SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|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 _________________
Commission File Number: 0-50275
BCB BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
New Jersey 26-0065262
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
104-110 Avenue C, Bayonne, New Jersey 07002
(Address of Principal Executive Offices) (Zip Code)
(201) 823-0700
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES |_| NO |X|
As of June 30, 2003, there were issued and outstanding 2,088,198 shares of
the Registrant's Common Stock. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of the Common Stock as of June 30, 2003, ($14.75) was $19,088,211.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the 2004 Annual Meeting of Stockholders (Parts I and
III).
TABLE OF CONTENTS
Item Page Number
Item 1. Description of Business..............................................1
Item 2. Properties..........................................................23
Item 3. Legal Proceedings...................................................23
Item 4. Submission of Matters to a Vote of Security holders.................24
Item 5. Market for Company's Common Stock and
Related Stockholder Matters.....................................24
Item 6. Selected Consolidated Financial and Other Data......................25
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................27
Item 7A. Qualitative and Quantitative Analysis of Market Risk...............39
Item 8. Financial Statements and Supplementary Data.........................40
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................40
Item 9A. Controls and Procedures............................................41
Item 10. Directors and Executive Officers of the Company....................41
Item 11. Executive Compensation.............................................41
Item 12. Security Ownership of Certain Beneficial Owners
and Management...............................................42
Item 13. Certain Relationships and Related Transactions.....................42
Item 14. Principal Accountant Fees and Services.............................42
Item 15. Exhibits, Financial Statements Schedules and Reports on
Form 8-K...........................................................42
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
BCB Bancorp, Inc.
BCB Bancorp, Inc. is a New Jersey corporation, which on May 1, 2003 became
the holding company parent of Bayonne Community Bank. Our executive office is
located at 104-110 Avenue C, Bayonne, New Jersey, 07002. Our telephone number is
(201) 823-0700. At December 31, 2003 we had $300.7 million in consolidated
assets, $253.7 million in deposits and $21.2 million in consolidated
stockholders' equity.
Bayonne Community Bank
Bayonne Community Bank was chartered as a New Jersey bank on October 27,
2000, and we opened for business on November 1, 2000. We operate through three
branches in Bayonne, New Jersey and through our executive office located at
104-110 Avenue C, Bayonne, New Jersey, 07002. Our telephone number is (201)
823-0700. Our deposit accounts are insured by the Federal Deposit Insurance
Corporation and we are a member of the Federal Home Loan Bank System.
We are a community-oriented financial institution. Our business is to
offer FDIC-insured deposit products and invest funds held in deposit accounts at
the bank, together with funds generated from operations, in investment
securities and loans. We offer our customers:
o loans, including one-to four- family mortgage loans, home
equity loans, construction loans, commercial and multi-family
real estate loans, consumer loans and commercial business
loans;
o FDIC-insured deposit products, including savings and club
accounts, non-interest bearing accounts, money market
accounts, certificates of deposit and individual retirement
accounts; and
o retail and commercial banking services including wire
transfers, money orders, traveler's checks, safe deposit
boxes, a night depository, federal payroll tax deposits, bond
coupon redemption and automated teller services.
Market Strategy
Our objective is to create a financial institution focused on delivering
products and services matched to the customers' needs. A primary focus of our
market strategy is to originate loans secured by commercial and multi-family
properties. Such loans provide higher returns than loans secured by one-to
four-family real estate. As a result of our underwriting practices, including
debt service requirements for multi-family loans we believe such loans offer the
Bank an opportunity to obtain higher returns while the revenue from the
underlying units diversify our risk. We believe that customers are drawn to a
locally owned and managed institution that demonstrates an active interest in
its customers and their business and personal financial needs.
The banking industry in our market has experienced and continues to
experience, substantial consolidation in recent years. Many of the area's
locally owned or managed financial institutions have been acquired by larger
regional bank holding companies. Management believes that this consolidation has
been and will continue to be accompanied by increasing fees for bank services,
the dissolution of local boards of directors, management and personnel changes
and, in the perception of management, a decline in the level of customer
service. With recent changes in regulations and the banking industry, this type
of consolidation is expected to continue.
Our Market Area
We are located in the City of Bayonne, Hudson County, New Jersey. The
Bank's locations are easily accessible to provide convenient services to
businesses and individuals throughout our market area.
Our market area includes the municipality of Bayonne and portions of
Jersey City. Our market area is well-served by a network of arterial roadways
including Route 440 and the New Jersey Turnpike.
Our market area has a high level of commercial business activity.
Businesses are concentrated in the service sector and retail trade areas. Major
employers in our market area include Bayonne Medical Center and the Bayonne
Board of Education.
Competition
The banking business in New Jersey is extremely competitive. We will
compete for deposits and loans with existing New Jersey and out-of-state
financial institutions that have longer operating histories, larger capital
reserves and more established customer bases. Our competition includes large
financial service companies and other entities in addition to traditional
banking institutions such as savings and loan associations, savings banks,
commercial banks and credit unions.
Our larger competitors have a greater ability to finance wide-ranging
advertising campaigns through their greater capital resources. Our marketing
efforts depend heavily upon referrals from officers and directors and
stockholders, selective advertising in local media and direct mail
solicitations. We compete for business principally on the basis of personal
service to customers, customer access to our officers and directors and
competitive interest rates and fees.
In the financial services industry in recent years, intense market
demands, technological and regulatory changes and economic pressures have eroded
industry classifications that were once clearly defined. Banks have been forced
to diversify their services, increase rates paid on deposits and become more
cost effective, as a result of competition with one another and with new types
of financial service companies, including non-banking competitors. Some of the
results of these market dynamics in the financial services industry have been a
number of new bank and non-bank competitors, increased merger activity, and
increased customer awareness of product and service differences among
competitors. These factors could affect our business prospects.
2
Lending Activities
Analysis of Loan Portfolio. Set forth below is selected data relating to
the composition of our loan portfolio by type of loan and in percentage of the
respective portfolio.
At December 31,
------------------------------------------------------------------------------------------
2003 2002 2001 2000
------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Type of loans:
Real estate loans:
One-to four-family .............. $ 33,913 17.74% $ 25,475 20.64% $ 9,099 20.04% $ 269 18.16%
Construction .................... 10,009 5.24 4,278 3.47 1,241 2.73 -- --
Home equity ..................... 16,825 8.80 14,106 11.43 9,374 20.64 360 24.31
Commercial and multi-family ..... 115,160 60.25 65,842 53.34 21,883 48.19 750 50.64
Commercial business ............... 14,048 7.35 12,934 10.48 2,988 6.58 60 4.05
Consumer .......................... 1,183 0.62 800 0.64 826 1.82 42 2.84
-------- ------ -------- ------ ------- ------ ------ ------
Total ......................... 191,138 100.00% 123,435 100.00% 45,411 100.00% 1,481 100.00%
====== ====== ====== ======
Less:
Deferred loan (costs) fees, net ... 239 117 26 --
Allowance for possible loan losses 2,113 1,233 412 30
-------- -------- ------- ------
Total loans, net .............. $188,786 $122,085 $44,973 $1,451
======== ======== ======= ======
Loan Maturities. The following table sets forth the contractual
maturity of our loan portfolio at December 31, 2003. The amount shown represents
outstanding principal balances. Demand loans, loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as being due in
one year or less. Variable-rate loans are shown as due at the time of repricing.
The table does not include prepayments or scheduled principal repayments.
Due after 1
Due within through Due after
1 Year 5 Years 5 Years Total
------ ------- ------- -----
(In Thousands)
One-to four-family ................... $ 1,002 $ 3,494 $ 29,417 $ 33,913
Construction ......................... 7,495 2,514 -- 10,009
Home equity .......................... 1,220 1,647 13,958 16,825
Commercial and multi-family .......... 3,105 24,652 87,403 115,160
Commercial business .................. 2,815 9,432 1,801 14,048
Consumer ............................. 692 478 13 1,183
--------- --------- --------- ---------
Total amount due ..................... $ 16,329 $ 42,217 $ 132,592 $ 191,138
========= ========= ========= =========
Loans with Predetermined or Floating or Adjustable Rates of Interest. The
following table sets forth the dollar amount of all loans at December 31, 2003
that are due after December 31, 2004, and have predetermined interest rates and
that have floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
One- to four-family ...................................... $ 29,241 $ 3,670 $ 32,911
Construction ............................................. 2,514 -- 2,514
Home equity .............................................. 15,605 -- 15,605
Commercial and multi-family .............................. 81,317 30,738 112,055
Commercial business ...................................... 10,887 346 11,233
Consumer ................................................. 491 -- 491
-------- -------- --------
Total amount due ......................................... $140,055 $ 34,754 $174,809
======== ======== ========
One- to Four-Family Lending. Our one- to four-
3
family residential mortgage loans are secured by property located in the State
of New Jersey. We generally originate one- to four-family residential mortgage
loans in amounts up to 80% of the lesser of the appraised value or selling price
of the mortgaged property without requiring mortgage insurance. We will
originate loans with loan to value ratios up to 90% provided the borrowers
obtain private mortgage insurance. We originate both fixed rate and adjustable
rate loans. One- to four-family loans may have terms of up to 30 years. The
majority of one- to four-family loans we originate for retention in our
portfolio have terms no greater than 15 years. We offer adjustable rate loans
with fixed rate periods of up to five years, with principal and interest
calculated using a maximum 30 year amortization period. We offer these loans
with a fixed rate for the first five years with repricing following every year
after the initial period. Adjustable rate loans may adjust up to 200 basis
points annually and 600 basis points over the term of the loan. In August 2003,
the Bank began to broker for a third party lender one-to four-family residential
loans, which were primarily fixed rate loans with terms of 30 years. The Bank's
loan brokerage activities permitted the Bank to offer customers longer-term
fixed rate loans it would not otherwise originate while providing a source of
fee income. During 2003, the Bank brokered $8.6 million in one-to four-family
loans and received $94,000 in fee income from the sale of such loans.
All of our one- to four-family mortgages include "due on sale" clauses,
which are provisions giving us the right to declare a loan immediately payable
if the borrower sells or otherwise transfers an interest in the property to a
third party.
Property appraisals on real estate securing our single-family residential
loans are made by state certified and licensed independent appraisers approved
by the Board of Directors. Appraisals are performed in accordance with
applicable regulations and policies. At our discretion, we obtain either title
insurance policies or attorneys' certificates of title, on all first mortgage
real estate loans originated. We also require fire and casualty insurance on all
properties securing our one-to four-family loans. In some instances, we charge a
fee equal to a percentage of the loan amount commonly referred to as points.
Construction Loans. We offer loans to finance the construction of various
types of commercial and residential property. We originated 20 such loans during
the year ended December 31, 2003. Construction loans to builders generally are
offered with terms of up to one year and interest rates are tied to prime rate
plus a margin. These loans generally are offered as adjustable rate loans. We
will originate residential construction loans for individual borrowers and
builders, provided all necessary plans and permits are in order. Construction
loan funds are disbursed as the project progresses. At December 31, 2003, our
largest construction loan was a loan participation in the amount of $2.0 million
of which $1.2 million was disbursed. This construction loan has been made for
the construction of residential properties. At December 31, 2003 this loan was
performing in accordance with its terms.
Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction and
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, we may
be required to advance funds
4
beyond the amount originally committed to permit completion of the project.
Additionally, if the estimate of value proves to be inaccurate, we may be
confronted, at or prior to the maturity of the loan, with a project having a
value which is insufficient to assure full repayment.
Commercial and Multi-family Real Estate Loans. Our commercial and
multi-family real estate loans are secured by commercial real estate (for
example, shopping centers, medical buildings, retail offices) and multi-family
residential units, consisting of five or more units. Permanent loans on
commercial and multi-family properties are generally originated in amounts up to
70% to 75% of the appraised value of the property. Our commercial real estate
loans are secured by improved property such as office buildings, retail stores,
warehouses, church buildings and other non-residential buildings. Commercial and
multi-family real estate loans are generally made at rates that adjust above the
five year U.S. Treasury interest rate, with terms of up to 25 years, or are
balloon loans with fixed interest rates which generally mature in three to five
years with principal amortization for a period of up to 30 years. Our largest
commercial loan had a principal balance of $2.7 million at December 31, 2003,
and was secured by three professional office buildings. Our largest multi-family
loan had a principal balance of $2.5 million at December 31, 2003. Both loans
were performing in accordance with their terms on that date.
Loans secured by commercial and multi-family real estate are generally
larger and involve a greater degree of risk than one- to four-family residential
mortgage loans. The borrower's creditworthiness and the feasibility and cash
flow potential of the project is of primary concern in commercial and
multi-family real estate lending. Loans secured by income properties are
generally larger and involve greater risks than residential mortgage loans
because payments on loans secured by income properties are often dependent on
the successful operation or management of the properties. As a result, repayment
of such loans may be subject to a greater extent than residential real estate
loans to adverse conditions in the real estate market or the economy. We intend
to continue emphasizing the origination of loans secured by commercial real
estate and multi-family properties.
Commercial Business Loans. Our commercial business loans are underwritten
on the basis of the borrower's ability to service such debt from income. Our
underwriting standards for commercial business loans include a review of the
applicant's tax returns, financial statements, credit history and an assessment
of the applicant's ability to meet existing obligations and payments on the
proposed loan based on cash flow generated by the applicant's business.
Commercial business loans are generally made to small and mid-sized companies
located within the state of New Jersey. In most cases, we require collateral of
equipment, accounts receivable, inventory, chattel or other assets before making
a commercial business loan. Our largest commercial business loan at December 31,
2003 had a principal balance of $1.0 million and was secured by school buses.
This loan was guaranteed by the Bayonne Board of Education.
Commercial business loans generally have higher rates and shorter terms
than one- to four-family residential loans, but they may also involve higher
average balances and a higher risk of default since their repayment generally
depends on the successful operation of the borrower's business.
5
Consumer. We make various types of secured and unsecured consumer loans
including home equity lines of credit and loans that are collateralized by new
and used automobiles. Consumer loans generally have terms of three years to ten
years.
Consumer loans are advantageous to us because of their interest rate
sensitivity, but they also involve more credit risk than residential mortgage
loans because of the higher potential for default, the nature of the collateral
and the difficulty in disposing of the collateral.
The following table shows our loan origination, purchase, sale and
repayment activities for the periods indicated.
Years Ended December 31,
---------------------------------------------------
2003 2002 2001 2000(1)
--------- --------- --------- ---------
(In thousands)
Beginning of period ................... $ 123,435 $ 45,411 $ 1,481 $ --
--------- --------- --------- ---------
Originations by Type:
Real estate mortgage:
One- to four-family residential .. 22,768 20,000 9,318 250
Construction ..................... 6,392 2,737 902
Home equity ...................... 9,393 8,711 9,961 360
Commercial and multi-family ...... 62,966 47,676 16,883 750
Commercial business ................ 2,544 10,846 3,022 79
Consumer ........................... 924 537 973 42
--------- --------- --------- ---------
Total loans originated ......... 104,987 90,507 41,059 1,481
--------- --------- --------- ---------
Purchases:
Real estate mortgage:
One- to four-family residential .. -- -- -- --
Construction ..................... 2,223 300 338 --
Home equity ...................... -- -- -- --
Commercial and multi-family ...... 3,207 2,794 5,318 --
Commercial business ................ -- -- -- --
Consumer ........................... -- -- -- --
--------- --------- --------- ---------
Total loans purchased .......... 5,430 3,094 5,656 --
--------- --------- --------- ---------
Sales:
Real estate mortgage:
One- to four-family residential .. -- -- -- --
Construction ..................... -- -- -- --
Home equity ...................... -- -- -- --
Commercial and multi-family ........ 3,480 1,599 -- --
Commercial business ................ -- -- -- --
Consumer ........................... -- -- -- --
--------- --------- --------- ---------
Total loans sold ............... 3,480 1,599 -- --
--------- --------- --------- ---------
Principal repayments ............... 39,234 13,978 2,785 --
--------- --------- --------- ---------
Total reductions ............... 42,714 15,577 2,785 --
--------- --------- --------- ---------
Increase (decrease) in other items, net -- -- -- --
--------- --------- --------- ---------
Net increase ................... 67,703 78,024 43,930 1,481
--------- --------- --------- ---------
Ending balance ................. $ 191,138 $ 123,435 $ 45,411 $ 1,481
========= ========= ========= =========
- ----------
(1) Bayonne Community Bank commenced operations on November 1, 2000.
Loan Approval Authority and Underwriting. We establish various lending
limits for executive management and also maintain a loan committee. The loan
committee is comprised of the Chairman of the Board, the President, the
Executive Loan Officer and five non-employee members of the Board of Directors.
The President or the Executive Loan Officer, together with
6
one other loan officer, have authority to approve applications for real estate
loans up to $400,000, other secured loans up to $400,000 and unsecured loans up
to $25,000. The loan committee considers all applications in excess of the above
lending limits and the entire board of directors ratifies all such loans.
Upon receipt of a completed loan application from a prospective borrower,
a credit report is ordered. Income and certain other information is verified. If
necessary, additional financial information may be requested. An appraisal is
required for the underwriting of all one- to four-family loans. We may rely on
an estimate of value of real estate performed by our Executive Loan Officer for
home equity loans or lines of credit of up to $150,000. Appraisals are processed
by independent fee appraisers.
An attorney's certificate of title is required on all real estate mortgage
loans. Borrowers also must obtain fire and casualty insurance. Flood insurance
is also required on loans secured by property that is located in a flood zone.
Loan Commitments. Written commitments are given to prospective borrowers
on all approved real estate loans. Generally, we honor commitments for up to 60
days from the date of issuance. At December 31, 2003, our outstanding loan
commitments totaled $33.2 million.
Nonperforming and Problem Assets
Loan Delinquencies. We send a notice of nonpayment to borrowers when their
mortgage loan becomes 15 days past due. If such payment is not received by month
end, an additional notice of nonpayment is sent to the borrower. After 60 days,
if payment is still delinquent, a notice of right to cure default is sent to the
borrower giving 30 additional days to bring the loan current before foreclosure
is commenced. If the loan continues in a delinquent status for 90 days past due
and no repayment plan is in effect, foreclosure proceedings will be initiated.
Loans are reviewed and are placed on a non-accrual status when the loan
becomes more than 120 days delinquent or when, in our opinion, the collection of
additional interest is doubtful. Interest accrued and unpaid at the time a loan
is placed on nonaccrual status is charged against interest income. Subsequent
interest payments, if any, are either applied to the outstanding principal
balance or recorded as interest income, depending on the assessment of the
ultimate collectability of the loan. At December 31, 2003, we had one
nonperforming loan. This loan is to a business borrower that has filed for
bankruptcy protection. The loan is also secured by the principal residence of
the business owner. The Bank has a first lien on this property. At December 31,
2003 this loan had a principal balance of $67,000. The Bank had two other loans
which were delinquent 90 days or more. These loans were not classified as
nonperforming as the borrowers have periodically made principal and interest
payments on their respective loans.
A loan is considered impaired when it is probable the borrower will not
repay the loan according to the original contractual terms of the loan
agreement. We have determined that first mortgage loans on one-to four-family
properties and all consumer loans represent large groups of smaller-balance
homogeneous loans that are collectively evaluated. Additionally, we have
determined that an insignificant delay (less than 90 days) will not cause a loan
to be classified as impaired and a loan is not impaired during a period of delay
in payment, if we expect to collect
7
all amounts due including interest accrued at the contractual interest rate for
the period of delay. We independently evaluate all loans identified as impaired.
We estimate credit losses on impaired loans based on the present value of
expected cash flows or the fair value of the underlying collateral if the loan
repayment is derived from the sale or operation of such collateral. Impaired
loans, or portions of such loans, are charged off when we determine that a
realized loss has occurred. Until such time, an allowance for loan losses is
maintained for estimated losses. Cash receipts on impaired loans are applied
first to accrued interest receivable unless otherwise required by the loan
terms, except when an impaired loan is also a nonaccrual loan, in which case the
portion of the receipts related to interest is recognized as income. At December
31, 2003, we did not have any loans deemed to be impaired.
The following table sets forth delinquencies in our loan portfolio as of
the dates indicated:
At December 31, 2003 At December 31, 2002
---------------------------------------------- -------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
--------------------- -------------------- ---------------------- -------------------
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands)
Real estate mortgage:
One- to four-
family residential ......... 1 $ 103 -- $ -- -- $ -- -- $ --
Construction ................ -- -- -- -- -- -- -- --
Home equity ................. -- -- -- -- -- -- -- --
Commercial and multi-family . -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total ....................... 1 103 -- -- -- -- -- --
Commercial business ........... 3 355 3 386 -- -- 1 67
Consumer ...................... -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total delinquent loans . 4 $ 458 3 $ 386 $ -- $ -- 1 $ 67
======= ======= ======= ======= ======= ======= ======= =======
Delinquent loans to total loans 0.24% 0.20% --% 0.05%
======= ======= ======= =======
At December 31, 2001 At December 31, 2000(1)
--------------------------------------------- --------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
--------------------- -------------------- ---------------------- -------------------
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands)
Real estate mortgage:
One- to four-
family residential ........ -- $ -- -- $ -- -- $ -- -- $ --
Construction ................ -- -- -- -- -- -- -- --
Home equity ................. -- -- -- -- -- -- -- --
Commercial and multi-family . -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total ....................... -- -- -- -- -- -- -- --
Commercial business ........... 1 12 -- -- -- -- -- --
Consumer ...................... 3 14 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total delinquent loans . 4 $ 26 -- $ -- -- $ -- -- $ --
======= ======= ======= ======= ======= ======= ======= =======
Delinquent loans to total
loans ........................ 0.06% --% --% --%
======= ======= ======= =======
- ----------
(1) Bayonne Community Bank commenced operations on November 1, 2000.
8
The table below sets forth the amounts and categories of non-performing
assets in the Bank's loan portfolio. Loans are placed on non-accrual status when
the collection of principal and/or interest become doubtful. For all years
presented, Bayonne Community Bank has had no troubled debt restructurings (which
involve forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than that of market rates). Foreclosed assets
include assets acquired in settlement of loans.
At December 31,
2003 2002 2001 2000(1)
---------- --------- --------- ---------
(Dollars in thousands)
Non-accruing loans:
One- to four-family residential.................. $ -- $ -- $ -- $ --
Construction..................................... -- -- -- --
Home equity...................................... -- -- -- --
Commercial and multi-family...................... 67 67 -- --
Commercial business.............................. -- -- -- --
Consumer......................................... -- -- -- --
---------- --------- --------- ---------
Total.......................................... 67 67 -- --
---------- --------- --------- ---------
Accruing loans delinquent more than 90 days:
One- to four-family residential.................. -- -- -- --
Construction..................................... -- -- -- --
Home equity...................................... -- -- -- --
Commercial and multi-family...................... 319 -- -- --
Commercial business.............................. -- -- -- --
Consumer......................................... -- -- -- --
---------- --------- --------- ---------
Total.......................................... 319 -- -- --
---------- --------- --------- ---------
Foreclosed assets................................... -- -- -- --
---------- --------- --------- ---------
Total non-performing assets......................... $ 386 $ 67 $ -- $ --
========== ========= ========= =========
Total as a percentage of total assets............... 0.13% 0.04% --% --%
========== ========= ========= =========
Total as a percent of total loans................... 0.20% 0.05% --% --%
========== ========= ========= =========
- ----------
(1) Bayonne Community Bank commenced operations on November 1, 2000.
For the year ended December 31, 2003, gross interest income which would
have been recorded had our non-accruing loans been current in accordance with
their original terms amounted to $6,000. We did not include any interest income
for such loans for the year ended December 31, 2003.
9
The following table sets forth an analysis of the Bank's allowance for
loan losses. We had no recoveries during the periods presented.
Years Ended December 31,
------------------------------------------------------------
2003 2002 2001 2000(1)
----------- ----------- ----------- -----------
(Dollars in thousands)
Balance at beginning of period ............................ $ 1,233 $ 412 $ 30 $ --
----------- ----------- ----------- -----------
Charge-offs:
One- to four-family residential ........................ -- -- -- --
Construction ........................................... -- -- -- --
Home equity ............................................ -- -- -- --
Commercial and multi-family ............................ -- -- -- --
Commercial business .................................... -- 10 -- --
Consumer ............................................... -- 12 -- --
----------- ----------- ----------- -----------
Total charge-offs ......................................... -- 22 -- --
----------- ----------- ----------- -----------
Recoveries ................................................ -- -- -- --
Net charge-offs ........................................... -- 22 -- --
----------- ----------- ----------- -----------
Provisions charged to operations .......................... 880 843 382 30
----------- ----------- ----------- -----------
Ending balance ............................................ $ 2,113 $ 1,233 $ 412 $ 30
=========== =========== =========== ===========
Ratio of non-performing assets to total assets
at the end of period ................................... 0.13% 0.04% --% --%
=========== =========== =========== ===========
Ratio of net charge-offs during the period to
loans outstanding during the period .................... --% 0.03% --% --%
=========== =========== =========== ===========
Ratio of net charge-offs during the period to
non-performing assets .................................. --% 32.8% --% --%
=========== =========== =========== ===========
- ----------
(1) Bayonne Community Bank commenced operations on November 1, 2000.
Classified Assets. Our policies provide for a classification system for
problem assets. Under this classification system, problem assets are classified
as "substandard," or "loss." An asset is considered substandard if it is
inadequately protected by its current net worth and paying capacity of the
borrower or of the collateral pledged, if any. Substandard assets include those
characterized by the "distinct possibility" that "some loss" will be sustained
if the deficiencies are not corrected. Assets classified as loss are those
considered "uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not warranted.
Assets may be designated "special mention" because of potential weaknesses that
do not currently warrant classification in one of the aforementioned categories.
When we classify problem assets as either substandard we may establish
general allowances for loan losses in an amount deemed prudent by management.
General allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities, but which,
unlike specific allowances, have not been allocated to particular problem
assets. When we classify problem assets as loss, we establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
charge off such amount. A portion of general loss allowances established to
cover possible losses related to assets classified as substandard or doubtful
may be included in determining our regulatory capital. Specific valuation
allowances for loan losses generally do not qualify as regulatory capital. At
December 31, 2003, we had $2.0 million in assets classified as substandard and
$142,000 in assets classified as special mention. The loans classified as
substandard represent commercial business loans secured by equipment. These
loans have been classified substandard
10
primarily because either updated financial information has not been timely
provided, or the collateral underlying the loan is in the process of being
revalued.
Allowances for Loan Losses. A provision for loan losses is charged to
operations based on management's evaluation of the losses that may be incurred
in our loan portfolio. The evaluation, including a review of all loans on which
full collectability of interest and principal may not be reasonably assured,
considers: (i) known and inherent risks in our portfolio, (ii) adverse
situations that may affect the borrower's ability to repay, (iii) the estimated
value of any underlying collateral, and (iv) current economic conditions.
We monitor our allowance for loan losses and make additions to the
allowance as economic conditions dictate. Although we maintain our allowance for
loan losses at a level that we consider adequate for the inherent risk of loss
in our loan portfolio, future losses could exceed estimated amounts and
additional provisions for loan losses could be required. In addition, our
determination of the amount of the allowance for loan losses is subject to
review by the New Jersey Department of Banking, as part of its examination
process. After a review of the information available, our regulators might
require the establishment of an additional allowance. Any increase in the loan
loss allowance required by regulators would have a negative impact on our
earnings.
11
Allocation of the Allowance for Loan Losses. The following table
illustrates the allocation of the allowance for loan losses for each category of
loan. The allocation of the allowance to each category is not necessarily
indicative of future loss in any particular category and does not restrict our
use of the allowance to absorb losses in other loan categories.
At December 31,
---------------------------------------------------------------------------------------
2003 2002 2001 2000
------------------- ------------------ ------------------ ------------------
Percent Percent Percent Percent
of Loans of Loans of Loans of Loans
in each in each in each in each
Category Category Category Category
in Total in Total in Total in Total
Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Type of loan:
One- to four-family .................. $ 105 17.74% $ 64 20.64% $ 52 20.04% $ 5 18.16%
Construction ......................... 125 5.24 53 3.47 16 2.73 -- --
Home equity .......................... 50 8.80 64 11.43 70 20.64 6 24.31
Commercial and multi-family .......... 1,178 60.25 658 53.34 225 48.19 15 50.64
Commercial business .................. 649 7.35 376 10.48 33 6.58 2 4.05
Consumer ............................. 6 0.62 18 0.64 16 1.82 2 2.84
------ ------ ------ ------ ------ ------ ------ ------
Total ............................... $2,113 100.00% $1,233 100.00% $ 412 100.00% $ 30 100.00%
====== ====== ====== ====== ====== ====== ====== ======
12
Allowance for Loan Losses. The following table sets forth information with
respect to our allowance for loan losses:
At or for At or for At or for At or for
the year ended the year ended the year ended the year ended
December 31, 2003 December 31, 2002 December 31, 2001 December 31, 2000
----------------- ----------------- ----------------- -----------------
(Dollars in Thousands)
Total loans outstanding .................... $ 191,138 $ 123,435 $ 45,411 $ 1,481
=========== =========== =========== ===========
Average loans outstanding .................. $ 155,145 $ 83,734 $ 19,129 $ 741
=========== =========== =========== ===========
Allowance balance at beginning
of period .................................. $ 1,233 $ 412 $ 30 $ --
----------- ----------- ----------- -----------
Provision:
Real estate loans .......................... 619 476 337 26
Commercial business ........................ 273 353 31 2
Consumer ................................... (12) 14 14 2
----------- ----------- ----------- -----------
Total provision .......................... 880 843 382 30
----------- ----------- ----------- -----------
Charge-offs:
Real estate loans .......................... -- -- -- --
Commercial business ........................ -- 10 -- --
Consumer ................................... -- 12 -- --
----------- ----------- ----------- -----------
Total charge-offs ........................ -- 22 -- --
----------- ----------- ----------- -----------
Recoveries: ................................ --
Real estate loans .......................... -- -- -- --
Commercial business ........................ -- -- -- --
Consumer ................................... -- -- -- --
----------- ----------- ----------- -----------
Total recoveries ......................... -- -- -- --
----------- ----------- ----------- -----------
Allowance balances at end of
period ..................................... $ 2,113 $ 1,233 $ 412 $ 30
=========== =========== =========== ===========
Allowance for loan losses as a
percent of total loans
outstanding ................................ 1.11% 1.00% 0.91% 2.03%
=========== =========== =========== ===========
Net loans charged off as percent
of average loans outstanding ............... --% 0.03% --% --%
=========== =========== =========== ===========
Investment Activities
Investment Securities. We are required under federal regulations to
maintain a minimum amount of liquid assets that may be invested in specified
short-term securities and certain other investments. The level of liquid assets
varies depending upon several factors, including: (i) the yields on investment
alternatives, (ii) our judgment as to the attractiveness of the yields then
available in relation to other opportunities, (iii) expectation of future yield
levels, and (iv) our projections as to the short-term demand for funds to be
used in loan origination and other activities. Investment securities, including
mortgage-backed securities, are classified at the time of purchase, based upon
management's intentions and abilities, as securities held to maturity or
securities available for sale. Debt securities acquired with the intent and
ability to hold to maturity are classified as held to maturity and are stated at
cost and adjusted for amortization of premium and accretion of discount, which
are computed using the level yield method and recognized as adjustments of
interest income. All other debt securities are classified as available for sale
to serve principally as a source of liquidity.
Current regulatory and accounting guidelines regarding investment
securities require us to categorize securities as "held to maturity," "available
for sale" or "trading." As of December 31, 2003, we had $90.3 million of
securities classified as "held to maturity," and no securities classified as
available for sale or trading. Securities classified as "available for sale" are
reported for financial reporting purposes at the fair market value with net
changes in the market value
13
from period to period included as a separate component of stockholders' equity,
net of income taxes. At December 31, 2003, our securities classified as
held-to-maturity had a market value of $91.2 million. Changes in the market
value of classified as securities held-to-maturity do not affect our income.
Management has the intent and we have the ability to hold securities classified
as held to maturity.
At December 31, 2003, our investment policy allowed investments in
instruments such as: (i) U.S. Treasury obligations; (ii) U.S. federal agency or
federally sponsored agency obligations; (iii) mortgage-backed securities; and
(iv) certificates of deposit. The board of directors may authorize additional
investments. At December 31, 2003 our U.S. Government agency securities totaled
$72.0 million, all of which were classified as held to maturity and which
primarily consisted of callable securities issued by federally sponsored
agencies.
As a source of liquidity and to supplement our lending activities, we have
invested in residential mortgage-backed securities. Mortgage-backed securities
generally yield less than the loans that underlie such securities because of the
cost of payment guarantees or credit enhancements that reduce credit risk.
Mortgage-backed securities can serve as collateral for borrowings and, through
repayments, as a source of liquidity. Mortgage-backed securities represent a
participation interest in a pool of single-family or other type of mortgages.
Principal and interest payments are passed from the mortgage originators,
through intermediaries (generally government-sponsored enterprises) that pool
and repackage the participation interests in the form of securities, to
investors, like us. The government-sponsored enterprises guarantee the payment
of principal and interest to investors and include Freddie Mac, Ginnie Mae, and
Fannie Mae.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgage loans that have interest
rates that are within a set range and have varying maturities. The underlying
pool of mortgages can be composed of either fixed rate or adjustable rate
mortgage loans. Mortgage-backed securities are generally referred to as mortgage
participation certificates or pass-through certificates. The interest rate risk
characteristics of the underlying pool of mortgages (i.e., fixed rate or
adjustable rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. Expected maturities will differ from contractual
maturities due to scheduled repayments and because borrowers may have the right
to call or prepay obligations with or without prepayment penalties.
14
Securities Portfolio. The following table sets forth the carrying value of
our securities portfolio and Federal funds at the dates indicated.
At December 31,
--------------------------------------------
2003 2002 2001
--------- --------- ---------
(In Thousands)
Securities held to maturity:
U.S. Government and Agency securities .......... $ 71,982 $ 21,989 $ 7,500
Mortgage-backed securities ................... 18,331 28,613 31,062
--------- --------- ---------
Total securities held to maturity ........... 90,313 50,602 38,562
Money market funds ............................... 6,000 2,000 24,000
FHLB stock ....................................... 1,250 760 --
--------- --------- ---------
Total investment securities ...................... $ 97,563 $ 53,362 $ 62,562
========= ========= =========
The following table shows our mortgage-backed and related securities
purchase, sale and repayment activities for the periods indicated.
Years Ended December 31,
----------------------------------------
2003 2002 2001
--------- --------- ---------
(In thousands)
Purchases:
Adjustable-rate ................... $ -- $ -- $ 8,903
Fixed-rate ........................ 75,947 27,092 37,024
--------- --------- ---------
Total purchases ................. $ 75,947 $ 27,092 $ 45,927
--------- --------- ---------
Sales:
Adjustable-rate ................... $ -- $ -- $ --
Fixed-rate ........................ -- 1,989(1) 4,996(1)
--------- --------- ---------
Total sales ..................... $ -- $ 1,989 $ 4,996
--------- --------- ---------
Principal Repayments:
Repayment of principal ............ $ 36,282 $ 13,077 $ 2,369
--------- --------- ---------
Increase in other items, net ...... 46 14 --
--------- --------- ---------
Net increases ................... $ 39,711 $ 12,040 $ 38,562
========= ========= =========
- ----------
(1) Consists of a Fannie Mae mortgage-backed security designated as available
for sale, sold during the year ended December 31, 2002, and the sale of a Fannie
Mae mortgage-backed security designated as available for sale, sold during the
year ended December 31, 2001.
15
Maturities of Securities Portfolio. The following table sets forth
information regarding the scheduled maturities, carrying values, estimated
market values, and weighted average yields for the Bank's investments securities
portfolio at December 31, 2003 by contractual maturity. The following table does
not take into consideration the effects of scheduled repayments or the effects
of possible prepayments.
As of December 31, 2003
--------------------------------------------------------------
More than More than five to
Within one year One to five years ten years
--------------- ----------------- ---------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Money market funds .............. $ 6,000 1.05% $ -- --% $ -- --%
U.S. government agency securities -- -- 2,500 4.10 19,982 4.84
Mortgage-backed securities ...... -- -- -- -- 856 6.00
FHLB stock ...................... 1,250 1.45 -- -- -- --
------- ------- -------
Total investment securities ..... $ 7,250 1.12% $ 2,500 4.10% $20,838 4.89%
======= ======= =======
As of December 31, 2003
------------------------------------------------------
Total investment
More than ten years securities
------------------- ----------
Carrying Average Market Carrying Average
Value Yield Value Value Yield
----- ----- ----- ----- -----
(Dollars in Thousands)
Money market funds .............. $ -- --% $ 6,000 $ 6,000 1.05%
U.S. government agency securities 49,500 5.92 72,395 71,982 5.56
Mortgage-backed securities ...... 17,475 5.63 18,802 18,331 5.56
FHLB stock ...................... -- -- 1,250 1,250 1.45
------- ------- -------
Total investment securities ..... $66,975 5.84% $98,447 $97,563 5.24%
======= ======= =======
16
Sources of Funds
Our major external source of funds for lending and other investment
purposes are deposits. Funds are also derived from the receipt of payments on
loans and prepayment of loans and maturities of investment securities and
mortgage-backed securities and borrowings. Scheduled loan principal repayments
are a relatively stable source of funds, while deposit inflows and outflows and
loan prepayments are significantly influenced by general interest rates and
market conditions.
Deposits. Consumer and commercial deposits are attracted principally from
within our primary market area through the offering of a selection of deposit
instruments including demand, NOW, savings and club accounts, money market
accounts, and term certificate accounts. Deposit account terms vary according to
the minimum balance required, the time period the funds must remain on deposit,
and the interest rate.
The interest rates paid by us on deposits are set at the direction of our
senior management. Interest rates are determined based on our liquidity
requirements, interest rates paid by our competitors, and our growth goals and
applicable regulatory restrictions and requirements. At December 31, 2003, we
had no brokered deposits.
Deposit Accounts. The following table sets forth the dollar amount of
savings deposits in the various types of deposit programs we offered as of the
dates indicated.
December 31,
----------------------------------------------------------------------------
2003 2002 2001
---------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Rate Amount Rate Amount Rate Amount
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Demand .................................. --% $ 16,626 --% $ 14,007 --% $ 8,685
NOW ..................................... 1.37 17,201 1.77 10,656 2.36 8,059
Money market ............................ 2.01 2,163 2.41 2,546 3.42 1,811
Savings and club accounts ............... 2.28 162,832 2.79 116,328 3.91 75,644
Certificates of deposit ................. 2.51 54,828 2.90 19,982 4.78 7,550
-------- -------- --------
Total ............................... 2.11% $253,650 2.53% $163,519 3.52% $101,749
======== ======== ========
The following table sets forth our savings flows during the periods
indicated.
Years Ended December 31,
----------------------------------------------
2003 2002 2001
---------- ---------- ----------
(Dollars in thousands)
Beginning of period ........................................ $ 163,519 $ 101,749 $ 21,918
---------- ---------- ----------
Net deposits (withdrawals) ................................. 85,873 58,404 77,557
Interest credited on deposit accounts ...................... 4,258 3,366 2,274
---------- ---------- ----------
Total increase (decrease) in deposit accounts .......... 90,131 61,770 79,831
---------- ---------- ----------
Ending balance ............................................. $ 253,650 $ 163,519 $ 101,749
========== ========== ==========
Percent increase (decrease) ................................ 55.12% 60.71% 364.22%
17
Jumbo Certificates of Deposit. The following table indicates the amount
of our certificates of deposit of $100,000 or more by time remaining until
maturity.
At December 31, 2003
--------------------
Maturity Period (In Thousands)
Within three months ....................... $ 2,510
Three through twelve months ............... 8,470
Over twelve months ........................ 5,350
---------
Total ..................................... $ 16,330
=========
The following table presents, by rate category, our certificate of deposit
accounts as of the dates indicated.
At December 31,
---------------------------------------------------------------------
2003 2002 2001
--------------------- --------------------- --------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
Certificate of deposit rates:
1.00% - 1.99%...................... $ 1,876 3.42% $ 919 4.60% $ -- --%
2.00% - 2.99%...................... 44,546 81.25 14,711 73.62 3,154 41.78
3.00% - 3.99%...................... 8,406 15.33 4,348 21.76 2,463 32.62
4.00% - 4.99%...................... -- -- -- -- 704 9.32
5.00% - 5.99%...................... -- -- -- -- 1,229 16.28
6.00% - 6.99%...................... -- -- 4 0.02 -- --
-------- ------ -------- ------ -------- ------
Total........................... $ 54,828 100.00% $ 19,982 100.00% $ 7,550 100.00%
======== ====== ======== ====== ======== ======
The following table presents, by rate category, the remaining period to
maturity of certificate of deposit accounts outstanding as of December 31, 2003.
Maturity Date
-----------------------------------------------------------
1 Year Over 1 Over 2 Over
or Less to 2 Years to 3 Years 3 Years Total
--------- ---------- ---------- --------- ---------
(In thousands)
Interest rate:
1.00% - 1.99% ............................ $ 1,876 $ -- $ -- $ -- $ 1,876
2.00% - 2.99% ............................ 37,583 5,446 44 1,473 44,546
3.00% - 3.99% ............................ 1,997 22 6,093 294 8,406
--------- --------- --------- --------- ---------
Total ................................ $ 41,456 $ 5,468 $ 6,137 $ 1,767 $ 54,828
========= ========= ========= ========= =========
Borrowings. Our advances from the FHLB of New York are secured by a pledge
of our stock in the FHLB of New York, and investment securities. Each FHLB
credit program has its own interest rate, which may be fixed or adjustable, and
range of maturities. If the need arises, we may also access the Federal Reserve
Bank discount window to supplement our supply of lendable funds and to meet
deposit withdrawal requirements. During the year ended December 31, 2003, we had
average borrowings, consisting of FHLB advances, of $2.9 million with a weighted
average cost of 1.48%. Our maximum borrowings outstanding during 2003 was $25.0
million. We had no borrowings in 2002 or 2001.
Employees
At December 31, 2003, we had 55 full-time and 22 part-time employees. None
of our employees is represented by a collective bargaining group. We believe
that our relationship with our employees is good.
18
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. These laws and regulations are intended to protect
depositors, not shareholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in the applicable law or regulation may have a material effect on the business
and prospects of the Company and the Bank.
Bank Holding Company Regulation
As a bank holding company registered under the Bank Holding Company Act,
the Company is subject to the regulation and supervision applicable to bank
holding companies by the Board of Governors of the Federal Reserve System. The
Company is required to file with the Federal Reserve annual reports and other
information regarding its business operations and those of its subsidiaries.
The Bank Holding Company Act requires, among other things, the prior
approval of the Federal Reserve in any case where a bank holding company
proposes to (i) acquire all or substantially all of the assets of any other
bank, (ii) acquire direct or indirect ownership or control of more than 5% of
the outstanding voting stock of any bank (unless it owns a majority of such
company's voting shares) or (iii) merge or consolidate with any other bank
holding company. The Federal Reserve will not approve any acquisition, merger,
or consolidation that would have a substantially anti-competitive effect, unless
the anti-competitive impact of the proposed transaction is clearly outweighed by
a greater public interest in meeting the convenience and needs of the community
to be served. The Federal Reserve also considers capital adequacy and other
financial and managerial resources and future prospects of the companies and the
banks concerned, together with the convenience and needs of the community to be
served, when reviewing acquisitions or mergers.
The Bank Holding Company Act generally prohibits a bank holding company,
with certain limited exceptions, from (i) acquiring or retaining direct or
indirect ownership or control of more than 5% of the outstanding voting stock of
any company which is not a bank or bank holding company, or (ii) engaging
directly or indirectly in activities other than those of banking, managing or
controlling banks, or performing services for its subsidiaries, unless such
non-banking business is determined by the Federal Reserve to be so closely
related to banking or managing or controlling banks as to be properly incident
thereto.
The Bank Holding Company Act has been amended to permit bank holding
companies and banks, which meet certain capital, management and Community
Reinvestment Act standards, to engage in a broader range of non-banking
activities. In addition, bank holding companies which elect to become financial
holding companies may engage in certain banking and non-banking activities
without prior Federal Reserve approval. Finally, the Financial Modernization Act
imposes certain privacy requirements on all financial institutions and their
treatment of consumer information. At this time, the Company has elected not to
become a financial holding company, as it does not engage in any activities not
permissible for banks.
19
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution is in danger of default. Under a policy of the Federal Reserve with
respect to bank holding company operations, a bank holding company is required
to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. The Federal Reserve
also has the authority under the Bank Holding Company Act to require a bank
holding company to terminate any activity or to relinquish control of a non-bank
subsidiary upon the Federal Reserve's determination that such activity or
control constitutes a serious risk to the financial soundness and stability of
any bank subsidiary of the bank holding company.
Capital Adequacy Guidelines for Bank Holding Companies
The Federal Reserve has adopted risk-based capital guidelines for bank
holding companies. The risk-based capital guidelines are designed to make
regulatory capital requirements more sensitive to differences in risk profile
among banks and bank holding companies, to account for off-balance sheet
exposure, and to minimize disincentives for holding liquid assets. Under these
guidelines, assets and off-balance sheet items are assigned to broad risk
categories each with appropriate weights. The resulting capital ratios represent
capital as a percentage of total risk-weighted assets and off-balance sheet
items.
The minimum ratio of total capital to risk-weighted assets (including
certain off-balance sheet activities, such as standby letters of credit) is 8%.
At least 4% of the total capital is required to be "Tier I Capital," consisting
of common shareholders' equity and qualifying preferred stock, less certain
goodwill items and other intangible assets. The remainder ("Tier II Capital")
may consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted
assets, (b) non-qualifying preferred stock, (c) hybrid capital instruments, (d)
perpetual debt, (e) mandatory convertible securities, and (f) qualifying
subordinated debt and intermediate-term preferred stock up to 50% of Tier I
capital. Total capital is the sum of Tier I and Tier II capital less reciprocal
holdings of other banking organizations' capital instruments, investments in
unconsolidated subsidiaries and any other deductions as determined by the
Federal Reserve (determined on a case by case basis or as a matter of policy
after formal rule-making).
Bank holding company assets are given risk-weights of 0%, 20%, 50% and
100%. In addition, certain off-balance sheet items are given similar credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for performing first mortgage loans fully secured by residential property which
carry a 50% risk-weighting and loans secured by deposits in the Bank which carry
a 20% risk-weighting. Most investment securities (including, primarily, general
obligation claims of states or other political subdivisions of the United
States) are assigned to the 20% category, except for municipal or state revenue
bonds, which have a 50% risk-weight, and direct obligations of the U.S. Treasury
or obligations backed by the full faith and credit of the U.S. Government, which
have a 0% risk-weight. In converting off-balance sheet items, direct credit
substitutes including general guarantees and standby letters of credit backing
financial obligations are given a 100%
20
risk-weighting. Transaction related contingencies such as bid bonds, standby
letters of credit backing nonfinancial obligations, and undrawn commitments
(including commercial credit lines with an initial maturity of more than one
year) have a 50% risk-weighting. Short-term commercial letters of credit have a
20% risk-weighting and certain short-term unconditionally cancelable commitments
have a 0% risk-weighting.
In addition to the risk-based capital guidelines, the Federal Reserve has
adopted a minimum Tier I capital (leverage) ratio, under which a bank holding
company must maintain a minimum level of Tier I capital to average total
consolidated assets of at least 3% in the case of a bank holding company that
has the highest regulatory examination rating and is not contemplating
significant growth or expansion. All other bank holding companies are expected
to maintain a leverage ratio of at least 100 to 200 basis points above the
stated minimum.
Bank Regulation
As a New Jersey-chartered commercial bank, the Bank is subject to the
regulation, supervision, and examination of the New Jersey Department of Banking
and Insurance. As an FDIC-insured institution, we are subject to the regulation,
supervision and examination of the FDIC, an agency of the federal government.
The regulations of the FDIC and the New Jersey Department of Banking and
Insurance impact virtually all of our activities, including the minimum level of
capital we must maintain, our ability to pay dividends, our ability to expand
through new branches or acquisitions and various other matters.
Insurance of Deposits. Our deposits are insured up to a maximum of
$100,000 per depositor under the Bank Insurance Fund of the FDIC. The FDIC has
established a risk-based assessment system for all insured depository
institutions. Under the risk-based assessment system, deposit insurance premium
rates range from 0-27 basis points of assessed deposits.
Capital Adequacy Guidelines. The FDIC has promulgated risk-based capital
guidelines, which are designed to make regulatory capital requirements more
sensitive to differences in risk profile among banks, to account for off-balance
sheet exposure, and to minimize disincentives for holding liquid assets. Under
these guidelines, assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and off-balance
sheet items. These guidelines are substantially similar to the Federal Reserve
guidelines discussed above.
In addition to the risk-based capital guidelines, the FDIC has adopted a
minimum Tier 1 capital (leverage) ratio. This measurement is substantially
similar to the Federal Reserve leverage capital measurement discussed above. At
December 31, 2003, the Bank's ratio of total capital to risk-weighted assets was
11.51%. Our Tier 1 capital to risk-weighted assets was 10.47%, and our Tier I
capital to total assets was 7.02%.
Dividends. The Bank may pay dividends as declared from time to time by the
Board of Directors out of funds legally available, subject to certain
restrictions. Under the New Jersey Banking Act of 1948, the Bank may not pay a
cash dividend unless, following the payment, the Bank's capital stock will be
unimpaired and the Bank will have a surplus of no less than 50% of the Bank
capital stock or, if not, the payment of the dividend will not reduce the
surplus. In
21
addition, the Bank cannot pay dividends in amounts that would reduce the Bank's
capital below regulatory imposed minimums.
The USA PATRIOT Act
In response to the terrorist events of September 11, 2001, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law 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. For years, financial institutions such as the Bank have
been subject to federal anti-money laundering obligations. As such, the bank
does not believe the USA PATRIOT Act will have a material impact on its
operations.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), contains a broad range
of legislative reforms intended to address corporate and accounting fraud. In
addition to the establishment of a new accounting oversight board that will
enforce auditing, quality control and independence standards and will be funded
by fees from all publicly traded companies, Sarbanes-Oxley places certain
restrictions on the scope of services that may be provided by accounting firms
to their public company audit clients. Any non-audit services being provided to
a public company audit client will require preapproval by the company's audit
committee. In addition, Sarbanes-Oxley makes certain changes to the requirements
for audit partner rotation after a period of time. Sarbanes-Oxley requires chief
executive officers and chief financial officers, or their equivalent, to certify
to the accuracy of periodic reports filed with the Securities and Exchange
Commission, subject to civil and criminal penalties if they knowingly or
willingly violate this certification requirement. The Company's Chief Executive
Officer and Chief Financial Officer have signed certifications to this Form 10-K
as required by Sarbanes-Oxley. In addition, under Sarbanes-Oxley, counsel will
be required to report evidence of a material violation of the securities laws or
a breach of fiduciary duty by a company to its chief executive officer or its
chief legal officer, and, if such officer does not appropriately respond, to
report such evidence to the audit committee or other similar committee of the
board of directors or the board itself.
Under Sarbanes-Oxley, longer prison terms will apply to corporate
executives who violate federal securities laws; the period during which certain
types of suits can be brought against a company or its officers is extended; and
bonuses issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from trading the company's
securities during retirement plan "blackout" periods, and loans to company
executives (other than loans by financial institutions permitted by federal
rules and regulations) are restricted. In addition, a provision directs that
civil penalties levied by the Securities and Exchange Commission as a result of
any judicial or administrative action under Sarbanes-Oxley be deposited to a
fund for the benefit of harmed investors. The Federal Accounts for Investor
Restitution provision also requires the Securities and Exchange Commission to
develop methods of improving collection rates. The legislation accelerates the
time frame for disclosures by
22
public companies, as they must immediately disclose any material changes in
their financial condition or operations. Directors and executive officers must
also provide information for most changes in ownership in a company's securities
within two business days of the change.
Sarbanes-Oxley also increases the oversight of, and codifies certain
requirements relating to, audit committees of public companies and how they
interact with the company's "registered public accounting firm." Audit Committee
members must be independent and are absolutely barred from accepting consulting,
advisory or other compensatory fees from the issuer. In addition, companies must
disclose whether at least one member of the committee is a "financial expert"
(as such term is defined by the Securities and Exchange Commission) and if not,
why not. Under Sarbanes-Oxley, a company's registered public accounting firm is
prohibited from performing statutorily mandated audit services for a company if
such company's chief executive officer, chief financial officer, comptroller,
chief accounting officer or any person serving in equivalent positions had been
employed by such firm and participated in the audit of such company during the
one-year period preceding the audit initiation date. Sarbanes-Oxley also
prohibits any officer or director of a company or any other person acting under
their direction from taking any action to fraudulently influence, coerce,
manipulate or mislead any independent accountant engaged in the audit of the
company's financial statements for the purpose of rendering the financial
statements materially misleading. Sarbanes-Oxley also requires the Securities
and Exchange Commission to prescribe rules requiring inclusion of any internal
control report and assessment by management in the annual report to
shareholders. Sarbanes-Oxley requires the company's registered public accounting
firm that issues the audit report to attest to and report on management's
assessment of the company's internal controls.
Although the Company has incurred some additional expense in complying
with the provisions of the Sarbanes-Oxley Act and the resulting regulations,
management does not expect that such compliance will have a material impact on
our results of operations or financial condition.
AVAILABILITY OF ANNUAL REPORT
We do not maintain a website. However, we will provide our Annual Report
on Form 10-K free of charge to shareholders who write to the Corporate Secretary
at 104-110 Avenue C, Bayonne, New Jersey 07002.
ITEM 2. PROPERTIES
At December 31, 2003, we conducted our business from our main office
located at 104-110 Avenue C, Bayonne, New Jersey, and our two branch offices.
The aggregate book value of our premises and equipment was $5.7 million at
December 31, 2003. We own our main office facility and lease our two branch
offices.
ITEM 3. LEGAL PROCEEDINGS
We are involved, from time to time, as plaintiff or defendant in various
legal actions arising in the normal course of its business. At December 31,
2003, we were not involved in any material legal proceedings.
23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of the year under report.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCK HOLDER MATTERS
BCB Bancorp, Inc. common stock is currently traded on the electronic
bulletin board under the symbol "BCBP", and there is an established market for
such common stock. At December 31, 2003, BCB Bancorp, Inc. had one market maker.
The following table sets forth the high and low bid quotations for BCB
Bancorp, Inc. common stock for the periods indicated. No cash dividends have
been paid on the common stock to date. These quotations represent prices between
dealers and do not include retail markups, markdowns, or commissions and do not
reflect actual transactions. The information presented reflects the three 10%
common stock dividends paid by the Company and Bank. This information has been
obtained from monthly statistical summaries provided through marketwatch.com. As
of December 31, 2003, there were 2,296,984 shares of BCB Bancorp, Inc. common
stock issued and outstanding. At December 31, 2003, BCB Bancorp, Inc. had
approximately 1,700 stockholders of record.
Cash Dividend
Fiscal 2003 High Bid Low Bid Declared
- ------------------------------------------------------------------------------------------------------
Quarter Ended December 31, 2003............. $ 22.00 $ 15.00 $ --
Quarter Ended September 30, 2003............ $ 15.68 $ 13.55 $ --
Quarter Ended June 30, 2003................. $ 15.91 $ 12.86 $ --
Quarter Ended March 31, 2003................ $ 17.50 $ 14.13 $ --
Cash Dividend
Fiscal 2002 High Bid Low Bid Declared
- ------------------------------------------------------------------------------------------------------
Quarter Ended December 31, 2002............. $ 16.12 $ 8.76 $ --
Quarter Ended September 30, 2002............ $ 10.04 $ 8.26 $ --
Quarter Ended June 30, 2002................. $ 8.26 $ 8.26 $ --
Quarter Ended March 31, 2002................ $ NM $ NM $ --
- ----------
NM- Management is not aware of any trades during the quarter ended March 31,
2002.
24
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected consolidated historical financial
and other data of BCB Bancorp, Inc. at and for December 31, 2003 and for Bayonne
Community Bank at and for years prior to December 31, 2003. The information is
derived in part from, and should be read together with, the audited Consolidated
Financial Statements and Notes thereto of BCB Bancorp, Inc. Per share data has
been adjusted for all periods to reflect the three 10% common stock dividends
paid by the Company and Bank.
Selected financial condition December 31, data at:
-----------------------------------------------------------------------------
2003 2002 2001 2000
-------------- -------------- -------------- --------------
Total assets .............................. $ 300,676,248 $ 183,107,705 $ 113,223,692 $ 29,536,388
Cash and cash equivalents.................. 11,786,283 5,143,986 27,167,533 25,634,234
Securities, held to maturity .............. 90,313,420 50,602,306 38,562,331 --
Loans receivable .......................... 188,785,530 122,084,802 44,973,005 1,451,149
Deposits .................................. 253,650,119 163,547,862 101,749,208 21,935,732
Borrowings ................................ 25,000,000 -- -- --
Stockholders' equity ...................... 21,167,034 18,771,621 11,303,215 7,204,021
Selected operating data for:
----------------------------------------------------------------------------------
The year ended The year ended The year ended The two months ended
December 31, 2003 December 31, 2002 December 31, 2001 December 31, 2000
----------------- ----------------- ----------------- -----------------
Net interest income ....................... $ 9,799,165 $ 5,959,928 $ 1,786,806 $ 172,542
Provision for loan losses ................. 880,000 843,000 382,000 30,000
Non-interest income ....................... 480,912 336,028 151,555 4,099
Non-interest expense ...................... 5,390,491 3,272,211 2,004,903 569,327
Income tax (benefit) ...................... 1,613,723 871,655 172,663 (253,865)
-------------- -------------- -------------- --------------
Net income (loss) ......................... $ 2,395,413 $ 1,309,090 $ (275,879) $ (168,821)
============== ============== ============== ==============
Net income (loss) per share:
Basic .................................. $ 1.04 $ 0.68 $ (0.23) N/M(1)
-------------- -------------- --------------
Diluted ................................ $ 1.01 $ 0.67 $ (0.23) N/M(1)
-------------- -------------- --------------
- ----------
(1) Per share information for the two months ended December 31, 2000 has been
omitted as not meaningful.
25
At or for the Years ended December 31,(1)
-----------------------------------------
2003 2002 2001
------ ------ ------
Selected Financial Ratios and Other Data:
Return on average assets (ratio of net
income to average total assets) ........................ 1.03% 0.86 (0.38)
Return on average stockholders'
equity (ratio of net income to
average stockholders' equity) .......................... 11.97 8.68 (3.28)
Non-interest income to average assets .................... 0.21 0.22 0.21
Non-interest expense to average assets ................... 2.32 2.16 2.77
Net interest rate spread during
the period ............................................. 4.03 3.60 1.97
Net interest margin (net interest income
to average interest earning assets) ................... 4.34 4.03 2.59
Ratio of average interest-earning assets
to average interest-bearing liabilities ................ 116.42 118.87 118.73
Asset Quality Ratios:
Nonperforming loans to total loans
at end of period ....................................... 0.13 0.04 --
Allowance for loan losses to
nonperforming loans at end of period ................... 547.48 1,840.73 --
Allowance for loan losses to
total loans at end of period ........................... 1.11 1.00 0.91
Capital Ratios:
Stockholders' equity to total assets
at end of period ....................................... 7.04 10.25 9.98
Average stockholders' equity to
average total assets ................................... 8.62 9.94 11.61
Tier 1 capital to adjusted assets ........................ 7.02 10.25 9.98
Tier 1 capital to risk weighted assets ................... 10.47 15.01 15.09
- ----------
(1) Ratios at December 31, 2000 and for the two months ended December 31, 2000
have been omitted as not meaningful.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
BCB Bancorp, Inc., completed its acquisition of Bayonne Community Bank on
May 1, 2003. Information at and for the twelve months ended December 31, 2003
reflects the consolidated financial information of BCB Bancorp Inc. Prior to the
completion of the acquisition, BCB Bancorp, Inc. had no assets, liabilities or
operations. Consequently the information provided below at and for the years
ended December 31, 2002 and prior is for Bayonne Community Bank on a stand-alone
basis.
This discussion, and other written material, and statements management may
make, may contain certain forward-looking statements regarding the Company's
prospective performance and strategies within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. The Company intends such forward-looking statements to
be covered by the safe harbor provisions for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995, and is
including this statement for purposes of said safe harbor provisions.
Forward-looking information is inherently subject to risks and
uncertainties, and actual results could differ materially from those currently
anticipated due to a number of factors, which include, but are not limited to,
factors discussed in the Company's Annual Report on Form 10-K and in other
documents filed by the Company with the Securities and Exchange Commission.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of the Company, are generally
identified by the use of the words "plan," "believe," "expect," "intend,"
"anticipate," "estimate," "project," "may," "will," "should," "could,"
"predicts," "forecasts," "potential," or "continue" or similar terms or the
negative of these terms. The Company's ability to predict results or the actual
effects of its plans or strategies is inherently uncertain. Accordingly, actual
results may differ materially from anticipated results.
Factors that could have a material adverse effect on the operations of the
Company and its subsidiaries include, but are not limited to, changes in market
interest rates, general economic conditions, legislation, and regulation;
changes in monetary and fiscal policies of the United States Government,
including policies of the United States Treasury and Federal Reserve Board;
changes in the quality or composition of the loan or investment portfolios;
changes in deposit flows, competition, and demand for financial services, loans,
deposits and investment products in the Company's local markets; changes in
accounting principles and guidelines; war or terrorist activities; and other
economic, competitive, governmental, regulatory, geopolitical and technological
factors affecting the Company's operations, pricing and services.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this discussion. Although the
Company believes that the expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance or achievements. Except as required by
27
applicable law or regulation, the Company undertakes no obligation to update
these forward-looking statements to reflect events or circumstances that occur
after the date on which such statements were made.
Critical Accounting Policies
Critical accounting policies are those accounting policies that can have a
significant impact on the Company's financial position and results of operations
that require the use of complex and subjective estimates based upon past
experiences and management's judgment. Because of the uncertainty inherent in
such estimates, actual results may differ from these estimates. Below are those
policies applied in preparing the Company's consolidated financial statements
that management believes are the most dependent on the application of estimates
and assumptions. For additional accounting policies, see Note 2 of "Notes to
Consolidated Financial Statements."
Allowance for Loan Losses
Loans receivable are presented net of an allowance for loan losses. In
determining the appropriate level of the allowance, management considers a
combination of factors, such as economic and industry trends, real estate market
conditions, size and type of loans in portfolio, nature and value of collateral
held, borrowers' financial strength and credit ratings, and prepayment and
default history. The calculation of the appropriate allowance for loan losses
requires a substantial amount of judgment regarding the impact of the
aforementioned factors, as well as other factors, on the ultimate realization of
loans receivable.
Stock Options
The Company has the choice to account for stock options using either
Accounting Principles Board Opinion No. 25 ("APB 25") or SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company has elected to use the
accounting method under APB 25 and the related interpretations to account for
its stock options. Under APB 25, generally, when the exercise price of the
Company's stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized. Had the Company elected to
use SFAS No. 123 to account for its stock options under the fair value method,
it would have been required to record compensation expense and, as a result,
diluted earnings per share for the fiscal years ended December 31, 2003 and 2002
would have been lower by $0.18 and $0.03 respectively. No stock options were
granted prior to 2002. See Note 2 to "Notes to Consolidated Financial
Statements."
Financial Condition
Comparison at December 31, 2003 and at December 31, 2002
Total assets increased by $117.6 million, or 64.2%, to $300.7 million at
December 31, 2003 from $183.1 million at December 31, 2002 as the Company
continued to grow the Bank's deposit base and invest these deposits in loans and
investments.
28
Total cash and cash equivalents increased by $6.7 million, or 131.4%, to
$11.8 million at December 31, 2003 from $5.1 million at December 31, 2002 in
order to accumulate cash liquidity to facilitate loan closings in the near-term.
Investment securities held-to-maturity increased by $39.7 million, or 78.5%, to
$90.3 million at December 31, 2003 from $50.6 million at December 31, 2002. This
increase was primarily attributable to the purchase of $70.0 million of callable
agency securities and the purchase of $6.0 million of mortgage-backed
securities, which was partially offset by the call of $20.0 million of agency
securities and $16.3 million of mortgage backed security repayments and
prepayments during the twelve months ended December 31, 2003.
Loans receivable increased by $66.7 million, or 54.6%, to $188.8 million
at December 31, 2003 from $122.1 million at December 31, 2002. The increase
resulted primarily from a $50.2 million increase in commercial and multi-family
loans net of amortization, a $14.2 million increase in home mortgages and
construction loans net of amortization, a $2.9 million increase in consumer
loans net of amortization, partially offset by an increase of $880,000 in the
allowance for loan losses. The growth in loans receivable was primarily
attributable to competitive pricing in a lower than normal interest rate
environment and a strong local economy as real estate construction and
rehabilitation was active during 2003.
Fixed assets increased by $3.1 million, or 119.2%, to $5.7 million at
December 31, 2003 from $2.6 million at December 31, 2002. The increase in fixed
assets resulted primarily from the rehabilitation of and equipment purchase for
a leased facility, presently being used as a branch office, opened during the
spring of 2003 and the acquisition, construction and outfitting of our 13,200
square foot corporate headquarters which opened during the fourth quarter of
2003.
Deposit liabilities increased by $90.2 million, or 55.2%, to $253.7
million at December 31, 2003 from $163.5 million at December 31, 2002. The
increase resulted primarily from an increase of $46.5 million or 40.0% in
savings and club accounts to $162.8 million from $116.3 million, an increase of
$34.8 million or 174.0% in time deposits to $54.8 million from $20.0 million,
and an increase of $8.8 million or 32.4% in demand deposits to $36.0 million
from $27.2 million. The Bank has been able to achieve these growth rates through
competitive pricing on select deposit products.
Borrowings increased by $25.0 million to $25.0 million at December 31,
2003, as the Bank employed a leverage strategy funded with wholesale borrowings
from the Federal Home Loan Bank of New York maturing in November 2004 and
carrying a 1.48% interest rate to invest in two callable investment securities
issued by the FHLB. The two investment securities have a final maturity of
fifteen years, and consist of a $20.85 million investment yielding 6.05% and a
$4.15 million investment yielding 6.00%.
Stockholders' equity increased by $2.4 million, or 12.8%, to $21.2 million
at December 31, 2003 from $18.8 million at December 31, 2002. The increase was
wholly attributable to net income for the twelve months ended December 31, 2003
of $2.4 million. At December 31, 2003 the Bank's Tier 1 leverage, Tier 1
risk-based and Total risk-based capital ratios were 7.02%, 10.47%, and 11.51%
respectively.
29
Comparison at December 31, 2002 and at December 31, 2001
Total assets increased by $69.9 million, or 61.7%, to $183.1 million at
December 31, 2002 from $113.2 million at December 31, 2001 as the Bank continued
to grow through competitive pricing policies and extended service hours.
Total cash and cash equivalents decreased by $22.1 million, or 81.3%, as
the Bank reinvested funds from retail deposit growth and loan and
mortgage-backed security repayments and prepayments into both investments and
loans. Investment securities held to maturity increased by $12.0 million, or
31.1%, to $50.6 million at December 31, 2002 from $38.6 million at December 31,
2001. This increase was primarily attributable to the purchase of $17.0 million
of callable agency securities and the purchase of $8.1 million of
mortgage-backed securities, which was partially offset by the call of a $2.5
million agency security and $10.6 million of mortgage-backed security repayments
and prepayments during the twelve months ended December 31, 2002.
Loans receivable increased by $77.1 million, or 171.3%, to $122.1 million
at December 31, 2002 from $45.0 million at December 31, 2001. The increase
resulted primarily from a $51.9 million increase in commercial and business
loans net of amortization, a $19.2 million increase in home mortgages and
construction loans net of amortization, a $4.6 million increase in consumer
loans net of amortization, and a $1.4 million increase in loan participations
with other financial institutions, net of amortization.
Fixed assets increased by $1.2 million, or 85.7%, to $2.6 million at
December 31, 2002 from $1.4 million at December 31, 2001. The increase in fixed
assets resulted primarily from the acquisition of real estate for $884,000 upon
which the Bank subsequently built a branch facility.
Deposit liabilities increased by $61.7 million, or 60.6%, to $163.5
million at December 31, 2002 from $101.8 million at December 31, 2001. The
increase resulted primarily from an increase of $40.7 million, or 53.8%, in
savings and club accounts to $116.3 million from $75.6 million, an increase of
$12.4 million, or 163.2%, in time deposits to $20.0 million from $7.6 million,
and an increase of $8.6 million, or 46.2%, in demand deposits to $27.2 million
from $18.6 million. The Bank has been able to achieve these growth rates through
competitive pricing on select deposit products.
Other liabilities increased $617,000 to $788,000 at December 31, 2002 from
$171,000 at December 31, 2001. The increase resulted primarily from a $458,000
increase in current income tax liabilities recorded at December 31, 2002, and
reflects the Bank's attainment of profitability in 2002.
Stockholders' equity increased by $7.5 million, or 66.4%, to $18.8 million
at December 31, 2002 from $11.3 million at December 31, 2001. The increase was
primarily attributable to net proceeds of $6.2 million from an offering of
common stock and net income for the twelve months ended December 31, 2002 of
$1.3 million. At December 31, 2002 the Bank's Tier 1
30
leverage, Tier 1 risk-based and Total risk-based capital ratios were 10.3%, 15.0
%, and 16.0% respectively.
Analysis of Net Interest Income
Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rates earned or paid on them,
respectively.
The following tables set forth balance sheets, average yields and costs,
and certain other information for the periods indicated. All average balances
are daily average balances. The yields set forth below include the effect of
deferred fees, discounts and premiums, which are included in interest income.
Information for the year ended December 31, 2000 has not been provided since the
Bank had commenced operations in November 2000, and such information, in the
opinion of management, is not meaningful.
At December 31, 2003 The year ended December 31, 2003
-------------------- --------------------------------
Actual Actual Yield/ Average Interest Average
Balance Cost (4) Balance earned/paid Yield/Cost(4)
------- -------- ------- ----------- -------------
Interest-earning assets: (Dollars in thousands)
Loans receivable ......................... $188,786 6.74% $155,145 $ 10,745 6.93%
Investment securities(1) ................. 91,563 5.52 60,286 3,299 5.47
Interest-bearing deposits ................ 8,891 1.05 10,446 91 0.87
-------- -------- --------
Total interest-earning assets ....... 289,240 6.18% 225,877 14,135 6.26%
-------- -------- --------
Interest-bearing liabilities:
Interest-bearing demand deposits ......... $ 17,201 1.39% $ 14,844 203 1.37%
Money market deposits .................... 2,163 1.93 2,287 46 2.01
Savings deposits ......................... 162,832 2.22 141,749 3,235 2.28
Certificates of deposit .................. 54,828 2.46 32,186 808 2.51
Borrowings ............................... 25,000 1.48 2,945 44 1.49
-------- -------- --------
Total interest-bearing liabilities .. 262,024 2.14% 194,011 4,336 2.23%
-------- -------- --------
Net interest income ....................... $ 9,799
========
Interest rate spread(2) ................... 4.04% 4.03%
==== ====
Net interest margin(3) .................... 4.34%
====
Ratio of average interest-earning assets to
average interest-bearing liabilities ..... 110.39% 116.42%
======== ========
The year ended December 31, 2002
--------------------------------
Average
Average Interest Yield/
Balance earned/paid Cost(4)
------- ----------- -------
Interest-earning assets: (Dollars in thousands)
Loans receivable ......................... $ 83,734 $ 6,119 7.31%
Investment securities(1) ................. 48,380 2,949 6.10
Interest-bearing deposits ................ 15,893 272 1.71
-------- --------
Total interest-earning assets ....... 148,007 9,340 6.31%
-------- --------
Interest-bearing liabilities:
Interest-bearing demand deposits ......... $ 9,520 169 1.77%
Money market deposits .................... 2,533 61 2.41
Savings deposits ......................... 99,057 2,761 2.79
Certificates of deposit .................. 13,402 389 2.90
Borrowings ............................... -- -- --
-------- --------
Total interest-bearing liabilities .. 124,512 3,380 2.71%
-------- --------
Net interest income ....................... $ 5,960
========
Interest rate spread(2) ................... 3.60%
====
Net interest margin(3) .................... 4.03%
====
Ratio of average interest-earning assets to
average interest-bearing liabilities ..... 118.87%
========
- ----------
(1) Includes Federal Home Loan Bank of New York stock.
(2) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(4) Average yields are computed using annualized interest income and expense
for the periods.
31
The year ended December 31, 2001
--------------------------------
Average Interest Average
Balance earned/paid Yield/Cost(4)
------- ----------- -------------
Interest-earning assets: (Dollars in thousands)
Loans receivable .................................... $ 19,129 $ 1,555 8.13%
Investment securities(1) ............................ 21,208 1,295 6.11
Interest-bearing deposits ........................... 28,750 1,207 4.20
-------- --------
Total interest-earning assets ...................... 69,087 4,057 5.87%
-------- --------
Interest-bearing liabilities:
Interest-bearing demand deposits .................... $ 4,543 $ 107 2.36%
Money market deposits ............................... 1,142 39 3.42
Savings deposits .................................... 44,172 1,726 3.91
Certificates of deposit ............................. 8,325 398 4.78
-------- --------
Total interest-bearing liabilities ................ 58,189 2,270 3.90%
-------- --------
Net interest income .................................. $ 1,787
========
Interest rate spread(2) .............................. 1.97%
========
Net interest margin(3) ............................... 2.59%
========
Ratio of average interest-earning assets to
average interest-bearing liabilities ................ 118.73%
======
- ----------
(1) Includes Federal Home Loan Bank of New York stock.
(2) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(4) Average yields are computed using annualized interest income and expense
for the periods.
Rate/Volume Analysis
The table below sets forth certain information regarding changes in our
interest income and interest expense for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); (ii) changes in rate (change
in rate multiplied by old average volume); (iii) the allocation of changes in
rate and volume; and (iv) the net change.
Years Ended December 31,
-------------------------------------------------------------------------------------------
2003 vs. 2002 2002 vs. 2001
--------------------------------- ----------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Due to
--------------------------------- Total ----------------------------- Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
------- ------- ------- ---------- ------- ------- ------- ----------
(In Thousands)
Interest income:
Loans receivable ................. $ 5,218 $ (320) $ (272) $ 4,626 $ 5,252 $ (157) $ (531) $ 4,564
Investment securities ............ 726 (302) (74) 350 1,659 (2) (3) 1,654
Interest-bearing deposits
with other banks ............... (93) (134) 46 (181) (540) (715) 320 (935)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets .... 5,851 (756) (300) 4,795 6,371 (874) (214) 5,283
------- ------- ------- ------- ------- ------- ------- -------
Interest expense:
Interest-bearing demand accounts . 95 (38) (23) 34 117 (26) (29) 62
Money market ..................... (6) (10) 1 (15) 47 (11) (14) 22
Savings and club ................. 1,190 (501) (215) 474 2,146 (496) (615) 1,035
Certificates of Deposit .......... 545 (53) (73) 419 242 (155) (96) (9)
Borrowed funds ................... -- -- 44 44 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 1,824 (602) (266) 956 2,552 (688) (754) 1,110
------- ------- ------- ------- ------- ------- ------- -------
Change in net interest income ...... $ 4,027 $ (154) $ (34) $ 3,839 $ 3,819 $ (186) $ 540 $ 4,173
======= ======= ======= ======= ======= ======= ======= =======
32
Results of Operations
Results of Operations for the Years Ended December 31, 2003 and 2002
Net income increased by $1.1 million, or 84.6%, to $2.4 million for the
year ended December 31, 2003 from $1.3 million for the year ended December 31,
2002. This increase in net income resulted from increases in net interest income
and non-interest income, which was partially offset by increases in the
provision for loan losses, non-interest expense and income taxes. Net interest
income increased by $3.8 million, or 63.3%, to $9.8 million for the year ended
December 31, 2003 from $6.0 million for the year ended December 31, 2002. This
increase resulted primarily from an increase in average net interest earning
assets of $8.4 million, or 35.7%, to $31.9 million for the year ended December
31, 2003 from $23.5 million for the year ended December 31, 2002, and an
increase in the net interest margin to 4.34% for the year ended December 31,
2003 from 4.03% for the year ended December 31, 2002. The increase in our net
interest margin reflected management's ability to invest a large percentage of
our deposit base in higher yielding, conservatively underwritten loans and
federally-sponsored United States Government Agency Securities.
Interest income on loans receivable increased by $4.6 million, or 75.4%,
to $10.7 million for the year ended December 31, 2003 from $6.1 million for the
year ended December 31, 2002. This increase was primarily due to an increase in
average loans receivable of $71.4 million, or 85.3%, to $155.1 million for the
year ended December 31, 2003 from $83.7 million for the year ended December 31,
2002, which was partially offset by a decrease in the average yield on loans
receivable to 6.93% for the year ended December 31, 2003 from 7.31% for the year
ended December 31, 2002. The increase in the average balance of loans reflected
management's strategy of deploying funds in higher yielding loans, specifically
commercial real estate loans as opposed to lower yielding investments in
government securities. The decrease in average yield reflects the lower interest
rate environment in 2003 as compared to 2002.
Interest income on securities increased by $350,000, or 11.9%, to $3.30
million for the year ended December 31, 2003 from $2.95 million for the year
ended December 31, 2002. The increase was primarily attributable to an increase
in the average balance of investment securities of $11.9 million, or 24.6%, to
$60.3 million for the year ended December 31, 2003 from $48.4 million for the
year ended December 31, 2002, which was partially offset by a decrease in the
average yield on investment securities to 5.47% for the year ended December 31,
2003 from 6.10% for the year ended December 31, 2002. The increase in average
balances reflects the redeployment of funds previously invested in short-term
interest earning deposits and the use of borrowings that were invested in short
term investments to secure a positive short term interest rate spread.
Interest income on other interest-earning assets consisting primarily of
federal funds sold decreased by $181,000, or 66.5%, to $91,000 for the year
ended December 31, 2003 from $272,000 for the year ended December 31, 2002. This
decrease was primarily due to a decrease in the average balance of other
interest-earning assets to $10.4 million for the year ended December 31, 2003
from $15.9 million for the year ended December 31, 2002, and a decrease in the
average yield on other interest-earning assets to 0.87% for the year ended
December 31, 2003 from 1.71% for the year ended December 31, 2002. The decrease
in the average balance reflects
33
management's decision to deploy funds in higher yielding loans and securities
and the decrease in average yield reflects the lower interest rate environment
in 2003 as compared to 2002.
Total interest expense increased by $956,000, or 28.3%, to $4.3 million
for the year ended December 31, 2003 from $3.4 million for the year ended
December 31, 2002. This increase resulted from an increase in average total
interest bearing deposits of $66.6 million, or 53.5%, to $191.1 million for the
year ended December 31, 2003 from $124.5 million for the year ended December 31,
2002, and a $2.9 million increase in borrowings at December 31, 2003, compared
to no borrowings the prior year-end, which was partially offset by a decrease in
the average cost of interest bearing liabilities to 2.23% for the year ended
December 31, 2003 from 2.71% for the year ended December 31, 2002. The decrease
in average cost reflects the lower interest rate environment in 2003 as compared
to 2002.
The provision for loan losses totaled $880,000 and $843,000 for the years
ended December 31, 2003 and 2002 respectively. The provision for loan losses is
established based upon management's review of the Bank's loans and consideration
of a variety of factors including, but not limited to, (1) the risk
characteristics of the loan portfolio, (2) current economic conditions, (3)
actual losses previously experienced, (4) the significant level of loan growth
and (5) the existing level of reserves for loan losses that are possible and
estimable. The Bank had non-accrual loans totaling $67,000 at December 31, 2003
and at December 31, 2002. The allowance for loan losses stood at $2.1 million or
1.1% of gross total loans at December 31, 2003, as compared to $1.2 million or
1.0% of gross total loans at December 31, 2002. The amount of the allowance is
based on estimates and the ultimate losses may vary from such estimates.
Management assesses the allowance for loan losses on a quarterly basis and makes
provisions for loan losses as necessary in order to maintain the adequacy of the
allowance. While management uses available information to recognize losses on
loans, future loan loss provisions may be necessary based on changes in the
aforementioned criteria. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the allowance
for loan losses and may require the Bank to recognize additional provisions
based on their judgment of information available to them at the time of their
examination. Management believes that the allowance for loan losses was adequate
at both December 31, 2003 and 2002.
Total non-interest income increased by $145,000, or 43.2%, to $481,000 for
the year ended December 31, 2003 from $336,000 for the year ended December 31,
2002. The increase in non-interest income resulted primarily from a $53,000
increase in fees and service charges, a $94,000 increase in gain on sales of
loans originated for sale as the Bank initiated a program to sell select fixed
rate mortgages to the secondary market, and a $5,000 increase in other income,
which was partially offset by a $8,000 decrease in gain on sales of securities
available for sale.
Total non-interest expenses increased by $2.1 million, or 63.6%, to $5.4
million for the year ended December 31, 2003 from $3.3 million for the year
ended December 31, 2002. The increase in 2003 was primarily due to an increase
of $1.2 million, or 75.0%, in salaries and employee benefits expense to $2.8
million for the year ended December 31, 2003 from $1.6 million for the year
ended December 31, 2002 as the Bank increased staffing levels and compensation
in an effort to service its growing customer base. Full time equivalent
employees
34
increased to 66 at December 31, 2003 from 34 at December 31, 2002. Equipment
expense increased by $294,000 to $940,000 for the year ended December 31, 2003
from $646,000 for the year ended December 31, 2002. The primary component of
this expense relates to the increased costs of the Bank's data service provider
reflecting the overall growth of the Bank's balance sheet. Occupancy expense
increased by $164,000 to $411,000 for the year ended December 31, 2003 from
$247,000 for the year ended December 31, 2002, and advertising expense increased
by $90,000 to $169,000 for the year ended December 31, 2003 from $79,000 for the
year ended December 31, 2002, primarily as a result of the opening of two new
offices during the twelve months ended December 31, 2003 and the increased
advertising expense to promote them. Other non-interest expense increased by
$309,000 to $1.1 million for the year ended December 31, 2003 from $749,000 for
the year ended December 31, 2002. Other non-interest expense is comprised of
directors' fees, stationary, forms and printing, professional fees, check
printing, correspondent bank fees, telephone and communication, shareholder
relations and other fees and expenses.
Income tax expense increased by $742,000, or 85.1%, to $1.6 million for
the year ended December 31, 2003 from $872,000 for the year ended December 31,
2002 reflecting pre-tax income of $4.0 million for the year ended December 31,
2003 compared to pre-tax income of $2.2 million earned for year ended December
31, 2002.
Results of Operations for the years ended December 31, 2002 and 2001.
Net income for the year ended December 31, 2002 was $1.3 million compared
to a net loss of $276,000 for the year ended December 31, 2001. This improvement
was due to increases in net interest income and non-interest income partially
offset by increases in the provision for loan losses, non-interest expense and
income taxes. Net interest income increased by $4.2 million, or 233.3%, to $6.0
million for the year ended December 31, 2002 from $1.8 million for the year
ended December 31, 2001. This increase resulted primarily from an increase in
average net interest earning assets of $12.6 million, or 115.6%, to $23.5
million for the year ended December 31, 2002 from $10.9 million for the year
ended December 31, 2001, and an increase in our net interest margin to 4.03% for
the year ended December 31, 2002 from 2.59% for the Year ended December 31,
2001.
Interest income on loans receivable increased by $4.5 million, or 281.3%,
to $6.1 million for the year ended December 31, 2002 from $1.6 million for the
twelve months ended December 31, 2001. The increase was primarily due to an
increase in average loans receivable of $64.6 million, or 338.2%, to $83.7
million for the year ended December 31, 2002 from $19.1 million for the year
ended December 31, 2001, which was partially offset by a decrease in the average
yield on loans receivable to 7.31% for the year ended December 31, 2002 from
8.13% for the year ended December 31, 2001. The increase in the average loans
reflects management's strategy of deploying funds in higher yielding loans,
specifically commercial real estate loans. The decrease in average yield
reflects the lower interest rate environment in 2002 as compared to 2001.
Interest income on securities increased by $1.6 million, or 123.1%, to
$2.9 million for the year ended December 31, 2002 from $1.3 million for the year
ended December 31, 2001. The
35
increase was primarily attributable to an increase in the average balance of
investment securities of $27.2 million, or 128.3%, to $48.4 million for the year
ended December 31, 2002 from $21.2 million for the year ended December 31, 2001,
partially offset by a decrease in the average yield on investment securities to
6.10% for the year ended December 31, 2002 from 6.11% for the year ended
December 31, 2001. The increase in the average balance of investment securities
reflected management's strategy of deploying funds in higher yielding
instruments in an effort to achieve higher returns.
Interest income on other interest-earning assets, consisting primarily of
federal funds sold, decreased by $935,000, or 77.5%, to $272,000 for the year
ended December 31, 2002 from $1.2 million for the year ended December 31, 2001.
This decrease was primarily due to a decrease in the average balance of other
interest-earning assets to $15.9 million for the year ended December 31, 2002
from $28.8 million for the year ended December 31, 2001, and a decrease in the
average yield on other interest-earning assets to 1.71% for the year ended
December 31, 2002 from 4.20% for the year ended December 31, 2001. The decrease
in the average balance reflects management's decision to deploy funds in higher
yielding loans and securities and the decrease in average yield reflects the
lower interest rate environment in 2002 as compared to 2001.
Total interest expense increased by $1.1 million, or 47.8%, to $3.4
million for the year ended December 31, 2002 from $2.3 million for the year
ended December 31, 2001. This increase resulted from an increase in average
total interest bearing liabilities of $66.3 million, or 113.9%, to $124.5
million for the year ended December 31, 2002 from $58.2 million for the year
ended December 31, 2001, partially offset by a decrease in the average cost of
interest bearing liabilities to 2.71% for the year ended December 31, 2002 from
3.90% for the year ended December 31, 2001. The decrease in average cost
reflects the lower interest rate environment in 2002 as compared to 2001.
The provision for loan losses totaled $843,000 and $382,000 for the years
ended December 31, 2002 and 2001, respectively. The provision for loan losses is
established based upon management's review of the Bank's loans and consideration
of a variety of factors including, but not limited to, (1) the risk
characteristics of the loan portfolio, (2) current economic conditions, (3)
actual losses previously experienced and (4) the existing level of reserves for
loan losses that are possible and estimable. The Bank had non-performing loans
totaling $67,000 at December 31, 2002 and no non-performing loans at December
31, 2001. The allowance for loan losses totaled $1.2 million, or 1.00% of total
loans at December 31, 2002, as compared to $412,000, or 0.91% of total loans at
December 31, 2001. The amount of the allowance is based on estimates and the
ultimate losses may vary from such estimates. Management assesses the allowance
for loan losses on a quarterly basis and makes provisions for loan losses as
necessary in order to maintain the adequacy of the allowance. While management
uses available information to recognize loses on loans, future loan loss
provisions may be necessary based on changes in the aforementioned criteria. In
addition various regulatory agencies, as an integral part of their examination
process, periodically review the allowance for loan losses and may require the
Bank to recognize additional provisions based on their evaluation of information
available to them at the time of their examination. Management believes that the
allowance for loan losses was adequate for both December 31, 2002 and 2001.
36
Total non-interest income increased by $184,000, or 121.1%, to $336,000
for the year ended December 31, 2002 from $152,000 for the year ended December
31, 2001. The increase in non-interest income resulted primarily from a $219,000
increase in fees and service charges and a $1,000 increase in other income,
partially offset by a $36,000 decrease in gain on securities available for sale.
Total operating expenses increased by $1.3 million, or 65.0%, to $3.3
million for the year ended December 31, 2002 from $2.0 million for the year
ended December 31, 2001. The increase in the twelve month period in 2002 was
primarily due to an increase of $561,000, or 57.5%, in salaries and employee
benefits expense to $1.6 million for the year ended December 31, 2002 from $1.0
million for the year ended December 31, 2001 as the Bank increased staffing
levels and compensation in an effort to service its growing customer base.
Equipment expense increased to $646,000 for the year ended December 31, 2002
from $373,000 for the year ended December 31, 2001. The primary component of
this expense relates to the increased costs of the Bank's data service provider
reflecting the overall growth of the Bank's balance sheet. Occupancy expense
increased by $46,000 to $247,000 for the year ended December 31, 2002 from
$201,000 for the year ended December 31, 2001, and advertising expense increased
nominally by $5,000 to $79,000 for the year ended December 31, 2002 from $74,000
for the year ended December 31, 2001. Other non-interest expense increased by
$384,000 to $749,000 for the year ended December 31, 2002 from $365,000 for the
year ended December 31, 2001. Other noninterest expense is comprised of
directors' fees, forms and printing, professional fees, check printing,
correspondent bank fees, telephone and communication, shareholder relations and
other fees and expenses.
Income tax expense totaled $872,000 for the year ended December 31, 2002
reflecting pre-tax income of $2.2 million earned during the year ended December
31, 2002 compared to a tax benefit of $173,000 for the year ended December 31,
2001 as the Bank had a cumulative loss before income taxes of $(449,000) for the
year ended December 31, 2001.
Liquidity and Capital Resources
Our funding sources include income from operations, deposits and
borrowings, principal payments on loans and investment securities. While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit outflows and mortgage prepayments are greatly
influenced by the general level of interest rates, economic conditions and
competition.
Our primary investing activities are the origination of commercial and
multi-family real estate loans, one-to four-family mortgage loans, construction,
commercial business and consumer loans, as well as the purchase of
mortgage-backed and other investment securities. During 2003, loan originations
totaled $105.0 million compared to $90.5 million and $41.1 million for 2002 and
2001, respectively. The increase in loan originations reflects management's
efforts to increase total assets of the Bank, the continued focus on increasing
commercial and multi-family lending operations and the strong refinance market
in 2003.
37
During 2003, cash flow provided by the calls and maturities and principal
payments received on maturing securities held to maturity amounted to $36.3
million compared to $13.1 million and $2.4 million in 2002 and 2001. Deposit
growth provided $90.1 million, $61.8 million and $79.8 million of funding for
the years ending December 31, 2002 and 2001, respectively. Borrowings totaled
$25.0 million in 2003 and were used to fund asset growth.
Loan Commitments. In the ordinary course of business the Bank extends
commitments to originate residential and commercial loans and other consumer
loans. 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 the Bank does not expect all of the
commitments to be funded, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. Collateral may be obtained based upon
management's assessment of the customers' creditworthiness. Commitments to
extend credit may be written on a fixed rate basis exposing the Bank to interest
rate risk given the possibility that market rates may change between the
commitment date and the actual extension of credit. The Bank had outstanding
commitments to originate and fund loans of approximately $33.2 million and $22.0
million at December 31, 2003 and 2002, respectively.
The following tables sets forth our contractual obligations and commercial
commitments at December 31, 2003.
Payments due by period
Less than 1 1-3 3-5 More than 5
Contractual obligations Total Year Years Years Years
------- ----------- ------- ------- ------------
(In thousands)
FHLB advances ....................................... $25,000 $25,000 $ -- $ -- $ --
Lease obligations ................................... 452 170 220 62 --
Certificates of deposit with original maturities
of one year or more ............................... 42,310 28,938 11,604 1,768 --
------- ------- ------- ------- --------
Total ............................................... $67,762 $54,108 $11,824 $ 1,830 $ --
======= ======= ======= ======= ========
Recent Accounting Pronouncements
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS
No. 150). This Statement established standards for how a company classifies and
measures certain financial instruments with characteristics of both liabilities
and equity as well as their classification in the company's statement of
financial position. It requires that the company classify a financial instrument
that is within its scope as a liability when that instrument embodies an
obligation of the issuer. SFAS No. 150 did not have any impact on the Company's
Consolidated Financial Statements.
Amendment of Statement 133 on Derivative Instruments and Hedging Activities
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No.
149 amends and
38
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. With a number of exceptions, SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did
not have a material impact on the Company's consolidated financial statements.
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor
entity, at the inception of a guarantee covered by the measurement provisions of
the interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. In addition, FIN 45 elaborates on
previously existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. The Company does not have
financial letters of credit as of December 31, 2003.
ITEM 7A. QUALITATIVE AND QUANTITATIVE ANALYSIS OF MARKET RISK
Management of Market Risk
General. The majority of our assets and liabilities are monetary in
nature. Consequently, one of our most significant forms of market risk is
interest rate risk. Our assets, consisting primarily of mortgage loans, have
longer maturities than our liabilities, consisting primarily of deposits. As a
result, a principal part of our business strategy is to manage interest rate
risk and reduce the exposure of our net interest income to changes in market
interest rates. Accordingly, our Board of Directors has established an
Asset/Liability Committee which is responsible for evaluating the interest rate
risk inherent in our assets and liabilities, for determining the level of risk
that is appropriate given our business strategy, operating environment, capital,
liquidity and performance objectives, and for managing this risk consistent with
the guidelines approved by the Board of Directors. Senior management monitors
the level of interest rate risk on a regular basis and the Asset/Liability
Committee, which consists of senior management and outside directors operating
under a policy adopted by the Board of Directors, meets as needed to review our
asset/liability policies and interest rate risk position.
The following table presents the Company's net portfolio value ("NPV").
These calculations were based upon assumptions believed to be fundamentally
sound, although they may vary from assumptions utilized by other financial
institutions. The information set forth below is based on data that included all
financial instruments as of December 31, 2003. Assumptions have been made by the
Company relating to interest rates, loan prepayment rates, core deposit
duration, and the market values of certain assets and liabilities under the
various interest rate scenarios. Actual maturity dates were used for fixed rate
loans and certificate accounts. Investment securities were scheduled at either
the maturity date or the next scheduled call date based upon management's
judgment of whether the particular security would be called in the current
interest rate environment and under assumed interest rate scenarios. Variable
rate loans were scheduled as of their next scheduled interest rate repricing
date. Additional
39
assumptions made in the preparation of the NPV table include prepayment rates on
loans and mortgage-backed securities, core deposits without stated maturity
dates were scheduled with an assumed term of 48 months, and money market and
noninterest bearing accounts were scheduled with an assumed term of 24 months.
The NPV at "PAR" represents the difference between the Company's estimated value
of assets and estimated value of liabilities assuming no change in interest
rates. The NPV for a decrease of 200 and 300 basis points has been excluded
since it would not be meaningful, in the interest rate environment as of
December 31, 2003. The following sets forth the Company's NPV as of December 31,
2003.
NPV as a % of Assets
Change in Net Portfolio $ Change from % Change from ------------------------
calculation Value PAR PAR NPV Ratio Change
----------- ----- --- --- --------- ------
+300bp $ 11,271 $ (21,128) -65.21% 4.35% -635bps
+200bp 20,353 (12,046) -37.81 7.38 -332bps
+100bp 28,880 (3,520) -10.86 9.89 -81bps
PAR 32,399 -- -- 10.70 --bps
-100bp 34,529 2,130 6.57 11.07 37bps
- ----------
bp-basis points
The table above indicates that at December 31, 2003, in the event of a 100
basis point decrease in interest rates, we would experience a 6.57% increase in
NPV. In the event of a 100 basis point increase in interest rates, we would
experience a 10.86% decrease in NPV.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurement. Modeling changes in NPV require making certain
assumptions that may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the NPV table
presented assumes that the composition of our interest-sensitive assets and
liabilities existing at the beginning of a period remains constant over the
period being measured and assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration or
repricing of specific assets and liabilities. Accordingly, although the NPV
table provides an indication of our interest rate risk exposure at a particular
point in time, such measurements are not intended to and do not provide a
precise forecast of the effect of changes in market interest rates on our net
interest income, and will differ from actual results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements identified in Item 15(a)(1) hereof are included
as Exhibit 13 and are incorporated hereunder.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants in the
Company's accounting and financial disclosure during 2003.
40
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act)
as of the end of the fiscal year (the "Evaluation Date"). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the Evaluation Date, our disclosure controls and procedures were
effective in timely alerting them to the material information relating to us (or
our consolidated subsidiaries) required to be included in our periodic SEC
filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
See the Certifications pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Company has adopted a Code of Ethics that applies to the Company's
principal executive officer, principal financial officer, principal accounting
officer or controller or persons performing similar functions. The Code of
Ethics is available for free by writing to: President and Chief Executive
Officer, BCB Bancorp, Inc., 104-110 Avenue C, Bayonne, New Jersey 07002. The
Code of Ethics is filed as an exhibit to this Form 10-K.
The "Proposal I--Election of Directors" section of the Company's definitive
Proxy Statement for the Company's 2004 Annual Meeting of Stockholders (the "2004
Proxy Statement") is incorporates herein by reference. The information
concerning directors and executive officers of the Company under the Caption
"Proposal I-Election of Director's and information under the captions "Section
16(a) Beneficial Ownership Compliance" and "The Audit Committee" of the 2004
Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The "Proposal I--Election of Directors" section of the Company's 2004
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The "Proposal I--Election of Directors" section of the Company's 2004
Proxy Statement is incorporated herein by reference.
41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The "Transactions with Certain Related Persons" section of the Company's
2004 Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by Item 14 is incorporated by reference to the
Company's Proxy Statement for the 2004 Annual Meeting of Stockholders, Proposal
II-Ratification of the Appointment of Independent Auditors--Fees paid to Radics.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The exhibits and financial statement schedules filed as a part of this
Form 10-K are as follows:
(A) Management Responsibility Statement
(B) Independent Auditors' Report
(C) Consolidated Statements of Financial Condition as of December
31, 2003 and 2002
(D) Consolidated Statements of Operations for each of the Years in
the Three-Year period ended December 31, 2003
(E) Consolidated Statements of Changes in Stockholders' Equity for
each of the Years in the Three-Year period ended December 31,
2003
(F) Consolidated Statements of Cash Flows for each of the Years in
the Three-Year period ended December 31, 2003
(G) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated statements or the notes
thereto.
42
(b) Reports on Form 8-K
None.
(c) Exhibits
3.1 Certificate of Incorporation of BCB Bancorp, Inc.*
3.2 Bylaws of BCB Bancorp, Inc.*
3.3 Specimen Stock Certificate*
10.1 Bayonne Community Bank 2002 Stock Option Plan**
10.2 Bayonne Community Bank 2003 Stock Option Plan**
13 Consolidated Financial Statements
14 Code of Ethics
21 Subsidiary of the Company
23 Accountant's Consent to incorporate consolidated financial
statements in Form S-8
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
- ----------
* Incorporated by reference to the Form 8-k-12g3 filed with the Securities
and Exchange Commission on May 1, 2003.
** Incorporated by reference to Exhibit 10.1 and 10.2 to the Company's
Registration Statement on Form S-8 (Commission File Number 333-11201)
filed with the Securities and Exchange Commission on January 26, 2004.
43
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
BCB BANCORP, INC.
Date: March 23, 2004 By: /s/ Donald Mindiak
-------------------------------------
Donald Mindiak
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange 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.
Signatures Title Date
- ---------- ----- ----
/s/ Donald Mindiak President, Chief Executive March 23, 2004
- ---------------------------- (Principal Officer and
Donald Mindiak Director Executive Officer)
/s/ Thomas M. Coughlin Vice President, Chief Financial March 23, 2004
- ---------------------------- Officer (Principal Financial
Thomas M. Coughlin and Accounting Officer)
and Director
/s/ Mark D. Hogan Chairman of the Board March 23, 2004
- ----------------------------
Mark D. Hogan
/s/ Robert Ballance Director March 23, 2004
- ----------------------------
Robert Ballance
/s/ Judith Q. Bielan Director March 23, 2004
- ----------------------------
Judith Q. Bielan
/s/ Joseph Brogan Director March 23, 2004
- ----------------------------
Joseph J. Brogan
/s/ James Collins Director March 23, 2004
- ----------------------------
James Collins
/s/ Donald S. Cymbor Director March 23, 2004
- ----------------------------
Donald S. Cymbor
/s/ Robert G. Doria Director March 23, 2004
- ----------------------------
Robert G. Doria
/s/ Phyllis Wasserman Garelick Director March 23, 2004
- ------------------------------
Phyllis Wasserman Garelick
/s/ John J. Hughes Director March 23, 2004
- ------------------------------
John J. Hughes
/s/ Joseph Lyga Director March 23, 2004
- ------------------------------
Joseph Lyga
/s/ Gary Maita Director March 23, 2004
- ------------------------------
Gary Maita
/s/ H. Mickey McCabe Director March 23, 2004
- ------------------------------
H. Mickey McCabe
/s/ Alexander Pasiechnik Director March 23, 2004
- ------------------------------
Alexander Pasiechnik
/s/ August Pellegrini, Jr Director March 23, 2004
- ------------------------------
August Pellegrini, Jr
/s/ Kenneth R. Poesl Director March 23, 2004
- ------------------------------
Kenneth R. Poesl
/s/ Joseph Tagliareni Director March 23, 2004
- ------------------------------
Joseph Tagliareni
EXHIBIT INDEX
3.1 Certificate of Incorporation of BCB Bancorp, Inc.*
3.2 Bylaws of BCB Bancorp, Inc.*
3.3 Specimen Stock Certificate*
10.1 Bayonne Community Bank 2002 Stock Option Plan**
10.2 Bayonne Community Bank 2003 Stock Option Plan**
13 Consolidated Financial Statements
14 Code of Ethics
21 Subsidiary of the Company
23 Accountant's Consent to incorporate consolidated financial
statements in Form S-8
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
- ----------
* Incorporated by reference to the Form 8k-12g3 filed with the Securities
and Exchange Commission on May 1, 2003.
** Incorporated by reference to Exhibit 10.1 and 10.2 to the Company's
Registration Statement on Form S-8 (Commission File Number 333-11201)
filed with the Securities and Exchange Commission on January 26, 2004.