FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ___________________.
COMMISSION FILE NUMBER: 0-26467
GREATER ATLANTIC FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 54-1873112
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10700 PARKRIDGE BOULEVARD, SUITE P50 703-391-1300
------------
RESTON, VIRGINIA 20191 (Registrant's Telephone Number,
---------------------- Including Area Code)
(Address of Principal Executive Offices)
(Zip Code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-KSB [ ]
As of December 15, 2000, the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the Registrant was approximately
$6,954,691.
As of December 15, 2000, there were 3,007,434 shares of the registrant's
Common Stock, par value $0.01 per share outstanding.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I Page
----
<S> <C> <C>
Item 1. Description of Business ......................................................................... 3
Business ........................................................................................ 3
Market Area and Competition ..................................................................... 3
Market Risk ..................................................................................... 3
Acquisition of Dominion Savings Bank, FSB........................................................ 3
Lending Activities .............................................................................. 4
Asset Quality ................................................................................... 7
Allowance for Loan Losses........................................................................ 8
Investment Activities ...........................................................................10
Sources of Funds ................................................................................14
Subsidiary Activities ...........................................................................16
Personnel .......................................................................................16
Regulation and Supervision ......................................................................17
Federal and State Taxation ......................................................................23
Item 2. Description of Property .........................................................................25
Item 3. Legal Proceedings ...............................................................................26
Item 4. Submission of Matters to a Vote of Security Holders .............................................26
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ...........................26
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................................................27
Item 7. Consolidated Financial Statements and Supplementary Information..................................46
PART III
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..............................................................87
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (A) of the Exchange Act...............................................87
Item 10. Executive Compensation ..........................................................................89
Item 11. Security Ownership of Certain Beneficial Owners and Management ..................................92
Item 12. Certain Relationships and Related Transactions ..................................................92
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K .................................93
SIGNATURES.........................................................................................................94
</TABLE>
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
We are a savings and loan holding company, which was organized in June
1997. We conduct substantially all of our business through our wholly-owned
subsidiary, Greater Atlantic Bank (the "Bank"), a federally-chartered savings
bank, and its wholly-owned subsidiary, Greater Atlantic Mortgage Corporation
("Greater Atlantic Mortgage"). We offer traditional banking services to
customers through eight 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.
MARKET AREA AND COMPETITION
We operate in a competitive environment, competing for deposits and
loans with other thrifts, commercial banks and other financial entities.
Numerous mergers and consolidations involving banks in the market in which we
operate have occurred resulting in an intensification of competition in the
banking industry in our geographical market. Many of the financial
intermediaries operating in our market area offer certain services, such as
trust, investment and international banking services, which we do not offer. In
addition, banks with a larger capitalization than ours and financial
intermediaries not subject to bank regulatory restrictions have larger lending
limits and are thereby able to serve the needs of larger customers.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises primarily from interest-rate risk
inherent in its lending and deposit taking activities. To that end, management
actively monitors and manages its interest-rate risk exposure. The measurement
of market risk associated with financial instruments is meaningful only when all
related and offsetting on- and off-balance-sheet transactions are aggregated,
and the resulting net positions are identified. Disclosures about the fair value
of financial instruments, which reflect changes in market prices and rates, can
be found in Note 17 of Notes to Consolidated Financial Statements herein.
The Company's primary objective in managing interest-rate risk is to
minimize the adverse impact of changes in interest rates on the Bank's net
interest income and capital, while adjusting the Company's asset-liability
structure to obtain the maximum yield-cost spread on that structure. The Company
relies primarily on its asset-liability structure to control interest-rate risk.
However, a sudden and substantial increase in interest rates may adversely
impact the Company's earnings, to the extent that the interest rates borne by
assets and liabilities do not change at the same speed, to the same extent, or
on the same basis.
ACQUISITION OF DOMINION SAVINGS BANK, FSB
On August 22, 2000, the Company completed the acquisition of Dominion
Savings Bank, FSB, Front Royal, Virginia. 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. Shareholders of Dominion were paid approximately $1.1 million in
cash, resulting in goodwill of approximately $1.4 million, which is being
amortized, on a straight-line basis over 15 years. Since the Dominion
acquisition occurred on August 22, 2000, its impact upon the Company's
consolidated results of operations for the fiscal year ended September 30, 2000
was not significant.
3
<PAGE>
LENDING ACTIVITIES
GENERAL. Net loans receivable at September 30, 2000 were $132.7
million, an increase of $59.9 million or 82.30% from the $72.8 million held at
September 30, 1999. 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 $5.6 million at September 30, 2000
compared to $7.4 million at September 30, 1999, a decrease of $1.8 million. The
decrease in loans held for sale is due to a reduction in the amount of loans
originated and sold during fiscal year 2000 when compared to fiscal year 1999.
During the fiscal year 2000, the origination and purchase of single-family
residential loans along with the origination of consumer loans and commercial
loans for the bank's portfolio increased resulting in an increase in the
aggregate of loans originated and purchased for the bank's portfolio.
The following table sets forth the bank's loan originations, purchases,
sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
For the Years Ended September 30, 2000 1999
-----------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Total loans at beginning of period $83,637 $53,606
Originations of loans for investment:
Single-family residential 48,023 23,429
Multi-family residential - -
Commercial real estate 7,501 3,769
Construction 18,169 2,814
Land loans 2,945 351
Second trust 416 784
Commercial business 17,541 12,362
Consumer 26,816 10,218
-----------------------------------------------------------------------------------------------
Total originations and purchases for investment 121,411 53,727
Loans originated for resale by Greater Atlantic Mortgage 117,037 312,077
-----------------------------------------------------------------------------------------------
Total originations 238,448 365,804
Repayments (56,236) (21,657)
Sale of loans originated for resale by Greater Atlantic Mortgage (118,874) (314,116)
-----------------------------------------------------------------------------------------------
Net activity in loans 63,338 30,031
-----------------------------------------------------------------------------------------------
Total loans at end of period (1) $146,975 $83,637
===============================================================================================
</TABLE>
-------------------------
(1) Includes loans held for sale of $5.6 million and $7.5 million at September
30, 2000 and 1999, respectively.
4
<PAGE>
LOAN PORTFOLIO. The following table sets forth the composition of the
bank's loan portfolio in dollar amounts and as a percentage of the portfolio at
the dates indicated.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
At September 30, 2000 1999
--------------------------------------------------------------------------------------------------------------
% of % of
Total Total
Amount Loans Amount Loans
--------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Single-family (1) $78,736 55.70 $53,219 69.86
Multi-family 1,053 0.74 1,216 1.60
Construction 14,537 10.28 4,624 6.07
Commercial real estate 10,765 7.62 5,664 7.43
Land 3,158 2.23 871 1.14
--------------------------------------------------------------------------------------------------------------
Total mortgage loans 108,249 76.57 65,594 86.10
--------------------------------------------------------------------------------------------------------------
Commercial business and consumer loans:
Commercial business 11,221 7.94 3,170 4.16
Consumer:
Home equity 20,116 14.23 7,114 9.34
Automobile 477 0.34 207 0.27
Other 1,294 0.92 102 0.13
--------------------------------------------------------------------------------------------------------------
Total commercial business and consumer loans 33,108 23.43 10,593 13.90
--------------------------------------------------------------------------------------------------------------
Total loans 141,357 100.00 76,187 100.00
==============================================================================================================
Less:
Allowance for loan losses (765) (590)
Loans in process (7,953) (3,049)
Unearned premium 59 244
--------------------------------------------------------------------------------------------------------------
Loans receivable, net $132,698 $72,792
==============================================================================================================
</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, 2000. The table does not
include the effect of future principal prepayments.
<TABLE>
<CAPTION>
At September 30, 2000
------------------------------------------------------------------------------------------------------------
Multi- Commercial
One- to Family and Business
Four- Commercial and Total
Family (1) Real Estate (1) Consumer Loans
------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Amounts due in:
One year or less $19,215 $9,115 $23,492 $51,822
After one year:
More than one year to three years 34,258 2,261 1,477 37,996
More than three years to five years 15,681 4,503 5,153 25,337
More than five years to 15 years 4,400 2,209 2,323 8,932
More than 15 years 8,654 - 663 9,317
------------------------------------------------------------------------------------------------------------
Total amount due $82,208 $18,088 $33,108 $133,404
============================================================================================================
</TABLE>
------------------------------
(1) Includes construction loans and land loans, net of loans in process of
$8.0 million.
5
<PAGE>
The following table sets forth, at September 30, 2000, the dollar
amount of loans contractually due after September 30, 2001, and whether such
loans have fixed interest rates or adjustable interest rates. At September 30,
2000, the bank did not have any construction, acquisition and development, or
land loans contractually due after September 30, 2001.
Due After September 30, 2001
--------------------------------------------------------------------------------
Fixed Adjustable Total
--------------------------------------------------------------------------------
(in thousands)
Real estate loans:
One- to four-family $15,605 $47,388 $62,993
Multi-family and commercial 6,554 2,419 8,973
--------------------------------------------------------------------------------
Total real estate loans 22,159 49,807 71,966
Commercial business and consumer loans 7,925 1,691 9,616
--------------------------------------------------------------------------------
Total loans $30,084 $51,498 $81,582
================================================================================
ONE- TO FOUR-FAMILY MORTGAGE LENDING. The bank currently offers both
fixed-rate and adjustable-rate mortgage ("ARM") loans with maturities of up to
30 years secured by single-family residences, which term includes real property
containing from one to four residences. At September 30, 2000, the bank's one-
to four-family mortgage loans totaled $78.7 million, or 55.70% of total loans.
Of the one- to four-family mortgage loans outstanding at that date, 23.30% were
fixed-rate loans and 76.70% were ARM loans.
CONSTRUCTION AND DEVELOPMENT LENDING. The bank originates construction
and development loans primarily to finance the construction of one- to
four-family, owner-occupied residential real estate properties located in the
bank's primary market area. The bank also originates land loans to local
contractors and developers for the purpose of making improvements thereon,
including small residential subdivisions in the bank's primary market area or
for the purpose of holding or developing the land for sale. At September 30,
2000, construction and development loans (including land loans) totaled $17.7
million, or 12.51%, of the bank's total loans, of which, land loans totaled $3.2
million, or 2.23% of total loans. The largest construction loan in the bank's
portfolio at September 30, 2000, was a $3.1 million loan secured by a first lien
deed of trust on land and improvements (15 unit building) to be developed on
land located in Calvert County, Maryland and a first lien deed of trust on
commercial real estate located in Prince George's County, Maryland. 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.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The bank originates
multi-family and commercial real estate loans that are generally secured by five
or more unit apartment buildings and properties used for business purposes such
as small office buildings or retail facilities located in the bank's primary
market area. The bank's multi-family and commercial real estate underwriting
policies provide that such real estate loans may be made in amounts of up to
75-80% of the appraised value of the property. The bank's multi-family and
commercial real estate loan portfolio at September 30, 2000 was $11.8 million,
or 8.36% of total loans. The largest multi-family or commercial real estate loan
in the bank's portfolio at September 30, 2000, was a $2.0 million loan secured
by assignment of an ownership interest in the borrower and assignment of notes
totaling $6.2 million.
COMMERCIAL BUSINESS LENDING. At September 30, 2000, the bank had $11.2
million in commercial business loans, which amounted to 7.94% 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,
6
<PAGE>
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.
CONSUMER LENDING. Consumer loans at September 30, 2000 amounted to
$21.9 million or 15.49% of the bank's total loans, and consisted primarily of
home equity loans, home equity lines of credit, and, to a significantly lesser
extent, secured and unsecured personal loans and new and used automobile loans.
These loans are generally made to residents of the bank's primary market area
and generally are secured by real estate, deposit accounts and automobiles.
These loans are typically shorter term and generally have higher interest rates
than one- to four-family mortgage loans.
The bank offers home equity loans and home equity lines of credit
(collectively, "home equity loans"). Most of the bank's equity loans are secured
by second mortgages on one- to four-family residences located in the bank's
primary market area. At September 30, 2000, these loans totaled $20.1 million or
14.23% of the bank's total loans and 60.76% of commercial business consumer
loans. Other types of consumer loans, primarily consisting of secured and
unsecured personal loans and new and used automobile loans, totaled $1.8
million, or 1.26% of the bank's total loans and 5.35% of consumer loans at
September 30, 2000.
ASSET QUALITY
DELINQUENT LOANS AND CLASSIFIED ASSETS. Reports listing all delinquent
accounts are generated and reviewed regularly by management and all loans or
lending relationships delinquent 30 days or more and all real estate owned
("REO") are reviewed monthly by the board of directors. The procedures taken by
the bank with respect to delinquencies vary depending on the nature of the loan,
the length and cause of delinquency and whether the borrower has previously been
delinquent.
Federal regulations and the bank's Asset Classification Policy require
that the bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The bank has incorporated the
internal asset classifications of the Office of Thrift Supervision (the "OTS")
as a part of its credit monitoring system. The bank currently classifies problem
and potential problem assets as "Substandard," "Doubtful" or "Loss" assets. An
asset is considered "Substandard" if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. "Substandard" assets include those characterized by the "distinct
possibility" that the insured institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "Doubtful" have all of the
weaknesses inherent in those classified "Substandard" with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "Loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "Special Mention."
The bank's management reviews and classifies the bank's assets on a
regular basis and the board of directors reviews the management's reports on a
quarterly basis. The bank classifies assets in accordance with the management
guidelines described above. At September 30, 2000, the bank had $579,000 of
loans designated as Substandard, which consisted of two commercial real estate
loans and one residential loan. At that same date the bank had $57,000 of assets
classified as Doubtful, consisting of one commercial real estate
7
<PAGE>
loan for $38,000 and nine second trust loans totaling $19,000. At September 30,
2000, the bank had no loans classified as Loss. As of September 30, 2000, the
bank also had one residential loan and three second trust loans, totaling
$120,000, designated as Special Mention. At September 30, 2000, the largest
adversely (other than Special Mention) classified loan was a multi-family loan
with an aggregate carrying balance of $442,000, which was secured by an
apartment building.
NON-PERFORMING ASSETS AND IMPAIRED LOANS. The following table sets
forth information regarding non-accrual loans and REO. The Bank's policy is to
cease accruing interest on mortgage loans 90 days or more past due, 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 any 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.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
September 30, 2000 1999
---------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Mortgage loans:
Single-family $ 144 $ 23
Commercial 50 -
---------------------------------------------------------------------------------------
Total non-accrual loans 194 23
REO 172 187
---------------------------------------------------------------------------------------
Total non-performing assets $366 $210
Non-performing loans to total loans held for investment 0.14% 0.03%
=======================================================================================
Total non-performing assets to total assets, at period end 0.12% 0.11%
=======================================================================================
</TABLE>
During the year ended September 30, 2000, 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
$4,000.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risks inherent in its loan
portfolio and the general economy. The allowance for loan losses is maintained
at an amount management considers adequate to cover estimated losses in loans
receivable which are deemed probable and estimable based on information
currently known to management. The allowance is based upon a number of factors,
including current economic conditions, actual loss experience and industry
trends. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the bank's allowance for loan losses.
Such agencies may require the bank to make additional provisions for estimated
loan losses based upon their judgments about information available to them at
the time of their examination. As of September 30, 2000, the bank's allowance
for loan losses amounted to $765,000 or 0.54% of total loans. While the
allowance for loan losses to total non-performing loans at September 30, 2000 is
394.33%, the allowance as a percentage of total loans decreased 0.23%, from
0.77% at September 30, 1999 to 0.54% at September 30, 2000. The decrease
resulted from a $65.2 million increase in total loans, from $76.2 million at
September 30, 1999 to $141.4 million at September 30, 2000. Based on
management's estimates, the allowance is considered adequate to cover estimated
losses in loans receivable at September 30, 2000.
8
<PAGE>
The following table sets forth activity in the bank's allowance for
loan losses.
--------------------------------------------------------------------------------
At or for the Years Ended September 30, 2000 1999
--------------------------------------------------------------------------------
(dollars in thousands)
Balance at beginning of period $590 $578
Provisions 13 26
Dominion reserves 225 -
--------------------------------------------------------------------------------
Total charge-offs 63 24
Total recoveries - 10
--------------------------------------------------------------------------------
Net charge-offs (63) (14)
--------------------------------------------------------------------------------
Balance at end of period $765 $590
================================================================================
Ratio of net charge-offs during the period
to average loans outstanding during the period 0.06% 0.03%
================================================================================
Allowance for loan losses to total non-performing
loans at end of period 394.33% 2,565.22%
================================================================================
Allowance for loan losses to total loans 0.54% 0.77%
================================================================================
The following table sets forth the bank's allowance for loan losses in
each of the categories listed and the percentage of such amounts to the total
allowance and the percentage of such amounts to total loans.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
At September 30, 2000 1999
---------------------------------------------------------------------------------------------------------------------------
Percent of Percent of
-------------------------- ----------------------
Total Total Total
Amount Allowance Total Loans Amount Allowance Loans
---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
Single-family $73 9.54% 0.05% $74 12.54% 0.10%
Multi-family 8 1.05 0.01 9 1.53 0.01
Construction 54 7.06 0.04 29 4.92 0.04
Commercial real estate 195 25.49 0.13 208 35.25 0.27
Land 39 5.10 0.03 16 2.71 0.02
---------------------------------------------------------------------------------------------------------------------------
Total mortgage loans 369 48.24 0.26 336 56.95 0.44
---------------------------------------------------------------------------------------------------------------------------
COMMERCIAL AND CONSUMER:
Commercial 168 21.96 0.11 79 13.39 0.10
Consumer:
Home equity 50 6.54 0.04 89 15.08 0.12
Automobile 27 3.53 0.02 9 1.53 0.01
Other - - - - - -
---------------------------------------------------------------------------------------------------------------------------
Total commercial and consumer 245 32.03 0.17 177 30.00 0.23
---------------------------------------------------------------------------------------------------------------------------
Unallocated 151 19.73 0.11 77 13.05 0.10
---------------------------------------------------------------------------------------------------------------------------
Total $765 100.00% 0.54% $590 100.00% 0.77%
===========================================================================================================================
</TABLE>
9
<PAGE>
INVESTMENT ACTIVITIES
The investment policy of the bank, as approved by the board of
directors, requires management, to maintain adequate liquidity and generate a
favorable return on investments without incurring undue interest rate and credit
risk, to complement the bank's lending activities. The bank primarily utilizes
investments in securities for liquidity management, as a source of income and as
a method of deploying excess funds not utilized for investment in loans.
Securities classified as trading are bought and held principally for sale in the
near term, generally within 90 days.
At September 30, 2000, the company had invested $45.3 million in
mortgage-backed securities, or 15.31% of total assets, of which $38.6 million
were classified as available-for-sale and $6.7 million were classified as
held-to-maturity. Investments in mortgage-backed securities involve a risk that
actual prepayments will be greater than estimated prepayments over the life of
the security, which may require adjustments to the amortization of any premium
or accretion of any discount relating to such instruments, thereby changing the
net yield on such securities. There is also reinvestment risk associated with
the cash flows from such securities or in the event the issuer redeems such
securities. In addition, the market value of such securities may be adversely
affected by changes in interest rates.
The following table sets forth information regarding the amortized cost
and estimated market value of the bank's investment securities.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
September 30, 2000 1999
---------------------------------------------------------------------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
Equity securities $2,157 $2,171 $11,958 $11,603
Corporate debt securities 1,967 1,924 2,454 2,488
Federal agency securities 1,000 976 3,000 2,947
CMOs 3,410 3,358 1,687 1,669
U.S. Government securities 39,967 39,487 21,414 21,313
---------------------------------------------------------------------------------------------------
Total available-for-sale 48,501 47,916 40,513 40,020
---------------------------------------------------------------------------------------------------
Held-to-maturity:
Corporate debt securities 1,037 965 1,047 960
U.S. Government securities 19,878 19,182 23,990 23,467
---------------------------------------------------------------------------------------------------
Total held-to-maturity 20,915 20,147 25,037 24,427
---------------------------------------------------------------------------------------------------
Total investment securities $69,416 $68,063 $65,550 $64,447
===================================================================================================
Investment securities with:
Fixed rates $7,752 $7,572 $10,750 $10,547
Adjustable rates 61,664 60,491 54,800 53,900
---------------------------------------------------------------------------------------------------
Total $69,416 $68,063 $65,550 $64,447
===================================================================================================
Trading securities (1) $ - $1,946 $ - $ -
===================================================================================================
</TABLE>
--------------------
(1) Consists of Federal agency securities.
10
<PAGE>
The following table sets forth information regarding the amortized cost
and estimated market value of the bank's mortgage-backed securities.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
September 30, 2000 1999
-----------------------------------------------------------------------------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
-----------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Available for sale:
FHLMC $10,772 $10,705 $6,596 $6,513
FNMA 26,880 26,555 26,869 26,489
GNMA 1,430 1,404 2,471 2,436
-----------------------------------------------------------------------------------------------------------
Total 39,082 38,664 35,936 35,438
===========================================================================================================
Held-to-maturity:
FHLMC $2,817 $2,739 $3,417 $3,349
FNMA 3,868 3,713 4,312 4,229
-----------------------------------------------------------------------------------------------------------
Total Held-to-maturity 6,685 6,452 7,729 7,578
-----------------------------------------------------------------------------------------------------------
Total $45,767 $45,116 $43,665 $43,016
===========================================================================================================
Mortgage-backed securities with:
Fixed rates $ 7,260 $ 7,068 $18,305 $17,818
Adjustable rates 38,507 38,048 25,360 25,198
-----------------------------------------------------------------------------------------------------------
Total $45,767 $45,116 $43,665 $43,016
===========================================================================================================
Trading securities (1) $ - $20,820 $ - $ -
===========================================================================================================
</TABLE>
--------------------
(1) Consists of mortgage-backed securities.
11
<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 September 30, 2000
--------------------------------------------------------------------------------------------------------------------------------
More than One More than Five
One Year or Less Year to Five Years Years to Ten Years More than Ten Years Total
--------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
--------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Investment
securities
available-for-sale:
Adjustable-rate
securities:
CMOs $ - -% $ - -% $ - -% $1,822 7.86% $ 1,822 7.86%
U.S.
Government agency - - - - - - 39,487 9.90 39,487 9.90
--------------------------------------------------------------------------------------------------------------------------------
Total - - - - - - 41,309 9.81 41,309 9.81
--------------------------------------------------------------------------------------------------------------------------------
Fixed-rate:
Equity - - - - - - 2,171 7.98 2,171 7.98
securities
Federal agency - - - - - - 976 8.20 976 8.20
Corporate debt 996 6.25 - - - - 928 7.83 1,924 7.01
CMOs - - - - - - 1,536 7.77 1,536 7.70
--------------------------------------------------------------------------------------------------------------------------------
Total 996 6.25 - - - - 5,611 7.94 6,607 7.66
--------------------------------------------------------------------------------------------------------------------------------
Total investment
securities
available-
for-sale 996 6.25 46,920 9.59 47,916 9.51
--------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed
securities
available-for-sale:
Adjustable-rate
securities:
FNMA - - 245 8.59 - - 20,396 7.57 20,641 7.58
FHLMC - - - - - - 10,468 8.01 10,468 8.01
GNMA - - - - 666 7.25 738 7.52 1,404 7.39
--------------------------------------------------------------------------------------------------------------------------------
Total - - 245 8.59 666 7.25 31,602 7.71 32,513 7.71
--------------------------------------------------------------------------------------------------------------------------------
Fixed-rate:
FNMA 844 8.15 - - - - 5,070 7.95 5,914 7.98
FHLMC 237 7.64 - - - - - - 237 7.64
--------------------------------------------------------------------------------------------------------------------------------
Total 1,081 8.04 - - - - 5,070 7.95 6,151 7.97
--------------------------------------------------------------------------------------------------------------------------------
Total mortgage-
backed
securities
available-for-sale 1,081 8.04 245 8.59 666 7.25 36,672 7.75 38,664 7.75
--------------------------------------------------------------------------------------------------------------------------------
Total investments $2,077 7.18% $245 8.59% $666 7.25% $83,592 8.78% $86,580 8.74%
================================================================================================================================
</TABLE>
12
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the bank's
investment securities held-to-maturity and mortgage-backed securities
held-to-maturity.
<TABLE>
<CAPTION>
At September 30, 2000
---------------------------------------------------------------------------------------------------------------------------------
More than One More than Five
One Year or Less Year to Five Years Years to Ten Years More than Ten Years Total
---------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
securities
held-to-maturity:
Adjustable-rate
securities:
U.S. Government
agency $897 9.38% $- -% $2,036 10.61% $16,945 9.26% $19,878 9.40%
---------------------------------------------------------------------------------------------------------------------------------
Total 897 9.38 - - 2,036 10.61 16,945 9.26 19,878 9.40
---------------------------------------------------------------------------------------------------------------------------------
Fixed-rate:
Corporate debt - - - - 1,037 7.15 - - 1,037 7.15
---------------------------------------------------------------------------------------------------------------------------------
Total - - - - 1,037 7.15 - - 1,037 7.15
---------------------------------------------------------------------------------------------------------------------------------
Total investment
securities
held-to-maturity 897 9.38 - - 3,073 9.44 16,945 9.26 20,915 9.29
---------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed
securities
held-to-maturity:
Adjustable-rate
securities:
FNMA - - - - - - 2,910 6.44 2,910 6.44
FHLMC - - - - - - 2,817 7.03 2,817 7.03
---------------------------------------------------------------------------------------------------------------------------------
Total - - - - - - 5,727 6.73 5,727 6.73
---------------------------------------------------------------------------------------------------------------------------------
Fixed-rate:
FNMA - - - - - - 958 6.50 958 6.50
---------------------------------------------------------------------------------------------------------------------------------
Total - - - - - - 958 6.50 958 6.50
---------------------------------------------------------------------------------------------------------------------------------
Total
mortgage-backed
securities
held-to-maturity - - - - - - 6,685 6.70 6,685 6.70
---------------------------------------------------------------------------------------------------------------------------------
Total
held-to-maturity
investments $897 9.38% $- -% $3,073 9.44% $23,630 8.53% $27,600 8.66%
=================================================================================================================================
</TABLE>
13
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments and prepayments, cash flows
generated from operations, Federal Home Loan Bank ("FHLB") advances and reverse
repurchase agreements are the primary sources of the bank's funds for use in
lending, investing and for other general purposes.
DEPOSITS. Because the bank has aggressively marketed its deposit
products, expanded its branch network and used brokered deposits to fund its
mortgage-banking activities, total deposits increased to $188.4 million at
September 30, 2000 from $129.0 million at September 30, 1999, an increase of
46.03%. Certificates of deposit increased $37.0 million, $29.4 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, 70.01% are in certificate of
deposit accounts at September 30, 2000. At September 30, 2000, transaction-based
accounts (savings, NOW, money market and noninterest bearing deposits)
represented 29.99% of total deposits.
At September 30, 2000, $109.3 million, or 82.89% of the bank's
certificate of deposit accounts were scheduled to mature within one year.
The following table sets forth the distribution and the rates paid on
each category of deposits.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
At September 30, 2000 1999
-----------------------------------------------------------------------------------------------------------------------
Percent of Percent of
total total
Balance deposits Rate paid Balance deposits Rate paid
-----------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings accounts $5,808 3.08% 2.51% $1,375 1.07% 3.25%
NOW and money market
Accounts 46,263 24.56 5.22 27,157 21.05 4.98
Certificates of deposit 131,893 70.01 6.18 94,879 73.55 5.25
Noninterest-bearing
deposits:
Demand deposits 4,423 2.35 - 5,596 4.33 -
-----------------------------------------------------------------------------------------------------------------------
Total deposits $188,387 100.00% 5.69% $129,007 100.00% 4.95%
=======================================================================================================================
</TABLE>
The following table presents information concerning the amounts, the
rates and the periods to maturity of the certificate accounts outstanding.
At September 30, 2000
--------------------------------------------------------------------
Amount Rate
--------------------------------------------------------------------
(dollars in thousands)
Balances maturing:
Three months or less $ 57,823 6.17%
Three months to one year 51,505 6.07
One year to three years 20,662 6.38
Over three years 1,903 5.65
--------------------------------------------------------------------
Total $131,893 6.16%
====================================================================
14
<PAGE>
At September 30, 2000, the bank had $22.0 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
------------------------------------------------------------
Weighed
Average
Maturity Period Amount Rate
------------------------------------------------------------
(Dollars in thousands)
Three months or less $5,199 5.97%
Over 3 through 6 months 4,047 6.10
Over 6 through 12 months 7,923 6.17
Over 12 months 4,858 6.28
------------------------------------------------------------
Total $22,027 6.13%
============================================================
BORROWINGS. FHLB advances amounted to $46.1 million at September 30,
2000, an increase from the $37.7 million at September 30, 1999 and other
borrowings (reverse repurchase agreements) amounted to $36.7 million, an
increase of $31.0 million compared to $5.7 million at September 30, 1999. At
September 30, 1999, borrowings consisted of FHLB advances and reverse repurchase
agreements totaling $43.4 million.
The bank also enters into sales of securities under agreements to
repurchase ("reverse repurchase agreements") with terms to maturity of less than
one year. At September 30, 2000, the bank had $36.7 million in reverse
repurchase agreements, compared to $5.7 million at September 30, 1999. During
the fiscal year ended September 30, 2000, all reverse repurchase agreements
represented agreements to repurchase the same securities.
The following table sets forth information regarding the Bank's
borrowed funds:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
At or for the years ended September 30, 2000 1999
---------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
FHLB Advances:
Average balance outstanding $55,691 $16,371
Maximum amount outstanding at any
month-end during the period 76,800 37,650
Balance outstanding at end of period 46,100 37,650
Weighted average interest rate
during the period 6.14% 4.95%
Weighted average interest rate at end of period 6.33% 5.55%
Reverse repurchase agreements:
Average balance outstanding 31,100 1,301
Maximum amount outstanding at any
month-end during the period 39,605 5,741
Balance outstanding at end of period 36,736 5,741
Weighted average interest rate
during the period 6.45% 5.46%
Weighted average interest rate at end of period 6.62% 5.50%
</TABLE>
15
<PAGE>
SUBSIDIARY ACTIVITIES
The bank has one wholly-owned subsidiary, Greater Atlantic Mortgage
Corporation, and in furtherance of our community banking focus, we have expanded
the operations of Greater Atlantic Mortgage in order to diversify our revenue
stream and support our growth. The strategy of Greater Atlantic Mortgage is to
originate mortgage loans for sale in the secondary market and to develop
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 43
persons in Tysons Corner, Virginia, Maryland and West Virginia. For the fiscal
year ended September 30, 2000, Greater Atlantic Mortgage originated $117.0
million of single-family residential loans, the majority of which consisted of
loans insured by the FHA or partially guaranteed by the Veterans Administration
which were pre-sold in the secondary market with servicing released.
PERSONNEL
As of September 30, 2000, the company had 120 full-time employees. The
employees are not represented by a collective bargaining unit and the company
considers its relationship with its employees to be good.
16
<PAGE>
REGULATION AND SUPERVISION
GENERAL
As a savings and loan holding company, Greater Atlantic Financial Corp.
is required by federal law to file reports with, and otherwise comply with, the
rules and regulations of the Office of Thrift Supervision. Greater Atlantic Bank
is subject to extensive regulation, examination and supervision by the Office of
Thrift Supervision, as its primary federal regulator, and the Federal Deposit
Insurance Corporation, as the deposit insurer. Greater Atlantic Bank is a member
of the Federal Home Loan Bank System and, with respect to deposit insurance, of
the Savings Association Insurance Fund ("SAIF") managed by the Federal Deposit
Insurance Corporation. Greater Atlantic Bank must file reports with the Office
of Thrift Supervision and the Federal Deposit Insurance Corporation 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 institutions. The Office of Thrift Supervision and/or the
Federal Deposit Insurance Corporation conduct periodic examinations to test
Greater Atlantic Bank's safety and soundness and compliance with various
regulatory requirements. That regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the Office of
Thrift Supervision, the Federal Deposit Insurance Corporation or the Congress,
could have a material adverse impact on Greater Atlantic Financial Corp.,
Greater Atlantic Bank and their operations. Certain of the regulatory
requirements applicable to Greater Atlantic Bank and to Greater Atlantic
Financial Corp. are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings institutions and
their holding companies set forth in this Form 10-KSB does not purport to be a
complete description of such statutes and regulations and their effects on
Greater Atlantic Bank and Greater Atlantic Financial Corp.
HOLDING COMPANY REGULATION
Greater Atlantic Financial Corp. is a unitary savings and loan holding
company under federal law because Greater Atlantic Bank is its only insured
subsidiary. Formerly, a unitary savings and loan holding company was not
restricted as to the types of business activities in which it could engage,
provided that its subsidiary savings association continued to be a qualified
thrift lender. See "--FEDERAL SAVINGS INSTITUTION REGULATION--QUALIFIED THRIFT
LENDER TEST." Recent legislation restricts unitary savings and loan holding
companies not existing or applied for before May 4, 1999, to activities
permissible for a financial holding company as defined under the legislation,
including insurance and securities activities, and those permitted for a
multiple savings and loan holding company as described below. If a unitary
savings and loan holding company acquires another savings institution or savings
bank that is not a problem institution, that meets the qualified thrift lender
test and that the Office of Thrift Supervision considers to be a savings
institution, the unitary savings and loan holding company would become a
multiple savings and loan holding company if the acquired institution were held
as a separate subsidiary and not merged into the subsidiary of the former
unitary savings and loan holding company. As a multiple savings and loan holding
company, the savings and loan holding company would generally be limited to
activities permissible for bank holding companies under federal law, so long as
the Office of Thrift Supervision first approves of these activities, and to
certain other activities authorized by Office of Thrift Supervision regulation.
17
<PAGE>
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the Office of Thrift Supervision and from acquiring or retaining control of a
depository institution that is not insured by the Federal Deposit Insurance
Corporation. In evaluating applications by holding companies to acquire savings
institutions, the Office of Thrift Supervision considers the financial and
managerial resources and future prospects of Greater Atlantic Financial Corp.
and the institution involved, the effect of the acquisition on the risk to the
deposit insurance funds, the convenience and needs of the community and
competitive factors.
The Office of Thrift Supervision may not approve any acquisition that
would result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions: (i) the approval
of interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. Greater Atlantic Bank
must notify the Office of Thrift Supervision 30 days before declaring any
dividend to Greater Atlantic Financial Corp. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the Office of Thrift Supervision and the agency has authority to order
cessation of activities or divestiture of subsidiaries deemed to pose a threat
to the safety and soundness of the institution.
FEDERAL SAVINGS INSTITUTION REGULATION
BUSINESS ACTIVITIES. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association,
(E.G., commercial, non-residential real property loans and consumer loans), are
limited to a specified percentage of the institution's capital or assets.
CAPITAL REQUIREMENTS. The Office of Thrift Supervision capital
regulations require savings institutions to meet three minimum capital
standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for
institutions receiving the highest rating on the CAMELS rating system) and an 8%
risk-based capital ratio. In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital
standard, a 4% leverage ratio (3% for institutions receiving the highest rating
on the CAMELS financial institution rating system), and, together with the
risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The
Office of Thrift Supervision regulations also require that, in meeting the
tangible, leverage and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks believed inherent in the type of asset.
18
<PAGE>
Core (Tier 1) capital is defined as common stockholders' equity (including
retained earnings), certain noncumulative perpetual preferred stock and related
surplus, and minority interests in equity accounts of consolidated subsidiaries,
less intangibles other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets and up to 45% of unrealized gains on available-for-sale
equity securities with readily determinable fair market values. Overall, the
amount of supplementary capital included as part of total capital cannot exceed
100% of core capital.
The capital regulations also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. For the present time, the Office of Thrift
Supervision has deferred implementation of the interest rate risk capital
charge. At September 30, 2000, Greater Atlantic Bank met each of its capital
requirements.
The following table presents the Bank's capital position at September
30, 2000:
<TABLE>
<CAPTION>
Capital
Excess ---------------------------
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
-------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible $20,295 $ 4,442 $15,853 6.85% 1.50%
Core (Leverage) 20,295 11,845 8,450 6.85 4.00
Risk-based 21,060 11,841 9,219 14.23 8.00
</TABLE>
PROMPT CORRECTIVE REGULATORY ACTION. The Office of Thrift Supervision
is required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
undercapitalization. Generally, a savings institution that has a ratio of total
capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core)
capital to risk-weighted assets of less than 4% or a ratio of core capital to
total assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the Office of
Thrift Supervision 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 Office of Thrift
Supervision within 45 days of the date a savings institution receives notice
that it is "undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to an undercapitalized institution, including, but not
limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The Office of Thrift Supervision could also
take any one of a number of discretionary supervisory actions, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.
INSURANCE OF DEPOSIT ACCOUNTS. Greater Atlantic Bank is a member of the
SAIF. The Federal Deposit Insurance Corporation maintains a risk-based
assessment system by which institutions are
19
<PAGE>
assigned to one of three categories based on their capitalization and one of
three subcategories based on examination ratings and other supervisory
information. An institution's assessment rate depends upon the categories to
which it is assigned. Assessment rates for SAIF member institutions are
determined semiannually by the Federal Deposit Insurance Corporation and
currently range from zero basis points for the healthiest institutions to 27
basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1999,
FICO payments for SAIF members approximated 6.1 basis points, while Bank
Insurance Fund ("BIF") members paid 1.2 basis points. By law, SAIF and BIF
members began equal sharing of FICO payments on January 1, 2000. The Federal
Deposit Insurance Corporation has authority to increase insurance assessments. A
significant increase in SAIF insurance premiums would likely have an adverse
effect on the operating expenses and results of operations of Greater Atlantic
Bank. Management cannot predict what insurance assessment rates will be in the
future.
Insurance of deposits may be terminated by the Federal Deposit
Insurance Corporation 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 Federal Deposit Insurance Corporation or the Office of
Thrift Supervision. The management of Greater Atlantic Bank does not know of any
practice, condition or violation that might lead to termination of deposit
insurance.
LOANS TO ONE BORROWER. Federal law provides that savings institutions
are generally subject to the limits on loans to one borrower applicable to
national banks. A savings institution may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if secured by specified readily-marketable collateral. At
September 30, 2000, Greater Atlantic Bank's limit on loans to one borrower was
$3.2 million, and Greater Atlantic Bank's largest aggregate outstanding balance
of loans to one borrower was $3.1 million.
QTL TEST. The Home Owners' Loan Act requires savings institutions to
meet a qualified thrift lender test. Under the test, a savings association is
required to either qualify as a "domestic building and loan association" under
the Internal Revenue Code or maintain at least 65% of its "portfolio assets"
(total assets less: (i) specified liquid assets up to 20% of total assets; (ii)
intangibles, including goodwill; and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed securities)
in at least 9 months out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of September 30, 2000, Greater Atlantic Bank maintained 81.93%
of its portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test. Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered "qualified thrift investments."
LIMITATION ON CAPITAL DISTRIBUTIONS. Office of Thrift Supervision
regulations impose limitations upon all capital distributions by a savings
institution, including cash dividends, payments to repurchase its shares and
payments to shareholders of another institution in a cash-out merger. An
application to and the prior approval of the Office of Thrift
20
<PAGE>
Supervision is required prior to any capital distribution if the institution
does not meet the criteria for "expedited treatment" of applications under
Office of Thrift Supervision regulations (I.E., generally, examination ratings
in the two top categories), the total capital distributions for the calendar
year exceed net income for that year plus the amount of retained net income for
the preceding two years, the institution would be undercapitalized following the
distribution or the distribution would otherwise be contrary to a statute,
regulation or agreement with Office of Thrift Supervision. If an application is
not required, the institution must still provide prior notice to Office of
Thrift Supervision of the capital distribution if, like Greater Atlantic Bank,
it is a subsidiary of a holding company. In the event Greater Atlantic Bank's
capital fell below its regulatory requirements or the Office of Thrift
Supervision notified it that it was in need of more than normal supervision,
Greater Atlantic Bank's ability to make capital distributions could be
restricted. In addition, the Office of Thrift Supervision could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the Office of Thrift Supervision determines that
such distribution would constitute an unsafe or unsound practice.
LIQUIDITY. Greater Atlantic Bank is required to maintain an average
daily balance of specified liquid assets equal to a monthly average of not less
than a specified percentage of its net withdrawable deposit accounts plus
short-term borrowings. This liquidity requirement is currently 4%, but may be
changed from time to time by the Office of Thrift Supervision to any amount
within the range of 4% to 10%. Monetary penalties may be imposed for failure to
meet these liquidity requirements. Greater Atlantic Bank's liquidity ratio for
September 30, 2000 was 10.0%, which exceeded the applicable requirements.
Greater Atlantic Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.
ASSESSMENTS. Savings institutions are required to pay assessments to
the Office of Thrift Supervision to fund the agency's operations. The general
assessments, paid on a semi-annual basis, are computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
Greater Atlantic Bank's latest quarterly thrift financial report. The
assessments paid by Greater Atlantic Bank for the fiscal year ended September
30, 2000 totaled $56,000.
TRANSACTIONS WITH RELATED PARTIES. Greater Atlantic Bank's authority to
engage in transactions with "affiliates" (E.G., any company that controls or is
under common control with an institution, including Greater Atlantic Financial
Corp. and its non-savings institution subsidiaries) is limited by federal law.
The aggregate amount of covered transactions with any individual affiliate is
limited to 10% of the capital and surplus of the savings institution. The
aggregate amount of covered transactions with all affiliates is limited to 20%
of the savings institution's capital and surplus. Certain transactions with
affiliates are required to be secured by collateral in an amount and of a type
described in federal law. The purchase of low quality assets from affiliates is
generally prohibited. The transactions with affiliates must be on terms and
under circumstances, that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
Greater Atlantic Bank's authority to extend credit to executive
officers, directors and 10% shareholders ("insiders"), as well as entities such
persons control, is also governed by federal law. Such loans are required to be
made on terms substantially the same as those offered to unaffiliated
individuals and not involve more than the normal risk of repayment. An exception
exists for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate
21
<PAGE>
amount of loans Greater Atlantic Bank may make to insiders based, in part, on
Greater Atlantic Bank's capital position and requires certain board approval
procedures to be followed.
ENFORCEMENT. The Office of Thrift Supervision has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. The Federal Deposit Insurance Corporation has the authority to recommend
to the Director of the Office of Thrift Supervision that enforcement action to
be taken with respect to a particular savings institution. If action is not
taken by the Director, the Federal Deposit Insurance Corporation has authority
to take such action under certain circumstances. Federal law also establishes
criminal penalties for certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the Office of Thrift
Supervision determines that a savings institution fails to meet any standard
prescribed by the guidelines, the Office of Thrift Supervision may require the
institution to submit an acceptable plan to achieve compliance with the
standard.
FEDERAL HOME LOAN BANK SYSTEM
Greater Atlantic Bank is a member of the Federal Home Loan Bank System,
which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan
Bank provides a central credit facility primarily for member institutions.
Greater Atlantic Bank, as a member of the Federal Home Loan Bank, is required to
acquire and hold shares of capital stock in that Federal Home Loan Bank in an
amount at least equal to 1.0% of the aggregate principal amount of its unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 1/20 of its advances (borrowings) from the Federal Home Loan Bank,
whichever is greater. Greater Atlantic Bank was in compliance with this
requirement with an investment in Federal Home Loan Bank stock at September 30,
2000 of $3.6 million.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. Those requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, Greater Atlantic Bank's net interest
income would likely also be reduced. Recent legislation has changed the
structure of the Federal Home Loan Banks funding obligations for insolvent
thrifts, revised the capital structure of the Federal Home Loan Banks and
implemented entirely voluntary membership for Federal Home Loan Banks.
Management cannot predict the effect that these changes may have with respect to
its Federal Home Loan Bank membership.
22
<PAGE>
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). During fiscal 2000, the
regulations generally provided that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $44.3 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts aggregating greater than $44.3 million, the reserve
requirement is $1.329 million plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $44.3 million. The first $5.0 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve Board) are
exempted from the reserve requirements. Greater Atlantic Bank complies with the
foregoing requirements.
For net transaction accounts in 2001, the first $5.5 million, up from
$5 million in 2000, will be exempt from reserve requirements. A 3 percent
reserve ratio will be assessed on net transaction accounts over $5.5 million to
and including $42.8 million, down from $44.3 million in 2000. A 10 percent
reserve ratio will be applied above $42.8 million.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act, as implemented by Office of
Thrift Supervision regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The Community Reinvestment Act does not establish specific
lending requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the
Community Reinvestment Act. The Community Reinvestment Act requires the Office
of Thrift Supervision, in connection with its examination of an institution, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of applications by such
institution. The Community Reinvestment Act requires public disclosure of an
institution's Community Reinvestment Act rating. Greater Atlantic Bank's latest
Community Reinvestment Act rating, received from the Office of Thrift
Supervision was "Satisfactory."
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
23
<PAGE>
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.
24
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
We currently conduct our business from eight full-service banking
offices and our administrative office. The following table sets forth the
company's offices as of September 30, 2000.
<TABLE>
<CAPTION>
Net Book Value
of Property or
Leasehold
Original Improvements
Year Date of at
Leased or Leased or Lease September 30,
Location Owned Acquired Expiration 2000
-------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
ADMINISTRATIVE OFFICE:
10700 Parkridge Boulevard
Reston, Virginia 20191 Leased 1998 03-31-03 $113
BRANCH OFFICES:
11834 Rockville Pike
Rockville, Maryland 20852 Leased 1998 06-15-05 276
8070 Ritchie Highway
Pasadena, Maryland 21122 Leased 1998 08-31-08 21
153 Defense Highway
Annapolis, Maryland 21401 Owned 2000 903
250 N. Glebe Road
Arlington, Virginia 22203 Leased 1998 03-31-03 29
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036 Leased 1998 07-31-08 250
46901 Cedar Lakes Plaza
Sterling, Virginia 20164 Leased 1999 02-28-19 366
1 South Royal Avenue
Front Royal, Virginia 22630 Owned 1977 - 668
9484 Congress Street
New Market, Virginia 22844 Owned 1989 - 190
2800 Valley Avenue
Winchester, Virginia 22601 Owned 1978 - 200
GREATER ATLANTIC MORTGAGE OFFICES:
8230 Old Courthouse Road
Vienna, Virginia 22182 Leased 1995 12-31-04 -
5301 Spectrum Drive
Frederick, Maryland 21703 Leased 1999 6-30-04 -
2730 University Boulevard
Wheaton, Maryland 20902 Leased 2000 9-30-05 -
6701 Democracy Boulevard, Suite 300
Bethesda, Maryland 20817 Leased 2000 11-01-00 -
310 West King Street Month to
Martinsburg, West Virginia 25401 Leased 2000 Month -
-------------------------------------------------------------------------------------------------------------------
$3,016
===================================================================================================================
</TABLE>
The bank also has entered into a contract to purchase property in South
Riding, Virginia, and Winchester, Virginia, for the purpose of constructing
branch offices.
25
<PAGE>
The total net book value of the company's furniture, fixtures and
equipment at September 30, 2000 was $4.9 million. The properties are considered
by management to be in good condition.
ITEM 3. LEGAL PROCEEDINGS
On July 28, 1999, First Guaranty Mortgage Corporation filed a complaint
against the Company and its wholly owned subsidiaries GAB and GAMC in Circuit
Court of Arlington, Virginia. This complaint alleged breach of contract and
related claims against these three companies and employees of GAMC who formerly
were employed at First Guaranty. First Guaranty alleged that GAMC, GAB and GAFC
wrongfully interfered with the business of First Guaranty's Frederick, Maryland
office by hiring the employees of that office. First Guaranty sought
approximately $5,000,000 in compensatory and $20,000,000 in punitive damages. In
2000, the Company entered into a settlement, which resolved this claim. The
resulting provision for litigation loss of $1.25 million has been reflected as
an operating expense in the accompanying statement of operations for the year
ended September 30, 2000.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders during the
fourth quarter of the fiscal year ended September 30, 2000, through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION. The Company's common stock is listed on the NASDAQ
Stock Market under the symbol "GAFC".
As of September 30, 2000, there were 3,007,434 total shares outstanding
and approximately 800 shareholders of record.
HIGH/LOW STOCK PRICE
Fiscal Year
September 30, 2000
------------------
High Low
---- ---
First Quarter 6 3/4 4 1/4
Second Quarter 4 15/32 3 3/8
Third Quarter 3 7/8 2 1/2
Fourth Quarter 4 2 11/16
26
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this form 10-KSB and in future filings by the company with
the Securities and Exchange Commission (the "SEC"), in the company's press
releases or other public or shareholder communications, and in oral statements
made with the approval of an authorized executive officer, the words or phrases
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including, among other things, changes in economic conditions in
the company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the company's market area
and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The company
wishes to advise readers that the factors listed above could affect the
company's financial performance and could cause the company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The company does not undertake and specifically declines any obligation
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events
GENERAL
The profitability of the Company, and more specifically, the
profitability of its primary subsidiary Greater Atlantic Bank (the "Bank"),
depends primarily on its net interest income. Net interest income is the
difference between the interest income it earns on its loans and investment
portfolio, and the interest it pays on interest-bearing liabilities, which
consists mainly of interest paid on deposits and borrowings.
The Company's profitability is also affected by the level of its
non-interest income and operating expenses. Non-interest income consists
primarily of gains on sales of loans and available-for-sale investments, service
charge fees and commissions earned by non-bank subsidiaries. Operating expenses
consist primarily of salaries and employee benefits, occupancy-related expenses,
equipment and technology-related expenses and other general operating expenses.
The operations of the Bank, and banking institutions in general, are
significantly influenced by general economic conditions and related monetary and
fiscal policies of regulatory agencies. Deposit flows and the cost of deposits
and borrowings are influenced by interest rates on competing investments and
general market rates of interest. Lending activities are affected by the demand
for financing real estate and other types of loans, which in turn are affected
by the interest rates at which such financing may be offered and other factors
affecting loan demand and the availability of funds.
27
<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 10-KSB.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
At or for the Years Ended September 30, 2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Interest income $17,772 $9,046
Interest expense 13,094 6,380
----------------------------------------------------------------------------------------------
Net interest income 4,678 2,666
Provision for loan losses 13 26
----------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,665 2,640
Noninterest income 2,054 6,081
Noninterest expense 10,957 8,789
----------------------------------------------------------------------------------------------
Loss before income tax benefit (4,238) (68)
Income tax benefit (600) (169)
----------------------------------------------------------------------------------------------
Net (loss) income $(3,638) $ 101
==============================================================================================
PER SHARE DATA:
Net (loss) income:
Basic $ (1.21) $ 0.07
Diluted (1.21) 0.07
Book value 6.94 8.31
Tangible book value 6.94 8.31
Weighted average shares outstanding:
Basic 3,007,434 1,362,390
Diluted 3,007,434 1,364,607
CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION DATA:
Total assets $296,296 $198,923
Total loans receivable, net 132,698 72,792
Allowance for loan losses 765 590
Mortgage-loans held for sale 5,599 7,436
Investment securities (1) 70,777 65,057
Mortgage-backed securities (1) 66,169 43,167
Total deposits 188,387 129,007
FHLB advances 46,100 37,650
Other borrowings 36,736 5,741
Total stockholders' equity 20,867 24,990
Tangible capital 20,668 24,990
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
At or for the Years Ended September 30, 2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION DATA:
Total assets $251,417 $137,389
Investment securities (1) 75,808 47,208
Mortgage-backed securities (1) 59,489 32,816
Total loans 106,917 51,754
Allowance for loan losses (599) (675)
Total deposits 137,272 104,909
Total stockholders' equity 24,067 11,151
PERFORMANCE RATIOS (2):
Return on average assets (1.45)% 0.07%
Return on average equity (15.12) 0.91
Average equity to assets 9.57 8.12
Net interest margin 1.93 2.02
Efficiency ratio (3) 162.76 100.48
ASSET QUALITY DATA:
Non-performing assets to total assets, at period end 0.12 0.11
Non-performing loans to total loans, at period end 0.14 0.03
Net charge-offs to average total loans 0.06 0.03
Allowance for loan losses to:
Total loans 0.54% 0.77%
Non-performing loans 394.33 2,565.22
Non-performing loans $ 194 $ 23
Non-performing assets 366 215
Allowance for loan losses 765 590
CAPITAL RATIOS OF THE BANK:
Leverage ratio 6.85% 10.52%
Tier 1 risk-based capital ratio 13.71 27.62
Total risk-based capital ratio 14.23 28.41
--------------------------------------------------------------------------------------------
</TABLE>
------------------------
(1) Consists of securities classified as available-for-sale, held-to-maturity
and trading.
(2) Ratios are presented on an annualized basis where appropriate.
(3) Efficiency ratio consists of non-interest expense divided by net interest
income and non-interest income.
29
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED
SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
NET INCOME. For the fiscal year ended September 30, 2000 the company
incurred a net loss of $3.6 million or $1.21 per share compared to net income of
$101,000 or $0.07 per share for fiscal year 1999. The $3.7 million decrease in
net income over the comparable period one year ago was primarily due to the
decline in income from mortgage-banking activities. Also, contributing to the
decrease in income was the settlement of a lawsuit against Greater Atlantic
Mortgage Corporation costing $1.3 million and the sale and reclassification by
the Bank of certain investment securities at a loss of $1.0 million.
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>
Difference
------------------------------------------------------------------------------------------
Years ended September 30, 2000 1999 Amount %
------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans $8,462 $ 4,210 $ 4,252 101.00%
Investments 9,310 4,836 4,474 92.51
------------------------------------------------------------------------------------------
Total 17,772 9,046 8,726 96.46
------------------------------------------------------------------------------------------
Interest expense:
Deposits 7,668 5,499 2,169 39.44
Borrowings 5,426 881 4,545 515.89
------------------------------------------------------------------------------------------
Total 13,094 6,380 6,714 105.24
------------------------------------------------------------------------------------------
Net interest income $4,678 $ 2,666 $ 2,012 75.47%
==========================================================================================
</TABLE>
Our growth in net interest income for fiscal year 2000 was due
primarily to the increase in average interest-earning assets resulting from our
planned growth. Although average interest-earning assets increased $110.4
million or 83.80% over the comparable period one-year ago, a decline in the net
interest margin (net interest income divided by average interest-earning assets)
of 9 basis points limited the increase in net interest income to $2.0 million.
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. Interest income for fiscal year 2000 increased $8.7
million from fiscal year 1999 primarily as a result of an increase in the
average outstanding balances in loans, investment securities and mortgage-backed
securities resulting in large measure from the planned leveraging of our
capital. The increase in interest income from the loan portfolio for fiscal year
2000 compared to interest income earned for fiscal 1999 resulted from an
increase of $55.2 million in the average balance of loans outstanding. That
increase was coupled with an increase in interest income from the investment and
mortgage-backed securities portfolios,
30
<PAGE>
resulting from an increase of $55.3 million in the average outstanding balance,
and was coupled with a 48 basis point increase in the average yield earned on
the portfolio.
INTEREST EXPENSE. The increase in interest expense on deposits and
borrowed funds for fiscal year 2000 compared to 1999 was principally the result
of a significant increase in the average outstanding balances in total deposits
and borrowed funds, coupled with a 64 basis point increase in the average cost
of funds. The increase in interest expense on deposits of $2.2 million was
primarily due to an increase in average certificates of deposit of $14.7 million
or 17.08% from $86.1 million for fiscal 1999 to $100.9 million for fiscal 2000,
and was coupled with a 44 basis point increase in the average rate paid from
5.37% for fiscal 1999 to 5.81% for fiscal 2000. The average rate we paid for
deposits increased from 5.24% for fiscal 1999 to 5.59% for fiscal 2000. That
increase in rate was coupled with an increase of $32.4 million in the average
outstanding balance of deposits.
31
<PAGE>
COMPARATIVE AVERAGE BALANCES AND INTEREST INCOME ANALYSIS. The
following table presents the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
annualized rates. No tax-equivalent adjustments were made and all average
balances are average daily balances. Non-accruing loans have been included in
the tables as loans carrying a zero yield.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
2000 1999
------------------------------------- ----------------------------------------
INTEREST AVERAGE INTEREST
AVERAGE INCOME/ AVERAGE INCOME/ YIELD/ AVERAGE
BALANCE EXPENSE YIELD/RATE BALANCE EXPENSE RATE
------------------------------------- ----------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Real estate loans $87,468 $6,699 7.66% $45,090 $3,685 8.17%
Consumer loans 13,980 1,236 8.84 4,167 320 7.68
Commercial business loans 5,469 527 9.64 2,497 205 8.21
--------- ---------- ---------- ---------- ---------- --------
Total loans 106,917 8,462 7.91 51,754 4,210 8.13
Investment securities 75,808 5,380 7.10 47,208 2,976 6.30
Mortgage-backed securities 59,489 3,930 6.61 32,816 1,860 5.67
--------- ---------- ---------- ---------- ---------- --------
Total interest-earning assets 242,214 17,772 7.34 131,778 9,046 6.86
---------- ---------- ---------- --------
Non-earning assets 9,203 5,611
--------- ----------
Total assets $251,417 $137,389
========= ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Savings accounts $ 1,532 40 2.61 $ 1,079 36 3.34
Now and money market accounts 34,882 1,772 5.08 17,688 841 4.75
Certificates of deposit 100,858 5,856 5.81 86,142 4,622 5.37
--------- ---------- ---------- ---------- ---------- --------
Total deposits 137,272 7,668 5.59 104,909 5,499 5.24
FHLB advances 55,691 3,419 6.14 16,371 810 4.95
Other borrowings 31,100 2,007 6.45 1,301 71 5.46
--------- ---------- ---------- ---------- ---------- --------
Total interest-bearing liabilities 224,063 13,094 5.84 122,581 6,380 5.20
---------- ---------- ---------- --------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 1,916 1,855
Other liabilities 1,371 1,802
--------- ----------
Total liabilities 227,350 126,238
Stockholders' equity 24,067 11,151
========= ==========
Total liabilities and
stockholders' equity $251,417 $137,389
========= ==========
Net interest income $4,678 $2,666
========== =========
Interest rate spread 1.49% 1.66%
========== ========
Net interest margin 1.93% 2.02%
========== ========
</TABLE>
32
<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, 2000 V. 1999
-----------------------------------------------
CHANGE ATTRIBUTABLE TO
-----------------------------------------------
VOLUME RATE TOTAL
-----------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans $3,463 $ (449) $3,014
Consumer loans 754 162 916
Commercial business loans 244 78 322
---------------- ------------ ------------
Total loans 4,461 (209) 4,252
Investments 1,803 601 2,404
Mortgage-backed securities 1,512 558 2,070
---------------- ------------ ------------
Total interest-earning assets $7,776 $950 $8,726
================ ============ ============
Savings accounts $ 15 $ (11) $ 4
Now and money market accounts 818 113 931
Certificates of deposit 790 444 1,234
---------------- ------------ ------------
Total deposits 1,623 546 2,169
FHLB advances 1,945 664 2,609
Other borrowings 1,626 310 1,936
---------------- ------------ ------------
Total interest-bearing liabilities 5,194 1,520 6,714
================ ============ ============
Change in net interest income $2,582 $ (570) $2,012
================ ============ ============
</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 increase in non-performing loans of $171,000 during fiscal 2000,
resulted primarily from the addition of two commercial loans and one residential
loan to non-performing status. Excluding those three non-performing loans, the
bank experienced a general decline during fiscal 2000, reflecting continued
stability in the local real estate market. The allowance for loan losses
increased $175,000 during fiscal 2000, and resulted primarily from the $225,000
addition from the Dominion acquisition offset by net charge-offs exceeding the
provision by $50,000. Net charge-offs increased from $14,000 during fiscal 1999
to $63,000 during fiscal 2000 as new management took a more aggressive posture
in assessing collectability of classified loans. Management expects charge-offs
to increase in the future as a result of the increase in its total loan
portfolio during fiscal 2000. While we have continued our loan loss provisions
in response to our continued growth in real estate loans, we have allowed our
allowance for loan losses to decline as a percentage of loans due to the
continuation of low charge-off and non-performing loan to average loan
percentages.
33
<PAGE>
NON-INTEREST INCOME. Non-interest income declined during fiscal 2000,
over the comparable period one year ago, primarily as a result of a decline of
$2.9 million in gain on sale of loans, reflecting a decreased volume of loan
originations and sales from the company's mortgage banking activities. That
decrease was coupled with a loss on sale of investments of $1.0 million. That
loss occurred as a result of the Bank transferring $22.8 million in securities
from available for sale to trading resulting in a loss of $580,000, with the
remaining $420,000 of loss on sale of investment securities resulting from sales
of $18.0 million in securities available for sale as the Bank restructured its
investment securities portfolio, while improving its net interest margin and
interest rate risk position. The proceeds from the sale will be re-invested in
substantially higher yielding loans and interest sensitive investments improving
future operations.
During the fiscal year ended September 30, 2000, the mortgage company
originated and disbursed $117.0 million in mortgage loans for sale compared to
$294.8 million during the comparable period one year ago. The $177.8 million
decrease in loans originated and disbursed was largely attributable to increases
in market interest rates, which reduced home mortgage refinancings. During the
period, substantially all loans originated were sold in the secondary market, in
most cases with servicing released. Proceeds from the sale of loans for fiscal
2000 amounted to $121.3 million compared to $318.1 million during the comparable
period one year ago. Sales of loans resulted in gains of $2.5 million and $5.4
million for fiscal 2000 and fiscal 1999, respectively.
The following table presents a comparison of the components of
non-interest income.
<TABLE>
<CAPTION>
Years Ended September 30, Difference
-------------------------------- ------------------------------------
2000 1999 Amount %
---------------- -------------- --------------- -------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Noninterest income:
Gain on sale of loans $ 2,466 $5,408 $(2,942) (54.40)%
Service fees on loans 464 513 (49) (9.55)
Service fees on deposits 177 110 67 60.91
Gain (loss) on sale of investment securities (1,025) 24 (1,049) (4,370.83)
Other operating income (28) 26 (54) (207.69)
---------------- -------------- -------------- -------------------
Total noninterest income $ 2,054 $6,081 $(4,027) (66.22)%
================ ============== ============== ===================
</TABLE>
NON-INTEREST EXPENSE. Non-interest expense increased $2.2 million, over
the comparable period one year ago mainly because of a non-recurring expense as
a result of the settlement of a lawsuit and related legal fees amounting to $1.6
million, of which $1.3 million related to the settlement. Excluding that
non-recurring increase in non-interest expense relating to the settlement of the
lawsuit and professional fees, non-interest expense would have increased
$606,000 during fiscal 2000 when compared to fiscal 1999. A significant portion
of the increase in compensation and employee benefits and occupancy expense
resulted from the addition of new employees and property in the Dominion
acquisition. The remaining salary and benefits expense increase reflects base
salary and staff increases during the past fiscal year. Increased data
processing cost of $226,000 resulted from additional systems activity,
conversion costs and the continued growth and expansion of the Bank.
34
<PAGE>
The following table presents a comparison of the components of
noninterest expense.
<TABLE>
<CAPTION>
Years Ended
September 30, Difference
----------------------------- -------------------------------
2000 1999 Amount %
--------------- ------------- --------------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Noninterest expense:
Compensation and employee benefits $4,738 $4,523 $215 4.75%
Occupancy 1,194 914 280 30.63
Professional services 794 388 406 104.64
Advertising 547 661 (114) (17.25)
Deposit insurance premium 52 64 (12) (18.75)
Furniture, fixtures and equipment 488 412 76 18.45
Data processing 410 184 226 122.83
Loss from foreclosed real estate 10 19 (9) (47.37)
Other operating expense 2,724 1,624 1,100 67.73
-------------- ------------- --------------- --------------
Total noninterest expense $10,957 $8,789 $2,168 24.67%
============== ============= =============== ==============
</TABLE>
INCOME TAXES. The company files a consolidated federal income tax
return with its subsidiaries and computes its income tax provision or benefit on
a consolidated basis. The income tax benefit in fiscal 2000 amounted to $600,000
compared to $169,000 in fiscal 1999.
Management has provided a valuation allowance for net deferred tax assets of
$1.7 million, as they believe that it is more likely than not that the entire
amount of deferred tax assets will not be realized.
At September 30, 2000, the Company has net operating loss carryforwards totaling
approximately $6.7 million, which expire in the years 2006 to 2020. As a result
of the change in ownership of the Bank, approximately $1.7 million of the total
net operating loss carryforwards are subject to an annual usage limitation of
approximately $114,000.
ASSET-LIABILITY MANAGEMENT
The primary objective of asset/liability management is to ensure the
steady growth of the company's primary earnings component, net interest income,
and the maintenance of reasonable levels of capital independent of fluctuating
interest rates. Interest rate risk can be defined as the vulnerability of an
institution's financial condition and/or results of operations to movements in
interest rates. Interest rate risk, or sensitivity, arises when the maturity or
repricing characteristics of assets differ significantly from the maturity or
repricing characteristics of liabilities. Management endeavors to structure the
balance sheet so that repricing opportunities exist for both assets and
liabilities in roughly equivalent amounts at approximately the same time
intervals to maintain interest rate risk at an acceptable level.
Management oversees the asset/liability management function and meets
periodically to monitor and manage the structure of the balance sheet, control
interest rate exposure, and evaluate pricing strategies for the company. The
asset mix of the balance sheet is continually evaluated in terms of several
variables: yield, credit quality, appropriate funding sources and liquidity.
Management of the liability mix of the balance sheet focuses on expanding the
company's various funding sources. At times, depending on the level of general
interest rates, the relationship between long- and short-term interest rates,
market conditions and competitive factors, the bank may determine to increase
our interest rate risk position in order to increase our net interest margin.
35
<PAGE>
The bank manages its exposure to interest rates by structuring the
balance sheet in the ordinary course of business. The bank currently emphasizes
adjustable rate loans and/or loans that mature in a relatively short period when
compared to single-family residential loans. In addition, to the extent
possible, the bank attempts to attract longer-term deposits. The bank has not
entered into instruments such as leveraged derivatives, structured notes,
interest rate swaps, caps, floors, financial options, financial futures
contracts or forward delivery contracts for the purpose of reducing interest
rate risk.
One of the ways the bank monitors interest rate risk is through an
analysis of the relationship between interest-earning assets and
interest-bearing liabilities to measure the impact that future changes in
interest rates will have on net interest income. An interest rate sensitive
asset or liability is one that, within a defined time period, either matures or
experiences an interest rate change in line with general market interest rates.
The management of interest rate risk is performed by analyzing the maturity and
repricing relationships between interest-earning assets and interest-bearing
liabilities at specific points in time ("GAP") and by analyzing the effects of
interest rate changes on net interest income over specific periods of time by
projecting the performance of the mix of assets and liabilities in varied
interest rate environments.
36
<PAGE>
The table below illustrates the maturities or repricing of the
company's assets and liabilities, including noninterest-bearing sources of
funds, to specific periods at September 30, 2000. 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.
<TABLE>
<CAPTION>
THREE YEARS
90 DAYS 91 DAYS TO 181 DAYS TO ONE YEAR TO TO FIVE FIVE YEARS
MATURING OR REPRICING PERIODS OR LESS 180 DAYS ONE YEAR THREE YEARS YEARS OR MORE TOTAL
---------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans:
Adjustable and balloon (1) $13,322 $ 2,365 $ 5,196 $50,533 $ - $ - $71,416
Fixed-rate (2) 5,538 1,144 2,118 6,600 9,493 6,356 31,249
Second mortgages (3) 367 169 312 955 605 705 3,113
Commercial business 8,785 213 422 1,622 129 - 11,171
Consumer 19,638 271 494 1,441 43 - 21,887
Investment securities (4) 62,415 - - 1,000 - 6,825 70,240
Mortgage-backed securities (5) 24,139 15,043 14,595 4,647 5,550 2,161 66,135
------------ ----------- ------------ ----------- ----------- ---------- ------------
Total $134,204 $19,205 $23,137 $66,798 $15,820 $16,047 $275,211
------------ ----------- ------------ ----------- ----------- ---------- ------------
INTEREST-BEARING LIABILITIES:
Deposits:
Savings accounts $ 264 $ 252 $ 471 $ 1,500 $ 978 $2,343 $ 5,808
NOW accounts 1,065 949 1,598 3,306 885 1,959 9,762
Money market accounts 11,802 7,990 9,070 4,019 1,914 1,706 36,501
Certificates of deposit 57,665 16,112 35,225 21,202 1,993 - 132,197
Borrowings:
FHLB advances 41,784 - 5,000 - - - 46,784
Other borrowings 36,052 - - - - - 36,052
------------ ----------- ------------ ----------- ----------- ---------- ------------
Total $148,632 $ 25,303 $ 51,364 $30,027 $5,770 $6,008 $267,104
------------ ----------- ------------ ----------- ----------- ---------- ------------
GAP $ (14,428) $(6,098) $ (28,227) $36,771 $10,050 $10,039 $ 8,107
============ =========== ============ =========== =========== ========== ============
CUMULATIVE GAP $ (14,428) $(20,526) $ (48,753) $ (11,982) $ (1,932) $8,107 $ -
============ =========== ============ =========== =========== ==========
RATIO OF CUMULATIVE GAP TO TOTAL
ASSETS (11.46)% (16.30)% (38.72)% (9.52)% (1.53)% 6.44%
============ =========== ============ =========== =========== ==========
</TABLE>
-----------------------------
(1) Includes $1.1 million of loans held for sale in the 90 days or less
repricing period.
(2) Includes $4.3 million of loans held for sale in the 90 days or less
repricing period.
(3) Includes $165,000 of loans held for sale in the 90 days or less repricing
period.
(4) Includes $2.0 million of investment securities classified as trading in the
90 days or less repricing period.
(5) Includes $21.2 million of mortgage-backed securities classified as trading
in the 90 days or less repricing period.
As indicated in the interest rate sensitivity table, the twelve-month
cumulative gap, representing the total net assets and liabilities that are
projected to re-price over the next twelve months, was liability sensitive in
the amount of $48.8 million at September 30, 2000.
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.
37
<PAGE>
Management uses two other analyses to manage interest rate risk: (1) an
earnings-at-risk analysis to develop an estimate of the direction and magnitude
of the change in net interest income if rates move up or down 100 to 300 basis
points; and (2) a value-at-risk analysis to estimate the direction and magnitude
of the change in net portfolio value if rates move up or down 100 to 200 basis
points. Currently the bank uses a sensitivity of net interest income analysis
prepared by the FHLB of Atlanta to measure earnings-at-risk and the OTS Interest
Rate Risk Exposure Report to measure value-at-risk.
The following table sets forth the earnings at risk analysis that
measures the sensitivity of net interest income to changes in interest rates at
September 30, 2000:
Net Interest Income Sensitivity Analysis
------------------------------------------------------------------
Changes in Rate Basis Point Percent
by Basis Net Interest Change Change
Point Margin From Base From Base
----------------- --------------- --------------- --------------
+300 1.51% (0.60)% (28.44)%
+200 1.73% (0.38)% (18.01)%
+100 1.93% (0.18)% (8.53)%
+0 2.11% - -
-100 2.31% 0.20% 9.48%
-200 2.50% 0.39% 18.48%
-300 2.70% 0.59% 27.96%
The table indicates that, if interest rates increase 200 basis points,
net interest margin, as measured as a percent of total assets, would decrease by
38 basis points or 18.01%. Conversely, if interest rates decrease 200 basis
points net interest margin, as a percent of total assets, would increase by 39
basis points or 18.48%.
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.
38
<PAGE>
Presented below, as of September 30, 2000, is an analysis of our
interest rate risk as measured by changes in net portfolio value for parallel
shifts of 200 basis points in market interest rates:
<TABLE>
<CAPTION>
Net Portfolio Value as a Percent of
the Present Value of Assets
-------------------------------------
Net Portfolio Change in
Net Portfolio Value Value Ratio NPV Ratio
---------------------------------- ------------------ -----------------
Changes in Rates Dollar Percent
(bp) Change Change
------------------ ----------------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
+200 $(4,371) (17.80)% 6.95% (1.25)%
+100 (2,024) (8.24) 7.63 (0.56)
+0 - - 8.20 -
-100 1,529 6.23 8.60 0.40
-200 2,899 11.81 8.96 0.76
</TABLE>
The decline in net portfolio value of $4.4 million or 17.80% in the
event of a 200 basis point increase in rates is a result of the current amount
of fixed rate loans held by the bank as of September 30, 2000. The foregoing
decline in net portfolio value, in the event of an increase in interest rates of
200 basis points, currently exceeds the company's internal board guidelines.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. The bank's primary sources of funds are deposits, principal
and interest payments on loans, mortgage-backed and investment securities and
borrowings. While maturities and scheduled amortization of loans are predictable
sources of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition. The bank has
continued to maintain the required levels of liquid assets as defined by OTS
regulations. This requirement of the OTS, which may be changed at the direction
of the OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The bank's currently required
liquidity ratio is 4.00%. At September 30, 2000, the bank's actual liquidity
ratio was 10.00%. The bank manages its liquidity position and demands for
funding primarily by investing excess funds in short-term investments and
utilizing FHLB advance and reverse repurchase agreements in periods when the
bank's demands for liquidity exceed funding from deposit inflows.
The bank's most liquid assets are cash and cash equivalents, securities
available-for-sale and trading securities. The levels of these assets are
dependent on the bank's operating, financing, lending and investing activities
during any given period. At September 30, 2000, cash and cash equivalents,
securities available-for-sale and trading totaled $115.1 million, or 38.83% of
total assets.
The primary investing activities of the bank are the origination of
residential one- to four-family loans, commercial real estate loans, real estate
construction and development loans, commercial borrowing and consumer loans and
the purchase of United States Treasury and agency securities, mortgage-backed
and mortgage-related securities and other investment securities. During the year
ended September 30, 2000, the bank's loan originations totaled $238.4 million.
Purchases of United States Treasury and agency securities, mortgage-backed and
mortgage related securities and other investment securities totaled $59.2
million for the year ended September 30, 2000.
39
<PAGE>
The bank has other sources of liquidity if a need for additional funds
arises. At September 30, 2000, the bank had $46.1 million in advances
outstanding from the FHLB and had an additional overall borrowing capacity from
the FHLB of $42.8 million at that date. Depending on market conditions, the
pricing of deposit products and FHLB advances, the bank may continue to rely on
FHLB borrowings to fund asset growth.
At September 30, 2000, the bank had commitments to fund (less
commitments to sell loans, investments and unused outstanding lines of credit,
unused standby letters of credit and undisbursed proceeds of construction
mortgages) totaling $611,000. The bank anticipates that it will have sufficient
funds available to meet its current loan origination commitments. Certificate
accounts, including IRA and Keogh accounts, which are scheduled to mature in
less than one year from September 30, 2000, totaled $109.3 million. Based upon
experience, management believes the majority of maturing certificates of deposit
will remain with the bank. In addition, management of the bank believes that it
can adjust the rates offered on certificates of deposit to retain deposits in
changing interest rate environments. In the event that a significant portion of
these deposits are not retained by the bank, the bank would be able to utilize
FHLB advances and reverse repurchase agreements to fund deposit withdrawals,
which would result in an increase in interest expense to the extent that the
average rate paid on such borrowings exceeds the average rate paid on deposits
of similar duration.
CAPITAL RESOURCES. At September 30, 2000, the bank exceeded all minimum
regulatory capital requirements with a tangible capital level of $20.3 million,
or 6.85% of total adjusted assets, which exceeds the required level of $4.4
million, or 1.50%; core capital of $20.3 million, or 6.85% of total adjusted
assets, which exceeds the required level of $11.8 million, or 4.00%; and
risk-based capital of $21.1 million, or 14.23% of risk-weighted assets, which
exceeds the required level of $11.8 million, or 8.00%.
40
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
NET INCOME. Net income for the fiscal year ended September 30, 1999,
amounted to $101,000 or $0.07 per share compared to net income of $609,000 or
$0.77 per share for fiscal year 1998. The $508,000 decrease in net income over
the comparable period one year ago was due to an increase in noninterest expense
coupled with a decrease in income from mortgage-banking activities. The
increased noninterest expense reflects our continuing expansion and growth,
including substantially increased compensation, occupancy and promotional
expenses.
NET INTEREST INCOME. An important source of our earnings is net
interest income, which is the difference between income earned on
interest-earning assets, such as loans, investment securities and
mortgage-backed securities, and interest paid on interest-bearing sources of
funds such as deposits and borrowings. The level of net interest income is
determined primarily by the relative average balances of interest-earning assets
and interest-bearing liabilities in combination with the yields earned and rates
paid upon them. The correlation between the repricing of interest rates on
assets and on liabilities also influences net interest income.
The following table presents a comparison of the components of interest
income and expense and net interest income.
<TABLE>
<CAPTION>
Years Ended September 30, Difference
------------------------------- ------------------------------
1999 1998 Amount %
---------------- ------------- ------------- ----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans $4,210 $2,631 $1,579 60.02%
Investments 4,836 1,380 3,456 250.43
---------------- ------------- ------------- ----------------
Total 9,046 4,011 5,035 125.53
---------------- ------------- ------------- ----------------
Interest expense:
Deposits 5,499 2,163 3,336 154.23
Borrowings 881 400 481 120.25
---------------- ------------- ------------- ----------------
Total 6,380 2,563 3,817 148.93
---------------- ------------- ------------- ----------------
Net interest income $2,666 $1,448 $1,218 84.12%
================ ============= ============= ================
</TABLE>
Our growth in net interest income for fiscal year 1999 was due
primarily to the increase in average interest-earning assets resulting from our
planned growth. Although average interest-earning assets increased $77.8 million
or 143.99% over the comparable period one-year ago, a decline in the net
interest margin (net interest income divided by average interest-earning assets)
of 66 basis points limited the increase in net interest income. The decline in
net interest margin resulted from a significant increase in investments at a
yield lower than could have been obtained if the funds had been invested in
loans.
Interest income for fiscal year 1999 increased $5.0 million from fiscal
year 1998 primarily as a result of an increase in the average outstanding
balances in loans, investment securities and mortgage-backed securities
resulting in large measure from the planned leveraging of our capital. The
increase in interest income from the loan portfolio for fiscal year 1999
compared to interest income earned for fiscal 1998 resulted from an increase of
$21.4 million in the average balance of loans outstanding. That increase was
coupled with an increase in interest income from the investment and
mortgage-backed securities portfolios, resulting from an increase of $56.4
million in the average outstanding balance, offset in part by a 57 basis point
decrease in the average yield earned on the portfolio.
41
<PAGE>
The increase in interest expense on deposits and borrowed funds for
fiscal year 1999 compared to 1998, was principally the result of a significant
increase in the average outstanding balances in total deposits and borrowed
funds, offset in part by a 22 basis point decrease in the average cost of funds.
The increase in interest expense on deposits was primarily due to an increase in
average certificates of deposit of $51.4 million, or 148.11%, from $34.7 million
for fiscal 1998 to $86.1 million for fiscal 1999, offset in part by a 29 basis
point decrease in the average rate paid from 5.56% for fiscal 1998 to 5.39% for
fiscal 1999. The average rate we paid for deposits decreased from 5.42% for
fiscal 1998 to 5.24% for fiscal 1999. That decrease in rate was offset by an
increase of $65.0 million in the average outstanding balance of deposits.
42
<PAGE>
COMPARATIVE AVERAGE BALANCES AND INTEREST INCOME ANALYSIS. The
following table presents the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates. No tax-equivalent adjustments were made and all average balances are
average daily balances. Nonaccruing loans have been included in the tables as
loans carrying a zero yield.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
1999 1998
-------------------------------------- ----------------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE INCOME/ YIELD/ RATE BALANCE INCOME/ YIELD/
EXPENSE EXPENSE RATE
-------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS: (DOLLARS IN THOUSANDS)
Interest-earning assets:
Real estate loans $45,090 $3,685 8.17% $29,079 $2,513 8.64%
Consumer loans 4,167 320 7.68 717 66 9.21
Commercial business loans 2,497 205 8.21 577 52 9.01
------------ ------------ ------------ ------------ ------------- ------------
Total loans 51,754 4,210 8.13 30,373 2,631 8.66
Investment securities 47,208 2,976 6.30 15,300 901 5.89
Mortgage-backed securities 32,816 1,860 5.67 8,337 479 5.75
------------ ------------ ------------ ------------ ------------- ------------
Total interest-earning assets 131,778 9,046 6.86 54,010 4,011 7.43
------------ ------------ ------------- ------------
Non-earning assets 5,611 2,396
------------ ------------
Total assets $137,389 56,406
============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Savings accounts $1,079 $36 3.34% $844 $30 3.55%
Now and money market accounts 17,688 841 4.75 4,352 168 3.86
Certificates of deposit 86,142 4,622 5.37 34,719 1,965 5.66
------------ ------------ ------------ ------------ ------------- ------------
Total deposits 104,909 5,499 5.24 2,163 5.42
FHLB advances 16,371 810 4.95 5,358 286 5.34
Other borrowings 1,301 71 5.46 2,015 114 5.66
------------ ------------ ------------ ------------ ------------- ------------
Total interest-bearing
liabilities 122,581 6,380 5.20 47,288 2,563 5.42
------------ ------------ ------------- ------------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 1,855 2,153
Other liabilities 1,802 1,046
------------ ------------
Total liabilities 126,238 50,484
Stockholders' equity 11,151 5,922
============ ============
Total liabilities and
stockholders' equity $137,389 $56,406
============ ============
Net interest income $2,666 $1,448
============ =============
Interest rate spread 1.66% 2.01%
============ ============
Net interest margin 2.02% 2.68%
============ ============
</TABLE>
43
<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.
Years Ended September 30,
1999 vs. 1998
---------------------------------------
Change Attributable to
---------------------------------------
Volume Rate Total
---------------------------------------
(in thousands)
Real estate loans $1,384 $(212) $1,172
Consumer loans 318 (64) 254
Commercial business loans 173 (20) 153
------------- ------------- ---------
Total loans 1,875 (296) 1,579
Investments 1,879 196 2,075
Mortgage-backed securities 1,406 (25) 1,381
------------- ------------- ---------
Total interest-earning assets $5,160 $(125) $5,035
============= ============= =========
Savings accounts $8 $(2) $6
Now and money market accounts 515 158 673
Certificates of deposit 2,910 (253) 2,657
------------- ------------- ---------
Total deposits 3,433 (97) 3,336
FHLB advances 588 (64) 524
Other borrowings (40) (3) (43)
------------- ------------- ---------
Total interest-bearing
liabilities $3,981 $(164) $3,817
============= ============= =========
Change in net interest income $1,179 $39 $1,218
============= ============= =========
PROVISION FOR LOAN LOSSES. The allowance for loan losses, which is
established through provisions for losses charged to expense, is increased by
recoveries on loans previously charged off and is reduced by charge-offs on
loans. Determining the proper reserve level or allowance involves management's
judgment based upon a review of factors, including the company's internal review
process which segments the loan portfolio into groups based on various risk
factors including the types of loans and asset classifications. Each segment is
then assigned a reserve percentage based upon the perceived risk in that
segment. Although management utilizes its best judgment in providing for
probable losses, there can be no assurance that the company will not have to
increase its provisions for loan losses in the future as a result of an adverse
market for real estate and economic conditions generally in the company's
primary market area, future increases in non-performing assets or for other
reasons which would adversely affect the company's results of operations.
The provision for loan losses decreased from $159,000 during fiscal
1998 to $26,000 during fiscal 1999. The reduction in the provision is directly
related to an improvement in credit quality over that time period coupled with a
decline in non-performing loans. Net charge-offs decreased from $357,000 during
fiscal 1998 to $14,000 during fiscal 1999 as overall asset quality improved as
new management took a more aggressive posture in assessing collectability of
classified loans.
44
<PAGE>
NONINTEREST INCOME. The following table presents a comparison of the
components of noninterest income.
<TABLE>
<CAPTION>
Years Ended September 30, Difference
-------------------------------- ---------------------------------
1999 1998 Amount %
---------------- -------------- -------------- ----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Noninterest income:
Gain on sale of loans $5,408 $5,774 $(366) (6.34)%
Service fees on loans 513 412 101 24.51
Service fees on deposits 110 25 85 340.00
Other operating income 50 58 (8) (13.79)
---------------- -------------- -------------- ----------------
Total noninterest income $6,081 $6,269 $(188) (3.00)%
================ ============== ============== ================
</TABLE>
Noninterest income decreased during fiscal 1999, over the comparable
period one year ago primarily as a result of the decrease in gain on sale of
loans. Primarily attributable to the decline in the net margin recognized from
the sale of loans as interest rates continued to increase.
NONINTEREST EXPENSE. The following table presents a comparison of the
components of noninterest expense.
<TABLE>
<CAPTION>
Years Ended
September 30, Difference
---------------------------- ----------------------------
1999 1998 Amount %
--------------- ------------ -------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Noninterest expense:
Compensation and employee benefits $4,523 $3,748 $775 20.68%
Occupancy 914 498 416 83.53
Professional services 388 193 195 101.04
Advertising 661 568 93 16.37
Deposit insurance premium 64 95 (31) (32.63)
Furniture, fixtures and equipment 412 203 209 102.96
Data processing 184 132 52 39.39
Loss from foreclosed real estate 19 34 (15) (44.12)
Other operating expense 1,624 1,167 457 39.16
--------------- ------------ -------------- -------------
Total noninterest expense $8,789 $6,638 $2,151 32.40%
=============== ============ ============== =============
</TABLE>
Compensation and employee benefits increased from the comparable period
one year ago mainly because of increased staffing in the branch network, the
hiring of additional administrative staff and the related employee benefit cost
associated with the increase in compensation. Net occupancy expenses increased
from fiscal 1998 to fiscal 1999 due to the development of the branch network
which increased from two branches as of September 30, 1998 to five branches as
of September 30, 1999, as well as the acquisition of additional administrative
space to handle the current and planned growth of the bank. The increase in
advertising expense from fiscal 1998 to fiscal 1999 reflects the company's
increased marketing efforts relating to both deposit and loan products. Other
operating expenses increased in fiscal 1999 compared to fiscal 1998 primarily
due to the costs associated with the branch expansion program.
INCOME TAXES. The company files a consolidated federal income tax
return with its subsidiaries and computes its income tax provision or benefit on
a consolidated basis. The income tax benefit in fiscal 1999 amounted to $169,000
compared to a provision of $311,000 in fiscal 1998.
45
<PAGE>
We recorded a deferred tax asset of $1.3 million, at September 30,
1999. Based on past operating performance under current management, we believe
that it is more likely than not that the net asset recorded will be realized.
At September 30, 1999, the company had net operating loss carry
forwards for federal income tax purposes of approximately $1.7 million which are
available to offset future federal taxable income, if any, through 2011. As a
result of the change in ownership of the bank, the amount of any tax loss
carryforward usage is restricted to an annual limitation of approximately
$114,000.
RECENT ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair market value. Under certain
circumstances, a portion of the derivative's gain or loss is initially reported
as a component of other comprehensive income and subsequently reclassified into
income when the transaction affects earnings. For a derivative not designated as
a hedging instrument, the gain or loss is recognized in income in the period of
change. The Company will be required to adopt SFAS 133 by October 1, 2000.
Presently, the Company does not use derivative instruments either in hedging
activities or as investments. Accordingly, the Company believes that adoption of
SFAS 133 will have no material impact on its financial position or results of
operation.
In March 2000, the FASB issued interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25". FIN 44 clarifies the application of APB
No. 25 for (a) the definition of employee for purposes of applying APB 25, (b)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequences of various modifications to the previously fixed
stock option of award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 2, 2000
but certain conclusions cover specific events that occur after either December
15, 1998 or January 12, 2000. The Bank believes that adoption of FIN 44 will not
have an affect on the Bank's financial statements but may impact the accounting
for grants or awards in future periods.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
The Consolidated Financial Statements and Supplementary Information of
Greater Atlantic Financial Corp. and subsidiary as of September 30, 2000 and
1999 are included in pages 47 through 86 of this report
46
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
PAGE
INDEPENDENT AUDITORS' REPORT ..............................................48
FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES:
Consolidated statements of financial condition ...................49
Consolidated statements of operations ............................50
Consolidated statements of comprehensive (loss) income ...........51
Consolidated statements of stockholders' equity ..................52
Consolidated statements of cash flows ............................53
Notes to consolidated financial statements .......................55
INDEPENDENT AUDITORS' REPORT ON
SUPPLEMENTAL FINANCIAL INFORMATION ........................................82
Consolidating statement of financial condition ...................83
Consolidating statement of operations ............................85
47
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
GREATER ATLANTIC FINANCIAL CORP.
Reston, Virginia
We have audited the accompanying consolidated statements of financial condition
of GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES as of September 30, 2000
and 1999, and the related consolidated statements of operations, comprehensive
income, stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GREATER ATLANTIC
FINANCIAL CORP. AND SUBSIDIARIES at September 30, 2000 and 1999, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
Washington, D.C.
October 27, 2000
48
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
SEPTEMBER 30, 2000 1999
-----------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Assets
Cash and cash equivalents $ 2,312 $ 1,064
Interest bearing deposits 3,405 639
Investment securities (Notes 3 and 10)
Available-for-sale 86,580 75,458
Held-to-maturity 27,600 32,766
Trading 22,766 -
Loans held for sale (Note 4) 5,599 7,436
Loans receivable, net (Notes 4, 10 and 16) 132,698 72,792
Accrued interest and dividends receivable (Note 5) 2,494 1,449
Deferred income taxes (Note 11) 1,520 1,324
Federal Home Loan Bank stock, at cost 3,560 2,013
Foreclosed real estate (Note 7) 172 187
Premises and equipment, net (Note 6) 4,859 2,218
Goodwill (Note 2) 1,378 -
Prepaid expenses and other assets 1,353 1,477
-----------------------------------------------------------------------------------------------
Total assets $296,296 $198,823
===============================================================================================
Liabilities and stockholders' equity
Liabilities
Deposits (Note 8) $188,387 $129,007
Advance payments from borrowers for taxes and insurance 264 264
Accrued expenses and other liabilities (Note 9) 3,942 1,171
Advances from the FHLB and other borrowings (Note 10) 82,836 43,391
-----------------------------------------------------------------------------------------------
Total liabilities 275,429 173,833
-----------------------------------------------------------------------------------------------
Commitments and contingencies (Note 12)
Stockholders' Equity (Notes 13 and 14)
Preferred stock $.01 par value - 2,500,000 shares authorized,
none outstanding - -
Common stock, $.01 par value - 10,000,000
shares authorized; 3,007,434 shares outstanding 30 30
Additional paid-in capital 25,132 25,132
Retained (loss) earnings (2,928) 710
Accumulated other comprehensive loss (1,367) (882)
-----------------------------------------------------------------------------------------------
Total stockholders' equity 20,867 24,990
-----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $296,296 $198,823
===============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 2000 1999
----------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Interest income
Loans $8,462 $4,210
Investments 9,310 4,836
----------------------------------------------------------------------------------------------
Total interest income 17,772 9,046
----------------------------------------------------------------------------------------------
Interest expense
Deposits (Note 8) 7,668 5,499
Borrowed money 5,426 881
----------------------------------------------------------------------------------------------
Total interest expense 13,094 6,380
----------------------------------------------------------------------------------------------
Net interest income 4,678 2,666
Provision for loan losses (Note 4) 13 26
----------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,665 2,640
----------------------------------------------------------------------------------------------
Noninterest income
Fees and service charges 613 649
Gain on sale of loans 2,466 5,408
Gain (loss) on sale of investment securities (1,025) 24
----------------------------------------------------------------------------------------------
Total noninterest income 2,054 6,081
----------------------------------------------------------------------------------------------
Noninterest expense
Compensation and employee benefits 4,738 4,523
Occupancy 1,194 914
Professional services 794 388
Advertising 547 661
Deposit insurance premium 52 64
Furniture, fixtures and equipment 488 412
Data processing 410 184
Provision for (recovery of) loss on real estate owned (Note 7) - (6)
Other real estate owned expenses (Note 7) 10 25
Other operating expenses 2,724 1,624
----------------------------------------------------------------------------------------------
Total noninterest expense 10,957 8,789
----------------------------------------------------------------------------------------------
Loss before income tax benefit (4,238) (68)
----------------------------------------------------------------------------------------------
Income tax benefit (Note 11) (600) (169)
----------------------------------------------------------------------------------------------
Net (loss) income $ (3,638) $ 101
----------------------------------------------------------------------------------------------
Basic and diluted (loss) earnings per share (Note 15) $ (1.21) $0.07
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
----------------------------------------------------------------------------
Years ended September 30, 2000 1999
---------------------------------------------------------------------------
(in thousands)
Net (loss) income $(3,638) $101
----------------------------------------------------------------------------
Other comprehensive loss, net of tax:
Unrealized losses on securities (485) (989)
----------------------------------------------------------------------------
Other comprehensive loss (485) (989)
----------------------------------------------------------------------------
Comprehensive loss $(4,123) $(888)
============================================================================
See accompanying notes to consolidated financial statements.
51
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Accumulated Other Total
Preferred Common Paid-in Earnings Comprehensive Stockholders'
Stock Stock Capital (Deficit) Income (Loss) Equity
-----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1998 $ - $8 $6,093 $ 609 $ 107 $ 6,817
Issuance of 8,961
common shares - 75 75
Issuance of 2,185,000 common
shares, net of related
expenses of $1.8 million 22 18,964 - - 18,986
Other comprehensive
income, net of tax of $470 - - - - (989) (989)
Net income for the period - - - 101 - 101
-----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 - 30 25,132 710 (882) 24,990
Other comprehensive income - - - - (485) (485)
Net loss for the period - - - (3,638) - (3,638)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 $ - $30 $25,132 $ (2,928) $(1,367) $ 20,867
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
52
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Years ended September 30, 2000 1999
------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Cash flow from operating activities
Net (loss) income $(3,638) $ 101
Adjustments to reconcile net (loss) income to net cash
provided by operating activities
Provision for loan losses 13 26
Provision (recovery) for losses on foreclosed assets - (6)
Depreciation and amortization 376 321
Deferred income taxes (196) (327)
Proceeds from sale of trading securities 5,578 243
Unrealized loss (gain) on trading securities 580 (6)
Realized loss (gain) on sale of investments 451 (19)
Realized (gain) loss on sale of mortgaged-backed securities (6) 6
Amortization of investment security premiums 624 224
Amortization of mortgage-backed securities 224 307
Amortization of deferred fees (127) (91)
Discount accretion net of premium amortization 80 1
Loss on disposal of fixed assets 67 -
(Gain) loss on sale of foreclosed real estate (14) 4
Gain on sale of loans held for sale (2,466) (5,408)
(Increase) decrease in assets
Disbursements for origination of loans (117,037) (294,776)
Proceeds from sales of loans 121,339 318,062
Accrued interest and dividend receivable (1,045) (594)
Prepaid expenses and other assets 124 (605)
Deferred loan fees collected, net of deferred costs incurred (64) (49)
Increase (decrease) in liabilities
Accrued expenses and other liabilities 2,772 (643)
Income taxes payable - 318
------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 7,635 $17,089
================================================================================================
</TABLE>
53
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Years ended September 30, 2000 1999
--------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Cash flow from investing activities
Net increase in loans $ (76,075) $(47,362)
Purchases of premises and equipment (3,081) (1,781)
Proceeds from sales of foreclosed real estate 310 99
Purchases of investment securities (30,006) (46,645)
Proceeds from sale of investment securities 15,626 266
Proceeds from repayments of investment securities 7,366 12,418
Purchases of mortgage-backed securities (29,169) (40,387)
Proceeds from sale of mortgage-backed securities 1,960 4,554
Proceeds from repayments of mortgage-backed securities 13,549 10,768
Purchases of FHLB stock (4,270) (7,019)
Proceeds from sale of FHLB stock 2,723 6,106
Acquisition, net of cash acquired (1,379) -
--------------------------------------------------------------------------------------------------
Net cash used in investing activities (102,446) (108,983)
--------------------------------------------------------------------------------------------------
Cash flow from financing activities
Net increase in deposits 59,380 52,696
Issuance of common shares - 22
Net initial public offering proceeds from sale of common stock - 19,039
Net advances from FHLB 8,450 15,650
Net borrowings on reverse repurchase agreements 30,995 5,741
Increase in advance payments by borrowers for taxes and insurance - 16
--------------------------------------------------------------------------------------------------
Net cash provided by financing activities 98,825 93,164
--------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 4,014 1,270
--------------------------------------------------------------------------------------------------
Cash and cash equivalents, at beginning of period 1,703 433
--------------------------------------------------------------------------------------------------
Cash and cash equivalents, at end of period $ 5,717 $ 1,703
==================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
54
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Greater Atlantic Financial Corp. (GAFC or the "Company") is a bank holding
company whose principal activity is the ownership and management of Greater
Atlantic Bank (GAB or "the Bank"), and its wholly owned subsidiary, Greater
Atlantic Mortgage Corporation (GAMC). The Bank originates 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 include the accounts of GAFC and its
wholly owned subsidiaries, GAB and GAMC. All significant intercompany accounts
and transactions have been eliminated in consolidation.
RISK AND UNCERTAINTIES
In its normal course of business, the Company encounters two significant
types of risk: economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice more rapidly, or on a different basis, than its
interest-earning assets. Credit risk is the risk of default on the Company's
loan portfolio that results from the borrowers' inability or unwillingness to
make contractually required payments. Market risk reflects changes in the value
of collateral underlying loans receivable and the valuation of real estate held
by the Company. The determination of the allowance for loan losses and the
valuation of real estate are based on estimates that are particularly
susceptible to significant changes in the economic environment and market
conditions. Management believes that, as of September 30, 2000 and September 30,
1999, 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.
55
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONCENTRATION OF CREDIT RISK
The Company's primary business activity is with customers located in
Maryland, Virginia and the District of Columbia. The Company primarily
originates residential loans to customers throughout these areas, most of who
are residents local to the Company's business locations. The Company has a
diversified loan portfolio consisting of residential, commercial and consumer
loans. Commercial and consumer loans generally provide for higher interest rates
and shorter terms, however such loans have a higher degree of credit risk.
Management monitors all loans, including, when possible, making inspections of
the properties, maintaining current operating statements, and performing net
realizable value calculations, with allowances for losses established as
necessary to properly reflect the value of the properties. Management believes
the current loss allowances are sufficient to cover the credit risk estimated to
exist at September 30, 2000.
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 (interest) method.
Investment securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities and reported
at fair value, with unrealized gains and losses included in earnings.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans receivable are stated at unpaid principal balances, net of unearned
discounts resulting from add-on interest, participation or whole-loan interests
owned by others, undisbursed loans in process, deferred loan fees, and
allowances for loan losses.
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 at September
30, 2000.
56
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. As an expedient, creditors may account for
impaired loans at the fair value of the collateral or at the observable market
price of the loan if one exists. 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 (interest) 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
(interest) method. Loans of $16.4 million and $1.3 million were sold with
servicing rights retained during the years ended September 30, 2000 and
September 30, 1999, respectively. The Company also sells participation interests
in loans that it services.
57
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 ten years. Leasehold
improvements are capitalized and amortized using the straight-line method over
the life of the related lease.
FORECLOSED REAL ESTATE
Real estate acquired through foreclosure is recorded at the lower of cost or
fair value less estimated selling costs. Subsequent to the date of foreclosure,
valuation adjustments are made, if required, to the lower of cost or fair value
less estimated selling costs. Costs related to holding the real estate, net of
related income, are reflected in operations when incurred. Recognition of gains
on sale of real estate is dependent upon the transaction meeting certain
criteria relating to the nature of the property sold and the terms of the sale.
INCOME TAXES
Income taxes are calculated using the liability method specified by Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes". 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
58
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
prominence as other financial statements. SFAS 130 is effective for financial
statements for periods beginning after December 15, 1997. Presently, the
Company's comprehensive income and loss is from unrealized gains and losses on
certain investment securities.
STOCK-BASED COMPENSATION
The Company measures compensation cost for stock options using the intrinsic
value method prescribed by APB Opinion No. 25, which requires compensation
expense to be recorded on the date of grant only if the current market price of
the underlying stock exceeds the exercise price. The Company provides pro forma
net income and pro forma earnings per share disclosures for employee stock
option grants as if the fair-value-based method defined in SFAS 123, "Accounting
for Stock-Based Compensation," had been applied. See Note 14 for the pro forma
net income and pro forma earnings per share disclosures.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
method of presentation. These reclassifications have no effect on the results of
operations previously reported.
2. ACQUISITION
On August 22, 2000, the Company completed the acquisition of certain assets
of Dominion Savings Bank, FSB, Front Royal, Virginia. 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. Shareholders of Dominion were paid approximately $1.1
million in cash, resulting in goodwill of approximately $1.4 million, which is
being amortized, on a straight-line basis over 15 years. Since the Dominion
acquisition occurred on August 22, 2000, its impact upon the Company's
consolidated results of operations for the fiscal year ended September 30, 2000
was not significant.
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisition had occurred on October 1, 1998.
----------------------------------------------------------------------------
Year ended September 30, 2000 1999
----------------------------------------------------------------------------
(in thousands)
Total interest income $ 20,811 $ 12,286
Net loss $ (4,809) $ (767)
Diluted loss per common share $ (1.60) $ (0.56)
----------------------------------------------------------------------------
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on the date
indicated, or which may result in the future.
59
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS
AVAILABLE-FOR-SALE, SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Investment securities
Equity securities $2,157 $87 $ 73 $2,171
SBA notes 39,967 - 480 39,487
FHLB notes 1,000 - 24 976
CMOs 3,410 3 55 3,358
Corporate debt securities 1,967 - 43 1,924
----------------------------------------------------------------------------------------------
48,501 90 675 47,916
----------------------------------------------------------------------------------------------
Mortgage-backed securities
FNMA notes 26,880 4 329 26,555
GNMA notes 1,430 - 26 1,404
FHLMC notes 10,772 2 69 10,705
----------------------------------------------------------------------------------------------
39,082 6 424 38,664
----------------------------------------------------------------------------------------------
$87,583 $96 $1,099 $86,580
==============================================================================================
</TABLE>
HELD-TO-MATURITY, SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Investment securities
SBA notes $19,878 $- $696 $19,182
Corporate debt securities 1,037 - 72 965
--------------------------------------------------------------------------------------------
20,915 - 768 20,147
--------------------------------------------------------------------------------------------
Mortgage-backed securities
FNMA notes 3,868 - 155 3,713
FHLMC notes 2,817 - 78 2,739
--------------------------------------------------------------------------------------------
6,685 - 233 6,452
--------------------------------------------------------------------------------------------
$27,600 $- $1,001 $26,599
============================================================================================
</TABLE>
60
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AVAILABLE-FOR-SALE, SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Investment securities
Equity securities $11,958 $6 $361 $11,603
SBA notes 21,414 23 124 21,313
FHLB notes 3,000 - 53 2,947
CMOs 1,687 - 18 1,669
Corporate debt securities 2,454 48 14 2,488
----------------------------------------------------------------------------------------------
40,513 77 570 40,020
----------------------------------------------------------------------------------------------
Mortgage-backed securities
FNMA notes 26,869 18 398 26,489
GNMA notes 2,471 - 35 2,436
FHLMC notes 6,596 2 85 6,513
----------------------------------------------------------------------------------------------
35,936 20 518 35,438
----------------------------------------------------------------------------------------------
$76,449 $97 $1,088 $75,458
==============================================================================================
</TABLE>
HELD-TO-MATURITY, SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Investment securities
SBA notes $23,990 $- $523 $23,467
Corporate notes 1,047 - 87 960
----------------------------------------------------------------------------------------------
25,037 - 610 24,427
----------------------------------------------------------------------------------------------
Mortgage-backed securities
FNMA notes 4,312 - 83 4,229
FHLMC notes 3,417 - 68 3,349
----------------------------------------------------------------------------------------------
7,729 - 151 7,578
----------------------------------------------------------------------------------------------
$32,766 $- $761 $32,005
==============================================================================================
</TABLE>
The weighted average interest rate on investments was 8.61% and 7.35% for the
years ended September 30, 2000 and 1999, respectively.
61
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TRADING ACTIVITIES
Trading assets, at fair value, consist of the following:
-----------------------------------------------------------------------
SEPTEMBER 30, 2000 1999
-----------------------------------------------------------------------
(in thousands)
FHLB notes $1,946 $ -
Mortgage-backed securities 20,820 -
-----------------------------------------------------------------------
$22,766 $ -
=======================================================================
The net (losses) gains on trading activities included in earnings are as
follows:
YEARS ENDED SEPTEMBER 30, 2000 1999
-----------------------------------------------------------------------
(in thousands)
FHLB notes $(54) $ -
Mortgage-backed securities (526) 11
-----------------------------------------------------------------------
$(580) $11
=======================================================================
Proceeds from the sale of available for sale securities were $15.1
million and $4.8 million for the years ended September 30, 2000 and 1999,
respectively. Gross realized losses were $1.0 million for the year ended
September 30, 2000 compared to gross gains of $23,000 for the year ended
September 30, 1999. The amortized cost and estimated fair value of securities at
September 30, 2000, by contractual maturity, are as follows:
62
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Available-for-Sale, September 30, 2000
-----------------------------------------------------------------------------
Amortized Fair
Cost Value
-----------------------------------------------------------------------------
(in thousands)
Amounts maturing in:
One year or less $ 996 $ 997
After one year through five years - -
After five years through ten years - -
After ten years 47,505 46,920
Mortgage-backed securities 39,082 38,663
-----------------------------------------------------------------------------
$87,583 $86,580
=============================================================================
Held-to-Maturity, September 30, 2000
-----------------------------------------------------------------------------
Amortized Fair
Cost Value
-----------------------------------------------------------------------------
(in thousands)
Amounts maturing in:
One year or less $ - $ -
After one year through five years 897 860
After five years through ten years 3,073 2,939
After ten years 16,945 16,348
Mortgage-backed securities 6,685 6,452
-----------------------------------------------------------------------------
$27,600 $26,599
=============================================================================
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.
63
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LOANS RECEIVABLE
Loans receivable consists of the following:
--------------------------------------------------------------------------
September 30, 2000 1999
--------------------------------------------------------------------------
(in thousands)
Mortgage loans:
Single-family $ 84,354 $60,660
Multi-family 1,053 1,216
Construction 14,537 4,624
Commercial real estate 10,765 5,665
Land loans 3,158 871
--------------------------------------------------------------------------
Total mortgage loans 113,867 73,036
Commercial loans 11,221 3,170
Consumer loans 21,887 7,423
--------------------------------------------------------------------------
Total loans 146,975 83,629
--------------------------------------------------------------------------
Due borrowers on loans-in process (7,953) (3,049)
Deferred loan fees 149 100
Allowance for loan losses (765) (590)
Unearned (discounts) premium (109) 138
--------------------------------------------------------------------------
(8,678) (3,401)
--------------------------------------------------------------------------
$138,297 $80,228
==========================================================================
Loans held for sale $ 5,599 $7,436
Loans receivable, net 132,698 72,792
--------------------------------------------------------------------------
$138,297 $80,228
==========================================================================
Loans held for sale are all single-family mortgage loans.
The activity in allowance for loan losses is summarized as follows:
--------------------------------------------------------------------------
September 30, 2000 1999
--------------------------------------------------------------------------
(in thousands)
Balance, beginning $590 $578
Provision for loan losses 13 26
Dominion reserves 225 -
Charge-offs (63) (24)
Recoveries - 10
--------------------------------------------------------------------------
Balance, ending $765 $590
==========================================================================
64
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amount of loans serviced for others totaled $18.1 million and $3.6
million as of September 30, 2000 and September 30, 1999, respectively.
The allowance for uncollected interest, established for mortgage loans which
are delinquent for a period of 90 days or more, amounted to $3,000 and $1,000 as
of September 30, 2000 and September 30, 1999, 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 $194,000 and $23,000 as of
September 30, 2000, and September 30, 1999, respectively.
5. ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest and dividends receivable consist of the following:
------------------------------------------------------------------------
September 30, 2000 1999
------------------------------------------------------------------------
(in thousands)
Investments $1,463 $ 929
Loans receivable 951 500
Accrued dividends on FHLB stock 80 20
------------------------------------------------------------------------
$2,494 $1,449
========================================================================
6. PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
--------------------------------------------------------------------------
SEPTEMBER 30, 2000 1999
--------------------------------------------------------------------------
(in thousands)
Furniture, fixtures and equipment $3,172 $1,824
Leasehold improvements 2,225 1,796
Land 1,137 -
--------------------------------------------------------------------------
6,534 3,620
Less: Allowances for depreciation
and amortization 1,675 1,402
--------------------------------------------------------------------------
$4,859 $2,218
==========================================================================
65
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FORECLOSED REAL ESTATE
Foreclosed real estate is summarized as follows:
----------------------------------------------------------------------------
SEPTEMBER 30, 2000 1999
----------------------------------------------------------------------------
(in thousands)
Real estate acquired through settlement of loans $172 $187
============================================================================
The cost of operations for foreclosed real consists of the following:
----------------------------------------------------------------------------
SEPTEMBER 30, 2000 1999
----------------------------------------------------------------------------
(in thousands)
INCOME:
Gain on sale $14 $ -
----------------------------------------------------------------------------
EXPENSE:
Loss on sale - 4
Provision for (recovery of) loss - (6)
Operating expenses 10 25
----------------------------------------------------------------------------
10 23
----------------------------------------------------------------------------
Gain (loss) $ 4 $(23)
============================================================================
Activity in the allowance for losses on foreclosed real estate is summarized
as follows:
----------------------------------------------------------------------------
September 30, 2000 1999
----------------------------------------------------------------------------
(in thousands)
Balance, beginning $ 5 $22
Provision (recovery) charged to income - (6)
Charge-offs, net of recoveries (5) (11)
----------------------------------------------------------------------------
Balance, ending $ - $ 5
============================================================================
66
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. DEPOSITS
Deposits are summarized as follows:
September 30, 2000
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Ranges of
Contractual
Amount Interest Rates %
--------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Savings accounts $ 5,808 2.50 - 3.25% 3.1%
NOW/money market accounts 46,263 0.00 - 6.11% 24.6
Certificates of deposit 131,893 4.45 - 9.00% 70.0
Non-interest bearing demand deposits 4,423 0.00% 2.3
--------------------------------------------------------------------------------------------
$188,387 100.0%
============================================================================================
</TABLE>
September 30,1999
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
Ranges of
Contractual
Amount Interest Rates %
-------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Savings accounts $ 1,375 2.50 - 3.25% 1.1%
NOW/money market accounts 27,157 0.00 - 5.03% 21.1
Certificates of deposit 94,879 4.50 - 6.50% 73.5
Non-interest bearing demand deposits 5,596 0.00% 4.3
-------------------------------------------------------------------------------------------
$129,007 100.0%
===========================================================================================
</TABLE>
67
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certificates of deposit as of September 30, 2000 mature as follows:
Years ending September 30,
--------------------------------------------------------------------------
(in thousands)
2001 $109,328
2002 15,021
2003 5,641
2004 992
2005 911
--------------------------------------------------------------------------
$131,893
==========================================================================
Interest expense on deposit accounts consists of the following:
--------------------------------------------------------------------------
Years ended September 30, 2000 1999
--------------------------------------------------------------------------
(in thousands)
NOW/money market accounts $1,773 $ 840
Savings accounts 40 36
Certificates of deposit 5,855 4,623
--------------------------------------------------------------------------
$7,668 $5,499
==========================================================================
Deposits, including certificates of deposit, with balances in excess of
$100,000 totaled $28.7 million and $40.4 million at September 30, 2000, and
September 30, 1999, 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. There was no compensation expense recognized in 2000
or 1999 related to this plan. The liability associated with the plan was
$500,000 at September 30, 2000 and 1999.
68
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
The Bank has $88.9 million credit availability as of September 30, 2000 from
the Federal Home Loan Bank of Atlanta (FHLB), which it uses to fund loans
originated by Greater Atlantic Mortgage Corporation. Any advances in excess of
$10 million are required to be collateralized with eligible securities. The
credit availability is at the discretion of the FHLB.
The following table sets forth information regarding the Bank's
borrowed funds:
<TABLE>
<CAPTION>
At or for the years ended September 30, 2000 1999
-------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
FHLB advances:
Average balance outstanding $55,691 $16,371
Maximum amount outstanding at any month-end during the period 76,800 37,650
Balance outstanding at end of period 46,100 37,650
Weighted average interest rate during the period 6.14% 4.95%
Weighted average interest rate at end of period 6.33% 5.55%
Reverse repurchase agreements:
Average balance outstanding 31,100 1,301
Maximum amount outstanding at any month-end during the period 39,605 5,741
Balance outstanding at end of period 36,736 5,741
Weighted average interest rate during the period 6.45% 5.46%
Weighted average interest rate at end of period 6.62% 5.50%
</TABLE>
The Bank has pledged certain investments with carrying values of $53.1
million at September 30, 2000, to collateralize advances from the FHLB.
First mortgage loans in the amount of $32.3 million are available to be
pledged as collateral for the advances at September 30, 2000.
69
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
The following is a summary of the income tax provision (benefit):
---------------------------------------------------------------------------
Years ended September 30, 2000 1999
---------------------------------------------------------------------------
(in thousands)
Current - Federal benefit $ - $(196)
State benefit - (50)
---------------------------------------------------------------------------
(246)
Deferred - Federal and state (benefit) provision (600) 77
---------------------------------------------------------------------------
$(600) $(169)
===========================================================================
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:
--------------------------------------------------------------------------
Years ended September 30, 2000 1999
--------------------------------------------------------------------------
(in thousands)
Federal tax benefit $(1,441) $ (23)
State tax benefit (212) (35)
(Increase) decrease in benefit resulting from:
Change in the valuation allowance 1,233 (80)
Permanent differences 20 9
Change in effective deferred tax rate - (41)
Other (200) 1
--------------------------------------------------------------------------
Income tax benefit $ (600) $(169)
==========================================================================
70
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company's deferred tax assets and liabilities
are as follows:
-------------------------------------------------------------------------
September 30, 2000 1999
-------------------------------------------------------------------------
(in thousands)
DEFERRED TAX ASSETS
Net operating loss carryforwards $2,603 $ 679
Allowance for loan losses 226 236
Unrealized losses on securities - 404
Loans held for sale 18 45
Core deposit intangible 67 67
Deferred loan fees 98 43
Book over tax depreciation - 53
Compensation payable 226 196
Net discounts on second trusts 32 46
Other 33 61
-------------------------------------------------------------------------
Total deferred tax assets 3,303 1,830
-------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
FHLB stock dividends 39 39
Tax over book depreciation 44 -
-------------------------------------------------------------------------
Total deferred tax liabilities 83 39
-------------------------------------------------------------------------
Net deferred tax assets 3,220 1,791
Less: Valuation allowance 1,700 467
-------------------------------------------------------------------------
Total $1,520 $1,324
=========================================================================
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.
At September 30, 2000, the Company has net operating loss carryforwards
totaling approximately $6.7 million, which expire in the years 2006 to 2020. As
a result of the change in ownership of the Bank, approximately $1.7 million of
the total net operating loss carryforwards are subject to an annual usage
limitation of approximately $114,000.
71
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES
On July 28, 1999, First Guaranty Mortgage Corporation filed a complaint
against the Company and it's wholly owned subsidiary GAB and GAMC in Circuit
Court of Arlington, Virginia. This complaint alleged breach of contract and
related claims against these three companies and employees of GAMC who formerly
were employed at First Guaranty. First Guaranty alleged that GAMC, GAB and GAFC
wrongfully interfered with the business of First Guaranty's Frederick, Maryland
office by hiring the employees of that office. First Guaranty sought
approximately $5,000,000 in compensatory and $20,000,000 in punitive damages. In
2000, the Company entered into a settlement, which resolved this claim. The
resulting provision for litigation loss of $1.25 million has been reflected in
other operating expenses in the accompanying statement of operations for the
year ended September 30, 2000.
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, standby letters of
credit, and financial guarantees. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the balance sheet. The contract or notional amounts of those instruments reflect
the extent of involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit and financial guarantees written is represented by the
contractual notional amount of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
At September 30, 2000, the Company had outstanding commitments to originate
and purchase loans and undisbursed construction mortgages aggregating
approximately $25.6 million. Fixed rate commitments are at market rates as of
the commitment dates and generally expire within 60 days. In addition, the
Company was contingently liable under unfunded lines of credit for approximately
$11.6 million and standby letters of credit for approximately $25,000.
Effective October 1, 2000, 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 two years 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
December 1, 1999. The agreement provides for a base salary of $150,000 per year.
Presently the Company and the Executive Officer are negotiating an extension of
the agreement with the completion of such negotiations within the next fiscal
quarter.
72
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RENTAL COMMITMENTS
The Company has entered into lease agreements for the rental of certain
properties expiring on various dates through February 28, 2019. The future
minimum rental commitments as of September 30, 2000, for all noncancellable
lease agreements, are as follows:
Years ending Rental
September 30, Commitments
--------------------------------------------------
2001 $1,252
2002 1,315
2003 1,324
2004 1,333
2005 1,225
Thereafter 7,382
--------------------------------------------------
Total $13,831
==================================================
Net rent expense for the years ended September 30, 2000 and September 30,
1999 was $1.1 million and $825,000, respectively.
The Company had a sublease agreement with a tenant, which occupied space in
the Rockville branch office. The sublease expired in January 1999. Rental income
for the year ended September 30, 1999 was $40,000.
13. REGULATORY MATTERS
Generally, annual dividends to shareholders are limited to the amount of
current year net income, plus the total net income for the preceding two years,
adjusted for any prior year distributions. Under certain circumstances,
regulatory approval would be required before making a capital distribution. The
Bank did not pay any cash dividends during the year ended September 30, 2000.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
created five categories of financial institutions based on the adequacy of their
regulatory capital level: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Under FDICIA, a well-capitalized financial institution is one
with Tier 1 leverage capital of 5%, Tier 1 risk-based capital of 6% and total
risk-based capital of 10%. At September 30, 2000 and September 30, 1999, 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.
73
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following presents the Bank's capital position at September 30, 2000 and
September 30, 1999:
<TABLE>
<CAPTION>
Required Required Actual Actual
At September 30, 2000 Balance Percent Balance Percent Surplus
-----------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Tangible $4,442 1.50% $20,295 6.85% $15,853
Core $11,845 4.00% $20,295 6.85% $8,450
Risk-based $11,841 8.00% $21,060 14.23% $9,219
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Required Required Actual Actual
At September 30, 1999 Balance Percent Balance Percent Surplus
------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Tangible $2,963 1.50% $20,782 10.52% $17,819
Core $7,901 4.00% $20,782 10.52% $12,881
Risk-based $6,018 8.00% $21,372 28.41% $15,354
======================================================================================================
</TABLE>
The following is a reconciliation of the Bank's net worth as reported to the
OTS on GAAP capital as presented in the accompanying financial statements.
---------------------------------------------------------------------------
September 30, 2000 1999
---------------------------------------------------------------------------
(in thousands)
GAAP CAPITAL $20,494 $20,103
Unrealized losses on available for sale securities 1,179 679
Goodwill (1,378) -
---------------------------------------------------------------------------
TANGIBLE CAPITAL 20,295 20,782
Adjustments - -
---------------------------------------------------------------------------
CORE CAPITAL 20,295 20,782
Allowance for general loss reserves 765 590
---------------------------------------------------------------------------
RISK-BASED CAPITAL $21,060 $21,372
===========================================================================
Failure to meet any of the three capital requirements 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.
14. STOCKHOLDERS' EQUITY
On June 30, 1999, the Company issued 2,000,000 shares at $9.50 per share in
an initial public offering of common stock. Proceeds, net of expenses, amounted
to $17.4 million. On July 28, 1999, the underwriter exercised its over-allotment
option to purchase an additional 185,000 shares, which resulted in net proceeds
of $1.6 million.
Effective November 14, 1998, the Company established the 1997 Stock Option
and Warrant Plan (the "Plan"). The Plan reserves options for 76,667 shares to
employees and warrants for 94,685 shares to stockholders. The stock options and
warrants vest immediately upon issuance and carry a maximum term of 10 years.
The exercise price for the stock options and warrants is the fair market value
at grant date. As of September 30, 2000, 94,685 warrants were issued.
74
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summary represents the activity under the Plan:
<TABLE>
<CAPTION>
Number Exercise Expiration
of Shares Price Date
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance outstanding at September 30, 1998 16,667
Options granted 41,667 $8.38 11-29-2008
------------------------------------------------------------------------------------------------------
Balance outstanding at September 30,1999 58,334
Options granted 17,500 $6.00 12-1-2009
------------------------------------------------------------------------------------------------------
Balance outstanding and exercisable at September 30, 2000 75,834
======================================================================================================
</TABLE>
A summary of the stock options outstanding and exercisable as of September
30, 2000 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- -----------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Number Remaining Life Exercise Number Exercise
Prices Outstanding (years) Price Exercisable Price
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$7.50 16,667 7.2 $7.50 16,667 $7.50
$8.38 41,667 8.2 $8.38 41,667 $8.38
$6.00 17,500 9.3 $6.00 17,500 $6.00
------------------------------------------------------------------------------------------------------
</TABLE>
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), but it continues to measure compensation cost for
the stock options using the intrinsic value method prescribed by APB Opinion No.
25. For the years ended September 30, 2000 and 1999, the fair value of stock
options has been estimated using the Black-Scholes option pricing model with the
following assumptions: Risk free interest rates of 6.21% and 6.00% for the years
ended September 30, 2000 and 1999, respectively, expected volatility of 41% and
45% for 2000 and 1999, respectively, dividend pay out rate of zero and an
expected option life of ten years. Using these assumptions, the average weighted
fair value of the stock options granted are $3.79 and $5.51 for 2000 and 1999,
respectively.
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.
75
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If the Company had elected to recognize compensation cost based on the
value at the grant dates with the method prescribed by SFAS 123, net income
would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Years ended September 30, 2000 1999
--------------------------------------------------------------------------------------------------------------
Reported Pro Forma Reported Pro Forma
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net (loss) income $(3,638) $(3,678) $ 101 $ (129)
==============================================================================================================
Basic and diluted earnings (loss) per share $(1.21) $(1.22) $0.07 $(0.09)
==============================================================================================================
</TABLE>
15. EARNINGS PER SHARE OF COMMON STOCK
The Company reports earning per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 requires two presentations of earning per share - "basic" and "diluted."
Basic earnings per share are computed by dividing income available to common
stockholders (the numerator) for the period. The computation of diluted earnings
per share is similar to basic earnings per share, except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potentially dilutive common shares had been issued.
The numerator in calculating both basic and diluted earnings per share for
each period is reported net income. The denominator is based on the following
weighted average number of common shares.
----------------------------------------------------------------------
Year ended September 30, 2000 1999
----------------------------------------------------------------------
Basic 3,007,434 1,362,390
Dilution relating to stock options - 2,217
----------------------------------------------------------------------
Diluted 3,007,434 1,364,607
======================================================================
16. RELATED PARTY TRANSACTIONS
The Bank offers loans to its officers, directors, employees and related
parties of such persons. These loans are made in the ordinary course of business
and, in the opinion of management, do not involve more than the normal risk of
collectibility, or present other unfavorable features. Such loans are made on
the same terms as those prevailing at the time for comparable transactions with
non-affiliated persons. The aggregate balance of loans to directors, officers
and other related parties is $445,000 and $426,000 as of September 30, 2000 and
September 30, 1999, respectively.
76
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, "Disclosures about Fair
Value of Financial Instruments," 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 cash flows using current rates.
77
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying value and estimated fair value of financial instruments is
summarized as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
September 30, 2000 1999
---------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
---------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and interest bearing deposits $ 5,717 $ 5,717 $ 1,703 $ 1,703
Investment securities 136,946 135,945 108,224 107,463
Loans receivable 138,297 134,827 80,228 79,193
---------------------------------------------------------------------------------------------
Liabilities:
Deposits 188,387 188,051 129,007 128,674
Borrowings 82,836 82,738 43,391 43,341
---------------------------------------------------------------------------------------------
Off-balance sheet instruments:
Commitments to extend credit - 480 - 439
Loans in process - 21 - 11
---------------------------------------------------------------------------------------------
</TABLE>
18. EMPLOYEE BENEFIT PLANS
The Company operates a 401(k) Retirement Plan covering all full-time
employees meeting the minimum age and service requirements. Contributions to the
Retirement Plan are at the discretion of the Company. The Company made no
contributions for the years ended September 30, 2000 and 1999.
19. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years ended September 30, 2000 1999
----------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Cash paid during period for interest on deposits and borrowings $ 2,521 $1,534
==============================================================================================
Transfer of investments to trading classification $22,766 $ -
==============================================================================================
Transfer of loans to foreclosed assets $ 281 $ 193
==============================================================================================
</TABLE>
78
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. SEGMENT REPORTING
The Company has two reportable segments, banking and mortgage banking. The
Bank operates retail deposit branches throughout the greater Washington,
D.C./Baltimore metropolitan area. The banking segment provides
retail consumer and small businesses with deposit products such as demand,
transaction, savings accounts and certificates of deposit and lending products,
such as residential and commercial real estate, construction and development,
consumer and commercial business loans. Further, the banking segment invests in
residential real estate loans purchased from GAMC and others, and also invests
in mortgage-backed and other securities. The mortgage banking segment
activities, which are conducted principally through GAMC, include the
origination of residential real estate loans either for the Bank's portfolio or
for sale into the secondary market with servicing released.
The accounting policies of the segments are the same as those described in
Note 1. The Company evaluates performance based on net interest income,
noninterest income, and noninterest expense. The total of these three items is
the reportable segment's net contribution.
The Company's reportable segments are strategic business units that offer
different services in different geographic areas. They are managed separately
because each segment appeals to different markets and, accordingly, requires
different technology and marketing strategies.
Since the Company derives a significant portion of its revenue from interest
income and interest expense, the segments are reported below using net interest
income. Because the Company also evaluates performance based on noninterest
income and noninterest expense, these measures of segment profit and loss are
also presented.
79
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Total Total
Mortgage Reportable Intersegment Operating
For the Years Ended September 30, Banking Banking Segments Eliminations Earnings
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income: (1)
2000 $ 4,436 $ 229 $ 4,665 $ - $ 4,665
1999 2,328 312 2,640 - 2,640
Noninterest income:
2000 $ (875) $ 2,980 $ 2,105 $ (51) $ 2,054
1999 195 5,925 6,120 (39) 6,081
Noninterest expense:
2000 $ 6,059 $ 4,949 $ 11,008 $ 51 $ 10,957
1999 4,239 4,589 8,828 39 8,789
Net income:
2000 $ (2,093) $(1,545) $ (3,638) $ - $ (3,638)
1999 (893) 994 101 - 101
Segment assets:
2000 $308,227 $ 6,368 $314,595 $(18,299) $296,296
1999 199,364 8,072 207,436 (8,613) 198,823
--------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Segment net interest income reflects income after provision for loan losses.
80
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. RECENT ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair market value. Under certain circumstances, a portion
of the derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into income when the
transaction affects earnings. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
The Company will be required to adopt SFAS 133 by October 1, 2000. Presently,
the Company does not use derivative instruments either in hedging activities or
as investments. Accordingly, the Company believes that adoption of SFAS 133 will
have no material impact on its financial position or results of operation.
In March 2000, the FASB issued interpretation No. 44 ("FIN 44"), "Accounting
for Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25". FIN 44 clarifies the application of APB No. 25 for (a) the
definition of employee for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the previously fixed stock
option of award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 2, 2000 but certain
conclusions cover specific events that occur after either December 15, 1998 or
January 12, 2000. The Bank believes that adoption of FIN 44 will not have an
affect on the Bank's financial statements but may impact the accounting for
grants or awards in future periods.
81
<PAGE>
INDEPENDENT AUDITORS' REPORT
ON SUPPLEMENTAL FINANCIAL INFORMATION
Board of Directors and Shareholders
Greater Atlantic Financial Corp.
Reston, Virginia
Our audit of the basic consolidated financial statements included in the
preceding section of this report was performed for the purpose of forming an
opinion on those consolidated statements taken as a whole. The consolidating
financial statements presented in the following section of this report are
presented for purposes of additional analysis and are not a required part of the
basic consolidated financial statements. Such information has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
BDO SEIDMAN, LLP
Washington, D.C.
October 27, 2000
82
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Greater
Greater Greater Atlantic
Atlantic Greater Atlantic Adjustments Financial
Mortgage Atlantic Financial and Corp. and
SEPTEMBER 30, 20000 Corporation Bank Corp. Eliminations Subsidiaries
-----------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 236 $ 2,203 $ 5 $ (132) $ 2,312
Interest-bearing deposits - 3,973 42 (610) 3,405
Investment securities
Available-for-sale - 86,323 257 - 86,580
Held-to-maturity - 27,600 - - 27,600
Trading - 22,766 - - 22,766
Loans held for sale 5,599 - - - 5,599
Loans receivable, net - 136,539 53 (3,894) 132,698
Accrued interest and dividends receivable 83 2,404 7 - 2,494
Deferred income taxes 134 786 - 600 1,520
Federal Loan Home Bank stock, at cost - 3,560 - - 3,560
Foreclosed real estate - 172 - - 172
Premises and equipment, net 166 4,693 - - 4,859
Goodwill - 1,378 - - 1,378
Prepaid expenses and other assets 150 15,460 6 (14,263) 1,353
Investment in subsidiaries - 1,000 21,756 (22,756) -
-----------------------------------------------------------------------------------------------------------------------
Total assets $6,368 $308,857 $22,126 $(41,055) $296,296
=======================================================================================================================
</TABLE>
83
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Greater
Greater Greater Atlantic
Atlantic Greater Atlantic Adjustments Financial
Mortgage Atlantic Financial and Corp. and
September 30, 2000 Corporation Bank Corp. Eliminations Subsidiaries
---------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Liabilities and Stockholders' Equity
Deposits $ - $188,346 $ - $ 41 $188,387
Advance payments from borrowers for
taxes and insurance 92 170 - 2 264
Intercompany payable 4,510 14,778 - (19,288) -
Accrued expenses and other liabilities 960 2,974 8 - 3,942
Income taxes payable (194) (741) (11) 946 -
Advances from the FHLB and other
borrowings - 82,836 - - 82,836
---------------------------------------------------------------------------------------------------------------------
Total liabilities 5,368 288,363 (3) (18,299) 275,429
---------------------------------------------------------------------------------------------------------------------
Preferred stock 750 - - (750) -
Common stock 25 2,000 30 (2,025) 30
Additional paid-in capital 1,354 22,653 25,132 (24,007) 25,132
Retained loss (1,129) (2,897) (2,928) 4,026 (2,928)
Accumulated other comprehensive loss - (1,262) (105) - (1,367)
---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,000 20,494 22,129 (22,756) 20,867
---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $6,368 $308,857 $22,126 $(41,055) $296,296
=====================================================================================================================
</TABLE>
84
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Greater
Greater Greater Atlantic
Atlantic Greater Atlantic Adjustments Financial
YEAR ENDED SEPTEMBER 30, 2000 Mortgage Atlantic Financial and Corp. and
Corporation Bank Corp. Eliminations Subsidiaries
-----------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Interest income
Loans $ 654 $ 8,224 $ 10 $ (426) $8,462
Investments - 9,218 110 (18) 9,310
-----------------------------------------------------------------------------------------------------------------------
Total interest income 654 17,442 120 (444) 17,772
-----------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits - 7,686 - (18) 7,668
Borrowed money 425 5,427 - (426) 5,426
-----------------------------------------------------------------------------------------------------------------------
Total interest expense 425 13,113 - (444) 13,094
-----------------------------------------------------------------------------------------------------------------------
Net interest income 229 4,329 120 - 4,678
Provision for loan losses - 8 5 - 13
-----------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 229 4,321 115 - 4,665
-----------------------------------------------------------------------------------------------------------------------
Noninterest income
Fees and service charges 518 146 - (51) 613
Earnings in equity of subsidiaries - (1,546) (3,614) 5,160 -
Gain on sale of loans 2,462 4 - - 2,466
Loss on sale of investment securities - (984) (41) - (1,025)
-----------------------------------------------------------------------------------------------------------------------
Total noninterest income $2,980 $(2,380) $(3,655) $5,109 $2,054
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
85
<PAGE>
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Greater
Greater Greater Atlantic
Atlantic Greater Atlantic Adjustments Financial
Mortgage Atlantic Financial and Corp. and
Year Ended September 30, 2000 Corporation Bank Corp. Eliminations Subsidiaries
-----------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Noninterest expense
Compensation and employee benefits $2,272 $2,466 $ - $ - $ 4,738
Occupancy 227 967 - - 1,194
Professional services 257 563 25 (51) 794
Advertising 115 432 - - 547
Deposit insurance premium - 52 - - 52
Furniture, fixtures and equipment 113 375 - - 488
Data processing 32 378 - - 410
Other real estate owned expenses - 10 - - 10
Other operating expenses 1,933 715 76 - 2,724
-----------------------------------------------------------------------------------------------------------------------
Total noninterest expense 4,949 5,958 101 (51) 10,957
-----------------------------------------------------------------------------------------------------------------------
Income loss before income tax provision (1,740) (4,017) (3,641) 5,160 (4,238)
Income tax benefit (194) (403) (3) - (600)
-----------------------------------------------------------------------------------------------------------------------
Net (loss) income $(1,546) $(3,614) $(3,638) $5,160 $(3,638)
=======================================================================================================================
</TABLE>
86
<PAGE>
PART III
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the Registrant's accountants on any
matters of accounting principles or practices or financial statement
disclosures.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
MANAGEMENT OF THE BANK
DIRECTORS
The following table sets forth information regarding the board of directors
of the bank.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE POSITION(S) HELD WITH THE BANK SINCE EXPIRES
------------------------------------ ---------- ------------------------------------------- ------------ -----------
<S> <C> <C> <C> <C>
Carroll E. Amos 52 Director, President and Chief 1997 2002
Executive Officer
William Calomiris (1) 80 Director, Chairman of the Board 1997 2002
of Directors
Paul J. Cinquegrana 58 Director 1997 2003
Jeffrey M. Gitelman 55 Director 1997 2001
Jeffrey W. Ochsman 47 Director 1999 2003
James B. Vito 74 Director 1998 2002
</TABLE>
--------------------------------------------
(1) Mr Calomiris died on December 13, 2000.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth information regarding the executive officers
of the bank who are not also directors.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD WITH BANK
----------- ----- ---------------------------------
<S> <C> <C>
Edward C. Allen 52 Senior Vice President, Chief Operating Officer
Jeremiah D. Behan 50 Senior Vice President, Construction Lending
Justin R. Golden 49 Senior Vice President, Consumer Lending
Patsy J. Mays 53 Senior Vice President, Small Business Lending and Retail Banking
Robert W. Neff 52 Senior Vice President, Commercial Real Estate Lending
Laurel L. Mitchell 42 Corporate Secretary
David E. Ritter 50 Senior Vice President and Chief Financial Officer
</TABLE>
87
<PAGE>
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.
BIOGRAPHICAL INFORMATION
DIRECTORS
WILLIAM CALOMIRIS, Chairman of the Board of the company and the bank, is the
President of Wm. Calomiris Investment Corporation, engaged in building,
developing and property management. Until 1996, he served as Chairman of the
Board of 1st Washington Bancorp and for Washington Federal Savings Bank.
CARROLL E. AMOS is President and Chief Executive Officer of the company and of
the bank. He is a private investor who until 1996 served as President and Chief
Executive Officer of 1st Washington Bancorp and Washington Federal Saving Bank.
PAUL J. CINQUEGRANA is a Senior Vice President Investments of Johnston, Lemon &
Co., Inc., a stock and bond brokerage firm.
JEFFREY M. GITELMAN, D.D.S., is an Oral Surgeon and the owner of Jeffrey M.
Gitelman D.D.S., P.C.
JEFFREY W. OCHSMAN, is a partner in the law firm of Friedlander, Misler,
Friedlander, Sloan & Herz, PLLC, Washington, D.C.
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.
88
<PAGE>
LAUREL L. MITCHELL joined the bank and the company as Corporate Secretary in
1999 after three years as Executive Assistant to the Executive Director of
Collier, Shannon, Rill and Scott, PLLC. Ms. Mitchell had previously been
employed with America's Community Bankers from 1993 to 1997.
ROBERT W. NEFF joined the bank in 1997 as Senior Vice President, Commercial Real
Estate Lending. Prior to joining the bank, Mr. Neff served as a Consultant on
commercial real estate loan brokerage with the First Financial Group of
Washington after serving from 1984 until 1996 as an Executive Vice President for
Commercial Real Estate Lending at Washington Federal Savings Bank.
DAVID E. RITTER joined the bank and the company as a Senior Vice President and
Chief Financial Officer in 1998. From 1996 to 1997, Mr. Ritter was a Senior
Financial Consultant with Peterson Consulting. From 1988 until 1996, he was the
Executive Vice President and Chief Financial Officer of Washington Federal
Savings Bank.
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
A beneficial owner of more than 10% of the company's common stock, Dr. Robert I
Schattner, was late in filing twice in fiscal year 2000. An amended form 4 was
filed for the month of December, 1999, because of two omitted transactions and
an amended form 4 was filed for the month of January, 2000, because of six
omitted transactions.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the cash compensation
paid by the bank for services rendered in all capacities during the fiscal years
ended September 30, 2000 and 1999, to the Chief Executive Officer, the only
executive officer of the bank who received salary and bonus in excess of
$100,000 ("Named Executive Officers").
<TABLE>
<CAPTION>
Long-Term Compensation (2)
----------------------------------------------------
Annual Compensation Awards Payouts
-------------------------------- ------------------------ --------------------------
Other Restricted Securities
Name and Fiscal Annual Stock Underlying LTIP
Principal Positions Year Salary Bonus Compensation Awards Options/SARs Payouts Compensation
(2) (2)
------------------- ----- -------- -------- ------------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Carroll E. Amos
President and
Chief 2000 $148,500 $ - $- - 36,334 $- $-
Executive 1999 $143,167 $3,300 $- - 33,334 $- $-
Officer
</TABLE>
------------------------
(1) Under Annual Compensation, the column titled "Bonus" consists of Board
approved discretionary bonus.
(2) For 2000 and 1999, 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 1999, 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.
89
<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 $144,000,
and at the second anniversary date, his base salary was increased to $150,000.
Presently the Company and the Executive Officer are negotiating an extension of
the agreement with the completion of such negotiations within the next fiscal
quarter. 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 $450,000.
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
90
<PAGE>
mortgage banking division of the bank. In addition to the salary and bonus
provisions, the Stamm Agreement provides for, among other things, participation
in various employee benefit plans and stock-based compensation programs, as well
as furnishing fringe benefits available to similarly situated personnel. The
Stamm Agreement also provides for an automobile allowance of $6,000 per year.
The Stamm Agreement provides for termination by the bank for cause (as defined
in the Stamm Agreement) at any time. In the event the bank chose to terminate
Mr. Stamm's employment for reasons other than for cause, Mr. Stamm or, in the
event of death, Mr. Stamm's beneficiary would be entitled to receive an amount
generally equal to the remaining base salary and bonus payments that would have
been paid to Mr. Stamm during the remaining term of the Stamm Agreement, but in
no event less than three months. The bank would also continue and pay for Mr.
Stamm's life, health and disability coverage for the remaining term of the Stamm
Agreement, but in no event less than three months.
Under the Stamm Agreement, if involuntary termination or voluntary termination
follows a change in control of the bank, Mr. Stamm or, in the event of his
death, his beneficiary, would be entitled to receive a severance payment
generally equal to the greater of: (i) the payments due for the remaining term
of the agreement, including the value of stock-based incentives previously
awarded to Mr. Stamm; or (ii) three times the average of the base salary,
excluding bonuses and all other forms of compensation paid or to be paid to Mr.
Stamm during the three preceding years. The bank would also continue Mr. Stamm's
life, health, and disability coverage for thirty-six months. In the event of a
change in control of the bank, the total amount of payment due under the Stamm
Agreement , based solely on the base salary paid to Mr. Stamm, and excluding any
benefits under any employee benefit plan which may otherwise become payable,
would equal approximately $324,000.
Effective October 1, 1998, the Stamm Agreement was modified to provide for his
employment as President of Greater Atlantic Mortgage for a two-year term. Under
the modified agreement, Mr. Stamm's compensation continues to be comprised of
three elements, a base salary for Mr. Stamm of $108,000, a production bonus of
two basis points, payable monthly on each loan closed in a month and a net
income bonus. However, the net income bonus was reduced from 37.5% to 30% of the
net income, as defined, of Greater Atlantic Mortgage. For the year ended
September 30, 1998, Greater Atlantic Mortgage had net income before bonus of
$3.1 million. The modified agreement further provides for the grant, within 45
days, of stock options to Mr. Stamm to purchase 25,000 shares of the common
stock of the company at a price equal to the book value of the company at
September 30, 1998, and for the grant of options to purchase an additional
10,000 shares of the common stock of the company, at the publicly traded price
on September 30, 1999, if the net earnings of Greater Atlantic Mortgage for the
fiscal year ending September 30, 1999 are equal to or greater than $1,625,000.
91
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the company's common stock as of September 30, 2000, by
(i) each director of the company, (ii) all directors and executive officers as a
group and (iii) each person who is known by the company to own beneficially 5%
or more of the common stock.
<TABLE>
<CAPTION>
SHARES OF COMMON OWNERSHIP AS
STOCK BENEFICIALLY A PERCENT OF
DIRECTORS AND EXECUTIVE OFFICERS OWNED CLASS
----------------------------------------------------- -------------------------- ----------------------
<S> <C> <C>
William Calomiris 359,895 11.97%
Carroll E. Amos 43,860 1.46
Paul J. Cinquegrana 48,734 1.62
Jeffrey M. Gitelman 64,913 2.16
James B. Vito 64,942 2.16
Jeffrey W. Ochsman 500 0.02
-----------------------------------------------------
Directors and executive officers as a group 582,844 19.38
-----------------------------------------------------
PRINCIPAL SHAREHOLDERS (1)
-----------------------------------------------------
Ralph Ochsman 238,597 7.93
Robert I. Schattner 437,096 14.53
</TABLE>
-----------------------------------------------------
(1) The information is derived from the Schedule 13D filed by Mr. Schattner on
December 31, 1999 and Form 4 filed on September 11, 2000 and the Schedule
13D filed by Mr. Ochsman as amended on July 28, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Federal regulations require that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features. In addition,
loans made to a director or executive officer in excess of the greater of
$25,000 or 5% of the bank's capital and surplus (up to a maximum of $500,000)
must be approved in advance by a majority of the disinterested members of the
board of directors.
The bank currently makes loans to its executive officers and directors on the
same terms and conditions offered to the general public. The bank's policy
provides that all loans made by the bank to its executive officers and directors
be made in the ordinary course of business, on substantially the same terms,
including collateral, as those prevailing at the time for comparable
transactions with other persons and may not involve more than the normal risk of
collectibility or present other unfavorable features. The aggregate balance of
loans to directors and executive officers is $445,000 and $426,000 at September
30, 2000 and 1999, respectively. Such loans were made by the bank in the
ordinary course of business, with no favorable terms and do not involve more
than the normal risk of collectibility or present unfavorable features.
92
<PAGE>
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.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Exhibits (filed herewith unless otherwise noted)
3.1 Certificate of Incorporation of Greater Atlantic Financial Corp. and
amendment thereto*
3.2 Bylaws of Greater Atlantic Financial Corp.*
4.0 Specimen Stock Certificate of Greater Atlantic Financial Corp.*
10.1 Employment Agreement with Carroll E. Amos*
10.2 Employment Agreement of T. Mark Stamm with Greater Atlantic Mortgage
Corporation*
10.3 Greater Atlantic Financial Corp. Deferred Compensation Plan*
10.4 Greater Atlantic Financial Corp. 1997 Stock Option and Warrant Plan*
11.0 Statement re: Computation of Per Share Earnings
27.0 Financial Data Schedule
Reports on Form 8-K
Reports on Form 8-K were filed on August 23, 2000.
* Incorporated by reference from the From SB-2 filed with the Securities
and Exchange Commission on April 13, 1999, Registration No. 333-76169
93
<PAGE>
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
GREATER ATLANTIC FINANCIAL CORP.
By: /s/ Carroll E. Amos
----------------------------------------------------
Carroll E. Amos
Chief Executive Officer, President and Director
Acting Chairman of the Board
Dated: December 28, 2000
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Name Title Date
---- ----- ----------------
/s/ Carroll E. Amos Chief Executive Officer,
------------------------ President and Director and
Carroll E. Amos Acting Chairman of the Board December 28, 2000
/s/ Paul J. Cinquegrana Director December 28, 2000
------------------------
Paul J. Cinquegrana
/s/ Jeffrey M. Gitelman Director December 28, 2000
------------------------
Jeffrey M. Gitelman
/s/ James B. Vito Director December 28, 2000
------------------------
James B. Vito
/s/ Jeffrey W. Ochsman Director December 28, 2000
------------------------
Jeffrey W. Ochsman
/s/ David E. Ritter Senior Vice President and December 28, 2000
------------------------ Chief Financial Officer
David E. Ritter
94
