s4gafc.htm
As
filed with the Securities and Exchange Commission on ___________,
2007
|
Registration
No. 33-______
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
----------
FORM
S-4
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
----------
SUMMIT
FINANCIAL GROUP, INC.
(Exact
Name of Registrant as Specified in Its Charter)
West
Virginia
|
6711
|
55-0672148
|
(State
or Other Jurisdiction
of
Incorporation or Organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.
R. S. Employer
Identification
Number)
|
300
North Main Street
Moorefield,
West Virginia 26836
(304)
530-1000
----------
(Address,
Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s
Principal Executive Offices)
H.
Charles Maddy, III
Summit
Financial Group, Inc.
300
N. Main Street
Moorefield,
West Virginia 26836
(304)
530-1000
----------
(Name,
Address, Including Zip Code, and Telephone Number, Including Area Code, of
Agent
for Service)
with
copies to:
Sandra
M. Murphy, Esq.
|
George
W. Murphy, Jr., Esq.
|
Bowles
Rice McDavid Graff & Love LLP
|
Victor
L. Cangelosi, Esq.
|
600
Quarrier Street
|
Muldoon
Murphy & Aguggia LLP
|
P.
O. Box 1386
|
5101
Wisconsin Avenue, N.W.
|
Charleston,
West Virginia 25325-1386
|
Washington,
D.C. 20016
|
(304)
347-1131
|
(202)
362-0840
|
Approximate
date of commencement of proposed sale to the public: as soon as
practicable after this registration statement becomes effective.
If
the
securities being registered on this Form are being offered in connection with
the formation of a holding company and there is compliance with General
Instruction G, check the following box.
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
CALCULATION
OF REGISTRATION FEE
Title
of Each Class of
Securities
to Be Registered
|
Amount
to Be
Registered
|
Proposed
Maximum
Offering
Price Per Unit
|
Proposed
Maximum
Aggregate
Offering Price
|
Amount
of
Registration
Fee
|
Common
Stock,
par
value $ 2.50 per share
|
712,809
shares
|
|
$10,040,410
|
$308.24
|
THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
MERGER
PROPOSAL - YOUR VOTE IS VERY IMPORTANT
You
are
cordially invited to attend the special meeting of the shareholders of Greater
Atlantic Financial Corp. (“Greater Atlantic”) to be held on ________, December
____, 2007 at ______ a.m., Eastern Standard Time, at the _____________,
___________, _____________, _________, Virginia. At the special
meeting, you will be asked to approve the proposed merger of Greater Atlantic
and Summit Financial Group, Inc. (“Summit”). In the merger, you will
receive a combination of cash and shares of Summit common stock for each share
of Greater Atlantic common stock that you own, subject to a “stock collar”
limiting the maximum and minimum number of shares Summit will
issue. The stock collar is described more fully
below. Subject to the stock collar, the total consideration for your
Greater Atlantic stock will be paid 70% in the form of Summit common stock
and
30% in cash, with each share of Greater Atlantic common stock exchanged for
shares of Summit common stock valued at $4.20 and $1.80 in cash. The number
of
shares of Summit common stock that you will receive for each share of Greater
Atlantic common stock you own will be determined by the exchange ratio at
closing.
At
the
closing, we will determine the exchange ratio by dividing $4.20 by the average
closing price of Summit common stock reported on NASDAQ for the twenty (20)
trading days prior to closing (the “Average Closing Price”). The exchange ratio
is subject to a stock collar, which sets the maximum and minimum numbers of
shares that Summit will issue. If the Average Closing Price of Summit
common stock is less than $17.82, the exchange ratio will be calculated by
dividing $4.20 by $17.82. If the Average Closing Price is greater
than $24.10, the exchange ratio will be calculated by dividing $4.20 by $24.10.
Thus, for each share of Greater Atlantic common stock that you own, you will
receive $1.80 in cash and at least 0.1743 shares of Summit common stock, but
no
more than 0.2357 shares of Summit common stock. A chart on page __
under “Merger Consideration” provides examples of the value of the transaction
to shareholders of Greater Atlantic at selected Average Closing Prices of Summit
common stock. Cash will be paid instead of issuing fractional shares
of Summit common stock.
We
expect
the merger to be tax-free with respect to the shares of Summit common stock
that
you receive. You may have to recognize income or gain for tax
purposes for the cash you receive in the merger.
The
merger proposal is described in this proxy statement/prospectus. We
encourage you to read this entire document carefully, including the “Risk
Factors” section beginning on page ___.
Your
board recommends that you vote for the merger. We need your
vote to complete the merger. Whether or not you plan to
attend the special meeting, please complete, sign and date the enclosed proxy
card and return it promptly in the enclosed envelope. If you neither
return your card nor vote in person, the effect will be to vote against the
merger.
You
should obtain current market quotations on shares of Summit common stock, which
is listed on the NASDAQ Capital Market under the symbol “SMMF,” and Greater
Atlantic common stock, which is quoted on the Pink Sheets under the symbol
“GAFC.PK.”
Carroll
E. Amos
President
and Chief Executive Officer
Greater
Atlantic Financial Corp.
An
investment in Summit common stock in
connection with the merger involves certain risks and
uncertainties. See “Risk Factors” beginning on page ___ of this proxy
statement/prospectus.
Neither
the Securities and Exchange
Commission nor any state securities commission has approved or disapproved
of
the securities to be issued in the merger or determined if this proxy
statement/prospectus is truthful or complete. It is illegal to tell
you otherwise.
The
securities to be issued in
the merger are not savings or deposit accounts and are not insured by the
Federal Deposit Insurance Corporation or any other federal or state governmental
agency.
This
proxy statement/prospectus is
dated November ___, 2007 and is expected to be first mailed to shareholders
on
or about November ___, 2007.
[insert
logo]
GREATER
ATLANTIC FINANCIAL CORP.
NOTICE
OF SPECIAL MEETING OF SHAREHOLDERS
TO
BE HELD ON DECEMBER ___, 2007
YOU
ARE
HEREBY NOTIFIED of and invited to attend the special meeting of shareholders
of
Greater Atlantic Financial Corp., a Delaware corporation, to be held on
____________, December ___, 2007, at ______ a.m. at the ________, _________,
____________, ________, Virginia, for the purpose of considering and voting
upon
the following:
|
1.
|
A
proposal to approve and adopt the Agreement and Plan of Reorganization
dated as of April 12, 2007, by and between Greater Atlantic Financial
Corp. (“Greater Atlantic”) and Summit Financial Group, Inc. (“Summit”) and
the transactions contemplated thereby. In this proxy
statement/prospectus, we refer to the Agreement and Plan of Reorganization
as the merger agreement. The merger agreement provides that
Greater Atlantic will merge with and into a subsidiary of Summit,
upon the
terms and subject to the conditions set forth in the merger agreement,
as
more fully described in the accompanying proxy
statement/prospectus. In the merger, among other things, each
share of Greater Atlantic common stock will be converted into and
become
the right to receive a combination of $1.80 in cash and shares of
Summit
common stock based on an exchange ratio, subject to adjustment as
further
described in the accompanying proxy statement/prospectus. Cash
will be paid instead of issuing fractional shares of Summit common
stock.
|
|
2.
|
A
proposal to adjourn the meeting to a later date or dates, if necessary,
to
permit further solicitation of proxies in the event there are not
sufficient votes at the time of the meeting to approve the matters
to be
considered by the shareholders at the meeting, as more fully described
in
the accompanying proxy statement
prospectus.
|
Our
board
of directors has determined that the terms of the merger are fair to and in
the
best interests of Greater Atlantic and our shareholders, has approved and
adopted the merger agreement, and unanimously recommends that our shareholders
vote “FOR” the approval and adoption of the merger agreement and the
transactions contemplated thereby.
Our
board
of directors has fixed the close of business on ____________, 2007 as the record
date for determination of our shareholders entitled to receive notice of
and to vote at the special meeting. A list of shareholders entitled
to vote will be available at 10700 Parkridge Boulevard, Suite P50, Reston,
Virginia 20191, for ten (10) days before the meeting and will also be
available for inspection at the meeting. The meeting may be adjourned
or postponed from time to time upon approval of our shareholders without any
notice other than by announcement at the special meeting of the adjournment
or
postponement thereof, and any and all business for which notice is hereby given
may be transacted at such adjourned or postponed special meeting.
The
affirmative vote of the holders of a majority of shares of our common stock
entitled to vote at the special meeting is required to approve and adopt the
merger agreement. Please complete, date, sign and promptly return the
enclosed proxy card, which is solicited by your board of directors, in the
enclosed envelope, whether or not you expect to attend the special
meeting. You may revoke the proxy at any time before its exercise by
delivering to us a written notice of revocation, by delivering to us a duly
executed proxy card bearing a later date or by voting in person at the special
meeting. Failure to return a properly executed proxy card, or to vote
at the special meeting, or abstaining from voting, will have the same effect
as
a vote against the merger agreement and the transactions contemplated
thereby.
By
Order of the Board
of Directors
Edward
C.
Allen
Secretary
Reston,
Virginia
____________,
2007
EACH
STOCKHOLDER, WHETHER OR NOT HE OR
SHE PLANS TO ATTEND THE SPECIAL MEETING, IS REQUESTED TO SIGN, DATE, AND RETURN
THE ENCLOSED PROXY CARD WITHOUT DELAY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
Page
QUESTIONS
AND ANSWERS ABOUT THE MERGER
|
1
|
SUMMARY
|
5
|
RISK
FACTORS
|
13
|
FORWARD-LOOKING
STATEMENTS
|
17
|
PRICE
RANGE OF COMMON STOCK AND DIVIDENDS
|
18
|
UNAUDITED
COMPARATIVE PER SHARE DATA
|
20
|
UNAUDITED
PRO FORMA FINANCIAL INFORMATION
|
22
|
SUMMARY
SELECTED FINANCIAL DATA
|
28
|
INFORMATION
ABOUT THE MEETING AND VOTING
|
31
|
|
General
|
31
|
|
Matters
Relating to the Special Meeting of Greater Atlantic
Shareholders
|
31
|
|
Proxies
|
31
|
|
Solicitation
of Proxies
|
32
|
|
Record
Date and Voting Rights
|
32
|
|
Vote
Required
|
32
|
|
Recommendation
of the Greater Atlantic Board of Directors
|
33
|
|
Appraisal
Rights for Greater Atlantic Stockholders
|
33
|
THE
MERGER
|
34
|
|
Merger
|
34
|
|
Merger
Consideration
|
34
|
|
Surrender
of Stock Certificates
|
35
|
|
No
Fractional Shares
|
36
|
|
Treatment
of Greater Atlantic Stock Options and Warrants
|
36
|
|
Dissenters’
or Appraisal Rights
|
36
|
|
Background
of the Merger; Board Recommendations and Reasons for the
Merger
|
40
|
|
Greater
Atlantic's Reasons for the Merger
|
45
|
|
Summit's
Reasons for the Merger
|
46
|
|
Opinion
of Greater Atlantic’s Financial Advisor
|
47
|
|
Interests
of Certain Persons in the Merger
|
55
|
|
Conditions
of the Merger
|
57
|
|
Representations
and Warranties
|
58
|
|
Termination
of the Merger Agreement
|
59
|
|
Effect
of Termination; Termination Fee
|
59
|
Page
|
Waiver
and Amendment
|
60
|
|
Indemnification
|
60
|
|
Acquisition
Proposals
|
60
|
|
Closing
Date; Effective Time
|
60
|
|
Regulatory
Approvals
|
61
|
|
Conduct
of Business Pending the Merger
|
62
|
|
Accounting
Treatment
|
64
|
|
Management
and Operations after the Merger
|
64
|
|
Resales
of Summit Common Stock
|
64
|
CERTAIN
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
|
64
|
|
General
|
64
|
|
The
Merger
|
65
|
|
Consequences
to Shareholders
|
65
|
|
Backup
Withholding and Reporting Requirements
|
67
|
INFORMATION
ABOUT SUMMIT FINANCIAL GROUP, INC. AND
GREATER
ATLANTIC FINANCIAL CORP.
|
68
|
|
Summit
Financial Group, Inc.
|
68
|
|
Greater
Atlantic Financial Corp.
|
68
|
DESCRIPTION
OF SUMMIT FINANCIAL GROUP COMMON STOCK
|
69
|
|
General
|
69
|
|
Common
Stock
|
69
|
|
Preemptive
Rights
|
70
|
|
Certain
Provisions of the Bylaws
|
70
|
|
Shares
Eligible for Future Sale
|
70
|
COMPARATIVE
RIGHTS OF SHAREHOLDERS
|
71
|
ADJOURNMENT
OF THE MEETING
|
80
|
LEGAL
MATTERS
|
80
|
EXPERTS
|
80
|
WHERE
YOU CAN FIND MORE INFORMATION
|
80
|
OTHER
MATTERS
|
82
|
|
|
Annex
A
|
Agreement
and Plan of Reorganization dated as of April 12, 2007,
between
Greater
Atlantic Financial Corp. and Summit Financial Group, Inc.
|
|
Annex
B
|
Section
262 of the Delaware General Corporation Law
|
|
Annex
C
|
Opinion
of Sandler O’Neill & Partners, L.P., dated ______________, 2007, to
the
board
of directors of Greater Atlantic Financial Corp.
|
|
Annex
D-1
|
Greater
Atlantic Financial Corp. Form 10-K for the year ended September 30,
2006
|
|
Annex
D-2
|
Greater
Atlantic Financial Corp. Form 10-Q for the period ended December 31,
2006
|
Annex
D-3
|
Greater
Atlantic Financial Corp. Form 10-Q for the period ended March 31,
2007
|
|
Annex
D-4
|
Greater
Atlantic Financial Corp. Form 10-Q for the period ended June 30,
2007
|
|
QUESTIONS
AND ANSWERS ABOUT THE MERGER
Q:
|
What
will shareholders be voting on at the special
meeting?
|
A:
|
Shareholders
will be voting on a proposal to approve and adopt the merger agreement
between Greater Atlantic and Summit and the transactions contemplated
thereby.
|
Shareholders
will also consider any other matters that may properly come before the
meeting.
Q:
|
Why
is Greater Atlantic proposing the
merger?
|
A:
|
We
believe the proposed merger is in the best interests of Greater Atlantic
and its shareholders. Our board of directors believes that
combining with Summit provides significant value to our shareholders
and
provides those shareholders the option to participate in the opportunities
for growth offered by the combined
company.
|
You
should review the reasons for the merger described in greater detail under
the
caption “Background of the Merger; Board Recommendations and Reasons for the
Merger” beginning on page ____.
Q:
|
When
and where is the shareholder
meeting?
|
A:
|
The
special meeting is scheduled to take place on December ___, 2007,
at
______ a.m., local time, at the ____________, ___________, ___________,
_________, Virginia.
|
Q:
|
What
does the Greater Atlantic board of directors
recommend?
|
A:
|
The
Greater Atlantic board of directors has approved the merger
agreement. The Greater Atlantic board recommends that
shareholders vote “FOR” the proposal to approve the merger agreement and
the transactions contemplated
thereby.
|
Q: What
will shareholders receive for their stock?
A:
|
For
each share of Greater Atlantic common stock that you own, you will
receive
a combination of $1.80 in cash and shares of Summit common stock
based on
an exchange ratio, subject to a “stock collar” or a limit on the maximum
and minimum number of shares Summit will issue. The stock
collar is described more fully below. Subject to the
stock collar, the total consideration for your Greater Atlantic stock
will
be paid in the form of 70% in Summit common stock and 30% in cash
as
follows: (referred to in this proxy statement/prospectus as “Merger
Consideration”):
|
|
(2)
|
the
number of shares of Summit Stock equal to $4.20 divided by the average
closing price of Summit Stock reported on the NASDAQ for the twenty
(20)
trading days prior to the closing.
|
The
number of shares of Summit common stock that you will receive for each share
of
Greater Atlantic common stock you own will be determined by the exchange ratio
at closing. At the closing, we will determine the exchange ratio by
dividing $4.20 by the average closing price of Summit common stock reported
on
NASDAQ for the twenty (20) trading days prior to closing (the “Average Closing
Price”). The exchange ratio is subject to a stock collar, which sets
the
maximum
and minimum numbers of shares that Summit will issue. If the Average
Closing Price of Summit common stock is less than $17.82, the exchange ratio
will be calculated by dividing $4.20 by $17.82. If the Average
Closing Price is greater than $24.10, the exchange ratio will be calculated
by
dividing $4.20 by $24.10. Thus, for each share of Greater Atlantic common stock
that you own, you will receive $1.80 in cash and at least 0.1743 shares of
Summit common stock, but no more than 0.2357 shares of Summit common
stock. Cash will be paid instead of issuing fractional shares of
Summit common stock. A chart on page __ under “Merger Consideration”
provides examples of the value of the transaction to shareholders of Greater
Atlantic at selected Average Closing Prices of Summit common stock.
Q: How
will I receive my shares of Summit common stock and cash?
A:
|
The
exchange agent will mail transmittal forms to each Greater Atlantic
shareholder within five (5) business days after completion of the
merger. You should complete the transmittal form and return it
to the exchange agent as soon as possible. Once the exchange
agent has received the proper documentation, it will forward to you
the
cash and shares of Summit common stock to which you are
entitled.
|
Shareholders
will not receive any fractional shares of Summit common
stock. Instead, they will receive cash, without interest, for any
fractional share of Summit common stock that they might otherwise have been
entitled to receive based on the market value of the Summit common stock on
the
date that the merger occurs.
Q: How
do I exchange my Greater Atlantic stock certificates?
A:
|
If
the merger is completed, Summit will send Greater Atlantic shareholders
written instructions for exchanging their stock
certificates. You will be asked to return your Greater Atlantic
stock certificates, and shortly after the merger, the exchange agent
will
allocate cash and Summit common stock among Greater Atlantic
shareholders. In any event, you should not forward your
Greater Atlantic certificates with your proxy
card.
|
Q:
|
What
should I do if my shares of Greater Atlantic are held by my broker
or
otherwise in “street
name?”
|
A:
|
If
you hold your shares of Greater Atlantic common stock in “street name”
(i.e., your bank or broker holds your shares for you), you should
receive instructions regarding election procedures directly from
your bank
or broker. If you have any questions regarding these
procedures, you should contact your bank or broker directly, or you
may
contact Summit or Greater Atlantic at the addresses or telephone
numbers
listed on page ___.
|
Q: When
will we complete the merger?
A:
|
We
intend to complete the merger as soon as possible after shareholder
approval is received, all other regulatory approvals have been obtained
and other conditions to the closing have been satisfied or
waived.
|
The
regulatory approvals are described
under “– Regulatory Approvals” beginning on page ___.
Q: What
should I do now?
A:
|
Mail
your signed and dated proxy card in the enclosed return envelope
as soon
as possible so that your shares may be represented at the shareholder
meeting. It is important that the proxy card be received as
soon as possible and in any event before the shareholder
meeting.
|
Q: Can
I change my vote after I mail my proxy card?
A:
|
Yes. You
can change your vote at any time before your proxy is voted at the
shareholder meeting. You can do this in one of three
ways:
|
·
|
First,
you can send a written notice stating that you revoke your
proxy.
|
·
|
Second,
you can complete, sign, date and submit a new proxy
card.
|
·
|
Third,
you can attend the shareholder meeting and vote in
person. Simply attending the shareholder meeting, however, will
not revoke your proxy.
|
If
you
choose either of the first or second methods, you must submit your notice of
revocation or your new proxy card to Greater Atlantic prior to the shareholder
meeting. Your submissions must be mailed to the Secretary of Greater
Atlantic at the address listed on page ___.
Q:
|
Who
will be soliciting
proxies?
|
A:
|
In
addition to solicitation of proxies by officers, directors and employees
of Greater Atlantic, Greater Atlantic has engaged a professional
proxy
solicitation firm, Georgeson Inc., to assist it in soliciting
proxies.
|
Q:
|
What
if I do not vote or I abstain from
voting?
|
A:
|
If
you do not vote or you abstain from voting, your failure to vote
or
abstention will count as a “NO” vote on the proposal to
approve and adopt the merger
agreement.
|
Q:
|
If
my shares are held by my broker in “street name,” will my broker vote my
shares for me?
|
A:
|
Your
broker will vote your shares on the proposal to approve and adopt
the
merger agreement only if you provide instructions on how to
vote. You should follow the directions provided by your broker
to vote your shares. If you do not provide your broker with
instructions on how to vote your shares held in “street name,” your broker
will not be permitted to vote your shares on the proposal to approve
and
adopt the merger agreement, which will have the effect of a
“NO” vote on the items being
considered.
|
Q:
|
Will
I be able to sell the shares of Summit common stock that I receive
in the
merger?
|
A:
|
Yes,
in most cases. The shares of Summit common stock to be issued
in the merger will be registered under the Securities Act of 1933
and
listed on the NASDAQ Capital Market. However, certain
shareholders who are deemed to be “affiliates” of Summit or Greater
Atlantic under the Securities Act (generally, directors, executive
officers and shareholders of Summit or Greater Atlantic holding 10%
or
more of the outstanding shares of common stock) must abide by certain
transfer restrictions under the Securities
Act.
|
Q: What
are the tax consequences of the merger to me?
A:
|
Your
tax consequences will depend on your basis in the Greater Atlantic
common
stock that you own. For greater detail, see “Certain Federal
Income Tax Consequences of the Merger” beginning on
page ___.
|
Q: Who
should shareholders call with questions?
A: If
you have more questions about the merger you should contact:
Carroll
E. Amos
President
and Chief Executive Officer
Greater
Atlantic Financial Corp.
10700
Parkridge Boulevard
Suite
P50
Reston,
Virginia 20191
Telephone:
(703) 391-1300
This
brief summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. We urge you to carefully read the entire proxy
statement/prospectus and the other documents to which this proxy
statement/prospectus refers to fully understand the merger. See
“Where You Can Find More Information” on page ___. Each item in
this summary includes a page reference directing you to a more complete
description of that item.
We
have
attached the merger agreement to this proxy statement/prospectus as Annex
A. Please read the merger agreement. It is the legal
document that governs the merger.
In
the
merger, Summit will acquire Greater Atlantic by means of the merger of Greater
Atlantic Financial Corp. (“Greater Atlantic”) into a subsidiary of Summit
Financial Group, Inc. (“Summit”).
Each
share of Greater Atlantic common stock outstanding will be converted in the
merger into cash and shares of Summit common stock as further described
below. We expect to complete the merger in the fourth quarter of
2007, although there can be no assurance in this regard.
Our
Reasons for the Merger (page ___)
The
terms
of the merger agreement were the results of arm’s length negotiations between
representatives of Greater Atlantic and Summit. In deciding to enter
into the merger agreement, Greater Atlantic’s board of directors considered a
number of factors including:
·
|
The
understanding of the Board of Directors of the strategic options
available
to Greater Atlantic and the Board of Directors’ assessment of those
options with respect to the prospects and estimated results of the
execution by Greater Atlantic of its business plan as an independent
entity under various scenarios, and the determination that none of
those
options or the execution of the business plan under the best case
scenarios were likely to create greater present value for Greater
Atlantic’s stockholders than the value to be paid by Summit. In
particular, the Board of Directors considered Greater Atlantic’s ability
to achieve consistent profitability as an independent entity and
the
prospects for regulatory action if it failed to do
so.
|
·
|
The
ability of Greater Atlantic’s stockholders to participate in the future
prospects of the combined entity through ownership of Summit common
stock
and that Greater Atlantic’s shareholders would have potential value
appreciation by owning the common stock of
Summit.
|
·
|
Summit’s
ability to continue to pay cash dividends on its common stock (Greater
Atlantic has never paid cash
dividends).
|
·
|
Sandler
O’Neill’s written opinion that, as of April 12, 2007, and subject to the
assumptions and limitations set forth in the opinion, the merger
consideration was fair to Greater Atlantic’s stockholders from a financial
point of view.
|
·
|
The
wider array of financial products and services that would be available
to
customers of Greater Atlantic and the communities served by Greater
Atlantic.
|
·
|
The
current and prospective economic, competitive and regulatory environment
and the regulatory compliance costs facing Greater Atlantic and other
similar size, independent, community banking institutions generally,
including the cost of compliance with the requirements of the
Sarbanes-Oxley Act.
|
·
|
A
review, with the assistance of Greater Atlantic’s financial and legal
advisors, of the terms of the merger agreement, including that the
merger
is intended to qualify as a transaction that is generally tax-free
for
U.S. federal income tax purposes.
|
·
|
The
results of the due diligence review of
Summit.
|
·
|
The
Greater Atlantic employees to be retained after the merger would
have
opportunities for career advancement in a larger
organization.
|
·
|
The
likelihood of receiving timely regulatory approval and the approval
of
Greater Atlantic’s stockholders and the estimated transaction and
severance costs associated with the merger and payments that could
be
triggered upon termination of or failure to consummate the
merger.
|
In
deciding to enter into the merger agreement, Summit’s board of directors
considered a number of factors, including the opportunity the merger presented
to expand its presence in attractive markets in Virginia. Summit
believes the acquisition of Greater Atlantic’s operations is consistent with its
plan to have operations, offices and distinct capabilities in every market
of
its choice within its region.
What
Shareholders Will Receive (page ____)
If
the
merger is completed, Greater Atlantic stockholders will receive a combination
of
cash and shares of Summit common stock for each share of Greater Atlantic common
stock that is owned, subject to a “stock collar” limiting the maximum and
minimum number of shares Summit will issue. The stock collar is
described more fully below. Subject to the stock collar, the total
consideration for the Greater Atlantic stock will be paid 70% in the form of
Summit common stock and 30% in cash, with each share of Greater Atlantic common
stock exchanged for shares of Summit common stock valued at $4.20 and $1.80
in
cash. The number of shares of Summit common stock that each Greater
Atlantic shareholder will receive for each share of Greater Atlantic common
stock he or she owns will be determined by the exchange ratio at
closing.
At
the
closing, we will determine the exchange ratio by dividing $4.20 by the average
closing price of Summit common stock reported on NASDAQ for the twenty (20)
trading days prior to closing (the “Average Closing Price”). The exchange ratio
is subject to a stock collar, which sets the maximum and minimum numbers of
shares that Summit will issue. If the Average Closing Price of Summit
common stock is less than $17.82, the exchange ratio will be calculated by
dividing $4.20 by $17.82. If the Average Closing Price is greater
than $24.10, the exchange ratio will be calculated by dividing $4.20 by
$24.10. Thus, for each share of Greater Atlantic common stock that is
owned, each Greater Atlantic shareholder will receive $1.80 in cash and at
least
0.1743 shares of Summit common stock, but no more than 0.2357 shares of Summit
common stock. A chart on page __ under “Merger Consideration”
provides examples of the value of the transaction to shareholders of Greater
Atlantic at selected Average Closing Prices of Summit common stock.
Summit
will not issue any fractional shares in the merger. Instead, you will
receive cash for any fractional share of Summit common stock owed to
you. The amount of cash that you will receive for any
such
fractional share will be calculated by multiplying the fractional share interest
by the closing price of Summit common stock on the NASDAQ Capital Market
on the
effective date of the merger.
Dissenters’
or Appraisal Rights (page __)
Under
Delaware law, Greater Atlantic stockholders may object to the merger and demand
to be paid the fair value of their shares. Under Delaware law, you should know
that in determining the fair value of your shares, any appreciation or
depreciation resulting from the accomplishment or expectation of the merger
will
not be considered. To properly exercise your appraisal rights and
avoid a waiver of such rights, you must not vote your shares in favor of the
merger and you must follow the exact procedures required by Delaware law (see
Annex B).
Resale
of Summit Shares Received in the Merger (page ____)
Summit
has registered the shares of its common stock to be issued in the merger under
the federal securities laws. Therefore, you may sell shares that you
receive in the merger without restriction unless you are considered an affiliate
of Greater Atlantic or you become an affiliate of Summit. A director,
executive officer or stockholder who beneficially owns 10% or more of the
outstanding shares of a company is generally deemed to be an affiliate of that
company.
If
you
are considered an affiliate of Greater Atlantic or become an affiliate of
Summit, you may resell the shares of Summit common stock you receive pursuant
to
an effective registration statement under the securities laws, or pursuant
to
Rule 145 of the SEC’s rules, or in transactions otherwise exempt from
registration under the securities laws. Summit is not obligated and
does not intend to register for resale the shares issued to affiliates of
Greater Atlantic.
Our
Recommendation (page __)
The
Greater Atlantic board of directors believes that the merger is advisable and
in
the best interests of Greater Atlantic’s shareholders. Greater
Atlantic’s board unanimously recommends that shareholders vote
“FOR” the proposal to approve and
adopt the merger agreement and the transactions contemplated
thereby.
Summary
of Risk Factors (page ____)
The
merger is subject to risks, some of which are described below. You
should carefully consider these risk factors and others discussed in more detail
on page _____ in deciding whether to vote for approval of the merger
agreement.
·
|
Summit
may be unable to manage effectively the new assets it
acquires;
|
·
|
changes
in interest rates may adversely affect Summit’s
business;
|
·
|
loss
of Summit’s CEO or other executive officers could adversely affect its
business;
|
·
|
Summit
and its subsidiaries operate in highly competitive
markets;
|
·
|
dividend
payments by Summit’s subsidiaries to Summit and by Summit to its
stockholders could be restricted;
|
·
|
Summit’s
business is concentrated in the Eastern Panhandle and South Central
regions of West Virginia and in the Shenandoah Valley and Northern
Virginia, and a downturn in the local economies may adversely affect
its
business;
|
·
|
determination
of the adequacy of the allowance for loan losses is based upon estimates
that are inherently subjective and dependent on the outcome of future
events. Ultimate losses may differ from current
estimates. As a result, such losses may increase
significantly.
|
Opinion
of Financial Advisor (page __)
In
approving the merger, Greater Atlantic’s board considered the opinion of its
financial advisor, Sandler O’Neill & Partners, L.P., as to the fairness from
a financial point of view of the consideration to be paid by Summit in the
merger as of April 12, 2007, as updated _______________, 2007. We
have attached this opinion to this proxy statement/prospectus as
Annex C. You should read this opinion completely to understand the
assumptions made, matters considered and limitations of the review undertaken
by
Sandler O’Neill & Partners, L.P. in providing its opinion.
Accounting
Treatment (page ___)
The
merger will be accounted for under the purchase method of
accounting.
Certain
Federal Income Tax Consequences (page ___)
A
holder
of Greater Atlantic common stock who exchanges his or her Greater Atlantic
common stock actually owned for a combination of cash and common stock of Summit
will recognize income or gain in an amount equal to the lesser of (a) the
amount of cash received, or (b) the gain realized on the
exchange. The gain realized on the exchange will equal the fair
market value of Summit common stock received plus the amount of cash received,
less the holder’s adjusted tax basis in the shares of Greater Atlantic common
stock exchanged by the holder. No loss may be recognized by a holder
of Greater Atlantic common stock from the combined distribution of cash and
Summit common stock or the stock distribution. You should consult
your own tax advisor for a full understanding of the merger’s tax consequences
that are particular to you. You will not be obligated to exchange
your shares of Greater Atlantic common stock unless Greater Atlantic receives
a
legal opinion that the merger will be treated for federal income tax purposes
as
a merger within the meaning of Section 368 of the Internal Revenue
Code. This opinion, however, will not bind the Internal Revenue
Service, which could take a different view.
Shareholders
will also be required to file certain information with their federal income
tax
returns and to retain certain records with regard to the merger.
The
discussion of United States federal income tax consequences set forth above
is
for general information only and does not purport to be a complete analysis
or
listing of all potential tax effects that may apply to a holder of Greater
Atlantic common stock. Shareholders of Greater Atlantic are strongly
urged to consult their tax advisors to determine the particular tax consequences
to them of the merger, including the application and effect of federal, state,
local, foreign and other tax laws.
The
Companies (page ____)
Summit
Financial Group, Inc.
300
North Main Street
Moorefield,
West Virginia 26836
(304)
530-1000
Summit
Financial Group, Inc. is a $1.3 billion financial holding company headquartered
in Moorefield, West Virginia, at 300 North Main Street. Summit
provides commercial and retail banking services primarily in the Eastern
Panhandle and South Central regions of West Virginia and the Northern region
of
Virginia. Summit provides these services through its community bank
subsidiary, Summit Community Bank. Summit also operates Summit
Insurance Services, LLC in Moorefield, West Virginia.
As
of
June 30, 2007, Summit had total assets of $1.3 billion, total deposits of $850.4
million, and stockholders’ equity of $81.9 million.
Greater
Atlantic Financial Corp.
10700
Parkridge Boulevard, Suite P50
Reston,
Virginia 20191
(703)
391-1300
Greater
Atlantic is a savings and loan holding company organized under the laws of
the
State of Delaware and is registered under the Home Owners’ Loan
Act. It has one subsidiary – Greater Atlantic Bank, which has four
offices in Virginia and an office in Maryland through which all of its business
is conducted.
Greater
Atlantic is engaged in the business of offering banking services to the general
public. Through its subsidiary, Greater Atlantic offers checking
accounts, savings and time deposits, and commercial, real estate, personal,
home
improvement, automobile and other installment and term loans. It also
offers financial services, travelers’ checks, safe deposit boxes, collection,
notary public and other customary bank services (with the exception of trust
services) to its customers. The principal types of loans that the
banks make are commercial loans, commercial and residential real estate loans
and loans to individuals for household, family and other consumer
expenditures.
As
of
June 30, 2007, Greater Atlantic reported total assets of $300.9 million, net
loans of $179.1 million, deposits of $254.4 million and shareholders’ equity of
$6.6 million.
The
Special Meeting and Required Vote (page ___)
Greater
Atlantic is holding a special shareholders’ meeting on December __, 2007 at ____
a.m. at the ________________, _______________, ____________,
Virginia. The purpose of the meeting is for Greater Atlantic
Financial Corp. stockholders to consider and vote on the merger
agreement. The record date for the meeting is the close of business
on ________________, 2007. On that date, Greater Atlantic had
_________________ shares of common stock outstanding and entitled to
vote. Only stockholders of record at the close of business on the
record date will be entitled to vote at the meeting and any
adjournment. You can cast one vote for each share of Greater Atlantic
common stock that you owned on that date.
The
approval of the merger agreement and the transactions contemplated thereby
requires the affirmative vote of the holders of a majority of Greater Atlantic’s
outstanding shares entitled to vote at the special meeting. As of
____________, 2007, Greater Atlantic’s directors and executive officers, and
their
affiliates,
held ___________ shares of Greater Atlantic common stock, which represents
approximately _______% of the total outstanding shares of Greater Atlantic
common stock entitled to vote at the special meeting. The Greater
Atlantic directors have indicated that they plan to vote the shares of Greater
Atlantic common stock that they own for approval of the merger agreement and
the
transactions contemplated thereby.
Conditions
to Completion of the Merger (page ___)
The
obligations of Summit and Greater Atlantic to complete the merger depend on
a
number of conditions being met. These include:
·
|
Greater
Atlantic’s shareholders’ approval of the merger
agreement;
|
·
|
approval
of the merger by the necessary federal and state regulatory
authorities;
|
·
|
authorization
for the listing on the NASDAQ Capital Market of the shares of Summit
common stock to be issued in the
merger;
|
·
|
absence
of any law or court order prohibiting the
merger;
|
·
|
receipt
of an opinion from counsel to Summit that the merger will qualify
as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code;
|
·
|
the
balance of core deposits (as defined in the merger agreement) being
not
less than $144 million;
|
·
|
the
sale of Greater Atlantic Bank’s branch office in Pasadena, Maryland, at
least forty-five (45) days prior to consummation of the merger (the
sale,
involving deposits of approximately $52.0 million, was completed
on August
24, 2007); and
|
·
|
the
continued accuracy of certain representations and
warranties.
|
Where
the
law permits, either of us could choose to waive a condition to our obligation
to
complete the merger although that condition has not been
satisfied. We cannot be certain when, or if, the conditions to the
merger will be satisfied or waived, or that the merger will be
completed.
Regulatory
Approvals (page ___)
We
cannot
complete the merger unless it is approved by the Board of Governors of the
Federal Reserve System. On October 4, 2007, Summit filed an
application to obtain approval of the merger with the Federal Reserve Bank
of
Richmond. Once the required regulatory authority approves the merger,
we have to wait from 15 to 30 days before we can complete it. During
that time, the Department of Justice may challenge the merger. Summit
will also file notices of closing with the Federal Reserve Bank of
Richmond.
As
of the
date of this proxy statement/prospectus, we have not yet received the required
approvals. While we do not know of any reason why we would not be
able to obtain the necessary approvals in a timely manner, we cannot be certain
when or if we will receive them.
Termination
of the Merger Agreement (page ___)
Greater
Atlantic and Summit may mutually agree to terminate the merger at any
time.
Either
Greater Atlantic or Summit may terminate the merger agreement if any of the
following occurs:
|
•
|
either
party breaches any of its representations or obligations under the
merger
agreement, and does not cure the breach within 30 days if such breach
individually or in the aggregate with other breaches results in a
material
adverse effect;
|
|
•
|
the
merger is not completed by December 31, 2007, unless the failure
of the
merger to be consummated arises out of or results from the knowing
action
or inaction of the party seeking to terminate;
or
|
|
•
|
the
approval of any governmental entity required for consummation of
the
merger is denied or the shareholders of Greater Atlantic do not approve
the merger agreement.
|
Summit
may terminate the merger agreement if Greater Atlantic’s board fails to
recommend approval of the merger agreement, withdraws its recommendation or
modifies its recommendation in a manner adverse to Summit before Greater
Atlantic’s shareholder meeting.
Greater
Atlantic may terminate the merger agreement in order to enter into an agreement
with respect to an unsolicited proposal that if consummated would result in
a
transaction more favorable to Greater Atlantic’s shareholders from a financial
point of view, provided that Summit does not make a counteroffer that is at
least as favorable to the other proposal and Greater Atlantic pays the
termination fee described below.
Termination
Fee (See Page ___)
In
the
event the merger agreement is terminated (i) due to failure to obtain Greater
Atlantic’s shareholder approval and prior to such time a competing acquisition
proposal for Greater Atlantic has been made public and not withdrawn or (ii)
by
Greater Atlantic in order to enter into an agreement with respect to a superior
proposal, then Greater Atlantic must pay Summit a cash termination fee of
$750,000 according to the following schedule: (i) $250,000 no later
than two (2) business days after the date of termination, (ii) $100,000 on
the
date that is one (1) year after the termination date, (iii) $100,000 on the
date
that is two (2) years after the termination date, and (iv) $300,000 on the
date
that is three (3) years after the termination date.
In
the
event the merger agreement is terminated (i) because Greater Atlantic’s board
fails to recommend, withdraws, modifies, or changes its recommendation of the
merger before Greater Atlantic’s shareholder meeting, (ii) by Summit due to a
breach by Greater Atlantic of any representation, warranty, covenant or other
agreement, or (iii) due to a failure to consummate the merger by December 31,
2007, then Greater Atlantic must pay Summit a cash termination fee of $250,000
no later than two (2) business days after the termination date.
Waiver
and Amendment (page ___)
We
may
jointly amend the merger agreement, and each of us may waive our right to
require the other party to adhere to the terms and conditions of the merger
agreement. However, we may not do so after Greater Atlantic’s
shareholders approve the necessary transactions if the amendment or waiver
would
violate the Delaware General Corporation Law or the West Virginia Business
Corporation Act.
Interests
of Directors and Officers in the Merger that Differ from Your Interests
(page ___)
Some
of
the directors and officers of Greater Atlantic have interests in the merger
that
differ from, or are in addition to, their interests as shareholders of Greater
Atlantic. These interests exist because of, among other things,
employment or severance agreements that the officers entered into with Greater
Atlantic, and rights that these officers and directors have under Greater
Atlantic’s benefit plans. These employment and severance agreements
provide certain officers with severance benefits if their employment is
terminated following the merger. Further, certain
officers and employees of Greater Atlantic will benefit from accelerated vesting
of stock options.
The
members of the Greater Atlantic board of directors knew about these additional
interests and considered them when they approved the merger agreement and the
merger.
If
the
merger is completed, each outstanding option and warrant to purchase shares
of
Greater Atlantic common stock under any and all plans of Greater Atlantic under
which stock options and warrants have been granted and are outstanding shall
vest and holders of Greater Atlantic stock options shall be entitled to receive
cash in an amount equal to the difference between the value of (a) the Merger
Consideration and (b) the applicable exercise price (rounded to the nearest
cent) for each outstanding Greater Atlantic stock option and
warrant.
Material
Differences in the Rights of Summit Shareholders and Greater Atlantic
Shareholders (page ___)
The
rights of Summit’s shareholders are governed by West Virginia law and by
Summit’s articles of incorporation and bylaws. The rights of Greater
Atlantic’s shareholders are governed by Delaware law and by Greater Atlantic’s
certificate of incorporation and bylaws. Upon completion of the
merger, the rights of the Summit shareholders, including former shareholders
of
Greater Atlantic, will be governed by West Virginia law and the articles of
incorporation and bylaws of Summit.
You
should carefully read and consider the following risk factors concerning Summit,
Greater Atlantic and the merger before you decide whether to vote to approve
the
merger and/or the other matters to be considered and voted upon at the
shareholder meeting.
Risks
Associated with the Merger
Fluctuations
in the trading price of Summit common stock will change the value of the shares
of Summit common stock you receive in the merger.
The
number of shares of Summit common stock that you will receive for each share
of
Greater Atlantic common stock will be calculated at closing based on the
exchange ratio. At the closing, we will determine the exchange ratio
by dividing the average closing price of Summit common stock reported on the
NASDAQ for the twenty (20) trading days prior to closing (the “Average Closing
Price”) by $4.20. However, the exchange ratio is subject to a stock
collar, which sets a maximum and minimum numbers of shares that Summit will
issue. If the Average Closing Price of Summit common stock is less
than $17.82, then the exchange ratio will be calculated by dividing $4.20 by
$17.82. If the Average Closing Price is greater than $24.10, then the
exchange ratio will be calculated by dividing $4.20 by $24.10. This
means that for each share of Greater Atlantic common stock that you own, you
will receive at least 0.1742 shares of Summit common stock, but no more
than 0.2356 shares of Summit common stock. As a result,
the market value of the Summit common stock that you receive in the merger
will
increase or decrease depending on the direction of the price movement of the
Summit common stock. See chart on page __ under the heading “Merger
Consideration” for an illustration of what you will receive based on Summit’s
stock price. Also, after the merger, the market value of Summit
common stock may decrease and be lower than the market value of Summit common
stock that was used in calculating the exchange ratio in the
merger.
The
integration of the operations of Summit and Greater Atlantic may be more
difficult than anticipated.
The
success of the merger will depend on a number of factors, including but not
limited to Summit’s ability to:
·
|
timely
and successfully integrate the operations of Summit and Greater
Atlantic;
|
·
|
maintain
existing relationships with depositors in Greater Atlantic to minimize
withdrawals of deposits subsequent to the
merger;
|
·
|
maintain
and enhance existing relationships with borrowers to limit unanticipated
losses of loan customers of Greater
Atlantic;
|
·
|
control
the incremental non-interest expense from Summit to maintain overall
operating efficiencies;
|
·
|
retain
and attract qualified personnel at Summit and Greater
Atlantic;
|
·
|
compete
effectively in the communities served by Summit and Greater Atlantic
and
in nearby communities; and
|
·
|
manage
effectively its anticipated growth resulting from the
merger.
|
The
merger with Greater Atlantic may distract management of Summit from its other
responsibilities.
The
acquisition of Greater Atlantic could cause the management of Summit to focus
its time and energies on matters related to the acquisition that otherwise
would
be directed to the business and operations of Summit. Any such
distraction on the part of management, if significant, could affect its ability
to service existing business and develop new business and adversely effect
the
business and earnings of Summit.
Greater
Atlantic’s shareholders will have less influence as shareholders of Summit than
as shareholders of Greater Atlantic
Greater
Atlantic’s shareholders currently have the right to vote in the election of the
board of directors of Greater Atlantic and on other matters affecting Greater
Atlantic. After the merger, the shareholders of Greater Atlantic as a
group will own approximately 8.0% of the combined organization. When
the merger occurs, each shareholder that receives shares of Summit common stock
will become a shareholder of Summit with a percentage ownership of the combined
organization much smaller than such shareholder’s percentage ownership of
Greater Atlantic. Because of this, Greater Atlantic’s shareholders
will have less influence on the management and policies of Summit than they
now
have on the management and policies of Greater Atlantic.
Directors
and officers of Greater Atlantic have interests in the merger that differ from
the interests of non-director or non-management
shareholders.
Some
of
the directors and officers of Greater Atlantic have interests in the merger
that
differ from, or are in addition to, their interests as shareholders of Greater
Atlantic, generally. These interests exist because of, among other
things, employment or severance agreements that certain officers entered into
with Greater Atlantic, rights that Greater Atlantic officers and directors
have
under Greater Atlantic’s benefit plans (including the treatment of their stock
options and warrants following the merger) and rights to indemnification
following the merger. Although the members of each of Summit’s and
Greater Atlantic’s board of directors knew about these additional interests and
considered them when they approved the merger agreement and the merger, you
should understand that some of the directors and officers of Greater Atlantic
will receive benefits or other payments in connection with the merger that
you
will not receive. See “The Merger – Interests of Certain Persons in
the Merger” on page ____.
Risks
Associated with Summit
Changes
in interest rates may adversely affect Summit’s
business.
Summit’s
earnings, like most financial institutions, depend significantly on its net
interest income. Net interest income is the difference between the
interest income Summit earns on loans and other assets which earn interest
and
the interest expense incurred to fund those assets, such as on savings deposits
and borrowed money. Therefore, changes in general market interest
rates, such as a change in the monetary policy of the Board of Governors of
the
Federal Reserve System or otherwise beyond those which are contemplated by
Summit’s interest rate risk model and policy, could have an effect on net
interest income.
Our
success depends on key personnel.
Summit
depends, and for the foreseeable future will depend, on the services of H.
Charles Maddy, III, the President and Chief Executive Officer of Summit, Robert
S. Tissue, the Senior Vice President and Chief Financial Officer of Summit,
Patrick N. Frye, the Senior Vice President and Chief Credit Officer of Summit,
Scott C. Jennings, the Senior Vice President and Chief Operating Officer of
Summit, Ronald F. Miller, the President and Chief Executive Officer of Summit
Community Bank, C.
David
Robertson, the Chairman of the Board of Summit Community Bank and Doug A.
Mitchell, the Senior Vice President, Retail Banking of Summit. Summit’s
Board of Directors will continue to rely on the expertise and management
abilities of Messrs. Maddy, Tissue, Frye, Jennings, Miller, Robertson and
Mitchell, and the other principal officers of Summit. If Summit loses
the services of one or more of these key personnel, it could have a negative
impact on its business because of their skills, years of industry experience
and
the difficulty of promptly finding qualified replacement
personnel.
Summit
faces strong
competition.
Summit
engages in highly competitive activities. Each activity and market
served involves competition with other banks and savings institutions, as
well as with non-banking and non-financial enterprises that offer financial
products and services that compete directly with Summit’s products and
services. Summit actively competes with other banks, mortgage
companies and other financial service companies in its efforts to obtain
deposits and make loans, in the scope and types of services offered, in
interest rates paid on deposits and charged on loans, and in
other aspects of banking.
In
addition to competing with other banks and mortgage companies, Summit competes
with other financial institutions engaged in the business of making loans
or accepting deposits, such as savings and loan associations, credit
unions, industrial loan associations, insurance companies, small loan
companies, finance companies, real estate investment trusts, certain
governmental agencies, credit card organizations and other enterprises.
In recent years, competition for money market accounts from
securities brokers has also intensified. Additional competition for
deposits comes from government and private issues of debt obligations and
other investment alternatives for depositors such as money market
funds. Summit takes an aggressive competitive posture, and intends to
continue vigorously competing for market share within our service areas by
offering competitive rates and terms on both loans and
deposits.
Summit’s
ability to pay dividends is
subject to regulation.
Summit’s
ability to pay dividends on its common stock is subject to its profitability
and
to government regulations that limit the aggregate amount of cash dividends
paid
to shareholders based on retained earnings and then-current income
levels. There can be no assurance that Summit’s future earnings will
support dividend payments in the future. In addition, Summit is
involved in litigation with Corinthian Mortgage Corporation, as described more
fully under the sub-heading “Risk Factors Relating to Summit’s Growth,
Including Pending Litigation” on page ___. After
consultation with legal counsel, Summit believes meritorious defenses exist
as
to all plaintiff’s claims including with respect to plaintiff’s claims for
damages. At the present time, Summit is unable to estimate the
impact, if any, an adverse decision may have on Summit’s results of operations
or financial condition. However, an adverse decision resulting in a
large damage award could have a significant negative impact on Summit’s
regulatory capital thereby limiting Summit’s near term growth and its ability to
pay dividends to its shareholders.
There
is a concentration of ownership
of Summit’s Common Stock.
Summit’s directors and executive officers beneficially own approximately 27.5%
of Summit Financial Group, Inc.’s outstanding Common
Stock. Accordingly, such persons effectively have the ability to
control Summit and direct its affairs and business, which may include taking
actions that may be inconsistent with the interests of non-affiliated
shareholders.
Common
Stock is not
Insured.
The Common Stock is not insured by the Federal Deposit Insurance Corporation
or
any other governmental agency.
Risk
Factors Relating to
Summit’s Growth, Including Pending Litigation.
Summit may not be able to maintain and manage its growth, which may adversely
affect its results of operations and financial
condition. Summit has had significant growth during the past five
years, and Summit plans to continue to grow and expand. Summit’s
ability to continue to grow depends on its ability to open new branch offices,
attract deposits to those locations, and identify loan and investment
opportunities. Summit’s ability to manage growth successfully also
will depend on whether it can maintain capital levels adequate to support its
growth and maintain cost controls and asset quality. It is possible
that Summit may need to raise additional capital to support future
growth. Summit cannot make any assurance that additional capital
would be available on terms satisfactory to all shareholders. This
could force Summit to limit its growth strategy. If Summit is unable
to sustain its growth, its earnings could be adversely affected. If
Summit grows too quickly, however, and is not able to control costs and maintain
asset quality, rapid growth also could adversely affect its financial
performance. In addition, Summit is involved in litigation with
Corinthian Mortgage Corporation. On November 20, 2006, Corinthian
filed an Amended Complaint, which added Summit as a defendant in the case and
requesting damages in the amount of $20 million. After consultation
with legal counsel, Summit believes that significant and meritorious defenses
exist as to all of the claims including with respect to plaintiff’s claims for
damages. Trial on this matter is currently scheduled to begin on
January 14, 2008. Summit will continue to evaluate the claims in the
Corinthian lawsuit and intends to vigorously defend against them. At
the present time, Summit is unable to estimate the impact, if any, an adverse
decision may have on Summit’s results of operations or financial
condition. However, an adverse decision resulting in a large damage
award could have a significant negative impact on Summit’s regulatory capital
thereby limiting Summit’s near term growth and its ability to pay dividends to
its shareholders.
Summit
depends on local economic
conditions, over which it has no control.
Summit’s success depends to a certain extent upon the general economic
conditions in the geographic markets in which it operates. Although
Summit anticipates that economic conditions in these markets will continue
to be
favorable, no assurance can be given that these economic conditions will
continue. Adverse changes in economic conditions in the geographic
markets in which Summit’s subsidiaries are located would likely impair their
ability to collect loans and could otherwise have a negative effect on Summit’s
financial condition. In addition, Summit’s deposit balances may
fluctuate due to economic conditions or other conditions over which it has
no
control.
There
are no assurances as to the adequacy of the allowance for credit
losses.
Summit
believes that its allowance for credit losses is maintained at a level adequate
to absorb probable losses in its loan portfolio given the current information
known to management.
Management
establishes the allowance based upon many factors, including, but not limited
to:
·
|
historical
loan loss experience;
|
·
|
industry
diversification of the commercial loan
portfolio;
|
·
|
the
effect of changes in the local real estate market on collateral
values;
|
·
|
the
amount of nonperforming loans and related collateral
security;
|
·
|
current
economic conditions that may affect the borrower’s ability to pay and
value of collateral;
|
·
|
sources
and cost of funds;
|
·
|
volume,
growth and composition of the loan portfolio;
and
|
·
|
other
factors management believes are
relevant.
|
These
determinations are based upon estimates that are inherently subjective, and
their accuracy depends on the outcome of future events, so ultimate losses
may
differ from current estimates. Depending on changes in economic,
operating and other conditions, including changes in interest rates, that are
generally beyond its control, Summit’s actual loan losses could increase
significantly. As a result, such losses could exceed Summit’s current allowance
estimates. Summit can provide no assurance that its allowance is
sufficient to cover actual loan losses should such losses differ substantially
from our current estimates.
In
addition, federal and state regulators, as an integral part of their respective
supervisory functions, periodically review Summit’s allowance for credit
losses. Summit’s independent auditors also review the allowance as a
part of their audit. Any increase in its allowance required by either
the regulatory agencies or independent auditors would reduce Summit’s pre-tax
earnings.
|
FORWARD-LOOKING
STATEMENTS
|
This
proxy statement/prospectus contains data and information that constitute
forward-looking statements (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding, among other things, the anticipated
closing date of the merger, the expected pro forma effect of the merger, and
plans and objectives of Summit’s management for future operations of the
combined organization following consummation of the merger. You can
identify these forward-looking statements because they may include terms such
as
“believes,” “anticipates,” “intends,” “expects,” or similar
expressions and may include discussions of future strategy. Each of
Summit and Greater Atlantic caution you not to rely unduly on any
forward-looking statements in this proxy statement/prospectus. These
forward-looking statements are based on current expectations that involve a
number of risks and uncertainties. Actual results may differ
materially from the results expressed in these forward-looking
statements.
Factors
that might cause such a difference include the following:
·
|
the
ability of Greater Atlantic to obtain the required shareholder approval
or
the ability of the companies to obtain the required regulatory approvals
for the merger;
|
·
|
the
ability of the companies to consummate the
merger;
|
·
|
Summit’s
ability to successfully integrate Greater Atlantic into Summit following
the merger;
|
·
|
a
material adverse change in the financial condition, results of operations
or prospects of either Summit or Greater
Atlantic;
|
·
|
the
outcome of litigation pending against
Summit;
|
·
|
Summit’s
ability to fully realize any cost savings and revenues or the ability
to
realize them on a timely basis;
|
·
|
the
risk of borrower, depositor and other customer attrition after the
transaction is completed;
|
·
|
a
change in general business and economic
conditions;
|
·
|
changes
in the interest rate environment, deposit flows, loan demand, real
estate
values, and competition;
|
·
|
changes
in accounting principles, policies or
guidelines;
|
·
|
changes
in legislation and regulation;
|
·
|
other
economic, competitive, governmental, regulatory, geopolitical, and
technological factors affecting the companies’ operations, pricing, and
services; and
|
·
|
other
risk factors described on pages ___ to ____ of this proxy
statement/prospectus.
|
Summit
and Greater Atlantic undertake no obligation to update or clarify these
forward-looking statements, whether as a result of new information, future
events or otherwise.
PRICE
RANGE OF COMMON STOCK AND DIVIDENDS
Summit
common stock is traded on the NASDAQ Capital Market (formerly known as the
NASDAQSmallCap Market) under the symbol “SMMF”. The closing sale
price reported for Summit common stock on April 12, 2007, the last trading
date
preceding the public announcement of the merger agreement, was
$20.80. Since February 22, 2007, Greater Atlantic common stock has
been quoted on the Pink Sheets under the symbol “GAFC.PK.” Before
that date, Greater Atlantic common stock was quoted on the NASDAQ Capital
Market. The closing sale price reported for Greater Atlantic common
stock on April 12, 2007, the last trading date preceding the public announcement
of the merger agreement, was $2.54.
The
following table sets forth for the periods indicated the high and low prices
per
share of Summit common stock and Greater Atlantic common stock as reported
on
their respective market, along with the semi-annual cash dividends per share
declared. The per share prices do not include adjustments for
markups, markdowns or commissions.
|
Summit
Financial Group, Inc.
|
|
Greater
Atlantic Financial Corp.
|
Sales
Price
|
Cash
Dividend Declared
|
|
Sales
Price
|
Cash
Dividend Declared
|
|
High
|
Low
|
|
High
|
Low
|
2005
|
|
|
|
|
|
|
|
First
Quarter
|
$36.00
|
$26.51
|
$ -
|
|
$6.46
|
$5.77
|
$ -
|
Second
Quarter
|
$33.49
|
$23.82
|
$0.14
|
|
$6.20
|
$5.03
|
$ -
|
Third
Quarter
|
$33.55
|
$25.54
|
$ -
|
|
$5.62
|
$5.10
|
$ -
|
Fourth
Quarter
|
$28.00
|
$22.48
|
$0.16
|
|
$5.45
|
$4.84
|
$ -
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
First
Quarter
|
$25.09
|
$19.90
|
$ -
|
|
$6.05
|
$4.60
|
$ -
|
Second
Quarter
|
$24.52
|
$19.10
|
$0.16
|
|
$5.90
|
$5.04
|
$ -
|
Third
Quarter
|
$24.18
|
$17.95
|
$ -
|
|
$5.36
|
$4.75
|
$ -
|
Fourth
Quarter
|
$20.16
|
$17.50
|
$0.16
|
|
$5.20
|
$4.30
|
$ -
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
First
Quarter
|
$21.51
|
$19.49
|
$ -
|
|
$4.30
|
$2.35
|
$ -
|
Second
Quarter
|
$21.20
|
$19.80
|
$0.17
|
|
$5.10
|
$2.25
|
$ -
|
Third
Quarter
|
$19.65
|
$18.40
|
$ -
|
|
$5.50
|
$5.00
|
$ -
|
(through
September 19, 2007)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
shareholders of Summit are entitled to receive dividends when and as declared
by
its board of directors. Dividends have been paid
semi-annually. Dividends were $0.32 per share in 2006, $0.30 per
share in 2005 and $0.26 per share in 2004. The payment of dividends
is subject to the restrictions set forth in the West Virginia Business
Corporation Act and the limitations imposed by the Federal Reserve
Board.
Payment
of dividends by Summit depends upon receipt of dividends from its banking
subsidiary. Payment of dividends by Summit’s state non-member banking
subsidiary is regulated by the Federal Deposit Insurance Corporation (“FDIC”)
and the West Virginia Division of Banking and generally, the prior approval
of
the FDIC is required if the total dividends declared by a state non-member
bank
in any calendar year exceeds its net profits, as defined, for that year combined
with its retained net profits for the preceding two
years. Additionally, prior approval of the FDIC is required when a
state non-member bank has deficit retained earnings but has sufficient current
year’s net income, as defined, plus the retained net profits of the two
preceding years. The FDIC may prohibit dividends if it deems the
payment to be an
unsafe
or
unsound banking practice. The FDIC has issued guidelines for dividend
payments by state non-member banks emphasizing that proper dividend size depends
on the bank’s earnings and capital.
The
following table sets forth historical per share market values for Summit common
stock and Greater Atlantic common stock (i) on April 12, 2007, the last
trading day prior to public announcement of the merger agreement, and
(ii) on October 11, 2007, the most recent practicable date before the
printing and mailing of this proxy statement/prospectus. The table
also shows the equivalent pro forma market value of Greater Atlantic common
stock on April 12, 2007, and October 11, 2007, assuming receipt of stock
consideration.
The
equivalent pro forma market value per share of Greater Atlantic common stock
is
the result obtained by multiplying the historical market price of Summit common
stock by the applicable exchange ratio and adding the cash consideration of
$1.80. For purposes of determining the equivalent pro forma market
value and the applicable exchange ratio, we have assumed that the average
closing price of a share of Summit common stock is equal to the historical
market price on April 12, 2007, and on October 11, 2007. Accordingly,
the pro forma market value of Greater Atlantic common stock (i) on April
12, 2007, is determined by multiplying $20.80 by the exchange ratio of 0.2019,
and (ii) on October 11, 2007, is determined by multiplying $17.40 by the
exchange ratio of 0.2357.
The
historical market prices represent the last sale prices on April 12, 2007,
and
October 11, 2007. The average closing price of Summit common stock
used to determined the exchange ratio and the market price may be higher or
lower than the closing prices of Summit common stock on the dates shown in
the
table and, therefore, the market value of the Summit common stock that you
receive may be higher or lower than the equivalent pro forma market value shown
in the table.
|
|
Historical
Market Price Per Share
|
|
|
|
|
|
|
Summit
|
|
|
Greater
Atlantic
|
|
|
Greater Atlantic
Equivalent Pro Forma Market Value Per Share
|
|
|
|
|
|
|
|
|
|
|
|
April
12, 2007
|
|
$ |
20.80
|
|
|
$ |
2.54
|
|
|
$ |
6.00
|
|
October
11, 2007
|
|
$ |
17.40
|
|
|
$ |
5.05
|
|
|
$ |
5.90
|
|
Once
the
merger is completed, there will be no further public market for Greater Atlantic
common stock.
UNAUDITED
COMPARATIVE PER SHARE DATA
We
have
summarized below historical earnings, dividend and book value per share
information for Summit and Greater Atlantic and additional similar information
as if the companies had been combined for the periods shown, which we refer
to
as “pro forma” information. The pro forma and pro forma equivalent
per share information gives effect to the merger as if the transaction had
been
effective at the year end dates presented, in the case of book value data,
and
as if the transaction had been effective at the beginning of each period
presented, in the case of the earnings and dividend data.
The
pro
forma combined and pro forma equivalent per share information below assume
that
Summit will pay consideration totaling $6.00 per share for each outstanding
share of Greater Atlantic common stock, as follows: $1.80 in cash,
and $4.20 in Summit common stock. For purposes of valuing Summit’s
common stock paid, a price per share of $20.80 was assumed, which represents
the
closing price of Summit’s common stock on the last trading day preceding the
public announcement of the Greater Atlantic merger transaction, and which
results in an exchange ratio 0.2019 shares of Summit common stock for each
share
of Greater Atlantic common stock.
The
Greater Atlantic pro forma equivalent per share amounts below are calculated
by
multiplying the Summit pro forma combined earnings per share and book value
per
share by the exchange ratio of 0.2019 so that the per share amounts equate
to
the respective values for one share of Greater Atlantic common
stock.
We
expect
that both Summit and Greater Atlantic will incur merger and integration costs
as
a result of the merger. We also anticipate that the merger will
provide the combined company with financial benefits that may include reduced
operating expenses. The information set forth below, while helpful in
illustrating the financial characteristics of the combined company under one
set
of assumptions, may not reflect all of these anticipated financial expenses
and
does not reflect any of these anticipated financial benefits and, accordingly,
does not attempt to predict or suggest future results. It also does
not necessarily reflect what the historical results of the combined company
would have been had our companies been combined during the periods
presented.
Summit
reports on a calendar year basis while Greater Atlantic reports on a fiscal
year
ending on September 30. Accordingly for purposes of the below
earnings per share data, Summit’s statements of income for the six months ended
June 30, 2007, and the year ended December 31, 2006, have been combined
with Greater Atlantic’s statements of income for the six months ended March 31,
2007, and the year ended September 30, 2006, respectively.
The
information in the following table is based on, and you should read it together
with, the historical financial information and the notes thereto for Summit
and
Greater Atlantic contained in this proxy statement/prospectus.
For
the Year Ended 12/31/06-Summit & 9/30/06-Greater
Atlantic
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
Atlantic
|
|
|
|
Summit
|
|
|
Atlantic
|
|
|
Pro
Forma
|
|
|
Pro
Forma
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Combined
|
|
|
Equivalent
|
|
Basic
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
from
continuing operations
|
|
$ |
1.55
|
|
|
$ |
(1.02 |
) |
|
$ |
1.19
|
|
|
$ |
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
continuing operations
|
|
$ |
1.54
|
|
|
$ |
(1.02 |
) |
|
$ |
1.18
|
|
|
$ |
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share
|
|
$ |
0.32
|
|
|
$ |
-
|
|
|
$ |
0.29
|
|
|
$ |
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value per share (at 12/31/2006)
|
|
$ |
11.12
|
|
|
$ |
2.67
|
|
|
$ |
12.20
|
|
|
$ |
2.46
|
|
For
the Six Months Ended 6/30/07-Summit & 3/31/07-Greater
Atlantic
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
Atlantic
|
|
|
|
Summit
|
|
|
Atlantic
|
|
|
Pro
Forma
|
|
|
Pro
Forma
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Combined
|
|
|
Equivalent
|
|
Basic
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
from
continuing operations
|
|
$ |
0.83
|
|
|
$ |
(0.57 |
) |
|
$ |
0.63
|
|
|
$ |
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
continuing operations
|
|
$ |
0.83
|
|
|
$ |
(0.57 |
) |
|
$ |
0.62
|
|
|
$ |
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share
|
|
$ |
0.17
|
|
|
$ |
-
|
|
|
$ |
0.16
|
|
|
$ |
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value per share (at 6/30/2007)
|
|
$ |
11.56
|
|
|
$ |
2.19
|
|
|
$ |
12.60
|
|
|
$ |
2.54
|
|
UNAUDITED
PRO FORMA FINANCIAL INFORMATION
The
following unaudited pro forma condensed combined consolidated balance sheet
as
of June 30, 2007 and unaudited pro forma condensed combined consolidated
statements of income for the six months ended June 30, 2007 and the year ended
December 31, 2006 combine the historical financial statements of Summit and
Greater Atlantic. The unaudited pro forma financial statements give
effect to the proposed merger of Greater Atlantic with and into Summit as if
the
merger occurred on June 30, 2007 with respect to the balance sheet, and on
January 1, 2007 and January 1, 2006 with respect to the statements of
income for the six months ended June 30, 2007 and the year ended
December 31, 2006, respectively. The unaudited pro forma
financial statements give effect to the proposed merger under the purchase
method of accounting using an acquisition price of $6.00 per share for Greater
Atlantic common stock.
Summit
reports on a calendar year basis while Greater Atlantic reports on a fiscal
year
ending on September 30. Accordingly for purposes of the
unaudited pro forma condensed combined consolidated statements of income,
Summit’s statements of income for the six months ended June 30, 2007 and the
year ended December 31, 2006 have been combined with Greater Atlantic’s
statements of income for the six months ended March 31, 2007 and the year ended
September 30, 2006.
The
purchase method of accounting requires that all of Greater Atlantic’s assets and
liabilities be adjusted to their estimated fair market values as of the date
of
acquisition. For purposes of the unaudited pro forma financial
statements, fair market value of June 30, 2007 assets and liabilities has
been estimated by management of Summit using market information available on
June 30, 2007. Accordingly, these adjustments are only
approximations. This information may not necessarily be indicative of
the financial position or results of operations that would have occurred if
the
merger had been consummated on the date or at the beginning of the period
indicated or which may be obtained in the future. Upon consummation
of the merger, Summit will make adjustments as of the date of consummation
based
on appraisals and estimates.
The
unaudited pro forma information, while helpful in illustrating the financial
characteristics of the combined company under one set of assumptions, does
not
reflect benefits of expected cost savings or opportunities to earn additional
revenue and, accordingly, does not attempt to predict or suggest future
results. It also does not necessarily reflect what the historical
results of the combined company would have been had our companies been combined
during this period.
SUMMIT
AND GREATER ATLANTIC
|
|
Unaudited
Pro Forma Condensed Combined Consolidated Balance
Sheet
|
|
June
30, 2007
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
(Unaudited)
|
|
|
|
|
|
|
|
Pro
Forma
|
|
|
|
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
|
|
|
Atlantic
|
|
|
Kelly
|
|
|
|
|
Greater
|
|
|
|
|
|
|
|
Financial
|
|
|
Financial
|
|
|
Agencies
|
|
|
|
|
Atlantic
|
|
|
|
|
|
|
|
Group,
Inc.
|
|
|
Corp.
|
|
|
Adjustments
|
|
|
|
|
Adjustments
|
|
|
|
Combined
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
15,198
|
|
|
$ |
3,796
|
|
|
$ |
233
|
|
(1 |
) |
|
|
|
|
|
$ |
19,227
|
|
Interest
bearing deposits with other banks
|
|
|
105
|
|
|
|
49,352
|
|
|
|
-
|
|
|
|
|
$ |
(49,270 |
) |
(2 |
) |
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
(5,736 |
) |
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
(496 |
) |
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
6,392
|
|
(7 |
) |
|
|
|
Federal
funds sold
|
|
|
1,717
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
1,717
|
Securities
available for sale
|
|
|
259,526
|
|
|
|
56,554
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
316,080
|
Securities
held to maturity
|
|
|
-
|
|
|
|
3,467
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
3,467
|
Loans
held for sale, net
|
|
|
2,337
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
2,337
|
Loans,
net
|
|
|
949,175
|
|
|
|
179,072
|
|
|
|
-
|
|
|
|
|
|
(2,500 |
) |
(5 |
) |
|
|
1,125,747
|
Premises
and equipment, net
|
|
|
22,133
|
|
|
|
2,457
|
|
|
|
65
|
|
(1 |
) |
|
|
(65 |
) |
(2 |
) |
|
|
24,590
|
Accrued
interest receivable
|
|
|
6,812
|
|
|
|
1,710
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
8,522
|
Identifiable
intangibles
|
|
|
-
|
|
|
|
-
|
|
|
|
3,000
|
|
(1 |
) |
|
|
3,000
|
|
(5 |
) |
|
|
6,000
|
Goodwill
|
|
|
3,121
|
|
|
|
956
|
|
|
|
4,110
|
|
(1 |
) |
|
|
8,186
|
|
(5 |
) |
|
|
16,373
|
Other
assets
|
|
|
20,304
|
|
|
|
3,527
|
|
|
|
47
|
|
(1 |
) |
|
|
(19 |
) |
(5 |
) |
|
|
26,526
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
1,600
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,067
|
|
(5 |
) |
|
|
|
Total
assets
|
|
$ |
1,280,428
|
|
|
$ |
300,891
|
|
|
$ |
7,455
|
|
|
|
|
$ |
(37,841 |
) |
|
|
|
$ |
1,550,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
850,389
|
|
|
$ |
254,397
|
|
|
$ |
-
|
|
|
|
|
$ |
(53,574 |
) |
(2 |
) |
|
$ |
1,051,212
|
Short-term
borrowings
|
|
|
100,901
|
|
|
|
3,649
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
104,550
|
Long-term
borrowings
|
|
|
216,758
|
|
|
|
25,000
|
|
|
|
-
|
|
|
|
|
|
450
|
|
(5 |
) |
|
|
242,208
|
Subordinated
debentures owed to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unconsolidated
subsidiary trusts
|
|
|
19,589
|
|
|
|
9,372
|
|
|
|
-
|
|
|
|
|
|
236
|
|
(5 |
) |
|
|
35,589
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
(9,608 |
) |
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
16,000
|
|
(7 |
) |
|
|
|
Other
liabilities
|
|
|
10,881
|
|
|
|
1,837
|
|
|
|
1,123
|
|
(1 |
) |
|
|
16
|
|
(2 |
) |
|
|
16,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,100
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
615
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
858
|
|
(5 |
) |
|
|
|
Total
liabilities
|
|
|
1,198,518
|
|
|
|
294,255
|
|
|
|
1,123
|
|
|
|
|
|
(43,907 |
) |
|
|
|
|
1,449,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock and related surplus
|
|
|
18,037
|
|
|
|
25,303
|
|
|
|
6,332
|
|
(1 |
) |
|
|
12,702
|
|
(3 |
) |
|
|
37,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,303 |
) |
(6 |
) |
|
|
|
Retained
earnings
|
|
|
65,479
|
|
|
|
(17,584 |
) |
|
|
-
|
|
|
|
|
|
4,223
|
|
(2 |
) |
|
|
65,479
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
(496 |
) |
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
13,857
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income (loss)
|
|
|
(1,606 |
) |
|
|
(1,083 |
) |
|
|
-
|
|
|
|
|
|
1,083
|
|
(6 |
) |
|
|
(1,606 |
Total
shareholders' equity
|
|
|
81,910
|
|
|
|
6,636
|
|
|
|
6,332
|
|
|
|
|
|
6,066
|
|
|
|
|
|
100,944
|
Total
liabilities and shareholders' equity
|
|
$ |
1,280,428
|
|
|
$ |
300,891
|
|
|
$ |
7,455
|
|
|
|
|
$ |
(37,841 |
) |
|
|
|
$ |
1,550,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Unaudited Pro Forma Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUMMIT
AND GREATER ATLANTIC
|
Unaudited
Pro Forma Condensed Combined Consolidated Statement of
Income
|
(dollars
in thousands, except per share
amounts)
|
|
|
Actual
(unaudited)
|
|
|
Pro
Forma
|
|
|
|
Year
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
|
|
|
Atlantic
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
|
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
Group,
Inc.
|
|
|
Corp.
|
|
|
Adjustments
|
|
|
|
|
|
Combined
|
|
Interest
income
|
|
$ |
80,278
|
|
|
$ |
18,794
|
|
|
$ |
(2,225 |
) |
|
|
(8 |
) |
|
$ |
97,897
|
|
|
|
|
|
|
|
|
|
|
|
|
1,050
|
|
|
|
(9 |
) |
|
|
|
|
Interest
expense
|
|
|
44,379
|
|
|
|
11,305
|
|
|
|
(1,692 |
) |
|
|
(8 |
) |
|
|
54,457
|
|
|
|
|
|
|
|
|
|
|
|
|
465
|
|
|
|
(10 |
) |
|
|
|
|
Net
interest income
|
|
|
35,899
|
|
|
|
7,489
|
|
|
|
|
|
|
|
|
|
|
|
43,440
|
|
Provision
for loan losses
|
|
|
1,845
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
1,971
|
|
Net
interest income after
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision
for loan losses
|
|
|
34,054
|
|
|
|
7,363
|
|
|
|
|
|
|
|
|
|
|
|
41,469
|
|
Noninterest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
fees
|
|
|
2,758
|
|
|
|
610
|
|
|
|
(40 |
) |
|
|
(8 |
) |
|
|
3,328
|
|
Other
|
|
|
875
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
904
|
|
Total
noninterest income
|
|
|
3,633
|
|
|
|
639
|
|
|
|
|
|
|
|
|
|
|
|
4,232
|
|
Noninterest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
11,821
|
|
|
|
4,718
|
|
|
|
(256 |
) |
|
|
(8 |
) |
|
|
16,283
|
|
Net
occupancy expense
|
|
|
1,557
|
|
|
|
1,337
|
|
|
|
(102 |
) |
|
|
(8 |
) |
|
|
2,792
|
|
Equipment
expense
|
|
|
1,901
|
|
|
|
554
|
|
|
|
(24 |
) |
|
|
(8 |
) |
|
|
2,431
|
|
Other
|
|
|
6,330
|
|
|
|
4,476
|
|
|
|
(62 |
) |
|
|
(8 |
) |
|
|
11,173
|
|
|
|
|
|
|
|
|
|
|
|
|
429
|
|
|
|
(11 |
) |
|
|
|
|
Total
noninterest expense
|
|
|
21,609
|
|
|
|
11,085
|
|
|
|
|
|
|
|
|
|
|
|
32,679
|
|
Income
(loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before income taxes
|
|
|
16,078
|
|
|
|
(3,083 |
) |
|
|
|
|
|
|
|
|
|
|
13,022
|
|
Income
tax expense
|
|
|
5,018
|
|
|
|
-
|
|
|
|
(1,172 |
) |
|
|
(12 |
) |
|
|
3,856
|
|
|
|
___________
|
|
|
__________
|
|
|
|
10
|
|
|
|
(13 |
) |
|
___________
|
|
Income
(loss) from continuing operations
|
|
$ |
11,060
|
|
|
$ |
(3,083 |
) |
|
$ |
1,189
|
|
|
|
|
|
|
$ |
9,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
continuing operations
|
|
$ |
1.55
|
|
|
$ |
(1.02 |
) |
|
|
|
|
|
|
|
|
|
$ |
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
continuing operations
|
|
$ |
1.54
|
|
|
$ |
(1.02 |
) |
|
|
|
|
|
|
|
|
|
$ |
1.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$ |
0.32
|
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
$ |
0.29
|
|
See
Notes to Unaudited Pro Forma Financial Statements
SUMMIT
AND GREATER ATLANTIC
|
|
Unaudited
Pro Forma Condensed Combined Consolidated Statement of
Income
|
|
(dollars
in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
(unaudited)
|
|
|
Pro
Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
|
|
|
Atlantic
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
|
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
Group,
Inc.
|
|
|
Corp.
|
|
|
Adjustments
|
|
|
|
|
|
Combined
|
|
Interest
income
|
|
$ |
44,211
|
|
|
$ |
9,399
|
|
|
$ |
(1,190 |
) |
|
|
(8 |
) |
|
$ |
52,945
|
|
|
|
|
|
|
|
|
|
|
|
|
525
|
|
|
|
(9 |
) |
|
|
|
|
Interest
expense
|
|
|
25,481
|
|
|
|
5,900
|
|
|
|
(923 |
) |
|
|
(8 |
) |
|
|
30,691
|
|
|
|
|
|
|
|
|
|
|
|
|
233
|
|
|
|
(10 |
) |
|
|
|
|
Net
interest income
|
|
|
18,730
|
|
|
|
3,499
|
|
|
|
|
|
|
|
|
|
|
|
22,254
|
|
Provision
for loan losses
|
|
|
780
|
|
|
|
293
|
|
|
|
|
|
|
|
|
|
|
|
1,073
|
|
Net
interest income after
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision
for loan losses
|
|
|
17,950
|
|
|
|
3,206
|
|
|
|
|
|
|
|
|
|
|
|
21,181
|
|
Noninterest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
fees
|
|
|
1,353
|
|
|
|
307
|
|
|
|
(20 |
) |
|
|
(8 |
) |
|
|
1,640
|
|
Other
|
|
|
400
|
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
378
|
|
Total
noninterest income
|
|
|
1,753
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
2,018
|
|
Noninterest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
6,463
|
|
|
|
2,441
|
|
|
|
(132 |
) |
|
|
(8 |
) |
|
|
8,772
|
|
Net
occupancy expense
|
|
|
826
|
|
|
|
687
|
|
|
|
(53 |
) |
|
|
(8 |
) |
|
|
1,460
|
|
Equipment
expense
|
|
|
940
|
|
|
|
267
|
|
|
|
(9 |
) |
|
|
(8 |
) |
|
|
1,198
|
|
Other
|
|
|
3,139
|
|
|
|
1,812
|
|
|
|
(12 |
) |
|
|
(8 |
) |
|
|
5,154
|
|
|
|
|
|
|
|
|
|
|
|
|
215
|
|
|
|
(11 |
) |
|
|
|
|
Total
noninterest expense
|
|
|
11,368
|
|
|
|
5,207
|
|
|
|
|
|
|
|
|
|
|
|
16,584
|
|
Income
(loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income taxes
|
|
|
8,335
|
|
|
|
(1,716 |
) |
|
|
|
|
|
|
|
|
|
|
6,615
|
|
Income
tax expense
|
|
|
2,421
|
|
|
|
-
|
|
|
|
(652 |
) |
|
|
(12 |
) |
|
|
1,767
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
(13 |
) |
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
5,914
|
|
|
$ |
(1,716 |
) |
|
$ |
650
|
|
|
|
|
|
|
$ |
4,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
continuing operations
|
|
$ |
0.83
|
|
|
$ |
(0.57 |
) |
|
|
|
|
|
|
|
|
|
$ |
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
continuing operations
|
|
$ |
0.83
|
|
|
$ |
(0.57 |
) |
|
|
|
|
|
|
|
|
|
$ |
0.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$ |
0.17
|
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
$ |
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Unaudited Pro Forma Financial Statements
|
|
|
|
|
|
|
|
|
|
SUMMIT
AND GREATER ATLANTIC
|
Notes
to Unaudited Pro Forma Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Effect
of Summit's acquisition of the Kelly Insurance Agency, Inc. and
Kelly
Property & Casualty Inc., two Leesburg, Virginia insurance agencies
(the "Kelly Agencies"). Under the terms of this transaction
which closed on July 2, 2007, Summit acquired all the outstanding
common
stock of the Kelly Agencies in exchange for 317,692 shares of Summit
common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Effect
of sale of Greater Atlantic's Pasadena, Maryland branch bank to
an
unaffiliated depository institution. This transaction closed on
August 24, 2007, and Greater Atlantic realized an after tax net
gain of
$4,223,000 on the sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
Effect
of stock and cash consideration paid by Summit to Greater Atlantic's
shareholders in conjunction with the merger and record cash paid
for its
estimated direct transaction costs. Under the terms of
the Greater Atlantic transaction, subject to adjustment for the
"stock collar", Summit will pay total consideration of $6.00 per
share for
each of the 3,024,220 outstanding common shares of Greater
Atlantic. This consideration will be paid 70% (or $4.20 per
share) in the form of Summit common stock and 30% (or $1.80 per
share) in
cash.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Stock
consideration: Issuance of 639,881 shares of Summit common
stock to Greater Atlantic shareholders assuming Summit's stock
price of
$19.85 per share at June 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
Cash
consideration and direct transaction costs: Cash payments
totalling $5,736,000 representing $5,444,000 in cash consideration
paid to
Greater Atlantic shareholders, $89,000 paid to holders of Greater
Atlantic
stock options in settlement of such options, and $203,000 for Summit's
estimated direct transaction costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
Effect
of Greater Atlantic's estimated direct transaction costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
|
Adjust
acquired assets and liabilities of Greater Atlantic to fair value
and
record related tax effects as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Purchase
price and transaction costs ($18,438) paid by Summit in excess
of Greater
Atlantic's Pro Forma equity at June 30, 2007 ($10,363), adjusted
for the
effect of sale of Pasadena, Maryland branch and direct transaction
costs
paid by Greater Atlantic.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 8,075
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
fair value purchase accounting adjustments:
|
|
|
|
Loans
|
|
|
|
|
$ (2,500)
|
|
|
Borrowings
|
|
|
|
(450)
|
|
|
Core
deposit intangible
|
|
|
3,000
|
|
|
Net
deferred tax liabilities on purchase accounting
adjustments
|
(19)
|
|
|
Tax
benefit of purchased net operating loss carryforwards
|
1,600
|
|
|
|
|
|
|
|
$ 1,631
|
|
(1,631)
|
Purchase
price and transaction costs in excess of fair value of
net assets acquired
|
|
|
|
|
|
|
|
6,444 |
|
|
|
|
|
|
|
|
|
|
|
Estimated
exit and other restructuring costs expected to be incurred in
connection
with acquisition:
|
|
|
|
|
|
|
|
|
|
|
Employee
severance costs
|
|
|
$ 1,100
|
|
|
EDP
contract cancellation costs
|
|
|
615
|
|
|
Early
redemption of Greater Atlantic's existing
|
|
|
|
|
trust
preferred securities
|
|
|
236
|
|
|
Lease
termination costs
|
|
|
858
|
|
|
Net
deferred tax asset on exit and restructuring costs
|
(1,067)
|
|
|
|
|
|
|
|
$ 1,742
|
|
1,742
|
Goodwill
|
|
|
|
|
|
|
$ 8,186
|
SUMMIT
AND GREATER ATLANTIC
|
Notes
to Unaudited Pro Forma Financial Statements -
continued
|
|
|
|
|
|
|
|
|
|
|
(6)
|
Reflect
elimination of Greater Atlantic's equity accounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7)
|
Issuance
of qualifying trust preferred securities prior to acquisition date
of
Greater Atlantic. The proceeds of this issuance will be
utilized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinance
all of Greater Atlantic's existing outstanding convertible trust
preferred
securities and related junior subordinated debt securities
|
|
|
|
|
|
$ 9,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
cash consideration and transaction costs associated with Greater
Atlantic
acquisition
|
6,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
issuance of qualifying trust preferred securities
|
$ 16,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
reductions to interest income, interest expense, non-interest income
and
non-interest expense as result of sale of Greater Atlantic's Pasadena,
Maryland branch bank.
|
(8)
|
|
|
|
|
|
|
|
|
|
|
(9)
|
Other
pro forma adjustments to interest income, as follows:
|
Six
Months
|
Year
|
|
|
|
|
|
|
|
|
Ended
|
Ended
|
|
|
|
|
|
|
|
|
June
30,
|
December
31,
|
|
|
|
|
|
|
|
|
2007
|
2006
|
|
|
|
Estimated
accretion of fair value adjustment to securities over
|
|
|
|
|
|
portfolio's
estimated 3 year average remaining life to maturity
|
$ 212
|
$ 425
|
|
|
|
Estimated
accretion of fair value adjustment to loans over
|
|
|
|
|
|
portfolio's
estimated 4 year average remaining life to maturity
|
313
|
625
|
|
|
|
|
|
|
|
|
$ 525
|
$ 1,050
|
|
(10)
|
Other
proforma adjustments to interest expense, as follows:
|
|
|
|
|
|
|
|
|
|
|
Six
Months
|
Year
|
|
|
|
|
|
|
|
|
Ended
|
Ended
|
|
|
|
|
|
|
|
|
June
30,
|
December
31,
|
|
|
|
|
|
|
|
|
2007
|
2006
|
|
|
|
Estimated
amortization of fair value adjustment to borrowings
|
|
|
|
|
|
over
the estimated 3 year average remaining maturity of the
|
|
|
|
|
|
borrowings
|
|
|
|
$ (75)
|
$ (150)
|
|
|
|
Estimated
interest expense on issuance of $16 million in trust preferred
securities
at 7.75%, less reduction in interest expense as result of refinance
of
Greater Atlantic's existing junior subordinated debt
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
308
|
615
|
|
|
|
|
|
|
|
|
$ 233
|
$ 465
|
|
|
|
|
|
|
|
|
|
|
|
(11)
|
Amortization
of core deposit intangible over estimated 7 year average
life.
|
|
|
|
|
|
|
|
|
|
|
|
|
(12)
|
Tax
benefit, previously unrecognized, of Greater Atlantic's loss from
continuing
|
|
|
|
operations
at a 38% effective tax rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13)
|
Tax
effect of pro forma adjustments at a 38% effective tax
rate.
|
|
|
|
SUMMARY
SELECTED FINANCIAL DATA
The
following table sets forth certain summary historical consolidated financial
information for Summit and Greater Atlantic. The balance sheet data
and income statement data of Summit is as of and for the five years in the
period ended December 31, 2006 and for Greater Atlantic is as of and for the
five years in the period ended September 30, 2006 and are derived from the
audited consolidated financial statements of Summit and Greater Atlantic,
respectively. The balance sheet data and income statement data of
each of Summit and Greater Atlantic for the six and nine months ended June
30,
2007, and June 30, 2006, respectively are derived from the unaudited
consolidated financial statements of Summit and Greater Atlantic,
respectively. You should not rely on the six-month and nine-month
information as being indicative of the results that may be expected for the
entire year or for any future interim period.
The
following information should be read in conjunction with the audited and
unaudited consolidated financial statements and the related notes of
Summit, which are incorporated by reference into this proxy
statement/prospectus, and Greater Atlantic, which are attached to this proxy
statement/prospectus.
SUMMIT
FINANCIAL GROUP, INC.
Summary
Consolidated Financial Data
|
Dollars
in thousands,
except
per share amounts
|
|
Six
months
ended
June
30,
2007
|
|
|
Six
months
ended
June 30,
2006
|
|
|
For
the Year Ended
December
31,
|
|
|
|
|
|
|
2004
|
2003
|
2002
|
|
|
|
|
Summary
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
44,211
|
|
|
$ |
37,320
|
|
|
$ |
80,278
|
|
|
$ |
56,653
|
|
$
45,041
|
$
41,154
|
$40,689
|
Interest
expense
|
|
|
25,481
|
|
|
|
20,061
|
|
|
|
44,379
|
|
|
|
26,503
|
|
18,663
|
17,827
|
18,842
|
Net
interest
income
|
|
|
18,730
|
|
|
|
17,259
|
|
|
|
35,899
|
|
|
|
30,150
|
|
26,378
|
23,327
|
21,847
|
Provision
for loan
losses
|
|
|
780
|
|
|
|
655
|
|
|
|
1,845
|
|
|
|
1,295
|
|
1,050
|
915
|
1,215
|
Net
interest income after
provision for loan losses
|
|
|
17,950
|
|
|
|
16,604
|
|
|
|
34,054
|
|
|
|
28,855
|
|
25,328
|
22,412
|
20,632
|
Noninterest
income
|
|
|
1,753
|
|
|
|
1,201
|
|
|
|
3,634
|
|
|
|
1,605
|
|
3,263
|
3,275
|
1,945
|
Noninterest
expense
|
|
|
11,368
|
|
|
|
11,033
|
|
|
|
21,610
|
|
|
|
19,263
|
|
16,919
|
14,218
|
12,607
|
Income
(loss) before income
taxes
|
|
|
8,335
|
|
|
|
6,772
|
|
|
|
16,078
|
|
|
|
11,197
|
|
11,672
|
11,469
|
9,970
|
Income
tax
expense
|
|
|
2,421
|
|
|
|
2,015
|
|
|
|
5,018
|
|
|
|
3,033
|
|
3,348
|
3,414
|
2,732
|
Income
(loss) from continuing
operations
|
|
|
5,914
|
|
|
|
4,757
|
|
|
|
11,060
|
|
|
|
8,164
|
|
8,324
|
8,055
|
7,238
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exit
costs and impairment
of
long-lived
assets
|
|
|
123
|
|
|
|
-
|
|
|
|
(2,480 |
) |
|
|
-
|
|
-
|
-
|
-
|
Operating
income
(loss)
|
|
|
(598 |
) |
|
|
683
|
|
|
|
(1,750 |
) |
|
|
3,862
|
|
2,913
|
(44)
|
-
|
Income
(loss) from
discontinuedoperations before tax
|
|
|
(475 |
) |
|
|
683
|
|
|
|
(4,230 |
) |
|
|
3,862
|
|
2,913
|
(44)
|
-
|
Income
tax expense
(benefit)
|
|
|
(162 |
) |
|
|
259
|
|
|
|
(1,427 |
) |
|
|
1,339
|
|
1,004
|
(15)
|
-
|
Income
(loss) from
discontinuedoperations
|
|
|
(313 |
) |
|
|
424
|
|
|
|
(2,803 |
) |
|
|
2,523
|
|
1,909
|
(29)
|
-
|
Net
income
|
|
$ |
5,601
|
|
|
$ |
5,181
|
|
|
$ |
8,257
|
|
|
$ |
10,687
|
|
$
10,233
|
$ 8,206
|
$
7,238
|
Balance
Sheet Data (at period end)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
1,280,428
|
|
|
$ |
1,180,590
|
|
|
$ |
1,235,519
|
|
|
$ |
1,110,214
|
|
$889,830
|
$791,577
|
$671,894
|
Securities
|
|
|
259,526
|
|
|
|
238,382
|
|
|
|
247,874
|
|
|
|
223,772
|
|
211,362
|
235,409
|
212,598
|
Loans
|
|
|
949,175
|
|
|
|
866,170
|
|
|
|
916,045
|
|
|
|
793,452
|
|
602,728
|
498,340
|
419,205
|
Deposits
|
|
|
850,389
|
|
|
|
761,563
|
|
|
|
888,688
|
|
|
|
673,887
|
|
524,596
|
511,801
|
458,648
|
Short-term
borrowings
|
|
|
100,901
|
|
|
|
164,185
|
|
|
|
60,428
|
|
|
|
182,028
|
|
120,629
|
49,714
|
20,191
|
Long-term
borrowings
and
subordinated
debentures
|
|
|
236,347
|
|
|
|
169,646
|
|
|
|
195,698
|
|
|
|
172,295
|
|
173,101
|
168,549
|
137,396
|
Shareholders
equity
|
|
|
81,910
|
|
|
|
75,023
|
|
|
|
78,752
|
|
|
|
72,691
|
|
65,150
|
57,005
|
52,080
|
Per
Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings
|
|
$ |
0.83
|
|
|
$ |
0.67
|
|
|
$ |
1.55
|
|
|
$ |
1.15
|
|
$ 1.18
|
$ 1.14
|
$ 1.03
|
Diluted
earnings
|
|
|
0.83
|
|
|
|
0.66
|
|
|
|
1.54
|
|
|
|
1.13
|
|
1.17
|
1.14
|
1.03
|
Earnings
per share – discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings
(loss)
|
|
|
(0.04 |
) |
|
|
0.06
|
|
|
|
(0.39 |
) |
|
|
0.35
|
|
0.27
|
-
|
-
|
Diluted
earnings
(loss)
|
|
|
(0.05 |
) |
|
|
0.06
|
|
|
|
(0.39 |
) |
|
|
0.35
|
|
0.27
|
-
|
-
|
Earnings
per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings
|
|
|
0.79
|
|
|
|
0.73
|
|
|
|
1.16
|
|
|
|
1.51
|
|
1.46
|
1.14
|
1.03
|
Diluted
earnings
|
|
|
0.78
|
|
|
|
0.72
|
|
|
|
1.15
|
|
|
|
1.48
|
|
1.44
|
1.14
|
1.03
|
Shareholders’
equity (at period end)
|
|
|
11.56
|
|
|
|
10.51
|
|
|
|
11.12
|
|
|
|
10.20
|
|
9.25
|
8.12
|
7.43
|
Cash
dividends
|
|
|
0.17
|
|
|
|
0.16
|
|
|
|
0.32
|
|
|
|
0.30
|
|
0.26
|
0.215
|
0.1875
|
Performance
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average
equity
|
|
|
13.45 |
% |
|
|
12.33 |
% |
|
|
10.44 |
% |
|
|
15.09 |
% |
16.60%
|
14.69%
|
15.15%
|
Return
on average
assets
|
|
|
0.89 |
% |
|
|
0.83 |
% |
|
|
0.70 |
% |
|
|
1.10 |
% |
1.22%
|
1.11%
|
1.15%
|
Dividend
payout
|
|
|
21.5 |
% |
|
|
22.0 |
% |
|
|
27.6 |
% |
|
|
20.0 |
% |
17.9%
|
18.8%
|
18.2%
|
Equity
to
assets
|
|
|
6.4 |
% |
|
|
6.4 |
% |
|
|
6.4 |
% |
|
|
6.5 |
% |
7.3%
|
7.2%
|
7.8%
|
GREATER
ATLANTIC FINANCIAL CORP.
Summary
Consolidated Financial Data
|
Dollars
in thousands,
except
per share amounts
|
|
Nine
months
ended
June
30,
2007
|
|
|
Nine
months
ended
June 30,
2006
|
|
|
For
the Year Ended
September
30,
|
|
|
2006
|
|
|
2005
|
2004 |
2003 |
2002
|
|
|
|
|
Summary
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
14,082
|
|
|
$ |
13,943
|
|
|
$ |
18,794
|
|
|
$ |
16,958
|
|
$ 18,085
|
$ 19,361
|
$ 20,538
|
Interest
expense
|
|
|
8,976
|
|
|
|
8,562
|
|
|
|
11,305
|
|
|
|
10,546
|
|
11,970
|
12,277
|
12,933
|
Net
interest
income
|
|
|
5,106
|
|
|
|
5,381
|
|
|
|
7,489
|
|
|
|
6,412
|
|
6,115
|
7,084
|
7,605
|
Provision
for loan
losses
|
|
|
289
|
|
|
|
87
|
|
|
|
126
|
|
|
|
219
|
|
209
|
791
|
832
|
Net
interest income after
provisionfor loan losses
|
|
|
4,817
|
|
|
|
5,294
|
|
|
|
7,363
|
|
|
|
6,193
|
|
5,906
|
6,293
|
6,773
|
Noninterest
income
(loss)
|
|
|
472
|
|
|
|
980
|
|
|
|
639
|
|
|
|
3,173
|
|
547
|
766
|
(2,589)
|
Noninterest
expense
|
|
|
7,514
|
|
|
|
7,869
|
|
|
|
11,085
|
|
|
|
9,889
|
|
10,370
|
10,014
|
8,984
|
Income
(loss) before income
taxes
|
|
|
(2,225 |
) |
|
|
(1,595 |
) |
|
|
(3,083 |
) |
|
|
(523 |
) |
(3,917)
|
(2,955)
|
(4,800)
|
Income
tax
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
-
|
-
|
-
|
Income
(loss) from continuing
operations
|
|
|
(2,225 |
) |
|
|
(1,595 |
) |
|
|
(3,083 |
) |
|
|
(523 |
) |
(3,917)
|
(2,955)
|
(4,800)
|
Discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exit
costs and impairment
of
long-lived
assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
-
|
-
|
-
|
Operating
income
(loss)
|
|
|
-
|
|
|
|
(2,499 |
) |
|
|
(2,488 |
) |
|
|
(1,107 |
) |
428
|
4,898
|
1,968
|
Income
(loss) from
discontinuedoperations before tax
|
|
|
-
|
|
|
|
(2,499 |
) |
|
|
(2,488 |
) |
|
|
(1,107 |
) |
428
|
4,898
|
1,968
|
Income
tax expense
(benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
-
|
-
|
-
|
Income
(loss) from
discontinuedoperations
|
|
|
-
|
|
|
|
(2,499 |
) |
|
|
(2,488 |
) |
|
|
(1,107 |
) |
428
|
4,898
|
1,968
|
Net
income
(loss)
|
|
$ |
(2,225 |
) |
|
$ |
(4,094 |
) |
|
$ |
(5,571 |
) |
|
$ |
(1,630 |
) |
$ (3,489)
|
$ 1,943
|
$ (2,832)
|
Balance
Sheet Data (at period end)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
300,891
|
|
|
$ |
297,412
|
|
|
$ |
305,219
|
|
|
$ |
339,542
|
|
$433,174
|
$ 498,456
|
$ 502,098
|
Securities
|
|
|
58,380
|
|
|
|
90,976
|
|
|
|
80,157
|
|
|
|
115,798
|
|
153,007
|
224,784
|
209,359
|
Loans,
net
|
|
|
179,072
|
|
|
|
188,111
|
|
|
|
193,307
|
|
|
|
194,920
|
|
246,387
|
242,253
|
248,081
|
Deposits
|
|
|
254,397
|
|
|
|
220,227
|
|
|
|
230,174
|
|
|
|
237,794
|
|
288,956
|
297,876
|
281,877
|
Short-term
borrowings
|
|
|
3,649
|
|
|
|
20,769
|
|
|
|
18,574
|
|
|
|
38,479
|
|
64,865
|
77,835
|
91,010
|
Long-term
borrowings
and
subordinated
debentures
|
|
|
34,372
|
|
|
|
45,385
|
|
|
|
45,388
|
|
|
|
47,378
|
|
60,569
|
96,159
|
105,846
|
Shareholders
equity
|
|
|
6,636
|
|
|
|
10,209
|
|
|
|
8,850
|
|
|
|
14,375
|
|
15,944
|
20,442
|
18,483
|
Per
Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share - continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings
(loss)
|
|
$ |
(0.74 |
) |
|
$ |
(0.53 |
) |
|
$ |
(1.02 |
) |
|
$ |
(0.17 |
) |
$ (1.30)
|
$ (0.98)
|
$ (1.59)
|
Diluted
earnings
(loss)
|
|
|
(0.74 |
) |
|
|
(0.53 |
) |
|
|
(1.02 |
) |
|
|
(0.17 |
) |
(1.30)
|
(0.98)
|
(1.59)
|
Earnings
(loss) per share – discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings
(loss)
|
|
|
-
|
|
|
|
(0.83 |
) |
|
|
(0.82 |
) |
|
|
(0.37 |
) |
0.14
|
1.63
|
(0.65)
|
Diluted
earnings
(loss)
|
|
|
-
|
|
|
|
(0.83 |
) |
|
|
(0.82 |
) |
|
|
(0.37 |
) |
0.14
|
1.11
|
(0.65)
|
Earnings
(loss) per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings
(loss)
|
|
|
(0.74 |
) |
|
|
(1.36 |
) |
|
|
(1.84 |
) |
|
|
(0.54 |
) |
(1.16)
|
0.65
|
(0.94)
|
Diluted
earnings
(loss)
|
|
|
(0.74 |
) |
|
|
(1.36 |
) |
|
|
(1.84 |
) |
|
|
(0.54 |
) |
(1.16)
|
0.44
|
(0.94)
|
Shareholders’
equity (at period end)
|
|
|
2.19
|
|
|
|
3.38
|
|
|
|
2.93
|
|
|
|
4.76
|
|
5.29
|
6.79
|
6.14
|
Cash
dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
-
|
-
|
-
|
Performance
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average
equity
|
|
|
(37.53 |
%) |
|
|
(39.46 |
%) |
|
|
(45.80 |
%) |
|
|
(11.79 |
%) |
(22.90%)
|
12.83%
|
(15.61%)
|
Return
on average
assets
|
|
|
(1.03 |
%) |
|
|
(1.70 |
%) |
|
|
(1.77 |
%) |
|
|
(0.44 |
%) |
(0.69%)
|
0.41%
|
(0.67%)
|
Dividend
payout
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
0.0%
|
0.0%
|
0.0%
|
Equity
to
assets
|
|
|
2.2 |
% |
|
|
3.4 |
% |
|
|
2.9 |
% |
|
|
4.2 |
% |
3.7%
|
4.1%
|
3.7%
|
|
INFORMATION
ABOUT THE MEETING AND
VOTING
|
General
This
section contains information about the Greater Atlantic special shareholder
meeting that has been called to vote upon the matters described
below. We expect to mail this proxy statement/prospectus to you, as a
Greater Atlantic shareholder, on or about ____________, 2007.
In
this
proxy statement/prospectus, we refer to the Agreement and Plan of Reorganization
dated as of April 12, 2007, among Summit and Greater Atlantic as the merger
agreement. Proxies may be voted on other matters that may properly
come before the Greater Atlantic meeting, if any, at the discretion of the
proxy
holders. Greater Atlantic’s board knows of no such other matters
except those incidental to the conduct of the meeting. A copy of the
merger agreement is attached as Annex A.
Matters
Relating to the Special Meeting of Greater Atlantic’s
Stockholders
Time
and
Place: _______________,
2007
______
a.m., Eastern Time
_____________________
_____________________
___________,
Virginia
________
|
Purpose of Meeting:
|
To
vote on the proposed merger of Greater Atlantic and Summit pursuant
to
which Greater Atlantic will merger with a wholly-owned subsidiary
of
Summit formed for the merger.
|
|
To
vote on the proposal to adjourn the meeting to a later date, if necessary,
to permit further solicitation of proxies in the event there are
not
sufficient votes at the time of the meeting to approve the matters
to be
considered by the shareholders at the
meeting.
|
Proxies
The
accompanying form of proxy is for use at the special meeting if you are unable
or do not desire to attend in person. You may attend the meeting even
if you have previously delivered a proxy to us. You can revoke your
proxy at any time before the vote is taken at the special meeting by submitting
to the Greater Atlantic corporate secretary written notice of revocation or
a
properly executed proxy of a later date, or by attending the special meeting
and
voting in person. Written notices of revocation and other
communications about revoking your proxy should be addressed to:
Greater
Atlantic Financial
Corp.
10700
Parkridge Boulevard, Suite P50
Reston,
Virginia 20191
Attention: Edward
C.
Allen
Telephone: (703)
391-1300
All
shares represented by valid proxies that we receive through this solicitation,
and not revoked before they are exercised, will be voted in the manner specified
in such proxies. If you make no specification on your returned proxy
card, your proxy will be voted “FOR” the matters to be
considered at the special meeting as described above.
Solicitation
of Proxies
Greater
Atlantic will bear the entire cost of soliciting proxies from you, except that
Summit has agreed to pay the cost of the preparation and filing of this proxy
statement/prospectus and other fees relating to the merger paid to the
Securities and Exchange Commission. In addition to solicitation of
proxies by mail, we will request banks, brokers and other record holders to
send
proxies and proxy material to the beneficial owners of the stock and secure
their voting instructions, if necessary. Greater Atlantic will
reimburse those record holders for their reasonable expenses in taking those
actions. If necessary, we also may use several of our regular
employees, who will not be specially compensated, to solicit proxies from our
shareholders, either personally or by telephone, the Internet, fax, letter
or
special delivery letter. Finally, Greater Atlantic has retained a
professional proxy solicitation firm, Georgeson Inc., to assist in soliciting
proxies. We will pay a fee in the amount of $5,500 to Georgeson Inc.
for its services, and we will also reimburse them for all costs and expenses,
which we expect to be approximately $____________, in connection with this
solicitation.
Record
Date and Voting Rights
In
accordance with Delaware law and Greater Atlantic’s certificate of incorporation
and bylaws, we have fixed ___________, 2007 as the record date for determining
the shareholders entitled to notice of and to vote at the special
meeting. Accordingly, you are only entitled to notice of, and to vote
at, the special meeting if you were a record holder of Greater Atlantic common
stock at the close of business on the record date. At that time,
___________ shares of Greater Atlantic common stock were outstanding, held
by
__________ holders of record. To have a quorum that permits us to
conduct business at the special meeting, we require the presence, whether in
person or through the prior submission of a proxy, of the holders of Greater
Atlantic common stock representing a majority of the shares outstanding and
entitled to vote on the record date. You are entitled to one vote for
each outstanding share of Greater Atlantic common stock you held as of the
close
of business on the record date.
Holders
of shares of Greater Atlantic common stock present in person at the special
meeting but not voting, and shares of Greater Atlantic common stock for which
we
have received proxies indicating that their holders have abstained, will be
counted as present at the special meeting for purposes of determining whether
we
have a quorum for transacting business. Shares held in street name
that have been designated by brokers on proxy cards as not voted will not be
counted as votes cast for or against any proposal. These broker
non-votes, however, will be counted for purposes of determining whether a quorum
exists.
Vote
Required
The
approval of the merger agreement and the transactions contemplated thereby
requires the affirmative vote of the holders of a majority of Greater Atlantic’s
outstanding shares entitled to vote at the special meeting.
Because
approval of the merger agreement and the transactions contemplated thereby
require the affirmative vote of the holders of a majority of the outstanding
shares of Greater Atlantic common stock entitled to vote at the special meeting,
abstentions and broker non-votes will have the same effect as votes
against these matters. Accordingly, the Greater Atlantic
board of directors urges you to complete, date and sign the accompanying proxy
and return it promptly in the enclosed, postage-paid
envelope.
As
of the
record date, directors and executive officers, and their affiliates, of Greater
Atlantic beneficially owned approximately _________ shares of Greater Atlantic
common stock, entitling them to exercise approximately ______% of the voting
power of the Greater Atlantic common stock entitled to vote at the special
meeting. Each director and executive officer of Greater
Atlantic intends to vote
each
share of Greater Atlantic common stock that he owns
“FOR” approval and adoption of the
merger agreement and the transactions contemplated
thereby.
Recommendation
of the Greater Atlantic Board of Directors
The
Greater Atlantic board of directors has approved the merger agreement and the
transactions contemplated thereby, including the merger. The Greater
Atlantic board believes that the merger agreement and the transactions
contemplated thereby, including the merger, are advisable, and are in the best
interests of, Greater Atlantic and its shareholders and unanimously recommends
that shareholders vote “FOR” approval of the merger
agreement and the transactions contemplated thereby.
Appraisal
Rights for Greater Atlantic Stockholders
If
the
merger agreement is approved and adopted by the Greater Atlantic stockholders,
holders of Greater Atlantic common stock who delivered a written demand for
appraisal to Greater Atlantic prior to the vote on the merger agreement at
Greater Atlantic’s special meeting and did not vote in favor of the approval and
adoption of the merger agreement will be entitled to receive the fair value
of
their shares under Section 262 of the Delaware General Corporation
Law. The text of this law is attached to this proxy
statement/prospectus as Annex B.
THE
MERGER
This
summary of the material terms and provisions of the merger agreement is
qualified in its entirety by reference to such document. The merger
agreement is attached as Annex A to this proxy
statement/prospectus. We incorporate this document into this
summary by reference.
Merger
Subject
to satisfaction or waiver of all conditions in the merger agreement, Greater
Atlantic will merge with and into SFG II, Inc., a wholly-owned subsidiary of
Summit. Upon completion of the merger, Greater Atlantic’s corporate
existence will terminate and SFG II, Inc. will continue as the surviving
corporation.
Merger
Consideration
In
the
merger, you will receive a combination of cash and shares of Summit common
stock
for each share of Greater Atlantic common stock that you own, subject to a
“stock collar” limiting the maximum and minimum number of shares Summit will
issue. The stock collar is described more fully
below. Subject to the stock collar, the total consideration for your
Greater Atlantic stock will be paid 70% in the form of Summit common stock
and
30% in cash, with each share of Greater Atlantic common stock exchanged for
shares of Summit common stock valued at $4.20 and $1.80 in cash.
The
number of shares of Summit common stock that you will receive for each share
of
Greater Atlantic common stock you own will be determined by the exchange ratio
at closing. At the closing, we will determine the exchange ratio by
dividing $4.20 by the average closing price of Summit common stock reported
on
NASDAQ for the twenty (20) trading days prior to closing (the “Average Closing
Price”). The exchange ratio is subject to a stock collar, which sets the maximum
and minimum numbers of shares that Summit will issue. If the Average
Closing Price of Summit common stock is less than $17.82, the exchange ratio
will be calculated by dividing $4.20 by $17.82. If the Average
Closing Price is greater than $24.10, the exchange ratio will be calculated
by
dividing $4.20 by $24.10. Thus, for each share of Greater Atlantic common stock
that you own, you will receive $1.80 in cash and at least 0.1743 shares of
Summit common stock, but no more than 0.2357 shares of Summit common
stock. Cash will be paid instead of issuing fractional shares of
Summit common stock.
The
following chart provides examples of the value of the transaction to
shareholders of Greater Atlantic at selected Average Closing Prices of Summit
common stock.
SMMF
|
|
Exchange
|
|
Value
to GAFC Shareholders
|
|
Deal
Value
|
Stock
Price
|
|
Ratio
|
|
Stock
($)
|
Cash
($)
|
|
Per
Share
|
$28.75
|
|
0.1743
|
|
$5.01
|
$1.80
|
|
$6.81
|
$26.50
|
|
0.1743
|
|
$4.62
|
$1.80
|
|
$6.42
|
$25.00
|
|
0.1743
|
|
$4.36
|
$1.80
|
|
$6.16
|
$24.10
|
|
0.1743
|
|
$4.20
|
$1.80
|
|
$6.00
|
$24.00
|
|
0.1750
|
|
$4.20
|
$1.80
|
|
$6.00
|
$23.25
|
|
0.1806
|
|
$4.20
|
$1.80
|
|
$6.00
|
$22.50
|
|
0.1867
|
|
$4.20
|
$1.80
|
|
$6.00
|
$21.75
|
|
0.1931
|
|
$4.20
|
$1.80
|
|
$6.00
|
$21.00
|
|
0.2000
|
|
$4.20
|
$1.80
|
|
$6.00
|
$20.25
|
|
0.2074
|
|
$4.20
|
$1.80
|
|
$6.00
|
$19.50
|
|
0.2154
|
|
$4.20
|
$1.80
|
|
$6.00
|
$18.75
|
|
0.2240
|
|
$4.20
|
$1.80
|
|
$6.00
|
$18.00
|
|
0.2333
|
|
$4.20
|
$1.80
|
|
$6.00
|
$17.82
|
|
0.2357
|
|
$4.20
|
$1.80
|
|
$6.00
|
$16.75
|
|
0.2357
|
|
$3.95
|
$1.80
|
|
$5.75
|
$15.25
|
|
0.2357
|
|
$3.59
|
$1.80
|
|
$5.39
|
$13.75
|
|
0.2357
|
|
$3.24
|
$1.80
|
|
$5.04
|
$12.25
|
|
0.2357
|
|
$2.89
|
$1.80
|
|
$4.69
|
$10.75
|
|
0.2357
|
|
$2.53
|
$1.80
|
|
$4.33
|
The
amount and nature of the merger consideration was established through
arm’s-length negotiations between Summit and Greater Atlantic and their
respective advisors, and reflects the balancing of a number of countervailing
factors. The total amount of the merger consideration reflects a
price both parties concluded was appropriate. See “– Background of
the Merger; Board Recommendations and Reasons for the Merger” beginning on
page ____ and “– Summit’s Reasons for the Merger” beginning on page
______. The parties have structured the merger, in part, to have the
favorable tax attributes of a “reorganization” for federal income tax
purposes. See “– Certain Federal Income Tax Consequences of the
Merger” beginning on page ____.
We
cannot assure you that the current fair market value of Summit or Greater
Atlantic common stock will be equivalent to the fair market value of Summit
or
Greater Atlantic common stock on the effective date of the
merger.
Surrender
of Stock Certificates
Registrar
and Transfer Company will act as exchange agent in the merger and in that role
will process the exchange of Greater Atlantic stock certificates for cash and
Summit common stock. Within five (5) business days after completion
of the merger, the exchange agent will mail to each Greater Atlantic shareholder
of record a letter of transmittal and instructions for use in effecting the
surrender of their Greater Atlantic common stock for Summit common stock, if
any, that the holders of the Greater Atlantic common stock are entitled to
receive, and the cash, if any, that the holders of the Greater Atlantic common
stock are entitled to receive, any cash in lieu of fractional shares and any
payment equal to any dividend or other distribution with respect to Summit
common stock with a record date prior to the effective time of the
merger.
After
the
effective time of the merger, each certificate formerly representing Greater
Atlantic common stock, until so surrendered and exchanged, will evidence only
the right to receive the cash and the number of whole shares of Summit common
stock that the holder is entitled to receive in the merger, any cash payment
in
lieu of a fractional share of Summit common stock and any dividend or
other
distribution
with respect to Summit common stock with a record date prior to the effective
time of the merger. The holder of such unexchanged certificate will
not be entitled to receive any dividends or distributions payable by Summit
until the certificate has been exchanged. Subject to applicable laws,
following surrender of such certificates, such dividends and distributions,
together with any cash payment in lieu of a fractional share of Summit common
stock, will be paid without interest.
After
the
completion of the merger, there will be no further transfers of Greater Atlantic
common stock. Greater Atlantic stock certificates presented for
transfer after the completion of the merger will be canceled and exchanged
for
the merger consideration.
If
your
Greater Atlantic stock certificates have been either lost, stolen or destroyed,
you will have to prove your ownership of these certificates and that they were
lost, stolen or destroyed before you receive any consideration for your
shares. Upon request, our exchange agent, Registrar and Transfer
Company, will send you instructions on how to provide evidence of
ownership.
No
Fractional Shares
Each
holder of shares of common stock exchanged pursuant to the merger who would
otherwise have been entitled to receive a fraction of a share of Summit common
stock shall receive, in lieu thereof, cash (without interest) in an amount
equal
to the product of (i) such fractional part of a share of Summit common stock
multiplied by (ii) the closing price for a share of Summit common stock on
the
NASDAQ Capital Market on the effective date of the merger.
Treatment
of Greater Atlantic Stock Options and Warrants
At
the effective time, each outstanding
and unexercised option and warrant granted by Greater Atlantic to purchase
shares of Greater Atlantic common stock shall vest and holders of such options
and warrants shall be entitled to receive cash in an amount equal to the
difference between the value of (a) the merger consideration and (b) the
applicable exercise price (rounded to the nearest cent) for each outstanding
option and warrant granted by Greater Atlantic to purchase shares of Greater
Atlantic common stock. At the effective time, Summit shall have no
obligation to make any additional grants or awards under the Greater Atlantic
stock plans or warrants.
Dissenters’
or Appraisal Rights
Under
the
Delaware General Corporation Law (DGCL), Greater Atlantic stockholders may
object to the merger and demand in writing to be paid the fair value of their
shares. Determination of fair value is based on all relevant factors,
but excludes any appreciation or depreciation resulting from the accomplishment
or expectation of the merger. Stockholders who elect to exercise
appraisal rights must comply with all of the procedures of Section 262 of the
DGCL to preserve those rights. A copy of Section 262 is attached as
Annex B to this proxy statement/prospectus.
Section
262 sets forth the procedures to be followed by a stockholder electing to demand
appraisal of his or her shares. These
procedures are complicated and must be followed strictly. Failure to
comply with these procedures may cause you to lose your appraisal
rights. The following information is only a brief summary of the
required procedures under Delaware law and is qualified in its entirety by
the
provisions of Section 262.
Under
Section 262, Greater Atlantic is required to notify stockholders not less than
20 days before the special meeting to vote on the merger that appraisal rights
will be available. A copy of Section 262 must be included with that
notice. This proxy statement/prospectus constitutes Greater
Atlantic's notice to its stockholders of the availability of appraisal rights
in
connection with the merger in compliance with the requirements of Section
262. If you wish to consider exercising your appraisal
rights,
you should carefully review the text of Section 262 contained in Annex
B. If you fail to timely and properly comply with the
requirements of Section 262, your appraisal rights under Delaware law may be
lost.
Please
review Section 262 for the complete procedures. Neither Summit nor
Greater Atlantic will give you any notice of your appraisal rights other than
as
described in this proxy statement/prospectus and as required by the
DGCL.
General
Requirements
If
you
want to object to the merger and be paid the full value of your shares in cash,
Section 262 generally requires you to take the following actions:
|
•
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You
must deliver a written demand for appraisal to Greater Atlantic before
the
vote is taken on the merger agreement at Greater Atlantic's special
meeting. This written demand for appraisal must be in addition
to and separate from any proxy or vote against the merger
agreement. Merely voting against, abstaining from voting or
failing to vote in favor of adoption of the merger agreement will
not
constitute a demand for appraisal within the meaning of Section
262. See "Requirements for Written Demand for Appraisal" below
for more details on making a demand for
appraisal.
|
|
•
|
You
must not vote in favor of approval and adoption of the merger
agreement. A failure to vote will satisfy this requirement, but
a vote in favor of the merger agreement will constitute a waiver
of your
right of appraisal. Accordingly, if you want to maintain your
appraisal rights you must either check the "Against" box or the "Abstain"
box on the proxy card or refrain from executing and returning the
enclosed
proxy card.
|
|
•
|
You
must continuously hold your shares of Greater Atlantic stock from
the date
you make the demand for appraisal through the effective date of the
merger.
|
Requirements
for Written Demand for Appraisal
A
written
demand for appraisal of Greater Atlantic stock is only effective if it is signed
by, or for, the stockholder of record who owns the shares at the time the demand
is made. The demand must be signed as the stockholder's name appears
on its Greater Atlantic stock certificate(s). If you are a beneficial
owner of Greater Atlantic stock but not a stockholder of record, you must have
the stockholder of record for your shares sign a demand for appraisal on your
behalf.
If
you
own Greater Atlantic stock in a fiduciary capacity, such as a trustee, guardian
or custodian, you must disclose the fact that you are signing the demand for
appraisal in that capacity.
If
you
own Greater Atlantic stock with one or more other persons, such as in a joint
tenancy or tenancy in common, all of the owners must sign, or have signed for
them, the demand for appraisal. An authorized agent, which could
include one or more of the owners, may sign the demand for appraisal for a
stockholder of record; however, the agent must expressly disclose who the
stockholder of record is and that he or she is signing the demand as that
stockholder's agent.
If
you
are a record owner, such as a broker, who holds Greater Atlantic stock as a
nominee for others, you may exercise a right of appraisal with respect to the
shares held for one or more beneficial owners, while not exercising that right
for other beneficial owners. In such a case, you should specify in
the written demand the number of shares as to which you wish to demand
appraisal. If you do not specify the number of shares, it will be
assumed that your written demand covers all the shares of Greater Atlantic
stock
that are in your name.
Greater
Atlantic stockholders who wish to exercise their appraisal rights should address
written demands to:
Greater
Atlantic Financial Corp.
10700
Parkridge Boulevard
Suite
P50
Reston,
Virginia 20191
Attention:
Corporate Secretary
Greater
Atlantic must receive all written demands for appraisal before the vote
concerning the merger agreement is taken. As explained above, this
written demand should be signed by, or on behalf of, the stockholder of
record. The written demand for appraisal should specify the
stockholder's name and mailing address, the number of shares of stock owned,
and
that the stockholder is thereby demanding appraisal of such stockholder's
shares.
Written
Notice
Within
10
days after the effective date of the merger, Summit, as the surviving
corporation in the merger, must give written notice that the merger has become
effective to each Greater Atlantic stockholder who has properly sent a written
demand for appraisal and who did not vote in favor of the
merger. Except as required by law, Summit will not notify
stockholders of any dates by which appraisal rights must be
exercised.
Petition
With Chancery Court
Within
120 days after the effective date of the merger, either Summit or any
stockholder who has complied with the requirements of Section 262(a) and (d)
may
file a petition in the Delaware Court of Chancery demanding a determination
of
the value of the shares of all stockholders entitled to
appraisal. Summit does not presently intend to file a petition, and
if you seek to exercise appraisal rights you should not assume that Summit
will
file a petition or that Summit will initiate any negotiations with respect
to
the fair value of your shares. If you are a Greater Atlantic
stockholder and want to have your Greater Atlantic shares appraised you should
be prepared to initiate any petitions necessary for the perfection of your
appraisal rights within the time period and in the manner prescribed in Section
262. Since Summit has no obligation to file a petition, your failure
to file a petition within the period specified could result in the loss of
your
appraisal rights.
Withdrawal
of Demand
If
you
change your mind and decide you no longer want an appraisal, you may withdraw
your demand for appraisal at any time within 60 days after the effective date
of
the merger. If you withdraw your demand for appraisal, your appraisal
rights will be terminated and you will receive the merger consideration provided
in the merger agreement.
Request
for Appraisal Rights Statement
If
you
have complied with the conditions of Section 262, you are entitled, upon written
request, to receive from Summit a statement setting forth the aggregate number
of shares for which appraisal rights have been properly exercised and the
aggregate number of holders of such shares. Summit must mail this
statement to you within 10 days after receiving your written
request. In order to receive this statement, you must send your
request within 120 days after the effective date of the merger to Summit at
the
following address:
Summit
Financial Group,
Inc.
300 North Main Street
Moorefield, West Virginia 26836
Attention: H. Charles Maddy, III
Chancery
Court Procedures
If
you
properly file a petition for appraisal in the Court and deliver a copy of such
petition to Summit, Summit will then have 20 days to provide the Court with
a
list of the names and addresses of all the stockholders who have demanded
payment for their shares and have not reached an agreement with Summit as to
the
value of their shares. If the Court decides it is appropriate, it has
the power to conduct a hearing to determine which stockholders have complied
with Section 262 and have become entitled to appraisal. The Register
in Chancery, if ordered to do so by the Court, will then send notice of the
time
and place of the hearing on the petition to all the stockholders who have
demanded appraisal. The Court may also require you to submit your
stock certificates to the Register in Chancery so that it can note on the
certificates that an appraisal proceeding is pending. If you do not
follow the Court's directions, you may be dismissed from the
proceeding.
Chancery
Court Appraisal of Greater Atlantic Shares
After
the
Court determines which stockholders are entitled to an appraisal, the Court
will
appraise the shares, determining their fair value by considering all relevant
factors except for any appreciation or depreciation resulting from the
accomplishment or expectation of the merger, together with a fair rate of
interest, if the payment of interest is deemed appropriate by the
Court. After the Court determines the fair value of the shares, it
will direct Summit to pay that value to the stockholders who are entitled to
such payment. In order to receive the fair value for your shares, you
must surrender your stock certificates.
The
Court
could determine that the fair value of shares of Greater Atlantic stock is
more
than, the same as, or less than the merger consideration. In other
words, if you demand appraisal rights, you could receive less consideration
that
you would under the merger agreement.
Costs
and Expenses of Appraisal Proceeding
The
costs
of the appraisal proceeding may be determined by the Court and assessed against
the parties as the Court deems equitable under the
circumstances. Upon application of a stockholder, the Court may also
order that all or a portion of the expenses incurred by any stockholder in
connection with the appraisal proceeding, including reasonable attorneys' fees
and the fees and expenses of experts, be charged pro rata against the value
of
all the shares entitled to an appraisal.
Loss
of Stockholders' Rights
If
you
demand appraisal, after the effective date of the merger you will not be
entitled to:
• vote
your shares of stock, for any purpose, for which you have demanded
appraisal;
|
•
|
receive
payment of dividends or other distributions with respect to your
shares,
except for dividends or distributions, if any, that are payable to
the
holders of record as of a record date before the effective date of
the
merger; or
|
• receive
the payment of the consideration provided for in the merger
agreement.
However,
you can regain these rights if no petition for an appraisal is filed within
120
days after the effective date of the merger, or if you deliver to Summit a
written withdrawal of your demand for an appraisal and your acceptance of the
merger, either within 60 days after the effective date of the merger
or
with
the written consent of Summit. As explained above, these actions will
also terminate your appraisal rights. However, an appraisal
proceeding in the Court cannot be dismissed without the Court's
approval. The Court may condition its approval upon any terms that it
deems just.
If
you fail to comply strictly with these procedures you will lose your appraisal
rights. Consequently, if you wish to exercise your appraisal rights,
you are strongly urged to consult a legal advisor before attempting to exercise
your appraisal rights.
Periodically,
the management of Greater Atlantic has evaluated Greater Atlantic’s strategic
options, including continuing to operate as an independent entity. At
the time of the most recent strategic evaluation in early 2006, Greater Atlantic
had not achieved consistent profitable earnings, sustaining losses in fiscal
years 2002, 2004 and 2005, and had continued to suffer losses in the first
quarter of fiscal year 2006. This inability to achieve consistent
profitability and its potential implications for Greater Atlantic’s financial
condition has been and continues to be an item of supervisory note by the Office
of Thrift Supervision, Greater Atlantic’s primary regulator.
At
a
meeting of the Board of Directors on September 28, 2005, the Board of Directors
authorized Charles W. Calomiris, Greater Atlantic’s Chairman of the Board, to
select and engage a qualified financial advisory firm to assist the Board of
Directors in its strategic planning process. Subsequently, the
Chairman of the Board, together with Carroll E. Amos, Greater Atlantic’s
President and Chief Executive Officer, met with representatives of financial
advisory firms, including with representatives of Sandler O’Neill &
Partners, L.P. (“Sandler O’Neill”). On January 30, 2006, Greater
Atlantic engaged Sandler O’Neill to serve as independent financial advisor to
the Board of Directors in connection with Greater Atlantic’s review of its
strategic options and to provide merger and acquisition analyses in connection
with a potential business combination transaction.
At
a
meeting on March 8, 2006, the Board of Directors met with representatives of
Sandler O’Neill who made a presentation to the Board of Directors regarding
strategic options available to Greater Atlantic. The discussion
focused on the merits of engaging in a potential business combination
transaction (either a whole-bank merger or acquisition or sale of one or more
branch offices) versus remaining independent. In discussing those
options, the Board of Directors noted and assessed the various perceived risks,
including the perceived supervisory risk associated with remaining independent
given Greater Atlantic’s recent operating history. Sandler O’Neill’s
presentation also included an overview of the current merger and acquisitions
environment. The representatives of Sandler O’Neill presented a
listing of recent thrift merger and acquisition transactions with
characteristics that would be comparable to a potential transaction involving
Greater Atlantic, branch sales in the immediate and adjoining markets, a list
of
potential acquirers, an overview of the equity market for bank and thrift stocks
and comparable group analyses on both nationwide and regional
bases. At the conclusion of the discussion, the Board of Directors
directed the Executive Committee of the Board of Directors, in consultation
with
Greater Atlantic Financial Corp.’s financial and legal advisors, to take all
necessary and appropriate action to conduct a process to determine what, if
any,
level of interest other parties might have in engaging in a potential business
combination transaction with Greater Atlantic.
On
March
29, 2006, Sandler O’Neill identified for Greater Atlantic 69 parties Sandler
O’Neill believed might have an interest in exploring a potential business
combination with Greater Atlantic. Over approximately the next month,
Sandler O’Neill, in consultation with Greater Atlantic’s senior management and
legal counsel, prepared a Confidential Information Memorandum containing
financial and other information regarding Greater Atlantic for distribution
to
interested parties following their execution of confidentiality
agreements. The Confidential Offering Memorandum provided
instructions for interested parties to submit, by June 9, 2006, written
indications of interest for a whole-bank transaction, a branch purchase
transaction or an equity investment.
During
April and May 2006, 16 interested parties executed confidentiality agreements
and thereafter received a Confidential Offering Memorandum, including Summit
which executed a confidentiality agreement dated April 25, 2006.
On
June
22, 2006, the Board of Directors met, together with representatives of Sandler
O’Neill and with representatives of legal counsel, to consider the 16
indications of interest that had been received: three for a
whole-bank transaction, 12 for a branch acquisition and one for an equity
investment. The representatives of Sandler O’Neill reviewed and
discussed the financial terms of each indication of interest with the Board
of
Directors.
The
whole-bank indications of interest varied with Party “A” indicating a proposed
transaction value of approximately $12.2 million, and Party “B” and Summit each
indicating a proposed transaction value of approximately $18.2 million, or
$6.00
per share. Parties “A” and “B” proposed all-cash transactions, and
Summit proposed a stock/cash transaction. Summit’s indication of
interest, however, was conditioned on Greater Atlantic Bank selling its branch
office in Pasadena, Maryland, before the closing of the proposed
transaction. Summit’s indication of interest, coupled with the sale
of the Pasadena branch office to Bay-Vanguard Federal Savings Bank, which
indicated the highest deposit premium for that branch (9.5%), would result
in an
aggregate indicated value of approximately $23.2 million, or $7.67 per share,
compared to approximately $18.2 million, or $6.00 per share, indicated by Party
“B” and approximately $12.2 million, or $4.03 per share, indicated by Party
“A”. During its discussion, the Board of Directors noted that
engaging in a proposed transaction with Summit would require separate
applications for regulatory approval and incur additional cost and possibly
a
longer approval process because it would entail the separate sale of the
Pasadena branch office. The representatives of Sandler O’Neill then
presented the Board with financial profiles, comparable peer analyses and
background on the three interested parties.
Following
the review of the whole-bank indications of interest, the Board reviewed and
discussed the indications of interest for the separate branch sales, noting
that
Greater Atlantic had received indications of interest providing for deposit
premiums ranging from 5.0% to 9.5%, with both the high and the low being for
the
Pasadena branch office. The representatives of Sandler O’Neill noted
that the median deposit premium for recently announced branch sales ranged
from
4.5% to 8.1%. The highest indication of interest for the Pasadena
branch office, at a 9.5% deposit premium, was submitted by Bay-Vanguard Federal
Savings Bank.
The
Board
of Directors then turned to the indication of interest submitted by the private
equity investor. The Board of Directors noted that while five private
equity investors had expressed interest when initially contacted by Sandler
O’Neill, and four had executed confidentiality agreements and received a
Confidential Offering Memorandum, only one of the private equity investors
submitted a written indication of interest. The indication of
interest received from the private equity investor proposed the sale of two
branch offices of Greater Atlantic Bank, a substantial loan sale, a capital
investment of approximately $7.5 million and a consulting contract for the
private equity group. In addition, the indication of interest provided that
Greater Atlantic negotiate exclusively with the private equity investor for
four
weeks toward a definitive agreement. Given the whole-bank indications
of interest that had been received, the Board of Directors determined not to
give exclusivity to any interested party at this time.
Following
further discussion, the Board of Directors authorized Sandler O’Neill to contact
each of the parties that had submitted a whole-bank indication of interest
and
communicate to them Greater Atlantic’s interest in pursuing a proposed
transaction and to contact both Summit and Bay-Vanguard Federal Savings Bank
to
invite them to commence their respective due diligence reviews. The
Board of Directors
also authorized Sandler O’Neill to contact Party “B” and invite it to commence
its due diligence review as soon as Summit and Bay-Vanguard Federal Savings
Bank
had completed their reviews.
On
June
22, 2006, Mr. Amos, Edward C. Allen, Chief Operating Officer of Greater Atlantic
Bank, and David E. Ritter, Greater Atlantic’s Senior Vice President and Chief
Financial Officer, met with H. Charles Maddy, III, Summit’s President and Chief
Executive Officer, and Robert S. Tissue, Summit’s Senior Vice President and
Chief Financial Officer, to discuss Summit’s indication of
interest.
On
June
26, 2006, Summit began its due diligence review of Greater Atlantic at the
main
offices of Greater Atlantic.
On
June
30, 2006, Bay-Vanguard Federal Savings Bank began its due diligence review
of
the Pasadena branch office. Also, on that date, Summit advised
Sandler O’Neill that its Board of Directors had authorized management to proceed
with negotiations toward a definitive agreement with Greater Atlantic, subject
to completion of its due diligence review.
On
August
10, 2006, Greater Atlantic announced publicly that it was investigating an
unreconciled inter-company account between Greater Atlantic Bank and Greater
Atlantic Mortgage Corporation, Greater Atlantic Bank’s wholly-owned mortgage
banking subsidiary that had terminated operations earlier in the
year.
On
September 8, 2006, Greater Atlantic announced publicly that the former
management company of Greater Atlantic Mortgage Corporation and its principal
had initiated arbitration proceedings against Greater Atlantic, Greater Atlantic
Bank and Mr. Amos.
On
September 26, 2006, Greater Atlantic received from Party “C” an unsolicited
indication of interest to purchase the Rockville, Maryland, and South Riding,
Virginia, branch offices of Greater Atlantic Bank for a 4% deposit
premium.
Following
the public announcements of the internal accounting issue and the commencement
of the arbitration proceeding, various interested parties, including Summit,
informed Greater Atlantic that these outstanding issues would have to be
resolved before they could complete their due diligence review of Greater
Atlantic and confirm their continued interest in pursuing a proposed
transaction. In an effort to continue the process, on October 4,
2006, Greater Atlantic authorized Sandler O’Neill to contact Summit and the
other parties that expressed interest in pursuing a whole-bank transaction
to
determine whether they would be interested in pursuing a purchase and assumption
transaction, which would permit them to acquire all of Greater Atlantic’s assets
and liabilities other than the liabilities associated with the internal
accounting issue and the arbitration proceeding.
On
December 7, 2006, Greater Atlantic Financial Corp. was advised of the interest
of Party “D” in acquiring Greater Atlantic Financial Corp. Party “D”
provided a confidentiality agreement and information concerning itself on
December 7, 2006. Subsequently, on February 8, 2007, Party
“D” submitted an indication of interest providing for an all-cash transaction
ranging from $15 million to $20 million, or an indicated range of $5.00 to
$6.67
per share, subject to, among other things, settlement of the outstanding
arbitration and due diligence.
On
January 11, 2007, Greater Atlantic received an indication of interest letter
from Summit proposing a purchase and assumption transaction.
On
January 16, 2007, the Board of Directors held a special meeting. A
representative of Sandler O’Neill analyzed the financial terms of Summit’s
purchase and assumption proposal as compared to the branch purchase indications
of interest with the highest deposit premiums. The Board of Directors
noted that Greater Atlantic would lose the tax benefit of its net operating
loss
carryforwards in a purchase and assumption transaction but would preserve it
in
a whole-bank merger or acquisition transaction. Valuing the deferred
tax asset at approximately $1.98 million for purposes of evaluating a proposed
purchase and assumption transaction, the Board of Directors noted that Summit’s
purchase and assumption proposal
indicated
a net transaction value of approximately $13.48 million, or $4.46 per
share. Following a review of the indications of interest received for
branch office transactions, the Board of Directors noted that the aggregate
transaction value for those transactions would amount to approximately $14.99
million, or $4.92 per share. During its discussion, the Board of
Directors also noted the execution risk that would be involved in dealing with
multiple acquirors, as well as the regulatory risk that would be involved given
that the Office of Thrift Supervision may raise issue with a series of proposed
purchase and assumption transactions that would leave Greater Atlantic Bank
a
smaller institution with substantial liabilities, including the potential
liability associated with the pending arbitration proceeding.
Following
further discussion, the Board of Directors instructed the representative of
Sandler O’Neill to advise Summit that Greater Atlantic has continued interest in
pursing a whole-bank transaction with Summit and that Summit was authorized
to
continue its due diligence review of Greater Atlantic.
On
January 18, 2007, the representative of Sandler O’Neill advised Greater Atlantic
that Summit remained interested in proceeding with its due diligence review
in
an effort to negotiate and execute a definitive merger agreement.
On
January 24, 2007, Party “E” executed a confidentiality agreement, and on January
25, 2007, Party “E” submitted an indication of interest.
On
January 25, 2007, the Board of Directors met to discuss the indication of
interest submitted by Party “E”. Party “E” proposed an all- cash
transaction valuing Greater Atlantic at $4.634 per share, subject to an
exclusivity period and other conditions.
On
January 25, 2007, Party “F” executed a confidentiality agreement.
On
January 29, 2007, Summit resumed its due diligence review of Greater
Atlantic.
On
February 7, 2007, Party “F” submitted an indication of interest for an all-cash
transaction that indicated a range of value from approximately $14.5 million
to
$16.0 million, or a range of $4.79 to $5.30 per share, subject to due diligence
and other conditions.
On
February 8, 2007, an indication of interest for an all-cash, whole-bank
transaction was received from Party “D” indicating a transaction value ranging
from $15 million to $20 million, or $5.00 to $6.67, per share, subject to due
diligence and other conditions.
On
February 9, 2007, Summit submitted a revised indication of interest for a
whole-bank transaction, but with the exclusion of the Pasadena branch office
and
with an indicated value of $4.60 per share.
On
February 9, 2007, Greater Atlantic announced publicly the resolution of the
arbitration proceeding.
On
February 13, 2007, Messrs. Calomiris and Amos, Sidney M. Bresler, a director
of
Greater Atlantic, and Paul J. Cinquegrana, a director of Greater Atlantic now
deceased, met with Messrs. Maddy, III and Tissue. Messrs. Maddy, III
and Tissue provided background information about Summit and expressed Summit’s
interest in a transaction with Greater Atlantic.
On
February 14, 2007, the Board of Directors of Greater Atlantic met. A
representative of Sandler O’Neill and representatives of Greater Atlantic’s
legal counsel were also present. The representative of Sandler
O’Neill reviewed the terms of the various indications of interest that had been
received to date. The Board of Directors considered and discussed in
detail Greater Atlantic’s prospects as an independent entity and came to the
consensus that it would be in the best interests of Greater Atlantic and its
stockholders to pursue a merger transaction with Summit, as well as the sale
of
the
Pasadena
branch office to Bay-Vanguard Federal Savings Bank. Following all
discussion, the Board of Directors determined to pursue the proposals by Summit
and Bay-Vanguard Federal Savings Bank and instructed senior management, in
consultation with Greater Atlantic’s legal and financial advisors, to proceed to
negotiate the terms of a definitive merger agreement with Summit and the terms
of a definitive purchase and assumption agreement with Bay-Vanguard Federal
Savings Bank, consistent with their respective indications of interest, for
presentation to and consideration by the Board of Directors at the earliest
practicable time.
On
February 20, 2007, representatives of Bay-Vanguard Federal Savings Bank
conducted a due diligence review of the Pasadena branch office.
On
March
1 and 2, 2007, representatives of Greater Atlantic conducted a due diligence
review of Summit at its offices in Moorefield, West Virginia.
On
March
21, 2007, Bay-Vanguard Federal Savings Bank informed Greater Atlantic, through
a
representative of Sandler O’Neill, that its had revised its indication of
interest to reduce the deposit premium for the Pasadena branch office to
8.5%.
On
March
28, 2007, the Board of Directors of Greater Atlantic met. Senior
management of Greater Atlantic advised the Board of Directors that
representatives of the Office of Thrift Supervision had inquired recently about
the status of the ongoing merger and acquisition discussions and the prospects
of negotiating and entering into a definitive agreement in the near
term. The Board of Directors then discussed the Bay-Vanguard Federal
Savings Bank’s revised indication of interest for the purchase of the Pasadena
branch office at a deposit premium of 8.5%. The representative of
Sandler O’Neill noted that the new proposed deposit premium, although reduced
from the 9.5% proposed initially, remained the highest proposal
obtained. Following discussion, the Board of Directors authorized
management, with the assistance of Greater Atlantic’s legal and financial
advisors, to negotiate a definitive purchase and assumption agreement for the
sale of the Pasadena branch office consistent with the terms of the revised
indication of interest of Bay-Vanguard Federal Savings Bank.
During
the balance of March and early April 2007, representatives of Greater Atlantic
and of Summit negotiated the terms of the definitive merger agreement and senior
management representatives of Greater Atlantic and of Summit were in periodic
contact to discuss transaction integration issues. During the same
period, representatives of Greater Atlantic Bank and of Bay-Vanguard Federal
Savings Bank negotiated the terms of the definitive purchase and assumption
agreement for the purchase of the Pasadena branch office.
On
the
morning of April 12, 2007, a joint meeting of the Boards of Directors of Greater
Atlantic and Greater Atlantic Bank was held to consider and discuss the terms
of
the definitive merger agreement as negotiated by Greater Atlantic and Summit
and
the terms of the definitive purchase and assumption agreement as negotiated
by
Greater Atlantic Bank and Bay-Vanguard Federal Savings Bank for the purchase
the
Pasadena branch office. A representative of Sandler O’Neill and
representatives of Greater Atlantic’s legal counsel were present at the
meeting. Copies of the merger agreement and ancillary documents and
of the purchase and assumption agreement were sent to each director before
the
meeting. The representative of Sandler O’Neill made a presentation
regarding the fairness of the proposed merger consideration to the holders
of
Greater Atlantic’s common stock from a financial point of view and delivered the
opinion of Sandler O’Neill that, as of April 12, 2007, and subject to
the limitations and qualifications set forth in the opinion, the proposed merger
consideration was fair from a financial point of view to the holders of Greater
Atlantic common stock. The Board of Directors considered carefully
the opinion of Sandler O’Neill as well as Sandler O’Neill’s experience,
qualifications and interest in the proposed
transactions. Representatives of Greater Atlantic’s legal counsel
reviewed in detail the terms of the merger agreement and the ancillary documents
and the terms of the purchase and assumption agreement with the Board of
Directors and reviewed with the Board of Directors its fiduciary duties in
the
context
of the proposed transactions. In addition, senior management of
Greater Atlantic, along with representatives of Sandler O’Neill and of legal
counsel, presented the findings of Greater Atlantic’s due diligence review of
Summit. In addition, the Board discussed the expected transaction
costs including the value of severance obligations under existing employment
and
change in control agreements with members of management and other benefit
arrangements. Following those presentations, and discussion regarding
the transactions, all of the directors present determined that the merger
agreement and the ancillary transactions and the purchase and assumption
agreement were advisable and in the best interests of Greater Atlantic and
its
stockholders and authorized Mr. Amos to execute and deliver the merger agreement
and related documents and the purchase and assumption agreement on behalf of
Greater Atlantic and Greater Atlantic Bank and to take all actions appropriate
to effect the transactions contemplated by those agreements. Jeffrey
M. Gitelman, D.D.S was the only director of Greater Atlantic and Greater
Atlantic Bank absent from the meeting. Dr. Gitelman’s absence was
unavoidable but he advised the Board of Directors before the meeting by e-mail
that he was in favor of both transactions. Later in the day, Greater
Atlantic issued a press release announcing the execution of the merger agreement
with Summit and the execution by Greater Atlantic Bank of the purchase and
assumption agreement with Bay-Vanguard Federal Savings Bank.
Greater
Atlantic’s Reasons for the Merger
At
the
meeting at which the merger agreement was presented for consideration, Greater
Atlantic’s Board of Directors, by a unanimous vote of the directors present at
the meeting, approved the merger agreement and recommended that Greater
Atlantic’s stockholders vote “FOR” approval of the merger
agreement.
Greater
Atlantic’s Board of Directors has determined that the merger is advisable and in
the best interests of Greater Atlantic and its stockholders. In
approving the merger agreement, the Board of Directors consulted with Sandler
O’Neill regarding the fairness of the transaction to Greater Atlantic’s
stockholders from a financial point of view and with Greater Atlantic’s legal
counsel regarding its legal duties and the terms of the merger agreement and
ancillary documents. In determining to approve the merger agreement
and recommend that stockholders approve the merger, the Board of Directors,
in
consultation with Greater Atlantic’s senior management and financial and legal
advisors, considered a number of factors, including the following material
factors:
·
|
The
understanding of the Board of Directors of the strategic options
available
to Greater Atlantic and the Board of Directors’ assessment of those
options with respect to the prospects and estimated results of the
execution by Greater Atlantic of its business plan as an independent
entity under various scenarios, and the determination that none of
those
options or the execution of the business plan under the best case
scenarios were likely to create greater present value for Greater
Atlantic’s stockholders than the value to be paid by Summit. In
particular, the Board of Directors considered Greater Atlantic’s ability
to achieve consistent profitability as an independent entity and
the
prospects for regulatory action if it failed to do
so.
|
·
|
The
ability of Greater Atlantic’s stockholders to participate in the future
prospects of the combined entity through ownership of Summit common
stock
and that Greater Atlantic’s shareholders would have potential value
appreciation by owning the common stock of
Summit.
|
·
|
Summit’s
ability to continue to pay cash dividends on its common stock (Greater
Atlantic has never paid cash
dividends).
|
·
|
Sandler
O’Neill’s written opinion that, as of April 12, 2007, and subject to the
assumptions and limitations set forth in the opinion, the merger
consideration was fair to Greater Atlantic’s stockholders from a financial
point of view.
|
·
|
The
wider array of financial products and services that would be available
to
customers of Greater Atlantic and the communities served by Greater
Atlantic.
|
·
|
The
current and prospective economic, competitive and regulatory environment
and the regulatory compliance costs facing Greater Atlantic and other
similar size, independent, community banking institutions generally,
including the cost of compliance with the requirements of the
Sarbanes-Oxley Act.
|
·
|
A
review, with the assistance of Greater Atlantic’s financial and legal
advisors, of the terms of the merger agreement, including that the
merger
is intended to qualify as a transaction that is generally tax-free
for
U.S. federal income tax purposes.
|
·
|
The
results of the due diligence review of
Summit.
|
·
|
The
Greater Atlantic employees to be retained after the merger would
have
opportunities for career advancement in a larger
organization.
|
·
|
The
likelihood of timely receiving regulatory approval and the approval
of
Greater Atlantic’s stockholders and the estimated transaction and
severance costs associated with the merger and payments that could
be
triggered upon termination of or failure to consummate the
merger.
|
The
foregoing information and factors considered by Greater Atlantic’s Board of
Directors is not exhaustive, but includes all material factors that the Board
of
Directors considered and discussed in approving the merger agreement and
recommending that Greater Atlantic’s stockholders vote to approve the
merger. In view of the wide variety of factors considered and
discussed by the Board of Directors in connection with its evaluation of the
merger and the complexity of these factors, the Board of Directors did not
consider it practical to, nor did it attempt to, quantify, rank or otherwise
assign any specific or relative weights to the specific factors that it
considered in reaching its decision; rather it considered all of the factors
as
a whole. The Board of Directors discussed and considered the
foregoing factors and reached general consensus that the merger was in the
best
interests of Greater Atlantic and its stockholders. In considering
the foregoing factors, individual directors of Greater Atlantic may have
assigned different weights to different factors. The Board of
Directors relied on the experience and expertise of Sandler O’Neill for
quantitative analysis of the financial terms of the merger
agreement. See “The Merger Opinion of Greater Atlantic’s
Financial Advisor” on page ___. It should be noted that this
explanation of the reasoning of Greater Atlantic’s Board of Directors and all
other information presented in this section is forward-looking in nature and,
therefore, should be read in light of the factors discussed under “Warning
About Forward-Looking Statements” on page ___.
Summit’s
Reasons for the Merger
The
merger is consistent with Summit’s plan to have operations, offices and distinct
capabilities in every market of its choice within its region. The
merger will afford Summit the opportunity to further expand market share in
the
Northern Virginia market. Summit believes that, in addition to expanding
Summit’s presence in very attractive markets, the merger provides an opportunity
to enhance Summit’s stockholder value with the prospects of positive long-term
performance of Summit’s common stock. Summit believes that the merger is a
strategic fit between Summit and Greater Atlantic given the compatibility of
the
management and business philosophy of each company. Enhanced opportunities
should result from the merger by eliminating redundant or unnecessary costs
and
enhancing revenue growth prospects.
Opinion
of Greater Atlantic’s Financial Advisor
By
letter
agreement dated January 30, 2006, Greater Atlantic retained Sandler O’Neill to
act as its financial advisor in connection with a possible business
combination. Sandler O’Neill is a nationally recognized investment
banking firm whose principal business specialty is financial
institutions. In the ordinary course of its investment banking
business, Sandler O’Neill is regularly engaged in the valuation of financial
institutions and their securities in connection with mergers and acquisitions
and other corporate transactions.
Sandler
O'Neill acted as financial advisor to Greater Atlantic in connection with the
proposed merger with Summit and participated in certain of the negotiations
leading to the merger agreement. At the April 12, 2007 meeting at
which Greater Atlantic’s Board considered and approved the merger agreement,
Sandler O’Neill delivered to the Board its oral opinion, subsequently confirmed
in writing that, as of such date, the merger consideration was fair to Greater
Atlantic’s stockholders from a financial point of view. Sandler
O’Neill has updated it fairness opinion as of the date of this proxy
statement. The full text of Sandler O’Neill’s updated opinion is
attached as Annex C to this document. The opinion outlines the procedures
followed, assumptions made, matters considered and qualifications and
limitations on the review undertaken by Sandler O’Neill in rendering its
opinion. The description of the opinion set forth below is qualified
in its entirety by reference to the opinion. Greater Atlantic
stockholders are urged to read the entire opinion carefully in connection with
their consideration of the proposed merger.
Sandler
O’Neill’s opinion speaks only as of the date of the opinion and was necessarily
based upon financial, economic, market and other conditions as they existed,
and
could be evaluated, on that date. The opinion is directed to the
Greater Atlantic Board and speaks only to the fairness of the merger
consideration to Greater Atlantic stockholders from a financial point of
view. It does not address the underlying business decision of Greater
Atlantic to engage in the merger or any other aspect of the merger and is not
a
recommendation to any Greater Atlantic stockholder as to how such stockholder
should vote at the special meeting with respect to the merger, the form of
consideration such stockholder should elect, or any other matter.
In
connection with rendering its April 12, 2007 opinion and its updated opinion,
Sandler O’Neill reviewed and considered, among other things:
(1)
|
the
merger agreement;
|
(2)
|
certain
publicly available financial statements and other historical financial
information of Greater Atlantic that Sandler O’Neill deemed
relevant;
|
(3)
|
certain
publicly available financial statements and other historical financial
information of Summit that Sandler O’Neill deemed
relevant;
|
(4)
|
internal
financial projections for Greater Atlantic for the year ending December
31, 2007, prepared by and reviewed with senior management of Greater
Atlantic and growth and performance projections for the years ending
December 31, 2008, 2009 and 2010, as provided by and reviewed with
senior
management of Greater Atlantic;
|
(5)
|
internal
financial projections for Summit for the years ending December 31,
2007
and 2008 prepared by and reviewed with management of Summit and growth
and
performance projections for the year ending December 31, 2009 and
2010, as
provided by and reviewed with management of
Summit;
|
(6)
|
the
pro forma financial impact of the merger on Summit based on assumptions
relating to transaction expenses, purchase accounting adjustments
and cost
savings determined by the senior managements of Greater Atlantic
and
Summit;
|
(7)
|
the
pro forma financial impact on Greater Atlantic of the sale of Greater
Atlantic Bank’s Pasadena branch
office;
|
(8)
|
the
publicly reported historical price and trading activity for Greater
Atlantic’s and Summit’s respective common stock, including a comparison of
certain financial and stock market information for Greater Atlantic
and
Summit with similar publicly available information for certain other
companies the securities of which are publicly
traded;
|
(9)
|
the
financial terms of certain recent business combinations in the commercial
banking and thrift industries, to the extent publicly
available;
|
(10)
|
the
current market environment generally and the banking environment
in
particular; and
|
(11)
|
such
other information, financial studies, analyses and investigations
and
financial, economic and market criteria as Sandler O’Neill considered
relevant.
|
Sandler
O’Neill also discussed with certain members of Greater Atlantic’s senior
management the business, financial condition, results of operations and
prospects of Greater Atlantic and held similar discussions with certain members
of senior management of Summit regarding the business, financial condition,
results of operations and prospects of Summit.
In
performing its reviews
and analyses, Sandler O’Neill relied upon the accuracy and completeness of all
of the financial and other information that was available to it from public
sources, that was provided by Greater Atlantic and Summit or their respective
representatives or that was otherwise available to Sandler O’Neill and assumed
such accuracy and completeness for purposes of rendering its
opinions. Sandler O’Neill further relied on the assurances of senior
management of Greater Atlantic and Summit that they were not aware of any facts
or circumstances that would make any of such information inaccurate or
misleading. Sandler O’Neill was not asked to, and did not, undertake
an independent verification of any of such information and Sandler O’Neill did
not assume any responsibility or liability for the accuracy or completeness
thereof. Sandler O’Neill did not make an independent evaluation or
appraisal of the specific assets, the collateral securing assets or the
liabilities (contingent or otherwise) of Greater Atlantic or Summit or any
of
their subsidiaries, or the collectibility of any such assets, nor was Sandler
O’Neill furnished with any such evaluations or appraisals. Sandler
O’Neill is not an expert in the evaluation of allowances for loan losses and
it
did not make an independent evaluation of the adequacy of the allowance for
loan
losses of Greater Atlantic or Summit, nor did Sandler O’Neill review any
individual credit files relating to Greater Atlantic or
Summit. Sandler O’Neill assumed, with Greater Atlantic’s consent,
that the respective allowances for loan losses for both Greater Atlantic and
Summit were adequate to cover such losses and together will be adequate for
the
combined company.
With
respect to the internal financial projections for Greater Atlantic and Summit
and the projections of transaction costs, purchase accounting adjustments and
expected cost savings prepared by and/or reviewed with the senior managements
of
Greater Atlantic and Summit used by Sandler O’Neill in its analyses, senior
management of Greater Atlantic and Summit confirmed that those projections
and
the assumptions related thereto reflected the best currently available estimates
and judgments of the future financial performance of Greater Atlantic and
Summit. Sandler O’Neill assumed that the financial performances
reflected in all projections and estimates used by them in their analyses would
be achieved and expressed no opinion as to such projections or estimates or
the
assumptions on which they were based. Those estimates and
projections, as well as the other estimates used by Sandler O'Neill in
its
analysis,
were based on numerous variables and assumptions which are inherently uncertain
and, accordingly, actual results could vary materially from those set forth
in
such projections.
Sandler
O’Neill also assumed that there had been no material change in Greater
Atlantic’s and Summit’s assets, financial condition, results of operations,
business or prospects since the date of the last financial statements made
available to them, that Greater Atlantic and Summit would remain as going
concerns for all periods relevant to its analyses, that all of the
representations and warranties contained in the merger agreement were true
and
correct as set forth in the merger agreement, that each party to the merger
agreement would perform all of the covenants required to be performed by such
party under that agreement, that the conditions precedent in the merger
agreement will not be waived and that the merger will qualify as a tax-free
reorganization for federal income tax purposes. Sandler O’Neill, with
Greater Atlantic’s consent, relied on the advice Greater Atlantic received from
its legal, accounting, and tax advisors as to all legal, accounting, and tax
matters relating to the merger agreement and the merger.
In
rendering its April 12, 2007 opinion and its updated opinion, Sandler O’Neill
performed a variety of financial analyses. Sandler O’Neill prepared
its analyses solely for purposes of rendering its opinions and provided such
analyses to the Greater Atlantic Board of Directors. The summary
below is not a complete description of the analyses underlying Sandler O’Neill’s
opinions or the presentation made by Sandler O’Neill to Greater Atlantic’s
Board, but is instead a summary of the material analyses performed and presented
in connection with its opinions. The preparation of a fairness
opinion is a complex process involving subjective judgments as to the most
appropriate and relevant methods of financial analysis and the application
of
those methods to the particular circumstances. Also, no company included
in Sandler O’Neill’s comparative analyses described below is identical to
Greater Atlantic or Summit and no transaction is identical to the
merger. Accordingly, an analysis of comparable companies or
transactions involves complex considerations and judgments concerning
differences in financial and operating characteristics of the companies and
other factors that could affect their public trading values or merger
transaction values. The process, therefore, is not necessarily susceptible
to a partial analysis or summary description.
In
arriving at its opinions, Sandler O’Neill did not attribute any particular
weight to any analysis or factor that it considered. Rather, Sandler
O’Neill made its own qualitative judgments as to the significance and relevance
of each analysis and factor. The financial analyses summarized below
include information presented in tabular format. Sandler O’Neill did
not form an opinion as to whether any individual analysis or factor (positive
or
negative) considered in isolation supported or failed to support its opinions;
rather Sandler O’Neill made its determination as to the fairness of the merger
consideration on the basis of its experience and professional judgment after
considering the results of all the analyses taken as a
whole. Accordingly, Sandler O’Neill believes that its analyses and
the summary of its analyses must be considered as a whole and that selecting
portions of its analyses or focusing on the information presented below in
tabular format, without considering all analyses and factors or the full
narrative description of the financial analyses, including methodologies and
assumptions underlying the analyses, could create a misleading or incomplete
view of the process underlying its analysis and opinions. The tables
alone do not constitute complete descriptions of the financial analyses
presented in such tables.
In
performing its analysis, Sandler also made numerous assumptions with respect
to
industry performance, business and economic conditions and various other
matters, many of which cannot be predicted and are beyond the control of Greater
Atlantic, Summit and Sandler O’Neill. The analysis performed by
Sandler O’Neill is not necessarily indicative of actual values or future
results, both of which may be significantly more or less favorable than
suggested by such analysis. Estimates on the values of companies did
not purport to be appraisals or necessarily reflect the prices at which
companies or their securities might actually be sold. Such estimates
are inherently subject to uncertainty and actual values may be materially
different. Accordingly, Sandler O’Neill’s analysis does not
necessarily reflect the value of Greater Atlantic’s common stock or Summit’s
common stock or the prices at which Greater Atlantic’s or Summit’s common stock
may be sold at any time. The analysis of Sandler and its
opinions
were
among a number of factors taken into consideration by Greater Atlantic’s Board
in making its determination to adopt the merger agreement and the analysis
described below should not be viewed as determinative of the decision of Greater
Atlantic’s Board with respect to the fairness of the merger.
Summary
of Proposal. Sandler O’Neill reviewed the
financial terms of the proposed transaction. Pursuant to the merger
agreement, each share of Greater Atlantic common stock issued and outstanding
immediately prior to the merger will be converted into the right to receive
(a)
cash in an amount equal to $1.80 per share and (b) that number of shares of
Summit common stock, $2.50 par value per share, (the “Summit Common Stock”)
equal to $4.20 divided by the average closing price of Summit Common Stock
reported on the NASDAQ for the twenty (20) trading days prior to the closing
of
the Merger; provided, however, if the Average Closing Price is less than $17.82,
the Exchange Ratio will be seventy percent of the Merger Consideration divided
by $17.82. If the Average Closing Price is greater than $24.10, then
the Exchange Ratio will be seventy percent of the Merger Consideration divided
by $24.10. Sandler O’Neill calculated the aggregate transaction value
to be $18.2 million. Based upon financial information for Greater
Atlantic for the twelve months ended June 30, 2006, Sandler O’Neill calculated
the following ratios:
Transaction
price / Last twelve months’ earnings per
share NM
Transaction
price / Book value per share (1) 167%
Transaction
price / Tangible book value per share (1) 183%
Tangible
book premium/Core Deposits (1),
(2) 4.1%
2
Day
market premium as of September 27,
2007 17.2%
2
Day
market premium as of April 10,
2007
140.0%
(1)
|
Book
value has been adjusted for the branch sale proceeds of $4.2 million,
resulting in an addition of $1.40 per
share.
|
(2)
|
Core
deposits exclude time deposits with account balances greater than
$100,000.
|
Stock
Trading History. Sandler O’Neill
also reviewed the history of the publicly reported trading prices of Greater
Atlantic’s common stock for the three-year period ended April 5,
2007. Sandler O'Neill also reviewed the history of the reported
trading prices and volume of Summit’s common stock for the one year and the
three year periods ended April 5, 2007. Sandler O’Neill then compared
the relationship between the movements in the price of Greater Atlantic’s common
stock against the movements in the prices of the Standard & Poor's 500
Index, the NASDAQ Bank Index, the Standard & Poor’s Bank Index and the
performance of a composite peer group - a weighted average (by market
capitalization) composite of publicly traded comparable depository institutions
selected by Sandler O’Neill. Sandler O’Neill also compared the relationship
between the movements in the prices of Summit’s common stock to movements in the
prices of the Nasdaq Bank Index, S&P Bank Index, and S&P 500 Index and
the performance of a composite peer group - a weighted average (by market
capitalization) composite of publicly traded comparable depository institutions
selected by Sandler O’Neill. The composition of the peer group for
Greater Atlantic is discussed under the relevant section under “Comparable
Company Analysis” below. The composition of the peer group for Summit
is discussed under the relevant section under “Comparable Company Analysis”
below.
The
relative performances were as follows:
Greater
Atlantic’s Stock Performance
|
Beginning
Index Value
|
Ending
Index Value
|
|
April
8, 2004
|
April
5, 2007
|
|
Greater
Atlantic
|
100.00%
|
32.2%
|
|
S&P
500 Index
|
100.00
|
126.8
|
|
NASDAQ
Bank Index
|
100.00
|
109.5
|
|
S&P
Bank Index
|
100.00
|
117.5
|
|
Regional
Peer Group Index(1)
|
100.00
|
96.0
|
|
(1) Refers
to the peer group outlined in the Comparable Group Analysis section
below.
|
Summit’s
Stock Performance
|
Beginning
Index Value
|
Ending
Index Value
|
|
April
8, 2004
|
April
5, 2007
|
|
S&P
500 Index
|
100.00
|
126.8
|
|
NASDAQ
Bank Index
|
100.00
|
109.5
|
|
S&P
Bank Index
|
100.00
|
117.5
|
|
Regional
Peer Group Index(1)
|
100.00
|
111.1
|
|
(1) Refers
to
the peer group outlined in the Comparable Group Analysis section
below.
|
Comparable
Company Analysis. Sandler O’Neill used publicly
available information to compare selected financial and market trading
information for Greater Atlantic and Summit to various peer groups selected
by
Sandler O’Neill. The peer group for Greater Atlantic consisted of the
following companies:
American
Bank Holdings, Inc.
|
KS
Bancorp, Inc.
|
Coddle
Creek Financial Corp.
|
SE
Financial Corp.
|
Community
Financial Corporation
|
South
Street Financial Corp.
|
First
Keystone Financial, Inc.
|
Virginia
Savings Bank, FSB
|
First
Star Bancorp, Inc.
|
Washington
Savings Bank, F.S.B.
|
Independence
Federal Savings Bank
|
WVS
Financial Corp.
|
The
analysis compared publicly available financial information as of and for the
most recently reported twelve-month period and market trading information as
of
April 10, 2007. The table below compares the data for Greater Atlantic with
the
median data for the regional peer group.
Greater
Atlantic Comparable Group Analysis
|
Greater
Atlantic
|
Regional
Peer
Group
Median
|
Market
Capitalization (in millions)
|
$7
|
$34
|
Total
assets (in millions)
|
$287
|
$325
|
Tangible
equity/Tangible assets
|
2.49%
|
7.99%
|
Last
twelve months’ return on average assets
|
(1.36%)
|
0.67%
|
Last
twelve months’ return on average equity
|
(37.18%)
|
7.91%
|
Price/Tangible
book value per share
|
100%
|
126%
|
Price/Last
twelve months’ earnings per share
|
NM
|
15.6x
|
The
“Regional Peer Group” for Summit consisted of the following
companies:
Burke
& Herbert Bank & Trust Co.
|
Middleburg
Financial Corporation
|
Cardinal
Financial Corporation
|
National
Bankshares, Incorporated
|
Eastern
Virginia Bankshares, Inc.
|
Old
Point Financial Corporation
|
First
Mariner Bancorp
|
Shore
Bancshares, Inc.
|
First
United Corporation
|
Virginia
Commerce Bancorp, Inc.
|
FNB
Corporation
|
Virginia
Financial Group, Inc.
|
The
analysis compared publicly available financial information as of and for the
most recently reported twelve-month period and market trading information as
of
April 10, 2007. The table below compares the data for Summit with the
median data for the peer group.
Summit
Comparable Group Analysis
|
Summit
|
Regional
Peer
Group
Median
|
Market
Capitalization (in millions)
|
$149
|
$190
|
Total
assets (in millions)
|
$1,235
|
$1,306
|
Tangible
equity/Tangible assets
|
6.23%
|
8.69%
|
Last
twelve months’ return on average assets
|
0.70
%
|
1.12%
|
Last
twelve months’ return on average equity
|
10.46%
|
12.46%
|
Price/Tangible
book value per share
|
194%
|
202%
|
Price/Last
twelve months’ earnings per share
|
18.2x
|
15.7x
|
Price/Estimated
2007 earnings per share
|
12.2x
|
14.9x
|
Analysis
of
Selected Merger Transactions. Sandler O’Neill reviewed
17 merger transactions announced from January 1, 2004 through April 10, 2007
involving acquisitions of banks and thrifts in the United States with announced
transaction value less than $30 million and the selling companies recorded
negative earnings for the last twelve month period. Sandler O’Neill reviewed the
multiples of transaction price at announcement to stated book value per share,
tangible book value per share, as well as tangible book premium to core deposits
and current market price premium, and computed high, low, mean and median
multiples and premiums for the transactions.
Comparable
Transactions Analysis
|
Selected
Merger Median Multiple
|
|
|
Transaction
price/ Book value per share
|
172%
|
|
|
Transaction
price / Tangible book value per share
|
172%
|
|
|
Tangible
book premium / Core deposits (1)
|
13.1%
|
|
|
Premium
to current market price
|
66.8%
|
(1)
|
Core
deposits exclude time deposits with account balances greater than
$100,000.
|
Discounted
Cash Flow Analysis. Sandler O’Neill performed an
analysis to estimate the future stream of after-tax cash flows that Summit
would
provide to equity holders through 2010 on a stand-alone basis, assuming Summit
increased their annual dividend by $0.02 annually and that Summit performed
in
accordance with the earnings and growth projections reviewed with Summit’s
senior management. To approximate the terminal value of Summit common
stock at December 31, 2010, Sandler O’Neill applied price/earnings multiples
ranging from 10x to 20x and multiples of tangible book value ranging from 150%
to 275%. The dividend stream and terminal values were then discounted
to present values using discount rates ranging from 9% to 15%, which were
selected by Sandler O’Neill to reflect different assumptions regarding required
rates of return of holders or prospective buyers of Summit’s common
stock. This analysis resulted in the following reference ranges of
indicated per share values for Summit’s common stock:
Terminal
Earnings Multiple
Discount
Rate
|
10x
|
12x
|
14x
|
16x
|
18x
|
20x
|
9.0%
|
$17.48
|
$20.74
|
$24.00
|
$27.26
|
$30.52
|
$33.78
|
10.0%
|
$16.86
|
$20.01
|
$23.15
|
$26.30
|
$29.44
|
$32.58
|
11.0%
|
$16.28
|
$19.31
|
$22.34
|
$25.38
|
$28.41
|
$31.44
|
12.0%
|
$15.72
|
$18.65
|
$21.57
|
$24.50
|
$27.42
|
$30.35
|
13.0%
|
$15.19
|
$18.01
|
$20.83
|
$23.66
|
$26.48
|
$29.30
|
14.0%
|
$14.68
|
$17.40
|
$20.13
|
$22.85
|
$25.58
|
$28.30
|
15.0%
|
$14.19
|
$16.82
|
$19.45
|
$22.08
|
$24.71
|
$27.34
|
Terminal
Tangible Book Multiple
Discount
Rate
|
150%
|
175%
|
200%
|
225%
|
250%
|
275%
|
9.0%
|
$19.98
|
$23.11
|
$26.25
|
$29.38
|
$32.51
|
$35.64
|
10.0%
|
$19.28
|
$22.30
|
$25.32
|
$28.34
|
$31.36
|
$34.38
|
11.0%
|
$18.61
|
$21.52
|
$24.44
|
$27.35
|
$30.26
|
$33.17
|
12.0%
|
$17.97
|
$20.78
|
$23.59
|
$26.40
|
$29.21
|
$32.02
|
13.0%
|
$17.36
|
$20.07
|
$22.78
|
$25.49
|
$28.20
|
$30.92
|
14.0%
|
$16.77
|
$19.39
|
$22.01
|
$24.62
|
$27.24
|
$29.86
|
15.0%
|
$16.21
|
$18.74
|
$21.27
|
$23.79
|
$26.32
|
$28.85
|
Sandler
O’Neill performed a similar analysis assuming Summit’s 2010 net income varied
from 25% above to 25% below the estimates noted above. This analysis
resulted in the following reference ranges of indicated per share values for
Summit’s common stock, using a discount rate of 12.98%:
Terminal
Earnings Multiple
EPS
Projection Change from Base Case
|
10x
|
12x
|
14x
|
16x
|
18x
|
20x
|
(25.0%)
|
$11.67
|
$13.79
|
$15.90
|
$18.02
|
$20.14
|
$22.26
|
(20.0%)
|
$12.37
|
$14.63
|
$16.89
|
$19.15
|
$21.41
|
$23.67
|
(15.0%)
|
$13.08
|
$15.48
|
$17.88
|
$20.28
|
$22.68
|
$25.09
|
(10.0%)
|
$13.79
|
$16.33
|
$18.87
|
$21.41
|
$23.96
|
$26.50
|
(5.0%)
|
$14.49
|
$17.18
|
$19.86
|
$22.54
|
$25.23
|
$27.91
|
0.0%
|
$15.20
|
$18.02
|
$20.85
|
$23.67
|
$26.50
|
$29.32
|
5.0%
|
$15.90
|
$18.87
|
$21.84
|
$24.80
|
$27.77
|
$30.73
|
10.0%
|
$16.61
|
$19.72
|
$22.83
|
$25.93
|
$29.04
|
$32.15
|
15.0%
|
$17.32
|
$20.57
|
$23.81
|
$27.06
|
$30.31
|
$33.56
|
20.0%
|
$18.02
|
$21.41
|
$24.80
|
$28.19
|
$31.58
|
$34.97
|
25.0%
|
$18.73
|
$22.26
|
$25.79
|
$29.32
|
$32.85
|
$36.38
|
In
its
discussions with the Greater Atlantic Board, Sandler O’Neill noted that the
discounted cash flow analysis is a widely used valuation methodology, but the
results of such methodology are highly dependent upon the numerous assumptions
that must be made, and the results thereof are not necessarily indicative of
actual values or future results.
Pro
Forma Merger Analysis. Sandler O’Neill analyzed certain
potential pro forma effects of the merger, assuming (1) a deal price per share
of $6.00; (2) all options to purchase shares of Greater Atlantic common stock
with a strike price lower than the current market value of Greater Atlantic
common stock outstanding at June 30, 2007 are to be cashed out; (3) each of
Greater Atlantic and Summit performs in accordance with the earnings projections
and estimates discussed above; (4) the Pasadena, MD branch sale closes during
the third quarter of 2007; (5) the Pasadena branch deposits, overall core
deposits, and total equity remain constant; and (6) the merger closes during
the
fourth quarter of 2007. Sandler O’Neill
also
assumed various purchase accounting adjustments (including amortizable
identifiable intangibles created in the merger), charges and transaction costs
associated with the merger, and cost savings resulting from the merger (100%
of
which would be realized in 2008). Based on the assumptions listed
above, the analysis indicated that the merger would be 1.3% dilutive to Summit’s
estimated 2008 earnings per share and approximately 6.5% accretive to 2009
earnings per share, and accretive to Summit’s estimated 2008 and 2009 tangible
book value per share. The actual results achieved by the combined
company may vary from projected results and the variations may be
material.
Sandler
O’Neill’s Compensation and Other Relationships with Greater Atlantic and
Summit. Greater Atlantic has agreed to pay Sandler
O’Neill a monthly retainer of $10,000 each month (“General Advisory Services
Fee”) and will continue to do so until the closing of the
transaction. Sandler O’Neill will also be paid a transaction fee in
connection with the merger of $150,000, plus an incentive fee of $61,209, which
is equal to 5% of the Aggregate Purchase Price over $17,000,000. It
is agreed that one-half of the General Advisory Services Fee shall be credited
against the $150,000 transaction fee. A fee of $100,000 has been paid
to Sandler O’Neill for rendering its fairness opinions. In connection
with the Pasadena, Maryland branch sale, Greater Atlantic has agreed to pay
Sandler O’Neill a fee of $77,281, which is equal to 0.15% of the total deposits
in the branch sale transaction. 50% of such branch sale transaction
fee was paid upon signing of the definitive agreement and the remaining amount
was paid the day of closing of the branch sale transaction. Greater
Atlantic has also agreed to reimburse certain of Sandler O’Neill’s reasonable
out-of-pocket expenses incurred in connection with its engagement and to
indemnify Sandler O’Neill and its affiliates and their respective partners,
directors, officers, employees, agents and controlling persons against certain
expenses and liabilities, including liabilities under the securities
laws.
In
the
ordinary course of its business as a broker-dealer, Sandler O’Neill may purchase
securities from and sell securities to Greater Atlantic and Summit and their
affiliates. Sandler O’Neill may also actively trade the debt and/or
equity securities of Greater Atlantic or Summit or their affiliates for its
own
account or for the accounts of its customers and, accordingly, may at any time
hold a long or short position in such securities.
Interests
of Certain Persons in the Merger
Certain
members of Greater Atlantic’s management have interests in the merger in
addition to their interests as shareholders of Greater
Atlantic. These interests are described below. In each
case, the Greater Atlantic board of directors was aware of these potential
interests, and considered them, among other matters, in approving the merger
agreement and the transactions contemplated thereby.
Employment
and Severance Agreements.
After
the
effective date of the merger, the employment of certain employees of Greater
Atlantic may be terminated in a manner which will entitle them to receive
termination benefits provided under existing employment agreements with Greater
Atlantic. The terms of such termination benefits for each employee
are set forth below.
Amos
Employment Agreement. Effective, November 1,
1997, Greater Atlantic Bank entered into an employment agreement with Carroll
E.
Amos, President and Chief Executive Officer of Greater Atlantic Bank. Under
the
employment agreement, if, following a change in control (as defined in the
employment agreement), Mr. Amos voluntarily resigns or his employment is
terminated involuntarily for reasons other than cause, Mr. Amos (or in the
event
of his death, his beneficiary) would be entitled to a lump sum cash severance
payment equal to the greater of: (i) the remaining payments due for the term
of
the employment agreement, or (ii) two times the average of Mr. Amos’ annual
compensation for the three years preceding the change in control. For
purposes of the employment agreement, the merger with Summit Financial Group
constitutes a change in control. In addition to a cash severance
payment, the employment agreement provides that Greater Atlantic Bank or its
successor will cause to be continued
Mr.
Amos’
life, health, dental and disability insurance coverage for thirty-six months
following his termination of employment in connection with a change in
control. That insurance coverage is required to be provided under
terms substantially identical to the coverage maintained by Greater Atlantic
Bank prior to Mr. Amos’ termination date. In the event Mr. Amos’
employment is voluntarily or involuntarily terminated following the merger
by
and between Summit Financial and Greater Atlantic, Mr. Amos would be entitled
to
a lump sum cash payment and health and welfare benefits equal to approximately
$390,000.
Senior
Officers’ Severance Compensation Plan. Effective on December 1,
1999, Greater Atlantic’s subsidiary, Greater Atlantic Bank, implemented an
Employee Severance Compensation Plan (the “Officer Plan”), to provide
severance benefits to the following senior officers who are terminated,
voluntarily or involuntarily from employment with Greater Atlantic Bank within
one year of a change in control (as defined in the Officer Plan) of the bank
or
Greater Atlantic: Edward C. Allen, Justin R. Golden, Gary L. Hobert,
Robert W. Neff and David E. Ritter. The severance benefits are
paid in a lump sum cash payment within thirty days after termination equal
in
amount to the compensation paid to such Participant during the twelve months
immediately preceding the date of termination. The merger would
constitute a change in control under the Officer Plan. Accordingly,
if the employment of the Participants is terminated within one year of the
merger, then each Participant will receive the following severance benefits:
Edward C. Allen - $121,000, Justin R. Golden - $101,000, Gary L. Hobert -
$135,000, Robert W. Neff - $130,000 and David E. Ritter - $114,000.
Conversion
of Stock Options and Warrants. The merger agreement provides
that each stock option and warrant granted to officers, employees and directors
of Greater Atlantic under Greater Atlantic’s stock option plan and outstanding
prior to the effective date will vest and holders of such options shall be
entitled to receive cash in an amount equal to the difference between the
value
of (a) the merger consideration and (b) the applicable exercise price
(rounded to the nearest cent) for each outstanding option and warrant granted
by
Greater Atlantic to purchase shares of Greater Atlantic common
stock. The following table sets forth the cash that will be paid to
each executive officer of Greater Atlantic upon consummation of the merger
in
accordance with the terms of the merger agreement and assumes that the value
for
each share of stock of Greater Atlantic that will be exchanged in the merger
is
$6.00.
GREATER
ATLANTIC FINANCIAL CORP.
|
|
|
Option
Payouts at Merger
|
|
|
|
|
|
|
|
|
|
|
|
Value
of
|
|
|
|
Exercise
|
Merger
|
|
|
# of
|
Price
|
Consideration
|
Cash
|
Employee
|
options
|
(per
share)
|
(per
share)
|
Payout
|
Carroll
E. Amos
|
8,666
|
4.00
|
6.00
|
$17,332.00
|
Robert
W. Neff
|
8,000
|
4.00
|
6.00
|
$16,000.00
|
David
E. Ritter
|
8,000
|
4.00
|
6.00
|
$16,000.00
|
Edward
C. Allen
|
9,000
|
4.00
|
6.00
|
$18,000.00
|
Justin
R. Golden
|
8,000
|
4.00
|
6.00
|
$16,000.00
|
Gary
L. Hobert
|
10,000
|
5.31
|
6.00
|
$ 6,900.00
|
|
|
|
|
|
Employee
Benefit Plans. Summit intends to provide the employees of
Greater Atlantic with employee benefit plans substantially similar to those
provided to the employees of Summit. Employees of Greater Atlantic
will receive credit for their service to Greater Atlantic in determining their
eligibility and vesting in the benefit plans provided by Summit.
Conditions
of the Merger
The
respective obligations of Summit and Greater Atlantic to consummate the merger
are subject to the satisfaction of certain mutual conditions, including
the following:
·
|
The
shareholders of Greater Atlantic approve the merger agreement and
the
transactions contemplated thereby, described in the proxy
statement/prospectus at the meeting of shareholders for Greater
Atlantic;
|
·
|
All
regulatory approvals required by law to consummate the transactions
contemplated by the merger agreement are obtained from the Federal
Reserve
Board and any other appropriate federal and/or state regulatory agencies
without unreasonable conditions, and all waiting periods after such
approvals required by law or regulation
expire;
|
·
|
The
registration statement (of which this proxy statement/prospectus
is a
part) registering shares of Summit common stock to be issued in the
merger
is declared effective and not subject to a stop order or any threatened
stop order;
|
·
|
There
shall be no actual or threatened litigation, investigations or proceedings
challenging the validity of, or damages in connection with, the merger
that would have a material adverse effect with respect to the interests
of
Summit or Greater Atlantic or impose a term or condition that shall
be
deemed to materially adversely impact the economic or business benefits
of
the merger;
|
·
|
The
absence of any statute, rule, regulation, judgment, decree, injunction
or
other order being enacted, issued, promulgated, enforced or entered
by a
governmental authority effectively prohibiting consummation of the
merger;
|
·
|
All
permits or other authorizations under state securities laws necessary
to
consummate the merger and to issue the shares of Summit common stock
to be
issued in the merger being obtained and remaining in full force and
effect; and
|
·
|
Authorization
for the listing on the NASDAQ Capital Market of the shares of Summit
common stock to be issued in the
merger.
|
In
addition to the mutual covenants described above, the obligation of Summit
to
consummate the merger is subject to the satisfaction, unless waived, of the
following other conditions:
·
|
The
representations and warranties of Greater Atlantic made in the merger
agreement are true and correct as of the date of the merger agreement
and
as of the effective time of the merger and Summit receives a certificate
of the chief executive officer and the chief financial officer of
Greater
Atlantic to that effect;
|
·
|
Greater
Atlantic performs in all material respects all obligations required
to be
performed under the merger agreement prior to the effective time
of the
merger and delivers to Summit a certificate of its chief executive
officer
and chief financial to that effect;
and
|
· Summit shall have
received an opinion of Hunton & Williams, special counsel to Summit, dated
as of the effective time of the merger, that the
merger
constitutes a “reorganization”
under Section 368 of the Internal Revenue Code.
In
addition to the mutual covenants described above, Greater Atlantic’s obligation
to complete the merger is subject to the satisfaction, unless waived, of the
following other conditions:
·
|
The
representations and warranties of Summit made in the merger agreement
are
true and correct as of the date of the merger agreement and as of
the
effective time of the merger and Greater Atlantic receives a certificate
of the chief executive officer and chief financial officer of Summit
to
that effect;
|
·
|
Summit
performs in all material respects all obligations required to be
performed
under the merger agreement prior to the effective time of the merger
and
delivers to Greater Atlantic a certificate of its chief executive
officer
and chief financial officer to that effect;
and
|
Representations
and Warranties
The
merger agreement contains representations and warranties by Summit and Greater
Atlantic. These representations and warranties are qualified by a
materiality standard, which means that Summit or Greater Atlantic is not in
breach of a representation or warranty unless the existence of any fact, event
or circumstance, individually, or taken together with other facts, events or
circumstances has had or is reasonably likely to have a material adverse effect
on Summit or Greater Atlantic. These include, among other things,
representations and warranties by Summit and Greater Atlantic to each other
as
to:
·
|
organization
and good standing of each entity and its
subsidiaries;
|
·
|
each
entity’s capital structure;
|
·
|
each
entity’s authority relative to the execution and delivery of, and
performance of its obligations under, the merger
agreement;
|
·
|
absence
of material adverse changes since September 30, 2006, or December
31,
2006, for Greater Atlantic and Summit,
respectively;
|
·
|
consents
and approvals required;
|
·
|
accuracy
of documents, including financial statements and other reports, filed
by
each company with the SEC;
|
·
|
absence
of defaults under contracts and
agreements;
|
·
|
absence
of environmental problems;
|
·
|
absence
of conflicts between each entity’s obligations under the merger agreement
and its charter documents and contracts to which it is a party or
by which
it is bound;
|
·
|
litigation
and related matters;
|
·
|
taxes
and tax regulatory matters;
|
·
|
compliance
with the Sarbanes-Oxley Act and accounting
controls;
|
·
|
absence
of brokerage commissions, except as disclosed for financial
advisors;
|
·
|
employee
benefit matters;
|
·
|
books
and records fully and accurately maintained and fairly present events
and
transactions; and
|
In
addition, Greater Atlantic represents and warrants to Summit that, except as
disclosed, neither Greater Atlantic nor any of its subsidiaries are parties
to
any interest rate swaps, caps, floors, option agreements, futures and forward
contract and other similar risk management
agreements. Summit represents and warrants to Greater Atlantic that
Summit has taken all action to exempt the merger
agreement
and the merger from the requirements of takeover laws and has sources of capital
to pay the cash consideration and to effect the merger.
Termination
of the Merger Agreement
The
merger agreement may be terminated at any time prior to the closing in any
of
the following ways.
The
merger agreement may be terminated by mutual written consent of Greater Atlantic
and Summit.
The
merger agreement may be terminated by either Greater Atlantic or Summit
if:
|
•
|
the
approval of any governmental entity required for consummation of
the
merger is denied by a final nonappealable action of such governmental
entity;
|
|
•
|
the
merger has not been completed on or before December 31, 2007, unless
the
failure of the merger to be consummated arises out of or results
from the
knowing action or inaction of the party seeking to
terminate;
|
|
•
|
there
has been a breach by the other party of any of its obligations under
the
merger agreement, which breach cannot be or has not been cured within
30
days following written notice to the breaching party of such breach;
or
|
|
•
|
the
merger agreement is not approved by the shareholders of Greater
Atlantic.
|
The
merger agreement may be terminated by Summit if Greater Atlantic’s board fails
to recommend the merger or withdraws, modifies or changes such recommendation
in
a manner adverse to Summit.
The
merger agreement may be terminated by Greater Atlantic, if the Greater Atlantic
board of directors determines that Greater Atlantic has received an unsolicited
proposal that if consummated would result in a transaction more favorable to
Greater Atlantic’s shareholders from a financial point of view, provided
that Summit does not make a counteroffer that is at least as favorable to the
other proposal and Greater Atlantic pays the termination fee described
below.
Effect
of Termination; Termination Fee
The
provisions of the merger agreement relating to expenses and termination fees
will continue in effect not withstanding termination of the merger agreement.
If the merger agreement is validly terminated, the merger agreement will
become void without any liability on the part of any party except termination
will not relieve a breaching party from liability for any willful breach of
the
merger agreement.
Greater
Atlantic has agreed to pay a cash termination fee to Summit equal to $750,000
if:
·
|
The merger agreement is terminated for failure to obtain the approval
of
Greater Atlantic’s shareholders, and before such time a competing
acquisition proposal
for Greater Atlantic has been made public and not withdrawn;
or
|
·
|
Greater Atlantic terminates the merger agreement to accept a proposal
by a
third party that it believes is superior to Summit’s offer set forth in
the merger agreement.
|
This termination fee would be payable as follows: (i) $250,000 no
later than two (2) business days after the date of termination, (ii) $100,000
on
the date that is one (1) year after the termination date, (iii) $100,000
on the
date that is two (2) years after the termination date, and (iv) $300,000
on the
date that is three (3) years after the termination date.
Greater
Atlantic also has agreed to pay a cash termination fee to Summit equal to
$250,000 if:
·
|
The
merger agreement is terminated because Greater Atlantic’s board fails to
recommend, withdraws, modifies, or changes its recommendation of
the
merger before the special meeting;
|
·
|
Summit
terminates the merger agreement due to a breach by Greater Atlantic
of any
representation, warranty, covenant or other agreement;
or
|
·
|
The
merger agreement is terminated due to a failure to consummate the
merger
by December 31, 2007.
|
This
termination fee would be payable no later than two (2) business days after
the
date of termination.
Waiver
and Amendment
Prior
to
the effective time of the merger, any provision of the merger agreement may
be
waived by the party benefiting by the provision or amended or modified by an
agreement in writing between the parties, except that, after the special
meeting, the merger agreement may not be amended if it would violate the
Delaware General Corporation Law or the West Virginia Business Corporation
Act.
Indemnification
Summit
has agreed to indemnify the directors, officers and employees of Greater
Atlantic for a period of three (3) years from the effective time of the merger
to the fullest extent that Greater Atlantic is permitted or required to
indemnify (and advance expenses to) its directors, officers and employees under
the laws of the State of Delaware and Greater Atlantic’s Articles of
Incorporation and Bylaws.
Acquisition
Proposals
Greater
Atlantic has agreed that it will not, and that it will cause its officers,
directors, agents, advisors, and affiliates not to: solicit or encourage
inquiries or proposals with respect to engage in any negotiations concerning,
or
provide any confidential information to any person relating to
any proposal to acquire the stock or assets of Greater Atlantic or
other business combination transactions with Greater Atlantic, unless the
Greater Atlantic board of directors concludes in good faith, after consultation
with and consideration of the advice of outside counsel, that the failure to
enter into such discussions or negotiations or resolving to accept such
acquisition proposal, would constitute a breach of its fiduciary duties to
shareholders under applicable law. If the board of directors of
Greater Atlantic is obligated by its fiduciary duties to accept a third party
proposal that it believes is superior to Summit’s offer set forth in the merger
agreement, Greater Atlantic is obligated to pay to Summit the termination fee
equal to $750,000. See “– Effect of Termination; Termination Fee”
beginning on page ____.
Closing
Date; Effective Time
The
merger will be consummated and become effective upon the issuance of a
certificate of merger by the West Virginia Secretary of State and the Delaware
Division of Corporations (or on such other date as may be specified in the
articles of merger to be filed with the West Virginia Secretary of
State
and
the Delaware Division of Corporations). Unless otherwise agreed to by
Summit or Greater Atlantic, the closing of the merger will take place on the
fifth business day to occur after the last of the conditions to the merger
has
been satisfied or waived, or, at the election of Summit, on the last business
day of the month in which such fifth business day occurs.
Regulatory
Approvals
The
merger and the other transactions contemplated by the merger agreement require
the approval of the Federal Reserve Board. As a bank holding company,
Summit is subject to regulation under the Bank Holding Company Act of
1956. Greater Atlantic Bank is a federally-chartered savings bank,
regulated by the Office of Thrift Supervision. Summit Community Bank
is a West Virginia banking corporation, is a non-member bank and is subject
to
the State Banking Code of West Virginia. Summit and Greater Atlantic
have filed all required applications seeking approval of the merger with the
Federal Reserve.
Under
the
Bank Holding Company Act, the Federal Reserve Board is required to examine
the
financial and managerial resources and future prospects of the combined
organization and analyze the capital structure and soundness of the resulting
entity. The Federal Reserve Board has the authority to deny an
application if it concludes that the combined organization would have inadequate
capital. In addition, the Federal Reserve Board can withhold approval
of the merger if, among other things, it determines that the effect of the
merger would be to substantially lessen competition in the relevant
market. Further, the Federal Reserve must consider whether the
combined organization meets the requirements of the Community Reinvestment
Act
of 1977 by assessing the involved entities’ records of meeting the credit needs
of the local communities in which they operate, consistent with the safe and
sound operation of such institutions.
In
addition, a period of 15 to 30 days must expire following approval by the
Federal Reserve Board before completion of the merger is allowed, within which
period the United States Department of Justice may file objections to the merger
under the federal antitrust laws.
The
merger cannot be consummated prior to receipt of all required
approvals. There can be no assurance that required regulatory
approvals for the merger will be obtained and, if the merger is approved, as
to
the date of such approvals or whether the approvals will contain any
unacceptable conditions. There can likewise be no assurance that the
United States Department of Justice will not challenge the merger during the
waiting period set aside for such challenges after receipt of approval from
the
Federal Reserve Board.
Summit
and Greater Atlantic are not aware of any governmental approvals or actions
that
may be required for consummation of the merger other than as described
above. Should any other approval or action be required, it is
presently contemplated that such approval or action would be
sought. There can be no assurance that any necessary regulatory
approvals or actions will be timely received or taken, that no action will
be
brought challenging such approval or action or, if such a challenge is brought,
as to the result thereof, or that any such approval or action will not be
conditioned in a manner that would cause the parties to abandon the
merger.
The
approval of any application merely implies the satisfaction of regulatory
criteria for approval, which does not include review of the merger from the
standpoint of the adequacy of the cash consideration or the exchange ratio
for
converting Greater Atlantic common stock to Summit common
stock. Furthermore, regulatory approvals do not constitute an
endorsement or recommendation of the merger.
Conduct
of Business Pending the Merger
The
merger agreement contains reciprocal forbearances made by Greater Atlantic
and
Summit to each other. Greater Atlantic and Summit have agreed that,
until the effective time of the merger, each of them and each of their
subsidiaries, without the prior written consent of the other, will
not:
·
|
Conduct
business other than in the ordinary and usual course or fail to use
reasonable efforts to preserve intact their business organizations
and
assets, or take any action reasonably likely to have an adverse effect
upon its ability to perform any of its material obligations under
the
merger agreement;
|
·
|
Except
as required by applicable law or regulation, implement or adopt any
material change in its interest rate or other risk management policies,
practices or procedures, fail to follow existing policies or practices
with respect to managing exposure to interest rate and other risks,
or
fail to use commercially reasonable means to avoid any material increase
in its aggregate exposure to interest rate risk;
or
|
·
|
Take
any action while knowing that such action would, or is reasonably
likely
to, prevent or impede the merger from qualifying as a merger within
the
meaning of Section 368 of the Internal Revenue Code of 1986, as amended,
or knowingly take any action that is intended or is reasonably likely
to
result in any of its representations and warranties set forth in
the
merger agreement being or becoming untrue in any material respect
at any
time at or prior to the effective time, any of the conditions to
the
merger not being satisfied, or a material violation of any provision
of
the merger agreement except, in each case, as may be required by
applicable law or regulation.
|
Greater
Atlantic has also agreed that, prior to the effective time, without the prior
written consent of Summit it will not:
·
|
Other
than pursuant to rights previously disclosed and outstanding on the
date
of the merger agreement, issue, sell or otherwise permit to become
outstanding, or authorize the creation of, any additional shares
of
Greater Atlantic common stock or any rights to purchase Greater Atlantic
common stock, enter into any agreement with respect to the foregoing,
or
permit any additional shares of Greater Atlantic common stock to
become
subject to new grants of employee or director stock options, other
rights
or similar stock-based employee
rights;
|
·
|
Make,
declare, pay or set aside for payment any dividend on or in respect
of, or
declare or make any distribution on, any shares of Greater Atlantic
stock
or directly or indirectly adjust, split, combine, redeem, reclassify,
purchase or otherwise acquire, any shares of its capital
stock;
|
·
|
Enter
into or amend or renew any employment, consulting, severance or similar
agreements or arrangements with any director, officer or employee
of
Greater Atlantic or its subsidiaries, or grant any salary or wage
increase
or increase any employee benefit (including incentive or bonus payments),
except for (i) normal individual payments of incentives and bonuses
to
employees in the ordinary course of business consistent with past
practice, not to exceed $10,000 in the aggregate, (ii) normal individual
payment of incentives and bonuses to employees under Greater Atlantic
Bank’s branch incentive plan, not to exceed $30,000 per quarter in the
aggregate, (iii) normal individual increases in compensation to employees
in the ordinary course of business consistent with past practices,
(iv)
other changes required by applicable law, (v) to satisfy
previously
|
|
disclosed
contractual obligations, and (vi) grants of awards to newly hired
employees consistent with past
practices;
|
·
|
Enter
into, establish, adopt or amend (except as may be required by
applicable law or to satisfy previously disclosed contractual obligations
existing as of the date of the merger agreement) any pension, retirement,
stock option, stock purchase, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other employee
benefit, incentive or welfare contract, plan or arrangement, or any
trust
agreement (or similar arrangement) related thereto, in respect of
any
director, officer or employee of Greater Atlantic or its subsidiaries,
or
take any action to accelerate the vesting or exercisability of stock
options, restricted stock or other compensation or benefits payable
thereunder;
|
·
|
Except
as previously disclosed or in connection with the consummation of
the sale
of the Pasadena Branch, sell, transfer, mortgage, encumber or otherwise
dispose of or discontinue any of its assets, deposits, business or
properties except in the ordinary course of business and in a transaction
that is not material to it and its subsidiaries taken as a
whole;
|
·
|
Except
as previously disclosed, acquire (other than by way of foreclosures
or
acquisitions of control in a bona fide fiduciary capacity or in
satisfaction of debts previously contracted in good faith, in each
case in
the ordinary and usual course of business consistent with past practice)
all or any portion of the assets, business, deposits or properties
of any
other entity;
|
·
|
Amend
Greater Atlantic’s certificate of incorporation or bylaws or the
articles of incorporation or bylaws (or similar governing documents)
of
any of Greater Atlantic’s
subsidiaries;
|
·
|
Implement
or adopt any change in its accounting principles, practices or methods,
other than as may be required by generally accepted accounting
principles;
|
·
|
Except
in the ordinary course of business consistent with past practice,
enter
into or terminate any material contract or amend or modify in any
material
respect any of its existing material
contracts;
|
·
|
Except
in the ordinary course of business consistent with past practice,
settle
any claim, action or proceeding, except for any claim, action or
proceeding that does not involve precedent for other material claims,
actions or proceedings and that involve solely money damages in an
amount,
individually or in the aggregate for all such settlements, that is
not
material to Greater Atlantic and its subsidiaries, taken as a
whole;
|
·
|
Make
any loans in a principal amount in excess of $750,000, or make any
loans
outside the District of Columbia, Delaware, Maryland, Pennsylvania,
Virginia and West Virginia;
|
·
|
Incur
any indebtedness for borrowed money other than in the ordinary course
of
business; or
|
·
|
Agree
or commit to do any of the
foregoing.
|
Summit
has agreed that, prior to the effective time, without the prior written consent
of Greater Atlantic it will not:
·
Make,
declare, pay or set aside for payment any
extraordinary dividend;
·
|
Agree
or commit to do any of the
foregoing.
|
Accounting
Treatment
The
merger will be accounted for under the “purchase” method of
accounting. Under the purchase method of accounting, the tangible
assets and liabilities of Greater Atlantic, as of the completion of the merger,
will be recorded at their fair values as well as any identifiable intangible
assets. Any remaining excess purchase price will be allocated to
goodwill and will not be amortized. Instead, goodwill is evaluated
for impairment annually. Financial statements of Summit issued after
the consummation of the merger will reflect such values and will not be restated
retroactively to reflect the historical position or results of operations of
Greater Atlantic. The operating results of Greater Atlantic will be
reflected in Summit’s consolidated financial statements from and after the date
the merger is consummated.
Management
and Operations after the Merger
Board
of Directors. The current Board of Directors of Summit will
continue to serve as the Board of Directors after the Merger.
Management. The
current executive officers of Summit will continue to serve as executive
officers after the Merger.
Resales
of Summit Common Stock
The
shares of Summit common stock to be issued to shareholders of Greater Atlantic
under the merger agreement have been registered under the Securities Act of
1933
and may be freely traded without restriction by holders who will not be
affiliates of Summit after the merger and who were not affiliates of Greater
Atlantic on the date of the special meeting.
All
directors and executive officers of Greater Atlantic are considered affiliates
of Greater Atlantic for this purpose. They may resell shares of
Summit common stock received in the merger only if the shares are registered
for
resale under the Securities Act or an exemption is available. They
may resell under the safe harbor provisions of Rule 145 under the
Securities Act or as otherwise permitted under the Securities
Act. Each Greater Atlantic director and each other person deemed to
be an affiliate will enter into an agreement with Summit providing that the
person will not transfer any shares of Summit common stock received in the
merger, except in compliance with the Securities Act. We encourage
any such person to obtain advice of securities counsel before reselling any
Summit common stock.
CERTAIN
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
General
The
following summary sets forth the material U.S. federal income tax consequences
of the merger to the holders of Greater Atlantic common stock who exchange
such
stock for a combination of the cash and Summit common stock. The tax
consequences under state, local and foreign laws are not addressed in this
summary. The following summary is based upon the Internal Revenue
Code of 1986, as amended, Treasury regulations, administrative rulings and
court
decisions in effect as of the date hereof, all of which are subject to change,
possibly with retroactive effect. Such a change could affect the
continuing validity of this summary. No assurance can be given that
the Internal Revenue Service would not
assert, or that a court would not sustain, a position contrary to any of the
tax
consequences set forth below.
The
following summary addresses only shareholders who are citizens or residents
of
the United States who hold their Greater Atlantic common stock as a capital
asset. It does not address all the tax consequences that may be
relevant to particular shareholders in light of their individual circumstances
or to shareholders that are subject to special rules, including, without
limitation: financial institutions; tax-exempt organizations; S corporations,
partnerships or other pass-through entities (or an investor in an S corporation,
partnership or other pass-through entities); insurance companies; mutual funds;
dealers in stocks or securities, or foreign currencies; foreign holders; a
trader in securities who elects the mark-to-market method of accounting for
the
securities; persons that hold shares as a hedge against currency risk, a
straddle or a constructive sale or conversion transaction; holders who acquired
their shares pursuant to the exercise of employee stock options or otherwise
as
compensation or through a tax-qualified retirement plan; holders of Greater
Atlantic stock options, stock warrants or debt instruments; and holders subject
to the alternative minimum tax.
The
Merger
No
ruling
has been, or will be, sought from the Internal Revenue Service as to the U.S.
federal income tax consequences of the merger. Consummation of the
merger is conditioned upon Summit’s receiving an opinion from Hunton &
Williams to the effect that, based upon facts, representations and assumptions
set forth in such opinions, the merger constitutes a reorganization within
the
meaning of Section 368 of the Internal Revenue Code. The issuance of
the opinion is conditioned on, among other things, such tax counsel’s receipt of
representation letters from each of Greater Atlantic or Summit, in each
case in form and substance reasonably satisfactory to such
counsel. Opinions of counsel are not binding on the Internal Revenue
Service.
Based
upon the above assumptions and qualifications, for U.S. federal income tax
purposes the merger will constitute a reorganization within the meaning of
Section 368 of the Internal Revenue Code. Each of Greater Atlantic
and Summit will be a party to the merger within the meaning of Section
368(b) of the Internal Revenue Code, and neither of Greater Atlantic
or Summit will recognize any gain or loss as a result of the
merger.
Consequences
to Shareholders
Exchange
of Greater Atlantic Common Stock for Summit
Common Stock and Cash. A holder of Greater Atlantic
common stock who exchanges his or her Greater Atlantic common stock actually
owned for a combination of cash and common stock of Summit will recognize income
or gain in an amount equal to the lesser of (a) the amount of cash
received, or (b) the gain realized on the exchange. The gain
realized on the exchange will equal the fair market value of Summit common
stock
received plus the amount of cash received, less the holder’s adjusted tax basis
in the shares of Greater Atlantic common stock exchanged by the
holder. No loss may be recognized by a holder of Greater Atlantic
common stock from the combined distribution of cash and Summit common stock
or
the stock distribution.
Cash
in Lieu of Fractional Shares. Holders of Greater Atlantic common stock who
receive cash in lieu of fractional shares of Summit common stock in the merger
generally will be treated as if the fractional shares of Summit common stock
had
been distributed to them as part of the merger, and then redeemed by Summit
in
exchange for the cash actually distributed in lieu of the fractional shares,
with the redemption generally qualifying as an “exchange” under Section 302 of
the Internal Revenue Code, as described below. Consequently, those
holders generally will recognize capital gain or loss with respect to the cash
payments they receive in lieu of fractional shares measured by the difference
between the amount of cash received and the tax basis allocated to the
fractional shares.
Possible Treatment of Cash as a Dividend. Whether the
cash received by a holder of Greater Atlantic common stock, in those situations
described in the immediately preceding two paragraphs, will be treated as
capital gain or as ordinary dividend income is determined under the principles
of
Section 302
of the Internal Revenue Code. In applying these principles, the
holder is treated as if shares of Summit common stock having a fair market
value
equal to the cash paid to the holder had been distributed by Summit to the
holder with such shares of Summit common stock then being redeemed by Summit
in
return for the cash. If this hypothetical redemption constitutes an
“exchange” under Section 302 of the Internal Revenue Code, taking into account
the holder’s actual and constructive ownership of Greater Atlantic common stock
under Section 318 of the Internal Revenue Code, the holder of Greater Atlantic
common stock who receives cash will recognize capital gain measured by the
difference between that holder’s adjusted basis for the Greater Atlantic common
stock exchanged and the cash received. If the hypothetical redemption
does not qualify as an “exchange” under Section 302 of the Internal Revenue
Code, the cash received by the holder will be treated as ordinary dividend
income, generally to the extent of the holder’s ratable share of accumulated
earnings and profits. To the extent the cash distribution exceeds the
holder’s ratable share of accumulated earnings and profits, the amount received
will be applied against and reduce the holder’s adjusted basis in his or her
stock and any excess will be treated as gain from the sale or exchange of the
stock.
In
general, whether this hypothetical redemption constitutes an “exchange” under
Section 302 of the Internal Revenue Code will depend upon whether and to what
extent the hypothetical redemption reduces the holder’s percentage stock
ownership in Summit. The hypothetical redemption will be treated as
an “exchange” if, under the principles of Section 302 of the Internal
Revenue Code, the hypothetical redemption is (a) ”substantially
disproportionate,” (b) ”not essentially equivalent to a dividend” or
(c) results in a “complete termination” of the holder’s interest in Summit
common stock.
In
general, the determination of whether the hypothetical redemption will be
“substantially disproportionate” will require a comparison of (x) the
percentage of the outstanding voting stock of Summit that the holder of Greater
Atlantic common stock is deemed to actually and constructively own immediately
before the hypothetical redemption by Summit and (y) the percentage of the
outstanding voting stock of Summit actually and constructively owned by the
holder immediately after the hypothetical redemption by
Summit. Generally, the hypothetical redemption will be “substantially
disproportionate” to a holder of Greater Atlantic common stock if the percentage
described in (y) above is less than 80% of the percentage described in
(x) above.
Whether
the hypothetical redemption is “not essentially equivalent to a dividend” with
respect to the holder will depend on the holder’s particular
circumstances. In order for the hypothetical redemption to be “not
essentially equivalent to a dividend,” the hypothetical redemption must result
in a “meaningful reduction” in the holder’s percentage stock ownership of the
merged company’s common stock. The Internal Revenue Service has ruled
that a minority shareholder in a publicly traded corporation whose relative
stock interest is minimal and who exercises no control with respect to corporate
affairs is considered to have a “meaningful reduction” generally if such
shareholder has some reduction in such shareholder’s percentage stock
ownership. Holders should consult their tax advisors as to the
applicability of the ruling to their own individual circumstances.
The
hypothetical redemption will result in a “complete termination” of the holder’s
interest in Summit common stock if all of the shares actually owned by the
holder are exchanged pursuant to the merger and the holder is eligible to waive,
and effectively waives, the attribution of shares constructively owned by the
holder in accordance with the procedures described in Section 302(c)(2) of
the
Internal Revenue Code. Only family attribution, as referred to below,
may be waived under Section 302(c)(2) of the Internal Revenue
Code.
Taxation
of Capital Gain. Any capital gain recognized by any holder of
Greater Atlantic common stock under the above discussion will be long-term
capital gain if the holder has held the Greater Atlantic
common stock for more than twelve months at the time of the
exchange. In the case of a non-corporate holder, that long-term
capital gain may be subject to a maximum federal income tax of
15%. The deductibility of capital losses by shareholders may be
limited.
Basis
in Summit Common Stock. Each holder’s
aggregate tax basis in Summit common stock received in the merger will be the
same as the holder’s aggregate tax basis in the Greater Atlantic common stock
exchanged, decreased by the amount of any cash received in the merger and by
the
amount of any tax basis allocable to any fractional share interest for which
cash is received and increased by any gain recognized in the
exchange. The holding period of Summit common stock received by a
holder in the merger will include the holding period of the Greater Atlantic
common stock exchanged in the merger to the extent the Greater Atlantic common
stock exchanged is held as a capital asset at the time of the
merger.
Constructive
Ownership. In applying the constructive ownership provisions of
Section 318 of the Internal Revenue Code, a holder of Greater Atlantic common
stock may be deemed to own stock that is owned directly or indirectly by other
persons, such as certain family members and entities such as trusts,
corporations, partnerships or other entities in which the holder has an
interest. Since the constructive ownership provisions are complex,
holders should consult their tax advisors as to the applicability of these
provisions.
Backup
Withholding and Reporting Requirements
Holders
of Greater Atlantic common stock, other than certain exempt recipients, may
be
subject to backup withholding at a rate of 28% with respect to any cash payment
received in the merger. However, backup withholding will not apply to
any holder who either (a) furnishes a correct taxpayer identification
number and certifies that he or she is not subject to backup withholding by
completing the substitute Form W-9 that will be included as part of the election
form and the transmittal letter, or (b) otherwise proves to Summit and its
exchange agent that the holder is exempt from backup withholding.
Shareholders
will also be required to file certain information with their federal income
tax
returns and to retain certain records with regard to the merger.
The
discussion of U.S. federal income tax consequences set forth above is for
general information only and does not purport to be a complete analysis or
listing of all potential tax effects that may apply to a holder of Greater
Atlantic common stock. We strongly encourage shareholders of Greater
Atlantic to consult their tax advisors to determine the particular tax
consequences to them of the merger, including the application and effect of
federal, state, local, foreign and other tax laws.
INFORMATION
ABOUT
SUMMIT
FINANCIAL GROUP, INC. AND
GREATER
ATLANTIC FINANCIAL CORP.
Summit
Financial Group, Inc.
Summit is
a West Virginia corporation registered as a bank holding company pursuant to
the
Bank Holding Company Act of 1956, as amended. Summit was incorporated
on March 3, 1987, organized on March 5, 1987, and began conducting business
on
March 5, 1987. At December 31, 2006, Summit has one banking
subsidiary “doing business” under the name of Summit Community
Bank. Summit Community Bank offers a full range of commercial and
retail banking services and products.
As
a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended, Summit’s present business is community banking. As of June 30,
2007, Summit’s consolidated assets approximated $1.3 billion and total
shareholders’ equity approximated $81.9 million. At June 30, 2007,
Summit’s loan portfolio, net of unearned income, was $949 million and its
deposits were $850 million.
The
principal executive offices of
Summit are located in Moorefield, West Virginia at 300 North Main
Street. The telephone number for Summit’s principal executive offices
is (304) 530-1000. Summit operates 15 full service offices - 9
located throughout West Virginia and 6 throughout Northern Virginia and the
Shenandoah Valley.
Greater
Atlantic Financial Corp.
Greater
Atlantic is a savings and loan holding company organized under the laws of
the
State of Delaware and is registered under the federal Home Owners’ Loan
Act. It has one subsidiary – Greater Atlantic Bank, which has four
offices in Virginia and an office in Maryland through which all of its business
is conducted.
Greater
Atlantic is engaged in the business of offering banking services to the general
public. Through its subsidiary, Greater Atlantic offers checking
accounts, savings and time deposits, and commercial, real estate, personal,
home
improvement, automobile and other installment and term loans. It also
offers financial services, travelers’ checks, safe deposit boxes, collection,
notary public and other customary bank services (with the exception of trust
services) to its customers. The principal types of loans that the
banks make are commercial loans, commercial and residential real estate loans
and loans to individuals for household, family and other consumer
expenditures.
As
of
June 30, 2007, Greater Atlantic reported, on a consolidated basis, total assets
of approximately $300.9 million, net loans of $179.1 million, deposits of $254.4
million and shareholders’ equity of $6.6 million.
The
principal executive offices of Greater Atlantic Financial Corp. are located
at
10700 Parkridge Boulevard, Reston, Virginia 20191, telephone number
(703) 391-1300.
DESCRIPTION
OF
SUMMIT
FINANCIAL GROUP COMMON STOCK
General
The
authorized capital stock of Summit consists of 20 million shares of common
stock, par value $2.50 per share. Summit has 7,084,980 shares of
common stock issued (including no shares held as treasury shares) as of June
30,
2007. The outstanding shares are held by 1,308 shareholders of
record, as well as 1,128 shareholders in street name as of June 30,
2007. All outstanding shares of Summit common stock are fully paid
and nonassessable. The unissued portion of Summit’s authorized common
stock (subject to registration approval by the SEC) and the treasury shares
are
available for issuance as the board of directors of Summit determines
advisable.
Summit
has also established a stock option plan as incentive for certain eligible
officers. It has 349,080 stock options issued and outstanding as of
June 30, 2007.
Common
Stock
Voting
Rights. Summit has only one class of stock and all voting rights
are vested in the holders of Summit stock. On all matters subject to
a vote of shareholders, the shareholders of Summit will be entitled to one
vote
for each share of common stock owned. Shareholders of Summit have
cumulative voting rights with regard to election of directors.
Dividend
Rights. The shareholders of Summit are entitled to receive
dividends when and as declared by its board of directors. Dividends
have been paid semi-annually. Summit paid a dividend of $0.17 per
share in the first half of 2007. Dividends were $0.32 per
share in 2006, $0.30 per share in 2005 and $0.26 per share in
2004. The payment of dividends is subject to the restrictions set
forth in the West Virginia Corporation Act and the limitations imposed by the
Federal Reserve Board.
Payment
of dividends by Summit is dependent upon receipt of dividends from its banking
subsidiary. Payment of dividends by Summit’s banking subsidiary is regulated by
the Federal Reserve System and generally, the prior approval of the Federal
Reserve Board is required if the total dividends declared by a state non-member
bank in any calendar year exceeds its net profits, as defined, for that year
combined with its retained net profits for the preceding two
years. Additionally, prior approval of the Federal Reserve is
required when a state non-member bank has deficit retained earnings but has
sufficient current year’s net income, as defined, plus the retained net profits
of the two preceding years. The Federal Reserve may prohibit dividends if it
deems the payment to be an unsafe or unsound banking practice. The
Federal Reserve has issued guidelines for dividend payments by state non-member
banks emphasizing that proper dividend size depends on the bank’s earnings and
capital.
Liquidation
Rights. Upon any liquidation, dissolution or winding up of its
affairs, the holders of Summit common stock are entitled to receive pro rata
all
of the assets of Summit for distribution to shareholders. There are
no redemption or sinking fund provisions applicable to the common
stock.
Assessment
and Redemption. Shares of Summit common stock presently
outstanding are validly issued, fully paid and nonassessable. There
is no provision for any voluntary redemption of Summit common
stock.
Transfer
Agent and Registrar. The transfer agent and registrar for
Summit’s common stock is Registrar and Transfer Company.
Preemptive
Rights
No holder of any share of the capital stock of Summit has any preemptive right
to subscribe to an additional issue of its capital stock or to any security
convertible into such stock.
Certain
Provisions of the Bylaws
Indemnification
and Limitations on Liability of Officers and Directors
As
permitted by the West Virginia Business Corporation Act, the articles of
incorporation of Summit contain provisions that indemnify its directors and
officers to the fullest extent permitted by West Virginia law. These
provisions do not limit or eliminate the rights of Summit or any shareholder
to
seek an injunction or any other non-monetary relief in the event of a
breach of a director’s or officer’s fiduciary duty. In addition,
these provisions apply only to claims against a director or officer arising
out
of his role as a director or officer and do not relieve a director or officer
from liability if he engaged in willful misconduct or a knowing violation of
the
criminal law or any federal or state securities law.
In
addition, the articles of incorporation of Summit provide for the
indemnification of both directors and officers for expenses that they incur
in
connection with the defense or settlement of claims asserted against them in
their capacities as directors and officers. This right of
indemnification extends to judgments or penalties assessed against
them. Summit has limited its exposure to liability for
indemnification of directors and officers by purchasing directors and officers
liability insurance coverage.
The
rights of indemnification provided in the articles of incorporation of Summit
are not exclusive of any other rights that may be available under any insurance
or other agreement, by vote of shareholders or disinterested directors
or otherwise.
Shares
Eligible for Future Sale
All
of
the shares that will be exchanged for shares of Summit common stock upon
consummation of the merger will be freely tradable without restriction or
registration under the Securities Act, except for shares owned by “affiliates”
as described under “– Resales of Summit Common Stock” on
page ____.
Summit
cannot predict the effect, if any, that future sales of shares of its common
stock, or the availability of shares for future sales, will have on the market
price prevailing from time to time. Sales of substantial amounts of
shares of our common stock, or the perception that such sales could occur,
could
adversely affect the prevailing market price of the shares.
COMPARATIVE
RIGHTS OF SHAREHOLDERS
The
rights of Summit’s shareholders are governed by the West Virginia Business
Corporation Act and the rights of Greater Atlantic’s shareholders are governed
by the Delaware General Corporation Law. The rights of shareholders
under both corporations are also governed by their respective
articles/certificate of incorporation and bylaws. Following the
merger, the rights of Greater Atlantic’s shareholders that receive Summit common
stock will be governed by the articles of incorporation and bylaws of
Summit. This summary does not purport to be a complete discussion of,
and is qualified in its entirety by reference to, Greater Atlantic’s articles of
incorporation and bylaws, Summit’s articles of incorporation and bylaws and West
Virginia and Delaware law.
Authorized
Capital Stock
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
20,000,000 shares
of common stock, $2.50 par value per share, and 250,000 shares of
preferred stock, $1.00 par value per share.
|
10,000,000
shares of common stock, $0.01 par value per share, and 2,500,000
shares of
preferred stock, no par value per
share.
|
Size
of Board of Directors
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
Summit’s
bylaws provide that the board of directors shall consist of at least
9 and
no more than 21 directors. Summit’s board of directors
currently consists of 16 individuals, and immediately following the
merger
will consist of 16 individuals.
|
The
bylaws of Greater Atlantic provide that the number of directors shall
be
such number as the majority of the whole board shall from time to
time
have designated, and in the absence of such designation, shall be
5. The board currently consists of 5 directors.
|
Cumulative
Voting for Directors
Cumulative
voting entitles each shareholder to cast an aggregate number of votes equal
to
the number of voting shares held, multiplied by the number of directors to
be
elected. Each shareholder may cast all of his or her votes for one
nominee or distribute them among two or more nominees, thus permitting holders
of less than a majority of the outstanding shares of voting stock to achieve
board representation. Where cumulative voting is not permitted,
holders of all outstanding shares of voting stock of a corporation elect the
entire board of directors of the corporation, thereby precluding the election
of
any directors by the holders of less than a majority of the outstanding shares
of voting stock.
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
Summit
stockholders are allowed to cumulate their votes in the election
of
directors. Each share of Summit stock may be voted for as many
individuals as there are directors to be elected. Directors are
elected by a plurality of the votes cast by the holders entitled
to vote
at the meeting.
|
Greater
Atlantic stockholders may not cumulate their votes for the election
of
directors. Directors are elected by a plurality of the votes
cast by the holders entitled to vote at the
meeting.
|
Classes
of Directors
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
Summit’s
Articles provide that the board of directors shall be divided into
three
(3) classes, consisting of an equal number of directors per
class. The term of office of directors of one class shall
expire at each annual meeting of shareholders.
|
The
bylaws of Greater Atlantic provide that the board of directors shall
be
divided into three classes, with one class elected at each annual
meeting.
|
Qualifications
of Directors
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
Summit’s
bylaws require that a person own a minimum of 2,000 shares of stock
of
Summit to be qualified as a director.
|
None.
|
Filling
Vacancies on the Board
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
Summit’s
bylaws provide that each vacancy existing on the board of directors
and
any directorship to be filled by reason of an increase in the number
of
directors, unless the articles of incorporation or bylaws provide
that a
vacancy shall be filled in some other manner, may be filled by the
affirmative vote of a majority of the remaining directors though
less than
a quorum of the board of directors at a regular or special
meeting of the board of directors. Any directorship to be filled
by reason
of a vacancy may be filled for the
unexpired term of his predecessor in office.
|
Greater
Atlantic’s bylaws provide that, unless the board of directors otherwise
determines, newly created directorships resulting from any increase
in the
authorized number of directors or any vacancies in the board of directors
resulting from death, resignation, retirement, disqualify-cation,
removal
from office or other cause may be filled only by a majority vote
of the
directors then in office, though less than a quorum, and directors
so
chosen shall hold office for a term expiring at the annual meeting
of
stockholders at which the term of office of the class to which they
have
been elected expires and until such director's successor shall have
been
duly elected and qualified.
|
Removal
of Directors
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
Under
West Virginia law any member of the board may be removed, with or
without
cause, by the affirmative vote of a majority of all the votes entitled
to
be cast for the election of directors; provided, however, that a
director
may not be removed if the number of votes sufficient to elect the
director
under cumulative voting is voted against the director’s
removal.
|
Under
Delaware law, subject to the rights of preferred stockholders, any
director, or the entire board of directors, may be removed from office
at
any time, but only for cause and only by the affirmative vote of
at least
80% of the voting power of the then-outstanding shares of capital
stock
entitled to vote generally in the election of directors voting together
as
a single class.
|
Notice
of Shareholder Proposals and Director Nominations
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
Summit’s
Articles provide that shareholders may make a nomination for director
provided that such nomination or nominations must be made in writing
and
delivered or mailed to, the President of Summit no later
than 30 days prior to any meeting of shareholders
called for the election of directors; provided, however, that if
less than
thirty (30) days notice of the meeting is given to shareholders,
such
nomination or nominations shall be mailed or delivered to the
President of Summit no later than the fifth (5th) day following the
day on
which the notice of meeting was mailed.
|
For
business to be properly brought before an annual meeting by a stockholder,
the business must relate to a proper subject matter for stockholder
action
and the stockholder must have given timely notice thereof in writing
to
the Secretary of Greater Atlantic. To be timely, a
stockholder's notice must be delivered or mailed to and received
at the
principal executive offices of Greater Atlantic not less than ninety
(90)
days prior to the date of the annual meeting; provided, however,
that in the event that less than one hundred (100) days' notice or
prior
public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be received
not
later than the close of business on the 10th day following the day
on
which such notice of the date of the annual meeting was mailed or
such
public disclosure was made. A stockholder's notice to the
Secretary shall set forth as to each matter such stockholder proposes
to
bring before the annual meeting: (i) a brief description of the
business desired to be brought before the annual meeting and the
reasons
for conducting such business at the annual meeting; (ii) the name
and
address, as they appear on Greater Atlantic’s books, of the stockholder
proposing such business; (iii) the class and number of shares of
Greater
Atlantic's capital stock that are beneficially owned by such stockholder;
and (iv) any material interest of such stockholder in such
business.
Nominations
of persons for election to the board of directors may be made by
any
stockholder entitled to vote for the election of directors at the
meeting
if made by timely notice in writing to the Secretary of Greater
Atlantic. To be timely, a stockholder's notice shall be
delivered or mailed to and received at the principal executive offices
of
Greater Atlantic not less than ninety (90) days prior to the date
of the
meeting; provided, however, that in the event that less than one
hundred (100) days' notice or prior disclosure of the date of the
meeting
is given or made to stockholders, notice by the stockholder to be
timely
must be so received not later than the close of business on the 10th
day
following the day on which such notice of the date of the
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
meeting
was
mailed or such public disclosure was made. Such stockholder's
notice
shall set forth: (i) as to each person
whom such stockholder proposes to nominate for
election or re-election as a director, all
information relating to such person that is
required
to
be disclosed in solicitations of proxies for
election
of directors, or is
otherwise
required,
in each case pursuant to Regulation 14A under
the
Securities
Exchange
Act
of 1934, as amended (including such person's written
consent to being
named
in the
proxy statement as a nominee and to serving as a
director if elected); and
(ii)
as
to the stockholder giving the notice (x) the name and
address, as they appear on
Greater
Atlantic's books, of such stockholder and (y) the
class and number of shares of
Greater
Atlantic's capital stock that are beneficially owned
by such stockholder.
|
|
|
Anti-Takeover
Provisions - Business Combinations
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
Summit’s
Articles of Incorporation provide that at least 66 2/3% of the authorized,
issued and outstanding voting shares of Summit must approve certain
“business combinations” unless the “business combination” has been
previously approved by at least 66 2/3% of the board of directors
of
Summit, in which case only a simple majority vote of the shareholders
shall be required.
Summit’s
Articles of Incorporation additionally provide that neither Summit
nor any
of its subsidiaries shall become a party to any “business combination”
unless certain fair price requirements are satisfied. West
Virginia corporate law does not contain statutory provisions concerning
restrictions on business combinations.
|
Greater
Atlantic’s certificate of incorporation provides that at least 80% of the
voting power of the then outstanding shares of voting stock must
approve
certain “business combinations” involving an “interested stockholder.”
However, this vote requirement is not applicable to any particular
business combination, and such business combination shall require
only the
vote of a majority of the outstanding shares of capital stock entitled
to
vote, if a majority of directors not affiliated with the interested
stockholder approves the business combination, or certain price and
procedure requirements are met. An “interested stockholder” generally
means a person who is a greater than 10% stockholder of Greater Atlantic
or who is an affiliate of Greater Atlantic and at any time within
the past
two years was a greater than 10% stockholder of Greater
Atlantic.
|
Shareholder
Action Without a Meeting
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
Summit’s
bylaws provide that any action required to be taken at a meeting
of the
shareholders may be taken without a meeting if a consent in writing,
setting forth the action so taken, shall be signed by all of the
shareholders entitled to vote on the matter at issue.
|
Under
Delaware law, unless limited by the certificate of incorporation,
any
action that could be taken by shareholders at a meeting may be taken
without a meeting if a consent (or consents) in writing, setting
forth the
action so taken, is signed by the holders of record of outstanding
stock
having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares
entitled
to vote thereon were present and voted. Greater Atlantic’s certificate of
incorporation does not contain a provision limiting such
action.
|
Calling
Special Meetings of Shareholders
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
Special
meetings of the shareholders may be called by the president or by
the
board of directors, and shall be called by the President if the holders
of
at least 10% of all the votes entitled to be cast on an issue to
be
considered at the proposed special meeting sign, date and deliver
to
Summit one or more written demands for the meeting describing the
purpose
or purposes for which it shall be held.
|
Special
meetings of stockholders may be called only by the board of directors
pursuant to a resolution adopted by a majority of the total number
of
directors which Greater Atlantic would have if there were no vacancies
on
the board of directors.
|
Notice
of Meetings
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
Summit’s
bylaws require that the notice of annual and special meetings be
given by
mailing to each shareholder a written notice specifying the time
and place
of such meeting, and, in the case of special meetings, the business
to be
transacted. The notice must be mailed to the last addresses of
the shareholders as they respectively appear upon the books of the
Summit
not less than 10 nor more than 60 days before the date of such
meeting.
|
Greater
Atlantic’s bylaws provide that written notice of the place, date, and time
of all meetings of the stockholders shall be given, not less than
ten (10)
nor more than sixty (60) days before the date on which the meeting
is to
be held, to each stockholder entitled to vote at such meeting, except
as
otherwise required by law (meaning, as required from time to time
by the
Delaware General Corporation Law or the certificate of
incorporation).
|
Vote
Required for Amendments to Articles
of
Incorporation and Certain Transactions
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
Summit’s
articles of incorporation require the affirmative vote of holders
of at
least 66 2/3% of the then outstanding voting shares of Summit;
provided, however, such vote shall not be required for any such amendment,
change or repeal recommended to the stockholders by the favorable
vote of
not less than 66 2/3% of the directors of Summit, and any such
amendment shall require only a majority vote.
West
Virginia law provides that on matters other than the election of
directors
and certain extraordinary corporate actions, if a quorum is present,
then
action on a matter is approved if the votes cast favoring the action
exceed the votes cast opposing the action, unless the vote of a greater
number is required by law or the articles of incorporation or
bylaws. The articles of incorporation or bylaws of Summit do
not require a greater number. An abstention is not considered a
“vote cast” for purposes of the voting requirements, but a stockholder who
abstains in person or by proxy is considered present for purposes
of the
quorum requirement.
The
articles of incorporation of Summit provide that at least 66 2/3%
of the
authorized, issued and outstanding voting shares of Summit must approve
any merger or consolidation of Summit with another corporation or
any
sale, lease or exchange by liquidation or otherwise of all or
substantially all of the assets of Summit unless such transaction
has been
previously approved by at least 66 2/3% of the board of directors
in which
case a simple majority vote of the shareholders shall be
required.
|
Greater
Atlantic’s certificate of incorporation reserves the right to amend or
repeal any provision in the certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware; provided, however,
that,
notwithstanding any other provision of the certificate of incorporation
or
any provision of law which might otherwise permit a lesser vote or
no
vote, the affirmative vote of the holders of at least 80% of the
voting
power of all of the then-outstanding shares of the capital stock
of the
corporation entitled to vote generally in the election of directors,
voting together as a single class, are required to amend or repeal
certain
articles.
Delaware
law provides that any amendment to the certificate of incorporation
must
first be proposed by the board of directors in a resolution setting
forth
the proposed amendment, declaring its advisability and submitting
it to
the stockholders entitled to vote on approval of the
amendment. It must then be submitted to the stockholders at the
next annual meeting, or at a special meeting called for the purpose
of
considering the amendment or submitted for adoption by written consent.
The affirmative vote required is a majority of the outstanding shares
entitled to vote thereon.
|
Amendment
of Bylaws
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
Under
West Virginia law both the board of directors and stockholders
have the power to amend the bylaws. Summit’s bylaws provide
that the bylaws may only be altered, amended or repealed and new
bylaws
may only be adopted by the board of directors at a regular or special
meeting of the board of directors by a vote of three
|
The
bylaws of Greater Atlantic provide that the board of directors may
amend,
alter or repeal the bylaws at any meeting of the board, provided
notice of
the proposed change was given not less than two (2) days prior to
the
meeting. The stockholders shall also have power to amend, alter
or repeal the bylaws at any meeting of
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
fourths
of the board of directors or by a majority of the
stockholders.
|
stockholders
provided notice of the proposed change was given in the notice of
the
meeting, and provided there is the vote of at least 80% of the voting
power of all the then-outstanding shares of the voting stock, voting
together as a single class.
|
Appraisal
Rights
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
Under
West Virginia law, stockholders are generally entitled to object
and
receive payment of the fair value of their stock in the event of
any of
the following corporate actions: merger, transfer of all or
substantially all of the corporation’s assets, participation in a share
exchange as the corporation the stock of which is to be acquired,
or an
amendment to the articles of incorporation that reduces the number
of
shares of a class or series owned by stockholders to a fraction of
a share
if the corporation has the obligation or right to repurchase the
fractional shares.
|
Delaware
law provides that stockholders of a corporation who are voting on
a merger
or consolidation generally are entitled to dissent from the transaction
and obtain payment of the fair value of their shares (so-called “appraisal
rights”). Appraisal rights do not apply if, however, (1) the shares
are listed on a national securities exchange or are held by 2,000
or more
holders of record (not currently the case with respect to Greater
Atlantic’s common stock) and (2) except for cash in lieu of
fractional share interests, the shares are being exchanged for the
shares
of the surviving corporation of the merger or the shares of any other
corporation, which shares of such other corporation will, as of the
effective date of the merger or consolidation, be listed on a national
securities exchange or be held of record by more than 2,000 holders.
Appraisal rights also are not available to a corporation’s stockholders
when the corporation will be the surviving corporation and a vote
of its
stockholders is not required to approve the merger.
Delaware
law also provides that any corporation may provide in its certificate
of
incorporation that appraisal rights shall be available in connection
with
amendments to its certificate of incorporation, any merger to which
the
corporation is a party or the sale of all or substantially all of
the
corporation’s assets .Greater Atlantic’s certificate of incorporation
contains no such provision.
|
Dividends
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
A
West Virginia corporation generally may pay dividends in cash, property
or
its own shares except when the corporation is unable to pay its debts
as
they become due in the usual course of business or the corporation’s total
assets would be less than the sum of its total liabilities plus the
amount
that would be needed, if the corporation were to be dissolved at
the time
of the dividend, to satisfy any stockholders who have rights superior
to
those receiving the dividend. Summit’s Articles of
Incorporation provide that preferred stock will not pay any
dividends.
|
Under
Delaware law, stockholders are entitled, when declared by the board
of
directors, to receive dividends, subject to any restrictions contained
in
the certificate of incorporation and subject to any rights or preferences
of any series of preferred stock. There are no express restrictions
regarding dividends in Greater Atlantic’s certificate of
incorporation.
|
Discharge
of Duties; Exculpation and Indemnification
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
West
Virginia law requires that a director of a West Virginia corporation
discharge duties as a director in good faith, in a manner reasonably
believed to be in the best interest of the corporation and with the
care
that a person in a like position would reasonably believe
appropriate under similar circumstances. Summit’s articles of
incorporation provide that each director or officer of Summit shall
be
indemnified for costs and expenses arising out of any civil suit
or
proceeding against the director or officer by reason of being a director
or officer of Summit provided the director or officer acted in good
faith
and in a manner which the director or officer reasonably believed
to be in
or not opposed to the best interests of the corporation.
With
respect to any criminal proceeding, a director or officer shall be
entitled to indemnification if such person had no reasonable cause
to
believe his or her conduct was unlawful.
However,
a director or officer shall not be indemnified if he or she is adjudged
in
such suit or proceeding to be liable for gross negligence or willful
misconduct in performance of a duty owed to the
corporation.
|
The
Delaware General Corporation Law requires directors to discharge
their
duties as a director in good faith, on an informed basis, with the
care an
ordinarily prudent person in a like position would exercise under
similar
circumstances, and in a manner reasonably believed to be in the best
interests of the corporation.
Delaware
law provides that a corporation may indemnify any director made party
to
any proceeding by reason of service in that capacity if the person
acted
in good faith and in a manner the person reasonably believed to be
in the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe the person’s
conduct was unlawful.
Delaware
law also provides that a corporation may not indemnify a director
in
respect to any claim, issue or matter as to which the director has
been
adjudged to be liable to the corporation unless and only to the extent
that, the Court of Chancery or court where such action was brought
determines indemnity is proper. Furthermore, directors shall be
indemnified where they have been successful on the merits or
otherwise.
Greater
Atlantic’s certificate of incorporation provides that the corporation
shall indemnify
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
any
director made party to a proceeding because he or she is or was serving
as
director against all expense, liability and loss to the fullest extent
authorized by Delaware law.
Greater
Atlantic’s certificate of incorporation also provides that a director
shall not be personally liable to the corporation or its stockholders
for
monetary damages for breach of fiduciary duty as a director, except
for
liability (i) for any breach of the director’s duty of loyalty to the
corporation or its stockholders; (ii) for acts or omissions not in
good
faith or which involve intentional misconduct or a knowing violation
of
law; (iii) for unlawful payment of dividends or unlawful stock purchases
or redemption; or (iv) for any transaction from which the director
derived
an improper personal benefit.
|
ADJOURNMENT
OF THE MEETING
In
the
event that there are not sufficient votes to constitute a quorum or to approve
the matters to be considered at the time of the special meeting, the merger
agreement will not be approved unless the special meeting is adjourned to a
later date or dates in order to permit further solicitation of
proxies. In order to allow proxies that have been received at the
time of the meeting to be voted for an adjournment, if necessary, Greater
Atlantic is submitting the question of adjournment to its shareholders as a
separate matter for their consideration. The board of directors of
Greater Atlantic recommends that its shareholders vote FOR the adjournment
proposal. If it is necessary to adjourn a meeting, no notice of such
adjourned meeting is required to be given to the company’s shareholders, other
than an announcement at the special meeting of the place, date and time to
which
the meeting is adjourned, if the meeting is adjourned for 30 days or
less.
The
board of directors of Greater Atlantic recommends that you vote “FOR” approval
of this proposal.
LEGAL
MATTERS
Hunton
& Williams will opine as to the qualification of the merger as a
reorganization and the tax treatment of the consideration paid in connection
with the merger under the Internal Revenue Code. Bowles Rice McDavid
Graff & Love LLP will opine as to the legality of the common stock of Summit
offered by this proxy statement/prospectus. Bowles Rice McDavid Graff
& Love LLP rendered legal services to Summit and its subsidiaries during
2006 and it is expected that the firm will continue to render certain services
to both in the future. The fees paid to Bowles Rice McDavid Graff & Love LLP
represented less than 5% of Bowles Rice McDavid Graff & Love LLP’s and
Summit’s revenues for 2006.
EXPERTS
The
consolidated financial statements of Summit appearing in Summit’s Annual Report
(Form 10-K) for the year ended December 31, 2006, as amended on September
26, 2007 on Form 10-K/A, and Summit management’s assessment of effectiveness of
internal control over financial reporting as of December 31, 2006, included
therein, have been audited by Arnett & Foster P.L.L.C., independent
registered public accounting firm, as set forth in their reports thereon,
included therein, and incorporated herein by reference. Such
consolidated financial statements and management’s assessment are incorporated
herein by reference in reliance upon such reports given on the authority of
such
firm as experts in accounting and auditing.
The
consolidated financial statements of Greater Atlantic and subsidiaries as of
September 30, 2006 and 2005 and for each of the three years in the period ended
September 30, 2006, attached to this proxy statement/prospectus and the
registration statement on Form S-4 as Annex D, have been attached hereto
and to the registration statement in reliance upon the report of BDO Seidman,
LLP, independent registered public accountants, and upon the authority of BDO
Seidman, LLP as experts in accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
Summit
has filed with the SEC under the Securities Act the registration statement
on
Form S-4 to register the shares of Summit common stock to be issued to Greater
Atlantic’s shareholders in connection with the merger. The
registration statement, including the exhibits and schedules thereto, contains
additional relevant information about Summit and its common
stock. The rules and regulations of the SEC allow Summit and Greater
Atlantic to omit certain information included in the registration statement
from
this proxy statement/prospectus. This proxy statement/prospectus is
part of the registration
statement
and is a prospectus of Summit in addition to being Greater Atlantic’s proxy
statement for its special meeting.
Both
Summit (File No. 0-16587) and Greater Atlantic (File No. 0-26467) file
reports, proxy statements and other information with the SEC under the
Securities Exchange Act of 1934. You may read and copy this
information at the Public Reference Room of the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information on the operation
of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet web site that
contains reports, proxy statements and other information about issuers, like
Summit and Greater Atlantic, who file electronically with the
SEC. The address of that site is www.sec.gov. Each of
Summit and Greater Atlantic also posts its SEC filings on its web
site. The website addresses are
www.summitfgi.com and www.gab.com,
respectively. Information contained on the Summit website or the
Greater Atlantic website is not incorporated by reference into this proxy
statement/prospectus, and you should not consider information contained in
its
website as part of this proxy statement/prospectus. You can also
inspect reports, proxy statements and other information that Summit and Greater
Atlantic have filed with the SEC at the National Association of Securities
Dealers, Inc., 1735 K Street, Washington, D.C. 20096.
The
SEC
allows Summit to “incorporate by reference” information into this proxy
statement/prospectus. This means that we can disclose important
information to you by referring you to another document filed separately by
Summit with the SEC. The information incorporated by reference is
considered to be a part of this proxy statement/prospectus, except for any
information that is superceded by information that is included in this proxy
statement/prospectus.
This
proxy statement/prospectus incorporates by reference the documents listed below
that Summit previously filed with the SEC:
|
●
|
Quarterly
Report on Form 10-Q
|
Quarter
ended March 31, 2007, as amended September 26, 2007, and Quarter
ended
June 30, 2007, as amended on September 26,
2007.
|
|
●
|
Annual
Report on Form 10-K
|
Year
ended December 31, 2006, as amended on September 26,
2007.
|
|
●
|
Definitive
Proxy Materials for
the
2007 Annual Meeting of
Shareholders
|
Filed
on April 11, 2007.
|
|
●
|
Current
Reports on Form 8-K
|
Filed
on January 26, 2007, April 13, 2007, April 20, 2007, April 30, 2007,
July 20, 2007, July 27, 2007 and August 22,
2007.
|
Greater
Atlantic previously filed with the SEC the documents listed below which are
attached to this proxy statement/prospectus for your reference:
|
●
|
Quarterly
Reports on Form 10-Q
|
Quarters
ended December 31, 2006, March 31, 2007, and June 30,
2007.
|
|
●
|
Annual
Report on Form 10-K
|
Year
ended September 30, 2006.
|
Neither
Summit nor Greater Atlantic has authorized anyone to give any information or
make any representation about the merger or the companies that is different
from, or in addition to, that contained in this proxy statement/prospectus
or in
any of the materials that we have incorporated into this proxy
statement/prospectus. Therefore, if anyone does give you information
of this sort, you should not rely on
it. Information
in this proxy statement/prospectus about Summit has been supplied by Summit
and
information about Greater Atlantic has been supplied by Greater
Atlantic. The information contained in this proxy
statement/prospectus speaks only as of the date of this proxy
statement/prospectus unless the information specifically indicates that another
date applies.
OTHER
MATTERS
The
board
of directors knows of no other matters that may come before this
meeting. If any matters other than those referred to should properly
come before the meeting, it is the intention of the persons named in the
enclosed proxy to vote such proxy in accordance with their best
judgment.
By
Order of the Board
of Directors
Edward
C. Allen,
Secretary
ANNEX
A
AGREEMENT
AND PLAN OF REORGANIZATION
dated
as
of April 12, 2007
by
and
between
SUMMIT
FINANCIAL GROUP, INC.
AND
GREATER
ATLANTIC FINANCIAL CORP.
Page
ARTICLE
I Certain
Definitions
|
1
|
1.01
|
Certain
Definitions
|
1
|
ARTICLE
II The
Merger
|
7
|
2.01
|
The
Merger
|
7
|
2.02
|
Effective
Date and Effective Time
|
7
|
ARTICLE
III The
Bank Merger
|
8
|
3.01
|
The
Bank Merger
|
8
|
3.02
|
Effective
Date and Effective Time
|
8
|
ARTICLE
IV Consideration;
Exchange Procedures
|
9
|
4.01
|
Merger
Consideration
|
9
|
4.02
|
Rights
as Stockholders; Stock Transfers
|
10
|
4.03
|
Fractional
Shares
|
10
|
4.04
|
Exchange
Procedures
|
10
|
4.05
|
Options
|
12
|
4.06
|
Warrants
|
12
|
4.07
|
Dissenters’
Rights
|
12
|
ARTICLE
V Actions
Pending the Effective Time
|
13
|
5.01
|
Forebearances
of GAFC
|
13
|
5.02
|
Forebearances
of Summit
|
15
|
ARTICLE
VI Representations
and Warranties
|
15
|
6.01
|
Disclosure
Schedules
|
15
|
6.02
|
Standard
|
16
|
6.03
|
Representations
and Warranties of GAFC
|
16
|
6.04
|
Representations
and Warranties of Summit
|
25
|
ARTICLE
VII Covenants
|
33
|
7.01
|
Reasonable
Best Efforts
|
33
|
7.02
|
Stockholder
Approval
|
33
|
7.03
|
Registration
Statement
|
33
|
7.04
|
Press
Releases
|
34
|
7.05
|
Access;
Information
|
34
|
7.06
|
Acquisition
Proposals
|
35
|
7.07
|
Affiliate
Agreements
|
35
|
7.08
|
Takeover
Laws
|
36
|
7.09
|
Certain
Policies
|
36
|
7.10
|
Regulatory
Applications
|
36
|
7.11
|
Indemnification
|
37
|
7.12
|
Benefit
Plans
|
37
|
7.13
|
Notification
of Certain Matters
|
38
|
7.14
|
Current
Public Information
|
38
|
7.15
|
Contractual
Rights of Current Employees |
38 |
7.16 |
GAFC
Trust Preferred
Securities |
38 |
7.17 |
Transition |
39 |
ARTICLE
VIII Conditions
to Consummation of the Merger
|
39
|
8.01
|
Conditions
to Each Party’s Obligation to Effect the Merger
|
39
|
8.02
|
Conditions
to Obligation of GAFC
|
40
|
8.03
|
Conditions
to Obligation of Summit
|
40
|
ARTICLE
IX Termination
|
41
|
9.01
|
Termination
|
41
|
9.02
|
Effect
of Termination and Abandonment
|
42
|
9.03
|
Fees
and Expenses
|
42
|
ARTICLE
X Miscellaneous
|
43
|
10.01
|
Survival
|
43
|
10.02
|
Waiver;
Amendment
|
43
|
10.03
|
Counterparts
|
43
|
10.04
|
Governing
Law
|
43
|
10.05
|
Expenses
|
43
|
10.06
|
Notices
|
43
|
10.07
|
Entire
Understanding; No Third Party Beneficiaries
|
44
|
10.08
|
Interpretation;
Effect
|
44
|
ANNEX
A.
|
FORM
OF SUPPLEMENT FOR MERGER SUB
ACCESSION
|
EXHIBIT
A.
|
FORM
OF GAFC AFFILIATE LETTER
|
AGREEMENT
AND PLAN OF REORGANIZATION, dated as of April 12, 2007 (this
“Agreement”), by and between GREATER ATLANTIC FINANCIAL CORP. (“GAFC”) and
SUMMIT FINANCIAL GROUP, INC. (“Summit”).
RECITALS
A. GAFC. GAFC
is a Delaware corporation, having its principal place of business in Reston,
Virginia.
B. Summit. Summit
is a West Virginia corporation, having its principal place of business in
Charleston, West Virginia.
C. Intentions
of the Parties. It is the intention of the parties to this
Agreement that the business combination contemplated hereby be treated as a
“reorganization” under Section 368 of the Internal Revenue Code of 1986, as
amended.
D. Board
Action. The respective Boards of Directors of each of Summit and
GAFC have determined that it is advisable and in the best interests of their
respective companies and their stockholders to consummate the strategic business
combination transaction provided for herein.
NOW,
THEREFORE, in consideration of the premises and of the mutual
covenants, representations, warranties and agreements contained herein the
parties agree as follows:
ARTICLE
I
Certain
Definitions
1.01 Certain
Definitions. The following terms are used in this Agreement
with the meanings set forth below:
“Acquisition
Proposal” means any tender or exchange offer, proposal for a merger,
consolidation or other business combination involving GAFC or any of its
Subsidiaries or any proposal or offer to acquire in any manner a substantial
equity interest in, or a substantial portion of the assets or deposits of,
GAFC
or any of its Subsidiaries, other than the transactions contemplated by this
Agreement.
“Adjusted
Shareholders’ Equity” has the meaning set forth in Section
4.01(c).
“Adjustment
Date” has the meaning set forth in Section 4.01(c).
“Agreement”
means this Agreement, as amended or modified from time to time in
accordance with Section 10.02.
“Average
Closing Price” has the meaning set forth in Section 4.01(a).
“Bank
Merger” has the meaning set forth in Section 3.01(a).
“Bank
Merger Effective Date” has the meaning set forth in Section
3.02.
“Benchmark
Equity” has the meaning set forth in Section 4.01(c).
“Cash
Consideration” has the meaning set forth in Section 4.01(a)
“Code”
means the Internal Revenue Code of 1986, as amended.
“Compensation
and Benefit Plans” has the meaning set forth in Section
6.03(m).
“Consultants”
has the meaning set forth in Section 6.03(m).
“Core
Deposits” means all deposits (as defined in 12 U.S.C. Section 1813(1)) of
GAFC shown on the books and records of GAB, including but not limited to all
interest posted thereon accrued but unpaid interest and both collected and
uncollected funds (including overdrawn accounts), together with GAB’s rights and
responsibilities under any customer agreement evidencing or relating thereto,
but excluding (i) deposit accounts associated with a public body, including
but
not limited to any municipal, county, state or federal government,
and (ii) brokered deposits and (iii) wholesale deposits, but
including corporate sweep accounts.
“Costs”
has the meaning set forth in Section 7.11(a).
“Directors”
has the meaning set forth in Section 6.03(m).
“Disclosure
Schedule” has the meaning set forth in Section 6.01.
“Dissenters’
Shares” has the meaning set forth in Section 4.07.
“DGCL”
means the Delaware General Corporation Law, as amended.
“DOL”
means the United States Department of Labor.
“Effective
Date” has the meaning set forth in Section 2.02(a).
“Effective
Time” means the effective time of the Merger, as provided for in Section
2.02(a).
“Employees”
has the meaning set forth in Section 6.03(m).
“Environmental
Laws” means all applicable local, state and federal environmental, health
and safety laws and regulations, including, without limitation, the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation, and Liability Act, the Clean Water Act, the Federal Clean Air
Act,
and the Occupational Safety and Health Act, each as amended, regulations
promulgated thereunder, and state counterparts.
“ERISA”
means the Employee Retirement Income Security Act of 1974, as
amended.
“ERISA
Affiliate” has the meaning set forth in Section 6.03(m)(i).
“Exchange
Act” means the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder.
“Exchange
Agent” has the meaning set forth in Sections 4.04(a).
“Exchange
Fund” has the meaning set forth in Section 4.04(a).
“Exchange
Ratio” has the meaning set forth in Section 4.01(a).
“GAB”
means Greater Atlantic Bank, a federally-chartered savings
bank.
“GAAP”
means generally accepted accounting principles in the United
States.
“GAFC”
has the meaning set forth in the preamble to this Agreement.
“GAFC
Affiliate” has the meaning set forth in Section 7.07(a).
“GAFC
Board” means the Board of Directors of GAFC.
“GAFC
By-Laws” means the By-laws of GAFC, as amended.
“GAFC
Certificate” means the Certificate of Incorporation of GAFC, as
amended.
“GAFC
Common Stock” means the common stock, par value $0.01 per share, of
GAFC.
“GAFC
Meeting” has the meaning set forth in Section 7.02.
“GAFC
Stock Option” has the meaning set forth in Section 4.05.
“GAFC
Stock Plans” has the meaning set forth in Section 4.05.
“GAFC
Trust Preferred Securities” means preferred shares of stock issued by
Greater Atlantic Financial Corporation Capital Trust I, a second tier business
trust subsidiary of GAFC.
“GAFC
Warrant” has the meaning set forth in Section 4.06.
“Governmental
Authority” means any court, administrative agency or commission or other
federal, state or local governmental authority or instrumentality.
“Guarantee”
shall mean the Guarantee executed by GAFC in connection with the issuance
of the GAFC Trust Preferred Securities.
“Indenture”
shall mean the Trust Indenture executed by GAFC in connection with the
issuance of the GAFC Trust Preferred Securities.
“IRS”
has the meaning set forth in Section 6.03(m).
“Indemnified
Party” has the meaning set forth in Section 7.11(a).
“Insurance
Amount” has the meaning set forth in Section 7.11(b).
“Lien”
means any charge, mortgage, pledge, security interest, restriction, claim,
lien, or encumbrance,
“Material
Adverse Effect” means, with respect to Summit or GAFC, any effect that (i)
is material and adverse to the financial position, results of operations or
business of Summit and its Subsidiaries taken as a whole or GAFC and its
Subsidiaries taken as a whole, respectively, or (ii) would materially impair
the
ability of either Summit or GAFC to perform its obligations under this Agreement
or otherwise materially threaten or materially impede the consummation of the
Merger and the other transactions contemplated by this Agreement; provided,
however, that Material Adverse Effect shall not be deemed to include the impact
of (a) changes in banking and similar laws of general applicability or
interpretations thereof by courts or governmental authorities, except to the
extent such changes have a disproportionate impact on Summit or GAFC, as the
case may be, relative to the overall effects on the banking industry, (b)
changes in generally accepted accounting principles or regulatory accounting
requirements applicable to banks and their holding companies generally, except
to the extent changes have a disproportionate impact on Summit or GAFC, as
the
case may be, relative to the overall effect on the banking industry, (c) any
modifications or changes to valuation policies and practices in connection
with
the Merger or restructuring charges taken in connection with the Merger, in
each
case in accordance with generally accepted accounting principles, (d) actions
and omissions of Summit or GAFC taken with the prior written consent of the
other in contemplation of the transactions contemplated hereby, (e) changes
in
economic conditions affecting financial institutions generally, including,
without limitation, changes in market interest rates or the projected future
interest rate environment, except to the extent that such changes have a
disproportionate impact on Summit or GAFC, as the case may be, relative to
the
overall effect on the banking industry or (f) direct effects of compliance
with
this Agreement on the financial condition and operating performance of the
parties, including, without limitation, expenses incurred by the parties in
consummating the transactions contemplated by this Agreement.
“Merger”
has the meaning set forth in Section 2.01(b).
“Merger
Consideration” has the meaning set forth in Section 4.01(a).
“Merger
Sub” means a Delaware corporation, and/or one or more other corporations or
limited liability companies to be organized under the corporate laws of the
State of Delaware by Summit prior to the Effective Time.
“NASDAQ”
means The NASDAQ Stock Market, Inc.’s Capital Market.
“New
Certificate” has the meaning set forth in Section 4.04(a).
“Old
Certificate” has the meaning set forth in Section 4.04(a).
“Pasadena
Branch” means the branch banking office owned by GAFC and located in
Pasadena, Maryland.
“PBGC”
means the Pension Benefit Guaranty Corporation.
“Pension
Plan” has the meaning set forth in Section 6.03(m).
“Person”
means any individual, bank, corporation, limited liability company,
partnership, association, joint-stock company, business trust or unincorporated
organization.
“Previously
Disclosed” by a party shall mean information set forth in its Disclosure
Schedule or in Summit’s or GAFC’s SEC Documents.
“Proxy
Statement” has the meaning set forth in Section 7.03(a).
“Registration
Statement” has the meaning set forth in Section 7.03(a).
“Regulatory
Authorities” has the meaning set forth in Section 6.03(i).
“Rights”
means, with respect to any Person, securities or obligations convertible
into or exercisable or exchangeable for, or giving any person any right to
subscribe for or acquire, or any options, calls or commitments relating to,
or
any stock appreciation right or other instrument the value of which is
determined in whole or in part by reference to the market price or value of,
shares of capital stock of such person.
“SEC”
means the Securities and Exchange Commission.
“Secretary
of State” means the Secretary of State of the State of
Delaware.
“Section
9.03(a) Fee” has the meaning set forth in Section 9.03(a).
“Section
9.03(b) Fee” has the meaning set forth in Section 9.03(b).
“Securities
Act” means the Securities Act of 1933, as amended, and the rules and
regulations thereunder.
“Shareholders’
Equity” means the total shareholders equity presented on GAFC’s balance
sheet as of a given date as calculated according to GAAP.
“Stock
Consideration” has the meaning set forth in Section 4.01(a).
“Stock
Option Consideration” has the meaning set forth in Section
4.05.
“Subsidiary”
and “Significant Subsidiary” have the meanings ascribed to them in
Rule 1-02 Section 210.1-(2)(w) of Regulation S-X of the SEC.
“Surviving
Corporation” has the meaning set forth in Section 2.01(b).
“Summit”
has the meaning set forth in the preamble to this Agreement.
“Summit
Bank” means Summit Community Bank, a commercial bank chartered under the
laws of the State of West Virginia.
“Summit
Board” means the Board of Directors of
Summit.
“Summit
Common Stock” means the common stock, par value $2.50 per share, of
Summit.
“Summit
Compensation and Benefit Plans” has the meaning set forth in Section
6.04(k)(i).
“Summit
Consultants” has the meaning set forth in Section 6.04(k)(i).
“Summit
Directors” has the meaning set forth in Section 6.04(k)(i).
“Summit
Employees” has the meaning set forth in Section 6.04(k)(i).
“Summit
ERISA Affiliate” has the meaning set forth in Section
6.04(k)(iii).
“Summit
ERISA Affiliate Plan” has the meaning set forth in Section
6.04(k)(iii).
“Summit
Pension Plan” has the meaning set forth in Section
6.04(k)(ii).
“Summit’s
SEC Documents” has the meaning set forth in Section 6.04(g).
“Superior
Proposal” has the meaning set forth in Section 9.01(f).
“Takeover
Laws” has the meaning set forth in Section 6.03(o).
“Tax”
and “Taxes” means all federal, state, local or foreign taxes,
charges, fees, levies or other assessments, however denominated, including,
without limitation, all net income, gross income, gains, gross receipts, sales,
use, ad valorem, goods and services, capital, production, transfer, franchise,
windfall profits, license, withholding, payroll, employment, disability,
employer health, excise, estimated, severance, stamp, occupation, property,
environmental, unemployment or other taxes, custom duties, fees, assessments
or
charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any taxing authority whether
arising before, on or after the Effective Date.
“Tax
Returns” means any return, amended return or other report (including
elections, declarations, disclosures, schedules, estimates and information
returns) required to be filed with respect to any Tax.
“Treasury
Stock” shall mean shares of GAFC Common Stock held by GAFC or any of its
Subsidiaries in each case other than in a fiduciary capacity or as a result
of
debts previously contracted in good faith.
ARTICLE II
The
Merger
2.01 The
Merger. (a) Prior to the Effective Time,
Summit shall take any and all action necessary (i) duly to organize the Merger
Sub for the purpose of consummating the Merger; (ii) to cause Merger Sub to
become a party to this Agreement, to be evidenced by the execution by the Merger
Sub of a supplement to this Agreement in substantially the form of Annex A
and
delivery thereof to GAFC; and (iii) to cause Merger Sub to take all actions
necessary or proper to comply with the obligations of Summit and such Merger
Sub
to consummate the transactions contemplated hereby.
(b) At
the Effective Time, GAFC shall merge with and into Merger Sub (the
“Merger”), the separate corporate existence of GAFC shall cease and
Merger Sub shall survive and continue to exist as a Delaware corporation (Merger
Sub, as the surviving corporation in the Merger, sometimes being referred to
herein as the “Surviving Corporation”). Summit may at any
time prior to the Effective Time change the method of effecting the combination
with GAFC (including, without limitation, the provisions of this Article II
other than sub-sections (i), (ii), (iii) and (iv) hereof) if and to the extent
it deems such change to be necessary, appropriate or desirable; provided,
however, that no such change shall (i) cause the approval of the stockholders
of
Summit to be required as a condition to the Merger, (ii) alter or change the
amount or kind of Merger Consideration (as hereinafter defined), or the relative
proportions of cash and Summit Common Stock included therein, (iii) adversely
affect the tax treatment of GAFC’s stockholders as a result of receiving the
Merger Consideration or (iv) materially impede or delay consummation of the
transactions contemplated by this Agreement; and provided further, that Summit
shall provide GAFC prior written notice of such change and the reasons
therefore. Immediately following the Merger, Surviving Corporation
shall merge with and into Summit, the separate corporate existence of the Merger
Sub shall cease and Summit shall survive and continue to exist as a West
Virginia corporation.
(c) Subject
to the satisfaction or waiver of the conditions set forth in Article VIII,
the
Merger shall become effective upon the occurrence of the filing in the office
of
the Secretary of State of a certificate of merger in accordance with Section
252
of the DGCL or such later date and time as may be set forth in such certificate
of merger. The Merger shall have the effects prescribed in the
DGCL.
(d) The
Certificate of Incorporation of Merger Sub, as in effect immediately prior
to
the Effective Time, shall be the Certificate of Incorporation of the Surviving
Corporation until thereafter amended in accordance with applicable
law.
2.02 Effective
Date and Effective Time. (a) Subject to
the satisfaction or waiver of the conditions set forth in Article VIII, the
parties shall cause the effective date of the Merger (the “Effective
Date”) to occur on (i) the fifth business day to occur after the last of
the conditions set forth in Article VIII shall have been satisfied or waived
in
accordance with the terms of this Agreement, other than those conditions that
by
their nature are to be satisfied at the closing of the Merger (or, at the
election of Summit, on the last business day of the month in which such fifth
business day occurs), or (ii) such other date to which the parties may agree
in
writing. The time on the Effective Date when the Merger shall become
effective is referred to as the “Effective Time.”
(b) Notwithstanding
any other provision in this Agreement to the contrary, if Summit shall exercise
its right to delay the Effective Date pursuant to Section 2.02(a), and a record
date for any dividend or other distribution in respect of the Summit Common
Stock is taken during the period of such delay such that the GAFC stockholders
will not be entitled to participate in such dividend, each stockholder of GAFC
shall be entitled to receive, upon surrender of the Old Certificates and
compliance with the other provisions of Article IV, a payment equal to the
amount and kind of dividend or other distribution that such holder would have
received had such holder been a holder of record of the shares of Summit Common
Stock issuable to such holder in the Merger on the record date for such dividend
or other distribution.
ARTICLE III
The
Bank Merger
3.01 The
Bank Merger. (a) Immediately after the
Effective Time, GAB, a wholly-owned subsidiary of GAFC, shall merge with and
into Summit Bank, a wholly-owned subsidiary of Summit (the “Bank
Merger”), the separate existence of GAB shall cease and Summit Bank shall
survive and continue to exist as a state chartered banking
corporation. Summit may at any time prior to the Effective Time,
change the method of effecting the combination with GAB (including without
limitation the provisions of this Article III other than sub-sections (i),
(ii)
and (iii) hereof) if and to the extent it deems such changes necessary,
appropriate or desirable; provided, however that no such change shall (i) alter
or change the amount or kind of Merger Consideration, or the relative
proportions of cash and Summit Common Stock included therein, (ii) adversely
affect the tax treatment of GAFC’s stockholders as a result of receiving the
Merger Consideration or (iii) materially impede or delay consummation of the
transactions contemplated by this Agreement, and provided further, that Summit
shall provide GAFC with prior written notice of such change and the reasons
therefore.
(b) Subject
to the satisfaction or waiver of the conditions set forth in Article VIII,
the
Bank Merger shall become effective upon the occurrence of the filing in the
Office of the Secretary of State of West Virginia of articles of merger in
accordance with the laws of the West Virginia or such later date and time as
may
be set forth in such articles and the issuance of a certificate of merger by
the
Secretary of State of West Virginia. The Bank Merger shall have the
effects prescribed in the West Virginia General Corporation Act.
3.02 Effective
Date and Effective Time. Subject to the satisfaction or
waiver of the conditions set forth in Article VIII, the parties shall cause
the
effective date of the Bank Merger (the “Bank Merger Effective Date”) to
occur on the Effective Date or such later date to which the parties may agree
in
writing.
ARTICLE
IV
Consideration;
Exchange Procedures
4.01 Merger
Consideration. Subject to the provisions of this
Agreement, at the Effective Time, automatically by virtue of the Merger and
without any action on the part of any Person:
(a) Stock
Consideration and Cash Consideration. Each holder of a share of
GAFC Common Stock (other than GAFC or its subsidiaries or Summit and its
subsidiaries, except for shares held by them in a fiduciary capacity, and
Dissenters’ Shares) shall receive in respect thereof, subject to the limitations
set forth in this Agreement and any adjustment pursuant to Section 4.01 (c),
(i)
the number of shares of Summit Stock (the “Stock
Consideration”) equal to $3.22, divided by the average closing price (the
“Average Closing Price”) of Summit Common Stock
reported on the NASDAQ for the twenty (20) trading days prior to the Closing
(the “Exchange Ratio”) and (ii) $1.38 in cash without interest (the
“Cash Consideration”). The Cash Consideration and the Stock
Consideration are sometimes referred to herein collectively as the “Merger
Consideration.”
(b) Stock
Collar. If the Average Closing Price is less than $17.82, then the Exchange
Ratio shall be seventy percent of the Merger Consideration divided by
$17.82. If the Average Closing Price is greater than $24.10 then the
Exchange Ratio will be seventy percent of the Merger Consideration divided
by
$24.10.
(c) Adjustment
to Merger Consideration for Decrease or Increase in GAFC’s Shareholder’s
Equity. If, as of the end of the month in which the sale of the
Pasadena Branch is consummated (the “Adjustment Date”), GAFC’s Shareholders’
Equity adjusted to exclude (i) accumulated other comprehensive income or loss,
(ii) Merger restructuring charges and/or Merger-related expenses incurred at
the
request of Summit on or prior to the Adjustment Date, and (iii) employee
severance charges incurred by GAB on or prior to the Adjustment Date (excluding
any charges relating to employee terminations for “cause” as defined in GAB’s
Employee Severance Compensation Plan (the “Adjusted Shareholder’s Equity”)
is:
(i) less
than Six Million Seven Hundred Thousand Dollars ($6,700,000) (the “Benchmark
Equity”), then the aggregate value of the Merger Consideration shall be
reduced one dollar for every dollar by which the Adjusted Shareholders’ Equity
is less than the Benchmark Equity; or
(ii) more
than the Benchmark Equity, then the aggregate value of the Merger Consideration
shall be increased one dollar for every dollar by which the Adjusted
Shareholders’ Equity exceeds the Benchmark Equity, but only to the extent that
the amount by which the Adjusted Shareholders’ Equity exceeds the Benchmark
Equity is attributable to the sale of the Pasadena Branch after deducting all
Taxes, if any, due and payable with the Tax Returns filed by GAFC for the tax
year in which such sale is consummated.
If
the
aggregate value of the Merger Consideration shall be adjusted pursuant to this
Section 4.01(c), then the Stock Consideration and the Cash Consideration
constituting the Merger Consideration, as so adjusted, shall be paid in the
same
proportion as the Stock Consideration and the Cash Consideration would have
been
paid pursuant to Section 4.01(a) without any adjustment pursuant to this Section
4.01(c).
(d) Outstanding
Summit Stock. Each share of Summit Common Stock issued and
outstanding immediately prior to the Effective Time shall remain issued and
outstanding and unaffected by the Merger.
(e) Treasury
Shares. Each share of GAFC Common Stock held as Treasury Stock
immediately prior to the Effective Time shall be canceled and retired at the
Effective Time and no consideration shall be issued in exchange
therefore.
(f) Merger
Sub. Each share of capital stock of Merger Sub issued and
outstanding immediately prior to the Effective Time shall remain outstanding
and
unaffected by the merger, and no consideration shall be issued in exchange
therefore.
4.02 Rights
as Stockholders; Stock Transfers. At the Effective
Time, holders of GAFC Common Stock shall cease to be, and shall have no rights
as, stockholders of GAFC, other than to receive the Merger Consideration and
any
dividend or other distribution with respect to such GAFC Common Stock with
a
record date occurring prior to the Effective Time, the payment, if any, in
lieu
of certain dividends on Summit Common Stock provided for in Section 2.02(b),
and
the consideration provided under this Article IV. After the Effective
Time, there shall be no transfers on the stock transfer books of GAFC or the
Surviving Corporation of shares of GAFC Common Stock.
4.03 Fractional
Shares. Notwithstanding any other provision hereof, no
fractional shares of Summit Common Stock and no certificates or scrip therefore,
or other evidence of ownership thereof, will be issued in the Merger; instead,
Summit shall pay to each holder of GAFC Common Stock who would otherwise be
entitled to a fractional share of Summit Common Stock (after taking into account
all Old Certificates registered in the name of such holder) an amount in cash
(without interest) determined by multiplying such fraction by the closing price
of Summit Common Stock as reported by NASDAQ reporting system (as reported
in
the Wall Street Journal) on the Effective Date.
4.04 Exchange
Procedures. (a) At or prior to the
Effective Time, Summit shall deposit, or shall cause to be deposited, with
Registrar and Transfer Company or a bank or trust company designated by Summit
and reasonably satisfactory to GAFC (the “Exchange Agent”), for the
benefit of the holders of certificates formerly representing shares of GAFC
Common Stock (“Old Certificates”), for exchange in accordance with this
Article IV, (i) certificates representing the shares of Summit Common Stock
(“New Certificates”), (ii) an amount of cash necessary to pay the cash
portion of the Merger Consideration and any payments required by Section 2.02(b)
and (iii) an amount of cash necessary for payments required by Section 4.03
(the
“Exchange Fund”). The Exchange Fund will be distributed in
accordance with the Exchange Agent’s normal and customary procedures established
in connection with merger transactions.
(b) As
soon as practicable after the Effective Time, and in no event later than five
business days thereafter, Summit shall cause the Exchange Agent to mail to
each
holder of record of one or more Old Certificates a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to
the
Old Certificates shall pass, only upon delivery of the Old Certificates to
the
Exchange Agent) and instructions for use in effecting the surrender of the
Old
Certificates in exchange for New Certificates, if any, that the holders of
the
Old Certificates are entitled to receive pursuant to Article IV, and the cash,
if any, that the holders of the Old Certificates are entitled to receive
pursuant to Article IV, any cash in lieu of fractional shares into which the
shares of GAFC Common Stock represented by the Old Certificates shall have
been
converted pursuant to this Agreement and any payment required pursuant to
Section 2.02(b) of this Agreement. Upon proper surrender of an Old Certificate
for exchange and
cancellation
to the Exchange Agent, together with such properly completed letter of
transmittal, duly executed, the holder of such Old Certificates shall be
entitled to receive in exchange therefore (i) a New Certificate representing
that number of whole shares of Summit Common Stock that such holder has the
right to receive pursuant to Article IV, if any, (ii) a check representing
the
amount of the cash that such holder is entitled to receive pursuant to Article
IV, if any, (iii) a check representing the amount of any cash in lieu of
fractional shares which such holder has the right to receive in respect of
the
Old Certificates surrendered pursuant to the provisions of this Article IV,
and
(iv) any payment required by Section 2.02(b), and the Old Certificates so
surrendered shall forthwith be cancelled.
(c) Neither
the Exchange Agent, if any, nor any party hereto shall be liable to any former
holder of GAFC Common Stock for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar
laws.
(d) No
dividends or other distributions with respect to Summit Common Stock with a
record date occurring after the Effective Time shall be paid to the holder
of
any unsurrendered Old Certificate representing shares of GAFC Common Stock
converted in the Merger into the right to receive shares of such Summit Common
Stock until the holder thereof shall be entitled to receive New Certificates
in
exchange therefore in accordance with the procedures set forth in this Section
4.05. After becoming so entitled in accordance with this Section
4.05, the record holder thereof also shall be entitled to receive any such
dividends or other distributions by the Exchange Agent, without any interest
thereon, which theretofore had become payable with respect to shares of Summit
Common Stock such holder had the right to receive upon surrender of the Old
Certificates.
(e) Any
portion of the Exchange Fund that remains unclaimed by the stockholders of
GAFC
for twelve months after the Effective Time shall be paid to
Summit. Any stockholders of GAFC who have not theretofore complied
with this Article IV shall thereafter look only to Summit for payment of the
Merger Consideration, cash in lieu of any fractional shares and unpaid dividends
and distributions on Summit Common Stock deliverable in respect of each share
of
GAFC Common Stock such stockholder holds as determined pursuant to this
Agreement, in each case, without any interest thereon.
(f) In
the event any Old Certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such Old
Certificate to be lost, stolen or destroyed and, if reasonably required by
Summit or the Exchange Agent, the posting by such person of a bond in such
amount as Summit may determine is reasonably necessary as indemnity against
any
claim that may be made against it with respect to such Old Certificate, the
Exchange Agent will issue in exchange for such lost, stolen or destroyed Old
Certificate the Merger Consideration deliverable in respect thereof pursuant
to
this Agreement.
4.05 Options. At
the Effective Time, each outstanding option (each, a “GAFC Stock
Option”) to purchase shares of GAFC Common Stock under any and all plans of
GAFC under which stock options have been granted and are outstanding
(collectively, the “GAFC Stock Plans”) shall vest and holders of GAFC
Stock Options shall be entitled to receive cash in an amount equal to the
difference between the value of (a) the Merger Consideration and (b)
the applicable exercise price (rounded to the nearest cent) for each outstanding
GAFC Stock Option (the “Stock Option Consideration”). At or
prior to the Effective Time, GAFC shall use its reasonable best efforts,
including using its reasonable best efforts to obtain any necessary consents
from optionees, with respect to the GAFC Stock Plans to permit Summit to pay
the
Stock Option Consideration pursuant to this Section. At the Effective
Time, Summit shall have no obligation to make any additional grants or awards
under the GAFC Stock Plans.
4.06 Warrants. At
the Effective Time, each outstanding warrant (each, a “GAFC Warrant “)
to purchase shares of GAFC Common Stock under any and all plans of GAFC under
which warrants have been granted and are outstanding (collectively, the
“GAFC Warrants “) shall vest and holders of GAFC Warrants shall be
entitled to receive cash in an amount equal to the difference between the value
of (a) the Merger Consideration and (b) the applicable exercise price (rounded
to the nearest cent) for each outstanding GAFC Warrant (the “Warrant
Consideration”). At or prior to the Effective Time, GAFC shall
use its reasonable best efforts, including using its reasonable best efforts
to
obtain any necessary consents from optionees, with respect to the GAFC Stock
Plans to permit Summit to pay the Warrant Consideration pursuant to this
Section. At the Effective Time, Summit shall have shall have no
obligation to make any additional grants or awards under the GAFC
Warrants.
4.07 Dissenters’
Rights. Notwithstanding any other provision of this
Agreement to the contrary, shares of GAFC Common Stock that are outstanding
immediately prior to the Effective Time and which are held by
stockholders
who shall have not voted in favor of the Merger or consented thereto in writing
and who properly shall have demanded appraisal for such shares in accordance
with the DGCL (collectively, the “Dissenters’ Shares”) shall not be
converted into or represent the right to receive the Merger
Consideration. Such stockholders instead shall be entitled to receive
payment of the appraised value of such shares held by them in accordance with
the provisions of the DGCL, except that all Dissenters’ Shares held by
stockholders who shall have failed to perfect or who effectively shall have
withdrawn or otherwise lost their rights to appraisal of such shares under
the
DGCL shall thereupon be deemed to have been converted into and to have become
exchangeable, as of the Effective Time, for the right to receive, without any
interest thereon, the Merger Consideration upon surrender in the manner provided
in Section 4.05 of the Old Certificates that, immediately prior to the Effective
Time, evidenced such shares.
ARTICLE
V
Actions
Pending the Effective Time
5.01 Forebearances
of GAFC. From the date hereof until the Effective Time,
except as expressly contemplated by this Agreement or Previously Disclosed,
without the prior written consent of Summit, GAFC will not, and will cause
each
of its Subsidiaries not to:
(a) Ordinary
Course. Conduct the business of GAFC and its Subsidiaries other
than in the ordinary and usual course or fail to use reasonable efforts to
preserve intact their business organizations and assets and maintain their
rights, franchises and existing relations with customers, suppliers, employees
and business associates, or take any action reasonably likely to have an adverse
affect upon GAFC’s ability to perform any of its material obligations under this
Agreement.
(b) Capital
Stock. Other than pursuant to Rights Previously Disclosed and
outstanding on the date hereof, (i) issue, sell or otherwise permit to become
outstanding, or authorize the creation of, any additional shares of GAFC Common
Stock or any Rights, (ii) enter into any agreement with respect to the
foregoing, or (iii) permit any additional shares of GAFC Common Stock to become
subject to new grants of employee or director stock options, other Rights or
similar stock-based employee rights.
(c) Dividends,
Etc. (a) Make, declare, pay or set aside for payment any
dividend on or in respect of, or declare or make any distribution on any shares
of GAFC Common Stock, or (b) directly or indirectly adjust, split, combine,
redeem, reclassify, purchase or otherwise acquire, any shares of its capital
stock.
(d) Compensation;
Employment Agreements; Etc. Enter into or amend or renew any
employment, consulting, severance or similar agreements or arrangements with
any
director, officer or employee of GAFC or its Subsidiaries, or grant any salary
or wage increase or increase any employee benefit (including incentive or bonus
payments), except (i) for normal individual payments of incentives and bonuses
to employees in the ordinary course of business consistent with past practice,
not to exceed $10,000 in the aggregate, (ii) for normal individual payments
of
incentives and bonuses to employees under GAB’s branch incentive plan, not to
exceed $30,000 per quarter in the aggregate, (iii) for normal individual
increases in compensation to employees in the ordinary course of business
consistent with past practice, (iv) for other changes that are required by
applicable law, (v) to satisfy Previously Disclosed contractual obligations
existing as of the date hereof, or (vi) for grants of awards to newly hired
employees consistent with past practice.
(e) Benefit
Plans. Enter into, establish, adopt or amend (except (i) as may
be required by applicable law or (ii) to satisfy Previously Disclosed
contractual obligations existing as of the date hereof) any pension, retirement,
stock option, stock purchase, savings, profit sharing, deferred compensation,
consulting, bonus, group insurance or other employee benefit, incentive or
welfare contract, plan or arrangement, or any trust agreement (or similar
arrangement) related thereto, in respect of any director, officer or employee
of
GAFC or its Subsidiaries, or take any action to accelerate the vesting or
exercisability of stock options, restricted stock or other compensation or
benefits payable thereunder.
(f) Dispositions. Except
as Previously Disclosed or in connection with the consummation of the sale
of
the Pasadena Branch, sell, transfer, mortgage, encumber or otherwise dispose
of
or discontinue any of its assets, deposits, business or properties except in
the
ordinary course of business and in a transaction that is not material to it
and
its Subsidiaries taken as a whole.
(g) Acquisitions. Except
as Previously Disclosed, acquire (other than by way of foreclosures or
acquisitions of control in a bona fide fiduciary capacity or in satisfaction
of
debts previously contracted in good faith, in each case in the ordinary and
usual course of business consistent with past practice) all or any portion
of,
the assets, business, deposits or properties of any other entity.
(h) Governing
Documents. Amend the GAFC Certificate, GAFC By-laws or the
certificate of incorporation or by-laws (or similar governing documents) of
any
of GAFC’s Subsidiaries.
(i) Accounting
Methods. Implement or adopt any change in its accounting
principles, practices or methods, other than as may be required by generally
accepted accounting principles.
(j) Contracts. Except
in the ordinary course of business consistent with past practice, enter into
or
terminate any material contract (as defined in Section 6.03(k)) or amend or
modify in any material respect any of its existing material
contracts.
(k) Claims. Except
in the ordinary course of business consistent with past practice, settle any
claim, action or proceeding, except for any claim, action or proceeding which
does not involve precedent for other material claims, actions or proceedings
and
which involve solely money damages in an amount, individually or in the
aggregate for all such settlements, that is not material to GAFC and its
Subsidiaries, taken as a whole.
(l) Adverse
Actions. (a) Take any action while knowing that such action
would, or is reasonably likely to, prevent or impede the Merger from qualifying
as a reorganization within the meaning of Section 368 of the Code; or (b)
knowingly take any action that is intended or is reasonably likely to result
in
(i) any of its representations and warranties set forth in this Agreement being
or becoming untrue subject to the standard set forth in Section 6.02, at any
time at or prior to the Effective Time, (ii) any of the conditions to the Merger
set forth in Article VIII not being satisfied or (iii) a material violation
of
any provision of this Agreement except, in each case, as may be required by
applicable law or regulation.
(m) Risk
Management. Except as required by applicable law or regulation,
(i) implement or adopt any material change in its interest rate and other risk
management policies, procedures or practices; (ii) fail to follow its existing
policies or practices with respect to managing its exposure to interest rate
and
other risk; or (iii) fail to use commercially reasonable means to avoid any
material increase in its aggregate exposure to interest rate risk.
(n) Indebtedness. Incur
any indebtedness for borrowed money other than in the ordinary course of
business.
(o) Loans. Make
any loans in a principal amount in excess of $750,000, or make any loans outside
of the District of Columbia, Delaware, Maryland, Pennsylvania, Virginia and
West
Virginia.
(p) Commitments. Agree
or commit to do any of the foregoing.
5.02 Forebearances
of Summit. From the date hereof until the Effective
Time, except as expressly contemplated by this Agreement, without the prior
written consent of GAFC, Summit will not, and will cause each of its
Subsidiaries not to:
(a) Ordinary
Course. Conduct the business of Summit and its Subsidiaries
other than in the ordinary and usual course or fail to use reasonable efforts
to
preserve intact their business organizations and assets and maintain their
rights, franchises and existing relations with customers, suppliers, employees
and business associates, or take any action reasonably likely to have an adverse
effect upon Summit’s ability to perform any of its material obligations under
this Agreement.
(b) Extraordinary
Dividends. Make, declare, pay or set aside for payment any
extraordinary dividend.
(c) Adverse
Actions. (a) Take any action while knowing that such action
would, or is reasonably likely to, prevent or impede the Merger from qualifying
as a reorganization within the meaning of Section 368 of the Code; or (b)
knowingly take any action that is intended or is reasonably likely to result
in
(i) any of its representations
and
warranties set forth in this Agreement being or becoming untrue, subject to
the
standard set forth in Section 6.02, at any time at or prior to the Effective
Time, (ii) any of the conditions to the Merger set forth in Article VIII not
being satisfied or (iii) a material violation of any provision of this Agreement
except, in each case, as may be required by applicable law or regulation;
provided.
(d) Commitments. Agree
or commit to do any of the foregoing.
ARTICLE
VI
Representations
and Warranties
6.01 Disclosure
Schedules. On or prior to the date hereof, Summit has
delivered to GAFC a schedule and GAFC has delivered to Summit a schedule
(respectively, its “Disclosure Schedule”) setting forth, among other
things, items the disclosure of which is necessary or appropriate either in
response to an express disclosure requirement contained in a provision hereof
or
as an exception to one or more representations or warranties contained in
Section 6.03 or 6.04 or to one or more of its covenants contained in Article
V;
provided, that (a) no such item is required to be set forth in a Disclosure
Schedule as an exception to a representation or warranty if its absence could
not be reasonably likely to result in the related representation or warranty
being deemed untrue or incorrect under the standard established by Section
6.02,
and (b) the mere inclusion of an item in a Disclosure Schedule as an exception
to a representation or warranty shall not be deemed an admission by a party
that
such item represents a material exception or fact, event or circumstance or
that
such item is reasonably likely to result in a Material Adverse Effect on the
party making the representation. All of GAFC’s representations,
warranties and covenants contained in this Agreement are qualified by reference
to the Disclosure Schedule and none thereof shall be deemed to be untrue or
breached as a result of effects arising solely from actions taken in compliance
with a written request of Summit.
6.02 Standard. No
representation or warranty of GAFC or Summit contained in Section 6.03 or 6.04
shall be deemed untrue or incorrect, and no party hereto shall be deemed to
have
breached a representation or warranty, as a consequence of the existence of
any
fact, event or circumstance unless such fact, circumstance or event,
individually or taken together with all other facts, events or circumstances
inconsistent with any representation or warranty contained in Section 6.03
or
6.04 has had or is reasonably likely to have a Material Adverse
Effect. For purposes of this Agreement, “knowledge” shall mean (i)
with respect to Summit, actual knowledge of H. Charles Maddy, III, and Robert
S.
Tissue, and (ii) with respect to GAFC, actual knowledge of Carroll E. Amos,
Edward C. Allen, David E. Ritter, Robert W. Neff and Gary L.
Hobert.
6.03 Representations
and Warranties of GAFC. Subject to Sections 6.01 and
6.02 and except as Previously Disclosed, GAFC hereby represents and warrants
to
Summit:
(a) Organization
and Standing. GAFC is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Delaware. GAFC is duly qualified to do business and is in good
standing in the Commonwealth of Virginia and in any foreign jurisdictions where
its ownership or leasing of property or assets or the conduct of its business
requires it to be so qualified.
(b) Capitalization. As
of March 31, 2007, the authorized capital stock of GAFC consists of (i)
10,000,000 shares of GAFC Common Stock, of which 3,024,220 shares were
outstanding and no shares were held in treasury, and (ii) 2,500,000 shares
of
preferred stock, $0.01 par value, none of which are issued and outstanding
or
held in treasury as of the date hereof. As of the date hereof, except
pursuant to the terms of options, stock, and warrants issued pursuant to the
GAFC Stock and/or Warrant Plans, GAFC does not have and is not bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the purchase or issuance of any shares of GAFC
Common Stock or any other equity securities of GAFC or any of its Subsidiaries
or any securities representing the right to purchase or otherwise receive any
shares of GAFC Common Stock or other equity securities of GAFC or any of its
Subsidiaries. As of March 31, 2007, GAFC has 340,171 shares of GAFC
Common Stock (with a weighted average strike price of $6.94 per share) which
are
issuable and reserved for issuance upon the exercise of GAFC Stock Options
and
GAFC Warrants. The outstanding shares of GAFC Common Stock have been
duly authorized and are validly issued and outstanding, fully paid and
nonassessable, and subject to no preemptive rights (and were not issued in
violation of any preemptive rights).
(c) Subsidiaries. (i)
GAFC has Previously Disclosed a list of all of its Subsidiaries together with
the jurisdiction of organization of each such Subsidiary. (A) GAFC
owns, directly or indirectly, all the issued and outstanding equity securities
of each of its Subsidiaries, (B) no equity securities of any of its Subsidiaries
are or may become required to be issued (other than to it or its wholly-owned
Subsidiaries) by reason of any Right or otherwise, (C) there are no contracts,
commitments, understandings or arrangements by which any of such Subsidiaries
is
or may be bound to sell or otherwise transfer any equity securities of any
such
Subsidiaries (other than to it or its wholly-owned Subsidiaries), (D) there
are
no contracts, commitments, understandings, or arrangements relating to its
rights to vote or to dispose of such securities and (E) all the equity
securities of each Subsidiary held by GAFC or its Subsidiaries are fully paid
and nonassessable and are owned by GAFC or its Subsidiaries free and clear
of
any Liens.
(ii) GAFC
has Previously Disclosed a list of all equity securities, or similar interests
of any Person or any interest in a partnership or joint venture of any kind,
other than its Subsidiaries, that it beneficially owns, directly or indirectly,
as of March 28, 2007.
(iii) Each
of GAFC’s Subsidiaries has been duly organized and is validly existing in good
standing under the laws of the jurisdiction of its organization, and is duly
qualified to do business and in good standing in the jurisdictions where its
ownership or leasing of property or the conduct of its business requires it
to
be so qualified.
(d) Corporate
Power. Each of GAFC and its Subsidiaries has the corporate power
and authority to carry on its business as it is now being conducted and to
own
all its properties and assets; and GAFC has the corporate power and authority
to
execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby.
(e) Corporate
Authority. Subject to receipt of the requisite approval of this
Agreement (including the agreement of merger set forth herein) by the holders
of
a majority of the outstanding shares of GAFC Common Stock entitled to vote
thereon (which is the only vote of GAFC stockholders required thereon), the
execution and delivery of this Agreement and the transactions contemplated
hereby have been authorized by all necessary corporate action of GAFC and the
GAFC Board. Assuming due authorization, execution and delivery by
Summit, this Agreement is a valid and legally binding obligation of GAFC,
enforceable in accordance with its terms (except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and similar laws of general applicability relating to or
affecting creditors’ rights or by general equity principles). The
GAFC Board of Directors has received the written opinion of Sandler O’Neill
& Partners, L.P. to the effect that as of the date hereof the consideration
to be received by the holders of GAFC Common Stock in the Merger is fair to
the
holders of GAFC Common Stock from a financial point of view.
(f) Consents
and Approvals; No Defaults. (i) No consents or approvals of, or
filings or registrations with, any Governmental Authority or with any third
party are required to be made or obtained by GAFC or any of its Subsidiaries
in
connection with the execution, delivery or performance by GAFC of this Agreement
or to consummate the Merger except for (A) filings of applications or notices
with federal and state banking and insurance authorities and (B) the
filing of a certificate of merger with the Secretary of State pursuant to the
DGCL and the issuance of a certificate of merger in connection
therewith. As of the date hereof, GAFC is not aware of any reason why
the approvals set forth in Section 8.01(b) will not be received without the
imposition of a condition, restriction or requirement of the type described
in
Section 8.01(b).
(ii) Subject
to receipt of the regulatory approvals referred to in the preceding paragraph,
and expiration of related waiting periods, the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby do not and will not (A) constitute a breach or violation
of,
or a default under, or give rise to any Lien, any acceleration of remedies
or
any right of termination under, any law, rule or regulation or any judgment,
decree, order, governmental permit or license, or any agreement, indenture
or
instrument of GAFC or of any of its Subsidiaries or to which GAFC or any of
its
Subsidiaries or properties is subject or bound, (B) constitute a breach or
violation of, or a default under, the GAFC Certificate or the GAFC By-Laws,
or
(C) require any consent or approval under any such law, rule, regulation,
judgment, decree, order, governmental permit or license or any agreement,
indenture or instrument.
(g) Financial
Reports; Absence of Certain Changes or Events. (i) GAFC’s Annual
Report on Form 10-K for the fiscal years ended September 30, 2004, 2005 and
2006, and all other reports, registration statements,
definitive
proxy statements or information statements filed or to be filed by it or any
of
its Subsidiaries subsequent to September 30, 2003, under the Securities Act
or
under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act in the form filed
or
to be filed (collectively “GAFC’s SEC Documents”), as of the date
filed, (A) as to form complied or will comply in all material respects with
the
applicable requirements under the Securities Act or the Exchange Act, as the
case may be, and (B) did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; and each of the balance sheets or
statements of condition of GAFC contained in or incorporated by reference into
any of GAFC’s SEC Documents (including the related notes and schedules thereto)
fairly presents, or will fairly present, the financial position of GAFC and
its
Subsidiaries as of its date, and each of the statements of income or results
of
operations and changes in stockholders’ equity and cash flows or equivalent
statements of GAFC in any of GAFC’s SEC Documents (including any related notes
and schedules thereto) fairly presents, or will fairly present, the results
of
operations, changes in stockholders’ equity and cash flows, as the case may be,
of GAFC and its Subsidiaries for the periods to which they relate, and in each
case were prepared in accordance with generally accepted accounting principles
consistently applied during the periods involved, except in each case as may
be
noted therein, and subject to normal year-end audit adjustments in the case
of
unaudited statements.
(ii) GAFC’s
Disclosure Schedule lists, and GAFC has delivered or previously made available
to Summit, copies of the documentation creating or governing all securitization
transactions and “off-balance sheet arrangements” (as defined in Item 303(c) of
Regulation S-K) effected by GAFC or its Subsidiaries, since September 30,
2006. BDO Siedman, LLP, which has expressed its opinion with respect
to the financial statements of GAFC and its Subsidiaries (including the related
notes) included in the GAFC SEC Documents is and has been throughout the periods
covered by such financial statements (A) a registered public accounting firm
(as
defined in Section 2(a)(12) of the Sarbanes-Oxley Act of 2002, (B) “independent”
with respect to GAFC within the meaning of Regulation S-X and C in compliance
with subsection (g) through (l) of Section 10A of the Exchange Act and the
related rules of the SEC and the Public Accounting Oversight Board.
(iii) Except
as disclosed on Disclosure Schedule 6.03(g), GAFC has on a timely basis filed
all forms, reports and documents required to be filed by it with the SEC since
September 30, 2004. GAFC’s Disclosure Schedule lists, and, except to
the extent available in full without redaction on the SEC’s web site through the
Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”) two days
prior to the date of this Agreement, GAFC has delivered or previously made
available to Summit copies in the form filed with the SEC of (A) GAFC’s Annual
Reports on Form 10-K for each fiscal year of the Company beginning since
September 30, 2003, (B) it Quarterly Reports on form 10-Q for each of the first
three fiscal quarters in each of the fiscal years of the GAFC referred to in
clause (A) above, (C) all proxy statements relating to GAFC’s meetings of
stockholders (whether annual or special) held, and all information statements
relating to stockholder consents since the beginning of the first fiscal year
referred to in clause above, (D) all certifications and statements required
by
(x) the SEC’s Order dated June 27, 2002, pursuant to Section 21(a)(1) of the
Exchange Act (File No. 4-460), (y) Rule 13a-14 or 15d-14 under the Exchange
Act
or (z) 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act of 2002) with
respect to any report referred to above, (E) all other forms, reports,
registration statements and other documents (other than preliminary materials
if
the corresponding definitive materials have been provided to Summit pursuant
to
this Section 6.03(g)(iii), filed by GAFC with the SEC since the beginning of
the
first fiscal year referred above, and (E) all comment letters received by GAFC
from the Staff of the SEC since December 31, 2004, and all responses to such
comment letters by or on behalf of GAFC.
(iv) Except
as Previously Disclosed, GAFC maintains disclosure controls and procedures
required by Rule 13a-15 or 15d-15 under the Exchange Act; such controls and
procedures are effective to ensure that all material information concerning
GAFC
and its subsidiaries is made known on a timely basis to the individuals
responsible for the preparation of the Company’s filings with the SEC and other
public disclosure documents. GAFC’s Disclosure Schedule lists, and
GAFC has delivered to Summit copies of, all written descriptions of, and all
policies, manuals and other documents promulgating, such disclosure controls
and
procedures. To GAFC’s knowledge, each director and executive officer
of GAFC has filed with the SEC on a timely basis all statements required by
Section 16(a) of the Exchange Act and the rules and regulations thereunder
since
September 30, 2004. As used in this Section 6.03(q), the term “file”
shall be broadly construed to include any manner in which a document or
information is furnished, supplied or otherwise made available to the
SEC.
(v) Since
September 30, 2006, GAFC and its Subsidiaries have not incurred any liability
other than in the ordinary course of business consistent with past practice
or
for legal, accounting, and financial advisory fees and out-of-pocket expenses
in
connection with the transactions contemplated by this Agreement.
(vi) Since
September 30, 2006, (A) GAFC and its Subsidiaries have conducted their
respective businesses in the ordinary and usual course consistent with past
practice (excluding matters related to this Agreement and the transactions
contemplated hereby) and (B) no event has occurred or circumstance arisen that,
individually or taken together with all other facts, circumstances and events
(described in any paragraph of Section 6.03 or otherwise), is reasonably likely
to have a Material Adverse Effect with respect to GAFC.
(h) Litigation. No
litigation, claim or other proceeding before any court or Governmental Authority
is pending against GAFC or any of its Subsidiaries and, to GAFC’s knowledge, no
such litigation, claim or other proceeding has been threatened.
(i) Regulatory
Matters. (i) Neither GAFC nor any of its Subsidiaries or
properties is a party to or is subject to any order, decree, agreement,
memorandum of understanding or similar arrangement with, or a commitment letter
or similar submission to, or extraordinary supervisory letter from, any federal
or state governmental agency or authority charged with the supervision or
regulation of financial institutions (or their holding companies) or issuers
of
securities or engaged in the insurance of deposits (including, without
limitation, the Office of the Thrift Supervision, the Federal Reserve Board
and
the Federal Deposit Insurance Corporation) or the supervision or regulation
of
it or any of its Subsidiaries (collectively, the “Regulatory
Authorities”).
(ii) Except
as disclosed on Disclosure Schedule 6.03(i), neither GAFC nor any of its
Subsidiaries has been advised by any Regulatory Authority that such Regulatory
Authority is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, decree, agreement,
memorandum of understanding, commitment letter, supervisory letter or similar
submission.
(iii) GAFC
is not a financial holding company as defined by the Gramm-Leach-Bliley Act
of
1999.
(j) Compliance
with Laws. Each of GAFC and its Subsidiaries:
(i) is
in compliance in all material respects with all applicable federal, state,
local
and foreign statutes, laws, regulations, ordinances, rules, judgments, orders
or
decrees applicable thereto or to the employees conducting such businesses,
including, without limitation, the Equal Credit Opportunity Act, the Fair
Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act
and all other applicable fair lending laws and other laws relating to
discriminatory business practices;
(ii) has
all permits, licenses, authorizations, orders and approvals of, and has made
all
filings, applications and registrations with, all Governmental Authorities
that
are required in order to permit them to own or lease their properties and to
conduct their businesses as presently conducted; all such permits, licenses,
certificates of authority, orders and approvals are in full force and effect
and, to GAFC’s knowledge, no suspension or cancellation of any of them is
threatened;
(iii) Except
as disclosed on Disclosure Schedule 6.03(j), GAFC has received, since December
31, 2005, no notification or communication from any Governmental Authority
(A)
asserting that GAFC or any of its Subsidiaries is not in compliance with any
of
the statutes, regulations, or ordinances which such Governmental Authority
enforces or (B) threatening to revoke any license, franchise, permit, or
governmental authorization (nor, to GAFC’s knowledge, do any grounds for any of
the foregoing exist); and
(iv) Since
July 1, 2001, is in compliance with the privacy provisions of the
Gramm-Leach-Bailey Act, and all other applicable laws relating to consumer
privacy.
(k) Material
Contracts; Defaults. Except for this Agreement and the definitive
agreement with respect to the sale of the Pasadena Branch, neither GAFC nor
any
of its Subsidiaries is a party to, bound by or subject to any agreement,
contract, arrangement, commitment or understanding (whether written or oral)
(i)
that is a “material contract” within the meaning of Item 601(b)(10) of the SEC’s
Regulation S-K or (ii) that restricts or limits in any way
the
conduct of business by it or any of its Subsidiaries (including without
limitation a non-compete or similar provision). Neither GAFC nor any
of its Subsidiaries is in default under any contract, agreement, commitment,
arrangement, lease, insurance policy or other instrument to which it is a party,
by which its respective assets, business, or operations may be bound or
affected, or under which it or its respective assets, business, or operations
receive benefits, and there has not occurred any event that, with the lapse
of
time or the giving of notice or both, would constitute such a
default.
(l) No
Brokers. No action has been taken by GAFC that would give rise to
any valid claim against any party hereto for a brokerage commission, finder’s
fee or other like payment with respect to the transactions contemplated by
this
Agreement, excluding a Previously Disclosed fee to be paid to Sandler O’Neill
& Partners, L.P.
(m) Employee
Benefit Plans. (i) GAFC has Previously Disclosed a complete and
accurate list of all existing bonus, incentive, deferred compensation, pension,
retirement, profit-sharing, thrift, savings, employee stock ownership, stock
bonus, stock purchase, restricted stock, stock option, severance, welfare and
fringe benefit plans, employment or severance agreements and all similar
practices, policies and arrangements in which any current or former employee
(the “Employees”), current or former consultant (the
“Consultants”) or current or former director (the “Directors”)
of GAFC or any of its Subsidiaries participates or to which any such Employees,
Consultants or Directors are a party (the “Compensation and Benefit
Plans”). Neither GAFC nor any of its Subsidiaries has any
commitment to create any additional Compensation and Benefit Plan or to modify
or change any existing Compensation and Benefit Plan.
(ii) Each
Compensation and Benefit Plan has been operated and administered in all material
respects in accordance with its terms and with applicable law, including, but
not limited to, ERISA, the Code, the Securities Act, the Exchange Act, the
Age
Discrimination in Employment Act, or any regulations or rules promulgated
thereunder, and all filings, disclosures and notices required by ERISA, the
Code, the Securities Act, the Exchange Act, the Age Discrimination in Employment
Act and any other applicable law have been timely made. Each
Compensation and Benefit Plan which is an “employee pension benefit plan” within
the meaning of Section 3(2) of ERISA (a “Pension Plan”) and which is
intended to be qualified under Section 401(a) of the Code has received a
favorable determination letter or has applied for a favorable determination
letter in compliance with the Code (including a determination that the related
trust under such Compensation and Benefit Plan is exempt from tax under Section
501(a) of the Code) from the Internal Revenue Service (“IRS”), and GAFC
is not aware of any circumstances likely to result in the revocation of any
existing favorable determination letter or in not receiving a favorable
determination letter. There is no material pending or, to the
knowledge of GAFC, threatened legal action, suit or claim relating to the
Compensation and Benefit Plans other than routine claims for
benefits. Neither GAFC nor any of its Subsidiaries has engaged in a
transaction, or omitted to take any action, with respect to any Compensation
and
Benefit Plan that would reasonably be expected to subject GAFC or any of its
Subsidiaries to a tax or penalty imposed by either Section 4975 of the Code
or
Section 502 of ERISA, assuming for purposes of Section 4975 of the Code that
the
taxable period of any such transaction expired as of the date
hereof.
(iii) No
Compensation and Benefit Plans currently maintained, or maintained within the
last six years, by GAFC or any of its Subsidiaries or any entity (and “ERISA
Affiliate”) which is considered one employer with GAFC under Section
4001(a)(14) of ERISA or Section 414(b) or (c) of the Code is or was subject
to
Title IV of ERISA or is or was a multiemployer plan under Subtitle E of Title
IV
of ERISA. To the knowledge of GAFC, there is no pending investigation
or enforcement action by the PBGC, the DOL or IRS or any other governmental
agency with respect to any Compensation and Benefit Plan.
(iv) All
contributions required to be made under the terms of any Compensation and
Benefit Plan or any employee benefit arrangements under any collective
bargaining agreement to which GAFC or any of its Subsidiaries is a party have
been timely made or have been reflected on GAFC’s financial
statements. None of GAFC, any of its Subsidiaries or any ERISA
Affiliate (x) has provided, or would reasonably be expected to be required
to
provide, security to any Pension Plan pursuant to Section 401(a)(29) of the
Code, and (y) has taken any action, or omitted to take any action, that has
resulted, or would reasonably be expected to result, in the imposition of a
lien
under Section 412(n) of the Code or pursuant to ERISA.
(v) Neither
GAFC nor any of its Subsidiaries has any obligations to provide retiree health
and life insurance or other retiree death benefits under any Compensation and
Benefit Plan, other than benefits mandated by Section 4980B of the Code, and
each such Compensation and Benefit Plan may be amended or
terminated
without
incurring liability thereunder. There has been no communication to
Employees by GAFC or any of its Subsidiaries that would reasonably be expected
to promise or guarantee such Employees retiree health or life insurance or
other
retiree death benefits on a permanent basis.
(vi) GAFC
and its Subsidiaries do not maintain any Compensation and Benefit Plans covering
foreign Employees.
(vii) With
respect to each Compensation and Benefit Plan, if applicable, GAFC has provided
or made available to Summit, true and complete copies of existing: (A)
Compensation and Benefit Plan documents and amendments thereto; (B) trust
instruments and insurance contracts; (C) two most recent Forms 5500 filed with
the IRS; (D) most recent actuarial report and financial statement; (E) the
most
recent summary plan description; (F) most recent determination letter issued
by
the IRS; (G) any Form 5310 or Form 5330 filed with the IRS; and (H) most recent
nondiscrimination tests performed under ERISA and the Code (including 401(k)
and
401(m) tests).
(viii) Except
as Previously Disclosed, the consummation of the transactions contemplated
by
this Agreement would not, directly or indirectly (including, without limitation,
as a result of any termination of employment prior to or following the Effective
Time) reasonably be expected to (A) entitle any Employee, Consultant or Director
to any payment (including severance pay or similar compensation) or any increase
in compensation, (B) result in the vesting or acceleration of any benefits
under
any Compensation and Benefit Plan or (C) result in any material increase in
benefits payable under any Compensation and Benefit Plan.
(ix) Neither
GAFC nor any of its Subsidiaries maintains any compensation plans, programs
or
arrangements the payments under which would not reasonably be expected to be
deductible as a result of the limitations under Section 162(m) of the Code
and
the regulations issued thereunder.
(x) As
a result, directly or indirectly, of the transactions contemplated by this
Agreement (including, without limitation, as a result of any termination of
employment prior to or following the Effective Time), none of Summit, GAFC
or
the Surviving Corporation, or any of their respective Subsidiaries will be
obligated to make a payment that would be characterized as an “excess parachute
payment” to an individual who is a “disqualified individual” (as such terms are
defined in Section 280G of the Code), without regard to whether such payment
is
reasonable compensation for personal services performed or to be performed
in
the future.
(n) Labor
Matters. Neither GAFC nor any of its Subsidiaries is a party to
or is bound by any collective bargaining agreement, contract or other agreement
or understanding with a labor union or labor organization, nor is GAFC or any
of
its Subsidiaries the subject of a proceeding asserting that it or any such
Subsidiary has committed an unfair labor practice (within the meaning of the
National Labor Relations Act) or seeking to compel GAFC or any such Subsidiary
to bargain with any labor organization as to wages or conditions of employment,
nor is there any strike or other labor dispute involving it or any of its
Subsidiaries pending or, to GAFC’s knowledge, threatened, nor is GAFC aware of
any activity involving its or any of its Subsidiaries’ employees seeking to
certify a collective bargaining unit or engaging in other organizational
activity.
(o) Takeover
Laws. GAFC has taken all action required to be taken by it in
order to exempt this Agreement and the transactions contemplated hereby from,
and this Agreement and the transactions contemplated hereby are exempt from,
the
requirements of any “moratorium”, “control share”, “fair price”, “affiliate
transaction”, “business combination” or other antitakeover laws and regulations
of any state applicable to GAFC (collectively, “Takeover Laws”),
including, without limitation, Section 203 of the DGCL.
(p) Environmental
Matters. To GAFC’s knowledge, neither the conduct nor operation
of GAFC or its Subsidiaries nor any condition of any property presently or
previously owned, leased or operated by any of them (including, without
limitation, in a fiduciary or agency capacity), or on which any of them holds
a
Lien, violates or violated Environmental Laws and to GAFC’s knowledge, no
condition has existed or event has occurred with respect to any of them or
any
such property that, with notice or the passage of time, or both, is reasonably
likely to result in liability under Environmental Laws. To GAFC’s
knowledge, neither GAFC nor any of its Subsidiaries has received any notice
from
any person or entity that GAFC or its Subsidiaries or the operation or condition
of any property ever owned, leased, operated, or held as collateral or in a
fiduciary capacity by any of them are or were in violation of or otherwise
are
alleged to have liability under any Environmental Law, including, but not
limited to, responsibility (or potential
responsibility)
for the cleanup or other remediation of any pollutants, contaminants, or
hazardous or toxic wastes, substances or materials at, on, beneath, or
originating from any such property.
(q) Tax
Matters. (i) All Tax Returns that are required to be filed by or
with respect to GAFC and its Subsidiaries have been duly filed, (ii) all Taxes
shown to be due on the Tax Returns referred to in clause (i) have been paid
in
full, (iii) the Tax Returns referred to in clause (i) have been examined by
the
Internal Revenue Service or the appropriate state, local or foreign taxing
authority or the period for assessment of the Taxes in respect of which such
Tax
Returns were required to be filed has expired, (iv) all deficiencies asserted
or
assessments made as a result of such examinations have been paid in full, (v)
no
issues that have been raised by the relevant taxing authority in connection
with
the examination of any of the Tax Returns referred to in clause (i) are
currently pending, and (vi) no waivers of statutes of limitation have been
given
by or requested with respect to any Taxes of GAFC or its
Subsidiaries. GAFC has made available to Summit true and correct
copies of the United States Federal Income Tax Returns filed by GAFC and its
Subsidiaries for each of the three most recent fiscal years ended on or before
December 31, 2004. Neither GAFC nor any of its Subsidiaries has any
liability with respect to income, franchise or similar Taxes that accrued on
or
before December 31, 2005 in excess of the amounts accrued with respect thereto
that are reflected in the financial statements of GAFC as of December 31, 2002
for each of the three years in the period ended December 31, 2004. As
of the date hereof, neither GAFC nor any of its Subsidiaries has any reason
to
believe that any conditions exist that might prevent or impede the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the
Code.
(ii) No
Tax is required to be withheld pursuant to Section 1445 of the Code as a result
of the transfer contemplated by this Agreement.
(r) Risk
Management Instruments. Except as disclosed on Disclosure
Schedule 6.03(r), neither GAFC nor any of its Subsidiaries are parties to any
interest rate swaps, caps, floors, option agreements, futures and forward
contracts and other similar risk management arrangements, whether entered into
for GAFC’s own account, or for the account of one or more of GAFC’s Subsidiaries
or their customers.
(s) Books
and Records. The books and records of GAFC and its Subsidiaries
have been fully, properly and accurately maintained in all material respects,
and there are no material inaccuracies or discrepancies of any kind contained
or
reflected therein and they fairly reflect the substance of events and
transactions included therein.
(t) Insurance. GAFC
Previously Disclosed all of the insurance policies, binders, or bonds maintained
by GAFC or its Subsidiaries. GAFC and its Subsidiaries are insured
with insurers believed to be reputable against such risks and in such amounts
as
the management of GAFC reasonably has determined to be prudent in accordance
with industry practices. All such insurance policies are in full
force and effect; GAFC and its Subsidiaries are not in material default
thereunder; and all claims thereunder have been filed in due and timely
fashion.
(u) Disclosure. The
representations and warranties contained in this Section 6.03 do not contain
any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements and information contained in this Section 6.03,
in light of the circumstances in which they are made, not
misleading.
6.04 Representations
and Warranties of Summit. Subject to Sections 6.01 and
6.02 and except as Previously Disclosed, Summit hereby represents and warrants
to GAFC:
(a) Organization
and Standing. Summit is a corporation duly organized, validly
existing and in good standing under the laws of the State of West
Virginia. Summit is duly qualified to do business and is in good
standing in the foreign jurisdictions where its ownership or leasing of property
or assets or the conduct of its business requires it to be so
qualified.
(b) Capitalization. (i)
As of December 31, 2006, the authorized capital stock of Summit consists solely
of 20,000,000 shares of Summit Common Stock, of which as of March 6, 2007,
7,084,980 shares, were outstanding, and 250,000 shares of Summit Preferred
Stock, of which none are issued and outstanding . As of the date
hereof, except as set forth in its Disclosure Schedule, Summit does not have
and
is not bound by any outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character calling for the purchase or issuance
of any shares of Summit Common Stock or any other equity securities of Summit
or
any of its Subsidiaries or any securities representing the right to purchase
or
otherwise receive any shares of Summit Common Stock or other equity securities
of Summit or any of its Subsidiaries. As of December 31, 2006, Summit
has 349,080 shares of Summit
Common
Stock which are issuable and reserved for issuance upon exercise of Summit
Stock
Options. The outstanding shares of Summit Common Stock have been duly
authorized and are validly issued and outstanding, fully paid and nonassessable,
and subject to no preemptive rights (and were not issued in violation of any
preemptive rights).
(ii) The
shares of Summit Common Stock to be issued in exchange for shares of GAFC Common
Stock in the Merger, when issued in accordance with the terms of this Agreement,
will be duly authorized, validly issued, fully paid and nonassessable, with
no
personal liability attaching to the ownership thereof, subject to no preemptive
rights and authorized for trading on the NASDAQ Capital Market.
(c) Subsidiaries. Each
of Summit’s Subsidiaries has been duly organized and is validly existing in good
standing under the laws of the jurisdiction of its organization, and is duly
qualified to do business and is in good standing in the jurisdictions where
its
ownership or leasing of property or the conduct of its business requires it
to
be so qualified and it owns, directly or indirectly, all the issued and
outstanding equity securities of each of its Significant
Subsidiaries.
(d) Corporate
Power. Each of Summit and its Subsidiaries has the corporate
power and authority to carry on its business as it is now being conducted and
to
own all its properties and assets; and Summit has the corporate power and
authority to execute, deliver and perform its obligations under this Agreement
and to consummate the transactions contemplated hereby.
(e) Corporate
Authority. This Agreement and the transactions contemplated
hereby have been authorized by all necessary corporate action of Summit and
the
Summit Board. Shareholder approval of the transactions contemplated
hereby is not required. Assuming due authorization, execution and
delivery by GAFC, this Agreement is a valid and legally binding agreement of
Summit, enforceable in accordance with its terms (except as enforceability
may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and similar laws of general applicability relating to or
affecting creditors’ rights or by general equity principles).
(f) Consents
and Approvals; No Defaults. (i) No consents or approvals of, or
filings or registrations with, any Governmental Authority or with any third
party are required to be made or obtained by Summit or any of its Subsidiaries
in connection with the execution, delivery or performance by Summit of this
Agreement or to consummate the Merger except for (A) filings of applications
and
notices with the federal and state banking and insurance authorities; (B)
filings with the NASDAQ Capital Market regarding the Summit Common Stock to
be
issued in the Merger; (C) the filing and declaration of effectiveness of the
Registration Statement; (D) the filing of a certificate of merger with the
Secretary of State pursuant to the DGCL and the issuance of the related
certificate of merger; (E) such filings as are required to be made or approvals
as are required to be obtained under the securities or “Blue Sky” laws of
various states in connection with the issuance of Summit Stock in the Merger;
and (F) receipt of the approvals set forth in Section 8.01(b). As of
the date hereof, Summit is not aware of any reason why the approvals set forth
in Section 8.01(b) will not be received without the imposition of a condition,
restriction or requirement of the type described in Section
8.01(b).
(ii) Subject
to the satisfaction of the requirements referred to in the preceding paragraph
and expiration of the related waiting periods, the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby do not and will not (A) constitute a breach or violation
of,
or a default under, or give rise to any Lien, any acceleration of remedies
or
any right of termination under, any law, rule or regulation or any judgment,
decree, order, governmental permit or license, or agreement, indenture or
instrument of Summit or of any of its Subsidiaries or to which Summit or any
of
its Subsidiaries or properties is subject or bound, (B) constitute a breach
or
violation of, or a default under, the certificate of incorporation or by-laws
(or similar governing documents) of Summit or any of its Subsidiaries, or (C)
require any consent or approval under any such law, rule, regulation, judgment,
decree, order, governmental permit or license, agreement, indenture or
instrument.
(g) Financial
Reports and SEC Documents; Absence of Certain Changes or
Events. (i) Summit’s Annual Report on Form 10-K for the
fiscal years ended December 31, 2004, 2005 and 2006, and all other reports,
registration statements, definitive proxy statements or information statements
filed or to be filed by it or any of its Subsidiaries subsequent to December
31,
2004, under the Securities Act or under Section 13(a), 13(c), 14 or 15(d) of
the
Exchange Act in the form filed or to be filed (collectively “Summit’s SEC
Documents”), as of the date filed, (A) as to form complied or will comply
in all material respects with the applicable requirements under the Securities
Act or the
Exchange
Act, as the case may be, and (B) did not and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and each of the
balance sheets or statements of condition of Summit contained in or incorporated
by reference into any of Summit’s SEC Documents (including the related notes and
schedules thereto) fairly presents, or will fairly present, the financial
position of Summit and its Subsidiaries as of its date, and each of the
statements of income or results of operations and changes in stockholders’
equity and cash flows or equivalent statements of Summit in any of Summit’s SEC
Documents (including any related notes and schedules thereto) fairly presents,
or will fairly present, the results of operations, changes in stockholders’
equity and cash flows, as the case may be, of Summit and its Subsidiaries for
the periods to which they relate, in each case in accordance with generally
accepted accounting principles consistently applied during the periods involved,
except in each case as may be noted therein, and subject to normal year-end
audit adjustments in the case of unaudited statements. Summit’s
Disclosure Schedule lists, and upon request, Summit has delivered to GAFC,
copies of the documentation creating or governing all securitization
transactions and “off-balance sheet arrangements” (as defined in Item 303(c) of
Regulation S-K) effected by Summit or its Subsidiaries, since December 31,
2006. Arnett & Foster, which has expressed its opinion with
respect to the financial statements of Summit and its Subsidiaries (including
the related notes) included in the Summit SEC Documents is and has been
throughout the periods covered by such financial statements (x) a registered
public accounting firm (as defined in Section 2(a)(12) of the Sarbanes-Oxley
Act
of 2002), (y) “independent” with respect to Summit within the meaning of
Regulation S-Y, and Z in compliance with subsection (g) through (l) of Section
10A of the Exchange Act and the related rules of the SEC and the Public
Accounting Oversight Board.
(ii) Since
December 31, 2006, Summit and its Subsidiaries have not incurred any liability
other than in the ordinary course of business consistent with past
practice.
(iii) Since
December 31, 2006, (A) Summit and its Subsidiaries have conducted their
respective businesses in the ordinary and usual course consistent with past
practice (excluding matters related to this Agreement and the transactions
contemplated hereby) and (B) no event has occurred or circumstance arisen that,
individually or taken together with all other facts, circumstances and events
(described in any paragraph of Section 6.04 or otherwise), is reasonably likely
to have a Material Adverse Effect with respect to Summit.
(h) Litigation. Except
as Previously Disclosed, no litigation, claim or other proceeding before any
court or Governmental Authority is pending against Summit or any of its
Subsidiaries and, to the best of Summit’s knowledge, no such litigation, claim
or other proceeding has been threatened.
(i) Regulatory
Matters. (i) Neither Summit nor any of its Subsidiaries or
properties is a party to or is subject to any order, decree, agreement,
memorandum of understanding or similar arrangement with, or a commitment letter
or similar submission to, or extraordinary supervisory letter from, any
Regulatory Authority.
(ii) Neither
Summit nor any of its Subsidiaries has been advised by any Regulatory Authority
that such Regulatory Authority is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such order,
decree, agreement, memorandum of understanding, commitment letter, supervisory
letter or similar submission.
(j) Laws. Each
of Summit and its Subsidiaries:
(i) is
in compliance with all applicable federal, state, local and foreign statutes,
laws, regulations, ordinances, rules, judgments, orders or decrees applicable
thereto or to the employees conducting such businesses, including, without
limitation, the Equal Credit Opportunity Act, the Fair Housing Act, the
Community Reinvestment Act, the Home Mortgage Disclosure Act and all other
applicable fair lending laws and other laws relating to discriminatory business
practices;
(ii) has
all permits, licenses, authorizations, orders and approvals of, and has made
all
filings, applications and registrations with, all Governmental Authorities
that
are required in order to permit them to own or lease their properties and to
conduct their businesses substantially as presently conducted; all such permits,
licenses, certificates of authority, orders and approvals are in full force
and
effect and, to the best of its knowledge, no suspension or cancellation of
any
of them is threatened;
(iii) has
received, since December 31, 2004, no notification or communication from any
Governmental Authority (A) asserting that Summit or any of its Subsidiaries
is
not in compliance with any of the statutes, regulations, or ordinances which
such Governmental Authority enforces or (B) threatening to revoke any license,
franchise, permit, or governmental authorization (nor, to Summit’s knowledge, do
any grounds for any of the foregoing exist); and
(iv) since
July 1, 2001, is in compliance with the privacy provisions of the
Gramm-Leach-Bliley Act, and all other applicable laws relating to consumer
privacy.
(k) Employee
Benefit Plans. (i) Summit’s Disclosure
Schedule contains a complete and accurate list of all existing bonus, incentive,
deferred compensation, pension, retirement, profit-sharing, thrift, savings,
employee stock ownership, stock bonus, stock purchase, restricted stock, stock
option, severance, welfare and fringe benefit plans, employment or severance
agreements and all similar practices, policies and arrangements in which any
current or former employee (the “Summit Employees”), current or former
consultant (the “Summit Consultants”) or current or former director
(the “Summit Directors”) of Summit or any of its Subsidiaries
participates or to which any Summit Employees, Summit Consultants or Summit
Directors are a party (the “Summit Compensation and Benefit
Plans”).
(ii) Each
Summit Compensation and Benefit Plan has been operated and administered in
all
material respects in accordance with its terms and with applicable law,
including, but not limited to, ERISA, the Code, the Securities Act, the Exchange
Act, the Age Discrimination in Employment Act, or any regulations or rules
promulgated thereunder, and all filings, disclosures and notices required by
ERISA, the Code, the Securities Act, the Exchange Act, the Age Discrimination
in
Employment Act and any other applicable law have been timely
made. Each Compensation and Benefit Plan which is an “employee
pension benefit plan” within the meaning of Section 3(2) of ERISA (a “Summit
Pension Plan”) and which is intended to be qualified under Section 401(a)
of the Code has received a favorable determination letter (including a
determination that the related trust under such Summit Compensation and Benefit
Plan is exempt from tax under Section 501(a) of the Code) from the IRS, and
Summit is not aware of any circumstances likely to result in revocation of
any
such favorable determination letter. There is no material pending or,
to the knowledge of Summit, threatened legal action, suit or claim relating
to
the Summit Compensation and Benefit Plans other than routine claims for
benefits. Neither Summit nor any of its Subsidiaries has engaged in a
transaction, or omitted to take any action, with respect to any Summit
Compensation and Benefit Plan that would reasonably be expected to subject
Summit or any of its Subsidiaries to a tax or penalty imposed by either Section
4975 of the Code or Section 502 of ERISA, assuming for purposes of Section
4975
of the Code that the taxable period of any such transaction expired as of the
date hereof.
(iii) No
liability (other than for payment of premiums to the PBGC which have been made
or will be made on a timely basis) under Title IV of ERISA has been or is
expected to be incurred by Summit or any of its Subsidiaries with respect to
any
ongoing, frozen or terminated “single-employer plan”, within the meaning of
Section 4001(a)(15) of ERISA, currently or formerly maintained by any of them,
or any single-employer plan of any entity (an “Summit ERISA Affiliate”)
which is considered one employer with Summit under Section 4001(a)(14) of ERISA
or Section 414(b) or (c) of the Code (an “Summit ERISA Affiliate
Plan”). None of Summit, any of its Subsidiaries or any Summit
ERISA Affiliate has contributed, or has been obligated to contribute, to a
multiemployer plan under Subtitle E of Title IV of ERISA at any time since
September 26, 1980. No notice of a “reportable event”, within the
meaning of Section 4043 of ERISA for which the 30-day reporting requirement
has
not been waived, has been required to be filed for any Summit Compensation
and
Benefit Plan or by any Summit ERISA Affiliate Plan within the 12-month period
ending on the date hereof, and no such notice will be required to be filed
as a
result of the transactions contemplated by this Agreement. The PBGC
has not instituted proceedings to terminate any Pension Plan or Summit ERISA
Affiliate Plan and, to Summit’s knowledge, no condition exists that presents a
material risk that such proceedings will be instituted. To the
knowledge of Summit, there is no pending investigation or enforcement action
by
the PBGC, the DOL or IRS or any other governmental agency with respect to any
Summit Compensation and Benefit Plan. Under each Summit Pension Plan
and Summit ERISA Affiliate Plan, as of the date of the most recent actuarial
valuation performed prior to the date of this Agreement, the actuarially
determined present value of all “benefit liabilities”, within the meaning of
Section 4001(a)(16) of ERISA (as determined on the basis of the actuarial
assumptions contained in such actuarial valuation of such Summit Pension Plan
or
Summit ERISA Affiliate Plan), did not exceed the then current value of the
assets of such Summit Pension Plan or Summit ERISA Affiliate Plan and since
such
date there has been neither an adverse change in the financial condition of
such
Summit Pension Plan or Summit
ERISA
Affiliate Plan nor any amendment or other change to such Pension Plan or ERISA
Affiliate Plan that would increase the amount of benefits thereunder which
reasonably could be expected to change such result.
(iv) All
contributions required to be made under the terms of any Summit Compensation
and
Benefit Plan or Summit ERISA Affiliate Plan or any employee benefit arrangements
under any collective bargaining agreement to which Summit or any of its
Subsidiaries is a party have been timely made or have been reflected on Summit’s
financial statements. Neither any Summit Pension Plan nor any Summit
ERISA Affiliate Plan has an “accumulated funding deficiency” (whether or not
waived) within the meaning of Section 412 of the Code or Section 302 of ERISA
and all required payments to the PBGC with respect to each Summit Pension Plan
or Summit ERISA Affiliate Plan have been made on or before their due
dates. None of Summit, any of its Subsidiaries or any Summit ERISA
Affiliate (x) has provided, or would reasonably be expected to be required
to
provide, security to any Summit Pension Plan or to any Summit ERISA Affiliate
Plan pursuant to Section 401(a)(29) of the Code, and (y) has taken any action,
or omitted to take any action, that has resulted, or would reasonably be
expected to result, in the imposition of a lien under Section 412(n) of the
Code
or pursuant to ERISA.
(v) Neither
Summit nor any of its Subsidiaries has any obligations to provide retiree health
and life insurance or other retiree death benefits under any Summit Compensation
and Benefit Plan, other than benefits mandated by Section 4980B of the Code,
and
each such Summit Compensation and Benefit Plan may be amended or terminated
without incurring liability thereunder. There has been no
communication to Employees by Summit or any of its Subsidiaries that would
reasonably be expected to promise or guarantee such Employees retiree health
or
life insurance or other retiree death benefits on a permanent
basis.
(vi) Summit
and its Subsidiaries do not maintain any Summit Compensation and Benefit Plans
covering foreign Employees.
(vii) With
respect to each Summit Compensation and Benefit Plan, if applicable, Summit
has
provided or made available to GAFC, true and complete copies of existing: (A)
Summit Compensation and Benefit Plan documents and amendments thereto; (B)
trust
instruments and insurance contracts; (C) two most recent Forms 5500 filed with
the IRS; (D) most recent actuarial report and financial statement; (E) the
most
recent summary plan description; (F) forms filed with the PBGC (other than
for
premium payments); (G) most recent determination letter issued by the IRS;
(H)
any Form 5310 or Form 5330 filed with the IRS; and (I) most recent
nondiscrimination tests performed under ERISA and the Code (including 401(k)
and
401(m) tests).
(viii) The
consummation of the transactions contemplated by this Agreement would not,
directly or indirectly (including, without limitation, as a result of any
termination of employment prior to or following the Effective Time) reasonably
be expected to (A) entitle any Summit Employee, Summit Consultant or Summit
Director to any payment (including severance pay or similar compensation) or
any
increase in compensation, (B) result in the vesting or acceleration of any
benefits under any Summit Compensation and Benefit Plan or (C) result in any
material increase in benefits payable under any Summit Compensation and Benefit
Plan.
(ix) Neither
Summit nor any of its Subsidiaries maintains any compensation plans, programs
or
arrangements the payments under which would not reasonably be expected to be
deductible as a result of the limitations under Section 162(m) of the Code
and
the regulations issued thereunder.
(x) As
a result, directly or indirectly, of the transactions contemplated by this
Agreement (including, without limitation, as a result of any termination of
employment prior to or following the Effective Time), none of Summit, GAFC
or
the Surviving Corporation, or any of their respective Subsidiaries will be
obligated to make a payment that would be characterized as an “excess parachute
payment” to an individual who is a “disqualified individual” (as such terms are
defined in Section 280G of the Code), without regard to whether such payment
is
reasonable compensation for personal services performed or to be performed
in
the future.
(l) No
Brokers. No action has been or will be taken by Summit that would
give rise to any valid claim against any party hereto for a brokerage
commission, finder’s fee or other like payment with respect to the transactions
contemplated by this Agreement.
(m) Takeover
Laws. Summit has taken all action required to be taken by it in
order to exempt this Agreement and the transactions contemplated hereby from,
and this Agreement and the transactions contemplated hereby are exempt from,
the
requirements of any Takeover Laws applicable to Summit.
(n) Environmental
Matters. To Summit’s knowledge, neither the conduct nor operation
of Summit or its Subsidiaries nor any condition of any property presently or
previously owned, leased or operated by any of them (including, without
limitation, in a fiduciary or agency capacity), or on which any of them holds
a
Lien, violates or violated Environmental Laws and to Summit’s knowledge no
condition has existed or event has occurred with respect to any of them or
any
such property that, with notice or the passage of time, or both, is reasonably
likely to result in liability under Environmental Laws. To Summit’s
knowledge, neither Summit nor any of its Subsidiaries has received any notice
from any person or entity that Summit or its Subsidiaries or the operation
or
condition of any property ever owned, leased, operated, or held as collateral
or
in a fiduciary capacity by any of them are or were in violation of or otherwise
are alleged to have liability under any Environmental Law, including, but not
limited to, responsibility (or potential responsibility) for the cleanup or
other remediation of any pollutants, contaminants, or hazardous or toxic wastes,
substances or materials at, on, beneath, or originating from any such
property.
(o) Tax
Matters. (i) All Tax Returns that are required to be filed by or
with respect to Summit and its Subsidiaries have been duly filed, (ii) all
Taxes
shown to be due on the Tax Returns referred to in clause (i) have been paid
in
full, (iii) the Tax Returns referred to in clause (i) have been examined by
the
Internal Revenue Service or the appropriate state, local or foreign taxing
authority or the period for assessment of the Taxes in respect of which such
Tax
Returns were required to be filed has expired, (iv) all deficiencies asserted
or
assessments made as a result of such examinations have been paid in full, (v)
no
issues that have been raised by the relevant taxing authority in connection
with
the examination of any of the Tax Returns referred to in clause (i) are
currently pending, and (vi) no waivers of statutes of limitation have been
given
by or requested with respect to any Taxes of Summit or its
Subsidiaries. Neither Summit nor any of its Subsidiaries has any
liability with respect to income, franchise or similar Taxes that accrued on
or
before the end of the most recent period covered by Summit’s SEC Documents filed
prior to the date hereof in excess of the amounts accrued with respect thereto
that are reflected in the financial statements included in Summit’s SEC
Documents filed on or prior to the date hereof. As of the date
hereof, neither Summit nor any of its Subsidiaries has any reason to believe
that any conditions exist that might prevent or impede the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the
Code.
(p) Books
and Records. The books and records of Summit and its Subsidiaries
have been fully, properly and accurately maintained in all material respects,
and there are no material inaccuracies or discrepancies of any kind contained
or
reflected therein, and they fairly present the substance of events and
transactions included therein.
(q) Insurance. Summit’s
Disclosure Schedule lists all of the insurance policies, binders, or bonds
maintained by Summit or its Subsidiaries. Summit and its Subsidiaries
are insured with insurers believed to be reputable against such risks and in
such amounts as the management of Summit reasonably has determined to be prudent
in accordance with industry practices. All such insurance policies
are in full force and effect; Summit and its Subsidiaries are not in material
default thereunder; and all claims thereunder have been filed in due and timely
fashion.
(r) Disclosure. The
representations and warranties contained in this Section 6.04 do not contain
any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements and information contained in this Section 6.04,
in light of the circumstances under which they are made, not
misleading.
(s) Representations and Warranties
of Summit with Respect to Merger Sub.
(i) Organization,
Standing and Authority. The Merger Sub is or prior to the
Effective Time will be duly organized and validly existing in good standing
under the laws of the state of its organization, and is or prior to the
Effective Time will be duly qualified to do business and in good standing in
the
jurisdictions where its ownership or leasing of property or the conduct of
its
business requires it to be so qualified. The Merger Sub will have
been organized for the purpose of the transactions contemplated by this
Agreement, and no newly chartered Merger Sub will have previously conducted
any
business or incurred any liabilities.
(ii) Power. The
Merger Sub has, or prior to the Effective Time will have, the power and
authority to execute, deliver and perform its obligations under this Agreement
and to consummate the transactions contemplated hereby.
(iii) Authority. This
Agreement and the transactions contemplated hereby have been, or prior to the
Effective Time will have been, authorized by all requisite action on the part
of
the Merger Sub and its respective subsidiaries or members. Upon
execution and delivery of Annex A, this Agreement will be a valid and legally
binding agreement of the Merger Sub enforceable in accordance with its terms
(except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws of general
applicability relating to or affecting creditors’ rights or by general equity
principles).
ARTICLE
VII
Covenants
7.01 Reasonable
Best Efforts. Subject to the terms and conditions of
this Agreement, each of GAFC and Summit agrees to use its reasonable best
efforts in good faith to take, or cause to be taken, all actions, and to do,
or
cause to be done, all things necessary, proper or desirable, or advisable under
applicable laws, so as to permit consummation of the Merger as promptly as
practicable and otherwise to enable consummation of the transactions
contemplated hereby and shall cooperate fully with the other party hereto to
that end.
7.02 Stockholder
Approval. GAFC
agrees to take, in accordance with applicable law and the GAFC Certificate
and
GAFC By-laws, all action necessary to convene an appropriate meeting of its
stockholders to consider and vote upon the approval of this Agreement and any
other matters required to be approved by GAFC’s stockholders for consummation of
the Merger (including any adjournment or postponement, the “GAFC
Meeting”), as promptly as practicable after the Registration Statement is
declared effective. The GAFC Board will recommend that the GAFC
stockholders approve and adopt the Agreement and the transactions contemplated
hereby, provided that the GAFC Board may fail to make such recommendation,
or
withdraw, modify or change any such recommendation, if the GAFC Board, after
having consulted with and considered the advice of outside counsel, has
determined that the making of such recommendation, or the failure to withdraw,
modify or change such recommendation, would be reasonably likely to constitute
a
breach of the fiduciary duties of the members of the GAFC Board under applicable
law.
7.03 Registration
Statement. (a) Summit agrees to prepare a
registration statement on Form S-4 (the “Registration Statement”) to be
filed by Summit with the SEC in connection with the issuance of Summit Common
Stock in the Merger (including the prospectus of Summit and proxy solicitation
materials of GAFC constituting a part thereof (the “Proxy Statement”)
and all related documents). GAFC and Summit agree to cooperate, and
to cause their respective Subsidiaries to cooperate, with the other and its
counsel and its accountants in the preparation of the Registration Statement
and
the Proxy Statement; and provided that GAFC and its Subsidiaries have
cooperated as required above, Summit agrees to file the Registration Statement
(including the Proxy Statement in preliminary form) with the SEC as promptly
as
reasonably practicable and in any event within forty-five (45) days from the
date on which the sale of the Pasedena Branch is consummated. Each of
GAFC and Summit agrees to use all reasonable efforts to cause the Registration
Statement to be declared effective under the Securities Act as promptly as
reasonably practicable after filing thereof. Summit also agrees to
use all reasonable efforts to obtain, prior to the effective date of the
Registration Statement, all necessary state securities law or “Blue Sky” permits
and approvals required to carry out the transactions contemplated by this
Agreement. GAFC agrees to furnish to Summit all information
concerning GAFC, its Subsidiaries, officers, directors and stockholders as
may
be reasonably requested in connection with the foregoing and shall have the
right to review and consult with Summit and approve the form of, and any
characterization of such information included in, the Registration Statement
prior to its being filed with the SEC.
(b) Each
of GAFC and Summit agrees, as to itself and its Subsidiaries, that none of
the
information supplied or to be supplied by it for inclusion or incorporation
by
reference in (i) the Registration Statement will, at the time the Registration
Statement and each amendment or supplement thereto, if any, becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to
make the statements therein not misleading, and (ii) the Proxy Statement and
any
amendment or supplement thereto will, at the date of mailing to stockholders
and
at the time of the GAFC Meeting, as the case may be, contain any untrue
statement of a material fact or omit to state any material fact required to
be
stated therein or necessary to make the statements therein not misleading or
any
statement which, in the light of the circumstances under which such statement
is
made, will be false or misleading with respect to any material fact, or which
will omit to state any material fact necessary in order to make the statements
therein not false or misleading or necessary to correct any statement in any
earlier statement in the Proxy Statement or any amendment or supplement
thereto. Each of GAFC and Summit further agrees that if it shall
become aware prior to the Effective Date of any information furnished by it
that
would
cause any of the statements in the Proxy Statement to be false or misleading
with respect to any material fact, or to omit to state any material fact
necessary to make the statements therein not false or misleading, to promptly
inform the other party thereof and to take the necessary steps to correct the
Proxy Statement.
(c) Summit
agrees to advise GAFC, promptly after Summit receives notice thereof, of the
time when the Registration Statement has become effective or any supplement
or
amendment has been filed, of the issuance of any stop order or the suspension
of
the qualification of Summit Stock for offering or sale in any jurisdiction,
of
the initiation or threat of any proceeding for any such purpose, or of any
request by the SEC for the amendment or supplement of the Registration Statement
or for additional information.
7.04 Press
Releases. Each of GAFC and Summit agrees that it will
not, without the prior approval of the other party, file any material pursuant
to SEC Rules 165 or 425, or issue any press release or written statement for
general circulation relating to the transactions contemplated hereby, except
as
otherwise required by applicable law or regulation or NASDAQ rules.
7.05 Access;
Information. (a) Each of GAFC and Summit
agrees that upon reasonable notice and subject to applicable laws relating
to
the exchange of information, it shall afford the other party and the other
party’s officers, employees, counsel, accountants and other authorized
representatives, such access during normal business hours throughout the period
prior to the Effective Time to the books, records (including, without
limitation, tax returns, and, subject to the consent of the independent
auditors, work papers of independent auditors), properties, personnel and to
such other information as any party may reasonably request and, during such
period, it shall furnish promptly to such other party (i) a copy of each
material report, schedule and other document filed by it pursuant to the
requirements of federal or state securities or banking laws, and (ii) all other
information concerning the business, properties and personnel of it as the
other
may reasonably request.
(b) Each
agrees that it will not, and will cause its representatives not to, use any
information obtained pursuant to this Section 7.05 (as well as any other
information obtained prior to the date hereof in connection with the entering
into of this Agreement) for any purpose unrelated to the consummation of the
transactions contemplated by this Agreement. Subject to the
requirements of law, each party will keep confidential, and will cause its
representatives to keep confidential, all information and documents obtained
pursuant to this Section 7.05 (as well as any other information obtained prior
to the date hereof in connection with the entering into of this Agreement)
unless such information (i) was already known to such party, (ii) becomes
available to such party from other sources not known by such party to be bound
by a confidentiality obligation, (iii) is disclosed with the prior written
approval of the party to which such information pertains or (iv) is or becomes
readily ascertainable from published information or trade sources. In
the event that this Agreement is terminated or the transactions contemplated
by
this Agreement shall otherwise fail to be consummated, each party shall promptly
cause all copies of documents or extracts thereof containing information and
data as to another party hereto to be returned to the party which furnished
the
same. No investigation by either party of the business and affairs of
the other shall affect or be deemed to modify or waive any representation,
warranty, covenant or agreement in this Agreement, or the conditions to either
party’s obligation to consummate the transactions contemplated by this
Agreement.
(c) During
the period from the date of this Agreement to the Effective Time, each party
shall promptly furnish the other with copies of all monthly and other interim
financial statements produced in the ordinary course of business as the same
shall become available.
7.06 Acquisition
Proposals. GAFC agrees that it shall not, and shall
cause its Subsidiaries and its Subsidiaries’ officers, directors, agents,
advisors and affiliates not to, solicit or encourage inquiries or proposals
with
respect to, or engage in any negotiations concerning, or provide any
confidential information to, or have any discussions with any person relating
to, any Acquisition Proposal. It shall immediately cease and cause to
be terminated any activities, discussions or negotiations conducted prior to
the
date of this Agreement with any parties other than Summit with respect to any
of
the foregoing and shall use its reasonable best efforts to enforce any
confidentiality or similar agreement relating to an Acquisition
Proposal. Notwithstanding the foregoing, if, at any time the GAFC
Board determines in good faith, after consultation with outside counsel, that
failure to do so would be reasonably likely to constitute a breach of its
fiduciary duties under applicable law, GAFC, in response to a written
Acquisition Proposal that was unsolicited or that did not otherwise result
from
a breach of this Section 7.06, may furnish non-public information with respect
to GAFC to the Person who made such Acquisition Proposal and participate in
negotiations regarding such Acquisition Proposal.
7.07 Affiliate
Agreements. (a) Not later
than the 15th day prior to the mailing of the Proxy Statement, GAFC shall
deliver to Summit a schedule of each person that, to the best of its knowledge,
is or is reasonably likely to be, as of the date of the GAFC Meeting, deemed
to
be an “affiliate” of GAFC (each, a “GAFC Affiliate”) as that term is
used in Rule 145 under the Securities Act.
(b) GAFC
shall use its reasonable best efforts to cause each person who may be deemed
to
be a GAFC Affiliate to execute and deliver to Summit on or before the date
of
mailing of the Proxy Statement an agreement in the form attached hereto as
Exhibit A.
7.08 Takeover
Laws. No party hereto shall take any action that would
cause the transactions contemplated by this Agreement to be subject to
requirements imposed by any Takeover Law and each of them shall take all
necessary steps within its control to exempt (or ensure the continued exemption
of) the transactions contemplated by this Agreement from any applicable Takeover
Law, as now or hereafter in effect.
7.09 Certain
Policies. Immediately prior to the Effective Date, GAFC
shall, consistent with generally accepted accounting principles and on a basis
mutually satisfactory to it and Summit, modify and change its loan, litigation
and real estate valuation policies and practices (including loan classifications
and levels of reserves) so as to be applied on a basis that is consistent with
that of Summit and shall make appropriate accruals for any employee benefits,
plans, arrangements or obligations assumed by Summit under this Agreement;
provided, however, that GAFC shall not be obligated to take any such action
pursuant to this Section 7.09 unless and until Summit acknowledges that all
conditions to its obligation to consummate the Merger have been satisfied and
certifies to GAFC that Summit’s representations and warranties, subject to
Section 6.02, are true and correct as of such date and that Summit is otherwise
material in compliance with this Agreement. Summit and GAFC also
shall consult with respect to the character, amount, and timing of restructuring
and Merger-related expense charges to be taken by each of them in connection
with the transactions contemplated by this Agreement and shall take such charges
in accordance with GAAP as may be mutually agreed upon by
them. GAFC’s representations, warranties and covenants contained in
this Agreement shall not be deemed to be untrue or breached in any respect
for
any purpose as a consequence of any modifications or changes undertaken solely
on account of this Section 7.09.
7.10 Regulatory
Applications. (a) Summit and GAFC and their
respective Subsidiaries shall cooperate and use their respective reasonable
best
efforts to prepare all documentation, to effect all filings and to obtain all
permits, consents, approvals and authorizations of all third parties and
Governmental Authorities necessary to consummate the transactions contemplated
by this Agreement. Each of Summit and GAFC shall have the right to
review in advance, and to the extent practicable each will consult with the
other, in each case subject to applicable laws relating to the exchange of
information, with respect to, all material written information submitted to
any
third party or any Governmental Authority in connection with the transactions
contemplated by this Agreement. In exercising the foregoing right,
each of the parties hereto agrees to act reasonably and as promptly as
practicable. Each party hereto agrees that it will consult with the
other party hereto with respect to the obtaining of all material permits,
consents, approvals and authorizations of all third parties and Governmental
Authorities necessary or advisable to consummate the transactions contemplated
by this Agreement and each party will keep the other party apprised of the
status of material matters relating to completion of the transactions
contemplated hereby.
(b) Each
party agrees, upon request, to furnish the other party with all information
concerning itself, its Subsidiaries, directors, officers and stockholders and
such other matters as may be reasonably necessary or advisable in connection
with any filing, notice or application made by or on behalf of such other party
or any of its Subsidiaries to any third party or Governmental
Authority.
7.11 Indemnification. (a) Following
the Effective Date and for a period of three (3) years thereafter, Summit shall
indemnify, defend and hold harmless the present directors, officers and
employees of GAFC and its Subsidiaries (each, an “Indemnified Party”)
against all costs or expenses (including reasonable attorneys’ fees), judgments,
fines, losses, claims, damages or liabilities (collectively, “Costs”)
incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of actions or omissions occurring at or prior to the Effective Time
(including, without limitation, the transactions contemplated by this Agreement)
to the fullest extent that GAFC is permitted or required to indemnify (and
advance expenses to) its directors and officers under the laws of
the State of Delaware, the GAFC Certificate, the GAFC By-Laws and any
agreement as in effect on the date hereof; provided that any
determination required to be made with respect to whether an officer’s,
director’s or employee’s conduct complies with the standards set forth under
Delaware law, the GAFC
Certificate,
the GAFC By-Laws and any agreement shall be made by independent counsel (which
shall not be counsel that provides material services to Summit) selected by
Summit and reasonably acceptable to such officer or director.
(b) Any
Indemnified Party wishing to claim indemnification under Section 7.11(a), upon
learning of any claim, action, suit, proceeding or investigation described
above, shall promptly notify Summit thereof; provided that the failure
so to notify shall not affect the obligations of Summit under Section 7.11(a)
unless and to the extent that Summit is actually prejudiced as a result of
such
failure.
(c) If
Summit or any of its successors or assigns shall consolidate with or merge
into
any other entity and shall not be the continuing or surviving entity of such
consolidation or merger or shall transfer all or substantially all of its assets
to any entity, then and in each case, proper provision shall be made so that
the
successors and assigns of Summit shall assume the obligations set forth in
this
Section 7.11.
(d)
The provisions of this Section 7.11 shall survive the Effective Time and are
intended to be for the benefit of, and shall be enforceable by, each Indemnified
Party and his or her heirs and representatives.
7.12 Benefit
Plans. (a) It is the intention of Summit
that within a reasonable period of time following the Effective Time (i) it
will
provide employees of GAFC with employee benefit plans substantially similar
in
the aggregate to those provided to similarly situated employees of Summit,
(ii)
Summit shall cause any and all pre-existing condition limitations (to the extent
such limitations did not apply to a pre-existing condition under the
Compensation and Benefit Plans) and eligibility waiting periods under group
health plans to be waived with respect to such participants and their eligible
dependents, and (iii) all GAB employees will receive credit for years of service
with GAFC and its predecessors prior to the Effective Time for purposes of
eligibility and vesting and not for purposes of benefit accrual under Summit’s
benefit plans. Summit shall maintain GAFC’s existing employee benefit
plans until such time as Summit has provided similar plans to GAFC’s employees
as contemplated in the preceding sentence. GAB employees shall not be
entitled to accrual of benefits or allocation of contributions under Summit’s
benefit plans based on years of service with GAFC and its predecessors prior
to
the Effective Date.
(b) Immediately
prior to the Effective Date, GAFC shall take such action as may be necessary
to
terminate its 401(k) plan, including accruing the estimated expense associated
with terminating the 401(k) plan. Following the receipt of a
favorable determination letter from the IRS relating to the termination of
the
401(k) plan, the assets of the plan shall be distributed to participants as
provided in the plan. Notwithstanding the foregoing, the 401(k) plan
trustee may make distributions to all non-continuing GAB employees before the
receipt of a favorable determination letter. In the event a favorable
ruling is not issued, GAFC agrees that termination of the 401(k) plan shall
not
occur and the 401(k) plan shall be merged with Summit’s 401(k)
plan.
7.13 Notification
of Certain Matters. Each of GAFC and Summit shall give
prompt notice to the other of any fact, event or circumstance known to it that
(i) is reasonably likely, individually or taken together with all other facts,
events and circumstances known to it, to result in any Material Adverse Effect
with respect to it or (ii) would cause or constitute a material breach of any
of
its representations, warranties, covenants or agreements contained
herein.
7.14 Current
Public Information. Summit agrees that it shall, for
a period of three (3) years following the Effective Time, use its best efforts
to meet the current public information requirements as set forth in paragraph
(c) of Rule 144 promulgated under the Securities Act, and will provide those
persons providing affiliate letters pursuant to Section 7.07 with such other
information as they may reasonably require and to otherwise cooperate with
such
persons to facilitate any sales of Summit Common Stock issued to such persons
pursuant to this Agreement in compliance with the provisions of Rule 144 and/or
Rule 145 promulgated under the Securities Act. The provisions of this
Section 7.14 shall survive the Effective Time and are intended to be for the
benefit of, and shall be enforceable by, such affiliates of GAFC.
7.15 Contractual
Rights of Current Employees. At and following the
Effective Time, Summit shall honor, and Summit shall continue to be obligated
to
perform, in accordance with their terms, all benefit obligations to, and
contractual rights of, current and former employees of GAFC and its Subsidiaries
existing as of the Effective Date, as well as all employment, severance,
deferred compensation, split dollar life insurance or “change-in-control”
agreements, plans or policies of GAFC and its Subsidiaries which are Previously
Disclosed. Summit acknowledges that
the
consummation of the Merger will constitute a “change-in-control” of for purposes
of any employee benefit plans, agreements and arrangements of GAFC and its
Subsidiaries.
7.16 GAFC Trust
Preferred Securities.
(a) GAFC
shall cooperate with Summit to permit Summit to assume the obligations of GAFC
under the Indenture and the Guarantee and to receive the transfer of the Common
Securities, as provided in Section 2.03, and to enable Summit to exercise the
call feature of the GAFC Trust Preferred Stock, including by causing GAFC's
counsel to deliver such opinions as the Trustee may reasonably require with
respect to the assumption of the GAFC Trust Preferred Securities.
(b) From
and after the date hereof and until and including the Closing Date, GAFC shall
(i) pay, or accrue, as applicable , and cause the Trust to pay, or accrue,
as
applicable, all amounts due (when and as due) and comply, and cause each Trust
to comply, with all of its obligations under the Indenture and the Guarantee,
and such other transaction documents (together the “Operative Documents”), and
(ii) not enter into any agreement (or amend, alter or agree to amend or alter
any Operative Document or other agreement) with the Trust.
7.17 Transition. Commencing
on the date hereof, and in all cases subject to applicable law and regulation,
GAFC shall, and shall cause its Subsidiaries to, cooperate with Summit and
its
Subsidiaries to facilitate the integration of the parties and their respective
businesses effective as of the Closing Date or such later date as may be
determined by Summit. Without limiting the generality of the
foregoing, from the date hereof through the Closing Date and consistent with
the
performance of their day-to-day operations and the continuous operation of
GAFC
and its Subsidiaries in the ordinary course of business, GAFC shall cause the
employees and officers of GAFC and its Subsidiaries to use their reasonable
best
efforts to provide support, including support from its outside contractors
and
vendors, and to assist Summit in performing all tasks, including equipment
installation, reasonably required to result in a successful integration at
the
Closing or such later date as may be determined by Summit. In
addition, GAFC shall cooperate with Summit in seeking to amend certain lease
arrangements of GAFC and its Subsidiaries as specified by Summit, such
amendments to be effective only upon consummation of the Merger.
ARTICLE
VIII
Conditions
to Consummation of the Merger
8.01 Conditions
to Each Party’s Obligation to Effect the Merger. The
respective obligation of each of Summit and GAFC to consummate the Merger is
subject to the fulfillment by Summit and GAFC prior to the Effective Time of
each of the following conditions:
(a) Stockholder
Approval. This Agreement shall have been duly approved by the
requisite vote of the stockholders of GAFC.
(b) Regulatory
Approvals. All regulatory approvals required to consummate the
transactions contemplated hereby shall have been obtained and shall remain
in
full force and effect and all statutory waiting periods in respect thereof
shall
have expired and no such approvals shall contain any conditions, restrictions
or
requirements (other than with respect to the sale of the Pasadena Branch) which
the Summit Board reasonably determines in good faith would either before or
after the Effective Time have a Material Adverse Effect on the Surviving
Corporation and its Subsidiaries taken as a whole.
(c) No
Injunction. No Governmental Authority of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any statute, rule,
regulation, judgment, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and prohibits consummation of
the
transactions contemplated by this Agreement.
(d) Registration
Statement. The Registration Statement shall have become effective
under the Securities Act and no stop order suspending the effectiveness of
the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC.
(e) Blue
Sky Approvals. All permits and other authorizations under state
securities laws necessary to consummate the transactions contemplated hereby
and
to issue the shares of Summit Common Stock to be issued in the Merger shall
have
been received and be in full force and effect.
(f) Listing. To
the extent required, the shares of Summit Common Stock to be issued in the
Merger shall have been approved for listing on the NASDAQ Capital Market,
subject to official notice of issuance.
8.02 Conditions
to Obligation of GAFC. The obligation of GAFC to
consummate the Merger is also subject to the fulfillment or written waiver
by
GAFC prior to the Effective Time of each of the following
conditions:
(a) Representations
and Warranties. The representations and warranties of Summit set
forth in this Agreement shall be true and correct, subject to Section 6.02,
as
of the date of this Agreement and as of the Effective Date as though made on
and
as of the Effective Date (except that representations and warranties that by
their terms speak as of the date of this Agreement or some other date shall
be
true and correct as of such date), and GAFC shall have received a certificate,
dated the Effective Date, signed on behalf of Summit by the Chief Executive
Officer and the Chief Financial Officer of Summit to such effect.
(b) Performance
of Obligations of Summit. Summit shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Effective Time, and GAFC shall have received a
certificate, dated the Effective Date, signed on behalf of Summit by the Chief
Executive Officer and the Chief Financial Officer of Summit to such
effect.
8.03 Conditions
to Obligation of Summit. The obligation of Summit to
consummate the Merger is also subject to the fulfillment or written waiver
by
Summit prior to the Effective Time of each of the following
conditions:
(a) Representations
and Warranties. The representations and warranties of GAFC set
forth in this Agreement shall be true and correct, subject to Section 6.02,
as
of the date of this Agreement and as of the Effective Date as though made on
and
as of the Effective Date (except that representations and warranties that by
their terms speak as of the date of this Agreement or some other date shall
be
true and correct as of such date) and Summit shall have received a certificate,
dated the Effective Date, signed on behalf of GAFC by the Chief Executive
Officer and the Chief Financial Officer of GAFC to such effect.
(b) Performance
of Obligations of GAFC. GAFC shall have performed in all material
respects all obligations required to be performed by it under this Agreement
at
or prior to the Effective Time, and Summit shall have received a certificate,
dated the Effective Date, signed on behalf of GAFC by the Chief Executive
Officer and the Chief Financial Officer of GAFC to such effect.
(c) Opinion
of Summit’s Counsel. Summit and GAFC shall have received an
opinion of Hunton &Williams, special counsel to Summit, dated the Effective
Date, to the effect that, on the basis of facts, representations and assumptions
set forth in such opinion, (i) the Merger constitutes a reorganization under
Section 368 of the Code (ii) no gain or loss will be recognized by stockholders
of GAFC who receive shares of Summit Common Stock in exchange for shares of
GAFC
Common Stock, except that gain or loss may be recognized as to cash received
as
Merger Consideration and/or in lieu of fractional share interests, and (iii)
after the Merger, Summit will be allowed to carry forward GAFC’s consolidated
net operating losses under Section 382 of the Code. In rendering its
opinion, Hunton &Williams may require and rely upon representations
contained in letters from Summit and others.
(d) Core
Deposits. The balance of Core Deposits shall not be less than
$144 million .
(e) Sale
of Branch. At least forty-five (45) days prior to
consummation of the Merger, GAB shall have consummated the sale of the Pasadena
Branch.
ARTICLE
IX
Termination
9.01 Termination. This
Agreement may be terminated, and the Merger may be abandoned:
(a) Mutual
Consent. At any time prior to the Effective Time, by the mutual
consent of Summit and GAFC, if the Board of Directors of each so determines
by
vote of a majority of the members of its entire Board.
(b) Breach. At
any time prior to the Effective Time, by Summit or GAFC (provided that the
party
seeking termination is not then in material breach of any representation,
warranty, covenant or other agreement contained herein), if its Board of
Directors so determines by vote of a majority of the members of its entire
Board, in the event of either: (i) a breach by the other party of any
representation or warranty contained herein (subject to the standard set forth
in Section 6.02), which breach cannot be or has not been cured within 30 days
after the giving of written notice to the breaching party of such breach; or
(ii) a breach by the other party of any of the covenants or agreements contained
herein, which breach cannot be or has not been cured within 30 days after the
giving of written notice to the breaching party of such breach, provided that
such breach (whether under (i) or (ii)) would be reasonably likely, individually
or in the aggregate with other breaches, to result in a Material Adverse
Effect.
(c) Delay. At
any time prior to the Effective Time, by Summit or GAFC, if its Board of
Directors so determines by vote of a majority of the members of its entire
Board, in the event that the Acquisition is not consummated by December 31,
2007, except to the extent that the failure of the Acquisition then to be
consummated arises out of or results from the knowing action or inaction of
the
party seeking to terminate pursuant to this Section 9.01(c).
(d) No
Approval. By GAFC or Summit, if its Board of Directors so
determines by a vote of a majority of the members of its entire Board, in the
event (i) the approval of any Governmental Authority required for consummation
of the Merger and the other transactions contemplated by this Agreement shall
have been denied by final nonappealable action of such Governmental Authority
or
(ii) the stockholder approval required by Section 8.01(a) herein is not obtained
at the GAFC Meeting.
(e) Failure
to Recommend, Etc. At any time prior to the GAFC Meeting, by
Summit if the GAFC Board shall have failed to make its recommendation referred
to in Section 7.02, withdrawn such recommendation or modified or changed such
recommendation in a manner adverse in any respect to the interests of
Summit.
(f) Superior
Proposal. By GAFC, if the GAFC Board so determines by a vote of
the majority of the members of its entire board, at any time prior to the GAFC
Meeting, in order to concurrently enter into an agreement with respect to an
unsolicited Acquisition Proposal that was received and considered by GAFC in
compliance with Section 7.06 and that would, if consummated, result in a
transaction that is more favorable to GAFC’s stockholders from a financial point
of view than the Merger (a “Superior Proposal”); provided,
however, that (i) this Agreement may be terminated by GAFC pursuant to this
Section 9.01(f) only after the fifth business day following Summit’s receipt of
written notice from GAFC advising Summit that GAFC is prepared to enter into
an
agreement with respect to a Superior Proposal and only if, during such five
business day period Summit elects not to make an offer or Summit does not make
an offer to GAFC that the GAFC Board determines in good faith, after
consultation with its financial and legal advisors, is at least as favorable
as
the Superior Proposal.
9.02 Effect
of Termination and Abandonment. In the event of
termination of this Agreement and the abandonment of the Merger pursuant to
this
Article IX, no party to this Agreement shall have any liability or further
obligation to any other party hereunder except (i) as set forth in Section
9.03
and (ii) that termination will not relieve a breaching party from liability
for
any willful breach of this Agreement giving rise to such
termination.
9.03 Fees
and Expenses. (a) In the
event that this Agreement shall be terminated (i) by either party pursuant
to
Section 9.01(d)(ii), and, at or prior to the time of the failure of GAFC’s
stockholders to approve this Agreement and the Merger, an Acquisition Proposal
shall have been made public and not withdrawn, or (ii) by GAFC pursuant to
Section 9.01(f), then GAFC shall pay Summit in immediately available funds
a fee
of $750,000 (the “Section 9.03(a) Fee”) as
follows: (i) $250,000 no later than two (2) business days after
the date of termination, (ii)
$100,000
on the date that is one (1) year after the termination date, (iii) $100,000
on
the date that is two (2) years after the termination date, and (iv) $300,000
on
the date that is three (3) years after the termination
date. Notwithstanding the foregoing, if GAFC consummates the
transaction that is the subject of the Acquisition Proposal, then the remaining
balance shall be due and payable no later than two (2) business days after
consummation.
(b) In
the event that (i) this Agreement is terminated pursuant to Section 9.01(e);
or
(ii) this Agreement is terminated by Summit pursuant to Section 9.01(b); or
(iii) this Agreement is terminated pursuant to Section 9.01(c), then, in any
such event, GAFC shall pay Summit promptly (but in no event later than two
business days after the first of such events shall have occurred) a fee of
$250,000 (the “Section 9.03(b) Fee”), which amount shall be payable in
immediately available funds.
(c) In
the event that GAFC shall fail to pay the Section 9.03(a) Fee or the Section
9.03(b) Fee when due, the applicable fee shall be deemed to include the costs
and expenses actually incurred or accrued by Summit (including, without
limitation, fees and expenses of counsel) in connection with the collection
of
the applicable fee under the enforcement of this Section 9.03, together with
interest on such applicable unpaid fee, commencing on the date that the
applicable fee became due, at a rate equal to the rate of interest publicly
announced by Citibank, N.A., from time to time, in the City of New York, as
such
bank’s Base Rate plus 2.00%.
(d) In
no event shall GAFC be obligated to pay both the Section 9.03(a) Fee and the
Section 9.03(b) Fee.
ARTICLE
X
Miscellaneous
10.01 Survival. No
representations, warranties, agreements and covenants contained in this
Agreement shall survive the Effective Time (other than Sections 2.02(b), 4.04,
7.11, 7.12, 7.14, 7.15 and this Article X which shall survive the Effective
Time) or the termination of this Agreement if this Agreement is terminated
prior
to the Effective Time (other than Sections 7.03(b), 7.05(b), 9.02, this Article
X which shall survive such termination).
10.02 Waiver;
Amendment. Prior to the Effective Time, any provision
of this Agreement may be (i) waived by the party benefited by the provision,
or
(ii) amended or modified at any time, by an agreement in writing between the
parties hereto executed in the same manner as this Agreement, except that after
the GAFC Meeting, this Agreement may not be amended if it would violate the
DGCL.
10.03 Counterparts. This
Agreement may be executed in one or more counterparts, each of which shall
be
deemed to constitute an original.
10.04 Governing
Law. This Agreement shall be governed by, and
interpreted in accordance with, the laws of the State of Delaware applicable
to
contracts made and to be performed entirely within such State (except to the
extent that mandatory provisions of Federal law are applicable).
10.05 Expenses.
Each party hereto will bear all expenses incurred by it in connection
with this Agreement and the transactions contemplated hereby, except that
printing expenses shall be shared equally between GAFC and Summit.
10.06 Notices. All
notices, requests and other communications hereunder to a party shall be in
writing and shall be deemed given if personally delivered, telecopied (with
confirmation) or mailed by registered or certified mail (return receipt
requested) to such party at its address set forth below or such other address
as
such party may specify by notice to the parties hereto.
If
to
GAFC, to:
GREATER
ATLANTIC FINANCIAL CORP.
10700
Parkridge Boulevard
Suite
P50
Reston,
Virginia 20191
Attn: Carroll
E. Amos
President
and Chief Executive
Officer
With
a
copy to:
Muldoon
Murphy & Aguggia LLP
5101
Wisconsin Avenue, NW
Washington,
DC 20016
Facsimile: (202)
966-9409
Attn: George
W. Murphy, Jr., Esq.
If
to
Summit, to:
SUMMIT
FINANCIAL GROUP, INC.
300
North
Main Street
P.
O. Box
179
Moorefield,
West Virginia 26836
Attn:
H. Charles Maddy, III
President
and Chief Executive
Officer
Robert
S. Tissue
Chief
Financial Officer
With
a
copy to:
Bowles
Rice McDavid Graff & Love LLP
600
Quarrier Street
P.
O. Box
1386
Charleston,
West Virginia 25325-1386
Facsimile: (305)
343-3058
Attn: Sandra
M. Murphy, Esq.
10.07 Entire
Understanding; No Third Party
Beneficiaries. This Agreement
represents the entire understanding of the parties hereto with reference to
the
transactions contemplated hereby and this Agreement supersedes any and all
other
oral or written agreements heretofore made. Except for Sections 7.11
and 7.12, nothing in this Agreement expressed or implied, is intended to confer
upon any person, other than the parties hereto or their respective successors,
any rights, remedies, obligations or liabilities under or by reason of this
Agreement.
10.08 Interpretation;
Effect. When a reference is made in this Agreement to
Sections, Exhibits or Disclosure Schedules, such reference shall be to a Section
of, or Exhibit or Disclosure Schedule to, this Agreement unless otherwise
indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and are not part of this
Agreement. Whenever the words “include,” “includes” or “including”
are used in this Agreement, they shall be deemed to be followed by the words
“without limitation.” No provision of this Agreement shall be
construed to require GAFC, Summit or any of their respective Subsidiaries,
affiliates or directors to take any action which would violate applicable law
(whether statutory or common law), rule or regulation.
IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
GREATER
ATLANTIC
FINANCIAL CORP.
By: /s/
Carroll E.
Amos
Carroll
E. Amos
Title: President
and Chief Executive Officer
SUMMIT
FINANCIAL
GROUP, INC.
By: /s/
H. Charles Maddy,
III
H.
Charles Maddy,
III
Title: President
and Chief Executive Officer
ANNEX
A
SUPPLEMENT
FOR MERGER SUB ACCESSION
TO
MERGER AGREEMENT
This
SUPPLEMENT FOR MERGER SUB ACCESSION TO MERGER AGREEMENT, dated as of the
22nd day of
October,
2007 (this “Supplement”), to the Agreement and Plan of Reorganization, dated as
of April 12, 2007 (as may be amended from time to time in accordance with
the
terms thereof, the “Agreement”), by and between SUMMIT FINANCIAL GROUP, INC., a
West Virginia corporation (“Summit”) and GREATER ATLANTIC FINANCIAL CORP., a
Delaware corporation (“GAFC”).
WHEREAS,
terms used but not otherwise defined herein have the meanings specified in
the
Agreement; and
WHEREAS,
pursuant to Section 2.01 of the Agreement, Summit has determined to consummate
the Merger in part through the merger of GAFC with and into SFG II, Inc.,
a West
Virginia corporation (the “Merger Sub”).
NOW,
THEREFORE, in consideration of the premises and of the mutual covenants,
representations and warranties contained in the Agreement, the parties agree
as
follows:
1. Agreement. Merger
Sub agrees (i) to be bound by and subject to the terms of the Agreement,
(ii) to
become a party to the Agreement, as provided by Section 2.01 thereof, (iii)
to
perform all obligations and agreements set forth therein, and (iv) to adopt
the
Agreement with the same force and effect as if the undersigned were originally
a
party thereto.
2. Notice. Any
notice required to be provided pursuant to Section 10.06 of the Agreement
shall
be given to the Merger Sub at the following address:
300
North Main Street
P.O.
Box 179
Moorefield,
West Virginia
26836
IN
WITNESS WHEREOF, this Supplement has been duly executed and delivered by
the
undersigned, duly authorized thereunto as of the date first hereinabove
written.
SFG
II,
INC.
By:
/s/ Robert S. Tissue______________________
Name:
Robert S. Tissue
Title:
Vice President
GREATER
ATLANTIC FINANCIAL CORP.
By: /s/
Carroll E. Amos__________________
Name: Carroll
E. Amos
Title: President
and Chief Executive Officer
SUMMIT
FINANCIAL GROUP, INC.
By: /s/
Robert S. Tissue_________________
Name: Robert
S. Tissue
Title: Senior
Vice President and
Chief
Financial
Officer
EXHIBIT
A
FORM
OF GAFC AFFILIATE LETTER
______________,
2007
SUMMIT
FINANCIAL GROUP, INC.
300
North
Main Street
Moorefield,
West Virginia 26836
Attention: Robert
S. Tissue
Chief
Financial Officer
Ladies
and Gentlemen:
I
have
been advised that I may be deemed to be, but do not admit that I am, an
“affiliate” of GREATER ATLANTIC FINANCIAL CORP. a Delaware
corporation (“GAFC”), as that term is defined in Rule 145 promulgated by the
Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933,
as amended (the “Securities Act”). I understand that pursuant to the
terms of the Agreement and Plan of Reorganization, dated as of ______, 2007
(the
“Agreement”), by and between SUMMIT FINANCIAL GROUP, INC., a West Virginia
corporation (“Summit”), and GAFC, GAFC plans to merge with and into a
wholly-owned subsidiary of Summit (the “Merger”).
I
further
understand that as a result of the Merger, I may receive shares of common stock,
par value $2.50 per share, of Summit (“Summit Stock”) in exchange for shares of
common stock, par value $0.01 per share, of GAFC (“GAFC Stock”).
I
have
carefully read this letter and reviewed the Agreement and discussed their
requirements and other applicable limitations upon my ability to sell, transfer,
or otherwise dispose of Summit Stock, to the extent I felt necessary, with
my
counsel or counsel for GAFC.
I
represent, warrant and covenant with and to Summit that in the event I receive
any Summit Stock as a result of the Merger:
1. I
shall not make any sale, transfer, or other disposition of such Summit Stock
unless (i) such sale, transfer or other disposition has been registered under
the Securities Act, (ii) such sale, transfer or other disposition is made in
conformity with the provisions of Rule 145 under the Securities Act (as such
rule may be amended from time to time), or (iii) in the opinion of counsel
in
form and substance reasonably satisfactory to Summit, or under a “no-action”
letter obtained by me from the staff of the SEC, such sale, transfer or other
disposition will not violate or is otherwise exempt from registration under
the
Securities Act.
2. I
understand that Summit is under no obligation to register the sale, transfer
or
other disposition of shares of Summit Stock by me or on my behalf under the
Securities Act or to take any other action necessary in order to make compliance
with an exemption from such registration available.
3. I
understand that stop transfer instructions will be given to Summit’s transfer
agent with respect to shares of Summit Stock issued to me as a result of the
Merger and that there will be placed on the certificates for such shares, or
any
substitutions therefor, a legend stating in substance:
The
shares represented by this
certificate were issued in a transaction to which Rule 145 promulgated under
the
Securities Act of 1933 applies. The shares represented by this
certificate may be transferred only in accordance with the terms of a letter
agreement, dated _____________, between the registered holder hereof and SUMMIT
FINANCIAL GROUP, INC., a copy of which agreement is on file at the principal
offices of SUMMIT FINANCIAL GROUP, INC.”
4. I
understand that, unless transfer by me of the Summit Stock issued to me as
a
result of the Merger has been registered under the Securities Act or such
transfer is made in conformity with the provisions of Rule
145(d)
under the Securities Act, Summit reserves the right, in its sole discretion,
to
place the following legend on the certificates issued to my
transferee:
The
shares represented by this
certificate have not been registered under the Securities Act of 1933 and were
acquired from a person who received such shares in a transaction to which Rule
145 under the Securities Act of 1933 applies. The shares have been
acquired by the holder not with a view to, or for resale in connection with,
any
distribution thereof within the meaning of the Securities Act of 1933 and may
not be offered, sold, pledged or otherwise transferred except in accordance
with
an exemption from the registration requirements of the Securities Act of
1933.”
It
is
understood and agreed that the legends set forth in paragraphs (3) and (4)
above
shall be removed by delivery of substitute certificates without such legends
if
I shall have delivered to Summit (i) a copy of a “no action” letter from the
staff of the SEC, or an opinion of counsel in form and substance reasonably
satisfactory to Summit, to the effect that such legend is not required for
purposes of the Act, or (ii) evidence or representations satisfactory to Summit
that the Summit Stock represented by such certificates is being or has been
sold
in conformity with the provisions of Rule 145(d).
I
further
understand and agree that this letter agreement shall apply to all shares of
Summit Stock that I am deemed to beneficially own pursuant to applicable federal
securities law.
Very
truly
yours,
By
____________________________________
Accepted
this ____ day of ______________, 2007.
GREATER
ATLANTIC FINANCIAL CORP.
By
Name: Carroll
E. Amos
Title: President
and Chief Executive Officer
SUMMIT
FINANCIAL GROUP, INC.
By
Name:
|
H.
Charles Maddy, III
|
Title:
|
President
and
|
Chief
Executive Officer
|
Section
262 of the Delaware General Corporation Law
DELAWARE
CODE ANNOTATED
TITLE
8. CORPORATIONS
CHAPTER
1. GENERAL CORPORATION LAW
SUBCHAPTER
IX. MERGER, CONSOLIDATION OR CONVERSION
8
Del. C. § 262 (2007)
§
262.
Appraisal rights
(a)
Any
stockholder of a corporation of this State who holds shares of stock on the
date
of the making of a demand pursuant to subsection (d) of this section with
respect to such shares, who continuously holds such shares through the effective
date of the merger or consolidation, who has otherwise complied with subsection
(d) of this section and who has neither voted in favor of the merger or
consolidation nor consented thereto in writing pursuant to § 228 of this title
shall be entitled to an appraisal by the Court of Chancery of the fair value
of
the stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the
word "stockholder" means a holder of record of stock in a stock corporation
and
also a member of record of a nonstock corporation; the words "stock" and "share"
mean and include what is ordinarily meant by those words and also membership
or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely
of
stock of a corporation, which stock is deposited with the
depository.
(b)
Appraisal rights shall be available for the shares of any class or series of
stock of a constituent corporation in a merger or consolidation to be effected
pursuant to § 251 (other than a merger effected pursuant to § 251(g) of this
title), § 252, § 254, § 257, § 258, § 263 or § 264 of this title:
(1)
Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or (ii) held of record by more
than
2,000 holders; and further provided that no appraisal rights shall be available
for any shares of stock of the constituent corporation surviving a merger if
the
merger did not require for its approval the vote of the stockholders of the
surviving corporation as provided in subsection (f) of § 251 of this
title.
(2)
Notwithstanding paragraph (1) of this subsection, appraisal rights under this
section shall be available for the shares of any class or series of stock of
a
constituent corporation if the holders thereof are required by the terms of
an
agreement of merger or consolidation pursuant to §§ 251, 252, 254, 257, 258, 263
and 264 of this title to accept for such stock anything except:
a.
Shares of stock of the corporation surviving or resulting from such merger
or
consolidation, or depository receipts in respect thereof;
b.
Shares of stock of any other corporation, or depository receipts in respect
thereof, which shares of stock (or depository receipts in respect thereof)
or
depository receipts at the effective date of the merger or consolidation will
be
either listed on a national securities exchange or held of record by more than
2,000 holders;
c.
Cash in lieu of fractional shares or fractional depository receipts described
in
the foregoing subparagraphs a. and b. of this paragraph; or
d.
Any combination of the shares of stock, depository receipts and cash in lieu
of
fractional shares or fractional depository receipts described in the foregoing
subparagraphs a., b. and c. of this paragraph.
(3)
In the event all of the stock of a subsidiary Delaware corporation party to
a
merger effected under § 253 of this title is not owned by the parent corporation
immediately prior to the merger, appraisal rights shall be available for the
shares of the subsidiary Delaware corporation.
(c)
Any
corporation may provide in its certificate of incorporation that appraisal
rights under this section shall be available for the shares of any class or
series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d)
and
(e) of this section, shall apply as nearly as is practicable.
(d)
Appraisal rights shall be perfected as follows:
(1)
If a proposed merger or consolidation for which appraisal rights are provided
under this section is to be submitted for approval at a meeting of stockholders,
the corporation, not less than 20 days prior to the meeting, shall notify each
of its stockholders who was such on the record date for such meeting with
respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or
all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking
of
the vote on the merger or consolidation, a written demand for appraisal of
such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy
or
vote against the merger or consolidation shall not constitute such a demand.
A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger
or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2)
If the merger or consolidation was approved pursuant to § 228 or § 253 of this
title, then either a constituent corporation before the effective date of the
merger or consolidation or the surviving or resulting corporation within 10
days
thereafter shall notify each of the holders of any class or series of stock
of
such constituent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are available
for any or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section. Such
notice may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective date of
the
merger or consolidation. Any stockholder entitled to appraisal rights may,
within 20 days after the date of mailing of such notice, demand in writing
from
the surviving or resulting corporation the appraisal of such holder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either (i)
each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of
any class or series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or
(ii)
the surviving or resulting corporation shall send such a second notice to all
such holders on or within 10 days after such effective date; provided, however,
that if such second notice is sent more than 20 days following the sending
of
the first notice, such second notice need only be sent to each stockholder
who
is entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is required
to give either notice that such notice has been given shall, in the absence
of
fraud, be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more than
10
days prior to the date the notice is given, provided, that if the notice is
given on or after the effective date of the merger or consolidation, the record
date shall be such effective date. If no record date is fixed and the notice
is
given prior to the effective date, the record date shall be the close of
business on the day next preceding the day on which the notice is
given.
(e)
Within 120 days after the effective date of the merger or consolidation, the
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) of this section hereof and who is otherwise entitled
to
appraisal rights, may commence an appraisal proceeding by filing a petition
in
the Court of Chancery demanding a determination of the value of the stock of
all
such stockholders. Notwithstanding the foregoing, at any time within 60 days
after the effective date of the merger or consolidation, any stockholder who
has
not commenced an appraisal proceeding or joined that proceeding as a named
party
shall have the right to withdraw such stockholder's demand for appraisal and
to
accept the terms offered upon the merger or consolidation. Within 120 days
after
the effective date of the merger or consolidation, any stockholder who has
complied with the requirements of subsections (a) and (d) of this section
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement
shall
be mailed to the stockholder within 10 days after such stockholder's written
request for such a statement is received by the surviving or resulting
corporation or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) of this section hereof, whichever
is
later. Notwithstanding subsection (a) of this section, a person who is the
beneficial owner of shares of such stock
held
either in a voting trust or by a nominee on behalf of such person may, in such
person's own name, file a petition or request from the corporation the statement
described in this subsection.
(f)
Upon
the filing of any such petition by a stockholder, service of a copy thereof
shall be made upon the surviving or resulting corporation, which shall within
20
days after such service file in the office of the Register in Chancery in which
the petition was filed a duly verified list containing the names and addresses
of all stockholders who have demanded payment for their shares and with whom
agreements as to the value of their shares have not been reached by the
surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such
a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and
to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day
of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The
forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting
corporation.
(g)
At
the hearing on such petition, the Court shall determine the stockholders who
have complied with this section and who have become entitled to appraisal
rights. The Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h)
After
the Court determines the stockholders entitled to an appraisal, the appraisal
proceeding shall be conducted in accordance with the rules of the Court of
Chancery, including any rules specifically governing appraisal proceedings.
Through such proceeding the Court shall determine the fair value of the shares
exclusive of any element of value arising from the accomplishment or expectation
of the merger or consolidation, together with interest, if any, to be paid
upon
the amount determined to be the fair value. In determining such fair value,
the
Court shall take into account all relevant factors. Unless the Court in its
discretion determines otherwise for good cause shown, interest from the
effective date of the merger through the date of payment of the judgment shall
be compounded quarterly and shall accrue at 5% over the Federal Reserve discount
rate (including any surcharge) as established from time to time during the
period between the effective date of the merger and the date of payment of
the
judgment. Upon application by the surviving or resulting corporation or by
any
stockholder entitled to participate in the appraisal proceeding, the Court
may,
in its discretion, proceed to trial upon the appraisal prior to the final
determination of the stockholders entitled to an appraisal. Any stockholder
whose name appears on the list filed by the surviving or resulting corporation
pursuant to subsection (f) of this section and who has submitted such
stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under
this
section.
(i)
The
Court shall direct the payment of the fair value of the shares, together with
interest, if any, by the surviving or resulting corporation to the stockholders
entitled thereto. Payment shall be so made to each such stockholder, in the
case
of holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any
state.
(j)
The
costs of the proceeding may be determined by the Court and taxed upon the
parties as the Court deems equitable in the circumstances. Upon application
of a
stockholder, the Court may order all or a portion of the expenses incurred
by
any stockholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorney's fees and the fees and expenses of experts,
to
be charged pro rata against the value of all the shares entitled to an
appraisal.
(k)
From
and after the effective date of the merger or consolidation, no stockholder
who
has demanded appraisal rights as provided in subsection (d) of this section
shall be entitled to vote such stock for any purpose or to receive payment
of
dividends or other distributions on the stock (except dividends or other
distributions payable to stockholders of record at a date which is prior to
the
effective date of the merger or consolidation); provided, however, that if
no
petition for an appraisal shall be filed within the time provided in subsection
(e) of this section, or if such stockholder shall deliver to the surviving
or
resulting corporation a written withdrawal of such stockholder's demand for
an
appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court,
and
such approval may be conditioned upon such terms as the Court deems just;
provided, however that this provision shall not affect the right of any
stockholder who has not commenced an appraisal proceeding or joined that
proceeding as a named party to withdraw such stockholder's demand for appraisal
and to accept the terms offered upon the merger or consolidation within 60
days
after the effective date of the merger or consolidation, as set forth in
subsection (e) of this section.
(l)
The
shares of the surviving or resulting corporation to which the shares of such
objecting stockholders would have been converted had they assented to the merger
or consolidation shall have the status of authorized and unissued shares of
the
surviving or resulting corporation.
October
_, 2007
Board
of
Directors
Greater
Atlantic Financial Corp.
10700
Parkridge Boulevard
Suite
P50
Reston,
Virginia 20191
Ladies
and Gentlemen:
Greater
Atlantic Financial Corp. (“Greater Atlantic”) and Summit Financial Group, Inc.
(“Summit”) have entered into an Agreement and Plan of Reorganization, dated as
of April 12, 2007 (the “Agreement”), pursuant to which Greater Atlantic will
merge with and into a to-be-formed subsidiary of Summit (the “Merger Sub”) with
Merger Sub as the surviving entity (the “Merger”). Under the terms of
the Agreement, Greater Atlantic sold a branch office located in Pasadena, MD
to
Bay-Vanguard Federal Savings Bank (the “Branch Sale” and together with the
Merger, the “Transactions”). Pursuant to the Agreement, each share of
Greater Atlantic common stock, par value $0.01 per share, issued and outstanding
immediately prior to the Merger (the “GAFC Common Stock”), other than certain
shares specified in the Agreement, will be converted into the right to receive
(a) cash in an amount equal to $1.80 per share (the “Cash Consideration”) and
(b) that number of shares of Summit common stock, $2.50 par value per share,
(the “Summit Common Stock”) equal to $4.20 (the “Stock Consideration” and
together with the Cash Consideration, the “Merger Consideration”), divided by
the average closing price (the “Average Closing Price”) of Summit Common Stock
reported on the NASDAQ for the twenty (20) trading days prior to the closing
of
the Merger (the “Exchange Ratio”), provided, however, if the Average Closing
Price is less than $17.82, the Exchange Ratio will be seventy percent of the
Merger Consideration divided by $17.82. If the Average Closing Price
is greater than $24.10 then the Exchange Ratio will be seventy percent of the
Merger Consideration divided by $24.10. Capitalized terms used herein
without definition shall have the meanings given to such term in the
Agreement. You have requested our opinion as to the fairness, from a
financial point of view, of the Merger Consideration to be received in the
Merger to the holders of GAFC Common Stock.
Sandler
O’Neill & Partners, L.P., as part of its investment banking business, is
regularly engaged in the valuation of financial institutions and their
securities in connection with mergers and acquisitions and other corporate
transactions. In connection with this opinion, we have reviewed,
among other things: (i) the Agreement; (ii) certain publicly available financial
statements and other historical financial information of Greater Atlantic that
we deemed relevant; (iii) certain publicly available financial statements and
other historical financial information of Summit Financial that we deemed
relevant; (iv) internal financial projections for Greater Atlantic for the
year
ending December 31, 2007 prepared by and reviewed with management of Greater
Atlantic and growth and performance projections for Greater Atlantic for the
years ending December 31, 2008, 2009 and 2010 as provided by and reviewed with
management of Greater Atlantic; (v) internal financial projections for Summit
for the years ending December 31, 2007 and 2008 prepared by and
reviewed with management of Summit and growth and performance projections for
Summit for the year ending December 31, 2009 and 2010 as provided by and
reviewed with management of Summit; (vi) the pro forma financial impact of
the
Branch Sale on Greater Atlantic; (vii) the pro forma financial impact of the
Merger on Summit, based on assumptions relating to transaction expenses,
purchase accounting adjustments and cost savings determined by the senior
managements of Greater Atlantic and Summit; (viii) the publicly reported
historical price and trading activity for Greater Atlantic’s and Summit’s common
stock, including a comparison of certain financial and stock market information
for Greater Atlantic and Summit with similar publicly
available
information for certain other companies the securities of which are publicly
traded; (ix) the financial terms of certain recent business combinations in
the
commercial banking industry, to the extent publicly available; (x) the current
market environment generally and the banking environment in particular; and
(xi)
such other information, financial studies, analyses and investigations and
financial, economic and market criteria as we considered relevant. We
also discussed with certain members of senior management of Greater Atlantic
the
business, financial condition, results of operations and prospects of Greater
Atlantic and held similar discussions with certain members of senior management
of Summit regarding the business, financial condition, results of operations
and
prospects of Summit.
In
performing our review, we have relied upon the accuracy and completeness of
all
of the financial and other information that was available to us from public
sources, that was provided to us by Greater Atlantic and Summit or their
respective representatives or that was otherwise reviewed by us and have assumed
such accuracy and completeness for purposes of rendering this
opinion. We have further relied on the assurances of the respective
managements of Greater Atlantic and Summit that they are not aware of any facts
or circumstances that would make any of such information inaccurate or
misleading. We have not been asked to and have not undertaken an
independent verification of any of such information and we do not assume any
responsibility or liability for the accuracy or completeness
thereof. We did not make an independent evaluation or appraisal of
the specific assets, the collateral securing assets or the liabilities
(contingent or otherwise) of Greater Atlantic, Summit or any of their respective
subsidiaries, or the collectibility of any such assets, nor have we been
furnished with any such evaluations or appraisals. We did not make an
independent evaluation of the adequacy of the allowance for loan losses of
Greater Atlantic and Summit nor have we reviewed any individual credit files
relating to Greater Atlantic and Summit. We have assumed, with your
consent, that the respective allowances for loan losses for both Greater
Atlantic and Summit are adequate to cover such losses and will be adequate
on a
pro forma basis for the combined entity.
With
respect to the internal projections for Greater Atlantic and Summit and the
projections of transaction costs, purchase accounting adjustments and expected
cost savings prepared by and/or reviewed with the managements of Greater
Atlantic and Summit and used by Sandler O’Neill in its analyses, Greater
Atlantic’s and Summit’s management confirmed to us that they reflected the best
currently available estimates and judgments of management of the future
financial performance of Greater Atlantic and Summit and we assumed that such
performance would be achieved. We express no opinion as to such
financial projections and estimates or the assumptions on which they are
based. We have also assumed that there has been no material change in
Greater Atlantic’s and Summit’s assets, financial condition, results of
operations, business or prospects since the date of the most recent financial
statements made available to us. We have assumed in all respects
material to our analysis that Greater Atlantic and Summit will remain as going
concerns for all periods relevant to our analyses, that all of the
representations and warranties contained in the Agreement are true and correct,
that each party to the Agreement will perform all of the covenants required
to
be performed by such party under the Agreement, that the conditions precedent
in
the Agreement are not waived. Finally, with your consent, we have
relied upon the advice Greater Atlantic has received from its legal, accounting
and tax advisors as to all legal, accounting and tax matters relating to the
Merger and the other transactions contemplated by the Agreement.
Our
opinion is necessarily based on financial, economic, market and other conditions
as in effect on, and the information made available to us as of, the date
hereof. Events occurring after the date hereof could materially
affect this opinion. We have not undertaken to update, revise,
reaffirm or withdraw this opinion or otherwise comment upon events occurring
after the date hereof. We are expressing no opinion herein as to what
the value of Greater Atlantic’s and Summit’s common stock will be when shares of
Summit’s common stock will be issued to Greater Atlantic’s shareholders pursuant
to the Agreement or the prices at which Greater Atlantic’s and Summit’s common
stock may trade at any time.
We
have
acted as Greater Atlantic’s financial advisor in connection with the
Transactions and will receive a fee for our services, a substantial portion
of
which is contingent upon consummation of the Merger. We will also
receive a fee for rendering this opinion. Greater Atlantic has also
agreed to indemnify us against certain liabilities arising out of our
engagement.
In
the
ordinary course of our business as a broker-dealer, we may purchase securities
from and sell securities to Greater Atlantic and Summit and their respective
affiliates. We may also actively trade the equity or debt securities
of Greater Atlantic and Summit or their respective affiliates for our own
account and for the accounts of our customers and, accordingly, may at any
time
hold a long or short position in such securities.
Our
opinion is directed to the Board of Directors of Greater Atlantic in connection
with its consideration of the Merger and does not constitute a recommendation
to
any shareholder of Greater Atlantic as to how such shareholder should vote
at
any meeting of shareholders called to consider and vote upon the Merger or
the
form of consideration such shareholder should elect. Our opinion is
directed only to the fairness, from a financial point of view, of the Merger
Consideration to be received in the Merger to holders of GAFC Common Stock
and
does not address the underlying business decision of Greater Atlantic to engage
in the Merger, the relative merits of the Merger as compared to any other
alternative business strategies that might exist for Greater Atlantic or the
effect of any other transaction in which Greater Atlantic might
engage. Our opinion is not to be quoted or referred to, in whole or
in part, in a registration statement, prospectus, proxy statement or in any
other document, nor shall this opinion be used for any other purposes, without
Sandler O'Neill’s prior written consent.
Based
upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Merger Consideration to be received in the Merger is fair to the
holders of GAFC’s Common Stock from a financial point of view.
Very
truly yours,
ANNEX
D-1
Greater
Atlantic Financial Corp. Form 10-K for the year ended September 30,
2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
[
√
] ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the
fiscal year ended September 30, 2006
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,
Reston,
Virginia 20191
(Address of Principal Executive
Offices) (Zip
Code)
703-391-1300
(Registrant’s
Telephone Number, Including Area 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 if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes [ ] No [ √ ].
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 of Section 15(d) of the Act. Yes [ ] No [ √
].
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 [√ ]No [ ]
Indicate
by check mark whether disclosure of delinquent filers pursuant to Item 405
of
Regulation S-K (§299.405 of this chapter) 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-K
or any amendment to this Form 10-K. [ √ ]
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Act. Yes [ ]. No [ √
].
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [
√ ]
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant computed by reference to the price at which
the
common equity was sold, or the average bid and asked prices of such stock,
as of
the last business day of the registrant’s most recently completed second fiscal
quarter was $15.7 million.
As
of
December 31, 2006, there were 3,023,506 shares of the registrant’s
Common
Stock,
par value $0.01 per share, outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
None
PART
I
|
|
Page
|
Item
1.
|
Business
|
3
|
|
Description
of
Business
|
3
|
|
Market
Area and
Competition
|
3
|
|
Market
Risk
|
3
|
|
Lending
Activities
|
3
|
|
Mortgage
Banking
Activities
|
7
|
|
Asset
Quality
|
7
|
|
Allowance
for Loan
Losses
|
9
|
|
Investment
Activities
|
11
|
|
Sources
of
Funds
|
14
|
|
Subsidiary
Activities
|
16
|
|
Personnel
|
16
|
|
Regulation
and
Supervision
|
17
|
|
Federal
and State
Taxation
|
22
|
Item
1A.
|
Risk
Factors
|
23
|
Item
1B.
|
Unresolved
Staff
Comments
|
24
|
Item
2.
|
Properties
|
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, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
27
|
Item
6.
|
Selected
Financial
Data
|
28
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
|
30
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
47
|
Item
8.
|
Consolidated
Financial Statements and Supplementary
Data
|
47
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
47
|
Item
9A.
|
Controls
and
Procedures
|
48
|
Item
9B.
|
Other
Information
|
49
|
PART
III
|
|
|
Item
10.
|
Directors
and Executive Officers of the
Registrant
|
49
|
Item
11.
|
Executive
Compensation
|
51
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
54
|
Item
13.
|
Certain
Relationships and Related
Transactions
|
57
|
Item
14.
|
Principal
Accountant Fees and
Services
|
57
|
PART
IV
|
|
|
Item
15.
|
Exhibits
and Financial Statement
Schedules
|
57
|
|
|
|
Signatures
|
|
58
|
PART
I
ITEM
1. BUSINESS
Description
of 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, a federally-chartered savings bank. We offer
traditional banking services to customers through our bank branches located
throughout the greater Washington, DC/Baltimore metropolitan area. We
established the Greater Atlantic Capital Trust I (“Trust”) in January 2002 to
issue certain convertible preferred securities which we completed in March
2002.
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 geographic 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. Our market risk arises primarily from interest-rate risk
inherent in our lending and deposit taking activities. To that end,
management actively monitors and manages 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 18 of Notes to Consolidated Financial Statements.
Our
primary objective in managing interest-rate risk is to minimize the adverse
impact of changes in interest rates on our net interest income and capital,
while adjusting our asset-liability structure to obtain the maximum yield-cost
spread on that structure. We rely primarily on our asset-liability
structure to control interest-rate risk. However, a sudden and
substantial increase in interest rates may adversely impact our 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.
Lending
Activities
General. Net
loans receivable at September 30, 2006 were $193.3 million, a decrease of $1.6
million or 0.83% from the $194.9 million held at September 30,
2005. The decrease in loans consisted of real estate loans secured by
consumer, and land loans, offset by an increase in first mortgages on
residential properties, commercial real estate loans, construction loans and
commercial business loans. No loans were held for sale at September
30, 2006 compared to $9.5 million held for sale at September 30,
2005. That decrease resulted from discontinuing the operations of
Greater Atlantic Mortgage Corporation as the type of business conducted by
that
mortgage corporation no longer fit the strategy of the bank.
The
following table shows the bank's loan originations, purchases, sales and
principal repayments during the periods indicated:
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
Total
loans at beginning of period (1)
|
|
$ |
224,733
|
|
|
$ |
262,598
|
|
|
$ |
257,247
|
|
Originations
of loans for investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
residential
|
|
|
12,559
|
|
|
|
6,624
|
|
|
|
16,202
|
|
Multifamily
|
|
|
625
|
|
|
|
-
|
|
|
|
145
|
|
Commercial
real estate
|
|
|
9,210
|
|
|
|
9,977
|
|
|
|
11,265
|
|
Construction
|
|
|
13,089
|
|
|
|
19,991
|
|
|
|
17,405
|
|
Land
loans
|
|
|
8,494
|
|
|
|
10,530
|
|
|
|
11,543
|
|
Second
trust
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
business
|
|
|
21,170
|
|
|
|
21,083
|
|
|
|
38,345
|
|
Consumer
|
|
|
39,048
|
|
|
|
44,205
|
|
|
|
50,937
|
|
Total
originations and purchases for investment
|
|
|
104,195
|
|
|
|
112,410
|
|
|
|
145,842
|
|
Loans
originated for resale by Greater Atlantic Bank
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans
originated for resale by Greater Atlantic Mortgage
|
|
|
91,477
|
|
|
|
276,038
|
|
|
|
402,988
|
|
Total
originations
|
|
|
195,672
|
|
|
|
388,448
|
|
|
|
548,830
|
|
Repayments
|
|
|
(117,440 |
) |
|
|
(154,263 |
) |
|
|
(139,466 |
) |
Sale
of loans originated for resale by Greater Atlantic
Mortgage
|
|
|
(100,994 |
) |
|
|
(272,050 |
) |
|
|
(404,013 |
) |
Net
activity in loans
|
|
|
(22,762 |
) |
|
|
(37,865 |
) |
|
|
5,351
|
|
Total
loans at end of period (1)
|
|
$ |
201,971
|
|
|
$ |
224,733
|
|
|
$ |
262,598
|
|
(1) Includes
loans held for
sale of $9.5 million at September 30, 2005.
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.
|
|
At
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
(1)
|
|
$ |
43,473
|
|
|
|
21.52 |
% |
|
$ |
41,434
|
|
|
|
19.25 |
% |
|
$ |
74,620
|
|
|
|
29.02 |
% |
|
$ |
95,818
|
|
|
|
38.20 |
% |
|
$ |
122,143
|
|
|
|
47.11 |
% |
Multi-family
|
|
|
813
|
|
|
|
0.40
|
|
|
|
751
|
|
|
|
0.35
|
|
|
|
1,074
|
|
|
|
0.42
|
|
|
|
1,445
|
|
|
|
0.58
|
|
|
|
536
|
|
|
|
0.21
|
|
Construction
|
|
|
14,245
|
|
|
|
7.05
|
|
|
|
24,273
|
|
|
|
11.28
|
|
|
|
16,696
|
|
|
|
6.49
|
|
|
|
11,996
|
|
|
|
4.78
|
|
|
|
18,993
|
|
|
|
7.32
|
|
Commercial
real estate
|
|
|
28,403
|
|
|
|
14.06
|
|
|
|
25,531
|
|
|
|
11.86
|
|
|
|
23,023
|
|
|
|
8.95
|
|
|
|
20,533
|
|
|
|
8.19
|
|
|
|
18,932
|
|
|
|
7.30
|
|
Land
|
|
|
13,829
|
|
|
|
6.86
|
|
|
|
18,421
|
|
|
|
8.55
|
|
|
|
20,668
|
|
|
|
8.04
|
|
|
|
17,258
|
|
|
|
6.88
|
|
|
|
9,947
|
|
|
|
3.84
|
|
Total
mortgage loans
|
|
|
100,763
|
|
|
|
49.89
|
|
|
|
110,410
|
|
|
|
51.29
|
|
|
|
136,081
|
|
|
|
52.92
|
|
|
|
147,050
|
|
|
|
58.63
|
|
|
|
170,551
|
|
|
|
65.78
|
|
Commercial
business and consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
39,794
|
|
|
|
19.70
|
|
|
|
35,458
|
|
|
|
16.47
|
|
|
|
47,654
|
|
|
|
18.53
|
|
|
|
39,043
|
|
|
|
15.57
|
|
|
|
28,880
|
|
|
|
11.14
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
61,031
|
|
|
|
30.22
|
|
|
|
69,006
|
|
|
|
32.06
|
|
|
|
72,814
|
|
|
|
28.32
|
|
|
|
63,888
|
|
|
|
25.47
|
|
|
|
58,531
|
|
|
|
22.58
|
|
Automobile
|
|
|
81
|
|
|
|
.04
|
|
|
|
100
|
|
|
|
.05
|
|
|
|
271
|
|
|
|
0.11
|
|
|
|
428
|
|
|
|
0.17
|
|
|
|
771
|
|
|
|
0.30
|
|
Other
|
|
|
302
|
|
|
|
.15
|
|
|
|
274
|
|
|
|
.13
|
|
|
|
315
|
|
|
|
0.12
|
|
|
|
409
|
|
|
|
0.16
|
|
|
|
533
|
|
|
|
0.20
|
|
Total
commercial business and
consumer
loans
|
|
|
101,208
|
|
|
|
50.11
|
|
|
|
104,838
|
|
|
|
48.71
|
|
|
|
121,054
|
|
|
|
47.08
|
|
|
|
103,768
|
|
|
|
41.37
|
|
|
|
88,715
|
|
|
|
34.22
|
|
Total
loans
|
|
|
201,971
|
|
|
|
100.00 |
% |
|
|
215,248
|
|
|
|
100.00 |
% |
|
|
257,135
|
|
|
|
100.00 |
% |
|
|
250,818
|
|
|
|
100.00 |
% |
|
|
259,266
|
|
|
|
100.00 |
% |
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(1,330 |
) |
|
|
|
|
|
|
(1,212 |
) |
|
|
|
|
|
|
(1,600 |
) |
|
|
|
|
|
|
(1,550 |
) |
|
|
|
|
|
|
(1,699 |
) |
|
|
|
|
Loans
in process
|
|
|
(8,517 |
) |
|
|
|
|
|
|
(20,386 |
) |
|
|
|
|
|
|
(10,453 |
) |
|
|
|
|
|
|
(8,394 |
) |
|
|
|
|
|
|
(11,103 |
) |
|
|
|
|
Unearned
premium
|
|
|
1,183
|
|
|
|
|
|
|
|
1,270
|
|
|
|
|
|
|
|
1,305
|
|
|
|
|
|
|
|
1,379
|
|
|
|
|
|
|
|
1,617
|
|
|
|
|
|
Loans
receivable, net
|
|
$ |
193,307
|
|
|
|
|
|
|
$ |
194,920
|
|
|
|
|
|
|
$ |
246,387
|
|
|
|
|
|
|
$ |
242,253
|
|
|
|
|
|
|
$ |
248,081
|
|
|
|
|
|
(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, 2006. Loans that have adjustable rates are
shown as amortizing when the interest rates are next subject to
change. The table does not include the effect of future principal
prepayments.
|
|
At
September 30, 2006
|
|
|
|
One-
to
Four-
Family
|
|
|
Multi-
Family
and
Commercial
Real
Estate
|
|
|
Commercial
Business
and
Consumer
|
|
|
Total
Loans
|
|
(In
Thousands)
|
|
|
|
Amounts
due in:
|
|
|
|
|
|
|
|
|
|
|
|
|
One
year or less
|
|
$ |
25,554
|
|
|
$ |
7,834
|
|
|
$ |
82,533
|
|
|
$ |
115,921
|
|
After
one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More
than one year to three years
|
|
|
12,182
|
|
|
|
6,197
|
|
|
|
4,407
|
|
|
|
22,786
|
|
More
than three years to five years
|
|
|
2,321
|
|
|
|
11,640
|
|
|
|
3,966
|
|
|
|
17,927
|
|
More
than five years to 15 years
|
|
|
5,135
|
|
|
|
7,634
|
|
|
|
4,898
|
|
|
|
17,667
|
|
More
than 15 years
|
|
|
11,751
|
|
|
|
1,998
|
|
|
|
5,404
|
|
|
|
19,153
|
|
Total
amount due
|
|
$ |
56,943
|
|
|
$ |
35,303
|
|
|
$ |
101,208
|
|
|
$ |
193,454
|
|
The
following table sets forth, at
September 30, 2006, the dollar amount of loans contractually due after September
30, 2007, identifying whether such loans have fixed interest rates or adjustable
interest rates. At September 30, 2006, the bank had $20.3 million of
construction, acquisition and development, land and commercial business loans
that were contractually due after September 30, 2007
|
|
Due
After September 30, 2007
|
|
|
|
Fixed
|
|
|
Adjustable
|
|
|
Total
|
|
(In
Thousands)
|
|
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
$ |
16,964
|
|
|
$ |
14,425
|
|
|
$ |
31,389
|
|
Multi-family
and commercial
|
|
|
16,528
|
|
|
|
10,941
|
|
|
|
27,469
|
|
Total
real estate loans
|
|
|
33,492
|
|
|
|
25,366
|
|
|
|
58,858
|
|
Commercial
business and consumer loans
|
|
|
7,923
|
|
|
|
10,752
|
|
|
|
18,675
|
|
Total
loans
|
|
$ |
41,415
|
|
|
$ |
36,118
|
|
|
$ |
77,533
|
|
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, 2006, the bank's one- to
four-family mortgage loans totaled $43.5 million, or 21.52% of total
loans. Of the one- to four-family mortgage loans outstanding at that
date, 39.19% were fixed-rate loans and 60.81% 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 land for sale. At September 30, 2006,
construction and development loans (including land loans) totaled $28.1 million,
or 13.91%, of the bank’s total loans, of which, land loans totaled $13.8 million
or 6.86% of total loans. Such loans are secured by a lien on the
property, are limited to 75% of the lower of the acquisition price or the
appraised value of the land and have a term of up to three years with a floating
interest rate generally based on the prime rate as reported in The Wall
Street Journal. All the bank's land loans are secured by
property in its primary market area.
Multi-family
and Commercial Real
Estate Lending. The bank originates multi-family and commercial
real estate loans that are generally secured by five or more unit apartment
buildings and properties used for business purposes such as small office
buildings or retail facilities located primarily in the bank’s 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, 2006 was $29.2 million,
or 14.46% of total loans. The largest multi-family or commercial real
estate loan in the bank’s portfolio at September 30, 2006, consisted of a $4.0
million commercial real estate loan secured by real property in
Alabama. The property is a skilled nursing facility on which the bank
has participated $2.1 million of the $6.1 million note to another
bank.
Commercial
Business
Lending. At September 30, 2006, the bank had $39.8 million in
commercial business loans which amounted to 19.70% of total loans. The bank
makes commercial business loans primarily in its market area to a variety of
professionals, sole proprietorships and small businesses. The bank
offers a variety of commercial lending products, including term loans for fixed
assets and working capital, revolving lines of credit and letters of
credit. Term loans are generally offered with initial fixed rates of
interest for the first five years and with terms of up to 7
years. Business lines of credit have adjustable rates of interest and
are payable on demand, subject to annual review and renewal. Business
loans with variable rates of interest adjust on a monthly basis and are
generally indexed to the prime rate as published in The Wall Street
Journal.
Consumer
Lending. Consumer loans at September 30, 2006 amounted to $61.4
million or 30.41% 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 loans on new and used
automobiles. 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 home equity loans are secured by second mortgages on one- to
four-family residences located in the bank's primary market area. At
September 30, 2006, these loans totaled $61.0 million or 30.22% of the bank's
total loans and 60.30% of commercial business and consumer loans. Other types
of
consumer loans, primarily consisting of secured and unsecured personal loans
and
new and used automobile loans, totaled $383,000, or 0.19% of the bank's total
loans and 0.38% of commercial business and consumer loans at September 30,
2006.
Mortgage
Banking Activities
The
bank’s mortgage banking activities primarily consist of originating mortgage
loans secured by single-family properties. However, the
mortgage-banking activities conducted in Greater Atlantic Mortgage Corporation
(“GAMC”) were discontinued effective March 29, 2006 as it was determined that,
because it was unprofitable, this business no longer fit our
strategy. Mortgage banking involves the origination and sale of
mortgage loans for the purpose of generating gains on sale of loans and fee
income on the origination of loans, in addition to loan interest
income. In recent years, the volume of GAMC’s originations had been
declining, resulting in losses from mortgage banking operations, which, pursuant
to an agreement, the manager had agreed to fund.
In
the
third quarter of 2006, we applied discontinued operations accounting for
GAMC. This business no longer fit our strategy because it was
unprofitable. Accordingly, the income statements for all periods have
been adjusted. The reclassifications primarily resulted in a
reduction to previously reported levels of net interest income, a reduction
in
noninterest income and a reduction in noninterest expense.
In
2004,
the bank entered into a management agreement with the manager of GAMC, its
mortgage-banking subsidiary. Under the management agreement the
manager was to reimburse operating losses equal to approximately 100% of any
operating loss in return for an increase in his share of net earnings from
40%
to 80%. Reflected in the loss from discontinued operations for 2005
is a reimbursement of $1.8 million of losses of GAMC provided by the manager
of
GAMC.
During
the three months ended September 30, 2005, the manager was no longer able to
reimburse GAMC for the losses incurred and as a result $993,000 of losses was
recognized during the quarter. The management contract was
subsequently terminated in the first quarter of fiscal 2006.
Due
to
the unprofitable operations of GAMC, the company recognized an additional loss
of $1.5 million for the nine months ended June 30, 2006. In addition
to the loss from operations, a non-recurring pre-tax impairment charge on
long-lived assets of $996,000 was recorded for the nine months ended June 30,
2006 and included in discontinued operations in the consolidated statements
of
operations.
Asset
Quality
Delinquent
Loans and Classified
Assets. Reports listing all delinquent accounts are generated and reviewed
monthly by management and the board of directors 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 management’s reports on a monthly basis. The bank classifies
assets in accordance with the management guidelines described
above. At September 30, 2006, the bank had $791,000 of loans
designated as Substandard which consisted of two residential loans, one
commercial business loan, one commercial real estate loan, one consumer loan,
and one land loan. At that same date, the bank had $319,000 of assets
classified as Doubtful, consisting of one commercial business loan and one
residential real estate loan. At September 30, 2006, the bank had no
loans classified as Loss. As of September 30, 2006, the bank had no
loans designated as Special Mention.
The
following table sets forth
delinquencies in the bank’s loans as of the dates indicated.
|
|
At
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
60
– 89 Days
|
|
|
90
Days or More
|
|
|
60
– 89 Days
|
|
|
90
Days or More
|
|
|
60
– 89 Days
|
|
|
90
Days or More
|
|
|
|
Number
of Loans
|
|
|
Principal
Balance of Loans
|
|
|
Number
of Loans
|
|
|
Principal
Balance of Loans
|
|
|
Number
of Loans
|
|
|
Principal
Balance of Loans
|
|
|
Number
of Loans
|
|
|
Principal
Balance of Loans
|
|
|
Number
of Loans
|
|
|
Principal
Balance of Loans
|
|
|
Number
of Loans
|
|
|
Principal
Balance of Loans
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
-
|
|
|
$ |
-
|
|
|
|
2
|
|
|
$ |
835
|
|
|
|
2
|
|
|
$ |
168
|
|
|
|
4
|
|
|
$ |
10
|
|
|
|
-
|
|
|
$ |
-
|
|
|
|
6
|
|
|
$ |
563
|
|
Home
equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
229
|
|
|
|
1
|
|
|
|
275
|
|
|
|
1
|
|
|
|
96
|
|
Construction
& Land
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
31
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
233
|
|
|
|
1
|
|
|
|
118
|
|
|
|
1
|
|
|
|
31
|
|
Commercial
real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
29
|
|
Commercial
business
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
216
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
1,105
|
|
|
|
1
|
|
|
|
28
|
|
|
|
1
|
|
|
|
228
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
6
|
|
Total
|
|
|
-
|
|
|
$ |
-
|
|
|
|
7
|
|
|
$ |
1,110
|
|
|
|
2
|
|
|
$ |
168
|
|
|
|
13
|
|
|
$ |
1,604
|
|
|
|
3
|
|
|
$ |
421
|
|
|
|
11
|
|
|
$ |
953
|
|
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, to cease accruing interest
on consumer loans 60 days or more past due (unless the loan principal and
interest are determined by management to be fully secured and in the process
of
collection), and to charge off any accrued and unpaid interest.
|
|
At
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
accounted for on a non-accrual basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
$ |
-
|
|
|
$ |
10
|
|
|
$ |
563
|
|
|
$ |
637
|
|
|
$ |
388
|
|
Home
equity
|
|
|
-
|
|
|
|
229
|
|
|
|
96
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
real estate
|
|
|
25
|
|
|
|
25
|
|
|
|
29
|
|
|
|
31
|
|
|
|
21
|
|
Construction
and Land
|
|
|
31
|
|
|
|
233
|
|
|
|
31
|
|
|
|
34
|
|
|
|
-
|
|
Commercial
business
|
|
|
216
|
|
|
|
1,105
|
|
|
|
228
|
|
|
|
716
|
|
|
|
45
|
|
Consumer
|
|
|
3
|
|
|
|
2
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
Total
non-accrual loans
|
|
|
275
|
|
|
|
1,604
|
|
|
|
953
|
|
|
|
1,418
|
|
|
|
454
|
|
Accruing
loans which are contractually past due 90 days or more
|
|
|
835
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
|
|
343
|
|
Total
of non-accrual and 90 days past due loans
|
|
|
1,110
|
|
|
|
1,604
|
|
|
|
953
|
|
|
|
1,446
|
|
|
|
797
|
|
Foreclosed
real estate, net
|
|
|
-
|
|
|
|
232
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
non-performing assets
|
|
$ |
1,110
|
|
|
$ |
1,836
|
|
|
$ |
953
|
|
|
$ |
1,446
|
|
|
$ |
797
|
|
Non-accrual
loans as a percentage of loans
held
for investment, net
|
|
|
0.14 |
% |
|
|
0.82 |
% |
|
|
0.39 |
% |
|
|
0.59 |
% |
|
|
0.18 |
% |
Non-accrual
and 90 days or more past due loans
as
a percentage of loans held for investment, net
|
|
|
0.57 |
% |
|
|
0.82 |
% |
|
|
0.39 |
% |
|
|
0.60 |
% |
|
|
0.32 |
% |
Non-accrual
and 90 days or more past due loans
as
a percentage of total assets
|
|
|
0.36 |
% |
|
|
0.47 |
% |
|
|
0.22 |
% |
|
|
0.29 |
% |
|
|
0.16 |
% |
Non-performing
assets as a percentage of total assets
|
|
|
0.36 |
% |
|
|
0.54 |
% |
|
|
0.22 |
% |
|
|
0.29 |
% |
|
|
0.16 |
% |
During
the year ended September 30,
2006, 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 $204,000.
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 judgment about information
available to them at the time of their examination. There can
be no assurance that the bank will not sustain credit losses in future periods,
which could be substantial in relation to the size of the
allowance. As of September 30, 2006, the bank's allowance for loan
losses amounted to $1.3 million or 0.66% of total loans. While the
allowance for loan losses to total non-performing loans at September 30, 2006
is
119.82%, the allowance as a percentage of total loans increased 10 basis points
when compared to September 30, 2005. A $126,000 provision for loan
losses was recorded during the year ended September 30, 2006, compared to a
provision of $219,000 during the year ended September 30, 2005. The
decrease in the provision for loan losses of $93,000 from the year ago period
resulted from the decline in non-performing assets and the outstanding balance
of the bank’s land loans, commercial business loans, home equity loans and real
estate owned. The decrease in provision was due primarily to the
decreases in the required provisions for those loans coupled with an overall
decline in the size of the bank’s loan portfolio. On an annual basis,
or more often if deemed necessary, the bank has contracted with an independent
outside third party to have its loan portfolio reviewed. The focus of
their review is to identify the extent of potential and actual risk in the
bank’s commercial loan portfolio, in addition to the underwriting and processing
practices. Observations made regarding the bank’s portfolio risk are
based upon review evaluations, portfolio profiles and discussion with the
operational staff, including the line lenders and senior
management.
The
following table sets forth activity
in the bank's allowance for loan losses for the periods
indicated. Where specific loan loss reserves have been established,
any differences between the loss allowances and the amount of loss realized
has
been charged or credited to current operations.
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
1,212
|
|
|
$ |
1,600
|
|
|
$ |
1,550
|
|
|
$ |
1,699
|
|
|
$ |
810
|
|
Provisions
|
|
|
126
|
|
|
|
219
|
|
|
|
209
|
|
|
|
855
|
|
|
|
968
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
-
|
|
|
|
33
|
|
|
|
20
|
|
|
|
162
|
|
|
|
64
|
|
Commercial
real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
Commercial
business
|
|
|
78
|
|
|
|
584
|
|
|
|
177
|
|
|
|
828
|
|
|
|
7
|
|
Consumer
|
|
|
2
|
|
|
|
8
|
|
|
|
3
|
|
|
|
8
|
|
|
|
27
|
|
Total
charge-offs
|
|
|
80
|
|
|
|
625
|
|
|
|
200
|
|
|
|
1,020
|
|
|
|
98
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
2
|
|
|
|
2
|
|
|
|
29
|
|
|
|
6
|
|
|
|
12
|
|
Commercial
real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
business
|
|
|
69
|
|
|
|
15
|
|
|
|
10
|
|
|
|
4
|
|
|
|
-
|
|
Consumer
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
6
|
|
|
|
7
|
|
Total
recoveries
|
|
|
72
|
|
|
|
18
|
|
|
|
41
|
|
|
|
16
|
|
|
|
19
|
|
Net
charge-offs
|
|
|
8
|
|
|
|
607
|
|
|
|
159
|
|
|
|
1,004
|
|
|
|
79
|
|
Balance
at end of period
|
|
$ |
1,330
|
|
|
$ |
1,212
|
|
|
$ |
1,600
|
|
|
$ |
1,550
|
|
|
$ |
1,699
|
|
Ratio
of net charge-offs during the period
to
average loans outstanding during the period
|
|
|
0.00 |
% |
|
|
0.28 |
% |
|
|
0.06 |
% |
|
|
0.36 |
% |
|
|
0.03 |
% |
Allowance
for loan losses to total non-performing
loans
at end of period
|
|
|
119.82 |
% |
|
|
75.56 |
% |
|
|
167.89 |
% |
|
|
109.31 |
% |
|
|
374.23 |
% |
Allowance
for loan losses to total loans
|
|
|
0.66 |
% |
|
|
0.56 |
% |
|
|
0.62 |
% |
|
|
0.62 |
% |
|
|
0.66 |
% |
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. Management believes that the allowance can be
allocated by category only on an approximate basis. The allocation of
the allowance to each category is not necessarily indicative of future losses
and does not restrict the use of the allowance to absorb losses in any other
categories.
|
|
At
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
Amount
|
|
|
Percent
of
Loans
in
Each
Category
to
Total
Loans
|
|
|
Amount
|
|
|
Percent
of
Loans
in
Each
Category
to
Total
Loans
|
|
|
Amount
|
|
|
Percent
of
Loans
in
Each
Category
to
Total
Loans
|
|
|
Amount
|
|
|
Percent
of
Loans
in
Each
Category
to
Total
Loans
|
|
|
Amount
|
|
|
Percent
of
Loans
in
Each
Category
to
Total
Loans
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
$ |
177
|
|
|
|
13.31 |
% |
|
$ |
35
|
|
|
|
19.25 |
% |
|
$ |
110
|
|
|
|
29.02 |
% |
|
$ |
141
|
|
|
|
38.20 |
% |
|
$ |
148
|
|
|
|
47.11 |
% |
Multi-family
|
|
|
6
|
|
|
|
0.45
|
|
|
|
6
|
|
|
|
0.35
|
|
|
|
8
|
|
|
|
0.42
|
|
|
|
11
|
|
|
|
0.58
|
|
|
|
4
|
|
|
|
0.21
|
|
Construction
|
|
|
67
|
|
|
|
5.04
|
|
|
|
72
|
|
|
|
11.28
|
|
|
|
78
|
|
|
|
6.49
|
|
|
|
80
|
|
|
|
4.78
|
|
|
|
80
|
|
|
|
7.32
|
|
Commercial
real estate
|
|
|
286
|
|
|
|
21.50
|
|
|
|
328
|
|
|
|
11.86
|
|
|
|
233
|
|
|
|
8.95
|
|
|
|
208
|
|
|
|
8.19
|
|
|
|
219
|
|
|
|
7.30
|
|
Land
|
|
|
109
|
|
|
|
8.20
|
|
|
|
155
|
|
|
|
8.55
|
|
|
|
175
|
|
|
|
8.04
|
|
|
|
132
|
|
|
|
6.88
|
|
|
|
72
|
|
|
|
3.84
|
|
Total
mortgage loans
|
|
|
645
|
|
|
|
48.50
|
|
|
|
596
|
|
|
|
51.29
|
|
|
|
604
|
|
|
|
52.92
|
|
|
|
572
|
|
|
|
58.63
|
|
|
|
523
|
|
|
|
65.78
|
|
Commercial
and Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
525
|
|
|
|
39.47
|
|
|
|
407
|
|
|
|
16.47
|
|
|
|
515
|
|
|
|
18.53
|
|
|
|
770
|
|
|
|
15.57
|
|
|
|
1,005
|
|
|
|
11.14
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
152
|
|
|
|
11.43
|
|
|
|
195
|
|
|
|
32.06
|
|
|
|
213
|
|
|
|
28.32
|
|
|
|
159
|
|
|
|
25.47
|
|
|
|
151
|
|
|
|
22.58
|
|
Automobile
|
|
|
6
|
|
|
|
0.45
|
|
|
|
5
|
|
|
|
0.18
|
|
|
|
9
|
|
|
|
0.23
|
|
|
|
13
|
|
|
|
0.33
|
|
|
|
20
|
|
|
|
0.50
|
|
Total
commercial and consumer
|
|
|
683
|
|
|
|
51.35
|
|
|
|
607
|
|
|
|
48.71
|
|
|
|
737
|
|
|
|
47.08
|
|
|
|
942
|
|
|
|
41.37
|
|
|
|
1,176
|
|
|
|
34.22
|
|
Unallocated
|
|
|
2
|
|
|
|
0.15
|
|
|
|
9
|
|
|
N/A
|
|
|
|
259
|
|
|
N/A
|
|
|
|
36
|
|
|
N/A
|
|
|
|
-
|
|
|
N/A
|
|
Total
|
|
$ |
1,330
|
|
|
|
100.00 |
% |
|
$ |
1,212
|
|
|
|
100.00 |
% |
|
$ |
1,600
|
|
|
|
100.00 |
% |
|
$ |
1,550
|
|
|
|
100.00 |
% |
|
$ |
1,699
|
|
|
|
100.00 |
% |
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, to complement the
bank's lending activities without incurring undue interest rate and credit
risk. 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 bought and
held principally for sale in the near term, generally within 90 days, are
classified as trading.
At
September 30, 2006, the bank had
invested $31.6 million in mortgage-backed securities, or 10.35% of total assets,
of which $31.4 million were classified as available-for-sale and $235,000 were
classified as held-to-maturity. Investments in mortgage-backed
securities involve a risk that actual prepayments will be greater than estimated
prepayments over the life of the security, which may require adjustments to
the
amortization of any premium or accretion of any discount relating to such
instruments thereby changing the net yield on such securities. There
is also reinvestment risk associated with the cash flows from such securities
or
in the event such securities are redeemed by the issuer. In addition,
the market value of such securities may be adversely affected by changes in
interest rates.
The
following table sets forth
information regarding the amortized cost and estimated market value of the
bank's investment portfolio at the dates indicated.
|
|
At
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Amortized
Cost
|
|
|
Estimated
Market
Value
|
|
|
Amortized
Cost
|
|
|
Estimated
Market
Value
|
|
|
Amortized
Cost
|
|
|
Estimated
Market
Value
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
debt securities
|
|
$ |
7,280
|
|
|
$ |
7,142
|
|
|
$ |
6,736
|
|
|
$ |
6,736
|
|
|
$ |
3,923
|
|
|
$ |
3,928
|
|
CMOs
|
|
|
9,735
|
|
|
|
9,755
|
|
|
|
14,446
|
|
|
|
14,454
|
|
|
|
9,812
|
|
|
|
9,823
|
|
U.S.
Government SBA’s
|
|
|
27,629
|
|
|
|
27,199
|
|
|
|
30,239
|
|
|
|
29,781
|
|
|
|
36,919
|
|
|
|
36,721
|
|
FHLMC
MBS’s
|
|
|
5,549
|
|
|
|
5,463
|
|
|
|
9,044
|
|
|
|
8,969
|
|
|
|
14,146
|
|
|
|
14,085
|
|
FNMA
MBS’s
|
|
|
18,350
|
|
|
|
17,986
|
|
|
|
35,548
|
|
|
|
34,947
|
|
|
|
61,195
|
|
|
|
60,302
|
|
GNMA
MBS’s
|
|
|
8,133
|
|
|
|
7,916
|
|
|
|
13,097
|
|
|
|
12,942
|
|
|
|
17,946
|
|
|
|
17,853
|
|
Total
available-for-sale
|
|
|
76,676
|
|
|
|
75,461
|
|
|
|
109,110
|
|
|
|
107,829
|
|
|
|
143,941
|
|
|
|
142,712
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
debt securities
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
1,020
|
|
|
|
1,003
|
|
|
|
1,065
|
|
U.S.
Government SBA’s
|
|
|
4,461
|
|
|
|
4,230
|
|
|
|
6,531
|
|
|
|
6,213
|
|
|
|
8,810
|
|
|
|
8,427
|
|
FHLMC
MBS’s
|
|
|
128
|
|
|
|
125
|
|
|
|
236
|
|
|
|
235
|
|
|
|
245
|
|
|
|
247
|
|
FNMA
MBS’s
|
|
|
107
|
|
|
|
105
|
|
|
|
202
|
|
|
|
198
|
|
|
|
237
|
|
|
|
235
|
|
Total
held-to-maturity
|
|
|
4,696
|
|
|
|
4,460
|
|
|
|
7,969
|
|
|
|
7,666
|
|
|
|
10,295
|
|
|
|
9,974
|
|
Total
investment securities
|
|
$ |
81,372
|
|
|
$ |
79,921
|
|
|
$ |
117,079
|
|
|
$ |
115,495
|
|
|
$ |
154,236
|
|
|
$ |
152,686
|
|
Investment
securities with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rates
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
1,000
|
|
|
$ |
1,020
|
|
|
$ |
1,003
|
|
|
$ |
1,065
|
|
Adjustable
rates
|
|
|
49,105
|
|
|
|
48,326
|
|
|
|
57,952
|
|
|
|
57,184
|
|
|
|
59,464
|
|
|
|
58,899
|
|
Mortgage-backed
securities with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rates
|
|
|
243
|
|
|
|
236
|
|
|
|
393
|
|
|
|
376
|
|
|
|
551
|
|
|
|
541
|
|
Adjustable
rates
|
|
|
32,024
|
|
|
|
31,359
|
|
|
|
57,734
|
|
|
|
56,915
|
|
|
|
93,218
|
|
|
|
92,181
|
|
Total
|
|
$ |
81,372
|
|
|
$ |
79,921
|
|
|
$ |
117,079
|
|
|
$ |
115,495
|
|
|
$ |
154,236
|
|
|
$ |
152,686
|
|
As
of September 30, 2006, the bank held
investments in available for sale with unrealized holding losses totaling $1.4
million. All losses are considered temporary and consisted of the
following:
|
|
Less
than 12 months
|
|
|
12
months or more
|
|
|
Total
|
|
Description
of Securities
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
debt securities
|
|
$ |
4,921
|
|
|
$ |
174
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
4,921
|
|
|
$ |
174
|
|
CMOs
|
|
|
3,279
|
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,279
|
|
|
|
28
|
|
U.S.
Government securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
|
|
|
22,375
|
|
|
|
536
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,375
|
|
|
|
536
|
|
GNMA
|
|
|
7,916
|
|
|
|
217
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,916
|
|
|
|
217
|
|
U.S.
Government agency securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
MBS’s
|
|
|
5,463
|
|
|
|
86
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,463
|
|
|
|
86
|
|
FNMA
MBS’s
|
|
|
17,773
|
|
|
|
357
|
|
|
|
213
|
|
|
|
7
|
|
|
|
17,986
|
|
|
|
364
|
|
Total
|
|
$ |
61,727
|
|
|
$ |
1,398
|
|
|
$ |
213
|
|
|
$ |
7
|
|
|
$ |
61,940
|
|
|
$ |
1,405
|
|
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.
|
|
At
September 30, 2006
|
|
|
|
One
Year or Less
|
|
|
More
than One
Year
to Five Years
|
|
|
More
than Five
Years
to Ten Years
|
|
|
More
than Ten Years
|
|
|
Total
|
|
|
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
(Dollars
in Thousands)
|
|
|
|
Investment
securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable-rate
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMO’s
|
|
$ |
-
|
|
|
|
- |
% |
|
$ |
-
|
|
|
|
- |
% |
|
$ |
-
|
|
|
|
- |
% |
|
$ |
9,755
|
|
|
|
5.78 |
% |
|
$ |
9,755
|
|
|
|
5.78 |
% |
Corporate
debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,880
|
|
|
|
6.46
|
|
|
|
4,262
|
|
|
|
7.04
|
|
|
|
7,142
|
|
|
|
6.81
|
|
U.S.
Government SBA’s
|
|
|
32
|
|
|
|
3.02
|
|
|
|
-
|
|
|
|
-
|
|
|
|
873
|
|
|
|
6.90
|
|
|
|
26,294
|
|
|
|
5.95
|
|
|
|
27,199
|
|
|
|
5.97
|
|
Total
|
|
|
32
|
|
|
|
3.02
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,753
|
|
|
|
6.56
|
|
|
|
40,311
|
|
|
|
6.02
|
|
|
|
44,096
|
|
|
|
6.06
|
|
MBS’s
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable-rate
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,463
|
|
|
|
3.82
|
|
|
|
5,463
|
|
|
|
3.82
|
|
FNMA
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,773
|
|
|
|
3.48
|
|
|
|
17,773
|
|
|
|
3.48
|
|
GNMA
|
|
|
34
|
|
|
|
4.66
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,882
|
|
|
|
3.62
|
|
|
|
7,916
|
|
|
|
3.62
|
|
Total
|
|
|
34
|
|
|
|
4.66
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,118
|
|
|
|
3.58
|
|
|
|
31,152
|
|
|
|
3.58
|
|
MBS’S
fixed-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
|
|
-
|
|
|
|
-
|
|
|
|
159
|
|
|
|
6.67
|
|
|
|
54
|
|
|
|
7.28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
213
|
|
|
|
6.89
|
|
Total
|
|
|
-
|
|
|
|
-
|
|
|
|
159
|
|
|
|
6.67
|
|
|
|
54
|
|
|
|
7.28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
213
|
|
|
|
6.89
|
|
Total
mortgage-backed securities available-for-sale
|
|
|
34
|
|
|
|
4.66
|
|
|
|
159
|
|
|
|
6.67
|
|
|
|
54
|
|
|
|
7.28
|
|
|
|
31,118
|
|
|
|
3.58
|
|
|
|
31,365
|
|
|
|
3.60
|
|
Total
investment portfolio
|
|
$ |
66
|
|
|
|
3.86 |
% |
|
$ |
159
|
|
|
|
6.67 |
% |
|
$ |
3,807
|
|
|
|
6.57 |
% |
|
$ |
71,429
|
|
|
|
4.96 |
% |
|
$ |
75,461
|
|
|
|
5.04 |
% |
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.
|
|
At
September 30, 2006
|
|
|
|
One
Year or Less
|
|
|
More
than One
Year
to Five Years
|
|
|
More
than Five
Years
to Ten Years
|
|
|
More
than Ten Years
|
|
|
Total
|
|
|
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
(Dollars
in Thousands)
|
|
|
|
Investment
securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable-rate
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government SBA’s
|
|
$ |
-
|
|
|
|
- |
% |
|
$ |
110
|
|
|
|
4.87 |
% |
|
$ |
553
|
|
|
|
5.21 |
% |
|
$ |
3,798
|
|
|
|
4.80 |
% |
|
$ |
4,461
|
|
|
|
4.86 |
% |
Fixed-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
investment securities held-to-maturity
|
|
|
-
|
|
|
|
-
|
|
|
|
110
|
|
|
|
4.87
|
|
|
|
553
|
|
|
|
5.21
|
|
|
|
3,798
|
|
|
|
4.80
|
|
|
|
4,461
|
|
|
|
4.86
|
|
MBS’s
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable-rate
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
128
|
|
|
|
3.00
|
|
|
|
128
|
|
|
|
3.00
|
|
FNMA
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
84
|
|
|
|
6.92
|
|
|
|
84
|
|
|
|
6.92
|
|
Total
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
212
|
|
|
|
4.56
|
|
|
|
212
|
|
|
|
4.56
|
|
Fixed-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23
|
|
|
|
6.50
|
|
|
|
23
|
|
|
|
6.50
|
|
Total
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23
|
|
|
|
6.50
|
|
|
|
23
|
|
|
|
6.50
|
|
Total
mortgage-backed securities
held-to-maturity-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
235
|
|
|
|
4.75
|
|
|
|
235
|
|
|
|
4.75
|
|
Total
held-to-maturity investments
|
|
$ |
-
|
|
|
|
- |
% |
|
$ |
110
|
|
|
|
4.87 |
% |
|
$ |
553
|
|
|
|
5.21 |
% |
|
$ |
4,033
|
|
|
|
4.80 |
% |
|
$ |
4,696
|
|
|
|
4.85 |
% |
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. Deposits
are attracted from within the bank’s market area by offering a broad selection
of deposit instruments, including checking, savings, money market and time
deposits. Deposit account terms vary, differentiated by the minimum
balance required, the time periods that the funds must remain on deposit and
the
interest rate, among other factors. In determining the terms of its
deposit accounts, the bank considers current interest rates, profitability
to
the bank, interest rate risk characteristics, competition and its customer
preferences and concerns. The bank may pay above-market interest
rates to attract or retain deposits when less expensive sources of funds are
not
available. The bank reviews its deposit composition and pricing
weekly.
At
September 30, 2006, $102.3 million,
or 79.93% of the bank's certificate of deposit accounts were to mature within
one year.
The
following table sets forth the
distribution and the rates paid on each category of the bank’s
deposits.
|
|
At
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Balance
|
|
|
Percent
of
Total
Deposits
|
|
|
Rate
Paid
|
|
|
Balance
|
|
|
Percent
of
Total
Deposits
|
|
|
Rate
Paid
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$ |
3,679
|
|
|
|
1.60 |
% |
|
|
0.98 |
% |
|
$ |
8,078
|
|
|
|
3.40 |
% |
|
|
0.99 |
% |
Now
and money market accounts
|
|
|
73,334
|
|
|
|
31.86
|
|
|
|
3.51
|
|
|
|
66,638
|
|
|
|
28.02
|
|
|
|
2.75
|
|
Certificates
of deposit
|
|
|
127,939
|
|
|
|
55.58
|
|
|
|
4.55
|
|
|
|
145,912
|
|
|
|
61.36
|
|
|
|
3.32
|
|
Noninterest-bearing
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
25,222
|
|
|
|
10.96
|
|
|
|
-
|
|
|
|
17,166
|
|
|
|
7.22
|
|
|
|
-
|
|
Total
deposits
|
|
$ |
230,174
|
|
|
|
100.00 |
% |
|
|
3.67 |
% |
|
$ |
237,794
|
|
|
|
100.00 |
% |
|
|
2.84 |
% |
The
following table presents information concerning the amounts, the rates and
the
periods to maturity of the bank’s certificate accounts outstanding.
|
|
At
September 30, 2006
|
|
|
|
Amount
|
|
|
Rate
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
Balance
maturing:
|
|
|
|
|
|
|
Three
months or less
|
|
$ |
47,401
|
|
|
|
4.54 |
% |
Three
months to one year
|
|
|
54,856
|
|
|
|
4.66
|
|
One
year to three years
|
|
|
21,264
|
|
|
|
4.31
|
|
Over
three years
|
|
|
4,418
|
|
|
|
4.48
|
|
Total
|
|
$ |
127,939
|
|
|
|
4.55 |
% |
At
September 30, 2006, the bank had $46.9 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
Maturity
Period
|
|
Amount
|
|
|
Weighed
Average
Rate
|
|
|
|
|
|
|
|
|
Three
months or less
|
|
$ |
25,992
|
|
|
|
4.74 |
% |
Over
3 through 6 months
|
|
|
5,577
|
|
|
|
4.70
|
|
Over
6 through 12 months
|
|
|
10,021
|
|
|
|
5.01
|
|
Over
12 months
|
|
|
5,315
|
|
|
|
4.41
|
|
Total
|
|
$ |
46,905
|
|
|
|
4.75 |
% |
The
following table sets forth the deposit activity of the bank for the periods
indicated.
|
|
At
or For the Year Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
237,794
|
|
|
$ |
288,956
|
|
|
$ |
297,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
deposits (withdrawals) before interest credited
|
|
|
(15,329 |
) |
|
|
(57,499 |
) |
|
|
(14,671 |
) |
Interest
credited
|
|
|
7,709
|
|
|
|
6,337
|
|
|
|
5,751
|
|
Net
increase (decrease) in deposits
|
|
|
(7,620 |
) |
|
|
(51,162 |
) |
|
|
(8,920 |
) |
Ending
balance
|
|
$ |
230,174
|
|
|
$ |
237,794
|
|
|
$ |
288,956
|
|
Borrowings. At
September 30, 2006, borrowings consisted of FHLB advances and reverse repurchase
agreements totaling $54.6 million. FHLB advances amounted to $36.0
million at September 30, 2006, a decrease from the $38.0 million outstanding
at
September 30, 2005, and other borrowings (reverse repurchase agreements)
amounted to $18.6 million, a decrease of $19.9 million compared to
$38.5 million at September 30, 2005. During the fiscal year
ended September 30, 2006, all reverse repurchase agreements represented
agreements to repurchase the same securities.
The
following table sets forth information regarding the bank’s borrowed
funds:
|
|
At
or For the Year Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
Advances:
|
|
|
|
|
|
|
|
|
|
Average
balance outstanding
|
|
$ |
44,894
|
|
|
$ |
44,422
|
|
|
$ |
116,155
|
|
Maximum
amount outstanding at any month-end during the period
|
|
|
51,000
|
|
|
|
49,200
|
|
|
|
142,250
|
|
Balance
outstanding at end of period
|
|
|
36,000
|
|
|
|
38,000
|
|
|
|
51,200
|
|
Weighted
average interest rate during the period
|
|
|
5.05 |
% |
|
|
4.47 |
% |
|
|
2.39 |
% |
Weighted
average interest rate at end of period
|
|
|
5.28 |
% |
|
|
4.85 |
% |
|
|
3.93 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse
repurchase agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
balance outstanding
|
|
|
31,624
|
|
|
|
58,837
|
|
|
|
89,734
|
|
Maximum
amount outstanding at any month-end during the period
|
|
|
35,641
|
|
|
|
62,846
|
|
|
|
93,730
|
|
Balance
outstanding at end of period
|
|
|
18,574
|
|
|
|
38,479
|
|
|
|
64,865
|
|
Weighted
average interest rate during the period
|
|
|
4.21 |
% |
|
|
4.37 |
% |
|
|
4.26 |
% |
Weighted
average interest rate at end of period
|
|
|
4.65 |
% |
|
|
3.69 |
% |
|
|
1.98 |
% |
Subsidiary
Activities
We
have two subsidiaries, the
bank and Greater Atlantic Capital Trust I. We established the
Trust in January 2002 to issue certain convertible preferred securities which
we
completed in March 2002. See discussion of the Trust in Note 22 to
the financial statements.
Personnel
As
of
September 30, 2006, we had 62 full-time employees and 14 part-time
employees. The employees are not represented by a collective
bargaining unit and the company considers its relationship with its employees
to
be good.
REGULATION
AND SUPERVISION
General
As
a
savings and loan holding company, the company is required by federal law to
report to, and otherwise comply with the rules and regulations of, the Office
of
Thrift Supervision. The 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. The bank is a member of the Federal Home Loan Bank System
and, with respect to deposit insurance, of the Savings Association Insurance
Fund managed by the Federal Deposit Insurance Corporation. The 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 savings
institutions. The Office of Thrift Supervision and/or the Federal
Deposit Insurance Corporation conduct periodic examinations to test the bank's
safety and soundness and compliance with various regulatory
requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and
is
intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect
to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes. Any change in such regulatory
requirements and policies, whether by the Office of Thrift Supervision, the
Federal Deposit Insurance Corporation or Congress, could have a material adverse
impact on the company, the bank and their operations. Certain regulatory
requirements applicable to the bank and to the company are referred to below
or
elsewhere herein. The description of statutory provisions and
regulations applicable to savings institutions and their holding companies
set
forth below does not purport to be a complete description of such statutes
and
regulations and their effects on the Bank and the company.
Holding
Company Regulation
The
company is a nondiversified unitary savings and loan holding company within
the
meaning of federal law. Under prior law, a unitary savings and loan
holding company, such as the company, was not generally restricted as to the
types of business activities in which it may engage, provided that the bank
continued to be a qualified thrift lender. See "Federal Savings
Institution Regulation - QTL Test." The Gramm-Leach-Bliley Act
of 1999 provides that no company may acquire control of a savings institution
after May 4, 1999 unless it engages only in the financial activities permitted
for financial holding companies under the law or for multiple savings and loan
holding companies as described below. Further, the Gramm-Leach-Bliley
Act specifies that existing savings and loan holding companies may only engage
in such activities. The Gramm-Leach-Bliley Act, however,
grandfathered the unrestricted authority for activities with respect to unitary
savings and loan holding companies existing prior to May 4, 1999, so long as
the
holding company’s savings institution subsidiary continues to comply with the
QTL Test. The company does not qualify for the grandfathering. Upon
any non-supervisory acquisition by the company of another savings institution
or
savings bank that meets the qualified thrift lender test and is deemed to be
a
savings institution by the Office of Thrift Supervision, the company would
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would generally be limited to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act, subject to the prior approval of the Office of Thrift Supervision,
and certain activities authorized by Office of Thrift Supervision
regulation. However, the OTS has issued an interpretation concluding
that multiple savings and loan holding companies may also engage in activities
permitted for financial holding companies.
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 the company and institution involved, the
effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors.
The
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 currently subject to specific capital
requirements or specific restrictions on the payment of dividends or other
capital distributions, federal regulations do prescribe such restrictions on
subsidiary savings institutions as described below. The bank must notify the
Office of Thrift Supervision (30) days before declaring any dividend to the
company. In addition, the financial impact of a holding company on
its subsidiary institution is a matter that is evaluated by the 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.
Acquisition
of the Company. Under the Federal Change in Bank Control Act, a
notice must be submitted to the Office of Thrift Supervision if any person
(including a company), or group acting in concert, seeks to acquire “control” of
a savings and loan holding company. Under certain circumstances, a
change of control may occur, and prior notice is required, upon the acquisition
of 10% or more of the company’s outstanding voting stock, unless the Office of
Thrift Supervision has found that the acquisition will not result in a change
of
control of the company. Under the Change in Bank Control Act, the
Office of Thrift Supervision has 60 days from the filing of a complete notice
to
act, taking into consideration certain factors, including the financial and
managerial resources of the acquirer and the anti-trust effects of the
acquisition. Any company that acquires control would then be subject
to regulation as a savings and loan holding company.
Federal
Savings Institution Regulation
Business
Activities. The activities of federal savings banks are governed
by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal savings banks may
engage. In particular, certain lending authority for federal savings
banks, e.g., commercial, non-residential real property loans and
consumer loans, is 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 to total assets ratio, a 4%
leverage ratio (3% for institutions receiving the highest rating on the CAMELS
examination 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 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, recourse obligations,
residual interests and direct credit substitutes, 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. 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
Office of Thrift Supervision also has authority to establish individual minimum
capital requirements in appropriate cases upon a determination that an
institution’s capital level is or may become inadequate in light of the
particular circumstances. At September 30, 2006, the bank met each of
its capital requirements.
The
following table presents the bank's capital position at September 30,
2006.
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
Actual
Capital
|
|
|
Required
Capital
|
|
|
Excess
(Deficiency)
Amount
|
|
|
Actual
Percent
|
|
|
Required
Percent
|
|
(Dollars
in Thousands)
|
|
|
|
Tangible
|
|
$ |
16,738
|
|
|
$ |
4,560
|
|
|
$ |
12,178
|
|
|
|
5.51 |
% |
|
|
1.50 |
% |
Core
(Leverage)
|
|
|
16,738
|
|
|
|
12,159
|
|
|
|
4,579
|
|
|
|
5.51
|
|
|
|
4.00
|
|
Risk-based
|
|
|
17,636
|
|
|
|
15,487
|
|
|
|
2,149
|
|
|
|
9.11
|
|
|
|
8.00
|
|
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
within specified time frames 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. Significantly and critically undercapitalized institutions
are subject to additional mandatory and discretionary measures.
Insurance
of Deposit Accounts. The bank’s deposits are insured up to
applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance
Corporation. The Deposit Insurance Fund is the successor to the Bank
Insurance Fund and the Savings Association Insurance Fund, which were merged
in
2006. The Federal Deposit Insurance Corporation recently amended its
risk-based assessment system for 2007 to implement authority granted by the
Federal Deposit Insurance Reform Act of 2005 (“Reform Act”). Under
the revised system, insured institutions are assigned to one of four risk
categories based on supervisory evaluations, regulatory capital levels and
certain other factors. An institution’s assessment rate depends upon
the category to which it is assigned. Risk category I, which contains
the least risky depository institutions, is expected to include more than 90%
of
all institutions. Unlike the other categories, Risk Category I
contains further risk differentiation based on the Federal Deposit Insurance
Corporation’s analysis of financial ratios, examination component ratings and
other information. Assessment rates are determined by the Federal
Deposit Insurance Corporation and currently range from five to seven basis
points for the healthiest institutions (Risk Category I) to 43 basis points
of
assessable deposits for the riskiest (Risk Category IV). The Federal
Deposit Insurance Corporation may adjust rates uniformly from one quarter to
the
next, except that no single adjustment can exceed three basis
points.
The
Reform Act also provided for a
one-time credit for eligible institutions based on their assessment base as
of
December 31, 1996. Subject to certain limitations with respect to
institutions that are exhibiting weaknesses, credits can be used to offset
assessments until exhausted. The bank’s one-time credit is expected
to approximate $103,000. The Reform Act also provided for the
possibility that the Federal Deposit Insurance Corporation may pay dividends
to
insured institutions once the Deposit Insurance fund reserve ratio equals or
exceeds 1.35% of estimated insured deposits.
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
to
recapitalize the predecessor to the Savings Association Insurance
Fund. During fiscal 2006, Financing Corporation payments for Savings
Association Insurance Fund members approximated 1.28 basis points of assessable
deposits.
The
bank's total assessment paid for this period (including the FICO assessment)
was
$105,044. The Federal Deposit Insurance Corporation has authority to
increase insurance assessments. A significant increase in Savings
Association Insurance Fund insurance premiums would likely have an adverse
effect on the operating expenses and results of operations of the
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 the 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, 2006, Greater Atlantic’s
limit on loans to one borrower was $2.7 million, and Greater Atlantic’s largest
aggregate outstanding loan to one borrower was $4.0 million. This
loan and any other loan in excess of the loans to one borrower limit will be
sold in the form of a participation.
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, 2006, Greater Atlantic maintained 74% 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 stockholders of another institution in a cash-out
merger. An application to and the prior approval of the Office of
Thrift 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, it is a subsidiary of a holding
company. In the event Greater Atlantic’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’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. On
December 13, 2006, the bank was advised by the OTS that the OTS would not
approve the bank’s application to pay a cash dividend to the company, and the
company exercised its right to defer the next scheduled quarterly distribution
on the cumulative convertible trust preferred securities for an indefinite
period (which can be no longer than 20 consecutive quarterly
periods).
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 based upon the savings institution’s total
assets, including consolidated subsidiaries, as reported in Greater Atlantic’s
latest quarterly thrift financial report. The assessments paid by
Greater Atlantic for the fiscal year ended September 30, 2006, totaled
$125,783.
Transactions
with Related Parties. Greater Atlantic’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
and its non-savings institution subsidiaries) is limited by federal
law. The aggregate amount of covered transactions with any individual
affiliate is limited to 10% of the capital and surplus of the savings
institution. The aggregate amount of covered transactions with all
affiliates is limited to 20% of the savings institution’s capital and
surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal
law. The purchase of low quality assets from affiliates is generally
prohibited. The transactions with affiliates must be on terms and
under circumstances, that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
The
Sarbanes-Oxley Act of 2002 generally prohibits loans by the company to its
executive officers and directors. However, that law contains a
specific exception for loans by the bank to its executive officers and directors
in compliance with federal banking laws. Under such laws, the bank's
authority to extend credit to executive officers, directors and 10% shareholders
("insiders"), as well as entities such persons control, is
limited. The law limits both the individual and aggregate amount of
loans the bank may make to insiders based, in part, on the bank's capital
position and requires certain board approval procedures to be
followed. 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. There is an exception for loans made
pursuant to a benefit or compensation program that is widely available to all
employees of the institution and does not give preference to insiders over
other
employees.
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 $1.0 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 be taken with respect to a particular savings
institution. If the Director does not take action, 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 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, 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 was in compliance with this requirement
with an investment in Federal Home Loan Bank stock at September 30, 2006 of
$2.4
million.
The
Federal Home Loan Banks are required to provide funds used 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’s net
interest income would likely also be reduced.
Federal
Reserve System
The
Federal Reserve Board regulations require savings institutions to maintain
non-interest earning reserves against their transaction accounts (primarily
NOW
and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows:
a
3% reserve ratio is assessed on net transaction accounts up to $48.3 million;
for $48.3 million the required reserve is $1.2 million, and, for amounts in
excess of $48.3 million the required ratio is 10%. The first $7.8
million of otherwise reservable balances (subject to adjustments by the Federal
Reserve Board) are exempted from the reserve requirements. The
amounts are adjusted annually. The bank complies with the foregoing
requirements.
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’s latest Community Reinvestment Act rating,
received from the Office of Thrift Supervision was “Satisfactory.”
FEDERAL
AND STATE TAXATION
General. The
company and the bank report their income on a fiscal year basis using the
accrual method of accounting and are subject to federal income taxation in
the
same manner as other corporations with some exceptions. The following
discussion of tax matters is intended only as a summary and does not purport
to
be a comprehensive description of the tax rules applicable to the bank or the
company. The bank has not been audited by the IRS or the Virginia Department
of
Taxation ("DOT") in the past five years.
Distributions.
To the extent that the bank makes "non-dividend distributions” to the company
that are considered as made (i) from the reserve for losses on qualifying real
property loans, to the extent the reserve for such losses exceeds the amount
that would have been allowed under the experience method, or (ii) from the
supplemental reserve for losses on loans ("Excess Distributions”), then an
amount based on the amount distributed will be included in the bank's taxable
income. Non-dividend distributions include distributions in excess of the bank's
current and accumulated earnings and profits, distributions in redemption of
stock and distributions in partial or complete liquidation. However, dividends
paid out of the bank's current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not be considered to result
in
a distribution from the bank's bad debt reserve. Thus, any dividends to the
company that would reduce amounts appropriated to the bank's bad debt reserve
and deducted for federal income tax purposes would create a tax liability for
the bank. The amount of additional taxable income created by an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the bank makes a "non-dividend distribution,” then approximately one
and one-half times the amount so used would be includable in gross income for
federal income tax purposes, presumably taxed at a 34% corporate income tax
rate
(exclusive of state and local taxes). See "Regulation” and "Dividend Policy” for
limits on the payment of dividends of the bank. The bank does not intend to
pay
dividends that would result in a recapture of any portion of its bad debt
reserve.
Corporate
Alternative Minimum Tax ("AMT”). The Code imposes a tax on alternative
minimum taxable income (“AMTI”) at a rate of 20%. Only 90% of AMTI
could be offset by net operating loss carryovers. 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). Since the company and
the bank have net operating losses for the 2006 fiscal year, they do not record
a provision for income taxes.
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
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.
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.
ITEM
1A. RISK
FACTORS
Our
increased emphasis on commercial and construction lending may expose us to
increased lending risks.
At
September 30, 2006, our loan portfolio consisted of $28.4 million, or 14.06%
of
commercial real estate loans, $28.1 million, or 13.91% of construction and
land
development loans and $39.8 million, or 19.70% of commercial business
loans. We intend to increase our emphasis on these types of
loans. These types of loans generally expose a lender to greater risk
of non-payment and loss than one-to-four-family residential mortgage loans
because repayment of the loans often depends on the successful operation of
the
property, the income stream of the borrowers and, for construction loans, the
accuracy of the estimate of the property’s value at completion of construction
and the estimated cost of construction. Such loans typically involve
larger loan balances to single borrowers or groups of related borrowers compared
to one- to four-family residential mortgage loans. Commercial
business loans expose us to additional risks since they typically are made
on
the basis of the borrower’s ability to make repayments from the cash flow of the
borrower’s business and are secured by non-real estate collateral that may
depreciate over time. In addition, since such loans generally entail
greater risk than one- to four-family residential mortgage loans, we may need
to
increase our allowance for loan losses in the future to account for the likely
increase in probable incurred credit losses associated with the growth of such
loans. Also, many of our commercial and construction borrowers have
more than one loan outstanding with us. Consequently, an adverse
development with respect to one loan or one credit relationship can expose
us to
a significantly greater risk of loss compared to an adverse development with
respect to a one- to four-family residential mortgage loan.
Strong
competition within our market area could hurt our ability to compete and could
slow our growth.
We
face
intense competition both in making loans and attracting
deposits. This competition has made it more difficult for us to make
new loans and has occasionally forced us to offer higher deposit
rates. Price competition for loans and deposits might result in us
earning less on our loans and paying more on our deposits, which reduces net
interest income. Some of the institutions with which we compete have
substantially greater resources and lending limits than we have and may offer
services that we do not provide. We expect competition to increase in
the future as a result of legislative, regulatory and technological changes
and
the continuing trend of consolidation in the financial services
industry. Our profitability depends upon our continued ability to
compete successfully in our market area.
An
increase in loan prepayments and on prepayment of loans underlying
mortgage-backed securities and small business administration certificates may
adversely affect our profitability.
Prepayment
rates are affected by consumer behavior, conditions in the housing and financial
markets, general economic conditions and the relative interest rates on
fixed-rate and adjustable-rate mortgage loans. Although changes in
prepayment rates are, therefore, difficult for us to predict, prepayment rates
tend to increase when market interest rates decline relative to the rates on
the
prepaid instruments.
We
recognize our deferred loan origination costs and premiums paid on originating
these loans by adjusting our interest income over the contractual life of the
individual loans. As prepayments occur, the rate at which net
deferred loan origination costs and premiums are expensed
accelerates. The effect of the acceleration of deferred costs and
premium amortization may be mitigated by prepayment penalties paid by the
borrower when the loan is paid in full within a certain period of time, which
varies between loans. If prepayment occurs after the period of time
when the loan is subject to a prepayment penalty, the effect of the acceleration
of premium and deferred cost amortization is no longer mitigated.
We
recognize premiums we pay on mortgage-backed securities and Small Business
Administration Certificates as an adjustment to interest income over the life
of
the security based on the rate of repayment of the securities. Acceleration
of
prepayment on the loans underlying a mortgage-backed security or Small Business
Administration Certificate shortens the life of the security, increases the
rate
at which premiums are expensed and further reduces interest income.
We
may
not be able to reinvest loan and security prepayments at rates comparable to
the
prepaid instruments particularly in periods of declining interest
rates.
We
operate in a highly regulated environment and we may be adversely affected
by
changes in laws and regulations.
The
bank
is subject to extensive regulation, supervision and examination by the Office
of
Thrift Supervision and by the Federal Deposit Insurance Corporation, as insurer
of its deposits. Such regulation and supervision govern the
activities in which the bank and the company may engage, and are intended
primarily for the protection of the insurance fund and for the depositors and
borrowers of the bank. The regulation and supervision by the Office
of Thrift Supervision and the Federal Deposit Insurance Corporation are not
intended to protect the interests of investors in the common stock of the
company. Regulatory authorities have extensive discretion in their
supervisory and enforcement activities, including the imposition of restrictions
on our operations, the classification of our assets and determination of the
level of our allowance for loan losses. Any change in such regulation
and oversight, whether in the form of regulatory policy, regulations,
legislation or supervisory action, may have a material impact on our
operations.
A
breach of information security could negatively affect our
earnings.
Increasingly,
we depend upon data processing, communication and information exchange on a
variety of computing platforms and networks and over the Internet. We
cannot be certain all our systems are entirely free from vulnerability to
attack, despite safeguards we have instituted. In addition, we rely
on the services of a variety of vendors to meet data processing and
communication needs. If information security is breached, information
can be lost or misappropriated, resulting in financial loss or costs to us
or
damages to others. These costs or losses could materially exceed the
amount of insurance coverage, if any, which would adversely affect our
earnings.
We
are subject to heightened regulatory scrutiny with respect to bank secrecy
and
anti-money laundering statutes and regulations.
Recently,
regulators have intensified their focus on the USA PATRIOT Act’s anti-money
laundering and Bank Secrecy Act compliance requirements. There is
also increased scrutiny of our compliance with the rules enforced by the Office
of Foreign Assets Control. In order to comply with regulations,
guidelines and examination procedures in this area, we have been required to
adopt new policies and procedures and to install new systems. We
cannot be certain that the policies, procedures and systems we have in place
are
flawless. Therefore, there is no assurance that in every instance we
are in full compliance with these requirements.
Failure
to pay interest on our debt may adversely impact us.
Deferral
of interest payments where allowed on our convertible preferred securities
may
affect our ability to issue additional debt.
Failure
to remain a well capitalized institution.
As
a
result of recording losses of $5.6 million during the year ended September
30,
2006, the bank ceased to be considered a well capitalized institution and is
now
considered to be an adequately capitalized institution. As an
adequately capitalized institution, the bank cannot issue brokered certificates
of deposit without OTS or FDIC permission, and the OTS can limit the payment
of
dividends from the bank to the company. Without the payment of a dividend from
the bank, the company is unable to make a distribution on the cumulative
convertible trust preferred securities. On December 13, 2006, the
bank was advised by the OTS that the OTS would not approve the bank’s
application to pay a cash dividend to the company, and the company exercised
its
right to defer the next scheduled quarterly distribution on the cumulative
convertible trust preferred securities.
ITEM
1B.UNRESOLVED STAFF COMMENTS
The
company has no unresolved staff comments for the period ended September 30,
2006.
During
fiscal year 2006, we conducted
our business from six full-service banking offices and our administrative
office. The following table sets forth certain information concerning
the bank’s offices as of September 30, 2006.
Location
|
|
Leased
or
Owned
|
|
Original
Year
Leased
or
Acquired
|
|
Date
of
Lease
Expiration
|
|
Net
Book Value
of
Property or
Leasehold
Improvements
at
September
30, 2006
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
Administrative
offices:
|
|
|
|
|
|
|
|
|
10700
Parkridge Boulevard
Reston,
Virginia 20191
|
|
Leased
|
|
1998
|
|
01-31-11
|
|
$ 101
|
Branch
offices:
|
|
|
|
|
|
|
|
|
11834
Rockville Pike
Rockville,
Maryland 20852
|
|
Leased
|
|
1998
|
|
06-30-09
|
|
8
|
8070
Ritchie Highway
Pasadena,
Maryland 21122
|
|
Leased
|
|
1998
|
|
08-31-08
|
|
23
|
10700
Parkridge Boulevard
Reston,
Virginia 20191
|
|
Leased
|
|
2004
|
|
01-31-11
|
|
394
|
43086
Peacock Market Plaza
South
Riding, Virginia 20152
|
|
Leased
|
|
2000
|
|
06-30-15
|
|
225
|
1
South Royal Avenue
Front
Royal, Virginia 22630
|
|
Owned
|
|
1977
|
|
|
|
700
|
9484
Congress Street
New
Market, Virginia 22844
|
|
Owned
|
|
1989
|
|
|
|
421
|
Loan
Offices:
2200
Defense Highway
Crofton,
Maryland 21114
|
|
Leased
|
|
2002
|
|
11-30-08
|
|
2
|
12530
Parklawn Drive, Suite 170
Rockville,
Maryland 20852
|
|
Leased
|
|
2005
|
|
06-30-10
|
|
48
|
Total
|
$1,922
|
The
total
net book value of the company’s furniture, fixtures and equipment at September
30, 2006 was $2.8 million. The properties are considered by
management to be in good condition.
ITEM
3.
|
LEGAL
PROCEEDINGS
|
As
previously reported in a Form 8-K filed on September 8, 2006, the company
announced that a Demand for Arbitration Before the American Arbitration
Association was filed against the company, the bank, GAMC, and Carroll E. Amos,
President and Chief Executive Officer of the company and the
bank. The Demand for Arbitration was filed by Stamm Mortgage
Management, Inc. ("Stamm Mortgage") and T. Mark Stamm, President of Stamm
Mortgage in connection with the Management Agreement among Stamm Mortgage,
the
bank, and GAMC that governed the management of GAMC by Stamm Mortgage before
the
bank terminated the operations of GAMC earlier this year, and certain aspects
of
the company's public disclosures of that event.
The
Demand for Arbitration alleges three counts: rescission, breach of contract,
and
defamation. As against the Bank and GAMC, Stamm Mortgage alleges that the
Management Agreement is unenforceable and should be rescinded, requiring the
Bank and GAMC, jointly and severally, to return $1.77 million that Stamm
Mortgage paid to the Bank and GAMC under the Management Agreement. As an
alternative to rescission, Stamm Mortgage alleges that the Bank and GAMC
breached the Management Agreement by terminating it contrary to its terms,
resulting in $9.6 million in lost profits to Stamm Mortgage. Stamm Mortgage
and
Mr. Stamm both allege that the company, the bank, GAMC, and Mr. Amos, acting
in
his official capacity, defamed Stamm Mortgage and Mr. Stamm through certain
public statements made in press releases and in public securities filings by
the
company and seek $1.0 million in compensatory damages and $350,000 in punitive
damages.
On
December 29, 2006, counsel for the company, the bank, GAMC and Mr. Amos filed
an
Answering Statement and Counterclaim in Arbitration. In, January
2007, the parties entered into negotiations looking toward a mutually acceptable
and amicable resolution of their claims. In the event that the claims
cannot be resolved through negotiations, the company intends to defend its
position vigorously.
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, 2006, through the solicitation of proxies or otherwise.
ITEM 5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY
SECURITIES
|
Market
information. The
company’s stock
trades on the NASDAQ Stock Market (ticker symbol GAFC). At September
30, 2006, there were approximately 373 stockholders of
record. The following table sets forth market price
information, based on closing prices, as reported by the NASDAQ for the common
stock high and low closing prices for the periods indicated.
|
|
First
Quarter
Ended
December
31
|
|
|
Second
Quarter Ended
March
31
|
|
|
Third
Quarter Ended
June
30
|
|
|
Fourth
Quarter Ended
September
30
|
|
Fiscal
Year 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
5.45
|
|
|
|
6.05
|
|
|
|
5.90
|
|
|
|
5.36
|
|
Low
|
|
|
4.84
|
|
|
|
4.60
|
|
|
|
5.04
|
|
|
|
4.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
7.08
|
|
|
|
6.46
|
|
|
|
6.20
|
|
|
|
5.62
|
|
Low
|
|
|
6.01
|
|
|
|
5.77
|
|
|
|
5.03
|
|
|
|
5.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These
market quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not necessarily represent actual
transactions. The company has not sold any unregistered securities
and did not repurchase any of its equity securities in the fiscal year ended
September 30, 2006.
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The
following Selected Consolidated Financial Data should be read in conjunction
with our Consolidated Financial Statements and the notes thereto, the
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other financial information included
elsewhere in this Annual Report.
At
or For the Years Ended September 30,
|
|
2006
|
|
|
2005
(Restated)
(4)
|
|
|
2004
(Restated)
(4)
|
|
|
2003
(Restated)
(4)
|
|
|
2002
(Restated)
(4)
|
|
(In
Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
18,794
|
|
|
$ |
16,958
|
|
|
$ |
18,085
|
|
|
$ |
19,361
|
|
|
$ |
20,538
|
|
Interest
expense
|
|
|
11,305
|
|
|
|
10,546
|
|
|
|
11,970
|
|
|
|
12,277
|
|
|
|
12,933
|
|
Net
interest income
|
|
|
7,489
|
|
|
|
6,412
|
|
|
|
6,115
|
|
|
|
7,084
|
|
|
|
7,605
|
|
Provision
for loan losses
|
|
|
126
|
|
|
|
219
|
|
|
|
209
|
|
|
|
791
|
|
|
|
832
|
|
Net
interest income after provision for loan losses
|
|
|
7,363
|
|
|
|
6,193
|
|
|
|
5,906
|
|
|
|
6,293
|
|
|
|
6,773
|
|
Noninterest
income (loss)
|
|
|
639
|
|
|
|
3,173
|
|
|
|
547
|
|
|
|
766
|
|
|
|
(2,589 |
) |
Noninterest
expense
|
|
|
11,085
|
|
|
|
9,889
|
|
|
|
10,370
|
|
|
|
10,014
|
|
|
|
8,985
|
|
(Loss)
income from continuing operations before taxes
|
|
|
(3,083 |
) |
|
|
(523 |
) |
|
|
(3,917 |
) |
|
|
(2,955 |
) |
|
|
(4,800 |
) |
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Loss)
income from continuing operations
|
|
|
(3,083 |
) |
|
|
(523 |
) |
|
|
(3,917 |
) |
|
|
(2,955 |
) |
|
|
(4,800 |
) |
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
(2,488 |
) |
|
|
(1,107 |
) |
|
|
428
|
|
|
|
4,898
|
|
|
|
1,968
|
|
Net
(loss) income
|
|
$ |
(5,571 |
) |
|
$ |
(1,630 |
) |
|
$ |
(3,489 |
) |
|
$ |
1,943
|
|
|
$ |
(2,832 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(1.84 |
) |
|
$ |
(0.54 |
) |
|
$ |
(1.16 |
) |
|
$ |
0.65
|
|
|
$ |
(0.94 |
) |
Diluted
|
|
$ |
(1.84 |
) |
|
$ |
(0.54 |
) |
|
$ |
(1.16 |
) |
|
$ |
0.44
|
|
|
$ |
(0.94 |
) |
Book
value
|
|
|
2.93
|
|
|
|
4.76
|
|
|
|
5.29
|
|
|
|
6.79
|
|
|
|
6.14
|
|
Tangible
book value
|
|
|
2.96
|
|
|
|
4.80
|
|
|
|
5.22
|
|
|
|
6.38
|
|
|
|
5.74
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,020,934
|
|
|
|
3,015,509
|
|
|
|
3,012,434
|
|
|
|
3,012,434
|
|
|
|
3,010,420
|
|
Diluted
|
|
|
3,020,934
|
|
|
|
3,015,509
|
|
|
|
3,012,434
|
|
|
|
4,413,462
|
|
|
|
3,010,420
|
|
Shares
outstanding
|
|
|
3,020,934
|
|
|
|
3,020,934
|
|
|
|
3,012,434
|
|
|
|
3,012,434
|
|
|
|
3,012,434
|
|
Consolidated
Statements of Financial Condition Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
305,219
|
|
|
$ |
339,542
|
|
|
$ |
433,174
|
|
|
$ |
498,456
|
|
|
$ |
502,098
|
|
Total
loans receivable, net
|
|
|
193,307
|
|
|
|
194,920
|
|
|
|
246,387
|
|
|
|
242,253
|
|
|
|
248,081
|
|
Allowance
for loan losses
|
|
|
1,330
|
|
|
|
1,212
|
|
|
|
1,600
|
|
|
|
1,550
|
|
|
|
1,699
|
|
Mortgage-loans
held for sale
|
|
|
-
|
|
|
|
9,517
|
|
|
|
5,528
|
|
|
|
6,554
|
|
|
|
14,553
|
|
Investment
securities (1)
|
|
|
48,557
|
|
|
|
58,502
|
|
|
|
60,285
|
|
|
|
138,049
|
|
|
|
157,247
|
|
Mortgage-backed
securities
|
|
|
31,600
|
|
|
|
57,296
|
|
|
|
92,722
|
|
|
|
86,735
|
|
|
|
52,112
|
|
Total
deposits
|
|
|
230,174
|
|
|
|
237,794
|
|
|
|
288,956
|
|
|
|
297,876
|
|
|
|
281,877
|
|
FHLB
advances
|
|
|
36,000
|
|
|
|
38,000
|
|
|
|
51,200
|
|
|
|
86,800
|
|
|
|
96,500
|
|
Other
borrowings
|
|
|
18,574
|
|
|
|
38,479
|
|
|
|
64,865
|
|
|
|
77,835
|
|
|
|
91,010
|
|
Guaranteed
convertible preferred securities of subsidiary trust
|
|
|
9,388
|
|
|
|
9,378
|
|
|
|
9,369
|
|
|
|
9,359
|
|
|
|
9,346
|
|
Total
stockholders’ equity
|
|
|
8,850
|
|
|
|
14,375
|
|
|
|
15,944
|
|
|
|
20,442
|
|
|
|
18,483
|
|
Tangible
capital
|
|
|
8,943
|
|
|
|
14,514
|
|
|
|
15,379
|
|
|
|
19,228
|
|
|
|
17,286
|
|
SELECTED
FINANCIAL DATA - (continued)
At
or For the Years Ended September 30,
|
|
|
|
|
2005
(Restated)(4)
|
|
|
2004
(Restated)(4)
|
|
|
2003
(Restated)(4)
|
|
|
2002
(Restated)(4)
|
|
(In
Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Consolidated Statements of Financial Condition Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
315,133
|
|
|
$ |
370,729
|
|
|
$ |
504,039
|
|
|
$ |
477,882
|
|
|
$ |
422,825
|
|
Investment
securities(1)
|
|
|
66,789
|
|
|
|
70,633
|
|
|
|
123,198
|
|
|
|
161,161
|
|
|
|
155,350
|
|
Mortgage-backed
securities(1)
|
|
|
43,979
|
|
|
|
77,424
|
|
|
|
111,016
|
|
|
|
51,046
|
|
|
|
39,320
|
|
Total
loans
|
|
|
193,688
|
|
|
|
210,152
|
|
|
|
253,772
|
|
|
|
251,386
|
|
|
|
214,501
|
|
Allowance
for loan losses
|
|
|
1,264
|
|
|
|
1,609
|
|
|
|
1,498
|
|
|
|
1,696
|
|
|
|
1,148
|
|
Total
deposits
|
|
|
210,311
|
|
|
|
245,518
|
|
|
|
275,636
|
|
|
|
279,469
|
|
|
|
243,120
|
|
Total
stockholders’ equity
|
|
|
12,164
|
|
|
|
13,830
|
|
|
|
15,236
|
|
|
|
15,132
|
|
|
|
18,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Ratios (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets
|
|
|
(1.77 |
)% |
|
|
(0.44 |
)% |
|
|
(0.69 |
)% |
|
|
0.41 |
% |
|
|
(0.67 |
)% |
Return
on average equity
|
|
|
(45.80 |
) |
|
|
(11.79 |
) |
|
|
(22.90 |
) |
|
|
12.83
|
|
|
|
(15.61 |
) |
Equity
to assets
|
|
|
2.90
|
|
|
|
4.23
|
|
|
|
3.68
|
|
|
|
4.10
|
|
|
|
3.68
|
|
Net
interest margin
|
|
|
2.46
|
|
|
|
1.79
|
|
|
|
1.25
|
|
|
|
1.53
|
|
|
|
1.86
|
|
Efficiency
ratio(3)
|
|
|
136.38
|
|
|
|
103.17
|
|
|
|
155.66
|
|
|
|
127.58
|
|
|
|
179.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Quality Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
assets to total assets, at period end
|
|
|
0.36
|
|
|
|
0.54
|
|
|
|
0.22
|
|
|
|
0.28
|
|
|
|
0.09
|
|
Non-performing
loans to total loans, at period end
|
|
|
0.55
|
|
|
|
0.75
|
|
|
|
0.37
|
|
|
|
0.57
|
|
|
|
0.18
|
|
Net
charge-offs to average total loans
|
|
|
0.00
|
|
|
|
0.28
|
|
|
|
0.06
|
|
|
|
0.36
|
|
|
|
0.03
|
|
Allowance
for loan losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
0.66 |
% |
|
|
0.56 |
% |
|
|
0.62 |
% |
|
|
0.62 |
% |
|
|
0.66 |
% |
Non-performing
loans
|
|
|
119.82
|
|
|
|
75.56
|
|
|
|
167.89
|
|
|
|
109.31
|
|
|
|
374.23
|
|
Non-performing
loans
|
|
$ |
1,110
|
|
|
$ |
1,604
|
|
|
$ |
953
|
|
|
$ |
1,418
|
|
|
$ |
454
|
|
Non-performing
assets
|
|
|
1,110
|
|
|
|
1,836
|
|
|
|
953
|
|
|
|
1,446
|
|
|
|
797
|
|
Allowance
for loan losses
|
|
|
1,330
|
|
|
|
1,212
|
|
|
|
1,600
|
|
|
|
1,550
|
|
|
|
1,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Ratios of the Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
ratio
|
|
|
5.51 |
% |
|
|
6.66 |
% |
|
|
5.59 |
% |
|
|
5.68 |
% |
|
|
4.90 |
% |
Tier
1 risk-based capital ratio
|
|
|
8.59
|
|
|
|
10.25
|
|
|
|
9.81
|
|
|
|
12.08
|
|
|
|
10.97
|
|
Total
risk-based capital ratio
|
|
|
9.11
|
|
|
|
10.75
|
|
|
|
10.42
|
|
|
|
12.70
|
|
|
|
11.73
|
|
(1)
|
Consists
of securities classified as available-for-sale, held-to-maturity
and for
trading.
|
(2)
|
Ratios
are presented on an annualized basis where
appropriate.
|
(3)
|
Efficiency
ratio consists of noninterest expense divided by net interest income
and
noninterest income
|
(4)
|
The
Consolidated Financial Statements and data for 2005, 2004, 2003 and
2002
have been restated to reflect adjustments that are described in Notes
2
and 3 to the Consolidated Financial
Statements.
|
ITEM 7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
|
Forward-Looking
Statements
When
used in this
Annual Report on Form 10-K 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 results 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, 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 consist mainly of interest paid on
deposits and borrowings.
The
level
of our non-interest income and operating expenses also affects our
profitability. 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.
During
2006, the company restated its historical financial statements to reflect the
accounting treatment for losses discovered in its subsidiary’s, (GAMC’s)
unreconciled inter-company account (See Note 2 to the consolidated financial
statements). The losses were discovered as the bank discontinued the
operations of the subsidiary. The loss in any given year did not
reach a material amount such as to require restatement. However, the
bank determined to provide the restatements because the cumulative amount of
the
losses aggregated $1.4 million. The revisions had no impact on the
cash flows of the bank.
As
previously reported in a Form 8-K filed on September 8, 2006, the company
announced that a Demand for Arbitration Before the American Arbitration
Association was filed against the company, the bank, GAMC, and Carroll E. Amos,
President and Chief Executive Officer of the company and the bank. (See Item
3.
Legal Proceedings of this Form 10-K.) During the course of the
negotiations, the company proposed a settlement offer which would require a
contribution of $500,000 by the company toward the settlement. That
offer was accepted conditioned on the execution of a mutual release by the
parties. That mutual release is currently the subject of
negotiation. As a result, the company has established a liability for
the probable settlement and charged $500,000 as other operating
expense. Should the settlement not occur the company intends to
defend its position vigorously.
Critical
Accounting Policies, Estimates and Judgments
The
company’s financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation
of these financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue
and
expenses as well as the disclosure of contingent
liabilities. Management continually evaluates its estimates and
judgments including those related to the allowance for loan losses and income
taxes. Management bases its estimates and judgments on historical
experience and other factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under
different assumptions or conditions. The company believes that of its
significant accounting policies, the following may involve a higher degree
of
judgment or complexity.
Allowance
for Loan Losses
The
company maintains an allowance for loan losses based on management’s evaluation
of the risks inherent in its loan portfolio and the general
economy. Management classifies loans as substandard, doubtful or loss
as required by federal regulations. Management provides a 100%
reserve for all assets classified as loss. Further, management bases
its estimates of the allowance on current economic conditions, actual loss
experience and industry trends. Also, the company discontinues
recognizing interest income on loans with principal and/or interest past due
90
days.
Income
Taxes
The
provision (or benefit) for income taxes is based on taxable income, tax credits
and available net operating losses. The company records deferred tax
assets and liabilities using enacted tax rates for the effect of temporary
differences between the book and tax bases of assets and
liabilities. If enacted tax rates change, the company would adjust
the deferred tax assets and liabilities, through the provision for income taxes
in the period of change, to reflect the enacted tax rate expected to be in
effect when the deferred tax items reverse. The company records a
valuation allowance on deferred tax assets to reflect the expected future tax
benefits expected to be realized. In determining the appropriate
valuation allowance, the company considers the expected level of future taxable
income and available tax planning strategies. At September 30, 2006,
the company had deferred tax assets of $1.9 million, which is net of a valuation
allowance of $3.5 million.
Recent
Accounting Standards
The
Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standard (“SFAS”) No. 123 (Revised 2004) (“SFAS No. 123R”),
“Share-Based Payment,” in December 2004. SFAS No. 123R is a revision
of FASB Statement 123, “Accounting for Stock-Based Compensation” and supersedes
APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related
implementation guidance. The Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123R requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide service in exchange
for
the award. This statement is effective as of the beginning of the
first annual reporting period that begins after June 15, 2005 and the company
adopted the standard in the first quarter of fiscal 2006. The
adoption of this statement did not have a material impact on its consolidated
financial position or results of operations.
In
May
2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections – a
replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 generally
requires retrospective application to prior periods’ financial statements of all
voluntary changes in accounting principle and changes required when a new
pronouncement does not include specific transition provisions. This standard
was
effective for the company beginning October 1, 2006.
In
July
2006, the FASB issued Interpretation (FIN) No. 48, “Accounting for Uncertainty
in Income Taxes” - an Interpretation of SFAS No. 109, “Accounting for Income
Taxes.” FIN 48 defines the threshold for recognizing the benefits of tax return
positions in the financial statements as “more-likely-than-not” to be sustained
by a taxing authority. The term “more-likely-than-not” means a likelihood of
more than 50 percent. FIN 48 is effective as of Jan. 1, 2007, with early
application permitted. Any impact from the adoption of FIN 48 will be recorded
directly to the beginning balance of retained earnings and reported as a change
in accounting principle. We are currently evaluating the impact of this
Interpretation, but do not expect it to be material.
On
October 1, 2006, we adopted SFAS 156, “Accounting for Servicing of Financial
Assets – an amendment of FASB Statement No.140.” SFAS 156 was issued in March
2006 and requires all newly recognized servicing rights and obligations to
be
initially measured at fair value. For each class of separately recognized
servicing rights and obligations retained, we have elected to continue to
account for each under the amortization method which requires us to amortize
servicing assets or liabilities in proportion to and over the periods of
estimated net servicing income or net servicing loss.
In
September 2006, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 108 (SAB 108). Due to diversity in practice among
registrants, SAB 108 expresses the SEC staff views regarding the process by
which misstatements in financials statements are evaluated for purposes of
determining whether financial statement restatement is necessary. SAB 108 is
effective for fiscal years ending after November 15, 2006, and early application
is encouraged. The company does not believe SAB 108 will have a material impact
on its consolidated financials statements.
In
September 2006, the Financial Accounting Standards Board released Statement
No.
157, "Fair Value Measurements" which defines fair value, establishes a framework
for measuring fair value in GAAP, and enhances disclosures about fair value
measurements. This Statement applies when other accounting pronouncements
require fair value measurements; it does not require new fair value
measurements. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those
years. While we are currently evaluating the effect of the guidance contained
in
this Statement, we do not expect the implementation to have a material impact
on
our consolidated financial statements.
Discontinued
mortgage banking operations
On
March
29, 2006, we began the process of discontinuing the operations of the bank’s
subsidiary, GAMC. It was determined that, because it was
unprofitable, this business no longer fit our strategy.
Due
to
the unprofitable operations of GAMC, the company recognized an additional loss
of $1.5 million during fiscal 2006. In addition to the loss from
operations, a non-recurring pre-tax impairment charge on long-lived assets
of
$996,000 was recorded and included in discontinued operations in the
consolidated statements of operations. That charge requires a write
down of long-lived assets by recording an impairment charge due to the
discontinuance of operations effective March 29, 2006.
As
a
result of the above action, we applied discontinued operations accounting in
the
third quarter of 2006, as we completed the closing of the GAMC
business. Accordingly, the income statements for all periods have
been adjusted. The reclassification of GAMC’s results to discontinued
operations primarily resulted in a reduction to previously reported levels
of
net interest income, a reduction in noninterest income and a reduction in
noninterest expense. The table below summarizes GAMC’s results which
were treated as discontinued operations for the periods indicated.
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
|
2005
(Restated)
|
|
(Dollars
in Thousands, Except Per Share Data
|
|
|
|
|
|
|
Interest
income
|
|
$ |
280
|
|
|
$ |
478
|
|
Interest
expense
|
|
|
257
|
|
|
|
347
|
|
Net
interest income
|
|
|
24
|
|
|
|
131
|
|
Noninterest
income
|
|
|
2,149
|
|
|
|
5,072
|
|
Noninterest
expense
|
|
|
4,661
|
|
|
|
6,310
|
|
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
Net
income (loss)
|
|
$ |
(2,488 |
) |
|
$ |
(1,107 |
) |
Earnings
per share – basic
|
|
$ |
(0.82 |
) |
|
$ |
(0.37 |
) |
Earnings
per share – diluted
|
|
|
(0.82 |
) |
|
|
(0.37 |
) |
Financial
Condition
2006
Compared to 2005
At
September 30, 2006, the company had total assets of $305.2 million, a decrease
of $34.3 million or 10.11% from the $339.5 million recorded at the close of
the
comparable period one-year ago. Investments and mortgage-backed
securities at September 30, 2006, amounted to $80.2 million a decrease of $35.6
million or 30.78% from the $115.8 million held at September 30, 2005, as a
result of prepayments of $42.0 million offset in part by purchases of $7.7
million. Loans receivable and loans held for sale at September 30,
2006, amounted to $193.3 million, a decrease of 5.44% from the $204.4 million
held at September 30, 2005, primarily as a result a $9.5 million decrease in
loans held for sale, coupled with a $12.6 million decline in land and consumer
loans outstanding. Those declines were due primarily to discontinuing
the operations of the bank’s subsidiary, GAMC as it was determined that, because
it was unprofitable, this business no longer fit our strategy and was coupled
with payoffs and lower than anticipated loan originations. Deposits
amounted to $230.2 million at September 30, 2006, a decrease of $7.6 million
from the $237.8 million held one year ago. That decline was primarily
the result of decreases in our checking, savings and certificates of deposit
accounts, and was offset by increases in non-interest checking and our money
funds accounts.
Results
of Operations
2006
Compared to 2005
During
2006, the company restated its historical financial statements to revise the
accounting treatment for losses discovered in its subsidiary, GAMC’s
unreconciled inter-company account. The losses were discovered as the
bank discontinued the operations of the subsidiary. The loss in any
given year did not reach a material amount such as to require
restatement. However, the bank determined to provide the restatements
because of the cumulative amount of the losses aggregated $1.4
million. The revisions had no impact on the cash flows of the
bank. The table below includes the effect of the restatement and the
presentation of GAMC as discontinued operations.
|
|
As
originally reported
|
|
|
Restatement
|
|
|
Discontinued
operations
|
|
|
As
restated
|
|
Year
ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
17,436
|
|
|
$ |
-
|
|
|
$ |
478
|
|
|
$ |
16,958
|
|
Interest
expense
|
|
|
10,893
|
|
|
|
-
|
|
|
|
347
|
|
|
|
10,546
|
|
Net
interest income
|
|
|
6,543
|
|
|
|
-
|
|
|
|
131
|
|
|
|
6,412
|
|
Noninterest
income
|
|
|
8,317
|
|
|
|
(72 |
) |
|
|
5,072
|
|
|
|
3,173
|
|
Noninterest
expense
|
|
|
16,199
|
|
|
|
-
|
|
|
|
6,310
|
|
|
|
9,889
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,107 |
) |
|
|
(1,107 |
) |
Net
income (loss)
|
|
|
(1,558 |
) |
|
|
(72 |
) |
|
|
-
|
|
|
|
(1,630 |
) |
Earnings
per share – continuing
|
|
|
(0.52 |
) |
|
|
(0.02 |
) |
|
|
0.37
|
|
|
|
(0.17 |
) |
Earnings
per share – discontinued
|
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
|
(0.37 |
) |
|
|
(0.37 |
) |
Year
ended September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
18,962
|
|
|
$ |
-
|
|
|
$ |
877
|
|
|
$ |
18,085
|
|
Interest
expense
|
|
|
12,355
|
|
|
|
-
|
|
|
|
385
|
|
|
|
11,970
|
|
Net
interest income
|
|
|
6,607
|
|
|
|
-
|
|
|
|
492
|
|
|
|
6,115
|
|
Noninterest
income
|
|
|
9,929
|
|
|
|
(297 |
) |
|
|
9,085
|
|
|
|
547
|
|
Noninterest
expense
|
|
|
19,430
|
|
|
|
-
|
|
|
|
9,060
|
|
|
|
10,370
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
428
|
|
|
|
428
|
|
Net
income (loss)
|
|
|
(3,192 |
) |
|
|
(297 |
) |
|
|
-
|
|
|
|
(3,489 |
) |
Earnings
per share – continuing
|
|
|
(1.06 |
) |
|
|
(0.10 |
) |
|
|
(0.14 |
) |
|
|
(1.30 |
) |
Earnings
per share – discontinued
|
|
|
(0.00 |
) |
|
|
0.00
|
|
|
|
0.14
|
|
|
|
0.14
|
|
Net
Income. For the fiscal year ended September 30, 2006, the
company had a net loss from continuing operations of $3.1 million or $1.02
per
diluted share compared to a loss from continuing operations of $523,000 or
$0.17
per diluted share for fiscal year 2005. The $2.6 million decline in
earnings over the comparable period one-year ago was primarily the result of
an
increase in non-interest expense and a decrease in non-interest
income. That increase in non-interest expense and decrease in
non-interest income were partially offset by an increase in net interest income
and a decrease in the provision for loan losses.
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 liabilities
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.
|
|
Years
ended September 30,
|
|
|
Difference
|
|
|
|
2006
|
|
|
2005
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in thousands)
|
|
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
13,866
|
|
|
$ |
12,430
|
|
|
$ |
1,436
|
|
|
|
11.55 |
% |
Investments
|
|
|
4,928
|
|
|
|
4,528
|
|
|
|
400
|
|
|
|
8.83
|
|
Total
|
|
|
18,794
|
|
|
|
16,958
|
|
|
|
1,836
|
|
|
|
10.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
7,709
|
|
|
|
6,337
|
|
|
|
1,372
|
|
|
|
21.65
|
|
Borrowings
|
|
|
3,596
|
|
|
|
4,209
|
|
|
|
(613 |
) |
|
|
(14.56 |
) |
Total
|
|
|
11,305
|
|
|
|
10,546
|
|
|
|
759
|
|
|
|
7.20
|
|
Net
interest income
|
|
$ |
7,489
|
|
|
$ |
6,412
|
|
|
$ |
1,077
|
|
|
|
16.80 |
% |
Our
increase in net interest income for fiscal year 2006, resulted primarily from
a
67 basis point increase in net interest margin (net interest income divided
by
average interest-earning assets) from 1.79% for fiscal year 2005 to 2.46% for
fiscal year 2006, offset in part by a $53.8 million decrease in the bank’s
interest-earning assets. Contributing to the increase in the net
interest margin was a $278,000 reduction in interest expense resulting from
payments made on certain interest rate swap and cap agreements compared to
a
charge of $533,000 in the comparable period one year ago. The
increase in net interest margin also resulted from the average yield on
interest-earning assets increasing by 59 basis points more than the increase
in
the average cost on interest-bearing liabilities and was coupled with average
interest earning assets decreasing by $746,000 less than the decline in average
interest-bearing liabilities.
Interest
Income. Interest income for the fiscal year ended September 30,
2006 increased $1.8 million compared to fiscal year 2005, primarily as a result
of a 144 basis point increase in the average yield earned on interest earning
assets. That increase was partially offset by a decrease of $53.8
million in the average outstanding balances of loans and
securities.
Interest
Expense. The $759,000 increase in interest expense for fiscal
year 2006 compared to the 2005 period was principally the result of an 85 basis
point increase in the cost of funds on average deposits and
borrowings. That increase in the cost of funds was partially offset
by a $54.5 million decrease in average deposits and borrowings. The
increase in interest expense on deposits was primarily due to a 109 basis point
increase in rates paid on deposits, primarily due to higher rates paid on
interest-bearing demand deposits, savings accounts and certificates and elevated
pricing on new and renewed time deposits. That increase was partially
offset by a decrease of $35.2 million in average deposits from $245.5 million
for fiscal 2005 to $210.3 million for fiscal 2006. The increase in
rates was primarily due to market rates moving rates higher on interest-bearing
demand deposits, savings accounts and certificates and the pricing on new and
renewed time deposits.
The
decrease in interest expense on borrowings for fiscal 2006, when compared to
the
2005 period, was principally the result of a $19.3 million decrease in average
borrowed funds and was partially offset by a 31 basis point increase in the
cost
of borrowed funds. Components accountable for the decrease of
$613,000 in interest expense on borrowings were a $834,000 decrease relating
to
average volume, offset in part by a $221,000 increase relating to average
cost.
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.
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
|
2005
restated
|
|
|
2004
restated
|
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Yield/ Rate
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Yield/
Rate
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
$ |
93,390
|
|
|
$ |
6,699
|
|
|
|
7.17 |
% |
|
$ |
98,217
|
|
|
$ |
6,379
|
|
|
|
6.49 |
% |
|
$ |
138,655
|
|
|
$ |
7,705
|
|
|
|
5.56 |
% |
Consumer
loans
|
|
|
65,338
|
|
|
|
4,701
|
|
|
|
7.19
|
|
|
|
71,817
|
|
|
|
3,748
|
|
|
|
5.22
|
|
|
|
68,268
|
|
|
|
2,566
|
|
|
|
3.76
|
|
Commercial
business
loans
|
|
|
34,960
|
|
|
|
2,466
|
|
|
|
7.05
|
|
|
|
40,118
|
|
|
|
2,303
|
|
|
|
5.74
|
|
|
|
46,849
|
|
|
|
2,358
|
|
|
|
5.03
|
|
Total
loans
|
|
|
193,688
|
|
|
|
13,866
|
|
|
|
7.16
|
|
|
|
210,152
|
|
|
|
12,430
|
|
|
|
5.91
|
|
|
|
253,772
|
|
|
|
12,629
|
|
|
|
4.98
|
|
Investment
securities
|
|
|
66,789
|
|
|
|
3,353
|
|
|
|
5.02
|
|
|
|
70,633
|
|
|
|
2,414
|
|
|
|
3.42
|
|
|
|
123,198
|
|
|
|
3,077
|
|
|
|
2.50
|
|
Mortgage-backed
securities
|
|
|
43,979
|
|
|
|
1,575
|
|
|
|
3.58
|
|
|
|
77,424
|
|
|
|
2,114
|
|
|
|
2.73
|
|
|
|
111,016
|
|
|
|
2,379
|
|
|
|
2.14
|
|
Total
interest-earning
assets
|
|
|
304,456
|
|
|
|
18,794
|
|
|
|
6.17
|
|
|
|
358,209
|
|
|
|
16,958
|
|
|
|
4.73
|
|
|
|
487,986
|
|
|
|
18,085
|
|
|
|
3.71
|
|
Non-earning
assets
|
|
|
10,677
|
|
|
|
|
|
|
|
|
|
|
|
12,520
|
|
|
|
|
|
|
|
|
|
|
|
16,053
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
315,133
|
|
|
|
|
|
|
|
|
|
|
$ |
370,729
|
|
|
|
|
|
|
|
|
|
|
$ |
504,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$ |
5,190
|
|
|
|
48
|
|
|
|
0.92
|
|
|
$ |
10,202
|
|
|
|
94
|
|
|
|
0.92
|
|
|
$ |
11,978
|
|
|
|
113
|
|
|
|
0.94
|
|
Now
and money market
accounts
|
|
|
73,485
|
|
|
|
2,430
|
|
|
|
3.31
|
|
|
|
64,723
|
|
|
|
1,197
|
|
|
|
1.85
|
|
|
|
77,981
|
|
|
|
852
|
|
|
|
1.09
|
|
Certificates
of deposit
|
|
|
131,636
|
|
|
|
5,231
|
|
|
|
3.97
|
|
|
|
170,593
|
|
|
|
5,046
|
|
|
|
2.96
|
|
|
|
185,677
|
|
|
|
4,786
|
|
|
|
2.58
|
|
Total
deposits
|
|
|
210,311
|
|
|
|
7,709
|
|
|
|
3.67
|
|
|
|
245,518
|
|
|
|
6,337
|
|
|
|
2.58
|
|
|
|
275,636
|
|
|
|
5,751
|
|
|
|
2.09
|
|
FHLB
advances
|
|
|
44,894
|
|
|
|
2,266
|
|
|
|
5.05
|
|
|
|
44,422
|
|
|
|
1,985
|
|
|
|
4.47
|
|
|
|
116,155
|
|
|
|
2,779
|
|
|
|
2.39
|
|
Other
borrowings
|
|
|
31,624
|
|
|
|
1,330
|
|
|
|
4.21
|
|
|
|
51,388
|
|
|
|
2,224
|
|
|
|
4.33
|
|
|
|
78,979
|
|
|
|
3,440
|
|
|
|
4.36
|
|
Total
interest-bearing
liabilities
|
|
|
286,829
|
|
|
|
11,305
|
|
|
|
3.94
|
|
|
|
341,328
|
|
|
|
10,546
|
|
|
|
3.09
|
|
|
|
470,770
|
|
|
|
11,970
|
|
|
|
2.54
|
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
deposits
|
|
|
14,993
|
|
|
|
|
|
|
|
|
|
|
|
14,138
|
|
|
|
|
|
|
|
|
|
|
|
15,243
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
1,147
|
|
|
|
|
|
|
|
|
|
|
|
1,433
|
|
|
|
|
|
|
|
|
|
|
|
2,790
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
302,969
|
|
|
|
|
|
|
|
|
|
|
|
356,899
|
|
|
|
|
|
|
|
|
|
|
|
488,803
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
12,164
|
|
|
|
|
|
|
|
|
|
|
|
13,830
|
|
|
|
|
|
|
|
|
|
|
|
15,236
|
|
|
|
|
|
|
|
|
|
Total
liabilities
and
stockholders'
equity
|
|
$ |
315,133
|
|
|
|
|
|
|
|
|
|
|
$ |
370,729
|
|
|
|
|
|
|
|
|
|
|
$ |
504,039
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
7,489
|
|
|
|
|
|
|
|
|
|
|
$ |
6,412
|
|
|
|
|
|
|
|
|
|
|
$ |
6,115
|
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
|
|
|
|
|
2.23 |
% |
|
|
|
|
|
|
|
|
|
|
1.64 |
% |
|
|
|
|
|
|
|
|
|
|
1.17 |
% |
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
2.46 |
% |
|
|
|
|
|
|
|
|
|
|
1.79 |
% |
|
|
|
|
|
|
|
|
|
|
1.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
Year
Ended September 30, 2006
Compared
to Year
Ended
September 30, 2005
Change
Attributable to
|
|
|
Year
Ended September 30, 2005
Compared
to Year
Ended
September 30, 2004
Change
Attributable to (restated)
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
$ |
(314 |
) |
|
$ |
634
|
|
|
$ |
320
|
|
|
$ |
(2,247 |
) |
|
$ |
921
|
|
|
$ |
(1,326 |
) |
Consumer
loans
|
|
|
(338 |
) |
|
|
1,291
|
|
|
|
953
|
|
|
|
133
|
|
|
|
1,049
|
|
|
|
1,182
|
|
Commercial
business loans
|
|
|
(296 |
) |
|
|
459
|
|
|
|
163
|
|
|
|
(339 |
) |
|
|
284
|
|
|
|
(55 |
) |
Total
loans
|
|
|
(948 |
) |
|
|
2,384
|
|
|
|
1,436
|
|
|
|
(2,453 |
) |
|
|
2,254
|
|
|
|
(199 |
) |
Investments
|
|
|
(131 |
) |
|
|
1,070
|
|
|
|
939
|
|
|
|
(1,313 |
) |
|
|
650
|
|
|
|
(663 |
) |
Mortgage-backed
securities
|
|
|
(913 |
) |
|
|
374
|
|
|
|
(539 |
) |
|
|
(720 |
) |
|
|
455
|
|
|
|
(265 |
) |
Total
interest-earning assets
|
|
$ |
(1,992 |
) |
|
$ |
3,828
|
|
|
$ |
1,836
|
|
|
$ |
(4,486 |
) |
|
$ |
3,359
|
|
|
$ |
(1,127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$ |
(46 |
) |
|
$ |
-
|
|
|
$ |
(46 |
) |
|
$ |
(17 |
) |
|
$ |
(2 |
) |
|
$ |
(19 |
) |
Now
and money market accounts
|
|
|
162
|
|
|
|
1,071
|
|
|
|
1,233
|
|
|
|
(145 |
) |
|
|
490
|
|
|
|
345
|
|
Certificates
of deposit
|
|
|
(1,152 |
) |
|
|
1,337
|
|
|
|
185
|
|
|
|
(389 |
) |
|
|
649
|
|
|
|
260
|
|
Total
deposits
|
|
|
(1,036 |
) |
|
|
2,408
|
|
|
|
1,372
|
|
|
|
(551 |
) |
|
|
1,137
|
|
|
|
586
|
|
FHLB
advances
|
|
|
21
|
|
|
|
260
|
|
|
|
281
|
|
|
|
(1,716 |
) |
|
|
922
|
|
|
|
(794 |
) |
Other
borrowings
|
|
|
(855 |
) |
|
|
(39 |
) |
|
|
(894 |
) |
|
|
(1,202 |
) |
|
|
(14 |
) |
|
|
(1,216 |
) |
Total
interest-bearing liabilities
|
|
$ |
(1,870 |
) |
|
$ |
2,629
|
|
|
$ |
759
|
|
|
$ |
(3,469 |
) |
|
$ |
2,045
|
|
|
$ |
(1,424 |
) |
Change
in net interest income
|
|
$ |
(122 |
) |
|
$ |
1,199
|
|
|
$ |
1,077
|
|
|
$ |
(1,017 |
) |
|
$ |
1,314
|
|
|
$ |
297
|
|
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
loan type. Management then looks at its classified assets, which are
loans 30 days or more delinquent, and classifies those loans as special mention,
substandard or doubtful, based on the performance of the loans. Those
classified loans are then individually evaluated for
impairment. Those loans that are not individually evaluated are then
segmented by type and assigned a reserve percentage that reflects the industry
loss experience. The loans individually evaluated for impairment are
measured by either the present value of expected future cash flows, the loans
observable market price, or the fair value of the
collateral. Although management utilizes its best judgment in
providing for probable losses, there can be no assurance that the bank will
not
have to increase its provisions for loan losses in the future. An
increase in provision may result from 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. On an annual basis, or
more often if deemed necessary, the bank has contracted with an independent
outside third party to have its loan portfolio reviewed. The focus of
their review is to identify the extent of potential and actual risk in the
bank’s commercial loan portfolio, in addition to the underwriting and processing
practices. Observations made regarding the bank’s portfolio risk are
based upon review evaluations, portfolio profiles and discussion with the
operational staff, including the line lenders and senior
management.
Non-performing
assets were $1.1 million or 0.36% of total assets at September 30, 2006,
compared to non-performing assets of $1.8 million or 0.54% of total assets
at
September 30, 2005. At September 30, 2006, assets of $791,000 were
classified as substandard and $319,000 classified as doubtful. The
decrease in the provision for loan losses of $93,000 resulted from declines
in
non-performing assets and the outstanding balance of the bank’s land loans,
commercial business loans, home equity loans and real estate
owned. The decrease in provision was due primarily to the decreases
in the required provisions for those loans coupled with an overall decline
in
the size of the bank’s loan portfolio.
Non-interest
income. Non-interest income decreased $2.5 million during fiscal
2006, over fiscal 2005. That decrease was primarily the result of
decreases in gain on sale of loans, gains on derivatives, gain on sale of
investment securities and declines in other operating income and service fees
on
deposits. Those decreases in income were partially offset by an
increase of $65,000 in gain on sale of real estate owned. The
decrease in other operating income reflects the $946,000 gain recognized one
year ago from the sale of the bank’s Washington, D.C., Winchester and Sterling,
Virginia, branches.
The
following table presents a comparison of the components of non-interest
income.
|
|
Years
Ended September 30,
|
|
|
Difference
|
|
|
|
2006
|
|
|
2005
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in Thousands)
|
|
|
|
Noninterest
income:
|
|
|
|
Gain
on sale of loans
|
|
$ |
-
|
|
|
$ |
53
|
|
|
$ |
(53 |
) |
|
|
(100.00 |
)% |
Service
fees on loans
|
|
|
186
|
|
|
|
182
|
|
|
|
4
|
|
|
|
2.20
|
|
Service
fees on deposits
|
|
|
424
|
|
|
|
552
|
|
|
|
(128 |
) |
|
|
(23.19 |
) |
Gain
(loss) on sale of investment securities
|
|
|
-
|
|
|
|
539
|
|
|
|
(539 |
) |
|
|
(100.00 |
) |
Gain
(loss) on derivatives
|
|
|
(66 |
) |
|
|
836
|
|
|
|
(902 |
) |
|
|
(107.89 |
) |
Gain
on sale of real estate owned
|
|
|
65
|
|
|
|
-
|
|
|
|
65
|
|
|
|
n/a
|
|
Other
operating income
|
|
|
30
|
|
|
|
1,011
|
|
|
|
(981 |
) |
|
|
(97.03 |
) |
Total
noninterest income
|
|
$ |
639
|
|
|
$ |
3,173
|
|
|
$ |
(2,534 |
) |
|
|
(79.86 |
)% |
Non-interest
expense. Noninterest expense for fiscal 2006 amounted to $11.1
million, an increase of $1.2 million or 12.09% from the $9.9 million incurred
in
fiscal 2005. The
increase in non-interest expense was distributed over various non-interest
expense categories with the major contributors being compensation, professional
services, advertising and other operating and was offset in part by decreases
in, furniture fixtures and equipment and data processing. The
increase in other operating expense is the result of a proposed settlement
offer
which would require a contribution of $500,000 by the company toward the
settlement. That offer was accepted conditioned on the execution of a
mutual release by the parties. That mutual release is currently the
subject of negotiation.
The
following table presents a comparison of the components of noninterest
expense.
|
|
Years
Ended September 30,
|
|
|
Difference
|
|
|
|
2006
|
|
|
2005
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in Thousands)
|
|
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
$ |
4,718
|
|
|
$ |
4,213
|
|
|
$ |
505
|
|
|
|
11.99 |
% |
Occupancy
|
|
|
1,337
|
|
|
|
1,337
|
|
|
|
-
|
|
|
|
-
|
|
Professional
services
|
|
|
1,227
|
|
|
|
969
|
|
|
|
258
|
|
|
|
26.63
|
|
Advertising
|
|
|
628
|
|
|
|
301
|
|
|
|
327
|
|
|
|
108.64
|
|
Deposit
insurance premium
|
|
|
101
|
|
|
|
100
|
|
|
|
1
|
|
|
|
1.00
|
|
Furniture,
fixtures and equipment
|
|
|
554
|
|
|
|
641
|
|
|
|
(87 |
) |
|
|
(13.57 |
) |
Data
processing
|
|
|
919
|
|
|
|
1,054
|
|
|
|
(135 |
) |
|
|
(12.81 |
) |
Other
operating expense
|
|
|
1,601
|
|
|
|
1,274
|
|
|
|
327
|
|
|
|
25.67
|
|
Total
noninterest expense
|
|
$ |
11,085
|
|
|
$ |
9,889
|
|
|
$ |
1,196
|
|
|
|
12.09 |
% |
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. We did not record a provision for income taxes
for fiscal 2006 and 2005 due to our operating losses. The company believes
that
it will generate future taxable income to assure utilization of a certain
portion of the existing net operating losses.
Contractual
Commitments and Obligations
The
following summarizes the company’s contractual cash obligations and commercial
commitments, including maturing certificates of deposit, as of September 30,
2006 and the effect such obligations may have on liquidity and cash flow in
future periods.
|
|
|
|
|
Less
Than
|
|
|
Two-Three
|
|
|
Four-Five
|
|
|
After
Five
|
|
|
|
Total
|
|
|
One
Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
Advances (1)
|
|
$ |
36,000
|
|
|
$ |
6,000
|
|
|
$ |
-
|
|
|
$ |
30,000
|
|
|
$ |
-
|
|
Reverse
repurchase agreements
|
|
|
18,574
|
|
|
|
18,574
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Operating
leases
|
|
|
4,865
|
|
|
|
1,089
|
|
|
|
2,108
|
|
|
|
1,175
|
|
|
|
493
|
|
Total
obligations
|
|
$ |
59,439
|
|
|
$ |
25,663
|
|
|
$ |
2,108
|
|
|
$ |
31,175
|
|
|
$ |
493
|
|
(1)
The company expects to refinance these short and medium-term obligations under
substantially the same terms and conditions.
Other
Commercial Commitments
|
|
|
|
|
Less
Than
|
|
|
Two-Three
|
|
|
Four-Five
|
|
|
After
Five
|
|
|
|
Total
|
|
|
One
Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit maturities (1)
|
|
$ |
127,939
|
|
|
$ |
102,257
|
|
|
$ |
21,264
|
|
|
$ |
4,325
|
|
|
$ |
93
|
|
Loan
originations
|
|
|
13,868
|
|
|
|
13,868
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Unfunded
lines of credit
|
|
|
113,117
|
|
|
|
113,117
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Standby
letter of credit
|
|
|
55
|
|
|
|
55
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$ |
254,979
|
|
|
$ |
229,297
|
|
|
$ |
21,264
|
|
|
$ |
4,325
|
|
|
$ |
93
|
|
(1)
The company expects to retain maturing deposits or replace amounts maturing
with
comparable certificates of deposit based on current market interest
rates.
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, and 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 general level of interest rates, the relationship between
long-
and short-term interest rates, market conditions and competitive factors, the
bank may determine to increase our interest rate risk position in order to
increase our net interest margin.
The
bank
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. While
the bank has entered into interest rate swaps and caps to assist in managing
interest rate risk, it has not entered into instruments such as leveraged
derivatives, structured notes, financial options, financial futures contracts
or
forward delivery contracts to manage 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.
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, 2006. Estimates and assumptions concerning
allocating prepayment rates of major asset categories are based on information
obtained from Farin and Associates on projected prepayment levels on
mortgage-backed and related securities and decay rates on savings, NOW and
money
market accounts. The bank believes that such information is
consistent with our current experience.
Maturing
or Repricing Periods
|
|
90
Days or Less
|
|
|
91
Days to 180 Days
|
|
|
181
Days to One Year
|
|
|
One
Year to Three Years
|
|
|
Three
Years to Five Years
|
|
|
Five
Years or More
|
|
|
Total
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable
and balloon
|
|
$ |
23,750
|
|
|
$ |
7,801
|
|
|
$ |
8,688
|
|
|
$ |
10,535
|
|
|
$ |
6,088
|
|
|
$ |
13
|
|
|
$ |
56,875
|
|
Fixed-rate
|
|
|
1,916
|
|
|
|
627
|
|
|
|
2.508
|
|
|
|
5,703
|
|
|
|
5,805
|
|
|
|
16,981
|
|
|
|
33,540
|
|
Commercial
business
|
|
|
31,109
|
|
|
|
1,093
|
|
|
|
892
|
|
|
|
3,929
|
|
|
|
2,062
|
|
|
|
1,473
|
|
|
|
40,558
|
|
Consumer
|
|
|
61,896
|
|
|
|
84
|
|
|
|
151
|
|
|
|
402
|
|
|
|
184
|
|
|
|
153
|
|
|
|
62,870
|
|
Investment
securities
|
|
|
58,496
|
|
|
|
160
|
|
|
|
288
|
|
|
|
817
|
|
|
|
460
|
|
|
|
5,966
|
|
|
|
66,187
|
|
Mortgage-backed
securities
|
|
|
8,838
|
|
|
|
7,643
|
|
|
|
13,331
|
|
|
|
1,610
|
|
|
|
11
|
|
|
|
11
|
|
|
|
31,444
|
|
Total
|
|
|
186,005
|
|
|
|
17,408
|
|
|
|
25,858
|
|
|
|
22,996
|
|
|
|
14,610
|
|
|
|
24,597
|
|
|
|
291,474
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
|
1,056
|
|
|
|
753
|
|
|
|
541
|
|
|
|
611
|
|
|
|
332
|
|
|
|
386
|
|
|
|
3,679
|
|
NOW
accounts
|
|
|
3,335
|
|
|
|
2,572
|
|
|
|
2,530
|
|
|
|
2,817
|
|
|
|
861
|
|
|
|
2,463
|
|
|
|
14,578
|
|
Money
market accounts
|
|
|
18,747
|
|
|
|
12,765
|
|
|
|
9,898
|
|
|
|
9,762
|
|
|
|
4,192
|
|
|
|
3,386
|
|
|
|
58,750
|
|
Certificates
of deposit
|
|
|
47,412
|
|
|
|
19,711
|
|
|
|
35,146
|
|
|
|
21,264
|
|
|
|
4,324
|
|
|
|
93
|
|
|
|
127,950
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
|
5,000
|
|
|
|
-
|
|
|
|
6,000
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
-
|
|
|
|
36,000
|
|
Other
borrowings
|
|
|
18,574
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,388
|
|
|
|
27,962
|
|
Total
|
|
|
94,124
|
|
|
|
35,801
|
|
|
|
54,115
|
|
|
|
34,454
|
|
|
|
34,709
|
|
|
|
15,716
|
|
|
$ |
268,919
|
|
GAP
|
|
$ |
91,881
|
|
|
$ |
(18,393 |
) |
|
$ |
(28,257 |
) |
|
$ |
(11,458 |
) |
|
$ |
(20,099 |
) |
|
$ |
8,881
|
|
|
$ |
22,555
|
|
Cumulative
GAP
|
|
$ |
91,881
|
|
|
$ |
73,488
|
|
|
$ |
45,231
|
|
|
$ |
33,773
|
|
|
$ |
13,674
|
|
|
$ |
22,555
|
|
|
|
|
|
Ratio
of Cumulative GAP
to
total interest earning assets
|
|
|
31.52 |
% |
|
|
25.21 |
% |
|
|
15.52 |
% |
|
|
11.59 |
% |
|
|
4.69 |
% |
|
|
7.74 |
% |
|
|
|
|
As
indicated in the interest rate sensitivity table, the 181 day to one year
cumulative gap, representing the total net assets and liabilities that are
projected to re-price over the next year, was asset sensitive in the amount
of
$45.2 million at September 30, 2006.
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 GAP 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 they do during periods of rising interest
rates.
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 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 300 basis points or down 200 basis
points. Currently the bank uses a sensitivity of net interest income
analysis prepared by Farin and Associates 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,
2006:
Net
Interest Income Sensitivity Analysis
|
Changes
in Rate by Basis Point
|
|
Net
Interest Margin
|
|
Basis
Point Change
From
Base
|
|
Percent
Change From Base
|
+300
|
|
3.28%
|
|
0.03%
|
|
0.92%
|
+200
|
|
3.27%
|
|
0.02%
|
|
0.62%
|
+100
|
|
3.27%
|
|
0.02%
|
|
0.62%
|
+0
|
|
3.25%
|
|
-
|
|
-
|
-100
|
|
3.12%
|
|
(0.13)%
|
|
(4.00)%
|
-200
|
|
2.96%
|
|
(0.29)%
|
|
(8.92)%
|
-300
|
|
2.78%
|
|
(0.47)%
|
|
(14.46)%
|
In
a
declining rate scenario the bank is not within the limits established by the
board of directors. Management will monitor the situation over the
next several quarters to determine if a change should be made in our
position.
The
above
table indicates that, based on an immediate and sustained 200 basis point
increase in market interest rates, net interest margin, as measured as a percent
of total assets, would increase by 2 basis points or 0.62% and, if interest
rates decrease 200 basis points, net interest margin, as a percent of total
assets, would decrease by 29 basis points or 8.92%.
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 assumptions as to the
nature and timing of interest rate levels including the shape of the yield
curve. Those 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.
Presented
below, as of September 30, 2006, is an analysis of our interest rate risk as
measured by changes in net portfolio value for parallel shifts of up 300 and
down 200 basis points in market interest rates:
|
|
|
Net
Portfolio Value
|
|
|
Net
Portfolio Value as a Percent of the Present Value of
Assets
|
|
Changes
in Rates (bp)
|
|
|
Dollar
Change
|
|
|
Percent
Change
|
|
|
Net
Portfolio
Value
Ratio
|
|
|
Change
in
NPV
Ratio
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
+300
|
|
|
$ |
(1,952 |
) |
|
|
(7.67 |
)% |
|
|
7.46 |
% |
|
|
(0.72 |
)% |
|
+200
|
|
|
|
(908 |
) |
|
|
(3.57 |
) |
|
|
7.81
|
|
|
|
(0.37 |
) |
|
+100
|
|
|
|
(355 |
) |
|
|
(1.40 |
) |
|
|
8.02
|
|
|
|
(0.16 |
) |
|
+0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8.18
|
|
|
|
-
|
|
|
-100
|
|
|
|
(490 |
) |
|
|
(1.93 |
) |
|
|
8.07
|
|
|
|
(0.11 |
) |
|
-200
|
|
|
|
(1,235 |
) |
|
|
(4.85 |
) |
|
|
7.89
|
|
|
|
(0.29 |
) |
The
decline in net portfolio value of $908,000 or 3.50% in the event of a 200 basis
point increase in rates is a result of the current amount of adjustable rate
loans and investments held by the bank as of September 30, 2006. The
foregoing decrease 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.
In
addition to the strategies set forth above, in 2002, the bank began using
derivative financial instruments, such as interest rate swaps, to help manage
interest rate risk. The bank does not use derivative financial
instruments for trading or speculative purposes. All derivative
financial instruments are used in accordance with board-approved risk management
policies.
The
bank
enters into interest rate swap agreements principally to manage its exposure
to
the impact of rising short-term interest rates on its earnings and cash
flows. Since short-term interest rates have stabilized the bank has
unwound its interest rate swaps during fiscal 2006.
Financial
Condition
2005
Compared to 2004
At
September 30, 2005, the company had total assets of $339.5 million, a decrease
of $93.6 million or 21.62% from the $433.2 million recorded at the close of
the
comparable period one-year ago. Investments and mortgage-backed
securities at September 30, 2005, amounted to $115.8 million a decrease of
$37.2
million or 24.32% from the $153.0 million held at September 30, 2004, as a
result of prepayments of $59.9 million offset in part by purchases of $21.6
million. Loans receivable and loans held for sale at September 30,
2005, amounted to $204.4 million, a decrease of 18.85% from the $251.9 million
held at September 30, 2004, primarily as a result of a $29.2 million decrease
in
the bank’s single family loan portfolio, coupled with a $16.2 million decline in
commercial and consumer loans outstanding. Those declines were due
primarily to payoffs and lower than anticipated loan
originations. Deposits amounted to $237.8 million at September 30,
2005, a decrease of $51.2 million from the $289.0 million held one year ago,
and
was primarily the result of the sale of three branches located in Washington,
D.C., Winchester and Sterling, Virginia. Those sales accounted for
approximately $41.1 million of the decline in deposits and was coupled with
the
$11.0 million decline in certificates of deposits of $100,000 or more,
continuing the bank’s approach to rely less and less on those types of
deposit.
Results
of Operations
2005
Compared to 2004
Discontinued
mortgage banking operations
In
2004,
the bank entered into a management agreement with the manager of GAMC, its
mortgage-banking subsidiary. Under the management agreement the
manager was to reimburse operating expenses equal to approximately 100% of
any
operating loss in return for an increase in the manager’s share of net earnings
from 40% to 80%. Reflected in the discontinued mortgage banking
operations for 2005 is a reduction in expense of $1.8 million provided by the
manager of the mortgage company.
Under
the
management agreement, if GAMC sustained losses in excess of the amount in the
escrow, and the manager did not restore those losses within 15 days of demand,
GAMC’s recourse was to terminate the agreement. At June 30, 2005, the escrow had
been depleted, the manager contributed an additional $108,000 to GAMC to make
up
the deficiency and the agreement was continued for three months.
During
the three months ended September 30, 2005, the losses at GAMC continued and
reached approximately $993,000. Because the escrow account was depleted and
the
manager had not posted sufficient collateral to securitize the account
receivable due from the manager, the bank’s earnings were reduced by the
$993,000 loss.
As
disclosed earlier, we applied discontinued operations accounting in the third
quarter of 2006, as we completed the closing of the GAMC
business. Accordingly, the income statements for all periods have
been adjusted. The reclassification of GAMC’s results to discontinued
operations primarily resulted in a reduction to previously reported levels
of
net interest income, a reduction in noninterest income and a reduction in
noninterest expense. The table below summarizes GAMC’s results which
were treated as discontinued operations for the periods indicated.
|
|
Year
Ended September 30,
|
|
|
|
2005(Restated)
|
|
|
2004
(Restated)
|
|
(Dollars
in Thousands, Except Per Share Data
|
|
|
|
|
|
|
Interest
income
|
|
$ |
478
|
|
|
$ |
877
|
|
Interest
expense
|
|
|
347
|
|
|
|
385
|
|
Net
interest income
|
|
|
131
|
|
|
|
492
|
|
Noninterest
income
|
|
|
5,072
|
|
|
|
9,085
|
|
Noninterest
expense
|
|
|
6,310
|
|
|
|
9,060
|
|
Provision
for income taxes
|
|
|
-
|
|
|
|
89
|
|
Net
income (loss)
|
|
$ |
(1,107 |
) |
|
$ |
428
|
|
Earnings
per share – basic
|
|
$ |
(0.37 |
) |
|
$ |
0.14
|
|
Earnings
per share – diluted
|
|
|
(0.37 |
) |
|
|
0.14
|
|
Net
Income. For the fiscal year ended September 30, 2005, the
company had a net loss from continuing operations of $523,000 or $0.17 per
diluted share compared to a loss from continuing operations of $3.9 million
or
$1.30 per diluted share for fiscal year 2004. The $3.4 million
improvement in earnings over the comparable period one-year ago resulted from
an
increase in non-interest income of $2.6 million, a decrease of $481,000 in
non-interest expense and was coupled with an increase in net interest income
of
$297,000. Those improvements in expenses and net interest income were
offset in part by an increase in the provision for loan losses of
$10,000. The increase in the provision for loan losses was due
primarily to an increase in the required allowance for non-performing loans,
notwithstanding a reduction in the required allowance for loans based on the
structure of the bank’s overall loan portfolio.
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 liabilities
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.
|
|
Years
ended September 30,
|
|
|
Difference
|
|
|
|
2005
|
|
|
2004
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in thousands)
|
|
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
12,430
|
|
|
$ |
12,629
|
|
|
$ |
(199 |
) |
|
|
(1.58 |
)% |
Investments
|
|
|
4,528
|
|
|
|
5,456
|
|
|
|
(928 |
) |
|
|
(17.01 |
) |
Total
|
|
|
16,958
|
|
|
|
18,085
|
|
|
|
(1,127 |
) |
|
|
(6.23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
6,337
|
|
|
|
5,751
|
|
|
|
586
|
|
|
|
10.19
|
|
Borrowings
|
|
|
4,209
|
|
|
|
6,219
|
|
|
|
(2,010 |
) |
|
|
(32.32 |
) |
Total
|
|
|
10,546
|
|
|
|
11,970
|
|
|
|
(1,424 |
) |
|
|
(11.90 |
) |
Net
interest income
|
|
$ |
6,412
|
|
|
$ |
6,115
|
|
|
$ |
297
|
|
|
|
4.86 |
% |
Our
increase in net interest income for fiscal year 2005, resulted primarily from
a
54 basis point increase in net interest margin (net interest income divided
by
average interest-earning assets) from 1.25% for fiscal year 2004 to 1.79% for
fiscal year 2005, offset in part by a $129.8 million decrease in the bank’s
interest-earning assets. Contributing to the increase in the net
interest margin was a $1.5 million reduction in interest expense resulting
from
payments made on certain interest rate swap and cap agreements compared to
a
charge of $2.1 million in the comparable period one year ago. The
improvement in net interest margin also resulted from increasing the average
yield on interest-earning assets by 47 basis points more than the increase
in
the average cost on average interest-bearing liabilities, but that increase
was
partially offset by a decrease in the amount the bank’s average interest-earning
assets exceeded the decrease in average interest-bearing liabilities by
$335,000.
Interest
Income. Interest income for the fiscal year ended September 30,
2005 decreased $1.1 million compared to fiscal year 2004, primarily as a result
of a decrease in the average outstanding balances of loans and investment
securities. That decrease was partially offset by a 102 basis point
increase of in the average yield earned on interest earning assets.
Interest
Expense. The $1.4 million decrease in interest expense for fiscal year 2005
compared to the 2004 period was principally the result of a $129.4 million
decrease in average deposits and borrowed funds. The decrease was
partially offset by a 55 basis point increase in the cost of funds on average
deposits and borrowed funds. The increase in interest expense on
deposits was primarily due to a 49 basis point increase in rates paid on
certificates of deposit, savings and NOW and money market
accounts. That increase was partially offset by a decrease of $30.1
million, in certificates, savings and NOW and money market accounts from $275.6
million for fiscal 2004 to $245.5 million for fiscal 2005. The
increase in rates was primarily due to market rates moving rates higher on
interest-bearing demand deposits, savings accounts and certificates and the
pricing on new and renewed time deposits.
Comparative
Average Balances and Interest Income Analysis. The following table presents
the total dollar amount of interest income from average interest-earning assets
and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and annualized
rates. No tax-equivalent adjustments were made and all average
balances are average daily balances. Non-accruing loans have been
included in the tables as loans carrying a zero yield.
|
|
Year
Ended September 30,
|
|
|
|
2005
restated
|
|
|
2004
restated
|
|
|
2003
restated
|
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Yield/ Rate
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Yield/
Rate
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
$ |
98,217
|
|
|
$ |
6,379
|
|
|
|
6.49 |
% |
|
$ |
138,655
|
|
|
$ |
7,705
|
|
|
|
5.56 |
% |
|
$ |
155,082
|
|
|
$ |
8,568
|
|
|
|
5.52 |
% |
Consumer
loans
|
|
|
71,817
|
|
|
|
3,748
|
|
|
|
5.22
|
|
|
|
68,268
|
|
|
|
2,566
|
|
|
|
3.76
|
|
|
|
63,548
|
|
|
|
2,539
|
|
|
|
4.00
|
|
Commercial
business
loans
|
|
|
40,118
|
|
|
|
2,303
|
|
|
|
5.74
|
|
|
|
46,849
|
|
|
|
2,358
|
|
|
|
5.03
|
|
|
|
32,756
|
|
|
|
1,636
|
|
|
|
4.99
|
|
Total
loans
|
|
|
210,152
|
|
|
|
12,430
|
|
|
|
5.91
|
|
|
|
253,772
|
|
|
|
12,629
|
|
|
|
4.98
|
|
|
|
251,386
|
|
|
|
12,743
|
|
|
|
5.07
|
|
Investment
securities
|
|
|
70,633
|
|
|
|
2,414
|
|
|
|
3.42
|
|
|
|
123,198
|
|
|
|
3,077
|
|
|
|
2.50
|
|
|
|
161,161
|
|
|
|
4,899
|
|
|
|
3.04
|
|
Mortgage-backed
securities
|
|
|
77,424
|
|
|
|
2,114
|
|
|
|
2.73
|
|
|
|
111,016
|
|
|
|
2,379
|
|
|
|
2.14
|
|
|
|
51,046
|
|
|
|
1,719
|
|
|
|
3.37
|
|
Total
interest-earning
assets
|
|
|
358,209
|
|
|
|
16,958
|
|
|
|
4.73
|
|
|
|
487,986
|
|
|
|
18,085
|
|
|
|
3.71
|
|
|
|
463,593
|
|
|
|
19,361
|
|
|
|
4.18
|
|
Non-earning
assets
|
|
|
12,520
|
|
|
|
|
|
|
|
|
|
|
|
16,053
|
|
|
|
|
|
|
|
|
|
|
|
14,289
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
370,729
|
|
|
|
|
|
|
|
|
|
|
$ |
504,039
|
|
|
|
|
|
|
|
|
|
|
$ |
477,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$ |
10,202
|
|
|
|
94
|
|
|
|
0.92
|
|
|
$ |
11,978
|
|
|
|
113
|
|
|
|
0.94
|
|
|
$ |
9,686
|
|
|
|
122
|
|
|
|
1.26
|
|
Now
and money market
accounts
|
|
|
64,723
|
|
|
|
1,197
|
|
|
|
1.85
|
|
|
|
77,981
|
|
|
|
852
|
|
|
|
1.09
|
|
|
|
76,744
|
|
|
|
1,050
|
|
|
|
1.37
|
|
Certificates
of deposit
|
|
|
170,593
|
|
|
|
5,046
|
|
|
|
2.96
|
|
|
|
185,677
|
|
|
|
4,786
|
|
|
|
2.58
|
|
|
|
193,039
|
|
|
|
5,501
|
|
|
|
2.85
|
|
Total
deposits
|
|
|
245,518
|
|
|
|
6,337
|
|
|
|
2.58
|
|
|
|
275,636
|
|
|
|
5,751
|
|
|
|
2.09
|
|
|
|
279,469
|
|
|
|
6,673
|
|
|
|
2.39
|
|
FHLB
advances
|
|
|
44,422
|
|
|
|
1,985
|
|
|
|
4.47
|
|
|
|
116,155
|
|
|
|
2,779
|
|
|
|
2.39
|
|
|
|
102,868
|
|
|
|
2,657
|
|
|
|
2.58
|
|
Other
borrowings
|
|
|
51,388
|
|
|
|
2,224
|
|
|
|
4.33
|
|
|
|
78,979
|
|
|
|
3,440
|
|
|
|
4.36
|
|
|
|
60,037
|
|
|
|
2,947
|
|
|
|
4.91
|
|
Total
interest-bearing
liabilities
|
|
|
341,328
|
|
|
|
10,546
|
|
|
|
3.09
|
|
|
|
470,770
|
|
|
|
11,970
|
|
|
|
2.54
|
|
|
|
442,374
|
|
|
|
12,277
|
|
|
|
2.78
|
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
deposits
|
|
|
14,138
|
|
|
|
|
|
|
|
|
|
|
|
15,243
|
|
|
|
|
|
|
|
|
|
|
|
17,130
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
1,433
|
|
|
|
|
|
|
|
|
|
|
|
2,790
|
|
|
|
|
|
|
|
|
|
|
|
3,246
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
356,899
|
|
|
|
|
|
|
|
|
|
|
|
488,803
|
|
|
|
|
|
|
|
|
|
|
|
462,750
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
13,830
|
|
|
|
|
|
|
|
|
|
|
|
15,236
|
|
|
|
|
|
|
|
|
|
|
|
15,132
|
|
|
|
|
|
|
|
|
|
Total
liabilities
and
stockholders'
equity
|
|
$ |
370,729
|
|
|
|
|
|
|
|
|
|
|
$ |
504,039
|
|
|
|
|
|
|
|
|
|
|
$ |
477,882
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
6,412
|
|
|
|
|
|
|
|
|
|
|
$ |
6,115
|
|
|
|
|
|
|
|
|
|
|
$ |
7,084
|
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
|
|
|
|
|
1.64 |
% |
|
|
|
|
|
|
|
|
|
|
1.17 |
% |
|
|
|
|
|
|
|
|
|
|
1.40 |
% |
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
1.79 |
% |
|
|
|
|
|
|
|
|
|
|
1.25 |
% |
|
|
|
|
|
|
|
|
|
|
1.53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
Year
Ended September 30, 2005
Compared
to Year
Ended
September 30, 2004
Change
Attributable to (restated)
|
|
|
Year
Ended September 30, 2004
Compared
to Year
Ended
September 30, 2003
Change
Attributable to (restated)
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
$ |
(2,247 |
) |
|
$ |
921
|
|
|
$ |
(1,326 |
) |
|
$ |
(908 |
) |
|
$ |
45
|
|
|
$ |
(863 |
) |
Consumer
loans
|
|
|
133
|
|
|
|
1,049
|
|
|
|
1,182
|
|
|
|
189
|
|
|
|
(162 |
) |
|
|
27
|
|
Commercial
business loans
|
|
|
(339 |
) |
|
|
284
|
|
|
|
(55 |
) |
|
|
704
|
|
|
|
18
|
|
|
|
722
|
|
Total
loans
|
|
|
(2,453 |
) |
|
|
2,254
|
|
|
|
(199 |
) |
|
|
(15 |
) |
|
|
(99 |
) |
|
|
(114 |
) |
Investments
|
|
|
(1,313 |
) |
|
|
650
|
|
|
|
(663 |
) |
|
|
(1,154 |
) |
|
|
(668 |
) |
|
|
(1,822 |
) |
Mortgage-backed
securities
|
|
|
(720 |
) |
|
|
455
|
|
|
|
(265 |
) |
|
|
2,020
|
|
|
|
(1,360 |
) |
|
|
660
|
|
Total
interest-earning assets
|
|
$ |
(4,486 |
) |
|
$ |
3,359
|
|
|
$ |
(1,127 |
) |
|
$ |
851
|
|
|
$ |
(2,127 |
) |
|
$ |
(1,276 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$ |
(17 |
) |
|
$ |
(2 |
) |
|
$ |
(19 |
) |
|
$ |
29
|
|
|
$ |
(38 |
) |
|
$ |
(9 |
) |
Now
and money market accounts
|
|
|
(145 |
) |
|
|
490
|
|
|
|
345
|
|
|
|
17
|
|
|
|
(215 |
) |
|
|
(198 |
) |
Certificates
of deposit
|
|
|
(389 |
) |
|
|
649
|
|
|
|
260
|
|
|
|
(210 |
) |
|
|
(505 |
) |
|
|
(715 |
) |
Total
deposits
|
|
|
(551 |
) |
|
|
1,137
|
|
|
|
586
|
|
|
|
(164 |
) |
|
|
(758 |
) |
|
|
(922 |
) |
FHLB
advances
|
|
|
(1,716 |
) |
|
|
922
|
|
|
|
(794 |
) |
|
|
343
|
|
|
|
(221 |
) |
|
|
122
|
|
Other
borrowings
|
|
|
(1,202 |
) |
|
|
(14 |
) |
|
|
(1,216 |
) |
|
|
930
|
|
|
|
(437 |
) |
|
|
493
|
|
Total
interest-bearing liabilities
|
|
$ |
(3,469 |
) |
|
$ |
2,045
|
|
|
$ |
(1,424 |
) |
|
$ |
1,109
|
|
|
$ |
(1,416 |
) |
|
$ |
(307 |
) |
Change
in net interest income
|
|
$ |
(1,017 |
) |
|
$ |
1,314
|
|
|
$ |
297
|
|
|
$ |
(258 |
) |
|
$ |
(711 |
) |
|
$ |
(969 |
) |
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
loan type. Management then looks at its classified assets, which are
loans 30 days or more delinquent, and classifies those loans as special mention,
substandard or doubtful, based on the performance of the loans. Those
classified loans are then individually evaluated for
impairment. Since the historical three-year loss experience for the
bank is new, those loans that are not classified are not individually
evaluated. Those loans that are not individually evaluated are then
segmented by type and assigned a reserve percentage that reflects the industry
loss experience. The loans individually evaluated for impairment are
measured by either the present value of expected future cash flows, the loans
observable market price, or the fair value of the
collateral. Although management utilizes its best judgment in
providing for probable losses, there can be no assurance that the bank will
not
have to increase its provisions for loan losses in the future. An
increase in provision may result from 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.
Non-performing
assets were $1.8 million or 0.54% of total assets at September 30, 2005,
compared to non-performing assets of $953,000 or 0.22%of total assets at
September 30, 2004. At September 30, 2005, assets of $1.6 million
were classified as substandard, $27,000 classified as doubtful and $232,000
classified as real estate owned. The increase in non-performing
assets from the comparable period one-year ago was due primarily to a $1.0
million home loan that became non-performing. As a result, the bank
provided an increase of $46,000 in the required allowance for the bank’s
non-performing loans. Notwithstanding a reduction in the required
allowance, based on the structure of the bank’s overall loan portfolio, the
provision for loan losses was increased due primarily to an increase in the
required allowance for non-performing loans.
Non-interest
income. Non-interest income increased $2.6 million during fiscal
2005 over fiscal 2004. That increase was primarily the result of
increases of $1.1 million in gains on derivatives, $980,000 in other operating
income and $597,000 in gains on sale of investments and an increase of $68,000
in service fee income on loans. That increase was partially offset by
a decrease of $203,000 in service fee income on deposits. The
increase in other operating income reflects the gain of $945,000 recognized
from
the sale of the bank’s Washington D.C., Winchester and Sterling, Virginia,
branches.
The
following table presents a comparison of the components of non-interest
income.
|
|
Years
Ended September 30,
|
|
|
Difference
|
|
|
|
2005
|
|
|
2004
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in Thousands)
|
|
|
|
Noninterest
income:
|
|
|
|
Gain
on sale of loans
|
|
$ |
53
|
|
|
$ |
(68 |
) |
|
$ |
121
|
|
|
|
177.94 |
% |
Service
fees on loans
|
|
|
182
|
|
|
|
114
|
|
|
|
68
|
|
|
|
59.65
|
|
Service
fees on deposits
|
|
|
552
|
|
|
|
755
|
|
|
|
(203 |
) |
|
|
(26.89 |
) |
Gain
(loss) on sale of investment securities
|
|
|
539
|
|
|
|
(58 |
) |
|
|
597
|
|
|
|
1,029.31
|
|
Gain
(loss) on derivatives
|
|
|
836
|
|
|
|
(227 |
) |
|
|
1,063
|
|
|
|
468.28
|
|
Other
operating income
|
|
|
1,011
|
|
|
|
31
|
|
|
|
980
|
|
|
|
3,161.29
|
|
Total
noninterest income
|
|
$ |
3,173
|
|
|
$ |
547
|
|
|
$ |
2,626
|
|
|
|
480.07 |
% |
Non-interest
expense. Noninterest expense for fiscal 2005 amounted to $9.9 million, a
decrease of $481,000 or 4.64% from the $10.4 million incurred in fiscal
2004. The decrease was primarily attributable to a decrease in
compensation, occupancy, furniture fixtures and equipment and data
processing. Those decreases were offset by increases in
professional services, advertising, deposit insurance premium and other
operating expenses
The
following table presents a comparison of the components of noninterest
expense.
|
|
Years
Ended September 30,
|
|
|
Difference
|
|
|
|
2005
|
|
|
2004
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in Thousands)
|
|
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
$ |
4,213
|
|
|
$ |
4,306
|
|
|
$ |
(93 |
) |
|
|
(2.16 |
)% |
Occupancy
|
|
|
1,337
|
|
|
|
1,759
|
|
|
|
(422 |
) |
|
|
(23.99 |
) |
Professional
services
|
|
|
969
|
|
|
|
717
|
|
|
|
252
|
|
|
|
35.15
|
|
Advertising
|
|
|
301
|
|
|
|
244
|
|
|
|
57
|
|
|
|
23.36
|
|
Deposit
insurance premium
|
|
|
100
|
|
|
|
44
|
|
|
|
56
|
|
|
|
127.27
|
|
Furniture,
fixtures and equipment
|
|
|
641
|
|
|
|
818
|
|
|
|
(177 |
) |
|
|
(21.64 |
) |
Data
processing
|
|
|
1,054
|
|
|
|
1,306
|
|
|
|
(252 |
) |
|
|
(19.30 |
) |
Other
operating expense
|
|
|
1,274
|
|
|
|
1,176
|
|
|
|
98
|
|
|
|
8.33
|
|
Total
noninterest expense
|
|
$ |
9,889
|
|
|
$ |
10,370
|
|
|
$ |
(481 |
) |
|
|
(4.64 |
)% |
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 company believes that it will generate
future taxable income to assure utilization of a portion of the existing net
operating losses.
Management
has provided a valuation allowance for net deferred tax assets of $3.0 million,
due to the timing of the generation of future taxable income.
At
September 30, 2005, the company had net operating loss carryforwards totaling
approximately $6.1 million, which expire in years 2006 to 2022. As a
result of the change in ownership of the bank, approximately $1.5 million of
the
total net operating loss carryforwards is subject to an annual usage limitation
of approximately $114,000.
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 levels of liquid
assets as previously required by OTS regulations. 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, interest bearing
deposits and securities available-for-sale. The levels of those
assets are dependent on the bank’s operating, financing, lending and investing
activities during any given period. At September 30, 2006, cash and
cash equivalents, interest bearing deposits and securities available-for-sale
totaled $95.3 million, or 31.21% 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 business 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, 2006, the bank’s loan originations and purchases
totaled $104.2 million. Purchases of United States Treasury and
agency securities, mortgage-backed and mortgage related securities and other
investment securities totaled $7.7 million for the year ended September 30,
2006.
The
bank
has other sources of liquidity if a need for additional funds
arises. At September 30, 2006, the bank had $36.0 million in advances
outstanding from the FHLB and had an additional overall borrowing capacity
from
the FHLB of $20.2 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, 2006, the bank had commitments to fund loans and unused
outstanding lines of credit, unused standby letters of credit and undisbursed
proceeds of construction mortgages totaling $127.0 million. The bank
anticipates that it will have sufficient funds available to meet its current
loan origination commitments. Certificate accounts, including IRA and
Keogh accounts, which are scheduled to mature in less than one year from
September 30, 2006, totaled $102.3 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, 2006, the bank exceeded minimum
regulatory capital requirements with a tangible capital level of $16.7 million,
or 5.51% of total adjusted assets, which exceeds the required level of $4.6
million, or 1.50%; core capital of $16.7 million, or 5.51% of total adjusted
assets, which exceeds the required level of $12.2 million, or 4.00%; and
risk-based capital of $17.6 million, or 9.11% of risk-weighted assets, which
exceeds the required level of $15.5 million, or 8.00%.
On
March
20, 2002, Greater Atlantic Capital Trust I (the, “Trust”), a Delaware statutory
business trust and a wholly owned Trust subsidiary of the company, issued $9.6
million aggregate liquidation amount (963,038 shares) of 6.50% cumulative
preferred securities maturing on December 31, 2031, retaining an option to
call
the securities on or after December 31, 2003. Conversion of the
preferred securities into the company’s common stock may occur at any time on or
after 60 days after the closing of the offering. The company may
redeem the preferred securities, in whole or in part, at any time on or after
December 31, 2003. Distributions on the preferred securities are
payable quarterly on March 31, June 30, September 30 and December 31 of each
year beginning on June 30, 2002. The Trust also issued 29,762 common
securities to the company for $297,620. The proceeds from the sale of
the preferred securities and the proceeds from the sale of the trust’s common
securities were utilized to purchase from the company junior subordinated debt
securities of $9,928,000 bearing interest of 6.50% and maturing December 31,
2031.
The
Trust
was formed for the sole purpose of investing the proceeds from the sale of
the
convertible preferred securities in the corresponding convertible
debentures. The company has fully and unconditionally guaranteed the
preferred securities along with all obligations of the trust related
thereto. The sale of the preferred securities yielded $9.2 million
after deducting offering expenses. The company retained approximately
$1.5 million of the proceeds for general corporate purposes, investing the
retained funds in short-term investments. The remaining $8.0 million
of the proceeds was invested in the bank to increase its capital
position.
On
December 19, 2006, the Company issued a news release announcing that the first
quarter distribution of Greater Atlantic Capital Trust I 6.50% Cumulative
Convertible Trust Preferred Securities scheduled for December 31, 2006, as
well
as future distributions on the Trust Preferred Securities, will be
deferred.
The
announcement by the Company follows advice received by Greater Atlantic Bank
from the Office of Thrift Supervision that it would not approve Greater Atlantic
Bank’s application to pay a cash dividend to the Company.
Accordingly,
the Company exercised its right to defer the payment of interest on its 6.50%
Convertible Junior Subordinated Debentures Due 2031 related to the Trust
Preferred Securities, for an indefinite period (which can be no longer than
20
consecutive quarterly periods).
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
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. The
company has little or no risk related to trading accounts, commodities or
foreign exchange.
Changes
in levels of interest rates may adversely affect us. In general, market
risk is the sensitivity of income to variations in interest rates and other
relevant market rates or prices. The company’s market rate sensitive
instruments include interest-earning assets and interest-bearing
liabilities. The company enters into market rate sensitive
instruments in connection with its various business operations, particularly
its
mortgage banking activities. Loans originated, and the related
commitments to originate loans that will be sold, represent market risk that
is
realized in a short period of time, generally two or three months.
The
company’s primary source of market risk exposure arises from changes in United
States interest rates and the effects thereof on mortgage prepayment and closing
behavior, as well as depositors’ choices (“interest rate
risk”). Changes in these interest rates will result in changes in the
company’s earnings and the market value of its assets and
liabilities. We expect to continue to realize income from the
differential or "spread" between the interest earned on loans, securities and
other interest-earning assets, and the interest paid on deposits, borrowings
and
other interest-bearing liabilities. That spread is affected by the
difference between the maturities and re-pricing characteristics of
interest-earnings assets and interest-bearing liabilities. Loan
volume and yields are affected by market interest rates on loans, and rising
interest rates generally are associated with fewer loan
originations. Management expects that a substantial portion of our
assets will continue to be indexed to changes in market interest rates and
we
intend to attract a greater proportion of short-term liabilities, which will
help address our interest rate risk. The lag in implementation of
re-pricing terms on our adjustable-rate assets may result in a decline in net
interest income in a rising interest rate environment. There can be
no assurance that our interest rate risk will be minimized or
eliminated. Further, an increase in the general level of interest
rates may adversely affect the ability of certain borrowers to pay the interest
on and principal of their obligations. Accordingly, changes in levels
of market interest rates, (primarily increases in market interest rates), could
materially adversely affect our interest rate spread, asset quality, loan
origination volume and overall financial condition and results of
operations.
To
mitigate the impact of changes in market interest rates on our interest-earning
assets and interest-bearing liabilities, we actively manage the amounts and
maturities of these assets and liabilities. A key component of this
strategy is the origination and retention of short-term and adjustable-rate
assets and the origination and sale of fixed-rate loans. We retain
short-term and adjustable-rate assets because they have re-pricing
characteristics that more closely match the re-pricing characteristics of our
liabilities.
To
further mitigate the risk of timing differences in the re-pricing of assets
and
liabilities, our interest-earning assets are matched with interest-bearing
liabilities that have similar re-pricing characteristics. For
example, the interest rate risk of holding fixed-rate loans is managed with
long-term deposits and borrowings, and the risk of holding ARMs is managed
with
short-term deposits and borrowings. Periodically, mismatches are
identified and managed by adjusting the re-pricing characteristics of our
interest-bearing liabilities with derivatives, such as interest rate caps and
interest rate swaps.
ITEM
8. CONSOLIDATED FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Please
refer to the index on page 59 for the Consolidated Financial Statements of
Greater Atlantic Financial Corp. and subsidiaries, together with the report
thereon by BDO Seidman, LLP.
ITEM 9.
|
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
9A. CONTROLS AND PROCEDURES
Pursuant
to an investigation being conducted under the supervision of the company’s Audit
Committee, management discovered a $2.1 million difference in an inter-company
account between the company and its subsidiary, GAMC. The company
discovered the un-reconciled inter-company account at GAMC during its review
of
the closing entries to the accounts of GAMC in connection with the preparation
of the company’s consolidated financial statements for the quarterly period
ended June 30, 2006. The investigation resulted in a determination
that the warehouse payable account maintained at GAMC had not been properly
reconciled.
The
extensive investigation revealed numerous errors in the reconciliation of the
warehouse payable account of GAMC over a period of five (5) years. As
a result of the investigation, the company determined that it has sustained
losses aggregating approximately $1.4 million. To date, the company
has identified claims of $738,000, primarily for duplicate checks issued and
paid on the same loan. Of that sum, $422,000 has been collected and
the company believes that the balance is recoverable. The
investigation regarding this matter is ongoing and the company has retained
legal and accounting personnel to assist in the company’s investigation. Costs
associated with engaging personnel to provide those professional services are
being treated as period costs.
The
company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed by the company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and regulations and that such
information is accumulated and communicated to the company's management,
including the company's Chief Executive Officer and Chief Financial Officer,
as
appropriate, to allow timely decisions regarding required disclosure. Because
of
the inherent limitations in all control systems, no evaluation of controls
can
provide absolute assurance that the company's disclosure controls and procedures
will detect or uncover every situation involving the failure of persons within
the company or its subsidiary to disclose material information otherwise
required to be set forth in the company's periodic reports.
The
company, under the supervision and with the participation of the company's
management, including the company's Chief Executive Officer and the Chief
Financial Officer, has evaluated the effectiveness of the company's disclosure
controls and procedures as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer and the Chief Financial
Officer have concluded that the company's disclosure controls and procedures
were not effective as of June 30, 2006 due to the override of certain internal
control procedures relating to preparation and review of certain
reconciliations. The override of those internal control procedures
enabled the differences in the reconciliations performed at GAMC to go
un-detected over a long period of time. While the bank had outsourced
its internal audit function to an independent CPA firm, neither their review
of
the reconciliations or that of the company’s then controller uncovered any
errors that were brought to the attention of senior
management. The person responsible for the reconciliations at
GAMC is no longer employed by GAMC, and the then controller of the bank, who
was
responsible for review of the reconciliations at GAMC, is no longer employed
by
the bank.
While
the
problem was isolated to one unique account with a subsidiary that is no longer
in business, and was the responsibility of individuals who are no longer
employed by subsidiaries of the company, the company has enhanced controls
in
similar situations going forward by:
·
|
Strengthening
the procedures for reconciling the intercompany accounts. Those
procedures include having an outside party
perform reconciliations semi-annually instead
of merely reviewing reconciliations performed by parties with
account responsibility; and
|
·
|
The
company has strengthened the accounting staff at the controller
position.
|
In
connection with this Form 10-K, the company's management, with the participation
of its Chief Executive Officer and Chief Financial Officer, evaluated the
company's disclosure controls and procedures as currently in effect, including
the changes discussed above, and such officers have concluded that, as of this
date, the company's disclosure controls and procedures are
effective.
Management
of the company is also responsible for establishing and maintaining adequate
internal control over financial reporting and control of the company's assets
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of
America. Other than those described above, there were no significant
changes in the company's internal control over financial reporting during the
company's quarter ended September 30, 2006 that have materially affected, or
are
reasonably likely to materially affect, the company's internal control over
financial reporting.
ITEM
9B. OTHER INFORMATION
During
the quarter ended September 30, 2006, the company filed a Current Report on
Form
8-K for all information required to be disclosed in a report on Form
8-K.
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE COMPANY.
Directors
The
following table sets forth information regarding the board of directors of
the
company. Each of the directors of the company is also a director of
the bank.
Name
|
|
Age
|
|
Position(s)
Held With the Company
|
|
Director
Since
|
|
Term
Expires
|
Carroll
E. Amos
|
|
59
|
|
Director,
President and Chief Executive Officer
|
|
1997
|
|
2008
|
Sidney
M. Bresler
|
|
52
|
|
Director
|
|
2003
|
|
2007
|
Charles
W. Calomiris
|
|
49
|
|
Director,
Chairman of the Board of Directors
|
|
2001
|
|
2008
|
Paul
J. Cinquegrana
|
|
65
|
|
Director
|
|
1997
|
|
2009
|
Jeffrey
M. Gitelman
|
|
62
|
|
Director
|
|
1997
|
|
2007
|
Jeffrey
W. Ochsman
|
|
54
|
|
Director
|
|
1999
|
|
2009
|
James
B. Vito
|
|
81
|
|
Director
|
|
1998
|
|
2008
|
Executive
Officers Who are Not Directors
The
following table sets forth information regarding the executive officers of
the
company and the bank who are not also directors.
Name
|
|
Age
|
|
Position(s)
Held With the Company
|
Edward
C. Allen
|
|
58
|
|
Senior
Vice President and Chief Operating Officer of the Bank and Corporate
Secretary of the Company and the Bank
|
Justin
R. Golden
|
|
56
|
|
Senior
Vice President, Consumer Lending, of the Bank
|
Gary
L. Hobert
|
|
57
|
|
Senior
Vice President, Commercial Business Lending, of the
Bank
|
Robert
W. Neff
|
|
59
|
|
Senior
Vice President, Commercial Real Estate Lending, of the
Bank
|
David
E. Ritter
|
|
56
|
|
Senior
Vice President and Chief Financial Officer of the Company and the
Bank
|
Each
of
the executive officers of the company and the bank holds his or her office
until
his or her successor is elected and qualified or until removed or
replaced. Officers are subject to re-election by the board of
directors annually.
Biographical
Information
Directors
Charles
W. Calomiris, Chairman of the Board of Directors of the company and the
bank. Mr. Calomiris is currently the Henry Kaufman Professor of
Finance and Economics at the Columbia University Graduate School of Business
and
a professor at the School of International and Public Affairs at
Columbia. During the last five years he has served as a
consultant to the Federal Reserve Board as well as to Federal Reserve Banks
and
the World Bank, to the governments of states and foreign countries and to major
U. S. corporations.
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.
Sidney
M.
Bresler is Chief Executive Officer of Bresler & Reiner Inc., engaged in
residential land development and construction and rental property ownership
and
management.
Paul
J.
Cinquegrana is a Principal of Washington Securities Corporation, 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, Sloan, Kletzkin
& Ochsman, PLLC, Washington, D.C.
James
B.
Vito is a managing general partner of 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.
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.
Gary
L.
Hobert joined the bank as Senior Vice President of the Commercial Business
Lending Department in 2001. From 2000 until joining the bank, Mr.
Hobert was the Senior Vice President of Adams National Bank. From
1998 until 2000 he served as Executive Vice President and Senior Loan Officer
for Grandbank.
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
Section
16(a) of the Securities and Exchange Act requires the company's executive
officers and directors, and persons who own more than ten percent of a
registered class of the company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the National Association of Securities Dealers, Inc., and to furnish the
company with copies of all Section 16(a) forms they file.
Based
solely on its review of the copies of such forms received by it, or written
representations from certain reporting persons that no Forms 5 were required
for
those persons, the company believes that all filing requirements applicable
to
its executive officers and directors were met during fiscal 2006.
Code
of
Ethics and Business Conduct
The
company has adopted a Code of Ethics and Business Conduct applicable to all
employees, officers and directors of the company and its
subsidiaries. A copy of the Code of Ethics and Business Conduct
will be furnished without charge to stockholders of record upon written request
to Greater Atlantic Financial Corp., Mr. Edward C. Allen, Corporate Secretary,
10700 Parkridge Boulevard, Suite P50, Reston, Virginia 20191.
Audit
Committee Financial Expert
No
current member of the Audit Committee qualifies as an “audit committee financial
expert” as defined in the rules of the Securities and Exchange
Commission. The company is currently seeking an additional director
who will qualify as an “audit committee financial expert,” but has not found a
qualified candidate who is willing to serve in that capacity.
ITEM
11. EXECUTIVE COMPENSATION
Summary
Compensation Table. The following table sets forth the cash
compensation paid by the company for services rendered in all capacities during
the fiscal years ended September 30, 2006, 2005 and 2004, to the Chief Executive
Officer, and for each of the other executive officers of the company who
received salary and bonus in excess of $100,000 (collectively, the "Named
Executive Officers").
|
|
|
|
Annual
Compensation
|
|
Long-Term
Compensation Awards Issued
|
|
Name
and Principal Position
|
Fiscal
Year
|
Salary
|
Bonus
|
Compensation
|
Other
|
|
Restricted
Stock Awards
|
Securities
Underlying Options
|
All
Other Compensation
|
Carroll
E. Amos,
|
2006
|
$182,000
|
$ -
|
$182,000
|
$ -
|
|
-
|
-
|
-
|
President
and Chief
|
2005
|
$182,000
|
$ -
|
$182,000
|
$ -
|
|
-
|
-
|
-
|
Executive
Officer
|
2004
|
$182,000
|
$ -
|
$182,000
|
$ -
|
|
-
|
10,000
|
-
|
|
|
|
|
|
|
|
|
|
|
Edward
C. Allen
|
2006
|
$115,000
|
$ -
|
$115,000
|
$ -
|
|
-
|
-
|
-
|
Senior
Vice President, Chief Operating
|
2005
|
$103,800
|
$ -
|
$103,800
|
$ -
|
|
-
|
-
|
-
|
Officer
and Secretary
|
2004
|
$100,300
|
$ -
|
$100,300
|
$ -
|
|
-
|
3,000
|
-
|
|
|
|
|
|
|
|
|
|
|
David
E. Ritter
|
2006
|
$108,000
|
$ -
|
$108,000
|
$ -
|
|
-
|
-
|
-
|
Senior
Vice President and
|
|
|
|
|
|
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
For
2006,
2005 and 2004, there were no (a) perquisites over the lesser of $50,000 or
10%
of the Chief Executive Officer’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.
Employment
Agreement. The company has entered into an employment
agreement with Mr. Carroll E. Amos. The Employment Agreement is intended to
ensure that the bank and the company will be able to maintain 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 the Chief Executive Officer.
The
Employment Agreement provides for a three-year term for Mr. Amos and provides
that commencing on the first anniversary date and continuing each anniversary
date thereafter the board of directors may extend the Employment Agreement
for
an additional year so that the remaining term shall be three years, unless
written notice of non-renewal is given by the board of directors after
conducting a performance evaluation of Mr. Amos. The Employment
Agreement provides that Mr. Amos’s base salary will be reviewed
annually. The base salary provided for in the Employment Agreement
for Mr. Amos was increased to $165,400 at the fourth anniversary date and to
$182,000 on January 1, 2003. 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.
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 and pay for Mr. Amos's life, health and disability coverage for
the remaining term of the Employment Agreement. Upon any termination
of Mr. Amos’s employment, 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) two 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
$364,000.
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
is 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.
Directors'
Compensation
Fees. Since
the formation of the company, the executive officers, directors and other
personnel have been compensated for services by the bank and have not received
additional remuneration from the company. Beginning on October 1,
1998, the Chairman was made a salaried officer of the bank and the company
and
in those capacities received compensation at the rate of $3,000 per
month. Since January 1, 2003, each outside directors of the bank has
received $750 for each Board meeting and $350 for each committee meeting
attended.
Stock
Option and Warrant Plans
Under
the
Greater Atlantic Financial Corp. 1997 Stock Option and Warrant Plan (the "Option
Plan"), which was ratified by shareholders in 1997 and amended in 2000 and
2002,
options are granted to employees at the discretion of a committee comprised
of
disinterested directors who administer the plan.
There
were no options granted to the Chief Executive Officer in fiscal year
2006.
The
following table provides information regarding Messrs. Amos, Allen and Ritter’s
unexercised stock options as of September 30, 2006. Messrs. Amos,
Allen and Ritter did no exercise any stock options and were not granted any
stock options during the fiscal year ended September 30, 2006.
|
|
|
|
|
|
Fiscal
Year-End Options/SAR Values
|
Name
|
|
Shares
Acquired on Exercise (#)
|
|
Value
Realized ($)
|
|
Number
of Securities Underlying Unexercised Options at
Fiscal
Year End (#)
Exercisable/
Unexercisable
|
|
Value
of Unexercised
In-the-Money
Options
at
Fiscal Year End ($)
Exercisable/Unexercisable
(1)
|
Carroll
E. Amos
|
|
0
|
|
0
|
|
75,000
/ 0
|
|
$8,059
|
Edward
C. Allen
|
|
0
|
|
0
|
|
18,000
/ 0
|
|
$8,370
|
David
E. Ritter
|
|
0
|
|
0
|
|
18,000
/ 0
|
|
$7,440
|
(1)
|
Value
of unexercised in-the-money stock options equals the market value
of
shares covered by in-the-money options on September 29, 2006 (the
last
trading day in 2006) less the option exercise price. Options
are in-the-money if the market value of shares covered by the options
is
greater than the exercise price.
|
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Persons
and groups owning in excess of five percent of the company's Common Stock are
required to file certain reports regarding such ownership with the company
and
with the Securities and Exchange Commission ("SEC"), in accordance with the
Securities Exchange Act of 1934 (the "Exchange Act").
The
following table sets forth information regarding persons known to be beneficial
owners of more than five percent of the company's outstanding Common Stock
as of
December 31, 2006.
Title
of Class
|
Name
and Address
of
Beneficial Owner
|
Amount
and Nature of
Beneficial
Ownership
|
Percent
of
Class
|
|
|
|
|
Common
Stock
|
Charles
W. Calomiris
251
Fox Meadow Road
Scarsdale,
New York 10583
|
176,807
shares(1)(2)
|
5.85%
|
Common
Stock
|
Robert
I. Schattner, DDS
121
Congressional Lane
Rockville,
MD 20852
|
432,328
shares(1)(3)
|
14.21%
|
Common
Stock
|
The
Ochsman Children Trust
1650
Tysons Boulevard
McLean,
VA 22102
|
238,597
shares(1)(4)
|
7.90%
|
Common
Stock
|
George
W. Calomiris
4848
Upton Street, N.W.
Washington,
DC 20016
|
199,715
shares(5)
|
6.41%
|
Common
Stock
|
Jenifer
Calomiris
4919
Upton Street, N.W.
Washington,
D.C. 20016
|
190,438
shares(6)
|
6.12%
|
Common
Stock
|
Katherine
Calomiris Tompros
5100
Van Ness Street, N.W.
Washington,
D.C. 20016
|
190,638
shares(7)
|
6.13%
|
_________________
(1)
|
Does
not include presently exercisable warrants to purchase 9,166, 20,000
and
13,334 shares held, respectively, by Charles W. Calomiris, Dr. Schattner,
and The Ochsman Children Trust under the Greater Atlantic Financial
Corp.
1997 Stock Option Plan, or shares of preferred securities presently
convertible into 114,841, 330,099 and 69,545 shares of common stock
held,
respectively, by Charles W. Calomiris Dr. Schattner and the Ochsman
Children Trust.
|
(2)
|
The
information furnished is derived from a Schedule 13D filed by Charles
W.
Calomiris on July 25, 2003, and a Form 4 filed on July 24,
2003.
|
(3)
|
The
information furnished is derived from a Schedule 13D and a Form 4
filed by
Robert I Schattner filed on September 6,
2005.
|
(4) The
information furnished is derived from a Schedule 13D filed by The Ochsman
Children Trust on April 9, 2002.
|
(5)
|
Includes
presently exercisable warrants to purchase 9,167 shares and shares
of
preferred securities presently convertible into 85,754 shares of
common
stock held by George W. Calomiris. The information furnished is
derived from a Schedule 13D filed by George Calomiris on December
7,
2004.
|
|
(6)
|
Includes
presently exercisable warrants to purchase 9,167 shares and shares
of
preferred securities presently convertible into 79,747 shares of
common
stock held by Jenifer Calomiris. The information furnished is
derived from a Schedule 13D filed by Jenifer Calomiris on March 21,
2003.
|
|
(7)
|
Includes
presently exercisable warrants to purchase 9,167 shares and shares
of
preferred securities presently convertible into 79,747 shares of
common
stock held by Katherine Calomiris Tompros. The information
furnished is derived from a Schedule 13D filed by Katherine Calomiris
Tompros on March 21, 2003.
|
Information
with Respect to Directors and Executive Officers
The
following table sets forth, as of December 31, 2006, the names of the directors,
and executive officers of the company as well as their ages; a brief description
of their recent business experience, including present occupations and
employment; certain directorships held by each; the year in which each became
a
director of the company and the year in which his term as director of the
company expires. This table also sets forth the amount of Common
Stock and the percent thereof beneficially owned as of the December 31, 2006
by
each director and all directors and executive officers as a group as of the
December 31, 2006.
Name
and Principal
Occupation
at Present
|
|
|
|
Shares
of
Common
Stock
Beneficially
Owned (1)
|
Ownership
as a
Percent
of
|
|
|
|
|
|
|
Charles
W. Calomiris, Chairman of the Board of the Company, is the Henry
Kaufman
Professor of Finance and Economics at the Columbia University Graduate
School of Business.
|
49
|
2001
|
2008
|
176,807(2)(3)
|
5.85%
|
Carroll
E. Amos, President and Chief
Executive
Officer of the company, is a private investor who until 1996 served
as
President and Chief Executive Officer of 1st Washington Bancorp and
Washington Federal Savings Bank.
|
59
|
1997
|
2008
|
44,060(4)
|
1.46%
|
James
B. Vito is Managing General
Partner,
James Properties, engaged in the sale and management of
property.
|
81
|
1998
|
2008
|
79,042(2)
|
2.62%
|
|
|
|
|
|
|
Paul
J. Cinquegrana is a Principal of
Washington
Securities Corporation, stock and bond brokerage firm.
|
65
|
1997
|
2006
|
52,134(2)
|
1.73%
|
Jeffrey
W. Ochsman is an attorney and partner of the law firm of Friedlander,
Misler, Sloan, Kletzkin & Ochsman, PLLC.
|
54
|
1999
|
2006
|
500
|
*
|
Jeffrey
M. Gitelman, D.D.S., is an Oral Surgeon and the owner of Jeffrey
M.
Gitelman – D.D.S., P.C.
|
62
|
1997
|
2007
|
84,913(2)
|
2.81%
|
Sidney
M. Bresler is a Director, Chief Executive Officer and Chief Operating
Officer of Bresler & Reiner, Inc. engaged in residential land
development and construction and rental property ownership and
management.
|
52
|
2003
|
2007
|
500
|
*
|
Name
and Principal
Occupation
at Present
and
for Past Five Years
|
|
Shares
of
Common
Stock
Beneficially
Owned(1)
|
Ownership
as A
Percent
of Class
|
Executive
Officers
Who
Are Not Directors
|
|
|
|
Edward
C. Allen joined the bank as Chief Financial Officer and became Chief
Operating Officer in 1997.
|
|
550(4)
|
*
|
David
E. Ritter joined the bank and the company as a Senior Vice President
and
Chief Financial Officer in 1998.
|
56
|
300(4)
|
*
|
|
|
|
|
|
|
|
|
All
directors and executive officers as a group (eight
persons)(3)
|
|
438,806
|
14.53%
|
(1)
|
Each
person effectively exercises sole voting or dispositive power as
to shares
reported.
|
(2)
|
Does
not include presently exercisable warrants to purchase 9,166, 3,334,
3,334, and 2,000 shares, respectively, held by Messrs. Calomiris,
Gitelman, Cinquegrana, and Vito under the Greater Atlantic Financial
Corp.
1997 Stock Option Plan, or shares of preferred securities presently
convertible into 114,841, 34,970, 37,797, 17,387, and 6,431 shares
of
common stock held, respectively, by Messrs. Calomiris, Vito, Cinquegrana,
Gitelman and Amos.
|
(3)
|
Includes
128,727 shares held directly, 10,000 shares held by his spouse and
38,080
shares held as custodian for minor
children.
|
(4)
|
Does
not include presently exercisable options to purchase 75,000 shares
granted to Mr. Amos or 18,000 granted to Mr. Allen and Mr. Ritter
under
the Greater Atlantic Financial Corp. 1997 Stock Option and Warrant
Plan.
|
*
|
Does
not exceed 1.0% of
the company's Common Stock.
|
The
following table summarizes share and exercise price information about the
company’s equity compensation plans as of September 30, 2006.
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
Equity
compensation plans approved by security holders:
|
|
|
|
1997
Stock Option and Warrant Plan
|
431,171
|
$6.94
|
83,500
|
Equity
compensation plans not approved by security holders
|
N/A
|
N/A
|
N/A
|
Total
|
431,171
|
$6.94
|
83,500
|
ITEM
13. 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. As of September
30, 2006, one of the bank's directors had loans with the bank which had
outstanding balances totaling $164,000. Such loans were made by the
bank in the ordinary course of business, with no favorable terms and do not
involve more than the normal risk of collectibility or present unfavorable
features.
The
company’s policy is that all transactions between the company and its executive
officers, directors, holders of 10% or more of the shares of any class of its
common stock and affiliates thereof, will contain terms no less favorable to
the
company than could have been obtained by it in arm's length negotiations with
unaffiliated persons and will be approved by a majority of independent outside
directors of the company not having any interest in the
transaction.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
Audit
Fees
BDO
Seidman, LLP billed the company aggregate fees of $249,000 and $185,705 for
professional services rendered for the audit of the company's annual
consolidated financial statements and for the reviews of the condensed
consolidated financial statements included in the company's Forms 10-Q for
the
fiscal year ended September 30, 2006 and 2005, respectively. Before
the company or any subsidiary engages an accountant, the company’s audit
committee approves the engagement.
Audit-Related
Fees
BDO
Seidman, LLP did not provide any such services to the company for the fiscal
year ended September 30, 2006 or 2005.
Tax
Fees
BDO
Seidman billed the company $35,600 and $19,850 for tax services for the fiscal
year ended September 30, 2006 and 2005, respectively. Tax fees
represented 20.05% of the fees paid to BDO Seidman, LLP in fiscal year 2006
and
9.66% in fiscal year 2005.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
(a)
1. Financial Statements
See
Index to
Consolidated Financial Statements on page 59
2.
|
Financial
Statement Schedules
|
|
All
schedules are omitted because they are not required or applicable,
or the
required information is shown in the consolidated financial statements
or
the notes thereto.
|
(b)
Exhibits
23.1Consent of BDO Seidman, LLP
|
31.1Certification
of Chief Executive Officer
|
|
31.2Certification
of Chief Financial Officer
|
32.1Certification of Chief Executive Officer pursuant to 18 U.S.C.
1350
32.2Certification of Chief Financial Officer pursuant to 18 U.S.C.
1350
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
GREATER
ATLANTIC FINANCIAL CORP.
By:
/s/
Carroll E.
Amos
Carroll E. Amos
Chief
Executive Officer, President and Director
Dated: January 31, 2007
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report
has
been signed by the following persons of the registrant and in the capacities
and
on the dates indicated.
Name
|
Title
|
Date
|
/s/
Charles W. Calomiris
Charles
W. Calomiris
|
Chairman
of the Board
|
January
31, 2007
|
/s/
Carroll E. Amos
Carroll
E. Amos
|
Chief
Executive Officer,
And
President and Director
|
January
31, 2007
|
/s/
Sidney M. Bresler
Sidney
M. Bresler
|
Director
|
January
31, 2007
|
/s/
Paul J. Cinquegrana
Paul
J. Cinquegrana
|
Director
|
January
31, 2007
|
/s/
Jeffrey M. Gitelman
Jeffrey
M. Gitelman
|
Director
|
January
31, 2007
|
/s/
Jeffrey W. Ochsman
Jeffrey
W. Ochsman
|
Director
|
January
31, 2007
|
/s/
James B. Vito
James
B. Vito
|
Director
|
January
31, 2007
|
/s/
David E. Ritter
David
E. Ritter
|
Senior
Vice President and
Chief
Financial Officer
|
January
31, 2007
|
Consolidated
Financial Statements of
Greater
Atlantic Financial Corp.
Index
|
|
|
Page
|
Report
of Independent Registered Public Accounting Firm
|
60
|
Consolidated
Statements of Financial Condition as of September 30, 2006 and 2005
(restated)
|
61
|
Consolidated
Statements of Operations for the Years Ended September 30, 2006,
2005
(restated) and 2004 (restated)
|
62
|
Consolidated
Statements of Comprehensive Income (Loss) for the Years Ended
September
30, 2006, 2005 (restated) and 2004 (restated)
|
63
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended September 30, 2006,
2005 (restated) and 2004 (restated)
|
63
|
Consolidated
Statements of Cash Flows for the Years Ended September 30, 2006,
2005
(restated) and 2004 (restated)
|
64
|
Notes
to Consolidated Financial Statements
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
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, 2006 and 2005 (restated), and the related consolidated statements
of operations, comprehensive income (loss), stockholders’ equity, and cash flows
for each of the three years in the period ended September 30, 2006 (2005 and
2004 restated). 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of
its
internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such
opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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, 2006 and 2005 (restated) and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 2006 (2005 and 2004 restated) in conformity with
accounting principles generally accepted in the United States of
America.
As
described in Note 2, the Company restated its consolidated Statement of
Financial Condition as of September 30, 2005 and the related consolidated
statements of operations, comprehensive income (loss), stockholders’ equity and
cash flows for each of the two years in the period ended September 30,
2005.
/s/
BDO Seidman, LLP
Richmond,
Virginia
January
30, 2007
Greater
Atlantic Financial Corp. and Subsidiaries
Consolidated
Statements of Financial Condition
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,516
|
|
|
$ |
2,291
|
|
Interest
bearing deposits
|
|
|
17,288
|
|
|
|
2,418
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
75,461
|
|
|
|
107,829
|
|
Held-to-maturity
|
|
|
4,696
|
|
|
|
7,969
|
|
Loans
held for sale
|
|
|
-
|
|
|
|
9,517
|
|
Loans
receivable, net
|
|
|
193,307
|
|
|
|
194,920
|
|
Accrued
interest and dividends receivable
|
|
|
2,073
|
|
|
|
1,746
|
|
Deferred
income taxes
|
|
|
1,928
|
|
|
|
1,974
|
|
Federal
Home Loan Bank stock, at cost
|
|
|
2,388
|
|
|
|
2,503
|
|
Other
real estate owned
|
|
|
-
|
|
|
|
232
|
|
Premises
and equipment, net
|
|
|
2,764
|
|
|
|
4,198
|
|
Goodwill
|
|
|
956
|
|
|
|
956
|
|
Prepaid
expenses and other assets
|
|
|
1,842
|
|
|
|
2,989
|
|
Total
Assets
|
|
$ |
305,219
|
|
|
$ |
339,542
|
|
Liabilities
and stockholders’ equity
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
230,174
|
|
|
$ |
237,794
|
|
Advance
payments from borrowers for taxes and insurance
|
|
|
270
|
|
|
|
268
|
|
Accrued
expenses and other liabilities
|
|
|
1,963
|
|
|
|
1,248
|
|
Advances
from the FHLB and other borrowings
|
|
|
54,574
|
|
|
|
76,479
|
|
Junior
subordinated debt securities
|
|
|
9,388
|
|
|
|
9,378
|
|
Total
liabilities
|
|
|
296,369
|
|
|
|
325,167
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock $.01 par value - 2,500,000 shares authorized, none
outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $.01 par value – 10,000,000
|
|
|
|
|
|
|
|
|
shares
authorized; 3,020,934 shares outstanding
|
|
|
30
|
|
|
|
30
|
|
Additional
paid-in capital
|
|
|
25,228
|
|
|
|
25,228
|
|
Accumulated
deficit
|
|
|
(15,359 |
) |
|
|
(9,788 |
) |
Accumulated
other comprehensive loss
|
|
|
(1,049 |
) |
|
|
(1,095 |
) |
Total
stockholders’ equity
|
|
|
8,850
|
|
|
|
14,375
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
305,219
|
|
|
$ |
339,542
|
|
See
accompanying notes to consolidated financial statements.
Greater
Atlantic Financial Corp. and Subsidiaries
Consolidated
Statements of Operations
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
(Dollars
in Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
13,866
|
|
|
$ |
12,430
|
|
|
$ |
12,629
|
|
Investments
|
|
|
4,928
|
|
|
|
4,528
|
|
|
|
5,456
|
|
Total
interest income
|
|
|
18,794
|
|
|
|
16,958
|
|
|
|
18,085
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
7,709
|
|
|
|
6,337
|
|
|
|
5,751
|
|
Borrowed
money
|
|
|
3,596
|
|
|
|
4,209
|
|
|
|
6,219
|
|
Total
interest expense
|
|
|
11,305
|
|
|
|
10,546
|
|
|
|
11,970
|
|
Net
interest income
|
|
|
7,489
|
|
|
|
6,412
|
|
|
|
6,115
|
|
Provision
for loan losses
|
|
|
126
|
|
|
|
219
|
|
|
|
209
|
|
Net
interest income after provision for loan losses
|
|
|
7,363
|
|
|
|
6,193
|
|
|
|
5,906
|
|
Noninterest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
and service charges
|
|
|
610
|
|
|
|
734
|
|
|
|
869
|
|
Gain
(loss) on sale of loans
|
|
|
-
|
|
|
|
53
|
|
|
|
(68 |
) |
Gain
(loss)on sale of investment securities
|
|
|
-
|
|
|
|
539
|
|
|
|
(58 |
) |
Gain
(loss) on derivatives
|
|
|
(66 |
) |
|
|
836
|
|
|
|
(227 |
) |
Gain
on sale of real estate owned
|
|
|
65
|
|
|
|
-
|
|
|
|
-
|
|
Other
operating income
|
|
|
30
|
|
|
|
1,011
|
|
|
|
31
|
|
Total
noninterest income
|
|
|
639
|
|
|
|
3,173
|
|
|
|
547
|
|
Noninterest
expense
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
|
4,718
|
|
|
|
4,213
|
|
|
|
4,306
|
|
Occupancy
|
|
|
1,337
|
|
|
|
1,337
|
|
|
|
1,759
|
|
Professional
services
|
|
|
1,227
|
|
|
|
969
|
|
|
|
717
|
|
Advertising
|
|
|
628
|
|
|
|
301
|
|
|
|
244
|
|
Deposit
insurance premium
|
|
|
101
|
|
|
|
100
|
|
|
|
44
|
|
Furniture,
fixtures and equipment
|
|
|
554
|
|
|
|
641
|
|
|
|
818
|
|
Data
processing
|
|
|
919
|
|
|
|
1,054
|
|
|
|
1,306
|
|
Other
operating expenses
|
|
|
1,601
|
|
|
|
1,274
|
|
|
|
1,176
|
|
Total
noninterest expense
|
|
|
11,085
|
|
|
|
9,889
|
|
|
|
10,370
|
|
Income
(loss) from continuing operations before income taxes
|
|
|
(3,083 |
) |
|
|
(523 |
) |
|
|
(3,917 |
) |
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income
(loss) from continuing operations
|
|
|
(3,083 |
) |
|
|
(523 |
) |
|
|
(3,917 |
) |
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
(2,488 |
) |
|
|
(1,107 |
) |
|
|
428
|
|
Net
income (loss)
|
|
$ |
(5,571 |
) |
|
$ |
(1,630 |
) |
|
$ |
(3,489 |
) |
Earnings
(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(1.02 |
) |
|
$ |
(0.17 |
) |
|
$ |
(1.30 |
) |
Discontinued
operations
|
|
|
(0.82 |
) |
|
|
(0.37 |
) |
|
|
0.14
|
|
|
|
$ |
(1.84 |
) |
|
$ |
(0.54 |
) |
|
$ |
(1.16 |
) |
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
3,020,934
|
|
|
|
3,015,509
|
|
|
|
3,012,434
|
|
See
accompanying notes to consolidated financial statements.
Greater
Atlantic Financial Corp. and Subsidiaries
Consolidated
Statements of Comprehensive Income (Loss)
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
(In
Thousands)
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
Net
(loss) income
|
|
$ |
(5,571 |
) |
|
$ |
(1,630 |
) |
|
$ |
(3,489 |
) |
Other
comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(loss) income on securities
|
|
|
46
|
|
|
|
(16 |
) |
|
|
(1,008 |
) |
Other
comprehensive (loss) income
|
|
|
46
|
|
|
|
(16 |
) |
|
|
(1,008 |
) |
Comprehensive
(loss) income
|
|
$ |
(5,525 |
) |
|
$ |
(1,646 |
) |
|
$ |
(4,497 |
) |
See
accompanying notes to consolidated financial statements
Greater
Atlantic Financial Corp. and Subsidiaries
Consolidated
Statements of Stockholders’ Equity
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Earnings
(Deficit)
|
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
|
Total
Stockholders’
Equity
|
|
(In
Thousands)
|
|
|
|
Balance
at September 30, 2003 (as restated)
|
|
$ |
-
|
|
|
$ |
30
|
|
|
$ |
25,152
|
|
|
$ |
(4,669 |
) |
|
$ |
(71 |
) |
|
$ |
20,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,008 |
) |
|
|
(1,008 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,489 |
) |
|
|
-
|
|
|
|
(3,489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2004 (as restated)
|
|
|
-
|
|
|
|
30
|
|
|
|
25,152
|
|
|
|
(8,158 |
) |
|
|
(1,079 |
) |
|
|
15,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
76
|
|
|
|
-
|
|
|
|
-
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,630 |
) |
|
|
-
|
|
|
|
(1,630 |
) |
Balance
at September 30, 2005 (as restated)
|
|
|
-
|
|
|
|
30
|
|
|
|
25,228
|
|
|
|
(9,788 |
) |
|
|
(1,095 |
) |
|
|
14,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,571 |
) |
|
|
-
|
|
|
|
(5,571 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2006
|
|
$ |
-
|
|
|
$ |
30
|
|
|
$ |
25,228
|
|
|
$ |
(15,359 |
) |
|
$ |
(1,049 |
) |
|
$ |
8,850
|
|
See
accompanying notes to consolidated financial statements
Greater
Atlantic Financial Corp. and Subsidiaries
Consolidated
Statements of Cash Flows
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
|
2005
(Restated)
|
|
|
2004
(Restated)
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
Cash
flow from operating activities
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(5,571 |
) |
|
$ |
(1,630 |
) |
|
$ |
(3,489 |
) |
Adjustments
to reconcile net income (loss) to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
Provided
(used) by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
126
|
|
|
|
219
|
|
|
|
209
|
|
Amortization
of loan acquisition adjustment
|
|
|
(50 |
) |
|
|
(27 |
) |
|
|
(27 |
) |
Depreciation
and amortization
|
|
|
658
|
|
|
|
930
|
|
|
|
986
|
|
(Gain)
loss on disposal of fixed assets
|
|
|
(26 |
) |
|
|
91
|
|
|
|
-
|
|
Option
compensation
|
|
|
-
|
|
|
|
42
|
|
|
|
-
|
|
Realized
loss (gain) on trading securities
|
|
|
-
|
|
|
|
-
|
|
|
|
135
|
|
Realized
gain on sale of investment securities
|
|
|
-
|
|
|
|
-
|
|
|
|
(77 |
) |
Realized
gain on sale of mortgaged-backed securities
|
|
|
-
|
|
|
|
(539 |
) |
|
|
-
|
|
Loss
(gain) on derivatives
|
|
|
66
|
|
|
|
(836 |
) |
|
|
227
|
|
Amortization
of investment security premiums
|
|
|
753
|
|
|
|
853
|
|
|
|
1,573
|
|
Amortization
of mortgage-backed security premiums
|
|
|
662
|
|
|
|
937
|
|
|
|
1,453
|
|
Amortization
of deferred fees
|
|
|
(496 |
) |
|
|
(635 |
) |
|
|
(563 |
) |
Discount
accretion net of premium amortization
|
|
|
(277 |
) |
|
|
(361 |
) |
|
|
628
|
|
Amortization
of convertible preferred stock costs
|
|
|
9
|
|
|
|
9
|
|
|
|
9
|
|
(Gain)
loss on sale of foreclosed real estate
|
|
|
(65 |
) |
|
|
-
|
|
|
|
-
|
|
Gain
on sale of loans held for sale
|
|
|
(1,522 |
) |
|
|
(4,720 |
) |
|
|
(9,191 |
) |
(Increase)
decrease in assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Disbursements
for origination of loans
|
|
|
(91,477 |
) |
|
|
(276,038 |
) |
|
|
(402,988 |
) |
Proceeds
from sales of loans
|
|
|
102,518
|
|
|
|
276,770
|
|
|
|
413,204
|
|
Accrued
interest and dividend receivable
|
|
|
(327 |
) |
|
|
193
|
|
|
|
359
|
|
Prepaid
expenses and other assets
|
|
|
1,156
|
|
|
|
360
|
|
|
|
(261 |
) |
Deferred
loan fees collected, net of deferred costs incurred
|
|
|
431
|
|
|
|
172
|
|
|
|
436
|
|
Increase
(decrease) in liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses and other liabilities
|
|
|
649
|
|
|
|
(451 |
) |
|
|
(3,382 |
) |
Net
cash provided by (used) in operating activities
|
|
$ |
7,217
|
|
|
$ |
(4,661 |
) |
|
$ |
(759 |
) |
(Continued)
Greater
Atlantic Financial Corp. and Subsidiaries
Consolidated
Statements of Cash Flows – (Continued)
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
|
2005
(Restated)
|
|
|
2004
(Restated)
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
Cash
flow from investing activities
|
|
|
|
|
|
|
|
|
|
Net
decrease (increase) in loans
|
|
$ |
1,879
|
|
|
$ |
51,867
|
|
|
$ |
(4,817 |
) |
Disposal
(purchases) of premises and equipment
|
|
|
792
|
|
|
|
2,055
|
|
|
|
(312 |
) |
Proceeds
from sales of foreclosed real estate
|
|
|
297
|
|
|
|
-
|
|
|
|
-
|
|
Purchases
of investment securities
|
|
|
(7,707 |
) |
|
|
(21,684 |
) |
|
|
(25,748 |
) |
Proceeds
from sale of investment securities
|
|
|
-
|
|
|
|
-
|
|
|
|
67,843
|
|
Proceeds
from repayments of investment securities
|
|
|
16,827
|
|
|
|
22,374
|
|
|
|
33,235
|
|
Purchases
of mortgage-backed securities
|
|
|
-
|
|
|
|
(24,224 |
) |
|
|
(63,056 |
) |
Proceeds
from sale of mortgage-backed securities
|
|
|
-
|
|
|
|
21,921
|
|
|
|
-
|
|
Proceeds
from repayments of mortgage-backed securities
|
|
|
25,198
|
|
|
|
37,548
|
|
|
|
54,932
|
|
Purchases
of FHLB stock
|
|
|
(3,015 |
) |
|
|
(5,169 |
) |
|
|
(15,875 |
) |
Proceeds
from sale of FHLB stock
|
|
|
3,130
|
|
|
|
6,751
|
|
|
|
16,130
|
|
Net
cash provided by (used) in investing activities
|
|
|
37,401
|
|
|
|
91,439
|
|
|
|
62,332
|
|
Cash
flow from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in deposits
|
|
|
(7,620 |
) |
|
|
(51,162 |
) |
|
|
(8,920 |
) |
Net
(repayments) advances from FHLB
|
|
|
(2,000 |
) |
|
|
(13,200 |
) |
|
|
(35,600 |
) |
Net
borrowings (repayments) on reverse repurchase agreements and other
borrowings
|
|
|
(19,905 |
) |
|
|
(26,386 |
) |
|
|
(12,971 |
) |
Increase
(decrease) in advance payments by borrowers for taxes and
insurance
|
|
|
2
|
|
|
|
(37 |
) |
|
|
81
|
|
Exercise
of stock options
|
|
|
-
|
|
|
|
34
|
|
|
|
-
|
|
Net
cash (used) in provided by financing activities
|
|
|
(29,523 |
) |
|
|
(90,751 |
) |
|
|
(57,410 |
) |
Increase
(decrease) in cash and cash equivalents
|
|
|
15,095
|
|
|
|
(3,973 |
) |
|
|
4,163
|
|
Cash
and cash equivalents, at beginning of year
|
|
|
4,709
|
|
|
|
8,682
|
|
|
|
4,519
|
|
Cash
and cash equivalents, at end of year
|
|
$ |
19,804
|
|
|
$ |
4,709
|
|
|
$ |
8,682
|
|
See
accompanying notes to consolidated financial statements.
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 was the ownership and management of Greater Atlantic Bank
(GAB or “the Bank”), and its wholly owned subsidiary, Greater Atlantic Mortgage
Corporation (GAMC). However, the mortgage-banking activities
conducted in GAMC were discontinued effective March 29, 2006 as it was
determined that, because it was unprofitable, this business no longer fit our
strategy. 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 was involved primarily in the origination
and sale of single-family mortgage loans and, to a lesser extent, multi-family
residential and second mortgage loans. The Company closed GAMC during
the fiscal year ended September 30, 2006, (see Note 3). GAMC also
originated loans for the Bank’s portfolio. In January 2002, GAFC
established Greater Atlantic Capital Trust I to issue certain convertible
preferred securities (see Note 22).
Principles
of Consolidation
The
consolidated financial statements include the accounts of GAFC and its wholly
owned subsidiaries, GAB and GAMC and Greater Atlantic Capital Trust
I. 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, 2006
and September 30, 2005, 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 14.
Concentration
of Credit Risk
The
Company's primary business activity is with customers located in Maryland,
Virginia and the District of Columbia. The Company primarily
originates residential loans to customers throughout these areas, most of whom
are residents local to the Company's business locations. The Company
has a diversified loan portfolio consisting of residential, commercial and
consumer loans. Commercial and consumer loans generally provide for
higher interest rates and shorter terms, however such loans have a higher degree
of credit risk. Management monitors all loans, including, when
possible, making inspections of the properties, maintaining current operating
statements, and performing net realizable value calculations with allowances
for
losses established as necessary to properly reflect the value of the
properties. Management believes the current loss allowances are
sufficient to cover the credit risk estimated to exist at September 30,
2006.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
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 would be 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
unless the loan principal and interest are determined by management to be fully
secured and in the process of collection.
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, 2006.
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.
Derivative
Financial Instruments
The
Company uses derivative financial instruments to mitigate market risk from
changes in interest rates. Our derivative financial instruments are
contracted in the over-the-counter market and include interest rate
swaps. Derivative financial instruments are accounted for in
accordance with Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities (SFAS 133), which requires
that all derivative instruments be recorded on the balance sheet at fair
value. Changes in the fair value of derivatives are recorded each
period either in current results of operations or other comprehensive income
(loss). For a derivative designated as part of a hedge transaction, where it
is
recorded is dependent on whether it is a fair value hedge or a cash flow
hedge. For a derivative designated as a fair value hedge, the gain or
loss of the derivative in the period of change and the offsetting loss or gain
of the hedged item attributed to the hedged risk are recognized in results
of
operations. For a derivative designated as a cash flow hedge, the effective
portion of the derivative's gain or loss is initially reported as a component
of
other comprehensive income (loss) and subsequently reclassified into results
of
operations when the hedged exposure affects results of operations. The
ineffective portion of the gain or loss of a cash flow hedge is recognized
currently in results of operations. For a derivative not designated as a hedging
instrument, the gain or loss is recognized currently in results of
operations. The Bank seeks to control or limit the interest rate risk
caused by mortgage banking activities. The method used to help reduce
interest rate risk from its mortgage banking activities are forward loan sale
agreements. At various times, depending on loan origination volume
and management’s assessment of projected loan fallout, the Bank may reduce or
increase its derivative positions.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
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. There were no loans sold with servicing rights
retained during the years ended September 30, 2006 and September 30,
2005. The Company also sells participation interests in loans that it
services.
Premises
and Equipment
Premises
and equipment are recorded at cost. Depreciation is computed on the
straight-line method over useful lives ranging from five to 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.
Guaranteed
Convertible Preferred Securities
On
July
1, 2003, the Company adopted Statement of Financial Accounting Standards No.
150, “Accounting for Mandatorily Redeemable Securities” (“SFAS
150”). SFAS 150 requires that the Company classify redeemable
securities with a mandatory redemption date as liabilities in its balance sheet
and classify distributions related to such securities as interest
expense. Also, SFAS 150 requires that the redeemable securities be
reflected at fair market value when reclassified as a
liability. Accordingly, the guaranteed convertible preferred
securities are presented as a liability in the Statements of Financial
Condition. The Company has consistently accounted for distributions
related to these securities as interest expense, and since the Company sold
the
securities in a public offering, there was no fair market value adjustment
necessary.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
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 12).
Cash
and Cash Equivalents
The
Company considers cash and interest bearing deposits in other banks as cash
and
cash equivalents for purposes of preparing the statement of cash
flows.
Use
of Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Comprehensive
Income
Statement
of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”
(“SFAS 130”), establishes standards for the reporting and display of
comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions
to
owners. Among other disclosures, SFAS 130 requires that all items
that are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that
is
displayed with the same prominence as other financial
statements. Presently, the Company’s comprehensive income and loss is
from unrealized gains and losses on certain investment securities.
Stock-Based
Compensation
The
Company has adopted the provisions of Statement of Financial Accounting
Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), to
measure compensation cost for stock options effective after October 1,
2005. As allowable under SFAS 123, the Company used the Black-Sholes
method to measure the compensation cost of stock options granted in 2006 with
the following assumptions: risk-free interest rate of 4.88%, a dividend payout
rate of zero, and an expected option life of nine years. The
volatility is 32%. Using these assumptions, the fair value of stock
options granted during fiscal 2006 was $2.92. In 2005 the Company
used the following assumptions: risk-free interest rate of 4.23%, a dividend
payout rate of zero, and an expected option life of nine years. The
volatility is 47%. Using these assumptions, the fair value of stock
options granted during fiscal 2005 was $3.70. In 2004 the Company
used the following assumptions: risk-free interest rate of 4.41%, a dividend
payout rate of zero, and an expected option life of ten years. The
volatility is 66%. Using these assumptions, the fair value of stock
options granted during fiscal 2004 was $5.75. There were 12,000
options granted during fiscal 2006 with an estimated fair value of
$22,000. 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 (loss) and earnings (loss) per share for 2005 and 2004 would have
been changed to the pro forma amounts indicated in the following
table:
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
|
|
Year
Ended September 30,
|
|
|
|
2005
|
|
|
2004
|
|
(In
Thousands, Except Per Share Data)
|
|
(Restated)
|
|
|
(Restated)
|
|
Net
(loss) income as reported
|
|
$ |
(1,630 |
) |
|
$ |
(3,489 |
) |
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all awards, net
of related tax effects
|
|
|
(239 |
) |
|
|
(128 |
) |
Pro
Forma net income (loss)
|
|
$ |
(1,869 |
) |
|
$ |
(3,617 |
) |
Basic
income (loss) per common share:
|
|
|
|
|
|
|
|
|
As
reported
|
|
$ |
(0.54 |
) |
|
$ |
(1.16 |
) |
Pro
Forma
|
|
|
(0.62 |
) |
|
|
(1.20 |
) |
Diluted
income (loss) per common share:
|
|
|
|
|
|
|
|
|
As
reported
|
|
$ |
(0.54 |
) |
|
$ |
(1.16 |
) |
Pro
Forma
|
|
|
(0.62 |
) |
|
|
(1.20 |
) |
Reclassifications
In
addition to reclassifications related to discontinued operations (see Note
3),
other reclassifications have been made to prior periods to place them on a
basis
comparable with the current period presentation. These
reclassifications have no effect on the results of operations previously
reported.
2. Restatements
During
2006, the Company restated its historical financial statements to reflect the
accounting treatment for losses discovered in its subsidiary, GAMC’s
unreconciled inter-company account. The losses were discovered as the
Bank discontinued the operations of the subsidiary. The loss in any
given year did not reach a material amount such as to require
restatement. However, the Bank determined to provide the restatements
because of the cumulative amount of the losses aggregated $1.4
million. The revisions had no impact on the cash flows of the
Bank. The table below includes the effect of the restatement and the
presentation of GAMC as discontinued operations.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
|
|
As
originally reported
|
|
|
Restatement
|
|
|
Discontinued
operations
|
|
|
As
restated
|
|
Year
ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
17,436
|
|
|
$ |
-
|
|
|
$ |
478
|
|
|
$ |
16,958
|
|
Interest
expense
|
|
|
10,893
|
|
|
|
-
|
|
|
|
347
|
|
|
|
10,546
|
|
Net
interest income
|
|
|
6,543
|
|
|
|
-
|
|
|
|
131
|
|
|
|
6,412
|
|
Noninterest
income
|
|
|
8,317
|
|
|
|
(72 |
) |
|
|
5,072
|
|
|
|
3,173
|
|
Noninterest
expense
|
|
|
16,199
|
|
|
|
-
|
|
|
|
6,310
|
|
|
|
9,889
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,107 |
) |
|
|
(1,107 |
) |
Net
income (loss)
|
|
|
(1,558 |
) |
|
|
(72 |
) |
|
|
-
|
|
|
|
(1,630 |
) |
Earnings
per share – continuing
|
|
|
(0.52 |
) |
|
|
(0.02 |
) |
|
|
0.37
|
|
|
|
(0.17 |
) |
Earnings
per share – discontinued
|
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
|
(0.37 |
) |
|
|
(0.37 |
) |
Year
ended September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
18,962
|
|
|
$ |
-
|
|
|
$ |
877
|
|
|
$ |
18,085
|
|
Interest
expense
|
|
|
12,355
|
|
|
|
-
|
|
|
|
385
|
|
|
|
11,970
|
|
Net
interest income
|
|
|
6,607
|
|
|
|
-
|
|
|
|
492
|
|
|
|
6,115
|
|
Noninterest
income
|
|
|
9,929
|
|
|
|
(297 |
) |
|
|
9,085
|
|
|
|
547
|
|
Noninterest
expense
|
|
|
19,430
|
|
|
|
-
|
|
|
|
9,060
|
|
|
|
10,370
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
428
|
|
|
|
428
|
|
Net
income (loss)
|
|
|
(3,192 |
) |
|
|
(297 |
) |
|
|
-
|
|
|
|
(3,489 |
) |
Earnings
per share – continuing
|
|
|
(1.06 |
) |
|
|
(0.10 |
) |
|
|
(0.14 |
) |
|
|
(1.30 |
) |
Earnings
per share – discontinued
|
|
|
(0.00 |
) |
|
|
0.00
|
|
|
|
0.14
|
|
|
|
0.14
|
|
The
$72,000 and $297,000 adjustments to noninterest income relate to gains on sale
of loans. In addition, the September 30, 2003 retained earnings
balance was reduced by $898,000 to reflect the cumulative effect of the
restatement of all periods prior to those reflected in this form
10-K.
3. Discontinued
operations
On
March
29, 2006, we began the process of discontinuing the operations of the Bank’s
subsidiary, GAMC. It was determined that, because it was
unprofitable, this business no longer fit our strategy.
As
a
result of the above action, we applied discontinued operations accounting in
the
third quarter of 2006, as we completed the closing of the GAMC
business. Accordingly, the income statements for all periods have
been adjusted. The reclassification of GAMC’s results to discontinued
operations primarily resulted in a reduction to previously reported levels
of
net interest income, a reduction in noninterest income and a reduction in
noninterest expense. The table below summarizes GAMC’s results which
were treated as discontinued operations for the periods indicated.
|
|
Year
Ended September 30,
|
|
|
|
2005
|
|
|
2004
|
|
(Dollars
in Thousands, Except Per Share Data
|
|
|
|
|
|
|
Interest
income
|
|
$ |
478
|
|
|
$ |
877
|
|
Interest
expense
|
|
|
347
|
|
|
|
385
|
|
Net
interest income
|
|
|
131
|
|
|
|
492
|
|
Noninterest
income
|
|
|
5,072
|
|
|
|
9,085
|
|
Noninterest
expense
|
|
|
6,310
|
|
|
|
9,060
|
|
Provision
for income taxes
|
|
|
-
|
|
|
|
89
|
|
Net
income (loss)
|
|
$ |
(1,107 |
) |
|
$ |
428
|
|
Earnings
per share – basic
|
|
$ |
(0.37 |
) |
|
$ |
0.14
|
|
Earnings
per share – diluted
|
|
|
(0.37 |
) |
|
|
0.14
|
|
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
4. Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale,
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Market
Value
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
notes
|
|
$ |
27,629
|
|
|
$ |
106
|
|
|
$ |
536
|
|
|
$ |
27,199
|
|
CMOs
|
|
|
9,735
|
|
|
|
48
|
|
|
|
28
|
|
|
|
9,755
|
|
Corporate
debt securities
|
|
|
7,280
|
|
|
|
36
|
|
|
|
174
|
|
|
|
7,142
|
|
|
|
|
44,644
|
|
|
|
190
|
|
|
|
738
|
|
|
|
44,096
|
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
notes
|
|
|
18,350
|
|
|
|
-
|
|
|
|
364
|
|
|
|
17,986
|
|
GNMA
notes
|
|
|
8,133
|
|
|
|
-
|
|
|
|
217
|
|
|
|
7,916
|
|
FHLMC
notes
|
|
|
5,549
|
|
|
|
-
|
|
|
|
86
|
|
|
|
5,463
|
|
|
|
|
32,032
|
|
|
|
-
|
|
|
|
667
|
|
|
|
31,365
|
|
|
|
$ |
76,676
|
|
|
$ |
190
|
|
|
$ |
1,405
|
|
|
$ |
75,461
|
|
Held-to-Maturity,
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Market
Value
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
SBA
notes
|
|
$
4,461
|
|
$ -
|
|
$
231
|
|
$
4,230
|
Corporate
debt securities
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
4,461
|
|
-
|
|
231
|
|
4,230
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
FNMA
notes
|
|
107
|
|
-
|
|
2
|
|
105
|
FHLMC
notes
|
|
128
|
|
-
|
|
3
|
|
125
|
|
|
235
|
|
-
|
|
5
|
|
230
|
|
|
$
4,696
|
|
$
-
|
|
$
236
|
|
$
4,460
|
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
Available-for-sale,
September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Market
Value
|
|
(In
Thousands)
|
|
|
|
Investment
securities
|
|
|
|
SBA
notes
|
|
$ |
30,239
|
|
|
$ |
112
|
|
|
$ |
570
|
|
|
$ |
29,781
|
|
CMOs
|
|
|
14,446
|
|
|
|
33
|
|
|
|
25
|
|
|
|
14,454
|
|
Corporate
debt securities
|
|
|
6,736
|
|
|
|
39
|
|
|
|
39
|
|
|
|
6,736
|
|
|
|
|
51,421
|
|
|
|
184
|
|
|
|
634
|
|
|
|
50,971
|
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
notes
|
|
|
35,548
|
|
|
|
29
|
|
|
|
630
|
|
|
|
34,947
|
|
GNMA
notes
|
|
|
13,097
|
|
|
|
-
|
|
|
|
155
|
|
|
|
12,942
|
|
FHLMC
notes
|
|
|
9,044
|
|
|
|
10
|
|
|
|
85
|
|
|
|
8,969
|
|
|
|
|
57,689
|
|
|
|
39
|
|
|
|
870
|
|
|
|
56,858
|
|
|
|
$ |
109,110
|
|
|
$ |
223
|
|
|
$ |
1,504
|
|
|
$ |
107,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity,
September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Market
Value
|
|
(In
Thousands)
|
|
|
|
Investment
securities
|
|
|
|
SBA
notes
|
|
$ |
6,531
|
|
|
$ |
1
|
|
|
$ |
319
|
|
|
$ |
6,213
|
|
Corporate
notes
|
|
|
1,000
|
|
|
|
20
|
|
|
|
-
|
|
|
|
1,020
|
|
|
|
|
7,531
|
|
|
|
21
|
|
|
|
319
|
|
|
|
7,233
|
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
notes
|
|
|
202
|
|
|
|
-
|
|
|
|
4
|
|
|
|
198
|
|
FHLMC
notes
|
|
|
236
|
|
|
|
-
|
|
|
|
1
|
|
|
|
235
|
|
|
|
|
438
|
|
|
|
-
|
|
|
|
5
|
|
|
|
433
|
|
|
|
$ |
7,969
|
|
|
$ |
21
|
|
|
$ |
324
|
|
|
$ |
7,666
|
|
The
weighted average interest rate on investments was 5.03% and 3.38% for the years
ended September 30, 2006 and 2005, respectively.
Trading
Activities
The
net
gains (losses) on trading activities included in earnings are as
follows:
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
FHLB
notes
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
Mortgage-backed
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
(135 |
) |
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
(135 |
) |
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
Proceeds
from the sale of available for sale securities were zero, $21.9 million and
$67.8 million for the years ended September 30, 2006, 2005 and 2004,
respectively. Gross realized gains were zero, $539,000 and $77,000
for the years ended September 30, 2006, 2005 and 2004,
respectively.
As
of September 30, 2006, the Bank held
investments in available for sale with unrealized holding losses totaling $1.4
million, consisting of the following:
|
|
Less
than 12 months
|
|
|
12
months or more
|
|
|
Total
|
|
Description
of Securities
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
debt securities
|
|
$ |
4,921
|
|
|
$ |
174
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
4,921
|
|
|
$ |
174
|
|
CMOs
|
|
|
3,279
|
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,279
|
|
|
|
28
|
|
U.S.
Government securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
|
|
|
22,375
|
|
|
|
536
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,375
|
|
|
|
536
|
|
GNMA
|
|
|
7,916
|
|
|
|
217
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,916
|
|
|
|
217
|
|
U.S.
Government agency securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
MBS’s
|
|
|
5,463
|
|
|
|
86
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,463
|
|
|
|
86
|
|
FNMA
MBS’s
|
|
|
17,773
|
|
|
|
357
|
|
|
|
213
|
|
|
|
7
|
|
|
|
17,986
|
|
|
|
364
|
|
Total
|
|
$ |
61,727
|
|
|
$ |
1,398
|
|
|
$ |
213
|
|
|
$ |
7
|
|
|
$ |
61,940
|
|
|
$ |
1,405
|
|
As
of September 30, 2006, the Bank held
investments in held-to-maturity with unrealized holding losses totaling
$236,000, consisting of the following:
|
|
Less
than 12 months
|
|
|
12
months or more
|
|
|
Total
|
|
Description
of Securities
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
|
|
$ |
4,230
|
|
|
$ |
231
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
4,230
|
|
|
$ |
231
|
|
U.S.
Government agency securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
MBS’s
|
|
|
125
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
125
|
|
|
|
3
|
|
FNMA
MBS’s
|
|
|
82
|
|
|
|
2
|
|
|
|
23
|
|
|
|
-
|
|
|
|
105
|
|
|
|
2
|
|
Total
|
|
$ |
4,437
|
|
|
$ |
236
|
|
|
$ |
23
|
|
|
$ |
-
|
|
|
$ |
4,460
|
|
|
$ |
236
|
|
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
Such
unrealized holding losses are the result of an increase in market interest
rates
during fiscal 2006 and are not the result of credit or principal
risk. Based on the nature of the investments and other considerations
discussed above, management concluded that such unrealized losses were not
other
than temporary as of September 30, 2006
The
amortized cost and estimated fair value of securities at September 30, 2006
and
2005, by contractual maturity, are as follows:
|
|
September
30, 2006
|
|
|
September
30, 2005
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
One
year or less
|
|
$ |
49
|
|
|
$ |
33
|
|
|
$ |
-
|
|
|
$ |
-
|
|
After
one year through five years
|
|
|
-
|
|
|
|
-
|
|
|
|
185
|
|
|
|
169
|
|
After
five years through ten years
|
|
|
3,891
|
|
|
|
3,753
|
|
|
|
4,070
|
|
|
|
4,041
|
|
After
ten years
|
|
|
40,704
|
|
|
|
40,310
|
|
|
|
47,166
|
|
|
|
46,761
|
|
Mortgage-backed
securities
|
|
|
32,032
|
|
|
|
31,365
|
|
|
|
57,689
|
|
|
|
56,858
|
|
|
|
|
76,676
|
|
|
|
75,461
|
|
|
|
109,110
|
|
|
|
107,829
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
year or less
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
1,020
|
|
After
one year through five years
|
|
|
110
|
|
|
|
94
|
|
|
|
408
|
|
|
|
373
|
|
After
five years through ten years
|
|
|
553
|
|
|
|
534
|
|
|
|
253
|
|
|
|
231
|
|
After
ten years
|
|
|
3,798
|
|
|
|
3,602
|
|
|
|
5,870
|
|
|
|
5,609
|
|
Mortgage-backed
securities
|
|
|
235
|
|
|
|
230
|
|
|
|
438
|
|
|
|
433
|
|
|
|
|
4,696
|
|
|
|
4,460
|
|
|
|
7,969
|
|
|
|
7,666
|
|
Total
investment securities
|
|
$ |
81,372
|
|
|
$ |
79,921
|
|
|
$ |
117,079
|
|
|
$ |
115,495
|
|
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.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
Loans
receivable consists of the following:
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
(In
Thousands)
|
|
|
|
|
|
|
Mortgage
loans:
|
|
|
|
|
|
|
Single-family
|
|
$ |
43,473
|
|
|
$ |
50,919
|
|
Multi-family
|
|
|
813
|
|
|
|
751
|
|
Construction
|
|
|
14,245
|
|
|
|
24,273
|
|
Commercial
real estate
|
|
|
28,403
|
|
|
|
25,530
|
|
Land
loans
|
|
|
13,829
|
|
|
|
18,421
|
|
Total
mortgage loans
|
|
|
100,763
|
|
|
|
119,894
|
|
Commercial
loans
|
|
|
39,794
|
|
|
|
35,458
|
|
Consumer
loans
|
|
|
61,414
|
|
|
|
69,381
|
|
Total
loans
|
|
|
201,971
|
|
|
|
224,733
|
|
Less:
|
|
|
|
|
|
|
|
|
Due
borrowers on loans-in process
|
|
|
(8,517 |
) |
|
|
(20,386 |
) |
Deferred
loan fees origination costs
|
|
|
944
|
|
|
|
873
|
|
Allowance
for loan losses
|
|
|
(1,330 |
) |
|
|
(1,212 |
) |
Unearned
(discounts) premium
|
|
|
239
|
|
|
|
429
|
|
|
|
$ |
193,307
|
|
|
$ |
204,437
|
|
Loans
held for sale
|
|
$ |
-
|
|
|
$ |
9,517
|
|
Loans
receivable, net
|
|
|
193,307
|
|
|
|
194,920
|
|
|
|
$ |
193,307
|
|
|
$ |
204,437
|
|
Loans
held for sale are all single-family mortgage loans.
The
activity in allowance for loan losses is summarized as follows:
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
Balance,
beginning
|
|
$ |
1,212
|
|
|
$ |
1,600
|
|
|
$ |
1,550
|
|
Provision
for loan losses
|
|
|
126
|
|
|
|
219
|
|
|
|
209
|
|
Charge-offs
|
|
|
(80 |
) |
|
|
(625 |
) |
|
|
(200 |
) |
Recoveries
|
|
|
72
|
|
|
|
18
|
|
|
|
41
|
|
Balance,
ending
|
|
$ |
1,330
|
|
|
$ |
1,212
|
|
|
$ |
1,600
|
|
The
amount of loans serviced for others totaled $34.4 million and $40.0 million
as
of September 30, 2006 and September 30, 2005, respectively.
The
allowance for uncollected interest, established for mortgage loans which are
delinquent for a period of 90 days or more, amounted to $204,000, $134,000
and
$108,000 as of September 30, 2006, 2005 and September 30, 2004,
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 $274,000, $1.6 million and $953,000 as of
September 30, 2006, 2005, and September 30, 2004, respectively.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
6. Accrued
Interest and Dividends Receivable
Accrued
interest and dividends receivable consist of the following:
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
(In
Thousands)
|
|
|
|
|
|
|
Investments
|
|
$ |
751
|
|
|
$ |
718
|
|
Loans
receivable
|
|
|
1,282
|
|
|
|
1,005
|
|
Accrued
dividends on FHLB stock
|
|
|
40
|
|
|
|
23
|
|
|
|
$ |
2,073
|
|
|
$ |
1,746
|
|
7. Premises
and Equipment
Premises
and equipment consists of the following:
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
(In
Thousands)
|
|
|
|
|
|
|
Furniture,
fixtures and equipment
|
|
$ |
2,621
|
|
|
$ |
5,228
|
|
Leasehold
improvements
|
|
|
2,835
|
|
|
|
2,836
|
|
Land
|
|
|
377
|
|
|
|
377
|
|
|
|
|
5,833
|
|
|
|
8,441
|
|
Less:
Allowances for depreciation and amortization
|
|
|
3,069
|
|
|
|
4,243
|
|
|
|
$ |
2,764
|
|
|
$ |
4,198
|
|
8. Foreclosed
Real Estate
Foreclosed
real estate is summarized as follows.
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
(In
Thousands)
|
|
|
|
|
|
|
Real
estate acquired through settlement of loans
|
|
$ |
-
|
|
|
$ |
232
|
|
There
was
no activity in the allowance for losses on foreclosed real estate in fiscal
2006, 2005 or 2004.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
9.
Deposits
Deposits
are summarized as follows:
September
30, 2006
|
|
|
|
|
|
Amount
|
|
|
Ranges
of
Contractual
Interest
Rates
|
|
|
%
of
Total
|
|
(In
Thousands)
|
|
|
|
Savings
accounts
|
|
$ |
3,679
|
|
|
|
0.00–1.09 |
% |
|
|
1.6 |
% |
NOW/money
market accounts
|
|
|
73,334
|
|
|
|
0.00–4.40 |
% |
|
|
31.9
|
|
Certificates
of deposit
|
|
|
127,939
|
|
|
|
0.94–9.00 |
% |
|
|
55.6
|
|
Non-interest
bearing demand deposits
|
|
|
25,222
|
|
|
|
0.00 |
% |
|
|
10.9
|
|
|
|
$ |
230,174
|
|
|
|
|
|
|
|
100.0 |
% |
September
30, 2005
|
|
|
|
Amount
|
|
|
Ranges
of
Contractual
Interest
Rates
|
|
|
%
of
Total
|
|
(In
Thousands)
|
|
|
|
Savings
accounts
|
|
$ |
8,078
|
|
|
|
0.00–1.09 |
% |
|
|
3.4 |
% |
NOW/money
market accounts
|
|
|
66,638
|
|
|
|
0.00–3.54 |
% |
|
|
28.0
|
|
Certificates
of deposit
|
|
|
145,912
|
|
|
|
0.99–9.00 |
% |
|
|
61.4
|
|
Non-interest
bearing demand deposits
|
|
|
17,166
|
|
|
|
0.00 |
% |
|
|
7.2
|
|
|
|
$ |
237,794
|
|
|
|
|
|
|
|
100.0 |
% |
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
Certificates
of deposit as of September 30, 2006 mature as follows:
Year
ending September 30,
|
|
Amount
|
|
(In
Thousands)
Thousands
|
|
|
|
2007
|
|
$ |
102,257
|
|
2008
|
|
|
16,930
|
|
2009
|
|
|
4,334
|
|
2010
|
|
|
3,451
|
|
2011
and after
|
|
|
967
|
|
|
|
$ |
127,939
|
|
Interest
expense on deposit accounts consists of the following:
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
NOW/money
market accounts
|
|
$ |
2,430
|
|
|
$ |
1,197
|
|
|
$ |
852
|
|
Savings
accounts
|
|
|
48
|
|
|
|
94
|
|
|
|
113
|
|
Certificates
of deposit
|
|
|
5,231
|
|
|
|
5,046
|
|
|
|
4,786
|
|
|
|
$ |
7,709
|
|
|
$ |
6,337
|
|
|
$ |
5,751
|
|
Deposits,
including certificates of deposit, with balances in excess of $100,000 totaled
$85.2 million and $83.7 million at September 30, 2006, and September 30, 2005,
respectively.
10. 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. The liability associated with the plan was zero at September
30, 2006 and 2005, respectively.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
11. Advances
From Federal Home Loan Bank and Other Borrowings
The
Bank
has $56.2 million credit availability as of September 30, 2006 from the Federal
Home Loan Bank of Atlanta (FHLB). 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:
|
|
At
or For the Year Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
FHLB
advances:
|
|
|
|
|
|
|
|
|
|
Average
balance outstanding
|
|
$ |
44,894
|
|
|
$ |
44,422
|
|
|
$ |
116,155
|
|
Maximum
amount outstanding at any month-end during the period
|
|
|
51,000
|
|
|
|
49,200
|
|
|
|
142,250
|
|
Balance
outstanding at end of period
|
|
|
36,000
|
|
|
|
38,000
|
|
|
|
51,200
|
|
Weighted
average interest rate during the period
|
|
|
5.05 |
% |
|
|
4.47 |
% |
|
|
2.39 |
% |
Weighted
average interest rate at end of period
|
|
|
5.28 |
% |
|
|
4.85 |
% |
|
|
3.93 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse
repurchase agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
balance outstanding
|
|
|
31,624
|
|
|
|
51,388
|
|
|
|
78,979
|
|
Maximum
amount outstanding at any month-end during the period
|
|
|
35,641
|
|
|
|
62,846
|
|
|
|
93,730
|
|
Balance
outstanding at end of period
|
|
|
18,574
|
|
|
|
38,479
|
|
|
|
64,865
|
|
Weighted
average interest rate during the period
|
|
|
4.21 |
% |
|
|
4.33 |
% |
|
|
4.36 |
% |
Weighted
average interest rate at end of period
|
|
|
4.65 |
% |
|
|
3.69 |
% |
|
|
1.98 |
% |
The
Bank
has pledged certain investments with carrying values of $25.6 million at
September 30, 2006, to collateralize advances from the FHLB.
First
mortgage loans in the amount of $30.8 million are also available to be pledged
as collateral for the advances at September 30, 2006.
12. Income
Taxes
The
provision (benefit) 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 (loss) as a result of the following differences:
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
|
2005
(Restated)
|
|
|
2004
(Restated)
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
Federal
tax provision (benefit)
|
|
$ |
(1,894 |
) |
|
$ |
(554 |
) |
|
$ |
(1,186 |
) |
State
tax provision (benefit)
|
|
|
(223 |
) |
|
|
(65 |
) |
|
|
(139 |
) |
(Increase)
decrease in provision resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
changes
|
|
|
1,833
|
|
|
|
613
|
|
|
|
1,319
|
|
Other
|
|
|
284
|
|
|
|
6
|
|
|
|
6
|
|
Income
tax provision
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
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,
|
|
|
|
2006
|
|
|
2005
(Restated)
|
|
(In
Thousands)
|
|
|
|
|
|
|
Deferred
tax assets
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$ |
4,665
|
|
|
$ |
4,192
|
|
Unrealized
(gains) losses on derivatives
|
|
|
178
|
|
|
|
(76 |
) |
Allowance
for loan losses
|
|
|
505
|
|
|
|
461
|
|
Available
for sale securities
|
|
|
433
|
|
|
|
515
|
|
Core
deposit intangible
|
|
|
65
|
|
|
|
65
|
|
Deferred
loan fees
|
|
|
125
|
|
|
|
177
|
|
Other
|
|
|
79
|
|
|
|
458
|
|
Total
deferred tax assets
|
|
|
6,050
|
|
|
|
5,792
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
|
Tax
over book depreciation
|
|
|
478
|
|
|
|
535
|
|
Other
|
|
|
140
|
|
|
|
108
|
|
Total
deferred tax liabilities
|
|
|
618
|
|
|
|
643
|
|
Net
deferred tax assets
|
|
|
5,432
|
|
|
|
5,149
|
|
Less: Valuation
allowance
|
|
|
3,504
|
|
|
|
3,175
|
|
Total
|
|
$ |
1,928
|
|
|
$ |
1,974
|
|
Management
has provided a valuation allowance for net deferred tax assets, due to the
timing of the generation of future taxable income.
At
September 30, 2006, the Company has net operating loss carryforwards for federal
income tax purposes of approximately $12.1 million, which expire in the years
2007 to 2022. As a result of the change in ownership of the Bank,
approximately $1.5 million of the total net operating loss carryforwards are
subject to an annual usage limitation of approximately $114,000.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
13. Commitments
and Contingencies
The
Company is a party to financial instruments with off-balance-sheet risk in
the
normal course of business to meet the financing needs of its customers and
to
reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, standby letters
of
credit, and financial guarantees. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The contract or notional
amounts of those instruments reflect the extent of involvement the Company
has
in particular classes of financial instruments.
The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit and financial guarantees written is represented by the
contractual notional amount of those instruments. The Company uses
the same credit policies in making commitments and conditional obligations
as it
does for on-balance-sheet instruments.
At
September 30, 2006, the Company had outstanding commitments to originate and
purchase loans and undisbursed construction mortgages aggregating approximately
$13.9 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 unused lines of credit for
approximately $113.1 million and standby letters of credit for approximately
$55,000.
As
previously reported in a Form 8-K filed on September 8, 2006, the company
announced that a Demand for Arbitration Before the American Arbitration
Association was filed. The Demand for Arbitration alleges three
counts: rescission, breach of contract, and defamation. As against the Bank
and
GAMC, Stamm Mortgage alleges that the Management Agreement is unenforceable
and
should be rescinded, requiring the Bank and GAMC, jointly and severally, to
return $1.77 million that Stamm Mortgage paid to the Bank and GAMC under the
Management Agreement. As an alternative to rescission, Stamm Mortgage alleges
that the Bank and GAMC breached the Management Agreement by terminating it
contrary to its terms, resulting in $9.6 million in lost profits to Stamm
Mortgage. Stamm Mortgage and Mr. Stamm both allege that the company, the bank,
GAMC, and Mr. Amos, acting in his official capacity, defamed Stamm Mortgage
and
Mr. Stamm through certain public statements made in press releases and in public
securities filings by the company and seek $1.0 million in compensatory damages
and $350,000 in punitive damages.
On
December 29, 2006, counsel for the company, the bank, GAMC and Mr. Amos filed
an
Answering Statement and Counterclaim in Arbitration. In, January
2007, the parties entered into negotiations looking toward a mutually acceptable
and amicable resolution of their claims. In the event that the claims
cannot be resolved through negotiations, the company intends to defend its
position vigorously.
Rental
Commitments
The
Company has entered into lease agreements for the rental of certain properties
expiring on various dates through June 30, 2015. The future minimum
rental commitments as of September 30, 2006, for all non-cancelable lease
agreements, are as follows:
Years
ending
September
30,
|
|
Rental
Commitments
|
|
(In
Thousands)
|
|
|
|
2007
|
|
$ |
1,089
|
|
2008
|
|
|
1,116
|
|
2009
|
|
|
992
|
|
2010
|
|
|
836
|
|
2011
|
|
|
339
|
|
Thereafter
|
|
|
493
|
|
Total
|
|
$ |
4,865
|
|
Net
rent
expense for the years ended September 30, 2006, 2005 and 2004 was $1.1 million,
$1.0 million and $1.3 million, respectively.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
14. Regulatory
Matters
Generally,
annual dividends by the Bank to the Company as its sole shareholder 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 years ended September 30, 2006, 2005 or 2004.
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, 2006 the
Bank was classified as an adequately capitalized financial institution and
was
classified as a well capitalized financial institution at September 30,
2005.
As
part
of FDICIA, the minimum capital requirements that the Bank is subject to are
as
follows: 1) tangible capital equal to at least 1.5% of adjusted total assets,
2)
core capital equal to at least 4% of adjusted total assets and 3) total
risk-based capital equal to at least 8% of risk-based assets.
The
following presents the Bank’s capital position at September 30, 2006 and
September 30, 2005:
At
September 30, 2006
|
|
Required
Balance
|
|
|
Required
Percent
|
|
|
Actual
Balance
|
|
|
Actual
Percent
|
|
|
Surplus
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible
|
|
$ |
4,560
|
|
|
|
1.50 |
% |
|
$ |
16,738
|
|
|
|
5.51 |
% |
|
$ |
12,178
|
|
Core
|
|
$ |
12,159
|
|
|
|
4.00 |
% |
|
$ |
16,738
|
|
|
|
5.51 |
% |
|
$ |
4,579
|
|
Risk-based
|
|
$ |
15,487
|
|
|
|
8.00 |
% |
|
$ |
17,636
|
|
|
|
9.11 |
% |
|
$ |
2,149
|
|
At
September 30, 2005 (Restated)
|
|
Required
Balance
|
|
|
Required
Percent
|
|
|
Actual
Balance
|
|
|
Actual
Percent
|
|
|
Surplus
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible
|
|
$ |
5,080
|
|
|
|
1.50 |
% |
|
$ |
22,546
|
|
|
|
6.66 |
% |
|
$ |
17,466
|
|
Core
|
|
$ |
13,547
|
|
|
|
4.00 |
% |
|
$ |
22,546
|
|
|
|
6.66 |
% |
|
$ |
8,999
|
|
Risk-based
|
|
$ |
17,600
|
|
|
|
8.00 |
% |
|
$ |
23,645
|
|
|
|
10.75 |
% |
|
$ |
6,045
|
|
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
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,
|
|
|
|
2006
|
|
|
2005
(Restated)
|
|
(In
Thousands)
|
|
|
|
|
|
|
GAAP
capital
|
|
$ |
10,161
|
|
|
$ |
15,658
|
|
Guaranteed
convertible preferred securities
|
|
|
8,000
|
|
|
|
8,000
|
|
Unrealized
losses on available for sale securities
|
|
|
1,049
|
|
|
|
1,095
|
|
Excluded
deferred tax asset
|
|
|
(1,516 |
) |
|
|
(1,250 |
) |
Goodwill
|
|
|
(956 |
) |
|
|
(956 |
) |
Tangible
capital
|
|
|
16,738
|
|
|
|
22,546
|
|
Adjustments
|
|
|
-
|
|
|
|
-
|
|
Core
capital
|
|
|
16,738
|
|
|
|
22,546
|
|
Allowance
for general loss reserves
|
|
|
1,011
|
|
|
|
1,212
|
|
Adjustments
to arrive at Risk-Weighted Assets
|
|
|
(113 |
) |
|
|
(113 |
) |
Risk-based
capital
|
|
$ |
17,636
|
|
|
$ |
23,645
|
|
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.
15. Stockholders’
Equity
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 Plan
was amended effective March 14, 2000, to increase the number of options
available for grant from 76,667 to 225,000 shares to employees and amended
again
effective March 15, 2002, to increase the number of options available for grant
from 225,000 to 350,000 shares to employees and to limit its application to
officers and employees. 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, 2006, 94,671 warrants were
outstanding.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
The
following summary represents the activity under the Plan:
|
|
Number
of
Shares
|
|
|
Exercise
Price
|
|
|
Expiration
Date
|
|
Balance
outstanding and exercisable at September 30, 2003
|
|
|
190,000
|
|
|
|
|
|
|
|
Options
granted
|
|
|
36,000
|
|
|
$ |
8.50
|
|
|
|
10-20-13
|
|
Balance
outstanding and exercisable at September 30, 2004
|
|
|
226,000
|
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
104,000
|
|
|
$ |
6.75
|
|
|
|
10-6-14
|
|
Options
exercised
|
|
|
(8,500 |
) |
|
$ |
4.00
|
|
|
|
|
|
Options
expired
|
|
|
(55,500 |
) |
|
$ |
6.52
|
|
|
|
|
|
Balance
outstanding and exercisable at September 30, 2005
|
|
|
266,000
|
|
|
$ |
6.91
|
|
|
|
|
|
Options
granted
|
|
|
12,000
|
|
|
$ |
6.00
|
|
|
|
3-31-2016
|
|
Options
expired
|
|
|
(25,000 |
) |
|
$ |
8.37
|
|
|
|
|
|
Balance
outstanding and exercisable at September 30, 2006
|
|
|
253,000
|
|
|
$ |
6.72
|
|
|
|
|
|
A
summary
of the stock options outstanding and exercisable as of September 30, 2006 is
as
follows:
Options
Outstanding
|
|
Options
Exercisable
|
Exercise
Prices
|
Number
Outstanding
|
Weighted
Average
Remaining
Life
(years)
|
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
|
Weighted
Average
Exercise
Price
|
$7.50
|
16,667
|
1.2
|
|
$7.50
|
16,667
|
$7.50
|
$8.38
|
16,667
|
2.2
|
|
$8.38
|
16,667
|
$8.38
|
$6.00
|
13,000
|
3.2
|
|
$6.00
|
13,000
|
$6.00
|
$4.00
|
41,666
|
4.2
|
|
$4.00
|
41,666
|
$4.00
|
$5.31
|
10,000
|
4.2
|
|
$5.31
|
10,000
|
$5.31
|
$7.00
|
17,000
|
5.3
|
|
$7.00
|
17,000
|
$7.00
|
$9.00
|
20,000
|
5.3
|
|
$9.00
|
20,000
|
$9.00
|
$8.50
|
30,000
|
7.1
|
|
$8.50
|
30,000
|
$8.50
|
$6.75
|
76,000
|
8.1
|
|
$6.75
|
76,000
|
$6.75
|
$6.00
|
12,000
|
9.5
|
|
$6.00
|
12,000
|
$6.00
|
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
16. Earnings
(Loss) 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 by the weighted
average number of shares of common stock outstanding during the year (the
denominator). 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
following table presents a reconciliation between the basic and diluted earnings
(loss) per share for the year ended September 30, 2006, 2005 and
2004:
|
|
For
the Year Ended September 30,
|
|
|
|
2006
|
|
|
2005
(Restated)
|
|
|
2004
(Restated)
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per
Share Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Per
Share Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Per
Share Amount
|
|
(Dollars
in Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
(5,571 |
) |
|
|
3,020,934
|
|
|
$ |
(1.84 |
) |
|
$ |
(1,630 |
) |
|
|
3,015,509
|
|
|
$ |
(0.54 |
) |
|
$ |
(3,489 |
) |
|
|
3,012,434
|
|
|
$ |
(1.16 |
) |
Effect
of conversion of preferred securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Effect
of dilutive stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted
|
|
$ |
(5,571 |
) |
|
|
3,020,934
|
|
|
$ |
(1.84 |
) |
|
$ |
(1,630 |
) |
|
|
3,015,509
|
|
|
$ |
(0.54 |
) |
|
$ |
(3,489 |
) |
|
|
3,012,434
|
|
|
$ |
(1.16 |
) |
The
effect of the conversion of
preferred securities and stock options were excluded in 2006, 2005 and 2004,
as
they would have been anti-dilutive.
17. 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 $263,000 and $204,000
as of September 30, 2006 and September 30, 2005, respectively.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
18. 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 - 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.
The
carrying value and estimated fair value of financial instruments is summarized
as follows:
|
|
For
the Year Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Carrying
value
|
|
|
Estimated
fair value
|
|
|
Carrying
value
|
|
|
Estimated
fair value
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and interest bearing deposits
|
|
$ |
19,804
|
|
|
$ |
19,804
|
|
|
$ |
4,709
|
|
|
$ |
4,709
|
|
Investment
securities
|
|
|
80,157
|
|
|
|
79,921
|
|
|
|
115,798
|
|
|
|
115,495
|
|
Loans
receivable
|
|
|
193,307
|
|
|
|
193,049
|
|
|
|
204,437
|
|
|
|
204,806
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
230,174
|
|
|
|
229,818
|
|
|
|
237,794
|
|
|
|
236,968
|
|
Borrowings
|
|
|
54,574
|
|
|
|
55,333
|
|
|
|
76,479
|
|
|
|
77,689
|
|
Off-balance
sheet instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
to extend credit
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
1,362
|
|
19. 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, 2006 and
2005.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
20. Supplemental
Cash Flow Information
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
Cash
paid during period for interest on deposits and borrowings
|
|
$ |
5,331
|
|
|
$ |
5,861
|
|
|
$ |
7,777
|
|
21. Segment
Reporting
The
Company had two reportable segments, banking and mortgage
banking. However, the mortgage-banking activities conducted in GAMC,
to which the mortgage-banking segment applied, were discontinued effective
March
29, 2006. The Bank operates retail deposit branches in the greater
Washington, D.C./Baltimore metropolitan area. The banking segment
provides retail consumers and small businesses with deposit products such as
demand, transaction, and 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 activities, which were conducted principally through GAMC,
included the origination of residential real estate loans either for sale into
the secondary market, with servicing released or for the Bank’s
portfolio.
On
March
29, 2006, we began the process of discontinuing the operations of the Bank’s
subsidiary, GAMC. It was determined that, because it was
unprofitable, this business no longer fit our strategy.
In
the
third quarter of 2006, we applied discontinued operations accounting for
GAMC. Accordingly, the income statements for all periods have been
restated. The restatements primarily resulted in a reduction to
previously reported levels of net interest income, a reduction in noninterest
income and a reduction in noninterest expense.
Due
to
the unprofitable operations of GAMC, the Company recognized an additional loss
of $1.5 million for the year ended September 30, 2006. In addition to
the loss from operations, a non-recurring pre-tax impairment charge for
long-lived assets of $996,000 was recorded and included in discontinued
operations in the consolidated statements of operations.
22. Junior
Subordinated Debt Securities
On
March
20, 2002, Greater Atlantic Capital Trust I (the, “Trust”), a Delaware statutory
business trust and a wholly owned Trust subsidiary of the Company issued $9.6
million aggregate liquidation amount (963,038 shares) of 6.50% cumulative
preferred securities maturing on December 31, 2031, with an option to call
on or
after December 31, 2003. Conversion of the preferred securities into
the Company’s common stock may occur at any time on or after 60 days after the
closing of the offering. The Company may redeem the preferred
securities, in whole or in part, at any time on or after December 31,
2003. Distributions on the preferred securities are payable quarterly
on March 31, June 30, September 30 and December 31 of each year beginning on
June 30, 2002. The Trust also issued 29,762 common securities to the
Company for $297,620. The Company purchased all the shares of the
common stock. The proceeds from the sale of the preferred securities
and the proceeds from the sale of the trust’s common securities were utilized to
purchase from the Company junior subordinated debt securities of $9,928,000
bearing interest of 6.50% and maturing December 31, 2031. All
intercompany interest and equity were eliminated in consolidation.
The
Trust
was formed for the sole purpose of investing the proceeds from the sale of
the
convertible preferred securities in the corresponding convertible
debentures. The Company has fully and unconditionally guaranteed the
preferred securities along with all obligations of the trust related
thereto. The sale of the preferred securities yielded $9.3 million
after deducting offering expenses. The Company currently retained
approximately $1.3 million of the proceeds for general corporate
purposes. The remaining $8.0 million of the proceeds was invested in
Greater Atlantic Bank to increase its capital position.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
To
comply
with FIN46, the trust preferred subsidiary was deconsolidated in 2004, and
the
related securities have been presented as obligations of the Company and titled
“Junior Subordinated Debt Securities” in the financial statements.
On
December 19, 2006, the Company issued a news release announcing that the first
quarter distribution of Greater Atlantic Capital Trust I 6.50% Cumulative
Convertible Trust Preferred Securities scheduled for December 31, 2006, as
well
as future distributions on the Trust Preferred Securities, will be
deferred.
The
announcement by the Company follows advice received by Greater Atlantic Bank
from the Office of Thrift Supervision that it would not approve Greater Atlantic
Bank’s application to pay a cash dividend to the Company.
Accordingly,
the Company exercised its right to defer the payment of interest on its 6.50%
Convertible Junior Subordinated Debentures Due 2031 related to the Trust
Preferred Securities, for an indefinite period (which can be no longer than
20
consecutive quarterly periods).
23. Derivative
Financial Instruments
Beginning
in fiscal 2002, the Bank utilized derivative financial instruments to hedge
its
interest rate risk. Beginning in 2002, the Bank adopted
statement of Financial Accounting Standard No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS 133”) which requires that an entity
recognize all derivatives as either assets or liabilities and measure those
instruments at fair value. The Bank bases the estimated fair values
of these agreements on the cost of interest-rate exchange agreements with
similar terms at available market prices, excluding accrued interest receivable
and payable. However, active markets do not exist for many types of
financial instruments. Consequently, fair values for these
instruments must be estimated using techniques such as discounted cash flow
analysis and comparisons to similar instruments. Estimates developed
using these methods are highly subjective and require judgments regarding
significant matters such as the amount and timing of future cash flows and
the
selection of discount rates that appropriately reflect market and credit
risks. Changes in these judgments often have a material effect on the
fair value estimates. Since those estimates are made as of a specific
time, they are susceptible to material near term changes.
The
Bank
entered into various interest-rate swaps during fiscal year 2003 and 2002 that
were sold during the fourth quarter of fiscal 2006 and totaled at that time
$21
million in notional principal. The swaps paid a fixed rate with the Bank
receiving payments based upon one-to three-month floating rate
LIBOR. The capped range was between 1.67% - 3.01%, and expired
between 1 and 5 years. The Bank also entered into various interest
rate caps during fiscal year 2003 and 2002 that total $25 million in notional
principal with terms between five and ten years that limit the float between
a
floor of 2.00%, and capped between 5.00% - 8.00%. The Bank accounts
for these derivatives, under the guidelines of SFAS 133.
The
Company’s derivatives do not meet hedge accounting requirements under SFAS 133,
and therefore, the Company carries the derivatives at their fair value on the
balance sheet, recognizing changes in their fair value in current-period
earnings. The Company recognized a loss of $66,000 in fiscal 2006, a
gain of $836,000 in fiscal 2005 and a loss of $227,000 in fiscal 2004 related
to
its derivatives.
24. Recent
Accounting Standards
The
Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standard (“SFAS”) No. 123 (Revised 2004) (“SFAS No. 123R”),
“Share-Based Payment,” in December 2004. SFAS No. 123R is a revision
of FASB Statement 123, “Accounting for Stock-Based Compensation” and supersedes
APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related
implementation guidance. The Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123R requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide service in exchange
for
the award. This statement is effective as of the beginning of the
first annual reporting period that begins after June 15, 2005 and the Company
adopted the standard in the first quarter of fiscal 2006. The
adoption of this statement did not have a material impact on its consolidated
financial position or results of operations.
In
May
2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections – a
replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 generally
requires retrospective application to prior periods’ financial statements of all
voluntary changes in accounting principle and changes required when a new
pronouncement does not include specific transition provisions. This standard
was
effective for the Company beginning October 1, 2006.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
In
July
2006, the FASB issued Interpretation (FIN) No. 48, “Accounting for Uncertainty
in Income Taxes” - an Interpretation of SFAS No. 109, “Accounting for Income
Taxes.” FIN 48 defines the threshold for recognizing the benefits of tax return
positions in the financial statements as “more-likely-than-not” to be sustained
by a taxing authority. The term “more-likely-than-not” means a likelihood of
more than 50 percent. FIN 48 is effective as of Jan. 1, 2007, with early
application permitted. Any impact from the adoption of FIN 48 will be recorded
directly to the beginning balance of retained earnings and reported as a change
in accounting principle. We are currently evaluating the impact of this
Interpretation, but do not expect it to be material.
On
October 1, 2006, we adopted SFAS 156, “Accounting for Servicing of Financial
Assets – an amendment of FASB Statement No.140.” SFAS 156 was issued in March
2006 and requires all newly recognized servicing rights and obligations to
be
initially measured at fair value. For each class of separately recognized
servicing rights and obligations retained, we have elected to continue to
account for each under the amortization method which requires us to amortize
servicing assets or liabilities in proportion to and over the periods of
estimated net servicing income or net servicing loss.
In
September 2006, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 108 (SAB 108). Due to diversity in practice among
registrants, SAB 108 expresses the SEC staff views regarding the process by
which misstatements in financials statements are evaluated for purposes of
determining whether financial statement restatement is necessary. SAB 108 is
effective for fiscal years ending after November 15, 2006, and early application
is encouraged. The company does not believe SAB 108 will have a material impact
on its consolidated financials statements.
In
September 2006, the Financial Accounting Standards Board released Statement
No.
157, "Fair Value Measurements" which defines fair value, establishes a framework
for measuring fair value in GAAP, and enhances disclosures about fair value
measurements. This Statement applies when other accounting pronouncements
require fair value measurements; it does not require new fair value
measurements. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those
years. While we are currently evaluating the effect of the guidance contained
in
this Statement, we do not expect the implementation to have a material impact
on
our consolidated financial statements.
25.
Parent Company – Only Financial Statements
Parent
Company – Only Condensed Statements of Financial Condition
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
(Restated)
|
|
(In
Thousands)
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
60
|
|
|
$ |
66
|
|
Loans
receivable
|
|
|
-
|
|
|
|
-
|
|
Investment
in subsidiary
|
|
|
19,423
|
|
|
|
24,976
|
|
Prepaid
expenses and other assets
|
|
|
309
|
|
|
|
304
|
|
Total
assets
|
|
$ |
19,792
|
|
|
$ |
25,346
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
Accrued
interest payable on subordinated debt
|
|
$ |
-
|
|
|
$ |
-
|
|
Other
liabilities
|
|
|
8
|
|
|
|
(9 |
) |
Total
liabilities
|
|
|
8
|
|
|
|
(9 |
) |
Subordinated
debt
|
|
|
9,928
|
|
|
|
9,928
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
30
|
|
|
|
30
|
|
Additional
paid-in capital
|
|
|
25,185
|
|
|
|
25,185
|
|
Accumulated
deficit
|
|
|
(15,359 |
) |
|
|
(9,788 |
) |
Total
stockholders’ equity
|
|
|
9,856
|
|
|
|
15,427
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
19,792
|
|
|
$ |
25,346
|
|
|
|
|
|
|
|
|
|
|
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
Parent
Company – Only Condensed Statements of Operations
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
|
2005
(Restated)
|
|
|
2004
(Restated)
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
1
|
|
|
$ |
-
|
|
|
$ |
2
|
|
Other
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
interest income
|
|
|
1
|
|
|
|
-
|
|
|
|
2
|
|
Interest
expense
|
|
|
645
|
|
|
|
645
|
|
|
|
645
|
|
Total
interest expense
|
|
|
645
|
|
|
|
645
|
|
|
|
645
|
|
Net
interest income (expense)
|
|
|
(644 |
) |
|
|
(645 |
) |
|
|
(643 |
) |
Noninterest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on sale of investment securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
operating income
|
|
|
19
|
|
|
|
19
|
|
|
|
19
|
|
Total
noninterest income
|
|
|
19
|
|
|
|
19
|
|
|
|
19
|
|
Noninterest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating expense
|
|
|
149
|
|
|
|
142
|
|
|
|
135
|
|
Total
noninterest expense
|
|
|
149
|
|
|
|
142
|
|
|
|
135
|
|
Loss
before income from subsidiaries
|
|
|
(774 |
) |
|
|
(768 |
) |
|
|
(759 |
) |
Equity
(loss) income from subsidiaries
|
|
|
(4,797 |
) |
|
|
(862 |
) |
|
|
(2,730 |
) |
Net
(loss) income
|
|
$ |
(5,571 |
) |
|
$ |
(1,630 |
) |
|
$ |
(3,489 |
) |
Parent
Company – Only Condensed Statements of Cash Flows
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
|
2005
(Restated)
|
|
|
2004
(Restated)
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(5,571 |
) |
|
$ |
(1,630 |
) |
|
$ |
(3,489 |
) |
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income)
loss from subsidiaries
|
|
|
4,797
|
|
|
|
862
|
|
|
|
2,730
|
|
(Increase)
decrease in assets
|
|
|
(5 |
) |
|
|
(1 |
) |
|
|
(283 |
) |
Decrease
in other liabilities
|
|
|
18
|
|
|
|
(12 |
) |
|
|
(9 |
) |
Net
cash used in operating activities
|
|
|
(761 |
) |
|
|
(781 |
) |
|
|
(1,051 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
originations in excess of repayments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Investment
in subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
cash provided by investing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividend from subsidiary
|
|
|
755
|
|
|
|
800
|
|
|
|
500
|
|
Stock
options exercised
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
755
|
|
|
|
833
|
|
|
|
500
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(6 |
) |
|
|
52
|
|
|
|
(551 |
) |
Cash
and cash equivalents at beginning of year
|
|
|
66
|
|
|
|
14
|
|
|
|
565
|
|
Cash
and cash equivalents at end of year
|
|
$ |
60
|
|
|
$ |
66
|
|
|
$ |
14
|
|
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to
Consolidated Financial Statements
|
26.
Quarterly Results of Operations (In Thousands, Except Share Information)
(Unaudited)
|
The
following tables set forth the quarterly financial data, which was derived
from
the consolidated financial statements presented in Form 10-Qs, for the fiscal
years ended September 30, 2006 and 2005.
|
|
For
Fiscal Year 2006
|
|
|
|
For
the Year Ended September 30, 2006
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter (Restated)
|
|
|
First
Quarter (Restated)
|
|
Interest
income
|
|
$ |
18,794
|
|
|
$ |
4,851
|
|
|
$ |
4,753
|
|
|
$ |
4,600
|
|
|
$ |
4,590
|
|
Interest
expense
|
|
|
11,305
|
|
|
|
2,955
|
|
|
|
2,837
|
|
|
|
2,772
|
|
|
|
2,741
|
|
Net
interest income
|
|
|
7,489
|
|
|
|
1,896
|
|
|
|
1,916
|
|
|
|
1,828
|
|
|
|
1,849
|
|
Provision
for loan losses
|
|
|
126
|
|
|
|
39
|
|
|
|
13
|
|
|
|
3
|
|
|
|
71
|
|
Net
interest income, after provision for loan losses
|
|
|
7,363
|
|
|
|
1,857
|
|
|
|
1,903
|
|
|
|
1,825
|
|
|
|
1,778
|
|
Noninterest
income
|
|
|
639
|
|
|
|
(130 |
) |
|
|
203
|
|
|
|
264
|
|
|
|
302
|
|
Noninterest
expense
|
|
|
11,085
|
|
|
|
3,216
|
|
|
|
2,722
|
|
|
|
2,627
|
|
|
|
2,520
|
|
Income
(loss) before income taxes
|
|
|
(3,083 |
) |
|
|
(1,489 |
) |
|
|
(616 |
) |
|
|
(538 |
) |
|
|
(440 |
) |
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
income (loss) from continuing operations
|
|
|
(3,083 |
) |
|
|
(1,489 |
) |
|
|
(616 |
) |
|
|
(538 |
) |
|
|
(440 |
) |
Income
(loss) from discontinued operations
|
|
|
(2,488 |
) |
|
|
11
|
|
|
|
(19 |
) |
|
|
(698 |
) |
|
|
(1,782 |
) |
Net
income (loss)
|
|
$ |
(5,571 |
) |
|
$ |
(1,478 |
) |
|
$ |
(635 |
) |
|
$ |
(1,236 |
) |
|
$ |
(2,222 |
) |
Basic
and diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(1.02 |
) |
|
$ |
(0.49 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.15 |
) |
Discontinued
operations
|
|
|
(0.82 |
) |
|
|
0.01
|
|
|
|
(0.01 |
) |
|
|
(0.23 |
) |
|
|
(0.59 |
) |
Net
income (loss)
|
|
$ |
(1.84 |
) |
|
$ |
(0.48 |
) |
|
$ |
(0.21 |
) |
|
$ |
(0.41 |
) |
|
$ |
(0.74 |
) |
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to Consolidated Financial Statements
|
|
For
Fiscal Year 2005
(Restated)
|
|
|
|
For
the Year Ended September 30, 2005
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
Interest
income
|
|
$ |
16,958
|
|
|
$ |
4,378
|
|
|
$ |
4,512
|
|
|
$ |
4,141
|
|
|
$ |
4,405
|
|
Interest
expense
|
|
|
10,546
|
|
|
|
2,742
|
|
|
|
2,660
|
|
|
|
2,674
|
|
|
|
2,817
|
|
Net
interest income
|
|
|
6,412
|
|
|
|
1,608
|
|
|
|
1,822
|
|
|
|
1,443
|
|
|
|
1,539
|
|
Provision
for loan losses
|
|
|
219
|
|
|
|
71
|
|
|
|
145
|
|
|
|
1
|
|
|
|
2
|
|
Net
interest income, after provision for loan losses
|
|
|
6,193
|
|
|
|
1,537
|
|
|
|
1,677
|
|
|
|
1,442
|
|
|
|
1,537
|
|
Noninterest
income
|
|
|
3,173
|
|
|
|
455
|
|
|
|
139
|
|
|
|
1,131
|
|
|
|
1,448
|
|
Noninterest
expense
|
|
|
9,889
|
|
|
|
2,478
|
|
|
|
2,433
|
|
|
|
2,478
|
|
|
|
2,500
|
|
Income
(loss) before income taxes
|
|
|
(523 |
) |
|
|
(486 |
) |
|
|
(617 |
) |
|
|
95
|
|
|
|
485
|
|
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
income (loss) from continuing operations
|
|
|
(523 |
) |
|
|
(486 |
) |
|
|
(617 |
) |
|
|
95
|
|
|
|
485
|
|
Income
(loss) from discontinued operations
|
|
|
(1,107 |
) |
|
|
(1,035 |
) |
|
|
(32 |
) |
|
|
(15 |
) |
|
|
(25 |
) |
Net
income (loss)
|
|
$ |
(1,630 |
) |
|
$ |
(1,521 |
) |
|
$ |
(649 |
) |
|
$ |
80
|
|
|
$ |
460
|
|
Basic
and diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(0.17 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.21 |
) |
|
$ |
0.04
|
|
|
$ |
0.16
|
|
Discontinued
operations
|
|
|
(0.37 |
) |
|
|
(0.34 |
) |
|
|
(0.01 |
) |
|
|
(0.01 |
) |
|
|
(0.01 |
) |
Net
income (loss)
|
|
$ |
(0.54 |
) |
|
$ |
(0.50 |
) |
|
$ |
(0.22 |
) |
|
$ |
0.03
|
|
|
$ |
0.15
|
|
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
Dated:
January 31, 2007
Exhibit
23.1
Consent
of Independent Registered Public Accounting Firm
Board
of
Directors
Greater
Atlantic Financial Corp.
We
hereby
consent to the incorporation by reference in the Registration Statements on
Form
S-8 (333-76169 and 333-92342) of our report dated January 30, 2007, relating
to
the consolidated financial statements of Greater Atlantic Financial Corp.
appearing in the Company’s Annual Report on Form 10-K for the year ended
September 30, 2006.
/s/
BDO Seidman, LLP
Richmond,
Virginia
January
30, 2007
Exhibit
31.1
CERTIFICATION
I,
Carroll E. Amos, Chief Executive
Officer of Greater Atlantic Financial Corp., certify that:
I.
|
I
have reviewed this annual report on Form 10-K of Greater Atlantic
Financial Corp.;
|
II.
|
Based
on my knowledge, this annual report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to
make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
annual report;
|
III.
|
Based
on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects
the financial condition, results of operations and cash flows of
the
registrant as of, and for, the periods presented in this annual
report;
|
IV.
|
The
registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e) for the registrant
and have:
|
(a)
Designed such disclosure controls and procedures, or caused
such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being
prepared;
(b)
Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented
in
this report our conclusions about the effectiveness of the disclosure controls
and procedures as of the end of the period covered by this based on such;
and
(c)
Disclosed
in this report
any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and;
V.
|
The
registrant's other certifying officers and I have disclosed, based
on our
most recent evaluation of
internal
control over financial reporting, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent
functions):
|
VI.
|
All
significant deficiencies and
material
weaknesses in
the design or operation of internal control over
financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information;
and
|
|
b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control
over financial reporting.;
|
Date: January
31, 2007
|
/s/
Carroll E. Amos
|
Chief
Executive Officer
Exhibit
31.2
CERTIFICATION
I,
David E. Ritter, Chief Financial
Officer of Greater Atlantic Financial Corp., certify that:
1.
I have reviewed this annual report on Form 10-K of Greater Atlantic Financial
Corp.;
2.
|
Based
on my knowledge, this annual report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to
make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
annual report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects
the financial condition, results of operations and cash flows of
the
registrant as of, and for, the periods presented in this annual
report;
|
4.
|
The
registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e) for the registrant
and have:
|
(a) Designed such disclosure controls and procedures, or caused
such
disclosure controls and procedures to be designed under our supervision,
to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period
in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented
in
this report our conclusions about the effectiveness of the
disclosure
controls and procedures as of the end of the period covered by this based
on such; and
(c) Disclosed
in this report
any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth
fiscal quarter in the case of an annual report) that has materially affected,
or
is reasonably likely to materially affect, the registrant’s internal control
over
financial reporting;
and;
5.
|
The
registrant's other certifying officers and I have disclosed, based
on our
most recent evaluation of
internal
control over financial reporting, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent
functions):
|
|
(a)
All significant deficiencies and
material
weaknesses in
the design or operation of internal control over
financial reporting which are
reasonably likely to adversely affect the
registrant's
ability to record, process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control
over financial reporting.
|
Date: January
31, 2007
|
/s/
David E. Ritter
|
Chief
Financial Officer
Exhibit
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C.
SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Report of Greater Atlantic Financial Corp. (the “Company”) on Form
10-K for the year ended September 30, 2006 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”),
I, Carroll E.
Amos, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C.'
1350, as adopted pursuant to '
906 of the Sarbanes-Oxley Act of 2002, that:
(A) The
Report fully complies with the requirements of Section 13(a) – 15(e) or 15(d)
–15(e) of the Securities Exchange Act of 1934; and
(B) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company as of and
for
the period covered by the Report.
/s/
Carroll E.
Amos
Carroll
E.
Amos
Chief
Executive
Officer
January
31,
2007
Exhibit
32.2
CERTIFICATION
PURSUANT TO
18
U.S.C.
SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Report of Greater Atlantic Financial Corp. (the "Company")
on Form 10-K for the year ended September 30, 2006 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, David E. Ritter,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.§ 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(A) The
Report fully complies with the requirements of Section 13(a) –15(e) or 15(d)
-15(e) of the Securities Exchange Act of 1934; and
(B) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company as of and
for
the period covered by the Report.
/s/
David E.
Ritter
David
E.
Ritter
Chief
Financial
Officer
January
31, 2007
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[√]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
quarterly period ended December 31, 2006
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)
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
10700 Parkridge Boulevard, Suite P50, Reston,
Virginia
20191
(Address of Principal Executive
Offices)
(Zip Code)
(703)
391-1300
(Registrant’s
telephone number, including area code)
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 [
√ ] No [ ]
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated
filer [__] Accelerated
filer [__] Non-
accelerated filer [ √ ]
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
Yes [__] No [
√ ]
At
December 31, 2006, there were 3,023,506 shares of the registrant’s
Common
Stock,
par value $0.01 per share outstanding
Greater
Atlantic Financial Corp.
Quarterly
Report on Form 10-Q
For
the Quarter Ended December 31, 2006
Table of Contents
PART
I. FINANCIAL INFORMATION
|
PAGE
NO.
|
|
|
|
Item
1.
|
Condensed
Financial Statements (Unaudited)
|
|
|
|
|
|
Consolidated
Statements of Financial Condition at December 31, 2006 and September
30,
2006
|
3
|
|
|
|
|
Consolidated
Statements of Operations
|
|
|
for
the three months ended December 31, 2006 and December 31, 2005
(restated)
|
4
|
|
|
|
|
Consolidated
Statements of Comprehensive Income (Loss)
|
|
|
for
the three months ended December 31, 2006 and December 31, 2005
(restated)
|
5
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
|
|
for
the three months ended December 31, 2006 and December 31, 2005
(restated)
|
5
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
for
the three months ended December 31, 2006 and December 31, 2005
(restated)
|
6
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
8
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
22
|
Item
4.
|
Controls
and Procedures
|
23
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
25
|
Item
1A.
|
Risk
Factors
|
25
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
27
|
Item
3.
|
Defaults
Upon Senior Securities
|
27
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
27
|
Item
5.
|
Other
Information
|
27
|
Item
6.
|
Exhibits
|
27
|
|
|
|
SIGNATURES
|
28
|
|
|
|
CERTIFICATIONS
|
29
|
Greater
Atlantic Financial Corp.
Consolidated
Statements of Financial Condition (Unaudited)
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2006
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,975
|
|
|
$ |
2,516
|
|
Interest
bearing deposits at banks
|
|
|
3,836
|
|
|
|
17,288
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
68,921
|
|
|
|
75,461
|
|
Held-to-maturity
|
|
|
4,176
|
|
|
|
4,696
|
|
Loans
receivable, net
|
|
|
195,172
|
|
|
|
193,307
|
|
Accrued
interest and dividends receivable
|
|
|
2,022
|
|
|
|
2,073
|
|
Deferred
income taxes
|
|
|
1,857
|
|
|
|
1,928
|
|
Federal
Home Loan Bank stock, at cost
|
|
|
2,433
|
|
|
|
2,388
|
|
Other
real estate owned
|
|
|
-
|
|
|
|
-
|
|
Premises
and equipment, net
|
|
|
2,660
|
|
|
|
2,764
|
|
Goodwill
|
|
|
956
|
|
|
|
956
|
|
Prepaid
expenses and other assets
|
|
|
1,606
|
|
|
|
1,842
|
|
Total
assets
|
|
$ |
286,614
|
|
|
$ |
305,219
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
217,880
|
|
|
$ |
230,174
|
|
Advance
payments from borrowers for taxes and insurance
|
|
|
266
|
|
|
|
270
|
|
Accrued
expenses and other liabilities
|
|
|
2,032
|
|
|
|
1,963
|
|
Advances
from the FHLB and other borrowings
|
|
|
48,972
|
|
|
|
54,574
|
|
Junior
subordinated debt securities
|
|
|
9,390
|
|
|
|
9,388
|
|
Total
liabilities
|
|
|
278,540
|
|
|
|
296,369
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock $.01 par value - 2,500,000 shares authorized,
none
outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $.01 par value – 10,000,000
|
|
|
|
|
|
|
|
|
shares
authorized; 3,023,506 shares outstanding
|
|
|
30
|
|
|
|
30
|
|
Additional
paid-in capital
|
|
|
25,228
|
|
|
|
25,228
|
|
Accumulated
deficit
|
|
|
(16,251 |
) |
|
|
(15,359 |
) |
Accumulated
other comprehensive loss
|
|
|
(933 |
) |
|
|
(1,049 |
) |
Total
stockholders’ equity
|
|
|
8,074
|
|
|
|
8,850
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
286,614
|
|
|
$ |
305,219
|
|
See
accompanying notes to consolidated financial statements
Greater
Atlantic Financial Corp.
Consolidated
Statements of Operations (Unaudited)
|
|
Three
Months Ended
December
31,
|
|
(Dollars
in Thousands, Except Per Share Data)
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
Interest
income
|
|
|
|
|
|
|
Loans
|
|
$ |
3,670
|
|
|
$ |
3,391
|
|
Investments
|
|
|
1,135
|
|
|
|
1,199
|
|
Total
interest income
|
|
|
4,805
|
|
|
|
4,590
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,239
|
|
|
|
1,765
|
|
Borrowed
money
|
|
|
794
|
|
|
|
976
|
|
Total
interest expense
|
|
|
3,033
|
|
|
|
2,741
|
|
Net
interest income
|
|
|
1,772
|
|
|
|
1,849
|
|
Provision
for loan losses
|
|
|
148
|
|
|
|
71
|
|
Net
interest income after provision for loan losses
|
|
|
1,624
|
|
|
|
1,778
|
|
Noninterest
income
|
|
|
|
|
|
|
|
|
Fees
and service charges
|
|
|
152
|
|
|
|
151
|
|
Gain
on derivatives
|
|
|
13
|
|
|
|
71
|
|
Gain
on sale of foreclosed real estate
|
|
|
-
|
|
|
|
65
|
|
Other
operating income
|
|
|
5
|
|
|
|
15
|
|
Total
noninterest income
|
|
|
170
|
|
|
|
302
|
|
Noninterest
expense
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
|
1,266
|
|
|
|
1,093
|
|
Occupancy
|
|
|
343
|
|
|
|
317
|
|
Professional
services
|
|
|
400
|
|
|
|
257
|
|
Advertising
|
|
|
24
|
|
|
|
173
|
|
Deposit
insurance premium
|
|
|
23
|
|
|
|
27
|
|
Furniture,
fixtures and equipment
|
|
|
130
|
|
|
|
137
|
|
Data
processing
|
|
|
220
|
|
|
|
243
|
|
Other
operating expenses
|
|
|
280
|
|
|
|
273
|
|
Total
noninterest expense
|
|
|
2,686
|
|
|
|
2,520
|
|
Loss
from continuing operations before income taxes
|
|
|
(892 |
) |
|
|
(440 |
) |
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
Loss
from continuing operations
|
|
|
(892 |
) |
|
|
(440 |
) |
Discontinued
operations:
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
-
|
|
|
|
(1,782 |
) |
Net
loss
|
|
$ |
(892 |
) |
|
$ |
(2,222 |
) |
Earnings
(loss) per common share
|
|
|
|
|
|
|
|
|
Basic
and diluted:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(0.30 |
) |
|
$ |
(0.15 |
) |
Discontinued
operations
|
|
|
-
|
|
|
|
(0.59 |
) |
Net
income (loss)
|
|
$ |
(0.30 |
) |
|
$ |
(0.74 |
) |
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
3,021,297
|
|
|
|
3,020,934
|
|
See
accompanying notes to consolidated financial statements
Greater
Atlantic Financial Corp.
Consolidated
Statements of Comprehensive Income (Loss) (Unaudited)
|
|
Three
months ended
|
|
|
|
December
31,
|
|
(In
Thousands)
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
Net
loss
|
|
$ |
(892 |
) |
|
$ |
(2,222 |
) |
Other
comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on securities
|
|
|
116
|
|
|
|
(172 |
) |
Other
comprehensive income (loss)
|
|
|
116
|
|
|
|
(172 |
) |
Comprehensive
loss
|
|
$ |
(776 |
) |
|
$ |
(2,394 |
) |
Greater
Atlantic Financial Corp.
Consolidated
Statements of Changes in Stockholders’ Equity (Unaudited)
For
the
Three Months Ended December 31, 2006 and 2005 (Restated)
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Earnings
(Deficit)
|
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
|
Total
Stockholders’
Equity
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2005 (as restated)
|
|
$ |
-
|
|
|
$ |
30
|
|
|
$ |
25,228
|
|
|
$ |
(9,788 |
) |
|
$ |
(1,095 |
) |
|
$ |
14,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(172 |
) |
|
|
(172 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period (as restated)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,222 |
) |
|
|
-
|
|
|
|
(2,222 |
) |
Balance
at December 31, 2005 (as restated)
|
|
$ |
-
|
|
|
$ |
30
|
|
|
$ |
25,228
|
|
|
$ |
(12,010 |
) |
|
$ |
(1,267 |
) |
|
$ |
11,981
|
|
Balance
at September 30, 2006
|
|
$ |
-
|
|
|
$ |
30
|
|
|
$ |
25,228
|
|
|
$ |
(15,359 |
) |
|
$ |
(1,049 |
) |
|
$ |
8,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
116
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(892 |
) |
|
|
-
|
|
|
|
(892 |
) |
Balance
at December 31, 2006
|
|
$ |
-
|
|
|
$ |
30
|
|
|
$ |
25,228
|
|
|
$ |
(16,251 |
) |
|
$ |
(933 |
) |
|
$ |
8,074
|
|
See
accompanying notes to consolidated financial statements
Greater
Atlantic Financial Corp.
Consolidated
Statements of Cash Flows (Unaudited)
|
|
Three
months ended December 31,
|
|
|
|
2006
|
|
|
2005
(Restated)
|
|
(In
Thousands)
|
|
|
|
|
|
|
Cash
flow from operating activities
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(892 |
) |
|
$ |
(2,222 |
) |
Adjustments
to reconcile net loss to net cash provided by
|
|
|
|
|
|
|
|
|
(used
in) operating activities
|
|
|
|
|
|
|
|
|
Provision
for loan loss
|
|
|
148
|
|
|
|
71
|
|
Amortization
of loan acquisition adjustment
|
|
|
(7 |
) |
|
|
(16 |
) |
Depreciation
and amortization
|
|
|
115
|
|
|
|
211
|
|
(Gain)
loss on derivatives
|
|
|
(13 |
) |
|
|
(71 |
) |
Amortization
of investment security premiums
|
|
|
155
|
|
|
|
187
|
|
Amortization
of mortgage-backed securities premiums
|
|
|
106
|
|
|
|
209
|
|
Amortization
of deferred fees
|
|
|
(99 |
) |
|
|
(158 |
) |
Discount
accretion net of premium amortization
|
|
|
(72 |
) |
|
|
(65 |
) |
Amortization
of convertible preferred stock costs
|
|
|
2
|
|
|
|
2
|
|
Gain
on sale of loans held for sale
|
|
|
-
|
|
|
|
(809 |
) |
Gain
on sale of foreclosed real estate
|
|
|
-
|
|
|
|
(65 |
) |
Gain
on sale of fixed assets
|
|
|
(26 |
) |
|
|
-
|
|
(Increase)
decrease in assets
|
|
|
|
|
|
|
|
|
Disbursements
for origination of loans held for sale
|
|
|
-
|
|
|
|
(49,513 |
) |
Proceeds
from sales of loans
|
|
|
-
|
|
|
|
54,634
|
|
Accrued
interest and dividend receivable
|
|
|
51
|
|
|
|
(236 |
) |
Prepaid
expenses and other assets
|
|
|
236
|
|
|
|
677
|
|
Deferred
loan fees collected, net of deferred costs incurred
|
|
|
163
|
|
|
|
51
|
|
Impairment
of premises and equipment
|
|
|
|
|
|
|
868
|
|
Increase
(decrease) in liabilities
|
|
|
|
|
|
|
|
|
Accrued
expenses and other liabilities
|
|
|
82
|
|
|
|
10
|
|
Net
cash provided by (used in) operating activities
|
|
|
(51 |
) |
|
|
3,765
|
|
Continued
Greater
Atlantic Financial Corp.
Consolidated
Statements of Cash Flows (Unaudited) – (Continued)
|
|
Three
months ended December 31,
|
|
|
|
2006
|
|
|
2005
(Restated)
|
|
(In
Thousands)
|
|
|
|
|
|
|
Cash
flow from investing activities
|
|
|
|
|
|
|
Net increase
in loans
|
|
$ |
(1,997 |
) |
|
$ |
(1,542 |
) |
Disposal of
premises and equipment
|
|
|
15
|
|
|
|
(86 |
) |
Purchases
of investment securities
|
|
|
-
|
|
|
|
(7,707 |
) |
|
|
|
|
|
|
|
|
|
Proceeds
from repayments of investment securities
|
|
|
2,895
|
|
|
|
4,939
|
|
Proceeds
from repayments of mortgage-backed securities
|
|
|
4,090
|
|
|
|
7,961
|
|
Proceeds
from the sale of foreclosed assets
|
|
|
-
|
|
|
|
297
|
|
Purchases
of FHLB stock
|
|
|
(225 |
) |
|
|
(1,350 |
) |
Proceeds
from sale of FHLB stock
|
|
|
180
|
|
|
|
855
|
|
Net
cash provided by investing activities
|
|
|
4,958
|
|
|
|
3,367
|
|
Cash
flow from financing activities
|
|
|
|
|
|
|
|
|
Net
decrease in deposits
|
|
|
(12,294 |
) |
|
|
(6,206 |
) |
Net
advances from FHLB
|
|
|
3,000
|
|
|
|
11,000
|
|
Net
decrease in borrowings on reverse repurchase agreements
|
|
|
(8,602 |
) |
|
|
(5,736 |
) |
Increase
(decrease) in advance payments by borrowers
for
taxes and insurance
|
|
|
(4 |
) |
|
|
(30 |
) |
Net
cash used in financing activities
|
|
|
(17,900 |
) |
|
|
(972 |
) |
Increase
(decrease) in cash and cash equivalents
|
|
|
(12,993 |
) |
|
|
6,160
|
|
Cash
and cash equivalents, at beginning of period
|
|
|
19,804
|
|
|
|
4,709
|
|
Cash
and cash equivalents, at end of period
|
|
$ |
6,811
|
|
|
$ |
10,869
|
|
See
accompanying notes to consolidated financial statements
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of December 31, 2006 and the Three Months Ended December 31, 2006
and 2005
(Unaudited)
(1)
BASIS OF PRESENTATION
The
accompanying unaudited consolidated financial statements, which include the
accounts of Greater Atlantic Financial Corp. (the “company”) and its wholly
owned subsidiary, Greater Atlantic Bank (the “bank”) have been prepared in
accordance with the instructions for Form 10-Q. Certain information
and note disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
of
America have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”) with respect to interim financial
reporting. It is recommended that these consolidated financial
statements be read in conjunction with the company’s Annual Report on Form 10-K
for the year ended September 30, 2006. The results of operations for
the three months ended December 31, 2006 are not necessarily indicative of
the
results of operations that may be expected for the year ending September 30,
2007 or any future periods. In addition to reclassifications related
to discontinued operations, other reclassifications have been made to prior
periods to place them on a basis comparable with the current period
presentation.
(2)
RESTATEMENT
During
2006, the company restated its historical financial statements to reflect the
accounting treatment for non-cash losses discovered in an unreconciled
inter-company account in its subsidiary, Greater Atlantic Mortgage Corporation
(“GAMC”). The losses were discovered as the bank discontinued the
operations of the subsidiary. The loss in any given year did not
reach a material amount such as to require restatement. However, the
bank determined to provide the restatements because the cumulative amount of
the
losses aggregated $1.4 million. The revisions had no impact on the
cash flows of the bank. The table below includes the effect of the
restatement and the presentation of GAMC as discontinued
operations.
|
|
As
originally reported
|
|
|
Restatement
|
|
|
Discontinued
operations
|
|
|
As
restated
|
|
Three
months ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
4,739
|
|
|
$ |
-
|
|
|
$ |
149
|
|
|
$ |
4,590
|
|
Interest
expense
|
|
|
2,863
|
|
|
|
-
|
|
|
|
122
|
|
|
|
2,741
|
|
Net
interest income
|
|
|
1,876
|
|
|
|
-
|
|
|
|
27
|
|
|
|
1,849
|
|
Noninterest
income
|
|
|
1,449
|
|
|
|
(92 |
) |
|
|
1,055
|
|
|
|
302
|
|
Noninterest
expense
|
|
|
5,384
|
|
|
|
-
|
|
|
|
2,864
|
|
|
|
2,520
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,782 |
) |
|
|
(1,782 |
) |
Net
income (loss)
|
|
|
(2,130 |
) |
|
|
(92 |
) |
|
|
-
|
|
|
|
(2,222 |
) |
Earnings
per share – continuing
|
|
|
(0.71 |
) |
|
|
(0.03 |
) |
|
|
0.59
|
|
|
|
(0.15 |
) |
Earnings
per share – discontinued
|
|
|
(0.00 |
) |
|
|
0.00
|
|
|
|
(0.59 |
) |
|
|
(0.59 |
) |
The
$92,000 adjustment to noninterest income relate to gains on sale of
loans. In addition, the September 30, 2005 retained earnings balance
was reduced by $1.3 million to reflect the cumulative effect of the restatement
of all periods prior to those reflected in this form 10-Q.
(3)
Discontinued operations
On
March
29, 2006, we began the process of discontinuing the operations of the bank’s
mortgage company subsidiary, GAMC. It was determined that this
business no longer fit our strategy.
As
a
result of the above action, we applied discontinued operations accounting in
the
third quarter of 2006, as we completed the closing of the GAMC
business. Accordingly, the income statements for all periods have
been adjusted. The reclassification of GAMC’s results to discontinued
operations primarily resulted in a reduction to previously reported levels
of
net interest income, a reduction in noninterest income and a reduction in
noninterest expense. The table below summarizes GAMC’s results which
were treated as discontinued operations for the periods
indicated.
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of December 31, 2006 and the Three Months Ended December 31, 2006
and 2005
(Unaudited)
|
|
Three
months ended December 31,
|
|
|
|
2005
|
|
(Dollars
in Thousands, Except Per Share Data
|
|
|
|
Interest
income
|
|
$ |
149
|
|
Interest
expense
|
|
|
122
|
|
Net
interest income
|
|
|
27
|
|
Noninterest
income
|
|
|
1,055
|
|
Noninterest
expense
|
|
|
2,864
|
|
Net
income (loss)
|
|
$ |
(1,782 |
) |
Earnings
(loss) per share – basic
|
|
$ |
(0.59 |
) |
Earnings
(loss) per share – diluted
|
|
|
(0.59 |
) |
(4)
LOAN
IMPAIRMENT AND LOAN LOSSES
In
accordance with guidance in the Statements of Financial Accounting Standards
Nos. 114 and 118, the company prepares a quarterly review to determine the
adequacy of the allowance for loan losses and to identify and value impaired
loans. An analysis of the change in the allowance for loan losses
follows (also see page 20 for discussion of non-performing loans):
|
|
At
or for the three months ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
1,330
|
|
|
$ |
1,212
|
|
Provisions
|
|
|
148
|
|
|
|
71
|
|
Total
charge-offs
|
|
|
(325 |
) |
|
|
(52 |
) |
Total
recoveries
|
|
|
5
|
|
|
|
14
|
|
Net
charge-offs
|
|
|
(320 |
) |
|
|
(38 |
) |
Balance
at end of period
|
|
$ |
1,158
|
|
|
$ |
1,245
|
|
Ratio
of net charge-offs during the period
to
average loans outstanding during the period
|
|
|
0.17 |
% |
|
|
0.02 |
% |
Allowance
for loan losses to total non-performing
loans
at end of period
|
|
|
247.44 |
% |
|
|
63.68 |
% |
Allowance
for loan losses to total loans
|
|
|
0.58 |
% |
|
|
0.59 |
% |
(5)
REGULATORY MATTERS
The
capital distribution regulation of the OTS requires that the bank provide the
applicable OTS Regional Director with a 30-day advance written notice of all
proposed capital distributions whether or not advance approval is
required. The bank paid dividends of $655,000 to the company during
the year ended September 30, 2006.
On
December 19, 2006, the company issued a news release announcing that the first
quarter distribution of Greater Atlantic Capital Trust I 6.50% Cumulative
Convertible Trust Preferred Securities scheduled for December 31, 2006, as
well
as future distributions on the Trust Preferred Securities, will be
deferred. The announcement by the company followed advice received by
the bank from the Office of Thrift Supervision that it would not approve the
bank’s application to pay a cash dividend to the
company. Accordingly, the company exercised its right to defer the
payment of interest on its 6.50% Convertible Junior Subordinated Debentures
Due
2031 related to the Trust Preferred Securities, for an indefinite period (which
can be no longer than 20 consecutive quarterly periods).
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of December 31, 2006 and the Three Months Ended December 31, 2006
and 2005
(Unaudited)
The
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) created
five categories of financial institutions based on the adequacy of their
regulatory capital levels: 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 December 31, 2006, the bank was classified as an
adequately-capitalized financial institution.
The
following presents the bank’s capital position at December 31,
2006:
|
|
Required
Balance
|
|
|
Required
Percent
|
|
|
Actual
Balance
|
|
|
Actual
Percent
|
|
|
Surplus/
(Shortfall)
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
|
|
$ |
14,260
|
|
|
|
5.00 |
% |
|
$ |
16,041
|
|
|
|
5.62 |
% |
|
$ |
1,781
|
|
Tier
1 Risk-based
|
|
$ |
11,192
|
|
|
|
6.00 |
% |
|
$ |
15,951
|
|
|
|
8.55 |
% |
|
$ |
4,759
|
|
Total
Risk-based
|
|
$ |
18,654
|
|
|
|
10.00 |
% |
|
$ |
17,109
|
|
|
|
9.17 |
% |
|
$ |
(1,545 |
) |
(6)
STOCK
OPTIONS
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 Plan
was amended effective March 14, 2000, to increase the number of options
available for grant to employees from 76,667 to 225,000 shares and amended
again
effective March 15, 2002, to increase the number of options available for grant
to employees from 225,000 to 350,000 shares and to limit its application to
officers and employees. 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 December 31, 2006, 94,685 warrants were
issued.
The
following summary represents the activity under the Plan:
|
|
Number
of Shares
|
|
|
Exercise
Price
|
|
|
Expiration
Date
|
|
Balance
outstanding and exercisable at September 30, 2004
|
|
|
226,000
|
|
|
|
|
|
|
|
Options
granted
|
|
|
104,000
|
|
|
$ |
6.75
|
|
|
|
10-6-2014
|
|
Options
exercised
|
|
|
(8,500 |
) |
|
$ |
4.00
|
|
|
|
|
|
Options
expired
|
|
|
(55,500 |
) |
|
$ |
6.52
|
|
|
|
|
|
Balance
outstanding and exercisable at September 30, 2005
|
|
|
266,000
|
|
|
$ |
6.91
|
|
|
|
|
|
Options
granted
|
|
|
12,000
|
|
|
$ |
6.00
|
|
|
|
3-31-2016
|
|
Options
expired
|
|
|
(25,000 |
) |
|
$ |
8.37
|
|
|
|
|
|
Balance
outstanding and exercisable at September 30, 2006
|
|
|
253,000
|
|
|
$ |
6.72
|
|
|
|
|
|
Options
granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance
outstanding and exercisable at December 31, 2006
|
|
|
253,000
|
|
|
$ |
6.72
|
|
|
|
|
|
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of December 31, 2006 and the Three Months Ended December 31, 2006
and 2005
(Unaudited)
The
company has adopted the provisions of Statement of Financial Accounting
Standards No. 123R, “Accounting for Stock-Based Compensation” (“SFAS 123R”), to
measure compensation cost for stock options effective after October 1,
2005. Prior to its adoption, the company accounted for its options
under APB 25 “Accounting for Stock Issued to Employees” with pro forma
disclosed. As allowable under SFAS 123R, the company used the
Black-Scholes method to measure the compensation cost of stock options granted
in 2006 with the following assumptions: risk-free interest rate of 4.88%, a
dividend payout rate of zero, and an expected option life of nine
years. The volatility is 32%. Using these assumptions, the
fair value of stock options granted during fiscal 2006 was $2.92. The
company estimates the fair value of each option on the date of grant using
the
Black-Scholes option-pricing model. There were no options granted during the
three months ended December 31, 2006 and December 31, 2005,
respectively..
(7)
EARNINGS PER SHARE
Earnings
per share is based on the weighted average number of shares of common stock
and
dilutive common stock equivalents outstanding. Basic earnings per
share includes no dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflect the potential
dilution of securities that could share in the earnings of an
entity. The weighted average shares outstanding for basic and diluted
earnings per share for the three months ended December 31, 2006 and 2005 were
the same as the effect of the conversion of preferred securities and the impact
of stock options were antidilutive for the periods ended December 31, 2006
and
2005. The effect of the conversion of the preferred securities would
result in an increase of 1,373,969 in common shares outstanding.
(8)
SEGMENT REPORTING
The
company had two reportable segments, banking and mortgage
banking. However, the mortgage-banking activities conducted in GAMC,
to which the mortgage-banking segment applied, were discontinued effective
March
29, 2006. The bank operates retail deposit branches in the greater
Washington, D.C./Baltimore metropolitan area. The banking segment
provides retail consumers and small businesses with deposit products such as
demand, transaction, and 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 activities, which were conducted principally through GAMC,
included the origination of residential real estate loans either for sale into
the secondary market, with servicing released or for retention in the bank’s
portfolio.
On
March
29, 2006, we began the process of discontinuing the operations of the bank’s
subsidiary, GAMC. Because it was unprofitable, it was determined that
this business no longer fit our strategy.
In
the
third quarter of 2006, we applied discontinued operations accounting for
GAMC. Accordingly, the income statements for all periods have been
restated. The restatements primarily resulted in a reduction to
previously reported levels of net interest income, a reduction in noninterest
income and a reduction in noninterest expense.
Due
to
the unprofitable operations of GAMC, the company recognized an operating loss
of
$693,000 for the three months ended December 31, 2005. In addition to
the loss from operations, a non-recurring pre-tax impairment charge for
long-lived assets of $996,000 was recorded and included in discontinued
operations in the consolidated statements of operations.
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of December 31, 2006 and the Three Months Ended December 31, 2006
and 2005
(Unaudited)
(9)
RECENT ACCOUNTING STANDARDS
The
Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standard (“SFAS”) No. 123 (Revised 2004) (“SFAS No. 123R”),
“Share-Based Payment,” in December 2004. SFAS No. 123R is a revision
of FASB Statement 123, “Accounting for Stock-Based Compensation” and supersedes
APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related
implementation guidance. The Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123R requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide service in exchange
for
the award. This statement is effective as of the beginning of the
first annual reporting period that begins after June 15, 2005 and the company
adopted the standard in the first quarter of fiscal 2006. The
adoption of this statement did not have a material impact on its consolidated
financial position or results of operations.
In
May
2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections – a
replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 generally
requires retrospective application to prior periods’ financial statements of all
voluntary changes in accounting principle and changes required when a new
pronouncement does not include specific transition provisions. This standard
was
effective for the company beginning October 1, 2006.
In
July
2006, the FASB issued Interpretation (FIN) No. 48, “Accounting for Uncertainty
in Income Taxes” - an Interpretation of SFAS No. 109, “Accounting for Income
Taxes.” FIN 48 defines the threshold for recognizing the benefits of tax return
positions in the financial statements as “more-likely-than-not” to be sustained
by a taxing authority. The term “more-likely-than-not” means a likelihood of
more than 50 percent. FIN 48 is effective for fiscal years beginning after
December 15, 2006, with early application permitted. Any impact from the
adoption of FIN 48 will be recorded directly to the beginning balance of
retained earnings and reported as a change in accounting principle. We are
currently evaluating the impact of this Interpretation, but do not expect it
to
be material.
On
October 1, 2006, we adopted SFAS 156, “Accounting for Servicing of Financial
Assets – an amendment of FASB Statement No.140.” SFAS 156 was issued in March
2006 and requires all newly recognized servicing rights and obligations to
be
initially measured at fair value. For each class of separately recognized
servicing rights and obligations retained, we have elected to continue to
account for each under the amortization method which requires us to amortize
servicing assets or liabilities in proportion to and over the periods of
estimated net servicing income or net servicing loss.
In
September 2006, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 108 (SAB 108). Due to diversity in practice among
registrants, SAB 108 expresses the SEC staff views regarding the process by
which misstatements in financials statements are evaluated for purposes of
determining whether financial statement restatement is necessary. SAB 108 is
effective for fiscal years ending after November 15, 2006, and early application
is encouraged. The company does not believe SAB 108 will have a material impact
on its consolidated financials statements.
In
September 2006, the Financial Accounting Standards Board released Statement
No.
157, "Fair Value Measurements" which defines fair value, establishes a framework
for measuring fair value in GAAP, and enhances disclosures about fair value
measurements. This Statement applies when other accounting pronouncements
require fair value measurements; it does not require new fair value
measurements. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those
years. While we are currently evaluating the effect of the guidance contained
in
this Statement, we do not expect the implementation to have a material impact
on
our consolidated financial statements.
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of December 31, 2006 and the Three Months Ended December 31, 2006
and 2005
(Unaudited)
(10)
JUNIOR SUBORDINATED DEBT SECURITIES
On
March
20, 2002, Greater Atlantic Capital Trust I (the, “Trust”), a Delaware statutory
business trust and a wholly owned Trust subsidiary of the company, issued $9.6
million aggregate liquidation amount (963,038 shares) of 6.50% cumulative
preferred securities maturing on December 31, 2031, retaining an option to
call
the securities on or after December 31, 2003. Conversion of the
preferred securities into the company’s common stock may occur at any time on or
after 60 days after the closing of the offering. The company may
redeem the preferred securities, in whole or in part, at any time on or after
December 31, 2003. Distributions on the preferred securities are
payable quarterly on March 31, June 30, September 30 and December 31 of each
year beginning on June 30, 2002. The Trust also issued 29,762 common
securities to the company for $297,620. The proceeds from the sale of
the preferred securities and the proceeds from the sale of the trust’s common
securities were utilized to purchase from the company junior subordinated debt
securities of $9,928,000 bearing interest of 6.50% and maturing December 31,
2031.
The
Trust
was formed for the sole purpose of investing the proceeds from the sale of
the
convertible preferred securities in the corresponding convertible
debentures. The company has fully and unconditionally guaranteed the
preferred securities along with all obligations of the trust related
thereto. The sale of the preferred securities yielded $9.3 million
after deducting offering expenses. The company retained approximately
$1.3 million of the proceeds for general corporate purposes, investing the
retained funds in short-term investments. The remaining $8.0 million
of the proceeds was invested in the bank to increase its capital position (also
see Note 5 Regulatory Matters).
(11)
DERIVATIVE FINANCIAL INSTRUMENTS
The
bank
has entered into various interest rate caps during fiscal year 2003 and 2002
that total $25 million in notional principal with terms between five and ten
years that limit the float between a floor of 2.00%, and are capped between
5.00% - 8.00%. The bank accounts for these derivatives, under the
guidelines of SFAS 133, as amended.
Realized
and unrealized gains and losses on those derivatives which meet hedge accounting
requirements are deferred and recognized when the hedge transaction
occurs. In the event hedge accounting requirements are not met gains
and losses on such instruments are included currently in the statement of
operations. During the three months ended December 31, 2006 and 2005
the instruments did not meet hedge accounting requirements. The
statements of operations include net gains of $13,000 and $71,000 for the three
months ended December 31, 2006 and 2005, respectively.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes presented elsewhere in this
report.
This
report contains forward-looking statements. When used in this 10-Q
report 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.
The
matters discussed in management’s discussion and analysis of financial condition
and results of operations reflects continuing operations, as adjusted for the
Restatement discussed in Note 2 of the financial statements, unless otherwise
noted.
Mortgage
Banking Activities
The
bank’s mortgage banking activities primarily consist of originating mortgage
loans secured by single-family properties. However, the
mortgage-banking activities conducted in GAMC were discontinued effective March
29, 2006 as it was determined that, because it was unprofitable, this business
no longer fit our strategy. Mortgage banking involves the origination
and sale of mortgage loans for the purpose of generating gains on sale of loans
and fee income on the origination of loans, in addition to loan interest
income. In recent years, the volume of GAMC’s originations had been
declining, resulting in losses from mortgage banking operations, which, pursuant
to an agreement, the manager had agreed to fund.
In
the
third quarter of 2006, we applied discontinued operations accounting for GAMC
as
we completed closing those operations during the quarter. This
business no longer fit our strategy because it was
unprofitable. Accordingly, the income statements for all periods have
been adjusted. The reclassifications primarily resulted in a
reduction to previously reported levels of net interest income, a reduction
in
noninterest income and a reduction in noninterest expense.
Due
to
the unprofitable operations of GAMC, the company recognized an operating loss
of
$693,000 for the three months ended December 31, 2005. In addition to
the loss from operations, a non-recurring pre-tax impairment charge on
long-lived assets of $996,000 was recorded for the three months ended December
31, 2005 and included in discontinued operations in the consolidated statements
of operations.
General
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, a federally chartered savings
bank. The bank is a member of the Federal Home Loan Bank system and
its deposits are insured up to applicable limits by the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation. We offer
traditional banking services to customers through the six branches of the bank
located throughout the greater Washington, D.C./Baltimore metropolitan
area.
The
profitability of the company depends primarily on its non-interest income and
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 consist mainly of
interest paid on deposits and borrowings. Non-interest income
consists primarily of gain on sales of loans, derivatives and available-for-sale
investments and service charge fees for deposits and loans.
The
level
of its operating expenses also affects the company’s
profitability. Operating expenses consist primarily of salaries and
employee benefits, occupancy-related expenses, equipment and technology-related
expenses and other general operating expenses.
At
December 31, 2006 the company’s total assets were $286.6 million, compared to
the $305.2 million held at September 30, 2006, representing a decrease of
6.10%. Both the bank’s overall asset size and customer base decreased
during the period and that decline is reflected in the consolidated statements
of financial condition and statements of operations. Net loans
receivable at December 31, 2006 were $195.2 million, an increase of $1.9 million
or 0.96% from the $193.3 million held at September 30, 2006. The
increase in loans consisted primarily of $3.2 million in multifamily, $3.7
million in commercial real estate and $1.1 million construction and land
loans. That increase was offset in part by decreases in single
family, commercial business and consumer loans totaling $6.3
million. At December 31, 2006, investment securities were $73.1
million, a decrease of $7.1 million or 8.81% from the $80.2 million held at
September 30, 2006. Deposits at December 31, 2006 were $217.9
million, a decrease of $12.3 million from the $230.2 million held at September
30, 2006.
On
February 22, 2006, the company announced that it had engaged Sandler O’Neill
& Partners, L.P. to advise and assist the company in evaluating the
financial aspects of all strategic alternatives available, including remaining
independent.
Critical
Accounting Policies, Estimates and Judgments
The
company’s financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation
of those financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue
and
expenses as well as the disclosure of contingent
liabilities. Management continually evaluates its estimates and
judgments including those related to the allowance for loan losses and income
taxes. Management bases its estimates and judgments on historical
experience and other factors that are believed to be reasonable under the
circumstances. Actual results may differ from those estimates under
different assumptions or conditions. The company believes that, of
its significant accounting policies, the most critical accounting policies
we
apply are those related to the evaluation of the adequacy of the allowance
for
loan losses.
A
variety
of factors impact the carrying value of the loan portfolio including the
calculation of the allowance for loan losses, valuation of underlying
collateral, the timing of loan charge-offs and the amount and amortization
of
loan fees and deferred origination costs. The allowance for loan
losses is the most difficult and subjective judgment. The allowance
is established and maintained at a level that we believe is adequate to cover
losses resulting from the inability of borrowers to make required payments
on
loans. Estimates for loan losses are arrived at by analyzing risks
associated with specific loans and the loan portfolio, current trends in
delinquencies and charge-offs, the views of our regulators, changes in the
size
and composition of the loan portfolio and peer comparisons. The
analysis also requires consideration of the economic climate and direction,
change in the interest rate environment, which may impact a borrower’s ability
to pay, legislation impacting the banking industry and economic conditions
specific to our service area. Because the calculation of the
allowance for loan losses relies on estimates and judgments relating to
inherently uncertain events, results may differ from our estimates.
Comparison
of Results of Operations for the Three Months Ended
December
31, 2006 and December 31, 2005
Net
Income. For the three months ended December 31, 2006, the
company had net loss of $892,000 or $0.30 per diluted share, compared to a
net
loss from continuing operations of $440,000 or $0.15 per diluted share for
the
three months ended December 31, 2005. The increase in the net loss of
$452,000 over the comparable period one-year ago was primarily the result of
an
increase in non-interest expense and provision for loan losses and decreases
in
net interest income and noninterest income.
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 liabilities
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 re-pricing 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.
Net
interest income from continuing operations
|
|
|
|
|
Difference
|
|
Three
Months Ended December 31,
|
|
2006
|
|
|
2005
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in Thousands)
|
|
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
3,670
|
|
|
$ |
3,391
|
|
|
$ |
279
|
|
|
|
8.23 |
% |
Investments
|
|
|
1,135
|
|
|
|
1,199
|
|
|
|
(64 |
) |
|
|
(5.34 |
) |
Total
|
|
|
4,805
|
|
|
|
4,590
|
|
|
|
215
|
|
|
|
4.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,239
|
|
|
|
1,765
|
|
|
|
474
|
|
|
|
26.86
|
|
Borrowings
|
|
|
794
|
|
|
|
976
|
|
|
|
(182 |
) |
|
|
(18.65 |
) |
Total
|
|
|
3,033
|
|
|
|
2,741
|
|
|
|
292
|
|
|
|
10.65
|
|
Net
interest income
|
|
$ |
1,772
|
|
|
$ |
1,849
|
|
|
$ |
(77 |
) |
|
|
(4.16 |
)% |
The
decrease in net interest income during the three months ended December 31,
2006,
resulted primarily from a $48.4 million decrease in the bank’s interest-earning
assets coupled with average interest-earning assets declining by $4.5 million
more than the decline in average interest-bearing liabilities and was offset
in
part by a 28 basis point increase in net interest margin (net interest income
divided by average interest-earning assets) from 2.26% for the three months
ended December 31, 2005 to 2.54% for the three months ended December 31,
2006. That increase in net interest margin was offset by an increase
of $33,000 in interest expense in the 2006 period compared to a reduction of
$41,000 in interest expense in the year ago period resulting from payments
made
on certain interest rate swap and cap agreements to the comparable period one
year ago. That increase in net interest margin also resulted from
increasing the average yield on interest-earning assets by 26 basis points
more
than the increase in the average cost on interest-bearing
liabilities.
Interest
Income. Interest income for the three months ended December 31,
2006 increased $215,000 compared to the three months ended December 31, 2005,
primarily as a result of an increase of 128 basis points in the average yield
earned on interest earning assets. That increase was partially offset
by a decrease of $48.4 million in the average outstanding balances of loans
and
investment securities.
Interest
Expense. The $292,000 increase in interest expense for the three
months ended December 31, 2006 compared to the 2005 period was principally
the
result of a 102 basis point increase in the cost of funds on average deposits
and borrowings. That increase in the cost of funds was partially
offset by a $43.9 million decrease in average deposits and
borrowings. The increase in interest expense on deposits was
primarily due to a 98 basis point increase in rates paid on
deposits. The increase in expense was primarily due to higher rates
paid on interest-bearing demand deposits, savings accounts and certificates
and
elevated pricing on new and renewed time deposits. That increase was
partially offset by a decrease of $5.2 million in average deposits from $215.7
million for the three months ended December 31, 2005 to $210.5 million for
the
three months ended December 31, 2006.
The
decrease in interest expense on borrowings for the three months ended December
31, 2006, when compared to the 2005 period, was principally the result of a
$38.7 million decrease in average borrowed funds, partially offset by a 151
basis point increase in the cost of borrowed funds. The components
accountable for the decrease of $182,000 in interest expense on borrowings
were
a $369,000 decrease relating to average volume, partially offset by a $187,000
increase relating to average cost.
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.
|
|
For
the Three Months Ended December 31,
|
|
|
|
2006
|
|
|
2005
(Restated)
|
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Yield/ Rate
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Yield/
Rate
|
|
Assets:
|
|
(dollars
in thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
$ |
93,132
|
|
|
$ |
1,717
|
|
|
|
7.37 |
% |
|
$ |
102,866
|
|
|
$ |
1,660
|
|
|
|
6.45 |
% |
Consumer
loans
|
|
|
59,504
|
|
|
|
1,180
|
|
|
|
7.93
|
|
|
|
68,646
|
|
|
|
1,116
|
|
|
|
6.50
|
|
Commercial
business loans
|
|
|
39,550
|
|
|
|
773
|
|
|
|
7.82
|
|
|
|
35,891
|
|
|
|
615
|
|
|
|
6.85
|
|
Total
loans
|
|
|
192,186
|
|
|
|
3,670
|
|
|
|
7.64
|
|
|
|
207,403
|
|
|
|
3,391
|
|
|
|
6.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
57,168
|
|
|
|
800
|
|
|
|
5.60
|
|
|
|
66,191
|
|
|
|
780
|
|
|
|
4.71
|
|
Mortgage-backed
securities
|
|
|
29,704
|
|
|
|
335
|
|
|
|
4.51
|
|
|
|
53,847
|
|
|
|
419
|
|
|
|
3.11
|
|
Total
interest-earning assets
|
|
|
279,058
|
|
|
|
4,805
|
|
|
|
6.89
|
|
|
|
327,441
|
|
|
|
4,590
|
|
|
|
5.61
|
|
Non-earning
assets
|
|
|
11,672
|
|
|
|
|
|
|
|
|
|
|
|
16,668
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
290,730
|
|
|
|
|
|
|
|
|
|
|
$ |
344,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$ |
3,154
|
|
|
|
7
|
|
|
|
0.89
|
|
|
$ |
6,749
|
|
|
|
15
|
|
|
|
0.89
|
|
Now
and money market accounts
|
|
|
79,378
|
|
|
|
711
|
|
|
|
3.58
|
|
|
|
69,223
|
|
|
|
524
|
|
|
|
3.03
|
|
Certificates
of deposit
|
|
|
127,998
|
|
|
|
1,521
|
|
|
|
4.75
|
|
|
|
139,723
|
|
|
|
1,226
|
|
|
|
3.51
|
|
Total
deposits
|
|
|
210,530
|
|
|
|
2,239
|
|
|
|
4.25
|
|
|
|
215,695
|
|
|
|
1,765
|
|
|
|
3.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
|
36,839
|
|
|
|
496
|
|
|
|
5.39
|
|
|
|
50,727
|
|
|
|
614
|
|
|
|
4.84
|
|
Other
borrowings
|
|
|
20,019
|
|
|
|
298
|
|
|
|
5.95
|
|
|
|
44,860
|
|
|
|
362
|
|
|
|
3.23
|
|
Total
interest-bearing
liabilities
|
|
|
267,388
|
|
|
|
3,033
|
|
|
|
4.54
|
|
|
|
311,282
|
|
|
|
2,741
|
|
|
|
3.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand deposits
|
|
|
12,330
|
|
|
|
|
|
|
|
|
|
|
|
15,668
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
2,266
|
|
|
|
|
|
|
|
|
|
|
|
4,065
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
281,984
|
|
|
|
|
|
|
|
|
|
|
|
331,015
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
8,746
|
|
|
|
|
|
|
|
|
|
|
|
13,094
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
stockholders'
Equity
|
|
$ |
290,730
|
|
|
|
|
|
|
|
|
|
|
$ |
344,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
1,772
|
|
|
|
|
|
|
|
|
|
|
$ |
1,849
|
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
|
|
|
|
|
2.35 |
% |
|
|
|
|
|
|
|
|
|
|
2.09 |
% |
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
2.54 |
% |
|
|
|
|
|
|
|
|
|
|
2.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate/Volume
Analysis. The following table presents certain
information regarding changes in interest income and interest expense
attributable to changes in interest rates and changes in volume of
interest-earning assets and interest-bearing liabilities for the periods
indicated. The change in interest attributable to both rate and
volume has been allocated to the changes in rate and volume on a pro rata
basis.
|
|
Three
Months Ended
December
31, 2006 compared to
|
|
|
|
December
31, 2005
|
|
|
|
Change
Attributable to
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
$ |
(157 |
) |
|
$ |
214
|
|
|
$ |
57
|
|
Consumer
loans
|
|
|
(149 |
) |
|
|
213
|
|
|
|
64
|
|
Commercial
business loans
|
|
|
63
|
|
|
|
95
|
|
|
|
158
|
|
Total
loans
|
|
|
(243 |
) |
|
|
522
|
|
|
|
279
|
|
Investments
|
|
|
(106 |
) |
|
|
126
|
|
|
|
20
|
|
Mortgage-backed
securities
|
|
|
(188 |
) |
|
|
104
|
|
|
|
(84 |
) |
Total
interest-earning assets
|
|
$ |
(537 |
) |
|
$ |
752
|
|
|
$ |
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$ |
(8 |
) |
|
$ |
-
|
|
|
$ |
(8 |
) |
Now
and money market accounts
|
|
|
77
|
|
|
|
110
|
|
|
|
187
|
|
Certificates
of deposit
|
|
|
(103 |
) |
|
|
398
|
|
|
|
295
|
|
Total
deposits
|
|
|
(34 |
) |
|
|
508
|
|
|
|
474
|
|
FHLB
advances
|
|
|
(168 |
) |
|
|
50
|
|
|
|
(118 |
) |
Other
borrowings
|
|
|
(200 |
) |
|
|
136
|
|
|
|
(64 |
) |
Total
interest-bearing liabilities
|
|
|
(402 |
) |
|
|
694
|
|
|
|
292
|
|
Change
in net interest income
|
|
$ |
(135 |
) |
|
$ |
58
|
|
|
$ |
(77 |
) |
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
loan type and assigns to them a reserve percentage that reflects the industry
standard. Management then looks at its classified assets, which are
loans 30 days or more delinquent, and classifies those loans as special mention,
substandard, doubtful or loss based on the performance of the
loans. Those classified loans are then individually evaluated for
impairment and measured by either the present value of expected future cash
flows, the loan’s observable market price, or the fair value of the
collateral. They are then segmented by type and assigned a reserve
percentage that reflects the underlying quality of the loan. Although
management utilizes its best judgment in providing for probable losses, there
can be no assurance that the bank will not have to increase its provisions
for
loan losses in the future. An increase in provision may result from
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. On an annual basis, or more often if deemed necessary,
the bank has contracted with an independent outside third party to have its
loan
portfolio reviewed. The focus of their review is to identify the
extent of potential and actual risk in the bank’s commercial loan portfolio, in
addition to the underwriting and processing practices. Observations
made regarding the bank’s portfolio risk are based upon review evaluations,
portfolio profiles and discussion with the operational staff, including the
line
lenders and senior management.
Non-performing
assets were $468,000 or 0.16% of total assets at December 31, 2006, with all
classified as substandard, no assets were classified as doubtful or as
loss. Non-performing assets decreased $1.5 million from the $2.0
million or 0.58% of total assets classified as non-performing at December 31,
2005. The $1.5 million decrease in non-performing loans does not
reflect $1.8 million of loans classified as special mention and is reflected
in
the $77,000 increase in the provision for loan losses for the December 31,
2006
quarter when compared to the provision made in the year ago
quarter. The increase in the provision for loan losses from the year
ago period also resulted from increases in the outstanding balance of the bank’s
commercial real estate, construction and land loans. Those increases
were offset by decreases in the outstanding balance of the bank’s commercial
business and second trust loans. The increase in provision resulted
primarily from the increase in the required provision for those loans and the
overall increase in the size of the bank’s loan portfolio.
Non-interest
Income. Non-interest income decreased $132,000 during the quarter ended
December 31, 2006, over the comparable period one year ago. That
decrease was primarily the result of a decrease of $123,000 in gains on
derivatives and gains on sale of foreclosed real estate.
The
following table presents a comparison of the components of non-interest
income.
Non-interest
income from continuing operations
|
|
|
|
|
Difference
|
|
Three
Months Ended December 31,
|
|
2006
|
|
|
2005
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in Thousands)
|
|
|
|
Non-interest
income:
|
|
|
|
Service
fees on loans
|
|
$ |
42
|
|
|
$ |
47
|
|
|
$ |
(5 |
) |
|
|
(10.64 |
)% |
Service
fees on deposits
|
|
|
110
|
|
|
|
104
|
|
|
|
6
|
|
|
|
5.77
|
|
Gain
on derivatives
|
|
|
13
|
|
|
|
71
|
|
|
|
(58 |
) |
|
|
(81.69 |
) |
Gain
on sale of foreclosed real estate
|
|
|
-
|
|
|
|
65
|
|
|
|
(65 |
) |
|
|
(100.00 |
) |
Other
operating income
|
|
|
5
|
|
|
|
15
|
|
|
|
(10 |
) |
|
|
(66.67 |
) |
Total
non-interest income
|
|
$ |
170
|
|
|
$ |
302
|
|
|
$ |
(132 |
) |
|
|
(43.71 |
)% |
Non-interest
expense. Non-interest expense increased $166,000 from $2.5 million for the
three months ended December 31, 2005 to $2.7 million for the three months ended
December 31 in the current year. The increase was distributed over
various non-interest expense categories with the primary contributors being
compensation, professional services and occupancy and was partially offset
by
decreases totaling $183,000 in advertising, deposit insurance premium, furniture
fixtures and equipment and data processing.
The
following table presents a comparison of the components of non-interest
expense.
Non-interest
expense from continuing operations
|
|
|
|
|
Difference
|
|
Three
Months Ended December 31,
|
|
2006
|
|
|
2005
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in Thousands)
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
$ |
1,266
|
|
|
$ |
1,093
|
|
|
$ |
173
|
|
|
|
15.83 |
% |
Occupancy
|
|
|
343
|
|
|
|
317
|
|
|
|
26
|
|
|
|
8.20
|
|
Professional
services
|
|
|
400
|
|
|
|
257
|
|
|
|
143
|
|
|
|
55.64
|
|
Advertising
|
|
|
24
|
|
|
|
173
|
|
|
|
(149 |
) |
|
|
(86.13 |
) |
Deposit
insurance premium
|
|
|
23
|
|
|
|
27
|
|
|
|
(4 |
) |
|
|
(14.81 |
) |
Furniture,
fixtures and equipment
|
|
|
130
|
|
|
|
137
|
|
|
|
(7 |
) |
|
|
(5.11 |
) |
Data
processing
|
|
|
220
|
|
|
|
243
|
|
|
|
(23 |
) |
|
|
(9.47 |
) |
Other
operating expense
|
|
|
280
|
|
|
|
273
|
|
|
|
7
|
|
|
|
2.56
|
|
Total
non-interest expense
|
|
$ |
2,686
|
|
|
$ |
2,520
|
|
|
$ |
166
|
|
|
|
6.59 |
% |
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. We did not record a provision for income taxes
for the three months ended December 31, 2006 and 2005 due to our operating
losses. The company believes that it will generate future taxable
income to assure utilization of a certain portion of the existing net operating
losses.
Contractual
Obligations and Off-Balance Sheet Financing Arrangements
The
following table summarizes the bank’s contractual obligations at December 31,
2006 and the effect those obligations are expected to have on the bank’s
liquidity and cash flows in future periods.
|
|
Total
|
|
|
Less
Than One Year
|
|
|
Two
– Three Years
|
|
|
Four
– Five Years
|
|
|
After
Five Years
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
Advances (1)
|
|
$ |
39,000
|
|
|
$ |
9,000
|
|
|
$ |
-
|
|
|
$ |
30,000
|
|
|
$ |
-
|
|
Reverse
repurchase agreements
|
|
|
9,972
|
|
|
|
9,972
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subordinated
debt securities
|
|
|
29,038
|
|
|
|
655
|
|
|
|
1,310
|
|
|
|
1,310
|
|
|
|
25,763
|
|
Operating
leases
|
|
|
4,604
|
|
|
|
1,097
|
|
|
|
2,050
|
|
|
|
992
|
|
|
|
465
|
|
Total
obligations
|
|
$ |
82,614
|
|
|
$ |
20,724
|
|
|
$ |
3,360
|
|
|
$ |
32,302
|
|
|
$ |
26,228
|
|
(1)
The company expects to refinance these short and medium-term obligations
under substantially the same terms and conditions.
|
|
Other
Commercial Commitments
|
|
Total
|
|
|
Less
Than One Year
|
|
|
Two
– Three Years
|
|
|
Four
– Five Years
|
|
|
After
Five Years
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate
of deposit maturities (1)
|
|
$ |
125,627
|
|
|
$ |
106,710
|
|
|
$ |
14,934
|
|
|
$ |
3,890
|
|
|
$ |
93
|
|
Loan
originations
|
|
|
8,944
|
|
|
|
8,944
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Unfunded
lines of credit
|
|
|
113,122
|
|
|
|
113,122
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Standby
letters of credit
|
|
|
155
|
|
|
|
155
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$ |
247,848
|
|
|
$ |
228,931
|
|
|
$ |
14,934
|
|
|
$ |
3,890
|
|
|
$ |
93
|
|
(1)
The company expects to retain maturing deposits or replace amounts
maturing with comparable certificates of deposits based on current
market
interest rates.
|
|
Liquidity
and Capital Resources. 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 continues to maintain the levels
of liquid assets previously required by OTS regulations. The bank
manages its liquidity position and demands for funding primarily by investing
excess funds in short-term investments and utilizing FHLB advances 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 and securities
available-for-sale. The levels of those assets are dependent on the
bank’s operating, financing, lending and investing activities during any given
period. At December 31, 2006, cash and cash equivalents, interest
bearing deposits and securities available-for-sale totaled $75.7 million or
26.42% of total assets.
The
primary investing activities of the bank are the origination of consumer loans,
residential one- to four-family loans, commercial business loans, commercial
real estate loans, and real estate construction and development loans and the
purchase of United States Treasury and agency securities, mortgage-backed and
mortgage-related securities and other investment securities. During
the three months ended December 31, 2006, the bank’s loan purchases and
originations totaled $21.3 million. The bank did not purchase any
United States Treasury or agency securities, mortgage-backed or mortgage related
securities or other investment securities during the three months ended December
31, 2006. The investments for the period ended December 31, 2006 are
all considered temporary impaired.
The
bank
has other sources of liquidity if a need for additional funds
arises. At December 31, 2006, the bank had $39.0 million in advances
outstanding from the FHLB and had an additional overall borrowing capacity
from
the FHLB of $12.6 million. Depending on market conditions, the
pricing of deposit products and the pricing of FHLB advances, the bank may
continue to rely on FHLB borrowings to fund asset growth.
At
December 31, 2006, the bank had commitments to fund loans and unused outstanding
lines of credit, unused standby letters of credit and undisbursed proceeds
of
construction mortgages totaling $122.2 million. Unfunded lines of
credit have remained relatively constant and have actually declined during
the
three months ended December 31, 2006. The bank anticipates that it
will have sufficient funds available to meet its current loan origination
commitments. Certificate accounts, including IRA and Keogh accounts,
which are scheduled to mature in less than one year from December 31, 2006,
totaled $106.7 million. Based upon experience, management believes
the majority of maturing deposits 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 those
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.
Item
3. Quantitative and Qualitative Disclosures About 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. The
company has little or no risk related to trading accounts, commodities or
foreign exchange. In general, market risk reflects the sensitivity of
income to variations in interest rates and other relevant market rates or
prices. The company’s market rate sensitive instruments include
interest-earning assets and interest-bearing liabilities. The company
enters into market rate sensitive instruments in connection with its various
business operations, particularly its mortgage banking
activities. Loans originated, and the related commitments to
originate loans that will be sold, represent market risk that is realized in
a
short period of time, generally two or three months.
The
company’s primary source of market risk exposure arises from changes in United
States interest rates and the effects thereof on mortgage prepayment and closing
behavior, as well as depositors’ choices (“interest rate
risk”). Changes in those interest rates will result in changes in the
company’s earnings and the market value of its assets and
liabilities. We expect to continue to realize income from the
differential or "spread" between the interest earned on loans, securities and
other interest-earning assets, and the interest paid on deposits, borrowings
and
other interest-bearing liabilities. That spread is affected by the
difference between the maturities and re-pricing characteristics of
interest-earnings assets and interest-bearing liabilities. Loan
volume and yields are affected by market interest rates on loans, and rising
interest rates generally are associated with fewer loan
originations. Management expects that a substantial portion of our
assets will continue to be indexed to changes in market interest rates and
we
intend to attract a greater proportion of short-term liabilities, which will
help us address our interest rate risk. The lag in implementation of
re-pricing terms on our adjustable-rate assets may result in a decline in net
interest income in a rising interest rate environment. There can be
no assurance that our interest rate risk will be minimized or
eliminated. Further, an increase in the general level of interest
rates may adversely affect the ability of certain borrowers to pay the interest
on and principal of their obligations. Accordingly, changes in levels
of market interest rates, (primarily increases in market interest rates), could
materially adversely affect our interest rate spread, asset quality, loan
origination volume and overall financial condition and results of
operations.
To
mitigate the impact of changes in market interest rates on our interest-earning
assets and interest-bearing liabilities, we actively manage the amounts and
maturities of these assets and liabilities. A key component of this
strategy is the origination and retention of short-term and adjustable-rate
assets and the origination and sale of fixed-rate loans. We retain
short-term and adjustable-rate assets because they have re-pricing
characteristics that more closely match the re-pricing characteristics of our
liabilities.
To
further mitigate the risk of timing differences in the re-pricing of assets
and
liabilities, our interest-earning assets are matched with interest-bearing
liabilities that have similar re-pricing characteristics. For
example, the interest rate risk of holding fixed-rate loans is managed with
long-term deposits and borrowings, and the risk of holding ARMs is managed
with
short-term deposits and borrowings. Periodically, mismatches are
identified and managed by adjusting the re-pricing characteristics of our
interest-bearing liabilities with derivatives, such as interest rate caps and
interest rate swaps.
Through
the use of these derivative instruments, management attempts to reduce or offset
increases in interest expense related to deposits and borrowings. We
use interest rate caps and pay-fixed interest rate swaps to protect against
rising interest rates.
The
interest rate caps and the pay-fixed interest rate swaps are designed to provide
an additional layer of protection, should interest rates on deposits and
borrowings rise, by effectively lengthening the re-pricing period. At
December 31, 2006, we held an aggregate notional value of $25 million
of. One of the interest rate caps had strike rates that were in
effect at December 31, 2006, as current LIBOR rates were above the strike
rate.
We
are
also striving to increase the proportion of transaction deposits to total
deposits to diminish our exposure to adverse changes in interest
rates. In particular, non-interest-bearing checking accounts and
custodial accounts are less sensitive to interest rate fluctuations and provide
a growing source of non-interest income through depositor and other retail
banking fees.
The
following table, which is based on information that we provide to the Office
of
Thrift Supervision, presents the change in our net portfolio value at September
30, 2006 that would occur in the event of an immediate change in interest rates
based on Office of Thrift Supervision assumptions, with no effect given to
any
steps that we might take to counteract that change.
|
|
|
Net
Portfolio Value
(Dollars
in thousands)
|
|
|
Net
Portfolio Value as % of
Portfolio
Value of Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Point (“bp”)
Change
in Rates
|
|
|
$Amount
|
|
|
$Change
|
|
|
%
Change
|
|
|
NPV
Ratio
|
|
|
Change
(bp)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+300
|
|
|
|
25,916
|
|
|
|
-2,864
|
|
|
|
-10 |
% |
|
|
8.75 |
% |
|
-68bp
|
|
|
+200
|
|
|
|
27,380
|
|
|
|
-1,401
|
|
|
|
-5 |
% |
|
|
9.15 |
% |
|
-29bp
|
|
|
+100
|
|
|
|
28,302
|
|
|
|
-479
|
|
|
|
-2 |
% |
|
|
9.36 |
% |
|
-7bp
|
|
|
0
|
|
|
|
28,781
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9.44 |
% |
|
|
-
|
|
|
-100
|
|
|
|
28,384
|
|
|
|
-396
|
|
|
|
-1 |
% |
|
|
9.25 |
% |
|
-19bp
|
|
|
-200
|
|
|
|
27,268
|
|
|
|
-1,512
|
|
|
|
-5 |
% |
|
|
8.85 |
% |
|
-59bp
|
|
The
Office of Thrift Supervision uses various assumptions in assessing interest
rate
risk. Those assumptions relate to interest rates, loan prepayment rates, deposit
decay rates and the market values of certain assets under differing interest
rate scenarios, among others. As with any method of measuring interest rate
risk, certain shortcomings are inherent in the methods of analyses presented
in
the foregoing tables. For example, although certain assets and liabilities
may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes
in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features that restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, expected rates of prepayments on loans and early withdrawals
from certificates could deviate significantly from those assumed in calculating
the table. Prepayment rates can have a significant impact on interest
income. Because of the large percentage of loans and mortgage-backed
securities we hold, rising or falling interest rates have a significant impact
on the prepayment speeds of our earning assets that in turn affect the rate
sensitivity position. When interest rates rise, prepayments tend to slow. When
interest rates fall, prepayments tend to rise. Our asset sensitivity would
be
reduced if prepayments slow and vice versa. While we believe these assumptions
to be reasonable, there can be no assurance that assumed prepayment rates will
approximate actual future mortgage-backed security and loan repayment
activity.
Item
4. Controls and Procedures.
Pursuant
to an investigation being conducted under the supervision of the company’s Audit
Committee, management discovered a $2.1 million difference in inter-company
accounts between the company and its subsidiary, GAMC. The company
discovered the un-reconciled inter-company account at GAMC during its review
of
the closing entries to the accounts of GAMC in connection with the preparation
of the company’s consolidated financial statements for the quarterly period
ended June 30, 2006. The investigation resulted in a determination
that the warehouse payable account maintained at GAMC had not been properly
reconciled.
The
extensive investigation revealed numerous errors in the reconciliation of the
warehouse payable account of GAMC over a period of five (5) years. As
a result of the investigation, the company determined that it has sustained
losses aggregating approximately $1.4 million. To date, the company
has identified claims of $738,000, primarily for duplicate checks issued and
paid on the same loan. Of that sum, $422,000 has been collected and
the company believes that the balance is recoverable. The
investigation regarding this matter is ongoing and the company has retained
legal and accounting personnel to assist in the company’s investigation. Costs
associated with engaging personnel to provide those professional services are
being treated as period costs.
The
company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed by the company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and regulations and that such
information is accumulated and communicated to the company's management,
including the company's Chief Executive Officer and Chief Financial Officer,
as
appropriate, to allow timely decisions regarding required disclosure. Because
of
the inherent limitations in all control systems, no evaluation of controls
can
provide absolute assurance that the company's disclosure controls and procedures
will detect or uncover every situation involving the failure of persons within
the company or its subsidiary to disclose material information otherwise
required to be set forth in the company's periodic reports.
The
company, under the supervision and with the participation of the company's
management, including the company's Chief Executive Officer and the Chief
Financial Officer, has evaluated the effectiveness of the company's disclosure
controls and procedures as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer and the Chief Financial
Officer have concluded that the company's disclosure controls and procedures
were not effective as of June 30, 2006 due to the override of certain internal
control procedures relating to preparation and review of certain
reconciliations. The override of those internal control procedures
enabled the differences in the reconciliations performed at GAMC to go
un-detected over a long period of time. While the bank had outsourced
its internal audit function to an independent CPA firm, neither their review
of
the reconciliations or that of the company’s then controller uncovered any
errors that were brought to the attention of senior
management. The person responsible for the reconciliations at
GAMC is no longer employed by GAMC, and the then controller of the bank, who
was
responsible for review of the reconciliations at GAMC, is no longer employed
by
the bank.
While
the
problem was isolated to one unique account with a subsidiary that is no longer
in business, and was the responsibility of individuals who are no longer
employed by subsidiaries of the company, the company has enhanced controls
in
similar situations going forward by:
·
|
Strengthening
the procedures for reconciling the intercompany accounts. Those
procedures include having an outside party
perform reconciliations semi-annually instead
of merely reviewing reconciliations performed by parties with
account responsibility; and
|
·
|
The
company has strengthened the accounting staff at the controller
position.
|
In
connection with this Form 10-Q, the company's management, with the participation
of its Chief Executive Officer and Chief Financial Officer, evaluated the
company's disclosure controls and procedures as currently in effect, including
the changes discussed above, and such officers have concluded that, as of this
date, the company's disclosure controls and procedures are
effective.
Management
of the company is also responsible for establishing and maintaining adequate
internal control over financial reporting and control of the company's assets
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.
There were no changes in the company's internal control over financial reporting
during the company's quarter ended December 31, 2006 that have materially
affected, or are reasonably likely to materially affect, the company's internal
control over financial reporting.
Part
II. Other
Information
Item
1. Legal
Proceedings
As
previously reported in a Form 8-K filed on September 8, 2006, the company
announced that a Demand for Arbitration before the American Arbitration
Association was filed against the company, the bank, GAMC, and Carroll E. Amos,
President and Chief Executive Officer of the company and the
bank. The Demand for Arbitration was filed by Stamm Mortgage
Management, Inc. ("Stamm Mortgage") and T. Mark Stamm, President of Stamm
Mortgage in connection with the Management Agreement among Stamm Mortgage,
the
bank, and GAMC that governed the management of GAMC by Stamm Mortgage before
the
bank terminated the operations of GAMC earlier this year, and certain aspects
of
the company's public disclosures of that event.
The
Demand for Arbitration alleges three counts: rescission, breach of contract,
and
defamation. As against the bank and GAMC, Stamm Mortgage alleges that the
Management Agreement is unenforceable and should be rescinded, requiring the
bank and GAMC, jointly and severally, to return $1.77 million that Stamm
Mortgage paid to the bank and GAMC under the Management Agreement. As an
alternative to rescission, Stamm Mortgage alleges that the bank and GAMC
breached the Management Agreement by terminating it contrary to its terms,
resulting in $9.6 million in lost profits to Stamm Mortgage. Stamm Mortgage
and
Mr. Stamm both allege that the company, the bank, GAMC, and Mr. Amos, acting
in
his official capacity, defamed Stamm Mortgage and Mr. Stamm through certain
public statements made in press releases and in public securities filings by
the
company and seek $1.0 million in compensatory damages and $350,000 in punitive
damages.
On
December 29, 2006, counsel for the company, the bank, GAMC and Mr. Amos filed
an
Answering Statement and Counterclaim in Arbitration. In, January
2007, the parties entered into negotiations looking toward a mutually acceptable
and amicable resolution of their claims. In the event that the claims
cannot be resolved through negotiations, the company intends to defend its
position vigorously.
On
February 9, 2007, the parties entered into a mutual release resolving any and
all related claims and controversies between the parties and obviating the
need
for all further arbitration and legal proceedings. The resolution of
the arbitration should not be construed as an assertion or admission of
liability on the part of any of the parties, as all parties expressly deny
any
and all liability, improper conduct or wrongdoing.
Item
1A. Risk
Factors
Our
increased emphasis on commercial and construction lending may expose us to
increased lending risks.
At
December 31, 2006, our loan portfolio consisted of $32.1 million, or 16.02%
of
commercial real estate loans, $26.0 million, or 12.95% of construction and
land
development loans and $39.2 million, or 19.56% of commercial business
loans. We intend to increase our emphasis on these types of
loans. These types of loans generally expose a lender to greater risk
of non-payment and loss than one-to-four-family residential mortgage loans
because repayment of the loans often depends on the successful operation of
the
property, the income stream of the borrowers and, for construction loans, the
accuracy of the estimate of the property’s value at completion of construction
and the estimated cost of construction. Such loans typically involve
larger loan balances to single borrowers or groups of related borrowers compared
to one- to four-family residential mortgage loans. Commercial
business loans expose us to additional risks since they typically are made
on
the basis of the borrower’s ability to make repayments from the cash flow of the
borrower’s business and are secured by non-real estate collateral that may
depreciate over time. In addition, since such loans generally entail
greater risk than one- to four-family residential mortgage loans, we may need
to
increase our allowance for loan losses in the future to account for the likely
increase in probable incurred credit losses associated with the growth of such
loans. Also, many of our commercial and construction borrowers have
more than one loan outstanding with us. Consequently, an adverse
development with respect to one loan or one credit relationship can expose
us to
a significantly greater risk of loss compared to an adverse development with
respect to a one- to four-family residential mortgage loan.
Strong
competition within our market area could hurt our ability to compete and could
slow our growth.
We
face
intense competition both in making loans and attracting
deposits. This competition has made it more difficult for us to make
new loans and has occasionally forced us to offer higher deposit
rates. Price competition for loans and deposits might result in us
earning less on our loans and paying more on our deposits, which would reduce
net interest income. Some of the institutions with which we compete
have substantially greater resources and lending limits than we have and may
offer services that we do not provide. We expect competition
to
increase
in the future as a result of legislative, regulatory and technological changes
and the continuing trend of consolidation in the financial services
industry. Our profitability depends upon our continued ability to
compete successfully in our market area.
An
increase in loan prepayments and on prepayment of loans underlying
mortgage-backed securities and small business administration certificates may
adversely affect our profitability.
Prepayment
rates are affected by consumer behavior, conditions in the housing and financial
markets, general economic conditions and the relative interest rates on
fixed-rate and adjustable-rate mortgage loans. Although changes in
prepayment rates are, therefore, difficult for us to predict, prepayment rates
tend to increase when market interest rates decline relative to the rates on
the
prepaid instruments.
We
recognize our deferred loan origination costs and premiums paid on originating
these loans by adjusting our interest income over the contractual life of the
individual loans. As prepayments occur, the rate at which net
deferred loan origination costs and premiums are expensed
accelerates. The effect of the acceleration of deferred costs and
premium amortization may be mitigated by prepayment penalties paid by the
borrower when the loan is paid in full within a certain period of time, which
varies between loans. If prepayment occurs after the period of time
when the loan is subject to a prepayment penalty, the effect of the acceleration
of premium and deferred cost amortization is no longer mitigated.
We
recognize premiums we pay on mortgage-backed securities and Small Business
Administration Certificates as an adjustment to interest income over the life
of
the security based on the rate of repayment of the securities. Acceleration
of
prepayment on the loans underlying a mortgage-backed security or Small Business
Administration Certificate shortens the life of the security, increases the
rate
at which premiums are expensed and further reduces interest income.
We
may
not be able to reinvest loan and security prepayments at rates comparable to
the
prepaid instruments particularly in periods of declining interest
rates.
We
operate in a highly regulated environment and we may be adversely affected
by
changes in laws and regulations.
The
bank
is subject to extensive regulation, supervision and examination by the Office
of
Thrift Supervision and by the Federal Deposit Insurance Corporation, as insurer
of its deposits. Such regulation and supervision govern the
activities in which the bank and the company may engage, and are intended
primarily for the protection of the insurance fund and for the depositors and
borrowers of the bank. The regulation and supervision by the Office
of Thrift Supervision and the Federal Deposit Insurance Corporation are not
intended to protect the interests of investors in the common stock of the
company. Regulatory authorities have extensive discretion in their
supervisory and enforcement activities, including the imposition of restrictions
on our operations, the classification of our assets and determination of the
level of our allowance for loan losses. Any change in such regulation
and oversight, whether in the form of regulatory policy, regulations,
legislation or supervisory action, may have a material impact on our
operations.
A
breach of information security could negatively affect our
earnings.
Increasingly,
we depend upon data processing, communication and information exchange on a
variety of computing platforms and networks and over the Internet. We
cannot be certain all our systems are entirely free from vulnerability to
attack, despite safeguards we have instituted. In addition, we rely
on the services of a variety of vendors to meet data processing and
communication needs. If information security is breached, information
can be lost or misappropriated, resulting in financial loss or costs to us
or
damages to others. These costs or losses could materially exceed the
amount of insurance coverage, if any, which would adversely affect our
earnings.
We
are subject to heightened regulatory scrutiny with respect to bank secrecy
and
anti-money laundering statutes and regulations.
Recently,
regulators have intensified their focus on the USA PATRIOT Act’s anti-money
laundering and Bank Secrecy Act compliance requirements. There is
also increased scrutiny of our compliance with the rules enforced by the Office
of Foreign Assets Control. In order to comply with regulations,
guidelines and examination procedures in this area, we have been required to
adopt new policies and procedures and to install new systems. We
cannot be certain that the policies, procedures and systems we have in place
are
flawless. Therefore, there is no assurance that in every instance we
are in full compliance with these requirements.
Failure
to pay interest on our debt may adversely impact us.
Deferral
of interest payments where allowed on our convertible preferred securities
may
affect our ability to issue additional debt.
Failure
to remain a well capitalized institution.
As
a
result of recording losses of $5.6 million during the year ended September
30,
2006, the bank ceased to be considered a well capitalized institution and is
now
considered to be an adequately capitalized institution. As an
adequately capitalized institution, the bank cannot issue brokered certificates
of deposit without OTS or FDIC permission, and the OTS can limit the payment
of
dividends from the bank to the company. Without the payment of a dividend from
the bank, the company is unable to make a distribution on the cumulative
convertible trust preferred securities. On December 13, 2006, the
bank was advised by the OTS that the OTS would not approve the bank’s
application to pay a cash dividend to the company, and the company exercised
its
right to defer the next scheduled quarterly distribution on the cumulative
convertible trust preferred securities.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
Not
applicable.
Item
3. Defaults
Upon Senior Securities
Not
applicable.
Item
4. Submission
of Matters to a Vote of Security Holders
Item
5. Other
Information
Not
applicable.
Item
6. Exhibits
(a)
Exhibits
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley
Act
of 2002
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley
Act
of 2002
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley
Act
of 2002
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley
Act
of 2002
|
Greater
Atlantic Financial Corp.
Signatures
Pursuant
to the requirement of the Securities and 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.
|
Carroll
E. Amos
|
President
and Chief Executive Officer
|
|
Senior
Vice President and Chief Financial
Officer
|
Exhibit
31.1
CERTIFICATION
I,
Carroll E. Amos, President and Chief Executive Officer of Greater Atlantic
Financial Corp., certify that:
1.
|
I
have reviewed this Quarterly Report on Form 10-Q of Greater Atlantic
Financial Corp.;
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
4.
|
The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
(b)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report, based on such evaluation;
and
|
(c)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
5.
|
The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board or directors (or persons performing the equivalent
functions):
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
By: /s/
Carroll E.
Amos
Carroll
E. Amos
President
and Chief Executive
Officer
Date:
February 13, 2007
Exhibit
31.2
CERTIFICATION
I,
David
E. Ritter, Senior Vice President and Chief Financial Officer of Greater Atlantic
Financial Corp., certify that:
1.
|
I
have reviewed this Quarterly Report on Form 10-Q of Greater Atlantic
Financial Corp.;
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
4.
|
The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
|
a.
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
b.
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report, based on such evaluation;
and
|
c.
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
5.
|
The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board or directors (or persons performing the equivalent
functions):
|
a.
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
b.
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
By: /s/
David E.
Ritter
David
E. Ritter
Senior
Vice President and
Chief
Financial Officer
Date:
February 13,
2007
Exhibit
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADDED BY
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of Greater Atlantic Financial Corp. (the
“company”) on Form 10-Q for the period ended December 31, 2006 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Carroll
E. Amos, President and Chief Executive Officer of the company, certify, pursuant
to 18 U.S.C.§ 1350, as added by § 906 of the Sarbanes-Oxley Act of 2002,
that:
A.
The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
B.
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the company
as of
and for the period covered by the Report.
By:
/s/ Carroll E.
Amos
Carroll
E.
Amos
President and Chief Executive Officer
Date: February 13, 2007
Exhibit
32.2
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADDED BY
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of Greater Atlantic Financial Corp. (the
“company”) on Form 10-Q for the period ended December 31, 2006 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, David
E. Ritter Senior Vice President and Chief Financial Officer of the company,
certify, pursuant to 18 U.S.C.§ 1350, as added by § 906 of the Sarbanes-Oxley
Act of 2002, that:
A.
The Report fully complies with the requirements of Section 13(a) or 15(d) of
the
Securities Exchange Act of 1934; and
B. The
information contained in the Report fairly presents, in all material respects,
the financial condition and results
of
operations of the company as of and for the period covered by the
Report.
By:
/s/ David E.
Ritter
David
E. Ritter
Senior
Vice President
and
Chief
Financial
Officer
Date:
February 13,
2007
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[√]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
quarterly period ended March 31, 2007
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)
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
10700 Parkridge Boulevard, Suite P50, Reston,
Virginia
20191
(Address
of Principal Executive
Offices)
(Zip Code)
(703)
391-1300
(Registrant’s
telephone number, including area code)
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 [
√ ] No [ ]
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated
filer [__] Accelerated
filer [__] Non-
accelerated filer [ √ ]
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
Yes [__] No [
√ ]
At
May
11, 2007, there were 3,024,220 shares of the registrant’s Common
Stock,
par value $0.01 per share outstanding
Greater
Atlantic Financial Corp.
Quarterly
Report on Form 10-Q
For
the Quarter Ended March 31, 2007
Table
of
Contents
|
|
|
PART
I. FINANCIAL INFORMATION
|
|
PAGE
NO.
|
|
|
|
Item
1.
|
Condensed
Financial Statements (Unaudited)
|
|
|
|
|
|
Consolidated
Statements of Financial Condition at March 31, 2007 and September
30,
2006
|
3
|
|
|
|
|
Consolidated
Statements of Operations
|
|
|
for
the three and six months ended March 31, 2007 and March 31, 2006
(restated)
|
4
|
|
|
|
|
Consolidated
Statements of Comprehensive Income (Loss)
|
|
|
for
the three and six months ended March 31, 2007 and March 31, 2006
(restated)
|
5
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
|
|
for
the six months ended March 31, 2007 and March 31, 2006
(restated)
|
5
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
for
the six months ended March 31, 2007 and March 31, 2006
(restated)
|
6
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
8
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
15
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
27
|
Item
4.
|
Controls
and Procedures
|
28
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
29
|
Item
1A.
|
Risk
Factors
|
29
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
31
|
Item
3.
|
Defaults
Upon Senior Securities
|
31
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
31
|
Item
5.
|
Other
Information
|
31
|
Item
6.
|
Exhibits
|
31
|
|
|
|
SIGNATURES
|
32
|
|
|
|
CERTIFICATIONS
|
33
|
Greater
Atlantic Financial Corp.
Consolidated
Statements of Financial Condition (Unaudited)
|
|
March
31,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
(a)
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,637
|
|
|
$ |
2,516
|
|
Interest
bearing deposits at banks
|
|
|
22,153
|
|
|
|
17,288
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
61,694
|
|
|
|
75,461
|
|
Held-to-maturity
|
|
|
3,720
|
|
|
|
4,696
|
|
Loans
receivable, net
|
|
|
182,941
|
|
|
|
193,307
|
|
Accrued
interest and dividends receivable
|
|
|
1,822
|
|
|
|
2,073
|
|
Deferred
income taxes
|
|
|
1,894
|
|
|
|
1,928
|
|
Federal
Home Loan Bank stock, at cost
|
|
|
2,204
|
|
|
|
2,388
|
|
Premises
and equipment, net
|
|
|
2,560
|
|
|
|
2,764
|
|
Goodwill
|
|
|
956
|
|
|
|
956
|
|
Prepaid
expenses and other assets
|
|
|
1,422
|
|
|
|
1,842
|
|
Total
assets
|
|
$ |
284,003
|
|
|
$ |
305,219
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
226,627
|
|
|
$ |
230,174
|
|
Advance
payments from borrowers for taxes and insurance
|
|
|
390
|
|
|
|
270
|
|
Accrued
expenses and other liabilities
|
|
|
1,428
|
|
|
|
1,963
|
|
Advances
from the FHLB and other borrowings
|
|
|
38,954
|
|
|
|
54,574
|
|
Junior
subordinated debt securities
|
|
|
9,392
|
|
|
|
9,388
|
|
Total
liabilities
|
|
|
276,791
|
|
|
|
296,369
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock $.01 par value - 2,500,000 shares authorized,
none
outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $.01 par value – 10,000,000
|
|
|
|
|
|
|
|
|
shares
authorized; 3,024,220 shares outstanding
|
|
|
30
|
|
|
|
30
|
|
Additional
paid-in capital
|
|
|
25,250
|
|
|
|
25,228
|
|
Accumulated
deficit
|
|
|
(17,075 |
) |
|
|
(15,359 |
) |
Accumulated
other comprehensive loss
|
|
|
(993 |
) |
|
|
(1,049 |
) |
Total
stockholders’ equity
|
|
|
7,212
|
|
|
|
8,850
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
284,003
|
|
|
$ |
305,219
|
|
(a) Consolidated Statement of Financial Condition as of September 30, 2006
has
been derived from audited consolidated financial statements.
See accompanying notes to consolidated financial statements
Greater
Atlantic Financial Corp.
Consolidated
Statements of Operations (Unaudited)
|
|
Three
Months Ended
March
31,
|
|
|
Six
Months Ended
March
31,
|
|
(Dollars
in Thousands, Except Per Share Data)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
3,651
|
|
|
$ |
3,399
|
|
|
$ |
7,322
|
|
|
$ |
6,790
|
|
Investments
|
|
|
943
|
|
|
|
1,201
|
|
|
|
2,077
|
|
|
|
2,400
|
|
Total
interest income
|
|
|
4,594
|
|
|
|
4,600
|
|
|
|
9,399
|
|
|
|
9,190
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,187
|
|
|
|
1,890
|
|
|
|
4,426
|
|
|
|
3,654
|
|
Borrowed
money
|
|
|
712
|
|
|
|
949
|
|
|
|
1,474
|
|
|
|
1,966
|
|
Total
interest expense
|
|
|
2,899
|
|
|
|
2,839
|
|
|
|
5,900
|
|
|
|
5,620
|
|
Net
interest income
|
|
|
1,695
|
|
|
|
1,761
|
|
|
|
3,499
|
|
|
|
3,570
|
|
Provision
for loan losses
|
|
|
145
|
|
|
|
3
|
|
|
|
293
|
|
|
|
74
|
|
Net
interest income after provision for loan losses
|
|
|
1,550
|
|
|
|
1,758
|
|
|
|
3,206
|
|
|
|
3,496
|
|
Noninterest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
and service charges
|
|
|
155
|
|
|
|
146
|
|
|
|
307
|
|
|
|
297
|
|
Gain
(loss) on derivatives
|
|
|
(13 |
) |
|
|
179
|
|
|
|
(33 |
) |
|
|
291
|
|
Gain
on sale of foreclosed real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
65
|
|
Other
operating income
|
|
|
6
|
|
|
|
5
|
|
|
|
11
|
|
|
|
20
|
|
Total
noninterest income
|
|
|
148
|
|
|
|
330
|
|
|
|
285
|
|
|
|
673
|
|
Noninterest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
|
1,175
|
|
|
|
1,194
|
|
|
|
2,441
|
|
|
|
2,286
|
|
Occupancy
|
|
|
344
|
|
|
|
334
|
|
|
|
687
|
|
|
|
651
|
|
Professional
services
|
|
|
323
|
|
|
|
261
|
|
|
|
722
|
|
|
|
519
|
|
Advertising
|
|
|
45
|
|
|
|
190
|
|
|
|
69
|
|
|
|
364
|
|
Deposit
insurance premium
|
|
|
7
|
|
|
|
25
|
|
|
|
30
|
|
|
|
52
|
|
Furniture,
fixtures and equipment
|
|
|
137
|
|
|
|
143
|
|
|
|
267
|
|
|
|
280
|
|
Data
processing
|
|
|
233
|
|
|
|
225
|
|
|
|
452
|
|
|
|
468
|
|
Other
operating expenses
|
|
|
258
|
|
|
|
254
|
|
|
|
539
|
|
|
|
528
|
|
Total
noninterest expense
|
|
|
2,522
|
|
|
|
2,626
|
|
|
|
5,207
|
|
|
|
5,148
|
|
Loss
from continuing operations before income taxes
|
|
|
(824 |
) |
|
|
(538 |
) |
|
|
(1,716 |
) |
|
|
(979 |
) |
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss
from continuing operations
|
|
|
(824 |
) |
|
|
(538 |
) |
|
|
(1,716 |
) |
|
|
(979 |
) |
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
-
|
|
|
|
(698 |
) |
|
|
-
|
|
|
|
(2,480 |
) |
Net
loss
|
|
$ |
(824 |
) |
|
$ |
(1,236 |
) |
|
$ |
(1,716 |
) |
|
$ |
(3,459 |
) |
Earnings
(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(0.27 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.57 |
) |
|
$ |
(0.32 |
) |
Discontinued
operations
|
|
|
-
|
|
|
|
(0.23 |
) |
|
|
-
|
|
|
|
(0.82 |
) |
Net
income (loss)
|
|
$ |
(0.27 |
) |
|
$ |
(0.41 |
) |
|
$ |
(0.57 |
) |
|
$ |
(1.14 |
) |
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
3,023,911
|
|
|
|
3,020,934
|
|
|
|
3,022,590
|
|
|
|
3,020,934
|
|
See
accompanying notes to consolidated financial statements
Greater
Atlantic Financial Corp.
Consolidated
Statements of Comprehensive Income (Loss) (Unaudited)
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
(In
Thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
Net
(loss) earnings
|
|
$ |
(824 |
) |
|
$ |
(1,236 |
) |
|
$ |
(1,716 |
) |
|
$ |
(3,459 |
) |
Other
comprehensive (loss) income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(loss) gain on securities
|
|
|
(60 |
) |
|
|
19
|
|
|
|
56
|
|
|
|
(153 |
) |
Other
comprehensive (loss) income
|
|
|
(60 |
) |
|
|
19
|
|
|
|
56
|
|
|
|
(153 |
) |
Comprehensive
(loss) income
|
|
$ |
(884 |
) |
|
$ |
(1,217 |
) |
|
$ |
(1,660 |
) |
|
$ |
(3,612 |
) |
Greater
Atlantic Financial Corp.
Consolidated
Statements of Changes in Stockholders’ Equity (Unaudited)
For
the
Six Months Ended March 31, 2007 and 2006 (Restated)
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Earnings
(Deficit)
|
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
|
Total
Stockholders’
Equity
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2005 (as restated)
|
|
$ |
-
|
|
|
$ |
30
|
|
|
$ |
25,228
|
|
|
$ |
(9,788 |
) |
|
$ |
(1,095 |
) |
|
$ |
14,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(153 |
) |
|
|
(153 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period (as restated)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,459 |
) |
|
|
-
|
|
|
|
(3,459 |
) |
Balance
at March 31, 2006 (as restated)
|
|
$ |
-
|
|
|
$ |
30
|
|
|
$ |
25,228
|
|
|
$ |
(13,247 |
) |
|
$ |
(1,248 |
) |
|
$ |
10,763
|
|
Balance
at September 30, 2006
|
|
$ |
-
|
|
|
$ |
30
|
|
|
$ |
25,228
|
|
|
$ |
(15,359 |
) |
|
$ |
(1,049 |
) |
|
$ |
8,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Option Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,716 |
) |
|
|
-
|
|
|
|
(1,716 |
) |
Balance
at March 31, 2007
|
|
$ |
-
|
|
|
$ |
30
|
|
|
$ |
25,250
|
|
|
$ |
(17,075 |
) |
|
$ |
(993 |
) |
|
$ |
7,212
|
|
See
accompanying notes to consolidated financial statements
Greater
Atlantic Financial Corp.
Consolidated
Statements of Cash Flows (Unaudited)
|
|
Six
months ended March 31,
|
|
|
|
2007
|
|
|
2006
(Restated)
|
|
(In
Thousands)
|
|
|
|
|
|
|
Cash
flow from operating activities
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,716 |
) |
|
$ |
(3,459 |
) |
Adjustments
to reconcile net loss to net cash provided by
|
|
|
|
|
|
|
|
|
(used
in) operating activities
|
|
|
|
|
|
|
|
|
Provision
for loan loss
|
|
|
293
|
|
|
|
74
|
|
Amortization
of loan acquisition adjustment
|
|
|
(25 |
) |
|
|
(26 |
) |
Depreciation
and amortization
|
|
|
228
|
|
|
|
419
|
|
Loss
(gain) on derivatives
|
|
|
33
|
|
|
|
(291 |
) |
Amortization
of investment security premiums
|
|
|
363
|
|
|
|
442
|
|
Amortization
of mortgage-backed securities premiums
|
|
|
214
|
|
|
|
371
|
|
Amortization
of deferred fees
|
|
|
(178 |
) |
|
|
(286 |
) |
Discount
accretion net of premium amortization
|
|
|
(145 |
) |
|
|
(135 |
) |
Amortization
of convertible preferred stock costs
|
|
|
4
|
|
|
|
5
|
|
Gain
on sale of loans held for sale
|
|
|
-
|
|
|
|
(1,465 |
) |
Gain
on sale of foreclosed real estate
|
|
|
-
|
|
|
|
(65 |
) |
Gain
on sale of fixed assets
|
|
|
-
|
|
|
|
(26 |
) |
(Increase)
decrease in assets
|
|
|
|
|
|
|
|
|
Disbursements
for origination of loans held for sale
|
|
|
-
|
|
|
|
(91,477 |
) |
Proceeds
from sales of loans
|
|
|
-
|
|
|
|
98,987
|
|
Accrued
interest and dividend receivable
|
|
|
251
|
|
|
|
(218 |
) |
Prepaid
expenses and other assets
|
|
|
351
|
|
|
|
804
|
|
Deferred
loan fees collected, net of deferred costs incurred
|
|
|
260
|
|
|
|
163
|
|
Increase
(decrease) in liabilities
|
|
|
|
|
|
|
|
|
Accrued
expenses and other liabilities
|
|
|
(477 |
) |
|
|
(314 |
) |
Net
cash provided by (used in) operating activities
|
|
|
(544 |
) |
|
|
3,503
|
|
Continued
Greater
Atlantic Financial Corp.
Consolidated
Statements of Cash Flows (Unaudited) – (Continued)
|
|
Six
months ended March 31,
|
|
|
|
2007
|
|
|
2006
(Restated)
|
|
(In
Thousands)
|
|
|
|
|
|
|
Cash
flow from investing activities
|
|
|
|
|
|
|
Net decrease
in loans
|
|
$ |
10,161
|
|
|
$ |
1,492
|
|
Disposal
(purchase) of premises and equipment
|
|
|
(24 |
) |
|
|
811
|
|
Purchases
of investment securities
|
|
|
-
|
|
|
|
(7,707 |
) |
Proceeds
from repayments of investment securities
|
|
|
6,224
|
|
|
|
8,401
|
|
Proceeds
from repayments of mortgage-backed securities
|
|
|
8,032
|
|
|
|
14,322
|
|
Proceeds
from the sale of foreclosed assets
|
|
|
-
|
|
|
|
297
|
|
Purchases
of FHLB stock
|
|
|
(653 |
) |
|
|
(1,800 |
) |
Proceeds
from sale of FHLB stock
|
|
|
837
|
|
|
|
1,915
|
|
Net
cash provided by investing activities
|
|
|
24,577
|
|
|
|
17,731
|
|
Cash
flow from financing activities
|
|
|
|
|
|
|
|
|
Net
decrease in deposits
|
|
|
(3,547 |
) |
|
|
(6,603 |
) |
Net
decrease in advances from the FHLB and other borrowings
|
|
|
(15,620 |
) |
|
|
(12,148 |
) |
Increase
(decrease) in advance payments by borrowers
for
taxes and insurance
|
|
|
120
|
|
|
|
73
|
|
Net
cash used in financing activities
|
|
|
(19,047 |
) |
|
|
(18,678 |
) |
Increase
in cash and cash equivalents
|
|
|
4,986
|
|
|
|
2,556
|
|
Cash
and cash equivalents, at beginning of period
|
|
|
19,804
|
|
|
|
4,709
|
|
Cash
and cash equivalents, at end of period
|
|
$ |
24,790
|
|
|
$ |
7,265
|
|
See accompanying notes to consolidated financial statements
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of March 31, 2007 and Three and Six Months Ended March 31, 2007 and
2006
(Unaudited)
(1)
BASIS
OF PRESENTATION
The
accompanying unaudited consolidated financial statements, which include the
accounts of Greater Atlantic Financial Corp. (the “company”) and its wholly
owned subsidiary, Greater Atlantic Bank (the “bank”) have been prepared in
accordance with the instructions for Form 10-Q. Certain information
and note disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
of
America have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”) with respect to interim financial
reporting. It is recommended that these consolidated financial
statements be read in conjunction with the company’s Annual Report on Form 10-K
for the year ended September 30, 2006. The results of operations for
the three months or the six months ended March 31, 2007 are not necessarily
indicative of the results of operations that may be expected for the year ending
September 30, 2007 or any future periods. In addition to
reclassifications related to discontinued operations, other reclassifications
have been made to prior periods to place them on a basis comparable with the
current period presentation.
As
previously reported in a Form 8-K filed on April 16, 2007, on April 12, 2007,
the company announced that it and Summit Financial Group, Inc. (“Summit”)
entered into a definitive agreement for the company to merge with and into
Summit and that the bank and Bay-Vanguard Federal Savings Bank (“Bay-Vanguard”),
entered into a definitive agreement for Bay-Vanguard to purchase the bank’s
branch office in Pasadena, Maryland.
(2)
RESTATEMENT
During
2006, the company restated its historical financial statements to reflect the
accounting treatment for non-cash losses discovered in an unreconciled
inter-company account in its subsidiary, Greater Atlantic Mortgage Corporation
(“GAMC”). The losses were discovered as the bank discontinued the
operations of the subsidiary. The loss in any given year did not
reach a material amount such as to require restatement. However, the
bank determined to provide the restatements because the cumulative amount of
the
losses aggregated $1.4 million. The revisions had no impact on the
cash flows of the bank. The table below includes the effect of the
restatement and the presentation of GAMC as discontinued
operations.
|
|
As
originally reported
|
|
|
Restatement
|
|
|
Discontinued
operations
|
|
|
As
restated
|
|
Three
months ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
4,722
|
|
|
$ |
-
|
|
|
$ |
122
|
|
|
$ |
4,600
|
|
Interest
expense
|
|
|
2,949
|
|
|
|
-
|
|
|
|
110
|
|
|
|
2,839
|
|
Net
interest income
|
|
|
1,773
|
|
|
|
-
|
|
|
|
12
|
|
|
|
1,761
|
|
Noninterest
income
|
|
|
1,405
|
|
|
|
(50 |
) |
|
|
1,025
|
|
|
|
330
|
|
Noninterest
expense
|
|
|
4,361
|
|
|
|
-
|
|
|
|
1,735
|
|
|
|
2,626
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(698 |
) |
|
|
(698 |
) |
Net
income (loss)
|
|
|
(1,186 |
) |
|
|
(50 |
) |
|
|
-
|
|
|
|
(1,236 |
) |
Earnings
per share – continuing
|
|
|
(0.39 |
) |
|
|
(0.02 |
) |
|
|
0.23
|
|
|
|
(0.18 |
) |
Earnings
per share – discontinued
|
|
|
(0.00 |
) |
|
|
0.00
|
|
|
|
(0.23 |
) |
|
|
(0.23 |
) |
Six
months ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
9,461
|
|
|
$ |
-
|
|
|
$ |
271
|
|
|
$ |
9,190
|
|
Interest
expense
|
|
|
5,852
|
|
|
|
-
|
|
|
|
232
|
|
|
|
5,620
|
|
Net
interest income
|
|
|
3,609
|
|
|
|
-
|
|
|
|
39
|
|
|
|
3,570
|
|
Noninterest
income
|
|
|
2,894
|
|
|
|
(144 |
) |
|
|
2,077
|
|
|
|
673
|
|
Noninterest
expense
|
|
|
9,744
|
|
|
|
-
|
|
|
|
4,596
|
|
|
|
5,148
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,480 |
) |
|
|
(2,480 |
) |
Net
income (loss)
|
|
|
(3,315 |
) |
|
|
(144 |
) |
|
|
-
|
|
|
|
(3,459 |
) |
Earnings
per share – continuing
|
|
|
(1.10 |
) |
|
|
(0.04 |
) |
|
|
0.82
|
|
|
|
(0.32 |
) |
Earnings
per share – discontinued
|
|
|
(0.00 |
) |
|
|
0.00
|
|
|
|
(0.82 |
) |
|
|
(0.82 |
) |
The
$50,000 and $144,000 adjustments to noninterest income, shown in the restatement
column above, relate to gains on sale of loans. In addition, the
September 30, 2005 retained earnings balance was reduced by $1.3 million to
reflect the cumulative effect of the restatement of all periods prior to those
reflected in this form 10-Q.
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of March 31, 2007 and Three and Six Months Ended March 31, 2007 and
2006
(Unaudited)
(3)
DISCONTINUED OPERATIONS
On
March
29, 2006, we began the process of discontinuing the operations of the bank’s
mortgage company subsidiary, GAMC. It was determined that this
business no longer fit our strategy.
As
a
result of the above action, we applied discontinued operations accounting in
the
third quarter of 2006, as we completed the closing of the GAMC
business. Accordingly, the income statements for all periods have
been adjusted. The reclassification of GAMC’s results to discontinued
operations primarily resulted in a reduction to previously reported levels
of
net interest income, a reduction in noninterest income and a reduction in
noninterest expense. The table below summarizes GAMC’s results which
were treated as discontinued operations for the periods indicated
|
|
Three
months ended March 31,
|
|
|
Six
months ended March 31,
|
|
|
|
2006
|
|
|
2006
|
|
(Dollars
in Thousands, Except Per Share Data)
|
|
|
|
|
|
|
Interest
income
|
|
$ |
122
|
|
|
$ |
271
|
|
Interest
expense
|
|
|
110
|
|
|
|
232
|
|
Net
interest income
|
|
|
12
|
|
|
|
39
|
|
Noninterest
income
|
|
|
1,025
|
|
|
|
2,077
|
|
Noninterest
expense
|
|
|
1,735
|
|
|
|
4,596
|
|
Net
income (loss)
|
|
$ |
(698 |
) |
|
$ |
(2,480 |
) |
Earnings
(loss) per share – basic
|
|
$ |
(0.23 |
) |
|
$ |
(0.82 |
) |
Earnings
(loss) per share – diluted
|
|
|
(0.23 |
) |
|
|
(0.82 |
) |
(4)
LOAN
IMPAIRMENT AND LOAN LOSSES
In
accordance with guidance in the Statements of Financial Accounting Standards
Nos. 114 and 118, the company prepares a quarterly review to determine the
adequacy of the allowance for loan losses and to identify and value impaired
loans. An analysis of the change in the allowance for loan losses
follows (also see page 22 for discussion of non-performing loans):
|
|
At
or for the six months ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
1,330
|
|
|
$ |
1,212
|
|
Provisions
|
|
|
293
|
|
|
|
74
|
|
Total
charge-offs
|
|
|
(327 |
) |
|
|
(56 |
) |
Total
recoveries
|
|
|
626
|
|
|
|
20
|
|
Net
recoveries (charge-offs)
|
|
|
299
|
|
|
|
(36 |
) |
Balance
at end of period
|
|
$ |
1,922
|
|
|
$ |
1,250
|
|
Ratio
of net charge-offs during the period
to
average loans outstanding during the period
|
|
|
(0.16 |
)% |
|
|
0.02 |
% |
Allowance
for loan losses to total non-performing
loans
at end of period
|
|
|
118.13 |
% |
|
|
86.45 |
% |
Allowance
for loan losses to total loans
|
|
|
1.02 |
% |
|
|
0.62 |
% |
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of March 31, 2007 and Three and Six Months Ended March 31, 2007 and
2006
(Unaudited)
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.
Our
total
recorded investment in impaired collateral dependent loans at March 31, 2007
was
$1.3 million and the related allowance associated with impaired loans was
$500,000. There were no impaired loans in the comparable period one
year ago. At March 31, 2007, all impaired loans had a related
allowance and we have not recognized interest income on impaired loans after
the
date that the loans were deemed to be impaired.
(5)
REGULATORY MATTERS
The
capital distribution regulation of the OTS requires that the bank provide the
applicable OTS Regional Director with a 30-day advance written notice of all
proposed capital distributions whether or not advance approval is
required. The bank paid dividends of $655,000 to the company during
the year ended September 30, 2006.
On
December 19, 2006, the company issued a news release announcing that the first
quarter distribution on the Greater Atlantic Capital Trust I 6.50% Cumulative
Convertible Trust Preferred Securities scheduled for December 31, 2006, as
well
as future distributions on the Trust Preferred Securities, will be
deferred. The announcement by the company followed advice received by
the bank that the Office of Thrift Supervision would not approve the bank’s
application to pay a cash dividend to the company. Accordingly, the
company exercised its right to defer the payment of interest on its 6.50%
Convertible Junior Subordinated Debentures Due 2031 related to the Trust
Preferred Securities, for an indefinite period (which can be no longer than
20
consecutive quarterly periods).
The
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) created
five categories of financial institutions based on the adequacy of their
regulatory capital levels: 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% and an adequately capitalized financial institution is one with Tier 1
leverage capital of 4%, Tier 1 risk-based capital of 4% and total risk-based
capital of 8%. At March 31, 2007, the bank was classified as an
adequately capitalized financial institution.
There
are
currently no orders, agreements, recommendations or understandings with our
regulatory agency, which, if implemented, would affect our liquidity, capital
resources, or results of operations. As an adequately capitalized
institution, the Bank cannot issue brokered certificates of deposit without
OTS
or FDIC permission. We do not believe that limitation will have a
material impact on the Bank’s operations.
The
following presents the bank’s capital position at March 31, 2007:
|
|
Required
Balance
|
|
|
Required
Percent to be Well Capitalized
|
|
|
Actual
Balance
|
|
|
Actual
Percent
|
|
|
Surplus/
(Shortfall)
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
|
|
$ |
14,134
|
|
|
|
5.00 |
% |
|
$ |
15,426
|
|
|
|
5.46 |
% |
|
$ |
1,292
|
|
Tier
1 Risk-based
|
|
$ |
10,815
|
|
|
|
6.00 |
% |
|
$ |
15,336
|
|
|
|
8.51 |
% |
|
$ |
4,521
|
|
Total
Risk-based
|
|
$ |
18,024
|
|
|
|
10.00 |
% |
|
$ |
17,258
|
|
|
|
9.57 |
% |
|
$ |
(766 |
) |
Greater
Atlantic Financial Corp., the holding company for Greater Atlantic Bank,
announced on February 20, 2007, it received a letter from The Nasdaq Stock
Market advising that the Nasdaq Listing Qualifications Panel had determined
to
delist the shares of the Company from the Nasdaq Global Market, and will suspend
trading of the Company’s shares effective Thursday, February 22,
2007.
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of March 31, 2007 and Three and Six Months Ended March 31, 2007 and
2006
(Unaudited)
As
previously reported, on February 6, 2007, the Company was notified that the
Company’s failure to maintain the minimum of $10,000,000 stockholders’ equity
requirement for continued listing on the Nasdaq Global Market, as set forth
in
Marketplace Rule 4450 (a) (3), served as an additional basis for delisting
the
Company’s shares from the Nasdaq Global Market. In its SEC Form 10-K
for the period ended September 30, 2006, filed on January 31, 2007, the Company
reported stockholders’ equity of $8,850,000. Because of the
$1,150,000 deficiency in stockholders’ equity, the Company did not make a
presentation to the Panel to consider the Company’s continued listing on the
Nasdaq Global Market or to transfer its listing to the Nasdaq Capital
Market. The Company’s common stock is currently listed on the Pink
Sheet under the symbol GAFC.PK.
(6)
STOCK
OPTIONS
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 Plan
was amended effective March 14, 2000, to increase the number of options
available for grant to employees from 76,667 to 225,000 shares and amended
again
effective March 15, 2002, to increase the number of options available for grant
to employees from 225,000 to 350,000 shares and to limit its application to
officers and employees. 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 March 31, 2007, 94,685 warrants were
issued.
The
following summary represents the activity under the Plan:
|
|
Number
of Shares
|
|
|
Exercise
Price
|
|
|
Expiration
Date
|
|
Balance
outstanding and exercisable at September 30, 2004
|
|
|
226,000
|
|
|
|
|
|
|
|
Options
granted
|
|
|
104,000
|
|
|
$ |
6.75
|
|
|
|
10-6-2014
|
|
Options
exercised
|
|
|
(8,500 |
) |
|
$ |
4.00
|
|
|
|
|
|
Options
expired
|
|
|
(55,500 |
) |
|
$ |
6.52
|
|
|
|
|
|
Balance
outstanding and exercisable at September 30, 2005
|
|
|
266,000
|
|
|
$ |
6.91
|
|
|
|
|
|
Options
granted
|
|
|
12,000
|
|
|
$ |
6.00
|
|
|
|
3-31-2016
|
|
Options
expired
|
|
|
(25,000 |
) |
|
$ |
8.37
|
|
|
|
|
|
Balance
outstanding and exercisable at September 30, 2006
|
|
|
253,000
|
|
|
$ |
6.72
|
|
|
|
|
|
Options
granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance
outstanding and exercisable at March 31, 2007
|
|
|
253,000
|
|
|
$ |
6.72
|
|
|
|
|
|
The
company has adopted the provisions of Statement of Financial Accounting
Standards No. 123R, “Accounting for Stock-Based Compensation” (“SFAS 123R”), to
measure compensation cost for stock options effective after October 1,
2005. Prior to its adoption, the company accounted for its options
under APB 25 “Accounting for Stock Issued to Employees” with pro forma
disclosed. As allowable under SFAS 123R, the company used the
Black-Scholes method to measure the compensation cost of stock options granted
in 2006 with the following assumptions: risk-free interest rate of 4.88%, a
dividend payout rate of zero, and an expected option life of nine
years. The volatility is 32%. Using those assumptions, the
fair value of stock options granted during fiscal 2006 was $2.92. The
company estimates the fair value of each option on the date of grant using
the
Black-Scholes option-pricing model. There were no options granted during the
six
months ended March 31, 2007 and March 31, 2006, respectively.
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of March 31, 2007 and Three and Six Months Ended March 31, 2007 and
2006
(Unaudited)
(7)
EARNINGS PER SHARE
Earnings
per share is based on the weighted average number of shares of common stock
and
dilutive common stock equivalents outstanding. Basic earnings per
share includes no dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflect the potential
dilution of securities that could share in the earnings of an
entity. The weighted average shares outstanding for basic and diluted
earnings per share for the six months ended March 31, 2007 and 2006 were the
same as the effect of the conversion of preferred securities and the impact
of
stock options were antidilutive for the periods ended March 31, 2007 and
2006. The effect of the conversion of the preferred securities would
result in an increase of 1,373,469 in common shares outstanding.
(8)
SEGMENT REPORTING
The
company had two reportable segments, banking and mortgage banking until the
mortgage-banking activities conducted in GAMC, to which the mortgage-banking
segment applied, were discontinued effective March 29, 2006. The bank
operates retail deposit branches in the greater Washington, D.C./Baltimore
metropolitan area. The banking segment provides retail consumers and
small businesses with deposit products such as demand, transaction, and 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
purchased residential real estate loans , and also invests in mortgage-backed
and other securities.
On
March
29, 2006, we began the process of discontinuing the operations of the bank’s
subsidiary, GAMC. Because it was unprofitable, it was determined that
this business no longer fit our strategy.
In
the
third quarter of 2006, we applied discontinued operations accounting for
GAMC. Accordingly, the income statements for all periods have been
restated. The restatements primarily resulted in a reduction to
previously reported levels of net interest income, a reduction in noninterest
income and a reduction in noninterest expense.
(9)
RECENT ACCOUNTING STANDARDS
In
May
2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections – a
replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 generally
requires retrospective application to prior periods’ financial statements of all
voluntary changes in accounting principle and changes required when a new
pronouncement does not include specific transition provisions. This standard
was
effective for the company beginning October 1, 2006.
In
July
2006, the FASB issued Interpretation (FIN) No. 48, “Accounting for Uncertainty
in Income Taxes” - an Interpretation of SFAS No. 109, “Accounting for Income
Taxes.” FIN 48 defines the threshold for recognizing the benefits of tax return
positions in the financial statements as “more-likely-than-not” to be sustained
by a taxing authority. The term “more-likely-than-not” means a likelihood of
more than 50 percent. FIN 48 is effective for fiscal years beginning after
December 15, 2006, with early application permitted. Any impact from the
adoption of FIN 48 will be recorded directly to the beginning balance of
retained earnings and reported as a change in accounting principle. We are
currently evaluating the impact of this Interpretation, but do not expect it
to
be material.
On
October 1, 2006, we adopted SFAS 156, “Accounting for Servicing of Financial
Assets – an amendment of FASB Statement No.140.” SFAS 156 was issued in March
2006 and requires all newly recognized servicing rights and obligations to
be
initially measured at fair value. For each class of separately recognized
servicing rights and obligations retained, we have elected to continue to
account for each under the amortization method which requires us to amortize
servicing assets or liabilities in proportion to and over the periods of
estimated net servicing income or net servicing loss.
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of March 31, 2007 and Three and Six Months Ended March 31, 2007 and
2006
(Unaudited)
In
September 2006, the Financial Accounting Standards Board released Statement
No.
157, "Fair Value Measurements" which defines fair value, establishes a framework
for measuring fair value in GAAP, and enhances disclosures about fair value
measurements. This Statement applies when other accounting pronouncements
require fair value measurements; it does not require new fair value
measurements. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those
years. While we are currently evaluating the effect of the guidance contained
in
this Statement, we do not expect the implementation to have a material impact
on
our consolidated financial statements.
In
February, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities,” which permits companies to report
certain financial assets and financial liabilities at fair value. SFAS 159
is
effective for fiscal years beginning after November 15, 2007. The
Company can elect to apply the standard prospectively and measure certain
financial instruments at fair value beginning January 1, 2008. The
Company is currently evaluating the guidance contained in SFAS 159, and has
yet
to determine which assets or liabilities (if any) will be
selected. At adoption, the difference between the carrying amount and
the fair value of existing eligible assets and liabilities selected (if any)
would be recognized via a cumulative adjustment to beginning retained earnings
on October 1, 2008.
(10)
JUNIOR SUBORDINATED DEBT SECURITIES
On
March
20, 2002, Greater Atlantic Capital Trust I (the, “Trust”), a Delaware statutory
business trust and a wholly owned Trust subsidiary of the company, issued $9.6
million aggregate liquidation amount (963,038 shares) of 6.50% cumulative
preferred securities maturing on December 31, 2031, retaining an option to
call
the securities on or after December 31, 2003. Conversion of the
preferred securities into the company’s common stock may occur at any time on or
after 60 days after the closing of the offering. The company may
redeem the preferred securities, in whole or in part, at any time on or after
December 31, 2003. Distributions on the preferred securities are
payable quarterly on March 31, June 30, September 30 and December 31 of each
year beginning on June 30, 2002. The Trust also issued 29,762 common
securities to the company for $297,620. The proceeds from the sale of
the preferred securities and the proceeds from the sale of the trust’s common
securities were utilized to purchase from the company junior subordinated debt
securities of $9,928,000 bearing interest of 6.50% and maturing December 31,
2031. The Company has
fully and unconditionally guaranteed the preferred securities along with all
obligations of the trust related thereto. The sale of the preferred
securities yielded $9.3 million after deducting offering expenses.
To
comply
with FIN46, the trust preferred subsidiary was deconsolidated in 2004, and
the
related securities have been presented as obligations of the Company and titled
“Junior Subordinated Debt Securities” in the financial statements.
On
December 19, 2006, the Company issued a news release announcing that the first
quarter distribution on the Greater Atlantic Capital Trust I 6.50% Cumulative
Convertible Trust Preferred Securities scheduled for December 31, 2006, as
well
as future distributions on the Trust Preferred Securities, will be
deferred. The announcement by the Company follows advice received by
Greater Atlantic Bank from the Office of Thrift Supervision that it would not
approve Greater Atlantic Bank’s application to pay a cash dividend to the
Company.
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of March 31, 2007 and Three and Six Months Ended March 31, 2007 and
2006
(Unaudited)
Accordingly,
the Company exercised its right to defer the payment of interest on its 6.50%
Convertible Junior Subordinated Debentures Due 2031 related to the Trust
Preferred Securities, for an indefinite period (which can be no longer than
20
consecutive quarterly periods).
The
company retained approximately $1.3 million of the proceeds for general
corporate purposes, investing the retained funds in short-term
investments. The remaining $8.0 million of the proceeds was invested
in the bank to increase its capital position (also see Note 5 Regulatory
Matters).
(11)
DERIVATIVE FINANCIAL INSTRUMENTS
During
fiscal years 2003 and 2002, the bank entered into various interest rate caps
that total $25 million in notional principal with terms between five and ten
years that limit the float between a floor of 2.00%, and are capped between
5.00% - 8.00%. The bank accounts for these derivatives, under the
guidelines of SFAS 133, as amended.
Realized
and unrealized gains and losses on those derivatives which meet hedge accounting
requirements are deferred and recognized when the hedge transaction
occurs. In the event hedge accounting requirements are not met gains
and losses on such instruments are included currently in the statement of
operations. During the six months ended March 31, 2007 and 2006 the
instruments did not meet hedge accounting requirements. The
statements of operations include net losses of $33,000 and gains of $291,000
for
the six months ended March 31, 2007 and 2006, respectively.
(12)
SUBSEQUENT EVENTS
As
previously reported in a Form 8-K filed on April 16, 2007, on April 12, 2007,
the company announced that it and Summit Financial Group, Inc. (“Summit”)
entered into a definitive agreement for the company to merge with and into
Summit and that the bank and Bay-Vanguard Federal Savings Bank (“Bay-Vanguard”),
entered into a definitive agreement for Bay-Vanguard to purchase the bank’s
branch office in Pasadena, Maryland.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes presented elsewhere in this
report.
This
report contains forward-looking statements. When used in this 10-Q
report 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.
The
matters discussed in management’s discussion and analysis of financial condition
and results of operations reflects continuing operations, as adjusted for the
Restatement discussed in Note 2 of the financial statements, unless otherwise
noted.
Mortgage
Banking Activities
The
bank’s mortgage banking activities primarily consisted of originating mortgage
loans secured by single-family properties. Those activities were
conducted in GAMC and were discontinued effective March 29, 2006 as it was
determined that, because it was unprofitable, this business no longer fit our
strategy. Mortgage banking involves the origination and sale of
mortgage loans for the purpose of generating gains on sale of loans and fee
income on the origination of loans, in addition to loan interest
income. In recent years, the volume of GAMC’s originations had been
declining, resulting in losses from mortgage banking operations.
In
the
third quarter of 2006, we applied discontinued operations accounting for GAMC
as
we completed closing those operations during the quarter, and accordingly,
the
income statements for all periods have been adjusted. The
reclassifications primarily resulted in a reduction to previously reported
levels of net interest income, a reduction in noninterest income and a reduction
in noninterest expense.
General
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, a federally chartered savings
bank. The bank is a member of the Federal Home Loan Bank system and
its deposits are insured up to applicable limits by the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation. We offer
traditional banking services to customers through the six branches of the bank
located throughout the greater Washington, D.C./Baltimore metropolitan
area.
The
profitability of the company depends primarily on its non-interest income and
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 consist mainly of
interest paid on deposits and borrowings. Non-interest income
consists primarily of gain on sales of loans, derivatives and available-for-sale
investments and service charge fees for deposits and loans.
The
level
of its operating expenses also affects the company’s
profitability. Operating expenses consist primarily of salaries and
employee benefits, occupancy-related expenses, equipment and technology-related
expenses and other general operating expenses.
At
March
31, 2007 the company’s total assets were $284.0 million, compared to the $305.2
million held at September 30, 2006, representing a decrease of
6.95%. The decrease resulted primarily from a decrease in investment
securities and loans receivable and was offset in part by an increase in
interest bearing deposits in the bank. The decline in the bank’s
overall asset size is reflected in the consolidated statements of financial
condition and statements of operations as we continued to manage its assets
and
liabilities to maintain an adequately capitalized position.
Net
loans
receivable at March 31, 2007 were $182.9 million, a decrease of $10.4 million
or
5.36% from the $193.3 million held at September 30, 2006. The decrease in loans
consisted primarily of a $5.7 million decline in the Bank’s single family loan
portfolio, coupled with a decrease of $6.4 million in the Bank’s consumer loan
portfolio. Because the Bank’s single family and consumer loan
portfolios consist primarily of adjustable-rate loans, with the current inverted
yield curve, where short-term rates are higher than rates for longer terms,
customers are able to extend the terms of their mortgages at lower
rates. Customers are also refinancing away from adjustable-rate loans
and into longer term, fixed-rate loans or curtailing outstanding
balances. Multifamily loans outstanding increased by $3.2 million and
commercial real estate loans increased by $3.5 million during the
period. Those increases were offset in part by
decreases of $2.0 million in construction and land loans and $2.2 million in
commercial business loans. The decrease in construction and land
loans was primarily in the single family residential sector of the
market. The company anticipates that lending in that area will
continue to decline as a result of the current slow sales pace occurring in
the
single family market..
At
March
31, 2007, investment securities were $65.4 million, a decrease of $14.7 million
or 18.39% from the $80.2 million held at September 30, 2006. The
decline in investment securities was used to reduced higher cost wholesale
funding including borrowings, brokered deposits and wholesale
deposits.
Deposits
at March 31, 2007 were $226.6 million, a decrease of $3.5 million from the
$230.2 million held at September 30, 2006. Our total deposits
continue to decline because the bank has reduced its reliance on brokered
deposits and wholesale deposits, which have a higher cost. Those
types of deposits have declined $33.6 million since March 31, 2006 while total
retail deposits have increased $31.1 million. The increase in retail
deposits is primarily in certificates of deposits and money fund accounts which
have been obtained through the Bank’s marketing efforts and are at a lower cost
than brokered and wholesale deposits.
On
February 22, 2006, the company announced that it had engaged Sandler O’Neill
& Partners, L.P. to advise on the financial aspects of the company’s review
of its strategic options and assist the company in evaluating the financial
aspects of all strategic alternatives available.
As
previously reported in a Form 8-K filed on April 16, 2007, on April 12, 2007,
the company announced that it and Summit Financial Group, Inc. (“Summit”)
entered into a definitive agreement for the company to merge with and into
Summit and that the bank and Bay-Vanguard Federal Savings Bank (“Bay-Vanguard”),
entered into a definitive agreement for Bay-Vanguard to purchase the bank’s
branch office in Pasadena, Maryland.
The
merger is expected to be completed in the fourth calendar quarter of 2007,
subject to regulatory and shareholder approvals. Immediately
following the merger, the bank intends to merge with and into Summit Community
Bank.
The
bank
will sell its leased branch office located at 8070 Ritchie Highway, Pasadena,
Maryland, to Bay-Vanguard. Under the agreement, Bay-Vanguard will pay
an 8.5% premium on the balance of deposits assumed at closing. At
March 31, 2007, the deposits at the Pasadena branch office on which the deposit
premium would apply totaled approximately $50.9 million. Bay-Vanguard
will also purchase the branch office’s fixed assets, but will not acquire any
loans as part of the transaction. The purchase is expected to be
completed during the third calendar quarter of 2007, subject to regulatory
approval.
Critical
Accounting Policies, Estimates and Judgments
The
company’s financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation
of those financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue
and
expenses as well as the disclosure of contingent
liabilities. Management continually evaluates its estimates and
judgments including those related to the allowance for loan losses and income
taxes. Management bases its estimates and judgments on historical
experience and other factors that are believed to be reasonable under the
circumstances. Actual results may differ from those estimates under
different assumptions or conditions. The company believes that, of
its significant accounting policies, the most critical accounting policies
we
apply are those related to the evaluation of the adequacy of the allowance
for
loan losses.
A
variety
of factors impact the carrying value of the loan portfolio including the
calculation of the allowance for loan losses, valuation of underlying
collateral, the timing of loan charge-offs and the amount and amortization
of
loan fees and deferred origination costs. The allowance for loan
losses is the most difficult and subjective judgment. The allowance
is established and maintained at a level that we believe is adequate to cover
losses resulting from the inability of borrowers to make required payments
on
loans. Estimates for loan losses are arrived at by analyzing risks
associated with specific loans and the loan portfolio, current trends in
delinquencies and charge-offs, the views of our regulators, changes in the
size
and composition of the loan portfolio and peer comparisons. The
analysis also requires consideration of the economic climate and direction,
change in the interest rate environment, which may impact a borrower’s ability
to pay, legislation impacting the banking industry and economic conditions
specific to our service area. Because the calculation of the
allowance for loan losses relies on estimates and judgments relating to
inherently uncertain events, results may differ from our estimates.
Comparison
of Results of Operations for the Three Months Ended
March
31, 2007 and March 31, 2006
Net
Income. For the three months ended March 31, 2007, the company
had a net loss of $824,000 or $0.27 per diluted share, compared to a net loss
from continuing operations of $538,000 or $0.18 per diluted share for the three
months ended March 31, 2006. The increase in the net loss of $286,000
over the comparable period one-year ago was primarily the result of decreases
in
net interest income, non-interest income and an increase in the provision for
loan losses and was offset by a decrease in non-interest expense. The
ongoing net losses from continuing operations remain a consistent problem for
management because the loan production needed to maintain the retail branch
network has not been attained. Due to the recent losses arising from
the operations of Mort, the Bank is currently managing its assets and
liabilities to maintain an adequately capitalized status. Because of
the impact on the risk-based capital requirements, the bank cannot aggressively
expand its commercial loan portfolio. In addition, the resulting
reduction in the bank’s loans to one borrower limit makes it difficult to
maintain a consistent level of outstanding loans to larger
customers. Those factors have caused earning assets to decline;
impacting earnings, as well as the margin pressure from the inverted yield
curve, and have presented a very challenging environment in which to increase
our net interest margin.
Accordingly
the Company has entered into agreements, to merge with and into Summit Financial
Group, Inc, and to sell its Pasadena, Maryland branch to Bay-Vanguard Federal
Savings Bank. Alternatively, in order for the Company to achieve
profitability it would have had to have sold a sufficient number of branches
to
increase capital and reduce overall operating cost.
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 liabilities
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 re-pricing 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.
Net
interest income from continuing operations
|
|
|
|
|
Difference
|
|
Three
Months Ended March 31,
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in Thousands)
|
|
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
3,651
|
|
|
$ |
3,399
|
|
|
$ |
252
|
|
|
|
7.41 |
% |
Investments
|
|
|
943
|
|
|
|
1,201
|
|
|
|
(258 |
) |
|
|
(21.48 |
) |
Total
|
|
|
4,594
|
|
|
|
4,600
|
|
|
|
(6 |
) |
|
|
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,187
|
|
|
|
1,890
|
|
|
|
297
|
|
|
|
15.71
|
|
Borrowings
|
|
|
712
|
|
|
|
949
|
|
|
|
(237 |
) |
|
|
(24.97 |
) |
Total
|
|
|
2,899
|
|
|
|
2,839
|
|
|
|
60
|
|
|
|
2.11
|
|
Net
interest income
|
|
$ |
1,695
|
|
|
$ |
1,761
|
|
|
$ |
(66 |
) |
|
|
(3.75 |
)% |
The
decrease in net interest income during the three months ended March 31, 2007,
from the comparable period one year ago, resulted primarily from a $37.2 million
decrease in the bank’s interest-earning assets coupled with average
interest-earning assets declining by $4.7 million more than the decline in
average interest-bearing liabilities. That decrease was offset in
part by a 22 basis point increase in net interest margin (net interest income
divided by average interest-earning assets) from 2.29% for the three months
ended March 31, 2006 to 2.51% for the three months ended March 31,
2007. The increase in net interest margin resulted from increasing
the average yield on interest-earning assets by 24 basis points more than the
increase in the average cost on interest-bearing liabilities.
The
interest rate environment has been a difficult one for most financial
institutions. With short-term rates close to or at times even higher
than long-term rates, the prospects of expanding interest rate spread and net
interest margin has been difficult at best. We expect the interest
rate environment to remain challenging and we believe it will continue to have
an impact on our net interest margin and net interest rate spread. We
also believe, however, that our strategy of changing the balance sheet from
one
that was wholesale oriented, as reflected in the Company’s decline in relying on
brokered and internet deposits, to one which is more retail oriented will
benefit us over time. We believe that change will position us to
realize a benefit when the interest rate environment improves. If
market interest rates were to rise, given our asset sensitivity position, we
would also expect our net interest margin to improve. However, in a
declining rate environment our interest rate spread and our net interest income
would decline. The Bank continues to monitor the markets and its
interest rate position to alleviate any material changes in net interest
margin.
Interest
Income. Interest income for the three months ended March 31,
2007 decreased $6,000 compared to the three months ended March 31, 2006,
primarily as a result of a decrease of $37.2 million in the average outstanding
balances of loans and investment securities and was partially offset by an
increase of 82 basis points in the average yield earned on interest earning
assets.
Interest
Expense. The $60,000 increase in interest expense for the three
months ended March 31, 2007 compared to the 2006 period was principally the
result of a 58 basis point increase in the cost of funds on average deposits
and
borrowings. That increase in the cost of funds was partially offset
by a $32.4 million decrease in average amount of deposits and
borrowings. The increase in interest expense on deposits was
primarily due to a 71 basis point increase in rates paid on deposits, primarily
due to higher rates paid on interest-bearing demand deposits and certificates
and elevated pricing on new and renewed time deposits. That increase
was partially offset by a decrease of $7.6 million in the average amount of
deposits from $213.5 million for the three months ended March 31, 2006 to $205.9
million for the three months ended March 31, 2007.
The
decrease in interest expense on borrowings for the three months ended March
31,
2007, when compared to the 2006 period, was principally the result of a $24.9
million decrease in average borrowed funds, partially offset by a 48 basis
point
increase in the cost of borrowed funds. The components accountable
for the decrease of $237,000 in interest expense on borrowings were a $313,000
decrease relating to average volume, partially offset by a $76,000 increase
relating to average cost.
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.
|
|
For
the Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
(Restated)
|
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Yield/ Rate
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Yield/
Rate
|
|
Assets:
|
|
(dollars
in thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
$ |
93,062
|
|
|
$ |
1,696
|
|
|
|
7.29 |
% |
|
$ |
93,874
|
|
|
$ |
1,674
|
|
|
|
7.13 |
% |
Consumer
loans
|
|
|
56,230
|
|
|
|
1,074
|
|
|
|
7.64
|
|
|
|
66,793
|
|
|
|
1,153
|
|
|
|
6.90
|
|
Commercial
business loans
|
|
|
39,919
|
|
|
|
881
|
|
|
|
8.83
|
|
|
|
33,891
|
|
|
|
572
|
|
|
|
6.75
|
|
Total
loans
|
|
|
189,211
|
|
|
|
3,651
|
|
|
|
7.72
|
|
|
|
194,558
|
|
|
|
3,399
|
|
|
|
6.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
54,579
|
|
|
|
662
|
|
|
|
4.85
|
|
|
|
66,487
|
|
|
|
809
|
|
|
|
4.87
|
|
Mortgage-backed
securities
|
|
|
25,979
|
|
|
|
281
|
|
|
|
4.33
|
|
|
|
45,913
|
|
|
|
392
|
|
|
|
3.42
|
|
Total
interest-earning assets
|
|
|
269,769
|
|
|
|
4,594
|
|
|
|
6.81
|
|
|
|
306,958
|
|
|
|
4,600
|
|
|
|
5.99
|
|
Non-earning
assets
|
|
|
11,119
|
|
|
|
|
|
|
|
|
|
|
|
13,008
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
280,888
|
|
|
|
|
|
|
|
|
|
|
$ |
319,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$ |
3,233
|
|
|
|
7
|
|
|
|
0.87
|
|
|
$ |
5,365
|
|
|
|
12
|
|
|
|
0.89
|
|
Now
and money market accounts
|
|
|
75,438
|
|
|
|
657
|
|
|
|
3.48
|
|
|
|
73,306
|
|
|
|
600
|
|
|
|
3.27
|
|
Certificates
of deposit
|
|
|
127,228
|
|
|
|
1,523
|
|
|
|
4.79
|
|
|
|
134,784
|
|
|
|
1,278
|
|
|
|
3.79
|
|
Total
deposits
|
|
|
205,899
|
|
|
|
2,187
|
|
|
|
4.25
|
|
|
|
213,455
|
|
|
|
1,890
|
|
|
|
3.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
|
38,378
|
|
|
|
505
|
|
|
|
5.26
|
|
|
|
39,125
|
|
|
|
454
|
|
|
|
4.64
|
|
Other
borrowings
|
|
|
15,201
|
|
|
|
207
|
|
|
|
5.45
|
|
|
|
39,339
|
|
|
|
495
|
|
|
|
5.03
|
|
Total
interest-bearing
liabilities
|
|
|
259,478
|
|
|
|
2,899
|
|
|
|
4.47
|
|
|
|
291,919
|
|
|
|
2,839
|
|
|
|
3.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand deposits
|
|
|
11,473
|
|
|
|
|
|
|
|
|
|
|
|
14,927
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
2,096
|
|
|
|
|
|
|
|
|
|
|
|
625
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
273,047
|
|
|
|
|
|
|
|
|
|
|
|
307,471
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
7,841
|
|
|
|
|
|
|
|
|
|
|
|
12,495
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
stockholders'
Equity
|
|
$ |
280,888
|
|
|
|
|
|
|
|
|
|
|
$ |
319,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
1,695
|
|
|
|
|
|
|
|
|
|
|
$ |
1,761
|
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
|
|
|
|
|
2.34 |
% |
|
|
|
|
|
|
|
|
|
|
2.10 |
% |
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
2.51 |
% |
|
|
|
|
|
|
|
|
|
|
2.29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate/Volume
Analysis. The following table presents certain
information regarding changes in interest income and interest expense
attributable to changes in interest rates and changes in volume of
interest-earning assets and interest-bearing liabilities for the periods
indicated. The change in interest attributable to both rate and
volume has been allocated to the changes in rate and volume on a pro rata
basis.
|
|
Three
Months Ended
March
31, 2007 compared to
|
|
|
|
March
31, 2006
|
|
|
|
Change
Attributable to
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
$ |
(14 |
) |
|
$ |
36
|
|
|
$ |
22
|
|
Consumer
loans
|
|
|
(182 |
) |
|
|
103
|
|
|
|
(79 |
) |
Commercial
business loans
|
|
|
102
|
|
|
|
207
|
|
|
|
309
|
|
Total
loans
|
|
|
(94 |
) |
|
|
346
|
|
|
|
252
|
|
Investments
|
|
|
(145 |
) |
|
|
(2 |
) |
|
|
(147 |
) |
Mortgage-backed
securities
|
|
|
(170 |
) |
|
|
59
|
|
|
|
(111 |
) |
Total
interest-earning assets
|
|
$ |
(409 |
) |
|
$ |
403
|
|
|
$ |
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$ |
(5 |
) |
|
$ |
-
|
|
|
$ |
(5 |
) |
Now
and money market accounts
|
|
|
17
|
|
|
|
40
|
|
|
|
57
|
|
Certificates
of deposit
|
|
|
(72 |
) |
|
|
317
|
|
|
|
245
|
|
Total
deposits
|
|
|
(60 |
) |
|
|
357
|
|
|
|
297
|
|
FHLB
advances
|
|
|
(9 |
) |
|
|
60
|
|
|
|
51
|
|
Other
borrowings
|
|
|
(304 |
) |
|
|
16
|
|
|
|
(288 |
) |
Total
interest-bearing liabilities
|
|
|
(373 |
) |
|
|
433
|
|
|
|
60
|
|
Change
in net interest income
|
|
$ |
(36 |
) |
|
$ |
(30 |
) |
|
$ |
(66 |
) |
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
loan type and assigns to them a reserve percentage that reflects the industry
standard. Management then looks at its classified assets, which are
loans 30 days or more delinquent, and classifies those loans as special mention,
substandard, doubtful or loss based on the performance of the
loans. Those classified loans are then individually evaluated for
impairment and measured by either the present value of expected future cash
flows, the loan’s observable market price, or the fair value of the
collateral. They are then segmented by type and assigned a reserve
percentage that reflects the underlying quality of the loan. Although
management utilizes its best judgment in providing for probable losses, there
can be no assurance that the bank will not have to increase its provisions
for
loan losses in the future. An increase in provision may result from
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. On an annual basis, or more often if deemed necessary,
the bank has contracted with an independent outside third party to have its
loan
portfolio reviewed. The focus of their review is to identify the
extent of potential and actual risk in the bank’s commercial loan portfolio, in
addition to the underwriting and processing practices. Observations
made regarding the bank’s portfolio risk are based upon review evaluations,
portfolio profiles and discussion with the operational staff, including the
line
lenders and senior management.
Non-performing
assets were $1.6 million or 0.57% of total assets at March 31, 2007, with $1.3
million classified as substandard, and $300,000 classified as doubtful or as
loss. Non-performing assets increased $181,000 from the $1.4 million
or 0.46% of total assets classified as non-performing at March 31,
2006. The increase in non-performing loans does not reflect $484,000
of loans classified as special mention. Credit quality remains
strong, with a ratio of non-performing assets to total assets of 0.57%, and
with
negligible nonperforming and past-due loans. The $142,000 increase in
the provision from the year ago period resulted primarily from increases in
the
outstanding balance of the bank’s commercial real estate, and multi-family loans
which are more at risk than single family loans. Those increases were
partially offset by decreases in the outstanding balance of the bank’s
commercial business and second trust loans and the provision required for those
loans. (See Note 4 for summary of the allowance for loan
losses).
Non-interest
Income. Non-interest income decreased $182,000 during the
quarter ended March 31, 2007, over the comparable period one year
ago. That decrease was primarily the result of a decrease of $192,000
in gains on derivatives and was partially offset by an increase of $11,000
in
deposit fees.
The
following table presents a comparison of the components of non-interest
income.
Non-interest
income from continuing operations
|
|
|
|
|
Difference
|
|
Three
Months Ended March 31,
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in Thousands)
|
|
|
|
Non-interest
income:
|
|
|
|
Service
fees on loans
|
|
$ |
45
|
|
|
$ |
47
|
|
|
$ |
(2 |
) |
|
|
(4.26 |
)% |
Service
fees on deposits
|
|
|
110
|
|
|
|
99
|
|
|
|
11
|
|
|
|
11.11
|
|
Gain
(loss) on derivatives
|
|
|
(13 |
) |
|
|
179
|
|
|
|
(192 |
) |
|
|
(107.26 |
) |
Other
operating income
|
|
|
6
|
|
|
|
5
|
|
|
|
1
|
|
|
|
20.00
|
|
Total
non-interest income
|
|
$ |
148
|
|
|
$ |
330
|
|
|
$ |
(182 |
) |
|
|
(55.15 |
)% |
Non-interest
expense. Non-interest expense decreased $104,000 from $2.6 million for the
three months ended March 31, 2006 to $2.5 million for the three months ended
March 31 in the current year. The decrease was distributed over
various non-interest expense categories with the primary contributors being
compensation, advertising, deposit insurance premiums and furniture, fixtures
and equipment and was partially offset by increases totaling $84,000 in
occupancy, professional services, data processing and other operating
expense.
The
following table presents a comparison of the components of non-interest
expense.
Non-interest
expense from continuing operations
|
|
|
|
|
Difference
|
|
Three
Months Ended March 31,
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in Thousands)
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
$ |
1,175
|
|
|
$ |
1,194
|
|
|
$ |
(19 |
) |
|
|
(1.59 |
)% |
Occupancy
|
|
|
344
|
|
|
|
334
|
|
|
|
10
|
|
|
|
2.99
|
|
Professional
services
|
|
|
323
|
|
|
|
261
|
|
|
|
62
|
|
|
|
23.75
|
|
Advertising
|
|
|
45
|
|
|
|
190
|
|
|
|
(145 |
) |
|
|
(76.32 |
) |
Deposit
insurance premium
|
|
|
7
|
|
|
|
25
|
|
|
|
(18 |
) |
|
|
(72.00 |
) |
Furniture,
fixtures and equipment
|
|
|
137
|
|
|
|
143
|
|
|
|
(6 |
) |
|
|
(4.20 |
) |
Data
processing
|
|
|
233
|
|
|
|
225
|
|
|
|
8
|
|
|
|
3.56
|
|
Other
operating expense
|
|
|
258
|
|
|
|
254
|
|
|
|
4
|
|
|
|
1.57
|
|
Total
non-interest expense
|
|
$ |
2,522
|
|
|
$ |
2,626
|
|
|
$ |
(104 |
) |
|
|
(3.96 |
)% |
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. We did not record a provision for income taxes
for the three months ended March 31, 2007 and 2006 due to our operating
losses. The company believes that it will generate future taxable
income through earnings and branch sales, to assure utilization of a certain
portion of the existing net operating losses.
Contractual
Obligations and Off-Balance Sheet Financing Arrangements
The
following table summarizes the bank’s contractual obligations at March 31, 2007
and the effect those obligations are expected to have on the bank’s liquidity
and cash flows in future periods.
|
|
Total
|
|
|
Less
Than One Year
|
|
|
Two
– Three Years
|
|
|
Four
– Five Years
|
|
|
After
Five Years
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
Advances (1)
|
|
$ |
36,000
|
|
|
$ |
6,000
|
|
|
$ |
25,000
|
|
|
$ |
5,000
|
|
|
$ |
-
|
|
Reverse
repurchase agreements
|
|
|
2,954
|
|
|
|
2,954
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subordinated
debt securities (2)
|
|
|
25,818
|
|
|
|
655
|
|
|
|
1,310
|
|
|
|
1,310
|
|
|
|
22,543
|
|
Operating
leases
|
|
|
4,342
|
|
|
|
1,107
|
|
|
|
1,993
|
|
|
|
808
|
|
|
|
434
|
|
Total
obligations
|
|
$ |
69,114
|
|
|
$ |
10,716
|
|
|
$ |
28,303
|
|
|
$ |
7,118
|
|
|
$ |
22,977
|
|
(1) The
company expects to refinance these short and medium-term obligations
under
substantially the same terms and conditions.
(2) Includes
principal and interest due on our junior subordinated debt
securities
|
|
Other
Commercial Commitments
|
|
Total
|
|
|
Less
Than One Year
|
|
|
Two
– Three Years
|
|
|
Four
– Five Years
|
|
|
After
Five Years
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate
of deposit maturities (1)
|
|
$ |
133,483
|
|
|
$ |
116,002
|
|
|
$ |
14,534
|
|
|
$ |
2,854
|
|
|
$ |
93
|
|
Loan
originations
|
|
|
6,767
|
|
|
|
6,767
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Unfunded
lines of credit (2)
|
|
|
115,549
|
|
|
|
115,549
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Standby
letters of credit
|
|
|
155
|
|
|
|
155
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$ |
255,954
|
|
|
$ |
238,473
|
|
|
$ |
14,534
|
|
|
$ |
2,854
|
|
|
$ |
93
|
|
(1) The
company expects to retain maturing deposits or replace amounts maturing
with comparable certificates of deposits based on current market
interest
rates.
(2) Revolving,
open-end loans on one-four dwelling units and commercial lines that
mostly
remain unfunded.
|
|
Comparison
of Results of Operations for the Six Months Ended
March
31, 2007 and March 31, 2006
Net
Income. For the six months ended March 31, 2007, the company had
a net loss of $1.7 million or $0.57 per diluted share, compared to a net loss
from continuing operations of $979,000 or $0.32 per diluted share for the six
months ended March 31, 2006. The increase in the net loss of $737,000
over the comparable period one-year ago was primarily the result of decreases
in
net interest income, non-interest income and increases in the provision for
loan
losses and non-interest expense.
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 liabilities
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 re-pricing 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.
Net
interest income from continuing operations
|
|
|
|
|
Difference
|
|
Six
Months Ended March 31,
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in Thousands)
|
|
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
7,322
|
|
|
$ |
6,790
|
|
|
$ |
532
|
|
|
|
7.84 |
% |
Investments
|
|
|
2,077
|
|
|
|
2,400
|
|
|
|
(323 |
) |
|
|
(13.46 |
) |
Total
|
|
|
9,399
|
|
|
|
9,190
|
|
|
|
209
|
|
|
|
2.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
4,426
|
|
|
|
3,654
|
|
|
|
772
|
|
|
|
21.13
|
|
Borrowings
|
|
|
1,474
|
|
|
|
1,966
|
|
|
|
(492 |
) |
|
|
(25.03 |
) |
Total
|
|
|
5,900
|
|
|
|
5,620
|
|
|
|
280
|
|
|
|
4.98
|
|
Net
interest income
|
|
$ |
3,499
|
|
|
$ |
3,570
|
|
|
$ |
(71 |
) |
|
|
(1.99 |
)% |
The
decrease in net interest income during the six months ended March 31, 2007,
resulted primarily from a $38.5 million decrease in the bank’s interest-earning
assets coupled with average interest-earning assets declining by $4.7 million
more than the decline in average interest-bearing liabilities. That
decrease was offset in part by a 27 basis point increase in net interest margin
(net interest income divided by average interest-earning assets) from 2.28%
for
the six months ended March 31, 2006 to 2.55% for the six months ended March
31,
2007. The increase in net interest margin resulted from increasing
the average yield on interest-earning assets by 28 basis points more than the
increase in the average cost on interest-bearing liabilities.
Interest
Income. Interest income for the six months ended March 31, 2007
increased $209,000 compared to the six months ended March 31, 2006, primarily
as
a result of an increase of 98 basis points in the average yield earned on
interest earning assets. That increase was partially offset by a
decrease of $38.5 million in the average outstanding balances of loans and
investment securities.
Interest
Expense. The $280,000 increase in interest expense for the six
months ended March 31, 2007 compared to the 2006 period was principally the
result of a 70 basis point increase in the cost of funds on average deposits
and
borrowings. That increase in the cost of funds was partially offset
by a $33.9 million decrease in average amount of deposits and
borrowings. The increase in interest expense on deposits was
primarily due to an 84 basis point increase in rates paid on deposits, primarily
due to higher rates paid on savings, interest-bearing demand deposits and
certificates and elevated pricing on new and renewed time
deposits. That increase was partially offset by a decrease of $6.4
million in the average amount of deposits from $214.6 million for the six months
ended March 31, 2006 to $208.2 million for the six months ended March 31,
2007.
The
decrease in interest expense on borrowings for the six months ended March 31,
2007, when compared to the 2006 period, was principally the result of a $27.5
million decrease in average borrowed funds, partially offset by a 59 basis
point
increase in the cost of borrowed funds. The components accountable
for the decrease of $492,000 in interest expense on borrowings were a $664,000
decrease relating to average volume, partially offset by a $172,000 increase
relating to average cost.
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.
|
|
For
the Six Months Ended March 31,
|
|
|
2007
|
|
2006
(Restated)
|
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Average
Yield/ Rate
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Average
Yield/
Rate
|
Assets:
|
|
(dollars
in thousands)
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
$
93,096
|
|
$
3,414
|
|
7.33%
|
|
$94,128
|
|
$3,334
|
|
7.08%
|
Consumer
loans
|
|
57,867
|
|
2,254
|
|
7.79
|
|
67,719
|
|
2,269
|
|
6.70
|
Commercial
business loans
|
|
39,735
|
|
1,654
|
|
8.33
|
|
34,891
|
|
1,187
|
|
6.80
|
Total
loans
|
|
190,698
|
|
7,322
|
|
7.68
|
|
196,738
|
|
6,790
|
|
6.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
55,874
|
|
1,461
|
|
5.23
|
|
66,339
|
|
1,589
|
|
4.79
|
Mortgage-backed
securities
|
|
27,841
|
|
616
|
|
4.43
|
|
49,880
|
|
811
|
|
3.25
|
Total
interest-earning assets
|
|
274,413
|
|
9,399
|
|
6.85
|
|
312,957
|
|
9,190
|
|
5.87
|
Non-earning
assets
|
|
11,396
|
|
|
|
|
|
13,416
|
|
|
|
|
Total
assets
|
|
$
285,809
|
|
|
|
|
|
$326,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$ 3,193
|
|
15
|
|
0.94
|
|
$ 6,058
|
|
28
|
|
0.92
|
Now
and money market accounts
|
|
77,408
|
|
1,368
|
|
3.53
|
|
71,264
|
|
1,123
|
|
3.15
|
Certificates
of deposit
|
|
127,613
|
|
3,043
|
|
4.77
|
|
137,253
|
|
2,503
|
|
3.65
|
Total
deposits
|
|
208,214
|
|
4,426
|
|
4.25
|
|
214,575
|
|
3,654
|
|
3.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
37,609
|
|
1,001
|
|
5.32
|
|
40,639
|
|
947
|
|
4.66
|
Other
borrowings
|
|
17,610
|
|
473
|
|
5.37
|
|
42,100
|
|
1,019
|
|
4.84
|
Total
interest-bearing
liabilities
|
|
263,433
|
|
5,900
|
|
4.48
|
|
297,314
|
|
5,620
|
|
3.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand deposits
|
|
11,901
|
|
|
|
|
|
15,297
|
|
|
|
|
Other
liabilities
|
|
2,167
|
|
|
|
|
|
983
|
|
|
|
|
Total
liabilities
|
|
277,501
|
|
|
|
|
|
313,594
|
|
|
|
|
Stockholders’
equity
|
|
8,308
|
|
|
|
|
|
12,779
|
|
|
|
|
Total
liabilities and
stockholders'
Equity
|
|
$
285,809
|
|
|
|
|
|
$326,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
$
3,499
|
|
|
|
|
|
$3,570
|
|
|
Interest
rate spread
|
|
|
|
|
|
2.37%
|
|
|
|
|
|
2.09%
|
Net
interest margin
|
|
|
|
|
|
2.55%
|
|
|
|
|
|
2.28%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
Six
Months Ended
March
31, 2007 compared to
|
|
|
|
March
31, 2006
|
|
|
|
Change
Attributable to
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
$ |
(37 |
) |
|
$ |
117
|
|
|
$ |
80
|
|
Consumer
loans
|
|
|
(330 |
) |
|
|
315
|
|
|
|
(15 |
) |
Commercial
business loans
|
|
|
165
|
|
|
|
302
|
|
|
|
467
|
|
Total
loans
|
|
|
(202 |
) |
|
|
734
|
|
|
|
532
|
|
Investments
|
|
|
(251 |
) |
|
|
123
|
|
|
|
(128 |
) |
Mortgage-backed
securities
|
|
|
(358 |
) |
|
|
163
|
|
|
|
(195 |
) |
Total
interest-earning assets
|
|
$ |
(811 |
) |
|
$ |
1,020
|
|
|
$ |
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$ |
(13 |
) |
|
$ |
-
|
|
|
$ |
(13 |
) |
Now
and money market accounts
|
|
|
97
|
|
|
|
148
|
|
|
|
245
|
|
Certificates
of deposit
|
|
|
(176 |
) |
|
|
716
|
|
|
|
540
|
|
Total
deposits
|
|
|
(92 |
) |
|
|
864
|
|
|
|
772
|
|
FHLB
advances
|
|
|
(71 |
) |
|
|
125
|
|
|
|
54
|
|
Other
borrowings
|
|
|
(593 |
) |
|
|
47
|
|
|
|
(546 |
) |
Total
interest-bearing liabilities
|
|
|
(756 |
) |
|
|
1,036
|
|
|
|
280
|
|
Change
in net interest income
|
|
$ |
(55 |
) |
|
$ |
(16 |
) |
|
$ |
(71 |
) |
Non-performing
assets were $1.6 million or 0.57% of total assets at March 31, 2007, with $1.3
million classified as substandard, and $300,000 classified as doubtful or as
loss. Non-performing assets increased $181,000 from the $1.4 million
or 0.46% of total assets classified as non-performing at March 31,
2006. The increase in non-performing loans does not reflect $484,000
of loans classified as special mention. The $219,000 increase in the
provision for loan losses from the year ago period resulted primarily from
the
provision necessary for loan losses resulting from increases in the outstanding
balance of the bank’s commercial real estate, and multi-family loans which are
more at risk the single-family loans, and the provision provided for the
$300,000 of loans receivable classified as doubtful. Those increases
were partially offset by decreases in the outstanding balance of the bank’s
commercial business and second trust loans and the provision required for those
loans. (See Note 4 for summary of the allowance for loan
losses).
Non-interest
Income. Non-interest income decreased $388,000 during the six months ended
March 31, 2007, over the comparable period one year ago. That
decrease was primarily the result of a decrease of $324,000 in gains on
derivatives and $65,000 in gain on sale of foreclosed real estate and was
partially offset by an increase of $16,000 in deposit fees.
The
following table presents a comparison of the components of non-interest
income.
Non-interest
income from continuing operations
|
|
|
|
|
Difference
|
|
Six
Months Ended March 31,
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in Thousands)
|
|
|
|
Non-interest
income:
|
|
|
|
Service
fees on loans
|
|
$ |
87
|
|
|
$ |
93
|
|
|
$ |
(6 |
) |
|
|
(6.45 |
)% |
Service
fees on deposits
|
|
|
220
|
|
|
|
204
|
|
|
|
16
|
|
|
|
7.84
|
|
Gain
(loss) on derivatives
|
|
|
(33 |
) |
|
|
291
|
|
|
|
(324 |
) |
|
|
(111.34 |
) |
Gain
on sale of foreclosed real estate
|
|
|
-
|
|
|
|
65
|
|
|
|
(65 |
) |
|
|
(100.00 |
) |
Other
operating income
|
|
|
11
|
|
|
|
20
|
|
|
|
(9 |
) |
|
|
(45.00 |
) |
Total
non-interest income
|
|
$ |
285
|
|
|
$ |
673
|
|
|
$ |
(388 |
) |
|
|
(57.65 |
)% |
Non-interest
expense. Non-interest expense increased $59,000 from $5.1 million for the
six months ended March 31, 2006 to $5.2 million for the six months ended March
31 in the current year. The increase was distributed over various
non-interest expense categories with the primary contributors being professional
services, compensation, occupancy and other operating expense and was partially
offset by decreases totaling $346,000 in advertising, deposit insurance premiums
and furniture, fixtures and equipment and data processing.
The
following table presents a comparison of the components of non-interest
expense.
Non-interest
expense from continuing operations
|
|
|
|
|
Difference
|
|
Six
Months Ended March 31,
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in Thousands)
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
$ |
2,441
|
|
|
$ |
2,286
|
|
|
$ |
155
|
|
|
|
6.78 |
% |
Occupancy
|
|
|
687
|
|
|
|
651
|
|
|
|
36
|
|
|
|
5.53
|
|
Professional
services
|
|
|
722
|
|
|
|
519
|
|
|
|
203
|
|
|
|
39.11
|
|
Advertising
|
|
|
69
|
|
|
|
364
|
|
|
|
(295 |
) |
|
|
(81.04 |
) |
Deposit
insurance premium
|
|
|
30
|
|
|
|
52
|
|
|
|
(22 |
) |
|
|
(42.31 |
) |
Furniture,
fixtures and equipment
|
|
|
267
|
|
|
|
280
|
|
|
|
(13 |
) |
|
|
(4.64 |
) |
Data
processing
|
|
|
452
|
|
|
|
468
|
|
|
|
(16 |
) |
|
|
(3.42 |
) |
Other
operating expense
|
|
|
539
|
|
|
|
528
|
|
|
|
11
|
|
|
|
2.08
|
|
Total
non-interest expense
|
|
$ |
5,207
|
|
|
$ |
5,148
|
|
|
$ |
59
|
|
|
|
1.15 |
% |
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. We did not record a provision for income taxes
for the six months ended March 31, 2007 and 2006 due to our operating
losses. The company believes that it will generate future taxable
income through earnings and branch sales, to assure utilization of a certain
portion of the existing net operating losses.
Liquidity
and Capital Resources. 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 continues to maintain the levels
of liquid assets previously required by OTS regulations. The bank
manages its liquidity position and demands for funding primarily by investing
excess funds in short-term investments and utilizing FHLB advances 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 and securities
available-for-sale. The levels of those assets are dependent on the
bank’s operating, financing, lending and investing activities during any given
period. At March 31, 2007, cash and cash equivalents, interest
bearing deposits and securities available-for-sale totaled $86.5 million or
30.45% of total assets.
The
primary investing activities of the bank are the origination of consumer loans,
residential one- to four-family loans, commercial business loans, commercial
real estate loans, and real estate construction and development loans and the
purchase of United States Treasury and agency securities, mortgage-backed and
mortgage-related securities and other investment securities. During
the six months ended March 31, 2007, the bank’s loan purchases and originations
totaled $35.4 million. The bank did not purchase any United States
Treasury or agency securities, mortgage-backed or mortgage related securities
or
other investment securities during the six months ended March 31,
2007. All of our investment securities are classified as either
available for sale or held to maturity and for the period ended March 31, 2007
were considered temporarily impaired. The market value of our
investment portfolio is obtained from various third party brokerage firms and
we
believe our filing fairly quantifies the value of those
securities. The investments are debt securities that pay principal
and interest monthly to maturity at such time as principal is
repaid. The fluctuation in value of our portfolio is due to changes
in market rates and not due to the credit quality of the issuer. The
Company has the ability and liquidity to hold those securities until such time
as the value recovers or the securities mature.
The
bank
has other sources of liquidity if a need for additional funds
arises. At March 31, 2007, the bank had $36.0 million in advances
outstanding from the FHLB and had an additional overall borrowing capacity
from
the FHLB of $12.8 million. Depending on market conditions, the
pricing of deposit products and the pricing of FHLB advances, the bank may
continue to rely on FHLB borrowings to fund asset growth.
At
March
31, 2007, the bank had commitments to fund loans of $5.1 million, unused
outstanding lines of credit of $115.5 million, consisting primarily of equity
lines of credit, unused standby letters of credit of $155,000 and undisbursed
proceeds of construction mortgages of $1.7 million. Unfunded lines of
credit have remained relatively constant and actually increased by $2.4 million
during the three months ended March 31, 2007. The bank anticipates
that it will have sufficient funds available to meet its current loan
origination commitments. Certificate accounts, including IRA and
Keogh accounts, which are scheduled to mature in less than one year from March
31, 2007, totaled $116.0 million. Based upon experience, management
believes the majority of maturing deposits 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 those 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.
Item
3. Quantitative and Qualitative Disclosures About 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. The
company has little or no risk related to trading accounts, commodities or
foreign exchange. In general, market risk reflects the sensitivity of
income to variations in interest rates and other relevant market rates or
prices. The company’s market rate sensitive instruments include
interest-earning assets and interest-bearing liabilities. The company
enters into market rate sensitive instruments in connection with its various
business operations. Loans originated, and the related commitments to
originate loans that will be sold, represent market risk that is realized in
a
short period of time, generally two or three months.
The
company’s primary source of market risk exposure arises
from changes in United States interest rates and the effects thereof on mortgage
prepayment and closing behavior, as well as depositors’ choices (“interest rate
risk”). Changes in those interest rates will result in changes in the
company’s earnings and the market value of its assets and
liabilities. We expect to continue to realize income from the
differential or "spread" between the interest earned on loans, securities and
other interest-earning assets, and the interest paid on deposits, borrowings
and
other interest-bearing liabilities. That spread is affected by the
difference between the maturities and re-pricing characteristics of
interest-earnings assets and interest-bearing liabilities. Loan
volume and yields are affected by market interest rates on loans, and rising
interest rates generally are associated with fewer loan
originations. Management expects that a substantial portion of our
assets will continue to be indexed to changes in market interest rates and
we
intend to attract a greater proportion of short-term liabilities, which will
help us address our interest rate risk. The lag in implementation of
re-pricing terms on our adjustable-rate assets may result in a decline in net
interest income in a rising interest rate environment. There can be
no assurance that our interest rate risk will be minimized or
eliminated. Further, an increase in the general level of interest
rates may adversely affect the ability of certain borrowers to pay the interest
on and principal of their obligations. Accordingly, changes in levels
of market interest rates, (primarily increases in market interest rates), could
materially adversely affect our interest rate spread, asset quality, loan
origination volume and overall financial condition and results of
operations.
To
mitigate the impact of changes in market interest rates on our interest-earning
assets and interest-bearing liabilities, we actively manage the amounts and
maturities of these assets and liabilities. A key component of this
strategy is the origination and retention of short-term and adjustable-rate
assets. We retain short-term and adjustable-rate assets because they
have re-pricing characteristics that more closely match the re-pricing
characteristics of our liabilities.
To
further mitigate the risk of timing differences in the re-pricing of assets
and
liabilities, our interest-earning assets are matched with interest-bearing
liabilities that have similar re-pricing characteristics. For
example, the interest rate risk of holding fixed-rate loans is managed with
long-term deposits and borrowings, and the risk of holding ARMs is managed
with
short-term deposits and borrowings. Periodically, mismatches are
identified and managed by adjusting the re-pricing characteristics of our
interest-bearing liabilities with derivatives, such as interest rate caps and
interest rate swaps.
Through
the use of these derivative instruments, management attempts to reduce or offset
increases in interest expense related to deposits and borrowings. We
use interest rate caps and pay-fixed interest rate swaps to protect against
rising interest rates.
The
interest rate caps are designed to provide an additional layer of protection,
should interest rates on deposits and borrowings rise, by effectively
lengthening the re-pricing period. At March 31, 2007, we held an
aggregate notional value of $25 million of interest rate caps. One of
the interest rate caps had strike rates that were in effect at March 31, 2007,
as current LIBOR rates were above the strike rate.
We
are
also striving to increase the proportion of transaction deposits to total
deposits to diminish our exposure to adverse changes in interest
rates. In particular, non-interest-bearing checking accounts and
custodial accounts are less sensitive to interest rate fluctuations and provide
a growing source of non-interest income through depositor and other retail
banking fees.
The
following table, which is based on information that we provide to the Office
of
Thrift Supervision, presents the change in our net portfolio value at December
31, 2006 that would occur in the event of an immediate change in interest rates
based on Office of Thrift Supervision assumptions, with no effect given to
any
steps that we might take to counteract that change.
|
|
|
Net
Portfolio Value
(Dollars
in thousands)
|
|
|
Net
Portfolio Value as % of
Portfolio
Value of Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Point (“bp”)
Change
in Rates
|
|
|
$Amount
|
|
|
$Change
|
|
|
%
Change
|
|
|
NPV
Ratio
|
|
|
Change
(bp)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+300
|
|
|
|
22,388
|
|
|
|
-1,526
|
|
|
|
-6 |
% |
|
|
7.81 |
% |
|
-36bp
|
|
|
+200
|
|
|
|
23,137
|
|
|
|
-777
|
|
|
|
-3 |
% |
|
|
8.01 |
% |
|
-16bp
|
|
|
+100
|
|
|
|
23,571
|
|
|
|
-343
|
|
|
|
-1 |
% |
|
|
8.10 |
% |
|
-7bp
|
|
|
0
|
|
|
|
23,914
|
|
|
|
|
|
|
|
-
|
|
|
|
8.17 |
% |
|
|
-
|
|
|
-100
|
|
|
|
23,558
|
|
|
|
-356
|
|
|
|
-1 |
% |
|
|
8.02 |
% |
|
-15bp
|
|
|
-200
|
|
|
|
23,043
|
|
|
|
-871
|
|
|
|
-4 |
% |
|
|
7.81 |
% |
|
-36bp
|
|
The
Office of Thrift Supervision uses various assumptions in assessing interest
rate
risk. Those assumptions relate to interest rates, loan prepayment rates, deposit
decay rates and the market values of certain assets under differing interest
rate scenarios, among others. As with any method of measuring interest rate
risk, certain shortcomings are inherent in the methods of analyses presented
in
the foregoing tables. For example, although certain assets and liabilities
may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes
in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features that restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, expected rates of prepayments on loans and early withdrawals
from certificates could deviate significantly from those assumed in calculating
the table. Prepayment rates can have a significant impact on interest
income. Because of the large percentage of loans and mortgage-backed
securities we hold, rising or falling interest rates have a significant impact
on the prepayment speeds of our earning assets that in turn affect the rate
sensitivity position. When interest rates rise, prepayments tend to slow. When
interest rates fall, prepayments tend to rise. Our asset sensitivity would
be
reduced if prepayments slow and vice versa. While we believe these assumptions
to be reasonable, there can be no assurance that assumed prepayment rates will
approximate actual future mortgage-backed security and loan repayment
activity.
Item
4. Controls and Procedures.
The
company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed by the company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and regulations and that such
information is accumulated and communicated to the company's management,
including the company's Chief Executive Officer and Chief Financial Officer,
as
appropriate, to allow timely decisions regarding required disclosure. Because
of
the inherent limitations in all control systems, no evaluation of controls
can
provide absolute assurance that the company's disclosure controls and procedures
will
detect
or
uncover every situation involving the failure of persons within the company
or
its subsidiary to disclose material information otherwise required to be set
forth in the company's periodic reports.
In
connection with this Form 10-Q, the company's management, with the participation
of its Chief Executive Officer and Chief Financial Officer, evaluated the
company's disclosure controls and procedures as currently in effect, and such
officers have concluded that, as of this date, the company's disclosure controls
and procedures are effective.
Management
of the company is also responsible for establishing and maintaining adequate
internal control over financial reporting and control of the company's assets
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.
There were no changes in the company's internal control over financial reporting
during the company's quarter ended March 31, 2007 that have materially affected,
or are reasonably likely to materially affect, the company's internal control
over financial reporting.
Part
II. Other
Information
Item
1. Legal
Proceedings
As
previously reported in a Form 8-K filed on September 8, 2006, the company
announced that a Demand for Arbitration before the American Arbitration
Association was filed against the company, the bank, GAMC, and Carroll E. Amos,
President and Chief Executive Officer of the company and the
bank. The Demand for Arbitration was filed by Stamm Mortgage
Management, Inc. ("Stamm Mortgage") and T. Mark Stamm, President of Stamm
Mortgage in connection with the Management Agreement among Stamm Mortgage,
the
bank, and GAMC that governed the management of GAMC by Stamm Mortgage before
the
bank terminated the operations of GAMC earlier this year, and certain aspects
of
the company's public disclosures of that event.
As
previously reported in a Form 8-K filed on February 9, 2007, the parties entered
into a mutual release resolving any and all related claims and controversies
between the parties and obviating the need for all further arbitration and
legal
proceedings.
Item
1A. Risk
Factors
Our
increased emphasis on commercial and construction lending may expose us to
increased lending risks.
At
March
31, 2007, our loan portfolio consisted of $31.9 million, or 16.98% of commercial
real estate loans, $21.4 million, or 11.41% of construction and land development
loans and $37.6 million, or 20.05% of commercial business loans. We
intend to increase our emphasis on those types of loans. Those types
of loans generally expose a lender to greater risk of non-payment and loss
than
one-to-four-family residential mortgage loans because repayment of the loans
often depends on the successful operation of the property, the income stream
of
the borrowers and, for construction loans, the accuracy of the estimate of
the
property’s value at completion of construction and the estimated cost of
construction. Such loans typically involve larger loan balances to
single borrowers or groups of related borrowers compared to one- to four-family
residential mortgage loans. Commercial business loans expose us to
additional risks since they typically are made on the basis of the borrower’s
ability to make repayments from the cash flow of the borrower’s business and are
secured by non-real estate collateral that may depreciate over
time. In addition, since such loans generally entail greater risk
than one- to four-family residential mortgage loans, we may need to increase
our
allowance for loan losses in the future to account for the likely increase
in
probable incurred credit losses associated with the growth of such
loans. Also, many of our commercial and construction borrowers have
more than one loan outstanding with us. Consequently, an adverse
development with respect to one loan or one credit relationship can expose
us to
a significantly greater risk of loss compared to an adverse development with
respect to a one- to four-family residential mortgage loan.
Strong
competition within our market area could hurt our ability to compete and could
slow our growth.
We
face
intense competition both in making loans and attracting
deposits. This competition has made it more difficult for us to make
new loans and has occasionally forced us to offer higher deposit
rates. Price competition for loans and deposits might result in us
earning less on our loans and paying more on our deposits, which would reduce
net interest income. Some of the institutions with which we compete
have substantially greater resources and lending limits than we have and may
offer services that we do not provide. We expect competition to
increase in the future as a result of legislative, regulatory and technological
changes and the continuing trend of
consolidation
in the financial services industry. Our profitability depends upon
our continued ability to compete successfully in our market area.
An
increase in loan prepayments and on prepayment of loans underlying
mortgage-backed securities and small business administration certificates may
adversely affect our profitability.
Prepayment
rates are affected by consumer behavior, conditions in the housing and financial
markets, general economic conditions and the relative interest rates on
fixed-rate and adjustable-rate mortgage loans. Although changes in
prepayment rates are, therefore, difficult for us to predict, prepayment rates
tend to increase when market interest rates decline relative to the rates on
the
prepaid instruments.
We
recognize our deferred loan origination costs and premiums paid on originating
these loans by adjusting our interest income over the contractual life of the
individual loans. As prepayments occur, the rate at which net
deferred loan origination costs and premiums are expensed
accelerates. The effect of the acceleration of deferred costs and
premium amortization may be mitigated by prepayment penalties paid by the
borrower when the loan is paid in full within a certain period of time, which
varies between loans. If prepayment occurs after the period of time
when the loan is subject to a prepayment penalty, the effect of the acceleration
of premium and deferred cost amortization is no longer mitigated.
We
recognize premiums we pay on mortgage-backed securities and Small Business
Administration Certificates as an adjustment to interest income over the life
of
the security based on the rate of repayment of the securities. Acceleration
of
prepayment on the loans underlying a mortgage-backed security or Small Business
Administration Certificate shortens the life of the security, increases the
rate
at which premiums are expensed and further reduces interest income.
We
may
not be able to reinvest loan and security prepayments at rates comparable to
the
prepaid instruments particularly in periods of declining interest
rates.
We
operate in a highly regulated environment and we may be adversely affected
by
changes in laws and regulations.
The
bank
is subject to extensive regulation, supervision and examination by the Office
of
Thrift Supervision and by the Federal Deposit Insurance Corporation, as insurer
of its deposits. Such regulation and supervision govern the
activities in which the bank and the company may engage, and are intended
primarily for the protection of the insurance fund and for the depositors and
borrowers of the bank. The regulation and supervision by the Office
of Thrift Supervision and the Federal Deposit Insurance Corporation are not
intended to protect the interests of investors in the common stock of the
company. Regulatory authorities have extensive discretion in their
supervisory and enforcement activities, including the imposition of restrictions
on our operations, the classification of our assets and determination of the
level of our allowance for loan losses. Any change in such regulation
and oversight, whether in the form of regulatory policy, regulations,
legislation or supervisory action, may have a material impact on our
operations.
A
breach of information security could negatively affect our
earnings.
Increasingly,
we depend upon data processing, communication and information exchange on a
variety of computing platforms and networks and over the Internet. We
cannot be certain all our systems are entirely free from vulnerability to
attack, despite safeguards we have instituted. In addition, we rely
on the services of a variety of vendors to meet data processing and
communication needs. If information security is breached, information
can be lost or misappropriated, resulting in financial loss or costs to us
or
damages to others. These costs or losses could materially exceed the
amount of insurance coverage, if any, which would adversely affect our
earnings.
We
are subject to heightened regulatory scrutiny with respect to bank secrecy
and
anti-money laundering statutes and regulations.
Recently,
regulators have intensified their focus on the USA PATRIOT Act’s anti-money
laundering and Bank Secrecy Act compliance requirements. There is
also increased scrutiny of our compliance with the rules enforced by the Office
of Foreign Assets Control. In order to comply with regulations,
guidelines and examination procedures in this area, we have been required to
adopt new policies and procedures and to install new systems. We
cannot be certain that the policies, procedures and systems we have in place
are
flawless. Therefore, there is no assurance that in every instance we
are in full compliance with these requirements.
Failure
to pay interest on our debt may adversely impact us.
Deferral
of interest payments where allowed on our convertible preferred securities
may
affect our ability to issue additional debt.
Failure
to remain a well capitalized institution.
As
a
result of recording losses of $5.6 million during the year ended September
30,
2006, the bank ceased to be considered a well capitalized institution and is
now
considered to be an adequately capitalized institution. As an
adequately capitalized institution, the bank cannot issue brokered certificates
of deposit without OTS or FDIC permission, and the OTS can limit the payment
of
dividends from the bank to the company. Without the payment of a dividend from
the bank, the company is unable to make a distribution on the cumulative
convertible trust preferred securities. On December 13, 2006, the
bank was advised by the OTS that the OTS would not approve the bank’s
application to pay a cash dividend to the company, and the company exercised
its
right to defer the next scheduled quarterly distribution on the cumulative
convertible trust preferred securities as well as future
distributions.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
Not
applicable.
Item
3. Defaults Upon Senior
Securities
Not
applicable.
Item
4. Submission
of Matters to a Vote of Security
Holders
Not
applicable.
Item
5. Other
Information
Not
applicable.
(a)
Exhibits
31.3 Certification
of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of
2002
31.4 Certification
of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of
2002
32.1 Certification
of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of
2002
32.2 Certification
of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of
2002
Greater
Atlantic Financial Corp.
Signatures
Pursuant
to the requirement of the Securities and 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.
|
Carroll
E. Amos
|
President
and Chief Executive Officer
|
|
Senior
Vice President and Chief Financial
Officer
|
Exhibit
31.1
CERTIFICATION
I,
Carroll E. Amos, President and Chief Executive Officer of Greater Atlantic
Financial Corp., certify that:
1.
|
I
have reviewed this Quarterly Report on Form 10-Q of Greater Atlantic
Financial Corp.;
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
4.
|
The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
|
|
a.
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
|
b.
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report, based on such evaluation;
and
|
|
c.
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
5.
|
The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board or directors (or persons performing the equivalent
functions):
|
|
a.
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
b.
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
By: /s/
Carroll E.
Amos
Carroll
E. Amos
President
and Chief Executive
Officer
Date:
May 15, 2007
Exhibit
31.2
CERTIFICATION
I,
David
E. Ritter, Senior Vice President and Chief Financial Officer of Greater Atlantic
Financial Corp., certify that:
1.
|
I
have reviewed this Quarterly Report on Form 10-Q of Greater Atlantic
Financial Corp.;
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
4.
|
The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
|
|
a.
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
|
b.
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report, based on such evaluation;
and
|
|
c.
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
5.
|
The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board or directors (or persons performing the equivalent
functions):
|
|
d.
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
e.
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
By: /s/
David E.
Ritter
David
E. Ritter
Senior
Vice President and
Chief
Financial Officer
Date:
May 15, 2007
Exhibit
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADDED BY
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of Greater Atlantic Financial Corp. (the
“company”) on Form 10-Q for the period ended March 31, 2007 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Carroll
E. Amos, President and Chief Executive Officer of the company, certify, pursuant
to 18 U.S.C.§ 1350, as added by § 906 of the Sarbanes-Oxley Act of 2002,
that:
A.
The Report fully complies with the requirements of Section 13(a) or 15(d) of
the
Securities Exchange Act of 1934; and
B. The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the company as of and
for
the period covered by the Report.
By:
/s/ Carroll E. Amos
Carroll
E. Amos
President
and Chief
Executive Officer
Date:
May 15,
2007
Exhibit
32.2
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADDED BY
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of Greater Atlantic Financial Corp. (the
“company”) on Form 10-Q for the period ended March 31, 2007 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, David
E. Ritter Senior Vice President and Chief Financial Officer of the company,
certify, pursuant to 18 U.S.C.§ 1350, as added by § 906 of the Sarbanes-Oxley
Act of 2002, that:
A. The
Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
B. The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the company as of and
for
the period covered by the Report.
By: /s/ David E. Ritter
David
E.
Ritter
Senior
Vice President
and
Chief
Financial
Officer
Date:
May 15,
2007
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[√]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
quarterly period ended June 30, 2007
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)
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
10700
Parkridge Boulevard, Suite P50, Reston, Virginia
20191
(Address
of Principal Executive
Offices)
(Zip Code)
(703)
391-1300
(Registrant’s
telephone number, including area code)
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 [
√ ] No [ ]
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated
filer [__] Accelerated
filer [__] Non-
accelerated filer [ √ ]
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
Yes [__] No [
√ ]
At
August
13, 2007, there were 3,024,220 shares of the registrant’s Common
Stock,
par value $0.01 per share outstanding
Greater
Atlantic Financial Corp.
Quarterly
Report on Form 10-Q
For
the Quarter Ended June 30, 2007
Table
of Contents
PART
I. FINANCIAL INFORMATION
|
|
PAGE
NO.
|
|
|
|
Item
1.
|
Condensed
Financial Statements (Unaudited)
|
|
|
|
|
|
Consolidated
Statements of Financial Condition at June 30, 2007 and September
30,
2006
|
3
|
|
|
|
|
Consolidated
Statements of Operations
|
|
|
for
the three and nine months ended June 30, 2007 and June 30,
2006
|
4
|
|
|
|
|
Consolidated
Statements of Comprehensive Income (Loss)
|
|
|
for
the three and nine months ended June 30, 2007 and June 30,
2006
|
5
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
|
|
for
the nine months ended June 30, 2007 and June 30, 2006
|
5
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
for
the nine months ended June 30, 2007 and June 30, 2006
|
6
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
8
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
15
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
27
|
Item
4.
|
Controls
and Procedures
|
28
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
29
|
Item
1A.
|
Risk
Factors
|
29
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
31
|
Item
3.
|
Defaults
Upon Senior Securities
|
31
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
31
|
Item
5.
|
Other
Information
|
31
|
Item
6.
|
Exhibits
|
31
|
|
|
|
SIGNATURES
|
32
|
|
|
|
CERTIFICATIONS
|
33
|
Greater
Atlantic Financial Corp.
Consolidated
Statements of Financial Condition (Unaudited)
|
|
June
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
(a)
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
Non-interest
bearing and vault
|
|
$ |
3,796
|
|
|
$ |
2,516
|
|
Interest
bearing
|
|
|
49,352
|
|
|
|
17,288
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
54,913
|
|
|
|
75,461
|
|
Held-to-maturity
|
|
|
3,467
|
|
|
|
4,696
|
|
Loans
receivable, net
|
|
|
179,072
|
|
|
|
193,307
|
|
Accrued
interest and dividends receivable
|
|
|
1,710
|
|
|
|
2,073
|
|
Deferred
income taxes
|
|
|
1,949
|
|
|
|
1,928
|
|
Federal
Home Loan Bank stock, at cost
|
|
|
1,641
|
|
|
|
2,388
|
|
Premises
and equipment, net
|
|
|
2,457
|
|
|
|
2,764
|
|
Goodwill
|
|
|
956
|
|
|
|
956
|
|
Prepaid
expenses and other assets
|
|
|
1,578
|
|
|
|
1,842
|
|
Total
assets
|
|
$ |
300,891
|
|
|
$ |
305,219
|
|
Liabilities
and Stockholders’ equity
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
254,397
|
|
|
$ |
230,174
|
|
Advance
payments from borrowers for taxes and insurance
|
|
|
372
|
|
|
|
270
|
|
Accrued
expenses and other liabilities
|
|
|
1,465
|
|
|
|
1,963
|
|
Advances
from the FHLB and other borrowings
|
|
|
28,649
|
|
|
|
54,574
|
|
Junior
subordinated debt securities
|
|
|
9,372
|
|
|
|
9,388
|
|
Total
liabilities
|
|
|
294,255
|
|
|
|
296,369
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock $.01 par value - 2,500,000 shares authorized,
none
outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $.01 par value – 10,000,000
|
|
|
|
|
|
|
|
|
shares
authorized; 3,024,220 shares outstanding
|
|
|
30
|
|
|
|
30
|
|
Additional
paid-in capital
|
|
|
25,273
|
|
|
|
25,228
|
|
Accumulated
deficit
|
|
|
(17,584 |
) |
|
|
(15,359 |
) |
Accumulated
other comprehensive loss
|
|
|
(1,083 |
) |
|
|
(1,049 |
) |
Total
stockholders’ equity
|
|
|
6,636
|
|
|
|
8,850
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
300,891
|
|
|
$ |
305,219
|
|
(a)
Consolidated Statement of Financial Condition as of September 30, 2006 has
been
derived from audited consolidated financial statements.
See
accompanying notes to consolidated financial statements
Greater
Atlantic Financial Corp.
Consolidated
Statements of Operations (Unaudited)
|
|
Three
Months Ended
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
(Dollars
in Thousands, Except Per Share Data)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
3,459
|
|
|
$ |
3,426
|
|
|
$ |
10,780
|
|
|
$ |
10,217
|
|
Investments
|
|
|
1,225
|
|
|
|
1,327
|
|
|
|
3,302
|
|
|
|
3,726
|
|
Total
interest income
|
|
|
4,684
|
|
|
|
4,753
|
|
|
|
14,082
|
|
|
|
13,943
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,459
|
|
|
|
2,030
|
|
|
|
6,885
|
|
|
|
5,684
|
|
Borrowed
money
|
|
|
617
|
|
|
|
911
|
|
|
|
2,091
|
|
|
|
2,878
|
|
Total
interest expense
|
|
|
3,076
|
|
|
|
2,941
|
|
|
|
8,976
|
|
|
|
8,562
|
|
Net
interest income
|
|
|
1,608
|
|
|
|
1,812
|
|
|
|
5,106
|
|
|
|
5,381
|
|
Provision
(recapture) for loan losses
|
|
|
(4 |
) |
|
|
13
|
|
|
|
289
|
|
|
|
87
|
|
Net
interest income after provision for loan losses
|
|
|
1,612
|
|
|
|
1,799
|
|
|
|
4,817
|
|
|
|
5,294
|
|
Noninterest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
and service charges
|
|
|
158
|
|
|
|
148
|
|
|
|
465
|
|
|
|
445
|
|
Gain
(loss) on derivatives
|
|
|
23
|
|
|
|
154
|
|
|
|
(10 |
) |
|
|
445
|
|
Gain
on sale of foreclosed real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
65
|
|
Other
operating income
|
|
|
5
|
|
|
|
5
|
|
|
|
17
|
|
|
|
25
|
|
Total
noninterest income
|
|
|
186
|
|
|
|
307
|
|
|
|
472
|
|
|
|
980
|
|
Noninterest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
|
1,082
|
|
|
|
1,216
|
|
|
|
3,523
|
|
|
|
3,502
|
|
Occupancy
|
|
|
364
|
|
|
|
357
|
|
|
|
1,051
|
|
|
|
1,008
|
|
Professional
services
|
|
|
210
|
|
|
|
281
|
|
|
|
932
|
|
|
|
799
|
|
Advertising
|
|
|
32
|
|
|
|
183
|
|
|
|
102
|
|
|
|
547
|
|
Deposit
insurance premium
|
|
|
7
|
|
|
|
24
|
|
|
|
36
|
|
|
|
77
|
|
Furniture,
fixtures and equipment
|
|
|
128
|
|
|
|
135
|
|
|
|
395
|
|
|
|
415
|
|
Data
processing
|
|
|
197
|
|
|
|
235
|
|
|
|
649
|
|
|
|
703
|
|
Other
operating expenses
|
|
|
286
|
|
|
|
291
|
|
|
|
826
|
|
|
|
818
|
|
Total
noninterest expense
|
|
|
2,306
|
|
|
|
2,722
|
|
|
|
7,514
|
|
|
|
7,869
|
|
Loss
from continuing operations before income taxes
|
|
|
(508 |
) |
|
|
(616 |
) |
|
|
(2,225 |
) |
|
|
(1,595 |
) |
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss
from continuing operations
|
|
|
(508 |
) |
|
|
(616 |
) |
|
|
(2,225 |
) |
|
|
(1,595 |
) |
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
-
|
|
|
|
(19 |
) |
|
|
-
|
|
|
|
(2,499 |
) |
Net
loss
|
|
$ |
(508 |
) |
|
$ |
(635 |
) |
|
$ |
(2,225 |
) |
|
$ |
(4,094 |
) |
Loss
per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(0.17 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.74 |
) |
|
$ |
(0.53 |
) |
Discontinued
operations
|
|
|
-
|
|
|
|
(0.01 |
) |
|
|
-
|
|
|
|
(0.83 |
) |
Net
loss
|
|
$ |
(0.17 |
) |
|
$ |
(0.21 |
) |
|
$ |
(0.74 |
) |
|
$ |
(1.36 |
) |
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
3,024,220
|
|
|
|
3,020,934
|
|
|
|
3,023,133
|
|
|
|
3,020,934
|
|
See
accompanying notes to consolidated financial statements
Greater
Atlantic Financial Corp.
Consolidated
Statements of Comprehensive Income (Loss) (Unaudited)
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(In
Thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) earnings
|
|
$ |
(508 |
) |
|
$ |
(635 |
) |
|
$ |
(2,225 |
) |
|
$ |
(4,094 |
) |
Other
comprehensive (loss) income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(loss) gain on securities
|
|
|
(90 |
) |
|
|
81
|
|
|
|
(34 |
) |
|
|
(72 |
) |
Other
comprehensive (loss) income
|
|
|
(90 |
) |
|
|
81
|
|
|
|
(34 |
) |
|
|
(72 |
) |
Comprehensive
(loss) income
|
|
$ |
(598 |
) |
|
$ |
(554 |
) |
|
$ |
(2,259 |
) |
|
$ |
(4,166 |
) |
Greater
Atlantic Financial Corp.
Consolidated
Statements of Changes in Stockholders’ Equity (Unaudited)
For
the
Nine Months Ended June 30, 2007 and 2006
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Earnings
(Deficit)
|
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
|
Total
Stockholders’
Equity
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2005 (as restated)
|
|
$ |
-
|
|
|
$ |
30
|
|
|
$ |
25,228
|
|
|
$ |
(9,788 |
) |
|
$ |
(1,095 |
) |
|
$ |
14,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(72 |
) |
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,094 |
) |
|
|
-
|
|
|
|
(4,094 |
) |
Balance
at June 30, 2006
|
|
$ |
-
|
|
|
$ |
30
|
|
|
$ |
25,228
|
|
|
$ |
(13,882 |
) |
|
$ |
(1,167 |
) |
|
$ |
10,209
|
|
Balance
at September 30, 2006
|
|
$ |
-
|
|
|
$ |
30
|
|
|
$ |
25,228
|
|
|
$ |
(15,359 |
) |
|
$ |
(1,049 |
) |
|
$ |
8,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option expense
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of trust preferred securities
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(34 |
) |
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,225 |
) |
|
|
-
|
|
|
|
(2,225 |
) |
Balance
at June 30, 2007
|
|
$ |
-
|
|
|
$ |
30
|
|
|
$ |
25,273
|
|
|
$ |
(17,584 |
) |
|
$ |
(1,083 |
) |
|
$ |
6,636
|
|
See
accompanying notes to consolidated financial statements
Greater
Atlantic Financial Corp.
Consolidated
Statements of Cash Flows (Unaudited)
|
|
Nine
months ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
(In
Thousands)
|
|
|
|
|
|
|
Cash
flow from operating activities
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,225 |
) |
|
$ |
(4,094 |
) |
Adjustments
to reconcile net loss to net cash provided by
|
|
|
|
|
|
|
|
|
(used
in) operating activities
|
|
|
|
|
|
|
|
|
Provision
for loan loss
|
|
|
289
|
|
|
|
87
|
|
Amortization
of deferred loan acquisition cost, net
|
|
|
28
|
|
|
|
(45 |
) |
Depreciation
and amortization
|
|
|
338
|
|
|
|
540
|
|
Loss
(gain) on derivatives
|
|
|
10
|
|
|
|
(445 |
) |
Amortization
of investment security premiums
|
|
|
544
|
|
|
|
606
|
|
Amortization
of mortgage-backed securities premiums
|
|
|
310
|
|
|
|
491
|
|
Amortization
of deferred fees
|
|
|
(247 |
) |
|
|
(419 |
) |
Discount
accretion net of premium amortization
|
|
|
218
|
|
|
|
(207 |
) |
Amortization
of convertible preferred stock costs
|
|
|
7
|
|
|
|
7
|
|
Stock
option expense
|
|
|
22
|
|
|
|
-
|
|
Gain
on sale of loans held for sale
|
|
|
-
|
|
|
|
(1,511 |
) |
Gain
on sale of foreclosed real estate
|
|
|
-
|
|
|
|
(65 |
) |
Gain
on sale of fixed assets
|
|
|
-
|
|
|
|
(26 |
) |
(Increase)
decrease in assets
|
|
|
|
|
|
|
|
|
Disbursements
for origination of loans held for sale
|
|
|
-
|
|
|
|
(91,477 |
) |
Proceeds
from sales of loans
|
|
|
-
|
|
|
|
102,218
|
|
Accrued
interest and dividend receivable
|
|
|
363
|
|
|
|
(226 |
) |
Prepaid
expenses and other assets
|
|
|
171
|
|
|
|
917
|
|
Deferred
loan fees collected, net of deferred costs incurred
|
|
|
367
|
|
|
|
297
|
|
Increase
(decrease) in liabilities
|
|
|
|
|
|
|
|
|
Accrued
expenses and other liabilities
|
|
|
(415 |
) |
|
|
(300 |
) |
Net
cash provided by (used in) operating activities
|
|
|
(220 |
) |
|
|
6,348
|
|
Continued
Greater
Atlantic Financial Corp.
Consolidated
Statements of Cash Flows (Unaudited) – (Continued)
|
|
Nine
months ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
(In
Thousands)
|
|
|
|
|
|
|
Cash
flow from investing activities
|
|
|
|
|
|
|
Net decrease
in loans
|
|
$ |
13,580
|
|
|
$ |
7,096
|
|
Disposal
(purchase) of premises and equipment, net
|
|
|
(31 |
) |
|
|
800
|
|
Purchases
of investment securities
|
|
|
-
|
|
|
|
(7,707 |
) |
Proceeds
from repayments of other investment securities
|
|
|
9,130
|
|
|
|
12,447
|
|
Proceeds
from repayments of mortgage-backed securities
|
|
|
11,739
|
|
|
|
18,884
|
|
Proceeds
from the sale of foreclosed assets
|
|
|
-
|
|
|
|
297
|
|
Purchases
of FHLB stock
|
|
|
(653 |
) |
|
|
(2,115 |
) |
Proceeds
from sale of FHLB stock
|
|
|
1,399
|
|
|
|
2,320
|
|
Net
cash provided by investing activities
|
|
|
35,164
|
|
|
|
32,022
|
|
Cash
flow from financing activities
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in deposits
|
|
|
24,223
|
|
|
|
(17,567 |
) |
Net
decrease in advances from the FHLB and other borrowings
|
|
|
(25,925 |
) |
|
|
(19,709 |
) |
Increase
in advance payments by borrowers
for
taxes and insurance
|
|
|
102
|
|
|
|
51
|
|
Net
cash used in financing activities
|
|
|
(1,600 |
) |
|
|
(37,225 |
) |
Increase
in cash and cash equivalents
|
|
|
33,344
|
|
|
|
1,145
|
|
Cash
and cash equivalents, at beginning of period
|
|
|
19,804
|
|
|
|
4,709
|
|
Cash
and cash equivalents, at end of period
|
|
$ |
53,148
|
|
|
$ |
5,854
|
|
See accompanying notes to consolidated financial statements
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of June 30, 2007 and the Three and Nine Months Ended June 30, 2007 and
2006
(Unaudited)
(1)
BASIS
OF PRESENTATION
The
accompanying unaudited consolidated financial statements, which include the
accounts of Greater Atlantic Financial Corp. (the “company”) and its wholly
owned subsidiary, Greater Atlantic Bank (the “bank”) have been prepared in
accordance with the instructions for Form 10-Q. Certain information
and note disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
of
America have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”) with respect to interim financial
reporting. It is recommended that these consolidated financial
statements be read in conjunction with the company’s Annual Report on Form 10-K
for the year ended September 30, 2006. The results of operations for
the three months or the nine months ended June 30, 2007 are not necessarily
indicative of the results of operations that may be expected for the year ending
September 30, 2007 or any future periods. In addition to
reclassifications related to discontinued operations, other reclassifications
have been made to prior periods to place them on a basis comparable with the
current period presentation.
(2)
BANK
MERGER
As
previously reported in a Form 8-K filed on April 16, 2007, on April 12, 2007,
the company announced that it and Summit Financial Group, Inc. (“Summit”)
entered into a definitive agreement for the company to merge with and into
Summit and that the bank and Bay-Vanguard Federal Savings Bank (“Bay-Vanguard”),
entered into a definitive agreement for Bay-Vanguard to purchase the bank’s
branch office in Pasadena, Maryland.
(3)
DISCONTINUED OPERATIONS
On
March
29, 2006, we began the process of discontinuing the operations of Greater
Atlantic Mortgage Corporations (“GAMC”), the bank’s mortgage company
subsidiary. It was determined that this business no longer fit our
strategy.
As
a
result of the above action, we applied discontinued operations accounting in
the
third quarter of 2006, as we completed the closing of the GAMC
business. Accordingly, the income statements for all periods have
been adjusted. The reclassification of GAMC’s results to discontinued
operations primarily resulted in a reduction to previously reported levels
of
net interest income, a reduction in noninterest income and a reduction in
noninterest expense. The table below summarizes GAMC’s results which
were treated as discontinued operations for the periods indicated
|
|
Three
months ended June 30,
|
|
|
Nine
months ended June 30,
|
|
|
|
2006
|
|
|
2006
|
|
(Dollars
in Thousands, Except Per Share Data)
|
|
|
|
|
|
|
Interest
income
|
|
$ |
9
|
|
|
$ |
280
|
|
Interest
expense
|
|
|
25
|
|
|
|
257
|
|
Net
interest income
|
|
|
(16 |
) |
|
|
23
|
|
Noninterest
income
|
|
|
59
|
|
|
|
2,136
|
|
Noninterest
expense
|
|
|
62
|
|
|
|
4,658
|
|
Net
income (loss)
|
|
$ |
(19 |
) |
|
$ |
(2,499 |
) |
Earnings
(loss) per share – basic
|
|
$ |
(0.01 |
) |
|
$ |
(0.83 |
) |
Earnings
(loss) per share – diluted
|
|
|
(0.01 |
) |
|
|
(0.83 |
) |
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of June 30, 2007 and the Three and Nine Months Ended June 30, 2007
and 2006
(Unaudited)
(4)
LOAN
IMPAIRMENT AND LOAN LOSSES
In
accordance with guidance in the Statements of Financial Accounting Standards
Nos. 114 and 118, the company prepares a quarterly review to determine the
adequacy of the allowance for loan losses and to identify and value impaired
loans. An analysis of the change in the allowance for loan losses
follows (also see page 21 for discussion of non-performing loans):
|
|
At
or for the nine months ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
1,330
|
|
|
$ |
1,212
|
|
Provisions
|
|
|
289
|
|
|
|
87
|
|
Total
charge-offs
|
|
|
(329 |
) |
|
|
(60 |
) |
Total
recoveries
|
|
|
632
|
|
|
|
24
|
|
Net
recoveries (charge-offs)
|
|
|
303
|
|
|
|
(36 |
) |
Balance
at end of period
|
|
$ |
1,922
|
|
|
$ |
1,263
|
|
Ratio
of net charge-offs (recoveries) during the period
to
average loans outstanding during the period
|
|
|
(0.16 |
)% |
|
|
0.02 |
% |
Allowance
for loan losses to total non-performing
loans
at end of period
|
|
|
116.18 |
% |
|
|
110.60 |
% |
Allowance
for loan losses to total loans
|
|
|
1.04 |
% |
|
|
0.65 |
% |
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of June 30, 2007 and the Three and Nine Months Ended June 30, 2007
and 2006
(Unaudited)
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.
Our
total
recorded investment in impaired collateral dependent loans at June 30, 2007
was
$1.3 million and the related allowance associated with impaired loans was
$500,000. There were no impaired loans in the comparable period one
year ago. At June 30, 2007, all impaired loans had a related
allowance and we have not recognized interest income on impaired loans after
the
date that the loans were deemed to be impaired.
(5)
REGULATORY MATTERS
The
capital distribution regulation of the OTS requires that the bank provide the
applicable OTS Regional Director with a 30-day advance written notice of all
proposed capital distributions whether or not advance approval is
required. The bank paid dividends of $655,000 to the company during
the year ended September 30, 2006.
On
December 19, 2006, the company issued a news release announcing that the first
quarter distribution on the Greater Atlantic Capital Trust I 6.50% Cumulative
Convertible Trust Preferred Securities scheduled for December 31, 2006, as
well
as future distributions on the Trust Preferred Securities, will be
deferred. The announcement by the company followed advice received by
the bank that the Office of Thrift Supervision would not approve the bank’s
application to pay a cash dividend to the company. Accordingly, the
company exercised its right to defer the payment of interest on its 6.50%
Convertible Junior Subordinated Debentures Due 2031 related to the Trust
Preferred Securities, for an indefinite period (which can be no longer than
20
consecutive quarterly periods).
The
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) created
five categories of financial institutions based on the adequacy of their
regulatory capital levels: 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% and an adequately capitalized financial institution is one with Tier 1
leverage capital of 4%, Tier 1 risk-based capital of 4% and total risk-based
capital of 8%. At June 30, 2007, the bank was classified as an
adequately capitalized financial institution.
There
are
currently no orders, agreements, recommendations or understandings with our
regulatory agency, which, if implemented, would affect our liquidity, capital
resources, or results of operations. As an adequately capitalized
institution, the Bank cannot issue brokered certificates of deposit without
OTS
or FDIC permission. We do not believe that limitation will have a
material impact on the Bank’s operations.
The
following presents the bank’s capital position at June 30, 2007:
|
|
Required
Balance
|
|
|
Required
Percent to be Well Capitalized
|
|
|
Actual
Balance
|
|
|
Actual
Percent
|
|
|
Surplus/
(Shortfall)
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
|
|
$ |
15,006
|
|
|
|
5.00 |
% |
|
$ |
15,462
|
|
|
|
5.15 |
% |
|
$ |
456
|
|
Tier
1 Risk-based
|
|
$ |
10,946
|
|
|
|
6.00 |
% |
|
$ |
15,373
|
|
|
|
8.43 |
% |
|
$ |
4,427
|
|
Total
Risk-based
|
|
$ |
18,243
|
|
|
|
10.00 |
% |
|
$ |
17,295
|
|
|
|
9.48 |
% |
|
$ |
(948 |
) |
The
company announced on February 20, 2007, that it received a letter from The
Nasdaq Stock Market advising that the Nasdaq Listing Qualifications Panel had
determined to delist the shares of the company from the Nasdaq Global Market,
and suspended trading of the company’s shares effective Thursday, February 22,
2007.
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of June 30, 2007 and the Three and Nine Months Ended June 30, 2007
and 2006
(Unaudited)
As
previously reported, on February 6, 2007, the Company was notified that the
Company’s failure to maintain the minimum of $10,000,000 stockholders’ equity
requirement for continued listing on the Nasdaq Global Market, as set forth
in
Marketplace Rule 4450 (a) (3), served as an additional basis for delisting
the
Company’s shares from the Nasdaq Global Market. In its SEC Form 10-K
for the period ended September 30, 2006, filed on January 31, 2007, the Company
reported stockholders’ equity of $8,850,000. Because of the
$1,150,000 deficiency in stockholders’ equity, the Company did not make a
presentation to the Panel to consider the Company’s continued listing on the
Nasdaq Global Market or to transfer its listing to the Nasdaq Capital
Market. The Company’s common stock is currently listed on the Pink
Sheet under the symbol GAFC.PK.
(6)
STOCK
OPTIONS
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 Plan
was amended effective March 14, 2000, to increase the number of options
available for grant to employees from 76,667 to 225,000 shares and amended
again
effective March 15, 2002, to increase the number of options available for grant
to employees from 225,000 to 350,000 shares and to limit its application to
officers and employees. 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 June 30, 2007, 94,685 warrants were
issued.
The
following summary represents the activity under the Plan:
|
|
Number
of Shares
|
|
|
Exercise
Price
|
|
|
Expiration
Date
|
|
Balance
outstanding and exercisable at September 30, 2005
|
|
|
266,000
|
|
|
$ |
6.91
|
|
|
|
|
Options
granted
|
|
|
12,000
|
|
|
$ |
6.00
|
|
|
|
3-31-2016
|
|
Options
expired
|
|
|
(25,000 |
) |
|
$ |
8.37
|
|
|
|
|
|
Balance
outstanding and exercisable at September 30, 2006
|
|
|
253,000
|
|
|
$ |
6.72
|
|
|
|
|
|
Options
granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance
outstanding and exercisable at June 30, 2007
|
|
|
253,000
|
|
|
$ |
6.72
|
|
|
|
|
|
The
company has adopted the provisions of Statement of Financial Accounting
Standards No. 123R, “Accounting for Stock-Based Compensation” (“SFAS 123R”), to
measure compensation cost for stock options effective after October 1,
2005. Prior to its adoption, the company accounted for its options
under APB 25 “Accounting for Stock Issued to Employees” with pro forma
disclosed. As allowable under SFAS 123R, the company used the
Black-Scholes method to measure the compensation cost of stock options granted
in 2006 with the following assumptions: risk-free interest rate of 4.88%, a
dividend payout rate of zero, and an expected option life of nine
years. The volatility is 32%. Using those assumptions, the
fair value of stock options granted during fiscal 2006 was
$2.92. There were no options granted during the nine months ended
June 30, 2007 and 12,000 options, with an estimated fair value of $22,000,
were
granted during the nine months ended June 30, 2006.
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of June 30, 2007 and the Three and Nine Months Ended June 30, 2007
and 2006
(Unaudited)
(7)
EARNINGS PER SHARE
Earnings
per share is based on the weighted average number of shares of common stock
and
dilutive common stock equivalents outstanding. Basic earnings per
share includes no dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflect the potential
dilution of securities that could share in the earnings of an
entity. The weighted average shares outstanding for basic and diluted
earnings per share for the nine months ended June 30, 2007 and 2006 were the
same as the effect of the conversion of preferred securities and the impact
of
stock options were antidilutive for the periods ended June 30, 2007 and
2006. The effect of the conversion of the preferred securities would
result in an increase of 1,368,143 in common shares outstanding.
(8)
SEGMENT REPORTING
The
company had two reportable segments, banking and mortgage banking until the
mortgage-banking activities conducted in GAMC, to which the mortgage-banking
segment applied, were discontinued effective March 29, 2006. The bank
operates retail deposit branches in the greater Washington, D.C./Baltimore
metropolitan area. The banking segment provides retail consumers and
small businesses with deposit products such as demand, transaction, and 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
purchased residential real estate loans , and also invests in mortgage-backed
and other securities.
On
March
29, 2006, we began the process of discontinuing the operations of the bank’s
subsidiary, GAMC. Because it was unprofitable, it was determined that
this business no longer fit our strategy.
In
the
third quarter of 2006, we applied discontinued operations accounting for
GAMC. Accordingly, the income statements for all periods have been
restated. The restatements primarily resulted in a reduction to
previously reported levels of net interest income, a reduction in noninterest
income and a reduction in noninterest expense.
(9)
RECENT ACCOUNTING STANDARDS
In
July
2006, the FASB issued Interpretation (FIN) No. 48, “Accounting for Uncertainty
in Income Taxes” - an Interpretation of SFAS No. 109, “Accounting for Income
Taxes.” FIN 48 defines the threshold for recognizing the benefits of tax return
positions in the financial statements as “more-likely-than-not” to be sustained
by a taxing authority. The term “more-likely-than-not” means a likelihood of
more than 50 percent. FIN 48 is effective for fiscal years beginning after
December 15, 2006, with early application permitted. Any impact from the
adoption of FIN 48 will be recorded directly to the beginning balance of
retained earnings and reported as a change in accounting principle. We are
currently evaluating the impact of this Interpretation, but do not expect it
to
be material.
On
October 1, 2006, we adopted SFAS 156, “Accounting for Servicing of Financial
Assets – an amendment of FASB Statement No.140.” SFAS 156 was issued in March
2006 and requires all newly recognized servicing rights and obligations to
be
initially measured at fair value. For each class of separately recognized
servicing rights and obligations retained, we have elected to continue to
account for each under the amortization method which requires us to amortize
servicing assets or liabilities in proportion to and over the periods of
estimated net servicing income or net servicing loss.
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of June 30, 2007 and the Three and Nine Months Ended June 30, 2007
and 2006
(Unaudited)
In
September 2006, the Financial Accounting Standards Board released Statement
No.
157, "Fair Value Measurements" which defines fair value, establishes a framework
for measuring fair value in GAAP, and enhances disclosures about fair value
measurements. This Statement applies when other accounting pronouncements
require fair value measurements; it does not require new fair value
measurements. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those
years. While we are currently evaluating the effect of the guidance contained
in
this Statement, we do not expect the implementation to have a material impact
on
our consolidated financial statements.
In
February, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities,” which permits companies to report
certain financial assets and financial liabilities at fair value. SFAS 159
is
effective for fiscal years beginning after November 15, 2007. The
Company can elect to apply the standard prospectively and measure certain
financial instruments at fair value beginning January 1, 2008. The
Company is currently evaluating the guidance contained in SFAS 159, and has
yet
to determine which assets or liabilities (if any) will be
selected. At adoption, the difference between the carrying amount and
the fair value of existing eligible assets and liabilities selected (if any)
would be recognized via a cumulative adjustment to beginning retained earnings
on October 1, 2008.
(10)
JUNIOR SUBORDINATED DEBT SECURITIES
On
March
20, 2002, Greater Atlantic Capital Trust I (the, “Trust”), a Delaware statutory
business trust and a wholly owned Trust subsidiary of the company, issued $9.6
million aggregate liquidation amount (963,038 shares) of 6.50% cumulative
preferred securities maturing on December 31, 2031, retaining an option to
call
the securities on or after December 31, 2003. Conversion of the
preferred securities into the company’s common stock may occur at any time on or
after 60 days after the closing of the offering. The company may
redeem the preferred securities, in whole or in part, at any time on or after
December 31, 2003. Distributions on the preferred securities are
payable quarterly on March 31, June 30, September 30 and December 31 of each
year beginning on June 30, 2002. The Trust also issued 29,762 common
securities to the company for $297,620. The proceeds from the sale of
the preferred securities and the proceeds from the sale of the trust’s common
securities were utilized to purchase from the company junior subordinated debt
securities of $9,928,000 bearing interest of 6.50% and maturing December 31,
2031. The Company has
fully and unconditionally guaranteed the preferred securities along with all
obligations of the trust related thereto. The sale of the preferred
securities yielded $9.3 million after deducting offering expenses.
To
comply
with FIN46, the trust preferred subsidiary was deconsolidated in 2004, and
the
related securities have been presented as obligations of the Company and titled
“Junior Subordinated Debt Securities” in the financial statements.
On
December 19, 2006, the Company issued a news release announcing that the first
quarter distribution on the Greater Atlantic Capital Trust I 6.50% Cumulative
Convertible Trust Preferred Securities scheduled for December 31, 2006, as
well
as future distributions on the Trust Preferred Securities, will be
deferred. The announcement by the Company follows advice received by
the bank from the Office of Thrift Supervision that it would not approve the
bank’s application to pay a cash dividend to the Company.
Greater
Atlantic Financial
Corp.
Notes
to Consolidated Financial
Statements
Information
as of June 30, 2007 and the Three and Nine Months Ended June 30, 2007
and 2006
(Unaudited)
Accordingly,
the Company exercised its right to defer the payment of interest on its 6.50%
Convertible Junior Subordinated Debentures Due 2031 related to the Trust
Preferred Securities, for an indefinite period (which can be no longer than
20
consecutive quarterly periods).
The
company retained approximately $1.3 million of the proceeds for general
corporate purposes, investing the retained funds in short-term
investments. The remaining $8.0 million of the proceeds was invested
in the bank to increase its capital position (also see Note 5 Regulatory
Matters).
(11)
DERIVATIVE FINANCIAL INSTRUMENTS
During
fiscal years 2003 and 2002, the bank entered into various interest rate caps
that total $20 million in notional principal with terms between five and ten
years that limit the float between a floor of 2.00%, and are capped between
5.00% - 8.00%. The bank accounts for these derivatives, under the
guidelines of SFAS 133, as amended.
Realized
and unrealized gains and losses on those derivatives which meet hedge accounting
requirements are deferred and recognized when the hedge transaction
occurs. In the event hedge accounting requirements are not met gains
and losses on such instruments are included currently in the statement of
operations. During the nine months ended June 30, 2007 and 2006 the
instruments did not meet hedge accounting requirements. The
statements of operations include net losses of $10,000 and gains of $445,000
for
the nine months ended June 30, 2007 and 2006, respectively.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes presented elsewhere in this
report.
This
report contains forward-looking statements. When used in this 10-Q
report 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.
The
matters discussed in management’s discussion and analysis of financial condition
and results of operations reflects continuing operations, unless otherwise
noted.
Mortgage
Banking Activities
The
bank’s mortgage banking activities primarily consisted of originating mortgage
loans secured by single-family properties. Those activities were
conducted in GAMC and were discontinued effective March 29, 2006 as it was
determined that, because it was unprofitable, this business no longer fit our
strategy. Mortgage banking involves the origination and sale of
mortgage loans for the purpose of generating gains on sale of loans and fee
income on the origination of loans, in addition to loan interest
income. In recent years, the volume of GAMC’s originations had been
declining, resulting in losses from mortgage banking operations.
In
the
third quarter of 2006, we applied discontinued operations accounting for GAMC
as
we completed closing those operations during the quarter, and accordingly,
the
income statements for all periods have been adjusted. The
reclassifications primarily resulted in a reduction to previously reported
levels of net interest income, a reduction in noninterest income and a reduction
in noninterest expense.
General
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, the bank, a federally chartered savings bank. The
bank is a member of the Federal Home Loan Bank (“FHLB”) system and its deposits
are insured up to applicable limits by the Federal Deposit Insurance
Corporation. We offer traditional banking services to customers
through the six branches of the bank located throughout the greater Washington,
D.C./Baltimore metropolitan area.
The
profitability of the company depends primarily on its non-interest income and
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 consist mainly of
interest paid on deposits and borrowings. Non-interest income
consists primarily of gain on sales of loans, derivatives and available-for-sale
investments and fees from service charges on deposits and loans.
The
level
of its operating expenses also affects the company’s
profitability. Operating expenses consist primarily of salaries and
employee benefits, occupancy-related expenses, equipment and technology-related
expenses and other general operating expenses.
At
June
30, 2007 the company’s total assets were $300.9 million, compared to the $305.2
million held at September 30, 2006, representing a decrease of
1.42%. The decrease resulted primarily from a decrease in investment
securities and loans receivable and was offset in part by an increase in
interest bearing deposits. The decline in the bank’s overall asset
size is reflected in the consolidated statements of financial condition and
statements of operations as we continued to manage its assets and liabilities
to
maintain the bank in an adequately capitalized position.
Net
loans
receivable at June 30, 2007 were $179.1 million, a decrease of $14.2 million
or
7.36% from the $193.3 million held at September 30, 2006. The decrease in loans
consisted primarily of a $6.0 million decline in the Bank’s single family loan
portfolio, coupled with a decrease of $8.4 million in the Bank’s consumer loan
portfolio. Because the Bank’s single family and consumer loan
portfolios consist primarily of adjustable-rate loans, with the current yield
curve, where short-term rates are only slightly lower than rates for longer
terms, customers are able to extend the terms of their
mortgages. Customers are also refinancing away from adjustable-rate
loans and into longer term, fixed-rate loans or curtailing outstanding
balances. Multifamily loans outstanding increased by $3.2 million and
commercial real estate loans increased by $4.4 million during the
period. Those increases were offset in part by decreases of $4.3
million in construction and land loans and $2.2 million in commercial business
loans. The decrease in construction and land loans was primarily in
the single family residential sector of the market. The company
anticipates that lending in that area will continue to decline as a result
of
the current slow sales pace occurring in the single family market.
At
June
30, 2007, investment securities were $58.4 million, a decrease of $21.8 million
or 27.17% from the $80.2 million held at September 30, 2006. The cash
proceeds from the sale or payoff of investment securities were used to reduce
higher cost wholesale funding, including borrowings, brokered deposits and
wholesale deposits.
Deposits
at June 30, 2007 were $254.4 million, an increase of $24.2 million from the
$230.2 million held at September 30, 2006. Total deposits have
increased notwithstanding our reduced reliance on brokered deposits and
wholesale deposits, both of which have a higher cost. Those types of
deposits have declined $26.8 million since June 30, 2006 while total retail
deposits have increased $60.5 million. The increase in retail
deposits is primarily in certificates of deposits and money fund accounts which
have been obtained through the Bank’s marketing efforts and are at a lower cost
than brokered and wholesale deposits.
On
February 22, 2006, the company announced that it had engaged Sandler O’Neill
& Partners, L.P. to advise on the financial aspects of the company’s review
of its strategic options and assist the company in evaluating the financial
aspects of all strategic alternatives available.
As
previously reported in a Form 8-K filed on April 16, 2007, and noted previously,
on April 12, 2007, the company announced that it and Summit entered into a
definitive agreement for the company to merge with and into Summit and that
the
bank and Bay-Vanguard entered into a definitive agreement for Bay-Vanguard
to
purchase the bank’s branch office in Pasadena, Maryland.
The
merger is expected to be completed in the fourth calendar quarter of 2007,
subject to regulatory and shareholder approvals. Immediately
following the merger, the bank intends to merge with and into Summit Community
Bank.
Under
the
agreement to sell its leased branch office located at 8070 Ritchie Highway,
Pasadena, Maryland, to Bay-Vanguard, Bay-Vanguard will pay the bank an 8.5%
premium on the balance of deposits assumed at closing. At June 30,
2007, the deposits at the Pasadena branch office on which the deposit premium
would apply totaled approximately $54.4 million. Bay-Vanguard will
also purchase the branch office’s fixed assets, but will not acquire any loans
as part of the transaction. The purchase is expected to be completed
during the third calendar quarter of 2007, and regulatory approval has been
obtained.
Critical
Accounting Policies, Estimates and Judgments
The
company’s financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation
of those financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue
and
expenses as well as the disclosure of contingent
liabilities. Management continually evaluates its estimates and
judgments including those related to the allowance for loan losses and income
taxes. Management bases its estimates and judgments on historical
experience and other factors that are believed to be reasonable under the
circumstances. Actual results may differ from those estimates under
different assumptions or conditions. The company believes that, of
its significant accounting policies, the most critical accounting policies
we
apply are those related to the evaluation of the adequacy of the allowance
for
loan losses.
A
variety
of factors impact the carrying value of the loan portfolio including the
calculation of the allowance for loan losses, valuation of underlying
collateral, the timing of loan charge-offs and the amount and amortization
of
loan fees and deferred origination costs. The allowance for loan
losses is the most difficult and subjective judgment. The allowance
is established and maintained at a level that we believe is adequate to cover
losses resulting from the inability of borrowers to make required payments
on
loans. Estimates for loan losses are arrived at by analyzing risks
associated with specific loans and the loan portfolio, current trends in
delinquencies and charge-offs, the views of our regulators, changes in the
size
and composition of the loan portfolio and peer comparisons. The
analysis also requires consideration of the economic climate and direction,
change in the interest rate environment, which may impact a borrower’s ability
to pay, legislation impacting the banking industry and economic conditions
specific to our service area. Because the calculation of the
allowance for loan losses relies on estimates and judgments relating to
inherently uncertain events, results may differ from our estimates.
Comparison
of Results of Operations for the Three Months Ended
June
30, 2007 and June 30, 2006
Net
Income. For the three months ended June 30, 2007, the company
had a net loss of $508,000 or $0.17 per diluted share, compared to a net loss
from continuing operations of $616,000 or $0.20 per diluted share for the three
months ended June 30, 2006. The $108,000 decrease in the net loss
over the comparable period one-year ago was primarily the result of a decrease
in non-interest expense and a decrease in the provision for loan
losses. Those decreases were offset by decreases in net interest
income and non-interest income. The ongoing net losses from
continuing operations remain a consistent problem for management because the
loan production needed to maintain the retail branch network has not been
attained. Due to the losses arising from the operations of GAMC, the
bank is currently managing its assets and liabilities to maintain an adequately
capitalized status. Because of the impact on the risk-based capital
requirements, the bank cannot aggressively expand its commercial loan
portfolio. In addition, the resulting reduction in the bank’s loans
to one borrower limit makes it difficult to maintain a consistent level of
outstanding loans to larger customers. Those factors have caused
earning assets to decline, impacting earnings. Further, margin
pressure from the yield curve, which had been inverted since the spring of
2006
and remains inverted from three months to three years and only recently moved
to
a positive pattern from three to ten years, presents a very challenging
environment in which to seek to increase our net interest margin.
Accordingly
the Company entered into an agreement, to merge with and into Summit and the
bank agreed to sell its Pasadena, Maryland, branch to
Bay-Vanguard. Alternatively, in order for the Company to achieve
profitability it would have had to have sold a sufficient number of branches
to
increase capital and reduce overall operating cost.
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 liabilities
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 re-pricing 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.
Net
interest income from continuing operations
|
|
|
|
|
Difference
|
|
Three
Months Ended June 30,
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in Thousands)
|
|
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
3,459
|
|
|
$ |
3,426
|
|
|
$ |
33
|
|
|
|
0.96 |
% |
Investments
|
|
|
1,225
|
|
|
|
1,327
|
|
|
|
(102 |
) |
|
|
(7.69 |
) |
Total
|
|
|
4,684
|
|
|
|
4,753
|
|
|
|
(69 |
) |
|
|
(1.45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,459
|
|
|
|
2,030
|
|
|
|
429
|
|
|
|
21.13
|
|
Borrowings
|
|
|
617
|
|
|
|
911
|
|
|
|
(294 |
) |
|
|
(32.27 |
) |
Total
|
|
|
3,076
|
|
|
|
2,941
|
|
|
|
135
|
|
|
|
4.59
|
|
Net
interest income
|
|
$ |
1,608
|
|
|
$ |
1,812
|
|
|
$ |
(204 |
) |
|
|
(11.26 |
)% |
The
decrease in net interest income during the three months ended June 30, 2007,
from the comparable period one year ago, resulted primarily from a $20.9 million
decrease in the bank’s interest-earning assets coupled with average
interest-earning assets declining by $8.9 million more than the decline in
average interest-bearing liabilities. That decrease was coupled with
an 11 basis point decrease in net interest margin (net interest income divided
by average interest-earning assets) from 2.42% for the three months ended June
30, 2006 to 2.31% for the three months ended June 30, 2007. The
decrease in net interest margin also resulted from the average cost on
interest-bearing liabilities increasing by 1 basis point more than the increase
in the average yield on interest-earning assets.
The
interest rate environment has been a difficult one for most financial
institutions. With short-term rates close to or at times even higher
than long-term rates, the prospects of expanding interest rate spread and net
interest margin has been difficult at best. We expect the interest
rate environment to remain challenging and we believe it will continue to have
an impact on our net interest margin and net interest rate spread. We
also believe, however, that our strategy of changing the balance sheet from
one
that was wholesale oriented, as reflected in the Company’s former reliance on
brokered and internet deposits, to one which is more retail oriented, will
benefit us over time. We believe that change will position us to
realize a benefit when the interest rate environment improves. If
market interest rates were to rise, given our asset sensitivity position, we
would also expect our net interest margin to improve. However, in a
declining rate environment our interest rate spread and our net interest income
would decline. The Bank continues to monitor the markets and its
interest rate position to alleviate any material changes in net interest
margin.
Interest
Income. Interest income for the three months ended June 30, 2007
decreased $69,000 compared to the three months ended June 30, 2006, primarily
as
a result of a $20.9 million decrease in the average balances of outstanding
loans and investment securities. The decreases in those balances were
partially offset by an increase of 38 basis points in the average yield earned
on interest earning assets.
Interest
Expense. The $135,000 increase in interest expense for the three
months ended June 30, 2007 compared to the 2006 period was principally the
result of a 39 basis point increase in the cost of funds on average deposits
and
borrowings. That increase in the cost of funds was partially offset
by an $11.9 million decrease in the average amount of deposits and
borrowings. The increase in interest expense on deposits was
primarily due to a 56 basis point increase in rates paid on deposits, primarily
due to higher rates paid on interest-bearing demand deposits and certificates
and elevated pricing on new and renewed time deposits. That increase
was coupled with an increase of $12.1 million in the average amount of deposits
from $211.7 million for the three months ended June 30, 2006 to $223.8 million
for the three months ended June 30, 2007.
The
decrease in interest expense on borrowings for the three months ended June
30,
2007, when compared to the 2006 period, was principally the result of a $24.0
million decrease in average borrowed funds, partially offset by a 20 basis
point
increase in the cost of borrowed funds. The components accountable
for the decrease of $294,000 in interest expense on borrowings were a $323,000
decrease relating to average volume, partially offset by a $29,000 increase
relating to average cost.
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.
|
|
For
the Three Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Yield/ Rate
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Yield/
Rate
|
|
Assets:
|
|
(dollars
in thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
$ |
89,172
|
|
|
$ |
1,639
|
|
|
|
7.35 |
% |
|
$ |
92,623
|
|
|
$ |
1,660
|
|
|
|
7.17 |
% |
Consumer
loans
|
|
|
53,768
|
|
|
|
1,068
|
|
|
|
7.95
|
|
|
|
64,267
|
|
|
|
1,207
|
|
|
|
7.51
|
|
Commercial
business loans
|
|
|
37,172
|
|
|
|
752
|
|
|
|
8.09
|
|
|
|
32,269
|
|
|
|
559
|
|
|
|
6.93
|
|
Total
loans
|
|
|
180,112
|
|
|
|
3,459
|
|
|
|
7.68
|
|
|
|
189,159
|
|
|
|
3,426
|
|
|
|
7.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
76,235
|
|
|
|
979
|
|
|
|
5.14
|
|
|
|
69,172
|
|
|
|
897
|
|
|
|
5.19
|
|
Mortgage-backed
securities
|
|
|
21,706
|
|
|
|
246
|
|
|
|
4.53
|
|
|
|
40,572
|
|
|
|
430
|
|
|
|
4.24
|
|
Total
interest-earning assets
|
|
|
278,053
|
|
|
|
4,684
|
|
|
|
6.74
|
|
|
|
298,903
|
|
|
|
4,753
|
|
|
|
6.36
|
|
Non-earning
assets
|
|
|
11,993
|
|
|
|
|
|
|
|
|
|
|
|
11,438
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
290,046
|
|
|
|
|
|
|
|
|
|
|
$ |
310,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$ |
2,985
|
|
|
|
7
|
|
|
|
0.94
|
|
|
$ |
4,680
|
|
|
|
11
|
|
|
|
0.94
|
|
Now
and money market accounts
|
|
|
79,542
|
|
|
|
707
|
|
|
|
3.56
|
|
|
|
76,696
|
|
|
|
658
|
|
|
|
3.43
|
|
Certificates
of deposit
|
|
|
141,226
|
|
|
|
1,745
|
|
|
|
4.94
|
|
|
|
130,333
|
|
|
|
1,361
|
|
|
|
4.18
|
|
Total
deposits
|
|
|
223,753
|
|
|
|
2,459
|
|
|
|
4.40
|
|
|
|
211,709
|
|
|
|
2,030
|
|
|
|
3.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
|
31,600
|
|
|
|
421
|
|
|
|
5.33
|
|
|
|
38,568
|
|
|
|
490
|
|
|
|
5.08
|
|
Other
borrowings
|
|
|
13,462
|
|
|
|
196
|
|
|
|
5.82
|
|
|
|
30,461
|
|
|
|
421
|
|
|
|
5.53
|
|
Total
interest-bearing
liabilities
|
|
|
268,815
|
|
|
|
3,076
|
|
|
|
4.58
|
|
|
|
280,738
|
|
|
|
2,941
|
|
|
|
4.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand deposits
|
|
|
12,019
|
|
|
|
|
|
|
|
|
|
|
|
15,107
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
2,140
|
|
|
|
|
|
|
|
|
|
|
|
1,165
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
282,974
|
|
|
|
|
|
|
|
|
|
|
|
297,010
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
7,072
|
|
|
|
|
|
|
|
|
|
|
|
13,331
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
stockholders'
Equity
|
|
$ |
290,046
|
|
|
|
|
|
|
|
|
|
|
$ |
310,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
1,608
|
|
|
|
|
|
|
|
|
|
|
$ |
1,812
|
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
|
|
|
|
|
2.16 |
% |
|
|
|
|
|
|
|
|
|
|
2.17 |
% |
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
2.31 |
% |
|
|
|
|
|
|
|
|
|
|
2.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ate/Volume
Analysis. The following table presents certain
information regarding changes in interest income and interest expense
attributable to changes in interest rates and changes in volume of
interest-earning assets and interest-bearing liabilities for the periods
indicated. The change in interest attributable to both rate and
volume has been allocated to the changes in rate and volume on a pro rata
basis.
|
|
Three
Months Ended
June
30, 2007 compared to
|
|
|
|
June
30, 2006
|
|
|
|
Change
Attributable to
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
$ |
(62 |
) |
|
$ |
41
|
|
|
$ |
(21 |
) |
Consumer
loans
|
|
|
(197 |
) |
|
|
58
|
|
|
|
(139 |
) |
Commercial
business loans
|
|
|
85
|
|
|
|
108
|
|
|
|
193
|
|
Total
loans
|
|
|
(174 |
) |
|
|
207
|
|
|
|
33
|
|
Investments
|
|
|
92
|
|
|
|
(10 |
) |
|
|
82
|
|
Mortgage-backed
securities
|
|
|
(200 |
) |
|
|
16
|
|
|
|
(184 |
) |
Total
interest-earning assets
|
|
$ |
(282 |
) |
|
$ |
213
|
|
|
$ |
(69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$ |
(4 |
) |
|
$ |
-
|
|
|
$ |
(4 |
) |
Now
and money market accounts
|
|
|
24
|
|
|
|
25
|
|
|
|
49
|
|
Certificates
of deposit
|
|
|
114
|
|
|
|
270
|
|
|
|
384
|
|
Total
deposits
|
|
|
134
|
|
|
|
295
|
|
|
|
429
|
|
FHLB
advances
|
|
|
(89 |
) |
|
|
20
|
|
|
|
(69 |
) |
Other
borrowings
|
|
|
(235 |
) |
|
|
10
|
|
|
|
(225 |
) |
Total
interest-bearing liabilities
|
|
|
(190 |
) |
|
|
325
|
|
|
|
135
|
|
Change
in net interest income
|
|
$ |
(92 |
) |
|
$ |
(112 |
) |
|
$ |
(204 |
) |
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
loan type and assigns to them a reserve percentage that reflects the industry
standard. Management then looks at its classified assets, which are
loans 30 days or more delinquent, and classifies those loans as special mention,
substandard, doubtful or loss based on the performance of the
loans. Those classified loans are then individually evaluated for
impairment and measured by either the present value of expected future cash
flows, the loan’s observable market price, or the fair value of the
collateral. They are then segmented by type and assigned a reserve
percentage that reflects the underlying quality of the loan. Although
management utilizes its best judgment in providing for probable losses, there
can be no assurance that the bank will not have to increase its provisions
for
loan losses in the future. An increase in provision may result from
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. On an annual basis, or more often if deemed necessary,
the bank has contracted with an independent outside third party to have its
loan
portfolio reviewed. The focus of their review is to identify the
extent of potential and actual risk in the bank’s commercial loan portfolio, in
addition to the bank’s underwriting and processing
practices. Observations made regarding the bank’s portfolio risk are
based upon review evaluations, portfolio profiles and discussion with the
operational staff, including the line lenders and senior
management.
Non-performing
assets were $1.7 million or 0.55% of total assets at June 30, 2007, a $512,000
increase from the $1.1 million or 0.38% of total assets classified as
non-performing at June 30, 2006. Of those, $1.4 million were
classified as substandard, and $300,000 were classified as
doubtful. Credit quality at the bank remains strong, with a ratio of
non-performing assets to total assets of 0.55%, and with negligible
nonperforming and past-due loans as reflected in the provision for loan losses
which decreased a modest $17,000 from the year ago period.
Non-interest
Income. Non-interest income decreased $121,000 during the three months
ended June 30, 2007, over the comparable three months one year
ago. That decrease was primarily the result of a decrease of $131,000
in gains on derivatives and was partially offset by an increase of $10,000
in
deposit fees.
The
following table presents a comparison of the components of non-interest
income.
Non-interest
income from continuing operations
|
|
|
|
|
Difference
|
|
Three
Months Ended June 30,
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in Thousands)
|
|
|
|
Non-interest
income:
|
|
|
|
Service
fees on loans
|
|
$ |
42
|
|
|
$ |
42
|
|
|
$ |
-
|
|
|
|
- |
% |
Service
fees on deposits
|
|
|
116
|
|
|
|
106
|
|
|
|
10
|
|
|
|
9.43
|
|
Gain
(loss) on derivatives
|
|
|
23
|
|
|
|
154
|
|
|
|
(131 |
) |
|
|
(85.06 |
) |
Other
operating income
|
|
|
5
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
Total
non-interest income
|
|
$ |
186
|
|
|
$ |
307
|
|
|
$ |
(121 |
) |
|
|
(39.41 |
)% |
Non-interest
expense. Non-interest expense decreased $416,000 from $2.7 million for the
three months ended June 30, 2006 to $2.3 million for the three months ended
June
30 in the current year. The decrease was distributed over various
non-interest expense categories with the primary contributors being
compensation, advertising, professional services, deposit insurance premiums,
data processing, furniture, fixtures and equipment and other operating
expense. The decreases in those categories of expense were partially
offset by an increase of $7,000 in occupancy expense.
The
following table presents a comparison of the components of non-interest
expense.
Non-interest
expense from continuing operations
|
|
|
|
Difference
|
Three
Months Ended June 30,
|
|
2007
|
|
2006
|
|
Amount
|
|
%
|
(Dollars
in Thousands)
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
$
1,082
|
|
$
1,216
|
|
$
(134)
|
|
(11.02)%
|
Occupancy
|
|
364
|
|
357
|
|
7
|
|
1.96
|
Professional
services
|
|
210
|
|
281
|
|
(71)
|
|
(25.27)
|
Advertising
|
|
32
|
|
183
|
|
(151)
|
|
(82.51)
|
Deposit
insurance premium
|
|
7
|
|
24
|
|
(17)
|
|
(70.83)
|
Furniture,
fixtures and equipment
|
|
128
|
|
135
|
|
(7)
|
|
(5.19)
|
Data
processing
|
|
197
|
|
235
|
|
(38)
|
|
(16.17)
|
Other
operating expense
|
|
286
|
|
291
|
|
(5)
|
|
(1.72)
|
Total
non-interest expense
|
|
$
2,306
|
|
$
2,722
|
|
$
(416)
|
|
(15.28)%
|
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. Due to our operating losses, we did not record
a provision for income taxes for the three months ended June 30, 2007 or
2006. The company believes that it will generate future
taxable income through earnings and branch sales, to assure utilization
of a portion of the existing net operating losses.
Contractual
Obligations and Off-Balance Sheet Financing Arrangements
The
following table summarizes the bank’s contractual obligations at June 30, 2007
and the effect those obligations are expected to have on the bank’s liquidity
and cash flows in future periods.
|
|
Total
|
|
|
Less
Than One Year
|
|
|
One
– Three Years
|
|
|
Four
– Five Years
|
|
|
After
Five Years
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
Advances (1)
|
|
$ |
25,000
|
|
|
$ |
-
|
|
|
$ |
25,000
|
|
|
$ |
-
|
|
|
$ |
-
|
|
Reverse
repurchase agreements
|
|
|
3,649
|
|
|
|
3,649
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subordinated
debt securities (2)
|
|
|
25,982
|
|
|
|
655
|
|
|
|
1,310
|
|
|
|
1,310
|
|
|
|
22,707
|
|
Operating
leases
|
|
|
4,093
|
|
|
|
1,121
|
|
|
|
1,944
|
|
|
|
624
|
|
|
|
404
|
|
Total
obligations
|
|
$ |
58,724
|
|
|
$ |
5,425
|
|
|
$ |
28,254
|
|
|
$ |
1,934
|
|
|
$ |
23,111
|
|
(3) The
company expects to refinance these short and medium-term obligations
under
substantially the same terms and conditions.
(4) Includes
principal and interest due on our junior subordinated debt
securities
|
|
Other
Commercial Commitments
|
|
Total
|
|
|
Less
Than One Year
|
|
|
One
– Three Years
|
|
|
Four
– Five Years
|
|
|
After
Five Years
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate
of deposit maturities (1)
|
|
$ |
146,807
|
|
|
$ |
130,791
|
|
|
$ |
13,583
|
|
|
$ |
2,340
|
|
|
$ |
93
|
|
Loan
originations
|
|
|
6,427
|
|
|
|
6,427
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Unfunded
lines of credit (2)
|
|
|
113,094
|
|
|
|
113,094
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Standby
letters of credit
|
|
|
310
|
|
|
|
310
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$ |
266,638
|
|
|
$ |
250,622
|
|
|
$ |
13,583
|
|
|
$ |
2,340
|
|
|
$ |
93
|
|
(3) The
company expects to retain maturing deposits or replace amounts maturing
with comparable certificates of deposit based on current market interest
rates.
(4) Revolving,
open-end loans on one-four dwelling units and commercial lines that
mostly
remain unfunded.
|
|
Comparison
of Results of Operations for the Nine Months Ended
June
30, 2007 and June 30, 2006
Net
Income. For the nine months ended June 30, 2007, the company had
a net loss of $2.2 million or $0.74 per diluted share, compared to a net loss
from continuing operations of $1.6 million or $0.53 per diluted share for the
nine months ended June 30, 2006. The increase in the net loss of
$629,000 over the comparable period one-year ago was primarily the result of
decreases in net interest income and non-interest income and an increase in
the
provision for loan losses; those items were partially offset by a decrease
in
non-interest expense.
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 liabilities
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 re-pricing 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.
Net
interest income from continuing operations
|
|
|
|
|
Difference
|
|
Nine
Months Ended June 30,
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in Thousands)
|
|
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
10,780
|
|
|
$ |
10,217
|
|
|
$ |
563
|
|
|
|
5.51 |
% |
Investments
|
|
|
3,302
|
|
|
|
3,726
|
|
|
|
(424 |
) |
|
|
(11.38 |
) |
Total
|
|
|
14,082
|
|
|
|
13,943
|
|
|
|
139
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
6,885
|
|
|
|
5,684
|
|
|
|
1,201
|
|
|
|
21.13
|
|
Borrowings
|
|
|
2,091
|
|
|
|
2,878
|
|
|
|
(787 |
) |
|
|
(27.35 |
) |
Total
|
|
|
8,976
|
|
|
|
8,562
|
|
|
|
414
|
|
|
|
4.84
|
|
Net
interest income
|
|
$ |
5,106
|
|
|
$ |
5,381
|
|
|
$ |
(275 |
) |
|
|
(5.11 |
)% |
The
decrease in net interest income during the nine months ended June 30, 2007,
resulted primarily from a $34.7 million decrease in the bank’s interest-earning
assets coupled with a decline in average interest-earning assets of $8.1 million
more than the decline in average interest-bearing liabilities. That
decrease in the bank’s interest earning assets was offset in part by a 16 basis
point increase in net interest margin (net interest income divided by average
interest-earning assets) from 2.31% for the nine months ended June 30, 2006
to
2.47% for the nine months ended June 30, 2007. The increase in net
interest margin resulted from increasing the average yield on interest-earning
assets by 22 basis points more than the increase in the average cost of
interest-bearing liabilities.
Interest
Income. Interest income for the nine months ended June 30, 2007
increased $139,000 compared to the nine months ended June 30, 2006, primarily
as
a result of an 82 basis point increase in the average yield earned on interest
earning assets. That increase was partially offset by a $34.7 million
decrease in the average outstanding balances of loans and investment
securities.
Interest
Expense. The $414,000 increase in interest expense for the nine
months ended June 30, 2007 compared to the 2006 period was principally the
result of a 60 basis point increase in the cost of funds on average deposits
and
borrowings. That increase in the cost of funds was partially offset
by a $26.6 million decrease in the average amount of deposits and
borrowings. The increase in interest expense on deposits was
primarily due to a 75 basis point increase in rates paid on deposits, primarily
due to higher rates paid on savings, interest-bearing demand deposits and
certificates, and elevated pricing on new and renewed time
deposits. That increase was partially offset by a decrease of
$226,000 in the average amount of deposits, from $213.6 million for the nine
months ended June 30, 2006 to $213.4 million for the nine months ended June
30,
2007.
The
decrease in interest expense on borrowings for the nine months ended June 30,
2007, when compared to the 2006 period, was principally the result of a $26.3
million decrease in average borrowed funds, partially offset by a 47 basis
point
increase in the cost of borrowed funds. The components accountable
for the decrease of $787,000 in interest expense on borrowings were a $968,000
decrease relating to average volume, partially offset by a $181,000 increase
relating to average cost.
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.
|
|
For
the Nine Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Yield/ Rate
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Yield/
Rate
|
|
Assets:
|
|
(dollars
in thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
$ |
91,789
|
|
|
$ |
5,052
|
|
|
|
7.34 |
% |
|
$ |
93,654
|
|
|
$ |
4,995
|
|
|
|
7.11 |
% |
Consumer
loans
|
|
|
56,501
|
|
|
|
3,322
|
|
|
|
7.84
|
|
|
|
66,569
|
|
|
|
3,476
|
|
|
|
6.96
|
|
Commercial
business loans
|
|
|
38,880
|
|
|
|
2,406
|
|
|
|
8.25
|
|
|
|
34,017
|
|
|
|
1,746
|
|
|
|
6.84
|
|
Total
loans
|
|
|
187,170
|
|
|
|
10,780
|
|
|
|
7.68
|
|
|
|
194,240
|
|
|
|
10,217
|
|
|
|
7.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
62,661
|
|
|
|
2,440
|
|
|
|
5.19
|
|
|
|
69,271
|
|
|
|
2,486
|
|
|
|
4.79
|
|
Mortgage-backed
securities
|
|
|
25,796
|
|
|
|
862
|
|
|
|
4.46
|
|
|
|
46,778
|
|
|
|
1,240
|
|
|
|
3.53
|
|
Total
interest-earning assets
|
|
|
275,627
|
|
|
|
14,082
|
|
|
|
6.81
|
|
|
|
310,289
|
|
|
|
13,943
|
|
|
|
5.99
|
|
Non-earning
assets
|
|
|
11,595
|
|
|
|
|
|
|
|
|
|
|
|
11,616
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
287,222
|
|
|
|
|
|
|
|
|
|
|
$ |
321,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$ |
3,124
|
|
|
|
21
|
|
|
|
0.90
|
|
|
$ |
5,598
|
|
|
|
39
|
|
|
|
0.93
|
|
Now
and money market accounts
|
|
|
78,119
|
|
|
|
2,075
|
|
|
|
3.54
|
|
|
|
73,075
|
|
|
|
1,781
|
|
|
|
3.25
|
|
Certificates
of deposit
|
|
|
132,151
|
|
|
|
4,789
|
|
|
|
4.83
|
|
|
|
134,947
|
|
|
|
3,864
|
|
|
|
3.82
|
|
Total
deposits
|
|
|
213,394
|
|
|
|
6,885
|
|
|
|
4.30
|
|
|
|
213,620
|
|
|
|
5,684
|
|
|
|
3.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
|
35,606
|
|
|
|
1,422
|
|
|
|
5.32
|
|
|
|
45,151
|
|
|
|
1,668
|
|
|
|
4.93
|
|
Other
borrowings
|
|
|
16,227
|
|
|
|
669
|
|
|
|
5.50
|
|
|
|
33,018
|
|
|
|
1,210
|
|
|
|
4.89
|
|
Total
interest-bearing
liabilities
|
|
|
265,227
|
|
|
|
8,976
|
|
|
|
4.51
|
|
|
|
291,789
|
|
|
|
8,562
|
|
|
|
3.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand deposits
|
|
|
11,941
|
|
|
|
|
|
|
|
|
|
|
|
15,234
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
2,149
|
|
|
|
|
|
|
|
|
|
|
|
1,048
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
279,317
|
|
|
|
|
|
|
|
|
|
|
|
308,071
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
7,905
|
|
|
|
|
|
|
|
|
|
|
|
13,834
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
stockholders'
Equity
|
|
$ |
287,222
|
|
|
|
|
|
|
|
|
|
|
$ |
321,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
5,106
|
|
|
|
|
|
|
|
|
|
|
$ |
5,381
|
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
|
|
|
|
|
2.30 |
% |
|
|
|
|
|
|
|
|
|
|
2.08 |
% |
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
2.47 |
% |
|
|
|
|
|
|
|
|
|
|
2.31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
Nine
Months Ended
June
30, 2007 compared to
|
|
|
|
June
30, 2006
|
|
|
|
Change
Attributable to
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
$ |
(99 |
) |
|
$ |
156
|
|
|
$ |
57
|
|
Consumer
loans
|
|
|
(526 |
) |
|
|
372
|
|
|
|
(154 |
) |
Commercial
business loans
|
|
|
250
|
|
|
|
410
|
|
|
|
660
|
|
Total
loans
|
|
|
(375 |
) |
|
|
938
|
|
|
|
563
|
|
Investments
|
|
|
(237 |
) |
|
|
191
|
|
|
|
(46 |
) |
Mortgage-backed
securities
|
|
|
(556 |
) |
|
|
178
|
|
|
|
(378 |
) |
Total
interest-earning assets
|
|
$ |
(1,168 |
) |
|
$ |
1,307
|
|
|
$ |
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$ |
(17 |
) |
|
$ |
(1 |
) |
|
$ |
(18 |
) |
Now
and money market accounts
|
|
|
123
|
|
|
|
171
|
|
|
|
294
|
|
Certificates
of deposit
|
|
|
(80 |
) |
|
|
1,005
|
|
|
|
925
|
|
Total
deposits
|
|
|
26
|
|
|
|
1,175
|
|
|
|
1,201
|
|
FHLB
advances
|
|
|
(353 |
) |
|
|
107
|
|
|
|
(246 |
) |
Other
borrowings
|
|
|
(615 |
) |
|
|
74
|
|
|
|
(541 |
) |
Total
interest-bearing liabilities
|
|
|
(942 |
) |
|
|
1,356
|
|
|
|
414
|
|
Change
in net interest income
|
|
$ |
(226 |
) |
|
$ |
(49 |
) |
|
$ |
(275 |
) |
Non-performing
assets were $1.7 million or 0.55% of total assets at June 30, 2007, an increase
of $512,000 from the $1.1 million or 0.38% of total assets classified as
non-performing at June 30, 2006. Of those, $1.4 million were
classified as substandard, and $300,000 were classified as
doubtful. The $202,000 increase in the provision for loan losses from
the year ago period was made primarily as a result of increases in the
outstanding balance of the bank’s commercial real estate, and multi-family
loans, which are more at risk than single-family loans, and to provide for
the
$300,000 of loans receivable that were classified as
doubtful. Those increases were partially offset by decreases in the
provision for the reduction in the outstanding balances of the bank’s single
family, construction and land, commercial business and home equity second trust
loans.
Non-interest
Income. Non-interest income decreased $508,000 during the nine months ended
June 30, 2007, over the comparable nine month period one year
ago. That decrease was primarily the result of a decrease of $455,000
in gains on derivatives, $65,000 in gain on sale of foreclosed real
estate and $8,000 in loan fees. That decrease was partially offset by
an increase of $28,000 in deposit fees.
The
following table presents a comparison of the components of non-interest
income.
Non-interest
income from continuing operations
|
|
|
|
|
Difference
|
|
Nine
Months Ended June 30,
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in Thousands)
|
|
|
|
Non-interest
income:
|
|
|
|
Service
fees on loans
|
|
$ |
128
|
|
|
$ |
136
|
|
|
$ |
(8 |
) |
|
|
(5.88 |
)% |
Service
fees on deposits
|
|
|
337
|
|
|
|
309
|
|
|
|
28
|
|
|
|
9.06
|
|
Gain
(loss) on derivatives
|
|
|
(10 |
) |
|
|
445
|
|
|
|
(455 |
) |
|
|
(102.25 |
) |
Gain
on sale of foreclosed real estate
|
|
|
-
|
|
|
|
65
|
|
|
|
(65 |
) |
|
|
(100.00 |
) |
Other
operating income
|
|
|
17
|
|
|
|
25
|
|
|
|
(8 |
) |
|
|
(32.00 |
) |
Total
non-interest income
|
|
$ |
472
|
|
|
$ |
980
|
|
|
$ |
(508 |
) |
|
|
(51.84 |
)% |
Non-interest
expense. Non-interest expense decreased $356,000 from $7.9 million for the
nine months ended June 30, 2006 to $7.5 million for the nine months ended June
30 in the current year. The decrease was distributed over various
non-interest expense categories with the primary contributors being advertising,
deposit insurance premiums, data processing, and furniture, fixtures and
equipment and was partially offset by increases in professional services,
occupancy and compensation and employee benefits.
The
following table presents a comparison of the components of non-interest
expense.
Non-interest
expense from continuing operations
|
|
|
|
|
Difference
|
|
Nine
Months Ended June 30,
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
(Dollars
in Thousands)
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
$ |
3,523
|
|
|
$ |
3,502
|
|
|
$ |
21
|
|
|
|
0.60 |
% |
Occupancy
|
|
|
1,051
|
|
|
|
1,008
|
|
|
|
43
|
|
|
|
4.27
|
|
Professional
services
|
|
|
932
|
|
|
|
799
|
|
|
|
133
|
|
|
|
16.65
|
|
Advertising
|
|
|
102
|
|
|
|
547
|
|
|
|
(445 |
) |
|
|
(81.35 |
) |
Deposit
insurance premium
|
|
|
36
|
|
|
|
77
|
|
|
|
(41 |
) |
|
|
(53.25 |
) |
Furniture,
fixtures and equipment
|
|
|
395
|
|
|
|
415
|
|
|
|
(20 |
) |
|
|
(4.82 |
) |
Data
processing
|
|
|
649
|
|
|
|
703
|
|
|
|
(54 |
) |
|
|
(7.68 |
) |
Other
operating expense
|
|
|
826
|
|
|
|
818
|
|
|
|
8
|
|
|
|
0.98
|
|
Total
non-interest expense
|
|
$ |
7,514
|
|
|
$ |
7,869
|
|
|
$ |
(355 |
) |
|
|
(4.51 |
)% |
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. We did not record a provision for income taxes
for the nine months ended June 30, 2007 and 2006 due to our operating
losses. The company believes that it will generate future taxable
income through earnings and branch sales, to assure utilization of a certain
portion of the existing net operating losses.
Liquidity
and Capital Resources. 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 continues to maintain the levels
of liquid assets previously required by OTS regulations. The bank
manages its liquidity position and demands for funding primarily by investing
excess funds in short-term investments and utilizing FHLB advances 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 and securities
available-for-sale. The levels of those assets are dependent on the
bank’s operating, financing, lending and investing activities during any given
period. At June 30, 2007, cash and cash equivalents, interest bearing
deposits and securities available-for-sale totaled $108.1 million or 35.91%
of
total assets.
The
primary investing activities of the bank are the origination of consumer loans,
residential one- to four-family loans, commercial business loans, commercial
real estate loans, and real estate construction and development loans and the
purchase of United States Treasury and agency securities,
mortgage-backed and mortgage-related securities and other investment
securities. During the nine months ended June 30, 2007, the bank’s
loan originations totaled $58.7 million. The bank did not purchase
any United States Treasury or agency securities, mortgage-backed or mortgage
related securities or other investment securities during the nine months ended
June 30, 2007. All of our investment securities are classified as
either available for sale or held to maturity and for the period ended June
30,
2007 were considered temporarily impaired. The market value of our
investment portfolio is obtained from various third party brokerage firms and
we
believe our filing fairly quantifies the value of those
securities. The investments are debt securities that pay principal
and interest monthly to maturity at such time as principal is
repaid. The fluctuation in value of our portfolio is primarily the
result of changes in market rates rather than due to the credit quality of
the
issuer. The Company has the ability and liquidity to hold those
securities until such time as the value recovers or the securities
mature.
The
bank
has other sources of liquidity if a need for additional funds
arises. At June 30, 2007, the bank had $25.0 million in advances
outstanding from the FHLB and had an additional overall borrowing capacity
from
the FHLB of $9.7 million. Depending on market conditions, the pricing
of deposit products and the pricing of FHLB advances, the bank may continue
to
rely on FHLB borrowings to fund asset growth.
At
June
30, 2007, the bank had commitments to fund loans of $3.5 million, unused
outstanding lines of credit of $113.1 million, consisting primarily of equity
lines of credit, unused standby letters of credit of $310,000 and undisbursed
proceeds of construction mortgages of $2.9 million. Unfunded lines of
credit have remained relatively constant and have actually decreased by $2.5
million during the three months ended June 30, 2007. 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 June 30, 2007, totaled $130.8 million. Based
upon experience, management believes the majority of maturing deposits 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 those 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.
Item
3. Quantitative and Qualitative Disclosures About 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. The
company has little or no risk related to trading accounts, commodities or
foreign exchange. In general, market risk reflects the sensitivity of
income to variations in interest rates and other relevant market rates or
prices. The company’s market rate sensitive instruments include
interest-earning assets and interest-bearing liabilities. The company
enters into market rate sensitive instruments in connection with its various
business operations. Loans originated, and the related commitments to
originate loans that will be sold, represent market risk that is realized in
a
short period of time, generally two or three months.
The
company’s primary source of market risk exposure arises from changes in United
States interest rates and the effects thereof on mortgage prepayment and closing
behavior, as well as depositors’ choices (“interest rate
risk”). Changes in those interest rates will result in changes in the
company’s earnings and the market value of its assets and
liabilities. We expect to continue to realize income from the
differential or "spread" between the interest earned on loans, securities and
other interest-earning assets, and the interest paid on deposits, borrowings
and
other interest-bearing liabilities. That spread is affected by the
difference between the maturities and re-pricing characteristics of
interest-earnings assets and interest-bearing liabilities. Loan
volume and yields are affected by market interest rates on loans, and rising
interest rates generally are associated with fewer loan
originations. Management expects that a substantial portion of our
assets will continue to be indexed to changes in market interest rates and
we
intend to attract a greater proportion of short-term liabilities, which will
help us address our interest rate risk. The lag in implementation of
re-pricing terms on our adjustable-rate assets may result in a decline in net
interest income in a rising interest rate environment. There can be
no assurance that our interest rate risk will be minimized or
eliminated. Further, an increase in the general level of interest
rates may adversely affect the ability of certain borrowers to pay the interest
on and principal of their obligations. Accordingly, changes in levels
of market interest rates, (primarily increases in market interest rates), could
materially adversely affect our interest rate spread, asset quality, loan
origination volume and overall financial condition and results of
operations.
To
mitigate the impact of changes in market interest rates on our interest-earning
assets and interest-bearing liabilities, we actively manage the amounts and
maturities of these assets and liabilities. A key component of this
strategy is the origination and retention of short-term and adjustable-rate
assets. We retain short-term and adjustable-rate assets because they
have re-pricing characteristics that more closely match the re-pricing
characteristics of our liabilities.
To
further mitigate the risk of timing differences in the re-pricing of assets
and
liabilities, our interest-earning assets are matched with interest-bearing
liabilities that have similar re-pricing characteristics. For
example, the interest rate risk of holding fixed-rate loans is managed with
long-term deposits and borrowings, and the risk of
holding
ARMs is managed with short-term deposits and
borrowings. Periodically, mismatches are identified and managed by
adjusting the re-pricing characteristics of our interest-bearing liabilities
with derivatives, such as interest rate caps and interest rate
swaps.
Through
the use of these derivative instruments, management attempts to reduce or offset
increases in interest expense related to deposits and borrowings. We
use interest rate caps and pay-fixed interest rate swaps to protect against
rising interest rates.
The
interest rate caps are designed to provide an additional layer of protection,
should interest rates on deposits and borrowings rise, by effectively
lengthening the re-pricing period. At June 30, 2007, we held an
aggregate notional value of $20 million of interest rate caps. None
of the interest rate caps had strike rates that were in effect at June 30,
2007,
as current LIBOR rates were above the strike rate.
We
are
also striving to increase the proportion of transaction deposits to total
deposits to diminish our exposure to adverse changes in interest
rates. In particular, non-interest-bearing checking accounts and
custodial accounts are less sensitive to interest rate fluctuations and provide
a growing source of non-interest income through deposit and other retail banking
fees.
The
following table, which is based on information that we provide to the Office
of
Thrift Supervision, presents the change in our net portfolio value at March
31,
2007 that would occur in the event of an immediate change in interest rates
based on Office of Thrift Supervision assumptions, with no effect given to
any
steps that we might take to counteract that change.
|
|
|
Net
Portfolio Value
(Dollars
in thousands)
|
|
|
Net
Portfolio Value as % of
Portfolio
Value of Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Point (“bp”)
Change
in Rates
|
|
|
$Amount
|
|
|
$Change
|
|
|
%
Change
|
|
|
NPV
Ratio
|
|
|
Change
(bp)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+300
|
|
|
|
20,559
|
|
|
|
-2,256
|
|
|
|
-10 |
% |
|
|
7.23 |
% |
|
-63bp
|
|
|
+200
|
|
|
|
21,538
|
|
|
|
-1,277
|
|
|
|
-6 |
% |
|
|
7.52 |
% |
|
-34bp
|
|
|
+100
|
|
|
|
22,206
|
|
|
|
-609
|
|
|
|
-3 |
% |
|
|
7.70 |
% |
|
-16bp
|
|
|
0
|
|
|
|
22,815
|
|
|
|
|
|
|
|
-
|
|
|
|
7.86 |
% |
|
|
-
|
|
|
-100
|
|
|
|
22,663
|
|
|
|
-152
|
|
|
|
-1 |
% |
|
|
7.77 |
% |
|
-9bp
|
|
|
-200
|
|
|
|
22,283
|
|
|
|
-532
|
|
|
|
-2 |
% |
|
|
7.61 |
% |
|
-25bp
|
|
The
Office of Thrift Supervision uses various assumptions in assessing interest
rate
risk. Those assumptions relate to interest rates, loan prepayment rates, deposit
decay rates and the market values of certain assets under differing interest
rate scenarios, among others. As with any method of measuring interest rate
risk, certain shortcomings are inherent in the methods of analyses presented
in
the foregoing tables. For example, although certain assets and liabilities
may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes
in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features that restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, expected rates of prepayments on loans and early withdrawals
from certificates could deviate significantly from those assumed in calculating
the table. Prepayment rates can have a significant impact on interest
income. Because of the large percentage of loans and mortgage-backed
securities we hold, rising or falling interest rates have a significant impact
on the prepayment speeds of our earning assets that in turn affect the rate
sensitivity position. When interest rates rise, prepayments tend to slow. When
interest rates fall, prepayments tend to rise. Our asset sensitivity would
be
reduced if prepayments slow and vice versa. While we believe these assumptions
to be reasonable, there can be no assurance that assumed prepayment rates will
approximate actual future mortgage-backed security and loan repayment
activity.
Item
4. Controls and Procedures.
The
company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed by the company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and regulations and that such
information is accumulated and communicated to the company's management,
including the company's Chief Executive Officer and Chief Financial Officer,
as
appropriate, to allow timely decisions regarding required disclosure. Because
of
the inherent limitations in all control systems, no evaluation of controls
can
provide absolute assurance that the company's disclosure controls and procedures
will detect or uncover every situation involving the failure of persons within
the company or its subsidiary to disclose material information otherwise
required to be set forth in the company's periodic reports.
In
connection with this Form 10-Q, the company's management, with the participation
of its Chief Executive Officer and Chief Financial Officer, evaluated the
company's disclosure controls and procedures as currently in effect, and such
officers have concluded that, as of this date, the company's disclosure controls
and procedures are effective.
Management
of the company is also responsible for establishing and maintaining adequate
internal control over financial reporting and control of the company's assets
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.
There were no changes in the company's internal control over financial reporting
during the company's quarter ended June 30, 2007 that have materially affected,
or are reasonably likely to materially affect, the company's internal control
over financial reporting.
Part
II. Other
Information
Item
1. Legal
Proceedings
Not
applicable.
Item
1A. Risk
Factors
Our
increased emphasis on commercial and construction lending may expose us to
increased lending risks.
At
June
30, 2007, our loan portfolio consisted of $32.8 million, or 17.73% of commercial
real estate loans, $20.4 million, or 11.02% of construction and land development
loans and $37.6 million, or 20.28% of commercial business loans. We
intend to increase our emphasis on commercial real estate loans and commercial
business loans. Those types of loans generally expose a lender to
greater risk of non-payment and loss than one-to-four-family residential
mortgage loans because repayment of the loans often depends on the successful
operation of the property and the income stream of the
borrowers. Such loans typically involve larger loan balances to
single borrowers or groups of related borrowers compared to one- to four-family
residential mortgage loans. Commercial business loans expose us to
additional risks since they typically are made on the basis of the borrower’s
ability to make repayments from the cash flow of the borrower’s business and are
secured by non-real estate collateral that may depreciate over
time. In addition, since such loans generally entail greater risk
than one- to four-family residential mortgage loans, we may need to increase
our
allowance for loan losses in the future to account for the likely increase
in
probable incurred credit losses associated with the growth of such
loans. Also, many of our commercial and construction borrowers have
more than one loan outstanding with us. Consequently, an adverse
development with respect to one loan or one credit relationship can expose
us to
a significantly greater risk of loss compared to an adverse development with
respect to a one- to four-family residential mortgage loan.
Strong
competition within our market area could hurt our ability to compete and could
slow our growth.
We
face
intense competition both in making loans and attracting
deposits. This competition has made it more difficult for us to make
new loans and has occasionally forced us to offer higher deposit
rates. Price competition for loans and deposits might result in us
earning less on our loans and paying more on our deposits, which would reduce
net interest income. Some of the institutions with which we compete
have substantially greater resources and lending limits than we have and may
offer services that we do not provide. We expect competition
to
continue
to increase in the future as a result of legislative, regulatory and
technological changes and the continuing trend of consolidation in the financial
services industry. Our profitability depends upon our continued
ability to compete successfully in our market area.
An
increase in loan prepayments and on prepayment of loans underlying
mortgage-backed securities and small business administration certificates may
adversely affect our profitability.
Prepayment
rates are affected by consumer behavior, conditions in the housing and financial
markets, general economic conditions and the relative interest rates on
fixed-rate and adjustable-rate mortgage loans. Although changes in
prepayment rates are, therefore, difficult for us to predict, prepayment rates
tend to increase when market interest rates decline relative to the rates on
the
prepaid instruments. In the current interest rate environment with
the existing yield curve adjustable rate loans prepay because customers can
get
a lower fixed rate loan.
We
recognize our deferred loan origination costs and premiums paid on originating
these loans by adjusting our interest income over the contractual life of the
individual loans. As prepayments occur, the rate at which net
deferred loan origination costs and premiums are expensed
accelerates. The effect of the acceleration of deferred costs and
premium amortization may be mitigated by prepayment penalties paid by the
borrower when the loan is paid in full within a certain period of time, which
varies between loans. If prepayment occurs after the period of time
when the loan is subject to a prepayment penalty, the effect of the acceleration
of premium and deferred cost amortization is no longer mitigated.
We
recognize premiums we pay on mortgage-backed securities and Small Business
Administration Certificates as an adjustment to interest income over the life
of
the security based on the rate of repayment of the securities. Acceleration
of
prepayment on the loans underlying a mortgage-backed security or Small Business
Administration Certificate shortens the life of the security, increases the
rate
at which premiums are expensed and further reduces interest income.
We
may
not be able to reinvest loan and security prepayments at rates comparable to
the
prepaid instruments particularly in periods of declining interest
rates.
We
operate in a highly regulated environment and we may be adversely affected
by
changes in laws and regulations.
The
bank
is subject to extensive regulation, supervision and examination by the Office
of
Thrift Supervision and by the Federal Deposit Insurance Corporation, as insurer
of its deposits. Such regulation and supervision govern the
activities in which the bank and the company may engage, and are intended
primarily for the protection of the insurance fund and for the depositors and
borrowers of the bank. The regulation and supervision by the Office
of Thrift Supervision and the Federal Deposit Insurance Corporation are not
intended to protect the interests of investors in the common stock of the
company. Regulatory authorities have extensive discretion in their
supervisory and enforcement activities, including the imposition of restrictions
on our operations, the classification of our assets and determination of the
level of our allowance for loan losses. Any change in such regulation
and oversight, whether in the form of regulatory policy, regulations,
legislation or supervisory action, may have a material impact on our
operations.
A
breach of information security could negatively affect our
earnings.
Increasingly,
we depend upon data processing, communication and information exchange on a
variety of computing platforms and networks and over the Internet. We
cannot be certain all our systems are entirely free from vulnerability to
attack, despite safeguards we have instituted. In addition, we rely
on the services of a variety of vendors to meet data processing and
communication needs. If information security is breached, information
can be lost or misappropriated, resulting in financial loss or costs to us
or
damages to others. These costs or losses could materially exceed the
amount of insurance coverage, if any, which would adversely affect our
earnings.
We
are subject to heightened regulatory scrutiny with respect to bank secrecy
and
anti-money laundering statutes and regulations.
Recently,
regulators have intensified their focus on the USA PATRIOT Act’s anti-money
laundering and Bank Secrecy Act compliance requirements. There is
also increased scrutiny of our compliance with the rules
enforced
by the Office of Foreign Assets Control. In order to comply with
regulations, guidelines and examination procedures in this area, we have been
required to adopt new policies and procedures and to install new
systems. We cannot be certain that the policies, procedures and
systems we have in place are flawless. Therefore, there is no
assurance that in every instance we are in full compliance with these
requirements.
Failure
to pay interest on our debt may adversely impact us.
Deferral
of interest payments where allowed on our convertible preferred securities
may
affect our ability to issue additional debt.
Failure
to remain a well capitalized institution.
As
a
result of recording losses of $5.6 million during the year ended September
30,
2006, the bank ceased to be considered a well capitalized institution and is
now
considered to be an adequately capitalized institution. As an
adequately capitalized institution, the bank cannot issue brokered certificates
of deposit without OTS or FDIC permission, and the OTS can limit the payment
of
dividends from the bank to the company. Without the payment of a dividend from
the bank, the company is unable to make a distribution on the cumulative
convertible trust preferred securities. On December 13, 2006, the
bank was advised by the OTS that the OTS would not approve the bank’s
application to pay a cash dividend to the company, and the company exercised
its
right to defer the next scheduled quarterly distribution on the cumulative
convertible trust preferred securities as well as future
distributions.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
Not
applicable.
Item
3. Defaults
Upon Senior Securities
Not
applicable.
Item
4. Submission
of Matters to a Vote of Security Holders
(a)
|
Greater
Atlantic Financial Corp. annual Stockholder’s Meeting was held on April
25, 2007.
|
(b)
|
Omitted
per instructions
|
(c)
|
A
brief description of each matter voted upon at the Annual Stockholder’s
Meeting held on April 25, 2007 and number of votes cast for, against
or
withheld
|
1. Election
of Director.
|
Votes
For
|
Votes
Against
|
Votes
Withheld
|
|
Sidney
M.
Bresler
1,920,889
|
0
|
502,996
|
In
addition to Sidney M. Bresler the terms of office of Directors Jeffrey W.
Ochsman, Charles W. Calomiris, Carroll E. Amos and James B. Vito continued
after
the meeting.
2. Ratification
of the Selection of BDO Seidman, LLP as Independent Auditor.
|
Votes
For
|
Votes
Against
|
Votes
Withheld
|
Item
5. Other
Information
Not
applicable.
(a)
Exhibits
31.5 Certification
of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of
2002
31.6 Certification
of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of
2002
32.1 Certification
of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of
2002
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley
Act
of 2002
|
Greater
Atlantic Financial Corp.
Signatures
Pursuant
to the requirement of the Securities and 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.
|
Carroll E. Amos
|
President
and Chief Executive Officer
|
|
Senior
Vice President and Chief Financial
Officer
|
Exhibit
31.1
CERTIFICATION
I,
Carroll E. Amos, President and Chief Executive Officer of Greater Atlantic
Financial Corp., certify that:
1.
|
I
have reviewed this Quarterly Report on Form 10-Q of Greater Atlantic
Financial Corp.;
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
4.
|
The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
|
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
|
(b)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report, based on such evaluation;
and
|
|
(c)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
5.
|
The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board or directors (or persons performing the equivalent
functions):
|
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
By: /s/
Carroll E.
Amos
Carroll
E. Amos
President
and Chief Executive
Officer
Date:
August 13, 2007
Exhibit
31.2
CERTIFICATION
I,
David
E. Ritter, Senior Vice President and Chief Financial Officer of Greater Atlantic
Financial Corp., certify that:
1.
|
I
have reviewed this Quarterly Report on Form 10-Q of Greater Atlantic
Financial Corp.;
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
4.
|
The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
|
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
|
(b)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report, based on such evaluation;
and
|
|
(c)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
5.
|
The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board or directors (or persons performing the equivalent
functions):
|
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
By: /s/
David E.
Ritter
David
E. Ritter
Senior
Vice President and
Chief
Financial Officer
Date:
August 13, 2007
Exhibit
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADDED BY
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of Greater Atlantic Financial Corp. (the
“company”) on Form 10-Q for the period ended June 30, 2007 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Carroll
E. Amos, President and Chief Executive Officer of the company, certify, pursuant
to 18 U.S.C.§ 1350, as added by § 906 of the Sarbanes-Oxley Act of 2002,
that:
A. The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
B. The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the company as of and
for
the period covered by the Report.
By:
/s/ Carroll E. Amos
Carroll
E. Amos
President and Chief Executive Officer
Date:
August 13,
2007
Exhibit
32.2
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADDED BY
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of Greater Atlantic Financial Corp. (the
“company”) on Form 10-Q for the period ended June 30, 2007 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, David
E. Ritter Senior Vice President and Chief Financial Officer of the company,
certify, pursuant to 18 U.S.C.§ 1350, as added by § 906 of the Sarbanes-Oxley
Act of 2002, that:
A. The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
B. The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the company as of and
for
the period covered by the Report.
By:
/s/ David E. Ritter
David E. Ritter
Senior Vice President and
Chief
Financial
Officer
Date:
August 13,
2007
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Under
Article X, Section I of its Articles of Incorporation, Summit is required
under certain circumstances to indemnify its directors and officers and
directors and officers of any majority or wholly owned subsidiary of Summit,
for
claims and liabilities, including costs and expenses of defending
such claim or liability to which they are made a party by reason of any action
alleged to have been taken, omitted, or neglected by him or her as such director
or officer of Summit, provided that he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation. With respect to any criminal
proceeding, a director or officer shall be entitled to indemnification if such
person had no reasonable cause to believe his or her conduct was
unlawful. These provisions are in addition to all other rights which
any director or officer may be entitled as a matter of law. The full
text of Article X, Section I is set forth below. Reference is made to West
Virginia Code § 31D-8-851 through § 31D-8-856 which sets forth the
indemnification rights permitted under West Virginia law. The full text of
the
relevant codes are set forth below.
Article X,
Section I of the Articles of Incorporation of Summit contains the following
indemnification provision:
Unless
otherwise prohibited by law, each director and officer of the corporation now
or
hereafter serving as such, and each director and officer of any majority or
wholly owned subsidiary of the corporation that has been designated as entitled
to indemnification by resolution of the board of directors of the corporation
as
may be from time to time determined by said board, shall be indemnified by
the
corporation against any and all claims and liabilities (other than an action
by
or in the right of the corporation or any majority or wholly owned subsidiary
of
the corporation) including expenses of defending such claim of liability to
which he or she has or shall become subject by reason of any action alleged
to
have been taken, omitted, or neglected by him or her as such director or officer
provided the director or officer acted in good faith and in a manner which
the
director or officer reasonably believed to be in or not opposed to the best
interests of the corporation. With respect to any criminal
proceeding, a director or officer shall be entitled to indemnification if such
person had no reasonable cause to believe his or her conduct was
unlawful. The corporation shall reimburse each such person as
provided above in connection with any claim or liability brought or arising
by
or in the right of the corporation or any majority or wholly owned subsidiary
of
the corporation provided, however, that such person shall be not indemnified
in
connection with, any claim or liability brought by or in the right of the
corporation or any majority or wholly owned subsidiary of the corporation as
to
which the director or officer shall have been adjudged to be liable for
negligence or misconduct in the performance of his or her duty to the
corporation or any majority or wholly owned subsidiary of the corporation unless
and only to the extent that the court in which such action or proceeding was
brought shall determine upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnify for such expenses which such court shall
deem proper.
The
determination of eligibility for indemnification shall be made by those board
members not party to the action or proceeding or in the absence of such board
members by a panel of independent shareholders appointed for such purpose by
a
majority of the shareholders of the corporation or in any other manner provided
by law.
The
right
of indemnification hereinabove provided for shall not be exclusive of any rights
to which any director or officer of the corporation may otherwise be entitled
by
law.
The
board
of directors may by resolution, by law or other lawful manner from time to
time
as it shall determine extend the indemnification provided herein to agents
and
employees of the corporation, to directors, officers, agents or employees of
other corporations or entities owned in whole or in part by the
corporation. The corporation may purchase and maintain insurance for
the purposes hereof.
W.
Va.
Code § 31D-8-851 through § 31D-8-856 provide:
§31D-8-851. Permissible
indemnification.
(a) Except
as otherwise provided in this section, a corporation may indemnify an individual
who is a party to a proceeding because he or she is a director against liability
incurred in the proceeding if:
(1)
(A) He or she conducted himself or herself in good faith; and
(B) He
or she reasonably believed: (i) In the case of conduct in his or
her official capacity, that his or her conduct was in the best interests of
the
corporation; and (ii) in all other cases, that his or her conduct was at
least not opposed to the best interests of the corporation; and
(C) In
the case of any criminal proceeding, he or she had no reasonable cause to
believe his or her conduct was unlawful; or
(2) He
or she engaged in conduct for which broader indemnification has been made
permissible or obligatory under a provision of the articles of incorporation
as
authorized by subdivision (5), subsection (b), section two hundred two, article
two of this chapter.
(b) A
director’s conduct with respect to an employee benefit plan for a purpose he or
she reasonably believed to be in the interests of the participants in, and
the
beneficiaries of, the plan is conduct that satisfies the requirement of
subparagraph (ii), paragraph (B), subdivision (1), subsection (a) of this
section.
(c) The
termination of a proceeding by judgment, order, settlement or conviction, or
upon a plea of nolo contendere or its equivalent, is not determinative that
the
director did not meet the relevant standard of conduct described in this
section.
(d) Unless
ordered by a court under subdivision (3), subsection (a), section eight hundred
fifty-four of this article, a corporation may not indemnify a
director:
(1) In
connection with a proceeding by or in the right of the corporation, except
for
reasonable expenses incurred in connection with the proceeding if it is
determined that the director has met the relevant standard of conduct under
subsection (a) of this section; or
(2) In
connection with any proceeding with respect to conduct for which he or she
was
adjudged liable on the basis that he or she received a financial benefit to
which he or she was not entitled, whether or not involving action in his or
her
official capacity.
§31D-8-852.
Mandatory Indemnification.
A
corporation must indemnify a director who was wholly successful, on the merits
or otherwise, in the defense of any proceeding to which he or she was a party
because he or she was a director of the corporation against reasonable expenses
incurred by him or her in connection with the proceeding.
§31D-8-853.
Advance for expenses.
(a) A
corporation may, before final disposition of a proceeding, advance funds to
pay
for or reimburse the reasonable expenses incurred by a director who is a party
to a proceeding because he or she is a director if he or she delivers to the
corporation:
(1) A
written affirmation of his or her good faith belief that he or she has met
the
relevant standard of conduct described in section eight hundred fifty-one of
this article or that the proceeding involves conduct for which liability has
been eliminated under a provision of the articles of incorporation as authorized
by subdivision (4), subsection (b), section two hundred two, article two of
this
chapter; and
(2) His
or her written undertaking to repay any funds advanced if he or she is not
entitled to mandatory indemnification under section eight hundred fifty-two
of
this article and it is ultimately determined under section eight hundred
fifty-four or eight hundred fifty-five of this article that he or she has not
met the relevant standard of conduct described in section eight hundred
fifty-one of this article.
(b) The
undertaking required by subdivision (2), subsection (a) of this section
must be an unlimited general obligation of the director but need not be secured
and may be accepted without reference to the financial ability of the director
to make repayment.
(c) Authorizations
under this section are to be made:
(1) By
the board of directors:
(A) If
there are two or more disinterested directors, by a majority vote of all the
disinterested directors, a majority of whom constitute a quorum for this
purpose, or by a majority of the members of a committee of two or more
disinterested directors appointed by a vote; or
(B) If
there are fewer than two disinterested directors, by the vote necessary for
action by the board in accordance with subsection (c), section eight hundred
twenty-four of this article in which authorization directors who do not qualify
as disinterested directors may participate; or
(2) By
the shareholders, but shares owned by or voted under the control of a director
who at the time does not qualify as a disinterested director may not be voted
on
the authorization; or
(3) By
special legal counsel selected in a manner in accordance with subdivision (2),
subsection (b), section eight hundred fifty-five of this article.
§31D-8-854.
Circuit court-ordered indemnification and advance for
expenses.
(a) A
director who is a party to a proceeding because he or she is a director may
apply for indemnification or an advance for expenses to the circuit court
conducting the proceeding or to another circuit court of competent
jurisdiction. After receipt of an application and after giving any
notice it considers necessary, the circuit court shall:
(1) Order indemnification if the circuit court determines that the director
is entitled to mandatory indemnification under section eight hundred fifty-two
of this article;
(2) Order
indemnification or advance for expenses if the circuit court determines that
the
director is entitled to indemnification or advance for expenses pursuant to
a
provision authorized by subsection (a), section eight hundred fifty-eight of
this article; or
(3) Order
indemnification or advance for expenses if the circuit court determines, in
view
of all the relevant circumstances, that it is fair and reasonable:
(A) To
indemnify the director; or
(B) To
advance expenses to the director, even if he or she has not met the relevant
standard of conduct set forth in subsection (a), section eight hundred fifty-one
of this article, failed to comply with section eight hundred fifty-three of
this
article or was adjudged liable in a proceeding referred to in subdivision
(1) or (2), subsection (d), section eight hundred fifty-one of this
article, but if he or she was adjudged so liable his or her indemnification
is
to be limited to reasonable expenses incurred in connection with the
proceeding.
(b) If
the circuit court determines that the director is entitled to indemnification
under subdivision (1), subsection (a) of this section or to indemnification
or advance for expenses under subdivision (2) of said subsection, it shall
also order the corporation to pay the director’s reasonable expenses incurred in
connection with obtaining circuit court-ordered indemnification or advance
for
expenses. If the circuit court determines that the director is
entitled to indemnification or advance for expenses under subdivision
(3) of said subsection, it may also order the corporation to pay the
director’s reasonable expenses to obtain circuit court-ordered indemnification
or advance for expenses.
§31D-8-855.
Determination and authorization of indemnification.
(a) A
corporation may not indemnify a director under section eight hundred fifty-one
of this article unless authorized for a specific proceeding after a
determination has been made that indemnification of the director is permissible
because he or she has met the relevant standard of conduct set forth in section
eight hundred fifty-one of this article.
(b) The
determination is to be made:
(1) If
there are two or more disinterested directors, by the board of directors by
a
majority vote of all the disinterested directors, a majority of whom constitute
a quorum for this purpose, or by a majority of the members of a committee of
two
or more disinterested directors appointed by a vote;
(2) By
special legal counsel:
(A) Selected
in the manner prescribed in subdivision (1) of this subsection;
or
(B) If
there are fewer than two disinterested directors, selected by the board of
directors in which selection directors who do not qualify as disinterested
directors may participate; or
(3) By
the shareholders, but shares owned by or voted under the control of a director
who at the time does not qualify as a disinterested director may not be voted
on
the determination.
(c) Authorization
of indemnification is to be made in the same manner as the determination that
indemnification is permissible, except that if there are fewer than two
disinterested directors or if the determination is made by special legal
counsel, authorization of indemnification is to be made by those entitled under
paragraph (B), subdivision (2), subsection (b) of this section to select
special legal counsel.
§31D-8-856.
Indemnification of officers.
(a) A
corporation may indemnify and advance expenses under this part to an officer
of
the corporation who is a party to a proceeding because he or she is an officer
of the corporation:
(1) To
the same extent as a director; and
(2) If
he or she is an officer but not a director, to a further extent as may be
provided by the articles of incorporation, the bylaws, a resolution of the
board
of directors or contract except for:
(A) Liability
in connection with a proceeding by or in the right of the corporation other
than
for reasonable expenses incurred in connection with the proceeding;
or
(B) Liability
arising out of conduct that constitutes:
(i) Receipt
by him or her of a financial benefit to which he or she is not
entitled;
(ii) An
intentional infliction of harm on the corporation or the shareholders;
or
(iii) An
intentional violation of criminal law.
(b) The
provisions of subdivision (2), subsection (a) of this section apply to an
officer who is also a director if the basis on which he or she is made a party
to the proceeding is an act or omission solely as an officer.
(c) An
officer of a corporation who is not a director is entitled to mandatory
indemnification under section eight hundred fifty-two of this article and may
apply to a court under section eight hundred fifty-four of this article for
indemnification or an advance for expenses in each case to the same extent
to
which a director may be entitled to indemnification or advance for expenses
under those provisions.
Certain
rules of the Federal Deposit Insurance Corporation limit the ability of certain
depository institutions, their subsidiaries and their affiliated depository
institution holding companies to indemnify affiliated parties, including
institution directors. In general, subject to the ability to purchase
directors’ and officers’ liability insurance and to advance professional
expenses under certain circumstances, the rules prohibit such institutions
from
indemnifying a director for certain costs incurred with regard to an
administrative or enforcement action commenced by any federal banking agency
that results in a final order or settlement pursuant to which the director
is
assessed a civil money penalty, removed from office, prohibited from
participating in the affairs of an insured depository institution or required
to
cease and desist from or take an affirmative action described in
Section 8(b) of the Federal Deposit Insurance Act (12 U.S.C. §
1818(b)).
Item
21. Exhibits and Financial Statement Schedules.
Exhibit
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Number
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Description
of Exhibits
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2.1
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Agreement
and Plan of Reorganization, dated as of April 12, 2007, by and between
Summit Financial Group, Inc., and Greater Atlantic Financial Corp.
(included as Annex A to the proxy
statement/prospectus).
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5.1
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Opinion
of Bowles Rice McDavid Graff & Love LLP, including
consent.
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8.1
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Tax
Opinion of Hunton & Williams, including consent.
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21
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Subsidiaries
of Registrant
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23.1
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Consent
of Bowles Rice McDavid Graff & Love LLP (included in Legal Opinion,
Exhibit 5.1).
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23.2
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Consent
of Hunton & Williams (included in Legal Opinion,
Exhibit 8.1).
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23.3
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Consent
of Arnett & Foster, P.L.L.C.
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23.4
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Consent
of BDO Seidman, LLP
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23.5
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Consent
of Sandler O’Neill & Partners, L.P.
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24
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Powers
of Attorney (signature page).
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99.1
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Form
of Proxy for Greater Atlantic Financial Corp.
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99.2
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Form
of Affiliate Letter (included as Exhibit A to Agreement and Plan
of
Reorganization which is included as Annex to the proxy
statement/prospectus).
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(b) Financial
Statement Schedules
(c) Opinion
of Sandler O’Neill & Partners, L.P.
The
opinion of Sandler O’Neill & Partners, L.P. to the board of directors of
Greater Atlantic Financial Corp. is included in Annex C to the proxy
statement/prospectus.
Item 22.
Undertakings.
1. The
undersigned registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this registration statement, by any person or party who
is
deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters in addition to the information called for by
the
other items of the applicable form.
2. The
registrant undertakes that every prospectus (i) that is filed pursuant to
paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415 (230.415),
will be filed as a part of an amendment to the registration statement and will
not be used until
such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall
be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be
the initial bona fide offering thereof.
3. Insofar
as indemnification for liabilities under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such
issue.
4. The
undersigned registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to Items 4,
10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
5. The
undersigned registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
registration when it became effective.
6. The
undersigned registrant hereby undertakes:
a. To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding
the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the effective
registration statement; and
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement;
b. That
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
c. To
remove from registration by means of post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
7. The
undersigned registrant hereby undertakes that, for purposes of determining
any
liability under the Securities Act of 1933, each filing of the registrant’s
annual report pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan’s annual report pursuant to Section 15(d) of the Securities Exchange
Act of 1934) that is attached to the registration statement shall be deemed
to
be a new registration statement relating to the securities offered therein,
and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Signatures
Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Moorefield, State of
West
Virginia, on October 22, 2007.
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SUMMIT
FINANCIAL GROUP, INC.
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By:
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/s/
H. Charles Maddy, III
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President
and Chief Executive Officer
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By:
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/s/
Robert S. Tissue
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Senior
Vice President, Chief Financial
Officer
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POWER
OF ATTORNEY
Each
of the undersigned hereby appoints
H. Charles Maddy, III as attorney-in-fact and agent for the undersigned, with
full power of substitution, for and in the name, place and stead of the
undersigned, to sign and file with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, any and all amendments (including
post-effective amendments) to this Registration Statement, with any schedules
or
exhibits thereto, and any and all supplements or other documents to be filed
with the Securities and Exchange Commission pertaining to the registration
of
securities covered hereby, with full power and authority to do and perform
any
and all acts and things as may be necessary or desirable in furtherance of
such
registration.
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
Signatures Title
Date
/s/ Oscar
M.
Bean_____________
Director October
22, 2007
Oscar
M.
Bean
/s/ ________________________ Director
Frank
A.
Baer, III
/s/ Dewey
S. Bensenhave,
M.D.___ Director October
22, 2007
Dewey
S.
Bensenhaver, M.D.
/s/ James
M.
Cookman__________ Director October
22, 2007
James
M.
Cookman
/s/ ________________________ Director
John
W.
Crites
/s/
Patrick N.
Frye______________ Director October
22, 2007
Patrick
N. Frye
/s/ James
Paul Geary,
II__________ Director October
22, 2007
James
Paul Geary, II
/s/ Thomas
J. Hawse, III
________ Director October
22, 2007
Thomas
J.
Hawse, III
/s/ Phoebe
Fisher
Heishman______ Director October
22, 2007
Phoebe
Fisher Heishman
/s/ Gary
L. Hinkle
______________ Director October
22, 2007
Gary
L.
Hinkle
/s/ Gerald
W.
Huffman_________ Director October
22, 2007
Gerald
W.
Huffman
/s/ Duke
A.
McDaniel___________ Director October
22, 2007
Duke
A.
McDaniel
/s/ Ronald
F.
Miller _____________ Director October
22, 2007
Ronald
F.
Miller
/s/ ________________________ Director
G.R.
Ours, Jr.
/s/ Charles
S.
Piccirillo __________ Director October
22, 2007
Charles
S. Piccirillo
EXHIBIT
INDEX
Exhibit
|
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Number
|
|
Description
of Exhibits
|
|
|
|
2.1
|
|
Agreement
and Plan of Reorganization, dated as of April 12, 2007, by and between
Summit Financial Group, Inc., and Greater Atlantic Financial Corp.
(included as Annex A to the proxy
statement/prospectus).
|
|
|
|
5.1
|
|
Opinion
of Bowles Rice McDavid Graff & Love LLP, including
consent.
|
|
|
|
8.1
|
|
Tax
Opinion of Hunton & Williams,including consent.
|
|
|
|
21
|
|
Subsidiaries
of Registrant
|
|
|
|
23.1
|
|
Consent
of Bowles Rice McDavid Graff & Love LLP (included in Legal Opinion,
Exhibit 5.1).
|
|
|
|
23.2
|
|
Consent
of Hunton & Williams (included in Legal Opinion,
Exhibit 8.1).
|
|
|
|
23.3
|
|
Consent
of Arnett & Foster, P.L.L.C.
|
|
|
|
23.4
|
|
Consent
of BDO Seidman, LLP
|
|
|
|
23.5
|
|
Consent
of Sandler O’Neill & Partners, L.P.
|
|
|
|
24
|
|
Powers
of Attorney (signature page).
|
|
|
|
99.1
|
|
Form
of Proxy for Greater Atlantic Financial Corp.
|
|
|
|
99.2
|
|
Form
of Affiliate Letter (included as Exhibit A to Agreement and Plan
of
Reorganization which is included as Annex to the proxy
statement/prospectus).
|
|