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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