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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, 2004
|_| 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
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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
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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, 2004 was approximately $93,631,015.
This calculation does not reflect a determination that persons are affiliates
for any other purpose.
The number of shares outstanding of the registrant's common stock as of
February 28, 2005 was 7,587,464.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the Company's definitive Proxy Statement for its
2005 Annual Meeting of Stockholders to be held on April 19, 2005 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, 2004
PAGE
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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 RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ..... 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 ........ 21
ITEM 8 FINANCIAL STATEMENTS .............................................. 22
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE .......................................... 51
ITEM 9A CONTROLS AND PROCEDURES ........................................... 51
ITEM 9B OTHER INFORMATION ................................................. 51
PART III ......................................................................... 51
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ................ 51
ITEM 11 EXECUTIVE COMPENSATION ............................................ 51
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS ........................ 52
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................... 52
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES ............................ 52
PART IV .......................................................................... 52
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ........................ 52
SIGNATURES ....................................................................... 53
EXHIBIT INDEX .................................................................... E-1
PART I
Item 1 BUSINESS
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THE HOLDING COMPANY
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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 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"), and its
nonbank subsidiaries.
During 2004, the Company continued to grow in assets in an increasingly
competitive and volatile environment. As of December 31, 2004, the Company's
consolidated assets were $825.4 million, as compared with consolidated assets of
$753.1 million at December 31, 2003. Earnings for the year 2004 were $7.8
million or $1.02 per diluted share ($1.06 per basic share), an increase from
$6.7 million or $0.87 per diluted share ($0.92 per basic share) in 2003. The
Company declared total cash dividends of $0.47 per share and $0.42 per share
during 2004 and 2003, respectively.
BANK SUBSIDIARIES
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The Company's three bank subsidiaries ("Bank Subsidiaries") received their
charters from the New Jersey Department of Banking & Insurance ("Department").
GCB commenced operations as a commercial bank in 1986. Its main office is
located at 55 Union Boulevard, Totowa, New Jersey. During 2004, GCB operated
eight additional branches, of which six branches are located in Passaic County
and two in Morris County, New Jersey. Three branches are located in Little
Falls, two in Clifton, one at 100 Furler Street, Totowa, one in Lincoln Park and
the eighth in Parsippany. GCB conducts a general commercial and retail banking
business encompassing a wide range of traditional deposit 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. GCB also offers a
broad variety of deposit accounts, including consumer and commercial checking
accounts, NOW accounts, and savings and time deposits. It also offers other
customary banking services.
BCB commenced banking operations in 1988. BCB concentrates its operations
in commercial lending and loans secured by real estate generally involving
nonresidential properties, primarily servicing Bergen County, New Jersey. BCB
also offers other customary banking services. Its 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.
RCB commenced its banking operations in 1999. During December, 2004 its
main office was moved from Glen Rock, New Jersey to Little Falls, New Jersey,
and its former main office in Glen Rock became a branch office. RCB has
primarily serviced Bergen County. RCB has offered a variety of banking services,
including commercial and real estate lending, revolving credit arrangements and
consumer loans, as well as traditional deposit services and other customary
banking services. Regulatory applications were filed in early 2005 to approve a
transfer of RCB's branch in Glen Rock to BCB.
Highland Capital Corp. ("HCC"), a wholly-owned nonbank subsidiary of GCB,
engages in high quality vendor-driven lease programs focusing primarily on small
to medium ticket medical equipment leasing.
GCB operates a securities brokerage business in its Greater Community
Financial division ("GCF"). In 2003, the Company's securities brokerage
operations were transferred from its nonbank subsidiary, Greater Community
Financial, LLC to GCF. The assets and business of the securities brokerage
operation are now operated as a division of GCB under the name of Greater
Community Financial. Under an agreement executed in 2003, Raymond James
Financial Services, Inc. acts as GCF's registered broker-dealer.
GCB and BCB each has a wholly-owned investment company nonbank subsidiary,
a New Jersey corporation, formed to manage their respective investment
portfolios. Each of the New Jersey investment companies in turn has a
wholly-owned Delaware subsidiary that holds and manages its investment
securities.
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NONBANK SUBSIDIARIES
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The Company directly owns three nonbank subsidiaries. GCB Realty, LLC
("Realty") was formed to acquire and manage real estate properties. Realty owns
a property in Bergen County, New Jersey. BCB and four other tenants lease space
in the building.
GCB Capital Trust II (the "2002 Trust") was formed under the Business
Trust Act of Delaware. The 2002 Trust's sole purposes were to issue and sell
Trust Preferred Securities ("Preferred Securities") and Common Securities and
use the sales proceeds to acquire Junior Subordinated Debentures (the
"Debentures") issued by the Company. The Company owns all of the 2002 Trust's
Common Securities. The Debentures are the 2002 Trust's sole assets and the
Company's interest payments on the Debentures are the 2002 Trust's sole revenue.
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. In July 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"),
that a similar trust created by the Company in 1997 had issued. The 2002
refinancing of the Preferred Securities reduced the Company's annual pre-tax
interest expense by approximately $350,000.
Greater Community Services, Inc. provides accounting, data processing and
management information systems, loan operations and various other
banking-related services at cost to the Bank Subsidiaries.
REO Fairfield, LLC ("REO"), a wholly-owned nonbank subsidiary was
established in 2003. REO manages other real estate owned by the Company. It
currently holds one property located in Passaic County, New Jersey.
RECENT LEGISLATION
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The Sarbanes-Oxley Act of 2002 ("SOA") is now having, and will in the
future continue to 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 has put in place a sound program to
comply with the SOA requirements and has allocated resources for continuous
monitoring of the processes. It expects that continued compliance with this
legislation will be time-consuming and expensive.
COMPETITION
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The Company, through its 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
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The banking industry is highly regulated. Statutory and regulatory
controls increase a bank holding company's cost of doing business, limit its
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's stock.
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The following is a brief summary of certain statutes, rules and
regulations affecting the Company and the Bank Subsidiaries. A number of other
statutes, regulations and governmental policies have an impact on their
operations. The Company is unable to predict the nature or the extent of the
effects on its business and earnings that fiscal or monetary policies, economic
control or new federal or state legislation may have in the future. The
following summary does not purport to be complete and is qualified in its
entirety by reference to such statutes and regulations.
Bank Holding Company Regulation
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During 2004 the Company continued to be registered as a bank holding
company and 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, 2004 the Company
had approximately $6.8 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
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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
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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
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The 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 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 will be
considered 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
3
foregoing, in any State; (c) providing financial, investment or economic
advisory services, including advising an investment company; (d) issuing or
selling instruments representing interests in pools of assets permissible for a
bank to hold directly; (e) underwriting, dealing in or making a market in
securities; (f) engaging in any activity that the Federal Reserve has determined
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto; (g) engaging in the United States in any activity that
a bank holding company may engage in outside of the United States that the
Federal Reserve has determined to be usual in connection with the transaction of
banking or other financial operations abroad; (h) engaging through non-bank
subsidiaries in various underwriting or merchant or investment banking
activities; and (i) acquiring investment assets through insurance company
affiliates in the ordinary course of an insurance company business.
Bank Regulation
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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 performance under the CRA.
Community Reinvestment Act
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Under the CRA, the Bank Subsidiaries 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 received a
"satisfactory" CRA rating in its most recent examination. BCB and RCB were not
subject to examination in 2004.
Bank Dividends
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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, 2004, 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
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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 Bank Subsidiary's capital and surplus. As to
the Company and all other affiliates, such transactions are limited to an
aggregate of 20% of the Bank Subsidiary's capital and surplus. These
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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
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Under FDIC regulations, state banks must adopt and maintain written
policies establishing appropriate limits and standards for real estate lending
activities. These policies must establish loan portfolio diversification
standards, prudent underwriting standards (including loan-to-value limits that
are clear and measurable), loan administration procedures and documentation,
approval and reporting requirements. A bank's real estate lending policy must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies adopted by federal bank regulators.
Deposit Insurance
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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 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 rate was 0.00% in
2004 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 GCB, BCB and RCB were .015% in 2004 and 2003.
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.
In late 2004, the FDIC advised the Company that Section 36 of the FDIC Act
and Part 363 of the FDIC Rules and Regulations require management of every
insured depository institution with total assets of at least $500 million at the
beginning of its fiscal year to obtain an annual audit of its financial
statements by an independent accountant reporting to the banking agencies on the
effectiveness of the institution's internal control over financial reporting. In
addition, it needs to obtain a report from an external auditor attesting to
management's assertions about this internal control. GCB has exceeded such
threshold and will be required to file such report with the FDIC and the
Department within 90 days after the end of the fiscal year 2005.
Enforcement Powers
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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 an
institution that the FDIC 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
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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
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, supplementary capital is limited to no more than 100% of core
capital, and the aggregate amount of certain types of supplementary capital is
limited. These regulations also 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, 2004, the Company's total risk-based capital and leverage
capital ratios were 11.73% and 7.99%, respectively. The minimum levels
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 an institution that does not 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 meet the minimum capital requirements.
Under the FDIC's prompt corrective action regulations, a
"well-capitalized" bank is one that is not subject to a 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 its capital levels are below these standards. A bank falling
within any of the three "undercapitalized" categories will be subject to
increased monitoring by the appropriate federal banking regulator and other
restrictions.
6
EFFECT OF GOVERNMENT MONETARY POLICIES; POSSIBLE FURTHER LEGISLATION
- --------------------------------------------------------------------
The Company's earnings are and will be affected by domestic and
international economic conditions and the monetary and fiscal policies of the
United States and foreign governments and their agencies.
The Federal Reserve's monetary policies have had, and will probably
continue to have, an important impact on the operating results of commercial
banks through its power to implement national monetary policy in order, among
other things, to curb inflation or combat a recession. The Federal Reserve has a
major effect on the levels of bank loans, investments and deposits through its
open market operations in United States Government securities and through its
regulation of, among other things, the discount rate on borrowings of banks and
the imposition of nonearning reserve requirements against 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, 2004, the Company employed a total of 212 employees,
including 185 full-time employees. Management considers relations with employees
to be satisfactory.
Item 2 PROPERTIES
----------
The Company does not directly own or lease any land, buildings or
equipment. One of the Company's nonbank subsidiaries, Realty, owns a property in
Bergen County, New Jersey. GCB owns three properties in Passaic County, New
Jersey and BCB owns three 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 former chairman emeritus
are members. GCB also leases space for its branches located in Totowa, Little
Falls, Clifton, Lincoln Park and Parsippany, New Jersey, and leases office space
in Montclair, New Jersey.
BCB leases its main office space at Two Sears Drive, Paramus, New Jersey,
from Realty. BCB also leases space for its branches in Hackensack and
Wallington, New Jersey. BCB owns the space for its branches located in Hasbrouck
Heights, Little Ferry and Wood-Ridge, New Jersey.
RCB leases its main office space at 7 Center Avenue, Little Falls, New
Jersey and its branch office space (formerly its main office) in Glen Rock, New
Jersey. Sinabaldo Leone, Jr., a director of RCB, owns the leased Glen Rock
premises.
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, 2004 (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 2004 to a vote of
security holders through the solicitation of proxies or otherwise.
7
PART II
Item 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
-------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------
The Company's common stock was held by approximately 1,011 holders of
record on December 31, 2004, 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 of 2.5% paid in both 2004 and 2003.
Market Quotations
----------------- Cash
Dividends
High Low Declared
----- ----- ---------
Year Ended December 31, 2003
First Quarter 15.51 15.32 $0.094
Second Quarter 16.74 16.31 0.107
Third Quarter 15.09 15.73 0.107
Fourth Quarter 16.80 16.38 0.107
Year Ended December 31, 2004
First Quarter 17.06 15.37 0.107
Second Quarter 15.71 13.55 0.12
Third Quarter 14.44 13.81 0.12
Fourth Quarter 16.42 13.94 0.12
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, 2004 with
respect to compensation plans under which equity securities of the Company are
authorized for issuance.
- ---------------------------- ----------------------------- -------------------------------- ----------------------------------
Plan Category Number of securities to be Weighted average exercise price Number of securities remaining
issued upon exercise of of outstanding options, warrants available for future issuance
outstanding options, warrants and rights under equity compensation plans
and rights (excluding securities reflected in
column (a)
Stock Option Plans (a) (b) (c)
- ---------------------------- ----------------------------- -------------------------------- ----------------------------------
Equity compensation plans
approved by security holders 519,349 $ 8.47 133,068
Equity compensation plan not
approved by security holders n/a n/a n/a
------- ------- -------
Total 519,349 $ 8.47 133,068
======= ======= =======
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.
Years ended December 31,
------------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(in thousands, except per share data)
Summary of Operations:
Total interest income .................. $ 40,250 $ 37,906 $ 40,905 $ 42,775 $ 41,458
Total interest expense ................. 12,599 12,244 14,686 20,497 20,664
Net interest income .................... 27,651 25,662 26,219 22,278 20,794
Provision for loan and lease losses .... 1,169 2,065 996 885 1,048
Non-interest income .................... 6,489 7,948 7,319 6,515 6,167
Non-interest expense ................... 21,251 22,025 21,676 18,664 18,290
Income before income taxes ............. 11,720 9,520 10,866 9,244 7,623
Provision for income taxes ............. 3,934 2,786 3,353 3,164 2,793
Net Income ............................. 7,786 6,734 7,513 6,080 4,830
Per Common Share Data: (1)
Earnings Per Share--Basic .............. $ 1.06 $ 0.92 $ 1.02 $ 0.83 $ 0.66
Earnings Per Share--Diluted ............ 1.02 0.87 0.96 0.79 0.64
Cash dividends per common share ........ 0.47 0.42 0.36 0.29 0.25
Stock dividends per common share ....... 2.5% 2.5% 5% 5% 5%
Book value per common share ............ $ 7.74 $ 7.04 $ 6.98 $ 6.23 $ 5.49
Selected Operating Ratios:
Return on average assets ............... 0.98% 0.91% 1.09% 0.95% 0.84%
Return on average equity ............... 14.28% 13.15% 15.29% 14.18% 13.43%
Interest rate spread ................... 3.29% 3.25% 3.48% 2.93% 3.13%
Net interest margin .................... 3.78% 3.75% 4.10% 3.79% 3.98%
Financial Condition Data:
Total Assets ........................... $825,363 $753,125 $719,867 $660,839 $607,305
Cash and cash equivalents .............. 32,322 29,233 37,133 46,997 56,292
Investment securities .................. 132,045 155,239 192,195 151,906 138,153
Total Loans, net ....................... 602,274 515,657 436,044 404,250 366,139
Allowance for loan and lease losses .... 8,918 8,142 7,298 6,320 5,657
Total Deposits ......................... 603,951 560,713 544,043 484,623 465,245
Other borrowings ....................... 154,771 134,747 115,728 115,347 90,020
Shareholders' equity ................... 58,615 50,570 51,498 46,112 40,231
Capital Ratios:
Equity to assets ....................... 7.10% 6.71% 7.15% 6.98% 6.62%
Total risk-based capital ratio ......... 11.73% 11.96% 13.77% 13.89% 13.88%
Tier I risk-based capital ratio ........ 9.52% 9.03% 10.58% 10.70% 10.14%
Leverage ratio ......................... 7.99% 7.09% 7.38% 7.23% 7.10%
(1) 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, notes 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 certain risks and uncertainties. These include, but are not limited to,
the ability of the Company's Bank Subsidiaries to generate deposits, loans and
leases and attract qualified employees, the direction of interest rates,
continued levels of loan and lease quality
9
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.
Results of Operations: Years Ended December 31, 2004, 2003 and 2002
In 2004, the Company recorded earnings of $7.8 million or $1.02 per
diluted share, an increase of 15.6% from 2003. In 2003, the Company earned $6.7
million or $0.87 per diluted share, a decrease of 10.4% from the $7.5 million or
$0.96 per diluted share earned during 2002.
Net income for the year ended December 31, 2004 increased as a result of
an increase in average earning assets. In addition, non-interest expense
declined 3.5% for the year 2004 compared with 2003.
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
interest-bearing demand, savings, time deposits and borrowings. 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 including the amount of interest
income and expense on related items, and the average yields and rates for the
years ended December 31, 2004, 2003 and 2002. The yields are not shown on a
fully tax-equivalent basis.
10
Average Balance Sheet, Interest Income and Expense and Average Interest Rates
For the Years Ended
-------------------------------------------------------------------------------------
December 31, 2004 December 31, 2003
----------------------------------------- -----------------------------------------
Average Interest Average Average Interest Average
Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
--------- ----------- ---------- --------- ----------- ----------
(dollars in thousands)
ASSETS
Earning Assets:
Investment securities ....................... $ 145,726 $ 5,574 3.82% $ 186,218 $ 6,289 3.38%
Due from banks - interest-bearing ........... 7,060 205 2.90% 9,849 243 2.47%
Federal funds sold .......................... 22,753 238 1.05% 16,060 187 1.16%
Loans (1) ................................... 556,111 34,233 6.16% 467,735 31,187 6.60%
--------- --------- --------- ---------
Total earning assets .................... 731,650 40,250 5.50% 679,862 37,906 5.54%
Less: Allowance for loan and
lease losses ......................... (8,604) -- (7,644) --
All other assets ............................ 70,507 -- 67,755 --
--------- --------- --------- ---------
Total assets ................................ $ 793,553 $ 40,250 $ 739,973 $ 37,906
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing Liabilities:
Savings and interest-bearing checking ... $ 269,382 $ 2,059 0.76% $ 259,974 $ 2,080 0.80%
Time deposits ........................... 177,795 3,883 2.18% 153,835 3,596 2.34%
Federal funds and
other borrowings(2) .................. 98,841 4,629 4.68% 96,923 4,537 4.68%
Subordinated debt ....................... 24,000 2,028 8.45% 24,000 2,031 8.45%
--------- --------- --------- ---------
Total interest-bearing liabilities ... 570,018 12,599 2.21% 534,732 12,244 2.29%
Non interest-bearing deposits ............... 161,400 -- 146,995 --
Other liabilities ........................... 7,614 -- 7,023 --
Shareholders' equity ........................ 54,521 -- 51,223 --
--------- --------- --------- ---------
Total liabilities and
Shareholders' equity .................... $ 793,553 $ 12,599 $ 739,973 $ 12,244
========= ========= ========= =========
NET INTEREST INCOME ......................... $ 27,651 $ 25,662
========= =========
NET INTEREST MARGIN (3) ..................... 3.78% 3.75%
==== ====
For the Years Ended
-----------------------------------------
December 31, 2002
-----------------------------------------
Average Interest Average
Balance Earned/Paid Yield/Rate
--------- ----------- ----------
(dollars in thousands)
ASSETS
Earning Assets:
Investment securities ....................... $ 176,455 $ 8,057 4.57%
Due from banks - interest-bearing ........... 14,846 511 3.44%
Federal funds sold .......................... 25,864 425 1.64%
Loans (1) ................................... 418,804 31,912 7.59%
--------- ---------
Total earning assets .................... 635,969 40,905 6.42%
Less: Allowance for loan and
lease losses ......................... (6,651) --
All other assets ............................ 61,968 --
--------- ---------
Total assets ................................ $ 691,286 $ 40,905
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing Liabilities:
Savings and interest-bearing checking ... $ 224,630 3,139 1.40%
Time deposits ........................... 154,577 4,859 3.14%
Federal funds and
other borrowings(2) .................. 95,603 4,520 4.73%
Subordinated debt ....................... 24,112 2,168 8.99%
--------- ---------
Total interest-bearing liabilities ... 498,922 14,686 2.94%
Non interest-bearing deposits ............... 135,840 --
Other liabilities ........................... 7,385 --
Shareholders' equity ........................ 49,139 --
--------- ---------
Total liabilities and
Shareholders' equity .................... $ 691,286 $ 14,686
========= =========
NET INTEREST INCOME ......................... $ 26,219
=========
NET INTEREST MARGIN (3) ..................... 4.10%
====
(1) Includes nonaccrual loans, the effect of which is to reduce the yield
earned on loans, and net deferred loan fees and costs.
(2) Includes federal funds purchased, securities sold under agreements to
repurchase and FHLB advances.
(3) Net interest income divided by total earning assets.
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 and interest-bearing
liabilities, related yields and associated funding costs.
Net interest income was $27.7 million in 2004, a $2.0 million or 7.8%
increase compared to 2003. Interest and fee income on loans during 2004
increased by $3.0 million from 2003 as a result of a 18.9% increase in average
total loans. In spite of the interest rate increases during 2004, the average
yield on loans declined 44 basis points to 6.16% in 2004 compared to 6.60% in
2003 as a result of competitive pricing. Loans represented 76.0% and 68.8% of
average earning assets for 2004 and 2003, respectively. Interest earned on
investment securities during 2004 decreased by $715,000 or 11.4% compared to
2003. The average yield on investment securities increased by 44 basis points in
2004 over 2003, despite a 21.7% decline in average volume during 2004 over 2003.
The average yield on securities was 3.82% for 2004 compared to 3.38% for the
prior year. Investments represented 19.9% of average earning assets in 2004.
Interest income on federal funds sold and deposits with banks during 2004
reflected a moderate increase compared to 2003 as a result of a $3.9 million, or
15.1% increase in average federal funds sold and deposits with banks. Federal
funds sold and deposits with banks represented 4.1% and 3.8% of average earning
assets at December 31, 2004 and 2003, respectively.
In 2003, net interest income was $25.7 million, a $557,000 or 2.2%
decrease compared to 2002. Interest and fee income on loans during 2003
decreased by $722,000 from 2002 despite a 11.7% increase in average total loans.
The average yield on loans decreased to 6.67% in 2003 compared to 7.62% in 2002
as a result of repricing of loans at prevailing rates. Loans represented 68.8%
and 65.9% of average earning assets for 2003 and 2002, respectively. Interest
earned on investment securities during 2003 decreased by $1.8 million, or 21.9%
compared to 2002. Although average investment securities increased 5.5% in 2003
over 2002, interest 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 27.4% of average earning
assets in 2003. Interest income on federal funds sold and deposits with banks
during 2003 decreased by $506,000, or 54.1%, compared to 2002 as a result of a
$14.8 million, or 36.4%, 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
represented 3.8% and 6.4% of average earning assets at December 31, 2003 and
2002, respectively.
Interest expense for 2004 increased by $355,000 or 2.9% from 2003.
Interest expense on deposits and short-term borrowings increased by $266,000 and
$92,000, respectively, primarily due to increases in average volume during 2004.
Interest expense on long-term borrowings was almost unchanged. For the year 2004
the average interest rate paid decreased by 8 basis points compared to 2003.
11
Interest expense for the year ended December 31, 2003 decreased by $2.4
million or 16.6% from 2002. Interest expense on deposits decreased by $2.3
million primarily due to lower 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.
Average interest-bearing deposits comprised 78.4% in 2004, 77.4% in 2003,
and 76.0% in 2002 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 3.78%, 3.75% and 4.10% for the years
ended December 31, 2004, 2003 and 2002, respectively.
Rate/Volume Analysis
The following table sets forth the changes in interest income and expense
as they relate to changes in volume and rate for the years ended December 31,
2004 and 2003 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.
2004 Compared to 2003 2003 Compared to 2002
Increase (Decrease) Increase (Decrease)
--------------------------------- ---------------------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
(in thousands)
Interest Earned On:
Loans ...................................... $ 5,440 $(2,394) $ 3,046 $ 3,312 $(4,037) $ (725)
Investment securities ...................... (1,549) 834 (715) 337 (2,105) (1,768)
Other earning assets ....................... (11) 24 13 (238) (268) (506)
------- ------- ------- ------- ------- -------
Total earning assets ................... $ 3,880 $(1,536) $ 2,344 $ 3,411 $(6,410) $(2,999)
======= ======= ======= ======= ======= =======
Interest Paid On:
Savings and interest-bearing checking ...... $ 72 $ (93) $ (21) $ 283 $(1,342) $(1,059)
Time deposits .............................. 523 (236) 287 (22) (1,241) (1,263)
Borrowings (1) ............................. 104 (15) 89 66 (186) (120)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities ..... $ 699 $ (344) $ 355 $ 327 $(2,769) $(2,442)
======= ======= ======= ======= ======= =======
(1) Includes FHLB advances, federal funds purchased, securities sold
under agreements to repurchase and subordinated debt.
Provision for Loan and Lease Losses
The Company recorded a provision for loan and lease losses of $1.2 million
in 2004 compared with $2.1 million in 2003. The year-to-year decrease was
primarily due to the recording in the prior year of an additional provision to
adequately reserve for nonperforming leases in its lease portfolio.
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 and HCC monitor their allowances for loan and leases
losses and may make future adjustments to the allowances through the provision
for loan and lease losses as economic conditions dictate. Although the
respective subsidiaries maintain their loan and lease loss allowances at levels
they consider adequate to provide for the inherent risk of loss in their loan
and lease 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 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 for the year 2004 was $6.5 million compared with $7.9
million for 2003, reflecting a decrease of $1.5 million or 18.4% over 2003. The
decline in non-interest income was primarily due to a $1.1 million, or 48.5%,
decline in gains on sales of investment securities coupled with a $339,000, or
28.5%, decline in all other income which was primarily attributable to a
non-recurring gain on sale of assets reported in 2003. In addition, loan fee
income and bank-owned life insurance income declined
12
$78,000 and $101,000, respectively, partially offset by increases in other
commissions and fees and service charges on demand deposits. Non-interest income
represented 19.0% of total income (net interest income plus non-interest income)
in 2004.
Total non-interest income was $7.9 million in 2003, representing 23.6% of
total income, compared with $7.3 million and 21.8%, respectively, in 2002. The
increase of $629,000 or 8.6% over 2002 was primarily due to increases of
$983,000, $364,000 and $349,000 from gains on sales of investment securities,
fee income on mortgage loans sold and service charges on deposit accounts,
respectively, partially offset by a $1.0 million decline in gains on sale of
leases. Included in the non-interest income were $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.
Non-interest Expense
Total non-interest expense decreased $774,000 or 3.5% to $21.3 million in
2004 compared with 2003. Of the total decrease, salaries and employee benefits
accounted for $658,000 or 5.3%. After adjusting 2003 for a one-time severance
payment to a former executive, salaries and benefits decreased 2.5%. The net
decrease in salaries and benefits resulted from significant deferred loan
origination costs represented by capitalized compensation costs due to
substantial loan originations in 2004, offset by normal salaries increases
during 2004. Increases in occupancy and equipment expense accounted for $200,000
as a result of increases in building and equipment maintenance costs and
property tax expenses. Regulatory and professional fees increased by $136,000
primarily as a result of the Company's requirements to comply with new
regulatory guidelines. Other operating expenses decreased $513,000 as the
Company continues to monitor and control its spending.
Total non-interest expense in 2003 increased $349,000 or 1.6% to $22.0
million, compared with 2002. During 2002, the Company recorded 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 2003
increased $1.4 million or 6.7% over 2002. The year to year increase in expense
was attributable to the Company's growth while being committed to continually
emphasize expense efficiencies. Of the total increase, increases in salaries and
employee benefits accounted for $1.5 million or 13.7% (of which $360,000 was
attributable to a separation package for a former executive), and an increase in
occupancy and equipment expense accounted for $172,000. These increases were
partially offset by decreases in other operating expenses and office expense of
$344,000 and $44,000, respectively.
Income Taxes
The Company recorded income tax provisions of $3.9 million, $2.8 million
and $3.4 million for the years ended December 31, 2004, 2003 and 2002,
respectively. The Company's respective effective tax rates were 34%, 29% and 31%
for such years. The increase in the effective tax rate for 2004 was the result
of a shift in pre-tax income to subsidiaries which are subject to higher state
income taxes as well as a change in certain tax estimates previously recorded.
Financial Condition
The Company's performance for 2004 was highlighted by continued loan
growth, particularly in the commercial mortgage portfolio. At December 31, 2004,
the Company's total assets were $825.4 million, an increase of $72.2 million or
9.6% over December 31, 2003. Gross loans increased by $87.4 million, or 16.7%,
reflecting increased loan demand, while investment securities and federal funds
sold decreased by $23.2 million and $630,000, respectively. Interest-bearing due
from banks increased $267,000. The increase in loans was funded by proceeds from
maturities of investment securities and increases in total deposits and
short-term borrowings.
A key element of the Company's consistent performance is its strong
capital base. The Company's risk-based capital ratios at December 31, 2004 were
9.52% and 11.73% for Tier 1 capital and total risk-based capital, respectively,
substantially exceeding the minimum requirements under regulatory guidelines.
At December 31, 2003, the Company's total assets were $753.1 million, an
increase of $33.3 million or 4.6% over December 31, 2002. Gross loans increased
by $80.5 million, reflecting increased loan demand. 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
also supported by increases in total deposits and borrowings.
Investment Securities
At December 31, 2004, the investment securities portfolio totaled $132.0
million, a decrease of $23.2 million or 14.9% from December 31, 2003. Investment
securities at December 31, 2003 decreased by $37.0 million or 19.3% compared to
December 31, 2002. The decreases in both 2004 and 2003 were primarily related to
sales, maturities and principal paydowns and the subsequent use of proceeds to
meet loan demand.
The following table presents the composition of the investment securities
portfolio along with the amortized cost and fair values of those components at
December 31, 2004, 2003 and 2002.
13
December 31,
---------------------------------------------------------------------
2004 2003 2002
--------------------- --------------------- ---------------------
(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 ................. $ 23,698 $ 23,567 $ 27,572 $ 27,749 $ 22,823 $ 23,237
State and political subdivisions ...... 12,744 12,754 13,272 13,241 4,536 4,595
Other debt and equity securities ...... 20,779 24,546 23,953 28,356 25,860 29,413
Mortgage-backed securities ............ 51,352 50,973 83,528 83,167 128,057 129,630
-------- -------- -------- -------- -------- --------
Total available-for-sale ........ $108,573 $111,840 $148,325 $152,513 $181,276 $186,875
-------- -------- -------- -------- -------- --------
Held-to-maturity:
U.S. Treasury and U.S. Government
agencies securities ................. $ 17,395 $ 17,293 $ 1,000 $ 985 $ 1,000 $ 1,003
State and political subdivisions ...... 2,786 2,786 1,689 1,689 4,120 4,120
Mortgage-backed securities ............ 24 25 37 38 200 204
-------- -------- -------- -------- -------- --------
Total held-to-maturity .......... $ 20,205 $ 20,104 $ 2,726 $ 2,712 $ 5,320 $ 5,327
-------- -------- -------- -------- -------- --------
Total investment securities ..... $128,778 $131,944 $151,051 $155,225 $186,596 $192,202
======== ======== ======== ======== ======== ========
During 2004, the Company realized net gains of $1.1 million from the sale
of $2.5 million in investment securities. In 2003, the Company realized net
gains of $2.2 million from the sale of $11.3 million in investment securities.
Included in shareholders' equity at December 31, 2004 is accumulated other
comprehensive income in the amount of $1.8 million, a decrease of $728,000 or
28.6% from the end of 2003. The Company had no investment securities held for
trading purposes at December 31, 2004 or 2003.
The following table reflects average yields, amortized costs and fair
values of the Company's investment securities by maturity.
December 31, 2004
--------------------------------
Average Amortized Fair
Yield Cost Value
------- --------- --------
(dollars in thousands)
Available-for-sale:
Due in one year or less ................... 2.31% $ 3,562 $ 3,554
Due after one year through five years ..... 3.10 21,280 21,148
Due after five years through ten years .... 3.93 4,542 4,451
Due after ten years ....................... 4.10 7,058 7,168
Mortgage-backed securities ................ 4.81 51,352 50,973
Other debt and equity securities .......... n/a 20,779 24,546
-------- --------
Total available-for-sale ............. $108,573 $111,840
======== ========
Held-to-maturity:
Due in one year or less ................... 2.35% $ 3,786 $ 3,782
Due after five years through ten years .... 3.20 16,395 16,297
Mortgage-backed securities ................ 5.18 24 25
-------- --------
Total held-to-maturity .............. 20,205 20,104
-------- --------
Total investment securities ......... $128,778 $131,944
======== ========
Loan Portfolio
Loan growth during 2004 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, 2004 totaled $611.2
million, an increase of $87.0 million over the December 31, 2003 reported
amount. Average loans for 2004 increased $88.4 million, while the average yield
on loans decreased by 51 basis points from 2003 as a result of a highly
competitive environment.
Loans outstanding of $523.8 million at December 31, 2003 increased $80.5
million from year-end 2002 primarily due to increased loan demand in the
Company's primary market areas.
14
The following table summarizes the components of the gross loan portfolio
at the dates indicated.
December 31,
-------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
(in thousands)
Loans secured by one-to-four-family residential properties ... $ 147,557 $ 148,121 $ 142,677 $ 146,450 $ 145,310
Loans secured by multi-family residential properties ......... 10,349 11,619 12,861 13,039 15,049
Loans secured by nonresidential properties ................... 311,568 260,318 203,501 181,959 149,304
Loans to individuals ......................................... 5,872 5,686 8,843 8,491 10,639
Commercial loans ............................................. 52,973 37,532 33,859 38,467 32,212
Construction loans ........................................... 44,687 37,640 24,339 14,054 13,014
Lease financing receivables .................................. 37,826 23,181 17,058 7,306 6,576
Other loans .................................................. 754 449 957 1,643 532
--------- --------- --------- --------- ---------
Total gross loans ........................................ 611,586 524,546 444,095 411,409 372,636
Less: Unearned fees ................................... (394) (747) (753) (839) (840)
--------- --------- --------- --------- ---------
Total loans .............................................. $ 611,192 $ 523,799 $ 443,342 $ 410,570 $ 371,796
========= ========= ========= ========= =========
Much of the Company's lending activity is focused in northern New Jersey,
with the exception of the out-of-state lease receivables portfolio. At December
31, 2004 there was no concentration of loans and leases exceeding 10% of the
total loan and lease portfolio other than loans that are secured by real estate.
Borrower concentrations are considered to exist when there are amounts loaned or
leased to borrowers engaged in similar activities which could similarly impact
them should there be a change in economic condition. Efforts are made to
maintain a diversified portfolio as to type of borrower to guard against a
significant downturn of the economy. The Company does not engage in foreign
loans and leases.
The following table sets forth the contractual maturity and interest rate
sensitivity of certain components of the loan portfolio at December 31, 2004.
Demand loans, having no stated schedule of repayment and no stated maturity, and
overdrafts are reported as due within one year.
December 31, 2004
-----------------------------------------------
Within 1 - 5 Over 5
1 Year Years Years Total
-------- -------- -------- --------
(in thousands)
Loans with predetermined interest rates:
Loans secured by nonresidential properties $ 13,560 $ 26,725 $ 89,994 $130,279
Commercial loans 7,961 17,351 991 26,303
Lease financing receivables 12,821 24,503 502 37,826
Real estate construction 8,788 2,038 -- 10,826
-------- -------- -------- --------
Total loans with predetermined interest rates 43,130 70,617 91,487 205,234
Loans with floating interest rates:
Loans secured by nonresidential properties 9,997 11,488 159,804 181,289
Commercial loans 18,691 6,083 1,896 26,670
Real estate construction 16,722 16,800 339 33,861
-------- -------- -------- --------
Total loans with floating interest rates 45,410 34,371 162,039 241,820
-------- -------- -------- --------
Total gross loans $ 88,540 $104,988 $253,526 $447,054
======== ======== ======== ========
Asset Quality
Various degrees of risk are associated with substantially all investing
activities. The senior lending officers of GCB, BCB and RCB are charged with
monitoring asset quality, establishing credit policies and procedures and
seeking consistent application of these policies and procedures. 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.
Management's monitoring of the loan and lease portfolio's asset quality is
assisted by the classification of nonperforming assets which include past due,
nonaccruing and renegotiated loans and other real estate.
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. Uncollected
interest is reversed on loans or leases placed on nonaccrual status.
Management believes that the asset quality is sound and has stabilized,
especially in the lease financing receivables portfolio. During 2003, the
Company took action to lower the risk profile of its leasing business to improve
the overall quality of the lease
15
portfolio. The Company maintains adequate reserves and believes additional
reserves are not required. It will continue to monitor the loan and lease
financing portfolios closely.
The following table summarizes the composition of the Company's
nonperforming assets and related asset quality ratios as of the dates indicated:
December 31,
------------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(dollars in thousands)
Nonaccruing loans and leases .......................... $2,511 $2,010 $2,767 $1,373 $1,281
Renegotiated loans .................................... 205 252 295 545 845
------ ------ ------ ------ ------
Total nonperforming loans and leases .............. 2,716 2,262 3,062 1,918 2,126
Loans past due 90 days and accruing ................... -- 313 587 34 54
Other real estate ..................................... 849 824 -- 175 --
------ ------ ------ ------ ------
Total nonperforming assets ........................ $3,565 $3,399 $3,649 $2,127 $2,180
====== ====== ====== ====== ======
Nonperforming loans and leases to total gross loans ... 0.44% 0.43% 0.69% 0.47% 0.57%
Nonperforming assets to total gross loans and
other real estate owned ........................... 0.58% 0.65% 0.82% 0.52% 0.58%
Nonperforming assets to total assets .................. 0.43% 0.45% 0.51% 0.32% 0.36%
Allowance for loan and lease losses to
nonperforming loans ............................... 328.35% 359.95% 238.34% 329.51% 266.09%
Nonperforming loans and leases increased $454,000 at December 31, 2004
compared to December 31, 2003. Of the total increase, nonaccruing loans and
leases increased $501,000 due to the reclassification of certain loans to
nonaccruing status, partly offset by a decrease of $47,000 in renegotiated
loans. Nonperforming loans and leases decreased by $800,000 at December 31, 2003
compared to December 31, 2002. The decrease was primarily due to the
reclassification of certain loans from nonaccruing to current status and from
current status to renegotiated status. If the nonaccruing loans in 2004, 2003
and 2002 had continued to pay interest, interest income during those years would
have increased by $156,000, $104,000 and $135,000, 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, 2004, 2003 and 2002, such loans
totaled $3.7 million, $5.5 million and $4.9 million, respectively, with
allowances of $1.1 million, $1.7 million and $1.5 million, respectively,
specifically allocated to them.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses increased by $776,000 to $8.9
million at December 31, 2004 compared to the prior year-end. At December 31,
2003 the allowance for loan and lease losses was $8.1 million compared to $7.3
million at December 31, 2002, an increase of $844,000. The allowance for loan
and lease losses is increased periodically through charges to earnings in the
form of a provision for loan and lease losses. Loans that are deemed
uncollectible are charged against the allowance and any recoveries of such loans
are credited to it. Management believes that although chargeoffs may occur in
the future, adequate reserves have been provided.
The Company maintains an allowance for loan and lease losses at an amount
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 leases and classified loans and leases, and an allocation to
general reserves based on historical trends and qualitative factors. The Company
consistently applies the following comprehensive methodology.
The first category of reserves consists of a specific allocation of the
allowance for impaired loans and leases and classified loans and leases. This
allocation is established for specific commercial and industrial loans,
commercial real estate, construction loans and lease financing receivables which
have been identified by bank management as being impaired or high-risk loan and
lease assets. These loans and leases are assigned based on nonperformance
according to their payment terms and there is reason to believe that repayment
of principal in whole or part is unlikely. The specific allocation of the
allowance is the total amount of potential unconfirmed losses for these impaired
or classified loans and leases. To assist in determining the fair value of loan
collateral for impaired and other loans and leases, 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 general allocation portion
of the allowance. This is determined by taking the loan and lease portfolios
outstanding and creating individual loan pools for commercial loans, real estate
loans, construction loans, leases and various types of loans to individuals that
have similar characteristics and applying historical loss experiences to 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 and lease portfolio performance,
loan policy or management changes and other qualitative factors which may
indicate future losses to deviate from historical levels.
16
Management must make estimates using assumptions and information, which is
often subjective and changing rapidly. Management believes the allowance for
loan and lease losses was at an acceptable level at December 31, 2004.
The following table represents transactions affecting the allowance for
loan and lease losses for the periods indicated.
Years ended December 31,
-----------------------------------------------------------
2004 2003 2002 2001 2000
------- ------- ------- ------- -------
(dollars in thousands)
Balance at beginning of year ........................ $ 8,142 $ 7,298 $ 6,320 $ 5,657 $ 4,953
Charge-offs:
Commercial ....................................... (43) (14) (160) (224) (142)
Lease financing receivables ...................... (1,142) (1,331) (52) (39) --
Real estate -- mortgages ......................... -- -- (47) (7) (197)
Installment loans to individuals ................. (8) (16) (3) (8) (49)
Credit cards and related plans ................... (8) (1) (36) (42) (60)
------- ------- ------- ------- -------
(1,201) (1,362) (298) (320) (448)
------- ------- ------- ------- -------
Recoveries:
Commercial ....................................... 120 42 66 73 18
Lease financing receivables ...................... 654 24 7 -- --
Real estate -- mortgages ......................... -- 58 165 3 69
Installment loans to individuals ................. 21 4 26 12 7
Credit cards and related plans ................... 13 13 16 10 10
------- ------- ------- ------- -------
808 141 280 98 104
------- ------- ------- ------- -------
Net charge-offs ..................................... (393) (1,221) (18) (222) (344)
Provision for loan and lease losses ................. 1,169 2,065 996 885 1,048
------- ------- ------- ------- -------
Balance at end of year .............................. $ 8,918 $ 8,142 $ 7,298 $ 6,320 $ 5,657
======= ======= ======= ======= =======
Ratio of net charge-offs during the period to
average loans outstanding during the period ...... (0.07)% (0.26)% (0.00)% (0.07)% (0.10)%
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 percentage of each category to total
loans and leases, at each of the dates indicated.
Years ended December 31,
----------------------------------------------------------------------------------------------------
2004 2003 2002
----------------------------- ----------------------------- -----------------------------
% of % of % of
Loans Loans Loans
to to to
Total Total Total
% of Gross % of Gross % of Gross
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------ --------- ------ ------ --------- ------ ------ --------- ------
(dollars in thousands)
Balance at end
of Period
allocable to:
Commercial and
non-
residential
properties ......... $4,335 49% 60% $3,712 45% 57% $3,576 49% 55%
Lease financing
receivables ........ 1,677 19 6 1,755 22 4 1,416 19 4
Construction ....... 814 9 7 403 5 7 278 4 5
Loans secured by
1-4 and multi-
family ............. 891 10 26 893 11 31 1,521 21 35
Loans to
individuals ........ 102 1 1 174 2 1 47 1 1
Other categories ... 1,099 12 -- 1,205 15 -- 460 6 --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan and
lease losses ....... $8,918 100% 100% $8,142 100% 100% $7,298 100% 100%
====== ====== ====== ====== ====== ====== ====== ====== ======
Years ended December 31,
----------------------------------------------------------------
2001 2000
----------------------------- -----------------------------
% of % of
Loans Loans
to to
Total Total
% of Gross % of Gross
Amount Allowance Loans Amount Allowance Loans
------ --------- ------ ------ --------- ------
(dollars in thousands)
Balance at end
of Period
allocable to:
Commercial and
non-
residential
properties ......... $3,388 53% 54% $1,745 31% 48%
Lease financing
receivables ........ 132 2 2 87 2 2
Construction ....... 164 3 3 107 2 3
Loans secured by
1-4 and multi-
family ............. 1,918 30 39 1,999 35 44
Loans to
individuals ........ 292 5 2 343 6 3
Other categories ... 426 7 -- 1,376 24 --
------ ------ ------ ------ ------ ------
Total allowance
for loan and
lease losses ....... $6,320 100% 100% $5,657 100% 100%
====== ====== ====== ====== ====== ======
Deposits
A large portion of the Company's liquidity is provided from its deposit
sources. At December 31, 2004 total deposits were $604.0 million, an increase of
$43.2 million or 7.7% over 2003. Of the total increase, increases in non
interest-bearing demand deposits, interest-bearing checking deposits and time
deposits less than $100,000 accounted for $13.4 million, $11.6 million and $25.9
million, respectively, while savings deposits decreased by $8.3 million. Total
deposits were $560.7 million at December 31, 2003, an increase of $16.7 million
compared with December 31, 2002. Non interest-bearing demand deposits,
interest-bearing checking deposits and
17
savings deposits increased by $15.8 million, $8.1 million and $6.1 million,
respectively, while total time deposits decreased by $13.4 million. The decrease
in time deposits during 2003 resulted from maturity runoff.
The following table summarizes the average rates of the components of
average deposit liabilities for the years indicated.
Years ended December 31,
---------------------------------------------------------------
Average Average Average
2004 Rate 2003 Rate 2002 Rate
-------- ------- -------- ------- -------- -------
(dollars in thousands)
Non interest-bearing .................... $161,400 -- $146,995 -- $135,840 --
Savings and interest-bearing checking ... 269,382 0.76% 259,974 0.80% 224,630 1.40%
Time deposits ........................... 177,795 2.18% 153,835 2.34% 154,577 3.14%
-------- ---- -------- ---- -------- ----
$608,577 0.97% $560,804 1.01% $515,047 1.55%
======== ==== ======== ==== ======== ====
Listed below is a summary of time certificates of deposit $100,000 and
over categorized by time remaining to maturity.
December 31, 2004
-----------------
(in thousands)
Three months or less .................... $29,899
Over three months through six months .... 3,510
Over six months through twelve months ... 403
Over twelve months ...................... 1,958
-------
$35,770
=======
Federal Home Loan Bank Advances
At both December 31, 2004 and 2003, Federal Home Loan Bank ("FHLB")
advances totaled $85.0 million. The Company considers FHLB advances as an added
source of funding and accordingly executes transactions to meet its funding
needs. There were no transactions during 2004. The FHLB advances have varying
terms and interest rates.
Short-Term Borrowings
As of December 31, 2004, securities sold under agreements to repurchase
and federal funds purchased were $45.8 million. Short-term borrowings generally
have maturities of less than one year. Details for the last three years are
presented below (in thousands):
December 31,
-------------------------------
2004 2003 2002
------- ------- -------
(dollars in thousands)
Securities sold under repurchase agreements
and federal funds purchased:
Balance at year-end ....................... $45,771 $25,747 $11,728
Average during the year ................... 14,620 11,198 15,276
Maximum month-end balance ................. 45,771 25,747 26,545
Weighted average rate during the year ..... 1.62% 1.07% 1.42%
Rate at year-end .......................... 1.88% 0.71% 1.01%
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 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 Preferred Securities.
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%).
18
The Company had a negative one-year gap position with respect to its
exposure to interest rate risk at December 31, 2004. The Asset/Liability
Management Committees of the Bank Subsidiaries' respective Boards of Directors
meet quarterly to discuss 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, 2004 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
Months Months Years Years Years Total Fair Value
---------- --------- --------- --------- --------- --------- ----------
(dollars in thousands)
Rate-sensitive assets:
Investment securities and interest-
bearing due from banks ................$ $ 15,708 $ 22,615 $ 45,096 $ 21,587 $ 31,577 $ 136,583 $ 139,750
Rate 3.10% 3.55% 3.20% 4.40% 5.14% 3.88%
Federal funds sold ........................$ 9,370 -- -- -- -- 9,370 9,370
Rate 2.95% -- -- -- -- 2.95%
Total loans net of unearned income ........$ 174,006 63,641 65,720 215,219 92,605 611,191 611,778
Rate 5.53% 6.60% 6.76% 6.38% 5.78% 6.11%
--------- --------- --------- --------- --------- --------- ---------
Total rate-sensitive assets ........ $ 199,084 $ 86,256 $ 110,816 $ 236,806 $ 124,182 $ 757,144 $ 760,898
========= ========= ========= ========= ========= ========= =========
Rate-sensitive liabilities:
Interest-bearing checking deposits ........$ $ 80,195 $ 3,810 $ 21,524 $ 48,379 $ 16,435 $ 170,343 $ 170,343
Rate 1.22% 1.72% 0.86% 0.85% 0.68% 1.03%
Savings deposits ..........................$ 29,334 221 13,420 32,144 18,725 93,844 93,844
Rate 0.59% 0.96% 0.68% 0.65% 0.63% 0.63%
Time deposits .............................$ 40,076 72,214 35,897 23,724 3 171,914 173,278
Rate 1.69% 1.95% 3.02% 3.38% 5.30% 2.31%
Total borrowings(1) ........................ 50,597 10,019 5,027 65,093 24,779 155,514 167,274
Rate 2.65% 4.76% 4.88% 5.24% 8.45% 4.85%
--------- --------- --------- --------- --------- --------- ---------
Total rate-sensitive liabilities ... $ 200,202 $ 86,264 $ 75,868 $ 169,340 $ 59,942 $ 591,615 $ 604,739
========= ========= ========= ========= ========= ========= =========
Interest rate sensitivity gap .............. (1,118) (8) 34,948 67,466 64,240 165,528
Interest rate sensitivity gap, as a
percentage of total rate-sensitive
assets ................................. (0.15%) -- 4.62% 8.91% 8.48%
Cumulative interest rate sensitivity gap ... (1,118) (1,126) 33,822 101,288 165,528
========= ========= ========= ========= =========
Cumulative interest rate sensitivity
gap as a percentage of total
rate-sensitive assets .................. (0.15%) (0.15%) 4.47% 13.38% 21.86%
(1) Includes FHLB advances, federal funds purchased, securities sold under
agreements to repurchase and subordinated debt.
Liquidity
The Company actively manages its liquidity under the direction of the
Asset/Liability Management Committees of the Bank Subsidiaries. Sources of
liquidity at December 31, 2004 totaled $152.0 million or 18.4% of total assets,
consisting of available-for-sale investment securities of $111.8 million and
$40.1 million in cash and cash equivalents and interest-bearing due from banks.
By comparison, total liquidity at December 31, 2003 totaled $189.3 million or
25.1% of total assets, consisting of investment securities of $152.5 million and
$36.8 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, 2004:
Three to
Less than One to Two Five After Five
One Year Years Years Years Total
--------- ---------- -------- ---------- --------
Remaining contractual maturities of time deposits ... $112,290 $ 35,897 $ 23,724 $ 3 $171,914
Total borrowings .................................... 60,616 5,027 65,092 24,779 155,514
Minimum annual rental payments ...................... 711 680 1,770 943 4,104
Loan commitments .................................... 121,700 -- 54,839 -- 176,539
Standby letters of credit ........................... 1,604 -- -- -- 1,604
-------- -------- -------- -------- --------
Total ....................................... $296,921 $ 41,604 $145,425 $ 25,725 $509,675
======== ======== ======== ======== ========
19
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 loan and lease 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, 2004 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, 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.
Management reviews their expansion strategies and capital alternatives on
an ongoing basis. They may consider raising capital during 2005 but have not
made any final determination in this regard.
The following table presents the risk-based and leverage capital ratios
for the Company and each Bank Subsidiary as of December 31, 2004 and 2003.
To be Well-Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- ------- ------- ------- -------
(dollars in thousands)
As of December 31, 2004
Total capital (to risk-weighted assets)
Greater Community Bancorp ............... $79,031 11.73% $53,900 8.00% n/a n/a
Greater Community Bank .................. 41,617 10.08 33,030 8.00 $41,287 10.00%
Bergen Commercial Bank .................. 24,883 10.83 18,381 8.00 22,976 10.00
Rock Community Bank ..................... 5,859 20.88 2,245 8.00 2,806 10.00
Tier 1 capital (to risk-weighted assets)
Greater Community Bancorp ............... 64,157 9.52 26,957 4.00 n/a n/a
Greater Community Bank .................. 36,448 8.82 16,530 4.00 24,795 6.00
Bergen Commercial Bank .................. 22,178 9.66 9,183 4.00 13,775 6.00
Rock Community Bank ..................... 5,506 19.62 1,123 4.00 1,684 6.00
Tier 1 capital (to average assets)
Greater Community Bancorp ............... 64,157 7.99 32,118 4.00 n/a n/a
Greater Community Bank .................. 36,448 7.28 20,026 4.00 25,033 5.00
Bergen Commercial Bank .................. 22,178 8.45 10,498 4.00 13,123 5.00
Rock Community Bank ..................... 5,506 16.01 1,376 4.00 1,720 5.00
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
New Accounting Pronouncements
In December 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 recognition of the excess of all cash flows
expected at acquisition over the investor's initial investment in the loan as
20
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 accepted 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. The Company does not expect adoption to have a material impact on the
consolidated financial statements, results of operations or liquidity.
In March 2004, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 105, Application of Accounting Principles to Loan
Commitments (SAB 105). SAB 105 provides general guidance that must be applied
when an entity determines the fair value of a loan commitment accounted for as a
derivative. SAB 105 is effective for commitments to originate mortgage loans to
be held for sale entered into after March 31, 2004. The adoption of SAB 105 did
not have a material impact on the Company's consolidated financial statements.
In March 2004, the Financial Accounting Standards Board (FASB) released
EITF Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. It provides guidance for determining when an
investment is impaired and whether the impairment is other than temporary. In
September 2004, the FASB approved for issuance a FASB Staff Position on EITF
Issue 03-1-1. This issue delays the effective date, originally set for periods
beginning after June 15, 2004, for the measurement and recognition guidance
contained in paragraph 10-20 of Issue 03-1. However, it does not suspend the
requirements to recognize other-than-temporary impairments as required by
existing authoritative literature. Management will continue to monitor the
impact of Issue 03-1 on the Company's financial statements as the FASB issues
additional guidance.
In December 2004, the FASB issued SFAS No. 123 (Revised), Share-Based
Payment ("SFAS No. 123(R)"), establishing accounting standards for transactions
in which an entity exchanges its equity instruments for goods or services. SFAS
No. 123(R) also addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the entity's
equity instruments. SFAS No. 123(R) covers a wide range of share-based
compensation arrangements including stock options, restricted stock plans,
performance-based stock awards, stock appreciation rights, and employee stock
purchase plans. SFAS No. 123(R) replaces existing requirements under SFAS No.
123, Accounting for Stock-Based Compensation, and eliminates the ability to
account for share-based compensation transactions using APB Opinion No. 25. The
provisions for SFAS No. 123(R) are effective for the Company on July 1, 2005.
The Company is currently assessing the financial statement impact of adopting
SFAS No. 123(R).
In December 2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary
Assets-an amendment of APB Opinion No. 29 ("SFAS No. 153"), addressing the
measurement of exchanges of nonmonetary assets. SFAS No. 153 eliminates the
exception from fair value measurements for nonmonetary exchanges of similar
production assets in APB Opinion No. 29, Accounting for Nonmonetary Exchanges,
and replaces it with an exception for exchanges that do not have commercial
substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005 with earlier application
permitted. The Company does not expect adoption of the provisions of SFAS No.
153 to have a material impact on the consolidated 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.
21
Item 8 FINANCIAL STATEMENTS
--------------------
GREATER COMMUNITY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
------------------------
2004 2003
--------- ---------
ASSETS
CASH AND DUE FROM BANKS - Non interest-bearing ..................................... $ 22,952 $ 19,233
FEDERAL FUNDS SOLD ................................................................. 9,370 10,000
--------- ---------
Total cash and cash equivalents ....................................... 32,322 29,233
DUE FROM BANKS -- Interest-bearing ................................................. 7,806 7,539
INVESTMENT SECURITIES - Available-for-sale ......................................... 111,840 152,513
INVESTMENT SECURITIES - Held-to-maturity (aggregate fair value of
$20,104 and $2,712 at December 31, 2004 and 2003, respectively) ................ 20,205 2,726
--------- ---------
Total investment securities ........................................... 132,045 155,239
LOANS AND LEASES ................................................................... 611,192 523,799
Allowance for loan and lease losses ............................................ (8,918) (8,142)
--------- ---------
Net loans ............................................................. 602,274 515,657
PREMISES AND EQUIPMENT, net ........................................................ 10,023 7,545
ACCRUED INTEREST RECEIVABLE ........................................................ 2,835 2,635
OTHER REAL ESTATE OWNED ............................................................ 849 824
BANK-OWNED LIFE INSURANCE .......................................................... 14,503 13,026
GOODWILL ........................................................................... 11,574 11,574
OTHER ASSETS ....................................................................... 11,132 9,853
--------- ---------
TOTAL ASSETS ................................................................... $ 825,363 $ 753,125
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Non interest-bearing ........................................................... $ 167,850 $ 154,462
Interest-bearing checking ...................................................... 170,343 158,719
Savings ........................................................................ 93,844 102,152
Time deposits less than $100 ................................................... 136,144 110,243
Time deposits $100 and over .................................................... 35,770 35,137
--------- ---------
Total deposits ........................................................ 603,951 560,713
FHLB ADVANCES ...................................................................... 85,000 85,000
FEDERAL FUNDS PURCHASED ............................................................ 40,000 15,700
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE ..................................... 5,771 10,047
ACCRUED INTEREST PAYABLE ........................................................... 1,637 1,475
OTHER LIABILITIES .................................................................. 5,646 5,620
SUBORDINATED DEBT .................................................................. 24,743 24,000
--------- ---------
Total liabilities ..................................................... 766,748 702,555
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock, par value $0.50 per share, 20,000,000 shares authorized, 7,570,278
and 7,180,090 shares outstanding at December 31, 2004 and
2003, respectively ............................................................. 3,785 3,502
Additional paid-in capital ......................................................... 48,538 41,788
Retained earnings .................................................................. 4,475 2,735
Accumulated other comprehensive income ............................................. 1,817 2,545
--------- ---------
Total shareholders' equity ............................................ 58,615 50,570
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......................................... $ 825,363 $ 753,125
========= =========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
22
GREATER COMMUNITY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For the Years Ended
December 31,
-------------------------------
2004 2003 2002
------- ------- -------
INTEREST INCOME:
Loans, including fees ........................................... $34,233 $31,187 $31,912
Investment securities ........................................... 5,574 6,289 8,057
Federal funds sold and deposits with banks ...................... 443 430 936
------- ------- -------
Total interest income ..................................... 40,250 37,906 40,905
------- ------- -------
INTEREST EXPENSE:
Deposits ........................................................ 5,942 5,676 7,998
Short-term borrowings ........................................... 4,629 4,537 4,520
Long-term borrowings ............................................ 2,028 2,031 2,168
------- ------- -------
Total interest expense .................................... 12,599 12,244 14,686
------- ------- -------
NET INTEREST INCOME .................................................. 27,651 25,662 26,219
PROVISION FOR LOAN AND LEASE LOSSES .................................. 1,169 2,065 996
------- ------- -------
Net interest income after provision for loan and lease losses ... 26,482 23,597 25,223
------- ------- -------
NON-INTEREST INCOME:
Service charges on deposit accounts ............................. 2,862 2,789 2,440
Other commission and fees ....................................... 713 610 707
Fee income on mortgage loans sold ............................... 414 492 128
Gain on sale of investment securities ........................... 1,121 2,174 1,191
Gain on sale of leases .......................................... 51 115 1,152
Bank-owned life insurance ....................................... 477 578 611
All other income ................................................ 851 1,190 1,090
------- ------- -------
Total non-interest income ................................. 6,489 7,948 7,319
------- ------- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits .................................. 11,788 12,446 10,942
Occupancy and equipment ......................................... 3,567 3,367 3,195
Regulatory, professional and other fees ......................... 2,129 1,993 1,996
Computer services ............................................... 577 510 424
Office expenses ................................................. 1,082 1,088 1,132
Write-off of deferred securities issuance costs ................. -- -- 1,022
Other operating expenses ........................................ 2,108 2,621 2,965
------- ------- -------
Total non-interest expense ................................ 21,251 22,025 21,676
------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES ............................. 11,720 9,520 10,866
PROVISION FOR INCOME TAXES ........................................... 3,934 2,786 3,353
------- ------- -------
NET INCOME ........................................................... $ 7,786 $ 6,734 $ 7,513
======= ======= =======
Net income per share -- basic ........................................ $ 1.06 $ 0.92 $ 1.02
======= ======= =======
Net income per share -- diluted ...................................... $ 1.02 $ 0.87 $ 0.96
======= ======= =======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
23
GREATER COMMUNITY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Common Stock Accumulated
------------------- Additional Other Total
Paid-in Retained Comprehensive Treasury Comprehensive Shareholders'
Shares Par Value Capital Earnings Income (loss) Stock Income Equity
-------- --------- ---------- -------- ------------- -------- ------------- -------------
BALANCE: Jan 1, 2002 ........... 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 adjustment
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: Dec 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 income-net
of reclassification adjustment
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: Dec 31, 2003 .......... 7,004 $ 3,502 $ 41,788 $ 2,735 $ 2,545 $ -- $ 50,570
Net income - 2004 .............. -- -- -- 7,786 -- -- $ 7,786 7,786
2.5% stock dividend ............ 180 90 2,484 (2,574) -- -- --
Exercise of stock options ...... 342 171 3,659 -- -- -- 3,830
Issuance of common stock ....... 44 22 607 629
Cash Dividends ................. -- -- (3,472) -- -- (3,472)
Other comprehensive income-net
of reclassification adjustment
and taxes ...................... -- -- -- (728) -- (728) (728)
--------
Total comprehensive income ..... -- -- -- -- -- $ 7,058
========
-------- -------- -------- -------- -------- -------- --------
BALANCE: Dec 31, 2004 .......... 7,570 $ 3,785 $ 48,538 $ 4,475 $ 1,817 $ -- $ 58,615
======== ======== ======== ======== ======== ======== ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
24
GREATER COMMUNITY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended
December 31,
-------------------------------------
2004 2003 2002
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income .................................................................. $ 7,786 $ 6,734 $ 7,513
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .......................................... 1,243 1,280 1,248
Amortization of premium on securities, net ............................. 624 2,867 1,472
Gains on sales of assets ............................................... (51) (270) (124)
Gains on sales of securities, net ...................................... (1,121) (2,174) (1,191)
Losses on sales of securities, trading account ......................... -- -- 9
Provision for loan and lease losses .................................... 1,169 2,065 996
Deferred income tax provision (benefit) ................................ 316 (790) (655)
(Increase) decrease in accrued interest receivable .................... (200) 496 (83)
(Increase) decrease in bank-owned life insurance and other assets ...... (2,013) (379) 268
Increase (decrease) in accrued interest and other liabilities .......... 188 (1,503) (6,159)
--------- --------- ---------
Net cash provided by operating activities ........................ 7,941 8,326 3,294
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale investment securities -
Purchases .......................................................... (45,166) (108,498) (161,124)
Sales .............................................................. 2,493 11,307 22,646
Maturities ......................................................... 82,838 128,166 101,815
Held-to-maturity investment securities -
Purchases ........................................................... (21,216) -- (4,120)
Maturities .......................................................... 3,749 2,595 494
Net (increase) decrease in interest-bearing deposits with banks ..... (267) 1,900 4,438
Net (increase) in loans ............................................. (87,786) (79,613) (31,775)
Capital expenditures ................................................ (3,721) (1,316) (2,193)
Proceeds from the sale of assets .................................... -- 341 --
(Increase) in other real estate owned ............................... (25) -- --
--------- --------- ---------
Net cash used in investing activities ............................ (69,101) (45,118) (69,819)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts ....................................... 43,238 16,670 59,420
Increase in federal funds purchased .................................... 24,300 -- --
(Decrease) increase in securities sold under agreement to repurchase ... (4,276) 14,019 (10,619)
Proceeds from long-term FHLB advances .................................. -- 5,000 10,000
Proceeds from issuance of subordinated debt ............................ -- -- 24,000
Repayment of subordinated debt ......................................... -- -- (23,000)
Dividends paid ......................................................... (3,472) (3,041) (2,679)
Proceeds from exercise of stock options ................................ 3,830 757 717
Proceeds from the issuance of common stock, net of costs ............... 629 -- --
Purchase of treasury stock ............................................. -- (4,513) (1,178)
--------- --------- ---------
Net cash provided by financing activities ........................ 64,249 28,892 56,661
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents ........................ $ 3,089 $ (7,900) $ (9,864)
--------- --------- ---------
CASH AND CASH EQUIVALENTS, beginning of the year ............................ 29,233 37,133 46,997
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year ...................................... $ 32,322 $ 29,233 $ 37,133
========= ========= =========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
25
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 sixteen 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 to medium ticket and
lower or middle market leases. GCB also operates a securities brokerage business
in its Greater Community Financial division ("GCF"). In 2003 GCB acquired the
securities brokerage assets and business previously operated by Greater
Community Financial, LLC, a direct nonbank subsidiary of the Company. Since 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.
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, Greater Community
Services, Inc., REO Fairfield, LLC and the wholly-owned direct and indirect
subsidiaries of GCB and BCB (HCC and investment companies). The Company adopted
the provisions under the revised interpretation under FIN 46(R) in 2004, which
required the Company to de-consolidate GCB Capital Trust II. See the discussion
on Variable Interest Entities later in this Note. 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 1999 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 or is subject to certain events or circumstances since its
last fair value determination, a charge for goodwill impairment may be
recognized.
BUSINESS SEGMENTS
Statement on Financial Accounting Standards (SFAS) No.131, Disclosures
about Segments of an Enterprise and Related Information, 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 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, with the exception of GCB's nonbank subsidiary HCC,
to create a reportable segment, "Community Banking." All of Community Banking's
activities are interrelated, and each activity is dependent and assessed based
on how each of the Community Banking's activities supports the
26
other activities. For example, a Bank Subsidiary's 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, significant
operating decisions are based upon analysis of Community Banking as an operating
segment. The Company regards HCC as a reportable segment, "Leasing", in that the
unit specializes in vendor-driven lease programs focusing primarily on small to
medium ticket medical equipment leasing and derives its business largely outside
the Bank Subsidiaries' traditional geographic market. Leasing is funded by a
credit facility with GCB.
The following table presents total revenue and net income for the years
2004, 2003 and 2002 and total assets at December 31, 2004, 2003 and 2002 for
both business segments. All significant intersegment accounts and transactions
have been eliminated.
At and for the Year Ended December 31, 2004
----------------------------------------------------------
Total Community Corporate
Company Banking Leasing and Other (2)
--------- --------- --------- -------------
(in thousands)
Net interest income ..................... $ 27,651 $ 25,812 $ 1,839 $ --
Non-interest income (1) ................. 5,317 5,118 262 (63)
--------- --------- --------- ---------
Total revenue .................... 32,968 30,930 2,101 (63)
Provision for loan and lease losses
(recovery) ....................... 1,169 (874) 2,043 --
Gain on sale of investment securities ... 1,121 1,121 -- --
Gain on sale of leases .................. 51 -- 51 --
Non-interest expense .................... 21,251 19,616 1,698 (63)
--------- --------- --------- ---------
Income (loss) before provision
for income taxes ................. 11,720 13,309 (1,589) --
Provision for income taxes (recovery) ... 3,934 4,435 (501) --
--------- --------- --------- ---------
Net income (loss) ................ $ 7,786 $ 8,874 $ (1,088) $ --
========= ========= ========= =========
Period-end total assets ................. $ 825,363 $ 821,746 $ 36,371 $ (32,754)
At and for the Year Ended December 31, 2003
----------------------------------------------------------
Total Community Corporate
Company Banking Leasing and Other (2)
--------- --------- --------- -------------
(in thousands)
Net interest income ..................... $ 25,662 $ 24,284 $ 1,378 $ --
Non-interest income (1) ................. 5,659 5,628 99 (68)
--------- --------- --------- ---------
Total revenue .................... 31,321 29,912 1,477 (68)
Provision for loan and lease losses ..... 2,065 789 1,276 --
Gain on sale of investment securities ... 2,174 2,174 -- --
Gain on sale of leases .................. 115 -- 115 --
Non-interest expense .................... 22,025 20,070 2,023 (68)
--------- --------- --------- ---------
Income (loss) before provision
for income taxes ................. 9,520 11,277 (1,707) --
Provision for income taxes (recovery) ... 2,786 3,418 (632) --
--------- --------- --------- ---------
Net income (loss) ................ $ 6,734 $ 7,809 $ (1,075) $ --
========= ========= ========= =========
Period-end total assets ................. $ 753,125 $ 753,414 $ 23,281 $ (23,570)
27
At and for the Year Ended December 31, 2002
----------------------------------------------------------
Total Community Corporate
Company Banking Leasing and Other (2)
--------- --------- --------- -------------
(in thousands)
Net interest income ..................... $ 26,219 $ 25,300 $ 919 $ --
Non-interest income (1) ................. 4,976 4,880 155 (59)
--------- --------- --------- ---------
Total revenue .................... 31,195 30,180 1,074 (59)
Provision for loan and lease losses ..... 996 770 226 --
Gain on sale of investment securities ... 1,191 1,191 -- --
Gain on sale of leases .................. 1,152 -- 1,152 --
Non-interest expense .................... 21,676 19,318 2,417 (59)
--------- --------- --------- ---------
Income (loss) before provision
for income taxes ................. 10,866 11,283 (417) --
Provision for income taxes (recovery) ... 3,353 3,495 (142) --
--------- --------- --------- ---------
Net income (loss) ................ $ 7,513 $ 7,788 $ (275) $ --
========= ========= ========= =========
Period-end total assets ................. $ 719,867 $ 717,667 $ 17,215 $ (15,015)
(1) Excludes non-recurring gains which are reported separately.
(2) Includes intersegment eliminations.
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 management 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.
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, 2004 and 2003, the Company did not have any 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 did not
have any derivatives at December 31, 2004 and 2003.
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, unamortized loan
origination costs 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
28
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 and leases 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 and leases as adjustments of
yield. When management believes there is sufficient doubt as to the ultimate
collectibility of interest on any loan and lease, the accrual of applicable
interest is discontinued. A loan and lease 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 deterioration in the financial condition of the
borrower, and payment in full of principal or interest is not expected. Loans
and leases past due 90 days or more and still accruing interest are loans and
leases 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 loan and lease losses using methods similar to those prescribed in
this standard.
The Company also follows Staff Accounting Bulletin (SAB) No.102, Selected
Loan Loss Allowance Methodology and Documentation Issue. 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 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.
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 issues 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 adopted 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.
SFAS 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.
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 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 certain employees and
non-employee directors. The Company's Bank Subsidiaries are owners and
beneficiaries of the policies.
29
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. On January 1, 2002, the Company
adopted SFAS No.142, Goodwill and Intangible Assets. This pronouncement modified
the accounting for all purchased goodwill and intangible assets and includes
requirements to test goodwill and indefinite lived intangible assets for
impairment rather than amortize them. The Company evaluates goodwill for
impairment annually and has determined that no impairment loss exists as of
December 31, 2004. Goodwill at December 31, 2004 and 2003 was approximately
$11.6 million.
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, 2004 and 2003 were
approximately $929,000 and $1.0 million, 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 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 $3.7
million, $3.6 million and $4.3 million for the years ended December 31, 2004,
2003 and 2002, respectively. Cash paid for interest was $12.4 million, $12.6
million and $15.6 million for the years ended December 31, 2004, 2003 and 2002,
respectively.
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, holding costs
and 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, 2004, 2003 and 2002 were approximately
$245,000, $240,000 and $311,000, 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 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, 2004, 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.
30
Years ended December 31,
-----------------------------------------
2004 2003 2002
--------- --------- ---------
(in thousands, except per share amounts)
Net Income ............................................. As reported $ 7,786 $ 6,734 $ 7,513
Less: stock-based compensation costs determined
under fair-value based method for all awards ...... (247) (255) (243)
--------- --------- ---------
Pro forma $ 7,539 $ 6,479 $ 7,270
========= ========= =========
Earnings per share of common stock - basic ............. As reported $ 1.06 $ 0.92 $ 1.02
Pro forma 1.02 0.89 0.98
Earnings per share of common stock - diluted ........... As reported 1.02 0.87 0.96
Pro forma 0.99 0.84 0.93
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 2004, 2003 and 2002,
respectively: dividend yields of 2.86%, 2.60% and, 2.5%; expected volatility of
18%, 29% and 34%; risk-free interest rates of 4.29%, 5.82% and 5.82%; and
expected lives of ten years. During 2004, the Company granted a total of 106,000
stock options.
NET INCOME PER SHARE
Basic earnings per share excludes 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 have
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 requires the reporting of 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:
(in thousands) December 31, 2004 December 31, 2003 December 31, 2002
- ----------------------------- ---------------------------- ----------------------------- ---------------------------
Before Tax Net of Before Tax Net of Before Tax Net of
Tax (Expense) Tax Tax (Expense) Tax Tax (Expense) Tax
Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount
------- --------- ------- ------- --------- ------- ------- --------- -------
Unrealized gain on
investment
securities:
Unrealized holding
gains arising
during period ......... $ 200 $ (255) $ (55) $ 763 $ (323) $ 440 $ 2,792 $(1,064) $ 1,728
Less reclassification
adjustment for gains
realized in net income ...... 1,121 (448) 673 2,174 (869) 1,305 1,191 (476) 715
------- ------- ------- ------- ------- ------- ------- ------- -------
Other comprehensive
loss, net ................. $ (921) $ 193 $ (728) $(1,411) $ 546 $ (865) $ 1,601 $ (588) $ 1,013
======= ======= ======= ======= ======= ======= ======= ======= =======
VARIABLE INTEREST ENTITIES
In 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.
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. The Company adopted the provisions under the revised
interpretation in 2004, which required the Company to de-consolidate GCB Capital
Trust II. 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. The de-consolidation of GCB
Capital Trust II resulted in a $743,000 increase in the Company's other assets
and a corresponding increase in subordinated debt. On March 1, 2005 the Federal
Reserve adopted a final rule that allows the continued inclusion of trust
preferred securities in the Tier 1 capital of bank holding companies. In
addition, the rule revised the quantitative limits applied to the aggregate
amount of trust preferred securities and certain other core capital elements
included in the Tier 1 capital. The
31
revised limits become effective after a five-year transition period. Management
is currently evaluating the provisions of the final rule.
RECLASSIFICATIONS
Certain reclassifications have been made in the 2003 and 2002 financial
statements to conform to the classifications used in 2004.
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,
--------------------------------------------------------------------------------------------
(in thousands) 2004 2003
------------------------------------- --------------------------------------------- ---------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
--------- ---------- ---------- ---------- --------- ---------- ---------- ----------
Available-for-sale:
U.S. Treasury and U.S. Government
agency securities ............... $ 23,698 $ 11 $ (142) $ 23,567 $ 27,572 $ 191 $ (14) $ 27,749
State and political subdivisions ... 12,744 141 (131) 12,754 13,272 125 (156) 13,241
Other debt and equity securities ... 20,779 3,850 (83) 24,546 23,953 4,715 (312) 28,356
Mortgage-backed securities:
FHLMC ........................... 13,453 132 (168) 13,417 24,801 269 (281) 24,789
FNMA ............................ 34,217 168 (563) 33,822 51,477 322 (740) 51,059
Other ........................... 3,682 58 (6) 3,734 7,250 84 (15) 7,319
-------- -------- -------- -------- -------- -------- -------- --------
51,352 358 (737) 50,973 83,528 675 (1,036) 83,167
-------- -------- -------- -------- -------- -------- -------- --------
Total available-for-sale ........... $108,573 $ 4,360 $ (1,093) $111,840 $148,325 $ 5,706 $ (1,518) $152,513
======== ======== ======== ======== ======== ======== ======== ========
Held-to-maturity:
U.S. Treasury and U.S. Government
agency securities ............... $ 17,395 $ -- $ (102) $ 17,293 $ 1,000 $ -- $ (15) $ 985
State and political subdivisions ... 2,786 -- -- 2,786 1,689 -- -- 1,689
Mortgage-backed securities:
FHLMC ........................... 24 1 -- 25 37 1 -- 38
-------- -------- -------- -------- -------- -------- -------- --------
24 1 -- 25 37 1 -- 38
-------- -------- -------- -------- -------- -------- -------- --------
Total held-to-maturity ............. $ 20,205 $ 1 $ (102) $ 20,104 $ 2,726 $ 1 $ (15) $ 2,712
======== ======== ======== ======== ======== ======== ======== ========
The amortized cost and fair value of securities at December 31, 2004 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 .................. $ 3,562 $ 3,554
Due after one year through 5 years ....... 21,280 21,148
Due after five years through 10 years .... 4,542 4,451
Due after ten years ...................... 7,058 7,168
Mortgage-backed securities ............... 51,352 50,973
Other debt and equity securities ......... 20,779 24,546
-------- --------
Total available-for-sale .......... $108,573 $111,840
======== ========
Held-to-maturity:
Due in one year or less .................. $ 3,786 $ 3,782
Due after five years through ten years ... 16,395 16,297
Mortgage-backed securities ............... 24 25
Total held-to-maturity ............. 20,205 20,104
-------- --------
Total investment securities ........ $128,778 $131,944
======== ========
32
Proceeds from sales of available-for-sale securities for the years ended
December 31, 2004, 2003 and 2002 were $2.5 million, $11.3 million and $22.6
million, respectively. Gross gains of $1.1 million, $2.2 million and $1.2
million were realized on these sales for the respective years. Gross losses were
not significant for such years.
Securities with a carrying value of $67.9 million and $68.3 million at
December 31, 2004 and 2003, 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, 2004 and 2003.
December 31, 2004
- --------------------------------------------------------------------------------------------------------------------
(in thousands) Less than 12 months 12 months or longer Total
- ------------------------- --------------------- --------------------- ---------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Description of securities Value Losses Value Losses Value Losses
- ------------------------- ------- ---------- ------- ---------- ------- ----------
Available-for-sale:
US Treasury Obligations ................ $ 1,244 $ (4) $ -- $ -- $ 1,244 $ (4)
Federal Agency securities .............. 7,688 (83) 6,453 (52) 14,141 (135)
State and Political Subdivisions ....... -- -- 7,497 (59) 7,497 (59)
Mortgage-backed securities ............. 12,832 (305) 20,803 (488) 33,635 (793)
Corporate Bonds ........................ -- -- 3,892 (94) 3,892 (94)
------- ------- ------- ------- ------- -------
Sub-total debt securities .......... 21,764 (392) 38,645 (693) 60,409 (1,085)
------- ------- ------- ------- ------- -------
Common Stock ........................... -- -- 1,967 (8) 1,967 (8)
------- ------- ------- ------- ------- -------
Total available-for-sale ........... $21,764 $ (392) $40,612 $ (701) $62,376 $(1,093)
======= ======= ======= ======= ======= =======
Held-to-maturity:
Federal Agency Securities .............. $16,303 $ (92) $ 990 $ (10) $17,293 $ (102)
------- ------- ------- ------- ------- -------
Total held-to-maturity ............. 16,303 (92) 990 (10) 17,293 (102)
Total temporarily impaired
securities - combined .......... $38,067 $ (484) $41,602 $ (711) $79,669 $(1,195)
======= ======= ======= ======= ======= =======
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, 2004 and 2003 represents an other-than-temporary impairment. As of
the same dates, total of 128 and 100 securities are included in the continuous
unrealized position, of which 106 and 98 are in the available-for sale category,
respectively. For 2004, the majority of the unrealized losses are 12 months or
longer in duration where as for 2003 majority of the unrealized losses are in
less than 12 months duration, both led 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.
33
NOTE 3 - LOANS AND LEASES
Major classifications of loans and leases are as follows:
December 31,
-----------------------
2004 2003
--------- ---------
(in thousands)
Loans secured by one-to-four family residential properties ... $ 147,557 $ 148,121
Loans secured by multi-family residential properties ......... 10,349 11,619
Loans secured by nonresidential properties ................... 311,568 260,318
Loans to individuals ......................................... 5,872 5,686
Commercial loans ............................................. 52,973 37,532
Construction loans ........................................... 44,687 37,640
Lease financing receivables .................................. 37,826 23,181
Other loans .................................................. 754 449
--------- ---------
Total gross loans ......................................... 611,586 524,546
Less: Unearned fees .................................... (394) (747)
--------- ---------
Total loans ............................................... $ 611,192 $ 523,799
========= =========
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 and still accruing.
December 31,
--------------------------
2004 2003 2002
------ ------ ------
(in thousands)
Nonaccrual loans and leases ................................................. $2,511 $2,010 $2,767
Renegotiated loans .......................................................... 205 252 295
------ ------ ------
Total nonperforming loans and leases ..................................... $2,716 $2,262 $3,062
====== ====== ======
Loans past due 90 days and accruing ......................................... $ -- $ 313 $ 587
====== ====== ======
Gross interest income which would have been recorded under original terms ... $ 156 $ 104 $ 135
====== ====== ======
The balance of impaired loans was $2.6 million, $2.1 million and $2.5
million at December 31, 2004, 2003 and 2002, respectively. The Bank Subsidiaries
identify 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 $394,000,
$455,000 and $1.1 million at December 31, 2004, 2003 and 2002, respectively. The
average recorded investment in impaired loans was $1.7 million, $2.1 million and
$1.7 million at December 31, 2004, 2003 and 2002, respectively. The income
recognized on impaired loans for 2004, 2003 and 2002 was $38,000, $118,000 and
$105,000, respectively. The Bank Subsidiaries' policy for interest income
recognition on impaired loans is to recognize income on restructured loans under
the accrual method and to 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,
income is not recognized.
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, 2004, loans outstanding to these related parties
amounted to $21.8 million. During 2004 there were new loans to related parties
of $6.9 million and repayments of $4.7 million. All such loans were current as
to principal and interest payments at December 31, 2004.
34
NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES
An analysis of the allowance for loan and lease losses is as follows:
December 31,
-----------------------------
2004 2003 2002
------- ------- -------
(in thousands)
Balance at beginning of year ...... $ 8,142 $ 7,298 $ 6,320
Provisions charged to operations .. 1,169 2,065 996
Charge-offs ....................... (1,201) (1,362) (298)
Recoveries ........................ 808 141 280
------- ------- -------
Balance at end of year ............ $ 8,918 $ 8,142 $ 7,298
======= ======= =======
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31,
---------------------
Estimated
Useful Lives 2004 2003
------------- -------- --------
(in thousands)
Land ................................................ Indefinite $ 2,636 $ 1,531
Buildings and improvements .......................... 5 to 20 years 6,549 5,020
Furniture, fixtures and equipment ................... 3 to 10 years 7,899 6,910
Leasehold improvements .............................. 3 to 40 years 2,631 2,534
-------- --------
19,715 15,995
Less: accumulated depreciation and amortization ..... (9,692) (8,450)
-------- --------
Total premises and equipment, net ................... $ 10,023 $ 7,545
======== ========
Depreciation and amortization expense were $1.2 million, $1.3 million and
$1.2 million for the years ended December 31, 2004, 2003 and 2002, respectively.
NOTE 6 - DEPOSITS
At December 31, 2004, the schedule of maturities of certificates of
deposit was as follows (in thousands):
2005 ........................... $112,291
2006 ........................... 35,897
2007 ........................... 14,984
2008 ........................... 4,929
2009 ........................... 3,813
--------
$171,914
========
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:
December 31,
-------------------------------
2004 2003 2002
------- ------- -------
(dollars in thousands)
Securities sold under repurchase agreements and federal funds purchased:
Balance at year end ..................................................... $45,771 $25,747 $11,728
Average during the year ................................................. 14,620 11,198 15,276
Maximum month-end balance ............................................... 45,771 25,747 26,545
Weighted average rate during the year ................................... 1.62% 1.07% 1.42%
Rate at December 31 ..................................................... 1.88% 0.71% 1.01%
35
Federal Home Loan Bank Advances
The Company has an overnight line of credit for $37.4 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, 2004, there were $15.5
million in outstanding balances which are reflected as federal funds purchased.
At December 31, 2004 the Company had $85.0 million of advances from the
FHLB. These advances are collateralized by certain first mortgage loans and
investment securities. The weighted average interest rate during 2004 was 5.08%.
Of the total outstanding, $70 million of advances are callable on a quarterly
basis at the option of FHLB contingent on changes in interest rates. The FHLB
advances mature as follows (in thousands):
2005 ............................ $ 5,000
2006 ............................ --
2007 ............................ 5,000
2008 ............................ 5,000
2009 ............................ 20,000
Thereafter ...................... 50,000
-------
$85,000
=======
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 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:
December 31,
---------------------------
2004 2003 2002
------- ------- -------
(in thousands)
Federal ..............................
Current ........................... $ 3,401 $ 3,449 $ 3,847
Deferred .......................... 269 (678) (498)
State ................................
Current ........................... 217 127 161
Deferred .......................... 47 (112) (157)
------- ------- -------
Provision for income taxes .. $ 3,934 $ 2,786 $ 3,353
======= ======= =======
36
The reconciliation of the provision for income taxes computed at the statutory
federal rate was as follows:
December 31,
-------------------------------
2004 2003 2002
------- ------- -------
(in thousands)
Tax at statutory federal rate .................. $ 3,985 $ 3,237 $ 3,694
Increase (reduction) in tax resulting from:
Tax-exempt income ........................... (423) (413) (96)
State income tax, net of federal benefits ... 175 10 18
Other ....................................... 197 (48) (263)
------- ------- -------
Provision for income taxes ............... $ 3,934 $ 2,786 $ 3,353
======= ======= =======
The net deferred tax asset consisted of the following:
December 31,
-------------------
2004 2003
------- -------
(in thousands)
Allowance for loan and lease losses ....................................... $ 3,197 $ 3,472
Interest income on nonaccrual loans ....................................... 4 140
Depreciation and amortization ............................................. 714 853
Difference between book and tax basis of assets acquired .................. 249 268
Unrealized holdings (gains) on investment securities available-for-sale ... (1,424) (1,634)
Other ..................................................................... 810 729
------- -------
Total net deferred tax asset (included in other assets) .............. $ 3,550 $ 3,828
======= =======
NOTE 9 - SHAREHOLDERS' EQUITY
On July 29, 2004, the Company paid a 2.5% stock dividend on its common
stock to shareholders of record on July 15, 2004. 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.
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:
December 31, 2004
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- --------
(in thousands, except per share data)
Basic EPS
Net income available to common stockholders ............................ $7,786 7,370 $ 1.06
Effect of Dilutive Securities
Options ................................................................ -- 231 (0.04)
------ ------ ------
Diluted EPS
Net income available to common stockholders plus assumed conversions ... $7,786 7,601 $ 1.02
====== ====== ======
37
December 31, 2003
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- --------
Basic EPS
Net income available to common stockholders ............................ $6,734 7,301 $ 0.92
Effect of Dilutive Securities
Options ................................................................ -- 443 (0.05)
------ ------ ------
Diluted EPS
Net income available to common stockholders plus assumed conversions ... $6,734 7,744 $ 0.87
====== ====== ======
December 31, 2002
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- --------
Basic EPS
Net income available to common stockholders ............................ $7,513 7,390 $ 1.02
Effect of Dilutive Securities
Options ................................................................ -- 431 (0.06)
------ ------ ------
Diluted EPS
Net income available to common stockholders plus assumed conversions ... $7,513 7,821 $ 0.96
====== ====== ======
NOTE 11 - STOCK BASED COMPENSATION
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 were authorized to be granted
under the 2001 Employee Plan. Options to acquire 155,098 and 112,413 shares were
outstanding under this Plan at December 31, 2004 and 2003, respectively.
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
were authorized to be granted under the 2001 Directors Plan. Options to acquire
44,952 and 55,599 shares were outstanding at December 31, 2004 and 2003. No
further options may be granted under the 2001 Directors Plan.
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, 2004 and 2003, options to purchase a total of 187,696 and
338,894 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, 2004 and 2003, options to
purchase 131,603 and 252,510 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, 2004, 2003 and 2002 and the changes during the years ending on those dates
is represented below.
2004 2003 2002
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
Outstanding, beginning of year ............ 759,416 $ 6.86 866,613 $ 6.93 878,353 $ 6.58
Granted ................................... 106,000 15.51 -- -- 64,535 12.32
Exercised ................................. (335,231) 7.00 (78,487) 7.16 (59,945) 7.33
Terminated ................................ (10,836) 8.50 (28,710) 8.38 (16,330) 8.00
------- ------- -------
Outstanding, end of year .................. 519,349 $ 8.47 759,416 $ 6.86 866,613 $ 6.93
======= ======= =======
Options exercisable at year-end ........... 322,101 511,531 458,572
======= ======= =======
Weighted average fair value of options
granted during the year .............. $ 15.51 $ -- $ 6.97
======== ======== ========
38
The following table summarizes information about stock options outstanding
and exercisable at December 31, 2004.
Options Outstanding Options Exercisable
----------------------------------------------------------- ------------------------------
Range of Number Weighted Average Weighted Average Number Weighted Average
Exercise Prices Outstanding Remaining Contractual Life Exercise Price Outstanding Exercise Price
----------------- ----------- -------------------------- -------------- ----------- ----------------
$5.45 to $8.63 364,253 2.20 years $ 5.91 304,802 $ 5.67
$12.32 to $15.71 155,096 6.81 years 14.50 17,299 12.32
------- -------
519,349 322,101
======= =======
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, 75% of employee contributions for all participants with six years
through 10 years of employment, not to exceed 3% of their salary, and 100% of
employee contributions for all participants with more than 10 years of
employment, not to exceed 4% of their salary. The Company contributed
approximately $662,000, $583,000 and $645,000 for 2004, 2003 and 2002,
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 three Supplemental Executive Retirement Plans
("SERPs"), two of which became effective in 1999 and the third of which became
effective in 2004. 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 Bank Subsidiary'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 $323,000. 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 $290,000, $115,000 and $61,000 for 2004, 2003 and 2002,
respectively.
DIRECTORS' RETIREMENT PLAN
The Company maintains a noncontributory nonqualified retirement plan for
nonemployee directors of the Company, GCB and BCB ("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 their respective Board(s) of which at least five years occur after
the Directors' Retirement Plan was established in 1999. Each participant's
retirement benefit is 75% of his/her projected annual board fees earned in the
year prior to his/her normal retirement date (the later of age 65 or five years
of plan participation), using fees actually earned in 1997 plus assumed
increases in such fees based upon annual compounding at the rate of 5%, subject
to a maximum amount specified in each participating director's Joinder
Agreement. If a director becomes disabled before reaching his/her benefit
eligibility date, he/she may ask the Board to permit him/her to receive an
immediate disability benefit equal to the annualized value of his/her accrued
benefit, payable monthly over a 10-year period. If a director dies before
reaching his/her benefit eligibility date, the director's beneficiary is
entitled to a monthly survivor benefit payable over a 10-year period. If the
director's services are terminated following a "change-in-control", the director
is entitled to receive full retirement benefit, commencing 30 days after
termination.
All nonemployee directors of the Company except for one were participants
in the Directors' Retirement Plan at the end of 2004. If the participating
directors continue to serve as directors and retire at their benefit eligibility
dates (the later of 65 or five years of plan participation), the estimated
annual pensions payable to them under the plan would be $92,035. These amounts
are payable in monthly installments over a period of ten years. Other
actuarially equivalent forms of payment are optionally permitted.
In January 2004, the Board of Directors approved a plan to implement an
optional secular trust program for all directors that choose to participate. At
the end of 2004, only Mr. Soldoveri's secular trust had been implemented, with
the Company contributing $5,800. In 2005, the Board intends to pursue the
implementation of secular trust for each Board member.
DEFERRED COMPENSATION PLAN
Effective January 1, 1999 the Company established a deferred compensation
plan for nonemployee directors of the Company, GCB and BCB ("Deferred
Compensation Plan"). A participating director may defer payment of a specified
amount up to 100% of his/her monthly board fees and/or stipend as a director of
both the Company and a subsidiary bank using fees actually earned in 1997 for a
five year period commencing January 1999 and ending December 2003. Deferred
amounts earn interest at the rate of
39
10% per annum. At retirement, the benefit under the Deferred Compensation Plan
is payable in the form of a monthly annuity for 10 years. If a director becomes
disabled before attaining his/her benefit eligibility date, he/she may ask the
Board to permit him/her to receive an immediate disability benefit equal to the
annuitized value of his/her deferral account, payable monthly over a 10-year
period. If a director dies before reaching his/her benefit eligibility date, the
director's beneficiary is entitled to a monthly survivor benefit payable over a
10-year period. The Deferred Compensation Plan also provides a $10,000 death
benefit payable to the director's beneficiary. A majority of nonemployee
directors of the Company are participating in the Deferred Compensation Plan.
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 $794,000, $788,000 and $766,000 for the years ended December 31,
2004, 2003 and 2002, respectively. Included in these amounts are $275,000 in
2004, $255,000 in 2003 and $255,000 in 2002 paid to a limited liability company
of which the Company's chairman and former chairman emeritus are members.
As of December 31, 2004, future approximate minimum annual rental payments
under these leases are as follows (in thousands):
2005 ................ $ 711
2006 ................ 680
2007 ................ 685
2008 ................ 552
2009 ................ 533
Thereafter .......... 943
------
Total .......... $4,104
======
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,
--------------------
2004 2003
-------- --------
(in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit ...................................... $176,539 $149,094
Standby letters of credit and financial guarantees written ........ 1,604 2,857
40
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.
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, 2004 varies up to 100%.
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, 2004 is
$1.6 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 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. Commercial and standby letters of credit
are granted primarily to commercial borrowers.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No.107, Disclosures about Fair Value of Financial Instruments,
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, 2004 and 2003 are outlined below.
For cash and cash equivalents, the recorded book values of $32.3 million
and $29.2 million at December 31, 2004 and 2003, respectively, approximate fair
values. For interest-bearing deposits with banks, the recorded book values of
$7.8 million and $7.5 million at December 31, 2004 and 2003, 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 and lease portfolio at December 31, 2004 and 2003 has been
valued using a present value discounted cash flow method 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 presents the carrying amounts and estimated fair
values of investment securities and loans and leases at December 31, 2004 and
2003.
2004 2003
------------------------ -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(in thousands)
Investment securities available-for-sale .... $111,840 $111,840 $152,513 $152,513
Investment securities held-to-maturity ...... 20,205 20,104 2,726 2,712
Loans and leases, net ....................... 602,274 611,778 515,657 525,899
41
The estimated fair values of demand deposits (i.e., non interest-bearing
demand deposits, interest-bearing checking deposits, 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.
The fair value of borrowed funds is based on the discounted value of
estimated cash flows. The discounted rate is estimated using the rates currently
offered for similar advances. The following table presents the carrying amounts
and estimated fair values of time deposits, securities sold under agreements to
repurchase, federal funds purchased and FHLB advances at December 31, 2004 and
2003.
2004 2003
------------------------ -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(in thousands)
Time deposits ..................................... $171,914 $173,278 $145,380 $146,784
Securities sold under agreements to repurchase .... 5,771 5,771 10,047 10,047
Federal funds purchased ........................... 40,000 40,000 15,700 15,700
FHLB Advances ..................................... 85,000 85,001 85,000 96,391
The carrying amounts of the Company's subordinated debt at both December
31, 2004 and 2003 approximate 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, 2004 and 2003, respectively, GCB had
$20.0 million and $16.1 million, BCB had $9.6 million and $5.6 million, and RCB
had $1.3 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, 2004.
42
As of December 31, 2004, 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 has changed the category of the Company or any of the
Bank Subsidiaries.
To be Well-Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- ------- ------- ------- -------
(dollars in thousands)
As of December 31, 2004:
Total capital (to risk-weighted assets)
Greater Community Bancorp ................ $79,031 11.73% $53,900 8.00% n/a n/a
Greater Community Bank ................... 41,617 10.08 33,030 8.00 $41,287 10.00%
Bergen Commercial Bank ................... 24,883 10.83 18,381 8.00 22,976 10.00
Rock Community Bank ...................... 5,859 20.88 2,245 8.00 2,806 10.00
Tier 1 capital (to risk-weighted assets)
Greater Community Bancorp ................ 64,157 9.52 26,957 4.00 n/a n/a
Greater Community Bank ................... 36,448 8.82 16,530 4.00 24,795 6.00
Bergen Commercial Bank ................... 22,178 9.66 9,183 4.00 13,775 6.00
Rock Community Bank ...................... 5,506 19.62 1,123 4.00 1,684 6.00
Tier 1 capital (to average assets)
Greater Community Bancorp ................ 64,157 7.99 32,118 4.00 n/a n/a
Greater Community Bank ................... 36,448 7.28 20,026 4.00 25,033 5.00
Bergen Commercial Bank ................... 22,178 8.45 10,498 4.00 13,123 5.00
Rock Community Bank ...................... 5,506 16.01 1,376 4.00 1,720 5.00
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
43
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,
------------------
2004 2003
------- -------
(in thousands)
ASSETS:
Cash ............................................. $ 1,560 $ 580
Investment securities available-for-sale ......... 5,214 7,651
Investment in subsidiaries ....................... 77,441 68,453
Other assets ..................................... 958 1,012
------- -------
Total assets ............................... $85,173 $77,696
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Subordinated debt ................................ $24,743 $24,743
Other liabilities ................................ 1,815 2,383
Shareholders' equity ............................. 58,615 50,570
------- -------
Total liabilities and shareholders' equity . $85,173 $77,696
======= =======
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
----------------------------------
2004 2003 2002
-------- -------- --------
(in thousands)
INCOME:
Equity in undistributed income of Bank Subsidiaries ... $ 8,284 $ 4,370 $ 823
Dividends from Bank Subsidiaries ...................... -- 2,291 7,919
Interest income ....................................... 241 334 350
Gain on sale of investment securities ................. 1,120 2,116 1,121
-------- -------- --------
9,645 9,111 10,213
-------- -------- --------
EXPENSES:
Interest on subordinated debt ......................... 2,028 2,030 2,168
Write-off of deferred insurance costs ................. -- -- 1,022
Other expenses ........................................ 230 403 205
-------- -------- --------
2,258 2,433 3,395
-------- -------- --------
Income before income tax benefits .............. 7,387 6,678 6,818
Income tax benefits ................................... (399) (56) (695)
-------- -------- --------
Net income ............................................ $ 7,786 $ 6,734 $ 7,513
======== ======== ========
44
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------
2004 2003 2002
-------- -------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................... $ 7,786 $ 6,734 $ 7,513
Adjustments to reconcile net income to cash provided by
operating activities:
Gains on sales of investment securities available-for-sale ........... (1,120) (2,116) (1,121)
Decrease (increase) in other assets .................................. 54 112 (35)
(Decrease) increase in other liabilities ............................. (568) 576 (392)
Equity in undistributed income of subsidiaries ....................... (8,284) (4,370) (823)
-------- -------- --------
Net cash provided by (used in) operating activities ............. (2,132) 936 5,142
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available-for-sale ................. (352) (2,425) (2,867)
Proceeds from the sale of investment securities available-for-sale ... 3,564 7,782 2,150
Payments from investments in and advances to subsidiaries ............ (2,823) (1,541) (2,736)
Proceeds from advances to subsidiaries ............................... 1,736 -- 1,000
-------- -------- --------
Net cash provided by (used in) investing activities ............. 2,125 3,816 (2,453)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net .......................... 629 -- --
Proceeds from exercise of stock options .............................. 3,830 757 717
Proceeds from issuance of subordinated debt .......................... -- -- 24,000
Repayment of subordinated debt ....................................... -- -- (23,000)
Dividends paid ....................................................... (3,472) (3,041) (2,679)
-------- -------- --------
Purchase of treasury stock ........................................... -- (4,513) (1,178)
Net cash provided by (used in) financing activities ............. 987 (6,797) (2,140)
Net Increase (Decrease) in Cash and Cash Equivalents ..................... $ 980 $ (2,045) $ 549
CASH AND CASH EQUIVALENTS, beginning of year ............................. 580 2,625 2,076
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year ................................... $ 1,560 $ 580 $ 2,625
======== ======== ========
45
NOTE 18 -QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents summarized 2004 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.
Quarters ended 2004
-------------------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
(in thousands, except for per share data)
2004
- ----
Interest income ............................... $10,411 $10,181 $ 9,705 $ 9,953
Interest expense .............................. 3,328 3,167 3,122 2,982
Net interest income ........................... 7,083 7,014 6,583 6,971
Provision for loan and lease losses ........... 207 245 356 361
Non-interest income ........................... 1,469 1,599 1,861 1,560
Non-interest expense .......................... 4,690 5,507 5,484 5,570
Income before provision for income taxes ...... 3,655 2,861 2,604 2,600
Net income .................................... 2,156 1,976 1,835 1,819
Average common shares outstanding - basic ..... 7,509 7,384 7,356 7,221
Average common shares outstanding - diluted ... 7,736 7,688 7,691 7,581
Per share data
- --------------
Earnings per common share - basic ............. $ 0.29 $ 0.27 $ 0.25 $ 0.25
Earnings per common share - diluted ........... 0.28 0.26 0.24 0.24
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 provision for 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 ..... 7,171 7,258 7,386 7,393
Average common shares outstanding - diluted ... 7,617 7,707 7,861 7,855
Per share data
- --------------
Earnings per common share - basic ............. $ 0.26 $ 0.23 $ 0.21 $ 0.22
Earnings per common share - diluted ........... 0.25 0.22 0.20 0.21
46
McGladrey & Pullen, LLP
One Valley Square, Ste. 250
612 Township Line Road
Blue Bell, PA 19422-2700
O 215-641-8600
F 215-641-8680
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Greater Community Bancorp
Totowa, New Jersey
We have audited the consolidated balance sheet of Greater Community Bancorp and
Subsidiaries (the "Company") as of December 31, 2004, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provided a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Greater Community
Bancorp as of December 31, 2004, and the results of their operations and their
cash flows for the year then ended, in conformity with U.S. generally accepted
accounting principles.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 3, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
/s/ McGladrey & Pullen, LLP
Blue Bell, Pennsylvania
March 3, 2005
McGladrey & Pullen, LLP is a member firm of RSM International -
an affiliation of separate and independent legal entities.
47
McGladrey & Pullen, LLP
One Valley Square, Ste. 250
512 Township Line Road
Blue Bell, PA 15422-2700
0 215-641-6600 F 215-641-8650
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Greater Community Bancorp
Totowa, New Jersey
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Greater
Community Bancorp (the "Company') maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
McGladrey & Pullen, LLP is a member firm of RSM International -
an affiliation of separate and independent legal entities.
48
To the Board of Directors
Greater Community Bancorp
Page 2
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Greater Community Bancorp
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion,
Greater Community Bancorp maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2004 of Greater Community
Bancorp and our report dated March 3, 2005 expressed an unqualified opinion.
/s/ McGladrey & Pullen, LLP
Blue Bell, Pennsylvania
March 3, 2005
49
Grant Thornton LLP
Accountants and Business Advisors
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Shareholders of Greater Community Bancorp
We have audited the accompanying consolidated balance sheet of Greater Community
Bancorp and subsidiaries as of December 31, 2003 and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the two
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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 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 the consolidated results
of their operations and their consolidated cash flows for each of the two years
in the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
January 16, 2004
Suite 3100
Two Commerce Square
2001 Market Street
Philadelphia, PA 19103-7080
T 215.561.4200
F 215.561.1066
W www.grantthornton.com
Grant Thornton LLP
US Member of Grant Thornton International
50
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) Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined
in Exchange Act Rule 13a-15(f) under the Securities Exchange Act of
1934. Under the supervision and with the participation of principal
executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our control over financial
reporting based on the framework in Internal Control- Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"). Based on our evaluation under the
framework, management has concluded that our internal control over
financial reporting was effective as of December 31, 2004.
Management's assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2004 has been audited by
McGladrey & Pullen, LLP, an independent registered public accounting
firm, as stated in their report which is included herein.
Item 9B OTHER INFORMATION
-----------------
None.
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 2005 Annual Meeting of Stockholders furnished to the Commission pursuant
to Regulation 14A.
Other Significant Employees: Not applicable.
Family Relationships: Anthony M. Bruno, Jr., Chairman and CEO of the
Company, Chairman, President and CEO of GCB and Chairman of BCB. C. Mark
Campbell, a director, President and COO of the Company and President and CEO 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 2005 Annual Meeting of
Stockholders furnished to the Commission pursuant to Regulation 14A.
51
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
Security Authorized for Issuance Under Equity Compensation Plans:
Information required by Item 201(d) of Reg. S-K is contained in the registrant's
definitive Proxy Statement for its 2005 Annual Meeting of Stockholders furnished
to the Commission pursuant to Regulation 14A.
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 2005 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
2005 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 of a nature described in Item 403(c) of Reg. S-K that may, at a
future date, result in a change of control of the registrant.
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 2005 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 2005 Annual Meeting of
Stockholders furnished to the Commission pursuant to Regulation 14A.
PART IV
Item 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
------------------------------------------
(a) This report includes financial statements for the Company's fiscal
year ended December 31, 2004.
(b) 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.
(c) Financial Statement Schedules. Not applicable.
52
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, 2005 BY: /s/ Anthony M. Bruno, Jr.
--------------------------------
Anthony M. Bruno, Jr.
Chairman and Chief Executive
Officer
Date: March 15, 2005 BY: /s/ Naqi A. Naqvi
--------------------------------
Naqi A. Naqvi
Senior Vice President and Chief
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, 2005 BY: /s/ Anthony M. Bruno, Jr.
--------------------------------
Anthony M. Bruno, Jr.
Chairman of the Board
Date: March 15, 2005 BY: /s/ Charles J. Volpe
--------------------------------
Charles J. Volpe
Director
Date: March 15, 2005 BY: /s/ C. Mark Campbell
--------------------------------
C. Mark Campbell
President and Director
Date: March 15, 2005 BY: /s/ Joseph A. Lobosco
--------------------------------
Joseph A. Lobosco
Director
Date: March 15, 2005 BY: /s/ Alfred R. Urbano
--------------------------------
Alfred R. Urbano
Director
Date: March 15, 2005 BY: /s/ Robert C. Soldoveri
--------------------------------
Robert C. Soldoveri
Director
53
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, D.C. 20549
EXHIBITS
--------
TO
FORM 10-K
For the fiscal year ended December 31, 2004
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)
10.3 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)
10.9 Executive Supplemental Retirement Income Agreement for Anthony
M. Bruno, Jr. dated as of February 1, 2004 among Greater
Community Bank, Anthony M. Bruno, Jr. and Greater Community
Bancorp (as guarantor) (incorporated by reference to Exhibit
10.9 to Form 10-Q filed on May 10, 2004)
10.10 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)
10.11 Employment Agreement of Anthony M. Bruno, Jr. dated March 2,
2005 (incorporated by reference to Exhibit 10.11 to Form 8-K
filed on March 8, 2005)
10.12 Employment Agreement of C. Mark Campbell dated March 2, 2005
(incorporated by reference to Exhibit 10.12 to Form 8-K filed
on March 8, 2005)
21 Subsidiaries of Registrant
23.1 Consent of Grant Thornton LLP
23.2 Consent of McGladrey and Pullen, LLP
E-1
31.1 Certification of Chief Executive Officer dated March 15, 2005
31.2 Certification of Chief Financial Officer dated March 15, 2005
32.1 Certification of Officers pursuant to 18 U.S.C. Section 1350
dated March 15, 2005
E-2