FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSTION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ___________________.
COMMISSION FILE NUMBER: 0-26467
GREATER ATLANTIC FINANCIAL CORP.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 54-1873112
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10700 PARKRIDGE BOULEVARD, SUITE 450 703-391-1300
RESTON, VIRGINIA 20191 -------------------------------
- --------------------------------------- (Registrant's Telephone Number,
(Address of Principal Executive Offices) Including Area Code)
(Zip Code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-KSB [X]
The Registrant had $15.1 million in gross income for the year ended September
30, 1999.
As of December 17, 1999, the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the Registrant was approximately
$13,909,382.
As of December 17, 1999, there were 3,007,434 shares
of the registrant's Common Stock, par value $0.01 per share, outstanding
<PAGE>
INDEX
Page
PART I Description of Business
Item 1. Business ......................................................... 3
Market Area and Competition ...................................... 3
Market Risk ...................................................... 3
Lending Activities ............................................... 4
Asset Quality .................................................... 7
Investment Activities ............................................10
Sources of Funds .................................................13
Subsidiary Activities ............................................16
Personnel ........................................................16
Regulation and Supervision .......................................17
Federal and State Taxation .......................................23
Item 2. Properties .......................................................24
Item 3. Legal Proceedings ................................................25
Item 4. Submission of Matters to a Vote of Security Holders ..............25
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ..............................................25
Item 6. Selected Financial Data, Management's Discussion and
Analysis of Financial Condition and Results of
Operations .......................................................26
Item 7. Financial Statements .............................................39
Item 8. Change In and Disagreements with Accountants on
Accounting and Financial Disclosure ..............................75
PART III
Item 9. Directors and Executive Officers of the Registrant ...............75
Item 10. Executive Compensation ...........................................78
Item 11. Security Ownership of Certain Beneficial Owners and
Management .......................................................81
Item 12. Certain Relationships and Related Transactions ...................82
Item 13. Exhibits, and Reports on Form 8-K ................................83
SIGNATURES .................................................................84
2
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
The registrant, Greater Atlantic Financial Corp. ("GAFC" or the "company"),
completed its public offering of 2,000,000 shares of its common stock on June
30, 1999 and issued an additional 185,000 shares in an over-allotment purchase
by the underwriter on July 28, 1999. The net initial and over-allotment proceeds
totaled $19.0 million of which $14.3 million was invested in our wholly-owned
subsidiary, Greater Atlantic Bank (the "bank") and $4.7 was retained by the
company.
We are a savings and loan holding company which was organized in June 1997. We
conduct substantially all of our business through the bank, a
federally-chartered savings bank, and its wholly-owned subsidiary, Greater
Atlantic Mortgage Corporation ("Greater Atlantic Mortgage"). We offer
traditional banking services to customers from five bank branches located
throughout the greater Washington, DC/Baltimore metropolitan area. We also
originate mortgage loans for sale in the secondary market through Greater
Atlantic Mortgage.
MARKET AREA AND COMPETITION
We operate in a competitive environment, competing for deposits and loans with
other thrifts, commercial banks and other financial entities. Numerous mergers
and consolidations involving banks in the market in which we operate have
occurred resulting in an intensification of competition in the banking industry
in our geographical market. Many of the financial intermediaries operating in
our market area offer certain services, such as trust, investment and
international banking services, which we do not offer. In addition, banks with a
larger capitalization than us and financial intermediaries not subject to bank
regulatory restrictions have larger lending limits and are thereby able to serve
the needs of larger customers.
MARKET RISK
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. To that end, management actively
monitors and manages its interest-rate risk exposure. The measurement of market
risk associated with financial instruments is meaningful only when all related
and offsetting on- and off-balance-sheet transactions are aggregated, and the
resulting net positions are identified. Disclosures about the fair value of
financial instruments, which reflect changes in market prices and rates, can be
found in Note 17 of Notes to Consolidated Financial Statements.
The company's primary objective in managing interest-rate risk is to minimize
the adverse impact of changes in interest rates on the bank's net interest
income and capital, while adjusting the company's asset-liability structure to
obtain the maximum yield-cost spread on that structure. The company relies
primarily on its asset-liability structure to control interest-rate risk.
However, a sudden and substantial increase in interest rates may adversely
impact the company's earnings, to the extent that the interest rates borne by
assets and liabilities do not change at the same speed, to the same extent, or
on the same basis.
3
<PAGE>
LENDING ACTIVITIES
GENERAL. Net loans receivable at September 30, 1999 were $72.8 million, an
increase of $47.3 million or 185.49% from the $25.5 million held at September
30, 1998. The increase in loans consisted primarily of real estate loans secured
by first mortgages on residential properties and consumer and commercial lines
of credit secured by mortgages on residential and commercial real estate. Loans
held for sale amounted to $7.4 million at September 30, 1999 compared to $25.3
million at September 30, 1998, a decrease of $17.9 million. During the fiscal
year 1999, the origination and purchase of single-family residential loans for
the bank's portfolio increased along with the origination of consumer loans and
commercial loans resulting in an increase in the aggregate of loans originated
and purchased for the bank's portfolio.
The following table sets forth the bank's loan originations, purchases, sales
and principal repayments for the periods indicated:
FOR THE YEARS ENDED
SEPTEMBER 30,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS)
Total loans at beginning of period (1) ... $ 53,606 $ 32,520
Originations of loans for investment:
Single-family residential ............. 23,429 11,463
Multi-family residential .............. -- --
Commercial real estate ................ 3,769 458
Construction .......................... 2,814 5,352
Land loans ............................ 351 1,705
Second trust .......................... 784 560
Commercial business ................... 12,362 480
Consumer .............................. 10,218 93
--------- ---------
Total originations and purchases for
investment ........................ 53,727 20,111
Loans originated for resale by Greater
Atlantic Mortgage ..................... 312,077 252,603
--------- ---------
Total originations ....................... 365,804 272,714
Repayments ............................... (21,657) (14,400)
Sale of loans originated for resale by
Greater Atlantic Mortgage ............. (314,116) (237,228)
--------- ---------
Net activity in loans .................... 30,031 21,086
--------- ---------
Total loans at end of period(1) .......... $ 83,637 $ 53,606
========= =========
- -------------------------
(1) Includes loans held for sale of $7.5 million and $25.2 million at September
30, 1999 and 1998, respectively.
4
<PAGE>
LOAN PORTFOLIO. The following table sets forth the composition of the bank's
loan portfolio in dollar amounts and as a percentage of the portfolio at the
dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------
1999 1998
----------------------- -----------------------
% OF AMOUNT % OF
TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS
----------------------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family(1) $53,218 69.85% $17,198 60.48%
Multi-family 1,216 1.60 1,189 4.18
Construction 4,624 6.07 5,520 19.41
Commercial real estate 5,665 7.44 2,246 7.90
Land 871 1.14 723 2.54
------- ------ ------- ------
Total mortgage loans 65,594 86.10 26,876 94.51
------- ------ ------- ------
Commercial business and consumer loans:
Commercial business 3,170 4.16 814 2.86
Consumer:
Home equity 7,114 9.34 542 1.91
Automobile 207 .27 99 0.35
Other 102 .13 105 0.37
------- ------ ------- ------
Total commercial business and 10,593 13.90 1,560 5.49
consumer loans ------- ------ ------- ------
Total loans 76,187 100.00% 28,436 100.00%
====== ======
Less:
Allowance for loan losses (590) (578)
Loans in process (3,049) (2,276)
Unearned premium (discounts) 244 (72)
------- -------
Loans receivable, net $72,792 $25,510
======= =======
</TABLE>
- ------------------------------
(1) Includes loans secured by second trusts on single-family residential
property.
LOAN MATURITY. The following table shows the remaining contractual maturity of
the bank's total loans at September 30, 1999. Loans that have adjustable rates
are shown as amortizing when the interest rates are next subject to change. The
table does not include the effect of future principal prepayments.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
----------------------------------------------------------------
MULTI- COMMERCIAL
ONE- TO FAMILY AND BUSINESS
FOUR- COMMERCIAL AND TOTAL
FAMILY (1)(2) REAL ESTATE CONSUMER LOANS
---------------- ---------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Amounts due in:
One year or less $11,576 $2,255 $ 9,009 $22,840
After one year:
More than one year to three years 6,487 1,108 120 7,715
More than three years to five years 11,089 884 1,446 13,419
More than five years to 10 years 4,808 27 - 4,835
More than 10 years to 15 years 3,139 2,222 18 5,379
More than 15 years 18,950 - - 18,950
--------------- --------------- ------------- -------------
Total amount due $56,049 $6,496 $10,593 $73,138
=============== =============== ============= =============
</TABLE>
- -----------------
(1) Net of loans in process of $3.1 million.
(2) Includes construction loans and land loans.
5
<PAGE>
The following table sets forth, at September 30, 1999, the dollar amount of
loans contractually due after September 30, 2000, and whether such loans have
fixed interest rates or adjustable interest rates. At September 30, 1999, the
bank did not have any construction, acquisition and development, land or
commercial business loans contractually due after September 30, 2000.
<TABLE>
<CAPTION>
DUE AFTER SEPTEMBER 30, 2000
------------------------------------------
FIXED ADJUSTABLE TOTAL
----------- ------------ -----------
(IN THOUSANDS)
Real estate loans:
<S> <C> <C> <C>
One- to four-family ........................ $23,447 $21,026 $44,473
Multi-family and commercial ................ 2,891 1,350 4,241
---------- ----------- ----------
Total real estate loans ................. 26,338 22,376 48,714
Commercial business and consumer loans ........ 1,080 504 1,584
---------- ----------- ----------
Total loans ............................. $27,418 $22,880 $50,298
========== =========== ==========
</TABLE>
ONE- TO FOUR-FAMILY MORTGAGE LENDING. The bank currently offers both fixed-rate
and adjustable-rate mortgage ("ARM") loans with maturities of up to 30 years
secured by single-family residences, which term includes real property
containing from one to four residences. At September 30, 1999, the bank's one-
to four-family mortgage loans totaled $53.2 million, or 69.85% of total loans.
Of the one- to four-family mortgage loans outstanding at that date, 44.48% were
fixed-rate loans and 55.52% were ARM loans.
CONSTRUCTION AND DEVELOPMENT LENDING. The bank originates construction and
development loans primarily to finance the construction of one- to four-family,
owner-occupied residential real estate properties located in the bank's primary
market area. The bank also originates land loans to local contractors and
developers for the purpose of making improvements thereon, including small
residential subdivisions in the bank's primary market area or for the purpose of
holding or developing the land for sale. At September 30, 1999, construction and
development loans (including land loans) totaled $5.5 million, or 7.21%, of the
bank's total loans, of which, land loans totaled $871,000, or 1.14% of total
loans. Such loans are secured by a lien on the property, are limited to 75% of
the lower of the acquisition price or the appraised value of the land and have a
term of up to three years with a floating interest rate based on the prime rate
as reported in THE WALL STREET JOURNAL. The bank's land loans are generally
secured by property in its primary market area.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The bank originates
multi-family and commercial real estate loans that are generally secured by five
or more unit apartment buildings and properties used for business purposes such
as small office buildings or retail facilities located in the bank's primary
market area. The bank's multi-family and commercial real estate underwriting
policies provide that such real estate loans may be made in amounts of up to
75-80% of the appraised value of the property. The bank's multi-family and
commercial real estate loan portfolio at September 30, 1999 was $6.9 million, or
9.04% of total loans. The largest multi-family or commercial real estate loan in
the bank's portfolio at September 30, 1999, was a $1.0 million participation in
a performing $3.2 million loan secured by a nursing home facility in Santa Cruz,
California.
COMMERCIAL BUSINESS LENDING. At September 30, 1999, the bank had $3.2 million in
commercial business loans which amounted to 4.16% of total loans. The bank makes
commercial business loans primarily in its market area to a variety of
professionals, sole proprietorships and small businesses. The bank offers a
variety of commercial lending products, including term loans for fixed assets
and working capital, revolving lines of credit and letters of credit. Term loans
are generally offered with initial fixed rates of interest for the first five
years and with terms of up to 7 years. Business lines of credit have adjustable
rates of interest and are payable on demand, subject to annual review and
renewal. Business loans with variable rates of interest adjust on a monthly
basis and are indexed to the prime rate as published in THE WALL STREET JOURNAL.
6
<PAGE>
CONSUMER LENDING. Consumer loans at September 30, 1999 amounted to $7.4 million
or 9.74% of the bank's total loans, and consisted primarily of home equity
loans, home equity lines of credit, and, to a significantly lesser extent,
secured and unsecured personal loans and new and used automobile loans. These
loans are generally made to residents of the bank's primary market area and
generally are secured by real estate, deposit accounts and automobiles. These
loans are typically shorter term and generally have higher interest rates than
one- to four-family mortgage loans.
The bank offers home equity loans and home equity lines of credit (collectively,
"home equity loans"). Most of the bank's equity loans are secured by second
mortgages on one- to four-family residences located in the bank's primary market
area. At September 30, 1999, these loans totaled $7.1 million or 9.34% of the
bank's total loans and 95.84% of consumer loans.
The bank also originates other types of consumer loans primarily consisting of
secured and unsecured personal loans and new and used automobile loans. At
September 30, 1999, these consumer loans totaled $309,000, or 0.40% of the
bank's total loans and 4.16% of consumer loans.
ASSET QUALITY
DELINQUENT LOANS AND CLASSIFIED ASSETS. Reports listing all delinquent accounts
are generated and reviewed regularly by management and all loans or lending
relationships delinquent 30 days or more and all real estate owned ("REO") are
reviewed monthly by the board of directors. The procedures taken by the bank
with respect to delinquencies vary depending on the nature of the loan, the
length and cause of delinquency and whether the borrower has previously been
delinquent.
Federal regulations and the bank's Asset Classification Policy require that the
bank utilize an internal asset classification system as a means of reporting
problem and potential problem assets. The bank has incorporated the internal
asset classifications of the Office of Thrift Supervision (the "OTS") as a part
of its credit monitoring system. The bank 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 reserve 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."
The bank's management reviews and classifies the bank's assets on a regular
basis and the board of directors reviews the management's reports on a quarterly
basis. The bank classifies assets in accordance with the management guidelines
described above. At September 30, 1999, the bank had $281,000 of loans
designated as Substandard which consisted of one commercial real estate loan. At
that same date the bank had $192,000 of assets classified as Doubtful, one
commercial real estate loan for $169,000 and twelve second trust loans totaling
$23,000. At September 30, 1999, the bank had no loans classified as Loss. At
September 30, 1999, the bank also had a total of one loan, totaling $39,000,
designated as Special Mention. At September 30, 1999, the largest adversely
classified asset was secured by commercial real estate consisting of two loans
with an aggregate balance of $450,000. The bank classified one as Doubtful for
$169,000 (a second trust) and the second as Substandard for $281,000 (a
participation interest in a $696,000 first trust). The property securing the two
loans is unoccupied and listed for sale for $1.1 million.
7
<PAGE>
NON-PERFORMING ASSETS AND IMPAIRED LOANS. The following table sets forth
information regarding non-accrual loans and REO. At September 30, 1999,
nonaccrual loans consisted of several second trust loans totaling $23,000. It is
the policy of the bank to cease accruing interest on mortgage loans 90 days or
more past due and to cease accruing interest on consumer loans 60 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 the accrued
and unpaid interest. As a result, the bank had no loans 90 days or more past due
but still accruing interest or troubled debt restructurings at any of the dates
indicated.
SEPTEMBER 30,
---------------------------
1999 1998
--------- --------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Single-family $ 23 $ 37
Multi-family - 193
--------- --------
Total non-accrual loans 23 230
REO 187 90
--------- --------
Total non-performing assets $210 $320
========= ========
Non-performing loans to total loans
held for investment 0.03% 0.81%
========= ========
Total non-performing assets to total
assets, at period end 0.11% 0.30%
========= ========
During the year ended September 30, 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 $1,000. The
total amount of interest not recognized to date on such loans was $1,000.
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 its 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 based on information currently known to
management. 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 bank's allowance for loan losses. Such agencies may
require the bank to make additional provisions for estimated loan losses based
upon their judgments about information available to them at the time of their
examination. As of September 30, 1999, the bank's allowance for loan losses
amounted to $590,000 or 0.77% of total loans. While the allowance for loan
losses to total non-performing loans at September 30, 1999 is 2,565.22%, the
allowance as a percentage of total loans decreased 1.26%, from 2.03% at
September 30, 1998 to 0.77% at September 30, 1999. The decrease resulted from a
$47.8 million increase in total loans, from $28.4 million at September 30, 1998
to $76.2 million at September 30, 1999. Based on management's estimates, the
allowance is considered adequate to cover estimated losses in loans receivable.
8
<PAGE>
The following table sets forth activity in the bank's allowance for loan losses.
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
SEPTEMBER 30,
------------------------------
(DOLLARS IN THOUSANDS)
1999 1998
------------- ------------
<S> <C> <C>
Balance at beginning of period ........................ $578 $776
Provisions ............................................ 26 159
------------ ------------
Total charge-offs ..................................... 24 362
Total recoveries ...................................... 10 5
------------ ------------
Net charge-offs ....................................... (14) (357)
------------ ------------
Balance at end of period .............................. $590 $578
============ ============
Ratio of net charge-offs during the period
to average loans outstanding during the period ..... 0.03% 1.18%
============ ============
Allowance for loan losses to total non-performing
loans at end of period ............................. 2,565.22% 251.30%
============ ============
Allowance for loan losses to total loans .............. 0.77% 2.03%
============ ============
</TABLE>
The following table sets forth the bank's allowance for loan losses in each of
the categories listed and the percentage of such amounts to the total allowance
and the percentage of such amounts to total loans.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------------------------------
1999 1998
------------------------------------ ----------------------------------
PERCENT OF PERCENT OF
----------------------- -----------------------
TOTAL TOTAL TOTAL
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE LOANS
----------- --------- ----------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
Single-family ................................... $ 74 12.54% 0.10% $ 47 8.13% 0.17%
Multi-family .................................... 9 1.53 0.01 129 22.32 0.45
Construction .................................... 29 4.92 0.04 57 9.86 0.20
Commercial real estate .......................... 208 35.25 0.27 53 9.17 0.19
Land ............................................ 16 2.71 0.02 21 3.63 0.07
----------- -------- ------ ------- ------- ------
Total mortgage loans ......................... 336 56.95 0.44 307 53.11 1.08
----------- -------- ------ ------- ------- ------
COMMERCIAL AND CONSUMER:
Commercial ...................................... 79 13.39 0.10 28 4.85 0.10
Consumer:
Home equity .................................. 89 15.08 0.12 44 7.61 0.15
Automobile ................................... 9 1.53 0.01 6 1.04 0.02
Other ........................................ - - - 81 14.01 0.29
----------- -------- ------ ------- ------- ------
Total commercial .......................... 177 30.00 0.23 159 27.51 0.56
and consumer
----------- -------- ------ ------- ------- ------
Unallocated ........................................ 77 13.05 0.10 112 19.38 0.39
----------- -------- ------ ------- ------- ------
Total .............................................. $590 100.00% 0.77% $578 100.00% 2.03%
=========== ======== ====== ======= ======= ======
</TABLE>
9
<PAGE>
INVESTMENT ACTIVITIES
The investment policy of the bank, as approved by the board of directors,
requires management to maintain adequate liquidity and generate a favorable
return on investments without incurring undue interest rate and credit risk, to
complement the bank's lending activities. The bank primarily utilizes
investments in securities for liquidity management, as a source of income and as
a method of deploying excess funds not utilized for investment in loans.
Securities classified as trading are bought and held principally for sale in the
near term, generally within 90 days.
At September 30, 1999, the bank had invested $43.2 million in mortgage-backed
securities, or 21.71% of total assets, of which $35.5 million were classified as
available-for-sale and $7.7 million were classified as held-to-maturity.
Investments in mortgage-backed securities involve a risk that actual prepayments
will be greater than estimated prepayments over the life of the security, which
may require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby changing the net yield on such
securities. There is also reinvestment risk associated with the cash flows from
such securities or in the event such securities are redeemed by the issuer. In
addition, the market value of such securities may be adversely affected by
changes in interest rates.
The following table sets forth information regarding the amortized cost and
estimated market value of the bank's investment securities.
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------------------------------
1999 1998
---------------------------- --------------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
----------- ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
Equity securities ........................... $11,958 $11,603 $ -- $ --
Corporate debt securities ................... 2,454 2,488 -- --
Federal agency securities ................... 3,000 2,947 9,565 9,574
CMOs ........................................ 1,687 1,669 -- --
U.S. Government securities .................. 21,414 21,313 22,561 22,638
------- ------- ------- -------
Total available-for-sale ................. 40,513 40,020 32,126 32,212
------- ------- ------- -------
HELD-TO-MATURITY:
Corporate debt securities ................... 1,047 960 -- --
U.S. Government securities .................. 23,990 23,467 -- --
------- ------- ------- -------
Total held-to-maturity ................... 25,037 24,427 -- --
------- ------- ------- -------
Total investment securities .............. $65,550 $64,447 $32,126 $32,212
======= ======= ======= =======
INVESTMENT SECURITIES WITH:
Fixed rates ................................. $10,750 $10,547 $ 9,565 $ 9,574
Adjustable rates ............................ 54,800 53,900 22,561 22,638
------- ------- ------- -------
Total .................................... $65,550 $64,447 $32,126 $32,212
======= ======= ======= =======
TRADING SECURITIES(1) .......................... $ -- $ -- $ 247 $ 241
======= ======= ======= =======
</TABLE>
- --------------------
(1) Consists of corporate debt securities.
10
<PAGE>
The following table sets forth information regarding the amortized cost and
estimated market value of the bank's mortgage-backed securities.
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------------------
1999 1998
-------------------------------- ---------------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
REMICS ...................................... $ -- $ -- $ 2,559 $ 2,601
FHLMC ....................................... 6,596 6,513 1,563 1,561
FNMA ........................................ 26,869 26,489 11,027 11,081
GNMA ........................................ 2,471 2,436 3,723 3,716
---------- ---------- ---------- ----------
Total .................................... 35,936 35,438 $ 18,872 $ 18,959
========== ========== ========== ==========
HELD-TO-MATURITY:
FHLMC ....................................... $ 3,417 $ 3,349 -- --
FNMA ........................................ 4,312 4,229 -- --
---------- ---------- ---------- ----------
Total Held-to-maturity .................. 7,729 7,578 -- --
---------- ---------- ---------- ----------
Total ................................... $ 43,665 $ 43,016 -- --
========== ========== ========== ==========
MORTGAGE-BACKED SECURITIES WITH:
Fixed rates ................................. $ 18,305 $ 17,818 $ 9,566 $ 9,678
Adjustable rates ............................ 25,360 25,198 9,306 9,281
---------- ---------- ---------- ----------
Total .................................... $ 43,665 $ 43,016 $ 18,872 $ 18,959
========== ========== ========== ==========
</TABLE>
11
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the bank's
available-for-sale investment securities and mortgage-backed securities.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
-------------------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS MORE THAN TEN YEARS TOTAL
-------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
---------- ----------------------------------------- ---------------------- ---------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Investment securities
available-for-sale:
Adjustable-rate
securities:
Equity securities .....$ 9,120 5.67% $ - -% $ - -% $ - -% $9,120 5.67%
U.S. Government agency. - - - - - - 21,313 8.57 21,313 8.57
--------- ------- ------ ---- ---- ------ ------- ---- ------ ----
Total ................ 9,120 5.67 - - - - 21,313 8.57 30,433 7.70
--------- ------- ------ ---- ---- ------ ------- ---- ------ ----
Fixed-rate:
Equity securities .... 503 9.38 975 7.70 - - 1,005 7.98 2,483 8.15
Federal agency ....... - - 995 6.13 955 6.50 997 8.00 2,947 6.88
Corporate debt ....... - - 1,472 6.17 - - 1,016 7.48 2,488 6.70
CMOs ................. - - - - - - 1,669 7.50 1,669 7.50
--------- ------- ------ ---- ---- ------ ------- ---- ------ ----
Total ................ 503 9.38 3,442 6.59 955 6.50 4,687 7.71 9,587 7.27
--------- ------- ------ ---- ---- ------ ------- ---- ------ ----
Total investment
securities ...........
available-for-sale ... 9,623 5.86 3,442 6.59 955 6.50 26,000 8.41 40,020 7.60
--------- ------- ------ ---- ---- ------ ------- ---- ------ ----
Mortgage-backed
securities
available-for-sale:
Adjustable-rate
securities:
FNMA ........ - - 381 6.86 - - 13,058 6.52 13,439 6.52
FHLMC ....... - - - - - - 3,229 6.04 3,229 6.04
GNMA ........ - - - - 916 6.13 990 6.38 1,906 6.25
--------- ------- ------ ---- ---- ------ ------- ---- ------ ----
Total ................ - - 381 6.86 916 6.13 17,277 6.42 18,574 6.41
--------- ------- ------ ---- ---- ------ ------- ---- ------ ----
Fixed-rate:
FNMA ................. - - 1,137 8.00 3,246 6.06 8,667 7.46 13,050 7.16
FHLMC ................ - - 295 7.50 - - 2,989 7.24 3,284 7.27
GNMA ................. - - - - - - 530 7.00 530 7.00
REMICs ............... - - - - - - - - - -
--------- ------- ------ ---- ---- ------ ------- ---- ------ ----
Total ................ - - 1,432 7.90 3,246 6.06 12,186 7.39 16,864 7.18
--------- ------- ------ ---- ---- ------ ------- ---- ------ ----
Total mortgage-backed
securities available-
for-sale .......... - - 1,813 6.86 4,162 6.07 29,463 6.82 35,438 6.78
--------- ------- ------ ---- ------ ------ ------- ---- ------ ----
Total investments .... $ 9,623 5.67% $5,255 6.97% $5,117 6.15% $55,463 7.57% $75,458 7.21%
========= ======= ====== ==== ====== ====== ======= ==== ======= ====
</TABLE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the bank's
held-to-maturity investment securities and mortgage-backed securities.
12
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
------------------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS MORE THAN TEN YEARS TOTAL
------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
--------------------------------------------------- ---------------------- ---------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
securities
held-to-maturity:
Adjustable-rate
securities:
Equity securities . $ - -% $ - -% $ - -% $ - -% $ - -%
U.S. Government
agency ........... - - 1,099 7.88 2,681 9.10 20,210 7.86 23,990 8.00
--------- ---- ------- ------- ------ ------- -------- ------ -------- -----
Total ............. - - 1,099 7.88 2,681 9.10 20,210 7.86 23,990 8.00
--------- ---- ------- ------- ------ ------- -------- ------ -------- -----
Fixed-rate:
Corporate debt .... - - - - 1,047 7.15 - - 1,047 7.15
CMOs .............. - - - - - - - - - -
--------- ---- ------- ------- ------ ------- -------- ------ -------- -----
Total ............. - - - - 1,047 7.15 - - 1,047 7.15
--------- ---- ------- ------- ------ ------- -------- ------ -------- -----
Total investment
securities
held-to-maturity .. - - 1,099 7.88 3,728 8.55 20,210 7.86 25,037 7.97
--------- ---- ------- ------- ------ ------- -------- ------ -------- -----
Mortgage-backed
securities
held-to-maturity:
Adjustable-rate
securities:
FNMA .............. - - - - - - 3,319 6.48 3,319 6.48
FHLMC ............. - - - - - - 3,417 7.02 3,417 7.02
GNMA .............. - - - - - - - - - -
--------- ---- ------- ------- ------ ------- -------- ------ -------- -----
Total ............. - - - - - - 6,736 6.75 6,736 6.75
--------- ---- ------- ------- ------ ------- -------- ------ -------- -----
Fixed-rate:
FNMA .............. - - - - - - 993 6.50 993 6.50
FHLMC ............. - - - - - - - - - -
GNMA .............. - - - - - - - - - -
REMICs ............ - - - - - - - - - -
--------- ---- ------- ------- ------ ------- -------- ------ -------- -----
Total ............. - - - - - - 993 6.50 993 6.50
--------- ---- ------- ------- ------ ------- -------- ------ -------- -----
Total
mortgage-backed
securities
held-to-maturity .. - - - - - - 7,729 6.72 7,729 6.72
--------- ---- ------- ------- ------ ------- -------- ------ -------- -----
Total
held-to-maturity
investments ....... $ - -% $ 1,099 7.88% $3,728 8.55% $ 27,939 7.55% $ 32,766 7.67%
--------- ---- ------- ------- ------ ------- -------- ------ -------- -----
</TABLE>
13
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments and prepayments, cash flows generated from
operations, Federal Home Loan Bank ("FHLB") advances and reverse repurchase
agreements are the primary sources of the bank's funds for use in lending,
investing and for other general purposes.
DEPOSITS. Because the bank has aggressively marketed its deposit products,
expanded its branch network and used brokered deposits to fund its
mortgage-banking activities, total deposits increased to $129.0 million at
September 30, 1999 from $76.3 million at September 30, 1998, an increase of
69.05%. Certificates of deposit increased $39.5 million, $12.0 million of which
were from brokered deposits. The bank offers a variety of deposit accounts with
a range of interest rates and terms. The bank's deposits consist of checking,
money market, savings, NOW, certificate accounts and Individual Retirement
Accounts. Of the funds deposited in the bank, 73.55% are in certificate of
deposit accounts at September 30, 1999. At September 30, 1999, transaction-based
accounts (savings, NOW, money market and noninterest bearing deposits)
represented 26.45% of total deposits.
At September 30, 1999, $77.5 million, or 81.69% of the bank's certificate of
deposit accounts were to mature within one year.
13
<PAGE>
The following table sets forth the distribution and the rates paid on each
category of the bank's deposits.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------
1999 1998
-------------------------- -----------------------------
PERCENT OF PERCENT OF
TOTAL RATE TOTAL RATE
BALANCE DEPOSITS PAID BALANCE DEPOSITS PAID
------- ---------- ---- ------- --------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Savings accounts ............. $ 1,375 1.07% 3.25% $ 703 0.92% 3.00%
Now and money market accounts. 27,157 21.05 4.98 6,761 8.86 4.53
Certificates of deposit ...... 94,879 73.55 5.25 55,422 72.63 5.58
Noninterest-bearing deposits:
Demand deposits .......... 5,596 4.33 -- 13,42 17.59 --
-------- ------- ------- -------- ------- -------
Total deposits ....... $129,007 100.00% 4.95% $ 76,31 100.00% 4.48%
======== ======= ======= ======== ======= =======
</TABLE>
The following table presents information concerning the amounts, the rates and
the periods to maturity of the bank's certificate accounts outstanding.
AT SEPTEMBER 30, 1999
---------------------------
AMOUNT RATE
------------ -----------
BALANCES MATURING: (DOLLARS IN THOUSANDS)
Three months or less .............. $ 15,947 5.40%
Three months to one year .......... 61,561 5.19
One year to three years ........... 16,370 5.34
Over three years .................. 1,001 5.41
---------- -----------
Total ........................... $ 94,879 5.25%
========== ===========
14
<PAGE>
At September 30, 1999, the bank had $28.0 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
WEIGHED
AVERAGE
MATURITY PERIOD AMOUNT RATE
- ---------------------------------------------- -------- ---------
(DOLLARS IN THOUSANDS)
Three months or less ..................... $ 2,921 5.37%
Over 3 through 6 months .................. 16,037 5.12
Over 6 through 12 months ................. 6,203 5.15
Over 12 months ........................... 2,858 5.37
-------- ----------
Total .............................. $ 28,019 5.28%
======== ==========
BORROWINGS. FHLB advances amounted to $37.7 million at September 30, 1999 an
increase from the $22.0 million at September 30, 1998. At September 30, 1999,
borrowings consisted of $37.7 million of FHLB advances and $5.7 million in other
borrowings (reverse repurchase agreements). At September 30, 1998, borrowings
consisted solely of FHLB advances.
The bank also enters into sales of securities under agreements to repurchase
("reverse repurchase agreements") with terms to maturity of less than one year.
At September 30, 1999 the bank had $5.7 million in reverse repurchase
agreements. During the fiscal year ended September 30, 1999, all reverse
repurchase agreements represented agreements to repurchase the same securities.
15
<PAGE>
The following table sets forth information regarding the bank's borrowed funds:
At or for the years ended
September 30,
-------------------------------
1999 1998
------------- --------------
(dollars in thousands)
FHLB Advances:
Average balance outstanding $16,371 $5,358
Maximum amount outstanding at any
month-end during the period 37,650 22,000
Balance outstanding at end of period 37,650 22,000
Weighted average interest
rate during the period 4.95% 5.34%
Weighted average interest rate at end of period 5.55% 6.00%
Reverse repurchase agreements:
Average balance outstanding 1,301 2,015
Maximum amount outstanding at any
month-end during the period 5,741 3,971
Balance outstanding at end of period 5,741 --
Weighted average interest
rate during the period 5.46% 5.66%
Weighted average interest rate at end of
period 5.50% --
SUBSIDIARY ACTIVITIES.
The bank has one wholly-owned subsidiary, Greater Atlantic Mortgage, and along
with our community banking focus, we have expanded the operations of Greater
Atlantic Mortgage in order to diversify our revenue stream and support our
growth. The strategy of Greater Atlantic Mortgage is to originate mortgage loans
for sale in the secondary market and profitable niche mortgage products, such as
Federal Housing Administration ("FHA") streamline refinancings and the
origination of loans on condominiums in connection with the conversion of
cooperative apartments to condominiums. Currently, the operations of Greater
Atlantic Mortgage employ approximately 60 persons in Tysons Corner, Virginia and
Frederick, Maryland. For the fiscal year ended September 30, 1999, Greater
Atlantic Mortgage originated $312.1 million of single-family residential loans,
respectively, the majority of which consisted of loans insured by the FHA or
partially guaranteed by the Veterans Administration ("VA") which were pre-sold
in the secondary market with servicing released.
PERSONNEL
As of September 30, 1999, the bank had 98 full-time employees and 3 part-time
employees. The employees are not represented by a collective bargaining unit and
the company considers its relationship with its employees to be good.
16
<PAGE>
REGULATION AND SUPERVISION
GENERAL
The company, as a savings and loan holding company, is required to file certain
reports with, and otherwise comply with the rules and regulations of the Office
of Thrift Supervision ("OTS") under the Home Owners' Loan Act, as amended (the
"HOLA"). In addition, the activities of savings institutions, such as the bank,
are governed by the HOLA and the Federal Deposit Insurance Act ("FDI Act").
The bank is subject to extensive regulation, examination and supervision by the
OTS, as its primary federal regulator, and the FDIC, as the deposit insurer. The
bank is a member of the Federal Home Loan Bank ("FHLB") System and its deposit
accounts are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") managed by the FDIC. The bank 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 bank'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 bank and their operations. Certain of the
regulatory requirements applicable to the bank 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 bank and the company.
HOLDING COMPANY REGULATION
The company is a non-diversified unitary savings and loan holding company within
the meaning of the HOLA. As a unitary savings and loan holding company, the
company generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that the bank continues to
be a qualified thrift lender ("QTL"). See "Federal Savings Institution
Regulation--QTL Test." Upon any non-supervisory acquisition by the company of
another savings institution or savings bank that meets the QTL 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 be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"),
subject to the prior approval of the OTS, and certain activities authorized by
OTS regulation, and no multiple savings and loan holding company may acquire
more than 5% of the voting stock of a company engaged in impermissible
activities.
The HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring more than 5% of the voting
stock of another savings institution or holding company thereof without prior
written approval of the OTS or 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 must consider the
financial and managerial resources and future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance
funds, the convenience and needs of the community and competitive factors.
17
<PAGE>
The OTS is prohibited from approving 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, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. The bank 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
CAPITAL REQUIREMENTS. The OTS capital regulations require savings institutions
to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4%
leverage (core) capital ratio (3% for savings associations that receive the
highest examination rating on the CAMELS financial institution 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, and, together with the risk-based capital standard itself, a
4% Tier I risk-based capital standard. Core capital is defined as common
stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The OTS regulations
also require that, in meeting the tangible, leverage (core) 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 I (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%, as assigned by the OTS capital regulation based on the
risks OTS believes are inherent in the type of asset. The components of Tier I
(core) capital are equivalent to those discussed earlier. 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 OTS regulatory capital requirements 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. A savings institution's interest rate risk is
measured by the decline in the net portfolio value of its assets (I.E., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component.
18
<PAGE>
At September 30, 1999, the bank met each of its capital requirements and it is
anticipated that the bank will not be subject to the interest rate risk
component.
The following table presents the bank's capital position at September 30, 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 ................ $20,782 $ 2,963 $17,819 10.52% 1.50%
Core (Leverage) ......... 20,782 7,901 12,881 10.52 4.00
Risk-based .............. 21,372 6,018 15,354 28.41 8.00
</TABLE>
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective action
regulations, 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 I (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 banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to an undercapitalized institution, including, but not
limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The OTS could also take any one of a number
of discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS. Deposits of the bank are presently insured by the
Savings Association Insurance Fund. The Federal Deposit Insurance Corporation
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 Savings Association Insurance Fund member
institutions are determined semiannually by the Federal Deposit Insurance
Corporation and currently range from zero basis points for the healthiest
institutions to 27 basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are required
to pay on bonds issued in the late 1980s by the Financing Corporation to
recapitalize the predecessor to the Savings Association Insurance Fund. During
1998, Financing Corporation payments for Savings Association Insurance Fund
members approximated 6.10 basis points, while bank Insurance Fund members paid
1.22 basis points. By law, there will be equal sharing of Financing Corporation
payments between the members of both insurance funds on the earlier of January
1, 2000 or the date the two insurance funds are merged.
The bank's assessment rate for fiscal 1999 ranged from 5.80 to 6.10 basis points
and the premium paid for this period was $66,000. A significant increase in SAIF
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of the bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
19
<PAGE>
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 bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
FINANCIAL INSTITUTION MODERNIZATION LEGISLATION. Recently enacted federal
legislation designed to modernize the regulation of the financial services
industry expands the ability of bank holding companies to affiliate with other
types of financial services companies such as insurance companies and investment
banking companies. However, the legislation provides that companies that acquire
control of a single savings association after May 4, 1999 (or that filed an
application for that purpose after that date) are not entitled to the
unrestricted activities formerly allowed for a unitary savings and loan holding
company. Rather, these companies will have authority to engage in the activities
permitted "a financial holding company" under the new legislation, including
insurance and securities-related activities, and the activities currently
permitted for multiple savings and loan holding companies, but generally not in
commercial activities. The authority for unrestricted activities is
grandfathered for unitary savings and loan holding companies, such as the
company, that existed before May 4, 1999. However, the authority for
unrestricted activities would not apply to any company that acquired the
company.
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions 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 such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At September 30,
1999, the bank's limit on loans to one borrower was $3.2 million. At September
30, 1999, the bank's largest aggregate outstanding balance of loans to one
borrower was $1.0 million.
QTL TEST. The HOLA requires savings institutions to meet a QTL test. Under the
QTL test, a savings and loan association is required to either 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 or qualify as a "domestic building and loan association" under the
Internal Revenue Code of 1986, as amended.
A savings institution that fails the QTL test is subject to certain operating
restrictions and may be required to convert to a bank charter. As of September
30, 1999, the bank maintained 88.99% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test.
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 Stockholders of another
institution in a cash-out merger. The rule effective through the first quarter
of 1999 established three tiers of institutions based primarily on an
institution's capital level. A Tier I institution exceeded all capital
requirements before and after a proposed capital distribution and has not been
advised by the OTS that it needs more than normal supervision. A Tier I
institution could, after first giving notice to but without obtaining approval
of the OTS, make capital distributions during the calendar year equal to the
greater of 100% of its net earnings to date during the calendar year plus the
amount that would have reduced by one-half the excess capital over its capital
requirements at the beginning of the calendar year, or 75% of its net income for
the previous four quarters. Any additional capital distributions required prior
regulatory approval.
Effective April 1, 1999, the OTS' capital distribution regulation changed. Under
the new regulation, an application to and the prior approval of the OTS is
required before any capital distribution if the institution does not meet the
criteria for "expedited treatment" of applications under OTS regulations
(generally, compliance with all capital requirements and examination ratings in
one of 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 give advance notice to OTS of the capital distribution.
20
<PAGE>
If the bank's capital fell below its regulatory requirements or if the OTS
notified it that it was in need of more than normal supervision, the bank's
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution, which would otherwise be
permitted by the regulation if the OTS determines that the distribution would be
an unsafe or unsound practice.
LIQUIDITY. The bank 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%. The bank's liquidity ratio for
September 30, 1999 was 16.83%, which exceeded the applicable requirements. The
bank 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 bank's latest quarterly thrift
financial report. The assessments paid by the bank for the fiscal year ended
September 30, 1999 totaled $33,000.
BRANCHING. OTS regulations permit nationwide branching by federally chartered
savings institutions to the extent allowed by federal statute. This permits
federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
TRANSACTIONS WITH RELATED PARTIES. The bank's authority to engage in
transactions with related parties or "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 Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate 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 Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or 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 bank's authority to extend credit to executive officers, directors and 10%
shareholders ("insiders"), as well as entities such persons control, is governed
by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder. Among other
things, such loans are required to be made on terms substantially the same as
those offered to unaffiliated individuals and to 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. Regulation O also places individual and aggregate limits on the
amount of loans the bank may make to insiders based, in part, on the bank's
capital position and requires certain board approval procedures to be followed.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement responsibility
over savings institutions and has the authority to bring actions against the
institution and all institution-affiliated parties, including stockholders, and
any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of a capital
directive or cease and desist order to removal of officers and/or directors to
institution of receivership, conservatorship or termination of deposit
insurance. Civil penalties cover a wide range of violations and can amount to
$25,000 per day, or even $1 million per day in especially egregious cases. Under
the FDI Act, the FDIC has the authority to recommend to the Director of the OTS
enforcement action to be taken with respect to a particular savings institution.
21
<PAGE>
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
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. 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. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality; earnings; and
compensation, fees and benefits. Most recently, the agencies issued guidelines
on Year 2000 computer compliance. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans when such plans are required.
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 Federal Reserve Board regulations generally
require that reserves be maintained against aggregate transaction accounts as
follows: for that portion of transaction 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 $1.33 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 bank is in compliance
with the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act, as implemented by OTS regulations, a
savings association has a continuing and affirmative obligation consistent with
its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The Community
Reinvestment Act does not establish specific lending requirements or programs
for financial institutions nor does it limit an institution's discretion to
develop the types of products and services that it believes are best suited to
its particular community, consistent with the Community Reinvestment Act. The
Community Reinvestment Act requires the OTS, in connection with its examination
of an institution, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
applications by such institution. The Community Reinvestment Act requires public
disclosure of an institution's Community Reinvestment Act rating. Greater
Atlantic Bank's latest Community Reinvestment Act rating, received from the OTS
was "Satisfactory."
22
<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The company and the bank will report their income on a fiscal year
basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions.
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
bank or the company. The bank has not been audited by the IRS or the Virginia
Department of Taxation ("DOT") in the past five years.
DISTRIBUTIONS. To the extent that the bank makes "non-dividend distributions" to
the company that are considered as made (i) from the reserve for losses on
qualifying real property loans, to the extent the reserve for such losses
exceeds the amount that would have been allowed under the experience method, or
(ii) from the supplemental reserve for losses on loans ("Excess Distributions"),
then an amount based on the amount distributed will be included in the bank's
taxable income. Non-dividend distributions include distributions in excess of
the bank's current and accumulated earnings and profits, distributions in
redemption of stock and distributions in partial or complete liquidation.
However, dividends paid out of the bank's current or accumulated earnings and
profits, as calculated for federal income tax purposes, will not be considered
to result in a distribution from the bank's bad debt reserve. Thus, any
dividends to the company that would reduce amounts appropriated to the bank's
bad debt reserve and deducted for federal income tax purposes would create a tax
liability for the bank. The amount of additional taxable income created by an
Excess Distribution is an amount that, when reduced by the tax attributable to
the income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the bank makes a "non-dividend distribution," then approximately one
and one-half times the amount so used would be includable in gross income for
federal income tax purposes, presumably taxed at a 34% corporate income tax rate
(exclusive of state and local taxes). See "Regulation" and "Dividend Policy" for
limits on the payment of dividends of the bank. The bank does not intend to pay
dividends that would result in a recapture of any portion of its bad debt
reserve.
CORPORATE ALTERNATIVE MINIMUM TAX ("AMT"). The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset
by net operating loss carryovers of which the bank currently has none. AMTI is
increased by an amount equal to 75% of the amount by which the bank's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). The bank does not expect to be
subject to the AMT.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The company may exclude from its
income 100% of dividends received from the bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the company and the bank will not file a consolidated tax return,
except that if the company or the bank owns more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.
STATE AND LOCAL TAXATION
COMMONWEALTH OF VIRGINIA. The Commonwealth of Virginia imposes a tax at the rate
of 6.0% on the "Virginia taxable income" of the bank and the company. Virginia
taxable income is equal to federal taxable income with certain adjustments.
Significant modifications include the subtraction from federal taxable income of
interest or dividends on obligations or securities of the United States that are
exempt from state income taxes, and a recomputation of the bad debt reserve
deduction on reduced modified taxable income.
DELAWARE TAXATION. As a Delaware company not earning income in Delaware, the
company is exempt 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.
However, to the extent that the company conducts business outside of Delaware,
the company may be considered doing business and subject to additional taxing
jurisdictions outside of Delaware.
23
<PAGE>
ITEM 2. PROPERTIES
We currently conduct our business from four full-service banking
offices and our administrative office. The following table sets forth certain
information concerning the bank's offices as of September 30, 1999.
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY OR
LEASEHOLD
ORIGINAL IMPROVEMENTS
YEAR DATE OF AT
LEASED OR LEASED OR LEASE SEPTEMBER 30,
LOCATION OWNED ACQUIRED EXPIRATION 1999
- -------------------------------- ------------------------- ------------- ------------------
(IN THOUSANDS)
ADMINISTRATIVE OFFICE:
<S> <C> <C> <C> <C>
10700 Parkridge Boulevard
Reston, Virginia 20191 ........................ Leased 1998 03-31-03 $ 45
BRANCH OFFICES:
11834 Rockville Pike
Rockville, Maryland 20852 ..................... Leased 1998 06-15-05 334
8070 Ritchie Highway
Pasadena, Maryland 21122 ...................... Leased 1998 08-31-08 23
250 N. Glebe Road
Arlington, Virginia 22203 ..................... Leased 1998 03-31-03 32
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036 ........................ Leased 1998 07-31-08 281
46901 Cedar Lakes Plaza
Sterling, Virginia 20164 ...................... Leased 1999 02-28-19 398
GREATER ATLANTIC MORTGAGE OFFICE:
8230 Old Courthouse Road
Vienna, Virginia 22182 ........................ Leased 1995 12-31-04 2
5301 Spectrum Drive, Suite D
Frederick, Maryland 21703 ..................... Leased 1999 6-30-04 --
------
Total ............................................... $1,115
======
</TABLE>
The bank also has entered into a contract to purchase property in South Riding,
Virginia and Annapolis, Maryland for the purpose of constructing branch offices.
The total net book value of the company's furniture, fixtures and equipment at
September 30, 1999 was $2.2 million. The properties are considered by management
to be in good condition. Management expects to expend up to $100,000 for
replacement of data processing and related equipment by September 30, 2000.
24
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On July 28, 1999, First Guaranty Mortgage Corporation filed a complaint against
us and our subsidiary, Greater Atlantic Bank ("GAB") and its subsidiary, Greater
Atlantic Mortgage Corporation ("GAMC") in Circuit Court of Arlington, Virginia.
This complaint alleges breach of contract and related claims against these three
companies and employees of GAMC who formerly were employed at First Guaranty.
First Guaranty alleges that GAMC, GAB and GAFC wrongfully interfered with the
business of First Guaranty's Frederick, Maryland office by hiring the employees
of that office. First Guaranty is seeking approximately $5,000,000 in
compensatory and $20,000,000 in punitive damages.
We believe that the allegations against GAB, GAFC and GAMC are without merit. We
are vigorously defending these claims. Although we can give no assurance, we
believe that the ultimate outcome of this matter will not materially adversely
affect our financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders during the fourth
quarter of the fiscal year ended September 30, 1999, through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION. The company's common stock is listed on the NASDAQ Stock
Market under the symbol "GAFC". The company has not paid a dividend on it's
common stock.
As of September 30, 1999, there were 3,007,434 total shares outstanding and
approximately 800 shareholders of record.
HIGH/LOW STOCK PRICE FISCAL YEAR SEPTEMBER 30, 1999
------------------------------
HIGH LOW
---- ---
First Quarter n/a n/a
Second Quarter n/a n/a
Third Quarter n/a n/a
Fourth Quarter 9 7/8 6 1/2
25
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA, MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following Selected Consolidated Financial Data in
conjunction with our Consolidated Financial Statements and the notes thereto,
the information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other financial information included
elsewhere in this 10-KSB.
AT OR FOR
THE YEARS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
----------- -----------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Interest income ........................ $ 9,046 $ 4,011
Interest expense ....................... 6,380 2,563
----------- -----------
Net interest income ................. 2,666 1,448
Provision for loan losses .............. 26 159
----------- -----------
Net interest income after provision . 2,640 1,289
for loan losses
Noninterest income ..................... 6,081 6,269
Noninterest expense .................... 8,789 6,638
----------- -----------
Income(loss) before taxes .......... (68) 920
Income tax (benefit) provision ......... (169) 311
----------- -----------
Net income ............................. $ 101 $ 609
=========== ===========
PER SHARE DATA:
Net income:
Basic ............................... $ 0.07 $ 0.77
Diluted ............................. 0.07 0.77
Book value ............................. 8.31 8.38
Tangible book value .................... 8.31 8.38
Weighted average shares outstanding:
Basic ..................................... 1,362,390 787,075
Diluted ................................... 1,364,607 787,075
CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION DATA:
Total assets ........................... $ 198,923 $ 107,342
Total loans receivable, net ............ 72,792 25,510
Allowance for loan losses .............. 590 578
Mortgage-loans held for sale ........... 7,436 25,322
Investment securities (1) .............. 65,057 32,454
Mortgage-backed securities ............. 43,167 18,959
Total deposits ......................... 129,007 76,311
FHLB advances .......................... 37,650 22,000
Other borrowings ....................... 5,741 --
Total stockholders' equity ............. 24,990 6,817
Tangible capital ....................... 24,990 6,817
26
<PAGE>
AT OR FOR
THE YEARS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
------------- -------------
AVERAGE CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION DATA:
Total assets ................................. $ 137,389 $ 56,406
Investment securities(1) ..................... 47,208 15,300
Mortgage-backed securities(1) ................... 32,816 8,337
Total loans .................................. 51,754 30,373
Allowance for loan losses .................... (675) (574)
Total deposits ............................... 104,909 39,915
Total stockholders' equity ................... 11,151 5,922
PERFORMANCE RATIOS:
Return on average assets ..................... 0.07% 1.08%
Return on average equity ..................... 0.91 10.28
Equity to assets ............................. 8.12 10.50
Net interest margin .......................... 2.02 2.68
Efficiency ratio(2) .......................... 100.48 86.02
ASSET QUALITY DATA:
Non-performing assets to total assets, ....... 0.11 0.30
at period end
Non-performing loans to total loans, at period 0.03 0.81
end
Net charge-offs to average total loans ....... 0.03 1.18
Allowance for loan losses to:
Total loans .................................. 0.77% 2.03%
Non-performing loans ......................... 2,565.22 251.30
Non-performing loans ......................... $ 23 $ 230
Non-performing assets ........................ 210 320
Allowance for loan losses .................... 590 578
CAPITAL RATIOS OF THE BANK:
Leverage ratio ............................... 10.52% 5.87%
Tier 1 risk-based capital ratio .............. 27.62 18.41
Total risk-based capital ratio ............... 28.41 19.66
- -----------------------
(1) Consists of securities classified as available-for-sale, held-to-maturity
and for trading.
(2) Efficiency ratio consists of noninterest expense divided by
net interest income and noninterest income.
27
<PAGE>
FORWARD-LOOKING STATEMENTS
When used in this form 10-KSB and in future filings by the company with the
Securities and Exchange Commission (the "SEC"), in the company's press releases
or other public or shareholder communications, and in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result" "are expected to," "will continue," "is anticipated," "estimate,"
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties,
including, among other things, changes in economic conditions in the company's
market area, changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in the company's market area and competition,
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The company wishes to advise
readers that the factors listed above could affect the company's financial
performance and could cause the company's actual results for future periods to
differ materially from any opinions or statements expressed with respect to
future periods in any current statements.
The company does not undertake-and specifically declines any obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
GENERAL
The profitability of the company, and more specifically, the profitability of
its primary subsidiary Greater Atlantic Bank, depends primarily on its net
interest income. Net interest income is the difference between the interest
income it earns on its loans and investment portfolio, and the interest it pays
on interest-bearing liabilities, which consists mainly of interest paid on
deposits and borrowings.
The company's profitability is also affected by the level of its non-interest
income and operating expenses. Non-interest income consists primarily of gains
on sales of loans and available-for-sale investments, service charge fees and
commissions earned by non-bank subsidiaries. Operating expenses consist
primarily of salaries and employee benefits, occupancy-related expenses,
equipment and technology-related expenses and other general operating expenses.
The operations of the bank, and banking institutions in general, are
significantly influenced by general economic conditions and related monetary and
fiscal policies of regulatory agencies. Deposit flows and the cost of deposits
and borrowings are influenced by interest rates on competing investments and
general market rates of interest. Lending activities are affected by the demand
for financing real estate and other types of loans, which in turn are affected
by the interest rates at which such financing may be offered and other factors
affecting loan demand and the availability of funds.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
NET INCOME. Net income for the fiscal year ended September 30, 1999, amounted to
$101,000 or $0.07 per share compared to net income of $609,000 or $0.77 per
share for fiscal year 1998. The $508,000 decrease in net income over the
comparable period one year ago was due to an increase in noninterest expense
coupled with a decrease in income from mortgage-banking activities. The
increased noninterest expense reflects our continuing expansion and growth,
including substantially increased compensation, occupancy and promotional
expenses.
NET INTEREST INCOME. An important source of our earnings is net interest income,
which is the difference between income earned on interest-earning assets, such
as loans, investment securities and mortgage-backed securities, and interest
paid on interest-bearing sources of funds such as deposits and borrowings. The
level of net interest income is determined primarily by the relative average
balances of interest-earning assets and interest-bearing liabilities in
combination with the yields earned and rates paid upon them. The correlation
between the repricing of interest rates on assets and on liabilities also
influences net interest income.
28
<PAGE>
The following table presents a comparison of the components of interest income
and expense and net interest income.
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30, DIFFERENCE
--------------------------- -----------------------------
1999 1998 AMOUNT %
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income:
Loans ..................... $ 4,210 $ 2,631 $ $1,579 60.02%
Investments ............... 4,836 1,380 3,456 250.43
--------- --------- --------- ----------
Total ........................ 9,046 4,011 5,035 125.53
--------- --------- --------- ----------
Interest expense:
Deposits .................. 5,499 2,163 3,336 154.23
Borrowings ................ 881 400 481 120.25
--------- --------- --------- ----------
Total ........................ 6,380 2,563 3,817 148.93
--------- --------- --------- ----------
Net interest income .......... $ 2,666 $ 1,448 $ 1,218 84.12%
========= ========= ========= ==========
</TABLE>
Our growth in net interest income for fiscal year 1999 was due primarily to the
increase in average interest-earning assets resulting from our planned growth.
Although average interest-earning assets increased $77.8 million or 143.99% over
the comparable period one-year ago, a decline in the net interest margin (net
interest income divided by average interest-earning assets) of 66 basis points
limited the increase in net interest income. The decline in net interest margin
resulted from a significant increase in investments at a yield lower than could
have been obtained if the funds had been invested in loans.
Interest income for fiscal year 1999 increased $5.0 million from fiscal year
1998 primarily as a result of an increase in the average outstanding balances in
loans, investment securities and mortgage-backed securities resulting in large
measure from the planned leveraging of our capital. The increase in interest
income from the loan portfolio for fiscal year 1999 compared to interest income
earned for fiscal 1998 resulted from an increase of $21.4 million in the average
balance of loans outstanding. That increase was coupled with an increase in
interest income from the investment and mortgage-backed securities portfolios,
resulting from an increase of $56.4 million in the average outstanding balance,
offset in part by a 57 basis point decrease in the average yield earned on the
portfolio.
The increase in interest expense on deposits and borrowed funds for fiscal year
1999 compared to 1998, was principally the result of a significant increase in
the average outstanding balances in total deposits and borrowed funds, offset in
part by a 22 basis point decrease in the average cost of funds. The increase in
interest expense on deposits was primarily due to an increase in average
certificates of deposit of $51.4 million, or 148.11%, from $34.7 million for
fiscal 1998 to $86.1 million for fiscal 1999, offset in part by a 29 basis point
decrease in the average rate paid from 5.56% for fiscal 1998 to 5.39% for fiscal
1999. The average rate we paid for deposits decreased from 5.42% for fiscal 1998
to 5.24% for fiscal 1999. That decrease in rate was offset by an increase of
$65.0 million in the average outstanding balance of deposits.
29
<PAGE>
COMPARATIVE AVERAGE BALANCES AND INTEREST INCOME ANALYSIS. The following table
presents the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
annualized rates. No tax-equivalent adjustments were made and all average
balances are average daily balances. Nonaccruing loans have been included in the
tables as loans carrying a zero yield.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------------------------------------------
1999 1998
----------------------------------- ---------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------------- --------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS: (DOLLARS IN THOUSANDS)
Interest-earning assets:
Real estate loans $ 45,090 $3,685 8.17% $29,079 $2,513 8.64%
Consumer loans 4,167 320 7.68 717 66 9.21
Commercial business loans 2,497 205 8.21 577 52 9.01
------------ ---------- ------ ------- ------ ------
Total loans 51,754 4,210 8.13 30,373 2,631 8.66
Investment securities 47,208 2,976 6.30 15,300 901 5.89
Mortgage-backed securities 32,816 1,860 5.67 8,337 479 5.75
------------ ---------- ------ ------- ------ ------
Total interest-earning assets 131,778 9,046 6.86 54,010 4,011 7.43
---------- ------ ------ ------
Non-earning assets 5,611 2,396
------------ -------
Total assets $ 137,389 $56,406
============ =======
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Savings accounts $ 1,079 $36 3.34% $ 844 $ 30 3.55%
Now and money market 17,688 841 4.75 4,352 168 3.86
accounts
Certificates of deposit 86,142 4,622 5.37 34,719 1,965 5.66
------------ ---------- ---- ------- ------ ----
Total deposits 104,909 5,499 5.24 39,915 2,163 5.42
FHLB advances 16,371 810 4.95 5,358 286 5.34
Other borrowings 1,301 71 5.46 2,015 114 5.66
------------ ---------- ---- ------- ------ ----
Total interest-bearing
liabilities 122,581 6,380 5.20 47,288 2,563 5.42
---------- ---- ------ ----
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 1,855 2,153
Other liabilities 1,802 1,043
------------ -------
Total liabilities 126,238 50,484
Stockholders' equity 11,151 5,922
------------ =======
Total liabilities and stockholders' equity $ 137,389 $56,406
============ =======
Net interest income $ 2,666 $1,448
========== ======
Interest rate spread 1.66% 2.01%
===== ==========
Net interest margin 2.02% 2.68%
===== ==========
</TABLE>
30
<PAGE>
RATE/VOLUME ANALYSIS. The following table presents certain information regarding
changes in interest income and interest expense attributable to changes in
interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities for the periods indicated. The change in interest
attributable to both rate and volume has been allocated to the changes in rate
and volume on a pro rata basis.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, 1999
VS. 1998
--------------------------------
CHANGE ATTRIBUTABLE TO
--------------------------------
VOLUME RATE TOTAL
--------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans $ 1,384 $ (212) $1,172
Consumer loans 318 (64) 254
Commercial business loans 173 (20) 153
--------- ------ ------
Total loans 1,875 (296) 1,579
Investments 1,879 196 2,075
Mortgage-backed securities 1,406 (25) 1,381
--------- ------ ------
Total interest-earning assets $ 5,160 $ (125) $5,035
========= ====== ======
Savings accounts $ 8 $ (2) $ 6
Now and money market accounts 515 158 673
Certificates of deposit 2,910 (253) 2,657
--------- ------ ------
Total deposits 3,433 (97) 3,336
FHLB advances 588 (64) 524
Other borrowings (40) (3) (43)
--------- ------ ------
Total interest-bearing liabilities $ 3,981 $ (164) $3,817
========= ====== ======
Change in net interest income $ 1,179 $ 39 $1,218
========= ====== ======
</TABLE>
PROVISION FOR LOAN LOSSES. The allowance for loan losses, which is established
through provisions for losses charged to expense, is increased by recoveries on
loans previously charged off and is reduced by charge-offs on loans. Determining
the proper reserve level or allowance involves management's judgment based upon
a review of factors, including the company's internal review process which
segments the loan portfolio into groups based on various risk factors including
the types of loans and asset classifications. Each segment is then assigned a
reserve percentage based upon the perceived risk in that segment. Although
management utilizes its best judgment in providing for probable losses, there
can be no assurance that the company will not have to increase its provisions
for loan losses in the future as a result of an adverse market for real estate
and economic conditions generally in the company's primary market area, future
increases in non-performing assets or for other reasons which would adversely
affect the company's results of operations.
The provision for loan losses decreased from $159,000 during fiscal 1998 to
$26,000 during fiscal 1999. The reduction in the provision is directly related
to an improvement in credit quality over that time period coupled with a decline
in non-performing loans. Net charge-offs decreased from $357,000 during fiscal
1998 to $14,000 during fiscal 1999 as overall asset quality improved as new
management took a more aggressive posture in assessing collectibility of
classified loans. However, management expects charge-offs to increase in the
future as a result of the increase in it's total loan portfolio during fiscal
1999.
31
<PAGE>
NONINTEREST INCOME. The following table presents a comparison of the components
of noninterest income.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, DIFFERENCE
------------------------------- ---------------------------
1999 1998 AMOUNT %
-------------- ------------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest income:
Gain on sale of loans $ 5,408 $ 5,774 $ (366) (6.34)%
Service fees on loans 513 412 101 24.51
Service fees on deposits 110 25 85 340.00
Other operating income 50 58 (8) (13.79)
-------------- ------------- ------------ ----------
Total noninterest income $ 6,081 $ 6,269 $ (188) (3.00)%
============== ============= ============ ==========
</TABLE>
Noninterest income decreased during fiscal 1999, over the comparable period one
year ago primarily as a result of the decrease in gain on sale of loans.
Primarily attributable to the decline in the net margin recognized from the sale
of loans as interest rates continued to increase.
NONINTEREST EXPENSE. The following table presents a comparison of the components
of noninterest expense.
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30, DIFFERENCE
---------------------------- ----------------------------
1999 1998 AMOUNT %
--------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Noninterest expense: (DOLLARS IN THOUSANDS)
Compensation and employee benefits ... $4,523 $3,748 $ 775 20.68%
Occupancy ............................ 914 498 416 83.53
Professional services ................ 388 193 195 101.04
Advertising .......................... 661 568 93 16.37
Deposit insurance premium ............ 64 95 (31) (32.63)
Furniture, fixtures and equipment .... 412 203 209 102.96
Data processing ...................... 184 132 52 39.39
Loss from foreclosed real estate ..... 19 34 (15) (44.12)
Other operating expense .............. 1,624 1,167 457 39.16
-------------- ----------- ------------- -----------
Total noninterest expense ............... $8,789 $6,638 $2,151 32.40%
============== =========== ============= ===========
</TABLE>
Compensation and employee benefits increased from the prior year mainly because
of increased staffing in the branch network, the hiring of additional
administrative staff and the related employee benefit costs associated with the
increase in compensation. Net occupancy expenses increased from fiscal 1998 to
fiscal 1999 due to the development of the branch network which increased from
two branches as of September 30, 1998 to five branches as of September 30, 1999,
as well as the acquisition of additional administrative space to handle the
current and planned growth of the bank. The increase in advertising expense from
fiscal 1998 to fiscal 1999 reflects the company's increased marketing efforts
relating to both deposit and loan products. Other operating expenses increased
in fiscal 1999 compared to fiscal 1998 primarily due to the costs associated
with the branch expansion program.
INCOME TAXES. The company files a consolidated federal income tax return with
its subsidiaries and computes its income tax provision or benefit on a
consolidated basis. The income tax benefit in fiscal 1999 amounted to $169,000
compared to a provision of $311,000 in fiscal 1998.
We recorded a net deferred tax asset of $1.3 million, at September 30, 1999.
Based on past operating performance under current management, we believe that it
is more likely than not that the net asset recorded will be realized.
32
<PAGE>
At September 30, 1999, the company had net operating loss carry forwards for
federal income tax purposes of approximately $1.7 million which are available to
offset future federal taxable income, if any, through 2011. As a result of the
change in ownership of the bank, the amount of any tax loss carryforward usage
is restricted to an annual limitation of approximately $114,000.
ASSET-LIABILITY MANAGEMENT
The primary objective of asset/liability management is to ensure the steady
growth of the company's primary earnings component, net interest income and the
maintenance of reasonable levels of capital independent of fluctuating interest
rates. Interest rate risk can be defined as the vulnerability of an
institution's financial condition and/or results of operations to movements in
interest rates. Interest rate risk, or sensitivity, arises when the maturity or
repricing characteristics of assets differ significantly from the maturity or
repricing characteristics of liabilities. Management endeavors to structure the
balance sheet so that repricing opportunities exist for both assets and
liabilities in roughly equivalent amounts at approximately the same time
intervals to maintain interest rate risk at an acceptable level.
Management oversees the asset/liability management function and meets
periodically to monitor and manage the structure of the balance sheet, control
interest rate exposure, and evaluate pricing strategies for the company. The
asset mix of the balance sheet is continually evaluated in terms of several
variables: yield, credit quality, appropriate funding sources and liquidity.
Management of the liability mix of the balance sheet focuses on expanding the
company's various funding sources. At times, depending on the level of general
interest rates, the relationship between long- and short-term interest rates,
market conditions and competitive factors, the bank may determine to increase
our interest rate risk position in order to increase our net interest margin.
The bank monitors interest rate risk and adjust the composition of
interest-related assets and liabilities in order to limit our exposure to
changes in interest income over time.
The bank manage it's exposure to interest rates by structuring the balance sheet
in the ordinary course of business. The bank currently emphasize adjustable rate
loans and/or loans that mature in a relatively short period when compared to
single-family residential loans. In addition, to the extent possible, the bank
attempts to attract longer-term deposits. The bank has not entered into
instruments such as leveraged derivatives, structured notes, interest rate
swaps, caps, floors, financial options, financial futures contracts or forward
delivery contracts for the purpose of reducing interest rate risk.
One of the ways the bank monitors interest rate risk is through an analysis of
the relationship between interest-earning assets and interest-bearing
liabilities to measure the impact that future changes in interest rates will
have on net interest income. An interest rate sensitive asset or liability is
one that, within a defined time period, either matures or experiences an
interest rate change in line with general market interest rates. The management
of interest rate risk is performed by analyzing the maturity and repricing
relationships between interest-earning assets and interest-bearing liabilities
at specific points in time ("GAP") and by analyzing the effects of interest rate
changes on net interest income over specific periods of time by projecting the
performance of the mix of assets and liabilities in varied interest rate
environments.
33
<PAGE>
The table below illustrates the maturities or repricing of the company's assets
and liabilities, including noninterest-bearing sources of funds to specific
periods at September 30, 1999. Estimates and assumptions concerning prepayment
rates of major asset categories are based on information obtained from the FHLB
of Atlanta on projected prepayment levels on mortgage-backed and related
securities and decay rates on savings, now and money market accounts. The bank
believes that such information is consistent with our current experience.
<TABLE>
<CAPTION>
MATURING OR REPRICING PERIODS 91 DAYS 181 DAYS ONE YEAR THREE YEARS FIVE
90 DAYS TO TO TO TO YEARS
OR LESS 180 DAYS ONE YEAR THREE YEARS FIVE YEARS OR MORE TOTAL
- ------------------------------------------------------- ----------- ----------- ----------- ------------- --------- ----------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable and balloon (1) $ 13,273 $ 909 $ 4,112 $ 4,400 $ 3,092 $ 7,103 $ 32,889
Fixed-rate (2) 8,576 877 1,698 6,021 4,967 13,600 35,739
Second mortgages (3) 179 99 177 516 301 325 1,597
Commercial business 2,329 60 119 451 211 - 3,170
Consumer 7,218 121 121 - - - 7,460
Investment securities 42,203 - - 5,127 - 14,965 62,295
Mortgage-backed securities 7,812 3,781 9,427 7,943 5,728 8,321 43,012
----------- ---------- --------- ---------- ---------- ------- ---------
Total $ 81,590 $ 5,847 $ 15,654 $ 24,458 $ 14,299 $44,314 $ 186,162
----------- ---------- --------- ---------- ---------- ------- ---------
INTEREST-BEARING LIABILITIES:
Deposits:
Savings accounts $ 67 $ 64 $ 119 $ 380 $ 248 $ 497 $ 1,375
Now accounts 174 155 261 541 145 320 1,596
Money market accounts 8,258 5,590 6,346 2,812 1,339 1,216 25,561
Certificates of deposit 15,936 30,078 31,494 16,370 1,001 - 94,879
Borrowings:
FHLB advances 27,650 - 10,000 - - - 37,650
Other borrowings 5,741 - - - - - 5,741
----------- ---------- --------- ---------- ---------- ------- ---------
Total $ 57,826 $ $35,887 $ 48,220 $ 20,103 $ 2,733 $2,033 $ 166,802
----------- ---------- --------- ---------- ---------- ------- ---------
GAP $ 23,764 $ (30,040) $ (32,566) $ 4,355 $ 11,566 $42,281 $ 19,360
=========== ========== ========= ========== ========== ======= =========
CUMULATIVE GAP $ 23,764 $ (6,276) $ (38,842) $ (34,487) $ (22,921) $19,360
=========== ========== ========= ========== ========== =======
RATIO OF CUMULATIVE GAP TO TOTAL ASSETS
11.95% (3.16)% $ (19.54)% (17.35)% (11.53)% 9.74%
=========== ========== ========= ========== ========== =======
</TABLE>
- --------------------
(1) Includes $656,000 of loans held for sale in the 90 days or less repricing
period.
(2) Includes $7.0 million of loans held for sale in the 90 days or less
repricing period.
(3) Includes $51,000 of loans held for sale in the 90 days or
less repricing period.
As indicated in the interest rate sensitivity table, the twelve-month cumulative
gap, representing the total net assets and liabilities that are projected to
re-price over the next twelve months, was liability sensitive in the amount of
$38.8 million at September 30, 1999.
While the GAP position is a useful tool in measuring interest rate risk and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates solely on the measure, without
accounting for alterations in the maturity or repricing characteristics of the
balance sheet that occur during changes in market interest rates. The GAP
position reflects only the prepayment assumptions pertaining to the current rate
environment and assets tend to prepay more rapidly during periods of declining
interest rates than during periods of rising interest rates.
34
<PAGE>
Management uses two other analyses to manage interest rate risk: (1) an earnings
at risk analysis to develop an estimate of the direction and magnitude of the
change in net interest income if rates move up or down 100 to 300 basis points;
and (2) a value-at-risk analysis to estimate the direction and magnitude of the
change in net portfolio value if rates move up or down 100 to 200 basis points.
Currently the bank uses a sensitivity of net interest income analysis prepared
by the FHLB of Atlanta to measure earnings-at-risk and the OTS Interest Rate
Risk Exposure Report to measure value-at-risk.
The following table sets forth the earnings at risk analysis that measures the
sensitivity of net interest income to changes in interest rates at September 30,
1999:
Net Interest Income Sensitivity Analysis
---------------------------------------------------------------------
Basis Point Percent
Changes in Net Interest Change Change from
Rate (bp) Margin from Base Base
---------------- --------------- --------------- ----------------
+ 300 1.92% (0.25)% (11.52)%
+ 200 2.03% (0.14) (6.45)
+ 100 2.12% (0.05) (2.30)
- 2.17% - -
- 100 2.24% 0.07 3.23
- 200 2.32% 0.15 6.91
- 300 2.41% 0.24 11.06
The table indicates that, if interest rates increase 200 basis points, net
interest margin, as measured as a percent of total assets, would decrease by 14
basis points or 6.45%. Conversely, if interest rates decrease 200 basis points
net interest margin, as a percent of total assets, would increase by 15 basis
points or 6.91%.
The net interest income sensitivity analysis does not represent a forecast and
should not be relied upon as being indicative of expected operating results. The
estimates used are based upon the assumption as to the nature and timing of
interest rate levels including the shape of the yield curve. These estimates
have been developed based upon current economic conditions; the company cannot
make any assurances as to the predictive nature of these assumptions including
how customer preferences or competitor influences might change.
35
<PAGE>
Presented below, as of September 30, 1999, is an analysis of our interest rate
risk as measured by changes in NPV for parallel shifts of 200 basis points in
market interest rates:
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE
AS A PERCENT OF THE PRESENT
NET PORTFOLIO VALUE VALUE OF ASSETS
--------------------------- ------------------------------
CHANGES IN DOLLAR PERCENT NET PORTFOLIO CHANGE IN
RATES (BP) CHANGE CHANGE VALUE RATIO NPV RATIO
---------- ------ ------ ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+ 200 $(6,932) (38.12)% 6.03% (3.30)%
+ 100 (3,319) (18.25) 7.78 (1.54)
- - - 9.33 -
- 100 2,776 15.27 10.56 1.23
- 200 4,876 26.81 11.45 2.12
</TABLE>
The decline in net portfolio value of $6.9 million or 38.12% in the event of a
200 basis point increase in rates is a result of the current amount of fixed
rate loans held by the bank as of September 30, 1999. the foregoing decline in
NPV in the event of an increase in interest rates of 200 basis points currently
exceeds the company's internal board guidelines.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The bank's primary sources of funds are deposits, principal and
interest payments on loans, mortgage-backed and investment securities and
borrowings. While maturities and scheduled amortization of loans are predictable
sources of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition. The bank has
continued to maintain the required levels of liquid assets as defined by OTS
regulations. This requirement of the OTS, which may be changed 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 bank's currently required
liquidity ratio is 4.00%. At September 30, 1999, the bank's actual liquidity
ratio was 16.83%. The bank manages its liquidity position and demands for
funding primarily by investing excess funds in short-term investments and
utilizing FHLB advance and reverse repurchase agreements in periods when the
bank's demands for liquidity exceed funding from deposit inflows.
The bank's most liquid assets are cash and cash equivalents, securities
available-for-sale and trading securities. The levels of these assets are
dependent on the bank's operating, financing, lending and investing activities
during any given period. At September 30, 1999, cash and cash equivalents and
securities available-for-sale totaled $77.2 million, or 38.81% of total assets.
The primary investing activities of the bank are the origination of residential
one- to four-family loans, commercial real estate loans, real estate
construction and development loans, commercial borrowing and consumer loans and
the purchase of United States Treasury and agency securities, mortgage-backed
and mortgage-related securities and other investment securities. During the year
ended September 30, 1999, the bank's loan originations totaled $365.8 million.
Purchases of United States Treasury and agency securities, mortgage-backed and
mortgage related securities and other investment securities totaled $87.0
million for the year ended September 30, 1999.
36
<PAGE>
The bank has other sources of liquidity if a need for additional funds arises.
At September 30, 1999, the bank had $37.7 million in advances outstanding from
the FHLB and had an additional overall borrowing capacity from the FHLB of $9.3
million at that date. Depending on market conditions, the pricing of deposit
products and FHLB advances, the bank may continue to rely on FHLB borrowings to
fund asset growth.
At September 30, 1999, the bank had commitments to fund loans and unused
outstanding lines of credit, unused standby letters of credit and undisbursed
proceeds of construction mortgages totaling $27.9 million. The bank anticipates
that it will have sufficient funds available to meet its current loan
origination commitments. Certificate accounts, including IRA and Keogh accounts,
which are scheduled to mature in less than one year from September 30, 1999,
totaled $77.5 million. Based upon experience, management believes the majority
of maturing certificates of deposit will remain with the bank. In addition,
management of the bank believes that it can adjust the rates offered on
certificates of deposit to retain deposits in changing interest rate
environments. In the event that a significant portion of these deposits are not
retained by the bank, the bank would be able to utilize FHLB advances and
reverse repurchase agreements to fund deposit withdrawals, which would result in
an increase in interest expense to the extent that the average rate paid on such
borrowings exceeds the average rate paid on deposits of similar duration.
Capital Resources. At September 30, 1999, the bank exceeded all minimum
regulatory capital requirements with a tangible capital level of $20.8 million,
or 10.52% of total adjusted assets, which is above the required level of $3.0
million, or 1.50%; core capital of $20.8 million, or 10.52% of total adjusted
assets, which is above the required level of $7.9 million, or 4.00%; and
risk-based capital of $21.4 million, or 28.41% of risk-weighted assets, which is
above the required level of $6.0 million, or 8.00%.
YEAR 2000 COMPLIANCE
As the year 2000 ("Year 2000") approaches, an important business issue has
emerged regarding how existing computer application software programs and
operating systems can accommodate change from the 1900s to the year 2000. Many
existing application software products are designed to accommodate the date
field, the year, with only two digits. If not corrected, many computer
applications and systems could fail or create erroneous results by or at the
Year 2000 (the "Year 2000 Issue"). With respect to the bank, computer systems
are used to perform financial calculations, track deposits and loan payments,
transfer funds and make direct deposits. Computer software and computer chips
also are used to run security systems, communications networks and other
essential equipment of the bank. While the bank maintains an internal computer
system for many operating functions, the majority of the bank's data processing
is out-sourced to a third party vendor. To become Year 2000 compliant, the bank
is following guidelines suggested by federal bank regulatory agencies and the
Securities and Exchange Commission (the "SEC"). A description of each of the
steps and the status of the bank's efforts in completing the steps is as
follows:
In July 1997, the bank formed a Year 2000 Committee (the "Y2K Committee") and in
connection therewith has adopted a Year 2000 Policy. The Y2K Committee has
prepared a matrix representing an overview of all systems or relationships that
could be affected by the Year 2000 Issue and has identified potential problems
associated with the Year 2000 Issue. From this, the Y2K Committee has developed
and implemented a plan designed to ensure that all software used in connection
with the bank's business will manage and manipulate data involving the date
transition from 1999 to 2000 and thereafter without functional or data
abnormality and without inaccurate results related to such data.
37
<PAGE>
The bank's ability to be Year 2000 compliant depends in large part upon the
cooperation of its vendors and customers. The bank has required its third-party
computer systems and software vendors to represent that the products provided
are or will be Year 2000 compliant and has planned and implemented a program of
testing for compliance. In addition, the company has received representations
from its primary third-party data processing vendor that it has resolved all
Year 2000 problems in its software and is Year 2000 compliant. The bank has
identified and instituted all systems that could be affected by the Year 2000
Issue, including a review of all major information technology and
non-information technology systems to determine how Year 2000 Issues affect
them. In connection with this system-wide review, the company has conducted an
assessment of which systems and equipment are most prone to placing the bank at
risk if they are not Year 2000 compliant (i.e., "mission-critical" systems). The
bank has completed testing of most of its mission critical systems as well as
its minor hardware and software systems. The results confirmed that the
applications tested were Year 2000 compliant. All Year 2000 issues for the bank,
including testing and remediation, were completed by June 30, 1999. The bank has
prepared Year 2000 brochures that are supplied in all branches and distributed
to customers making them aware of the Year 2000 issue and the bank's
preparations.
The bank's operations also may be affected by the Year 2000 compliance of its
significant suppliers and other vendors, including those vendors who provide
non-information and technology systems. To a lesser extent, the bank's
operations could be affected by the Year 2000 compliance of multi-family or
commercial borrowers. The bank has begun the process of requesting information
related to the Year 2000 compliance of its significant suppliers and other
vendors. However, the bank does not currently have complete information
concerning the compliance status of some of its significant suppliers and other
vendors. In the event that any of the bank's significant suppliers or other
vendors do not successfully achieve Year 2000 compliance in a timely manner, the
bank's business or operations could be adversely affected. Accordingly, the bank
has prepared a contingency plan, if required, in the event that there are any
system interruptions and is preparing a business resumption plan providing for
manual maintenance of critical accounts in the event of failure. There can be no
assurances, however, that implementation of that plan, if required, will be
effective to remedy all potential problems.
To the extent that the bank's systems are not fully Year 2000 compliant, there
can be no assurance that potential systems interruptions or the cost necessary
to update software would not have a materially adverse effect on the bank's
business, financial condition, results of operations, cash flows or business
prospects. The bank's efforts to become Year 2000 compliant are monitored by its
federal banking regulators. Failure to be Year 2000 compliant could subject the
bank to formal supervisory or enforcement actions. The bank presently believes
that the Year 2000 Issue will not pose significant operating problems for the
bank. However, if implementation and testing plans are not completed in a
satisfactory and timely manner by third parties on whom the bank depends, or if
other unforseen problems arise, then the Year 2000 Issue could potentially have
an adverse effect on the operations of the bank.
RECENT ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair market value. Under certain circumstances, a portion
of the derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into income when the
transaction affects earnings. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
The company will be required to adopt SFAS 133 by October 1, 2000. Presently,
38
<PAGE>
the company does not use derivative instruments either in hedging activities or
as investments. Accordingly, the company believes that adoption of SFAS 133 will
have no material impact on its financial position or results of operation.
In October 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 134, "Accounting for Mortgage Backed
Securities Retained After the Securitization of Mortgage Loans Held For Sale By
A Mortgage Banking Enterprise" ("SFAS 134"). SFAS 134 establishes accounting and
reporting standards for certain activities of mortgage banking enterprises and
other enterprises that conduct operations that are substantially similar to the
primary operations of a mortgage banking enterprise. This statement requires
that after the securitization of mortgage loans held for sale, an entity engaged
in mortgage banking activities classify the resulting mortgage-backed securities
or other retained interests based on its ability and intent to sell or hold
those investments. The company will be required to adopt SFAS 134 during the
quarter ended December 31,1999. Presently, the company's mortgage banking
company does not securitize mortgage loans held for sale. Accordingly, the
company believes that adoption of SFAS 134 will have no material impact on its
financial position or results of operations.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements of Greater Atlantic Financial Corp. and
subsidiary as of September 30, 1999 and 1998 are included in pages 40 through 74
of this report.
39
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
PAGE
----
INDEPENDENT AUDITORS' REPORT ..............................................41
FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES:
Consolidated statements of financial condition .......................42
Consolidated statements of operations ................................43
Consolidated statements of comprehensive income ......................44
Consolidated statements of stockholders' equity ......................45
Consolidated statements of cash flows ................................46
Notes to consolidated financial statements ...........................48
40
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
GREATER ATLANTIC FINANCIAL CORP.
Reston, Virginia
We have audited the accompanying consolidated statements of financial condition
of GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES as of September 30, 1999
and 1998, and the related statements of operations, comprehensive income,
stockholders' 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial condition of GREATER ATLANTIC FINANCIAL
CORP. AND SUBSIDIARIES at September 30, 1999 and 1998, and the results of its
operations and its cash flows for the years then ended.
Washington, D.C.
October 29, 1999
41
<PAGE>
<TABLE>
<CAPTION>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
---------------------------------
1999 1998
-------------- ----------------
(dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,064 $ 433
Interest bearing deposits 639 --
Investment securities (Notes 3 and 10)
Available-for-sale 75,458 51,171
Held-to-maturity 32,766 --
Trading -- 241
Loans held for sale (Note 4) 7,436 25,322
Loans receivable, net (Notes 4, 10 and 16) 72,792 25,510
Accrued interest and dividends receivable (Note 5) 1,449 855
Deferred income taxes (Note 11) 1,324 997
Federal Home Loan Bank stock, at cost 2,013 1,100
Foreclosed real estate (Note 7) 187 90
Premises and equipment, net (Note 6) 2,218 758
Prepaid expenses and other assets 1,477 865
--------- ---------
$ 198,823 $ 107,342
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 8) $ 129,007 $ 76,311
Advance payments from borrowers for taxes and insurance 264 248
Accrued expenses and other liabilities (Note 9) 1,171 1,814
Income taxes payable -- 152
Advances from the FHLB and other borrowings (Note 10) 43,391 22,000
--------- ---------
TOTAL LIABILITIES 173,833 100,525
--------- ---------
Commitments and contingencies (Note 12)
Stockholders' Equity (Note 14)
Preferred stock $.01 par value - 2,500,000 shares authorized, none -- --
outstanding at September 31, 1999
Common stock, $.01 par value - 10,000,000
shares authorized; 3,007,434 and 813,473
shares outstanding, respectively 30 8
Additional paid-in capital 25,132 6,093
Retained earnings 710 609
Accumulated other comprehensive (loss) income (882) 107
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 24,990 6,817
--------- ---------
$ 198,823 $ 107,342
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
<TABLE>
<CAPTION>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended
September 30,
----------------------------
1999 1998
------- -------
(dollars in thousands)
Interest income
<S> <C> <C>
Loans $ 4,210 $ 2,631
Investments 4,836 1,380
------- -------
Total interest income 9,046 4,011
------- -------
Interest expense
Deposits (Note 8) 5,499 2,163
Borrowed money 881 400
------- -------
Total interest expense 6,380 2,563
------- -------
Net interest income 2,666 1,448
Provision for loan losses (Note 4) 26 159
------- -------
Net interest income after provision for loan losses 2,640 1,289
------- -------
Noninterest income
Fees and service charges 673 495
Gain on sale of loans 5,408 5,774
------- -------
Total noninterest income 6,081 6,269
------- -------
Noninterest expense
Compensation and employee benefits 4,523 3,748
Occupancy 914 498
Professional services 388 193
Advertising 661 568
Deposit insurance premium 64 95
Furniture, fixtures and equipment 412 203
Data processing 184 132
Provision for (recovery of) loss on real estate owned (Note7) (6) 5
Other real estate owned expenses (Note 7) 25 29
Other operating expenses 1,624 1,167
------- -------
Total noninterest expense 8,789 6,638
------- -------
Income (loss) before income tax provision (68) 920
------- -------
Income tax (benefit) provision (Note 11) (169) 311
------- -------
Net income $ 101 $ 609
------- -------
Basic and diluted earnings per share (Note 15) $ 0.07 $ 0.77
======= =======
</TABLE>
43
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Years ended
September 30,
------------------------
1999 1998
------------ ----------
(in thousands)
Net income $ 101 $ 609
----------- ----------
Other comprehensive income, net of tax:
Unrealized (losses) gains on securities (989) 107
---------- ----------
Other comprehensive (loss) income (989) 107
---------- ----------
Comprehensive (loss) income $ (888) $ $716
========== ==========
See accompanying notes to consolidated financial statements.
44
<PAGE>
<TABLE>
<CAPTION>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Additional Accumulated Other Total
Preferred Common Paid-in Earnings Comprehensive Stockholders'
Stock Stock Capital (Deficit) Income Equity
------------- ----------- ------------- ---------------- ------------------ -----------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1997 $ 1,873 $ 3 $ 3,902 $ (4,214) $ - $ 1,564
Sale of stock by
former investors (Note 2) (1,873) (3) (3,902) 4,214 - (1,564)
Issuance of 813,473
common shares - 8 6,093 - - 6,101
Other comprehensive
income, net of tax of $66 - - - - 107 107
Net income - - - $ 609 - 609
------------ --------- ------------- ------------ ------------ ------------
Balance at September 30, 1998 - 8 6,093 609 107 6,817
Issuance of 8,961
common shares - 75 75
Issuance of 2,185,000 common
shares net of related
expenses of $1.8 million 22 18,964 - - 18,986
Net income - - - 101 - 101
Other comprehensive
income, net of tax
of $146,441 (unaudited)
income, net of tax of $470 - - - - (989) (989)
------------ --------- ------------- ------------ ------------ ------------
Balance at September 30, 1999 $ - $ 30 $ 25,132 $ 710 $ (882) $ 24,990
============ ========= ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Years ended September 30, 1999 1998
- --------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 101 $ 609
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Provision for loan losses 26 159
Provision (recovery) for losses on foreclosed assets (6) 5
Depreciation and amortization 321 133
Deferred income taxes (327) (274)
Purchases of trading securities -- (247)
Proceeds from sale of trading securities 243 --
Unrealized loss (gain) on trading securities (6) 6
Realized gain on sale of investments (13) --
Amortization of excess of purchase price over net assets acquired -- 20
Amortization of security premiums 531 274
Amortization of deferred fees (91) (61)
Discount accretion net of premium amortization 1 7
Loss on disposal of fixed assets -- 2
Loss on sale of foreclosed real estate 4 1
Gain on sale of loans held for sale (5,408) (5,774)
(Increase) decrease in assets:
Disbursements for origination of loans (294,776) (252,603)
Proceeds from sales of loans 318,062 243,002
Accrued interest and dividend receivable (594) (648)
Prepaid expenses and other assets (605) (469)
Deferred loan fees collected, net of deferred costs incurred (49) (227)
Increase (decrease) in liabilities:
Accrued expenses and other liabilities (643) 1,570
Income taxes payable 318 86
--------- ---------
Net cash provided by (used in) operating activities $ 17,089 $ (14,429)
--------- ---------
</TABLE>
46
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Years ended September 30, 1999 1998
- -------------------------------------------------------------------------------------------
(in thousands)
CASH FLOW FROM INVESTING ACTIVITIES
<S> <C> <C>
Net increase in loans $ (47,362) $ (6,402)
Purchases of premises and equipment (1,781) (664)
Proceeds from sales of foreclosed real estate 99 97
Purchases of investment securities (87,032) (55,972)
Proceeds from sale of investment securities 4,820 --
Proceeds from repayments of investment securities 23,186 5,704
Purchases of FHLB stock (7,019) (758)
Proceeds from sale of FHLB stock 6,106 73
Acquisition, net of cash acquired -- (2,368)
--------- ---------
Net cash used in investing activities (108,983) (60,290)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in deposits 52,696 47,932
Issuance of common shares 22 6,101
Net initial public offering proceeds from sale of common stock 19,039 --
Net advances from FHLB 21,391 20,750
Increase in advance payments by borrowers for taxes and insurance 16 129
--------- ---------
Net cash provided by financing activities 93,164 74,912
--------- ---------
Increase in cash and cash equivalents 1,270 193
--------- ---------
Cash and cash equivalents, at beginning of period 433 240
--------- ---------
Cash and cash equivalents, at end of period $ 1,703 $ 433
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Greater Atlantic Financial Corp. (GAFC, or the "Company") is a bank holding
company whose principal activity is the ownership and management of Greater
Atlantic Bank, (GAB or "the Bank"), and its wholly-owned subsidiary, Greater
Atlantic Mortgage Corporation (GAMC). Effective October 1, 1997, GAFC acquired
100% of the outstanding shares of Greater Atlantic Savings Bank, FSB from
Greater Atlantic Corporation (the predecessor corporation) and changed the name
to Greater Atlantic Bank, (See Note 2). The Bank generates commercial, mortgage
and consumer loans and receives deposits from customers located primarily in
Virginia, Washington, D.C. and Maryland. The Bank operates under a federal bank
charter and provides full banking services.
GAMC was incorporated as a separate entity on June 11, 1998 and began
independent operations on September 1, 1998. GAMC is involved primarily in the
origination and sale of single-family mortgage loans and, to a lesser extent,
multi-family residential and second mortgage loans. GAMC also originates loans
for the Bank's portfolio.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements included the accounts of GAFC and its
wholly owned subsidiaries, GAB and GAMC. All significant intercompany accounts
and transactions have been eliminated in consolidation.
RISK AND UNCERTAINTIES
In its normal course of business, the Company encounters two significant types
of risk: economic and regulatory. There are three main components of economic
risk: interest rate risk, credit risk and market risk. The Company is subject to
interest rate risk to the degree that its interest-bearing liabilities mature or
reprice more rapidly, or on a different basis, than its interest-earning assets.
Credit risk is the risk of default on the Company's loan portfolio that results
from the borrowers' inability or unwillingness to make contractually required
payments. Market risk reflects changes in the value of collateral underlying
loans receivable and the valuation of real estate held by the Company. The
determination of the allowance for loan losses and the valuation of real estate
are based on estimates that are particularly susceptible to significant changes
in the economic environment and market conditions. Management believes that, as
of September 30, 1999 and September 30, 1998, the allowance for loan losses and
valuation of real estate are adequate based on information currently available.
A worsening or protracted economic decline would increase the likelihood of
losses due to credit and market risks and could create the need for substantial
additional loan loss reserves. See discussion of regulatory matters in Note 13.
48
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONCENTRATION OF CREDIT RISK
The Company's primary business activity is with customers located in Maryland,
Virginia and the District of Columbia. The Company primarily originates
residential loans to customers throughout these areas, most of whom are
residents local to the Company 's business locations. The Company has a
diversified loan portfolio consisting of residential, commercial and consumer
loans. Commercial and consumer loans generally provide for higher interest rates
and shorter terms, however such loans have a higher degree of credit risk.
Management monitors all loans, including, when possible, making inspections of
the properties, maintaining current operating statements, and performing net
realizable value calculations, with allowances for losses established as
necessary to properly reflect the value of the properties. Management believes
the current loss allowances are sufficient to cover the credit risk estimated to
exist at September 30, 1999.
INVESTMENT SECURITIES
Investment securities which the Company has the intent and ability to hold to
maturity are carried at amortized cost. The amortization of premiums and
accretion of discounts are recorded on the level yield (interest) method, over
the period from the date of purchase to maturity. When sales do occur, gains and
losses are recognized at the time of sale and the determination of cost of
securities sold is based upon the specific identification method. Investment
securities which the Company intends to hold for indefinite periods of time, use
for asset/liability management or that are to be sold in response to changes in
interest rates, prepayment risk, the need to increase regulatory capital or
other similar factors are classified as available-for-sale and carried at fair
value with unrealized gains and losses excluded from earnings and reported in a
separate component of stockholders' equity. If a sale does occur, gains and
losses are recognized as a component of earnings at the time of the sale. The
amortization of premiums and accretion of discounts are recorded on the level
yield method.
Investment securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities and reported
at fair value, with unrealized gains and losses included in earnings.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans receivable are stated at unpaid principal balances, net of unearned
discounts resulting from add-on interest, participation or whole-loan interests
owned by others, un-disbursed loans in process, deferred loan fees, and
allowances for loan losses.
Loans are placed on non-accrual status when the principal or interest is past
due more than 90 days or when, in management's opinion, collection or principal
and interest is not likely to be made in accordance with a loan's contractual
terms.
49
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The allowance for loan losses provides for the risk of losses inherent in the
lending process. The allowance for loan losses is based on periodic reviews and
analyses of the loan portfolio which include consideration of such factors as
the risk rating of individual credits, the size and diversity of the portfolio,
economic conditions, prior loss experience and results of periodic credit
reviews of the portfolio. The allowance for loan losses is increased by
provisions for loan losses charged against income and reduced by charge-offs,
net of recoveries. In management's judgment, the allowance for loan losses is
considered adequate to absorb losses inherent in the loan portfolio.
The Company considers a loan to be impaired if it is probable that they will be
unable to collect all amounts due (both principal and interest) according to the
contractual terms of the loan agreement. When a loan is deemed impaired, the
Company computes the present value of the loan's future cash flows, discounted
at the effective interest rate. The effective rate used is the contractual rate
adjusted for any deferred fees, deferred costs, premiums or discounts existing
at origination. If the present value is less than the carrying value of the
loan, a valuation allowance is recorded. For collateral dependent loans, the
Company uses the fair value of the collateral, less estimated costs to sell, on
a discounted basis, to measure impairment.
Mortgage loans originated and intended for sale are carried at the lower of cost
or estimated market value in the aggregate. Net unrealized losses are recognized
in a valuation allowance by charges to income.
MORTGAGE LOAN INCOME, DISCOUNTS AND PREMIUMS
Interest income on loans is recorded on the accrual method. Discounts and
premiums relating to mortgage loans purchased are deferred and amortized against
or accreted into income over the estimated lives of the loans using the
level-yield method. Accrual of interest is discontinued and an allowance for
uncollected interest is established and charged to interest income for the full
amount of accrued interest receivable on loans which are delinquent for a period
of 90 days or more.
LOAN ORIGINATION AND COMMITMENT FEES
Loan origination and commitment fees and certain incremental direct loan
origination costs are being deferred with the net amount being amortized as an
adjustment of the related loan's yield. The Company is amortizing those amounts
over the contractual life of the related loans as adjusted for anticipated
prepayments using current and past payment trends.
MORTGAGE LOAN SALES AND SERVICING
The Company originates and sells loans and participating interest in loans
generally without retaining servicing rights. Loans are sold to provide the
Company with additional funds and to generate gains from mortgage banking
operations. Loans originated for sale are carried at the lower of cost or
market. When a loan and the related servicing are sold the Company recognizes
any gain or loss at the time of sale.
50
<PAGE>
When servicing is retained on a loan that is sold, the Company recognizes a gain
or loss based on the present value of the difference between the average
constant rate of interest it receives, adjusted for a normal servicing fee, and
the yield it must pay to the purchaser of the loan over the estimated remaining
life of the loan. Any resulting net premium is deferred and amortized over the
estimated life of the loan using a method approximating the level-yield method.
During the year ended September 30, 1998, no loans were sold with servicing
rights retained. Loans of $1.3 million were sold with servicing rights retained
as of September 30, 1999. The Company also sells participation interests in
loans that it services.
PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost. Depreciation is computed on the
straight-line method over useful lives ranging from five to seven years.
Leasehold improvements are capitalized and amortized using the straight-line
method over the life of the related lease. FORECLOSED REAL ESTATE
Real estate acquired through foreclosure is recorded at the lower of cost or
fair value less estimated selling costs. Subsequent to the date of foreclosure,
valuation adjustments are made, if required, to the lower of cost or fair value
less estimated selling costs. Costs related to holding the real estate, net of
related income, are reflected in operations when incurred. Recognition of gains
on sale of real estate is dependent upon the transaction meeting certain
criteria relating to the nature of the property sold and the terms of the sale.
INCOME TAXES
Income taxes are calculated using the liability method specified by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". ("SFAS
109") The net deferred tax asset is reduced, if necessary, by a valuation
allowance for the amount of any tax benefits that, based on available evidence,
are not expected to be realized. (See Note 11).
CASH AND CASH EQUIVALENTS
The Company considers cash and interest bearing deposits in other banks as cash
and cash equivalents for purposes of preparing the statement of cash flows.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130"), establishes standards for the reporting and
51
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS 130 is effective for financial statements for
periods beginning after December 15, 1997. The Company adopted SFAS 130 for the
twelve months ended September 30, 1998.
STOCK-BASED COMPENSATION
The Company measures compensation cost for stock options using the intrinsic
value method prescribed by APB Opinion No. 25, which requires compensation
expense be recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. The Company provides pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants as if the fair-value-based method defined in SFAS 123 had been applied.
See Note 14 of the notes to supplemental consolidated financial statements for
the pro forma net income and pro forma earnings per share disclosures.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
method of presentation. These reclassifications have no effect on the results of
operations previously reported.
2. ACQUISITION
Effective October 1, 1997, Greater Atlantic Financial Corp. purchased 100% of
the outstanding common and preferred shares of Greater Atlantic Savings Bank,
FSB from Greater Atlantic Corporation. The aggregate purchase price was
approximately $2.0 million excluding transaction expenses. The acquisition is
being accounted for as a purchase, and accordingly, the financial statements
include assets and liabilities acquired at fair value and results of operations
from the date of acquisition. As a result of this transaction, goodwill of
approximately $700,000 was recorded and was being amortized on a straight-line
basis over 15 years. In accordance with SFAS 109, when the Company reduced the
valuation allowance related to the deferred tax assets, it first reduced to zero
the goodwill related to the acquisition. (See Notes 11 and 19).
52
<PAGE>
<TABLE>
<CAPTION>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS
--------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE, SEPTEMBER 30, 1999
--------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES (in thousands)
Equity securities $11,958 $ 6 $ (361) $11,603
SBA Notes 21,414 23 (124) 21,313
FHLB Notes 3,000 -- (53) 2,947
CMO's 1,687 -- (18) 1,669
Corporate debt securities 2,454 48 (14) 2,488
--------------------------------------------------------------------------------------------------------------
40,513 77 (570) 40,020
--------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES
FNMA notes 26,869 18 (398) 26,489
GNMA notes 2,471 -- (35) 2,436
FHLMC notes 6,596 2 (85) 6,513
--------------------------------------------------------------------------------------------------------------
35,936 20 (518) 35,438
--------------------------------------------------------------------------------------------------------------
$76,449 $97 $(1,088) $75,458
==============================================================================================================
HELD-TO-MATURITY, SEPTEMBER 30, 1999
==============================================================================================================
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES (in thousands)
SBA Notes $23,990 $-- $ (523) $23,467
Corporate debt securities 1,047 -- (87) 960
--------------------------------------------------------------------------------------------------------------
25,037 -- (610) 24,427
--------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES
FNMA Notes 4,312 -- (83) 4,229
FHLMC Notes 3,417 -- (68) 3,349
--------------------------------------------------------------------------------------------------------------
7,729 -- (151) 7,578
--------------------------------------------------------------------------------------------------------------
$32,766 $-- $ (761) $32,005
==============================================================================================================
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVAILABLE-FOR-SALE, SEPTEMBER 30, 1998
--------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES (in thousands)
SBA Notes $22,561 $109 $ (32) $22,638
FHLB Notes 8,565 9 -- 8,574
FHLMC Notes 1,000 -- -- 1,000
--------------------------------------------------------------------------------------------------------------
32,126 118 (32) 32,212
--------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES
FNMA Notes 11,027 95 (41) 11,081
GNMA Notes 3,723 5 (12) 3,716
FHLMC Notes 1,563 -- (2) 1,561
REMICS 2,559 42 -- 2,601
--------------------------------------------------------------------------------------------------------------
18,872 142 (55) 18,959
--------------------------------------------------------------------------------------------------------------
$50,998 $260 $ (87) $51,171
==============================================================================================================
TRADING SECURITIES, SEPTEMBER 30, 1998
--------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES (in thousands)
Corporate Notes $ 247 $ -- $ (6) $ 241
--------------------------------------------------------------------------------------------------------------
$ 247 $ -- $ (6) $ 241
==============================================================================================================
</TABLE>
The weighted average interest rate on investments was 7.35% and 7.57% for the
years ended September 30, 1999 and 1998, respectively.
54
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Proceeds from available for sale securities were $4.8 Million and $0 for
the years ended September 30, 1999 and 1998, respectively. Gross realized gains
were $23,000 and $0 for the years ended September 30, 1999 and 1998,
respectively. The amortized cost and estimated fair value of securities at
September 30, 1999, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE, SEPTEMBER 30, 1999
-------------------------------------------------------------------------------------------------------------
Amortized Fair
Cost Value
-------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
AMOUNTS MATURING IN:
One year or less $ 9,900 $ 9,623
After one year through five years 3,507 3,442
After five years through ten years 1,000 955
After ten years 26,106 26,000
Mortgage-backed securities 35,936 35,438
-------------------------------------------------------------------------------------------------------------
$76,449 $75,458
=============================================================================================================
HELD-TO-MATURITY
-------------------------------------------------------------------------------------------------------------
Amortized Fair
Cost Value
-------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
AMOUNTS MATURING IN:
One year or less $ -- $ --
After one year through five years 1,099 1,072
After five years through ten years 3,728 3,587
After ten years 20,210 19,768
Mortgage-backed securities 7,729 7,578
-------------------------------------------------------------------------------------------------------------
$32,766 $32,005
=============================================================================================================
AVAILABLE-FOR-SALE, SEPTEMBER 30, 1998
-------------------------------------------------------------------------------------------------------------
Amortized Fair
Cost Value
-------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
AMOUNTS MATURING IN:
One year or less $ -- $ --
After one year through five years 6,523 6,538
After five years through ten years 8,099 8,089
After ten years 20,063 20,186
Mortgage-backed securities 16,313 16,358
-------------------------------------------------------------------------------------------------------------
$50,998 $51,171
=============================================================================================================
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TRADING
-------------------------------------------------------------------------------------------------------------
Amortized Fair
Cost Value
-------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
AMOUNTS MATURING IN:
After ten years $ 247 $ 241
-------------------------------------------------------------------------------------------------------------
$ 247 $ 241
=============================================================================================================
</TABLE>
Actual maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
4. LOANS RECEIVABLE Loans receivable consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 1998
-------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Mortgage loans:
Single-family $53,218 $17,198
Multi-family 1,216 1,189
Construction 4,624 5,520
Commercial real estate 5,665 2,246
Land loans 871 723
-------------------------------------------------------------------------------------------------------------
Total mortgage loans 65,594 26,876
Commercial loans 3,170 814
Consumer loans 7,423 746
-------------------------------------------------------------------------------------------------------------
Total loans 76,187 28,436
-------------------------------------------------------------------------------------------------------------
Due borrowers on loans-in process (3,049) (2,276)
Deferred loan fees 106 (37)
Allowance for loan losses (590) (578)
Unearned premium (discounts) 138 (35)
-------------------------------------------------------------------------------------------------------------
(3,395) (2,926)
-------------------------------------------------------------------------------------------------------------
LOANS RECEIVABLE, NET $72,792 $25,510
=============================================================================================================
</TABLE>
Loans held for sale are all single-family mortgage loans.
56
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The activity in allowance for loan losses is summarized as follows:
Years ended
September 30,
-----------------------
1999 1998
-------- --------
(in thousands)
Balance, beginning $ 578 $ 776
Provision for loan losses 26 159
Charge-offs (24) (362)
Recoveries 10 5
-------- --------
Balance, ending $ 590 $ 578
======== ========
The amount of loans serviced for others totaled $3.6 million and $1.7 million as
of September 30, 1999 and September 30, 1998, respectively.
The allowance for uncollected interest, established for mortgage loans which are
delinquent for a period of 90 days or more, amounted to $1,000 and $14,000 as of
September 30, 1999 and September 30, 1998, respectively. This is the entire
amount of interest income that would have been recorded in these periods under
the contractual terms of such loans. Principal balances of non-performing loans
related to reserves for uncollected interest totaled $23,000 and $230,000 as of
September 30, 1999, and September 30, 1998, respectively.
5. ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest and dividends receivable consists of the following:
Years Ended
September 30,
--------------------------
1999 1998
----------- -----------
(in thousands)
Investments $ 929 $ 584
Loans receivable 500 254
Accrued dividends on FHLB stock 20 17
---------- ----------
$ $1,449 $ 855
========== ==========
57
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
Years ended
September 30,
--------------------------
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Furniture, fixtures and equipment $ 1,824 $ 1,311
Leasehold improvements 1,796 527
---------- -----------
3,620 1,838
Less: Allowances for depreciation
and amortization 1,402 1,080
---------- ----------
$ 2,218 $ 758
========== ==========
7. FORECLOSED REAL ESTATE
Foreclosed real estate is summarized as follows:
Years ended
September 30,
-------------------------
1999 1998
---------- ----------
(in thousands)
<S> <C> <C>
Real estate acquired through settlement of loans $ 187 $ 90
========== ==========
</TABLE>
The cost of operations for foreclosed real estate in the statements of
operations consists of the following:
Years ended
September 30,
--------------------------
1999 1998
----------- -----------
(in thousands)
INCOME:
Gain on sale $ - $ -
---------- ----------
EXPENSE:
Loss on sale 4 1
Provision for (recovery of) loss (6) 5
Operating expenses 25 29
---------- ----------
23 35
---------- ----------
LOSS $ (23) $ (35)
========== ==========
58
<PAGE>
<TABLE>
<CAPTION>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity in the provision for losses on foreclosed real
estate is summarized as follows:
--------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Balance at September 30, 1997 $205
Provision charged to income (5)
Charge-offs, net of recoveries (178)
--------------------------------------------------------------------
Balance at September 30, 1998 22
Provision (recovery) charged to income (6)
Charge-offs, net of recoveries (11)
--------------------------------------------------------------------
Balance at September 30, 1999 $ 5
====================================================================
8. DEPOSITS Deposits are summarized as follows:
September 30, 1999
---------------------------------------------------------------------------------------
Ranges of
Contractual
Amount Interest Rates %
---------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Savings accounts $ 1,375 3.25% 1.1
NOW/Money
market accounts 27,157 0.00 - 5.03% 21.1
Certificates of deposit 94,879 4.50 - 6.50% 73.5
Non-interest bearing
demand deposits 5,596 0.00% 4.3
---------------------------------------------------------------------------------------
$129,007 100.0
=======================================================================================
September 30,1998
-------------------------------------------------------------------------------------------------
Ranges of
Contractual
Amount Interest Rates %
-------------------------------------------------------------------------------------------------
(in thousands)
Savings accounts $ 703 3.00% 0.9
NOW/Money
market accounts 6,761 0.00 - 5.23% 8.9
Certificates of deposit 55,422 4.50 - 6.50% 72.6
Non-interest bearing
demand deposits 13,425 0.00% 17.6
-------------------------------------------------------------------------------------------------
$76,311 100.0
=================================================================================================
</TABLE>
59
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certificates of deposit as of September 30, 1999 mature as follows:
Years ending September 30,
- ---------------------------------------------------------------------------
(in thousands)
2000 $77,508
2001 15,774
2002 596
2003 271
2004 730
- ---------------------------------------------------------------------------
$94,879
===========================================================================
Interest expense on deposit accounts consists of the followings:
Years ended September 30, 1999 1998
- --------------------------------------------------------------------------------
(in thousands)
NOW/Money market accounts $840 $168
Savings accounts 36 30
Certificates of deposit 4,623 1,965
- --------------------------------------------------------------------------------
$5,499 $2,163
================================================================================
Deposits, including certificates of deposit, with balances in excess of $100,000
totaled $40.4 million and $34.5 million at September 30, 1999, and September,
30, 1998, respectively.
9. DEFERRED COMPENSATION PLAN
On October 30, 1997, the Company adopted a deferred compensation plan. Under the
deferred compensation plan, an employee may elect to participate by directing
that all or part of his or her compensation be credited to a deferral account.
The election must be made prior to the beginning of the calendar year. The
deferral account bears interest at 6% per year. The amounts credited to the
deferral account are payable in preferred stock or cash at the election of the
Board of Directors on the date the Company announces a change in control or the
date three years from the date the participant elects to participate in the
deferred compensation plan. At September 30, 1999, $500,000 was accrued as
deferred compensation.
60
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
The Bank has $47.0 million Credit availability as of September 30, 1999 from the
Federal Home Loan Bank of Atlanta (FHLB), which it uses to fund loans originated
by Greater Atlantic Mortgage Corporation. Any advances in excess of $10 million
are required to be collateralized with eligible securities. The credit
availability is at the discretion of the FHLB.
The following table sets forth information regarding the Bank's
borrowed funds:
<TABLE>
<CAPTION>
At or for the years ended
September 30,
--------------------------
1999 1998
------------ ------------
(dollars in thousands)
<S> <C> <C>
FHLB Advances:
Average balance outstanding $16,371 $5,358
Maximum amount outstanding at any month-end during the period 37,650 22,000
Balance outstanding at end of period 37,650 22,000
Weighted average interest rate during the period 4.95% 5.34%
Weighted average interest rate at end of period 5.55% 6.00%
Reverse repurchase agreements:
Average balance outstanding 1,301 2,015
Maximum amount outstanding at any month-end during the period 5,741 3,971
Balance outstanding at end of period 5,741 -
Weighted average interest rate during the period 5.46% 5.66%
Weighted average interest rate at end of period 5.50% -
</TABLE>
The Bank has pledged certain investments with carrying values of $55.4
million at September 30, 1999, to collateralize advances from the FHLB.
First mortgage loans in the amount of $2.9 million are available to be
pledged as collateral for the advances at September 30, 1999.
61
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
The following is a summary of the income tax provision:
<TABLE>
<CAPTION>
Years ended
September 30,
---------------------------
1999 1998
----------- ----------
(in thousands)
<S> <C> <C>
Current - Federal (benefit) provision $ (196) $ 467
State (benefit) provision (50) 119
--------- ----------
(246) 586
Deferred - Federal and state 77 (275)
--------- ----------
$ (169) $ 311
========= ==========
</TABLE>
The provision for income taxes differs from the amount of income tax determined
by applying the applicable U.S. statutory federal income tax rate to pre-tax
income as a result of the following differences:
<TABLE>
<CAPTION>
Years ended
September 30,
---------------------------
1999 1998
----------- ---------
(in thousands)
<S> <C> <C>
Federal tax expense (benefit) $ (23) $ 311
State tax expense (benefit) (35) 74
Increase (decrease) in taxes resulting from:
Change in the valuation allowance (80) 20
Permanent differences 9 (16)
Change in effective deferred tax rate (41) (63)
Other 1 (15)
--------- --------
Income tax (benefit) provision $ (169) $ 311
========= ========
</TABLE>
62
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company's deferred tax assets and
liabilities are as follows:
September 30,
-----------------------
1999 1998
---------- ----------
(in thousands)
DEFERRED TAX ASSETS
Net operating loss carryforwards $ 679 $ 679
Allowance for loan loss 236 227
Unrealized losses on securities 404 --
Loans held for sale 45 292
Core deposit intangible 67 67
Deferred loan fees 43 43
Book over tax depreciation 53 66
Post foreclosure write-down on foreclosed assets 2 9
Compensation payable 196 196
Net discounts (premiums) on second trusts 46 48
Miscellaneous items 59 46
---------- ----------
Total deferred tax assets 1,830 1,673
---------- ----------
DEFERRED TAX LIABILITIES
FHLB stock dividends 39 39
Deferred origination costs -- 89
---------- ----------
Total deferred tax liabilities 39 128
---------- ----------
Net deferred tax assets 1,791 1,545
Less: Valuation allowance 467 548
---------- ----------
Total $ 1,324 $ 997
========== ==========
Management has provided a valuation allowance for net deferred tax assets, as
they believe that it is more likely than not that the entire amount of deferred
tax assets will not be realized. During the year ended September 30, 1998 the
Company increased its deferred tax asset by $662,000 by reducing goodwill
associated with the acquisition of Greater Atlantic Savings Bank, FSB
At September 30, 1999, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $1.7 million, which are available
to offset future federal taxable income, if any, through 2011. As a result of
the change in ownership of the Bank, the amount of any tax loss carryforward
usage is restricted to an annual limitation of approximately $114,000.
63
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES
On July 28, 1999, First Guaranty Mortgage Corporation filed a complaint against
the Company and it's wholly owned subsidiary GAB and GAMC in Circuit Court of
Arlington, Virginia. This complaint alleges breach of contract and related
claims against these three companies and employees of GAMC who formerly were
employed at First Guaranty. First Guaranty alleges that GAMC, GAB and GAFC
wrongfully interfered with the business of First Guaranty's Frederick, Maryland
office by hiring the employees of that office. First Guaranty is seeking
approximately $5,000,000 in compensatory and $20,000,000 in punitive damages.
The Company believes that the allegations against GAB, GAFC and GAMC are without
merit and is vigorously defending these claims. The litigation is in the early
stages. In the opinion of management, after consultation with legal counsel, the
ultimate disposition of this matter is not expected to have a material adverse
effect on the consolidated financial condition of the Company.
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 and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters of credit, and
financial guarantees. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheet. The contract or notional amounts of those instruments reflect the extent
of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit and financial guarantees written 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.
At September 30, 1999, the Company had outstanding commitments to originate and
purchase loans and undisbursed construction mortgages aggregating approximately
$19.5 million. Fixed rate commitments are at market rates as of the commitment
dates and generally expire within 60 days.
In addition, the Company was contingently liable under unfunded lines of credit
for approximately $13.3 million and standby letters of credit for approximately
$43,000.
Effective October 1, 1998, the Company renewed an employment agreement with the
executive in charge of its mortgage division which calls for a base salary of
$108,000 plus bonuses based on loan closings and net income levels. The term of
this agreement is for one year and can be automatically extended.
Effective November 1, 1997, the Company entered into a three year employment
agreement with the President and Chief Executive Officer of the Bank. The
agreement can be automatically extended and was extended for an additional year
effective October 9, 1998. The agreement provides for a base salary of $120,000
per year.
64
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RENTAL COMMITMENTS
The Company has entered into lease agreements for the rental of certain
properties expiring on various dates through February 28, 2019. The future
minimum rental commitments as of September 30, 1999, for all noncancellable
lease agreements, are as follows:
<TABLE>
<CAPTION>
Years ending Rental Sublease Net
September 30, Commitments Income Commitment
- ---------------- ------------------ ---------------- ---------------
(in thousands)
<S> <C> <C> <C>
2000 $859 $26 $833
2001 878 - 878
2002 894 - 894
2003 848 - 848
2004 687 - 687
Thereafter 3,277 - 3,277
----------------- --------------- ---------------
Total $7,443 $26 $7,417
================= =============== ===============
</TABLE>
Net rent expense for the years ended September 30, 1999 and September 30, 1998
was $825,000 and $455,000, respectively.
The Company has entered into sublease agreements with a tenant which occupies
space in the Rockville branch office. The sublease terms for the Rockville
branch office expire in January 1999. Rental income for the years ended
September 30, 1999 and 1998 was $40,000 and $79,000, respectively.
13. REGULATORY MATTERS
The Bank qualifies as a Tier 1 institution and may make capital distributions
during a calendar year up to 100% of its net income to date plus the amount that
would reduce by one-half its surplus capital ratio at the beginning of the
calendar year. Any distributions in excess of that amount require prior notice
to the OTS, with the opportunity for the OTS to object to the distribution. A
Tier 1 institution is defined as an institution that has, on a pro forma basis
after the proposed distribution, capital equal to or greater than the OTS fully
phased-in capital requirement and has not been deemed by the OTS to be "in need
of more than normal supervision". The Bank is currently classified as a Tier 1
institution for these purposes. The Capital Distribution Regulation requires
that the institution provide the applicable OTS District Director with a 30-day
advance written notice of all proposed capital distributions whether or not
advance approval is required by the regulation. The Bank did not pay any
dividends during the periods ended September 30, 1999 and September 30, 1998.
65
<PAGE>
Effective December 19, 1992, the President signed into law the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA). The "Prompt Corrective
Action" section of FDICIA created five categories of financial institutions
based on the adequacy of their regulatory capital level: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized. Under FDICIA, a well capitalized financial
institution is one with Tier 1 leverage capital of 5%, Tier 1 risk-based capital
of 6% and total risk-based capital of 10%. At September 30, 1999 and September
30, 1998, the Bank was classified as a well capitalized financial institution.
As part of FDICIA, the minimum capital requirements that the Bank is subject to
are as follows: 1) tangible capital equal to at least 1.5% of adjusted total
assets, 2) core capital equal to at least 4% of adjusted total assets and 3)
total risk-based capital equal to at least 8% of risk-based assets.
The following presents the Bank's capital position at September 30, 1999 and
September 30, 1998:
<TABLE>
<CAPTION>
Required Required Actual Actual
At September 30, 1999 Balance Percent Balance Percent Surplus
- -----------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Tangible $2,963 1.50% $20,782 10.52% $17,819
Core $7,901 4.00% $20,782 10.52% $12,881
Risk-based $6,018 8.00% $21,372 28.41% $15,354
===========================================================================================================
Required Required Actual Actual
At September 30, 1998 Balance Percent Balance Percent Surplus
- -----------------------------------------------------------------------------------------------------------
(in thousands)
Tangible $1,603 1.50% $6,277 5.87% $4,674
Core $4,274 4.00% $6,277 5.87% $2,003
Risk-based $2,728 8.00% $6,705 19.66% $3,977
===========================================================================================================
</TABLE>
The following is a reconciliation of the Bank's net worth as reported to the OTS
on GAAP capital as presented in the accompanying financial statements.
<TABLE>
<CAPTION>
September 30,
-----------------------
1999 1998
---------- -----------
<S> <C> <C>
GAAP CAPITAL $20,103 $6,384
Unrealized (gains) losses on available for sale securities 679 (107)
---------- ----------
TANGIBLE CAPITAL 20,782 6,277
Adjustments - -
---------- ----------
CORE CAPITAL 20,782 6,277
Allowance for general loss reserves 590 428
---------- ----------
RISK-BASED CAPITAL $21,372 $6,705
========== ==========
</TABLE>
66
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Failure to meet any of the three capital requirements after December 7, 1989
causes savings institutions to be subject to certain regulatory restrictions and
limitations including a limit on asset growth, and the requirement to obtain
regulatory approval before certain transactions or activities are entered into.
On December 18, 1995, a new supervisory agreement became effective, replacing
the previous written agreement. The new agreement required the Board of
Directors to submit a business plan and a capital plan, to establish internal
control and audit procedures, as necessary, and to provide for proper self
classification of assets and adequate recordkeeping. During the year ended
September 30, 1997 Bank implemented a plan and submitted quarterly reports to
the OTS. The objectives of the plan were successfully met during these periods.
In October 1997, the OTS removed the supervisory agreement upon approval of the
stock purchase by the new shareholders (see Note 2).
The FDIC proposed, and enacted into law on September 30, 1996, a one-time
assessment on all SAIF-insured deposits of approximately .67 cents per $100 of
domestic deposits held as of March 31, 1995. This one-time assessment is
intended to recapitalize the SAIF to the required level of 1.25% of insured
deposits. On November 8, 1996, the Bank received an exemption from paying the
special assessment. However, the Bank was required to pay regular semi-annual
assessments to the SAIF from the first semi-annual period of 1997 through the
second semi-annual period of 1999 according to the schedule of rates in effect
for SAIF members on June 30, 1995. As a result of the stock purchase and
recapitalization of the Bank (see Note 2), the Bank has elected to pay the
assessment through a one-time payment. Accordingly, for the year ended September
30, 1998 the Bank paid approximately $83,000 for the assessment.
14. STOCKHOLDERS' EQUITY
On September 30, 1993, a group of individuals acquired 49% of the outstanding
common stock of the Bank from the sole stockholder. Simultaneously with this
purchase, both the new purchasers ("minority stockholders") and the existing
stockholder ("majority stockholder"), exchanged their stock in the Bank for
stock in a newly formed holding company. Additionally, the minority stockholders
purchased 362,500 shares of noncumulative perpetual preferred stock in the
amount of $1,450,000 from the Bank. Effective October 1, 1997, all shares of
preferred and common stock were purchased as part of the business combination
(see Note 2).
On June 30, 1999, the company issued 2,000,000 shares at $9.50 per share in an
initial public offering of common stock. Proceeds, net of expenses, amounted to
$17.4 million. On July 28, 1999 the underwriter exercised it's over-allotment
option to purchase an additional 185,000 shares, which resulted in net proceeds
of $1.6 million.
Effective November 14, 1998, the Company established the 1997 Stock Option and
Warrant Plan (the "Plan"). The Plan reserves options for 76,667 shares to
employees and warrants for 94,685 shares to stockholders. The stock options and
warrants vest immediately upon issuance and carry a maximum term of 10 years.
The exercise price for the stock options and warrants is the fair market value
at grant date. As of September 30, 1999, 94,685 warrants were issued.
67
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summary represents the activity under the Plan:
<TABLE>
<CAPTION>
Number of Exercise Expiration
Shares Price Date
------------ ------------ ---------------
At October 1, 1997
<S> <C> <C> <C> <C>
Options granted 16,667 $7.50 11-14-2007
-----------
Balance outstanding at September 31, 1998 16,667
Options granted 41,667 $8.38 11-29-2008
-----------
Balance outstanding and exercisable at September 30, 1999 58,334
===========
</TABLE>
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123"), but it continues to measure compensation cost for the stock options using
the intrinsic value method prescribed by APB Opinion No. 25. For the year ended
September 30, 1998, the company used the "Minimum Value" method to measure the
compensation cost of stock options granted in 1998 with the following
assumptions: risk-free interest rate of 5.45%, a dividend payout rate of zero,
and an expected option life of five years, respectively. There were no
adjustments made in calculating the fair value to account for
non-transferability. For the year ended September 30, 1999, the fair value of
stock options has been estimated using the Black-Scholes option pricing model
with the following assumptions: risk free interest rate of 8.00%, expected
volatility of 45%, a dividend pay out rate of zero and an expected option life
of ten years.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
If the Company had elected to recognize compensation cost based on the value at
the grant dates with the method prescribed by SFAS 123, net income would have
been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years ended September 30,
------------------------------------------------------------
1999 1998
---------------------------- -----------------------------
Reported Pro Forma Reported Pro Forma
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net (loss) income $ 101 $ (129) $ 609 $ 580
============ =========== ============ =============
Basic and diluted earnings (loss) per share $ 0.07 $ (0.09) $ 0.77 $ 0.74
============ =========== ============ =============
</TABLE>
68
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. EARNINGS PER SHARE OF COMMON STOCK
The Company reports earning per share in accordance with Statement of Financial
Accounting Standards No. 128, (SFAS 128) "Earnings Per Share". SFAS 128 requires
two presentations of earning per share - "basic" and "diluted." Basic earnings
per share is computed by dividing income available to common stockholders (the
numerator) for the period. The computation of diluted earnings per share is
similar to basic earnings per share, except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potentially dilutive common shares had been issued.
The numerator in calculating both basic and diluted earnings per share for each
period is reported net income. The denominator is based on the following
weighted average number of common shares.
Year ended
September 30,
---------------------------
1999 1998
------------ ----------
Basic 1,362,390 787,075
Dilution relating to stock options 2,217 -
------------ ----------
Diluted 1,364,607 787,075
============ ==========
16. RELATED PARTY TRANSACTIONS
The Bank offers loans to its officers, directors, employees and related parties
of such persons for the financing of their homes, consumer and commercial loans.
These loans are made in the ordinary course of business and, in the opinion of
management, do not involve more than the normal risk of collectibility, or
present other unfavorable features. Such loans are made on the same terms as
those prevailing at the time for comparable transactions with non-affiliated
persons. The aggregate balance of loans to directors, officers and other related
parties is $426,000 and $269,000 as of September 30, 1999 and September 30,
1998, respectively.
17. MARKET VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The fair value information for financial instruments, which is provided below,
is based on the requirements of Financial Accounting Standard Board Statement of
Financial Accounting Standards No. 107 and does not represent the aggregate net
fair value of the Bank.
Much of the information used to determine fair value is subjective and
judgmental in nature; therefore, fair value estimates, especially for less
marketable securities, may vary. The amounts actually realized or paid upon
settlement or maturity could be significantly different.
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is reasonable to estimate that
value:
69
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is reasonable to estimate that
value:
A. Cash and interest-bearing deposits - Fair value is estimated to be carrying
value.
B. Investment securities - Fair value is estimated using quoted market prices
or market estimates.
C. Loans receivable - For residential mortgage loans, fair value is estimated
by discounting future cash flows using the current rate for similar loans.
D. Deposits - For passbook savings, checking and money market accounts, fair
value is estimated at carrying value. For fixed maturity certificates of
deposit, fair value is estimated by discounting future cash flows at the
currently offered rates for deposits of similar remaining maturities.
E. Advances from the FHLB of Atlanta and Reverse Repurchase agreements - Fair
value is estimated by discounting future cash flows at the currently
offered rates for advances of similar remaining maturities.
F. Off-Balance Sheet Instruments - The fair value of commitments is determined
by discounting future cash flows using the current rate for similar loans.
Commitments to extend credit for other types of loans and standby letters
of credit were determined by discounting future cashflows using current
rates.
70
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying value and estimated fair value of financial
instruments is summarized as follows:
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------
1999 1998
-----------------------------------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
------------- ------------- ------------ -----------
(in thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and interest-
bearing deposits $ 1,703 $ 1,703 $433 $433
Investment securities 108,224 107,463 51,171 51,171
Loans receivable 80,228 79,193 50,831 51,717
-----------------------------------------------------------------------------------------------
Liabilities:
Deposits 129,007 128,674 76,311 76,612
Borrowings 43,391 43,341 22,000 22,010
-----------------------------------------------------------------------------------------------
Off-balance sheet
Instruments:
Commitments to
extend credit - 439 - 882
Loans in process - 11 - 19
-----------------------------------------------------------------------------------------------
</TABLE>
71
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. EMPLOYEE BENEFIT PLANS
The Company operates a 401(k) Profit Sharing Plan covering all full-time
employees meeting the minimum age and service requirements. Contributions to the
Profit Sharing Plan are at the discretion of the Company. The Company made no
contributions for the years ended September 30, 1999 and 1998.
19. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years ended
September 30,
-------------------------------
1999 1998
----------- ---------
(in thousands)
<S> <C> <C>
Cash paid during period for
interest on deposits and borrowings $1,534 $2,429
----------------------------------------------------------------------------
Transfer of loans for foreclosed assets $ 193 $ 89
----------------------------------------------------------------------------
</TABLE>
Following is a reconciliation of goodwill recorded in conjunction with
the acquisition discussed in Note 2:
Acquisition
Year ended September 30, 1998
----------------------------------------------------------
(in thousands)
Total cash paid for acquisition $2,367
Fair market value of assets acquired 1,667
----------------------------------------------------------
Goodwill, October 1, 1997 700
Amortization (19)
Other (19)
Reduction from recording deferred tax asset (662)
----------------------------------------------------------
Goodwill, September 30, 1998 $ -
==========================================================
20. SEGMENT REPORTING
The Company has two reportable segments, banking and mortgage banking. The Bank
operates retail deposit branches throughout the greater Washington,
D.C./Baltimore metropolitan area. The banking segment provides retail consumer
and small businesses with deposit products such as demand, transaction, savings
accounts and certificates of deposit and lending products, such as residential
and commercial real estate, construction and development, consumer and
commercial business loans. Further, the banking segment invests in residential
real estate loans purchased from the mortgage company and others, and also
invests in mortgage-backed and other securities. The mortgage banking segment's
activities, which are conducted principally through GAMC, include the production
of residential real estate loans either for the bank's portfolio or for sale
into the secondary market with servicing released.
72
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accounting policies of the segments are the same as those described in note
1. The Company evaluates performance based on net interest income, noninterest
income, and noninterest expense. The total of these three items is the
reportable segment's net contribution.
The Company's reportable segments are strategic business units that offer
different services in different geographic areas. They are managed separately
because each segment appeals to different markets and, accordingly, requires
different technology and marketing strategies.
Since the Company derives a significant portion of it's revenue from interest
income and interest expense, the segments are reported below using net interest
income. Because the Company also evaluates performance based on noninterest
income and noninterest expense, these measures of segment profit and loss are
also presented.
<TABLE>
<CAPTION>
Total Total
Mortgage Reportable Intersegment Operating
For the Years Ended September 30, Banking Banking Segments Eliminations Earnings
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income: (1)
1999 $ 2,328 $ 312 $ 2,640 $ - $ 2,640
1998 1,264 25 1,289 - 1,289
Noninterest income:
1999 $ 195 $5,925 $ 6,120 $ (39) $ 6,081
1998 484 5,785 6,269 - 6,269
Noninterest expense:
1999 $ 4,239 $4,589 $ 8,828 $ 39 $ 8,789
1998 2,247 4,391 6,638 - 6,638
Net income:
1999 $ (893) $ 994 $ 101 - 101
1998 (711) 1,320 609 - $ 609
Segment assets:
1999 $199,364 $8,072 $207,436 $ (8,613) $198,823
1998 80,237 27,087 107,324 18 107,342
</TABLE>
- -----------
(1) Segment net interest income reflects income after provision for loan losses.
73
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. RECENT ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair market value. Under certain circumstances, a portion
of the derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into income when the
transaction affects earnings. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
The Company will be required to adopt SFAS 133 by October 1, 2000. Presently,
the Company does not use derivative instruments either in hedging activities or
as investments. Accordingly, the Company believes that adoption of SFAS 133 will
have no material impact on its financial position or results of operation.
In October 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 134, "Accounting for Mortgage Backed
Securities Retained After the Securitization of Mortgage Loans Held For Sale By
A Mortgage Banking Enterprise" ("SFAS 134"). SFAS 134 establishes accounting and
reporting standards for certain activities of mortgage banking enterprises and
other enterprises that conduct operations that are substantially similar to the
primary operations of a mortgage banking enterprise. This statement requires
that after the securitization of mortgage loans held for sale, an entity engaged
in mortgage banking activities classify the resulting mortgage-backed securities
or other retained interests based on its ability and intent to sell or hold
those investments. The Company will be required to adopt SFAS 134 during the
quarter ended December 31,1999. Presently, the Company's mortgage banking
company does not securitize mortgage loans held for sale. Accordingly, the
Company believes that adoption of SFAS 134 will have no material impact on its
financial position or results of operations.
74
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the Registrant's accountants on any
matters of accounting principles or practices or financial statement
disclosures.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT OF THE BANK
DIRECTORS
The following table sets forth information regarding the board of directors of
the bank.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE POSITION(S) HELD WITH THE BANK SINCE EXPIRES
- ------------------------ ----------- ------------------------------------------- ----------- -----------
<S> <C> <C> <C>
Carroll E. Amos 51 Director, President and Chief 1997 2002
Executive Officer
William Calomiris 78 Director, Chairman of the Board 1997 2002
of Directors
Paul J. Cinquegrana 57 Director 1997 2000
Jeffrey M. Gitelman 54 Director 1997 2001
Lynnette Dobbins Taylor 78 Director 1998 2001
James B. Vito 73 Director 1998 2002
- ------------------------
</TABLE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth information regarding the executive officers of
the bank who are not also directors.
<TABLE>
<CAPTION>
NAME AGE POSITION(s) HELD WITH BANK
- ---- --- --------------------------
<S> <C>
Edward C. Allen 51 Senior Vice President, Chief Operating Officer
Jeremiah D. Behan 49 Senior Vice President, Construction Lending
Justin R. Golden 48 Senior Vice President, Consumer Lending
Patsy J. Mays 52 Senior Vice President, Small Business Lending and Retail Banking
Robert W. Neff 51 Senior Vice President, Commercial Real Estate Lending
Laurel L. Mitchell 41 Corporate Secretary
David E. Ritter 49 Senior Vice President and Chief Financial Officer
</TABLE>
Each of the executive officers of the bank holds his or her office until his or
her successors is elected and qualified or until removed or replaced. Officers
are subject to re-election by the board of directors annually.
75
<PAGE>
BIOGRAPHICAL INFORMATION
DIRECTORS
William Calomiris, Chairman of the Board of the company and the bank, is the
President of Wm. Calomiris Investment Corporation, engaged in building,
developing and property management. Until 1996, he served as Chairman of the
Board of 1st Washington Bancorp and for Washington Federal Savings Bank.
Carroll E. Amos is President and Chief Executive Officer of the company and of
the bank. He is a private investor who until 1996 served as President and Chief
Executive Officer of 1st Washington Bancorp and Washington Federal Saving Bank.
Paul J. Cinquegrana is a Senior Vice President Investments of Johnston, Lemon &
Co., Inc., a stock and bond brokerage firm.
Jeffrey M. Gitelman, D.D.S., is an Oral Surgeon and the owner of Jeffrey M.
Gitelman -D.D.S., P.C.
Jeffrey W. Ochsman, is a partner in the law firm of Friedlander, Misler,
Friedlander, Sloan & Herz, PLLC, Washington, D.C.
Lynnette Dobbins Taylor is President of Taylor Enterprises, Incorporated, a
consulting firm to non-profit and civic related organizations; retired Executive
Director, Delta Sigma Theta, Inc.
James B. Vito is Chairman of the Board, James B. Vito, Inc., a plumbing and
heating company and managing general partner, James Properties, engaged in the
sale and management of property.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Edward C. Allen joined the bank as a Senior Vice President and Chief Financial
Officer in mid 1996 and became Chief Operating Officer in 1997. Prior to joining
the bank, Mr. Allen was the Chief Financial Officer of Servus Financial Corp.
from 1994 to 1996 and Senior Vice President of NVR Savings Bank from 1992 to
1994.
Jeremiah D. Behan joined the bank in 1998 as a Senior Vice President with
primary responsibility for the bank's Construction Lending Department. From 1997
until joining the bank, Mr. Behan was the Senior Servicing Officer for Virginia
Asset Financing Corporation. From 1986 until 1996, he served as Senior Vice
President of Construction Administration and Servicing at Washington Federal
Savings Bank.
Justin R. Golden joined the bank as Senior Vice President of the Consumer
Lending Department in 1998. From 1984 until 1997 he served in various capacities
at Citizens Bank, most recently having responsibility for reorganizing and
operating that Bank's Home Equity Lending Function.
76
<PAGE>
Patsy J. Mays joined the bank in 1998 as a Senior Vice President, primarily
responsible for Small Business Lending and Retail Banking. Prior to joining the
bank, Ms. Mays served as an Assistant Vice President at Wachovia Bank of South
Carolina responsible for sales production and branch operations from 1995 to
1996. From 1993 until 1995 she served as Vice President for Branch
Administration at Ameribanc Savings Bank.
Laurel L. Mitchell joined the bank and the company as Corporate Secretary in
1999 after three years as Executive Assistant to the Executive Director of
Collier, Shannon, Rill and Scott, PLLC. Ms. Mitchell had previously been
employed with America's Community Bankers from 1993 to 1997.
Robert W. Neff joined the bank in 1997 as Senior Vice President, Commercial Real
Estate Lending. Prior to joining the bank, Mr. Neff served as a Consultant on
commercial real estate loan brokerage with the First Financial Group of
Washington after serving from 1984 until 1996 as an Executive Vice President for
Commercial Real Estate Lending at Washington Federal Savings Bank.
David E. Ritter joined the bank and the company as a Senior Vice President and
Chief Financial Officer in 1998. From 1996 to 1997, Mr. Ritter was a Senior
Financial Consultant with Peterson Consulting. From 1988 until 1996, he was the
Executive Vice President and Chief Financial Officer of Washington Federal
Savings Bank.
77
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the cash compensation
paid by the bank for services rendered in all capacities during the fiscal years
ended September 30, 1999 and 1998, to the Chief Executive Officer, the only
executive officer of the bank who received salary and bonus in excess of
$100,000 ("Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION(2)
-----------------------------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
--------------------------------------------------------------------------------------------
NAME AND OTHER RESTRICTED SECURITIES ALL OTHER
PRINCIPAL FISCAL ANNUAL STOCK UNDERLYING LTIP COMPENSATION
POSITIONS YEAR SALARY BONUS COMPENSATION(2) AWARDS OPTIONS/SARS PAUOUTS (2)
- -------------------------------------- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carroll E. Amos
President and
Chief Executive 1999 $119,167 $3,300 -- -- 16,667 -- --
Officer 1998 $107,133 $18,500 -- -- 16,667 -- --
</TABLE>
- -------------
(1) Under Annual Compensation, the column titled "Bonus" consists of Board
approved discretionary bonus.
(2) For 1999 and 1998, there were no (a) perquisites over the lesser of $50,000
or 10% of the individual's total salary and bonus for the year; (b)
payments of above-market preferential earnings on deferred compensation;
(c) payments of earnings with respect to long-term incentive plans prior to
settlement or maturation; (d) tax payment reimbursements; or (e)
preferential discounts on stock. For 1998, the bank had no restricted stock
or stock related plans in existence.
EMPLOYMENT AGREEMENTS
Carroll E. Amos. Effective November 1, 1997, the bank entered into an employment
agreement (the "Employment Agreement") with Mr. Amos. The Employment Agreement
is intended to ensure that the bank and the company will be able to retain Mr.
Amos who provides a stable and competent management base. The continued success
of the bank and the company depends to a significant degree on the skills and
competence of its executive officers, particularly Mr. Amos, the Chief Executive
Officer.
The Employment Agreement provides for a three-year term for Mr. Amos and
provides that commencing on the first anniversary date and continuing each
anniversary date thereafter the board of directors may extend the Employment
Agreement for an additional year so that the remaining term shall be three
years, unless written notice of non-renewal is given by the board of directors
after conducting a performance evaluation of Mr. Amos. The Employment Agreement
provides that Mr. Amos's base salary will be reviewed annually. The base salary
provided for in the Employment Agreement for Mr. Amos for 1998 was $110,000. At
the first anniversary date, Mr. Amos's base salary was increased to $120,000 and
at the second anniversary date, his base salary was increased to $126,000. In
addition to the base salary, the Employment Agreement provides for, among other
things, participation in various employee benefit plans and stock-based
compensation programs, as well as furnishing fringe benefits available to
similarly situated executive personnel. Effective November 1, 1998, the
Employment Agreement also provides for an automobile allowance of $9,600 per
year.
The Employment Agreement provides for termination by the bank for cause (as
defined in the Employment Agreement) at any time. In the event the bank chooses
to terminate Mr. Amos's employment for reasons other than for cause or, in the
event of Mr. Amos's resignation from the bank upon: (i) failure to re-elect Mr.
Amos to his current office; (ii) a material change in Mr. Amos's functions,
duties or responsibilities; (iii) a relocation of Mr. Amos's principal place of
employment by more than 30 miles; (iv) liquidation or dissolution of the bank or
the company; or (v) a breach of the Employment Agreement by the bank, Mr. Amos
or, in the event of death, Mr. Amos's beneficiary would be entitled to receive
78
<PAGE>
an amount generally equal to the remaining base salary and bonus payments that
would have been paid to Mr. Amos during the remaining term of the Employment
Agreement. The bank would also continue to pay for Mr. Amos's life, health and
disability coverage for the remaining term of the Employment Agreement. Upon any
termination of Mr. Amos, Mr. Amos is subject to a covenant not to compete with
the bank for one year.
Under the Employment Agreement, if involuntary termination or voluntary
termination follows a change in control of the bank or the company, Mr. Amos or,
in the event of his death, his beneficiary, would receive a severance payment
generally equal to the greater of: (i) the payments due for the remaining terms
of the agreement, including the value of stock-based incentives previously
awarded to Mr. Amos; or (ii) three times the average of the three preceding
taxable years' annual compensation. The bank would also continue Mr. Amos's
life, health, and disability coverage for thirty-six months. In the event of a
change in control of the bank, the total amount of payment due under the
Employment Agreement, based solely on the base salary paid to Mr. Amos, and
excluding any benefits under any employee benefit plan which may otherwise
become payable, would equal approximately $360,000.
All reasonable costs and legal fees paid or incurred by Mr. Amos pursuant to any
dispute or question of interpretation relating to the Employment Agreement are
to be paid by the bank if he is successful on the merits pursuant to a legal
judgment, arbitration or settlement. The Employment Agreement also provides that
the bank will indemnify Mr. Amos to the fullest extent allowable under federal
law.
T. Mark Stamm. Effective October 1, 1997, the bank entered into an employment
agreement (the "Stamm Agreement") with Mr. Stamm. The Stamm Agreement was
intended to ensure that the bank and the company would be able to retain the
services of an experienced mortgage banking professional.
The Stamm Agreement was for a one-year term with total compensation comprised of
three elements, a base salary for Mr. Stamm of $108,000, a production bonus of
two basis points, payable monthly on each loan closed in a month, and a net
income bonus equal to 37.5% of the net income, as defined, of the then mortgage
banking division of the bank. In addition to the salary and bonus provisions,
the Stamm Agreement provides for, among other things, participation in various
employee benefit plans and stock-based compensation programs, as well as
furnishing fringe benefits available to similarly situated personnel. The Stamm
Agreement also provides for an automobile allowance of $6,000 per year.
The Stamm Agreement provides for termination by the bank for cause (as defined
in the Stamm Agreement) at any time. In the event the bank chose to terminate
Mr. Stamm's employment for reasons other than for cause, Mr. Stamm or, in the
event of death, Mr. Stamm's beneficiary would be entitled to receive an amount
generally equal to the remaining base salary and bonus payments that would have
been paid to Mr. Stamm during the remaining term of the Stamm Agreement, but in
no event less than three months. The bank would also continue and pay for Mr.
Stamm's life, health and disability coverage for the remaining term of the Stamm
Agreement, but in no event less than three months.
Under the Stamm Agreement, if involuntary termination or voluntary termination
follows a change in control of the bank, Mr. Stamm or, in the event of his
death, his beneficiary, would be entitled to receive a severance payment
generally equal to the greater of: (i) the payments due for the remaining term
of the agreement, including the value of stock-based incentives previously
awarded to Mr. Stamm; or (ii) three times the average of the base salary,
excluding bonuses and all other forms of compensation paid or to be paid to Mr.
Stamm during the three preceding years. The bank would also continue Mr. Stamm's
life, health, and disability coverage for thirty-six months. In the event of a
change in control of the bank, the total amount of payment due under the Stamm
79
<PAGE>
Agreement , based solely on the base salary paid to Mr. Stamm, and excluding any
benefits under any employee benefit plan which may otherwise become payable,
would equal approximately $324,000.
Effective October 1, 1998, the Stamm Agreement was modified to provide for his
employment as President of Greater Atlantic Mortgage for a two-year term. Under
the modified agreement, Mr. Stamm's compensation continues to be comprised of
three elements, a base salary for Mr. Stamm of $108,000, a production bonus of
two basis points, payable monthly on each loan closed in a month and a net
income bonus. However, the net income bonus was reduced from 37.5% to 30% of the
net income, as defined, of Greater Atlantic Mortgage. For the year ended
September 30, 1998, Greater Atlantic Mortgage had net income before bonus of
$3.1 million. The modified agreement further provides for the grant, within 45
days, of stock options to Mr. Stamm to purchase 25,000 shares of the common
stock of the company at a price equal to the book value of the company at
September 30, 1998, and for the grant of options to purchase an additional
10,000 shares of the common stock of the company, at the publicly traded price
on September 30, 1999, if the net earnings of Greater Atlantic Mortgage for the
fiscal year ending September 30, 1999 are equal to or greater than $1,625,000.
80
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the company's common stock as of September 30, 1999, by (i) each
director of the company, (ii) all directors and executive officers as a group
and (iii) each person who is known by the company to own beneficially 5% or more
of the common stock.
<TABLE>
<CAPTION>
SHARES OF COMMON OWNERSHIP AS
STOCK BENEFICIALLY A PERCENT OF
DIRECTORS AND EXECUTIVE OFFICERS OWNED CLASS
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
William Calomiris .................................................. 357,895 11.90%
Carroll E. Amos .................................................... 43,860 1.46
Paul J. Cinquegrana ................................................ 33,334 1.11
Jeffrey M. Gitelman ................................................ 64,913 2.16
Lynnette Dobbins Taylor ............................................ 134 *
James B. Vito ...................................................... 56,842 1.89
------- -----
Directors and executive officers as a group ........................ 556,978 18.52
------- -----
(15 persons)
---------------------------------------------------------------------
* Indicates ownership which does not exceed 1.0%.
PRINCIPAL SHAREHOLDERS (1)
---------------------------------------------------------------------
Ralph Ochsman ...................................................... 238,597 7.93
Robert I. Schattner ................................................ 355,229 11.81
---------------------------------------------------------------------
</TABLE>
(1) The information is derived from the Schedule 13D filed by Mr. Schattner on
July 12, 1999 and the Schedule 13D filed by Mr. Ochsman on July 12, 1999
and amended on August 2, 1999
81
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Federal regulations require that all loans or extensions of credit to executive
officers and directors must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. In addition, loans made
to a director or executive officer in excess of the greater of $25,000 or 5% of
the bank's capital and surplus (up to a maximum of $500,000) must be approved in
advance by a majority of the disinterested members of the board of directors.
The bank currently makes loans to its executive officers and directors on the
same terms and conditions offered to the general public. The bank's policy
provides that all loans made by the bank to its executive officers and directors
be made in the ordinary course of business, on substantially the same terms,
including collateral, as those prevailing at the time for comparable
transactions with other persons and may not involve more than the normal risk of
collectibility or present other unfavorable features. The aggregate balance of
loans to directors and executive officers is $426,000 and $269,000 at September
30, 1999 and 1998, respectively. Such loans were made by the bank in the
ordinary course of business, with no favorable terms and do not involve more
than the normal risk of collectibility or present unfavorable features.
The company's policy is that all transactions between the company and its
executive officers, directors, holders of 10% or more of the shares of any class
of its common stock and affiliates thereof, will contain terms no less favorable
to the company than could have been obtained by it in arm's length negotiations
with unaffiliated persons and will be approved by a majority of independent
outside directors of the company not having any interest in the transaction.
82
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits (filed herewith unless otherwise noted)
3.1 Certificate of Incorporation of Greater Atlantic Financial Corp. and
amendment thereto*
3.2 Bylaws of Greater Atlantic Financial Corp.*
4.0 Specimen Stock Certificate of Greater Atlantic Financial Corp.*
10.1 Employment Agreement with Carroll E. Amos*
10.2 Employment Agreement of T. Mark Stamm with Greater Atlantic Mortgage
Corporation*
10.3 Greater Atlantic Financial Corp. Deferred Compensation Plan*
10.4 Greater Atlantic Financial Corp. 1997 Stock Option and Warrant Plan*
11.0 Statement re: Computation of Per Share Earnings
27.0 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the company during the fourth
quarter.
* Incorporated by reference from the From SB-2 filed with the Securities
and Exchange Council on April 13, 1999, Registration No. 333-76169
83
<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.
GREATER ATLANTIC FINANCIAL CORP.
By: /s/ CARROLL E. AMOS
---------------------------------------------
Carroll E. Amos
Chief Executive Officer (Principal Executive
Officer), President and Director
Dated: December 28, 1999
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Name Title Date
- ---- ----- ----
/s/ WILLIAM CALOMIRIS Chairman of the Board December 28, 1999
- ----------------------------
William Calomiris
/s/ PAUL J. CINQUEGRANA Director December 28, 1999
- ----------------------------
Paul J. Cinquegrana
/s/ JEFFREY M. GITELMAN Director December 28, 1999
- ----------------------------
Jeffrey M. Gitelman
/s/ LYNNETTE DOBBINS TAYLOR Director December 28, 1999
- ----------------------------
Lynnette Dobbins Taylor
/s/ JAMES B. VITO Director December 28, 1999
- ----------------------------
James B. Vito
/s/ JEFFREY W. OCHSMAN Director December 28, 1999
- ----------------------------
Jeffrey W. Ochsman
/s/ CARROLL E. AMOS Chief Executive Officer December 28, 1999
- ---------------------------- President and Director
Carroll E. Amos
/s/ DAVID E. RITTER Senior Vice President and December 28, 1999
- ---------------------------- Chief Financial Officer
David E. Ritter
84
<TABLE>
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
FOR THE YEARS ENDED SEPTEMBER 30,
-----------------------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1999 1998
- -----------------------------------------------
----------------- ---------------------
<S> <C> <C>
NET INCOME $ 101 $ 609
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,362,390 787,075
COMMON STOCK EQUIVALENTS DUE TO DILUTIVE EFFECT OF STOCK
OPTIONS 2,217 -
TOTAL WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE
EQUIVALENTS OUTSTANDING 1,364,607 787,075
BASIC EARNINGS PER COMMON SHARE AND COMMON SHARE
EQUIVALENTS $0.07 $0.77
DILUTED EARNINGS PER COMMON SHARE $0.07 $0.77
</TABLE>
85
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information derived from the annual
report on form 10-KSB for the fiscal year ended September 30, 1999, and is
qualified in its entirety by reference to such financial statements thereto.
</LEGEND>
<CIK> 0001082735
<NAME> GREATER ATLANTIC FINANCIAL
<MULTIPLIER> 1000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,064
<INT-BEARING-DEPOSITS> 639
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 75,458
<INVESTMENTS-CARRYING> 32,766
<INVESTMENTS-MARKET> 32,005
<LOANS> 80,228
<ALLOWANCE> 590
<TOTAL-ASSETS> 198,823
<DEPOSITS> 129,007
<SHORT-TERM> 33,391
<LIABILITIES-OTHER> 1,435
<LONG-TERM> 10,000
0
0
<COMMON> 30
<OTHER-SE> 24,960
<TOTAL-LIABILITIES-AND-EQUITY> 198,823
<INTEREST-LOAN> 4,210
<INTEREST-INVEST> 4,836
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 9,046
<INTEREST-DEPOSIT> 5,499
<INTEREST-EXPENSE> 6,380
<INTEREST-INCOME-NET> 2,666
<LOAN-LOSSES> 26
<SECURITIES-GAINS> 23
<EXPENSE-OTHER> 8,789
<INCOME-PRETAX> (68)
<INCOME-PRE-EXTRAORDINARY> (68)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 101
<EPS-BASIC> 0
<EPS-DILUTED> .07
<YIELD-ACTUAL> 6.86
<LOANS-NON> 23
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 578
<CHARGE-OFFS> 24
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 590
<ALLOWANCE-DOMESTIC> 513
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 77
</TABLE>
