<PAGE>
GRAND CENTRAL FINANCIAL CORP.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 0-25045
GRAND CENTRAL FINANCIAL CORP.
-----------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 34-1877137
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 Main Street, Wellsville, Ohio 43968
---------------------------------------
(Address of principal executive offices)
(330) 532-1517
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or
for such shorter period that the issuer was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class: Outstanding at October 31, 1999
Common stock, $0.01 par value 1,841,927 common shares
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
ITEM 1 - Financial Statements............................................................... 3
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998.................................................................. 3
Consolidated Statements of Income for the three months ended
September 30, 1999 and 1998........................................................ 4
Consolidated Statements of Comprehensive Income for the
Nine Months Ended September 30, 1999 and 1998...................................... 5
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998.................................................. 6
Notes to Consolidated Financial Statements......................................... 7
ITEM 2 - Management's Discussion and Analysis or Plan of Operation.......................... 12
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................................. 19
ITEM 2. Changes in Securities and Use of Proceeds.......................................... 19
ITEM 3. Defaults Upon Senior Securities.................................................... 19
ITEM 4. Submission of Matters to a Vote of Security Holders................................ 19
ITEM 5. Other Information.................................................................. 19
ITEM 6. Exhibits and Reports on Form 8-K................................................... 19
SIGNATURES
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions ... $ 2,610 $ 1,372
Interest-bearing deposits in other banks ............ 2,163 24,654
--------- ---------
Total cash and cash equivalents .................. 4,773 26,026
Securities available for sale ....................... 4,650 5,149
Securities held to maturity (estimated fair value
of $54,788 in 1999 and $32,963 in 1998) .......... 56,376 32,629
Loans held for sale ................................. 149 1,152
Loans, net .......................................... 68,372 62,949
Federal Home Loan Bank, at cost ..................... 2,842 2,699
Premises and equipment, net ......................... 2,054 2,139
Accrued interest receivable ......................... 867 571
Other assets ........................................ 264 122
--------- ---------
Total assets .................................. $ 140,347 $ 133,436
========= =========
LIABILITIES
Deposits:
Noninterest bearing .............................. $ 2,235 $ 5,471
Interest bearing ................................. 74,950 79,167
--------- ---------
Total deposits ................................ 77,185 84,638
Federal Home Loan Bank Advances ..................... 32,497 16,029
Advance payments by borrowers for taxes and insurance 390 776
Cash dividends payable .............................. 97 --
Accrued interest payable ............................ 95 89
Other liabilities ................................... 270 131
--------- ---------
Total liabilities ............................. 110,534 101,663
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized
1,000,000 shares, no shares issued and outstanding
Common stock, $.01 par value, 6,000,000 shares
authorized, 1,938,871 shares issued .............. 19 19
Additional paid-in capital .......................... 18,575 18,720
Retained earnings, substantially restricted ......... 14,718 14,330
Treasury stock (96,944 shares at September 30, 1999) (1,285)
Obligation under employee stock ownership plan ...... (1,258) (1,339)
Unearned recognition and retention plan ............. (985)
---------
Accumulated other comprehensive income .............. 29 43
--------- ---------
Total shareholders' equity .................... 29,813 31,773
--------- ---------
Total liabilities and shareholders' equity .... $ 140,347 $ 133,436
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 3
<PAGE>
GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees ...................................................... $1,355 $1,266 $3,946 $3,700
Interest on securities:
Taxable ................................................................. 1,050 934 2,942 2,839
Non-taxable ............................................................. 2 3 7 12
Interest-bearing deposits in banks ......................................... 12 23 136 87
------ ------ ------ ------
Total interest income ................................................ 2,419 2,226 7,031 6,638
INTEREST EXPENSE
Deposits ................................................................... 780 874 2,397 2,592
FHLB borrowings ............................................................ 422 387 1,098 1,205
------ ------ ------ ------
Total interest expense ............................................... 1,202 1,261 3,495 3,797
Net interest income ........................................................... 1,217 965 3,536 2,841
Provision for loan losses ..................................................... -- 4 -- 154
------ ------ ------ ------
Net interest income after provision for
loan losses ................................................................ 1,217 961 3,536 2,687
NONINTEREST INCOME
Service charges ............................................................ 70 67 183 152
Gain on sale of loans ...................................................... -- 6 12 39
Gain (loss) on sale of securities .......................................... 5 9 32 13
Other income ............................................................... 10 3 20 43
------ ------ ------ ------
Total noninterest income ............................................. 85 85 247 247
NONINTEREST EXPENSE
Salaries and employee benefits ............................................. 504 433 1,455 1,272
Net occupancy expense ...................................................... 123 110 388 337
Data processing expense .................................................... 35 35 114 104
FDIC assessments ........................................................... 12 12 37 36
Franchise taxes ............................................................ 68 60 181 171
Other expenses ............................................................. 217 161 726 583
------ ------ ------ ------
Total noninterest expense ............................................ 959 811 2,901 2,503
Income before income taxes .................................................... 343 235 882 431
Income tax expense ............................................................ 154 60 299 105
------ ------ ------ ------
Net income .................................................................... $ 189 $ 175 $ 583 $ 326
====== ====== ====== ======
Basic and diluted earnings per share .......................................... $ 0.11 N/A $ 0.33 N/A
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 4
<PAGE>
GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
----- ----
<S> <C> <C>
NET INCOME .................................... $ 583 $ 326
Other comprehensive income, net of tax
Unrealized gain (loss) on securities
available for sale arising during the period (14) 38
Less: Reclassified adjustment for accumulated
gains included in net income ...... -- --
----- -----
Unrealized gains (losses) on securities ....... (14) 38
----- -----
Comprehensive income .......................... $ 569 $ 364
===== =====
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 5
<PAGE>
GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
1999 1998
---- ----
<S> <C> <C>
NET CASH FROM OPERATING ACTIVITIES ................................ $ 449 $ 440
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases ................................................... (1,407) (1,929)
Proceeds from sales ......................................... 421 184
Proceeds from maturities and payments ....................... 1,409 4,276
Securities held to maturity:
Purchases ................................................... (48,057) (8,243)
Proceeds from maturities and payments ....................... 24,320 6,593
Net change in loans ............................................ (5,410) (4,447)
Purchase of FHLB stock ......................................... (143) (139)
Purchases of premises and equipment ............................ (119) (504)
-------- --------
Net cash from investing activities .......................... (28,986) (4,209)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits ......................................... (7,453) 2,196
Net change in escrow accounts .................................. (386) (109)
Net decrease in short-term borrowings .......................... -- (5,500)
Purchase of treasury stock ..................................... (1,285) --
Cash dividends paid ............................................ (60) --
Proceeds from long-term FHLB advances .......................... 26,800 8,500
Repayment of long-term FHLB advances ........................... (10,332) (3,849)
-------- --------
Net cash from financing activities .......................... 7,284 1,238
NET DECREASE IN CASH AND CASH EQUIVALENTS ......................... (21,253) (2,531)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................. 26,026 5,846
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................ $ 4,773 $ 3,315
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 6
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unless otherwise indicated, amounts in thousands.
BASIS OF PRESENTATION: These interim consolidated financial statements are
prepared without audit and reflect all adjustments which, in the opinion of
management, are necessary to present fairly the financial position of Grand
Central Financial Corp. ("Company") and its sole subsidiary, Central Federal
Savings and Loan Association of Wellsville ("Association"), at September 30,
1999, and its results of operations and cash flows for the periods presented.
All such adjustments are normal and recurring in nature. The accompanying
unaudited consolidated financial statements do not purport to contain all the
necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances. The results
of operations for the three and nine month periods ended September 30, 1999 and
1998 are not necessarily indicative of the results that may be expected or that
have occurred for the entire year. The annual report for the Company for the
year ended December 31, 1998, contains consolidated financial statements and
related notes that should be read in conjunction with the accompanying unaudited
consolidated financial statements.
Effective December 30, 1998, Central Federal Savings & Loan Association of
Wellsville converted from a federally chartered mutual savings and loan
association to a federally chartered stock savings and loan with the concurrent
formation of a holding company, Grand Central Financial Corp. The conversion was
accomplished through an amendment of the Association's articles of incorporation
and the sale of the Company's common stock in an amount equal to the pro forma
market value of the Association after giving effect to the conversion.
CONSOLIDATION POLICY: The consolidated financial statements include the accounts
of the Company and the Association. All significant intercompany transactions
and balances have been eliminated.
NATURE OF OPERATIONS: The Company is engaged in the business of banking with
operations and six offices in Wellsville, Ohio and surrounding areas, which are
primarily light industrial areas. These communities are the source of
substantially all of the Company's deposits and loan activities. The Company's
primary source of revenue is single-family residential loans to middle income
individuals.
INVESTMENT AND MORTGAGE-BACKED SECURITIES:
The Company classifies investment and mortgage-backed securities as held to
maturity, trading or available for sale. Securities classified as held to
maturity are those that management has the positive intent and ability to hold
to maturity. Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts.
Securities classified as available for sale are those that management intends to
sell or that could be sold for liquidity, investment management, or similar
reasons, even if there is not a present intention for such a sale. Securities
available for sale are carried at fair value with unrealized gains and losses
included as a separate component of shareholders' equity, net of tax. Gains or
losses on dispositions are based on net proceeds and the adjusted carrying
amount of securities sold, using the specific identification method. Securities
are written down to fair value when a decline in fair value is not temporary.
LOANS:
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees. Interest income on loans is accrued over the
term of the loans based upon the principal outstanding. The allowance for loan
losses is increased by charges to income and decreased by charge-offs (net of
recoveries). Management's periodic
Page 7
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
EARNINGS PER SHARE:
Basic earnings per common share for the three and six months ended September 30,
1999 was based on earnings for the three and six months then ended, divided by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share shows the dilutive effect of additional common shares
issuable under stock options assuming the exercise of stock options less the
treasury shares assumed to be purchased from the proceeds using the average
market price of the Company's stock for the periods presented.
The basic and diluted weighted average shares were 1,773,121 and 1,704,522 for
the three and nine months ended September 30, 1999, respectively. Earnings per
share information for 1998 is not meaningful since the mutual to stock
conversion was not consummated until December 30, 1998.
Page 8
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2: INVESTMENT AND MORTGAGE-BACKED SECURITIES
The carrying values and estimated fair values of investment and
mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSS FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Municipal securities ............... $ 125 $ 1 $ $ 126
Corporate notes .................... 499 (1) 498
Mortgage-backed securities:
Freddie Mac ..................... 289 (1) 288
Fannie Mae ...................... 1,540 30 1,570
Ginnie Mae ...................... 2,164 8 (4) 2,168
------- ------- ------- -------
Total ..................... $ 4,617 $ 39 $ (6) $ 4,650
======= ======= ======= =======
HELD TO MATURITY:
U.S. government and federal agencies $21,491 $ $ (394) $21,097
Corporate notes
Mortgage-backed securities:
Freddie Mac ..................... 19,089 49 (670) 18,468
Fannie Mae ...................... 7,500 10 (293) 7,217
CMO's ........................... 8,296 (290) 8,006
------- ------- ------- -------
Total ..................... $56,376 $ 59 $(1,647) $54,788
======= ======= ======= =======
</TABLE>
Page 9
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2: INVESTMENT AND MORTGAGE-BACKED SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSS VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Municipal securities ............... $ 175 $ 4 $ 179
Mortgage-backed securities:
Freddie Mac ..................... 342 1 343
Fannie Mae ...................... 2,056 30 2,086
Ginnie Mae ...................... 2,508 33 2,541
-------- -------- -------- --------
Total ..................... $ 5,081 $ 68 $ 5,149
======== ======== ======== ========
HELD TO MATURITY:
U.S. government and federal agencies $ 998 $ 8 $ $ 1,006
Corporate notes .................... 1,494 (6) 1,488
Mortgage-backed securities:
Freddie Mac ..................... 17,019 312 17,331
Fannie Mae ...................... 4,078 78 (9) 4,147
CMO's ........................... 9,040 (49) 8,991
-------- -------- -------- --------
Total ..................... $ 32,629 $ 398 $ (64) $ 32,963
======== ======== ======== ========
</TABLE>
NOTE 3: LOANS RECEIVABLE
Loans are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
Construction loans on single family residences $ 1,531 $ 735
Single family ................................ 47,698 45,441
Multi-family and commercial .................. 1,181 1,150
Commercial loans ................................ 466 263
Consumer loans .................................. 17,871 15,739
-------- --------
68,747 63,328
Allowance for loan losses ....................... (375) (379)
-------- --------
Total .................................. $ 68,372 $ 62,949
======== ========
</TABLE>
Page 10
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3: LOANS RECEIVABLE (CONTINUED)
An analysis of the allowance of loan losses is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Balance, beginning of period $ 379 $ 231
Loans charged off .......... (8) (7)
Recoveries ................. 4 1
Provision for losses ....... -- 154
----- -----
Balance, end of period ..... $ 375 $ 379
===== =====
</TABLE>
NOTE 4 - STOCK OPTION PLAN
On July 15, 1999 the Compensation Committee of the Board of Directors
granted options to purchase 171,497 shares of common stock at an exercise price
of $13.25 to certain officers and directors of the Association and Company.
One-fifth of the options awarded become first exercisable on each of the first
five anniversaries of the date of grant. The option period expires 10 years from
the date of grant. No options were exercised during the three months ended
September 30, 1999.
NOTE 5 - RECOGNITION AND RETENTION PLAN
On July 15, 1999, the Recognition and Retention Plan Committee of the Board
of Directors awarded 77,554 shares to certain directors and officers of the
Association and the Company. No shares had been previously awarded. One-fifth of
such shares will be earned and nonforfeitable on each of the first five
anniversaries of the date of the awards. In the event of the death or disability
of a participant, however, the participant's shares will be deemed to be earned
and nonforfeitable upon such date. Compensation expense, which is based upon the
cost of the shares, was $49,250 for the three months ended September 30, 1999.
Page 11
<PAGE>
GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The following discussion compares the financial condition of Grand Central
Financial Corp. ("Company") and its wholly owned subsidiary, Central Federal
Savings and Loan Association of Wellsville (the "Association"), at September 30,
1999 to December 31, 1998 and the results of operations for the three months
ended September 30, 1999 and 1998 and the nine months ended September 30, 1999
and 1998. This discussion should be read in conjunction with the interim
financial statements and footnotes included herein.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of these safe harbor
provisions. When used herein, the terms "anticipates", "plans", "expects",
"believes", and similar expressions as they relate to the Company or its
management are intended to identify such forward-looking statements. The
Company's actual results, performance or achievements may materially differ from
those expressed or implied in the forward-looking statements. Risks and
uncertainties that could cause or contribute to such material differences
include, but are not limited to, general economic conditions, interest rate
environment, competitive conditions in the financial services industry, changes
in law, governmental policies and regulations, and rapidly changing technology
affecting financial services.
These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Company and its business,
including additional factors that could materially affect the Company's
financial results, is included in the Company's filings with the SEC.
The Company does not undertake - and specifically disclaims any obligation
- - to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
GENERAL
The Company's results of operations are dependent primarily on net interest
income, which is the difference ("spread") between the interest income earned on
its loans, mortgage-backed securities, and securities portfolio and its cost of
funds, consisting of interest paid on its deposits and borrowed funds. The
interest rate spread is affected by regulatory, economic and competitive factors
that influence interest rates, loan demand and deposit flows. The Company's net
income is also affected by, among other things, loan fee income, provisions for
loan losses, service charges, operating expenses and franchise and income taxes.
The 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.
Page 12
<PAGE>
GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
MANAGEMENT STRATEGY
The Company is a community oriented financial institution offering a
variety of financial services to meet the needs of the communities it serves.
The Company attracts deposits from the general public and uses such deposits,
together with borrowings and other funds, to originate one-to four-family
residential mortgage loans and short-term consumer loans. To a lesser extent,
the Company also originates residential construction loans in its market area
and a limited amount of commercial business loans and loans secured by
multi-family and non-residential real estate. Management has sought in recent
years to expand the business of the Company by establishing additional branches
to service additional customers in its market area. Management's efforts in
increasing the Company's volume of shorter-term consumer loans have been
intended to help reduce interest rate risk, as well as to build on the Company's
residential mortgage business. The Company's deposits are insured up to the
maximum allowable amount by the Savings Association Insurance Fund (the "SAIF"),
and administered by the Federal Deposit Insurance Corporation (the "FDIC"). The
Company also invests in mortgage-backed securities, most of which are insured or
guaranteed by federal agencies, as well as securities issued by the U.S.
government or agencies thereof.
The Company is not aware of any market or institutional trends, events or
uncertainties that are expected to have a material effect on liquidity, capital
resources or operations, except as discussed below. Except as discussed below,
the Company is not aware of any current recommendations by its regulators which,
if implemented, would have a material effect on the Company.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
Total assets of the Company were $140.3 million at September 30, 1999,
compared to $133.4 million at December 31, 1998, representing an increase of
$6.9 million, or 5.2%. The primary component in the increase in total assets was
a $23.3 million increase in total securities (including securities available for
sale and held to maturity) which was partially offset by a decrease in cash and
cash equivalents of $21.3 million. The increase in assets was primarily funded
by the $17.2 million net proceeds from the conversion from a mutual association
to a stock company and an increase of $16.5 million in FHLB advances. The
increase in securities was primarily due to management moving the conversion
proceeds from cash and cash equivalents to the securities portfolio and the use
of FHLB advances to fund securities purchases through an arbitrage transaction.
Management entered into the arbitrage transaction in order to better leverage
the new capital and enhance earnings. The Company plans to utilize the proceeds
from the conversion to fund loan growth as loan demand allows. In the short
term, the proceeds will continue to be invested in the securities portfolio. The
majority of securities purchased with the proceeds from the offering mature
within one year.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
GENERAL. Net income for the three months ended September 30, 1999 increased
by $14,000 or 8.00% from $175,000 for the three months ended September 30, 1998
to $189,000 for the three months ended September 30, 1999. Net income for the
nine months ended September 30, 1999 of $583,000 was an increase of $257,000 or
78.84%, from the net income of $326,000 for the nine months ended September 30,
1998. The increase was primarily due to the increase in net interest income and
non-interest income which was partially offset by an increase in non-interest
expense and tax expense.
NET INTEREST INCOME. Net interest income is the largest component of the
Company's net income, and consists of the difference between interest income
generated on interest-earning assets and interest expense incurred on
Page 13
<PAGE>
GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
interest-bearing liabilities. Net interest income is primarily affected by the
volume, interest rates and composition of interest-earning assets and
interest-bearing liabilities.
Net interest income increased approximately $252,000, or 26.11%, for the
three months ended September 30, 1999 and increased $695,000, or 24.66%, for the
nine months ended September 30, 1999, when compared to the corresponding periods
in 1998. The primary reason for the increase in net interest income was a
decrease in interest expense of $302,000, or 7.95% and an increase in interest
income of $393,000, or 5.92% for the nine months ended September 30, 1999
compared to the 1998 period. Interest expense decreased $59,000, or 4.68%, and
interest income increased $193,000, or 8.67%, for the three months ended
September 30, 1999 compared to the 1998 period. The decrease in interest expense
was due to a decline in the cost of funds. The increase in interest income was
due to an increase in average earning assets which was partially offset by a
decline in the yield on interest earning assets. The decline in the yield on
interest earning assets and the decline in cost of funds was due to a decline in
overall market interest rates.
PROVISION FOR LOAN LOSSES. The provision for loan losses is based on
management's regular review of the loan portfolio, in which it considers factors
such as past experience, prevailing general economic conditions and
considerations applicable to specific loans, such as the ability of the borrower
to repay the loan and the estimated value of the underlying collateral, as well
as changes in the size and growth of the loan portfolio.
No provision for loan losses was recorded during the three or nine months
ended September 30, 1999. The provision for loan losses recorded during both the
three and nine months ended September 30, 1998 totaled $4,000 and $154,000,
respectively. The higher provision during 1998 was due to a $50,000 allocation
recorded on a commercial loan during 1998 in addition to other factors including
a nationwide increase in consumer bankruptcies and a strike at a large local
employer going on at that time. The strike was subsequently settled and the
workers affected by the layoffs have returned to work. In addition, while
management feels it is appropriate to continue to maintain a higher than
historical allowance based on local economic conditions and national trends
indicating increased consumer bankruptcies, the Company did not experience an
increase in loan charge-off's during the nine months ended September 30, 1999
compared to the nine months ended September 30, 1998. At September 30, 1999, the
allowance for loan losses represented .55% of total loans compared to .59% at
December 31, 1998. Management believes the allowance for loan losses is adequate
to absorb probable losses; however, future additions to the allowance may be
necessary based on changes in economic conditions.
NON-INTEREST INCOME. Non-interest income for both the nine months ended
September 30, 1999 and 1998 totaled $247,000, respectively. The Company
experienced no change in non-interest income during the three month periods
ended September 30, 1998 and September 30, 1999, which was constant at $85,000.
NON-INTEREST EXPENSE. Noninterest expense increased $148,000, or 18.25%,
for the quarter ended September 30, 1999 and $398,000 or 15.90%, for the nine
months ended September 30, 1999 compared to the similar periods in 1998. The
increase was primarily due to an increase in salaries and employee benefits,
occupancy costs and other non-interest expenses. Salaries and benefits increased
$71,000, or 16.40%, for the three months ended September 30, 1999 and $183,000,
or 14.39%, for the nine months ended September 30, 1999, compared to the related
1998 periods. The increase in salaries and benefits and the increase in net
occupancy expense were due in part to the two branch offices opened during 1998.
In addition, a portion of the increases in salary and benefits expense was due
to the Employee Stock Ownership Plan and Recognition and Retention Plan put in
place when the Company converted from a mutual association to a stock company
and the cost of the shares allocated to participants based on these plans. The
Page 14
<PAGE>
GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
increase in other expenses includes increased expenses associated with the
additional branch offices, increased professional fees as a result of being a
public company and increased data processing costs related to Y2K.
INCOME TAXES. The provision for income taxes totaled $299,000 for the nine
months ended September 30, 1999 compared to $105,000 for the nine months ended
September 30, 1998, due to the increase in income before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Association's primary sources of funds are deposits, principal and
interest payments on loans, mortgage-backed and investment securities and
borrowings from the FHLB-Cincinnati. The Association uses the funds generated to
support its lending and investment activities as well as any other demands for
liquidity such as deposit outflows. While maturities and scheduled amortization
of loans are predictable sources of funds, deposit flows, mortgage prepayments
and the exercise of call features are greatly influenced by general interest
rates, economic conditions and competition. The Association has continued to
maintain the required levels of liquid assets as defined by OTS regulations.
This requirement of the OTS, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The Association's currently required
liquidity ratio is 4.0%. At September 30, 1999, the Association's liquidity
ratio was 20.5%.
At September 30, 1999, the Association exceeded all of its regulatory
capital requirements with a tangible capital level of $29.8 million, or 20.97%,
of total adjusted assets, which exceeds the required level of $2.1 million, or
1.5%; core capital of $29.8 million, or 20.97%, of total adjusted assets, which
is above the required level of $5.7 million, or 4.0%; and risk-based capital of
$30.2 million, or 49.00%, of risk-weighted assets, which is above the required
level of $4.9 million, or 8.0%.
The Association's most liquid assets are cash and cash equivalents. The
levels of those assets are dependent on the Association's operating, financing,
lending and investing activities during any given period. At September 30, 1999,
cash and cash equivalents totaled $4.8 million, or 3.39% of total assets.
The Association has other sources of liquidity if a need for additional
funds arises, including FHLB advances. At September 30, 1999, the Association
had $32.5 million in advances outstanding from the FHLB-Cincinnati, and at
September 30, 1999, had an additional overall borrowing capacity from the FHLB
of $24.3 million. Depending on market conditions, the pricing of deposit
products and FHLB advances, the Association may rely on FHLB borrowing to fund
asset growth.
The Association relies primarily on competitive rates, customer service and
long-standing relationships with customers to retain deposits. Based on the
Association's experience with deposit retention and current retention
strategies, management believes that, although it is not possible to predict
future terms and conditions upon renewal, a significant portion of such deposits
will remain with the Association.
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products were
designed to accommodate only two-digits. For example, "98" is stored on the
system to represent 1998.
Page 15
<PAGE>
GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Accordingly, operating systems upon which the Company relies may recognize "00"
as the year 1900 rather than 2000, causing the systems to fail or generate
erroneous information. Although there can be no assurance that the Company and
its service providers and vendors will be successful in remedying all potential
problems, the Company has conducted a comprehensive review of its computer
systems and equipment to identify applications that could be affected by the
"Year 2000" problem and has implemented a plan designed to ensure that all
software used in connection with the Company's business will manage and
manipulate data involving the transition with data from 1999 to 2000 without
functional or data abnormality and without inaccurate results related to such
data. Pursuant to the plan, the Company has developed and implemented testing
strategies and plans for testing internal mission critical systems and testing
mission critical systems of service providers and vendors. Pursuant to the plan,
the Company also proposes to identify material customers and evaluate Year 2000
risks that may be associated with them.
The Company's mission critical data processing is performed under
agreements with FISERV, Inc. ("FISERV"), a nationwide financial service bureau
which performs loan processing, savings deposit processing, and other financial
services. Consequently, the Company is very dependent on this service bureau to
conduct its business. The Company has 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. The Company has received
assurances by FISERV that it is Year 2000 compliant. As a member of FISERV's
client advisory group, the Company participated in the group testing of the
FISERV systems that was completed prior to December 31, 1998. The Company
completed individual testing with FISERV during the first nine months of 1999.
The Company's other service providers, which interface with FISERV, also
completed their testing for Year 2000 compliance. The Company's in-house
computers play a less critical role in the Company's operations and have been
upgraded for Year 2000 compliance. Testing of these systems was completed by
December 31, 1998. The Company believes that its costs related to Year 2000 will
be approximately $70,000, in addition to any increased costs passed through as
higher fees charged by service providers, which costs are not yet determined.
Management does not expect these costs to have a significant impact on the
Company's financial position or results of operations. However, there can be no
assurance that all service providers' systems will be Year 2000 compliant,
consequently, the Company could incur incremental costs to convert to another
service provider.
In addition to possible expense related to its own systems, the Company
could incur losses if Year 2000 issues adversely affect the Company's depositors
or borrowers. Such problems could include delayed loan payments due to year-2000
problems affecting any of the Company's significant borrowers or impairing the
payroll systems of large employers in the Company's market area. The Company has
determined that Year 2000 non-compliance by any individual loan customer would
have no material impact on the Company. Because the Company's loan portfolio is
highly diversified with regard to individual borrowers and types of businesses,
the Company does not expect any significant or prolonged year-2000 related
difficulties arising from its customers that will affect the earnings or cash
flows. The risks associated with the Year 2000 issue, however, could go beyond
the Company's own ability to solve Year 2000 problems. Should suppliers of
critical services fail in their efforts to be Year 2000 compliant, it could have
significant adverse financial results for the Company. Accordingly, the Company
had developed Year 2000 remediation contingency plans for mission-critical
systems. These plans would likely involve replacement of service providers and
alternatives to the Company's established plan. The Company has completed its
contingency and business resumption plans and tested those plans in the third
quarter. The Company reviewed and finalized their liquidity plans and will
implement them during the fourth quarter of 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
Page 16
<PAGE>
GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
are not limited to, the continued progress and eventual success of service
providers and other persons on which the Company and it customers depend.
RECENT LEGISLATION
The Congress has completed work and the President is expected to sign
legislation designed to modernize the regulation of the financial services
industry expands the ability of bank holding companies to affiliate with other
types of financial services companies such as insurance companies and investment
banking companies. However, the legislation provides that companies that acquire
control of a single savings association after May 4, 1999 (or that filed an
application for that purpose after that date) are not entitled to the
unrestricted activities formerly allowed for a unitary savings and loan holding
company. Rather, these companies will have authority to engage in the activities
permitted "a financial holding company" under the new legislation, including
insurance and securities-related activities, and the activities currently
permitted for multiple savings and loan holding companies, but generally not in
commercial activities. The authority for unrestricted activities is
grandfathered for unitary savings and loan holding companies, such as the
Company, that existed prior to May 4, 1999. However, the authority for
unrestricted activities would not apply to any company that acquired the
Company.
Page 17
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1999
PART II - OTHER INFORMATION
ITEM I. LEGAL PROCEEDINGS.
Neither the Company nor its banking subsidiary, Central Federal Savings
and Loan Association of Wellsville, is a party to any material legal
proceedings at this time. From time to time the Company and its banking
subsidiary are involved in various claims and legal actions arising in
the ordinary course of business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Grand Central Financial Corp. held its Annual Meeting of Shareholders on
July 13, 1999. Results of shareholder voting was as follows:
a) Election of Director for a three year term:
Gerry W. Grace
--------------
For 1,666,412
Abstain 25,965
Against --
b) 1999 Stock-Based Incentive Plan for key employees
Stock-Based Incentive Plan
--------------------------
For 1,053,824
Abstain 168,658
Against 4,300
c) Appointment of independent auditor for the fiscal year ending
December 31, 1999
Crowe, Chizek and Company, LLP
------------------------------
For 1,684,796
Abstain 6,921
Against 660
ITEM 5. OTHER INFORMATION.
None
Page 18
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1999
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Certificate of Incorporation of Grand Central Financial Corp.(1)
3.2 Bylaws of Grand Central Financial Corp.(1)
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.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on August 13, 1999,
reporting the press release issued on July 28, 1999 announcing the
Company had received regulatory clearance to begin the 5% repurchase.
Page 19
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1999
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned hereunto duly
authorized.
GRAND CENTRAL FINANCIAL CORP.
Dated: November 13, 1999 By: /s/ William R. Williams
------------------------------------
William R. Williams
President and Chief Executive Officer
(principal executive officer)
Dated: November 13, 1999 By: /s/ John A. Rife
------------------------------------
John A. Rife
Executive Vice President and Treasurer
(principal accounting and financial officer)
Page 20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the quarterly
report on Form 10-QSB and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0001070680
<NAME> GRAND CENTRAL FINANCIAL CORP.
<MULTIPLIER> 1,000
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
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<INVESTMENTS-HELD-FOR-SALE> 4,650
<INVESTMENTS-CARRYING> 56,376
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0
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