UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2003
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______________
Commission file number 0-14294
Greater Community Bancorp
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(Exact name of registrant as specified in its charter)
New Jersey 22-2545165
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Union Boulevard, Totowa, New Jersey 07512
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 942-1111
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NASDAQ National Market
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Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.50 per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.)
YES |X| NO |_|
The aggregate market value of the voting common stock held by
non-affiliates of the registrant at June 30, 2003 (the last business day of the
registrant's most recently completed second fiscal quarter) was approximately
$96,746,477. This calculation does not reflect a determination that persons are
affiliates for any other purpose.
The number of shares outstanding of the registrant's common stock as of
February 10, 2004 was 7,034,458.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the Company's definitive Proxy Statement for its
2004 Annual Meeting of Stockholders to be held on April 20, 2004 is incorporated
by reference into Part III, Items 10 through 13, inclusive.
GREATER COMMUNITY BANCORP AND SUBSIDIARIES
Index to Form 10-K for December 31, 2003
PAGE NO.
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PART I.........................................................................1
ITEM 1 BUSINESS........................................................1
ITEM 2 PROPERTIES......................................................7
ITEM 3 LEGAL PROCEEDINGS...............................................7
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............7
PART II........................................................................8
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.....................................8
ITEM 6 SELECTED FINANCIAL DATA.........................................9
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION..............................9
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....23
ITEM 8 FINANCIAL STATEMENTS...........................................24
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................49
ITEM 9A CONTROLS AND PROCEDURES........................................49
PART III......................................................................49
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............49
ITEM 11 EXECUTIVE COMPENSATION.........................................49
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.....................49
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................50
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES.........................50
PART IV.......................................................................50
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.......................................................50
SIGNATURES....................................................................51
EXHIBIT INDEX................................................................E-1
PART I
Item 1 BUSINESS
THE HOLDING COMPANY
Greater Community Bancorp (the "Company") is a business corporation
incorporated in New Jersey in 1984. It is registered as a bank holding company
with the Board of Governors of the Federal Reserve System ("Federal Reserve")
under the Federal Bank Holding Company Act of 1956, as amended ("Holding Company
Act"). At the end of 2001 the Company filed a declaration with the Federal
Reserve to be designated as a "financial holding company" pursuant to the
Gramm-Leach-Bliley Act of 1999 (the "1999 Act"). The 1999 Act permits a bank
holding company to qualify as a financial holding company and expand into a wide
variety of services that are financial in nature, provided that its subsidiary
depository institutions are well managed, well capitalized and have received a
"satisfactory" rating on their last Community Reinvestment Act examination. The
Federal Reserve accepted the Company's declaration. (See "SUPERVISION AND
REGULATION -- Financial Holding Company Regulation" below.)
The Company's primary business activity is the ownership and operation of
its three New Jersey commercial bank subsidiaries, Greater Community Bank
("GCB"), Bergen Commercial Bank ("BCB") and Rock Community Bank ("RCB") (the
"Bank Subsidiaries"), and its nonbank subsidiaries.
During 2003, the Company continued to grow in assets in an increasingly
competitive and volatile environment. As of December 31, 2003, the Company's
consolidated assets were $753.1 million, as compared with consolidated assets of
$719.9 million at December 31, 2002. However, the challenging interest rate
environment prevented us from achieving the higher level of revenue commensurate
with our growth. Earnings for the full year 2003 were $6.7 million or $0.89 per
diluted share ($0.95 per basic share), a decline from $7.5 million or $0.98 per
diluted share ($1.04 per basic share) in 2002. The Company declared total cash
dividends of $0.43 per share and $0.37 per share during 2003 and 2002,
respectively.
BANK SUBSIDIARIES
GCB received its charter from the New Jersey Department of Banking &
Insurance (the "Department") in 1985 and commenced operations as a commercial
bank in 1986. Its main office is located at 55 Union Boulevard, Totowa, New
Jersey. During 2003, GCB had seven additional branches, of which six branches
are located in Passaic County and one in Morris County, New Jersey. Three
branches are located in Little Falls, two in Clifton, one at 100 Furler Street,
Totowa and the seventh in Lincoln Park. GCB conducts a general commercial and
retail banking business encompassing a wide range of traditional deposits and
lending functions. It offers a broad variety of lending services, including
commercial and residential real estate loans, short and medium term loans,
revolving credit arrangements, lines of credit and consumer installment loans.
In the depository area, GCB offers a broad variety of deposit accounts,
including consumer and commercial checking accounts and NOW accounts. It also
offers other customary banking services.
BCB was incorporated in New Jersey in 1987 and commenced banking
operations in 1988. BCB concentrates its operations in commercial lending and
loan origination secured by real estate generally involving nonresidential
properties, primarily servicing Bergen County, New Jersey. BCB also offers other
customary banking services. BCB's main office is located at Two Sears Drive in
Paramus, New Jersey. BCB has five additional branch offices in Bergen County,
located in Hackensack, Hasbrouck Heights, Little Ferry, Wallington and
Wood-Ridge.
Highland Capital Corp. ("HCC"), a wholly-owned nonbank subsidiary of GCB,
engages in high quality vendor-driven lease programs focusing primarily on small
ticket medical equipment leasing. GCB and BCB each has a wholly-owned investment
company subsidiary, a New Jersey corporation, formed to manage their respective
investment portfolios. Each of the investment companies in turn has a
wholly-owned Delaware subsidiary that holds and manages its investment
securities.
RCB commenced its banking operations in 1999. Its sole office is located
at 175 Rock Road in Glen Rock, New Jersey. It primarily services Bergen County.
RCB offers a variety of banking services, including commercial and real estate
lending, revolving credit arrangements and consumer loans. It also offers
traditional deposit services and other customary banking services.
NONBANK SUBSIDIARIES
The Company directly owns three nonbank subsidiaries. GCB Realty, L.L.C.
("Realty") was formed to acquire and manage real estate properties. Realty owns
a property in Bergen County, New Jersey. BCB and five other tenants lease space
in the building.
GCB Capital Trust II (the "2002 Trust") was formed in 2002 under the
Business Trust Act of Delaware. The 2002 Trust's sole purposes were to issue and
sell Trust Preferred Securities ("Preferred Securities") and Common Securities
and use the sales proceeds to acquire Junior Subordinated Debentures (the
"Debentures") issued by the Company. The Company owns all of the 2002 Trust's
Common Securities. The Debentures are the 2002 Trust's sole assets and the
Company's interest payments on the
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Debentures are the 2002 Trust's sole revenue. In June and July, 2002 the Company
issued, through the 2002 Trust, 2,400,000 Preferred Securities, $10 face value
per security, for total proceeds of $24 million. The Preferred Securities have
an annual distribution rate of 8.45% payable quarterly. The Preferred Securities
mature on June 30, 2032 but are callable at the Company's option on or after
June 30, 2007. On July 8, 2002, the Company used the net proceeds from the above
transaction to call the 920,000 securities of 10% Trust Preferred Securities,
$25 face value ("10% Preferreds"), issued by the Company in 1997. The Company
wrote-off the unamortized issuance cost relating to the 10% Preferreds in 2002.
The 2002 refinancing of the Preferreds reduced the Company's annual pre-tax
interest expense by approximately $350,000.
Greater Community Services, Inc. provides accounting/bookkeeping, data
processing and management information systems, loan operations and various other
banking-related services at cost to the Bank Subsidiaries.
In mid-2003, the Company's securities brokerage operations were
transferred from a nonbank subsidiary, Greater Community Financial, LLC ("GCF")
to GCB. The assets and business of the securities brokerage operation are now
operated as a division of GCB under the name of Greater Community Financial
("GCF"). Under an agreement executed in mid-2003, Raymond James Financial
Services, Inc. acts as GCF's registered broker-dealer.
RECENT LEGISLATION
The Sarbanes-Oxley Act of 2002 is now having, and will in the future have,
a great impact on the corporate governance and financial statement preparation
and reporting obligations of publicly held business entities such as the
Company. This legislation contains far-reaching requirements relating to, among
other things: certifications by an issuer's principal officers relating to the
accuracy of financial disclosures and disclosure controls and procedures; the
independence of auditors; the composition, specific duties and independence of
audit committees of boards of directors; the manner in which audit committees
obtain and process financial and related information; acceleration, over a
period of years, of the time within which issuers must file annual and quarterly
reports; an increase in the events required to be reported currently; and a
dramatic acceleration of the time within which an issuer's "insiders" must
report changes in beneficial ownership of the issuer's securities. The Company
expects that compliance with this legislation will be time-consuming and
expensive.
COMPETITION
The Company, through the Bank Subsidiaries, competes with other New Jersey
commercial banks, savings banks, savings and loan associations, finance
companies, insurance companies and credit unions. A substantial number of
offices of competing financial institutions are located within the Bank
Subsidiaries' respective market areas. The past trend towards consolidation of
the banking industry has continued in New Jersey in recent years. This trend may
make it more difficult for smaller banks such as the Bank Subsidiaries to
compete with larger national and regional banking institutions. Several of the
Bank Subsidiaries' competitors are affiliated with major banking and financial
institutions that are substantially larger and have far greater financial
resources than the Bank Subsidiaries.
Competitive factors between financial institutions can be classified into
two categories: competitive rates and competitive service. Rate competition is
intense, especially in the area of time deposits. The Bank Subsidiaries compete
with larger institutions with respect to the interest rates they offer. From a
service standpoint, the Bank Subsidiaries' competitors, by virtue of their
superior financial resources, have substantially greater lending limits than the
Bank Subsidiaries. Such competitors also perform certain functions for their
customers, such as trust and international services, which the Bank Subsidiaries
have chosen not to provide.
SUPERVISION AND REGULATION
The banking industry is highly regulated. Statutory and regulatory
controls increase a bank holding company's cost of doing business, limit its
management's options to deploy assets and maximize income and may significantly
limit the activities of institutions that do not meet regulatory capital or
other requirements. Areas subject to regulation and supervision by the bank
regulatory agencies include, among others: minimum capital levels; dividends;
affiliate transactions; expansion of locations; acquisitions and mergers;
reserves against deposits; deposit insurance premiums; credit underwriting
standards; management and internal controls; investments; and general safety and
soundness of banks and bank holding companies. Supervision, regulation and
examination of the Company and the Bank Subsidiaries by the bank regulatory
agencies are intended primarily for the protection of depositors, the
communities served by the institutions or other governmental interests, rather
than for holders of stock of the Company.
The following is a brief summary of certain statutes, rules and
regulations affecting the Company and the Bank Subsidiaries. A number of other
statutes and regulations and governmental policies have an impact on their
operations. The Company is unable to predict the nature or the extent of the
effects on its business and earnings that fiscal or monetary policies, economic
control or new federal or state legislation may have in the future. The
following summary does not purport to be complete and is qualified in its
entirety by reference to such statutes and regulations.
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Bank Holding Company Regulation
During 2003 the Company continued to be registered as a bank holding
company and also classified as a financial holding company under the Holding
Company Act. As such, it is subject to regular examination, supervision and
regulation by the Federal Reserve. The Company is required to file reports with
the Federal Reserve and to furnish such additional information as the Federal
Reserve may require pursuant to the Holding Company Act. The Company also is
subject to regulation by the Department.
Federal Reserve policy requires the Company to act as a source of
financial and managerial strength to the Bank Subsidiaries and to commit
resources to support them. In addition, any loans by the Company to the Bank
Subsidiaries would be subordinate in right of payment to deposits and certain
other indebtedness of the Bank Subsidiaries. At December 31, 2003 the Company
had approximately $8.2 million in financial resources in addition to its
investment in the Bank Subsidiaries and nonbank subsidiaries. The Federal
Reserve has adopted guidelines regarding the capital adequacy of bank holding
companies requiring them to maintain specified minimum ratios of capital to
total assets and capital to risk-weighted assets.
Holding Company Activities
With certain exceptions, the Holding Company Act prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of a company that is not a bank or a bank holding company
or from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
nonbank activities that, by statute or by Federal Reserve regulation or order,
have been identified as activities closely related to the business of banking.
The Company's activities are subject to these legal and regulatory limitations
under the Holding Company Act and related Federal Reserve regulations.
Satisfactory capital ratios and Community Reinvestment Act ("CRA") ratings are
generally prerequisites to obtaining regulatory approval to make acquisitions.
The Federal Interstate Banking and Branching Act of 1994 permits a bank
holding company to acquire banks in states other than its home state, regardless
of applicable state law. The 1994 law also permits banks to create interstate
branches, either by merging across state lines or by creating new branches,
subject to a state's ability to opt out of these enabling provisions. As have
most states, New Jersey has enacted legislation to authorize interstate banking
either by merger or by branching into New Jersey if the foreign bank already has
branches in New Jersey; however, that legislation did not authorize de novo
branching into New Jersey.
Holding Company Dividends and Stock Repurchases
The Federal Reserve has the power to prohibit bank holding companies from
paying dividends if their actions are deemed to constitute unsafe or unsound
practices. The Federal Reserve has issued a policy statement on the payment of
cash dividends by bank holding companies. It is the Federal Reserve's view that
a bank holding company should pay cash dividends only to the extent that its net
income for the past year is sufficient to cover both the cash dividends and a
rate of earnings retention that is consistent with its capital needs, asset
quality and overall financial condition.
As a bank holding company, the Company is required to give the Federal
Reserve prior written notice of any purchase or redemption of its outstanding
equity securities if the gross consideration for the purchase or redemption,
when combined with the net consideration paid for all such purchases or
redemptions during the preceding 12 months, is equal to 10% or more of the
Company's consolidated net worth. The Federal Reserve may disapprove such a
purchase or redemption if it determines that the proposal would violate any law,
regulation, Federal Reserve order, directive or any condition imposed by or
written agreement with the Federal Reserve.
Financial Holding Company Regulation
The Gramm-Leach-Bliley Act of 1999 ("1999 Act") removed long-standing
legal barriers separating banks and securities firms, and facilitates
affiliations of securities firms, insurance companies and banks. As a "financial
holding company" effective in January, 2002, the Company may engage in any
activity that the Federal Reserve determines to be financial in nature or
incidental to such financial activity, or is complementary to a financial
activity and does not pose a substantial risk to the safety or soundness of
depository institutions or the financial system generally. The 1999 Act provides
that the following activities shall be considered to be financial in nature: (a)
lending, exchanging, transferring, investing for others or safeguarding money or
securities; (b) insuring, guaranteeing or indemnifying against loss, harm,
damage, illness, disability or death, or providing and issuing annuities, and
acting as principal, agent or broker for purposes of the foregoing, in any
State; (c) providing financial, investment or economic advisory services,
including advising an investment company; (d) issuing or selling instruments
representing interests in pools of assets permissible for a bank to hold
directly; (e) underwriting, dealing in or making a market in securities; (f)
engaging in any activity that the Federal Reserve has determined to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto; (g) engaging in the United States in any activity that a bank
holding company may engage in outside of the United States that the Federal
Reserve has determined to be usual in connection with the transaction of banking
or other financial operations abroad; (h) engaging through non-bank subsidiaries
in various underwriting or merchant or investment banking activities; and (i)
acquiring investment assets through insurance company affiliates in the ordinary
course of an insurance company business.
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Bank Regulation
As state-chartered banks that are not members of the Federal Reserve
System, the Bank Subsidiaries are subject to the primary federal supervision of
the FDIC under the Federal Deposit Insurance Act (the "FDIA"). Prior FDIC
approval is required to establish or relocate a branch office or engage in any
merger, consolidation or significant purchase or sale of assets. The Bank
Subsidiaries are also subject to regulation and supervision by the Department.
In addition, they are subject to numerous federal and state laws and regulations
which set forth specific restrictions and procedural requirements with respect
to the establishment of branches, investments, interest rates on loans, credit
practices, the disclosure of credit terms and discrimination in credit
transactions.
The FDIC and the Department regularly examine the operations of the Bank
Subsidiaries and their condition, including capital adequacy, reserves, loans,
investments and management practices. These examinations are for the protection
of the Bank Subsidiaries' depositors and the Bank Insurance Fund ("BIF") and not
the Company. The Bank Subsidiaries are also required to furnish quarterly and
annual reports to the FDIC. The FDIC's enforcement authority includes the power
to remove officers and directors and the authority to issue orders to prevent a
bank from engaging in unsafe or unsound practices or violating laws or
regulations governing its business.
The FDIC has adopted regulations regarding the capital adequacy of banks
subject to its primary supervision. Such regulations require those banks to
maintain specified minimum ratios of capital to total assets and capital to
risk-weighted assets. See "Regulatory Capital Requirements."
Statewide branching is permitted in New Jersey. Branch approvals are
subject to statutory standards relating to safety and soundness, competition,
public convenience and CRA performance.
Community Reinvestment Act
Under the CRA, the Subsidiary Banks have a continuing and affirmative
obligation, consistent with their safe and sound operation, to help meet the
credit needs of their entire communities, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. GCB and BCB
received "satisfactory" CRA ratings in their most recent examinations.
Bank Dividends
New Jersey law permits the Bank Subsidiaries to declare dividends only if,
after payment of the dividends, their capital would be unimpaired and their
remaining surplus would equal at least 50% of their capital. Under the FDIA, the
Bank Subsidiaries are prohibited from declaring or paying dividends or making
any other capital distribution if, after that distribution, they would fail to
meet their regulatory capital requirements. At December 31, 2003, the Bank
Subsidiaries met their regulatory capital requirements. The FDIC also has
authority to prohibit the payment of dividends by a bank when it determines such
payment to be an unsafe and unsound banking practice. The FDIC may prohibit
parent companies of banks that are deemed to be "significantly undercapitalized"
under the FDIA or which fail to properly submit and implement capital
restoration plans required by the FDIA from paying dividends or making other
capital distributions without the FDIC's permission. See "Holding Company
Dividends and Stock Repurchases."
Restrictions On Intercompany Transactions
The Bank Subsidiaries are subject to restrictions imposed by federal law
on extensions of credit to, and certain other transactions with, the Company and
other affiliates. Such restrictions prevent the Company and its affiliates from
borrowing from the Bank Subsidiaries unless the loans are secured by specified
collateral, and require such transactions to have terms comparable to terms of
arms-length transactions with third persons. Such transactions by each of the
Bank Subsidiaries are generally limited in amount as to the Company and as to
any other affiliate to 10% of the Subsidiary Bank's capital and surplus. As to
the Company and all other affiliates, such transactions are limited to an
aggregate of 20% of the Subsidiary Bank's capital and surplus. These regulations
and restrictions may limit the Company's ability to obtain funds from the Bank
Subsidiaries for its cash needs, including funds for acquisitions and for
payment of dividends, interest and operating expenses.
Real Estate Lending Guidelines
Under FDIC regulations, state banks must adopt and maintain written
policies establishing appropriate limits and standards for real estate lending
activities. These policies must establish loan portfolio diversification
standards, prudent underwriting standards (including loan-to-value limits that
are clear and measurable), loan administration procedures and documentation,
approval and reporting requirements. A bank's real estate lending policy must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies adopted by federal bank regulators.
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Deposit Insurance
The Bank Subsidiaries are FDIC member institutions. As such, their
respective deposits are currently insured to a maximum of $100,000 per depositor
through the BIF, administered by the FDIC. The Bank Subsidiaries are also
required to pay deposit insurance premiums to the FDIC.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") included provisions to reform the federal deposit insurance system,
including the implementation of risk-based deposit insurance premiums. FDICIA
permits the FDIC to make special assessments on insured depository institutions
in amounts the FDIC determines necessary to give it adequate assessment income
to repay amounts borrowed from the U.S. Treasury and other sources or for any
other purpose the FDIC deems necessary. Under a risk-based insurance premium
system, banks are assessed insurance premiums according to how much risk they
are deemed to present to the BIF. Banks with higher levels of capital and
involving a low degree of supervisory concern are assessed lower premiums than
banks with lower levels of capital and/or involving a higher degree of
supervisory concern. Effective in 1997 the assessment rates ranged from 0.00% to
0.27% of deposits. The Bank Subsidiaries' deposit assessment rates were 0.00% in
2002 and 2003.
The Deposit Insurance Act of 1996 authorized the Financing Corporation
("FICO") to levy assessments on BIF assessable deposits and stipulated that the
rate must equal one-fifth the FICO assessment rate that is applied to deposits
assessable by the Savings Association Insurance Fund ("SAIF"). The rates
established for both GCB and BCB for 1999 through 2003 are .015%.
Standards for Safety and Soundness
Under FDICIA, each federal banking agency is required to prescribe
noncapital safety and soundness standards for institutions under its authority.
The federal banking agencies have adopted interagency guidelines covering
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees, benefits, and standards for asset quality and earnings
sufficiency. An institution that fails to meet any of these standards may be
required to develop a plan acceptable to the agency, specifying the steps that
the institution will take to meet the standards. Failure to submit or implement
such a plan may subject the institution to regulatory sanctions. The Company
believes the Bank Subsidiaries meet all adopted standards.
Enforcement Powers
The bank regulatory agencies have broad discretion to issue cease and
desist orders if they determine that the Company or its Bank Subsidiaries are
engaging in "unsafe or unsound banking practices." In addition, the federal bank
regulatory authorities may impose substantial civil money penalties for
violations of certain federal banking statutes and regulations, violation of a
fiduciary duty, or violation of a final or temporary cease and desist orders,
among other things. Financial institutions and a broad range of persons
associated with them are subject to the imposition of fines, penalties, and
other enforcement actions based upon the conduct of their relationships with the
institutions.
The FDIC may be appointed as a conservator or receiver for a depository
institution based upon a number of events and circumstances. In such a capacity
the FDIC also has express authority to repudiate most contracts with such
institution that it determines to be burdensome or to promote the orderly
administration of the institution's affairs. The FDIC also has authority to
enforce contracts made by a depository institution notwithstanding any
contractual provision providing for termination, default, acceleration, or
exercise of rights upon, or solely by reason of, insolvency or the appointment
of a conservator or receiver. Insured depository institutions also are
prohibited from entering into contracts for goods, products or services that
would adversely affect their safety and soundness.
Regulatory Capital Requirements
The Federal Reserve and the FDIC have established guidelines with respect
to the maintenance of appropriate levels of capital by bank holding companies
and state-chartered banks that are not members of the Federal Reserve System
("state nonmember banks"). The regulations impose two sets of capital adequacy
requirements: minimum leverage rules, which require maintenance of a specified
minimum ratio of capital to total assets, and risk-based capital rules, which
require the maintenance of specified minimum ratios of capital to
"risk-weighted" assets.
These regulations require bank holding companies and state nonmember banks
to maintain a minimum leverage ratio of "Tier I capital" to total assets of 3%.
Only the strongest bank holding companies and banks, with composite examination
ratings of 1 under the rating system used by the federal bank regulators, are
permitted to operate at or near such minimum level of capital. All other bank
holding companies and banks are expected to maintain a leverage ratio of at
least 1% to 2% above the minimum ratio, depending on the assessment of an
individual organization's capital adequacy by its primary regulator. Any bank or
bank holding company experiencing or anticipating significant growth would be
expected to maintain capital well above the minimum levels. In addition, the
Federal Reserve has indicated that whenever appropriate, and in particular when
a bank holding company is undertaking expansion, seeking to engage in new
activities or otherwise facing unusual or abnormal risks, it will consider, on a
5
case-by-case basis, the level of an organization's ratio of tangible Tier I
capital (after deducting all intangibles) to total assets in making an overall
assessment of capital.
The risk-based capital rules require bank holding companies and state
nonmember banks to maintain minimum regulatory capital levels based upon a
weighting of their assets and off-balance sheet obligations according to risk.
The risk-based capital rules have two basic components: a Tier I or core capital
requirement and a Tier II or supplementary capital requirement. Tier I capital
consists primarily of common stockholders' equity, certain perpetual preferred
stock and minority interests in the equity accounts of consolidated
subsidiaries, less most intangible assets, primarily goodwill. Tier II capital
elements include, subject to certain limitations, the allowance for losses on
loans and leases; perpetual preferred stock that does not qualify for Tier I and
long-term preferred stock with an original maturity of at least 20 years from
issuance; hybrid capital instruments, including perpetual debt and mandatory
convertible securities; and subordinated debt and intermediate-term preferred
stock.
The risk-based capital regulations assign balance sheet assets and credit
equivalent amounts of off-balance sheet obligations to one of four broad risk
categories based principally on the degree of credit risk associated with the
obligor. The assets and off-balance sheet items in the four risk categories are
weighted at 0%, 20%, 50% and 100%. These computations result in the total
risk-weighted assets.
The risk-based capital regulations require all banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios, (i) supplementary capital is limited to no more than 100% of core
capital, and (ii) the aggregate amount of certain types of supplementary capital
is limited. In addition, the risk-based capital regulations limit the allowance
for loan and lease losses which may be included as capital to 1.25% of total
risk-weighted assets.
At December 31, 2003, the Company's total risk-based capital and leverage
capital ratios were 11.96% and 7.09%, respectively. The minimum level
established by the regulators for these measures are 8% and 4%, respectively.
FDICIA requires federal banking regulators to classify insured depository
institutions by capital levels and to take various prompt corrective actions to
resolve the problems of any institution that fails to satisfy the capital
standards. Under FDICIA and its prompt corrective action regulations, all
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees that would cause the
institution to fail to satisfy the minimum levels for any of its capital
requirements.
Under the FDIC's prompt corrective action regulation, a "well-capitalized"
bank is one that is not subject to any regulatory order or directive to meet any
specific capital level and that has or exceeds the following capital levels: a
total risk-based capital ratio of 10%, a Tier I risk-based capital ratio of 6%
and a leverage ratio of 5%. An "adequately-capitalized" bank is one that does
not qualify as "well-capitalized" but meets or exceeds the following capital
requirements: a total risk-based capital ratio of 8%, a Tier I risk-based
capital ratio of 4% and a leverage ratio of either 4% or 3% if the bank has the
highest composite examination rating. A bank not meeting these criteria will be
treated as "undercapitalized," "significantly undercapitalized," or "critically
undercapitalized" depending on the extent to which the bank's capital levels are
below these standards. A bank falling within any of the three "undercapitalized"
categories will be subject to increased monitoring by the appropriate federal
banking regulator and other restrictions.
EFFECT OF GOVERNMENT MONETARY POLICIES; POSSIBLE FURTHER LEGISLATION
The Company's earnings are and will be affected by domestic and
international economic conditions and the monetary and fiscal policies of the
United States and foreign governments and their agencies.
The Federal Reserve's monetary policies have had, and will probably
continue to have, an important impact on the operating results of commercial
banks through its power to implement national monetary policy in order, among
other things, to curb inflation or combat a recession. The Federal Reserve has a
major effect on the levels of bank loans, investments and deposits through its
open market operations in United States Government securities and through its
regulation of, among other things, the discount rate on borrowings of banks and
the imposition of nonearning reserve requirements against member bank deposits.
It is not possible to predict the nature and impact of future changes in
monetary and fiscal policies.
From time to time, proposals are made in the United States Congress, the
New Jersey Legislature and various bank regulatory authorities that would alter
the powers of, and place restrictions on, different types of banking
organizations. It is impossible to predict whether any of these proposals will
be adopted and any impact of such adoption on the business of the Company and/or
the Bank Subsidiaries.
The Bank Subsidiaries are also subject to various Federal and State laws
such as usury laws and consumer protection laws.
EMPLOYEES
As of December 31, 2003, the Company employed a total of approximately 197
employees, including 190 full-time employees. Management considers relations
with employees to be satisfactory.
6
Item 2 PROPERTIES
The Company does not directly own or lease any land, buildings or
equipment. However, the Company's nonbank subsidiary, Realty, owns a property in
Bergen County, New Jersey. GCB owns two properties in Passaic County, New Jersey
and BCB owns two properties in Bergen County, New Jersey.
GCB leases its main office banking facility and certain other office space
at 55 Union Boulevard, Totowa, New Jersey. Such space is owned by a limited
liability company of which the Company's chairman and chairman emeritus are
members. During 2003, GCB also leased space for its other branches in Totowa,
Little Falls, Clifton and Lincoln Park.
BCB leases its main office space at Two Sears Drive, Paramus, New Jersey,
from Realty. BCB also leases space for three other branches in Hackensack,
Wallington and Wood-Ridge, New Jersey. BCB owns the space for its branches
located in Hasbrouck Heights and Little Ferry, New Jersey.
RCB leases its main office space at 175 Rock Road, Glen Rock, New Jersey.
Sinabaldo Leone, Jr., a director of RCB, owns the leased space.
In the opinion of management, all such leased properties are adequately
insured and leased at fair rentals.
Further information about the lease obligations of the Company and its
subsidiaries is contained in Note 13 of the Company's Notes to Consolidated
Financial Statements for the year ended December 31, 2003 (Item 8 - "Financial
Statements").
Item 3 LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time parties to various
legal actions arising in the normal course of business. Management believes
there is no proceeding threatened or pending against the Company, which, if
determined adversely, would have a material effect on the Company's business,
consolidated financial position or consolidated results of operations.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 2003 to a vote of
security holders through the solicitation of proxies or otherwise.
7
PART II
Item 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was held by approximately 1,035 holders of
record on December 31, 2003, and is traded on the NASDAQ National Market under
the symbol GFLS.
The following table indicates the range of high and low market quotations
of the Common Stock, as reported by NASDAQ, and the cash dividends declared per
share on the Common Stock, in each case for the quarterly periods indicated. The
market quotations and cash dividends have been adjusted to take into account the
effect of stock dividends paid in 2003 (2.5%) and 2002 (5%).
Cash
Market Quotations Dividends
------------------- ---------
High Low Declared
-------- -------- ---------
Year Ended December 31, 2002
First Quarter $13.24 $10.68 $.079
Second Quarter 15.24 12.73 .098
Third Quarter 16.04 13.95 .098
Fourth Quarter 15.85 12.74 .098
Year Ended December 31, 2003
First Quarter 15.90 15.70 .098
Second Quarter 17.16 16.72 .11
Third Quarter 16.47 16.12 .11
Fourth Quarter 17.22 16.79 .11
The Company's ability to pay dividends on its Common Stock in the future
is subject to numerous regulatory restrictions that are potentially applicable.
Management does not expect any such restrictions to apply so long as the Company
and the Bank Subsidiaries continue to operate profitably.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2003 with
respect to compensation plans under which equity securities of the registrant
are authorized for issuance.
Equity Compensation Plan Information
- -------------------------------------------------------------------------------------------------------------------------------
Plan Category Number of securities to be Weighted average exercise Number of securities
issued upon exercise of price of outstanding options, remaining available for
outstanding options, warrants warrants and rights future issuance under equity
and rights. compensation plans (excluding
securities reflected in
Stock Option Plans (a) (b) column (a)
(c)
- -------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans 740,891 $7.02 226,982
approved by the security holder
Equity compensation plan not
approved by security holders n.a. n.a. n.a.
----------------------------- ----------------------------- -----------------------------
Total 740,891 $7.02 226,982
----------------------------- ----------------------------- -----------------------------
8
Item 6 SELECTED FINANCIAL DATA
The selected consolidated financial highlights of the Company set forth
below should be read in conjunction with the more detailed information included
in the Consolidated Financial Statements, related Notes and Management's
Discussion and Analysis of Financial Condition and Results of Operation,
appearing elsewhere herein.
As of the Years Ended December 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(In Thousands, except per share data)
Summary of Operations:
Total interest income .......................... $ 37,906 $ 40,905 $ 42,775 $ 41,458 $ 34,564
Total interest expense ......................... 12,244 14,686 20,497 20,664 17,140
Net interest income ............................ 25,662 26,219 22,278 20,794 17,424
Provision for loan and lease losses ............ 2,065 996 885 1,048 885
Net interest income after provision for loan
and lease losses ........................... 23,597 25,223 21,393 19,746 16,539
Non interest income ............................ 7,948 7,319 6,515 6,167 7,270
Non interest expenses .......................... 22,025 21,676 18,664 18,290 17,288
Income before income taxes ..................... 9,520 10,866 9,244 7,623 6,521
Provision for income taxes ..................... 2,786 3,353 3,164 2,793 2,349
Net Income ..................................... $ 6,734 $ 7,513 $ 6,080 $ 4,830 $ 4,172
Per Common Share Data: (1)
Earnings Per Share--Basic ...................... $ 0.95 $ 1.04 $ 0.85 $ 0.68 $ 0.60
Earnings Per Share--Diluted .................... $ 0.89 $ 0.98 $ 0.81 $ 0.66 $ 0.58
Cash dividends per common share ................ $ 0.43 $ 0.37 $ 0.30 $ 0.26 $ 0.22
Stock dividends per common share ............... 2.5% 5% 5% 5% 5%
Book value per common share .................... $ 7.22 $ 7.15 $ 6.39 $ 5.63 $ 4.95
Selected Operating Ratios:
Return on average assets ....................... 0.91% 1.09% 0.95% 0.84% 0.81%
Return on average equity ....................... 13.15% 15.29% 14.18% 13.43% 11.98%
Interest rate spread ........................... 3.25% 3.48% 2.93% 3.13% 3.02%
Net interest margin ............................ 3.75% 4.10% 3.79% 3.98% 3.78%
Financial Condition Data:
Total Assets ................................... $753,125 $719,867 $660,839 $607,305 $567,453
Cash and cash equivalents ...................... 29,233 37,133 46,997 56,292 19,200
Investment securities .......................... 155,239 192,195 151,906 138,153 151,191
Total Loans, net ............................... 515,657 436,044 404,250 366,139 340,563
Allowance for loan and lease losses ............ 8,142 7,298 6,320 5,657 4,953
Total Deposits ................................. 560,713 544,043 484,623 465,245 460,634
Other borrowings ............................... 134,747 115,728 115,347 90,020 64,403
Shareholders' equity ........................... $ 50,570 $ 51,498 $ 46,112 $ 40,231 $ 35,402
Capital Ratios:
Equity to assets ............................... 6.71% 7.15% 6.98% 6.62% 6.23%
Total risk-based capital ratio ................. 11.96% 13.77% 13.89% 13.88% 13.73%
Tier I risk-based capital ratio ................ 9.03% 10.58% 10.70% 10.14% 9.59%
Leverage ratio ................................. 7.09% 7.38% 7.23% 7.10% 7.18%
(1) All per share data has been adjusted to reflect stock dividends.
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The purpose of this analysis is to provide the reader with information
relevant to understanding and assessing the Company's financial condition and
results of operation for each of the past three years and its financial
condition at the end of each of the past two years. In order to appreciate this
analysis fully, the reader is encouraged to review the consolidated financial
statements and statistical data presented in this annual report. Data is
presented for the Company and its subsidiaries in the aggregate unless otherwise
indicated.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Form 10-K, both in this MD&A section and elsewhere (including
documents incorporated by reference herein), contains both historical
information and "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are not
historical facts and include expressions about management's confidence and
strategies and its expectations about new and existing programs and products,
relationships, opportunities, technology and market conditions. These statements
may be identified by an asterisk (*) or such forward-looking terminology as
"projected," "expect," "look," "believe," "anticipate," "may," "will," or
similar statements or variations of such terms. Such forward-looking statements
involve
9
certain risks and uncertainties. These include, but are not limited to, the
ability of the Company's Bank Subsidiaries to generate deposits and loans and
attract qualified employees, the direction of interest rates, continued levels
of loan quality and origination volume, continued relationships with major
customers including sources for loans and leases as well as the effects of
economic conditions and legal and regulatory barriers and structure. Actual
results may differ materially from such forward-looking statements. The Company
assumes no obligation to update any such forward-looking statement at any time.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States of America (US
GAAP) and general practices within the financial services industry. The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and the assumptions that affect the amounts
reported in the financial statements and the accompanying notes. Actual results
could differ from those estimates.
The Company considers that the determination of the allowance for loan and
lease losses involves a higher degree of judgment and complexity than its other
significant accounting policies. The allowance for loan losses is calculated
with the objective of maintaining a reserve level believed by management to be
sufficient to absorb estimated credit losses. Management's determination of the
adequacy of the allowance is based on periodic evaluations of the loan and lease
portfolios and other relevant factors. However, this evaluation is inherently
subjective as it requires material estimates, including, among others, expected
default probabilities, loss given default, expected commitment usage, the
amounts and timing of expected future cash flows on impaired loans, mortgages,
and general amounts for historical loss experience. The process also considers
economic conditions, uncertainties in estimating losses and inherent risks in
the loan portfolio. All of these factors may be susceptible to significant
change. To the extent actual outcomes differ from management estimates,
additional provisions for loan and lease losses may be required that would
adversely impact earnings in future periods.
The Company recognizes deferred tax assets and liabilities for the future
tax effects of temporary differences, net operating loss carryforwards and tax
credits. Deferred tax assets are subject to management's judgment based upon
available evidence that future realization is more likely than not. If
management determines that the Company may be unable to realize all or part of
net deferred tax assets in the future, a direct charge to income tax expense may
be required to reduce the recorded value of the net deferred tax asset to the
expected realizable amount.
The Company adopted SFAS No. 142, Goodwill and Intangible Assets, on
January 1, 2002. This SFAS modifies the accounting for all purchased goodwill
and intangible assets. SFAS No. 142 includes requirements to test goodwill and
indefinite lived intangible assets for impairment rather than amortize them. On
January 1, 2002, the Company stopped amortizing goodwill, which approximated
$800,000 annually. The Company did not identify any impairment of goodwill
during its annual testing of its outstanding goodwill.
Results of Operations: Fiscal Years Ended December 31, 2003, 2002 and 2001
In 2003, the Company recorded earnings of $6.7 million or $0.89 per
diluted share, a decrease of 10% from 2002. In 2002, the Company earned $7.5
million or $0.98 per diluted share, an increase of 24% over $6.1 million or
$0.81 per diluted share earned during 2001.
Cash earnings (net income before amortization of intangible assets) per
diluted share were $0.89, $0.98 and $0.92 for the years ending December 31,
2003, 2002 and 2001.
The decrease in net income for the year ended December 31, 2003 was
impacted by low interest rates combined with accelerated premium amortization on
mortgage backed securities. Also, during 2003 the Company recorded a $1.1
million increase in provisions for loan and lease losses and a charge of
approximately $360,000 for salaries and benefits relating to a separation
package for a former executive.
Average Balances and Net Interest Income
Net interest income, the primary source of the Company's results of
operations, is the difference between interest, dividends and fees earned on
loans and other earning assets, and interest paid on interest-bearing
liabilities. Earning assets include loans to businesses and individuals,
investment securities, interest-bearing deposits with banks and federal funds
sold in the interbank market. Interest-bearing liabilities include primarily
interest-bearing demand, savings and time deposits. Net interest income is
determined by the difference between the yields earned on earning assets and
rates paid on interest-bearing liabilities ("interest rate spread") and the
relative amounts of earning assets and interest-bearing liabilities. The
Company's interest rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit flows
and general levels of nonperforming assets.
The following table sets forth the Company's consolidated average balances
of assets, liabilities and shareholders' equity as well as the amount of
interest income and expense on related items, and the Company's average yield
for the years ended December 31, 2003, 2002 and 2001. The yields are not shown
on a fully taxable basis.
10
Average Balance Sheet, Interest Income and Expense and Average Interest Rates
For the Years Ended
----------------------------------------------------------------------------------------
December 31, 2003 December 31, 2002 December 31, 2001
---------------------------- ---------------------------- ----------------------------
Interest Average Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
--------- -------- ------- --------- -------- ------- --------- -------- -------
(Dollars in Thousands)
ASSETS
Earning Assets:
Investment securities .................... $ 186,218 $ 6,289 3.38% $ 176,455 $ 8,057 4.57% $ 145,477 $ 8,647 5.94%
Due from banks - interest-bearing ........ 9,849 243 2.47% 14,846 511 3.44% 14,237 587 4.12%
Federal funds sold ....................... 16,060 187 1.16% 25,864 425 1.64% 38,299 1,591 4.15%
Loans (1) ................................ 472,306 31,187 6.60% 421,942 31,912 7.59% 390,354 31,950 8.18%
--------- ------- --------- ------- --------- -------
Total earning assets ................ 684,433 37,906 5.54% 639,107 40,905 6.42% 588,367 42,775 7.27%
Less: Allowance for loan and lease
losses ................................. (7,644) -- (6,651) -- (6,022) --
Unearned income - loans ............. (4,571) -- (3,138) -- (2,287) --
All other assets ......................... 67,755 -- 61,968 -- 59,539 --
--------- ------- --------- ------- --------- -------
Total assets ........................ $ 739,973 $37,906 $ 691,286 $40,905 $ 639,597 $42,775
========= ======= ========= ======= ========= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing Liabilities:
Savings and interest-bearing deposits .. $ 259,974 $ 2,080 0.80% $ 224,630 $ 3,139 1.40% $ 166,916 $ 3,515 2.11%
Time deposits .......................... 153,835 3,596 2.34% 154,577 4,859 3.14% 192,952 10,114 5.24%
Federal funds and short-term
borrowings (2) ....................... 96,923 4,537 4.68% 95,603 4,520 4.73% 89,514 4,568 5.10%
Trust preferred securities ............. 24,000 2,031 8.45% 24,112 2,168 8.99% 23,000 2,300 10.00%
--------- ------- --------- ------- --------- -------
Total interest-bearing liabilities .. 534,732 12,244 2.29% 498,922 14,686 2.94% 472,382 20,497 4.34%
Non interest-bearing deposits ............ 146,995 -- 135,840 -- 113,203 --
Other liabilities ........................ 7,023 -- 7,385 -- 11,127 --
Shareholders' equity ..................... 51,223 -- 49,139 -- 42,885 --
--------- ------- --------- ------- --------- -------
Total liabilities and
Shareholders' equity .............. $ 739,973 $12,244 $ 691,286 $14,686 $ 639,597 $20,497
========= ======= ========= ======= ========= -------
NET INTEREST INCOME ...................... $25,662 $26,219 $22,278
======= ======= =======
NET INTEREST MARGIN ...................... 3.75% 4.10% 3.79%
===== ===== =====
(1) Average balance includes nonperforming loans and leases.
(2) Balance includes FHLB Advances, Federal Funds purchased and
securities sold under agreements to repurchase
11
Net Interest Income
Net interest income is the largest source of the Company's operating
income. Changes in net interest income and margin result from the interaction
between the volume and composition of earning assets, related yields and
associated funding costs. In 2003, net interest income was greatly impacted by
low interest rates. The Company was successful in replacing loan runoff due to
high level of refinancing activity, but at a lower interest rate. The Company
also experienced a substantial principal paydowns on its mortgage backed
securities which accelerated the premium amortization. Total interest income
declined 7% when compared to 2002 despite an increase in average earning assets,
whereas total interest expense declined dramatically with the repricing of
paying liabilities in a lower rate environment.
Net interest income was $25.7 million in 2003, a $557,000 or 2% decrease
compared to 2002. Interest and fee income on loans during 2003 decreased by
$725,000 from 2002 in spite of a 12% increase in average total loans. The
average yield on loans decreased to 6.60% in 2003 compared to 7.59% in 2002 as a
result of repricing of loans at prevailing rates. Loans represented 69% and 66%
of average earning assets for 2003 and 2002, respectively. Income earned on
investment securities during 2003 decreased by $1.8 million, or 22% compared to
2002. Though the average investment securities increased by 6% in 2003 over
2002, income from securities decreased, largely due to declining yields during
2003 over 2002. The average yield on securities was 3.38% for 2003 compared to
4.57% for 2002. Investments represented 27% of average earning assets in 2003.
Interest income on federal funds sold and deposits with banks during 2003
decreased by $506,000 or 54% compared to 2002 as a result of a $14.8 million, or
36%, decrease in average federal funds sold and deposits with banks, coupled
with a decrease in the average yield on federal funds sold from 1.64% in 2002 to
1.16% in 2003. Federal funds sold and deposits with banks represent 4% and 6% of
average earning assets at December 31, 2003 and 2002, respectively.
In 2002, net interest income was $26.2 million, a $4.1 million or 18%
increase compared to 2001. Interest and fee income on loans during 2002
increased moderately over 2001 in spite of an 8% increase in average total
loans. The average yield on loans decreased to 7.59% in 2002 compared to 8.18%
in 2001 as a result of repricing of loans at prevailing rates. Loans represented
66% of average earning assets for both 2002 and 2001. Income earned on
investment securities during 2002 decreased by $590,000, or 7% compared to 2001.
Though the average investment securities increased by 21% in 2002 over 2001,
income from securities decreased, largely due to declining yields during 2002
over 2001. The average yield on securities was 4.57% for 2002 compared to 5.94%
for 2001. Investments represented 28% of average earning assets in 2002.
Interest income on federal funds sold and deposits with banks during 2002
decreased by $1.2 million or 57% compared to 2001 as a result of a combination
of a $11.8 million, or 23%, decrease in average federal funds sold and deposits
with banks, and a decline in the average yield on federal funds sold from 4.15%
in 2001 to 1.64% in 2002. Federal funds sold and deposits with banks represent
6% and 9% of average earning assets at December 31, 2002 and 2001, respectively.
Interest expense for 2003 decreased by $2.4 million or 17% from 2002.
Interest expense on deposits decreased by $2.3 million primarily due to low
interest rates during 2003, while interest expense on long-term borrowings
decreased by $137,000 due to refinancing of the trust preferred securities
during the second half of 2002. Interest on short-term borrowings increased
moderately. For the year 2003 the average interest rate paid decreased by 65
basis points compared to 2002.
Interest expense for the year ended December 31, 2002, decreased by $5.8
million or 28% from 2001. Interest expense on deposits decreased by $5.6 million
primarily due to declining interest rates during 2002 and 2001, while interest
expense on short-term borrowings decreased by $48,000. Interest expense on
long-term borrowings decreased by $132,000 due to the refinancing of the trust
preferred securities during the second half of 2002. For the year 2002 the
average interest rate paid decreased by 140 basis points compared to 2001.
Average interest-bearing deposits comprised 77% in 2003, and 76% in both
2002 and 2001, of the Company's total funding sources, with the balance
comprised of short- and long-term funding.
The Company's net interest margin, which measures net interest income as a
percentage of average earning assets, was 3.75%, 4.10% and 3.79% for the years
ended December 31, 2003, 2002 and 2001, respectively.
Rate/Volume Analysis
The following table sets forth the changes in interest income and expenses
as they relate to changes in volume and rate for the years ended December 31,
2003 and 2002 compared to the prior years. Because of numerous simultaneous
balance and rate changes during the periods indicated, it is difficult to
allocate the changes precisely between balances and rates. For purposes of this
table, changes that are not due solely to changes in balances or rates are
allocated between such categories based on the average percentage changes in
average balances and average rates.
12
Full Year 2003 Full Year 2002
Compared to Full Year 2002 Compared to Full Year 2001
Increase(Decrease) Increase(Decrease)
------------------------------- -------------------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
(In Thousands)
Interest Earned On:
Loans .................................... $ 3,312 $(4,037) $ (725) $ 2,398 $(2,308) $ 90
Investment securities .................... 337 (2,105) (1,768) 1,414 (2,004) (590)
Other earning assets ..................... (238) (268) (506) (182) (1,060) (1,242)
------- ------- ------- ------- ------- -------
Total earning assets .................. $ 3,411 $(6,410) $(2,999) $ 3,630 $(5,372) $(1,742)
======= ======= ======= ======= ======= =======
Interest Paid On:
Savings and interest-bearing deposits .... $ 283 $(1,342) $(1,059) $ 807 $(1,182) $ (375)
Time deposits ............................ (22) (1,241) (1,263) (1,206) (4,050) (5,256)
Borrowings (1) ........................... 66 (186) (120) 402 (582) (180)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities ... $ 327 $(2,769) $(2,442) $ 3 $(5,814) $(5,811)
======= ======= ======= ======= ======= =======
(1) Includes FHLB advances, federal funds purchased, securities sold under
agreements to repurchase and trust preferred securities.
Provision for Loan and Lease Losses
The Company recorded a provision for loan and lease losses of $2.1 million
in 2003 compared with $996,000 in 2002. Management of each Bank Subsidiary
regularly performs an analysis to identify the inherent risk of loss in its loan
portfolio, and management of GCB regularly conducts a similar review to identify
risks in the lease portfolio of HCC. These analyses include evaluations of
concentrations of credit, past loss experience, current economic conditions,
amount and composition of the loan portfolio (including loans and leases being
specifically monitored by management), estimated fair value of underlying
collateral, loan commitments outstanding, delinquencies and other factors.
The Bank Subsidiaries will continue to monitor their allowances for loan
and leases losses and make future adjustments to the allowances through the
provision for loan and lease losses as economic conditions dictate. Although the
Bank Subsidiaries maintain their loan loss allowances at levels they consider
adequate to provide for the inherent risk of loss in their loan portfolios,
there can be no assurance that future losses will not exceed estimated amounts
or that additional provisions for loan and lease losses will not be required in
future periods. In addition, the Bank Subsidiaries' determinations as to the
amount of their allowances for possible loan and lease losses are subject to
review by the FDIC and the Department as part of their respective examination
processes. Such reviews may result in the establishment of an additional
allowance based upon those regulators' judgments after a review of the
information available at the times of their examinations.
Non-interest Income
Non-interest income was $7.9 million in 2003, representing 24% of total
income (net interest income plus non-interest income), compared with $7.3
million and 22%, respectively, in 2002. The increase of $629,000 or 9% over 2002
is primarily due to increases of $983,000, $364,000 and $349,000 in gains on
sales of investment securities, fee income on mortgage loans sold and service
charges on deposit accounts, respectively, partially offset by a decline in gain
made on sale of leases of $1.0 million. Included in the increase of non-interest
income is $270,000 in gains on sale of assets resulting from the sale of real
estate, $372,000 in automated teller machine fees and $269,000 in rental income.
Total non-interest income was $7.3 million in 2002, representing 22% of
total income (net interest income plus non-interest income), compared with $6.5
million and 23%, respectively, in 2001. The increase of $804,000 or 12% over
2001 is primarily due to increases in gains on sales of investment securities
and all other income. Gains on sale of investment securities increased by
$558,000 and all other income increased by $179,000. Included in the increase of
all other income is $124,000 in gains on sale of assets as a result of the sale
of the MasterCard portfolio in early 2002. Other income for 2002 also included
$306,000 in rental income and $354,000 in automated teller machine service fees.
Non-interest Expenses
Total non-interest expenses increased $349,000 or 2% to $22.0 million in
2003 compared with 2002. During 2002, the Company incurred a $1.0 million
write-off of the unamortized portion of the financing cost of trust preferred
securities. Excluding the $1.0 million charge, non-interest expense for the year
increased $1.4 million or 6.7%. The year to year increase in expenses is
attributable to the Company's growth while management is committed to
continually emphasize expense reduction. Of the total increase, increases in
salaries and employee benefits accounted for $1.5 million or 13.7% (of which
$360,000 is attributable to a separation package for a former executive), and
increases in occupancy and equipment expense accounted for $172,000. Those
increases were partially offset by decreases in other operating expenses and
office expense of $344,000 and $44,000, respectively.
13
Total non-interest expenses in 2002 increased $3.0 million or 16% to $21.7
million when compared with 2001. The increase in expenses was attributable to
the continued growth of the Company, its investment in technology and the need
to attract and retain high-caliber employees. Of the $3.0 million total
increase, increases in salaries and employee benefits accounted for $1.3
million, a write off of the unamortized deferred financing cost from the
issuance of trust preferred securities in 1997 accounted for $1.0 million,
increases in regulatory, professional and other fees accounted for $652,000,
increases in other operating expenses accounted for $566,000, and increases in
occupancy and equipment expense accounted for $139,000. These increases were
partially offset by a decrease in amortization of intangible assets of $777,000
as a result of the adoption of a new accounting standards ceasing the further
amortization of goodwill, and a $31,000 decrease in office expense.
Income Taxes
The Company recorded income tax provisions of $2.8 million, $3.4 million
and $3.2 million for the years ended December 31, 2003, 2002 and 2001,
respectively. The Company's respective effective rates were 29%, 31% and 34% for
such years. The effective tax rate decreases are due to tax planning strategies
partially offset by nondeductible amortization of goodwill prior to 2002.
Financial Condition
The Company's performance for 2003 was highlighted by strong loan growth,
particularly in the commercial mortgage portfolio. At December 31, 2003, the
Company's total assets were $753.1 million, an increase of $33.3 million or 5%
over December 31, 2002. Gross loans increased by $80.5 million, or 18%,
reflecting increased loan demand, while investment securities, federal funds
sold and interest bearing due from banks decreased by $37.0 million, $7.7
million and $1.9 million, respectively. The increase in loans was supported by
increases in total deposits, short-term borrowings and FHLB advances.
A key element of the Company's consistent performance is its strong
capital base. The Company's risk-based capital ratios at December 31, 2003 were
9.03% and 11.96% for Tier 1 Capital and total risk-based capital, respectively,
substantially exceeding the minimum requirements under regulatory guidelines.
At December 31, 2002, the Company's total assets were $719.9 million, an
increase of $58.4 million or 8% over December 31, 2001. Gross loans increased by
$32.7 million reflecting increased loan demand. Investment securities increased
by $40.3 million, while federal funds sold and interest bearing due from banks
decreased by $6.0 million and $4.4 million, respectively.
Investment Securities
At December 31, 2003, the investment securities portfolio amounted to
$155.2 million, a decrease of $37.0 million or 19% from December 31, 2002. The
decrease was primarily related to maturities and principal paydowns and the
subsequent use of proceeds to meet loan demand. Investment securities at
December 31, 2002 increased by $40.3 million or 27% over December 31, 2001. The
increase was primarily related to liquidity arising from deposit growth. The
following table presents the composition of the investment securities portfolio
along with the amortized cost and fair values of those components at December
31, 2003, 2002 and 2001.
December 31
--------------------------------------------------------------------------
2003 2002 2001
---------------------- ---------------------- ----------------------
(In Thousands)
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- ---------
Available-for-sale
U.S. Treasury and U.S...............
Government agencies securities ... $ 27,572 $ 27,749 $ 22,823 $ 23,237 $ 21,288 $ 21,712
State and political subdivisions ... 13,272 13,241 4,536 4,595 7,279 7,253
Other debt and equity securities ... 23,953 28,356 25,860 29,413 23,796 26,679
Mortgage-backed securities ......... 83,528 83,167 128,057 129,630 93,860 94,568
--------- --------- --------- --------- --------- ---------
Total available-for-sale ...... $ 148,325 $ 152,513 $ 181,276 $ 186,875 $ 146,223 $ 150,212
--------- --------- --------- --------- --------- ---------
Held-to-maturity
U.S. Treasury and U.S..............
Government agencies securities ... $ 1,000 $ 985 $ 1,000 $ 1,003 $ 1,000 $ 950
State and political subdivisions ... 1,689 1,689 4,120 4,120 185 186
Mortgage-backed securities ......... 37 38 200 204 509 521
--------- --------- --------- --------- --------- ---------
Total held-to-maturity ........ $ 2,726 $ 2,712 $ 5,320 $ 5,327 $ 1,694 $ 1,657
--------- --------- --------- --------- --------- ---------
Total investment securities ... $ 151,051 $ 155,225 $ 186,596 $ 192,202 $ 147,917 $ 151,869
========= ========= ========= ========= ========= =========
During 2003, the Company realized net gains of $2.2 million from the sale
of $11.3 million in investment securities. In 2002, the Company realized net
gains of $1.2 million from the sale of $22.6 million in investment securities.
Included in shareholders'
14
equity at December 31, 2003 is accumulated other comprehensive income in the
amount of $2.5 million, a decrease of $865,000 or 25% from the end of 2002. The
Company has no investment securities held for trading purposes at December 31,
2003.
The following table shows the average yields, amortized costs and fair
values of the Company's investment securities by maturity.
December 31, 2003
-------------------------------
Average Amortized Fair
Yield Cost Value
------- --------- --------
(Dollars in Thousands)
Available-for-sale
Due in one year or less ........................ 2.86% $ 15,918 $ 16,088
Due after one year through 5 years ............. 2.88 7,283 7,307
Due after five years through 10 years .......... 3.37 7,079 6,956
Due after ten years ............................ 3.89 10,564 10,639
Mortgage-backed securities ..................... 3.99 83,528 83,167
Other debt and equity securities ............... n.a. 23,953 28,356
-------- --------
Total available-for-sale .................... $148,325 $152,513
======== ========
Held-to-maturity
Due in one year or less ........................ 1.59% $ 1,689 $ 1,689
Due after five years through 10 years .......... 6.05 1,000 985
Mortgage-backed securities ..................... 5.61 37 38
-------- --------
Total held-to-maturity .................... 2,726 2,712
-------- --------
Total investment securities ............... $151,051 $155,225
======== ========
Loan Portfolio
Loan growth during 2003 occurred primarily in loans secured by
nonresidential properties and commercial loans. The growth reflected the
Company's aggressive business development programs and capitalizing upon new
opportunities. The gross loan portfolio at December 31, 2003 totaled $524.5
million, an increase of $80.5 million over the December 31, 2002 reported
amount. Average loan volume for 2003 increased $50.4 million, while the average
yield on loans decreased by 99 basis points from 2002 as a result of low
interest rates.
Loans outstanding of $444.1 million at December 31, 2002 increased $32.7
million from year-end 2001 primarily due to increased loan demand in the
Company's primary market areas. The following table summarizes the components of
the gross loan portfolio at the dates indicated.
December 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(In Thousands)
Loans secured by one-to-four-family residential properties .. $148,121 $142,677 $146,450 $145,310 $141,072
Loans secured by multi-family residential properties ........ 11,619 12,861 13,039 15,049 13,750
Loans secured by nonresidential properties .................. 260,318 203,501 181,959 149,304 140,200
Loans to individuals ........................................ 5,686 8,843 8,491 10,639 9,405
Commercial loans ............................................ 37,532 33,859 38,467 32,212 27,680
Construction loans .......................................... 37,640 24,339 14,054 13,014 10,024
Lease financing receivables ................................. 23,181 17,058 7,306 7,912 3,122
Other loans ................................................. 449 957 1,643 532 1,782
-------- -------- -------- -------- --------
Total gross loans ...................................... $524,546 $444,095 $411,409 $373,972 $347,035
======== ======== ======== ======== ========
The following table sets forth the contractual maturity and interest rate
sensitivity of certain components of the loan portfolio at December 31, 2003.
Demand loans, having no stated schedule of repayment and no stated maturity, and
overdrafts are reported as due within one year.
December 31, 2003
------------------------------------------
Within 1 - 5 Over 5
1 year Years Years Total
------- ------- -------- --------
(In Thousands)
Loans with predetermined interest rates:
Loans secured by nonresidential properties ........... $ 7,995 $27,233 $ 48,742 $ 83,970
Commercial loans ..................................... 5,127 15,087 345 20,559
Lease financing receivables .......................... 7,854 15,241 86 23,181
Real estate construction ............................. 5,394 7,160 -- 12,554
------- ------- -------- --------
Total loans with predetermined interest rates ... 26,370 64,721 49,173 140,264
Loans with floating interest rates:
Loans secured by nonresidential properties ........... 10,787 9,114 156,447 176,348
Commercial loans ..................................... 12,853 3,130 990 16,973
Real estate construction ............................. 13,117 11,612 357 25,086
------- ------- -------- --------
Total loans with floating interest rates ........ 36,757 23,856 157,794 218,407
------- ------- -------- --------
Total gross loans ................... $63,127 $88,577 $206,967 $358,671
======= ======= ======== ========
15
At December 31, 2003 no loans were concentrated within a single industry
or group of related industries and the Company had no foreign loans.
Asset Quality
Various degrees of risk are associated with substantially all investing
activities. The senior lending officers of BCB, GCB and RCB are charged with
monitoring asset quality, establishing credit policies and procedures and
seeking consistent application of these policies and procedures. Nonperforming
assets include past due, nonaccrual and renegotiated and other real estate
loans. The degree of risk inherent in all lending activities is influenced
heavily by general economic conditions in the immediate market area. Among the
factors that tend to affect portfolio risks are changes in local or regional
real estate values, income levels and energy prices. These factors, coupled with
unemployment levels and tax rates, as well as governmental actions and weakened
market conditions that reduce credit demand among qualified borrowers, are also
important determinants of the risk inherent in lending.
Past Due, Nonaccruing and Renegotiated Loans. It is the Company's policy
to review monthly all loans and leases that are past due as to principal or
interest. The accrual of interest income on loans and leases is discontinued
when it is determined that such loans or leases are either doubtful of
collection or are involved in a protracted collection process. The current
year's uncollected interest is reversed on such nonaccrual loans or leases.
During 2003, management has noted that the asset quality has shown some
deterioration, especially on the lease financing receivables portfolio. The
Company has taken action to reposition our leasing business to improve the
overall quality of the portfolio. However, the Company maintains adequate
reserves and believes additional reserves are not required. It will continue to
monitor both loans and lease financing portfolios closely. Management has also
restructured the terms of certain loans to accommodate changes in the financial
condition of borrowers. A typical concession would be a reduction in the
currently payable interest rate to one that is lower than the current market
rate for new debt with similar risks; interest foregone would be deferred until
maturity.
The following table summarizes the composition of the Company's
nonperforming assets and related asset quality ratios as of the dates indicated:
December 31,
--------------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(Dollars in Thousands)
Nonaccruing loans and leases ................................. $2,010 $2,767 $1,373 $1,281 $1,678
Renegotiated loans ........................................... 252 295 545 845 606
------ ------ ------ ------ ------
Total nonperforming loans and leases .................... 2,262 3,062 1,918 2,126 2,284
Loans past due 90 days and accruing .......................... 313 587 34 54 248
Other real estate ............................................ -- -- 175 -- 467
------ ------ ------ ------ ------
Total nonperforming assets .............................. $2,575 $3,649 $2,127 $2,180 $2,999
====== ====== ====== ====== ======
Nonperforming loans and leases to total gross loans .......... .43% .69% .47% .57% .66%
Nonperforming assets to total gross loans and other
real estate owned ........................................ .49% .82% .52% .58% .86%
Nonperforming assets to total assets ......................... .34% .51% .32% .36% .53%
Allowance for loan and lease losses to nonperforming loans ... 359.95% 238.34% 329.51% 266.09% 216.86%
Nonperforming loans and leases decreased by $800,000 at December 31, 2003
compared to December 31, 2002. Almost all of the decrease is attributable to the
write-off of certain lease financing receivables. Nonperforming loans and leases
increased by $1.1 million at December 31, 2002 compared to December 31, 2001.
The increase is primarily due to the reclassifications of certain loans from
nonaccruing to current loans and from current to renegotiated status. If the
nonaccruing loans in 2003, 2002 and 2001 had continued to pay interest, interest
income during those years would have increased by $104,000, $135,000 and
$45,000, respectively.
Potential Problem Loans. As part of the loan review process, management
routinely identifies performing loans when there is a doubt as to whether the
borrowers will comply with the original loan repayment terms and allocates
specific reserves against them. At December 31, 2003, 2002 and 2001, such loans
totaled $5.5 million, $4.9 million and $5.1 million with allowances of $1.7 $1.5
million and $833,000, respectively, specifically allocated to them.
Foreign Loans. The Company has no foreign loans or any other foreign
exposure.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses increased by $844,000 to $8.1
million at December 31, 2003 compared to the end of the prior year. At December
31, 2002 the allowance for loan and lease losses was $7.3 million compared to
$6.3 million at December 31, 2001, an increase of $978,000. The allowance for
loan and lease losses is increased periodically through charges to earnings in
the form of a provision for loan and lease losses. Loans that are deemed
uncollectible are charged against the allowance and any
16
recoveries of such loans are credited to it. Management believes that although
chargeoffs may occur in the future, adequate reserves have been provided.
The Company maintains an allowance for loan and lease losses at an amount
that management considers adequate to provide for potential credit losses based
upon periodic evaluation of the risk characteristics of the loan portfolio.
Management reviews the adequacy of the allowance on a monthly basis. In doing
so, it takes into consideration factors such as actual versus estimated losses,
regional and national economic conditions, portfolio concentration and the
impact of government regulations. The Company makes specific allocations to
impaired loans and for doubtful or watchlist loans, an allocated reserve based
on historical trends and an unallocated portion. The Company consistently
applies the following comprehensive methodology.
The first category of reserves consists of specific allocation of the
allowance for doubtful or watchlist loans. This allocation is established for
specific commercial and industrial loans, real estate development loans, and
construction loans, which have been identified by bank management as being
high-risk loan assets. These loans are assigned a doubtful risk-rating grade
based solely on nonperformance according to their payment terms and there is
reason to believe that repayment of the loan principal in whole or part is
unlikely. The specific allocation of the allowance is the total amount of
potential unconfirmed losses for these individual doubtful or watchlist loans.
To assist in determining the fair value of loan collateral, the Company often
utilizes independent third party qualified appraisal firms which in turn employ
their own criteria and assumptions that may include occupancy rates, rental
rates, and property expenses, among others.
The second category of reserves consists of the allocated portion of the
allowance. This is determined by taking the loan portfolios outstanding and
creating individual loan pools for commercial loans, real estate loans and
construction loans and various types of loans to individuals that have similar
characteristics and applying historical loss experience for each pool. This
estimate represents the potential unconfirmed losses within each pool of the
portfolio. The historical estimation for each loan pool is then adjusted to
account for current conditions, current loan portfolio performance, loan policy
or management changes or any other factor which may cause future losses to
deviate from historical levels.
Finally, the Company also maintains an unallocated allowance that is used
to cover any factors or condition that may cause a potential loan loss but are
not specifically identifiable. Management considers an unallocated portion of
the allowance as necessary irrespective of how detailed an analysis of potential
loan losses is performed because these estimates by definition lack precision.
Management must make estimates using assumptions and information, which is often
subjective and changing rapidly. Management believes the allowance for loan and
lease losses and nonperforming loans and leases was at an acceptable level at
December 31, 2003.
The following table represents transactions affecting the allowance for
loan and lease losses for the periods indicated.
Years ended December 31,
----------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(Dollars in Thousands)
Balance at beginning of year ...................... $ 7,298 $ 6,320 $ 5,657 $ 4,953 $ 3,525
Charge-offs:
Commercial ..................................... (14) (160) (224) (142) (102)
Lease financing receivables .................... (1,331) (52) (39) -- --
Real estate - mortgages ........................ -- (47) (7) (198) --
Installment loans to individuals ............... (16) (3) (8) (49) (45)
Credit cards and related plans ................. (1) (36) (42) (60) (59)
-------- -------- -------- -------- --------
(1,362) (298) (320) (448) (206)
-------- -------- -------- -------- --------
Recoveries:
Commercial ..................................... 42 66 73 18 59
Lease Financing Receivables .................... 24 7 -- -- --
Real estate - mortgages ........................ 58 165 3 69 50
Installment loans to individuals ............... 4 26 12 7 4
Credit cards and related plans ................. 13 16 10 10 12
-------- -------- -------- -------- --------
141 280 98 104 125
-------- -------- -------- -------- --------
Net recoveries (charge-offs) ...................... (1,221) (18) (222) (345) (81)
Provision for loan losses ......................... 2,065 996 885 1,048 885
Adjustment(1) ..................................... -- -- -- -- 624
-------- -------- -------- -------- --------
Balance at end of year ............................ $ 8,142 $ 7,298 $ 6,320 $ 5,657 $ 4,953
======== ======== ======== ======== ========
Ratio of net charge-offs during the period to
average loans outstanding during the period .... (0.26)% (0.00%) (0.07%) (0.10%) (0.03%)
(1) Allowance for loan and lease losses acquired from First Savings Bank of
Little Falls in 1999.
17
Allocation of the Allowance for Loan and Lease Losses
The following table sets forth the allocation of the allowance for loan
and lease losses by loan category amounts, the percent of loans in each category
to total loans in the allowance, and the percent of loans in each category to
total loans, at each of the dates indicated.
At December 31,
------------------------------------------------------------------------------------------
2003 2002 2001
-------------------------- -------------------------- --------------------------
% of % of % of
Loans Loans Loans
to to to
% of Total % of Total % of Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------ --------- ----- ------ --------- ----- ------ --------- -----
(Dollars in Thousands)
Balance at end of
Period allocable to:
Commercial and non-
Residential
properties ............... $3,712 45% 58% $3,576 49% 54% $3,388 53% 54%
Lease financing receivable ... 1,755 22 4 1,416 4 4 132 2 2
Construction ................. 403 5 7 278 4 5 164 3 3
Loans secured by 1-4
families ................... 893 11 30 1,521 21 35 1,918 30 39
Loans to individuals ....... 174 2 1 47 1 2 292 5 2
Unallocated reserves ......... 1,205 15 -- 460 21 -- 426 7 --
------ --- --- ------ --- --- ------ --- ---
Total allowance for loan
and lease losses ........... $8,142 100% 100% $7,298 100% 100% $6,320 100% 100%
====== === === ====== === === ====== === ===
At December 31,
----------------------------------------------------------
2000 1999
-------------------------- --------------------------
% of % of
Loans Loans
to to
% of Total % of Total
Amount Allowance Loans Amount Allowance Loans
------ --------- ----- ------ --------- -----
(Dollars in Thousands)
Balance at end of
Period allocable to:
Commercial and non-
Residential
properties ............... $1,745 31% 48% $1,558 32% 48%
Lease financing receivable ... 87 2 2 56 1 1
Construction ................. 107 2 3 115 2 3
Loans secured by 1-4
families ................... 1,999 35 44 2,183 44 45
Loans to individuals ....... 343 6 3 264 5 3
Unallocated reserves ......... 1,376 24 -- 777 16 --
------ --- --- ------ --- ---
Total allowance for loan
and lease losses ........... $5,657 100% 100% $4,953 100% 100%
====== === === ====== === ===
18
Deposits
A certain portion of the Company's liquidity is funded through its deposit
sources. At December 31, 2003 total deposits were $560.7 million, an increase of
$16.7 million or 3% over 2002. Of the total increase, increases in demand
deposits, interest bearing and savings deposits accounted for $15.8 million,
$8.1 million and $6.1 million, respectively, while time deposits less than
$100,000 and time deposits $100,000 and over decreased by $11.3 million and $2.1
million, respectively. The majority of such increases were a result of
aggressive marketing of new products. The $13.4 million decrease in time
deposits was a result of maturity run off. Total deposit sources were $544.1
million at December 31, 2002, an increase of $59.4 million compared with
December 31, 2001. Non interest-bearing, interest-bearing demand deposits and
savings deposits increased by $17.9 million, $21.7 million and $28.6 million,
respectively, while time deposits decreased by $8.7 million. The decrease in
time deposits during 2002 resulted from maturity run off.
The following table summarizes the average yield/rate of the components of
average deposit liabilities for the years indicated.
Years ended December 31,
-------------------------------------------------------------------------------
Average Average Average
2003 Yield/Rate 2002 Yield/Rate 2001 Yield/Rate
-------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
Non interest-bearing.......... $146,995 -0- $135,840 -0- $113,203 -0-
Savings and interest-bearing.. 259,974 0.80% 224,630 1.40% 166,916 2.11%
Time.......................... 153,835 2.34 154,577 3.14 192,952 5.24
-------- ---- -------- ---- -------- ----
$560,804 1.01% $515,047 1.55% $473,071 2.88%
======== ==== ======== ==== ======== ====
Listed below is a summary of time certificates of deposit $100,000 and
over categorized by time remaining to maturity.
At December 31,
2003
---------------
(In Thousands)
Three months or less............................................ $13,664
Over three months through six months............................ 6,272
Over six months through twelve months........................... 9,834
Over twelve months.............................................. 5,367
-------
$35,137
=======
Federal Home Loan Bank Advances
At December 31, 2003 Federal Home Loan Bank ("FHLB") advances totaled
$85.0 million, an increase of $5.0 million compared with December 31, 2002. The
Company considers FHLB advances as an added source of funding and accordingly
executed transactions during 2003 to meet its funding needs. The FHLB advances
have varying terms and interest rates.
Short-Term Borrowings
As of December 31, 2003, securities sold under agreements to repurchase
and federal funds purchased were $25.7 million. Short-term borrowings include
various other borrowings, which generally have maturities of less than one year.
The details of these categories for the last three years are presented below (in
thousands):
Years ended December 31,
--------------------------------
2003 2002 2001
-------- -------- --------
Securities sold under repurchase agreements and federal funds purchased
Balance at year-end .................................................. $ 25,747 $ 11,728 $ 22,347
Average during the year .............................................. 11,198 15,276 17,326
Maximum month-end balance ............................................ 25,747 26,545 64,010
Weighted average rate during the year ................................ 1.07% 1.42% 3.32%
Rate at December 31 .................................................. 0.71% 1.01% 1.67%
Guaranteed Preferred Beneficial Interest in the Company's Subordinated Debt
During June and July, 2002 the Company, through GCB Capital Trust II (the
"2002 Trust"), issued 2,400,000 Trust Preferred Securities, $10 face value, for
total proceeds of $24.0 million. The securities have an annual distribution rate
of 8.45% payable quarterly. The securities mature on June 30, 2032 but are
callable at the Company's option on or after June 30, 2007. In July 2002 the
Company used most of the net proceeds from the above transaction to redeem all
of the 10% Trust Preferred Securities that the Company had issued in 1997.
Excess proceeds of $1.0 million were used for expenses associated with the issue
of the 2002 Trust.
19
Interest Rate Sensitivity
Banks are concerned with the extent to which they are able to match
maturities of interest-earning assets and interest-bearing liabilities. Such
matching is facilitated by examining the extent to which assets and liabilities
are interest rate sensitive and by monitoring the institution's interest rate
sensitivity gap. An asset or liability is considered to be interest rate
sensitive if it will mature or reprice within a specific time period. The
interest rate sensitivity gap is defined as the excess of interest-earning
assets maturing or repricing within a specific time period over interest-bearing
liabilities maturing or repricing within that time period. The Bank Subsidiaries
monitor their gaps on a monthly basis, primarily their six-month and one-year
maturities, and work to maintain their gaps within a range of 10% to (25)%.
The Company had a positive one-year gap position with respect to its
exposure to interest rate risk at December 31, 2003. The Asset/Liability
Management Committees of the Bank Subsidiaries' respective Boards of Directors
meet quarterly to discuss their interest rate risks. The Company uses simulation
models to measure the impact of potential changes in interest rates on the net
interest income, balance sheet mix and spread relationship between market rates
and bank products. As described below, sudden changes in interest rates should
not have a material impact to the Bank Subsidiaries' results of operations.
Should the Bank Subsidiaries experience a positive or negative mismatch in
excess of the approved range, they have a number of remedial options. They have
the ability to reposition their investment portfolios to include securities with
more advantageous repricing and/or maturity characteristics. They can attract
variable or fixed-rate loan products as appropriate. They can also price deposit
products to attract deposits with maturity characteristics that can lower their
exposures to interest rate risk.
The following table summarizes, as of December 31, 2003, the repricing of
earning assets and interest-bearing liabilities in accordance with their
contractual terms in given time periods.
Due
within Four to One to Two to Over
Three Twelve Two Five Five Fair
Months Months Years Years Years Total Value
-------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Rate-sensitive assets:
Investment securities and interest deposits
From banks........................................$ $ 18,549 $ 39,655 $ 27,338 $ 35,402 $ 41,833 $162,777 $162,764
Rate 2.83% 3.76% 4.02% 4.33% 5.39% 4.24%
Federal funds sold ..................................$ 10,000 -- -- -- -- 10,000 10,000
Rate 1.19% -- -- -- -- 1.19%
Total loans net of unearned income...................$ 114,012 59,866 63,770 176,703 109,448 523,799 525,899
Rate 5.27% 6.44% 6.98% 6.37% 6.10% 6.16%
-------- -------- -------- -------- -------- --------
Total rate-sensitive assets ....................... $142,561 $ 99,521 $ 91,108 $212,105 $151,281 $696,576 $698,663
======== ======== ======== ======== ======== ========
Rate-sensitive liabilities
Interest-bearing demand deposits.....................$ $ 69,032 $ 3,173 $ 21,449 $ 47,568 $ 17,497 $158,719 $158,719
Rate .72% 1.09% 0.67% 0.46% 0.50% 0.62%
Savings deposits.....................................$ 31,507 219 14,826 35,213 20,387 102,152 102,152
Rate 0.77% .66% .72% 0.31% .67% .58%
Time deposits........................................$ 35,651 73,013 19,178 17,535 2 145,379 146,784
Rate 1.42% 1.55% 3.28% 3.58% 5.30% 1.99%
Total borrowings (1).................................$ 25,510 5,026 10,037 40,126 54,048 134,747 141,933
Rate .41% 5.82% 3.61% 5.46% 6.85% 4.94%
-------- -------- -------- -------- -------- --------
Total rate-sensitive liabilities .................. $161,700 $ 81,431 $ 65,490 $140,442 $ 91,934 $540,997 $549,588
======== ======== ======== ======== ======== ========
Interest rate sensitivity gap ........................ (19,139) 18,090 25,618 71,663 59,347 155,579
Interest rate sensitivity gap as a percentage of
total rate-sensitive assets ....................... (2.75%) 2.60% 3.68% 10.29% 8.52%
Cumulative interest rate sensitivity gap ............. (19,139) (1,049) 24,569 96,232 155,579
======== ======== ======== ======== ========
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets ......... (2.75%) (0.15%) 3.53% 13.82% 22.33%
(1) Includes FHLB advances, federal funds purchased, securities sold under
agreements to repurchase and trust preferred securities
Liquidity
The Company actively manages its liquidity under the direction of the
Asset/Liability Management Committees of the Bank Subsidiaries. During the last
two years the Company has been highly liquid and its liquid funds have been more
than sufficient to meet future loan demand or the possible outflow of deposits
in addition to being able to adapt to changing interest rate conditions.
Management expects this high liquidity trend to continue until overall economic
conditions improve and loan demand rises.
Sources of liquidity at December 31, 2003 totaled $192.0 million or 25% of
total assets, consisting of investment securities of $155.2 million and $36.8
million in cash and cash equivalents and interest-bearing due from banks. By
comparison, total liquidity at December 31, 2002 totaled $238.8 million or 33%
of total assets, consisting of investment securities of $192.2 million and $46.6
million in cash and cash equivalents and interest-bearing due from banks.
The following table sets forth the Company's contractual obligations and
other commitments requiring potential cash outflows as of December 31, 2003:
20
Less than One to Two Three to After Five
One year years Five years Years Total
--------- ---------- ---------- ---------- --------
Remaining contractual maturities on time deposits .... $108,664 $ 19,178 $ 17,535 $ 3 $145,380
Total Borrowings ..................................... 30,536 10,037 40,126 54,048 134,747
Minimum annual rental payments ....................... 691 571 1,443 947 3,652
Loan commitments ..................................... 93,726 -- 55,368 -- 149,094
Standby letters of credit ........................... 2,857 -- -- -- 2,857
-------- -------- -------- -------- --------
Total ................................................ $236,474 $ 29,786 $114,472 $ 54,998 $435,730
======== ======== ======== ======== ========
The Company currently does not have any unconsolidated subsidiaries or
unconsolidated special purpose entities. The Company has no capital leases.
Capital Resources
The Company's primary regulator, the Federal Reserve Board (Federal
Reserve), which regulates bank holding companies, has issued guidelines
classifying and defining bank holding company capital into the following
components: (1) Tier I capital, which includes tangible shareholders' equity for
common stock and certain qualifying perpetual preferred stock, and (2) Tier II
capital, which includes a portion of the allowance for possible loan losses,
certain qualifying long-term debt and preferred stock that does not qualify as
Tier II capital. The risk-based capital guidelines require financial
institutions to maintain specific defined credit risk factors (risk-adjusted
assets). As of December 31, 2003 the minimum Tier I and combined Tier I and Tier
II capital ratios required by the Federal Reserve for capital adequacy purposes
were 4% and 8%, respectively.
In addition to the risk-based capital guidelines discussed above, the
Federal Reserve requires that a bank holding company which meets that
regulator's highest performance and operating standards maintain a minimum
leverage ratio (Tier I capital as a percentage of tangible assets) of 4%. Those
bank holding companies anticipating significant growth are expected to maintain
a leverage ratio above the minimum ratio. The Federal Reserve evaluates minimum
leverage ratios for each entity through the ongoing regulatory examination
process. The Bank Subsidiaries' primary regulator, the FDIC, has also issued
regulations establishing similar risk-based and leverage capital ratios that
apply separately to each bank.
The following table presents the risk based and leverage capital ratios
for the Company and each Bank Subsidiary as of December 31, 2003 and 2002.
To Be Well-Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
-------------------- ---------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
(Dollars in Thousands)
As of December 31, 2003
Total capital (to risk-weighted assets)
Greater Community Bancorp..... $69,455 11.96% $46,460 8.00% N/A N/A
Greater Community Bank........ 35,854 10.09 28,433 8.00 $35,541 10.00%
Bergen Commercial Bank ....... 18,979 10.14 14,967 8.00 18,709 10.00
Rock Community Bank........... 5,578 17.95 2,486 8.00 3,107 10.00
Tier 1 capital (to risk-weighted assets)
Greater Community Bancorp..... 52,459 9.03 23,230 4.00 N/A N/A
Greater Community Bank........ 31,404 8.84 14,217 4.00 21,325 6.00
Bergen Commercial Bank........ 16,639 8.89 7,484 4.00 11,226 6.00
Rock Community Bank........... 5,188 16.70 1,243 4.00 1,864 6.00
Tier 1 capital (to average assets)
Greater Community Bancorp..... 52,459 7.09 29,586 4.00 N/A N/A
Greater Community Bank........ 31,404 6.72 18,703 4.00 23,378 5.00
Bergen Commercial Bank........ 16,639 7.33 9,079 4.00 11,348 5.00
Rock Community Bank........... 5,188 13.56 1,530 4.00 1,913 5.00
As of December 31, 2002
Total capital (to risk-weighted assets)
Greater Community Bancorp..... $68,402 13.77% $39,734 8.00% N/A N/A
Greater Community Bank........ 33,139 10.78 24,592 8.00 $30,741 10.00%
Bergen Commercial Bank ....... 15,280 10.11 12,090 8.00 15,113 10.00
Rock Community Bank........... 5,354 19.46 2,201 8.00 2,751 10.00
Tier 1 capital (to risk-weighted assets)
Greater Community Bancorp..... 52,543 10.58 19,867 4.00 N/A N/A
Greater Community Bank........ 29,285 9.53 12,296 4.00 18,444 6.00
Bergen Commercial Bank........ 13,388 8.86 6,045 4.00 9,068 6.00
Rock Community Bank........... 5,010 18.21 1,100 4.00 1,651 6.00
Tier 1 capital (to average assets)
Greater Community Bancorp..... 52,543 7.38 28,488 4.00 N/A N/A
Greater Community Bank........ 29,285 6.50 18,012 4.00 22,515 5.00
Bergen Commercial Bank........ 13,388 6.39 8,387 4.00 10,484 5.00
Rock Community Bank........... 5,010 13.11 1,528 4.00 1,910 5.00
21
New Accounting Pronouncements
The Company adopted FASB Interpretation 45 (FIN 45), Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others, on January 1, 2003. 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. The Company has issued
financial and performance letters of credit. Financial letters of credit require
the Company to make payment if the customer's financial condition deteriorates,
as defined in the agreements. Performance letters of credit require the Company
to make payments if the customer fails to perform certain non-financial
contractual obligations. The Company previously did not record a liability when
guaranteeing obligations unless it became probable that the Company would have
to perform under the guarantee. FIN 45 applies prospectively to guarantees the
Company issues or modifies after 2002.
The Company defines the initial fair value of these letters of credit as
the fee received from the customer. The maximum potential undiscounted amount of
potential future payments of these letters of credit as of December 31, 2003 is
$2.9 million. Generally these letters of credit are good for a term of one year
at which time they are automatically renewed for the same term. Amounts due
under these letters of credit would be reduced by any proceeds that the Company
would be able to obtain in liquidating the collateral for the loans, which
varies depending on the customer.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies the application of
Accounting Research Bulletin 51, Consolidated Financial Statements, to certain
entities in which voting rights are not effective in identifying the investor
with the controlling financial interest. An entity is subject to consolidation
under FIN 46 if the investors either do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support, are unable to direct the entity's activities, or are not exposed to the
entity's losses or entitled to its residual returns ("variable interest
entities"). Variable interest entities within the scope of FIN 46 will be
required to be consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be the party that
absorbs a majority of the entity's expected losses, receives a majority of its
expected returns, or both.
Management has determined that GCB Capital Trust II qualifies as a
variable interest entity under FIN 46. GCB Capital Trust II issued mandatorily
redeemable preferred stock to investors and loaned the proceeds to the Company.
GCB Capital Trust II holds, as its sole asset, subordinated debentures issued by
the Company in 2002. GCB Capital Trust II is currently included in the Company's
consolidated balance sheet and statements of income. The Company has evaluated
the impact of FIN 46 and concluded it should continue to consolidate GCB Capital
Trust II entity as of December 31, 2003, in part due to its ability to call the
preferred stock prior to the mandatory redemption date and thereby benefit from
a decline in required dividend yields.
Subsequent to the issuance of FIN 46, the FASB issued a revised
interpretation, FIN 46(R), the provisions of which must be applied to certain
variable interest entities by March 31, 2004. The Company plans to adopt the
provisions under the revised interpretation in the first quarter of 2004. FIN
46(R) will require NPB to deconsolidate GCB Capital Trust II as of March 31,
2004. FIN 46(R) precludes consideration of the call option embedded in the
preferred stock when determining if the Company has the right to a majority of
GCB Capital Trust II expected residual returns. Accordingly, the Company will
deconsolidate GCB Capital Trust II at the end of the first quarter, which will
result in an increase in outstanding debt by $743,000. The banking regulatory
agencies have not issued any guidance that would change the regulatory capital
treatment for the trust-preferred securities issued by GCB Capital Trust II
based on the adoption of FIN 46(R). However, as additional interpretations from
the banking regulators related to entities such as GCB Capital Trust II become
available, management will reevaluate its potential impact to its Tier I capital
calculation under such interpretations.
The Company adopted Statement of Financial Accounting Standard 149 (SFAS
No. 149), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, on July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for
implementation issues raised by constituents or includes the conclusions reached
by the FASB on certain FASB Staff Implementation Issues. Statement 149 also
amends SFAS No. 133 to require a lender to account for loan commitments related
to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003. The
Company periodically enters into commitments with its customers which it intends
to sell in the future. The adoption of SFAS No. 149 did not have a material
impact on the Company's financial position or results of operations.
The FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity, on May 15, 2003. SFAS No.
150 changes the classification in the statement of financial position of certain
common financial instruments from either equity or mezzanine presentation to
liabilities and requires an issuer of those financial statements to recognize
changes in fair value or redemption amount, as applicable, in earnings. SFAS No.
150 is effective for public companies for financial instruments entered into or
modified after May 31, 2003 and is effective at the beginning of the first
interim period beginning after September15, 2003. Management has not entered
into any financial instruments that would qualify under SFAS No. 150 after May
31, 2003. The Company currently classifies its Guaranteed Preferred Beneficial
Interest in the Company's Subordinated Debt as a liability. As a result,
management does not anticipate the adoption of SFAS No. 150 to have a material
impact on the Company's financial position or results of operations.
In October 2003, the AICPA issued SOP 03-3 Accounting for Loans or Certain
Debt Securities Acquired in a Transfer. SOP 03-3 applies to a loan with the
evidence of deterioration of credit quality since origination acquired by
completion of a transfer for which
22
it is probable at acquisition, that the Company will be unable to collect all
contractually required payments receivable. SOP 03-3 requires that the Company
recognize the excess of all cash flows expected at acquisition over the
investor's initial investment in the loan as interest income on a level-yield
basis over the life of the loan as the accretable yield. The loan's contractual
required payments receivable in excess of the amount of its cash flows expected
at acquisition (nonaccretable difference) should not be recognized as an
adjustment to yield, a loss accrual or a valuation allowance for credit risk.
SOP 03-3 is effective for loans acquired in fiscal years beginning after
December 31, 2004. Early adoption is permitted. Management is currently
evaluating the provisions of SOP 03-3.
The Bank adopted EITF 03-1 The Meaning of Other than Temporary Impairment
and Its Application to Certain Investments as of December 31, 2003. EITF 03-1
includes certain disclosures regarding quantitative and qualitative disclosures
for investment securities accounted for under SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities that are impaired at the
balance sheet date, but an other-than-temporary impairment has not been
recognized. The disclosures under EITF 03-1 are required for financial
statements for years ending after December 15, 2003 and are included in these
financial statements.
Impact of Inflation and Changing Prices
The Company's consolidated financial statements and notes thereto
presented elsewhere in this Report have been prepared in accordance with US
GAAP. US GAAP requires the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, nearly all of the Company's assets and liabilities
are monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operation.
23
Item 8 FINANCIAL STATEMENTS
GREATER COMMUNITY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share data)
December 31,
----------------------
2003 2002
--------- ---------
ASSETS
CASH AND DUE FROM BANKS - Non interest-bearing ........................................... $ 19,233 $ 19,433
FEDERAL FUNDS SOLD ....................................................................... 10,000 17,700
--------- ---------
Total cash and cash equivalents ................................................. 29,233 37,133
DUE FROM BANKS - Interest-bearing ........................................................ 7,539 9,439
INVESTMENT SECURITIES - Available-for-sale ............................................... 152,513 186,875
INVESTMENT SECURITIES - Held-to-maturity (aggregate fair values of
$2,712 and $5,327 at December 31, 2003 and 2002, respectively) .................. 2,726 5,320
--------- ---------
155,239 192,195
LOANS .................................................................................... 524,546 444,095
Allowance for loan and lease losses .................................................... (8,142) (7,298)
Unearned income ........................................................................ (747) (753)
--------- ---------
Net loans ....................................................................... 515,657 436,044
PREMISES AND EQUIPMENT, net .............................................................. 7,545 7,850
ACCRUED INTEREST RECEIVABLE .............................................................. 2,635 3,131
OTHER REAL ESTATE OWNED .................................................................. 824 --
BANK OWNED LIFE INSURANCE ................................................................ 13,026 12,448
GOODWILL ................................................................................. 11,574 11,574
OTHER ASSETS ............................................................................. 9,853 10,053
--------- ---------
TOTAL ASSETS ............................................................................. $ 753,125 $ 719,867
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Non interest-bearing .................................................................. $ 154,462 $ 138,679
Interest-bearing ...................................................................... 158,719 150,600
Savings ............................................................................... 102,152 96,034
Time Deposits less than $100 .......................................................... 110,243 121,539
Time Deposits $100 and over ........................................................... 35,137 37,191
--------- ---------
Total deposits .................................................................. 560,713 544,043
FHLB ADVANCES ............................................................................ 85,000 80,000
FEDERAL FUNDS PURCHASED .................................................................. 15,700 --
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE ........................................... 10,047 11,728
ACCRUED INTEREST PAYABLE ................................................................. 1,475 1,877
OTHER LIABILITIES ........................................................................ 5,620 6,721
GUARANTEED PREFERRED BENEFICIAL INTEREST IN THE COMPANY'S
SUBORDINATED DEBT .................................................................... 24,000 24,000
--------- ---------
Total liabilities ............................................................... 702,555 668,369
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock, par value $0.50 per share: 20,000,000 shares authorized, 7,004,966 and
7,021,102 shares outstanding at December 31, 2003 and 2002, respectively ............ 3,502 3,511
Additional paid-in capital ............................................................. 41,788 42,856
Retained earnings ...................................................................... 2,735 1,721
Accumulated other comprehensive income ................................................. 2,545 3,410
--------- ---------
Total shareholders' equity ........................................................... 50,570 51,498
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................................... $ 753,125 $ 719,867
========= =========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
24
GREATER COMMUNITY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, except per share data)
For the Years Ended
December 31,
---------------------------
2003 2002 2001
------- ------- -------
INTEREST INCOME:
Loans, including fees ............................................ $31,187 $31,912 $31,950
Investment securities ............................................ 6,289 8,057 8,647
Federal funds sold and deposits with banks ....................... 430 936 2,178
------- ------- -------
Total interest income ....................................... 37,906 40,905 42,775
INTEREST EXPENSE:
Deposits ......................................................... 5,676 7,998 13,629
Short-term borrowings ............................................ 4,537 4,520 4,568
Long-term borrowings ............................................. 2,031 2,168 2,300
------- ------- -------
Total interest expense ...................................... 12,244 14,686 20,497
------- ------- -------
NET INTEREST INCOME .................................................. 25,662 26,219 22,278
PROVISION FOR LOAN AND LEASE LOSSES .................................. 2,065 996 885
------- ------- -------
Net interest income after provision for loan and lease losses .... 23,597 25,223 21,393
NON-INTEREST INCOME:
Service charges on deposit accounts .............................. 2,789 2,440 2,460
Other commission and fees ........................................ 610 707 716
Fee income on mortgage loans sold ................................ 492 128 --
Gain on sale of investment securities ............................ 2,174 1,191 633
Gain on sale of leases ........................................... 115 1,152 1,180
Bank owned life insurance ........................................ 578 611 615
All other income ................................................. 1,190 1,090 911
------- ------- -------
Total non-interest income ................................... 7,948 7,319 6,515
------- ------- -------
NON-INTEREST EXPENSES:
Salaries and employee benefits .................................. 12,446 10,942 9,649
Occupancy and equipment ......................................... 3,367 3,195 3,056
Regulatory, professional and other fees ......................... 1,993 1,996 1,344
Amortization of intangibles ..................................... -- -- 777
Computer services ............................................... 510 424 386
Office expenses ................................................. 1,088 1,132 1,053
Write off of deferred securities issuance costs ................. -- 1,022 --
Other operating expenses ........................................ 2,621 2,965 2,399
------- ------- -------
Total non-interest expenses ................................. 22,025 21,676 18,664
------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES ............................. 9,520 10,866 9,244
PROVISION FOR INCOME TAXES ........................................... 2,786 3,353 3,164
------- ------- -------
NET INCOME ........................................................... $ 6,734 $ 7,513 $ 6,080
======= ======= =======
Net income per share - basic ......................................... $ 0.95 $ 1.04 $ 0.85
======= ======= =======
Net income per share - diluted ....................................... $ 0.89 $ 0.98 $ 0.81
======= ======= =======
The accompanying notes to consolidated financial statements
are an integral part of these statements.
25
GREATER COMMUNITY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands)
Accumulated
Common Stock Additional Other Compre- Total
----------------- Paid-in Retained Comprehensive Treasury hensive Shareholders'
Shares Par Value Capital Earnings Income (loss) Stock Income Equity
------ --------- ---------- -------- ------------- -------- ------- -------------
BALANCE, January 1, 2001 ............... 6,318 $ 3,159 $ 34,178 $ 2,069 $ 825 $ -- $ 40,231
===== ======= ======== ======= ======= ======= ========
Net income - 2001 .................... -- -- -- 6,080 -- -- $ 6,080 6,080
5% stock dividend .................... 314 157 3,495 (3,652) -- -- --
Issuance of common stock - dividend
Reinvestment plan ................. 40 20 390 -- -- -- 410
Exercise of stock options ............ 84 42 461 -- -- -- 503
Cash dividends ....................... -- -- -- (2,176) -- (2,176)
Other comprehensive income, net of
Reclassification adjustments and
taxes ............................. -- -- -- -- 1,572 -- 1,572 1,572
-------
Total comprehensive income ........... -- $ 7,652
=======
Purchase of treasury stock ........... -- -- -- -- -- (508) (508)
Retirement of treasury stock ......... (48) (24) (484) -- -- 508 --
----- ------- -------- ------- ------- ------- --------
BALANCE, December 31, 2001 ............. 6,708 $ 3,354 $ 38,040 $ 2,321 $ 2,397 $ -- $ 46,112
===== ======= ======== ======= ======= ======= ========
Net income - 2002 .................... -- -- -- 7,513 -- -- $ 7,513 7,513
5% stock dividend .................... 335 168 5,266 (5,434) -- -- --
Exercise of stock options ............ 68 34 683 -- -- -- 717
Cash dividends ....................... -- -- -- (2,679) -- -- (2,679)
Other comprehensive income, net of
reclassification adjustments and
taxes ............................. -- -- -- -- 1,013 -- 1,013 1,013
-------
Total comprehensive income ........... $ 8,526
=======
Purchase of treasury stock ........... -- -- -- -- -- (1,178) (1,178)
Retirement of treasury stock ......... (90) (45) (1,133) -- -- 1,178 --
----- ------- -------- ------- ------- ------- --------
BALANCE, December 31, 2002 ............. 7,021 $ 3,511 $ 42,856 $ 1,721 $ 3,410 $ -- $ 51,498
===== ======= ======== ======= ======= ======= ========
Net income - 2003 .................... -- -- -- 6,734 -- -- $ 6,734 6,734
2.5% stock dividend .................. 177 88 2,591 (2,679) -- -- --
Exercise of stock options ............ 86 43 714 -- -- -- 757
Cash dividends ....................... -- -- -- (3,041) -- -- (3,041)
Other comprehensive loss, net of
reclassification adjustments and
taxes ............................. -- -- -- -- (865) -- (865) (865)
-------
Total comprehensive income ........... $ 5,869
=======
Purchase of treasury stock ........... -- -- -- -- -- (4,513) (4,513)
Retirement of treasury stock ......... (280) (140) (4,373) -- -- 4,513 --
----- ------- -------- ------- ------- ------- --------
BALANCE, December 31, 2003 ............. 7,004 $ 3,502 $ 41,788 $ 2,735 $ 2,545 $ -- $ 50,570
===== ======= ======== ======= ======= ======= ========
The accompanying notes to consolidated financial statements are
an integral part of these statements.
26
GREATER COMMUNITY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the Years Ended
December 31,
--------------------------------
2003 2002 2001
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................................... $ 6,734 $ 7,513 $ 6,080
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .................................................... 1,280 1,248 2,094
Amortization of premium on securities, net ....................................... 2,867 1,472 194
Gains on sales of assets ......................................................... (270) (124) --
Gains on sales of securities, net ................................................ (2,174) (1,191) (633)
Losses on sales of securities, trading account ................................... -- 9 --
Provision for loan and lease losses .............................................. 2,065 996 885
Deferred income tax benefit ...................................................... (790) (655) (580)
Decrease (increase) in accrued interest receivable ............................... 496 (83) 1,253
Decrease (increase) in Bank owned life insurance and other assets ................ (379) 268 (2,808)
(Decrease) increase in accrued interest and other liabilities .................... (1,503) (6,159) 2,948
-------- -------- --------
Net cash provided by operating activities .............................. 8,326 3,294 9,433
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale investment securities -
Purchases ...................................................................... (108,498) (161,124) (127,143)
Sales .......................................................................... 11,307 22,646 17,655
Maturities ..................................................................... 128,166 101,815 94,713
Held-to-maturity investment securities -
Purchases ...................................................................... -- (4,120) --
Maturities ..................................................................... 2,595 494 1,867
Net decrease (increase) in interest-bearing deposits with banks ................... 1,900 4,438 (9,086)
Net (increase) in loans ........................................................... (79,613) (31,775) (38,112)
Capital expenditures .............................................................. (1,316) (2,193) (1,556)
Proceeds from the sale of assets .................................................. 341 -- --
-------- -------- --------
Net cash used in investing activities .................................. (45,118) (69,819) (61,662)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts .................................................. 16,670 59,420 19,378
Increase (decrease) in securities sold under agreement to repurchase .............. 14,019 (10,619) 5,327
Proceeds from long-term FHLB advances ............................................. 5,000 10,000 20,000
Proceeds from issuance of subordinated debt ....................................... -- 24,000 --
Repayment of subordinated debt .................................................... -- (23,000) --
Dividends paid .................................................................... (3,041) (2,679) (2,176)
Proceeds from exercise of stock options ........................................... 757 717 503
Proceeds from the issuance of common stock, net of costs .......................... -- -- 410
Purchases of treasury stock ....................................................... (4,513) (1,178) (508)
-------- -------- --------
Net cash provided by financing activities .............................. 28,892 56,661 42,934
-------- -------- --------
Net (decrease) in cash and cash equivalents ............................ (7,900) (9,864) (10,140)
CASH AND CASH EQUIVALENTS, beginning of year ......................................... 37,133 46,997 56,292
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year ............................................... $ 29,233 $ 37,133 $ 46,997
======== ======== ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
27
GREATER COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Greater Community Bancorp ("the Company"), through its subsidiary banks
Greater Community Bank ("GCB"), Bergen Commercial Bank ("BCB") and Rock
Community Bank ("RCB") (collectively the "Bank Subsidiaries"), offers a broad
range of lending, depository and related financial services to individual
consumers, businesses and governmental units primarily through fifteen full
service offices located in Bergen, Passaic and Morris Counties, New Jersey.
Highland Capital Corp. ("HCC"), a wholly-owned nonbank subsidiary of GCB,
engages in commercial equipment leasing focusing on small ticket and lower or
middle market leases for resale to third parties. GCB also operates a securities
brokerage business in its Greater Community Financial division. In mid-2003 GCB
acquired the securities brokerage assets and business previously operated by
Greater Community Financial, LLC ("GCF"), a direct nonblank subsidiary of the
Company. Since the middle of 2003 an unaffiliated company has acted as
registered broker-dealer for GCB's Greater Community Financial division.
The Bank Subsidiaries compete with other banking and financial
institutions in their primary market communities, including financial
institutions with resources substantially greater than their own. Commercial
banks, savings banks, savings and loan associations, credit unions, and money
market funds actively compete for deposits and loans. Such institutions, as well
as consumer finance and insurance companies, may be considered competitors with
respect to one or more services they render.
The Company, Bank Subsidiaries and GCF are subject to regulation and
periodic examination by certain state and federal agencies. As a consequence of
the extensive regulation of commercial banking and related financial activities,
their respective businesses are particularly susceptible to being affected by
state and federal legislation and regulations.
BASIS OF FINANCIAL PRESENTATION
The accounting and reporting policies of the Company and its subsidiaries
conform with accounting principles generally accepted in the United States of
America (US GAAP) and predominant practices within the banking industry. The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries GCB, BCB, RCB, GCB Realty, LLC, GCF, Greater Community
Services, Inc., and the wholly-owned direct and indirect subsidiaries of GCB and
BCB (HCC and investment companies). All significant intercompany accounts and
transactions have been eliminated.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. These estimates and assumptions also affect reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The principal estimate that is particularly susceptible to significant
change in the near term relates to the allowance for loan and lease losses and
intangible assets. The evaluation of the adequacy of the allowance for loan and
lease losses includes an analysis of the individual loans and overall risk
characteristics and size of the different loan portfolios, and takes into
consideration current economic and market conditions, the capability of specific
borrowers to pay specific loan obligations, and current loan collateral values.
However, actual losses on specific loans, which also are encompassed in the
analysis, may vary from estimated losses.
Substantially all outstanding goodwill resulted from the acquisition of
First Savings Bancorp of Little Falls, Inc. ("First Savings"), a Passaic County
institution which had developed a compelling, if not predominant, market
position of being the small business bank in Passaic County. As a result of
First Savings' market penetration, the Company had formulated its own strategy
to create such a "market role." Accordingly, implicit in the Company's purchase
of the First Savings franchise was the acquisition of that role. However, if
such benefits, including new business, are not derived or the Company changes
its business plan, estimated amortization may increase and/or a charge for
impairment may be recognized.
SEGMENTS
Statement on Financial Accounting Standards (SFAS) No.131 establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in subsequent
interim financial reports issued to stockholders. It also establishes standards
for related disclosure about products and services, geographic area, and major
customers. The statement requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
The Company applies the aggregation criteria set forth under SFAS No.131
for its Bank subsidiaries operating segments to create one reportable segment,
"Community Banking." All of the Company's activities are interrelated, and each
activity is dependent and assessed based on how each of the Company's activities
supports the other activities. For example, a bank's
28
commercial lending is dependent upon its ability to fund itself with retail
deposits and other borrowings and to manage interest rate and credit risk. This
situation is also similar for consumer and residential mortgage lending.
Accordingly, all significant operating decisions are based upon analysis of the
Company as one operating segment or unit.
INVESTMENT SECURITIES
The Company accounts for its investment securities in accordance with SFAS
No.115, Accounting for Certain Investments in Debt and Equity Securities.
Investment securities that the Company has the ability and intent to hold to
maturity are classified as held-to-maturity and are stated at cost, adjusted for
premium amortization and discount accretion. Securities which are held for
indefinite periods of time which management intends to use as part of its
asset/liability strategy, or that may be sold in response to changes in interest
rates, changes in prepayment risk, increased capital requirements or other
similar factors, are classified as available-for-sale and are carried at fair
market value. Net unrealized gains and losses for such securities, net of income
tax effect, are charged/credited directly to shareholders' equity. The Company
through its brokerage subsidiary engaged in very limited securities trading
before 2003. Securities transactions are accounted for on a trade date basis.
Gains or losses on disposition of investment securities are based on the net
proceeds and the adjusted carrying amount of the securities sold using the
specific identification method.
As of December 31, 2003, the Company did not have any investment
securities designated as trading. At year end 2002, the Company had $25,000 in
investment securities designated as trading.
SFAS No.133, Accounting for Derivative Instruments and Hedging Activity,
established accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No.133 was amended by SFAS No.138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities.
The Company's adoption of SFAS No.133, as amended, did not have a material
impact on its financial condition or results of operations. The Company does not
have any derivatives at December 31, 2003 and 2002.
The Bank adopted EITF 03-1 The Meaning of Other than Temporary Impairment
and Its Application to Certain Investments as of December 31, 2003. EITF 03-1
includes certain disclosures regarding quantitative and qualitative disclosures
for investment securities accounted for under SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities that are impaired at the
balance sheet date, but an other-than-temporary impairment has not been
recognized. The disclosures under EITF 03-1 are required for financial
statements for years ending after December 15, 2003 and are included in these
financial statements.
LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Loans and leases that management has the intent or the ability to hold for
the foreseeable future or until maturity or payoff are stated at the amount of
unpaid principal net of unearned discount, unearned loan fees, and an allowance
for loan and lease losses. The allowance for loan and lease losses is
established through a provision for loan and lease losses charged to expense.
Loans and leases are charged against the allowance for loan and lease losses
when management believes that the collectibility of principal is unlikely. The
allowance for loan and lease losses is maintained at a level that management
considers adequate to provide for loan and lease losses inherent in the loan
portfolio at the reporting date. The level of the allowance is based on
management's evaluation of losses in the loan and lease portfolios after
consideration of prevailing and anticipated economic conditions, including
estimates and appraisals, among other items, known or anticipated at each
reporting date. On a periodic basis during the year management makes credit
reviews of the loan and lease portfolios designed to identify potential charges
to the allowance.
Interest income on loans is credited to operations based upon the
principal amount outstanding. The net amounts of loan origination fees, direct
loan origination costs and loan commitment fees are deferred and recognized over
the lives of the related loans as adjustments of yield. When management believes
there is sufficient doubt as to the ultimate collectibility of interest on any
loan, the accrual of applicable interest is discontinued. A loan is generally
classified as nonaccrual when principal and interest have consistently been in
default for a period of 90 days or more or because of a deterioration in the
financial condition of the borrower, and payment in full of principal or
interest is not expected. Loans past due 90 days or more and still accruing
interest are loans that are generally well-secured and expected to be restored
to a current status in the near future.
The Company follows SFAS No.114, Accounting by Creditors for Impairment of
a Loan, as amended by SFAS No.118, Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures. This standard requires that certain
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rates, except that as a
practical expedient, a creditor may measure impairment based on a loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent. Regardless of the measurement method, a creditor must
measure impairment based on the fair value of the collateral when the creditor
determines that foreclosure is probable. The Company had previously measured the
allowance for credit losses using methods similar to those prescribed in this
standard.
The Company accounts for its transfers and servicing assets in accordance
with SFAS No.140, "Accounting for Transfers of Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No.140 revised the accounting for the
securitization of other transfers of financial assets and collateral.
29
During 2001, Accounting Bulletin (SAB) No.102, Selected Loan Loss
Allowance Methodology and Documentation Issues, was issued. This SAB provides
guidance on the development, documentation, and application of a systematic
methodology for determining the allowance for loans and leases in accordance
with US GAAP. The adoption of SAB No.102 did not have a material impact on the
Company's consolidated financial position or results of operations.
The Company adopted FASB Interpretation 45 (FIN 45), Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others, on January 1, 2003. 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. The Company has issued
financial and performance letters of credit. Financial letters of credit require
the Company to make payment if the customer's financial condition deteriorates,
as defined in the agreements. Performance letters of credit require the Company
to make payments if the customer fails to perform certain non-financial
contractual obligations. The Company previously did not record a liability when
guaranteeing obligations unless it became probable that the Company would have
to perform under the guarantee. FIN 45 applies prospectively to guarantees the
Company issues or modifies after 2002.
The Company defines the initial fair value of these letters of credit as
the fee received from the customer. The maximum potential undiscounted amount of
potential future payments of these letters of credit as of December 31, 2003 is
$2.9 million. Generally these letters of credit are good for a term of one year
at which time they are automatically renewed for the same term. Amounts due
under these letters of credit would be reduced by any proceeds that the Company
would be able to obtain in liquidating the collateral for the loans, which
varies depending on the customer.
The Company adopted Statement of Financial Accounting Standard 149 (SFAS
No. 149), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, on July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for
implementation issues raised by constituents or includes the conclusions reached
by the FASB on certain FASB Staff Implementation Issues. Statement 149 also
amends SFAS No. 133 to require a lender to account for loan commitments related
to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003. The
Company periodically enters into commitments with its customers which it intends
to sell in the future. The adoption of SFAS No. 149 did not have a material
impact on the Company's financial position or results of operations.
In October 2003, the AICPA issued SOP 03-3, Accounting for Loans or
Certain Debt Securities Acquired in a Transfer. SOP 03-3 applies to a loan with
the evidence of deterioration of credit quality since origination acquired by
completion of a transfer for which it is probable at acquisition, that the
Company will be unable to collect all contractually required payments
receivable. SOP 03-3 requires that the Company recognize the excess of all cash
flows expected at acquisition over the investor's initial investment in the loan
as interest income on a level-yield basis over the life of the loan as the
accretable yield. The loan's contractual required payments receivable in excess
of the amount of its cash flows expected at acquisition (nonaccretable
difference) should not be recognized as an adjustment to yield, a loss accrual
or a valuation allowance for credit risk. SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 31, 2004. Early adoption is
permitted. Management is currently evaluating the provisions of SOP 03-3.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed primarily on the straight-line method
over the estimated useful lives of the assets. Leasehold improvements are
amortized over the term of the lease or estimated useful life, whichever is
shorter.
The Company follows SFAS No.144, Accounting for the Impairment or Disposal
of Long-Lived Assets (SFAS No.144). SFAS No.144 retained the existing
requirements to recognize and measure the impairment of long-lived assets to be
held and used or to be disposed of by sale. SFAS No.144 also changed the
requirements relating to reporting the effects of a disposal or discontinuation
of a segment of a business.
BANK OWNED LIFE INSURANCE
The Company invests in bank-owned life insurance (BOLI). BOLI involves the
Company's purchase of insurance on the lives of a certain of employees and
non-employee directors. The Company is the owner and beneficiary of the
policies.
GOODWILL
Goodwill represents the excess of the cost over the fair value of net
assets of acquired businesses. Substantially all outstanding goodwill resulted
from the acquisition of First Savings in 1999 and, through 2001, was being
amortized over 20 years on a straight-line basis. Goodwill at December 31, 2003
and 2002 was approximately $11,574,000. The annual amortization expense charged
to income before 2002 was $777,000. Amortization expense was not charged to
income after 2001 as a result of the adoption of SFAS No.142.
On January 1, 2002, the Company adopted SFAS No.142, Goodwill and
Intangible Assets. This SFAS modifies the accounting for all purchased goodwill
and intangible assets. SFAS No.142 includes requirements to test goodwill and
indefinite lived intangible
30
assets for impairment rather than amortize them. The Company did not identify
any impairment of goodwill during its transitional impairment testing and has
not recorded any transitional goodwill impairment loss as a result of the
adoption of SFAS. No.142.
The following table presents a reconciliation of net income and
earnings-per-share amounts, as reported in the financial statements, to those
amounts adjusted for goodwill and intangible asset amortization determined in
accordance with SFAS No.142.
For the years ended December 31,
-------------------------------
2003 2002 2001
-------- -------- --------
(In Thousands except for
earnings per share amounts)
Reported net income ......................... $ 6,734 $ 7,513 $ 6,080
Add back goodwill amortization .............. -- -- 777
-------- -------- --------
Adjusted net income ......................... $ 6,734 $ 7,513 $ 6,857
======== ======== ========
Basic earnings per share
Reported basic earnings per share ........... $ 0.95 $ 1.04 $ 0.85
Goodwill amortization ....................... -- -- 0.11
-------- -------- --------
Adjusted basic earnings per share ........... $ 0.95 $ 1.04 $ 0.96
======== ======== ========
Diluted earnings per share
Reported basic earnings per share ........... $ 0.89 $ 0.98 $ 0.81
Goodwill amortization ....................... -- -- 0.11
-------- -------- --------
Adjusted basic earnings per share ........... $ 0.89 $ 0.98 $ 0.92
======== ======== ========
DEFERRED FINANCING COSTS
Deferred financing costs related to the issuance of subordinated debt are
being amortized over the life of the instruments and are included in other
assets. The unamortized balances at December 31, 2003 and 2002 were
approximately $1.0 million and $1.1million, respectively. In 2002, the Company
wrote off deferred financing costs of $1.0 million related to the issuance of
the 1997 Trust Preferred Securities.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates that will be in effect when
these differences reverse. Deferred tax expense is the result of changes in
deferred tax assets and liabilities. The principal types of accounts resulting
in differences between assets and liabilities for financial statement and tax
return purposes are the allowance for loan and lease losses, interest income on
nonaccrual loans, depreciation and amortization, difference between book and tax
bases of assets acquired and acquired net operating loss carryforwards. The
Company and its subsidiaries file a consolidated federal income tax return.
STATEMENTS OF CASH FLOWS
Cash and cash equivalents are defined as the sum of cash on hand, non
interest-bearing amounts due from banks and federal funds sold. Generally,
federal funds are sold for a one-day period. Cash paid for income taxes was $3.6
million, $4.3 million and $3.2 million for the years ended December 31, 2003,
2002 and 2001, respectively. Cash paid for interest was $12.6 million, $15.6
million and $21.7 million for the years ended December 31, 2003, 2002 and 2001,
respectively. The Company conducted a non-cash transfer of other real estate
from nonperforming lease to other real estate owned.
OTHER REAL ESTATE OWNED
Other real estate owned is recorded at lower of cost or market value less
costs of disposal. When property is acquired, the excess, if any, of the loan
balance over fair market value is charged to the allowance for loan and lease
losses. Periodically thereafter, the asset is reviewed for subsequent declines
in the estimated fair market value. Subsequent declines, if any, and holding
costs, as well as gains and losses on subsequent sale, are included in the
consolidated statements of income.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expenses
for the years ended December 31, 2003, 2002 and 2001 were approximately
$240,000, $311,000 and $297,000, respectively.
STOCK BASED COMPENSATION
The Company follows the disclosure provisions for its stock options under
SFAS No.123, Accounting for Stock-Based Compensation. This standard contains a
fair value-based method for valuing stock-based compensation that entities may
use, and measures compensation cost at the grant date based on the fair value of
the award. Compensation is then recognized over the service period, which is
usually the vesting period. Alternatively, the standard permits entities to
continue accounting for employee stock options and similar equity instruments
under Accounting Principles Board ("APB") Opinion No.25, Accounting for Stock
Issued to Employees. Entities that continue to account for stock options using
APB Opinion No.25 are required to make pro forma
31
disclosures of net income and earnings per share as if the fair value-based
method of accounting defined in SFAS No.123 had been applied.
At December 31, 2003, the Company has four stock-based employee and
director compensation plans, which are more fully described in Note 11. The
Company accounts for these plans under the recognition and measurement
principles of APB Opinion No.25 and related interpretations. Stock-based
employee and director compensation costs are not reflected in net income, as all
options granted under these plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No.123 to stock-based
employee and director compensation.
Year ended December 31,
-------------------------------------
2003 2002 2001
------ ------ ------
(In Thousands, except per share amounts)
Net income ........................................ As reported $6,734 $7,513 $6,080
Less: stock-based compensation costs determined
Under fair value-based method for all awards ... (255) (243) (240)
------ ------ ------
Pro forma $6,479 $7,270 $5,840
====== ====== ======
Earnings per share of common stock - basic ........ As reported $0.95 $1.04 $0.85
Pro forma $0.91 $1.01 $0.82
Earnings per share of common stock-diluted ........ As reported $0.89 $0.90 $0.81
Pro forma $0.86 $0.96 $0.78
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 2003, 2002 and 2001,
respectively: dividend yields of 0%, 2.5% and 2.6%; expected volatility of 0%,
34% and 38%; risk-free interest rates of 0%, 5.82% and 5.46%; and expected lives
of five and ten years. The Company did not grant any options in 2003.
NET INCOME PER SHARE
Basic earnings per share exclude dilution and is computed by dividing
income available to common shareholders by the weighted-average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if stock options or other contracts to issue
common stock were exercised and converted into common stock. All weighted
average actual shares and per share information in the financial statements has
been adjusted retroactively for the effect of stock dividends.
COMPREHENSIVE INCOME
The Company follows the disclosure provisions of SFAS No.130, Reporting
Comprehensive Income. SFAS No. 130 reports comprehensive income, which includes
net income as well as certain other items that result in a change to
shareholders' equity during the period.
The income tax effects allocated to comprehensive income are as follows:
December 31, 2003 December 31, 2002 December 31, 2001
---------------------------- ---------------------------- --------------------------
Before Tax Net Before Tax Net Before Tax Net
Tax (Expense) Of Tax Tax (Expense) of Tax Tax (Expense) of Tax
Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount
------- ------- ------- ------ ------- ------ ------ ------- ------
Unrealized gains on investment
securities:
Unrealized holding gains
arising during period ............. $ 763 $(323) $ 440 $2,792 $(1,064) $1,728 $3,234 $(1,282) $1,952
Less reclassification adjustment
For gains realized in net income .. 2,174 (869) 1,305 1,191 (476) 715 633 (253) 380
------- ----- ------- ------ ------- ------ ------ ------- ------
Other comprehensive loss, net ....... $(1,411) $ 546 $ (865) $1,601 $ (588) $1,013 $2,601 $(1,029) $1,572
======= ===== ======= ====== ======= ====== ====== ======= ======
VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies the application of
Accounting Research Bulletin 51, Consolidated Financial Statements, to certain
entities in which voting rights are not effective in identifying the investor
with the controlling financial interest. An entity is subject to consolidation
under FIN 46 if the investors either do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support, are unable to direct the entity's activities, or are not exposed to the
entity's losses or entitled to its residual returns ("variable interest
entities"). Variable interest entities within the scope of FIN 46 will be
required to be consolidated
32
by their primary beneficiary. The primary beneficiary of a variable interest
entity is determined to be the party that absorbs a majority of the entity's
expected losses, receives a majority of its expected returns, or both.
Management has determined that GCB Capital Trust II qualifies as a
variable interest entity under FIN 46. GCB Capital Trust II issued mandatorily
redeemable preferred stock to investors and loaned the proceeds to the Company.
GCB Capital Trust II holds, as its sole asset, subordinated debentures issued by
the Company in 2002. GCB Capital Trust II is currently included in the Company's
consolidated balance sheet and statements of income. The Company has evaluated
the impact of FIN 46 and concluded it should continue to consolidate GCB Capital
Trust II entity as of December 31, 2003, in part due to its ability to call the
preferred stock prior to the mandatory redemption date and thereby benefit from
a decline in required dividend yields.
Subsequent to the issuance of FIN 46, the FASB issued a revised
interpretation, FIN 46(R), the provisions of which must be applied to certain
variable interest entities by March 31, 2004. The Company plans to adopt the
provisions under the revised interpretation in the first quarter of 2004. FIN
46(R) will require GCB to deconsolidate GCB Capital Trust II as of March 31,
2004. FIN 46(R) precludes consideration of the call option embedded in the
preferred stock when determining if the Company has the right to a majority of
GCB Capital Trust II expected residual returns. Accordingly, the Company will
deconsolidate GCB Capital Trust II at the end of the first quarter, which will
result in an increase in outstanding debt by $743,000. The banking regulatory
agencies have not issued any guidance that would change the regulatory capital
treatment for the trust-preferred securities issued by GCB Capital Trust II
based on the adoption of FIN 46(R). However, as additional interpretations from
the banking regulators related to entities such as GCB Capital Trust II become
available, management will reevaluate its potential impact to its Tier I capital
calculation under such interpretations.
RECLASSIFICATIONS
Certain reclassifications have been made in the 2002 and 2001 financial
statements to conform to the classifications used in 2003.
33
NOTE 2 - INVESTMENT SECURITIES
The amortized cost, unrealized gains and losses, and fair value of the
Company's investment securities available-for-sale and held-to-maturity are as
follows:
December 31,
-------------------------------------------------------------------------------------------
2003 2002
-------------------------------------------- ---------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- -------- --------- ---------- ---------- --------
(In Thousands)
Available-for-sale
U.S. Treasury and U.S.
Government agencies securities .... $ 27,572 $ 191 $ (14) $ 27,749 $ 22,823 $ 426 $ (12) $ 23,237
State and political
Subdivisions ...................... 13,272 125 (156) 13,241 4,536 59 -- 4,595
Other debt and equity
Securities ........................ 23,953 4,715 (312) 28,356 25,860 4,157 (604) 29,413
Mortgage-backed securities:
FHLMC ......................... 24,801 269 (281) 24,789 63,250 797 (73) 63,974
FNMA .......................... 51,477 322 (740) 51,059 43,444 584 (10) 44,018
Other ......................... 7,250 84 (15) 7,319 21,363 280 (5) 21,638
-------- ------- -------- -------- -------- ------- --------- --------
83,528 675 (1,036) 83,167 128,057 1,661 (88) 129,630
-------- ------- -------- -------- -------- ------- --------- --------
Total Available-for-sale ............. $148,325 $ 5,706 $ (1,518) $152,513 $181,276 $ 6,303 $ (704) $186,875
======== ======= ======== ======== ======== ======= ========= ========
Held-to-maturity
U.S. Treasury and U.S.
Government agencies securities .... $ 1,000 $ -- $ (15) $ 985 +$ 1,000 $ 3 $ -- $ 1,003
State and political
Subdivisions ...................... 1,689 -- -- 1,689 4,120 -- -- 4,120
Mortgage-backed securities:
FHLMC ......................... 37 1 -- 38 200 4 -- 204
-------- ------- -------- -------- -------- ------- --------- --------
37 1 -- 38 200 4 -- 204
-------- ------- -------- -------- -------- ------- --------- --------
Total Held-to-maturity ............... $ 2,726 $ 1 $ (15) $ 2,712 $ 5,320 $ 7 $ -- $ 5,327
======== ======= ======== ======== ======== ======= ========= ========
34
The amortized cost and fair value of securities at December 31, 2003 by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because issuers and borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
--------- --------
(In Thousands)
Available-for-sale
Due in one year or less .................. $ 15,918 $ 16,088
Due after one year through five years .... 7,283 7,307
Due after five years through ten years ... 7,079 6,956
Due after ten years ...................... 10,564 10,639
Mortgage-backed securities ............... 83,528 83,167
Other debt and equity securities ......... 23,953 28,356
-------- --------
$148,325 $152,513
======== ========
Held-to-maturity
Due in one year or less .................. $ 1,689 $ 1,689
Due after five years through ten years ... 1,000 985
Mortgage-backed securities ............... 37 38
-------- --------
$ 2,726 $ 2,712
-------- --------
$151,051 $155,225
======== ========
Proceeds from sales of available-for-sale securities for the years ended
December 31, 2003, 2002 and 2001were $11.3 million, $22.6 million and $17.7
million, respectively. Gross gains of $2.2 million, $1.2 million and $633,000
were realized on these sales for those respective years. Gross losses were not
significant for such years.
Securities with a carrying value of $68.3 million and $79.0 million at
December 31, 2003 and 2002, respectively, were pledged to secure public deposits
and repurchase agreements and for other purposes required by law.
The table below indicates the length of time individual securities have
been in a continuous unrealized loss position at December 31, 2003.
Description of securities Less than 12 months 12 months or longer Total
-------------------- -------------------- --------------------
Fair Unrealized Fair Unrealized Fair Unrealized
value Losses value Losses value Losses
-------- ---------- -------- ---------- -------- ----------
Available-for-sale
US Treasury Obligations ............ $ -- $ -- $ -- $ -- $ -- $ --
Federal Agency Securities .......... 2,433 (7) 823 (7) 3,266 (14)
State and Political Subdivisions ... 3,620 (156) -- -- 3,620 (156)
Mortgage Backed Securities ......... 41,423 (1,019) 3,593 (17) 45,016 (1,036)
Corporate Bonds .................... 3,490 (82) 3,993 (230) 7,483 (312)
-------- -------- -------- -------- -------- --------
Sub-total debt securities ..... 50,966 (1,264) 8,409 (254) 59,385 (1,518)
-------- -------- -------- -------- -------- --------
Total available-for-sale ...... $ 50,966 $ (1,264) $ 8,409 $ (254) $ 59,385 $ (1,518)
======== ======== ======== ======== ======== ========
Held-to-maturity
Federal Agency Securities .......... $ 985 $ (15) $ -- $ -- $ 985 $ (15)
-------- -------- -------- -------- -------- --------
Total held-to-maturity ........ 985 (15) -- -- 985 (15)
======== ======== ======== ======== ======== ========
Total temporarily impaired
securities - combined ........ $ 51,951 $ (1,279) $ 8,409 $ (254) $ 60,370 $ (1,533)
======== ======== ======== ======== ======== ========
The Company does not believe that any individual unrealized loss as of
December 31, 2003 represents an other-than-temporary impairment. A total of 100
securities are included in the continuous unrealized position, of which 98 are
in the available-for sale. Majority of the unrealized losses are in less than 12
months duration lead by mortgage backed securities which includes securities
issued by FHLMC, FNMA and other similar institutions. The unrealized losses are
primarily due to changes in interest rates.
NOTE 3 - LOANS
Major classifications of loans are as follows: December 31,
-------------------
2003 2002
-------- --------
(In Thousands)
Loans secured by one- to four-family residential properties .... $148,121 $142,677
Loans secured multi-family residential properties .............. 11,619 12,861
Loans secured by nonresidential properties ..................... 260,318 203,501
Loans to individuals ........................................... 5,686 8,843
Commercial loans ............................................... 37,532 33,859
Construction loans ............................................. 37,640 24,339
Lease financing receivables .................................... 23,181 17,058
Other loans .................................................... 449 957
-------- --------
$524,546 $444,095
======== ========
35
The following table presents information related to loans which are on a
nonaccrual basis, loans which have been renegotiated to provide a reduction or
deferral of interest or principal for reasons related to the debtor's financial
difficulties and loans contractually past due ninety days or more as to interest
or principal payments.
December 31,
------------------------
2003 2002 2001
------ ------ ------
(In Thousands)
Nonaccrual loans and leases ................................................ $2,010 $2,767 $1,373
Renegotiated loans ......................................................... 252 295 545
------ ------ ------
Total nonperforming loans and leases ..................................... $2,262 $3,062 $1,918
====== ====== ======
Loans past due 90 days and accruing ........................................ $ 313 $ 587 $ 34
====== ====== ======
Gross interest income which would have been recorded under original terms .. $ 104 $ 135 $ 45
====== ====== ======
The balance of impaired loans was $2.1 million, $2.5 million and $1.4
million at December 31, 2003, 2002 and 2001, respectively. The Bank Subsidiaries
have identified a loan as impaired when it is probable that interest and
principal will not be collected according to the contractual terms of the loan
agreements. The allowance for loan and lease losses associated with impaired
loans was $455,000, $1.1 million and $549,000 at December 31, 2003, 2002 and
2001, respectively. The average recorded investment in impaired loans was $2.1
million, $1.7 million and $1.3 million at December 31, 2003, 2002 and 2001,
respectively. The income recognized on impaired loans for 2003, 2002 and 2001
was $118,000, $105,000 and $45,000, respectively. The Bank Subsidiaries' policy
for interest income recognition on impaired loans is to recognize income on
restructured loans under the accrual method. The Bank Subsidiaries recognize
income on nonaccrual loans under the cash method when the loans are current and
the collateral on the loans is sufficient to cover the outstanding obligation.
If both of these factors do not exist, the Bank Subsidiaries do not recognize
income.
The Bank Subsidiaries extended credit to various directors, executive
officers and their associates. These extensions are made in the ordinary course
of business and on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
others. At December 31, 2003, loans outstanding to these related parties
amounted to $13.4 million. During 2003 there were new loans to related parties
of $3.0 million and repayments of $5.8 million. All such loans were current as
to principal and interest payments at December 31, 2003.
NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES
An analysis of the allowance for loan and lease losses is as follows:
Years ended December 31,
--------------------------------
2003 2002 2001
-------- -------- --------
(In Thousands)
Balance at beginning of year ................ $ 7,298 $ 6,320 $ 5,657
Provision charged to operations ............. 2,065 996 885
Charge-offs ................................. (1,362) (298) (320)
Recoveries .................................. 141 280 98
-------- -------- --------
Balance at end of year ...................... $ 8,142 $ 7,298 $ 6,320
======== ======== ========
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
December 31,
--------------------
Estimated
Useful Lives 2003 2002
------------- ------- -------
(In Thousands)
Land ............................................. Indefinite $ 1,531 $ 1,531
Buildings and improvements ....................... 5 to 20 years 5,020 4,994
Furniture, fixtures and equipment ................ 3 to 10 years 6,910 6,177
Leasehold improvements ........................... 3 to 40 years 2,534 2,442
------- -------
15,995 15,144
Less accumulated depreciation and amortization ... (8,450) (7,294)
------- -------
$ 7,545 $ 7,850
======= =======
Depreciation and amortization expense was $1.3 million, $1.2 million and
$1.3 million for the years ended December 31, 2003, 2002 and 2001, respectively.
36
NOTE 6 - DEPOSITS
At December 31, 2003, the schedule of maturities of certificates of
deposit is as follows (in thousands):
2004 ................................................................. $108,664
2005.................................................................. 31,465
2006.................................................................. 3,951
2007.................................................................. --
2008.................................................................. 1,300
--------
$145,380
========
NOTE 7 - DEBT
Short-Term Borrowings
Federal funds purchased and securities sold under agreements to repurchase
generally mature within 30 days from the date of the transaction. Short-term
borrowings consist of various other borrowings, which generally have maturities
of less than one year. The details of these categories are presented below:
Years ended December 31,
--------------------------------
2003 2002 2001
-------- -------- --------
(In Thousands)
Securities sold under repurchase agreements and federal funds purchased
Balance at year-end ................................................... $ 25,747 $ 11,728 $ 22,347
Average during the year ............................................... 11,198 15,276 17,326
Maximum month-end balance ............................................. 25,747 26,545 64,010
Weighted average rate during the year ................................. 1.07% 1.42% 3.32%
Rate at December 31 ................................................... 0.71% 1.01% 1.67%
Federal Home Loan Bank Advances
The Company has a line of credit for $29.0 million with the Federal Home
Loan Bank ("FHLB") which is collateralized by FHLB stock. Borrowings under this
arrangement have an interest rate that fluctuates based on market conditions and
customer demand. As of December 31, 2003 and 2002 there were no outstanding
balances.
At December 31, 2003 the Company had $85.0 million of advances from the
FHLB. These advances are collateralized by certain first mortgage loans. The
weighted average interest rate during 2003 was 5.08%. The FHLB advances mature
as follows:
2004 ................................................................. $ --
2005.................................................................. 5,000
2006.................................................................. --
2007.................................................................. 5,000
2008.................................................................. 5,000
Thereafter............................................................ 70,000
-------
$85,000
Guaranteed Preferred Beneficial Interest in the Company's Subordinated Debt
In 1997 the Company issued $23.0 million of 10.00% junior subordinated
debentures (the "1997 Debentures") to a Delaware business trust (the "1997
Trust") in which the Company owned all of the common equity. The 1997 Trust
issued $23.0 million of Preferred Securities to investors, secured by the 1997
Debentures and the Company's guarantee. On July 8, 2002, the Company used the
net proceeds from its sale of the 2002 Debentures to redeem the 1997 Debentures.
During June and July, 2002 the Company issued $24.0 million of 8.45%
junior subordinated debentures (the "2002 Debentures") due June 30, 2032 to GCB
Capital Trust II (the "2002 Trust"), also a Delaware business trust whose equity
securities are wholly-owned by the Company. The 2002 Debentures are the 2002
Trust's sole asset. The 2002 Trust issued 2,400,000 shares of trust preferred
securities, $10 face value. The Company's obligations under the 2002 Debentures
and related documents, taken together, constitute a full, irrevocable and
unconditional guarantee on a subordinated basis by the Company of the 2002
Trust's obligations under the preferred securities. The preferred securities are
redeemable by the Company on or after June 30, 2007, or earlier if the deduction
of related interest for federal income taxes is prohibited, treatment as Tier I
capital is no longer permitted, or
37
certain other contingencies arise. The preferred securities must be redeemed
upon maturity of the 2002 Debentures in 2032. The ability of the Company's Bank
Subsidiaries to pay dividends or extend credit to the Company is subject to
legal and regulatory limitations.
NOTE 8 - INCOME TAXES
The provision for income taxes was as follows:
Years Ended December 31,
--------------------------------
2003 2002 2001
-------- -------- --------
(In Thousands)
Federal
Current ................................. $ 3,449 $ 3,847 $ 3,484
Deferred ................................ (678) (498) (440)
State
Current .................................. 127 161 260
Deferred ................................. (112) (157) (140)
-------- -------- --------
$ 2,786 $ 3,353 $ 3,164
======== ======== ========
The reconciliation of the provision for income taxes computed at the
statutory federal rate was as follows:
Years Ended December 31,
------------------------------
2003 2002 2001
-------- -------- --------
(In Thousands)
Tax at statutory federal rate ................. $ 3,237 $ 3,694 $ 3,143
Increase (reduction) in tax resulting from:
Tax-exempt income ........................... (413) (96) (86)
Amortization of intangible assets ........... -- -- 36
State income tax, net of federal benefit .... 10 18 104
Other ....................................... (48) (263) (33)
-------- -------- --------
Provision for income taxes ............ $ 2,786 $ 3,353 $ 3,164
======== ======== ========
The net deferred tax asset consists of the following:
December 31,
--------------------
2003 2002
-------- --------
(In Thousands)
Allowance for loan and lease losses and other real estate ................. $ 3,472 $ 3,085
Interest income on nonaccrual loans ....................................... 140 223
Depreciation and amortization ............................................. 853 848
Difference between book and tax basis of assets acquired .................. 268 290
Unrealized holding (gains) on investment securities available-for-sale .... (1,634) (2,180)
Other ..................................................................... 729 226
-------- --------
Total net deferred tax asset (included in other assets) ............. $ 3,828 $ 2,492
======== ========
NOTE 9 - SHAREHOLDERS' EQUITY
On July 31, 2003, the Company paid a 2.5% stock dividend on its common
stock to shareholders of record on July 15, 2003. On July 31, 2002, the Company
paid a 5% stock dividend on its common stock to shareholders of record on July
12, 2002. On July 31, 2001, the Company paid a 5% stock dividend on its common
stock to shareholders of record on July 13, 2001.
38
NOTE 10 - EARNINGS PER SHARE
The Company's calculation of earnings per share in accordance with SFAS
No.128, Earnings Per Share, is as follows:
For Year Ended December 31, 2003
-------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(In Thousands, except for per share data)
Basic EPS
Net income available to common stockholders .............................. $6,734 7,121 $ 0.95
Effect of Dilutive Securities Options .................................... -- 434 (0.06)
------ ------ ------
Diluted EPS
Net income available to common stockholders plus assumed conversions ..... $6,734 7,555 $ 0.89
====== ====== ======
For Year Ended December 31, 2002
-------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS
Net income available to common stockholders .............................. $7,513 7,210 $ 1.04
Effect of Dilutive Securities
Options .................................................................. -- 421 (0.06)
------ ------ ------
Diluted EPS
Net income available to common stockholders plus assumed conversions ..... $7,513 7,631 $ 0.98
====== ====== ======
For Year Ended December 31, 2001
-------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS
Net income available to common stockholders .............................. $6,080 7,152 $ 0.85
Effect of Dilutive Securities
Options .................................................................. -- 316 (0.04)
------ ------ ------
Diluted EPS
Net income available to common stockholders plus assumed conversions ..... $6,080 7,468 $ 0.81
====== ====== ======
NOTE 11 - STOCK BASED COMPENSATION
In April 2001, the Company adopted two stock option plans. The 2001
Employee Stock Option Plan (the "2001 Employee Plan") provides for the granting
of incentive stock options, nonqualified stock options and stock appreciation
rights to employees of the Company and its subsidiaries. Options to purchase a
total of 330,750 shares may be granted under the 2001 Employee Plan. Options to
acquire 109,671 and 116,025 shares were outstanding under this Plan at December
31, 2003 and 2002.
The 2001 Stock Option Plan for Nonemployee Directors (the "2001 Directors
Plan) provides for the granting of nonqualified stock options to nonemployee
directors of the Bank Subsidiaries. Options to purchase a total of 61,740 shares
may be granted under the 2001 Directors Plan. Options to acquire 54,243 and
58,212 shares were outstanding at December 31, 2003 and 2002.
The 1996 Employee Stock Option Plan (the "1996 Employee Plan") provides
for the granting of incentive stock options, nonqualified stock options and
stock appreciation rights to employees of the Company and its subsidiaries. A
total of 560,291 shares were authorized to be granted under the 1996 Employee
Plan. At December 31, 2003 and 2002, options to purchase a total of 330,626 and
396,179 shares, respectively, were outstanding under this Plan. No further
options will be granted under the 1996 Employee Plan.
The 1996 Stock Option Plan for Nonemployee Directors (the "1996 Directors
Plan") provides for the granting of nonqualified stock options to nonemployee
directors of the Bank Subsidiaries. At December 31, 2003 and 2002, options to
purchase 246,351 and 254,438 shares were outstanding under this Plan. No further
options may be granted under the 1996 Directors Plan.
A summary of the status of the Company's stock option plans as of December
31, 2003, 2002 and 2001 and the changes during the years ending on those dates
is represented below.
39
2003 2002 2001
------------------------ ------------------------ ------------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
Of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
Outstanding, beginning of year ........ 845,476 $ 7.10 856,929 $ 6.74 843,722 $ 6.60
Granted ............................... -- -- 62,961 12.63 119,787 9.51
Exercised ............................. (76,573) 7.34 (58,483) 7.51 (91,051) 9.93
Terminated ............................ (28,010) 8.59 (15,932) 8.20 (15,529) 5.35
-------- -------- --------
Outstanding, end of year .............. 740,893 $ 7.02 845,476 $ 7.10 856,929 $ 6.74
======== ======== ========
Options exercisable at year=end ....... 499,055 447,387 332,100
======== ======== ========
Weighted average fair value of
Options granted during the year .... -- $ 7.14 $ 5.66
====== ====== ======
The following table summarizes information about options outstanding at
December 31, 2003.
Options Outstanding Options Exercisable
--------------------------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Outstanding Price
- --------------- ----------- ---------------- -------- ----------- --------
$5.59- $8.32 612,299 3.62 $6.30 459,035 $6.14
$8.48 - $12.63 128,594 7.84 10.43 40,020 9.73
----------- -----------
740,893 499,055
=========== ===========
NOTE 12 - BENEFIT PLANS
EMPLOYEE 401(k) PLAN
The Company has a 401(k) savings plan covering substantially all
employees. Under the plan, the Company matches 50% of employee contributions for
all participants with less than five years employment, not to exceed 2% of their
salary, and 75% of employee contributions for all participants with five or more
years of employment, not to exceed 3% of their salary. The Company contributed
approximately $583,000, $645,000 and $529,000 for 2003, 2002 and 2001,
respectively. Included in the Company's contribution is the profit sharing
percentage, which is determined on an annual basis.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS
The Company adopted two Supplemental Executive Retirement Plans ("SERPs")
effective January 1999. The SERPs are designed to provide key executives with a
benefit equal to the difference between (i) 70% of their respective highest
average three consecutive years of annual salary at retirement and (ii) the
benefits in fact provided from the respective subsidiary bank's funding of
tax-qualified retirement plans (such as the 401(k) Plan). Under the SERPs, the
amount of aggregate annual benefits to which the key executives would be
entitled upon retirement at age 65 has been actuarially determined to be
approximately $211,000. The benefits will be paid over 15 years. The Company
intends to fund its obligations under the SERPs with the proceeds of insurance
policies it purchased on the lives of these key executives. The Company
contributed $578,000, $611,000 and $615,000 for 2003, 2002 and 2001,
respectively.
DIRECTORS' RETIREMENT PLAN
During 1999, the Company established a noncontributory nonqualified
retirement plan for nonemployee directors of the Company and its subsidiaries
("Directors' Retirement Plan"). The Directors' Retirement Plan is designed to
provide a benefit to those nonemployee directors who, at retirement age, will
have a minimum of 15 years of service on the Board of which at least 5 years
occur after establishment of that Plan. Each participant's Retirement Benefit is
75% of his projected annual board fees earned in the year prior to his normal
retirement date. The annual payouts under this plan are based upon the
individual director's retirement ages and range from approximately $5,000 to
$68,000.
DEFERRED COMPENSATION PLAN
Effective January 1999 the Company established a deferred compensation
plan for certain directors of the Company ("Deferred Compensation Plan"). A
participating director may defer payment of a specified amount up to 100% of
monthly board fees. Amounts deferred earn interest at the rate of 10% per annum.
At retirement, the benefit under the Deferred Compensation Plan is payable in
the form of a monthly annuity for 10 years.
40
NOTE 13 - COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
The Company and its subsidiaries lease banking facilities and other office
space under operating leases that expire at various dates through 2012 and that
contain certain renewal options. Rent expenses charged to operations
approximated $788,000, $766,000 and $836,000 for the years ended December 31,
2003, 2002 and 2001, respectively. Included in these amounts are $255,000, in
2003, $255,000 in 2002 and $241,000 in 2001, paid to a limited liability company
of which the Company's chairman and chairman emeritus are members.
As of December 31, 2003, future approximate minimum annual rental payments
under these leases are as follows (in thousands):
2004 .................................................................. $ 691
2005 .................................................................. 571
2006................................................................... 518
2007................................................................... 523
2008................................................................... 402
Thereafter ............................................................ 947
------
Total............................................................. $3,652
======
LITIGATION
The Company and its subsidiaries may, in the ordinary course of business,
become a party to litigation involving collection matters, contract claims and
other legal proceedings relating to the conduct of their business. In
management's judgment, the consolidated financial position of the Company will
not be affected materially by the final outcome of any present legal proceedings
or other contingent liabilities and commitments.
NOTE 14 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
The Bank Subsidiaries are parties to financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of their customers and to reduce their own exposure to fluctuations in
interest rates. These financial instruments include commitments to extend credit
and standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable. Those instruments involve, to
varying degrees, elements of credit and interest rate risks in excess of the
amount recognized in the consolidated balance sheets. The contract or notional
amounts of those instruments reflect the extent of involvement the Bank
Subsidiaries have in particular classes of financial instruments.
The Bank Subsidiaries' exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the contractual or
notional amount of those instruments. The Bank Subsidiaries use the same credit
policies in making commitments and conditional obligations as they do for
on-balance sheet instruments.
Unless noted otherwise, the Bank Subsidiaries do not require collateral or
other security to support financial instruments with credit risk. The
approximate contract amounts are as follows:
December 31,
---------------------
2003 2002
-------- --------
(In Thousands)
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit....................................... $149,094 $114,070
Standby letters of credit and financial guarantees written......... 2,857 2,374
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank Subsidiaries evaluate each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank Subsidiaries upon extension of credit,
is based on management's credit evaluation.
41
Standby letters of credit are conditional commitments issued by the Bank
Subsidiaries to guarantee a customer's performance to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank Subsidiaries hold residential or commercial real estate, accounts
receivable, inventory and equipment as collateral supporting those commitments
for which collateral is deemed necessary. The extent of collateral held for
those commitments at December 31, 2003 varies up to 100%.
The Bank Subsidiaries grant various commercial and consumer loans,
primarily within the State of New Jersey. Although the Bank Subsidiaries have
diversified loan portfolios, a substantial portion of their borrowers' ability
to honor their loan payment obligations in a timely fashion is dependent on the
success of the real estate industry. The distribution of commitments to extend
credit approximates the distribution of loans outstanding. Commercial and
standby letters of credit were granted primarily to commercial borrowers.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No.107 requires disclosure of the estimated fair value of an entity's
assets and liabilities considered to be financial instruments. For the Company,
as for most financial institutions, the majority of its assets and liabilities
are considered financial instruments as defined in SFAS No.107. However, many
such instruments lack an available trading market, as characterized by a willing
buyer and seller engaging in an exchange transaction. Also, it is the Company's
general practice and intent to hold its financial instruments to maturity and
not to engage in trading or sales activities. Therefore, the Company had to use
significant estimations and present value calculations to prepare this
disclosure.
Changes in the assumptions or methodologies used to estimate fair values
may materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between the Company and other
institutions due to the wide range of permitted assumptions and methodologies in
the absence of active markets. This lack of uniformity gives rise to a high
degree of subjectivity in estimating financial instrument fair values.
The Company has determined estimated fair values using the best available
data and an estimation methodology suitable for each category of financial
instruments. The estimation methodologies used, the estimated fair values, and
recorded book balances at December 31, 2003 and 2002 are outlined below.
For cash and cash equivalents, the recorded book values of $29.2 million
and $37.1 million at December 31, 2003 and 2002, respectively, approximate fair
values. For interest-bearing deposits with banks, the recorded book values of
$7.5 million and $9.4 million at December 31, 2003 and 2002, respectively,
approximate fair values. The estimated fair values of investment securities are
based on quoted market prices, if available. Estimated fair values are based on
quoted market prices of comparable instruments if quoted market prices are not
available.
The net loan portfolio at December 31, 2003 and 2002 has been valued using
a present value discounted cash flow where market prices were not available. The
discount rate used in these calculations is the estimated current market rate
adjusted for credit risk. The carrying value of accrued interest approximates
fair value.
The following table describes the carrying amounts and estimated fair
values of investment securities and loans at December 31, 2003 and 2002.
2003 2002
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In Thousands)
Investment securities available-for-sale ... $152,513 $152,513 $186,875 $186,875
Investment securities held-to-maturity ..... 2,726 2,712 5,320 5,327
Loans, net ................................. 515,657 525,899 436,044 450,097
The estimated fair values of demand deposits (i.e., interest-bearing (NOW)
and non interest-bearing demand accounts, savings and certain types of money
market accounts) are, by definition, equal to the amount payable on demand at
the reporting date (i.e., their carrying amounts). The carrying amounts of
variable rate accounts and certificates of deposit approximate their fair values
at the reporting date. The carrying amount of accrued interest payable
approximates its fair value.
42
The following table describes the carrying amounts and estimated fair
values of time deposits, federal funds purchased and securities sold under
agreements to repurchase and FHLB advances at December 31, 2003 and 2002.
2003 2002
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In Thousands)
Time deposits................................ $145,380 $146,784 $158,730 $159,764
Securities sold under agreements to repurchase 10,047 10,047 11,728 11,728
Federal Funds purchased ..................... 15,700 15,700 - -
FHLB Advances ............................... 85,000 96,391 80,000 96,200
The fair value of the guaranteed preferred beneficial interest in the
Company's subordinated debt totaling $24.0 million at both December 31, 2003 and
2002, approximates fair value.
The fair value of commitments to extend credit is estimated based on the
amount of unamortized deferred loan commitment fees. The fair value of letters
of credit is based on the amount of unearned fees plus the estimated cost to
terminate the letters of credit. Fair values of unrecognized financial
instruments, including commitments to extend credit and the fair value of
letters of credit, are considered immaterial.
NOTE 16 - REGULATORY MATTERS AND CAPITAL REQUIREMENTS
New Jersey state law permits a bank subsidiary to pay dividends to its
parent company provided there is no impairment of the subsidiary's capital
accounts and provided the subsidiary bank maintains a surplus of not less than
50% of its capital stock, or if payment of the dividend will not reduce the
subsidiary's surplus. As of December 31, 2003 and 2002, respectively, GCB had
$16.1 million and $12.9 million, BCB had $5.6 million and $4.2 million, and RCB
had $1.0 million and $1.0 million, of funds available for the payment of
dividends to the Company.
The Company and the Bank Subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies including the
Federal Reserve. Failure to meet minimum capital requirements can initiate
certain mandatory and possible additional discretionary actions by regulators
that, if undertaken, could have a material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank Subsidiaries must meet
specific capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance sheet items as calculated under regular
accounting practices. The capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulations to ensure capital
adequacy require the Bank Subsidiaries and the Company to maintain minimum
amounts and ratios of total and Tier I capital to risk-weighted assets.
Management believes the Company and the Bank Subsidiaries met all capital
adequacy requirements to which they were subject as of December 31, 2003.
As of December 31, 2003, the most recent notification from the FDIC
categorized the Bank Subsidiaries as well-capitalized under the regulatory
framework for prompt corrective action. To be categorized as well-capitalized,
the Company and Bank Subsidiaries must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the following table.
Management believes no conditions or events have occurred since the most recent
FDIC notification that have changed the category of the Company or any of the
Bank Subsidiaries.
43
To Be Well-Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
----------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
As of December 31, 2003
Total capital (to risk-weighted
assets)
Greater Community Bancorp ........... $ 69,455 11.96% $ 46,460 8.00% N/A N/A
Greater Community Bank .............. 35,854 10.09 28,433 8.00 $ 35,541 10.00%
Bergen Commercial Bank .............. 18,979 10.14 14,967 8.00 18,709 10.00
Rock Community Bank ................. 5,578 17.95 2,486 8.00 3,107 10.00
Tier 1 capital (to risk-weighted
assets)
Greater Community Bancorp ........... 52,459 9.03 23,230 4.00 N/A N/A
Greater Community Bank .............. 31,404 8.84 14,217 4.00 21,325 6.00
Bergen Commercial Bank .............. 16,639 8.89 7,484 4.00 11,226 6.00
Rock Community Bank ................. 5,188 16.70 1,243 4.00 1,864 6.00
Tier 1 capital (to average assets)
Greater Community Bancorp ........... 52,459 7.09 29,586 4.00 N/A N/A
Greater Community Bank .............. 31,404 6.72 18,703 4.00 23,378 5.00
Bergen Commercial Bank .............. 16,639 7.33 9,079 4.00 11,348 5.00
Rock Community Bank ................. 5,188 13.56 1,530 4.00 1,913 5.00
As of December 31, 2002
Total capital (to risk-weighted
assets)
Greater Community Bancorp ........... $ 68,402 13.77% $ 39,734 8.00% N/A N/A
Greater Community Bank .............. 33,139 10.78 24,592 8.00 $ 30,741 10.00%
Bergen Commercial Bank .............. 15,280 10.11 12,090 8.00 15,113 10.00
Rock Community Bank ................. 5,354 19.46 2,201 8.00 2,751 10.00
Tier 1 capital (to risk-weighted
assets)
Greater Community Bancorp ........... 52,543 10.58 19,867 4.00 N/A N/A
Greater Community Bank .............. 29,285 9.53 12,296 4.00 18,444 6.00
Bergen Commercial Bank .............. 13,388 8.86 6,045 4.00 9,068 6.00
Rock Community Bank ................. 5,010 18.21 1,100 4.00 1,651 6.00
Tier 1 capital (to average assets)
Greater Community Bancorp ........... 52,543 7.38 28,488 4.00 N/A N/A
Greater Community Bank .............. 29,285 6.50 18,012 4.00 22,515 5.00
Bergen Commercial Bank .............. 13,388 6.39 8,387 4.00 10,484 5.00
Rock Community Bank ................. 5,010 13.11 1,528 4.00 1,910 5.00
44
NOTE 17 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The condensed financial information of Greater Community Bancorp (parent
company only) is as follows:
CONDENSED BALANCE SHEET
December 31,
----------------------
2003 2002
-------- --------
(In Thousands)
ASSETS:
Cash .......................................................................... $ 580 $ 2,625
Investment securities available-for-sale ...................................... 7,651 10,775
Accrued interest receivable ................................................... -- 39
Investment in subsidiaries .................................................... 68,453 61,845
Other assets .................................................................. 1,012 1,338
-------- --------
Total assets ............................................................. $ 77,696 $ 76,622
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Guaranteed preferred beneficial interest in the Company's subordinated debt ... $ 24,743 $ 24,743
Other liabilities ............................................................. 2,383 381
Shareholders' equity .......................................................... 50,570 51,498
-------- --------
Total liabilities and shareholders' equity ............................... $ 77,696 $ 76,622
======== ========
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
--------------------------------------
2003 2002 2001
-------- -------- --------
(In Thousands)
INCOME:
Equity in undistributed income of Bank Subsidiaries .... $ 4,370 $ 823 $ 3,350
Dividends from Bank Subsidiaries ........................ 2,291 7,919 3,900
Interest income ......................................... 334 350 319
Gain on sale of investment securities ................... 2,116 1,121 337
-------- -------- --------
9,111 10,213 7,906
-------- -------- --------
EXPENSES:
Interest on subordinated debt ........................... 2,030 2,168 2,300
Write off of deferred issuance costs .................... -- 1,022 --
Other expenses .......................................... 403 205 172
-------- -------- --------
2,433 3,395 2,472
-------- -------- --------
Income before income tax benefit ................... 6,678 6,818 5,434
Income tax benefit ...................................... (56) (695) (646)
-------- -------- --------
Net income .............................................. $ 6,734 $ 7,513 $ 6,080
======== ======== ========
45
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
--------------------------------------
2003 2002 2001
-------- -------- --------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................................... $ 6,734 $ 7,513 $ 6,080
Adjustments to reconcile net income to cash provided by operating activities:
Gains on sales of investment securities available-for-sale ................. (2,116) (1,121) (337)
Decrease (increase) in other assets ........................................ 112 (35) 621
(Decrease) increase in other liabilities ................................... 576 (392) 805
Equity in undistributed income of subsidiaries ............................. (4,370) (823) (3,350)
-------- -------- --------
Net cash (used in) provided by operating activities ..................... 936 5,142 3,819
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities, available-for-sale ...................... (2,425) (2,867) (697)
Proceeds from the sale of investment securities, available-for-sale ........ 7,782 2,150 --
Payments for investments in and advances to subsidiaries ................... (1,541) (2,736) (100)
Proceeds from advances to Subsidiaries ..................................... -- 1,000 --
-------- -------- --------
Net cash provided by (used in) investing activities ..................... 3,816 (2,453) (797)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net ................................ -- -- 410
Proceeds from exercise of stock options .................................... 757 717 503
Proceeds from the issuance of subordinated debt ............................ -- 24,000 --
Repayment of subordinated debt ............................................. -- (23,000) --
Dividends paid ............................................................. (3,041) (2,679) (2,176)
Purchase of treasury stock ................................................. (4,513) (1,178) (508)
Other, net ................................................................. -- -- 38
-------- -------- --------
Net cash used in financing activities ................................... (6,797) (2,140) (1,733)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents .................... (2,045) 549 1,289
-------- -------- --------
CASH AND CASH EQUIVALENTS, beginning of year ................................... 2,625 2,076 787
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year ......................................... $ 580 $ 2,625 $ 2,076
======== ======== ========
46
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the
Company which, in the opinion of management, reflects all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's results of operations.
Three months ended
-------------------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ --------- --------
(In Thousands, except for per share data)
2003
Interest income ............................... $ 9,450 $ 9,192 $ 9,440 $ 9,824
Interest expense .............................. 2,877 2,987 3,105 3,275
Net interest income ........................... 6,573 6,205 6,335 6,549
Provision for loan and lease losses ........... 362 1,249 138 316
Non-interest income ........................... 1,713 2,996 1,639 1,600
Non-interest expense .......................... 5,183 5,694 5,658 5,490
Income before income taxes .................... 2,741 2,258 2,178 2,343
Net income .................................... $ 1,899 $ 1,659 $ 1,537 $ 1,639
Average common shares outstanding - basic ..... 6,991 7,078 7,207 7,213
Average common shares outstanding - diluted ... 7,427 7,516 7,669 7,664
Per share data
Net income per common share - basic ........... $ 0.28 $ 0.23 $ 0.21 $ 0.23
Net income per common share - diluted ......... 0.26 0.22 0.20 0.21
2002
Interest income ............................... $ 10,089 $ 10,443 $ 10,382 $ 10,119
Interest expense .............................. 3,537 3,624 3,668 3,857
Net interest income ........................... 6,552 6,819 6,714 6,262
Provision for loan and lease losses ........... 335 223 217 221
Non-interest income ........................... 2,015 1,466 1,746 1,964
Non-interest expense .......................... 5,010 6,415 5,286 4,965
Income before income taxes .................... 3,222 1,647 2,957 3,040
Net income .................................... $ 2,203 $ 1,177 $ 2,039 $ 2,094
Average common shares outstanding - basic ..... 7,194 7,203 7,215 7,214
Average common shares outstanding - diluted ... 7,640 7,672 7,664 7,588
Per share data
Net income per common share - basic ........... $ 0.31 $ 0.16 $ 0.28 $ 0.29
Net income per common share - diluted ......... 0.30 0.15 0.27 0.27
47
Report Of Independent Certified Public Accountants
To the Board of Directors and Shareholders
Greater Community Bancorp
We have audited the accompanying consolidated balance sheets of Greater
Community Bancorp and subsidiaries as of December 31, 2003 and 2002 and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Greater Community Bancorp and subsidiaries as of December 31, 2003 and 2002, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, on January 1, 2002.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
January 16, 2004
48
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 9A CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The management of the Company, including the Chief Executive Officer
and the Chief Financial Officer, have conducted an evaluation of the
effectiveness of the Company's disclosure controls and procedures
pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 as
of a date (the "Evaluation Date") within 90 days prior to the filing
date of this report. Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures
were effective in ensuring that all material information relating to
the Company, including our consolidated subsidiaries, required to be
filed in this report has been made known to them in a timely manner.
(b) Changes in internal controls.
There have been no significant changes made in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the Evaluation Date, including any corrective actions with regard
to significant deficiencies and material weaknesses.
PART III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers: Information required by Items 401, 405
and 406 of Reg. S-K is contained in the registrant's definitive Proxy Statement
for its 2004 Annual Meeting of Stockholders furnished to the Commission pursuant
to Regulation 14A.
Other Significant Employees: Not applicable.
Family Relationships: John L. Soldoveri, Chairman Emeritus of the Company,
is the father of Robert C. Soldoveri, a director of both the Company and GCB,
and the uncle of Anthony M. Bruno, Jr., Chairman and CEO of the Company, GCB and
BCB. C. Mark Campbell, a director, President and COO of the Company and
President of BCB, is Mr. Bruno's brother-in-law.
Involvement in Certain Legal Proceedings: Not applicable.
Item 11 EXECUTIVE COMPENSATION
Information required by Item 402 of Reg. S-K is contained in the
registrant's definitive Proxy Statement for its 2004 Annual Meeting of
Stockholders furnished to the Commission pursuant to Regulation 14A.
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners: Information required by
Item 403(a) of Reg. S-K is contained in the registrant's definitive Proxy
Statement for its 2004 Annual Meeting of Stockholders furnished to the
Commission pursuant to Regulation 14A.
Security Ownership of Management: Information required by Item 403(b) of
Reg. S-K is contained in the registrant's definitive Proxy Statement for its
2004 Annual Meeting of Stockholders to be furnished to the Commission pursuant
to Regulation 14A.
Changes in Control: Not applicable. The registrant knows of no contractual
arrangements that may, at a future date, result in a change of control of the
registrant.
49
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 404 of Reg. S-K is contained in the
registrant's definitive Proxy Statement for its 2004 Annual Meeting of
Stockholders furnished to the Commission pursuant to Regulation 14A.
Item 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by Item 9(c) of Schedule 14A is contained in the
registrant's definitive Proxy Statement for its 2004 Annual Meeting of
Stockholders furnished to the Commission pursuant to Regulation 14A.
PART IV
Item 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) This report includes financial statements for the Company's fiscal
year ended December 31, 2003.
(b) Reports on Form 8-K.
On October 28, 2003, the Company filed Form 8-K reporting its
earnings for the first nine months and third quarter of 2003.
On December 17, 2003, the Company filed Form 8-K reporting the
declaration of a cash dividend of $0.11 per common share.
On January 23, 2004, the Company filed Form 8-K reporting its
earnings for the year and fourth quarter of 2003.
(c) Exhibits. An Exhibit Index has been filed as part of this Report on
page E-1. Such Exhibit Index is incorporated herein by reference.
The exhibits are being filed with the SEC but are not part of the
annual report sent to stockholders.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Greater Community Bancorp
Date: March 15, 2004 BY: /s/ Anthony M. Bruno, Jr.
---------------------------------
Anthony M. Bruno, Jr.
Chairman and Chief Executive
Officer
Date: March 15, 2004 BY: /s/ Naqi A. Naqvi
---------------------------------
Naqi A. Naqvi
Treasurer, Principal Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 15, 2004 BY: /s/ Anthony M. Bruno, Jr.
---------------------------------
Anthony M. Bruno, Jr.
Chairman of the Board
Date: March 15, 2004 BY: /s/ Charles J. Volpe
---------------------------------
Charles J. Volpe
Director
Date: March 15, 2004 BY: /s/ C. Mark Campbell
---------------------------------
C. Mark Campbell
President and Director
Date: March 15, 2004 BY: /s/ Joseph A. Lobosco
---------------------------------
Joseph A. Lobosco
Director
Date: March 15, 2004 BY: /s/ Alfred R. Urbano
---------------------------------
Alfred R. Urbano
Director
Date: March 15, 2004 BY: /s/ Robert C. Soldoveri
---------------------------------
Robert C. Soldoveri
Director
51
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM 10-K
For the fiscal year ended December 31, 2003
Commission File No. 0-14294
Greater Community Bancorp
Exhibit Index
Certain of the following exhibits, as indicated parenthetically, were
previously filed as exhibits to registration statements filed by Greater
Community Bancorp ("registrant") under the Securities Act of 1933, as amended,
or to reports or registration statements filed by registrant under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), respectively,
and are hereby incorporated by reference to such statements or reports.
Registrant's Exchange Act filing number is 0-14294.
Exhibit
No. Description
3.1 Restated Certificate of Incorporation of the Company (incorporated
by reference to Exhibit 3.4 to Form 10-QSB for the quarter ended
June 30, 1998, filed on August 14, 1998)
3.2 Bylaws of the Company as amended and restated effective May 15, 2001
(incorporated by reference to Exhibit 3.2 to Form 8-K filed on June
18, 2001)
4.1 Junior Subordinated Indenture between the Company and Deutsche Bank
Trust Company Americas as Trustee, dated May 24, 2002 (incorporated
by reference to Exhibit 4.1 of Exhibits to Form S-3 Registration
Statement filed by GCB Capital Trust II and Greater Community
Bancorp under the Securities Act of 1933, Registration Nos.
333-89050, 333-89050-01, filed May 24, 2002)
4.4 Amended and Restated Trust among Greater Community Bancorp as
Depositor, Deutsche Bank Trust Company Americas as Property Trustee,
and Deutsche Bank Trust (Delaware) as Delaware Trustee, dated May
24, 2002 incorporated by reference to Exhibit 4.4 of Exhibits on
Form S-3 Registration Statement filed by GCB Capital Trust II and
Greater Community Bancorp under the Securities Act of 1933,
Registration Nos. 333-89050, 333-89050-01, filed May 24, 2002)
4.6 Guarantee Agreement between Greater Community Bancorp (as Guarantor)
and Deutsche Bank Trust Company Americas (as Trustee) dated May 24,
2002 (incorporated by reference to Exhibit 4.6 of Exhibits to Form
S-3 Registration Statement filed by GCB Capital Trust II and Greater
Community Bancorp under the Securities Act of 1933, Registration
Nos. 333-89050, 333-89050-01, filed May 24, 2002)
10.1 Employment Agreement of George E. Irwin dated July 31, 1998
(incorporated by reference to Exhibit 10.1 to Form 10-KSB for the
year ended December 31, 1998, filed on March 17, 1999)
10.2 Employment Agreement of C. Mark Campbell dated July 31, 1998
(incorporated by reference to Exhibit 10.2 to Form 10-KSB for the
year ended December 31, 1998, filed on March 17, 1999)
10.3 Employment Agreement of Erwin D. Knauer dated July 1, 1999
(incorporated by reference to Exhibit 10.3 to Form 10-Q for quarter
ended September 30, 1999)
10.4 Executive Supplemental Retirement Income Agreement for George E.
Irwin dated as of January 1, 1999 among Great Falls Bank, George E.
Irwin and Greater Community Bancorp (as guarantor) (incorporated by
reference to Exhibit 10.4 to Form 10-K for the year ended December
31, 1999)
10.5 Executive Supplemental Retirement Income Agreement for C. Mark
Campbell dated as of January 1, 1999 among Bergen Commercial Bank,
C. Mark Campbell and Greater Community Bancorp (as guarantor)
(incorporated by reference to Exhibit 10.5 to Form 10-K for the year
ended December 31, 1999)
10.6 Greater Community Bancorp 2001 Employee Stock Option Plan Adopted
February 20, 2001 (incorporated by reference to Exhibit 10.6 to Form
10-K for the year ended December 31, 2000)
10.7 Greater Community Bancorp 2001 Stock Option Plan for Nonemployee
Directors Adopted February 20, 2001 (incorporated by reference to
Exhibit 10.7 to Form 10-K for the year ended December 31, 2000)
10.8 Amended Employment Agreement of George E. Irwin dated August 1, 2003
(incorporated by reference to Exhibit 10.8 to Form 8-K filed on
August 1, 2003)
21 Subsidiaries of Registrant
23 Consent of Grant Thornton LLP
31.1 Certification of Chief Executive Officer dated March 15, 2004
31.2 Certification of Chief Financial Officer dated March 15, 2004
32.1 Certification of Officers pursuant to 18 U.S.C. Section 1350 dated
March 15, 2004
E-1
MARKET AND DIVIDEND INFORMATION (unaudited)
The Company's common stock was held by approximately 1,035 holders of
record on December 31, 2003, and is traded on the NASDAQ National Market under
the symbol GFLS.
The following table indicates the range of high and low market quotations
of the Common Stock, as reported by NASDAQ, and the cash dividends declared per
share on the Common Stock, in each case for the quarterly periods indicated. The
market quotations and cash dividends have been adjusted to take into account the
effect of stock dividends paid in 2003 (2.5%) and 2002 (5%).
Cash
Market Quotations Dividends
---------------------------- ---------
High Low Declared
-------- -------- ---------
Year Ended December 31, 2002 $13.24 $10.68 $.079
First Quarter 15.24
Second Quarter 12.73 .098
Third Quarter 16.04 13.95 .098
Fourth Quarter 15.85 12.74 .098
Year Ended December 31, 2003 $15.90 $15.70 $.098
First Quarter
Second Quarter 17.16 16.72 .11
Third Quarter 16.47 16.12 .11
Fourth Quarter 17.22 16.79 .11
The Company's ability to pay dividends on its Common Stock in the future
is subject to numerous regulatory restrictions that are potentially applicable.
However, management does not expect any such restrictions to apply so long as
the Company and the Bank Subsidiaries continue to operate profitably.
SHAREHOLDER INFORMATION
Annual Meeting Stock Transfer Agent
The annual meeting of shareholders of Registrar and Transfer Company
Greater Community Bancorp will be held Attn: Investor Relations
on April 20, 2004 at 4:00 p.m. at the 10 Commerce Drive
offices of Greater Community Bank at Cranford, NJ 07016-3572
55 Union Boulevard, Totowa, NJ.
Independent Accountant Counsel
Grant Thornton LLP Williams, Caliri, Miller & Otley, P.C.
Two Commerce Square 1428 Route 23 N
2001 Market Street PO Box 995
Philadelphia, PA 19103-7080 Wayne, NJ 07474-0995