that is
adequate to provide for probable and reasonably estimable loan losses. The level
of the allowance is reviewed and adjusted by management on a quarterly basis and
includes an evaluation of non-performing loans, loan loss experience, economic
conditions, the composition of the loan portfolio and other relevant factors.
35
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
($ IN THOUSANDS)
Average total loans outstanding... $2,106,469 $1,890,744 $1,788,505 $1,636,913 $1,356,725
========== ========== ========== ========== ==========
Allowance for loan losses at
beginning of period............. $ 9,971 $ 9,749 $ 8,517 $ 8,533 $ 8,778
---------- ---------- ---------- ---------- ----------
Loans charged off during the
period:
Commercial financial and
agricultural loans(1)........... (2,768) (1,366) (84) (397) (67)
Consumer installment loans........ (4,446) (2,404) (1,768) (1,728) (2,550)
Real estate construction
loans(1)........................ (6,570) -- -- -- --
Commercial mortgage loans(1)...... (906) -- (584) (60) --
Residential mortgage loans........ (5) (290) -- (316) (124)
Recoveries during period of losses
previously charged off:
Commercial, financial and
agricultural loans.............. 218 85 54 60 47
Consumer installment loans........ 1,833 1,166 1,314 1,173 1,203
Real estate construction loans.... -- -- -- -- --
Commercial mortgage loans......... 17 831 66 1,871 32
Residential mortgage loans........ -- -- 34 -- 14
---------- ---------- ---------- ---------- ----------
Net loans (charged off) recovered
during period................... (12,627) (1,978) (968) 603 (1,445)
---------- ---------- ---------- ---------- ----------
Additions to (deductions) from
allowance for loan losses
charged (credited) to expense
during period................... 12,800 2,200 2,200 (619) 1,200
---------- ---------- ---------- ---------- ----------
Allowance for loan losses at end
of period....................... $ 10,144 $ 9,971 $ 9,749 $ 8,517 $ 8,533
========== ========== ========== ========== ==========
Ratio of net charge-offs to
average loans outstanding for
period.......................... 0.60% 0.10% 0.05% (0.04)% 0.11%
========== ========== ========== ========== ==========
Ratios of allowance for loan
losses to total loans (net of
unearned income) outstanding at
end of period................... 0.46% 0.49% 0.54% 0.53% 0.56%
========== ========== ========== ========== ==========
---------------
(1) 2003 includes a charge-off related to borrowings by a single commercial real
estate customer where the loans, net of loan charge-offs of $9,200, have
been transferred to loans held to sale. The $9,200 loan charge-off has been
recorded as follows: $1,724 for commercial, financial and agricultural
loans, $6,570 for real estate construction loans and $906 for commercial
mortgage loans. See notes 7 and 8 to the Consolidated Financial Statements.
The following tables show a breakdown of the allowance for loan losses by
the major loan categories as well as the percentage of loans in each category to
total loans held in portfolio as of the dates indicated. The
36
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any category.
AT DECEMBER 31,
-------------------------------------------
2003 2002 2001 2000 1999
------- ------ ------ ------ ------
($ IN THOUSANDS)
Dollar Amount of Allowance For Loan
Losses
Commercial, financial and agricultural
loans.................................. $ 2,233 $1,412 $1,012 $1,114 $ 792
Consumer installment loans............... 5,021 5,344 3,622 4,447 5,357
Real estate construction loans........... 407 213 294 269 235
Commercial mortgage loans................ 1,401 1,704 1,196 1,037 1,375
Residential mortgage loans............... 250 317 277 252 363
Unallocated.............................. 832 981 3,348 1,398 411
------- ------ ------ ------ ------
Total.................................. $10,144 $9,971 $9,749 $8,517 $8,533
======= ====== ====== ====== ======
Percentage of Loans in Category to Loans
Held in Portfolio
Commercial, financial and agricultural
loans.................................. 9.0% 7.5% 7.0% 7.2% 5.5%
Consumer installment loans............... 32.0 35.9 29.3 27.6 25.3
Real estate construction loans........... 3.6 3.7 5.1 4.7 5.7
Commercial mortgage loans................ 26.8 34.9 31.6 27.7 25.8
Residential mortgage loans............... 28.6 18.0 27.0 32.8 37.7
------- ------ ------ ------ ------
Total.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
======= ====== ====== ====== ======
While we believe that we have established our allowance for loan losses in
accordance with generally accepted accounting principles, we cannot be assured
that regulators, in reviewing our assets, will not make us increase our loss
allowance, thereby negatively affecting our reported financial condition and
results of operations.
INVESTMENT ACTIVITIES
We are permitted to make certain investments, including investments in
securities issued by various federal agencies and state and municipal
governments, deposits at the Federal Home Loan Bank of New York, certificates of
deposits in federally insured institutions, certain bankers' acceptances and
Federal funds. We may also invest, subject to certain limitations, in short term
corporate obligations referred to as "commercial paper" and certain other types
of corporate debt securities and mutual funds. We are required to maintain a
minimum amount of liquid assets that may be invested in cash and specified
securities.
We invest in investment securities in order to diversify our assets, manage
cash flow, manage interest rate sensitivity, obtain yield and maintain the
minimum levels of liquid assets required by regulatory authorities. Such
investments generally include sales of federal funds, and purchases of federal
government and agency securities, mortgage backed securities, corporate bonds,
municipal bonds and commercial paper.
At the time of purchase, securities are classified as either held to
maturity or available for sale. The Bank does not purchase securities for
trading purposes. The appropriateness of these classifications is reassessed at
each reporting date.
Debt securities for which management has the intent and the Bank has the
ability to hold to maturity are classified as "held to maturity." These
securities are reported at cost, adjusted for amortization of premiums and
accretion of discounts, using the level-yield method over the term of the
security.
Securities that are to be held for an indefinite period of time are
classified as securities available for sale and are carried at market value.
Securities available for sale include securities that management intends to use
as part of the Bank's asset/liability management strategy and that may be sold
to provide liquidity, satisfy
37
customer loan demand or in response to changes in interest rates, prepayment
risks and similar factors. Unrealized holding gains and losses for available for
sale securities are included in accumulated other comprehensive income (loss) as
a component of stockholders' equity, net of related income taxes. Gains or
losses realized upon sale are included in earnings using the specific
identification method. When a decline in a security's estimated fair value is
determined to be other than temporary, the security is written down to its
estimated fair value through a charge to earnings.
AT DECEMBER 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
($ IN THOUSANDS)
SECURITIES AVAILABLE FOR SALE
U.S. treasury and government agencies and sponsored
corporations........................................... $ 253,056 $ 400,837 $ 421,954
States and political subdivisions........................ 274,736 312,019 217,425
Mortgage backed securities -- U.S. government agencies
and sponsored corporations............................. 1,010,622 1,053,743 839,895
Trust preferred securities............................... 96,531 113,463 114,209
Federal Home Loan Bank Stock............................. 27,500 32,250 30,000
Other.................................................... 15,961 14,753 998
---------- ---------- ----------
Total securities available for sale...................... $1,678,406 $1,927,065 $1,624,481
========== ========== ==========
AT DECEMBER 31,
----------------------------
2003 2002 2001
------- ------- --------
($ IN THOUSANDS)
SECURITIES HELD TO MATURITY
U.S. government agencies and sponsored corporations......... $ -- $ -- $ 54,881
Trust preferred securities.................................. 52,427 52,636 52,845
------- ------- --------
Total securities held to maturity........................... $52,427 $52,636 $107,726
======= ======= ========
Maturities and weighted average interest rates of the securities portfolio
at December 31, 2003 are illustrated below. Maturities are based upon the
earlier of contractual terms or call dates, except for mortgage-backed
securities that are based upon expected maturities, and the Federal Home Loan
Bank stock that has been placed in the "over 10 year" category. The method used
to calculate the weighted average rates was to add the interest for each
individual security and divide the total by the carrying value. The weighted
average rates have been calculated on a tax-equivalent basis. Actual maturities
may differ from contractual maturities
38
reported below because debt securities issuers may have the right to call or
repay obligations with or without call or repayment penalties.
U.S. TREASURY
AND GOVERNMENT MORTGAGE STATES AND TRUST FEDERAL HOME
AGENCIES AND BACKED POLITICAL PREFERRED LOAN BANK
SPONSORED CORPORATIONS SECURITIES SUBDIVISIONS SECURITIES STOCK OTHER
----------------------- ---------- ------------- ---------- ------------ -------
($ IN THOUSANDS)
SECURITIES AVAILABLE
FOR SALE
MATURING:
Within 1 year:
Amount............... $ 12,055 $ 308,927 $ 17,228 $ -- $ -- $ --
Rate................. 0.96% 3.91% 2.94% --% --% --%
1-5 years:
Amount............... $241,001 $ 497,430 $ 6,643 $ 57,107 $ -- $13,897
Rate................. 3.16% 3.72% 7.76% 7.33% --% 4.97%
5-10 years:
Amount............... $ -- $ 204,265 $ 23,630 $ 16,200 $ -- $ --
Rate................. --% 3.73% 7.65% 7.53% --% --%
Over 10 years:
Amount............... $ -- $ -- $ 227,235 $ 23,224 $27,500 $ 2,064
Rate................. -- -- 7.78% 7.70% 0.00% 3.64%
-------- ---------- ---------- -------- ------- -------
Total Book Value..... $253,056 $1,010,622 $ 274,736 $ 96,531 $27,500 $15,961
======== ========== ========== ======== ======= =======
U.S. GOVERNMENT MORTGAGE STATES AND TRUST FEDERAL HOME
AGENCIES AND BACKED POLITICAL PREFERRED LOAN BANK
SPONSORED CORPORATIONS SECURITIES SUBDIVISIONS SECURITIES STOCK OTHER
---------------------- ---------- ------------- ---------- ------------ -----
($ IN THOUSANDS)
SECURITIES HELD TO
MATURITY
MATURING:
Within 1 year:
Amount................ $-- $-- $-- $ -- $-- $--
Rate.................. --% --% --% --% --% --%
1-5 years:
Amount................ $-- $-- $-- $32,468 $-- $--
Rate.................. --% --% --% 7.45% --% --%
5-10 years:
Amount................ $-- $-- $-- $11,173 $-- $--
Rate.................. --% --% --% 8.01% --% --%
Over 10 years:
Amount................ $-- $-- $-- $ 8,786 $-- $--
Rate.................. --% --% --% 8.24 --% --%
-- -- -- ------- -- --
Total Book Value...... $-- $-- $-- $52,427 $-- $--
== == == ======= == ==
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of our funding for lending and
other investment purposes. In addition to deposits, our sources of funding
include loan principal repayments, interest payments and
39
maturing investments. Loan repayments and interest payments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by prevailing market interest rates and money market conditions.
Borrowings may be used to supplement our available funds, and from time to time
we have borrowed funds from the Federal Home Loan Bank of New York and through
reverse repurchase agreements. Under these agreements, we acquire funds through
the sale of securities and simultaneously commit to repurchasing the securities
sold on a certain date at a specified price, which is the sale price plus
interest.
Deposits. We attract deposits principally from within our market area by
offering a variety of deposit instruments, including passbook and statement
accounts and certificates of deposit that range in term from 91 days to several
years. Deposit terms vary, principally on the basis of the minimum balance
required, the length of time the funds must remain on deposit and the interest
rate. We generally seek to attract deposits from local residents through our
branch network rather than from outside our market area. We also hold deposits
from various municipal and other governmental agencies. Historically, we have
not accepted deposits from brokers. We establish our interest rates, maturities,
service fees and withdrawal penalties on deposits on a periodic basis. We
determine deposit interest rates and maturities based on:
- our funding needs;
- our liquidity requirements;
- the rates paid by our competitors;
- our growth goals; and
- applicable regulatory restrictions and requirements.
Our deposits have decreased by approximately 3% to $3.307 billion at
December 31, 2003 from $3.437 billion at December 31, 2002. Deposits had
increased over 11% to $3.437 billion at December 31, 2002 from $3.087 billion at
December 31, 2001.
The following tables indicate average balances of our deposits for the
periods indicated:
YEAR ENDED DECEMBER 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
($ IN THOUSANDS)
Demand deposits.................................. $ 607,735 $ 528,457 $ 460,147
Average rate paid.............................. 0.00% 0.00% 0.00%
Savings, NOW and money market deposits........... $1,230,668 $1,106,007 $ 751,289
Average rate paid.............................. 1.19% 1.92% 2.54%
Total time deposits.............................. $1,501,799 $1,641,574 $1,651,875
Average rate paid.............................. 2.39% 3.35% 5.07%
Total average deposits...................... $3,340,202 $3,276,038 $2,863,311
========== ========== ==========
Total average rate paid..................... 1.51% 2.33% 3.59%
PERCENT OF DEPOSIT CATEGORY TO TOTAL DEPOSITS
Demand deposits.................................. 18.2% 16.1% 16.1%
Savings, NOW and money market deposits........... 36.8 33.8 26.2
Total time deposits.............................. 45.0 50.1 57.7
---------- ---------- ----------
Total....................................... 100.0% 100.0% 100.0%
========== ========== ==========
40
The following table summarizes the maturity of certificates of deposit and
other savings and time deposits over $100,000 as of December 31, 2003.
CERTIFICATES OF DEPOSIT OTHER SAVINGS AND TIME DEPOSITS
$100,000 OR MORE $100,000 OR MORE
----------------------- -------------------------------
($ IN THOUSANDS)
MATURING
3 months or less........................ $469,938 $96,598
After three months but up to six
months................................ 93,483 --
After six months but up to 12 months.... 96,722 --
After 12 months......................... 66,969 --
-------- -------
Total................................... $727,112 $96,598
======== =======
At December 31, 2003 certificates of deposit of $100,000 or more and
securities sold under agreements to repurchase and other borrowings totaled $848
million. These liabilities support the Bank's interest earning assets due within
one year (comprised of Federal funds sold, securities, loans and loans held for
sale) of $983 million.
Borrowings. Savings deposits historically have been the primary source of
funds for our lending, investment and general operating activities. However, we
utilize FHLB advances and securities sold under agreement to repurchase to
supplement our supply of lendable funds and to meet deposit withdrawal
requirements. The following table sets forth certain information regarding our
borrowings at the dates and for the periods indicated:
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
2003 2002 2001
----------- ----------- -----------
($ IN THOUSANDS)
FHLB ADVANCES:
Average amount outstanding........................... $581,371 $600,000 $427,534
Total interest cost(1)............................... 27,262 29,624 22,537
Average interest rate paid(1)........................ 4.63% 4.87% 5.20%
Maximum amount outstanding at any month end.......... $600,000 $600,000 $600,000
Ending balance....................................... 550,000 600,000 600,000
Weighted average interest rate on balance
outstanding(1)..................................... 4.29% 4.87% 4.87%
SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE:
Average amount outstanding........................... $ 64,426 $ 39,221 $193,694
Total interest cost.................................. 823 678 9,287
Average interest rate paid........................... 1.28% 1.73% 4.79%
Maximum amount outstanding at any month end.......... $175,781 $ 66,563 $472,088
Ending balance....................................... 118,947 66,563 134,917
Weighted average interest rate on balance
outstanding........................................ 1.45% 1.34% 2.00%
---------------
(1) 2003 includes the impact of $175 million notional amount of interest rate
swaps classified as fair value xxxxxx of specified FHLB advances.
LIQUIDITY AND CAPITAL RESOURCES
The term "liquidity" refers to our ability to generate adequate amounts of
cash to fund loan originations, loan purchases, deposit withdrawals and
operating expenses. Our primary sources of funds are scheduled amortization and
prepayments of loan principal and mortgage-backed securities, deposits, borrowed
funds, maturities and calls of investment securities and funds provided by our
operations. Our membership in the
41
FHLB provides us access to additional sources of borrowed funds, which is
generally limited to 25% of total assets (subject to the availability of
qualifying collateral as defined by the FHLB).
Scheduled loan repayments and maturing investment securities are a
relatively predictable source of funds. However, deposit flows, calls of
investment securities and borrowed funds, and prepayments of loans and
mortgage-backed securities are strongly influenced by interest rates, general
and local economic conditions and competition in the marketplace. These factors
reduce the predictability of the timing of these sources of funds. As interest
rates decline, borrowing and customer refinancing activity tends to accelerate,
causing an increase in cash flow from both our loan and mortgage-backed security
portfolios. If our pricing is competitive, the demand for loan originations also
accelerates. When interest rates increase, the opposite effect tends to occur
and our loan origination and purchase activity becomes increasingly dependent on
the strength of the residential real estate market, home purchases and new
construction activity.
Effective liquidity management protects against the risk that significant
losses might occur if the Bank were forced to liquidate assets in an adverse
market. In this sense, liquidity provides protection from loss of profits due to
adverse changes in interest rates. The major factors that determine a bank's
liquidity are stability of its deposits (which in part is a function of the
maturity, if any, and rates paid), marketability, maturity structure and
pledging status of its investments and also potential for unexpected loan
demand.
Total cash and cash equivalents amounted to $147 million at December 31,
2003 compared to $185 million at December 31, 2002. The consolidated statements
of cash flows present the change in cash and cash equivalents from operating,
investing and financing activities. During the year ended December 31, 2003, net
cash of $260 million was provided by operating activities, primarily as a result
of the securitization and sale of $567 million of 1 -- 4 family residential
mortgage loans that were originated by the Bank, which provided $216 million of
net cash after considering cash used to originate loans held for sale. Investing
activities used $155 million of cash during 2003 with cash invested in new loans
and securities exceeding the cash provided from securities repayments,
maturities and calls and sales. Net cash of $143 million used in financing
activities was largely attributable to decreases in deposits.
At December 31, 2003, Federal funds sold, loans and securities maturing or
re-pricing within one year and loans held for sale totaled $983 million or 23.0%
of total assets, compared to $1.055 billion or 23.9% of total assets at December
31, 2002. At December 31, 2003, we had outstanding borrowings of $121 million
through the use of securities sold under agreements to repurchase and other
borrowings and $550 million through the use of FHLB advances. Advances from the
FHLB are collateralized by loans and securities.
Total deposits decreased $131 million at December 31, 2003 compared to
December 31, 2002. Deposit flows are affected by the level of market interest
rates, the interest rates and products offered by competitors, and other
factors. The decrease in total deposits since December 31, 2002 was due in part
to a strategic decision by management to focus its deposit-gathering efforts on
the more profitable transaction and savings accounts and to place less emphasis
on high rate time deposits. Core deposits increased 2.7% to $1.849 billion at
December 31, 2003 from $1.799 billion at December 31, 2002, while time deposits
decreased by 11.0% to $1.458 billion over the same time period. Time deposit
accounts scheduled to mature within one year were $1.225 billion at December 31,
2003. Based on our deposit retention experience and current pricing strategy, we
anticipate that a significant portion of these time deposits will remain with
us, although we cannot assure you that we will retain these deposits. The Bank
is committed to maintaining a strong liquidity position; therefore, we monitor
our liquidity position on a daily basis. The Bank anticipates that it will have
sufficient funds to meet its current funding commitments.
At December 31, 2003, the Bank had outstanding loan commitments to
borrowers of approximately $333 million, and available home equity and overdraft
lines of credit of approximately $129 million. The Bank anticipates that it will
have sufficient funds available to meet our current commitments in the normal
course of business.
During the 12 months ended December 31, 2003 we purchased in the open
market and retired 99,792 shares of our common stock at a cost of $2.8 million
under our previously announced common stock
42
buy-back plan. The Bank paid its common stockholders a total of $12.5 million in
cash dividends during that period.
As of December 31, 2003, our Tier I and combined Tier I and Tier II capital
ratios were 9.63% and 10.03%, respectively, and our leverage capital ratio was
5.75%. These ratios exceed the FDIC's minimum ratio requirements, and the
requirements to be "well capitalized" within the meaning of the FDIC's
regulations.
The Bank does not anticipate any material capital expenditures nor does it
have any balloon or other payments due on any long-term obligations or any
off-balance sheet items other than the commitments and unused lines of credit
noted above.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and accompanying Notes to the
Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. Such
principles generally requires the measurement of financial position and
operating results in terms of historical dollars without consideration for
changes in the relative purchasing power of money over time due to inflation.
The impact of inflation is reflected in the increased cost of our operations.
Unlike industrial companies, our assets and liabilities are primarily monetary
in nature. As a result, changes in market interest rates have a greater impact
on performance than do the effects of inflation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), "Consolidation of Variable Interest Entities," which addresses
how a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities," which was issued in January 2003.
The Bank will be required to apply FIN 46R to variable interests in any VIEs
created after December 31, 2003. At December 31, 2003, the Bank did not have any
interest in VIEs within the scope of FIN 46R.
FASB Statement No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity," was issued in May 2003. This
Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The Statement also includes required disclosures for financial
instruments within its scope. For the Bank, the Statement was effective for
instruments entered into or modified after May 31, 2003 and otherwise will be
effective as of January 1, 2004, except for mandatorily redeemable financial
instruments. For certain mandatorily redeemable financial instruments, the
Statement will be effective for the Bank on January 1, 2005. The effective date
has been deferred indefinitely for certain other types of mandatorily redeemable
financial instruments. The Bank currently does not have any financial
instruments that are within the scope of this Statement.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 2002, FASB Statement No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," was issued. Statement No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." The provisions of
Statement No. 146 were effective for exit or disposal activities initiated after
December 31, 2002, with early application encouraged. The Bank accounted for the
costs of closing certain banking branches during 2003 in accordance with the
provisions of Statement No. 146 (see note 3 of Notes to the Consolidated
Financial Statements included in Item 8. Financial Statements and Supplementary
Data).
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, and interpretation of FASB
43
Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34,"
was issued. This Interpretation enhances the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions of the Interpretation were applicable to guarantees issued or
modified after December 31, 2002 and the disclosure requirements were effective
for financial statements of interim or annual periods ending after December 15,
2002. The adoption of FIN 45 did not have a significant impact on the Bank's
Consolidated Financial Statements.
In November 2003, the Emerging Issues Task Force (EITF) issued EITF Issue
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments." Issue 03-1 requires new tabular and narrative disclosure
items effective for fiscal years ending after December 15, 2003. Companies are
required to provide expanded information about their debt and marketable equity
securities with market values below carrying values. The narrative information
must include positive and negative information management considered in
concluding the unrealized loss was not other-than-temporary and therefore was
not recognized in earnings. The Company's disclosures in Item 8. Financial
Statements and Supplementary Data, Notes to the Consolidated Financial
Statements Nos. 1 and 6 of the consolidated financial statements incorporate the
requirements of Issue No. 03-1.
In December 2003, FASB Statement No. 132 (revised), "Employers' Disclosures
about Pensions and Other Postretirement Benefits," was issued. Statement No. 132
(revised) prescribes employers' disclosures about pension plans and other
postretirement benefit plans; it does not change the measurement or recognition
of those plans. The Statement retains and revises the disclosure requirements
contained in the original Statement No. 132. It also requires additional
disclosures about the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and other postretirement benefit plans.
The Statement generally is effective for fiscal years ending after December 15,
2003. The Bank's disclosures in note 16 of Notes to the Consolidated Financial
Statements included in Item 8. Financial Statements and Supplementary Data)
incorporate the requirements of Statement No. 132 (revised).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Asset/Liability Management and Market Risk Disclosure" in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE TRUST COMPANY OF NEW JERSEY
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31
---------------------------
2003 2002
------------ ------------
($ IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
ASSETS
Cash and due from banks..................................... $ 117,403 $ 135,382
Federal funds sold.......................................... 30,000 50,000
---------- ----------
Total cash and cash equivalents........................ 147,403 185,382
Securities:
Available for sale, at estimated fair value (pledged
$1,212,112 in 2003 and $1,412,974 in 2002.............. 1,678,406 1,927,065
Held to maturity (estimated fair value $57,081 in 2003 and
$54,575 in 2002)....................................... 52,427 52,636
---------- ----------
Total securities....................................... 1,730,833 1,979,701
Loans:
Held for sale............................................. 66,095 251,284
Held in portfolio, net of unearned income................. 2,132,706 1,790,570
Less: Allowance for loan losses........................... (10,144) (9,971)
---------- ----------
Loans, net.......................................... 2,188,657 2,031,883
Premises and equipment...................................... 39,135 40,167
Other real estate owned..................................... 3,271 9,846
Accrued interest receivable................................. 20,602 24,840
Bank owned life insurance................................... 70,093 67,765
Prepaid pension cost and other assets....................... 78,011 71,218
---------- ----------
Total Assets................................................ $4,278,005 $4,410,802
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand............................... $ 627,830 $ 584,979
Interest bearing -- NOW and money market.................. 659,928 700,345
Savings................................................... 560,883 513,934
Time...................................................... 1,458,042 1,638,024
---------- ----------
Total deposits......................................... 3,306,683 3,437,282
Securities sold under agreements to repurchase and other
borrowings................................................ 121,331 71,283
Federal Home Loan Bank advances............................. 550,000 600,000
Deferred taxes and other liabilities........................ 36,626 37,967
---------- ----------
Total liabilities...................................... 4,014,640 4,146,532
Commitments and Contingencies (Note 18)..................... -- --
Preferred stock, $100 par value; authorized 60,000 shares;
no shares outstanding..................................... -- --
Common stock, $2.00 par value; authorized 72,000,000 shares;
issued and outstanding 18,387,801 in 2003 and 18,312,909
in 2002................................................... 36,776 36,626
Additional paid-in capital.................................. 30,061 26,762
Retained earnings........................................... 182,135 179,179
Accumulated other comprehensive income...................... 14,393 21,703
---------- ----------
Total stockholders' equity............................. 263,365 264,270
---------- ----------
Total Liabilities and Stockholders' Equity.................. $4,278,005 $4,410,802
========== ==========
See accompanying Notes to the Consolidated Financial Statements.
45
THE TRUST COMPANY OF NEW JERSEY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTEREST INCOME
Interest and fees on loans.............................. $ 134,377 $ 134,751 $ 138,962
Interest on Federal funds sold.......................... 1,234 2,928 3,325
Interest and dividends on securities -- Taxable......... 55,832 74,556 86,342
Exempt from Federal income taxes...................... 13,142 12,119 7,850
----------- ----------- -----------
Total interest income................................. 204,585 224,354 236,479
INTEREST EXPENSE
Interest on deposits.................................... 50,544 76,333 102,807
Interest on borrowed funds.............................. 28,103 30,413 31,973
----------- ----------- -----------
Total interest expense................................ 78,647 106,746 134,780
----------- ----------- -----------
Net interest income................................... 125,938 117,608 101,699
Provision for loan losses............................. 12,800 2,200 2,200
----------- ----------- -----------
Net interest income after provision for loan losses... 113,138 115,408 99,499
NON-INTEREST INCOME
Service charges on deposit accounts and other retail
banking fees.......................................... 19,282 19,306 15,425
Trust department income................................. 2,012 1,620 1,542
Bank owned life insurance............................... 4,514 4,089 2,982
Net gains on securities sales........................... 1,190 9,111 12,401
Gains on sales of securitizations and loans............. 11,439 11,746 --
Other income............................................ 1,003 315 301
----------- ----------- -----------
Total non-interest income............................. 39,440 46,187 32,651
NON-INTEREST EXPENSES
Salaries and employee benefits.......................... 64,606 53,855 48,450
Pension expense (income)................................ (12,110) 860 (14,197)
Occupancy expense, net of rental income................. 14,587 13,668 12,389
Furniture and equipment expense......................... 9,504 8,422 8,336
Outside data processing services........................ 5,969 5,737 4,070
Other real estate owned expenses, net................... 1,227 2,034 499
Mortgage servicing asset valuation expense.............. 1,002 2,520 1,583
Merger related expenses................................. 7,173 -- --
Loss on early extinguishment of debt.................... 6,027 -- --
Other expense........................................... 34,186 23,201 22,336
----------- ----------- -----------
Total non-interest expenses........................... 132,171 110,297 83,466
Income before provision for income taxes................ 20,407 51,298 48,684
Provision for income taxes.............................. 2,336 13,308 14,167
----------- ----------- -----------
NET INCOME.............................................. $ 18,071 $ 37,990 $ 34,517
=========== =========== ===========
EARNINGS PER COMMON SHARE
Basic................................................. $ 0.99 $ 2.07 $ 1.86
=========== =========== ===========
Diluted............................................... $ 0.95 $ 2.03 $ 1.84
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic................................................. 18,338,712 18,386,331 18,513,826
=========== =========== ===========
Diluted............................................... 18,933,515 18,694,748 18,735,981
=========== =========== ===========
See accompanying Notes to the Consolidated Financial Statements.
46
THE TRUST COMPANY OF NEW JERSEY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ACCUMULATED OTHER TOTAL
-------------------- ADDITIONAL RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL EARNINGS INCOME (LOSS) EQUITY
---------- ------- --------------- -------- ----------------- -------------
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE, DECEMBER 31, 2000................ 18,518,966 37,038 24,194 138,167 (13,673) 185,726
Comprehensive Income:
Net income -- Twelve months ended December
31, 2001................................. 34,517 34,517
Unrealized holding (loss) on securities
available for sale, net of tax of
$8,125................................... 15,089 15,089
Reclassification adjustment for gains on
securities available for sale, net of tax
of $(4,340).............................. (8,061) (8,061)
--------
Total comprehensive income............... 41,545
--------
Deferred compensation and taxes related to
nonqualified stock option plan........... 112 112
Exercise of stock options................. 113,481 227 943 1,170
Purchase and retirement of common stock... (194,134) (388) (4,298) (4,686)
Cash dividend, $0.57 per share............ (10,562) (10,562)
---------- ------- ------- -------- -------- --------
BALANCE, DECEMBER 31, 2001................ 18,438,313 36,877 25,249 157,824 (6,645) 213,305
Comprehensive Income:
Net income -- Twelve months ended December
31, 2002................................. 37,990 37,990
Unrealized holding (loss) on securities
available for sale, net of tax of
$18,454.................................. 34,270 34,270
Reclassification adjustment for gains on
securities available for sale, net of tax
of $(3,189).............................. (5,922) (5,922)
--------
Total comprehensive income............... 66,338
--------
Deferred compensation and taxes related to
nonqualified stock option plan........... 415 415
Exercise of stock options................. 108,500 217 1,098 1,315
Purchase and retirement of common stock... (233,904) (468) (5,411) (5,879)
Cash dividend, $0.61 per share............ (11,224) (11,224)
---------- ------- ------- -------- -------- --------
BALANCE, DECEMBER 31, 2002................ 18,312,909 36,626 26,762 179,179 21,703 264,270
Comprehensive Income:
Net income -- Twelve months ended December
31, 2003................................. 18,071 18,071
Unrealized holding (loss) on securities
available for sale, net of tax of
$(3,520)................................. (6,537) (6,537)
Reclassification adjustment for gains on
securities available for sale, net of tax
of $(417)................................ (773) (773)
--------
Total comprehensive income............... 10,761
--------
Deferred compensation and taxes related to
nonqualified stock option plan........... 681 681
Exercise of stock options and other
transactions............................. 174,684 349 2,618 2,967
Purchase and retirement of common stock... (99,792) (199) (2,629) (2,828)
Cash dividend, $0.68 per share............ (12,486) (12,486)
---------- ------- ------- -------- -------- --------
BALANCE, DECEMBER 31, 2003................ 18,387,801 $36,776 $30,061 $182,135 $ 14,393 $263,365
========== ======= ======= ======== ======== ========
See accompanying Notes to the Consolidated Financial Statements.
47
THE TRUST COMPANY OF NEW JERSEY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------
2003 2002 2001
----------- ----------- -----------
($ IN THOUSANDS)
CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES:
Net Income................................... $ 18,071 $ 37,990 $ 34,517
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Provision for loan losses.................... 12,800 2,200 2,200
Pension (income) expense..................... (12,110) 860 (14,197)
Net gains on securities sales................ (1,190) (9,111) (12,401)
Depreciation, amortization and other
provisions................................ 12,789 13,344 9,587
Amortization of debt security premium
(discount), net --
Available for sale........................... 11,525 4,084 1,695
Held to maturity............................. 209 202 84
Gains on sales of securitizations and
loans..................................... (11,439) (11,746) --
Origination of loans held for sale........... (363,017) (251,284) --
Proceeds from securitizations and sales of
loans..................................... 578,759 -- --
(Increase) decrease in accrued interest
receivable................................ 4,238 (5,971) 8,672
(Decrease) increase in deferred taxes and
other liabilities......................... 2,850 (8,631) 5,147
(Increase) decrease in other assets.......... 6,150 (10,355) 39,267
----------- ----------- -----------
Net cash provided by (used in) operating
activities.............................. 259,635 (238,418) 74,571
----------- ----------- -----------
CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES:
Proceeds from sales of securities available
for sale.................................. 230,456 703,333 1,146,456
Proceeds from maturities or calls of
securities --
Available for sale........................ 1,248,995 4,009,409 2,951,629
Held to maturity.......................... -- 64,866 500,402
Purchases of securities --
Available for sale........................ (1,789,975) (5,224,650) (4,518,638)
Held to maturity.......................... -- (9,978) (74,977)
Principal reductions on mortgage backed
securities................................ 537,602 268,508 60,527
Proceeds from sales of securitizations and
loans..................................... -- 368,788 --
Net (increase) in loans...................... (373,877) (341,158) (386,361)
Purchases of premises and equipment, net..... (7,917) (14,025) (9,516)
----------- ----------- -----------
Net cash provided by (used in) investing
activities.............................. (154,716) (174,907) (330,478)
----------- ----------- -----------
CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES:
Increase in deposits from acquisition of
branches.................................. -- 63,373 15,547
Net other increase (decrease) in deposits.... (130,599) 286,755 362,800
Net increase (decrease) in securities sold
under agreements to repurchase and other
borrowings................................ 50,048 (69,694) (173,024)
(Decrease) increase in Federal Home Loan Bank
advances.................................. (50,000) -- 300,000
Cash dividends paid.......................... (12,486) (11,224) (10,562)
Purchase and retirement of common stock...... (2,828) (5,879) (4,686)
Exercise of stock options and other stock
option transactions....................... 2,967 1,315 1,170
----------- ----------- -----------
Net cash provided by (used in) financing
activities.............................. (142,898) 264,646 491,245
----------- ----------- -----------
(Decrease) increase in cash and cash
equivalents............................. (37,979) (148,679) 235,338
----------- ----------- -----------
Cash and cash equivalents, beginning of the
year...................................... 185,382 334,061 98,723
----------- ----------- -----------
Cash and cash equivalents, end of the year... $ 147,403 $ 185,382 $ 334,061
=========== =========== ===========
See accompanying Notes to the Consolidated Financial Statements.
48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
The Trust Company of New Jersey (the "Bank") is a full service commercial
bank chartered in 1896 by the State of New Jersey and is a member of the Federal
Deposit Insurance Corporation. The Bank, headquartered in Jersey City, New
Jersey, has branches located throughout Bergen, Essex, Hudson, Mercer,
Middlesex, Monmouth, Xxxxxx, Ocean, Passaic, Somerset, Union and Xxxxxx counties
in New Jersey, and Rockland County in New York.
The Consolidated Financial Statements have been prepared in conformity with
accounting principles generally accepted in the United States of America
("GAAP"). The significant accounting policies are summarized as follows --
CONSOLIDATION
The accompanying Consolidated Financial Statements include the accounts of
The Trust Company of New Jersey and its wholly owned subsidiaries, TC Financial,
LLC (sales of annuities, mutual funds and life insurance products), TCB
Investment Corp. (an investment company), TC Preferred Funding, Inc. (a real
estate investment trust) and ORAC, Inc. (foreclosed real estate) (collectively,
the Bank). All significant intercompany balances and transactions have been
eliminated in consolidation.
USE OF ESTIMATES
The accompanying Consolidated Financial Statements are prepared in
conformity with GAAP, which require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. The most significant estimates and assumptions relate to
the allowance for loan losses and the determination of pension income and
expense. Actual results may differ from management's current estimates.
The provision for loan losses is based upon management's evaluation of the
adequacy of the allowance for loan losses, including an assessment of known and
inherent risks in the portfolio, giving consideration to the size and
composition of the loan portfolio, actual loan loss experience, level of
delinquencies, detailed analysis of individual loans for which full
collectibility may not be assured, the existence and estimated net realizable
value of any underlying collateral and guarantees securing the loans, and
current economic and market conditions. Although management uses the best
information available, the level of the allowance for loan losses remains an
estimate that is subject to significant judgment and short-term change. Various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to make additional provisions for loan losses based upon
information available to them at the time of their examination. Furthermore, the
majority of the Bank's loans are secured by real estate in the State of New
Jersey. Accordingly, the collectibility of a substantial portion of the carrying
value of the Bank's loan portfolio is susceptible to changes in local market
conditions and may be adversely affected should real estate values decline or
the New Jersey area experience an adverse economic shock. Future adjustments to
the allowance for loan losses may be necessary due to economic, operating,
regulatory and other conditions beyond the Bank's control.
The Bank accounts for its pension expense by utilizing the "immediate
recognition" provisions of Statement of Financial Accounting Standards No. 87.
Accordingly, plan assets and the projected benefit obligation are each
marked-to-market at all period-ends and recorded in employee benefits expense.
Generally, the value of plan assets are subject to the inherent volatility of
the securities markets and the specific market performance of the plan assets;
the value of the projected benefit obligation (which can also have a significant
element of volatility) is subject to the level of interest rates, the expected
inflation rate, the number of employees covered under the plan, and other
factors.
49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SECURITIES
At the time of purchase, securities are classified as either held to
maturity or available for sale. The Bank does not purchase securities for
trading purposes. The appropriateness of these classifications is reassessed at
each reporting date.
Held to maturity debt securities are those securities in which the Bank has
the ability and intent to hold the security until maturity. These securities are
recorded at amortized cost, adjusted for the amortization or accretion of
premiums or discounts.
Available for sale securities include all securities that are not
classified as held to maturity. Such securities are recorded at fair value.
Securities available for sale include securities that management intends to use
as part of the Bank's asset/liability management strategy and that may be sold
to provide liquidity, satisfy customer loan demand as well as in response to
changes in interest rates, prepayment risks and similar factors. Unrealized
holding gains and losses, net of the related tax effect, on available for sale
securities are excluded from earnings and are reported as a separate component
of accumulated other comprehensive income (loss) until realized. Realized gains
and losses from the sale of available for sale securities are determined on a
specific identification basis.
A decline in the market value of any available for sale or held to maturity
security below cost that is deemed to be other than temporary results in a
writedown in the carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established. To determine
whether an impairment is other than temporary, the Bank considers whether it has
the ability and intent to hold the security until a market price recovery and
considers whether evidence indicating the cost of the security is recoverable
outweighs evidence to the contrary. Evidence considered in this assessment
includes the reasons for the impairment, the severity and duration of the
impairment, changes in value subsequent to year-end, and forecasted performance
of the issuer of the security.
Premiums and discounts are amortized or accreted over the life of the
related held to maturity or available for sale security as an adjustment to
yield using the effective interest method. Dividend and interest income are
recognized when earned.
The Bank, as a member of the Federal Home Loan Bank of New York, is
required to invest in its stock. This investment is carried at cost, which is
the redemption value of the stock.
LOANS
Loans held in portfolio are stated at the principal amount outstanding, net
of deferred loan origination fees/expenses, unearned discounts and the allowance
for loan losses. Interest on substantially all loans is accrued and credited to
interest income based upon the principal amount outstanding. Loan fees and
certain expenses associated with originating loans are deferred and the net
amount is amortized as an adjustment of the related loan's yield using the
level-yield method over the term of the loan. When loans are securitized and
sold, sold or prepaid, the balances of any unamortized fees and expenses are
immediately recognized in earnings.
Generally, interest income is not accrued on loans (including impaired
loans) where principal or interest is 90 days or more past due, unless the loan
is both well secured and in the process of collection. A loan less than 90 days
past due may be placed on non-accrual if management believes there is sufficient
doubt as to the ultimate collectibility of the outstanding loan balance.
When a loan (including an impaired loan) is classified as non-accrual,
uncollected past due interest is reversed and charged against current income.
Interest income will not be recognized until the financial condition of the
borrower improves or additional collateral is pledged, payments are brought
current and a consistent payment history is established. Payments received on
non-accrual loans (including impaired loans)
50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are first applied to all principal amounts owed. Once the remaining principal
balance is deemed fully collectible, payments are then applied to interest
income and fees.
A loan is considered impaired when, based upon current information and
events, it has been rated substandard. Generally, a loan is rated substandard
when it is probable that the Bank will be unable to collect all amounts due
(both principal and interest) according to the contractual terms of the loan
agreement. However, certain loans rated substandard are current as to their
interest and principal payments and are maintained on an accrual basis. Impaired
loans are measured based upon the present value of expected future cash flows,
or, as a practical expedient, at the loan's observable market price, or the fair
value of the underlying collateral, if the loan is collateral dependent.
Loans are originated primarily with the intent of being held until they
mature or pay off. However, as part of its management of credit, interest rate
risk and loan mix, the Bank may sell or securitize residential mortgage loans.
When a decision is made to sell or securitize residential mortgages, the loans
are identified as held for sale and carried at the lower of cost or market using
the aggregate method. When the loans are sold or securitized, the Bank allocates
the cost of the loan between the respective fair values of servicing rights and
loan principal. In the case of loan sales (including loans that are securitized
and immediately sold), any excess (or deficiency) of sale proceeds over the
remaining loan principal is recorded in non-interest income as gain (loss) on
sale of securitizations and loans. If loans are securitized and held, the
allocated cost basis of the loans is transferred to the Bank's securities
available for sale portfolio. These securities are marked-to-market thereafter
with any adjustment recorded in accumulated other comprehensive income (loss).
When securitized loans are sold out of the Bank's securities available for sale
portfolio, any resulting gain (loss) is removed from accumulated other
comprehensive income and recorded in non-interest income as gain (loss) on sale
of securitizations and loans.
The servicing asset determined in accordance with the policy noted above is
amortized over the estimated life of the underlying loans being serviced.
Quarterly, the estimated fair value of the servicing asset is determined taking
into account the risk characteristics of the underlying serviced loans
("servicing tranche") and the servicing tranche is valued on a lower of cost or
market basis, with downward adjustments to estimated fair value recorded as
charges to earnings and a valuation allowance. Increases in estimated fair value
are recorded as credits to earnings to the extent they reduce the valuation
allowance to zero.
The Bank, under certain limited circumstances, sells or securitizes and
sells residential mortgage loans with recourse provisions. At the time mortgage
loans are sold or securitized and sold, an evaluation is made of the potential
recourse liability. This evaluation takes into account the Bank's underwriting
standards for originating the mortgage loan, the value of the mortgaged
property, the borrower's payment history, the Bank's historical experience with
these categories of loans and other factors. To date, at the time of sale, all
of the Bank's mortgage loans have been performing in accordance with their terms
and the recourse liability has been estimated at zero. At December 31, 2003, the
principal amount of loans sold with recourse amounted to $2.2 million.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level management considers
adequate to provide for probable loan losses as of the balance sheet date. The
allowance is increased by provisions charged to expense and is reduced by net
charge-offs. The level of the allowance is based on management's evaluation of
probable losses in the loan portfolio, after consideration of prevailing
economic conditions in the Bank's market area. Credit reviews of the loan
portfolio, designed to assess risk and identify potential charges to the
allowance, are made throughout the year by management. A risk rating system,
consisting of multiple grading categories, is utilized as an analytical tool to
assess the appropriate level of loss reserves. Along with the risk system,
management further evaluates risk characteristics of the loan portfolio under
current economic conditions and considers such factors as the financial
condition of the borrowers, past and expected loan loss experience, and other
factors management feels deserve recognition in establishing an adequate
allowance.
51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
This risk assessment process is performed at least quarterly, and, as
adjustments become necessary, they are realized in the periods in which they
become known. Although management attempts to maintain the allowance at a level
deemed adequate to provide for probable losses, future additions to the
allowance may be necessary based upon certain factors including changes in
market conditions and underlying collateral values. In addition, various
regulatory agencies periodically review the adequacy of the Bank's allowance for
loan losses. These agencies may require the Bank to make additional provisions
based on their judgments about information available to them at the time of
their examinations.
Charge-offs are recorded on loans when the collectibility of such loans
becomes doubtful as a charge to the allowance for loan losses. Recoveries on
loans previously charged off are recorded as increases to the allowance for loan
losses when realized.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Amortization and depreciation is calculated using the
straight-line method over the estimated useful lives of the assets, which are as
follows: buildings -- 40 years, furniture, fixtures and equipment -- 8 -- 10
years, computer hardware -- 8 years, computer software -- 5 years,
automobiles -- 4 years, and leasehold improvements -- lesser of estimated useful
life of the asset or term of the lease.
Projects in progress include leasehold improvements and purchased furniture
and equipment for future banking branches. Amortization and depreciation expense
commences when the branch is opened for business.
Maintenance and repairs are charged to expense as incurred.
OTHER REAL ESTATE OWNED
Other real estate owned includes properties that have been acquired by the
Bank through foreclosure or accepted by the Bank in-lieu of foreclosure. Other
real estate is carried at the lower of: (1) the estimated fair value of the
property, generally as determined by independent appraisals, less estimated
costs to sell, and (2) the recorded investment in the related loan at the date
of foreclosure. Subsequent reserves and adjustments to the carrying value of the
properties to reflect declines in the estimated fair value after the date of
foreclosure as well as carrying and disposal costs are charged to operating
expenses.
INTANGIBLE ASSETS
Intangible assets include the cost of acquired bank branches deposits (core
deposit intangible assets), which are being amortized on a straight-line basis
over a 12-year period. Management periodically reviews the core deposit
intangible assets for potential impairment and, if required, writes down the
carrying value through a charge to current operations.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating losses and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established against certain deferred
tax assets when the realization of the deferred tax assets cannot be reasonably
assured. Increases or decreases in the valuation allowance are charged or
credited to income tax provision (benefit).
52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TRUST DEPARTMENT ASSETS AND INCOME
Property held in fiduciary or agency capacities, except cash balances, for
the Bank's customers is not included in the accompanying consolidated statements
of condition since such items are not assets of the Bank. Cash balances held for
trust customers are reflected as deposit liabilities of the Bank. Trust
department income is recorded on a cash basis which approximates the accrual
method of accounting.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On the date a derivative contract is entered into, the Bank designates the
derivative as either a hedge of the fair value of a recognized asset or
liability or of an unrecognized firm commitment (fair value hedge), a hedge of a
forecasted transaction or the variability of cash flows to be received or paid
related to a recognized asset or liability (cash flow hedge), a foreign-currency
fair-value or cash-flow hedge (foreign currency hedge), or a hedge of a net
investment in a foreign operation. The Bank currently has only fair value xxxxxx
pertaining to $175 million in outstanding FHLB advances. For all hedging
relationships the Bank formally documents the hedging relationship and its
risk-management objective and strategy for undertaking the hedge, the hedging
instrument, the item being hedged, the nature of the risk being hedged, how the
hedging instrument's effectiveness in offsetting the hedged risk will be
assessed, and a description of the method of measuring ineffectiveness. This
process includes linking derivatives that are designated as fair-value xxxxxx to
specific liabilities on the balance sheet. The Bank also formally assesses, both
at the hedge's inception and on an ongoing basis, whether the derivatives that
are used in hedging transactions are highly effective in offsetting changes in
the fair values of the hedged items. Changes in the fair value of a derivative
that is highly effective and that is designated and qualifies as a fair-value
hedge, along with the loss or gain on the hedged liability that is attributable
to the hedged risk, are recorded in earnings. The ineffective portion of the
change in fair value of a derivative instrument that qualifies as a fair-value
hedge is reported in earnings.
STOCK-BASED COMPENSATION
The Bank accounts for stock-based compensation using the
intrinsic-value-method under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employers" and related interpretations.
Accordingly, no compensation expense has been recognized for stock options
issued with an exercise price equal to the stock's market value at the date of
grant. The Bank has recorded compensation expense related to any issuances of
options at exercise prices less than market value of the Bank's stock at the
date of grant.
Financial Accounting Standards Board ("FASB") Statement No. 123,
"Accounting for Stock-Based Compensation," as amended by FASB Statement No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure," permits
the use of the intrinsic value method but requires disclosure of pro forma net
income and earnings per share as if the stock based compensation had been
accounted for using the fair value method. Had compensation costs for the Bank's
stock option plans been determined based on the fair
53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value method, the Bank's net income and earnings per share would have been
reduced to the pro forma amounts indicated below.
2003 2002 2001
--------- --------- ---------
($ IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net income, as reported................................. $18,071 $37,990 $34,517
Stock-based compensation expense included in reported
net income under the intrinsic value method, , net of
related tax effects................................... 252 245 66
Total stock-based compensation expense determined under
the fair-value-based method, including all stock
option grants, net of related tax effects............. (2,147) (1,927) (1,342)
------- ------- -------
Pro forma net income.................................... $16,176 $36,308 $33,241
======= ======= =======
Basic earnings per share --
As reported............................................. $ 0.99 $ 2.07 $ 1.86
Pro forma............................................... $ 0.88 $ 1.97 $ 1.80
Diluted earnings per share --
As reported............................................. $ 0.95 $ 2.03 $ 1.84
Pro forma............................................... $ 0.85 $ 1.94 $ 1.77
Weighted average fair value of options granted during
the year.............................................. $ 9.41 $ 6.41 $ 6.36
The fair value of stock options granted by the Bank was estimated through
the use of the Black-Scholes option pricing model applying the following
assumptions --
2003 2002 2001
--------- --------- ---------
Risk-free interest rate.............................. 3.13% 3.72% 5.42%
Expected option life................................. 6.5 years 6.5 years 6.5 years
Expected volatility.................................. 32.38% 28.05% 28.53%
Expected dividend yield.............................. 2.22% 2.49% 2.38%
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents includes
cash on hand, amounts due from banks and Federal funds sold.
The following disclosures supplement the consolidated statements of cash
flows -
2003 2002 2001
------- -------- --------
($ IN THOUSANDS)
Cash paid during the year for --
Interest.............................................. $80,238 $109,100 $136,341
Income taxes.......................................... 5,666 22,779 4,280
Non-cash investing activities --
Loans securitized and held in securities available for
sale................................................ -- -- 167,424
Transfer of loans to other real estate owned.......... -- 188 877
Transfer of premises to assets held for sale (other
assets)............................................. -- 7,420 --
Transfer of loans from held in portfolio to held for
sale................................................ 19,114 -- --
54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER COMMON SHARE
Basic earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the year.
Diluted earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the year, as
adjusted for the assumed exercise of potentially dilutive common stock options
utilizing the Treasury Stock method.
CALCULATION OF BASIC AND DILUTED EARNINGS PER SHARE: 2003 2002 2001
---------------------------------------------------- ----------- ----------- -----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Income....................................... $ 18,071 $ 37,990 $ 34,517
=========== =========== ===========
Weighted average common shares outstanding....... 18,338,712 18,386,331 18,513,826
Plus: Dilutive stock options..................... 594,803 308,417 222,155
----------- ----------- -----------
Diluted weighted average common shares outstanding.. 18,933,515 18,694,748 18,735,981
=========== =========== ===========
Earnings per common share:
Basic............................................ $ 0.99 $ 2.07 $ 1.86
Diluted.......................................... $ 0.95 $ 2.03 $ 1.84
RETIREMENT BENEFITS
The Bank maintains two noncontributory defined benefit retirement plans
(the Plans), which cover all employees who have met eligibility requirements of
the Plans. The benefits are based on years of service and the employee's five
highest consecutive years of earnings during the ten-year period prior to normal
retirement date, as defined. The Plans are funded currently sufficiently to meet
the minimum funding requirements set forth in the Employee Retirement Income
Security Act of 1974. The Bank accounts for the cost of these Plans over the
estimated service period of the employees covered under the Plans. In accordance
with FASB Statement No. 87, the Bank utilizes the "immediate recognition" method
in recognizing all experience gains and losses as a component of periodic
pension expense. Under this method, all experience gains and losses (including
changes in market values of Plan assets and the effect of discount rates on Plan
obligations) are recognized in the period in which they occur.
COMPREHENSIVE INCOME
Comprehensive income includes net income and the change in net unrealized
gains and losses on securities available for sale, net of taxes.
BANK OWNED LIFE INSURANCE
The Bank has purchased life insurance policies covering specified senior
officers. These policies are recorded in other assets at their cash surrender
value, net of any policy premium charged. Increases in cash surrender value, net
of policy premiums, and proceeds from death benefits in excess of cash surrender
value are recorded in non-interest income.
SEGMENT REPORTING
As a community-oriented financial institution, substantially all of the
Bank's operations involve the delivery of loan and deposit products to
customers. The Bank makes operating decisions and assesses performance based on
an ongoing review of these community-banking operations, which constitute the
only operating segment for financial reporting purposes.
55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, such as bank premises and equipment and purchased
intangible assets subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), "Consolidation of Variable Interest Entities," which addresses
how a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities," which was issued in January 2003.
The Bank will be required to apply FIN 46R to variable interests in any VIEs
created after December 31, 2003. At December 31, 2003, the Bank did not have any
interest in VIEs within the scope of FIN 46R.
FASB Statement No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity," was issued in May 2003. This
Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The Statement also includes required disclosures for financial
instruments within its scope. For the Bank, the Statement was effective for
instruments entered into or modified after May 31, 2003 and otherwise will be
effective as of January 1, 2004, except for mandatorily redeemable financial
instruments. For certain mandatorily redeemable financial instruments, the
Statement will be effective for the Bank on January 1, 2005. The effective date
has been deferred indefinitely for certain other types of mandatorily redeemable
financial instruments. The Bank currently does not have any financial
instruments that are within the scope of this Statement. The Bank currently does
not have any financial instruments that are within the scope of the Statement.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 2002, FASB Statement No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," was issued. Statement No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." The provisions of
Statement No. 146 were effective for exit or disposal activities initiated after
December 31, 2002, with early application encouraged. The Bank accounted for the
costs of closing certain banking branches during 2003 in accordance with the
provisions of Statement No. 146 (see note 3).
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, and interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34," was issued. This Interpretation
enhances the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the
Interpretation were applicable to guarantees issued or modified after December
31, 2002 and the disclosure requirements were effective for financial statements
of interim or annual periods ending after December 15, 2002. The adoption of FIN
45 did not have a significant impact on the Bank's Consolidated Financial
Statements.
56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In November 2003, the Emerging Issues Task Force (EITF) issued EITF Issue
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments." Issue 03-1 requires new tabular and narrative disclosure
items effective for fiscal years ending after December 15, 2003. Companies are
required to provide expanded information about their debt and marketable equity
securities with market values below carrying values. The narrative information
must include positive and negative information management considered in
concluding the unrealized loss was not other-than-temporary and therefore was
not recognized. The Bank's disclosures in notes 1 and 6 incorporate the
requirements of Issue No. 03-1.
In December 2003, FASB Statement No. 132 (revised), "Employers' Disclosures
about Pensions and Other Postretirement Benefits," was issued. Statement No. 132
(revised) prescribes employers' disclosures about pension plans and other
postretirement benefit plans; it does not change the measurement or recognition
of those plans. The Statement retains and revises the disclosure requirements
contained in the original Statement No. 132.
It also requires additional disclosures about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. The Statement generally is effective for fiscal
years ending after December 15, 2003. The Bank's disclosures in note 16
incorporate the requirements of Statement No. 132 (revised).
RECLASSIFICATIONS
Certain amounts have been reclassified to conform to the current year
presentation.
NOTE 2. MERGER AGREEMENT WITH NORTH FORK BANCORPORATION AND NORTH FORK BANK
On December 16, 2003, the Bank entered into a definitive agreement to be
acquired by North Fork Bancorporation ("NFB") in an all-stock transaction valued
at $726 million. The Bank's stockholders will receive a fixed exchange ratio of
one share of NFB common stock for each share held. The transaction is intended
to qualify as a reorganization for federal income tax purposes and provide a
tax-free exchange of shares.
The definitive agreement has been approved by the directors of both NFB and
the Bank. The transaction is subject to all required regulatory approvals,
approval of the stockholders of the Bank (by a two-thirds vote of outstanding
shares), and other customary conditions. Bank stockholders holding approximately
42% of the Bank's stock have committed to vote in favor of the merger through
the execution of voting agreements. The transaction is expected to be completed
in the second quarter of 2004.
At December 31, 2003, the Bank had incurred professional fees and costs
amounting to $7.2 million directly related to the merger agreement, comprised of
investment banking, legal and accounting fees of $1.3 million and costs under
certain employment contracts of $5.9 million. When the transaction closes,
additional professional fees will be incurred and additional amounts will be due
under employment contracts and severance arrangements (the latter amounts will
be dependent upon the number and composition of employees not retained by NFB).
In connection with its merger agreement with NFB, the Bank committed to
sell certain commercial real estate loans to one borrower totaling $29.2 million
(including unfunded commitments of $0.9 million). The borrower has recently
exhibited a deterioration in financial condition but remains current as to
principal and interest. If the Bank is unable to sell the loans prior to the
effectiveness of the merger, certain principal stockholders of the Bank have
agreed, at NFB's request, to purchase the loans for $20 million. Accordingly,
during the fourth quarter 2003, the Bank recognized a loan charge-off of $9.2
million, placed the loans on non-accrual status, reclassified the remaining
balance of the loans to the held-for-sale category and replenished the allowance
for loan losses through a charge to the provision for loan losses of $9.2
million.
57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PURCHASE, SALE AND CLOSING OF BRANCH OFFICES
In December 2001, the Bank entered into an agreement with CFS Bank, a
subsidiary of New York Community Bank, to purchase 7 in-store branches, located
in Rockland County, New York, and various counties in New Jersey. The
transaction was consummated in May 2002. As a result of this transaction, the
Bank added $63.4 million of deposits and a core deposit intangible asset of
$1,165,000, which is being amortized over a 12-year period. In February 2001,
the Bank consummated the purchase of 4 in-store branches in various counties of
New Jersey from The Bank of New York. This purchase added $15.6 million of
deposits and a core deposit intangible asset of $1,168,000, which is being
amortized over a 12-year period. Amortization expense of the core deposit
intangible associated with these two purchases amounted to $194,000 in 2003,
$201,000 in 2002 and $43,000 in 2001. Annual amortization expense relating to
these purchases for each of the next five years is $194,000.
During 2003, the Bank closed ten in-store banking branches -- one in the
second quarter 2003 and nine in the fourth quarter 2003. Total costs incurred
for the branch closings, consisting of remaining lease commitments, write-offs
of bank premises and equipment and lease restoration expenses, amounted to
$840,000 that was recorded in other expenses. Also during the fourth quarter
2003, the Bank sold one of the branches scheduled to be closed to another
financial institution for $150,000 that was recorded in other income and
negotiated the sale of a second branch to a different financial institution for
$350,000. The sale of the second branch will close during 2004.
In January 2004, the Bank announced plans to close an additional 20
in-store branches, continuing a strategy of closing under-performing locations.
These closings are expected to occur no later than May 2004, prior to the
anticipated closing of the merger with NFB. It is estimated that a pretax charge
of $7.0 million will be recognized in the second quarter 2004 with respect to
the twenty branches that are being closed. Consistent with its previous
experience, the Bank believes that it will retain a major portion of the
deposits and customer relationships of these branches. The Bank estimates that
the in-store closings will contribute $4.0 million in pretax earnings on an
annual basis.
NOTE 4. REGULATORY CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTION
The Federal Deposit Insurance Corporation, the primary Federal oversight
agency of the Bank, and the New Jersey Department of Banking and Insurance have
issued regulations classifying and defining capital for all banks into the
following components: (1) Tier 1 capital which includes tangible stockholders'
equity for common stock and certain perpetual preferred stock and (2) Tier 2
capital which includes a portion of the allowance for loan losses and preferred
stock which does not qualify for Tier 1 capital.
The Bank is subject to various regulatory capital requirements administered
by the banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance sheet items calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
As of December 31, 2003, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table below.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain certain minimum capital ratios. Such ratios are
defined in the regulations and include the Tier 1 Capital Ratio
58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Tier 1 capital to risk-weighted assets), the Total Capital Ratio (Tier 1
capital plus Tier 2 capital to risk-weighted assets) and the Leverage Ratio
(Tier 1 capital to average assets).
The Bank's actual capital amounts and ratios, as well as the amounts and
ratios required to meet regulatory minimums, are set forth below --
FOR CAPITAL TO BE WELL CAPITALIZED
ADEQUACY PURPOSES UNDER FDIC PROVISION
ACTUAL ----------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ------ ---------- ---------
($ IN THOUSANDS)
As of December 31, 2003 --
Total capital.......................... $257,209 10.03% $205,175 >8.00% $256,469 >10.00%
Tier 1 capital......................... 247,065 9.63 102,588 >4.00 153,881 > 6.00
Leverage............................... 247,065 5.75 171,910 >4.00 214,887 > 5.00
As of December 31, 2002 --
Total capital.......................... $249,934 10.14% $197,092 >8.00% $246,364 >10.00%
Tier 1 capital......................... 239,963 9.74 98,546 >4.00 147,819 > 6.00
Leverage............................... 239,963 5.47 175,555 >4.00 219,443 > 5.00
Under the New Jersey Banking Act, a New Jersey state chartered bank may
declare and pay dividends on its outstanding stock only to the extent that the
payment of the dividend would not impair the capital stock of the Bank. In
addition, a New Jersey bank may not pay a dividend if the surplus of the Bank
would, after the payment of the dividend, be reduced unless after such reduction
the surplus was 50% or more of the Bank's capital stock.
NOTE 5. CASH AND DUE FROM BANKS
Balances reserved to meet regulatory requirements amounted to $12,399,000
at December 31, 2003 and averaged $10,305,000 for the year 2003.
59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. SECURITIES
The amortized cost and estimated fair value of securities as of December
31, 2003 and 2002, follows --
DECEMBER 31, 2003
-----------------------------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED ESTIMATED
AMORTIZED COST HOLDING GAINS HOLDING LOSSES FAIR VALUE
-------------- ---------------- ---------------- ----------
($ IN THOUSANDS)
Securities Available for Sale:
U.S. Treasury................. $ 12,055 $ -- $ -- $ 12,055
U.S. Government agencies and
sponsored corporations...... 240,269 1,076 (344) 241,001
States and political
subdivisions................ 264,626 10,113 (3) 274,736
Mortgage backed securities --
Primarily U.S. Government
sponsored corporations...... 1,006,657 9,645 (5,680) 1,010,622
Trust preferred securities.... 89,735 7,284 (488) 96,531
Federal Home Loan Bank
stock....................... 27,500 -- -- 27,500
Other securities.............. 15,421 540 -- 15,961
---------- ------- ------- ----------
Total......................... $1,656,263 $28,658 $(6,515) $1,678,406
========== ======= ======= ==========
Securities Held to Maturity:
Trust preferred securities.... $ 52,427 $ 4,654 $ -- $ 57,081
========== ======= ======= ==========
DECEMBER 31, 2002
-----------------------------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED ESTIMATED
AMORTIZED COST HOLDING GAINS HOLDING LOSSES FAIR VALUE
-------------- ---------------- ---------------- ----------
($ IN THOUSANDS)
Securities Available for Sale:
U.S. Treasury................. $ 12,093 $ 1 $ -- $ 12,094
U.S. Government agencies and
sponsored corporations...... 386,654 2,089 -- 388,743
States and political
subdivisions................ 305,868 6,269 (118) 312,019
Mortgage backed securities --
Primarily U.S. Government
sponsored corporations...... 1,032,230 21,524 (11) 1,053,743
Trust preferred securities.... 109,894 3,930 (361) 113,463
Federal Home Loan Bank
stock....................... 32,250 -- -- 32,250
Other securities.............. 14,686 116 (49) 14,753
---------- ------- ------- ----------
Total......................... $1,893,675 $33,929 $ (539) $1,927,065
========== ======= ======= ==========
Securities Held to Maturity:
Trust preferred securities.... $ 52,636 $ 2,031 $ (92) $ 54,575
========== ======= ======= ==========
The amortized cost and estimated fair value of securities at December 31,
2003, by contractual maturity, except for mortgage backed securities and Federal
Home Loan Bank stock that are presented separately at
60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
their respective total amounts, are shown below. Expected maturities will differ
from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
ESTIMATED
AMORTIZED COST FAIR VALUE
-------------- ----------
($ IN THOUSANDS)
Securities Available for Sale:
Due in one year or less.................................... $ 26,814 $ 26,814
Due after one year through five years...................... 253,715 254,930
Due after five years through ten years..................... -- --
Due after ten years........................................ 341,577 358,540
Mortgage backed securities................................. 1,006,657 1,010,622
Federal Home Loan Bank stock............................... 27,500 27,500
---------- ----------
Total...................................................... $1,656,263 $1,678,406
========== ==========
Securities Held to Maturity:
Due after five years through ten years..................... $ 11,172 $ 12,173
Due after ten years........................................ 41,255 44,908
---------- ----------
Total...................................................... $ 52,427 $ 57,081
========== ==========
The proceeds from sales of available for sale securities and the gross
realized gains and gross losses on those sales in 2003, 2002 and 2001 are as
follows --
GROSS REALIZED
YEAR ENDED DECEMBER 31, PROCEEDS FROM SALES GROSS REALIZED GAINS LOSSES NET REALIZED GAINS
----------------------- ------------------- -------------------- -------------- ------------------
($ IN THOUSANDS)
2003........................... $ 230,456 $2,971 $(1,781) $1,190
2002........................... 703,333 9,113 (2) 9,111
2001........................... 1,146,456 12,425 (24) 12,401
Securities available for sale with a carrying value totaling $1.2 billion
at December 31, 2003, were pledged to secure deposits of public funds,
securities sold under agreements to repurchase, other borrowings and for other
purposes as required and permitted by law. Securities pledged to secure deposits
of public funds, securities sold under agreements to repurchase or other
borrowings were not under the sole control of the Bank.
Gross unrealized losses on securities available for sale and their related
estimated fair values, aggregated by security category and length of time that
individual securities have been in a continuous unrealized loss position, at
December 31, 2003, were as follows:
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
----------------------- ----------------------- ------------------------
UNREALIZED ESTIMATED UNREALIZED ESTIMATED UNREALIZED ESTIMATED
LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES* FAIR VALUE
---------- ---------- ---------- ---------- ----------- ----------
($ IN THOUSANDS)
U.S. Government agencies and
sponsored corporations...... $ (344) $ 24,289 $ -- $ -- $ (344) $ 24,289
Mortgage-backed securities.... (5,680) 442,988 -- -- (5,680) 442,988
Trust preferred securities.... -- -- (488) 4,261 (488) 4,261
States and political
subdivisions................ (3) 1,594 -- -- (3) 1,594
------- -------- ----- ------ ------- --------
Total......................... $(6,027) $468,871 $(488) $4,261 $(6,515) $473,132
======= ======== ===== ====== ======= ========
---------------
* The unrealized losses were caused by market interest rate increases. The
losses do not reflect declines in credit quality or the ability of the issuers
to meet their contractual repayment obligations. The Bank has the ability and
intent to hold these securities until a market price recovery or their
maturity. These securities are not considered other-than-temporarily impaired
at December 31, 2003.
61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. LOANS
The composition of loans held in portfolio as of December 31, 2003 and 2002
follows --
DECEMBER 31,
-----------------------
2003 2002
---------- ----------
($ IN THOUSANDS)
Commercial, financial and agricultural loans................ $ 192,893 $ 134,001
Consumer installment loans.................................. 682,116 642,462
Real estate loans --
1 - 4 family residential mortgages.......................... 501,266 219,209
Commercial mortgages........................................ 571,357 625,724
Other residential real estate loans......................... 109,222 103,768
Construction................................................ 75,852 65,406
---------- ----------
Total....................................................... $2,132,706 $1,790,570
========== ==========
The Bank extends credit in the normal course of business to its customers,
the majority of whom operate or reside within the State of New Jersey. Although
the Bank has a diversified loan portfolio, a portion of its borrowers' ability
to repay their loans is dependent on the economic environment of the real estate
industry and the general economic conditions in the New Jersey marketplace.
Not included in the table above is $66,095,000 and $251,284,000,
respectively, of loans that as of December 31, 2003 and December 31, 2002,
respectively, the Bank has designated as being held for sale. At December 31,
2003, loans held for sale consisted of $46,981,000 of 1 - 4 family residential
mortgage loans and $19,114,000 of loans to a single commercial real estate
customer. At December 31, 2002, loans held for sale consisted of only 1 - 4
family residential mortgage loans. Held for sale 1 - 4 family residential
mortgage loans are reported in the Consolidated Statements of Condition at the
lower of their aggregate cost or estimated fair value. The loans held for sale
for the commercial real estate customer are reported in the Consolidated
Statement of Condition at the lower of the cost or estimated fair value of each
individual loan.
In 2003, the Bank either directly sold or securitized and sold
(collectively the "sales") $567.4 million of 1 - 4 family residential mortgage
loans, and recorded a gain of $11.4 million on such sales. In 2002, the Bank
sold $524.4 million of 1 - 4 family residential mortgage loans, and recorded a
gain of $11.7 million on such sales. The Bank did not sell any loans during
2001. The gains on the sales have been reported in the Consolidated Statements
of Income in the line caption gains on sales of securitizations and loans.
Excluding loans held for sale of $19,114,000, which are current as to
principal and interest, as of December 31, 2003 and 2002, the Bank's non-accrual
loans amounted to $4,561,000 and $4,339,000, respectively. If interest had been
accrued on the non-accrual loans held in portfolio, income before provision for
income taxes would have increased approximately $402,000, $384,000, and $481,000
in 2003, 2002 and 2001, respectively. The amount of interest income recognized
on these loans was not significant to any period presented.
At December 31, 2003, the Bank had no outstanding commitments to lend to
borrowers whose loans were on non-accrual, except for a commitment of $886,000
to a commercial real estate customer whose loans have been classified as held
for sale. The commitment to extend credit to this commercial real estate
customer is dependent upon his ability to provide qualifying collateral to
support additional borrowing. At December 31, 2003, this customer would have
been able to borrow $609,000 under the Bank's commitment.
In addition, as of December 31, 2003 and 2002, the loan portfolio included
$285,000 and $1,112,000, respectively, of loans on which interest or principal
was 90 days or more past due and still accruing interest since these loans were
both well collateralized and in the process of collection.
62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Bank's recorded investment in impaired loans and the related valuation
allowance as of December 31, 2003 and 2002 follows --
DECEMBER 31, 2003 DECEMBER 31, 2002
---------------------- ----------------------
RECORDED VALUATION RECORDED VALUATION
INVESTMENT ALLOWANCE INVESTMENT ALLOWANCE
---------- --------- ---------- ---------
($ IN THOUSANDS)
Valuation allowance required................ $ 5,038 $982 $8,535 $1,164
Valuation allowance not required(1)......... 19,114 -- -- --
------- ---- ------ ------
Total impaired loans........................ $24,152 $982 $8,535 $1,164
======= ==== ====== ======
---------------
(1) The December 31, 2003 amount consists of commercial real estate loans in the
held for sale portfolio that are valued at the lower of cost or estimated
fair value.
This valuation allowance is included in the allowance for loan losses in
the Bank's Consolidated Statements of Condition. The average recorded investment
in impaired loans for the years ended December 31, 2003, 2002 and 2001 was
$6,045,000, $6,338,000 and $6,603,000, respectively.
Interest payments received on impaired loans are recorded as interest
income unless collection of the remaining investment is doubtful in which case
payments received are recorded as reductions of principal. The amount of
interest income recognized on impaired loans was not significant to any period
presented.
An analysis of loans to directors, executive officers or their associates
for the year ended December 31, 2003 follows --
($ IN THOUSANDS)
----------------
Balance at beginning of year................................ $26,071
New loans................................................... 3,776
Repayments.................................................. (8,246)
-------
Balance at end of year...................................... $21,601
=======
The above analysis excludes loans made to Wilshire Enterprises, Inc.,
formerly known as Wilshire Oil Company of Texas, (Wilshire). The Bank has
maintained a relationship with Wilshire through its former Chairman who had
served as President and Chairman of Wilshire, and later as a consultant to
Wilshire. The former Chairman's daughter is currently Chairman and Chief
Executive Officer of Wilshire. Loans to Wilshire aggregated approximately
$21,167,000 and $32,305,000 at December 31, 2003 and 2002, respectively. The
Bank recorded interest income on these loans amounting to $1,757,000, $2,111,000
and $2,400,000 in 2003, 2002 and 2001, respectively. These loans to Wilshire
bear interest at the prevailing interest rates (prime and above) at the time the
loans were made and mature at various dates through 2013. In addition, the Bank
had outstanding commitments to extend credit to Wilshire amounting to $2,075,000
and $391,000 at December 31, 2003 and 2002, respectively.
As of December 31, 2003, all loans to related parties were current as to
principal and interest payments.
63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on estimates, and ultimate losses
may vary from the current estimates. These estimates are reviewed periodically
and, as adjustments become necessary, they are reflected in operations in the
periods in which they become known.
An analysis of the changes in the allowance for loan losses follows --
2003 2002 2001
-------- ------- -------
($ IN THOUSANDS)
Balance at beginning of year............................ $ 9,971 $ 9,749 $ 8,517
Provision for loan losses............................... 12,800 2,200 2,200
Loans charged off(1).................................... (14,695) (4,060) (2,436)
Recoveries of loans charged off......................... 2,068 2,082 1,468
-------- ------- -------
Balance at end of year.................................. $ 10,144 $ 9,971 $ 9,749
======== ======= =======
---------------
(1) The 2003 total includes $9.2 million related to borrowings by a single
commercial real estate customer where the loans, net of the loan charge-off,
have been transferred to loans held for sale at a carrying value of $19.1
million.
NOTE 9. PREMISES AND EQUIPMENT
The detail of premises and equipment as of December 31, 2003 and 2002
follows --
DECEMBER 31,
-------------------
2003 2002
-------- --------
($ IN THOUSANDS)
Land........................................................ $ 5,013 $ 3,853
Buildings................................................... 27,018 23,426
Furniture, fixtures and equipment........................... 61,770 57,969
Leasehold improvements...................................... 20,413 22,515
Projects in process......................................... 803 2,111
-------- --------
Gross premises and equipment................................ 115,017 109,874
Less accumulated depreciation and amortization.............. 75,882 69,707
-------- --------
Net premises and equipment.................................. $ 39,135 $ 40,167
======== ========
Depreciation and amortization expense amounted to $8,949,000, $8,218,000
and $7,849,000 in 2003, 2002 and 2001, respectively.
Portions of the Bank's premises are leased to others under operating lease
agreements that expire in periods ending in 2007. Rental income of $389,000,
$343,000 and $276,000 in 2003, 2002 and 2001, respectively, has been applied
against occupancy expense in the accompanying Consolidated Statements of Income.
64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. OTHER REAL ESTATE OWNED
An analysis of the changes in other real estate owned during 2003 and 2002
follows --
2003 2002
------ -------
($ IN THOUSANDS)
Balance at beginning of year................................ $9,846 $13,387
New properties.............................................. -- 188
Properties sold............................................. (4,310) (1,377)
Write-downs to estimated fair value including costs to
sell...................................................... (2,218) (1,990)
Payments received on properties not sold and other.......... (47) (362)
------ -------
Balance at end of year...................................... $3,271 $ 9,846
====== =======
NOTE 11. DEPOSITS
The expected maturity distribution of time deposits as of December 31, 2003
follows --
2003
($ IN THOUSANDS)
----------------
Due in one year or less..................................... $1,225,254
Due between one and two years............................... 135,588
Due between two and three years............................. 40,209
Due between three and four years............................ 29,916
Due between four and five years............................. 27,065
Due over five years......................................... 10
----------
Total....................................................... $1,458,042
==========
As of December 31, 2003 and 2002, there were $727,112,000 and $789,695,000
of time deposits greater than $100,000, respectively. The amount of overdraft
deposits classified as commercial loans was $2,478,000 at December 31, 2003 and
$3,525,000 at December 31, 2002.
The total amount of public funds held on deposit as of December 31, 2003
and 2002, was $460,547,000 and $514,176,000, for which $422,699,000 and
$547,557,000 of the Bank's securities available for sale were pledged as
collateral, respectively.
NOTE 12. OTHER BORROWINGS
As of December 31, 2003 and 2002, other borrowings are comprised of the
following --
2003 2002
-------- -------
($ IN THOUSANDS)
Securities sold under agreements to repurchase.............. $118,947 $66,563
Demand notes -- U.S. Treasury............................... 2,384 4,720
-------- -------
Total....................................................... $121,331 $71,283
======== =======
Securities sold under agreements to repurchase at December 31, 2003 are
comprised of $50,000,000 with remaining maturities in excess of one year and
$68,947,000 of short-term borrowings generally maturing within 90 days. The
securities pledged as collateral for these transactions had an amortized cost of
$148,909,000 and a market value of $148,948,000 at December 31, 2003.
65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information regarding securities sold under agreements to repurchase and
demand notes -- U.S. Treasury follows --
2003 2002
-------- -------
($ IN THOUSANDS)
Securities sold under agreements to repurchase:
Balance at year end......................................... $118,947 $66,563
Weighted average interest rate at year end.................. 1.45% 1.34%
Maximum amount outstanding at any month-end during the
year...................................................... $175,781 $66,563
Average amount outstanding during the year.................. 64,426 39,221
Weighted average interest rate during the year.............. 1.27% 1.73%
Demand notes -- U.S. Treasury:
Balance at year end......................................... $ 2,384 $ 4,720
Weighted average interest rate at year end.................. 0.76% 0.99%
Maximum amount outstanding at any month-end during the
year...................................................... $ 4,965 $ 5,892
Average amount outstanding during the year.................. 1,516 2,869
Weighted average interest rate during the year.............. 1.04% 3.78%
At December 31, 2003 and 2002, the Bank did not have any committed credit
lines from other financial institutions.
NOTE 13. FEDERAL HOME LOAN BANK ADVANCES
The Bank may obtain advances from the Federal Home Loan Bank (FHLB) up to
25% of total assets (subject to the availability of qualifying collateral as
defined by the FHLB). The Bank must hold FHLB stock
66
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equal to at least 5% of the outstanding principal amount of total advances at
all times. At December 31, 2003 and 2002, FHLB advances consisted of the
following obligations.
PRINCIPAL BALANCE
---------------------------
DECEMBER 31, DECEMBER 31,
MATURITY DATE CALL DATE FIXED INTEREST RATE 2003 2002
------------- ---------------- ------------------- ------------ ------------
($ IN THOUSANDS)
May 1, 2006.............. January 30, 2004 4.540% $ 50,000 $ 50,000
June 6, 2006............. March 6, 2004 4.520 25,000 25,000
June 7, 2006............. March 7, 2004 4.500 25,000 25,000
June 13, 2006............ March 13, 2004 4.450 25,000 25,000
June 19, 2006............ June 18, 2003 4.340 -- 25,000
July 18, 2006............ January 18, 2004 4.420 50,000 50,000
August 11, 2006.......... Not callable 2.580 50,000 --
November 7, 2006......... November 7, 2004 3.420 -- 50,000
-------- --------
Advances with contractual maturities in
2006 225,000 250,000
-------- --------
November 28, 2007........ February 28, 5.750 75,000 75,000
2004
December 5, 2007......... March 5, 2004 5.515 25,000 25,000
-------- --------
Advances with contractual maturities in
2007 100,000 100,000
-------- --------
November 22, 2010........ February 21, 5.500 100,000 100,000
2004
November 29, 2010........ February 28, 5.650 75,000 75,000
2004
December 20, 2010........ March 20, 2004 4.880 25,000 25,000
-------- --------
Advances with contractual maturities in
2010 200,000 200,000
-------- --------
November 7, 2011......... November 7, 2005 3.700 -- 25,000
November 7, 2011......... November 7, 2006 4.005 25,000 25,000
-------- --------
Advances with contractual maturities in
2011 25,000 50,000
-------- --------
Total FHLB advances.... $550,000 $600,000
======== ========
During 2003, the Bank early extinguished three advances from the FHLB that
amounted to $100 million principal amount at a loss of $6,027,000. The loss is
recorded in the Consolidated Statement of Income in the line caption "Loss on
early extinguishment of debt." In addition, during 2003 the Bank entered into
interest rate swap contracts with embedded put options and designated such
contracts as a fair value hedge related to three FHLB advances totaling $175
million. See note 14 to the Consolidated Financial Statements for further
details.
The Bank participates in the Federal Home Loan Bank's Overnight Repricing
Advance Program, under which the Bank has a $50 million overnight revolving
credit line and a $50 million one month revolving credit line, the maximum
amounts available under this program. Both credit lines expire on December 15,
2004 and bear daily interest at the Federal funds rate plus a spread (that is
generally 12.5 basis points). At December 31, 2003, the full amounts of both
credit lines were available to the Bank.
NOTE 14. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In July 2003, the Bank entered into interest rate swap transactions with
embedded options for $175 million of convertible advances from the FHLB that are
designated as fair value xxxxxx. These xxxxxx are designed to convert fixed rate
borrowings into floating rate borrowings and to eliminate any call risk to which
the Bank had been subject. The $175 million notional interest rate swaps convert
the fixed interest rates that the Bank was paying on three separate advances
from the FHLB at interest rates ranging from 4.42% to 5.50% to floating interest
rates of 3-month LIBOR plus spreads ranging from 174 to 231 basis points. The
embedded option gives the Bank the right to convert the fixed rate received
under the interest rate
67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
swaps to a 3-month LIBOR rate. This right will be exercised if the FHLB calls
and the Bank converts the advances held by the Bank into 3-month LIBOR
instruments. Under the contractual terms of the advances, the Bank can choose to
convert each advance into either a floating or fixed interest rate at then
current market prices based upon the then current product listing offered by the
FHLB. With the embedded option, the Bank eliminated any interest rate risk
associated with the call provision of the FHLB advances. The effectiveness of
the fair value hedge is evaluated quarterly. The hedge was effective through
December 31, 2003.
By using interest rate swap contracts with embedded options to hedge
exposures to changes in interest rates and call risk, the Bank exposes itself to
credit risk and market risk. Credit risk is the failure of the counterparty to
perform under the terms of the interest rate swap contract. When the fair value
of the interest rate swap contract is positive, the counterparty owes the Bank,
which creates credit risk for the Bank. When the fair value of an interest rate
swap contract is negative, the Bank owes the counterparty and, therefore, it
does not possess credit risk. The Bank minimizes the credit risk in its interest
rate swap contracts by entering into transactions with high-quality
counterparties whose credit rating is A or higher or by requiring the
counterparty to deposit with us qualifying collateral.
Market risk is the adverse effect on the value of a financial instrument
that results from a change in interest rates. Under its interest rate swap
agreements, the Bank is receiving a payment that is based upon a fixed interest
rate and paying amounts that are based upon a short-term interest rate that
resets periodically as set forth in each agreement. As the short-term interest
rate declines at each reset date, the Bank's interest expense will decrease. As
the short-term interest rate increases at each reset date, the Bank's interest
expense will increase, but the increase is mitigated by the impact of the
embedded options.
The effectiveness of the hedge is measured at each reporting date through a
comparison of the change in fair value of the hedged FHLB advances against the
change in fair value of the interest rate swaps with embedded options from
inception of the hedging relationship. Since the underlying terms of these swaps
substantially mirror the terms of the hedged FHLB advances, hedge
ineffectiveness is minimal and is related to changes in the floating LIBOR
interest rate reset of the interest rate swaps. The change in fair values of the
hedge instruments since inception of the hedge relationships were not
significant.
As a fair value hedge, the Bank recognizes the results of the interest rate
swap contracts, including any hedge ineffectiveness, as an adjustment to
interest expense on the FHLB advances. For the period July 24, 2003 through
December 31, 2003, interest expense on borrowed funds has been reduced by
$1,381,000 due to the interest rate swap contracts.
NOTE 15. INCOME TAXES
The components of the provision for income taxes are as follows --
2003 2002 2001
------ ------- -------
($ IN THOUSANDS)
Federal:
Current provision........................................ $3,083 $13,645 $10,499
Deferred provision (benefit)............................. 786 (1,137) 2,606
------ ------- -------
Total Federal............................................ 3,869 12,508 13,105
------ ------- -------
State:
Current provision........................................ 1,468 1,121 326
Deferred provision (benefit)............................. (3,001) (321) 736
------ ------- -------
Total State.............................................. (1,533) 800 1,062
------ ------- -------
Total provision for income taxes......................... $2,336 $13,308 $14,167
====== ======= =======
68
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in accumulated other comprehensive income are income tax expense
(benefit) attributable to net unrealized gains (losses) on securities available
for sale in the amounts of $(3,937,000), $15,265,000 and $3,785,000 for the
years ended December 31, 2003, 2002 and 2001, respectively.
A reconciliation between the reported provision for income taxes and the
amount computed by multiplying income before taxes by the statutory Federal
income tax rate follows --
2003 2002 2001
------ ------- -------
($ IN THOUSANDS)
Income tax provision at statutory rate................... $7,142 $17,955 $17,039
Tax-exempt income, primarily from securities and bank
owned life insurance................................... (6,035) (5,156) (3,693)
State income taxes, net of Federal tax effect............ (996) 520 690
Merger related expenses.................................. 1,706 -- --
Other.................................................... 519 (11) 131
------ ------- -------
Provision for income taxes............................... $2,336 $13,308 $14,167
====== ======= =======
Effective tax rate....................................... 11.4% 25.9% 29.1%
====== ======= =======
The significant components of the net deferred tax liability as of December
31, 2003 and 2002 follow --
2003 2002
-------- --------
($ IN THOUSANDS)
Deferred tax assets:
Allowance for loan losses................................... $ 4,144 $ 4,073
Loans held for sale......................................... 3,758 --
Other real estate owned..................................... 2,809 3,306
Consulting contract......................................... 2,557 --
Reserve for account reconciling differences................. 2,042 --
Accrued stock appreciation rights........................... 815 1,777
Depreciation................................................ 1,009 3,610
Non-accrual loan interest................................... 467 325
Deferred compensation....................................... 465 673
Mortgage servicing rights................................... -- 647
Other....................................................... 2,715 424
-------- --------
Total deferred tax assets................................... 20,781 14,835
-------- --------
Deferred tax liabilities:
Pension plan................................................ (26,369) (21,970)
Net unrealized gain on securities available for sale........ (7,750) (11,687)
Discount accretion.......................................... (304) (934)
Other....................................................... -- (38)
-------- --------
Total deferred tax liabilities.............................. (34,423) (34,629)
-------- --------
Net deferred tax liability.................................. $(13,642) $(19,794)
======== ========
The Bank has state income tax loss carryforwards of approximately $10
million, which expire in 2010. Based upon taxes paid in the carryback period,
projected future taxable income and available tax planning strategies,
management has determined that it is more likely than not that the total
deferred tax assets will be realized.
69
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16. RETIREMENT AND INCENTIVE PLANS
The Bank has two noncontributory defined benefit retirement plans (the
Plans), funded through a self-administered trust, covering all employees with
one or more years of continuous employment. The Bank contributes such amounts as
are necessary on an actuarial basis to provide the Plans with assets sufficient
to meet the benefits to be paid to plan participants. The benefits are based on
years of service and the employee's five highest consecutive years of earnings
during the ten-year period prior to normal retirement date, as defined.
Changes in the Plans' benefit obligation are set forth in the following
table --
2003 2002
------- -------
($ IN THOUSANDS)
Benefit obligation at beginning of year..................... $28,704 $23,883
Service cost................................................ 2,565 1,974
Interest cost............................................... 1,900 1,645
Benefits paid............................................... (470) (424)
Actuarial loss.............................................. 3,193 1,626
------- -------
Benefit obligation at end of year........................... $35,892 $28,704
======= =======
Changes in the Plans' Assets are set forth below --
2003 2002
-------- -------
($ IN THOUSANDS)
Fair value of Plan assets at beginning of year.............. $ 81,237 $77,311
Actual return on Plan assets................................ 19,733 4,350
Benefits paid............................................... (470) (424)
-------- -------
Fair value of Plan assets at the end of year................ $100,500 $81,237
-------- -------
Funded status (Plan assets less benefit obligation)......... $ 64,608 $52,533
Unrecognized net asset...................................... (92) (145)
Unrecognized prior service cost............................. 36 53
-------- -------
Prepaid pension cost........................................ $ 64,552 $52,441
======== =======
Net pension expense (income) includes the following components --
2003 2002 2001
-------- ------ --------
($ IN THOUSANDS)
Service cost -- benefits earned during the periods...... $ 2,565 $1,974 $ 1,508
Interest cost on projected benefit obligation........... 1,900 1,645 1,519
Actual return on plan assets............................ (19,733) (4,350) (18,766)
Net deferral............................................ 3,211 1,644 1,595
Amortization of net asset at transition................. (53) (53) (53)
-------- ------ --------
Net pension expense (income)............................ $(12,110) $ 860 $(14,197)
======== ====== ========
In determining the projected benefit obligation, the discount rate used was
6.00% and 6.50% at December 31, 2003 and 2002, respectively, while the rate of
increase in future compensation levels was approximately 5.00% for
Administrative Employees and 4.33% for Collective Bargaining Employees in 2003
and 2002, with the inflation component of compensation increases amounting to
2.75% and 3.00% at December 31, 2003 and 2002, respectively. The expected
long-term rate of return on assets was 8.00% for 2003 and 2002. The expected
long-term rate of return is based on the portfolio as a whole and not on the
70
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sum of the returns on individual asset categories. The return is based
exclusively on historical returns, without adjustments. Since the Bank
recognizes all gains and losses, including investment experience immediately,
the expected long-term rate of return on assets does not have a significant
impact on the Bank's pension costs.
The Plan's weighted average asset allocations at December 31, 2003 and 2002
were as follows --
PLAN ASSETS AT
DECEMBER 31,
---------------
2003 2002
------ ------
Asset category:
Fixed income instruments.................................... 70.7% 11.9%
Trust Company of New Jersey common stock.................... 16.3 14.1
Pennfed Financial Services, Inc. common stock............... 4.7 18.5
United National Bancorp common stock........................ -- 31.7
Other equity securities..................................... 8.3 23.8
----- -----
100.0% 100.0%
===== =====
The Bank's investment policies and strategies for the pension benefits
plans do not use target allocations for the individual asset categories. The
Bank's investment goals are to maximize returns subject to specific risk
management policies. The portfolio underwent a restructuring in 2003 whereby its
exposure to large holdings of specific securities was strategically reduced
while realizing large gains on those positions. The Bank's risk management
policies permit investments in mutual funds, equity securities and other
financial instruments.
The Bank made no contributions to the Plans in 2003, 2002 and 2001, and
does not anticipate making any contributions in 2004.
Based on the Bank's current benefit policies, there are no other material
post-retirement benefits other than the retirement plans described above.
The Bank sponsors a 401(k) plan (the "Plan") that is available to all
administrative employees. Participants with one year of service are eligible to
receive the employer matching contribution. Subject to certain limitations
imposed by federal law, employees may contribute from 1% to 25% of their
eligible compensation to the Plan. The Bank may match a portion of the employee
contribution through discretionary employer-matching contributions that may vary
from year-to-year. The maximum employer matching contribution is 3.5% of
eligible compensation. The Plan provides various alternative investment options,
with the Bank's matching contributions being invested in the Employer Stock
Fund. The Bank charged expense for matching employer contributions of $694,000,
$622,000 and $589,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
NOTE 17. STOCK OPTION PLANS
Under the Executive and Incentive Stock Option Plans, the Stock Option
Committee (the Committee) may grant options to officers to purchase the Bank's
stock. Under the Non-Employee Directors Stock Option Plans, members of the
Bank's Board of Directors who are not employees of the Bank may be granted
options to purchase the Bank's stock under terms comparable to those offered to
employees under the Incentive Stock Option Plans.
Option prices are determined by the Committee, provided however, that the
option price of shares may not be less than the fair market value of such shares
at the date of grant for the Incentive Stock Option Plans and not less than 85%
of the fair market value of shares at the date of grant for the Executive Stock
Option Plan. The period during which an option may be exercised varies, but no
option may be exercised after ten years from the date of grant. Compensation
attributable to all options granted under the Executive Stock
71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option Plan amounted to charges of $426,000 in 2003, $415,000 in 2002 and
$112,000 in 2001 and is included in other expenses in the Consolidated
Statements of Income and as a credit to additional paid-in capital in the
Consolidated Statements of Changes in Stockholders' Equity.
The Committee may grant options under the Executive Stock Option Plan that
provide for a credit against the purchase price equal to any increase in the
fair market value of the common stock at the date of exercise over the fair
market value on the date of grant. In addition, the Committee may grant stock
appreciation rights (SARs) in tandem with options granted under the Executive
Stock Option Plan which allow the holder of a stock option to receive an amount
equal to the excess of the fair market value of the common stock at the exercise
date over the option price, at the Committee's discretion, in cash, common stock
or a combination of cash and common stock in lieu of exercising the option. In
the event that SARs are exercised, the number of shares available for issuance
under the plan is reduced by the number of shares covered by the SARs. For the
years 2003, 2002 and 2001, expense related to SARs amounted to $707,000,
$1,243,000 and $2,785,000, respectively. During 2003, the estate of the former
chairman exercised 205,200 SARs that resulted in the Bank making a payment of
$3.1 million to the estate. The liability included in the Consolidated
Statements of Condition related to SARs amounted to $1,994,000 at December 31,
2003 and $4,349,000 at December 31, 2002.
A summary of activity for the Executive and Incentive Stock Option Plans
for the years ended December 31, 2003, 2002 and 2001 follows --
2003 2002 2001
------------------------ ------------------------ ------------------------
OPTION PRICE OPTION PRICE OPTION PRICE
SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
--------- ------------ --------- ------------ --------- ------------
Options outstanding at beginning of
year.................................. 2,127,300 $9.78-27.00 1,838,128 $9.35-25.87 1,545,158 $ 5.69-25.87
Options granted......................... 272,500 24.40-35.50 481,350 19.90-27.00 484,400 16.90-19.88
Options exercised....................... (174,684) 9.78-24.08 (108,500) 9.35-25.88 (113,481) 7.44-20.56
Options terminated/expired(1)........... (380,150) 9.78-28.70 (83,678) 11.00-20.56 (77,949) 5.69-25.87
--------- --------- ---------
Options outstanding at end of year...... 1,844,966 9.78-35.50 2,127,300 9.78-27.00 1,838,128 9.35-25.87
========= ========= =========
Options exercisable at end of year...... 1,037,067 9.78-29.40 1,131,880 9.78-25.88 904,488 9.35-25.87
========= ========= =========
---------------
(1) Options terminated/expired in 2003 include 205,200 options that had SARs
attached. When the SARs were exercised in 2003, the options were terminated.
The following table summarizes additional information about the Executive
and Incentive Stock Option Plans at December 31, 2003 --
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
$ 9-12.................. 268,196 4.8 years $11.00 214,236 $10.99
12-15.................. 75,935 6.0 13.52 63,135 13.52
15-18.................. 287,440 5.5 16.30 203,680 16.25
18-21.................. 611,155 6.7 19.91 432,855 19.92
21-24.................. 231,970 8.5 23.32 88,888 23.31
24-27.................. 103,470 8.6 25.43 32,333 25.01
27-30.................. 9,700 9.4 29.22 1,940 29.22
30-36.................. 257,100 9.8 32.37 -- --
--------- ---------
9-36.................. 1,844,966 7.0... 20.31 1,037,067 17.43
========= =========
72
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the non-employee directors stock option plan, in each of the years
2003, 2002 and 2001, the Bank granted 35,000 options to various qualifying
directors with an exercise price equal to the stock's market value at the
respective date of grant. These options are exercisable at prices ranging from
$17.33 -- $29.08 and are fully vested after one year. At December 31, 2003,
140,000 options were outstanding and 105,000 options were exercisable under this
plan.
At December 31, 2003 there were 656,150 options remaining available for
grant under all of the Bank's stock option plans.
NOTE 18. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Bank was a party to an employment agreement with the former Chairman of
the Bank, the late Siggi X. Xxxxxx. In the event of his death, his estate would
receive certain specified payments. The Bank, upon Xx. Xxxxxx'x death in January
2003 recorded in the first quarter 2003 a $7.9 million liability representing
the present value of these payments. At December 31, 2003, the remaining
liability under this contract was $6.6 million.
The Bank is also a party to employment agreements with members of executive
management that expire in 2004 through 2005, which provide for minimum annual
salaries and minimum cash bonuses during the term of the agreements and other
customary benefits. The employees may resign and the Bank may terminate the
agreements with or without cause. If the Bank terminates the agreements without
cause, the Bank is required to make lump-sum payments to the employees and to
provide other benefits for a specified period of time. The agreements also
provide for the payment of lump-sum amounts in the event of a change in control.
See note 2 to the Consolidated Financial Statements for a discussion of payments
made in conjunction with the merger agreement with NFB.
OWNERSHIP
On February 13, 2003, the Bank announced that it had determined that its
former Chairman, the late Siggi X. Xxxxxx, owned a larger interest in the Bank
than had been reported previously. The additional shares were held in accounts
that had not been attributed to Xx. Xxxxxx, including one account held through
the Bank.
The Bank formed a special committee of independent directors to review the
matter and the involvement of the Bank and related persons. The committee found
that, during the period from January 30, 1992 through September 10, 2001 Xx.
Xxxxxx purchased 848,070 shares of the Bank's common stock, and during the
period from January 26, 1998 through February 12, 2002 Xx. Xxxxxx sold 119,675
shares of the Bank's common stock, in each case in a transaction that was not
previously attributed to him. As a result of this review, the Estate of Siggi X.
Xxxxxx (i) disgorged any profits made on these transactions and (ii) filed a
Form S-8 on November 22, 2003 itemizing each of the previously unreported
transactions. These matters did not have a material impact to the Bank's
financial statements or its customers.
The Bank has cooperated fully with federal and state regulatory authorities
in investigating this matter and developing remedial measures.
LITIGATION
The Bank is party, in the ordinary course of business, to litigation
involving collection matters, contract claims and other miscellaneous causes of
action arising from its business. In the opinion of management, none of these
proceedings are expected to have a material effect on the consolidated financial
position or results of operations of the Bank.
73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPERATING LEASES
The Bank leases several of its branch offices under noncancelable operating
leases expiring at various dates through 2022. Under the terms of these leases,
the minimum annual rentals are as follows --
$ (IN THOUSANDS)
----------------
2004........................................................ $5,647
2005........................................................ 5,067
2006........................................................ 4,477
2007........................................................ 3,736
2008........................................................ 2,615
Thereafter.................................................. 8,375
Rental expense for these facilities is included in occupancy expense in the
accompanying Consolidated Statements of Income and amounted to $5,900,000,
$4,992,000 and $4,698,000, in 2003, 2002 and 2001, respectively.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments consist of commitments to extend credit and standby
letters of credit. These financial instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the accompanying Consolidated Statements of Condition. The contract or notional
amounts of these instruments express the extent of involvement the Bank has in
each class of financial instrument.
The Bank had outstanding commitments to extend credit to borrowers of
approximately $332,987,000 and $280,334,000 at December 31, 2003 and 2002,
respectively. The Bank also had available home equity and overdraft lines of
credit of approximately $129,274,000 and $98,845,000, at the respective
year-ends. Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the customer.
The Bank is also contingently liable for outstanding letters of credit
totaling $19,930,000 at December 31, 2003 and $20,835,000 at December 31, 2002.
The credit risk and underwriting procedures involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. Approximately 75% of the Bank's outstanding standby letters of credit
are performance standby letters of credit within the scope of FASB
Interpretation No. 45. These are irrevocable undertakings by the Bank, as
guarantor, to make payments in the event a specified third party fails to
perform under a non-financial contractual obligation. Most of the Bank's
performance standby letters of credit arise in connection with lending
relationships and have terms of one year or less. The maximum potential future
payments the Bank could be required to make equals the face amount of the
letters of credit shown above. The fair value of the Bank's recognized liability
for performance standby letters of credit was insignificant at December 31, 2003
and 2002.
OTHER
The increase in all other expenses is also attributable to a $5.0 million
provision that was established in 2003 for probable losses incurred by the Bank
related to unreconciled general ledger accounts. During
74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
February 2004, the Bank discovered unreconciled differences in certain general
ledger accounts that amounted to approximately $4.8 million. The Bank is
reviewing this matter, but as of yet cannot identify the specific transactions
that caused the difference. Based upon their nature, we believe that any
substantial collection of these items is remote and a loss from these
differences is probable and have recorded a liability of $5.0 million before
taxes ($3.0 million after taxes) in the fourth quarter 2003 to cover losses
expected to arise from this review.
NOTE 19. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair value of
certain financial instruments. Financial instruments include cash, loans, debt
and equity securities, deposit liabilities, borrowings, interest rate swaps,
loan commitments, standby letters of credit, financial guarantees and other
similar agreements. The fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction between willing
parties, other than a forced or liquidation sale.
Estimated fair values have been determined by the Bank using the best
available data and estimation methodology suitable for each category of
financial instruments. For those loans and deposits with floating interest
rates, it is presumed that estimated fair values generally approximate their
recorded book balances. The estimation methodologies used, the estimated fair
values and recorded book balances of the Bank's financial instruments at
December 31, 2003 and 2002 are as follows -
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from bank balances and
Federal funds sold. For these instruments, the recorded book balance
approximates their fair value.
SECURITIES
For securities in the Bank's portfolio, fair value was determined by
reference to quoted market prices. In the few instances where quoted market
prices were not available, prices for similar securities were used. Additional
detail is contained in Note 6 to these Consolidated Financial Statements.
LOANS
The Bank aggregated loans into pools having similar characteristics when
comparing their terms, contractual rates, type of collateral, risk profile and
other pertinent loan characteristics. Since no active market exists for these
pools, fair values were estimated using the present value of future cash flows
expected to be received. Loan rates currently offered by the Bank were used in
determining the appropriate discount rates.
DEPOSITS
The fair value of demand deposits, savings deposits and certain money
market accounts approximate their recorded book balances. The fair value of
fixed maturity certificates of deposit was estimated using the present value of
discounted cash flows based on rates currently offered for deposits of similar
remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The fair value of securities sold under agreements to repurchase
approximates their respective recorded book balances as these instruments are
short-term in nature.
75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEDERAL HOME LOAN BANK ADVANCES
The fair value of Federal Home Loan Bank advances is based on a discounted
net present value method using market price indications.
OFF-BALANCE SHEET COMMITMENTS
The liability associated with off-balance sheet commitments to fund loans
and credits to borrowers, which were paid for by customers or otherwise legally
binding upon the Bank, have been priced on the basis of fees currently charged
to enter similar agreements, taking into account remaining terms and the
counterparties' credit standing.
The following estimates may not reflect the actual amount that could be
realized if all or substantially all of the financial assets were offered for
sale or financial liabilities were settled. This is due to the fact that no
market exists for a sizable portion of loan, deposit and off-balance sheet
instruments. Further, the estimates made by management were subjective in nature
and were based upon their judgment as to certain economic scenarios. These
estimates are also subject to uncertainties. Changes in assumptions or economic
conditions and/or market segments or products could materially affect future
estimates.
In addition, reasonable comparability between financial institutions may
not be likely due to the wide range of permitted valuation techniques and
numerous estimates which must be made given the absence of active secondary
markets for many of the financial instruments. This lack of uniform valuation
methodologies also introduces a greater degree of subjectivity to these fair
values.
The estimated fair values and the recorded book balances of the Bank's
financial instruments as of December 31, 2003 and 2002 are as follow -
DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------- -------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE
---------- ------------ ---------- ------------
($ IN THOUSANDS)
Financial assets:
Cash and cash equivalents........... $ 147,403 $ 147,403 $ 185,382 $ 185,382
Securities.......................... 1,735,487 1,730,833 1,981,640 1,979,701
Loans, net.......................... 2,202,329 2,188,657 2,103,065 2,031,883
Financial liabilities Deposits...... 3,317,138 3,306,683 3,468,829 3,437,282
Securities sold under agreements to
repurchase and other borrowings... 121,442 121,331 71,283 71,283
Federal Home Loan Bank advances..... 600,567 550,000 636,554 600,000
Off-balance sheet commitments:
Commitments to extend credit........ 1,684 1,684 2,417 2,417
76
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
The Trust Company of New Jersey:
We have audited the accompanying consolidated statements of condition of
The Trust Company of New Jersey and subsidiaries as of December 31, 2003 and
2002, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2003. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Trust
Company of New Jersey and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
(KPMG)
Short Hills, New Jersey
February 25, 2004
77
CONSOLIDATED QUARTERLY FINANCIAL DATA
FOR THE THREE MONTHS ENDING
-----------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
2003 2003 2003 2003
----------- ----------- ----------- -----------
(UNAUDITED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income.................. $ 53,177 $ 52,327 $ 48,397 $ 50,684
Interest expense................. 22,422 20,604 18,185 17,436
----------- ----------- ----------- -----------
Net interest income.............. 30,755 31,723 30,212 33,248
Provision for loan losses........ 800 800 1,000 10,200
Non-interest income.............. 12,448 10,087 8,547 8,358
Non-interest expense............. 41,137 28,485 23,864 38,685
----------- ----------- ----------- -----------
Income (loss) before income
taxes.......................... 1,266 12,525 13,895 (7,279)
Income tax expense (benefit)..... (1,962) 3,127 3,921 (2,750)
----------- ----------- ----------- -----------
Net income (loss)................ $ 3,228 $ 9,398 $ 9,974 $ (4,529)
=========== =========== =========== ===========
Earnings (loss) per
share -- diluted............... $ 0.17 $ 0.50 $ 0.53 $ (0.25)
Average shares
outstanding -- diluted......... 18,743,939 18,766,728 18,838,987 18,352,843
FOR THE THREE MONTHS ENDING
-----------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
2002 2002 2002 2002
----------- ----------- ----------- -----------
(UNAUDITED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income.................. $ 54,620 $ 56,378 $ 56,347 $ 57,009
Interest expense................. 27,927 27,109 26,458 25,252
----------- ----------- ----------- -----------
Net interest income.............. 26,693 29,269 29,889 31,757
Provision for loan losses........ 300 300 300 1,300
Non-interest income.............. 9,493 8,873 20,311 7,510
Non-interest expense............. 24,111 22,302 34,933 28,951
----------- ----------- ----------- -----------
Income before income taxes....... 11,775 15,540 14,967 9,016
Income tax expense............... 3,032 4,445 4,270 1,561
----------- ----------- ----------- -----------
Net income....................... $ 8,743 $ 11,095 $ 10,697 $ 7,455
=========== =========== =========== ===========
Earnings per share -- diluted.... $ 0.46 $ 0.59 $ 0.57 $ 0.40
Average shares
outstanding -- diluted......... 18,748,615 18,855,119 18,670,160 18,701,342
78
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, the
Bank conducted an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as of the end of the period covered by this report (the "Evaluation
Date"). There are inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility of human error and
the circumvention or overriding of the controls and procedures. Accordingly,
even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives.
Based on this evaluation, our principal executive officer and principal
financial officer concluded that, as of the Evaluation Date, our disclosure
controls and procedures were effective such that the information relating to the
Bank, including our consolidated subsidiaries, required to be disclosed in our
Exchange Act reports (i) is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms, and (ii) is accumulated and
communicated to the Bank's management, including our principal executive officer
and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Further, during the period covered by this report, there was no change in
our internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act) that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
79
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE BANK
The Bank has adopted (i) a Code of Ethics for Senior Financial Officers
(the "Code of Ethics") that applies to its chief executive officer, chief
financial officer, chief accounting officer and any person performing similar
functions and (ii) a "Code of Conduct and Conflict of Interest Policy" that
applies to all of its directors, officers (including its chief executive
officer, chief financial officer, chief accounting officer and any person
performing similar functions) and employees. Copies of the Code of Ethics and
the Code of Conduct may be obtained upon request, without charge, by contacting
the Bank's Secretary at (000) 000-0000 or by writing to us at The Trust Company
of New Jersey, 00 Xxxxxxx Xxxxxx, Xxxxxx Xxxx, XX 00000, Attention: Secretary.
The additional information required by this Item 10 will be contained in
the Bank's definitive proxy statement for its 2004 annual meeting of
stockholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be contained in the Bank's
definitive proxy statement for its 2004 annual meeting of stockholders and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 will be contained in the Bank's
definitive proxy statement for its 2004 annual meeting of stockholders and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 will be contained in the Bank's
definitive proxy statement for its 2004 annual meeting of stockholders and is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 will be contained in the Bank's
definitive proxy statement for its 2004 annual meeting of stockholders and is
incorporated herein by reference.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements. See Item 8.
(b) Reports on Form 8-K.
(i) Form 8-K dated October 23, 2003 disclosing (under Items 7 and 12)
a press release dated October 23, 2003 concerning the Company's results for
the three months ended September 30, 2003. Pursuant to applicable rules,
this report is not deemed to have been "filed."
(ii) Form 8-K dated December 16, 2003 disclosing (under Items 5 and 7)
a press release dated December 16, 2003 announcing that the Bank, North
Fork Bancorporation, Inc. and North Fork Bank had entered into an Agreement
and Plan of Merger.
(iii) Form 8-K dated December 18, 2003 filing (under Items 5 and 7)
the Agreement and Plan of Merger, dated as of December 16, 2003, by and
among the Bank, North Fork Bancorporation, Inc. and North Fork Bank, and
certain other documents with the FDIC.
(c) Exhibits. See Exhibit Index on page 82.
(d) Financial Statement Schedules: Not applicable
80
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused the report to be signed on its behalf by
the undersigned, thereunto duly authorized.
THE TRUST COMPANY OF NEW JERSEY
By: /s/ XXXX X. XXXXXX
------------------------------------
Xxxx X. Xxxxxx
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ XXXX X. XXXXXX Chairman of the Board, February 27, 2004
-------------------------------------- President, Chief Executive
Xxxx X. Xxxxxx Officer and Director
* Director February 27, 2004
--------------------------------------
Xxxxxx X. Xxxxxxx
* Director February 27, 2004
--------------------------------------
Xxxxxxxx X. Xxxxx
* Director February 27, 2004
--------------------------------------
Xxxxxxx X. Xxxxxx
* Director February 27, 2004
--------------------------------------
Xx. Xxxxxx X. Xxxxxxx
* Director February 27, 2004
--------------------------------------
Xxxx Xxxxxxx
* Director February 27, 2004
--------------------------------------
Xxxxxxx Xxxxx
* Director February 27, 2004
--------------------------------------
Xxxxxx Xxxxx
* Director February 27, 2004
--------------------------------------
Xxxxxx Xxxxxx
* By: /s/ XXXX X. XXXXXX
-----------------------------------------
Xxxx X. Xxxxxx
as attorney-in-fact
/s/ XXXXXXX X. XXXXX Executive Vice President & February 27, 2004
-------------------------------------- Chief Financial Officer
Xxxxxxx X. Xxxxx
81
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Agreement and Plan of Merger, dated as of December 16, 2003,
by and among North Fork Bancorporation, Inc., North Fork
Bank and the Bank (incorporated by reference to Exhibit 99.1
to the Bank's Current Report on Form 8-K filed with the FDIC
on December 18, 2003)
3.1 Restated Certificate of Incorporation of the Bank, dated
December 24, 1993 (incorporated by reference to Exhibit 3.1
to the Bank's Annual Report on Form 10-K for the year ended
December 31, 2002, filed with the FDIC on March 31, 2003)
3.2 Amended and Restated By-laws of the Bank (incorporated by
reference to Exhibit 3.1 to the Bank's Quarterly Report on
Form 10-Q/A for the quarter ended June 30, 2003, filed with
the FDIC on August 11, 2003)
10.1 1993 Incentive Stock Option Plan, as amended (incorporated
by reference to Exhibit 10.1 to the Bank's Annual Report on
Form 10-K for the year ended December 31, 2002, filed with
the FDIC on March 31, 2003)
10.2 1993 Executive Stock Option Plan, as amended (incorporated
by reference to Exhibit 10.2 to the Bank's Annual Report on
Form 10-K for the year ended December 31, 2002, filed with
the FDIC on March 31, 2003)
10.3 2002 Stock Option Plan (incorporated by reference to Exhibit
10.3 to the Bank's Annual Report on Form 10-K for the year
ended December 31, 2002, filed with the FDIC on March 31,
2003)
10.4 2002 Executive Stock Option Plan (incorporated by reference
to Exhibit 10.4 to the Bank's Annual Report on Form 10-K for
the year ended December 31, 2002, filed with the FDIC on
March 31, 2003)
10.5 2000 Non-employee Director Stock Option Plan (incorporated
by reference to Exhibit 10.5 to the Bank's Annual Report on
Form 10-K for the year ended December 31, 2002, filed with
the FDIC on March 31, 2003)
10.6 Employment Agreement by and between the Bank and Xxxx X.
Xxxxxx (incorporated by reference to Exhibit 10.7 to the
Bank's Annual Report on Form 10-K for the year ended
December 31, 2002, filed with the FDIC on March 31, 2003)
10.7 First Amendment to Employment Agreement by and between the
Bank and Xxxx X. Xxxxxx
10.8 Second Amendment to Employment Agreement by and between the
Bank and Xxxx X. Xxxxxx
10.9 Employment Agreement by and between the Bank and Xxxxxxx X.
Xxxxx
10.10 Employment Agreement by and between the Bank and Xxxxxx X.
Xxxxxx
10.11 Letter Agreement between the Bank and Xxxxx Van Grofski
10.12 Letter Agreement between the Bank and Xxxxxxx X. Xxxxxx
11 Statement re Computation of Per Share Earnings
12 Statement re Computation of Ratios of Earnings to Fixed
Charges
21 Subsidiaries of the Xxxxxxxxxx
00 Powers of Attorney
31.1 Certification of the Chief Executive Officer under Section
302 of the Xxxxxxxx-Xxxxx Act of 2002.
31.2 Certification of the Chief Financial Officer under Section
302 of the Xxxxxxxx-Xxxxx Act of 2002.
32.1 Certification of the Chief Executive Officer under Section
906 of the Xxxxxxxx-Xxxxx Act of 2002.
32.2 Certification of the Chief Financial Officer under Section
906 of the Xxxxxxxx-Xxxxx Act of 2002. The Bank will furnish
any exhibit listed above upon written request to the
Comptroller, Xxxx X. Xxxxxx.
82
