<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, 1999
[ ] 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 (I.R.S. Employer
incorporation 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(bn) of the Exchange Act: NONE
----------------------
Securities registered under Section
12(g) of the Exchange Act: COMMON STOCK, PAR VALUE $.01 PER SHARE
--------------------------------------
(Title of Class)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. X
As of December 31, 1999, the Registrant's revenues were $9.6 million.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates as of February 29, 2000 was $26,000,525. As of February 29,
2000, there were 1,841,927 shares of the Registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders
to be held on April 26, 2000 (Part III).
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I
Item 1. Description of Business.......................................... 1
Item 2. Description of Property.......................................... 29
Item 3. Legal Proceedings................................................ 29
Item 4. Submission of Matters to a Vote of Security Holders.............. 29
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters.......................................................... 29
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 30
Item 7. Financial Statements............................................. 40
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure............................................. 41
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................ 41
Item 10. Executive Compensation........................................... 42
Item 11. Security Ownership of Certain Beneficial Owners and Management... 42
Item 12. Certain Relationships and Related Transactions................... 43
PART IV
Item 13. Exhibits, List and Reports on Form 8-K........................... 43
</TABLE>
SIGNATURES
<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, 1999, the Company had total assets of $142.5 million and stockholders'
equity of $29.2 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") 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 advances and proceeds from the sale of loans. The
Association operates through its home office located in Wellsville, Ohio, and
its two full service branch offices. In December 1999, the Association closed
three full service branch offices in Phar-Mor stores in Austintown, Boardman and
Youngstown, Ohio.
MARKET AREA AND COMPETITION
The Association's primary market area includes Columbiana 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
1
<PAGE>
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, 1999, the Association had gross loans receivable of
$73.9 million, of which $51.9 million were single-family, residential mortgage
loans, or 70.25% of the Association's gross loans receivable. The remainder of
the portfolio consisted of: consumer loans of $18.3 million, or 24.71% of gross
loans receivable; $2.1 million of construction and land loans, or 2.81% of gross
loans receivable; $1.3 million of multi-family mortgage loans, or 1.76% of gross
loans receivable; and $344,000 of commercial loans, or 0.47% of gross loans
receivable. At that same date, 88.0% of the Association's loan portfolio had
fixed interest rates. The Association had $147,000 in single-family residential
mortgage loans held-for-sale at December 31, 1999.
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,
--------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- ----------- ---------- ---------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family(1)................... $51,925 70.25% $46,781 72.34% $42,429 72.80%
Multi-family and commercial........ 1,301 1.76 1,150 1.78 1,006 1.73
Construction....................... 2,073 2.81 735 1.14 1,017 1.74
--------- -------- ---------- -------- --------- --------
Total real estate loans...... 55,299 74.82 48,666 75.26 44,452 76.27
-------- ------- -------- ------- --------- -------
Consumer loans:
Home equity loans.................. 2,944 3.98 2,843 4.40 2,227 3.82
Automobile......................... 15,324 20.73 12,896 19.94 10,585 18.16
Other.............................. -- -- -- -- 710 1.22
---------- --------- ---------- --------- --------- --------
Total consumer loans......... 18,268 24.71 15,739 24.34 13,522 23.20
Commercial loans...................... 344 0.47 263 0.40 308 0.53
---------- -------- ---------- -------- --------- --------
Total loans.................. 73,911 100.00% 64,668 100.00% 58,282 100.00%
====== ====== ======
Less:
Deferred loan origination
fees and discounts.............. (218) (188) (165)
Allowance for loan losses.......... (369) (379) (231)
--------- ---------- ---------
Total loans, net................ $73,324 $64,101 $57,886
======= ======= =======
</TABLE>
- --------------------------------------
(1) Includes loans held-for-sale.
2
<PAGE>
LOAN MATURITY. The following table shows the remaining contractual maturity
of the Association's commercial and construction loans at December 31, 1999. The
table does not include the effect of future principal prepayments.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
-----------------------------------------------------------
CONSTRUCTION (1) COMMERCIAL TOTAL
--------------------- --------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Amounts due in:
One year or less.............................. $ -- $ 180 $ 180
After one year:
More than one year to three years.......... -- -- --
More than three years to five years........ -- -- --
More than five years to 10 years........... -- -- --
More than 10 years to 15 years............. -- 164 164
More than 15 years......................... 2,073 -- 2,073
------- ------ -------
Total amount due........................ $2,073 $ 344 $2,417
====== ==== ======
</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, 1999, the dollar amount of
loans contractually due after December 31, 2000, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 2000
---------------------------------------------
FIXED ADJUSTABLE TOTAL
--------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Consumer loans...................... $2,073 $ -- $2,073
Commercial loans.................... - 164 164
----- ---- -------
Total loans...................... $2,073 $164 $2,237
====== ==== ======
</TABLE>
ORIGINATION OF LOANS. The Association's mortgage lending activities are
conducted through its home office and two 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, 1999, there
were three 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,
----------------------------------------------
1999 1998 1997
----------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans at beginning of period.................. $64,101 $ 57,886 $ 49,517
---------- ---------- ----------
Originations:
Real estate:
Single-family......................... 16,300 21,652 11,932
Multi-family and commercial........... 344 178 --
Construction.......................... 1,386 1,799 1,042
Consumer.............................. 17,037 9,871 10,139
Commercial............................ 462 229 341
---------- ---------- ----------
Total loans originated............. 35,529 33,729 23,454
---------- ---------- ----------
Principal loan repayments and prepayments... (25,221) (21,433) (14,161)
Loan sales............................... (1,076) (5,923) (877)
Transfers to REO......................... 11 (4) (39)
Change in unearned origination fees...... (30) (6) (6)
Change in allowance for loan losses...... 10 (148) (2)
---------- ---------- ----------
Net loan activity.............................. 9,223 6,215 8,369
---------- ---------- ----------
Loans at end of period(1)................ $73,324 $ 64,101 $ 57,886
========== ========== ==========
</TABLE>
- -----------------------------------------
(1) Loans at end of period include loans in process of $715,000, $869,000 and
$574,000 for fiscal years 1999, 1998 and 1997, 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, 1999, the Association retained 30-year loans with a rate
of interest of 7.4% or higher and 15-year loans with a rate of interest of 7.0%
or higher. The Association generally retains for its portfolio any adjustable
rate mortgage ("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, 1999, single-family mortgage loans totalled $51.9
million, or 70.3% of total loans at such date. At that date, of the
Association's mortgage loans secured by single-family residences, $45.9 million,
or 88.4%, 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
4
<PAGE>
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 million, or 11.6%, 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 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, 1999 was $200,000. The loan was current and performing in accordance with
its contractual terms at December 31, 1999.
5
<PAGE>
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, 1999 totalled $1.3 million or 1.76% of gross loans receivable.
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, 1999, the
Association's commercial loan portfolio was $344,000, or 0.47% 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.
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, 1999 had a balance of $206,000 and is
secured by a single-family residence. This loan is currently performing in
accordance with its terms. At December 31, 1999, the Association had $2.1
million of construction and land loans totalling 2.81% 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, 1999, the Association's consumer loan
portfolio was $18.3 million, or 24.71%, 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
6
<PAGE>
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 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.
7
<PAGE>
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, 1999, the Association had no assets designated as Special Mention, $107,000
of assets classified as Substandard consisting of five loans, and no assets
classified as Doubtful and Loss.
8
<PAGE>
The following table(1) sets forth the delinquencies in the Association's
loan portfolio as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------------------------- ----------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS
-------------------- -------------------- -------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE OF OF BALANCE OF
LOANS OF LOANS LOANS LOANS LOANS LOANS
------- --------- ------- ---------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family ................ 2 $ 24 3 $ 83 1 $ 31
Multi-family and commercial .. -- -- -- -- -- --
Consumer Loans: ................. -- -- -- --
Home equity loans and lines
of credit.................. -- -- -- -- -- --
Automobile ................... 1 23 5 10 -- --
Unsecured lines of credit .... -- -- -- -- -- --
Other ........................ 2 29 -- -- -- --
Commercial Loans ................ -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Total ..................... 5 $ 76 8 $ 93 1 $ 31
==== ==== ==== ==== ==== ====
Delinquent loans to total loans . 0.10% 0.13% 0.05%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------- ------------------------------------------
90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
-------------------- -------------------- --------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF OF BALANCE OF OF BALANCE
LOANS LOANS LOANS LOANS LOANS OF LOANS
------- --------- -------- --------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family ................ 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 ..................... 5 $ 39 13 $145 10 $185
==== ==== ==== ==== ==== ====
Delinquent loans to total loans . 0.06% 0.25% 0.32%
</TABLE>
- -------------------------------------------
(1) The table does not include delinquent loans less than 60 days past due. At
December 31, 1999, 1998 and 1997, total loans past due 30 to 59 days
amounted to $257,000, $389,000 and $356,000, respectively.
9
<PAGE>
NON-PERFORMING ASSETS AND IMPAIRED LOANS. The following table sets forth
information regarding non-accrual loans and real estate owned ("REO"). At
December 31, 1999, non-accrual loans totalled $93,000, consisting of eight
loans. 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, 1999, 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
$5,000. At December 31, 1999 and 1998, the Association had no impaired loans.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accruing loans:
Single-family real estate............................................ $ 83 $32 $128
Consumer............................................................. 10 7 21
Commercial........................................................... -- -- 50
------ ---- ------
Total(1).......................................................... 93 39 199
Real estate owned (REO)................................................. -- -- --
Other repossessed assets................................................ 11 -- --
------ ---- ------
Total nonperforming assets(2)..................................... 104 39 199
Troubled debt restructurings............................................ -- -- --
------ ---- ------
Troubled debt restructurings and total nonperforming assets............. $104 $39 $199
==== === ====
Total nonperforming loans and troubled debt restructurings
as a percentage of total loans....................................... 0.13% 0.06% 0.34%
Total nonperforming assets and troubled debt restructurings 0.07% 0.03% 0.17%
as a percentage of total assets......................................
</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.
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, 1999, the Association's allowance for loan losses was 0.50% of
gross loans receivable as compared to 0.59% as of December 31, 1998. The
Association had non-accrual loans of $93,000 and $39,000 at December 31, 1999
and December 31, 1998, respectively. The Association will continue to monitor
and modify its allowances for loan losses as conditions dictate.
10
<PAGE>
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,
--------------------------------------------------
1999 1998 1997
----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Allowance for loan losses, beginning of year............. $379 $231 $229
Charged-off loans:
Single-family real estate............................. -- 7 --
Multi-family and commercial real estate............... -- -- --
Consumer.............................................. 12 -- 4
------ ------ -------
Total charged-off loans............................ 12 7 4
Recoveries on loans previously charged off:
Single-family real estate............................. -- -- --
Consumer.............................................. 2 1 6
------- ------- -------
Total recoveries................................... 2 1 6
Net loans charged-off (recovered)........................ 10 6 (2)
Provision for loan losses................................ -- 154 --
------ ----- ------
Allowance for loan losses, end of period................. $369 $379 $231
==== ==== ====
Allowance for loan losses to total loans................. 0.50% 0.59% 0.40%
Allowance for loan losses to nonperforming loans
and troubled debt restructuring....................... 3.97x 9.72x 1.16x
Net loans charged-off (recovered) to allowance %
for loan losses....................................... 2.71% 1.58% (0.87)%
Net loans charged-off (recovered) to average loans....... 0.01% 0.01% --
</TABLE>
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,
-------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- -------------------------- ---------------------------
% 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 ON 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.................... $258 69.92% 74.82% $ 274 72.30% 75.26% $107 46.32% 76.27%
Consumer....................... 61 16.53 24.71 62 16.36 24.34 37 16.02 23.20
Commercial..................... 30 8.13 0.47 43 11.34 0.40 87 37.66 0.53
Unallocated.................... 20 5.42 -- -- -- -- -- -- --
------ -------- ------ ---- ------ ------ ------ -------- ------
Total allowance for loan losses $369 100.00% 100.00% $379 100.00% 100.00% $231 100.00% 100.00%
==== ====== ====== ==== ====== ====== --==== ----==== ======
</TABLE>
11
<PAGE>
REAL ESTATE OWNED
At December 31, 1999, the Association had $11,000 of REO. The Association
initially records REO at its fair market value less the costs it would require
to sell the property. Thereafter, REO is valued at the lower of the recorded
investment or the fair market 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 United States 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 advances. The success of such
use of FHLB 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 advances. At December 31, 1999, the Association had investment
and mortgage-backed securities with a carrying value of $58.5 million and a
market value of $56.1 million. At December 31, 1999, the Association had $3.8
million in mortgage-backed and investment securities classified as
available-for-sale and $54.8 million in investment and mortgage-backed
securities classified as held-to-maturity. Of the Association's mortgage-backed
securities, $3.7 million had adjustable rates at December 31, 1999.
At December 31, 1999, 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 two CMOs which failed a stress test at December
31, 1999. The securities failed the portion of the test in which the life of the
security would shorten beyond the prescribed limit in the event interest rates
drop 200 basis points or more. The securities failed the portion of the test in
which the percentage change in price would drop more than the prescribed amount
in the event interest rates rise 300 basis points or more. The risk involved is
the inability to sell the security to reinvest at more favorable rates.
Management does not consider these securities to be high risk.
12
<PAGE>
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,
---------------------------------------------------------------------
1999 1998 1997
---------------------- --------------------- ----------------------
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.............................. $21,492 $20,945 $ 998 $ 1,006 $ 2,497 $ 2,515
Commercial paper...................... -- -- 1,494 1,488 992 992
-------- -------- --------- --------- --------- ----------
Total........................... 21,492 20,945 2,492 2,494 3,489 3,507
-------- -------- --------- --------- --------- ---------
Debt securities available-for-sale:
Obligations of U.S. Treasury and
U.S. government agencies........... -- -- -- -- 9,989 9,905
Municipal securities.................. 25 25 175 179 275 284
-------- -------- --------- --------- -------- ---------
Total........................... 25 25 175 179 10,264 10,189
Total debt securities........... 21,517 20,970 2,667 2,673 13,753 13,696
-------- -------- --------- --------- -------- --------
Mortgage-related securities:
Mortgage-related securities held-to-
maturity:
Freddie Mac........................... 18,455 17,585 17,019 17,331 22,714 22,884
Fannie Mae............................ 7,210 6,827 4,078 4,147 5,273 5,234
Collateralized Mortgage Obligations... 7,551 6,943 9,040 8,991 -- --
--------- --------- --------- --------- ----------- ---------
Total mortgage-related securities
held-to-maturity................ 33,216 31,355 30,137 30,469 27,987 28,118
-------- -------- --------- -------- -------- --------
Mortgage-related securities available-
for-sale:
Freddie Mac........................... 281 277 342 343 391 396
Fannie Mae............................ 1,486 1,510 2,056 2,086 3,734 3,809
Ginnie Mae............................ 1,963 1,983 2,508 2,541 3,358 3,424
--------- --------- --------- --------- --------- ---------
Total mortgage-related
securities available-for-sale... 3,730 3,770 4,906 4,970 7,483 7,629
--------- -------- --------- -------- --------- --------
Total mortgage-related securities 36,946 35,125 35,043 35,439 35,470 35,747
-------- -------- --------- -------- -------- --------
Net unrealized gains on
available-for-sale securities... 40 -- 68 -- 71 --
---------- -------- --------- -------- ---------- --------
Total securities................ $58,503 $56,095 $37,778 $38,112 $49,294 $49,443
======= ======= ======= ======= ======= =======
</TABLE>
13
<PAGE>
The following table sets forth the Association's securities activities for
the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
INVESTMENT SECURITIES:
Investment securities, beginning of period(1)................ $ 37,778 $ 49,294 $ 64,364
Purchases:
Investment securities - held-to-maturity.................. 36,887 11,500 3,987
Investment securities - available-for-sale................ 503 425 4,989
Sales:
Investment securities - available-for-sale................ (504) (442) --
Calls, maturities and payments:
Investment securities - held-to-maturity.................. (14,808) (12,684) (15,964)
Investment securities - available-for-sale................ (1,437) (10,395) (8,522)
Net increase (decrease) in premium amortization and
discount accretion........................................ 110 83 67
Net increase (decrease) in unrealized gain (loss)............ (26) (3) 373
----------- --------- --------
Net increase (decrease) in investment securities............. 20,725 (11,516) (15,070)
----------- --------- --------
Investment securities, end of period......................... $ 58,503 $ 37,778 $ 49,294
======== ======== ========
</TABLE>
- -------------------
(1) Includes mortgage-related securities.
14
<PAGE>
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, 1999.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
-----------------------------------------------------------------------------------
MORE THAN MORE THAN
ONE YEAR FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS
---------------------- ---------------------- ---------------------- ---
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
--------- ----------- --------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity securities:
Investment securities:
Obligations of U.S. ...........
government agencies ........ $13,500 4.83% $ 498 6.02% $ 2,000 6.64%
Mortgage-related securities:
Freddie Mac ................... -- -- 66 9.50 1,756 6.00
Fannie Mae .................... -- -- -- -- -- --
Collateralized Mortgage
Obligations ................ -- -- -- -- -- --
-------- ------- -------
Total securities at
amortized cost .......... $13,500 4.83% $ 564 6.02% $ 3,756 6.34%
======== ======= =======
Available-for-sale securities:
Investment securities:
Municipal securities (1) ...... $ 25 6.60% $ -- --% $ -- --%
Mortgage-related securities:
Freddie Mac ................... -- -- -- -- -- --
Fannie Mae .................... -- -- -- -- -- --
Ginnie Mae .................... -- -- -- -- -- --
-------- ------- -----
Total securities at fair value $ 25 6.60% $ -- $ --
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
-----------------------------------
MORE THAN
TEN YEARS TOTAL
------------------- ----------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Held-to-maturity securities:
Investment securities:
Obligations of U.S. ...........
government agencies ........ $ 5,494 7.21% $21,492 4.24
Mortgage-related securities:
Freddie Mac ................... 16,633 6.55 18,455 6.51
Fannie Mae .................... 7,210 6.44 7,210 6.44
Collateralized Mortgage
Obligations ................ 7,551 6.62 7,551 6.62
-------
Total securities at
amortized cost .......... $36,888 6.64% $54,708 5.62%
======= =======
Available-for-sale securities:
Investment securities:
Municipal securities (1) ...... $ -- --% $ 25 6.60%
Mortgage-related securities:
Freddie Mac ................... 277 6.99 277 6.99
Fannie Mae .................... 1,510 7.53 1,510 7.53
Ginnie Mae .................... 1,983 6.91 1,983 6.91
------- -------
Total securities at fair value $ 3,770 7.16% $ 3,795 7.16%
======= =======
</TABLE>
- --------------------
(1) Weighted Average Yield data for municipal securities is presented on a tax
equivalent basis based on an assumed tax rate of 34%.
15
<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 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, 1999, certificates of
deposit constituted 54.6% 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, 1999, the Association had $24.5 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,
-------------------------------------------
1999 1998 1997
------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) before interest credited......... $(9,993) $7,071 $ 510
Interest credited.................................... 1,188 584 645
------- ------ ------
Net increase (decrease).............................. $(8,805) $7,655 $1,155
======= ====== ======
</TABLE>
At December 31, 1999, the Association had $2.6 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................. $ 424 5.20%
Over 3 through 6 months.............. 313 5.29
Over 6 through 12 months............. 428 4.95
Over 12 months....................... 1,452 5.60
-------
Total.......................... $2,617 5.39
======
</TABLE>
16
<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, 1999. Averages for the periods presented utilize month-end
balances.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ---------------------------- ----------------------------
PERCENT PERCENT OF PERCENT 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................ $ 5,256 7.02% 2.85% $ 8,478 10.54% 2.$3% 7,611 10.08% 2.63%
Money market accounts....... 3,020 4.03 3.41 2,575 3.20 3.30 2,741 3.63 3.36
Savings accounts............ 22,222 29.67 2.50 23,586 29.31 2.95 23,424 31.01 3.09
Certificates of deposit..... 43,231 57.72 5.41 44,775 55.64 5.58 41,001 54.29 5.73
Non-interest-bearing deposits:
Demand deposits.......... 1,170 1.56 -- 1,059 1.31 -- 751 0.99 --
-------- ------ ------ ------ ------ -----
Total average deposits $74,899 100.00% 4.20% $ 80,473 100.00% 4.3% $75,528 100.00% 4.46%
======= ====== ======= ====== ======= ======
</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, 1999 AT DECEMBER 31,
-------------------------------------------------------- -------------------------------
TWO TO OVER
LESS THAN ONE TO THREE THREE
ONE YEAR TWO YEARS YEARS YEARS TOTAL 1998 1997 1996
---------- ----------- -------- -------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CERTIFICATE ACCOUNTS:
0 to 3.99%................ $ 20 $ -- $ -- $ -- $ 20 $ -- $ -- $ --
4.00 to 4.99%............. 9,547 3,716 158 27 13,448 4,516 3,976 5,171
5.00 to 5.99%............. 13,600 11,479 172 41 25,292 30,421 24,615 24,770
6.00 to 6.99%............. 1,314 19 1,024 26 2,383 9,369 12,437 8,864
7.00 to 7.99%............. -- -- -- -- -- -- 1,098 1,088
Over 8.00%................ -- -- 14 82 96 109 121 121
---------- ----------- --------- ------ --------- ---------- ---------- ----------
Total certificate accounts $24,481 $15,214 $1,368 $176 $41,239 $44,408 $42,247 $40,014
======= ======= ====== ==== ======= ======= ======= =======
</TABLE>
BORROWINGS. The Association utilizes FHLB advances as an alternative to
retail deposits to fund its operations as part of its operating strategy. These
FHLB 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. FHLB 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 will advance to member
institutions, including the Association, fluctuates from time to time in
accordance with the policies of the FHLB.
17
<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,
-----------------------------------------------
1999 1998 1997
------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances and other borrowings:
Average balance outstanding.................................. $29,778 $25,390 $31,907
Maximum amount outstanding at any month-end
during the period......................................... 36,419 31,951 35,098
Balance outstanding at end of period......................... 36,419 16,029 26,161
Weighted average interest rate during the period............. 5.27% 5.82% 5.97%
Weighted average interest rate at end of period.............. 5.52% 5.62% 6.51%
</TABLE>
18
<PAGE>
SELECTED FINANCIAL AND OTHER DATA OF THE COMPANY
The selected financial and other data of the Company set forth below is
derived in part from, and should be read in conjunction with, the Financial
Statements of the Company and Notes thereto presented elsewhere in this report.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets............................. $142,497 $133,436 $118,265 $124,186 $110,412
Cash and cash equivalents................ 4,928 26,026 5,846 5,238 4,640
Loans, net(1)............................ 73,177 64,101 57,886 49,517 48,233
Securities held-to-maturity(2):
Mortgage-related securities, net...... 33,216 30,137 27,987 37,893 38,485
Investment securities, net............ 21,492 2,492 3,489 5,499 --
Securities available-for-sale(2):
Mortgage-related securities, net...... 3,770 4,970 7,629 10,093 11,871
Investment securities, net............ 25 179 10,189 10,879 2,948
Deposits................................. 75,833 84,638 76,983 75,828 71,991
FHLB advances............................ 36,419 16,029 26,161 34,277 24,524
Total equity............................. 29,200 31,773 14,165 13,243 13,224
Real estate owned, net................... 11 -- -- -- --
Nonperforming assets and troubled
debt restructurings................... 103 39 199 45 24
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income.................... $9,303 $8,787 $8,803 $8,613 $8,117
Interest expense......................... 4,714 4,963 5,273 5,197 4,771
------- ------- ------- ------- -------
Net interest income................... 4,589 3,824 3,530 3,416 3,346
Provision for loan losses................ -- 154 -- -- 42
--------- -------- --------- --------- ---------
Net interest income after provision
for loan losses.................... 4,589 3,670 3,530 3,416 3,304
Non-interest income:
Net gain (loss) on sale of securities. 38 21 -- (9) --
Other................................. 276 318 241 178 157
-------- -------- -------- -------- --------
Total non-interest income.......... 314 339 241 169 157
Non-interest expense(3).................. 4,956 3,681 2,883 3,252 2,485
------- ------- ------- ------- -------
Income (loss) before income taxes........ (53) 328 888 333 976
Income taxes............................. (11) 117 207 46 307
-------- -------- -------- --------- --------
Net income (loss).................. $ (42) $ 211 $ 681 $ 287 $ 669
======== ======= ======= ======= =======
(SEE FOOTNOTES ON NEXT PAGE)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS AND OTHER DATA(4):
PERFORMANCE RATIOS:
Average yield on interest-earning assets(5)... 6.97% 7.44% 7.42% 7.37% 7.26%
Average rate paid on interest-bearing liabilities 4.55 4.73 4.94 4.93 4.75
Average interest rate spread(6)............... 2.42 2.71 2.48 2.44 2.51
Net interest margin(7)........................ 3.44 3.31 2.98 2.92 2.99
Ratio of interest-earning assets to
interest-bearing liabilities............... 127.68 112.43 111.22 110.89 111.39
Efficiency ratio(8)........................... 101.75 88.87 76.45 90.48 70.94
Non-interest expense as a percent of average
assets..................................... 3.60 3.03 2.36 2.71 2.22
Return on average assets...................... (0.03) 0.17 0.56 0.24 0.60
Return on average equity...................... (0.14) 1.41 5.00 2.19 5.26
Ratio of average equity to average assets..... 22.48 12.36 11.16 10.94 11.37
Earnings per shares(9)........................ (0.02) -- -- -- --
REGULATORY CAPITAL RATIOS:
Tangible capital ratio........................ 15.10 16.10 11.95 10.80 11.91
Core capital ratio............................ 15.10 16.10 11.95 10.80 11.91
Risk-based capital ratio...................... 34.10 36.80 27.39 28.38 30.90
ASSET QUALITY RATIOS:
Nonperforming loans and troubled debt
restructurings as a percent of total loans(10) 0.13 0.06 0.35 0.09 0.05
Nonperforming assets and troubled debt
restructurings as a percent of total assets(11) 0.07 0.03 0.17 0.04 0.02
Allowance for loan losses as a percent
of total loans............................. 0.50 0.59 0.40 0.46 0.51
Allowance for loan losses as a percent of
nonperforming loans and troubled debt
restructurings(1)(10)...................... 3.97x 9.72x 1.16x 5.09x 10.38x
FULL SERVICE OFFICES AT END OF PERIOD............ 3 6 4 4 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, 1999, 1998,
1997, 1996 and 1995 was $369,000, $379,000, $231,000, $229,000 and
$249,000, 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.
(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 non-interest expense divided by net interest income plus
non-interest income (excluding gains or losses on securities transactions).
(9) The dividend payout ratio is not meaningful for 1999 and nonapplicable for
all years prior to 1999.
(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.
20
<PAGE>
SUBSIDIARY ACTIVITIES
As of December 31, 1999, the Company maintained the Association as a
wholly owned subsidiary. The Association has no subsidiaries.
PERSONNEL
As of December 31, 1999, the Association had 38 full-time employees and
14 part-time employees. The employees are not represented by a collective
bargaining unit and the Association believes it has a good relationship with its
employees.
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 Federal Deposit Insurance Corporation ("FDIC"), as the deposit insurer. The
Association is a member of the Federal Home Loan Bank System and, with respect
to deposit insurance, of 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. Under prior law, a unitary savings
and loan holding company, such as the Company was not generally restricted as to
the types of business activities in which it may engage, provided that the
Association continued to be a qualified thrift lender. See "Federal Savings
Institution Regulation--QTL Test." The Gramm-Leach-Bliley Act of 1999 provides
that no company may acquire control of a savings association after May 4, 1999
unless it engages only in the financial activities permitted for financial
holding companies under the law or for multiple savings and loan holding
companies as described below. Further, the Gramm-Leach- Bliley Act specifies
that existing savings and loan holding companies may only engage in such
activities. The Gramm-Leach-Bliley Act, however, grandfathered the unrestricted
authority for activities with respect to unitary savings and loan holding
companies existing prior to May 4, 1999, such as the Company, so long as the
Association continues to comply with the 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
21
<PAGE>
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.
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 association,
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 4% leverage ratio (3% for institutions receiving the highest rating on
the CAMELS rating system) 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
22
<PAGE>
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, the allowance for loan
and lease losses limited to a maximum of 1.25% of risk-weighted assets and up
to 45% of unrealized gains on available-for-sale equity securities with
readily determinable fair market values. 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, 1999, the
Association met each of its capital requirements.
The following table presents the Association's capital position at
December 31, 1999.
<TABLE>
<CAPTION>
CAPITAL
EXCESS ---------------------------
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
-------- ----------- -------------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Tangible................... $20,575 $2,044 $18,531 15.1% 1.50%
Core (Leverage)............ $20,575 $2,455 $18,120 33.5% 4.00%
Risk-based................. $20,945 $4,910 $16,034 34.1% 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. The Association is a member of 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.
23
<PAGE>
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980's by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1999,
FICO payments for SAIF members approximated 6.1 basis points, while Bank
Insurance Fund ("BIF") members paid 1.2 basis points. By law, there is equal
sharing of FICO payments between SAIF and BIF members beginning on January 1,
2000.
The Association's assessment rate for fiscal 1999 ranged from 0.588 to
0.61 basis points and no premium was paid for this period. Payments toward the
FICO bonds amounted to $49,000. 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.
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, 1999, the Association's limit on loans to one borrower was $3.09
million, and the Association's largest aggregate outstanding balance of loans to
one borrower was $205,000.
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, 1999, the Association maintained 92.0% 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 the first
quarter of 1999 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 Bank")
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. Effective April 1, 1999, the OTS's capital distribution
regulation changed. Under the
24
<PAGE>
new regulation, an application to and the prior approval of the OTS is 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 if, like the Association, it is a subsidiary of
a holding company. 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
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, 1999 was 20.87%, 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, 1999 totalled $32,000.
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
25
<PAGE>
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.
FEDERAL HOME LOAN BANK SYSTEM
The Association is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank
provides a central credit facility primarily for member institutions. The
Association, as a member of the Federal Home Loan Bank, is required to acquire
and hold shares of capital stock in that Federal Home Loan Bank in an amount at
least equal to 1.0% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20 of
its advances (borrowings) from the Federal Home Loan Bank, whichever is greater.
The Association was in compliance with this requirement with an investment in
Federal Home Loan Bank stock at December 31, 1999 of $2.9 million.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980's and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, The Association's net interest income
would likely also be reduced. Recent legislation has changed the structure of
the Federal Home Loan Banks funding obligations for insolvent thrifts, revised
the capital structure of the Federal Home Loan Banks and implemented entirely
voluntary membership for Federal Home Loan Banks. Management cannot predict the
effect that these changes may have with respect to its Federal Home Loan Bank
membership.
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 $44.3 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $44.3 million, the reserve requirement is $1.329
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 $44.3
million. The first $5.0 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.
26
<PAGE>
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. For its 1999 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.
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.
27
<PAGE>
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 8.5% of computed Ohio taxable income in excess of $50,000,
and (ii) 0.4% 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 total net worth are apportioned or allocated are determined
by complex formulas. The minimum tax 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 computer 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.
Certain holding companies, such as the Company, will qualify for
complete exemption from the net worth tax if certain conditions are met. The
Company will most likely meet these conditions, and thus, calculate its Ohio
franchise tax on the net income basis.
The Association is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.4% for 1999
and 1.3% for 2000 and thereafter of the Association's apportioned book net
worth, determined in accordance with Generally Accepted Accounting Principles,
less any statutory deduction. 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.
28
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
The Association conducts its business through three banking offices
located in Columbiana and Jefferson Counties, Ohio. In December 1999, the
Association closed three banking offices operating in Phar-Mor locations. The
following table sets forth certain information regarding the Association's
offices as of December 31, 1999.
<TABLE>
<CAPTION>
NET BOOK VALUE
ORIGINAL OF PROPERTY OR
LEASED YEAR DATE OF LEASEHOLD
OR LEASED OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1999
- ----------- --------- ------------ ------------ -----------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ADMINISTRATIVE/HOME OFFICE:
601 Main Street
Wellsville, Ohio 43968................... Owned 1989 -- $470
BRANCH OFFICES:
49028 Foulks Drive
East Liverpool, Ohio 43920............... Owned 1979 -- $243
100 Main Street Leased 1996 2011 $177
Wintersville, Ohio 43952.................
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
At December 31, 1999, 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.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock has been traded on the Nasdaq SmallCap
Market under the symbol "GCFC" since the Company's initial public offering on
December 30, 1998. The following quoted market prices reflect the high and low
bid for the Common Stock for the quarters ended:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
High.............. $10.813 $11.375 $13.25 $ 16.75
Low............... 10.25 10.25 10.75 11.875
Dividends......... -- 0.05 0.05 0.06
</TABLE>
29
<PAGE>
The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. As of
December 31, 1999, there were 1,841,927 shares of Common Stock outstanding and
approximately 619 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 single-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'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 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.
30
<PAGE>
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 it 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 Association uses an interest rate sensitivity model which
generates estimates of the change in the Association'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 Association's quarterly
Thrift Financial Reports, including estimated loan prepayment rates,
reinvestment rates and deposit decay rates. The following table sets forth the
Association's NPV as of December 31, 1999, as calculated by the OTS.
<TABLE>
<CAPTION>
NPV AS A % OF
PORTFOLIO
NET PORTFOLIO VALUE VALUE OF ASSETS
CHANGE IN INTEREST ------------------------------------------------- ------------------------
RATES IN BASIS POINTS NPV
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE RATIO CHANGE
- --------------------------- --------- ----------- ------------- ------- ---------
<S> <C> <C> <C> <C> <C>
300 $14,501 $(7,078) (33) 11.47 (439)
200 16,891 (4,689) (22) 13.03 (283)
100 19,319 (2,260) (10) 14.53 (133)
Static 21,579 -- -- 15.86 --
(100) 23,265 1,686 8 16.78 92
(200) 24,377 2,797 13 17.33 147
(300) 24,979 3,400 16 17.56 170
</TABLE>
As illustrated in the table, the Association's NPV declines in a rising
interest rate environment. Specifically, the table indicates that, at December
31, 1999, the Association's NPV was $21.6 million (or 15.86% 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 $4.7
million or 22% decline in the Association's NPV and would result in a 283 basis
point or 17.8% decline in the Association's NPV ratio to 13.03%. The percentage
decline in the Association's NPV at December 31, 1999 was within the limit in
the Association's Board-approved guidelines.
31
<PAGE>
In evaluating the Association'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
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 Association believe that
certain factors afford the Association the ability to operate successfully
despite its exposure to interest rate risk. The Association 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 Association's board of
directors based on current market rates.
32
<PAGE>
AVERAGE BALANCE SHEET. The following table sets forth certain
information relating to the Association at and for the years ended December 31,
1999, 1998 and 1997. 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,
-----------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- ---------------------------
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.. $ 3,587 $ 145 4.04% $5,840 $ 138 2.36% $2,892 $ 100 3.46%
Investment securities (1):
Taxable................. 59,498 3,727 6.26 48,587 3,428 7.06 59,325 4,107 6.89
Non-taxable(2).......... 129 8 9.40 248 15 9.16 291 18 9.36
Loans (3).................. 67,434 5,227 7.75 60,797 5,020 8.26 53,484 4,405 8.24
FHLB stock................. 2,787 196 7.03 2,592 186 7.18 2,412 173 7.17
-------- ------- -------- ------- -------- -------
Total interest-earning as 133,435 9,303 6.97 118,064 8,787 7.44 118,404 8,803 7.42
Non-interest-earning assets... 4,103 3,268 3,718
-------- -------- --------
Total assets......... $137,538 $121,332 $122,122
======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits:
NOW accounts............ $ 6,256 150 2.40 8,478 206 2.43 7,611 200 2.63
Money market accounts... 3,020 103 3.41 2,575 85 3.30 2,741 92 3.36
Savings accounts........ 22,222 556 2.50 23,586 696 2.95 23,424 724 3.09
Certificates of deposit. 43,231 2,337 5.41 44,775 2,499 5.58 41,001 2,351 5.73
-------- ------- ------- ------- ------- -------
Total deposits....... 74,729 3,146 4.21 79,414 3,486 4.39 74,777 3,367 4.50
FHLB advances and other
borrowings.............. 29,779 1,568 5.27 25,595 1,477 5.77 31,907 1,906 5.97
-------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities....... 104,508 4,714 4.55 105,009 4,963 4.73 106,684 5,273 4.94
------- ---- ------- ---- ------- ----
Non-interest-bearing liabilities 2,105 1,331 1,814
-------- ------- --------
Total liabilities.... 106,613 106,340 108,498
Equity..................... 30,925 14,992 13,624
-------- ------- --------
Total liabilities and equity $137,538 $121,332 $122,122
======== ======== ========
Net interest-earning assets $ 28,927 $ 13,055 $ 11,720
======== ======== ========
Net interest income/interest rate
spread (4).............. $4,589 2.42% $3,824 2.71% $3,530 2.48%
====== ==== ====== ==== ======= ====
Net interest margin as a percentage
of interest-earning assets (5) 3.44% 3.31% 2.98%
==== ==== ====
Ratio of interest-earning assets
to interest-bearing liabilities 127.68% 112.43% 111.22%
======== ======== ========
</TABLE>
(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.
33
<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, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------- ------------------------- --------------------------
INCREASE/ INCREASE/ INCREASE/
(DECREASE) DUE TO (DECREASE) DUE TO (DECREASE) DUE TO
---------------- ---------------- ----------------
RATE VOLUME NET RATE VOLUME NET RATE VOLUME NET
------- ------ ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-earning deposits.. $ 74 $ (64) $ 7 $ (39) $ 77 $ 38 $ (19) $ (19) $ (38)
Investment securities:
Taxable................ (413) 712 299 94 (773) (679) 28 (145) (117)
Non-taxable............ 1 (8) (7) (1) (2) (3) 3 (11) (8)
Loans..................... (320) 527 207 11 604 615 (24) 361 337
FHLB...................... (4) 14 10 - 13 13 4 12 16
------- ------- ------- -------- -------- -------- -------- -------- --------
Total interest-earning
asseets $ (662) $1,178 $ 516 $ 65 $ (81) $ (16) $ (8) $ 198 $ 190
======= ====== ====== ======== ======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits:
NOW accounts.............. $ 32 $ (88) $ (50) $ (16) $ 22 $ 6 $ (7) $ 10 $ 3
Money market accounts..... 3 15 18 (1) (6) (7) 2 (5) (3)
Savings accounts.......... (101) (39) (140) (33) 5 (28) (1) (34) (35)
Certificates of deposit... (77) (85) (162) (64) 212 148 (17) 187 170
FHLB advances and other
borrowings............. (137) 220 91 (63) (366) (429) 3 (62) (59)
------- ------- ------ -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities........ $ (281) $ 32 $ (249) $ (177) $ (133) $ (310) $ (20) $ 96 $ 76
======= ======= ======= ======== ======== ======== ======== ======= =======
Increase(decrease) in net
interest income.............. $ (381) $1,146 $ 765 $ 242 $ 52 $ 294 $ 12 $ 102 $ 114
======= ======= ======= ======== ======== ======== ======== ======= =======
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 AND DECEMBER 31, 1998
Total assets of the Company were $142.5 million at December 31, 1999,
compared to $133.4 million at December 31, 1998, representing an increase of
$9.1 million, or 6.79%. The primary component in the increase in total assets
was a $20.7 million increase in investment and mortgage-backed securities and a
$9.2 million increase in loans, which was partially offset by a decrease in cash
and cash equivalents of $21.1 million. The increase in assets was primarily
funded by net proceeds from the conversion from a mutual association to a stock
company on December 31, 1998 which were held in interest-bearing deposits in
other banks at December 31, 1998. The increase in loans was primarily due to a
$6.1 million increase in single-family loans and a $2.5 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 decreased $21.1
million, from $26.0 million at December 31, 1998 to $4.9 million at December 31,
1999. The decrease was primarily the result of the $17.2 million of net proceeds
from the conversion, which the Company had received on December 31, 1998, which
was used to fund increases in securities and loans during 1999.
34
<PAGE>
SECURITIES. Total securities increased $20.7 million, or 54.86%, from
$37.8 million at December 31, 1998 to $58.5 million at December 31, 1999. The
increase was primarily in U.S. Government and federal agency securities which
increased $20.5 million from the prior year due to management investing a
significant portion of the proceeds from the offering in the securities
portfolio until such time that the proceeds can be used to fund loan growth.
LOANS. Loans, including loans held for sale, increased $9.2 million, or
14.39%, from $64.1 million at December 31, 1998 to $73.3 million at December 31,
1999. Average loans comprised 50.54% of interest-earning assets in 1999 compared
to 51.49% in 1998. The increase in loans was primarily due to an increase in
single-family real estate loans, including loans held for sale, of $5.1 million,
or 10.98%. In addition, consumer loans increased $2.5 million, or 16.07%, as
management continued its efforts to expand the consumer lending portfolio during
1999.
DEPOSITS AND BORROWINGS. The Company's deposits are obtained primarily
from individuals and businesses in its market area. Total deposits decreased
$8.8 million, or 10.40%, from $84.6 million at December 31, 1998 to $75.8
million at December 31, 1999. The decline occurred primarily in non-interest
bearing deposits which decreased $4.4 million and certificates of deposits,
which decreased $3.2 million. The decrease in non-interest-bearing deposits was
primarily due to an increase in short-term funds at December 31, 1998 which were
withdrawn in early 1999 and not due to a significant change in number of
accounts or average balances of the non-interest bearing deposits. Advances from
the FHLB were used to fund loan growth and the decline in deposit accounts.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND
DECEMBER 31, 1998
GENERAL. Net income for the year ended December 31, 1999 decreased by
$253,000 or 119.91%, from $211,000 for the year ended December 31, 1998 to
($42,000) for the year ended December 31, 1999. The decrease was primarily due
to the $917,000 charge taken as a result of management's decision to close three
in-store branches during the fourth quarter of 1999. Management decided to close
the branches based on its analysis that the costs incurred to close the branches
was less than the continuing costs of operating the branches and based on its
projections that the branches would not achieve the necessary growth in the near
term to provide a positive contribution to earnings.
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
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 $765,000 or 20.01%, from
$3.8 million for the year ended December 31, 1998 to $4.6 million for the year
ended December 31, 1999. The increase was due to a $516,000, or 5.87%, increase
in interest income as well as a $249,000, or 5.02% decrease in interest expense.
The increase in interest income consisted of a $1,178,000 increase due to
increased average volume of interest-earning assets and a $662,000 decrease due
to decreasing interest rates. The decrease in interest expense resulted from a
$281,000 decrease from the decline in average interest rates, which was
partially offset by a $32,000 increase from the increase in average
interest-bearing balances.
Average loans outstanding for the year ended December 31, 1999
increased $6.6 million, or 10.92%, compared to average loans outstanding for the
year ended December 31, 1998, and average securities increased $10.8 million, or
22.10%, compared to the prior year. For the year ended December 31, 1999, the
Association experienced a decrease in average yield on assets of 47 basis points
and a decrease in the average cost of liabilities of 18 basis points. The
combination of the increase in average earning assets coupled with the decline
in interest rates resulted in a $765,000 increase in net interest income over
net interest income
35
<PAGE>
for the year ended December 31, 1998. Average net interest margin increased 13
basis points from 3.31% for the year ended December 31, 1998 to 3.44% for the
year ended December 31, 1999. The Association's interest rate spread decreased
29 basis points from 2.71% for the year ended December 31 1998 to 2.42% for the
year ended December 31, 1999.
The tables appearing elsewhere in this annual report 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. No provision for loan losses was
recorded during the year ended December 31, 1999. The provision for loan loss
recorded during the year ended December 31, 1998 was $154,000. The higher
provision during 1998 was due to a $50,000 allocation recorded on a commercial
loan taken during 1998 in addition to other factors including a nationwide
increase in consumer loan bankruptcies and a strike at a large local employer
during 1998. 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 the national trends indicating increased consumer
bankruptcies, the Company did not experience a significant increase in loan
charge-off's during the year ended December 31, 1999 compared to 1998. At
December 31, 1999, the allowance for loan losses represented 0.50% of total
loans compared to 0.60% at December 31, 1998.
NONINTEREST INCOME. The Company experienced a $25,000, or 7.37%,
decrease in noninterest income for the year ended December 31, 1999 from the
year ended December 31, 1998. The decrease was primarily due to a $71,000
decrease in the gain on sale of loans. During the second half of 1999, long term
fixed rates increased which decreased the volume of long term fixed rates
originated and which are the primary loans that the Association sells in the
secondary market. In addition, with the increase in rates, management decided to
retain more of the mortgage loans originated in the Association's loan
portfolio. An increase in service charges and fees of $38,000, or 21.23%, and
gains on sale of securities of $17,000 partially offset the decline in the gain
on sale of loans.
NONINTEREST EXPENSE. Noninterest expense for the year ended December
31, 1999 increased $1.3 million, or 34.47%, as compared with the year ended
December 31, 1998, primarily due to $917,000 charge due to the branch closings
previously discussed. Salaries and benefits increased $21,000, or 1.03%, due to
an increase in employee salaries and the expense related to the recognition and
retention plan implemented in 1999 which were partially offset by a decrease in
the ESOP expense during 1999. Because of the timing of the ESOP payment in 1998,
a greater portion of the shares were allocated which resulted in a larger
expense for 1998. The increases in other noninterest expenses including
professional fees, data processing and other expenses were based on the growth
in the Company and the additional costs associated with becoming a public
company.
INCOME TAXES. The income tax benefit totalled $5,000 for the year ended
December 31, 1999 compared to an expense of $117,000 for the year ended December
31, 1998, due to the decrease in income before income taxes.
36
<PAGE>
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-earnings assets and interest expense
incurred on interest-bearing liabilities. Net interest income is primarily
affected by the volumes, interest rates and composition of interest-earning
assets and interest-bearing liabilities.
Net interest income increased approximately $294,000, or 8.33%, from
$3,530,000 in 1997 to $3,824,000 in 1998. The primary component of this change
was $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 in average volume versus that portion
due to change 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 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 0.60% 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 conditions. 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 affected workers have
returned to work but the company is currently 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.
37
<PAGE>
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
$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. 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 totalled $117,000 in 1998
compared to $207,000 in 1997, due to the decrease 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, 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. 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, 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
20.87%, 19.3% and 8.36% for the years ended December 31, 1999, 1998 and 1997,
respectively. The Company's regulatory liquidity ratio increased at December 31,
1999 and 1998 due the funds received from the sale of the stock on December 31,
1998. As the conversion proceeds are utilized to fund loan growth or longer term
assets, management expects the liquidity ratio to return to more historical
levels.
On February 18, 2000, the Board of Directors approved a $6 per share
cash distribution. Management expects the cash distribution will be a
non-taxable return of capital. The $10.2 million cash distribution will be paid
to shareholders during the first quarter of 2000. In connection with the cash
distribution, the Company plans to obtain a commercial bank loan to fund a
portion of the distribution. Management expects to repay the commercial bank
loan from the receipt of dividends from the Association subsidiary during early
2001. The dividends from the Association to the Company are subject to
regulatory approval and cannot be assured. However, management expects to
receive regulatory approval for the dividends. Management anticipates an
increase in interest expense for the Company due to the additional debt obtained
to fund a portion of the cash distribution.
The Company's Employee Stock Ownership Plan holds approximately 154,556
shares of the company's common stock. The trustee of the ESOP expects to
purchase additional shares in open market transactions beginning after March 17,
2000 with the $927,000 it will receive from the distribution. In addition, the
Company expects to record a one-time compensation expense during the first
quarter of 2000 with the pass-through of the special distribution to recipients
of awards under the Company's 1999 Stock-
38
<PAGE>
Incentive Plan. However, it is anticipated that the special distribution will
also result in a reduction of the Company's ongoing expense with respect to such
awards as a result of adjustments to the value of unvested shares subject to
awards. The aggregate amount of the additional compensation expense in the first
quarter of 2000 is anticipated to be $465,000.
In February 2000, the Company announced its intention to repurchase up
to five percent of its outstanding shares during the subsequent six month period
subject to the availability of stock and other market considerations. In
addition, the Company expects to consider additional opportunities to repurchase
stock in the future.
The Company's cash flows are comprised of three primary
classifications: cash flows from operating activities, investing activities and
financing activities. Cash flows from operating activities were $(36,000),
$837,000 and $656,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. Net cash from investing activities consisted primarily of
disbursements for loan organizations and the purchase, sales and maturities of
investments and mortgage-backed securities. Net cash from financing activities
consisted primarily of the net proceeds from sale of stock, activity in deposit
accounts and FHLB advances.
At December 31, 1999, the Company exceeded all of its regulatory
capital requirements with a core capital level of $20.6 million, or 15.1%, of
adjusted total assets, which is above the required level of $5.4 million, or
4.00%; Tier I capital of $20.6 million, or 33.5%, of risk-weighted assets, which
is above the required level of $2.5 million, or 4.00%; and risk-based capital of
$20.9 million, or 34.1%, of risk-weighted assets, which is above the required
level of $4.9 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 any given period. At December 31, 1999,
cash and short-term investments totalled $4.9 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 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 of $36.4 million and $3.8 million of securities available for sale.
At December 31, 1999, the Company had outstanding commitments to
originate loans of $2.4 million compared to $3.2 million at December 31, 1998.
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, 1999 totalled $24.5 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
advances to a limited extent or raise interest rates on deposits to attract new
accounts, which may result in higher levels of interest expense.
YEAR 2000 COMPLIANCE
Management devoted significant time and attention during 1999 to the
task of ensuring the Company was "Year 2000" compliant prior to December 31,
1999. At the present time, the Company has not experienced and management does
not anticipate any negative effects from the "Year 2000" issue.
39
<PAGE>
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 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, 2000. This statement is 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. 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.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements listed in the Index to Consolidated Financial
Statements at Item 13 of this Form 10-KSB are incorporated by reference to this
Item 7 of Part II of this Form 10-KSB.
40
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The information relating to a change in auditing firms appears in the
Proxy Statement for the annual meeting of stockholders to be held on April 26,
2000 under the section captioned "Proposal 3. Ratification of Appointment of
Independent Auditors" 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................. 56 Director, President and Chief 1979 2000
Executive Officer
Jeffrey W. Aldrich.................. 57 Director 1979 2000
Thomas P. Ash....................... 50 Director 1985 2001
Fred C. Jackson..................... 74 Director 1977 2001
Gerry W. Grace...................... 60 Chairman of the Board 1986 2002
</TABLE>
- --------------------------------------
(1) As of December 31, 1999.
(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...................... 44 Executive Vice President and Treasurer
Daniel F. Galeoti................. 44 Vice President of Mortgage Operations
Charles O. Standley............... 46 Vice President of Commercial and Consumer Lending
</TABLE>
- ------------------
(1) As of December 31, 1999.
41
<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.
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.
ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The information contained under the sections captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
(a) Security Ownership of Certain Beneficial Owners.
Information required by this item is incorporated herein by
reference to the section captioned "Security Ownership of
Certain Beneficial Owners" in the Proxy Statement.
(b) Security Ownership of Management.
Information required by this item is incorporated herein by
reference to the section captioned "Proposal 1. Election of
Directors--Information with Respect to Nominees, Continuing
Directors and Certain Executive Officers," in the Proxy
Statement.
42
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the section captioned "Transaction With
Certain Related Persons" in the Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K.
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT.
1. FINANCIAL STATEMENTS
The following consolidated financial statements of
the Company and its subsidiaries are filed as part of this
document under Item 7:
<TABLE>
<S> <C>
Report of Independent Auditors..................................................................F-2
Consolidated Balance Sheets.....................................................................F-3
Consolidated Statements of Income...............................................................F-4
Consolidated Statements of Changes in Shareholders' Equity......................................F-5
Consolidated Statements of Cash Flows...........................................................F-6
Notes to Consolidated Financial Statements......................................................F-7
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the required
information is either inapplicable or included in the
Consolidated Financial Statements or related Notes contained
in the Annual Report.
(B) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF 1999
No reports were filed on Form 8-K during the last quarter of
1999.
43
<PAGE>
(C) EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION
REGULATION S-B
EXHIBIT
NUMBER
-------
<TABLE>
<S> <C>
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(2)
10.2 Employment Agreement between Grand Central Financial Corp. and John A. Rife(2)
10.3 Employment Agreement between Grand Central Financial Corp. and Daniel F.
Galeoti(2)
10.4 Employment Agreement between Grand Central Financial Corp. and Charles O.
Standley(2)
10.5 Employment Agreement between Central Federal Savings and Loan Association of
Wellsville and William R. Williams(2)
10.6 Employment Agreement between Central Federal Savings and Loan Association of
Wellsville and John A. Rife(2)
10.7 Employment Agreement between Central Federal Savings and Loan Association of
Wellsville and Daniel F. Galeoti(2)
10.8 Employment Agreement between Central Federal Savings and Loan Association of
Wellsville and Charles O. Standley(2)
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)
10.11 Amended and Restated Incentive Stock Option Plan(1)
11.0 Statement Re: Computation of Per Share Earnings(3)
16 Letter on Change in Certifying Accountant(3)
21 Subsidiaries Information Incorporated Herein By Reference to Part 1--Subsidiary
Activity
23 Consent of Independent Auditors(3)
27 Financial Data Schedule(3)
</TABLE>
--------------------
(1) Incorporated by reference into this document from the
Exhibits filed with the Registration Statement on Form
SB-2, and any amendments thereto, Registration No.
333-64089.
(2) Incorporated by reference into this document from the
Annual Report on Form 10-KSB, filed by the Company on
December 31, 1998.
(3) Filed herewith.
44
<PAGE>
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
Pursuant to the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ William R. Wiliams President, Chief Executive March 20, 2000
- ------------------------------------ Officer and Director
William R. Williams (principal executive officer)
/s/ John A. Rife Executive Vice President March 20, 2000
- ------------------------------------ and Treasurer (principal accounting
John A. Rife and financial officer)
/s/ Gerry W. Grace Chairman of the Board March 20, 2000
- ------------------------------------
Gerry W. Grace
/s/ Jeffrey W. Aldrich Director March 20, 2000
- ------------------------------------
Jeffrey W. Aldrich
/s/ Thomas P. Ash Director March 20, 2000
- ------------------------------------
Thomas P. Ash
/s/ Fred C. Jackson Director March 20, 2000
- ------------------------------------
Fred C. Jackson
</TABLE>
45
<PAGE>
Exhibit 13
GRAND CENTRAL FINANCIAL CORP.
Wellsville, Ohio
ANNUAL REPORT
December 31, 1999
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Auditors ...............................................................................F-2
Consolidated Balance Sheets...................................................................................F-3
Consolidated Statements of Income.............................................................................F-4
Consolidated Statements of Changes in Shareholders' Equity....................................................F-5
Consolidated Statements of Cash Flows.........................................................................F-6
Notes to Consolidated Financial Statements....................................................................F-7
</TABLE>
F-1
<PAGE>
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, 1999 and 1998 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The 1997 financial statements were
audited by other auditors whose report dated March 18, 1998, expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Grand Central
Financial Corp. as of December 31, 1999 and 1998 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Cleveland, Ohio
February 17, 2000
F-2
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 2,597 $ 1,372
Interest-bearing deposits in other banks 2,331 24,654
------------ ------------
Total cash and cash equivalents 4,928 26,026
Securities available for sale 3,795 5,149
Securities held to maturity (estimated fair value
of $52,300 in 1999 and $32,963 in 1998) 54,708 32,629
Loans held for sale 147 1,152
Loans, net 73,177 62,949
Federal Home Loan Bank stock, at cost 2,895 2,699
Premises and equipment, net 1,244 2,139
Accrued interest receivable 983 571
Other assets 620 122
------------ ------------
Total assets $ 142,497 $ 133,436
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 1,090 $ 5,471
Interest-bearing 74,743 79,167
------------ ------------
Total deposits 75,833 84,638
Federal Home Loan Bank advances 36,419 16,029
Advance payments by borrowers for taxes and insurance 550 621
Accrued interest payable 178 89
Other liabilities 317 286
------------ ------------
Total liabilities 113,297 101,663
Commitments and contingencies
Preferred Stock, authorized 1,000,000 shares, no shares
issued and outstanding
Common stock, $.01 par value, 6,000,000 shares authorized,
1,938,871 shares issued 19 19
Additional paid-in capital 18,595 18,720
Retained earnings, substantially restricted 14,010 14,330
Unearned employee stock ownership plan shares (1,231) (1,339)
Unearned stock based incentive plan shares (934)
Treasury stock, 96,944 shares, at cost (1,285)
Accumulated other comprehensive income 26 43
------------ ------------
Total shareholders' equity 29,200 31,773
------------ ------------
Total liabilities and shareholders' equity $ 142,497 $ 133,436
============ ============
</TABLE>
F-3
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands, except
per share data)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 5,227 $ 5,020 $ 4,405
Interest on securities:
Taxable 3,923 3,614 4,280
Non-taxable 8 15 18
Interest-bearing deposits in banks 145 138 100
----------- ----------- -----------
Total interest income 9,303 8,787 8,803
INTEREST EXPENSE
Deposits 3,146 3,486 3,367
FHLB borrowings 1,568 1,477 1,906
----------- ----------- -----------
Total interest expense 4,714 4,963 5,273
----------- ----------- -----------
NET INTEREST INCOME 4,589 3,824 3,530
Provision for loan losses 0 154 0
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,589 3,670 3,530
NON-INTEREST INCOME
Service charges 217 179 171
Gain on sale of loans 12 83 5
Gain on sale of securities 38 21 0
Other income 47 56 65
----------- ----------- -----------
Total non-interest income 314 339 241
NON-INTEREST EXPENSE
Salaries and employee benefits 2,056 2,035 1,553
Net occupancy expense 588 549 395
Data processing expense 149 138 128
Franchise taxes 233 214 201
Professional fees 237 89 63
Loan expense 112 151 115
Branch closing expense 917 0 0
Other expenses 664 505 428
----------- ----------- -----------
Total non-interest expense 4,956 3,681 2,883
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (53) 328 888
Income tax expense (benefit) (11) 117 207
------------ ----------- -----------
NET INCOME (LOSS) $ (42) $ 211 $ 681
=========== =========== ===========
Basic and diluted earnings (loss) per share $ (0.02) N/A N/A
</TABLE>
F-4
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unearned Unearned
Employee Stock Accumulated
Additional Stock Based Other Total
Common Paid-in Retained Ownership Incentive Treasury comprehensive Shareholders'
STOCK CAPITAL EARNINGS PLAN SHARES PLAN SHARES STOCK INCOME EQUITY
----- ------- -------- ----------- ----------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1997 $ 13,438 $ (195) $ 13,243
Comprehensive Income:
Net income 681 681
Other comprehensive income 241 241
----------
Total comprehensive income ---------- 922
-------- ----------
Balance at December 31, 1997 14,119 46 14,165
Comprehensive income:
Net income 211 211
Other comprehensive income (3) (3)
-------
Total comprehensive income 208
Proceeds from sale of common
shares, net of issuance costs $ 19 $ 18,720 18,739
Employee stock ownership plan
shares purchased $ (1,551) (1,551)
Commitment to release 21,188
employee stock ownership plan
shares 212 212
-------- ------------ -------- ----------- ------------ ---------
Balances at December 31, 1998 19 18,720 14,330 (1,339) 43 31,773
Comprehensive income:
Net loss (42) (42)
Other comprehensive income (17) (17)
---------
Total comprehensive income
(loss) (59)
--------
Capitalized conversion costs (145) (145)
Commitment to release 10,842
employee stock ownership plan
shares 20 108 128
Purchase of 96,944 shares of
treasury stock $ (1,285) (1,285)
Purchase of 77,554 incentive plan
shares $ (1,028) (1,028)
Release of 7,112 incentive plan shares 94 94
Cash dividends declared
($.16 per share) (278) (278)
----- --------- -------- -------- ------ --------- ----- ---------
Balance at December 31, 1999 $ 19 $ 18,595 $ 14,010 $ (1,231) $ (934) $ (1,285) $ 26 $ 29,200
===== ========= ======== ======== ====== ========= ===== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (42) $ 211 $ 681
Adjustments to reconcile net income to net cash
provided by operating activities:
Discount accretion net of premium amortization (110) (83) (67)
(Gain) loss on sale of securities (38) (21)
FHLB stock dividend (196) (185) (173)
Provision for loan losses 154
Compensation expense on ESOP shares 128 212
(Gain) loss on sale of fixed assets, net (5)
Gain on sales of loans held for sale, net (12) (83) (5)
Depreciation 260 282 156
Write-down of assets from branch closings 732
Deferred income taxes 35 (14) (55)
Compensation expense for RRP shares 94
Change in:
Accrued interest receivable (412) 306 96
Accrued interest payable 89 (65) (32)
Other assets and liabilities (564) 123 60
-------- -------- ---------
Net cash from operating activities (36) 837 656
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale
Purchases (503) (425) (4,989)
Proceeds from sales 542 463
Proceeds from maturities and payments 1,437 12,684 8,522
Securities held to maturity
Purchases (36,887) (11,500) (3,987)
Proceeds from maturities and payments 14,808 10,395 15,964
Net increase in loans (9,243) (6,286) (8,364)
Purchases of premises and equipment (97) (810) (329)
Proceeds from sale of premises and equipment 7
-------- -------- ---------
Net cash from investing activities (29,943) 4,521 6,824
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of stock 17,188
Net increase (decrease) in deposits (8,805) 7,655 1,155
Net change in short-term FHLB advances (17,579) (16,488) (4,750)
Proceeds from long-term FHLB advances 44,330 8,500
Repayment of long-term FHLB advances (6,361) (2,144) (3,367)
Purchase of RRP shares (1,028)
Purchase of treasury stock (1,285)
Stock issuance costs (145)
Cash dividends paid (175)
Net change in escrow accounts (71) 111 90
-------- -------- ---------
Net cash from financing activities 8,881 14,822 (6,872)
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (21,098) 20,180 608
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 26,026 5,846 5,238
-------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,928 $ 26,026 $ 5,846
======== ======== =========
SUPPLEMENTAL DISCLOSURES Cash paid for:
Interest $ 4,625 $5,028 $ 5,305
Income taxes 225 172 276
NONCASH TRANSACTIONS
Transfers to other real estate owned 11 4 39
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unless otherwise indicated, dollar amounts are 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 four
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:
Securities are classified as held to maturity and carried at amortized cost when
management has the positive intent and ability to hold them to maturity.
Securities are classified as available for sale when they might be sold before
maturity. Securities available for sale are carried at fair value, with
unrealized holding gains and losses reported in other comprehensive income.
Trading securities are carried at fair value, with changes in unrealized holding
gains and losses included in income. Other securities such as Federal Home Loan
Bank stock are carried at cost.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
F-7
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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 is 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.
F-8
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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:
Assets acquired through or instead of loan foreclosure are initially recorded at
fair value when acquired, establishing a new cost basis. If fair value declines,
a valuation allowance is recorded through expense. Costs after acquisition are
expensed.
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.
LONG-TERM ASSETS: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
discounted amounts.
INCOME TAXES:
Income tax expense is the total of the current year income tax due or refundable
and the change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax amounts for the temporary differences
between carrying amounts and tax bases of assets and liabilities, computed using
enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets
to the amount expected to be realized.
EMPLOYEE STOCK OWNERSHIP PLAN:
The cost of shares issued to the Employee Stock Ownership Plan ("ESOP"), but not
yet allocated to participants, is shown as a reduction of shareholders' equity.
Compensation expense is based on the market price of shares as they are
committed to be released to participant accounts. Dividends on allocated ESOP
shares reduce retained earnings; dividends on unearned ESOP shares reduce debt
and accrued interest.
F-9
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
DIVIDEND RESTRICTION:
Banking regulations require maintaining certain capital levels and may limit the
dividends paid by the Bank to the holding company or by the holding company to
its shareholders.
EARNINGS PER COMMON SHARE:
Basic earnings per common share is net income divided by the weighted average
number of common shares outstanding during the period. ESOP shares are
considered outstanding for this calculation unless unearned. Recognition and
Retention Plan ("RRP") shares are considered outstanding as they become vested.
Diluted earnings per common share include the dilutive effect of RRP shares and
the additional potential common shares issuable under stock options. The basic
weighted average shares were 1,755,202 and diluted weighted average shares were
1,764,352 for 1999. Earnings per share information for 1998 and 1997 is not
meaningful since the mutual to stock conversion was not consummated until
December 31, 1998.
STOCK COMPENSATION:
Employee compensation expense under stock option plans is reported if options
are granted below market price at grant date. Pro forma disclosures of net
income and earnings per share are shown using the fair value method of Statement
of Financial Accounting Standards ("SFAS") No. 123 to measure expense for the
options granted using an option pricing model to estimate fair value.
COMPREHENSIVE INCOME:
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains and losses on securities
available for sale, which is also recognized as a separate component of
shareholders' equity.
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.
F-10
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
BUSINESS SEGMENTS:
While the company's chief decision-makers monitor the revenue streams of the
various Company products and services, operations are managed and financial
performance is evaluated on a company-wide basis. Accordingly, all of the
Company's banking operations are considered by management to be aggregated in
one reportable operating segment.
FINANCIAL STATEMENT PRESENTATION:
Certain previously reported consolidated financial statement amounts have been
reclassified to conform to the 1999 presentation.
NOTE 2 - CONSUMMATION OF THE CONVERSION TO A STOCK SAVINGS AND LOAN 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 and loan with the concurrent
formation of a holding company, Grand Central Financial Corp.. 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.
The Bank converted from a mutual to a stock institution, and a "liquidation
account" was established at approximately $14,300, which was the net worth
reported in the conversion prospectus. Eligible depositors who have maintained
their accounts, less annual reductions to the extent they have reduced their
deposits, would receive a distribution from this account if the Bank liquidated.
Dividends may not reduce shareholders' equity below the required liquidation
account balance.
Under Office of Thrift Supervision ("OTS") regulations, limitations have been
imposed on all capital distributions, including cash dividends.
F-11
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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, 1999
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Municipal securities $ 25 $ 25
Mortgage-backed securities:
Freddie Mac 281 $ (4) 277
Fannie Mae 1,486 $ 24 1,510
Ginnie Mae 1,963 20 1,983
--------------- -------------- --------------- ---------------
Total $ 3,755 $ 44 $ (4) $ 3,795
=============== ============== =============== ===============
HELD TO MATURITY:
U.S. government and federal
agencies $ 21,492 $ (547) $ 20,945
Mortgage-backed securities:
Freddie Mac 18,455 $ 13 (883) 17,585
Fannie Mae 7,210 6 (389) 6,827
CMO's 7,551 (608) 6,943
--------------- -------------- --------------- ---------------
Total $ 54,708 $ 19 $ (2,427) $ 52,300
=============== ============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES 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>
F-12
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES (Continued)
The scheduled maturities of investment and mortgage-backed securities held to
maturity and available for sale at December 31, 1999 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 $ 25 $ 25 $ 13,500 $ 13,498
After one year through
five years - - 498 481
After five year through
ten years 2,000 1,867
After ten years 5,494 5,099
Mortgage-backed
securities 3,730 3,770 33,216 31,355
--------- --------- --------- ---------
$ 3,755 $ 3,795 $ 54,708 $ 52,300
========= ========= ========= =========
</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, 1999 and 1998, the Company sold securities
available for sale for total proceeds of $542 and $463 resulting in gross
realized gains of $38 and $21. During the year ended December 31, 1997 the
Company did not sell any securities available for sale.
Securities with a carrying amount of approximately $5,958 and $7,902, were
pledged to secure deposits as required or permitted by law at December 31, 1999
and 1998, respectively.
NOTE 4 - LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Loans secured by real estate:
Construction loans on single family residences $ 2,073 $ 735
Single family 51,560 45,441
Multi-family and commercial 1,301 1,150
Commercial loans 344 263
Consumer loans 18,268 15,739
------------ ------------
73,546 63,328
Allowance for loan losses (369) (379)
------------ ------------
Total $ 73,177 $ 62,949
============ ============
</TABLE>
F-13
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 4 - LOANS (Continued)
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of period $ 379 $ 231 $ 229
Loans charged off (12) (7) (4)
Recoveries 2 1 6
Provision for losses - 154 -
----------- ----------- -----------
Balance, end of period $ 369 $ 379 $ 231
=========== =========== ===========
</TABLE>
Nonperforming loans were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Loans past due over 90 days still on accrual $ - $ -
Nonaccrual loans 93 39
</TABLE>
Impaired loans are not material for any period presented.
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>
1999
----
<S> <C>
Balance, beginning of period $ 304
New loans 59
Payments (17)
------------
Balance, end of period $ 346
============
</TABLE>
F-14
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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 $7,384 and
$7,880 at December 31, 1999 and 1998, respectively.
Changes in capitalized mortgage loan servicing rights included in other assets
were:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of year $ 64 $ 11
Originations 11 58
Amortization (14) (5)
----------- -----------
Totals $ 61 $ 64
=========== ===========
</TABLE>
NOTE 6 - PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ 63 $ 63
Buildings and improvements 1,451 1,451
Furniture, fixtures and equipment 1,162 1,227
Leasehold improvements 229 967
------------ ------------
2,905 3,708
Accumulated depreciation and amortization (1,661) (1,569)
------------ ------------
Total $ 1,244 $ 2,139
============ ============
</TABLE>
Certain Company facilities and equipment were leased under various operating
leases. Rental expense was $122, $87, and $42 for years ended December 31, 1999,
1998 and 1997. Future minimum rental commitments under noncancellable leases are
$38 in 2000, $41 in 2001, $43 in 2002, $43 in $2003, $43 in 2004 and $297
thereafter.
During 1999 the Company closed three branches. In connection with the branch
closings the Company paid a cancellation fee for terminating the leases,
wrote-off the remaining leasehold improvements and abandoned equipment and wrote
down the remaining equipment which was held for sale at December 31, 1999 to its
estimated realizable value. The total charge recorded in 1999 related to the
branch closings totaled $917.
F-15
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 7 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Loans $ 326 $ 289
Mortgage-backed securities 220 226
Investments and other 437 56
------------ ------------
Totals $ 983 $ 571
============ ============
</TABLE>
NOTE 8 - DEPOSITS
Interest-bearing deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest-bearing checking
account $ 12,352 $ 11,106
Savings accounts 21,152 23,653
Certificates of deposit 41,239 44,408
------------ ------------
$ 74,743 $ 79,167
============ ============
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100 thousand was approximately $2,617 and $3,373 at December 31, 1999 and 1998,
respectively. Deposits in excess of $100 are not insured by the FDIC.
At December 31, 1999, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<S> <C>
2000 $ 24,481
2001 15,214
2002 1,368
2003 164
2004 1
Thereafter 11
-----------
Total $ 41,239
===========
</TABLE>
F-16
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 8 - DEPOSITS (Continued)
The Company held deposits of approximately $970 for related parties at December
31, 1999.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest-bearing checking $ 253 $ 291 $ 292
Savings 556 696 724
Certificates of deposit 2,337 2,499 2,351
----------- ----------- -----------
Totals $ 3,146 $ 3,486 $ 3,367
=========== =========== ===========
</TABLE>
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 1999 1998
- -------- ------------- ---- ----
<S> <C> <C> <C>
2000 5.21% - 5.59% $15,530 $ --
2002 5.95% - 6.50% 803 1,715
2003 5.45% - 5.80% 2,243 3,394
2005 6.86% - 6.96% 113 133
2006 6.31% 47 53
2007 6.45% - 6.60% 483 734
2008 5.07% - 5.59% 12,200 10,000
2009 5.07% - 5.47% 5,000 --
------- -------
Total $36,419 $16,029
======= =======
</TABLE>
Pursuant to a collateral agreement with the FHLB, the advances are secured by
all stock invested in the FHLB, certain securities and certain qualifying first
mortgage loans. Qualifying first mortgage loans pledged to secure FHLB advances
totaled $47,374 at December 31, 1999. Based on the carrying amount of FHLB stock
owned by the Company, total FHLB advances are limited to approximately $57,900
at December 31, 1999.
At December 31, 1999, scheduled payments on borrowings are as follows:
<TABLE>
<S> <C>
2000 $ 16,446
2001 1,071
2002 1,049
2003 257
2004 71
Thereafter 17,525
-----------
Total $ 36,419
===========
</TABLE>
F-17
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 10 - FEDERAL INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current $ (46) $ 131 $ 262
Deferred 35 (14) (55)
------------ ------------ ------------
$ (11) $ 117 $ 207
============ ============ ============
</TABLE>
The provision for federal income taxes differs from that computed by applying
federal statutory rates to income before federal income tax expense (benefit),
as indicated in the following analysis:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected tax provision (benefit)
at a 34% rate $ (16) $ 112 $ 302
Effect of tax-exempt income (2) (5) (67)
ESOP shares released at
fair market value 7
Other - 10 (28)
------------ ------------ ------------
$ (11) $ 117 $ 207
============ ============ ============
Effective tax rate 20.8% 35.7% 23.3%
</TABLE>
F-18
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 10 - FEDERAL INCOME TAXES (Continued)
The net deferred tax assets in the balance sheets include the following
components:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets
Bad debt $ 102 $ 93 $ 30
Deferred loan fees and costs 215 228 188
Accrued stock award 32
Other 2 4 8
--------- ------- --------
Total deferred tax assets 351 325 226
Deferred tax liabilities
Fixed assets 95 102 98
Unrealized gain on securities
available for sale 14 23 24
FHLB Stock Dividends 130 63
Other 24 23 5
--------- ------ --------
Total deferred tax liabilities 263 211 127
--------- ------ --------
Net deferred tax asset $ 88 $ 114 $ 99
========= ======= ========
</TABLE>
No valuation allowance for deferred tax assets was provided 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, 1999 and 1998, 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, 1999 and 1998 was
approximately $765.
Taxes attributable to securities gains approximated $13, $7 and $0 for the years
ended December 31, 1999, 1998 and 1997, respectively.
F-19
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
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, 1997 amounted to $9. The Company made no contributions for
1999 or 1998.
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 are
allocated to participants on the basis of the ratio of each year's principal and
interest payments to the total of all principal and interest payments. All
dividends on unallocated shares received by the ESOP are used to pay debt
service. The shares purchased with the loan proceeds are held in a suspense
account for allocation among participants as the loan is repaid. When loan
payments are made, ESOP shares are allocated to participants based on relative
compensation.
ESOP compensation expense was $128 and $212 for 1999 and 1998. ESOP shares at
December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Allocated shares 21,188 -
Shares released for allocation 10,842 21,188
Unreleased shares 123,081 133,923
------------ ----------
Total ESOP shares 155,111 155,111
============ ==========
Fair value of unreleased shares $ 1,662 $ 1,440
============ ==========
</TABLE>
F-20
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 13 - STOCK OPTION PLAN
On July 15, 1999 the Board of Directors granted options to purchase 155,111
common shares at an exercise price of $13.00 to certain officers and directors
of the Bank and Company. The maximum number of Common Shares that may be issued
under the plan is 193,887. The Plan provides for the grant of options, which may
qualify as either incentive stock options or nonqualified options. 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 exercisable during 1999. In addition, 38,776
shares of authorized but unissued common stock are reserved for which no options
have been granted.
Weighted-average fair
value of options granted
during year:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Qualified $ 3.44
Non-qualified $ 2.36
</TABLE>
Had compensation cost for stock options been measured using FASB Statement No.
123, net income and earnings per share would have been the pro forma amounts
indicated below. The pro forma effect may increase in the future if more options
are granted.
<TABLE>
<CAPTION>
1999
----
<S> <C>
Net loss as reported $ (42)
Pro forma net loss (154)
Basic and diluted loss per share as reported $ (0.02)
Pro forma basic and diluted loss per share (0.09)
</TABLE>
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
<TABLE>
<CAPTION>
QUALIFIED NON-QUALIFIED
<S> <C> <C>
Risk-free interest rate 5.87% 5.61%
Expected option life 8 years 5 years
Expected stock price volatility 8.34% 8.34%
Dividend yield 1.55% 1.55%
</TABLE>
F-21
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 14 - STOCK BASED INCENTIVE PLAN
The Company maintains a stock based incentive plan for the benefit of directors
and certain key employees of the Company. The stock based incentive plan is used
to provide such individuals ownership interest in the Company in a manner
designed to compensate such directors and key employees for services. The Bank
contributed sufficient funds to enable the stock based incentive plan to
purchase a number of common shares in the open market equal to 4% of the common
shares sold in connection with the Conversion.
On July 15, 1999 a Committee of the Board of Directors awarded 73,679 shares to
certain directors and officers of 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 or a change in control of the Company, the
participant's shares will be deemed to be entirely earned and nonforfeitable
upon such date. There were 3,875 shares at December 31, 1999 reserved for future
awards. Compensation expense is based on the cost of the shares, which
approximates fair value at the date of grant, and was $94 for 1999.
NOTE 15 - REGULATORY MATTERS
Related to its conversion from a mutual to stock savings and loan association,
the Bank established a liquidation account at approximately $14,300 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.
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 judgments by the regulators about components,
risk weightings, and other factors.
F-22
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 15 - REGULATORY MATTERS (Continued)
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, 1999, the Bank meets all of the capital adequacy requirements to
which it is subject.
As of 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.
At December 31, 1999 and 1998, 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
1999
- ----
<S> <C> <C> <C> <C> <C> <C>
Total Risk-Based
Capital (to Risk-
Weighted Assets) $ 20,944 34.1% $ 4,910 8.0% $ 6,138 10.0%
Tier I Capital
(to Risk-Weighted
Assets) 20,575 33.5 2,455 4.0 3,683 6.0
Tier I Capital
(to Adjusted Assets) 20,575 15.1 5,446 4.0 6,808 5.0
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
</TABLE>
F-23
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 15 - REGULATORY MATTERS (Continued)
Subsequent to December 31, 1999, the Board of Directors declared a special cash
distribution of approximately $10,250, or $6.00 per share. The cash distribution
will be payable on or about March 17, 2000 to stockholders of record as of the
close of business on March 6, 1999. The Company expects that the distribution
will be a non-taxable return of capital.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
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 principal
commitments of the Company are as follows:
The Company had outstanding commitments to originate loans as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
<S> <C> <C>
First mortgages $ 471 $ 1,654
Consumer lines 1,828 1,348
Commercial lines 103 172
------------ ------------
$ 2,402 $ 3,174
============ ============
</TABLE>
As of December 31, 1999, fixed-rate commitments totaled $510 and had interest
rates ranging from 7.50% to 8.99%. As of December 31, 1998, fixed-rate
commitments totaled $1,692 and had interest rates ranging from 6.50% to 7.50%.
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.
F-24
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)
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.
NOTE 17 - 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.
F-25
<PAGE>
- -------------------------------------------------------------------------------
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,928 $ 4,928 $ 26,026 $ 26,026
Securities 58,503 56,095 37,778 38,112
Loans, net of allowance 73,177 72,874 62,949 64,580
Loans held for sale 147 147 1,152 1,160
FHLB Stock 2,895 2,895 2,699 2,699
Accrued interest receivable 983 983 571 571
Financial liabilities:
Deposits (75,833) (75,373) (84,638) (84,863)
Federal Home Loan Bank
advances (36,419) (35,928) (16,029) (16,568)
Accrued interest payable (178) (178) (89) (89)
</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, 1999 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,
1999 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 certain loan servicing rights, the value of a trained work
force, customer goodwill and similar items.
F-26
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 18 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Unrealized holding gains and losses on $ 12 $ 16 $ 365
available-for-sale securities
Less reclassification adjustments for gains
and losses later recognized in income (38) (21) -
-------------- --------------- --------------
Net unrealized gains and losses (26) (5) 365
Tax effect (9) (2) 124
-------------- --------------- --------------
Other comprehensive income $ (17) $ (3) $ 241
============== =============== ==============
</TABLE>
F-27
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 19 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
CONDENSED BALANCE SHEET,
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,129 $ 9,415
Securities held to maturity 6,200 -
Investment in banking subsidiary 20,601 21,647
Other assets 1,373 1,340
--------------- ----------------
Total assets $ 29,303 $ 32,402
=============== ================
LIABILITIES AND EQUITY
Accrued expenses and other liabilities $ 103 $ 629
Shareholders' equity 29,200 31,773
--------------- ----------------
Total liabilities and shareholders' equity $ 29,303 $ 32,402
=============== ================
CONDENSED STATEMENTS OF INCOME
December 31, 1999 and One day ended December 31, 1999
1999 1998
---- ----
INTEREST AND DIVIDEND INCOME
Loan interest income $ 104 $ 1
Investment interest income 327
Dividend from subsidiary 25
--------------- ----------------
Total interest and dividend income 456 1
Operating expenses 162 -
--------------- ----------------
INCOME BEFORE TAXES AND EQUITY IN UNDISTRIBUTED
EARNINGS (LOSS) OF SUBSIDIARY 294 1
Income tax expense 98 -
--------------- ----------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS
(LOSS) OF SUBSIDIARY 196 -
Equity in undistributed earnings (loss) of subsidiary (238) -
--------------- ----------------
NET INCOME (LOSS) $ (42) $ 1
=============== ================
</TABLE>
F-28
<PAGE>
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 19 - PARENT COMPANY ONLY CONDENSED FINANCIAL
INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
At December 31, 1999 and 1998
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (42) $ 1
Equity in undistributed earnings (loss)
of subsidiary 238 -
Change in other assets and other liabilities (770) 629
-------- ----------
Net cash from operating activities (574) 630
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities held to maturity (6,200)
Net change in loan to subsidiary bank 108 (1,340)
Injection of capital into subsidiary bank - (7,063)
-------- ----------
Net cash from investing activities (6,092) (8,403)
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (1,285) -
Cash dividends paid (175) -
Stock issuance costs (145) -
Dividends on unallocated ESOP shares (15) -
Proceeds from sale of stock - 17,188
-------- ----------
Net cash from financing activities (1,620) 17,188
-------- ----------
Net change in cash and cash equivalents (8,286) 9,415
Beginning cash and cash equivalents 9,415 -
-------- ----------
Ending cash and cash equivalents $ 1,129 $ 9,415
-------- ----------
-------- ----------
</TABLE>
F-29
<PAGE>
[LOGO]
[LETTERHEAD]
March 16, 2000
Securities and Exchange Commission
Washington D.C. 20549
RE: Grand Central Financial Corp.
601 Main Street, Wellsville, Ohio 43968
Form 8-K, dated January 15, 1999
Commission File Number 333-64089
Dear Sirs:
This is inform you that we agree with item 4 of the Form 8-K for Grand Central
Financial Corp. as noted above.
There were no disagreements with Grand Central Financial Corp. on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures.
Sincerely,
/s/ Robert E. Dixon
Robert E. Dixon
President
cc: Grand Central Financial Corp.
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-8 filed on or about
August 8, 1999 of Grand Central Financial Corp. of our report dated February 17,
2000 related to the consolidated balance sheets of Grand Central Financial Corp.
as of December 31, 1999 and 1998 and the related consolidated statements of
operations, shareholders' equity and cash flows for the years then ended, which
report is included in this Form 10-KSB.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Cleveland, Ohio
March 20, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the annual
report on Form 10-KSB and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,597
<INT-BEARING-DEPOSITS> 2,331
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,795
<INVESTMENTS-CARRYING> 54,708
<INVESTMENTS-MARKET> 52,300
<LOANS> 73,324
<ALLOWANCE> 369
<TOTAL-ASSETS> 142,497
<DEPOSITS> 75,833
<SHORT-TERM> 550
<LIABILITIES-OTHER> 495
<LONG-TERM> 36,419
0
0
<COMMON> 19
<OTHER-SE> 29,181
<TOTAL-LIABILITIES-AND-EQUITY> 142,497
<INTEREST-LOAN> 5,227
<INTEREST-INVEST> 3,931
<INTEREST-OTHER> 145
<INTEREST-TOTAL> 9,303
<INTEREST-DEPOSIT> 3,146
<INTEREST-EXPENSE> 4,714
<INTEREST-INCOME-NET> 4,589
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 38
<EXPENSE-OTHER> 4,956
<INCOME-PRETAX> (53)
<INCOME-PRE-EXTRAORDINARY> (42)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 142
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
<YIELD-ACTUAL> 2.42
<LOANS-NON> 93
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 379
<CHARGE-OFFS> 12
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 369
<ALLOWANCE-DOMESTIC> 369
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
