PROSPECTUS
[LOGO]
$20,000,000
GCB Capital Trust
10.00% Preferred Securities
(Liquidation Amount $25 per Preferred Security)
fully and unconditionally guaranteed, as described herein, by
Greater Community Bancorp
The Preferred Securities offered hereby represent preferred undivided
beneficial interests in the assets of GCB Capital Trust, a statutory business
trust created under the laws of the State of Delaware (the "Issuer Trust").
Greater Community Bancorp (the "Company") will initially be the holder of all of
the beneficial interests represented by common securities of the Issuer Trust
(the "Common Securities" and, together with the Preferred Securities, the "Trust
Securities").
(Continued on next page)
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SEE "RISK FACTORS" BEGINNING ON PAGE 11 HEREOF FOR CERTAIN INFORMATION
RELEVANT TO AN INVESTMENT IN THE PREFERRED SECURITIES.
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THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A
BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER INSURER OR GOVERNMENT AGENCY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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Underwriting Proceeds to
Price to Public(1) Discount (2) Issuer Trust(3)(4)
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Per Preferred Security...... $25.00 (4) $25.00
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Total(5).................... $20,000,000 (4) $20,000,000
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(1) Plus accrued Distributions, if any, from May 21, 1997.
(2) The Company and the Issuer Trust have each agreed to indemnify the
Underwriters against certain liabilities under the Securities Act of 1933.
See "Underwriting."
(3) Before deduction of expenses payable by the Company estimated at $220,000.
(4) In view of the fact that the proceeds of the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures,
the Company has agreed to pay to the Underwriters, as compensation for
arranging the investment therein of such proceeds, $1.00 per Preferred
Security (or $800,000 in the aggregate). See "Underwriting."
(5) The Company has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional
$3,000,000 aggregate liquidation amount of the Preferred Securities on the
same terms as set forth above, solely to cover over-allotments, if any. If
such over-allotment option is exercised in full, the total Price to Public
and Proceeds to Issuer Trust will be $23,000,000 and $23,000,000,
respectively. See "Underwriting."
The Preferred Securities are offered by the Underwriters subject to
receipt and acceptance by them, prior sale and the Underwriters' right to reject
any order in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that delivery of the Preferred Securities will be
made in book-entry form through the book-entry facilities of The Depository
Trust Company on or about May 21, 1997, against payment therefor in immediately
available funds.
ADVEST, INC.
The date of this Prospectus is May 16, 1997
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(cover page continued)
The Issuer Trust exists for the sole purpose of issuing the Trust Securities and
investing the proceeds thereof in 10.00% Junior Subordinated Deferrable Interest
Debentures (the "Junior Subordinated Debentures," and together with the Trust
Securities, the "Securities") to be issued by the Company. The Junior
Subordinated Debentures will mature on June 30, 2027 (the "Stated Maturity").
The Preferred Securities will have a preference under certain circumstances over
the Common Securities with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise. See "Description of Preferred Securities
- -- Subordination of Common Securities."
The Preferred Securities will be represented by one or more global
securities registered in the name of a nominee of The Depository Trust Company,
as depositary ("DTC"). Beneficial interests in the global securities will be
shown on, and transfer thereof will be effected only through, records maintained
by DTC and its participants. Except as described under "Description of Preferred
Securities," Preferred Securities in definitive form will not be issued and
owners of beneficial interests in the global securities will not be considered
holders of the Preferred Securities. Application will be made to include the
Preferred Securities in Nasdaq's National Market. Settlement for the Preferred
Securities will be made in immediately available funds. The Preferred Securities
will trade in DTC's Same-Day Funds Settlement System, and secondary market
trading activity for the Preferred Securities will therefore settle in
immediately available funds.
Holders of the Preferred Securities will be entitled to receive
preferential cumulative cash distributions accumulating from May 21, 1997, and
payable quarterly in arrears on March 31, June 30, September 30 and December 31
of each year commencing June 30, 1997, at the annual rate of 10.00% of the
Liquidation Amount of $25 per Preferred Security ("Distributions"). The Company
has the right to defer payment of interest on the Junior Subordinated Debentures
at any time or from time to time for a period not exceeding 20 consecutive
quarterly periods with respect to each deferral period (each, an "Extension
Period"), provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. No interest shall be due and
payable during any Extension Period, except at the end thereof. Upon the
termination of any such Extension Period and the payment of all amounts then
due, the Company may elect to begin a new Extension Period subject to the
requirements set forth herein. If interest payments on the Junior Subordinated
Debentures are so deferred, Distributions on the Preferred Securities will also
be deferred and the Company will not be permitted, subject to certain exceptions
described herein, to declare or pay any cash distributions with respect to the
Company's capital stock or with respect to debt securities of the Company that
rank pari passu in all respects with or junior to the Junior Subordinated
Debentures. During an Extension Period, interest on the Junior Subordinated
Debentures will continue to accrue (and the amount of Distributions to which
holders of the Preferred Securities are entitled will accumulate) at the rate of
10.00% per annum, compounded quarterly, and holders of Preferred Securities will
be required to accrue interest income for United States federal income tax
purposes. See "Description of Junior Subordinated Debentures -- Option to Extend
Interest Payment Period" and "Certain Federal Income Tax Consequences --
Interest Income and Original Issue Discount."
The Company has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures and the Junior Subordinated Indenture (each as defined
herein), taken together, fully, irrevocably and unconditionally guaranteed all
the Issuer Trust's obligations under the Preferred Securities as described
below. See "Relationship Among the Preferred Securities, the Junior Subordinated
Debentures and the Guarantee -- Full and Unconditional Guarantee." The Guarantee
of the Company guarantees the payment of Distributions and payments on
liquidation or redemption of the Preferred Securities, but only in each case to
the extent of funds held by the Issuer Trust, as described herein (the
"Guarantee"). See "Description of Guarantee." If the Company does not make
payments on the Junior Subordinated Debentures held by the Issuer Trust, the
Issuer Trust may have insufficient funds to pay Distributions on the Preferred
Securities. The Guarantee does not cover payment of Distributions when the
Issuer Trust does not have sufficient funds to pay such Distributions. In such
event, a holder of Preferred Securities may institute a legal proceeding
directly against the Company to enforce payment of such Distributions to such
holder. See "Description of Junior Subordinated Debentures -- Enforcement of
Certain Rights by Holders of Preferred Securities." The obligations of the
Company under the Guarantee and the Preferred Securities are subordinate and
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junior in right of payment to all Senior Indebtedness (as defined in
"Description of Junior Subordinated Debentures -- Subordination") of the
Company.
The Preferred Securities are subject to mandatory redemption (i) in
whole, but not in part, upon repayment of the Junior Subordinated Debentures at
Stated Maturity or, at the option of the Company, their earlier redemption in
whole upon the occurrence of a Tax Event, an Investment Company Event or a
Capital Treatment Event (each as defined herein) and (ii) in whole or in part at
any time on or after June 30, 2002 contemporaneously with the optional
redemption by the Company of the Junior Subordinated Debentures in whole or in
part. The Junior Subordinated Debentures are redeemable prior to maturity at the
option of the Company (i) on or after June 30, 2002, in whole at any time or in
part from time to time, or (ii) in whole, but not in part, at any time within 90
days following the occurrence and continuation of a Tax Event, Investment
Company Event or Capital Treatment Event, in each case at a redemption price set
forth herein, which includes the accrued and unpaid interest on the Junior
Subordinated Debentures so redeemed to the date fixed for redemption. The
ability of the Company to exercise its rights to redeem the Junior Subordinated
Debentures or to cause the redemption of the Preferred Securities prior to the
Stated Maturity may be subject to prior regulatory approval by the Board of
Governors of the Federal Reserve System (the "Federal Reserve"), if then
required under applicable Federal Reserve capital guidelines or policies. See
"Description of Junior Subordinated Debentures -- Redemption" and "Description
of Preferred Securities -- Liquidation Distribution Upon Dissolution."
The holders of the outstanding Common Securities have the right at any
time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, to cause the Junior
Subordinated Debentures to be distributed to the holders of the Preferred
Securities and Common Securities in liquidation of the Issuer Trust. The ability
of the Company, as holder of the Common Securities, to dissolve the Issuer Trust
may be subject to prior regulatory approval of the Federal Reserve, if then
required under applicable Federal Reserve capital guidelines or policies. See
"Description of Preferred Securities -- Liquidation Distribution Upon
Dissolution."
In the event of the dissolution of the Issuer Trust, after satisfaction of
liabilities to creditors of the Issuer Trust as provided by applicable law, the
holders of the Preferred Securities will be entitled to receive a Liquidation
Amount of $25 per Preferred Security plus accumulated and unpaid Distributions
thereon to the date of payment, subject to certain exceptions, which may be in
the form of a distribution of such amount in Junior Subordinated Debentures. See
"Description of Preferred Securities -- Liquidation Distribution Upon
Dissolution."
The Junior Subordinated Debentures are unsecured and subordinated to all
Senior Indebtedness of the Company. See "Description of Junior Subordinated
Debentures -- Subordination."
Prospective purchasers must carefully consider the information set forth
in "Certain ERISA Considerations."
THE JUNIOR SUBORDINATED DEBENTURES ARE DIRECT AND UNSECURED OBLIGATIONS OF
THE COMPANY, DO NOT EVIDENCE DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER INSURER OR GOVERNMENT AGENCY.
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MAP
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED
SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTING SHARES OF THE PREFERRED
SECURITIES AND BIDDING FOR AND PURCHASING SUCH SHARES AT A LEVEL ABOVE THAT
WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING." SUCH STABILIZING TRANSACTIONS, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information in
this Prospectus is based on the assumption that the Underwriters (as defined
herein) will not exercise their over-allotment option.
THE COMPANY
The Company, a New Jersey corporation, is a bank holding company
headquartered in Totowa, New Jersey with two banking subsidiaries, Great Falls
Bank ("GFB"), and Bergen Commercial Bank ("BCB", and together with GFB, the
"Bank Subsidiaries"). At March 31, 1997, the Company had total assets of $267.1
million, total deposits of $223.2 million and total shareholders' equity of
$21.8 million. The Bank Subsidiaries' deposits are federally insured by the
Federal Deposit Insurance Corporation ("FDIC") primarily through the Bank
Insurance Fund ("BIF") with a small portion of deposits insured through the
Savings Association Insurance Fund ("SAIF"). The Company's principal business is
to serve as a holding company for the Bank Subsidiaries.
The Company was incorporated in 1984. GFB received its charter from the
New Jersey Department of Banking (the "Department") in 1985 and commenced
operations as a commercial bank in January 1986. During 1995, the Company
acquired all of the outstanding stock of BCB solely in exchange for the
Company's common stock, and acquired Family First Federal Savings Bank of
Clifton, New Jersey ("Family First"), which was merged into GFB. In July 1996,
the Company changed its name from Great Falls Bancorp to its present name.
The Company's operating strategy is to combine quality personal service,
convenient office locations and technology to offer a variety of loan and
deposit products tailored to fit the needs of its customers. The Company and the
Bank Subsidiaries emphasize personalized service and local decision-making in
their banking businesses. Each of the Bank Subsidiaries has its own management
team and sets individual performance targets consistent with overall Company
goals. This structure allows the senior management of each bank subsidiary to
focus their efforts on understanding their customers and meeting the specific
needs of the markets they serve. In addition, it is the Company's strategy to
expand its operations in northern New Jersey through internal growth and
strategic acquisitions.
As of March 31, 1997, the Bank Subsidiaries provided community banking
services through eight branches located in northern New Jersey. The Bank
Subsidiaries offer a wide variety of consumer and commercial lending and deposit
services. The loans offered by the Bank Subsidiaries include short and medium
term loans, loans secured by residential and non-residential real estate
properties, revolving lines of credit, mortgage loans and installment loans. The
Bank Subsidiaries also offer deposit and personal banking services including
checking, regular savings, money market deposits, term certificate accounts and
individual retirement accounts. Through Greater Community Financial, L.L.C., the
Company offers securities brokerage and investment advisory services. The
Company considers its primary market area to be Passaic and Bergen counties in
northern New Jersey which comprises a diverse base of business and retail
customers.
The executive office of the Company is located at 55 Union Boulevard,
Totowa, New Jersey 07512 and its telephone number is (201) 942-1111.
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Financial Summary
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At or For the
Three Months
Ended
March 31, At or for Year Ended December 31,
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1997 1996 1995 1994 1993 1992
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(Dollars in thousands)
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Net income .............. $ 665 $ 2,337 $ 2,072 $ 1,486 $ 1,301 $ 1,034
Total assets ............ 267,097 256,506 253,045 168,303 150,632 139,883
Loans receivable (net) .. 141,036 134,587 129,107 94,550 81,920 80,604
Shareholders' equity .... 21,819 21,061 19,595 14,961 14,156 12,927
Return on average assets 1.02% 0.93% 0.93% 0.91% 0.90% 0.84%
Return on average equity 12.43% 11.69% 11.99% 10.19% 9.66% 8.43%
Net interest margin ..... 4.84% 4.95% 5.24% 5.02% 4.70% 5.18%
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GCB CAPITAL TRUST
The Issuer Trust is a statutory business trust formed under Delaware
law pursuant to (i) a trust agreement, dated as of April 29, 1997, executed by
the Company, as Depositor, and Bankers Trust (Delaware), as Delaware Trustee,
and (ii) the filing of a Certificate of Trust with the Delaware Secretary of
State on April 29, 1997. Such initial trust agreement will be amended and
restated in its entirety (as so amended and restated, the "Trust Agreement"), as
of the date the Preferred Securities are initially issued. Two individuals will
be selected by the holder of the Common Securities to act as administrators with
respect to the Issuer Trust (the "Administrators"). The Company, while holder of
the Common Securities, intends to select two individuals who are employees or
officers of or affiliated with the Company to serve as Administrators. The
Issuer Trust's business and affairs are conducted by its Property Trustee,
Delaware Trustee, and two Administrators. The Issuer Trust exists for the
exclusive purposes of (i) issuing and selling the Preferred Securities and
Common Securities, (ii) using the proceeds from the sale of Preferred Securities
and Common Securities to acquire the Junior Subordinated Debentures issued by
the Company and (iii) engaging in only those other activities necessary,
advisable or incidental thereto (such as registering the transfer of the
Preferred Securities). Accordingly, the Junior Subordinated Debentures will be
the sole assets of the Issuer Trust and payments under the Junior Subordinated
Debentures will be the sole revenue of the Issuer Trust. All of the Common
Securities will be owned by the Company. The Common Securities will rank pari
passu, and payments will be made thereon pro rata, with the Preferred
Securities, except that upon the occurrence and during the continuance of an
Event of Default under the Trust Agreement resulting from an Event of Default
under the Indenture, the rights of the Company as holder of the Common
Securities to payment in respect of Distributions and payments upon liquidation,
redemption or otherwise will be subordinated to the rights of the holders of the
Preferred Securities. The Company will acquire Common Securities representing an
aggregate liquidation amount equal to 3% of the total capital of the Issuer
Trust. The Issuer Trust has a term of 31 years, but may terminate earlier as
provided in the Trust Agreement. The principal executive office of the Issuer
Trust is 55 Union Boulevard, Totowa, New Jersey 07512, and its telephone number
is (201) 942-1111.
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THE OFFERING
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Securities Offered.............. The $20,000,000 aggregate liquidation amount of Preferred
Securities offered hereby represents preferred undivided
beneficial interests in the Issuer Trust's assets, which will
consist solely of the Junior Subordinated Debentures. The Trust
has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an
additional $3,000,000 aggregate liquidation amount of Preferred
Securities at the offering price, solely to cover over-allotments,
if any.
Offering Price.................. $25 per Preferred Security (Liquidation Amount $25), plus
accumulated Distributions, if any, from May 21, 1997.
Distributions................... The distributions payable on each Preferred
Security will be fixed at a rate per annum of
10.00% of the stated liquidation amount per Preferred Security,
will be cumulative, will accrue from May 21, 1997, the date of
issuance of the Preferred Securities, and will be payable
quarterly in arrears on March 31, June 30, September 30
and December 31 of each year, commencing June 30, 1997.
See "Description of Preferred Securities -- Distributions."
Junior Subordinated Debentures.. The Issuer Trust will invest the proceeds from the issuance of
the Preferred Securities and Common Securities in an equivalent
amount of 10.00% Junior Subordinated Debentures of the
Company. The Junior Subordinated Debentures will mature on
June 30, 2027. The Junior Subordinated Debentures will rank
subordinate and junior in right of payment to all Senior
Indebtedness of the Company. In addition, the Company's
obligations under the Junior Subordinated Debentures will be
structurally subordinated to all existing and future liabilities and
obligations of its subsidiaries.
Guarantee....................... Under the terms of the Guarantee, the Company has guaranteed
the payment of Distributions and payments on liquidation or
redemption of the Preferred Securities, but only in each case to
the extent of funds held by the Issuer Trust described herein.
The Company and the Issuer Trust believe that the obligations of
the Company under the Guarantee, the Trust Agreement, the
Junior Subordinated Debentures and the Junior Subordinated
Indenture taken together, fully, irrevocably and unconditionally
guarantee all of the Issuer Trust's obligations relating to the
Preferred Securities. The obligations of the Company under the
Guarantee and the Preferred Securities are subordinate and
junior in right of payment to all Senior Indebtedness. See
"Description of Guarantee."
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Right to Defer Interest......... The Company has the right, at any time, to defer payments of
interest on the Junior Subordinated Debentures for a period not
exceeding 20 consecutive quarters; provided that no Extension
Period may extend beyond the Stated Maturity of the Junior
Subordinated Debentures. As a consequence of the Company's
extension of the interest payment period, quarterly Distributions
on the Preferred Securities will be deferred (though such Distribution
would continue to accrue with interest thereon compounded quarterly,
since interest will continue to accrue and compound on the Junior
Subordinated Debentures during any such Extension Period). During an
Extension Period, the Company will be prohibited, subject to certain
exceptions described herein, from declaring or paying any cash
distributions with respect to its capital stock or debt securities
that rank pari passu with or junior to the Junior Subordinated
Debentures. Upon the termination of any Extension Period and the
payment of all amounts then due, the Company may commence a new Extension
Period, subject to the foregoing requirements. See "Description of
Junior Subordinated Debentures -- Option to Extend Interest Payment Period."
Should an Extension Period occur, Preferred Security holders
will continue to include interest income (and de minimis original
issue discount, if any) for United States federal income tax
purposes. See "Certain Federal Income Tax Consequences -- Interest
Income and Original Issue Discount.
Redemption...................... The Preferred Securities are subject to mandatory redemption (i) in whole,
but not in part, at the Stated Maturity upon repayment of the Junior
Subordinated Debentures, (ii) in whole, but not in part, contemporaneously
with the optional redemption at any time by the Company of the Junior
Subordinated Debentures upon the occurrence and continuation of a Tax Event,
Investment Company Event or Capital Treatment Event and (iii) in whole or
in part at any time on or after June 30, 2002, contemporaneously with the
optional redemption by the Company of the Junior Subordinated Debentures
in whole or in part, in each case at the applicable Redemption Price. See
"Description of Preferred Securities -- Redemption."
Liquidation of the Issuer Trust. The Company, as holder of the Common Securities, has the right at any time
to dissolve the Issuer Trust and cause the Junior Subordinated Debentures
to be distributed to holders of Preferred Securities in liquidation of the
Issuer Trust, subject to the Company having received prior approval of the
Federal Reserve to do so if then required under applicable capital guidelines
or policies of the Federal Reserve. See "Description of Preferred Securities
-- Liquidation Distribution Upon Dissolution."
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Voting Rights................... Generally, the holders of the Preferred Securities will not have
any voting rights. See "Description of Preferred Securities --
Voting Rights; Amendment of Trust Agreement" and "Risk
Factors -- Limited Voting Rights."
Use of Proceeds................. The proceeds from the sale of the Preferred
Securities offered hereby will be used by the
Issuer Trust to purchase the Junior Subordinated Debentures
issued by the Company. The proceeds received by the Company
from the sale of the Junior Subordinated Debentures will be
used for general corporate purposes which may include branch
acquisitions and/or acquisitions of other financial institutions.
In addition, a portion of the proceeds may be contributed through
investments in or advances to the Bank Subsidiaries. The Trust
Securities will qualify as Tier 1 or core capital of the Company,
subject to the 25% Capital Limitation (as defined herein), under
the risk-based capital guidelines of the Federal Reserve. The
portion of the Trust Securities that exceeds the 25% Capital Limitation
will qualify as Tier 2 or supplementary capital of the Company. See
"Use of Proceeds."
ERISA Considerations............ Prospective purchasers should consider the information set forth
under "Certain ERISA Considerations."
Nasdaq National Market Symbol... Application has been made to have the Preferred Securities
approved for quotation on the Nasdaq National Market under the
symbol "GFLSP".
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RISK FACTORS
Prospective investors should carefully consider the matters set forth
under "Risk Factors," beginning on page 11.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following summary information regarding the Company should be read in
conjunction with the consolidated financial statements of the Company and notes
beginning on page F-1. Consolidated historical financial and other data
regarding the Company at or for the three months ended March 31, 1997 and 1996,
have been prepared by the Company without audit and may not be indicative of
results on an annualized basis or any other period. In the opinion of
management, all adjustments (consisting only of normal recurring accruals) that
are necessary for a fair presentation for such periods or dates have been made.
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At or For the
Three Months
Ended March 31, At or for Year Ended December 31,
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1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Selected Results of Operations
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Interest income ............................... $ 4,764 $ 4,523 $ 18,693 $ 17,433 $ 11,402 $ 9,335 $ 9,254
Net interest income ........................... 2,958 2,754 11,539 10,883 7,768 6,333 5,941
Provision for possible loan loss............... 115 90 440 414 172 478 952
Net interest income after provision
for loan losses ............................. 2,843 2,664 11,099 10,469 7,596 5,855 4,989
Other income .................................. 449 746 1,929 2,177 855 1,338 1,023
Other expenses ................................ 2,323 2,650 9,463 9,400 6,125 5,088 4,437
Net income .................................... 665 482 2,337 2,072 1,486 1,301 1,034
Per Share Data
Net income .................................... 0.28 0.23 0.97 1.04 0.89 0.79 0.63
Book value .................................... 11.57 11.51 11.13 10.32 9.33 8.90 9.02
Selected Balance Sheet Data
Total assets .................................. 267,097 241,190 256,506 253,045 168,303 150,632 139,883
Investment securities ......................... 94,891 87,331 89,679 83,986 58,961 43,468 26,054
Loans receivable (net) ........................ 141,036 125,639 134,587 129,107 94,550 81,920 80,604
Total deposits ................................ 223,229 210,060 223,242 222,766 144,289 129,852 125,141
Borrowings and securities sold under
agreements to repurchase .................... 13,623 3,655 4,159 2,756 2,700 750 703
Redeemable subordinated debentures............ 4,891 4,979 4,988 4,976 4,963 4,950 --
Shareholders' equity .......................... 21,819 19,684 21,061 19,595 14,961 14,156 12,927
Performance Ratios
Return on average assets ...................... 1.02% 0.81% 0.93% 0.93% 0.91% 0.90% 0.84%
Return on average equity ...................... 12.43% 10.20% 11.69% 11.99% 10.19% 9.66% 8.43%
Net interest margin ........................... 4.84% 5.09% 4.95% 5.24% 5.02% 4.70% 5.18%
Asset Quality Ratios
Non-performing loans to total gross loans...... 1.64 2.00% 1.28% 1.47% 2.09% 3.01% 2.36%
Non-performing assets to total loans
and other real estate owned .................. 3.45% 4.69% 3.21% 3.84% 3.29% 4.66% 6.58%
Net charge-offs to average total gross loans... --% 0.05% 0.16% 0.79% 0.13% 0.85% 0.14%
Total allowance for loan losses to
total non-performing loans .................. 112.24% 92.15% 144.40% 120.27% 90.07% 70.25% 102.56%
Capital Ratios
Equity to assets .............................. 8.17% 8.16% 8.21% 7.74% 8.89% 9.40% 9.24%
Tier 1 risk-based capital ratio................ 12.51% 13.27% 7.97% 7.27% 9.06% 8.33% 15.70%
Total risk-based capital ratio ................ 16.71% 18.13% 16.89% 16.77% 19.30% 26.44% 16.96%
Leverage ratio ................................ 7.93% 7.72% 8.12% 8.28% 8.34% 8.69% 9.84%
Ratios of Earnings to Fixed Charges(1)
Excluding interest on deposits................. 4.34x 4.67x 4.77x 5.05x 5.13x 20.49x 12.25x
Including interest on deposits................. 1.56x 1.42x 1.50x 1.48x 1.63x 1.68x 1.47x
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(1)The consolidated ratio of earnings to fixed charges has been computed by
dividing income before income taxes, cumulative effect of changes in
accounting principles and fixed charges by fixed charges. Fixed charges
represent all interest expense (ratios are presented both excluding and
including interest on deposits). There were no amortization of notes and
debentures expense nor any portion of net rental expense which was deemed to
be equivalent to interest on debt. Interest expense (other than on deposits)
includes interest on notes, federal funds purchased and securities sold under
agreements to repurchase, and other funds borrowed.
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RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
Preferred Securities offered by this Prospectus. Certain statements in this
Prospectus and documents incorporated herein by reference are forward-looking
and are identified by the use of forward-looking words or phrases such as
"intended," "will be positioned," "expects," is or are "expected,"
"anticipates," and "anticipated." These forward-looking statements are based on
the Company's current expectations. To the extent any of the information
contained in this Prospectus constitutes a "forward-looking statement" as
defined in Section 27A(i)(1) of the Securities Act, the risk factors set forth
below are cautionary statements identifying important factors that could cause
actual results to differ materially from those in the forward-looking statement.
RISK FACTORS RELATING TO THE OFFERING
Ranking of Subordinated Obligations Under the Guarantee and the Junior
Subordinated Debentures
The obligations of the Company under the Guarantee issued by the Company
for the benefit of the holders of Preferred Securities and under the Junior
Subordinated Debentures are subordinate and junior in right of payment to all
Senior Indebtedness. At March 31, 1997, the Senior Indebtedness of the Company
aggregated approximately $4.9 million. None of the Junior Subordinated
Indenture, the Guarantee or the Trust Agreement places any limitation on the
amount of secured or unsecured debt, including Senior Indebtedness, that may be
incurred by the Company. See "Description of Guarantee -- Status of the
Guarantee" and "Description of Junior Subordinated Debentures -- Subordination."
The ability of the Issuer Trust to pay amounts due on the Preferred
Securities is solely dependent upon the Company's making payments on the Junior
Subordinated Debentures as and when required.
Option to Extend Interest Payment Period; Tax Consequences
So long as no Event of Default (as defined in the Junior Subordinated
Indenture) has occurred and is continuing with respect to the Junior
Subordinated Debentures (a "Debenture Event of Default"), the Company has the
right under the Junior Subordinated Indenture to defer the payment of interest
on the Junior Subordinated Debentures at any time or from time to time for a
period not exceeding 20 consecutive quarterly periods with respect to each
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. See "Description of Junior
Subordinated Debentures -- Debenture Events of Default." As a consequence of any
such deferral, quarterly Distributions on the Preferred Securities by the Issuer
Trust will be deferred during any such Extension Period. Distributions to which
holders of the Preferred Securities are entitled will accumulate additional
Distributions thereon during any Extension Period at the rate of 10.00% per
annum, compounded quarterly from the relevant payment date for such
Distributions, computed on the basis of a 360-day year of twelve 30-day months
and the actual days elapsed in a partial month in such period. Additional
Distributions payable for each full Distribution period will be computed by
dividing the rate per annum by four. The term "Distribution" as used herein
shall include any such additional Distributions. During any such Extension
Period, the Company may not (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire or make a liquidation payment with respect to,
any of the Company's capital stock or (ii) make any payment of principal of or
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank pari passu in all respects with or junior in
interest to the Junior Subordinated Debentures (other than (a) repurchases,
redemptions
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or other acquisitions of shares of capital stock of the Company in connection
with any employment contract, benefit plan or other similar arrangement with or
for the benefit of any one or more employees, officers, directors or
consultants, in connection with a dividend reinvestment or stockholder stock
purchase plan or in connection with the issuance of capital stock of the Company
(or securities convertible into or exercisable for such capital stock) as
consideration in an acquisition transaction entered into prior to the applicable
Extension Period, (b) as a result of an exchange or conversion of any class or
series of the Company's capital stock (or any capital stock of a subsidiary of
the Company) for any class or series of the Company's capital stock or of any
class or series of the Company's indebtedness for any class or series of the
Company's capital stock, (c) the purchase of fractional interests in shares of
the Company's capital stock pursuant to the conversion or exchange provisions of
such capital stock or the security being converted or exchanged, (d) any
declaration of a dividend in connection with any stockholder's rights plan, or
the issuance of rights, stock or other property under any stockholder's rights
plan, or the redemption or repurchase of rights pursuant thereto, or (e) any
dividend in the form of stock, warrants, options or other rights where the
dividend stock or the stock issuable upon exercise of such warrants, options or
other rights is the same stock as that on which the dividend is being paid or
ranks pari passu with or junior to such stock). Prior to the termination of any
such Extension Period, the Company may further defer the payment of interest,
provided that no Extension Period may exceed 20 consecutive quarterly periods or
extend beyond the Stated Maturity of the Junior Subordinated Debentures. Upon
the termination of any Extension Period and the payment of all interest then
accrued and unpaid (together with interest thereon at the annual rate of 10.00%,
compounded quarterly, to the extent permitted by applicable law), the Company
may elect to begin a new Extension Period subject to the above conditions. No
interest shall be due and payable during an Extension Period, except at the end
thereof. The Company must give the Issuer Trustees notice of its election to
begin an Extension Period at least one Business Day prior to the earlier of (i)
the date the Distributions on the Preferred Securities would have been payable
but for the election to begin such Extension Period and (ii) the date the
Property Trustee is required to give notice to holders of the Preferred
Securities of the record date or the date such Distributions are payable, but in
any event not less than one Business Day prior to such record date. The Property
Trustee will give notice of the Company's election to begin a new Extension
Period to the holders of the Preferred Securities. Subject to the foregoing,
there is no limitation on the number of times that the Company may elect to
begin an Extension Period. See "Description of Preferred Securities --
Distributions" and "Description of Junior Subordinated Debentures -- Option to
Extend Interest Payment Period."
Should an Extension Period occur, a holder of Preferred Securities will
continue to accrue income (in the form of original issue discount ("OID")) for
United States federal income tax purposes in respect of its pro rata share of
the Junior Subordinated Debentures held by the Issuer Trust, which will include
a holder's pro rata share of both the stated interest and de minimis OID, if
any, on the Junior Subordinated Debentures. As a result, a holder of Preferred
Securities will include such OID in gross income for United States federal
income tax purposes in advance of the receipt of cash, and will not receive the
cash related to such income from the Issuer Trust if the holder disposes of the
Preferred Securities prior to the record date for the payment of Distributions.
See "Certain Federal Income Tax Consequences -- Interest Income and Original
Issue Discount" and "-- Sales of Preferred Securities."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures. However, should the Company elect to exercise such
right in the future, the market price of the Preferred Securities is likely to
be affected. A holder that disposes of his, her or its Preferred Securities
during an Extension Period, therefore, might not receive the same return on his,
her or its investment as a holder that continues to
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hold its Preferred Securities. In addition, as a result of the existence of the
Company's right to defer interest payments, the market price of the Preferred
Securities (which represent preferred undivided beneficial interests in the
assets of the Issuer Trust) may be more volatile than the market prices of other
securities on which original issue discount or interest accrues that are not
subject to such deferrals.
Tax Event, Investment Company Event or Capital Treatment Event Redemption
Upon the occurrence and during the continuation of a Tax Event, Investment
Company Event or Capital Treatment Event, the Company has the right to redeem
the Junior Subordinated Debentures in whole, but not in part, at any time within
90 days following the occurrence of such Tax Event, Investment Company Event or
Capital Treatment Event and thereby cause a mandatory redemption of the
Preferred Securities. Any such redemption shall be at a price equal to the
liquidation amount of the Preferred Securities, together with accumulated
Distributions to but excluding the date fixed for redemption. The ability of the
Company to exercise its rights to redeem the Junior Subordinated Debentures
prior to the stated maturity may be subject to prior regulatory approval by the
Federal Reserve, if then required under applicable Federal Reserve capital
guidelines or policies. See "Description of Junior Subordinated Debentures --
Redemption" and "Description of Preferred Securities -- Liquidation Distribution
Upon Dissolution."
A "Tax Event" means the receipt by the Issuer Trust of an opinion of
counsel to the Company experienced in such matters to the effect that, as a
result of any amendment to, or change (including any announced prospective
change) in, the laws (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein, or as a result of
any official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement or decision is announced on or after the date
of issuance of the Preferred Securities, there is more than an insubstantial
risk that (i) the Issuer Trust is, or will be within 90 days of the delivery of
such opinion, subject to United States federal income tax with respect to income
received or accrued on the Junior Subordinated Debentures, (ii) interest payable
by the Company on the Junior Subordinated Debentures is not, or within 90 days
of the delivery of such opinion will not be, deductible by the Company, in whole
or in part, for United States federal income tax purposes or (iii) the Issuer
Trust is, or will be within 90 days of the delivery of the opinion, subject to
more than a de minimis amount of other taxes, duties or other governmental
charges.
See "-- Possible Tax Law Changes Affecting the Preferred Securities" and
"Certain Federal Income Tax Consequences -- Possible Tax Law Changes" for a
discussion of certain legislative proposals that, if adopted, could give rise to
a Tax Event, which may permit the Company to cause a redemption of the Preferred
Securities prior to June 30, 2002.
"Investment Company Event" means the receipt by the Issuer Trust of an
opinion of counsel to the Company experienced in such matters to the effect
that, as a result of the occurrence of a change in law or regulation or a
written change (including any announced prospective change) in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, there is more than an insubstantial risk that
the Issuer Trust is or will be considered an "investment company" that is
required to be registered under the Investment Company Act of 1940, as amended
(the "Investment Company Act"), which change or prospective change becomes
effective or would become effective, as the case may be, on or after the date of
the issuance of the Preferred Securities.
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A "Capital Treatment Event" means the reasonable determination by the
Company that, as a result of the occurrence of any amendment to, or change
(including any announced prospective change) in, the laws (or any rules or
regulations thereunder) of the United States or any political subdivision
thereof or therein, or as a result of any official or administrative
pronouncement or action or judicial decision interpreting or applying such laws
or regulations, which amendment or change is effective or such pronouncement,
action or decision is announced on or after the date of issuance of the
Preferred Securities, there is more than an insubstantial risk that the Company
will not be entitled to treat an amount equal to the Liquidation Amount of the
Preferred Securities as "Tier 1 Capital" (or the then equivalent thereof) except
as otherwise restricted under the 25% Capital Limitation (as defined herein),
for purposes of the risk-based capital adequacy guidelines of the Federal
Reserve, as then in effect and applicable to the Company.
Exchange of Preferred Securities for Junior Subordinated Debentures
The holders of all the outstanding Common Securities have the right at any
time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, cause the Junior
Subordinated Debentures to be distributed to the holders of the Preferred
Securities and Common Securities in liquidation of the Issuer Trust. The ability
of the Company, as holder of the Common Securities, to dissolve the Issuer Trust
may be subject to prior regulatory approval of the Federal Reserve, if then
required under applicable Federal Reserve capital guidelines or policies. See
"Description of Preferred Securities -- Liquidation Distribution Upon
Dissolution."
Under current United States federal income tax law and interpretations and
assuming, as expected, that the Issuer Trust will not be taxable as a
corporation, a distribution of the Junior Subordinated Debentures upon a
liquidation of the Issuer Trust will not be a taxable event to holders of the
Preferred Securities. However, if a Tax Event were to occur that would cause the
Issuer Trust to be subject to United States federal income tax with respect to
income received or accrued on the Junior Subordinated Debentures, a distribution
of the Junior Subordinated Debentures by the Issuer Trust would be a taxable
event to the Issuer Trust and the holders of the Preferred Securities. See
"Certain Federal Income Tax Consequences -- Distribution of Junior Subordinated
Debentures to Securityholders."
Rights Under the Guarantee
Bankers Trust Company will act as the trustee under the Guarantee and will
hold the Guarantee for the benefit of the holders of the Preferred Securities.
Bankers Trust Company will also act as Debenture Trustee for the Junior
Subordinated Debentures and as Property Trustee under the Trust Agreement.
Bankers Trust (Delaware) will act as Delaware Trustee under the Trust Agreement.
The Guarantee guarantees to the holders of the Preferred Securities the
following payments, to the extent not paid by or on behalf of the Issuer Trust:
(i) any accumulated and unpaid Distributions required to be paid on the
Preferred Securities, to the extent that the Issuer Trust has funds on hand
available therefor at the payment date, (ii) the Redemption Price with respect
to any Preferred Securities called for redemption, to the extent that the Issuer
Trust has funds on hand available therefor at such time, and (iii) upon a
voluntary or involuntary dissolution, winding up or liquidation of the Issuer
Trust (unless the Junior Subordinated Debentures are distributed to holders of
the Preferred Securities), the lesser of (a) the aggregate of the Liquidation
Amount and all accumulated and unpaid Distributions to the date of payment, to
the extent that the Issuer Trust has funds on hand available therefor at such
time, and (b) the amount of assets of the Issuer Trust remaining available for
distribution to holders of the Preferred Securities on liquidation of the Issuer
Trust. The Guarantee is subordinated as described under "-- Ranking of
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Subordinated Obligations Under the Guarantee and the Junior Subordinated
Debentures" and "Description of Guarantee -- Status of the Guarantee." The
holders of not less than a majority in aggregate Liquidation Amount of the
outstanding Preferred Securities have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Guarantee
Trustee in respect of the Guarantee or to direct the exercise of any trust power
conferred upon the Guarantee Trustee under the Guarantee. Any holder of the
Preferred Securities may institute a legal proceeding directly against the
Company to enforce its rights under the Guarantee without first instituting a
legal proceeding against the Issuer Trust, the Guarantee Trustee or any other
person or entity.
If the Company were to default on its obligation to pay amounts payable
under the Junior Subordinated Debentures, the Issuer Trust may lack funds for
the payment of Distributions or amounts payable on redemption of the Preferred
Securities or otherwise, and, in such event, holders of the Preferred Securities
would not be able to rely upon the Guarantee for payment of such amounts.
Instead, if a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay any amounts payable
in respect of the Junior Subordinated Debentures on the payment date on which
such payment is due and payable, then a holder of Preferred Securities may
institute a legal proceeding directly against the Company for enforcement of
payment to such holder of any amounts payable in respect of such Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Preferred Securities of such holder (a "Direct
Action"). In connection with such Direct Action, the Company will have a right
of set-off under the Junior Subordinated Indenture to the extent of any payment
made by the Company to such holder of Preferred Securities in the Direct Action.
Except as described herein, holders of Preferred Securities will not be able to
exercise directly any other remedy available to the holders of the Junior
Subordinated Debentures or assert directly any other rights in respect of the
Junior Subordinated Debentures. See "Description of Junior Subordinated
Debentures -- Enforcement of Certain Rights by Holders of Preferred Securities,"
"-- Debenture Events of Default" and "Description of Guarantee." The Trust
Agreement provides that each holder of Preferred Securities by acceptance
thereof agrees to the provisions of the Guarantee and the Junior Subordinated
Indenture.
Limited Voting Rights
Holders of Preferred Securities will have limited voting rights relating
generally to the modification of the Preferred Securities and the Guarantee and
the exercise of the Issuer Trust's rights as holder of Junior Subordinated
Debentures. Holders of Preferred Securities will not be entitled to appoint,
remove or replace the Property Trustee or the Delaware Trustee except upon the
occurrence of certain events specified in the Trust Agreement. The Property
Trustee and the holders of all the Common Securities may, subject to certain
conditions, amend the Trust Agreement without the consent of holders of
Preferred Securities to cure any ambiguity or make other provisions not
inconsistent with the Trust Agreement or to ensure that the Issuer Trust (i)
will not be taxable as a corporation for United States federal income tax
purposes, or (ii) will not be required to register as an "investment company"
under the Investment Company Act. See "Description of Preferred Securities --
Voting Rights; Amendment of Trust Agreement" and "-- Removal of Issuer Trustees;
Appointment of Successors."
Absence of Market
The Preferred Securities are a new issue of securities with no established
trading market. Application has been made to list the Preferred Securities in
the Nasdaq National Market, but one of the requirements for listing and
continued listing is the presence of two market makers for the Preferred
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Securities. The Company and the Issuer Trust have been advised by Advest, Inc.
that it intends to make a market in the Preferred Securities. However, Advest,
Inc. is not obligated to do so and such market making may be interrupted or
discontinued at any time without notice at the sole discretion of Advest, Inc.
Moreover, there can be no assurance of a second market maker for the Preferred
Securities. Accordingly, no assurance can be given as to the development or
liquidity of any market for the Preferred Securities.
Market Prices
There can be no assurance as to the market prices for Preferred
Securities, or the market prices for Junior Subordinated Debentures that may be
distributed in exchange for Preferred Securities if a liquidation of the Issuer
Trust occurs. Accordingly, the Preferred Securities or the Junior Subordinated
Debentures that a holder of Preferred Securities may receive on liquidation of
the Issuer Trust may trade at a discount to the price that the investor paid to
purchase the Preferred Securities offered hereby. Because holders of Preferred
Securities may receive Junior Subordinated Debentures on termination of the
Issuer Trust, prospective purchasers of Preferred Securities are also making an
investment decision with regard to the Junior Subordinated Debentures and should
carefully review all the information regarding the Junior Subordinated
Debentures contained herein. See "Description of Junior Subordinated
Debentures."
Possible Tax Law Changes Affecting the Preferred Securities
On February 6, 1997, President Clinton released his budget proposals for
fiscal year 1998. One of the revenue provisions of those proposals would
generally deny interest deductions for interest on an instrument issued by a
corporation that has a maximum term of more than 15 years and that is not shown
as indebtedness on the separate balance sheet of the issuer or, where the
instrument is issued to a related party (other than a corporation), where the
holder or some other related party issues a related instrument that is not shown
as indebtedness on the issuer's consolidated balance sheet. If enacted as
proposed by the President, this provision would be effective for instruments
issued on or after the date of first action by a Congressional committee with
respect to the proposal. It is not clear from the President's proposals as to
what constitutes Congressional "committee action" with respect to this proposal.
If the provision were to apply to the Junior Subordinated Debentures, the
Company would be unable to deduct interest on the Junior Subordinated
Debentures. There can be no assurance, however, that future legislative
proposals or final legislation will not affect the ability of the Company to
deduct interest on the Junior Subordinated Debentures. Such a change could give
rise to a Tax Event, which may permit the Company to cause a redemption of the
Preferred Securities before June 30, 2002. See "Description of Junior
Subordinated Debentures -- Redemption" and "Description of Preferred Securities
- -- Redemption." See also "Certain Federal Income Tax Consequences -- Possible
Tax Law Changes." Under current law, the Company will be able to deduct interest
on the Junior Subordinated Debentures.
RISK FACTORS RELATING TO THE COMPANY
Status of the Company as a Bank Holding Company
The Company is a legal entity separate and distinct from the Bank
Subsidiaries, although the principal source of the Company's cash revenues is
dividends from the Bank Subsidiaries. The ability of the Company to pay the
interest on, and principal of, the Junior Subordinated Debentures will be
significantly dependent on the ability of the Bank Subsidiaries to pay dividends
to the Company and the
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ability of the Company to realize a return on its investments in amounts
sufficient to service the Company's debt obligations. Payment of dividends by
the Bank Subsidiaries is restricted by various legal and regulatory limitations.
No dividend may be paid, unless, following the payment of such dividend, the
capital stock of the bank will be unimpaired, and the bank will either have a
surplus of not less than 50% of its capital stock, or the payment of the
dividend will not reduce the surplus of the bank.
The right of the Company to participate in the assets of any subsidiary
upon the latter's liquidation, reorganization or otherwise (and thus the ability
of the holders of Preferred Securities to benefit indirectly from any such
distribution) will be subject to the claims of the subsidiaries' creditors,
which will take priority except to the extent that the Company may itself be a
creditor with a recognized claim. As of March 31, 1997, the Company's
subsidiaries had indebtedness and other liabilities of approximately $240.4
million.
The Bank Subsidiaries are also subject to restrictions under federal law
which limit the transfer of funds by them to the Company, whether in the form of
loans, extensions of credit, investments, asset purchases or otherwise. Such
transfers by either Bank Subsidiary to the Company or any nonbank subsidiary of
the Company are limited in amount to 10% of the bank's capital and surplus and,
with respect to the Company and all its nonbank subsidiaries, to an aggregate of
20% of the bank's capital and surplus. Furthermore, such loans and extensions of
credit are required to be secured in specified amounts. Federal law also
prohibits banks from purchasing "low-quality" assets from affiliates.
Competition
The banking business is highly competitive. In its primary market area,
the Bank Subsidiaries compete with other commercial banks, savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies, and brokerage and investment banking firms operating locally and
elsewhere. The Bank Subsidiaries' primary competitors have substantially greater
resources and lending limits than the Bank Subsidiaries and may offer certain
services, such as trust services, that the Bank Subsidiaries do not provide at
this time. The profitability of the Company depends upon the Bank Subsidiaries'
ability to compete in their primary market area. See "Business of the Company --
Competition."
Loan Portfolio Considerations
During the past three years, the Company has experienced significant
growth in its loan portfolio. Loans increased to $144.0 million at March 31,
1997, from $96.7 million at December 31, 1994. Commercial real estate loans
increased by 48% or $20.2 million at March 31, 1997, as compared to December 31,
1994, and comprised 43% of total loans as of March 31, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Loan
Portfolio." The nature of commercial real estate loans is such that they may
present more credit risk to the Company than other types of loans such as home
equity or residential real estate loans. Further, these loans are concentrated
in Passaic and Bergen Counties in northern New Jersey. As a result, a decline in
the general economic conditions of northern New Jersey could have a material
adverse effect on the Company's financial condition and results of operations
taken as a whole. See "Business of the Company -- Lending Activities --
Commercial Real Estate Loans."
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Growth and Acquisition Strategies
The Company has pursued and intends to continue to pursue an internal
growth strategy, the success of which will depend primarily on generating an
increasing level of loans and deposits at acceptable risk levels and terms
without significant increases in noninterest expenses. There can be no assurance
that the Company will be successful in implementing its internal growth
strategy. In addition, the Company has grown and may seek to grow by acquiring
other financial institutions. Any acquisitions will be subject to regulatory
approval, and there can be no assurance that the Company will obtain such
approvals. Although the Company does not have any signed contracts, letters of
intent or agreements in principle, the Company routinely reviews acquisition
opportunities. The Company may not be successful in identifying further
acquisition candidates, integrating acquired institutions or preventing deposit
erosion at acquired institutions. Competition for acquisitions in the Company's
market area is highly competitive, and the Company may not be able to acquire
other institutions on attractive terms. Furthermore, the success of the growth
strategy of the Company will depend on maintaining sufficient regulatory capital
levels and on economic conditions.
Market Value of Investments
A significant portion of the Company's securities investment portfolio has
been designated as available-for-sale pursuant to Statement of Financial
Accounting Standards No. 115 ("SFAS 115") relating to accounting for
investments. SFAS 115 requires that unrealized gains and losses in the estimated
value of the available-for-sale portfolio be "marked to market" and reflected as
a separate item in shareholders' equity (net of tax). At March 31, 1997, the
Company maintained approximately 21.2% of its assets in securities
available-for-sale. Shareholders' equity will continue to reflect the unrealized
gains and losses (net of tax) of these investments. There can be no assurance
that the market value of the Company's investment portfolio will not decline,
causing a corresponding decline in shareholders' equity.
Management believes that several factors will affect the market values of
the Company's investment portfolio. These include, but are not limited to,
changes in interest rates or expectations of changes, the degree of volatility
in the securities markets, inflation rates or expectations of inflation and the
slope of the interest rate yield curve. (The yield curve refers to the
differences between longer-term and shorter-term interest rates. A positively
sloped yield curve means shorter-term rates are lower than longer-term rates.)
Also, the passage of time will affect the market values of the securities, in
that the closer they are to maturing, the closer the market price should be to
par value. In addition to the foregoing, there are other factors that impact
specific categories of the portfolio differently.
Allowance for Loan Losses
The inability of borrowers to repay loans can erode the earnings and
capital of banks. Like all banks, the Company maintains an allowance for loan
losses to provide for loan defaults and nonperformance. The allowance is based
on prior experience with loan losses, as well as an evaluation of the risks in
the current portfolio, and is maintained at a level considered adequate by
management to absorb anticipated losses. The amount of future losses is
susceptible to changes in economic, operating and other conditions, including
changes in interest rates, that may be beyond management's control, and such
losses may exceed current estimates. At March 31, 1997, the Company had
nonperforming loans of $2.4 million and an allowance for loan losses of $2.7
million or 1.8% of total loans and 112% of nonperforming loans. There can be no
assurance that the Company's allowance for loan losses will be adequate to cover
actual losses. Future provisions for loan losses could materially and adversely
affect
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results of operations of the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Economic Conditions and Impact of Interest Rates
Results of operations for financial institutions, including the Company,
may be materially and adversely affected by changes in prevailing economic
conditions, including declines in real estate values, rapid changes in interest
rates and the monetary and fiscal policies of the federal government. The
profitability of the Company is in part a function of the spread between the
interest rates earned on assets and the interest rates paid on deposits and
other interest-bearing liabilities (net interest income), including advances
from the Federal Home Loan Bank of New York ("FHLB"). Interest rate risk arises
from mismatches (i.e., the interest sensitivity gap) between the dollar amount
of repricing or maturing assets and liabilities, and is measured in terms of the
ratio of the interest rate sensitivity gap to total assets. More assets
repricing or maturing than liabilities over a given time period is considered
asset-sensitive and is reflected as a positive gap, and more liabilities
repricing or maturing than assets over a given time period is considered
liability-sensitive and is reflected as negative gap. An asset-sensitive
position (i.e., a positive gap) will generally enhance earnings in a rising
interest rate environment and will negatively impact earnings in a falling
interest rate environment, while a liability-sensitive position (i.e., a
negative gap) will generally enhance earnings in a falling interest rate
environment and negatively impact earnings in a rising interest rate
environment. Fluctuations in interest rates are not predictable or controllable.
The Company has attempted to structure its asset and liability management
strategies to mitigate the impact on net interest income of changes in market
interest rates. However, there can be no assurance that the Company will be able
to manage interest rate risk so as to avoid significant adverse effects in net
interest income. At March 31, 1997, the Company had a one year cumulative
negative gap of 2.12%. This negative one year gap position may, as noted above,
have a negative impact on earnings in a rising interest rate environment. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Interest Rate Sensitivity."
Supervision and Regulation
Bank holding companies and banks operate in a highly regulated environment
and are subject to the supervision and examination by several federal and state
regulatory agencies. The Company is subject to the Bank Holding Company Act of
1956, as amended ("BHCA") and to regulation and supervision by the Federal
Reserve, and the Bank Subsidiaries are subject to regulation and supervision by
the Department and the FDIC. The Bank Subsidiaries are also members of the FHLB
and are subject to regulation thereby. Federal and state banking laws and
regulations govern matters ranging from the regulation of certain debt
obligations, changes in the control of bank holding companies, and the
maintenance of adequate capital to the general business operations and financial
condition of the Bank Subsidiaries, including permissible types, amounts and
terms of loans and investments, the amount of reserves against deposits,
restrictions on dividends, establishment of branch offices, and the maximum rate
of interest that may be charged by law. The Federal Reserve, the FDIC, and the
Department also possess cease and desist powers over bank holding companies and
banks, to prevent or remedy unsafe or unsound practices or violations of law.
These and other restrictions limit the manner in which the Company and the Bank
Subsidiaries may conduct their business and obtain financing. Furthermore, the
commercial banking business is affected not only by general economic conditions,
but also by the monetary policies of the Federal Reserve. These monetary
policies have had and are expected to continue to have significant effects on
the operating results of commercial banks. Changes in monetary or legislative
policies may affect the ability of the Bank Subsidiaries to attract deposits and
make loans. See "Supervision and Regulation."
19
<PAGE>
GCB CAPITAL TRUST
The Issuer Trust is a statutory business trust created under Delaware law
pursuant to the filing of a Certificate of Trust with the Delaware Secretary of
State on April 29, 1997. The Issuer Trust will be governed by the Trust
Agreement among the Company, as Depositor, Bankers Trust (Delaware), as Delaware
Trustee, and Bankers Trust Company, as Property Trustee (together with the
Delaware Trustee, the "Issuer Trustees"). Two individuals will be selected by
the holder of the Common Securities to act as administrators with respect to the
Issuer Trust (the "Administrators"). The Company, while holder of the Common
Securities, intends to select two individuals who are employees or officers of
or affiliated with the Company to serve as the Administrators. See "Description
of Preferred Securities -- Miscellaneous." The Issuer Trust exists for the
exclusive purposes of (i) issuing and selling the Trust Securities, (ii) using
the proceeds from the sale of the Trust Securities to acquire the Junior
Subordinated Debentures and (iii) engaging in only those other activities
necessary, convenient or incidental thereto (such as registering the transfer of
the Trust Securities). Accordingly, the Junior Subordinated Debentures will be
the sole assets of the Issuer Trust, and payments under the Junior Subordinated
Debentures will be the sole source of revenue of the Issuer Trust.
All the Common Securities will initially be owned by the Company. The
Common Securities will rank pari passu, and payments will be made thereon pro
rata, with the Preferred Securities, except that upon the occurrence and during
the continuation of a Debenture Event of Default arising as a result of any
failure by the Company to pay any amounts in respect of the Junior Subordinated
Debentures when due, the rights of the holder of the Common Securities to
payment in respect of Distributions and Payments upon liquidation, redemption or
otherwise will be subordinated to the rights of the holders of the Preferred
Securities. See "Description of Preferred Securities -- Subordination of Common
Securities." The Company will acquire Common Securities in an aggregate
liquidation amount equal to 3% of the total capital of the Issuer Trust. The
Issuer Trust has a term of 31 years, but may terminate earlier as provided in
the Trust Agreement. The address of the Delaware Trustee is Bankers Trust
(Delaware), 1001 Jefferson Street, Wilmington, Delaware 19801, telephone number
(302) 576-3301. The address of the Property Trustee, the Guarantee Trustee and
the Debenture Trustee is Bankers Trust Company, Four Albany Street, 4th Floor,
New York, New York 10006, telephone number (212) 250-2500.
USE OF PROCEEDS
All the proceeds to the Issuer Trust from the sale of the Preferred
Securities will be invested by the Issuer Trust in the Junior Subordinated
Debentures. The proceeds from the sale of the Preferred Securities are expected
to qualify as Tier 1 or core capital with respect to the Company under the risk-
based capital guidelines established by the Federal Reserve, however capital
received from the proceeds of the sale of the Preferred Securities cannot
constitute more than 25% of the total Tier 1 capital of the Company (the "25%
Capital Limitation"). Amounts in excess of the 25% Capital Limitation will
constitute Tier 2, or supplementary capital, of the Company. The net proceeds to
be received by the Company from the sale of the Junior Subordinated Debentures
will be used for general corporate purposes which may include branch
acquisitions and/or acquisitions of other financial institutions. In addition, a
portion of the proceeds may be used to make contributions through investments in
or advances to the Bank Subsidiaries. Pending any such use, the net proceeds may
be invested in short-to-medium-term obligations. The precise amounts and timing
of the application of proceeds will depend upon the funding requirements of the
Company and its subsidiaries and the availability of other funds.
20
<PAGE>
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of the
Company at March 31, 1997, (ii) the consolidated capitalization of the Company
giving effect to the issuance of the Preferred Securities hereby offered by GCB
Capital Trust and application by the Company of the net proceeds from the
corresponding sale of the Junior Subordinated Debentures to GCB Capital Trust as
if the sale of the Preferred Securities had been consummated on March 31, 1997,
and assuming the Underwriters' over-allotment was not exercised, and (iii) the
actual and pro forma capital ratios of the Company.
(Unaudited)
As Adjusted
For the Sale of
Actual Preferred Securities
------ --------------------
(Dollars in Thousands)
Redeemable Subordinated Debentures (1) ......... $ 4,891 $ 4,891
------- -------
Guaranteed preferred beneficial interests in the
Company's subordinated debt (2) .................. -- 20,000
SHAREHOLDERS' EQUITY:
Preferred stock no par value, 1,000,000 shares
authorized, none issued .......................... -- --
Common stock $1 par value - 10,000,000 shares
authorized; 1,891,733 outstanding ................ 1,886 1,886
Additional paid-in-capital ..................... 17,653 17,653
Unrealized holding gains on securities available
for sale, net of income taxes ................ 558 558
Retained earnings .............................. 1,722 1,722
------- -------
Total shareholders' equity ................. 21,819 21,819
------- -------
Total capitalization ........................... $26,710 $46,710
======= =======
COMPANY CAPITAL RATIOS(3):
Equity to total assets ......................... 8.17% 7.60%
Tier 1 risk-based capital ratio(4) ............. 12.51 16.28
Total risk-based capital ratio ................. 16.71 28.11
Leverage ratio ................................. 7.93 9.82
- -----------------
(1) The Company issued $5 million of 8.5% Redeemable Subordinated Debentures
("Debentures") due November 1, 1998, interest payable quarterly. In
addition to the Debentures, the Company issued Cancellable Mandatory
Stock Purchase Contracts ("Equity Contracts") requiring the purchase of
$5 million in common stock at a price of $9.77 (as adjusted for stock
dividends) per share no later than November 1, 1997, and permitting the
purchase of common stock in that amount prior to that date. The purchase
price under the Equity Contracts can be paid by the surrender of the
Debentures with a principal amount equal to the amount of the common
stock to be purchased. The Debentures are redeemable and the Equity
Contracts are cancellable at the election of the Company upon 60 days
written notice.
(2) Preferred Securities representing beneficial interests in an aggregate
principal amount of $20,000,000 of the 10.00% Junior Subordinated
Debentures of the Company. The Junior Subordinated Debentures will mature
on June 30, 2027.
(3) The capital ratios, as adjusted, are computed including the total
estimated net proceeds from the sale of the Preferred Securities, in a
manner consistent with Federal Reserve guidelines.
(4) Federal Reserve guidelines for calculation of Tier 1 capital limit the
amount of cumulative preferred stock which can be included in Tier 1
capital to 25% of total Tier 1 capital.
21
<PAGE>
ACCOUNTING TREATMENT
For financial reporting purposes, the Issuer Trust will be treated as a
subsidiary of the Company and, accordingly, the accounts of the Issuer Trust
will be included in the consolidated financial statements of the Company. The
Preferred Securities will be included in the consolidated balance sheets of the
Company and appropriate disclosures about the Preferred Securities, the
Guarantee and the Junior Subordinated Debentures will be included in the notes
to the consolidated financial statements of the Company. For financial reporting
purposes, Distributions on the Preferred Securities will be recorded in the
consolidated statements of income of the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This section presents a review of the Company's consolidated financial
condition and results of operations. Data is presented for both the Company and
its subsidiaries unless otherwise noted.
In addition to historical information, this discussion and analysis
contains forward-looking statements. The forward-looking statements contained
herein are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Important factors that might cause such a difference include, but
are not limited to, those discussed in this section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. The
Company undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events and circumstances that arise after
the date hereof.
Acquisitions
During 1995, the Company completed certain transactions which were
significant to its business, operations and structure. On April 7, 1995, the
Company acquired Family First which was merged into GFB. In connection with the
Family First acquisition, GFB added two full-service banking offices. The
acquisition was accounted for as a purchase transaction and accordingly GFB
recorded all assets and liabilities of Family First on its books at the
acquisition date. The Company acquired $26.3 million in loans and $49.8 million
in deposits pursuant to the Family First acquisition. The purchase price
exceeded the fair market value of net assets acquired by approximately $734,000,
which was recorded as goodwill and is being amortized over a period of six
years. Income and expense are recorded in the Company's results since the
acquisition date and prior periods have not been restated. In addition, in July
1995 GFB opened a de novo full-service banking office in Totowa, New Jersey.
As of December 31, 1995, the Company acquired BCB through a stock for
stock exchange which was accounted for as a pooling-of-interests. Due to the
pooling-of-interest accounting treatment, financial results for periods prior to
1995 have been restated to include BCB. The acquisition of BCB added four
full-service banking offices. At December 31, 1995, BCB had total assets of
$76.9 million and total deposits of $68.8 million.
Results of Operations: Three Months ended March 31, 1997 and 1996
The Company earned net income of $665,000 or $0.28 per share for the three
months ended March 31, 1997, compared to $482,000 or $0.23 per share for the
same period in 1996.
22
<PAGE>
Interest income increased by $241,000 or 5% for the three months ended
March 31, 1997, relative to the comparable period in 1996. The increase is
attributable primarily to the increase in average income-yielding assets.
Total interest expense increased by $37,000 during the first three months
of 1997, relative to the first three months of 1996, due primarily to the
increase in interest expense incurred as a result of the increase in federal
funds borrowing.
The provision for possible loan losses for the three months ended March
31, 1997, was $115,000 compared to $90,000 during the first three months of the
prior year.
Other income decreased by $297,000 or 40% in the first quarter of 1997
compared to the same period in 1996. The decrease in other income is a direct
result of reduction in fee income from the merchant credit card services which
were discontinued by BCB.
Total other expenses decreased by $327,000 during the first three months
of 1997, compared to the same period in 1996, resulting mainly from management's
efforts to consolidate various operational functions of the Bank Subsidiaries.
Results of Operations: Fiscal Years Ended December 31, 1996, 1995 and 1994
The Company earned $2.3 million or $0.97 per share in 1996 compared to
$2.1 million or $1.04 per share in 1995, and $1.5 million or $.89 per share in
1994. The earnings reported are after $111,000, $191,000 and $110,000 of
amortization expense of intangible assets on a pre-tax basis, for the years
ended December 31, 1996, 1995 and 1994, respectively. In 1996, the Company's
earnings improved 13% over 1995. In 1995, the Company's earnings, improved 39%
over 1994. Net interest income increased by $656,000, or 6%, in 1996 compared to
1995, and $3.1 million or 40% in 1995 compared to 1994. Total other expenses
showed a moderate increase of $63,000 in 1996 over 1995 and increased by $3.3
million or 54% in 1995 over 1994. The increase in net interest income in 1996 is
attributable to the growth of the Company. The increases in both net interest
income and other expenses in 1995 over 1994 are primarily attributable to the
acquisition of Family First and in part to the growth of the Company. The
provision for possible loan losses increased by $26,000 in 1996 compared to
1995, and increased by $242,000 in 1995 compared to 1994, primarily as a result
of the increase in the loan portfolio resulting from the acquisition of Family
First and in part to internal growth. The Company's annual interest expense
increased by $604,000 in 1996 compared to 1995, primarily due to an increase in
average interest-bearing liabilities. In 1995 the annual interest expense
increased by $2.9 million compared to 1994, primarily due to the increase in
average deposits which resulted from the Family First acquisition completed by
the Company during 1995.
During 1996, the Company's earnings, through its Bank Subsidiaries, were
adversely affected by a legislative action taken by the United States Government
to sign into law the Deposit Insurance Funds Act of 1996 to recapitalize the
SAIF. Under the act, the FDIC levied a special assessment on SAIF-assessable
deposits held as of March 31, 1995. In its acquisition of Family First in 1995,
the Company had acquired SAIF-assessable deposits which were subject to this
special assessment. In the third quarter of 1996, the Company recorded $249,000
before income taxes as its portion of the assessment. Excluding this assessment,
the Company's earnings would have been $2.5 million or $1.03 per share for the
year ended December 31, 1996.
23
<PAGE>
Average Balances and Net Interest Income
Net interest income, the primary source of the Company's results of
operations, is the difference between interest, dividends and fees earned on
loans and other earning assets, and interest paid on interest-bearing
liabilities. Earning assets include loans to businesses and individuals,
investment securities, interest-bearing deposits with banks and federal funds
sold in the interbank market. Interest- bearing liabilities include primarily
interest-bearing demand, savings and time deposits. Net interest income is
determined by (i) the difference between the yields earned on earning assets and
rates paid on interest-bearing liabilities ("interest rate spread") and (ii) 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 non-performing assets.
The following table sets forth the Company's consolidated average balances
of assets, liabilities and shareholders' equity as well as the amount of
interest expense on related items, and the Company's average yield for the three
months ended March 31, 1997, and the years ended December 31, 1996, 1995 and
1994. The yields are shown on a fully taxable basis and assume a 34% tax rate.
24
<PAGE>
Average Balance Sheet, Interest Income and Expense, and Average Interest Rates
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
---------------------------------- -------------------------------
Average Interest Average Average Interest Average
Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
------- ----------- ---------- ------- ----------- ----------
(Dollars in Thousands)
ASSETS:
Earning Assets:
<S> <C> <C> <C> <C> <C> <C>
Investment securities ........................... $ 93,417 $ 1,435 6.23% $ 87,604 $ 5,569 6.36%
Due from banks--interest-bearing............... 4,614 67 5.89% 2,947 138 4.67%
Federal funds sold ............................ 5,781 62 4.35% 7,468 365 4.89%
Loans 1 ....................................... 140,797 3,200 9.22% 135,161 12,621 9.34%
-------- ------- ---- -------- -------- ----
Total earning assets................. 244,609 4,764 7.90% 233,180 18,693 8.02%
Less: Allowance for possible loan losses........ 2,584 -- 2,393 --
Unearned income - loans............... 296 -- 317 --
All other assets .............................. 20,103 -- 21,433 --
-------- -------- -------- ---------
Total assets ........................ $261,832 $ 4,764 $251,903 $ 18,693
======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing Liabilities:
Savings and interest-bearing accounts.......... $ 81,443 $ 456 2.27% $ 81,112 $ 1,799 2.22%
Time deposits ................................. 82,406 1,093 5.38% 86,277 4,605 5.34%
Federal funds and short-term borrowings....... 12,626 148 4.75% 6,062 312 5.15%
Long-term borrowings .......................... 4,974 109 8.89%
-------- ------- ---- -------- -------- ----
Total interest-bearing
liabilities ........................ 181,449 1,806 4.04% 178,433 7,154 4.01%
Demand deposits ................................. 55,566 -- 50,243 --
Other liabilities ............................... 3,418 -- 3,240 --
Shareholders' equity ............................ 21,399 -- 19,987 --
-------- -------- -------- ---------
Total liabilities and
shareholders'equity................. $261,832 $ 1,806 $251,903 $ 7,154
======== ======== ======== =========
NET INTEREST INCOME
(fully taxable basis) ........................... $ 2,958 $ 11,539
======== =========
NET INTEREST MARGIN
(fully taxable basis) ........................... 4.84% 4.95%
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
--------------------------------- ---------------------------------
Average Interest Average Average Interest Average
Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
------- ----------- ---------- -------- ----------- ----------
ASSETS:
Earning Assets:
<S> <C> <C> <C> <C> <C> <C>
Investment securities ........................... $ 74,751 $ 4,790 6.41% $ 52,813 $ 2,693 5.10%
Due from banks--interest-bearing............... 1,271 54 4.23% 3,884 158 4.07%
Federal funds sold ............................ 11,178 658 5.89% 4,991 143 2.87%
Loans 1 ....................................... 120,379 11,931 9.91% 92,978 8,408 9.04%
-------- -------- ---- -------- -------- ----
Total earning assets................. 207,579 17,433 8.40% 154,666 11,402 7.37%
Less: Allowance for possible loan losses........ 2,427 -- 1,777 --
Unearned income - loans............... 335 -- 262 --
All other assets .............................. 17,368 -- 10,546 --
-------- -------- -------- ------
Total assets ........................ $222,185 $17,433 $163,173 $ 11,402
======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing Liabilities:
Savings and interest-bearing accounts.......... $ 74,207 $1,890 2.55% $ 63,409 $ 1,388 2.19%
Time deposits ................................. 75,505 4,037 5.35% 45,458 1,755 3.86%
Federal funds and short-term borrowings....... 2,934 185 6.31% 1,122 53 4.72%
Long-term borrowings .......................... 4,969 438 8.82% 4,958 438 8.83%
-------- -------- ---- -------- -------- ----
Total interest-bearing
liabilities ........................ 157,615 6,550 4.16% 114,947 3,634 3.16%
Demand deposits ................................. 44,335 -- 32,446 --
Other liabilities ............................... 2,948 -- 1,200 --
Shareholders' equity ............................ 17,287 -- 14,580 --
-------- -------- -------- ------
Total liabilities and
shareholders'equity................. $222,185 $ 6,550 $163,173 $3,634
======== ======== ======== ======
NET INTEREST INCOME
(fully taxable basis) ........................... $ 10,883 $7,768
======== ======
NET INTEREST MARGIN
(fully taxable basis) ........................... 5.24% 5.02%
</TABLE>
1 Average balance includes non-performing loans.
25
<PAGE>
Net Interest Income
In 1996, interest income increased by $1.2 million or 7% compared to 1995.
Interest and fee income on loans during 1996 increased by $690,000, or 6% over
the comparable period in 1995 as a result of an increase of 12% in average total
loans. The average yield on loans decreased to 9.34% in 1996 compared to 9.91%
in 1995. Income earned on securities during 1996 increased by $779,000 or 16%
compared to the same period in 1995. The increase was primarily due to a 17%
increase in average investments for the year ended December 31, 1996 over 1995.
The average yield on securities was 6.36% for the year ended December 31, 1996
compared to 6.41% for the same period in the prior year, a moderate decline due
to general market conditions. Interest income on federal funds sold and deposits
with banks during 1996 decreased by $209,000 or 29% compared to the same period
in the prior year as a result of a $2.0 million, or 16%, decrease in average
federal funds sold and deposits with banks.
In 1995, interest income of $17.4 million represented a $6.0 million or
53% increase over $11.4 million reported for 1994. Interest and fee income on
loans during 1995 increased by $3.5 million or 42% over 1994. This increase was
due to an increase of 29% in average total loans and an increase in the average
yield on loans to 9.91% in 1995 compared to 9.04% in 1994. Income earned on
securities during 1995 increased by $2.1 million or 78% compared to the same
period in 1994. This increase was primarily due to a 42% increase in average
investments for the year ended December 31, 1995 over 1994. In addition, the
average yield on securities increased to 6.41% for the year ended December 31,
1995, compared to 5.10% for the prior year. Interest income on federal funds
sold and deposits with banks increased from 1994 to 1995 by $411,000 or 137% as
a result of a $3.6 million, or 40%, increase in average federal funds sold and
deposits with banks. All such increases are primarily attributable to the
acquisitions which occurred during 1995 and the overall growth of the Company.
Interest expense for the year ended December 31, 1996, increased by
$604,000 or 9% from the level of interest expense for 1995. $477,000 of the
total increase in interest expense is related to the increase in interest
expense on deposits from 1996 to 1995 and the remaining $127,000 is related to
the increase in interest expense on short- and long-term borrowings. The
increase in total interest expense is related to the increase in average
interest-bearing liabilities of $20.8 million or 13% due to the overall growth
of the Company.
Interest expense for the year ended December 31, 1995, increased by $2.9
million or 80% from the level of interest expense for 1994. $2.8 million of the
total increase in interest expense is related to the increase in interest
expense on deposits from 1995 to 1994. The increase in total interest expense is
related to the increase in average interest-bearing liabilities of $42.7 million
or 37% due to the acquisitions which occurred in 1995 and the overall growth of
the Company.
The Company's net interest margin, which measures net interest income as a
percentage of average earning assets, was 4.95%, 5.24% and 5.02% for the years
ended December 31, 1996, 1995 and 1994, respectively.
Rate/Volume Analysis
The following table sets forth the changes in interest income and expenses
as they relate to changes in volume and rate for the twelve-month periods ended
December 31, 1996, 1995 and 1994. 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 which
26
<PAGE>
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.
<TABLE>
<CAPTION>
Full Year 1996 Full Year 1995 Full Year 1994
Compared to Full Year 1995 Compared to Full Year 1994 Compared to Full Year 1993
Increase (Decrease) Increase (Decrease) Increase (Decrease)
---------------------------- --------------------------- -----------------------------
Volume Rate Net Volume Rate Net Volume Rate Net
-------- ------ ------ -------- ------- ------ -------- --------- ------
(Dollars in Thousands)
Interest Earned On:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans .............................. $ 1,378 $ (688) $ 690 $ 2,991 $ 532 $ 3,523 $ 986 $ 335 $ 1,321
Investment securities .............. 819 (40) 779 1,347 750 2,097 791 169 960
Other earning assets ............... (103) (106) 209 268 143 411 (301) 87 (214)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total earning assets ............. $ 2,094 $ (834) $ 1,260 $ 4,606 $ 1,425 $ 6,031 $ 1,476 $ 591 $ 2,067
======= ======= ======= ======= ======= ======= ======= ======= =======
Interest Paid On:
Savings & money market ............. $ 158 $ (249) $ (91) $ 262 $ 240 $ 502 $ 108 $ (213) $ (105)
Time deposits ...................... 575 (7) 568 1,507 775 2,282 215 71 286
Borrowings ......................... 213 (86) 127 133 (1) 132 430 21 451
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing Liabilities $ 946 $ (342) $ 604 $ 1,902 $ 1,014 $ 2,916 $ 753 ($ 121) $ 632
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Provision for Possible Loan Losses
The Company recorded a provision for possible loan losses of $440,000 in
1996 compared with $414,000 in 1995 and $172,000 in 1994. The increase in the
provision for possible loan losses in 1995 was attributable to an increase in
the size of the loan portfolio due to the acquisitions in 1995 and internal loan
growth. Management of each bank subsidiary regularly performs an analysis to
identify the inherent risk of loss in its loan portfolio. This analysis includes
evaluation of concentrations of credit, past loss experience, current economic
conditions, amount and composition of the loan portfolio (including loans being
specifically monitored by management), estimated fair value of underlying
collateral, loan commitments outstanding, delinquencies, and other factors.
The Bank Subsidiaries will continue to monitor their allowance for
possible loan losses and make future adjustments to the allowance through the
provision for possible loan losses as economic conditions dictate. Although the
Bank Subsidiaries maintain their allowance for possible loan losses at a level
that they consider to be adequate to provide for the inherent risk of loss in
their loan portfolio, there can be no assurance that future losses will not
exceed estimated amounts or that additional provisions for possible loan losses
will not be required in future periods. In addition, the Bank Subsidiaries'
determination as to the amount of their allowance for possible loan losses is
subject to review by the FDIC and the Department, as part of their examination
process, which may result in the establishment of an additional allowance based
upon the judgment of the FDIC or the Department, after a review of the
information available at the time of their examination.
Other Income
Total other income for the year ended December 31, 1996, was $1.9 million,
a decrease of $248,000 or 11% compared to 1995. The $248,000 net decrease was
the result of significant fluctuations within the major components of Other
Income. Although service charges on deposit accounts increased by $307,000, fees
on merchant credit card processing and other commissions and fees decreased by
$385,000 and $142,000, respectively. The majority of increase in service charges
on deposit accounts is attributable to the increase in deposit-related services
during 1996. The primary reason for the decrease in merchant credit card
processing fees is due to the discontinuation of such services offered by BCB.
27
<PAGE>
Realized gain or loss on sale of securities available-for-sale during 1996
decreased by $158,000 while all other income increased by $130,000 when compared
to 1995.
Total other income for the year ended December 31, 1995 was $2.2 million,
an increase of $1.3 million or 155% compared to 1994. The $1.3 million net
increase was the result of significant fluctuations in the major components of
Other Income. More specifically, fee on merchant credit card processing
increased by $502,000 and service charges on deposits increased by $352,000.
Realized loss or gain on sale of investment securities available-for-sale during
1995 increased by $293,000 compared to 1994. The majority of such increases are
attributable to the increase in deposit-related services during 1995.
Other Expenses
Total other expenses increased by $63,000 for the year ended December 31,
1996 over 1995. The $63,000 net increase was a result of significant
fluctuations within the components of Other Expenses. More specifically,
salaries and employee benefits increased by $444,000 or 12%. The increase in
salaries and employee benefits is attributable to general salary increases
coupled with increases in employee benefits expense. Occupancy and equipment
expense, which includes the costs of leasing office and branch space, expenses
associated with maintaining these facilities and depreciation of fixed assets,
increased by $540,000 or 38% primarily due to the addition of office space and
equipment.
Regulatory, professional and other fees, and computer services decreased
by $85,000 or 11% and $141,000 or 36%, respectively, from 1995. The primary
reason for such decreases is the reduction in expenses associated with the 1995
acquisitions. The $432,000 or 70% decrease in merchant credit card expense is a
result of discontinuation of merchant processing activity by BCB. All other
operating expenses decreased by $347,000 or 24% due in part to management's
efforts to reduce such expenses. Included in all other operating expenses is the
amortization expense of intangible assets which declined by $80,000 in 1996
compared to 1995 as a result of fully written-off intangible assets relative to
the formation of GFB in 1986. Office expenses increased moderately while other
real estate operating expense decreased moderately in 1996 when compared to
1995.
FDIC insurance assessment totaled $340,000 for the year ended December 31,
1996, an increase of $78,000 over 1995. The increase is a direct result of a
legislation enacted to recapitalize the SAIF. The FDIC levied a special
assessment on SAIF-assessable deposits held as of March 31, 1995. In its
acquisition of Family First in 1995, the Company acquired SAIF-assessable
deposits which were subject to this special assessment. In the third quarter of
1996, the Company recorded $249,000 as its portion of this assessment. Excluding
this special assessment, the FDIC insurance assessment would have decreased for
1996 compared to 1995. The legislation is expected to reduce the future annual
deposit insurance costs for SAIF deposits. The Company anticipates that such
reductions, which are to become effective in 1997, will equal the $249,000
charge in approximately 3 years.
Total other expenses increased by $3.3 million or 54% for the year ended
December 31, 1995 over 1994. Of this increase, $955,000 was attributable to
increases in salaries and benefits. The increase in salaries and employee
benefits is attributable to the acquisition of Family First, hiring of
additional employees and general increases in employee benefits. Occupancy and
equipment expense, which includes the costs of leasing office and branch space,
expenses associated with maintaining these facilities and depreciation of fixed
assets, increased by $499,000 primarily due to the addition of office space and
equipment.
28
<PAGE>
Regulatory, professional and other fees, computer services and office
expenses during 1995 increased by $170,000, $138,000 and $123,000 respectively,
compared to 1994. Other real estate expenses and merchant credit card expenses
increased by $259,000 and $562,000, respectively, compared to 1994. Such
increases were primarily due to the acquisitions in 1995 and in part due to the
Company's overall growth. FDIC insurance assessment for 1995 decreased by
$98,000 due to a decline in FDIC assessment rate when compared to 1994.
All other operating expenses for 1995 increased by $667,000 when compared
to 1994. The majority of such increase is directly related to the acquisition of
Family First. Included in all other expenses is amortization expense totaling
$191,000 and $110,000 for the years 1995 and 1994, respectively. The final
amortization of the intangible assets related to the 1986 acquisition was
$110,000 in 1995. In December 1993, the Company incurred costs of $106,000
relative to the sale of debentures and equity contracts. These costs are being
amortized over 4 years commencing in 1994 at an annual expense of $26,000. In
addition, the acquisition of Family First early in the second quarter of 1995
resulted in an increase in the amortization expense of $70,000 in 1995. The
Company expects amortized expenses relating to the acquisition of Family First
to be $108,000 per year for the next six years.
Income Taxes
The Company recorded income tax provisions of $1.3 million, $1.2 million
and $840,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
The increases in income tax provision are attributable to increased earnings for
those three years.
Financial Condition
At March 31, 1997, the Company's total assets were $267.1 million, an
increase of $10.6 million or 4% over the amount reported at December 31, 1996.
Cash and cash equivalents decreased by $690,000 or 4% from December 31, 1996,
which decrease was primarily used to purchase investment securities and fund
loan demand. Investment securities increased by $5.2 million or 6% and gross
loans increased by $6.4 million or 5% from December 31, 1996. The majority of
increases in assets at March 31, 1997, were funded primarily by federal funds
purchased.
At December 31, 1996, the Company's total assets were $256.5 million, an
increase of $3.5 million or 1.3%, over the amount reported at December 31, 1995.
Federal funds sold decreased by $11.3 million. Substantially all of such
decrease was offset by increases in both investment securities and gross loans
of $5.7 million and $5.7 million, respectively. Interest bearing due from banks
increased by $3.3 million primarily due to additional investing in such assets
when compared to the amount reported at December 31, 1995. Cash and non-interest
bearing due from banks increased by $523,000.
29
<PAGE>
Investment Securities
Investment securities totaled $94.9 million at March 31, 1997, an increase
of $5.2 million or 6% as of December 31, 1996. Investment securities at December
31, 1996, constituted an increase of $5.7 million or 7% over the amount reported
at December 31, 1995. The increase at March 31, 1997, occurred mainly in
mortgage-backed securities. The following table presents the composition of the
securities portfolio along with the book and market values of those components
at March 31, 1997, and December 31, 1996 and 1995.
<TABLE>
<CAPTION>
March 31, December 31,
------------------------- ------------------------------------------------
1997 1996 1995
------------------------- ---------------------- -----------------------
Amortized Fair Market Amortized Fair Market Amortized Fair Market
Cost Value Cost Value Cost Value
---------- ----------- --------- ----------- ---------- -----------
(Dollars in Thousands)
Available-for-sale
U.S. Treasury securities and U.S.
<S> <C> <C> <C> <C> <C> <C>
Government agencies .............. $38,794 $38,768 $36,673 $36,861 $36,812 $37,805
State & political subdivisions .... 906 906 1,006 1,006 -- --
Other debt and equity securities .. 6,323 7,250 6,192 6,407 2,524 2,507
Mortgage-backed securities ........ 9,797 9,823 7,879 7,977 7,577 7,523
------- ------- ------- ------- ------- -------
Total available-for-sale ..... $55,820 $56,747 $51,750 $52,251 $46,913 $47,835
------- ------- ------- ------- ------- -------
Held-to-maturity
U.S. Treasury securities and U.S.
Government agencies ............. $18,253 $17,749 $18,996 $18,602 $32,774 $32,679
State and political subdivisions .. 393 388 393 390 613 615
Mortgage-backed securities ........ 19,498 19,289 18,039 17,978 2,764 2,767
------- ------- ------- ------- ------- -------
Total held-to-maturity ....... $38,144 $37,426 $37,428 $36,970 $36,151 $36,061
------- ------- ------- ------- ------- -------
Total securities ...... $93,964 $94,173 $89,178 $89,221 $83,064 $83,896
======= ======= ======= ======= ======= =======
</TABLE>
30
<PAGE>
Of the total at March 31, 1997, 60% of the investment securities are in
U.S. Government obligations, 31% in U.S. Government agency obligations and
mortgage-backed securities, with the balance in municipal and other equity
securities.
Under the requirements of SFAS No. 115, effective January 1, 1994, the
Company segregated its investment portfolio into held-to-maturity and
available-for-sale. At March 31, 1997, based on the fair market value of its
available-for-sale portfolio, the Company recorded the difference between the
unamortized cost and the fair market value as an unrealized gain in the amount
of $558,000, net of taxes, as a component of shareholders' equity. This was an
increase of $251,000 from the $307,000 recorded at December 31, 1996.
During 1996, the Company realized net gains of $51,000. The gains were
realized through the sale of $5.5 million of securities from its
available-for-sale portfolio. Included in shareholders' equity at December 31,
1996, is an unrealized holding net gain on available-for-sale securities, net of
income taxes, in the amount of $307,000. The Company has no securities held for
trading purposes.
31
<PAGE>
The following table provides information concerning the available-for-sale
and held-to-maturity portions of the Company's investment securities portfolio
at March 31, 1997:
<TABLE>
<CAPTION>
March 31, 1997
--------------------------------------------------------------------------------------------------
Due Within Due One to Due Five to Due Ten Years
One Year Five Years to Ten Years and Over Total
------------------- ------------------ ------------------- ------------------ -----------------
Fair Fair Fair Fair Fair
Amortized Market Amortized Market Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- ------ --------- ------- --------- ------
(In Thousands)
Available-for-sale:
U.S. Treasury & Government
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
securities..................... $13,237 $13,254 $23,824 $23,810 $ 1,408 $ 1,394 $ 325 $ 310 $38,794 $38,768
State and political subdivisions 906 906 -- -- -- -- -- -- 906 906
Other debt and equity securities 6,323 7,250 -- -- -- -- -- -- 6,323 7,250
Mortgage-backed securities ..... 605 614 4,847 4,861 2,265 2,269 2,080 2,079 9,797 9,823
------- ------- ------- ------- ------- ------- ------- ----- ------ ------
Total available-for-sale .... 21,071 22,024 26,671 28,671 3,673 3,663 2,405 2,389 55,820 56,747
Held-to-maturity:
U.S. Treasury & Government
securities..................... 3,448 3,456 12,624 12,442 1,181 1,201 1,000 650 18,253 17,749
State and political subdivisions 76 75 127 126 190 187 -- -- 393 388
Mortgage-backed securities ..... 245 243 7,940 7,868 8,045 7,944 3,268 3,234 19,498 19,289
------- ------- ------- ------- ------- ------- ------- ------ -------- -------
Total held-to-maturity ...... 3,769 3,774 20,691 20,436 9,416 9,332 4,268 3,684 38,144 37,426
------- ------- ------- ------- ------- ------- ------- -------- -------
Total securities ........ $24,840 $25,798 $49,362 $49,107 $13,089 $12,994 $ 6,613 $ 6,273 $ 93,964 $94,173
======= ======= ======= ======= ======= ======= ======= ======= ======== =======
</TABLE>
32
<PAGE>
Maturity Schedule - Securities
The following table shows the average yields, book values and fair market
value of the Company's investment securities by maturity for the three months
ended March 31, 1997, and the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
March 31, December 31,
-------------------------------- --------------------------------------------------------------------
1997 1996 1995
-------------------------------- ------------------------------------ -------------------------------
Average Amortized Fair Market Average Amortized Fair Market Average Amortized Fair Market
Yield Cost Value Yield Cost Value Yield Cost Value
------ --------- ----------- ------- --------- ----------- ------- --------- -----------
(Dollars in Thousands)
Available-for-sale
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due 0-1 Years......... 6.65% $ 14,143 $ 14,160 6.29% $11,602 $11,656 6.10% $16,531 $ 16,716
Due 1-5 Years......... 6.60% 23,824 23,810 6.94% 24,360 24,487 6.32% 23,750 24,529
Due 5-10 Years........ 7.44% 1,408 1,394 7.72% 1,393 1,403 6.32% 4,209 4,184
Due 10 Years and Over. 7.59% 325 310 9.09% 324 321 N/A - -
Mortgage-backed and
equity securities... N/A 16,120 17,073 N/A 14,071 14,384 N/A 2,423 2,406
-------- -------- -------- -------- -------- --------
Total available-
for-sale......... $ 55,820 $ 56,747 $ 51,750 $ 52,251 $ 46,913 $ 47,835
-------- -------- -------- -------- -------- --------
Held-to-maturity
Due 0-1 Years......... 5.42% $ 3,524 $ 3,531 5.34% $ 3,198 $ 3,198 4.99% $ 12,472 $12,562
Due 1-5 Years......... 5.82% 12,751 12,568 5.94% 13,822 13,748 5.49% 19,404 19,481
Due 5-10 Years........ 6.52% 1,371 1,388 6.54% 1,369 1,407 5.39% 4,275 4,018
Due 10 Years and Over. 6.02% 1,000 650 5.94% 1,000 640 N/A - -
Mortgage-backed
securities.......... N/A 19,498 19,289 6.27% 18,039 17,977 N/A - -
-------- -------- -------- -------- -------- --------
Total held-to-
maturity........... $ 38,144 $ 37,426 $ 37,428 $ 36,970 36,151 36,061
-------- -------- -------- -------- -------- --------
Total investment
securities......... $ 93,964 $ 94,173 $ 89,178 $ 89,221 $ 83,064 $ 83,896
======== ======== ======== ======== ======== ========
</TABLE>
33
<PAGE>
Loan Portfolio
The Company's gross loan portfolio at March 31, 1997, totaled $144.0
million, an increase of $6.6 million or 5%, compared to the amount reported at
December 31, 1996. This increase is primarily due to increased loan demand at
the Bank Subsidiaries. The increased demand is primarily the result of
consolidation in the market area, which has left many small to mid-size
businesses underserved. The Company's gross loan portfolio at December 31, 1996,
totaled $137.4 million, an increase of $5.7 million or 4%, as compared to the
amount reported at December 31, 1995. This increase was again primarily due to
increased loan demand. The Company's gross loan portfolio increased $35.1
million to $131.7 million at December 31, 1995, from $96.7 million at December
31, 1994. This increase was primarily due to the acquisition of $26.3 million of
gross loans in connection with the Family First acquisition, as well as
increased loan demand. The following table summarizes the components of the loan
portfolio as of March 31, 1997, and December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
March 31, December 31,
--------- ---------------------------
1997 1996 1995 1994
------ ------ -------- ------
(In Thousands)
Loans secured by one- to four-family
<S> <C> <C> <C> <C>
residential properties ...................... $ 45,975 $ 43,100 $ 43,328 $ 26,925
Loans secured by nonresidential properties..... 62,061 58,106 51,133 41,891
Loans to individuals .......................... 10,073 9,997 8,661 6,688
Loans to depository institutions .............. -- -- 4,600 600
Commercial loans .............................. 13,367 14,106 14,823 10,320
Construction loans ............................ 5,557 5,534 4,292 4,754
Other loans ................................... 6,959 6,567 4,905 5,486
-------- -------- -------- --------
Total gross loans ........................ $143,992 $137,410 $131,742 $ 96,664
======== ======== ======== ========
</TABLE>
34
<PAGE>
The following tables set forth the contractual maturity and interest rate
sensitivity of components of the loan portfolio at December 31, 1996 and 1995.
Demand loans, having no stated schedule of repayment and no stated maturity, and
overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------
Within 1 - 5 Over 5
1 year Years Years Total
------ ------ ------- -------
(In Thousands)
Loans with predetermined interest rates:
<S> <C> <C> <C> <C>
Commercial ........................... $ 7,360 $ 13,578 $ 1,028 $ 21,966
Real estate construction ............. 1,343 -- -- 1,343
Real estate mortgage ................. 7,919 35,879 7,949 51,747
Consumer ............................. 1,855 5,811 2,234 9,900
-------- -------- -------- --------
18,477 55,268 11,211 84,956
Loans with floating interest rates:
Commercial ........................... 29,876 -- -- 29,876
Lease financing ...................... 3,785 -- -- 3,785
Real estate mortgage ................. 12,648 3,508 -- 16,156
Consumer ............................. 2,637 -- -- 2,637
-------- -------- -------- --------
48,946 3,508 -- 52,454
-------- -------- -------- --------
Total loans ............... $ 67,423 $ 58,776 $ 11,211 $137,410
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------
Within 1 - 5 Over 5
1 year Years Years Total
------- ------- -------- -------
(In Thousands)
Loans with predetermined interest rates:
<S> <C> <C> <C> <C>
Commercial ............................ $ 13,707 $ 20,299 $ 2,174 $ 36,180
Real estate construction ............. 4,000 -- -- 4,000
Real estate mortgage ................. 2,038 19,180 7,016 28,234
Consumer ............................. 4,414 2,716 722 7,852
-------- -------- -------- --------
24,159 42,195 9,912 76,266
Loans with floating interest rates:
Commercial ........................... 29,850 -- -- 29,850
Loans to depository institutions ..... 600 -- -- 600
Real estate construction ............. 3,848 -- -- 3,848
Lease financing ...................... -- 902 -- --
Real estate mortgages ................ 13,243 -- -- 14,145
Consumer ............................. 7,033 -- -- 7,033
-------- -------- -------- --------
54,574 902 -- 55,476
-------- -------- -------- --------
Total loans ............. $ 78,733 $ 43,097 $ 9,912 $131,742
======== ======== ======== ========
</TABLE>
At the dates indicated in the foregoing loan tables, no loans were
concentrated within a single industry or group of related industries and the
Company had no foreign loans.
35
<PAGE>
Asset Quality
Various degrees of risk are associated with substantially all investing
activities. The lending function, however, carries the greatest risk of loss.
The senior lending officers of BCB and GFB are charged with monitoring asset
quality, establishing credit policies and procedures and seeking consistent
application of these procedures. Non-performing assets include loans past due,
nonaccrual, renegotiated and other real estate. Since lending is concentrated
within the local market area, non-performing loans were also made primarily to
customers operating in the area. The degree of risk inherent in all lending
activities is influenced heavily by general economic conditions in the immediate
market area. Among the factors which tend to affect portfolio risks are changes
in local or regional real estate values, income levels and energy prices. These
factors, coupled with high unemployment levels and tax rates, as well as
governmental actions and weakened market conditions which reduce the demand for
credit among qualified borrowers, are also important determinants of the risk
inherent in lending.
Past Due, Non-accruing and Renegotiated Loans. It is the Company's policy
to review monthly all loans which are past due as to principal or interest. The
accrual of interest income on loans is discontinued when it is determined that
such loans are either doubtful of collection or are involved in a protracted
collection process. The current year's uncollected interest is reversed on such
non-accrual loans. Management has also restructured the terms of certain loans
to accommodate changes in the financial condition of borrowers. A typical
concession would be a reduction in the currently payable interest rate to one
which is lower than the current market rate for new debt with similar risks;
interest foregone would be deferred until maturity. The following table
summarizes the composition of the Company's non-performing assets and related
asset quality ratios as of the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
--------- ------------------------
1997 1996 1995 1994
------ ----- ----- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Non-accruing loans ........................ $1,536 $1,033 $1,422 $1,499
Renegotiated loans ........................ 825 726 517 526
------ ------ ------ ------
Total non-performing loans ........... $2,361 1,759 1,939 2,025
Loans past due 90 days and accruing ....... 1,009 876 1,125 10
Other real estate ......................... 1,650 1,834 2,070 1,184
------ ------ ------ ------
Total non-performing assets .......... $5,020 $4,469 $5,134 $3,219
====== ====== ====== ======
Non-performing loans to total gross loans . 1.64% 1.28% 1.47% 2.09%
Non-performing assets to total gross loans
and other real estate owned ............. 3.45% 3.21% 3.84% 3.29%
Non-performing assets to total assets ..... 1.88% 1.74% 2.03% 1.91%
Allowance for loan losses to non-performing
loans .................................... 112.24% 144.40% 120.27% 90.07%
</TABLE>
The net increase in non-accruing loans of $503,000 for the three months
ended March 31, 1997, when compared to December 31, 1996, was primarily due to
the addition of one loan in the amount of $566,000. The loan is guaranteed by
the Small Business Administration for up to 75% of its value and is further
collateralized by a first mortgage. Renegotiated loans increased by $99,000 for
the same period, primarily due to a reclassification of a non-accrual loan.
The $389,000 or 27% decrease in non-accruing loans at December 31, 1996
compared to December 31, 1995, is primarily the result of an improved loan
portfolio coupled with the management's
36
<PAGE>
effort to collect on the loans and make them current. If the non-accruing loans
in 1996 had continued to pay interest, interest income during 1996 would have
increased by $286,000. If non-accruing loans in 1995 had continued to pay
interest, interest income during 1995 would have increased by $135,000.
Potential Problem Loans. As part of the loan review process, management
routinely identifies performing loans where there is a doubt as to whether the
borrowers will comply with the original loan repayment terms and thus allocates
specific reserves against them. At March 31, 1997, and December 31, 1996, such
loans totaled $6.9 million and $6.5 million, respectively, with an allowance of
$1.1 million and $1.0 million, respectively, specifically allocated to them.
Foreign Loans. The Company has no foreign loans or any other foreign
exposure.
Allowance for Possible Loan Losses
At December 31, 1996, the allowance for possible loan losses was $2.5
million as compared to $2.3 million at December 31, 1995. The allowance for
possible loan losses is increased periodically through charges to earnings in
the form of a provision for possible loan losses. Loans that are deemed
uncollectible are charged against the allowance and any recoveries of such loans
are credited to it. It is management's belief that, although charge-offs may
occur in the future, there are adequate reserves allotted. The level of the
allowance is based on the ongoing evaluation by management of the respective
Bank Subsidiaries of potential losses in the loan portfolio. Such evaluation
includes consideration of the current financial status and credit standing of
borrowers, prior loss experiences, results of periodic regulatory examinations,
comments and recommendations of the Company's independent accountants, and
management's judgment as to prevailing and anticipated real estate values and
other economic conditions in the Bank Subsidiaries' market areas. Since future
events that may affect these financial conditions are unpredictable, there is
uncertainty as to the final outcome of the Bank Subsidiaries' loans and
non-performing assets.
37
<PAGE>
The following table represents transactions affecting the allowance for
possible loan losses for the three months ended March 31, 1997, and the years
ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
March 31, December 31,
--------- ------------------------------
1997 1996 1995 1994
------ ------ ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance--beginning of period ................. $ 2,540 $ 2,332 $ 1,824 $ 1,771
Charge-offs:
Commercial, financial and agricultural ..... (18) (21) (589) (164)
Real estate - mortgage ..................... -- (281) (364) (57)
Installment loans to individuals ........... (1) (63) (82) (43)
Credit cards and related plans ............. (7) -- -- --
------- ------- ------- -------
(26) (365) (1,035) (264)
------- ------- ------- -------
Recoveries:
Commercial, financial and agricultural ..... 18 124 87 100
Real Estate - mortgage ..................... -- 9 -- --
Installment loans to individuals ........... 3 9 3 45
------- ------- ------- -------
21 142 90 145
------- ------- ------- -------
Net charge-offs .............................. (5) (223) (945) (119)
Provision for possible loan losses ........... 115 440 414 172
Adjustment (allowance for loan losses acquired
from Family First) .......................... -- (9) 1,039 --
------- ------- ------- -------
Balance--end of period ....................... $ 2,650 $ 2,540 $ 2,332 $ 1,824
======= ======= ======= =======
Ratio of net charge-offs during the period to
average loans outstanding during the period . -% .16% .79% .13%
</TABLE>
38
<PAGE>
Allocation of the Allowance for Possible Loan Losses
The following table sets forth the allocation of the allowance for loan
losses by loan category amounts, the percent of loans in each category to total
loans in the allowance, and the percent of loans in each category to total
loans, at each of the dates indicated.
<TABLE>
<CAPTION>
At March 31, At December 31,
----------------------------- -------------------------------------------------------------------------------
1997 1996 1995 1994
----------------------------- ------------------------- ------------------------- --------------------------
% of Loans % of Loans % of Loans % of Loans
% of to Total % of to Total % of to Total % of to Total
Amount Allowance Loans Amount Allowance Loan Amount Allowance Loans Amount Allowance Loans
------ --------- -------- ------ --------- -------- ------ --------- -------- ------ --------- ---------
(Dollars in Thousands)
Balance at end of period
allocable to:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial .............. $ 945 36% 52% $ 859 34% 53% $1,256 54% 53% $ 876 48% 54%
Real estate--construction 337 12 4 -- -- 4 -- -- 3 -- -- 5
Real estate--mortgage ... 464 18 32 670 26 31 662 28 33 457 25 27
Installment loans to
individuals............ 72 27 12 206 8 12 296 13 11 215 12 14
Unallocated reserves .... 175 7 -- 805 32 -- 118 5 -- 276 15 --
------ ------ ------ ------ ----- ------ ------ ------ ------ ------ ----- ------
Total allowance for
possible loan
losses .............. $2,650 100% 100% $2,540 100% 100% $2,332 100% 100% $1,824 100% 100%
====== ====== ====== ====== ===== ====== ====== ====== ====== ====== ===== ======
</TABLE>
39
<PAGE>
Other Real Estate
As of March 31, 1997, and December 31, 1996, other real estate totaled
$1.7 million and $1.8 million, respectively, a decrease of $184,000 or 10% and
$236,000 or 11%, respectively, compared to December 31, 1995. The $1.7 million
includes collateral acquired through foreclosure of loans, stated at the lower
of the loan value or fair market value less estimated costs to sell. Management
is actively seeking repayment through sale of the underlying collateral.
40
<PAGE>
Deposits
As of March 31, 1997, and December 31, 1996, total deposits were $223.2
million, a moderate increase over the amount reported at December 31, 1995.
The following table summarizes the average yield/rate of the components of
average deposit liabilities for the three months ended March 31, 1997 and for
the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
March 31, At December 31,
---------------------- ------------------------------------------------------------------------------
Average Average Average Average
1997 Yield/Rate 1996 Yield/Rate 1995 Yield/Rate 1994 Yield/Rate
-------- ------------ --------- --------------- -------- ---------------- ------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Demand ..................... $ 55,566 -- $ 50,243 -- $ 44,335 -- $ 32,446 --
Savings and interest-bearing 81,443 2.27% 81,112 2.22% 74,207 2.55% 63,409 2.19%
Time ....................... 82,406 5.38% 86,277 5.34% 75,505 5.35% 46,548 3.86%
-------- -------- -------- --------
$219,415 $217,632 $194,047 $142,403
======== ======== ======== ========
</TABLE>
41
<PAGE>
Listed below is a summary of time certificates of deposit $100,000 and
over categorized by time remaining to maturity at March 31, 1997, and December
31, 1996 and 1995.
At March 31, At December 31,
------------ -----------------
1997 1996 1995
------- ------ -------
(In thousands)
Three months or less .................. $16,417 $15,057 $16,633
Over three months through twelve months 7,738 8,974 7,977
Over twelve months .................... 1,255 1,153 1,486
------- ------- -------
$25,410 $25,184 $26,096
======= ======= =======
Subordinated Debentures and Equity Contracts
In December 1993, the Company raised $5 million by issuing Redeemable
Subordinated Debentures ("Debentures") (unsecured debt obligation of the
Company) due November 1, 1998, at an interest rate of 8.5% payable quarterly. In
addition, the Company issued Cancellable Mandatory Stock Purchase Contracts
("Equity Contracts") to purchase $5 million of the Company's common stock at a
predetermined price of $9.77 (as adjusted for stock dividends) per share to be
exercised no later than November 1, 1997. 511,770 shares of the Company's common
stock were reserved for future issuance pursuant to the outstanding Equity
Contracts.
Interest Rate Sensitivity
The following table summarizes, as of March 31, 1997, the repricing of
earning assets and interest-bearing liabilities in accordance with their
contractual terms in given time periods.
<TABLE>
<CAPTION>
Due between Due between
Due within 91 Days and One Year and Due after Non-Interest
90 Days One Year Five Years Five Years Bearing Total
----------- ------------ ------------- ---------- ------------ -----
(Dollars in Thousands)
Assets
<S> <C> <C> <C> <C> <C> <C>
Investment securities ......................... $ 14,255 $ 22,095 $ 55,865 $ 2,676 $ -- $ 94,891
Federal funds sold and deposits with banks..... 5,946 1,563 -- -- -- 7,509
Total loans ................................... 54,018 19,395 59,754 6,245 4,580 143,992
Non-earning assets ............................ -- -- -- -- 20,705 20,705
--------- --------- --------- --------- --------- ---------
Total assets ........................ $ 74,219 $ 43,053 $ 115,619 $ 8,921 $ 25,285 $ 267,097
========= ========= ========= ========= ========= =========
Liabilities and Shareholders' Equity
Deposits ...................................... $ 52,546 $ 49,866 $ 51,290 $ 9,712 $ 59,815 $ 223,229
Other liabilities ............................. 15,623 4,891 -- -- 1,535 22,049
Shareholders' equity .......................... -- -- -- -- 21,819 21,819
--------- --------- --------- --------- --------- ---------
Total liabilities and shareholders'
equity............................. $ 68,169 $ 54,757 $ 51,290 $ 9,712 $ 83,169 $ 267,097
========= ========= ========= ========= ========= =========
Interest rate sensitivity gap ................... $ 6,050 $ (11,704) $ 64,329 $ (791) $ (57,884)
Interest rate sensitivity gap as a percentage of
total assets................................... 2.27% -4.38% 24.08% -0.30% -21.67%
Cumulative interest rate sensitivity gap......... $ 6,050 $ (5,654) $ 58,675 $ 57,884
Cumulative interest rate sensitivity gap as a
percentage of total assets .................... 2.27% -2.12% 21.97% 21.67%
</TABLE>
42
<PAGE>
Banks are concerned with the extent to which they are able to match
maturities of interest-earning assets and interest-bearing liabilities. Such
matching is facilitated by examining the extent to which such assets and
liabilities are interest-rate sensitive and by monitoring an institution's
interest rate sensitivity gap. An asset or liability is considered to be
interest-rate sensitive if it will mature or reprice within a specific time
period. The interest rate sensitivity gap is defined as the excess of
interest-earning assets maturing or repricing within a specific time period over
interest-bearing liabilities maturing or repricing within that time period. On a
monthly basis, the Bank Subsidiaries monitor their gap, primarily their
six-month and one-year maturities and work to maintain their gap within a range
10% to (25)%.
The Company currently has a negative position with respect to its exposure
to interest rate risk. The Asset/Liability Management Committees of the Bank
Subsidiaries' respective Boards of Directors meet quarterly to discuss the
bank's interest rate risk. The Company uses simulation models to measure the
impact of potential changes in interest rates on the net interest income,
balance sheet mix and the spread relationship between market rates and bank
products. As described below, sudden changes in interest rates should not have a
material impact to the Bank Subsidiaries' results of operations. Should the Bank
Subsidiaries experience a positive or negative mismatch in excess of the
approved range, they have a number of remedial options. They have the ability to
reposition their investment portfolio to include securities with more
advantageous repricing and/or maturity characteristics. They can attract
variable- or fixed-rate loan products as appropriate. They can also price
deposit products to attract deposits with maturity characteristics that can
lower their exposure to interest rate risk.
At March 31, 1997, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing during the same time period by $11.7 million, representing a negative
cumulative one-year gap ratio of 2.12%. As a result, the yield on
interest-earning assets of the Bank Subsidiaries should adjust to changes in
interest rates at a slower rate than the cost of the Bank Subsidiaries'
interest-bearing liabilities.
Liquidity
The Company actively manages its liquidity under the direction of the
Bank's Asset/Liability Management Committee. During the last two years the
Company has been highly liquid and its liquid funds are more than sufficient to
meet future loan demand or the possible outflow of deposits in addition to being
able to adapt to changing interest rate conditions. Management expects that this
high liquidity trend will continue until such time as overall economic
conditions improve and loan demand rises.
At March 31, 1997, sources of liquidity include $22.1 million in cash and
cash equivalents, and $56.7 million in investment securities available-for-sale.
Secondary sources of liquidity include $38.1 million in securities
held-to-maturity. Sources of liquidity at December 31, 1996, totaled $112.5
million or 44% of total assets, consisting of investment securities of $89.7
million and $22.8 million in cash and cash equivalents and interest-bearing due
from banks. By comparison, total liquidity sources were $114.2 million or 45% of
total assets at December 31, 1995, consisting of investment securities in the
amount of $84.0 million and cash and cash equivalents and interest-bearing due
from banks in the amount of $30.2 million.
Certificates of Deposit scheduled to mature during the fiscal year ending
December 31, 1997 total $72.7 million. The Company may renew these certificates,
attract new replacement deposits or replace such funds with borrowings.
Management believes, based on past experience, that the Company will retain much
of the deposits or replace them with new deposits.
43
<PAGE>
Capital Resources
The Company's primary regulator, the Federal Reserve (which regulates bank
holding companies), has issued guidelines classifying and defining bank holding
company capital into the following components: (1) Tier 1 Capital, which
includes tangible shareholders' equity for common stock and certain qualifying
perpetual preferred stock, and (2) Tier 2 Capital, which includes a portion of
the allowance for possible loan losses, certain qualifying long-term debt and
preferred stock that does not qualify as Tier 1 Capital. The risk-based capital
guidelines require financial institutions to maintain specific defined credit
risk factors (risk-adjusted assets). As of March 31, 1997, the minimum Tier 1
and the combined Tier 1 and Tier 2 capital ratios required by the Federal
Reserve Board were 4% and 8%, respectively.
In addition to the risk-based capital guidelines discussed above, the
Federal Reserve requires that a bank holding company which meets that
regulator's highest performance and operating standards maintain a minimum
leverage ratio (Tier 1 capital as a percentage of tangible assets) of 3%. Those
bank holding companies anticipating significant growth are expected to maintain
a leverage ratio above the minimum ratio. Minimum leverage ratios for each
entity will be evaluated through the ongoing regulatory examination process.
Regulations have also been issued by the Bank Subsidiaries' primary regulator,
the FDIC, establishing similar risk-based and leverage capital ratios which
apply to each bank as a separate entity. See "Supervision and Regulation -- Bank
Regulation -- Regulatory Capital Requirements."
44
<PAGE>
The following table presents the risk-based and leverage capital ratios
for GFB, BCB and the Company, respectively, as of March 31, 1997, and December
31, 1996.
<TABLE>
<CAPTION>
Well
Capitalized
Great Falls Bergen Commercial Greater Community (Under FDIC
Bank Bank Bancorp requirements)
---------------------------- -------------------------- --------------------------- -------------
March 31, December 31, March 31, December 31, March 31, December 31,
--------- ------------ --------- ------------ --------- ------------
1997 1996 1997 1996 1997 1996
--------- ------------ --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Tier 1 and Tier 2... 12.27% 13.21% 14.55% 14.17% 16.71% 16.89% 10.00%
Tier 1 Risk-Based
Capital Ratio..... 11.01% 11.95% 13.30% 12.96% 12.51% 12.90% 6.00%
Tier 1 Leverage Ratio 6.63% 6.78% 8.81% 9.32% 7.93% 8.12% 5.00%
</TABLE>
45
<PAGE>
Impact of Inflation and Changing Prices
The Company's consolidated financial statements and notes thereto
presented elsewhere herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Company's operations. Unlike most industrial companies, nearly all of the
Company's assets and liabilities are monetary in nature. As a result, interest
rates have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
Impact of Recent Accounting Standards
The FASB has issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share, which is effective for financial statements issued after
December 15, 1997. Early adoption of the new standard is not permitted. The new
standard eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share together with disclosure of
how the per share amounts were computed. Basic earnings per share excludes
dilution and is computed by dividing income available to common shareholders by
the weighted-average common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised and converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. The adoption of this new standard is not expected to
have a material impact on the disclosure of earnings per share in the financial
statements. The effect of adopting this new standard has not been determined.
BUSINESS OF THE COMPANY
The Company is organized as a business corporation under the laws of the
State of New Jersey and registered as a bank holding company with the Federal
Reserve under the BHCA. The Company's only substantive business activity is the
ownership and operation of GFB and BCB.
Bank Subsidiaries
Great Falls Bank. GFB conducts a general commercial and retail banking
business encompassing a wide range of traditional deposits and lending
functions. GFB offers a broad variety of lending services, including commercial
and residential real estate loans, short and medium term loans, revolving credit
arrangements, lines of credit, and consumer installment loans. In the depository
area, GFB offers a broad variety of deposit accounts, including consumer and
commercial checking accounts and NOW accounts. GFB also offers other customary
banking services.
Bergen Commercial Bank. BCB was incorporated in New Jersey in 1987 and
commenced its banking operations in February 1988. BCB concentrates its
operations in commercial lending and loan origination secured by real estate
generally involving nonresidential properties, primarily servicing Bergen
County, New Jersey. In addition to its main office at Two Sears Drive in
Paramus, New Jersey, BCB has two branch offices in Hasbrouck Heights and
Wood-Ridge, New Jersey. BCB also offers other customary banking services.
46
<PAGE>
Market Area
The Bank Subsidiaries are community-oriented financial institutions,
offering a wide variety of financial services to meet the needs of the
communities they serve. The Bank Subsidiaries conduct their business through 8
branch offices located in the northern New Jersey counties of Passaic and Bergen
("primary market area"). The Bank Subsidiaries' deposit gathering base and
lending area are concentrated in the communities surrounding their offices.
The Bank Subsidiaries conduct their businesses through eight branch
offices located in the northern New Jersey counties of Bergen and Passaic. The
Bank Subsidiaries' deposit-gathering and lending markets are concentrated in
these counties. Bergen county, one of the most affluent communities in New
Jersey, due to its close proximity to New York City, functions as a home to
commuters working in New Jersey suburban areas around New York. Average
household and per capita incomes in 1996 were $75,711 and $28,768, respectively,
well above the average for New Jersey of $63,174 and $23,416. In addition,
Bergen county has a growing and well-diversified base of service companies and
small businesses that are part of the Company's target market. Passaic, which is
west of Bergen county, also serves as a home to commuters working in New Jersey
suburban areas around New York.
Lending Activities
General. The principal lending activity of the Bank Subsidiaries is the
origination of commercial real estate loans, commercial business and industrial
loans, home equity loans and, to a much lesser extent, residential mortgage
loans and installment loans. Most loans are originated in the Company's primary
market area. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a description of the Bank Subsidiaries' loan
portfolio.
Commercial and Industrial Loans. The Bank Subsidiaries originate several
types of commercial and industrial loans. Included as commercial loans are
short- and long-term business loans, lines of credit, and real estate
construction loans. The primary focus of the Bank Subsidiaries is the
origination of commercial loans secured by real estate. The majority of the Bank
Subsidiaries' customers for these loans are small- to medium-sized businesses
located in northern New Jersey.
Commercial Real Estate Loans. Loans secured by commercial properties
generally involve a greater degree of risk than residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income-producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. A significant portion of the Bank Subsidiaries' commercial real
estate, commercial and industrial loan portfolios include a balloon payment
feature. A number of factors may affect a borrower's ability to make or
refinance a balloon payment, including, without limitation, the financial
condition of the borrower at the time, the prevailing local economic conditions,
and the prevailing interest rate environment. There can be no assurance that
borrowers will be able to make or refinance balloon payments when due.
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related real estate or
commercial project. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired. This cash flow shortage may result in
the failure to make loan payments. In such cases, the Company may be compelled
to modify the terms of the loan. In addition, the nature of these loans is such
that they are generally less predictable and more difficult to evaluate and
monitor. As a result, repayment of these loans may be
47
<PAGE>
subject, to a greater degree than residential loans, to adverse conditions in
the real estate market or economy.
Home Equity Lines and Loans. The Bank Subsidiaries originate home equity
loans secured by first or second mortgages on homes being purchased or owned by
the borrower. Home equity loans are either consumer revolving lines of credit or
single advance loans with a specified repayment plan. The interest rate charged
on the line of credit loans is usually a floating rate related to the prime
lending rate. A home equity line is typically originated as a fifteen-year note
that allows the borrower to draw upon the approved line of credit during the
same period as the note. Home equity loans are usually amortized over a 5-, 10-,
or 15-year basis. The Bank Subsidiaries generally require a loan-to-value ratio
of 75% or less which is inclusive of all preceding mortgages.
Residential Real Estate Loans. The Bank Subsidiaries generate residential
mortgages for sale to outside loan correspondents. These loans are originated
using the correspondents' underwriting standards, rates and terms. Prior to
closing, the Bank usually has commitments for the purchase of loans, at a
premium and without recourse, in the secondary market. Secondary market sales
are generally scheduled to close shortly after the origination of the loan.
The majority of the Bank Subsidiaries's residential mortgage loans consist
of loans secured by owner-occupied, single-family residences. The Bank
Subsidiaries' mortgage loan portfolio consists of both fixed-rate and
adjustable-rate loans secured by various types of collateral as discussed below.
Management expects to continue offering mortgage loans at market interest rates,
with substantially the same terms and conditions as it currently offers.
The Bank Subsidiaries' residential mortgage loans customarily include
due-on-sale clauses, which are provisions giving the institution the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells or otherwise disposes of the real property serving as
security for the loan. Due-on-sale clauses are an important means of adjusting
rates on fixed-rate mortgages. The Bank Subsidiaries usually exercise their
right under these clauses.
Installment Loans. The Bank Subsidiaries originate installment, or
consumer loans secured by a variety of collateral, such as new and used
automobiles. A limited number of unsecured installment loans are made.
Loan Solicitation and Processing. Loan originations are derived from a
number of sources such as loan officers, customers, borrowers and referrals from
real estate brokers, accountants and attorneys.
Upon receipt of a loan application, a credit report is ordered and
reviewed to verify specific information relating to the loan applicant's
creditworthiness. For residential mortgage loans, written verifications of
employment and deposit balances are requested. The Bank Subsidiaries may require
that an appraisal of the real estate intended to secure the proposed loan is
undertaken by a certified independent appraiser approved by the Bank
Subsidiaries and licensed by the State. After all the required information is
obtained, the Bank Subsidiaries then make their credit decisions. Depending on
the type, collateral and amount of the credit request, various levels of
approval may be necessary.
Each subsidiary bank has a loan committee which has the authority to
approve loans up to certain levels. Below such levels, loans may be approved by
various officers of the bank. Credit requests greater than loan committee limits
must be approved by the Bank Subsidiaries' respective boards of directors.
48
<PAGE>
Title insurance policies are usually required on all first mortgage loans.
Hazard insurance coverage is required on all properties securing loans made by
the Bank Subsidiaries. Flood insurance is also required, when applicable.
Loan applicants are normally notified of the credit decision by letter. If
the loan is approved, the loan commitment specifies the terms and conditions of
the proposed loan including the amount, interest rate, amortization term, a
brief description of the required collateral, and the required insurance
coverage. The borrower must provide proof of fire, flood (if applicable) and
casualty insurance on the property serving as collateral, which insurance must
be maintained during the full term of the loan. Generally, title insurance
endorsed to the Bank Subsidiaries is required on all first mortgage loans.
Loan Commitments. When a commercial loan is approved, the Bank
Subsidiaries issue a written commitment to the loan applicant. The commitment
indicates the loan amount, term and interest rate and is valid for approximately
60 days. Approximately 90% of the Bank Subsidiaries' commitments are accepted or
rejected by the customer before the expiration of the commitment. At March 31,
1997, the Bank Subsidiaries had approximately $34.5 million in loan commitments
outstanding, as opposed to approximately $22.1 million as of December 31, 1996.
Credit Card Portfolio. The Bank Subsidiaries originate secured and
unsecured credit cards for their own portfolio. Cards are available to residents
of New Jersey only, and are approved according to strict debt-to-income
standards. The overall credit card portfolio is considered modest in relation to
other consumer loans.
Credit Risk, Credit Administration and Loan Review. Credit risk represents
the possibility that a customer or counterparty may not perform in accordance
with contractual terms. The Bank Subsidiaries incur credit risk whenever they
extend credit to, or enter into other transactions with, their customers. The
risks associated with extensions of credit include general risk, which is
inherent in the lending business, and risk specific to individual borrowers. The
senior lending officers of the Bank Subsidiaries are responsible for the overall
management of the Bank Subsidiaries' credit risk and the development,
application and enforcement of uniform credit policies and procedures, the
principal purpose of which is to minimize such risk. One objective of credit
administration is to identify and, to the extent feasible, diversify extensions
of credit. Loan review and other loan monitoring practices provide a means for
the Bank Subsidiaries' management to ascertain whether proper credit,
underwriting and loan documentation policies, procedures and practices are being
followed by the Bank Subsidiaries' loan officers and are being applied
uniformly. Within the last year, the Bank Subsidiaries have taken a number of
steps to enhance their credit administration and loan review functions in an
effort to better manage their credit risk. While the Bank Subsidiaries continue
to review these and other related functional areas, there can be no assurance
that the steps the Bank Subsidiaries' have taken to date will be sufficient to
enable them to identify, measure, monitor and control all credit risk.
Investment Securities Activities
General. The investment policy of each of the Bank Subsidiaries is
established by senior management and approved by the Board of Directors. It is
based on asset and liability management goals and is designed to provide a
portfolio of investments that optimize interest income and provides acceptable
limits of safety and liquidity. The Bank Subsidiaries' investment goals are to
invest available funds in instruments that meet specific requirements of the
Bank Subsidiaries' asset and liability management goals. The investment
activities of the Bank Subsidiaries consist primarily of investments in federal
funds, securities issued or guaranteed by the United States Government or its
agencies, states and political
49
<PAGE>
subdivisions and corporate bonds. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a description of the Bank
Subsidiaries' investment portfolio.
Sources of Funds
General. Deposits are the major source of the Bank Subsidiaries' funds for
lending and other investment purposes. In addition to deposits, the Bank
Subsidiaries derive funds from the amortization, prepayment or sale of loans,
maturities or sale of investment securities and operations. Scheduled loan
principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are significantly influenced by
general interest rates and market conditions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a description of
the Bank Subsidiaries' sources of funds.
Deposits. Consumer and commercial deposits are attracted principally from
within the primary market area through the offering of a broad selection of
deposit instruments including checking, regular savings, money market deposits,
term certificate accounts and individual retirement accounts. Deposit account
terms vary according to the minimum balance required, the time periods the funds
must remain on deposit and the interest rate, among other factors. The Bank
Subsidiaries regularly evaluate the internal cost of funds, survey rates offered
by competing institutions, review their cash flow requirements for lending and
liquidity and execute rate changes when deemed appropriate. From time to time,
the Bank Subsidiaries have offered promotional interest rates on certain
certificates of deposit in response to interest rates offered by other financial
institutions in the Bank Subsidiaries' primary market area, as well as in
response to general increases in overall market rates for certificates of
deposit. There can be no assurances that the Bank Subsidiaries will be able to
retain such deposits at maturity at non-promotional interest rates. The Bank
Subsidiaries do not obtain funds through brokers, nor do they solicit funds
outside the State of New Jersey.
Competition
The Company, through the Bank Subsidiaries, competes with other New Jersey
commercial banks, savings banks, savings and loan associations, finance
companies, insurance companies, and credit unions. A substantial number of
offices of competing financial institutions are located within the Bank
Subsidiaries' respective market areas. The past trend toward 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 large, national and regional banking institutions. Several of the
Bank Subsidiaries' competitors are affiliated with major banking and financial
institutions which 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 rates of interest 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 are able to provide. Such competitors also perform certain
functions for their customers, such as trust and international services, which
the Bank Subsidiaries do not provide.
Properties
The Company does not own or lease any land, buildings or equipment. GFB
leases its main office banking facility and certain other office space at 55
Union Boulevard, Totowa, New Jersey. Such
50
<PAGE>
main office leased space is owned by a general partnership of which the
Company's chairman and vice chairman are both partners. GFB also leases space
for its four other branches in Totowa, Little Falls and Clifton, New Jersey. BCB
leases its main office as well as its two branch offices.
Personnel
At December 31, 1996, the Company had 98 full-time and 12 part-time
employees. The employees of the Company and its subsidiaries are not represented
by any collective bargaining unit.
Relations between management and employees are considered good.
Legal Proceedings
The Company and its subsidiaries are from time to time parties to various
legal actions arising out of the normal course of business. Management believes
that there is no proceeding threatened or pending against the Company, which, if
determined adversely, would have a material effect on the business, financial
position or results of operations of the Company.
51
<PAGE>
MANAGEMENT
Directors and Executive Officers
The Board of Directors of the Company is currently composed of nine
members, each of whom serves for a term of three years. Executive officers are
elected annually by the Board of Directors and serve at the Board's discretion.
The following table sets forth information with respect to the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
Current
Term as
Director/Executive Director Director
Officer Age (1) Position Since Expires
<S> <C> <C> <C> <C>
John L. Soldoveri (2)(4) 73 Chairman, Chief Executive 1985 1999
Officer
Anthony M. Bruno, Jr.(3)(4) 42 Vice-Chairman 1995 1998
George E. Irwin(2) 53 Director, President & Chief 1987 1998
Operating Officer
C. Mark Campbell(3)(4) 46 Director & Executive Vice 1995 1999
President
Naqi A. Naqvi 40 Treasurer N/A N/A
Joseph A. Lobosco(2) 62 Director 1990 1999
Charles J. Volpe(3) 59 Director 1995 1999
M. A. Bramante(2) 64 Director 1985 2000
Robert J. Conklin(2) 58 Director 1985 2000
William T. Ferguson(2) 54 Director 1985 2000
</TABLE>
- --------------------
(1) At March 1, 1997.
(2) Indicates membership on the Board of Directors of Great Falls Bank.
(3) Indicates membership on the Board of Directors of Bergen Commercial Bank.
(4) Mr. Bruno is a nephew of Mr. Soldoveri and is Mr. Campbell's
brother-in-law.
Biographical Information
Directors and Executive Officers of the Company. The principal occupation
of each director and executive officer of the Company is set forth below.
John L. Soldoveri is the Chairman of the Board of Directors and Chief
Executive Officer of the Company. He was appointed to the latter position at the
end of 1995, having acted as the Company's President from 1985 until the end of
1995. Mr. Soldoveri has been a founding director of both the Company and Great
Falls Bank since 1985. Mr. Soldoveri was President of Soldoveri Agency and
Rhodes Agency Inc., real estate brokerage and insurance agency firms, for many
years until 1991. He has served as Vice President of both companies since 1991.
Mr. Soldoveri has been the controlling
52
<PAGE>
partner in Anjo Realty since 1980 and is an active investor in real estate,
directly and through various entities.
Anthony M. Bruno, Jr. was appointed as a director and Vice Chairman of the
Board of Directors of the Company at the end of 1995 in connection with the
Company's acquisition of Bergen Commercial Bank. Mr. Bruno has been Chairman of
the Board of Bergen Commercial Bank since 1987. Prior thereto, Mr. Bruno was a
founding director of the Company and Great Falls Bank in 1985, positions from
which he resigned in 1987 when Bergen Commercial Bank was formed. Mr. Bruno is a
senior partner of Bruno, DiBello & Co., L.L.C., certified public accountants.
Mr. Bruno is a minority partner in Anjo Realty, which invests in real estate.
George E. Irwin was appointed as the President and Chief Operating Officer
of the Company at the end of 1995. Prior thereto, Mr. Irwin had served since
1987 as the Company's Vice President. He has also been the President and Chief
Executive Officer of Great Falls Bank since 1987. During 1986, Mr. Irwin was
Great Falls Bank's Executive Vice President, Treasurer, and Senior Loan Officer.
He has been a director of both the Company and Great Falls Bank since 1987.
C. Mark Campbell was appointed as a director and Executive Vice President
of the Company at the end of 1995 in connection with the Company's acquisition
of Bergen Commercial Bank. He has acted as President, Chief Executive Officer
and director of Bergen Commercial Bank since 1987.
Naqi A. Naqvi has been the Company's Treasurer since 1988, and Vice
President and Treasurer of Great Falls Bank since 1987.
Joseph A. Lobosco retired at the end of 1994 as the Senior Partner of
Joseph Lobosco & Sons, an insurance agency, of which he had been a partner since
1961. He has served as a director of both the Company and Great Falls Bank since
1990.
Charles J. Volpe was appointed as a director of the Company at the end of
1995 in connection with the Company's acquisition of Bergen Commercial Bank. Mr.
Volpe is the chief executive officer and principal of J. P. Patti Company
(roofing). He has been a director of Bergen Commercial Bank since 1987.
Marino A. Bramante, an orthodontist, has been the President of M. A.
Bramante, D.D.S., P.A. since 1960. He has served as a founding director of both
the Company and Great Falls Bank since 1985.
Robert J. Conklin has been the President of The Conklin Corporation, which
is engaged in construction and engineering, since 1960. He is also President of
an electronics firm, Crystal Accel. He has been a founding director of both the
Company and Great Falls Bank since 1985.
William T. Ferguson has been the Vice President of Ted Car Inc., an auto
wholesaler, since 1977. He has served as a founding director of both the Company
and Great Falls Bank since 1985.
53
<PAGE>
SUPERVISION AND REGULATION
Introduction
Bank holding companies and banks are extensively regulated under both
federal and state law. The following information describes certain aspects of
that regulation applicable to the Company and the Bank Subsidiaries, and does
not purport to be complete. The discussion is qualified in its entirety by
reference to all particular statutory or regulatory provisions.
The Company is a legal entity separate and distinct from the Bank
Subsidiaries. Accordingly, the right of the Company, and consequently the right
of creditors and shareholders of the Company, to participate in any distribution
of the assets or earnings of the Bank Subsidiaries is necessarily subject to the
prior claims of creditors of the Bank Subsidiaries, except to the extent that
claims of the Company in its capacity as creditor may be recognized. The
principal source of the Company's revenue and cash flow is dividends from the
Bank Subsidiaries. There are, however, legal limitations on the extent to which
a subsidiary bank can finance or otherwise supply funds to its parent holding
company.
The Company
General. As a registered holding company, the Company is regulated under
the BHCA and is subject to supervision and regular inspection by the Federal
Reserve. The BHCA requires, among other things, the prior approval of the
Federal Reserve in any case where the Company proposes to (i) acquire all or
substantially all of the assets of any bank, (ii) acquire direct or indirect
ownership or control of more than 5 percent of the voting shares of any bank, or
(iii) merge or consolidate with any other bank holding company.
Acquisitions/Permissible Business Activities. The BHCA currently permits
bank holding companies from any state to acquire banks and bank holding
companies located in any other state, subject to certain conditions, including
certain nationwide- and state-imposed concentration limits. Effective June 1,
1997, the Bank Subsidiaries will have the ability, subject to certain
restrictions, including state opt-out provisions, to acquire by acquisition or
merger branches outside its home state. States may affirmatively opt-in to
permit these transactions earlier, which New Jersey, among other states, has
done. The establishment of new interstate branches also will be possible in
those states with laws that expressly permit it. Interstate branches will be
subject to certain laws of the states in which they are located. Competition may
increase further as banks branch across state lines and enter new markets.
Under the BHCA, the Company is prohibited, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5 percent of any
class of voting shares of any nonbanking corporation. Further, the Company may
not engage in any business other than managing and controlling banks or
furnishing certain specified services to subsidiaries, and may not acquire
voting control of nonbanking corporations except those corporations engaged in
businesses or furnishing services that the Federal Reserve deems to be closely
related to banking.
Source of Strength Policy. Under Federal Reserve policy, a bank holding
company is expected to serve as a source of financial strength to each of its
subsidiary banks and to commit resources to support each such bank. Consistent
with its "source of strength" policy for subsidiary banks, the Federal Reserve
has stated that, as a matter of prudent banking, a bank holding company
generally should not maintain a rate of cash dividends unless its net income
available to common shareholders has been
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sufficient to fund fully the dividends, and the prospective rate of earnings
retention appears to be consistent with the corporation's capital needs, asset
quality and overall financial condition.
Bank Regulation
As state-chartered banks which are not members of the Federal Reserve, the
Bank Subsidiaries are subject to the primary federal supervision of the FDIC
under the Federal Deposit Insurance Act (the "FDIA"). Prior approval of the FDIC
is required for the Bank Subsidiaries to establish or relocate a branch office
or to 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, the Bank Subsidiaries 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
respective Bank Subsidiaries and their condition, including but not limited to
capital adequacy, reserves, loans, investments and management practices. These
examinations are for the protection of the Bank Subsidiaries' depositors and the
BIF and the SAIF and not the Bank Subsidiaries' stockholder. In addition, the
Bank Subsidiaries are 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, which require such banks to maintain
specified minimum ratios of capital to total assets and capital to risk-weighted
assets. See "--Regulatory Capital Requirements."
Statewide branching is permitted in New Jersey. Branch approvals are
subject to statutory standards relating to safety and soundness, competition,
public convenience and CRA performance.
Bank Dividends. New Jersey law permits the Bank Subsidiaries to declare
dividends only if, after payment thereof, their capital would be unimpaired and
their remaining surplus would equal at least 50 percent 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 March 31,
1997, 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 bank holding companies of banks which are deemed to be
"significantly undercapitalized" under the FDIA or which fail to properly submit
and implement capital restoration plans required thereby from paying dividends
or making other capital distributions without the permission of the FDIC.
Restrictions Upon Intercompany Transactions. The Bank Subsidiaries are
subject to restrictions imposed by federal law on extensions of credit to, and
certain other transactions with, the Company and other affiliates. Such
restrictions prevent the Company and such other 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 secured loans and other 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 Subsidiaries' capital and
surplus and
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as to the Company and all other affiliates to an aggregate of 20% of the Bank
Subsidiaries' capital and surplus. These regulations and restrictions may limit
the Company's ability to obtain funds from the Bank Subsidiaries for its cash
needs, including funds for acquisitions and for payment of dividends, interest
and operating expenses.
Deposit Insurance. Since the Bank Subsidiaries are FDIC member
institutions, their respective deposits are currently insured to a maximum of
$100,000 per depositor through the BIF, administered by the FDIC, and the Bank
Subsidiaries are required to pay semi-annual deposit insurance premium
assessments to the FDIC.
The amount of FDIC assessments paid by individual insured depository
institutions is based on their relative risk as measured by regulatory capital
ratios and certain other factors.
During 1996, the President of the United States enacted legislation which
contains the Deposit Insurance Funds Act of 1996 to recapitalize the SAIF. Under
this legislation, the FDIC has levied a special assessment on SAIF-assessable
deposits held as of March 31, 1995. In its acquisition of Family First in 1995,
the Company acquired SAIF-assessable deposits which were subject to this special
assessment.
In addition, the Deposit Insurance Funds 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 SAIF. The rates established for GFB and
BCB for 1997 through 1999 are 0.065% and 0.013%, respectively.
Enforcement Powers. The bank regulatory agencies have broad discretion to
issue cease and desist orders if they determine that the Company or its Bank
Subsidiaries are engaging in "unsafe or unsound banking practices." In addition,
the federal bank regulatory authorities are empowered to 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 order, among other things. Financial institutions, and
directors, officers, employees, controlling shareholders, agents, consultants,
attorneys, accountants, appraisers and others associated with a depository
institution are subject to the imposition of fines, penalties, and other
enforcement actions based upon the conduct of their relationships with the
institution.
Under the FDIA, the FDIC may be appointed as a conservator or receiver for
a depository institution based upon a number of events and circumstances,
including: (i) consent by the board of directors of the institution; (ii)
cessation of the institution's status as an insured depository institution;
(iii) the institution is undercapitalized and has no reasonable prospect of
becoming adequately capitalized when required to do so, fails to submit an
acceptable capital plan or materially fails to implement an acceptable capital
plan; (iv) the institution is critically undercapitalized or otherwise has
substantially insufficient capital; (v) appointment of a conservator or receiver
by a state banking authority, such as the Department; (vii) the institution's
assets are less than its obligations to its creditors and others; (viii)
substantial dissipation in the institution's assets or earnings due to violation
of any statute or regulation or unsafe or unsound practice; (ix) a willful
violation of a cease and desist order that has become final; (x) an inability of
the institution to pay its obligations or meet its depositors' demands in the
normal course of business; or (xi) any concealment of the institution's books,
records or assets or refusal to submit to examination.
Under the FDIA, the FDIC as a conservator or receiver of a depository
institution has express authority to repudiate contracts with such institution
which it determines to be burdensome or if such
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repudiation will promote the orderly administration of the institution's
affairs. Certain "qualified financial contracts", defined to include securities
contracts, commodity contracts, forward contracts, repurchase agreements, and
swap agreements, generally are excluded from the repudiation powers of the FDIC.
The FDIC is also given authority to enforce contracts made by a depository
institution notwithstanding any contractual provision providing for termination,
default, acceleration, or exercise of rights upon, or solely by reason of,
insolvency or the appointment of a conservator or receiver. Insured depository
institutions also are prohibited from entering into contracts for goods,
products or services which would adversely affect the safety and soundness of
the institutions.
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 non-member banks"), respectively. The
regulations impose two sets of capital adequacy requirements: minimum leverage
rules, which require bank holding companies and banks to maintain 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.
The regulations of the Federal Reserve and the FDIC require bank holding
companies and state non-member banks, respectively, to maintain a minimum
leverage ratio of "Tier 1 capital" (as defined in the risk-based capital
guidelines discussed in the following paragraphs) to total assets of 3.0%.
Although setting a minimum 3.0% leverage ratio, the capital regulations state
that only the strongest bank holding companies and banks, with composite
examination ratings of 1 under the rating system used by the federal bank
regulators, would be 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 1 capital (after deducting all
intangibles) to total assets in making an overall assessment of capital.
The risk-based capital rules of the Federal Reserve and the FDIC require
bank holding companies and state non-member 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 1 or core capital requirement and a Tier 2 or supplementary
capital requirement. Tier 1 capital consists primarily of common stockholders'
equity, certain perpetual preferred stock (which must be noncumulative with
respect to banks), and minority interests in the equity accounts of consolidated
subsidiaries; less most intangible assets, primarily goodwill. Tier 2 capital
elements include, subject to certain limitations, the allowance for losses on
loans and leases; perpetual preferred stock that does not qualify for Tier 1 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 require all banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios, (i) supplementary capital is limited to no more than 100% of core
capital, and (ii) the aggregate amount of certain types of supplementary capital
is limited. In addition,
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the risk-based capital regulations limit the allowance for loan losses which may
be included as capital to 1.25% of total risk-weighted assets.
FDICIA also required the federal banking regulators to classify insured
depository institutions by capital levels and to take various prompt corrective
actions to resolve the problems of any institution that fails to satisfy the
capital standards. The FDIC has issued final regulations establishing these
capital levels and otherwise implementing FDICIA's prompt corrective action
provisions. Under FDICIA and these regulations, all institutions, regardless of
their capital levels, are restricted from making any capital distribution or
paying any management fees that would cause the institution to fail to satisfy
the minimum levels for any of its capital requirements.
Under the FDIC's prompt corrective action regulation, a "well-capitalized"
bank is one that is not subject to any regulatory order or directive to meet any
specific capital level and that has or exceeds the following capital levels: a
total risk-based capital ratio of 10%, a Tier 1 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 1 risk-based
capital ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 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 to which the bank's capital levels are below these standards. A bank that
falls within any of the three "undercapitalized" categories established by the
prompt corrective action regulation will be: (i) subject to increased monitoring
by the appropriate federal banking regulator; (ii) required to submit an
acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A significantly
undercapitalized institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, will be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution may be
required to divest its interest in the institution. The senior executive
officers of a significantly undercapitalized institution may not receive bonuses
or increases in compensation without prior approval. A critically
undercapitalized institution is prohibited from making payments of principal or
interest on its subordinated debt, except with respect to debt as approved by
the FDIC or, until July 15, 1996, with respect to subordinated debt outstanding
on July 15, 1991 and not extended or otherwise renegotiated after July 15, 1991.
If an institution's ratio of tangible capital to total assets falls below a
level established by the appropriate federal banking regulator, which may not be
less than 2%, nor more than 65% of the minimum tangible capital level otherwise
required (the "critical capital level"), the institution will be subject to
conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized.
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Effect of Government Monetary Policies; Possible Further Legislation
The earnings of the Company, through the Bank Subsidiaries, 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 upon 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 non-earning reserve requirements against member bank deposits.
It is not possible to predict the nature and impact of future changes in
monetary and fiscal policies.
From time to time, proposals are made in the United States Congress, the
New Jersey Legislature, and various bank regulatory authorities which 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 the
Bank Subsidiaries.
The Bank Subsidiaries are also subject to various Federal and State laws
such as usury laws and consumer protection laws.
DESCRIPTION OF PREFERRED SECURITIES
Pursuant to the terms of the Trust Agreement for the Issuer Trust, the
Issuer Trustees on behalf of the Issuer Trust will issue the Preferred
Securities and the Common Securities. The Preferred Securities will represent
preferred undivided beneficial interests in the assets of the Issuer Trust and
the holders thereof will be entitled to a preference in certain circumstances
with respect to Distributions and amounts payable on redemption or liquidation
over the Common Securities, as well as other benefits as described in the Trust
Agreement. This summary of certain provisions of the Preferred Securities and
the Trust Agreement does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all the provisions of the Trust
Agreement, including the definitions therein of certain terms. Wherever
particular defined terms of the Trust Agreement are referred to herein, such
defined terms are incorporated herein by reference. A copy of the form of the
Trust Agreement is available upon request from the Issuer Trustees.
General
The Preferred Securities will be limited to $20,000,000 aggregate
Liquidation Amount outstanding (which amount may be increased by up to
$3,000,000 aggregate liquidation amount of referred Securities for exercise of
the Underwriters' over-allotment option). See "Underwriting." The Preferred
Securities will rank pari passu, and payments will be made thereon pro rata,
with the Common Securities except as described under "-- Subordination of Common
Securities." The Junior Subordinated Debentures will be registered in the name
of the Issuer Trust and held by the Property Trustee in trust for the benefit of
the holders of the Preferred Securities and Common Securities. The Guarantee
will be a guarantee on a subordinated basis with respect to the Preferred
Securities but will not guarantee
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payment of Distributions or amounts payable on redemption or liquidation of such
Preferred Securities when the Issuer Trust does not have funds on hand available
to make such payments. See "Description of Guarantee."
Distributions
The Preferred Securities represent preferred undivided beneficial
interests in the assets of the Issuer Trust, and Distributions on each Preferred
Security will be payable at the annual rate of 10.00% of the stated Liquidation
Amount of $25, payable quarterly in arrears on March 31, June 30, September 30
and December 31 of each year (each a "Distribution Date"), to the holders of the
Preferred Securities at the close of business on 15th day of March, June,
September and December (whether or not a Business Day (as defined below)) next
preceding the relevant Distribution Date. Distributions on the Preferred
Securities will be cumulative. Distributions will accumulate from May 21, 1997.
The first Distribution Date for the Preferred Securities will be June 30, 1997.
The amount of Distributions payable for any period less than a full Distribution
period will be computed on the basis of a 360-day year of twelve 30-day months
and the actual days elapsed in a partial month in such period. Distributions
payable for each full Distribution period will be computed by dividing the rate
per annum by four. If any date on which Distributions are payable on the
Preferred Securities is not a Business Day, then payment of the Distributions
payable on such date will be made on the next succeeding day that is a Business
Day (without any additional Distributions or other payment in respect of any
such delay), with the same force and effect as if made on the date such payment
was originally payable.
So long as no Debenture Event of Default has occurred and is continuing,
the Company has the right under the Junior Subordinated Indenture to defer the
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 20 consecutive quarterly periods with
respect to each Extension Period, provided that no Extension Period may extend
beyond the Stated Maturity of the Junior Subordinated Debentures. As a
consequence of any such deferral, quarterly Distributions on the Preferred
Securities by the Issuer Trust will be deferred during any such Extension
Period. Distributions to which holders of the Preferred Securities are entitled
will accumulate additional Distributions thereon at the rate of 10.00% per
annum, compounded quarterly from the relevant payment date for such
Distributions, computed on the basis of a 360-day year of twelve 30-day months
and the actual days elapsed in a partial month in such period. Additional
Distributions payable for each full Distribution period will be computed by
dividing the rate per annum by four. The term "Distributions" as used herein
shall include any such additional Distributions. During any such Extension
Period, the Company may not (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire or make a liquidation payment with respect to,
any of the Company's capital stock or (ii) make any payment of principal of or
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank pari passu in all respects with or junior in
interest to the Junior Subordinated Debentures (other than (a) repurchases,
redemptions or other acquisitions of shares of capital stock of the Company in
connection with any employment contract, benefit plan or other similar
arrangement with or for the benefit of any one or more employees, officers,
directors or consultants, in connection with a dividend reinvestment or
stockholder stock purchase plan or in connection with the issuance of capital
stock of the Company (or securities convertible into or exercisable for such
capital stock) as consideration in an acquisition transaction entered into prior
to the applicable Extension Period, (b) as a result of an exchange or conversion
of any class or series of the Company's capital stock (or any capital stock of a
subsidiary of the Company) for any class or series of the Company's capital
stock or of any class or series of the Company's indebtedness for any class or
series of the Company's capital stock, (c) the purchase of fractional interests
in shares of the Company's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged,
(d) any
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declaration of a dividend in connection with any stockholder's rights plan, or
the issuance of rights, stock or other property under any stockholder's rights
plan, or the redemption or repurchase of rights pursuant thereto, or (e) any
dividend in the form of stock, warrants, options or other rights where the
dividend stock or the stock issuable upon exercise of such warrants, options or
other rights is the same stock as that on which the dividend is being paid or
ranks pari passu with or junior to such stock). Prior to the termination of any
such Extension Period, the Company may further defer the payment of interest,
provided that no Extension Period may exceed 20 consecutive quarterly periods or
extend beyond the Stated Maturity of the Junior Subordinated Debentures. Upon
the termination of any such Extension Period and the payment of all amounts then
due, the Company may elect to begin a new Extension Period. No interest shall be
due and payable during an Extension Period, except at the end thereof. The
Company must give the Issuer Trustees notice of its election of such Extension
Period at least one Business Day prior to the earlier of (i) the date the
Distributions on the Preferred Securities would have been payable but for the
election to begin such Extension Period and (ii) the date the Property Trustee
is required to give notice to holders of the Preferred Securities of the record
date or the date such Distributions are payable, but in any event not less than
one Business Day prior to such record date. The Property Trustee will give
notice of the Company's election to begin a new Extension Period to the holders
of the Preferred Securities. Subject to the foregoing, there is no limitation on
the number of times that the Company may elect to begin an Extension Period. See
"Description of Junior Subordinated Debentures -- Option To Extend Interest
Payment Period" and "Certain Federal Income Tax Consequences -- Interest Income
and Original Issue Discount."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures.
The revenue of the Issuer Trust available for distribution to holders of
the Preferred Securities will be limited to payments under the Junior
Subordinated Debentures in which the Issuer Trust will invest the proceeds from
the issuance and sale of the Preferred Securities. See "Description of Junior
Subordinated Debentures." If the Company does not make payments on the Junior
Subordinated Debentures, the Issuer Trust may not have funds available to pay
Distributions or other amounts payable on the Preferred Securities. The payment
of Distributions and other amounts payable on the Preferred Securities (if and
to the extent the Issuer Trust has funds legally available for and cash
sufficient to make such payments) is guaranteed by the Company on a limited
basis as set forth herein under "Description of Guarantee."
Redemption
Upon the repayment or redemption, in whole or in part, of the Junior
Subordinated Debentures, whether at maturity or upon earlier redemption as
provided in the Junior Subordinated Indenture, the proceeds from such repayment
or redemption shall be applied by the Property Trustee to redeem a Like Amount
(as defined below) of the Preferred Securities, upon not less than 30 nor more
than 60 days' notice, at a redemption price (the "Redemption Price") equal to
the aggregate Liquidation Amount of such Preferred Securities plus accumulated
but unpaid Distributions thereon to the date of redemption (the "Redemption
Date") and the related amount of the premium, if any, paid by the Company upon
the concurrent redemption of such Junior Subordinated Debentures. See
"Description of Junior Subordinated Debentures -- Redemption." If less than all
the Junior Subordinated Debentures are to be repaid or redeemed on a Redemption
Date, then the proceeds from such repayment or redemption shall be allocated to
the redemption pro rata of the Preferred Securities and the Common Securities.
The amount of premium, if any, paid by the Company upon the redemption of all or
any part of the Junior Subordinated
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Debentures to be repaid or redeemed on a Redemption Date shall be allocated to
the redemption pro rata of the Preferred Securities and the Common Securities.
The Company has the right to redeem the Junior Subordinated Debentures (i)
on or after June 30, 2002, in whole at any time or in part from time to time, or
(ii) in whole, but not in part, at any time within 90 days following the
occurrence and during the continuation of a Tax Event, Investment Company Event
or Capital Treatment Event (each as defined below), in each case subject to
possible regulatory approval. See "-- Liquidation Distribution Upon
Dissolution." A redemption of the Junior Subordinated Debentures would cause a
mandatory redemption of a Like Amount of the Preferred Securities and Common
Securities at the Redemption Price.
"25% Capital Limitation" means the limitation imposed by the Federal
Reserve that the proceeds of certain qualifying securities like the Trust
Securities will qualify as Tier 1 capital of the issuer up to an amount not to
exceed 25% of the Issuer's Tier 1 capital, or any subsequent limitation adopted
by the Federal Reserve.
"Business Day" means a day other than (a) a Saturday or Sunday, (b) a day
on which banking institutions in the State of New Jersey or the City of New York
are authorized or required by law or executive order to remain closed, or (c) a
day on which the Property Trustee's Corporate Trust Office or the Corporate
Trust Office of the Debenture Trustee is closed for business.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount (as defined below) equal to that
portion of the principal amount of Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Junior Subordinated Indenture,
allocated to the Common Securities and to the Preferred Securities based upon
the relative Liquidation Amounts of such classes and (ii) with respect to a
distribution of Junior Subordinated Debentures to holders of Trust Securities in
connection with a dissolution or liquidation of the Issuer Trust, Junior
Subordinated Debentures having a principal amount equal to the Liquidation
Amount of the Trust Securities of the holder to whom such Junior Subordinated
Debentures are distributed.
"Liquidation Amount" means the stated amount of $25 per Trust Security.
"Tax Event" means the receipt by the Issuer Trust of an opinion of counsel
to the Company experienced in such matters to the effect that, as a result of
any amendment to, or change (including any announced prospective change) in, the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement or decision is announced on or after the date
of issuance of the Preferred Securities, there is more than an insubstantial
risk that (i) the Issuer Trust is, or will be within 90 days of the delivery of
such opinion, subject to United States federal income tax with respect to income
received or accrued on the Junior Subordinated Debentures, (ii) interest payable
by the Company on the Junior Subordinated Debentures is not, or within 90 days
of the delivery of such opinion, will not be, deductible by the Company, in
whole or in part, for United States federal income tax purposes or (iii) the
Issuer Trust is, or will be within 90 days of the delivery of such opinion,
subject to more than a de minimis amount of other taxes, duties or other
governmental charges.
"Investment Company Event" means the receipt by the Issuer Trust of an
opinion of counsel to the Company experienced in such matters to the effect
that, as a result of the occurrence of a change in law or regulation or a
written change (including any announced prospective change) in interpretation or
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application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, there is more than an insubstantial risk that
the Issuer Trust is or will be considered an "investment company" that is
required to be registered under the Investment Company Act, which change or
prospective change becomes effective or would become effective, as the case may
be, on or after the date of the issuance of the Preferred Securities.
"Capital Treatment Event" means the reasonable determination by the
Company that, as a result of the occurrence of any amendment to, or change
(including any announced prospective change) in, the laws (or any rules or
regulations thereunder) of the United States or any political subdivision
thereof or therein, or as a result of any official or administrative
pronouncement or action or judicial decision interpreting or applying such laws
or regulations, which amendment or change is effective or such pronouncement,
action or decision is announced on or after the date of issuance of the
Preferred Securities, there is more than an insubstantial risk that the Company
will not be entitled to treat an amount equal to the Liquidation Amount of the
Preferred Securities as "Tier 1 Capital" (or the then equivalent thereof),
except as otherwise restricted under the 25% Capital Limitation, for purposes of
the risk-based capital adequacy guidelines of the Federal Reserve, as then in
effect and applicable to the Company.
If a Tax Event described in clause (i) or (iii) of the definition of Tax
Event above has occurred and is continuing and the Issuer Trust is the holder of
all the Junior Subordinated Debentures, the Company will pay Additional Sums (as
defined below), if any, on the Junior Subordinated Debentures.
"Additional Sums" means the additional amounts as may be necessary in
order that the amount of Distributions then due and payable by the Issuer Trust
on the outstanding Preferred Securities and Common Securities of the Issuer
Trust will not be reduced as a result of any additional taxes, duties and other
governmental charges to which the Issuer Trust has become subject as a result of
a Tax Event.
Redemption Procedures
Preferred Securities redeemed on each Redemption Date shall be redeemed at
the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Junior Subordinated Debentures. Redemptions of the Preferred
Securities shall be made and the Redemption Price shall be payable on each
Redemption Date only to the extent that the Issuer Trust has funds on hand
available for the payment of such Redemption Price. See also "-- Subordination
of Common Securities."
If the Issuer Trust gives a notice of redemption in respect of the
Preferred Securities, then, by 12:00 noon, New York City time, on the Redemption
Date, to the extent funds are available, in the case of Preferred Securities
held in book-entry form, the Property Trustee will deposit irrevocably with DTC
funds sufficient to pay the applicable Redemption Price and will give DTC
irrevocable instructions and authority to pay the Redemption Price to the
holders of the Preferred Securities. With respect to Preferred Securities not
held in book-entry form, the Property Trustee, to the extent funds are
available, will irrevocably deposit with the paying agent for the Preferred
Securities funds sufficient to pay the applicable Redemption Price and will give
such paying agent irrevocable instructions and authority to pay the Redemption
Price to the holders thereof upon surrender of their certificates evidencing the
Preferred Securities. Notwithstanding the foregoing, Distributions payable on or
prior to the Redemption Date for any Preferred Securities called for redemption
shall be payable to the holders of the Preferred Securities on the relevant
record dates for the related Distribution Dates. If notice of redemption shall
have been given and funds deposited as required, then upon the date of such
deposit all rights of the holders of such Preferred Securities so called for
redemption will cease, except the right of the holders of such Preferred
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Securities to receive the Redemption Price, but without interest on such
Redemption Price, and such Preferred Securities will cease to be outstanding. If
any date fixed for redemption of Preferred Securities is not a Business Day,
then payment of the Redemption Price payable on such date will be made on the
next succeeding day which is a Business Day (without any interest or other
payment in respect of any such delay), except that, if such Business Day falls
in the next calendar year, such payment will be made on the immediately
preceding Business Day. In the event that payment of the Redemption Price in
respect of Preferred Securities called for redemption is improperly withheld or
refused and not paid either by the Issuer Trust or by the Company pursuant to
the Guarantee as described under "Description of Guarantee," Distributions on
such Preferred Securities will continue to accumulate at the then applicable
rate, from the Redemption Date originally established by the Issuer Trust for
such Preferred Securities to the date such Redemption Price is actually paid, in
which case the actual payment date will be the date fixed for redemption for
purposes of calculating the Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities laws), the Company or its affiliates may at any time and from
time to time purchase outstanding Preferred Securities by tender, in the open
market or by private agreement, and may resell such securities.
If less than all the Preferred Securities and Common Securities are to be
redeemed on a Redemption Date, then the aggregate Liquidation Amount of such
Preferred Securities and Common Securities to be redeemed shall be allocated pro
rata to the Preferred Securities and the Common Securities based upon the
relative Liquidation Amounts of such classes. The particular Preferred
Securities to be redeemed shall be selected on a pro rata basis not more than 60
days prior to the Redemption Date by the Property Trustee from the outstanding
Preferred Securities not previously called for redemption, or if the Preferred
Securities are then held in the form of a Global Preferred Security (as defined
below), in accordance with DTC's customary procedures. The Property Trustee
shall promptly notify the securities registrar for the Trust Securities in
writing of the Preferred Securities selected for redemption and, in the case of
any Preferred Securities selected for partial redemption, the Liquidation Amount
thereof to be redeemed. For all purposes of the Trust Agreement, unless the
context otherwise requires, all provisions relating to the redemption of
Preferred Securities shall relate, in the case of any Preferred Securities
redeemed or to be redeemed only in part, to the portion of the aggregate
Liquidation Amount of Preferred Securities which has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each registered holder of Preferred
Securities to be redeemed at its address appearing on the securities register
for the Trust Securities. Unless the Company defaults in payment of the
Redemption Price on the Junior Subordinated Debentures, on and after the
Redemption Date interest will cease to accrue on the Junior Subordinated
Debentures or portions thereof (and, unless payment of the Redemption Price in
respect of the Preferred Securities is withheld or refused and not paid either
by the Issuer Trust or the Company pursuant to the Guarantee, Distributions will
cease to accumulate on the Preferred Securities or portions thereof) called for
redemption.
Subordination of Common Securities
Payment of Distributions on, and the Redemption Price of, and the
Liquidation Distribution in respect of, the Preferred Securities and Common
Securities, as applicable, shall be made pro rata based on the Liquidation
Amount of such Preferred Securities and Common Securities. However, if on any
Distribution Date or Redemption Date a Debenture Event of Default has occurred
and is continuing as a result of any failure by the Company to pay any amounts
in respect of the Junior Subordinated Debentures when due, no payment of any
Distribution on, or Redemption Price of, or Liquidation
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Distribution in respect of, any of the Common Securities, and no other payment
on account of the redemption, liquidation or other acquisition of such Common
Securities, shall be made unless payment in full in cash of all accumulated and
unpaid Distributions on all the outstanding Preferred Securities for all
Distribution periods terminating on or prior thereto, or in the case of payment
of the Redemption Price the full amount of such Redemption Price on all the
outstanding Preferred Securities then called for redemption, shall have been
made or provided for, and all funds available to the Property Trustee shall
first be applied to the payment in full in cash of all Distributions on, or
Redemption Price of, the Preferred Securities then due and payable.
In the case of any Event of Default (as defined below) resulting from a
Debenture Event of Default, the holders of the Common Securities will be deemed
to have waived any right to act with respect to any such Event of Default under
the Trust Agreement until the effects of all such Events of Default with respect
to such Preferred Securities have been cured, waived or otherwise eliminated.
See "-- Events of Default; Notice" and "Description of Junior Subordinated
Debentures -- Debenture Events of Default." Until all such Events of Default
under the Trust Agreement with respect to the Preferred Securities have been so
cured, waived or otherwise eliminated, the Property Trustee will act solely on
behalf of the holders of the Preferred Securities and not on behalf of the
holders of the Common Securities, and only the holders of the Preferred
Securities will have the right to direct the Property Trustee to act on their
behalf.
Liquidation Distribution Upon Dissolution
The amount payable on the Preferred Securities in the event of any
liquidation of the Issuer Trust is $25 per Preferred Security plus accumulated
and unpaid Distributions, subject to certain exceptions, which may be in the
form of a distribution of such amount in Junior Subordinated Debentures.
The holders of all the outstanding Common Securities have the right at any
time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, cause the Junior
Subordinated Debentures to be distributed to the holders of the Preferred
Securities and Common Securities in liquidation of the Issuer Trust.
The Federal Reserve's risk-based capital guidelines currently provide that
redemptions of permanent equity or other capital instruments before stated
maturity could have a significant impact on a bank holding company's overall
capital structure and that any organization considering such a redemption should
consult with the Federal Reserve before redeeming any equity or capital
instrument prior to maturity if such redemption could have a material effect on
the level or composition of the organization's capital base (unless the equity
or capital instrument were redeemed with the proceeds of, or replaced by, a like
amount of a similar or higher quality capital instrument and the Federal Reserve
considers the organization's capital position to be fully adequate after the
redemption).
In the event the Company, while a holder of Common Securities, dissolves
the Issuer Trust prior to the stated maturity of the Preferred Securities and
the dissolution of the Issuer Trust is deemed to constitute the redemption of
capital instruments by the Federal Reserve under its risk-based capital
guidelines or policies, the dissolution of the Issuer Trust by the Company may
be subject to the prior approval of the Federal Reserve. Moreover, any changes
in applicable law or changes in the Federal Reserve's risk-based capital
guidelines or policies could impose a requirement on the Company that it obtain
the prior approval of the Federal Reserve to dissolve the Issuer Trust.
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Pursuant to the Trust Agreement, the Issuer Trust will automatically
dissolve upon expiration of its term or, if earlier, will dissolve on the first
to occur of: (i) certain events of bankruptcy, dissolution or liquidation of the
Company or the holder of the Common Securities, (ii) the distribution of a Like
Amount of the Junior Subordinated Debentures to the holders of the Trust
Securities, if the holders of Common Securities have given written direction to
the Property Trustee to dissolve the Issuer Trust (which direction, subject to
the foregoing restrictions, is optional and wholly within the discretion of the
holders of Common Securities), (iii) the repayment of all the Preferred
Securities in connection with the redemption of all the Trust Securities as
described under "-- Redemption" and (iv) the entry of an order for the
dissolution of the Issuer Trust by a court of competent jurisdiction.
If dissolution of the Issuer Trust occurs as described in clause (i), (ii)
or (iv) above, the Issuer Trust will be liquidated by the Property Trustee as
expeditiously as the Property Trustee determines to be possible by distributing,
after satisfaction of liabilities to creditors of the Issuer Trust as provided
by applicable law, to the holders of such Trust Securities a Like Amount of the
Junior Subordinated Debentures, unless such distribution is not practical, in
which event such holders will be entitled to receive out of the assets of the
Issuer Trust available for distribution to holders, after satisfaction of
liabilities to creditors of the Issuer Trust as provided by applicable law, an
amount equal to, in the case of holders of Preferred Securities, the aggregate
of the Liquidation Amount plus accumulated and unpaid Distributions thereon to
the date of payment (such amount being the "Liquidation Distribution"). If such
Liquidation Distribution can be paid only in part because the Issuer Trust has
insufficient assets available to pay in full the aggregate Liquidation
Distribution, then the amounts payable directly by the Issuer Trust on its
Preferred Securities shall be paid on a pro rata basis. The holders of the
Common Securities will be entitled to receive distributions upon any such
liquidation pro rata with the holders of the Preferred Securities, except that
if a Debenture Event of Default has occurred and is continuing as a result of
any failure by the Company to pay any amounts in respect of the Junior
Subordinated Debentures when due, the Preferred Securities shall have a priority
over the Common Securities. See "-- Subordination of Common Securities."
After the liquidation date fixed for any distribution of Junior
Subordinated Debentures (i) the Preferred Securities will no longer be deemed to
be outstanding, (ii) DTC or its nominee, as the registered holder of Preferred
Securities, will receive a registered global certificate or certificates
representing the Junior Subordinated Debentures to be delivered upon such
distribution with respect to Preferred Securities held by DTC or its nominee and
(iii) any certificates representing the Preferred Securities not held by DTC or
its nominee will be deemed to represent the Junior Subordinated Debentures
having a principal amount equal to the stated Liquidation Amount of the
Preferred Securities and bearing accrued and unpaid interest in an amount equal
to the accumulated and unpaid Distributions on the Preferred Securities until
such certificates are presented to the security registrar for the Trust
Securities for transfer or reissuance.
If the Company does not redeem the Junior Subordinated Debentures prior to
maturity and the Issuer Trust is not liquidated and the Junior Subordinated
Debentures are not distributed to holders of the Preferred Securities, the
Preferred Securities will remain outstanding until the repayment of the Junior
Subordinated Debentures and the distribution of the Liquidation Distribution to
the holders of the Preferred Securities.
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Preferred Securities if a dissolution and liquidation of the Issuer
Trust were to occur. Accordingly, the Preferred Securities that an investor may
purchase, or the Junior Subordinated Debentures that the investor may receive on
dissolution and
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liquidation of the Issuer Trust, may trade at a discount to the price that the
investor paid to purchase the Preferred Securities offered hereby.
Events of Default; Notice
Any one of the following events constitutes an "Event of Default" under
the Trust Agreement (an "Event of Default") with respect to the Preferred
Securities (whatever the reason for such Event of Default and whether it is
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) the occurrence of a Debenture Event of Default (see "Description of
Junior Subordinated Debentures -- Debenture Events of Default"); or
(ii) default by the Issuer Trust in the payment of any Distribution when
it becomes due and payable, and continuation of such default for a period of 30
days; or
(iii) default by the Issuer Trust in the payment of any Redemption Price
of any Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect, of
any covenant or warranty of the Issuer Trustees in the Trust Agreement (other
than a covenant or warranty a default in the performance of which or the breach
of which is dealt with in clause (ii) or (iii) above), and continuation of such
default or breach for a period of 60 days after there has been given, by
registered or certified mail, to the Issuer Trustees and the Company by the
holders of at least 25% in aggregate Liquidation Amount of the outstanding
Preferred Securities, a written notice specifying such default or breach and
requiring it to be remedied and stating that such notice is a "Notice of
Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee if a successor Property Trustee has not been
appointed within 90 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee will transmit
notice of such Event of Default to the holders of Trust Securities and the
Administrators, unless such Event of Default has been cured or waived. The
Company, as Depositor, and the Administrators are required to file annually with
the Property Trustee a certificate as to whether or not they are in compliance
with all the conditions and covenants applicable to them under the Trust
Agreement.
If a Debenture Event of Default has occurred and is continuing as a result
of any failure by the Company to pay any amounts in respect of the Junior
Subordinated Debentures when due, the Preferred Securities will have a
preference over the Common Securities with respect to payments of any amounts in
respect of the Preferred Securities as described above. See "-- Subordination of
Common Securities," "-- Liquidation Distribution Upon Dissolution" and
"Description of Junior Subordinated Debentures -- Debenture Events of Default."
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Removal of Issuer Trustees; Appointment of Successors
The holders of at least a majority in aggregate Liquidation Amount of the
outstanding Preferred Securities may remove an Issuer Trustee for cause or, if a
Debenture Event of Default has occurred and is continuing, with or without
cause. If an Issuer Trustee is removed by the holders of the outstanding
Preferred Securities, the successor may be appointed by the holders of at least
25% in Liquidation Amount of Preferred Securities. If an Issuer Trustee resigns,
such Trustee will appoint its successor. If an Issuer Trustee fails to appoint a
successor, the holders of at least 25% in Liquidation Amount of the outstanding
Preferred Securities may appoint a successor. If a successor has not been
appointed by the holders, any holder of Preferred Securities or Common
Securities or the other Issuer Trustee may petition a court in the State of
Delaware to appoint a successor. Any Delaware Trustee must meet the applicable
requirements of Delaware law. Any Property Trustee must be a national or
state-chartered bank, and at the time of appointment have securities rated in
one of the three highest rating categories by a nationally recognized
statistical rating organization and have capital and surplus of at least
$50,000,000. No resignation or removal of an Issuer Trustee and no appointment
of a successor trustee shall be effective until the acceptance of appointment by
the successor trustee in accordance with the provisions of the Trust Agreement.
Merger or Consolidation of Issuer Trustees
Any entity into which the Property Trustee or the Delaware Trustee may be
merged or converted or with which it may be consolidated, or any entity
resulting from any merger, conversion or consolidation to which such Issuer
Trustee is a party, or any entity succeeding to all or substantially all the
corporate trust business of such Issuer Trustee, will be the successor of such
Issuer Trustee under the Trust Agreement, provided such entity is otherwise
qualified and eligible.
Mergers, Consolidations, Amalgamations or Replacements of the Issuer Trust
The Issuer Trust may not merge with or into, consolidate, amalgamate, or
be replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to, any entity, except as described below or as
otherwise set forth in the Trust Agreement. The Issuer Trust may, at the request
of the holders of the Common Securities and with the consent of the holders of
at least a majority in aggregate Liquidation Amount of the outstanding Preferred
Securities, merge with or into, consolidate, amalgamate, or be replaced by or
convey, transfer or lease its properties and assets substantially as an entirety
to a trust organized as such under the laws of any State, so long as (i) such
successor entity either (a) expressly assumes all the obligations of the Issuer
Trust with respect to the Preferred Securities or (b) substitutes for the
Preferred Securities other securities having substantially the same terms as the
Preferred Securities (the "Successor Securities") so long as the Successor
Securities have the same priority as the Preferred Securities with respect to
distributions and payments upon liquidation, redemption and otherwise, (ii) a
trustee of such successor entity, possessing the same powers and duties as the
Property Trustee, is appointed to hold the Junior Subordinated Debentures, (iii)
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease does not cause the Preferred Securities (including any Successor
Securities) to be downgraded by any nationally recognized statistical rating
organization, if then rated, (iv) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the Preferred Securities (including
any Successor Securities) in any material respect, (v) such successor entity has
a purpose substantially identical to that of the Issuer Trust, (vi) prior to
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease, the Issuer Trust has received an opinion from independent counsel
experienced in such matters to the effect that (a) such merger, consolidation,
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amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material respect and (b)
following such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, neither the Issuer Trust nor such successor entity will be
required to register as an investment company under the Investment Company Act,
and (vii) the Company or any permitted successor or assignee owns all the common
securities of such successor entity and guarantees the obligations of such
successor entity under the Successor Securities at least to the extent provided
by the Guarantee. Notwithstanding the foregoing, the Issuer Trust may not,
except with the consent of holders of 100% in aggregate Liquidation Amount of
the Preferred Securities, consolidate, amalgamate, merge with or into, or be
replaced by or convey, transfer or lease its properties and assets substantially
as an entirety to, any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it if such consolidation,
amalgamation, merger, replacement, conveyance, transfer or lease would cause the
Issuer Trust or the successor entity to be taxable as a corporation for United
States federal income tax purposes.
Voting Rights; Amendment of Trust Agreement
Except as provided above and under "-- Removal of Issuer Trustees;
Appointment of Successors" and "Description of Guarantee -- Amendments and
Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the Preferred Securities will have no voting rights.
The Trust Agreement may be amended from time to time by the holders of a
majority of the Common Securities and the Property Trustee, without the consent
of the holders of the Preferred Securities, (i) to cure any ambiguity, correct
or supplement any provisions in the Trust Agreement that may be inconsistent
with any other provision, or to make any other provisions with respect to
matters or questions arising under the Trust Agreement, provided that any such
amendment does not adversely affect in any material respect the interests of any
holder of Trust Securities, or (ii) to modify, eliminate or add to any
provisions of the Trust Agreement to such extent as may be necessary to ensure
that the Issuer Trust will not be taxable as a corporation for United States
federal income tax purposes at any time that any Trust Securities are
outstanding or to ensure that the Issuer Trust will not be required to register
as an "investment company" under the Investment Company Act, and any amendments
of the Trust Agreement will become effective when notice of such amendment is
given to the holders of Trust Securities. The Trust Agreement may be amended by
the holders of a majority of the Common Securities and the Property Trustee with
(i) the consent of holders representing not less than a majority in aggregate
Liquidation Amount of the outstanding Preferred Securities and (ii) receipt by
the Issuer Trustees of an opinion of counsel to the effect that such amendment
or the exercise of any power granted to the Issuer Trustees in accordance with
such amendment will not affect the Issuer Trust's not being taxable as a
corporation for United States federal income tax purposes or the Issuer Trust's
exemption from status as an "investment company" under the Investment Company
Act, except that, without the consent of each holder of Trust Securities
affected thereby, the Trust Agreement may not be amended to (i) change the
amount or timing of any Distribution on the Trust Securities or otherwise
adversely affect the amount of any Distribution required to be made in respect
of the Trust Securities as of a specified date or (ii) restrict the right of a
holder of Trust Securities to institute suit for the enforcement of any such
payment on or after such date.
So long as any Junior Subordinated Debentures are held by the Issuer
Trust, the Property Trustee will not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
execute any trust or power conferred on the Property Trustee with respect to the
Junior Subordinated Debentures, (ii) waive any past default that is waivable
under Section 5.13 of
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the Junior Subordinated Indenture, (iii) exercise any right to rescind or annul
a declaration that the Junior Subordinated Debentures shall be due and payable
or (iv) consent to any amendment, modification or termination of the Junior
Subordinated Indenture or the Junior Subordinated Debentures, where such consent
shall be required, without, in each case, obtaining the prior approval of the
holders of at least a majority in aggregate Liquidation Amount of the
outstanding Preferred Securities, except that, if a consent under the Junior
Subordinated Indenture would require the consent of each holder of Junior
Subordinated Debentures affected thereby, no such consent will be given by the
Property Trustee without the prior consent of each holder of the Preferred
Securities. The Property Trustee may not revoke any action previously authorized
or approved by a vote of the holders of the Preferred Securities except by
subsequent vote of the holders of the Preferred Securities. The Property Trustee
will notify each holder of Preferred Securities of any notice of default with
respect to the Junior Subordinated Debentures. In addition to obtaining the
foregoing approvals of the holders of the Preferred Securities, before taking
any of the foregoing actions, the Property Trustee will obtain an opinion of
counsel experienced in such matters to the effect that the Issuer Trust will not
be taxable as a corporation for United States federal income tax purposes on
account of such action.
Any required approval of holders of Preferred Securities may be given at a
meeting of holders of Preferred Securities convened for such purpose or pursuant
to written consent. The Property Trustee will cause a notice of any meeting at
which holders of Preferred Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be given
to each registered holder of Preferred Securities in the manner set forth in the
Trust Agreement.
No vote or consent of the holders of Preferred Securities will be required
to redeem and cancel Preferred Securities in accordance with the Trust
Agreement.
Notwithstanding that holders of Preferred Securities are entitled to vote
or consent under any of the circumstances described above, any of the Preferred
Securities that are owned by the Company, the Issuer Trustees or any affiliate
of the Company or any Issuer Trustees, will, for purposes of such vote or
consent, be treated as if they were not outstanding.
Expenses and Taxes
In the Indenture, the Company, as borrower, has agreed to pay all debts
and other obligations (other than with respect to the Preferred Securities) and
all costs and expenses of the Issuer Trust (including costs and expenses
relating to the organization of the Issuer Trust, the fees and expenses of the
Issuer Trustees and the costs and expenses relating to the operation of the
Issuer Trust) and to pay any and all taxes and all costs and expenses with
respect thereto (other than United States withholding taxes) to which the Issuer
Trust might become subject. The foregoing obligations of the Company under the
Indenture are for the benefit of, and shall be enforceable by, any person to
whom any such debts, obligations, costs, expenses and taxes are owed (a
"Creditor") whether or not such Creditor has received notice thereof. Any such
Creditor may enforce such obligations of the Company directly against the
Company, and the Company has irrevocably waived any right or remedy to require
that any such Creditor take any action against the Issuer Trust or any other
person before proceeding against the Company. The Company has also agreed in the
Indenture to execute such additional agreements as may be necessary or desirable
to give full effect to the foregoing.
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Book Entry, Delivery and Form
The Preferred Securities will be issued in the form of one or more fully
registered global securities which will be deposited with, or on behalf of, DTC
and registered in the name of DTC's nominee. Unless and until it is exchangeable
in whole or in part for the Preferred Securities in definitive form, a global
security may not be transferred except as a whole by DTC to a nominee of DTC or
by a nominee of DTC to DTC or another nominee of DTC or by DTC or any such
nominee to a successor of such Depository or a nominee of such successor.
Ownership of beneficial interests in a global security will be limited to
persons that have accounts with DTC or its nominee ("Participants") or persons
that may hold interests through Participants. The Company expects that, upon the
issuance of a global security, DTC will credit, on its book-entry registration
and transfer system, the Participants' accounts with their respective principal
amounts of the Preferred Securities represented by such global security.
Ownership of beneficial interests in such global security will be shown on, and
the transfer of such ownership interests will be effected only through, records
maintained by DTC (with respect to interests of Participants) and on the records
of Participants (with respect to interests of Persons held through
Participants). Beneficial owners will not receive written confirmation from DTC
of their purchase, but are expected to receive written confirmations from the
Participants through which the beneficial owner entered into the transaction.
Transfers of ownership interests will be accomplished by entries on the books of
Participants acting on behalf of the beneficial owners.
So long as DTC, or its nominee, is the registered owner of a global
security, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Preferred Securities represented by such global security
for all purposes under the Junior Subordinated Indenture. Except as provided
below, owners of beneficial interests in a global security will not be entitled
to receive physical delivery of the Preferred Securities in definitive form and
will not be considered the owners or holders thereof under the Junior
Subordinated Indenture. Accordingly, each person owning a beneficial interest in
such a global security must rely on the procedures of DTC and, if such person is
not a Participant, on the procedures of the Participant through which such
person owns its interest, to exercise any rights of a holder of Preferred
Securities under the Junior Subordinated Indenture. The Company understands
that, under DTC's existing practices, in the event that the Company requests any
action of holders, or an owner of a beneficial interest in such a global
security desires to take any action which a holder is entitled to take under the
Junior Subordinated Indenture, DTC would authorize the Participants holding the
relevant beneficial interests to take such action, and such Participants would
authorize beneficial owners owning through such Participants to take such action
or would otherwise act upon the instructions of beneficial owners owning through
them. Redemption notices will also be sent to DTC. If less than all of the
Preferred Securities are being redeemed, the Company understands that it is
DTC's existing practice to determine by lot the amount of the interest of each
Participant to be redeemed.
Distributions on the Preferred Securities registered in the name of DTC or
its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner of the global security representing such Preferred Securities.
None of the Company, the Issuer Trustees, the Administrators, any Paying Agent
or any other agent of the Company or the Issuer Trustees will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the global
security for such Preferred Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Disbursements of Distributions to Participants shall be the responsibility of
DTC. DTC's practice is to credit Participants' accounts on a payable date in
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe
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that it will not receive payment on the payable date. Payments by Participants
to beneficial owners will be governed by standing instructions and customary
practices, as is the case with securities held for the accounts of customers in
bearer form or registered in "street name," and will be the responsibility of
such Participant and not of DTC, the Company, the Issuer Trustees, the Paying
Agent or any other agent of the Company, subject to any statutory or regulatory
requirements as may be in effect from time to time.
DTC may discontinue providing its services as securities depository with
respect to the Preferred Securities at any time by giving reasonable notice to
the Company or the Issuer Trustees. If DTC notifies the Company that it is
unwilling to continue as such, or if it is unable to continue or ceases to be a
clearing agency registered under the Exchange Act and a successor depository is
not appointed by the Company within ninety days after receiving such notice or
becoming aware that DTC is no longer so registered, the Company will issue the
Preferred Securities in definitive form upon registration of transfer of, or in
exchange for, such global security. In addition, the Company may at any time and
in its sole discretion determine not to have the Preferred Securities
represented by one or more global securities and, in such event, will issue
Preferred Securities in definitive form in exchange for all of the global
securities representing such Preferred Securities.
DTC has advised the Company and the Issuer Trust as follows: DTC is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its Participants and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book entry changes to accounts of its Participants, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers (such as the Underwriter), banks, trust companies and clearing
corporations and may include certain other organizations. Certain of such
Participants (or their representatives), together with other entities, own DTC.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through, or maintain a custodial
relationship with a Participant, either directly or indirectly.
Same-Day Settlement and Payment
Settlement for the Preferred Securities will be made by the Underwriters
in immediately available funds.
Secondary trading in Preferred Securities of corporate issuers is
generally settled in clearinghouse or next-day funds. In contrast, the Preferred
Securities will trade in DTC's Same-Day Funds Settlement System, and secondary
market trading activity in the Preferred Securities will therefore be required
by DTC to settle in immediately available funds. No assurance can be given as to
the effect, if any, of settlement in immediately available funds on trading
activity in the Preferred Securities.
Payment and Paying Agency
Payments in respect of the Preferred Securities will be made to DTC, which
will credit the relevant accounts at DTC on the applicable Distribution Dates
or, if the Preferred Securities are not held by DTC, such payments will be made
by check mailed to the address of the holder entitled thereto as such address
appears on the securities register for the Trust Securities. The paying agent
(the "Paying Agent") will initially be the Property Trustee and any co-paying
agent chosen by the Property Trustee and acceptable to the Administrators. The
Paying Agent will be permitted to resign as Paying Agent upon
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30 days' written notice to the Property Trustee and the Administrators. If the
Property Trustee is no longer the Paying Agent, the Property Trustee will
appoint a successor (which must be a bank or trust company reasonably acceptable
to the Administrators) to act as Paying Agent.
Registrar and Transfer Agent
The Property Trustee will act as registrar and transfer agent for the
Preferred Securities.
Registration of transfers of Preferred Securities will be effected without
charge by or on behalf of the Issuer Trust, but upon payment of any tax or other
governmental charges that may be imposed in connection with any transfer or
exchange. The Issuer Trust will not be required to register or cause to be
registered the transfer of the Preferred Securities after the Preferred
Securities have been called for redemption.
Information Concerning the Property Trustee
The Property Trustee, other than during the occurrence and continuance of
an Event of Default, undertakes to perform only such duties as are specifically
set forth in the Trust Agreement and, after such Event of Default, must exercise
the same degree of care and skill as a prudent person would exercise or use in
the conduct of his or her own affairs. Subject to this provision, the Property
Trustee is under no obligation to exercise any of the powers vested in it by the
Trust Agreement at the request of any holder of Preferred Securities unless it
is offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby.
For information concerning the relationships between Bankers Trust
Company, the Property Trustee, and the Company, see "Description of Junior
Subordinated Debentures -- Information Concerning the Debenture Trustee."
Miscellaneous
The Administrators and the Property Trustee are authorized and directed to
conduct the affairs of and to operate the Issuer Trust in such a way that the
Issuer Trust will not be deemed to be an "investment company" required to be
registered under the Investment Company Act or taxable as a corporation for
United States federal income tax purposes and so that the Junior Subordinated
Debentures will be treated as indebtedness of the Company for United States
federal income tax purposes. In this connection, the Property Trustee and the
holders of Common Securities are authorized to take any action, not inconsistent
with applicable law, the certificate of trust of the Issuer Trust or the Trust
Agreement, that the Property Trustee and the holders of Common Securities
determine in their discretion to be necessary or desirable for such purposes, as
long as such action does not materially adversely affect the interests of the
holders of the Preferred Securities.
Holders of the Preferred Securities have no preemptive or similar rights.
The Issuer Trust may not borrow money, issue debt or mortgage or pledge
any of its assets.
Governing Law
The Trust Agreement will be governed by and construed in accordance with
the laws of the State of Delaware.
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DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under the Junior
Subordinated Indenture, under which Bankers Trust Company is acting as Debenture
Trustee. This summary of certain terms and provisions of the Junior Subordinated
Debentures and the Junior Subordinated Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, all the
provisions of the Junior Subordinated Indenture, including the definitions
therein of certain terms. Whenever particular defined terms of the Junior
Subordinated Indenture (as amended or supplemented from time to time) are
referred to herein, such defined terms are incorporated herein by reference. A
copy of the form of Junior Subordinated Indenture is available from the
Debenture Trustee upon request.
General
Concurrently with the issuance of the Preferred Securities, the Issuer
Trust will invest the proceeds thereof, together with the consideration paid by
the Company for the Common Securities, in the Junior Subordinated Debentures
issued by the Company. The Junior Subordinated Debentures will bear interest,
accruing from May 21, 1997, at the annual rate of 10.00% of the principal amount
thereof, payable quarterly in arrears on March 31, June 30, September 30 and
December 31 of each year (each, an "Interest Payment Date"), commencing June 30,
1997, to the person in whose name each Junior Subordinated Debenture is
registered at the close of business on the 15th day of March, June, September or
December (whether or not a Business Day) next preceding such Interest Payment
Date. It is anticipated that, until the liquidation, if any, of the Issuer
Trust, each Junior Subordinated Debenture will be registered in the name of the
Issuer Trust and held by the Property Trustee in trust for the benefit of the
holders of the Trust Securities. The amount of interest payable for any period
less than a full interest period will be computed on the basis of a 360-day year
of twelve 30-day months and the actual days elapsed in a partial month in such
period. The amount of interest payable for any full interest period will be
computed by dividing the rate per annum by four. If any date on which interest
is payable on the Junior Subordinated Debentures is not a Business Day, then
payment of the interest payable on such date will be made on the next succeeding
day that is a Business Day (without any interest or other payment in respect of
any such delay), with the same force and effect as if made on the date such
payment was originally payable. Accrued interest that is not paid on the
applicable Interest Payment Date will bear additional interest on the amount
thereof (to the extent permitted by law) at the rate per annum of 10.00%,
compounded quarterly and computed on the basis of a 360-day year of twelve
30-day months and the actual days elapsed in a partial month in such period. The
amount of additional interest payable for any full interest period will be
computed by dividing the rate per annum by four. The term "interest" as used
herein includes quarterly interest payments, interest on quarterly interest
payments not paid on the applicable Interest Payment Date and Additional Sums
(as defined below), as applicable.
The Junior Subordinated Debentures will mature on June 30, 2027.
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior Indebtedness of the
Company. The Junior Subordinated Debentures will not be subject to a sinking
fund. The Junior Subordinated Indenture does not limit the incurrence or
issuance of other secured or unsecured debt by the Company, including Senior
Indebtedness, whether under the Junior Subordinated Indenture or any existing or
other indenture that the Company may enter into in the future or otherwise. See
"-- Subordination."
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Option to Extend Interest Payment Period
So long as no Debenture Event of Default has occurred and is continuing,
the Company has the right at any time during the term of the Junior Subordinated
Debentures to defer the payment of interest at any time or from time to time for
a period not exceeding 20 consecutive quarterly periods with respect to each
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. During any such Extension Period
the Company shall have the right to make partial payments of interest on any
interest payment date. At the end of such Extension Period, the Company must pay
all interest then accrued and unpaid (together with interest thereon at the
annual rate of 10.00%, compounded quarterly and computed on the basis of a
360-day year of twelve 30-day months and the actual days elapsed in a partial
month in such period, to the extent permitted by applicable law). The amount of
additional interest payable for any full interest period will be computed by
dividing the rate per annum by four. During an Extension Period, interest will
continue to accrue and holders of Junior Subordinated Debentures (or holders of
Preferred Securities while outstanding) will be required to accrue interest
income for United States federal income tax purposes. See "Certain Federal
Income Tax Consequences -- Interest Income and Original Issue Discount."
During any such Extension Period, the Company may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu in
all respects with or junior in interest to the Junior Subordinated Debentures
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of the Company in connection with any employment contract, benefit
plan or other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or stockholder stock purchase plan or in connection with the
issuance of capital stock of the Company (or securities convertible into or
exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the applicable Extension Period, (b) as a
result of an exchange or conversion of any class or series of the Company's
capital stock (or any capital stock of a subsidiary of the Company) for any
class or series of the Company's capital stock or of any class or series of the
Company's indebtedness for any class or series of the Company's capital stock,
(c) the purchase of fractional interests in shares of the Company's capital
stock pursuant to the conversion or exchange provisions of such capital stock or
the security being converted or exchanged, (d) any declaration of a dividend in
connection with any stockholder's rights plan, or the issuance of rights, stock
or other property under any stockholders rights plan, or the redemption or
repurchase of rights pursuant thereto, or (e) any dividend in the form of stock,
warrants, options or other rights where the dividend stock or the stock issuable
upon exercise of such warrants, options or other rights is the same stock as
that on which the dividend is being paid or ranks pari passu with or junior to
such stock). Prior to the termination of any such Extension Period, the Company
may further defer the payment of interest, provided that no Extension Period may
exceed 20 consecutive quarterly periods or extend beyond the Stated Maturity of
the Junior Subordinated Debentures. Upon the termination of any such Extension
Period and the payment of all amounts then due, the Company may elect to begin a
new Extension Period subject to the above conditions. No interest shall be due
and payable during an Extension Period, except at the end thereof. The Company
must give the Issuer Trustees notice of its election of such Extension Period at
least one Business Day prior to the earlier of (i) the date the Distributions on
the Preferred Securities would have been payable but for the election to begin
such Extension Period and (ii) the date the Property Trustee is required to give
notice to holders of the Preferred Securities of the record date or the date
such Distributions are payable, but in any event not less than one Business Day
prior to such record date. The Property Trustee will give notice of the
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Company's election to begin a new Extension Period to the holders of the
Preferred Securities. There is no limitation on the number of times that the
Company may elect to begin an Extension Period.
Redemption
The Junior Subordinated Debentures are redeemable prior to maturity at the
option of the Company (i) on or after June 30, 2002, in whole at any time or in
part from time to time, or (ii) in whole, but not in part, at any time within 90
days following the occurrence and during the continuation of a Tax Event,
Investment Company Event or Capital Treatment Event (each as defined under
"Description of Preferred Securities -- Redemption"), in each case at the
redemption price described below. The proceeds of any such redemption will be
used by the Issuer Trust to redeem the Preferred Securities.
The Federal Reserve's risk-based capital guidelines, which are subject to
change, currently provide that redemptions of permanent equity or other capital
instruments before stated maturity could have a significant impact on a bank
holding company's overall capital structure and that any organization
considering such a redemption should consult with the Federal Reserve before
redeeming any equity or capital instrument prior to maturity if such redemption
could have a material effect on the level or composition of the organization's
capital base (unless the equity or capital instrument were redeemed with the
proceeds of, or replaced by, a like amount of a similar or higher quality
capital instrument and the Federal Reserve considers the organization's capital
position to be fully adequate after the redemption).
The redemption of the Junior Subordinated Debentures by the Company prior
to their Stated Maturity would constitute the redemption of capital instruments
under the Federal Reserve's current risk-based capital guidelines and may be
subject to the prior approval of the Federal Reserve. The redemption of the
Junior Subordinated Debentures also could be subject to the additional prior
approval of the Federal Reserve under its current risk-based capital guidelines.
The redemption price for Junior Subordinated Debentures is the outstanding
principal amount of the Junior Subordinated Debentures plus accrued interest
(including any Additional Interest or any Additional Sums) thereon to but
excluding the date fixed for redemption.
Additional Sums
The Company has covenanted in the Junior Subordinated Indenture that, if
and for so long as (i) the Issuer Trust is the holder of all Junior Subordinated
Debentures and (ii) the Issuer Trust is required to pay any additional taxes,
duties or other governmental charges as a result of a Tax Event, the Company
will pay as additional sums on the Junior Subordinated Debentures such amounts
as may be required so that the Distributions payable by the Issuer Trust will
not be reduced as a result of any such additional taxes, duties or other
governmental charges. See "Description of Preferred Securities -- Redemption."
Registration, Denomination and Transfer
The Junior Subordinated Debentures will initially be registered in the
name of the Issuer Trust. If the Junior Subordinated Debentures are distributed
to holders of Preferred Securities, it is anticipated that the depositary
arrangements for the Junior Subordinated Debentures will be substantially
identical to those in effect for the Preferred Securities. See "Description of
Preferred Securities -- Book Entry, Delivery and Form."
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Although DTC has agreed to the procedures described above, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days of receipt of notice from DTC to such effect, the
Company will cause the Junior Subordinated Debentures to be issued in definitive
form.
Payments on Junior Subordinated Debentures represented by a global
security will be made to Cede & Co., the nominee for DTC, as the registered
holder of the Junior Subordinated Debentures, as described under "Description of
Preferred Securities -- Book Entry, Delivery and Form." If Junior Subordinated
Debentures are issued in certificated form, principal and interest will be
payable, the transfer of the Junior Subordinated Debentures will be registrable,
and Junior Subordinated Debentures will be exchangeable for Junior Subordinated
Debentures of other authorized denominations of a like aggregate principal
amount, at the corporate trust office of the Debenture Trustee in New York, New
York or at the offices of any Paying Agent or transfer agent appointed by the
Company, provided that payment of interest may be made at the option of the
Company by check mailed to the address of the persons entitled thereto. However,
a holder of $1 million or more in aggregate principal amount of Junior
Subordinated Debentures may receive payments of interest (other than interest
payable at the Stated Maturity) by wire transfer of immediately available funds
upon written request to the Debenture Trustee not later than 15 calendar days
prior to the date on which the interest is payable.
Junior Subordinated Debentures will be exchangeable for other Junior
Subordinated Debentures of like tenor, of any authorized denominations, and of a
like aggregate principal amount.
Junior Subordinated Debentures may be presented for exchange as provided
above, and may be presented for registration of transfer (with the form of
transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), at the office of the securities registrar appointed under the
Junior Subordinated Debenture or at the office of any transfer agent designated
by the Company for such purpose without service charge and upon payment of any
taxes and other governmental charges as described in the Junior Subordinated
Indenture. The Company will appoint the Debenture Trustee as securities
registrar under the Junior Subordinated Indenture. The Company may at any time
designate additional transfer agents with respect to the Junior Subordinated
Debentures.
In the event of any redemption, neither the Company nor the Debenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of the Junior
Subordinated Debentures to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption or (ii) transfer or
exchange any Junior Subordinated Debentures so selected for redemption, except,
in the case of any Junior Subordinated Debentures being redeemed in part, any
portion thereof not to be redeemed.
Any monies deposited with the Debenture Trustee or any paying agent, or
then held by the Company in trust, for the payment of the principal of (and
premium, if any) or interest on any Junior Subordinated Debenture and remaining
unclaimed for two years after such principal (and premium, if any) or interest
has become due and payable shall, at the request of the Company, be repaid to
the Company and the holder of such Junior Subordinated Debenture shall
thereafter look, as a general unsecured creditor, only to the Company for
payment thereof.
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Restrictions on Certain Payments; Certain Covenants of the Company
The Company has covenanted that it will not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu in
all respects with or junior in interest to the Junior Subordinated Debentures
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of the Company in connection with any employment contract, benefit
plan or other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or stockholder stock purchase plan or in connection with the
issuance of capital stock of the Company (or securities convertible into or
exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the applicable Extension Period or other event
referred to below, (b) as a result of an exchange or conversion of any class or
series of the Company's capital stock (or any capital stock of a subsidiary of
the Company) for any class or series of the Company's capital stock or of any
class or series of the Company's indebtedness for any class or series of the
Company's capital stock, (c) the purchase of fractional interests in shares of
the Company's capital stock pursuant to the conversion or exchange provisions of
such capital stock or the security being converted or exchanged, (d) any
declaration of a dividend in connection with any stockholder's rights plan, or
the issuance of rights, stock or other property under any stockholder's rights
plan, or the redemption or repurchase of rights pursuant thereto, or (e) any
dividend in the form of stock, warrants, options or other rights where the
dividend stock or the stock issuable upon exercise of such warrants, options or
other rights is the same stock as that on which the dividend is being paid or
ranks pari passu with or junior to such stock), if at such time (i) there has
occurred any event (a) of which the Company has actual knowledge that with the
giving of notice or the lapse of time, or both, would constitute a Debenture
Event of Default and (b) that the Company has not taken reasonable steps to
cure, (ii) if the Junior Subordinated Debentures are held by the Issuer Trust,
the Company is in default with respect to its payment of any obligations under
the Guarantee or (iii) the Company has given notice of its election of an
Extension Period as provided in the Junior Subordinated Indenture and has not
rescinded such notice, or such Extension Period, or any extension thereof, is
continuing.
The Company has covenanted in the Junior Subordinated Indenture (i) to
continue to hold, directly or indirectly, 100% of the Common Securities,
provided that certain successors that are permitted pursuant to the Junior
Subordinated Indenture may succeed to the Company's ownership of the Common
Securities, (ii) as holder of the Common Securities, not to voluntarily
terminate, windup or liquidate the Issuer Trust, other than (a) in connection
with a distribution of Junior Subordinated Debentures to the holders of the
Preferred Securities in liquidation of the Issuer Trust or (b) in connection
with certain mergers, consolidations or amalgamations permitted by the Trust
Agreement and (iii) to use its reasonable efforts, consistent with the terms and
provisions of the Trust Agreement, to cause the Issuer Trust to continue not to
be taxable as a corporation for United States federal income tax purposes.
Modification of Junior Subordinated Indenture
From time to time, the Company and the Debenture Trustee may, without the
consent of any of the holders of the outstanding Junior Subordinated Debentures,
amend, waive or supplement the provisions of the Junior Subordinated Indenture
to: (1) evidence succession of another corporation or association to the Company
and the assumption by such person of the obligations of the Company under the
Junior Subordinated Debentures, (2) add further covenants, restrictions or
conditions for the protection of holders of the Junior Subordinated Debentures,
(3) cure ambiguities or correct the Junior
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Subordinated Debentures in the case of defects or inconsistencies in the
provisions thereof, so long as any such cure or correction does not adversely
affect the interest of the holders of the Junior Subordinated Debentures in any
material respect, (4) change the terms of the Junior Subordinated Debentures to
facilitate the issuance of the Junior Subordinated Debentures in certificated or
other definitive form, (5) evidence or provide for the appointment of a
successor Debenture Trustee, or (6) qualify, or maintain the qualification of,
the Junior Subordinated Indentures under the Trust Indenture Act. The Junior
Subordinated Indenture contains provisions permitting the Company and the
Debenture Trustee, with the consent of the holders of not less than a majority
in principal amount of the Junior Subordinated Debentures, to modify the Junior
Subordinated Indenture in a manner affecting the rights of the holders of the
Junior Subordinated Debentures, except that no such modification may, without
the consent of the holder of each outstanding Junior Subordinated Debenture so
affected, (i) change the Stated Maturity of the Junior Subordinated Debentures,
or reduce the principal amount thereof, the rate of interest thereon or any
premium payable upon the redemption thereof, or change the place of payment
where, or the currency in which, any such amount is payable or impair the right
to institute suit for the enforcement of any Junior Subordinated Debenture or
(ii) reduce the percentage of principal amount of Junior Subordinated
Debentures, the holders of which are required to consent to any such
modification of the Junior Subordinated Indenture. Furthermore, so long as any
of the Preferred Securities remain outstanding, no such modification may be made
that adversely affects the holders of such Preferred Securities in any material
respect, and no termination of the Junior Subordinated Indenture may occur, and
no waiver of any Debenture Event of Default or compliance with any covenant
under the Junior Subordinated Indenture may be effective, without the prior
consent of the holders of at least a majority of the aggregate Liquidation
Amount of the outstanding Preferred Securities unless and until the principal of
(and premium, if any, on) the Junior Subordinated Debentures and all accrued and
unpaid interest thereon have been paid in full and certain other conditions are
satisfied.
Debenture Events of Default
The Junior Subordinated Indenture provides that any one or more of the
following described events with respect to the Junior Subordinated Debentures
that has occurred and is continuing constitutes an "Event of Default" with
respect to the Junior Subordinated Debentures:
(i) failure to pay any interest on the Junior Subordinated
Debentures when due (subject to the deferral of any due date
in the case of an Extension Period); or
(ii) failure to pay any principal of or premium, if any, on the
Junior Subordinated Debentures when due whether at maturity,
upon redemption, by declaration of acceleration or otherwise;
or
(iii) failure to observe or perform in any material respect certain
other covenants contained in the Junior Subordinated Indenture
for 90 days after written notice to the Company from the
Debenture Trustee or the holders of at least 25% in aggregate
outstanding principal amount of the outstanding Junior
Subordinated Debentures; or
(iv) the Company consents to the appointment of a receiver or other
similar official in any liquidation, insolvency or similar
proceeding with respect to the Company or all or substantially
all its property.
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For purposes of the Trust Agreement and this Prospectus, each such Event
of Default under the Junior Subordinated Debenture is referred to as a
"Debenture Event of Default." As described in "Description of Preferred
Securities -- Events of Default; Notice," the occurrence of a Debenture Event of
Default will also constitute an Event of Default in respect of the Trust
Securities.
The holders of at least a majority in aggregate principal amount of
outstanding Junior Subordinated Debentures have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Debenture Trustee. The Debenture Trustee or the holders of not less than 25% in
aggregate principal amount of outstanding Junior Subordinated Debentures may
declare the principal due and payable immediately upon a Debenture Event of
Default, and, should the Debenture Trustee or such holders of Junior
Subordinated Debentures fail to make such declaration, the holders of at least
25% in aggregate Liquidation Amount of the outstanding Preferred Securities
shall have such right. The holders of a majority in aggregate principal amount
of outstanding Junior Subordinated Debentures may annul such declaration and
waive the default if all defaults (other than the non-payment of the principal
of Junior Subordinated Debentures which has become due solely by such
acceleration) have been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Debenture Trustee. Should the holders of Junior
Subordinated Debentures fail to annul such declaration and waive such default,
the holders of a majority in aggregate Liquidation Amount of the outstanding
Preferred Securities shall have such right.
The holders of at least a majority in aggregate principal amount of the
outstanding Junior Subordinated Debentures affected thereby may, on behalf of
the holders of all the Junior Subordinated Debentures, waive any past default,
except a default in the payment of principal (or premium, if any) or interest
(unless such default has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Debenture Trustee) or a default in respect of a covenant
or provision which under the Junior Subordinated Indenture cannot be modified or
amended without the consent of the holder of each outstanding Junior
Subordinated Debenture affected thereby. See "-- Modification of Junior
Subordinated Indenture." The Company is required to file annually with the
Debenture Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants applicable to it under the
Junior Subordinated Indenture.
If a Debenture Event of Default occurs and is continuing, the Property
Trustee will have the right to declare the principal of and the interest on the
Junior Subordinated Debentures, and any other amounts payable under the Junior
Subordinated Indenture, to be forthwith due and payable and to enforce its other
rights as a creditor with respect to the Junior Subordinated Debentures.
Enforcement of Certain Rights by Holders of Preferred Securities
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay any amounts payable
in respect of the Junior Subordinated Debentures on the date such amounts are
otherwise payable, a registered holder of Preferred Securities may institute a
Direct Action against the Company for enforcement of payment to such holder of
an amount equal to the amount payable in respect of Junior Subordinated
Debentures having a principal amount equal to the aggregate Liquidation Amount
of the Preferred Securities held by such holder. The Company may not amend the
Junior Subordinated Indenture to remove the foregoing right to bring a Direct
Action without the prior written consent of the holders of all the Preferred
Securities. The Company will have the right under the Junior Subordinated
Indenture to set-off any payment made to such holder of Preferred Securities by
the Company in connection with a Direct Action.
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The holders of the Preferred Securities are not able to exercise directly
any remedies available to the holders of the Junior Subordinated Debentures
except under the circumstances described in the preceding paragraph. See
"Description of Preferred Securities -- Events of Default; Notice."
Consolidation, Merger, Sale of Assets and Other Transactions
The Junior Subordinated Indenture provides that the Company may not
consolidate with or merge into any other Person or convey, transfer or lease its
properties and assets substantially as an entirety to any Person, and no Person
may consolidate with or merge into the Company or convey, transfer or lease its
properties and assets substantially as an entirety to the Company, unless (i) if
the Company consolidates with or merges into another Person or conveys or
transfers its properties and assets substantially as an entirety to any Person,
the successor Person is organized under the laws of the United States or any
state or the District of Columbia, and such successor Person expressly assumes
the Company's obligations in respect of the Junior Subordinated Debentures; (ii)
immediately after giving effect thereto, no Debenture Event of Default, and no
event which, after notice or lapse of time or both, would constitute a Debenture
Event of Default, has occurred and is continuing; and (iii) certain other
conditions as prescribed in the Junior Subordinated Indenture are satisfied.
The provisions of the Junior Subordinated Indenture do not afford holders
of the Junior Subordinated Debentures protection in the event of a highly
leveraged or other transaction involving the Company that may adversely affect
holders of the Junior Subordinated Debentures.
Satisfaction and Discharge
The Junior Subordinated Indenture provides that when, among other things,
all Junior Subordinated Debentures not previously delivered to the Debenture
Trustee for cancellation (i) have become due and payable, (ii) will become due
and payable at the Stated Maturity within one year, and the Company deposits or
causes to be deposited with the Debenture Trustee funds, in trust, for the
purpose and in an amount sufficient to pay and discharge the entire indebtedness
on the Junior Subordinated Debentures not previously delivered to the Debenture
Trustee for cancellation, for the principal (and premium, if any) and interest
to the date of the deposit or to the Stated Maturity, as the case may be, then
the Junior Subordinated Indenture will cease to be of further effect (except as
to the Company's obligations to pay all other sums due pursuant to the Junior
Subordinated Indenture and to provide the officers' certificates and opinions of
counsel described therein), and the Company will be deemed to have satisfied and
discharged the Junior Subordinated Indenture.
Subordination
The Junior Subordinated Debentures will be subordinate and junior in right
of payment, to the extent set forth in the Junior Subordinated Indenture, to all
Senior Indebtedness (as defined below) of the Company. If the Company defaults
in the payment of any principal, premium, if any, or interest, if any, or any
other amount payable on any Senior Indebtedness when the same becomes due and
payable, whether at maturity or at a date fixed for redemption or by declaration
of acceleration or otherwise, then, unless and until such default has been cured
or waived or has ceased to exist or all Senior Indebtedness has been paid, no
direct or indirect payment (in cash, property, securities, by setoff or
otherwise) may be made or agreed to be made on the Junior Subordinated
Debentures, or in respect of any redemption, repayment, retirement, purchase or
other acquisition of any of the Junior Subordinated Debentures.
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As used herein, "Senior Indebtedness" means, whether recourse is to all or
a portion of the assets of the Company and whether or not contingent, (i) every
obligation of the Company for money borrowed; (ii) every obligation of the
Company evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of the Company with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of the Company; (iv) every obligation of the Company issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of the Company; (vi) every
obligation of the Company for claims (as defined in Section 101(4) of the United
States Bankruptcy Code of 1978, as amended) in respect of derivative products
such as interest and foreign exchange rate contracts, commodity contracts and
similar arrangements; and (vii) every obligation of the type referred to in
clauses (i) through (vi) of another person and all dividends of another person
the payment of which, in either case, the Company has guaranteed or is
responsible or liable, directly or indirectly, as obligor or otherwise; without
limiting the generality of the foregoing, Senior Indebtedness shall include the
Debentures. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Subordinated Debentures and Equity Contracts." Senior
Indebtedness shall not include (i) any obligations which, by their terms, are
expressly stated to rank pari passu in right of payment with, or to not be
superior in right of payment to, the Junior Subordinated Debentures, (ii) any
Senior Indebtedness of the Company which when incurred and without respect to
any election under Section 1111(b) of the United States Bankruptcy Code of 1978,
as amended, was without recourse to the Company, (iii) any indebtedness of the
Company to any of its subsidiaries, (iv) indebtedness to any executive officer
or director of the Company, or (v) any indebtedness in respect of debt
securities issued to any trust, or a trustee of such trust, partnership or other
entity affiliated with the Company that is a financing entity of the Company in
connection with the issuance of such financing entity of securities that are
similar to the Preferred Securities.
In the event of (i) certain events of bankruptcy, dissolution or
liquidation of the Company or the holder of the Common Securities, (ii) any
proceeding for the liquidation, dissolution or other winding up of the Company,
voluntary or involuntary, whether or not involving insolvency or bankruptcy
proceedings, (iii) any assignment by the Company for the benefit of creditors or
(iv) any other marshalling of the assets of the Company, all Senior Indebtedness
(including any interest thereon accruing after the commencement of any such
proceedings) shall first be paid in full before any payment or distribution,
whether in cash, securities or other property, shall be made on account of the
Junior Subordinated Debentures. In such event, any payment or distribution on
account of the Junior Subordinated Debentures, whether in cash, securities or
other property, that would otherwise (but for the subordination provisions) be
payable or deliverable in respect of the Junior Subordinated Debentures will be
paid or delivered directly to the holders of Senior Indebtedness in accordance
with the priorities then existing among such holders until all Senior
Indebtedness (including any interest thereon accruing after the commencement of
any such proceedings) has been paid in full.
In the event of any such proceeding, after payment in full of all sums
owing with respect to Senior Indebtedness, the holders of Junior Subordinated
Debentures, together with the holders of any obligations of the Company ranking
on a parity with the Junior Subordinated Debentures, will be entitled to be paid
from the remaining assets of the Company the amounts at the time due and owing
on the Junior Subordinated Debentures and such other obligations before any
payment or other distribution, whether in cash, property or otherwise, will be
made on account of any capital stock or obligations of the Company ranking
junior to the Junior Subordinated Debentures and such other obligations. If any
payment or distribution on account of the Junior Subordinated Debentures of any
character or any security, whether in cash, securities or other property is
received by any holder of any Junior
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Subordinated Debentures in contravention of any of the terms hereof and before
all the Senior Indebtedness has been paid in full, such payment or distribution
or security will be received in trust for the benefit of, and must be paid over
or delivered and transferred to, the holders of the Senior Indebtedness at the
time outstanding in accordance with the priorities then existing among such
holders for application to the payment of all Senior Indebtedness remaining
unpaid to the extent necessary to pay all such Senior Indebtedness in full. By
reason of such subordination, in the event of the insolvency of the Company,
holders of Senior Indebtedness may receive more, ratably, and holders of the
Junior Subordinated Debentures may receive less, ratably, than the other
creditors of the Company. Such subordination will not prevent the occurrence of
any Event of Default in respect of the Junior Subordinated Debentures.
The Junior Subordinated Indenture places no limitation on the amount of
additional Senior Indebtedness that may be incurred by the Company. The Company
expects from time to time to incur additional indebtedness constituting Senior
Indebtedness.
Information Concerning the Debenture Trustee
The Debenture Trustee, other than during the occurrence and continuance of
a default by the Company in performance of its obligations under the Junior
Subordinated Debenture, is under no obligation to exercise any of the powers
vested in it by the Junior Subordinated Indenture at the request of any holder
of Junior Subordinated Debentures, unless offered reasonable indemnity by such
holder against the costs, expenses and liabilities that might be incurred
thereby. The Debenture Trustee is not required to expend or risk its own funds
or otherwise incur personal financial liability in the performance of its duties
if the Debenture Trustee reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.
Bankers Trust Company, the Debenture Trustee, may serve from time to time
as trustee under other indentures or trust agreements with the Company or its
subsidiaries relating to other issues of their securities. In addition, the
Company and certain of its affiliates may have other banking relationships with
Bankers Trust Company and its affiliates.
Governing Law
The Junior Subordinated Indenture and the Junior Subordinated Debentures
will be governed by and construed in accordance with the laws of the State of
New York.
DESCRIPTION OF GUARANTEE
The Guarantee will be executed and delivered by the Company concurrently
with the issuance of Preferred Securities by the Issuer Trust for the benefit of
the holders from time to time of the Preferred Securities. Bankers Trust Company
will act as Guarantee Trustee under the Guarantee. This summary of certain
provisions of the Guarantee does not purport to be complete and is subject to,
and qualified in its entirety by reference to, all the provisions of the
Guarantee, including the definitions therein of certain terms. A copy of the
form of Guarantee is available upon request from the Guarantee Trustee. The
Guarantee Trustee will hold the Guarantee for the benefit of the holders of the
Preferred Securities.
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General
The Company will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth in the Guarantee and described herein, the Guarantee
Payments (as defined below) to the holders of the Preferred Securities, as and
when due, regardless of any defense, right of set-off or counterclaim that the
Issuer Trust may have or assert other than the defense of payment. The following
payments with respect to the Preferred Securities, to the extent not paid by or
on behalf of the Issuer Trust (the "Guarantee Payments"), will be subject to the
Guarantee: (i) any accumulated and unpaid Distributions required to be paid on
such Preferred Securities, to the extent that the Issuer Trust has funds on hand
available therefor at such time, (ii) the Redemption Price with respect to any
Preferred Securities called for redemption, to the extent that the Issuer Trust
has funds on hand available therefor at such time, and (iii) upon a voluntary or
involuntary dissolution, of the Issuer Trust (unless the Junior Subordinated
Debentures are distributed to holders of the Preferred Securities), the lesser
of (a) the aggregate of the Liquidation Amount and all accumulated and unpaid
Distributions to the date of payment, to the extent that the Issuer Trust has
funds on hand available therefor at such time, and (b) the amount of assets of
the Issuer Trust remaining available for distribution to holders of the
Preferred Securities on liquidation of the Issuer Trust. The Company's
obligation to make a Guarantee Payment may be satisfied by direct payment of the
required amounts by the Company to the holders of the Preferred Securities or by
causing the Issuer Trust to pay such amounts to such holders.
The Guarantee will be an irrevocable guarantee on a subordinated basis of
the Issuer Trust's obligations under the Preferred Securities, but will apply
only to the extent that the Issuer Trust has funds sufficient to make such
payments, and is not a guarantee of collection.
If the Company does not make payments on the Junior Subordinated
Debentures held by the Issuer Trust, the Issuer Trust will not be able to pay
any amounts payable in respect of the Preferred Securities and will not have
funds legally available therefor. The Guarantee will rank subordinate and junior
in right of payment to all Senior Indebtedness of the Company. See "-- Status of
the Guarantee." The Guarantee does not limit the incurrence or issuance of other
secured or unsecured debt of the Company, including Senior Indebtedness, whether
under the Junior Subordinated Indenture, any other indenture that the Company
may enter into in the future or otherwise.
The Company has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures and the Junior Subordinated Indenture, taken together,
fully, irrevocably and unconditionally guaranteed all the Issuer Trust's
obligations under the Preferred Securities on a subordinated basis. No single
document standing alone or operating in conjunction with fewer than all the
other documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Issuer Trust's obligations in respect of the
Preferred Securities. See "Relationship Among the Preferred Securities, the
Junior Subordinated Debentures and the Guarantee."
Status of the Guarantee
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Indebtedness
of the Company in the same manner as the Junior Subordinated Debentures.
The Guarantee will constitute a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
the Guarantor to enforce its rights under the
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Guarantee without first instituting a legal proceeding against any other person
or entity). The Guarantee will be held by the Guarantee Trustee for the benefit
of the holders of the Preferred Securities. The Guarantee will not be discharged
except by payment of the Guarantee Payments in full to the extent not paid by
the Issuer Trust or distribution to the holders of the Preferred Securities of
the Junior Subordinated Debentures.
Amendments and Assignment
Except with respect to any changes which do not materially adversely
affect the rights of holders of the Preferred Securities (in which case no vote
will be required), the Guarantee may not be amended without the prior approval
of the holders of not less than a majority of the aggregate Liquidation Amount
of the outstanding Preferred Securities. The manner of obtaining any such
approval will be as set forth under "Description of Preferred Securities --
Voting Rights; Amendment of Trust Agreement." All guarantees and agreements
contained in the Guarantee shall bind the successors, assigns, receivers,
trustees and representatives of the Company and shall inure to the benefit of
the holders of the Preferred Securities then outstanding.
Events of Default
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder, or to
perform any non-payment obligation if such non-payment default remains
unremedied for 30 days. The holders of not less than a majority in aggregate
Liquidation Amount of the outstanding Preferred Securities have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Guarantee Trustee in respect of the Guarantee or to direct the
exercise of any trust or power conferred upon the Guarantee Trustee under the
Guarantee.
Any registered holder of Preferred Securities may institute a legal
proceeding directly against the Company to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Issuer Trust,
the Guarantee Trustee or any other person or entity.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with all
the conditions and covenants applicable to it under the Guarantee.
Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the occurrence and continuance of
a default by the Company in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after the
occurrence of an event of default with respect to the Guarantee, must exercise
the same degree of care and skill as a prudent person would exercise or use in
the conduct of his or her own affairs. Subject to this provision, the Guarantee
Trustee is under no obligation to exercise any of the powers vested in it by the
Guarantee at the request of any holder of the Preferred Securities unless it is
offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby.
For information concerning the relationship between Bankers Trust Company,
as Guarantee Trustee, and the Company, see "Description of Junior Subordinated
Debentures -- Information Concerning the Debenture Trustee."
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Termination of the Guarantee
The Guarantee will terminate and be of no further force and effect upon
full payment of the Redemption Price of the Preferred Securities, upon full
payment of the amounts payable with respect to the Preferred Securities upon
liquidation of the Issuer Trust or upon distribution of Junior Subordinated
Debentures to the holders of the Preferred Securities. The Guarantee will
continue to be effective or will be reinstated, as the case may be, if at any
time any holder of the Preferred Securities must restore payment of any sums
paid under the Preferred Securities or the Guarantee.
Governing Law
The Guarantee will be governed by and construed in accordance with the
laws of the State of New York.
RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR
SUBORDINATED DEBENTURES AND THE GUARANTEE
Full and Unconditional Guarantee
Payments of Distributions and other amounts due on the Preferred
Securities (to the extent the Issuer Trust has funds available for such payment)
are irrevocably guaranteed, on a subordinated basis, by the Company as and to
the extent set forth under "Description of Guarantee." Taken together, the
Company's obligations under the Junior Subordinated Debentures, the Junior
Subordinated Indenture, the Trust Agreement and the Guarantee provide, in the
aggregate, a full, irrevocable and unconditional guarantee of payments of
Distributions and other amounts due on the Preferred Securities. No single
document standing alone or operating in conjunction with fewer than all the
other documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Issuer Trust's obligations in respect of the
Preferred Securities. If and to the extent that the Company does not make
payments on the Junior Subordinated Debentures, the Issuer Trust will not have
sufficient funds to pay Distributions or other amounts due on the Preferred
Securities. The Guarantee does not cover payment of amounts payable with respect
to the Preferred Securities when the Issuer Trust does not have sufficient funds
to pay such amounts. In such event, the remedy of a holder of the Preferred
Securities is to institute a legal proceeding directly against the Company for
enforcement of payment of the Company's obligations under Junior Subordinated
Debentures having a principal amount equal to the Liquidation Amount of the
Preferred Securities held by such holder.
The obligations of the Company under the Junior Subordinated Debentures
and the Guarantee are subordinate and junior in right of payment to all Senior
Indebtedness.
Sufficiency of Payments
As long as payments are made when due on the Junior Subordinated
Debentures, such payments will be sufficient to cover Distributions and other
payments distributable on the Preferred Securities, primarily because (i) the
aggregate principal amount of the Junior Subordinated Debentures will be equal
to the sum of the aggregate stated Liquidation Amount of the Preferred
Securities and Common Securities; (ii) the interest rate and interest and other
payment dates on the Junior Subordinated Debentures will match the Distribution
rate, Distribution Dates and other payment dates for the Preferred
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Securities; (iii) the Company will pay for any and all costs, expenses and
liabilities of the Issuer Trust except the Issuer Trust's obligations to holders
of the Trust Securities; and (iv) the Trust Agreement further provides that the
Issuer Trust will not engage in any activity that is not consistent with the
limited purposes of the Issuer Trust.
Notwithstanding anything to the contrary in the Junior Subordinated
Indenture, the Company has the right to set-off any payment it is otherwise
required to make thereunder against and to the extent the Company has
theretofore made, or is concurrently on the date of such payment making, a
payment under the Guarantee.
Enforcement Rights of Holders of Preferred Securities
A holder of any Preferred Security may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee, the Issuer
Trust or any other person or entity. See "Description of Guarantee."
A default or event of default under any Senior Indebtedness of the Company
would not constitute a default or Event of Default in respect of the Preferred
Securities. However, in the event of payment defaults under, or acceleration of,
Senior Indebtedness of the Company, the subordination provisions of the Junior
Subordinated Indenture provide that no payments may be made in respect of the
Junior Subordinated Debentures until such Senior Indebtedness has been paid in
full or any payment default thereunder has been cured or waived. See
"Description of Junior Subordinated Debentures -- Subordination."
Limited Purpose of Issuer Trust
The Preferred Securities represent preferred undivided beneficial
interests in the assets of the Issuer Trust, and the Issuer Trust exists for the
sole purpose of issuing its Preferred Securities and Common Securities and
investing the proceeds thereof in Junior Subordinated Debentures. A principal
difference between the rights of a holder of a Preferred Security and a holder
of a Junior Subordinated Debenture is that a holder of a Junior Subordinated
Debenture is entitled to receive from the Company payments on Junior
Subordinated Debentures held, while a holder of Preferred Securities is entitled
to receive Distributions or other amounts distributable with respect to the
Preferred Securities from the Issuer Trust (or from the Company under the
Guarantee) only if and to the extent the Issuer Trust has funds available for
the payment of such Distributions.
Rights Upon Dissolution
Upon any voluntary or involuntary dissolution of the Issuer Trust, other
than any such dissolution involving the distribution of the Junior Subordinated
Debentures, after satisfaction of liabilities to creditors of the Issuer Trust
as required by applicable law, the holders of the Preferred Securities will be
entitled to receive, out of assets held by the Issuer Trust, the Liquidation
Distribution in cash. See "Description of Preferred Securities -- Liquidation
Distribution Upon Dissolution." Upon any voluntary or involuntary liquidation or
bankruptcy of the Company, the Issuer Trust, as registered holder of the Junior
Subordinated Debentures, would be a subordinated creditor of the Company,
subordinated and junior in right of payment to all Senior Indebtedness as set
forth in the Junior Subordinated Indenture, but entitled to receive payment in
full of all amounts payable with respect to the Junior Subordinated Debentures
before any stockholders of the Company receive payments or distributions. Since
the Company is the guarantor under the Guarantee and has agreed under the Junior
Subordinated Indenture
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to pay for all costs, expenses and liabilities of the Issuer Trust (other than
the Issuer Trust's obligations to the holders of the Trust Securities), the
positions of a holder of the Preferred Securities and a holder of such Junior
Subordinated Debentures relative to other creditors and to stockholders of the
Company in the event of liquidation or bankruptcy of the Company are expected to
be substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
In the opinion of Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C.,
in its capacity as special tax counsel to the Company ("Tax Counsel"), the
following discussion summarizes the material United States federal income tax
consequences of the purchase, ownership and disposition of the Preferred
Securities.
This summary is based on the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations thereunder, and administrative and judicial
interpretations thereof, each as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. The authorities on which this summary
is based are subject to various interpretations, and the opinions of Tax Counsel
are not binding on the Internal Revenue Service (the "IRS") or the courts,
either of which could take a contrary position. Moreover, no rulings have been
or will be sought from the IRS with respect to the transactions described
herein. Accordingly, there can be no assurance that the IRS will not challenge
the opinions expressed herein or that a court would not sustain such a
challenge.
Except as otherwise stated, this summary deals only with the Preferred
Securities held as a capital asset by a holder who or which (i) purchased the
Preferred Securities upon original issuance (an "Initial Holder") at their
original offering price and (ii) is a US Holder (as defined below). This summary
does not address all the tax consequences that may be relevant to a US Holder,
nor does it address the tax consequences, except as stated below, to holders
that are not US Holders ("Non-US Holders") or to holders that may be subject to
special tax treatment (such as banks, thrift institutions, real estate
investment trusts, regulated investment companies, insurance companies, brokers
and dealers in securities or currencies, other financial institutions,
tax-exempt organizations, persons holding the Preferred Securities as a position
in a "straddle," or as part of a "synthetic security," "hedging," as part of a
"conversion" or other integrated investment, persons having a functional
currency other than the U.S. Dollar and certain United States expatriates).
Further, this summary does not address (a) the income tax consequences to
shareholders in, or partners or beneficiaries of, a holder of the Preferred
Securities, (b) the United States federal alternative minimum tax consequences
of the purchase, ownership or disposition of the Preferred Securities, or (c)
any state, local or foreign tax consequences of the purchase, ownership and
disposition of Preferred Securities.
A "US Holder" is a holder of the Preferred Securities who or which is (i)
a citizen or individual resident (or is treated as a citizen or individual
resident) of the United States for income tax purposes, (ii) a corporation or
partnership created or organized (or treated as created or organized for income
tax purposes) in or under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which is includible in its
gross income for United States federal income tax purposes without regard to its
source, or (iv) a trust if (a) a court within the United States is able to
exercise primary supervision over the administration of the trust and (b) one or
more United States trustees have the authority to control all substantial
decisions of the trust.
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HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER
TAX LAWS.
US Holders
Characterization of the Issuer Trust. In connection with the issuance of
the Preferred Securities, Tax Counsel will render its opinion generally to
effect that, under then current law and based on the representations, facts and
assumptions set forth in this Prospectus, and assuming full compliance with the
terms of the Trust Agreement (and other relevant documents), and based on
certain assumptions and qualifications referenced in the opinion, the Issuer
Trust will be characterized for United States federal income tax purposes as a
grantor trust and will not be characterized as an association taxable as a
corporation. Accordingly, for United States federal income tax purposes, each
holder of the Preferred Securities generally will be considered the owner of an
undivided interest in the Junior Subordinated Debentures owned by the Issuer
Trust, and each US Holder will be required to include all income or gain
recognized for United States federal income tax purposes with respect to its
allocable share of the Junior Subordinated Debentures on its own income tax
return.
Characterization of the Junior Subordinated Debentures. The Company and
the Issuer Trust will agree to treat the Junior Subordinated Debentures as
indebtedness for all United States federal income tax purposes. In connection
with the issuance of the Junior Subordinated Debentures, Tax Counsel will render
its opinion generally to the effect that, under then current law and based on
the representations, facts and assumptions set forth in this Prospectus, and
assuming full compliance with the terms of the Junior Subordinated Indenture
(and other relevant documents) and based on certain assumptions and
qualifications referenced in the opinion, the Junior Subordinated Debentures
will be characterized for United States federal income tax purposes as debt of
the Company.
Interest Income and Original Issue Discount. Under the terms of the Junior
Subordinated Debentures, the Company has the ability to defer payments of
interest from time to time by extending the interest payment period for a period
not exceeding 10 consecutive semi-annual periods, but not beyond the maturity of
the Junior Subordinated Debentures. Treasury regulations under Section 1273 of
the Code provide that debt instruments like the Junior Subordinated Debentures
will not be considered issued with original issue discount ("OID") by reason of
the Company's ability to defer payments of interest if the likelihood of such
deferral is "remote."
The Company has concluded, and this discussion assumes, that, as of the
date of this Prospectus, the likelihood of deferring payments of interest under
the terms of the Junior Subordinated Debentures is "remote" within the meaning
of the applicable Treasury regulations, in part because exercising that option
would prevent the Company from declaring dividends on its stock and would
prevent the Company from making any payments with respect to debt securities
that rank pari passu with or junior to the Junior Subordinated Debentures.
Therefore, the Junior Subordinated Debentures should not be treated as issued
with OID by reason of the Company's deferral option. Rather, stated interest on
the Junior Subordinated Debentures will generally be taxable to a US Holder as
ordinary income when paid or accrued in accordance with that holder's method of
accounting for income tax purposes. It should be noted, however, that these
Treasury regulations have not yet been interpreted in any rulings or any other
published authorities of the IRS. Accordingly, it is possible that the IRS could
take a position contrary to the interpretation described herein.
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In the event the Company exercises its option to defer payments of
interest, the Junior Subordinated Debentures would be treated as redeemed and
reissued for OID purposes and the sum of the remaining interest payments (and
any de minimis OID) on the Junior Subordinated Debentures would thereafter be
treated as OID, which would accrue, and be includible in a US Holder's taxable
income, on an economic accrual basis (regardless of the US Holder's method of
accounting for income tax purposes) over the remaining term of the Junior
Subordinated Debentures (including any period of interest deferral), without
regard to the timing of payments under the Junior Subordinated Debentures.
(Subsequent distributions of interest on the Junior Subordinated Debentures
generally would not be taxable.) The amount of OID that would accrue in any
period would generally equal the amount of interest that accrued on the Junior
Subordinated Debentures in that period at the stated interest rate.
Consequently, during any period of interest deferral, US Holders will include
OID in gross income in advance of the receipt of cash, and a US Holder which
disposes of a Preferred Security prior to the record date for payment of
distributions on the Junior Subordinated Debentures following that period will
be subject to income tax on OID accrued through the date of disposition (and not
previously included in income), but will not receive cash from the Issuer Trust
with respect to the OID.
If the possibility of the Company's exercise of its option to defer
payments of interest is not remote, the Junior Subordinated Debentures would be
treated as initially issued with OID in an amount equal to the aggregate stated
interest (plus any de minimis OID) over the term of the Junior Subordinated
Debentures. That OID would generally be includible in a US Holder's taxable
income, over the term of the Junior Subordinated Debentures, on an economic
accrual basis.
Characterization of Income. Because the income underlying the Preferred
Securities will not be characterized as dividends for income tax purposes,
corporate holders of the Preferred Securities will not be entitled to a
dividends-received deduction for any income recognized with respect to the
Preferred Securities.
Market Discount and Bond Premium. Holders of the Preferred Securities
other than Initial Holders may be considered to have acquired their undivided
interests in the Junior Subordinated Debentures with market discount or
acquisition premium (as each phrase is defined for United States federal income
tax purposes).
Receipt of Junior Subordinated Debentures or Cash Upon Liquidation of the
Issuer Trust. Under certain circumstances described herein (See "Description of
the Preferred Securities--Liquidation Distribution Upon Dissolution"), the
Issuer Trust may distribute the Junior Subordinated Debentures to holders in
exchange for the Preferred Securities and in liquidation of the Issuer Trust.
Except as discussed below, such a distribution would not be a taxable event for
United States federal income tax purposes, and each US Holder would have an
aggregate adjusted basis in its Junior Subordinated Debentures for United States
federal income tax purposes equal to such holder's aggregate adjusted basis in
its Preferred Securities. For United States federal income tax purposes, a US
Holder's holding period in the Junior Subordinated Debentures received in such a
liquidation of the Issuer Trust would include the period during which the
Preferred Securities were held by the holder. If, however, the relevant event is
a Tax Event which results in the Issuer Trust being treated as an association
taxable as a corporation, the distribution would likely constitute a taxable
event to US Holders of the Preferred Securities for United States federal income
tax purposes.
Under certain circumstances described herein (see "Description of the
Preferred Securities"), the Junior Subordinated Debentures may be redeemed for
cash and the proceeds of such redemption distributed to holders in redemption of
their Preferred Securities. Such a redemption would be taxable for United States
federal income tax purposes, and a US Holder would recognize gain or loss as if
it had sold the Preferred Securities for cash. See "--Sales of Preferred
Securities" below.
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Sales of Preferred Securities. A US Holder that sells Preferred Securities
will recognize gain or loss equal to the difference between its adjusted basis
in the Preferred Securities and the amount realized on the sale of such
Preferred Securities. A US Holder's adjusted basis in the Preferred Securities
generally will be its initial purchase price, increased by OID previously
included (or currently includible) in such holder's gross income to the date of
disposition, and decreased by payments received on the Preferred Securities
(other than any interest received with respect to the period prior to the
effective date of the Company's first exercise of its option to defer payments
of interest). Any such gain or loss generally will be capital gain or loss, and
generally will be a long-term capital gain or loss if the Preferred Securities
have been held for more than one year prior to the date of disposition.
A holder who disposes of his Preferred Securities between record dates for
payments of distributions thereon will be required to include accrued but unpaid
interest (or OID) on the Junior Subordinated Debentures through the date of
disposition in its taxable income for United States federal income tax purposes
(notwithstanding that the holder may receive a separate payment from the
purchaser with respect to accrued interest), and to deduct that amount from the
sales proceeds received (including the separate payment, if any, with respect to
accrued interest) for the Preferred Securities (or as to OID only, to add such
amount to such holder's adjusted tax basis in its Preferred Securities). To the
extent the selling price is less than the holder's adjusted tax basis (which
will include accrued but unpaid OID, if any), a holder will recognize a capital
loss. Subject to certain limited exceptions, capital losses cannot be applied to
offset ordinary income for United States federal income tax purposes.
Proposed Tax Law Changes
On February 6, 1997, President Clinton released his budget proposals for
fiscal year 1998. One of the tax proposals therein (the "Tax Proposal") would
generally deny corporate issuers a deduction for interest related to certain
debt obligations that have a maximum term in excess of 15 years and are not
shown as indebtedness on the separate balance sheet of the issuer or, where the
instrument is issued to a related party (other than a corporation), where the
holder of some other related party issues a related instrument that is not shown
as indebtedness on the issuer's consolidated balance sheet. As currently
drafted, the Tax Proposal would be effective generally for instruments issued on
or after the date of first Congressional committee action. Although it is not
clear from the President's proposals as to what constitutes Congressional
"committee action" with respect to the Tax Proposal, it appears that, as
drafted, the Tax Proposal would not apply retroactively to the Junior
Subordinated Debentures. However, the Company and the Issuer Trust have been
advised by Tax Counsel that, if the Tax Proposal (or similar legislation) is
enacted into law with retroactive effect with respect to the Junior Subordinated
Debentures, the Company would not be entitled to a deduction with respect to the
interest payable on the Junior Subordinated Debentures. There can be no
assurance that the Tax Proposal, if enacted, will not apply retroactively to the
Junior Subordinated Debentures or that other legislation enacted after the date
hereof will not otherwise adversely affect the ability of the Company to deduct
the interest payable on the Junior Subordinated Debentures. Accordingly, there
can be no assurance that a Tax Event will not occur. See "Description of
Preferred Securities -- Redemption."
Non-US Holders
The following discussion applies to a Non-US Holder.
Payments to a holder of a Preferred Security which is a Non-US Holder will
generally not be subject to withholding of income tax, provided that (a) the
beneficial owner of the Preferred Security does not (directly or indirectly,
actually or constructively) own 10% or more of the total combined voting
91
<PAGE>
power of all classes of stock of the Company entitled to vote, (b) the
beneficial owner of the Preferred Security is not a controlled foreign
corporation that is related to the Company through stock ownership, and (c)
either (i) the beneficial owner of the Preferred Securities certifies to the
Issuer Trust or its agent, under penalties of perjury, that it is a Non-US
Holder and provides its name and address, or (ii) a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "Financial
Institution"), and holds the Preferred Security in such capacity, certifies to
the Issuer Trust or its agent, under penalties of perjury, that such a statement
has been received from the beneficial owner by it or by another Financial
Institution between it and the beneficial owner in the chain of ownership, and
furnishes the Issuer Trust or its agent with a copy thereof.
As discussed above (see "--Proposed Tax Law Changes"), changes in
legislation affecting the income tax consequences of the Junior Subordinated
Debentures are possible, and could adversely affect the ability of the Company
to deduct the interest payable on the Junior Subordinated Debentures. Moreover,
any such legislation could adversely affect Non-US Holders by characterizing
income derived from the Junior Subordinated Debentures as dividends, generally
subject to a 30% income tax (on a withholding basis) when paid to a Non-US
Holder, rather than as interest which, as discussed above, is generally exempt
from income tax in the hands of a Non-US Holder.
A Non-US Holder of a Preferred Security will generally not be subject to
withholding of income tax on any gain realized upon the sale or other
disposition of a Preferred Security.
A Non-US Holder which holds the Preferred Securities in connection with
the active conduct of a United States trade or business will be subject to
income tax on all income and gains recognized with respect to its proportionate
share of the Junior Subordinated Debentures.
Information Reporting
In general, information reporting requirements will apply to payments made
on, and proceeds from the sale of, the Preferred Securities held by a
noncorporate US Holder within the United States. In addition, payments made on,
and payments of the proceeds from the sale of, the Preferred Securities to or
through the United States office of a broker are subject to information
reporting unless the holder thereof certifies as to its Non-United States status
or otherwise establishes an exemption from information reporting and backup
withholding. See "--Backup Withholding." Taxable income on the Preferred
Securities for a calendar year should be reported to US Holders on the
appropriate forms by the following January 31st.
Backup Withholding
Payments made on, and proceeds from the sale of, the Preferred Securities
may be subject to a "backup" withholding tax of 31% unless the holder complies
with certain identification or exemption requirements. Any amounts so withheld
will be allowed as a credit against the holder's income tax liability, or
refunded, provided the required information is provided to the IRS.
The preceding discussion is only a summary and does not address the
consequences to a particular holder of the purchase, ownership and disposition
of the Preferred Securities. Potential holders of the Preferred Securities are
urged to contact their own tax advisors to determine their particular tax
consequences.
92
<PAGE>
CERTAIN ERISA CONSIDERATIONS
The Company and certain affiliates of the Company may each be considered a
"party in interest" within the meaning of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or a "disqualified person" within the
meaning of Section 4975 of the Code with respect to many employee benefit plans
("Plans") that are subject to ERISA. The purchase of the Preferred Securities by
a Plan that is subject to the fiduciary responsibility provisions of ERISA or
the prohibited transaction provisions of Section 4975(e)(1) of the Code and with
respect to which the Company, or any affiliate of the Company is a service
provider (or otherwise is a party in interest or a disqualified person) may
constitute or result in a prohibited transaction under ERISA or Section 4975 of
the Code, unless the Preferred Securities are acquired pursuant to and in
accordance with an applicable exemption. Any pension or other employee benefit
plan proposing to acquire any Preferred Securities should consult with its
counsel.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") dated May 16, 1997, among the Company, the Issuer
Trust and the underwriters named therein (the "Underwriters"), the Issuer Trust
has agreed to sell to the Underwriters, and the Underwriters have severally
agreed to purchase from the Issuer Trust, the following respective aggregate
Liquidation Amount of Preferred Securities at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:
Liquidation Amount of
---------------------
Underwriter: Preferred Securities:
- ----------- --------------------
Advest, Inc............................ $13,000,000
First of Michigan Corporation.......... 1,000,000
Friedman, Billings, Ramsey & Co., Inc.. 1,000,000
Janney Montgomery Scott Inc............ 1,000,000
Principal Financial Securities, Inc.... 1,000,000
Rauscher Pierce Refsnes, Inc........... 1,000,000
Roney & Co............................. 1,000,000
Stifel, Nicolaus & Company,
Incorporated......................... 1,000,000
-----------
Total.................................. $20,000,000
===========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the Preferred Securities offered hereby if any
of such Preferred Securities are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the Preferred Securities to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $0.50 per Preferred Security. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $0.10 per Preferred Security to certain other dealers. After the public
offering, the offering price and other selling terms may be changed by the
Underwriters.
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<PAGE>
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to an
additional $3,000,000 aggregate Liquidation Amount of the Preferred Securities
at the public offering price plus accrued Distributions, if any, from May 21,
1997. To the extent that the Underwriter exercises such option, the Company will
be obligated, pursuant to the option, to sell such Preferred Securities to the
Underwriters. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the Preferred Securities
offered hereby. If purchased, the Underwriters will offer such additional
Preferred Securities on the same terms as those on which the $20,000,000
aggregate Liquidation Amount of the Preferred Securities are being offered.
In connection with the offering of the Preferred Securities, the
Underwriters and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the Securities
and Exchange Commission's Regulation M that are intended to stabilize, maintain
or otherwise affect the market price of the Preferred Securities. Such
transactions may include over-allotment transactions in which the Underwriters
create a short position for their own account by selling more Preferred
Securities than they are committed to purchase from the Issuer Trust. In such a
case, to cover all or part of the short position, the Underwriters may exercise
the over-allotment option described above or may purchase Preferred Securities
in the open market following completion of the initial offering of the Preferred
Securities. The Underwriters also may engage in stabilizing transactions in
which they bid for, and purchase, shares of the Preferred Securities at a level
above that which might otherwise prevail in the open market for the purpose of
preventing or retarding a decline in the market price of the Preferred
Securities. The Underwriters also may reclaim any selling concessions allowed to
an Underwriter or dealer if the Underwriters repurchase shares distributed by
that Underwriter or dealer. Any of the foregoing transactions may result in the
maintenance of a price for the Preferred Securities at a level above that which
might otherwise prevail in the open market. Neither the Company nor any of the
Underwriters makes any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Preferred Securities. The Underwriters are not required to engage
in any of the foregoing transactions and, if commenced, such transactions may be
discontinued at any time without notice.
In view of the fact that the proceeds from the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures issued by
the Company, the Underwriting Agreement provides that the Company will pay as
compensation for the Underwriter's arranging the investment therein of such
proceeds an amount of $1.00 per Preferred Security (or $800,000 ($920,000 if the
over-allotment option is exercised in full) in the aggregate) and an advisory
fee equal to $25,000 for the account of the Underwriters.
Because the National Association of Securities Dealers, Inc. ("NASD") is
expected to view the Preferred Securities as interests in a direct participation
program, the offering of the Preferred Securities is being made in compliance
with the applicable provisions of Rule 2810 of the NASD's Conduct Rules.
The Preferred Securities are a new issue of securities with no established
trading market. The Company and the Issuer Trust have been advised by the
Underwriters that they intend to make a market in the Preferred Securities.
However, the Underwriters are not obligated to do so and such market making may
be interrupted or discontinued at any time without notice at the sole discretion
of each of the Underwriters. Application has been made by the Company to list
the Preferred Securities in the Nasdaq National Market, but one of the
requirements for listing and continuing listing is the presence of two market
makers for the Preferred Securities, and the presence of a second market maker
cannot be
94
<PAGE>
assured. Accordingly, no assurance can be given as to the development or
liquidity of any market for the Preferred Securities.
The Company and the Issuer Trust have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act.
The Underwriters may in the future perform various services to the
Company, including investment banking services, for which it has or may receive
customary fees for such services.
VALIDITY OF SECURITIES
The validity of the Guarantee and the Junior Subordinated Debentures and
certain tax matters will be passed upon for the Company by Malizia, Spidi,
Sloane & Fisch, P.C., Washington, D.C., counsel to the Company. Certain legal
matters will be passed upon and for the Underwriters by Arnold & Porter,
Washington, D.C., and New York, New York. Certain matters of Delaware law
relating to the validity of the Preferred Securities, the enforceability of the
Trust Agreement and the creation of the Issuer Trust will be passed upon by
Richards, Layton & Finger, special Delaware counsel to the Company and the
Issuer Trust. Malizia, Spidi, Sloane & Fisch, P.C. and Arnold & Porter will rely
as to certain matters of Delaware law on the opinion of Richards, Layton &
Finger.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996, and for the year ended December 31, 1996, included in this Prospectus have
been audited by Grant Thornton LLP, independent certified public accountants, as
stated in their report appearing in this Prospectus, or in the Registration
Statement of which this Prospectus forms a part, and have been included in
reliance upon such report of Grant Thornton, LLP given upon their authority as
experts in accounting and auditing.
The consolidated financial statements of the Company as of December 31,
1995 and for the years ended December 31, 1995 and 1994, included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto and have been
included herein in reliance upon the authority of said firm as experts in giving
said report.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, Suite
1300, New York, New York 10048 and Suite 1400, Citicorp Center, 14th Floor, 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can also
be obtained at prescribed rates by writing to the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Such material
also may be accessed electronically by means of the Commission's home page on
the Internet at http://www.sec.gov. This Prospectus does not contain all the
information set forth in the Registration Statement and exhibits thereto, which
the Company has filed with the Commission under the Securities Act and to which
reference is hereby made.
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<PAGE>
No separate financial statements of the Issuer Trust have been included or
incorporated by reference herein. The Company and the Issuer Trust do not
consider that such financial statements would be material to holders of the
Preferred Securities because the Issuer Trust is a newly formed special purpose
entity, has no operating history or independent operations and is not engaged in
and does not propose to engage in any activity other than holding as trust
assets the Junior Subordinated Debentures and issuing the Trust Securities. See
"GCB Capital Trust," "Description of Preferred Securities," "Description of
Junior Subordinated Debentures" and "Description of Guarantee." In addition, the
Company does not expect that the Issuer Trust will be filing reports under the
Exchange Act with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference in this Prospectus the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1996, and the Form 10-Q for the period ended March 31, 1997, previously filed by
the Company with the Commission pursuant to Section 13 of the Exchange Act.
Any statement contained herein, or in any document all or a portion of
which is incorporated or deemed to be incorporated herein by reference shall be
deemed to be modified or superseded for purposes of the Registration Statement
and this Prospectus to the extent that a statement contained herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of the
Registration Statement or this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, on the written or oral
request of any such person, a copy of any or all of the foregoing documents
incorporated herein by reference (other than certain exhibits to such
documents). Written requests should be directed to the Office of the Secretary,
Greater Community Bancorp, 55 Union Boulevard, Totowa, New Jersey 07512.
Telephone requests may be directed to (201) 942-1111.
96
<PAGE>
GREATER COMMUNITY BANCORP AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance as of March 31, 1997 (unaudited), and as of December 31, 1996
and 1995.................................................................................... F-2
Consolidated Statements of Income for the three months ended March 31, 1997 and
1996 (unaudited) and for each of the years in the three year period ended
December 31, 1996........................................................................... F-3
Consolidated Statements of Changes in Shareholders' Equity for the three months
ended March 31, 1997 (unaudited) and each of the years in the three year period ended
December 31, 1996........................................................................... F-4
Consolidated Statements of Cash Flows for the three months ended March 31, 1997
and 1996 (unaudited) and for each of the years in the three year period
ended December 31, 1996..................................................................... F-5
Notes to Consolidated Financial Statements.................................................. F-6
Reports of Independent Certified Public Accountants......................................... F-30
</TABLE>
F-1
<PAGE>
GREATER COMMUNITY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
--------- ----------------------
ASSETS 1997 1996 1995
--------- --------- ---------
(Unaudited)
<S> <C> <C> <C>
CASH AND DUE FROM BANKS - Non-interest-bearing ................................................ $ 14,554 $ 11,994 $ 11,471
FEDERAL FUNDS SOLD ............................................................................ 3,050 6,300 17,575
--------- --------- --------
Total cash and cash equivalents ........................................... 17,604 18,294 29,046
DUE FROM BANKS - Interest-bearing ............................................................. 4,459 4,481 1,148
INVESTMENT SECURITIES - Available-for-sale .................................................... 56,747 52,251 47,835
INVESTMENT SECURITIES - Held-to-maturity (aggregate fair values of $37,426 at
March 31, 1997, and $36,970 and $36,061 at December 31, 1996 and 1995, respectively)....... 38,144 37,428 36,151
--------- --------- --------
94,891 89,679 83,986
LOANS ......................................................................................... 143,992 137,410 131,742
Allowance for possible loan losses .......................................................... (2,650) (2,540) (2,332)
Unearned income ............................................................................. (306) (283) (303)
--------- --------- --------
Net loans ................................................................. 141,036 134,587 129,107
PREMISES AND EQUIPMENT, net ................................................................... 3,050 3,203 3,082
OTHER REAL ESTATE ............................................................................. 1,650 1,834 2,070
ACCRUED INTEREST RECEIVABLE ................................................................... 1,879 1,906 1,977
INTANGIBLE AND OTHER ASSETS ................................................................... 2,528 2,522 2,629
--------- --------- --------
TOTAL ASSETS .............................................................. $ 267,097 $ 256,506 $253,045
========= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Non-interest-bearing ....................................................................... $ 58,625 $ 59,588 $ 46,332
Interest-bearing ........................................................................... 56,922 55,882 59,141
Savings .................................................................................... 27,077 25,918 26,030
Time (includes deposits $100 and over of $25,410 at March 31, 1997, and $25,184 and
$26,096 at December 31, 1996 and 1995, respectively) .................................... 80,605 81,854 91,263
--------- --------- ---------
Total deposits ............................................................ 223,229 223,242 222,766
ACCRUED INTEREST PAYABLE ...................................................................... 1,720 1,466 1,626
OTHER LIABILITIES ............................................................................. 1,815 1,590 1,326
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE ................................................ 4,623 4,159 2,756
FEDERAL FUNDS PURCHASED ....................................................................... 9,000 -- --
REDEEMABLE SUBORDINATED DEBENTURES ............................................................ 4,891 4,988 4,976
--------- --------- ---------
Total liabilities ......................................................... 245,278 235,445 233,450
--------- --------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock, without par value: 1,000,000 shares authorized, non-outstanding ............ -- -- --
Common stock, par value $1 per share: 10,000,000 shares authorized, 1,886,198 at
March 31, 1997, 1,891,733 and 1,709,451 shares outstanding at December 31, 1996
and 1995, respectively..................................................................... 1,886 1,892 1,709
Additional paid-in capital .................................................................. 17,653 17,841 15,231
Retained earnings ........................................................................... 1,722 1,209 2,102
Net unrealized holding gains on investment securities available-for-sale..................... 558 307 553
Treasury stock (-0- at March 31, 1997, and 12,596 and -0- shares at December 31, 1996
and 1995, respectively, at cost) ......................................................... -- (188) --
--------- --------- ---------
Total shareholders' equity ....................................................... 21,819 21,061 19,595
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................................................... $ 267,097 $ 256,506 $ 253,045
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-2
<PAGE>
GREATER COMMUNITY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the For the Years
Three Months Ended Years Ended
March 31, December 31,
------------------ ----------------------------
1997 1996 1996 1995 1994
-------- -------- ------- ------- --------
(Unaudited)
INTEREST INCOME:
<S> <C> <C> <C> <C> <C>
Loans, including fees ........................ $ 3,200 $ 3,028 $12,621 $11,931 $ 8,408
Investment securities ........................ 1,435 1,354 5,569 4,790 2,693
Federal funds sold and deposits with banks.... 129 141 503 712 301
------- ------- ------- ------- -------
Total interest income......... 4,764 4,523 18,693 17,433 11,402
------- ------- ------- ------- -------
INTEREST EXPENSE:
Deposits .................................... 1,549 1,616 6,404 5,927 3,143
Short-term borrowings ....................... 148 153 312 185 53
Long-term borrowings ........................ 109 -- 438 438 438
------- ------- ------- ------- -------
Total interest expense........ 1,806 1,769 7,154 6,550 3,634
------- ------- ------- ------- -------
NET INTEREST INCOME .............................. 2,958 2,754 11,539 10,883 7,768
PROVISION FOR POSSIBLE LOAN LOSSES ............... 115 90 440 414 172
------- ------- ------- ------- -------
Net interest income after provision
for losses ............................. 2,843 2,664 11,099 10,469 7,596
------- ------- ------- ------- -------
OTHER INCOME
Service charges on deposit accounts.......... 337 271 1,174 867 515
Credit card fee income ...................... 7 -- 182 567 65
Other commission and fees ................... 13 10 48 190 136
Gain (loss) on sale of securities ........... 10 -- 51 209 (84)
All other income ............................ 82 465 474 344 223
------- ------- ------- ------- -------
Total other income ........... 449 746 1,929 2,177 855
OTHER EXPENSES:
Salaries and employee benefits .............. 1,120 1,100 4,144 3,700 2,745
Occupancy and equipment ..................... 487 530 1,958 1,418 919
Regulatory, professional and other fees...... 184 204 696 781 611
FDIC insurance assessment ................... 13 41 340 262 360
Computer services ........................... 34 27 249 390 252
Office expenses ............................. 144 117 510 494 371
Other real estate operating and loan expenses 40 42 304 314 55
Merchant credit card expenses ............... 2 94 184 616 54
All other operating expenses ................ 299 495 1,078 1,425 758
------- ------- ------- ------- -------
Total other expenses.......... 2,323 2,650 9,463 9,400 6,125
------- ------- ------- ------- -------
Income before income taxes
and minority interest....... 969 760 3,565 3,246 2,326
PROVISION FOR INCOME TAXES ....................... 370 278 1,312 1,174 840
------- ------- ------- ------- -------
Income before minority interest ............ 599 482 2,253 2,072 1,486
------- ------- ------- ------- -------
MINORITY INTEREST ................................ 66 -- 84 -- --
------- ------- ------- ------- -------
NET INCOME ....................................... $ 665 $ 482 $ 2,337 $ 2,072 $ 1,486
======= ======= ======= ======= =======
Weighted average shares outstanding............ 2,299 2,095 2,111 2,065 1,664
======= ======= ======= ======= =======
Net income per share .......................... $ 0.28 $ 0.23 $ 0.97 $ 1.04 $ 0.89
======= ======= ======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE>
GREATER COMMUNITY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 1997 (Unaudited) and For the Years Ended
December 31, 1996, 1995 and 1994 (In thousands, except per share amounts)
<TABLE>
<CAPTION>
Net Unrealized
Common Holding
------------------- Gain(Loss)
Additional on Securities Total
Paid-In Retained Available- Treasury Shareholders'
Shares Par Value Capital Earnings -for-Sale Stock Equity
------- --------- ---------- -------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994 .................... 1,359 $ 1,359 $ 11,354 $ 1,443 $ -- $ -- $ 14,156
Net income for the year ended ............. -- -- -- 1,486 -- -- 1,486
10% stock dividend ........................ 72 72 766 (841) -- -- (3)
Cash dividend ............................. -- -- -- (245) -- -- (245)
Exercise of stock options ................. 12 12 89 -- -- -- 101
Change in net unrealized holding loss on
securities available-for-sale ........... -- -- -- -- (534) -- (534)
--------- -------- -------- -------- ------ ----- --------
BALANCE, December 31, 1994 .................. 1,443 1,443 12,209 1,843 (534) -- 14,961
Net income for the year ended ............. -- -- -- 2,072 -- -- 2,072
Stock issued in connection with acquisition
of Family First Federal Savings Bank... 157 157 1,645 -- -- -- 1,802
10% stock dividend ........................ 100 100 1,293 (1,398) -- -- (5)
Exercise of stock options ................. 9 9 84 -- -- -- 93
Cash dividend ............................. -- -- -- (415) -- -- (415)
Change in net unrealized holding gains on
securities available-for-sale ........ -- -- -- -- 1,087 -- 1,087
--------- -------- -------- -------- ------ ----- --------
BALANCE, December 31, 1995 .................. 1,709 1,709 15,231 2,102 553 -- 19,595
Net income for the year ended ............. -- -- -- 2,337 -- -- 2,337
10% stock dividend ........................ 171 171 2,520 (2,697) -- -- (6)
Exercise of stock options ................. 12 12 90 -- -- -- 102
Cash dividend ............................. -- -- -- (533) -- -- (533)
Change in net unrealized holding loss on
securities available-for-sale ........ -- -- -- -- (246) -- (246)
Purchase of treasury stock ................ -- -- -- -- -- (188) (188)
--------- -------- -------- -------- ------ ----- --------
BALANCE, December 31, 1996 .................. $ 1,892 $ 1,892 $ 17,841 $ 1,209 $ 307 ($ 188) $ 21,061
Net income for the three months ended
March 31, 1997 (unaudited) .............. -- -- -- 665 -- -- 665
Exercise of stock options ................. 6 6 45 -- -- -- 51
Exercise of equity contracts .............. 10 10 89 -- -- -- 99
Cash dividends ............................ -- -- -- (152) -- -- (152)
Change in net unrealized holding gain
on securities available-for-sale ........ -- -- -- -- 251 -- 251
Purchase of treasury stock ................ -- -- -- -- -- (156) (156)
Retirement of treasury stock .............. (22) (22) (322) -- -- 344 --
--------- -------- -------- -------- ------ ----- --------
BALANCE, March 31, 1997 (unaudited).......... $ 1,886 $ 1,886 $ 17,653 $ 1,722 $ 558 $ -- $ 21,819
========= ======== ======== ======== ====== ===== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE>
GREATER COMMUNITY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Three Months Ended For the Years Ended
March 31, December 31,
-------------------------- ------------------------------
1997 1996 1996 1995 1994
------------ ---------- -------- --------- --------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net income......................................................... $ 665 $482 $ 2,337 $ 2,072 $ 1,486
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................................... 251 302 1,056 626 449
Accretion of discount on securities, net ........................ (37) (77) (241) (69) (19)
Accretion of discount on debentures ............................. 3 -- 12 13 13
Realization of discount on securities sold ...................... -- -- 3 21 22
Loss (gain) on sale of securities, net .......................... (10) -- (51) (209) 84
Provision for possible loan losses .............................. 115 90 440 375 172
Deferred income tax provision (benefit) ........................ (82) (57) (267) 135 (65)
(Increase) decrease in accrued interest receivable .............. 27 (135) 71 (481) (533)
(Increase) decrease in other assets ............................. 44 (41) 107 (1,998) (170)
Increase (decrease) in accrued interest and other liabilities.... 561 (83) 104 1,560 466
------ -------- -------- ------- ---------
Net cash provided by operating activities...... 1,537 481 3,571 2,045 1,905
------ -------- -------- ------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities -
Purchases ..................................................... (8,985) (1,903) (18,962) (18,962) (24,694)
Sales ......................................................... 1,963 2,278 5,472 16,619 13,061
Maturities .................................................... 4,154 -- 9,004 2,550 --
Held-to-maturity securities -
Purchases ..................................................... (2,058) (6,718) (23,089) (10,225) (13,367)
Maturities .................................................... -- 2,689 21,812 1,415 8,569
Net decrease in interest-bearing deposits with banks.............. 22 (737) (3,333) 1,220 5,710
Net (increase) decrease in loans ................................. (6,564) 3,378 (5,920) (4,668) (10,062)
Capital expenditures ............................................ (71) (110) (824) (1,994) (779)
Decrease in other real estate ................................... 184 -- 236 280 453
------ -------- -------- ------- ---------
Net cash used in investing activities........... (11,355) (1,123) (15,604) (13,473) (21,109)
------ -------- -------- ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts ................................ (13) (12,706) 476 28,668 14,437
Increase in securities sold under agreement to repurchase........ 464 899 1,403 57 1,950
Increase in federal funds purchased ............................. 9,000 -- -- -- --
Dividends paid .................................................. (152) (119) (533) (415) (245)
Proceeds from exercise of stock options ......................... 51 -- 102 93 101
Purchases of treasury stock ..................................... (155) -- (188) -- --
Conversion of redeemable subordinated debentures................. (97) -- -- -- --
Cash acquired from purchase business combination ................ -- -- -- 4,045 --
Other, net ...................................................... 30 33 21 (26) (3)
------ -------- -------- ------- ---------
Net cash provided by financing activities.... 9,128 (11,893) 1,281 32,422 16,240
------ -------- -------- ------- ---------
Net increase (decrease in cash and cash
equivalents................................. (690) (12,535) (10,752 20,994 (2,964)
CASH AND CASH EQUIVALENTS, beginning of period...................... 18,294 29,046 29,046 8,052 11,016
------ -------- -------- ------- ---------
CASH AND CASH EQUIVALENTS, end of period............................ 17,604 $ 16,511 $ 18,294 $29,046 $ 8,052
====== ======== ======== ======= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements
F-5
<PAGE>
GREATER COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Company, through its subsidiary banks, Great Falls Bank (GFB) and
Bergen Commercial Bank (BCB) (collectively the "Bank Subsidiaries"), offers a
broad range of lending, depository and related financial services to individual
consumers, business and governmental units primarily through eight full service
offices located in Bergen and Passaic counties, New Jersey. Great Falls
Investment Company, Inc. is a wholly-owned subsidiary of GFB, and BCB Investment
Company, Inc. is a wholly-owned subsidiary of BCB. The primary business of these
subsidiaries is to own and manage the investment portfolios of their respective
parent banks. In 1996, the Company changed its name to Greater Community Bancorp
from Great Falls Bancorp to reflect the expanded embraced range of businesses
under its umbrella.
In October 1996, the Company formed Greater Community Financial, L.L.C.
("Greater Community Financial"), a New Jersey limited liability company located
in Clifton, New Jersey. The Company is a registered broker-dealer. At December
31, 1996, Greater Community Financial had assets of $313,000 and member capital
of $311,000.
The Bank Subsidiaries compete with other banking and financial
institutions in their primary market communities, including financial
institutions with resources substantially greater than their own. Commercial
banks, savings banks, savings and loan associations, credit unions, and money
market funds actively compete for deposits and for types of loans. Such
institutions, as well as consumer finance and insurance companies, may be
considered competitors with respect to one or more of the services they render.
The Company and the Bank Subsidiaries are subject to regulations of
certain state and federal agencies and, accordingly, they are periodically
examined by those regulatory authorities. As a consequence of the extensive
regulation of commercial banking activities, the Bank Subsidiaries' businesses
are particularly susceptible to being affected by state and federal legislation
and regulations.
Basis of financial presentation
- -------------------------------
The accounting and reporting policies of the Company and its subsidiaries
conform with generally accepted accounting principles and predominant practices
within the banking industry. All significant intercompany accounts and
transactions have been eliminated. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. These estimates and assumptions also affect reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The consolidated financial statements as of March 31, 1997, and the three
months ended March 31, 1997 and 1996, are unaudited. In the opinion of
management, all adjustments (consisting only of
F-6
<PAGE>
normal recurring accruals) necessary for a fair presentation of the financial
position and results of operations have been included. The results of operations
for the three months ended March 31, 1997 and 1996, are not necessarily
indicative of the results that may be attained for an entire fiscal year.
Financial instruments
- ---------------------
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 107, "Disclosures about Fair Value of
Financial Instruments," which requires all entities to disclose the estimated
fair value of their assets and liabilities considered to be financial
instruments. Financial instruments requiring disclosure consist primarily of
investment securities, loans and deposits.
INVESTMENT SECURITIES
The Company adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," on January 1, 1994. Investment securities which the
Company has the ability and intent to hold to maturity are classified as
held-to-maturity and are stated at cost, adjusted for premium amortization and
discount accretion. Securities which are held for indefinite periods of time
which management intends to use as part of its asset/liability strategy, or that
may be sold in response to changes in interest rates, changes in prepayment
risk, increased capital requirements or other similar factors, are classified as
available-for-sale and are carried at fair market value. Net unrealized gains
and losses for such securities, net of income tax effect, are charged/credited
directly to shareholders' equity. The Company does not engage in securities
trading. Securities transactions are accounted for on a trade date basis. Gains
or losses on disposition of investment securities are based on the net proceeds
and the adjusted carrying amount of the securities sold using the specific
identification method.
LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans are stated at the amount of unpaid principal and are net of unearned
discount, unearned loan fees, and an allowance for loan losses. The allowance
for loan losses is established through a provision for possible loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely. The
allowance for possible loan losses is maintained at a level considered by
management to be adequate to provide for potential loan losses inherent in the
loan portfolio at the reporting date. The level of the allowance is based on
management's evaluation of potential losses in the loan portfolio after
consideration of prevailing and anticipated economic conditions, including
estimates and appraisals, among other items, known or anticipated at each
reporting date. Credit reviews of the loan portfolio, designed to identify
potential charges to the allowance, are made on a periodic basis during the year
by management.
Interest income on loans is credited to operations based upon the
principal amount outstanding. The net amounts of loan origination fees, direct
loan origination costs and loan commitment fees are deferred and recognized over
the lives of the related loans as adjustments of yield. When management believes
there is sufficient doubt as to the ultimate collectibility of interest on any
loan, the accrual of applicable interest is discontinued. A loan is generally
classified as non-accrual when principal and interest has consistently been in
default for a period of 90 days or more or because of a deterioration in the
financial condition of the borrower, and payment in full of principal or
interest is not expected. Loans past due 90 days or more and still accruing
interest are loans that are generally well-secured and expected to be restored
to a current status in the near future.
F-7
<PAGE>
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures," on January 1, 1995. This
standard requires that certain impaired loans be measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rates, except that as a practical expedient, a creditor may measure impairment
based on a loan's observable market price, or the fair value of the collateral
if the loan is collateral dependent. Regardless of the measurement method, a
creditor must measure impairment based on the fair value of the collateral when
the creditor determines that foreclosure is probable. The Company had previously
measured the allowance for credit losses using methods similar to those
prescribed in this standard. As a result, no additional allowance for loan
losses was required on January 1, 1995 when SFAS No. 114, as amended by SFAS No.
118 was adopted.
On January 1, 1996, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights," which requires that a mortgage banking enterprise
recognize as a separate asset rights to service mortgage loans for others,
however those servicing rights are acquired. In circumstances where mortgage
loans are originated, separate asset rights to service mortgage loans are only
recorded when the enterprise intends to sell such loans. The adoption of SFAS
No. 122 did not have a material impact on the Company's consolidated financial
position or results of operations.
The FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," as amended by SFAS No.
127, which provides accounting guidance on transfers of financial assets,
servicing of financial assets and extinguishment of liabilities. This statement
is effective for transfers of financial assets, servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996. Adoption
of this new statement is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed primarily on the straight-line method
over the estimated useful lives of the assets. Leasehold improvements are
amortized over the term of the lease or estimated useful life, whichever is
shorter.
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
which provides guidance on when to recognize and how to measure impairment
losses of long-lived assets and certain identifiable intangibles and how to
value long-lived assets to be disposed of. The adoption of SFAS No. 121 had no
material effect on the Company's consolidated financial position or results of
operations.
OTHER REAL ESTATE
Other real estate owned, representing property acquired through
foreclosure, is carried at the lower of the principal balance of the secured
loan or the fair value less estimated disposal costs, of the acquired property.
F-8
<PAGE>
INTANGIBLE ASSETS
Intangible assets represent the excess of the cost over the fair value of
net assets of acquired businesses. Intangible assets at December 31, 1996 and
1995, were approximately $566,000 and $676,000, respectively and are being
charged to operations on a straight line basis over a seven-year period which
coincides with the average life of the assets acquired. The amortization charged
to income was $111,000, $191,000 and $110,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
MORTGAGES HELD FOR SALE
Mortgages held for sale are recorded at cost which approximate market.
Gains or losses on such sales are recognized at the time of sale in an amount
equal to the present value of the difference between the effective interest rate
to the Bank Subsidiaries and the net yield to the investor, excluding normal
future loan servicing fees, over the estimated remaining lives of the loans
sold, adjusted for prepayments. Included in loans in the accompanying
consolidated financial statements are $0 and $228,000 of loans held for sale at
December 31, 1996 and 1995, respectively.
FEDERAL INCOME TAXES
The Company accounts for income taxes under the liability method. Under
the liability method, deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect when
these differences reverse. Deferred tax expense is the result of changes in
deferred tax assets and liabilities. The principal types of accounts resulting
in differences between assets and liabilities for financial statement and tax
return purposes are the allowance for possible losses on loans, interest on
non-accrual loans and acquired net operating loss carryforwards. The Company and
its subsidiaries file a consolidated Federal income tax return.
DIVIDEND RESTRICTIONS
New Jersey state law permits the payment of dividends from subsidiary
banks to their parent company(ies) provided there is no impairment of the
subsidiary's capital accounts and provided the subsidiary bank maintains a
surplus of not less than 50% of its capital stock, or, provided payment of the
dividend will not reduce the subsidiary's surplus. As of March 31, 1997 and
December 31, 1996 and 1995, GFB had $6.5 million, $6.5 million and $5.9 million
and BCB had $1.5 million, $1.6 million and $1.4 million of funds available for
the payment of dividends to their parent Company, respectively.
STATEMENTS OF CASH FLOWS
Cash and cash equivalents are defined as cash on hand,
non-interest-bearing amounts due from banks and Federal funds sold. Generally,
Federal funds are sold for a one-day period. Cash paid for income taxes was
$991,000, $1.0 million and $744,000 for the years ended December 31, 1996, 1995,
and 1994, respectively. Cash paid for interest was $7.3 million, $5.6 million
and $3.3 million for the years ended December 31, 1996, 1995, and 1994,
respectively.
F-9
<PAGE>
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses
for the years ended December 31, 1996, 1995, and 1994 were approximately
$143,000, $106,000, and $188,000, respectively.
Stock Options
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," on January 1, 1996, which contains a fair value-based method for
valuing stock-based compensation that entities may use, which measures
compensation cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which is usually the
vesting period. Alternatively, the standard permits entities to continue
accounting for employee stock options and similar equity instruments under
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined in
SFAS No. 123 had been applied. The Company's stock option plans are accounted
for under APB Opinion No. 25.
NET INCOME PER SHARE
Net income per share is computed based on the weighted average number of
common and common equivalent shares outstanding during each year. All weighted
average actual share or per share information in the financial statements has
been adjusted retroactively for the effect of stock dividends. The effect of
outstanding dilutive options and equity contracts was considered in the
computation.
The previously reported net income per share has been corrected to reflect
the dilutive effect of certain common stock equivalents. As a result, the
previously reported net income per share of $1.11 has been changed to $.97.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1995 and 1994 financial
statements to conform to the classifications used in 1996.
F-10
<PAGE>
NOTE 2 ACQUISITIONS
On December 31, 1995, the Company acquired BCB by an exchange of stock.
Each share of BCB common stock outstanding was exchanged for 1.7 shares of the
Company's common stock, resulting in the issuance of 629,298 shares. The
acquisition was accounted for as a pooling of interest basis and all prior
periods have been restated to reflect the combination as follows:
1995 1994
------- --------
Net interest income......................................... $ 7,110 $ 4,554
BCB......................................................... 3,773 3,214
------ -----
$10,883 $ 7,768
Net income.................................................. $ 1,533 $ 966
BCB......................................................... 539 520
------ ------
$ 2,072 $1,486
====== =====
On April 7, 1995, the Company completed the acquisition of Family First
Federal Savings Bank ("Family First") of Clifton, New Jersey. Under the terms of
the agreement, the Company issued 172,310 shares of its common stock at a cost
of $1.8 million in exchange for the common stock of Family First. The merger was
accounted for using the purchase method of accounting. The purchase price
exceeded the fair market value of net assets acquired by approximately $734,000,
which is reflected as goodwill, included in intangible and other assets in the
accompanying consolidated balance sheet. The unamortized balance at December 31,
1996 and 1995 was $566,000 and $675,000, respectively.
The pro forma results of operations, assuming Family First had been
acquired as of January 1, 1994, are as follows:
1995 1994
------- ------
Net interest income......................................... $11,372 $9,905
Net income.................................................. 2,079 1,102
F-11
<PAGE>
NOTE 3 SECURITIES
The amortized cost, unrealized gains and losses, and estimated market
value of the Company's investment securities available-for-sale and
held-to-maturity are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended March 31, For the Years Ended December 31,
------------------------------------------- -------------------------------------------
1997 1996
------------------------------------------- -------------------------------------------
Gross Gross Fair Gross Gross Fair
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gain Losses Value Cost Gain Losses Value
--------- ---------- ---------- ------ --------- ---------- ---------- -------
Available-for-sale
U.S. Treasury securities and
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government agencies.. $ 38,794 $ 83 $ (109) $38,768 $ 36,673 $ 213 $ (25) $ 36,861
State and political
subdivisions ............. 906 -- -- 906 1,006 -- -- 1,006
Other debt and equity
securities ............... 6,323 927 -- 7,250 6,192 215 -- 6,407
Mortgage-backed securities... 9,797 52 (26) 9,823 7,879 98 -- 7,977
-------- -------- -------- ------- -------- -------- -------- --------
$ 55,820 $ 1,062 $ (135) $56,747 $ 51,750 $ 526 $ (25) $ 52,251
======== ======== ======== ======== ======== ======== ======== ========
Held-to-maturity
U.S. Treasury securities and
U.S. Government agencies.. $ 18,253 $ 58 $ (562) $ 17,749 $ 18,996 $ 135 $ (529) $ 18,602
State and political
subdivisions ............. 393 -- (5) 388 393 -- (3) 390
Mortgage-backed securities... 19,498 -- (209) 9,289 18,039 19 (80) 17,978
------- -------- -------- ------- -------- -------- -------- --------
$ 38,144 $ 58 $ (776) $ 37,426 $ 37,428 $ 154 $ (612) $ 36,970
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1995
-----------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market
Cost Gain Losses Value
--------- ---------- ----------- -------
Available-for-sale
U.S. Treasury securities and
<S> <C> <C> <C> <C>
U.S. Government agencies.. $ 36,812 $ 1,001 $ ( 8) $ 37,805
State and political
subdivisions ............. -- -- -- --
Other debt and equity
securities ............... 2,524 -- (17) 2,507
Mortgage-backed securities... 7,577 19 (73) 7,523
-------- -------- --- - --------
$ 46,913 $ 1,020 $ (98) $ 47,835
======== ======== ===== ========
Held-to-maturity
U.S. Treasury securities and
U.S. Government agencies.. $ 32,774 $ 325 $(420) $ 32,679
State and political
subdivisions ............. 613 2 -- 615
Mortgage-backed securities... 2,764 7 (4) 2,767
-------- -------- --- - --------
$ 36,151 $ 334 $(424) $ 36,061
======== ======== ===== ========
</TABLE>
F-12
<PAGE>
In the fourth quarter of 1995, concurrent with the adoption of its
implementation guide on SFAS No. 115, the FASB allowed a one-time reassessment
of the classifications of all securities currently held. Any reclassifications
would be accounted for at fair value in accordance with SFAS No. 115 and any
reclassifications from the held-to-maturity portfolio that resulted from this
one-time reassessment would not call into question the intent of the Company to
hold other debt securities to maturity in the future. The Company used the
opportunity under this one-time reassessment to reclassify $6.2 million in U.S.
Treasury securities from held-to-maturity to available-for-sale. In connection
with this reclassification, gross unrealized gains of $30,000 and gross
unrealized losses of $12,000 were recorded on available-for-sale securities.
The amortized cost and estimated market value of securities at March 31,
1997, and December 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because issuers and borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
---------------------- ------------------------
Amortized Fair Market Amortized Fair Market
Cost Value Cost Value
--------- ----------- --------- -----------
Available-for-sale
<S> <C> <C> <C> <C>
Due in one year or less .................... $14,143 $14,160 $11,602 $11,656
Due after one year through five years....... 23,824 23,810 24,360 24,487
Due after five years through ten years...... 1,408 1,394 1,393 1,403
Due after ten years ........................ 325 310 324 321
Mortgage-backed and equity securities....... 16,120 17,073 14,071 14,384
------- ------- ------- -------
$55,820 $56,747 $51,750 $52,251
======= ======= ======= =======
Held-to-maturity
Due in one year or less .................... $ 3,524 $ 3,531 $ 3,198 $ 3,198
Due after one year through five years....... 12,751 12,568 13,822 13,748
Due after five years through ten years...... 1,371 1,388 1,369 1,407
Due after ten years ........................ 1,000 650 1,000 640
Mortgage-backed securities ................. 19,498 19,289 18,039 17,977
------- ------- ------- -------
$38,144 $37,426 $37,428 $36,970
======= ======= ======= =======
</TABLE>
Proceeds from sales of available-for-sale securities during the three
months ended March 31, 1997 and 1996, was $2.0 million and $2.3 million,
respectively, and for the years ended December 31, 1996, 1995 and 1994 were $5.5
million, and $16.6 million, and $13.1 million, respectively. Gross gains of
$10,000 and $-0- were realized for the three months ended March 31, 1997 and
1996, respectively, and gross gains of $51,000 and $209,000 were realized on
these sales for the years ended December 31, 1996
F-13
<PAGE>
and 1995, respectively. Gross losses of $84,000 were realized on these sales for
the year ended December 31, 1994.
Securities with a carrying value of $13.7 million and $17.6 million at
December 31, 1996, and 1995, respectively, were pledged to secure public
deposits and repurchase agreements and for other purposes required by law.
NOTE 4 LOANS
Major classifications of Loans are as follows:
March 31, December 31,
---------- -------------------
1997 1996 1995
---------- -------- --------
(Unaudited)
Loans secured by one-to four-family residential
properties .................................. $ 45,975 $ 43,100 $ 43,328
Loans secured by nonresidential properties .... 62,061 58,106 51,133
Loans to individuals .......................... 10,073 9,997 8,661
Loans to depository institutions .............. -- -- 4,600
Commercial loans .............................. 13,367 14,106 14,823
Construction loans ............................ 5,557 5,534 4,292
Other loans ................................... 6,959 6,567 4,905
-------- -------- --------
$143,992 $137,410 $131,742
======== ======== ========
The following table presents information related to loans which are on a
non-accrual basis, loans which have been renegotiated to provide a reduction or
deferral of interest or principal for reasons related to the debtor's financial
difficulties and loans contractually past due ninety days or more as to interest
or principal payments.
March 31, December 31,
--------- --------------
1997 1996 1995
--------- ----- ------
(Unaudited)
Nonaccrual loans ....................... $1,536 $1,033 $1,422
Renegotiated loans ..................... 825 726 517
------ ------ ------
Total non-performing loans ........... $2,361 $1,759 $1,939
====== ====== ======
Loans 90 days or more past due and still
accruing ............................. $1,009 $ 876 $1,125
====== ====== ======
Gross interest income which would have
been recorded under original terms .. $ 31 $ 286 $ 135
====== ====== ======
F-14
<PAGE>
The balance of impaired loans was $1.2 million at March 31, 1997, and was
$711,000 and $1.5 million at December 31, 1996 and 1995, respectively. The Bank
Subsidiaries have identified a loan as impaired when it is probable that
interest and principal will not be collected according to the contractual terms
of the loan agreements. The allowance for credit loss associated with impaired
loans was $346,000 at March 31, 1997, and $316,000 and $588,000 at December 31,
1996 and 1995, respectively. The average recorded investment in impaired loans
was $1.7 million at March 31, 1997, and $1.1 million and $1.5 million at
December 31, 1996 and 1995, respectively. The income recognized on impaired
loans during the three months ended March 31, 1997 and 1996, was $11,000 and
$56,000, respectively, and for the years ended December 31, 1996 and 1995, was
$0 and $59,000, respectively. The Bank Subsidiaries' policy for interest income
recognition on impaired loans is to recognize income on restructured loans under
the accrual method. The Bank Subsidiaries recognize income on non-accrual loans
under the cash basis when the loans are both current and the collateral on the
loan is sufficient to cover the outstanding obligation to the Bank Subsidiaries.
If these factors do not exist the Banks, will not recognize income.
The Bank Subsidiaries extended credit to various directors, executive
officers and their associates. These extensions are made in the ordinary course
of business and on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
others. At December 31, 1996, loans outstanding to these related parties
amounted to $6.6 million. An analysis of activity in loans to related parties at
December 31, 1996, resulted in new loans of $3.2 million and repayments of $1.5
million. All such loans are current as to principal and interest payments at
December 31, 1996.
NOTE 5 ALLOWANCE FOR POSSIBLE LOAN LOSSES
An analysis of the allowance for possible loan losses is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year ended December 31,
------------------ ------------------------------
1997 1996 1996 1995 1994
------- -------- ------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year .. $ 2,540 $ 2,332 $ 2,332 $ 1,824 $ 1,771
Acquired businesses ........... _ _ (9) 1,039 --
Provision charged to operations 115 90 440 414 172
Charge-offs ................... (26) (76) (365) (1,035) (264)
Recoveries .................... 21 15 142 90 145
------- ------- ------- ------- -------
Balance at end of year ........ $ 2,650 $ 2,361 $ 2,540 $ 2,332 $ 1,824
======= ======= ======= ======= =======
</TABLE>
F-15
<PAGE>
NOTE 6 PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
----------- ------------------------
Estimated
Useful Lives 1997 1996 1995
------------ ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Land....................... $ 124 $ 124 $ 124
Buildings and improvements. 5 to 20 years 481 481 1,489
Furniture, fixtures and
equipment................ 3 to 10 years 3,394 3,327 2,937
Leasehold improvements..... 3 to 40 years 1,987 1,982 403
------ ------- -------
5,986 5,914 4,953
Less accumulated depreciation and
amortization............... 2,936 2,711 1,871
------ ------- -------
$3,050 $ 3,203 $ 3,082
====== ======= =======
</TABLE>
NOTE 7 DEPOSITS
At December 31, 1996, the schedule of maturities of Certificates of
Deposit is as follows:
1997........................................................ $72,666
1998........................................................ 5,582
1999........................................................ 2,230
2000........................................................ 988
2001 and thereafter......................................... 388
-------
$81,854
=======
NOTE 8 DEBT
Federal Home Loan Bank Advances
The Company has a line of credit for $15.9 million with the Federal Home
Loan Bank (FHLB) which is collateralized by FHLB stock. Borrowings under this
arrangement have an interest rate that fluctuates based on market conditions and
customer demand. As of December 31, 1996 and 1995, there were no outstanding
balances.
F-16
<PAGE>
Redeemable Subordinated Debentures And Cancellable Mandatory Stock Purchase
Contracts
The Company issued $5.0 million of 8.5% Redeemable Subordinated Debentures
("Debentures") due November 1, 1998, interest payable quarterly. In addition to
the Debentures, the Company issued Cancellable Mandatory Stock Purchase
Contracts ("Equity Contracts") requiring the purchase of $5.0 million in common
stock at a price of $9.77 (as adjusted for stock dividends) per share no later
than November 1, 1997, and permitting the purchase of common stock in that
amount prior to that date. The purchase price under the Equity Contracts can be
paid by the surrender of the Debentures with a principal amount equal to the
amount of the common stock to be purchased. The Debentures are redeemable and
the Equity Contracts are cancellable at the election of the Company upon 60 days
written notice. At December 31, 1996, 511,770 shares of common stock were
reserved for future issuance pursuant to the outstanding Equity Contracts.
NOTE 9 INCOME TAXES
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
-------------------- ------------------------------------
1997 1996 1996 1995 1994
--------- --------- ------- -------- --------
(Unaudited)
Federal
<S> <C> <C> <C> <C> <C>
Current.............. $ 394 $ 308 $1,452 $ 872 $796
Deferred............. (82) (57) (267) 135 (65)
State................... 58 27 127 167 109
------ ----- ------ ------ ----
$ 370 $ 278 $1,312 $1,174 $840
====== ===== ====== ====== ====
</TABLE>
F-17
<PAGE>
The reconciliation of the tax computed at the statutory federal rate was
as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------- --------------------------------
1997 1996 1996 1995 1994
--------- -------- ----------- -------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Tax at statutory rate ...................... $ 329 $ 258 $ 1,241 $ 1,104 $ 791
Increase (reduction) in tax resulting from:
Tax-exempt income ....................... (10) (11) (22) (24) (8)
Amortization of intangible assets ....... 9 10 37 51 24
State income tax, net of federal benefit ... 38 30 84 110 72
Acquisition expenses .................... -- -- -- 58 --
Utilization of capital loss carryforward. -- -- -- (99) --
Other ...................................... 4 (9) (28) (26) (39)
------- ------- ------- ------- -------
Provision for income taxes .............. $ 370 $ 278 $ 1,312 $ 1,174 $ 840
======= ======= ======= ======= =======
</TABLE>
The net deferred tax asset consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
--------- -------------------
1997 1996 1995
------ -------- --------
(Unaudited)
Allowance for possible losses on loans and other real
<S> <C> <C> <C>
estate ..................................................... $ 705 $ 604 $ 407
Interest income on non-accrual loans ......................... 251 237 181
Depreciation and amortization ................................ 70 76 (10)
Acquired net operating loss carryforward ..................... 262 272 374
Difference between book and tax basis of assets acquired ..... 348 370 346
Unrealized holding gain loss on investment securities
available-for-sale ......................................... (395) (194) (194)
Other ........................................................ (92) (97) (103)
------- ------- -------
Total net deferred tax asset (included in other assets)... $ 1,149 $ 1,268 $ 1,001
======= ======= =======
</TABLE>
At March 31, 1997, the Company had a net operating loss carryforward for
federal income tax purposes of approximately $0.8 million. This net operating
loss carryforward originated from pre-acquisition losses at Family First.
Subject to certain yearly limitations, the Company can utilize the
pre-acquisition net operating loss carryforward to offset future consolidated
taxable income. The net operating loss carryforwards, if unused, would expire in
the years 2008 to 2010.
F-18
<PAGE>
NOTE 10 SHAREHOLDERS' EQUITY
On July 31, 1996, the Company paid a 10% stock dividend on its common
stock to shareholders of record on July 15, 1996.
In April 1996, the Company amended its articles of incorporation whereby
the number of authorized shares of its common stock was increased from 4,000,000
shares to 10,000,000 shares.
On July 31, 1995, the Company paid a 10% stock dividend on its common
stock to shareholders of record on July 15, 1995.
On July 31, 1994, the Company paid a 10% stock dividend on its common
stock to shareholders of record on July 15, 1994.
NOTE 11 STOCK OPTIONS
The Company adopted a non-statutory stock option plan in 1988 (the "1988
Plan") that also allows for the granting to employees of options to acquire up
to a maximum of 111,304 shares (after adjustments for stock dividends) of the
Company's common stock. The exercise price of any options granted under the 1988
Plan will not be less than 100% of the fair market value per share of the
Company's common stock on the date such options are granted. Options granted may
have terms of not more than 10 years from the respective dates of grant and
outstanding options are exercisable over various periods following the
respective dates of grant.
The Company adopted a non-statutory stock option plan in 1993 (the "1993
Plan") authorizing the granting of options to purchase shares of the Company's
common stock to individuals who were then directors of GFB. All options
authorized by the 1993 Plan were granted during 1993 and no further options are
available for grant under that plan. At December 31, 1996, options to purchase a
total of 3,663 shares were outstanding and expired on December 31, 1996.
The Company adopted a non-statutory stock option plan in 1994 (the "1995
Plan") allowing for the Company's Board of Directors to grant, to the
individuals who were directors of GFB at that time, options to purchase a total
of 32,670 shares of the Company's common stock. At December 31, 1996, options to
purchase a total of 30,250 shares were outstanding and will expire if not
exercised by December 31, 1997.
The Company adopted two additional stock option plans in 1996. The 1996
Employee Stock Option Plan (the "1996 Employee Plan") provides for the granting
of incentive stock options, nonqualified stock options and stock appreciation
rights to employees of the Company and its subsidiaries. Effective with the
approval of the 1996 Employee Plan, the 1988 Plan was terminated. A total of
220,000 shares are authorized to be granted under the 1996 Employee Plan. During
1996, options to acquire 112,200 shares were granted under this plan. The 1996
Stock Option Plan for Non-employee Directors (the "1996 Directors Plan")
provides for the granting of nonqualified stock options to non-employee
directors of the corporation's bank subsidiaries. A total of 104,500 shares are
authorized to be granted under the 1996 Directors Plan. During 1996, options to
acquire 104,500 shares were granted under this plan.
F-19
<PAGE>
Had compensation cost for the plan been determined based on the fair value
of the options at the grant dates consistent with the method of (SFAS 123), the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below.
1996 1995
---------- --------
Net income.......................... As reported $2,337 $2,072
Pro forma $2,300 $2,068
Primary earnings per share.......... As reported $ .97 $1.04
Proforma $ .95 $1.04
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants before 1995.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995, respectively:
dividend yield of 2.2 % for both years; expected volatility of 35% and 34%;
risk-free interest rates of 6.35% and 7.89% percent; and expected lives of 10
years for both years.
A summary of the status of the Company's option plans as of December 31,
1996, 1995, and 1994 and the changes during the years ending on those dates is
represented below:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- --------------------- --------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price Shares
-------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Outstanding, beginning of year ....... 97,071 $ 8.95 77,878 $ 8.39 75,237
Granted .............................. 216,700 16.90 32,670 10.33 24,079
Exercised ............................ (10,632) 8.86 (12,355) 8.76 (15,717)
Terminated ........................... (924) 10.33 (1,122) 7.06 (5,721)
--------- --------- -------- ------- ------
Outstanding, end of year ............. 302,215 $ 13.71 97,071 $ 8.95 77,878
Options exercisable at year-end....... 32,954 36,866
========= ========
Weighted average fair value of
options granted during the year ... $ 7.53 $ 5.18
========= =======
</TABLE>
F-20
<PAGE>
The following information applies to options outstanding at December 31,
1996:
Number outstanding............................................ 302,215
Range of exercise prices......................................$6.83 - $17.125
Weighted average exercise price............................... $13.71
Weighted average remaining contractual life................... 8.63 years
NOTE 12 EMPLOYEE BENEFIT PLAN
The Company has a 401(k) savings plan covering substantially all
employees. Under the plan, the Company matches 50% of employee contributions for
all participants with less than five years employment, not to exceed 2% of their
salary, and 75% of employee contributions for all participants with five or more
years of employment, not to exceed 3% of their salary. Contributions made by the
Company were approximately $139,000, $142,000 and $91,000 for the years ended
December 31, 1996, 1995, and 1994, respectively.
NOTE 13 COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
The Company and its subsidiaries lease banking facilities and other office
space under operating leases which expire at various dates through 2007,
containing certain renewal options. Rent expenses charged to operations
approximated $621,000, $530,000 and $195,000, for the years ended December 31,
1996, 1995 and 1994, respectively. Included in these amounts is $146,000 per
year which is paid to a general partnership that includes two directors of the
Company.
As of December 31, 1996, future minimum annual rental payments under these
leases are as follows:
1997............................................................. $ 578
1998............................................................. 579
1999............................................................. 579
2000............................................................. 560
2001............................................................. 571
Thereafter....................................................... 2,539
-------
Total........................................................ $ 5,406
-------
F-21
<PAGE>
LITIGATION
The Company and its subsidiaries may, in the ordinary course of business,
become a party to litigation involving collection matters, contract claims and
other legal proceedings relating to the conduct of their business. In
management's judgment, the consolidated financial position of the Company will
not be affected materially by the final outcome of any present legal proceedings
or other contingent liabilities and commitments.
NOTE 14 - FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
The Bank Subsidiaries are parties to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of their customers and to reduce their own exposure to fluctuations in
interest rates. These financial instruments include commitments to extend credit
and standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable. Those instruments involve, to
varying degrees, elements of credit and interest rate risks in excess of the
amount recognized in the consolidated balance sheets. The contract or notional
amounts of those instruments reflect the extent of involvement the Bank
Subsidiaries have in particular classes of financial instruments.
The Bank Subsidiaries' exposure to credit loss in the event of
non-performance by the other party to the financial instrument for commitments
to extend credit and standby letters of credit is represented by the contractual
or notional amount of those instruments. The Bank Subsidiaries use the same
credit policies in making commitments and conditional obligations as they do for
on-balance-sheet instruments.
Unless noted otherwise, the Bank Subsidiaries do not require collateral or
other security to support financial instruments with credit risk. The
approximate contract amounts are as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1996 1995
------ -------
Financial instruments whose contract amounts represent credit risk
<S> <C> <C>
Commitments to extend credit ................................ $22,100 $22,652
Standby letters of credit and financial guarantees written.. 1,144 1,908
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank Subsidiaries evaluate each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank Subsidiaries upon extension of credit,
is based on management's credit evaluation.
F-22
<PAGE>
Standby letters of credit are conditional commitments issued by the Bank
Subsidiaries to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank Subsidiaries hold residential or commercial real estate, accounts
receivable, inventory and equipment as collateral supporting those commitments
for which collateral is deemed necessary. The extent of collateral held for
those commitments at December 31, 1996 varies up to 100%.
The Bank Subsidiaries grant various commercial and consumer loans,
primarily within the State of New Jersey. Although the Bank Subsidiaries have
diversified loan portfolios, a substantial portion of the ability of their
borrowers to honor their loan payment obligations in a timely fashion is
dependent on the success of the real estate industry. The distribution of
commitments to extend credit approximates the distribution of loans outstanding.
Commercial and standby letters of credit were granted primarily to commercial
borrowers.
NOTE 15 FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an
entity's assets and liabilities considered to be financial instruments. For the
Company, as for most financial institutions, the majority of its assets and
liabilities are considered financial instruments as defined in SFAS No. 107.
However, many such instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange transaction.
Also, it is the Company's general practice and intent to hold its financial
instruments to maturity and not to engage in trading or sales activities, except
for certain loans. Therefore, the Company had to use significant estimations and
present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values
may materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the wide
range of permitted assumptions and methodologies in the absence of active
markets. This lack of uniformity gives rise to a high degree of subjectivity in
estimating financial instrument fair values.
Estimated fair values have been determined by the Company using the best
available data and an estimation methodology suitable for each category of
financial instruments. The estimation methodologies used, the estimated fair
values, and recorded book balances at December 31, 1996 and 1995 are outlined
below.
For cash and due from banks, the recorded book values of $18.3 million and
$29.0 million at December 31, 1996 and 1995, respectively, approximate fair
values. For interest-bearing deposits with banks, the recorded book values of
$4.5 million and $1.1 million at December 31, 1996 and 1995, respectively,
approximate fair values. The estimated fair values of investment securities are
based on quoted market prices, if available. Estimated fair values are based on
quoted market prices of comparable instruments if quoted market prices are not
available.
The net loan portfolio at December 31, 1996 and 1995, has been valued
using a present value discounted cash flow where market prices were not
available. The discount rate used in these calculations is the estimated current
market rate adjusted for credit risk. The carrying value of accrued interest
approximates fair value.
F-23
<PAGE>
<TABLE>
<CAPTION>
1996 1995
------------------- ---------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Investment securities available-for-sale.......................... $52,251 $52,251 $ 47,835 $ 47,835
Investment securities held-to-maturity........................... 37,428 36,970 36,151 36,061
Loans ............................................................ 137,127 137,257 132,440 132,563
</TABLE>
The estimated fair values of demand deposits (i.e., interest (NOW) and
non-interest bearing demand accounts, savings and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). The carrying amounts of variable
rate accounts and certificates of deposit approximate their fair values at the
reporting date. The carrying amount of accrued interest payable approximates its
fair value.
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Time deposits ..................... $81,854 $82,540 $91,263 $91,648
Securities sold under agreements to
repurchase ...................... 4,159 4,159 2,756 2,759
The fair values of the redeemable subordinated debentures totaling $5.0
million and $5.0 million are estimated to approximate their recorded book
balances at December 31, 1996 and 1995, respectively.
There was no material difference between the notional amount and the
estimated fair value of off-balance-sheet items which totaled approximately
$22.1 million and $24.6 million at December 31, 1996 and 1995, respectively, and
primarily comprise unfunded loan commitments which are generally priced at
market at the time of funding.
NOTE 16 REGULATORY MATTERS AND CAPITAL REQUIREMENTS
The Company and the Bank Subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies including the
Federal Reserve. Failure to meet minimum capital requirements can initiate
certain mandatory and possible additional discretionary actions by regulators
that, if undertaken, could have a material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank Subsidiaries must meet
specific capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under regular
accounting practices. The capital amounts and classifications are also subject
to qualitative judgements by the regulators about components, risk weightings
and other factors.
F-24
<PAGE>
Quantitative measures established by regulations to ensure capital
adequacy require the Bank Subsidiaries and the Company to maintain minimum
amounts and ratios of total and Tier 1 capital to risk weighted assets. As of
December 31, 1996, management believes that the Company and the Bank
Subsidiaries meet all capital adequacy requirements to which they are subject.
As of December 31, 1996, the Company and the Bank Subsidiaries met all
regulatory requirements for classification as "well-capitalized" institutions.
To be categorized as well capitalized, the Company and Bank Subsidiaries must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events which have occurred
that management believes have changed the institution's category.
F-25
<PAGE>
The Bank Subsidiaries and the Company had the following capital ratios:
<TABLE>
<CAPTION>
Bergen Greater Well Capitalized
Great Falls Bank Commercial Bank Community Bancorp (FDIC requirements)
------------------------- ------------------------- -------------------------- -------------------
March 31, December 31, March 31, December 31, March 31, December 31,
--------- --------------- --------- -------------- --------- ----------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
--------- ------ ------- --------- ------- ------ --------- ------ ------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 and Tier 2 .......... 12.27% 13.21% 14.71% 14.55% 14.17% 13.68% 16.71% 16.89% 16.77% 10.00%
Tier 1 Core Capital Ratio... 11.01% 6.83% 6.79% 13.30% 9.04% 12.66% 12.51% 7.97% 7.27% 6.00%
Tier 1 Leverage Ratio ...... 6.63% 6.78% 7.90% 8.81% 9.32% 9.11% 7.93% 8.12% 8.28% 5.00%
</TABLE>
F-26
<PAGE>
NOTE 17 CONDENSED FINANCIAL
INFORMATION - PARENT COMPANY ONLY
The condensed financial information of Greater Community Bancorp is as
follows:
CONDENSED BALANCE SHEET
December 31,
--------------------
1996 1995
--------- --------
ASSETS:
Cash and due from banks - non-interest-bearing... $ 627 $ 632
Investment securities available-for-sale......... 5,766 4,800
Accrued interest receivable...................... 29 63
Investment in subsidiaries....................... 19,844 19,168
Other assets..................................... 92 178
--------- -------
Total assets............................ $ 26,358 $24,841
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Redeemable subordinated debentures............... $ 4,988 $ 4,976
Other liabilities................................ 309 270
Shareholders' equity............................. 21,061 19,595
--------- -------
Total liabilities and shareholders'
equity................................ $ 26,358 $24,841
========= =======
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1995 1994
------ ------- ------
Income
<S> <C> <C> <C>
Equity in undistributed income of Bank Subsidiaries .................................... $ 712 $ 2,069 $ 1,646
Dividends from Bank Subsidiaries ........................................................ 1,858 -- --
Interest income ......................................................................... 234 342 244
Non-interest income ..................................................................... (9) 291 --
------- ------- -------
2,795 2,702 1,890
Other expenses .......................................................................... 656 735 528
------- ------- -------
Income before income taxes ......................................................... 2,139 1,967 1,362
Income tax benefit ...................................................................... 198 105 124
------- ------- -------
Net income ....................................................................... $ 2,337 $2,072 $ 1,486
======= ====== =======
</TABLE>
F-27
<PAGE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995 1994
-------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income .................................................................... $ 2,337 $ 2,072 $ 1,486
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Discount accretion .......................................................... 25 22 22
(Gain) loss on sale of investment securities available-for-sale.............. (9) (291) 13
(Increase) decrease in other assets ........................................ 87 169 (252)
(Increase) decrease in accrued interest payable ............................. 34 3 (56)
(Decrease) increase in other liabilities .................................... 39 156 (27)
Equity in undistributed income of subsidiaries .............................. (712) (2,069) (1,646)
------- ------- -------
Net cash provided by (used in) operating activities............. 1,801 62 (460)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities, available-for-sale............ 2,193 509 680
Proceeds from maturities of investment securities available-for-sale........ (3,301) -- (4,345)
------- ------- --------
Net cash used in investing activities........................... (1,108) 509 (3,665)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options ..................................... 102 93 87
Dividends paid .............................................................. (533) (269) (134)
Purchase of treasury stock .................................................. (188) -- --
Other, net .................................................................. (79) (30) (23)
------- ------- --------
Net cash provided by financing activities................ (698) (206) (70)
------- ------- --------
Net increase (decrease) in cash and cash equivalents.... (5) 365 (4,195)
CASH AND CASH EQUIVALENTS, beginning of year ................................... 632 267 4,462
------- ------- --------
CASH AND CASH EQUIVALENTS, end of year ......................................... $ 627 $ 632 $ 267
======= ======= ========
</TABLE>
F-28
<PAGE>
NOTE 18 - QUARTERLY
FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the
Company which, in the opinion of management, reflects all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's results of operations.
Three Months Ended
March 31,
1997
Interest income..................... $ 4,764
Interest expense.................... 1,806
Net interest income................. 2,958
Provisions for possible loan losses. 115
Other income........................ 449
Other expenses...................... 2,323
Income before income taxes.......... 969
Net income.......................... 665
Per share data
Average common shares outstanding... 2,299
Net income per common share - primary .28
Three months ended
-------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ -------- --------
1996
Interest income ................... $4,789 $4,771 $ 4,610 $4,523
Interest expense .................. 1,794 1,844 1,748 1,769
Net interest income ............... 2,995 2,927 2,862 2,754
Provision for credit losses ....... 150 110 90 90
Other operating income ............ 470 465 248 746
Other operating expenses .......... 2,049 2,560 2,204 2,650
Income before income taxes ........ 1,267 722 816 760
Net income ........................ 856 477 522 482
Per share data
Average common shares outstanding . 2,337 2,337 2,200 2,095
Net income per common share - primary .28 .18 .28 .23
1995
Interest income ................... $4,895 $4,739 $4,497 $3,302
Interest expense .................. 1,931 1,735 1,738 1,146
Net interest income ............... 2,964 3,004 2,759 2,156
Provision for credit losses ....... 119 134 96 65
Other operating income ............ 1,034 264 597 282
Other operating expenses .......... 3,010 2,296 2,334 1,760
Income before income taxes ........ 869 838 926 613
Net income ........................ 733 317 633 389
Per share data
Average common shares outstanding . 2,065 2,054 2,038 1,679
Net income per common share - primary .35 .25 .23 .23
F-29
<PAGE>
Report Of Independent
Certified Public Accountants
To the Board of Directors
and Shareholders of
Greater Community Bancorp
We have audited the accompanying consolidated balance sheet of Greater Community
Bancorp (formally Great Falls Bancorp) and Subsidiaries as of December 31, 1996,
and the related consolidated statements of income, shareholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. We also audited the
adjustments to share and earnings per share data for 1995 and 1994 due to the
10% stock dividend declared in 1996 as discussed in Note 10 and the restatement
of the stock option information in 1995, as discussed in Note 11. In our opinion
such adjustments are appropriate and have been properly applied.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the financial position of Greater Community Bancorp
and Subsidiaries as of December 31, 1996, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/s/ Grant Thornton, LLP
GRANT THORNTON, LLP
Philadelphia, Pennsylvania
January 15, 1997 (except for Note 1, as to which the date is April 29, 1997)
F-30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Greater Community Bancorp:
We have audited the accompanying consolidated balance sheet of Greater Community
Bancorp (a New Jersey corporation) (formerly Great Falls Bancorp) and subsidiary
as of December 31, 1995, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the two years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Greater Community Bancorp and
subsidiaries as of December 31, 1995, and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 1995
in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for debt and
equity securities.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 16, 1996
F-31
<PAGE>
=================================== ===================================
No person has been authorized in
connection with the offering made
hereby to give any information or
to make any representation not
contained in this prospectus and,
if given or made, such information [Logo}
or representation must not be relied
upon as having been authorized by the
company or any [Logo] underwriter. $20,000,000
This prospectus does not constitute
an offer to sell or a solicitation of
$20,000,000 any offer to buy any of
the securities offered hereby to GCB CAPITAL TRUST
any person or by anyone in any
jurisdiction in which it is unlawful
to make GCB CAPITAL TRUST such offer 10.00% Preferred Securities
or solicitation. Neither the delivery (Liquidation Amount $25 per
of this prospectus nor any sale made Preferred Security)
hereunder shall, under any circumstances, guaranteed, as described herein, by
10.00% Preferred Securities create any
implication that the information
(Liquidation Amount $25 per contained
herein is correct as of any date
Preferred Security) subsequent to
the date hereof.
TABLE OF CONTENTS
PAGE GREATER COMMUNITY
BANCORP
Summary................................... 5
Selected Consolidated Financial Data...... 10
Risk Factors.............................. 11
GCB Capital Trust......................... 20
Use of Proceeds........................... 20 -------------------
Capitalization............................ 21 PROSPECTUS
Accounting Treatment...................... 22 -------------------
Management's Discussion and Analysis
of Financial Condition and Results
of Operations........................... 22
Business of the Company................... 46
Management................................ 52 Advest, Inc.
Supervision and Regulation................ 54
Description of Preferred Securities....... 59
Description of Junior Subordinated
Debentures.............................. 74 May 16, 1997
Description of Guarantee.................. 83
Relationship Among the Preferred
Securities, the Junior Subordinated
Debentures and the Guarantee............ 86
Certain Federal Income Tax
Consequences............................ 88
Certain ERISA Considerations
Underwriting.............................. 93
Validity of Securities.................... 93
Experts................................... 95
Available Information..................... 95
Incorporation of Certain Documents
by Reference............................ 96
Financial Statements...................... F-1
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