Filed Pursuant to Rule 424(b)(1)
Registration No. 333-76169
PROSPECTUS
2,000,000 SHARES
[LOGO OMITTED]
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 been approved
to have our common stock included for quotation on the Nasdaq National Market
under the symbol "GAFC."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 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 THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(1)
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Per Share ......... $9.50 $0.665 $8.835
Total ............. $19,000,000 $1,130,000 $17,870,000
</TABLE>
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(1) The underwriting discount for shares sold to the public is $0.665 per share
and the proceeds to the company are $8.835 per share. The underwriting
discount for shares sold to certain original stockholders and members of
the board of directors of Greater Atlantic Financial Corp. is $0.285 per
share and the proceeds to the company are $9.215 per share. See
"Underwriting."
The shares are offered pursuant to a firm commitment underwriting agreement
between Greater Atlantic Financial Corp. and the underwriter. 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. We
expect that the common stock will be ready for delivery on or about June 30,
1999, subject to customary closing conditions.
LEGG MASON WOOD WALKER
INCORPORATED
The date of this prospectus is June 24, 1999
<PAGE>
[LOGO OMITTED]
GREATER ATLANTIC
FINANCIAL CORP.
[MAP OMITTED]
UNTIL JULY 19, 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.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary ................................................................... 3
Risk Factors ......................................................................... 6
Use of Proceeds ...................................................................... 9
Market for the Common Stock .......................................................... 9
Dividend Policy ...................................................................... 9
Dilution ............................................................................. 10
Capitalization ....................................................................... 10
Our Business ......................................................................... 11
Selected Consolidated Financial Data ................................................. 14
Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Management of the Company ............................................................ 52
Management of the Bank ............................................................... 53
Regulation ........................................................................... 61
Federal and State Taxation ........................................................... 69
Description of Capital Stock ......................................................... 70
Shares Eligible for Future Sale ...................................................... 73
Underwriting ......................................................................... 74
Legal Opinions ....................................................................... 75
Experts .............................................................................. 75
Where You Can Find More Information .................................................. 75
Index to Consolidated Financial Statements ........................................... F-1
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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 no exercise by the
underwriter of its over-allotment option to purchase up to 300,000 additional
shares of common stock. 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.
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.
In October 1997, an investment group led by William Calomiris and Carroll
E. Amos 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.
After assuming control of the bank in October 1997, we:
o 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.
o Opened two branch offices in Arlington, Virginia and Washington, D.C.
o Increased total assets from $31.6 million at September 30, 1997 to $125.9
million at March 31, 1999.
o Transferred the mortgage operations of the bank to a wholly-owned
subsidiary of the bank in July 1998.
o Returned the bank to profitability 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.
o Recognized $422,000 in net income and achieved a return on average equity
of 12.20% for the six months ended March 31, 1999.
Following the offering, we will implement the following growth strategies
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-based 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.
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THE OFFERING
Common stock offered...... 2,000,000 shares
Common stock outstanding
after the offering...... 2,822,434 shares. There are also 153,019 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.
Net proceeds to the
company.............. $17,245,000, at the initial public offering price of
$9.5 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 branch expansion and 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 526,316 shares of common
stock in the offering. Consequently, such persons
would own in the aggregate approximately 46.43% of
our common stock (49.18% assuming exercise of
outstanding options and warrants).
Nasdaq National Market
symbol................. GAFC
4
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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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<CAPTION>
AT OR FOR THE AT OR FOR THE
SIX MONTHS ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
-------------------------- ---------------------------
1999 1998 1998 1997
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net interest income .......................................... $ 998 $ 672 $ 1,448 $ 1,103
Noninterest income ........................................... 4,692 2,871 6,268 3,528
Noninterest expense .......................................... 4,987 2,894 6,637 4,778
Net income (loss) ............................................ 422 342 609 (634)
PER SHARE DATA:
Net income (loss):
Basic ....................................................... $ 0.52 $ 0.44 $ 0.77 $ (1.92)
Diluted ..................................................... 0.52 0.44 0.77 (1.92)
Book value ................................................... 8.50 7.96 8.38 4.74
FINANCIAL CONDITION DATA:
Total assets ................................................. $125,896 $71,424 $107,342 $ 31,554
Total loans receivable, net .................................. 31,365 19,028 25,510 18,854
Mortgage-loans held for sale ................................. 1,367 30,670 25,322 9,946
Investment securities ........................................ 45,118 8,950 32,454 1,005
Mortgage-backed securities(1) ................................ 32,020 8,266 18,959 --
Total deposits ............................................... 112,091 60,542 76,311 28,377
Total stockholders' equity ................................... 6,993 6,208 6,817 1,564
SELECTED FINANCIAL RATIOS(2):
Return on average assets ..................................... 0.73% 1.81% 1.08% (2.26)%
Return on average equity ..................................... 12.20 12.58 10.28 (32.23)
Net interest margin .......................................... 1.80 3.81 2.68 4.18
Efficiency ratio(3) .......................................... 87.65 81.68 86.02 103.17
Non-performing assets to total assets, at period end ......... 0.16 0.89 0.30 2.75
Leverage ratio(4) ............................................ 5.58 8.05 5.87 6.06
Tier 1 risk-based capital ratio(4) ........................... 11.83 19.45 18.41 9.65
Total risk-based capital ratio(4) ............................ 12.86 20.71 19.66 10.90
</TABLE>
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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.
(4) Capital ratios of the bank.
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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.
OUR RAPID GROWTH PRESENTS INCREASED RISKS TO OUR PROFITABILITY.
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
profitability depends 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 profitability.
One result of our rapid growth during the past two years has been a 39%
increase in noninterest expense during fiscal 1998. 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.
Continued increases in noninterest expense could adversely affect our
profitability if net interest income and noninterest income do not increase by a
corresponding amount.
WE HAVE A LIMITED OPERATING HISTORY FOR YOU TO CONSIDER IN MAKING YOUR
INVESTMENT DECISION.
Since we acquired Greater Atlantic Bank in October 1997, we have focused on
returning the bank to profitability and aggressively growing the bank's
interest-earning assets and retail branch system. Because of our brief operating
history, our past results may be of limited relevance for you to use in
evaluating our future performance.
WE DEPEND ON KEY PERSONNEL FOR SUCCESFUL OPERATIONS.
We are dependent on the continued services of certain key management
personnel, including Carroll E. Amos, our President and Chief Executive Officer.
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. During the six
months ended March 31, 1999, income from Greater Atlantic Mortgage Corporation
of $1.1 million more than offset losses at Greater Atlantic Bank of $661,000.
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.
OUR EXECUTIVE OFFICERS, DIRECTORS AND CURRENT SHAREHOLDERS OWN 822,434 SHARES
OF COMMON STOCK WHICH ARE ELIGIBLE FOR FUTURE SALE AND WHICH COULD IMPACT THE
MARKET FOR OUR STOCK.
As of March 31, 1999, there were 822,434 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
6
<PAGE>
of 320,136 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 153,019 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.
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.
OUR RESIDENTIAL CONSTRUCTION AND NONRESIDENTIAL LENDING CARRY GREATER RISK THAN
PERMANENT LOANS ON SINGLE-FAMILY HOMES.
At March 31, 1999, residential construction, commercial real estate
(including multi-family residential real estate), commercial business and
consumer loans amounted to approximately $15.6 million or approximately 46.37%
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.
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 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 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. 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 March 31, 1999, we had $84.9 million in assets
maturing or repricing within one year and $97.3 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
7
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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.
EFFECTIVE VOTING CONTROL WILL REMAIN WITH MANAGEMENT.
We have 822,434 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 153,019 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 46.43% of
the common stock of the company (49.18% assuming the exercise of outstanding
options and warrants). If, following the offering, they were to act as a group
or 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.
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 80%
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. We do not have a stockholders' rights plan.
8
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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) will be approximately $17.2 million ($19.9
million if the underwriter's over-allotment option is exercised in full). We
intend to infuse approximately $12.9 million of the net proceeds into the bank.
The bank intends to use the proceeds we contribute to it to continue its growth
strategy. The bank's current regulatory capital level does not allow the bank to
continue its growth strategy and remain a well-capitalized institution under
applicable regulations. Increasing its regulatory capital by $12.9 million will
allow the bank to increase its asset size by in excess of $258 million which the
bank plans to do over the next two years. This increase in regulatory capital
will permit the bank to expand its branch network, increase its origination of
loans and purchases of investment and mortgage-backed securities which are
expected to be funded primarily through increases in deposits, FHLB advances and
reverse repurchase agreements. We intend to use the proceeds retained at the
company level for purchasing investment securities and, when appropriate,
originating construction and commercial loans to the extent those loans exceed
the amount the bank can make under applicable regulations. 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 been approved 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 its 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. The bank's and our ability to pay dividends are also
subject to and limited by certain legal and regulatory restrictions. 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."
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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 March 31, 1999, the net tangible book
value of the common stock was $8.50 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 $1.8 million the pro
forma tangible book value per share at March 31, 1999 would have been $8.59.
This would represent an immediate increase in tangible book value of $0.09 per
share to existing shareholders and an immediate dilution to new investors of
$0.91 per share.
CAPITALIZATION
The following table sets forth our capitalization at March 31, 1999, and as
adjusted to give effect to the sale of 2,000,000 shares of common stock offered
hereby, 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.
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AS OF MARCH 31, 1999
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ACTUAL AS ADJUSTED(1)
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(IN THOUSANDS, EXCEPT PER
SHARE DATA)
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Stockholders' equity:
Common stock, $.01 par value:
10,000,000 shares authorized; 822,434 shares outstanding;
2,822,434 shares outstanding as adjusted .............. $ 8 $ 28
Additional paid-in capital ............................... 6,168 23,393
Retained earnings ........................................ 1,031 1,031
Accumulated other comprehensive income ................... (214) (214)
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Total stockholders' equity ............................... $6,993 $24,238
====== =======
Book value per share ..................................... $ 8.50 $ 8.59
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(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 $26.9 million, respectively. This table excludes
approximately 153,019 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.
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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. 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.
In October 1997, an investment group led by William Calomiris and Carroll
E. Amos 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.
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 as Chief Financial Officer
and from 1982 until 1991 and as Vice Chairman, Chief Executive Officer and
director from 1991 until 1996. 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 our Chairman and Chairman of Greater
Atlantic Bank. Mr. Amos serves as our President and Chief Executive Officer and
President and Chief Executive Officer of Greater Atlantic Bank.
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 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 Greater Atlantic 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 operation that was well managed, although its
growth was restricted from a lack of capital and the problems inherent in 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 believed that with the mortgage banking operation and the mortgage market
that existed at the time of acquisition, and that continues today, we could
build a strong locally-owned banking institution more economically than could be
done by establishing a de novo institution.
11
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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 six branches in established office facilities by June 2001
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 deposit 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.
o Develop niche products and services for Greater Atlantic Mortgage
Corporation. 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.
12
<PAGE>
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 six months ended March 31, 1999,
Greater Atlantic Mortgage originated $252.6 million and $186.5 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.
13
<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 and 1997 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. Effective October 1, 1997,
we acquired the bank and contributed $3.9 million in equity to the bank. The
acquisition was accounted for as a purchase. Accordingly, the assets and
liabilities were revalued and $700,000 of goodwill was recorded. The selected
historical consolidated financial data as of and for the six months ended March
31, 1999 and 1998 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 six months ended March 31, 1999 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 THE AT OR FOR THE
SIX MONTHS ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1998 1997
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS:
Interest income ............................................... $ 3,790 $ 1,454 $ 4,011 $ 2,394
Interest expense .............................................. 2,792 782 2,563 1,291
-------- -------- -------- --------
Net interest income ......................................... 998 672 1,448 1,103
Provision for loan losses ..................................... 23 95 159 487
-------- -------- -------- --------
Net interest income after provision for loan losses ......... 975 577 1,289 616
Noninterest income ............................................ 4,692 2,871 6,268 3,528
Noninterest expense ........................................... 4,987 2,894 6,637 4,778
-------- -------- -------- --------
Income (loss) before taxes .................................. 680 554 920 (634)
Income tax provision .......................................... 258 212 311 --
-------- -------- -------- --------
Net income (loss) ............................................. $ 422 $ 342 $ 609 $ (634)
======== ======== ======== ========
PER SHARE DATA:
Net income (loss):
Basic ....................................................... $ 0.52 $ 0.44 $ 0.77 $ (1.92)
Diluted ..................................................... 0.52 0.44 0.77 (1.92)
Book value .................................................... 8.50 7.96 8.38 4.74
Tangible book value ........................................... 8.50 7.41 8.38 4.74
Weighted average shares outstanding:
Basic ....................................................... 817,264 780,005 787,075 330,000
Diluted ..................................................... 819,014 780,005 787,075 330,000
FINANCIAL CONDITION DATA:
Total assets .................................................. $125,896 $ 71,424 $107,342 $ 31,554
Total loans receivable, net ................................... 31,365 19,028 25,510 18,854
Allowance for loan losses ..................................... 610 700 578 776
Mortgage-loans held for sale .................................. 1,367 30,670 25,322 9,946
Investment securities(1) ...................................... 45,118 8,950 32,454 1,005
Mortgage-backed securities(1) ................................. 32,020 8,266 18,959 --
Total deposits ................................................ 112,091 60,542 76,311 28,377
FHLB advances ................................................. 5,000 -- 22,000 1,250
Total stockholders' equity .................................... 6,993 6,208 6,817 1,564
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
SIX MONTHS ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
-------------------------- -------------------------
1999 1998 1998 1997
------------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
AVERAGE FINANCIAL CONDITION DATA:
Total assets ................................................. $ 115,738 $ 37,766 $ 56,406 $28,075
Investment securities(1) ..................................... 39,243 5,910 15,300 2,154
Mortgage-backed securities(1) ................................ 27,155 2,822 8,337 --
Total loans receivable, net .................................. 44,484 26,515 30,373 25,248
Allowance for loan losses .................................... (617) (538) (574) (408)
Total deposits ............................................... 90,958 26,068 39,915 21,334
Total stockholders' equity ................................... 6,920 5,437 5,922 1,967
SELECTED FINANCIAL RATIOS(2):
Return on average assets ..................................... 0.73% 1.81% 1.08% ( 2.26)%
Return on average equity ..................................... 12.20 12.58 10.28 (32.23)
Net interest margin .......................................... 1.80 3.81 2.68 4.18
Efficiency ratio(3) .......................................... 87.65 81.68 86.02 103.17
Equity to assets, at period end .............................. 5.55 8.69 6.35 4.96
ASSET QUALITY DATA:
Non-performing assets to total assets, at period end ......... 0.16% 0.89% 0.30% 2.75%
Non-performing loans to total loans, at period end............ 0.04 1.67 0.81 2.95
Net charge-offs to average total loans ....................... (0.02) 0.64 1.18 0.58
Allowance for loan losses to:
Total loans ................................................ 1.82 3.14 2.03 3.44
Non-performing loans ....................................... 5,083.33 188.17 251.30 116.69
Non-performing loans ......................................... $ 12 $ 372 $ 230 $ 665
Non-performing assets ........................................ 204 638 320 867
Allowance for loan losses .................................... 610 700 578 776
CAPITAL RATIOS OF THE BANK:
Leverage ratio ............................................... 5.58% 8.05% 5.87% 6.06%
Tier 1 risk-based capital ratio .............................. 11.83 19.45 18.41 9.65
Total risk-based capital ratio ............................... 12.86 20.71 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.
15
<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 six months ended March 31,
1999 and March 31, 1998 and for the years ended September 30, 1998 and 1997.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS
ENDED MARCH 31, 1999 AND MARCH 31, 1998
Net Income. Net income for the six months ended March 31, 1999, amounted to
$422,000 or $0.52 per share compared to net income of $342,000 or $0.44 per
share for the six months ended March 31, 1998. The $80,000 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>
SIX MONTHS ENDED
MARCH 31, DIFFERENCE
---------------------- ----------------------
1999 1998 AMOUNT %
---------- --------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income:
Loans ...................... $ 1,868 $1,188 $ 680 57.24%
Investments ................ 1,922 266 1,656 622.56
------- ------ ------ ------
Total .................... 3,790 1,454 2,336 160.66
------- ------ ------ ------
Interest expense:
Deposits ................... 2,423 684 1,739 254.24
Borrowings ................. 369 98 271 276.53
------- ------ ------ ------
Total .................... 2,792 782 2,010 257.03
------- ------ ------ ------
Net interest income ......... $ 998 $ 672 $ 326 48.51%
======= ====== ====== ======
</TABLE>
Our growth in net interest income for the six months ended March 31, 1999
was due primarily to the increase in average interest-earning assets resulting
from our planned growth. Although average interest-earning assets increased
$75.6 million or 214.59% over the comparable period one-year ago, a decline in
the net interest margin (net interest income divided by average interest-earning
assets) of 201 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 six months ended March 31, 1999 increased $2.3
million from the six months ended March 31, 1998 primarily as a result of an
increase in the average outstanding balances in loans, investment securities and
mortgage-backed securities resulting in large measure from the
16
<PAGE>
planned leveraging of our capital. The increase in interest income on the loan
portfolio for the six months ended March 31, 1999 compared to interest income
earned for the 1998 period resulted from an increase of $18.0 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 $57.7 million in the average outstanding
balance, offset in part by a 30 basis point decrease in the average yield earned
on the portfolio.
The increase in interest expense on deposits and borrowed funds for the six
months ended March 31, 1999 compared to the 1998 period was principally the
result of a significant increase in the average outstanding balances in total
deposits and borrowed funds, offset in part by a four basis point decrease in
the average cost of funds. The increase in interest expense on deposits was
primarily due to an increase in average certificates of deposit of $55.3
million, or 248.54%, from $22.3 million for the six months ended March 31, 1998
to $77.6 million for the six months ended March 31, 1999, offset in part by a 13
basis point decrease in the average rate paid from 5.59% for the six months
ended March 31, 1998 to 5.46% for the six months ended March 31, 1999. The
average rate we paid for deposits increased from 5.25% for the six months ended
March 31, 1998 to 5.33% for the six months ended March 31, 1999. That increase
in rate was coupled with an increase of $64.9 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.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED MARCH 31,
----------------------------------------------------------------
1999 1998
-------------------------------- -------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
----------- ---------- --------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Real estate loans .................................. $ 39,597 $1,675 8.46% $25,157 $1,129 8.98%
Consumer loans ..................................... 2,179 84 7.71 742 34 9.16
Commercial business loans .......................... 2,708 109 8.05 616 25 8.12
-------- ------ ---- ------- ------ ----
Total loans ...................................... 44,484 1,868 8.40 26,515 1,188 8.96
Investment securities ............................... 39,243 1,156 5.89 5,910 192 6.50
Mortgage-backed securities .......................... 27,155 766 5.64 2,822 74 5.24
-------- ------ ---- ------- ------ ----
Total interest-earning assets .................... 110,882 3,790 6.84 35,247 1,454 8.25
------ ---- ------ ----
Non-earning assets .................................. 4,856 2,519
-------- -------
Total assets ....................................... $115,738 $37,766
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings accounts ................................... $ 804 $ 13 3.23% $ 767 $ 13 3.39%
Now and money market accounts ...................... 12,569 293 4.66 3,041 49 3.22
Certificates of deposit ............................ 77,585 2,117 5.46 22,260 622 5.59
-------- ------ ---- ------- ------ ----
Total deposits ................................... 90,958 2,423 5.33 26,068 684 5.25
FHLB advances ...................................... 13,665 325 4.76 2,455 70 5.70
Other borrowings ................................... 1,549 44 5.68 993 28 5.64
-------- ------ ---- ------- ------ ----
Total interest-bearing liabilities ............... 106,172 2,792 5.26 29,516 782 5.30
------ ---- ------ ----
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing demand deposits ................ 1,409 1,888
Other liabilities .................................. 1,237 925
-------- -------
Total liabilities ................................ 108,818 32,329
Stockholders' equity ................................ 6,920 5,437
-------- -------
Total liabilities and stockholders' equity ......... $115,738 $37,766
======== =======
Net interest income ................................. $ 998 $ 672
====== ======
Interest rate spread ................................ 1.58% 2.95%
==== ====
Net interest margin ................................. 1.80% 3.81%
==== ====
</TABLE>
17
<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>
SIX MONTHS ENDED MARCH 31,
1999 VS. 1998
-----------------------------------
CHANGE ATTRIBUTABLE TO
-----------------------------------
VOLUME RATE TOTAL
-------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans .......................... $ 648 $ (102) $ 546
Consumer loans ............................. 66 (16) 50
Commercial business loans .................. 85 (1) 84
------ --------- ------
Total loans ............................... 799 (119) 680
Investments ................................ 1,083 (119) 964
Mortgage-backed securities ................. 638 54 692
------ -------- ------
Total interest-earning assets .............. $2,520 $ (184) $2,336
====== ======== ======
Savings accounts ........................... $ 1 $ (1) $ --
Now and money market accounts .............. 154 90 244
Certificates of deposit .................... 1,546 (51) 1,495
------ -------- ------
Total deposits ............................ 1,701 38 1,739
FHLB advances .............................. 319 (64) 255
Other borrowings ........................... 16 -- 16
------ -------- ------
Total interest-bearing liabilities ......... $2,036 $ (26) $2,010
====== ======== ======
Change in net interest income .............. $ 484 $ (158) $ 326
====== ======== ======
</TABLE>
Provision for Loan Losses. The allowance for loan losses, which is
established through provisions for losses charged to expense, is increased by
recoveries on loans previously charged off and is reduced by charge-offs on
loans. Determining the proper reserve level or allowance involves management's
judgment based upon a review of factors, including the company's internal review
process which segments the loan portfolio into groups based on various risk
factors including the types of loans and asset classifications. Each segment is
then assigned a reserve percentage based upon the perceived risk in that
segment. Although management utilizes its best judgment in providing for
probable losses, there can be no assurance that the company will not have to
increase its provisions for loan losses in the future as a result of an adverse
market for real estate and economic conditions generally in the company's
primary market area, future increases in non-performing assets or for other
reasons which would adversely affect the company's results of operations.
The provision for loan losses decreased from $95,000 during the six months
ended March 31, 1998 to $23,000 during the six months ended March 31, 1999. The
reduction in the provision is directly related to an improvement in credit
quality over that time period coupled with a decline in non-performing loans.
Net charge-offs decreased from $171,000 during the six months ended March 31,
1998 to a recovery of $9,000 during the six months ended March 31, 1999 as
overall asset quality improved as new management took a more aggressive posture
in assessing collectability of classified loans.
18
<PAGE>
Noninterest Income. The following table presents a comparison of the
components of noninterest income.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
MARCH 31, DIFFERENCE
--------------------- ------------------------
1999 1998 AMOUNT %
--------- --------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest income:
Gain on sale of loans .............. $4,396 $2,609 $1,787 68.49%
Service fees on loans .............. 260 207 53 25.60
Service fees on deposits ........... 22 11 11 100.00
Other operating income ............. 14 44 (30) (68.18)
------ ------ ------ ------
Total noninterest income ......... $4,692 $2,871 $1,821 63.43%
====== ====== ====== ======
</TABLE>
Noninterest income increased during the six months ended March 31, 1999,
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 six months ended March 31, 1999 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 six months ended March 31, 1999, the company originated $205.3
million in mortgage loans compared with $138.9 million originated in the
comparable period one year ago. The $66.4 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 six months ended March 31, 1999 amounted to $210.5 million compared to
sales of $109.7 million during the comparable period one year ago. Sales of
loans resulted in gains of $4.4 million and $2.6 million for the six months
ended March 31, 1999 and 1998, 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.
Noninterest Expense. The following table presents a comparison of the
components of noninterest expense.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31, DIFFERENCE
--------------------- ------------------------
1999 1998 AMOUNT %
--------- --------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest expense:
Compensation and employee benefits ......... $2,937 $1,656 $1,281 77.36%
Occupancy .................................. 450 193 257 133.16
Professional services ...................... 104 68 36 52.94
Advertising ................................ 247 199 48 24.12
Deposit insurance premium .................. 31 55 (24) (43.64)
Furniture, fixtures and equipment .......... 211 88 123 139.77
Data processing ............................ 62 77 (15) (19.48)
Loss from foreclosed real estate ........... 5 19 (14) (73.68)
Other operating expense .................... 940 539 401 74.40
------ ------ ------ ------
Total noninterest expense ................ $4,987 $2,894 $2,093 72.32%
====== ====== ====== ======
</TABLE>
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
19
<PAGE>
employee benefit cost associated with the increase in compensation. Net
occupancy expenses increased from the 1998 six month period to the comparable
1999 period due to the development of the branch network which increased from
two branches as of March 31, 1998 to four branches as of March 31, 1999, 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 six months ended March 31, 1998 to the six months
ended March 31, 1999 reflects the company's increased marketing efforts relating
to both deposit and loan products. Other operating expenses increased in the six
months ended March 31, 1999 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 six months ended March 31,
1999 amounted to $258,000 compared to a provision of $212,000 for the six months
ended March 31, 1998.
We recorded a deferred tax asset of $679,000, net of a valuation allowance
of $548,000 at March 31, 1999. Based on past operating performance under current
management, we believe that it is more likely than not that the net asset
recorded will be realized.
At March 31, 1999, 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. During the six
months ended March 31, 1999, the company's estimated effective income tax rate
is 38%, which was calculated based on the best information currently available.
20
<PAGE>
FINANCIAL CONDITION AT MARCH 31, 1999
GENERAL
At March 31, 1999 the company's total assets were $125.9 million, compared
to $107.3 million held at September 30, 1998, representing an increase of
17.33%. 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 $176,000 during the six months ended March 31, 1999. The increase reflects
the $422,000 of net income recognized during the six month period plus the sale
of $75,000 of stock, and was partially offset by an increase of $322,000 in
unrealized losses on securities classified as available for sale.
LENDING ACTIVITIES
General. Net loans receivable at March 31, 1999 were $31.4 million, an
increase of $5.9 million or 23.14% from the $25.5 million held at September 30,
1998. The increase in loans consisted primarily of real estate loans secured by
first mortgages on residential properties and consumer and commercial lines of
credit secured by mortgages on residential and commercial real estate. Loans
held for sale amounted to $1.4 million at March 31, 1999 compared to $25.3
million at September 30, 1998, a decrease of $23.9 million. The decrease in
loans held for sale reflects the fact that $33.2 million of the $34.3 million of
loans originated for sale during March 1999 were disbursed after March 31, 1999.
During the six months ended March 31, 1999, 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 an increase in
the aggregate of loans originated for the bank's portfolio.
The following table sets forth the bank's loan originations, sales and
principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Total loans at beginning of period(1) ............................ $ 53,606 $ 32,520
---------- ----------
Originations of loans for investment:
Single-family residential(2) .................................... 1,482 445
Multi-family residential ........................................ -- --
Commercial real estate .......................................... 1,649 --
Construction .................................................... 3,507 5,915
Land loans ...................................................... 277 369
Second trust .................................................... 277 413
Commercial business ............................................. 7,317 1,369
Consumer ........................................................ 4,229 3
---------- ----------
Total originations for investment ............................. 18,738 8,514
Loans originated for resale by Greater Atlantic Mortgage ......... 186,528 130,383
---------- ----------
Total originations ............................................... 205,266 138,897
Repayments ....................................................... (13,614) (8,363)
Sale of loans originated for resale by Greater Atlantic Mortgage
Corporation ..................................................... (210,483) (109,659)
---------- ----------
Net activity in loans ............................................ (18,831) 20,875
---------- ----------
Total loans at end of period ..................................... $ 34,775 $ 53,395
========== ==========
</TABLE>
- ----------
(1) Includes loans held for sale of $25.2 million and $10.0 million at September
30, 1998 and 1997, respectively.
(2) Includes $1.5 million of loans purchased in the six months ended March 31,
1999.
21
<PAGE>
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 March 31, 1999, the bank's mortgage loan portfolio
totalled $27.3 million or 81.24% of total loans. Loans secured by one- to
four-family residential real estate loans totalled $17.2 million, or 51.20% of
total loans. At March 31, 1999, the bank also had $4.3 million or 12.84% of
total loans in construction loans, $3.9 million or 11.64% in commercial real
estate loans, $1.1 million, or 3.13% in multi-family loans and $815,000 or 2.43%
in land loans.
The bank's consumer loans at March 31, 1999, aggregated $4.2 million, or
12.62% of total loans, and included $4.1 million of home equity loans, $91,000
of automobile loans and $40,000 of other consumer loans. The bank's commercial
business loans totalled $2.1 million, or 6.14% of total loans, at March 31,
1999.
At March 31, 1999, regulations of the Office of Thrift Supervision (the
"OTS") limit our maximum loans-to-one borrower to approximately $1.2 million. At
March 31, 1999, the five largest loans or loan relationships amounted to $1.0
million, $1.0 million, $950,000, $750,000 and $740,000, all of which were
performing in accordance with their terms as of such date. As a result of the
offering, our loans-to-one borrower limit is expected to exceed $3.1 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 MARCH 31, 1999
-------------------------
% OF
AMOUNT TOTAL LOANS
---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
MORTGAGE LOANS:
Single-family(1) ........................................ $ 17,189 51.20%
Multi-family ............................................ 1,050 3.13
Construction ............................................ 4,310 12.84
Commercial real estate .................................. 3,908 11.64
Land .................................................... 815 2.43
-------- ------
Total mortgage loans .................................. 27,272 81.24
-------- ------
COMMERCIAL BUSINESS AND CONSUMER LOANS:
Commercial business ..................................... 2,060 6.14
Consumer:
Home equity ........................................... 4,107 12.23
Automobile ............................................ 91 0.27
Other ................................................. 40 0.12
-------- ------
Total commercial business and consumer loans ......... 6,298 18.76
-------- ------
Total loans receivable ............................... 33,570 100.00%
======
LESS:
Allowance for loan losses ............................... (610)
Loans in process ........................................ (1,636)
Unearned premium (discounts) ............................ 41
--------
Loans receivable, net ................................. $ 31,365
========
</TABLE>
- ----------
(1) Includes loans secured by second trusts on single-family residential
property.
22
<PAGE>
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 March 31, 1999, the bank's one- to four-family
mortgage loans totalled $17.2 million, or 51.20% of total loans. Of the one- to
four-family mortgage loans outstanding at that date, 36.66% were fixed-rate
loans and 63.34% were ARM loans.
Construction and Development Lending. The bank originates construction and
development loans primarily to finance the construction of one- to four-family,
owner-occupied residential real estate properties located in the bank's primary
market area. 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 March 31,
1999, the bank's largest construction and development loan was a performing
$950,000 loan secured by six 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 March 31, 1999, construction and
development loans (including land loans) totalled $5.1 million, or 15.27%, 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 March 31,
1999, land loans totaled $815,000, or 2.43% of total loans. The largest land
loan at that date was a performing loan which amounted to $418,000.
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 March 31, 1999, was approximately
$1.2 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
23
<PAGE>
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 March 31, 1999 was $5.0 million, or 14.77% of total loans. The
largest multi-family or commercial real estate loan in the bank's portfolio at
March 31, 1999, was a $1.0 million participation in a performing $5.3 million
loan secured by two nursing home facilities in Whittier, California.
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 March 31, 1999, the bank had $2.1 million
in commercial business loans which amounted to 6.14% 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 March 31, 1999, the bank's largest commercial business loan was a $1.0
million revolving warehouse line of credit with an outstanding balance of
$615,000 secured by an assignment of the notes and deeds of trust on single
family residential loans.
Consumer Lending. Consumer loans at March 31, 1999 amounted to $4.2 million
or 12.62% 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.
24
<PAGE>
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 March 31, 1999, these loans totalled $4.1 million or
12.23% of the bank's total loans and 96.91% 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 March 31, 1999, the bank had $9.5 million of home equity loans of which $4.1
million, or 40.59% 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
March 31, 1999, these consumer loans totalled $131,000, or 0.39% of the bank's
total loans and 3.09% 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 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
25
<PAGE>
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 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 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 March 31, 1999, the bank had $59,000 of loans designated as
Substandard which consisted of one commercial real estate loan for $40,000 and
four second trusts totalling $19,000. At that same date the bank had $182,000 of
assets classified as Doubtful, one commercial real estate loan for $170,000 and
two second trusts totalling $12,000. At March 31, 1999, the bank had no loans
classified as Loss. As of March 31, 1999, the bank also had a total of 2 loans,
totalling $349,000, designated as Special Mention. At March 31, 1999, the
largest adversely (other than Special Mention) classified loan was a commercial
real estate second trust loan with an aggregate carrying balance of $170,000, 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 March 31, 1999, REO
consisted of a multi-family property totalling $192,000, which is under contract
of sale as of June 11, 1999. 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.
26
<PAGE>
<TABLE>
<CAPTION>
AT MARCH 31, 1999
-----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Mortgage loans:
Single-family .................................................... $ 12
-------
Total non-accrual loans ............................................ 12
REO ................................................................ 192
-------
Total non-performing assets ........................................ $ 204
=======
Non-performing loans to total loans ................................ 0.04%
-------
Total non-performing assets to total assets, at period end ......... 0.16%
=======
</TABLE>
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 March 31,
1999, the bank had recorded investments of $12,000 in impaired loans. During the
six months ended March 31, 1999, the amount of additional interest income that
would have been recognized on non-accrual loans if such loans had continued to
perform in accordance with their contractual terms was $141. The total amount of
interest not recognized to date on such loans was $499.
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 March 31, 1999, the bank's allowance for loan losses amounted to
$610,000 or 1.82% of total loans. The bank had non-accrual loans of $12,000 at
March 31, 1999. 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.
27
<PAGE>
The following table sets forth activity in the bank's allowance for loan
losses.
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS ENDED
MARCH 31, 1999
-----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Balance at beginning of period ................................................... $ 578
Provisions ....................................................................... 23
---------
Total charge-offs ................................................................ (1)
Total recoveries ................................................................. 10
-----------
Net (charge-offs) recoveries ..................................................... 9
-----------
Balance at end of period ......................................................... $ 610
===========
Ratio of net charge-offs during the period to average loans outstanding during the
period .......................................................................... (0.02)%
===========
Allowance for loan losses to total non-performing loans at end of period ......... 5,083.33%
===========
Allowance for loan losses to total loans ......................................... 1.82%
===========
</TABLE>
The following table sets forth the bank's allowance for loan losses in each
of the categories listed and the percentage of such amounts to the total
allowance and the percentage of such amounts to total loans.
<TABLE>
<CAPTION>
AT MARCH 31, 1999
-----------------------------------
PERCENT OF
------------------------
TOTAL TOTAL
AMOUNT ALLOWANCE LOANS
-------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
MORTGAGE LOANS:
Single-family ............................ $ 110 18.03% 0.33%
Multi-family ............................. 9 1.48 0.03
Construction ............................. 47 7.70 0.14
Commercial real estate ................... 153 25.08 0.46
Land ..................................... 16 2.62 0.04
----- ------ ----
Total mortgage loans .................... 335 54.91 1.00
----- ------ ----
COMMERCIAL BUSINESS AND CONSUMER LOANS:
Commercial business ...................... 104 17.05 0.31
Consumer:
Home equity ............................ 51 8.36 0.15
Automobile ............................. 4 0.66 0.01
Other .................................. -- -- --
----- ------ ----
Total commercial and consumer ......... 159 26.07 0.47
----- ------ ----
Unallocated ............................... 116 19.02 0.35
----- ------ ----
Total ..................................... $ 610 100.00% 1.82%
===== ====== ====
</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.
28
<PAGE>
Investment and mortgage-backed securities increased from $51.2 million at
September 30, 1998 to $77.1 million at March 31, 1999. 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 March 31, 1999, the bank had invested $32.0 million in mortgage-backed
securities, or 25.43% 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 MARCH 31, 1999
------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
AVAILABLE FOR SALE:
Equity securities(1) ............... $ 9,093 $ 9,017
Corporate debt securities .......... 2,112 2,209
Federal agency securities .......... 1,000 989
CMOs ............................... 1,731 1,737
U.S. Government securities ......... 31,465 31,166
------- -------
Total ............................. $45,401 $45,118
======= =======
INVESTMENT SECURITIES WITH:
Fixed rates ........................ $ 4,843 $ 4,935
Adjustable rates ................... 40,558 40,183
------- -------
Total ............................. $45,401 $45,118
======= =======
</TABLE>
- ----------
(1) Equity securities consist of a $3.0 million investment in a short-term U.S.
government securities mutual fund; a $3.0 million investment in an
intermediate-term mortgage securities mutual fund; and a $3.0 million
investment in a U.S. government mortgage securities mutual fund.
The following table sets forth information regarding the amortized cost and
estimated market value of the bank's mortgage-backed securities.
<TABLE>
<CAPTION>
AT MARCH 31, 1999
------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
AVAILABLE FOR SALE:
REMICs ............................ $ 2,546 $ 2,583
FHLMC ............................. 5,182 5,149
FNMA .............................. 21,287 21,235
GNMA .............................. 3,070 3,053
------- -------
Total ............................ $32,085 $32,020
======= =======
MORTGAGE-BACKED SECURITIES WITH:
Fixed rates ................... $18,142 $18,136
Adjustable rates .............. 13,943 13,884
------- -------
Total ........................ $32,085 $32,020
======= =======
</TABLE>
29
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the bank's
investment securities available-for-sale and mortgage-backed securities
available-for-sale.
<TABLE>
<CAPTION>
AT MARCH 31, 1999
-------------------------------------------
MORE THAN ONE
ONE YEAR OR LESS YEAR TO FIVE YEARS
--------------------- ---------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment securities available-for-sale:
Adjustable-rate securities:
Equity securities ...................................... $9,017 5.82% $ -- --%
U.S. Government agency ................................. -- -- 1,250 7.52
------ ---- ------ ----
Total ................................................. 9,017 5.82 1,250 7.52
------ ---- ------ ----
Fixed-rate:
Federal agency ......................................... -- -- -- --
Corporate debt ......................................... -- -- -- --
CMOs ................................................... -- -- -- --
------ ---- ------ ----
Total ................................................. -- -- -- --
------ ---- ------ ----
Total investment securities available-for-sale .......... 9,017 5.82 1,250 7.52
------ ---- ------ ----
Mortgage-backed securities available-for-sale:
Adjustable-rate securities:
FNMA .................................................. -- -- 550 6.10
FHLMC ................................................. -- -- -- --
GNMA .................................................. -- -- -- --
------ ---- ------ ----
Total ................................................ -- -- 550 6.10
------ ---- ------ ----
Fixed-rate:
FNMA .................................................. -- -- -- --
FHLMC ................................................. -- -- -- --
GNMA .................................................. -- -- -- --
REMICs ................................................ -- -- -- --
------ ---- ------ ----
Total ................................................ -- -- -- --
------ ---- ------ ----
Total mortgage-backed securities available-for-sale ..... -- -- 550 6.10
------ ---- ------ ----
Total investments ....................................... $9,017 5.82% $1,800 7.09%
====== ==== ====== ====
<PAGE>
<CAPTION>
AT MARCH 31, 1999
----------------------------------------------------------------
MORE THAN FIVE MORE THAN
YEARS TO TEN YEARS TEN YEARS TOTAL
--------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
---------- ---------- ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment securities available-for-sale:
Adjustable-rate securities:
Equity securities ...................................... $ -- --% $ -- --% $ 9,017 5.82%
U.S. Government agency ................................. 3,181 5.20 26,735 6.04 31,166 6.01
------- ---- -------- ---- ------- ----
Total ................................................. 3,181 5.20 26,735 6.04 40,183 5.97
------- ---- -------- ---- ------- ----
Fixed-rate:
Federal agency ......................................... 989 6.57 -- -- 989 6.57
Corporate debt ......................................... -- -- 2,209 6.83 2,209 6.83
CMOs ................................................... -- -- 1,737 7.35 1,737 7.35
------- ---- -------- ---- ------- ----
Total ................................................. 989 6.57 3,946 7.06 4,935 6.96
------- ---- -------- ---- ------- ----
Total investment securities available-for-sale .......... 4,170 5.52 30,681 6.17 45,118 6.08
------- ---- -------- ---- ------- ----
Mortgage-backed securities available-for-sale:
Adjustable-rate securities:
FNMA .................................................. -- -- 9,536 5.31 10,086 5.35
FHLMC ................................................. -- -- 1,415 6.02 1,415 6.02
GNMA .................................................. 1,132 5.07 1,251 5.98 2,383 5.55
------- ---- -------- ---- ------- ----
Total ................................................ 1,132 5.07 12,202 5.46 13,884 5.45
------- ---- -------- ---- ------- ----
Fixed-rate:
FNMA .................................................. 2,025 6.29 9,124 7.12 11,149 6.97
FHLMC ................................................. 366 6.57 3,368 6.08 3,734 6.13
GNMA .................................................. -- -- 670 6.44 670 6.44
REMICs ................................................ -- -- 2,583 6.22 2,583 6.22
------- ---- -------- ---- ------- ----
Total ................................................ 2,391 6.33 15,745 6.72 18,136 6.67
------- ---- -------- ---- ------- ----
Total mortgage-backed securities available-for-sale ..... 3,523 5.93 27,947 6.17 32,020 6.14
------- ---- -------- ---- ------- ----
Total investments ....................................... $ 7,693 5.71% $ 58,628 6.17% $77,138 6.11%
======= ==== ======== ==== ======= ====
</TABLE>
30
<PAGE>
SOURCES OF FUNDS
General. Deposits, loan repayments and prepayments, cash flows generated
from operations, Federal Home Loan Bank ("FHLB") advances and reverse repurchase
agreements are the primary sources of the bank's funds for use in lending,
investing and for other general purposes.
Deposits. Because the bank has aggressively marketed its deposit products,
expanded its branch network and used brokered deposits to fund its
mortgage-banking activities, total deposits increased to $112.1 million at March
31, 1999 from $76.3 million at September 30, 1998, an increase of 46.92%.
Certificates of deposit increased $34.5 million, $3.0 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, 80.18% are in certificate of deposit accounts at
March 31, 1999. At March 31, 1999, transaction-based accounts (savings, NOW,
money market and noninterest bearing deposits) represented 19.82% 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 March 31, 1999, $78.7 million, or 87.54% of
the bank's certificate of deposit accounts were to mature within one year.
The following table sets forth the distribution and the rates paid on each
category of deposits.
<TABLE>
<CAPTION>
AT MARCH 31, 1999
--------------------------------------
PERCENT OF TOTAL RATE
BALANCE DEPOSITS PAID
----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Savings accounts ...................... $ 925 0.83% 3.00%
Now and money market accounts ......... 17,633 15.73 4.70
Certificates of deposit ............... 89,877 80.18 5.23
Noninterest-bearing deposits:
Demand deposits ...................... 3,656 3.26 --
-------- ------ ----
Total deposits ...................... $112,091 100.00% 4.96%
======== ====== ====
</TABLE>
The following table presents information concerning the amounts, the rates
and the periods to maturity of the certificate accounts outstanding.
<TABLE>
<CAPTION>
AT MARCH 31, 1999
-----------------------
AMOUNT RATE
---------- ----------
. (DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCES MATURING:
Three months or less ................. $25,220 5.17%
Three months to one year ............. 53,505 5.26
One year to three years .............. 10,611 5.17
Over three years ..................... 541 5.37
------- ----
Total ............................... $89,877 5.23%
======= ====
</TABLE>
31
<PAGE>
At March 31, 1999, the bank had $34.5 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
MATURITY PERIOD AMOUNT RATE
------------------ ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less ............. $13,698 4.89%
Over 3 through 6 months .......... 8,442 4.92
Over 6 through 12 months ......... 9,570 5.26
Over 12 months ................... 2,744 5.25
------- ----
Total ........................... $34,454 5.03%
======= ====
</TABLE>
Borrowings. FHLB advances amounted to $5.0 million at March 31, 1999 a
decrease from the $22.0 million at September 30, 1998 primarily because the
company had sufficient funds from the $35.8 million increase in deposit accounts
and the $24.0 million reduction in mortgage loans held for sale. At March 31,
1999 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 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 six months ended March 31, 1999, at the end of the period
the bank did not have any reverse repurchase agreements outstanding. During the
six months ended March 31, 1999, 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.
32
<PAGE>
The following table sets forth information regarding the bank's borrowed
funds:
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS ENDED
MARCH 31, 1999
-----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
FHLB advances:
Average balance outstanding ........................................... $ 13,665
========
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 ...................... 4.76%
========
Weighted average interest rate at end of period ....................... 3.98%
========
Reverse repurchase agreements:
Average balance outstanding ........................................... $ 1,549
========
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>
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 net 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.
33
<PAGE>
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 deposit 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.
<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
--------- ---------- --------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
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>
34
<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>
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
35
<PAGE>
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 %
--------- --------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest expense:
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 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
36
<PAGE>
deferred tax asset by $662,000 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.
37
<PAGE>
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 335.9%, 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.
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 ................................................... (14,400) (11,537)
Sale of loans originated for resale by Greater Atlantic
Mortgage .................................................... (237,228) (133,563)
---------- ----------
Net activity in loans ........................................ 21,086 1,740
---------- ----------
Total loans at end of period ................................. $ 53,606 $ 32,520
========== ==========
</TABLE>
- ----------
(1) Includes loans held for sale of $10.0 million and $6.2 million at September
30, 1997 and 1996, respectively.
38
<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.
39
<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
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage loans:
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>
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>
40
<PAGE>
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)
<S> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
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>
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.
41
<PAGE>
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>
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.
42
<PAGE>
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
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCES MATURING:
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.
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)
<S> <C> <C>
FHLB ADVANCES:
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 outstanding ........................................... $ 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>
43
<PAGE>
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.
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 March 31, 1999. Estimates and assumptions concerning
prepayment rates of major asset categories are based on information obtained
from the FHLB of Atlanta on projected prepayment levels on mortgage-backed and
related securities and decay rates on savings, now and money market accounts. We
believe that such information is consistent with our current experience.
44
<PAGE>
<TABLE>
<CAPTION>
90 DAYS 91 DAYS TO 181 DAYS TO
MATURING OR REPRICING PERIODS OR LESS 180 DAYS ONE YEAR
- ------------------------------------ ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans:
Adjustable and balloon ............ $ 5,821 $ 10,279 $ 338
Fixed-rate (1) .................... 1,743 161 312
Second mortgages(2) ............... 367 50 93
Commercial business ............... 1,690 -- --
Consumer .......................... 4,126 17 30
Investment securities .............. 46,921 -- --
Mortgage-backed securities ......... 1,467 4,669 6,776
-------- -------- --------
Total ............................ 62,135 15,176 7,549
-------- -------- --------
INTEREST-BEARING LIABILITIES:
Deposits:
Savings accounts .................. 42 40 75
Now accounts ...................... 180 160 271
Money market accounts ............. 5,233 3,542 4,021
Certificates of deposit ........... 25,220 18,692 34,813
Borrowings:
FHLB advances ..................... 5,000 -- --
Other borrowings .................. -- -- --
-------- -------- --------
Total ............................ 35,675 22,434 39,180
-------- -------- --------
GAP ................................ $ 26,460 $ (7,258) $(31,631)
======== ======== ========
Cumulative GAP ..................... $ 26,460 $ 19,202 $(12,429)
======== ======== ========
Ratio of cumulative GAP to total
assets ............................ 21.02% 15.25% (9.87)%
======== ======== ========
<CAPTION>
ONE YEAR TO THREE YEARS TO FIVE YEARS
MATURING OR REPRICING PERIODS THREE YEARS FIVE YEARS OR MORE TOTAL
- ------------------------------------ ------------- ---------------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans:
Adjustable and balloon ............ $ 1,633 $ 946 $ 149 $ 19,166
Fixed-rate (1) .................... 1,076 846 2,131 6,269
Second mortgages(2) ............... 294 199 295 1,298
Commercial business ............... -- 370 -- 2,060
Consumer .......................... 65 -- -- 4,238
Investment securities .............. -- -- 4,840 51,761
Mortgage-backed securities ......... 5,739 4,600 8,129 31,380
-------- --------- -------- --------
Total ............................ 8,807 6,961 15,544 116,172
-------- --------- -------- --------
INTEREST-BEARING LIABILITIES:
Deposits:
Savings accounts .................. 239 156 373 925
Now accounts ...................... 560 150 332 1,653
Money market accounts ............. 1,782 848 554 15,980
Certificates of deposit ........... 10,611 541 -- 89,877
Borrowings:
FHLB advances ..................... -- -- -- 5,000
Other borrowings .................. -- -- -- --
-------- --------- -------- --------
Total ............................ 13,192 1,695 1,259 113,435
-------- --------- -------- --------
GAP ................................ $ (4,385) $ 5,266 $ 14,285 $ 2,737
======== ========= ======== ========
Cumulative GAP ..................... $(16,814) $ (11,548) $ 2,737
======== ========= ========
Ratio of cumulative GAP to total
assets ............................ (13.36)% (9.17)% 2.17%
======== ========= ========
</TABLE>
- ----------
(1) Includes $783,000 of loans held for sale in the 90 days or less repricing
period.
(2) Includes $314,000 of loans held for sale in the 90 days or less repricing
period.
As indicated in the interest rate sensitivity table, the twelve-month
cumulative gap, representing the total net assets and liabilities that are
projected to reprice over the next twelve months, was liability sensitive in the
amount of $12.4 million at March 31, 1999.
While the GAP position is a useful tool in measuring interest rate risk and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates solely on the measure, without
accounting for alterations in the maturity or repricing characteristics of the
balance sheet that occur during changes in market interest rates. The GAP
position reflects only the prepayment assumptions pertaining to the current rate
environment and assets tend to prepay more rapidly during periods of declining
interest rates than during periods of rising interest rates.
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
45
<PAGE>
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 March 31,
1999:
<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 2.14% 0.18% 9.18%
+ 200 2.09 0.13 6.63
+ 100 2.03 0.07 3.57
-- 1.96 -- --
- 100 1.90 (0.06) (3.06)
- 200 1.84 (0.12) (6.12)
- 300 1.79 (0.17) (8.67)
</TABLE>
The table indicates that, if interest rates increase 200 basis points, net
interest margin, as measured as a percent of total assets, would increase by 13
basis points or 6.63%. Conversely, if interest rates decrease 200 basis points
net interest margin, as a percent of total assets, would decline by 12 basis
points or 6.12%. The primary reason for this minimal change is because the
negative one year cumulative GAP position of $12.4 million is offset by the
bank's investment of $28.7 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 $28.7 million
investment, $9.2 million adjusts on a monthly basis and $11.1 million adjusts on
a quarterly basis and does not have a period or lifetime cap. The remaining $8.4
million, of which $6.3 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.
46
<PAGE>
Presented below, as of March 31, 1999, is an analysis of our interest rate
risk as measured by changes in NPV for parallel shifts of 200 basis points in
market interest rates:
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE AS A
PERCENT OF THE
NET PORTFOLIO VALUE PRESENT VALUE OF ASSETS
----------------------------- -------------------------------
CHANGES IN DOLLAR PERCENT NET PORTFOLIO CHANGE IN
RATES (BP) CHANGE CHANGE VALUE RATIO NPV RATIO
- ------------ ------------ -------------- --------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
+ 200 $ (4,353) (50.95)% 3.42% (3.28)%
+ 100 (1,973) (23.09) 5.25 (1.45)
-- -- -- 6.70 --
- 100 1,500 17.56 7.75 1.05
- 200 2,600 30.43 8.48 1.78
</TABLE>
The decline in net portfolio value of $4.4 million or 50.95% 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 March 31, 1999. The foregoing decline in NPV
in the event of an increase in interest rates of 200 basis points currently
exceeds the company's internal board guidelines. 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 March 31, 1999, the bank's actual liquidity ratio
was 18.85%. 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 March 31, 1999, cash and cash equivalents and
securities available-for-sale totalled $87.2 million, or 69.23% of total assets.
47
<PAGE>
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 six
months ended March 31, 1999, the bank's loan originations totalled $205.3
million. Purchases of United States Treasury and agency securities,
mortgage-backed and mortgage related securities and other investment securities
totalled $43.7 million for the six months ended March 31, 1999. The bank has
other sources of liquidity if a need for additional funds arises. At March 31,
1999, 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 March 31, 1999, the bank had commitments to fund loans and unused
outstanding lines of credit, unused standby letters of credit and undisbursed
proceeds of construction mortgages totaling $18.8 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 March 31, 1999,
totalled $78.7 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.
As part of our growth strategy the Bank intends to open six branches in
established office facilities by June 2001. The Bank has adequate liquidity and
capital resources to cover any costs associated with opening and maintaining
these additional branches. We do not expect these costs to be material.
Capital Resources. At March 31, 1999, the bank exceeded all minimum
regulatory capital requirements with a tangible capital level of $7.0 million,
or 5.58% of total adjusted assets, which is above the required level of $1.9
million, or 1.50%; core capital of $7.0 million, or 5.58% of total adjusted
assets, which is above the required level of $5.0 million, or 4.00%; and
risk-based capital of $7.6 million, or 12.86% of risk-weighted assets, which is
above the required level of $3.0 million, or 8.00%.
YEAR 2000 COMPLIANCE
As the year 2000 ("Year 2000") approaches, an important business issue has
emerged regarding how existing computer application software programs and
operating systems can accommodate change from the 1900s to the year 2000. Many
existing application software products are designed to accommodate the date
field, the year, with only two digits. If not corrected, many computer
applications and systems could fail or create erroneous results by or at the
Year 2000 (the "Year 2000 Issue"). With respect to the bank, computer systems
are used to perform financial calculations, track deposits and loan payments,
transfer funds and make direct deposits. Computer software and computer chips
also are used to run security systems, communications networks and other
essential equipment of the bank. While the bank maintains an internal computer
system for many operating functions, the majority of the bank's data processing
is out-sourced to a third party vendor. To become Year 2000 compliant, the bank
is following guidelines suggested by federal bank regulatory agencies and the
Securities and Exchange Commission (the "SEC"). A description of each of the
steps and the status of the bank's efforts in completing the steps is as
follows:
In July 1997, the bank formed a Year 2000 Committee (the "Y2K Committee")
and in connection therewith has adopted a Year 2000 Policy. The Y2K Committee
has prepared a matrix representing an overview of all systems or relationships
that could be affected by the Year 2000 Issue and has identified potential
problems associated with the Year 2000 Issue. From this, the Y2K
48
<PAGE>
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 all 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.
As of March 31, 1999, 98% of material third parties have represented to the
bank that they are Year 2000 compliant. The bank will terminate its relationship
with third parties who have not satisfied us that they are Year 2000 compliant
after June 30, 1999. In the event that any of the bank's significant suppliers
or other vendors do not successfully achieve Year 2000 compliance in a timely
manner, the bank's business or operations could be adversely affected.
Accordingly, the bank has prepared a contingency plan, if required, in the event
that there are any system interruptions and is preparing a business resumption
plan providing for manual maintenance of critical accounts in the event of
failure. There can be no assurances, however, that implementation of that plan,
if required, will be effective to remedy all potential problems.
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 March 31, 1999, the
bank had expended approximately $45,000 on Year 2000 remediation. 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.
49
<PAGE>
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 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.
50
<PAGE>
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 March 31, 1999.
<TABLE>
<CAPTION>
NET BOOK
VALUE
OF PROPERTY OR
LEASEHOLD
ORIGINAL IMPROVEMENTS
YEAR DATE OF AT
LEASED OR LEASED OR LEASE MARCH 31,
LOCATION OWNED ACQUIRED EXPIRATION 1999
- ---------------------------------- ----------- ----------- ------------ ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ADMINISTRATIVE OFFICE:
10700 Parkridge Boulevard
Reston, Virginia 20191 Leased 1998 03-31-03 $ 51
BRANCH OFFICES:
11834 Rockville Pike
Rockville, Maryland 20852 Leased 1998 06-15-05 383
8070 Ritchie Highway
Pasadena, Maryland 21122 Leased 1998 08-31-08 30
250 N. Glebe Road
Arlington, Virginia 22203 Leased 1998 03-31-03 32
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036 Leased 1998 07-31-08 295
GREATER ATLANTIC MORTGAGE OFFICE:
8230 Old Courthouse Road
Vienna, Virginia 22182 Leased 1995 12-31-99 7
----
Total $798
====
</TABLE>
The bank has leased property for an additional bank branch office on the
Harry Byrd Highway in Sterling, Virginia, expected to open in September 1999.
The bank also has entered into a contract to purchase property in Annapolis,
Maryland for the purpose of constructing a branch office.
The total net book value of the company's furniture, fixtures and equipment
at March 31, 1999 was $885,000. 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.
PERSONNEL
As of March 31, 1999, the company had 99 full-time employees and 6
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.
51
<PAGE>
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 Jeffrey W. Ochsman
(who is expected to become a director during June 1999), 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."
52
<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(1) AGE(2) POSITION(S) HELD WITH THE BANK SINCE EXPIRES
- --------------------------------- -------- ------------------------------------------------- ---------- --------
<S> <C> <C> <C> <C>
Carroll E. Amos ................. 51 Director, President and Chief Executive Officer 1997 2002
William Calomiris ............... 78 Director, Chairman of the Board of Directors 1997 2002
Paul J. Cinquegrana ............. 57 Director 1997 2000
Jeffrey M. Gitelman ............. 54 Director 1997 2001
Lynnette Dobbins Taylor ......... 78 Director 1998 2001
James B. Vito ................... 73 Director 1998 2002
</TABLE>
- ----------
(1) Jeffrey W. Ochsman, age 47, is expected to become a member of the board
during June 1999, with a term to expire in the year 2000.
(2) As of March 15, 1999.
EXECUTIVE OFFFICERS 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.
53
<PAGE>
BIOGRAPHICAL INFORMATION
DIRECTORS
William Calomiris, Chairman of the Board of the company and the bank, is
the President of Wm. Calomiris Investment Corporation, engaged in building,
developing and property management. Until 1996, he served as Chairman of the
Board of 1st Washington Bancorp and for Washington Federal Savings Bank.
Carroll E. Amos is President and Chief Executive Officer of the company and
of the bank. He is a private investor who until 1996 served as President and
Chief Executive Officer of 1st Washington Bancorp and Washington Federal Saving
Bank.
Paul J. Cinquegrana is a Senior Vice President Investments of Johnston,
Lemon & Co., Inc., a stock and bond brokerage firm.
Jeffrey M. Gitelman, D.D.S., is an Oral Surgeon and the owner of Jeffrey
M. Gitelman -D.D.S., P.C.
Jeffrey W. Ochsman, is expected to become a director during June 1999. He
is a partner in the law firm of Friedlander, Misler, Friedlander, Sloan & Herz,
PLLC, Washington, D.C.
Lynnette Dobbins Taylor is President of Taylor Enterprises, Incorporated, a
consulting firm to non-profit and civic related organizations; retired Executive
Director, Delta Sigma Theta, Inc.
James B. Vito is Chairman of the Board, James B. Vito, Inc., a plumbing and
heating company and managing general partner, James Properties, engaged in the
sale and management of property.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Edward C. Allen joined the bank as a Senior Vice President and Chief
Financial Officer in mid 1996 and became Chief Operating Officer in 1997. Prior
to joining the bank, Mr. Allen was the Chief Financial Officer of Servus
Financial Corp. from 1994 to 1996 and Senior Vice President of NVR Savings Bank
from 1992 to 1994.
Jeremiah D. Behan joined the bank in 1998 as a Senior Vice President with
primary responsibility for the bank's Construction Lending Department. From 1997
until joining the bank, Mr. Behan was the Senior Servicing Officer for Virginia
Asset Financing Corporation. From 1986 until 1996, he served as Senior Vice
President of Construction Administration and Servicing at Washington Federal
Savings Bank.
Justin R. Golden joined the bank as Senior Vice President of the Consumer
Lending Department in 1998. From 1984 until 1997 he served in various capacities
at Citizens Bank, most recently having responsibility for reorganizing and
operating that Bank's Home Equity Lending Function.
Patsy J. Mays joined the bank in 1998 as a Senior Vice President, primarily
responsible for Small Business Lending and Retail Banking. Prior to joining the
bank, Ms. Mays served as an Assistant Vice President at Wachovia Bank of South
Carolina responsible for sales production and branch operations from 1995 to
1996. From 1993 until 1995 she served as Vice President for Branch
Administration at Ameribanc Savings Bank.
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.
54
<PAGE>
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.
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>
ANNUAL COMPENSATION(1)
---------------------------------------
OTHER
NAME AND FISCAL ANNUAL
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(2)
- ---------------------------- -------- ----------- ---------- ----------------
<S> <C> <C> <C> <C>
Carroll E. Amos
President and Chief
Executive Officer ......... 1998 $107,133 $18,500 --
<CAPTION>
LONG-TERM COMPENSATION(2)
-----------------------------------------------------
AWARDS PAYOUTS
-------------------------- --------------------------
RESTRICTED SECURITIES
NAME AND STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITION AWARDS OPTIONS/SAR PAYOUTS COMPENSATION(2)
- ---------------------------- ------------ ------------- --------- ----------------
<S> <C> <C> <C> <C>
Carroll E. Amos
President and Chief
Executive Officer ......... -- 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.
55
<PAGE>
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 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.
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The Stamm Agreement provides for termination by the bank for cause (as
defined in the Stamm Agreement) at any time. In the event the bank chose to
terminate Mr. Stamm's employment for reasons other than for cause, Mr. Stamm or,
in the event of death, Mr. Stamm's beneficiary would be entitled to receive an
amount generally equal to the remaining base salary and bonus payments that
would have been paid to Mr. Stamm during the remaining term of the Stamm
Agreement, but in no event less than three months. The bank would also continue
and pay for Mr. Stamm's life, health and disability coverage for the remaining
term of the Stamm Agreement, but in no event less than three months.
Under the Stamm Agreement, if involuntary termination or voluntary
termination follows a change in control of the bank, Mr. Stamm or, in the event
of his death, his beneficiary, would be entitled to receive a severance payment
generally equal to the greater of: (i) the payments due for the remaining term
of the agreement, including the value of stock-based incentives previously
awarded to Mr. Stamm; or (ii) three times the average of the base salary,
excluding bonuses and all other forms of compensation paid or to be paid to Mr.
Stamm during the three preceding years. The bank would also continue Mr. Stamm's
life, health, and disability coverage for thirty-six months. In the event of a
change in control of the bank, the total amount of payment due under the Stamm
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 up to 94,685
warrants to the original investors and provides for the granting of up to 76,667
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, 94,685 warrants, each with a
warrant price of $7.50, were granted in fiscal 1998 to the members of the board
of directors and original stockholders on the basis of one warrant for each
share of stock purchased. Under this plan, 58,334 options have been granted to
employees. Mr. Amos was not granted warrants in fiscal 1998, but was granted
16,667 options to purchase the company stock at the same price, $7.50, as the
warrant price. In fiscal 1999, Mr. Amos was granted 16,667 additional options at
an exercise price of $8.38.
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 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.
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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.
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 March 31,
1999. 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>
NUMBER OF SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS OPTIONS GRANTED TO EXERCISE EXPIRATION
NAME GRANTED#(1) EMPLOYEES PRICE DATE
- ------------------------- ---------------------- -------------------- ---------- -----------
<S> <C> <C> <C> <C>
Carroll E. Amos ......... 16,667 100% $ 7.50 11/14/07
</TABLE>
AGGREGATED YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SEPTEMBER 30, 1998(#) SEPTEMBER 30, 1998($)(1)(2)
----------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Carroll E. Amos ......... 16,667 -- $14,500 --
</TABLE>
- ----------
(1) Does not include options granted in fiscal year 1999.
(2) Based on the estimated market value of the underlying stock at September 30,
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
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other persons and may not involve more than the normal risk of collectibility or
present other unfavorable features. As of March 31, 1999, one of the bank's
directors had loans with the bank which had outstanding balances totaling
$260,000. 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's policy is that all transactions between the company and its
executive officers, directors, holders of 10% or more of the shares of any class
of its common stock and affiliates thereof, will contain terms no less favorable
to the company than could have been obtained by it in arm's length negotiations
with unaffiliated persons and will be approved by a majority of independent
outside directors of the company not having any interest in the transaction.
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 OWNERSHIP AFTER
OFFERING(1)(2) THE OFFERING
----------------------- --------------------------
SHARES PERCENT SHARES PERCENT
--------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
William Calomiris .......................... 200,000 24.32% 357,895 12.68%
Carroll E. Amos ............................ 33,334 4.05 43,860 1.55
Paul J. Cinquegrana ........................ 33,334 4.05 33,334 1.18
Jeffrey M. Gitelman ........................ 33,334 4.05 64,913 2.30
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) .............................. 320,136 38.92 556,978 19.73
------- ------ ------- ------
PRINCIPAL SHAREHOLDERS:
Peter Calomiris ............................ 66,667 8.11 92,983 3.29
Robert Harris .............................. 66,667 8.11 66,667 2.36
Ralph Ochsman .............................. 133,334 16.21 238,597 8.45
Robert I. Schattner ........................ 197,334 23.99 355,229 12.59
------- ------ ------- ------
Principal shareholders as a group ......... 464,002 56.42 753,476 26.70
------- ------ ------- ------
Total ................................... 784,138 95.34% 1,310,454 46.43%
======= ====== ========= ======
Total shares outstanding ............... 822,434 100.00% 2,822,434 100.00%
======= ====== ========= ======
</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 128,019 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.
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 March 31, 1999, the bank's general limit on
loans-to-one borrower was $1.1 million. At March 31, 1999, the bank's largest
aggregate amount of loans-to-one borrower consisted of various single family
properties with a carrying balance of $1.0 million, secured by real estate.
Management believes that the bank is in compliance with all applicable
loans-to-one borrower limitations.
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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 March 31, 1999,
the bank maintained 76.83% 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 March 31, 1999 was
18.85%, 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."
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 calendar year 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
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<PAGE>
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 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
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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 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 March 31, 1999, 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.
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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 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 to 9 basis points and the regular premium paid for this period
was $85,000.
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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.
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 March 31,
1999, of $1.1 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 March 31, 1999, 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.
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,
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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 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.
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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.
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FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The company and the bank will report their income on a fiscal year
basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions.
The following discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to the
bank or the company. The bank has not been audited by the IRS or the Virginia
Department of Taxation ("DOT") in the past five years.
Distributions. To the extent that the bank makes "non-dividend
distributions" to the company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the bank's taxable income. Non-dividend distributions include distributions
in excess of the bank's current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of the bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the bank's bad debt reserve. Thus,
any dividends to the company that would reduce amounts appropriated to the
bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for the bank. The amount of additional taxable income
created by an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus,
if, after the Conversion, the bank makes a "non-dividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, presumably taxed at a 34%
corporate income tax rate (exclusive of state and local taxes). See "Regulation"
and "Dividend Policy" for limits on the payment of dividends of the bank. The
bank does not intend to pay dividends that would result in a recapture of any
portion of its bad debt reserve.
Corporate Alternative Minimum Tax ("AMT"). The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carryovers of which the bank currently has
none. AMTI is increased by an amount equal to 75% of the amount by which the
bank's adjusted current earnings exceeds its AMTI (determined without regard to
this preference and prior to reduction for net operating losses). The bank does
not expect to be subject to the AMT.
Dividends Received Deduction and Other Matters. The company may exclude
from its income 100% of dividends received from the bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the company and the bank will not file a consolidated tax return,
except that if the company or the bank owns more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.
STATE AND LOCAL TAXATION
Commonwealth of Virginia. The Commonwealth of Virginia imposes a tax at the
rate of 6.0% on the "Virginia taxable income" of the bank and the company.
Virginia taxable income is equal to federal taxable income with certain
adjustments. Significant modifications include the subtraction from federal
taxable income of interest or dividends on obligations or securities of the
United States that are exempt from state income taxes, and a recomputation of
the bad debt reserve deduction on reduced modified taxable income.
Delaware Taxation. As a Delaware company not earning income in Delaware,
the company is exempt from Delaware corporate income tax but is required to file
an annual report with and pay an annual franchise tax to the State of Delaware.
However, to the extent that the company conducts business outside of Delaware,
the company may be considered doing business and subject to additional taxing
jurisdictions outside of Delaware.
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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 March
31, 1999, 822,434 shares of common stock were issued and outstanding and no
shares of Preferred Stock were outstanding. As of March 31, 1999, 153,019 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.
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 March 31, 1999, the company had outstanding warrants to purchase 94,685
shares and options to purchase 58,334 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.
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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."
SUPERMAJORITY VOTING REQUIREMENTS; ANTI-TAKOVER 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
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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 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
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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 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
2,822,434 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 822,434 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 March 31, 1999, an aggregate of 822,434 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 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 153,019
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."
73
<PAGE>
UNDERWRITING
Legg Mason Wood Walker, Incorporated, as underwriter, has agreed, subject
to the terms and conditions of its underwriting agreement with the company, to
purchase from the company 2,000,000 of shares of common stock at the initial
public offering price less the underwriting discounts and commissions set forth
on the cover page of this prospectus. The company and the underwriter have
agreed that the underwriting discounts and commissions for shares sold to
certain original stockholders and members of the board of directors of the
company shall be $0.285 per share or 3.0% of the initial public offering price,
for up to 526,316 shares of common stock.
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 underwriter may reject
orders in whole or in part and withdraw, cancel, or modify the offer without
notice. 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 underwriter may also impose a penalty bid on certain selling group
members. This means that if the underwriter purchases shares of common stock in
the open market to reduce the underwriter's short position or to stabilize the
price of the common stock, it may reclaim the amount of the selling concession
from the selling group members who sold those shares as part of the offering.
The underwriter may create a "short position" in the common stock in
connection with the offering, which means that they may over-allot or sell more
shares than are set forth on the cover page of this prospectus. If the
underwriter creates a short position by such over-allotment, then the
underwriter may reduce that short position by purchasing common stock in the
open market. The underwriter also may elect to reduce any short position by
exercising all or part of the over-allotment option. In general, purchases of a
security for the purpose of stabilization or to reduce a short position could
cause the price of the security to be higher than it might otherwise be in the
absence of such purchases. The imposition of a penalty bid might also have an
effect on the price of a security to the extent that it were to discourage
resales of the security.
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 such additional shares
of common stock.
The company has been advised by the underwriter 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
$0.40 per share. The selected dealers may reallow a concession not to exceed
$0.10 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 underwriter. The company has agreed to pay
the underwriter a fee of $50,000 in consideration of the underwriter's financial
advisory services upon consummation of the offering.
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 underwriter.
74
<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. 333-76169) 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.
75
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
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-28
</TABLE>
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>
MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
--------------- --------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents .................................. $ 893,931 $ 433,218 $ 240,035
Interest bearing deposits .................................. 9,131,230 -- --
Investment securities (Notes 3 and 10)
Available-for-sale ........................................ 77,137,716 51,171,435 --
Held-to-maturity .......................................... -- -- 1,004,836
Trading ................................................... -- 241,250 --
Loans held for sale (Note 4) ............................... 1,366,822 25,321,543 9,946,377
Loans receivable, net (Notes 4, 10 and 16) ................. 31,364,712 25,509,868 18,854,524
Accrued interest and dividends receivable (Note 5) ......... 974,504 854,767 206,772
Deferred income taxes (Note 11) ............................ 679,000 997,000 60,000
Federal Home Loan Bank stock, at cost ...................... 1,112,600 1,100,000 414,400
Foreclosed real estate (Note 7) ............................ 187,200 90,283 201,692
Premises and equipment, net (Note 6) ....................... 1,682,885 757,792 229,014
Prepaid expenses and other assets .......................... 1,365,087 864,780 395,950
------------ ------------ ------------
Total Assets .............................................. $125,895,687 $107,341,936 $ 31,553,600
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 8) .......................................... $112,091,423 $ 76,310,537 $ 28,377,011
Advance payments from borrowers for taxes and
insurance ................................................. 267,709 247,756 118,594
Accrued expenses and other liabilities (Note 9) ............ 1,543,771 1,814,024 244,179
Income taxes payable ....................................... -- 152,163 --
Advances from the FHLB (Note 10) ........................... 5,000,000 22,000,000 1,250,000
------------ ------------ ------------
Total Liabilities ......................................... 118,902,903 100,524,480 29,989,784
------------ ------------ ------------
Commitments and contingencies (Note 12)
Stockholders' Equity (Notes 14 and 21)
Preferred stock $.01 par value - 2,500,000 shares
authorized, 0 shares outstanding at March 31, 1999;
$4 par value - 1,000,000 shares authorized; 0
and 468,284 shares outstanding at September 30, 1998
and 1997, respectively .................................. -- -- 1,873,136
Common stock, $.01 par value - 10,000,000 shares
authorized; 822,434, 813,473 and 330,000 shares
outstanding, respectively ............................... 8,224 8,135 3,300
Additional paid-in capital ................................ 6,167,777 6,092,865 3,901,217
Retained earnings (deficit) ............................... 1,031,408 609,110 (4,213,837)
Accumulated other comprehensive income .................... (214,625) 107,346 --
------------ ------------ ------------
Total Stockholders' Equity ................................ 6,992,784 6,817,456 1,563,816
------------ ------------ ------------
$125,895,687 $107,341,936 $ 31,553,600
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
----------------------------- -----------------------------
1999 1998 1998 1997
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest income
Loans ..................................... $1,867,697 $1,188,200 $2,630,943 $2,253,113
Investments ............................... 1,922,458 265,740 1,379,881 140,710
---------- ---------- ---------- ----------
Total interest income ...................... 3,790,155 1,453,940 4,010,824 2,393,823
---------- ---------- ---------- ----------
Interest expense
Deposits (Note 8) ......................... 2,422,773 684,037 2,163,240 1,134,824
Borrowed money ............................ 368,936 97,479 399,465 156,007
---------- ---------- ---------- ----------
Total interest expense ..................... 2,791,709 781,516 2,562,705 1,290,831
---------- ---------- ---------- ----------
Net interest income ........................ 998,446 672,424 1,448,119 1,102,992
Provision for loan losses (Note 4) ......... 23,132 95,313 159,486 487,430
Net interest income after provision for
loan losses ............................... 975,314 577,111 1,288,633 615,562
---------- ---------- ---------- ----------
Noninterest income
Fees and service charges .................. 296,104 261,682 494,433 266,435
Gain on sale of loans ..................... 4,395,835 2,609,426 5,774,281 3,261,349
---------- ---------- ---------- ----------
Total noninterest income ................... $4,691,939 $2,871,108 $6,268,714 $3,527,784
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
------------------------------- -------------------------------
1999 1998 1998 1997
------------- --------------- --------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Noninterest expense
Compensation and employee benefits ........... $2,936,823 $ 1,656,380 $ 3,747,657 $2,996,191
Occupancy .................................... 449,758 193,013 497,653 325,346
Professional services ........................ 104,490 68,270 192,701 129,905
Advertising .................................. 246,554 199,022 567,575 37,333
Deposit insurance premium .................... 30,800 54,513 94,942 97,895
Furniture, fixtures and equipment ............ 211,305 88,177 202,715 160,186
Data processing .............................. 62,388 77,064 132,057 90,694
Provision for (recovery of) loss on real
estate owned (Note 7) ...................... (5,972) 5,172 5,172 205,437
Other real estate owned expenses (Note 7)..... 10,666 13,293 28,704 35,073
Other operating expenses ..................... 940,143 539,260 1,168,061 699,150
---------- ----------- ----------- ----------
Total noninterest expense ..................... 4,986,955 2,894,164 6,637,237 4,777,210
---------- ----------- ----------- ----------
Income (loss) before income tax provision ..... 680,298 554,055 920,110 (633,864)
---------- ----------- ----------- ----------
Income tax provision (Note 11) ................ 258,000 212,000 311,000 --
---------- ----------- ----------- ----------
Net income (loss) ............................. $ 422,298 $ 342,055 $ 609,110 $ (633,864)
---------- ----------- ----------- ----------
Basic and diluted earnings (loss) per share
(Note 15) .................................... $ .52 $ .44 $ .77 $ (1.92)
========== =========== =========== ==========
</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>
SIX MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
--------------------------- ----------------------------
1999 1998 1998 1997
------------- ----------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net (loss) income ......................... $ 422,298 $342,055 $609,110 $ (633,864)
---------- -------- -------- -----------
Other comprehensive income, net of
tax:
Unrealized gains (losses) on
securities ............................. (321,971) 15,501 107,346 --
---------- -------- -------- -----------
Other comprehensive income (loss) ......... (321,971) 15,501 107,346 --
---------- -------- -------- -----------
Comprehensive (loss) income ............... $ 100,327 $357,556 $716,456 $ (633,864)
========== ======== ======== ===========
</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 813,473
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
Issuance of 8,961 common
shares (unaudited) ............. -- 89 74,912 -- -- 75,001
Net income for the period
(unaudited) .................... -- -- -- 422,298 -- 422,298
Other comprehensive
income, net of tax of
$199,900 (unaudited)............ -- -- -- -- (321,971) (321,971)
------------ -------- ------------ ------------ ---------- ------------
Balance at March 31, 1999
(unaudited) .................... $ -- $ 8,224 $ 6,167,777 $ 1,031,408 $ (214,625) $ 6,992,784
============ ======== ============ ============ ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSSOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
------------------------------------- -------------------------------------
1999 1998 1998 1997
----------------- ----------------- ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ......................... $ 422,298 $ 342,055 $ 609,110 $ (633,864)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities
Provision for loan losses ................. 23,132 95,313 159,486 487,430
Provision for losses on foreclosed
assets ................................... (5,972) 5,172 5,172 205,437
Depreciation and amortization ............. 172,138 57,736 133,099 116,242
Deferred income taxes ..................... 318,000 -- (274,000) --
Unrealized loss (gain) on trading
securities ............................... (5,750) 11,707 5,750 --
Realized gain on sale of investments ...... (2,130) -- -- --
Amortization of excess of purchase
price over net assets acquired ........... -- 14,330 19,600 --
Amortization of security premiums ......... 284,923 19,231 274,226 7,000
Amortization of deferred fees ............. 26,688 (32,317) (60,422) (117,541)
Stock compensation ........................ -- -- -- 423,136
Discount accretion net of premium
amortization ............................. (92,235) (43,096) 7,171 (10,378)
Loss on disposal of fixed assets .......... -- -- 1,687 --
Loss (gain) on sale of foreclosed real
estate ................................... 3,547 367 756 (16,143)
Gain on sale of loans held for sale ....... (4,395,835) (2,609,426) (5,774,281) (3,261,349)
(Increase) decrease in assets:
Disbursements for origination of loans..... (186,528,196) (130,383,098) (252,602,776) (138,202,824)
Proceeds from sales of loans .............. 214,878,752 112,268,606 243,001,891 136,823,690
Accrued interest and dividend
receivable ............................... (119,737) (192,023) (647,995) 38,979
Insurance recoveries on foreclosures ...... -- -- -- 44,152
Prepaid expenses and other assets ......... (500,307) (367,185) (468,831) (211,152)
Deferred loan fees collected, net of
deferred costs incurred .................. (19,087) 41,498 (227,125) 50,045
Increase (decrease) in liabilities:
Accrued expenses and other liabilities..... (270,253) 823,061 1,569,645 124,743
Income taxes payable ...................... 47,737 212,000 85,869 --
Purchases of trading securities ........... -- -- (247,000) --
Proceeds from sale of trading
securities ............................... 243,120 -- -- --
-------------- -------------- -------------- --------------
Net cash provided by (used in)
operating activities ..................... $ 24,480,833 $ (19,736,069) $ (14,428,968) $ (4,132,397)
-------------- -------------- -------------- --------------
</TABLE>
F-8
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSSOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
----------------------------------- ---------------------------------
1999 1998 1998 1997
---------------- ---------------- ---------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOW FROM INVESTING ACTIVITIES
Net (decrease) increase in loans ....... $ (5,986,403) $ (159,725) $ (6,402,285) $ 1,767,967
Purchases of premises and equipment..... (1,097,231) (146,634) (663,564) (38,654)
Proceeds from sales of foreclosed real
estate ................................ 98,569 -- 97,031 25,337
Purchases of investment securities ..... (43,736,887) (17,501,134) (55,971,612) --
Proceeds from sale of investment
securities ............................ 2,265,534 -- -- --
Proceeds from repayments of
investment securities ................. 14,704,288 1,279,026 5,703,814 --
Purchases of FHLB stock ................ (2,565,500) (245,600) (758,100) --
Proceeds from sale of FHLB stock ....... 2,552,900 -- 72,500 --
Acquisition, net of cash acquired ...... -- (2,367,517) (2,367,517) --
------------- ------------- ------------- ------------
Net cash (used in) provided by
investing activities .................. (33,764,730) (19,141,584) (60,289,733) 1,754,650
------------- ------------- ------------- ------------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in deposits ............... 35,780,886 32,145,616 47,931,522 5,006,040
Issuance of common shares .............. 75,001 5,850,000 6,101,000 --
Net advances (repayments) from
FHLB .................................. (17,000,000) 1,816,000 20,750,000 (3,750,000)
Increase (decrease) in advance
payments by borrowers for taxes
and insurance ......................... 19,953 202,370 129,362 5,084
------------- ------------- ------------- ------------
Net cash provided by financing
activities ............................ 18,875,840 40,013,986 74,911,884 1,261,124
------------- ------------- ------------- ------------
Increase (decrease) in cash and cash
equivalents ........................... 9,591,943 1,136,333 193,183 (1,116,623)
------------- ------------- ------------- ------------
Cash and cash equivalents, at
beginning of period ................... 433,218 240,035 240,035 1,356,658
------------- ------------- ------------- ------------
Cash and cash equivalents, at end of
period ................................ $ 10,025,161 $ 1,376,368 433,218 $ 240,035
============= ============= ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1999 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Greater Atlantic Financial Corp. (GAFC, or the "Company") is a bank holding
company whose principal activity is the ownership and management of Greater
Atlantic Bank, (GAB or "the Bank"), and its wholly-owned subsidiary, Greater
Atlantic Mortgage Corporation (GAMC). Effective October 1, 1997, GAFC acquired
100% of the outstanding shares of Greater Atlantic Savings Bank, F.S.B. 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 March 31, 1999 and for the six 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 March 31, 1999 and September 30,
1998, the allowance for loan losses and valuation of real estate are adequate
based on information currently available. A worsening or protracted economic
decline would increase the likelihood of losses due to credit and market risks
and could create the need for substantial additional loan loss reserves. See
discussion of regulatory matters in Note 13.
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
F-10
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED.)
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 March 31, 1999 and September 30, 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, un-disbursed loans in process, deferred loan fees, and
allowances for loan losses.
Loans are placed on non-accrual status when the principal or interest is
past due more than 90 days or when, in management's opinion, collection of
principal and interest is not likely to be made in accordance with a loan's
contractual terms.
The allowance for loan losses provides for the risk of losses inherent in
the lending process. The allowance for loan losses is based on periodic reviews
and analyses of the loan portfolio which include consideration of such factors
as the risk rating of individual credits, the size and diversity of the
portfolio, economic conditions, prior loss experience and results of periodic
credit reviews of the portfolio. The allowance for loan losses is increased by
provisions for loan losses charged against income and reduced by charge-offs,
net of recoveries. In management's judgment, the allowance for loan losses is
considered adequate to absorb losses inherent in the loan portfolio.
The Company uses a two-tier approach: (1) identification of impaired loans
and the establishment of specific loss allowances on such loans; and (2)
establishment of general valuation allowances on the remainder of the portfolio.
The Company considers a loan to be impaired if it is probable that they will be
unable to collect all amounts due (both principal and interest) according to the
contractual terms of the loan agreement. When a loan is deemed impaired, the
Company computes the present value of the loan's future cash flows, discounted
at the effective interest rate. The effective rate used is the contractual rate
adjusted for any deferred fees, deferred costs,
F-11
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED.)
premiums or discounts existing at origination. If the present value is less than
the carrying value of the loan, a valuation allowance is recorded. For
collateral dependent loans, the Company uses the fair value of the collateral,
less estimated costs to sell, on a discounted basis, to measure impairment.
Mortgage loans originated and intended for sale are carried at the lower of
cost or estimated market value in the aggregate. Net unrealized losses are
recognized in a valuation allowance by charges to income.
MORTGAGE LOAN INCOME, DISCOUNTS AND PREMIUMS
Interest income on loans is recorded on the accrual method. Discounts and
premiums relating to mortgage loans purchased are deferred and amortized against
or accreted into income over the estimated lives of the loans using the
level-yield method. Accrual of interest is discontinued and an allowance for
uncollected interest is established and charged to interest income for the full
amount of accrued interest receivable on loans which are delinquent for a period
of 90 days or more.
LOAN ORIGINATION AND COMMITMENT FEES
Loan origination and commitment fees and certain incremental direct loan
origination costs are being deferred with the net amount being amortized as an
adjustment of the related loan's yield. The Company is amortizing those amounts
over the contractual life of the related loans as adjusted for anticipated
prepayments using current and past payment trends.
MORTGAGE LOAN SALES AND SERVICING
The Company originates and sells loans and participating interest in loans
generally without retaining servicing rights. Loans are sold to provide the
Company with additional funds and to generate gains from mortgage banking
operations. Loans originated for sale are carried at the lower of cost or
market. When a loan and the related servicing are sold the Company recognizes
any gain or loss at the time of sale.
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 $2,863,325 were sold with servicing rights
retained as of March 31, 1999. The Company also sells participation interests in
loans that it services.
PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost. Depreciation is computed on
the straight-line method over useful lives ranging from five to seven years.
Leasehold improvements are capitalized and amortized using the straight-line
method over the life of the related lease.
FORECLOSED REAL ESTATE
Real estate acquired through foreclosure is recorded at the lower of cost
or fair value less estimated selling costs. Subsequent to the date of
foreclosure, valuation adjustments are made, if required, to the lower of cost
or fair value less estimated selling costs. Costs related to holding the real
estate, net of related income, are reflected in operations when incurred.
Recognition of gains on sale of real estate is dependent upon the transaction
meeting certain criteria relating to the nature of the property sold and the
terms of the sale.
F-12
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND
FOR THE SIX 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
six months ended March 31, 1999 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 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.
F-13
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED.)
2. ACQUISITION
Effective October 1, 1997, Greater Atlantic Financial Corp. 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).
3. INVESTMENTS
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE, MARCH 31, 1999
Investment securities
Equity securities .................... $ 9,093,224 $ -- $ (76,047) $ 9,017,177
SBA notes ........................... 31,464,727 3,630 (302,674) 31,165,683
FHLB notes .......................... 1,000,000 -- (10,940) 989,060
CMO's ............................... 1,730,782 6,505 -- 1,737,287
Corporate debt securities ........... 2,112,341 99,299 (2,750) 2,208,890
----------- -------- ---------- -----------
45,401,074 109,434 (392,411) 45,118,097
----------- -------- ---------- -----------
Mortgage-backed securities
FNMA notes .......................... 21,287,118 18,867 (70,899) 21,235,086
GNMA notes .......................... 3,070,301 1,827 (19,489) 3,052,639
FHLMC notes ......................... 5,181,879 -- (32,610) 5,149,269
REMICS .............................. 2,546,188 36,437 -- 2,582,625
----------- -------- ---------- -----------
32,085,486 57,131 (122,998) 32,019,619
----------- -------- ---------- -----------
$77,486,560 $166,565 $ (515,409) $77,137,716
=========== ======== ========== ===========
AVAILABLE-FOR-SALE, SEPTEMBER 30, 1998
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
Investment Securities
Corporate notes ..................... $ 247,000 $ -- $ (5,750) $ 241,250
=========== ======== ========== ===========
HELD-TO-MATURITY, SEPTEMBER 30, 1997
Investment securities
FHLB notes .......................... $ 1,004,836 $ -- $ (6,398) $ 998,438
=========== ======== ========== ===========
</TABLE>
F-14
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED.)
The weighted average interest rate on investments was 7.28% for the six
months ended March 31, 1999 and 7.57% and 4.72% for the years ended September
30, 1998 and 1997, respectively.
Proceeds from available for sale securities were $2,265,534, $0 and $0 for
the six months ended March 31, 1999 and the years ended September 30, 1998 and
1997, respectively. Gross realized gains were $6,010, $0 and $0 for the six
months ended March 31, 1999 and the years ended September 30, 1998 and 1997,
respectively.
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
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
TRADING
--------------------------
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Amounts Maturing In:
After ten years ................. $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.
4. LOANS RECEIVABLE
Loans receivable consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
MARCH 31, --------------------------------
1999 1998 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Mortgage loans:
Single-family ............................ $ 17,189,223 $ 17,198,151 $ 8,778,361
Multi-family ............................. 1,050,335 1,189,000 1,653,000
Construction ............................. 4,310,000 5,519,562 6,794,850
Commercial real estate ................... 3,908,378 2,246,457 2,554,591
Land loans ............................... 814,682 723,198 1,176,750
------------ ------------ ------------
Total mortgage loans ...................... 27,272,618 26,876,368 20,957,552
Commercial loans .......................... 2,059,921 813,542 795,123
Consumer loans ............................ 4,237,802 746,353 778,492
------------ ------------ ------------
Total loans ............................... 33,570,341 28,436,263 22,531,167
------------ ------------ ------------
Due borrowers on loans-in process ......... (1,636,302) (2,276,168) (2,750,676)
Deferred loan fees ........................ 16,524 (37,310) (54,714)
Allowance for loan losses ................. (610,000) (577,929) (776,150)
Unearned premium (discounts) .............. 24,149 (34,988) (95,103)
------------ ------------ ------------
(2,205,629) (2,926,395) (3,676,643)
------------ ------------ ------------
Loans receivable, net ..................... $ 31,364,712 $ 25,509,868 $ 18,854,524
============ ============ ============
</TABLE>
F-15
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED.)
Loans held for sale are all single-family mortgage loans.
The activity in allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
--------------------------- -----------------------------
1999 1998 1998 1997
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, beginning ................ $577,929 $ 776,150 $ 776,150 $ 429,257
Provision for loan losses ......... 23,132 95,313 159,486 487,430
Charge-offs ....................... (1,061) (171,463) (362,707) (140,537)
Recoveries ........................ 10,000 -- 5,000 --
-------- ---------- ---------- ----------
Balance, ending ................... $610,000 $ 700,000 $ 577,929 $ 776,150
======== ========== ========== ==========
</TABLE>
The amount of loans serviced for others totaled $4,039,997, $1,720,790 and
$1,204,968 as of March 31, 1999, September 30, 1998 and September 30, 1997,
respectively.
The allowance for uncollected interest, established for mortgage loans
which are delinquent for a period of 90 days or more, amounted to $499, $13,762
and $38,542 as of March 31, 1999, September 30, 1998 and September 30, 1997,
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 $12,058, $230,320 and $665,408 as of March 31, 1999, September 30, 1998,
and September 30, 1997, respectively.
5. ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest and dividends receivable consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
MARCH 31, ------------------------
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
Investments ............................. $609,305 $583,642 $ 17,916
Loans receivable ........................ 342,088 254,010 181,365
Accrued dividends on FHLB stock ......... 23,111 17,115 7,491
-------- -------- --------
$974,504 $854,767 $206,772
======== ======== ========
</TABLE>
6. PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
MARCH 31, ----------------------------
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
Furniture, fixtures and equipment ......... $1,693,021 $1,311,262 $ 827,101
Leasehold improvements .................... 1,243,833 526,361 520,754
---------- ---------- ---------
2,936,854 1,837,623 1,347,855
Less: Allowances for depreciation and
amortization ............................. 1,253,969 1,079,831 1,118,841
---------- ---------- ---------
$1,682,885 $ 757,792 $ 229,014
========== ========== =========
</TABLE>
F-16
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED.)
7. FORECLOSED REAL ESTATE
Foreclosed real estate is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
MARCH 31, --------------------------
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Real estate acquired through settlement of loans. $ 187,200 $ 90,283 $ 201,692
========= ======== =========
</TABLE>
The cost of operations for foreclosed real estate in the statements of
operations consists of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
----------------------------- ------------------------------
1999 1998 1998 1997
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
INCOME:
Gain on sale ............................. $ -- $ -- $ -- $ 16,143
--------- --------- --------- ----------
EXPENSE:
Loss on sale ............................. 3,547 -- 756 --
Provision for (recovery of) loss ......... (5,972) 5,172 5,172 205,437
Operating expenses ....................... 10,666 13,293 28,704 35,073
--------- --------- --------- ----------
8,241 18,465 34,632 240,510
--------- --------- --------- ----------
Loss ..................................... $ (8,241) $ (18,465) $ (34,632) $ (224,367)
========= ========= ========= ==========
</TABLE>
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 income .................... (5,172)
Charge-offs, net of recoveries ................. (178,360)
----------
Balance at September 30, 1998 .................. 21,905
Provision (recovery) charged to income ......... (5,972)
Charge-offs, net of recoveries ................. (11,133)
----------
Balance at March 31, 1999 ...................... $ 4,800
==========
</TABLE>
F-17
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED.)
8. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
RANGES OF
CONTRACTUAL
MARCH 31, 1999 AMOUNT INTEREST RATES %
- ---------------------------------------------- --------------- ---------------- ----------
<S> <C> <C> <C>
Savings accounts ............................. $ 925,278 3.00% 0.8
NOW/Money market accounts .................... 17,632,938 0.00 - 5.00% 15.7
Certificates of deposit ...................... 89,877,365 4.50 - 6.50% 80.2
Non-interest bearing demand deposits ......... 3,655,842 0.00% 3.3
------------ ------- -----
$112,091,423 100.0
============ =====
SEPTEMBER 30, 1998
- -----------------------------------------------
Savings accounts ............................. $ 702,583 3.00% 0.9
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
============ ======
SEPTEMBER 30, 1997
- -----------------------------------------------
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
------------ ------- ------
$ 28,377,011 100.00
============ ======
</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 following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
------------------------- --------------------------
1999 1998 1998 1997
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Now/Money market accounts ......... $ 292,635 $ 48,810 $ 168,301 $ 102,888
Savings accounts .................. 13,162 13,440 29,516 27,950
Certificates of deposit ........... 2,116,976 621,787 1,965,423 1,003,986
---------- -------- ---------- ----------
$2,422,773 $684,037 $2,163,240 $1,134,824
========== ======== ========== ==========
</TABLE>
F-18
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED.)
Deposits, including certificates of deposit, with balances in excess of
$100,000 totaled $41,156,243, $34,515,472 and $9,442,598 at March 31, 1999,
September 30, 1998, and September, 30, 1997, respectively.
9. DEFERRED COMPENSATION PLAN
On October 30, 1997, the Company adopted a deferred compensation plan.
Under the deferred compensation plan, an employee may elect to participate by
directing that all or part of his or her compensation be credited to a deferral
account. The election must be made prior to the beginning of the calendar year.
The deferral account bears interest at 6% per year. The amounts credited to the
deferral account are payable in preferred stock or cash at the election of the
Board of Directors on the date the Company announces a change in control or the
date three years from the date the participant elects to participate in the
deferred compensation plan. At March 31, 1999 and September 30, 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 SIX MONTHS ENDED AT OR FOR THE YEARS ENDED
MARCH 31, SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1998 1997
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
FHLB Advances:
Average balance outstanding ........................ $ 13,664,500 $ 2,455,148 $ 5,358,094 $ 2,867,329
Maximum amount outstanding at any month-end
during the period ................................. 5,000,000 -- 22,000,000 2,600,000
Balance outstanding at end of period ............... 5,000,000 -- 22,000,000 1,250,000
Weighted average interest rate during the period ... 4.76% 5.70% 5.34% 5.44%
Weighted average interest rate at end of period .... 3.98% -- 6.00% 6.55%
Reverse Repurchase Agreements:
Average balance outstanding ........................ $ 1,548,997 $ 993,165 $ 2,014,881 $ --
Maximum amount outstanding at any month-end
during the period ................................. -- 3,071,500 3,971,000 --
Balance outstanding at end of period ............... -- 3,066,000 -- --
Weighted average interest rate during the period ... 5.68% 5.64% 5.66% --
Weighted average interest rate at end of period .... -- 5.74% -- --
</TABLE>
F-19
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED.)
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
The following is a summary of the income tax provision:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
--------------------------- ----------------------
1999 1998 1998 1997
------------- ----------- ------------ -------
<S> <C> <C> <C> <C>
Current - Federal provision .......... $ (48,000) $170,000 $ 467,000 $ --
State provision ...................... (12,000) 42,000 119,000 --
--------- -------- ---------- ----
(60,000) 212,000 586,000 --
Deferred - Federal and state ......... 318,000 -- (275,000) --
--------- -------- ---------- ----
$ 258,000 $212,000 $ 311,000 $ --
========= ======== ========== ====
</TABLE>
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pre-tax income as a result of the following differences:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
------------------------- -------------------------------
1999 1998 1998 1997
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Federal tax expense (benefit) ................. $ 231,400 $188,400 $ 311,000 $ (191,000)
State tax expense (benefit) ................... 40,800 33,200 74,000 (54,000)
Increase (decrease) in taxes resulting from:
Change in the valuation allowance ............. -- -- 20,000 245,000
Permanent differences ......................... -- -- (16,000) --
Change in effective deferred tax rate ......... -- -- (63,000) --
Other ......................................... (14,200) (9,600) (15,000) --
--------- -------- ---------- ----------
Income tax provision (benefit) ................ $ 258,000 $212,000 $ (311,000) $ --
========= ======== ========== ==========
</TABLE>
F-20
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED.)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
MARCH 31, ------------------------------
1999 1998 1997
------------ ------------ ---------------
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Net operating loss carryforwards .................. $ 656,000 $ 679,000 $ 698,000
Allowance for loan loss ........................... 240,000 227,000 238,000
Loans held for sale ............................... 9,000 292,000 87,000
Core deposit intangible ........................... 67,000 67,000 65,000
Deferred loan fees ................................ 44,000 43,000 43,000
Book over tax depreciation ........................ 66,000 66,000 63,000
Post foreclosure writedown on foreclosed
assets .......................................... -- 9,000 69,000
Compensation payable .............................. 196,000 196,000 --
Net discounts (premiums) on second trusts ......... 47,000 48,000 --
Miscellaneous items ............................... 55,000 46,000 25,000
--------- --------- ------------
Total deferred tax assets ......................... 1,380,000 1,673,000 1,288,000
--------- --------- ------------
DEFERRED TAX LIABILITIES
FHLB stock dividends .............................. 39,000 39,000 38,000
Deferred origination costs ........................ 114,000 89,000 --
--------- --------- ------------
Total deferred tax liabilities .................... 153,000 128,000 38,000
--------- --------- ------------
Net deferred tax assets ........................... 1,227,000 1,545,000 1,250,000
Less: Valuation allowance ......................... (548,000) (548,000) (1,190,000)
--------- --------- ------------
Total ........................................... $ 679,000 $ 997,000 $ 60,000
========= ========= ============
</TABLE>
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 six months ended March 31, 1999, the Company's estimated
effective income tax rate is 38%, 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
F-21
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED.)
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 approximately $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.
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 six months ended March 31, 1999 and March 31,
1998, was $409,048 and $175,876, respectively, and for the years ended September
30, 1998 and September 30, 1997 was $454,613 and $222,994, 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 six months
ended March 31, 1999 and March 30, 1998 was $25,647 and $39,670, respectively,
and for the years ended September 30, 1998 and 1997 was $79,340 and $74,787,
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
F-22
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED.)
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 March 31, 1999, September 30, 1998 and
September 30, 1997.
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 March
31, 1999 and September 30, 1998, the Bank was classified as a well capitalized
financial institution.
As part of FDICIA, the minimum capital requirements that the Bank is
subject to are as follows: 1) tangible capital equal to at least 1.5% of
adjusted total assets, 2) core capital equal to at least 4% of adjusted total
assets and 3) total risk-based capital equal to at least 8% of risk-based
assets.
The following presents the Bank's capital position at March 31, 1999 and
September 30, 1998:
<TABLE>
<CAPTION>
REQUIRED REQUIRED ACTUAL ACTUAL
AT MARCH 31, 1999 BALANCE PERCENT BALANCE PERCENT SURPLUS
- --------------------------- ------------- ---------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Tangible .................. $1,888,240 1.50% $7,018,701 5.58% $5,130,461
Core ...................... $5,035,306 4.00% $7,018,701 5.58% $1,983,395
Risk-based ................ $2,965,625 8.00% $7,628,701 12.86% $4,663,076
AT SEPTEMBER 30, 1998
- ----------------------------
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
</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,
MARCH 31, -----------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
GAAP Capital ...................................... $6,850,251 $6,384,348 $1,563,816
Less: Unrealized (gains) losses on available for
sale securities .................................. 168,450 (107,346) --
---------- ---------- ----------
Tangible Capital .................................. 7,018,701 6,277,002 1,563,816
Core Capital ...................................... 7,018,701 6,277,002 1,563,816
Plus: Allowance for general loss reserves ......... 610,000 428,088 246,000
---------- ---------- ----------
Risk-Based Capital ................................ $7,628,701 $6,705,090 $1,809,816
========== ========== ==========
</TABLE>
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
F-23
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED.)
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 94,685 shares to stockholders. The stock options and
warrants vest immediately upon issuance and carry a maximum term of 10 years.
The exercise price for the stock options and warrants is the fair market value
at grant date. As of September 30, 1998, 94,685 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 ...................... 41,667 $ 8.38 11-29-2008
------
Balance outstanding at March 31, 1999 58,334
======
</TABLE>
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), but it continues to measure compensation cost for
the stock options using the intrinsic value method prescribed by APB Opinion No.
25. 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.
F-24
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED.)
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>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
--------------------- --------------------
1999 1998 1998 1997
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Basic ........... 817,264 780,005 787,075 330,000
Diluted ......... 819,014 780,005 787,075 330,000
</TABLE>
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
F-25
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED.)
prevailing at the time for comparable transactions with non-affiliated persons.
The aggregate balance of loans to directors, officers and other related parties
is $430,275, $268,559 and $150,000 as of March 31,1999, September 30, 1998 and
September 30, 1997, 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.
The carrying value and estimated fair value of financial instruments is
summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Assets:
Cash and interest- bearing deposits .... $ 433,218 $ 433,218 $ 240,035 $ 240,035
Investment securities .................. 51,171,435 51,171,435 1,004,836 1,004,836
Loans receivable ....................... 50,831,410 51,716,537 28,800,901 28,892,603
Liabilities:
Deposits ............................... 76,310,537 76,612,024 28,377,011 28,391,647
Borrowings ............................. 22,000,000 22,010,000 1,250,000 1,250,000
Off-balance sheet instruments:
Commitments to extend credit ........... -- 882,000 -- 782,000
Loans in process ....................... -- 19,000 -- --
</TABLE>
F-26
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED.)
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 six months ended March 31, 1999 and 1998, and the years
ended September 30, 1998 and 1997.
19. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
--------------------------- -----------------------------
1999 1998 1998 1997
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Cash paid during period for interest on deposits
and borrowings ................................. $1,146,444 $249,898 $2,429,000 $1,306,800
Transfer of loans for foreclosed assets ......... $ -- $ -- $ 89,000 $ 451,000
</TABLE>
Following is a reconciliation of goodwill recorded in conjunction with the
acquisition discussed in Note 2:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1998
-------------------
<S> <C>
ACQUISITION
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
F-27
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED.)
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.
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-28
<PAGE>
ABOUT THIS PROSPECTUS
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 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 of this prospectus.
CAUTION ABOUT FORWARD LOOKING STATEMENTS
We make forward looking statements in this prospectus that are subject to
risks and uncertainties. These forward looking statements include statements
regarding profitability, liquidity, allowance for loan losses, interest rate
sensitivity, market risk, year 2000 compliance, and financial and other goals.
The words "believes," "expects," "may," "will," "should," "projects,"
"contemplates," "anticipates," "forecasts," "intends" or other similar words or
terms are intended to identify forward looking statements.
These forward looking statements are subject to significant uncertainties
because they are based upon or are affected by factors including:
o Continued levels of loan quality and origination volume
o Interest rate fluctuations and other economic conditions
o Competition in product offerings and product pricing
o Implementation of year 2000 technology changes by us and our vendors and
suppliers
o Continued relationships with major customers
o Future laws and regulations
o Management of the company and the bank
o Other factors, including those matters discussed in the "Risk Factors"
section and the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of this prospectus
Because of these uncertainties, our actual future results may be materially
different from the results indicated by these forward looking statements. In
addition, our past results of operations do not necessarily indicate our future
results.
<PAGE>
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2,000,000 SHARES
[LOGO OMITTED]
GREATER ATLANTIC
FINANCIAL CORP.
COMMON STOCK
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PROSPECTUS
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LEGG MASON WOOD WALKER
INCORPORATED
JUNE 24, 1999
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