As filed with the Securities and Exchange Commission on April 13, 1999
Registration No. 333-__________
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
GREATER ATLANTIC FINANCIAL CORP.
(NAME OF SMALL BUSINESS ISSUER IN ITS CERTIFICATE OF INCORPORATION)
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<S> <C> <C>
DELAWARE 6035 54-18773112
(State or Other Jurisdiction of Incorporation or (Primary Standard Industrial (IRS Employer Identification No.)
Organization) Classification Code Number)
10700 PARKRIDGE BOULEVARD 10700 PARKRIDGE BOULEVARD
RESTON, VIRGINIA 20191 RESTON, VIRGINIA 20191
(703) 391-1300 (703) 391-1300
(Address and Telephone Number of Principal Executive Office (Address of Principal Place of Business or Intended Principal Place
of Business)
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CARROLL E. AMOS
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
GREATER ATLANTIC FINANCIAL CORP.
10700 PARKRIDGE BOULEVARD
RESTON, VIRGINIA 20191
(703) 391-1300
(Name, Address and Telephone Number of Agent for Service)
Copies to:
GEORGE W. MURPHY, JR., ESQUIRE NORMAN B. ANTIN, ESQUIRE
LESLIE A. MURPHY, ESQUIRE JEFFREY D. HAAS, ESQUIRE
MULDOON, MURPHY & FAUCETTE LLP ELIAS, MATZ, TIERNAN & HERRICK, L.L.P.
5101 WISCONSIN AVENUE, N.W. 734 15TH STREET, N.W., 12TH FLOOR
WASHINGTON, D.C. 20016 WASHINGTON, D.C. 20005
(202) 362-0840 (202) 347-0300
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: As soon as practicable after
this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act Registration Statement number of the earlier
effective Registration Statement for the same offering. /___/
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. /___/
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. /___/
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /___/
CALCULATION OF REGISTRATION FEE
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Title of each Class of Amount to Proposed Maximum Proposed Maximum Amount of
Securities to be Registered be Registered Offering Price Aggregate Offering Registration Fee
Per Unit Price (1)
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<S> <C> <C> <C> <C>
Common Stock
$.01 par Value 2,300,000 Shares $10.00 $23,000,000 $ 6,394
========================================================================================================================
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(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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PROSPECTUS SUBJECT TO COMPLETION DATED __, 1999
2,000,000 SHARES
GREATER ATLANTIC FINANCIAL CORP.
COMMON STOCK
We are Greater Atlantic Financial Corp., a savings and loan holding
company. This is an initial public offering of 2,000,000 shares of our common
stock and no public market currently exists for our stock. We have applied to
have our common stock included for quotation on the Nasdaq National Market under
the symbol "GAFC."
The offering price is expected to be between $9.00 to $10.00 per share. As
a result, our maximum gross and net proceeds are estimated at $20.0 million and
$18.2 million.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT COMPANY
--------------- -------- -------
<S> <C> <C> <C>
Per Share................................. $ $ $
Total..................................... $ $ $
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In connection with this offering, the underwriter may purchase up to an
additional 300,000 shares within 30 days from the date of this Prospectus to
cover over-allotments.
LEGG MASON WOOD WALKER
INCORPORATED
THE DATE OF THIS PROSPECTUS IS _________, 1999
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
1
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[MAP GOES HERE]
The underwriter may reject orders in whole or in part and withdraw, cancel,
or modify the offer without notice. We expect that the common stock will be
ready for delivery on or about _______, 1999.
Transactions which stabilize the market price of the common stock at a
level above that which might otherwise prevail in the open market may be
effected in the over-the-counter market or, otherwise. Such stabilizing, if
commenced, may be discontinued at any time.
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TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................4
RISK FACTORS...................................................................9
USE OF PROCEEDS...............................................................13
MARKET FOR THE COMMON STOCK...................................................14
DIVIDEND POLICY...............................................................14
DILUTION .....................................................................14
CAPITALIZATION................................................................16
OUR BUSINESS..................................................................17
SELECTED CONSOLIDATED FINANCIAL DATA..........................................19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................21
MANAGEMENT OF THE COMPANY.....................................................65
MANAGEMENT OF THE BANK........................................................66
REGULATION....................................................................76
FEDERAL AND STATE TAXATION....................................................84
DESCRIPTION OF CAPITAL STOCK..................................................86
SHARES ELIGIBLE FOR FUTURE SALE...............................................90
UNDERWRITING..................................................................91
LEGAL OPINIONS................................................................92
EXPERTS .....................................................................92
WHERE YOU CAN FIND MORE INFORMATION...........................................92
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-1
3
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PROSPECTUS SUMMARY
Because this is a summary, it does not contain all the information that may
be important to your decision to invest in our stock. You should carefully read
this entire Prospectus, especially the information under the caption "Risk
Factors," before deciding to purchase our common stock. Unless otherwise
indicated, the information in this Prospectus assumes (i) an initial public
offering price of $9.50 per share and (ii) no exercise by the underwriter of its
over-allotment option to purchase up to 300,000 additional shares of common
stock.
GREATER ATLANTIC FINANCIAL CORP.
We are a savings and loan holding company which was originally organized in
June 1997. We conduct substantially all of our business through our wholly-owned
subsidiary, Greater Atlantic Bank, a federally-chartered savings bank, and its
wholly-owned subsidiary, Greater Atlantic Mortgage Corporation. We offer
traditional banking services to customers through four Greater Atlantic Bank
branches located throughout the greater Washington, D.C./Baltimore metropolitan
area. We also originate mortgage loans for sale in the secondary market through
Greater Atlantic Mortgage Corporation.
The bank was organized in 1886 and previously operated as a
Maryland-chartered thrift institution under the name Greater Baltimore Savings
and Loan Association. On March 21, 1989, the bank converted to a federal savings
bank and changed its name to Greater Atlantic Savings Bank, F.S.B.
In September 1997, an investment group led by current management formed our
company to purchase all of the outstanding common and preferred stock of Greater
Atlantic Savings Bank, F.S.B. In October 1997, current management raised
approximately $5.9 million, of which approximately $2.0 million was used to
acquire the bank with the balance infused as capital into the bank in order to
support its operations. At that time, the bank had total assets of $31.6 million
and had incurred a net loss of $634,000 for the year ended September 30, 1997.
In February 1998, current management adopted the bank's present name, Greater
Atlantic Bank. In July 1998, we transferred the mortgage operations of the bank
to the newly formed mortgage company which operates as a wholly-owned subsidiary
of the bank.
The group that purchased the bank was led by William Calomiris and Carroll
E. Amos. Mr. Calomiris is President of Wm. Calomiris Investment Corporation, a
company engaged in building, developing and property management. Mr. Amos, an
independent investor and Certified Public Accountant, was employed by Washington
Federal Savings Bank from 1982 until 1996, serving first as Chief Financial
Officer and from 1991 until 1996 as Vice Chairman, Chief Executive Officer and
director. Mr. Amos subsequently served as Vice Chairman and Chief Executive
Officer of 1st Washington Bancorp, Inc., the holding company formed by
Washington Federal Savings Bank, until the acquisition of 1st Washington by
First Maryland Bancorp in July 1996. Mr. Calomiris currently serves as Chairman
of the Board of the company and the bank and Mr. Amos serves as President and
Chief Executive Officer of the company and the bank.
Following the acquisition of Greater Atlantic Bank by the company, Messrs.
Calomiris and Amos assembled a board of directors of well-known business and
civic leaders with strong ties to the bank's market area and a commitment to the
growth and success of the company. They also hired bank personnel and loan
officers with knowledge of the local market and experience in extending credit
to
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small and medium-sized businesses. Several of these individuals had contributed
to the success, along with Messrs. Calomiris and Amos, of 1st Washington
Bancorp. When we acquired the bank, it was a small undercapitalized problem
institution that did not have the financial or managerial resources necessary to
build a strong community based bank. On the other hand, the bank did have a
strong mortgage banking division that was well managed, although its growth was
restricted from a lack of capital and the problems inherent in the bank.
Therefore, when we acquired the bank, we saw the opportunity to obtain an
existing bank franchise with a limited infrastructure at a relatively low price
as compared to the then current market. We felt that with the presence of the
mortgage banking division and the mortgage market that existed at the time of
acquisition, and that continues today, we would be able to build a strong
locally owned banking institution that would be more economical than
establishing a de novo institution.
After assuming control of the bank in October 1997, we implemented a
strategy of growing the bank and expanding its mortgage banking activities so
that the revenue from that activity would offset the operating costs that are
incurred at the bank level.
Since current management has taken over the bank's operations, we opened
two branch offices in Arlington, Virginia and Washington, D.C. and increased
total assets from $31.6 million at September 30, 1997 to $117.8 million at
December 31, 1998. We have also returned to profitability under current
management with net income increasing to $609,000 for the fiscal year ended
September 30, 1998, compared to a net loss of $634,000 for the fiscal year ended
September 30, 1997. For the three months ended December 31, 1998, we recognized
$271,000 in net income and achieved a return on average equity of 15.79%.
Following the offering, we will continue to implement the following growth
strategy so as to become less reliant on mortgage banking income, to enhance
shareholder value and to build our banking franchise:
o Expand the bank's current branch network.
o Expand and diversify the bank's loan products.
o Increase the amount of transaction accounts through a branch
sales and service culture.
o Purchase investment securities for growth and profitability.
o Expand the products of Greater Atlantic Mortgage.
o Improve our operating efficiency.
Our executive offices are located at 10700 Parkridge Boulevard, Reston,
Virginia 20191 and our telephone number is (703) 391-1300.
5
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THE OFFERING
Common stock offered ...................... 2,000,000 shares
Common stock outstanding
after the offering...................... 2,822,427 shares. There are also
153,013 shares of common stock
reserved for future issuance upon
exercise of outstanding options
and warrants at exercise prices
ranging between $7.50 and $8.38
per share.
Estimated net proceeds to
the company ......................... $17,245,000, assuming an initial
public offering price of $9.50 per
share, underwriting commissions of
$1,130,000, and other expenses
estimated to be $625,000.
Use of proceeds............................ We intend to use the net proceeds
of this offering to increase the
capital of Greater Atlantic Bank
for possible future acquisitions
of other financial institutions,
for working capital and for
general corporate purposes.
Proposed purchases of common stock......... Our directors, executive officers
and current shareholders intend to
purchase approximately $5.0
million or approximately 526,300
shares of common stock in the
offering. Therefore, such persons
would own in the aggregate
approximately 46.90% of our common
stock (49.63% assuming exercise of
outstanding options and warrants).
Proposed Nasdaq National
Market symbol............................. GAFC
6
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following Summary Consolidated Financial Data of Greater Atlantic
Financial Corp. is derived from the Selected Consolidated Financial Data
appearing elsewhere in this Prospectus, and should be read 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 Prospectus. Some prior year amounts have been reclassified to conform with
the 1998 presentation.
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AT OR FOR THE THREE MONTHS AT OR FOR THE YEARS ENDED
ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- --------------------------
1998 1997 1998 1997
----------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net interest income................................ $ 508 $ 310 $ 1,448 $ 1,103
Provision for loan losses.......................... 22 35 159 487
--------- --------- -------- ---------
Net interest income after provision
for loan losses............................... 486 275 1,289 616
Noninterest income................................. 2,513 1,158 6,268 3,528
Noninterest expense................................ 2,541 1,288 6,637 4,778
------- ------- ------- --------
Income (loss) before taxes....................... 458 145 920 (634)
Income tax provision............................... 187 29 311 --
-------- --------- -------- ----------
Net income (loss).................................. $ 271 $ 116 $ 609 $ (634)
======= ======= ======= ========
PER SHARE DATA:
Net income(loss):
Basic............................................ $ 0.33 $ 0.15 $ 0.77 $ (1.92)
Diluted.......................................... 0.33 0.15 0.77 (1.92)
Book value......................................... 8.42 7.66 8.38 4.74
Tangible book value................................ 8.42 7.08 8.38 4.74
Weighted average shares outstanding:
Basic............................................ 813,467 780,000 787,115 330,000
Diluted.......................................... 815,218 780,000 787,115 330,000
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DATA:
Total assets....................................... $117,818 $30,487 $107,342 $31,554
Total loans receivable, net........................ 28,704 16,656 25,510 18,854
Mortgage-loans held for sale....................... 14,812 3,498 25,322 9,946
Investment securities.............................. 34,001 3,647 32,454 1,005
Mortgage-backed securities......................... 31,218 953 18,959 --
Total deposits .................................... 104,097 23,954 76,311 28,377
FHLB advances...................................... 5,000 -- 22,000 1,250
Total stockholders' equity......................... 6,849 5,974 6,817 1,564
PERFORMANCE RATIOS(2):
Return on average assets........................... 1.04% 1.53% 1.08% (2.26)%
Return on average equity........................... 15.79 9.41 10.28 (32.23)
Net interest margin................................ 2.04 4.30 2.68 4.18
Efficiency ratio(3)................................ 84.11 87.74 86.02 103.17
ASSET QUALITY DATA:
Non-performing assets to total assets, at period end 0.26 2.05 0.30 2.75
Non-performing loans to total loans, at period end. 0.62 1.83 0.81 2.95
Net charge-offs to average total loans............. (0.01) 0.69 1.18 0.58
Allowance for loan losses to:
Total loans...................................... 1.88% 3.26% 2.03% 3.44%
Non-performing loans............................. 304.02 177.78 251.30 116.69
Non-performing loans............................... $199 $360 $230 $665
Non-performing assets.............................. 309 626 320 867
Allowance for loan losses.......................... 605 640 578 776
CAPITAL RATIOS OF THE BANK:
Leverage ratio..................................... 5.55% 18.18% 5.87% 6.06%
Tier 1 risk-based capital ratio.................... 14.27 32.15 18.41 9.65
Total risk-based capital ratio..................... 15.52 33.40 19.66 10.90
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7
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(1) Consists of securities classified as available for sale and for trading.
(2) Ratios are presented on an annualized basis where appropriate.
(3) Efficiency ratio consists of noninterest expense divided by the sum of net
interest income and noninterest income.
8
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RISK FACTORS
The following discussion is only a summary of aspects of our business and
operations which involve risks. You should read the entire Prospectus in order
to more fully understand the nature of our business and operations. In addition
to historical information, the discussion in this Prospectus contains
forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. Our cautionary
statements should be read as being applicable to all related forward-looking
statements wherever they appear in this Prospectus. Our actual results could
differ materially from those discussed. Some of the factors that could cause or
contribute to such differences include those discussed in this section and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
THESE ARE RISKS WHICH RESULT FROM OUR RAPID GROWTH.
Since the acquisition of the bank, we have grown rapidly as a result of our
branch expansion and the acquisition of competitors by out-of-market
institutions. In the short-term, we expect this rapid growth to continue. To
date, we have not experienced any material problems as a result of our growth.
We believe we have the management, data processing systems, internal controls
and a strong credit culture to support continued rapid growth. However, our
growth and profitability depend on the ability of our officers and key employees
to manage our growth effectively, to attract and retain skilled employees and to
maintain adequate internal controls and a strong credit culture. Accordingly,
there can be no assurance that we will be successful in managing our expansion
and the failure to do so would adversely affect our financial condition and
results of operations.
One result of our rapid growth during the past two years has been a
significant increase in noninterest expense. These costs are related to
increased occupancy expenses and the increased staffing and equipment which are
necessary to support our growth. Because we expect this rapid growth to
continue, investors should expect noninterest expense to continue to rise
although management believes such expenses will increase at a slower rate than
in prior periods.
It has been our strategy to increase the number of branches of Greater
Atlantic Bank prior to the time that the volume of business was sufficient to
generate profits from branch operations. That strategy was implemented in order
to have a branch network in place to take advantage of business opportunities as
they arose. That strategy anticipates that revenues from mortgage banking
operations would offset losses from retail branch operations until such time as
the volume of other banking business reaches the levels necessary to support
profitable branch operations. The continued success of that strategy depends on
management's ability to continue to generate the necessary level of profit from
the mortgage banking business.
WE HAVE A LIMITED OPERATING HISTORY.
Since we acquired the bank in October 1997, management has focused on
returning the bank to profitability and aggressively growing the bank's
interest-earning assets and retail branch system. Our business strategy is
dependent upon our ability to (i) increase interest-earning assets, including
our investment in loans and investment and mortgage-backed securities, (ii)
effectively control interest rate and credit risk, and (iii) reduce funding and
operating costs. Our ability to maintain profitability as we pursue this
business strategy will depend upon, among other things, (i) maintaining
appropriate
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procedures, policies and standards with respect to our investments and loan
activities, (ii) maintaining, augmenting and implementing internal reporting and
management systems to accommodate substantial increases in our investment and
loan portfolios, (iii) retaining and attracting qualified personnel or advisors,
(iv) attracting additional capital, and (v) operating in competitive, economic
and regulatory environments that are conducive to our business activities.
Changes in our ability to obtain or maintain any or all of these factors or to
successfully implement our strategy could have a material adverse impact on our
operations, profitability and growth.
WE DEPEND ON KEY PERSONNEL.
We are dependent on the continued services of certain key management
personnel, including Carroll E. Amos, President and Chief Executive Officer of
the company and of the bank. We have entered into a three-year employment
agreement with Mr. Amos effective November 1, 1998. Our continued growth and
profitability will depend upon our ability to attract and retain skilled
managerial, marketing and technical personnel. Competition for qualified
personnel in the banking industry is intense and there can be no assurance that
we will be successful in attracting and retaining such personnel.
WE RELY ON MORTGAGE BANKING INCOME WHICH CARRIES RELATED RISKS.
We are currently dependent on the origination and sale of loans by Greater
Atlantic Mortgage Corporation to sustain profitable operations. Real estate loan
origination activity, including refinancings, generally is greater during
periods of declining interest rates and favorable economic conditions, and has
been favorably affected by relatively lower market interest rates during recent
years. There is no assurance that such favorable conditions will continue. To
the extent such favorable conditions fail to continue, income from Greater
Atlantic Mortgage Corporation may not be available to support our growth
strategy.
WE ARE FOLLOWING A LEVERAGE STRATEGY.
We intend to leverage the proceeds raised in this offering to support
increases in deposits, Federal Home Loan Bank advances and reverse repurchase
agreements which will be used to originate loans and to purchase investment and
mortgage-backed securities. Management's leverage strategy is premised on the
assumption that we will earn a positive spread on the yield generated from loans
originated and securities purchased over the rate we pay on our borrowings. If
market interest rates fluctuate in such a manner that the company is unable to
earn a positive spread as a result of its leverage strategy, the company's net
interest margin and net earnings will be adversely affected.
EFFECTIVE VOTING CONTROL WILL REMAIN WITH MANAGEMENT.
We have 822,427 shares of common stock outstanding all of which are held by
our directors, executive officers and current shareholders. In addition, options
and warrants to purchase an aggregate of 153,013 shares of common stock are
beneficially owned by such persons and they intend to purchase an aggregate of
approximately $5.0 million or approximately 526,316 shares of common stock in
the offering. In that event, our directors, executive officers and current
shareholders of the company would own in the aggregate approximately 46.90% of
the common stock of the company (49.63% assuming the exercise of outstanding
options and warrants). If, following the offering, they were to act as a group
or
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in concert, they could exercise a significant influence over the outcome of any
stockholder vote requiring a majority vote or in the election of directors and
could effectively exercise veto power on matters requiring a stockholder vote
with respect to certain business combinations.
THERE HAS NOT BEEN A PRIOR MARKET FOR THE COMMON STOCK.
We have never publicly issued stock. We have applied to have the common
stock listed on the Nasdaq National Market under the symbol "GAFC." However,
there can be no assurance that an active and liquid trading market for the
common stock will develop or, once developed, will continue. There also cannot
be any assurances that purchasers of our common stock will be able to sell their
shares at or above the initial public offering price. The absence of a market
for the common stock would have an adverse impact on both the price and
liquidity of our common stock.
THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
The Year 2000 issue is the result of computer software programs only being
able to use two digits rather than four to define the applicable year. Thus,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations,
causing disruptions of operations, including, among others, a temporary
inability to process deposit and loan transactions, affect financings or engage
in normal business activities and could have a material adverse effect on our
results of operations and financial condition.
RESIDENTIAL CONSTRUCTION AND NONRESIDENTIAL LENDING CARRY GREATER RISK THAN
PERMANENT LOANS ON SINGLE-FAMILY HOMES.
At December 31, 1998, residential construction, commercial real estate
(including multi-family residential real estate), commercial business and
consumer loans amounted to approximately $14.2 million or approximately 44.07%
of our total loan portfolio. Although such loans generally provide for higher
interest rates and shorter terms than single-family residential real estate
loans, such loans generally have a higher degree of credit risk and we intend to
increase our emphasis on residential construction, commercial real estate,
commercial business and consumer lending during the next several years. No
assurance can be given that we will be successful in building up these
portfolios to levels consistent with our business plan.
MAKING LOANS CARRIES WITH IT THE RISK OF LOAN LOSSES.
The risk of credit losses on loans is part of the banking business and
varies with, among other things, general economic conditions, the type of loan,
the creditworthiness of the borrower and the value and marketability of the
collateral for the loan. We maintain an allowance for loan losses based upon,
among other things, historical experience, an evaluation of economic conditions
and regular reviews of delinquencies and loan portfolio quality. Based upon such
factors, we make judgments about the ultimate collectability of the loan
portfolio and provide an allowance for loan losses based upon outstanding loan
balances. We also provide allowances for specific loans when their
collectability is considered questionable.
There can be no assurance that the allowance we have established will prove
sufficient to cover future loan losses and future adjustments may be necessary
if economic conditions differ substantially
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from the assumptions used or if adverse developments arise with respect to
non-performing or performing loans. Material additions to the allowance for loan
losses would result in a decrease in the bank's net income and capital.
CHANGES IN LEVELS OF INTEREST RATES MAY ADVERSELY AFFECT US.
We expect to continue to realize income from the differential or "spread"
between the interest earned on loans, securities and other interest-earning
assets, and the interest paid on deposits, borrowings and other interest-bearing
liabilities. That spread is affected by the difference between the maturities
and repricing characteristics of interest-earnings assets and interest-bearing
liabilities. Loan volume and yields are affected by market interest rates on
loans, and rising interest rates generally are associated with fewer loan
originations. Management expects that a substantial portion of our assets will
continue to be indexed to changes in market interest rates and we intend to
attract a greater proportion of short-term liabilities which will help address
our interest rate risk. At December 31, 1998, we had $78.9 million in assets
maturing or repricing within one year and $83.1 million in liabilities maturing
or repricing within one year. The lag in implementation of repricing terms on
our adjustable-rate assets may result in a decline in net interest income in a
rising interest rate environment. There can be no assurance that our interest
rate risk will be minimized or eliminated. Further, an increase in the general
level of interest rates may adversely affect the ability of certain borrowers to
pay the interest on and principal of their obligations. Accordingly, changes in
levels of market interest rates could materially adversely affect our interest
rate spread, asset quality, loan origination volume and overall financial
condition and results of operations.
WE ARE SUBJECT TO EXTENSIVE REGULATION AND SUPERVISION LEGISLATION.
The bank is subject to extensive regulation and supervision as a federal
savings institution. In addition, the company, as a savings and loan holding
company, is also subject to regulation and supervision. Such regulations, which
affect us on a daily basis, may be changed at any time, and the interpretation
of the relevant law and regulations is also subject to change by the authorities
who examine us and interpret those laws and regulations. Any change in the
regulatory structure or the applicable statutes or regulations, whether by the
Office of Thrift Supervision, the Federal Deposit Insurance Corporation or the
Congress, could have a material impact on our financial condition and
operations.
WE HAVE SIGNIFICANT 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.
WE DETERMINED THE INITIAL PUBLIC OFFERING PRICE OF THE COMMON STOCK BY
NEGOTIATION.
12
<PAGE>
We determined the initial public offering price of our common stock by
negotiation with the underwriter based on a variety of factors, including, in
addition to prevailing market conditions, the history of and prospects for the
industry in which we compete, an assessment of our management, the prospects for
the bank, an evaluation of our assets, comparisons of the relationships between
market prices and book values of other financial institutions of a similar size
and asset quality, and other factors that were deemed relevant. The initial
public offering price was not based upon an actual trading market for our common
stock. Accordingly, we cannot assure investors that they will be able to resell
their shares at or above the initial public offering price following the
offering.
WE DO NOT INTEND TO PAY A DIVIDEND ON THE COMMON STOCK.
We have not paid cash dividends on our common stock and dividends are not
contemplated for the foreseeable future. We can not tell you if or when we may
begin the payment of cash dividends. In addition, because our business
operations are conducted through the bank, cash available to pay dividends
depends upon dividends paid to us by the bank. The bank's and our ability to pay
dividends are also subject to and limited by certain legal and regulatory
restrictions.
OUR EXECUTIVE OFFICERS, DIRECTORS AND CURRENT SHAREHOLDERS OWN 822,427 SHARES OF
COMMON STOCK WHICH ARE ELIGIBLE FOR FUTURE SALE.
As of January 31, 1999, there were 822,427 shares of our common stock
outstanding which may not be sold unless they are registered under the
Securities Act of 1933, as amended, or are sold pursuant to Rule 144 under the
Securities Act or another exemption from registration. An aggregate of 333,467
shares of common stock are beneficially owned by our executive officers and
directors. We and our executive officers and directors and beneficial owners of
2% or more of our common stock have agreed that, for a period of 180 days after
completion of the offering, we will not sell any shares of common stock. There
are also 153,013 shares of common stock reserved for future issuance upon the
exercise of outstanding options and warrants. The sale of the shares issuable
upon exercise of the options and warrants will also be restricted under Rule
144. The sale of any number of shares of common stock in the public market
following the offering could adversely impact the market price of the shares.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS CONTAIN SUPERMAJORITY VOTING
REQUIREMENTS AND OTHER ANTI-TAKEOVER MEASURES.
Our Certificate of Incorporation and Bylaws contain provisions designed to
help our board of directors deal with attempts to acquire control of the
company. Those provisions include classification of the board of directors into
three classes pursuant to which directors of each class serve for staggered
three year periods. The Certificate of Incorporation also provides for
supermajority voting provisions for the approval of certain business
combinations. Those provisions do not prevent a takeover. However, they may
discourage a takeover attempt not approved by our board of directors even if it
offered stockholders a substantial premium over the market price of our stock.
As a result, stockholders who might desire to participate in such a transaction
might not have the opportunity to do so. Such provisions also make the removal
of our board of directors and management more difficult and may serve to keep
current management in place. In turn, that could adversely affect the market
price of the common stock.
13
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the 2,000,000 shares of common stock
offered hereby (after deducting the underwriting discount and commissions and
estimated expenses of the offering) are estimated to be approximately $17.2
million ($19.9 million if the underwriter's over-allotment option is exercised
in full), based upon an estimated initial public offering price of $9.50 per
share. We intend to infuse approximately $12.9 million of the net proceeds into
the bank for future expansion and acquisitions, loan originations, working
capital and general corporate purposes. The bank intends to leverage the
proceeds we contribute to it by increasing its origination of loans and the
purchase of investment and mortgage-backed securities funded primarily through
increases in deposits, FHLB advances and reverse repurchase agreements. We
intend to use the proceeds retained at the company level for loans and
investments. Pending their longer-term use, the net proceeds from this offering
are expected to be invested in short-term, investment grade securities.
With respect to future acquisitions, we regularly review potential
acquisitions. We have no current agreements, understandings or commitments for
any such acquisitions.
MARKET FOR THE COMMON STOCK
We have not previously issued stock to the public and, consequently, there
is no established market for the common stock. We have applied for approval to
have the common stock listed on Nasdaq National Market under the symbol "GAFC"
upon completion of the offering. Such approval is subject to various conditions,
including completion of the offering and the satisfaction of applicable listing
criteria. We are not certain that the common stock will be able to meet the
applicable listing criteria in order to maintain the listing on Nasdaq or that
an active and liquid trading market will develop or, if developed, will be
maintained. A public market having the desirable characteristics of depth,
liquidity and orderliness, however, depends upon the presence in the marketplace
of both willing buyers and sellers of common stock at any given time, which is
not within our control. No assurance can be given that an investor will be able
to resell the common stock after the offering at or above the initial public
offering price.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently anticipate that we will retain all of our earnings, if any, to finance
our operations and the expansion of our business. Therefore, we do not intend to
pay dividends on our common stock in the foreseeable future. No assurances can
be given, that any dividends will be paid or, if commenced, will continue to be
paid.
If we pay dividends in the future, they will be funded primarily through
dividends from the bank. For information concerning federal regulations which
apply to the bank's ability to make capital distributions, including payment of
dividends to the company, see "Federal and State Taxation--Federal
Taxation--Distributions" and "Regulation--Federal Savings Institution
Regulation--Limitation on Capital Distributions."
14
<PAGE>
DILUTION
Purchasers of common stock in the offering will experience immediate
dilution in net tangible book value (stockholders' equity less intangible
assets) per share from the initial public offering price. "Net tangible book
value per share" is determined by dividing the difference between the total
amount of tangible assets and the total amount of liabilities by the number of
shares of common stock outstanding. At December 31, 1998, the net tangible book
value of the common stock on a fully diluted basis was $8.42 per share. After
giving effect to the sale of 2,000,000 shares of common stock at an estimated
initial public offering price of $9.50 per share (the median of the estimated
initial offering price range) and to the payment of estimated offering expenses
of $1,755,000, the pro forma tangible book value per share at December 31, 1998
would have been $8.56. This would represent an immediate increase in tangible
book value of $0.14 per share to existing shareholders and an immediate dilution
to new investors of $0.94 per share.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization at December 31, 1998, and
as adjusted to give effect to the sale of 2,000,000 shares of common stock
offered hereby at the estimated initial public offering price of $9.50 per share
(the midpoint of the estimated initial public offering price range), less the
underwriting discount and commissions and estimated expenses. You should read
this table in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes thereto included in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
---------------------------------------------
ACTUAL AS ADJUSTED(1)
-------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Stockholders' equity
Common Stock, $.01 par value: $ 8 $ 28
10,000,000 shares authorized;
813,467 shares outstanding;
2,813,467 shares outstanding as adjusted......................
Additional paid-in capital....................................... 6,093 23,318
Retained earnings................................................ 880 880
Accumulated other comprehensive income........................... (132) (132)
------ -------
Total stockholders' equity....................................... $6,849 $24,094
====== =======
Net book value per share......................................... $ 8.42 $ 8.56
======= =========
</TABLE>
- ----------
(1) If the underwriter's over-allotment option is exercised in full, Common
Stock, additional paid-in capital and total stockholders' equity would be
$31,000, $26.0 million and $26.7 million, respectively. This table excludes
approximately 153,013 shares of common stock issuable upon exercise of
outstanding options and warrants at average exercise prices ranging from
$7.50 to $8.38 per share.
16
<PAGE>
OUR BUSINESS
We are a community-oriented institution offering a variety of financial
products and services to meet the needs of the communities we serve. Our lending
and deposit gathering activities are concentrated in our primary market of the
greater Washington, D.C./Baltimore metropolitan area. We conduct business from
our home office at 11834 Rockville Pike in Rockville, Maryland and through three
full-service branch offices in Pasadena, Maryland, Arlington, Virginia and
Washington, D.C. All of our offices are located within a radius of approximately
35 miles of Washington, D.C.
As an independent community bank, we are engaged in the general banking
business with particular emphasis on the needs of individuals and small
businesses. We emphasize personal attention and professional service to our
customers while delivering a wide range of traditional financial products and
services. We believe that individuals and small businesses in our market area
are underserved by the larger out-of-state banking institutions which have
acquired local institutions. Those acquisitions have provided us with the
opportunity to attract both displaced customers who are unsatisfied with the
level of service at larger institutions, as well as experienced banking
professionals, who have strong knowledge of our primary market and a desire to
continue their careers in banking. To this end, we provide customers with direct
access to local bank officers who are empowered to act with flexibility to meet
customers' unique needs in order to foster long-term loan and deposit
relationships.
GROWTH STRATEGY
Since assuming control of the bank in October 1997, we have implemented a
strategy of growing the bank by leveraging the existing net worth through the
purchase of investment and mortgage-backed securities until loan growth at the
bank level could supplant such activity. We have moved rapidly to build a branch
network in our market area and have opened two new branch offices in 1998. The
bank also has expanded its mortgage banking activities so that the revenue from
that activity would offset the operating costs that are incurred at the bank
level to effect our growth strategy.
Following the offering, we will continue to implement the following growth
strategies so as to become less reliant on mortgage banking income to enhance
shareholder value and to build our banking franchise:
o Expand the bank's branch network to accelerate retail deposit growth.
We intend to open new branch offices and branch offices at locations
previously occupied by other banks, and acquire small institutions or
branches which present opportunities to enhance the existing
franchise.
o Expand and diversify loan products while maintaining a community focus
with personal attention. We intend to increase our emphasis on
residential construction, commercial real estate, consumer and
commercial business lending.
o Increase the amount of transaction-based accounts in our portfolio
through the implementation of our community banking strategy. We
intend to continue to offer competitive rates and lower fee
transaction products in order to attract customers from larger
depository institutions and lower our overall cost of funds.
o Continue our strategy of leveraging our existing net worth by
investing in securities to support growth and profitability.
17
<PAGE>
o Develop niche products and services for Greater Atlantic Mortgage
Corporation ("Greater Atlantic Mortgage"). For example, in an attempt
to further diversify its product mix, Greater Atlantic Mortgage has
recently started originating pre-sold, high loan-to-value, home equity
loans and lines of credit and small multi-family residential loans.
o Improve our operating efficiency by taking advantage of our prior
investment in management and infrastructure to further implement our
growth strategy.
PRODUCTS AND SERVICES
Lending Activities. Our lending strategy is to maintain a conservative and
diverse loan mix consisting of residential mortgage loans, multi-family
residential and commercial real estate loans, construction and development
loans, commercial business loans and consumer loans. Although historically we
have focused on the origination of single-family residential loans, in the
future management expects to increase its emphasis on the origination of
residential construction, multi-family, residential and commercial real estate,
commercial business and consumer loans. As a result of the offering, our
loans-to-one borrower limit is expected to increase which will allow us to
compete for and originate larger residential construction, multi-family
residential and commercial real estate loans. In addition, we are training and
incentivizing our employees to market commercial business and consumer loans to
customers in our branch offices.
Mortgage Banking Activities. 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 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. For the
fiscal year ended September 30, 1998, and the three months ended December 31,
1998, Greater Atlantic Mortgage originated $252.6 million and $92.9 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.
Investing Activities. We purchase mortgage-backed securities, U.S.
government and agency-sponsored securities and other fixed income securities
which are funded through advances from the FHLB of Atlanta or other borrowings.
The primary goals of this strategy are to increase net interest income, return
on average equity and earnings per share. We administer this strategy
pro-actively, analyzing risk and reward relationships in different interest rate
environments based on the composition of our investment portfolio and its
overall interest rate risk position.
Deposit Products. We offer a variety of deposit accounts with a range of
interest rates and terms. The bank's deposit products include checking, money
market, savings, NOW, certificates of deposit and individual retirement
accounts. Historically, due to its organization as a savings institution, the
bank has relied on certificates of deposit as its primary funding source. The
company intends to implement a program to offer customers a choice of different
types of checking accounts which traditionally cost the bank less than
certificates of deposit.
18
<PAGE>
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 Prospectus. The selected historical consolidated financial
data as of and for each of the two years ended September 30, 1998 are derived
from our Consolidated Financial Statements which have been audited by BDO
Seidman, LLP, independent accountants. Certain prior year amounts have been
reclassified to conform with the 1998 presentation. The selected historical
consolidated financial data as of and for the three months ended December 31,
1998 and 1997 have not been audited but, in the opinion of management, contain
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair statement of the results for the interim periods. The results of
operations for the three months ended December 31, 1998 are not necessarily
indicative of the results of operations that may be expected for the year ended
September 30, 1999, or for any future periods.
<TABLE>
<CAPTION>
AT OR FOR AT OR FOR
THE THREE MONTHS ENDED THE YEARS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Interest income...................................... $1,790 $614 $4,011 $2,394
Interest expense..................................... 1,282 304 2,563 1,291
------ ------ ------ ------
Net interest income............................... 508 310 1,448 1,103
Provision for loan losses............................ 22 35 159 487
------ ------- ------- ------
Net interest income after provision
for loan losses................................ 486 275 1,289 616
Noninterest income................................... 2,513 1,158 6,268 3,528
Noninterest expense.................................. 2,541 1,288 6,637 4,778
------ ------ ------ ------
Income(loss) before taxes........................ 458 145 920 (634)
Income tax provision................................. 187 29 311 --
------- ------- ------ --------
Net income (loss).................................... $ 271 $ 116 $ 609 $ (634)
====== ===== ===== =======
PER SHARE DATA:
Net income (loss):
Basic............................................. $0.33 $0.15 $0.77 $(1.92)
Diluted........................................... 0.33 0.15 0.77 (1.92)
Book value........................................... 8.42 7.66 8.38 4.74
Tangible book value.................................. 8.42 7.08 8.38 4.74
Weighted average shares outstanding:
Basic.............................................. 813,467 780,000 787,115 330,000
Diluted............................................ 815,218 780,000 787,115 330,000
CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION DATA:
Total assets......................................... $117,818 $30,487 $107,342 $31,554
Total loans receivable, net.......................... 28,704 16,656 25,510 18,854
Allowance for loan losses............................ 605 640 578 776
Mortgage-loans held for sale......................... 14,812 3,498 25,322 9,946
Investment securities (1) ........................... 34,001 3,647 32,454 1,005
Mortgage-backed securities........................... 31,218 953 18,959 --
Total deposits....................................... 104,097 23,954 76,311 28,377
FHLB advances........................................ 5,000 -- 22,000 1,250
Total stockholders' equity........................... 6,849 5,974 6,817 1,564
Tangible capital..................................... 6,849 5,522 6,817 1,564
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR AT OR FOR
THE THREE MONTHS ENDED THE YEARS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
AVERAGE CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION DATA:
Total assets ........................................ $ 103,922 $ 30,327 $ 56,406 $ 28,075
Investment securities(1) ............................ 36,217 3,833 15,300 2,154
Mortgage-backed securities .......................... 23,941 102 8,337 --
Total loans ......................................... 42,240 24,895 30,373 25,248
Allowance for loan losses ........................... (631) (525) (574) (408)
Total deposits ...................................... 78,346 21,659 39,915 21,334
Total stockholders' equity .......................... 6,866 4,932 5,922 1,967
PERFORMANCE RATIOS(2):
Return on average assets ............................ 1.04% 1.53% 1.08% (2.26)%
Return on average equity ............................ 15.79 9.41 10.28 (32.23)
Net interest margin ................................. 2.04 4.30 2.68 4.18
Efficiency ratio(3) ................................. 84.11 87.74 86.02 103.17
ASSET QUALITY DATA:
Non-performing assets to total assets,
at period end...................................... 0.26% 2.05% 0.30% 2.75%
Non-performing loans to total loans, at period
end.............................................. 0.62 1.83 0.81 2.95
Net charge-offs to average total loans .............. (0.01) 0.69 1.18 0.58
Allowance for loan losses to:
Total loans ...................................... 1.88 3.26 2.03 3.44
Non-performing loans ............................. 304.02 177.78 251.30 116.69
Non-performing loans ................................ $ 199 $ 360 $ 230 $ 665
Non-performing assets ............................... 309 626 320 867
Allowance for loan losses ........................... 605 640 578 776
CAPITAL RATIOS OF THE BANK:
Leverage ratio ...................................... 5.55% 18.18% 5.87% 6.06%
Tier 1 risk-based capital ratio ..................... 14.27 32.15 18.41 9.65
Total risk-based capital ratio ...................... 15.52 33.40 19.66 10.90
</TABLE>
- ----------
(1) Consists of securities classified as available for sale and for trading.
(2) Ratios are presented on an annualized basis where appropriate.
(3) Efficiency ratio consists of noninterest expense divided by net interest
income and noninterest income.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our results of operations and financial
condition should be read in conjunction with the Consolidated Financial
Statements and related notes and other statistical information included in the
tables accompanying the discussion and appearing elsewhere within this
Prospectus. Results reflect our operations for the quarters ended December 31,
1998 and December 31, 1997 and for the years ended September 30, 1998 and 1997.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
AND DECEMBER 31, 1997
Net Income. Net income for the three months ended December 31, 1998,
amounted to $271,000 or $0.33 per share compared to net income of $116,000 or
$0.15 per share for the three months ended December 31, 1997. The $155,000
increase in net income over the comparable period one year ago was due to an
increase in income from mortgage-banking activities offset in part by an
increase in noninterest expense. 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.
The following table presents a comparison of the components of interest
income and expense and net interest income.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, DIFFERENCE
------------------------------ -----------------------------
1998 1997 AMOUNT %
-------------- ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income:
Loans.......................................... $ 940 $548 $ 392 71.53%
Investments.................................... 850 66 784 1,187.88
-------- ------ --------
Total........................................ 1,790 614 1,176 191.53
------- ----- -------
Interest expense:
Deposits....................................... 1,075 282 793 281.21
Borrowings..................................... 207 22 185 840.91
------- ------ --------
Total........................................ 1,282 304 978 321.71
------- ----- --------
Net interest income............................... $ 508 $310 $ 198 63.87%
======= ==== ======= =====
</TABLE>
21
<PAGE>
Our growth in net interest income for the three months ended December 31,
1998 was due primarily to the increase in average interest-earning assets
resulting from our planned growth. Although average interest-earning assets
increased $73.6 million or 242.67% over the comparable period one-year ago, a
decline in the net interest margin (net interest income divided by average
interest-earning assets) of 226 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 the three months ended December 31, 1998 increased $1.2
million from the three months ended December 31, 1997 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 on the loan portfolio
for the three months ended December 31, 1998 compared to interest income earned
for the 1997 period resulted from an increase of $17.3 million in the average
balance of loans outstanding. This increase was coupled with an increase in
interest income from the investment and mortgage-backed securities portfolios,
due to an increase of $53.2 million in the average outstanding balance, offset
in part by a 76 basis point decrease in the average yield earned on the
portfolio.
The increase in interest expense on deposits and borrowed funds for the
three months ended December 31, 1998 compared to the 1997 period was principally
the result of a significant increase in total deposits and borrowed funds and an
increase of 15 basis points 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 $50.1 million, or 272.99%, from $18.3 million for the
three months ended December 31, 1997 to $68.4 million for the three months ended
December 31, 1998, with the average rate paid increasing from 5.54% for the
three months ended December 31 1997 to 5.62% for the three months ended December
31, 1998. The average rate we paid for deposits increased from 5.21% for the
three months ended December 31, 1997 to 5.49% for the three months ended
December 31, 1998. That increase in rate was coupled with an increase of $56.7
million in the average outstanding balance of deposits.
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.
22
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED DECEMBER 31,
-------------------------------------------------------------
1998 1997
------------------------------- ---------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- -------- -------- -------- ------- --------
ASSETS: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans............................... $38,953 $ 871 8.94% $ 23,471 $516 8.79%
Consumer loans.................................. 1,116 24 8.60 758 18 9.50
Commercial business loans....................... 2,171 45 8.29 666 14 8.41
-------- ------ ------- -----
Total loans.................................. 42,240 940 8.90 24,895 548 8.80
Investment securities.............................. 33,217 492 5.92 3,833 65 6.78
Mortgage-backed securities......................... 23,941 358 5.98 102 1 3.92
-------- ------ ------- -----
Total interest-earning assets................ 99,398 1,790 7.20 28,830 614 8.52
------ ---- ----- ----
Non-earning assets................................. 4,524 1,497
-------- -------
Total assets................................... $103,922 $30,327
======== =======
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Savings accounts................................ $ 766 $ 6 3.13% $ 722 $ 6 3.32%
Now and money market
accounts..................................... 9,144 107 4.68 2,589 22 3.40
Certificates of deposit......................... 68,436 962 5.62 18,348 254 5.54
-------- ------- ------- -----
Total deposits............................... 78,346 1,075 5.49 21,659 282 5.21
FHLB advances................................... 13,411 163 4.86 1,478 22 5.95
Other borrowings................................ 3,098 44 5.68 -- -- --
--------- -------- ------- -----
Total interest-bearing
liabilities............................... 94,855 1,282 5.41 23,137 304 5.26
------- ---- ----- ----
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits.............. 1,497 1,739
Other liabilities................................ 704 519
---------- -------
Total liabilities.............................. 97,056 25,395
Stockholders' equity............................... 6,866 4,932
----------- -------
Total liabilities and
stockholders' equity...................... $103,922 $30,327
======== =======
Net interest income................................ $ 508 $310
====== ====
Interest rate spread............................... 1.79% 3.26%
==== ====
Net interest margin................................ 2.04% 4.30%
==== ====
</TABLE>
23
<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.
THREE MONTHS ENDED DECEMBER
31, 1998 VS. 1997
------------------------------
CHANGE ATTRIBUTABLE TO
------------------------------
VOLUME RATE TOTAL
--------- -------- ----------
(IN THOUSANDS)
Real estate loans ..... $ 340 $ 15 $ 355
Consumer loans ........ 9 (3) 6
Commercial business
loans ............... 32 (1) 31
------ ------ ------
Total loans ..... 381 11 392
Investments ........... 498 (71) 427
Mortgage-backed
securities ......... 234 123 357
------ ------ ------
Total interest-earning
assets ............. $1,113 $ 63 $1,176
====== ====== ======
Savings accounts ...... $ -- $ -- $ --
Now and money market
accounts ........... 56 29 85
Certificates of deposit 693 15 708
------ ------ ------
Total deposits ...... 749 44 793
FHLB advances ......... 178 (37) 141
Other borrowings ...... -- 44 44
------ ------ ------
Total interest-bearing
liabilities ........ $ 927 $ 51 $ 978
====== ====== ======
Change in net interest
income ............. $ 186 $ 12 $ 198
====== ====== ======
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 $35,000 during the three
months ended December 31, 1997 to $22,000 during the three months ended December
31, 1998. The reduction in the
24
<PAGE>
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 $171,000 during the three months ended December 31, 1997 to a recovery of
$5,000 during the three months ended December 31, 1998 as overall asset quality
improved as new management took a more aggressive posture in assessing
collectability of classified loans.
Noninterest Income. The following table presents a comparison of the
components of noninterest income.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED DECEMBER 31, DIFFERENCE
-------------------------------- ----------------------------
1998 1997 AMOUNT %
-------------- ------------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest income:
Gain on sale of loans ........................ $ 2,328 $ 1,038 $ 1,290 124.28%
Service fees on loans ........................ 175 83 92 110.84
Service fees on deposits ..................... 10 5 5 100.00
Other operating income ....................... -- 32 (32) (100.00)
------- ------- ------- ------
Total noninterest income .................. $ 2,513 $ 1,158 $ 1,355 117.01%
======= ======= ======= ======
</TABLE>
Noninterest income increased during the three months ended December 31,
1998, over the comparable period one year ago primarily as a result of the
increase in gain on sale of loans coupled with an increase in service fees on
loans, both of which related to an increased volume of loan originations and
sales as a result of the company's mortgage banking activities. The significant
level of gains during the three months ended December 31, 1998 resulted from the
company taking advantage of record loan origination volumes coupled with home
loan refinancing and a declining interest rate environment which enabled the
company to sell loans through Greater Atlantic Mortgage at a gain.
During the three months ended December 31, 1998, the company originated
$101.4 million in mortgage loans compared with $36.1 million originated in the
comparable period one year ago. The $65.3 million increase in loan originations
was largely attributable to decreases in interest rates and an increase in home
mortgage refinancing. During the period, substantially all loans originated were
sold in the secondary market, in most cases with servicing released. Loan sales
for the three months ended December 31, 1998 amounted to $105.8 million compared
to sales of $42.5 million during the comparable period one year ago. Sales of
loans resulted in gains of $2.3 million and $1.0 million for the three months
ended December 31, 1998 and 1997, respectively. The ability of the company to
generate gains from the sale of loans should continue in the future; however,
the level of future gains will depend upon the dollar amount of loans sold and
economic conditions.
25
<PAGE>
Noninterest Expense. The following table presents a comparison of the
components of noninterest expense.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, DIFFERENCE
--------------------------- ---------------------------
1998 1997 AMOUNT %
-------------- ----------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest expense:
Compensation and employee benefits............... $1,528 $ 753 $775 102.92%
Occupancy........................................ 245 93 152 163.44
Professional services............................ 43 41 2 4.88
Advertising...................................... 157 68 89 130.88
Deposit insurance premium........................ 17 27 (10) (37.04)
Furniture, fixtures and equipment................ 96 49 47 95.92
Data processing.................................. 22 25 (3) (12.00)
Loss from foreclosed real estate................. (2) 14 (16) (114.29)
Other operating expense.......................... 435 218 217 99.54
------ ------ ------ -----
Total noninterest expense...................... $2,541 $1,288 $1,253 97.28%
====== ====== ====== =====
</TABLE>
Noninterest expense increased to $2.5 million in the three months ended
December 31, 1998 from $1.3 million for the comparable period one year ago.
Compensation and employee benefits increased from the comparable period one year
ago mainly because of increased staffing in the branch network, the hiring of
additional administrative staff and an increase in commissions to loan officers
due to increased loan production and the related employee benefit cost
associated with the increase in compensation. Net occupancy expenses increased
from the 1997 quarter to the 1998 quarter due to development of the branch
network which increased from two branches as of December 31, 1997 to four
branches as of December 31, 1998, as well as the acquisition of additional
administrative space to handle the current and planned growth of the bank and
Greater Atlantic Mortgage. The increase in advertising expense from the three
months ended December 31, 1997 to the three months ended December 31, 1998
reflects the company's increased marketing efforts relating to both deposit and
loan products. Other operating expenses increased in the three months ended
December 31, 1998 from the comparable period one year ago primarily due to the
costs associated with the branch expansion program and the increase in loan
originations and sales related to the company's mortgage-banking activities.
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 provision for the three months ended December
31, 1998 amounted to $188,000 compared to a provision of $29,000 for the three
months ended December 31, 1997.
We recorded a deferred tax asset of $790,000, net of a valuation allowance
of $548,000 at December 31, 1998. 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.
At December 31, 1998, the company had 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
26
<PAGE>
carryforward usage is restricted to an annual limitation of approximately
$114,000. During the three months ended December 31, 1998, the company's
estimated effective income tax rate is 41%, which was calculated based on the
best information currently available.
FINANCIAL CONDITION AT DECEMBER 31, 1998
GENERAL
At December 31, 1998 the company's total assets were $117.8 million,
compared to $107.3 million held at September 30, 1998, representing an increase
of 9.79%. Both the bank's overall asset size and customer base increased during
the period and that growth is reflected in the consolidated statements of
financial condition and statements of operations. Stockholders' equity increased
by $31,000 during the three months ended December 31, 1998. The increase
reflects the $271,000 of net income recognized during the quarter, which was
partially offset by an increase in unrealized losses on securities classified as
available for sale.
LENDING ACTIVITIES
General. Net loans receivable at December 31, 1998 were $28.7 million, an
increase of $3.2 million or 12.55% 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. Loans held for sale amounted to $14.8
million at December 31, 1998 compared to $25.3 million at September 30, 1998, a
decrease of $10.5 million. The decrease in loans held for sale reflects the
disbursement of $14.8 million of the $36.1 million of loans originated during
December, 1998 and the disbursement of the remaining $21.3 million relating to
these originations after December 31, 1998. During the three months ended
December 31, 1998, the origination of single-family residential loans for the
bank's portfolio decreased while the origination of consumer loans and
commercial loans was emphasized resulting in a modest decline in the aggregate
of loans originated for the bank's portfolio.
27
<PAGE>
The following table sets forth the bank's loan originations, sales and
principal repayments for the periods indicated:
FOR THE THREE MONTHS
ENDED
DECEMBER 31,
--------------------------
1998 1997
------------ -----------
(IN THOUSANDS)
Total loans at beginning of period (1).......... $ 53,606 $ 32,520
--------- --------
Originations of loans for investment:
Single-family residential(2)................. 1,606 --
Multi-family residential..................... -- --
Commercial real estate....................... 1,764 --
Construction................................. 916 791
Land loans................................... 351 --
Second trust................................. 49 220
Commercial business.......................... -- --
Consumer..................................... 3,736 3
---------- -------------
Total originations for investment......... 8,422 1,014
Loans originated for resale by Greater
Atlantic Mortgage............................ 92,947 35,099
---------- ---------
Total originations.............................. 101,369 36,113
Repayments...................................... (2,399) (3,082)
Sale of loans originated for resale by
Greater Atlantic Mortgage Corporation........ (105,785) (42,451)
--------- ---------
Net activity in loans........................... (6,815) (9,420)
---------- ----------
Total loans at end of period.................... $ 46,791 $ 23,100
========= ========
- ----------
(1) Includes loans held for sale of $25.2 million and $10.0 million at December
31, 1998 and 1997, respectively.
(2) Includes $1.5 million of loans purchased.
Loan Portfolio. The bank's loan portfolio consists principally of first
mortgage loans, primarily mortgage loans secured by one- to four-family
residential real estate. At December 31, 1998, the bank's mortgage loan
portfolio totalled $27.4 million or 85.32% of total loans. Loans secured by one-
to four-family residential real estate loans totalled $17.0 million, or 52.98%
of total loans. At December 31, 1998, the bank also had $6.6 million or 20.47%
of total loans in construction loans, $2.0 million or 6.27% in commercial real
estate loans, $850,000, or 2.64% in multi-family loans and $948,000 or 2.95% in
land loans.
The bank's consumer loans at December 31, 1998, aggregated $2.3 million, or
7.14% of total loans, and included $2.2 million of home equity loans, $98,000 of
automobile loans and $43,000 of other consumer loans. The bank's commercial
business loans totalled $2.4 million, or 7.55% of total loans, at December 31,
1998.
28
<PAGE>
At December 31, 1998, regulations of the Office of Thrift Supervision limit
our maximum loan to one borrower to approximately $1.0 million. At December 31,
1998, the five largest loans or loan relationships amounted to $742,000,
$726,000, $648,000, $620,000 and $541,000, all of which were performing in
accordance with their terms as of such date. As a result of the offering, our
loan-to-one borrower limit is expected to exceed $3.0 million which will enable
the bank to compete for larger, more profitable loans and meet the needs of our
customers without seeking loan participants.
The following table sets forth the composition of the bank's loan portfolio
in dollar amounts and as a percentage of the portfolio.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
---------------------------------
% OF
AMOUNT TOTAL LOANS
-------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
MORTGAGE LOANS:
Single-family(1).......................................... $17,042 52.98%
Multi-family.............................................. 850 2.64
Construction.............................................. 6,585 20.48
Commercial real estate.................................... 2,016 6.27
Land...................................................... 948 2.95
--------- --------
Total mortgage loans................................... 27,441 85.32
------- -------
COMMERCIAL BUSINESS AND CONSUMER LOANS:
Commercial business....................................... 2,427 7.55
Consumer:
Home equity............................................ 2,155 6.70
Automobile............................................. 98 0.30
Other.................................................. 43 0.13
---------- --------
Total commercial business and
consumer loans................................... 4,723 14.68
--------- -------
Total loans receivable.............................. 32,164 100.00%
-------- ======
Less:
Allowance for loan losses................................. (605)
Loans in process.......................................... (2,867)
Unearned premium (discounts).............................. 12
-----------
Loans receivable, net $28,704
===========
</TABLE>
- ----------
(1) Includes loans secured by second trusts on single-family residential
property.
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. Most of such loans are located in the
bank's primary market area. One- to four-family mortgage loan originations are
generally obtained from the bank's in-house loan representatives, from existing
or past customers and through advertising and referrals from residents of the
bank's local communities. At December 31, 1998, the bank's one- to four-family
mortgage loans totalled $17.0 million, or 52.98% of total loans. Of the one- to
four-family mortgage loans outstanding at that date, 29.88% were fixed-rate
loans and 70.12% were ARM loans.
29
<PAGE>
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. Construction and development loans are generally offered to
customers and experienced builders with whom the bank has an established
relationship. Construction and development loans are typically offered with
terms of up to 12 months; however, terms may be extended up to four years under
certain circumstances. The maximum loan-to-value limit applicable to such loans
is 80% for contract sales and 75% for speculative properties. Construction loan
proceeds are disbursed periodically in increments as construction progresses and
as inspections by independent construction loan inspectors warrant. At December
31, 1998, the bank's largest construction and development loan was a performing
$726,000 loan secured by two single-family homes.
Construction and development financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction compared to the estimated cost (including interest)
of construction and other assumptions, including the estimated time to sell
residential properties. If the estimate of value proves to be inaccurate, the
bank may be confronted with a project, when completed, having a value which is
insufficient to assure full repayment. At December 31, 1998, construction and
development loans (including land loans) totalled $7.5 million, or 23.43%, of
the bank's total loans.
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. Such loans are secured by a lien on the property,
are limited to 60% 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. At December
31, 1998, land loans totaled $948,000, or 2.95% of total loans. The largest land
loan at that date was a performing loan which amounted to $410,000.
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, subject to the bank's current
loans-to-one-borrower policy limit, which at December 31, 1998, was
approximately $1.0 million. The bank's multi-family and commercial real estate
loans may be made with terms ranging from five to 15 years and amortization
periods of up to 30 years or with interest rates that adjust every three to five
years. In reaching its decision on whether to make a multi-family or commercial
real estate loan, the bank considers the net operating income of the property,
the borrower's expertise, credit history and profitability and the value of the
underlying property. Environmental risk evaluations are generally required for
all multi-family and commercial real estate loans. Generally, all multi-family
and commercial real estate loans made to corporations, partnerships and other
business entities require personal guarantees by the principals. On an exception
basis, the bank may not require a personal guarantee on such loans depending on
the creditworthiness of the borrower and the amount of the downpayment and other
mitigating circumstances. The bank's multi-family and commercial real estate
loan portfolio at December 31, 1998 was $2.9 million, or 8.91% of total loans.
The largest multi-
30
<PAGE>
family or commercial real estate loan in the bank's portfolio at December 31,
1998, was a performing $648,000 loan secured by a combination office and
warehouse complex located in Merrifield, Virginia.
Loans secured by multi-family and commercial real estate properties
generally involve larger principal amounts and a greater degree of risk than
one- to four-family residential mortgage loans. Because payments on loans
secured by multi-family and commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse conditions in the real estate market or
the economy. The bank seeks to minimize these risks through its underwriting
standards.
Commercial Business Lending. At December 31, 1998, the bank had $2.4
million in commercial business loans which amounted to 7.55% 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.
In making commercial business loans, the bank considers the financial
statements of the borrower, the bank's lending history with the borrower, the
debt service capabilities of the borrower, the projected cash flows of the
business and the value of the collateral. Commercial business loans are
generally secured by a variety of collateral, primarily equipment, assets and
accounts receivable, and are supported by personal guarantees. Depending on the
collateral used to secure the loans, commercial loans are made in amounts of up
to 80% of the adjusted value of the collateral securing the loan. The bank
generally does not make unsecured commercial business loans. In addition, the
bank participates in loans, often community-based, with area lenders with whom
the bank has a relationship. When determining whether to participate in such
loans, the bank will underwrite its participation interest according to its own
underwriting standards.
In an effort to increase its emphasis on commercial business loans, the
bank has hired a commercial loan officer with extensive experience in
originating commercial business loans to small businesses. Her primary
responsibility will be to increase commercial business loan volume particularly
at the bank's branch offices. Management believes that through training and
implementation of a sales culture, managers at the branch offices can
successfully originate commercial business loans.
Unlike mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment or other income,
and which are secured by real property whose value tends to be more easily
ascertainable, commercial business loans are of higher risk and typically are
made on the basis of the borrower's ability to make repayment from the cash flow
of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself. Further, any collateral securing such loans may
depreciate over time, may be difficult to appraise and may fluctuate in value.
At December 31, 1998, the bank's largest commercial business loan was a $750,000
revolving commercial business line of credit with an outstanding balance of
$541,000 loan secured by a first deed of trust and an assignment of
31
<PAGE>
the borrower's right under an unsubordinated ground lease which was made to a
real estate investment business operating in Laurel, Maryland.
Consumer Lending. Consumer loans at December 31, 1998 amounted to $2.3
million or 7.13% 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 December 31, 1998, these loans totalled $2.2 million or
6.70% of the bank's total loans and 93.86% of consumer loans. Home equity loans
are generally offered with terms of up to 15 years and with both adjustable and
fixed-rates of interest. The interest rate on adjustable-rate loans is based on
the prime rate as reported in The Wall Street Journal. Adjustable-rate home
equity loans generally provide for overall caps on the increase or decrease in
the interest rate over the life of the loan which are based on state usury laws.
At December 31, 1998, the bank had $4.1 million of home equity loans of which
$2.2 million, or 53.66% of total home equity loans, was drawn down at such date.
The underwriting standards employed by the bank for equity loans include a
determination of the applicant's credit history and an assessment of the
applicant's ability to meet existing obligations and payments on the proposed
loan and the value of the collateral securing the loan. Generally, the maximum
combined loan-to-value ratio ("LTV") on equity loans is 80% on both
owner-occupied and non-owner-occupied properties. The stability of the
applicant's monthly income may be determined by verification of gross monthly
income from primary employment and, additionally, from any verifiable secondary
income. Creditworthiness of the applicant is of primary consideration.
The bank also originates other types of consumer loans primarily consisting
of secured and unsecured personal loans and new and used automobile loans. At
December 31, 1998, these consumer loans totalled $141,000, or 0.44% of the
bank's total loans and 6.14% of consumer loans. Secured personal loans are
generally secured by deposit accounts. Unsecured personal loans generally have a
maximum borrowing limitation of $15,000 and generally require a debt ratio (the
ratio of debt service to net earnings) of 40%. Automobile loans have a maximum
borrowing limitation of 90% of the sale price of a new automobile or the
National Automobile Dealers Association's Guide's loan value for used
automobiles. As part of its strategy to develop a diverse loan mix, the bank has
employed a senior bank officer with extensive experience in the development,
implementation and marketing of consumer loan programs and intends to increase
its emphasis on such lending. In addition, the bank has recently instituted a
training program designed to enable branch managers to originate consumer loans
at the branch level. That program will substantially eliminate the time lapse
between application and closing of many consumer loans and management believes
that such program will assist the bank in expanding its consumer loan portfolio.
Loans secured by rapidly depreciable assets such as automobiles or that are
unsecured entail greater risks than one- to four-family mortgage loans. In such
cases, repossessed collateral for a defaulted loan may not provide an adequate
source of repayment of the outstanding loan balance, since there is a greater
likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections on these loans are dependent on the
borrower's continuing financial stability
32
<PAGE>
and, therefore, are more likely to be adversely affected by job loss, divorce,
illness or personal bankruptcy. Finally, the application of various federal and
state laws, including federal and state bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans in the event of a default.
DELINQUENT LOANS, CLASSIFIED ASSETS AND NON-PERFORMING ASSETS
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. When a borrower fails to make a required payment on a loan, the bank
may take any of a number of steps to have the borrower cure the delinquency and
restore the loan to current status. The bank generally sends the borrower a
written notice of non-payment when the loan is first past due. The bank's
guidelines provide that telephone, written correspondence and/or face-to-face
contact will be attempted to ascertain the reasons for delinquency and the
prospects of repayment. When contact is made with the borrower at any time prior
to foreclosure, the bank will attempt to obtain full payment, work out a
repayment schedule with the borrower to avoid foreclosure or, in some instances,
accept a deed in lieu of foreclosure. In the event payment is not then received
or the loan not otherwise satisfied, additional letters and telephone calls
generally are made. If the loan is still not brought current or satisfied and it
becomes necessary for the bank to take legal action, which typically occurs
after a loan is 90 days or more delinquent, the bank will commence foreclosure
proceedings against any real or personal property that secures the loan. If a
foreclosure action is instituted and the loan is not brought current, paid in
full, or refinanced before the foreclosure sale, the property securing the loan
generally is sold at foreclosure and, if purchased by the bank, becomes REO.
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."
When the bank classifies one or more assets, or portions thereof, as
Substandard, it establishes a general valuation allowance for loan losses in an
amount deemed prudent by management. General valuation allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to
33
<PAGE>
particular problem assets. When the bank classifies one or more uncollateralized
assets, or portions thereof, as Doubtful, it establishes a specific allowance
for losses equal to 50% of the amount of the asset so classified. With respect
to collateralized assets, the specific allowance is 50% of the difference
between the loan amount and the collateral value. Assets, or portions thereof,
classified as Loss are charged off.
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 December 31, 1998, the bank had $221,000 of loans designated
as Substandard which consisted of one multi-family loan for $193,000 and a
commercial real estate loan for $28,000. At that same date the bank had $78,000
of assets classified as Doubtful, consisting of two second trusts. At December
31, 1998, the bank had no loans classified as Loss. As of December 31, 1998, the
bank also had a total of 2 loans, totalling $429,000, designated as Special
Mention. At December 31, 1998, the largest adversely (other than Special
Mention) classified loan was a multi-family loan with an aggregate carrying
balance of $193,000 which was secured by an apartment building. Subsequent to
December 31, 1998, the bank classified as doubtful a $171,000 second trust on a
property on which it also holds a $285,000 participation interest in a $696,000
first trust. The property securing the two loans is unoccupied and listed for
sale for $1.1 million.
Non-Performing Assets and Impaired Loans. The following table sets forth
information regarding non-accrual loans and REO. At December 31, 1998,
non-accrual loans totalled $199,000 consisting of two loans, one secured by a
single-family property and one secured by a multi-family property, and REO
totalling $110,000, consisting of one parcel of land. 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.
AT DECEMBER 31, 1998
--------------------------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Single-family........................ $ 6
Multi-family......................... 193
--------
Total non-accrual loans................. 199
REO..................................... 110
--------
Total non-performing assets............. $ 309
========
Non-performing loans to total loans
held for investment................... 0.62%
========
Total non-performing assets to total
assets, at period end................. 0.26%
========
On December 14, 1995, the bank adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS No. 118. At December 31,
1998, the bank had recorded investments of $199,000 in impaired loans. During
the three months ended December 31, 1998, the amount of additional interest
income that would have been recognized on non-accrual loans if such loans
34
<PAGE>
had continued to perform in accordance with their contractual terms was $3,000.
The total amount of interest not recognized to date on such loans was $13,000.
At December 31, 1998, the bank had $110,000 of REO. When the bank acquires
property through foreclosure or deed in lieu of foreclosure, it is initially
recorded at the lesser of the carrying value of the loan or fair value of the
property at the date of acquisition, less costs to sell. Thereafter, if there is
a further deterioration in value, the bank provides for a specific valuation
allowance and charges operations for the diminution in value. It is the policy
of the bank to obtain an appraisal or broker's price opinion on all real estate
subject to foreclosure proceedings prior to the time of foreclosure. It is also
the bank's policy to require appraisals on a periodic basis on foreclosed
properties and to conduct inspections on foreclosed properties.
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 December 31, 1998, the bank's allowance for loan losses amounted to
$605,000 or 1.88% of total loans. The bank had non-accrual loans of $199,000 at
December 31, 1998. The bank will continue to monitor and modify its allowance
for loan losses as conditions dictate. While management believes the bank's
allowance for loan losses is sufficient to cover losses inherent in its loan
portfolio at this time, no assurances can be given that the bank's level of
allowance for loan losses will be sufficient to cover loan losses incurred by
the bank or that adjustments to the allowance for loan losses will not be
necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance for loan losses.
The following table sets forth activity in the bank's allowance for loan
losses.
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS
ENDED DECEMBER 31, 1998
-----------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Balance at beginning of period......................... $ 578
Provisions............................................. 22
--------
Total charge-offs.................................... --
Total recoveries..................................... 5
--------
Net (charge-offs) recoveries........................... 5
--------
Balance at end of period............................... $ 605
========
Ratio of net charge-offs during the period
to average loans outstanding during the period...... (0.01)%
========
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS
ENDED DECEMBER 31, 1998
-----------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Allowance for loan losses to total non-performing
loans at end of period.............................. 304.02%
========
Allowance for loan losses to total loans............... 1.88%
========
</TABLE>
36
<PAGE>
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 DECEMBER 31, 1998
--------------------------------------------------------
PERCENT OF
-------------------------------------
TOTAL TOTAL
AMOUNT ALLOWANCE LOANS
----------------- --------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
MORTGAGE LOANS:
Single-family........................................ $ 143 23.64% 0.44%
Multi-family......................................... 33 5.45 0.10
Construction......................................... 65 10.74 0.20
Commercial real estate............................... 62 10.25 0.19
Land................................................. 24 3.97 0.08
------ ------- ------
Total mortgage loans.............................. 327 54.05 1.01
------ ------- ------
Commercial........................................... 97 16.03 0.30
Consumer:
Home equity....................................... 54 8.93 0.17
Automobile........................................ 2 0.33 0.01
Other............................................. -- -- --
------ ------- ------
Total commercial and consumer.................. 153 25.29 0.48
------ ------- ------
Unallocated............................................. 125 20.66 0.39
------ ------- ------
Total................................................... $ 605 100.00% 1.88%
===== ====== ======
</TABLE>
INVESTMENT ACTIVITIES
The investment policy of the bank, as approved by the board of directors,
requires management, to maintain adequate liquidity, generate a favorable return
on investments without incurring undue interest rate and credit risk, and 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. Generally, the bank's investment policy is
more restrictive than the OTS regulations allow and, accordingly, the bank has
invested primarily in U.S. government and agency securities, which qualify as
liquid assets under the OTS regulations, federal funds and U.S. government
sponsored, agency-issued, mortgage-backed securities.
Investment and mortgage-backed securities increased from $51.2 million at
September 30, 1997 to $65.1 million at December 31, 1998. Substantially all
securities held by the company were classified as available for sale and were
used to leverage the bank's capital while new consumer and commercial products
were developed and marketed. The company at times has held securities for
trading. They are bought and held principally for the purpose of selling in the
near term, generally within 90 days. At December 31, 1998, the company held
$146,000 of securities for trading purposes consisting of corporate debt
securities.
37
<PAGE>
At December 31, 1998, the bank had invested $31.2 million in
mortgage-backed securities, or 26.50% of total assets, all of which were
classified as available-for-sale. 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>
AT DECEMBER 31, 1998
-----------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
AVAILABLE FOR SALE:
Equity securities(1)................. $ 6,004 $ 6,006
Corporate debt securities............ 1,365 1,398
Federal agency....................... 1,000 1,001
U.S. Government...................... 25,728 25,450
-------- --------
Total............................. $34,097 $33,855
======= =======
INVESTMENT SECURITIES WITH:
Fixed rates.......................... $2,365 $2,399
Adjustable rates..................... 31,732 31,456
-------- --------
Total............................. $34,097 $33,855
======= =======
HELD FOR TRADING SECURITIES(2).......... $147 $146
==== ====
</TABLE>
- ----------
(1) Equity securities consist of a $2.0 million investment in a short-term U.S.
government securities mutual fund; a $2.0 million investment in an
intermediate-term mortgage securities mutual fund; and a $2.0 million
investment in a U.S. government mortgage securities mutual fund.
(2) Consists of corporate debt securities.
38
<PAGE>
The following table sets forth information regarding the amortized cost and
estimated market value of the bank's mortgage-backed securities.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
----------------------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------------ -------------------
(IN THOUSANDS)
<S> <C> <C>
AVAILABLE FOR SALE:
REMICS............................................................... $ 2,553 $ 2,571
FHLMC................................................................ 6,451 6,475
FNMA................................................................. 18,792 18,806
GNMA................................................................. 3,393 3,366
------- -------
Total............................................................. $31,189 $31,218
======= =======
MORTGAGE-BACKED SECURITIES WITH:
Fixed rates.......................................................... $19,765 $19,824
Adjustable rates..................................................... 11,424 11,394
------- -------
Total............................................................. $31,189 $31,218
======= =======
</TABLE>
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 $104.1 million at
December 31, 1998 from $76.3 million at September 30, 1998, an increase of
36.44%. Certificates of deposit increased $27.1 million, $8.0 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, 79.31% are in certificate of
deposit accounts at December 31, 1998. At December 31, 1998, transactional
deposits (savings, NOW, money market and noninterest bearing deposits)
represented 20.69% of total deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. The bank's deposits are obtained predominantly from the areas in
which its branch offices are located. The bank has historically relied primarily
on customer service and long-standing relationships with customers to attract
and retain these deposits; however, market interest rates and rates offered by
competing financial institutions significantly affect the bank's ability to
attract and retain deposits. The bank uses traditional means of advertising its
deposit products, including print media. The bank also uses deposit brokers to
obtain deposits that are used primarily to fund the bank's mortgage-banking and
investment activities. In view of the short-term holding period for
loans-held-for-sale, brokered deposits are a cost effective source of funding
for the bank's mortgage-banking activities. Should loans-held-for-sale decline,
the brokered certificates can easily be allowed to run-off with no impact on
long-term customer relationships. At December 31, 1998, $68.9 million, or 83.41%
of the bank's certificate of deposit accounts were to mature within one year.
39
<PAGE>
The following table sets forth the distribution and the rates paid on each
category of deposits.
AT DECEMBER 31, 1998
----------------------------------------
PERCENT OF
TOTAL RATE
BALANCE DEPOSITS PAID
---------- ------------ -----------
(DOLLARS IN THOUSANDS)
Savings accounts............... $782 0.75% 3.00%
Now and money market
accounts................... 12,079 11.60 4.71
Certificates of deposit........ 82,555 79.31 5.32
Noninterest-bearing deposits:
Demand deposits............ 8,681 8.34 --
-------- ------ ----
Total deposits......... $104,097 100.00% 4.79%
======== ====== ====
The following table presents information concerning the amounts, the rates
and the periods to maturity of the certificate accounts outstanding.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
------------------------------------
AMOUNT RATE
--------------- ---------------
BALANCES MATURING: (DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less............................. $24,683 5.14%
Three months to one year......................... 44,172 5.44
One year to three years.......................... 13,362 5.25
Over three years................................. 338 5.55
------- ----
Total.......................................... $82,555 5.32%
======= ====
</TABLE>
At December 31, 1998, the bank had $36.2 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........... $20,552 4.98%
Over 3 through 6 months........ 5,428 5.08
Over 6 through 12 months....... 5,304 5.43
Over 12 months................. 4,875 5.29
------- ----
Total.................... $36,159 5.10%
======= ====
Borrowings. FHLB advances amounted to $5.0 million at December 31, 1998 a
decrease from the $22.0 million at September 30, 1998 primarily because the
company had sufficient funds from the $27.8 million increase in deposit accounts
and the $10.5 million reduction in mortgage loans held for sale. At December 31,
1998 and September 30, 1998, borrowings consisted solely of FHLB advances. FHLB
advances are used to arbitrage both the investment and mortgage-backed
securities portfolio and the mortgage banking activities of the bank. The bank
utilizes advances from the FHLB of Atlanta as an alternative to retail deposits
to fund its operations as part of its operating strategy. These FHLB advances
are collateralized primarily by the bank's mortgage loans and mortgage-backed
securities and secondarily by the bank's investment in capital stock of the FHLB
of Atlanta. FHLB advances are made
40
<PAGE>
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB of
Atlanta will advance to member institutions, including the bank, fluctuates from
time to time in accordance with the policies of the FHLB of Atlanta.
The bank also enters into sales of securities under agreements to
repurchase ("reverse repurchase agreements") with terms to maturity of less than
one year. Fixed-coupon reverse repurchase agreements are treated as financings,
and the obligations to repurchase securities sold are reflected as a liability
in the statements of financial condition. The dollar amount of securities
underlying the agreements remains in the asset accounts. The securities
underlying the agreements are book-entry securities. During the period in which
the bank borrowed through the use of reverse repurchase agreements, the
securities were delivered by appropriate entry into the counterparties' accounts
maintained at the FHLB of Atlanta or in some cases with the securities dealers.
Although the bank borrowed funds through the use of reverse repurchase
agreements during the three months ended December 31, 1998, at the end of the
period the bank did not have any reverse repurchase agreements. During the three
months ended December 31, 1998, all reverse repurchase agreements represented
agreements to repurchase the same securities.
The bank is subject to the risk that its interest in the sold securities is
adequately protected in the event the purchasing securities dealer fails to
perform its obligations. The bank attempts to reduce the effects of such risks
by entering into such agreements only with well-capitalized securities dealers
who are primary dealers in government securities and by limiting the maximum
amount of agreements outstanding at any time with any single securities dealer.
The following table sets forth information regarding the bank's borrowed
funds:
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED
DECEMBER 31, 1998
-------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
FHLB advances:
Average balance outstanding...................... $ 13,411
=========
Maximum amount outstanding at any
month-end during the period.................... $ 5,000
=========
Balance outstanding at end of period............. $ 5,000
=========
Weighted average interest rate during the period. 4.86%
=========
Weighted average interest rate at end of period.. 3.90%
=========
Reverse repurchase agreements:
Average balance outstanding....................... $ 3,098
=========
Maximum amount outstanding at any month-end
during the period............................... $ --
=========
Balance outstanding at end of period.............. $ --
=========
Weighted average interest rate during the period.. 5.68%
=========
Weighted average interest rate at end of period... --%
=========
</TABLE>
41
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1998
AND SEPTEMBER 30, 1997
Net Income. Net income for the fiscal year ended September 30, 1998
amounted to $609,000 or $0.77 per share compared to a net loss of $634,000 or
$1.92 per share for fiscal year 1997 that had been incurred prior to the
acquisition of the bank by current management. The $1.2 million increase in
fiscal 1998 income was primarily due to an increase in mortgage-banking income
which was partially offset by the increase in noninterest expense. The increase
in noninterest expense reflects the bank's continuing expansion and growth,
including substantially increased compensation, occupancy and promotional
expenses.
Net Interest Income. 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
------------------------------ ----------------------------
1998 1997 AMOUNT %
-------------- ------------ ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income:
Loans......................................... $2,631 $2,253 $ 378 16.78%
Investments................................... 1,380 141 1,239 878.72
------ ------ ------- -----
Total...................................... 4,011 2,394 1,617 67.54
------ ------ ------- -----
Interest expense:
Deposits...................................... 2,163 1,135 1,028 90.57
Borrowings.................................... 400 156 244 156.41
------ ------ ------- -----
Total...................................... 2,563 1,291 1,272 98.53
------ ------ ------- -----
Net interest income............................... $1,448 $1,103 $ 345 31.28%
====== ====== ======= =====
</TABLE>
Our growth in net interest income was due primarily to the increase in
average interest-earning assets resulting from the bank's planned growth
strategy in 1998. Although average interest-earning assets increased $27.6
million or 104.57% during fiscal 1998, a decline in the net interest margin
limited the increase in net interest income. The decline in net interest margin
of 150 basis points resulted from a significant increase in investment
securities at a yield lower than could have been obtained if the funds had been
invested in loans.
Interest income increased for fiscal year 1998, compared to 1997, primarily
as a result of an increase in the average outstanding balances of loans,
investment securities and mortgage-backed securities coupled with increases in
the yields on the investment and mortgage-backed securities portfolios resulting
in large measure from the planned leveraging of the bank's capital. The increase
in interest income on the loan portfolio for fiscal 1998 when compared to fiscal
1997 resulted primarily from an increase of $6.1 million in the average balance
of loans. This increase was coupled with an increase in interest income from the
investment and mortgage-backed securities portfolios due to an increase of $21.5
million in the average balances of such securities.
Interest expense on deposits and borrowed funds increased for the fiscal
year 1998, compared to 1997, principally as a result of a significant increase
in total deposits and borrowed funds and to a lesser extent an increase in the
average cost of deposits. The increase in interest expense on deposits was
primarily due to an increase in the average balance of certificates of deposit.
Average certificates of
42
<PAGE>
provision increased $17.1 million, or 97.44%, from $17.6 million for the year
ended September 30, 1997 to $34.7 million for the year ended September 30, 1998,
while the average rate paid thereon decreased from 5.71% for the year ended
September 30, 1997 to 5.66% for 1998. The average rate paid for deposits
increased from 5.33% for fiscal 1997 to 5.42% for fiscal 1998 and was coupled
with an increase of $18.6 million in the average outstanding balance. The
combined average cost of deposits and borrowings was 5.33% for fiscal 1998
compared to 5.42% for fiscal 1997.
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
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.
43
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
--------- --------- -------- -------- --------- ----------
ASSETS: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans............................. $29,079 $2,513 8.64% $21,635 $2,070 9.57%
Consumer loans................................ 717 66 9.21 1,104 93 8.42
Commercial business loans..................... 577 52 9.01 1,509 90 5.96
------ ----- ------ ----- ----
Total loans................................. 30,373 2,631 8.66 24,248 2,253 9.29
Investment securities......................... 15,300 901 5.89 2,154 141 6.55
Mortgage-backed securities.................... 8,337 479 5.75 -- -- --
------ ----- ------ -----
Total interest-earning assets 54,010 $4,011 7.43 26,402 $2,394 9.07
===== ---- ------ ===== ----
Non-earning assets.............................. 2,396 1,673
------ ------
Total assets................................ $56,406 $28,075
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings accounts.............................. $ 844 $ 30 3.55% $ 772 $ 28 3.63%
Now and money market accounts................. 4,352 168 3.86 2,977 103 3.46
Certificates of deposit....................... 34,719 1,965 5.66 17,585 1,004 5.71
------ ----- ---- ------ ----- ----
Total deposits.............................. 39,915 2,163 5.42 21,334 1,135 5.32
FHLB advances................................. 5,358 286 5.34 2,867 156 5.44
Other borrowings.............................. 2,015 114 5.66 -- -- --
------ ----- ---- ------ ----- ----
Total interest-bearing
liabilities............................... 47,288 $2,563 5.42 24,201 $1,291 5.33
------ ===== ---- ------ ===== ----
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits................................... 2,153 1,716
Other liabilities............................. 1,043 191
------- -------
Total liabilities........................... 50,484 26,108
Stockholders' equity............................ 5,922 1,967
------- -------
Total liabilities and
stockholders' equity..................... $56,406 $28,075
======= =======
Net interest income............................. $1,448 $1,103
====== ======
Interest rate spread............................ 2.01% 3.74%
==== ====
Net interest margin............................. 2.68% 4.18%
==== ====
</TABLE>
44
<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,
1998 V. 1997
-------------------------------------
CHANGE ATTRIBUTABLE TO
-------------------------------------
VOLUME RATE TOTAL
--------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans ................................................ $ 712 $ (269) $ 443
Consumer loans ................................................... (33) 6 (27)
Commercial business loans ........................................ (55) 17 (38)
------- ------- -------
Total loans ................................................. 624 (246) 378
Investment securities ............................................ 861 (101) 760
Mortgage-backed securities ....................................... -- 479 479
------- ------- -------
Total interest-earning assets ............................... $ 1,485 $ 132 $ 1,617
======= ======= =======
Savings accounts ................................................. $ 3 $ (1) $ 2
Now and money market accounts .................................... 48 17 65
Certificates of deposit .......................................... 978 (17) 961
------- ------- -------
Total deposits .............................................. 1,029 (1) 1,028
FHLB advances .................................................... 135 (5) 130
Other borrowings ................................................. -- 114 114
------- ------- -------
Total interest-bearing liabilities .......................... $ 1,164 $ 108 $ 1,272
======= ======= =======
Change in net interest income .................................... $ 321 $ 24 $ 345
======= ======= =======
</TABLE>
Provision for Loan Losses. The provision for loan losses decreased $328,000
from $487,000 provided during fiscal 1997 to $159,000 provided during fiscal
1998. The reduction in the provision in fiscal 1998 is directly related to an
improvement in credit quality over that time period coupled with a decline in
non-performing loans. Charge-offs increased to $362,000 during fiscal year 1998
from $140,000 during fiscal year 1997 as new management took a more aggressive
posture on assessing collectability in classifying loans.
Noninterest Income. The following table presents a comparison of the
components of noninterest income.
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30, DIFFERENCE
------------------------------ ------------------------------
1998 1997 AMOUNT %
------------- ------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest income:
Gain on sale of loans.......................... $5,774 $3,261 $2,513 77.06%
Service fees on loans.......................... 412 231 181 78.35
Service fees on deposits....................... 25 26 (1) (3.85)
Other operating income......................... 58 10 48 480.00
------ ------ ------
Total noninterest income.................... $6,269 $3,528 $2,741 77.69%
====== ====== ====== =====
</TABLE>
45
<PAGE>
Noninterest income increased during the fiscal year ended September 30,
1998, compared to fiscal year 1997, primarily as a result of the increase in
gain on sale of loans coupled with the increase in service fees on loans, both
of which related to an increased volume of loan originations and sales as a
result of the company's mortgage banking activities. The significant level of
gains during fiscal 1998 resulted from the company taking advantage of record
loan origination volumes resulting from home loan refinancing and a declining
interest rate environment which enabled the company to sell loans at a gain.
During fiscal 1998, the company originated $272.7 million in mortgage loans
compared with $146.8 million originated during fiscal 1997. The $125.9 million
increase in loan originations was largely attributable to decreases in interest
rates and an increase in home mortgage refinancing. During fiscal year 1998,
substantially all loans originated were sold in the secondary market, with
servicing released. Loan sales in fiscal 1998 amounted to $243.0 million
compared to sales of $136.8 million during fiscal 1997. Sales of loans resulted
in gains of $5.8 million and $3.3 million for the fiscal year ended September
30, 1998 and 1997, respectively. The ability to generate gains from the sale of
loans should continue in the future; however, the level of future gains will
depend upon the dollar amount of loans sold and economic conditions.
Noninterest Expense. The following table presents a comparison of the
components of noninterest expense.
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30, DIFFERENCE
--------------------------- ---------------------------
1998 1997 AMOUNT %
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Noninterest expense: (DOLLARS IN THOUSANDS)
Compensation and employee benefits.................... $3,748 $2,996 $ 752 25.10%
Occupancy............................................. 498 325 173 53.23
Professional services................................. 193 130 63 48.46
Advertising........................................... 568 37 531 1,435.14
Deposit insurance premium............................. 95 98 (3) (3.06)
Furniture, fixtures and equipment..................... 203 160 43 26.88
Data processing....................................... 132 91 41 45.05
Loss from foreclosed real estate...................... 34 241 (207) (85.89)
Other operating expense............................... 1,166 699 467 66.81
------- -------- --------
Total noninterest expense........................... $6,637 $4,777 $1,860 38.94%
====== ====== ====== =====
</TABLE>
Noninterest expense increased to $6.6 million in fiscal 1998 from $4.8
million in fiscal 1997. Compensation and employee benefits expense comprised
56.47% of total noninterest expense in the fiscal year ended September 30, 1998,
compared to 62.72% in fiscal year 1997. Compensation and employee benefits
increased between fiscal 1997 and fiscal 1998 mainly because of increased
staffing of the branch network, the hiring of additional administrative staff
and an increase in commissions to loan officers due to increased loan production
and the related employee benefit cost associated with increases in compensation.
Net occupancy expenses increased from fiscal 1997 to fiscal 1998 due to
expansion of the branch network which increased from two branches as of
September 30, 1997 to four branches as of September 30, 1998 as well as the
acquisition of additional administrative space to handle the current and planned
growth of the bank and Greater Atlantic Mortgage. Professional services
increased from fiscal 1997 to fiscal 1998 due to the growth of the branch
network. Advertising expense increased from fiscal 1997 to fiscal 1998,
reflecting the company's increased marketing efforts relating
46
<PAGE>
to both deposit and loan products. Other expenses increased in the fiscal year
1998 compared to fiscal 1997 due primarily to the cost associated with the
branch expansion program and the increase in loan originations and sales related
to the company's mortgage banking activities.
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 provision in fiscal year 1998 amounted to
$311,000 compared to no provision in fiscal year 1997 due to operating losses
incurred during the year.
We recorded a deferred tax asset of $1,545,000, net of a valuation allowance of
$548,000 at September 30, 1998. During the fiscal year ended September 30, 1998
the company increased its deferred tax asset by $642,000 by reducing goodwill
associated with the acquisition of the bank. Based on past operating performance
under current management, we believe that it is more likely than not that the
net deferred tax asset recorded will be realized.
At September 30, 1998 the company had 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.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
GENERAL
At September 30, 1998 the company's total assets were $107.3 million as
compared to $31.6 million at September 30, 1997, which represented an increase
of 239.6%. The bank's overall asset size and customer base increased
significantly during fiscal year 1998 and this growth is reflected in the
consolidated statements of financial condition and statements of operations.
Stockholders' equity increased significantly by $5.3 million, or 336%, during
fiscal 1998 as composed to fiscal 1997. The increase is primarily due to the
acquisition and recapitalization of the bank in October 1997 and, to a lesser
extent, the net income recognized by the company during fiscal 1998.
LENDING ACTIVITIES
General. Net loans receivable at September 30, 1998 were $25.5 million, an
increase of $6.6 million or 34.9% from the $18.9 million held at September 30,
1997. In the year ended September 30, 1997, loan repayments and prepayments
approximately equaled loan originations, resulting in a modest decrease in the
bank's total loans, net. However, in the year ended September 30, 1998, the bank
increased loan originations, primarily of one- to four-family real estate loans.
This increase was attributable in significant part to refinancings due to a
favorable interest rate environment and a greater acceptability by the bank to
refinancing its own loans. Loans held for sale amounted to $25.3 million at
September 30, 1998, compared to $10.0 million at September 30, 1997, an increase
of $15.3 million. The increase in loans held for sale reflects expansion of the
mortgage-banking activities of the bank resulting from the recapitalization that
occurred when the company acquired the bank.
47
<PAGE>
The following table sets forth the bank's loan originations, sales and
principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Total loans at beginning of period (1).......... $ 32,520 $ 30,780
--------- ---------
Originations of loans for investment:
Single-family residential.................... 11,463 1,272
Multi-family residential..................... -- --
Commercial real estate....................... 458 180
Construction................................. 5,352 6,526
Land loans................................... 1,705 --
Second trust................................. 560 431
Commercial business.......................... 480 111
Consumer..................................... 93 117
------------- ------------
Total originations for investment......... 20,111 8,637
Loans originated for resale by Greater
Atlantic Mortgage ........................... 252,603 138,203
--------- ---------
Total originations.............................. 272,714 146,840
Repayments...................................... (8,626) (8,276)
Sale of loans originated for resale by
Greater Atlantic Mortgage.................... (243,002) (136,824)
--------- ---------
Net activity in loans........................... 21,086 1,740
---------- -----------
Total loans at end of period(1)................. $ 53,606 $ 32,520
========= =========
</TABLE>
- -------------------------
(1) Includes loans held for sale of $10.0 million and $6.2 million at September
30, 1998 and 1997, respectively.
48
<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,
-----------------------------------------------
1998 1997
---------------------- ----------------------
% OF % OF
TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS
--------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans:
Single-family(1)............................ $17,198 60.48% $ 8,778 38.96%
Multi-family................................ 1,189 4.18 1,653 7.34
Construction................................ 5,520 19.41 6,795 30.16
Commercial real estate...................... 2,246 7.90 2,555 11.34
Land........................................ 723 2.54 1,177 5.22
-------- ------ ------- ------
Total mortgage loans..................... 26,876 94.51 20,958 93.02
-------- ------ ------- ------
Commercial business and consumer loans:
Commercial business......................... 814 2.86 795 3.53
Consumer:
Home equity.............................. 542 1.91 532 2.36
Automobile............................... 99 0.35 192 0.85
Other.................................... 105 0.37 54 0.24
-------- ------ ------- ------
Total commercial business and
consumer loans..................... 1,560 5.49 1,573 6.98
-------- ------ ------- ------
Total loans........................... 28,436 100.00% 22,531 100.00%
-------- ====== ------- ======
Less:
Allowance for loan losses................... (578) (776)
Loans in process............................ (2,276) (2,750)
Unearned premium (discounts)................ (72) (150)
--------- -------
Loans receivable, net $25,510 $18,855
======= =======
</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, 1998. The table does not include the
effect of future principal prepayments.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
-----------------------------------------------------------
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............................. $ 8,819 $3,373 $1,353 $13,545
After one year:
More than one year to three years............ 7,721 143 48 7,912
More than three years to five years.......... 721 -- 49 770
More than five years to 10 years............. 652 -- -- 652
More than 10 years to 15 years............... 1,127 29 -- 1,156
More than 15 years........................... 2,124 -- -- 2,124
------- ------ ------ -------
Total amount due.......................... $21,164 $3,545 $1,450 $26,159
======= ====== ====== =======
</TABLE>
- -----------------
(1) Net of loans in process of $2.3 million.
(2) Includes construction loans and land loans.
49
<PAGE>
The following table sets forth, at September 30, 1998, the dollar
amount of loans contractually due after September 30, 1999, and whether such
loans have fixed interest rates or adjustable interest rates. At September 30,
1998, the bank did not have any construction, acquisition and development, land
or commercial business loans contractually due after September 30, 1999.
<TABLE>
<CAPTION>
DUE AFTER SEPTEMBER 30, 1999
--------------------------------------------------
FIXED ADJUSTABLE TOTAL
---------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
One- to four-family....................................... $11,281 $1,064 $12,345
Multi-family and commercial............................... 29 143 172
------- -------- ----------
Total real estate loans................................ 11,310 1,207 12,517
Consumer loans............................................... 97 -- 97
------- -------- -----------
Total loans............................................ $11,407 $1,207 $12,614
======= ====== =======
</TABLE>
Non-Performing Assets and Impaired Loans. The following table sets forth
information regarding non-accrual loans and REO.
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1998 1997
------------- ------------
Mortgage loans: (DOLLARS IN THOUSANDS)
<S> <C> <C>
Single-family.................................. $ 37 $ 154
Multi-family................................... 193 348
Construction................................... -- --
Commercial real estate......................... -- --
Land........................................... -- --
Commercial business............................... -- 150
Consumer.......................................... -- 13
------ ------
Total non-accrual loans........................... 230 665
REO............................................... 90 202
------ ------
Total non-performing assets....................... $ 320 $ 867
====== ======
Non-performing loans to total loans held for
investment..................................... 0.81% 2.95%
====== ======
Total non-performing assets to total assets,
at period end.................................. 0.30% 2.75%
====== ======
</TABLE>
50
<PAGE>
Allowance for Loan Losses. The following table sets forth activity in the
bank's allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1998 1997
------------------ --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period..................................... $ 776 $ 429
Provisions......................................................... 159 487
------- -------
Charge-offs:
Mortgage loans:
Single-family................................................ 4 --
Multi-family................................................. 155 --
Commercial business............................................. 171 96
Consumer........................................................ 32 44
------- -------
Total charge-offs.................................................. 362 140
Total recoveries................................................... 5 --
------- -------
Net (charge-offs) recoveries....................................... (357) (140)
------- -------
Balance at end of period........................................... $ 578 $ 776
======= =======
Ratio of net charge-offs during the period
to average loans outstanding during the period.................. 1.18% 0.58%
======= =======
Allowance for loan losses to total non-performing
loans at end of period.......................................... 251.30% 116.69%
======= =======
Allowance for loan losses to total loans........................... 2.03% 3.44%
======= ======
</TABLE>
The following table sets forth the bank's allowance for loan losses in each
of the categories listed at the dates indicated and the percentage of such
amounts to the total allowance and the percentage of such amounts to total
loans.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------
1998 1997
--------------------------- ---------------------------
PERCENT OF PERCENT OF
------------------- -------------------
TOTAL TOTAL TOTAL TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------- --------- -------- ------ --------- --------
(DOLLARS IN THOUSANDS)
MORTGAGE LOANS:
<S> <C> <C> <C> <C> <C> <C>
Single-family......................................... $ 47 8.13% 0.17% $ 46 5.93% 0.20%
Multi-family.......................................... 129 22.32 0.45 225 29.00 1.00
Construction.......................................... 57 9.86 0.20 70 9.02 0.31
Commercial real estate................................ 53 9.17 0.19 59 7.60 0.26
Land.................................................. 21 3.63 0.07 33 4.25 0.15
-- ---- ---- ---- ---- ----
Total mortgage loans............................... 307 53.11 1.08 433 55.80 1.92
--- ----- ---- ---- ----- ----
COMMERCIAL AND CONSUMER:
Commercial............................................ 28 4.85 0.10 233 30.02 1.04
Consumer:
Home equity........................................ 44 7.61 0.15 73 9.40 0.32
Automobile......................................... 6 1.04 0.02 12 1.55 0.05
Other.............................................. 81 14.01 0.29 4 0.52 0.02
-- ----- ---- ---- ---- ----
Total commercial
and consumer................................. 159 27.51 0.56 322 41.49 1.43
--- --- - ---- ---- ----- ----
Unallocated.............................................. 112 19.38 0.39 21 2.71 0.09
--- ----- ---- ---- ---- ----
Total.................................................... $578 100.00% 2.03% $776 100.00% 3.44%
==== ====== ==== ==== ====== ====
</TABLE>
51
<PAGE>
INVESTMENT ACTIVITIES
Investments and mortgage-backed securities increased from $1.0 million at
September 30, 1997 to $51.4 million at September 30, 1998. Substantially all
securities held by the company were classified as available for sale and were
used to leverage the bank's capital while new consumer and commercial products
were developed and marketed. The company at times has held securities for
trading. They are bought and held principally for the purpose of selling in the
near term, generally within 90 days. At September 30, 1998, the company held
$241,000 of securities for trading purposes consisting of corporate debt
securities.
The following table sets forth information regarding the amortized cost and
estimated market value of the bank's investment securities at the dates
indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30
----------------------------------------------------------------
1998 1997
--------------------------- ---------------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------------- ----------- ------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Federal agency............................... $ 9,565 $ 9,574 $ -- $ --
U.S. Government.............................. 22,561 22,638 -- --
-------- -------- ------- --------
Total available for sale.................. 32,126 32,212 -- --
HELD-TO-MATURITY................................ -- -- 1,005 1,005
-------- -------- ------- -------
Total..................................... $32,126 $32,212 $1,005 $1,005
======= ======= ====== ======
INVESTMENT SECURITIES WITH:
Fixed rates.................................. $ 9,565 $ 9,574 $1,005 $1,005
Adjustable rates............................. 22,561 22,638 -- --
-------- ------- ------ ---------
Total..................................... $32,126 $32,212 $1,005 $1,005
======= ======= ====== ======
HELD FOR TRADING SECURITIES(1).................. $ 247 $ 241 $ -- $ --
======= ======= ====== ========
</TABLE>
- --------------------
(1) Consists of corporate debt securities.
The following table sets forth information regarding the amortized cost and
estimated market value of the bank's mortgage-backed securities for the periods
indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------------
1998 1997
------------------------------- ------------------------------
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........................................ 1,563 1,561 -- --
FNMA......................................... 11,027 11,081 -- --
GNMA......................................... 3,723 3,716 -- --
--------- --------- -------- --------
Total..................................... $18,872 $18,959 $ -- $ --
======= ======= ======= =======
MORTGAGE-BACKED SECURITIES WITH:
Fixed rates.................................. $ 9,566 $ 9,678 $ -- $ --
Adjustable rates............................. 9,306 9,281 -- --
--------- --------- -------- --------
Total..................................... $18,872 $18,959 $ -- $ --
======= ======= ======= =======
</TABLE>
52
<PAGE>
SOURCES OF FUNDS
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 $76.3 million at
September 30, 1998 from $28.4 million at September 30, 1997, an increase of
168.92%. Certificates of deposit accounted for the largest portion of this
increase, up $38.7 million, of which $13.9 million were from brokered deposits.
The following table sets forth the distribution and the rates paid on each
category of deposits.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------------------------------
1998 1997
----------------------------- -----------------------------
PERCENT PERCENT
OF TOTAL RATE OF TOTAL RATE
BALANCE DEPOSITS PAID BALANCE DEPOSITS PAID
--------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Savings accounts......... $ 703 0.92% 3.00% $ 678 2.39% 3.00%
Now and money market
accounts.............. 6,761 8.86 4.53 2,789 9.83 3.35
Certificates of deposit.. 55,422 72.63 5.58 16,710 58.89 5.67
Noninterest-bearing deposits:
Demand deposits...... 13,425 17.59 -- 8,200 28.89 --
-------- ------ ------ -------
Total deposits... $76,311 100.00% 4.48% $28,377 100.00% 3.74%
======= ====== ==== ======= ====== ====
</TABLE>
The following table presents the amounts, the yields and the periods to
maturity of the certificate accounts outstanding at September 30, 1998 and 1997.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT SEPTEMBER 30,
1998 1997
------------------------ ---------------------------
AMOUNT RATE AMOUNT RATE
---------- ----------- ------------ ------------
BALANCES MATURING: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Three months or less..................................... $19,951 5.49% $ 6,368 5.77%
Three months to one year................................. 29,557 5.61 9,619 5.61
One year to three years.................................. 5,735 5.67 658 5.69
Over three years......................................... 179 5.77 65 5.33
--------- --------
Total.................................................. $55,422 5.58% $16,710 5.67%
======= ==== ========= ====
</TABLE>
Borrowings. Borrowings amounted to $22.0 million at September 30, 1998 an
increase from the $1.3 million at September 30, 1997. Borrowings are used to
arbitrage both the investment securities portfolio and the mortgage banking
activities of the company. At September 30, 1998 and 1997, borrowings consisted
solely of FHLB advances.
53
<PAGE>
The following table sets forth information regarding the bank's borrowed
funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS
ENDED
SEPTEMBER 30,
-------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
FHLB advances:
<S> <C> <C>
Average balance outstanding.................................. $ 5,358 $2,867
======== =======
Maximum amount outstanding at any
month-end during the period................................ $22,000 $2,600
======= =======
Balance outstanding at end of period......................... $22,000 $1,250
======= =======
Weighted average interest rate during the period............. 5.34% 5.44%
======= =======
Weighted average interest rate at end of period.............. 6.00% 6.55%
======= =======
Reverse repurchase agreements:
Average balance oustanding.................................... $ 2,015 $ --
======== =======
Maximum amount outstanding at any
month-end during the period................................. $ 3,971 $ --
======== =======
Balance outstanding at end of period.......................... $ -- $ --
======== =======
Weighted average interest rate during the period.............. 5.66% --%
======== =======
Weighted average interest rate at end of period............... --% --%
======== =======
</TABLE>
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, we may determine to increase our
interest rate risk position in order to increase our net interest margin. We
monitor 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.
54
<PAGE>
We manage our exposure to interest rates by structuring the balance sheet
in the ordinary course of business. We 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, we attempt
to attract longer-term deposits. We have 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 we monitor 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.
Interest rate sensitivity reflects the potential effect on net interest income
of a movement in interest rates. A company is considered to be asset sensitive,
or to have a positive GAP, when the amount of its interest-earning assets
maturing or repricing within a given period exceeds the amount of its
interest-bearing liabilities also maturing or repricing within that time period.
Conversely, a company is considered to be liability sensitive, or to have a
negative GAP, when the amount of its interest-bearing liabilities maturing or
repricing within a given period exceeds the amount of its interest-earning
assets also maturing or repricing within that time period. During a period of
rising interest rates, a negative GAP tends to affect adversely net interest
income, while a positive GAP tends to result in an increase in net interest
income. During a period of falling interest rates, a negative GAP tends to
result in an increase in net interest income, while a positive GAP tends to
affect net interest income adversely.
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 December 31, 1998. 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. We
believe that such information is consistent with our current experience.
55
<PAGE>
<TABLE>
<CAPTION>
90 DAYS 91 DAYS TO 181 DAYS TO ONE YEAR TO
MATURING OR REPRICING PERIODS OR LESS 180 DAYS ONE YEAR THREE YEARS
- ------------------------------------------------------------------------- ---------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans:
<S> <C> <C> <C> <C>
Adjustable and balloon(1)............................................. $ 5,586 $ 1,566 $ 9,431 $ 2,143
Fixed-rate (2)........................................................ 14,835 329 329 1,061
Second mortgages(3)................................................... 828 50 91 268
Commercial business................................................... 2,052 -- -- --
Consumer.............................................................. 2,155 34 30 77
Investment securities.................................................... 32,051 -- -- --
Mortgage-backed securities............................................... 6,728 972 1,794 5,589
--------- ---------- --------- ----------
Total.............................................................. 64,235 2,951 11,675 9,138
--------- ---------- --------- ----------
INTEREST-BEARING LIABILITIES:
Deposits:
Savings accounts...................................................... $ 36 $ 34 $ 63 $202
Now accounts.......................................................... 170 101 170 353
Money market accounts................................................. 3,548 2,402 2,726 1,208
Certificates of deposit............................................... 24,683 20,872 23,300 13,362
Borrowings:
FHLB advances......................................................... 5,000 -- -- --
Other borrowings...................................................... -- -- -- --
-------- ---------- ----------- ------------
Total.............................................................. 33,437 23,409 26,259 15,125
-------- -------- -------- ---------
GAP...................................................................... $30,798 $(20,458) $(14,584) $ (5,987)
======= ======== ======== =========
CUMULATIVE GAP........................................................... $30,798 $10,340 $ (4,244) $(10,231)
======= ======= ======== ========
RATIO OF CUMULATIVE GAP TO TOTAL ASSETS.................................. 26.14% 8.78% (3.60)% (8.68)%
===== ==== ===== =====
</TABLE>
<TABLE>
<CAPTION>
THREE YEARS TO FIVE YEARS
MATURING OR REPRICING PERIODS FIVE YEARS OR MORE TOTAL
- ------------------------------------------------------------------------- ------------- --------- ----------
INTEREST-EARNING ASSETS:
Loans:
<S> <C> <C> <C>
Adjustable and balloon(1)............................................. $ -- $ -- $ 18,726
Fixed-rate (2)........................................................ 750 1,591 18,895
Second mortgages(3)................................................... 158 186 1,581
Commercial business................................................... 375 -- 2,427
Consumer.............................................................. -- -- 2,296
Investment securities.................................................... 250 4,650 36,951
Mortgage-backed securities............................................... 4,131 8,766 27,980
-------- ----- --------
Total.............................................................. 5,664 15,193 108,856
--------- ------- --------
INTEREST-BEARING LIABILITIES:
Deposits:
Savings accounts...................................................... $132 $315 $782
Now accounts.......................................................... 94 209 1,097
Money market accounts................................................. 575 523 10,982
Certificates of deposit............................................... 338 -- 82,555
Borrowings:
FHLB advances......................................................... -- -- 5,000
Other borrowings...................................................... -- -- --
----------- ----------- -----------
Total.............................................................. 1,139 1,047 100,416
--------- --------- --------
GAP...................................................................... $ 4,525 $14,146 $ 8,440
======== ======= =========
CUMULATIVE GAP........................................................... $ (5,706) $ 8,440
======== ========
RATIO OF CUMULATIVE GAP TO TOTAL ASSETS.................................. (4.84)% 7.16%
===== ====
</TABLE>
- -----------------------------
(1) Includes $129,000 of loans held for sale in the 90 days or less repricing
period.
(2) Includes $13.7 million of loans held for sale in the 90 days or less
repricing period.
(3) Includes $774,000 of loans held for sale in the 90 days or less repricing
period.
56
<PAGE>
As indicated in the interest rate sensitivity table, the twelve-month
cumulative gap, representing the total net assets and liabilities that are
projected to reprice over the next twelve months, was liability sensitive in the
amount of $4.2 million at December 31, 1998.
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.
Other factors affecting net interest income are interest rate changes on
variable rate loans. The amount of change will depend on how variable loan rates
are determined, and time lags may delay rate increases. A loan's interest rate
may be capped and not be adjustable in a single period above or below a
predetermined rate. While interest rate changes will not affect the rate earned
on fixed rate loans if interest rates rise, the interest earned will be less
than what could be obtained on a current market rate investment or if the loan
had a variable rate of interest that adjusted with market conditions.
Because of these and other factors not contemplated by the GAP position, an
institution could have a matched GAP position in the current rate environment
and still have its net interest income exposed to increased interest rate risk.
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 we use 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 December
31, 1998:
<TABLE>
<CAPTION>
Net Interest Income Sensitivity Analysis
- --------------------------------------------------------------------
Basis Point Percent
Changes in Net Interest Change Change
Rate (bp) Margin From Base From Base
- ---------------- -------------- -------------- --------------
<S> <C> <C> <C>
+ 300 2.24% (0.09)% (3.45)%
+ 200 2.29 (0.03) (1.29)
+ 100 2.30 (0.02) (0.86)
- -- 2.32 -- --
- - 100 2.32 -- --
- - 200 2.32 -- --
- - 300 2.31 (0.01) (0.43)
</TABLE>
The table indicates that, if interest rates increase 200 basis points, net
interest margin, as measured as a percent of total assets, would decline by 3
basis points or 1.29%. Conversely, if interest rates decrease 200 basis points
there would be no impact on net interest margin. The primary reason for
57
<PAGE>
this minimal change is because the negative one year cumulative GAP position of
$4.2 million is offset by the bank's investment of $23.5 million in investment
securities that are tied to the prime rate, adjust on a monthly or quarterly
basis and do not have a period cap or, in certain instances, do not have a
lifetime cap. Of this $23.5 million investment, $6.0 million adjusts on a
monthly basis and $9.0 million adjusts on a quarterly basis and does not have a
period or lifetime cap. The remaining $8.5 million, of which $6.4 million
adjusts quarterly and $2.1 million adjusts monthly, has an average lifetime cap
of 13.04% but is not limited to a period cap. The bank's investment in these
securities tends to neutralize the benefit or detriment of the fixed rate
investments and loans in the bank's portfolio.
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.
As market conditions vary from those assumed in the sensitivity analysis,
actual results will also differ due to: prepayment and refinancing levels likely
deviating from those assumed, the varying impact of interest rate changes on
caps or floors on adjustable rate loans; depositor early withdrawals and product
preference changes; and other internal and external variables. Further, the
sensitivity analysis does not reflect actions that management might take in
responding to or anticipating changes in interest rates.
Interest rate risk is the potential of economic losses due to future
interest rate changes. These economic losses can be reflected as a loss of
future net interest income as demonstrated above and/or a loss of current fair
market values. The objective is to measure the effect on net interest income and
to adjust the balance sheet to minimize the inherent risk, while at the same
time maximizing income. Management realizes certain risks are inherent; the goal
is to identify, monitor and accept the risks.
We apply a net portfolio value (NPV) analysis to gauge our interest rate
risk exposure as derived from the OTS Interest Rate Risk simulation model.
Generally NPV is the discounted present value of the difference between incoming
cash flows on interest-earning assets and other investments and outgoing cash
flows on interest bearing liabilities in addition to the present value of net
expected cash flows from existing off-balance sheet contracts. The application
of the methodology attempts to quantify interest rate risk by measuring the
change in the NPV that would result from a theoretical instantaneous and
sustained 200 basis point shift in market interest rates.
58
<PAGE>
Presented below, as of December 31, 1998, 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 VALUE OF ASSETS
NET PORTFOLIO VALUE -------------------------------------
-----------------------------
CHANGES IN DOLLAR PERCENT NET PORTFOLIO CHANGE IN
RATES (BP) CHANGE CHANGE VALUE RATIO NPV RATIO
- ---------------- ------------ ------------- ------------------ ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
+ 200 $(4,176) (44.31)% 4.55% (3.25)%
+ 100 (1,904) (20.20) 6.36 (1.44)
-- -- -- 7.80 --
- 100 1,373 14.57 8.78 0.98
- 200 2,649 26.11 9.66 1.86
</TABLE>
The decline in net portfolio value of $4.2 million or 44.31% in the event
of a 200 basis point increase in rates is a result of the current amount of
fixed rate loans held by us as of December 31, 1998. 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. However, upon receipt of the
capital expected to be raised in the offering, a similar increase in interest
rates of 200 basis points would result in a decline in NPV that would be well
within the company's internal board guidelines.
As with any method of gauging interest rate risk, there are certain
shortcomings inherent in the NPV methodology. The model assumes interest rate
changes are instantaneous parallel shifts in the yield curve. In reality, rate
changes are rarely instantaneous. The use of the simplifying assumption that
short-term and long-term rates change by the same degree may also misstate
historical rate patterns, which rarely show parallel yield curve shifts.
Further, the model assumes that certain assets and liabilities of similar
maturity or repricing will react identically to changes in rates. In reality,
the market value of certain types of financial instruments may adjust in
anticipation of changes in market rates, while any adjustment in the valuation
of other types of financial instruments may lag behind the change in general
market rates. Additionally, the NPV methodology does not reflect the full impact
of contractual restrictions on changes in rates for certain assets, such as
adjustable rate loans. When interest rates change, actual loan prepayments and
early withdrawals from time deposits may deviate significantly from the
assumptions used in the model. Finally, this methodology does not measure or
reflect the impact that higher rates may have on the ability of adjustable-rate
loan clients to service their debt. All of these factors are considered in
monitoring our exposure to interest rate risk.
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 December 31, 1998, the bank's actual liquidity
ratio
59
<PAGE>
was 20.83%. 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 December 31, 1998, cash and cash equivalents and
securities available-for-sale totalled $68.3 million, or 57.97% 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
three months ended December 31, 1998, the bank's loan originations totalled
$101.4 million. Purchases of United States Treasury and agency securities,
mortgage-backed and mortgage related securities and other investment securities
totalled $25.5 million for the three months ended December 31, 1998.
The bank has other sources of liquidity if a need for additional funds
arises. At December 31, 1998, the bank had $5.0 million in advances outstanding
from the FHLB and had an additional overall borrowing capacity from the FHLB of
$27.0 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 December 31, 1998, 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 $23.1 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 December 31, 1998,
totalled $68.9 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 December 31, 1998, the bank exceeded all minimum
regulatory capital requirements with a tangible capital level of $6.5 million,
or 5.55% of total adjusted assets, which is above the required level of $1.8
million, or 1.50%; core capital of $6.5 million, or 5.55% of total adjusted
assets, which is above the required level of $4.7 million, or 4.00%; and
risk-based capital of $7.1 million, or 15.52% of risk-weighted assets, which is
above the required level of $3.7 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
60
<PAGE>
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.
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, are expected to be completed by June 30, 1999. The bank
is in the process of preparing brochures to distribute to its customers to make
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
61
<PAGE>
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.
The bank is currently engaged in an upgrade of its technology systems in
addition to implementing its Year 2000 policy and has budgeted approximately
$126,000 in connection with the costs associated with achieving Year 2000
compliance and related technology systems upgrades. As of December 31, 1998, the
bank had expended approximately $26,000. Material costs, if any, that may arise
from the failure to achieve Year 2000 compliance by either the bank's
third-party data processing vendor or its significant suppliers and other
vendors is not currently determinable.
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.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which provides for the measurement
of financial position and operating results generally in terms of historical
dollar amounts without considering the changes in the relative purchasing power
of money over time due to inflation. The impact of inflation is reflected in the
increased cost of the company's operations. Unlike industrial companies, nearly
all of the assets and liabilities of the company are monetary in nature. As a
result, interest rates have a greater impact on the company's performance than
do the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
RECENT ACCOUNTING DEVELOPMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130"). SFAS 130 establishes standards for the reporting and
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. The company adopted SFAS 130 effective October 1,
1998.
In June 1997, FASB issued Statement of Financial Accounting Standards No.
131, Disclosure about Segments of a Business Enterprise ("SFAS 131"). SFAS 131
establishes standards for the way that public enterprises report information
about operating segments in interim financial statements issued to the public.
It also establishes standards for disclosures regarding products and services,
geographic areas
62
<PAGE>
and major customers. SFAS 131 defines operating segments as components of an
enterprise about which separate financial information is available and that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The company will be required to
adopt SFAS 131 by September 30, 1999.
In June 1998, FASB 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 operations.
In October 1998, FASB 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 obligations 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 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.
PROPERTIES
We currently conduct our business from four full-service banking offices
and our administrative office. We intend to acquire additional facilities
including additional branch offices, consistent with our strategy to grow the
bank. The following table sets forth the company's offices as of December 31,
1998.
63
<PAGE>
<TABLE>
<CAPTION>
NET BOOK
VALUE
0F PROPERTY OR
LEASEHOLD
ORIGINAL IMPROVEMENTS
YEAR DATE OF AT
LEASED OR EASED OR LEASE DECEMBER 31,
LOCATION OWNED ACQUIRED EXPIRATION 1998
- ---------- ---------- ---------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ADMINISTRATIVE OFFICE:
10700 Parkridge Boulevard
Reston, Virginia Leased 1998 03-31-03 $ 30
BRANCH OFFICES:
11834 Rockville Pike
Rockville, Maryland 20852 Leased 1998 06-15-05 431
8070 Ritchie Highway
Pasadena, Maryland 21122 Leased 1998 08-31-08 34
250 N. Glebe Road
Arlington, Virginia 22203 Leased 1998 03-31-03 33
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036 Leased 1998 07-31-08 205
GREATER ATLANTIC MORTGAGE OFFICE:
8230 Old Courthouse Road
Vienna, Virginia 22182 Leased 1995 12-31-99 8
----
Total.............................................. $741
====
</TABLE>
The company has leased property for an additional bank branch office on the
Harry Byrd Highway in Sterling, Virginia, expected to open in June 1999.
The total net book value of the company's furniture, fixtures and equipment
at December 31, 1998 was $1.6 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 March 31, 2000.
LEGAL PROCEEDINGS
The company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the company's financial condition, results of operations or cash
flows.
64
<PAGE>
PERSONNEL
As of December 31, 1998, the company had 80 full-time employees and 11
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. See "Management of the Bank--Other Benefit Plans" for a description of
compensation and benefit programs offered to the company's employees.
MANAGEMENT OF THE COMPANY
The board of directors of the company consists of seven members and is
divided into three classes, each of which contains approximately one-third of
the Board. The directors are elected by the stockholders of the company for
staggered three year terms, or until their successors are elected and qualified.
One class of directors, consisting of Paul J. Cinquegrana and Bruce D. Ochsman,
has a term of office expiring at the annual meeting of stockholders in 2000; a
second class, consisting of Jeffrey M. Gitelman and Lynnette Dobbins Taylor has
a term of office expiring at the annual meeting of stockholders in 2001; and a
third class, consisting of William Calomiris, Carroll E. Amos and James B. Vito,
has a term of office expiring at the annual meeting of stockholders in 2002.
There are no familial relationships among the directors or executive
officers of the company or the bank and no director is serving as a director
pursuant to an agreement. Information concerning the principal occupations,
employment and other information concerning the directors and officers of the
company during the past five years is set forth under "Management of the
Bank--Biographical Information."
The following individuals are the executive officers of the company and
hold the offices set forth below opposite their names.
<TABLE>
<CAPTION>
NAME POSITION(S) HELD WITH COMPANY
- -------- --------------------------------------
<S> <C>
William Calomiris Chairman of the Board of Directors
Carroll E. Amos President and Chief Executive Officer
David E. Ritter Chief Financial Officer
Margaret A. Reynolds Corporate Secretary
</TABLE>
The executive officers of the company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal at the discretion of the board of directors.
DIRECTOR COMPENSATION
Since the formation of the company, the executive officers, directors and
other personnel have been compensated for services by the bank and have not
received additional remuneration from the company. For information regarding
fees paid to the bank's Board of Directors see "Management of the Bank--Director
Compensation."
65
<PAGE>
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(1) POSITION(S) HELD WITH THE BANK SINCE EXPIRES
- ---------- ---------- ------------------------------------------- ---------- ----------
<S> <C> <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
Bruce D. Ochsman 41 Director 1997 2000
Lynnette Dobbins Taylor 78 Director 1998 2001
James B. Vito 73 Director 1998 2002
</TABLE>
(1) As of March 15, 1999.
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> <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
Margaret A. Reynolds 33 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.
66
<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.
Bruce D. Ochsman is a Managing Director of Wheat First Union, a stock and
bond brokerage firm.
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.
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
67
<PAGE>
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.
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.
Margaret A. Reynolds joined the bank and the company as Corporate Secretary
in 1998 after approximately one year as a legal secretary and Office Manager for
Zuckerman, Spaeder, Goldstein, Taylor & Kolker. Ms. Reynolds had previously been
employed as an Executive Assistant, Human Resources Manager and Office Manager
with Management Analysis, Incorporated, and Vista Consulting Group, Inc., from
1994 to 1997.
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.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK
The bank's board of directors meets 12 times each year and may have
additional special meetings called in the manner specified in the Bylaws.
The Executive Committee consists of Messrs. Calomiris, Amos and
Cinquegrana. The Executive Committee meets regularly between meetings of the
Board and reviews matters pertaining to day-to-day operations, including review
of operational policies and procedures and loan applications.
The Compensation Committee consists of Messrs. Calomiris, Amos, Gitelman
and Vito. This committee is responsible for all matters regarding compensation
and fringe benefits. The Compensation Committee meets on an as-needed basis and
met once during the year ended December 31, 1998.
The Audit Committee consists of the entire board of directors. This
committee meets with the bank's independent auditors and evaluates policies and
procedures relating to auditing functions and internal controls.
DIRECTOR COMPENSATION
Since the acquisition of the bank, outside directors of the bank, including
the Chairman of the Board, received $200 for each Board meeting and $100 for
each committee meeting attended. Beginning October 1, 1998, outside directors of
the bank receive $500 for each Board meeting and $250 for each committee meeting
attended. Beginning on that same date, the Chairman was made a salaried officer
of the bank and company and in that capacity receives compensation at the rate
of $3,000 per month.
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<PAGE>
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
year ended September 30, 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
-------------------------------------------------- ----------------------- ---------------------------
OTHER
ANNUAL RESTRICTED SECURITIES ALL OTHER
NAME AND FISCAL COMPENSATION STOCK UNDERLYING LTIP COMPENSATION
PRINCIPAL POSITIONS YEAR SALARY BONUS (2) AWARDS OPTIONS/SARS PAYOUTS (2)
- ----------------------- --------- --------- ------------- --------- ----------- ------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carroll E. Amos
President and Chief
Executive 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 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. 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
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Employment Agreement by the bank, Mr. Amos or, in the event of death, Mr. Amos'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. 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
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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
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 37,500 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
15,000 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.
INSURANCE PLANS
The bank makes available to all full-time employees medical plan benefits,
life and accidental death insurance, long term disability insurance and travel
insurance.
OTHER BENEFIT PLANS
401(k) Plan. The bank maintains the Greater Atlantic Savings Bank 401(k)
Savings Plan (the "401(k) Plan"), a tax-qualified profit sharing plan with a
qualified cash or deferred arrangement under Section 401(k) of the Code. The
401(k) Plan provides participants with savings and retirement benefits based on
employee deferrals of compensation, as well as any matching and other
discretionary contributions made by the bank. Eligible employees are eligible to
participate in the 401(k) Plan when they complete six months of service with the
bank and have attained the age of 20.5. Participants currently may make salary
reduction contributions to the 401(k) Plan of 1% to 15% of their compensation or
the legally permissible limit ($10,000 for 1998). A participant is always 100%
vested in his or her salary reduction contributions to the 401(k) Plan.
Participants also become 100% vested in their accounts under the 401(k) Plan
upon death or incurring disability (as described in the 401(k) Plan) or
attainment of their "Normal Retirement Age" (as defined in the 401(k) Plan).
Participants become vested in any employer contributions to the 401(k) Plan
after two years of service at the rate of 20% for each completed year of
service; however, the bank did not make matching contributions in the fiscal
years ended September 30, 1998 or 1997.
Currently, participants may invest their accounts under the 401(k) Plan in
and among seven funds. The bank may add or eliminate investment options
available under the 401(k) Plan in the future.
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Generally, distributions from the 401(k) Plan may commence upon a
participant's separation from service, death, or disability. However,
participants may request hardship withdrawals from the 401(k) Plan under certain
circumstances. Distributions from the 401(k) Plan are generally subject to
federal and state income taxes and distributions made prior to a participant
attaining age 59 1/2 and are also generally subject to a federal excise tax.
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 bank
announces a change in control or the date three years from the date the
participant elects to participate in the deferred compensation plan. At December
31, 1998, one employee of Greater Atlantic Mortgage, T. Mark Stamm, was
participating in the plan and an amount of $500,000 is recorded as deferred
compensation.
Stock-Option and Warrant Plan. The board of directors of the company has
adopted the Greater Atlantic Financial Corp. 1997 Stock Option and Warrant Plan
(the "Stock Option Plan") which provided for the granting of warrants to the
original investors and provides for the granting of options to purchase Common
Stock ("Stock Options") to eligible officers, employees, and directors of the
company and bank. The plan may also provide for certain rights related to the
grant of Stock Options.
Under the Stock Option Plan, as amended, 94,680 warrants, each with a
warrant price of $7.50, were granted to the members of the board of directors
and original stockholders on the basis of one warrant for each share of stock
purchased. Mr. Amos was not granted warrants but was granted 16,667 options to
purchase the company stock at the same price, $7.50, as the warrant price.
The grants of Stock Options are designed to attract and retain qualified
personnel in key positions, provide officers and key employees with a
proprietary interest in the company as an incentive to contribute to the success
of the company, and reward employees for outstanding performance. All employees
of the company, the bank and its subsidiaries are eligible to participate in the
Stock Option Plan. The committee administering the plan will determine the terms
of awards granted to officers and employees. The committee will also determine
whether Stock Options will qualify as Incentive Stock Options or Non-Statutory
Stock Options, as described below, the number of shares subject to each Stock
Option, the exercise price of each Stock Option, the method of exercising Stock
Options, and the time when Stock Options become exercisable. Only employees may
receive grants of Incentive Stock Options.
An individual generally will not recognize taxable income upon the grant of
a Non-Statutory Stock Option or Incentive Stock Option or upon the exercise of
an Incentive Stock Option, provided the individual does not dispose of the
shares received through the exercise of the Incentive Stock Option for at least
one year after the date the individual receives the shares in connection with
the option exercise and two years after the date of grant of the Stock Option (a
"disqualifying disposition"). No compensation deduction will generally be
available to the company as a result of the exercise of Incentive Stock Options
unless there has been a disqualifying disposition. In the case of a
Non-Statutory Stock Option and in the case of a disqualifying disposition of
shares received in connection with the exercise of an Incentive Stock Option, an
individual will recognize ordinary income upon exercise of the
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Stock Option (or upon the disqualifying disposition) in an amount equal to the
amount by which the fair market value of the Common Stock exceeds the exercise
price of the Stock Option. The amount of any ordinary income recognized by an
optionee upon the exercise of a Non-Statutory Stock Option or due to a
disqualifying disposition will be a deductible expense to the company for tax
purposes. In the case of limited rights, the holder will recognize any amount
paid to him or her upon exercise in the year in which the payment is made and
the company will be entitled to a deduction for federal income tax purposes of
the amount paid.
Stock Options are exercisable for a period of time following the date on
which the optionee ceases to perform services for the bank or the company,
except that in the event of death or disability, options accelerate and become
fully vested and could be exercisable for up to one year thereafter or such
other period of time as determined by the company. In the case of death or
disability, Stock Options may be exercised for a period of 12 months or such
other period of time as determined by the committee. However, any Incentive
Stock Options exercised more than three months following the date the employee
ceases to perform services as an employee would be treated essentially as a
Non-Statutory Stock Option. In the event of retirement, if the optionee
continues to perform services as a director or consultant on behalf of the bank,
the company or an affiliate, unvested options and awards would continue to vest
in accordance with their original vesting schedule until the optionee ceases to
serve as a consultant or director. In the event of death, disability or normal
retirement, the company, if requested by the optionee, or the optionee's
beneficiary, could elect, in exchange for vested options, to pay the optionee,
or the optionee's beneficiary in the event of death, the amount by which the
fair market value of the Common Stock exceeds the exercise price of the options
on the date of the employee's termination of employment. At December 31, 1998,
all options provided for in the Stock Option Plan had been granted.
The following tables show information with respect to options granted
during fiscal year 1998 and the number of shares of common stock represented by
outstanding stock options held by the Chief Executive Officer as of December 31,
1998. Also reported is the value for "in-the-money" options which represent the
positive spread between the exercise price of any existing stock options and the
year-end price of the common stock.
OPTION GRANTS IN FISCAL YEAR 1998
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE EXPIRATION
NAME OPTIONS GRANTED # EMPLOYEES PRICE DATE
- ------------------------------- ----------------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Carroll E. Amos 16,667 100% $5.00 11/14/07
</TABLE>
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AGGREGATED YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER VALUE OF
OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
NAME DECEMBER 31, 1998(#) DECEMBER 31, 1998($)(1)
- ------------------------- -------------------------------- -----------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Carroll E. Amos 33,333 -- $14,500 $--
</TABLE>
- ------------------------------------
(1) Based on the estimated market value of the underlying stock at December 31,
1998, minus the exercise price.
TRANSACTIONS WITH RELATED PERSONS
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. As of December 31, 1998,
one of the bank's directors had loans with the bank which had outstanding
balances totaling $261,000. 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 intends that all transactions in the future between the company
and its executive officers, directors, holders of 10% or more of the shares of
any class of its common stock and affiliates thereof, will contain terms no less
favorable to the company than could have been obtained by it in arm's length
negotiations with unaffiliated persons and will be approved by a majority of
independent outside directors of the company not having any interest in the
transaction.
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OWNERSHIP AND SUBSCRIPTIONS BY DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the company's common stock as of March 31, 1999, and as adjusted to
reflect the sale of the common stock offered hereby by (1) each director of the
company, (ii) each person who is known by the company to own beneficially 5% or
more of the common stock and (iii) all directors and executive officers as a
group. Unless otherwise indicated, each person has sole voting and dispositive
power over the shares indicated as owned by such person and the address of each
shareholder is the same as the address of the company.
<TABLE>
<CAPTION>
OWNERSHIP PRIOR TO THE
OFFERING(1) OWNERSHIP AFTER THE OFFERING
------------------------------ -----------------------------------
SHARES PERCENT SHARES PERCENT
------------- -------------- ---------------- ----------------
DIRECTORS AND EXECUTIVE OFFICERS
- ---------------------------------------------
<S> <C> <C> <C> <C>
William Calomiris............................ 200,000 24.32% 357,895 12.68%
Carroll E. Amos ............................. 33,333 4.05 43,860 1.55
Paul J. Cinquegrana. 33,333 4.05 33,333 1.18
Jeffrey M. Gitelman 33,333 4.05 64,912 2.30
Bruce D. Ochsman 13,333 1.62 13,333 0.47
Lynnette Dobbins Taylor 134 .02 134 *
James B. Vito 20,000 2.43 56,842 2.01
------ ---- ------ ----
Directors and executive officers as a group
(15 persons)............................ 333,466 40.55 570,309 20.20
PRINCIPAL SHAREHOLDERS
- ---------------------------------------------
Peter Calomiris 66,667 8.11 92,982 3.29
Robert Harris 66,667 8.11 66,667 2.36
Ralph Ochsman 133,333 16.21 238,596 8.45
Robert I. Schattner 197,333 23.99 355,228 12.59
------- ----- ------- -----
Principal shareholders as a group......... 464,000 56.42 753,473 26.70
------- ----- --------- -----
Total................................... 797,466 96.97% 1,323,782 46.90%
--------- ----- --------- -----
Total shares outstanding.............. 822,427 2,822,427
</TABLE>
- ------------------------------
* Indicates ownership which does not exceed 1.0%.
(1) Assumes the issuance of 2,000,000 shares in the offering.
(2) Does not include 128,013 options and warrants exercisable within 60 days.
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REGULATION
GENERAL
The bank is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The
bank is a member of the FHLB System. The bank's deposit accounts are insured up
to applicable limits by the Savings Association Insurance Fund (the "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 financial institutions. There are periodic
examinations by the OTS to test the bank's compliance with various regulatory
requirements. In addition, the FDIC may also conduct examinations of the bank at
the FDIC's discretion. 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 policies, whether by the OTS, the FDIC or the Congress, could
have a material adverse impact on the company, the bank and their operations.
The company, as a savings and loan company, is also subject to examination and
regulation by the OTS and is required to file certain reports with and otherwise
comply with the rules and regulations of the OTS and of the SEC under the
federal securities laws.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a material
impact on the company, the bank and their operations. Congress has been
considering the elimination of the federal thrift charter and abolition of the
OTS. The results of such consideration, including possible enactment of
legislation is uncertain. Therefore, the bank is unable to determine the extent
to which such consideration or possible legislation, if enacted, would affect
its business. See "Risk Factors." We are subject to extensive regulation and
supervision legislation.
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 associations set forth in this
Prospectus do not purport to be complete descriptions of such statutes and
regulations or their effects on the bank and the company and is qualified in its
entirety by reference to such statutes and regulations.
FEDERAL SAVINGS INSTITUTION REGULATION
Business Activities. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations
issued by the FDIC or OTS to implement those statutes. Those laws and
regulations delineate the nature and extent of the activities in which federal
savings associations may engage. In particular, certain lending authority for
federal savings associations, e.g., commercial, non-residential real property
loans and consumer loans, is limited to a specified percentage of the
institution's capital or assets.
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Loans-to-One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the bank's unimpaired capital and surplus, plus an additional
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 December 31, 1998, the bank's general limit on
loans-to-one borrower was $1.0 million. At December 31, 1998, the bank's largest
aggregate amount of loans-to-one borrower consisted of various single family
properties with a carrying balance of $742,000, secured by real estate.
Management believes that the bank is in compliance with all applicable
loans-to-one borrower limitations.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings association is required to either qualify as a "domestic
building and loan association," as defined in the Code, or maintain at least 65%
of its "portfolio assets" (total assets less: (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and (iii) the value
of property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out of each 12
month period. A savings association that fails the QTL test must either convert
to a bank charter or operate under certain restrictions. As of December 31,
1998, the bank maintained 85.53% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. Recent legislation has expanded
the extent to which education loans, credit card loans and small business loans
may be considered as "qualified thrift investments."
Limitation on Capital Distributions. The regulations of the OTS impose
limitations upon all capital distributions by a savings institution, including
cash dividends, payments to repurchase its shares and payments to shareholders
of another institution in a cash-out merger. Effective April 1, 1999, the
capital distribution regulation of the OTS was changed. Under the new
regulation, an application to and the prior approval of the OTS is required
before any capital distribution may be made if the institution does not meet the
criteria for "expedited treatment" of applications under the OTS regulations,
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 the OTS. If an application is not required, the institution must still give
advance notice of the capital distribution to the OTS. If the capital of the
bank fell below its regulatory requirements, or if the OTS notified the bank
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 determined 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 4% of its
net withdrawable deposit accounts plus short-term borrowings. OTS regulations
formerly required each savings institution to maintain an average daily balance
of short-term liquid assets at 1% of the total of its net withdrawable deposit
accounts and borrowings payable in one year or less. However, this requirement
was recently eliminated. Monetary penalties may be imposed for failure to meet
the liquidity requirements. The bank's liquidity ratio at December 31, 1998 was
20.83%, which exceeded the applicable requirements. The bank has never been
subject to monetary penalties for failure to meet its liquidity requirements.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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Assessments. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general assessment,
paid on a semi-annual basis, is based upon the savings institution's total
assets, as reported in the bank's latest quarterly Thrift Financial Report. The
most recent assessments paid by the bank were for the year ended December 31,
1998, totalled $19,000.
Branching. OTS regulations permit federally chartered savings associations
to branch nationwide under certain conditions. Generally, federal savings
associations may establish interstate networks and geographically diversify
their loan portfolios and lines of business. The OTS authority preempts any
state law purporting to regulate branching by federal savings associations.
Transactions with Related Parties. The bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the company
and any non-savings institution subsidiaries that the company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates 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 requires 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.
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 Section 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 to insiders made pursuant to a benefit or compensation programs that are
widely available to all employees of the institution and do 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 that certain board approval
procedures be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against 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 or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $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 that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establishes criminal penalties for
certain violations.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal
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controls, information systems and audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth and compensation, fees
and benefits and such other operational and managerial standards as the agency
deems appropriate. The federal banking agencies have adopted regulations and
Interagency Guidelines Establishing Standards for Safety and Soundness
("Guidelines") to implement these safety and soundness standards. 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 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. If the appropriate federal
banking agency determines that an institution fails to meet a 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 regulations establish deadlines for the submission
and review of such safety and soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 4% leverage (core capital to total assets) ratio and an 8% risk based capital
standard. Core capital is generally defined as common stockholders' equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related surplus and minority interests in equity accounts of consolidated
subsidiaries, less intangibles other than certain mortgage servicing rights
("MSRs") and certain purchased credit card relationships. The OTS regulations
require that, in meeting the leverage ratio, tangible and risk-based capital
standards, institutions generally must deduct investments in and loans to
subsidiaries engaged in activities as principal that are not permissible for a
national bank. In addition, the OTS prompt corrective action regulation provides
that a savings institution that has a leverage capital ratio of less than 4% (3%
for institutions receiving the highest examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "--Prompt
Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of at least 8%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight of between 0% and 100%, as assigned by the OTS
capital regulation, based on the risks OTS believes are inherent in the type of
asset. The components of core capital are equivalent to those discussed above.
The components of supplementary capital generally include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock and, within specified limits,
the allowance for loan and lease losses. Overall, the amount of supplementary
capital included as part of total capital cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association'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 association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk
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exposure exceeds 2% must deduct an interest rate component in calculating its
total capital under the risk-based capital rule. The interest rate risk
component is 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 association's assets. That dollar amount is deducted from
an association's total capital in calculating compliance with its risk-based
capital requirement. Under the rule, there is a two quarter lag between the
reporting date of an institution's financial data and the effective date for the
new capital requirement based on that data. A savings association 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. The rule also provides that the Director of the OTS may waive or
defer an association's interest rate risk component on a case-by-case basis. The
OTS has postponed indefinitely the date that the component will first be
deducted from an institution's total capital. As a result of the
recapitalization of the bank by Greater Atlantic, the bank paid the assessment
and obtained a lower premium level. At December 31, 1998, the bank exceeded all
regulatory capital requirements.
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 capitalization. Generally, a savings institution that
has a total risk-based capital ratio of less than 8.0% or a leverage ratio or a
Tier 1 capital to risk-based assets ratio that is less than 4.0% is considered
to be undercapitalized. A savings institution that has a total risk-based
capital ratio less than 6.0%, a Tier 1 risk-based capital ratio of less than
3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% 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 an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent company. In addition, numerous mandatory
supervisory actions may become immediately applicable to the institution
depending upon its category, including, but not limited to, increased monitoring
by regulators, restrictions on growth and capital distributions and limitations
on expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. The FDIC has adopted a risk-based insurance
assessment system. The FDIC assigns an institution to one of three capital
categories based on the institution's financial information, as of the reporting
period ending seven months before the assessment period. The capital categories
are (1) well capitalized, (2) adequately capitalized or (3) undercapitalized. An
institution is also placed in one of three supervisory subcategories within each
capital group. The supervisory subgroup to which an institution is assigned is
based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned with the most well
capitalized, healthy institutions receiving the lowest rates.
Deposits of the bank are presently insured by the SAIF. Both the SAIF and
the Bank Insurance Fund (the "BIF") are statutorily required to be recapitalized
to a 1.25% of insured reserve deposits ratio. Until recently, members of the
SAIF and BIF were paying average deposit insurance assessments of
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between 24 and 25 basis points. The BIF met the required reserve in 1995,
whereas the SAIF was not expected to meet or exceed the required level until
2002 at the earliest. This situation was primarily due to the statutory
requirement that SAIF members make payments on bonds issued in the late 1980s by
the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the bank could have been placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, the President of the United States signed into law
the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other
things, imposed a special one-time assessment on SAIF member institutions,
including the bank, to recapitalize the SAIF. As required by the Funds Act, the
FDIC imposed a special assessment of 65.7 basis points on SAIF assessable
deposits held as of March 31, 1995, payable November 27, 1996 (the "SAIF Special
Assessment"). Originally, the bank was exempted from paying the assessment
because of its capital position but was required to pay higher deposit insurance
premiums. As a result of the bank's recapitalization, the bank recognized the
SAIF Special Assessment as an expense in the quarter ended September 30, 1998
which was tax deductible. The SAIF Special Assessment recorded by the bank
amounted to $84,000 on a pre-tax basis and $52,000 on an after-tax basis.
The Funds Act also spread the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits were
assessed for a FICO payment of 1.3 basis points, while SAIF deposits pay 6.48
basis points. Full pro rata sharing of the FICO payments between BIF and SAIF
members will occur on the earlier of January 1, 2000 or the date the BIF and
SAIF are merged.
As a result of the Funds Act, the FDIC effectively lowered SAIF assessments
to 0 to 27 basis points as of January 1, 1997, a range comparable to that of BIF
members. Most recently, the FDIC determined to continue the 0 to 27 basis point
range for the second half of 1998. SAIF members will also continue to make the
FICO payments described above. Management cannot predict the level of FDIC
insurance assessments on an on-going basis, whether the federal thrift charter
will be eliminated or whether the BIF and SAIF will eventually be merged.
The bank's assessment rate for the fiscal year ended September 30, 1998
ranged from 35 basis points to 9 basis points and the regular premium paid for
this period was $85,000.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the bank.
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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
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.
Federal Home Loan Bank System. The bank is a member of the FHLB System,
which consists of 12 regional FHLBs. The FHLB provides a central credit facility
primarily for member institutions. The bank, as a member of the FHLB, is
required to acquire and hold shares of capital stock in the FHLB in an amount at
least equal to 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20 of
its advances (borrowings) from the FHLB, whichever is greater. The bank was in
compliance with this requirement with an investment in FHLB stock at December
31, 1998 of $1.4 million. FHLB advances must be secured by specified types of
collateral and all long-term advances may only be obtained for the purpose of
providing funds for residential housing finance. At December 31, 1998, the bank
had $5.0 million in FHLB advances.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended September 30, 1998 and 1997,
dividends from the FHLB to the bank amounted to approximately $47,000 and
$30,000, respectively. If dividends were reduced, the bank's net interest income
would likely also be reduced. Further, there can be no assurance that the impact
of recent or future legislation on the FHLBs will not also cause a decrease in
the value of the FHLB stock held by the bank.
Federal Reserve System. The Federal Reserve Board regulations require
savings institutions to maintain noninterest-earning reserves against their
transaction accounts. The Federal Reserve Board regulations generally require
that reserves be maintained against [net aggregate] transaction accounts as
follows: for accounts aggregating $46.5 million or less (subject to adjustment
by the Federal Reserve Board) the reserve requirement is 3%; and for accounts
greater than $46.5 million, the reserve requirement is $1.395 million plus 10%
(subject to adjustment by the Federal Reserve Board between 8% and 14%) against
that portion of total transaction accounts in excess of $46.5 million. The first
$4.9 million of otherwise reservable balances (subject to adjustment by the
Federal Reserve Board) are exempted from the reserve requirements. The bank is
in compliance with the foregoing requirements. Because required reserves must be
maintained in the form of either vault cash, a noninterest-bearing account at a
Federal Reserve Bank or a pass-through account as defined by the Federal Reserve
Board, the effect of this reserve requirement is to reduce the bank's
interest-earning assets. FHLB System members are also authorized to borrow from
the Federal Reserve discount window, but Federal Reserve Board regulations
require institutions to exhaust all FHLB sources before borrowing from a Federal
Reserve Bank.
HOLDING COMPANY REGULATION
The company is a non-diversified unitary savings and loan company within
the meaning of the HOLA. As such, the company will be required to register with
the OTS and will be subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, the OTS has enforcement authority over the
company and its non-savings institution subsidiaries.
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As a unitary savings and loan company, the company is generally 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 QTL. See "--Federal
Savings Institution Regulation--QTL Test" for a discussion of the QTL
requirements. Upon any non-supervisory acquisition by the company of another
savings association, the company would become a multiple savings and loan
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
company and its non-insured institution subsidiaries primarily to activities
authorized for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act, as amended (the "BHC Act"), subject to the prior approval of the
OTS, and to other activities authorized by OTS regulation. No multiple savings
and loan company may acquire more than 5% of the voting stock of a company
engaged in impermissible activities. Proposed legislation would, subject to
certain grandfathering, limit the activities of unitary savings and loan
companies to those permissible for multiple savings and loan holding companies.
See "Risk Factors--We are subject to extensive regulation and supervision
legislation."
The HOLA prohibits a savings and loan company, directly or indirectly, or
through one or more subsidiaries, from acquiring more than 5% of the voting
stock of another savings institution, or company thereof, without prior written
approval of the OTS, and from acquiring or retaining, with certain exceptions,
more than 5% of a non-subsidiary company or savings association. The HOLA also
prohibits a savings and loan company from acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS 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.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan company controlling savings institutions in more than
one state, except: (i) 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 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 above. The bank must notify the OTS 30 days
before declaring any dividend to the company. In addition, the financial impact
of a 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.
THRIFT RECHARTERING
The Funds Act provides that the BIF and the SAIF were to have merged on
January 1, 1999, if there were no more savings associations as of that date.
Several bills have been introduced in Congress that would eliminate the federal
thrift charter, create a uniform financial charter, abolish the OTS and restrict
savings and loan holding company activities. The bank is unable to predict
whether any such legislation will be enacted or, given such uncertainty,
determine the extent to which the legislation, if
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enacted, would affect its business. The bank is also unable to predict whether
the SAIF and BIF will eventually be merged or the federal thrift charter
eliminated, and what effect, if any, such legislation would have on the bank.
FEDERAL SECURITIES LAWS
The company has filed a registration statement with the SEC under the
Securities Act, for the registration of the common stock to be issued in this
public offering. Upon completion of the public offering, the company's Common
Stock will be registered with the SEC under the Exchange Act. The company will
then be subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
The registration of the shares of the Common Stock to be issued in this
public offering under the Securities Act does not cover the resale of such
shares. Shares of the Common Stock purchased by persons who are not affiliates
of the company may be resold without registration. Shares purchased by an
affiliate of the company will be subject to the resale restrictions of Rule 144
under the Securities Act. If the company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the company
who complies with the other conditions of Rule 144 (including those that require
the affiliate's sale to be aggregated with those of certain other persons) would
be able to sell in the public market, without registration, a number of shares
not to exceed, in any three-month period, the greater of (i) 1% of the
outstanding shares of the company or (ii) the average weekly volume of trading
in such shares during the preceding four calendar weeks. Provision may be made
in the future by the company to permit affiliates to have their shares
registered for sale under the Securities Act under certain circumstances.
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.
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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
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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.
DESCRIPTION OF CAPITAL STOCK
General. The authorized capital stock of the company consists of 10,000,000
shares of Common Stock, par value $0.01 per share, and 2,500,000 shares of
Preferred Stock, par value $0.01 per share (the "Preferred Stock"). As of
December 31, 1998, 813,467 shares of Common Stock were issued and outstanding
and no shares of Preferred Stock were outstanding. Subsequent to December 31,
1998, the company issued an additional 8,961 shares of common stock. As of
December 31, 1998, 153,012 shares of Common Stock were reserved for issuance
pursuant to outstanding warrants and employee benefit plans. Since the company
is a savings and loan holding company, the right of the company, and hence the
right of creditors and stockholders of the company, to participate in any
distribution of assets of any subsidiary (including Greater Atlantic Bank) upon
its liquidation or reorganization or otherwise is necessarily subject to the
prior claims of creditors of the subsidiary, except to the extent that claims of
the company itself as a creditor of the subsidiary may be recognized.
The following summary does not purport to be complete and is subject in all
respects to the applicable provisions of the Delaware General Corporation Law
and the company's Certificate of Incorporation.
Common Stock. Holders of common stock are entitled to one vote for each
share held of record on each matter submitted to a vote at a meeting of
stockholders. The board of directors is divided into three classes as nearly
equal in number as possible, with one third of the Board elected at each annual
meeting of stockholders. Each share of Common Stock is entitled to share, pro
rata, in dividends and in the company's assets in the event of its dissolution
or liquidation. Holders of shares of Common Stock do not possess any preemptive
rights. The outstanding shares of Common Stock are fully paid and nonassessable.
No option, warrant, privilege or right has been issued or is outstanding other
than options granted under the company's stock option plans.
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Subject to any prior rights of any Preferred Stock of the company
outstanding, holders of the Common Stock are entitled to dividends when, as and
if declared by the board of directors out of funds legally available therefor.
Under Delaware law, the company may pay dividends out of surplus (whether
capital surplus or earned surplus) or net profits for the fiscal year in which
declared or for the preceding fiscal year, even if its surplus accounts are in a
deficit position. The principal source of funds for payment of dividends by the
company is its subsidiary, Greater Atlantic Bank. Payments made by such
subsidiary to the company are limited by law and regulations of the bank
regulatory authorities. See "Regulation -- Federal Savings Institution
Regulation -- Limitation on Capital Distributions."
Preferred Stock. The company's board of directors has the authority to
issue shares of the Preferred Stock from time to time as a class without series,
or in one or more series. The Preferred Stock may be issued with such voting,
dividend, redemption, sinking fund, conversion, exchange, liquidation and other
rights as shall be determined by resolution of the board of directors, without
stockholder approval. Preferred Stock will have a preference over Common Stock
as to the payment of dividends, as to the right to distribution of assets upon
redemption of shares or upon liquidation of the company, or as to both dividends
and assets, and such other preferences as may be fixed by the board of
directors.
OPTIONS AND WARRANTS
At December 31, 1998, the company had outstanding warrants to purchase
94,680 shares and options to purchase 58,333 shares of the company's Common
Stock at exercise prices between $7.50 and $8.38 per share. The term of the
warrants and options is 10 years. Holders of the warrants and options have no
rights to have the underlying shares registered under the Securities Act. The
number of shares that may be purchased upon the exercise of warrants or options
will be adjusted in the event of a reclassification, recapitalization or other
adjustment to the outstanding Common Stock. All options and warrants granted
under the 1997 Stock Option Plan are fully vested and exercisable. The exercise
of any of these warrants or options will result in a dilution of the percentage
of the shares of the company's Common Stock owned by each purchaser of the
Common Stock in this offering.
DIVIDENDS
Holders of shares of Common Stock are entitled to dividends if, when and as
declared by the board of directors out of funds legally available therefor. The
company has not paid any dividends on its Common Stock and intends to retain
earnings, if any, to finance the development and expansion of its business.
Future dividend policy is subject to the discretion of the board of directors
and will depend upon a number of factors, including future earnings, capital
requirements, regulatory constraints. and the financial condition of the
company.
GENERAL VOTING REQUIREMENTS
Except as described in the next section regarding certain supermajority
voting requirements, the affirmative vote of the holders of a majority of the
shares of Common Stock entitled to vote is required to approve any action for
which shareholder approval is required. A sale or transfer of substantially all
of the company's assets, liquidation, merger, consolidation, reorganization, or
similar extraordinary corporate action requires the affirmative vote of 80% of
the shares of Common Stock entitled to vote thereon. See "Risk Factors--Our
certificate of incorporation and bylaws contain supermajority voting
requirements and other anti-takeover measures."
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SUPERMAJORITY VOTING REQUIREMENTS; ANTI-TAKEOVER MEASURES
General. The company's Certificate of Incorporation and Bylaws contain
certain provisions designed to enhance the ability of the board of directors to
deal with attempts to acquire control of the company. These provisions may be
deemed to have an anti-takeover effect and may discourage takeover attempts
which have not been approved by the board of directors (including takeovers
which certain shareholders may deem to be in their best interest). These
provisions also could discourage or make more difficult a merger. tender offer
or proxy contest, even though such transaction may be favorable to the interests
of shareholders, and could potentially adversely affect the market price.
The following briefly summarizes protective provisions contained in the
Certificate of Incorporation and Bylaws. This summary is necessarily general and
is not intended to be a complete description of all the features and
consequences of those provisions, and is qualified in its entirety by reference
to the Certificate of Incorporation and Bylaws.
Staggered Board Terms. The Bylaws provide that the board of directors be
divided into three classes of directors, one class to be originally elected for
a term expiring at the next annual meeting of stockholders in 2000, another
class to be originally elected for a term expiring at the annual meeting of
stockholders to be held in 2001 and another class to be originally elected for a
term expiring at the annual meeting of stockholders to be held in 2002, with
each director to hold office until his or her successor is duly elected and
qualified.
The Bylaws provide that any directorships resulting from any increase in
the number of directors and any vacancies on the company's Board resulting from
death, resignation, disqualification, or removal, may be filled by the board of
directors, acting by a majority of the directors then in office, even though
less than a quorum, and any director so chosen shall hold office until the next
election of the class for which such director shall have been chosen and until
his or her successor shall be elected and qualified. At each annual meeting of
stockholders the successors to the class of directors whose term shall then
expire shall be elected to hold office for a term expiring at the third
succeeding annual meeting. In addition, any director may be removed from office
but only with cause by the affirmative vote of the holders of 80% of the capital
stock of the company entitled to vote on such matter.
These provisions would preclude a third party from removing incumbent
directors and simultaneously gaining control of the Board by filling the
vacancies created by removal with its own nominees. Under the classified board
provisions described above, it would take at least two elections of directors
for any individual or group to gain control of the Board. Accordingly, these
provisions could discourage a third party from initiating a proxy contest,
making a tender offer or otherwise attempting to gain control of the company.
Stockholder Vote Required to Approve Business Combinations. The
Certificate of Incorporation require the affirmative vote of holders of at least
80% of the company's Common Stock entitled to vote to approve certain business
combinations. If Board approval has been obtained, then the affirmative vote of
holders of only a majority of the company's Common Stock entitled to vote would
be required to approve the transaction. Business combinations subject to the
supermajority voting requirements include (i) a merger or consolidation of the
company or any subsidiary of the company, (ii) the sale, exchange, transfer or
other disposition (in one or a series of transactions) of substantially all of
the assets of the company or a subsidiary of the company having an aggregate
fair market value, as defined, exceeding
88
<PAGE>
25% or more of the combined assets of the company and its subsidiaries, (iii)
adoption of a plan or proposal for the liquidation or dissolution or liquidation
of the company on behalf of an interested stockholder, as defined; or (iv) any
reclassification of securities (including any reverse stock split) or merger or
consolidation with any of the company's subsidiaries which has the effect of
increasing the proportionate share of the outstanding shares of any class of
equity securities of the company directly or indirectly owned by any interested
stockholder or any affiliate of any interested stockholder . Any amendments to
this provision would require the approval of holders of at least 80% of the
company's Common Stock entitled to vote thereon.
This provision would have the effect of making more difficult the
accomplishment of a merger or the assumption of control of the company by a
stockholder, because a higher percentage of votes would be required to approve a
business combination if the transaction is not approved by the company's board
of directors. The board of directors of the company believes that the company
and its stockholders are best served when the Board has the opportunity to
objectively review and evaluate proposed transactions involving the company, and
that these provisions are desirable and in the best interests of the company and
its stockholders because they will deter potential acquirors from influencing a
transaction that could result in stockholders receiving less than fair value for
their shares. These provisions, however, may make more difficult the
consummation of a transaction that has terms favorable to stockholders of the
company.
Delaware Corporate Law. The state of Delaware has a statute designed to
provide Delaware corporations with additional protection against hostile
takeovers. The takeover statute, which is codified in Section 203 of the
Delaware General Corporate Law ("Section 203"), is intended to discourage
certain takeover practices by impeding the ability of a hostile acquiror to
engage in certain transactions with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
"Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the board of directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, with the number of shares outstanding
calculated without regard to those shares owned by the corporation's directors
who are also officers and by employee stock plans; (iii) any business
combination with an Interested Stockholder that is approved by the board of
directors and by a two-thirds vote of the outstanding voting stock not owned by
the Interested Stockholder; and (iv) certain business combinations that are
proposed after the corporation had received other acquisition proposals and
which are approved or not opposed by a majority of continuing members of the
board of directors. A corporation may exempt itself from the requirements of the
statute by adopting an amendment to its
89
<PAGE>
Certificate of Incorporation or Bylaws electing not to be governed by Section
203. At the present time, the board of directors does not intend to propose any
such amendment.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no established public trading market
for the common stock. Future sales of substantial amounts of common stock in the
public market could adversely affect the prevailing market price and impair the
company's ability to raise additional funds.
Upon completion of this offering, the company will have outstanding
2,822,427 shares of common stock (assuming no exercise of the Underwriters'
over-allotment option). The shares sold in this offering will be freely
tradeable by persons other than "affiliates" of the company, as that term is
defined in the Securities Act. The 822,427 shares of common stock outstanding
prior to this offering may not be sold unless they are registered under the
Securities Act or are sold pursuant to Rule 144 under the Securities Act or
another exemption from registration.
As of January 31, 1999, an aggregate of 822,427 shares of common stock
are beneficially owned by the company's executive officers, directors and
current stockholders. Our executive officers, directors and holders of 2% or
more of the company's common stock, all of whom have agreed that for a period of
180 days from the date of this Prospectus, they will not sell, offer for sale or
take any action that may constitute a transfer of shares of common stock. There
are also 153,013 shares subject to outstanding options and warrants, Although
the sale of the shares issued upon exercise of options and warranties will be
restricted under Rule 144, the sale of any number of shares of common stock in
the public market following the offering could have an adverse impact on the
then prevailing market price of the shares.
Beginning 90 days after the date of this Prospectus, if a period of at
least two years has elapsed from the date that shares of Common Stock were
acquired from the company or an affiliate of the company, the holder of such
shares (including an affiliate of the company), may sell, pursuant to Rule 144,
within any three month period that number of shares which does not exceed the
greater of 1% of the then outstanding shares of Common Stock or the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding such sale. Sales pursuant to Rule 144 are subject to certain
requirements relating to the manner of sale, notice and availability of current
public information about the company. If at least three years has elapsed from
the date the shares of Common Stock were acquired from the company, or an
affiliate of the company, and the proposed seller has not been an affiliate of
the company at any time during the three months immediately preceding the sale,
such person is entitled to sell such shares pursuant to Rule 144(k) without
regard to the limitations described above. See "Risk Factors - Shares Eligible
for Future Sale."
90
<PAGE>
UNDERWRITING
The underwriter named below (the "Underwriter"), for whom Legg Mason Wood
Walker, Incorporated is acting as representative (the "Representative"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement, to purchase from the company the number of shares of Common Stock set
forth opposite their names below:
Underwriter Number of Shares
Legg Mason Wood Walker, Incorporated
--------------------------------
Total ___________
The Underwriting Agreement provides that the obligations of the Underwriter
are subject to certain conditions, and that if any of the foregoing shares of
Common Stock are purchased by the Underwriter pursuant to the Underwriting
Agreement, all such shares must be so purchased.
The company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments which the Underwriter may be required to make in respect thereof.
The company has granted to the Underwriter a 30-day option to purchase up
to 300,000 additional shares of Common Stock at the initial offering price to
public, less the underwriting discounts and commissions shown on the cover page
of this Prospectus. To the extent such option is exercised, the Underwriter will
be committed, subject to certain conditions, to purchase a number of additional
shares of Common Stock proportionate to the Underwriter's initial commitment as
set forth in the preceding table.
The company has been advised by the Representative that the Underwriter
proposes to offer the shares of Common Stock to the public initially at the
public offering price set forth on the cover page of this Prospectus and to
certain selected dealers at such public offering price less a concession of
$____ per share. The selected dealers may reallow a concession not to exceed
$_____ per share to certain other dealers. After the initial public offering,
the public offering price, the concession to selected dealers and the
reallowance to other dealers may be changed by the Representative.
The company and each of the officers and directors of the company and each
shareholder and holder of options, warrants or other securities exercisable,
convertible or exchangeable for common stock who beneficially owns 2% or more of
the outstanding equity securities of the company has agreed with the Underwriter
that for a period of 180 days after the completion of the offering they will not
offer, sell, or otherwise dispose of any shares of its capital stock or
securities exchangeable or convertible or exercisable for its capital stock
other than the shares of common stock offered hereby, except in certain limited
circumstances, without the prior written consent of the Representative.
91
<PAGE>
LEGAL OPINIONS
The legality of the shares offered hereby will be passed upon for the
company by Muldoon, Murphy & Faucette LLP, 5101 Wisconsin Avenue, N.W.,
Washington, D.C. 20016, and for the Underwriter by Elias, Matz, Tiernan &
Herrick L.L.P., 734 15th Street, N.W., Washington, D.C. 20005.
EXPERTS
The consolidated financial statements and schedule included in this
prospectus and in the registration statement have been audited by BDO Seidman,
LLP, independent certified public accountants, to the extent and for the periods
set forth in their report appearing elsewhere herein and in the registration
statement and have been included herein in reliance upon such reports given upon
the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
The company has filed with the Commission a Registration Statement on Form
SB-2 (File No. 333-________) under the Securities Act of 1933, as amended, with
respect to the common stock offered hereby. This prospectus does not contain all
the information contained in the Registration Statement, certain parts of which
are omitted as permitted by the rules and regulations of the Commission. This
information may be inspected at the public reference facilities maintained by
the Commission at 450 Fifth Street, NW, Room 1024, Washington, D.C. 20549 and at
its regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies
may be obtained at prescribed rates from the Public Reference Room of the
Commission at 450 Fifth Street, NW, Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC- 0330. The Registration Statement also is available
through the Commission's World Wide Web site on the Internet at
http://www.sec.gov.
You should rely only on the information contained in this prospectus.
Neither Greater Atlantic Financial Corp. nor the bank has authorized anyone to
provide you with different information. This prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any of the securities offered
by this prospectus to any person or in any jurisdiction in which an offer or
solicitation is not authorized or in which the person making an offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make an offer or solicitation in those jurisdictions. Neither the delivery of
this prospectus nor any sale hereunder shall under any circumstances imply that
there has been no change in the affairs of Greater Atlantic Financial Corp. or
the bank since any of the dates as of which information is furnished in this
prospectus or since the date printed below.
[Logo for Greater Atlantic Financial Corp.]
2,000,000 Shares of Common Stock
----------
Prospectus
----------
LEGG MASON WOOD WALKER
INCORPORATED
_____________, 1999
Until ________________, 1999, all dealers that buy, sell or trade these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
92
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997 AND 1998
Independent Auditors' Report F-2
Financial Statements:
Consolidated statements of financial condition F-3
Consolidated statements of operations F-4 to F-5
Consolidated statements of comprehensive income F-6
Consolidated statements of stockholders' equity F-7
Consolidated statements of cash flows F-8 to F-9
Notes to consolidated financial statements F-10 to F-34
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Greater Atlantic Financial Corp.
We have audited the accompanying consolidated statements of financial condition
of Greater Atlantic Financial Corp. as of September 30, 1998, and the related
statements of operations, comprehensive income, stockholders' equity, and cash
flows for the year then ended. We have also audited the accompanying
consolidated statement of financial condition of the predecessor corporation,
Greater Atlantic Corporation, as of September 30, 1997, and the related
statements of operations, comprehensive income, stockholders' equity, and cash
flows for the year 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial conditions of Greater Atlantic Financial
Corp. at September 30, 1998, and the predecessor corporation, Greater Atlantic
Corporation at September 30, 1997, and the results of their operations and their
cash flows for the years then ended.
/s/BDO Seidman, LLP
Washington, D.C.
December 10, 1998,
except for Note 21,
the date of which is
April 12, 1999
F-2
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, September 30, December 31,
1997 1998 1998
---------------- --------------- ---------------
(unaudited)
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents $ 240,035 $ 433,218 $ 688,828
Interest bearing deposits - - 2,540,736
Investment securities (Notes 3 and 10)
Available-for-sale - 51,171,435 65,072,894
Held-to-maturity 1,004,836 - -
Trading - 241,250 145,500
Loans held for sale (Note 4) 9,946,377 25,321,543 14,811,833
Loans receivable, net (Notes 4, 10 and 15) 18,854,524 25,509,868 28,703,759
Accrued interest and dividends receivable (Note 5) 206,772 854,767 879,173
Deferred income taxes (Note 11) 60,000 997,000 790,000
Federal Home Loan Bank stock, at cost 414,400 1,100,000 1,400,000
Foreclosed real estate (Note 7) 201,692 90,283 98,550
Premises and equipment, net (Note 6) 229,014 757,792 1,603,077
Prepaid expenses and other assets 395,950 864,780 1,084,097
----------------- ----------------- ------------------
TOTAL ASSETS $31,553,600 $107,341,936 $117,818,447
================= ================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 8) $28,377,011 $76,310,537 $104,097,362
Advance payments from borrowers
for taxes and insurance 118,594 247,756 234,394
Accrued expenses and other liabilities (Note 9) 244,179 1,814,024 1,637,741
Income taxes payable - 152,163 -
Advances from the FHLB (Note 10) 1,250,000 22,000,000 5,000,000
----------------- ----------------- ------------------
TOTAL LIABILITIES 29,989,784 100,524,480 110,969,497
----------------- ----------------- ------------------
Commitments and contingencies (Note 12)
Stockholders' Equity (Notes 14 and 21)
Preferred stock, $4 par value - 2,500,000 authorized;
468,284 shares outstanding 1,873,136 - -
Common stock, $.01 par value - 10,000,000
shares authorized; 330,000, 813,467
and 813,467 shares outstanding 3,500 8,135 8,135
Additional paid-in capital 3,901,217 6,092,865 6,092,865
Retained earnings (deficit) (4,213,837) 609,110 879,939
Accumulated other comprehensive income - 107,346 (131,989)
----------------- ----------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 1,563,816 6,817,456 6,848,950
----------------- ----------------- ------------------
$31,553,600 $107,341,936 $117,818,447
================= ================= ==================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended Three months ended
September 30, December 31,
1997 1998 1997 1998
-------------- ------------- ---------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Interest income
Loans $2,253,113 $2,630,943 $ 547,532 $ 940,544
Investments 140,710 1,379,881 66,103 850,080
-------------- ------------- ---------------- ----------------
Total interest income 2,393,823 4,010,824 613,635 1,790,624
-------------- ------------------------------ ------------------
Interest expense
Deposits (Note 8) 1,134,824 2,163,240 282,284 1,075,098
Borrowed money 156,007 399,465 21,574 207,202
-------------- ------------- ---------------- ----------------
Total interest expense 1,290,831 2,562,705 303,858 1,282,300
-------------- ------------- ---------------- ----------------
Net interest income 1,102,992 1,448,119 309,777 508,324
Provision for loan losses (Note 4) 487,430 159,486 35,313 22,071
-------------- ------------- ---------------- ----------------
Net interest income after provision for
loan losses 615,562 1,288,633 274,464 486,253
-------------- ------------- ---------------- ----------------
Noninterest income
Fees and service charges 266,435 494,433 120,546 185,349
Gain on sale of loans 3,261,349 5,774,281 1,037,766 2,327,603
-------------- ------------- ---------------- ----------------
Total noninterest income $3,527,784 $6,268,714 $1,158,312 $2,512,952
-------------- ------------- ---------------- ----------------
</TABLE>
F-4
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CON'T)
<TABLE>
<CAPTION>
Years ended Three months ended
September 30, December 31,
1997 1998 1997 1998
-------------- ------------- ---------------- ------------------
(Unaudited)
<S> <C> <C> <C> <C>
Noninterest expense
Compensation and employee benefits $2,996,191 $3,747,657 $ 753,309 $1,527,909
Occupancy 325,346 497,653 92,634 244,623
Professional services 129,905 192,701 41,135 43,204
Advertising 37,333 567,575 68,228 157,448
Deposit insurance premium 97,895 94,942 27,108 16,829
Furniture, fixtures and equipment 160,186 202,715 47,814 95,496
Data processing 90,694 132,057 24,665 21,827
Provision for (recover of) loss on real
estate owned (Note 7) 205,437 5,172 5,172 (10,507)
Other real estate owned expenses (Note 7) 35,073 28,704 9,278 8,664
Other operating expenses 699,150 1,168,061 218,181 435,383
-------------- --------------- ----------------- -------------------
Total noninterest expense 4,777,210 6,637,237 1,287,524 2,540,876
-------------- --------------- ----------------- -------------------
Income (loss) before income tax provision (633,864) 920,110 145,252 458,329
-------------- --------------- ----------------- -------------------
Income tax provision (Note 11) - 311,000 29,000 187,500
-------------- --------------- ----------------- -----------------
Net income (loss) $ (633,864) $ 609,110 $ 116,252 $ 270,829
-------------- --------------- ----------------- -----------------
Basic and diluted earnings (loss) per share
(Note 15) $ (1.92) $ .77 $ .15 $ .33
============== =============== ================= =================
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Years ended Three months ended
September 30, December 31,
1997 1998 1997 1998
-------------- ------------- ---------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Net (loss) income $(633,864) $609,110 $116,252 $270,829
---------- ------------ ---------------- -----------------
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period - 107,346 - (239,335)
---------- ------------ ---------------- -----------------
Other comprehensive income (loss) - 107,346 (239,335)
---------- ------------ ---------------- -----------------
Comprehensive (loss) income $(633,864) $716,456 $116,252 $ 31,494
========== ============ ================ =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Accumulated Other Total
Preferred Common Paid-in Earnings Comprehensive Stockholders'
Stock Stock Capital (Deficit) Income Equity
--------------- ------------ ----------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1996 $1,450,000 $ 3,300 $ 3,901,217 $(3,579,973) $ - $ 1,774,544
Net loss for the year - - - (633,864) - (633,864)
Issuance of preferred
stock (Note 14) 423,136 - - - - 423,136
--------------- ------------ ----------------- --------------- ---------------- ----------------
Balance at
September 30, 1997 1,873,136 3,300 3,901,217 (4,213,837) - 1,563,816
Sale of stock by
former investors
(Note 2) (1,873,136) (3,300) (3,901,217) 4,213,837 - (1,563,816)
Issuance of 813,467
common shares - 8,135 6,092,865 - - 6,101,000
Other comprehensive
income, net of tax
of $65,681 - - - - 107,346 107,346
Net income for the
year - - - 609,110 - 609,110
--------------- ------------ ----------------- --------------- ---------------- ----------------
Balance at
September 30, 1998 - 8,135 6,092,865 609,110 107,346 6,817,456
Net income for the
period (unaudited) - - - 270,829 - 270,829
Other comprehensive
income, net of tax
of $146,441
(unaudited) - - - - (239,335) (239,335)
--------------- ------------ ----------------- --------------- ---------------- ----------------
Balance at
December 31, 1998
(unaudited) $ - $8,135 $6,092,865 $879,939 $(131,989) $6,848,950
=============== ============ ================= =============== ================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended Three months ended
September 30, December 31,
1997 1998 1997 1998
-------------- ----------------- ----------------- ------------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ (633,864) $ 609,110 $116,252 $270,829
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities
Provision for loan losses 487,430 159,486 35,313 22,071
Provision for losses on foreclosed assets 205,437 5,172 5,172 (10,507)
Depreciation and amortization 116,242 133,099 28,411 50,918
Deferred income taxes - (274,000) - 207,000
Unrealized loss (gain) on trading - 5,750 - (4,250)
securities
Amortization of excess of purchase price
over net assets acquired - 19,600 7,644 -
Amortization of security premiums 7,000 274,226 1,750 134,131
Amortization of deferred fees (117,541) (60,422) (33,947) (16,703)
Stock compensation 423,136 - - -
Discount accretion net of premium
amortization (10,378) 7,171 (8,919) -
Loss on disposal of fixed assets - 1,687 - -
Loss (gain) on sale of foreclosed real
estate (16,143) 756 - 2,240
Gain on sale of loans (3,261,349) (5,774,281) (1,037,766) (2,327,603)
(Increase) decrease in assets:
Disbursements for origination of loans (138,202,824) (252,602,776) (35,098,726) (92,947,295)
Proceeds from sales of loans 136,823,690 243,001,891 42,451,414 105,784,608
Accrued interest and dividend
receivable 38,979 (647,995) 10,227 (24,406)
Insurance recoveries on foreclosures 44,152 - 367 -
Prepaid expenses and other assets (211,152) (468,831) 385,953 (219,317)
Deferred loan fees collected, net of
deferred costs incurred 50,045 (227,125) (59,478) (44,569)
Increase (decrease) in liabilities:
Accrued expenses and other liabilities 124,743 1,569,645 188,787 (176,280)
Income taxes payable - 85,869 29,000 (5,722)
Purchases of trading securities - (247,000) - -
Proceeds from sale of trading securities - - - 100,000
------------------- ------------------- ----------------- --------------------
Net cash (used in) provided by operating
activities $ (4,132,397) $ (14,428,968) $ 7,021,454 $ 10,795,145
------------------- ------------------- ----------------- -----------------
</TABLE>
F-8
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Year ended Three months ended
September 30, December 31,
1997 1998 1997 1998
--------------- ----------------- ---------------- -----------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flow from investing activities
Net (decrease) increase in loans $ 1,767,967 $ (6,402,285) $ 2,330,653 $ (3,154,697)
Purchases of premises and equipment (38,654) (663,564) (56,308) (896,203)
Proceeds from sales of foreclosed real estate 25,337 97,031 - -
Purchases of investment securities - (55,971,612) (3,593,484) (25,485,255)
Proceeds from sale of investment securities - 2,950,000 - 8,565,000
Proceeds from repayments of investment securities - 2,753,814 - 2,498,893
Purchases of FHLB stock - (758,100) - (800,000)
Proceeds from sale of FHLB stock - 72,500 - 500,000
Acquisition, net of cash acquired - (2,367,517) (2,367,517) -
--------------- ----------------- ------------------ -----------------
Net cash provided by (used in) investing activities 1,754,650 (60,289,733) (3,686,656) (18,772,262)
--------------- ----------------- ------------------ -----------------
Cash flow from financing activities
Net increase(decrease) in deposits 5,006,040 47,931,522 (4,450,114) 27,786,825
Issuance of common shares - 5,850,000 5,850,000 -
Capital contributions - 251,200 - -
Net advances (repayments) from FHLB (3,750,000) 20,750,000 (1,250,000) (17,000,000)
Increase (decrease) in advance payments by
borrowers for taxes and insurance 5,084 129,162 (21,795) (13,362)
--------------- ----------------- ------------------ -----------------
Net cash (used in) provided by financing activities 1,261,124 74,911,884 128,091 10,773,463
--------------- ----------------- ------------------ -----------------
Increase (decrease) in cash and cash equivalents (1,116,623) 193,183 3,462,889 2,796,346
--------------- ----------------- ------------------ -----------------
Cash and cash equivalents, at beginning of period 1,356,658 240,035 240,035 433,218
--------------- ----------------- ------------------ -----------------
Cash and cash equivalents, at end of period $ 240,035 $ 433,218 $ 3,702,924 $ 3,229,564
=============== ================= ================== =================
</TABLE>
F-9
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Greater Atlantic Financial Corporation (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, F.S.B.
(the Bank) 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.
INTERIM FINANCIAL INFORMATION
The financial information as of December 31, 1998 and for the three months
then ended is unaudited. In the opinion of management, such information contains
all adjustments, consisting only of normal recovering adjustments, necessary for
a fair presentation of the results for such periods. Results for interim periods
are not necessarily indicative of results to be expected for an entire year.
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, 1998 and December 31,
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.
F-10
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
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, 1998 and December 31, 1998.
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, undisbursed loans in process, deferred loan fees, and
allowances for loan losses. Valuation allowances for estimated losses on loans
are established by charges to earnings when any significant decline in value is
deemed to have occurred. Management's determination of the adequacy of the
valuation allowance is based on historical patterns, industry experience,
current economic conditions, changes in the composition and risk characteristics
of the loan portfolio, appraisals and other factors deemed relevant to the
collectibility of the loans currently outstanding.
In addition to the allowance for specific loans, management makes a
provision for losses on loans based in part on loan loss experience and in part
on prevailing market conditions.
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
F-11
<PAGE>
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.
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 years ended September 30, 1998 and 1997, no loans were sold with
servicing rights retained. Loans of $3,054,355 were sold with servicing rights
retained as of December 31, 1998. 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.
F-12
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
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
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
three months ended December 31, 1998 and has restated comparative information
for earlier years presented.
STOCK-BASED COMPENSATION
The Company records stock-based compensation under the provisions of SFAS
123, "Accounting for Stock-Based Compensation," which permits entities to
recognize, as expense over the vesting period, the fair value of all stock-based
awards on the date of grant.
Alternatively, SFAS 123 also allows entities to continue to apply the
provision of Accounting Principles Board (APB) Opinion 25 and provide 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. The Company has elected to continue to apply the provisions of APB
Opinion 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, and provide the pro forma disclosure provisions of SFAS 123. 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.
2. ACQUISITION
Effective October 1, 1997, Greater Atlantic Financial Corporation purchased
100% of the outstanding common and preferred shares of Greater Atlantic Savings
Bank, F.S.B. from Greater Atlantic Corporation. The aggregate purchase price was
approximately $2,028,000, 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).
F-13
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
<TABLE>
<CAPTION>
3. INVESTMENTS HELD-TO-MATURITY, SEPTEMBER 30, 1997
----------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------ -- -------------- -- ------------- -- ------------- -- ---------------
INVESTMENT SECURITIES
<S> <C> <C> <C> <C>
FHLB Notes $1,004,836 $ - $(6,398) $998,438
------------------------------------ -- -------------- -- ------------- -- ------------- -- ---------------
$1,004,836 $ - $(6,398) $998,438
==================================== == ============== == ============= == ============= == ===============
AVAILABLE-FOR-SALE, SEPTEMBER 30, 1998
------------------------------------------------------------------------------------- --------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------ -- -------------- -- ------------- -- ------------- -- ---------------
INVESTMENT SECURITIES
SBA Notes $22,561,220 $109,458 $(32,339) $22,638,339
FHLB Notes 8,565,000 9,063 - 8,574,063
FHLMC Notes 1,000,000 - - 1,000,000
------------------------------------ -- -------------- -- ------------- -- ------------- -- ---------------
32,126,220 118,521 (32,339) 32,212,402
------------------------------------ -- -------------- -- ------------- -- ------------- -- ---------------
MORTGAGE-BACKED
SECURITIES
FNMA Notes 11,027,100 94,873 (41,087) 11,080,886
GNMA Notes 3,723,282 4,842 (11,763) 3,716,361
FHLMC Notes 1,562,906 337 (2,238) 1,561,005
REMICS 2,558,900 41,881 - 2,600,781
------------------------------------ -- -------------- -- ------------- -- ------------- -- ---------------
18,872,188 141,933 (55,088) 18,959,033
------------------------------------ -- -------------- -- ------------- -- ------------- -- ---------------
$50,998,408 $260,454 $(87,427) $51,171,435
==================================== == ============== == ============= == ============= == ===============
TRADING SECURITIES, SEPTEMBER 30, 1998
------------------------------------------------------------------------------------- --------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------ -- -------------- -- ------------- -- ------------- -- ---------------
INVESTMENT SECURITIES
Corporate Notes $247,000 $ - $(5,750) $241,250
------------------------------------ -- -------------- -- ------------- -- ------------- -- ---------------
$247,000 $ - $(5,750) $241,250
==================================== == ============== == ============= == ============= == ===============
</TABLE>
F-14
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE, DECEMBER 31, 1998
---------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------ --------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES
Equity securities $ 6,003,731 $ 2,073 $ (5) $ 6,005,799
SBA Notes 25,728,011 244 (277,959) 25,450,296
FHLB Notes 1,000,000 938 - 1,000,938
Corporate debt securities 1,365,372 32,503 - 1,397,875
------------------------------------ --------------------------------------------------------------
34,097,114 35,758 (277,964) 33,854,908
------------------------------------ --------------------------------------------------------------
MORTGAGE-BACKED SECURITIES
FNMA notes 18,792,273 56,500 (42,380) 18,806,393
GNMA Notes 3,392,998 193 (27,593) 3,365,598
FHLMC Notes 6,450,714 25,219 (1,423) 6,474,510
REMICS 2,552,544 18,941 - 2,571,485
------------------------------------ --------------------------------------------------------------
31,188,529 100,853 (71,396) 31,217,986
------------------------------------ --------------------------------------------------------------
$65,285,643 $136,611 $(349,360) $65,072,894
=================================== ================ =============== =============== =================
<CAPTION>
TRADING SECURITIES, DECEMBER 31, 1998
------------------------------------------------------------------------------------ --------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------ -- ------------- -- ------------- -- ------------- -- --------------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES
Corporate Notes $147,000 $ - $(1,500) $145,500
------------------------------------ -- ------------- -- ------------- -- ------------- -- --------------
$147,000 $ - $(1,500) $145,500
==================================== == ============= == ============= == ============= == ==============
</TABLE>
The weighted average interest rate on investments was 4.72%, and 7.57% for
the years ended September 30, 1997 and 1998, respectively and 6.38% for the
three months ended December 31, 1998.
F-15
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
The amortized cost and estimated fair value of securities at September 30, 1998,
by contractual maturity, are as follows:
<TABLE>
<CAPTION>
Available-for-sale
------------------------------------
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
AMOUNTS MATURING IN:
One year or less $ - $ -
After one year through five years 6,523,001 6,537,857
After five years through ten years 8,099,321 8,089,270
After ten years 20,062,798 20,186,057
Mortgage-backed securities 16,313,288 16,358,251
- --------------------------------------------------------------------------------
$50,998,408 $51,171,435
================================================================================
Trading
------------------------------------
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------
AMOUNTS MATURING IN:
After ten years $247,000 $241,250
- --------------------------------------------------------------------------------
$247,000 $241,250
================================================================================
</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.
F-16
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
4. LOANS RECEIVABLE
Loans receivable consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1998 1998
------------------ ------------------- -------------------
<S> <C> <C> <C>
Mortgage loans:
Single-family $ 8,778,361 $17,198,151 $ 17,041,990
Multi-family 1,653,000 1,189,000 850,000
Construction 6,794,850 5,519,562 6,585,029
Commercial real estate 2,554,591 2,246,457 2,015,728
Land loans 1,176,750 723,198 947,638
- -----------------------------------------------------------------------------------------------
Total mortgage loans 20,957,552 26,876,368 27,440,385
Commercial loans 795,123 813,542 2,426,656
Consumer loans 778,492 746,353 2,296,176
- -----------------------------------------------------------------------------------------------
Total loans 22,531,167 28,436,263 32,163,217
- -----------------------------------------------------------------------------------------------
Due borrowers on loans-in process (2,750,676) (2,276,168) (2,866,900)
Deferred loan fees (54,714) (37,310) (10,711)
Allowance for loan losses (776,150) (577,929) (605,000)
Unearned premium (discounts) (95,103) (34,988) 23,153
- -----------------------------------------------------------------------------------------------
(3,676,643) (2,926,395) (3,459,458)
- -----------------------------------------------------------------------------------------------
LOANS RECEIVABLE, NET $18,854,524 $25,509,868 $ 28,703,759
================================================================================================
</TABLE>
Loans held for sale are all single-family mortgage loans.
F-17
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
The activity in allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Years ended Three months ended
September 30, December 31,
1997 1998 1997 1998
----------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C>
Balance, beginning $ 429,257 $ 776,150 $ 776,150 $577,929
Provision for loan losses 487,430 159,486 35,313 22,071
Charge-offs (140,537) (362,707) (171,463) -
Recoveries - 5,000 - 5,000
- ------------------------------------------------------------- --------------------------------
Balance, ending $776,150 $577,929 $640,000 $605,000
============================================================= ================================
</TABLE>
The amount of loans serviced for others totaled $1,204,968, $1,720,790 and
$4,953,139 as of September 30, 1997, September 30, 1998 and December 31, 1998,
respectively.
The allowance for uncollected interest, established for mortgage loans
which are delinquent for a period of 90 days or more, amounted to $38,542,
$13,762 and $13,518 as of September 30, 1997, September 30, 1998 and December
31, 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 $665,408, $230,320 and $198,839 as of September 30, 1997,
September 30, 1998, and December 31, 1998, respectively.
5. ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest and dividends receivable consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1998 1998
-------------- -------------- --------------------
<S> <C> <C> <C>
Investments $ 17,916 $583,642 $563,495
Loans receivable 181,365 254,010 293,902
Accrued dividends on FHLB stock 7,491 17,115 21,776
--------------- -------------- --------------------
$206,772 $854,767 $879,173
=============== ============== ====================
</TABLE>
F-18
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
6. PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1998 1998
--------------- -------------- -------------------
<S> <C> <C> <C>
Furniture, fixtures and equipment $ 827,101 $1,311,262 $1,977,759
Leasehold improvements 520,754 526,361 756,067
--------------- -------------- --------------------
1,347,855 1,837,623 2,733,826
Less allowances for depreciation
and amortization 1,118,841 1,079,831 1,130,749
--------------- -------------- --------------------
$ 229,014 $757,792 $ 1,603,077
=============== ============== ====================
</TABLE>
7. FORECLOSED REAL ESTATE
Foreclosed real estate is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1998 1998
----------------- --------------- -------------------
<S> <C> <C> <C>
Real estate acquired through
settlement of loans $201,692 $90,283 $98,550
=============== ============ ===============
</TABLE>
The cost of operations for foreclosed real estate in the statements of
operations consists of the following:
<TABLE>
<CAPTION>
Years ended Three months ended
September 30, December 31,
1997 1998 1997 1998
---------------- ----------------- -----------------------------------
<S> <C> <C> <C> <C>
Income:
Gain on sale $ 16,143 $ - $ - $ -
----------- ------------------ ----------------- ----------------
EXPENSE:
Loss on sale - 756 - 2,240
Provision for (recovery of)
loss 205,437 5,172 5,172 (10,507)
Operating expenses 35,073 28,704 9,278 8,664
----------- ------------------ ----------------- ----------------
240,510 34,632 14,450 397
----------- ------------------ ----------------- ----------------
LOSS $(224,367) $(34,632) $(14,450) $ (397)
=========== ================== ================= ================
</TABLE>
F-19
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
Activity in the provision for losses on foreclosed real estate is summarized as
follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
Balance at September 30, 1996 $ -
Provision charged to expense 205,437
---------------------
Balance at September 30, 1997 205,437
Provision charged to expense (5,172)
Charge-offs, net of recoveries (178,360)
---------------------
Balance at September 30, 1998 21,905
Provision charged to income (10,507)
Charge-offs, net of recoveries (448)
---------------------
Balance at December 31, 1998 $ 10,950
=====================
</TABLE>
8. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1997
- --------------------------------------------------------------------------------
Ranges of
Contractual
Amount Interest Rates %
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Savings accounts $ 678,165 3.00% 2.4
NOW/Money
market accounts 2,789,000 0.00 - 4.00% 9.8
Certificates of deposit 16,710,116 4.40 - 6.50% 58.9
Non-interest bearing
demand deposits 8,199,730 0.00% 28.9
- -------------------------------------------------------------------------------
$28,377,011 100.0
===============================================================================
September 30, 1998
- -------------------------------------------------------------------------------
Ranges of
Contractual
Amount Interest Rates %
- ------------------------------------------------------------------------------
Savings accounts $ 702,583 3.00% .9
NOW/Money
market accounts 6,761,000 0.00 - 5.23% 8.9
Certificates of deposit 55,422,137 4.50 - 6.50% 72.6
Non-interest bearing
demand deposits 13,424,817 0.00% 17.6
- ------------------------------------------------------------------------------
$76,310,537 100.00
==============================================================================
</TABLE>
F-20
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
<TABLE>
<CAPTION>
December 31, 1998
- ---------------------------------------------------------------------------------
Ranges of
Contractual
Amount Interest Rates %
- --------------------------------- -----------------------------------------------
<S> <C> <C> <C>
Savings accounts $ 782,282 3.00% 0.8
NOW/Money market accounts 12,079,000 0.00 - 5.12% 11.6
Certificates of deposit 82,555,429 4.50 - 6.50% 79.3
Non-interest bearing
demand deposits 8,680,651 0.00% 8.3
- --------------------------------- -----------------------------------------------
$104,097,362 100.0
================================= ===============================================
</TABLE>
Certificates of deposit as of September 30, 1998 mature as follows:
<TABLE>
<CAPTION>
Years ending September 30,
- ---------------------------------------------------------------------------------
<S> <C>
1999 $49,357,833
2000 5,719,139
2001 127,310
2002 26,420
2003 191,435
- ---------------------------------------------------------------------------------
$55,422,137
==================
</TABLE>
Interest expense on deposit accounts consists of the followings:
<TABLE>
<CAPTION>
Years ended Three months ended
September 30, December 31,
1997 1998 1997 1998
--------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
NOW/Money market accounts $ 102,888 $ 168,301 $ 22,298 $ 106,894
Savings accounts 27,950 29,516 6,449 6,645
Certificates of deposit 1,003,986 1,965,423 253,537 961,559
--------------- -------------- -------------- --------------
$ 1,134,824 $2,163,240 $282,284 $1,075,098
=============== ============== ============== ==============
</TABLE>
Deposits, including certificates of deposit, with balances in excess of
$100,000 totaled $9,442,598, $34,515,472 and $42,566,745 at September 30, 1997,
September 30, 1998, and December, 31, 1998, respectively.
F-21
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
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, 1998 and December 31, 1998,
$500,000 was accrued as deferred compensation.
10. ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
The Bank has $22,000,000 Credit availability as of September 30, 1998
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 At or for the three months
September 30, ended December 31,
1997 1998 1997 1998
-------------- --------------- ------------ -----------------
<S> <C> <C> <C> <C>
FHLB Advances:
Average balance outstanding $2,867,329 $5,358,094 $1,478,146 $13,411,413
Maximum amount outstanding at any month- 2,600,000 22,000,000 -- 5,000,000
end during the period
Balance outstanding at end of period 1,250,000 22,000,000 -- 5,000,000
Weighted average interest rate during the period 5.44% 5.34% 5.79% 4.86%
Weighted average interest rate at end of period 6.55% 6.00% -- 3.90%
Reverse repurchase agreements:
Average balance outstanding $ -- $3,097,995 $ -- $2,014,881
Maximum amount outstanding at any month- -- -- -- --
end during the period
Balance outstanding at end of period -- -- -- --
Weighted average interest rate during the period -- 5.68% -- 5.66%
Weighted average interest rate at end of period -- -- -- --
</TABLE>
The Bank has pledged certain investments with carrying values of
$26,573,656 at September 30, 1998, to collateralize advances from the FHLB.
First mortgage loans in the amount of $3,102,929 are pledged as
collateral for the advances at September 30, 1998.
11. INCOME TAXES
F-22
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
The following is a summary of the income tax provision:
<TABLE>
<CAPTION>
Years ended Three months ended
September 30, December 31,
1997 1998 1997 1998
--------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Current - Federal provision $ - $ 467,000 $23,000 $(19,000)
State provision - 119,000 6,000 (500)
-------------- ----------- --------------- ------------
586,000 29,000 (19,500)
Deferred - Federal and state - (275,000) - 207,000
-------------- ----------- --------------- ------------
$ - $ 311,000 $29,000 $187,500
============== =========== =============== ============
</TABLE>
F-23
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
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 Three months ended
September 30, December 31,
1997 1998 1997 1998
--------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C>
Federal tax expense (benefit) $(191,000) $ 311,000 $49,000 $156,000
State tax expense (benefit) (54,000) 74,000 9,000 27,500
Increase (decrease) in taxes resulting from:
Change in the valuation allowance 245,000 20,000 - -
Permanent differences - (16,000) (4,000) -
Change in effective deferred tax rate - (63,000) (16,000) -
Other - (15,000) (9,000) 4,000
--------------- ---------------- --------------- --------------
Income tax provision $ - $(311,000) $29,000 $187,500
=============== ================ =============== ==============
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1998 1998
------------------ ------------------- ------------------
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Net operating loss carryforwards $ 698,000 $ 679,000 $ 677,000
Allowance for loan loss 238,000 227,000 235,000
Loans held for sale 87,000 292,000 142,000
Core deposit intangible 65,000 67,000 67,000
Deferred loan fees 43,000 43,000 4,000
Book over tax depreciation 63,000 66,000 66,000
Post foreclosure writedown on foreclosed assets 69,000 9,000 -
Compensation payable - 196,000 196,000
Net discounts (premiums) on second trusts - 48,000 50,000
Miscellaneous items 25,000 46,000 52,000
------------------ ------------------- ------------------
Total deferred tax assets 1,288,000 1,673,000 1,489,000
------------------ ------------------- ------------------
DEFERRED TAX LIABILITIES
FHLB stock dividends 38,000 39,000 39,000
Deferred origination costs - 89,000 112,000
------------------ ------------------- ------------------
Total deferred tax liabilities 38,000 128,000 151,000
------------------ ------------------- ------------------
Net deferred tax assets 1,250,000 1,545,000 1,338,000
Less: Valuation allowance (1,190,000) (548,000) (548,000)
------------------ ------------------- ------------------
Total $ 60,000 $ 997,000 $ 790,000
================== =================== ==================
</TABLE>
F-24
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
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,
F.S.B.
At September 30, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $1,728,000, 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.
During the three months ended December 31, 1998, the Company's estimated
effective income tax rate is 41%, which was calculated based on the best
information currently available.
12. COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers
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, 1998, the Company had outstanding commitments to
originate loans aggregating $22,166,423. 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 $693,000 and standby letters of credit for
approximately $103,000.
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 periods for a base salary of
$120,000 per year.
F-25
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
RENTAL COMMITMENTS
The Company has entered into lease agreements for the rental of certain
properties expiring on various dates through March 13, 2003. The future minimum
rental commitments as of September 30, 1998, for all noncancellable lease
agreements, are as follows:
<TABLE>
<CAPTION>
Years ending Rental Sublease Net
September 30, Commitments Income Commitment
- ---------------------- ------------------ --------------- ------------------
<S> <C> <C> <C>
1999 $ 731,467 $ 23,247 $ 708,220
2000 593,893 - 593,893
2001 592,389 - 592,389
2002 610,193 - 610,193
2003 563,404 - 563,404
Thereafter 1,630,063 - 1,630,063
- ---------------------- ------------------ --------------- ------------------
Total $ 4,721,409 $ 23,247 $ 4,698,162
====================== ================== =============== ==================
</TABLE>
Net rent expense for the years ended September 30, 1997 and September 30,
1998, was $222,994 and $454,613, respectively and for the three months ended
December 31, 1997 and December 31, 1998 was $85,795 and $223,229, 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, 1997 and September 30, 1998 was $74,787 and $79,340,
respectively, and for the three months ended December 31, 1997 and 1998 was
$19,835 and $19,835, 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, 1997,
September 30, 1998 and December 31, 1998.
F-26
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
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, 1998 and December 31, 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, 1998 and
December 31, 1998:
<TABLE>
<CAPTION>
Required Required Actual Actual
At September 30, 1998 Balance Percent Balance Percent Surplus
- ----------------------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
Tangible $1,602,717 1.50% $6,277,002 5.87% $4,674,285
Core $4,273,911 4.00% $6,277,002 5.87% $2,003,091
Risk-based $2,727,774 8.00% $6,705,090 19.66% $3,977,316
===================================================== ========================================
Required Required Actual Actual
At December 31, 1998 Balance Percent Balance Percent Surplus
- ----------------------------------------------------- ----------------------------------------
Tangible $1,768,168 1.50% $6,542,654 5.55% $4,774,486
Core $4,715,114 4.00% $6,542,654 5.55% $1,827,540
Risk-based $3,668,520 8.00% $7,116,254 15.52% $3,447,734
===================================================== ========================================
</TABLE>
The following is a reconciliation of the Bank's net worth as reported to the OTS
to GAAP capital as presented in the accompanying financial statements.
<TABLE>
<CAPTION>
September 30,
------------------------------ December 31,
1997 1998 1998
------------------------------ ------------
<S> <C> <C> <C>
GAAP CAPITAL $1,563,816 $6,384,348 $6,410,665
Less: Unrealized (gains) losses on
available for sale securities - (107,346) 131,989
---------- ---------- ------------
TANGIBLE CAPITAL 1,563,816 6,277,002 6,542,654
Plus: Adjustments - - -
---------- ---------- ------------
CORE CAPITAL 1,563,816 6,277,002 6,542,654
Plus: Allowance for general loss
reserves 246,000 428,088 573,600
---------- --------- ------------
RISK-BASED CAPITAL $1,809,816 $6,705,090 $7,116,254
========== ========== ============
</TABLE>
F-27
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
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).
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 94,680 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, 1998, 94,680 warrants were issued.
The following summary represents the activity under the Plan:
<TABLE>
<CAPTION>
Number Exercise Expiration
or Shares Price Date
---------------- --------------- ----------------
<S> <C> <C> <C>
At October 1, 1997 -
Options granted 16,667 $7.50 11-14-2007
Balance outstanding at September 31, 1998 16,667
Options granted 41,666 $8.38 11-29-2008
----------------
Balance outstanding at December 31, 1998 58,334
================
</TABLE>
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123,
F-28
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
"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. As allowable under SFAS 123, 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.
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>
Year ended
September 30, 1998
------------------------------------------
Pro
Reported Forma
------------------ ---------------------
<S> <C> <C>
Net income $609,110 $579,977
================== =====================
Basic and diluted earnings per share $ .77 $ .74
================== =====================
</TABLE>
Effective January 1, 1996 the Bank, with approval of the OTS, executed an
employment agreement with the executive in charge of its Mortgage Division. The
agreement allowed the executive the right to receive preferred shares if the
bank were to merge with or into another entity or became the subject of a change
in control as defined in the employment agreement. In accordance with APB No.
25, the Bank did not record compensation expense related to the preferred stock
until it established a measurement date. A measurement date was established
effective September 30, 1997 due to the change in control of the Bank (see Note
2). As a result, 103,284 additional shares of preferred stock were issued and
compensation expense of $413,136 was recorded for this executive for the year
ended September 30, 1997.
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.
<TABLE>
<CAPTION>
Year ended Three months ended
September 30, December 31,
1997 1998 1997 1998
------------- ----------------- --------------- -------------
<S> <C> <C> <C> <C>
Basic 330,000 787,115 780,000 813,467
Diluted 330,000 787,115 780,000 813,467
</TABLE>
F-29
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
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 $150,000, $268,569 and $275,718 as of September 30,
1997, September 30, 1998 and December 31, 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:
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.
F-30
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
The carrying value and estimated fair value of financial instruments is
summarized as follows:
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1998
--------------------------- -------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Assets:
Cash and interest-
bearing deposits $ 240,035 $ 240,035 $ 433,218 $ 433,218
Investment
securities 1,004,836 1,004,836 51,171,435 51,171,435
Loans receivable 28,800,901 28,892,603 50,831,410 51,716,537
- -------------------------------------------------------------------------------
Liabilities:
Deposits 28,377,011 28,391,647 76,310,537 76,612,024
Borrowings 1,250,000 1,250,000 22,000,000 22,010,000
- -------------------------------------------------------------------------------
Off-balance sheet
Instruments:
Commitments to
extend credit - 782,000 - 882,000
Loans in process - - - 19,000
======================================================------------==============
</TABLE>
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, 1997 and 1998, and the three
months ended December 31, 1997 and 1998.
19. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year ended Three months ended
September 30, December 31,
1997 1998 1997 1998
---------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Cash paid during period for
interest on deposits and borrowings $1,306,800 $2,429,000 $96,969 $352,686
- ------------------------------------------------------------------------------------------------------------------
Transfer of loans for foreclosed assets $ 451,000 $89,000 - -
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
F-31
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
Following is a reconciliation of goodwill recorded in conjunction with
the acquisition discussed in Note 2:
<TABLE>
<CAPTION>
Year ended
ACQUISITION September 30, 1998
--------------------------
<S> <C>
Total cash paid for acquisition $2,367,000
Fair market value of assets acquired 1,667,000
- -------------------------------------------------------------------------------------------------
Goodwill, October 1, 1997 700,000
Amortization (19,000)
Other (19,000)
Reduction from recording deferred tax asset (662,000)
- -------------------------------------------------------------------------------------------------
Goodwill, September 30, 1998 $ -
- -------------------------------------------------------------------------------------------------
</TABLE>
20. RECENT ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosure about Segments of a Business
Enterprise ("SFAS 131"). SFAS 131 establishes standards for the way that public
enterprises report information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas and major customers. SFAS 131
defines operating segments as components of an enterprise about which separate
financial information is available and that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Company will be required to adopt SFAS 131 by September 30,
1999 and expects to disclose two operating segments which include the Bank and
the mortgage operations.
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.
F-32
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR
THE THREE MONTHS THEN ENDED IS UNAUDITED.)
21. SUBSEQUENT EVENTS
Effective January 28, 1999, the Company's Board of Directors amended its
articles of incorporation to increase the number of authorized shares of common
and preferred stock from 5,000,000 and 1,000,000, respectively, to 10,000,000
and 2,500,000, respectively.
Effective April 12, 1999, the Company's Board of Directors authorized and
the stockholders approved a two for three reverse stock split for stockholders
of record on April 8, 1999. All references in the consolidated financial
statements to the number of authorized shares, the weighted average number of
shares, and the calculation of basic and diluted earnings per share have been
adjusted to reflect the split.
F-33
<PAGE>
3,000,000 Shares of Common Stock
------
PROSPECTUS
------
LEGG MASON WOOD WALKER
INCORPORATED
____________, 1999
UNTIL ________________, 1999, ALL DEALERS THAT BUY, SELL OR TRADE THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the General and Business Corporations Law of the State of
Delaware (being Chapter 1 of Title 8 of the Delaware Statutes), Article 10 of
the Registrant's Certificate of Incorporation provides as follows:
TENTH:
A. Each person who was or is made a party or is threatened to be made
a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a Director or
an Officer of the Corporation or is or was serving at the request of the
Corporation as a Director, Officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan (hereinafter an
"indemnitee"), whether the basis of such proceeding is alleged action in an
official capacity as a Director, Officer, employee or agent or in any other
capacity while serving as a Director, Officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to
the extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide
prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered
by such indemnitee in connection therewith; provided, however, that, except
as provided in Section C hereof with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such
indemnitee in connection with a proceeding (or part thereof) initiated by
such indemnitee only if such proceeding (or part thereof) was authorized by
the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this Article
TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final
disposition (hereinafter and "advancement of expenses"); provided, however,
that, if the Delaware General Corporation Law requires, an advancement of
expenses incurred by an indemnitee in his or her capacity as a Director or
Officer (and not in any other capacity in which service was or is rendered
by such indemnitee, including, without limitation, services to an employee
benefit plan) shall be made only upon delivery to the Corporation of an
undertaking (hereinafter an "undertaking"), by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right
to appeal (hereinafter a "final adjudication") that such indemnitee is not
entitled to be indemnified for such expenses under this Section or
otherwise. The rights to indemnification and to the advancement of expenses
conferred in Sections A and B of this Article TENTH shall be contract
rights and such rights shall continue as to an indemnitee who has ceased to
be a Director, Officer, employee or agent and shall inure to the benefit of
the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid
in full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be
twenty days, the indemnitee may at any time thereafter bring suit against
the Corporation to recover the unpaid amount of the claim. If successful in
whole or in part in any such suit, or in a suit brought by the Corporation
to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall be entitled to be paid also the expenses
of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a
suit brought by the indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of
an undertaking the Corporation shall be entitled to recover such expenses
upon a final adjudication that, the indemnitee has not met any applicable
standard for indemnification set forth in the Delaware General Corporation
Law. Neither the failure of the Corporation (including its Board of
<PAGE>
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification
of the indemnitee is proper in the circumstances because the indemnitee has
met the applicable standard of conduct set forth in the Delaware General
Corporation Law, nor an actual determination by the Corporation (including
its Board of Directors, independent legal counsel, or its stockholders)
that the indemnitee has not met such applicable standard of conduct, shall
create a presumption that the indemnitee has not met the applicable
standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the burden of proving
that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article TENTH or otherwise shall be on
the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, the
Corporation's Certificate of Incorporation, Bylaws, agreement, vote of
stockholders or Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
subsidiary or Affiliate or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether
or not the Corporation would have the power to indemnify such person
against such expense, liability or loss under the Delaware General
Corporation Law.
F. The Corporation may, to the extent authorized from time to time by
the Board of Directors, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to the
fullest extent of the provisions of this Article TENTH with respect to the
indemnification and advancement of expenses of Directors and Officers of
the Corporation.
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......................................... $ 6,300
NASD filing fee............................................................................. 3,000
Nasdaq National Market Listing fee.......................................................... 90,000
Printing expenses........................................................................... 105,000
Accounting fees and expenses................................................................ 75,000
Legal fees and expenses..................................................................... 200,000
Fees and expenses (including legal fees) for qualifications under state securities laws..... 10,000
Financial advisor fee....................................................................... 50,000
Transfer agent's fees and expenses.......................................................... 10,000
Miscellaneous, postage, mailing, delivery, etc.............................................. 75,700
---------
TOTAL ............................................................................... $ 625,000
=========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On July 10, 1997, eight investors capitalized Greater Atlantic Financial
Corp. through the purchase of 1,150,000 shares of the common stock of Greater
Atlantic Financial Corp. at a price of $5.00 per share. Each of the eight
investors is an "accredited investor" as that term is used in Rule 501 (a)(5).
There was no underwriter and the shares were sold for cash and were not offered
publicly. The shares were offered only to the eight investors who purchased the
shares. Exemption is claimed under Rule 506(b).
On November 3, 1997, a single investor who is an "accredited investor" as
that term is used in Rule 501 (a)(5) purchased 20,000 shares of common stock of
Greater Atlantic Financial Corp. at a price of $5.00 per share. There was no
underwriter and the shares were sold for cash and were not offered publicly. The
shares were offered only to the single investor who purchased the shares.
Exemption is claimed under Rule 506(b).
On May 29, 1998, a single investor who is an "accredited investor" as that
term is used in Rule 501 (a)(5) and a director of Greater Atlantic Financial
Corp. purchased 20,000 shares of common stock of Greater Atlantic Financial
Corp. at a price of $5.00 per share. There was no underwriter and the shares
were sold for cash and were not offered publicly. The shares were offered only
to the single investor who purchased the shares. Exemption is claimed under Rule
506(b).
On June 19, 1998, a director of Greater Atlantic Financial Corp. purchased
200 shares of common stock of Greater Atlantic Financial Corp. at a price of
$5.00 per share. There was no underwriter and the shares were sold for cash and
were not offered publicly. The shares were offered only to the director who
purchased the shares. Exemption is claimed under Rule 506(b).
On August 17, 1998, a single investor who is an "accredited investor" as
that term is used in Rule 501 (a)(5) purchased 30,000 shares of common stock of
Greater Atlantic Financial Corp. at a price of $5.00 per share. There was no
underwriter and the shares were sold for cash and were not offered publicly. The
shares were offered only to the single investor who purchased the shares.
Exemption is claimed under Rule 506(b).
On January 14, 1999, two investors, each of whom is an "accredited
investor" as that term is used in Rule 501 (a)(5) purchased 4,480 shares and
8,961 shares of common stock of Greater Atlantic Financial Corp. at a price of
$5.58 per share. There was no underwriter and the shares were sold for cash and
were not offered publicly. The shares were offered only to the two investors who
purchased the shares. Exemption is claimed under Rule 506(b).
<PAGE>
ITEM 27. EXHIBITS.
The exhibits filed as a part of this Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letter between Greater Atlantic Financial Corp. and Legg Mason
Wood Walker, Incorporated
1.2 Draft Form of Underwriting Agreement
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.
5.0 Draft Opinion of Muldoon, Murphy & Faucette LLP re: legality
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
21.0 Subsidiaries of Greater Atlantic Financial Corp.
23.1 Consent of Muldoon, Murphy & Faucette LLP
23.2 Consent of BDO Seidman, LLP
24.1 Powers of Attorney
27.0 Financial Data Schedule
<PAGE>
ITEM 28. UNDERTAKINGS.
(1) Greater Atlantic Financial Corp. will provide to the underwriter at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter
to permit prompt delivery to each purchaser.
(2) (a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of Greater Atlantic Financial Corp.
pursuant to the foregoing provisions, or otherwise, Greater Atlantic
Financial Corp. has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
(b) In the event that a claim for indemnification against such liabilities
(other than the payment by Greater Atlantic Financial Corp. of
expenses incurred or paid by a director, officer or controlling person
of Greater Atlantic Financial Corp. in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
Greater Atlantic Financial Corp. will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(3) The Greater Atlantic Financial Corp. will:
(a) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the small business issuer under Rule
424(b)(1), or (4) or 497(h) under the Securities Act
(ss.ss.230.424(b)(1), (4) or 230.497(h)) as part of this Registration
Statement as of the time the Commission declared it effective.
(b) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
<PAGE>
CONFORMED
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in Reston, Virginia, on
April 7, 1999.
Greater Atlantic Financial Corp.
By: /s/ Carroll E. Amos
--------------------------------------
Carroll E. Amos
President, Chief Executive Officer
and Director
(duly authorized representative)
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Carroll E. Amos President, Chief Executive
- ---------------------------- Officer and Director April 7, 1999
Carroll E. Amos (principal executive
officer)
/s/ David E. Ritter Chief Financial Officer April 7, 1999
- ---------------------------- (principal accounting and
David E. Ritter financial officer)
/s/ William Calomiris Director and Chairman
- ---------------------------- of the Board of Directors April 7, 1999
William Calomiris
/s/ Paul J. Cinquegrana Director April 7, 1999
- ----------------------------
Paul J. Cinquegrana
/s/ Jeffrey M. Gitelman Director April 7, 1999
- ----------------------------
Jeffrey M. Gitelman
/s/ Bruce D. Ochsman Director April 7, 1999
- --------------------
Bruce D. Ochsman
/s/ Lynnette Dobbins Taylor Director April 7, 1999
- ----------------------------
Lynnette Dobbins Taylor
/s/ James B. Vito Director April 7, 1999
- ----------------------------
James B. Vito
</TABLE>
<PAGE>
As filed with the Securities and Exchange Commission on April 7, 1999
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO THE
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GREATER ATLANTIC FINANCIAL CORP.
(Exact name of registrant as specified in its certificate of incorporation)
=====================================
<PAGE>
TABLE OF CONTENTS
LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED)
The exhibits filed as a part of this Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letter between Greater Atlantic Financial Corp. and Legg Mason
Wood Walker, Incorporated
1.2 Draft Form of Underwriting Agreement
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.
5.0 Draft Opinion of Muldoon, Murphy & Faucette LLP re: legality
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
21.0 Subsidiaries of Greater Atlantic Financial Corp.
23.1 Consent of Muldoon, Murphy & Faucette LLP
23.2 Consent of BDO Seidman, LLP
24.1 Powers of Attorney
27.0 Financial Data Schedule
EXHIBIT 1.1
[LETTERHEAD LEGG MASON]
January 29, 1999
CONFIDENTIAL
Greater Atlantic Financial Corporation
10700 Parkridge Boulevard, Suite 450
Reston, VA 20191
Attention: Carroll E. Amos
President and Chief Executive Officer
Dear Mr. Amos:
This letter is in reference to discussions between Legg Mason Wood
Walker, Incorporated (the "Underwriter") and Greater Atlantic Financial
Corporation (the "Company") concerning a proposed public offering of common
stock ("Common Stock") of the Company.
We have made a preliminary analysis of the Company and will continue to
examine its business, affairs, prospects and financial condition. On the basis
of, among other things, such preliminary analysis and the information furnished
to us by the Company, we hereby confirm in principle our interest in forming and
managing a group of securities firms to underwrite a public offering of Common
Stock. In particular, this letter (the "Letter of Intent") is intended to
confirm the intent of Legg Mason to act as lead underwriter in connection with a
proposed registered public offering of Common Stock pursuant to a firm
commitment underwriting arrangement (the "Offering").
<PAGE>
Greater Atlantic Financial Corporation
January 29, 1999
Page 2
The Underwriter expects to form an underwriting syndicate or selling
group to purchase from the Company and to offer to the public shares of Common
Stock (the "Securities") with a market value of approximately $20 million. The
Underwriter will purchase the Securities from the Company at an offering price
per share mutually agreed upon by the Company and the Underwriter, based upon
market conditions and other factors, contemporaneously with the effectiveness of
an underwriting agreement (the "Underwriting Agreement"), less an underwriting
discount ("Underwriting Discount") equal to 7.0% of the public offering price.
The Underwriter has agreed to reduce the Underwriting Discount from 7.0% to 3.0%
on sales of Securities to the original investors and members of the Board of
Directors of the Company as listed in Exhibit A to this Letter of Intent in an
aggregate amount not to exceed $5 million. The original investors and members of
the Board of Directors of the Company will pay the same offering price per share
as other investors in the Offering. The Company agrees to grant to the
Underwriter an over-allotment option exercisable for 30 days from the effective
date of the registration statement relating to the Securities (the "Registration
Statement"), to purchase up to an additional 15% of the Securities at the public
offering price less the Underwriting Discount solely to cover over-allotments,
if any.
In view of the need to commit substantial resources to prepare for the
Offering, we request that you agree to the following terms and conditions, in
addition to the terms and conditions that will be included in the Underwriting
Agreement to be negotiated prior to the Offering:
1. The Company will furnish the Underwriter with all information and
material concerning the Company which the Underwriter requests in connection
with the performance of its obligations hereunder. The Company represents and
warrants that all information made available to the Underwriter by the Company
will, at all times during the period of the engagement of the Underwriter
hereunder, be complete and correct in all material respects and will not contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein not misleading in light of the
circumstances under which such statements are made. The Company further
represents and warrants that any projections provided to the Underwriter will
have been prepared in good faith and will be based upon assumptions which, in
light of the circumstances under which they are made, are reasonable. The
Company acknowledges and agrees that in rendering its services hereunder the
Underwriter will be using and relying, without any independent investigation or
verification thereof, on all information that is or will be furnished to the
Underwriter by or on behalf of the Company and on publicly available
information, and the Underwriter will not in any respect be responsible for the
accuracy or completeness of any of the foregoing kinds of information and that
the Underwriter will not undertake to make an independent appraisal of any of
the assets of the Company or any of its subsidiaries. The Company understands
that in rendering services hereunder the Underwriter will be relying upon the
advice of counsel to the Company and other advisors to the Company as to legal,
tax, regulatory, accounting and other matters relating to the Offering.
<PAGE>
Greater Atlantic Financial Corporation
January 29, 1999
Page 3
2. Following the execution of this Letter of Intent and until the
earlier of (i) its expiration or termination or (ii) the execution of the
Underwriting Agreement, (a) the Underwriter will be the sole and exclusive
representative of the Company in connection with the Offering, and (b) the
Company will not negotiate with any other person, firm, corporation or entity
relating to a possible public or private sale of equity securities of the
Company.
3. The Company represents and warrants to the Underwriter that this
Letter of Intent has been duly authorized, and that neither this Agreement nor
the consummation of the transactions contemplated hereby requires the approval
or consent of any government or regulatory agency or violates any law,
regulation, contract, order or other letter of intent binding on the Company.
4. Each director and officer of the Company and each shareholder and
holder of options, warrants or other securities exercisable, convertible or
exchangeable for Common Stock who beneficially owns 2% or more of the
outstanding equity securities of the Company shall agree not to, directly or
indirectly, offer, sell, transfer, pledge, assign, hypothecate or otherwise
encumber any shares of Common Stock or options, warrants or other securities
exercisable, convertible or exchangeable for Common Stock during the period
commencing with the filing of a Registration Statement for the Offering and
ending 180 days after completion of the Offering. In addition, except for
securities issued pursuant to existing employee benefit plans in accordance with
past practices, the Company shall agree not to issue, offer to sell or sell any
shares of Common Stock or options, warrants or other securities exercisable,
convertible or exchangeable for Common Stock (other than the Securities) without
the Underwriter's prior written consent for a period of 180 days after
completion of the Offering.
5. The Company will pay all expenses incurred in connection with the
Offering, including the fees and expenses of the Company's accountants and
counsel and fees and expenses incurred in connection with (i) the preparation,
printing, filing, mailing and delivery of the Registration Statement and
prospectus in its preliminary and final forms and any amendments thereto,
including fees payable to the Securities and Exchange Commission and the
National Association of Securities Dealers, Inc.; (ii) if applicable, the
listing or qualification of the Securities for trading on an exchange or on The
Nasdaq Stock Market; (iii) the printing and mailing of the Underwriting
Agreement and related documents; (iv) the issuance, transfer and delivery of the
Securities including issue and transfer taxes, if any; (v) the qualification,
registration or exemption, if required, of the Securities under the securities
laws of those states in which the Underwriter determines to offer the
Securities, including the costs of preparing, printing and mailing the "Blue
Sky" surveys and the fees and disbursements of counsel to the Underwriter in
connection therewith; (vi) the Company's travel in connection with "roadshow"
informational meetings and presentations for the brokerage community and
institutional investors; (vii) settlement in same day funds, if desired by the
Company; and (viii) registrar and transfer agent fees.
If for any reason the Offering is not consummated, other than as a
result of the Underwriter's refusal to proceed, without cause, the Company will
reimburse the Underwriter for its accountable out-of-pocket expenses (including
but not limited to the fees and disbursements of Underwriter's counsel) relating
to the Offering, including in connection with the services described in Section
6 below, in an amount not to exceed $100,000.
<PAGE>
Greater Atlantic Financial Corporation
January 29, 1999
Page 4
6. The Company acknowledges and agrees that Legg Mason has provided and
is expected to continue to provide the Company with financial advice with
respect to the structuring and terms of the Offering. Upon and subject to the
closing of the Offering and in consideration of Legg Mason's financial advisory
services, the Company will pay to Legg Mason a fee in the amount of $50,000.
Payment of this financial advisory fee and the related expenses shall not reduce
or in any way affect the amount of any other fees or expense reimbursements from
the Company to Legg Mason in connection with the Offering.
7. This Letter of Intent may be terminated by either the Company or the
Underwriter at any time upon written notice to the other; provided, however,
that if the Letter of Intent is terminated by the Underwriter for good cause or
by the Company then the Company shall be responsible for (i) reimbursement of
all the Underwriter's expenses in connection with the Offering incurred through
the date of termination, subject to the limitation provided in the second
paragraph of Section 5 above, and (ii) payment of the fees and disbursements
referred to in the first paragraph of Section 5.
8. It is understood that the Underwriter's intent to form an
underwriting syndicate and to enter into the Underwriting Agreement is subject
to, among other matters: (a) satisfaction of the Underwriter and prospective
underwriters with the Company's financial position, results of operations,
current earnings and prospects; (b) our further satisfactory due diligence
investigation into the Company's business; (c) approval by the Underwriter's
Commitment Committee of the Underwriter's participation in the Offering; (d)
market conditions at the time of the Offering; (e) preparation of the
Registration Statement and other appropriate documents related to the Offering
satisfactory to us and counsel to the Underwriter; (f) compliance with all legal
requirements to the satisfaction of counsel to the Underwriter; and (g) the
Company having an authorization and number of outstanding shares of capital
stock reasonably satisfactory to the Underwriter. Without limitation of the
foregoing, it is acknowledged and agreed that the Underwriter shall be under no
obligation of any nature whatsoever to the Company unless and until a definitive
Underwriting Agreement in respect of the Offering is executed and delivered by
the Company and the Underwriter.
9. The Offering will be pursuant to an Underwriting Agreement
containing customary representations and warranties from the Company, requiring
the delivery of an acceptable comfort letter from the Company's independent
certified public accountants, and providing for indemnification of the
underwriters for, among other things, any material misstatement or omission in
the Registration Statement or, in the event the indemnification provisions are
held to be unenforceable, customary provisions providing for contribution among
the parties. The Underwriting Agreement would also contain customary provisions
permitting its termination under certain circumstances, including without
limitation any material adverse change or any development involving a
prospective material adverse change in or affecting the condition of the Company
or the earnings, business or management of the Company.
<PAGE>
Greater Atlantic Financial Corporation
January 29, 1999
Page 5
10. In the event the Underwriter becomes involved in any capacity in
any action, proceeding or investigation brought by or against any person in
connection with any matter referred to in this Letter of Intent, the Company
periodically will reimburse the Underwriter for its legal and other expenses
(including the cost of any investigation and preparation) incurred in connection
therewith. The Company will also indemnify the Underwriter against any loss,
claim, damage or liability to which the Underwriter may become subject in
connection with any such matter, except to the extent that any such loss, claim,
damage or liability results from the gross negligence or bad faith of the
Underwriter. If for any reason the foregoing indemnification is unavailable to
the Underwriter or insufficient to hold it harmless, the Company shall
contribute to the amount paid or payable by the Underwriter as a result of such
loss, claim, damage or liability in such proportion as is appropriate to reflect
not only the relative benefits received by the Company, on the one hand, and the
Underwriter on the other hand, but also the relative fault of the Company and
the Underwriter, as well as any relevant equitable considerations.
The reimbursement, indemnity and contribution obligations of the
Company under this Section shall be in addition to any liability that the
Company may otherwise have, shall extend upon the same terms and conditions to
any affiliate of the Underwriter and the directors, employees and controlling
persons (if any), as the case may be, of the Underwriter and any such affiliate
and shall be binding upon and inure to the benefit of any successors or assigns,
heirs and personal representatives of the Company, the Underwriter, any such
affiliate and any such person.
11. The agreement regarding the payment and reimbursement of fees and
expenses as set forth in Sections 5, 6 and 7 above and the agreement in Sections
1, 10 and 12 are binding agreements of the Company and its successors and
assigns and shall survive any termination of this Letter of Intent. Except for
such binding agreements, this Letter of Intent is not intended to be a binding
legal document.
12. The Company agrees that, following the closing or consummation of
the Offering, Legg Mason has the right to place advertisements in financial and
other newspapers and journals at its own expense describing its services to the
Company hereunder.
13. The Company represents and warrants that there are no brokers,
representatives or other persons which have an interest in any compensation due
to the Underwriter from the Offering or any other transaction contemplated
herein.
14. This Letter of Intent represents the entire understanding between
the Underwriter and the Company with respect to the subject matter hereof, and
all prior discussions are merged herein. The terms and provisions of this Letter
of Intent are solely for the benefit of the Company and the Underwriter and the
other indemnified persons identified in Section 10 hereof and their respective
successors, assigns, heirs and personal representatives, and no other person or
entity shall acquire or have any right by virtue of this Letter of Intent. This
Letter of Intent shall be governed by, and construed in accordance with, the
laws of the State of Maryland without regard to such state's principles of
conflicts of laws, and may be amended, modified or supplemented only by written
instrument executed by each of the parties hereto.
<PAGE>
Greater Atlantic Financial Corporation
January 29, 1999
Page 6
If the foregoing correctly sets forth the entire understanding and
agreement between the Underwriter and the Company, please so indicate in the
space provided for that purpose below and return an executed copy to us,
whereupon this letter shall confirm our general understanding in connection with
the proposed Offering, subject to the execution of an Underwriting Agreement, as
of the date first above written.
Very truly yours,
LEGG MASON WOOD WALKER, INCORPORATED
By:/s/ Mark C. Micklem
---------------------------------
Mark C. Micklem
Managing Director
AGREED:
GREATER ATLANTIC FINANCIAL CORPORATION
By: /s/ Carroll E. Amos
------------------------------------------
Carroll E. Amos
President and Chief Executive Officer
<PAGE>
EXHIBIT A
ORIGINAL
NAME INVESTOR DIRECTOR
---- -------- --------
William Calomiris Yes Yes
Ralph Ochsman Yes No
Peter Calomiris Yes No
Robert Harris Yes No
Jeffrey M. Gitleman Yes Yes
Paul Cinquegrana Yes Yes
Carroll E. Amos Yes Yes
Marvin R. Jawer, Yes No
Irrevocable Trust #1
Robert I. Schattner Yes No
Bruce D. Ochsman No Yes
Lynnette Taylor No Yes
James Vito No Yes
EXHIBIT 1.2
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GREATER ATLANTIC FINANCIAL CORP.
(A DELAWARE CORPORATION)
2,000,000 Shares of Common Stock*
UNDERWRITING AGREEMENT
______ __, 1999
================================================================================
- --------------------
*Plus an option to purchase from the Company up to 300,000 additional
shares.
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TABLE OF CONTENTS
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PAGE
<S> <C>
PURCHASE AGREEMENT..............................................................................................-1-
SECTION 1. REPRESENTATIONS AND WARRANTIES................................................................-2-
(a) Representations and Warranties by the Company.................................................-2-
(i) Compliance with Registration Requirements........................................-2-
(ii) Independent Accountants..........................................................-3-
(iii) Financial Statements.............................................................-3-
(iv) No Material Adverse Change in Business. ........................................-4-
(v) Good Standing of the Company....................................................-4-
(vi) Good Standing of the Subsidiaries................................................-4-
(vii) Foreign Qualifications...........................................................-4-
(viii) Capital Stock Duly Authorized and Validly Issued.................................-4-
(ix) Capitalization...................................................................-5-
(x) Authorization of Agreement.......................................................-5-
(xi) Authorization and Description of Securities......................................-5-
(xii) Investment Company Act...........................................................-5-
(xiii) Absence of Defaults and Conflicts................................................-5-
(xiv) Absence of Labor Dispute.........................................................-6-
(xv) Absence of Proceedings...........................................................-6-
(xvi) Absence of Further Requirements..................................................-6-
(xvii) Accuracy of Exhibits.............................................................-7-
(xviii) Possession of Intellectual Property..............................................-7-
(xix) Possession of Licenses and Permits...............................................-7-
(xx) Compliance with Laws and Regulations.............................................-7-
(xxi) Title to Property................................................................-8-
(xxii) Registration Rights..............................................................-8-
(xxiii) Warrants, Options and Other Rights...............................................-8-
(xxiv) Environmental Laws...............................................................-8-
(xxv) Tax Matters......................................................................-9-
(xxvi) Insurance........................................................................-9-
(xxvii) Accounting Controls..............................................................-9-
(xxiii) Fees.............................................................................-9-
(xxix) Lock-up Agreements...............................................................-9-
(xxx) Use of Prospectus...............................................................-10-
(b) Officer's Certificates.......................................................................-10-
SECTION 2. SALE AND DELIVERY TO UNDERWRITER; CLOSING....................................................-10-
(a) Initial Securities...........................................................................-10-
(b) Option Securities............................................................................-10-
(c) Payment......................................................................................-11-
(d) Denominations; Registration..................................................................-11-
SECTION 3. COVENANTS OF THE COMPANY. ..................................................................-11-
(a) Compliance with Securities Regulations and Commission Requests...............................-11-
(b) Filing of Amendments.........................................................................-12-
(c) Delivery of Registration Statements..........................................................-12-
(d) Delivery of Prospectuses.....................................................................-12-
(e) Continued Compliance with Securities Laws....................................................-12-
(f) Blue Sky Qualifications......................................................................-13-
(g) Rule 158.....................................................................................-13-
(h) Use of Proceeds..............................................................................-13-
</TABLE>
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<TABLE>
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(i) Listing......................................................................................-13-
(j) Restriction on Sale of Securities............................................................-13-
(k) Reporting Requirements.......................................................................-14-
SECTION 4. PAYMENT OF EXPENSES AND ADVISORY FEE.........................................................-14-
(a) Expenses.....................................................................................-14-
(b) Advisory Fee.................................................................................-15-
(c) Termination of Agreement.....................................................................-15-
(d) Allocation of Expenses.......................................................................-15-
SECTION 5. CONDITIONS OF UNDERWRITER'S OBLIGATIONS......................................................-15-
(a) Effectiveness of Registration Statement......................................................-15-
(b) Opinion of Counsel for the Company...........................................................-15-
(c) Opinion of Counsel for the Underwriter.......................................................-16-
(d) Officers' Certificate........................................................................-16-
(e) Accountant's Comfort Letter..................................................................-16-
(f) Bring-down Comfort Letter....................................................................-16-
(g) Approval of Listing..........................................................................-16-
(h) No Objection.................................................................................-16-
(i) Lock-up Agreements...........................................................................-16-
(j) Conditions to Purchase of Option Securities..................................................-16-
(i) Officers' Certificate...........................................................-17-
(ii) Opinion of Counsel of the Company...............................................-17-
(iii) Opinion of Counsel for the Underwriter..........................................-17-
(iv) Bring-down Comfort Letter.......................................................-17-
(k) Additional Documents.........................................................................-17-
(l) Termination of Agreement.....................................................................-17-
SECTION 6. INDEMNIFICATION..............................................................................-18-
(a) Indemnification of the Underwriter...........................................................-18-
(b) Indemnification of Company, Directors and Officers...........................................-19-
(c) Actions against Parties; Notification........................................................-19-
(d) Settlement without Consent if Failure to Reimburse...........................................-19-
SECTION 7. CONTRIBUTION.................................................................................-20-
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY...............................-21-
SECTION 9. TERMINATION OF AGREEMENT.....................................................................-21-
(a) Termination; General.........................................................................-21-
(b) Liabilities..................................................................................-21-
SECTION 10. NOTICES......................................................................................-22-
SECTION 11. PARTIES......................................................................................-22-
SECTION 12. GOVERNING LAW AND TIME.......................................................................-23-
SECTION 13. EFFECT OF HEADINGS...........................................................................-23-
SCHEDULE A............................................................................................Schedule A-1
SCHEDULE B............................................................................................Schedule B-1
SCHEDULE C............................................................................................Schedule C-1
SCHEDULE D.............................................................................................Schedule D-1
SCHEDULE E............................................................................................Schedule E-1
</TABLE>
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<PAGE>
GREATER ATLANTIC FINANCIAL CORP.
(a Delaware corporation)
2,000,000 Shares of Common Stock
(Par Value $.01 Per Share)
UNDERWRITING AGREEMENT
_______ __, 1999
LEGG MASON WOOD WALKER, INCORPORATED
1747 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
Ladies and Gentlemen:
Greater Atlantic Financial Corp., a Delaware corporation (the "Company"),
confirms its agreement with Legg Mason Wood Walker, Incorporated (the
"Underwriter"), with respect to (i) the sale by the Company and the purchase by
the Underwriter of 2,000,000 shares of Common Stock, par value $.01 per share,
of the Company ("Common Stock") and (ii) the grant by the Company to the
Underwriter of the option described in Section 2(b) hereof to purchase all or
any part of 300,000 additional shares of Common Stock to cover over-allotments,
if any. The aforesaid 2,000,000 shares of Common Stock (the "Initial
Securities") to be purchased by the Underwriter and all or any part of the
300,000 shares of Common Stock subject to the option described in Section 2(b)
hereof (the "Option Securities") are hereinafter called, collectively, the
"Securities."
The Company understands that the Underwriter proposes to make a public
offering of the Securities (the "Offering") as soon as it deems advisable after
this Agreement has been executed and delivered. The Underwriter may assemble and
manage a selling group of broker-dealers that are members of the National
Association of Securities Dealers, Inc. ("NASD") to participate in the
solicitation of purchase orders for the Securities under the form of a master
selected dealer agreement or similar form of dealer agreement, which the
Underwriter has entered into with such broker dealers.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (No. 333-______) covering
the registration of the Securities under the Securities Act of 1933, as amended
(the "1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if
<PAGE>
the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act
Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with
the provisions of Rule 434 and Rule 424(b). The information included in such
prospectus or in such Term Sheet, as the case may be, that was omitted from such
registration statement at the time it became effective but that is deemed to be
part of such registration statement at the time it became effective (a) pursuant
to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b)
pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information."
Each prospectus used before such registration statement became effective, and
any prospectus that omitted, as applicable, the Rule 430A Information or the
Rule 434 Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto and
schedules thereto at the time it became effective and including the Rule 430A
Information and the Rule 434 Information, as applicable, is herein called the
"Registration Statement." Any registration statement filed pursuant to Rule
462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b)
Registration Statement," and after such filing the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. The final prospectus in
the form first furnished to the Underwriter for use in connection with the
offering of the Securities is herein called the "Prospectus." If Rule 434 is
relied on, the term "Prospectus" shall refer to the preliminary prospectus dated
________ __, 1999 together with the Term Sheet and all references in this
Agreement to the date of the Prospectus shall mean the date of the Term Sheet.
For purposes of this Agreement, all references to the Registration Statement,
any preliminary prospectus, the Prospectus or any Term Sheet or any amendment or
supplement to any of the foregoing shall be deemed to include the copy filed
with the Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) Representations and Warranties by the Company. The Company represents
and warrants to the Underwriter as of the date hereof, as of the Closing Time
referred to in Section 2(c) hereof, and as of each Date of Delivery (if any)
referred to in Section 2(b) hereof, and agrees with the Underwriter, as follows:
(i) Compliance with Registration Requirements. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and
any request on the part of the Commission for additional information
has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Securities
are purchased, at the Date of Delivery), the Registration Statement,
the Rule 462(b) Registration Statement and any amendments and
supplements
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<PAGE>
thereto complied and will comply in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations and did not
and will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading. Neither the Prospectus nor
any amendments or supplements thereto, at the time the Prospectus or
any such amendment or supplement was issued and at the Closing Time
(and, if any Option Securities are purchased, at the Date of Delivery),
included or will include an untrue statement of a material fact or
omitted or will omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading. If Rule 434 is used, the Company
will comply with the requirements of Rule 434 and the Prospectus shall
not be "materially different", as such term is used in Rule 434, from
the prospectus included in the Registration Statement at the time it
became effective. The representations and warranties in this subsection
shall not apply to statements in or omissions from the Registration
Statement or Prospectus made in reliance upon and in conformity with
information furnished to the Company in writing by the Underwriter
expressly for use in the Registration Statement or Prospectus.
Each preliminary prospectus and the Prospectus filed as part of
the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectus
delivered to the Underwriter for use in connection with this Offering
was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.
(ii) Independent Accountants. The accountants who certified the
financial statements and supporting schedules included in the
Registration Statement are independent public accountants within the
meaning of the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements included in
the Registration Statement and the Prospectus, together with the
related schedules and notes, present fairly the financial position of
the Company and its consolidated subsidiaries at the dates indicated
and the results of operations, shareholders' equity and cash flows of
the Company and its consolidated subsidiaries for the periods
specified; and said financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods involved. The
supporting schedules included in the Registration Statement present
fairly in accordance with GAAP the information required to be stated
therein. The selected consolidated financial data and the summary
consolidated financial data included in the Prospectus present fairly
the information shown therein and have been compiled on a basis
consistent with that of the audited financial statements included in
the Registration Statement.
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<PAGE>
(iv) No Material Adverse Change in Business. Since the respective
dates as of which information is given in the Registration Statement
and the Prospectus, except as otherwise stated therein, (A) there has
been no material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects
of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business (a "Material
Adverse Effect"), (B) there have been no transactions entered into by
the Company or any of its subsidiaries, other than those in the
ordinary course of business, which are material with respect to the
Company and its subsidiaries considered as one enterprise, and (C)
there has been no dividend or distribution of any kind declared, paid
or made by the Company on any class of its capital stock.
(v) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing
under the laws of the State of Delaware and has the corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and to enter into and perform
its obligations under this Agreement; and the Company is duly
registered as a savings and loan holding company under the Home Owners'
Loan Act, as amended (the "HOLA").
(vi) Good Standing of the Subsidiaries. Greater Atlantic Bank (the
"Bank") and Greater Atlantic Mortgage Corporation ("GAMC") (each a
"Subsidiary" and together, the "Subsidiaries") are the only
subsidiaries of the Company; the Bank is a federal savings bank duly
organized, validly existing and in good standing under the laws of the
United States with corporate power and authority under such laws to
own, lease and operate its properties and conduct its business as
described in the Prospectus; the deposit accounts of the Bank are
insured by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC") up to the maximum
allowable limits thereof; GAMC has been duly organized and is validly
existing as a corporation in good standing under the laws of the State
of Maryland and has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus.
(vii) Foreign Qualifications. The Company and the Subsidiaries are
each duly qualified as a foreign corporation to transact business and
are each in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the
failure to so qualify or be in good standing would not result in a
Material Adverse Effect (as defined in Section l(a)(iv) hereof).
(viii) Capital Stock Duly Authorized and Validly Issued. All of
the issued and outstanding capital stock of the Company has been duly
authorized and validly issued and is fully paid and nonassessable and
none of the capital stock of the Company was issued in violation of the
preemptive rights of any shareholder of the Company; all of the issued
and outstanding capital stock of the Subsidiaries has been duly
authorized and validly issued, is fully paid and nonassessable and is
owned by the Company, directly or through subsidiaries,
-4-
<PAGE>
free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equitable right; and none of such outstanding
shares of capital stock of the Subsidiaries was issued in violation of
any preemptive or similar rights arising by operation of law, or under
the charter or by-laws of the Company or the Subsidiaries or under any
agreement to which the Company or any Subsidiary is a party.
(ix) Capitalization. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities or
options referred to in the Prospectus).
(x) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by the Company.
(xi) Authorization and Description of Securities. The Securities
to be purchased by the Underwriter from the Company have been duly
authorized for issuance and sale to the Underwriter pursuant to this
Agreement and, when issued and delivered by the Company pursuant to
this Agreement against payment of the consideration set forth herein,
will be validly issued and fully paid and non-assessable; the Common
Stock conforms to all statements relating thereto contained in the
Prospectus and such description conforms to the rights set forth in the
instruments defining the same; no holder of the Securities will be
subject to personal liability by reason of being such a holder; and the
issuance of the Securities is not subject to the preemptive or other
similar rights of any securityholder of the Company.
(xii) Investment Company Act. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the
Prospectus will not be, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in
the Investment Company Act of 1940, as amended (the "1940 Act").
(xiii) Absence of Defaults and Conflicts. Neither the Company nor
any of its Subsidiaries is in violation of its charter or by-laws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage,
deed of trust, loan or credit agreement, note, lease or other agreement
or instrument to which the Company or any of its Subsidiaries is a
party or by which it or any of them may be bound, or to which any of
the property or assets of the Company or any Subsidiary is subject
(collectively, the "Agreements and Instruments") except for such
defaults that would not, individually or in the aggregate, result in a
Material Adverse Effect; and the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated
herein and in the Registration Statement (including the issuance and
sale of the Securities and the use of the proceeds from the sale of the
Securities as
-5-
<PAGE>
described in the Prospectus under the caption "Use of Proceeds") and
compliance by the Company with its obligations hereunder have been duly
authorized by all necessary corporate action and do not and will not,
whether with or without the giving of notice or passage of time or
both, conflict with or constitute a breach of, or a default or
Repayment Event (as defined below) under, give rise to any right of
termination under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
Subsidiary pursuant to, any of the Agreements and Instruments (except
for such conflicts, breaches or defaults or liens, charges or
encumbrances that would not, individually or in the aggregate, result
in a Material Adverse Effect), nor will such action result in any
violation of the provisions of the charter or by-laws of the Company or
any Subsidiary or any applicable law, statute, rule, regulation,
judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over
the Company or any Subsidiary or any of their assets, properties or
operations, including without limitation the Office of Thrift
Supervision ("OTS") and the FDIC (collectively, "Governmental
Entities"). As used herein, a "Repayment Event" means any event or
condition which gives the holder of any note, debenture or other
evidence of indebtedness (or any person acting on such holder's behalf)
the right to require the repurchase, redemption or repayment of all or
a portion of such indebtedness by the Company or any Subsidiary.
(xiv) Absence of Labor Dispute. No labor dispute with the
employees of the Company or any Subsidiary exists or, to the knowledge
of the Company, is threatened.
(xv) Absence of Proceedings. There is no action, suit, proceeding,
inquiry or investigation before or brought by any court or Governmental
Entity, now pending, or, to the knowledge of the Company, threatened,
against or affecting the Company or any Subsidiary, which is required
to be disclosed in the Prospectus (other than as disclosed therein), or
which would reasonably be expected to result in a Material Adverse
Effect, or which would reasonably be expected to materially and
adversely affect the properties or assets thereof or the consummation
of the transactions contemplated in this Agreement or the performance
by the Company of its obligations hereunder; the aggregate of all
pending legal or governmental proceedings to which the Company or any
Subsidiary is a party or of which any of their respective property or
assets is the subject which are not described in the Prospectus,
including ordinary routine litigation incidental to the business, could
not reasonably be expected to result in a Material Adverse Effect.
(xvi) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in connection with the offering, issuance or
sale of the Securities hereunder or the consummation of the
transactions contemplated by this Agreement, except such as have been
already obtained or as may be required under the 1933 Act or the 1933
Act Regulations or state securities laws.
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<PAGE>
(xvii) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits thereto which have not been so
described or filed as required.
(xviii) Possession of Intellectual Property. The Company and its
Subsidiaries own or possess, or can acquire on reasonable terms,
adequate patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property") material
to the business of the Company and its subsidiaries now operated by
them, and neither the Company nor any of its Subsidiaries has received
any written notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any
Intellectual Property or of any facts or circumstances which would
render any Intellectual Property invalid or inadequate to protect the
interest of the Company or any of its Subsidiaries therein, and which
infringement or conflict (if the subject of any unfavorable decision,
ruling or finding) or invalidity or inadequacy, individually or in the
aggregate, would result in a Material Adverse Effect.
(xix) Possession of Licenses and Permits. The Company and its
Subsidiaries possess such certificates, authorities, permits, licenses,
approvals, consents and other authorizations (collectively,
"Governmental Licenses") issued by the appropriate Government Entities
necessary to conduct the business now operated by them; the Company and
its Subsidiaries are in compliance with the terms and conditions of all
such Governmental Licenses, except where the failure so to comply would
not, individually or in the aggregate, have a Material Adverse Effect;
all of the Governmental Licenses are valid and in full force and
effect, except when the invalidity of such Governmental Licenses or the
failure of such Governmental Licenses to be in full force and effect
would not have a Material Adverse Effect; and neither the Company nor
any of its Subsidiaries has received any notice of proceedings relating
to the revocation or modification of any such Governmental Licenses
which, individually or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a Material
Adverse Effect.
(xx) Compliance with Laws and Regulations. Neither the Company nor
any Subsidiary is or has been (by virtue of any action, omission to
act, contract to which it is a party or by which it is bound, or any
occurrence or state of facts whatsoever) in violation of any applicable
federal, state, municipal, or local statutes, laws, ordinances, rules,
regulations and/or orders issued pursuant to foreign, federal, state,
municipal, or local statutes, laws, ordinances, rules, or regulations
(including those relating to any aspect of banking, savings and loan
holding companies, environmental protection, occupational safety and
health, and equal employment practices) heretofore or currently in
effect, except such violation that has been fully cured or satisfied
without recourse or that is not reasonably likely to have a Material
Adverse Effect.
-7-
<PAGE>
(xxi) Title to Property. Each of the Company and each of its
Subsidiaries has good and marketable title to all properties (real and
personal) owned by the Company or its Subsidiaries, free and clear of
all mortgages, pledges, liens, security interests, claims, restrictions
or encumbrances of any kind except such as (a) are described in the
Prospectus or (b) do not, individually or in the aggregate, materially
affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company or any of
its Subsidiaries; and all of the leases and subleases material to the
business of the Company and its Subsidiaries, considered as one
enterprise, and under which the Company or any of its Subsidiaries
holds properties described in the Prospectus, are in full force and
effect, and neither the Company nor any Subsidiary has any written
notice of any material claim of any sort that has been asserted by
anyone adverse to the rights of the Company or any Subsidiary under any
of the leases or subleases mentioned above, or affecting or questioning
the rights of the Company or such Subsidiary to the continued
possession of the leased or subleased premises under any such lease or
sublease.
(xxii) Registration Rights. There are no persons with registration
rights or other similar rights to have any securities registered
pursuant to the Registration Statement or otherwise registered by the
Company under the 1933 Act.
(xxiii) Warrants, Options and Other Rights. Except as disclosed in
the Prospectus, there are no outstanding options, warrants or other
rights calling for the issuance of, and no commitments, plans or
arrangements to issue, any shares of capital stock of the Company or
any of its Subsidiaries or any security convertible into or
exchangeable for capital stock of the Company or any of its
Subsidiaries.
(xxiv) Environmental Laws. Except as described in the Registration
Statement and except as would not, individually or in the aggregate,
result in a Material Adverse Effect, (A) neither the Company nor any of
its Subsidiaries is in violation of any federal, state, local or
foreign statute, law, rule, regulation, ordinance, code, policy or rule
of common law or any judicial or administrative interpretation thereof,
including any judicial or administrative order, consent, decree or
judgment, relating to pollution or protection of human health, the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including,
without limitation, laws and regulations relating to the release or
threatened release of chemicals, pollutants, contaminants, wastes,
toxic substances, hazardous substances, petroleum or petroleum products
(collectively, "Hazardous Materials") or to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or handling of Hazardous Materials (collectively, "Environmental
Laws"), (B) the Company and its Subsidiaries have all permits,
authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements,
(C) there are no pending or, to the knowledge of the Company,
threatened, administrative, regulatory or judicial actions, suits,
demands, demand letters, claims, liens, notices of noncompliance or
violation, investigation or proceedings relating to any Environmental
Law against the Company or any of its Subsidiaries and (D) there are no
-8-
<PAGE>
events or circumstances that might reasonably be expected to form the
basis of an order for clean-up or remediation, or an action, suit or
proceeding by any private party or governmental body or agency, against
or affecting the Company or any of its Subsidiaries relating to
Hazardous Materials or any Environmental Laws.
(xxv) Tax Matters. The Company and its Subsidiaries have timely
filed all federal, state, local and foreign tax returns that are
required to be filed or have duly requested extensions thereof and have
timely paid all taxes required to be paid by any of them and any
related assessments, fines or penalties, except for any such tax,
assessment, fine or penalty that is being contested in good faith and
by appropriate proceedings; and adequate charges, accruals and reserves
have been provided for in the financial statements referred to in
Section 1(a)(iii) above in respect of all federal, state, local and
foreign taxes for all periods as to which the tax liability of the
Company or any of its Subsidiaries has not been finally determined or
remains open to examination by applicable taxing authorities.
(xxvi) Insurance. The Company and its Subsidiaries carry or are
entitled to the benefits of insurance in such amounts and covering such
risks as is generally maintained by companies of established repute
engaged in the same or similar business, and all such insurance is in
full force and effect.
(xxvii) Accounting Controls. The Company and its Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance
with management's general and specific authorizations; (ii)
transactions are recorded as necessary to permit the preparation of
financial statements in conformity with GAAP and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorizations; and
(iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(xxviii) Fees. Other than as contemplated by this Agreement, there
is no broker, finder or other party that is entitled to receive from
the Company or any of its Subsidiaries any brokerage or finder's fee or
any other fee, commission or payment as a result of the transactions
contemplated by this Agreement.
(xix) Lock-up Agreements. The Company has obtained and delivered
to the Underwriter the agreements of the persons and entities named in
Schedule A hereto to the effect that each such person and entity will
not, for a period of 180 days from the date hereof and except as
otherwise provided therein, without the prior written consent of the
Underwriter directly or indirectly, (i) offer, pledge, sell, contract
to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale
of, or otherwise dispose of or transfer any shares of the Common Stock
or any securities convertible into or exchangeable or exercisable for
Common Stock or file or cause to be filed any registration statement
under the 1933 Act with respect to any of the
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foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction is to be settled by delivery of
Common Stock or other securities, in cash or otherwise; provided,
however, that such restrictions shall not apply to a bona fide gift of
shares of Common Stock by such person to a person or entity who, prior
to such transfer, shall have executed and delivered to the Underwriter
an agreement, substantially in the form of the agreement contemplated
by this Section 1(a)(xxix), not to take any action prohibited by such
agreement with respect to such shares of Common Stock.
(xxx) Use of Prospectus. The Company has not distributed and,
prior to the later to occur of (i) the Closing Time and (ii) completion
of the distribution of the Securities, will not distribute any
prospectus (as such term is defined in the 1933 Act and the 1933 Act
Regulations) in connection with the offering and sale of the Securities
other than the Registration Statement, any preliminary prospectus, the
Prospectus or other materials, if any, permitted by the 1933 Act or by
the 1933 Act Regulations and approved by the Underwriter.
(b) Officer's Certificates. Any certificate signed by any duly
authorized officer of the Company or any Subsidiary and delivered to you or to
counsel for the Underwriter shall be deemed a representation and warranty by the
Company to the Underwriter as to the matters covered thereby.
SECTION 2. SALE AND DELIVERY TO THE UNDERWRITER; CLOSING.
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriter and the Underwriter agrees
to purchase from the Company 2,000,000 shares of the Securities at the price per
share set forth in Schedule B reflecting an underwriting discount equal to 7.0%
of the public offering price; provided however, the underwriting discount shall
be reduced to 3.0% on sales of Securities to the Company's original investors
and members of the Board of Directors of the Company as listed in Schedule C in
an aggregate amount of Securities not to exceed $5.0 million based upon the
initial offering price.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the Underwriter to purchase,
in addition to the Initial Securities, 300,000 shares of the Option Securities
at the price per share set forth in Schedule B, less an amount per share equal
to any dividends or distributions declared by the Company and payable on the
Initial Securities but not payable on the Option Securities. The option hereby
granted will expire 30 days after the date hereof and may be exercised in whole
or in part from time to time only for the purpose of covering over-allotments
which may be made in connection with the offering and distribution of the
Initial Securities upon notice by the Underwriter to the Company setting forth
the aggregate number of Option Securities as to which the Underwriter is then
exercising the option and the time and date of payment and delivery for such
Option Securities. Any such time and date of delivery (a "Date of
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Delivery") shall be determined by the Underwriter, but shall not be later than
seven full business days after the exercise of said option, nor in any event
prior to the Closing Time, as hereinafter defined.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Elias,
Matz, Tiernan & Herrick L.L.P., 734 15th Street, N.W., Washington, D.C. 20005,
or at such other place as shall be agreed upon by the Underwriter and the
Company at 10:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs
after 4:30 P.M. (Eastern time) on any given day) business day after the date
hereof or such other time not later than ten business days after such date as
shall be agreed upon by the Underwriter and the Company (such time and date of
payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriter, payment of the purchase price for, and delivery of
certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Underwriter and
the Company on each Date of Delivery as specified in the notice from the
Underwriter to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to bank accounts designated by the Company as the case may be,
against delivery to the Underwriter of certificates for the Securities to be
purchased.
(d) Denominations; Registration. Certificates for the Initial
Securities and the Option Securities, if any, shall be in such denominations and
registered in such names as the Underwriter may request in writing at least one
full business day before the Closing Time or the relevant Date of Delivery, as
the case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Underwriter in the city of Washington, D.C. not later than 10:00 A.M. (Eastern
time) on the business day prior to the Closing Time or the relevant Date of
Delivery, as the case may be.
SECTION 3. COVENANTS OF THE COMPANY.
The Company covenants with the Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(b), will comply with the requirements of Rule 430A
or Rule 434, as applicable, and will notify the Underwriter immediately, and
confirm such notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement to the
Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt
of any comments from the Commission, (iii) of any request by the Commission for
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus or for additional information, and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any
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preliminary prospectus, or of the suspension of the qualification of the
Securities for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes. The Company will
promptly effect the filings necessary pursuant to Rule 424(b) and will take such
steps as shall be necessary to ascertain promptly whether the form of prospectus
transmitted for filing under Rule 424(b) was received for filing by the
Commission and, in the event that it was not, it will promptly file such
prospectus. The Company will make every reasonable effort to prevent the
issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the Underwriter notice
of its intention to file or prepare any amendment to the Registration Statement
(including any filing under Rule 462(b)), any Term Sheet or any amendment,
supplement or revision to either the prospectus included in the Registration
Statement at the time it became effective or to the Prospectus, will furnish the
Underwriter with copies of any such documents a reasonable amount of time prior
to such proposed filing or use, as the case may be, and will not file or use any
such document to which the Underwriter or counsel for the Underwriter shall
object.
(c) Delivery of Registration Statements. The Company has furnished or
will deliver to the Underwriter and counsel for the Underwriter, without charge,
signed copies of the Registration Statement as originally filed and of each
amendment thereto (including exhibits filed therewith or incorporated by
reference therein) and signed copies of all consents and certificates of
experts, and will also deliver to the Underwriter, without charge, a conformed
copy of the Registration Statement as originally filed and of each amendment
thereto (without exhibits). The copies of the Registration Statement and each
amendment thereto furnished to the Underwriter will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to the
Underwriter, without charge, as many copies of each preliminary prospectus as
such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to Underwriter, without charge, during the period when the Prospectus is
required to be delivered under the 1933 Act or the Securities Exchange Act of
1934 (the "1934 Act"), such number of copies of the Prospectus (as amended or
supplemented) as such Underwriter may reasonably request. The Prospectus and any
amendments or supplements thereto furnished to the Underwriter will be identical
to the electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply
with the 1933 Act and the 1933 Act Regulations so as to permit the completion of
the distribution of the Securities as contemplated in this Agreement and in the
Prospectus. If at any time when a prospectus is required by the 1933 Act to be
delivered in connection with sales of the Securities, any event shall occur or
condition shall exist as a result of which it is necessary, in the opinion of
counsel for the Underwriter or for the Company, to amend the Registration
Statement or amend or supplement the
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Prospectus in order that the Prospectus will not include any untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein not misleading in the light of the circumstances existing at
the time it is delivered to a purchaser, or if it shall be necessary, in the
opinion of such counsel, at any such time to amend the Registration Statement or
amend or supplement the Prospectus in order to comply with the requirements of
the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and
file with the Commission, subject to Section 3(b), such amendment or supplement
as may be necessary to correct such statement or omission or to make the
Registration Statement or the Prospectus comply with such requirements, and the
Company will furnish to the Underwriter such number of copies of such amendment
or supplement as the Underwriter may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best efforts, in
cooperation with the Underwriter, to qualify the Securities for offering and
sale under the applicable securities laws of such states and other jurisdictions
(domestic or foreign) as the Underwriter may designate and to maintain such
qualifications in effect for a period of not less than one year from the later
of the effective date of the Registration Statement and any Rule 462(b)
Registration Statement; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify as a
foreign corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the Company will
file such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of not less
than one year from the effective date of the Registration Statement and any Rule
462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of Section
11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received by
it from the sale of the Securities in the manner specified in the Prospectus
under "Use of Proceeds."
(i) Listing. The Company will use its best efforts to effect and
maintain the quotation of the Securities on the Nasdaq Stock Market, Inc.
SmallCap Market (the "Nasdaq SmallCap Market") and will file with the Nasdaq
Stock Market, Inc. all documents and notices required by the Nasdaq Stock
Market, Inc. of companies that have securities that are traded in the over-
the-counter market and quotations for which are reported by the Nasdaq SmallCap
Market.
(j) Restriction on Sale of Securities. During a period of 180 days from
the date of the Prospectus, the Company will not, without the prior written
consent of the Underwriter, (i) directly or indirectly, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of any shares of Common Stock or any securities convertible
into or exercisable or
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exchangeable for Common Stock or file or cause to be filed any registration
statement under the 1933 Act with respect to any of the foregoing or (ii) enter
into any swap or any other agreement or any transaction that transfers, in whole
or in part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
the Securities to be sold hereunder, (B) any shares of Common Stock issued by
the Company upon the exercise of an option or warrant or the conversion of a
security outstanding on the date hereof and referred to in the Prospectus, (C)
any shares of Common Stock issued or options to purchase Common Stock granted
pursuant to existing employee benefit plans of the Company referred to in the
Prospectus or (D) any shares of Common Stock issued pursuant to any non-employee
director stock plan.
(k) Reporting Requirements. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will
file all documents required to be filed with the Commission pursuant to the 1934
Act within the time periods required by the 1934 Act and the rules and
regulations of the Commission thereunder.
SECTION 4. PAYMENT OF EXPENSES AND ADVISORY FEE.
(a) Expenses. The Company will pay or cause to be paid all expenses
incident to the performance of its obligations under this Agreement, including
(i) the preparation, printing and filing of the Registration Statement
(including financial statements and exhibits) as originally filed and of each
amendment thereto, (ii) the preparation, printing and delivery to the
Underwriter of this Agreement and such other documents as may be required in
connection with the offering, purchase, sale, issuance or delivery of the
Securities, (iii) the preparation, issuance and delivery of the certificates for
the Securities to the Underwriter, including any stock or other transfer taxes
and any stamp, capital or other duties payable upon the sale, issuance or
delivery of the Securities to the Underwriter, (iv) the fees and disbursements
of the Company's counsel, accountants and other advisors, (v) the qualification
of the Securities under securities laws in accordance with the provisions of
Section 3(f) hereof, including filing fees and the fees and disbursements of
counsel for the Underwriter in connection therewith and in connection with the
preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing
and delivery to the Underwriter of copies of each preliminary prospectus, any
Term Sheets and of the Prospectus and any amendments or supplements thereto,
(vii) the preparation, printing and delivery to the Underwriter of copies of the
Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of any
transfer agent or registrar for the Securities, (ix) the filing fees incident
to, and the fees and disbursements of counsel to the Underwriter in connection
with, the review by the National Association of Securities Dealers, Inc. (the
"NASD") of the terms of the sale of the Securities, (x) the fees and expenses
incurred in connection with the inclusion of the Securities in the Nasdaq
SmallCap Market, and (xi) the Company's travel in connection with "roadshow"
informational meetings and presentations for the brokerage community and
institutional investors.
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(b) Advisory Fee. The Company acknowledges and agrees that the
Underwriter has provided and is expected to continue to provide the Company with
financial advice with respect to the structuring and terms of the Offering. Upon
and subject to the closing of the Offering and in consideration of the
Underwriter's financial advisory services, the Company will pay to the
Underwriter a fee in the amount of $50,000 at the Closing Time. Payment of this
financial advisory fee and the related expenses shall not reduce or in any way
affect the amount of any other fees or expense reimbursements from the Company
to the Underwriter in connection with the Offering, including those payable
pursuant to Sections 2 and 4 of this Agreement.
(c) Termination of Agreement. If this Agreement is terminated by the
Underwriter in accordance with the provisions of Section 5(1) or, Section 9(a)
hereof, the Company shall reimburse the Underwriter for all of its out-of-pocket
expenses, including but not limited to the reasonable fees and disbursements of
counsel for the Underwriter and expenses in connection with the financial
advisory services described in Section 4(b) hereof, in an amount not to exceed
$100,000.
(d) Allocation of Expenses. The provisions of this Section shall not
affect and, as between the Underwriter, on the one hand, and the Company on the
other hand, shall not be affected by, any agreement that the Company may make
for the sharing of such costs and expenses.
SECTION 5. CONDITIONS OF UNDERWRITER'S OBLIGATIONS.
The obligations of the Underwriter hereunder are subject to the
accuracy of the representations and warranties of the Company contained in
Section 1 hereof or in certificates of any officer of the Company or any
Subsidiary of the Company delivered pursuant to the provisions hereof, to the
performance by the Company of its respective covenants and other obligations
hereunder, and to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, shall have become
effective and at Closing Time no stop order suspending the effectiveness of the
Registration Statement shall have been issued under the 1933 Act or proceedings
therefor initiated or threatened by the Commission, and any request on the part
of the Commission for additional information shall have been complied with to
the reasonable satisfaction of counsel to the Underwriter. A prospectus
containing the Rule 430A Information shall have been filed with the Commission
in accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434,
a Term Sheet shall have been filed with the Commission in accordance with Rule
424(b).
(b) Opinion of Counsel for Company. At Closing Time, the Underwriter
shall have received the favorable opinion, dated as of Closing Time, of Muldoon,
Murphy & Faucette LLP, counsel for the Company, in form and substance
satisfactory to counsel for the Underwriter, substantially in the form set forth
in Schedule D.
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(c) Opinion of Counsel for the Underwriter. At Closing Time, the
Underwriter shall have received the favorable opinion, dated as of Closing Time,
of Elias, Matz, Tiernan & Herrick L.L.P., counsel for the Underwriter, with
respect to the Securities and other related matters as the Underwriter may
require.
(d) Officers' Certificate. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Company and its Subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, and the Underwriter shall have
received a certificate of the President or a Vice President of the Company and
of the chief financial or chief accounting officer of the Company, dated as of
Closing Time, to the effect that (i) there has been no such material adverse
change, (ii) the representations and warranties in Section 1(a) hereof are true
and correct with the same force and effect as though expressly made at and as of
Closing Time, (iii) the Company has complied with all agreements and satisfied
all conditions on its part to be performed or satisfied at or prior to Closing
Time, and (iv) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or are contemplated by the Commission.
(e) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Underwriter shall have received from BDO Seidman, LLP a letter
dated such date, in form and substance satisfactory to the Underwriter
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the Registration
Statement and the Prospectus.
(f) Bring-down Comfort Letter. At Closing Time, the Underwriter shall
have received from BDO Seidman, LLP a letter, dated as of Closing Time, in form
and substance satisfactory to the Underwriter, to the effect that they reaffirm
the statements made in the letter furnished pursuant to subsection (e) of this
Section, except that the specified date referred to shall be a date not more
than three business days prior to Closing Time.
(g) Approval of Listing. At Closing Time, the Securities shall have
been approved for inclusion in the Nasdaq SmallCap Market, subject only to
official notice of issuance.
(h) No Objection. The NASD shall have confirmed that it has not raised
any objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the Underwriter
shall have received an agreement substantially in the form of Schedule E hereto
signed by the persons listed on Schedule A hereto (which includes each director
and officer of the Company and each shareholder, and holder of option, warrants
or other securities exercisable, convertible or
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exchangeable for Common Stock, who beneficially owns 2% or more of the
outstanding Common Stock).
(j) Conditions to Purchase of Option Securities. In the event that the
Underwriter exercises its option provided in Section 2(b) hereof to purchase all
or any portion of the Option Securities, the representations and warranties of
the Company contained herein and the statements in any certificates furnished by
the Company, any Subsidiary of the Company shall be true and correct as of each
Date of Delivery and, at the relevant Date of Delivery, and the Underwriter
shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and of
the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(d) hereof remains true and correct as of such Date of
Delivery.
(ii) Opinion of Counsel of the Company. The favorable opinion of
Muldoon, Murphy & Faucette LLP, counsel for the Company, in form and
substance satisfactory to counsel for the Underwriter, dated such Date
of Delivery, relating to the Option Securities to be purchased on such
Date of Delivery and otherwise to the same effect as the opinion
required by Section 5(b) hereof.
(iii) Opinion of Counsel for the Underwriter. The favorable
opinion of Elias, Matz, Tiernan & Herrick L.L.P., counsel for the
Underwriter, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise to
the same effect as the opinion required by Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from BDO Seidman, LLP in
form and substance satisfactory to the Underwriter and dated such Date
of Delivery, substantially in the same form and substance as the letter
furnished to the Underwriter pursuant to Section 5(e) hereof, except
that the "specified date" in the letter furnished pursuant to this
paragraph shall be a date not more than five days prior to such Date of
Delivery.
(k) Additional Documents. At Closing Time and at each Date of Delivery
counsel for the Underwriter shall have been furnished with such documents and
opinions as they may require for the purpose of enabling them to pass upon the
issuance and sale of the Securities as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be satisfactory in form and substance to the
Underwriter and counsel for the Underwriter.
(l) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of the Option
Securities on a Date of Delivery which is after the Closing Time, the
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obligations of the Underwriter to purchase the relevant Option Securities, may
be terminated by the Underwriter by notice to the Company at any time at or
prior to the Closing Time or such Date of Delivery, as the case may be, and such
termination shall be without liability of any party to any other party except as
provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any
such termination and remain in full force and effect.
SECTION 6. INDEMNIFICATION.
(a) Indemnification of the Underwriter. The Company agrees to indemnify
and hold harmless the Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein in light
of the circumstances under which they were made not misleading or
arising out of any untrue statement or alleged untrue statement of a
material fact included in any preliminary prospectus or the Prospectus
(or any amendment or supplement thereto), or the omission or alleged
omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission; provided
that (subject to Section 6(d) below) any such settlement is effected
with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by the
Underwriter), reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above; provided, however, that
this indemnity agreement shall not apply to any loss, liability, claim,
damage or expense to the extent arising out of any untrue statement or
omission or alleged untrue statement or omission made in reliance upon
and in conformity with written information furnished to the Company by
any Underwriter through the Underwriter expressly for use in the
Registration Statement (or any amendment thereto), including the Rule
430A Information
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and the Rule 434 Information, if applicable, or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto).
(b) Indemnification of Company, Directors and Officers. Underwriter
agrees to indemnify and hold harmless the Company, its directors, each of its
officers who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act, against any and all loss, liability, claim, damage and
expense described in the indemnity contained in subsection (a) of this Section,
as incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto) in reliance upon and in conformity with
written information furnished to the Company by such Underwriter expressly for
use in the Registration Statement (or any amendment thereto) or such preliminary
prospectus or the Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by the Underwriter, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses
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<PAGE>
of counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 6(a)(ii) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement at
least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
SECTION 7. CONTRIBUTION.
If the indemnification provided for in Section 6 hereof is for any
reason unavailable to or insufficient to hold harmless an indemnified party in
respect of any losses, liabilities, claims, damages or expenses referred to
therein, then each indemnifying party shall contribute to the aggregate amount
of such losses, liabilities, claims, damages and expenses incurred by such
indemnified party, as incurred, (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriter on the other hand from the offering of the Securities pursuant to
this Agreement or (ii) if the allocation provided by clause (i) is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and of the Underwriter on the other hand in
connection with the statements or omissions which resulted in such losses,
liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriter on the other hand in connection with the offering of the Securities
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Securities
pursuant to this Agreement (before deducting expenses) received by the Company
and the total underwriting discount received by the Underwriter, in each case as
set forth on the cover of the Prospectus, or, if Rule 434 is used, the
corresponding location on the Term Sheet bear to the aggregate initial public
offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand and the Underwriter
on the other hand shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriter and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriter agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or
-20-
<PAGE>
defending against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever
based upon any such untrue or alleged untrue statement or omission or alleged
omission.
Notwithstanding the provisions of this Section 7, Underwriter shall not
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
Subsidiaries submitted pursuant hereto, shall remain operative and in full force
and effect, regardless of any investigation made by or on behalf of Underwriter
or controlling person, or by or on behalf of the Company, and shall survive
delivery of the Securities to the Underwriter.
SECTION 9. TERMINATION OF AGREEMENT.
(a) Termination; General. The Underwriter may terminate this Agreement,
by notice to the Company at any time at or prior to Closing Time (i) if there
has been, since the time of execution of this Agreement or since the respective
dates as of which information is given in the Prospectus, any material adverse
change in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its Subsidiaries considered as
one enterprise, whether or not arising in the ordinary course of business, or
(ii) if there has occurred any material adverse change in the financial markets
in the United States or the international financial markets, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which is
such as to make it, in the judgment of the Underwriter, impracticable to market
the Securities or to enforce contracts for the sale of the
-21-
<PAGE>
Securities, or (iii) if trading in any securities of the Company has been
suspended or limited by the Commission or the Nasdaq Stock Market, Inc., or if
trading generally on the American Stock Exchange or the New York Stock Exchange
or in the Nasdaq Stock Market, Inc. has been suspended or limited, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices have
been required, by any of said exchanges or by such system or by order of the
Commission, the NASD or any other governmental authority, or (iv) if a banking
moratorium has been declared by either Federal, New York or Maryland
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. NOTICES.
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed or transmitted by any standard
form of telecommunication. Notices to the Underwriter shall be directed to Legg
Mason Wood Walker, Incorporated, 1747 Pennsylvania Avenue, N.W., Washington,
D.C. 20006, attention of Mark C. Micklem with a copy to Norman B. Antin, Esq.,
Elias, Matz, Tiernan & Herrick L.L.P., 734 15th Street, N.W., Washington, D.C.
20005, and notices to the Company shall be directed to it at Greater Atlantic
Financial Corp., 10700 Parkridge Boulevard, Suite 450, Reston, Virginia 20191,
attention of Carroll E. Amos with a copy to George W. Murphy, Jr., Esq.,
Muldoon, Murphy & Faucette LLP, 5101 Wisconsin Avenue, N.W., Washington, D.C.
20016.
SECTION 11. PARTIES.
This Agreement shall each inure to the benefit of and be binding upon
the Underwriter, the Company and their respective successors. Nothing expressed
or mentioned in this Agreement is intended or shall be construed to give any
person, firm or corporation, other than the Underwriter, the Company and their
respective successors and the controlling persons and officers and directors
referred to in Sections 6 and 7 and their heirs and legal representative, any
legal or equitable right, remedy or claim under or in respect of this Agreement
or any provision herein contained. This Agreement and all conditions and
provisions hereof are intended to be for the sole and exclusive benefit of the
Underwriter and the Company and their respective successors, and said
controlling persons and officers and directors and their heirs and legal
representative, and for the benefit of no other person, firm or corporation. No
purchaser of Securities from any Underwriter shall be deemed to be a successor
by reason merely of such purchase.
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<PAGE>
SECTION 12. GOVERNING LAW AND TIME.
This agreement shall be governed by and construed in accordance with
the laws of the State of Maryland. Except as otherwise set forth herein,
specified times of day refer to Eastern time.
SECTION 13. EFFECT OF HEADINGS.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
-23-
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
among the Underwriter and the Company in accordance with its terms.
Very truly yours,
GREATER ATLANTIC FINANCIAL CORP.
By:
------------------------------------
Carroll E. Amos
President and Chief Executive Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
LEGG MASON WOOD WALKER, INCORPORATED
By :
---------------------------------
Mark C. Micklem
Managing Director
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<PAGE>
SCHEDULE A
----------
List of Shareholders subject to lock-up agreements
- --------------------------------------------------
Schedule A-1
<PAGE>
SCHEDULE B
----------
2,000,000 Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the Securities, determined
as provided in said Section 2, shall be $_____.
2. The purchase price per share for ____ Securities to be paid by the
Underwriter shall be $_____, being an amount equal to the initial public
offering price set forth above less $____ per share and the purchase price
per share for _____ Securities to be paid by the Underwriters for shares
sold to persons listed on Schedule C shall be $_____, being an amount equal
to the initial public offering price set forth above less $_____ per share;
provided that the purchase price per share for any Option Securities
purchased upon the exercise of the over-allotment option described in
Section 2(b) shall be reduced by an amount per share equal to any dividends
or distributions declared by the Company and payable on the Initial
Securities but not payable on the Option Securities.
Schedule B-1
<PAGE>
SCHEDULE C
----------
Number of Shares
----------------
William Calomiris
Ralph Ochsman
Peter Calomiris
Robert Harris
Jeffrey M. Gitleman
Paul Cinquegrana
Caroll E. Amos
Marvin R. Jawer, Irrevocable Trust #1
Robert I. Schattner
Bruce D. Ochsman
Lynnette Taylor
James Vito
Schedule C-1
<PAGE>
SCHEDULE D
----------
FORM OF OPINION OF COUNSEL
The opinion of counsel for the Company to be delivered pursuant to
Section 5(b) of the Underwriting Agreement shall be substantially to the effect
that:
1. The Registration Statement has become effective under the 1933 Act
and no stop order suspending the effectiveness of the Registration Statement has
been issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or, to our knowledge, are contemplated by the
Commission. At the time the Registration Statement became effective and at the
Closing Time, the Registration Statement complied in all material respects with
the requirements of the 1933 Act and the 1933 Act Regulations, except that we do
not express any opinion as to the financial statements, schedules and other
financial, statistical or accounting data included therein or the exhibits to
the Registration Statement. The Prospectus filed as part of the Registration
Statement as originally filed and as filed pursuant to Rule 424 under the 1933
Act, complied when so filed in all material respects with the 1933 Act
Regulations, except that we do not express any opinion as to the financial
statements, schedules and other financial, statistical or accounting data
included or incorporated by reference therein or the exhibits to the
Registration Statement.
2. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
3. The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Underwriting
Agreement.
4. The Company is duly registered as a savings and loan holding company
under the Home Owners' Loan Act, as amended, and, to our knowledge, the Company
possesses the foreign qualifications necessary to carry on the business of the
Company, as described in the Prospectus, except where the failure to have such
qualifications would not have a material adverse effect on the condition
(financial or otherwise), earnings, business affairs or business prospects of
the Company and its subsidiaries, considered as a whole.
5. The Bank has been duly incorporated and is validly existing as a
federal savings bank under the laws of the United States and has the corporate
power and authority and foreign qualifications necessary to own, lease and
operate its properties and to conduct its business, as described in the
Prospectus, except where the failure to have such authority or qualifications
would not have a material adverse effect on the condition (financial or
otherwise), earnings, business affairs or business prospects of the Company and
its subsidiaries, considered as a whole; all of the issued and outstanding
capital stock of the Bank has been duly authorized and validly issued, is fully
paid and non-assessable and is owned directly by the Company, free and clear of
any security interest,
Schedule D-1
<PAGE>
mortgage, pledge, lien, encumbrance, claim or equity; and none of such shares
was issued in violation of the preemptive rights of any stockholder of the Bank.
6. GAMC has been duly organized and is validly existing as a
corporation in god standing under the laws of the State of Maryland and has the
corporate power and authority and foreign qualifications necessary to own, lease
and operate its properties and to conduct its business, as described in the
Prospectus, except where the failure to have such authority or qualifications
would not have a material adverse effect on the condition (financial or
otherwise), earnings, business affairs or business prospects of the Company and
its subsidiaries, considered as a whole; all of the issued and outstanding
capital stock of GAMC has been duly authorized and validly issued, is fully paid
and non-assessable and is owned in directly by the Company, free and clear of
any security interest, mortgage, pledge, lien, encumbrance, claim or equity; and
none of such shares was issued in violation of the preemptive rights of any
stockholder of GAMC.
7. The Company had at the date indicated a duly authorized
capitalization as set forth in the Prospectus; all of the outstanding shares of
capital stock of the Company have been duly authorized and validly issued and
are fully paid and non-assessable; and the stockholders of the Company have no
preemptive rights.
8. The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
9. The Securities have been duly authorized for issuance by the
Company; and the Securities, when delivered and paid for in accordance with the
Underwriting Agreement, will be validly issued, fully paid and nonassessable
shares of Common Stock of the Company.
10. Neither the Company nor any of its Subsidiaries is in violation of
its charter or by-laws or in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note, lease or
other agreement or instrument to which the Company or any of its Subsidiaries is
a party or by which it or any of them may be bound, or to which any of the
property or assets of the Company or any Subsidiary is subject except for such
defaults that would not, individually or in the aggregate, result in a material
adverse effect on the condition (financial or otherwise), earnings, business
affairs or business prospects of the Company and its Subsidiaries, considered as
a whole.
11. At the time the Registration Statement became effective, the
Registration Statement (except for the financial statements, notes to financial
statements, schedules and other financial or statistical information and data
included therein, as to which we express no opinion) complied as to form in all
material respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
During the course of preparation of the Prospectus, we reviewed the
Prospectus and participated in discussions with officers of the Company and the
Bank, and their advisors and
Schedule D-2
<PAGE>
discussed the business and affairs of the Company with officers and
representatives of the Company. Although we have not undertaken to determine
independently, and are not passing upon or assuming any responsibility for, the
accuracy, completeness or fairness of the statements contained in the Prospectus
or the Registration Statement, on the basis of such review and discussions,
nothing has come to our attention that caused us to believe that the
Registration Statement (other than the financial statements, notes to financial
statements, schedules and other financial and statistical information and data
included therein or omitted therefrom, as to which we express no opinion), at
the time it became effective or the date hereof contained or contains an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein, or necessary to make the statements therein, not misleading or
that the Prospectus (other than the financial statements, notes to financial
statements, schedules and other financial and statistical information and data
included therein or omitted therefrom, as to which we express no opinion), as of
its date or the date hereof contained or contains an untrue statement of a
material fact or omitted to state a material fact required to be stated therein,
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
Schedule D-3
<PAGE>
SCHEDULE E
----------
FORM OF LOCK-UP AGREEMENT
TO: Greater Atlantic Financial Corp.
Legg Mason Wood Walker, Incorporated
The undersigned hereby agrees that, without first obtaining the prior
written consent of Legg Mason Wood Walker, Incorporated ("Legg Mason"), which
shall not be unreasonably withheld, he or she will not, directly or indirectly,
sell or otherwise dispose of, or offer or contract to sell, any shares of Common
Stock of Greater Atlantic Financial Corp. (the "Company") or any securities
convertible into the Common Stock of the Company (i) during the period of the of
underwritten public offering by Legg Mason which is conducted pursuant to an
underwriting agreement executed by the Company with Legg Mason, and (ii) for an
additional period extending 180 days after the completion of such offering.
The undersigned understands that the prospectus pertaining to the
offering will disclose the above agreement of the undersigned, as part of
similar commitments of other executive officers, directors and certain
stockholders of the Company as a group, and that any breach by the undersigned
of this agreement could subject the undersigned to legal action by the Company,
Legg Mason or others for damages and injunctive relief.
The undersigned represents and acknowledges that this agreement is
being executed in order to induce Legg Mason to enter into the underwriting
agreement with respect to the Company's public offering, and that Legg Mason
would not enter into such underwriting agreement in the absence of this
agreement by the undersigned. This agreement shall be governed by the laws of
the State of Maryland.
--------------------------------------
(signature)
--------------------------------------
(print name)
Accepted:
GREATER ATLANTIC FINANCIAL CORP.
By:
-------------------------
Name:
-------------------
Title:
-------------------
LEGG MASON WOOD WALKER, INCORPORATED
By:
-------------------------
Name:
-------------------
Title:
-------------------
Schedule E-1
EXHIBIT 3.1A
CERTIFICATE OF INCORPORATION
OF
GREATER ATLANTIC FINANCIAL CORP.
FIRST: The name of the Corporation is Greater Atlantic Financial Corp.
(hereinafter sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of the registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
FOURTH:
A. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is seven million five hundred
thousand (7,500,000) consisting of:
1. Two million five hundred thousand (2,500,000) shares of
Preferred Stock, no par value (the "Preferred Stock"); and
2. Five million (5,000,000) shares of Common Stock, par value
one cent ($.01) per share (the "Common Stock").
B. The Board of Directors is authorized, subject to any
limitations prescribed by law, to provide for the issuance of the
shares of Preferred Stock in series, and by filing a certificate
pursuant to the applicable law of the State of Delaware (such
certificate being hereinafter referred to as a "Preferred Stock
Designation"), to establish from time to time the number of shares to
be included in each such series, and to fix the designation, powers,
preferences, and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof. The number of
authorized shares of Preferred Stock may be increased or decreased (but
not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the Common Stock,
without a vote of the holders of the Preferred Stock, or of any series
thereof, unless a vote of any such holders is required pursuant to the
terms of any Preferred Stock Designation.
C. Except as otherwise provided by law or expressly provided
in this Section C, the presence, in person or by proxy, of
the holders of record of shares of capital stock of the
Corporation entitling the holders thereof to cast a
majority of the votes (after giving effect, if required,
to the provisions of this Section C) entitled to be cast
by the holders of shares of capital stock of the
Corporation entitled to vote shall constitute a quorum at
all meetings of the stockholders, and every reference in
this Certificate of Incorporation to a
<PAGE>
majority or other proportion of capital stock (or the
holders thereof) for purposes of determining any quorum
requirement or any requirement for stockholder consent or
approval shall be deemed to refer to such majority or
other proportion of the votes (or the holders thereof)
then entitled to be cast in respect of such capital stock.
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its Directors and stockholders:
A. The business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors. In addition to the
powers and authority expressly conferred upon them by statute or by
this Certificate of Incorporation or the Bylaws of the Corporation, the
Directors are hereby empowered to exercise all such powers and do all
such acts and things as may be exercised or done by the Corporation.
B. The Directors of the Corporation need not be elected by
written ballot unless the Bylaws so provide.
C. Any action required or permitted to be taken by the
stockholders of the Corporation may be effected at a duly called annual
or special meeting of stockholders of the Corporation or by consent in
writing by stockholders holding the requisite shares of voting stock
necessary to approve the prepared action at a stockholder meeting.
D. Special meetings of stockholders of the Corporation may be
called only by the Board of Directors pursuant to a resolution adopted
by a majority of the Whole Board or as otherwise provided in the
Bylaws. The term "Whole Board" shall mean the total number of
authorized directorships (whether or not there exist any vacancies in
previously authorized directorships at the time any such resolution is
presented to the Board for adoption).
2
<PAGE>
SIXTH:
A. The number of Directors shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted
by a majority of the Whole Board. The Directors shall be divided into
three classes, as nearly equal in number as reasonably possible, with
the term of office of the first class to expire at the first annual
meeting of stockholders, the term of office of the second class to
expire at the annual meeting of stockholders one year thereafter and
the term of office of the third class to expire at the annual meeting
of stockholders two years thereafter with each Director to hold office
until his or her successor shall have been duly elected and qualified.
At each annual meeting of stockholders following such initial
classification and election, Directors elected to succeed those
Directors whose terms expire shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders after
their election with each Director to hold office until his or her
successor shall have been duly elected and qualified.
B. Subject to the rights of holders of any series of Preferred
Stock outstanding, the newly created directorships resulting from any
increase in the authorized number of Directors or any vacancies in the
Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office or other cause may be filled only
by a majority vote of the Directors then in office, though less than a
quorum, and Directors so chosen shall hold office for a term expiring
at the annual meeting of stockholders at which the term of office of
the class to which they have been chosen expires. No decrease in the
number of Directors constituting the Board of Directors shall shorten
the term of any incumbent Director.
C. Advance notice of stockholder nominations for the election of
Directors and of business to be brought by stockholders before any
meeting of the stockholders of the Corporation shall be given in the
manner provided in the Bylaws of the Corporation.
D. Subject to the rights of holders of any series of Preferred
Stock then outstanding, any Director, or the entire Board of Directors,
may be removed from office at any time, but only for cause and only by
the affirmative vote of the holders of at least 80 percent of the
voting power of all of the then-outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of Directors
(after giving effect to the provisions of Article FOURTH of this
Certificate of Incorporation ("Article FOURTH")), voting together as a
single class.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend
or repeal Bylaws of the Corporation. Any adoption, amendment or repeal of the
Bylaws of the Corporation by the Board of Directors shall require the approval
of a majority of the Whole Board. The stockholders shall also have power to
adopt, amend or repeal the Bylaws of the Corporation; provided, however, that,
in addition to any vote of the holders of any class or series of stock of this
Corporation required by law or by this Certificate of Incorporation, the
3
<PAGE>
affirmative vote of the holders of at least 80 percent of the voting power of
all of the then-outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of Directors (after giving effect to
the provisions of Article FOURTH), voting together as a single class, shall be
required to adopt, amend or repeal any provisions of the Bylaws of the
Corporation.
EIGHTH:
A. In addition to any affirmative vote required by law or this
Certificate of Incorporation, and except as otherwise expressly
provided in this Article EIGHTH:
1. any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with: (i) any
Interested Stockholder (as hereinafter defined); or (ii)
any other corporation (whether or not itself an
Interested Stockholder) which is, or after such merger or
consolidation would be, an Affiliate (as hereinafter
defined) of an Interested Stockholder; or
2. any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of
transactions) to or with any Interested Stockholder, or
any Affiliate of any Interested Stockholder, of any
assets of the Corporation or any Subsidiary having an
aggregate Fair Market Value (as hereinafter defined)
equaling or exceeding 25% or more of the combined assets
of the Corporation and its Subsidiaries; or
3. the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of
transactions) of any securities of the Corporation or any
Subsidiary to any Interested Stockholder or any Affiliate
of any Interested Stockholder in exchange for cash,
securities or other property (or a combination thereof)
having an aggregate Fair Market Value (as hereinafter
defined) equaling or exceeding 25% of the combined Fair
Market Value of the outstanding common stock of the
Corporation and its Subsidiaries, except for any issuance
or transfer pursuant to an employee benefit plan of the
Corporation or any Subsidiary thereof; or
4. the adoption of any plan or proposal for the liquidation
or dissolution of the Corporation proposed by or on
behalf of an Interested Stockholder or any Affiliate of
any Interested Stockholder; or
5. any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or
any merger or consolidation of the Corporation with any
of its Subsidiaries or any other transaction (whether or
not with or into or otherwise involving an Interested
Stockholder) which has the effect, directly or
indirectly, of increasing
4
<PAGE>
the proportionate share of the outstanding shares of any
class of equity or convertible securities of the
Corporation or any Subsidiary which is directly or
indirectly owned by any Interested Stockholder or any
Affiliate of any Interested Stockholder;
shall require the affirmative vote of the holders of at least 80% of
the voting power of the then-outstanding shares of stock of the
Corporation entitled to vote in the election of Directors (the "Voting
Stock") (after giving effect to the provisions of Article FOURTH),
voting together as a single class. Such affirmative vote shall be
required notwithstanding the fact that no vote may be required, or that
a lesser percentage may be specified, by law or by any other provisions
of this Certificate of Incorporation or any Preferred Stock Designation
in any agreement with any national securities exchange or otherwise.
The term "Business Combination" as used in this Article EIGHTH
shall mean any transaction which is referred to in any one or more of
paragraphs 1 through 5 of Section A of this Article EIGHTH.
B. The provisions of Section A of this Article EIGHTH shall not
be applicable to any particular Business Combination, and such Business
Combination shall require only the affirmative vote of the majority of
the outstanding shares of capital stock entitled to vote after giving
effect to the provisions of Article FOURTH, or such vote (if any), as
is required by law or by this Certificate of Incorporation, if, in the
case of any Business Combination that does not involve any cash or
other consideration being received by the stockholders of the
Corporation solely in their capacity as stockholders of the
Corporation, the condition specified in the following paragraph 1 is
met or, in the case of any other Business Combination, all of the
conditions specified in either of the following paragraphs 1 or 2 are
met:
1. The Business Combination shall have been approved by a
majority of the Disinterested Directors (as hereinafter
defined).
2. All of the following conditions shall have been met:
a. The aggregate amount of the cash and the Fair Market
Value as of the date of the consummation of the Business
Combination of consideration other than cash to be
received per share by the holders of Common Stock in such
Business Combination shall at least be equal to the
higher of the following:
(1)(if applicable) the Highest Per Share Price (as
hereinafter defined), including any brokerage
commissions, transfer taxes and soliciting dealers'
fees, paid by the Interested Stockholder or any of its
Affiliates for any shares of Common Stock acquired by
it: (i) within the two-year period immediately prior
to the first public
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announcement of the proposal of the Business
Combination (the "Announcement Date"); or (ii) in the
transaction in which it became an Interested
Stockholder, whichever is higher; or
(2)the Fair Market Value per share of Common Stock on
the Announcement Date or on the date on which the
Interested Stockholder became an Interested
Stockholder (such latter date is referred to in this
Article EIGHTH as the "Determination Date"), whichever
is higher.
b. The aggregate amount of the cash and the Fair Market
Value as of the date of the consummation of the Business
Combination of consideration other than cash to be
received per share by holders of shares of any class of
outstanding Voting Stock other than Common Stock shall be
at least equal to the highest of the following (it being
intended that the requirements of this subparagraph (b)
shall be required to be met with respect to every such
class of outstanding Voting Stock, whether or not the
Interested Stockholder has previously acquired any shares
of a particular class of Voting Stock):
(1)(if applicable) the Highest Per Share Price (as
hereinafter defined), including any brokerage
commissions, transfer taxes and soliciting dealers'
fees, paid by the Interested Stockholder for any
shares of such class of Voting Stock acquired by it:
(i) within the two-year period immediately prior to
the Announcement Date; or (ii) in the transaction in
which it became an Interested Stockholder, whichever
is higher; or
(2)(if applicable) the highest preferential amount per
share to which the holders of shares of such class of
Voting Stock are entitled in the event of any
voluntary or involuntary liquidation, dissolution or
winding up of the Corporation; or
(3)the Fair Market Value per share of such class of
Voting Stock on the Announcement Date or on the
Determination Date, whichever is higher.
c. The consideration to be received by holders of a
particular class of outstanding Voting Stock (including
Common Stock) shall be in cash or in the same form as the
Interested Stockholder has previously paid for shares of
such class of Voting Stock. If the Interested Stockholder
has paid for shares of any class of Voting Stock with
varying forms of consideration, the form of consideration
to be received per share by holders of shares of such
class of Voting Stock shall be either cash or the
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<PAGE>
form used to acquire the largest number of shares of such
class of Voting Stock previously acquired by the
Interested Stockholder. The price determined in
accordance with subparagraph B.2 of this Article EIGHTH
shall be subject to appropriate adjustment in the event
of any stock dividend, stock split, combination of shares
or similar event.
d. After such Interested Stockholder has become an
Interested Stockholder and prior to the consummation of
such Business Combination: (1) except as approved by a
majority of the Disinterested Directors (as hereinafter
defined), there shall have been no failure to declare and
pay at the regular date therefor any full quarterly
dividends (whether or not cumulative) on any outstanding
stock having preference over the Common Stock as to
dividends or liquidation; (2) there shall have been: (i)
no reduction in the annual rate of dividends paid on the
Common Stock (except as necessary to reflect any
subdivision of the Common Stock), except as approved by a
majority of the Disinterested Directors; and (ii) an
increase in such annual rate of dividends as necessary to
reflect any reclassification (including any reverse stock
split), recapitalization, reorganization or any similar
transaction which has the effect of reducing the number
of outstanding shares of the Common Stock, unless the
failure to so increase such annual rate is approved by a
majority of the Disinterested Directors, and (3) neither
such Interested Stockholder or any of its Affiliates
shall have become the beneficial owner of any additional
shares of Voting Stock except as part of the transaction
which results in such Interested Stockholder becoming an
Interested Stockholder.
e. After such Interested Stockholder has become an
Interested Stockholder, such Interested Stockholder shall
not have received the benefit, directly or indirectly
(except proportionately as a stockholder), of any loans,
advances, guarantees, pledges or other financial
assistance or any tax credits or other tax advantages
provided, directly or indirectly, by the Corporation,
whether in anticipation of or in connection with such
Business Combination or otherwise.
f. A proxy or information statement describing the proposed
Business Combination and complying with the requirements
of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder (or any subsequent
provisions replacing such Act, and the rules or
regulations thereunder) shall be mailed to stockholders
of the Corporation at least 30 days prior to the
consummation of such Business Combination (whether or not
such proxy or information statement is required to be
mailed pursuant to such Act or subsequent provisions).
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C. For the purposes of this Article EIGHTH:
1. A "Person" shall include an individual, a firm, a group acting
in concert, a corporation, a partnership, an association, a
joint venture, a pool, a joint stock company, a trust, an
unincorporated organization or similar company, a syndicate or
any other group formed for the purpose of acquiring, holding
or disposing of securities or any other entity.
2. "Interested Stockholder" shall mean any person (other than the
Corporation or any Holding Company or Subsidiary thereof) who
or which:
a. is the beneficial owner, directly or indirectly, of more
than 10% of the voting power of the outstanding Voting
Stock; or
b. is an Affiliate of the Corporation and at any time within
the two-year period immediately prior to the date in
question was the beneficial owner, directly or indirectly,
of 10% or more of the voting power of the then outstanding
Voting Stock; or
c. is an assignee of or has otherwise succeeded to any shares
of Voting Stock which were at any time within the two-year
period immediately prior to the date in question
beneficially owned by any Interested Stockholder, if such
assignment or succession shall have occurred in the course
of a transaction or series of transactions not involving a
public offering within the meaning of the Securities Act of
1933, as amended.
3. For purposes of this Article EIGHTH, "beneficial ownership"
shall be determined in the manner provided in Section C of
Article FOURTH hereof.
4. "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as in
effect on the date of filing of this Certificate of
Incorporation.
5. "Subsidiary" means any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by
the Corporation; provided, however, that for the purposes of
the definition of Interested Stockholder set forth in
Paragraph 2 of this Section C, the term "Subsidiary" shall
mean only a corporation of which a majority of each
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<PAGE>
class of equity security is owned, directly or indirectly, by
the Corporation.
6. "Disinterested Director" means any member of the Board of
Directors who is unaffiliated with the Interested Stockholder
and was a member of the Board of Directors prior to the time
that the Interested Stockholder became an Interested
Stockholder, and any Director who is thereafter chosen to fill
any vacancy of the Board of Directors or who is elected and
who, in either event, is unaffiliated with the Interested
Stockholder and in connection with his or her initial
assumption of office is recommended for appointment or
election by a majority of Disinterested Directors then on the
Board of Directors.
7. "Fair Market Value" means:
a. in the case of stock, the highest closing sales price of
the stock during the 30-day period immediately preceding
the date in question of a share of such stock on the
National Association of Securities Dealers Automated
Quotation System or any system then in use, or, if such
stock is admitted to trading on a principal United States
securities exchange registered under the Securities
Exchange Act of 1934, as amended, Fair Market Value shall
be the highest sale price reported during the 30-day
period preceding the date in question, or, if no such
quotations are available, the Fair Market Value on the
date in question of a share of such stock as determined
by the Board of Directors in good faith, in each case
with respect to any class of stock, appropriately
adjusted for any dividend or distribution in shares of
such stock or any stock split or reclassification of
outstanding shares of such stock into a greater number of
shares of such stock or any combination or
reclassification of outstanding shares of such stock into
a smaller number of shares of such stock; and
b. in the case of property other than cash or stock, the
Fair Market Value of such property on the date in
question as determined by the Board of Directors in good
faith.
8. Reference to "Highest Per Share Price" shall in each case with
respect to any class of stock reflect an appropriate
adjustment for any dividend or distribution in shares of such
stock or any stock split or reclassification of outstanding
shares of such stock into a greater number of shares of such
stock or any combination or reclassification of outstanding
shares of such stock into a smaller number of shares of such
stock.
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9. In the event of any Business Combination in which the
Corporation survives, the phrase "consideration other than
cash to be received" as used in Subparagraphs (a) and (b) of
Paragraph 2 of Section B of this Article EIGHTH shall include
the shares of Common Stock and/or the shares of any other
class of outstanding Voting Stock retained by the holders of
such shares.
D. A majority of the Disinterested Directors of the Corporation
shall have the power and duty to determine for the purposes of this
Article EIGHTH, on the basis of information known to them after
reasonable inquiry: (a) whether a person is an Interested Stockholder;
(b) the number of shares of Voting Stock beneficially owned by any
person; (c) whether a person is an Affiliate or Associate of another;
and (d) whether the assets which are the subject of any Business
Combination have, or the consideration to be received for the issuance
or transfer of securities by the Corporation or any Subsidiary in any
Business Combination has an aggregate Fair Market Value equaling or
exceeding 25% of the combined Fair Market Value of the Common Stock of
the Corporation and its Subsidiaries. A majority of the Disinterested
Directors shall have the further power to interpret all of the terms
and provisions of this Article EIGHTH.
E. Nothing contained in this Article EIGHTH shall be construed
to relieve any Interested Stockholder from any fiduciary obligation
imposed by law.
F. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a
lesser vote or no vote, but in addition to any affirmative vote of the
holders of any particular class or series of the Voting Stock required
by law, this Certificate of Incorporation or any Preferred Stock
Designation, the affirmative vote of the holders of at least 80 percent
of the voting power of all of the then-outstanding shares of the Voting
Stock (after giving effect to the provisions of Article FOURTH), voting
together as a single class, shall be required to alter, amend or repeal
this Article EIGHTH.
NINTH: The Board of Directors of the Corporation, when evaluating any
offer of another Person (as defined in Article EIGHTH hereof) to: (A) make a
tender or exchange offer for any equity security of the Corporation; (B) merge
or consolidate the Corporation with another corporation or entity; or (C)
purchase or otherwise acquire all or substantially all of the properties and
assets of the Corporation, may, in connection with the exercise of its judgment
in determining what is in the best interest of the Corporation and its
stockholders, give due consideration to all relevant factors, including, without
limitation, those factors that Directors of any subsidiary of the Corporation
may consider in evaluating any action that may result in a change or potential
change in the control of the subsidiary, and the social and economic effect of
acceptance of such offer: on the Corporation's present and future customers and
employees and those of its Subsidiaries (as defined in Article EIGHTH hereof);
on the communities in which the Corporation and its Subsidiaries operate or are
located; on the ability of the Corporation to fulfill its corporate objective as
a savings and loan holding company under applicable laws and
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regulations; and on the ability of its subsidiary savings bank to fulfill the
objectives of a stock form savings bank under applicable statutes and
regulations.
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TENTH:
A. Each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she is
or was a Director or an Officer of the Corporation or is or was serving
at the request of the Corporation as a Director, Officer, employee or
agent of another corporation or of a partnership, joint venture, trust
or other enterprise, including service with respect to an employee
benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director,
Officer, employee or agent or in any other capacity while serving as a
Director, Officer, employee or agent, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by the
Delaware General Corporation Law, as the same exists or may hereafter
be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to
provide prior to such amendment), against all expense, liability and
loss (including attorneys' fees, judgments, fines, ERISA excise taxes
or penalties and amounts paid in settlement) reasonably incurred or
suffered by such indemnitee in connection therewith; provided, however,
that, except as provided in Section C hereof with respect to
proceedings to enforce rights to indemnification, the Corporation shall
indemnify any such indemnitee in connection with a proceeding (or part
thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this
Article TENTH shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its
final disposition (hereinafter and "advancement of expenses");
provided, however, that, if the Delaware General Corporation Law
requires, an advancement of expenses incurred by an indemnitee in his
or her capacity as a Director or Officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including,
without limitation, services to an employee benefit plan) shall be made
only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal
(hereinafter a "final adjudication") that such indemnitee is not
entitled to be indemnified for such expenses under this Section or
otherwise. The rights to indemnification and to the advancement of
expenses conferred in Sections A and B of this Article TENTH shall be
contract rights and such rights shall continue as to an indemnitee who
has ceased to be a Director, Officer, employee or agent and shall inure
to the benefit of the indemnitee's heirs, executors and administrators.
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<PAGE>
C. If a claim under Section A or B of this Article TENTH is not
paid in full by the Corporation within sixty days after a written claim
has been received by the Corporation, except in the case of a claim for
an advancement of expenses, in which case the applicable period shall
be twenty days, the indemnitee may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit, or in a suit brought
by the Corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the indemnitee shall be entitled to be
paid also the expenses of prosecuting or defending such suit. In (i)
any suit brought by the indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the indemnitee
to enforce a right to an advancement of expenses) it shall be a defense
that, and (ii) in any suit by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication
that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law.
Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made
a determination prior to the commencement of such suit that
indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set
forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the indemnitee has
not met such applicable standard of conduct, shall create a presumption
that the indemnitee has not met the applicable standard of conduct or,
in the case of such a suit brought by the indemnitee, be a defense to
such suit. In any suit brought by the indemnitee to enforce a right to
indemnification or to an advancement of expenses hereunder, or by the
Corporation to recover an advancement of expenses pursuant to the terms
of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under
this Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of
expenses conferred in this Article TENTH shall not be exclusive of any
other right which any person may have or hereafter acquire under any
statute, the Corporation's Certificate of Incorporation, Bylaws,
agreement, vote of stockholders or Disinterested Directors or
otherwise.
E. The Corporation may maintain insurance, at its expense, to
protect itself and any Director, Officer, employee or agent of the
Corporation or subsidiary or Affiliate or another corporation,
partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not the Corporation would have
the power to indemnify such person against such expense, liability or
loss under the Delaware General Corporation Law.
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F. The Corporation may, to the extent authorized from time to
time by the Board of Directors, grant rights to indemnification and to
the advancement of expenses to any employee or agent of the Corporation
to the fullest extent of the provisions of this Article TENTH with
respect to the indemnification and advancement of expenses of Directors
and Officers of the Corporation.
ELEVENTH: A Director of this Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except for liability: (i) for any breach of the
Director's duty of loyalty to the Corporation or its stockholders; (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) under Section 174 of the Delaware General
Corporation Law; or (iv) for any transaction from which the Director derived an
improper personal benefit. If the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a Director of the Corporation existing at the time of such repeal
or modification.
TWELFTH: The Corporation reserves the right to amend or repeal any
provision contained in this Certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware and all rights conferred upon
stockholders are granted subject to this reservation; provided, however, that,
notwithstanding any other provision of this Certificate of Incorporation or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any vote of the holders of any class or series of the stock of this
Corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least 80 percent of the voting power of
all of the then-outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of Directors (after giving effect to
the provisions of Article FOURTH), voting together as a single class, shall be
required to amend or repeal this Article TWELFTH, Section C of Article FOURTH,
Sections C or D of Article FIFTH, Article SIXTH, Article SEVENTH, Article EIGHTH
or Article TENTH.
THIRTEENTH: The name and mailing address of the sole incorporator are
as follows:
Name Mailing Address
---- ---------------
Thomas J. Haggerty Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Suite 508
Washington, D. C. 20016
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I, THE UNDERSIGNED, being the incorporator, for the purpose of forming
a corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation and do certify that the facts herein stated
are true, and accordingly, have hereto set my hand this 30th day of May, 1997.
/s/ Thomas J. Haggerty
-----------------------
Incorporator
15
EXHIBIT 3.1B
AMENDMENT TO
CERTIFICATE OF INCORPORATION
OF
GREATER ATLANTIC FINANCIAL CORP
(Pursuant to 8 Del C. Section 242)
Greater Atlantic Financial Corp, a corporation organized and existing under and
by virtue of the Delaware General Corporation Law (the "Corporation") does
hereby certify that:
FIRST, a Certificate of Incorporation was initially filed by the Corporation on
June 2, 1997 with the Office of the Secretary of the State of Delaware.
SECOND, that the Board of Directors of the Corporation in accordance with the
provisions of Section 242 of the Delaware General Corporation Law, duly adopted
an amendment to the Certificate of Incorporation to increase the number of
shares of Common Stock from Five million (5,000,000) to Ten million (10,000,000)
declaring said amendment to be advisable and calling a meeting of stockholders
of the Corporation for consideration thereof.
THIRD, that thereafter on February 25, 1999, an Annual Meeting of Stockholders
of the Corporation was duly called and held, upon notice and in accordance with
Section 222 of the Delaware General Corporation Law, at which meeting the
necessary number of shares as required by the Delaware General Corporation Law
were voted in favor of the amendment substantially in the form attached hereto
as Exhibit A.
FOURTH, the amendment was duly adopted in accordance with the provisions of
Section 242 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by
its President and attested by its Secretary on this 5th day of April, 1999.
GREATER ATLANTIC FINANCIAL CORP.
By: /s/ Carroll E. Amos
------------------------
Carroll E. Amos
President
Attest:
/s/ Margaret A. Reynolds
- ------------------------
Margaret A. Reynolds
Secretary
<PAGE>
EXHIBIT A TO
AMENDMENT TO
CERTIFICATE OF INCORPORATION OF
GREATER ATLANTIC FINANCIAL CORP.
ARTICLE FOURTH: CAPITAL STOCK - PARAGRAPHS A & B
FOURTH:
A. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is Twelve million Five hundred
thousand (12,500,000), consisting of:
1. Two million Five hundred thousand (2,500,000) shares of
Preferred Stock, par value one cent ($.01) per share (the
"Preferred Stock"); and
2. Ten million (10,000,000) shares of Common Stock, par value one
cent ($.01) per share (the "Common Stock").
B. The Board of Directors is authorized, subject to any limitations
prescribed by law, to provide for the issuance of the shares of Preferred Stock
in series, and by filing a certificate pursuant to the applicable law of the
State of Delaware (such certificate being hereinafter referred to as a
"Preferred Stock Designation"), to establish from time to time the number of
shares to be included in each such series, and to fix the designation, powers,
preferences, and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof. The number of authorized
shares of Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of the
holders of a majority of the Common Stock, without a vote of the holders of the
Preferred Stock, or of any series thereof, unless a vote of any such holders is
required pursuant to the terms of any Preferred Stock Designation.
EXHIBIT 3.2
GREATER ATLANTIC FINANCIAL CORP.
BYLAWS
ARTICLE I - STOCKHOLDERS
Section 1. Annual Meeting.
An annual meeting of the stockholders, for the election of Directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall each year fix, which date
shall be within thirteen (13) months subsequent to the later of the date of
incorporation or the last annual meeting of stockholders.
Section 2. Special Meetings.
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, special meetings of stockholders of the Corporation
may be called only by the Board of Directors pursuant to a resolution adopted by
a majority of the total number of Directors which the Corporation would have if
there were no vacancies on the Board of Directors (hereinafter the "Whole
Board").
Section 3. Notice of Meetings.
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time by
the Delaware General Corporation Law or the Certificate of Incorporation of the
Corporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than thirty
(30) days after the date for which the meeting was originally noticed, or if a
new record date is fixed for the adjourned meeting, written notice of the place,
date, and time of the adjourned meeting shall be given in conformity herewith.
At any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum.
At any meeting of the stockholders, the holders of a majority of all of
the shares of the stock entitled to vote at the meeting, present in person or by
proxy (after giving effect to the provisions of Article FOURTH of the
Corporation's Certificate of Incorporation), shall constitute a quorum for
<PAGE>
all purposes, unless or except to the extent that the presence of a larger
number may be required by law. Where a separate vote by a class or classes is
required, a majority of the shares of such class or classes present in person or
represented by proxy (after giving effect to the provisions of Article FOURTH of
the Corporation's Certificate of Incorporation) shall constitute a quorum
entitled to take action with respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date, or time.
If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present in person or by proxy constituting a quorum, then except as
otherwise required by law, those present in person or by proxy at such adjourned
meeting shall constitute a quorum, and all matters shall be determined by a
majority of the votes cast at such meeting.
Section 5. Organization.
Such person as the Board of Directors may have designated or, in the
absence of such a person, the Chairman of the Board of the Corporation or, in
his or her absence, such person as may be chosen by the holders of a majority of
the shares entitled to vote who are present, in person or by proxy, shall call
to order any meeting of the stockholders and act as chairman of the meeting. In
the absence of the Secretary of the Corporation, the secretary of the meeting
shall be such person as the chairman appoints.
Section 6. Conduct of Business.
(a) The chairman of any meeting of stockholders shall determine
the order of business and the procedures at the meeting, including such
regulation of the manner of voting and the conduct of discussion as seem to him
or her in order. The date and time of the opening and closing of the polls for
each matter upon which the stockholders will vote at the meeting shall be
announced at the meeting.
(b) At any annual meeting of the stockholders, only such
business shall be conducted as shall have been brought before the meeting: (i)
by or at the direction of the Board of Directors or (ii) by any stockholder of
the Corporation who is entitled to vote with respect thereto and who complies
with the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the business must
relate to a proper subject matter for stockholder action and the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered or mailed to
and received at the principal executive offices of the Corporation not less than
ninety (90) days prior to the date of the annual meeting; provided, however,
that in the event that less than one hundred (100) days' notice or prior public
disclosure of the date of the meeting is given or made to
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stockholders, notice by the stockholder to be timely must be received not later
than the close of business on the 10th day following the day on which such
notice of the date of the annual meeting was mailed or such public disclosure
was made. A stockholder's notice to the Secretary shall set forth as to each
matter such stockholder proposes to bring before the annual meeting: (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting; (ii) the name
and address, as they appear on the Corporation's books, of the stockholder
proposing such business; (iii) the class and number of shares of the
Corporation's capital stock that are beneficially owned by such stockholder; and
(iv) any material interest of such stockholder in such business. Notwithstanding
anything in these Bylaws to the contrary, no business shall be brought before or
conducted at an annual meeting except in accordance with the provisions of this
Section 6(b). The Officer of the Corporation or other person presiding over the
annual meeting shall, if the facts so warrant, determine and declare to the
meeting that business was not properly brought before the meeting in accordance
with the provisions of this Section 6(b) and, if he should so determine, he
shall so declare to the meeting and any such business so determined to be not
properly brought before the meeting shall not be transacted.
At any special meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting by or at the direction
of the Board of Directors.
(c) Only persons who are nominated in accordance with the
procedures set forth in these Bylaws shall be eligible for election as
Directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders at which directors are to
be elected only: (i) by or at the direction of the Board of Directors; or (ii)
by any stockholder of the Corporation entitled to vote for the election of
Directors at the meeting who complies with the notice procedures set forth in
this Section 6(c). Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made by timely notice in writing
to the Secretary of the Corporation. To be timely, a stockholder's notice shall
be delivered or mailed to and received at the principal executive offices of the
Corporation not less than ninety (90) days prior to the date of the meeting;
provided, however, that in the event that less than one hundred (100) days'
notice or prior disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the day on which such
notice of the date of the meeting was mailed or such public disclosure was made.
Such stockholder's notice shall set forth: (i) as to each person whom such
stockholder proposes to nominate for election or re-election as a Director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); and (ii) as to
the stockholder giving the notice (x) the name and address, as they appear on
the Corporation's books, of such stockholder and (y) the class and number of
shares of the Corporation's capital stock that are beneficially owned by such
stockholder. At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a Director shall furnish to the Secretary
of the Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
3
<PAGE>
for election as a Director of the Corporation unless nominated in accordance
with the provisions of this Section 6(c). The Officer of the Corporation or
other person presiding at the meeting shall, if the facts so warrant, determine
that a nomination was not made in accordance with such provisions and, if he or
she shall so determine, he or she shall so declare to the meeting and the
defective nomination shall be disregarded.
Section 7. Proxies and Voting.
At any meeting of the stockholders, every stockholder entitled to vote
may vote in person or by proxy authorized by an instrument in writing filed in
accordance with the procedure established for the meeting. Any facsimile
telecommunication or other reliable reproduction of the writing or transmission
created pursuant to this paragraph may be substituted or used in lieu of the
original writing or transmission for any and all purposes for which the original
writing or transmission could be used, provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or transmission.
All voting, including on the election of Directors but excepting where
otherwise required by law or by the governing documents of the Corporation, may
be made by a voice vote; provided, however, that upon demand therefor by a
stockholder entitled to vote or his or her proxy, a stock vote shall be taken.
Every stock vote shall be taken by ballot, each of which shall state the name of
the stockholder or proxy voting and such other information as may be required
under the procedures established for the meeting. The Corporation shall, in
advance of any meeting of stockholders, appoint one or more inspectors to act at
the meeting and make a written report thereof. The Corporation may designate one
or more persons as alternate inspectors to replace any inspector who fails to
act. If no inspector or alternate is able to act at a meeting of stockholders,
the person presiding at the meeting shall appoint one or more inspectors to act
at the meeting. Each inspector, before entering upon the discharge of his
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his ability.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or the Certificate of Incorporation, all
other matters shall be determined by a majority of the votes cast.
Section 8. Stock List.
A complete list of stockholders entitled to vote at any meeting of
stockholders, arranged in alphabetical order for each class of stock and showing
the address of each such stockholder and the number of shares registered in his
or her name, shall be open to the examination of any such stockholder, for any
purpose germane to the meeting, during ordinary business hours for a period of
at least ten (10) days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or if not so specified, at the place where the meeting is to be
held.
4
<PAGE>
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
Section 9. Consent of Stockholders in Lieu of Meeting.
Any action required or permitted to be taken by the stockholders of the
Corporation at an annual or special meeting of stockholders of the Corporation
may be taken without a meeting, without prior notice and without a vote, if a
consent or consents in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting of which all shares entitled to vote thereon were present and voted and
shall be delivered to the Corporation by delivery to its registered office in
Delaware, its principal place of business, or an officer or agent of the
Corporation having custody of the book in which proceedings of meetings of
shareholders are recorded.
ARTICLE II - BOARD OF DIRECTORS
Section 1. General Powers, Number, Term of Office and Limitations.
The business and affairs of the Corporation shall be under the direction
of its Board of Directors. The number of Directors who shall constitute the
Whole Board shall be such number as the Board of Directors shall from time to
time have designated, except that in the absence of such designation shall be
five. The Board of Directors shall annually elect a Chairman of the Board from
among its members who shall, when present, preside at its meetings.
Except for the initial members of the Board of Directors as of the
effective date of these Bylaws, no person shall be eligible for initial election
as a Director who is 75 years of age or more.
The Directors, other than those who may be elected by the holders of any
class or series of Preferred Stock, shall be divided, with respect to the time
for which they severally hold office, into three classes, with the term of
office of the first class to expire at the first annual meeting of stockholders,
the term of office of the second class to expire at the annual meeting of
stockholders one year thereafter and the term of office of the third class to
expire at the annual meeting of stockholders two years thereafter, with each
Director to hold office until his or her successor shall have been duly elected
and qualified. At each annual meeting of stockholders, Directors elected to
succeed those Directors whose terms then expire shall be elected for a term of
office to expire at the third succeeding annual meeting of stockholders after
their election, with each Director to hold office until his or her successor
shall have been duly elected and qualified.
5
<PAGE>
Section 2. Vacancies and Newly Created Directorships.
Subject to the rights of the holders of any class or series of Preferred
Stock, and unless the Board of Directors otherwise determines, newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause may be filled
only by a majority vote of the Directors then in office, though less than a
quorum, and Directors so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of office of the class to which
they have been elected expires and until such Director's successor shall have
been duly elected and qualified. No decrease in the number of authorized
directors constituting the Board shall shorten the term of any incumbent
Director.
Section 3. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such place
or places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all Directors. A
notice of each regular meeting shall not be required.
Section 4. Special Meetings.
Special meetings of the Board of Directors may be called by one-third
(1/3) of the Directors then in office (rounded up to the nearest whole number),
by the Chairman of the Board or the President or, in the event that the Chairman
of the Board or President are incapacitated or otherwise unable to call such
meeting, by the Secretary, and shall be held at such place, on such date, and at
such time as they, or he or she, shall fix. Notice of the place, date, and time
of each such special meeting shall be given each Director by whom it is not
waived by mailing written notice not less than five (5) days before the meeting
or by telegraphing or telexing or by facsimile transmission of the same not less
than twenty-four (24) hours before the meeting. Unless otherwise indicated in
the notice thereof, any and all business may be transacted at a special meeting.
Section 5. Quorum.
At any meeting of the Board of Directors, a majority of the Whole Board
shall constitute a quorum for all purposes. If a quorum shall fail to attend any
meeting, a majority of those present may adjourn the meeting to another place,
date, or time, without further notice or waiver thereof.
Section 6. Participation in Meetings By Conference Telephone.
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
6
<PAGE>
Section 7. Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted
in such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the Directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
Section 8. Powers.
The Board of Directors may, except as otherwise required by law,
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation.
Section 9. Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as Directors,
including, without limitation, their services as members of committees of the
Board of Directors.
ARTICLE III - COMMITTEES
Section 1. Committees of the Board of Directors.
The Board of Directors, by a vote of a majority of the Board of
Directors, may from time to time designate committees of the Board, with such
lawfully delegable powers and duties as it thereby confers, to serve at the
pleasure of the Board and shall, for these committees and any others provided
for herein, elect a Director or Directors to serve as the member or members,
designating, if it desires, other Directors as alternate members who may replace
any absent or disqualified member at any meeting of the committee. Any committee
so designated may exercise the power and authority of the Board of Directors to
declare a dividend, to authorize the issuance of stock or to adopt a certificate
of ownership and merger pursuant to Section 253 of the Delaware General
Corporation Law if the resolution which designates the committee or a
supplemental resolution of the Board of Directors shall so provide. In the
absence or disqualification of any member of any committee and any alternate
member in his or her place, the member or members of the committee present at
the meeting and not disqualified from voting, whether or not he or she or they
constitute a quorum, may by unanimous vote appoint another member of the Board
of Directors to act at the meeting in the place of the absent or disqualified
member.
7
<PAGE>
Section 2. Conduct of Business.
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings. The quorum requirements for each such
committee shall be a majority of the members of such committee unless otherwise
determined by the Board of Directors by a majority vote of the Board of
Directors which such quorum determined by a majority of the Board may be
one-third of such members and all matters considered by such committees shall be
determined by a majority vote of the members present. Action may be taken by any
committee without a meeting if all members thereof consent thereto in writing,
and the writing or writings are filed with the minutes of the proceedings of
such committee.
Section 3. Nominating Committee.
The Board of Directors shall appoint a Nominating Committee of the
Board, consisting of not less than three (3) members. The Nominating Committee
shall have authority: (a) to review any nominations for election to the Board of
Directors made by a stockholder of the Corporation pursuant to Section 6(c)(ii)
of Article I of these Bylaws in order to determine compliance with such Bylaw;
and (b) to recommend to the Whole Board nominees for election to the Board of
Directors to replace those Directors whose terms expire at the annual meeting of
stockholders next ensuing.
ARTICLE IV - OFFICERS
Section 1. Generally.
(a) The Board of Directors as soon as may be practicable after
the annual meeting of stockholders shall choose a Chairman of the Board, Chief
Executive Officer, a President, one or more Vice Presidents, a Secretary and a
Treasurer and from time to time may choose such other officers as it may deem
proper. The Chairman of the Board shall be chosen from among the Directors. Any
number of offices may be held by the same person.
(b) The term of office of all Officers shall be until the next
annual election of Officers and until their respective successors are chosen but
any Officer may be removed from office at any time by the affirmative vote of a
majority of the authorized number of Directors then constituting the Board of
Directors.
(c) All Officers chosen by the Board of Directors shall have
such powers and duties as generally pertain to their respective Offices, subject
to the specific provisions of this ARTICLE IV. Such officers shall also have
such powers and duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
(d) The Board of Directors may, except as otherwise required by
law, remove any Officer of the Corporation with or without cause, and from time
to time, devolve the powers and
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<PAGE>
duties of any Officer upon any other person for the time being, and to confer
upon any Officer of the Corporation the power to appoint, remove or suspend
subordinate officers, employees and agents.
Section 2. Chairman of the Board of Directors.
The Chairman of the Board shall, subject to the provisions of these
Bylaws and to the direction of the Board of Directors, serve in general
executive capacity and unless the Board has designated another person, when
present, shall preside at all meetings of the stockholders of the Corporation.
The Chairman of the Board shall perform all duties and have all powers which are
commonly incident to the office of Chairman of the Board or which are delegated
to him or her by the Board of Directors. He or she shall have power to sign all
stock certificates, contracts and other instruments of the Corporation which are
authorized.
Section 3. President and Chief Executive Officer.
The President and Chief Executive Officer (the "President") shall have
general responsibility for the management and control of the business and
affairs of the Corporation and shall perform all duties and have all powers
which are commonly incident to the offices of President and Chief Executive
Officer or which are delegated to him or her by the Board of Directors. Subject
to the direction of the Board of Directors, the President shall have power to
sign all stock certificates, contracts and other instruments of the Corporation
which are authorized and shall have general supervision of all of the other
Officers (other than the Chairman of the Board), employees and agents of the
Corporation.
Section 4. Vice President.
The Vice President or Vice Presidents shall perform the duties of the
President in his absence or during his inability to act. In addition, the Vice
Presidents shall perform the duties and exercise the powers usually incident to
their respective offices and/or such other duties and powers as may be properly
assigned to them by the Board of Directors, the Chairman of the Board or the
President. A Vice President or Vice Presidents may be designated as Executive
Vice President or Senior Vice President.
Section 5. Secretary.
The Secretary or Assistant Secretary shall issue notices of meetings,
shall keep their minutes, shall have charge of the seal and the corporate books,
shall perform such other duties and exercise such other powers as are usually
incident to such office and/or such other duties and powers as are properly
assigned thereto by the Board of Directors, the Chairman of the Board or the
President. Subject to the direction of the Board of Directors, the Secretary
shall have the power to sign all stock certificates.
Section 6. Treasurer.
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<PAGE>
The Treasurer shall be the Comptroller of the Corporation and shall have
the responsibility for maintaining the financial records of the Corporation. He
or she shall make such disbursements of the funds of the Corporation as are
authorized and shall render from time to time an account of all such
transactions and of the financial condition of the Corporation. The Treasurer
shall also perform such other duties as the Board of Directors may from time to
time prescribe. Subject to the direction of the Board of Directors, the
Treasurer shall have the power to sign all stock certificates.
Section 7. Assistant Secretaries and Other Officers.
The Board of Directors may appoint one or more Assistant Secretaries and
such other Officers who shall have such powers and shall perform such duties as
are provided in these Bylaws or as may be assigned to them by the Board of
Directors, the Chairman of the Board or the President.
Section 8. Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the President or
any Officer of the Corporation authorized by the President shall have power to
vote and otherwise act on behalf of the Corporation, in person or by proxy, at
any meeting of stockholders of or with respect to any action of stockholders of
any other corporation in which this Corporation may hold securities and
otherwise to exercise any and all rights and powers which this Corporation may
possess by reason of its ownership of securities in such other corporation.
ARTICLE V - STOCK
Section 1. Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by, or in the
name of the Corporation by, the Chairman of the Board or the President, and by
the Secretary or an Assistant Secretary, or any Treasurer or Assistant
Treasurer, certifying the number of shares owned by him or her. Any or all of
the signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these Bylaws,
an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefor.
10
<PAGE>
Section 3. Record Date.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; provided, however, that if no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the next day preceding the day
on which the meeting is held, and, for determining stockholders entitled to
receive payment of any dividend or other distribution or allotment or rights or
to exercise any rights of change, conversion or exchange of stock or for any
other purpose, the record date shall be at the close of business on the day on
which the Board of Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any certificate of
stock, another may be issued in its place pursuant to such regulations as the
Board of Directors may establish concerning proof of such loss, theft or
destruction and concerning the giving of a satisfactory bond or bonds of
indemnity.
Section 5. Regulations.
The issue, transfer, conversion and registration of certificates of
stock shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI - NOTICES
Section 1. Notices.
Except as otherwise specifically provided herein or required by law, all
notices required to be given to any stockholder, Director, Officer, employee or
agent shall be in writing and may in every instance be effectively given by hand
delivery to the recipient thereof, by depositing such notice in the mails,
postage paid, or by sending such notice by prepaid telegram or mailgram or other
courier.
11
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Any such notice shall be addressed to such stockholder, Director, Officer,
employee or agent at his or her last known address as the same appears on the
books of the Corporation. The time when such notice is received, if hand
delivered, or dispatched, if delivered through the mails or by telegram or
mailgram or other courier, shall be the time of the giving of the notice.
Section 2. Waivers.
A written waiver of any notice, signed by a stockholder, Director,
Officer, employee or agent, whether before or after the time of the event for
which notice is to be given, shall be deemed equivalent to the notice required
to be given to such stockholder, Director, Officer, employee or agent. Neither
the business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE VII - MISCELLANEOUS
Section 1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these Bylaws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing the name
of the Corporation, which seal shall be in the charge of the Secretary. If and
when so directed by the Board of Directors or a committee thereof, duplicates of
the seal may be kept and used by the Treasurer or by an Assistant Secretary or
an assistant to the Treasurer.
Section 3. Reliance Upon Books, Reports and Records.
Each Director, each member of any committee designated by the Board of
Directors, and each Officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its Officers or
employees, or committees of the Board of Directors so designated, or by any
other person as to matters which such Director or committee member reasonably
believes are within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the Corporation.
Section 4. Fiscal Year.
The fiscal year of the Corporation shall be as fixed by the Board of
Directors.
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Section 5. Time Periods.
In applying any provision of these Bylaws which requires that an act be
done or not be done a specified number of days prior to an event or that an act
be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be excluded,
and the day of the event shall be included.
Section 6. Adoption of Regulations.
The Board of Directors may, except as otherwise required by law, adopt
from time to time regulations, not inconsistent with these Bylaws, for the
management of the Corporation's business and affairs.
ARTICLE VIII - AMENDMENTS
The Board of Directors may amend, alter or repeal these Bylaws at any
meeting of the Board, provided notice of the proposed change was given not less
than two (2) days prior to the meeting. The stockholders shall also have power
to amend, alter or repeal these Bylaws at any meeting of stockholders provided
notice of the proposed change was given in the notice of the meeting; provided,
however, that, notwithstanding any other provisions of the Bylaws or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any affirmative vote of the holders of any particular class or
series of the voting stock required by law, the Certificate of Incorporation,
any Preferred Stock Designation or these Bylaws, the affirmative votes of the
holders of at least 80% of the voting power of all the then-outstanding shares
of the Voting Stock, voting together as a single class, shall be required to
alter, amend or repeal any provisions of these Bylaws.
The above Bylaws are effective as of June 2, 1997, the date of incorporation of
Greater Atlantic Financial Corp.
13
EXHIBIT 4.0
COMMON STOCK COMMON STOCK
PAR VALUE $.01 SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP
GREATER ATLANTIC FINANCIAL CORP.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
S P E C I M E N
is the owner of:
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK $.01 PAR VALUE PER SHARE
----------------
The shares represented by this certificate are transferable only on the stock
transfer books of the Corporation by the holder of record thereof, or by his
duly authorized attorney or legal representative, upon the surrender of this
certificate properly endorsed. This certificate and the shares represented
hereby are issued and shall be held subject to all the provisions of the
Certificate of Incorporation of the Corporation and any amendments thereto
(copies of which are on file with the Transfer Agent), to all of which
provisions the holder by acceptance hereof, assents.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar. The shares represented by this Certificate are not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
IN WITNESS THEREOF, Greater Atlantic Financial Corp. has caused
this certificate to be executed by the facsimile signatures of its duly
authorized officers and has caused a facsimile of its corporate seal to be
hereunto affixed.
Dated: [SEAL]
Chairman of the Board Secretary
<PAGE>
----------------
The Board of Directors of the Corporation is authorized by
resolution(s), from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the voting powers, designations,
preferences and relative, participating, optional, or other special rights of
the shares of each such series and the qualifications, limitations and
restrictions thereof. The Corporation will furnish to any shareholder upon
request and without charge a full description of each class of stock and any
series thereof.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFTS MIN ACT - __________ custodian __________
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors Act
-------------------------
(State)
JT TEN - as joint tenants with right
of survivorship and not as
tenants in common
Additional abbreviations may also be used though not in the above list.
For value received, __________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFICATION NUMBER OF TRANSFEREE
- ------------------------------------------------------------------------------------------------
Please print or typewrite name and address including postal zip code of assignee
_______________________________________________ shares of the common stock
represented by the within Certificate, and do hereby irrevocably constitute and
appoint _______________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
DATED ________________________
_____________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE GUARANTEED: _______________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15
</TABLE>
EXHIBIT 5.0
[DRAFT]
_________, 1999
Board of Directors
Greater Atlantic Financial Corp.
10700 Parkridge Boulevard
Reston, Virginia 20191
Re: The offering of 2,300,000 shares of
Greater Atlantic Financial Corp. Common Stock
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of Delaware
law in connection with the offering (the "Offering") by Greater Atlantic
Financial Corp., a Delaware corporation (the "Company"), of 2,300,000 shares of
its common stock, par value $.01 per share ("Common Stock").
In connection with your request for our opinion, you have provided to
us and we have reviewed the Company's certificate of incorporation filed with
the Secretary of State of Delaware on June 2, 1997, (the "Certificate of
Incorporation"), as amended on April 6 and ___, 1999; the Company's Bylaws; the
Company's Registration Statement on Form SB-2, as filed with the Securities and
Exchange Commission initially on _______________, 1999, (the "Registration
Statement"); resolutions of the Board of Directors of the Company (the "Board")
concerning the organization of the Company, the Offering and the designation of
a Pricing Committee of the Board, and the form of stock certificate approved by
the Board to represent shares of Common Stock. We have also been furnished a
certificate of the Secretary of State certifying the Company's good standing as
a Delaware corporation. Capitalized terms used but not defined herein have the
meaning given them in the Certificate of Incorporation.
Based upon and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:
Upon the due adoption by the Pricing Committee of a resolution fixing
the price of the shares of Common Stock to be sold in the Offering, the Common
Stock to be issued in the Offering will be duly authorized and, when such shares
are sold and paid for in accordance with the terms set forth in the Prospectus
and in the resolution of the Pricing Committee and certificates representing
such shares substantially in the form provided to us and included as Exhibit 4.0
to the Registration Statement, are duly and properly issued, will be validly
issued, fully paid and nonassessable.
<PAGE>
Board of Directors
Greater Atlantic Financial Corp.
_________, 1999
Page 2
The following provisions of the Articles of Incorporation may not be
given effect by a court applying Delaware law, but, in our opinion, the failure
to give effect to such provisions will not affect the duly authorized, validly
issued, fully paid and nonassessable status of the Common Stock:
1. (a) Section D of Article EIGHTH, which grants to the Board the
authority to construe and apply the provisions of that
Article to the extent, if any, that a court applying
Delaware law were to impose equitable limitations upon such
authority; and
(b) Article NINTH, which grants to the Board authority to
consider the effect of any offer to acquire the Company on
constituencies other than stockholders in evaluating any
such offer.
Very truly yours,
MULDOON, MURPHY & FAUCETTE LLP
EXHIBIT 10.1
GREATER ATLANTIC SAVINGS BANK, F.S.B.
EMPLOYMENT AGREEMENT
WITH
CARROLL E. AMOS
This AGREEMENT is made effective as of Novermber 1, 1997, by and between
Greater Atlantic Savings Bank, F.S.B. (the "Bank"), a federally chartered
savings institution, with its principal administrative office at 8230 Old
Courthouse Road, Suite 520, Vienna, Virginia 22182, and Carroll E. Amos (the
"Executive").
WHEREAS, the Bank wishes to assure itself of the services of Executive
for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve
as President and Chief Executive Officer of the Bank. The Executive shall render
administrative and management services to the Bank such as are customarily
performed by persons situated in a similar executive capacity. Any failure to
reelect Executive as President and Chief Executive Officer without the consent
of the Executive shall constitute a breach of this Agreement.
2. TERMS.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the first anniversary date of this Agreement, and continuing at each anniversary
date thereafter, the board of directors of the Bank (the "Board") may extend the
Agreement for an additional year. The Board will review the Agreement and the
Executive's performance annually for purposes of determining whether to extend
the Agreement and, unless the Board determines that there exists no basis upon
which to extend this Agreement, the Agreement shall be extended for an
additional year. The results thereof shall be included in the minutes of the
Board's meeting at which the review occurs.
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(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Bank and participation in community and civic
organizations; provided, however, that, with the approval of the Board, as
evidenced by a resolution of the Board adopted from time to time, Executive may
serve, or continue to serve, on the boards of directors of, and hold any other
offices or positions in, companies or organizations, which, in the Board's
judgment, will not present any conflict with the interests of the Bank, or
materially affect the performance of Executive's duties pursuant to this
Agreement.
(c) Notwithstanding any other provision of this Agreement, this
Agreement shall terminate and no benefits shall be payable hereunder in the
event that the Bank is determined to be in default as that term is defined in
Section 3 of the Federal Deposit Insurance Act or ceases to be an "adequately
capitalized" institution under Section 38 of that Act.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Section 1. The Bank shall
pay Executive as compensation a salary of not less than $110,000 per year ("Base
Salary"). Such Base Salary shall be payable semimonthly. During the period of
this Agreement, Executive's Base Salary shall be reviewed at least annually; the
first such review will be made no later than one year from the date of this
Agreement. Such review shall be conducted by a Committee designated by the
Board, and the Board may increase Executive's Base Salary. Any increase shall
become the "Base Salary" for purposes of this Agreement. In addition to the Base
Salary provided in this Section 3(a), the Bank shall provide Executive at no
cost to Executive with all such other benefits as are provided uniformly to
permanent full-time employees of the Bank. Base Salary shall include any amounts
of compensation deferred by Executive under a qualified plan maintained by the
Bank.
(b) The Bank will provide Executive with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Bank will not, without
Executive's prior written consent, make any changes in such plans, arrangements
or perquisites which would adversely affect Executive's rights or benefits
thereunder, except to the extent such coverage may be changed in its application
to all Bank employees. Without limiting the generality of the foregoing
provisions of this Subsection (b), Executive will be entitled to participate in
or receive benefits under any employee benefit plans including but not limited
to, retirement plans, supplemental retirement plans, pension plans,
profit-sharing plans, health-and-accident plan, medical coverage or any other
employee benefit plan or arrangement made available by the Bank in the future to
its senior executives and key management employees, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
and arrangements. Executive will be entitled to incentive
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compensation and bonuses as provided in any plan of the Bank in which Executive
is eligible to participate. Nothing paid to the Executive under any such plan or
arrangement will be deemed to be in lieu of other compensation to which the
Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the Bank shall pay or reimburse Executive for all reasonable travel
and other reasonable expenses incurred by Executive performing his obligations
under this Agreement including but not limited to payment of an automobile
allowance of $600 per month plus reimbursement for gasoline expense and may
provide such additional compensation in such form and such amounts as the Board
may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
The provisions of this Section shall in all respects be subject to the
terms and conditions stated in Sections 7 and 15.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Bank of Executive's full-time employment hereunder for any
reason other than a Change in Control, as defined in Section 5(a) hereof, upon
Retirement, as defined in Section 6 hereof or for Cause, as defined in Section 7
hereof; (ii) Executive's resignation from the Bank's employ, upon any (A)
failure to elect or reelect or to appoint or reappoint Executive as President
and Chief ExecutiveOfficer, unless consented to by the Executive, (B) material
change in Executive's functions, duties, or responsibilities, which change would
cause Executive's position to become one of lesser responsibility, importance,
or scope from the position and attributes thereof described in Section 1, above,
(and any such material change shall be deemed a continuing breach of this
Agreement), (C) a relocation of Executive's principal place of employment by
more than 30 miles from its location at the effective date of this Agreement, or
a material reduction in the benefits and perquisites to the Executive from those
being provided as of the effective date of this Agreement, (D) liquidation or
dissolution of the Bank , or (E) breach of this Agreement by the Bank. Upon the
occurrence of any event described in clauses (A), (B), (C), (D) or (E), above,
Executive shall have the right to elect to terminate his employment under this
Agreement by resignation upon not less than sixty (60) days prior written notice
given within a reasonable period of time not to exceed, except in case of a
continuing breach, four calendar months after the event giving rise to said
right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Bank shall be obligated to pay
Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to the greater of (i) the payments due for the
remaining term of the Agreement, including Base Salary, bonuses and any other
cash or deferred compensation paid or to be paid to the Executive in the year of
the Event of Termination, and the
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amount of any benefits received or to be received by the Executive or
contributions made or to be made on behalf of the Executive pursuant to any
employee benefit plans maintained by the Bank during the year of the Event of
Termination or (ii) thirty-six (36) times the highest monthly base salary
received by the Executive during the term of the Agreement. At the election of
the Executive, which election is to be made within thirty (30) days of the
Executive's Date of Termination, such payments shall be made in a lump sum or
paid monthly during the remaining term of the Agreement following the
Executive's termination. In the event that no election is made, payment to the
Executive will be made on a monthly basis during the remaining term of the
Agreement. Such payments shall not be reduced in the event the Executive obtains
other employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Bank will cause
to be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank for Executive prior to his
termination, except to the extent such coverage may be changed in its
application to all Bank employees. Such coverage shall cease upon the expiration
of the remaining term of this Agreement.
(d) Upon the occurrence of an Event of Termination, the Executive will
be entitled to receive benefits due to him under or contributed by the Bank on
his behalf pursuant to any retirement, incentive, profit sharing, bonus,
performance, disability or other employee benefit plan maintained by the Bank on
the Executive's behalf to the extent that such benefits are not otherwise paid
to Executive under a separate provision of this Agreement.
(e) In the event that the Executive is receiving monthly payments
pursuant to Section 4(b) hereof, on an annual basis, thereafter, prior to
January 1 of any year and effective for payments to be made in the year
beginning with the next January 1, Executive shall elect whether the balance of
the amount payable under the Agreement at that time shall be paid in a lump sum
or on a pro rata basis. Such election shall be irrevocable for the year for
which such election is made.
5. CHANGE IN CONTROL.
(a) No benefit shall be payable under this Section 5 unless there shall
have been a Change in Control of the Bank, as set forth below. For purposes of
this Agreement, a "Change in Control" of the Bank shall mean an event of a
nature that; (i) would be required to be reported in response to Item 1 of the
Current Report on Form 8-K, as in effect on the date hereof pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii)
results in a Change in Control of the Bank within the meaning of the Home
Owners' Loan Act, as amended, and the rules and regulations promulgated by the
Office of Thrift Supervision (or its predecessor agency), as in effect on the
date hereof; or (iii) without limitation, such a Change in Control shall be
deemed to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined
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in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Bank representing 25% or more of the Bank's outstanding securities; or (B)
individuals who constitute the Board on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Bank's stockholders was
approved by the same Nominating Committee serving under an Incumbent Board,
shall be, for purposes of this clause (B), considered as though he were a member
of the Incumbent Board; or (C) a reorganization, merger, consolidation, sale of
all or substantially all the assets of the Bank or similar transaction occurs in
which the Bank is not the resulting entity.
(b) If, during the term of this Agreement, any of the events described
in Section 5(a) hereof constituting a Change in Control have occurred or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c), (d), (e), (f) and (g) of
this Section 5 upon his subsequent termination of employment regardless of
whether such termination results from his dismissal or his resignation unless
such termination is because of his death, retirement or termination for Cause.
(c) Upon the occurrence of a Change in Control followed by the
Executive's termination of employment, the Bank shall pay Executive, or in the
event of his subsequent death, his beneficiary or beneficiaries, or his estate,
as the case may be, as severance pay or liquidated damages, or both, a sum equal
to the greater of the payments due for the remaining term of the Agreement or
two (2) times the average of the Base Salary, including bonuses and any other
cash or deferred compensation paid or to be paid to the Executive during the
preceding three (3) years, and the amount of any contributions made or to be
made to any employee benefit plans, on behalf of the Executive, maintained by
the Bank during such years except to the extent such benefits are otherwise
payable to Executive upon a Change in Control. At the election of the Executive,
which election is to be made within thirty (30) days of the Date of Termination,
such payment may be made in a lump sum or paid in equal monthly installments
during the thirty-six (36) months following the Executive's termination. In the
event that no election is made, payment to the Executive will be made on a
monthly basis during the remaining term of the Agreement.
(d) Upon the occurrence of a Change in Control followed by the
Executive's termination of employment, the Bank will cause to be continued life,
medical, dental and disability coverage substantially identical to the coverage
maintained by the Bank for the Executive prior to his severance. Such coverage
and payments shall cease upon the expiration of thirty-six (36) months.
(e) If, pursuant to Section 5(c) of this Agreement, the Executive is
receiving monthly payments, prior to January 1 of any year and effective for
payments to be made in the year beginning with the next January 1, Executive may
elect whether the balance of the amount payable under the Agreement at that time
shall be paid in a lump sum or on an installment basis. Such election shall be
irrevocable for the year for which such election is made.
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6. TERMINATION UPON RETIREMENT.
Termination by the Bank of the Executive based on "Retirement" shall
mean termination in accordance with the Bank's retirement policy or in
accordance with any retirement arrangement established with Executive's consent
with respect to him. Upon termination of Executive upon Retirement, Executive
shall be entitled to all benefits under any retirement plan of the Bank and
other plans to which Executive is a party.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of the
Executive's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, regulation (other than traffic
violations or similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement. In determining incompetence, the acts
or omissions shall be measured against standards generally prevailing in the
savings institutions industry. Notwithstanding the foregoing, termination of
Executive's employment shall not be deemed to be Termination for Cause unless
and until there shall have been delivered to him a Notice of Termination which
shall include a copy of a resolution duly adopted by the affirmative vote of not
less than a majority of the members of the Board at a meeting of the Board
called and held for that purpose (after reasonable notice to Executive and an
opportunity for him, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board, Executive was guilty of
conduct justifying Termination for Cause and specifying the particulars thereof
in detail.
The Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause. Any stock options and
related limited rights granted to Executive under any stock option plan or any
unvested awards granted to Executive under any recognition and retention plan of
the Bank shall become null and void effective upon Executive's receipt of Notice
of Termination for Cause pursuant to Section 8 hereof, and shall not be
exercisable by or delivered to Executive at any time subsequent to such
Termination for Cause.
8. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by a Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall be immediate).
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9. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with paragraph (b) of this Section 9 during
the term of this Agreement and for one (1) full year after the expiration or
termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information
and assistance to the Bank as may reasonably be required by the Bank in
connection with any litigation in which it or any of its subsidiaries or
affiliates is, or may become, a party.
10. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 4 hereof, Executive agrees not to compete with the Bank for a period of
one (1) year following such termination in any city, town or county in which the
Bank has an office or has filed an application for regulatory approval to
establish an office, determined as of the effective date of such termination,
except as agreed to pursuant to a resolution duly adopted by the Board.
Executive agrees that during such period and within said cities, towns and
counties, Executive shall not work for or advise, consult or otherwise serve
with, directly or indirectly, any entity whose business materially competes with
the depository, lending or other business activities of the Bank.
(b) The parties hereto, recognizing that irreparable injury will result
to the Bank, its business and property in the event of Executive's breach of
Section 10(a), supra, agree that, in the event of any such breach by Executive,
the Bank will be entitled, in addition to any other remedies and damages
available to it, to an injunction to restrain the violation of this Agreement by
Executive, Executive's partners, agents, servants, employers, employees and any
and all persons acting for or with Executive. Executive represents and
acknowledges that, in the event of the termination of his employment pursuant to
Section 4 hereof, Executive's experience and capabilities are such that
Executive can obtain employment in a business engaged in other lines and/or of a
different nature than the Bank, and that the enforcement of a remedy by way of
injunction will not prevent Executive from earning a livelihood. Nothing herein
will be construed as prohibiting the Bank from pursuing any other remedies
available to the Bank for any such breach or threatened breach, including the
recovery of damages from Executive.
(c) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, after the term of his
employment, disclose any knowledge of the past, present, planned or considered
business activities of the Bank or affiliates thereof to any person, firm,
corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank. In the
event of a breach or threatened breach by the Executive of the provisions of
this Section
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10, the Bank will be entitled to an injunction restraining Executive from
disclosing, in whole or in part, the knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof, or from
rendering any services to any person, firm, corporation, other entity to whom
such knowledge, in whole or in part, has been disclosed or is threatened to be
disclosed. Nothing herein will be construed as prohibiting the Bank from
pursuing any other remedies available to the Bank for such breach or threatened
breach, including the recovery of damages from Executive.
11. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to the Executive
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) Except for increases in the Base Salary as provided for in Section
3(a), this Agreement may not be modified or amended except by an instrument in
writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall
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operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future as to any act other
than that specifically waived.
15. REQUIRED PROVISIONS.
(a) The Bank may terminate the Executive's employment at any time, but
any termination by the Bank, other than Termination for Cause, shall not
prejudice Executive's right to compensation or other benefits under this
Agreement. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause as defined in Section 7
hereinabove.
(b) If the Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs by a notice
served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (12
USC ss.1818(e)(3) or (g)(1)), the Bank's obligations under this contract shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Executive all or part of the compensation withheld while
their contract obligations were suspended and (ii) reinstate (in whole or in
part) any of the obligations which were suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (12 USC
ss.1818(e)(4) or (g)(1)), all obligations of the Bank under this contract shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x)(1) (12 USC
1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the institution, (i) by the Director of the
Office of Thrift Supervision (or his designee), the Federal Deposit Insurance
Corporation or the Resolution Trust Corporation, at the time FDIC enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) (12 USC ss.1823(c)) of the Federal Deposit Insurance
Act; or (ii) by the Director of the Office of Thrift Supervision ("OTS") (or his
designee) at the time the Director (or his designee) approves a supervisory
merger to resolve problems related to the operations of the Bank or when the
Bank is determined by the Director to be in an unsafe or unsound condition. Any
rights of the parties that have already vested, however, shall not be affected
by such action.
(f) Any payments made to the Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
ss.1828(k).
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16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
The validity, interpretation, performance and enforcement of this
Agreement shall be governed by the laws of the Commonwealth of Virginia, but
only to the extent not superseded by federal law.
19. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of the Bank, in accordance with the rules of
the American Arbitration Bank then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
20. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank if Executive is successful on the merits pursuant to a
legal judgment, arbitration or settlement.
21. INDEMNIFICATION.
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The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under federal law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Bank (whether or not he continues to be a director or officer
at the time of incurring such expenses or liabilities), such expenses and
liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
22. SUCCESSOR TO THE BANK.
The Bank shall require any successor or assignee,whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
SIGNATURES
IN WITNESS WHEREOF, Greater Atlantic Savings Bank, F.S.B. and Carroll E.
Amos have caused this Agreement to be executed and their seals to be affixed
hereunto by their duly authorized officers and directors, and Executive has
signed this Agreement, on the first day of November , 1997.
ATTEST: GREATER ATLANTIC SAVINGS BANK, F.S.B.
/s/ Howard Bowdring BY: /s/ William Calomiris
- -------------------- ----------------------------
Secretary Duly Authorized Officer
[SEAL]
WITNESS:
/s/ Martha LaChance /s/ Carroll E. Amos
- -------------------- --------------------------
Carroll E. Amos
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EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") entered into as of this first day of
October, 1998, by and between Greater Atlantic Mortgage Corporation ("GAMC") and
T. Mark Stamm (the "Employee").
WHEREAS, it is the desire of GAMC and its Employee to have an agreement
establishing responsibilities and compensation, including severance
compensation, for voluntary or involuntary termination of service by said
Employee.
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of GAMC and the Employee.
NOW, THEREFORE, IT IS AGREED AS FOLLOWS:
1. Employment. The Employee is employed in the capacity of Chief
Executive Officer with the title of President of GAMC and reports directly to
the Chairman of the Board of GAMC. The Employee shall render such administrative
and management services to GAMC as are customarily performed by persons situated
in a similar executive capacity who direct a mortgage banking firm. The
Employee's other duties shall be such as the Chairman of the Board of GAMC may
from time to time reasonably direct. In performance all of duties, the Employee
is expected to conform to the Mortgage Bankers Associations Canons of Ethics and
Standards of Practice as from time to time amended.
2. Compensation.
The Employee shall receive compensation that will be paid out as follows:
A. The Employee's base salary will be, $108,000 per annum, payable in
semi- monthly installments.
B. Production Bonus:
(1) The Employee will receive a Production Bonus equal to 2.0
basis points on each loan that is closed during a month.
(2) The Production Bonus will be paid monthly after preparation
and issuance of monthly financial statements by the
Accounting Department.
C. Net Income Bonus:
(1) The Employee will receive a Net Income Bonus equal to 30% of
GAMC's adjusted Pre Tax Net Income (as hereinafter defined in
this Agreement and in Exhibits A through D to this
Agreement).
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(2) An amount equal to eighty percent (80%) of the Net Income
Bonus will be paid in quarterly installments within 15 days
after preparation and issuance of quarterly financial
statements prepared by the Accounting Department.
(3) An amount equal to 20% of the quarterly Net Income Bonus (the
"Holdback") will be retained by GAMC and be paid and to the
Employee upon completion of the annual audit by the
independent accountants. If the annual year-end audit for
GAMC is not completed by November 15th following the fiscal
year end, and the reason(s) for delay are not envisioned by
the Chairman of GAMC to significantly impact GAMC's income
statement for the year as initially prepared by the
Accounting Department, fifty percent (50%) of the Holdback
will be paid to the President within two working days. The
remaining fifty percent (50%) of the Holdback will be paid
upon completion of the annual audit. The Holdback will earn
interest at Greater Atlantic Bank's Premier Money Fund Rate.
(4) Should there be a loss in any quarterly calculation period,
that loss will be carried back first to eliminate any monies
due from the Holdback, including any earned interest, and
then carried forward to future quarterly calculation periods.
Such carryforward will, if necessary, extend over a fiscal
accounting year.
D. Stock Options:
Within 45 days of the effective date of this agreement, the
employee will be awarded options (the "Stock Options") to
purchase 37,500 shares of the stock of Greater Atlantic
Financial Corporation (the "Corporation") at an exercise
price equal to the book value of the Corporation on a per
share basis at September 30, 1998. The Stock Options will be
issued in accordance with the existing Stock Option Plan of
the Corporation and in a form consistent with the options
that have been issued.
If the net earnings of GAMC for the fiscal year ending
September 30, 1999 is equal to or greater than $1,625,000, on
November 15, 1999, the Employee will be awarded options to
purchase 15,000 shares of the Corporation's stock. The
exercise price for the options issued will be the Market
Price of the Corporation's Stock on the date of issue if the
Corporation is a publicly traded company. If the Corporation
is not publicly traded than the exercise price will be the
book value per share of
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the Corporation on September 30, 1999.
If the net earnings of GAMC for the fiscal year ending
September 30, 2000 is equal to or greater than $1,625,000, on
November 15, 2000, the Employee will be awarded options to
purchase 15,000 shares of the Corporation's stock. The
exercise price for the options issued will be the Market
Price of the Corporation's Stock on the date of issue if the
Corporation is a publicly traded company. If the Corporation
is not publicly traded than the exercise price will be the
book value per share of the Corporation on September 30,
2000.
All Stock Options granted to Employee shall vest immediately
on the date of grant and shall be evidenced by a Stock Option
Agreement, substantially in the form attached hereto as
Exhibit E, except that such Stock Option Agreement shall
specifically provide that Employee may exercise Stock Options
following termination of employment or service for a period
of 5 years; provided, however, that in no event shall the
period extend beyond the expiration of any Option.
As used herein, Pre-tax Net Income is pre-tax net income determined in
accordance with generally accepted accounting principles ("GAAP") which, in
turn, determines the recognition of revenue and expense for financial reporting
purposes. Net Earnings is also to be determined in accordance with GAAP and will
be after deduction for the Net Income Bonus provided for in this Agreement and
after deduction of income tax expense. The applicable tax rate used to compute
income tax expense will be the rate in effect as if GAMC were a stand-alone
company.
3. Benefits.
(a) Participation in Retirement and Medical Plans. The Employee shall
be entitled to participate in any plan of GAMC relating to pension or other
retirement benefits and such medical coverage or reimbursement plans that GAMC
may adopt for the benefit of its other employees, generally.
(b) Employee Benefits; Expenses. GAMC, in its discretion, shall
authorize an expense account for all reasonable out-of-pocket expenses which
Employee shall incur in connection with his service for GAMC.
(c) Employee Benefits; Transportation. GAMC will provide Employee with
an automobile and pay for the maintenance, repairs, taxes and insurance on the
company automobile. In addition, the Employee will be reimbursed by GAMC for oil
and gasoline expenses.
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4. Term.
The term of this Agreement shall be a period of two years commencing on
the Effective Date of this Agreement (the "Effective Date"), subject to earlier
termination as provided herein. Beginning on the second anniversary of the
Effective Date, and on each second anniversary thereafter, the term of this
Agreement shall automatically be extended for a period of two years, provided
that GAMC has not given notice in writing to the Employee at least 90 days prior
to such anniversary that the term of this Agreement will not be extended further
or the Employee has not given written notice at least 90 days prior to such
anniversary that he does not wish to renew the Agreement. Reference herein to
the term of this Agreement refers to both such initial term and any extended
term.
5. Loyalty; Noncompetition.
(a) The Employee shall devote his full time and attention to the
performance of his duties under this Agreement. During the term of Employee's
employment under this Agreement, the Employee shall not engage in any business
or activity contrary to the business affairs or inconsistent with the best
interests of GAMC or Greater Atlantic Bank.
(b) Nothing contained in this Paragraph 5 shall be deemed to prevent or
limit the right of Employee to invest in the capital stock or other securities
of any business dissimilar from that of GAMC, or, solely as a passive or
minority investor, in any business.
6. Standards.
The Employee shall perform his duties under this Agreement in
accordance with such reasonable standards expected of employees with comparable
positions in comparable organizations and as may be established from time to
time by the Board of Directors of GAMC (the "Board of Directors").
7. Vacation and Sick Leave.
The Employee shall be entitled to annual vacation and sick leave in
accordance with the policies as are periodically established by the Board of
Directors for senior management employees of GAMC.
8. Termination and Termination Pay.
Employment of the Employee under this Agreement shall be terminated
upon any of the following occurrences:
(a) The death of the Employee during the term of this Agreement, in
which event the
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Employee's estate shall be entitled to receive the compensation due the Employee
through the last day of the calendar month in which Employee's death shall have
occurred, plus compensation provided for under this Agreement for two (2)
additional months.
(b) The Board of Directors may terminate the Employee's employment at
any time, but any termination by the Board of Directors, other than termination
for Just Cause, shall not prejudice the employees's right to compensation or
other benefits provided under the Agreement in accordance with this Section 8.
Termination shall be effected by giving the Employee written notice of
termination which shall state the date of termination, the grounds for
termination, including whether such termination is with or without Just Cause.
If the notice fails to state clearly and explicitly that the termination is for
Just Cause and fails to specify the grounds for the Just Cause termination, then
termination shall be conclusively established as without Just Cause. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for Just Cause, but shall be entitled to all
compensation or other benefits accrued up until the date of termination.
Termination for "Just Cause" is defined as any of the following acts: (i)
material personal dishonesty or breach of fiduciary duty detrimental to the
business and affairs of GAMC and which involves personal profit; (ii) willful
continuing intentional failure to perform legitimate duties as directed by GAMC
policies and procedures, Chairman of the Board or the GAMC Board of Directors;
(iii) willful violation of any law, rule or regulation (other than minor traffic
violations or similar violations) or final cease-and-desist order, which
violation is materially detrimental to the business and affairs of GAMC or its
parent company GAB; (iv) bankruptcy or insolvency; (v) willful conduct or
behavior which materially violates applicable governmental rules or regulations
relating to the mortgage banking business (including but not limited to rules or
regulations of HUD or VA); (vi) any of the specific acts or infractions as set
forth in GAMC's Employee Handbook, or GAB's Handbook until one is prepared for
GAMC, specified as grounds for termination for cause, and as set forth in any
reasonable revisions thereto; or (vii) willful conduct or behavior which is
detrimental to the business affairs of GAMC which violates product loan
origination practices or Canons of Ethics or Standards of Practice of the
Mortgage Bankers Association.
(c) Except for termination pursuant to Section 9 herein, in the event
Employee's employment under this Agreement is terminated by the Board of
Directors without Just Cause, GAMC will be obligated to continue to pay the
Employee the lesser of the amount of the compensation provided for under this
Agreement for the remaining term of the Agreement or the amount of compensation
provided for under the Agreement for a period of six months after notice of
termination (but in no event for a period less than three months). GAMC will
also be obligated to provide the Employee with a continuation of health, life,
disability, and other benefits which the Employee would be eligible to
participate in for a period not less than three months nor greater than six
months based upon the benefit levels substantially equal to those being provided
Employee at the date of the notice of termination of employment. The monthly
compensation to be paid to the Employee pursuant to this subparagraph (c) shall
be determined by obtaining a monthly average of the compensation for the most
recent three months prior to the date of any notice of termination without Just
Cause.
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In addition to all other compensation to which Employee is
entitled, upon termination without Just Cause, Employee will be entitled to the
37,500 Stock Options provided for in the first paragraph of Section 2(D).
Employee will be entitled to additional Stock Options in accordance with Section
2(D), depending on the date of termination (as specified in the notice of
termination) and the financial performance of GAMC up until the date of
termination. If the date of Employee's termination is on or before September 30,
1999, then Employee will be entitled to a pro rata portion of the 15,000 Stock
Options referred to in the second paragraph of Section 2(D) in accordance with
the following formula:
If Net Earnings from October 1, 1998 through the date
of termination multiplied by 365 and divided by the
number of days from October 1, 1998, through the date
of termination is at least $1,625,000, then Employee
will be immediately granted Stock Options in the
amount of 15,000 multiplied by the number of days
from October 1, 1998 through date of termination and
divided by 365.
If the date of Employee's termination is after September 30, 1999,
then Employee will be entitled to Stock Options under the second paragraph of
Section 2(D), in accordance with its terms, and will be entitled to a pro rata
portion of the 15,000 Stock Options referred to in the third paragraph of
Section 2(D), in accordance with the same pro rata methodology for annualizing
Net Earnings for the fiscal year, as set forth above in calculating Stock
Options where the date of termination is on or before September 30, 1999.
(d) It is expressly understood and agreed that the Employee's ability
to direct the Mortgage Banking Activities of GAMC is an essential term of his
employment and this Agreement. Accordingly, if the Employee's responsibility or
authority are materially diminished without cause during the term of his
employment by GAMC, such action shall be deemed to be termination of Employee's
employment without Just Cause withing the meaning of this Section 8.
(e) If the contract is not renewed, employee will be entitled to two
(2) months pay after the end date of the contract in accordance with 8c.
(f) If the Employee is removed and/or permanently prohibited from
participating in the conduct of GAMC's affairs pursuant to the Federal Deposit
Insurance Act ("FDIA") (12 U.S.C. 1811 et seq.), all obligations of GAMC under
this Agreement shall terminate, as of the effective date of the order, but the
vested rights of the parties shall not be affected.
(h) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of Greater Atlantic Bank or GAMC: (i) by the Director of the
Office of Thrift Supervision ("Director of OTS"), or his or her designee, at the
time that the Federal Deposit Insurance Corporation ("FDIC") enters into an
agreement to provide assistance to or on behalf of Greater
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Atlantic Bank under the authority contained in Section 13 (c) of FDIA; or (ii)
by the Director of the OTS, or his or her designee, at the time that the
Director of the OTS, or his or her designee, approves a supervisory merger to
resolve problems related to operation of Greater Atlantic Bank or when Greater
Atlantic Bank is determined by the Director of the OTS to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action.
9. Change in Control.
(a) No benefit shall be payable under this Section 9 unless there shall
have been a Change in Control of Greater Atlantic Bank (the "Bank"), as set
forth below. For purposes of this Agreement, a "Change in Control" of the Bank
shall mean an event of a nature that results in a Change in Control of the Bank
within the meaning of the Home Owners' Loan Act, as amended, and the rules and
regulations promulgated by the Office of Thrift Supervision, as in effect on the
date hereof.
(b) If, during the term of this Agreement, any event described in
Section 9(a) hereof constituting a Change in Control has occurred or the Board
has determined that a Change in Control has occurred, Employee shall be entitled
to the benefits provided in paragraph (c) of this Section 9 upon his subsequent
termination of employment, regardless of whether such termination results from
his dismissal or his resignation unless such termination is because of his
death, retirement or termination for Just Cause.
(c) Upon the occurrence of a Change in Control followed by the
Employee's termination of employment, GAMC shall pay Employee, or in the event
of his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, as severance pay or liquidated damages, or both, the amount due
Employee under this Agreement for the month in which such termination occurs,
plus a sum equal to the greater of the compensation due under section 8(c) of
the Agreement or three (3) times the average of the Base Salary, excluding
bonuses and all other forms of compensation, paid or to be paid to the Employee
during the preceding three (3) years. At the election of the Employee, which
election is to be made within thirty (30) days of the date of termination, such
payment may be made in a lump sum or paid in equal monthly installments during
the thirty-six (36) months following the Employee's termination. In the event
that no election is made, payment to the Employee will be made on a monthly
basis during the remaining term of the Agreement.
10. Suspension of Employment.
If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of GAMC's affairs by a notice served under the
FDIA, GAMC's obligations under the Agreement shall be suspended as of the date
of service, unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, GAMC shall, (i) pay the Employee all or part of the
compensation withheld while its contract obligations were suspended and (ii)
reinstate any of its obligations which were suspended.
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11. Disability.
If the Employee shall become disabled or incapacitated to the extend
that he is unable to perform his duties hereunder, by reason of a medically
determinable physical or mental impairment, as determined by a doctor engaged by
the Board of Directors, Employee shall nevertheless continue to receive
compensation and benefits which may be payable to Employee under the provisions
of disability insurance coverage in effect for GAMC employees. Upon returning to
active full-time employment, the Employee's full compensation as set forth in
this Agreement shall be reinstated as of the date of commencement of such
activities. In the event that the Employee returns to active employment on other
than a full-time basis, then his compensation (as set forth in Paragraph 2 of
this Agreement) shall be reduced in proportion to the time spent in said
employment, or as shall otherwise be agreed to by the parties.
12. Arbitration.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Employee within fifty
(50) miles from the location of the GAMC, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Employee shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection
with Employee's termination is resolved in favor of the Employee, whether by
judgment, arbitration or settlement, Employee shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Employee under this
Agreement.
13. Successors and Assigns.
(a) Except as otherwise provided herein, this Agreement shall inure to
the benefit of and be binding upon any corporate or other successor of GAMC
which shall acquire, directly or indirectly, by merger, consolidation, purchase
or otherwise, all or substantially all of the assets or stock of GAMC. GAMC may,
at its option, assign this Agreement to a subsidiary or affiliate of GAMC.
(b) Since GAMC is contracting for the unique personal skills of the
Employee, the Employee is precluded from assigning or delegating his rights or
duties hereunder without first obtaining the written consent of GAMC.
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14. Applicable Law.
This agreement shall be governed by all respects whether as to
validity, construction, capacity, performance or otherwise by the laws of the
Commonwealth of Virginia, except to the extent that Federal law shall be deemed
to apply.
15. Severability.
The provisions of the Agreement shall be deemed severable and the
invalidity or unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
16. Entire Agreement.
This Agreement together with any understanding or modifications thereof
as agreed to in writing by the parties, shall constitute the entire agreement
between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and first herein above written.
GREATER ATLANTIC MORTGAGE
CORPORATION
ATTEST: BY: /s/ Carroll E. Amos
-----------------------
/s/ Martha La Chance Chairman of the Board
- --------------------------
Secretary
WITNESS:
/s/ Carroll E. Amos /s/ T. Mark Stamm
- --------------------------- -----------------------
T. Mark Stamm
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GREATER ATLANTIC MORTGAGE CORPORATION
EXHIBIT A
QUARTERLY
CALCULATION ADJUSTED NET INCOME AND
NET INCOME BONUS
<TABLE>
<CAPTION>
YEAR TO DATE
------------
<S> <C>
Net income before taxes and bonus $
Add:
Depreciation of GAMC automobile (Current transaction only)
------------
Sub-total
Less:
Charge for recourse loan sales (1):
- -----------------------------------
Required Capital to be held for recourse
Loan Sales (Exhibit D) $
Cost of Capital (GAB Average cost of
Funds for the most recent quarter + 2.00%)
------------ ------------
ADJUSTED NET INCOME BEFORE
BONUS AND TAXES $
Bonus Percent 30.00%
------------
Net Income Bonus $
------------
</TABLE>
- ------------------
(1) This calculation will change quarterly. The required capital as
computed in accordance with Exhibit D at the end of a quarter (i.e., 9/30/98)
will be used in the net income bonus calculation for the subsequent quarter
(i.e., 10/1/98 to 12/31/98).
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GREATER ATLANTIC MORTGAGE CORPORATION
EXHIBIT B
ACCOUNTING FOR THE SALE OF LOANS
AND LOAN SERVICING RIGHTS
TO GREATER ATLANTIC BANK
During the ordinary course of business, Greater Atlantic Mortgage Corporation
("GAMC") will sell loans and servicing rights to Greater Atlantic Bank ("GAB").
Generally accepted accounting principles ("GAAP") are used in preparing the
financial statements for GAMC. Since GAMC is a subsidiary of Greater Atlantic
Bank and not an independent mortgage banking company, certain revenues cannot be
recognized by GAMC. In order for GAMC earnings to properly reflect direct income
and expense, the sale of loans and servicing rights to Greater Atlantic Bank
need to be accounted for differently.
Following is the accounting for the sale of loans and servicing rights to
Greater Atlantic Bank:
SALE OF LOAN SERVICING RIGHTS: Any servicing released premium
received by GAMC that is in excess of what GAB can recognize
on its books as a premium for the acquisition of servicing is
to be deferred on the books of GAMC and amortized over the
estimated life of the servicing. Should the premium carried on
the books of the Bank require a write down due to a decrease
in value, such write down in valuation will have no impact of
the financial statements of GAMC.
SALE OF LOANS: Any gain on sale of loans arising from the sale
of loans to Greater Atlantic Bank that is in excess of the
origination cost of that loan will be deferred and amortized
into the income of GAMC over the life of the loan in
accordance with GAAP.
Should the employee be terminated, any net income bonus due for any deferred
fees or servicing release premiums will be paid to the employee on the date of
termination at the net income bonus rate applicable when the loan or servicing
was sold to Greater Atlantic Bank.
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GREATER ATLANTIC MORTGAGE CORPORATION
EXHIBIT C
EXPENSE REIMBURSEMENT DUE
GREATER ATLANTIC BANK
While net income of GAMC reflects all income and expenses directly generated by
GAMC there are certain expenses incurred by Greater Atlantic Bank (the "Bank")
that are reimbursable by GAMC because the combined payment for such expenses
would be less than if paid individually.
Following are those expenses directly related to GAMC that are reimbursable to
the Bank:
o Monthly charge of $2,200 for Bank accounting personnel used in the
review and preparation of GAMC's financial statements or such other
amount as agreed to between the parties.
o Twenty percent (20%) of the annual audit fee and tax return
preparation charges.
o All required insurance policies whether directly identified (such
as hospitalization, life insurance, etc.,) or allocated based on a
reasonable allocation percentage obtained from the carrier (such as
fidelity bonds, errors and omissions, etc.)
o Other cost or expenses that can be directly related to operating
GAMC. The primary guiding principle will be "...did GAMC benefit
from the cost or expense incurred?"
All reimbursements will be based on cost (no profit factor added) and, in the
case of reimbursement for personnel cost, an 18% benefit factor will be applied.
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GREATER ATLANTIC MORTGAGE CORP.
EXHIBIT D
RECOURSE AGREEMENTS
<TABLE>
<CAPTION>
INVESTOR BRIEF DESCRIPTION PRACTICAL AMOUNT TFR
OF RECOURSE APPLICATION LINE
NUMBER
<S> <C> <C> <C> <C>
Chase Manhattan The greater of $700,000 or $1,400,000 or 10%
10% of loans sold in any whichever is greater. $1,400,000 CCR 450
calendar quarter. $0 CCR 480
Countrywide If 1st payment is greater Loans closed in the prior
than 30 days late and loan two months plus any loans
becomes greater than 90 that are 1st payment
days delinquent in the first delinquent, until 90 day $7,798,590 CCR 450
year. delinquency clock runs out. $866,510 CCR 480
First Plus If 1st payment is greater Loans closed in the prior
than 30 days late. two months plus any loans
that are 1st payment
delinquent, until 90 day
delinquency clock runs out. $487,500 CCR 480
Norwest The greater of $700,000 or $1,400,000 of 10%
10% of loans sold in any whichever is greater.
calendar quarter. $1,281,000 CCR 450
$119,000 CCR 480
----------------
$10,967,090 CCR 450
$985,510 CCR 480
$10,552,600 CCR 460
10,967,090 x 20% x 10% = $219,342
985,510 x 50% x 10% = $49,275
Required Capital for
Recourse Loan Sales $268,617
================
</TABLE>
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GREATER ATLANTIC FINANCIAL CORP.
1997 STOCK OPTION AND WARRANT PLAN
NON-STATUTORY STOCK OPTION AGREEMENT
NAME OF RECIPIENT: T. Mark Stamm
NUMBER OF SHARES
SUBJECT TO THIS OPTION: 37,5000 shares
EXERCISE PRICE: $5.58
TERM OF OPTION: This Non-statutory Stock Option expires on October
29, 2008. (The term of this Non-statutory Stock
Option shall not exceed 10 years commencing on the
Date of Grant).
PAYMENT OF EXERCISE PRICE: The Exercise Price may be paid in cash or Greater
Atlantic Financial Corp. common stock ("Common
Stock") having a Fair Market Value on the exercise
date equal to the total Exercise Price or any
combination of cash or Common Stock, including a
cashless exercise with a qualifying broker-dealer.
DATE OF GRANT: October 29, 1998
VESTING SCHEDULE: This Non-statutory Stock Option vests immediately
on the date of grant.
VOTING: The Recipient shall have no rights as a shareholder
with respect to any shares of Common Stock covered
by this Non-statutory Stock Option until the date
of issuance of a stock certificate for the Common
Stock acquired by this Non-statutory Stock Option.
DISTRIBUTION: Shares of Common Stock subject to this
Non-statutory Stock Option will be distributed as
soon as practicable upon exercise. Distributions
pursuant to associated rights will be made under
the terms of the Plan.
DESIGNATION OF
BENEFICIARY: A Beneficiary may be designated in writing to
receive, in the event of death, any Common Stock
the Recipient is entitled to under this
Non-statutory Stock Option Agreement.
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EFFECT OF TERMINATION OF
EMPLOYMENT OR SERVICE
BECAUSE OF:
(A) DEATH OR DISABILITY: All Non-statutory Stock Options become
immediately exercisable and remain
exercisable for a period of one (1) year
following termination of employment or
service.
(B) CAUSE: All rights under Non-statutory Stock
Options shall expire immediately upon the
effective date of Termination for Cause.
(C) RETIREMENT: Non-statutory Stock Options that are
immediately exercisable by the Recipient
at the date of Retirement may be exercised
and such Options shall remain exercisable
for a period of one (1) year following
Retirement; provided, however, that, if
the Recipient is immediately engaged by
Greater Atlantic Financial Corp. or an
Affiliate as a consultant or advisor, any
unexercisable Non-statutory Stock Options
shall become exercisable in accordance
with this Agreement during the period the
Recipient is engaged by Greater Atlantic
Financial Corp. or an Affiliate as a
consultant. Notwithstanding the foregoing
provision, in no event shall any Option
extend beyond its original term.
(E) OTHER REASONS: All Non-statutory Stock Options that are
immediately exercisable by the Recipient
at the date of termination may be
exercised and such Options shall remain
exercisable only for a period of five (5)
years following termination of employment
or service; provided, however, that in no
event shall the period extend beyond the
expiration of any Option.
NON-TRANSFERABILITY: Non-statutory Stock Options shall not be
transferred, assigned, hypothecated, or
disposed of in any manner by the Recipient
other than by will or the laws of
intestate succession. However, the
Recipient may petition the Committee to
permit transfer or assignment of this
Non-statutory Stock Option if such
transfer or assignment is, in the
Committee's sole determination, for valid
estate planning purposes and permitted
under the Internal Revenue Code of 1986,
as amended and the Securities Exchange Act
of 1934, as amended.
TAX WITHHOLDING: This Non-statutory Stock Option Award is
subject to tax withholding to the extent
required by any governmental
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authority. The Recipient is responsible,
for any required withholding applicable to
any Non-statutory Stock Option which has
been transferred pursuant to the terms of
the Plan, unless otherwise inconsistent
with current law.
MODIFICATION AND WAIVER: This Non-statutory Stock Option Agreement
may be amended or modified, prospectively
or retroactively; provided, however, that
no such amendment or modification will
adversely affect the rights of the
Recipient under this agreement without his
or her written consent. This Non-statutory
Stock Option Agreement is subject to the
terms and conditions of the Greater
Atlantic Financial Corp. 1998 Stock Option
and Warrant Plan (the "Plan"). Neither the
Plan nor this Agreement create any right
on the part of any employee to continue in
the employ or service of Greater Atlantic
Financial Corp. or any Affiliates thereof.
All capitalized terms herein shall have
the same meaning as those contained in the
Plan.
The Recipient hereby acknowledges that all decisions, determinations
and interpretations of the Board of Directors, or the Committee thereof, in
response of the Plan and this Non-statutory Stock Option Agreement are final and
conclusive.
IN WITNESS WHEREOF, Greater Atlantic Financial Corp. has caused this
Non-statutory Stock Option Agreement to be executed, and said Recipient has
hereunto set his hand, as of the 29th day of October, 1998.
GREATER ATLANTIC FINANCIAL CORP.
Board of Directors
By:
-----------------------------------
William Calomiris, Chairman
RECIPIENT
---------------------------------------
T. Mark Stamm
16
EXHIBIT 10.3A
GREATER ATLANTIC SAVINGS BANK
DEFERRED COMPENSATION PLAN
(EFFECTIVE OCTOBER 30, 1997)
<PAGE>
GREATER ATLANTIC SAVINGS BANK
DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I
PURPOSE OF PLAN
Page
----
<S> <C>
SECTION 1.1 PURPOSE...........................................................1
-------
ARTICLE II
DEFINITIONS
SECTION 2.1 DEFINITIONS.......................................................1
-----------
ARTICLE III
ELIGIBILITY AND PARTICIPATION
SECTION 3.1 ELIGIBILITY........................................................3
-----------
SECTION 3.2 ELECTION TO PARTICIPATE............................................3
-----------------------
ARTICLE IV
MAINTENANCE OF DEFERRAL ACCOUNTS
SECTION 4.1 DEFERRAL ACCOUNTS..................................................4
-----------------
ARTICLE V
DISTRIBUTION
SECTION 5.1 DISTRIBUTIONS......................................................5
-------------
ARTICLE VI
CLAIMS PROCEDURE
SECTION 6.1 CLAIMS REVIEWER....................................................8
---------------
SECTION 6.2 CLAIMS PROCEDURE...................................................9
----------------
ARTICLE VII
AMENDMENT AND TERMINATION
SECTION 7.1 AMENDMENT OF THE PLAN.............................................10
---------------------
SECTION 7.2 TERMINATION OF THE PLAN...........................................10
-----------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARTICLE VIII
AMENDMENT AND TERMINATION
Page
----
<S> <C> <C>
SECTION 8.1 UNFUNDED, UNSECURED PROMISE TO MAKE PAYMENTS IN THE FUTURE........10
----------------------------------------------------------
SECTION 8.2 PLAN ADMINISTRATOR................................................11
------------------
SECTION 8.3 EXPENSES..........................................................11
--------
SECTION 8.4 STATEMENTS........................................................11
----------
SECTION 8.5 RIGHTS OF PARTICIPANTS AND BENEFICIARIES..........................11
----------------------------------------
SECTION 8.6 INCOMPETENT INDIVIDUALS...........................................12
-----------------------
SECTION 8.7 SALE, MERGER, OR CONSOLIDATION OF THE BANK........................12
------------------------------------------
SECTION 8.8 LOCATION OF PARTICIPANTS..........................................12
------------------------
SECTION 8.9 LIABILITY OF THE BANK.............................................13
---------------------
SECTION 8.10 GOVERNING LAW.....................................................13
-------------
</TABLE>
<PAGE>
ARTICLE I
PURPOSE OF THE PLAN
SECTION 1.1 PURPOSE.
The purpose of the Greater Atlantic Savings Bank Deferred Compensation
Plan is to provide Eligible Individuals with the opportunity to defer the
receipt of Compensation to a specified time in the future.
ARTICLE II
DEFINITIONS
SECTION 2.1 DEFINITIONS.
When used herein, the following words and phrases shall have the
meaning set forth below:
(a) "AFFILIATE" means any "parent corporation" or any "subsidiary
corporation" of the Company, as such terms are defined in Sections
424(e) and 424(f), respectively, of the Internal Revenue Code of
1986, as amended.
(b) "APPLICABLE PERIOD OF SERVICE" means the calendar year.
(c) "BANK" means Greater Atlantic Savings Bank
(d) "BOARD OF DIRECTORS" means the Board of Directors of the Bank
(e) "CHANGE IN CONTROL" means a change in control of the Bank as
determined by the Board of Directors.
(f) "COMMITTEE" means the committee designated by the Board of
Directors to administer the Plan pursuant to Section 8.2 of the
Plan.
(g) "COMPENSATION" means cash remuneration, including bonuses,
otherwise payable to an Employee for services performed for the
Bank or an Affiliate.
(h) "EFFECTIVE DATE" means October 30, 1997.
(i) "ELIGIBLE INDIVIDUAL" means any Employee of the Bank or an
Affiliate who is one of a "select group of management or highly
compensated employees," as such phrase is used for purposes of
Sections 101, 201, and 301 of the Employee Retirement Income
Security Act of 1974, as amended, and who is designated by
1
<PAGE>
the Board of Directors, pursuant to Section 3.1 of the Plan, as
eligible to participate in the Plan.
(j) "EMPLOYEE" means any person employed by the Bank or an Affiliate.
(k) "FAIR MARKET VALUE" means the market price of Preferred Stock,
determined by the Committee as follows:
(1) If the Preferred Stock was traded on the date in question on
The Nasdaq Stock Market, then the Fair Market Value shall be
equal to the last transaction price quoted for such date by
The Nasdaq Stock Market;
(2) If the Preferred Stock was traded on a stock exchange on the
date in question, then the Fair Market Value shall be equal
to the closing price reported by the applicable composite
transactions reported for such date; and
(3) If neither of the foregoing provisions is applicable, then
the Fair Market Value shall be determined by the Committee in
good faith on such basis as it deems appropriate.
(l) "PARTICIPANT" means an Eligible Individual who elects, pursuant to
Section 3.2 of the Plan, to defer the receipt of all or any
portion of his or her Compensation.
(m) "PLAN" means this Greater Atlantic Savings Bank Deferred
Compensation Plan.
(n) "PREFERRED STOCK" means Greater Atlantic Savings Bank 6%
non-cumulative preferred stock which is convertible into Greater
Atlantic Financial Corp. common stock at $8.00 per share in years
four through seven after issuance.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
SECTION 3.1 ELIGIBILITY.
Any Eligible Employee designated by the Board of Directors,
including any member of the Board of Directors who is also an
Employee, shall be eligible to participate in this Plan with
respect to the deferral of his or her Compensation.
SECTION 3.2 ELECTION TO PARTICIPATE.
(a) Prior to the beginning of any Applicable Period of Service, an
Eligible Individual may elect to participate in the Plan by
directing that all or part of his or her Compensation, which such
Eligible Individual would otherwise receive in such
2
<PAGE>
Applicable Period of Service and/or subsequent Applicable Periods
of Service, be credited to a deferral account established in his
or her name on the books of the Bank or an Affiliate, as
applicable.
(b) Notwithstanding the general election timing requirement set forth
in Paragraph (a) of this Section 3.2, upon first becoming eligible
to participate in the Plan, an Eligible Individual may,within
thirty (30) days of first becoming eligible to participate, make
an election to defer all or part of any Compensation yet to be
paid. Employees designated by the Board as eligible to participate
in this Plan as of the Effective Date may make an election prior
to or within thirty (30) days of the Effective Date to defer any
Compensation which such Employees would receive, and had yet to be
paid, during the Applicable Period of Service including the
Effective Date
(c) Any election to participate in the Plan shall be in the form of a
document acceptable to the Committee and executed by the Eligible
Individual and filed with the Committee. An election related to
Compensation otherwise payable currently in any Applicable Period
of Service shall become irrevocable on the last day prior to the
beginning of such Applicable Period of Service.
ARTICLE IV
MAINTENANCE OF DEFERRAL ACCOUNTS
SECTION 4.1 DEFERRAL ACCOUNTS.
The Committee shall credit to a deferral account established for
the Participant deferred amounts related to Compensation,
including applicable interest. Such deferral account shall bear
interest at a rate of 6% per annum so long as any amount credited
to the Participant's deferral account remains undistributed to the
Participant.
ARTICLE V
DISTRIBUTIONS
SECTION 5.1 DISTRIBUTIONS.
(a) At the time an Eligible Individual makes an election to
participate in the Plan pursuant to Section 3.2 of the Plan, he or
she shall also make an election with respect to the distribution
(during his or her lifetime or in the event of his or her death)
of the amounts credited to his or her deferral account.
3
<PAGE>
(b) A Participant may make an election with respect to amounts
credited to his or her deferral account to be distributed to the
Participant during the Participant's lifetime of amounts otherwise
payable currently in any Applicable Period of Service. Such
election shall become irrevocable on the last day prior to the
beginning of such Applicable Period of Service; provided, however,
that a Participant may elect to extend the period of deferral if
the Participant makes such an election no later than 18 full
calendar months prior to the date payments are otherwise to begin
under the Plan.
(c) A Participant may make an election with respect to amounts
credited to his or her deferral account to be distributed in the
event of the Participant's death and such election, including the
designation of a beneficiary or beneficiaries, may be changed by
the individual at any time by filing an appropriate document with
the Committee.
(d) The amounts credited to a Participant's deferral account shall be
payable in Preferred Stock or cash at the election of the Board of
Directors of the Bank on (i) the date the Bank announces a Change
in Control or (ii) the date three (3) years from the date the
Participant elects to defer his or her Compensation. Said amount
shall be distributed to the Participant as soon as practicable
after such date.
(e) The amount of Preferred Stock payable to a Participant under this
Section 5.1 shall be calculated by dividing the Fair Market Value
of the Preferred Stock by the total amount of Compensation
deferred, including interest. This calculation shall be computed
within three (3) business days from (i) the date the Bank
announces a Change in Control or (ii) the date three (3) years
from the date the Participant elects to defer his or her
Compensation
(f) Notwithstanding Paragraph (d) of this Section 5.1, the entire
amount then credited to a Participant's deferral account shall be
paid immediately in a single payment if (i) the Participant is
discharged for "cause" by the Bank or an Affiliate, or (ii) the
Committee determines that the Participant engaged in misconduct in
connection with the Participant's employment with the Bank or an
Affiliate. The determination of whether a Participant is
discharged for "cause" or whether a Participant has engaged in
misconduct in connection with his or her service with the Bank or
an Affiliate shall be made by the Board of Directors of the Bank
or an Affiliate, as appropriate, and such determination shall be
binding on all concerned parties.
(g) The Committee may, at its sole discretion, allow for the early
payment of a Participant's deferred Compensation account in the
event of an "unforeseeable emergency" or in the event of the death
or Disability of the Participant. An "unforeseeable emergency"
means an unanticipated emergency caused by an event
4
<PAGE>
beyond the control of the Participant that would result in severe
financial hardship if the distribution were not permitted. Such
distributions shall be limited to the amount necessary to
sufficiently address the financial hardship. Any distributions
under this provision, shall be consistent with the Code and
regulations.
(h) The obligation to make a distribution of deferred amounts credited
to a Participant's deferral account during any calendar year plus
the additional amounts credited on such deferred amount pursuant
to Section 4.1 of the Plan shall be borne by the Bank or Affiliate
which otherwise would have paid the related Compensation.
(i) Notwithstanding anything herein to the contrary, if, at any time,
a court of competent jurisdiction or the Internal Revenue Service
(if such determinant is not appealed in a court of competent
jurisdiction) determines that an amount in a Participant's
deferral account is includible in the gross income of the
Participant and subject to tax, the Committee may, in its sole
discretion, permit an immediate lump sum distribution of an amount
equal to the amount determined to be includible in the
Participant's gross income.
(j) The Committee may make any provision necessary for withholding
from any payment to a Participant or beneficiary amounts required
for federal, state, and local income or employment tax purposes.
ARTICLE VI
CLAIMS PROCEDURE
SECTION 6.1 CLAIMS REVIEWER.
For purposes of handling claims with respect to this Plan, the "Claims
Reviewer" shall be the Committee, unless another person or organization unit is
designated by the Committee as Claims Reviewer.
SECTION 6.2 CLAIMS PROCEDURE.
(a) An initial claim for benefits under the Plan must be made by the
Participant or his or her beneficiary or beneficiaries in
accordance with the terms of this Section 6.2.
(b) Not later than ninety (90) days after receipt of such a claim, the
Claims Reviewer will render a written decision on the claim to the
claimant, unless special circumstances require the extension of
such 90-day period. If such extension is necessary, the Claims
Reviewer shall provide the Participant or the Participant's
beneficiary or beneficiaries with written notification of such
extension before the expiration of the initial 90-day period. Such
notice shall specify the reason or reasons for such extension and
the date by which a final decision can be expected.
5
<PAGE>
In no event shall such extension exceed a period of 90 days from
the end of the initial 90-day period.
(c) In the event the Claims Reviewer denies the claim of a Participant
or any beneficiary in whole or in part, the Claims Reviewer's
written notification shall specify, in a manner calculated to be
understood by the claimant, the reason for the denial; a reference
to the Plan or other document or form that is the basis for the
denial; a description of any additional material or information
necessary for the claimant to perfect the claim; an explanation as
to why such information or material is necessary; and an
explanation of the applicable claims procedure.
(d) Should the claim be denied in whole or in part and should the
claimant be dissatisfied with the Claims Reviewer's disposition of
the claimant's claim, the claimant may have a full and fair review
of the claim by the Committee upon written request submitted by
the claimant or the claimant's duly authorized representative and
received by the Committee within sixty (60) days after the
claimant receives written notification that the claimant's claim
has been denied. In connection with such review, the claimant or
the claimant's duly authorized representative shall be entitled to
review pertinent documents and submit the claimant's views as to
the issues, in writing. The Committee shall act to deny or accept
the claim within sixty (60) days after receipt of the claimant's
written request for review unless special circumstances require
the extension of such 60- day period. If such extension is
necessary, the Committee shall provide the claimant with written
notification of such extension before the expiration of such
initial 60-day period. In all events, the Committee shall act to
deny or accept the claim within 120 days of the receipt of the
claimant's written request for review. The action of the Committee
shall be in the form of a written notice to the claimant and its
contents shall include all of the requirements for action on the
original claim.
(e) In no event may a claimant commence legal action for benefits the
claimant believes are due the claimant until the claimant has
exhausted all of the remedies and procedures afforded the claimant
by this Article VI.
ARTICLE VII
AMENDMENT AND TERMINATION
SECTION 7.1 AMENDMENT OF THE PLAN.
The Bank may at any time amend the Plan, but such amendment shall not
adversely affect the rights of any Participant or beneficiary, without his or
her consent, to any benefit under the Plan to which such Participant or
beneficiary has become entitled prior to the effective date of such amendment.
The Committee shall be authorized to make minor or administrative changes to the
Plan, as well as amendments required by applicable federal or state law (or
authorized or
6
<PAGE>
made desirable by such statutes); provided, however, that such amendments must
subsequently be ratified by the Board of Directors.
SECTION 7.2 TERMINATION OF THE PLAN.
The Bank may at any time terminate the Plan, but such termination shall
not adversely affect the rights of any Participant or beneficiary, without his
or her consent, to any benefit under the Plan to which such Participant or
beneficiary has become entitled prior to the effective date of such termination.
Upon termination of the Plan, distribution of amounts credited to the deferral
accounts of Participants shall be made to Participants and their beneficiaries
in accordance with Article V of the Plan.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
SECTION 8.1 UNFUNDED, UNSECURED PROMISE TO MAKE PAYMENTS IN THE FUTURE.
The right of a Participant or any beneficiary to receive a distribution
hereunder shall be an unsecured claim against the general assets of the Bank or
an Affiliate, and neither a Participant nor his or her designated beneficiary or
beneficiaries shall have any rights in or against any amount credited to any
account under this Plan or any other assets of the Bank or an Affiliate. The
Plan at all times shall be considered entirely unfunded both for tax purposes
and for purposes of Title I of the Employee Retirement Income Security Act of
1974, as amended. Any funds invested hereunder shall continue for all purposes
to be part of the general assets of the Bank or an Affiliate and available to
its general creditors in the event of bankruptcy or insolvency. Accounts under
this Plan and any benefits which may be payable pursuant to this Plan are not
subject in any manner to anticipation, sale, alienation, transfer, assignment,
pledge, encumbrance, attachment, or garnishment by creditors of a Participant or
a Participant's beneficiary. The Plan constitute a mere promise by the Bank or
Affiliate to make benefit payments in the future. No interest or right to
receive a benefit may be taken, either voluntarily or involuntarily, for the
satisfaction of the debts of, or other obligations or claims against, such
Participant or beneficiary, including claims for alimony, support, separate
maintenance and claims in bankruptcy proceedings.
SECTION 8.2 PLAN ADMINISTRATOR.
(a) The Plan shall be administered by the Committee designated by the
Board of Directors.
(b) The Committee shall have the authority, duty and power to
interpret and construe the provisions of the Plan as it deems
appropriate. The Committee shall have the duty and responsibility
of maintaining records, making the requisite calculations and
disbursing the payments hereunder. In addition, the Committee
shall have the authority and power to delegate any of its
administrative duties to employees of
7
<PAGE>
the Bank or Affiliate, as the Committee may deem appropriate. The
Committee shall be entitled to rely on all tables, valuations,
certificates, opinions, data and reports furnished by any actuary,
accountant, controller, counsel or other person employed or
retained by the Bank with respect to the Plan. The
interpretations, determination, regulations and calculations of
the Committee shall be final and binding on all persons and
parties concerned.
SECTION 8.3 EXPENSES.
Expenses of administration of the Plan shall be paid by the Bank or an
Affiliate.
SECTION 8.4 STATEMENTS.
The Committee shall furnish individual annual statements of accrued
benefits to each Participant, or current beneficiary, in such form as determined
by the Committee or as required by law.
SECTION 8.5 RIGHTS OF PARTICIPANTS AND BENEFICIARIES.
(a) The sole rights of a Participant or beneficiary under this Plan
shall be to have this Plan administered according to its
provisions, to receive whatever benefits he or she may be entitled
to hereunder.
(b) Nothing in the Plan shall be interpreted as a guaranty that any
funds in any trust which may be established in connection with the
Plan or assets of the Bank or an Affiliate will be sufficient to
pay any benefit hereunder.
(c) The adoption and maintenance of this Plan shall not be construed
as creating any contract of employment or service between the Bank
or an Affiliate and any Participant or other individual. The Plan
shall not affect the right of the Bank or an Affiliate to deal
with any Participants in employment or service respects, including
their hiring, discharge, compensation, and conditions of
employment or other service.
SECTION 8.6 INCOMPETENT INDIVIDUALS.
The Committee may from time to time establish rules and procedures
which it determines to be necessary for the proper administration of the Plan
and the benefits payable to a Participant or beneficiary in the event that such
Participant or beneficiary is declared incompetent and a conservator or other
person legally charged with that Participant's or beneficiary's care is
appointed. Except as otherwise provided herein, when the Committee determines
that such Participant or beneficiary is unable to manage his or her financial
affairs, the Committee may pay such Participant's or beneficiary's benefits to
such conservator, person legally charged with such Participant's or
beneficiary's care, or institution then contributing toward or providing for the
care and maintenance of such Participant or beneficiary. Any such payment shall
constitute, to
8
<PAGE>
the extent of such payment, a complete discharge of any liability of the Bank or
an Affiliate and the Plan to such Participant or beneficiary.
SECTION 8.7 SALE, MERGER, OR CONSOLIDATION OF THE BANK.
Upon a merger, consolidation or other Change in Control any amounts
credited to Participant's deferral account shall be paid in a single payment.
Any legal fees incurred by a Participant in determining benefits to which such
Participant is entitled under the Plan following a sale, merger, or
consolidation of the Bank or an Affiliate of which the Participant is an
Employee shall be paid by the resulting or succeeding entity.
SECTION 8.8 LOCATION OF PARTICIPANTS.
Each Participant shall keep the Bank informed of his or her current
address and the current address of his or her designated beneficiary or
beneficiaries. The Bank shall not be obligated to search for any person. If such
person is not located within three (3) years after the date on which payment of
the Participant's benefits payable under this Plan may first be made, payment
may be made as though the Participant or his or her beneficiary had died at the
end of such three-year period.
SECTION 8.9 LIABILITY OF THE BANK.
Notwithstanding any provision herein to the contrary, neither the Bank
nor any individual acting as an employee or agent of the Bank shall be liable to
any Participant, former Participant, beneficiary, or any other person for any
claim, loss, liability or expense incurred in connection with the Plan, unless
attributable to fraud or willful misconduct on the part of the Bank or any such
employee or agent of the Bank.
SECTION 8.10 GOVERNING LAW.
All questions pertaining to the construction, validity and effect of
the Plan shall be determined in accordance with the laws of the United States
and to the extent not preempted by such laws, by the laws of the Commonwealth of
Virginia.
Approved and Adopted this _______ day of __________________, 1997.
- -----------------------------------
Chairman of the Board of Directors
9
EXHIBIT 10.3B
GREATER ATLANTIC SAVINGS BANK
DEFERRED COMPENSATION PLAN
ELECTION AGREEMENT
I,__________________ , hereby elect to have
(Participant's Name)
_____ a portion of my compensation which is payable for the year
ending December 31, 1998 ,
deferred under the terms of this agreement and pursuant to the Greater Atlantic
Savings Bank Deferred Compensation Plan (the "Plan").
PARTICIPANT COMPENSATION ELECTION
- ---------------------------------
I elect to reduce my compensation for 1998 by (select one of the
following):
________% (but not to exceed $______);
________ the lesser of 100% of my bonus compensation or $500,000.
________% of proration, if any, of such compensation that exceeds
$__________.
BENEFICIARY ELECTION
--------------------
I understand that in the event of my death any amount to which I am
entitled under this the Plan will be paid to the beneficiary designated by me
or, if none, to my surviving spouse or, if none, to my estate. I further
understand that the last beneficiary designation filed by during my lifetime
revokes all prior beneficiary designations previously filed by me for purposes
of the Plan. I hereby state (choose one):
___ that I do not wish to name a Beneficiary; or
<PAGE>
that _________________________________ (insert name) residing at
________________________________________________________________
whose Social Security number is ___-__-____, is designated as my
primary beneficiary.
_____________________________________ (insert name) residing at
________________________________________________________________
whose Social Security number is __-__-____, is designated as my
secondary beneficiary.
If my secondary beneficiary(ies) are not living at the time of this
distribution, then my contingent beneficiary shall be _________________
residing at____________________________________________________________
whose Social Security number is ___-__-____.
--------------------------- ---------------------------
Date Signature of Participant
----------------------------
Social Security Number
----------------------------
Witness
EXHIBIT 10.4A
Greater Atlantic Financial Corp.
1997 Stock Option and Warrant Plan
1. PURPOSE
The purpose of the Greater Atlantic Financial Corp. 1997 Stock Option
and Warrant Plan (the "Plan") is to serve the best interests of Greater Atlantic
Financial Corp. (the "Company") by rewarding those that have helped to make the
Company a success.
2. DEFINITIONS
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Committee" shall mean the Committee appointed by the Board in
accordance with Section 3 hereof.
(d) "Common Stock" shall mean the Common Stock, par value $.01 of the
Company.
(e) "Company" shall mean the Greater Atlantic Financial Corp. a
Delaware corporation.
(f) "Date of Grant" shall mean the date on which the Options or
Warrants are granted under this Plan.
(g) "Exercise Price" shall mean the price per Share of Common Stock,
which shall be an amount not less than 100% of the Fair Market
Value per share of the Shares on the Date of Grant.
(h) "Fair Market Value" of a Share as of a specified date shall mean
the closing price of a Share on the principal securities exchange
or market on which such Shares are traded on the day immediately
preceding the date as of which Fair Market Value is being
determined, or on the next preceding date on which such Shares are
traded if no Shares were traded on such immediately preceding day,
or if the Shares are not traded on a securities exchange or market
which provides closing sale price information, Fair Market Value
shall be deemed to be the average of the high bid and low asked
prices of the Shares in the over-the-counter market on the day
immediately preceding the date as of which the Fair Market Value
is being determined or on the next preceding date on which such
high bid and low asked
1
<PAGE>
prices were recorded. If the Shares are not publicly traded, Fair
Market Value shall be determined by the Board. In no case shall
Fair Market Value be less than theT par value of a Share.
(i) "Grantee" shall mean a person whom a Option or Warrant has been
granted.
(j) "Option" shall mean a stock purchase option granted pursuant to
the Plan.
(k) "Option Purchaser Price" shall mean the Exercise Price times the
number of whole Shares with respect to which an Option is
exercised.
(l) "Participant" shall mean any employee or investor who holds an
outstanding Option or Warrant under the terms of the Plan.
(m) "Plan" shall mean this Greater Atlantic Financial Corp. 1998 Stock
Option and Warrant Plan.
(n) "Securities Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
(o) "Share" shall mean one share of Common Stock.
(p) "Warrant" shall mean a stock purchase warrant granted pursuant to
the Plan.
3. ADMINISTRATION
The Plan shall be administered by a Committee appointed by the Board
consisting of not less than two members. The Committee is authorized, subject to
the provisions of the Plan, to establish such rules and regulations as it deems
necessary for the proper administration of the Plan and to make whatever
determinations and interpretations in connections with the Plan it deems
necessary or advisable. All determinations and interpretations made by the
Committee shall be binding and conclusive on all Participants and on their legal
representatives and beneficiaries. The grant of Options and Warrants are made
herein by the terms of this plan.
4. ELIGIBILITY
(a) Warrants. Each investor in the Company so designated by the Board
shall be eligible to receive Warrants hereunder.
(b) Options. Each employee of the Company so designated by the Board
shall be eligible to receive Options hereunder.
2
<PAGE>
5. SHARES SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 11, the maximum number of
Shares reserved hereby for purchase pursuant to the exercise of:
(a) Options granted under the Plan is 115,000; and
(b) Warrants granted under the Plan is 142,000.
The Shares subject to Options or Warrants which may be awarded
hereunder may be either authorized but unissued Shares or authorized Shares
previously issued and reacquired by the Company. To the extent the Options and
Warrants are granted under the Plan, the Shares underlying such Option or
Warrant will be unavailable for any other use including future grants under the
Plan except that, new Options and/or Warrants may be granted, to the extent that
either the Options or Warrants terminate, expire, are forfeited or are canceled
without having been exercised.
6. AGREEMENTS WITH GRANTEES
(a) Options. Each Option will be evidenced by a written agreement
("Option Agreement"), executed by the Participant and the Company
that describes the terms and conditions for receiving the Option
including the date of the Option, the Exercise Price if any, the
term or other applicable periods, and other terms and conditions
as may be required or imposed by the Plan, the Board, tax law
considerations or applicable securities law.
(b) Warrants. Each Warrant will be evidenced by a written agreement
("Warrant Agreement"), executed by the Participant and the Company
that describes the terms and conditions for receiving the Warrant
including the date of the Warrant, the Exercise Price if any, the
term or other applicable periods, and other terms and conditions
as may be required or imposed by the Plan, the Board, tax law
considerations or applicable securities law.
7. OPTION EXERCISE ALTERNATIVES
The Committee has sole discretion to determine the form of payment it
will accept for the exercise of an Option or a Warrant. The Committee may
indicate acceptable forms in the Option or Warrant Agreement covering such
Options and Warrants, respectively, or it may reserve its decision until the
time of exercise. No Option or Warrant shall be considered exercised until
payment in full is accepted by the Committee or its agent.
(a) Cash Payment. The Exercise Price may be paid in cash or by
certified check.
3
<PAGE>
(b) Exchange of Common Stock.
(i) The Committee may, in its sole discretion, permit payment by
the tendering of previously acquired shares of Common Stock.
(ii) Any shares of Common Stock tendered in payment of the
Exercise Price of an Option or a Warrant shall be valued at
the Fair Market Value of the Common Stock on the date prior
to the date of exercise.
(c) Cashless Exercise. To the extent permitted under the applicable
laws and regulations, at the request of the Participant and with
the consent of the Committee, the Company agrees to cooperate in a
"cashless exercise" of the Option or Warrant. The cashless
exercise shall be effected by the Participant delivering to the
Committee or its agent instructions to exercise all or part of the
Option or Warrant, including instructions to sell a sufficient
number of shares of Common Stock to cover the costs and expenses
associated therewith.
8. MERGER, CONSOLIDATION, REORGANIZATION, LIQUIDATION, ETC.
If the Company shall become a party to any corporate merger,
consolidation, major acquisition of property for stock, reorganization, or
liquidation, the Board shall have power to make arrangements, which shall be
binding upon the holders of unexpired Options or Warrants, for the substitution
of new Options or Warrants for any unexpired Options or Warrants then
outstanding under the Plan.
9. RIGHTS OF A SHAREHOLDER: NONTRANSFERABILITY
No Participant shall have any rights as a shareholder with respect to
any shares of Common Stock covered by an Option or a Warrant until the date of
issuance of a stock certificate for such Common Stock. Nothing in this Plan or
in any Option or Warrant granted confers on any person any right to continue in
the employ or service of the Company or interferes in any way with the right of
the Company to terminate a Participant's services at any time.
10. DESIGNATION OF BENEFICIARY
A Participant may, with the consent of the Committee, designate a
person or persons to receive, in the event of death, any Option or Warrant to
which the Participant would then be entitled. Such designation shall be made
upon forms supplied by and delivered to the Committee and may be revoked in
writing. If a Participant fails effectively to designate a beneficiary, then the
Participant's estate will be deemed to be the beneficiary.
4
<PAGE>
11. ADJUSTMENTS
Should the Company effect one or more (a) stock dividends, stock
split-ups, subdivisions or consolidations of shares or other similar changes in
capitalization; (b) spin-offs, spin-outs, split-ups, split-offs, or other such
distribution of assets to shareholders; or (c) direct or indirect assumptions
and/or conversions of outstanding Options or Warrants due to an acquisition of
the Company, then the maximum number of shares as to which grants of Options and
Warrants that may be issued under this Plan shall be proportionately adjusted
and the terms of the such grants shall be adjusted as the Committee shall
determine to be equitably required, provided that the number of shares subject
to any grant of Options or Warrants shall always be a whole number. Any
determination made under this Section 11 by the Committee shall be final and
conclusive.
However, notwithstanding Section 13, no such adjustments may materially
change the value of benefits available to a Participant under a previously
granted Option or Warrant. All Options and Warrants granted under the Plan shall
be binding upon any successors or assigns of the Company.
12. TAX WITHHOLDING
Options and Warrants under this Plan shall be subject to tax
withholding to the extent required by any governmental authority. If the Plan
meets the requirements under 17 C.F.R. ss.240.16b-3 under the Exchange Act
("Rule 16b-3"), then any withholding shall comply with Rule 16b-3 or any
amendment or successive rule.
13. AMENDMENT OF THE PLAN
The Board may at any time, and from time to time, modify or amend the
Plan in any respect, prospectively or retroactively.
No such termination, modification or amendment may affect the rights of
a Participant under an outstanding Option or Warrant without the written
permission of such Participant.
14. TERMINATION OF THE PLAN
The right to grant Options or Warrants under the Plan will terminate
upon the earlier of (i) ten (10) years after the Date of Grant or (ii) the
exercise of Options and Warrants equivalent to the maximum number of shares
reserved under the Plan as set forth in Section 5. The Board has the right to
suspend or terminate the Plan at any time, provided that no such action will,
without the consent of a Participant, adversely affect his vested rights under a
previously granted Option or Warrant.
5
<PAGE>
15. APPLICABLE LAW
The Plan will be administered in accordance with the laws of the state
of Delaware.
16. DELEGATION OF AUTHORITY
The Committee may delegate all authority for: the determination of
forms of payment to be made by or received by the Plan; the execution of Option
and/or Warrant Agreements; the determination of Fair Market Value; the
determination of all other aspects of administration of the plan to the
executive officer(s) of the Company. The Committee may rely on the descriptions,
representations, reports and estimates provided to it by the management of
Company for determinations to be made pursuant to the Plan.
17. GRANTING OF OPTIONS AND WARRANTS
Nothing contained in the Plan or in any resolution adopted or to be
adopted by the Board or the shareholders of the Company nor any action taken by
the Committee shall constitute the granting of any Option or Warrant. The
granting of an Option or Warrant shall take place only upon the execution of an
Option Agreement or Warrant Agreement pursuant to Section 6.
IN WITNESS WHEREOF, Greater Atlantic Financial Corp. has established
this Plan, to be executed by a designee of the Board of Directors its duly
corporate seal to be affixed and duly attested, effective as of the 15th day of
October, 1997.
[CORPORATE SEAL] GREATER ATLANTIC FINANCIAL CORP.
ADOPTED BY THE BOARD OF DIRECTORS:
By: /s/ William Calomiris
-----------------------------------
William Calomiris
Chairman of the Board of Directors
For the Board of Directors
6
EXHIBIT 10.4B
GREATER ATLANTIC FINANCIAL CORP.
1997 STOCK OPTION AND WARRANT PLAN
NON-STATUTORY STOCK OPTION AGREEMENT
NAME OF RECIPIENT: [EXECUTIVE]
NUMBER OF SHARES
SUBJECT TO THIS OPTION: 25,000 shares
EXERCISE PRICE: $5.00
TERM OF OPTION: This Non-statutory Stock Option expires on November
14, 2007. (The term of this Non-statutory Stock
Option shall not exceed 10 years commencing on the
Date of Grant).
PAYMENT OF EXERCISE PRICE: The Exercise Price may be paid in cash or Greater
Atlantic Financial Corp. common stock ("Common
Stock") having a Fair Market Value on the exercise
date equal to the total Exercise Price or any
combination of cash or Common Stock, including a
cashless exercise with a qualifying broker-dealer.
DATE OF GRANT: November 14, 1997
VESTING SCHEDULE: This Non-statutory Stock Option vests immediately on
the date of grant.
VOTING: The Recipient shall have no rights as a shareholder
with respect to any shares of Common Stock covered by
this Non-statutory Stock Option until the date of
issuance of a stock certificate for the Common Stock
acquired by this Non-statutory Stock Option.
DISTRIBUTION: Shares of Common Stock subject to this Non-statutory
Stock Option will be distributed as soon as
practicable upon exercise. Distributions pursuant to
associated rights will be made under the terms of the
Plan.
DESIGNATION OF
BENEFICIARY: A Beneficiary may be designated in writing to
receive, in the event of death, any Common Stock the
Recipient is entitled to under this Non-statutory
Stock Option Agreement.
<PAGE>
EFFECT OF TERMINATION OF
EMPLOYMENT OR SERVICE
BECAUSE OF:
(A) DEATH OR DISABILITY: All Non-statutory Stock Options become
immediately exercisable and remain exercisable
for a period of one (1) year following
termination of employment or service.
(B) CAUSE: All rights to Non-statutory Stock Options shall
expire immediately upon the effective date of
Termination for Cause.
(C) RETIREMENT: Only those Non-statutory Stock Options that are
immediately exercisable by the Recipient at the
date of Retirement may be exercised and such
Options shall remain exercisable for a period of
one (1) year following Retirement; provided,
however, that, if the Recipient is immediately
engaged by Greater Atlantic Financial Corp. or an
Affiliate as a consultant or advisor, any
unexercisable Non-statutory Stock Options shall
become exercisable in accordance with this
Agreement during the period the Recipient is
engaged by Greater Atlantic Financial Corp. or an
Affiliate as a consultant. Notwithstanding the
foregoing provision, in no event shall any Option
extend beyond its original term.
(E) OTHER REASONS: Unless otherwise determined by the Committee,
only those Non-statutory Stock Options that are
immediately exercisable by the Recipient at the
date of termination may be exercised and such
Options shall remain exercisable only for a
period of three (3) months following termination
of employment or service; provided, however, that
in no event shall the period extend beyond the
expiration of any Option.
NON-TRANSFERABILITY: Non-statutory Stock Options shall not be
transferred, assigned, hypothecated, or disposed
of in any manner by the Recipient other than by
will or the laws of intestate succession.
However, the Recipient may petition the Committee
to permit transfer or assignment of this
Non-statutory Stock Option if such transfer or
assignment is, in the Committee's sole
determination, for valid estate planning purposes
and permitted under the Internal Revenue Code of
1986, as amended and the Securities Exchange Act
of 1934, as amended.
2
<PAGE>
TAX WITHHOLDING: This Non-statutory Stock Option Award is subject
to tax withholding to the extent required by any
governmental authority. The Recipient is
responsible, for any required withholding
applicable to any Non-statutory Stock Option
which has been transferred pursuant to the terms
of the Plan, unless otherwise inconsistent with
current law.
MODIFICATION AND WAIVER: This Non-statutory Stock Option Agreement may be
amended or modified, prospectively or
retroactively; provided, however, that no such
amendment or modification will adversely affect
the rights of the Recipient under this agreement
without his or her written consent. This
Non-statutory Stock Option Agreement is subject
to the terms and conditions of the Greater
Atlantic Financial Corp. 1998 Stock Option and
Warrant Plan (the "Plan"). Neither the Plan nor
this Agreement create any right on the part of
any employee to continue in the employ or service
of Greater Atlantic Financial Corp. or any
Affiliates thereof. All capitalized terms herein
shall have the same meaning as those contained in
the Plan.
The Recipient hereby acknowledges that all decisions, determinations
and interpretations of the Board of Directors, or the Committee thereof, in
response of the Plan and this Non-statutory Stock Option Agreement are final and
conclusive.
IN WITNESS WHEREOF, Greater Atlantic Financial Corp. has caused this
Non-statutory Stock Option Agreement to be executed, and said Recipient has
hereunto set his hand, as of the ____ day of ___________, 1998.
GREATER ATLANTIC FINANCIAL CORP.
Board of Directors
By:
------------------------------------
RECIPIENT
---------------------------------------
[EXECUTIVE]
3
EXHIBIT 10.4C
GREATER ATLANTIC FINANCIAL CORP.
1997 STOCK OPTION AND WARRANT PLAN
WARRANT AGREEMENT
NAME OF RECIPIENT: [EXECUTIVE]
NUMBER OF SHARES
SUBJECT TO THIS WARRANT: 55,000 shares
EXERCISE PRICE: $5.00
TERM OF WARRANT: This Warrant expires on November 14, 2007.
(The term of this Warrant shall not exceed 10 years
commencing on the Date of Grant).
PAYMENT OF EXERCISE PRICE: The Exercise Price may be paid in cash or in any
combination of cash or Common Stock of Greater
Atlantic Financial Corp. having a Fair Market Value
on the exercise date equal to the total Exercise
Price. Payment may also be effected by a cashless
exercise with a qualifying broker-dealer.
DATE OF GRANT: November 14, 1997
VOTING: The Recipient shall have no rights as a shareholder
with respect to any shares of Common Stock covered by
this Warrant until the date of issuance of a stock
certificate for the Common Stock acquired by exercise
of this Warrant.
DISTRIBUTION: Shares of Common Stock obtained by the exercise of
this Warrant will be distributed as soon as
practicable following exercise.
DESIGNATION
OF BENEFICIARY: The Recipient may designate in writing the
beneficiary who is to receive, in the event of death,
any Common Stock the Recipient would be entitled to
receive upon the exercise of this Warrant.
<PAGE>
NON-TRANSFERABILITY: Warrants shall not be transferred, assigned,
hypothecated, or disposed of in any manner by the
Recipient other than by will or the laws of intestate
succession. The Recipient may, however, petition the
Committee to permit transfer or assignment of this
Warrant if such transfer or assignment is, in the
Committee's sole determination, for valid estate
planning purposes and permitted under the Internal
Revenue Code of 1986, as amended and the Securities
Exchange Act of 1934, as amended.
MODIFICATION AND WAIVER: This Warrant may be amended or modified,
prospectively or retroactively; provided, however,
that no such amendment or modification will adversely
affect the rights of the Recipient under this
agreement without his or her written consent.
This Warrant Agreement is subject to the terms and conditions of the
Greater Atlantic Financial Corp. Stock Option and Warrant Plan (the "Plan"). All
capitalized terms herein shall have the same meaning as those contained in the
Plan.
The Recipient hereby acknowledges that all decisions, determinations
and interpretations of the Board of Directors, or the Committee thereof, in
response of the Plan and this Warrant Agreement are final and conclusive.
IN WITNESS WHEREOF, Greater Atlantic Financial Corp. has caused this
Warrant Agreement to be executed, and the Recipient has hereunto set his hand,
as of the ____ day of ___________, 1998.
GREATER ATLANTIC FINANCIAL CORP.
Board of Directors
By:
-----------------------------------
RECIPIENT
---------------------------------------
[EXECUTIVE]
2
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
--------------------------------------------
1998 1997
------------------- ---------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net Income $ 609 $ (634)
Weighted average common shares
outstanding 787,115 330,000
Common stock equivalents due to dilutive
effect of stock options -- --
Total weighted average common shares and
common share equivalents outstanding 787,115 330,000
Basic earnings per common share and
common share equivalents $0.77 $(1.92)
Diluted earnings per common share 0.77 (1.92)
</TABLE>
EXHIBIT 21.0
SUBSIDIARIES OF GREATER ATLANTIC FINANCIAL CORP.
NAME STATE OF INCORPORATION
Greater Atlantic Bank United States
Greater Atlantic Mortgage Corporation Maryland
EXHIBIT 23.1
CONSENT
We hereby consent to the references to this firm and our opinions in
the Registration Statement on Form SB-2 filed by Greater Atlantic Financial
Corp, Inc. (the "Company"), and all amendments thereto, relating to the offering
of the Company's common stock.
MULDOON, MURPHY & FAUCETTE LLP
/s/ Muldoon, Murphy & Faucette LLP
Dated this 12th day of
April, 1999
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Greater Atlantic Financial Corp.
Washington, D.C.
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated December 10, 1998, except for Note
21, the date of which is April 12, 1999, relating to the consolidated financial
statements of Greater Atlantic Financial Corp., which is contained in that
Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
Washington, D.C.
April 8, 1999
EXHIBIT 24.1
CONFORMED
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Carroll E. Amos, as true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for them and in their name, place and stead, in any and all capacities to sign
any or all amendments to the Form SB-2 Registration Statement by Greater
Atlantic Financial Corp. and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Office of Thrift Supervision
of the Department of the Treasury (the "OTS") or the U.S. Securities and
Exchange Commission, respectively, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as they
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or their substitute or substitutes may lawfully do
or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
NAME DATE
---- ----
<S> <C>
/s/ Carroll E. Amos April 7, 1999
- ----------------------------------
Carroll E. Amos
President, Chief Executive Officer
and Director
(principal executive officer)
Greater Atlantic Financial Corp.
/s/ David E. Ritter April 7, 1999
- ----------------------------------
David E. Ritter
Chief Financial Officer
(principal accounting and financial officer)
Greater Atlantic Financial Corp.
/s/ William Calomiris April 7, 1999
- ----------------------------------
William Calomiris
Chairman of the Board of Directors
Greater Atlantic Financial Corp.
/s/ Paul J. Cinquegrana April 7, 1999
- ----------------------------------
Paul J. Cinquegrana
Director
Greater Atlantic Financial Corp.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
/s/ Jeffrey M. Gitelman April 7, 1999
- ----------------------------------
Jeffrey M. Gitelman
Director
Greater Atlantic Financial Corp.
/s/ Bruce D. Ochsman April 7, 1999
- ----------------------------------
Bruce D. Ochsman
Director
Greater Atlantic Financial Corp.
/s/ Lynnette Dobbins Taylor April 7, 1999
- ----------------------------------
Lynnette Dobbins Taylor
Director
Greater Atlantic Financial Corp.
/s/ James B. Vito April 7, 1999
- ----------------------------------
James B. Vito
Director
Greater Atlantic Financial Corp.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
</LEGEND>
<CIK> 0001082735
<NAME> Greater Atlantic Financial Corp.
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 433
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 241
<INVESTMENTS-HELD-FOR-SALE> 51,171
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<INVESTMENTS-MARKET> 0
<LOANS> 51,410
<ALLOWANCE> 578
<TOTAL-ASSETS> 107,342
<DEPOSITS> 76,311
<SHORT-TERM> 22,000
<LIABILITIES-OTHER> 2,214
<LONG-TERM> 0
0
0
<COMMON> 8
<OTHER-SE> 6,809
<TOTAL-LIABILITIES-AND-EQUITY> 107,342
<INTEREST-LOAN> 2,631
<INTEREST-INVEST> 1,380
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 4,011
<INTEREST-DEPOSIT> 2,163
<INTEREST-EXPENSE> 2,563
<INTEREST-INCOME-NET> 1,448
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<EXPENSE-OTHER> 6,637
<INCOME-PRETAX> 920
<INCOME-PRE-EXTRAORDINARY> 920
<EXTRAORDINARY> 0
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<NET-INCOME> 609
<EPS-PRIMARY> .77
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<YIELD-ACTUAL> 7.43
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<LOANS-PAST> 0
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<ALLOWANCE-CLOSE> 578
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<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 112
</TABLE>
