<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended December 31, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File Number: 0-25945
GRAND CENTRAL FINANCIAL CORP.
(Name of small business issuer in its charter)
DELAWARE 34-1877137
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
601 MAIN STREET, WELLSVILLE, OHIO 43968
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (330) 532-1517
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. (1) YES X NO__
(2) YES X NO__
Indicate by check mark if disclosure of delinquent filers to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
As of December 31, 1998, the Registrant's revenues were $9,126,000.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates as of March 19, 1999 was $16,828,991.
Based on the average of the bid and ask prices, the aggregate market value
of the Common Stock outstanding held by the nonaffiliates of the Registrant on
March 19, 1999 was $16,828,991 (1,602,761 shares at $10.50 per share).
As of March 19, 1999, there were 1,938,871 shares of the Registrant's
Common Stock outstanding.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I
PAGE NO.
<S> <C>
Item 1. Description of Business...........................................1
Item 2. Description of Property.......................................... 26
Item 3. Legal Proceedings................................................ 26
Item 4. Submission of Matters to a Vote of Security Holders.............. 26
PART II
Item 5. Market for the Company's Common Equity
and Related Stockholder Matters.................................. 27
Item 6. Management's Discussion and Analysis of Financial
Condition or Plan of Operation................................... 27
Item 7. Financial Statements............................................. 38
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.............................. 65
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................ 65
Item 10. Executive Compensation........................................... 67
Item 11. Security Ownership of Certain Beneficial Owners and Management... 69
Item 12. Certain Relationships and Related Transactions................... 70
PART IV
Item 13. Exhibits and Reports on Form 8-K................................. 71
SIGNATURES.......... ......................................................... 73
</TABLE>
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Grand Central Financial Corp. (the "Company") was incorporated under
Delaware law on September 10, 1998. On December 30, 1998, the Company acquired
Central Federal Savings and Loan Association of Wellsville (the "Association")
as a part of the Association's conversion from a federally chartered mutual
savings and loan association into a federally chartered capital stock savings
and loan association (the "Conversion"). The Company is a savings and loan
holding company and is subject to regulation by the Office of Thrift Supervision
(the "OTS"). Currently, the Company does not transact any material business
other than through the Association. The Company retained 50% of the net
conversion proceeds amounting to $9.3 million which it intended to use for
general business activities and to fund a loan to the Employee Stock Ownership
Plan ("ESOP") to purchase 8% of the stock issued in the Conversion. At December
31, 1998, the Company had total assets of $133.4 million and stockholders'
equity of $31.8 million.
The Association is a community-oriented savings institution which was
originally organized in 1892. The Association's principal business consists of
attracting deposits from the general public in its primary market area and
investing those deposits and other funds, generated from operations, and from
Federal Home Loan Bank of Cincinnati ("FHLB-Cincinnati") advances, primarily in
conventional mortgage loans secured by single-family residences. The Association
also invests in consumer loans, primarily indirect automobile loans and loans
originated directly or on the Association's behalf by automobile dealers at the
time of sale. To a significantly lesser extent, the Association invests in home
equity, multi-family, commercial real estate, construction and land loans. The
Association also invests in mortgage-backed securities, primarily those
guaranteed or insured by government agencies such as Ginnie Mae, Fannie Mae and
Freddie Mac, and other investment grade securities. The Association's revenues
are derived principally from the generation of interest and fees on loans
originated and, to a lesser extent, interest and dividends on investment
securities. The Association's primary sources of funds are retail savings
deposits and, to a lesser extent, principal and interest payments on loans and
investment securities, FHLB-Cincinnati advances and proceeds from the sale of
loans. The Association operates through its home office located in Wellsville,
Ohio, and its five full service branch offices.
MARKET AREA AND COMPETITION
The Association's primary market area includes Columbiana, Mahoning and
Jefferson Counties in Eastern Ohio. In recent years, the market area has
experienced higher unemployment rates than in Ohio and the United States and a
slightly decreasing population. Per capita income and median household income in
the market area are lower and have increased at a lower rate than in Ohio and
the United States.
The Association's primary market area is a competitive market for financial
services and the Association faces significant competition both in making loans
and in attracting deposits. The Association faces direct competition from a
number of financial institutions operating in its market area, many with a
state-wide or regional presence, and in some cases, a national presence. Many of
these financial institutions are significantly larger and have greater financial
resources than the Association. The Association's competition for loans comes
principally from savings institutions, mortgage banking companies, commercial
banks and credit unions. Its most direct competition for deposits has
historically come from savings institutions and commercial banks. In addition,
the Association faces increasing competition for deposits and other financial
products from non-bank institutions such as brokerage firms and insurance
companies in mutual funds and annuities. Competition may also increase as a
result of the lifting of restrictions on the interstate operations of financial
institutions.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Association's loan portfolio consists
primarily of conventional first mortgage loans secured by single-family
residences. At December 31, 1998, the Association had gross loans receivable of
$64.7 million, of which $46.8 million were single-family, residential mortgage
loans, or 72.3% of the Association's gross loans receivable. The remainder of
the portfolio consisted of: consumer loans of $15.7 million,
1
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or 24.3% of gross loans receivable; $735,000 of construction and land loans, or
1.2% of gross loans receivable; $1.2 million of multi-family mortgage loans, or
1.8% of gross loans receivable; and $263,000 of commercial loans, or 0.4% of
gross loans receivable. At that same date, 89.7% of the Association's loan
portfolio had fixed interest rates. The Association had $1.2 million in
single-family residential mortgage loans held for sale at December 31, 1998.
The types of loans that the Association may originate are subject to
federal and state law and regulations. Interest rates charged by the Association
on loans are affected by the demand for such loans and the supply of money
available for lending purposes and the rates offered by competitors. These
factors are, in turn, affected by, among other things, economic conditions,
fiscal policies of the federal government, the monetary policies of the Federal
Reserve Board, and legislative tax policies.
The following table sets forth the composition of the Association's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------
1998 1997 1996
------------------------ ---------------------- -------------------------
PERCENT AMOUNT PERCENT PERCENT
AMOUNT OF TOTAL OF TOTAL AMOUNT OF TOTAL
--------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family(1)........ $46,781 72.34% $42,429 72.80% $38,498 77.14%
Multi-family and
commercial........... 1,150 1.78 1,006 1.73 1,448 2.90
Construction............ 735 1.14 1,017 1.74 612 1.23
------ ------ ------ ------ ------ ------
Total real estate loans 48,666 75.26 44,452 76.27 40,558 81.27
------ ------ ------ ------ ------ ------
Consumer loans:
Home equity loans....... 2,843 4.40 2,227 3.82 1,598 3.20
Automobile.............. 12,896 19.94 10,585 18.16 6,879 13.79
Other................... -- -- 710 1.22 580 1.16
------ ------ ------ ------ ------ ------
Total consumer loans 15,739 24.34 13,522 23.20 9,057 18.15
------ ------ ------ ------ ------ ------
Commercial loans........... 263 0.40 308 0.53 290 0.58
------ ------ ------ ------ ------ ------
Total loans.......... 64,668 100.00% 58,282 100.00% 49,905 100.00%
------ ------ ------
------ ------ ------
Less:
Deferred loan origination
fees and discounts... (188) (165) (159)
Allowance for loan losses (379) (231) (229)
--------- ---- -----
Total loans, net..... $64,101 $57,886 $49,517
------- ------- -------
------- ------- -------
</TABLE>
(1)Includes loans held for sale.
2
<PAGE>
LOAN MATURITY. The following table shows the remaining contractual maturity
of the Association's total loans at December 31, 1998. The table does not
include the effect of future principal prepayments.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
------------------------------------------------------------
CONSTRUCTION(1) COMMERCIAL TOTAL LOANS
------------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Amounts due in:
One year or less.............................. $ -- $ 91 $ 91
After one year:
More than one year to three years.......... -- 5 5
More than three years to five years........ -- -- --
More than five years to 10 years........... -- -- --
More than 10 years to 15 years............. -- 167 167
More than 15 years......................... 735 -- 735
---- ---- ----
---- ---- ----
Total amount due........................ $735 $263 $998
---- ---- ----
---- ---- ----
</TABLE>
(1) Construction loans, which consist of loans to the owner for the
construction of single-family residences, automatically convert to
permanent financing upon completion of the construction phase.
The following table sets forth, at December 31, 1998, the dollar amount of
loans contractually due after December 31, 1999, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1999
-------------------------------------------
FIXED ADJUSTABLE TOTAL
--------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Consumer loans....................................... $735 $ -- $735
Commercial loans..................................... 5 167 172
---- ---- ----
Total loans.................................... $740 $167 $907
---- ---- ----
---- ---- ----
</TABLE>
ORIGINATION OF LOANS. The Association's mortgage lending activities are
conducted through its home office and five branch offices. Although the
Association may originate both adjustable-rate and fixed-rate mortgage loans, a
substantial majority of the Association's loan originations have been fixed-rate
mortgage loans. The Association's ability to originate loans depends upon the
relative customer demand for fixed-rate or adjustable-rate mortgage loans, which
is affected by the current and expected future level of interest rates. The
Association has not emphasized the origination of adjustable-rate mortgage loans
due to the relatively low demand for such loans in the Association's primary
market area. The Association sells a portion of the mortgage loans that it
originates, primarily to Freddie Mac and retains only loans that bear an
interest rate above levels established from time to time by the Association's
board of directors based on current market rates. At December 31, 1998, there
were 14 loans categorized as held for sale. The Association also emphasizes the
origination of home equity loans and construction loans secured primarily by
owner-occupied properties.
3
<PAGE>
The following table sets forth the Association's loan originations,
purchases, sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans at beginning of period ............. $ 57,886 $ 49,517 $ 48,233
-------- -------- --------
Originations:
Real estate:
Single-family ..................... 21,652 11,932 11,495
Multi-family and commercial ....... 178 -- 353
Construction ...................... 1,799 1,042 376
Consumer .......................... 9,871 10,139 5,469
Commercial ........................ 229 341 283
-------- -------- --------
Total loans originated ......... 33,729 23,454 17,976
-------- -------- --------
Principal loan repayments and
prepayments ............................ (21,433) (14,161) (16,076)
Loan sales ........................... (5,923) (877) (629)
Transfers to REO ..................... (4) (39) --
Change in unearned origination fees .. (6) (6) (7)
Change in allowance for loan losses .. (148) (2) 20
-------- -------- --------
Net loan activity ........................ 6,215 8,369 1,284
-------- -------- --------
Loans at end of period (1) ........... $ 64,101 $ 57,886 $ 49,517
-------- -------- --------
-------- -------- --------
</TABLE>
(1) Loans at end of period include loans in process of $869,000, $574,000 and
$550 for fiscal years 1998, 1997 and 1996, respectively.
SINGLE-FAMILY MORTGAGE LENDING. The primary lending activity of the
Association has been and continues to be the origination of permanent
conventional mortgage loans secured by single-family residences located in the
Association's primary market area. The Association sells a portion of the
fixed-rate loans that it originates. The Association retains the servicing
rights on the loans it sells. The Association retains fixed-rate loans with a
rate of interest higher than the level established by the Association's board of
directors as high in relation to the current market based on Freddie Mac's
levels. At December 31, 1998, the Association retained 30-year loans with a rate
of interest of 7.5% or higher and 15-year loans with a rate of interest of 7.0%
or higher. The Association generally retains for its portfolio any ARM loans
that it originates. Most single-family mortgage loans are underwritten according
to Freddie Mac guidelines. Loan originations are obtained from the Association's
loan officers and their contacts with the local real estate industry, existing
or past customers, and members of the local communities. The Association
primarily originates fixed-rate loans in the current low interest rate
environment, but also offers adjustable-rate mortgage loans. At December 31,
1998, single-family mortgage loans totalled $46.8 million, or 72.3% of total
loans at such date. At that date, of the Association's mortgage loans secured by
single-family residences, $40.7 million, or 87.0%, were fixed-rate loans.
The Association's policy is to originate single-family residential mortgage
loans in amounts up to 80% of the appraised value of the property securing the
loan and up to 95% of the appraised value if private mortgage insurance is
obtained. Mortgage loans originated by the Association generally include
due-on-sale clauses which provide the Association with the contractual right to
deem the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Association's consent. Due-on-sale clauses
are an important means of adjusting the rates on the Association's fixed-rate
mortgage loan portfolio and the Association exercises its rights under these
clauses. The residential mortgage loans originated by the Association are
generally for terms to maturity of up to 30 years.
The Association offers several adjustable-rate loan programs with terms of
up to 25 years and interest rates that adjust either annually or every three
years. Of the Association's mortgage loans secured by single-family residences,
$6.1 million, or 13.0%, had adjustable rates. Certain of the Association's
one-year ARM loans have a maximum adjustment limitation of 2% per year and a 6%
lifetime cap on adjustments. The Association has additional one-year ARM loans
that have no caps. The Association's three-year ARM loan has a maximum
adjustment limitation
4
<PAGE>
of 1.5% per change and a 6% lifetime cap. The interest rate adjustments on ARM
loans currently offered are indexed to the monthly average rate on a variety of
established indices.
The volume and types of ARM loans originated by the Association have been
affected by such market factors as the level of interest rates, consumer
preferences, competition and the availability of funds. In recent years, demand
for ARM loans in the Association's primary market area has been weak due to the
low interest rate environment and consumer preference for fixed-rate loans.
Consequently, in recent years the Association has not originated a significant
amount of ARM loans as compared to its originations of fixed-rate loans. The ARM
loans offered by the Association do not provide for initial deep discount
interest rates or for negative amortization. Although the Association expects to
offer ARM loans, the Association cannot be certain that in the future it will be
able to originate a sufficient volume of ARM loans to constitute a significant
portion of the Association's loan portfolio.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. On a limited basis, the
Association occasionally originates multi-family mortgage loans generally
secured by properties located in the Association's primary market area. In
reaching its decision on whether to make a multi-family loan, the Association
considers a number of factors including: the net operating income of the
mortgaged premises before debt service and depreciation; the debt service ratio
(the ratio of net operating income to debt service); and the ratio of loan
amount to appraised value. Pursuant to the Association's current underwriting
policies, a multi-family mortgage loan may be made in an amount up to 80% of the
appraised value of the underlying property. In addition, the Association
generally requires a debt service ratio of 120%. Properties securing a
multi-family loan are appraised by an independent appraiser.
When evaluating a multi-family loan, the Association also considers the
financial resources and income level of the borrower, the borrower's experience
in owning or managing similar property, and the Association's lending experience
with the borrower. The Association's underwriting policies require that the
borrower be able to demonstrate strong management skills and the ability to
maintain the property from current rental income. The borrower is required to
present evidence of the ability to repay the mortgage and a satisfactory credit
history. In making its assessment of the creditworthiness of the borrower, the
Association generally reviews the financial statements, employment and credit
history of the borrower, as well as other related documentation.
On a limited basis, the Association originates commercial real estate loans
that are generally secured by properties used for business or religious purposes
such as farms, churches, small office buildings or retail facilities located in
its primary market area. The Association's underwriting procedures provide that
commercial real estate loans may be made in amounts up to 70% of the appraised
value of the property. The Association's underwriting standards and procedures
are similar to those applicable to its multi-family loans, whereby the
Association considers the net operating income of the property, the debt service
ratio and the borrower's expertise, credit history and profitability. The
largest commercial real estate loan in the Association's portfolio at December
31, 1998 was $115,000. The loan was current and performing in accordance with
its contractual terms at December 31, 1998.
Multi-family and commercial real estate loans are generally considered to
involve a greater degree of risk than single-family residential mortgage loans.
Because payments on loans secured by multi-family and commercial real estate
properties are often dependent on successful operation or management of the
properties, repayment of such loans may be subject to a greater extent to
adverse conditions in the real estate market or the economy. The Association
seeks to minimize these risks through its underwriting policies, which require
such loans to be qualified at origination on the basis of the property's income
and debt coverage ratio.
The Association's multi-family and commercial real estate loan portfolio at
December 31, 1998 totalled $1.2 million or 1.8% of gross loans receivable. The
Association's largest multi-family loan at December 31, 1998, had a principal
balance outstanding of less than $16,000.
COMMERCIAL LENDING. On a very limited basis, the Association makes
commercial business loans generally secured by business equipment, inventory,
accounts receivable and other business assets. At December 31, 1998, the
Association's commercial loan portfolio was $263,000 or 0.4% of gross loans
receivable, none of which were in non-accrual status. The Association does not
currently anticipate that commercial lending activities will significantly
increase in the immediate future.
5
<PAGE>
CONSTRUCTION AND LAND LENDING. The Association generally originates
construction and land development loans to contractors and individuals in its
primary market area. The Association's construction loans primarily are made to
finance the construction of owner-occupied single-family residential properties
and, to a significantly lesser extent, individual properties built by developers
for future sale. The Association's construction loans to individuals are
primarily fixed-rate loans which, after a four-month construction period,
convert to permanent loans with maturities of up to 30 years. The Association's
policies provide that construction loans may be made in amounts up to 80% of the
appraised value of the property for construction of single-family residences.
The Association requires an independent appraisal of the property. Loan proceeds
are disbursed in increments as construction progresses and as inspections
warrant. The Association requires regular inspections to monitor the progress of
construction. Land loans are determined on an individual basis, but generally
they do not exceed 75% of the actual cost or current appraised value of the
property, whichever is less. The largest construction and land loan in the
Association's portfolio at December 31, 1998 had a balance of $168,000 and is
secured by a single family residence. This loan is currently performing in
accordance with its terms. At December 31, 1998, the Association had $735,000 of
construction and land loans totalling 1.1% of the Association's gross loans
receivable.
Construction and land financing is considered to involve a higher degree of
credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development compared to the estimated cost (including interest) of construction.
If the estimate of value proves to be inaccurate, the Association may be
confronted with a project, when completed, having a value which is insufficient
to assure full repayment.
CONSUMER AND OTHER LENDING. The Association's originated consumer loans
generally consist of automobile loans, second mortgage loans, home equity loans
and loans secured by deposits. The Association originates a relatively small
number of home equity lines of credit, which are generally ARM loans with the
rate adjusting monthly at 2% above the prime rate of interest as disclosed in
THE WALL STREET JOURNAL. At December 31, 1998, the Association's consumer loan
portfolio was $15.8 million, or 24.3% of gross loans receivable.
Loans secured by rapidly depreciable assets such as automobiles entail
greater risks than single-family residential mortgage loans. In such cases,
repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance, since there is a greater
likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections on these loans depend on the borrower's
continuing financial stability and, therefore, are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Finally, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans in the event of a default. A significant portion of the Association's
automobile loans are originated on the Association's behalf by automobile
dealers at the time of sale. This indirect lending requires the maintenance of
relationships with such dealers. Such loans do not have the benefit of direct
interaction between the borrowers and the Association's lending officers during
the underwriting process.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors establishes
the lending policies of the Association. Consumer loans in amounts up to $25,000
may be approved by the Association's loan officers. Loans in excess of $25,000
and up to $50,000 must be approved by the President or Vice President. Consumer
loans in excess of $50,000 must be approved by the Board of Directors. All
mortgage loans are approved by the Executive Committee. Pursuant to OTS
regulations, loans to one borrower cannot exceed 15% of the Association's
unimpaired capital and surplus. The Association will not make loans to one
borrower that are in excess of regulatory limits.
DELINQUENCIES AND CLASSIFIED ASSETS. The Board of Directors performs a
monthly review of all delinquent loans thirty days or more past due. The
procedures taken by the Association with respect to delinquencies vary depending
on the nature of the loan and period of delinquency. When a borrower fails to
make a required payment on a loan, the Association takes a number of steps to
have the borrower cure the delinquency and restore the loan to current status.
The Association sends the borrower a written notice of non-payment after the
loan is first past due. In the event payment is not then received, additional
letters are sent and phone calls are made. If management believes that the loan
is well-secured, the Association generally will try to work with the borrower to
have the loan brought current. If the loan is still not brought current and it
becomes necessary for the Association to take legal action, the Association will
commence foreclosure proceedings against any real property that secures the
loan. If a
6
<PAGE>
foreclosure action is instituted and the loan is not brought current, paid in
full, or refinanced before the foreclosure sale, the real property securing the
loan is foreclosed upon and sold at a sheriff's sale.
Federal regulations and the Association's Classification of Assets Policy
require that the Association utilize an internal asset classification system as
a means of reporting problem and potential problem assets. The Association has
incorporated the OTS internal asset classifications as a part of its credit
monitoring system. The Association currently classifies problem and potential
problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset is
considered "Substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "Doubtful" have all of the weaknesses
inherent in those classified "Substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss allowance is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, under current OTS policy the Association is
required to consider establishing a general valuation allowance in an amount
deemed prudent by management. The general valuation allowance, which is a
regulatory term, represents a loss allowance which has been established to
recognize the inherent credit risk associated with lending and investing
activities, but which, unlike specific allowances, has not been allocated to
particular problem assets. When an insured institution classifies one or more
assets, or portions thereof, as "Loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation allowances. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Management believes that an adequate allowance for loan losses has been
established. However, actual losses are dependent upon future events and, as
such, further additions to the level of allowances for estimated loan losses may
become necessary.
The Association's Classification of Assets Committee reviews and classifies
the Association's assets on a quarterly basis and the Board of Directors reviews
the results of the reports on a quarterly basis. The Association classifies
assets in accordance with the management guidelines described above. At December
31, 1998, the Association had $7,000 of assets designated as Special Mention
which consisted of one loan, $56,000 of assets classified as Substandard
consisting of three loans and no assets classified as doubtful and loss. At
December 31, 1998, the largest loan designated as Special Mention was a $7,000
loan and was secured by real estate.
7
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The following table1 sets forth the delinquencies in the Association's loan
portfolio as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------------- ---------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------ -------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF OF OF OF OF OF OF OF
LOANS LOANS LOANS LOANS LOANS LOANS LOANS LOANS
------- --------- ------- -------- ------- --------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Single-family................ 1 $31 3 $32 8 $114 6 $128
Multi-family and
commercial................. -- -- -- -- -- -- -- --
Consumer Loans: -- -- -- --
Home equity loans and
lines of credit........... -- -- -- -- 3 26 -- --
Automobile................... -- -- -- -- -- -- -- --
Unsecured lines of credit.... -- -- -- -- -- -- -- --
Other........................ -- -- 2 7 2 5 3 7
Commercial Loans................ -- -- -- -- -- -- 1 50
------- --------- ------- -------- ------- --------- ------- --------
Total..................... 1 $31 5 $39 13 $145 10 $185
------- --------- ------- -------- ------- --------- ------- --------
------- --------- ------- -------- ------- --------- ------- --------
Delinquent loans to
total loans............... 0.25% 0.32%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
----------------------- ------------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF OF OF OF
LOANS LOANS LOANS LOANS
------ --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real Estate Loans:
Single-family..................................... 6 $215 2 $41
Multi-family and commercial....................... -- -- -- --
Consumer Loans:
Home equity loans and lines of credit............. -- -- -- --
Automobile........................................ -- -- -- --
Unsecured lines of credit......................... 1 1 -- --
Other............................................. 3 10 1 4
Commercial Loans..................................... -- -- -- --
------ --------- ------- ---------
Total.......................................... 10 $226 3 $45
------ --------- ------- ---------
------ --------- ------- ---------
Delinquent loans to total loans...................... 0.45% 0.09%
</TABLE>
(1) The table does not include delinquent loans less than 60 days past due. At
December 31, 1998, 1997 and 1996, total loans past due 30 to 59 days
amounted to $389,000, $356,000 and $471,000, respectively.
8
<PAGE>
NON-PERFORMING ASSETS AND IMPAIRED LOANS. The following table sets forth
information regarding non-accrual loans and REO. At December 31, 1998,
non-accrual loans totalled $39,000, consisting of five loans and no REO. It is
the policy of the Association to cease accruing interest on loans 90 days or
more past due (unless the loan principal and interest are determined by
management to be fully secured and in the process of collection) and to charge
off all accrued interest. At December 31, 1998, the amount of additional
interest income that would have been recognized on non-accrual loans if such
loans had continued to perform in accordance with their contractual terms was
$10,000. At December 31, 1998 and 1996, the Association had no impaired loans.
At December 31, 1997, there were $5,000 of impaired loans with specific loan
loss allowances of $0.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------
1998 1997 1996
-------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accruing loans:
Single-family real estate.................................... $32 $128 $41
Consumer..................................................... 7 21 4
Commercial................................................... -- 50 --
-------- -------- ---------
Total(1).................................................. 39 199 45
Real estate owned (REO)....................................... -- -- --
Other repossessed assets...................................... -- -- --
-------- -------- ---------
Total nonperforming assets(2)............................. $39 $199 $45
Troubled debt restructurings.................................. -- -- --
-------- -------- ---------
Troubled debt restructurings and total nonperforming assets... $39 $199 $45
-------- -------- ---------
-------- -------- ---------
Total nonperforming loans and troubled debt restructurings
as a percentage of total loans............................... 0.06% 0.34% 0.09%
Total nonperforming assets and troubled debt restructurings
as a percentage of total assets.............................. 0.03% 0.17% 0.04%
</TABLE>
- -------------------------------------
(1) Total non-accruing loans equals total nonperforming loans.
(2) Nonperforming assets consist of nonperforming loans (and impaired loans),
other repossessed assets and REO.
9
<PAGE>
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in the Association's loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers
adequate to cover estimated losses in loans receivable which are deemed probable
and estimable. The allowance is based upon a number of factors, including
current economic conditions, actual loss experience and industry trends. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Association's allowance for loan losses. Such
agencies may require the Association to make additional provisions for loan
losses based upon information available at the time of the review. As of
December 31, 1998, the Association's allowance for loan losses was 0.59% of
gross loans receivable as compared to 0.40% as of December 31, 1997. The
Association had non-accrual loans of $39,000 and $199,000 at December 31, 1998
and December 31, 1997, respectively. The Association will continue to monitor
and modify its allowances for loan losses as conditions dictate.
The following table sets forth activity in the Association's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Allowance for loan losses, beginning of year............. $231 $229 $249
Charged-off loans:
Single-family real estate............................. 7 -- 15
Multi-family and commercial real estate............... -- -- --
Consumer.............................................. -- 4 5
----- ------ ------
----- ------ ------
Total charged-off loans............................ 7 4 20
Recoveries on loans previously charged off:
Single-family real estate............................. -- -- --
Consumer.............................................. 1 6 --
----- ------ ------
----- ------ ------
Total recoveries................................... 1 6 --
Net loans charged-off (recovered)........................ 6 (2) 20
Provision for loan losses................................ 154 -- --
----- ------ ------
----- ------ ------
Allowance for loan losses, end of period................. $379 $231 $229
----- ------ ------
----- ------ ------
Allowance for loan losses to total loans................. 0.59% 0.40% 0.46%
Allowance for loan losses to nonperforming loans
and troubled debt restructuring....................... 9.72x 1.16x 5.09x
Net loans charged-off (recovered) to
allowance for loan losses............................ 1.58% (0.87)% 8.73%
Net loans charged-off (recovered) to average loans....... 0.01% -- 0.04%
</TABLE>
10
<PAGE>
The following table sets forth the Association's allowance for loan losses
in each of the categories listed at the dates indicated and the percentage of
such amounts to the total allowance and to total loans.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- -------------------------- ----------------------------------
% OF PERCENT % OF PERCENT % OF PERCENT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
-------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate................. $174 45.91% 75.26% $107 46.32% 76.27% $107 46.73% 81.27%
Consumer.................... 62 16.36 24.34 37 16.02 23.20 35 15.28 18.15
Commercial.................. 143 37.73 0.40 87 37.66 0.53 87 37.99 0.58
Unallocated................. -- -- -- -- -- -- -- -- --
---- ----- ----- ---- ----- ----- ---- ----- -----
Total allowance
for loan losses...... $379 100.00% 100.00% $231 100.00% 100.00% $229 100.00% 100.00%
---- ------ ------ ---- ------ ------ ---- ------ ------
---- ------ ------ ---- ------ ------ ---- ------ ------
</TABLE>
REAL ESTATE OWNED
At December 31, 1998, the Association had no REO. If the Association
acquires any REO, it is initially recorded at fair value less costs to sell and
thereafter REO is recorded at the lower of the recorded investment in the loan
or the fair value of the related assets at the date of foreclosure, less costs
to sell. Thereafter, REO is valued at the lower of the recorded investment or
the fair value of the property less costs to sell. If there is a further
deterioration in value, the Association provides for a specific valuation
allowance.
INVESTMENT ACTIVITIES
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances and federal funds. Subject to
various restrictions, federally chartered savings institutions may also invest
their assets in commercial paper, investment-grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally chartered
savings institution is otherwise authorized to make directly. Additionally, the
Association must maintain minimum levels of investments that qualify as liquid
assets under OTS regulations. Historically, the Association has maintained
liquid assets above the minimum OTS requirements and at a level considered to be
more than adequate to meet its normal daily activities.
The investment policy of the Association as established by the Board of
Directors attempts to provide and maintain liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk, and
complement the Association's lending activities. The Association's policies
generally limit investments to government and federal agency securities. The
Association's policies provide the authority to invest in U.S. Treasury and
federal agency securities meeting the Association's guidelines and in
mortgage-backed securities guaranteed by the U.S. government and agencies
thereof. The Association funds such investments not only through payments on
deposit accounts and the proceeds from the repayment of loans and the
Association's operations, but also through FHLB- Cincinnati advances. The
success of such use of FHLB-Cincinnati advances depends on management's ability
to maintain a positive spread between the interest earned on the investment
securities and the interest cost of the FHLB- Cincinnati advances. At December
31, 1998, the Association had investment and mortgage-backed securities with a
carrying value of $37.8 million and a market value of $38.1 million. At December
31, 1998, the Association had $5.1 million in mortgage-backed and investment
securities classified as available for sale and $32.6 million in investment and
mortgage-backed securities classified as held to maturity. Of the Association's
mortgage-backed securities, $5.0 million had adjustable rates at December 31,
1998.
At December 31, 1998, all of the Association's mortgage-backed
securities were insured or guaranteed by either Freddie Mac, Fannie Mae or
Ginnie Mae. In addition, the Association owned one CMO which failed a stress
test at December 31, 1998.
11
<PAGE>
security failed the portion of the test in which the life of the security
would extend greater than the prescribed limit in the event interest rates
increased 300 basis points. This condition occurred due to the recent decline
in rates and the resulting decrease in the weighted average life of the
security. The results of the other tests provided the results which were
similar to the conditions when the security was purchased, which passed the
stress test. Because the security was purchased at a discount and an increase
in prepayments causes the security yield to increase along with the fact that
the security passed the other elements of the stress test, management does
not consider the security to be high risk. Investments in mortgage-backed
securities involve a risk that actual prepayments will be greater than
estimated prepayments over the life of the security which may require
adjustments to the amortization of any premium or accretion of any discount
relating to such instruments thereby reducing or increasing, respectively,
the net yield on such securities. There is also the risk associated with the
necessity to reinvest the cash flows from such securities at market interest
rates which may be lower than the interest rates received on such securities.
In addition, the market value of such securities may be adversely affected by
changes in interest rates.
The following table sets forth certain information regarding the amortized
cost and fair value of the Association's securities at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996
------------------- -------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
---------- ------- --------- --------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Debt securities held-to-maturity:
Obligations of U.S. government
agencies .......................... $ 998 $ 1,006 $ 2,497 $ 2,515 $ 5,499 $ 5,507
Commercial paper .................. 1,494 1,488 992 992 -- --
----- ----- ----- ----- ----- -----
Total ....................... 2,492 2,494 3,489 3,507 5,499 5,507
----- ----- ----- ----- ----- -----
Debt securities available-for-sale:
Obligations of U.S. Treasury and
U.S. government agencies ....... -- -- 9,989 9,905 10,988 10,540
Municipal securities .............. 175 179 275 284 328 339
----- ----- ----- ----- ----- -----
Total ....................... 175 179 10,264 10,189 11,316 10,879
Total debt securities ....... 2,667 2,673 13,753 13,696 16,815 16,386
----- ----- ----- ----- ----- -----
Mortgage-related securities:
Mortgage-related securities
held-to-maturity:
Freddie Mac ....................... 17,019 17,331 22,714 22,884 31,991 30,967
Fannie Mae ........................ 4,078 4,147 5,273 5,234 5,902 6,033
Collateralized Mortgage
Obligations .................... 9,040 8,991 -- -- -- --
----- ----- ----- ----- ----- -----
Total mortgage-related
securities held-to-maturity 30,137 30,469 27,987 28,118 37,893 37,000
----- ----- ----- ----- ----- -----
Mortgage-related securities
available-for-sale:
Freddie Mac ....................... 342 343 391 396 490 491
Fannie Mae ........................ 2,056 2,086 3,734 3,809 5,452 5,531
Ginnie Mae ........................ 2,508 2,541 3,358 3,424 4,014 4,071
----- ----- ----- ----- ----- -----
Total mortgage-related
securities available-for-sale 4,906 4,970 7,483 7,629 9,956 10,093
----- ----- ----- ----- ----- -----
Total mortgage-related
securities ............... 35,043 35,439 35,470 35,747 47,849 47,093
----- ----- ----- ----- ----- -----
Net unrealized (losses) gains on
available-for-sale securities . 68 -- 71 -- (300) --
----- ----- ----- ----- ----- -----
Total securities ............ $37,778 $38,112 $49,294 $49,443 $ 64,364 $63,479
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
12
<PAGE>
The following table sets forth the Association's securities activities for
the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996
---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
INVESTMENT SECURITIES:
Investment securities, beginning of period(1)....... $49,294 $64,364 $53,304
Purchases:
Investment securities - held-to-maturity......... 11,500 3,987 11,499
Investment securities - available-for-sale....... 425 4,989 11,144
Sales:
Investment securities - available-for-sale....... (442) -- (1,518)
Calls, maturities and payments:
Investment securities - held-to-maturity......... (12,684) (15,964) (6,451)
Investment securities - available-for-sale....... (10,395) (8,522) (3,137)
Net increase (decrease) in premium
amortization and discount accretion.............. 83 67 (66)
Net increase (decrease) in unrealized gain (loss)... (3) 373 (411)
-------- -------- -------
Net increase (decrease) in investment
securities.................................. (11,516) (15,070) 11,060
-------- -------- -------
Investment securities, end of period................ $ 37,778 $ 49,294 $64,364
-------- -------- -------
-------- -------- -------
</TABLE>
- ----------------------------------------------
(1) Includes mortgage-related securities.
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Association's
investment securities and mortgage-related securities as of December 31, 1998.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-------------------------------------------------------------------------------------------------
MORE THAN FIVE
MORE THAN ONE YEAR YEARS MORE THAN TEN
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS YEARS TOTAL
------------------ ------------------ ------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- ------- -------- -------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity securities:
Investment securities:
Obligations of U.S.
government agencies .......... $ -- --% $ 998 7.15% $ -- --% $ -- --% $ 998 7.15%
Corporate notes ............... 1,494 5.89 -- -- -- -- -- -- 1,494 5.89
Mortgage-related securities:
Freddie Mac .................... -- -- 121 9.50 2,365 6.00 14,533 6.56 17,019 6.50
Fannie Mae ..................... -- -- -- -- -- -- 4,078 6.44 4,078 6.44
Collateralized Mortgage
Obligations ................... -- -- -- -- -- -- 9,040 6.75 9,040 6.75
----- ---- ----- ---- ----- ---- ------ ---- ------ ----
Total securities at
amortized cost .............. 1,494 5.89 1,119 7.40 2,365 6.00 27,651 6.60 32,629 6.55
Available-for-sale securities:
Investment securities:
Obligations of U.S.
government agencies ........... -- -- -- -- -- -- -- -- -- --
Municipal securities (1) ....... 102 6.35 77 6.53 -- -- -- -- 179 6.43
Mortgage-related securities:
Freddie Mac .................... -- -- -- -- -- -- 343 6.96 343 6.96
Fannie Mae ..................... -- -- -- -- -- -- 2,086 7.48 2,086 7.48
Ginnie Mae ..................... -- -- -- -- -- -- 2,541 6.91 2,541 6.91
----- ---- ----- ---- ----- ---- ------ ---- ------ ----
Total securities at fair
value ....................... $ 102 6.35% $ 77 6.53% $ -- $ -- $ 4,970 7.15% $ 5,149 7.13%
----- ---- ----- ---- ----- ---- ------ ---- ------ ----
----- ---- ----- ---- ----- ---- ------ ---- ------ ----
</TABLE>
(1) Weighted Average Yield data for municipal securities is presented on a tax
equivalent basis based on an assumed tax rate of 34%.
13
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments and prepayments and cash flows generated
from operations are the primary sources of the Association's funds for use in
lending, investing and for other general purposes. The Association has
historically also used FHLB-Cincinnati advances as a source of funds.
DEPOSITS. The Association offers a variety of deposit accounts with a range
of interest rates and terms. The Association's deposits consist of passbook
accounts, savings and club accounts, NOW accounts, money market accounts and
certificates of deposit. For the year ended December 31, 1998, certificates of
deposit constituted 55.18% of total average deposits. The term of the
certificates of deposit offered by the Association vary from six months to four
years and the offering rates are established by the Association on a weekly
basis. Once a certificate account is established, no additional amounts are
permitted to be deposited in that account, with the exception of Individual
Retirement Account certificates. Specific terms of an individual account vary
according to the type of account, the minimum balance required, the time period
funds must remain on deposit and the interest rate, among other factors. The
flow of deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and competition. At
December 31, 1998, the Association had $32.6 million of certificate accounts
maturing in less than one year. The Association expects that most of these
accounts will be reinvested and does not believe that there are any material
risks associated with the respective maturities of these certificates. The
Association's deposits are obtained predominantly from the area in which its
banking offices are located. The Association relies primarily on a willingness
to pay market-competitive interest rates to attract and retain these deposits.
Accordingly, rates offered by competing financial institutions significantly
affect the Association's ability to attract and retain deposits.
The following table presents the deposit activity of the Association for
the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) before interest credited......... $7,071 $ 510 $3,174
Interest credited.................................... 584 645 655
------ ------ ------
Net increase......................................... $7,655 $1,155 $3,829
------ ------ ------
------ ------ ------
</TABLE>
At December 31, 1998, the Association had $3.4 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
WEIGHED
AVERAGE
MATURITY PERIOD AMOUNT RATE
- -------------------- ------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less............................... $ 439 5.57%
Over 3 through 6 months............................ 973 5.95
Over 6 through 12 months........................... 1,334 5.88
Over 12 months..................................... 627 5.43
---
Total..................................... $3,373 5.78%
------ ----
------ ----
</TABLE>
14
<PAGE>
The following table sets forth the distribution of the Association's
average deposit accounts for the periods indicated and the weighted average
interest rates on each category of deposits presented and such information at
December 31, 1998. Averages for the periods presented utilize month-end
balances.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------ -----------------------------
PERCENT PERCENT PERCENT
OF OF OF
TOTAL AVERAGE TOTAL AVERAGE TOTAL AVERAGE
AVERAGE AVERAGE RATE AVERAGE AVERAGE RATE AVERAGE AVERAGE RATE
BALANCE DEPOSITS PAID BALANCE DEPOSITS PAID BALANCE DEPOSITS PAID
--------- --------- -------- ---------- ---------- ------- --------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NOW accounts............. $ 8,478 10.54% 2.43% $ 7,611 10.08% 2.63% $ 7,237 9.90% 2.72%
Money market accounts.... 2,575 3.20 3.30 2,741 3.63 3.36 2,888 3.95 3.29
Savings accounts......... 23,586 29.31 2.95 23,424 31.01 3.09 24,536 33.58 3.09
Certificates of deposit.. 44,775 55.64 5.58 41,001 54.29 5.73 37,740 51.65 5.78
Noninterest-bearing
deposits:
Demand deposits....... 1,059 1.31 -- 751 0.99 -- 666 0.92 --
-------- ------- -------- ------- -------- -------
Total average deposits $ 80,473 100.00% 4.33% $ 75,528 100.00% 4.46% $ 73,067 100.00% 4.42%
-------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- -------
</TABLE>
The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM DECEMBER 31, 1998 AT DECEMBER 31,
------------------------------------------------- ----------------------------
LESS
THAN ONE TO TWO TO OVER
ONE TWO THREE THREE
YEAR YEARS YEARS YEARS TOTAL 1997 1996 1995
-------- ---------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CERTIFICATE ACCOUNTS:
0 to 3.99%....................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
4.00 to 4.99%................... 4,010 408 78 20 4,516 3,976 5,171 5,410
5.00 to 5.99%................... 20,478 8,542 1,279 122 30,421 24,615 24,770 23,140
6.00 to 6.99%................... 8,017 1,345 -- -- 9,362 12,437 8,864 7,142
7.00 to 7.99%.................... -- -- -- -- -- 1,098 1,088 --
Over 8.00%...................... 22 -- -- 87 109 121 121 122
------ ----- ----- --- ------ ------ ------ ------
Total certificate accounts... $ 32,527 $ 10,295 $1,357 $ 229 $44,408 $42,247 $40,014 $35,814
------ ----- ----- --- ------ ------ ------ ------
------ ----- ----- --- ------ ------ ------ ------
</TABLE>
BORROWINGS. The Association utilizes FHLB-Cincinnati advances as an
alternative to retail deposits to fund its operations as part of its operating
strategy. These FHLB-Cincinnati advances are collateralized primarily by certain
of the Association's mortgage loans and mortgage-backed securities and
secondarily by the Association's investment in capital stock of the
FHLB-Cincinnati. FHLB-Cincinnati advances are made pursuant to several credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the FHLB-Cincinnati will advance to member institutions,
including the Association, fluctuates from time to time in accordance with the
policies of the FHLB-Cincinnati.
15
<PAGE>
The following table sets forth certain information regarding the
Association's borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------
1998 1997 1996
--------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances and other borrowings:
Average balance outstanding............................ $25,390 $31,907 $32,953
Maximum amount outstanding at any month-end
during the period.................................... 31,951 35,098 37,588
Balance outstanding at end of period................... 16,029 26,161 34,277
Weighted average interest rate during the period....... 5.82% 5.97% 5.96%
Weighted average interest rate at end of period........ 5.62% 6.51% 6.06%
</TABLE>
16
<PAGE>
SELECTED FINANCIAL AND OTHER DATA OF THE ASSOCIATION
The selected financial and other data of the Association set forth below is
derived in part from, and should be read in conjunction with, the Financial
Statements of the Association and Notes thereto presented elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets.............................................. $133,436 $118,265 $124,186 $110,412 $116,707
Cash and cash equivalents................................. 26,026 5,846 5,238 4,640 3,408
Loans, net(1)............................................. 64,101 57,886 49,517 48,233 48,748
Securities held-to-maturity(2):
Mortgage-related securities, net....................... 30,137 27,987 37,893 38,485 44,262
Investment securities, net............................. 2,492 3,489 5,499 -- --
Securities available-for-sale(2):
Mortgage-related securities, net....................... 4,970 7,629 10,093 11,871 13,945
Investment securities, net.......................... 179 10,189 10,879 2,948 2,000
Deposits.................................................. 84,638 76,983 75,828 71,991 71,274
FHLB advances............................................. 16,029 26,161 34,277 24,524 32,726
Total equity.............................................. 31,773 14,165 13,243 13,224 12,063
Real estate owned, net.................................... -- -- -- -- --
Nonperforming assets and
troubled debt restructurings............................ 39 199 45 24 126
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income.......................... $8,787 $8,803 $8,613 $8,117 $7,989
Interest expense............................... 4,963 5,273 5,197 4,771 4,372
------ ------ ------ ------ ------
Net interest income.......................... 3,824 3,530 3,416 3,346 3,617
Provision for loan losses...................... 154 -- -- 42 48
------ ------ ------ ------ ------
Net interest income after provision
for loan losses............................. 3,670 3,530 3,416 3,304 3,569
Noninterest income:
Net gain (loss) on sale of securities........ 21 -- (9) -- --
Other........................................ 318 241 178 157 253
------ ------ ------ ------ ------
Total noninterest income.......... 339 241 169 157 253
Noninterest expense(3)......................... 3,681 2,883 3,252 2,485 2,411
------ ------ ------ ------ ------
Income before income taxes..................... 328 888 333 976 1,411
Income taxes................................... 117 207 46 307 432
------ ------ ------ ------ ------
Net income.................................... $ 211 $ 681 $ 287 $ 669 $ 979
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
(SEE FOOTNOTES ON NEXT PAGE)
17
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS AND OTHER DATA(4):
PERFORMANCE RATIOS:
Average yield on interest-earning assets(5)................. 7.44% 7.42% 7.37% 7.26% 7.03%
Average rate paid on interest-bearing liabilities........... 4.93 4.94 4.93 4.75 4.19
Average interest rate spread(6)............................. 2.71 2.48 2.44 2.51 2.84
Net interest margin(7)...................................... 3.31 2.98 2.92 2.99 3.18
Ratio of interest-earning assets to
interest-bearing liabilities............................. 112.43 111.22 110.89 111.39 109.00
Efficiency ratio(8)......................................... 88.87 76.45 90.48 70.94 62.30
Noninterest expense as a percent of
average assets........................................... 3.03 2.36 2.71 2.22 2.05
Return on average assets.................................... 0.17 0.56 0.24 0.60 0.83
Return on average equity.................................... 1.41 5.00 2.19 5.26 8.21
Ratio of average equity to average assets................... 12.36 11.16 10.94 11.37 10.14
REGULATORY CAPITAL RATIOS:(9)
Tangible capital ratio...................................... 16.10 11.95 10.80 11.91 10.32
Core capital ratio.......................................... 16.10 11.95 10.80 11.91 10.32
Risk-based capital ratio.................................... 36.80 27.39 28.38 30.90 27.80
ASSET QUALITY RATIOS:
Nonperforming loans and troubled debt
restructurings as a percent of total loans(10)........... 0.06 0.35 0.09 0.05 0.26
Nonperforming assets and troubled debt
restructurings as a percent of total assets(11).......... 0.03 0.17 0.04 0.02 0.12
Allowance for loan losses as a percent
of total loans ........................................... 0.59 0.40 0.46 0.51 0.43
Allowance for loan losses as a percent of
nonperforming loans and troubled debt
restructurings(1)(10).................................... 9.72x 1.16x 5.09x 10.38x 1.67x
FULL SERVICE OFFICES AT END OF PERIOD........................... 6 4 4 3 3
</TABLE>
- ------------------------------
(1) Loans, net, represents gross loans receivable and loans held for sale net
of the allowance for loan losses, loans in process and deferred loan
origination fees. The allowance for loan losses at December 31, 1998, 1997,
1996, 1995 and 1994 was $379,000,$231,000, $229,000, $249,000 and $211,000,
respectively.
(2) The Association adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," during fiscal 1994.
(3) Includes a one-time special assessment of $449,000 in order to recapitalize
the SAIF fund in fiscal 1996.
(4) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods. Ratios for interim
periods are stated on an annualized basis.
(5) Calculations of yield are presented on a taxable equivalent basis using the
Federal income tax rate of 34%.
(6) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(7) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(8) Equals noninterest expense divided by net interest income plus noninterest
income (excluding gains or losses on securities transactions).
(9) For definitions and further information relating to the Association's
regulatory capital requirements, see "Regulation and
Supervision--Federal Savings Institution Regulation -- Capital
Requirements."
(10) Non-performing loans consist of all non-accrual loans and all other loans
90 days or more past due. The Association ceases to accrue interest on
loans 90 days or more past due (unless the loan principal and interest are
determined by management to be fully secured and in the process of
collection) and to charge off all accrued interest.
(11) Non-performing assets consist of non-performing loans, other repossessed
assets and REO.
18
<PAGE>
Subsidiary Activities
As of December 31, 1998, the Company maintained the Association as a
wholly-owned Subsidiary. The Association has no subsidiaries.
Personnel
As of December 31, 1998, the Association had 53 full-time employees
and 16 part-time employees. The employees are not represented by a collective
bargaining unit and the Association considers its relationship with its
employees to be good.
REGULATION AND SUPERVISION
GENERAL
As a savings and loan holding company, the Company is required by
federal law to file reports with, and otherwise comply with, the rules and
regulations of the OTS. The Association is subject to extensive regulation,
examination and supervision by the OTS, as its primary federal regulator, and
the FDIC, as the deposit insurer. The Association is a member of the Federal
Home Loan Bank System and its deposit accounts are insured up to applicable
limits by the Savings Association Insurance Fund ("SAIF") managed by the FDIC.
The Association must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other savings institutions. The OTS and/or the FDIC conduct
periodic examinations to test the Association's safety and soundness and
compliance with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulatory requirements and
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Association and their operations. Certain of
the regulatory requirements applicable to the Association and to the Company are
referred to below or elsewhere herein. The description of statutory provisions
and regulations applicable to savings institutions and their holding companies
set forth in this Form 10-KSB does not purport to be a complete description of
such statutes and regulations and their effects on the Association and the
Company.
HOLDING COMPANY REGULATION
The Company is a nondiversified unitary savings and loan holding
company within the meaning of federal law. As a unitary savings and loan holding
company, the Company generally is not restricted under existing laws as to the
types of business activities in which it may engage, provided that the
Association continues to be a qualified thrift lender. See "Federal Savings
Institution Regulation - QTL Test." Upon any non-supervisory acquisition by the
Company of another savings institution or savings bank that meets the qualified
thrift lender test and is deemed to be a savings institution by the OTS, the
Company would become a multiple savings and loan holding company (if the
acquired institution is held as a separate subsidiary) and would generally be
limited to activities permissible for bank holding companies under Section
4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the
OTS, and certain activities authorized by OTS regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions, the OTS considers the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors.
19
<PAGE>
The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. The Association must
notify the OTS 30 days before declaring any dividend to the Company. In
addition, the financial impact of a holding company on its subsidiary
institution is a matter that is evaluated by the OTS and the agency has
authority to order cessation of activities or divestiture of subsidiaries deemed
to pose a threat to the safety and soundness of the institution.
FEDERAL SAVINGS INSTITUTION REGULATION
BUSINESS ACTIVITIES. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal associations,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets.
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage ratio and an 8% risk-based capital ratio. In addition, the
prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMEL financial institution rating system),
and, together with the risk-based capital standard itself, a 4% Tier 1
risk-based capital standard. The OTS regulations also require that, in meeting
the tangible, leverage and risk-based capital standards, institutions must
generally deduct investments in and loans to subsidiaries engaged in activities
as principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier 1) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The capital regulations also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. For the present time, the OTS has deferred
implementation of the interest rate risk component. At December 31, 1998, the
Association met each of its capital requirements.
20
<PAGE>
The following table presents the Association's capital position at
December 31, 1998.
<TABLE>
<CAPTION>
CAPITAL
EXCESS ---------------------------------
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
----------------- ------------- ----------------- -------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Core (Leverage)..... $21,626 $2,390 $19,236 36.2% 4.00%
Risk-based.......... $22,005 $4,779 $17,226 36.8% 8.00%
</TABLE>
PROMPT CORRECTIVE REGULATORY ACTION. The OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of undercapitalization.
Generally, a savings institution that has a ratio of total capital to risk
weighted assets of less than 8%, a ratio of Tier 1 (core) capital to
risk-weighted assets of less than 4% or a ratio of core capital to total assets
of less than 4% (3% or less for institutions with the highest examination
rating) is considered to be "undercapitalized." A savings institution that has a
total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than
3% or a leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the OTS is required to appoint
a receiver or conservator for an institution that is "critically
undercapitalized." The regulation also provides that a capital restoration plan
must be filed with the OTS within 45 days of the date a savings institution
receives notice that it is "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Compliance with the plan must be guaranteed by
any parent holding company. In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including, but
not limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The OTS could also take any one of a number
of discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS. Deposits of the Association are
presently insured by the SAIF. The FDIC maintains a risk-based assessment system
by which institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1998,
FICO payments for SAIF members approximated 6.10 basis points, while Bank
Insurance Fund ("BIF") members paid 1.22 basis points. By law, there will be
equal sharing of FICO payments between SAIF and BIF members on the earlier of
January 1, 2000 or the date the SAIF and BIF are merged.
The Association's assessment rate for fiscal 1998 ranged from .0582 to
.0628 basis points and no premium was paid for this period. Payments toward the
FICO bonds amounted to $47,172. The FDIC has authority to increase insurance
assessments. A significant increase in SAIF insurance premiums would likely have
an adverse effect on the operating expenses and results of operations of the
Association. Management cannot predict what insurance assessment rates will be
in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that
the institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Association does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
21
<PAGE>
THRIFT RECHARTERING LEGISLATION. Legislation enacted in 1996 provided
that the BIF and SAIF were to have merged on January 1, 1999 if there were no
more savings associations as of that date. Various proposals to eliminate the
federal savings association charter, create a uniform financial institutions
charter, abolish the OTS and restrict savings and loan holding company
activities have been introduced in Congress. The Association is unable to
predict whether such legislation will be enacted or the extent to which the
legislation would restrict or disrupt its operations.
LOANS TO ONE BORROWER. Federal law provides that savings institutions
are generally subject to the limits on loans to one borrower applicable to
national banks. A savings institution may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if secured by specified readily-marketable collateral. At
December 31, 1998, the Association's limit on loans to one borrower was $3.2
million, and the Association's largest aggregate outstanding balance of loans to
one borrower was $234,000.
QTL TEST. The HOLA requires savings institutions to meet a qualified
thrift lender test. Under the test, a savings association is required to either
qualify as a "domestic building and loan association" under the Internal Revenue
Code or maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of December 31, 1998, the Association maintained 81% of its
portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test. Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered "qualified thrift investments."
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. The rule effective in 1998 established
three tiers of institutions based primarily on an institution's capital level.
An institution that exceeded all capital requirements before and after a
proposed capital distribution ("Tier 1 Association") and had not been advised by
the OTS that it was in need of more than normal supervision, could, after prior
notice but without obtaining approval of the OTS, make capital distributions
during the calendar year equal to the greater of (i) 100% of its net earnings to
date during the calendar year plus the amount that would reduce by one-half the
excess capital over its capital requirements at the beginning of the calendar
year or (ii) 75% of its net income for the previous four quarters. Any
additional capital distributions required prior regulatory approval. At December
31, 1998, the Association was a Tier 1 Association. Effective April 1, 1999, the
OTS's capital distribution regulation will change. Under the new regulation, an
application to and the prior approval of the OTS will be required prior to any
capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under OTS regulations (I.E., generally,
examination ratings in the two top categories), the total capital distributions
for the calendar year exceed net income for that year plus the amount of
retained net income for the preceding two years, the institution would be
undercapitalized following the distribution or the distribution would otherwise
be contrary to a statute, regulation or agreement with OTS. If an application is
not required, the institution must still provide prior notice to OTS of the
capital distribution. In the event the Association's capital fell below its
regulatory requirements or the OTS notified it that it was in need of more than
normal supervision, the Association's ability to make capital distributions
could be restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice.
LIQUIDITY. The Association is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
22
<PAGE>
borrowings. This liquidity requirement is currently 4%, but may be changed from
time to time by the OTS to any amount within the range of 4% to 10%. Monetary
penalties may be imposed for failure to meet these liquidity requirements. The
Association's liquidity ratio for December 31, 1998 was 19.3%, which exceeded
the applicable requirements. The Association has never been subject to monetary
penalties for failure to meet its liquidity requirements.
ASSESSMENTS. Savings institutions are required to pay assessments to
the OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Association's latest
quarterly thrift financial report. The assessments paid by the Association for
the fiscal year ended December 31, 1998 totaled $38,111.
TRANSACTIONS WITH RELATED PARTIES. The Association's authority to
engage in transactions with "affiliates" (E.G., any company that controls or is
under common control with an institution, including the Company and its
non-savings institution subsidiaries) is limited by federal law. The aggregate
amount of covered transactions with any individual affiliate is limited to 10%
of the capital and surplus of the savings institution. The aggregate amount of
covered transactions with all affiliates is limited to 20% of the savings
institution's capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
federal law. The purchase of low quality assets from affiliates is generally
prohibited. The transactions with affiliates must be on terms and under
circumstances that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is also governed by federal law. Such loans are required to be made on
terms substantially the same as those offered to unaffiliated individuals and
not involve more than the normal risk of repayment. Recent legislation created
an exception for loans made pursuant to a benefit or compensation program that
is widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Association may make to insiders based, in
part, on the Association's capital position and requires certain board approval
procedures to be followed.
ENFORCEMENT. The OTS has primary enforcement responsibility over
savings institutions and has the authority to bring actions against the
institution and all institution-affiliated parties, including stockholders, and
any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of a capital
directive or cease and desist order to removal of officers and/or directors to
institution of receivership, conservatorship or termination of deposit
insurance. Civil penalties cover a wide range of violations and can amount to
$25,000 per day, or even $1 million per day in especially egregious cases. The
FDIC has the authority to recommend to the Director of the OTS that enforcement
action to be taken with respect to a particular savings institution. If action
is not taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
23
<PAGE>
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $46.5 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $46.5 million, the reserve requirement is $1.395
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $46.5
million. The first $4.9 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Association complies with the foregoing requirements.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Association report their income on a
fiscal year, consolidated basis and the accrual method of accounting, and are
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the Association's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Association or the Company. The Association has not been
audited by the IRS since 1993, which covered the tax years 1990, 1991 and 1992.
For its 1998 taxable year, the Association is subject to a maximum federal
income tax rate of 34%.
BAD DEBT RESERVE. Historically, savings institutions such as the
Association which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrifts") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. The Association's
deductions with respect to "qualifying real property loans," which are generally
loans secured by certain interest in real property, were computed using an
amount based on the Association's actual loss experience, or a percentage equal
to 8% of the Association's taxable income, computed with certain modifications
and reduced by the amount of any permitted addition to the non-qualifying
reserve. Due to the Association's loss experience, the Association generally
recognized a bad debt deduction equal to 8% of taxable income.
In August 1996, the provisions repealing the above thrift bad debt
rules were passed by Congress as part of "The Small Business Job Protection Act
of 1996". The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. Those rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Association has
previously recorded a deferred tax liability equal to the bad debt recapture and
as such, the new rules will have no effect on net income or federal income tax
expense. For taxable years beginning after December 31, 1995, the Association's
bad debt deduction will be equal to net charge-offs. The new rules allowed an
institution to suspend the bad debt reserve recapture for the 1996 and 1997 tax
years if the institution's lending activity for those years was equal to or
greater than the institution's average mortgage lending activity for the six
taxable years preceding 1996. For this purpose, only home purchase and home
improvement loans are included and the institution can elect to have the tax
years with the highest and lowest lending activity removed from the average
calculation. If an institution was permitted to postpone the reserve capture, it
must begin its six year recapture no later than the 1998 tax year. The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continue to be subject to a provision
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.
24
<PAGE>
DISTRIBUTIONS. Under the 1996 Act, if the Association makes
"non-dividend distributions" to the Company, such distributions will be
considered to have been made from the Association's unrecaptured tax bad debt
reserves (including the balance of its reserves as of December 31, 1987) to the
extent thereof, and then from the Association's supplemental reserve for losses
on loans, to the extent thereof, and an amount based on the amount distributed
(but not in excess of the amount of such reserves) will be included in the
Association's income. Non-dividend distributions include distributions in excess
of the Association's current and accumulated earnings and profits, as calculated
for federal income tax purposes, distributions in redemption of stock, and
distributions in partial or complete liquidation. Dividends paid out of the
Association's current or accumulated earnings and profits will not be so
included in the Association's income.
The amount of additional taxable income triggered by a non-dividend is
an amount that, when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if the Association makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Association does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.
SAIF RECAPITALIZATION ASSESSMENT. The Funds Act levied a 65.7-cent fee
on every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible under Section 162 of the Code in the year of payment.
OHIO TAXATION
The Company is subject to the Ohio corporation franchise tax, which, as
applied to the Company, is a tax measured by both net earnings and net worth.
The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.9% of computed Ohio taxable income in excess of $50,000 and
(ii) 0.582% times taxable net worth. Under these alternative measures of
computing tax liability, the states to which a taxpayer's adjusted total net
income and adjusted net worth are apportioned or allocated are determined by
complex formulas. The minimum is $50 per year.
A special litter tax is also applicable to all corporations, including
the Company, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to 0.11% of the first $50,000 of computed Ohio taxable income and
0.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to 0.014% times taxable
net worth.
Ohio corporation franchise tax law is scheduled to change markedly
beginning on January 1, 1999 as a consequence of legislative reforms enacted
July 1, 1997. Tax liability, however, continues to be measured by both net
income and net worth. In general, tax liability will be the greater of (i) 5.1%
on the first $50,000 of computed Ohio taxable income and 8.5% of computed Ohio
taxable income in excess of $50,000 or (ii) 0.40% of taxable net worth. Under
these alternative measures of computing tax liability, the states to which total
net income and total net worth will be apportioned or allocated will continue to
be determined by complex formulas, but the formulas change. The minimum tax will
still be $50 per year and maximum tax liability as measured by net worth will be
limited to $150,000 per year. The special litter taxes remain in effect. Various
other changes in the tax law may affect the Company.
The Association is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporation franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of the
Association's apportioned book net worth, determined in accordance with GAAP,
less any statutory deduction. This rate of tax is
25
<PAGE>
scheduled to decrease in each of the years 1999 and 2000. As a "financial
institution," the association is not subject to any tax based upon net income or
net profits imposed by the State of Ohio.
DELAWARE TAXATION. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
ITEM 2. DESCRIPTION OF PROPERTY.
The Association conducts its business through six banking offices
located in Columbiana, Mahoning and Jefferson Counties, Ohio. The following
table sets forth certain information regarding the Association's offices as of
December 31, 1998.
<TABLE>
<CAPTION>
NET BOOK VALUE
ORIGINAL OF PROPERTY OR
YEAR DATE OF LEASEHOLD
LEASED OR LEASED OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1998
- -------- -------- -------- --------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ADMINISTRATIVE/HOME OFFICE:
601 Main Street
Wellsville, Ohio 43968......................................... Owned 1989 -- $489
BRANCH OFFICES:
49028 Foulks Drive
East Liverpool, Ohio 43920..................................... Owned 1979 -- $260
100 Main Street
Wintersville, Ohio 43952....................................... Leased 1996 2011 $192
7121 Tiffany Boulevard
Boardman, Ohio 44514........................................... Leased 1997 2012 $235
3551 Belmont Avenue
Youngstown, Ohio 44505......................................... Leased 1998 2013 $228
4755 Mahoning Avenue
Austintown, Ohio 44515........................................ Leased 1998 2013 $238
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
At December 31, 1998, the Association was not involved in any pending
legal proceedings. However, from time to time, the Association is involved in
legal proceedings occurring in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
26
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Grand Central Financial Corp.'s Common Stock is traded on the Nasdaq
SmallCap Market. The stock began trading on December 30, 1998. The high and low
bid for the common stock for the quarter ended December 31, 1998 were $11.00 and
$10.50, respectively. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions. As
of December 31, 1998, Grand Central Financial Corp. had approximately 743
holders of record.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 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 SAIF, and administered by 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.
MANAGEMENT OF MARKET RISK
GENERAL. Market risk is the risk of loss from adverse changes in market
prices and rates. The Company's market risk arises primarily from interest-rate
risk inherent in its lending and deposit taking activities. The Company, like
other financial institutions, is subject to interest rate risk to the extent
that its interest-earning assets reprice
27
<PAGE>
differently than its interest-bearing liabilities. One of the Company's
principal financial objectives is to achieve long-term profitability while
reducing and managing its exposure to fluctuations in interest rates. To that
end, management actively monitors and manages its interest rate risk exposure.
QUALITATIVE ASPECTS OF MARKET RISK. The principal objective of the
Company's interest rate risk management function is to evaluate the interest
rate risk included in certain balance sheet accounts, determine the level of
risk appropriate to the Company's business strategy, operating environment,
capital and liquidity requirement and performance objectives, and manage the
risk consistent with Board of Directors' approved guidelines. Through such
management, the Company seeks to reduce the vulnerability of its operations to
changes in interest rates. The Company monitors its interest rate risk as such
risk relates to its operating strategies. The Company's Board of Directors has
established an Asset/Liability Committee, responsible for reviewing its
asset/liability policies and interest rate risk position, which meets on a
monthly basis and reports trends and interest rate risk position to the Board of
Directors. The extent of the movement of interest rates is an uncertainty that
could have a negative impact on earnings of the Company.
The Company has sought to reduce exposure of its earnings to changes in
market interest rates by managing asset and liability maturities and interest
rates primarily through the use of adjustable rate mortgage-backed securities
and, subject to market conditions, adjustable-rate mortgage loans and by
extending the maturities of its interest-bearing liabilities. In the current low
interest rate environment, customer demand for adjustable-rate mortgage loans
has been limited.
QUANTITATIVE ASPECTS OF MARKET RISK. As part of its interest rate risk
analysis, the Company uses an interest rate sensitivity model which generates
estimates of the change in the Company's net portfolio value ("NPV") over a
range of interest rate scenarios and which is prepared by the OTS on a quarterly
basis. NPV is the present value of expected cash flows from assets, liabilities
and off-balance sheet contracts. The NPV ratio, under any interest rate
scenario, is defined as the NPV in that scenario divided by the market value of
assets in the same scenario. The OTS produces such analysis using its own model,
based upon data submitted on the Company's quarterly Thrift Financial Reports,
including estimated loan prepayment rates, reinvestment rates and deposit decay
rates. The following table set forth the Company's NPV as of December 31, 1998,
as calculated by the OTS.
<TABLE>
<CAPTION>
NPV AS A % OF PORTFOLIO
CHANGE IN NET PORTFOLIO VALUE VALUE OF ASSETS
INTEREST RATES ---------------------------------------------------- -----------------------------
IN BASIS POINTS NPV
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE RATIO CHANGE
- -------------------- ----------- ------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
200 $21,429 $(2,607) (11)% 16.06 (141)
100 22,978 (1,058) (4) 16.93 (54)
Static 24,036 -- -- 17.47 --
(100) 24,396 361 2 17.58 11
(200) 24,402 367 2 17.48 1
</TABLE>
As illustrated in the table, the Company's NPV declines in a rising
interest rate environment. Specifically, the table indicates that, at December
31, 1998, the Company's NPV was $24.0 million (or 17.47% of the market value of
portfolio assets) and that, based upon the assumptions utilized, an immediate
increase in market interest rates of 200 basis points would result in a $2.6
million or 11% decline in the Company's NPV and would result in a 141 basis
point or 8.78% decline in the Company's NPV ratio to 16.06%. The percentage
decline in the Company's NPV at December 31, 1998 was within the limit in the
Company's Board-approved guidelines.
In evaluating the Company's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing table
must be considered. For example, although certain assets and liabilities may
28
<PAGE>
have similar maturities or period to repricing, they may react in different
degrees to changes in market interest rates. In addition, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Furthermore, in the event of a change in interest
rates, prepayments and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the ability
of many borrowers to service their debt may decrease in case of an interest rate
increase. Therefore, the actual effect of changing interest rates, may differ
from that presented in the foregoing table.
The Board of Directors and management of the Company believe that
certain factors afford the Company the ability to operate successfully despite
its exposure to interest rate risk. The Company manages its interest rate risk
by attempting to originate adjustable-rate loans as market conditions allow,
purchasing adjustable-rate mortgage-backed securities, maintaining capital well
in excess of regulatory requirements and by selling fixed rate one-to
four-family real estate loans, except such loans that bear an interest rate
above levels established from time to time by the Company's board of directors
based on current market rates.
29
<PAGE>
AVERAGE BALANCE SHEET. The following table sets forth certain
information relating to the Association at and for the years ended December 31,
1998, 1997 and 1996. The average yields and costs are derived by dividing income
or expense by the average balance of interest-earning assets or interest-bearing
liabilities, respectively, for the periods shown, except where otherwise noted,
and reflect annualized yields and costs. Average balances are derived from
average monthly balances. Management does not believe that the use of average
monthly balances instead of average daily balances has caused any material
differences in the information presented. The yields and costs include fees
which are considered adjustments to yields.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1998 1997 1996
--------------------------- -------------------------- -------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- -------- -------- -------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
INTEREST EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits... $ 5,840 $ 138 2.36% $ 2,892 $ 100 3.46% $ 3,382 $ 138 4.08%
Investment securities (1):
Taxable............... 48,587 3,428 7.06 59,325 4,107 6.89 61,400 4,224 6.85
Non-taxable(2)........ 248 15 9.16 291 18 9.36 411 26 9.59
Loans (3)................... 60,797 5,020 8.26 53,484 4,405 8.24 49,097 4,068 8.29
FHLB stock.................. 2,592 186 7.18 2,412 173 7.17 2,250 157 6.98
------- -------- -------- ------- -------- -------
Total interest-earning
assets............. 118,064 8,787 7.44 118,404 8,803 7.42 116,540 8,613 7.37
Noninterest-earning assets..... 3,268 3,718 3,491
----- ----- -----
Total assets.......... $121,332 $122,122 $120,031
-------- -------- --------
-------- -------- --------
INTEREST-BEARING LIABILITIES:
Deposits:
NOW accounts............. $ 8,478 $ 206 2.43% $ 7,611 $ 200 2.63% $ 7,237 $ 197 2.72%
Money market accounts.... 2,575 85 3.30 2,741 92 3.36 2,888 95 3.29
Savings accounts......... 23,586 696 2.95 23,424 724 3.09 24,536 759 3.09
Certificates of deposit.. 44,775 2,499 5.58 41,001 2,351 5.73 37,740 2,181 5.78
------- -------- -------- ------- -------- -------
Total deposits..... 79,414 3,486 4.39 74,777 3,367 4.50 72,401 3,232 4.46
FHLB advances and other
borrowings............... 25,595 1,477 5.77 31,907 1,906 5.97 32,953 1,965 5.96
------- -------- -------- ------- -------- -------
Total interest-bearing
liabilities....... 105,009 4,963 4.73 106,684 5,273 4.94 105,354 5,197 4.93
-------- ----- ------- ----- ------- -----
Noninterest-bearing
liabilities....... 1,331 1,814 1,550
----- ----- -----
Total liabilities..... 106,340 108,498 106,904
Equity...................... 14,992 13,624 13,127
------ ------ ------
------ ------ ------
Total liabilities and $121,332 $122,122 $120,031
equity............ -------- -------- --------
-------- -------- --------
Net interest-earning assets. $ 11,720 $ 11,186
-------- --------
-------- --------
Net interest income/interest
rate spread (4)........... $3,824 2.71% $3,530 2.48% $3,416 2.44%
-------- ------- ------- ------ ------- -------
-------- ------- ------- ------ ------- -------
Net interest margin as a
percentage of interest-earning
assets (5)................ 3.31% 2.98% 2.92%
-------- ------- -------
Ratio of interest-earning -------- ------- -------
assets to interest-bearing
liabilities.............. 112.43% 111.22% 110.89%
-------- --------- --------
-------- --------- --------
</TABLE>
30
- ---------------------------------
(1) Includes investment securities available-for-sale and held-to-maturity,
mortgage-related securities available-for-sale and held-to- maturity.
(2) Yield/Rate is presented on a taxable equivalent basis using the Federal
income tax marginal rate of 34%.
(3) Balances are net of deferred loan origination costs, undisbursed
proceeds of construction loans in process, and include nonperforming
loans.
(4) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
<PAGE>
RATE/VOLUME ANALYSIS. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Association's interest income
and interest expense during the periods indicated. Information is provided in
each category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the net
change (the sum of the prior columns). The changes attributable to the combined
impact of volume and rate have been allocated on a proportional basis between
changes in rate and volume.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
COMPARED TO COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------- ------------------------- --------------------------
INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE)
DUE TO DUE TO DUE TO
------------------ ---------------- ----------------
RATE VOLUME NET RATE VOLUME NET RATE VOLUME NET
-------- ------- -------- ------- ------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning deposits..... $ (39) $ 77 $ 38 $(19) $ (19) $ (38) $ (16) $ 3 $ (13)
Investment securities:
Taxable.................... 94 (773) (679) 28 (145) (117) 118 318 436
Non-taxable................ (1) (2) (3) 3 (11) (8) 4 (11) (7)
Loans......................... 11 604 615 (24) 361 337 51 15 66
FHLB.......................... -- 13 13 4 12 16 4 10 14
------- ------ ------ ------ ------ ------ ------ ------ ------
Total interest-earning assets $ 65 $ (81) $ (16) $ (8) $198 $190 $161 $335 $496
------- ------ ------ ------ ------ ------ ------ ------ ------
------- ------ ------ ------ ------ ------ ------ ------ ------
INTEREST-BEARING LIABILITIES:
Deposits:
NOW accounts............... $ (16) $ 22 $ 6 $ (7) $ 10 $ 3 $ (15) $ (6) $ (21)
Money market accounts...... (1) (6) (7) 2 (5) (3) 1 (23) (22)
Savings accounts........... (33) 5 (28) (1) (34) (35) 1 (23) (22)
Certificates of deposit.... (64) 212 148 (17) 187 170 160 244 404
FHLB advances and other
borrowings.............. (63) (366) (429) 3 (62) (59) (47) 134 87
------- ------ ------ ------ ------ ------ ------ ------ ------
Total interest-bearing
liabilities......... $(177) $(133) $(310) $(20) $ 96 $ 76 $100 $326 $426
------- ------ ------ ------ ------ ------ ------ ------ ------
------- ------ ------ ------ ------ ------ ------ ------ ------
Increase(decrease) in net
interest income............... $ 242 $ 52 $ 294 $ 12 $102 $114 $ 61 $ 9 $ 70
------- ------ ------ ------ ------ ------ ------ ------ ------
------- ------ ------ ------ ------ ------ ------ ------ ------
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND DECEMBER 31, 1997
Total assets of the Company were $133.4 million at December 31, 1998,
compared to $118.3 million at December 31, 1997, representing an increase of
$15.2 million, or 12.83%. The primary component in the increase in total assets
was a $20.2 million increase in cash and cash equivalents and a $6.2 million
increase in loans, which was partially offset by a decrease in total securities
of $11.5 million. The increase in assets was primarily funded by $17.2 million
of net proceeds from the conversion from a mutual association to a stock
company. The increase in loans was primarily due to a $4.8 million increase in
single family loans and a $2.2 million increase in consumer loans. The changes
in the balance sheets and the factors that caused the changes are discussed
below.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents increased $20.2
million, from $5.8 million at December 31, 1997 to $26.0 million at December 31,
1998. The increase was primarily the result of the $17.2 million of net proceeds
from the conversion which the company received on December 31, 1998. The Company
plans to utilize the proceeds to fund loan growth and, in the short term, a
portion of the proceeds are to be invested in securities.
31
<PAGE>
SECURITIES. Total securities decreased $11.5 million, or 23.36%, from
$49.3 million at December 31, 1997 to $37.8 million at December 31, 1998. The
decrease was due to one large security which was called during 1998. The Company
funded the purchase of the security in an arbitrage transaction through the use
of FHLB advances and when the security was called management elected to use the
proceeds to repay the FHLB advances instead of acquiring a new security due to
the interest rate environment at that time.
LOANS. Loans, including loans held for sale, increased $6.2 million, or
10.74% from $57.9 million at December 31, 1997 to $64.1 million at December 31,
1998. Average loans comprised 51.49% of interest-earning assets in 1998 compared
to 45.17% in 1997. The increase in loans was primarily due to an increase in
single family real estate loans, including loans held for sale, of $4.3 million,
or 10.24%. In addition, consumer loans increased $2.2 million, or 16.40%, as
management continued its efforts to expand the consumer lending portfolio during
1998.
DEPOSITS AND BORROWINGS. The Company's deposits are obtained primarily
from individuals and businesses in its market area. Total deposits increased
$7.7 million, or 9.94%, from $77.0 million at December 31, 1997 to $84.6 million
at December 31, 1998. The growth was primarily in non-interest bearing deposits
which increased $4.4 million and certificates of deposit, which increased $2.2
million. The increase in non-interest bearing deposits was primarily due to an
increase in short term funds at December 31, 1998 not due to a sustained overall
increase in non-interest bearing deposits. Advances from the FHLB used to
purchase securities and fund loan demand decreased $10.1 million due to the
repayment of the FHLB advance used to fund the security purchased in an
arbitrage transaction once the security was called.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997
GENERAL. Net income for the year ended December 31, 1998 decreased by
$470,000, or 69.02%, from $681,000 for the year ended December 31, 1997 to
$211,000 for the year ended December 31, 1998. The decrease was primarily due to
the increase in the provision for loan losses and an increase in noninterest
expense which was partially offset by an increase in net interest income and
other income.
NET INTEREST INCOME. Net interest income is the largest component of
the Central Federal's net income, and consists of the difference between
interest income generated on interest-earning 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 $294,000, or 8.33%, from
$3.5 million in 1997 to $3.8 million in 1998, The primary component of this
change was a $310,000, or 5.88%, decrease in interest expense. The decrease in
interest expense consisted of a $133,000 decrease due to a decrease in average
volume of interest-bearing liabilities and a $177,000 decrease due to decreasing
average interest rates, The decrease in interest expense was partially offset by
a $16,000, or 0.18%, decrease in interest income.
Average loans outstanding during 1998 increased $7.3 million, or
13.67%, compared to 1997, while average securities decreased $11.0 million, or
18.45%, compared to the prior year. In 1998, the Company experienced increases
in yield on assets of 2 basis points and a decrease in the cost of liabilities
of 21 basis points, resulting in the $294,000 increase in net interest income.
Net interest margin increased 26 basis points from 2.98% in 1997 to 3.24% in
1998. The Company's average interest rate spread increased 23 basis points from
2.48% in 1997 to 2.71% in 1998.
The tables appearing elsewhere in this report provide a more detailed
analysis of the changes in average balances, yields/rates and net interest
income identifying that portion of change due to changein average volume versus
that portion due to change in average rates, See "Average Balances, Interest
Rates and Yields," "Rate/Volume Analysis of Net Interest Income" and "Weighted
Average Yields."
32
<PAGE>
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
The provision for loan losses increased to $154,000 from $0 for the
year ended December 31, 1998 compared to the year ended December 31, 1997. At
December 31, 1998, the allowance for loan losses represented 0.59% of total
loans compared to 0.40% at December 31, 1997. The increase in the provision and
the allowance for loan losses was due to the continued increase in consumer
lending and management's assessment of local economic condition. The largest
portion of the increase in consumer lending relates to an increase in indirect
lending. While the Company has had a relatively low amount of charge-offs from
its consumer loan portfolio, management believes that national increases in the
level of consumer bankruptcies during 1998 and the growth in consumer lending in
areas of the Company's market served by the Company's newer branches warranted
an increase in the overall level of the allowance for loan losses during 1998.
In addition, significant layoffs caused by a strike at facilities of a major
employer located in the northern portion of the Company's market area caused
management to increase the overall level of the allowance during 1998. The
strike was settled during 1998 and the majority of the effected worker have
returned to work but the company is currently contemplating closing the
manufacturing facility. Based on this uncertainty and the company's position as
a major direct and indirect employer in the market area, management determined
that an increase in the overall level of the allowance for loan losses was
necessary. 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 $98,000, or 40.66%,
increase in noninterest income during 1998. The increase was primarily due to a
$78,000 increase in the gain on sale of loans and a $21,000 gain on the sale of
securities.
NONINTEREST EXPENSE. Noninterest expense increased $798,000, or 27.68%,
primarily due to increases of $482,000 in salaries and benefits expense,
$196,000 in occupancy expense and $89,000 in other operating expense. The
increase in both salaries and benefits and net occupancy expense were a direct
result of the one branch office 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 are by entering the
Youngstown and Boardman markets. Salaries and benefits and net occupancy costs
are expected to increase in 1999 as the Company will have a full year impact of
the additions. In addition, $212,000 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 in 1998 based on this plan.
INCOME TAXES. The provision for income taxes totaled $117,000 in 1998
compared to $207,000 in 1997, due to the decrease in income before income taxes.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31,1996
GENERAL. Net income for the year ended December 31, 1997 increased by
$394,000 or 137.28% from $287,000 for the year ended December 31, 1996 to
$681,000 for the year ended December 31, 1997. The increase was primarily due to
an increase in net interest income and other income and the one-time $449,000
SAIF assessment in 1996. Excluding the one-time SAIF assessment net income for
1996 would have been $583,000.
NET INTEREST INCOME. Net interest income is the largest component of
the Association'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.
33
<PAGE>
Net interest income increased approximately $114,000, or 3.34%, from
$3.4 million for the year ended December 31, 1996 to $3.5 million for the year
ended December 31, 1997. The primary component of this change was a $190,000, or
2.21%, increase in interest income. The increase in interest income consisted of
a $198,000 increase due to increased average volume of interest-earning assets
and an $8,000 decrease due to decreasing average interest rates. The increase in
interest income was partially offset by a $76,000, or 1.46%, increase in
interest expense.
Average loans outstanding for the year ended December 31, 1997
increased $4.4 million, or 8.94%, compared to average loans outstanding for the
year ended December 31, 1996, while average securities decreased $2.2 million,
or 3.55%, compared to the prior year. For the year ended December 31, 1997, the
Association experienced an increase in average yield on assets of 5 basis points
and an increase in the average cost of liabilities of 1 basis point, resulting
in a $114,000 increase in net interest income over net interest income for the
year ended December 31, 1996. Average net interest margin increased 6 basis
points from 2.92% for the year ended December 31, 1996 to 2.98% for the year
ended December 31, 1997. The Association's average interest rate spread
increased 4 basis points from 2.44% for the year ended December 31, 1996 to
2.48% for the year ended December 31, 1997.
The tables appearing elsewhere in this prospectus provide a more
detailed analysis of the changes in average balances, yields/rates and net
interest income identifying that portion of change in average volume versus that
portion due to changes in average rates. See "Average Balance Sheet,"
"Rate/Volume Analysis" and "Weighted Average Yields."
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, 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. The provision for loan losses was, $0
for each of the years ending December 31, 1996 and December 31, 1997. At
December 31, 1997, the allowance for loan losses represented 0.40% of total
loans compared to 0.46% at December 31, 1996.
NONINTEREST INCOME. The Association experienced a $72,000, or 42.60%,
increase in noninterest income for the year ended December 31, 1997 over the
year ended December 31, 1996. The increase was primarily due to a $41,000
increase in service charges and fees compared to the prior year due to
restructuring and increasing fees on certain deposit accounts and transactions.
NONINTEREST EXPENSE. Noninterest expense for the year ended December
31, 1997 decreased $369,000, or 11.35%, as compared with the year ended
December 31, 1996, primarily due to $449,000 expensed during fiscal 1996 for the
assessment to recapitalize the SAIF, which was not repeated in 1997. The
increase in both salaries and benefits and net occupancy expense were related to
the full year impact of the branch office opened in Wintersville during the
first half of 1996 and due to the branch office located in Boardman opened
during the fourth quarter of 1997. The decrease in FDIC expense was partially
offset by increases in salaries and employee benefits of $112,000, or 7.77%, and
an increase in net occupancy expense of $56,000, or 18.86%.
INCOME TAXES. The provision for income taxes totaled $207,000 for the
year ended December 31, 1997 compared to $46,000 for the year ended December 31,
1996, due to the increase in income before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits and other
borrowings, including advances from the FHLB-Cincinnati, loan and
mortgage-backed securities repayments and other funds provided by operations.
The Company also has the ability to borrow additional funds from the
FHLB-Cincinnati. The Company maintains investments in liquid assets based upon
management's assessment of: (i) the Company's need for funds; (ii) expected
deposit flows; (iii) the yields available on short-term liquid assets; and (iv)
the objectives of the Company's asset/liability management program. The Company
maintains a liquidity ratio above the regulatory requirement. This requirement,
34
<PAGE>
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 required ratio is currently 4.0%. The Company's
average regulatory liquidity ratios were 19.3%, 8.36%, 10.99%,10.26% and 6.14%
for the years ended December 31, 1998, 1997, 1996, 1995 and 1994, respectively.
The Company's regulatory liquidity ratio increased at December 31, 1998 due the
funds received from the sale of the stock on December 31, 1998. As the
conversion proceeds are utilized, management expects to maintain liquidity at
more historical levels.
The Company's cash flows are comprised of three primary
classifications: cash flows from operating activities, investing activities and
financing activities. Cash flows provided by operating activities were $837,000,
$656,000 and $20,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. Net cash from investing activities consisted primarily of
disbursements for loan originations and the purchase of investments and
mortgage-backed securities. Net cash from financing activities consisted
primarily of the net proceeds from sale of stock and activity in deposit
accounts. The net increase in deposits was $7.7 million, $1.2 million and $3.8
million for the years ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, the Company exceeded all of its regulatory
capital requirements with a tangible capital level of $21.6 million, or 16.1%,
of adjusted total assets, which is above the required level of $2.0 million, or
1.50%; core capital of $21.6 million, or 16.1%, of adjusted total assets, which
is above the required level of $5.4 million, or 4.00%; and risk-based capital of
$22.0 million, or 36.8%, of risk-weighted assets, which is above the required
level of $4.8 million, or 8.00%, See "Regulatory Capital Compliance."
The Company's most liquid assets are cash and short-term investments.
The levels of these assets are dependent on the Company's operating, financing,
lending and investing activities during arty given period. At December 31, 1998,
cash and short-term investments totaled $26.0 million. The Company has other
sources of liquidity if a need for additional funds arises, including securities
maturing within one year and the repayment of loans. The Company may also
utilize FHLB--Cincinnati advances or the sale of securities available for sale
as a source of funds. At December 31, 1998, the Company had advances outstanding
from the FHLB--Cincinnati of $16.0 million and $5.1 million of securities
available for sale.
At December 31, 1998, the Company had outstanding commitments to
originate loans of $3.2 million compared to $3.4 million at December 31, 1997.
The Company anticipates that it will have sufficient funds available to meet its
current loan origination commitments. Certificate accounts which are scheduled
to mature in less than one year from December 31, 1998 totaled $32.6 million.
The Company expects that a substantial portion of the maturing certificate
accounts will be retained by the Company at Maturity. However, if a substantial
portion of these deposits are not retained, the Company may utilize FHLB--
Cincinnati advances, or raise interest rates on deposits to attract new
accounts, which may result in higher levels of interest expense.
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
mange 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
35
<PAGE>
mission critical systems of service providers and vendors. Pursuant to the plan,
the 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 perform 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 is
scheduled to engage in individual testing with FISERV as needed during the first
quarter of 1999. The Company's other service providers, which interface with
FISERV, are scheduled for testing for Year 2000 compliance prior to March 31,
1999. The Company's in-house computers play a less critical role in the
Company's operations and these systems have been upgraded for Year 2000
compliance and testing and those 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 an 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 expects that the
contingency plans will be developed further depending on the Company's view of
the development and success of the established plan. Such determinations will
likely be reached upon the conclusion of the testing phase, which is expected to
occur by March 31, 1999.
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 its customers depend.
IMPACT OF NEW ACCOUNTING STANDARDS
Recent pronouncements by the Financial Accounting Standards Board
("FASB") will have an impact on financial statements issued in subsequent
periods. Set forth below are summaries of such pronouncements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 addresses the accounting for
derivative instruments and certain derivative instruments embedded in other
contracts, and hedging activities. The statement standardizes the accounting for
derivative instruments by requiring that
36
<PAGE>
an entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. This statement is effective
for all fiscal years beginning after June 15, 1999,
In October 1998, the FASB issued SFAS No. 134 "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". SFAS No. 134 will, in 1999,
allow mortgage loans that are securitized to be classified as trading, available
for sale, or in certain circumstances held to maturity. Currently these must be
classified as trading.
These statements are not expected to have a material effect on the
Company's consolidated financial position or results of operation.
IMPACT ON INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and results of operations
primarily in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of the Company
are monetary in nature. Therefore, interest rates have a more significant impact
on a financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services. The liquidity, maturity
structure and quality of the Company's assets and liabilities are critical to
the maintenance of acceptable performance levels.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report that are not historical
facts are forward looking statements that are subject to certain risks and
uncertainties. 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.
37
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONTENTS
Page
----
<S> <C>
Report of Independent Auditors ............................................. 39
Consolidated Balance Sheets ................................................ 40
Consolidated Statements of Income .......................................... 41
Consolidated Statements of Changes in Shareholders' Equity ................. 42
Consolidated Statements of Cash Flows ...................................... 43
Notes to Consolidated Financial Statements ................................. 44
</TABLE>
38
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
WELLSVILLE, OHIO
ANNUAL REPORT
DECEMBER 31, 1998
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Grand Central Financial Corp.
Wellsville, Ohio
We have audited the accompanying consolidated balance sheets of Grand Central
Financial Corp. as of December 31, 1998 and the related consolidated statements
of income, changes in shareholders' equity and cash flows for the year ended
December 31, 1998. 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. The 1997 and 1996 financial statements
were audited by other auditors whose report dated March 18, 1998, expressed an
unqualified opinion on those statements.
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 financial statements referred to above present fairly, in
all material respects, the financial position of Grand Central Financial Corp.
as of December 31, 1998 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Cleveland, Ohio
March 19, 1999
39
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
(Dollars in thousands, except share data)
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions ..................... $ 1,372 $ 990
Interest-bearing deposits in other banks .............................. 24,654 4,856
--------- --------
Total cash and cash equivalents ..................................... 26,026 5,846
Securities available-for-sale ......................................... 5,149 17,818
Securities held-to-maturity (estimated fair value
of $32,963 in 1998 and $31,625 in 1997) ............................. 32,629 31,476
Loans held for sale ................................................... 1,152 1,605
Loans, net ............................................................ 62,949 56,281
Federal Home Loan Bank, at cost ....................................... 2,699 2,514
Premises and equipment, net ........................................... 2,139 1,611
Accrued interest receivable ........................................... 571 877
Other assets .......................................................... 122 237
--------- --------
Total assets ......................................................... $ 133,436 $118,265
--------- --------
--------- --------
LIABILITIES
Deposits
Noninterest bearing ................................................. $ 5,471 $ 1,091
Interest bearing .................................................... 79,167 75,892
--------- --------
Total deposits ..................................................... 84,638 76,983
Federal Home Loan Bank Advances ....................................... 16,029 26,161
Advance payments by borrowers for taxes
and insurance ...................................................... 776 665
Accrued interest payable .............................................. 89 154
Other liabilities ..................................................... 131 137
--------- --------
Total liabilities ................................................ 101,663 104,100
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
Additional paid in capital ............................................ 18,720
Retained earnings, substantially restricted ........................... 14,330 14,119
Obligation under employee stock ownership plan ........................ (1,339)
Accumulated other comprehensive income ................................ 43 46
--------- --------
Total shareholders' equity .......................................... 31,773 14,165
--------- --------
Total liabilities and shareholders' equity ....................... $ 133,436 $118,265
--------- --------
--------- --------
</TABLE>
40
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees ............................................. $5,020 $4,405 $ 4,068
Interest on securities:
Taxable ....................................................... 3,614 4,280 4,381
Non-taxable ................................................... 15 18 26
Interest-bearing deposits in banks ................................ 138 100 138
------ ------ -------
Total interest income ......................................... 8,787 8,803 8,613
INTEREST EXPENSE
Deposits .......................................................... 3,486 3,367 3,232
FHLB borrowings ................................................... 1,477 1,906 1,965
------ ------ -------
Total interest expense ........................................ 4,963 5,273 5,197
------ ------ -------
NET INTEREST INCOME .................................................... 3,824 3,530 3,416
Provision for loan losses .............................................. 154 0 0
------ ------ -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ............................................ 3,670 3,530 3,416
NON-INTEREST INCOME
Service charges ................................................... 179 171 130
Gain on sale of loans ............................................. 83 5 4
Gain (loss) on sale of securities ...................................... 21 0 (9)
Other income ...................................................... 56 65 44
------ ------ -------
Total non-interest income ..................................... 339 241 169
NON-INTEREST EXPENSE
Salaries and employee benefits .................................... 2,035 1,553 1,441
Net occupancy expense ............................................. 549 395 297
Data processing expense ........................................... 138 128 125
FDIC assessments .................................................. 47 39 614
Franchise taxes ................................................... 214 201 201
Other expenses .................................................... 698 567 574
------ ------ -------
Total non-interest expense .................................... 3,681 2,883 3,252
------ ------ -------
INCOME BEFORE INCOME TAXES ............................................. 328 888 333
Income tax expense ..................................................... 117 207 46
------ ------ -------
NET INCOME ............................................................. $ 211 $ 681 $ 287
------ ------ -------
------ ------ -------
Basic and diluted earnings per share
(since conversion) .................................................... Not N/A N/A
Meaningful
</TABLE>
41
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
(Dollars 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, 1996 $ $ $ $ $ 73 $ 13,224
Comprehensive income:
Net income 287 287
Change in unrealized
gain (loss) on securities
available-for-sale, net of tax (268) (268)
Total Comprehensive Income 19
-------- --------- -----------
Balances at December 31, 1996 13,438 (195) 13,243
Comprehensive Income:
Net income 681 681
Change in unrealized
gain (loss) on securities
available-for-sale, net of tax 241 241
Total Comprehensive Income 922
-------- --------- -----------
Balance at December 31, 1997 14,119 46 14,165
Proceeds from sale of stock, net
of issuance cost $ 19 $ 18,720 18,739
Employee stock ownership plan
obligation $ (1,551) (1,551)
Commitment to release 21,188 employee
stock ownership plan shares 212 212
Comprehensive Income:
Net income 211 211
Change in unrealized
gain (loss) on securities
available-for-sale, net of tax (3) (3)
-----------
Total Comprehensive Income 208
------ --------- -------- ----------- --------- -----------
Balances at December 31, 1998 $ 19 $ 18,720 $ 14,330 $ (1,339) $ 43 $ 31,773
------ --------- -------- ----------- --------- -----------
------ --------- -------- ----------- --------- -----------
</TABLE>
42
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................... $ 211 $ 681 $ 287
Adjustments to reconcile net income to net cash
provided by operating activities:
Premium amortization net of discount accretion (83) (67) 66
(Gain) loss on sale of securities ............ (21) (9)
FHLB stock dividend .......................... (185) (173) (157)
Provision for loan losses .................... 154
Compensation expense on ESOP shares .......... 212
(Gain) loss on sale of fixed assets, net ..... (5) (4)
Gain on sales of loans held for sale, net .... (83) (4) (20)
Depreciation ................................. 282 156 161
Deferred income taxes ........................ (14) (55) 12
Increase (decrease) in:
Accrued interest receivable .............. 306 96 (354)
Other assets ............................. 115 (1) (4)
Accrued interest payable ................. (65) (32) (17)
Other liabilities ........................ 8 60 33
-------- -------- --------
Net cash from operating activities .. 837 656 20
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale
Purchases .................................... (425) (4,989) (11,144)
Proceeds from sales .......................... 463 1,509
Proceeds from maturities and payments ........ 12,684 8,522 3,137
Securities held to maturity
Purchases .................................... (11,500) (3,987) (11,499)
Proceeds from maturities and payments ........ 10,395 15,964 6,451
Net increase in loans ......................... (6,286) (8,364) (1,179)
Purchases of premises and equipment ........... (810) (329) (367)
Proceeds from sale of premises and equipment .. 7
-------- -------- --------
Net cash from investing activities ........... 4,521 6,824 (13,092)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of stock ............... 17,188
Net increase in deposits ...................... 7,655 1,155 3,829
Net change in short-term FHLB advances ........ (16,488) (4,750) 10,938
Proceeds from long-term FHLB advances ......... 8,500
Repayment of long-term FHLB advances .......... (2,144) (3,367) (1,185)
Net change in escrow accounts ................. 111 90 87
-------- -------- --------
Net cash from financing activities .......... 14,822 (6,872) 13,669
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..... 20,180 608 597
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,846 5,238 4,641
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ...... $ 26,026 $ 5,846 $ 5,238
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest ................................... $ 5,028 $ 5,305 $ 5,214
Income taxes ............................... 172 276 68
NONCASH TRANSACTIONS
Transfers to other real estate owned ........ 4 39
</TABLE>
43
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unless otherwise indicated, amounts in thousand, except per share data
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Grand Central
Financial Corp. (Company) and its wholly owned subsidiary Central Federal
Savings and Loan of Wellsville (Bank). All significant intercompany balances and
transactions have been eliminated in consolidation.
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.
USE OF ESTIMATES:
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 and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the value
of loans held for sale.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, deposits with financial institutions and
interest bearing deposits in other banks. The Company reports net cash flows for
customer loan and deposit transactions.
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 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.
44
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOANS HELD FOR SALE:
Mortgage loans originated and held for sale in the secondary market are carried
at the lower of cost or market valued determined on an aggregate basis. Net
unrealized losses are recognized through a valuation allowance by charges to
income. Gains and losses on the sale of loans held for sale are determined using
the specific identification method.
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.
45
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PREMISES AND EQUIPMENT:
Land is carried at cost. Other premises and equipment are recorded at cost and
are depreciated on the straight-line method. Depreciation and amortization are
provided over the estimated useful lives of the respective assets which range
from 3 to 40 years.
OTHER REAL ESTATE OWNED:
Other real estate owned is recorded at the lower of cost or fair value, less
estimated costs to sell. Any reduction in fair value is reflected in a valuation
allowance account established by a charge to income. Cost incurred to carry the
foreclosed real estate are charged to expense.
MORTGAGE SERVICING RIGHTS:
The Company recognizes as separate assets the rights to service mortgage loans
for others, whether the servicing rights are acquired through purchases or loan
originations. The fair value of capitalized mortgage servicing rights is based
upon the present value of estimated future cash flows. Based upon current fair
values capitalized mortgage servicing rights are periodically assessed for
impairment, which is recognized in the statement of income during the period in
which impairment occurs as an adjustment to the corresponding valuation
allowance. For purposes of performing its impairment evaluation, the Company
stratifies its portfolio on the basis of certain risk characteristics including
loan type and note rate. Capitalized mortgage servicing rights are amortized
over the period of estimated net servicing income and take into account
appropriate prepayment assumptions.
INCOME TAXES:
The Company follows the liability method in accounting for income taxes. The
liability method provides that deferred tax assets and liabilities are recorded
based on the difference between the tax basis of assets and liabilities and
their carrying amounts for financial reporting purposes, referred to as
"temporary differences."
EARNINGS PER SHARE:
Earnings per share information for 1998, 1997 and 1996 is not meaningful since
the mutual to stock conversion was not consummated until December 31, 1998.
Basic earnings per share is computed by dividing the period earnings by the
weighted average shares outstanding. The Company currently has no agreements
that would cause a dilutive effect for common shareholders. Employee Stock
Ownership Plan (ESOP) shares are considered outstanding for earnings per share
calculations as they are committed to be released; unearned shares are not
considered outstanding.
PENSION PLAN:
The Company has a pension plan covering substantially all employees. It is the
policy of the Company to fund the maximum amount that can be deducted for
federal income tax purposes but in amounts not less than the minimum amounts
required by law.
46
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed separately. Fair
value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates.
The fair value estimates of existing on-and off-balance sheet financial
instruments does not include the value of anticipated future business or the
values of assets and liabilities not considered financial instruments.
FINANCIAL STATEMENT PRESENTATION: Certain previously reported consolidated
financial statement amounts have been reclassified to conform to the 1998
presentation.
NOTE 2 - CONSUMMATION OF THE CONVERSION TO A STOCK SAVINGS BANK
WITH THE CONCURRENT FORMATION OF A HOLDING COMPANY
On June 11, 1998, the Board of Directors of the Bank unanimously adopted a plan
of conversion to convert from a federally chartered mutual savings and loan
association to a federally chartered stock savings bank with the concurrent
formation of a holding company, Grand Central Financial Corporation. The
conversion was consummated on December 31, 1998 by amending the Bank's federal
charter and the sale of the Corporation's common shares in an amount equal to
the market value of the Bank after giving effect to the conversion. A total of
1,938,871 common shares of the Corporation were sold at $10.00 per share and net
proceeds from the sale were $18,739 after deducting the costs of conversion.
The Corporation retained 50% of the net proceeds from the sale of common shares.
The remainder of the net proceeds were invested in the capital stock issued by
the Bank to the Corporation as a result of the conversion.
At the time of Conversion, the Bank established a liquidation account which was
equal to its regulatory capital as of the latest practicable date prior to the
Conversion. In the event of a complete liquidation, each eligible depositor will
be entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for the accounts then
held.
Under Office of Thrift Supervision ("OTS") regulations, limitations have been
imposed on all capital distributions, including cash dividends. The regulation
establishes a three-tiered system of restrictions, with the greatest flexibility
afforded to thrifts which are both well-capitalized and given favorable
qualitative examination ratings by the OTS.
47
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The carrying values and estimated fair values of investment and mortgage-backed
securities are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
--------- ---------- ---------- ---------
<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>
<TABLE>
<CAPTION>
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. government and federal
agencies $ 9,989 $ $ (84) $ 9,905
Municipal securities 275 9 284
Mortgage-backed securities:
Freddie Mac 391 5 396
Fannie Mae 3,734 75 3,809
Ginnie Mae 3,358 66 3,424
--------------- -------------- --------------- ---------------
Total $ 17,747 $ 155 $ (84) $ 17,818
--------------- -------------- --------------- ---------------
--------------- -------------- --------------- ---------------
</TABLE>
48
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES (Continued)
<TABLE>
<CAPTION>
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
HELD TO MATURITY:
U.S. government and federal
agencies $ 2,497 $ 18 $ $ 2,515
Corporate notes 992 992
Mortgage-backed securities:
Freddie Mac 22,714 346 (176) 22,884
Fannie Mae 5,273 70 (109) 5,234
--------------- -------------- --------------- ---------------
Total $ 31,476 $ 434 $ (285) $ 31,625
--------------- -------------- --------------- ---------------
--------------- -------------- --------------- ---------------
</TABLE>
The scheduled maturities of investment and mortgage-backed securities
held-to-maturity and available-for-sale at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
------------------ ----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------ --------- ------- ----------
<S> <C> <C> <C> <C>
One year or less $ 100 $ 102 $ 1,494 $ 1,488
After one year through
five years 75 77 998 1,006
Mortgage-backed
securities 4,906 4,970 30,137 30,469
--------- --------- ------------- ------------
$5,081 $5,149 $ 32,629 $ 32,963
--------- --------- ------------- ------------
--------- --------- ------------- ------------
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations without call or prepayment
penalties.
During the years ended December 31, 1998 and 1996, the Company sold securities
available-for-sale for total proceeds of approximately $463 and $1,509 resulting
in gross realized gains of approximately $21 in 1998 and gross realized losses
of approximately $9 in 1996. During the year ended December 31, 1997 the Company
did not sell any securities available-for-sale.
There were no securities transferred between classifications during 1998, 1997
or 1996. Securities with a carrying amount of approximately $7,902 and $20,510,
were pledged to secure deposits as required or permitted by law at December 31,
1998 and 1997, respectively.
49
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 4 - LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Loans secured by real estate:
Construction loans on single family residences $ 735 $ 1,017
Single family 45,441 40,659
Multi-family and commercial 1,150 1,006
Commercial loans 263 308
Consumer loans 15,739 13,522
------ ------
63,328 56,512
Allowance for loan losses (379) (231)
------ ------
Total $ 62,949 $ 56,281
------ ------
------ ------
</TABLE>
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of period $ 231 $ 229 $ 249
Loans charged off (7) (4) (20)
Recoveries 1 6
Provision for losses 154
--------- -------- --------
Balance, end of period $ 379 $ 231 $ 229
--------- -------- --------
--------- -------- --------
</TABLE>
At December 31, 1998, 1997 and 1996, the total recorded investment in impaired
loans, all of which had allowances determined in accordance with SFAS No. 114
and No. 118, amounted to approximately $0, $5 and $0, respectively. The average
recorded investment in impaired loans amounted to approximately $0, $2 and $0
for the for the years ended December 31, 1998, 1997 and 1996, respectively. No
interest income on impaired loans was recognized for cash payments received for
the years ended December 31, 1998, 1997 and 1996.
The Company has no commitments to loan additional funds to borrowers whose loans
have been modified.
50
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 4 - LOANS (Continued)
In the ordinary course of business, the Company has and expects to continue to
have transactions, including borrowings, with its officers, directors, and their
affiliates. In the opinion of management, such transactions were on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time of comparable transactions with other persons and did not
involve more than a normal risk of collectibility or present any other
unfavorable features to the Company. Loans to such borrowers are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance, beginning of period $ 280 $ 240
New loans 197 164
Payments (173) (124)
---- ----
Balance, end of period $ 304 $ 280
-------- -------
-------- -------
</TABLE>
NOTE 5 - MORTGAGE BANKING ACTIVITIES
Mortgage loans serviced for others are not included in the accompanying balance
sheets. The outstanding balances of serviced loans were approximately $7,880 and
$3,453 at December 31, 1998 and 1997, respectively.
Changes in capitalized mortgage loan servicing rights included in other assets
were:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance at beginning of year $ 11 $ 4
Originations 58 10
Amortization (5) (3)
------ ------
Totals $ 64 $ 11
------ ------
------ ------
</TABLE>
51
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 6 - PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 63 $ 63
Buildings and improvements 1,451 1,449
Furniture, fixtures and equipment 1,227 926
Leasehold improvements 967 334
Construction in process 150
------- -------
3,708 2,922
Accumulated depreciation and
amortization (1,569) (1,311)
------- -------
Total $ 2,139 $ 1,611
------- -------
------- -------
</TABLE>
Certain Company facilities and equipment are leased under various operating
leases. Rental expense was $87, $42, and $23 for years ended December 31, 1998,
1997 and 1996. Future minimum rental commitments under noncancelable leases are:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
<S> <C>
1999 $ 90
2000 90
2001 90
2002 91
2003 100
Thereafter 1,026
---------
Total $ 1,487
---------
---------
</TABLE>
NOTE 7 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Loans $ 289 $ 286
Mortgage-backed securities 226 235
Investments and other 56 356
------------ ------------
Totals $ 571 $ 877
------------ ------------
------------ ------------
</TABLE>
52
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 8 - DEPOSITS
Interest bearing deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest-bearing checking
account $ 11,106 $ 10,379
Savings accounts 23,653 23,266
Certificates of deposit 44,408 42,247
---------- ----------
$ 79,167 $ 75,892
----------- ----------
----------- ----------
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100 thousand was approximately $3,373 and $2,427 at December
31, 1998 and 1997, respectively. Deposits in excess of $100 thousand are not
insured by the FDIC.
At December 31, 1998, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<S> <C>
1999 $ 32,527
2000 10,295
2001 1,357
2002 156
2003 71
Thereafter 2
------------
Total $ 44,408
------------
------------
</TABLE>
The Company held deposits of approximately $1,102 for related parties at
December 31, 1998.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest bearing checking $ 291 $ 292 $ 292
Savings 696 724 759
Certificates of deposit 2,499 2,351 2,181
-------- ----------- ------------
Totals $ 3,486 $ 3,367 $ 3,232
-------- ----------- ------------
-------- ----------- ------------
</TABLE>
53
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES
The Bank has entered into various borrowing agreements with the Federal Home
Loan Bank (FHLB) of Cincinnati. FHLB advances are comprised of the following:
<TABLE>
<CAPTION>
MATURITY INTEREST RATE 1998 1997
- -------- ------------- ---- ----
<S> <C> <C> <C>
1998 6.02% $ 17,988
2002 5.95% - 6.50% $ 1,715 2,513
2003 5.45% - 5.80% 3,394 4,486
2005 6.86% - 6.96% 133 153
2006 6.31% 53 60
2007 6.45% - 6.60% 734 961
2008 5.07% - 5.59% 10,000
--------- ---------
Total $ 16,029 $ 26,161
--------- ---------
--------- ---------
</TABLE>
Pursuant to a collateral agreement with the FHLB, the advances are secured by
all stock invested in the FHLB and certain qualifying first mortgage loans.
Qualifying first mortgage loans pledged to secure FHLB advances totaled $24,044
at December 31, 1998. Based on the carrying amount of FHLB stock owned by the
Company, total FHLB advances are limited to approximately $53,986 at December
31, 1998.
The aggregate minimum future annual principal payments on FHLB advances at
December 31, 1998 are $1,117 in 1999, $1,155 in 2000, $1,225 in 2001, $1,149 in
2002, $919 in 2003 and $10,464 thereafter.
54
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 10 - FEDERAL INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current $ 131 $ 262 $ 34
Deferred (14) (55) 12
------- -------- -------
$ 117 $ 207 $ 46
------- -------- -------
------- -------- -------
</TABLE>
The provision for federal income taxes differs from that computed by applying
federal statutory rates to income before federal income tax expense, as
indicated in the following analysis:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected tax provision at a
34% rate $ 112 $ 302 $ 113
Effect of tax-exempt income (5) (67) (62)
Other 10 (28) (5)
------ ------ ------
$ 117 $ 207 $ 46
------ ------ ------
------ ------ ------
Effective tax rate 35.7% 23.3% 13.8%
</TABLE>
55
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 10 - FEDERAL INCOME TAXES (Continued)
The net deferred tax assets in the balance sheets include the following
components:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets
Bad debt $ 93 $ 30 $ 19
Deferred loan fees and costs 228 188 151
Unrealized loss on securities
available for sale 100
Other 4 8 1
--------- ------- ------
Total deferred tax assets 325 226 271
Deferred tax liabilities
Fixed assets 102 98 96
Unrealized gain on securities
available for sale 23 24
FHLB Stock Dividends 63
Other 23 5 1
--------- ------- ------
Total deferred tax liabilities 211 127 97
--------- ------- ------
Net deferred tax asset $ 114 $ 99 $ 174
--------- ------- ------
--------- ------- ------
</TABLE>
No valuation allowance for deferred tax assets was provided at December 31,
1998, 1997 or 1996 because the Company had sufficient taxes paid in and
available for recovery to warrant recording the full deferred tax asset.
Retained earnings at December 31, 1998 and 1997, includes approximately $2,250
for which no federal income tax liability has been recorded. These amounts
represent an allocation of income to bad debt deductions for tax purposes alone.
Reduction of amounts so allocated for purposes other than tax bad debt losses or
adjustments from carryback of net operating losses would create income for tax
purposes only, which would be subject to current tax. The unrecorded deferred
tax liability on the above amounts at December 31, 1998 and 1997 was
approximately $765.
Taxes attributable to securities gains and losses approximated $7, $0 and $(3)
for the years ended December 31, 1998, 1997 and 1996, respectively.
56
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 11 - PENSION PLAN
The Company maintains a contributory trusteed pension plan for all eligible
employees. The benefits contemplated by the plan are funded as accrued through
the purchase of individual life insurance policies. The cost of funding is
charged directly to operations. No unfunded liability exists for past service
costs. The Company's contributions to the plan charged to earnings for the years
ended December 31, 1998, 1997 and 1996 amounted to $9, $9 and $36.
NOTE 12 - EMPLOYEE STOCK OWNERSHIP PLAN
During 1998, the Company established an Employee Stock Ownership Plan ("ESOP")
for the benefit of employees 21 and older and who have completed at least one
year of service. Contributions under the ESOP are conditioned upon the ESOP
being qualified under Sections 401 and 501 of the Internal Revenue code of 1986,
as amended (the "Code").
To fund the plan, the ESOP borrowed $1,551 from the Company for the purposes of
purchasing 155,100 shares of stock at $10 per share in the conversion. Principal
and interest payments on the loan are due in annual installments which began
December 31, 1998 with the final payments of principal and interest being due
and payable at maturity on December 31, 2009. Interest is payable during the
term of the loan at a fixed rate of 7.5%. The loan is collateralized by the
shares of the Company's common stock purchased with the proceeds. As the Bank
periodically makes contributions to the ESOP to repay the loan, shares will be
allocated to participants on the basis of the ratio of each years principal and
interest payments to the total of all principal and interest payments.
NOTE 13 - REGULATORY MATTERS
Related to its conversion from a mutual to stock savings and loan association,
the Bank established a liquidation account which was equal to its total net
worth as of the date of the latest balance sheet appearing in the final
conversion prospectus. The liquidation account will be maintained for the
benefit of eligible depositors who continue to maintain their accounts at the
Bank after the conversion. The liquidation account will be reduced annually to
the extent that eligible depositors have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. The Bank may not pay dividends that would reduce
shareholders' equity below the required liquidation account balance.
57
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 13 - REGULATORY MATTERS (Continued)
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Office of Thrift Supervision (OTS). Failure
to meet minimum capital requirements can initiate certain mandatory, and
possible additional discretionary actions by regulators that, if undertaken,
could have a direct affect on the Bank and the financial statements. Under the
regulatory capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification under the prompt corrective action guidelines
are also subject to qualitative judgements by the regulators about components,
risk weightings, and other factors.
Qualitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total risk-based
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), Tier I capital to adjusted total assets (as defined), and tangible
capital to total assets (as defined). As discussed in greater detail below, as
of December 31, 1998, the Bank meets all of the capital adequacy requirements to
which it is subject.
As of December 31, 1998, the most recent notifications from the OTS, the Bank
was categorized as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since the most recent
notification that management believes have changed the Bank's prompt corrective
action category.
58
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 13 - REGULATORY MATTERS (Continued)
At December 31, 1998 and 1997, the Bank's actual capital levels and minimum
required levels were:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ---------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1998
Total Risk-Based
Capital (to Risk
Weighted Assets) $ 22,005 36.8% $ 4,779 8.0% $ 5,974 10.0%
Tier I Capital
(to Risk Weighted
Assets) 21,626 36.2 2,390 4.0 3,584 6.0
Tier I Capital
(to Adjusted Assets) 21,626 16.1 5,368 4.0 6,710 5.0
1997
Total Risk-Based $ 14,388 27.5% $ 4,193 8.0% $ 5,242 10.0%
Capital
(to Risk Weighted Assets)
Tier I Capital 14,158 27.0 2,097 4.0 3,145 6.0
(to Risk Weighted
Assets)
Tier I Capital 14,158 12.0 4,729 4.0 5,911 5.0
(to Adjusted Assets)
</TABLE>
59
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 14 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying financial statements. The principal commitments of the Company are
as follows:
The Company had outstanding commitments to originate loans as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
-------- -------
<S> <C> <C>
First mortgages $ 1,654 $ 574
Consumer lines 1,348 1,332
Commercial lines 172 1,481
------- -------
$ 3,174 $ 3,387
------- -------
------- -------
</TABLE>
As of December 31, 1998, fixed-rate commitments totaled $1,692 and had interest
rates ranging from 6.50% to 7.50%. As of December 31, 1997, fixed-rate
commitments totaled $1,712 and had interest rates ranging from 7.25% to 8.50%.
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the balance sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
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 Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount and type of collateral
obtained, if deemed necessary by the Company upon extension of credit, varies
and is based on management's credit evaluation of the counterparty.
In addition, the Company periodically is a defendant in various legal
proceedings arising in connection with its business. It is the best judgment of
management that neither the financial position nor results of operations of the
Company will be materially affected by the final outcome of these legal
proceedings.
60
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS: For those short-term instruments, the carrying amount
is a reasonable estimate of fair value.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES: For investment and mortgage-backed
securities, fair values are based on quoted market prices or dealer quotes.
LOANS: The fair value of loans is estimated by discounting future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
FEDERAL HOME LOAN BANK STOCK: The estimated fair value of Federal Home Loan Bank
stock is considered to approximate cost since it may be redeemed at par under
certain circumstances.
DEPOSIT LIABILITIES: The fair value of demand deposits and savings accounts is
the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated by discounting future cash
flows using the rates currently offered for deposits of similar remaining
maturities.
FEDERAL HOME LOAN BANK ADVANCES: The fair value of Federal Home Loan Bank
Advance is estimated by discounting future cash flows using the rates currently
offered for similar borrowings of similar remaining maturities.
ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE: For these assets and
liabilities, the carrying amount is a reasonable estimate of fair value.
OFF BALANCE SHEET COMMITMENTS: The fair value of off balance sheet commitments
to extend credit is not material.
61
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 26,026 $ 26,026 $ 5,846 $ 5,846
Securities 37,778 38,112 49,294 49,443
Loans, net of allowance 62,949 64,580 56,281 57,651
Loans held for sale 1,152 1,160 1,605 1,611
FHLB Stock 2,699 2,699 2,514 2,514
Accrued interest receivable 571 571 877 877
Financial liabilities:
Deposits (84,638) (84,863) (76,983) (76,995)
Federal Home Loan Bank
advances (16,029) (16,568) (26,161) (26,043)
Accrued interest payable (89) (89) (154) (154)
</TABLE>
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Company to have
disposed of such items at December 31, 1998 the estimated fair values would
necessarily have been achieved at that date, since market values may differ
depending on various circumstances. The estimated fair values at December 31,
1998 should not necessarily be considered to apply at subsequent dates.
Other assets and liabilities of the Company may have value, but are not included
in the above disclosures, such as property and equipment. Also, nonfinancial
instruments typically not recognized in these financial statements nevertheless
may have value, but are not included in the above disclosures. These include,
among other items, the estimated earnings power of core deposit accounts, the
earnings potential of loan servicing rights, the value of a trained work force,
customer goodwill and similar items.
62
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
CONDENSED BALANCE SHEET,
December 31, 1998
<TABLE>
ASSETS
<S> <C>
Cash and cash equivalents $ 9,415
Investment in banking subsidiaries 21,647
Other assets 1,340
-------
Total assets $32,402
-------
-------
LIABILITIES AND EQUITY
Accrued expenses and other liabilities $ 629
Shareholders' equity 31,773
-------
Total liabilities and shareholders' equity $32,402
-------
-------
CONDENSED STATEMENTS OF INCOME
One day ended December 31, 1998
Loan interest income $ 1
-------
Net income $ 1
-------
-------
</TABLE>
63
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL
INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
At December 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities
Net income $ 1
Change in other liabilities 629
--------
Net cash from operating activities 630
Cash flows from investing activities
Net increase in loan to subsidiary bank (1,340)
Injection of capital into subsidiary bank (7,063)
--------
Net cash from investing activities (8,403)
Cash flows from financing activities
Proceeds from sale of stock 17,188
-------
Net cash from financing activities 17,188
Net change in cash and cash equivalents 9,415
Beginning cash and cash equivalents --
--------
Ending cash and cash equivalents $ 9,415
--------
--------
</TABLE>
64
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Information regarding change in accountants appears in Current
Report on Form 8-K filed by the Company on January 15, 1999 and amended on
January 26, 1999, and is incorporated herein by reference.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS
The Directors of the Company are also Directors of the Association. The
following table sets forth certain information regarding the Board of Directors
of the Association and the Company.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE (1) POSITION(S) HELD (2) SINCE(3) EXPIRES(4)
- ------- -------- ---------------------- -------- -----------
<S> <C> <C> <C> <C>
William R. Williams................ 55 Director, President and Chief 1979 2000
Executive Officer
Gerry W. Grace..................... 59 Chairman of the Board 1986 2001
Jeffrey W. Aldrich................. 56 Director 1979 1999
Thomas P. Ash...................... 49 Director 1985 2000
Fred C. Jackson.................... 73 Director 1977 2000
William F. Porter.................. 83 Director 1964 1998
Joseph M. Wells, Jr................ 83 Director 1958 1998
</TABLE>
- --------------------
(1) As of December 31, 1998.
(2) Positions listed are for the Company and the Association unless
otherwise noted.
(3) Lists date individual first became director of the Association. All
Directors of the Company were appointed in 1998, the first year of its
incorporation.
(4) Expiration date is the same for the Company and the Association.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the
executive officers who are not also directors.
<TABLE>
<CAPTION>
NAME AGE (1) POSITION(S) HELD
- ------- -------- ----------------------
<S> <C> <C>
John A. Rife................................ 43 Executive Vice President and Treasurer
Daniel F. Galeoti........................... 43 Vice President of Mortgage Operations
Charles O. Standley......................... 45 Vice President of Commercial and Consumer
Lending
</TABLE>
- ----------------
(1) As of December 31, 1998.
65
<PAGE>
BIOGRAPHICAL INFORMATION
DIRECTORS
GERRY W. GRACE has served as a Director of the Association since 1987.
Mr. Grace is the owner and president of Grace Services, Inc., a weed and pest
control company located in Canfield, Ohio. Mr. Grace is also a member of the
Board of Trustees of Ellsworth Township.
WILLIAM R. WILLIAMS has served as a Director of the Association since
1979. Mr. Williams was also appointed as President and Chief Executive Officer
of the Association in 1979.
JEFFREY W. ALDRICH has served as a Director of the Association since
1979. Mr. Aldrich is the President and Chief Executive Officer of Sterling China
Co., a dishware manufacturing company.
THOMAS P. ASH has served as a Director of the Association since 1985.
Mr. Ash has served as the Superintendent of the East Liverpool City School
District since 1984.
FRED C. JACKSON has served as a Director of the Association since 1977.
Mr. Jackson has been retired since 1987.
WILLIAM F. PORTER has served as a Director of the Association since
1964. Mr. Porter has been retired since 1980. Before retiring, Mr. Porter was
the President of Globe Refractories, Inc., a brick manufacturing company.
JOSEPH M. WELLS, JR. has served as a Director of the Association since
1958. Mr. Wells serves currently as the Chairman of the Board of the Homer
Laughlin China Co., located in Newell, West Virginia.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
JOHN A. RIFE currently serves as the Executive Vice President and
Treasurer of the Association. Mr. Rife has served as Executive Vice President
since 1991.
DANIEL F. GALEOTI is the Vice President of Mortgage Lending of the
Association, and is responsible for supervising all residential mortgage
lending. Mr. Galeoti has served in this position since January 1989.
CHARLES O. STANDLEY currently serves as the Vice President of
Commercial and Consumer Lending. Mr. Standley supervises all commercial and
consumer lending operations including direct and indirect auto, home equity and
home improvement loans. Mr. Standley has served in this position since March
1989.
66
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
CASH COMPENSATION. The following table sets forth the cash compensation
paid by the Association for services rendered in all capacities during the years
ended December 31, 1998 and 1997 to the chief executive officer and the
executive officers of the Association who received compensation in excess of
$100,000.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------ --------------------- --------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
POSITIONS YEAR ($)(1) ($) ($)(2) (#)(4) ($)(5) ($)(3) ($)
- ----------------- ------- -------- --------- ------------- ---------- ---------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
William R. Williams........ 1998 $133,950 $16,000 $-- $-- -- $-- $--
President and 1997 $132,585 16,000 -- -- -- -- --
Chief Executive Officer
- ------------------------
</TABLE>
(1) Includes base salary and director's fees for the President and Chief
Executive Officer.
(2) For 1997 and 1998, there were no (a) perquisites over the lesser of
$50,000 or 10% of the individual's total salary and bonus for the year;
(b) payments of above-market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long-term
incentive plans prior to settlement or maturation; (d) tax payment
reimbursements; or (e) preferential discounts on stock.
(3) For 1997 and 1998, there were no stock awards plans in existence.
(4) For 1997 and 1998, there were no stock option plans in existence.
(5) For 1997 and 1998, there were no long-term incentive plans in
existence.
EMPLOYMENT AGREEMENTS
The Association and the Company have entered into employment agreements
(collectively, the "Employment Agreements") with William R. Williams, John A.
Rife, Charles O. Standley and Daniel F. Galeoti (individually, the "Executive").
The Association and Company intend the Employment Agreements to ensure that the
Association and the Company will maintain a stable and competent management base
after the Conversion. The continued success of the Association and the Company
depends to a significant degree on the skills and competence of Messrs.
Williams, Rife, Standley and Galeoti.
The Employment Agreements provide for a three-year term for each
Executive from December 30, 1998. The Association Employment Agreements provide
that, commencing on the first anniversary date of the agreement and continuing
each anniversary date thereafter, the Board of Directors of the Association may
extend each of the agreements for an additional year so that the remaining term
shall be three years unless written notice of non-renewal is given by the Board
of Directors after conducting a performance evaluation of the Executive. The
terms of the Company Employment Agreements shall be extended on a daily basis,
unless written notice of non-renewal is given by the Board of Directors of the
Company. The Association and Company Employment Agreements provide that the
Executive's base salary will be reviewed annually. The base salary for Mr.
Williams, is $124,950. In addition to the base salary, the Employment Agreements
provide for, among other things, participation in various employee benefit plans
and stock-based compensation programs, as well as furnishing certain fringe
benefits available to similarly situated executive personnel. The Employment
Agreements provide for termination by the Association or the Company for cause
(as described in the agreements) at any time. In the event the Association or
the Company chooses to terminate the Executive's employment for reasons other
than for cause or, in the event of the Executive's resignation from the
Association or the Company upon: (i) failure to re-elect the Executive to
his/her current offices; (ii) a material change in the Executive's functions,
duties or responsibilities; (iii) a relocation of the Executive's principal
place of employment by more than 25 miles; (iv) liquidation or dissolution of
the Association or the
67
<PAGE>
Company; or (v) a breach of the Employment Agreements by the Association or the
Company; the Executive or, in the event of the Executive's death, the
Executive's beneficiary would be entitled to receive an amount generally equal
to the remaining base salary and bonus payments that would have been paid to the
Executive during the remaining term of the Employment Agreements. In addition,
the Executive would receive a payment attributable to the contributions that
would have been made on the Executive's behalf to any employee benefit plans of
the Association or the Company during the remaining term of the Employment
Agreements, together with the value of certain stock-based incentives previously
awarded to the Executive. The Association and the Company would also continue
and pay for the Executive's life and disability coverage for the remaining term
of the Employment Agreement, as well as provide medical and hospitalization
coverage until the Executive at least attains eligible Medicare age. Upon any
termination of the Executive, the Executive is subject to a covenant not to
compete with the Company or the Association for one year. The Association and
the Company would also continue or pay for the Executive's life, health and
disability coverage for the remaining term of the Employment Agreement.
Under the agreements, if voluntary or involuntary termination follows a
change in control of the Association or the Company, the Executive or, in the
event of the Executive's death, the Executive's beneficiary would be entitled to
a severance payment generally equal to the greater of: (i) the payments due for
the remaining terms of the agreement, including the value of certain stock-based
incentives previously awarded to the Executive; or (ii) three times the average
of the five preceding taxable years' annual compensation. The Association and
the Company would also continue the Executive's life, health, and disability
coverage for thirty-six months (except medical and hospitalization would be
provided at least until the Executive attains eligible Medicare age).
Notwithstanding that both Employment Agreements provide for a severance payment
in the event of a change in control, the Executive would only be entitled to
receive a severance payment under one agreement. In the event of a change in
control of the Association or the Company, the total amount of payments due
under the Agreements, based solely on the base salaries paid to Messrs.
Williams, Rife, Standley and Galeoti excluding any benefits under any employee
benefit plan which may be payable, would equal approximately $1.13 million.
Payments to the Executive under the Association Employment Agreement
will be guaranteed by the Company in the event that payments or benefits are not
paid by the Association. Payments under the Company Employment Agreements would
be made by the Company. All reasonable costs and legal fees paid or incurred by
the Executive pursuant to any dispute or question of interpretation relating to
the Employment Agreements shall be paid by the Association or Company,
respectively if the Executive is successful on the merits pursuant to a legal
judgment, arbitration or settlement. The Employment Agreements also provide that
the Association and Company shall indemnify the Executive to the fullest extent
allowable under federal, Ohio and Delaware law, respectively.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Code limits the amount of compensation the Association may consider
in providing benefits under its tax-qualified retirement plans, such as the
Pension Plan and the ESOP. The Code further limits the amount of contributions
and benefit accruals under such plans on behalf of any employee. To provide
benefits to make up for the reduction in benefit flowing from these limits in
connection with the Pension Plan and ESOP, the Association implemented a
non-qualified deferred compensation arrangement known as a "Supplemental
Executive Retirement Plan" ("SERP"). The SERP generally provides benefits to
eligible individuals (designated by the Board of Directors of the Association or
its affiliates) that cannot be provided under the Pension Plan and/or ESOP as a
result of the limitations imposed by the Code, but that would have been provided
under the Pension Plan and/or ESOP but for such limitations. In addition to
providing for benefits lost under tax-qualified plans as a result of limitations
imposed by the Code, the SERP makes up lost ESOP benefits to designated
individuals who retire, who terminate employment in connection with a change in
control, or whose participation in the ESOP ends due to termination of the ESOP
in connection with a change in control (regardless of whether the individual
terminates employment) prior to the complete scheduled repayment of the ESOP
loan. Generally, upon the retirement of an eligible individual or upon a change
in control of the Association or the Company prior to complete repayment of the
ESOP Loan, the SERP will provide the individual with a benefit equal to what the
individual would have received under the ESOP had he remained employed
throughout the term of the ESOP or had the ESOP not been terminated prior to the
scheduled repayment of the ESOP loan. An individual's benefits under the SERP
become payable upon the participant's retirement (in
68
<PAGE>
accordance with the standard retirement policies of the Association), upon the
change in control of the Association or the Company or as determined under the
ESOP and Pension Plan.
The Association may establish a grantor trust in connection with the
SERP to satisfy the obligations of the Association with respect to the SERP. The
assets of the grantor trust would remain subject to the claims of the
Association's general creditors in the event of the Association's insolvency
until paid to the individual pursuant to the terms of the SERP.
DIRECTOR COMPENSATION
All directors of the Association receive an annual retainer of $9,000 a
year, and $100 per executive committee meeting attended.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information as to those persons believed
by management to be beneficial owners of more than 5% of the Company's
outstanding shares of Common Stock or as disclosed in certain reports received
to date regarding such ownership filed by such persons with the Company and with
the SEC, in accordance with Sections 13(d) and 13(g) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Other than those persons listed
below, the Company is not aware of any person, as such term is defined in the
Exchange Act, who owns more than 5% of the Company's Common Stock as of the
Record Date.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER
TITLE OF CLASS BENEFICIAL OWNER OF SHARES PERCENT OF CLASS
- ---------------- -------------------------------------- -------------- -----------------
<S> <C> <C> <C>
Common Stock The Central Federal Savings and Loan 155,110(1) 8.0%
of Wellsville Employee Stock
Ownership Plan and Trust (the
"ESOP")
601 Main Street
Wellsville, Ohio 43968
</TABLE>
- -----------------------------
(1) Shares of Common Stock were acquired by the ESOP in the Association's
Conversion. The ESOP Committee administers the ESOP. First Bankers
Trust, N.A. has been appointed as the corporate trustee for the ESOP
("ESOP Trustee"). The ESOP Trustee, subject to its fiduciary duty, must
vote all allocated shares held in the ESOP in accordance with the
instructions of the participants. As of December 31, 1998, no shares
had been allocated under the ESOP. Under the ESOP, unallocated shares
and allocated shares as to which voting instructions are not given by
participants are to be voted by the ESOP Trustee in a manner calculated
to most accurately reflect the instructions received from participants
regarding the allocated stock so long as such vote is in accordance
with the provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA").
69
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number of shares of Common Stock the
Association's executive officers and directors own as of the record date.
<TABLE>
<CAPTION>
NUMBER
OF PERCENT
NAME SHARES OF CLASS
- ------- --------- -------------
<S> <C> <C>
Gerry W. Grace......................................... 20,000 1.03%
William R. Williams.................................... 20,000 1.03%
Jeffrey W. Aldrich..................................... 20,000 1.03%
Thomas P. Ash.......................................... 20,000 1.03%
Fred C. Jackson........................................ 20,000 1.03%
William F. Porter...................................... 1,000 0.05%
Joseph M. Wells, Jr.................................... 20,000 1.03%
John A. Rife........................................... 20,000 1.03%
Daniel F. Galeoti...................................... 20,000 1.03%
Charles O. Standley.................................... 20,000 1.03%
--------
All Directors and Executive Officers
as a group (10 persons).............................. 181,000 9.32%
------- ----
------- ----
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA") requires that all loans or extensions of credit to executive officers
and directors must be made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. In addition, loans made
to a director or executive officer in excess of the greater of $25,000 or 5% of
the Association's capital and surplus (up to a maximum of $500,000) must be
approved in advance by a majority of the disinterested members of the Board of
Directors.
Prior to FIRREA, the Bank made loans to its executive officers and
Directors which were secured by their primary residences. The rates of interest
charged by the Bank on such loans were the Bank's cost of funds. Pursuant to
FIRREA, in 1989, the Bank discontinued its practice of making such preferential
loans to its officers and Directors. However, all such pre-FIRREA preferential
loans were "grandfathered" under FIRREA. Since the enactment of FIRREA, the Bank
has not made any loans to its executive officers or Directors. The Bank intends
to implement a policy whereby it will begin to again offer loans to executive
officers and Directors. Such loans, as well as loans made to Bank employees,
will be made on the same terms and conditions offered to the general public. If
the Bank implements a policy of extending credit to executive officers and
Directors, such policy will provide that all such loans will be made in the
ordinary course of business, on substantially the same terms, including
collateral, as those prevailing at the time for comparable transactions with
other persons and may not involve more than the normal risk of collectibility or
present other unfavorable features. As of December 31, 1998, the Bank had
$304,000 of loans to executive officers or Directors all of which had balances
of less than $60,000 or were made by the Bank in the ordinary course of business
with no favorable terms and do not involve more than the normal risk of
collectibility or present unfavorable features.
70
<PAGE>
The Company intends that all transactions in the future between the
Company and its executive officers, directors, holders of 10% or more of the
shares of any class of its common stock and affiliates thereof, will contain
terms no less favorable to the Company than could have been obtained by it in
arm's-length negotiations with unaffiliated persons and will be approved by a
majority of independent outside directors of the Company not having any interest
in the transaction.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and
its subsidiaries are filed as part of this document under Item 7:
- Independent Auditors' Report
- Balance Sheets as of December 31, 1998 and 1997
- Consolidated Statements of Income for the Years Ended December
31, 1998, 1997 and 1996
- Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended December 31, 1998, 1997 and 1996
- Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996
- Notes to Consolidated Financial Statements
(a) 2. FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or notes thereto.
(b) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF 1998
No reports were filed on Form 8-K during the last quarter of 1998.
71
<PAGE>
(c) EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION REGULATION S-B
<TABLE>
<CAPTION>
Exhibit
Number
------
<S> <C>
2.1 Plan of Conversion of Central Federal Savings and Loan
Association of Wellsville (1)
3.1 Certificate of Incorporation of Grand Central Financial Corp.
(1)
3.2 Bylaws of Grand Central Financial Corp. (1)
10.1 Employment Agreement between Grand Central Financial Corp. and
William R. Williams
10.2 Employment Agreement between Grand Central Financial Corp. and
John A. Rife
10.3 Employment Agreement between Grand Central Financial Corp. and
Daniel F. Galeoti
10.4 Employment Agreement between Grand Central Financial Corp. and
Charles O. Standley
10.5 Employment Agreement between Central Federal Savings and Loan
Association of Wellsville and William R. Williams
10.6 Employment Agreement between Central Federal Savings and Loan
Association of Wellsville and John A. Rife
10.7 Employment Agreement between Central Federal Savings and Loan
Association of Wellsville and Daniel F. Galeoti
10.8 Employment Agreement between Central Federal Savings and Loan
Association of Wellsville and Charles O. Standley
10.9 Form of Central Federal Savings and Loan Association of
Wellsville Employee Severance Compensation Plan (1)
10.10 Form of Central Federal Savings and Loan Association of
Wellsville Supplemental Executive Retirement Plan (1)
11.0 Statement Re: Computation of Per Share Earnings(2)
16.1 Letter re: Change in Certifying Accountant(3)
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) Not applicable as the Company did not have earnings in 1998.
(3) 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.
</TABLE>
<PAGE>
CONFORMED
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Grand Central Financial Corp.
/s/ William R. Williams
-----------------------------------------------
William R. Williams
President, Chief Executive Officer and Director
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ William R. Williams President, Chief Executive March 31, 1999
- ----------------------------------------- Officer and Director
William R. Williams (principal executive
officer)
/s/ John A. Rife
- ---------------------------------------- Executive Vice President March 31, 1999
John A. Rife and Treasurer
(principal accounting and
financial officer)
*
- ---------------------------------------- Chairman of the Board March 31, 1999
Gerry W. Grace
*
- --------------------------------------- Director March 31, 1999
Jeffrey W. Aldrich
*
- --------------------------------------- Director March 31, 1999
Thomas P. Ash
*
- --------------------------------------- Director March 31, 1999
Fred C. Jackson
- ------------------
*Pursuant to Power of Attorney filed on September 23, 1998, as Exhibit 24.1 to
the Registration Statement on Form SB-2 for Grand Central Financial Corp.
/s/ William R. Williams March 31, 1999
- ---------------------------
William R. William
President, Chief Executive Officer
and Director
</TABLE>
73
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT BETWEEN GRAND CENTRAL FINANCIAL CORP.
AND WILLIAM R. WILLIAMS
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of December 30, 1998,
by and between Grand Central Financial Corp. (the "Holding Company"), a
corporation organized under the laws of Delaware, with its principal
administrative office at 601 Main Street, Wellsville, Ohio 43968 and William R.
Williams (the "Executive"). Any reference to "Institution" herein shall mean
Central Federal Savings and Loan Association of Wellsville or any successor
thereto.
WHEREAS, the Holding Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Holding
Company for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of Executive's employment hereunder, Executive agrees
to serve as President and Chief Executive Officer of the Holding Company. The
Executive shall render administrative and management services to the Holding
Company such as are customarily performed by persons in a similar executive
capacity. During said period, Executive also agrees to serve, if elected, as an
officer and director of any subsidiary of the Holding Company.
2. TERMS.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty six (36) full calendar months thereafter. Commencing on
the date of the execution of this Agreement, the term of this Agreement shall be
extended for one day each day until such time as the board of directors of the
Holding Company (the "Board") or Executive elects not to extend the term of the
Agreement by giving written notice to the other party in accordance with Section
8 of this Agreement, in which case the term of this Agreement shall be fixed and
shall end on the third anniversary of the date of such written notice.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder including activities and services related to the organization,
operation and management of the Holding Company and its direct or indirect
subsidiaries ("Subsidiaries") and participation in community and civic
organizations; provided, however, that,
<PAGE>
with the approval of the Board, as evidenced by a resolution of such Board, from
time to time, Executive may serve, or continue to serve, on the boards of
directors of, and hold any other offices or positions in, companies or
organizations, which, in such Board's judgment, will not present any conflict of
interest with the Holding Company or its Subsidiaries, or materially affect the
performance of Executive's duties pursuant to this Agreement.
(c) Notwithstanding anything herein contained to the contrary,
Executive's employment with the Holding Company may be terminated by the Holding
Company or Executive during the term of this Agreement, subject to the terms and
conditions of this Agreement. Moreover, in the event the Executive is terminated
or suspended from his position with the Institution, Executive shall not
perform, in any respect, directly or indirectly, during the pendency of his
temporary or permanent suspension or termination from the Institution, duties
and responsibilities formerly performed at the Institution as part of his duties
and responsibilities as President and Chief Executive Officer of the Holding
Company.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Executive shall be entitled to a salary from the Holding
Company or its Subsidiaries of $135,608 per year ("Base Salary"). Base Salary
shall include any amounts of compensation deferred by Executive under any
tax-qualified retirement or welfare plan or any other deferred compensation
arrangement maintained by the Holding Company and its Subsidiaries. Such Base
Salary shall be payable bi-weekly. During the period of this Agreement,
Executive's Base Salary shall be reviewed at least annually; the first such
review will be made no later than one year from the date of this Agreement. Such
review shall be conducted by the Board or by a Committee of the Board delegated
such responsibility by the Board. The Committee or the Board may increase
Executive's Base Salary. Any increase in Base Salary shall become the "Base
Salary" for purposes of this Agreement. In addition to the Base Salary provided
in this Section 3(a), the Holding Company shall also provide Executive, at no
premium cost to Executive, with all such other benefits as provided uniformly to
permanent full-time employees of the Holding Company and its Subsidiaries.
(b) The Executive shall be entitled to participate in any employee
benefit plans, arrangements and perquisites substantially equivalent to those in
which Executive was participating or otherwise deriving benefit from immediately
prior to the beginning of the term of this Agreement, and the Holding Company
and its Subsidiaries will not, without Executive's prior written consent, make
any changes in such plans, arrangements or perquisites which would materially
adversely affect Executive's rights or benefits thereunder, except to the extent
that such changes are made applicable to all Holding Company and Institution
employees eligible to participate in such plans, arrangements and perquisites on
a non-discriminatory basis. Without limiting the generality of the foregoing
provisions of this Subsection (b), Executive shall be entitled to participate in
or receive benefits under any employee benefit plans including, but not limited
to, retirement plans, supplemental retirement plans, pension plans,
profit-sharing plans, health-and-accident plans, medical coverage or any other
employee benefit plan or arrangement made available by the Holding Company and
its Subsidiaries in the future to its senior executives
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and key management employees, subject to and on a basis consistent with the
terms, conditions and overall administration of such plans and arrangements.
Executive shall be entitled to incentive compensation and bonuses as provided in
any plan of the Holding Company and its Subsidiaries in which Executive is
eligible to participate. Nothing paid to the Executive under any such plan or
arrangement will be deemed to be in lieu of other compensation to which the
Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of
this Section 3 and other compensation provided for by paragraph (b) of this
Section 3, the Holding Company shall pay or reimburse Executive for all
reasonable travel, including reasonable expenses for spouse's travel, and other
reasonable expenses incurred in the performance of Executive's obligations under
this Agreement and may provide such additional compensation in such form and
such amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Holding Company of Executive's full-time employment hereunder
for any reason other than termination governed by Section 5(a) hereof, or for
Cause, as defined in Section 7 hereof; (ii) Executive's resignation from the
Holding Company's employ, upon, any (A) failure to elect or reelect or to
appoint or reappoint Executive as President and Chief Executive Officer, unless
consented to by the Executive, (B) a material change in Executive's function,
duties, or responsibilities with the Holding Company or its Subsidiaries, which
change would cause Executive's position to become one of lesser responsibility,
importance, or scope from the position and attributes thereof described in
Section 1, above, unless consented to by the Executive, (C) a relocation of
Executive's principal place of employment by more than 25 miles from its
location at the effective date of this Agreement, unless consented to by the
Executive, (D) a material reduction in the benefits and perquisites to the
Executive from those being provided as of the effective date of this Agreement,
unless consented to by the Executive, (E) a liquidation or dissolution of the
Holding Company or the Institution, or (F) breach of this Agreement by the
Holding Company. Upon the occurrence of any event described in clauses (A), (B),
(C), (D) (E) or (F), above, Executive shall have the right to elect to terminate
his employment under this Agreement by resignation upon not less than sixty (60)
days prior written notice given within six full calendar months after the event
giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Holding Company shall be obligated to
pay Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, a sum equal to the sum of: (i)
the Base Salary and bonuses in accordance with Section 3 of this Agreement that
would have been paid to Executive for the remaining term of this Agreement had
the Event of Termination not occurred, plus the value as calculated by a
recognized firm
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<PAGE>
customarily performing such valuation, of any stock options or related rights
which as of the Date of Termination have been granted to Executive but are not
exercisable by Executive and the value of any restricted stock awards or related
rights which have been granted to Executive; but in which Executive does not
have a non-forfeitable or fully-vested interest as of the Date of Termination;
and (ii) all benefits, including health insurance in accordance with Section
3(b) that would have been provided to Executive for the remaining term of this
Agreement had an Event of Termination not occurred. At the election of the
Executive, which election is to be made prior to an Event of Termination, such
payments shall be made in a lump sum. In the event that no election is made,
payment to the Executive will be made on a monthly basis in approximately equal
installments during the remaining term of the Agreement. Such payments shall not
be reduced in the event the Executive obtains other employment following
termination of employment.
(c) Upon the occurrence of an Event of Termination, the Holding Company
will cause to be continued life, medical, dental and disability coverage
substantially equivalent to the coverage maintained by the Holding Company or
its Subsidiaries for Executive prior to his termination at no premium cost to
the Executive. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the
Holding Company or the Institution shall mean an event of a nature that; (i)
would be required to be reported in response to Item 1(a) of the current report
on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a
Change in Control of the Institution or the Holding Company within the meaning
of the Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance
Act, or the Rules and Regulations promulgated by the Office of Thrift
Supervision (or its predecessor agency), as in effect on the date hereof
(provided, that in applying the definition of change in control as set forth
under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of voting securities of the Institution or the Holding
Company representing 20% or more of the Institution's or the Holding Company's
outstanding voting securities or right to acquire such securities except for any
voting securities of the Institution purchased by the Holding Company and any
voting securities purchased by any employee benefit plan of the Holding Company
or its Subsidiaries; or (B) individuals who constitute the Board on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Company's stockholders was approved by a Nominating Committee solely
composed of members which are Incumbent Board members, shall be, for purposes of
this clause (B), considered as though he were a member of the Incumbent Board;
or (C) a plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the
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Institution or the Holding Company or similar transaction occurs or is
effectuated in which the Institution or Holding Company is not the resulting
entity; provided, however, that such an event listed above will be deemed to
have occurred or to have been effectuated upon the receipt of all required
federal regulatory approvals not including the lapse of any statutory waiting
periods; or (D) a proxy statement has been distributed soliciting proxies from
stockholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Holding Company or Institution
with one or more corporations as a result of which the outstanding shares of the
class of securities then subject to such plan or transaction are exchanged for
or converted into cash or property or securities not issued by the Institution
or the Holding Company shall be distributed; or (E) a tender offer is made for
20% or more of the voting securities of the Institution or Holding Company then
outstanding.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c) and, (d), of this Section 5
upon his subsequent termination of employment at any time during the term of
this Agreement due to (i) Executive's dismissal, or (ii) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, reduction in the annual compensation or material
reduction in benefits or relocation of his principal place of employment by more
than 25 miles from its location immediately prior to the change in control,
unless such termination is because of his death or Termination for Cause (as
defined herein).
(c) Upon the Executive's entitlement to benefits pursuant to Section
5(b), the Holding Company shall pay Executive, or in the event of his subsequent
death, his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay or liquidated damages, or both, a sum equal to the greater of: (i)
the Base Salary and bonuses in accordance with Section 3 of this Agreement that
would have been paid to Executive for the remaining term of the Agreement had
the event described in Subsection (b) of this Section 5 not occurred, plus the
value, as calculated by a recognized firm customarily performing such valuation,
of any stock option or related rights which as of the Date of Termination have
been granted to Executive, but are not exercisable by Executive and the value of
restricted stock awards or related rights which have been granted to Executive,
but which Executive does not have a non-forfeitable or fully vested interest as
of the Date of Termination and all benefits, including health insurance, in
accordance with Section 3(b) that would have been provided to Executive for the
remaining term of this Agreement had the event described in Subsection (b) of
this Section 5 not occurred; or (ii) three (3) times Executive's average Annual
Compensation for the five (5) preceding taxable years. Such Annual Compensation
shall include all taxable income paid by the Holding Company or its
Subsidiaries, including, but not limited to, Base Salary, commissions and
bonuses, as well as contributions on behalf of Executive to any pension and
profit sharing plan, severance payments, directors or committee fees and fringe
benefits paid or to be paid to the Executive during such years. At the election
of the Executive, which election is to be made prior to a Change in Control,
such payment shall be made in a lump sum. In the event that no election is made,
payment to the Executive will be made on a monthly basis in approximately equal
installments during the remaining term of the
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<PAGE>
Agreement. Such payments shall not be reduced in the event Executive obtains
other employment following termination of employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section
5(b), the Company will cause to be continued life, medical, dental and
disability coverage substantially equivalent to the coverage maintained by the
Institution for Executive at no premium cost to Executive prior to his
severance. Such coverage and payments shall cease upon the expiration of
thirty-six (36) months following the Change in Control.
6. CHANGE OF CONTROL RELATED PROVISIONS.
(a) Notwithstanding the provisions of Section 5, in the event
that:
(i) the aggregate payments or benefits to be made or
afforded to Executive, which are deemed to be
parachute payments as defined in Section 280G of the
Internal Revenue Code of 1986, as amended (the
"Code") or any successor thereof, (the "Termination
Benefits") would be deemed to include an "excess
parachute payment" under Section 280G of the Code;
and
(ii) if such Termination Benefits were reduced to an
amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal
to three (3) times Executive's "base amount," as
determined in accordance with said Section 280G and
the Non-Triggering Amount less the product of the
marginal rate of any applicable state and federal
income tax and the Non Triggering Amount would be
greater than the aggregate value of the Termination
Benefits (without such reduction) minus (i) the
amount of tax required to be paid by the Executive
thereon by Section 4999 of the Code and further minus
(ii) the product of the Termination Benefits and the
marginal rate of any applicable state and federal
income tax,
then the Termination Benefits shall be reduced to the Non-Triggering Amount. The
allocation of the reduction required hereby among the Termination Benefits shall
be determined by the Executive.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of a
material loss to the Holding Company or one of its Subsidiaries caused by the
Executive's intentional failure to perform stated duties, personal dishonesty,
willful violation of any law, rule, regulation (other than traffic violations or
similar offenses), final cease and desist order or material breach of any
provision of this Agreement. For purposes of this Section, no act, or the
failure to act, on Executive's part shall be "willful" unless done, or omitted
to be done, not in good faith and without reasonable belief that the action or
omission was in the best interest of the Holding
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<PAGE>
Company or its Subsidiaries. Notwithstanding the foregoing, Executive shall not
be deemed to have been terminated for Cause unless and until there shall have
been delivered to him a Notice of Termination which shall include a copy of a
resolution duly adopted by the affirmative vote of not less than three-fourths
of the members of the Board at a meeting of the Board called and held for that
purpose (after reasonable notice to Executive and an opportunity for him,
together with counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail. The
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause. During the period beginning on the date
of the Notice of Termination for Cause pursuant to Section 8 hereof through the
Date of Termination, stock options and related limited rights granted to
Executive under any stock option plan shall not be exercisable nor shall any
unvested awards granted to Executive under any stock benefit plan of the Holding
Company or its Subsidiaries vest. At the Date of Termination, such stock options
and related limited rights and such unvested awards shall become null and void
and shall not be exercisable by or delivered to Executive at any time subsequent
to such Date of Termination for Cause.
8. NOTICE.
(a) Any purported termination by the Holding Company or by Executive
shall be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence of
a Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Holding Company will
continue to pay Executive his full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, Base Salary) and
continue him as a participant in all compensation, benefit and insurance plans
in which he was participating when the notice of dispute was given, until the
dispute is finally resolved in
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accordance with this Agreement. Amounts paid under this Section are in addition
to all other amounts due under this Agreement and shall not be offset against or
reduce any other amounts due under this Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Holding Company. Executive shall, upon
reasonable notice, furnish such information and assistance to the Holding
Company as may reasonably be required by the Holding Company in connection with
any litigation in which it or any of its subsidiaries or affiliates is, or may
become, a party.
10. NON-COMPETITION AND NON-DISCLOSURE.
(a) Upon any termination of Executive's employment hereunder pursuant
to Section 4 hereof, Executive agrees not to compete with the Holding Company or
its Subsidiaries for a period of one (1) year following such termination in any
city, town or county in which the Executive's normal business office is located
and the Holding Company or any of its Subsidiaries has an office or has filed an
application for regulatory approval to establish an office and any county
adjacent to such city, town or county, determined as of the effective date of
such termination, except as agreed to pursuant to a resolution duly adopted by
the Board. Executive agrees that during such period and within said cities,
towns and counties, Executive shall not work for or advise, consult or otherwise
serve with, directly or indirectly, any entity whose business materially
competes with the depository, lending or other business activities of the
Holding Company or its Subsidiaries. The parties hereto, recognizing that
irreparable injury will result to the Holding Company or its Subsidiaries, its
business and property in the event of Executive's breach of this Subsection
10(a) agree that in the event of any such breach by Executive, the Holding
Company or its Subsidiaries will be entitled, in addition to any other remedies
and damages available, to an injunction to restrain the violation hereof by
Executive, Executive's partners, agents, servants, employees and all persons
acting for or under the direction of Executive. Executive represents and admits
that in the event of the termination of his employment pursuant to Section 7
hereof, Executive's experience and capabilities are such that Executive can
obtain employment in a business engaged in other lines and/or of a different
nature than the Holding Company or its Subsidiaries, and that the enforcement of
a remedy by way of injunction will not prevent Executive from earning a
livelihood. Nothing herein will be construed as prohibiting the Holding Company
or its Subsidiaries from pursuing any other remedies available to the Holding
Company or its Subsidiaries for such breach or threatened breach, including the
recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Holding Company and
its Subsidiaries as it may exist from time to time, is a valuable, special and
unique asset of the business of the Holding Company and its Subsidiaries.
Executive will not, during or after the term of his employment, disclose any
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knowledge of the past, present, planned or considered business activities of the
Holding Company and its Subsidiaries thereof to any person, firm, corporation,
or other entity for any reason or purpose whatsoever unless expressly authorized
by the Board of Directors or required by law. Notwithstanding the foregoing,
Executive may disclose any knowledge of banking, financial and/or economic
principles, concepts or ideas which are not solely and exclusively derived from
the business plans and activities of the Holding Company. In the event of a
breach or threatened breach by the Executive of the provisions of this Section,
the Holding Company will be entitled to an injunction restraining Executive from
disclosing, in whole or in part, the knowledge of the past, present, planned or
considered business activities of the Holding Company or its Subsidiaries or
from rendering any services to any person, firm, corporation, other entity to
whom such knowledge, in whole or in part, has been disclosed or is threatened to
be disclosed. Nothing herein will be construed as prohibiting the Holding
Company from pursuing any other remedies available to the Holding Company for
such breach or threatened breach, including the recovery of damages from
Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in
cash or check from the general funds of the Holding Company subject to Section
11(b).
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated December 30, 1998,
between Executive and the Institution, such compensation payments and benefits
paid by the Institution will be subtracted from any amount due simultaneously to
Executive under similar provisions of this Agreement. Payments pursuant to this
Agreement and the Institution Agreement shall be allocated in proportion to the
level of activity and the time expended on such activities by the Executive as
determined by the Holding Company and the Institution on a quarterly basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Holding Company
or any predecessor of the Holding Company and Executive, except that this
Agreement shall not affect or operate to reduce any benefit or compensation
inuring to the Executive of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that Executive is subject to receiving
fewer benefits than those available to him without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by
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<PAGE>
operation of law, and any attempt, voluntary or involuntary, to affect any such
action shall be null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Holding Company and their respective successors, heirs and
assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
15. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
16. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
Wherever any words are used herein in the masculine, feminine or neuter
gender, they shall be construed as though they were also used in another gender
in all cases where they would so apply.
17. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Delaware
without regard to the principles of conflicts of law of this state, unless
otherwise specified herein.
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18. ARBITRATION.
Notwithstanding any right to enforcement under Section 10(a), any
dispute or controversy arising under or in connection with this Agreement shall
be settled exclusively by arbitration, conducted before a panel of three
arbitrators sitting in a location selected by the Executive within fifty (50)
miles from the location of the Institution, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
19. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Holding Company, if Executive is successful pursuant to a
legal judgment, arbitration or settlement.
20. INDEMNIFICATION.
(a) The Holding Company shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense, and shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Delaware law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of him having been a director
or officer of the Holding Company (whether or not he continues to be a director
or officer at the time of incurring such expenses or liabilities), such expenses
and liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
(b) Any payments made to Executive pursuant to this Section are subject
to and conditioned upon compliance with 12 U.S.C. Section 1828(k) and 12 C.F.R.
Part 359 and any rules or regulations promulgated thereunder.
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21. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Institution or the Holding
Company, expressly and unconditionally to assume and agree to perform the
Holding Company's obligations under this Agreement, in the same manner and to
the same extent that the Holding Company would be required to perform if no such
succession or assignment had taken place.
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SIGNATURES
IN WITNESS WHEREOF, Grand Central Financial Corp. has caused this
Agreement to be executed and its seal to be affixed hereunto by its duly
authorized officer and its directors, and Executive has signed this Agreement,
on the 30th day of December, 1998.
ATTEST: GRAND CENTRAL FINANCIAL CORP.
/s/ Deborah Bins By: /s/ Gerry W. Grace
- --------------------------- ------------------------------------
[SEAL]
WITNESS:
/s/ Deborah Bins By: /s/ William R. Williams
- --------------------------- ------------------------------------
William R. Williams
12
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EXHIBIT 10.2
EMPLOYMENT AGREEMENT BETWEEN GRAND CENTRAL FINANCIAL CORP.
AND JOHN A. RIFE
<PAGE>
EXHIBIT 10.2
Mr. Rife's Employment Agreement is the same as the Employment Agreement
in Exhibit 10.1, which is incorporated herein by reference except as to: (i) the
name of the signatory, which is John A. Rife; (ii) the signatory for the
Company, which is William R. Williams; (iii) the position in Section 1, which is
Executive Vice President and Treasurer; and (iv) the amount of the base salary
in Section 3(a), which is $92,961.
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT BETWEEN GRAND CENTRAL FINANCIAL CORP.
AND DANIEL F. GALEOTI
<PAGE>
EXHIBIT 10.3
Mr. Galeoti's Employment Agreement is the same as the Employment
Agreement in Exhibit 10.1, which is incorporated herein by reference except as
to: (i) the name of the signatory, which is Daniel F. Galeoti; (ii) the
signatory for the Company, which is William R. Williams; (iii) the position in
Section 1, which is Vice President of Mortgage Operations; and (iv) the amount
of the base salary in Section 3(a), which is $81,130.
<PAGE>
EXHIBIT 10.4
EMPLOYMENT AGREEMENT BETWEEN GRAND CENTRAL FINANCIAL CORP.
AND CHARLES O. STANDLEY
<PAGE>
EXHIBIT 10.4
Mr. Standley's Employment Agreement is the same as the Employment
Agreement in Exhibit 10.1, which is incorporated herein by reference except as
to: (i) the name of the signatory, which is Charles O. Standley; (ii) the
signatory for the Company, which is William R. Williams; (iii) the position in
Section 1, which is Vice President of Commercial and Consumer Lending; and (iv)
the amount of the base salary in Section 3(a), which is $86,273.
<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT BETWEEN CENTRAL FEDERAL SAVINGS AND
LOAN ASSOCIATION OF WELLSVILLE AND WILLIAM R. WILLIAMS
<PAGE>
CENTRAL FEDERAL SAVINGS AND LOAN ASSOCIATION OF WELLSVILLE
EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of December 30, 1998, by and among
Central Federal Savings and Loan Association of Wellsville (the "Association"),
a federally-chartered financial institution, with its principal administrative
office at 601 Main Street, Wellsville, Ohio, 43968, Grand Central Financial
Corp., a corporation organized under the laws of the State of Delaware, the
holding company for the Association (the "Holding Company"), and William R.
Williams ("Executive").
WHEREAS, the Association wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Association
for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to
serve as President and Chief Executive Officer of the Association. Executive
shall render administrative and management services to the Association such as
are customarily performed by persons situated in a similar executive capacity.
During said period, Executive also agrees to serve, if elected, as an officer
and director of the Holding Company or any subsidiary of the Association.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the first anniversary date of this Agreement, and continuing on each anniversary
thereafter, the disinterested members of the board of directors of the
Association ("Board") may extend the Agreement an additional year such that the
remaining term of the Agreement shall be three (3) years unless the Executive
elects not to extend the term of this Agreement by giving written notice in
accordance with Section 8 of this Agreement. The Board will review the Agreement
and Executive's performance annually for purposes of determining whether to
extend the Agreement and the rationale and results thereof shall be included in
the minutes of the Board's meeting. The Board shall give notice to the Executive
as soon as possible after such review as to whether the Agreement is to be
extended.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder including activities and services related to the organization,
operation and management of the Association and participation in community and
civic organizations; provided, however, that, with the approval of the Board, as
evidenced by a
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resolution of such Board, from time to time, Executive may serve, or continue to
serve, on the boards of directors of, and hold any other offices or positions
in, companies or organizations, which, in such Board's judgment, will not
present any conflict of interest with the Association, or materially affect the
performance of Executive's duties pursuant to this Agreement.
(c) Notwithstanding anything herein to the contrary, Executive's
employment with the Association may be terminated by the Association or the
Executive during the term of this Agreement, subject to the terms and conditions
of this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Association shall pay Executive as compensation a salary of
$135,608 per year ("Base Salary"). Base Salary shall include any amounts of
compensation deferred by Executive under any tax-qualified retirement or welfare
benefit plan or any other deferred compensation arrangement maintained by the
Association. Such Base Salary shall be payable bi-weekly. During the period of
this Agreement, Executive's Base Salary shall be reviewed at least annually; the
first such review will be made no later than one year from the date of this
Agreement. Such review shall be conducted by the Board or by a Committee of the
Board, delegated such responsibility by the Board. The Committee or the Board
may increase Executive's Base Salary. Any increase in Base Salary shall become
the "Base Salary" for purposes of this Agreement. In addition to the Base Salary
provided in this Section 3(a), the Association shall also provide Executive, at
no premium cost to Executive, with all such other benefits as are provided
uniformly to permanent full-time employees of the Association.
(b) The Executive shall be entitled to participate in any employee
benefit plans, arrangements and perquisites substantially equivalent to those in
which Executive was participating or otherwise deriving benefit from immediately
prior to the beginning of the term of this Agreement, and the Association will
not, without Executive's prior written consent, make any changes in such plans,
arrangements or perquisites which would materially adversely affect Executive's
rights or benefits thereunder; except to the extent such changes are made
applicable to all Association employees on a non-discriminatory basis. Without
limiting the generality of the foregoing provisions of this Subsection (b),
Executive shall be entitled to participate in or receive benefits under any
employee benefit plans including but not limited to, retirement plans,
supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plans, medical coverage or any other employee benefit plan
or arrangement made available by the Association in the future to its senior
executives and key management employees, subject to and on a basis consistent
with the terms, conditions and overall administration of such plans and
arrangements. Executive shall be entitled to incentive compensation and bonuses
as provided in any plan of the Association in which Executive is eligible to
participate. Nothing paid to the Executive under any such plan or arrangement
will be deemed to be in lieu of other compensation to which the Executive is
entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of
this Section 3 and other compensation provided for by paragraph (b) of this
Section 3, the Association shall pay or reimburse Executive for all reasonable
travel and other reasonable expenses incurred in the
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performance of Executive's obligations under this Agreement and may provide such
additional compensation in such form and such amounts as the Board may from time
to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Association of Executive's full-time employment hereunder for
any reason other than a termination governed by Section 5(a) hereof, or
Termination for Cause, as defined in Section 7 hereof; (ii) Executive's
resignation from the Association's employ upon any (A) failure to elect or
reelect or to appoint or reappoint Executive as President and Chief Executive
Officer, unless consented to by the Executive, (B) a material change in
Executive's function, duties, or responsibilities, which change would cause
Executive's position to become one of lesser responsibility, importance, or
scope from the position and attributes thereof described in Section 1, above,
unless consented to by Executive, (C) a relocation of Executive's principal
place of employment by more than 25 miles from its location at the effective
date of this Agreement, unless consented to by the Executive, (D) a material
reduction in the benefits and perquisites to the Executive from those being
provided as of the effective date of this Agreement, unless consented to by the
Executive, or (E) a liquidation or dissolution of the Association or Holding
Company, or (F) breach of this Agreement by the Association. Upon the occurrence
of any event described in clauses (A), (B), (C), (D), (E) or (F), above,
Executive shall have the right to elect to terminate his employment under this
Agreement by resignation upon not less than sixty (60) days prior written notice
given within six full months after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Association shall be obligated to pay
Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be an amount equal to the sum of:
(i) the Base Salary and bonuses in accordance with Section 3 of this Agreement
that would have been paid to Executive for the remaining term of this Agreement
had the Event of Termination not occurred; and (ii) all benefits, including
health insurance in accordance with Section 3(b) that would have been provided
to Executive for the remaining term of this Agreement had an Event of
Termination not occurred; PROVIDED, HOWEVER, that any payments pursuant to this
subsection and subsection 4(c) below, shall not, in the aggregate, exceed three
(3) times Executive's average annual compensation for the five most recent
taxable years that Executive has been employed by the Association or such lesser
number of years in the event that Executive shall have been employed by the
Association for less than five years. In the event the Association is not in
compliance with its minimum capital requirements or if such payments pursuant to
this subsection (b) would cause the Association's capital to be reduced below
its minimum regulatory capital requirements, such payments shall be deferred
until such time as the Association or successor thereto is in capital
compliance. At the election of the Executive, which election is to be made prior
to an Event of Termination, such payments shall be made in a lump sum as of the
Executive's Date of Termination. In the event that no election is made, payment
to Executive will be made on a monthly basis in approximately equal installments
during the
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remaining term of the Agreement. Such payments shall not be reduced in the event
the Executive obtains other employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Association
will cause to be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by the Association or the
Holding Company for Executive prior to his termination at no premium cost to the
Executive, except to the extent such coverage may be changed in its application
to all Association or Holding Company employees. Such coverage shall cease upon
the expiration of the remaining term of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the
Association or Holding Company shall mean an event of a nature that: (i) would
be required to be reported in response to Item 1 of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); or (ii)
results in a Change in Control of the Association or the Holding Company within
the meaning of the Home Owners' Loan Act of 1933, as amended, the Federal
Deposit Insurance Act or the Rules and Regulations promulgated by the Office of
Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the date
hereof (provided, that in applying the definition of change in control as set
forth under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of voting securities of the Association or the Holding
Company representing 25% or more of the Association's or the Holding Company's
outstanding voting securities or right to acquire such securities except for any
voting securities of the Association purchased by the Holding Company and any
voting securities purchased by any employee benefit plan of the Association or
the Holding Company, or (B) individuals who constitute the Board on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Holding Company's stockholders was approved by the same Nominating
Committee serving under an Incumbent Board, shall be, for purposes of this
clause (B), considered as though he were a member of the Incumbent Board, or (C)
a plan of reorganization, merger, consolidation, sale of all or substantially
all the assets of the Association or the Holding Company or similar transaction
occurs in which the Association or Holding Company is not the resulting entity;
provided, however, that such an event listed above will be deemed to have
occurred or to have been effectuated upon the receipt of all required regulatory
approvals not including the lapse of any statutory waiting periods.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c), and (d) of this Section 5
upon his subsequent termination of employment at any time during the twenty-four
(24) month period following the date of the Change in Control due to: (1)
Executive's dismissal or (2) Executive's voluntary resignation
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following any demotion, loss of title, office or significant authority or
responsibility, material reduction in annual compensation or benefits or
relocation of his principal place of employment by more than 25 miles from its
location immediately prior to the Change in Control, unless such termination is
because of his death or Termination for Cause (as defined herein).
(c) Upon Executive's entitlement to benefits pursuant to Section 5(b),
the Association shall pay Executive, or in the event of his subsequent death,
his beneficiary or beneficiaries, or his estate, as the case may be, a sum equal
to the greater of: (1) the Base Salary and bonuses in accordance with Section 3
of this Agreement that would have been paid to Executive for the remaining term
of the Agreement had the event described in Subsection (b) of this Section 5 not
occurred; or (2) three (3) times Executive's average Annual Compensation for the
five (5) most recent taxable years that Executive has been employed by the
Association or such lesser number of years in the event that Executive shall
have been employed by the Association for less than five (5) years. Such average
Annual Compensation shall include all taxable income paid by the Association,
including, but not limited to, Base Salary, commissions and bonuses, as well as
contributions on Executive's behalf to any pension and/or profit sharing plan,
severance payments, retirement payments, directors or committee fees, fringe
benefits paid or to be paid to the Executive in any such year, and payment of
expense items without accountability or business purpose or that do not meet the
IRS requirements for deductibility by the Institution; PROVIDED HOWEVER, that
any payment under this provision and subsection 5(d) below shall not exceed
three (3) times the Executive's average annual compensation. In the event the
Association is not in compliance with its minimum capital requirements or if
such payments would cause the Association's capital to be reduced below its
minimum regulatory capital requirements, such payments shall be deferred until
such time as the Association or successor thereto is in capital compliance. At
the election of the Executive, which election is to be made prior to a Change in
Control, such payment shall be made in a lump sum as of the Executive's Date of
Termination. In the event that no election is made, payment to the Executive
will be made in approximately equal installments on a monthly basis over a
period of thirty-six (36) months following the Executive's termination. Such
payments shall not be reduced in the event Executive obtains other employment
following termination of employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section
5(b), the Association will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Association for Executive prior to his severance at no premium cost to the
Executive, except to the extent that such coverage may be changed in its
application for all Association employees on a non-discriminatory basis. Such
coverage and payments shall cease upon the expiration of thirty-six (36) months
following the Date of Termination.
6. CHANGE OF CONTROL RELATED PROVISIONS.
Notwithstanding the provisions of Section 5, in no event shall the
aggregate payments or benefits to be made or afforded to Executive under said
paragraphs (the "Termination Benefits") constitute an "excess parachute payment"
under Section 280G of the Code or any successor thereto, and in order to avoid
such a result, Termination Benefits will be reduced, if necessary, to an amount
(the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less
than
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an amount equal to three (3) times Executive's "base amount", as determined in
accordance with said Section 280G. The allocation of the reduction required
hereby among the Termination Benefits provided by Section 5 shall be determined
by Executive.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement. Notwithstanding the foregoing,
Executive shall not be deemed to have been Terminated for Cause unless and until
there shall have been delivered to him a Notice of Termination which shall
include a copy of a resolution duly adopted by the affirmative vote of not less
than a majority of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive's conduct justified a finding of
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause. During the period beginning on the date
of the Notice of Termination for Cause pursuant to Section 8 hereof through the
Date of Termination for Cause, stock options and related limited rights granted
to Executive under any stock option plan shall not be exercisable, nor shall any
unvested awards granted to Executive under any stock benefit plan of the
Association, the Holding Company or any subsidiary or affiliate thereof, vest.
At the Date of Termination for Cause, such stock options and related limited
rights and such unvested awards shall become null and void and shall not be
exercisable by or delivered to Executive at any time subsequent to such
Termination for Cause.
8. NOTICE.
(a) Any purported termination by the Association or by Executive shall
be communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty days from the date such Notice of Termination is given.).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of
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Termination shall be extended by a notice of dispute only if such notice is
given in good faith and the party giving such notice pursues the resolution of
such dispute with reasonable diligence. Notwithstanding the pendency of any such
dispute, in the event the Executive is terminated for reasons other than
Termination for Cause the Association will continue to pay Executive his Base
Salary in effect when the notice giving rise to the dispute was given until the
earlier of: 1) the resolution of the dispute in accordance with this Agreement
or 2) the expiration of the remaining term of this Agreement as determined as of
the Date of Termination. Amounts paid under this Section are in addition to all
other amounts due under this Agreement and shall not be offset against or reduce
any other amounts due under this Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Association. Executive shall, upon reasonable
notice, furnish such information and assistance to the Association as may
reasonably be required by the Association in connection with any litigation in
which it or any of its subsidiaries or affiliates is, or may become, a party.
10. NON-COMPETITION AND NON-DISCLOSURE.
(a) Upon any termination of Executive's employment hereunder pursuant
to Section 4 hereof, Executive agrees not to compete with the Association for a
period of one (1) year following such termination in any city, town or county in
which the Executive's normal business office is located and the Association has
an office or has filed an application for regulatory approval to establish an
office and any county adjacent to such city, town or county, determined as of
the effective date of such termination, except as agreed to pursuant to a
resolution duly adopted by the Board. Executive agrees that during such period
and within said cities, towns and counties, Executive shall not work for or
advise, consult or otherwise serve with, directly or indirectly, any entity
whose business materially competes with the depository, lending or other
business activities of the Association. The parties hereto, recognizing that
irreparable injury will result to the Association, its business and property in
the event of Executive's breach of this Subsection 10(a) agree that in the event
of any such breach by Executive, the Association will be entitled, in addition
to any other remedies and damages available, to an injunction to restrain the
violation hereof by Executive, Executive's partners, agents, servants, employees
and all persons acting for or under the direction of Executive. Nothing herein
will be construed as prohibiting the Association from pursuing any other
remedies available to the Association for such breach or threatened breach,
including the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Association and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the Association. Executive will not, during
or after the term of his employment, disclose any knowledge of the past,
present, planned or considered business activities of the Association or
affiliates thereof to any person, firm, corporation, or other entity for any
reason or purpose whatsoever. Notwithstanding the foregoing, Executive may
disclose any knowledge of banking, financial and/or economic
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principles, concepts or ideas which are not solely and exclusively derived from
the business plans and activities of the Association. Further, Executive may
disclose information regarding the business activities of the Association to the
OTS and the Federal Deposit Insurance Corporation ("FDIC") pursuant to a formal
regulatory request. In the event of a breach or threatened breach by Executive
of the provisions of this Section, the Association will be entitled to an
injunction restraining Executive from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of the
Association or affiliates thereof, or from rendering any services to any person,
firm, corporation, other entity to whom such knowledge, in whole or in part, has
been disclosed or is threatened to be disclosed. Nothing herein will be
construed as prohibiting the Association from pursuing any other remedies
available to the Association for such breach or threatened breach, including the
recovery of damages from Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in
cash or check from the general funds of the Association. The Holding Company,
however, unconditionally guarantees payment and provision of all amounts and
benefits due hereunder to Executive and, if such amounts and benefits due from
the Association are not timely paid or provided by the Association, such amounts
and benefits shall be paid or provided by the Holding Company.
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated December 30, 1998,
between Executive and the Holding Company, such compensation payments and
benefits paid by the Holding Company will be subtracted from any amounts due
simultaneously to Executive under similar provisions of this Agreement. Payments
pursuant to this Agreement and the Holding Company Agreement shall be allocated
in proportion to the services rendered and time expended on such activities by
Executive as determined by the Holding Company and the Association on a
quarterly basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Association or
any predecessor of the Association and Executive, except that this Agreement
shall not affect or operate to reduce any benefit or compensation inuring to
Executive of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
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(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Association and their respective successors, heirs, and
assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
15. REQUIRED PROVISIONS.
(a) The Association may terminate Executive's employment at any time,
but any termination by the Association, other than Termination for Cause, shall
not prejudice Executive's right to compensation or other benefits under this
Agreement. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause as defined in Section 7
hereinabove.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Association's affairs by a notice
served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12
U.S.C. Section 1818(e)(3) or (g)(1); the Association's obligations under this
contract shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Association may in its discretion: (i) pay Executive all or part of the
compensation withheld while their contract obligations were suspended; and (ii)
reinstate (in whole or in part) any of the obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Association's affairs by an order issued
under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
Section 1818(e)(4) or (g)(1), all obligations of the Association under this
contract shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(d) If the Association is in default as defined in Section 3(x)(1)
of the Federal Deposit Insurance Act, 12 U.S.C. Section 1813(x)(1) all
obligations of the Association under this contract shall terminate as of the
date of default, but this paragraph shall not affect any vested rights of the
contracting parties.
(e) All obligations of the Association under this contract shall be
terminated, except to the extent determined that continuation of the contract is
necessary for the continued operation of the institution: (i) by the Director of
the OTS (or her designee), the FDIC or the Resolution
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Trust Corporation, at the time the FDIC enters into an agreement to provide
assistance to or on behalf of the Association under the authority contained
in Section 13(c) of the Federal Deposit Insurance Act, 12 U.S.C. Section
1823(c); or (ii) by the Director of the OTS (or her designee) at the time the
Director (or her designee) approves a supervisory merger to resolve problems
related to the operations of the Association or when the Association is
determined by the Director to be in an unsafe or unsound condition. Any
rights of the parties that have already vested, however, shall not be
affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
Section 1828(k) and 12 C.F.R. Section 545.121 and any rules and regulations
promulgated thereunder.
16. REINSTATEMENT OF BENEFITS UNDER SECTION 15(b).
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Association's affairs by a notice described
in Section 15(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Association will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 5 of this Agreement upon the
Association's receipt of a dismissal of charges in the Notice.
17. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
18. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
Wherever any words are used herein in the masculine, feminine or neutor
gender, they shall be construed as though they were also used in another gender
in all cases where they would so apply.
19. GOVERNING LAW.
The validity, interpretation, performance and enforcement of this
Agreement shall be governed by the laws of the State of Ohio, but only to the
extent not superseded by federal law.
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20. ARBITRATION.
Notwithstanding any right to enforcement under Section 10(a), any
dispute or controversy arising under or in connection with this Agreement shall
be settled exclusively by arbitration, conducted before a panel of three
arbitrators sitting in a location selected by Executive within fifty (50) miles
from the location of the Association, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement, other than in the case of a
Termination for Cause.
In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
21. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Association if Executive is successful on the
merits pursuant to a legal judgment, arbitration or settlement.
22. INDEMNIFICATION.
(a) Subject to the provisions of Section 15 hereof, the Association
shall provide Executive (including his heirs, executors and administrators) with
coverage under a standard directors' and officers' liability insurance policy at
its expense, and shall indemnify Executive (and his heirs, executors and
administrators) to the fullest extent permitted under Ohio law against all
expenses and liabilities reasonably incurred by him in connection with or
arising out of any action, suit or proceeding in which he may be involved by
reason of him having been a director or officer of the Association (whether or
not he continues to be a director or officer at the time of incurring such
expenses or liabilities), such expenses and liabilities to include, but not be
limited to, judgments, court costs and attorneys' fees and the cost of
reasonable settlements.
23. SUCCESSOR TO THE ASSOCIATION.
The Association shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Association or the Holding
Company, expressly and unconditionally to assume and agree to perform the
Association's obligations under this Agreement, in the same manner and to the
same extent that the Association would be required to perform if no such
succession or assignment had taken place.
11
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, Central Federal Savings and Loan Association of
Wellsville and Grand Central Financial Corp. have caused this Agreement to be
executed and their seals to be affixed hereunto by their duly authorized
officers and directors, and Executive has signed this Agreement, on the 30th day
of December, 1998.
ATTEST: CENTRAL FEDERAL SAVINGS AND LOAN
ASSOCIATION OF WELLSVILLE
/s/ Deborah Bins By: /s/ Gerry W. Grace
- --------------------- ---------------------------------
For the Entire Board of Directors
[SEAL]
ATTEST: GRAND CENTRAL FINANCIAL CORP.
/s/ Deborah Bins By: /s/ Gerry W. Grace
- --------------------- ---------------------------------
For the Entire Board of Directors
[SEAL]
WITNESS:
/s/ Deborah Bins By: /s/ William R. Williams
- --------------------- ---------------------------------
William R. Williams
12
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT BETWEEN CENTRAL FEDERAL SAVINGS AND
LOAN ASSOCIATION OF WELLSVILLE AND JOHN A. RIFE
13
<PAGE>
EXHIBIT 10.6
Mr. Rife's Employment Agreement is the same as the Employment Agreement
in Exhibit 10.5, which is incorporated herein by reference except as to: (i) the
name of the signatory, which is John A. Rife; (ii) the position in Section 1,
which is Executive Vice President and Treasurer; (iii) the signatory for the
Company, which is William R. Williams; (iv) the guarantor for the Company, which
is William R. Williams; and (v) the amount of the base salary in Section 3(a),
which is $92,961.
<PAGE>
EXHIBIT 10.7
EMPLOYMENT AGREEMENT BETWEEN CENTRAL FEDERAL SAVINGS AND
LOAN ASSOCIATION OF WELLSVILLE AND DANIEL F. GALEOTI
<PAGE>
EXHIBIT 10.7
Mr. Galeoti's Employment Agreement is the same as the Employment
Agreement in Exhibit 10.5, which is incorporated herein by reference except as
to: (i) the name of the signatory, which is Daniel F. Galeoti; (ii) the position
in Section 1, which is Vice President of Mortgage Operations; (iii) the
signatory for the Company, which is William R. Williams; (iv) the guarantor for
the Company, which is William R. Williams; and (v) the amount of the base salary
in Section 3(a), which is $81,130.
<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT BETWEEN CENTRAL FEDERAL SAVINGS AND
LOAN ASSOCIATION OF WELLSVILLE AND CHARLES O. STANDLEY
<PAGE>
EXHIBIT 10.8
Mr.Standley's Employment Agreement is the same as the Employment
Agreement in Exhibit 10.5, which is incorporated herein by reference except as
to: (i) the name of the signatory, which is Charles O. Standley; (ii) the
position in Section 1, which is Vice President of Commercial and Consumer
Lending; (iii) the signatory for the Company, which is William R. Williams; (iv)
the guarantor for the Company, which is William R. Williams; and (v) the amount
of the base salary in Section 3(a), which is $86,273.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION QUARTERLY REPORT ON FORM
10-K FOR THE YEAR IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,372,000
<INT-BEARING-DEPOSITS> 24,654,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,149,000
<INVESTMENTS-CARRYING> 32,629,000
<INVESTMENTS-MARKET> 32,963,000
<LOANS> 55,928,000
<ALLOWANCE> 979,000
<TOTAL-ASSETS> 133,496,000
<DEPOSITS> 84,698,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 941,000
<LONG-TERM> 16,029,000
19,000
0
<COMMON> 0
<OTHER-SE> 31,809,000
<TOTAL-LIABILITIES-AND-EQUITY> 133,436,000
<INTEREST-LOAN> 5,020,000
<INTEREST-INVEST> 9,629,000
<INTEREST-OTHER> 158,000
<INTEREST-TOTAL> 8,787,000
<INTEREST-DEPOSIT> 9,403,000
<INTEREST-EXPENSE> 4,880,000
<INTEREST-INCOME-NET> 9,907,000
<LOAN-LOSSES> 154,000
<SECURITIES-GAINS> 21,000
<EXPENSE-OTHER> 3,681,000
<INCOME-PRETAX> 411,000
<INCOME-PRE-EXTRAORDINARY> 411,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 266,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 9.31
<LOANS-NON> 39,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 63,000
<ALLOWANCE-OPEN> 231,000
<CHARGE-OFFS> 7,000
<RECOVERIES> 1,000
<ALLOWANCE-CLOSE> 379,000
<ALLOWANCE-DOMESTIC> 379,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
