<PAGE>
GRAND CENTRAL FINANCIAL CORP.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to______________
Commission File Number 0-25945
-------
GRAND CENTRAL FINANCIAL CORP.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 34-1877137
- -------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
601 Main Street, Wellsville, Ohio 43968
----------------------------------------
(Address of principal executive offices)
(330) 532-1517
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the issuer was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class: Outstanding at April 30, 1999
Common stock, $0.01 par value 1,938,871 common shares
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
FORM 10-QSB
QUARTER ENDED MARCH 31, 1999
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 ............................................................... 3
Consolidated Statements of Income for the three months ended
March 31, 1999 and 1998.......................................................... 4
Condensed Consolidated Statements of Changes in Shareholders' Equity
for the three months ended March 31, 1999........................................ 5
Consolidated Statements of Comprehensive Income for the three months
ended March 31, 1999 and 1998 ................................................... 6
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998.................................................... 7
Notes to Consolidated Financial Statements ...................................... 8
ITEM 2 - Management's Discussion and Analysis or Plan of Operation..................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 20
Item 2. Changes in Securities and Use of Proceeds..................................... 20
Item 3. Defaults Upon Senior Securities............................................... 20
Item 4. Submission of Matters to a Vote of Security Holders........................... 20
Item 5. Other Information............................................................. 20
Item 6. Exhibits and Reports on Form 8-K.............................................. 20
SIGNATURES ............................................................................ 22
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 2,376 $ 1,372
Interest-bearing deposits in other banks 2,588 24,654
--------- ---------
Total cash and cash equivalents 4,964 26,026
Securities available-for-sale 4,776 5,149
Securities held-to-maturity (estimated fair value
of $62,632 in 1999 and $32,963 in 1998) 62,871 32,629
Loans held for sale -- 1,152
Loans, net 64,015 62,949
Federal Home Loan Bank, at cost 2,746 2,699
Premises and equipment, net 2,187 2,139
Accrued interest receivable 799 571
Other assets 303 122
--------- ---------
Total assets $ 142,661 $ 133,436
--------- ---------
--------- ---------
LIABILITIES
Deposits
Non-interest bearing $ 1,068 $ 5,471
Interest bearing 79,111 79,167
--------- ---------
Total deposits 80,179 84,638
Federal Home Loan Bank Advances 29,902 16,029
Advance payments by borrowers for taxes and insurance 384 776
Accrued interest payable 231 89
Other liabilities 95 131
--------- ---------
Total liabilities 110,791 101,663
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, authorized 1,000,000 shares, no shares
issued and outstanding
Common stock, $.01 par value, 6,000,000 shares
authorized, 1,938,871 shares issued 19 19
Additional paid-in capital 18,574 18,720
Retained earnings, substantially restricted 14,549 14,330
Obligation under employee stock ownership plan (1,312) (1,339)
Accumulated other comprehensive income 40 43
--------- ---------
Total shareholders' equity 31,870 31,773
--------- ---------
Total liabilities and shareholders' equity $ 142,661 $ 133,436
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
3.
<PAGE>
GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (In thousands, except per share amount)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1999 1998
------ ------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $1,297 $1,211
Interest on securities:
Taxable 877 946
Non-taxable 3 4
Interest-bearing deposits in banks 97 47
------ ------
Total interest income 2,274 2,208
INTEREST EXPENSE
Deposits 817 858
FHLB borrowings 283 401
------ ------
Total interest expense 1,100 1,259
NET INTEREST INCOME 1,174 949
Provision for loan losses -- --
------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,174 949
NON-INTEREST INCOME
Service charges 49 37
Gain on sale of loans 12 21
Gain (loss) on sale of securities 11 --
Other income 20 11
------ ------
Total non-interest income 92 69
NON-INTEREST EXPENSE
Salaries and employee benefits 446 405
Net occupancy expense 131 94
Data processing expense 42 34
FDIC assessments 12 12
Franchise taxes 64 53
Other expenses 249 168
------ ------
Total non-interest expense 944 766
Income before income taxes 322 252
Income tax expense 103 64
------ ------
Net income $ 219 $ 188
------ ------
------ ------
Basic and diluted earnings per share $ 0.12 N/A
</TABLE>
See accompanying notes to consolidated financial statements.
4.
<PAGE>
GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
Accumulated
Additional Obligation Other Total
Common Paid in Retained Under Comprehensive Shareholders
Stock Capital Earnings Esop Income Equity
----- ------- -------- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1999 $ 19 $ 18,720 $ 14,330 $ (1,339) $ 43 $ 31,773
Employee stock ownership plan
obligation 27 27
Stock issuance costs (146) (146)
Comprehensive income:
Net income 219 219
Change in unrealized
gain (loss) on securities
available-for-sale, net of tax (3) (3)
-------
Total Comprehensive Income 216
----- -------- --------- ---------- -------- -------
Balances at March 31, 1999 $ 19 $ 18,574 $ 14,549 $ (1,312) $ 40 $31,870
----- -------- --------- ---------- -------- -------
----- -------- --------- ---------- -------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
5.
<PAGE>
GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1999 1998
----- -----
<S> <C> <C>
NET INCOME $ 219 $ 188
Other comprehensive income, net of tax
Unrealized gain (loss) on securities
available for sale arising during
the period (10) (3)
Less: Reclassified adjustment for
accumulated gains included
in net income 7 --
----- -----
Unrealized gains (losses) on
securities (3) (3)
----- -----
COMPREHENSIVE INCOME $ 216 $ 185
----- -----
----- -----
</TABLE>
See accompanying notes to consolidated financial statements.
6.
<PAGE>
GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
NET CASH FROM OPERATING ACTIVITIES $ 887 $ 2,235
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (690) --
Proceeds from sales 134 --
Proceeds from maturities and payments 922 2,246
Securities held to maturity
Purchases (34,857) (10,000)
Proceeds from maturities and payments 4,615 2,151
Net change in loans (984) (3,436)
Purchases of premises and equipment (111) (110)
-------- --------
Net cash from investing activities (30,971) (9,149)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (4,459) 1,236
Net change in other borrowings (392) (360)
Proceeds from long-term FHLB advances 14,700 9,000
Repayment of long-term FHLB advances (827) (5,315)
-------- --------
Net cash from financing activities 9,022 4,561
NET DECREASE IN CASH AND CASH EQUIVALENTS (21,062) (2,353)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 26,026 5,846
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,964 $ 3,493
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 958 $ 1,125
Income taxes -- --
</TABLE>
See accompanying notes to consolidated financial statements.
7.
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unless otherwise indicated, amounts in thousand.
BASIS OF PRESENTATION: These interim consolidated financial statements are
prepared without audit and reflect all adjustments which, in the opinion of
management, are necessary to present fairly the financial position of Grand
Central Financial Corp. ("Company") and its sole subsidiary, Central Federal
Savings and Loan Association of Wellsville ("Association"), at March 31, 1999,
and its results of operations and cash flows for the periods presented. All such
adjustments are normal and recurring in nature. The accompanying unaudited
consolidated financial statements do not purport to contain all the necessary
financial disclosures required by generally accepted accounting principles that
might otherwise be necessary in the circumstances. The results of operations for
the three month period ended March 31, 1999 and 1998 are not necessarily
indicative of the results that may be expected or that have occurred for the
entire year. The annual report for the Company for the year ended December 31,
1998, contains consolidated financial statements and related notes that should
be read in conjunction with the accompanying unaudited consolidated financial
statements.
Effective December 30, 1998, Central Federal Savings & Loan Association of
Wellsville converted from a federally chartered mutual savings and loan
association to a federally chartered stock savings and loan with the concurrent
formation of a holding company, Grand Central Financial Corp. The conversion was
accomplished through an amendment of the Association's articles of incorporation
and the sale of the Company's common stock in an amount equal to the pro forma
market value of the Association after giving effect to the conversion.
CONSOLIDATION POLICY: The consolidated financial statements include the accounts
of the Company and the Association. All significant intercompany transactions
and balances have been eliminated.
NATURE OF OPERATIONS:
The Company is engaged in the business of banking with operations and six
offices in Wellsville, Ohio and surrounding areas, which are primarily light
industrial areas. These communities are the source of substantially all of the
Company's deposits and loan activities. The Company's primary source of revenue
is single-family residential loans to middle income individuals.
INVESTMENT AND MORTGAGE-BACKED SECURITIES:
The Company classifies investment and mortgage-backed securities as held to
maturity, trading or available for sale. Securities classified as held to
maturity are those that management has the positive intent and ability to hold
to maturity. Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts.
Securities classified as available for sale are those that management intends to
sell or that could be sold for liquidity, investment management, or similar
reasons, even if there is not a present
8.
(Continued)
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
intention for such a sale. Securities available for sale are carried at fair
value with unrealized gains and losses included as a separate component of
shareholders' equity, net of tax. Gains or losses on dispositions are based on
net proceeds and the adjusted carrying amount of securities sold, using the
specific identification method. Securities are written down to fair value when a
decline in fair value is not temporary.
LOANS:
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees. Interest income on loans is accrued over the
term of the loans based upon the principal outstanding. The allowance for loan
losses is increased by charges to income and decreased by charge-offs (net of
recoveries). Management's periodic evaluation of the adequacy of the allowance
is based on the Company's past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the collateral, and current
economic conditions.
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued and unpaid, and income is subsequently recognized only to the
extent that cash payments are received until, in management's judgment, the
borrower demonstrates the ability to make periodic interest payments in which
case the loan is returned to accrual status. Loans considered to be impaired, as
identified according to internal loan review standards, are reduced to the
present value of expected future cash flows or to the fair value of collateral
by allocating a portion of the allowance for loan losses to such loans. If these
allocations cause the allowance for loan losses to require an increase, such an
increase will be reported as a provision for loan losses charged to operations.
Management analyzes loans on an individual basis and classifies a loan as
impaired when an analysis of the borrower's operating results and financial
condition indicates that underlying cash flows are not adequate to meet its debt
service requirements. Often this is associated with a delay or shortfall in
payments of 30 days or more. Smaller balance homogeneous loans are evaluated for
impairment in total. Such loans include residential first mortgage loans secured
by one to four family residences, residential construction loans, home equity,
and other consumer loans, with balances less than $200,000. Loans are generally
moved to non-accrual status when 90 days or more past due. These loans may also
be considered impaired.
Impaired loans, or portions thereof, are charged off when deemed uncollectible.
The nature of the disclosures for impaired loans is considered generally
comparable to prior nonaccrual loans and non-performing and past due asset
disclosures.
9.
(Continued)
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EARNINGS PER SHARE:
Basic earnings per common share for the three months ended March 31, 1999 was
based on earnings for the three months then ended, divided by the weighted
average number of common shares outstanding for the period. The Company had no
dilutive securities at March 31, 1999. The weighted average shares outstanding
were 1,807,649 for the three months ended March 31, 1999. Earnings per share
information for 1998 is not meaningful since the mutual to stock conversion was
not consummated until December 30, 1998.
NOTE 2 - INVESTMENT AND MORTGAGE BACKED SECURITIES
The carrying values and estimated fair values of investment and mortgage-backed
securities are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1999
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
--------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Municipal securities $ 175 $ 3 $ 178
U.S. government and federal
agencies 67 1 68
Mortgage-backed securities:
Freddie Mac 310 1 (1) 310
Fannie Mae 1,822 23 1,845
Ginnie Mae 2,341 34 2,375
------- ------- ------- -------
Total $ 4,715 $ 62 (1) $ 4,776
------- ------- ------- -------
------- ------- ------- -------
HELD TO MATURITY:
U.S. government and federal
agencies $16,547 $ $ (72) $16,475
Corporate notes 3,956 4 (1) 3,959
Mortgage-backed securities:
Freddie Mac 20,449 186 (306) 20,329
Fannie Mae 14,589 50 (108) 14,531
CMO's 7,330 8 7,338
------- ------- ------- -------
Total $62,871 $ 248 $ (487) $62,632
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
10.
(Continued)
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - INVESTMENT AND MORTGAGE BACKED SECURITIES (Continued)
<TABLE>
<CAPTION>
December 31, 1998
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
--------------- -------------- --------------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Municipal securities $ 175 $ 4 $ 179
Mortgage-backed securities:
Freddie Mac 342 1 343
Fannie Mae 2,056 30 2,086
Ginnie Mae 2,508 33 2,541
--------------- -------------- --------------- ---------------
Total $ 5,081 $ 68 $ 5,149
--------------- -------------- --------------- ---------------
--------------- -------------- --------------- ---------------
HELD TO MATURITY:
U.S. government and federal
agencies $ 998 $ 8 $ $ 1,006
Corporate notes 1,494 (6) 1,488
Mortgage-backed securities:
Freddie Mac 17,019 312 17,331
Fannie Mae 4,078 78 (9) 4,147
CMO's 9,040 (49) 8,991
--------------- -------------- --------------- ---------------
Total $ 32,629 $ 398 $ (64) $ 32,963
--------------- -------------- --------------- ---------------
--------------- -------------- --------------- ---------------
</TABLE>
NOTE 3 - LOANS RECEIVABLE
Loans are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Loans secured by real estate:
Construction loans on single family residences $ 1,094 $ 735
Single family 45,644 45,441
Multi-family and commercial 1,118 1,150
Commercial loans 302 263
Consumer loans 16,229 15,739
-------- --------
64,387 63,328
Allowance for loan losses (372) (379)
-------- --------
Total $ 64,015 $ 62,949
-------- --------
-------- --------
</TABLE>
11.
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - LOANS RECEIVABLE (Continued)
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 1998
----- -----
(In thousands)
<S> <C> <C>
Balance, beginning of period $ 379 $ 231
Loans charged off (7) (1)
Recoveries -- --
Provision for losses -- --
----- -----
Balance, end of period $ 372 $ 230
----- -----
----- -----
</TABLE>
12.
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The following discussion compares the financial condition of Grand Central
Financial Corp ("Company") and its wholly owned subsidiary, Central Federal
Savings and Loan Association of Wellsville (the "Association") at March 31, 1999
to December 31, 1998 and the results of operations for the three months ended
March 31, 1999 and 1998. This discussion should be read in conjunction with the
interim financial statements and footnotes included herein.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions which are
not subject to certain risks and uncertainties for forward-looking statements
contained in the Private Securities Reform Act of 1995, and is including this
statement for purposes of these safe harbor provisions. When used herein, the
terms "anticipates", "plans", "expects", "believes", and similar expressions as
they relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements may materially differ from those expressed or implied in the
forward-looking statements. Risks and uncertainties that could cause or
contribute to such material differences include, but are not limited to, general
economic conditions, interest rate environment, competitive conditions in the
financial services industry, changes in law, governmental policies and
regulations, and rapidly changing technology affecting financial services.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the SEC.
The Company does not undertake - and specifically disclaims any obligation - to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
GENERAL
The Company's results of operations are dependent primarily on net
interest income, which is the difference ("spread") between the interest income
earned on its loans, mortgage-backed securities, and securities portfolio and
its cost of funds, consisting of interest paid on its deposits and borrowed
funds. The interest rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows. The Company's net income is also affected by, among other things, loan
fee income, provisions for loan losses, service charges, operating expenses and
franchise and income taxes. The
13.
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Company's revenues are derived primarily from interest on mortgage loans,
consumer loans, mortgage-backed securities and securities, as well as income
from service charges and loan originations. The Company's operating expenses
principally consist of employee compensation and benefits, occupancy, federal
deposit-insurance premiums and other general and administrative expenses. The
Company's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities. Future changes
in applicable law, regulations or government policies may materially impact the
Company.
MANAGEMENT STRATEGY
The Company is a community oriented financial institution offering a
variety of financial services to meet the needs of the communities it serves.
The Company attracts deposits from the general public and uses such deposits,
together with borrowings and other funds, to originate one-to four-family
residential mortgage loans and short-term consumer loans. To a lesser extent,
the Company also originates residential construction loans in its market area
and a limited amount of commercial business loans and loans secured by
multi-family and non-residential real estate. Management has sought in recent
years to expand the business of the Company by establishing additional branches
to service additional customers in its market area. Management's efforts in
increasing the Company's volume of shorter-term consumer loans have been
intended to help reduce interest rate risk, as well as to build on the Company's
residential mortgage business. The Company's deposits are insured up to the
maximum allowable amount by the Savings Association Insurance Fund (the "SAIF"),
and administered by the Federal Deposit Insurance Corporation (the "FDIC"). The
Company also invests in mortgage-backed securities, most of which are insured or
guaranteed by federal agencies, as well as securities issued by the U.S.
government or agencies thereof.
The Company is not aware of any market or institutional trends, events
or uncertainties that are expected to have a material effect on liquidity,
capital resources or operations, except as discussed below. The Company is also
not aware of any current recommendations by its regulators which would have a
material effect if implemented, except as discussed below.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1999 AND DECEMBER 31, 1998
Total assets of the Company were $142.7 million at March 31, 1999,
compared to $133.4 million at December 31, 1998, representing an increase of
$9.2 million, or 6.9%. The primary component in the increase in total assets was
a $29.9 million increase in total securities (including securities available for
sale and held to maturity) which was partially offset by a decrease in cash and
cash equivalents of $21.1 million. The increase in assets was primarily funded
by $17.2 million net proceeds from the conversion from a mutual association to a
stock company and an increase of $13.9 million in FHLB advances. The increase in
securities was
14.
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
primarily due to management moving the conversion proceeds from cash and cash
equivalents to the securities portfolio and the use of FHLB advances to fund
securities purchases through an arbitrage transaction. Management entered into
the arbitrage transaction in order to better leverage the new capital and
enhance earnings. The Company plans to utilize the proceeds from the conversion
to fund loan growth as loan demand allows. In the short term, the proceeds will
continue to be invested in the securities portfolio. The majority of securities
purchased with the proceeds from the offering mature within one year.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998
GENERAL. Net income for the three months ended March 31, 1999 increased
by $31,000 or 16.5% from $188,000 for the three months ended March 31, 1998 to
$219,000 for the three months ended March 31, 1999. The increase was primarily
due to the increase in net interest income and non-interest income which was
partially offset by an increase in non-interest expense and tax expense.
NET INTEREST INCOME. Net interest income is the largest component of
the Company's net income, and consists of the difference between interest income
generated on interest-earnings assets and interest expense incurred on
interest-bearing liabilities. Net interest income is primarily affected by the
volumes, interest rates and composition of interest-earning assets and
interest-bearing liabilities.
Net interest income increased approximately $225,000, or 23.7%, from
$949,000 for the three months ended March 31, 1998 to $1,174,000 for the three
months ended March 31, 1999. The primary reason for this change was a decrease
in interest expense of $159,000, or 12.6%, and an increase in interest income of
$66,000, or 3.0%. The decrease in interest expense was due to a decline in the
cost of funds along with a decrease in average interest bearing liabilities
outstanding, but borrowings went up at the end of the quarter. The increase in
interest income was due to an increase in average earning assets which was
partially offset by a decline in the yield on earning assets. The decline in the
yield on earning assets and decline in cost of funds was due to a decline in
overall market interest rates.
PROVISION FOR LOAN LOSSES. The provision for loan losses is based on
management's regular review of the loan portfolio, which considers factors such
as past experience, prevailing general economic conditions and considerations
applicable to specific loans, such as the ability of the borrower to repay the
loan and the estimated value of the underlying collateral, as well as changes in
the size and growth of the loan portfolio.
No provision for loan losses was recorded during the three months ended
March 31, 1999 or 1998. At March 31, 1999, the allowance for loan losses
represented .58% of total loans
15.
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
compared to .59% at December 31, 1998. Management believes the allowance for
loan losses is adequate to absorb probable losses; however, future additions to
the allowance may be necessary based on changes in economic conditions.
NONINTEREST INCOME. The Company experienced a $23,000, or 33.3%,
increase in noninterest income during the first three months of 1999 compared to
the same period in 1998. The increase was primarily due to an increase in
service charge income of $12,000 and an increase in gain on sale of securities
of $11,000.
NONINTEREST EXPENSE. Noninterest expense increased $178,000, or
23.2%, primarily due to increases of $41,000 in salaries and benefits
expense, $37,000 in occupancy expense and $81,000 in other operating expense.
The increase in both salaries and benefits and net occupancy expense were a
direct result of the branch offices opened in late 1997 and the two branch
offices opened during 1998. The branches are leased facilities located in
Phar-Mor stores and have allowed the Company to expand its market area by
entering the Youngstown and Boardman markets. Salaries and benefits and net
occupancy costs are expected to increase due to the impact of the additions.
In addition, a portion of the increases in salary and benefits expense was
due to the Employee Stock Ownership Plan put in place when the Company
converted from a mutual association to a stock company and the cost of the
shares allocated to participants based on this plan. The increase in other
expenses includes increased expenses associated with the additional branch
offices, increased professional fees as a result of being a public company
and increased data processing costs related to Y2K.
INCOME TAXES. The provision for income taxes totaled $103,000 for the
three months ended March 31, 1999 compared to $64,000 for the three months ended
March 31, 1998, due to the increase in income before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Association's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed and investment securities and borrowings from
the FHLB-Cincinnati. The Association uses the funds generated to support its
lending and investment activities as well as any other demands for liquidity
such as deposit outflows. While maturities and scheduled amortization of loans
are predictable sources of funds, deposit flows, mortgage prepayments and the
exercise of call features are greatly influenced by general interest rates,
economic conditions and competition. The Association has continued to maintain
the required levels of liquid assets as defined by OTS regulations. This
requirement of the OTS, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The Association's currently required
liquidity ratio is 4.0%. At March 31, 1999, the Association's liquidity ratio
was 20.3%.
16.
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
At December 31, 1998, the Association exceeded all of its regulatory
capital requirements with a tangible capital level of $21.8 million, or 16.25%,
of total adjusted assets, which is above the required level of $2.0 million, or
1.5%; core capital of $21,799 million, or 16.25%, of adjusted total assets,
which is above the required level of $4.0 million, or 4.0%; and risk-based
capital of $22.2 million, or 37.95%, of risk-weighted assets, which is above the
required level of $4.7 million, or 8.0%.
The Association's most liquid assets are cash and cash equivalents. The
levels of those assets are dependent on the Association's operating, financing,
lending and investing activities during any given period. At March 31, 1999,
cash and cash equivalents totaled $5.0, or 3.5% of total assets.
The Association has other sources of liquidity if a need for additional
funds arises, including FHLB advances. At March 31, 1999, the Association had
$29.9 million in advances outstanding from the FHLB-Cincinnati, and at March 31,
1999, had an additional overall borrowing capacity from the FHLB of $25.0
million. Depending on market conditions, the pricing of deposit products and
FHLB advances, the Association may rely on FHLB borrowing to fund asset growth.
The Association relies primarily on competitive rates, customer service and
long-standing relationships with customers to retain deposits. Based on the
Association's experience with deposit retention and current retention
strategies, management believes that, although it is not possible to predict
future terms and conditions upon renewal, a significant portion of such deposits
will remain with the Association.
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products were
designed to accommodate only two-digits. For example, "98" is stored on the
system to represent 1998. Accordingly, operating systems upon which the Company
relies may recognize "00" as the year 1900 rather than 2000, causing the systems
to fail or generate erroneous information. Although there can be no assurance
that the Company and its service providers and vendors will be successful in
remedying all potential problems, the Company has conducted a comprehensive
review of its computer systems and equipment to identify applications that could
be affected by the "Year 2000" problem and has implemented a plan designed to
ensure that all software used in connection with the Company's business will
manage and manipulate data involving the transition with data from 1999 to 2000
without functional or data abnormality and without inaccurate results related to
such data. Pursuant to the plan, the Company has developed and implemented
testing strategies and plans for testing internal mission critical systems and
testing mission critical systems of service providers and vendors. Pursuant to
the plan, the
17.
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Company also proposes to identify material customers and evaluate Year 2000
risks that may be associated with them.
The Company's mission critical data processing is performed under
agreements with FISERV, Inc. ("FISERV"), a nationwide financial service bureau
which performs loan processing, savings deposit processing, and other financial
services. Consequently, the Company is very dependent on this service bureau to
conduct its business. The Company has already contacted FISERV, as well as each
of its other service providers to request schedules for year 2000 compliance and
expected costs, if any, to be passed along to the Company. The Company believes
that FISERV has completed its remediation efforts and is engaged in the testing
phase of its Year 2000 plan. However, the Company has not received written
assurances by FISERV that it is Year 2000 compliant. As a member of FISERV's
client advisory group, the Company participated in the group testing of the
FISERV systems that was completed prior to December 31, 1998. The Company
completed individual testing with FISERV during the first quarter of 1999. The
Company's other service providers, which interface with FISERV, also completed
their testing for Year 2000 compliance. The Company's in-house computers play a
less critical role in the Company's operations and have been upgraded for Year
2000 compliance. Testing of these systems was completed by December 31, 1998.
The Company believes that its costs related to Year 2000 will be approximately
$70,000, in addition to any increased costs passed through as higher fees
charged by service providers, which costs are not yet determined. Management
does not expect these costs to have a significant impact on the Company's
financial position or results of operations. However, there can be no assurance
that all service providers' systems will be Year 2000 compliant, consequently,
the Company could incur incremental costs to convert to another service
provider.
In addition to possible expense related to its own systems, the Company
could incur losses if year-2000 issues adversely affect the Company's depositors
or borrowers. Such problems could include delayed loan payments due to year-2000
problems affecting any of the Company's significant borrowers or impairing the
payroll systems of large employers in the Company's market area. The Company has
determined that Year 2000 non-compliance by any individual loan customer would
have no material impact on the Company. Because the Company's loan portfolio is
highly diversified with regard to individual borrowers and types of businesses,
the Company does not expect any significant or prolonged year-2000 related
difficulties arising from its customers that will affect the earnings or cash
flows. The risks associated with the Year 2000 issue, however, could go beyond
the Company's own ability to solve Year 2000 problems. Should suppliers of
critical services fail in their efforts to be Year 2000 compliant, it could have
significant adverse financial results for the Company. Accordingly, the Company
is developing Year 2000 remediation contingency plans for mission-critical
systems. (These plans would likely involve replacement of service providers and
alternatives to the Company's established plan. The Company has completed the
majority of testing as of March 31, 1999 as stated in previous paragraphs. The
Company will continue to develop their contingency plan over the next quarter
based on the results from their testing.)
18.
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The above discussion contains certain forward-looking statements. The
discussion is based on the Company's current estimates that are subject to
uncertainties that could cause the implementation of the schedule, the costs and
the results contemplated by the plan to differ materially from the Company's
expectation. Such uncertainties include, but are not limited to, the continued
progress and eventual success of service providers and other persons on which
the Company and it customers depend.
19.
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
FORM 10-QSB
Quarter ended March 31, 1999
PART II - OTHER INFORMATION
Item 1 Legal Proceedings.
Neither the Company nor its banking subsidiary, Central Federal
Savings and Loan Association of Wellsville, is a party to any
material legal proceedings at this time. From time to time the
Company and its banking subsidiary are involved in various claims
and legal actions arising in the ordinary course of business.
Item 2 Changes in Securities and Use of Proceeds.
The following information is provided in connection with the
Company's sale of its common stock as part of the Association's
conversion.
a. The effective date of the Registration Statement on Form
SB-2 (File No. 333-64089) was November 12, 1998.
b. The offering was consummated on December 30, 1998 with the
sale of all securities registered pursuant to the
Registration Statement. Sandler O'Neill & Partners, L.P.,
acted as marketing agent for the offering.
c. The class of securities registered was common stock, par
value $.01 per share. The aggregate amount of such
securities registered was 1,938,871 shares which represented
an aggregate amount of $19,388,710.
d. The expenses incurred in connection with the conversion and
offering was $774,000, including expenses paid to or for
underwriters of $214,000, attorney and accounting fees of
$360,000 and other expenses of $200,000. The net proceeds
resulting from the offering after deducting expenses was
$18,615,000.
e. The net proceeds are invested in capital stock of the
subsidiary savings and loans and investment securities.
Item 3 Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits
20.
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
Quarter ended March 31, 1999
PART II - OTHER INFORMATION
3.1 Certificate of Incorporation of Grand Central Financial Corp. (1)
3.2 Bylaws of Grand Central Financial Corp. (1)
16.1 Letter re: change in Certifying Accountant (2)
21.0 Subsidiaries Information Incorporated Herein by Reference to Part 1 -
Subsidiary Activity
27.0 Financial Data Schedule
(1) Incorporated by reference into this document from the Exhibits filed
with the Registration Statement on Form SB-2, and any amendments
thereto, Registration No. 333-64089.
(2) Incorporated by reference into this document from Current Report on
Form 8-K, filed by the Company on January 15, 1999 and amended on
January 26, 1999.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on January 15, 1999 and amended
it on January 26, 1999, reporting under Item 4 a change in the Company's
independent accountants.
On January 11, 1999, the registrant changed independent auditors by replacing
Robb, Dixon, Francis, Davis, Oneson & Company, with Crowe, Chizek and Company
LLP. Robb, Dixon, Francis, Davis, Oneson & Company's reports on the financial
statements for the past two years contained no adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles. Also, there were no disagreements with Robb, Dixon,
Francis, Davis, Oneson & Company on any matter of accounting principles or
practice, financial statement disclosure, or auditing scope or procedure or
accounting principle.
21.
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned hereunto duly
authorized.
GRAND CENTRAL FINANCIAL CORP.
Dated: May 17, 1999 By: /s/ William R. Williams
-----------------------------------
William R. Williams
President and Chief Executive Officer
(principal executive officer)
Dated: May 17, 1999 By: /s/ John A. Rife
-----------------------------------
John A. Rife
Executive Vice President and Treasurer
(principal accounting and financial officer)
22.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the quarterly
report on Form 10-QSB and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0001070680
<NAME> GRAND CENTRAL FINANCIAL CORP.
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
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